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Edited Transcript of TRZ.TO earnings conference call or presentation 13-Dec-18 3:00pm GMT

Q4 2018 Transat AT Inc Earnings Call

Montreal Jan 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Transat AT Inc earnings conference call or presentation Thursday, December 13, 2018 at 3:00:00pm 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 & Public 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

* Cameron Doerksen

National Bank Financial, Inc., Research Division - Analyst

* 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

* 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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(Spoken in French) Good morning, ladies and gentlemen. Welcome to the Transat conference call. (Spoken in French) I would now like to turn the meeting over to Mr. Christophe Hennebelle, Vice President, Corporate Affairs. Mr. Hennebelle, (spoken in French) please go ahead.

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

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Hi, everyone, and welcome to the Transat conference call for the presentation of the financial results of the fourth quarter and year-ended October 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 expectation as at December 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 financial measures to assess the corporation's operational performance. It is likely that the non-IFRS financial measures used by the corporation will not be comparable to similar measures reported by other issuers or those used by financial analysts as their measures may be different -- may have different definitions.

The measures used by the corporation are intended to provide additional information and should not be considered in isolation or as a substitute for IFRS financial performance measures.

Additional information on non-IFRS financial measures, such as their definition and their reconciliation with the more comparable IFRS measures, are available in our annual report.

With that, let me turn the call over to 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. Good morning, everyone. We are reporting today our numbers for the second half of the summer, our fourth quarter, for which the results are primarily driven by the transatlantic market. As usual, I will review the financial results and then share our outlook for next winter.

In September, we said that given the observed trends and considering the recent significant increase in jet fuel cost, summer operating income would be lower than last year. Since that date, fuel costs remained high until the end of October. Pricing remains slightly lower and load factor improved a little versus last year. Therefore, as anticipated, the fourth quarter results are not as good as last year's.

For Q4, results were as follows. For all markets combined, as compared to last year, revenues stood at $668 million, excluding the $84 million of revenues generated by Jonview in 2017, which was sold in November last year, the variation was an increase of plus 9%. We posted an adjusted operating income of $36 million versus $79 million. The adjusted net income was $17 million compared with $46 million. And as per financial statements, the net income was $8 million compared with $148 million. 2017 net income include the $102 million gain on disposal of Ocean Hotels.

On our transatlantic routes, our main market during the summer, again compared to 2017, capacity was 14% higher, selling prices were 1.5% lower, and our load factor was up 1% despite the significant increase in capacity. The impact of higher fuel cost combined with the FX year-over-year variation was an 8.1% increase in operating cost.

Therefore, we noted a decrease in profitability. On our Sun destinations program, low season for a leisure traveler, compared to a year ago, our capacity was similar, selling prices of our packages slightly increased, and our load factor was 89%, same as in 2017. On an apple-to-apple basis, by excluding from our 2017 results the $8 million from Jonview and Ocean Hotels, our adjusted EBITDA is -- or was $35 million lower than last year, from which the same amount, $35 million, is attributable to the rise in jet fuel prices and the impact of the U.S. dollar on our results.

Looking at the entire summer, we recorded an adjusted operating income of $41 million compared with $138 million a year ago. Our adjusted net income was $14 million versus $73 million. And as per financial statement, we recorded a net income of $4 million compared with $175 million in 2017. Again, the amount in 2017 include $102 million gain on the disposal of Ocean Hotels.

In summary, the deterioration of summer '18 results was primarily due to the combined effect of increased jet fuel prices and USD fluctuations, which increased our operating cost by $76 million compared to 2017.

Our past year experience showed that time is required to reflect in the pricing increases in cost, like fuel this summer. Selling leisure is different from selling business. Leisure travelers tend to be more sensitive to prices and their variation, while business travel is more dependent on the global health of the economy.

For the year, revenue were $3 billion, excluding the $182 million of revenue generated by Jonview in 2017, the variation was an increase of 6%.

Our adjusted operating income was $17 million for the year compared with $102 million in '17. We recorded an adjusted net loss of $25 million or $0.65 per share compared with an adjusted net income of $29 million a year ago.

Now on our balance sheet. Corporation's free cash totaled $594 million as of October 31, 2018, which is similar to a year ago. And obviously, our credit facilities remain unused. This amount includes the cash received from the disposal of Jonview in November '17 and pursuing the development of our hotel chain, the cash injected to purchase a land in Puerto Morelos in Mexico for a cash consideration of $60 million in September '18.

