No record summer in 2016

Results from continuing operations for the fourth quarter:

• Revenues of $612.1 million, compared with $634.0 million in 2015.
• Adjusted operating income¹ of $46.5 million, compared with $70.8 million in 2015.
• Adjusted net income³ of $24.2 million, compared with $44.6 million in 2015.
• Sale of business units Transat France and Tourgreece for €63.4 million ($93.3 million).

Results from continuing operations for fiscal 2016:

• Revenues of $2.9 billion, compared with $2.9 billion in 2015.
• Adjusted operating income¹ of $25.8 million, compared with $100.6 million in 2015.
• Adjusted net loss³ of $15.5 million, compared with adjusted net income³ of $45.9 million in 2015.

MONTREAL, Dec. 15, 2016 /CNW Telbec/ - Transat A.T. Inc., one of the largest integrated tourism companies in the world and Canada's holiday travel leader, posted revenues of $612.1 million for the quarter ended October 31, 2016, compared with $634.0 million in 2015, a decrease of $21.9 million, or 3.5%. The Corporation recorded adjusted operating income¹ of $46.5 million, compared with $70.8 million in 2015, and net income attributable to shareholders of $34.9 million ($0.95 per share basic and diluted), compared with $69.1 million ($1.82 per share basic and diluted) in 2015. Before non-operating items, Transat reported adjusted net income³ of $24.2 million ($0.66 per share) for the fourth quarter of 2016, compared with $44.6 million ($1.18 per share) in 2015.

"At the end of the previous quarter, we forecasted that we would have difficulty achieving another record summer in 2016, given the drastic increase in overall supply compared with the year before," said Jean-Marc Eustache, President and Chief Executive Officer of Transat. "Our prediction proved to be correct. We've had a satisfactory summer season per se, but it was not enough to offset the especially challenging winter, with the end result that we are finishing the year with a slight adjusted net loss, equivalent to about 0.5% of sales."

Fourth-quarter highlights

The Corporation posted revenues of $612.1 million, compared with $634.0 million in 2015. The decrease of $21.9 million (3.5%) was due mainly to lower load factors (-3.6%), and lower average selling prices (-8.9%) on the transatlantic market, the main market for this period. The number of passengers increased by 3.4%. The Corporation increased capacity in this market by 7.4% compared with 2015, while overall capacity increased nearly 14%. On the Sun destinations market, average selling prices increased by 3.7%, the Corporation increased capacity by 5.0% compared with 2015, and the number of passengers rose by 2.2%.

The Corporation posted adjusted operating income¹ of $46.5 million from continued activities, compared with $70.8 million in 2015. The decrease stemmed mainly from the lower load factors and lower average selling prices, which lower fuel costs and continuing cost-reduction efforts could not fully offset. The decrease in fuel costs, combined with the decline in value of the Canadian dollar against its U.S. counterpart, led to a decrease in operating costs of $12.9 million on the transatlantic market.

Ocean Hotels, which is 35% owned by Transat, contributed $4.3 million to the Corporation's net loss for the quarter, compared with a contribution of $1.6 million to net income in 2015. The decrease, which was in spite of an improvement in profitability of operations, resulted from the recording of an exchange-rate difference following conversion of financial statements to dollars and the recording of a tax recovery in 2015. Transat's equity participation in Ocean Hotels accounted for $97.7 million in assets as at October 31, 2016, net of the dividend of $9.1 million received during the quarter, compared with $97.9 million as at October 31, 2015.

12-month period highlights

For fiscal 2016, the Corporation reported revenues of $2.9 billion, compared with $2.9 billion in 2015, and adjusted operating income¹ of $25.8 million, compared with $100.6 million in 2015. The Corporation increased supply on the Sun destinations market by 4.5% during the winter season and by 6.2% on the transatlantic market in the summer season. The number of passengers on all markets combined for fiscal 2016 increased by 5.5%.

Fears prompted by the Zika virus, the threat of strike action by Air Transat pilots, a decrease in demand for travel from Western Canada, and increased competition affected the Corporation's winter-season performance. Furthermore, the decline in value of the Canadian dollar against the U.S. currency, combined with lower fuel costs, resulted in a $49.0 million increase in operating costs for Sun destinations packages, nearly 60% of which was offset by the Corporation's cost-reduction efforts and by higher average selling prices. The combination of these factors prevented any improvement in profitability.

For the summer, the decrease in adjusted operating income¹ stemmed mainly from the lower load factors and from reduced average selling prices on the transatlantic market due to the increase in overall market capacity of 14%, offset in part by the decrease in fuel costs, which combined with the decline in value of the Canadian dollar against the U.S. currency, resulted in a decrease in operating costs of $28.3 million on the transatlantic market. Special items also contributed to the weakening in operating results.

