Transat A.T. Inc. (TRZ) Earnings Call Transcript & Summary

[Foreign Language] Good morning, ladies and gentlemen. Welcome to the Transat Conference Call. This call is being recorded. [Foreign Language] I would now like to turn the meeting over to Mr. Christophe Hennebelle, Vice President, Corporate Affairs. Mr. Hennebelle [Foreign Language].

Thank you, Frank. Hello, everyone, and welcome to the Transat Conference Call for the Presentation of the Financial Results of the Second Quarter ended April 30, 2022. I'm here with Annick Guerard, President and CEO; and Patrick Bui, CFO. Annick will provide our comments and observations on the current situation and on the operational and commercial plans for the future, before Patrick reviews the financial results in more details. We will then answer questions from financial analysts. Questions from journalists will be handled offline. 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. Patrick may refer to it as he presents the results. Today's call contains forward-looking statements. There are risks that actual results will differ materially from those contemplated by those forward-looking statements. For additional information on such risks, we invite you to consult our filings with the Canadian Securities Commission. Forward-looking statements represent Transat's expectations as at June 9, 2022, and accordingly, are subject to change after such date. However, we disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by law. Finally, we may refer to IFRS and non-IFRS financial measures. In addition to IFRS financial measures, we are using non-IFRS measures to assess the corporation's operational performance. It is likely that the non-IFRS financial measures used by the corporation will not be comparable to similar measures reported by other issuers. All those used by financial analysts as they measures may have different definitions. The measures used by the corporation are intended to provide additional information and should not be considered in isolation or as a substitute for IFRS financial performance measures. Additional information on non-IFRS financial measures, such as their definition and their reconciliation with the more comparable IFRS measures, are available in our annual report and our investor presentation. With that, let me turn the call over to Eric for our opening remarks.

Thank you, Christophe. Good morning, everyone. During the second quarter, February was still quite slow, but as the effect of Omicron subsided, we saw a strong rise in demand and capacity, which resulted in a strong rebound for March and April travel and in bookings for summer travel dates. Our final capacity for the quarter was slightly below 50% of the levels we had in 2019, starting at 1/3 in February and reaching 2/3 in April. On the other hand, load factors tapped out at 67% in February. They were slightly below 80% in March, but slightly above 80% in April. As a result, we generated revenues of $358 million for the quarter. What matters most is that our volume increased steadily throughout the quarter. This ramp-up is reflected in our sales for the summer. From mid-December to the beginning of March, summer net bookings were significantly lower than 2019. Afterwards, we saw sales similar to those of 2019, but they have been higher since the beginning of May. Clients are booking later than they were before the pandemic, but the pace is steadily increasing. Our capacity for the summer is at about 90% of 2019 levels. If this trend holds, we expect to see good volumes in the months ahead. Our customers are obviously looking forward to be flying again, and we have been proactive in taking advantage of the strong demand, both in the short term and in the long term to deploy and consolidate our strategic plan. An integral part of our plan is the way we are reshaping our network. We wanted to be stronger, denser and more centered around Eastern Canada, that means more choices for our customers and more efficiency for us. In 2019, we were offering around 500 possible itineraries. This summer, we are offering more than 1,200. Of these, 550 itineraries will be our own. We have reopened most of our existing routes and added some. In addition, we have new destinations such as San Francisco and Los Angeles from Montreal. We also have new direct routes to existing destinations such as Amsterdam from Montreal and London from Quebec City, both of which we were already serving from Toronto. And finally, we have made it possible to connect between Europe and the United States on our wings. For instance, our customers are now able to book a trip from Paris to San Francisco with a layover in Montreal. 320 itineraries will come from our codeshare agreements. Sales are now open on our codeshare agreement with WestJet. As an example, our customers in Winnipeg can now buy a trip to Faro in Portugal with a stopover flight change in Toronto. The first leg is operated by WestJet and the second leg, of course, from Toronto to Faro is operated by Transat. This is in addition to train and air combinations that we are offering with CJB on many destinations in France and Belgium from Canada. And we will add other itineraries in the fall through our codeshare agreement with Porter. More than 400 itineraries are made possible through our virtual interline agreement within connectair by Air Transat, allowing our customers to connect with 8 airlines to more than 245 destinations in Europe, North Africa, the Middle East, South and Central America as well as Canada. This is all made possible by our renewed and more efficient fleet. We are still expecting 2 more A321neoLRs this summer, which will increase this type of aircraft within our fleet to 12. No need to explain to you again how much this fuel efficient and versatile aircraft, which we are the only Canadian airline to operate this summer will contribute to our success, nor do I need to dwell on the advantages of the mixed fleet flying operation that we will be using between these aircraft on our A330s. Also, we are very pleased to have extended our pilot's collective agreement for an extra 3 years, protecting us against unexpected labor cost fluctuation and giving us some stability for the years to come, while we are implementing our restart and deploying our plan. I want to thank our pilots and their representatives for working with us towards this mutually beneficial agreement. On June 1, we welcomed Marc-Philippe Lumpe, our new Chief Airline Operation Officer. In this role, Mr. Lumpe will be in charge of all airline operations, replacing Jean-Francois Lemay, who has helmed Air Transat since 2013. Marc's extensive experience in aviation, particularly in the areas of operations, quality, maintenance, procurement and IT are undeniable assets for the long-term recovery and development of our aviation activities. So in a nutshell, even though we are not able yet to generate profitability because as explained during Q1, we are still carrying significant -- linked to the restarting of our operation. We have certainly seen the volumes come back and our top line is gradually rebuilding, which is a good sign for the upcoming summer. In the meantime, we have continued implementing our strategic plan to build a stronger, more resilient company that is both ready to take advantage of much more robust demand and to tackle whatever bumps in the road lay ahead of us. Patrick will now give you details about our financials.

