The travel industry is a fickle beast. Consumer confidence can evaporate overnight, fuel prices gyrate with unnerving unpredictability, and engine issues can leave airlines scrambling for spare parts and leased aircraft. Transat, the Canadian leisure travel giant, has weathered its fair share of storms, particularly the turbulence caused by the COVID-19 pandemic.

But amidst the cost pressures and market uncertainties, Transat is sitting on a hidden treasure – a billion-dollar hoard of customer deposits for future travel. This staggering figure, exceeding all previous records, suggests an underlying strength in the company’s position, a strength that seems to have been overlooked amidst the focus on near-term headwinds.

While analysts dissect the impacts of Pratt & Whitney engine woes, volatile fuel prices, and the recent flight attendant negotiations, a more profound story is unfolding. Transat's customers are demonstrating an unwavering desire to travel, placing their trust and money in the company for future adventures. This speaks volumes about the enduring appeal of Transat's leisure travel offerings and the loyalty it has cultivated among its customer base.

Transat's Q1 2024 earnings call [Ref: Q1 2024 Earnings Transcript], on the surface, paints a picture of a company grappling with industry-wide challenges. Revenues, though up year-over-year, fell short of expectations. Adjusted EBITDA was negative, dragged down by rising costs and an unfavorable aircraft maintenance calendar. The specter of grounded A321LR aircraft due to Pratt & Whitney engine issues forced a reduction in planned capacity growth for the year.

However, the $1 billion customer deposit figure shines a spotlight on a different reality. This record sum represents an 18% increase from the same period in 2023 and signals a pent-up demand that could translate into a surge of revenue in the coming quarters. It's a compelling indicator of future revenue streams, a powerful counterpoint to the narrative of industry headwinds.

Potential Revenue Realization

Here's where things get even more interesting. Let's assume that Transat manages to maintain its current load factor of around 80% and that the average ticket price remains stable (a conservative assumption given the continued strong demand for leisure travel). Based on these assumptions, the $1 billion deposit could generate over $800 million in revenue realization as these trips materialize.

This potential revenue windfall could significantly bolster Transat's financial position, providing a much-needed boost to profitability and accelerating its deleveraging efforts. It could be the catalyst for a dramatic turnaround, allowing the company to not just weather the current storm but to emerge stronger and more resilient than ever before.

Strategic Initiatives

Transat is actively pursuing several initiatives to enhance its revenue generation capabilities. Its joint venture with Porter Airlines, aimed at creating a comprehensive feeder network, holds significant promise for driving customer traffic and increasing yields. The company is also focused on improving revenue management practices, generating more ancillary revenue per passenger, and implementing an internal optimization program to enhance operational efficiency.

If these initiatives gain traction, the revenue realization from the customer deposits could be even higher than the $800 million estimate, propelling Transat towards its goal of achieving a double-digit EBITDA margin. It would be a testament to the company’s strategic vision and its ability to capitalize on the enduring demand for leisure travel.

Transat’s billion-dollar deposit secret isn’t just a number. It's a powerful signal of a company poised for growth, a company that, despite the challenges, is holding the key to unlocking a wave of future revenue. It's a story worth paying attention to, a story that could rewrite the narrative of Transat's future.

"Q1 2024 Earnings Call Transcript"

