Transat A.T. Inc.

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. Andréanne Gagné, Senior Director.

Thank you, Sylvie. 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 uncertainties. Forward-looking statements represent Transat's expectation as at March 14, 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 first quarter news release available on Transat.com and CDAR+. With that, let me turn the call over to Annick for opening remarks.

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 Montreal. We signed a multi-year agreement with the Montreal-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 Montreal. 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 our 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 low 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 program, 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 low 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 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 GV 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.

Merci, Annick, et bon matin à tous. Our first quarter top line results show revenue growth of 17.7% year-over-year, driven by a solid increase in traffic. On the other end, 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 was 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 faced an unfavorable aircraft maintenance calendar compared to last year as a result of lower aircraft utilization during the 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 trusts 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 $1.34 Canadian dollars per U.S. dollars, and an average price per gallon of jet fuel of $4 Canadian 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.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your touchtone phone. You will then hear a three-tone prompt acknowledging your request. And if you would like to withdraw from the question queue, simply press star followed by two. And if you're using a speakerphone, you will need to lift the handset first before pressing any keys. Please go ahead and press star one now if you have any questions. The first question will be from Karnat Gupta at Scotiabank. Please go ahead.

Thanks, Aubrey. Good morning, everyone. So my first question is on, you know, you talked about a few issues in the quarter from Brett and Whitney to maintenance timing to, you know, flight attendant risk for strike as well as, you know, the industry pressures that we're seeing. I think of all these issues seems like, you know, the Brett and Whitney and the labor noise were sort of the transitory issues for sure. So I'm just wondering, what was your expectation heading into the quarter back in mid-December, let's say, about EBITDA and how much did you fall short because of these two issues, which I would say are transitory?

Well, obviously, the situation evolves and the expectation that we had 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.

Maybe I can add that back then in December, we had a first tentative agreement that was signed with the flight attendants. And we observe a clear decline in our bookings 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 rejections. the agreement. So overall, a clear correlation of events in our bookings, unfortunately, that honestly we had not anticipated back then in December.

Right. That's very helpful.

If I can add something else, the other thing that we might not have anticipated that well, I would say, is the 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 months, The aircraft leasing market has tightened for different reasons that we know. The supply chain is becoming very challenging for all the suppliers. So, Pride & Whitney is facing their issues. Boeing 737 MAX is another issue. So, a lot of carriers are looking for suppliers 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.

Right. Right. Makes sense. Thanks, Anik. 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, you know, 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?

We have reduced capacity. We have cancelled 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 cancer routes on the domestic market. We have cancer 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 PrEP and 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 these changes are really driven by what we're facing with Brett and 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 should continue to increase aircraft utilization, which allows us to maintain a decent increase in the market.

That's great, Colette. Thanks so much for the time.

You're welcome. Thank you. Next question will be from Benoit Poirier at Desjardins. Please go ahead.

Yes, thank you very much. Good morning, Annie. Good morning, Jean-Francois. Good morning. Yeah. Looking at your top line, revenue was only up 18% year-over-year versus a capacity increase of 25%. Could you maybe quantify what the impact of light attendance strike speculation in the quarter was, and what would be your load factor or yield if these events would not occur?

Well, as I explained earlier, while it's difficult to define exactly what was the exact impact in numbers, but as I explained earlier, we definitely saw a correlation between all the events that happened throughout all the announcements that happened throughout the negotiations in our bookings. So, of course, the load factor was affected by that, lower volume. Even though we put a lot of marketing initiatives in the market, just based on what we were receiving in terms of feedback in the call center, the clients were very afraid of booking, especially during Christmas period. They didn't want to put their vacation in jeopardy, so we even received some cancellations of travel. So that's it. People didn't know in terms of uncertainty that didn't want to take any chance in booking with us.

Okay. And in your presentation, Anik, you mentioned that it also impacted booking in Q2. How comparable it is in terms of a drag in Q2 so far? Is it a little bit less or comparable to the Q1?

It is pretty much comparable. The The negotiation happened during key months of booking. The month of December, the month of January, January being the highest month of booking for the winter period and the beginning of the summer period as well. So the whole month of January was affected. This is where we received the second rejection of the... not the second rejection, but the first rejection of the entente de principe, so the agreement, and we saw a definite impact on our bookings. So unfortunately, it happened during a peak period of booking.

Okay, okay. And with respect to the gear turbo-finished shoes, you made a good call-out in your press release about the other airline costs, the aircraft frames. We roughly calculate that your adjusted EBITDA would have been positive in the quarter, so good job on this side. I'm just wondering what kind of impact we could expect for the full year, and I suspect this would be included in your revised guidance? Absolutely.

It is all included or inclusive in our four-year revised guidance, yes.

Okay. And now if we look at the overall competitive landscape, we've seen continued consolidation of the Canadian airline market post-WestJet Sunwing acquisition, the link shutdown, the reduction in the pension plan. I would be curious to get your thoughts about how do you expect pricing to evolve over the coming years in Canada given the market dynamics we see out there?

Well, depending on what's going to happen, what we see right now, of course, is two strong players, WestJet in Western Canada and Air Canada more focused on Eastern Canada. I think that what happened with Lynx is another example of the challenge of the low-cost, ultra-low-cost model in Canada, which is a challenge for multiple factors. driven by the population landscape, Canadian airport costs, which are among the highest in the world, the seasonality of the Canadian market as well. We don't see, with the departure of Link, we don't see a significant impact in the market. They had a small program. They were not yet upscale. We won't comment on FLIR. But I think it's still challenging for them, but we'll see what's going to happen there. However, the season links, while backed by strong investors with experience in low-cost business model, could decrease significantly the confidence in ULCC model in Canada. And in that context, I would say that's a strength that when we look at the position of players like Transat and Porter, And we see us playing together and collaborating together more and more as an alternative, solid alternative to AC and WestJet in Canada.

