Transat A.T. Inc.

Thank you, Frank. Hi, everyone, and welcome to the Transat conference call for the presentation of the financial results of the [second quarter] (sic) first quarter ended January 31, 2022.

I'm here with Annick Guérard, President and CEO; and Patrick Bui, CFO. Annick will provide her comments and observations on the current situation and on the operational and commercial plans for the future, before Patrick reviews the financial results in more details.

We will then answer questions from financial analysts. Questions from journalists will be handled offline.

The conference call will be held in English, but questions may be asked in French or English. As usual, our investor's presentation has been updated and is posted on our website in the Investors section.

Patrick may refer to it as he presents the results. Today's call contains forward-looking statements.

There are risks that actual results will differ materially from those contemplated by those forward-looking statements. For additional information on such risks, we invite you to consult our filings with the Canadian Securities Commission.

Forward-looking statements represent Transat's expectations as at March, 10, 2022 and accordingly are subject to change after such date. However, we disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise, other than as required by law.

Finally, we may refer to IFRS and non-IFRS financial measures. In addition to IFRS financial measures, we are using non-IFRS measures to assess the Corporation's operational performance.

It is likely that the non-IFRS financial measures used by the Corporation will not be comparable to similar measures reported by other issuers or those used by financial analysts as their measures may have different definitions. The measures used by the Corporation are intended to provide additional information and should not be considered in isolation or as a substitute for IFRS financial performance measures.

Additional information on non-IFRS financial measures such as their definition and their reconciliation with the more comparable IFRS measures are available in our Annual Report. With that, let me turn the call over to Annick for her opening remarks.

Good morning, everyone. Last quarter, we announced that we were well on our way to reconstructing our capacity, bringing it across winter and summer to levels ever closer to those of 2019.

Demand was there in November and the first half of December were very much in line with what we were expecting. The surge of the Omicron variant in the second half of December put a temporary halt to the upward trend.

In November, our net bookings were about 70% of 2019 levels. However, from mid-December to mid-January, cancellations exceeded new bookings and net bookings became negative.

Though the Omicron crisis has impacted both our winter and summer season, it was primarily felt on winter bookings. The trend started to reverse mid-January and as of February we had caught up with the November pace.

In the week of February 15, when the government of Canada announced that it would be removing some border restrictions, our net bookings even exceeded those of the same week in 2019. As we have said many times, it is clear that our customers are impatient to travel and to make up for all the time when we have been forced to stay at home by the pandemic and the measures taken to fend it off.

The impact on our first quarter has obviously been significant. We are announcing today CAD202 million in revenues for the quarter.

This is close to 5-fold what we achieved in 2021, but of course far from where it needs to be. Our adjusted operating loss is CAD36 million and our net adjusted loss is CAD95 million.

During this period, we have maintained and reinforced the cash preservation measures we have implemented over the past two years. Once again, we have gone back to the negotiation table with our suppliers and partners.

I would like to acknowledge them, once again, for the support they have provided throughout this crisis. However, we remain convinced from the start that this Omicron wave was a bump in the road and not something that was there to last.

We have certainly taken a hit for the winter but we are confident that our summer will still unfold as we had initially planned. This is why we decided not to take any drastic measures that would compromise the ramp up towards our summer operation.

Of course there is a cost of having had to delay our recovery. We've seen an impact on our cash burn and we expect this impact could continue until the summer.

To bridge the gap created on our liquidity, we have restarted discussions through the Canada Enterprise Emergency Funding Corporation with the federal government, who has been very receptive about the consequences of the border measures on hardest hit companies. As the first results of these thoughts, we are announcing today some additional financial support.

Patrick will give you the details about this after my remarks. We are planning to execute a summer program in line with what we were forecasting last quarter.

We announced this past Monday that we were gradually opening 69 summer routes, representing most of those we used to operate before the pandemic and some new ones such as Montreal, Amsterdam, Quebec City, London, Montreal, San Francisco and Montreal LA. With that in view, we have continued recalling our employees and retaining them and retraining them to be ready for that ambitious program.

