Transat A.T. Inc. ($TRZ)

Good morning, ladies and gentlemen. Welcome to the Transat conference call. Please note that this conference call is being recorded. I would now like to turn the meeting over to Andrean Gagne, Senior Director, Communications, Public Affairs and Corporate Responsibility. Please go ahead, Ms. Gagne.

Hello, everyone, and thank you for joining us for our second quarter earnings call ended April 31, 2026. Annick Guerard, President and CEO; and Jean-Francois Pruneau, Chief Financial Officer, will provide you 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 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 presents 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 subject to risks and uncertainties. Forward-looking statements represent Transat's expectations as at June 11, 2026, and are, therefore, subject to change after today. Our actual results may differ materially from any stated expectations. Please refer to our 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. Thank you, Andrea.

Good morning. Thank you for joining our conference call for the second quarter of fiscal 2026. Following a solid first quarter that continued the positive momentum of fiscal 2025 and reflected the tangible benefits of our strategic initiatives, second quarter results were significantly below our expectations as factors beyond our control severely impacted profitability. With prices remaining high due to prolonged closure of the Strait of Hormuz, fuel costs increased operating expenses by about $70 million in March and April and the impact persisted in May. Additionally, the sudden halt of our operations to Cuba further impacted results by about $25 million. Together, these 2 external factors resulted in a negative impact of about $95 million on adjusted EBITDA. During this period of intense volatility, we've implemented specific measures to mitigate adverse effects such as fuel surcharges on new bookings and targeted adjustments to network capacity, which was reduced by 6% from May to October 2026. Fuel surcharges had a marginal impact on our second quarter results since most reservation for this period had been booked prior to the start of the conflict in the Middle East. We anticipate surcharges will gradually mitigate the effect of higher fuel costs with full offset only expected towards the end of the year. We welcome the introduction by the Government of Canada of the liquidity for airline sector resilience facility, which recognized the significant fuel cost pressures currently facing Canadian airlines. Transat intends to apply to the facility, which will provide meaningful support as we navigate the current environment with a continued focus on disciplined cost management, operational execution and delivering for our customers. In the context of an industry-wide fuel crisis that caused operational disruptions and network adjustments, we experienced downward pressure on key metrics in the second quarter. Our yield declined 0.7 percentage points after 5 consecutive quarters of growth, while load factor was 83.8% compared to 84.6% in the second quarter of 2025. Capacity expressed in available seat miles grew by 4.8%, while capacity for SA routes, our main program during this period rose by 1.7% despite the suspension of Cuba. It should be recalled that following the initial cancellation of flights to Cuba in mid-February, the short notice only allowed for a partial redeployment of that capacity to other destinations. Finally, traffic expressed in revenue passenger miles rose 3.9% in the second quarter, reflecting strong demand. Out of a fleet of 42 aircraft at the end of the second quarter, 5 were grounded due to GTF engine issues compared to 3 initially anticipated. This ongoing problem continues to drive operating inefficiencies, increase scheduling variability and negatively impact revenues. Since the beginning of the supply chain crisis, Pratt & Whitney has not been able to provide us with clear visibility on a detailed resolution plan. The situation remains highly volatile for Transat. We still expect 3 aircraft to be grounded this summer and full resolution is not expected before early 2028. Moving to our network. Several new routes were recently unveiled as part of the next winter program alongside the extension of European routes to year-round service. These include new connections to South destination in Europe as well as the annualization of key transatlantic routes such as Toronto, Paris and Montreal, Barcelona. This reflects continued progress on network diversification and a focus on reducing seasonality through a more balanced year-round offering. We also announced recently the introduction of a year-round nonstop service between Montreal and Istanbul starting in October. This addition builds on the existing Toronto Istanbul route whose strong performance has confirmed solid demand for travel to Turkey and beyond through the collaboration with Turkish Airlines. Partnerships remain a key pillar and cornerstone of our network strategy, not only with Turkish Airlines and several interline agreements with Iberia as the newest addition, but also through our joint venture with Porter Airlines that has been further strengthened with the launch of trans packages on Per-operated flights with Transat acting as a tour operator. These initiatives adds new destination for Transat customers such as NASA and Grand Cayman and expand options to Mexico with flights operated by either porter or Transat offering greater flexibility and convenience. As we look ahead to the summer season, load factors to date are 0.6 percentage points lower compared to the same period last year, while unit revenues expressed as yields or 0.6% higher than they were at this time last year. As for capacity, reflecting our latest adjustment, we expect a 4% to 5% increase measured in available seat miles for all of fiscal 2026 compared to last year. In conclusion, the quarter and likely the defining chacter of our year was shaped by 2 abrupt external shocks rather than underlying execution issues. First, the sudden halt of our Cuba operations led to an immediate and significant revenue loss while leaving us with fixed operating costs that could not be redeployed in the short term. Second, the industry faced a sharp and rapid increase in fuel prices. While we implemented mitigating measures, market condition and demand elasticity constrain our ability to fully pass these costs on to customers without materially affecting demand and overall revenue performance. Both these factors were exceptional, exogenous and unfolded within a very short time frame, limiting our capacity to adjust our operation and cost structure dynamically. Our Q2 results do not reflect in any way the progress accomplished by our teams in executing our plan. We remain fully committed navigating today's industry challenges with determination and resilience. We will continue to proactively adjust our strategies in a timing and diligent manner for the remainder of the fiscal year. This concludes my remarks for today. Jean-Francois will now review our financial results.

