Transat A.T. Inc. - Results for the third quarter of 2016

Dramatically higher capacity affect prices and load factors and impacts performance

From continuing operations for the third quarter:

• Revenues of $663.6 million, compared with $704.8 million in 2015.
• Adjusted operating income¹ of $16.0 million, compared with $44.8 million in 2015.
• Adjusted net income³ of $2.5 million, compared with $26.9 million in 2015.

From continuing operations for the nine-month period:

• Revenues of $2.3 billion, compared with $2.3 billion in 2015.
• Adjusted operating loss¹ of $20.7 million, compared with adjusted operating income¹ of $29.8 million in 2015.
• Adjusted net loss³ of $39.7 million, compared with adjusted net income³ of $1.3 million in 2015.

MONTREAL, Sept. 8, 2016 /CNW Telbec/ - Transat A.T. Inc., one of the largest integrated tourism companies in the world and Canada's holiday travel leader, posted revenues of $663.6 million for the quarter ended July 31, 2016, compared with $704.8 million for the same period of 2015, a decrease of $41.3 million, or 5.9%. The Corporation recorded adjusted operating income¹ of $16.0 million, compared with $44.8 million in 2015, and net income attributable to shareholders of $9.4 million ($0.26 per share basic and diluted), compared with $13.1 million ($0.34 per share basic and diluted) in 2015. Before non-operating items, Transat reported adjusted net income³ of $2.5 million ($0.07 per share) for the third quarter of 2016, compared with $26.9 million ($0.70 per share) for the corresponding 2015 quarter.

"The transatlantic market overall, and the United Kingdom in particular, has been affected by drastically increased supply, and demand that cannot keep up quickly enough, fuelled in part by terrorism-related fears," said Jean-Marc Eustache, President and Chief Executive Officer of Transat. "We are relatively satisfied with our results, given the circumstances, but we cannot hope for a repeat of our outstanding summer-season performance over the past two years."

Third-quarter highlights

The Corporation posted revenues of $663.6 million, compared with $704.8 million in 2015. The decrease of $41.3 million (5.9%) was due to lower load factors and lower average selling prices, resulting, among other things, from the 14% increase in overall transatlantic market capacity. Lower aircraft fuel costs also helped push average selling prices lower. On the transatlantic market, the Corporation increased its capacity by 5.0%, while on the Sun destinations market, it decreased by 2.2%. The number of travellers on all markets combined rose by 2.8%.

The Corporation posted adjusted operating income¹ of $16.0 million, compared with $44.8 million in 2015. The decrease in operating income stemmed mainly from the lower load factors and lower average selling prices, which in turn resulted from the increased overall transatlantic market capacity; part of the decrease was offset by lower fuel costs, which, combined with the decline in value of the Canadian dollar against the U.S. dollar, led to a decrease in operating costs of $10.0 million for the quarter. The lower operating income was also due to the Sun destinations market, where the impact of the depreciated Canadian dollar on operating costs was only partly offset by higher average selling prices.

Ocean Hotels, which is 35% owned by Transat, accounted for $2.5 million of the Corporation's net income for the quarter, against $1.6 million in 2015. The increase was attributable to the strength of the U.S. dollar versus other currencies, and to improved profitability. Transat's equity participation in Ocean Hotels accounted for $99.2 million in asset as at July 31, 2016, net of the dividend of $9.1 million received during the quarter, compared with $96.5 million as at July 31, 2015. 

Nine-month highlights

The Corporation posted revenues of $2.3 billion, compared with $2.3 billion in 2015, and an adjusted operating loss¹ of $20.7 million, compared with adjusted operating income¹ of $29.8 million in 2015. The Corporation increased its capacity on the Sun destinations market by 4.5% during the winter season, and it increased capacity on the transatlantic market during the summer by 5.0%. For the nine-month period, the number of travellers on all markets combined rose by 3.2%.

During the winter season, fears prompted by the Zika virus, the threat of strike action by Air Transat pilots, a decrease in demand for travel from Western Canada, and increased competition prevented any improvement in profitability. Furthermore, the decline in the value of the Canadian dollar against the U.S. currency, combined with lower fuel costs, resulted in a $49.0 million increase in operating costs for Sun destinations packages, nearly 60% of which was offset by the Corporation's cost-reduction efforts and by higher selling prices.

The decrease in adjusted operating income¹ for the summer season stemmed mainly from the lower load factors and lower average selling prices on the transatlantic market, which resulted, among other things, from the increase in overall capacity of 14% on that market.

For the nine-month period, Ocean Hotels accounted for $10.6 million of the Corporation's income, compared with $5.9 million in 2015. That increase was attributable to the strength of the U.S. dollar versus other currencies, and to improved profitability.