As a reminder, we finalized the purchase of a second adjoining piece of land after the close of the quarter. The deposit for future travel were at $511 million compared with $434 million due to higher reservations than the one at the same date last year.

Off-balance sheet agreements stood at $2.5 billion at the end of October, including the 7 Airbus A321neo aircraft signed in June.

These aircraft are to be delivered between 2020 and 2022 and will replace some of Transat Airbus A330s, the leases of which will then come to an end.

A glimpse at winter 2019. On the Sun destinations, when compared with winter '18, global capacity is 8% higher, our capacity is up 2%, and 52% of our capacity has been sold.

Currently, booking are up 5.6% versus last year, same date, and load factor are up also now by 3.8%. The combined effect of U.S. fluctuation and fuel, fuel cost result in a 3.4% increase in operating expenses. And all those metrics -- taking all those metrics into account, unit margins are similar to those of last year. On the transatlantic market where it's the low season, 54% of the capacity has been sold. Load factor are up 9% and prices are down 3.3%. Even considering all those metrics, corporation believes that it's still too early to give any indication regarding winter 2019 final results. In conclusion, the results of Q4 and summer '18 are not as positive as last year's. Yearly results are clearly not satisfying, reflecting the headwinds from jet fuel cost.

However, we are satisfied with the progress of our initiatives, as Jean-Marc and Annick will probably detail in answer to your questions.

Transformation of our fleet has started with the arrival of the first A321 and more orders announced this year. Our revenue management and network planning capabilities are improving. We are on track with our cost reduction and margin improvement initiatives, and we have purchased our first land in Mexico, an important milestone on the path to our hotel division.

We are therefore confident in our ability to deliver on our objectives, on our strategic plans in the years to come.

We'll now proceed, as usual, with your questions.

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Questions and Answers

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Operator [1]

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(Spoken in French) (Operator Instructions) Our first question comes from the line of Mona Nazir with Laurentian Bank Securities.

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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 firstly, in regards -- so firstly just in regard to the outlook commentary, and I'm sorry if I missed this, I did hear the transatlantic pricing, but I'm just wondering what are you seeing in regard to 2019 pricing for the Sun destinations market?

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Annick Guérard, Transat A.T. Inc. - COO [3]

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Good morning, this is Annick Guérard. We see that the market capacity for winter 2019 is up by 8%. Our capacity is up by around 2%. And as Denis has described in his presentation, we are in advance in terms of bookings, both on south and Europe. And our load factor is up as well, both on Europe and South. We -- I don't know if we've talked about prices in the market. But packages, in terms of prices, they are up flights in the South are up as well. Europe flights at this point are slightly down since we pushed a lot on load factors. But so far, this is what we're seeing. Overall margins, as Denis explained, are similar to last year. That's for winter.

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

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Perfect. And just on your commentary, that package in terms of pricing is up, is it low single digits? Mid-single digits?

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

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What we said in the document or in the outlook shared on -- with you this morning is that when we include pricing and when we include the cost of all the component that are included in our packages, when we compare to last year margin, margin are similar to the one of last year, they are similar in total, including the FX, including everything, margin are similar. It really mean that pricing is a little up because as you have -- obviously, we have said earlier, there is an impact coming mainly from the U.S. dollar variation year-over-year.

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

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And then, just secondly, I was looking for an update on the hotel side. It's been a few months since you announced the initial cash outlay for the land package in Mexico. I'm just wondering if you could please provide an update in regard to how that's progressing, construction, architecture, timing to break ground? And is it expected to contribute to 2020 results? And what type of contribution could we potentially expect?

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [7]

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Okay. Jean-Marc speaking. So now we're the owner of the land. We already asked for the permit. We should get the permit by beginning or mid-April. We are working on the brand. We should announce the brand beginning of the year that we choose the architects. We are now in the hiring the people around Jordi. The office is open. We are -- we're going to choose the construction company to build this hotel. This hotel will be adult on one side and family on the other side. It should be around 860 to 900 rooms, and we should start the construction beginning of May. And this hotel should be completely done by April 2020 to -- a little bit before. You will see...

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [8]

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After November in 2020.

