Transat A.T. (TSX:TRZ) Q3 2026 Earnings Call

0:00 Bonjour Mesdames et Messieurs. Bienvenue à la conférence Transat. Good morning, ladies and gentlemen. Welcome to the Transat conference call. Please note this 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.

0:24 Thank you. Bonjour et bienvenue à cet appel trimestriel de Transat. Hello, everyone, and thank you for joining us for our third quarter earnings call ended July 31, 2026. Annick Guerard, President and CEO, and Jean-Francois Pruneau, our Chief Financial Officer, will provide 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'll 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.

1:11 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 of September 10, 2026, and therefore are subject to change after today. Our actual results may differ materially from any stated expectations. Please refer to a forward-looking statement in Transat's third quarter news release available on Transat.com and on CEDAR+. With that, I would like to turn the call over to Annick for opening remarks.

1:56 Thank you, Andrean. Good morning and thank you for joining us. Our third quarter results were significantly impacted by persistently high fuel prices, which outweighed the progress achieved across the business and placed considerable pressure on profitability. At the same time, the men for our product remain resilient. Revenue and traffic grew, and our transatlantic network continued to perform well despite a highly competitive environment. While fuel prices remain outside of control, our response is not.

2:41 We are actively managing capacity, cost, liquidity, and network deployment to mitigate the impact and position the business for recovery. On July 27, we closed financing of up to $150 million under the Government of Canada's Liquidity for Airline Sector Resilience Facility, or LASER program. This facility is now fully drawn and strengthens our liquidity position as we navigate a period of sustained fuel price volatility. The federal government has also made available an additional $250 million in funding, providing further flexibility as fuel prices remain elevated well beyond initial expectations.

3:37 Jean-Francois will cover the financial details shortly. Beyond the immediate fuel pressure, We remain firmly focused on strengthening transit's long-term earnings profile. Our objective is to broaden our sources of revenue, deepen customer loyalty, expand our premium offering, and capture more value for each booking. Our new loyalty program remains on track for launch toward the end of 2026. The program is designed to strengthen customer retention, increase engagement, and create additional revenue opportunities across our ecosystem.

4:24 The beta launch is already underway, with over 23,000 members enrolled to date and member engagement outperforming our initial expectations. In parallel, we are advancing a comprehensive cabin reconfiguration program with the first modernized aircraft scheduled to enter service in the second half of 2027. The upgrade of our cabins will increase premium seating capacity, support ancillary revenue growth, and enhance the overall customer experience. Together, these initiatives are designed to diversify our revenue base, strengthen margins, and improve the structural earnings profile of the business over time.

5:19 Turning to our operating matrix, third quarter capacity increased by 6% year over year. Load factor was slightly below last year, while year declined by 1%. As bookings progress through the summer, the competitive environment intensified. This placed pressure on yield and significantly limited our ability to recover higher fuel costs through fares. Nevertheless, transatlantic yield increased by 0.6% in the context of 8% capacity growth. While this performance did not upset the increase in fuel costs, It demonstrates the underlying resilience of our core transatlantic network.

6:12 Our soft program continues to be affected by the situation in Cuba with a cumulative revenue impact of $116 million. Turning to our operational and commercial update. Of our 41 aircraft at quarter end, were grounded to the ongoing Pratt & Whitney GTF engine issues, one more than anticipated when planning our summer program. These disruptions continue to impact our operations throughout the quarter. Despite these constraints, we continue to execute our network strategy with discipline.

6:57 Our focus remains on selective growth in markets where our brand, and others. This summer, we launched new non-stop services from Montreal to Agadir, Reykjavik and Dakar, as well as from Toronto to Tirana. The early performance of these routes have been very encouraging. As an example, We have already confirmed that our Montreal Dakar service will operate year-round beginning this winter, supporting our objective of reducing seasonality while developing new traffic flows across the network.

7:47 For the upcoming winter season, we are maintaining a conservative approach to capacity growth in light of persistently high fuel prices. Capacity deployment will remain highly disciplined with a focus on our strongest performing markets and the most attractive opportunities for value creation. Partnerships also remain central to our strategy, including our growing portfolio of interline and co-chair agreements and our successful joint venture with Porter Airlines. With that, I will turn the call over to Jean-Francois who will review our financial results.

