Transat A.T. Inc.

Bonjour, Mesdames et Messieurs. Bienvenue à la conférence Transat. Good morning, ladies and gentlemen. Welcome to the Transat conference call. Please note that this call is being recorded. I would now like to turn the meeting over to Andréane Gagné, Senior Director, Communications, Public Affairs, and Corporate Responsibility. Please go ahead, Ms. Gagné.

Bonjour et bienvenue à cet appel trimestriel de Transat. Hello, everyone, and thank you for joining us for our first quarter earnings call ended January 31, 2025. Annick Guerra, President and CEO, and Jean-François Pruneau, our Chief Financial Officer, will provide an overview of the quarter and comment on the current operational situation and commercial plans. Jean-François will also discuss our financial results in detail. We will then take questions from analysts. Questions from journalists will be taken offline after the call. The conference call will be conducted in English, but questions may be asked in French or English. As usual, our Supplementary Disclosure has been updated and is available on our website in the Investors section. You can also refer to it when you present the results. Our comments and discussions today may include forward-looking information regarding transact outlooks, objectives, and strategies that are based on assumptions and subject to risk and uncertainty. Forward-looking statements represent Transat's expectations as of March 13, 2025, and are therefore subject to change after that date. Our actual results may differ materially from any stated expectations. Please refer to a forward-looking statement in Transat's first quarter news release available on Transat.com and on SEDOT's website. With that, I would like to turn over the call to Annick for opening remarks.

Good morning. Thank you for joining us for our first quarter conference call for fiscal 2025. The quarter ended with a better performance compared to the same period last year, with revenue growing 5.6% to $830 million and adjusted EBITDA tolling $20 million. These results were mainly driven by positive yields, reduced fuel costs, and a tight control of operating expenses. Turning to our operating matrix, customer traffic expressed as revenue passenger miles increased 1% in the first quarter of 2025 from Q1 2024, reflecting continued demand for leisure travel. High traffic and a discipline capacity increase resulted in a yield improvement of 1.7% year over year. Our load factor in the first quarter was in line with the same period last year. Finally, available seat miles or capacity was up 0.5% across our global network, reflecting our disciplined planning approach. Early in the second quarter, while our load factor has slightly declined, the steady improvement in yield has upset this impact, driving revenue growth. With regards to our elevation program, as of today, the initiatives already implemented will generate and annualize adjusted EBITDA of approximately 37 million. We remain fully on track for the program to generate 100 million in adjusted EBITDA by mid-2026. As a reminder, the initial phase of the program mainly consists in optimizing our cost structure. On this front, I am very encouraged by the efficiency gains and cost savings that we have been able to achieve so far, especially those generated through the implementation of technology and AI in our operations. In the coming months, we will continue to implement key initiatives with a special focus in the area of revenue management. As anticipated, the impact on our financial results at this stage has been relatively neutral due to the startup implementation cost, but we expect the benefits to begin to materialize more significantly in the second half of fiscal 2025. Turning to our operations, as stated last quarter, we do not have aircraft deliveries planned for this year. Our fleet consists of 44 aircraft for the winter season, including a dry leaf contracted in 2024 and 43 aircraft for the summer season. We continue to actively manage the severe negative impact caused by Pratt & Whitney GTF engine issue. The number of grounded aircraft has fluctuated between six and seven during the last quarter, and we anticipate this level of AOG to persist throughout the year. As previously explained, this situation not only escalates costs, but also introduces a substantial degree of uncertainty and volatility to our operation. We continue to press for the conclusion of an agreement with Pratt & Whitney regarding the grounded aircraft for 2025. Regarding our network, we recently announced an exclusive non-stop route between Toronto and Berlin. The service will start next summer with two weekly flights. Other network expansion initiatives include the introduction of Valencia from Montreal starting in June, a new partnership with Air Europa of Spain to further strengthen our presence in the growing Spanish travel market via their hub in Madrid, We also extended our service to Martinique from Montreal for the summer season as we continue to expand our offering of year-round south destinations. We are well prepared for this summer with a robust program and a modest capacity increase. Our network will also continue to benefit from the value created by our joint venture with Porter. We continue to build on strong organic momentum and forecast a significant increase in additional connecting passengers compared to 2024. On the operational front, we continue to make great progress to deliver strong performance. Our on-time performance in the first quarter improved by more than four percentage points year over year, marking a third consecutive quarter of significant progress. As indicated last quarter, the successful insourcing of passenger and rent services at Montreal Trudeau Airport has played a key role in this improvement. During the major snowstorms in February, our strong operational performance stood out, with remarkable on-time performance showcasing our team's stellar efficiency in challenging conditions. In addition, our customer satisfaction continued to be strong, consistently meeting our targets throughout the quarter. Our solid operational performance as well as our level of customer satisfaction clearly reflect the hard work and dedication of our team and provide a robust foundation for achieving our broader goals moving forward. Finally, we formally opened negotiations with our pilot union in late January to reach a new collective agreement in 2025, and we are encouraged with discussions that have been productive so far. Looking ahead to the second quarter and the summer season, we are closely analyzing any potential impact of US tariffs on our business and consumer sentiment. Transat has limited exposure to the U.S., with only two routes to Florida, representing about 3% of our total ASMs. However, the negative effects of a trade dispute with the U.S. could have multiple impacts, with two key areas of concern. First, the depreciation of the Canadian dollar already underway, directly increase our costs, particularly for fuel and aircraft leasing, which are priced in US dollars. Perhaps even more critical is the broader economic uncertainty that such a dispute is creating, affecting consumer confidence and, in turn, potentially impacting travel demand. We recognize this is a highly volatile environment. We are closely monitoring the evolution and continue to factor in into our decision-making and forecasting processes. In closing, we are encouraged by the yield improvement achieved in a more disciplined capacity environment. Our yield has maintained its steady growth in the early part of the second quarter, which is compensating for a slightly lower load factor. While it is still early, these trends are currently carrying over into the summer season. However, given the current macroeconomic uncertainties, we are taking a cautious stance when assessing the outlook for the remainder of 2025. Our elevation program is progressing according to plan, and we remain on track towards achieving our financial objectives. The refinancing of our debt and the strengthening of our balance sheet remain our priority for 2025. We are continuing to explore all alternatives that will allow us to implement an optimal structure over the long term. In the meantime, work continues at all levels to increase revenues, tighten spending, boost liquidity, and improve overall productivity. All teams are mobilized, and I thank them once again for their unwavering commitment. This concludes my remarks.

