Transat A.T. Inc. ($TRZ)

Good afternoon, ladies and gentlemen, and welcome to the Transat A.T., Inc. First Quarter 2026 Results Conference Call. [Operator Instructions] This call is being recorded on Tuesday, March 10, 2026. I would now like to turn the conference over to Andrean Gagne, Senior Director, Communications. Please go ahead.

[Foreign Language] Hello, everyone, and thank you for joining us for our first quarter earnings call ended January 31st, 2026. 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 plan. Jean-Francois, 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 Investors section. Jean-Francois may refer to it when he present the results. Our comments and discussion today may include forward-looking information regarding Transat's outlook, objectives and strategies that are based on assumptions and are subject to risks and uncertainties. Forward-looking statements represent Transat's expectations as of March 10th, 2026, 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 second quarter news release available on transat.com and on SEDAR+. With that, I would like to turn the call over to Annick for opening remarks.

Good afternoon, everyone. Thank you for joining our fiscal 2026 first quarter conference call. Before talking about Q1 results, I would like to comment on Transat's Annual and Special Meeting of Shareholders held earlier today. Today's vote delivered a clear mandate to continue executing on turnaround -- our turnaround plan and confirm that this Board is the right team to guide Transat through the next phase of its strategy. The Board elected this morning will bring deep and multidisciplinary expertise with a mix of new and returning directors. Transat is well positioned to reach new heights. Our focus is unwavering, disciplined execution, strengthening profitability and sustain long-term value for all shareholders. The mandate obtained today by shareholders provides clarity for employees, customers, plant partners, lenders and regulators so we can keep executing. Propelled by the strong signal of support, we will continue to build on our momentum created by the solid foundation of the Elevation program. Before moving on, I would like to take a moment to acknowledge a key contributor to Transat's journey. I would like to personally thank Susan Kudzman, who served on Transat's Board of Directors since 2014, including the last 3 years as Chair. Susan, let me express sincere thanks for your unwavering support and wise counsel for all these years. I want to thank all other directors who served in the recent years, while Transat was facing unprecedented challenges. Thank you all for your important contribution. I also welcome all new Board members with whom I'll be as dedicated and engaged to work with. Turning to Q1 results. Transat delivered a solid financial performance, reflecting sustained momentum from the diligent execution of our profitable growth strategy. Key initiatives implemented during the last several quarters, including advanced revenue management practices, network diversification strategy and increased connectivity produced a 5% revenue increase to $871 million in the quarter despite some disruption from Hurricane Melissa in Jamaica. Adjusted EBITDA grew 68% to $34 million, driven by higher revenues and ongoing disciplined cost management, reflecting the benefits of our elevation program initiatives. During the quarter, we also reached an important milestone for the ratification of a new 5-year collective agreement with our pilots. This agreement recognized their contribution, brings us closer to industry standards and introduces meaningful efficiency and productivity improvement. We are pleased with our operating performance in the first quarter of 2026, highlighted by sustained year-over-year traffic growth and a fifth consecutive quarter of yield improvement. This momentum is reflected across our key operating metrics. Capacity expressed as available seat miles increased by 1%, while capacity for sun routes, our main program during the season, improved by 4.4%. Our load factor reached 81.5%, up from 80.6% in the same period last year. Finally, traffic expressed in revenue passenger miles rose 2.2%, while yields were 1.4% higher than for the same period last year. Turning to our operations. We have a fleet of 43 aircraft, of which 4 were grounded in the first quarter and will remain grounded in Q2 due to ongoing GTF engine issues. As indicated last quarter, we expect the situation to gradually improve with the number of grounded aircraft projected to decline to 3 by summer and full resolution anticipated by the end of 2027 or early 2028. As outlined last quarter, we have launched and announced multiple new destinations and expanded service across several regions. Recent additions include new destinations such as Tirana, Albania; as well as Agadir, Morocco; and Dakar, Senegal, which align with our focus on high potential markets with low seasonality and strong visiting friends and relative's demand. Performance across new routes has been very encouraging, and they are contributing positively to the overall network. Our program development continues to emphasize diversification across Africa, Europe and South America, supporting a more balanced demand profile throughout the year. We have also expanded connectivity through strategic partnerships, extending our reach beyond our own operated routes. Overall, these actions strengthen the network and support sustained demand across key markets as we continue to execute our network strategy. Let me now address the situation in Cuba. Early in the second fiscal quarter, we proactively suspended all flights to Cuba through April 30th due to an anticipated fuel shortage at destination airports, a situation outside of our control. Mindful of the safety and well-being of our customers, we quickly organized repatriation flights to ensure their safe return to Canada. This decision will have an impact on our second quarter results as Cuba represented approximately 10% of our winter season capacity. To help mitigate this impact, we redeployed a portion of the effective capacity to other sun destinations where we have observed increased demand. We will continue to closely monitor geopolitical developments and operating conditions to determine when flights to Cuba can safely and reliably resume. We also experienced a brief and localized operational disruption in Puerto Vallarta in February. Due to local conditions in the State of Jalisco, 4 flights to and from Puerto Vallarta were postponed over a 2-day period with the safety of our passengers and crew guiding our decisions. Affected customers were contacted and offered flexible options and operations resumed [ prom ]. These events temporarily affected consumer confidence and their impact was felt over the past few weeks. However, bookings to Mexico are gradually returning to expected levels. In January, we announced the framework of our new loyalty program scheduled to launch in the second half of 2026. This program will feature a co-branded credit card developed in partnership with Desjardins Group and enabled by Visa, offering cardholders enhanced travel benefits and exclusive rewards. Beyond strengthening customer engagement, the program is expected to create a new recurring revenue stream, support improved revenue quality and drive higher load factors, allowing us to gain market share and create long-term value for Transat's brand. Looking ahead to the second quarter of fiscal 2026, despite the situation in Cuba discussed earlier, plant capacity represents an increase of approximately 5% year-over-year. To date, Q2 2026 yields are tracking in line with last year's level in the context of increased capacity. Load factors are 1.8 percentage points below the prior year with the unfavourable variance weighted primarily towards the back end of the quarter. Our network diversification strategy continues to deliver results with most new destinations performing positively and enhanced connectivity with partners driving incremental passenger volumes across the network. For the full fiscal 2026, we anticipate capacity growth of approximately 5% to 7%. To wrap up, Transat delivered solid profitable growth in the first quarter of 2026, highlighting that our turnaround plan is working. We continue to reap benefits from initiatives put in place to improve our operations and to make sure that service excellence remains as an essential part of Transat's DNA. Supported by a seasoned Board of Directors, Transat's management team can continue executing its growth plan to ensure the company reaches its sustained profitability. This concludes my remarks for today. Jean-Francois will now review our financial results. Jean-Francois?