8:34 Good morning everyone. This was a challenging quarter, driven mainly by persistently high fuel prices. Revenue and traffic grew, but the increase in fuel costs more than offset that growth and was the main factor behind our results. Revenues were up 3% in Q3 2026, or $26 million, to $793 million on higher capacity and traffic. Adjusted EBITDA was negative $1 million, compared with positive $81 million in Q3 2025. The decline was almost entirely attributable to higher fuel costs. Before the contribution under the laser facility, fuel costs increased $105 million year over year.

9:20 The fuel price rose 56% to $3.74 U.S. dollars per gallon, I should say, from $2.40 last year. A $25 million contribution under the laser facility was recorded as a reduction of fuel expense. Reported fuel expense was therefore $238 million, up $79 million, or 50%, from $159 million in 2025. Beyond fuel, salaries increased, mainly reflecting the new collective agreement with our pilots and additional hours required to address operational disruptions, including aircraft availability constraints resulting from continuing engine issues.

10:06 During the peak summer period, four aircraft remained grounded due to the ongoing Pratt & Whitney GTF engine issues, one more than initially anticipated. Additional unscheduled maintenance events affecting engines on our A330 fleet created further operational pressure. Together, these events required aircraft substitutions, schedule adjustments, and crew reassignments, contributing to higher overtime and other related costs. We continue to manage the GTF-related pressure through additional leased spare engines and active fleet management. Additional costs and revenue management inefficiencies are expected to persist until the issue is fully resolved, which is not anticipated before 2028.

10:54 During the quarter, we recognized $7 million in compensation from Pratt & Whitney as revenue, broadly consistent with the prior year. However, this compensation once again did not fully offset the financial impact of the ongoing engine-related disruptions. Net loss was $107 million compared with net income of $400 million The prior year result included a one-time $345 million gain on the extinguishment of long-term debt related to our government debt refinancing and is therefore not comparable. Adjusted net loss was $89 million or $2.18 per share versus an adjusted net loss of $12 million or $0.28 per share last year. Free cash flow was negative $302 million in the quarter and a number of others. In the first nine months, free cash flow was positive $4 million compared with $149 million last year. Cash used in operating activities was $221 million in the quarter compared with $105 million last year.

12:16 Capital expenditures were $21 million compared with $30 million last year. And for the first nine months, they were $53 million, down from $68 million last year, reflecting a tighter CapEx plan and the deferral of discretionary spending. Cash and cash equivalents were $243 million as of July 31, 2026. down from $390 million at the end of Q2 and up from $165 million at the end of fiscal 2025. Cash and cash equivalents and trusts are otherwise reserved mainly related to travel package bookings or $208 million up from $194 million at the end of Q2 and down from $430 million at the end of fiscal 2025 reflecting the seasonal nature of our business.

13:04 Customer deposits for future travel were

13:07 $847 million as of July 31, 2026, compared with $822 million a year earlier. Long-term debt and deferred government grant were $448 million as of July 31, up from $320 million three months earlier. The increase mainly reflected the initial $125 million laser drawdown and a $30 million draw on our subordinated working capital facility. Long-term debt and deferred government grant net of cash were $205 million compared with a net cash position of $70 million three months earlier. As Annick noted, on July 27, we closed our financing under the laser facility administered by the Canada Enterprise Emergency Funding Corporation.

13:58 The facility provides up to $150 million, which we have now drawn in full. It matures in July 2030 and bears interest at 3.91%. Since March, the cumulative additional fuel costs we have absorbed amounts to approximately $175 million. Beyond the laser facility, the federal government has agreed to extend an additional $250 million loan under the existing LEAF agreement, further supporting our liquidity as we work through this period. This multi-draw loan matures in 2035 and bears interest of 1.22% for the first three years and 3% thereafter. We will stay disciplined on both capacity and expenses, supported by the additional liquidity from our recent financing agreements.

14:51 Back to you, Annick, for closing remarks before the Q&A.