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [9]

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November -- excuse me, November 2020, it should be open for the season -- winter season 2020, 2021, so December 2020. And this hotel like we already said, should bring margin between 25%, 30%, approximately, like we said. We are now -- we continue to look at lands. We have a couple of offer in Riviera Maya. We have a couple of offer also in Punta Cana. We are really looking at Punta Cana, a little bit more than Riviera Maya because now we have already something going on with Riviera Maya. And we're looking at a couple of hotels that are for sale. One, it's brand-new, the other one it is an old one that we could refurbish and bring on the market to -- with our new name. So this is going as it was planned and it's going well. We have no problem with that at all. Is that clear or...

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

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Yes. No, that's great. So thus far, in the hotel or the land piece that you purchased in Mexico, there's been no real delays in permitting or construction or the time frame.

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [11]

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No.

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Mona Nazir, Laurentian Bank Securities, Inc., Research Division - VP of Research and Transportation & Infrastructure Analyst [12]

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Okay.

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [13]

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No, not at all. We're on the timing of everything and everything is going very well on that side.

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Mona Nazir, Laurentian Bank Securities, Inc., Research Division - VP of Research and Transportation & Infrastructure Analyst [14]

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That's great. And then I know that you mentioned that you are kind of putting together the team. And when Jordi came in, it's almost less than a year now, but I understand that it was somewhat lean on the hotel side until you kind of commenced your foray into the hotel market. Do you think you have all the team members in place right now? Are you just kind of ramping up and building that?

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [15]

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No, no, the team is almost there. We still have a couple of person that are -- will not come right away. We don't need them right away. To give you an example, the VP Sales will be onboard in May because we don't need it right now. But we have the person, we agree, there's no problem. But the guy in charge of construction, IT, finance, everybody is already there or is coming in beginning of next year. So there's no problem at all with that.

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Operator [16]

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Our next question comes from the line of Cameron Doerksen with National Bank Financial.

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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [17]

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I guess a couple more questions on the hotel business. Denis, maybe if you can just update us on your prospects of getting financing for the hotels. What that market looks like? And also what kind of financing rates you're seeing out there? Has there been any change since we last talked about that?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [18]

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No change. I would say this is what we have communicated earlier. Market is more -- financing remain available. Market are supportive for this kind of project. I would say no change, really. No change for -- I think they appreciate -- the people that we are meeting with are appreciating the fact that we're already a producer of client and not only someone who will build a hotel and will welcome customers. They like the fact that we will be in a position from Canada to send lots of clients and they like that. Then I would say condition are at the level -- have not really changed and meeting our objectives.

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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [19]

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And could you just talk about the timing of when you would access potential mortgage financing? I mean, does that come when you start construction or, you know, just the timing on that?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [20]

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Depending of the speed at which we will purchase land and hotel, I would say if we buy an existing hotel, the financing will come at the beginning. If we buy a land and we construct, the financing will come to us progressively as we build. We have a solid cash position, it's not excluded that at the beginning we'll put more cash at work instead of putting the financing in place and still having cash that we have in our bank account. Then we will balance that with the project, with the speed of the -- of all projects that we'll have.

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Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [21]

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Okay. And just wondering about the disclosure on this business, I mean, is this something you're going to -- I guess just the amount of capital that you've put into the hotel businesses, is this something that you're ultimately going to disclose kind of separately just so we can have a valuation or evaluate the total I guess sort of book value that you've kind of allocated to the business? Because obviously you're spending cash now, but there's no revenue or cash flow generation for several years.

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [22]

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Yes, that will be easy for one that will read our financial statement and our communication to identify the amount of cash invested in this sector. And we think at this point that we will have to report the number as a separate activities, then lots of visibility will be there for everyone.

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Operator [23]

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

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [24]

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Denis, is it possible to give us a sense of approximately how much you're going to spend on building hotels here in 2019?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [25]

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Our objective is to -- now that we have the first land, to start the construction by the end of the year, then to spend some cash on this. But on top of it, we're looking for -- to move on in our initiatives to reach the 5,000 rooms. Then we are looking at other project. Then we want at least to have identified or have conclude on 1 additional project and maybe 2 in 2019. And depending on the speed, and if we'll buy land or if we will buy an existing hotel, the deployment of cash would be very, very different. Very, very different. But again, we are looking at all opportunities right now on the market. And 1 or 2 project in -- additional project in 2019 is the objective.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [26]

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Okay, that's fair enough. But I mean in terms of this particular one in Mexico that you're building, what's your sort of projected spend on that one?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [27]

