A warm Canadian winter clouds Transat's outlook
TRANSPORTATION REPORTER
Canada's biggest tour operator should be looking forward to the industry's high season, with the recession behind it, travel rebounding, and a stronger dollar that allows vacationers to spend more in sunny holiday spots.
Instead, Transat A.T. Inc. shed 30 per cent of stock value in a single day as it forecast a loss for its second quarter, which ends April 30 and runs through the industry's spring equivalent of rush hour.
Montreal-based Transat said yesterday its first-quarter revenue slumped 10 per cent as it posted an operating loss of $12.4-million for the three months ended Jan. 31, a worse showing than analysts expected and deeper than the $8.5-million operating loss a year earlier. Its net loss narrowed in the quarter.
Unusually warm weather in Canada, scaled-back family vacations and Canadians' preoccupation with watching the Winter Olympics instead of departing for sunny climes combined to erode travel demand at Transat, prompting the warning on its second quarter, traditionally a busy period.
National Bank Financial Inc. analyst David Newman said part of the reason for Transat's gloomy outlook is a hangover from the recession, with many Canadians taking their breaks close to home to save money - the so-called "staycation."
As well, because the winter wasn't bitterly cold, and the Vancouver Olympic Games became a "distraction and attraction," demand for getaways to sun destinations such as Mexico and the Caribbean sagged, he said.
Transat finds itself having to chop prices by 10 per cent or more just to sustain bookings close to last year's second-quarter volumes.
While millions of Canadians were glued to the Olympics, some travellers managed to get off their couches and board planes because last-minute bargains emerged for trips and the loonie strengthened, said Brad Miron, vice-president of business development at holiday retailer itravel2000.
Sunwing Travel Group's merger last fall with Signature Vacations has put pressure on Transat as the industry struggles with an excess of holiday packages, many of which sell at discounted rates. Other competitors in the sector include Sunquest Vacations, Air Canada Vacations and WestJet Vacations.
Transat, which serves more than 60 destination countries, told analysts on a conference call that Air Canada Vacations and WestJet Vacations in particular have been sharply increasing the number of holiday packages on sale by redeploying aircraft affected by the slowdown in commercial traffic.
BMO Nesbitt Burns Inc. analyst Claude Proulx described Transat's earnings guidance for its second quarter as "a major disappointment," saying the pessimistic forecast "raises questions as to sustainability of the business model," though a stronger summer could still allow an annual profit.
If Transat is able to benefit from a rebounding economy in its second half, the company might be able to register an annual profit, despite a rough first half, Mr. Proulx and other analysts said.
Jean-Marc Eustache, Transat's chief executive officer, said the decreased first-quarter revenue reflected lower selling prices for vacations and fewer packages sold.
"I think the model is still good," said Mr. Eustache, who co-founded Transat in 1987. "The old lion is not dead."
Mr. Eustache said it's too early to forecast pricing trends this summer for trips to Europe, but so far, reservations are holding up for the third quarter ending July 31, compared with the same period in 2009.
"The market was bullish about Transat," but reality has set in that the industry is suffering with overcapacity, he saidyesterday.
Analysts slashed their ratings yesterday for Transat. Versant Partners Inc. analyst Cameron Doerksen, for instance, reduced his 52-week target to $15 from $22, while lowering his recommendation on the stock to "neutral" from "buy."
TRANSAT (TRZ.B)
Close: $13.70, down $5.80
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Transat
Q1.........................2010....................2009
Loss............($13.9-million).....($29.4-million)
EPS..................(37 cents)..............(90 cents)
Revenue.......$793-million.........$877-million
Source: Company reports
