Transat A.T. Inc. (TRZ), a leading integrated international tourism company, reported a robust double-digit revenue growth in the second quarter of 2024, although its adjusted EBITDA saw a decrease to $38 million.
The company highlighted both industry-wide and specific challenges that impacted its financials, including increased competition that led to a yield decrease by 7.5%. Despite these challenges, Transat remains focused on strategic initiatives, including a joint venture with Porter Airlines and a commitment to fleet expansion and debt reduction.
Key Takeaways
- Transat's Q2 2024 revenue saw double-digit growth.
- Adjusted EBITDA fell to $38 million due to various challenges.
- The company's customer traffic and overall capacity increased by 12% and 13%, respectively.
- Yield decreased by 7.5%, influenced by increased competition.
- Transat has launched a joint venture with Porter Airlines.
- The company is adjusting its capacity expansion plans from 13% to 11% for fiscal 2024.
- Transat is taking delivery of seven new aircraft and has repaid $110 million in debt.
- Annick Guérard and Jean-François Pruneau discussed issues such as aircraft delivery delays, union issues, and increased costs impacting financials.
Company Outlook
- Transat is confident in overcoming challenges with strategic initiatives and a dedicated team.
- The company has improved its financial position, reducing long-term debt and extending secured debt maturity.
- Transat aims to generate positive free cash flow to further reduce debt levels.
Bearish Highlights
- Transat cites industry-wide and company-specific challenges impacting its financial performance.
- The company has cut capacity in the US, particularly in destinations like San Francisco and Los Angeles.
- Increased salaries and benefits costs are affecting the company's financials.
Bullish Highlights
- Transat reports being ahead of pre-pandemic levels despite current challenges.
- The joint venture with Porter Airlines is expected to be fully aligned by the end of 2025, enhancing the company's market reach.
- Transat's deleveraging efforts are ongoing, with significant debt repayment.
Misses
- The company has faced delays in aircraft deliveries and issues with the union and Pratt & Whitney.
- Frequencies on European programs have been reduced due to a lack of suitable aircraft for certain routes.
Q&A Highlights
- No significant changes in Porter's capacity plans for 2024, with both companies coordinating for maximum value.
- The executives expect CapEx related to maintenance to be in line with the fleet's needs for the next year.
- Approximately $10 million spent for ground operations at Montréal Airport, nearing completion.
In conclusion, Transat's second quarter of 2024 showcased resilience amidst a challenging operational environment. With strategic partnerships and a focus on financial stability, the company is navigating through the pressures of increased competition and operational hurdles.
Its proactive measures, such as the joint venture with Porter Airlines and fleet expansion, signal a commitment to maintaining growth and market presence. As Transat continues to adapt to the dynamic travel industry, stakeholders will be watching closely to see how the company's initiatives unfold in the coming fiscal periods.
Full transcript - Transat AT Inc (TRZ) Q2 2024:
Operator: Good morning, ladies and gentlemen. Welcome to the Transat Conference Call. Note that this call is being recorded. And I would like to turn the meeting over to Ms. Andréan Gagné, Senior Director, Communications and Corporate Affair. Please go ahead, Ms. Gagné.
Andréan Gagné: Thank you, [Sylvie]. [Foreign Language] Hello, everyone, and thank you for attending our earnings call of the second quarter ended April 30, 2024. I'm here this morning with Annick Guérard, President and CEO; and Jean-François Pruneau, our Chief Financial Officer. 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 have 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 outlook, objectives and strategies that are based on assumptions and subject to risks and uncertainty. Forward-looking statement represent Transat's expectations as at June 6, 2024, and accordingly, are subject to change after such date. Our actual results could differ materially from any stated expectation. Please refer to our forward-looking statement in Transat's second quarter news release available on transat.com and on 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 second quarter conference call. Transat delivered double-digit revenue growth for a second straight quarter in Q2 2024 on the strength of sustained customer traffic. On the profitability side, adjusted EBITDA decreased to $38 million due to well-documented industry-wide and company-specific issues, including a highly competitive environment creating downward pressure on yields and the ongoing impact of Pratt & Whitney engine issue. We promptly responded to the situation by implementing initiatives to mitigate the impact of these challenges that will remain over a longer period. In terms of our financial position, we continued our ongoing deleveraging efforts, which totaled approximately $110 million in debt repayments in the last three quarters. Jean-François will provide you with more details in his financial overview. Turning to operating metrics for the quarter. Customer traffic increased 12% from the second quarter of 2023 while overall capacity grew 13%. Capacity offered for south destinations, our main program during the quarter, also increased 13% year-over-year. Our load factor of 85.5% for the second quarter remain largely in line with last year. However, yield decreased 7.5% year-over-year due to increased competition industry-wide, the ongoing economic slowdown, the negative effects of potential strikes on revenues and inefficiencies related to grounded aircraft. Regarding our on-time performance, despite an increase in flight volume year-over-year, second quarter results showed a marked improvement by nine percentage points. This demonstrates our operational team's unparalleled focus and execution. As we look ahead to the second half of the fiscal year, we are fully prepared from an operational standpoint to welcome passengers for the summer season. Our team has worked diligently to ensure our operations are seamless and efficient. First, we recently completed the process of bringing in-house passenger and ramp services at Trudeau International Airport. The Montréal Airport represents a key up for Transat where