Transat A.T. Inc.

Bonjour, Mesdames et Messieurs. Bienvenue à la conférence Transat. Good morning, ladies and gentlemen, and welcome to the Transat conference call. Please note that this call is being recorded. I would now like to turn the conference 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 third quarter earnings call ended July 31, 2025. Annick Guérard, 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 financial 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 Investor section. Jean-François may refer to it when he presents the results. Our comments and discussion today may include forward-looking information regarding transact outlook, objectives, and strategies that are based on assumptions and subject to risk and uncertainty. Forward-looking statements represent Transat's expectations as of September 11, 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 third quarter news release available on Transat.com and on CEDAR+. With that, I would like to turn the call over to Annick for opening remarks.

Good morning. Thank you for joining our third quarter conference call for fiscal 2025. Over the quarter, we improved our operating and financial performance with a 4.1% increase in revenue to $766 million and adjusted EBITDA of $81 million. These results are in line with our expectations. That said, the beginning of our summer season produced mixed results. On the one hand, we are pleased by the performance of our south program. Although this was the off-peak season, demand exceeded expectations as traveler preferences shifted away from the U.S. in favor of Mexican and Caribbean destinations. On the other hand, lower industry demand for transborder traveling resulted in a relocation of capacity to transatlantic routes in addition to planned increases. This shift in supply created a more challenging environment for European destinations in our peak season, but we have been able to hold our ground with a relatively stable yield. Looking at our operating matrix, capacity expressed in available seat miles increased 2.4% over last year, with capacity for transatlantic routes up 4.2%. Customer traffic expressed as revenue passenger miles increased 1% over last year, reflecting continued demand for leisure travel. Yield improved 2.6% year-over-year as a result of higher traffic and discipline capacity growth, thus maintaining the positive momentum experienced since the beginning of the year. Our load factor stood at 85% compared to 86.2% in 2024. Turning to our elevation program, benefits began to materialize as anticipated during the quarter. The positive impact of the program combined with higher revenues, rigorous control of operating expenses and lower fuel costs resulted in improved operating profitability. Exactly one year ago, we launched elevation with the goal of generating 100 million in annual adjusted EBITDA by mid-2026. We remain on track to achieve our target and drive results through cost reduction and revenue generation initiatives. Turning to our operations, I am pleased to report a fifth consecutive quarter of improved on-time performance. Our operational discipline rooted in our culture allows us to offer a quality experience to our customers while maintaining tight control over our expenses. We currently have a fleet of 43 aircraft, of which six are grounded due to the ongoing Pratt & Whitney GTF engine issue. We expect that number to gradually improve for the upcoming winter season. Needless to say, this burden has significantly affected our performance for over two years now, even though we are doing everything we can to minimize its impact. As announced last month, we completed a sell and leaseback transaction for two additional spare engines, which were part of the compensation received from Pratt & Whitney for grounded aircraft for 2025. Jean-Francois will provide additional details on the transaction in a few moments. Turning now to our network expansion. Since the last quarter, we announced new non-stop service from Toronto to Istanbul, Turkey, operating twice weekly starting in December. We have also established a partnership with Turkish Airlines to strengthen service between our two countries, offering consumers more travel options to destinations across the Middle East, Asia, and Africa. We also announced new non-stop service to Rio de Janeiro, Brazil, with two weekly flights from Toronto and one weekly flight from Montreal, offering Canadian travelers more opportunities to explore South America. These additions are part of an extended winter offering, which includes 14 new routes. For next winter, we will also be adding frequencies on several existing high-performing routes to the south and across the Atlantic, reinforcing our commitment to strengthening our core network. Altogether, our enhanced winter schedule represents about 5% to 7% capacity increase compared to last year, mainly driven by the gradual return to service of aircraft currently grounded along with higher aircraft utilization. This expansion reflects our ongoing efforts to diversify the network and broaden our international footprint. We will be announcing additional destinations for 2026 in the coming months, further building on this momentum and unlocking new growth opportunities. We are targeting high potential markets with strong VFR demand and low seasonality, which help drive year-round traffic. Importantly, the strong performance observed to date of recently launched routes supports our diversification strategy. Longer haul routes, such as Rio and Istanbul, play a key role in maximizing aircraft utilization and allowing us to optimize fleet efficiency. Finally, I am pleased to report that our brand and customer satisfaction continue to shine. Air Transat has been named the world's best leisure airline at the 2025 Skytrax World Airline Awards for the seventh time. This award is based on passenger satisfaction and reflects the unwavering commitment of our teams to placing the client at the heart of every decision we make. Thanks to our team's openness, attention to detail, and constant desire to go above and beyond what is expected, Transact continues to stand out from its peers. Looking ahead, we anticipate recent trends to continue over the next few quarters, and we remain cautious in light of pressures on consumer discretionary spending. At this time, we are witnessing softness in our two four-load factors, which are down 1.2 percentage points compared to last year. Yields are 3.1% above last year, although they are currently trending downward. As we enter our winter season, we continue to see strong demand for south destination, supported by a shift in consumer behavior away from U.S. travel. That said, given the current environment, it remains difficult to predict how demand will evolve in the coming months. In conclusion, I want to once again highlight the significant progress made in terms of improving our balance sheet, as the refinancing represents a major step forward for the long-term sustainability of transit. We are also pleased with our results after nine months. The results show us that we are focusing on the right thing. But we will continue to remain prudent. going forward, considering economic and geopolitical uncertainty and a more challenging competitive environment. This concludes my remarks for today.