Thank you, Annick, and Good morning, everyone. As mentioned by Annick, the quarter started in difficult circumstances with the effect of Omicron greatly impacting our financial results and negatively impacting our liquidity position, but ended on a positive note in April, notably surpassing our pre-Omicron top line expectations. As you will see in the investor presentation that we posted on the website, bookings in the past 4 weeks have surpassed 2019 levels. From a financial strategy perspective, our focus has been on building the resiliency and the flexibility required to navigate through these, yes, improving, but tumultuous times. As we mentioned in our Q1 earnings call, we analyzed the opportunity to implement a hedging strategy against the surge in oil prices, the most important risk we faced this summer. Prices were already impacting our Q2 results. For example, without the recent increase, our EBITDA would have been positive in the month of April for the first time in more than 2 years. In our analysis, we considered the industry's ability to share the costs with the consumers and ultimately, we decided to execute on a hedging strategy starting in June for our summer period to ensure greater resiliency in our company. With respect to financing, as we mentioned also in our Q1 earnings call, we are pursuing discussions with all current lenders, including the Government of Canada in a spirit of continued collaboration regarding amendments to the existing financing agreements in order to ensure greater financial flexibility to the corporation. With respect to cash burn during the second quarter, we are happy to report that our monthly cash burn decreased to an average of $3 million compared to $27 million in the first quarter as a result of the recovery in demand after the effect of Omicron. We highlight, however, that cash burn should accelerate during the shoulder period, May and June, while potentially turning positive during the peak of July and August. And now with respect to our Q2 results. Revenue stood at $358 million, up from $8 million in 2021, driven by the resumption of operations after Omicron subsided at the end of February. As you may remember, we had to stop our operations at the beginning of the second quarter in 2021. Adjusted EBITDA was negative $51 million for the quarter, identical to the $51 million negative in 2021. Although EBITDA remained the same, our results are encouraging since they included the cost of ramping up our operations and since the first half of the quarter was still suffering from the lack of demand as a result of Omicron. Furthermore, during the quarter, we made great progress in the recall of our pilots in order to get ready for the summer season. Pilots needed to be requalified and properly trained. This had an impact on salary and training expenses, but this was a conscious investment in the reboot of our activities. And lastly, fuel prices increased dramatically in the quarter and heavily weighed on our financial results. Adjusted net loss was $112 million compared with $103 million last year. And as per our financial statements, the net loss was $98 million compared to $70 million last year, a $28 million deterioration. This includes a foreign exchange loss of $7 million, mainly from the unfavorable exchange effect on lease liabilities related to aircraft compared to a foreign exchange gain of $30 million in 2021. Our Q2 net loss also included a gain on long-term debt modification of $22 million as a result of lower interest rates on the unsecured financing negotiated and announced with the Government of Canada last March. Now with respect to our balance sheet. As of April 30, the corporation's cash and cash equivalent remained solid at $511 million with undrawn facilities of $4.7 million for a total unrestricted liquidity of $515.9 million. Cash and trust and otherwise reserve totaled $192 million, while deposits for future travel stood at $994 million. After reimbursing more than $500 million of travel credits in the past year, we were able to rebuild 80% of our pre-pandemic order book, reflecting the strong recovery in demand. Drawdowns on our credit facilities totaled $859 million compared to $678 million last quarter. During the quarter, an additional amount of $142 million was drawn on our $390 million lease facility and $39 million was drawn on our $353 million travel credit facility. Lease liabilities stood at $931 million, which includes 10 A321neoLRs. Off-balance sheet agreements, excluding agreements with suppliers, stood at $596 million. This is an undiscounted figure, mainly related to 7 Airbus A321neoLRs yet to be delivered as of April 30. As we previously mentioned, we expect the delivery of 2 A321neoLRs during the upcoming summer. So in summary, we capped off Q2 on a much more positive note. We're thinking specifically about April. Leading indicators suggesting the business is gaining steam, for example, booking trends and client deposits, but we still have headwinds from heightened oil prices, which we decided to manage through our recently implemented hedging strategy. Thank you.

