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Transat turns year ago loss into profit

Dec. 17, 2009, Montreal – Transat A.T. Inc. swung to a profit in the fourth quarter despite lower revenues as the travel company benefited from a dramatic reduction in hotel costs along with other savings.


December 17, 2009
By Melissa Damota

Dec. 17, 2009, Montreal – Transat A.T. Inc. swung to a profit in the fourth quarter despite lower revenues as the travel company benefited from a dramatic reduction in hotel costs along with other savings.

The Montreal-based tourism operator reported net income of $18.1 million or 52 cents per share for the quarter ended Oct. 31. That was up from a year-ago net loss of $82.4 million or $2.54 per share.

Revenues for the quarter totalled $719.7 million, down from $790.4 million last year as it suffered from lower prices and fewer travellers, particularly in it operations in France.

Analysts had expected revenue of $774 million and adjusted earnings of 29 cents, according to estimates compiled by Thomson Reuters.

Transat said its nine per cent decline in revenue was largely due to a decrease in average sale prices and a drop in the number of travellers as a result of a weak economy and the spread of the H1N1 virus.

Lower input costs increased Transat operating margin to 4.9 per cent, well ahead of forecasts of 3.7 per cent as direct costs fell 10.5 per cent to $350.2 million.

The primary reason was a dramatic reduction of hotel costs as the weak economy reduced the number of travellers from the United States and Europe.

Profits have grown in the fourth quarter despite having the same number of customers as last year because of lower input costs, said CEO Jean-Marc Eustache.

"Input costs have been going down for the entire industry and at Transat we have been able to reduce our input costs maybe more than others,'' he said Thursday during a conference call.

The deal with CanJet Airlines to use around 14 fuel-efficient Boeing 737s saved $5 million in flying costs last summer and those savings are expected to increase substantially  over the busier winter season. Fuel prices are also down and Transat has cut administrative overhead expenses.

Eustache said much of the margin gains are sustainable but that the company will reduce capacity to preserve profits if demand slows in the winter months. "If it is necessary we will have less capacity to be sure that at the end of the day we improve our bottom line,'' he said.

While most competitors are acting responsibly by not increasing capacity, Eustache said Air Canada Vacations and WestJet Vacations have been adding seats unnecessarily.

"It's because of guys like that we don't make the money that we should make,'' he said.

David Newman of National Bank Financial said Transat's annual
cost savings could total $30 million to $40 million.

"We believe the cost savings achieved by Transat lead to a more favourable outlook'' for the company, he said, raising his price target for its stock by $3 to $23.

On the Toronto Stock Exchange, Transat's shares soared nearly nine per cent, gaining $1.57 at $19.16 in early afternoon trading Thursday.

The company's revenue from its North American business units went down 10 per cent during the fourth quarter largely due to a drop in sale prices and a decline in volume. Transat said the volume decline came from a reduction in European sales of travel to Canadian destinations.

Revenues for European business units, generated by sales in Europe and Canada, decreased nearly eight per cent in the fourth quarter despite a slight increase in the number of travellers.

For the fiscal year, Transat posted revenues of $3.55 billion, an increase of one per cent from $3.51 billion in 2008.

Annual net income was $61.8 million or $1.85 per share, compared to a net loss of $49.4 million or $1.49 per share in 2008.

Transat said reservations from Canada to sunny destinations for winter 2010 were lower than year-ago levels, leading the company to reduce capacity by nine per cent in the first quarter of 2010 to protect its load factors.