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Edited Transcript of TRZ.TO earnings conference call or presentation 13-Sep-18 2:00pm GMT

Q3 2018 Transat AT Inc Earnings Call

Montreal Sep 19, 2018 (Thomson StreetEvents) -- Edited Transcript of Transat AT Inc earnings conference call or presentation Thursday, September 13, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Annick Guérard

Transat A.T. Inc. - COO

* Christophe Hennebelle

Transat A.T. Inc. - VP of HR & Corporate Affairs

* Denis Pétrin

Transat A.T. Inc. - VP of Finance & Administration and CFO

* Jean-Marc Eustache

Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO

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Conference Call Participants

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* Benoit Poirier

Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst

* David Bruce Tyerman

Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research

* Kevin Chiang

CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst

* Mona Nazir

Laurentian Bank Securities, Inc., Research Division - VP of Research and Transportation & Infrastructure Analyst

* Tim James

TD Securities Equity Research - Research Analyst

* Turan Quettawala

Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research

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Presentation

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Operator [1]

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(foreign language) Good morning, ladies and gentlemen. Welcome to the Transat conference call. As a reminder, this conference is being recorded, Thursday, September 13, 2018. (foreign language)

I would now like to turn the meeting over to Mr. Christophe Hennebelle, Vice President, Corporate Affairs. (foreign language) Please go ahead, Mr. Hennebelle.

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Christophe Hennebelle, Transat A.T. Inc. - VP of HR & Corporate Affairs [2]

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(foreign language) Hi, everyone, and welcome to the Transat conference call for the presentation of the financial results of the third quarter ended July 31, 2018.

I'm here with Jean-Marc Eustache, President and CEO; Annick Guérard, COO; and Denis Pétrin, our CFO. Denis will review the financial results, and we will then answer questions from financial analysts.

Questions from journalists will be handled off-line.

The conference call will be in English, but questions may be asked in French or English. As usual, our investors presentation has been updated and is posted on our website in the Investors section. Denis may refer to it as he comments.

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, please consult our filings with the Canadian securities commissions. Forward-looking statements represent Transat's expectations as at September 13, 2018, 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 measures -- financial measures used by the corporation will not be comparable to similar measures reported by other insurers 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 quarterly report.

With that, let me turn the call over to Denis.

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [3]

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Thank you, Christophe, and good morning, everyone. We are reporting today our numbers for the first half of the summer, our third quarter, for which the results are primarily driven by transatlantic market.

As usual, I will review the financial results and then share our outlook for the fourth quarter and some KPI for next winter.

In our mid-June communication, we said that given the observed trends and considering the recent significant increase in jet fuel cost, summer operating income will be lower than last year.

Since that date, fuel costs remained high and pricing in low [cycle] Is slightly lower than last year. Therefore, as anticipated, third quarter results are not as good as last year.

For Q3, results were as follows for all the markets combined: revenues of $697 million, down 5% compared to '17. Excluding the $77 million of revenues generated by Jonview in '17, which was sold in November of last year, the variation was an increase of 6%.

We posted an adjusted operating income of $5 million versus $59 million last year. The adjusted net loss was $3 million compared with an adjusted net income of $27 million in 2017.

And as for financial statement, the net loss was $4 million compared with a net income of $27 million last year.

On our transatlantic route, our main market during the summer, capacity was up 13.9%. The increase in capacity was higher at the beginning of the season up to mid-June. And it was limited to 9% in July, the peak season.

Selling prices were similar to last year and our load factor was down 1.9% compared to last year. The difference stemming from May and June. The impact of higher fuel costs combined with FX year-over-year variation was a 7.6% increase in operating cost.

Consequently, we noted a decrease in profitability compared to 2017 on the transatlantic routes.

On our Sun destination program, low season for leisure travelers, our capacity was up 7%. Selling prices of our packages increased compared to last year. Load factor was 92.7%, an increase of 0.7%.

In total, due to increased fuel cost, margins were lower by 2.8% versus last year.

On an apples-to-apples basis, i.e. excluding from our 2017 results of $7.1 million coming from Jonview and Ocean Hotels, our adjusted EBITDA is $47 million lower than last year, from which $40 million is attributable to the rise in jet fuel prices and the impact of the U.S. dollar on our results.

The difference, $7 million, is mainly attributable to lower-than-expected demand from Europe in May and June, which has pulled our load factors down during those months.

A glimpse at the fourth quarter outlook now. On the transatlantic market, when compared with '17, global capacity on the market is 9% higher. Transat capacity is up 14%. Again, with a capacity increase in the peak season of 9%, the more significant increases in the fall shoulder season explaining the difference.

Currently, 84% of that capacity has been sold, bookings are up 16%, load factor are higher 1.1% and fare are lower 2.7%. As we speak, the combined effect of increased jet fuel cost and currency fluctuation results in a projected 7.3% increase in operating expenses.