So, I will now review our financial results. Thank you, Annick. Good morning, everyone.

Before addressing the quarterly results, let me review a few financial and operational highlights. On July 10th, we completed the restructuring of the government debt. This agreement represents a major step forward to substantially deleverage our balance sheet and paves the way for Transat to further implement its long-term strategic plan. As you will hear from the results, this has significantly reduced our total debt at the end of the third quarter and resulted in a one-time gain on long-term debt extinguishment of $345 million. The sale and leaseback transaction for two Pratt & Whitney GTF spare engines acquired using credits received as compensation for grounded aircraft in 2025 was completed at the end of July. The transaction, valued at $45 million U.S., will allow us to increase liquidity while continuing to use spare engines to power our A321LR fleet. Following quarter end, we used $30 million Canadian of the proceeds to redeem 6.2 million Series 4 preferred shares held by the Canadian government for a total amount of $16 million. As a result, the number of outstanding Series 4 preferred shares was reduced from 9.9 million to 3.7 million. The remaining amount of proceeds of $14 million was used to repay a portion of the principal amount of the 2035 debenture held by the government. After these repayments, the government made $30 million available to us in the form of working capital advances, which we subsequently drew upon. As Anik mentioned, the Elevation Program delivered its anticipated benefits during the quarter, which slightly contributed to our profitability improvement. These benefits were driven primarily by improvements in our call center operations, savings from reduced external expenses, targeted revenue management strategies, and select organizational restructuring initiatives. Now let's take a closer look at our results for the third quarter of fiscal 2025. Revenues amounted to $766 million, up 4.1% from the third quarter of 2024. This growth reflects a 2.6% year-over-year improvement in yield expressed in airline unit revenues and a 1% increase in customer traffic expressed in revenue passenger miles. Following the agreement with Pratt & Whitney, we also recorded a non-cash revenue amount of $7 million. Adjusted EBITDA reached $81 million, up from $48 million in the third quarter of last year. In addition to the contribution from elevation, this improvement reflects higher revenues, increased productivity, and a 14% decrease in fuel prices compared to the corresponding period in 2024. For the third quarter of 2025, the corporation reported net income of $400 million, or $9.97 per share, compared with a net loss of $40 million, or $1.03 per share, last year. This year's net income was mostly driven by the $345 million gain on the extinguishment of long-term debt. On an adjusted basis, we had a net loss of $12 million, or $0.28 per share, in Q3 2025, compared to a net loss of $36 million, or $0.93 per share last year. Moving to our cash flow and financial position. Cash flow from operating activities was negative $105 million in the third quarter of 2025, compared to a negative $91 million last year. The variation reflects a reduction in cash flow generated by the net change in non-cash working capital balances, partially offset by higher profitability. As for investing activities, CapEx was $30 million steady from a year ago, and proceeds from the sale-leaseback transaction in Q3 2025 were $62 million Canadian. After accounting for investing activities and repayment of lease liabilities, pre-cash flow was negative $122 million compared with negative $169 million a year ago. Still, after nine months, We have generated positive free cash flow of $149 million, which includes three Price & Whitney sell and leaseback transactions in 2025 compared to $92 million, totaling, sorry, $92 million compared to negative $20 million in 2024. Turning to our balance sheet, cash and cash equivalent stood at $357 million as of July 31, 2025, compared to $260 million as at October 31, 2024. Cash and cash equivalents in trust or otherwise reserved, mainly resulting from travel package bookings, was $306 million at the end of Q3, compared to $485 million as at October 31, 2024, reflecting the seasonal nature of our operations. Long-term debt and deferred government grant stood at $384 million as at July 31, versus $803 million as of October 31, 2024. This decrease essentially reflects our debt restructuring agreement, including the full repayment of the $41 million principal balance of the secured government debt. Long-term debt and deferred government grant, net of cash and cash equivalents, is $27 million, down from $543 million at the beginning of the fiscal year. Additionally, In September, we extended the maturity date of our revolving credit facility to fiscal 2028. As we look ahead to Q4, it's important to keep in mind that last year's revenues included the financial compensation of $34 million related to the Pratt & Whitney engine situation. The amount recorded at that time was significant as it represented cumulative compensation for years 2023 and 2024. In contrast, This year's compensation will reflect only the number of grounded aircraft during Q4. We also anticipate a modest year-over-year decline in capacity in the fourth quarter, resulting in a full-year increase of 1% for 2025, as previously indicated. Finally, unlike the first nine months of the year, Q4 should not benefit as much from the tailwind of lower fuel prices. Conversely, we will take advantage of reduced interest and the charges following the debt restructuring, and we expect benefits from elevation to gradually ramp up. So this concludes my prepared comments. We will now open the call for questions from analysts.

