Transat A.T. Inc. - Results for first quarter of 2020

Improved first quarter but outlook overshadowed by COVID-19
Acquisition of the Corporation is pending regulatory approvals

For the first quarter:

• Revenues of $692.8 million.
• Adjusted operating income¹ of $27.4 million (operating loss of $25.1 million).
• Adjusted net loss³ of $20.3 million (net loss attributable to shareholders of $33.8 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 jurisdictions concerned, particularly in Canada and Europe.

MONTRÉAL, March 12, 2020 /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 first quarter ended January 31, 2020.

"We're satisfied with the improvement in results for the first quarter, even though the coronavirus epidemic makes the rest of the year difficult to predict," stated Jean-Marc Eustache, President and Chief Executive Officer of Transat. "But Transat has already faced several epidemiological threats in the past, including SARS and H1N1, and I firmly believe that the resilience of our teams and our solid balance sheet will enable us to deal with risks and difficulties once again. We're taking all the necessary measures to allow our clients to travel with peace of mind." 

First-quarter highlights

The Corporation posted revenues of $692.8 million for the quarter, up $45.2 million (7.0%) compared with 2019. This increase was attributable to the 10.8% increase in the number of travellers in the sun destinations program, the Corporation's main program for the winter season, resulting from the decision to increase capacity.

Operations generated an operating loss of $25.1 million, compared with $48.6 million in 2019, an improvement of $23.6 million. This improvement resulted mainly from the higher profitability of the sun destinations program. Transat reported adjusted operating income¹ of $27.4 million compared with an adjusted operating loss¹ of $7.6 million in 2019, an improvement of $34.9 million.

Net loss attributable to shareholders amounted to $33.8 million or $0.90 per share (basic and diluted) compared with $53.0 million or $1.41 per share (basic and diluted) in 2019. Excluding non-operating items, Transat reported an adjusted net loss³ of $20.3 million ($0.54 per share) for the first quarter of 2020, compared with $39.2 million ($1.04 per share) in 2019. 

Financial position

As at January 31, 2020, cash and cash equivalents amounted to $682.2 million, compared with $620.4 million on the same date in 2019. This change was mainly attributable to positive cash flows generated by operations, partially offset by the acquisition of two replacement engines for the A321neoLR fleet ($33.4 million) and the costs related to the transaction with Air Canada ($11.5 million).

The working capital ratio was 1.04, compared with 1.14 as at January 31, 2019. This change was mainly attributable to the acquisition of two replacement engines for the A321neoLR fleet and the increase in the current portion of lease liabilities.

Deposits from customers for future travel amounted to $809.1 million, compared with $752.8 million as at January 31, 2019, an increase of $56.2 million.

Following the adoption of the IFRS 16 accounting standard, leases with a term of more than 12 months are now recorded on the balance sheet as right of use assets and as lease liabilities. As at January 31, 2020, lease liabilities amounted to $689.6 million.

Off-balance-sheet agreements, excluding contracts with service providers, stood at $1.3 billion as at January 31, 2020. This amount was mainly composed of commitments to take delivery of the 15 A321neos undelivered as at January 31, 2020.

IFRS update

The Corporation adopted IFRS 16, Leases, on November 1, 2019. The 2019 comparative figures have been restated to reflect these changes.

To sum up, the adoption of this standard resulted in increases of $748.4 million in assets, $716.9 million in liabilities and $22.7 million in equity, respectively, as at October 31, 2019. For the year ended October 31, 2019, the adoption of this standard resulted in an increase in net income attributable to shareholders of $0.8 million. The main changes related to the adoption of IFRS 16 are described in note 3 to the interim condensed consolidated financial statements for the quarter ended January 31, 2020.

Outlook

Status of second quarter bookings

To date, in the sun destinations market, the Corporation's main market for the period, Transat's capacity is higher than the previous year by 5%. 83% of this capacity has been sold and load factors are 1.7% lower than those of 2019. The impact of fluctuations in the Canadian dollar, combined with lower fuel costs, will result in a 0.3% decrease in operating expenses if the Canadian dollar relative to the U.S. dollar and fuel prices remain stable. Unit margins are currently higher by 0.8% compared with the same date last year.

To date, in the transatlantic market, where it is low season, load factors are lower by 1.6% compared to last winter. Prices are comparable to those at the same date last year.

Status of summer bookings

To date, in the transatlantic market, the Corporation's main market during the summer, Transat's capacity is up 3% compared with 2019. Currently, 34% of seats have been sold. Load factors are 1.7% lower and selling prices are down 5.7% compared with the same date last year. Fuel costs, net of fluctuations in the Canadian dollar against the U.S. dollar, the euro and the pound, have triggered a 4.0% decrease in operating expenses to date.

Impact of the coronavirus on outlook

Since February 24, daily bookings are lower than last year's and the difference has increased significantly in recent days. In the current situation, it is impossible to predict the effect on future bookings.

The Corporation has implemented a series of operational, commercial and financial measures, including cost reduction, aimed both at ensuring the security and peace of mind of its customers and at preserving its cash flow. The Corporation monitors the situation day by day in order to adjust these measures according to its development.

Consequently, the Corporation will not provide an outlook for the second quarter or for the summer.