During the quarter, our active employees count has increased from 2,080 to 2,750. We are extremely happy to see our employees come back after a very long furlough.

It is an extraordinary tribute to their engagement with Transat. Conversely, the pandemic has forced us to reorganize and find new ways to be more efficient, and we estimate that our staffing levels will remain significantly lower than pre-pandemic levels when we fully recover.

The actions undertaken within our plan will enable us to significantly improve our operational performance as early as summer 2022 when we will be operating at 90% of our 2019 capacity with eight fewer aircraft increasing fleet utilization by 13%. This is a major improvement resulting from our transformation.

In the same way, as we have kept on preparing for an active summer of operation, we paid the course on our strategic plan as evidenced by the culture agreement we announced on Tuesday with Porter Airlines, which will allow customers to and from Toronto and Halifax to connect to many of our European, U.S. and domestic destinations.

This is an important piece of the strengthening of our network, in addition to the agreements we have already announced with Pascan and WestJet. Speaking of the latter, we have taken note of the proposed transaction announced last week.

We expect a thorough analysis of the firm by the Competition Bureau and the Ministry of Transport, given the important competition issues that this raises. We certainly do not see this as being good news for customers as it will significantly reduce competition in the market, especially in key markets such as Western Canada where concentration would be very high.

In the meantime, we are pursuing our plan to strengthen our network in Eastern Canada where we have a solid position. As we pursue a gradual ramp up of our operation, we will remain cautious and continuously monitor the impact of COVID-19 and new variants and geopolitical developments.

In the last few weeks, as a result of the Russian war on Ukraine, we have all witnessed a dramatic increase in the cost of fuel, which will again affect the entire airline sector as well as many other industries. In response to this fuel crisis, we are adapting, of course, our pricing structure.

Fortunately, we have the most fuel efficient aircraft on the transatlantic market. The A321neoLR, which will allow us to mitigate some of the impact for the upcoming summer.

This aircraft will never have been more relevant and competitive than in the current environment. That being said, this shows that there is still a lot of uncertainty in the market and this is why we will remain cautiously optimistic over the next few months.

Before I conclude, I would like to say one word about the war that is currently raging in Ukraine. There are, of course, no words to describe the horror that has befallen the innocent Ukranian people.

Our heart goes out to them and to the courageous stand they are making to defend their country. Let's all hope the government of Russia lets reason prevail and stops this unconceivable attack on an independent democratic country.

In conclusion, I would like to say that Omicron has certainly had a major impact for us, but we have adapted and continued on our way. We have now gathered speed again and are ready for a more satisfying summer.

Patrick will now give you more details about our financials.

Thank you, Annick, and good morning, everyone. So, as highlighted by Annick earlier, we were at the onset of a strong recovery in November and until mid-December with results both from a revenue and an EBITDA perspective, on track with our internal targets, targets which were we believe consistent with Street expectations.

Starting in mid-December, we recorded weeks with cancellations greater than bookings, which led to load factors diminishing. On Page 7 of the investor presentation posted on our website, we have provided data with respect to our booking levels versus 2019.

You will notice the limited to negative booking trends for at least 7 weeks, but you will also notice the strong recovery since. So back in mid-December, we had to reinforce once again our cash preservation and cost containment efforts, including detailed analysis of our flight program to cancel flights that did not cover variable costs, which led to a reduction of 30% of our flights in January and February.

Reduction in discretionary spending, including slowing down some recalls and recruitment and measures relating to commercialization, deferral of leases, real estate and aircraft and payables. That said, despite our cash preservation and cost containment initiatives, our normalized cash burn increased to CAD27 million per month in the quarter, which is above the CAD15 million to CAD20 million range we said in our prior earnings call.

Obviously, at the time, we did not suspect the magnitude of the impact of Omicron. For this reason, during the quarter, we successfully negotiated favorable amendments to our lead facilities with the federal government, amendments, which will aid our recovery.

