Transat to reduce costs by $100 million: 2015-17 strategic plan

A three-year 2015-2017 strategic plan for Transat A.T. Inc has been released following the release of the company's most recent quarterly results.

The corporation recorded an operating loss of $31 million for the quarter ended Jan. 31, 2015 compared with one of $25.1 million for the same quarter last year. According to Transat, this was due mainly to the depreciation of the Canadian dollar versus the U.S. dollar, which, even in light of lower aircraft fuel prices, led to a $15 million increase in operating expenses.

Company initiatives such as higher selling prices, cost-control initiatives and a currency-hedging program were also unsuccessful in offsetting the impact of currency changes.

That, combined with a deterioration in results in France and reduced revenues from aircraft subleasing, kept Transat from posting improved results for the quarter compared with last year, said Jean-Marc Eustache, president and CEO.

Transat announced its intention to launch a normal-course issuer bid share buyback program, subject to approval from regulatory authorities.

The strategic plan, keeping the corporation on course with efforts to improve efficiency and margins as well as develop markets and foster growth, includes a program to reduce costs and improve margins totaling $100 million over three years, specifically $45 million in 2015 (including the impact of narrow-body aircraft), $30 million in 2016 and $25 million in 2017.

The main initiatives and projects are:

- Reduce air costs by decreasing the number of wide-body aircraft operated in winter following the successful implementation of a flexible narrow-body aircraft fleet.

- Implement a connecting-flights strategy, starting next summer in Canada, using Air Transat's narrow-body aircraft to expand the destination offering in certain source markets. Implement a similar strategy in 2016 in Europe with an air partner, paving the way for new destinations and source markets.

- Increase density of three wide-body Airbus A330s to be dedicated to the London and Paris routes.

- Increase ancillary revenues from the sale of optional services to travellers and from other sources such as freight.

- Continue technological upgrade projects of reservation systems, primarily to improve efficiency and reduce time-to-market of new products.

With a focus on growth in existing markets, main efforts including the introduction of new destinations in Europe, starting with Budapest in summer 2015; fine-tune the Sun destinations offering through exclusive partnerships with hotels and the continued improvement of collections, based on customer expectations; and continue to develop Lookea clubs in France, as well as the tour market.

The plan also includes a program to "significantly transform the corporation's distribution ecosystem in a fully integrated fashion" by continuing to develop the Transat Travel brand, and in particular, complete its implementation in the corporation's own agencies, while also developing a new distribution website as part of a strategy for transparently integrating the customer relations centres and travel agencies.

Finally, in an effort to ensure growth, another element is developing markets and continuing the integration strategy by penetrating new source markets that can generate synergies with current operations, through acquisitions; enhancing presence in destinations as an incoming tour operator, particularly by leveraging Jonview Canada, Tourgreece and Trafic Tours; and developing and growing Ocean Hotels, increasing the number of rooms from the current 2,200 to potentially 5,000 over the duration of the plan.

First-quarter highlights

Transat posted revenues of $788.6 million, compared with $847.2 million in 2014, a decrease of $58.6 million, or 6.9 per cent, and an adjusted operating loss of $35.8 million, versus one of $23.9 million for the same period of 2014.

During the quarter, the corporation's capacity on the Sun destinations market was reduced by 6.5 per cent from the previous year. The number of travellers on all of the markets served by the Corporation declined by 8.1 per cent.

Revenues of North American business units, which are generated by sales in Canada and abroad, decreased by $43.3 million (6 per cent) during the first quarter compared with the same period in 2014.

The decrease stemmed from the decision to reduce product supply on the Sun destinations market by 6.5 per cent, which in part explains the overall drop of 7.6 per cent in the number of travellers, while average selling prices were higher.

Compared with 2014, revenues of European business units, which are generated by sales in Europe and in Canada, decreased by $15.3 million (12.3 per cent), owing to a decrease in the number of travellers. Measured in local currencies, revenues from the European business units declined. This was due to decreased sales of travel products to North Africa and Senegal, which contributed to a drop of 12.4 per cent in the number of travellers during the quarter, compared with 2014, while average selling prices were lower than for the same period last year.

Outlook: Second quarter

The Sun destinations market outbound from Canada accounts for a substantial portion of Transat's business during the winter season, and on that market, margins are particularly slim and volatile.

On the Sun destinations market, Transat's capacity is approximately six per cent lower than that offered last year. To date, 75 per cent of that capacity has been sold, load factors are similar and selling prices are up one per cent compared with last year at the same date.

On the transatlantic market, currently in low season, Transat's capacity is six per cent lower than that marketed last winter. To date, 74 per cent of that capacity has been sold, and load factors and selling prices are similar.

The weakened Canadian dollar, net of the decline in fuel cost, will result in an increase in operating expenses of 2.2 per cent, if the dollar and the cost of fuel remain at their current levels. The increase was 0.1 per cent as of last December.

Given the significant, recent decline in the value of the Canadian currency, the corporation believes that its second-quarter results may be lower than those posted for the same quarter last winter.

Summer 2015

With regard to summer 2015, Transat says it is too soon to draw firm conclusions. To date, 32 per cent of seats have been sold. When compared with the summer of 2014, which ranked as the company's second best, capacity on the transatlantic market is down two per cent. Load factors are higher by two per cent, and prices are down by 3.5 per cent, but operating expenses are expected to be lower by 3.8 per cent if the dollar and the cost of fuel remain at their current levels.