Thank you. Ladies and gentlemen, if you do have a question, please press star followed by one on your touch-tone phone. You will then hear a prompt that your hand has been raised. And should you wish to decline from the polling process, please 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 1 now if you have any questions. First, we will hear from Karnat Gupta at Scotiabank. Please go ahead.

Thanks, operator. Good morning, everyone. On the yield side first, I guess, you know, you guys pointed out that the quarter rate yield is tracking 3% above from last year. And I think you also mentioned that there's a downward trend you are seeing in that number lately. Can you help us understand, you know, A, was the yield in the early part of this quarter fiscal Q4, was it higher than 3% and that started to kind of taper down? And did you see any benefits from the AR Canada labor disruption that happened in August?

Yeah, that is pretty interesting. Just to come back on Q3, the south market has remained highly dynamic throughout the quarter, with yields that were up 7% year-over-year, driven by a shift in demand from trans-border routes to some destinations. For Q4, we continue to see strong demand, but with September and October, we are getting into a lower season, so bookings are slowing down, which is normal. As for Europe, in the context of significant capacity increase from competitors on our key markets, and considering the entry as well of French B on Paris and Virgin Atlantic on London, we clearly see disrupted pricing on key markets. We were relatively pleased by our performance so far as we were able to maintain decent yield and resin now as indicated earlier if we look at Europe of September and October pricing from competition has been extremely aggressive since mid-august and that is why we have been seeing a trend downward on video as you expressed we substantially substantially benefit from AC in August. So our yields went up for a couple of days. Load factors were up to 100% on several sites. So that caused the yields to go up 3% compared to last year. And now we're dealing with more competition for September and October.