we have a strong footprint and operate a high volume of flight. We firmly believe this strategic move will improve customer service and enhance our well-earned reputation in this area. We have already seen an increase in customer satisfaction as a result. Second, we've just launched this week the first phase of our joint venture with Porter Airlines, which will generate incremental customer traffic. Travelers (NYSE:TRV) can now book direct and connecting flights with either Air Transat or Porter. Our co-sharing partnership results so far have been in line with our expectations, so we are confident about the added potential of this JV. Third, we are taking delivery of seven additional aircraft for this summer, including four A321LRs, bringing the total to 19, and three A330 aircraft on permanent leases to mitigate the impact of grounded planes. Turning to key indicators. Load factors for the summer season are currently down 2.1 percentage points from the same period last year while yields are 8% lower. Reflecting current market conditions and aircraft availability, we have adjusted our capacity expansion plans slightly for fiscal 2024 from 13% to 11%. Our flight portfolio, however, remains the same with a total of 45 destinations covered this summer, including the addition of Marrakech and Lima. In summary, we delivered encouraging top line results in the second quarter despite prevailing challenges of both industry and customer specific. We are highly optimistic about our commercial joint venture with Porter, which is expected to generate incremental booking. We reimbursed $110 million in debt during the last three quarters to improve our overall financial position. However, it is clear that this year is a challenging one for Transat. We are facing multiple external factors, some beyond our control, but also some in areas where we can make a significant difference. We are proactively implementing measures to navigate these turbulent times effectively. In an industry that has endured significant damage stemming from the pandemic, including severe supply chain disruptions, patience and resilience are crucial. It is not a straightforward journey. But with our dedicated team and strategic initiatives, we are confident in our ability to overcome these obstacles. Before I close, I would like to thank our loyal customers and recognize the unwavering commitment of our teams in providing outstanding customer service, which remains at the core of everything we do at Transact. This concludes my remarks. Jean-François will now review our financial results.
Jean-François Pruneau: Thank you, Annick. Good morning, everyone. Before reviewing our financial results, I would like to highlight improvements to our financial position in the second quarter. We diligently continue to deleverage our balance sheet by voluntarily paying off our high-interest subordinated debt of $36 million in the quarter, which will allow us to save $5 million of interest costs annually. Of note, this latest payment flowed from our operations, not from a land sale or external sources. As Annick mentioned earlier, total loan payments have amounted to $110 million in the last three quarters. So we continue making progress in reducing our debt level. We have also extended our secured debt maturity from 2025 to 2026, providing Transat with added flexibility to secure our refinancing. In that respect, we are engaged in continued discussions with our main debt holder, the federal government. Our refinancing remains top priority. Now let's turn to our second quarter results. Revenues in the second quarter of 2024 reached $973 million, up 12% from the second quarter of 2023. The revenue growth reflects sustained demand for leisure travel, driven by a 12% increase in traffic and additional capacity of 13% year-over-year. However, growth was tempered by intense competition, challenges in revenue management stemming from the Pratt & Whitney engine issues, the negative impact on bookings of employee strike threats and the economic slowdown, which all apply downward pressure on airline unit revenues. As a result, yield declined 7.5% year-over-year. Net loss totaled $54 million or $1.40 per share in the second quarter of 2024 compared to a loss of $29 million or $0.76 per share for the same period in 2023. Meanwhile, adjusted EBITDA amounted to $38 million in the second quarter of 2024 compared to $56 million in the second quarter of last year. The variation is mainly due to the fall in airline unit revenues and to higher operating expense associated with capacity expansion and expenses caused by the Pratt & Whitney engine issue, including additional temporary aircraft lease during the quarter to replace grounded aircraft. These factors were partially offset by lower fuel expenses reflecting a price decline of 11% year-over-year. It should be noted that we are still in negotiations with Pratt & Whitney to obtain compensation for grounded aircraft. To date, load factors for this summer are 2.1 percentage points lower than in 2023, and yields are 8% lower than last year. Moving to cash flows and financial position. Cash flow from operating activities amounted to $183 million in the second quarter of 2024 compared to $191 million in the second quarter of 2023. The slight decrease can mainly be explained by lower operating income this year and to a decline in net change in the provision for return conditions. These factors were partially offset by higher liquidity generated by a net change in noncash working capital balances as well as in other assets and liabilities. After accounting for investing activities and repayment of lease liabilities, free cash flows reached $110 million in the second quarter of 2024 versus $154 million in the same period last year. In terms of our balance sheet, cash and cash equivalents stood at $529 million at the end of the second quarter of this year, up from $453 million at the end of Q1 2024. Following the debt repayment that I referred to earlier, Transat's long-term debt and deferred government grant stood at $781 million at the end of the second quarter compared to $806 million at the end of the previous quarter. Consequently, we strengthened our cash position and reduced our long-term debt in the second quarter of 2024. Finally, long-term debt and deferred government grants, net of cash and cash equivalents, declined to $252 million as of April 30, 2024, down $100 million from the end of Q1 2024. So this concludes our prepared comments. We are now ready to take questions.