14:56 Thank you, Jean-Francois. High fuel prices place significant pressure on our third quarter results, but demand of our product remained resilient, supporting continued revenue and traffic growth. Looking ahead, four-quarter load factor is currently 0.6 percentage points ahead of the same time last year, while yield is broadly in line. Capacity increase is 2% year-over-year measured in available seat miles. We are maintaining a disciplined approach to capacity, cost, and liquidity while continuing to execute the strategic initiatives that will strengthen Transat's long-term growth.

15:43 Finally, I would like to sincerely thank the Government of Canada for its support. The financing strengthens our liquidity position and provides additional flexibility as we navigate the current difficult environment. I also want to acknowledge the incredible work of our employees. In a period marked by significant challenges and uncertainty, they have continued to serve our customers with commitment and resilience. Thank you all. While near-term conditions remain challenging, we are taking the actions necessary to strengthen Transat's earnings power, enhance resilience, and position the company for the future. This concludes our remarks and we are now ready for questions.

16:36 Merci. Mesdames et messieurs, si vous désirez poser une question, s'il vous plaît, appuyez sur l'étoile suivie du 1 sur votre clavier téléphonique. Pour retirer votre question, appuyez sur l'étoile suivie du 2. Un moment s'il vous plaît pour votre première question. Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. If you'd like to withdraw your question, press star 2. One moment, please, for your first question. Your first question comes from Conor Gupta from Scotiabank. Please go ahead.

17:13 Thanks, and good morning. I wanted to dig into the yield performance in this third quarter and your outlook for the fourth quarter. If I look at the airline's Thank you for joining us. Do you see any surprises or any incremental pockets of weakness in your network that explains the gap in your yield performance versus the peers?

18:01 Yeah, good question. So we compete in a segment where customers are highly price sensitive. and this summer's environment was particularly challenging with industry capacity growth and exceptionally intense promotional activity across the Canadian market. In that context, our ability to fully pass higher fuel costs through fares was constrained. The reality that we are facing is that Our economy segment, which is, of course, predominant, when we look at our performance in that segment, it is not materially different from that of our competitors or legacy carriers.

18:48 The key difference lies above the economy cabin. Legacy carriers have premium, corporate, and loyalty revenue streams that have more than compensated for higher fuel costs across their networks. Unfortunately, we do not have those same levers at scale today. This is exactly what our loyalty program and cabin transformation initiatives are designed to address.

19:20 Makes sense. Thanks for that, Annick. And then, Jean-Francois, perhaps on the balance sheet side, you guys have tapped in fully on the laser facility and also signed up the incremental leaf loan. Facility. Can you help us understand, in light of the fuel price environment today, and obviously we are seeing a little bit more pressure in the last few weeks or days with the Iran situation, do you think these loans you have kept here would be enough to satisfy the liquidity needs you might have for the next several months, or you may have to re-look at some other options?

20:02 Well, that's a difficult one, obviously related to the fuel markets on which we have no control. But that being said, when we look at the forward fuel price curve, we're going to be okay. We feel that the amount of money that we are able to get from the federal government and the additional funding that we're getting now will be sufficient. But that situation obviously is dynamic, is volatile, and I don't know precisely where fuel prices will be in a month, in two months, or a year from now.

20:44 Okay. So based on the current forward curve, you feel like you're at a comfortable position? Absolutely.

20:50 Based on the forward curve, we're definitely fine.

20:53 Yeah. Okay. Perfect. That's it for me. Thank you, guys. Your next question comes from Cameron Darkson from National Bank. Please go ahead.

21:05 Yeah, thanks. Good morning. I wanted to ask, I guess, about the capacity plans. I mean, you mentioned some of the initiatives you're taking to kind of improve the premium yields, but that obviously is not something that's going to impact you significantly in the near term. So, you know, I guess most airlines, when they face higher fuel prices in the past, have significantly cut capacity. Yeah, I'm just wondering, you know, why add any capacity in Q4, just given where fuel prices are? I mean, it seems like the only way you're going to get yields up is to reduce some of the capacity.

