The head of Transat AT Inc. TRZ-T said consumers show little sign of travel wariness, but increased competition and customer financial strain have begun to thin out profit margins even as the travel company guns for major growth next year.
“Consumers clearly continue to prioritize travel despite inflation,” CEO Annick Guerard told analysts on a conference call Thursday, but added that economic headwinds and competition from rival fleets have picked up.
“People are looking to get best possible value for money. We have witnessed slower price growth compared to last year and we believe it will continue into 2024 because of the economic environment and the high interest rates that prevail,” she said.
“We believe that 2023 prices reflected a revenge-travel demand on limited capacity, whereas 2024 is returning to more normal conditions.”
On Wednesday, Statistics Canada said Canadians are spending a greater proportion of their income on debt servicing, as payments on mortgages, loans and credit grew faster than income in the third quarter versus the second.
Despite potential consumer reluctance to shell out on leisure in the face of soaring debt payments, Transat plans to increase flight capacity by 19 per cent next year through more aircraft and better “fleet utilization.”
The planes will be used to offer higher frequency on some routes, year-round service for other destinations such as southern France and El Salvador, as well as some new summer destinations including Marrakesh in Morocco, the company said.
Transat eked out a profit in its latest quarter, a sharp improvement from losses that averaged more than $1 million per day a year ago as the travel company continues to ramp up flights.
The Montreal-based carrier reported net income of $3.2 million for the three months ended Oct. 31 compared with a loss of $126.2 million in the same period last year.
Higher prices to European destinations helped drive a one-third jump in revenues year over year. The $764.5 million in sales for the quarter — up from $573.1 million a year ago — also sat 10 per cent above 2019 levels despite seven per cent lower capacity and a comparable proportion of seats filled, Transat said.
In its coming financial year, Transat is targeting a profit margin between 7.5 per cent and nine per cent for earnings before interest, taxes, depreciation and amortization, exceeding historical levels.
One challenge could be the greater focus on sun-splashed getaways by several competitors, including ultra-low-cost carriers such as Flair Airlines and Lynx Air. There has been 20 per cent market growth between Canada and sun destinations over the past year, Guerard said, and budget airlines account for more than a third of that.
“Transat has an advantage with a strong customer base looking for packages that these airlines do no offer. It’s difficult for low-cost carlines to win market share without a tour operator business,” the CEO said.
National Bank analyst Cameron Doerksen said that “pricing has deteriorated somewhat on more recent bookings” with Transat.
Across Canada, fares fell 19 per cent in October compared with the same month a year earlier, according to Statistics Canada.
“Although we still expect a solid winter from Transat, we have previously cautioned that winter yields could come under some pressure given the significant increase in overall industry capacity from Canada to sun destinations,” he told investors in a note.
Another hurdle will be the recently discovered defect in the Pratt & Whitney engines on some of Transat’s Airbus A321LR jets. Three of the 15 A321 narrow-bodies that Transat operates will be affected by the “anticipated inspection and removal” of their turbofans, Guerard said. Other airlines are also impacted by the manufacturing flaw, which Pratt & Whitney parent RTX Corp. has said will see hundreds of Airbus jets grounded at any one time over the next few years.
In a separate announcement, Transat said it has signed a deal to sell its 50 per cent stake in the Marival Armony Luxury Resort near Puerto Vallarta in Mexico to its co-owner, the owner of the Marival Group, for US$15.5 million. Proceeds from the sale will be used to repay its $2.1-billion total debt, a figure that reflects the financial toll of the COVID-19 pandemic.
Chief financial officer Patrick Bui said Transat continues to work toward a refinancing deal.
The company also announced it had reached an agreement in principle to renew a collective agreement with the union representing its flight attendants. Details of the deal, subject to a vote by members of the Canadian Union of Public Employees, will be presented to workers in the coming days, Transat said.
It unveiled another deal on Nov. 28, when Air Transat and Porter Airlines agreed to an “alliance” that lets them expand their range of destinations, tap each other’s markets and gear up for a battle with Canada’s biggest carrier, Air Canada. The venture to share revenues and co-ordinate pricing and schedules builds on the two airlines’ codeshare agreement.
For Toronto-based Porter, the deal will open the gate to Europe and the sunny southern getaways currently being served by Air Transat. Meanwhile, the Montreal-based airline, which largely operates tour package trips, can benefit from access to Porter’s rapidly growing network in Canada and the United States.
Porter will account for 15 per cent to 18 per cent of Air Transat’s traffic next year, Guerard said.
On Thursday, the tour package company reported its profit amounted to eight cents per share for its fourth quarter compared with a loss of $126.2 million or $3.32 per share in the same quarter last year.
On an adjusted basis, Transat said it earned 41 cents per share last quarter versus an adjusted loss of $2 per share a year ago. The figure far surpassed analyst expectations of an adjusted loss of 39 cents per share, according to financial markets data firm Refinitiv.