On Sun destinations, where it's the low season, 75% of the capacity -- [more] capacity has been sold. In currency and considering the combined effect of fuel and FX, margins are inferior by 7.2%.

Obviously, we have closely monitored the surge in fuel prices. Fuel is an important component of our cost during the summer months when we mainly sell airline seats to and from Europe. As was the case in Q3, our fuel hedging program will reduce the impact on our cost in Q4.

Globally and considering the significant impact again coming from the increase of fuel price, the fourth quarter operating income will be lower than last year.

Looking further ahead, here are a few preliminary comments regarding next winter season. As of now, on the Sun capacity -- on the Sun destinations when compared to last year, global capacity on the market is up 8%. Our own capacity is up 3%. 25% of our capacity is sold and load factor are ahead 2.7% versus last year.

As we speak, the impact of fuel and FX represent an increase of 3.4% from our operating cost. Despite those indicators, it is too soon to draw any conclusion on the winter results at this point, especially since the comparison with 2017 is made with the situation and it -- as it was before the 2 major hurricanes in September, Irma and Maria, that strongly affected the rest of the winter season last year.

Now for our balance sheet. Corporation free cash totaled $867 million at the end of July, an increase versus last year of $287 million. Our facility, credit facility, obviously, remains unused.

This amount includes the cash received from the disposal of our investment in Ocean Hotel in October '17 as well as the cash received from the disposal of Jonview in November 2017.

The deposit for future travel were $562 million compared with $510 million at the same day, all this due to higher reservations. Off-balance sheet agreements stood at $2.4 billion as at July 31, now including the 7 Airbus A321neo aircraft signed in June. These aircraft are to be delivered between 2020 and 2022, and they will replace some of Transat Airbus A330s, the leases of which will then come to an end.

In conclusion, results of Q3 and the outlook for the rest of the summer season are not as positive as last year. Some indicator have worsened since mid-June.

Compared to last summer and net of our favorable hedging position, the combined effect of fuel and currency fluctuation on our cost will result in a $63 million impact as opposed to $55 million as estimated in June.

On top of that, the effect of currency on some of our balance sheet accounts as at July 31 explain an $11 million variation on our quarterly result compared to last year.

Those balance sheet accounts are mostly the provision for overall unleased aircraft which are calculated in U.S. dollar and converted at the end of each quarter at the market rate of that day.

Booking have remained strong on the other side, but there has been some pressure on fares. As said earlier, fares ended at par versus last year in Q3 and are actually slightly lower in Q4.

We are clearly not satisfied with these results. Nevertheless, future pricing will take into consideration these increases.

There is some inertia in the market and such changes, unfortunately, always take some time before they get reflected into the pricing, especially when close to and during the sales season.

It's too early this summer to really see any major impact of the moves of our strategic plan, such as the redesign of the fleet, the improvements in revenue management or the cost reduction effects, but we are proceeding as planned.

As an example, the first A321 long range will only be delivered in 2019. Finally, we are pursuing on the establishment of our hotel division, analyzing opportunities to acquire assets in Sun destinations. This is going well, and we expect to make some announcement before the end of the year.

We'll now proceed with your questions.

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Questions and Answers

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Operator [1]

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(foreign language) (Operator Instructions) Our first question comes from the line of Mona Nazir with Laurentian Bank.

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Mona Nazir, Laurentian Bank Securities, Inc., Research Division - VP of Research and Transportation & Infrastructure Analyst [2]

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So my first question, it's actually more of a clarification. So I see in your presentation and also you just spoke about the disposal of the businesses having a negative $7 million impact on EBITDA in Q3. So firstly, my first question was, I believe you stated it would be $16 million negative impact for Q3 and Q4 combined. Is that correct?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [3]

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Total is $15 million, that's very close to what you...

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Mona Nazir, Laurentian Bank Securities, Inc., Research Division - VP of Research and Transportation & Infrastructure Analyst [4]

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$15 million? Okay. Perfect. And then what was the impact of Jonview sale on revenue for Q3? And then what would it be for the entire Q3 and Q4 combined?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [5]

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Sorry, Mona, I missed the question.

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Mona Nazir, Laurentian Bank Securities, Inc., Research Division - VP of Research and Transportation & Infrastructure Analyst [6]

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Yes. So what was just the Jonview's impact on revenue for Q3 and then on revenue for Q3 and Q4, combined.

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [7]

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For Q3, the variance was $77 million. Give me a second. $103 million -- $100 million -- $103 million.

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Mona Nazir, Laurentian Bank Securities, Inc., Research Division - VP of Research and Transportation & Infrastructure Analyst [8]

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Okay. Perfect. That's exactly what I was looking for. So... okay. And then going forward, looking at the Q4 outlook commentary and your statement of lower year-over-year performance and from what I'm seeing on Slide 8, it's possible that the degree of decline could be similar to what we're seeing or what we've seen in the third quarter from at least an EBITDA perspective. Would that be correct? I'm just trying to get a sense of reasonable expectations here.

