Margins pressured by fuel prices
- Revenues of $1.101 billion, compared with $1.060 billion in 2010, reflecting an increase in average selling prices.
- Margin1 of $9.2 million, compared with $8.2 million in 2010.
- Net income of $8.6 million, compared with $6.2 million in 2010.
- Adjusted after-tax loss3 of $0.7 million, compared with $2.7 million in 2010
Transat A.T. Inc., one of the largest integrated tourism companies in the world and Canada's holiday travel leader, posted revenues of $1.101 billion for the quarter ended April 30, 2011, compared with $1.060 billion in 2010, an increase of $40.7 million, or 3.8%. The Corporation recorded a margin1 of $9.2 million, compared with $8.2 million in 2010, and net income of $8.6 million ($0.23 per share on a diluted basis), compared with $6.2 million ($0.16 per share on a diluted basis) in 2010. Before non-cash and non-operating items, Transat reported an adjusted after-tax loss3 of $0.7 million ($0.02 per share on a diluted basis), compared with $2.7 million ($0.07 per share on a diluted basis) in 2010.
“These quarterly results reflect many of the initiatives put in place to grow our revenues and maintain our leadership position on the market. However, as anticipated, these efforts have been offset by the substantial and quick rise in fuel prices,” said President and Chief Executive Officer Jean-Marc Eustache.
Second quarter highlights
The Corporation’s second-quarter revenues increased by $40.7 million. This increase is mainly attributable to higher average selling prices stemming from higher fuel surcharges. Transat recorded an 8% increase in the number of travellers from Canada to sun destinations. The increase in revenues was offset in part by the strength of the Canadian dollar against the euro and pound sterling, which caused a decrease in the revenues of foreign business units when expressed in Canadian dollars. The Corporation recorded a margin1 of $9.2 million, compared with $8.2 million in 2010. Although margins are slightly higher than the prior year as a result of higher average selling prices, these were curtailed higher aircraft fuel prices and the continued, intense competition on sun destinations
Revenues of North American business units, which are generated by sales in Canada and abroad, increased by $21.7 million (2.5%) compared with the same period in 2010. The increase is attributable to higher average selling prices offset partially by a 1.2% decrease in the number of travellers. North American business units recorded a margin of 1.1%, compared with 1.5% in 2010. The decrease is attributable mainly to the rise of fuel prices.
Revenues of European business units, which are generated by sales made in Europe and in Canada, increased by $19.0 million (10.9%) over 2010. The favourable impact from higher average selling prices was offset by the weaker euro and pound sterling. All European business units recorded higher revenues, except Amplitravel, which sells packages to Tunisia. European operations generated an operating loss of $0.5 million (0.3%) for the quarter, compared with $4.9 million (2.8%) in 2010. Second quarter margins in 2011 were impacted by the unrest in North Africa, which caused a temporary suspension of sales to Tunisia whereas in 2010, European margins were more significantly impacted by the additional costs incurred as a result of the volcanic activity in Iceland.
First six-month period highlights
For the first six months, the Corporation’s revenues increased by $58.3 million over 2010. This increase is mainly attributable to higher average selling prices stemming from higher fuel surcharges. Transat recorded a 12% increase in the number of travellers from Canada to sun destinations. The increase in revenues was offset in part by the strength of the Canadian dollar against the euro and pound sterling, which caused a decrease in the revenues of foreign business units when expressed in Canadian dollars. The Corporation recorded an operating loss1 of $5.5 million, compared with $4.2 million in 2010, as margins suffered from higher aircraft fuel prices. Intense competition also contributed to reduced margins.
Revenues of North American business units increased by $40.5 million (2.6%) compared with the same period in 2010. The increase is attributable to higher average selling prices, with the number of travellers remaining stable. For the period, North American business units recorded a margin of 0.2%, compared with 0.6% in 2010. The decrease is attributable mainly to the rise of fuel prices.
Revenues of European business units increased by $17.8 million (5.8%) over 2010. The favourable impact from higher average selling prices was offset by the weaker euro and pound sterling. European operations generated an operating loss of $9.1 million (2.8%) for the period, compared with $13.4 million (4.3%) in 2010. Margins in 2011 were impacted by the unrest in North Africa, which caused a temporary suspension of sales to Tunisia. In 2010, European margins had suffered from additional costs relating to the volcanic activity in Iceland.
Financial position
The Corporation’s free cash totalled $278.2 million as at April 30, 2011, compared with $ 206.7 million as at April 30, 2010. Total balance sheet debt decreased by $48.5 million during the 12-month period, to $6.9 million. The net cash4 position improved by $119.7 million, from a net cash position of 151.6 million as at April 30, 2010 to $271.4 million as at January 31, 2011. Most of the improvement over the past year is due to the operating profit and better working capital management.
Off-balance-sheet agreements stood at $618.8 million as at April 30, 2011, compared with $397.5 million as at April 30, 2010, reflecting new leases for additional Airbus A330s as part of the Air Transat fleet renewal program.