We are pleased with our first quarter results, which show further revenue growth and profitability improvements. This performance reflects the ongoing execution of our plan, including our elevation optimization program. Looking more closely at our results, revenues reached $871 million, up 5% from last year. The growth was driven by a 2.2% traffic increase and a 1.4% yield improvement. We also recorded compensation revenue of $5 million from Pratt & Whitney related to the grounded aircraft during the quarter versus no such revenue a year ago. These factors were partially offset by continued inefficiencies stemming from ongoing Pratt & Whitney GTF engine issues as well as by the negative impact of Hurricane Melissa in early November, which led to flight cancellations to Jamaica despite the redeployment of capacity to other destinations. Adjusted EBITDA reached $34 million in the first quarter of fiscal 2026 compared to $20 million in the first quarter of last year. This improvement reflects higher revenue, while rigorous cost management limited the rise in operating expenses to only 1% as higher costs associated with capacity growth and higher pilot compensation were largely offset by better margins on vacation packages and lower fuel expenses. Both revenues and adjusted EBITDA also benefited from the gain delivered by our elevation initiatives. As a result, the net loss was $29 million or $0.73 per share in the first quarter of 2026 compared to a net loss of $122 million or $3.10 per share in the same period of 2025. Adjusted net loss was $48 million or $1.18 per share versus an adjusted net loss of $75 million or $1.90 per share last year. Moving to cash flow and financial position. Cash flows generated by operating activities amounted to $296 million in Q1 2026, up from $169 million in the first quarter of last year. This significant improvement reflects higher profitability and an increase in the net change in noncash working capital balances. As for investing activities, first quarter CapEx was $14 million compared to $23 million a year ago. The prior year quarter also benefited from $31 million in proceeds from a sale-leaseback transaction involving one Pratt & Whitney GTF engine. After accounting for investing activities and repayment of lease liabilities, free cash flow was $247 million in Q1 2026, representing a significant improvement over $129 million in Q1 2025. Turning to our balance sheet. Cash and cash equivalents totaled $387 million as of January 31, 2026, up from $165 million at the end of Q4 2025. Cash and cash equivalents and trust or otherwise reserved mainly resulting from travel package bookings amounted to $528 million at the end of Q1 2026, up from $430 million at the end of the previous quarter, reflecting solid travel package bookings during the first quarter. Long-term debt and deferred government grants stood at $375 million as of January 31, 2026, down from $400 million 3 months ago and down from $813 million 12 months ago prior to our debt refinancing last summer. The quarter-over-quarter decrease reflects the repayment of $25 million on our revolving credit facility during the first quarter. In addition, after period end, we repaid an amount of $30 million on our subordinated working capital facility as our cash position was beyond a certain threshold, bringing total long-term debt and deferred government grants to $345 million. This facility remains available if needed. As a result, Transat had a net cash and cash equivalent position of $12 million at the end of Q1 2026, representing a significant improvement from a net debt position of $235 million 3 months earlier and $424 million a year ago. Looking ahead to the second quarter, as indicated by Annick, we anticipate that cancelled flights to Cuba will affect results, but we have been able to partially mitigate the impact by redeploying a portion of our capacity to other routes. As for the upcoming summer season, Cuba only represents a very small portion of our capacity. At this stage, we do not expect any material effect beyond the current quarter. On the cost side, we will benefit from lower interest charges and from a stronger Canadian dollar versus the U.S. currency. In parallel, benefits from elevation are expected to further ramp up. On the fuel expense side, I remind you that we have in place a hedging policy according to which we partially hedge our fuel expense against fuel price increases. As a result, our short-term exposure is limited as more than half of our consumption is subject to hedging positions. However, if the situation currently impacting fuel prices should persist, the impact will grow over time unless mitigating measures are implemented. Transat's foundation is stronger, and we have a well-defined strategy calling from -- calling for methodical expansion into high potential markets. A less levered balance sheet also provides us with more flexibility to carry out our plan. Our achievements this quarter demonstrate that Transat continues to progress in the right direction to create lasting value for our shareholders. This concludes my prepared comments. We will now open the call for questions from analysts.