Jean-François will now present our financial results. Good morning, everyone.

So before reviewing our financial results, I would like to highlight the steps that we have taken to address our debt challenges. Discussions with our main lender, the federal government, which began over 18 months ago, along with other stakeholders, are still ongoing, although a permanent solution has not yet been reached. To provide greater flexibility while these discussions continue, and given their complexity, we have recently extended the maturity dates of our subordinated and secured leave financing agreements with the federal government to April 2027 and November 2026, respectively. Additionally, we renegotiated our revolving credit facility, extending its maturity to November 2026. Now let's take a closer look at our first quarter results for fiscal 2025. Revenues total $830 million, up 5.6% from the first quarter of 2024. This growth reflects a 1.7% increase in yield expressed in airline unit revenues, and 1% improvement in customer traffic expressed in revenue passenger miles compared to the first quarter of 2024. As Anik mentioned earlier, network capacity rose 0.5% in the first quarter from the same period last year. Adjusted EBITDA, meanwhile, reached $20 million compared to negative adjusted EBITDA of $3 million in the first quarter a year ago. This improvement reflects revenue growth a 15% year-over-year decrease in fuel prices, tight control over our costs and lower aircraft rent expenses. Net loss amounted to $123 million or $3.10 per share in the first quarter of 2025, compared to $61 million or $1.58 per share in the first quarter 2024, all explained by the variation of the Canadian dollar. Meanwhile, the adjusted net loss was $75 million versus $76 million last year. Moving to our cash flow and financial position. Cash flow from operating activities total $169 million in the first quarter of 2025, compared to $111 million in the first quarter last year, mainly driven by favorable changes in working capital balances. CapEx decreased from $49 million in Q1 2024 to $23 million this quarter, with higher capital expenditures in 2024 primarily driven by an unfavorable maintenance calendar. After accounting for investing activities and repayment of lease liabilities, free cash flow reached $129 million in the first quarter of this year versus $39 million for the same period in 2024. Turning to our balance sheet, cash and cash equivalents stood at $389 million as at January 31st, 2025, up from $260 million at the end of Q4 2024. Cash and cash equivalent and trusts are otherwise reserved, mainly resulting from travel package bookings, improved to $604 million at the end of the first quarter, up from $454 million at the end of Q4 2024. Early in the first quarter, Transat received net proceeds of nearly $31 million from the sale and leaseback of a Ford spare engine, obtained as a compensation from Pratt & Whitney due to operational disruptions during the 2023-2024 period. It should be noted that we have already entered into negotiations for a follow-up agreement with the engine manufacturer related to our grounded aircraft in 2025. Reflecting these proceeds and the change in cash, our net long-term debt and deferred government grant amounted to $424 million at the end of the first quarter, down from $543 million at the end of the fourth quarter 2024. This concludes my prepared comments. We will now open the line for questions.

