“Testing South America is worth it in the near future,” says Chief Financial Officer Patrick Bui. (Photo: courtesy / CNW / Transat)
Despite its heavy debt of 1.5 billion dollars (G$), the winds are starting to become favorable again for Transat, if we are to believe its chief financial officer, Patrick Bui. And to overcome this, a recovery plan is expected by the end of the year or the beginning of 2024. Deals took advantage of the announcement of the company’s most recent results to discuss with him the future of the Quebec airline.
The question came up a few times during the call with analysts Thursday morning: Yes, revenue of $746 million for the third quarter, up almost 40% year-over-year last, are encouraging. And above all the return of profits, $57M, a first since the start of the pandemic.
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But how can we control the debt, ask many analysts who follow Transat’s activities?
“Yes, it’s a central point for the company,” admits Patrick Bui straight away. But the company’s debt level is 100% due to the pandemic. Before 2020, we had no financial debt. On the contrary, we had high cash balances,” he recalls.
“A good part of this debt is government in several respects (with rates between 15 and 8%). I often say that not all debt is equal. In this debt, there are roughly a billion rental leases. Planes that we fly. From an accounting point of view, it is debt, but someone can argue that it is good debt to operate the planes,” he seeks to qualify.
However, part of this $1.5B is more complicated to repay. And it costs the tour operator a lot of money. “There is a portion that we do not like, approximately $200M of debt, which is guaranteed debt,” explains Patrick Bui. This debt costs us between 14% and 15%. We want to repay this one when possible.”
Moreover, to overcome this, Transat will use $50M from the sale (at a loss) of land it held in Puerto Morelos, Mexico.
“Today I am on government debt. A slice costs us 1%. Another 5%, which rises to 8% at the end of the year. These are not bad rates. So I don’t want to refinance, just for the sake of refinancing. It must make economic sense. We are therefore patient to find the right window,” said the chief financial officer, specifying that this window could well open at the end of the year or somewhere at the beginning of 2024.
Economic and business context
Although fears of recession are spreading in several sectors of the economy, they do not yet seem to reach, at least, that of air transport. Especially since in addition to the surpluses announced Thursday, Transat affirms that its deposits for upcoming trips amounted to $819.9M during the last quarter, an increase of 34% compared to the end of July 2019 and 40% compared to the third quarter of 2022.
In other words, economic turbulence is not on the radar screens of tour operators. Patrick Bui attempts an explanation. “It is believed that despite inflation and a recession, people need to travel for their well-being. The jobs are there and the inflation is there. It’s certain that budgets are tighter, but people value this expense more. This is what we see.”
Also, he jokes, “we’ve been talking about a recession for a year and a half. Someone recently told me that people have been talking about a recession for longer than the duration of a recession. (…) As a prudent manager, does this worry us? The answer is yes. Is this what we see in our data? The answer is no,” he says.
Demand is strong, therefore, and prices are high. The perfect addition for Transat to pick up where it left off before the economy closed in 2020. Especially, adds the company, that it “uses its planes in more efficient ways”. “We are regaining our place in the market. We are strengthening historic routes that we know and which are profitable,” expresses Patrick Bui.
“North America and Europe are our most profitable markets. We have been putting all our attention into it for 35 years. I think there is still development to be done in Europe,” he continues, adding that the growth is probably also to the south. Especially after the opening of a connection to Lima, capital of Peru, on August 28.
“Testing South America is worth it in the near future,” says the CFO. (For the clientele), it is a natural market for visiting friends and family. But also for leisure tourism. We think there is something to develop. One day, we will make more of a breakthrough in South America.”