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [9]

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I think it's correct. Except during Q3, we also have the impact of the FX conversion on some of our balance sheet accounts. And as we speak, we do not expect to have a variation of the same size in Q4. Obviously, it will depend where the U.S. dollar versus the Canadian dollar will be at the end of Q4. But in the range of the CAD 1.30, like we are today, we do not expect to have this one during the fourth quarter.

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Mona Nazir, Laurentian Bank Securities, Inc., Research Division - VP of Research and Transportation & Infrastructure Analyst [10]

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Okay. Perfect. And then just speaking about pricing for the Q4 period, you expect it to be 2.7% lower year-over-year, which is a sequential decline from the relatively flat pricing in the third quarter. Can you just speak about the dynamics and drivers of that? Because I've been reading that Air Canada and WestJet recently have been putting through kind of double-digit price increases in July and August to kind of counter the fuel. So I'm just wondering if you could speak about your specific dynamics with that.

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Annick Guérard, Transat A.T. Inc. - COO [11]

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This is Annick Guérard. We read about that as well. Our prices during the third quarter are pretty much similar to last year. We did not see prices increase on the routes we operate. Now we understand that other carriers might have had increased and it might be happening in markets where we do not operate, such as domestic, transborder, Asia. Also I think it's important to understand that we compete with fares from competition on their economy classes. So we see more and more airlines being more aggressive with their economy class and yielding more in more premium business and first classes. So Air Canada increases might come from these seat sale baskets as well. Another action that took place during summertime, which disrupted a little bit pricing in the market was that several carriers operating on the Atlantic market introduced their new basic fare, which excludes the first baggage, which have had an impact to reduce the lower fare in the market about 20% per way...

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [12]

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$20.

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Annick Guérard, Transat A.T. Inc. - COO [13]

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$20. Sorry, not 20%, per way. So considering all that on our side, we haven't been able to push the prices up as much as we wanted. And other -- as we said, the fuel increases have been very suddenly in a short time period. In those circumstances, often we are not able to pass that increase to consumers. We are confident that we will be able to do that in the future.

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Operator [14]

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Our next question comes from the line of Kevin Chiang with CIBC.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [15]

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Maybe we'll just take a step back. I mean, Q3 looks like it might be the worst EBITDA you put up for the past 15 years. And this summer looks like it's going to be pretty challenging based on some of the headwinds you've highlighted here. And I appreciate fuel is a headwind and FX is a headwind, but we've seen fuel and FX at more extreme levels than you're facing today, and you've put up better earnings. So when I think back at all the restructuring you've done, all the cost cutting that you've accomplished, are you surprised that your business model is not more resilient in the face of these headwinds, given that your earnings has maybe bled a little bit more than we would have anticipated this summer?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [16]

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I think, Kevin, if you were to look at historical summer results, we see clearly that when there is a sudden and significant increase in elements like currencies or fuel, it was always very hard for us to pass these increased costs that will end up by being included in the fare but for the first summer, as Annick just pointed out. Then, in our view, it has nothing to do with the business model, with the demand from the leisure traveler. It's more a question of the ones that are selling the products because it's a competitive market for the first period, let's say this summer, to put that in the fare. And I would be surprised if situation in the competition will be very different from us because our prices are aligned with the competition. We're not doing our pricing in isolation. We're always comparing our price. And we're not selling for less than the other. Then it's the dynamic of the market and it's more important, it's probably more impacting in the leisure than it is when you're selling the business to a business traveler, very hard in a competitive market for a specific -- for a season to pass these costs when it happens just at the beginning of the season, very, very hard. But you're quite right when you say that we have been able to deliver better results when the price of fuel, to use that example, was higher than it is today. People will not stop traveling because the price of fuel is at $70 a barrel or $65 or whatever. We're only talking about something like $60. People will not decide not to go to Europe because the price of their holiday is $60 more this year than it was last summer. It's insignificant. It's more -- problem is not this. It's really that the ones that are selling the products have problem to integrate that into their selling price for that first season. Next summer, we could all anticipate that the pricing will include this new element of -- this -- the fuel as it is today. We have no doubt about this, and we have -- we have gone through this several, several occasion in the past. No difference, no difference this time... I'm not saying that we're happy with the results, but no difference.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [17]

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If I turn to -- I know one of your initiatives here is to expand your ancillary revenue, and I think you have a slide here in your deck, number 16 here, where you talked about having achieved about $94 million of ancillary revenue in fiscal '17, and that's going to increase another 50% in the next 5 years or so. Should I think of this as being -- well, I think of ancillary revenue as being an extremely high margin. One is, is that the case for Transat or if I'm mistaken in that assumption? And then, two, if you are generating $94 million of ancillary revenue, that does suggest that's basically the bulk of the earnings, your EBITDA the 2017 that you generated. Is that effectively what's happening? Like a lot of the -- or the vast majority of your earnings are coming from the ancillary revenue, which are high margin and the rest of your business is, maybe at best, breaking even or maybe losing money in the face of when there's big spikes in fuel or big moves in FX?