OK. That's really helpful. Thanks for the color. And then in terms of your planning for the upcoming winter, I think you guys are expecting 5% to 7% growth in capacity. I understand a lot of that could be driven by the aircraft that's ungrounding after two years or so. But do you see the demand being enough to support that capacity or not? I mean, do you plan to kind of launch new routes, as you said, where you expect to sort of stimulate the market demand?

Yeah, so as you said, for next winter, the number of grounded aircraft is expected to decrease from six last year to four to five this winter, and with a potential further reduction for next summer. So we've done a lot of schedule optimizations And we've launched, as well as part of our network program, longer haul destination that are further enhancing aircraft utilization and driving natural capacity growth. So as a result, we're looking at a 5% to 7% increase this winter. We're still working on the program, so numbers could change a little bit again, but this is what we're anticipating so far. And as for demand, of course, it's still early to have clear visibility, but trends are encouraging so far. We remain cautious as airlines are currently making several capacity adjustments. We are seeing a significant increase on south destination. So, but, you know, We see the same trends as we've seen over the last summer in terms of U.S. demand shifting to south destinations, so we are encouraged so far.

Okay, thanks. And last one before I turn over. On the elevation programs, so congrats on achieving the full benefits, and I think hopefully you're expecting some or most of them to show up as we go ahead in the next few quarters. My question on the elevation now is, you know, I mean, over the last year or so, you have clearly made a lot of efforts to realize this $100 million saving. Any changes, you know, like on the positive side or negative side you have seen as you, you know, hopped on those initiatives, whether from supply chain or, I don't know, from macro or even like any new opportunities that surfaced? Did you see the $100 million is a good firm number, or do you need to adjust that number as we go forward from here?

So far, everything is on target.

As we are progressing, we see additional opportunities to improve our overall performance. They still need to be quantified. But We're very pleased with what we've seen so far. We now have reached our implementation target with current initiatives in place expecting to deliver the 100 million in adjusted EBITDA by mid-2026. Overall, the majority of the planned initiatives have been implemented. Sorry about that. There's a few remaining initiatives are still being rolled out. and should be completed by winter. So progress is striking well against our plan, and we remain confident on the final results.

If I may add just one comment on that in terms of modeling and financial modeling, I should say. You know, it's not a linear path, obviously. So the way to look at the initiatives and the benefit setting or P&L, you know, it's not going to be linear. So I think it's going to be accelerating over time and more back-ended. But, you know, as Anik mentioned, we remain very, very confident about the $100 million being generated by mid-2026.

Okay, perfect.

Thanks for the time. Thank you.

Thank you. Next question will be from Kevin Chang at CIBC. Please go ahead.

Hi, good morning. Thanks for taking my question. Maybe just following on some of the questions Conarch had asked, I guess if I think of the 5% to 7% capacity growth next year, is there a way to break that down between how much of that is length of haul driven? It sounds like reduced grounding of some of these aircraft will provide that opportunity versus how much of that 5% to 7% is just increased capacity into existing markets? Just trying to get a sense of if the length of haul is a bigger contributor to the 5% to 7% growth.

Also, the increase comes from less grounded aircraft due to Platt & Whitney engine issues. So we're going to have two additional aircraft, the A321LRs, and this is what's driving capacity up. So I would say that's counts for maybe 75% of the increase. The other 25% is around having changed our program or optimized our program to increase aircraft utilization. As we said, we deployed more long-haul routes. We are using more aircraft as well in period that we were not necessarily using them last year. So it's based on our ongoing commitment to increase overall productivity from an aircraft perspective, but people perspective as well. We want to make sure that we optimize overall operation, making sure we maximize our crews, maximize our aircraft utilization, and this is what's bringing the capacity up.

