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

[Foreign Language] 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 Andrean Gagne, Senior Director of Communications, Public Affairs and Corporate Responsibility. Please go ahead, Ms. Gagne.

[Foreign Language] Hello, everyone, and thank you for joining us for our first quarter earnings call ended January 31, 2025. Annick Guerard, President and CEO; and Jean-Francois Pruneau, our Chief Financial Officer, will provide an overview of the quarter and comment on the current operational situation and commercial plans. Jean-Francois 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. Jean-Francois may refer to it when he presents the results. Our comments and discussions today may include forward-looking information regarding Transat's outlook, objectives and strategies that are based on assumptions and subject to risks and uncertainties. Forward-looking statements represent Transat expectations as at 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 our forward-looking statement in Transat's first quarter news release available on Transat.com and on SEDAR+. 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 totaling $20 million. These results were mainly driven by positive yields, reduced fuel costs and a tight control of operating expenses. Turning to our operating metrics. 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 disciplined 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 offset this impact, driving revenue growth. With regards to our elevation program. As of today, the initiatives already implemented will generate an annualized 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 start-up implementation costs, 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 lease 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 6 and 7 during the last quarter, and we anticipate this level of AOG to persist throughout the year. As previously explained, the situation not only escalates cost 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 nonstop route between Toronto and Berlin. The service will start next summer with 2 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, the other 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 4 percentage points year-over-year, marking a third consecutive quarter of significant progress. As indicated last quarter, the successful in-sourcing of passenger and rent services at Montréal-Trudeau Airport has played a key role in this improvement. During the major snowstorms in February, our strong operational performance stood up 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 open 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 U.S. tariffs on our business and consumer sentiment. Transat has limited exposure to the U.S. with only 2 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 2 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 U.S. 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 a 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-Francois will now present our financial results.

Thank you, Annick. 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 LEEFF 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 totaled $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 Annick 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 cost 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 totaled $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 31, 2025, up from $260 million at the end of Q4 2024. Cash and cash equivalent in trust or 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.

[Operator Instructions] [Foreign Language] [Operator Instructions] The first question will be from Konark Gupta at Scotiabank.

Just maybe going back, Annick, to your point about impact of the Canadian dollar weakness and macro from the tariff uncertainty. I just wanted to understand, 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, there's a wave of boycott U.S.A. 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 2 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 offerings. In the meantime, I think what helps us is that we, at the beginning of the year, we've 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 impact besides the U.S. market on our bookings. So things are looking good for now.

Okay. That's encouraging. And on the other topic of what's happening in Canada, I think there's been discussions about 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 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.

Next question will be from Cameron Doerksen at National Bank Financial.

I wanted to ask a little bit about the yield trends in the winter. I mean overall, yields up 1.7%, but interesting that the 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.

Yes. Yes. So we've seen -- when we look at the yields, the South 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 close to 6% right now as we look into Q2. And trends are -- it's trending positive as we're 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 summer period as well with the bookings you've had so far?

Well, it's very early to comment 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 [ indicative ] so far. Nothing negative so far.

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

Yes. Well, the change in government, it's obviously hard to speculate if it's going to slow down or accelerate our process. That's probably a question for them rather than for us. That being said, 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've got from our creditors, mainly the federal government with the maturity extension, I think it helps.

[Operator Instructions] Next, we will hear from Alice Liu at CIBC.

I have a question on just a lot of headlines for Canadian boycotting travel of the U.S. Just wondering, are you seeing that impact in the competitive environment for some destinations and transatlantic market?

I think you're asking us if we're seeing any negative impact on the U.S. market. That's for sure. We talked about that 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 decreased their capacity as well. So there is definitely a clear impact in terms of Canadian government to the U.S. We're looking as well what the carriers are announcing for the domestic in the U.S. is decreasing as well. Is your question to see if this capacity is being deployed on other markets? Is that what I heard?

Yes. And yes, basically, are you seeing that like in the competitive environment?

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

Okay. 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 cost, incremental costs in fiscal Q2?

No. Not really, no.

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 12. 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.