Frank, are we taking questions?

[Operator Instructions] Our first question comes from Konark Gupta with Scotiabank.

So my first question is on fuel hedging. I think you guys said that you're hedging this summer starting from June. Can you provide any sense in terms of what percentage of consumption is being hedged here? And are you hedging WTI or Brent or something else? And that -- and any sense on how much protection can it provide in terms of price?

Yes. Thanks for the question. So first of all, the strategy that we've implemented is a gradual strategy where we started taking positions today and we'll continue taking positions in the following weeks. The way we thought about it, just taking a step back, fuel price increase could be managed in many ways. From our end, the fact that we have the fleet that we have with the A321s, obviously, there's a decision that we've taken a few years ago is very helpful. There's obviously the whole notion of changes to the pricing structure. Pricing structure also includes ancillary services. And then there's a portion that needs to be managed through financial derivatives, we believe. So we don't disclose necessarily the exact percentage, again, because we are currently implementing the strategy, but we want the coverage to be a meaningful percentage. And so what we're trying to protect, just to be clear, is we're trying to protect ourselves against an additional surge in the price and if the price of oil remains high. And what we mean by the oil price is through derivatives related to -- and you mentioned it Konark, related to the WTI.

That's great, Patrick. And then like recently, all the media articles, and I think a lot of us have been traveling, and we have seen significant delays and maybe cancellations happening at Toronto Pearson and maybe Vancouver as well. From your operational perspective, have you seen any disruption in operations due to delays at the airports? And if you have, what do you think -- what's driving these issues at this point? Is it the shortage of people or customs or ground staff at the airports and how is that being fixed by the government? We saw some announcement by Minister of Transport, but is that enough?

Yes, we've had the delays in Pearson among other places. There are challenges in Europe as well. Demand for travel ramps up, Canada's border policies and resources in airports, whether it's [indiscernible] NAVCAN, CBSA need to reflect this new reality. Processing times per passenger are very much higher with the current public health restrictions. It would normally take customs agent 30 seconds to process a passenger and now it's taking 2 to 4x that because of public health protocols. Normal travel volumes very difficult to coexist with current public health protocol in place within our airport facilities in Canadian airports as stated by the Canadian Airports Council. So we have collaborated closely with the government to implement each layer of public health measure for travel during the pandemic. Our employees continue to implement and enforce these measures. Our sector made certain to be ready to welcome back travelers and meet the anticipated pent-up demand for travel that we are now experiencing, which is significant. And we are joining travelers, consumers groups, airports in expressing hope that the government will be there to really to scale up and meet the strong demand of Canadians and visitors to resume travel. So we are in discussion with the right organizations. We are putting pressure. Of course, the pent-up demand is going very high in a short period of time. Everybody needs to adjust but we remain hopeful that everything is going to be ready for the peak times for July and August.

[Operator Instructions] Our next question comes from Tim James with TD Securities.

Transat is at according to the presentation, putting about 75% of the seats in the market relative to 2019, and this is for the Transatlantic this summer. That appears to be kind of a lower end of what competitors are doing in terms of their capacity relative to '19. Is that a strategic decision by Transat or are there sort of limitations related to your own capacity or employee base that are driving that lower relative amount of capacity?

No it's part of our strategy to rebuild our European network step by step. We were looking at the upcoming summer and we made some adjustments as we saw an increased demand on sub-destinations. So we made some adjustment to be able to rebalance our network. We are using the summer, all our aircraft and maximizing utilization. So the way we have designed our network, overall network is very well balanced between Europe, South, domestic in the U.S. market, and we have made sure that we've optimized aircraft utilization.

Okay. My second question is, I'm wondering if you can comment or put some approximate numbers around how much of your domestic and U.S. transborder traffic is connecting onto your Transatlantic network? Is there a very high degree of connectivity or do you have a high an unusually large amount of just point-to-point within North America basically on that service?

You're talking about the domestic or the U.S. market?