[Operator Instructions] Your first question comes from Cameron Doerksen from National Bank.

Jean-Francois, you talked a little bit about the fuel hedging. Can you just maybe go into a little bit more detail on how you're protected? You mentioned, I guess, 50% of short-term needs. I'm just wondering if you can sort of define short term. And is there any, I guess, indicator you can give about kind of where you're hedged to like kind of at what level?

Yes. I will partially answer your question, in fact. In terms of short term, what we mean by short term is the second quarter. So more than half of our consumption is currently subject to hedging positions, like I said. As for the summer, it's lower than half, but it's still providing a fairly good protection to fuel price increases. In terms of the levels, unfortunately, I will not be able to disclose the levels on which we are hedged.

Okay. I know in the past, you typically, I guess, hedge kind of in conjunction with when bookings come in. Is that still kind of the policy? It would -- I guess, if that's the case, it would sort of help us understand where you might have put in those hedges.

That's a fair estimate, yes.

Okay. Perfect. And the other thing, I guess, I've noticed with Transat and with other Canadian airlines, we have started to see fuel surcharges show up for international flights. I'm wondering how you see that as an additional protection against the spike in fuel we've seen? And I guess, any experience in the past about how sticky some of those fuel surcharges have been or how effective they've been in protecting you from fuel price spikes in the past?