21:41 Yeah, the increase in capacity in Q4 is very limited. It's below 2%. So we're, you know, we're keeping a conservative approach. And when we look at the upcoming winter, There won't be any capacity increase. So looking, you know, at the overall patterns that we're seeing, we feel comfortable with the capacity that has been deployed. Okay.

22:15 And maybe you can just expand a little bit, I guess, on the premium cabin upgrades that you're doing. I'm just wondering when it's kind of all said and done, How much bigger of an increase in premium seating will you have on average on your aircraft versus what you have today? I'm just trying to get a sense of how this could improve the yield profile as we look ahead a couple of years.

22:40 Yeah, so that's part of our strategic initiative. Unfortunately, we cannot disclose a number at this point. This is something that we're going to be able to share later on as we deploy the new cabins. Okay. All right. I'll pass the line. Thanks very much. Your next question comes from Tim James from TD Cowen. Please go ahead.

23:13 Thank you very much. Good morning. I just want to return to Cam's question actually for a minute, just thinking about the fourth quarter capacity and the 2%. How do you approach that? Do you have the ability to actually reduce that capacity or once you start selling, because you've sold some of these seats that will be provided in the fourth quarter months and months ago, do you actually sort of have the ability or can you cancel those flights or do you take those actions? I guess where I'm going with this is if you were to sort of decide on the ideal Q4 capacity today, would it still be a 2% growth or is part of that because You've already sold some of these seats and these flights months and months ago at a lower fuel price environment.

24:00 I just want to clarify, in terms of seats, we are below 2% compared to last year. And the ASM are plus 2%, and this is strictly due to the removal of Cuba. So we are not doing any increase in the market. and to respond your questions as we move along through a season, we always adjust capacity based on performance to make sure that we protect the highest margin as possible. So the cleanup has been done for Q4. If you recall at the beginning of spring, we reduced 6% capacity for the whole summer and then we made other adjustments throughout the summer.

24:53 So, you know, we've done, based on the fleet that we have, we've done all the actions that were required to maintain a conservative capacity.

25:06 Okay, that's helpful. Then just thinking about the yield and the year-over-year yield comparisons, obviously your trip length and your route, Can you just maybe give us a sense for an apples to apples basis across the network? What are actual fares for you in Q4 at this point and maybe Q3 as well? How have fares changed year over year on a root comparable basis?

25:40 Yeah, so fares, when we look at the fares for Q4, we're looking at an increase of 6%. When we look at Q3, we had, you know, 4.8%. But you need to understand that the mix, the network change, in an important fashion, in the removal of Cuba. So when we look at yield, of course, much more laid out on longer distance since Cuba represents shorter distances. So we're okay with the increase in TMC. However, when you look at the unit revenues, it doesn't cover for the loss of Cuba. That was a highly performing market especially in summer, but as well at the end of last winter.

26:37 Okay, okay, that's helpful.

26:41 So we're looking, you know, at next winter. Of course, Cuba won't be there anymore, so we have adjusted to make sure that the capacity for south destination is well balanced. So, of course, Dominican Republic will play a big role. Performance so far is very high. and trying to redistribute this capacity to maximize performance for next winter.

27:12 Okay, that's helpful. Thank you. I guess my last question, I'm just wondering if you can expand a little bit on the increased competition that was called out in the Q2 report as well. It sounds like it's continued, if not even increased a little bit more over the course of the summer. Just wondering if you can talk about what form that is taking. Is that competitors kind of putting more capacity on than you think is warranted? Is that competitors being more aggressive with pricing or maybe not pushing pricing higher to offset fuel costs? Just wondering if you can talk about what form that increased competition is taking this summer.

27:51 Yeah, it's both actually. There was big increases on the Atlantic market and combine with the fact that when we introduced the fuel surcharges, demand went down. So the whole market, the Canadian market, competitors, everybody, started to launch promotions and it never ended. It was promotions one after the other. We've never seen such a highly competitive network. It was promotion one after the other. The whole summer, and it continues. So this is what has affected the overall yield, especially in the economy segment, unfortunately, which prevented ourselves from passing on the increase in fuel to customers.