Thank you. We will now take questions from analysts. If you are an analyst and would like to register a question, please press star 1 on your telephone keypad. And if you would like to withdraw, please press star 2. Nous allons maintenant commencer la période de questions. Si vous êtes analyste, appuyez sur étoile 1. Et si vous désirez vous retirer, s'il vous plaît, appuyez sur étoile 2. Please press star 1 now if you do have any questions. The first question will be from Conor Gupta at Scotiabank. Please go ahead.

Thanks, and good morning. You know, just maybe going back to your point about, you know, impact of the Canadian dollar weakness and macro from the tariff uncertainty, I just wanted to understand, you know, what have you seen so far in the booking curve from both perspectives? Canadian dollar weakness, obviously you have a lot of international travel and also, you know, there's a wave of boycott USA going on in light of tariffs. So what are you seeing in your demand curve right now? Are people slowing down bookings for certain specific markets, or is it broad-based?

Thank you for the question. So besides the U.S. market, which remains, as we explained, a very small market for us, with only two destinations that we operate on Florida, we have not seen yet other negative impact on our booking curve following tariffs announcements. Of course, we are closely monitoring the situation as it evolves, especially as we enter right now in a strong booking period for the summer. We are well aware that the current environment is affecting overall consumer confidence, and this could eventually affect travel demand, but we haven't seen any impact over the last weeks on our, the bookings on our different offering. In the meantime, I think what helps us is that we, you know, at the beginning of the year, we decided to deploy limited capacity And this is something that we have control on, control over, so that's really important. So we remain very disciplined on that side. And the other thing we're looking at right now, given the current environment, we would not be surprised to see more last-minute bookings this year. I think that people potentially will – hesitate before making any bookings, better understanding what's going to happen with the economic environment. But anyway, we're going to touch wood. So far, we haven't seen impacts besides the U.S. market on our bookings. So things are looking good for now.

Okay, that's encouraging. Thanks. And on the other topic of what's happening in Canada, I think there's been discussions about or proposals from the government about privatizing airports. Do you guys have any views? How will the privatization impact your business? Will it be beneficial or less beneficial to you guys? And do you support that?

Well, we support, of course, much-needed investments in our air infrastructure, especially at our AAB airports in Montreal and Toronto. Canadian aviation infrastructure is funded, as we've mentioned multiple times, by a user-paid model. So airlines are charged with very high rent, which should be reinvested in infrastructure. In these uncertain economic times right now, we are especially mindful of all these costs in all aspects of the air travel ecosystem, and enhancing a traveler's experience should remain a priority. So we want to work closely with the different relevant parties to ensure the best infrastructure for our people, And we support any evaluation or assessments that are being made to support these objectives. So if privatizing some of the activities is worth helping the whole infrastructure, so we're not against it.

