Transat Reports Q3 Results
In reporting its results for the third quarter of 2020 – which ended July 31 — Transat A.T. Inc’s president and CEO, Jean-Marc Eustache observed that: “The reduction of operations to just one week for this quarter is unprecedented for Transat and for the industry as a whole. Given the dynamic measures we took to protect the Corporation and its cash flow, we’re ready for the recovery.”
“However,” Eustache continued: “with Canada maintaining some of the most stringent border restrictions and still requiring quarantine for people returning from abroad, it’s time for the government to provide targeted support for the airline sector to ensure the existence of a competitive industry in Canada over the long term.”
In reporting its 2020 Q3 results, the company pointed out that travel restrictions, uncertainty about when borders will reopen, both in Canada and at the destinations the Corporation flies to, and the need for quarantine and physical distancing measures create significant demand uncertainty for the remaining part of fiscal 2020 and at least for fiscal 2021.
And it continued that for the moment, the Corporation cannot predict all the impacts of COVID-19 on its operations and results, or when the situation will improve.
Until the Corporation is able to resume operations at a sufficient level, the situation will affect its cash position.
However, it said that it has implemented a series of operational and commercial as well as financial measures, including cost reduction, aimed at preserving its cash flow and it is monitoring the situation daily to adjust these measures as it evolves.
Q3 Highlights
Since mid-March, restrictions on international travel and government-imposed quarantine measures have made travel sales very difficult.
The Corporation suspended all of its flights as of April 1 and therefore had no more sales from that date, until the partial resumption of airline operations on July 23, 2020.
As a result, these factors caused the fall in revenues. The Corporation recognized revenues of $9.5 million during the quarter, a decrease of $689.4 million (98.6%) compared with 2019.
Operations generated an operating loss of $132.0 million compared with operating income of $1.7 million in 2019, a deterioration of $133.7 million.
Despite the absence of revenues up to July 23 and despite the cost reduction measures implemented to deal with the COVID-19 pandemic, the Corporation was obliged to maintain certain fixed costs during the suspension of airline operations; as a result, the fall in revenues was more pronounced than the decrease in operating expenses.
The decline in operating results was accentuated by the unfavourable settlement of fuel-related derivative contracts.
Transat reported an adjusted operating loss1 of $79.9 million compared with an adjusted operating income1 of $62.1 million in 2019, a deterioration of $142.0 million.
Net loss attributable to shareholders amounted to $45.1 million or $1.20 per share compared with $1.5 million or $0.04 per share in 2019.
Net loss attributable to shareholders for the quarter includes a $67.7 million gain for changes in the fair value of fuel-related derivatives and other derivatives due to the significant recovery in fuel prices during the quarter, a $28.5 million foreign exchange gain mainly related to the remeasurement of lease liabilities.
These gains reversed a very large portion of losses of the same nature included in the loss attributable to shareholders for the second quarter announced last June.
Excluding non-operating items, Transat reported adjusted net loss3 of $139.8 million ($3.70 per share) for the third quarter of 2020, compared with adjusted net income3 of $6.2 million ($0.16 per share) in 2019.
Nine-Month Period Highlights
As a result of these factors, the Corporation experienced a significant deterioration in its performance for the nine-month period ended July 31.
The impact of the pandemic annihilated a very good start to the fiscal year, as the adjusted operating income1 for the first four months of the year was up $63.3 million compared with 2019, due to a significant improvement in the profitability of the sun destinations program, our main program during the winter season.
Considering the impacts of COVID-19, the Corporation recognized revenues of $1.3 billion, a decrease of $970.3 million (43.2%) compared with 2019, and operations generated an operating loss of $186.6 million, compared with $50.7 million in 2019, a deterioration of $136.0 million.
Transat reported adjusted operating loss1 of $31.4 million compared with adjusted operating income1 of $94.9 million in 2019, a deterioration of $126.3 million.
Net loss attributable to shareholders amounted to $258.5 million or $6.85 per share compared with $55.4 million or $1.47 per share for the corresponding nine-month period of last year.
Net loss attributable to shareholders for the quarter includes a $29.3 million charge for changes in the fair value of fuel-related derivatives and other derivatives due to the collapse in fuel prices in the second quarter, a $21.7 million charge to reduce the carrying value of deferred tax assets and a $7.4 million foreign exchange loss mainly related to the re-measurement of lease liabilities.
Before non-operating items, Transat reported adjusted net loss3 of $198.9 million ($5.27 per share) for the first nine months of 2020, compared with $39.5 million ($1.05 per share) in 2019.
Financial Position
As at July 31, 2020, cash and cash equivalents amounted to $576.4 million, compared with $723.8 million on the same date in 2019.
This change was mainly attributable to a significant decrease in profitability, the acquisition of one replacement engine for the A321neo LR fleet ($16.6 million), and to costs related to the transaction with Air Canada ($15.3 million), partially offset by the $50.0 million drawdown on its revolving credit facility agreement.
The working capital ratio was 0.93, compared with 1.10 as at July 31, 2019. This change was mainly attributable to the increase in the current portion of lease liabilities and the decrease in cash and cash equivalents.
Deposits from customers for future travel amounted to $638.1 million, compared with $611.1 million as at July 31, 2019, an increase of $27.0 million.
