Air Transat Sees First Profit Since 2019 Despite GTF Issues

Transat AT, the Canadian parent of leisure company and airline Air Transat, produced its first quarterly operating and net profits since Q4 2019. The airline benefitted from strong demand for travel and responded by ramping up capacity on the network. The group reported a consolidated adjusted net profit of C$42.3 million compared to C$-120.9 million in its third quarter, which ran from May-July. Total revenues were up by 47 percent to C$746.3 million from C$508.3 million, thanks to 19 percent higher capacity and strong demand. This pushed the load factor up by nine percent and yields by 29 percent year on year, largely explained by the mismatch between demand and supply. EBITDA or the adjusted operating profit was C$114.8 million versus C$-57.8 million last year and was 85 percent higher than in Q3 2019. Higher fares in combination with lower fuel costs were major contributors to the result. Free cash flow was still negative at C$-52.1 million but is a positive C$246.1 million for the nine-month period until July 31. Revenues year to date stand at C$2.284 billion, up from C$2.244 billion last year. While EBITA is positive at C$174.3 million versus C$-145.2 million last year, the adjusted net result for October 2022-July 2023 is a negative C$-27.2 million, an improvement over C$-327.8 million. In FY22, Transat AT reported a net loss of C$-445.3 million. Cash and cash equivalents stood at C$570.6 million, and unrestricted liquidity at C$670.6 million. Fourth quarter outlook Air Transat expects to operate at 93 percent capacity of 2019 levels in the fourth quarter. The airline deploys 80 percent of its activities to Europe as this leverages the most profitable routes. “To date, load factors for the fourth quarter are 2.2 percentage points lower than in 2019, while airline unit revenues, expressed in yield, remain 26 percent higher. The combination of sustained demand and firm pricing will allow the Corporation to cope with a cost environment that remains generally higher and volatile.” Rising fuel costs are closely watched by Air Transat, but the company says it is roughly 70 percent hedged for fuel in Q4 and will extend this into 2024. “Considering the solid results achieved in the first nine months of fiscal 2023, the Corporation is raising the target for adjusted EBITDA margin from a range of 5.5 to 7 percent to a target of 7.5 to 8 percent for the year,” it says. This assumes a moderate growth in Canada's GDP, an exchange rate of C$1.35 to US$1, and an average price per gallon of jet fuel of C$4.25. For the coming winter season, Air Transat will grow capacity by 23 percent year on year, despite concerns of a slowing down of the economy and inflation. The fleet will grow to forty aircraft, thanks to the introduction of three Airbus A321LRs and one A321ceo to the fleet. These aircraft will be deployed on the best-performing routes and to new, promising destinations. Forward bookings for Q1 FY24 look good so far and are ahead of booking curves, especially on transatlantic routes. Higher productivity should also result in better results. GTF impact should be limited Air Transat currently has fourteen A321LRs in service, with another five on order. Ten aircraft were delivered between May 2019 and June 2021, but the airline doesn’t know yet how many of their Pratt & Whitney PW1100G-JM engines have flawed parts produced with contaminated metal powder. These engines will require repairs, with P&W saying earlier this week that most repairs are scheduled for HY1 of next year but they will extend into 2026. Air Transat CEO Annick Guérard said on Thursday’s earnings call that she expects only limited effects from the GTF issue for 2024. “We are working closely with Pratt & Whitney to better assess the challenges, but based on our understanding so far, we estimate the impact will be minimal and manageable for 2024. This will give us time to work on contingency plans for 2025. We will be in a better position to understand once P&W has issued the Service Bulletin. We need to consider that we also have spare engines, so we will be able to mitigate the impacts, at least for most of 2024.”

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