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Transat stock plunges after first-quarter loss

March 12, 2010, Montreal - Transat A.T. Inc. said it's model as one of Canada's largest vacation companies isn't broken even though poor results and the prospect of a loss for the key winter travel period caused its shares to plunge Thursday.


March 12, 2010
By The Canadian Press

Transat's class B shares fell $5.80 to close at $13.70 on the Toronto Stock Exchange, a decline of nearly 30 per cent.

Company president Jean-Marc Eustache said the drop was an expected consequence of poor results, caused in part by a decision by rivals Air Canada and WestJet to flood the market with low-priced vacation packages.

"It's a slap in the face — a strong one — but the old lion is not dead and you're going to see it for next year and (we'll) give them a ride they've never seen in their lives,'' the industry veteran said in a conference call.

The Montreal-based company, which operates Air Transat, and sells vacation packages, reported a loss of $13.9 million or 37 cents per share for the three months ended Jan. 31. That was less than half the loss of $29.4 million or 90 cents per share booked during the year-earlier quarter.

Its adjusted earnings amounted to a loss of 48 cents per share, which was far deeper than the average analyst estimate of a loss of nine cents per share, according to Thomson Reuters and worse than the 36 cents per share reported a year earlier.

Revenue totalled $792.6 million compared with $877.3 million a year-earlier.

Eustache said Transat cut operating costs significantly, partially offsetting the impact of lower prices and margins in the intense competitive environment.

However, he admitted the company made a strategic blunder in cutting capacity by 10 per cent during the year's slowest quarter to stem losses. The reduction was quickly sucked up by rivals — notably WestJet Vacations and Air Canada Vacations — which increased their offerings to sun destinations as they cut capacity on their regular domestic and transborder flights.

Continued price pressure is expected to cause Transat to lose money in the second quarter, but not on an operating basis. However, the company wouldn't say how deep the loss will be nor whether it will result in a loss for the year.

A recovery isn't expected until the winter of 2011.

"It seems that the recession has ended, but we think there has to be some realism about 2010 which will be a transition year which will at most see an improvement rather than a full recovery,'' Eustache told shareholders during an annual meeting.

The industry is also reaping the challenges from having increased capacity by up to 30 per cent over the past couple of years, including 17 per cent in 2008.

Transat said it is working on strategies to differentiate itself
from its rivals and avoid constantly reducing prices.

The focus will likely be to improve customer service and perhaps
to offer some type of loyalty reward, said chief operating officer
Nelson Gentiletti.

"With the advent of the Internet, with the fact that consumers are substantially more demanding than they were before, we really have to ratchet up our focus on the customer,'' he told reporters.

That includes improving the way it communicates with customers and address complaints.

It has already increased the leg room on Air Transat planes and is trying to resolve consumer concerns about service aboard aircraft operated by partner CanJet.

Analyst Cameron Doerksen of Versant Partners said the worse-than-expected results and weak outlook pushed him to reduce his Transat rating to neutral from buy and lowered his target by $7 to $15.

"Although the longer-term macro environment is seemingly improving for travel companies, given Transat's negative outlook and the severity of the 'miss' in the first quarter, we don't see many reasons why the stock will move higher in the short-term,'' he wrote in a report.

Doerksen said he's never before seen Transat lose money in the seasonally strongest second quarter.

For the summer, improving demand, a more rational competitive environment, cost savings and a stronger Canadian dollar should lead to improved results in the second half of the year.