Transat A.T. Inc. (OTCPK:TRZBF) Q1 2024 Earnings Conference Call March 14, 2024 10:00 AM ET Company Participants Andréan Gagné - Senior Director Annick Guérard - President and CEO Jean-François Pruneau - Chief Financial Officer Conference Call Participants Konark Gupta - Scotiabank Benoit Poirier - Desjardins Cameron Doerksen - The National Bank Jessica Zhang - CIBC Operator [Foreign Language] Good morning, ladies and gentlemen. Welcome to the Transat Conference Call. This call is being recorded. I would now like to turn the meeting over to Ms. Andréan Gagné, Senior Director. Andréan Gagné Thank you, Sylvie. [Foreign Language] Hello, everyone. And thank you for attending our earnings call for the first quarter ended January 31, 2024. I’m here this morning with Annick Guérard, President and CEO; and Jean-François Pruneau, our new Chief Financial Officer, who joined Transat early January, and who is pleased to be presenting to you for the first time this morning. Annick will provide an overview of the quarter and share comments on the current operational situation and commercial plans for the future. Jean-François will ask to cover our financial results in more detail. We will then take questions from financial analysts. Questions from journalists will be handled offline after this call. The conference call will be held in English, but questions may be asked in French or English. As usual, our investors’ presentation has been updated and is posted on our website in the Investors’ section. Jean-François may refer to it as he presents the results. Our comments and discussion today may contain forward-looking information about Transat’s outlook, objectives and strategies that are based on assumptions and subject to risk and uncertainty. Forward-looking statements represent Transat’s expectations as at March 14, 2024, and accordingly are subject to change after such date. Our actual results could differ materially from any stated expectations. Please refer to our forward-looking statement in Transat’s first quarter news release available on transat.com and SEDAR+. With that, let me turn the call over to Annick for opening remarks. Annick Guérard Good morning, everyone. Thank you for joining us for our fiscal 2024 first quarter conference call. Transat’s financial results reflect sustained demand for leisure travel and a solid increase in traffic as revenues grew 17.7% year-over-year to $785 million. However, industry-wide structural challenges, including costs related to Pratt & Whitney GTF engines, applied downward pressure on profitability. As a result, adjusted EBITDA was negative $8.6 million in the quarter, while net loss totaled $61 million. Let me remind you that, historically, the first quarter has been seasonally weak for Transat. Jean-François will provide you with more details in a few minutes. Before turning to operating metrics, I want to highlight one important recent development. Last month, we announced a new collective agreement with our flight attendants, effective until October 2027, providing long-term stability in our relationship. You may recall that the union was vocal about our negotiations and the possibility of a strike. The media exposure clearly affected bookings and yields over the last three months, a period that typically experiences robust reservation activity. Given the uncertainty, customers were cautious about booking for the holiday season, as well as for the winter season. The effects witnessed in the first quarter carried into the second quarter. The agreement reached three weeks ago removed the uncertainty. Our flight attendants play a key role with our customers. Their passion has allowed us to build the solid reputation we have today. They’re at the forefront, dedicated and committed. By offering them better working conditions, we firmly believe we’re making a sustainable investment in Transat’s future. During the quarter, we’ve also continued to improve our operations, reporting significant progress in on-time performance. Our performance improved for each month of the quarter. December was especially remarkable with a 15% year-over-year improvement despite a marked increase in the volume of activity. Another good news on the commercial front is our recently announced partnership with CF Montréal. We signed a multi-year agreement with the Montréal-based soccer team to become an official partner. This will enhance Air Transat’s brand recognition not only across different cultural communities but also towards families, which have been a key target audience for Transat for years. Over the years, Air Transat has always been more than an airline. It’s an ambassador for our city and a bridge between cultures, much like CF Montréal. Turning to operating metrics, traffic increased 20% from the first quarter of 2023, while overall capacity increased 25% during the same period. Industry-wide capacity increase to some destinations led to pressure on yields. A significant increase in capacity and growing uncertainty about the negotiation process with our flight attendants resulted in a 3% decline in yield, while a load factor lost 3.5 points compared to last year’s first quarter, ending at 80.2%. Lower yield is also a reflection of consumers’ price-sensitive behavior in the current economic context, a behavior we’ve been observing over the past few months. In response to the strike threat in the last quarter, we have deployed additional promotional activities. These efforts have shown solid year-over-year improvements in the number of passengers, transactions and revenues. Despite load factor and yield trends for summer 2024, tracking in line with the same period last year, we don’t foresee the same uplift exhibited last summer. After an exceptional summer last year, airfares now seem to normalize for 2024. This said, several programs continue to show strong performance and we are pleased with early results of additions to our flight programs, such as our routes to Marrakech