Operator: [Operator Instructions] [Foreign Language] [Operator Instructions] And your first question is from Konark Gupta at Scotiabank. Please go ahead.
Konark Gupta: Thanks Operator. Good morning. My first question is on the capacity. And I -- you went down from 19% growth to 13% recently and then now 11%. Just curious if this incremental capacity cut is all driven by the union noise that we are hearing and then the Pratt & Whitney continued issues there, or is there something else in these cuts?
Annick Guérard: Well, it's not only the impact of the union, but it's also the impact of change in program that we have to make due to Pratt & Whitney issues. So we had to revise some downward capacity on routes. We had to cut some routes. Some of the aircraft that were supposed to be delayed earlier, as well the A321LRs. So because of the delay, we had to get to -- caught on capacity. So it's a mix of different factors. The union, Pratt & Whitney and late deliveries in our aircraft as well.
Konark Gupta: Okay. No, that makes sense. And is there any specific area or region where you have to cut more capacity because of these issues?
Annick Guérard: I would say mostly on the U.S., Western U.S., so destinations like San Francisco, Los Angeles. Of course, we cut as well on domestic, but that was planned. That was part of the plan. We had to reduce some frequencies on the European program because we don't have necessarily the right aircraft to be operating on specific routes. So that's about it.
Konark Gupta: Okay. That's very helpful. Thank you. And then last one for me before I turn over. Jean-François, if we can dig into the debt side of things. You repaid some over the last three quarters, which is pretty good, I guess, but you still probably have a few more kind of things to kind of take care of in the next few quarters. Can you help us understand what opportunity do you see now on the debt side to delever the balance sheet further in this new sort of interest rate cut environment that we are starting to see now finally? And does it help you?
Jean-François Pruneau: Yes. Of course, it helps. Some of the debt is on a floating rate basis. Obviously, if -- the rate cut's going to help on the interest expense. That being said, there's no magic. Free cash flow generation is the magic. So we definitely have to generate positive free cash flow to be able to reduce our debt level. That being said, as I mentioned in my prepared comments, we are in ongoing discussions with our main creditor, the government. And we're still confident that we are able to execute on our refinancing plan that's going to be helpful for the company.
Konark Gupta: That's great. Thanks, guys.
Jean-François Pruneau: Thank you.
Operator: Next question will be from Cameron Doerksen at National Bank Financial. Please go ahead.
Cameron Doerksen: Thanks very much. Good morning. A question on the Porter JV, which it is now good to see that it's approved and underway. But you sort of characterized it, I guess, as the first phase of the joint venture. Can you talk about what additional phases there will be with this relationship?
Annick Guérard: Yes. So the first phase was to increase our capability to connect the North American network of Porter with our European network. So that's the first phase, so making sure that we align schedule, making sure that we align pricing as well and that we coordinate the commercial efforts at both sides. What was announced as well yesterday is that both carriers are now able to commercialize each one's full network. So that's good news as well. In terms of Phase 2, what we're looking at is approaching the U.S. market on routes that we have in common, so -- especially on Florida. So we're going to have to work on that. So Phase 2 is going to come more in fall, and Phase 3 is looking at how we will work together on south destination. That's going to be in 2025 as well. As we have previously mentioned, we will be doing the tour operator business for Porter. Porter will deploy capacity in south destinations. So we will see -- we will have to work to make sure we coordinate our efforts effectively on the south market. So these are the three phases. So by the end of 2025, we should have pretty much everything in line, adding as well some alignment on loyalty. So Porter will be able to earn their points -- customers of Porter will be able to earn their points on our network. And eventually, we will be able to do so as well, once we have our loyalty program launch next year.
Cameron Doerksen: Okay. That's great detail. Just second question for me. On the salaries and benefits costs, they were up quite a bit year-over-year 30.5%, but also a pretty big sequential increase as well from Q1. So I'm just wondering if there's anything unusual going on there.