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According to our plan, something like USD 75 million, depending when we start and what we will have been able to accomplish by year end. If it's a project of, let's say, 800 rooms and we spend USD 250,000, USD 300,000 per room, depending where we are at the end of the year will determine what will have been spent in '19. But if it's not spent in '19, it will surely be spent in the beginning of the following year and to reach the value that I described for the opening of the hotel by November '19. Then when we're in Mexico, it's -- we still use the average value of USD 250,000 to build 1 room. But when you're in Mexico, please increase that amount a little versus when we are in DR, a little less. The average should be around USD $215,000, including the land, including everything.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [28]

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Okay, that's helpful. And then I guess just wondering with industry capacity up 8% here, I think Swoop is also getting into the Sun destinations market here starting in the spring. Can you just give us a sense of how is demand holding up overall?

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Annick Guérard, Transat A.T. Inc. - COO [29]

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Well, Swoop, we've been -- this is Annick. We've been following them, of course. They are active, just starting on the domestic market, which is not necessarily our market. On the U.S. transborder market as well, we are checking them closely on their introduction on a couple of destination in the Caribbean such as Montego Bay, Puerto Vallarta, Cançun, Mazatlan as well out of Hamilton, Abbotsford. So this is still a small business for us. We are watching, of course, kind of pricing they're going to put in the market. But as we are dealing with other low-cost carrier in the Atlantic market, we know how to phase those. For instance, we introduced our first baggage on the Atlantic market for next summer. We have the same condition on the South market. So far we still think that it's very low volume out of Swoop. However, we'll make sure that we follow them very closely.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [30]

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Okay, perfect. I think they've also started from Hamilton, right? Starting this...

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Annick Guérard, Transat A.T. Inc. - COO [31]

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Hamilton, Abbotsford, yes.

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Turan Quettawala, Scotiabank Global Banking and Markets, Research Division - Director, Transportation and Aerospace, Equity Research [32]

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Okay. And then I guess overall, are you seeing any -- like how is demand holding up overall as you try to get some positive yield here on the Sun destinations market with industry capacity up about 8%, 9% here?

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Annick Guérard, Transat A.T. Inc. - COO [33]

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As I described earlier, we used -- we were very aggressive on our side at the beginning of the season to be able to capture volumes, so we are very pleased with our advance in terms of load factor at this point. Of course, it's still early to comment on what's going to be the end result of the season, but we were able compared to last year to capture much more volume at this point. So we're very satisfied with our load factor at this point.

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Operator [34]

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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 [35]

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My first question is for the first half fiscal '19. Obviously, there was some great disclosure on the Slide 11 about the changes versus 2018. So far it seems that with the FX and fuel, the adjusted EBITDA for first half could be about $52 million negative. I'm just wondering if you could provide any color on what we should expect with the yield management for Sun destinations and others items below the yield line, so...

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Annick Guérard, Transat A.T. Inc. - COO [36]

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Of course, we're looking at the impact of fuel and FX. FX being greater in the winter season, as we deal on the Sun destinations. On the revenue side, we are being a little bit more aggressive, I would say, on the targets to increase ancillary revenues.

We have as well changed the way we do revenue management for this winter, improving capabilities. Over the last year we have changed system as well using more operational research, algorithm and predictive analysis. So we're seeing this paying off especially on the flights. And we are working as well on the packages side to be able to increase revenues as much as we can. So far we've been able to increase revenues on both flights and packages. And we're pushing so that it stays up, continue to yield. But at the end, of course, it will depend on market condition, on how the others, our competitors will behave in the market.

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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. And now if we look at the transatlantic market for next summer, I know it's still very early. But when we look at 2018, we -- you finish with $41 million of EBITDA, which compare to almost a peak level in fiscal '17. So when we look at the fuel price, which will become much more important in the summer, just trying to -- to try to get a sense on how do you look at the transatlantic for the summer season? If you could mention some color about the pricing you see, capacity and expectation from an EBITDA standpoint? Just some color.

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Annick Guérard, Transat A.T. Inc. - COO [38]

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So what we see so far in terms of bookings, again, as we did for winter, we started early in the season, so it's very early to comment where our load factor are in advance and bookings as well. Price are a little down, but that's part of our strategy. Because it's early, so we want to fill. Especially right now we're focusing on front and back shoulders, so low seasons May, June, September, October, these months that are difficult to fill, which were especially difficult for us to fill in 2018, so we are focusing on that. And we're seeing positive results in terms of bookings. The fuel effects, as we speak right now, is not -- is flat. So -- but this is the image as of today. Of course, this could evolve in one -- on one side or the other side. So our focus, of course, is to increase as much as we can, the revenues, while focusing on our operational cost.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [39]

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Okay, so does it mean, Annick, that the transatlantic so far for next summer could be comparable to fiscal '18?