With respect to our CAD310 million unsecured voucher facility, a second tranche in the amount of CAD43.3 million will be added for a total of CAD353.3 million at the attractive rate of 1.2%. With respect to the CAD312 million unsecured portion of the CAD390 million lead facility, the following amendments were agreed upon.

Number one, deferring the start of the interest rate hikes, whereas the interest rate would have increased to 8% by the end of this upcoming April, the current 5% rate will continue until December 31, 2023, for an additional 20 months, at which time it would increase to 8%, then 10% in 2025 and 12% for the first four months of 2026. Prior to this amendment, the loan would have reached 14% in its last year.

Number two, extending the deadline to cancel 50% of the warrants. Under the loan agreement, 50% of the vested warrants, or 6.5 million warrants, would be cancelled should the loan be repaid by April 29, 2023, in a few weeks from now.

This deadline has been pushed out by 20 months to the end of 2023. We've also extended the period during which interest can be paid in kind.

In other words, interest does not need to be paid in cash until the end of 2024. So that's another 20-month extension, but rather added to the principal of the loan.

Our priority is to protect our treasury and to access liquidity to overcome these unprecedented times. While we are on a upward trend, the impacts of COVID-19 continue and the geopolitical landscape is evolving since we remain in a cash burn position, and in the context, we want to be very prudent.

We are also in discussions with the federal government for complementary financing. All of us at Transat wish to recognize the support of the Government of Canada and of the Canada Enterprise Emergency Funding Corporation for their continuous support through these times.

Now with respect to our balance sheet, cash and cash equivalents totaled CAD343 million as at January 31. In total, available financing was CAD820 million, of which CAD678 million was drawn at the end of the quarter for total unrestricted liquidity of CAD485 million.

Of note, following the end of the quarter, the company drew an additional CAD112 million for a total of CAD790 million. So with the CAD43 million increase on the voucher facility and when considering CAD885 million in total unrestricted liquidity, the pro forma unrestricted liquidity stood at CAD528 million as at January 31.

Lease liabilities stood at CAD943 million, and with the CAD678 million drawn, total debt stood at CAD1.6 million, while netting CAD343 million in cash and cash equivalents, our net debt stood at CAD1.3 billion. And now with respect to our Q1 results.

Revenues stood at CAD202 million, which is a sharp increase from CAD42 million in the first quarter of 2021 and from CAD63 million in the fourth quarter of 2021. Our improved performance is attributable to the increase in the number of travelers, combined with a slight increase in the average selling prices.

As previously mentioned, revenue growth was dampened by the emergence of Omicron and the new travel restrictions put in place on December 15, which have since been significantly rolled back. As a result of the new variant and restrictive measures, we suffered a sharp decline in demand, which led us to cancel nearly 30% of flights scheduled for January and February and which handicapped our load factors.

Adjusted EBITDA was negative CAD36 million for the quarter compared to negative CAD54 million in 2021. This improvement was attributed to a gradual and partial resumption of airline operations, offset by the increase in cancellations due to Omicron and limited by fuel price increases.

Adjusted net loss was CAD95 million compared with CAD109 million last year. And as per our financial statements, the net loss was CAD114 million compared to CAD61 million last year, a CAD54 million deterioration.

This includes a foreign exchange loss of CAD22 million, mainly from the unfavorable exchange effect on lease liabilities related to aircraft compared to foreign exchange gain of CAD33 million in 2021, and includes a gain on the disposal of assets of CAD4 million related to the early return of an A330 compared to a gain of CAD17 million related to the termination of three aircraft leases in 2021. Thank you.

And we will now open it up for questions.

Thanks for all the details there and some of the recent booking trend. I guess I'd be interested in knowing if you're seeing any - I guess any change in consumer behavior given the conflict in Russia and the Ukraine in terms of demand for overall European travel or rising fuel prices and the commensurate increase in fares that you're pushing through.