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Annick Guérard, Transat A.T. Inc. - COO [18]

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So to answer your first question, it is an element that is highly important for us. It has a big impact on our bottom line. We are looking at ancillary revenues in a very diligent way. We've posted a very aggressive target for the years to come, and we will implement several initiative in the next 12 months. We are confident to achieve our target of -- which was defined as $150 million and even surpass it before the end of the strat plan, which ends in 2022. So this is an extremely important for us. We focus on it. We put the right efforts around it. So that's your first question. The second one was around?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [19]

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The link between the ancillary revenue and the EBITDA. Obviously, you could make that link, Kevin, but -- and it's true that there's not a lot of expenses associated with ancillary revenue. But the only one that could make those margin are the ones that are selling the seats than the business that are linked together. Obviously, what remained, you could say, is the ancillary revenue, but they are linked together. Then you convince the customers to buy your products and you propose them after added value and that and covering the cost and generating a satisfactory margin at the end, which is the purpose.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [20]

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That's helpful. And just last one for me. You've had a more volatile earnings stream in the past 5, 6 years here. In one of your slides, you kind of showed the historical earnings. When you think of your hotel strategy and the growth there, I'm sure you got a sense -- like how do you see that benefiting the travel leisure business? Do you think that creates maybe a less price-elastic product that you now have a more unique offering that allows you to maybe price a little bit better or at least have a more differentiated product that makes you less price sensitive than it seems like today, where you're unable to recoup sudden moves in fuel or FX? Just can you speak to maybe the ability to use the hotel business to maybe reduce the volatility in your leisure travel business?

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [21]

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This is Jean-Marc speaking. The reason why we're doing the hotel chain development is because, like we said before and also in our presentation, we think that in the winter, the best thing that we will do will be around breakeven the model of business -- business model. And for sure, we will make the money in the -- with the hotel because that's where the money is today. And when you see our peers, they are doing the same thing. And where they're making the money now it's with the hotel business. And in our model, the -- it's to bring a Canadian to these hotels in some of the -- in the winters, more in the winter than in the summer and everybody is doing that now. And really, the tour operator and the travel agencies are really a commercial tool to sell 2 things: one, it's the hotel, all year round. But then the -- in the winter and in the summer, selling Europe feeders and offshore Caribbean sun. And where the money is on the other side is with the airline. So for sure, the hotel is more than important for us. And that's the way we're looking at it. And if you look at -- I'm thinking about some peers like think about TUI, where it's making its money now? It's making its money with the hotels and with the cruise. And it's not making any more money with the tour operator. The tour operator is a tool to sell those product and really, it's in the product that you make, you build and you sell that you're making money.

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Operator [22]

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Our next question comes from the line of Benoit Poirier with Desjardins Capital Markets.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [23]

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Could you provide more color on what drove lower demand for the transatlantic in Q3?

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Annick Guérard, Transat A.T. Inc. - COO [24]

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Lower demand was especially -- where we witnessed it was especially for the month of May and June, okay? And we were comparing the demand from last year, and we were anticipating that the demand out of Europe would be stronger this year if we compare it to last year, which was very strong. So this is how we increase capacity in a significant way during the month of May and June. Unfortunately, the demand was weaker than what we have anticipated, strongly weaker. So for instance, last year, Europe to Canada represented 39% of our flights and it came down to 36% this year (inaudible) European from our aircraft. And this came mostly out of the French market and the U.K. market. So this is what we experienced during the month of May and June, was a little bit more on track back in July and August, but (inaudible).

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [25]

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Okay. And the other question is related to the winter. I know it's still early, but if I go on Slide 10, you still provide some very good color on the fact that FX and fuel should have a negative impact of about $35 million. So you gave some, and I -- again, I understand it's early, but could you talk a little bit about the pricing you're seeing so far and whether it could push down -- the number down furthermore, assuming pricing doesn't go up.