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Annick Guérard, Transat A.T. Inc. - COO [40]

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We're looking to have a better one than 2018. Of course, our goal is to beat 2018.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [41]

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Okay, that's great. And also if you could talk about the -- do you have some good information about the excess cash in fiscal '22, Denis, about $150 million. So obviously it implies that you'll continue to put some money at work on the hotel strategy. But when you look at the legacy business, I was wondering what type of assumption do you assume on the legacy business? Because my understanding is that the negative EBITDA for the winter and the season and also when you look at the market right now might be tough to put some positive free cash flow on the legacy business next year and -- so just if you could provide some color about the free cash flow for the legacy business in terms of assumption.

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [42]

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What we have assumed in -- up to 2022 for the year '19, '20, '21, and the last one '22, is that results will be better than the one in 2018. That we'll have a better profitability during the summer. Again, like we just said, [thar] getting surely higher than the one delivered in summer '18 when the impact of fuel was so big. But in those assumption, we're not counting on massive cash coming from the actual business, but bringing that to a positive level that is satisfying in the context and positive numbers coming from the actual business.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [43]

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Okay. And is the $40 million CapEx, excluding the hotel strategy in fiscal '19 is kind of the sustainable level we should expect in fiscal '20, '21 and '22?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [44]

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The answer is, yes. The answer is, yes. $40 million to $50 million should be the average for the duration of the plan.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [45]

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Okay. And last one for me, when you look at your leverage ratio, the off-balance sheet items, you put the 7x multiple on the rent expenses. So I was just wondering the rent expenses, if it's more on a trailing-12 month basis or it's more kind of a normalized level that take into account the upcoming planes that you will be receiving over the next 2 years?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [46]

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For the -- it's the last 12 months for each of the years. In 2022 is the rent that we expect to have at that time, where for the previous one we're using the rent that we were having in those years.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [47]

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Okay. And the annualized rent, what will be kind of the peak level going forward? One you'll be able to replenish the whole fleet? I'm just trying to get a sense on what -- where we could see the annualized rent at the peak when you'll receive everything?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [48]

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It will depend on the fleet that we will have, obviously, during all those year. But let's use the assumption, $225 million per year at a time. We will have -- composition of the fleet will be very, very different. We'll have the new Airbuses, A321neo where we will have 17 of them. Those -- because of those aircraft, the rents will be higher, but the fuel and maintenance will be lower. Then we don't expect total cost to be increased because of this initiative, in fact that the opposite. We expect to deliver some savings from the introduction of these aircraft. That will replace the A310 that we operate today and some of our A330 where the leases will come to an end. Then if you use the -- if you were to make some calculation on that, please consider the fuel and maintenance also because the rents are going up because aircraft will be newer than the one that we have in our fleet today.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [49]

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That's perfect. And yes...

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [50]

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Benoit, and the fleet will better adapt to the market. Don't forget that those planes will have 199 seats, where today the Airbus A330, we have 345 seats or with the 310, 250 seats. So that's mean for us, we could add frequency and a better product also.

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Annick Guérard, Transat A.T. Inc. - COO [51]

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Generally higher.

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [52]

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So like that, we will get higher revenue. So it's not just a question of cost, it's the question of revenues because of this type of plane.

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Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [53]

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No, I see it's a good point. And I'm just curious, Denis, could you mention some color about the IFRS 16, how it's going to impact the results going forward?

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Denis Pétrin, Transat A.T. Inc. - VP of Finance & Administration and CFO [54]

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We're not sure today what will be the impact on results because we are evaluating this as we speak. First year [obligation] of IFRS 16 will be -- we will start that in a year from now. The impact of this or the consequences of the IFRS 16 is that now leases or commitment on leases will be presented on balance sheet with assets and liabilities. And when looking at the results instead of having a line where you will see rent will be replaced by amortization and interest -- implicit interest, then would be very different.

And it's a big project. We're working on that right now. It's not only for fleet. It's for space that we are renting in building. Then we'll be in a position later this year to come back and give more color on that. Obviously, the EBITDA will be higher because today we're deducting from EBITDA -- sorry, the amount of rent, but that's the end results that are important.