Jean-François Pruneau: Yes. Well, obviously, salaries reflect added capacity. So we're hiring based on the capacity we want to deploy. So it's obviously on a year-over-year basis, explained most of it. But it's true, we had a onetime cost in our salaries that boosted the expense. It was a $5 million onetime cost.
Cameron Doerksen: Okay. And bringing the -- some of the airport operations in Montréal in-house, does that affect the, I guess, the headcount and will also affect that line item?
Jean-François Pruneau: Absolutely. Yes, it's true. I should've mentioned it, but it's true. The fact that we internalize our grounding operations, ramp operations in Montréal, we added employees, obviously, to -- on our payroll.
Cameron Doerksen: Okay. That's very helpful. Thanks very much.
Jean-François Pruneau: Thank you.
Operator: [Operator Instructions] [Foreign Language] The next question will be from Tim James at TD Cowen. Please go ahead.
Tim James: Thank you. Good morning. I'm just wondering if you could talk a bit about what you're seeing -- you've called it competitive pressure. Could you just talk about kind of regionally where you see that being the most significant? Or maybe, I guess, in reference to your various hubs across the country, if there's any particular regions where that's more significant than other locations.
Annick Guérard: I would say that it's really across all program, all destination. I think that when we're looking at overall capacity, of course, on one side, we are seeing sustained demand for travel. But I think we all believe -- I would say the market all believe that last year's urge for travel would persist this year in the same way. And obviously, capacity was deployed with that assumption. What we see, we still see a lot of uncertainty in the market from an economic standpoint. Canadians continue to feel the negative impact of high inflation, high interest rates on their budget. We see even some postponing their spending. So overall result is that there is significant increase in capacity, but all of this has put a lot of pressure on yield because the demand is there, but it's not at a growth rate that is as strong as last year.
Tim James: Okay. Then on the same topic, the 7.5% decline in yield, is that a pretty good indication of the year-over-year change in fares or packages? Or is there anything in terms of mix and route additions that would be influencing that as well? I'm just trying to disaggregate between maybe what's just really year-over-year changes in the price that the customers are facing versus any other influences that drive that yield number.
Annick Guérard: No, it's really -- yields are tracking below last year. It's really -- it's not a question of mix. It's really year-over-year what we're seeing compared to last year, understanding that last year was exceptionally strong so the comparison is a little bit difficult to do. And we need to bear in mind as well that we're still ahead of pre-pandemic levels. So the comparisons with the 2023 is a little bit difficult.
Tim James: Okay. And my last question. Have any changes in Porter's capacity plans been a contributing factor to your changing sort of capacity plans or your financial guidance for this year? I'm just wondering if that -- your assumptions that have been put into your business plan regarding the timing of quarter and how it would ramp up have changed at all or if it's kind of tracking to your original assumptions.
Annick Guérard: No, not for 2024. And we are very well aligned on our growth plan. Of course, we know their plans. We know they're expanding quickly in North America, domestic and transborder. And as we expand on our side, we are working at coordinating that capacity together and making sure that we create as much value as possible. So -- but there hasn't been any changes -- significant changes in Porter plans that had an impact on us.
Tim James: Thank you very much.
Jean-François Pruneau: Thank you.
Operator: Next question will be from Michael Kypreos at Desjardins Capital Markets. Please go ahead.
Michael Kypreos: Yes, good morning and thank you for taking my question. Maybe on CapEx. For the first six months of the year, you spent around $79 million on CapEx, primarily for aircraft maintenance. It's just real nice step-up versus last year. Could you maybe just give us an update on your expectations for CapEx, free cash flow generation for the balance of the year and if there are any plans to kind of scale down some of this, given the lower expected profitability?
Jean-François Pruneau: Sure. Well, in terms of the maintenance calendar, obviously, like I think we said in the past, due to the pandemic, our calendar is unfavorable this year. So it obviously had an impact. On top of that, we have increased capacity in more airplanes or more aircraft than our fleet. So it also have an impact on maintenance -- on the CapEx related to maintenance. And the fact that we internalize our ground operations at the Montréal Airport, we obviously had to spend more on capital expenditures. And in fact, for the first two quarters of the year, and it's over -- it's almost over now, and we still have some few things to do. But I would say it's pretty minor. But total for this -- the first semester or the first two quarters of the year is total of $10 million related to the investment for ground-ending operations in Montréal. So that should be almost over. In terms of next year, obviously, it has to reflect the fleet. We might have some reduced needed for our maintenance related to our current calendar, but I wouldn't expect that to be material.
Michael Kypreos: Thank you. I appreciate it.
Operator: And at this time, we have no other questions registered. Please proceed.
Andréan Gagné: Thank you, everyone. Before we close the line, let me remind you that our third quarter results will be released on September 12. Thank you, and have a great day.
Operator: Thank you. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.
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