Yes. We've got a couple of experience. And that sudden spikes in fuel price are never easy to pass through in the short term. This is historical. It's -- and we look at the data. Tickets that are already sold can be repriced, of course. And if we raise fares immediately, we see a negative impact on demand. So we're always looking at a fair balance. So in some actions that we've taken so far, we have increased fuel surcharges on Europe. However, this is blended in the total price. What we're also doing is currently raising fares on peak travel dates and routes where we see less competition, where we have more flexibility. And we are looking as well at optimizing ancillary revenues, which there's a couple of areas where we can improve our position. Depending on how long this is going to last, hopefully, it's not going to last too long. Nobody wants that. We could be pushed to look at different measures, looking even at cutting capacity if required, but we're not at this point right now. But we're really doing anything we have to do in forays including restricting our expenses across the company to make sure that we're going to be able to deal with that fuel spike.

Your next question comes from Benoit Poirier from Desjardins.

Congrats for the announcement around the loyalty program. So could you maybe, Annick, talk about the benefits you expect from this loyalty program down the road and kind of the timing of when you see the things happening?

Yes, of course. So we've announced the partnership that we have with Desjardins at the beginning of January. For us, it represents a core long-term asset for Transat with significant value creation. If you've looked at the airline industry overall, more often than not a loyalty program is valued as gets a value that it's even more higher than the business -- the core business itself. So we've developed an innovative design, specifically around our leisure and VFR customer base, and we want to make sure that there is a strong natural fit with our customer profiles and behaviour. For us, the objectives, of course, are to create a new recurring revenue stream, support improved revenue quality. We want to drive higher load factors. Based on the analysis that we've conducted, it will allow us to gain market share. We estimate that not having a loyalty program prevents us from a 4% to 5% market share today. And again, we want to strengthen customer engagement. So we think we have the right tool that's going to be deployed next fall to be able to capture all this value.

That's great. And Annick, you now have a revamped Board of Directors. What would you expect from your new Board members? And what should be their focus in the short term?

Well, I think -- first of all, I want to thank all the Board members that were with us over the last years. I think they support us very well and made a tremendous effort in stabilizing the company. The last year has been very difficult for Transat, and we're very thankful to the work and the support they have provided the organization. As to moving forward, of course, we are in the process of integrating or finalizing all the initiatives around elevation programs. So, they are going to be overseeing the value that we need to deliver by mid-2026, the $100 million in EBITDA. So that's going to be one of their key priorities. And the other one is that we're working on developing the next phase of our strategic plan, which is extremely important, and we will share in due time. So that's going to be part of their job. I would say that's the key main point of focus.

Okay. That's great. And maybe last question. Obviously, it looks like that we need to be agile these days with the situation in the U.S., Mexico, Cuba and the Middle East, you've talked about it. But what about the latest trend in booking? And where do you see, Annick, the greatest momentum among the regions that Transat serve right now?

There's still -- well, overall, there are still strong demand on Europe. That's our first market. And all the destinations are performing very well when we look at summer. So we're very comfortable with those. The advantage that we have in South destination is that we offer a broad range of different destinations. So when one suffer like we see right now in Cuba, we are able to display some capacity and move it towards Dominican Republic, for instance. So Dominican Republic, Costa Rica are very popular these days. Mexico has been a little tough over the last 2 days, but it remains a super well-established destination and one of Canadians' favourite. As for Cuba, it is a very popular destination. Our intention is to resume operation as soon as conditions allow. But we need to -- it's always been our priority to diversify our network in some destination so that when it doesn't go well in one such as a big hurricane or something, we have the flexibility to bring our customers elsewhere. And this is what we're doing right now.

And if I remember, Annick, Cuba has been seen as the lowest margin region in the past. I don't know if it's still the case. But given the mix that you see right now, should we expect a benefit in terms of margins, or it creates some inefficiencies that it's tougher to navigate in the short term?