Okay, that's helpful. And just maybe on the competitive environment, it sounds like some of the increased competition you've seen in the transatlantic market maybe in the recent months reflects increased competition from European carriers. It sounds like European carriers lower cost carriers. Just wondering as you look into the winter season, are you seeing a similar competitive dynamic emerge where southern carriers may be looking to take advantage of the shift in Canadian travel? dynamics here as Canadians travel more towards sun destination markets outside of the U.S.? Just wondering if you're seeing something similar in the winter season as you saw in the summer season here from some of your foreign competitors.

Well, we're definitely seeing increased capacity to sub-destination from Canadian carriers overall. We're looking at the 10% increase if we consider all the major players. We are increasing our share as well, counting where we anticipate that demand will be. It's going to be competitive, but again, I think it's pretty much in line with demand that we're seeing so far. The U.S. U.S. demand is down, and as we are looking into our booking curve right now, looking at yields and load factor, we're pretty confident that the market is going to be able to digest this capacity increase.

Okay, that's helpful. Maybe just a last one for me. Again, congratulations on getting through the Elevation Program. It felt like a lot of the Elevation Program was focused on kind of improving the optimization of your organizational structure, so a lot of cost initiatives. I guess what's next after here, I guess I've always thought that you've had an opportunity from a revenue perspective, whether it's you know, improving your yield management, whether it's maybe looking at loyalty programs. Just wondering, as you've kind of completed elevation, is there an opportunity here to maybe address some of the lower hanging fruit from a revenue management perspective?

The revenue management initially is part of the, or at the center of the elevation program. as much as the cost-cutting initiatives. So we started working on the revenue management initiatives back at the beginning of the year, around January, and it's been progressing very well. We started seeing some results this quarter. It's going well. It's been encouraging, as we've discussed in the past. There's about five to six initiatives being implemented to maximize the algorithm, to maximize the modernization of the program. We've got help from specialists as well. We finalized pros implementation. So it's really at the core of the elevation program. as well. So things are going well on that side.

Perfect. I'll leave it there. Thank you.

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

Thanks. Good morning. I wonder if you can talk a little bit about what you're seeing from a consumer behavior point of view. It's one of the things you've kind of highlighted here is some I guess, shifts in consumer behavior and, I guess, maybe some consumer concerns around the economic backdrop. I mean, what can you kind of point to that gives you, I guess, maybe a little bit of concern about the ability for the consumer to continue to travel?

Well, we see a little bit more last-minute demand. We've been seeing this for the last, I would say, six to nine months. So people hesitate a little bit. There's a little bit less confidence, maybe in terms of economic trends. We'll see what's going to happen for next year. Economists seem to be confident that things will improve in terms of the consumer sentiment. for next year, but this is something that we're watching very carefully, as our customers, of course, spend on discretionary budget. But we're not too, I would say we're pretty much positive right now in what we see.

Okay, that's helpful. Second question, I guess, on your relationship with Porter. Just wondering if you can update how that's kind of progressed through the summer and I guess the feed traffic that they've provided to you. But I also want to ask, I guess, a bit about some of the new routes they've announced back in June to sun destinations, some of which look like they may overlap with traditional transit markets to the sun. So I'm just wondering how, I guess, how you kind of, work with them to avoid competing with each other.

So far, for fiscal year 2025, we were able to capture a little bit more than 160,000 connecting passengers between Air Transit and Porter, representing 3.4% of our total traffic. The target is set at 4% right now. So revenue generated was up 20, a little bit more than 20% compared to last year. So we were very pleased about that, and we continue to align our networks, align our pricing strategy to maximize connecting folks. As for the SALT program, as you said, in June Porter unveiled their first flights to Mexico, the different SALT destinations for next winter. Their program was coordinated under the terms of the joint venture, complementing Transact's existing offering. So we're all doing this collaboration making sure that we maximize our footprint on self-destination.

Okay, no, that's helpful. So you're basically working in conjunction with them to, I guess, offer the best schedule that you can between the two airlines. Yeah, exactly. Okay, perfect. That was all my questions.

Thanks very much.

Thank you. Next question will be from Benoit Poirier at Desjardins. Please go ahead.