During the nine-month period, the Corporation recorded an impairment charge of $15.8 million, resulting from the introduction of a new booking platform encouraging purchase of seats by European travellers directly from Air Transat, rather than through the European business units. The charge also reflects the recent refocusing on the Transat brand, which has brought about the elimination of certain other brands.

Strategic plan and margin-improvement initiatives

"We are continuing the implementation of our strategic plan," Mr. Eustache explained. "We should complete the sale of our France- and Greece-based operations toward the end of the fourth quarter, and we are actively working toward our objective of making acquisitions on a new source market such as the U.S., or on the Sun destinations hotel market. In that context, we have decided to postpone our decision on setting up a share buyback program."

As set forth in the plan announced at the end of the first quarter of 2015, the Corporation is continuing its cost-reduction and margin-improvement initiatives, which target savings of at least $100 million over three years. The main initiatives that contributed to reaching the objective of $45 million in 2015 were Air Transat's insourcing of narrow-body aircraft and implementation of a flexible fleet. In 2016, the Corporation expects to save at least $30 million through improvements, chiefly by continuing to apply the cost-reduction program at Air Transat, optimizing hotel costs, and increasing ancillary revenues. The Corporation's target for 2017 is at least $25 million.

Sale of Transat France and Tourgreece

On May 11, 2016, the Corporation announced that it had received a firm offer from TUI AG, the world's leading tourism business, to purchase its France- and Greece-based tour-operating business units (Transat France and Tourgreece, respectively) for an enterprise value of €54.5 million ($79.7 million), subject to working-capital adjustments at closing. The contemplated transaction is subject to approval from European anti-trust authorities as well as obtaining the advisory opinion of the Transat France work council (employee representatives), as mandated by French law; the latter approval was secured during the third quarter. Closing is expected to take place before October 31, 2016.

The proposed transaction will have no impact on Transat's transatlantic program or on the operations and growth strategy of Air Transat in France or elsewhere in Europe, and concerns only operations involving destination countries other than Canada, outbound from France. Air Transat will maintain a structure and staff in France, along with its European distribution network.

Consequently, on July 31, 2016, the assets and liabilities of Transat France and Tourgreece are recorded as held for sale on the consolidated statements of financial position, and their results have been recorded as discontinued operations in the consolidated statements of income (loss) and of comprehensive loss. The planned transaction has no other impact on the Corporation's financial statements for the period ended July 31, 2016.

Compared with 2015, quarterly revenues of the Transat France and Tourgreece business units decreased by $1.7 million (0.8%). The decline was attributable to a drop of 3.0% in the number of travellers, especially in Tunisia and Turkey owing to geopolitical factors; it was offset in part by higher average selling prices. Net income from the discontinued operations during the quarter was $1.7 million (0.8%), versus $0.0 million in 2015. The increased net income stemmed primarily from higher margins on tour-type products sold.

For the nine-month period, revenues from the Transat France and Tourgreece business units grew by $35.1 million (7.6%). That increase was attributable to higher average selling prices, offset in part by a drop in the number of travellers of 2.4%. The discontinued operations posted a net loss of $5.6 million (1.1%), compared with $12.4 million (2.7%) in 2015. The reduced net loss was due mainly to higher margins on tour and package products sold, especially to the Caribbean.

As a result of the planned sale of its French and Greek tour-operating business units, the Corporation will cease geographically segmented reporting of its results.

Financial position

As at July 31, 2016, the Corporation's free cash totalled $470.1 million, compared with $515.6 million at the same date in 2015. The decrease was attributable to the reclassification of deposits to Transat France and Tourgreece as liabilities related to the assets held for sale, and to the shares repurchased as part of the normal-course-issuer bid launched in April 2015, partially offset by the past 12 months' earnings. The working-capital ratio was 1.05, as against 1.04, and deposits from customers for future travel amounted to $440.4 million, compared with $527.9 million a year earlier; the decrease is attributable mainly to the reclassification of deposits to Transat France and Tourgreece as liabilities related to the assets held for sale. Off-balance-sheet agreements, excluding contracts with service providers, stood at $725.2 million as at July 31, 2016, compared with $713.7 million as at October 31, 2015, the increase being attributable to the signing of aircraft leases, partially offset by payments made during the period.

In its previous quarterly report, Transat A.T. Inc. announced its intention to renew its normal-course-issuer bid program. Considering the environment and its plans to make acquisitions, however, the Corporation has postponed its decision regarding implementation of that program.