Thank you, Annick. Good morning, everyone. Our second quarter results were affected by several factors, the most important of which were outside our control. First, the sharp increase in fuel prices had an adverse impact on profitability as only a marginal portion of the increase was recovered through surcharges on new bookings during the period. Second, the suspension of flights to Cuba reduced revenue as capacity redeployment efforts only partially mitigated the effect and resulted in additional costs. Looking more closely at the results. Revenues were relatively stable year-over-year at $1.03 billion. The suspension of flights to Cuba caused a revenue shortfall of $81 million compared to last year. . In addition, compensation revenue from Pratt & Whitney related to grounded aircraft was $5 million in the second quarter of fiscal 2026 versus $20 million last year, as the prior year amount reflected an extended period from October to April following the agreement signed in April, while the current year reflects only the quarter. The revenue decline was partially offset by a 3.9% traffic increase, while yields were marginally lower. Adjusted EBITDA was negative $21 million compared to positive $98 million last year. The shortfall of nearly $120 million can be broken down as follows: approximately $70 million in additional fuel costs incurred in March and April, driven by the rapid increase in fuel prices following the start of the conflict that shut down the Strait of Hormuz. As mentioned, so charges had a marginal impact since modeling for the second quarter had been made prior to the onset of the conflict. The situation in Cuba affected operating income by approximately $25 million reflecting both lost revenue from last minute flight cancellation and higher costs associated with partial capacity with redeployment and customer repatriation efforts. I already pointed out the $50 million year-over-year reduction in compensation from Pratt & Whitney, but the volatile engine situation also resulted in unplanned costs and inefficiencies. We also incurred higher year-over-year salary and benefit expenses, primarily reflecting the new collective agreement with our pilots, including temporary inefficiencies related to its implementation, such as more over time. Finally, we had an increase in general expenses, including approximately $5 million directly related to the proxy fight, leading up to our last Annual General Meeting. These factors were partially offset by a capacity increase. As a result, the net loss was $79 million in Q2 2026 compared to a net loss of $23 million in the same period last year. Adjusted net loss was $105 million versus adjusted net income of $5 million reported last year. Moving to our financial position. Cash flow generated by operating activities were $118 million in Q2 2026 compared to $208 million last year. The variation reflects lower profitability while the net change in noncash working capital balances was in line with last year. As for investing activities, CapEx was $19 million in the quarter compared to $15 million a year ago. Turning to our balance sheet. Cash and cash equivalents totaled $390 million as of April 30, 2026, relatively stable from $387 million at the end of Q1. Cash and cash equivalents in trust or otherwise reserved mainly resulting from travel package bookings amounted to $194 million at the end of Q2 2026, down from $528 million at the end of Q1, reflecting the seasonal nature of our operations. Long-term debt and deferred government grant stood at $320 million as of April 30, 2026, down from $375 million 3 months ago and down from $812 million 12 months ago. prior to our debt refinancing last summer. The $55 million quarter-over-quarter decrease reflects the repayment of $25 million on our revolving term credit facility and $30 million on our subordinated working capital facility during the second quarter. As a result, Transat had a net cash and cash equivalent position of $70 million at end of Q2 2026, up from a net cash position of $12 million 3 months ago. and up from a net debt position of $280 million a year ago. To summarize, the second quarter results were affected by a perfect storm, mostly comprised of external factors, which affected profitability by $119 million, essentially fuel $70 million, Cuba $25 million; and Pret & Whitney $15 million. As Annick mentioned, Transat intends to apply to the laser facility administered by the Canada Enterprise emergency funding operation seats, which would provide additional financial flexibility as we remain focused on executing our strategic priorities. The facility would provide access to up to $150 million in funding with exact amounts determined as a function of the year-over-year increase in fuel prices resulting from the closure of the straight of our mutes. The facility will strengthen our liquidity position and provide additional financial flexibility. Looking ahead to the second half of the year, elevated fuel prices will continue to weigh on our operating results. That said, surcharges and other actions are expected to help partially offset the impact while draws on the laser facility will provide additional support. On the broader cost front, we are taking decisive action to recalibrate our operating cost structure in line with deployed capacity and to rapidly mitigate the short-term impact arising from the rollout of new operational rules under our new pilot agreement. Finally, we will continue to benefit from lower interest charges while efficiencies and gains from elevation program are expected to further ramp up. In summary, we will maintain a strict discipline on elements we can control. This concludes my comments. We will now open the call for questions from analysts.