If you're seeing that change - have you seen that result in any demand destruction or is the feeling that there's so much pent up demand that maybe the elasticity of demand is a little bit different during this recovery, just because a lot of Canadians haven't traveled in two years. It'd be interesting to see what you've seen recently just given all these recent developments over the past couple of weeks.

Yes. We haven't seen any impact on our summer sales to Europe.

Sales have certainly picked up week after week with the easing of the restrictions both for winter and summer. Just as an indicator for winter, over the last week, we have been pacing at a level representing 90% of 2019 pace.

And this is a percentage that is increasing week after week. And for summer, we are around 85% of 2019 pace.

So this is also increasing week after week. So we haven't seen a decrease any impact so far in terms of bookings for summer.

However, of course, the collateral effect is around the price of oil, of course, which has soared. We are looking at all the programming we have planned for this summer.

We are using all the A321neoLR, which are very fuel efficient planes. So that's going to be beneficial for us and we think it's going to give us an edge in the upcoming season.

We understand also that all our Canadian competitors are affected in the same way. We are adapting our pricing structure.

We are seeing some movements in terms of fuel surcharge in the market as well, on the Atlantic market. So this is reassuring and that's it.

That is really good color. And maybe just sticking on the booking curve, I mean, I used myself as an example.

We're looking as a family to book something a little bit further out. It'd be interesting to know what you're seeing in terms of behavior, in terms of how further out you're seeing people book.

I mean, during the pandemic, it was a lot more close-in booking for leisure travel. Are you seeing that also return to more normalized behavior where people are typically booking, let's say, six months out, like they typically would have done back in 2019, giving you a little more visibility as well?

Yes, yes. We of course, we analyzed the trends in terms of booking.

We are not back to the trends that we saw in 2019. People book much closer to departure dates, which we have had to adapt over the last two years in terms of forecast.

We still see this for the upcoming summer. However, what's encouraging at this point is that we are getting to the trend of having a booking trends that are similar to 2019 right now, trend in terms of pace, but we still see people booking.

Right now what we see, the bookings are more for May, for June, at this time back in 2019, people were more booking for July, August, even September. So we are prepared for that.

We have changed the way we do our forecast and we do our pricing as well. And so far, the last minute booking is still in the market.

I would tell you, I would add that we see it extremely during the winter season. We are getting 10 points of load factors for which right now, which is something that we have rarely seen in the past.

There is a lot of demand still for South destination for March and April. Fortunately, we have the opportunity to yield those bookings and increase pricing.

So hopefully this is what's going to happen for summer as well.

That makes sense. It's been a cold winter here in Canada.

So, I can appreciate why everyone's trying to get down South there. Maybe just last one for me, you made your - you made some public comments here on the announced merger or acquisition of WestJet and Sunwing.

But you also have a codeshare - just wondering, I guess, with your position on their merger or on that acquisition, just how you think that impacts your codeshare or your relationship?

WestJet has always been a competitor. The culture we have signed allowed us to feed more volume, more passenger on the Atlantic market.

So this is not going to change. This is still efficient for us.

So - and we've discussed with WestJet over the last weeks as well in terms of the impact of what they announced in the market. We are reassured at this point that this will not affect our agreement, first agreement.

We will see what's going to happen in the upcoming months, but so far we are confident that this is going to remain in place.

So, first of all, I wanted to ask you, perhaps more for Patrick, the liquidity announcements you made. So, what's the key driver for the CAD43 million increase in refund possibility, is it for the prior bookings which were done over the last couple of years or is it for the latest bookings that were being cancelled due to Omicron?

Yes. So, the answer is, it's for prior bookings prior to Omicron.

So these are funds or cash that we borrow, for the most part already reimbursed customers. And so, in many respects, we're getting access to this liquidity.

It's, in our view, in addition to our liquidity since the money was already paid out. As you recall, we had a cap of CAD310 million on the voucher facility.