Outlook

Summer 2016 – The transatlantic market outbound from Canada and Europe accounts for a substantial portion of Transat's business during the summer season. For the period August to October 2016, total industry capacity is higher by 14%, while that of the Corporation is higher by 8%. To date, Transat's load factors on that market are lower by 3.5% that those of summer 2015, 83% of the capacity has been sold, and selling prices of bookings taken are lower by 9.0% than those recorded at the same date in 2015. Lower fuel costs, offset in part by the weakened Canadian dollar, will result in a decrease in operating expenses of 4.6% if the dollar remains at its current level against the U.S. dollar, the euro and the pound, and if fuel prices remain stable.

On the Sun destinations market outbound from Canada, where summer is low season, Transat's capacity is higher by 5% than that marketed at the same date last year. To date, 73% of that capacity has been sold, load factors are lower by 4.2%, and selling prices are similar. If the weakened Canadian dollar remains at its current value against the U.S. currency and if fuel prices continue at their low level, operating expenses will increase by 3.8%.

With regard to the discontinued France-based operations, medium-haul bookings are ahead by 4%, while long-haul bookings are ahead by 8% compared with last year at this time. Average selling prices, however, are lower by 3%.

Transat expects its overall results for the fourth quarter to be lower those of last year, which were among the best in the Corporation's history.

Additional information

The results were affected by non-operating items, as summarized in the following table:

Highlights and impact of non-operating items on results (in thousands of CAD)
CONTINUING OPERATIONS		Third quarter		First nine-month period
		2016	2015	2016	2015
Revenues		663,591	704,844	2,277,535	2,263,946
Operating income (loss)		(2,990)	34,480	(57,233)	(3,059)
	Lump-sum payments –collective agreement	4,200	—	4,200	—
Restructuring charge		3,700	—	3,700	—
Depreciation and amortization		12,111	10,318	35,335	32,862
	Premium related to derivatives matured during the period	(1,057)	—	(6,723)	—
Adjusted operating income (loss)^1		15,964	44,798	(20,721)	29,803
Income (loss) before taxes		11,755	18,305	(95,064)	(17,026)
	Lump-sum payments –collective agreement	4,200	—	4,200	—
	Restructuring charge	3,700	—	3,700	—
Fuel-related derivatives and other derivatives		(13,922)	18,895	24,042	21,016
	Loss on disposal of a subsidiary	—	—	843	—
Asset impairment		—	—	15,809	—
	Premium related to derivatives matured during the period	(1,057)	—	(6,723)	—
Adjusted pre-tax income (loss) ^2		4,676	37,200	(53,193)	3,990
Net income (loss) attributable to shareholders		9,439	13,067	(76,668)	(26,543)
	Net income (loss) from discontinued operations	(1,735)	(9)	5,645	12,428
	Lump-sum payments –collective agreement	3,074	—	3,074	—
	Restructuring charge	2,708	—	2,708	—
	Fuel-related derivatives and other derivatives	(10,190)	13,828	17,600	15,381
	Loss on disposal of a subsidiary	—	—	615	—
	Asset impairment	—	—	12,222	—
	Premium related to derivatives matured during the period	(773)	—	(4,921)	—
Adjusted net income (loss)^3		2,523	26,886	(39,725)	1,266
Diluted earnings (loss) per share		0.26	0.34	(2.08)	(0.69)
	Net income (loss) from discontinued operations	(0.05)	(0.00)	0.15	0.32
	Lump-sum payments –collective agreement	0.08	—	0.08	—
	Restructuring charge	0.07	—	0.07	—
	Fuel-related derivatives and other derivatives	(0.28)	0.36	0.48	0.40
	Loss on disposal of a subsidiary	—	—	0.02	—
	Asset impairment	—	—	0.31	—
	Premium related to derivatives matured during the period	(0.02)	—	(0.13)	—
Adjusted net income (loss) per share^3		0.07	0.70	(1.08)	0.03

Hedging – The Corporation records in the statement of income any gains or losses resulting from mark-to-market adjustments of the derivative financial instruments used to manage aircraft fuel-price risk, as well any gains or losses resulting from mark-to-market adjustments of certain hedging instruments used to mitigate exchange-rate exposure stemming from its expenses and/or revenues in foreign currencies. For the third quarter of 2016, this translates into a $13.9 million non-cash loss ($10.2 million after income taxes), compared with a loss of $18.9 million ($13.8 million after income taxes) in 2015. For the nine-month period, this translates into a $24.0 million non-cash loss ($17.6 million after income taxes), compared with a $21.0 million loss ($15.6 million after income taxes) in 2015.

