Transat A.T. Inc. – Results for fourth quarter 2019

Provided by Transat A.T. Inc/CNW

Fourth quarter and annual results are up;
Acquisition of the Corporation is pending regulatory approvals

For the fourth quarter:

• Revenues of $693.2 million.
• Adjusted operating income¹ of $50.9 million (Operating income of $23.5 million).*
• Adjusted net income³ of $27.2 million (Net income attributable to shareholders of $20.3 million).*                                                

For the year:

• Revenues of $2.9 billion.
• Adjusted operating income¹ of $38.0 million (Operating loss of $49.8 million)*
• Adjusted net loss³ of $9.4 million (Net loss attributable to shareholders of $33.2 million).*

Transaction with Air Canada:

• Transaction expected to close by the second quarter of the 2020 calendar year if the required regulatory approvals are obtained and conditions are met.
• Approval process underway in the relevant jurisdictions, particularly Canada and Europe

MONTRÉAL, Dec. 12, 2019 /CNW Telbec/ – Transat A.T. Inc., one of the largest integrated tourism companies in the world and Canada’s holiday travel leader, announces its results for the fourth quarter ended October 31, 2019.

“We’re working to obtain the required approvals to complete our transaction, while focusing significant efforts on serving our customers and improving our results,” stated Jean-Marc Eustache, President and Chief Executive Officer of Transat. “I salute our employees’ professionalism which has allowed us to achieve these last two objectives this year.”

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* NOTE: Figures in parentheses and not designated as adjusted on this page refer to IFRS financial measures for the current year.

Fourth-Quarter Highlights

The Corporation posted revenues of $693.2 million for the quarter, up $24.4 million (3.6%) compared with 2018. This increase resulted from higher average selling prices across all programs, as well as growth in ancillary revenues.

Operations generated adjusted operating income of $23.5 million, compared with $6.9 million in 2018, an improvement of $16.6 million. The increase in operating income resulted primarily from higher average selling prices across all programs, and growth in ancillary revenues, partially offset by the costs associated with the transaction with Air Canada and by higher aircraft maintenance costs due to a larger number of maintenance events than last year. Adjusted operating income¹ amounted to $50.9 million, compared with $31.5 million in 2018, an improvement of $19.4 million.

Net income attributable to shareholders amounted to $20.3 million ($0.54 per share, basic and diluted) compared with $6.8 million ($0.18 per share, basic and diluted) in 2018. Net income attributable to shareholders included expenses of $10.1 million recorded in connection with the transaction with Air Canada. Before non-operating items, Transat reported adjusted net income³ of $27.2 million ($0.72 per share) for the fourth quarter of 2019, compared with $13.7 million ($0.36 per share) in 2018.

Highlights for the year

The Corporation recognized revenues of $2.9 billion, up $88.2 million or 3.1% from 2018. During winter, higher revenues were partially offset by a greater proportion of flight-only sales, which generate lower revenue per unit than packages. During the summer season, revenues were $58.7 million higher than in 2018. The higher revenues were driven primarily by the increase in average selling prices and load factors across all programs, as well as growth in ancillary revenues.

The Corporation recognized an operating loss for the winter season amounting to $65.7 million (4.2%) compared with $46.7 million (3.1%) in 2018. The increase in operating loss resulted primarily from the increase in fuel prices, combined with the weakening of the dollar against the U.S. dollar and from the additional costs incurred for the transition and optimization of the Corporation’s fleet, which in total exceeded the increase in the average selling prices of packages.

During the summer, operating income totalled $15.9 million (1.1%) compared with an operating loss of $3.9 million (0.3%) for the previous year. The improvement in operating income was driven by higher average selling prices and load factors across all programs, and growth in ancillary revenues. The increase in operating income was partially offset by the costs associated with the transaction with Air Canada, amounting to $23.9 million, and by higher aircraft maintenance costs due to a larger number of maintenance events than last year.

For the year, operations resulted in an adjusted operating income¹ of $38.0 million compared with $17.2 million in 2018, an increase of $20.8 million. This increase resulted from the higher adjusted operating income¹ during the summer season, partially offset by the increase in adjusted operating loss¹ for the winter season.

Net loss attributable to shareholders amounted to $33.2 million or $0.88 per share (basic and diluted) compared with net income of $6.5 million or $0.17 per share (basic and diluted) for the previous year. Net income for 2019 included after tax expenses of $17.5 million related to the transaction with Air Canada, while net income for 2018 included a $31.3 million gain on the sale of the Corporation’s subsidiary Jonview. Excluding non-operating items, Transat reported an adjusted net loss³ of $9.4 million ($0.25 per share) for the period ended October 31, 2019, compared with $24.0 million ($0.64 per share) in 2018.

Financial Position

As at October 31, 2019, cash and cash equivalents totalled $564.8 million compared with $593.7 million as at October 31, 2018. This change resulted primarily from the purchase of a replacement engine for the Airbus A321neo LR fleet ($16.8 million), from the purchase of land in Mexico ($15.8 million), from the change in the calculation of cash and cash equivalents to be held in trust following the adoption of the new revenue recognition standard IFRS 15 ($14.4 million), from professional fees related to the transaction with Air Canada ($10.3 million) and from the settlement of a litigation in the courts of the state of New York ($6.7 million), partially offset by positive cash flows generated by operations.