[Operator Instructions] First, we will hear from Hamad Gupta at Scotiabank.

Maybe the first question on the field in the second quarter. I guess a $70 million headwind you kind of pointed out early on so it was expected. But what was any benefit of fuel hedging in the quarter if you had? And do you expect some of the hedges to roll into Q3 as well? .

Yes. So essentially, our hedging strategy, I'm sorry, we were on mute, I believe. So essentially, our hedging strategies with respect to fuel are using options rather than using forwards. So essentially, we're not locking price but rather using strategies that provide a discount mechanism over market prices. And that will be the case for the second half of the year as well.

Okay. So there's some benefits of that potentially in the second half as well? .

Correct. There was some in the second quarter as well.

Okay. And then in terms of the fuel availability itself, that's been a challenge in Europe to some degree. How are you guys procuring for you? I mean do you have any agreements in place? Or do you have any visibility on the supply side? .

Yes. We are obviously closely monitoring the situation in collaboration with our suppliers. We have secured the fuel supply that is required to operate our full summer program effect. So our operations are running as planned, and we expect that they will continue to run as planned for the rest of the summer.

Okay. Great. And last one for me before I turn over. On the yield side, for the summer, you guys are looking at this point, obviously, a 60 basis point improvement in the yield versus last year at the current time spend. And I was just wondering with the fuel surcharges and fares and ancillary piece, et cetera, with all that going up, some of the North American airlines are looking at very decent double-digit numbers in yield increases. What's the delta? What's the gap between you guys and your peers? .

When we're looking at the year so far for summer, our yields are up 0.6%. In percentage, the Atlantic market is up 1.7%, [indiscernible] is down about 6%. When we compare in terms of average fare for summer, the average fare is up 4.5% compared to last year. So as explained initially, we see that the overall fuel surcharge that we put in the market did not stick. It ticked at the beginning but not recently. So the initial resource charge were well absorbed with demand remaining resilient through the early rounds of increases. But more recent increases resulted in a slowdown in the booking momentum. The situation, however, remains very volatile. At the moment, we need to stimulate demand with fair adjustments on targeted routes. And we have communicated over the past week that surcharge expect to progressively offset higher fuel cost towards year-end, but it will still be limited for summer season as we are looking into a pattern right now. Demand remains robust and customer remains price sensitive. And therefore, price aggressiveness is necessary at this point for keeping bookings and overall revenue targets for summer. It's difficult to compare with our competitors because as you know, we don't have -- we have less of a premium class were more leisure-focused. So when we compare ourselves to more legacy carriers on the Atlantic market, for instance, the benefit from customers that are less price sensitive. Unfortunately, this is something that we have, but to a less extent compared to our competitors. And there is still a lot of capacity in the market, so that's putting pressure on the yields as well. but on specific routes where we see potential of increasing our yield, we are doing everything we can to push it forward. Now there's still capacity to be sold for the rest of summer, and we are confident that -- well, first, I would say with consumers, we are more confident that there's going to be -- there won't be any you're shortage during summer I think that's going to bring the in up and in that sense, we believe that we would be able to yield a little more to what we've been experiencing over the last weeks.

Next question will be from Benoit Poirier at Desjardins.

Jane, just with respect to the overall year yield increase for the summer, so 60 basis points. What portion of the increase is currently covered by the yield or what kind of yield should we see to offset the full impact of the fuel right now? .

Well, like Annick said, up until mid-May, surcharge on new bookings were essentially completely offsetting additional costs related to fuel. But since then, our ability to offset additional costs without impacting demand started to erode. So recently, when we compare our yields or marginal yields to last year, we don't see a lot of offset of additional costs related to fuel prices.

Okay. That's great. .

Benoit, just if we look at the average fare for summer, as we look at our numbers today, it is up 4.5% compared to last year. If your surcharge at stick, I would say we would be more around 15%. So there is some surcharge that are being absorbed, but not fully at this point. .

Okay. Okay. And any big discrepancy between South and your global network in terms of ability to pass those fuel surchages? So it looks like that the global network is the -- there's a little bit more competition as opposed to the South. .