Well I'm talking about, I guess, domestic, if you can focus on that, the domestic business, how much of it of that traffic is connecting onto your Transatlantic services versus just a trip within Canada that ends -- starts and ends within Canada? Then the same question on your U.S. transborder.

It's a little bit more than 40%. So the Canadians connecting on our network to the European destination. And as I explained, so this was -- this has been connecting for a while now. And we opened the connection between the U.S. market and the European market, and this is increasing week after week.

Okay. And then my final question, just a housekeeping question here quickly. Can you confirm or are there any changes to the timing of the 321s LR deliveries that you have planned relative to planning at the end of the last quarter?

So overall we have 17 firm command. We have -- right now, as we speak, we have 10. We are expecting 2 additional A321LR for this summer. There has been some delays, not only for us, but for the overall market because of the supply chain disruption. So there has been delays for a couple of weeks for both the 2 aircraft we are expecting this summer, but we have been able to adjust and add an aircraft in ACMI. So we've compensate -- we had some mitigation measures to be able to maintain our capacity in the market and these aircrafts will arrive in July. As for the remaining 5 that are scheduled to arrive in -- in 2024, we do not expect at this time any delays, but this, of course, still needs to be confirmed as we move along to the next month.

There are no further questions at this time. Pardon me, there's actually one more question just from Michael Kypreos with Desjardins Securities.

Just regarding networking -- net weekly booking that increased over 100% at the end of May and June. Do you guys really see this as sustainable throughout the whole summer and fall or as a big jump in spike because of the reopening and people taking their vacation time for the summer?

No we really see this as being sustainable as published by IATA. International traffic took up really in April of 2022. As you know, domestic -- during the pandemia, domestic and transborder markets were the first markets to get back on track. And now since April, we are really seeing the demand pick up on the international market. So this is really encouraging. It's really a sign that we are getting back to normal trends.

Perfect. And maybe just on the cash burn. I know you said it's going to turn positive maybe in July and August. When looking at the fall, are you thinking about the same thing or staying around the $15 million to $20 million range that you had previously mentioned?

Yes, it's difficult to say. We don't provide guidance on our cash burn. I mean, obviously, there's -- we mentioned was tumultuous times. I mean, obviously, fuel prices impacting that. I think our comment was there are shoulder seasons in our program, shoulder season includes May, June. And then when you look at the end of the summer, October can be considered -- October, November shoulder season. So we don't provide guidance there, but you should expect, once we hit that other shoulder season at the end of summer, we should be still in a cash consumption mode.

We have a follow-up question from Konark Gupta with Scotiabank.

A couple of follow-ups actually. On the Transatlantic, I know you disclosed some capacity doubling versus 2019. But curious, what are you seeing, Annick, in terms of volumes or pricing and load factors compared to 2019 in Transatlantic this summer?

Yes. So everything is going up. We have been able to increase our pricing steadily over the last weeks and we are -- as well as the pacing. So both pacing in fuel velocity and pricing is higher than pre-pandemic. So that's really encouraging. And at the same time, it shows also less -- it highlights also less on bookings that we have been seeing since the pandemic -- the beginning of the pandemia. So all of this is very encouraging at this time.

That's great. And then last one, in terms of your employee base, pilots, airport staff, we have heard from a lot of the U.S. airlines are having issues, finding the talent and getting their pilots and other people back. A few Canadian airlines have said something opposite, they had not had this issue. Where do you stand? Do you have issues finding the pilots in wrapping up capacity in operations and ground staff?

Overall, it's going well. It's going pretty well. We still have a lot of attraction power within our company for the different positions within the organization. We are dealing with subcontractors at the airport, and we are in ongoing collaboration with them discussions to make sure they have the proper level of staffing to be able to support our operation. I'm not saying it's 100% where it should be right now, but we are progressing and making progress, and everybody is helping each other to make sure that we are able to deliver good service levels.

We have a follow-up from Tim James with TD Securities.

Actually, my follow-up is somewhat similar to Konark's first question, just maybe a little bit more specific here. I'm wondering if you can comment that your plans for 90% of capacity for the summer. How is load factor on that capacity tracking currently relative to the same time in 2019?

Yes. Load factors compared to same time in 2019 are lower for different reasons. First of all, as I said, the international traffic took up both in April. There is still more last-minute demand. However, the gap in load factor between 2019 and this year is reducing week after week. So because we have higher velocity at this time compared to same time in 2019. So the gap is closing more and more.

There are no further questions at this time.

Okay. So thank you, everyone. Let me remind you that our third quarter results will be released on June -- sorry, that's September 2022. Thank you, and have a good day.

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.