and Lima, and the annualization of several destinations, including Lyon and Marseille. They are all presenting results above expectations with solid load factors, excellent yields and good booking velocity. Moving to our forecasted capacity increase for fiscal 2024, we revised our growth plan mainly due to structural issues affecting the industry. First, the aircraft leasing market has been under significant pressure. Due to the operating challenges caused by the Pratt & Whitney engine situation, as well as the problems affecting the Boeing 737 MAX 9, a great number of carriers are looking for aircraft. These issues, combined with an already stressed supply chain, are putting important pressures on the availability and the cost of aircraft leasing. We currently have four aircraft grounded due to the Pratt & Whitney situation, a number that is expected to increase to five or six by the end of the current fiscal year. Consequently, in light of expected grounded A321LR aircraft, we have recently secured three A330 aircraft leases to support network needs for upcoming years. As planned, we expect to have four new A321LR delivered to our permanent fleet over the next month. In the context, we have cautiously reduced our fiscal 2024 planned capacity increase, which we now expect to be 13%, compared to 19% previously. In closing, although Transat experienced a more challenging start to fiscal 2024 than expected, we remain committed to executing our strategic plan. The agreement with flight attendants not only eliminates uncertainty for our customers, but also enables us to dive back into the execution of our priorities, which include; restructuring of our balance sheet; implementing our commercial JV with Porter with the first phase being deployed this summer; pursuing the deployment of our internal optimization program to increase the efficiency of our operations; deploying solutions to significantly improve revenue management, including generating more ancillary revenue per passenger. At the core of our strategic plan is the commitment to providing customers with an outstanding travel experience and cultivating a positive working environment for employees. We believe we are making the appropriate adjustments to reflect a demand environment that remains firm. This is highlighted by our solid cash position and the record customer deposits for future travel in excess of $1 billion at the end of the first quarter. Nevertheless, we remain prudent about our performance for the entire fiscal. A continuous monitoring of the Pratt & Whitney GTF engine situation, an adaptive contingency plan, and a satisfying settlement with Pratt & Whitney will be key to the rest of the year. This concludes my remarks. Jean-François will now review our financial results. Jean-François Pruneau Merci, Annick, [Foreign Language]. Our first quarter topline results show revenue growth of 17.7% year-over-year, driven by a solid increase in traffic. On the other hand, profitability was negatively impacted by rising industry costs, stemming in part from operating challenges related to the Pratt & Whitney GTF engine issue and an unfavorable year-over-year aircraft maintenance calendar. As a result, adjusted EBITDA was in negative territory for the first quarter and obviously below expectations. During the quarter, we also completed the previously announced sale of an investment in a hotel in Mexico with proceeds from the transaction applied to reduce secured facilities by $21 million. Accordingly, we lowered our long-term debt to $665 million at the end of the first quarter. Looking ahead, we aim to defer our April 2025 debt maturities. As you are probably aware, one of my key priorities upon taking over the position of CFO is to execute a successful refinancing plan. Deferring maturities would provide more flexibility in carrying out a plan beneficial to all stakeholders. Additionally, I want to highlight that ongoing discussions with stakeholders are in progress and we will keep you updated as it evolves. Now, let’s drill down to our first quarter results. Revenues reached $785 million, up 17.7% from the first quarter of 2023. The increase reflects sustained demand for leisure travel driven by a 20% increase in traffic expressed in revenue passenger miles. Company-wide capacity grew 25% from the same period last year while yield went down 3.1%. Adjusted EBITDA amounted to negative $8.6 million in the first quarter of 2024, compared to a positive $3.3 million in the first quarter last year. The variation is mainly due to a year-over-year increase in operating expenses related to deployed capacity along with operating challenges related to the Pratt & Whitney GTF engine issue and the leasing of additional aircrafts. In the first quarter, we also face an unfavorable aircraft maintenance calendar compared to last year as a result of lower aircraft utilization during pandemic. These factors were partially offset by lower fuel expenses reflecting a price decline of 18% compared to the same period last year. Net loss, meanwhile, totaled $61 million or $1.58 per diluted share, compared to $57 million or $1.49 per diluted share in the first quarter of 2023. Moving to cash flows and financial position, cash flows from operating activities amounted to $111 million in the first quarter of 2024, compared to $195 million in the first quarter of 2023. The decrease can mainly be attributed to an unfavorable variation in changes of non-cash balances related to operations and to a greater operating loss in the most recent quarter. After accounting for investing activities and repayment of lease liabilities, we generated positive free cash flows in the first quarter at $39 million versus $144 million in the same period last year. In terms of our balance sheet, cash and cash equivalents stood at $453 million at the end of the first quarter of 2024, compared to $436 million at the end of our last financial year. Cash and cash equivalents and trust are