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [26]

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I think we have showed, like we're showing on this slide, 25% of the inventory. The beginning of the season last year was excellent, one of our best. But as we remember, beginning of September, there was the 2 very, very major hurricanes that hit the Sun destination in most of the market and -- that's why it's difficult to compare, as we speak, because again, the beginning was excellent but the end was not necessarily excellent. And today, I will say that we're happy with the numbers that we have. Sales are good, load factor, like we're showing on this slide, are ahead by 2.7%. And again, we're -- it's just the beginning. It's pretty impossible, Benoit, to say where we will end with these numbers, but what we know for sure is that the numbers that we are comparing with will deteriorate significantly because if we remember, from -- for the month of September up to mid-October last year, fare were very, very weak. And to recover from that period because we lose -- last year, we lose the momentum, we had to bring the price down again to convince people that destination and the beach were there and the hotel were not too damaged. And it was tough. We even had to organize for travel agencies a tour to Cuba to show the destination. And then we're okay with the numbers that we have right now.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [27]

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Okay. So is it fair to say that from a pricing standpoint, you'll be facing -- as you advance in the quarter, you'll be facing an easy compare? So meaning that the pricing should be up? And is it fair to say that pricing right now is up year-over-year for the upcoming winter, Denis?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [28]

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The first part, I will comment by saying that it's true that we will compare with weak numbers but it still do not make sense for us today to comment on pricing today because we're -- again, we're just feeling current strategy that -- to sell more in advance and to make the partner -- to use the pricing as a tool, and we're happy with the numbers that we have today.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [29]

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Okay. And overall, we know it's a tough industry but what makes you confident that the pricing for the industry will become more rational as we advance in the winter and the next summer, let's say, next year?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [30]

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We never use the word will become rational because I don't think we are in an industry that have these characteristics. But what we could say, though, is that cost takes some time to be integrated. Cost, I mean, fuel and FX take some time to be integrated in the pricing but demand travel is so strong that they end up being integrated in the price. And because the margin are what they are, then no airline has really choice on that on the road. Cost have to be integrated in the pricing. And again, as I was saying at the beginning, it's not for a $60 difference that people will decide not to go to Europe next summer. It's insignificant. But if there's someone that is willing to sell the seats for $60 or less, then, obviously, people will take it. But I'll be surprised if next year those prices are available.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [31]

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Okay. And does the -- Denis, the softer outlook, let's say, for Q4 and the upcoming winter change the way you look at the hotel strategy? Does it reinforce your hotel strategy and/or does it open discussion to potential strategic partnership?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [32]

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We really look at summer and winter separately. Summer, I think, it's the surge in fuel that have destroyed the results of the summer. Next winter, totally different, we'll see where we'll end at the end of the winter. But like Jean-Marc was saying earlier, for a company like us and looking at all the peers, having hotels added into our company makes a lot of sense. It's very, very logical and we -- it has not changed our view on that. We want to have our own hotel division, and we want to grow that over time and we will.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [33]

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Okay. And the last for me, Denis. Could you give us an update on the surplus cash and given the softer outlook you're seeing in Q4, whether it brings down your surplus cash expectation at the end of the year?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [34]

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Using the numbers that we have posted this morning and considering that Q4 will be weaker, we'll end the year with a loss, but not a big one. It's always too big but it's not major in term of cash burn. Then it will not have a significant impact on the excess cash that we have. Whatever the loss, let's say, that we will have in Q4, this will be relatively small versus the amount of excess cash. Then in a year where you produce 0, the cash is not affected, then it does not change the plan. And if you make a small loss again, that does not really affect the cash that are available. If we were to make a very huge loss, it's a different story, but we're not talking about that today. I think it's not significant.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [35]

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Okay. So is the expectation to end the year with -- I thought the previous number that we were talking about was around $440 million, I believe, Denis, or $400 million, something like that. So would it be above $425 million? Or can you give maybe just a magnitude a little bit of what we could expect when you say no significant impact?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [36]

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Just a second, Benoit. I think we have posted something like $440 million. At the end of June, then if we make a small loss, then it will be a little smaller than this. And the loss have an impact on -- if we end by having one, end up by having the impact on the cash available at the end of the year. But there's also the situation with accounts receivable, account payable, the deposit, things like that, then where numbers will be of the same magnitude. You could refer, Benoit, to Page 20, where we have given you some information about the cash position. And numbers are very different from where they were earlier. On the other hand, if we complete like we hope to complete acquisition of -- related to the hotel division, obviously, cash will be affected but the cash is for that purpose.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [37]

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Okay. Perfect. So it's about $10 million gap versus the earlier expectation in June?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [38]

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Yes, kind of. Yes.

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Operator [39]

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(foreign language) (Operator Instructions) Our next question comes from the line of David Tyerman with Cormark Securities.

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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [40]

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My first question is on the Q4 pricing. So I see it's down on your transatlantic 2.7%, where it was flat in Q3. So is competition growing? Or is there some other explanation as to why pricing seems to be getting worse?