The Corporation uses hedging instruments to mitigate exchange-rate exposure stemming from its expenses and/or revenues in foreign currencies. Accordingly, under applicable accounting standards, any fluctuations resulting from mark-to-market adjustments of these instruments are recorded in the consolidated statement of financial position and consolidated statement of comprehensive income rather than in the consolidated statement of income. For the third quarter of 2016, Transat recorded a gain of $11.8 million ($8.7 million after income taxes) on these foreign-currency hedging instruments, compared with a gain of $34.2 million ($25.3 million after income taxes) in 2015. For the first nine months of 2016, Transat recorded a loss of $23.4 million ($17.1 million after income taxes) on these foreign-currency hedging instruments, compared with a gain of $19.0 million ($14.6 million after income taxes) in 2015.

Summary of non-operational items – Before non-operating items, Transat posted adjusted net income³ of $2.5 million for the third quarter of 2016 ($0.07 per share) compared with $26.9 million in 2015 ($0.70 per share). For the first nine months, the Corporation posted an adjusted net loss³ of $39.7 million ($1.08 per share) compared with adjusted net income³ of $1.3 million ($0.03 per share) in 2015.

Transat A.T. Inc. is an integrated international tour operator with more than 60 destination countries and that distributes products in over 50 countries. A holiday travel specialist, Transat operates mainly in Canada and Europe, as well as in the Caribbean, Mexico and the Mediterranean Basin. Montreal-based Transat is also active in air transportation, accommodation, destination services and distribution.

NOTES

The following are non-IFRS financial measures used by management as indicators to evaluate ongoing and recurring operational performance.

1)	Adjusted operating income (loss): Operating income (loss) before depreciation and amortization expense, restructuring charge, lump-sum payments relative to collective agreements and other significant unusual items, including premiums for fuel-related derivatives and other derivatives matured during the period.
2)	Adjusted pre-tax income (loss): Income (loss) before income tax expense before change in fair value of fuel-related derivatives and other derivatives, gain (loss) on disposal of a subsidiary, restructuring charge, lump-sum payments relative to collective agreements, impairment of assets and other significant unusual items, including premiums for fuel-related derivatives and other derivatives matured during the period.
3)	Adjusted net income (loss): Net income (loss) attributable to shareholders before net income (loss) from discontinued operations, change in fair value of fuel-related derivatives and other derivatives, gain (loss) on disposal of a subsidiary, restructuring charge, lump-sum payments relative to collective agreements, impairment of assets and other significant unusual items, including premiums for fuel-related derivatives and other derivatives matured during the period, net of related taxes.

Conference call

Third-quarter 2016 conference call: Thursday, September 8, 10 a.m. Dial 1 800 926-9801. Name of conference: Transat. Webcast: www.transat.com. The archived call will be available at 1 800 558-5253, access code 21806235, until October 7, 2016.

Non-IFRS measures

Transat prepares its financial statements in accordance with International Financial Reporting Standards (IFRS). We will occasionally refer to non-IFRS financial measures in the news release. These non-IFRS financial measures do not have any meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. They are furnished to provide additional information and should not be considered as a substitute for measures of performance prepared in accordance with IFRS. All amounts are in Canadian dollars unless otherwise indicated.

Caution regarding forward-looking statements

This news release contains certain forward-looking statements regarding the Corporation's expectation that travel reservations will follow the trends. In making these statements, the Corporation has assumed that the trends in reservations and selling prices will continue, and that fuel prices, other costs and the value of the Canadian dollar against foreign currencies will remain stable. If these assumptions prove incorrect, actual results and developments may differ materially from those contemplated by the forward-looking statements contained in this news release. Factors that could lead actual results to differ include, among others, extreme weather conditions, fuel prices, war, terrorism, market and general economic conditions, disease outbreaks, demand fluctuations related to seasonality in the travel industry, ability to reduce operating costs and workforce, labour relations, collective agreements and labour conflicts, issues related to pensions, exchange rate, interest rates, future funding, evolution of legal environment, introduction of unfavourable regulations, lawsuits and legal challenges, and other risks detailed from time to time in the Corporation's continuous disclosure documents.

These forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by these forward-looking statements. The Corporation considers the assumptions on which these forward-looking statements are based to be reasonable, but cautions the reader that these assumptions regarding future events, many of which are beyond its control, may ultimately prove to be incorrect since they are subject to risks and uncertainties that affect the Corporation. For additional information with respect to these and other factors, see the Annual Information Form and Annual Report for the year ended October 31, 2015, filed with Canadian securities commissions. The Corporation disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by securities laws.

SOURCE Transat A.T. Inc.

Source: Transat A.T. Inc. (www.transat.com); Media: Christophe Hennebelle, 514 987-1660, poste 4584; Financial analysts: Denis Pétrin, Chief Financial Officer, 514 987-1660