otherwise reserved mainly resulting from travel package sales significantly improved year-over-year reaching $612 million versus $524 million at the end of the same period in 2023. I am pleased to point out that total cash exceeded a record $1 billion, which reflects important efforts made to improve our operations and our ability to convert revenues into cash. Following the debt repayment, Transat’s long-term debt and deferred government grants stood at $806 million at the end of the first quarter, compared to $816 million at the end of fiscal 2023. Debt, net of cash and cash equivalents improved amounting to $452 million as of January 31, 2024, down $28 million from $380 million at the end of 2023. Turning to our outlook, considering recent industry-related issues that impacted our cost base, we now expect an adjusted EBITDA margin for fiscal 2024 to be at the lower end of the range of 7.5% to 9% announced last December. This updated outlook assumes a 13% increase in available capacity, which still represents healthy growth year-over-year. Our main assumptions in deriving this forecast include a weak GDP growth in Canada, an exchange rate of C$1.34 per US$1, and an average price per gallon of jet fuel of C$4 even. In closing, this conference call marks my first as CFO of Transat. I look forward to opening a dialogue with sell-side analysts and the investment community at large to ensure that Transat’s path to value creation is well understood. This concludes my prepared comments. We will now open the call for questions from analysts. Question-and-Answer Session Operator Thank you. [Operator Instructions] The first question will be from Konark Gupta at Scotiabank. Please go ahead. Konark Gupta Thanks, Operator. Good morning, everyone. So, my first question is on, you talked about a few issues in the quarter from Pratt & Whitney to maintenance timing to flight attendant risk for strike, as well as the industry pressures that we’re seeing. I think of all these issues, things like, the Pratt & Whitney and the labor noise were sort of the transitory issues, for sure. I’m just wondering, what was your expectation heading into the quarter back in mid-December, let’s say, about EBITDA, and, like, how much did you fall short because of these two issues, which I would say transitory? Jean-François Pruneau Well, obviously, the situation evolves and the expectation that we had in -- back in December, as I said, EBITDA was below expectations. So obviously, results or impacts for the quarter were worse than expected. That being said, obviously, the guidance is an annual guidance. We don’t provide a quarterly guidance and I can certainly not talk about what was the impact expected in the first quarter specifically. Annick Guérard Maybe I can add that when we, back then in December, we had a first tentative agreement that was signed with the flight attendants and we observed a clear decline in our booking at different periods. First, when there was a first right to strike that was voted at the end of November, then we observed solid booking increases following the signing of the two tentative agreements, and afterwards, we saw significant slowdown again following the rejection of the agreement. So overall, a clear correlation of events in our bookings, unfortunately, that honestly we had not anticipated back then in December. Konark Gupta Right. No. It makes sense. That’s very helpful. Annick Guérard Yeah. If I can add something else. Konark Gupta Sure. Sure. Annick Guérard The other thing that we might not have anticipated that well, I would say, is how the market, the leasing market, has tightened over the last month. So in order to mitigate the impacts of the Pratt & Whitney engines and the fact that we have aircrafts that are grounded right now and will be grounded, additional aircraft will be grounded over the next month, the aircraft leasing market has tightened for different reasons that we know. The supply chain is becoming very challenging for all the suppliers. So Pratt & Whitney is facing their issues. Boeing 737 MAX is another issue. So a lot of carriers are looking for additional aircraft right now. So the demand is very high and the offer is very limited in the market. So automatically this is putting a pressure on higher prices for leasing. Konark Gupta Right. Right. Makes sense. Thanks, Annick, and thanks, Jean-François. If I can just quickly follow up on your full year guidance for capacity. I’m like 13% still is pretty decent capacity growth coming out of the pandemic and all that, but still a decent cut from the 19% you were expecting. So I understand there’s issues from the leasing markets that you mentioned, Annick, but are you only seeing the limited availability of aircraft at this point, which is why you’re cutting capacity guidance or is it that you’re also reducing utilization in some markets? Annick Guérard No. We are -- we have reduced capacity. We have canceled routes because of lack of aircraft. So from what we anticipated at the beginning of the year, so we have reduced overall capacity. We have canceled routes on the domestic market. We have canceled routes on the U.S. market as well for the upcoming summer. We really want to be cautious. This is why we have reviewed our capacity, because we have a scenario on the information that we have so far from Pratt & Whitney, we want to be cautious and make sure that we don’t take too much risk for the upcoming year. So that’s why we made those recent changes. And there really -- these changes are really driven by what we’re facing with Pratt & Whitney right now. That being said, we continue to increase aircraft utilization. So this is why we are able, even though we don’t have the same number of aircraft we were expecting or we continue to increase aircraft utilization, which allows us to maintain a decent increase in the market. Konark Gupta Great. That’s great color. Thanks so much for the time. Annick Guérard You’re welcome. Operator