Ocean Hotels contributed $6.3 million to the Corporation's results for fiscal 2016, compared with $7.0 million in 2015. The decrease stems from a currency exchange loss, offset by higher operating profitability.

For the year ended October 31, 2016, the Corporation recorded a $79.7 million asset-impairment charge on certain trademarks and on goodwill. The asset-impairment charge of $15.8 million on trademarks, recorded in the second quarter, resulted from the introduction of a new booking platform encouraging purchase of seats by European travellers directly from Air Transat, rather than through the European business units. The charge also reflects the recent refocusing on the Transat brand, which has brought about the elimination of certain other brands. As at October 31, 2016, significant change in the environment in which the Corporation operates, including substantial increases in capacity on the Corporation's market (and their effects on selling prices and load factors), volatility of currency markets and fuel prices, and the recent deterioration in summer results prompted management to review its assumptions for estimating future cash flows and, in turn, conduct a new goodwill impairment test. As a result, the Corporation recorded a $63.9 million impairment charge for the fourth quarter.

Strategic plan and margin-improvement initiatives

"We have taken major steps forward in the implementation of our strategic plan," Mr. Eustache explained, "specifically regarding the simplification of our distribution structure in Europe and of our Web presence. We are now ready to begin the next phase, namely, make an acquisition in the hotel market in the South, before, in a third phase, setting our sights on the U.S. The year just concluded has been challenging for our bottom line, but particularly fruitful when it came to making progress on our transformation plan."

To that end, the Corporation has initiated strategic thinking and discussions with its partner, H10 Hotels, with regard to its 35% interest in Ocean Hotels. During the next months, the Corporation will evaluate the preferred course of action: increasing its stake to 100%, or selling it to its partner, who currently holds the remaining 65% share, so as to render the funds available for other investments. The target of the Corporation in any case is to have full control of its hotel unit. The Corporation expects to be in a position to make its decision public in the coming months and does not intend to make any further comments in the meantime.

For the record, Ocean Hotels directly owns 3 hotels with a total of 1,600 rooms, and manages another four in Cuba comprising 2,000 rooms. The goal of the venture is to reach 5,600 rooms by 2019 through a mix of owned and operated hotels.

As set forth in the plan announced during the first quarter of 2015, the Corporation is continuing its cost-reduction and margin-improvement initiatives, which target savings of at least $100 million over three years. The main initiatives that contributed to reaching the objective of $45 million in 2015 were Air Transat's insourcing of narrow-body aircraft and implementation of a flexible fleet. The principal factors leading to achievement of the $30 million for 2016 were the continued application of the cost-reduction program at Air Transat, optimization of hotel costs, and growth in ancillary revenues. The Corporation plans to save at least another $25 million in 2017.

Sale of Transat France and Tourgreece

On October 21, 2016, European anti-trust authorities approved the transaction for the sale of the Corporation's France- and Greece-based tour-operating business units (Transat France and Tourgreece, respectively) to multinational tourism company TUI AG. The Corporation therefore closed the sale on October 31, 2016, for €63.4 million ($93.3 million) cash. The final amount results from adjustments, to the initially announced sale price of €54.5 million, that were stipulated in the sale agreement and determined during the closure of the accounts as at October 31. It is to be noted that the buyer has 90 business days following the sale closing date to accept the price in order for it to become final.

The sale therefore resulted in a gain on disposal of $49.7 million and a $68.0 million increase in the amount of the Corporation's cash as at October 31, 2016, which corresponds to the sale price less Transat France's cash, which amounted to $23.0 million, and transaction fees paid on that date.

As at October 31, 2015, the France- and Greece-based tour-operating activities were recorded neither as discontinued operations, nor as assets held for sale. As a result, the consolidated statements of income and of comprehensive income have been restated to present the discontinued operations separately from continuing operations.

The disposal of Transat France and Tourgreece has no impact on either Transat's transatlantic program or the Air Transat operations.

Financial position

As at October 31, 2016, the Corporation's cash totalled $363.7 million, compared with $336.4 million at the same date in 2015. The working-capital ratio was 1.28, as against 1.09, and deposits from customers for future travel amounted to $409.0 million, compared with $489.6 million a year earlier; the decrease is attributable mainly to the disposal of the Transat France and Tourgreece business units. Off-balance-sheet agreements, excluding contracts with service providers, stood at $710.3 million as at October 31, 2016, compared with $713.7 million as at October 31, 2015, the decrease being attributable to payments made during the period, offset by the signing of aircraft leases and the decline in value of the Canadian dollar against the U.S. dollar.