There are very -- there's price point products everywhere. When you look at Dominican Republic, when you look at Mexico, so there's very products for everyone. The other thing that you need to understand as well, unfortunately, having less demand towards Cuba, while the hoteliers in Mexico and Dominican Republic are increasing their fares. So that's not helping us necessarily in terms of producing higher margins. But we're trying to find the right balance for our customers at different price points so that everybody finds it what they're looking for.

Your next question comes from Tim James from TD Cowen.

My first question, I'm wondering if you could talk about what your CapEx expectations are for the full year fiscal '26. And maybe if you can shed any light on what you see for fiscal '27.

Well, in terms of '27, it's a bit too early to talk about that. In terms of 2026, Q1 specifically, we spent $10 million less than last year in terms of CapEx. There were some timing issues or timing elements that are explaining the lower CapEx this quarter. So there will be some kind of catch-up. So if you include that catch-up and you pro forma that for a full year, you'll be very close to what we expect as CapEx spending.

Okay. And then just the reference to a bit of weakness late in the quarter, is it fair to assume that's sort of a reference to Cuba and to Mexico?

You're talking about Q2?

I'm talking about, I believe, Q1. I don't have the text in front of me, but I believe it was a reference to the first quarter.

Q1 was mostly affected by the impact of Hurricane Melissa, so Jamaica. So we had to suspend flights to Jamaica for several weeks. And the destination never came back to the previous level. So about 50% of the hotels are still closed for the season, the whole winter. So this has been affected Q1. But besides that, whatever is around Cuba arrived at the beginning of Q2. So it's going to be affecting Q2. And like Jean-Francois expressed, Cuba during summer, we don't have a lot of capacity. So it's not going to be significant.

Right. Okay. And then I'm just curious, I mean, with the developments in the Middle East, the war in Iran, are you -- I realize obviously you don't fly there, but I'm just wondering if there's any sort of impact on your bookings at all, just travellers being a little bit more nervous about heading overseas. Are you seeing any indication of that impacting your bookings?

First, we're very sad about what's going on like everybody else, what's going on in Iran and about the people that are affected by the conflict. On our side, there has not been a direct impact on our operations per se. besides maybe a little bit of softness over the last 2 weeks in the booking curve on Istanbul that you know that we offer Istanbul, but it's only one route, and we go there twice a week out of Toronto. So it's very limited. The main impact for us is going to be when we look at Iran, of course, is going to be on fuel overall. But we haven't seen a lack of confidence from our customers in their willingness to travel. So booking trends are still strong. People are traveling South and Europe, Europe first, when we're looking at summer. So depending on what's going to happen with the conflict, at this point, we believe it's going to be -- it's going to remain in a certain perimeter, and we're not going to be that affected besides fuel, again, the impact on the fuel cost.

[ Operator Instructions]. Your next question comes from Alexander Augimeri from CIBC.

Just looking at your elevation program, can you maybe quantify how much of the $100 million in adjusted operating income was captured thus far? And I was wondering if you see any opportunities for upside in that $100 million target?

Yes. No, we're still on track for the $100 million target for mid-2026. We're probably close to $70 million that is already embedded in our P&L.

Do you see upside?

There's always upside. We're always working on new initiatives. it's a new way to work on different projects. It's a new way to explore for different initiatives that will help on the cost side and on the revenue side. So the realization program is not the end of it. So it's -- we will continue to evolve and find new initiatives.

Over the last months, we have embedded our ways of working being much more, I would say, diligent and rigorous in engaging people to find opportunities within the organization to either increase revenues or decrease costs. So we see some initiatives that are popping up and that are going to be promising for the future. And with the arrival of AI which is ongoing. We are looking at every opportunity within the company, either on the efficiency side or on the value creation for customers side. So that's going to be going on for the upcoming months and upcoming years.

And there are no further questions at this time. I will turn the call back over to Andrean for closing remarks.

Thank you, everyone, for attending and asking your questions. As a reminder, our 2026 second quarter results will be released in June. Thank you, and have a good day.

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.