Okay. And we've seen some reports, Nick, where Canadian airlines are having trouble hiring pilots and pilot salaries obviously have been up. Can you talk a little bit about how this would compare in terms of hiring pilots versus history?

The hiring of pilots is going well on our side in terms of retention as well. We had a couple of challenges of retention just after the pandemic. But right now, you know, we renewed the pilot collective agreement back in April 2022, and our contract is in effect until April 2025. Relationships are going well. If pilot attraction and retention remains our priority for sure, so we make sure that our relationship remains healthy, solid, we keep open discussion. You know, day after day, we work at increasing or enhancing their overall conditions. So things have been going well so far for us.

Okay, and maybe just a quick one for Jean-Francois. Just in terms of CapEx, given your number, how should we be thinking about your overall CapEx envelope for the year?

Yeah, obviously, in light of...

The revised guidance, we have revised our CAPEX plan as well.

So it's been revised down, obviously. Like it was said in December, we have a few checks and maintenance. A calendar is heavier than it was previously. We have obviously some IT projects related to the digitalization of our processes. There's also playing into... having a role in the CAPEX program. Obviously, I'm sure you're aware of the project that we have of internalizing our ground and lane services at the Montreal airport. Obviously, it goes with some CAPEX to be or some projects to invest in. But I have to confirm that we have revised down our capex plan for the year.

Okay. Thank you very much for the time.

You're welcome. Thank you. Next question will be from Cameron Dirksen at the National Bank. Please go ahead.

Yeah, thanks. Good morning. I just want to follow up on the capacity adjustment that you've made. So if we look at Q1, your ASM is up, you know, 25%. Just wondering if you can comment on, I guess, with the new plan, you know, what capacity growth looks like for Q2. And, you know, I'd assume we'd see a pretty significant deceleration as we get into the summer period. So just any comments on kind of the capacity sort of by quarter here over the rest of the year?

Yeah, for sure. So when we're looking at Q2 right now, we're looking at an increase of about 14% compared to previous year. So overall, for the winter, this would represent an increase of 19%. And when we're looking at summer, we're more looking at a 9% increase over last year. So overall, when we looked at 2024, This will reflect an increase in capacity of 13% compared to 2023, compared to 19% that we had planned at the beginning of the year.

Okay, that's very helpful. And just around, I guess, the early look at the summer yields, I mean, it still sounds like a fairly healthy summer period. But just want to make sure I understand the commentary around the expectation that you don't see the uplift in yields through the summer that we saw last year. I guess you're sort of referring to the fact that I guess the yields sort of got progressively stronger as we got down the booking curve last year and that you're just not seeing the same type of trend. Is that fair to say?

We still see robust demand for overall leisure travel. So we see the same trend this winter as and the upcoming summer. We see that travel definitely remains a priority for consumer. However, overall demand growth is not at the same level as it was last year. We remind ourselves that 2023 was an exceptional year, especially in terms of yields. So it's still early in the season to comment, but to date we see bookings and pricing conditions that are largely in line with last year, but we see at the same time all the capacity that has been deployed in the market for this upcoming summer. So we know that there's going to be pressure on yields. We start to see it, and so we don't foresee, as I said, the same kind of uplift. We see that being applied for both South and Europe, even though we see good momentum for bookings in several destinations. But, you know, it's going to be to the level we saw in 2023.

Okay, that's helpful. And just on that, I mean, you cited in the press release here some, you know, I guess greater price competition here. particularly in the Toronto market. Is that a comment about the winter or is that a comment about the summer?

It's winter. Winter is specific to sub-destination. If you look at the market capacity that was deployed in Ontario, it's specifically winter in Ontario.

Got it. That's very helpful. That was all for me. Thanks very much.

Thank you.

Once again, as a reminder, ladies and gentlemen, if you do have any questions, please press star followed by one on your touch-tone phone. And your next question will be from Jessica Zhang at CIBC. Please go ahead.

Morning, Annick. Morning, Jean-François. Thanks for taking my question. Maybe just circling back on the yield pressure, can you quantify for us if any of the yield pressure in Q1 reflected the promotional activity that you talked about? to protect the booking curve during all the labor noise. Do you have a sense of, you know, how, like, how much might that have been?

Well, it's difficult to say. We know that, you know, we were expecting higher yields. And as I explained earlier, we saw the yield and the resin go down over, you know, over the days, over the weeks, as negotiations were progressing. And, you know, we explained a little bit earlier as well that there was fierce competition, especially in Ontario. So, I cannot add very much comment around that. That's basically it.

Helpful. And maybe just one more for me. Maybe just touch upon, like, do you have any update on how the partnership with Porter is developing?

Yeah, the partnership with Porter is going very well. So, you know, we announced the joint venture agreement back in November. And since then, of course, we're working in a co-chair pattern right now. Our target is to be unable to open ourselves through the joint venture agreement for this upcoming summer. So, as you know, we have strong network complementarity. We have strong synergies. We will be able to have a joint pricing approach, optimizing our network as well, and we will be able as well to harmonize the customer service, which is at the heart of of the current work that we are doing right now. So it's coming. The first phase is coming. The first phase being to connect overall domestic and trans-border, border network to our European destinations. And with what we're seeing in terms of results from the co-chair agreement right now, we believe this is going to be extremely promising.

Okay, perfect. That was all for me. Thank you so much.

Thank you. And at this time, it appears that we have no other questions registered. Please proceed. Thank you, Sylvie. Thank you, everyone.

Our next call will be on June 6th for second quarter results. I thank you all and have a great day.

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. Enjoy the rest of your day.