Outlook for the first 6-month period

On the Sun destinations market outbound from Canada, the Corporation's main market segment in the winter, Transat's capacity is approximately 3% lower than that offered last year. To date, 50% of that capacity has been sold, bookings are ahead by 2.2%, and load factors are higher by 3.3%. The impact of the weakened Canadian dollar, added to the increase in fuel costs, will be a 3.0% increase in operating costs if the dollar and fuel costs remain at their current level. At this moment, margins are lower by 1.5% compared with last year at the same date.

On the transatlantic market, where it is low season, Transat's capacity is greater by 8% than that of last winter. To date, 49% of that capacity has been sold, bookings are ahead by 10%, load factors are higher by 0.8%, and selling prices are lower by 4.4%. Higher fuel costs, in combination with currency variations, will result in an increase in operating costs of 2.7% if the dollar remains at its current level against the U.S. dollar, the euro and the pound, and if fuel prices remain stable. Margins are currently lower by 7.8% compared with last year at the same date.

With the winter of 2016 having been affected by several important events (worry over the Zika virus, the threat of strike action by pilots and terror attacks in Europe), the situation deteriorated as of the beginning of December. In comparison, the results may therefore show improvement over last year, once the season is over, despite the indicators mentioned above.

Additional information

The results were affected by non-operating items, as summarized in the following table:

Hedging – The Corporation records in the statement of income any gains or losses resulting from mark-to-market adjustments of the derivative financial instruments used to manage aircraft fuel-price risk, as well any gains or losses resulting from mark-to-market adjustments of certain hedging instruments used to mitigate exchange-rate exposure stemming from its expenses and/or revenues in foreign currencies. For the fourth quarter of 2016, this translates into a $30.9 million non-cash gain ($22.6 million after income taxes), compared with one of $19.6 million ($14.4 million after income taxes) in 2015. For the 12-month period, this represents a non-cash loss of $6.9 million ($5.0 million after income taxes), compared with one of $1.4 million ($1.0 million after income taxes) in 2015.

The Corporation 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 consolidated statement of financial position and consolidated statement of comprehensive income rather than in the consolidated statement of income. For the fourth quarter of 2016, Transat recorded a gain of $6.3 million ($4.6 million after income taxes) on these foreign-currency hedging instruments, compared with a loss of $13.6 million ($10.6 million after income taxes) in 2015. For the 12-month period, Transat recorded a loss of $17.1 million ($12.5 million after income taxes) on these foreign-currency hedging instruments, compared with a gain of $5.5 million ($4.0 million after income taxes) in 2015.

Summary of non-operational items – Before non-operating items, Transat posted adjusted net income³ of $24.2 million for the fourth quarter of 2016 ($0.66 per share) compared with $44.6 million in 2015 ($1.18 per share). For the 12-month period, the Corporation posted an adjusted net loss³ of $15.5 million ($0.42 per share) compared with adjusted net income³ of $45.9 million ($1.19 per share) in 2015.

Transat A.T. Inc. is a major international integrated tourism company specialized in holiday travel and active in air transportation, accommodation, travel packaging and distribution. It operates mainly in Canada, Europe, Mexico and the Caribbean, with some 25 destination countries, and distributes products in over 50 countries. Based in Montreal, the company employs more than 5,000 people. Transat is a recognized Travelife Partner whose firm commitment to sustainable tourism development is reflected in its multiple corporate responsibility initiatives. For two years running, the company has made Corporate Knights research firm's annual list of the Best 50 Corporate Citizens in Canada (TSX: TRZ).

NOTES

The following are non-IFRS financial measures used by management as indicators to evaluate ongoing and recurring operational performance.

Conference call

Fourth quarter 2016 conference call: Thursday, December 15, 10 a.m. Dial 1 800 926-9801. Name of conference: Transat. Webcast: www.transat.com. The archived call will be available at 1 800 558-5253, access code 21806237, until January 14, 2017.

Non-IFRS measures

Transat prepares its financial statements in accordance with International Financial Reporting Standards (IFRS). We will occasionally refer to non-IFRS financial measures in the news release. These non-IFRS financial measures do not have any meaning prescribed by IFRS 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 IFRS. 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 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. Similarly, the release refers to discussions with H10 Hotels, which may or may not lead to a transaction. If these assumptions prove incorrect, actual results and developments may differ materially from those contemplated by the forward-looking statements contained in this news release. Factors that could lead actual results to differ include, among others, extreme weather conditions, fuel prices, 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, 2016, 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.

SOURCE Transat A.T. Inc.