And that's right here. Thank you so much for the time.

Thank you. Next question will be from Cameron Dirksen at National Bank Financial. Please go ahead.

Thanks. Good morning. I wanted to ask a little bit about the yield trends in the winter. Overall, yields up 1.7%, but interesting that yield on the southern destinations, which would be, I guess, the majority of what you're doing in the winter, is actually slightly negative. So I'm just wondering if you can talk about Kind of what you're seeing there, I mean, it would seem to me that maybe you're seeing some pretty strong pricing trends on the transatlantic markets. So if you could confirm that and just see if we're seeing something similar in the second quarter as well.

Yeah. So we've seen, when we look at yields on the stock market for Q1, we haven't seen significant growth, as you mentioned. But as we are looking into Q2, we're seeing positive yields compared to last year. So we're more looking into, as we are speaking right now, around a little bit more than 2%. So that's encouraging. In the Atlantic market, we've seen very positive years in Q1 with 8%. And we are looking around that percentage of close to 6% right now as we look into Q2. And trends are, it's trending positive as we are getting there closer to summer as well.

Okay. Are you seeing, I guess, in the bookings you've got so far for the summer, and I appreciate it's still pretty early, but that kind of plus 6% you're seeing in Q2, is that something that you're seeing into the, into the summer period as well with the bookings you've had so far?

Well, it's very early to comment, you know, as you're saying, but what we're seeing right now is positive compared to last year. Again, it's early, and due to the economic context, we will be careful in our comments. Okay, fair enough. Nothing innovative so far.

Okay. And just secondly, just on the, I guess, You know, the refinancing negotiations or discussions, you know, appreciate that these are complex. But is there any kind of update on the timeline of when we can finally get something done here? And I'm wondering if, you know, a potential change in government in Canada is going to extend this whole process even further.

Yeah. Well, the change of government is obviously hard to speculate if it's going to slow down or accelerate our process. you know, it's probably a question for them rather than for us. That being said, you know, discussions with the government, other stakeholders, key stakeholders are ongoing. Like you mentioned, it's a complex situation. And all alternatives are on the table, essentially. So we're working very hard with them. And because of the complexity of those discussions, I think that The additional room to maneuver that we got from our creditors, mainly the federal government, with the maturity extension, I think it helps.

Okay. That's great. I'll pass the line. Thanks very much.

Thank you. Once again, ladies and gentlemen, if you do have any questions, please press star followed by one. Next, we will hear from Alice Liu at CIBC. Please go ahead.

Hi, good morning. I have a question on just a lot of headlines of Canadians boycotting travel to the U.S. Just wondering, are you seeing that impact in the competitive environment for some destinations in transatlantic markets?

I think you're asking us if we're seeing negative impact on the U.S. markets. That's for sure. We talked about it earlier. We had to decrease our overall capacity towards the U.S. market by 10%. And as you can have seen as well from other carriers, a lot of Canadian carriers decrease their capacity as well. So there is definitely a clear impact in terms of donating them to the UIF. We're looking as well at what... carriers are announcing. So the domestic in the U.S. is decreasing as well. Is your questions to see if this capacity is being deployed on other markets? Is that what I heard?

Yeah, basically. Are you seeing that in the competitive environment?

No, I think we could anticipate that some of the carriers who have removed their capacity from the U.S. could deploy elsewhere, but we haven't seen clear plans so far.

Okay, thank you. And last question I have is, with the challenging winter conditions in February and Delta Airline incident at Pearson, are you, should we be mindful of any costs, incremental costs in fiscal Q2?

No, no, not really, no. Okay, thank you. That's all my questions.

Thank you. And at this time, we have no other questions. Please proceed.

Thank you, everyone. As a reminder, our 2025 second quarter results will be released on Thursday, June 12th. Thank you, and have a good day.

Thank you. Ladies and gentlemen, this does indeed conclude the conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your lines. Thank you.