And in essence, we made more than CAD310 million in reimbursements. That excess over the CAD310 million we had to draw on the that excess over the CAD310 million, we had to draw on the other facility at 5% and we just thought it made more sense to be drawing on a 1% facility as opposed to the 5% facility.

And that's good color. And I think just staying on the liquidity for now, you also mentioned, I think, in the disclosures that you are in ongoing discussions with the government for additional liquidity.

Just trying to understand, the bookings are going probably very well at this point and maybe are rebounding perhaps toward 2019 levels. So there's this cash coming in the door.

What's the drive for additional liquidity discussion? Is that more about the macro, given the Russia-Ukraine situation, the risk of new variants or is it the fuel or is it something else?

Yeah, it's a fair question. Look, I mean, when you look back, we spent the past two years in this pandemic, the last wave, Omicron did have a significant impact on our balance sheet.

Right. So you could see in the investor presentation, we had many weeks where our flights were being debooked as being - as opposed to - as to being booked.

So that left the gap on our finances. When you look in the future where we're optimistic about the summer season and so on and so forth, but in other respects, I mean, Omicron is not completely over.

There's certain volatility in the geopolitical situation. All this to say that, we were, just to be clear, we're sitting on CAD500-plus millions of unrestricted liquidity.

We just want to be very prudent looking into the future from a balance sheet perspective and have that dialogue with the government of Canada.

That makes sense. And last one for me, on the oil price, I think, Annick, you kind of mentioned that the A321neos will definitely provide an offset or a hedge against the oil price.

And you mentioned about the fuel surcharge as well. I think, like industry as a whole, it's probably still not looking at fuel hedging at this point perhaps.

But I wanted to ask you, any thoughts of what will actually trigger you guys or the industry to go for the hedging again? And is there anything you can share with us in terms of the sensitivity, because the oil price has gone up way higher here, I don't know if surcharges and demand elasticity and those things, they can provide a full offset.

So, any thoughts there?

Sure. Look, you're right, we're currently unhedged.

We can't speak for the industry. But certainly from our end, we evolve in a competitive market.

Our peers are unhedged as well. So we want to maintain a certain - similar playing field, but we do remain vigilant on fuel prices.

And based on our hedging policy, we may look at hedging contracts in the future. The way we think about it as our business has a natural hedge, price inflation, Annick talked about adjustments to our pricing structure.

And then, it's up to us to analyze while how much of a shock can the company take in the future. And the delta that we think that above a certain level of oil is difficult for the company, well, then maybe we would consider hedging strategies in that context.

But from what we could see right now, I mean, it is obviously very volatile. We could also see that there are adjustments to the pricing structure.

So now, we are currently unhedged, but that may change in the future.

First thing, I just wanted to clarify the A321neo deliveries that you've got, 737 coming in. Are they - will they be in the fleet by the beginning of calendar '23 or by the end of calendar '23?

So we've got 10 of them right now within our fleet. There's going to be additional - two additionals coming for the upcoming summer.

And then, there's going to be another one coming for two in 2003 and two in 2004, ready for summer seasons.

Then I just want to think about, you've got plans for capacity this summer at 91% of the level it was in 2019. How should we think about load factor and what load factor - below what load factor would you adjust that capacity plan lower?

And I'm wondering about or thinking specifically about with higher oil prices, if they remain and you have to raise fares and traffic growth slows down. What type of load factor would cause the company to say, hey, this is a bit too much capacity, let's pull back on that?

The way we see this right now, there's so much volatility with the fuel price. It is too early for us to be able to estimate what's going to be the breakeven point.

This is something we do on an ongoing basis. We've done this over the last months to decide on which - what would be the part that would not cover their variable costs and decided not to fly them.

And this is how we decided to cut capacity for winter season. So far, we are looking at all the measures we can to increase pricing in the market, increase not only pricing for seats, but all the ancillary products.

And we are still making the analysis on what's going to be the breakeven point. So, I'm not able to answer - give you a straight answer today on that.

But this is an exercise that we're doing on an ongoing basis. So far, we maintain the capacity we have in the market.