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Annick Guérard, Transat A.T. Inc. - COO [41]

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This is Annick. As I was explaining earlier, we haven't seen -- we haven't been able to see any increase on pricing for the summer and, therefore -- and we don't anticipate at this point that it's going to change unless we see movement in the market in the upcoming weeks. And this is why our pricing has been really similar to last year. The pricing that we are hearing -- the increases that we are hearing from the market might happen on markets where we do not operate or on classes where we do -- at least do not have either, such as the premium and first class and business class. But on the economy per se, we have seen a strong competitive and aggressive pricing on every route and departure that we operate on the Atlantic market. And this is still the image that we see for the upcoming Q4.

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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [42]

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Okay. So does this give you any concern that this could become a feature of the summer season? If the other airlines can make it up and do okay on...

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [43]

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David? David, sorry, we have trouble hearing you. Would it be possible to come a bit closer to the mic or speak up?

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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [44]

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Sure. Is that better?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [45]

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A bit, yes. Thanks.

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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [46]

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Okay. So if -- could this become a feature of the market going forward in that if other airlines can make up the difference on what they're giving away on economy through premium or other markets or whatever, like is this a problem that could be recurring that you're wondering whether this could be recurring?

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Annick Guérard, Transat A.T. Inc. - COO [47]

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We don't anticipate that the pricing is going to be as low necessarily as it is today. But as we said earlier, that airlines will be able to pass that increase in fuel to consumers even in economy classes moving forward. So we anticipate that. Of course, we are looking at our overall pricing strategy to be able to segment even a little more between consumers within our economy class to maximize pricing. And we are looking at all different initiatives as well as we said earlier to recuperate those revenues either with ancillary revenues or working even more strongly on our cost structure to be able to protect our margin. But in the midterm, we anticipate that pricing is going to go up in the market.

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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [48]

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Sure. Okay, very good. Second question is on the winter. So given 8% industry capacity increase, which sounds on the high side to me, do you think that, that will enable you to get adequate pricing, given that your costs are higher?

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Annick Guérard, Transat A.T. Inc. - COO [49]

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We've done similar. We're up 3% on the -- on next winter. That's for -- basically for the South. We're a little down on Europe because we've done some moves in terms of our program and this is really important. In terms of being able to increase our prices, we've removed some A330s from our program for this season because we don't necessarily perform well in the South market. So that will allow us to increase revenues and load factor, hopefully. We have downsized as well some program on Toronto, Gatwick, important programs during wintertime. So we have downsized aircraft from the remaining -- keeping the same frequency, however, downsizing the aircraft. So this is going to diminish the pressure on pricing. So we will positively -- this will have a positive impact on revenues and load factor, we believe. We've got as well -- streamlined some different routes that were not profitable, especially out of Western Canada. And taking into consideration, like Denis described just a little earlier, the impact of hurricanes. So if you compare pricing to last year, we believe that our pricing should go up. So putting all this into consideration, having worked on the programs to make it more efficient, continuing as well in a subject that is really important for us to refine our revenue management practices that we started last year, we think that this is going to have a positive impact as well on winter. So given all of this, focusing on ancillary revenues, we are confident that the revenues should go up during winter.

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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [50]

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Okay. That's helpful. And then on the hotel side, I'm wondering if you could give us any idea of what you're thinking about here. Is it just 1 or 2 new -- 1 or 2 hotels initially? And when should we think about the initiatives beginning to contribute to the financial results of the company. Is it a year or 2 out? Or is it sooner than that?

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [51]

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So number one, as you know, we have someone who's in charge of the hotel business. We are hiring right now some other people to build the hotel division. We're negotiating 3 lands right now. And like I said the other time, by the end of this coming year we will have at least 1 land. We hired the architects. We're right now choosing construction companies to build the hotel, and we're working with a firm for the brand and for the product to be sure that we have the right product for the customer we're looking at. And saying that, as you see, land -- to buy a land is complicated. To be sure that we have all the titles and everything, it takes around 4 to 6 months. To get the permit, it takes another 4 to 6 months and to build the hotel, it takes between 18 to 24 months. So putting that together, we will start with 1 hotel and a few months after, a second hotel. It will not bring really profitability to the bottom line of Transat before 2021 or something like that. So at the beginning, it will be just expenses and investment and you will not -- so that's why we're working on having the winter kind of breakeven and making money this summer. It's not happening this summer, but we should come back to the same thing next year. So to answer your question, I will say 2021.

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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [52]

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Okay. My final question is just on the FX conversion cost, the $11 million in the quarter. So if I understand what you said correctly to me, it sounds like you have balance related to the aircraft maintenance, that's the main thing; and presumably it's in U.S. dollars and you have to mark-to-market that every quarter. Is that correct?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [53]

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Yes.

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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [54]

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Okay. And so with the Canadian dollar versus U.S. dollar staying stable, then we should see a 0 there. And I don't think it's moved very much in Q4, so is that the general idea here?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [55]

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Absolutely.

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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [56]

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Okay. And do you have sensitivity what a $0.01 move means X amount?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [57]

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I would say -- I have to get back to you on this one.