So, it's Europe in terms of demand remained strong, robust. So we have ability on the European market. The SOP market demand remains very challenging, not only with the suspension of Cuba, but other external factor as well as security issues in Mexico and Jamaica, which has not completed recover fully from the hurricane. So this is all creating less favorable backdrop. So it's easier for us to absorb -- for our customers to absorb the surcharge on Europe. South remains difficult at this point.

Okay. And Jean-Francois, you made great comments about the laser facility with the federal program and the up to $150 million that you could pull. What is the timing on that? When would you expect to fall on the amount?

Yes. So essentially, drawdowns will be reflecting the increase in fuel prices from May to October. It would be monthly drawing. So the first draw -- monthly drawdown, soryy. So the first draw will essentially be retroactive to May 1. And then on a monthly basis, we will draw on the facility up until we reach $150 million.

Okay. Okay. And last question for me. Could you talk about the ramp-up of your fidelity program that you put in place? And how are you tracking versus expectations? .

Okay. So you're talking about -- asking about the time line for the loyalty program?

I know it's still far ahead. There's still work to be done, but just so far, how it's shaping up versus the [indiscernible].

It's going very well. We are in a beta phase during summer and a full commercial launch is targeted towards the end of 2026. So we are working closely with Desjardins, as you know to launch a program that will be highly innovative and the partnership with Desjardins and Visa that we unveiled in January for co-branded credit cards really creates -- we've received feedback, really creates a compelling value proposition for our customers and potential new customers as well. So we are on track to deliver this by the end of 2026.

Next question will be from Tim James at TD Cowen. .

First question, just, I guess, a bit of a clarification maybe. You mentioned average fares up 4.5% year-over-year. I believe that was for the summer. I'm wondering if you could give kind of a comparable number for Q2? And forgive me if you did, and I missed it. So what the Q2 number was? And then when you make reference to that, does that include the fuel surcharge? Or is the fuel surcharge on top of those growth rates?

Yes, it does include the dual surcharge. When we look at Q2, we had revenues that were similar to last year. with capacity that was up 4.8%, but yields were down 0.7% year-over-year. And of course, when we -- and as you know, in Q2, the -- most of the capacity had already been sold when we introduced a fuel surcharge. In addition to that, there were several factors weighted on soft performance, the Cuba suspension, Mexico, and we have more ALGs due to Pratt & Whitney engine. So we couldn't get to the yields and pricing that we were anticipating, unfortunately.

Okay. My next question in the press release, there's a reference to recent market volatility has weakened pricing power. I'm just trying to understand that comment. I'm just wondering if you could maybe expand on that a little bit how the actual volatility sort of impacts your ability to pass through higher fares.

Well, when we look at demand, there was some -- passenger has started worrying about fuel surcharge. So that was one thing. Then there was a lot of media coverage around the increase -- significant increase in pricing during summer season. And so we saw at one point that we were not able to sustain our fuel surcharges and because the demand went down, so there was some markets that could sustain it other markets that could not sustain it. So we had to introduce a couple of measures, including decreasing price on certain segments and increasing as well some flexibility measures for customers are removing this, for instance, for modification or cancellation depending on the family fares. So we had to do a couple of actions on top of decreasing price to stimulate demand.

[Operator Instructions] Next is Alexander Augimeri at CIBC.

I have a 2-part question on elevation. First off, congrats on completing the program in that $100 million target. I was hoping, can you help us understand how much of that $100 million annualized run rate was flowing through those Q2 results. And given you completed the program during the quarter, should we expect maybe an increased contribution in the third quarter?

Yes. In terms of Q2, on an LTM basis, we have captured everything that we wanted. And in terms of the future, looking forward, there will be further initiatives that will continue to provide additional benefits, but it should be marginal. .

Okay. And I had a question on the pilot salaries. They were -- I saw them up 15% year-over-year. Can you help us understand the phasing of that. Do we think that's the run rate going forward? Or maybe there was some onetime costs in that for the quarter. .

Can you repeat, Alex, please? I just missed the beginning of the question.

Yes. That new pilot agreement was reached. I was wondering, is that the full run rate that we should expect in Q2 that year-over-year increase? Or maybe there was some onetime costs in that?

No. There were some inefficiencies related to the transition between the old agreement and the new agreement which resulted in a lot of overtime. So obviously, as we progress into the year, we should see that those inefficiencies going down. So I wouldn't say that Q2 is the run rate year-over-year increase. And on top of that, don't forget that last year, we were under the older agreement regime, but starting in Q3, we'll be under the new agreement regime. So on a year-over-year basis, the year-over-year increase should be lower going forward. .

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

Thank you, everyone. As a reminder, our 2026 3rd quarter results will be released in September. Thank you, and have a good day.

Thank you. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. And at this time, we ask that you please disconnect your line.