Discussions relating to the sale of the Corporation

On August 23, 2019, Transat's shareholders approved the arrangement agreement with Air Canada, under which it is provided that Air Canada will acquire all issued and outstanding shares of Transat for a cash consideration of $18 per share [the "arrangement"]. The arrangement remains subject to certain customary closing conditions, including regulatory approvals, particularly authorities in Canada and the European Union. Notably, a public interest assessment regarding the arrangement is currently underway by Transport Canada. As part of this assessment process, the Commissioner of Competition will provide Transport Canada with its assessment of the impacts on competition. If the required regulatory approvals are obtained and conditions are met, it is expected that the arrangement 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.

Additional information

The Corporation adopted IFRS 16, Leases, on November 1, 2019, and the quarterly financial information shown in the table below have been restated for 2019.

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 resulting from its expenses and/or revenues in foreign currencies. In the first quarter of 2020, this resulted in a $10.8 million non-cash loss ($7.9 million after income taxes), compared with $18.7 million ($13.7 million after income taxes) in 2019.

As needed, the Corporation uses derivative financial instruments to mitigate exchange rate exposure arising 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 first quarter of 2020, Transat recorded a loss of $0.7 million ($0.5 million after income taxes) on these foreign exchange derivatives, compared with $3.9 million ($2.8 million after income taxes) in 2019.

About Transat
Transat A.T. Inc. is a leading integrated international tourism company specializing in holiday travel. Under the Transat and Air Transat banners, the Corporation offers vacation packages, hotel stays and air travel to some 60 destinations in over 25 countries in the Americas and Europe. Transat is firmly committed to sustainable tourism development, as reflected in its multiple corporate responsibility initiatives over the past 12 years, and obtained Travelife certification in 2018. Based in Montréal, the Corporation has 5,000 employees (TSX: TRZ).

NOTES

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

1. Adjusted operating income (loss): Operating income (loss) before depreciation and amortization expense, restructuring charge, lump-sum payments related to collective agreements and other significant unusual items, including premiums for fuel-related derivatives and other derivatives matured during the period. The Corporation uses this measure to assess the operational performance of its activities before the aforementioned items to ensure better comparability of financial results.
2. Adjusted pre-tax income (loss): Income (loss) before income tax expense before change in fair value of fuel-related derivatives and other derivatives, gain (loss) on business disposal, restructuring charge, lump-sum payments related to collective agreements, asset impairment, foreign exchange gain (loss) and other significant unusual items, and including premiums for fuel-related derivatives and other derivatives matured during the period. The Corporation uses this measure to assess the financial performance of its activities before the aforementioned items to ensure better comparability of financial results.
3. Adjusted net income (loss): Net income (loss) attributable to shareholders before net income (loss) from discontinued operations, change in fair value of fuel-related derivatives and other derivatives, gain (loss) on business disposal, restructuring charge, lump-sum payments related to collective agreements, asset impairment, foreign exchange gain (loss) and other significant unusual items, and including premiums for fuel-related derivatives and other derivatives matured during the period, net of related taxes. The Corporation uses this measure to assess the financial performance of its activities before the aforementioned items to ensure better comparability of financial results. Adjusted net income (loss) is also used in calculating the variable compensation of employees and senior executives.

Conference call

First quarter 2020 conference call: Thursday, March 12, 2:30 p.m. Dial 1-800-926-9801. Name of conference: Transat. Webcast: https://www.transat.com/en-CA/corporate. The archived call will be available at 416-626-4100 or 1-800-558-5253 access code 21951700, until April 11, 2020.

The second-quarter results will be announced on June 11, 2020.

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 intended 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. 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. Results indicated in forward-looking statements may differ materially from actual results for a number of reasons, including without limitation, economic conditions, changes in demand due to the seasonal nature of the business, extreme weather conditions, climatic or geological disasters, war, political instability, real or perceived terrorism, outbreaks of epidemics or disease, consumer preferences and consumer habits, consumers' perceptions of the safety of destination services and aviation safety, demographic trends, disruptions to the air traffic control system, the cost of protective, safety and environmental measures, competition, the Corporation's ability to maintain and grow its reputation and brand, the availability of funding in the future, fluctuations in fuel prices and exchange rates and interest rates, the Corporation's dependence on key suppliers, the availability and fluctuation of costs related to aircraft, information technology and telecommunications, changes in legislation, unfavourable regulatory developments or procedures, pending litigation and third party lawsuits, the ability to reduce operating costs, the Corporation's ability to attract and retain skilled resources, labour relations, collective bargaining and labour disputes, pension issues, maintaining insurance coverage at favourable levels and conditions and at an acceptable cost, and other risks detailed from time to time in the Corporation's continuous disclosure documents.

This news release also contains certain forward-looking statements about the Corporation concerning the transaction involving the acquisition of all the shares of the Corporation by Air Canada. These statements are based on certain assumptions deemed reasonable by the Corporation, but are subject to certain risks and uncertainties, several of which are outside the control of the Corporation, which may cause actual results to vary materially. In particular, the completion of a transaction is subject to the approval of applicable regulatory and governmental authorities and the satisfaction of other conditions customary for this type of transaction.

In addition, statements regarding the results of a potential transaction will depend on the purchaser's plans following the completion of a potential transaction. 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.

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 Report for the year ended October 31, 2019, 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.