As a result of this sudden, unpredictable and unprecedented health crisis and the resulting travel restrictions, the Corporation decided, like other Canadian carriers, to issue travel credits for cancelled trips.
Customer deposits as at July 31, 2020 included these travel credits amounting to $564.0 million, 43% of which was placed in trust, with the difference representing deposits made directly with Air Transat or foreign subsidiaries.
This exposes the Corporation to litigation and enforcement measures by legislative and regulatory authorities, including class action suits, which the Corporation intends to contest in good faith and with good reason.
Following the adoption of the IFRS 16 accounting standard, leases with terms of more than 12 months are now recorded as right-of-use under assets and as lease liabilities under liabilities. As at July 31, 2020, lease liabilities amounted to $909.2 million.
Off-balance-sheet agreements, excluding contracts with service providers, stood at $847.1 million as at July 31, 2020. This amount was composed of commitments to take delivery of the 11 undelivered A321neos.
As it is impossible to assess the pace of recovery or the possible evolution of the pandemic and its effects, the Corporation, similarly to the vast majority of air carriers and other travel industry players in the normal course of their operations following the impacts of COVID-19, is currently reviewing various opportunities to increase its cash flow. In particular, the Corporation is continuing discussions initiated in the second quarter with its financiers and the various levels of government to improve its cash flow.
Resuming Operations
Having partially resumed its flights and tour operator activities on July 23, 2020, Transat is currently operating a condensed flight schedule for the summer with 17 destinations.
It serves 11 European destinations (in France, the United Kingdom and Portugal) and three destinations in the South (Mexico, Dominican Republic and Haiti) from Montréal or Toronto, as well as a domestic program linking the main Canadian airports (Montréal, Toronto, Calgary and Vancouver).
The Corporation will continue to adjust its programs based on border restrictions and health measures in place.
The Traveller Care program aims to ensure the safety and peace of mind of the Corporation’s customers with new health measures at check-in, at boarding, on board and at destination.
On August 4, 2020, the Corporation announced a winter program including, at the height of the season, flights to many destinations to the Caribbean, Mexico, Central America and South America, the United States, Europe and Canada. A selection of hotel packages in the South and in Europe will also be offered.
Outlook
In the current situation, it is impossible for the moment to predict the impact of the COVID-19 pandemic on future bookings, the partial resumption of flight operations and financial results.
The Corporation has implemented a series of operational, commercial and financial measures, including cost reduction, aimed at preserving its cash and continues to monitor the situation daily to adjust these measures as it evolves.
Consequently, for now the Corporation is not providing an outlook for summer 2020 or winter 2021.
Sale Discussions
On Aug. 23, 2019, Transat’s shareholders approved the arrangement agreement with Air Canada, under which it is provided that Air Canada will acquire all issued and outstanding shares of Transat for a cash consideration of $18.00 per share [the “arrangement”].
The arrangement remains subject to certain customary closing conditions, including regulatory approvals, particularly those of authorities in Canada and the European Union.
Notably, a public interest assessment regarding the arrangement is being undertaken by Transport Canada. On March 27, 2020, as part of this assessment process, the Commissioner of Competition released the report provided to Transport Canada summarizing his assessment of the impacts on competition. On May 1, 2020, Transport Canada in turn provided its assessment report to the Minister of Transport.
On May 25, 2020, the European Commission decided to open an in-depth (“Phase II”) investigation to assess the transaction with Air Canada. This extension is part of the European Commission’s normal process of assessing the impact of transactions submitted for its approval, which is currently complicated by the COVID 19 pandemic and the impact it is having on the international commercial aviation market. On Sept. 1, 2020, with retroactive effect to Aug. 20, 2020, the European Commission ended the suspension of the deadline decided on June 9, 2020 and set a new provisional deadline of Dec. 11, 2020 for its decision.
While the Corporation remains firmly committed to completing the transaction with Air Canada, certain factors beyond its control and related to the COVID-19 pandemic could influence the outcome of the proposed arrangement.
The market conditions of the global industry have been completely transformed.
Among other things, the vast majority of North American, European and international air carriers have requested financial assistance measures, but have had to implement reductions in capacity (as the Corporation did). This context could impact the obtaining of approvals from regulatory authorities, especially regarding the appropriate package of remedies aimed at obtaining those approvals.
Moreover, owing to the pandemic and the continued restrictions on non-essential travel, the Corporation is actively looking to obtain additional sources of financing.
The covenants undertaken under the arrangement agreement with Air Canada restrict and govern the Corporation’s capacity to obtain additional sources of financing and may require Air Canada’s prior consent.
Although the agreement provides that Air Canada’s consent may not be unreasonably withheld, there is no certainty that Air Canada will consent to the obtaining of additional sources of financing by the Corporation.
If the required approvals are obtained and the conditions are met, it is now expected that the arrangement will be completed during the fourth quarter of the 2020 calendar year.
Under the arrangement agreement, the deadline for obtaining the regulatory approvals cannot be extended beyond Dec. 27, 2020. This date, initially set for June 27, 2020, may be deferred, to the extent that the regulatory approvals are not obtained, for three one-month periods upon notification by one of the parties, and subsequently for three additional one-month periods under certain conditions. The Corporation has successively informed Air Canada of its decision to activate the first three initial one-month periods, which defers, for now, the June 27 deadline to Sept. 27, 2020.