The working-capital ratio was 1.23, compared with 1.33 as at October 31, 2018.

Deposits from customers for future travel amounted to $561.4 million, compared with $517.4 million as at October 31, 2018.

Off-balance-sheet agreements, excluding contracts with service providers, stood at $2.2 billion as at October 31, 2019, compared with $2.5 billion as at October 31, 2018. This $296.6 million decrease resulted mainly from repayments made during the year, combined with a decrease in estimated future rent payments for the Airbus A321neo LRs to be added to the fleet by 2022 due to lower long-term interest rates.

IFRS update

On November 1, 2018, the Corporation adopted IFRS 9, Financial Instruments, and IFRS 15, Revenue from Contracts with Customers. The 2018 comparative figures have been restated to reflect these changes.

In short, the adoption of these standards resulted in a $2.6 million increase in shareholders’ equity as at October 31, 2017. For the year ended October 31, 2018, the adoption of these standards resulted in an increase in net income attributable to shareholders of $7.6 million. The main changes related to the adoption of IFRS 9 and IFRS 15 are described in note 4 to the consolidated financial statements for the year ended October 31, 2019.

Future Changes in Accounting Policies

IFRS 16, Leases introduces a single lessee accounting model under which most of lease-related assets and liabilities are recognized in the statement of financial position. The application of IFRS 16 is mandatory and will be effective for the Corporation’s annual reporting period beginning on November 1, 2019.

Considering that the Corporation is committed under numerous operating leases, the adoption of IFRS 16 will have a significant impact on its consolidated financial statements. The Corporation will be required to recognize a right-of-use asset and a liability at the present value of future lease payments. Amortization of the right-of-use asset and interest expense on the lease obligation will replace rent expense related to operating leases.

As at October 31, 2019, the Corporation operated 31 aircraft under operating leases for which right-of-use assets and lease obligations will be recognized upon application of IFRS 16; these aircraft are part of the permanent fleet.

For the permanent fleet, right-of-use assets will be broken down and eligible maintenance costs will be capitalized and depreciated over the shorter of the lease term or expected useful life. In addition, eligible maintenance costs over the lease term will be capitalized and depreciated over the shorter of the lease term or expected useful life. As a result, the maintenance expense of leased aircraft will decrease and the depreciation expense will increase following the adoption of IFRS 16. The Corporation will also recognize a provision for the return conditions of leased aircraft and engines upon application of IFRS 16.

All aircraft-related operating leases are denominated in U.S. dollars. The lease obligation in respect of leased aircraft and the provision for return conditions are denominated in U.S. dollars and must be revalued at the prevailing exchange rate as at the reporting date. Accordingly, the volatility of the foreign exchange gain (loss) recognized in the consolidated statements of income (loss) will be higher on the application of IFRS 16.

The Corporation is party to real estate leases, in particular for spaces in airports, offices and travel agencies. Right-of-use assets and lease obligations will be recognized upon application of IFRS 16 in respect of such leases, except for short-term leases and leases that include a substantial right of substitution.

Outlook

Winter 2020 – In the sun destinations program, the Corporation’s main program for the period, Transat’s capacity is higher by 6.7%. To date, 56% of that capacity has been sold, bookings are ahead by 13.1%, and load factors are 3.4% higher compared with 2019. The impact of fluctuations in the Canadian dollar, combined with decreased fuel costs, will result in a nil increase in operating expenses if the dollar against the U.S. dollar and aircraft fuel prices remain stable. Margins are currently at slightly higher levels compared with the same date last year.

In the transatlantic program, where it is low season, load factors are tracking 1.6% higher than last winter. Prices are currently up 4.2% from the same date last year.

If the current trends hold, the Corporation expects its results for the winter season to be slightly higher than those of last year.

Discussions relating to the sale of the Corporation

On June 27, 2019, the Corporation announced that it had concluded a definitive arrangement agreement that provides for Air Canada’s acquisition of all issued and outstanding shares of Transat and its combination with Air Canada.

On August 23, 2019, a significant majority of the Corporation’s shareholders voted in favour of the special resolution approving the plan of arrangement entered into on June 27 pursuant to which Air Canada will acquire all of the issued and outstanding Class A variable voting shares and Class B voting shares of Transat for a cash consideration of $18.00 per share.

On August 29, 2019, the Corporation announced that the Superior Court of Quebec issued a final order approving the plan of arrangement with Air Canada. The arrangement remains subject to certain customary closing conditions, including regulatory approvals, particularly those of Canada and the European Union. Notably, a public interest assessment regarding the arrangement is being undertaken by Transport Canada with input from the Commissioner of Competition. If the required regulatory approvals are obtained and conditions are met, it is expected that the transaction will close by the second quarter of the 2020 calendar year.

The management information circular dated July 19, 2019 contains additional information regarding the arrangement.

The Corporation has agreed to limit its undertakings and expenses related to the execution of its hotel strategy in the period leading up to the closing of the transaction with Air Canada.