Yeah, thanks very much. Good morning, Annick, and good morning, Jean-François. Yeah, just to come back on Porter, really nice to hear that you've been able to grow. Any impact from the sharp decrease we saw between Canada and the U.S. travel, or have they been successful to replace the capacity elsewhere?

Yeah, well, the Of course, the connections to the U.S. have declined, but this segment is not a major component of our overall connectivity. The majority of connecting traffic continues to come from Canadian routes, so connecting their national domestic network with our European network. So it's difficult to pinpoint the exact, you know, caught the exact impact on porters, but they've been able to adjust the network schedule to maximize the connecting passenger with us.

Okay, that's great. And just talking about partnership, Annick, You've announced a nice partnership with the Turkish Airlines back in June. So I think it will start from Toronto to Istanbul in December 2025 on a weekly basis, twice. So could you maybe provide more granularity about the expectation, how sizable could be the partnership for you down the road?

Yeah, so it's a first season. For us, it's the beginning of a new relationship. So we have, there are mutual commitments. We want this to be successful. We've operated Turkey in the past, so we pretty know how, you know, successful factor to this route. The partnership, we anticipate, will grow over time. We start small, but we have the ambition to make this stronger.

Okay, okay. And could you also maybe provide an update on the potential you see at the Saint-Subar Airport with Porter? And also, if you could give an update on the loyalty program rollout, that would be great.

Yeah. In terms of St. Tobias, we don't expect to operate at St. Tobias, so that's pretty clear on our side. It doesn't hit with our network, so that's going to be a separate business for Porter. As for the loyalty program, it remains a key strategic project for us, given its strong value creation potential. It will provide for us strong leverage to develop airline, but also non-airline partnerships. And of course, we want to increase customer loyalty. So we aim to launch towards the end of fiscal 2026. That was the calendar. We're still on that calendar. And we are currently integrating the program with the selected financial institution and working on offering a strong ecosystem. So things are going very well, and again, it's part of our priorities for 2026. It's been a priority for 2025, but it takes time to develop such a program, but we'll be really ready to launch in 2026.

Okay, thank you very much for the time. You're welcome.

Once again, ladies and gentlemen, if you do have any questions, please press star followed by one on your touch-tone phones. Next, we will hear from Tim James at TD Cowan. Please go ahead.

Thank you. Good morning. I just want to return to the Porter discussion for a minute, and I'm wondering if you could talk about going forward, remaining opportunities, initiatives that you have with Porter. For example, them potentially selling packages down the road, which I think might be an opportunity, which they would do with your organization. assistance and expertise. Just you can remind us what are sort of the remaining kind of building blocks in that partnership.

Well, as they are growing, of course, developing into domestic in the U.S. as well, we are aligning more and more our schedules, our network to optimize and maximize connecting passengers. So that's our first goal. In terms of south, the south destination, as we said, they are launching their new roads this winter, and we are doing this in coordination to maximize the impact on south destination. Looking forward, and we've talked about this when we launched the joint venture, As part of the agreement, there is a piece where we will act as a tour operator for Porter Airlines. So these packages would be branded under Transat brand, but operated with Porter Flights. So that's part of the overall joint venture agreement. It's not for this upcoming winter, but should be in place for next year.

Okay, that's helpful. And will there come a time really when basically all Transat flights and Porter flights are sort of part of the joint venture? Or that passengers can connect from one airline on to the other? I don't recall where Europe is at on that front, but is that the ultimate goal eventually?

What we're looking at right now is to maximize the agreement. We want to grow more connections together. The final state, I think, is still to be determined depending on the performance that we see. We need to adjust. Sometimes we create value, sometimes Sometimes we create value together, sometimes it's better to stay apart in terms of flight. So, as we move along, we analyze the performance and we adjust.

Okay, that's helpful. Thank you very much. Thank you.

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

Thank you, Sylvie. Thank you, everyone. As a reminder, our 2025 fourth quarter results will be released on Thursday, December 18. Thank you, and have a good 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 ask that you please disconnect your lines.