28:46 And it continues. Okay, thank you very much, Annick. That's really helpful. Your next question comes from Benoit Poirier from Desjardins Capital Markets. Please go ahead.

29:04 Yeah, thanks and good morning everyone. Just related to your premium cabin upgrade, could you talk a little bit about the incremental capex required on those and what are the most What are the most attractive regions to introduce those new cabins at first glance?

29:34 I'm going to answer the second part first. The most attractive markets are primary markets in Europe that we do year-round, such as Paris, London, Portugal, and then you have a longer stage like Aten, so Greece and Rome. So these are the primary markets where we plan to deploy the highest level, I would say, of premium cabins. So that's it. And we have some aircraft as well, do not have what we call our club class. So we want to standardize as well because we see big demand in club class. So on some aircraft, we're going to increase that class.

30:27 On some, we're going to introduce that class. So the goal is really to maximize revenues per client as much as possible. So it's going to touch the whole thing.

30:42 OK, that's great. In terms of CapEx,

30:48 Obviously, we're not in a position to provide any guidance for next year CapEx, but that being said, the introduction of the new cabin reconfiguration starting at the second half of next year will have a minimal impact on CapEx year over year. The bulk of it will really be in 2028.

31:11 Okay, that's a great caller. And for this upcoming winter, Annick, you talked about the potential capacity that's going to be flat. Could you talk about the pricing you've seen lately? You talked about the promotions that were quite high in the last few months. What about the pricing environment that you've seen lately for this upcoming winter?

31:41 We're trying to see yields rebounding in a more stable picture, I would say, especially on the south program heading into the fall and winter. So, again, given the current economic volatility and uncertainty, we are taking a very highly disciplined and conservative approach to capacity and deployment. No growth for next winter. So far, we see strong demand for self-destination. Load factor, still early, still early to come in, but load factor is similar to last year and yields are up year over year.

32:29 Okay. Would it be enough to cover for the fuel increase that you currently see? Not yet. Yeah, okay, that's a great caller. And obviously you were successful to secure a $250 million term credit facility agreement at attractive rates. There's $170 million left. You talked about the visibility you have on the forward curve. Any other options at your disposal aside the $170 million left that you might be looking at?

33:11 Nothing under the analysis as we speak. We feel very confident with the forward curve today, but we might have, maybe, to find other solutions if fuel prices don't improve. Like I said, very difficult to predict, but we feel very confident today with the market environment that we're seeing in front of us.

33:33 Okay, and any changes in terms of edging policy or things that you're looking at from a fuel standpoint?

33:42 No, you know, it obviously benefited in Q3. So, you know, our fuel price, our fuel expense would have risen more than what we've seen essentially without edging. So, it has been beneficial in Q3. and our program is ongoing, so we're hedged about 65%, I would say, on the fuel side for Q3 and a bit less for the first half of 2027. That's great.

34:16 Okay, thanks for the call. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star 1. Your next question comes from Krista Friesen from CIBC. Please go ahead.

34:32 Hi, thanks for taking my question. Maybe just one from me. You spoke about the soft launch of your new loyalty program and that's tracking ahead of expectations. Can you give us any additional color on what sort of Thank you. Yeah, well, for 2027, the contribution will be minimal, obviously. As we are launching, we will be fully launched, you know, by the end of 2026. So, you know, in the first years, obviously,

35:20 were more on the earned side than the burned side. So, you know, total, we expect, in fact, that this product or this new offering will mature over a period of three years, and that's where we're going to start to see a material contribution.

35:38 Okay, great. And then just anything we should be aware of in terms of any initial investments that are needed for the loyalty program? And I'll jump back in the queue.

35:49 In terms of investment, you said?

35:52 Almost nothing. It's all behind us, and it's been minimal. It's essentially A.T. systems. Perfect. Thank you. And there are no further questions at this time. I will turn the call back over to Andrean Gagne for closing remarks.

36:13 Thank you Julie, thank you everyone. As a reminder, our 2026 fourth quarter results will be released in December. Thank you and have a good day. Ladies and gentlemen, this concludes today's conference call. You may now disconnect. Merci.