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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [58]

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Okay. That's fine. I'd appreciate that if you could let me know.

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [59]

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Okay. Thank you.

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Operator [60]

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Our next question comes from the line of Tim James with TD Securities.

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Tim James, TD Securities Equity Research - Research Analyst [61]

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Just first of all, quick clarification. You mentioned about announcements on Sun destination investments, hotel investments by the end of the year. Do you mean the end of the current fiscal year or the end of the calendar year?

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [62]

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It should be the end of the fiscal year.

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Tim James, TD Securities Equity Research - Research Analyst [63]

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Okay. And then just looking at your -- I'm just trying to understand kind of the revenue growth in the third quarter here, in particular. Travelers were up 8% to 11% year-over-year, depending on which part of the business you're looking at and pricing was flat year-over-year. And yet revenue, excluding the Jonview impact, was up 6.2%. So I'm just trying to understand what accounts for that differential. Just looking at the traveler numbers and the pricing, I would have thought revenue would have been up 10% plus year-over-year, but it was 6.2%. What's the reason for the difference?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [64]

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The difference, Tim, is for the mix. It's for the mix, for one, and we end up having a load factor also slightly lower in May-June. Then if you were to start with the number of last year, remove Jonview $77 million, and you take into consideration the increasing numbers of travelers on transatlantic plus the one in -- on Sun destinations. And with load factor, then could be very, very close to the numbers that we are getting for this quarter, which is close to $700 million.

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Tim James, TD Securities Equity Research - Research Analyst [65]

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So when you say changes in mix, do you mean more travelers in the -- more transatlantic travelers as opposed to Sun destination travelers this third quarter?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [66]

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Yes. If you were to use that because when we are selling tickets for Europe, it's only for seats compared to when we're selling for Sun destinations, then it's $900 for Europe versus $1,400 for Sun destinations and we are grow more one versus the other and also we're selling more seats only on the Sun destinations program. Then instead of selling packages all the time today, where we have demand for people who just wants to buy the seats to Cancun, then it's a question of mix.

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Operator [67]

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We have a follow-up question from the line of Benoit Poirier with Desjardins Capital Markets.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [68]

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Yes. To come back on Annick's comment about the pricing that is different on certain routes, I was wondering if there's currently an opportunity to relocate some of the planes on more profitable markets. Is it something that is being looked at and possible?

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Annick Guérard, Transat A.T. Inc. - COO [69]

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There's the short term and more the long term. Regarding the short term, as we saw the impact on May and June -- as we were close to May and June and we saw the impact on fuel, of course, we always look at our program and do whatever is necessary to improve our program. So for instance, of course, we're going to change all the routes because there's a lot of passengers already booked on other flight. But we have increased on -- in some programs that were not going well, like -- I'll give an example, for instance, like Barcelona, we switched capacity to Italy, to Greece and Portugal that were performing very well. We downsized several flights as well to smaller aircraft. We consolidated several flights as well during the month of May and June, seeing the load factors that were not picking up. So this is short term. As we get into the season, we try to do, what we call, a bit of damage control, without impacting passengers because we -- from the moment the fuel started to rise at the beginning of April, of course, our loads were around 65% at that time for the season and it was 75% for May, 70% for June. So there's a limit to what you can do in terms of disrupting the program. However, looking forward, of course, we always do analysis, P&L on each of the different routes to know what has worked, what hasn't worked and we optimize our program for the upcoming seasons, upcoming months. So we do that on a constant continuous basis.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [70]

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Okay. Okay. Then the -- great color. And given the latest development at EMEA with Aeroplan, I was just wondering if there's an opportunity to maybe further push your partnership with AIR MILES or is there something else you could do in light of the latest development?

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Annick Guérard, Transat A.T. Inc. - COO [71]

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We are exploring different avenues. We could be interested in a loyalty program if the conditions were very interesting for us. So we're in discussion with different partners. But such a program would have to be very simple with a big return on investment for us to get in. Of course, we see the benefits, we see it when we did the exercise with EMEA. However, we're going to be very careful on that plan because we don't want to get into any program that will be high maintenance for us and not so valuable for consumers, for our type of consumers that are leisure travelers. So we are exploring different avenues.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [72]

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Okay. Perfect. And latest one for me, when we look on the Slide 9 in the Sun destination capacity breakdown by market, we know Air Canada and WestJet have put out a lot of capacity over the last years. You are now ranked #3, but WestJet seems to be increasing capacity a little bit more than you for the upcoming winter. So I was just wondering whether it changed the bargaining power a little bit when it's time to book with the hotel operators given the competition that has been growing a lot in the last year.