We might have to do adjustments like we've done in the past, but we are confident that we're going to be able to operate it.

And then, just my last question again on capacity. The domestic capacity, more specifically, plans are for it to be 9% above 2019 levels this summer.

I'm just wondering very approximately how much of that capacity. And I assume it's most will be used by travelers connecting on to your international flights as opposed to just sort of point to point traffic within the domestic market.

Can you give us a sense for kind of the breakdown very approximately between the 2?

It's about - I would say, 40% of travelers traveling domestically with us, which connects on the European flights during summertime. So there's a lot - there's still a lot of point-to-point business.

Of course, we don't operate on all the routes, we operate on long routes such as Vancouver-Montreal, Calgary-Vancouver, Calgary - I'm sorry, Vancouver-Montreal, Calgary-Montreal, Vancouver-Toronto and Calgary and Toronto. These are the four main routes where we maximize the utilization of our aircraft, whether it's the A321ceo or A321neoLR.

So this is where we put the capacity. And of course, we look at the overall profitability when it connects and feeds the European network.

It's still a profitable program for us and it's an important program for us.

I got onto the call a little bit late, so apologies if this has been asked already. But just wondering if you could talk to a bit about, I guess, the point of sales trends, particularly what point of sales Europe looks like for Europeans coming to Canada for the summer specifically.

And do you think that the fact that Canada still has this antigen test requirement is a significant impediment for visitors to Canada this summer?

As we are looking right now, we are in similar trends than what we saw in 2019. So, we're about, I would say, 45% in the load coming out of France.

We're about 45% French, 55% Canadians on the legs from France to Canada and about the same as well in Gatwick, so in London, between London and Canada. So it's 55% Canadian, 45% Europeans.

I mean, do you think that there's still an impediment? I mean, clearly the bookings are looking pretty good for the summer, so probably isn't the case.

But you still think there's maybe a bit of an impediment from the testing requirement in Canada and if that goes away, which hopefully it will in time for the summer, I mean, could we see a further step up in bookings?

Totally. It is a turn off now for customers to have to let people afraid to be stuck at destination.

When we look at our consumer going south and when we think about our consumers going to Europe, people, especially down south, people don't want to be stuck at destination, at hotels, increasing their travel costs. So, we've - of course, the antigen is better than the PCR, but we're still pushing back and putting pressure for these measures to be removed and to allow people to travel a little bit more freely.

And we expect that when these will be removed, because they will, we believe they will, it's going to have a bounce effect on the bookings.

That's good. That's what I would expect too.

And just kind of a related question. I mean, for the summer, I mean, you're adding in some new routes to the U.S.

to maybe what I would call in sort of non-traditional markets in California. I'm just wondering, if you're targeting kind of point-of-sale U.S.

to Canada in your plans for those routes and are you actually spending any money on marketing for point-of-sale U.S. to try to attract passengers from those markets into Canada?

Yes, most of the point of sale is Canada. I would say, about 70%, but there's also 30% point-of-sale U.S.

So we are investing in the digital world, I would say. And with the distribution partners that we have such as Expedia and we've been doing this in Florida for many, many, many years.

It's been successful. So we are investing as well, not as much as in Canada, of course, but most of the traffic is Canadians on those routes.

We've done all the analysis and these are very promising routes, especially out of Montreal and believe that's going to be a success in time.

Maybe just one last quick question for Patrick, just on the - you had the question on fuel hedging earlier. I mean, what are you guys doing right now on foreign exchange hedgings?

I know in the past, you've always had a pretty comprehensive program for FX hedging.

Yes. I mean, right now, I mean, frankly we were in the process of ramping up operations, so we are not currently hedged.

We have in the past and definitely we're reviewing that in the context of fuel hedging as well, so that will be looked at for sure.

Okay, excellent. So thank you, everyone.

Let me remind you that our third quarter - our second quarter, sorry, results will be released on June 9, 2022. Thank you.

Have a good day.

Thank you.

Thank you.