09/12/2013 07:57 EDT | Updated 11/12/2013 05:12 EST

Vacation prices rising as Transat profits by cutting capacity and costs

MONTREAL - Transat A.T. says Canadian travellers face higher vacation costs this fall and next winter as the travel company works to restore its profits for the year by cutting capacity while offering consumers more deluxe package options.

During the first half of its summer season, the Montreal-based company produced record third-quarter results on higher transatlantic selling prices, reduced capacity and the increasing contribution of its cost-cutting initiatives.

"It's not a revolution. We have a plan, we follow the plan, we focus on what we have to do and we're doing it," CEO Jean-Marc Eustache said Thursday during a conference call.

The Montreal-based company's net income attributable to shareholders exceeded expectations, more than quadrupling to $41.1 million from $9.4 million a year earlier.

Transat's (TSX:TRZ.B) adjusted after-tax income was $30.7 million, or 80 cents per share, for the period ended July 31. That compared with $10.5 million or 28 cents per share in the prior year.

Revenues were $927 million, up two per cent from the $909.1 million in the third quarter of 2012.

Analysts had projected 38 cents per share of adjusted earnings and $848.5 million of revenue.

Transat's shares to hit a new 52-week high in early trading Thursday morning on the Toronto Stock Exchange. They were up 65 cents or nearly seven per cent, to $9.99 in later trading.

The company said revenues increased due to higher average selling prices, which offset a 7.3 per cent drop in the number of travellers when it reduced capacity, mainly to Europe.

Capacity on the transatlantic market decreased 10.9 per cent.

"We are very satisfied with the results, as this is our best third quarter ever," said Jean-Marc Eustache, Transat's president and chief executive officer.

"We performed very well on the transatlantic market, and the implementation of our cost-reduction and margin-improvement program is unfolding as planned. And as the numbers indicate, we are on our way to a profitable year."

He said Transat is working to set itself apart in the market by offering more four- and five-star hotels, along with upgrading its fleet of aircraft.

Strong demand from Canada compensated for weaker sales in Europe where the economy has weakened and political turmoil has reduced vacation interest in destinations such as Tunisia and Egypt.

Transat, which offers vacation packages and flights on Air Transat, said its fourth-quarter results should be better than last year, but not as dramatic an improvement as was recorded in the third quarter.

The company said it hasn't noted any impact from Air Canada Rouge, which launched its operations July 1.

"Until today I don't see anything and we're used to competition. We have been in competition for all our life and especially in Europe," said Eustache, adding that its main rival is Sunwing.

Transat said its plan to return to profitability is on track. Efforts to cut costs, boost revenues and make efficiencies have generated a $20-million improvement to margins in 2012. Another $15 million is expected in 2013, $20 million in 2014 and $20 million in 2015, when it benefits from the decision to no longer outsource its fleet of narrow-body aircraft to service sun destinations.

Cameron Doerksen of National Bank Financial increased his target price for Transat's shares by 15 per cent to $15.50 even though they have more than doubled since May.

"The outlook for the balance of the summer remains positive. Industry winter capacity remains uncertain at this point, but Transat's bottom line should benefit from ongoing cost reductions and potentially from higher pricing," he wrote in a report.