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Annick Guérard, Transat A.T. Inc. - COO [73]

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We're all going to be around 1 million seats, 1 million a little plus. We are a different beast. When you look at WestJet, they do not contract a lot with hoteliers. And when you look at Sunwing, a lot of their contracting is done with their own hotel. So when we talk to hotelier, our buying power is still very powerful in the South. We have strong relationships that have been built over more than 20 years with a lot of big hotel chains. So when we -- we are in continuous discussion with them. These relationships are still going very well. We try -- of course, we concentrate our inventory where we have the best partnership. So at the end, we're not decreasing of course. We are increasing slowly because we don't think that the market can accept such a big increase in capacity. We believe that it's not a really disciplined market, however, we think that our 3% of increase is reasonable.

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Operator [74]

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Our next question comes from the line of Turan Quettawala from Scotiabank.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [75]

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Denis, I'm sorry, I had a bit of phone trouble. So I just wanted a quick clarification. Did you say that basically on the full year basis, you're now expecting a loss?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [76]

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I think if you look at our numbers for the first 9 months and you had the Q4, and I said earlier that variance quarter-over-quarter should be in the same magnitude, not the same numbers, excluding all things related to onetime item like FX conversion and things like that, then the -- (inaudible) bring you to -- bring our numbers to negative for the year. Then yes, this is what we're showing in our information for Q4, yes.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [77]

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Got you. Okay, that's helpful. And then just one more from me. As we're looking -- I heard some of the comments that you made about mix and what the other airlines are doing with regard to premium versus basic economy and so on and so forth. But you also have the biggest capacity increase in the transatlantic market and it seems like you are underindexing quite a bit on the yield versus what Air Canada just seem to be showing. So I'm wondering if you're looking at your capacity at all, maybe into next summer with regard to the transatlantic business to maybe improve yield there.

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Annick Guérard, Transat A.T. Inc. - COO [78]

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Yes. In terms of how we have described this in our strategic plan, in terms of the upcoming summer and even upcoming winter as well, we plan to follow the market in terms of growth. So our growth should vary around 2% and 3% at the most. And bringing -- yes, the number and of course, we want to do that while transforming the fleet. So without increasing capacity on some of our routes and putting smaller bodies, we will be able to increase frequency significantly, and that's the main goal (inaudible) with regards to our network.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [79]

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And are you at all preparing for WestJet's entry as well into transatlantic in a bigger way next year?

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Annick Guérard, Transat A.T. Inc. - COO [80]

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We are watching them very closely. We're not all clear on their strategy at this point, but we are watching what they're doing and preparing for additional competition.

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Operator [81]

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Our next question is a follow-up question from the line of David Tyerman from Cormark Securities.

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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [82]

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Annick, you just -- if I understood correctly, you think the market is growing 2% or 3%, but you guys are showing industries got 8% increase in volume. And you've -- sorry in the winter. Do you not expect then pretty considerable price pressure? Because it sounds like the market is going to be unbalanced.

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Annick Guérard, Transat A.T. Inc. - COO [83]

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Yes, yes, we were a little bit surprised by the 8% increase in market, understanding that the forecast that we have seen -- the forecast [in the year] was really around 2% and 3%. So we -- yes, we anticipate that there's going to be still pressure on the pricing. However, we believe that we have done -- we are well prepared to be able to face that. This is one of the reason why we have decided to downsize our aircraft, use the most efficient ones on the South destination and so forth. And of course, pushing a lot of pressure on increasing our ancillary revenue.

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David Bruce Tyerman, Cormark Securities Inc., Research Division - Analyst of Institutional Equity Research [84]

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Sure. Okay. So all the factors you talked about in my earlier question. So when I think about the winter then, with costs up and pricing pressure, but you doing a lot of things, when I think of all of those things together, would it be difficult to improve on last winter's results? Because it sounds like you've got a lot of headwind, which you're trying to offset but to do better than offsetting them might be a challenge. Is that a fair way of thinking about it?

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [85]

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It's difficult to answer to that question. It's too early, like we said. I will prefer to give -- we gave you the numbers. You know what is the market, what are the prices. We decide our strategy not to have a too big raise of -- rise of seats in the winter season. And it depends on so many factor. We had 2 hurricanes last year. We have no hurricane until now. If we're going to have a hurricane coming in the month of October or November, what would be the price of the fuel? What would be the dollar? What's happening right now with all the negotiation between Canada and United States, United States and China. It's impossible for us to say. We do what we have to do and for the rest, we don't do. And so it's -- we cannot answer a question like that.

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Operator [86]

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There are no further questions at this time. I will now turn the call back to you, gentlemen.

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Christophe Hennebelle, Transat A.T. Inc. - VP of HR & Corporate Affairs [87]

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So thank you, everyone. Let me remind you that our fourth quarter results will be released on December 13, 2018. Thank you, again, and have a good day.

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [88]

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Thank you very much, everyone.

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Operator [89]

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Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. (foreign language)