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Operator [55]

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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 [56]

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Just maybe a -- I just have a clarification question actually to a question Benoit asked earlier. When I look at Slide 11, when you're saying that margins are similar to previous years and you highlight that you have a $28 million FX and fuel headwind, as we look out into this winter versus what you saw last winter, am I to presume that if your revenue environment stays the same, that you're right now offsetting that $28 million of cost headwinds based on your revenue initiatives?

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

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The answer is yes. By a combination of load factors and pricing, we have said that margins are similar including everything to the one of last year.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [58]

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And when you look at the 52% of inventory sold -- and thank you for color on some of the revenue initiatives you've -- you're pursuing, how is that -- how does that yield progress through that booking curve? Has it gone stronger? Has it been pretty stable? Has it weakened here? Just trying to get a sense of how that I guess how that yield curve looks through that booking curve.

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

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Pricing during the winter for the type of product that we are selling tend to go down, closer you are to the departure date. It does not mean that it's up at the begin -- very, very, beginning and it's down. But when you are very close to departure date, booking tends to -- sorry, pricing tends to go down the -- clients are interested to leave 2 weeks before departures are looking for a deal.

Then that's why Annick explained that strategy this year and previous year, but it really works this year, was to take as much booking as possible from the get-go in order to have less seats and packages to sell at the last minute. Then this is the environment. Obviously, this is a very general comment that I make because when you look at Christmas time versus January versus school break versus the end of the season, this is very, very different.

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Annick Guérard, Transat A.T. Inc. - COO [60]

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I'm just going to bring some precision on that. When we're talking about packages, this is a curve that we see in terms of yield and pricing. And we -- and this is why we tend to book as much packages in advance as we can so that we are not caught on the last minute to have to drop to follow the market because our competitor will drop at the last minute. However, 30% of our capacity on the Sun destinations is flight only. And we have as well the Atlantic market, which is flights only. Those, however, do not follow the same pattern as the one just described. These tend to yield up to the departure date. So this has -- we've seen this over the years, and it continues to follow that trend.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [61]

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That's super helpful. And then just second for me, if I were to take a step back and -- I mean, you know what your competitors are doing. I think Air Canada has talked about what they want to do with their Rouge product line and obviously WestJet has talked about what they're doing with Swoop. I presume you're looking out longer term and continuously seeing excess capacity being thrown into a lot of the markets that you compete in, which is creating additional challenges for you. When this hotel strategy matures, how important is it for you to have this air travel business? Like, is this something that's core to making that hotel business successful? Or do you think having that hotel business makes your air travel much more successful? Especially, if you don't think you can generate positive free cash flow every year on the back of this. I'm just wondering, like, 5 years from now, does it make sense to have this business if your hotel strategy is kind of firing on all cylinders?

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

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Number one, we always made money with the airline, even this year, this summer. We made less money this year because of this suddenly fuel going up. But at the end of the day, if you look at the past 10 years, we have been always making money with the airline, number one. Where it's difficult today is not the airline, it's the tour operator. Tour operator is something -- and that's why we don't call that anymore tour operator. We call that distribution. It's more and more a cost, but it's a cost that you needed. Even the schedule airline, we are in the -- not in that business to our main competitor, still -- they still need to have a tour operator and to use the tour operator.

And even if you look at AMResorts who is the Apple Leisure Group we've got the hotel and resort, Apple Leisure Group is the group and they have tour operators, they have OTA, they even bought the second biggest tour operator in the U.S., Mark Travel Corporation. And they now manage about 50 to 57 hotel where they make money with the hotel and the distribution for them is a cost. If you look at even one of our competitor in Canada, it's more and more in the hotel business, but they're still in the airline, they still have a tour operator, they still have travel agencies. It doesn't mean that's for distribution.

And if you look at guys in Europe, like Tui where 60% of its profit now is made through the hotel and the cruise business, still have tour operators, still have the airline. So tomorrow we're going to have the hotels where we are going to make more money with the hotel, but we still need the travel agencies, the tour operator, the Internet, and the airline to fill up part of the aircraft.