Cash flows from operating activities decreased by $23.3 million during the quarter, from $128.0 million in 2010, to $104.7 million in 2011; and increased by $45.5 million during the first six months, from $106.7 million in 2010 to $152.2 million in 2011. The increase stems mainly from improved working capital management during the winter.
Outlook
The transatlantic market accounts for a very significant portion of Transat’s business in the summer. For the second half of 2011, the Corporation’s capacity and bookings are approximately 15% higher than the actual capacity offered in 2010; approximately 60% of capacity has been sold and load factors are similar to last year at the same date.
Aircraft fuel costs, expressed in Canadian dollars, have increased by approximately 30%, including the impact of the introduction of additional fuel-efficient Airbus A330s and fuel hedging. Despite additional fuel surcharges implemented, selling prices are similar to last year.
In France, bookings for medium-haul travel are slightly behind compared to last year, due to unrest in North Africa. The decrease in bookings for North African destinations, notably Tunisia and Egypt, is partially offset by the rise on other destinations. On long-haul travel, bookings are more than 10% higher than the prior year.
Consequently, Transat expects the results of the second half to be inferior to the record results reported last year.
Additional Information
The results were affected by non-cash and non-operating items, as summarized in the following table:
Hedging—The Corporation records any gains or losses resulting from mark-to-market adjustments of the derivative financial instruments used to manage aircraft fuel price risk in the statement of income. For the second quarter 2011, this translates into a $8.2 million non-cash gain ($5.8 million after income taxes) compared with a $9.1 million gain ($6.3 million after income taxes) in 2010. For the first six months of 2011, this translates into a $12.0 million non-cash gain ($8.6 million after income taxes) compared with a $10.3 million gain ($7.2 million after income taxes) in 2010.
The Corporation also 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 balance sheet and statement of comprehensive income rather than in the statement of income. For the second quarter 2011, Transat recorded a $3.6 million loss ($2.5 million after income taxes) on these foreign-currency hedging instruments, compared with a $3.0 million gain ($2.2 million after income taxes) in 2010. For the first six months of 2011, Transat recorded a $4.0 million loss ($3.0 million after income taxes) on these foreign-currency hedging instruments, compared with a $18.0 million gain ($12.6 million after income taxes) in 2010.
Commercial paper—Results for the quarter include a $3.5 million gain ($3.5 million after income taxes) stemming from the revaluation of the Corporation’s investments in asset-backed commercial paper (ABCP). In 2010, Transat had recorded a revaluation gain of $1.9 million ($1.9 million after income taxes). As of April 30, 2011, the total accumulated provision represented 33.4% of the notional amount of the Corporation’s $117.3 million in ABCP investments.
Gain on restructuring—On September 24, 2009, Transat announced a plan to make structural changes to its distribution network in France. For the second quarter 2010, the Corporation reported a $1.0 million gain on disposal of assets, comprising mainly gains on the sale of travel agencies.
Summary of non-cash items—Before the aforementioned non-cash and non-operating items, Transat posted an adjusted after-tax loss of $0.7 million ($0.02 per share on a diluted basis) compared with an adjusted after-tax loss of $2.7 million ($0.07 per share on a diluted basis) in 2010 for the quarter, and an adjusted after-tax loss of $20.1 million ($0.53 per share on a diluted basis), compared with an adjusted after-tax loss of $20.9 million ($0.55 per share on a diluted basis) in 2010 for the first six months.
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. (TSX: TRZ.B, TRZ.A)
NOTES
The following are non-GAAP financial measures used by management as indicators to evaluate ongoing and recurring operational performance.
(1) MARGIN (OPERATING LOSS): Revenues less operating expenses.
(2) ADJUSTED INCOME (LOSS): Income (loss) before income taxes, non-controlling interest in business units’ results, impact of fuel hedge accounting, ABCP revaluation, and restructuring charges (gain on restructuring).
(3) ADJUSTED AFTER-TAX INCOME (LOSS): Net income (loss) before impact of fuel hedge accounting, ABCP revaluation and restructuring charges (gain on restructuring), net of related taxes.
(4) NET CASH: Cash and cash equivalents not held in trust or otherwise reserved, less balance sheet debt.
For more information on non-GAAP financial measures, please refer to the “Non-GAAP financial measures” section of the Management’s Discussion and Analysis report.
Conference call
Second quarter 2011 conference call: Thursday, June 9, 2011, 9.30 a.m. Dial 1 866 542-4146 or 514 392-9193. Name of conference: Transat. Webcast: www.transat.com. The archived call will be available at 1 800 408-3053 or 514 861-2272, access code 5841683 pound sign, until July 9, 2011.
Non-GAAP measures
Transat prepares its financial statements in accordance with Canadian generally accepted accounting principles (“GAAP”). We will occasionally refer to non-GAAP financial measures in the news release. These non-GAAP financial measures do not have any meaning prescribed by GAAP 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 GAAP. 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 the assumptions used in the valuation of the ABCP securities will materialize, and 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 press release. Factors that could lead actual results to differ include, among others, extreme weather conditions, 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, 2010, 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.