And even in the U.S., you'll need some aircraft to fill up your hotel. So I think our strategy is a good one. It takes time, but the only problem that we cannot build a hotel in one day. And it's difficult right now to buy hotel not because we don't want it, because there's no hotel on sale -- for sale. And number two, when you find a hotel for sale, it's a very high price. Why? Because it's -- you make good money with it. So at the end of the day, I think -- no, we will not be just a hotel company, we will be a company that are more and more in the hotel. But more of its profit will come from the hotel, we will be in the airline business. And even if we have competition, if you look at -- I will take a route that is well known in, from Québec, Montreal-Paris. Montreal-Paris, you have everybody on the route. And at the end of the day, do we make money on that route? Yes, sir. And not just we're making money, we're one of the biggest airline on the route.

So I think at the end of the day -- but for sure the big difference that we have with the other guy, it's when you have a fuel

[Audio Gap]

getting up, like he was raising this year, it's more difficult to pass that to the leisure people than to the business people. So what happened this year, it's -- they did a little bit better, the others, and I'm saying a little bit because they were not so fantastic at the end of the day. They did better because they have those travelers, those that they take business class and premium and that's something that we're looking. We maybe going to have -- we have just 12 club seats or 12 premium seats in our plane, and that's something we're looking at it. Maybe we will add more to get better revenues on that seats. But now looking at the next season, when you see the fuel, it's okay for Europe. We think that should be a not bad season.

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Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [63]

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That's helpful. And maybe just -- maybe last one on this topic. I mean, obviously, a lot of concern in the past few months of maybe a coordinated global slowdown. And as you mentioned, you're more indexed -- as an organization, you're more indexed to the leisure traveler, which is maybe a little bit more economically sensitive and obviously more price sensitive.

When you look at this 5-year strategy here, how much flexibility do you think you have if the economy isn't as strong as you had envisioned 2 years ago when you embarked on the strategy? Is this something you would -- would you continue along this pace of trying to have 5,000 rooms by -- within so many years? Or would you kind of push it out? Or would you kind of maybe reassess how to use that cash? I'm just trying to get a sense of how much flexibility your plan has to changes in the economic outlook you have internally.

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [64]

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Just something that you have to be a little bit aware, when the economy is not so good, it's not so much the VFR market that goes down, it's more the business people. Because the business people can decide not to travel. And they can to do a video conference and things like that. So number one, we have to be a little bit careful with that. Number two, don't forget that we have 6 Airbus 310 that we can put on the ground tomorrow. But don't forget that we have Airbus 330, (technical difficulty) with very low rent that we could put on the ground right away, if necessary. So for the airline, I don't see any problem. It would be bad for the people, but it happened to us in 2001. And remember what we did and we went through that very well.

Number two, the hotel, like we said, you have to go step by step, so tomorrow there is a big recession, the hotel business is going down, terrible, we'll not invest anymore and we'll be careful with that, we will go slower. And if there's hotel for sale, we will look at the sales of those hotels. But we will not change our strategy, but it's very easy for us because we're not a big, big organization to adapt ourselves. And in the last 41 years, as a company, and 31 years as a public company, I think we proved many times with very difficult time that we were very fast and we went through all those crisis in very good shape. Never had any money from the government, never had anything to anyone and always having cash in the bank account because that's something I learned a long time ago, cash is king. So we have always cash if something happen. History prove history.

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Operator [65]

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We have a follow-up question from 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 [66]

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I was having a question about your partnership with Thomas Cook. Any expectation on the fleet agreement? And what we should expect for this upcoming winter? And if you see opportunities for other partnership overall?

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [67]

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Thomas Cook, we know them very well, they know us, we're talking to them every time, all the time. The planes already arrived. I think most of the plane, if not all are in the fleet right now. And most of them are flying top shape. Good plane, almost brand-new planes, so there's no problem with that at all. 8 of the plane are flat -- it's our pilot that flies them, 2 of the plane on the 10 planes are -- they fly with the pilot of Thomas Cook. So there's no problem with that.

With -- again, with the planes, in my life, I saw once in 1989 that you couldn't find a plane. You always find planes. So there's no problem to find planes. There's no problem to find people that can send you plane when you need it, especially in the winter. Because in Europe winter is low season, so everybody is ready to send you more plane in the winter. And in our agreement with Thomas Cook, in the years to come, they're supposed to send us more plane, but if the market is not there, we will take less plane, and it's part of the agreement between the 2 companies.

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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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Okay, and Jean-Marc, do you see other opportunities for partnership overall given the current market environment? Is there any more things you could squeeze overall kind of partnership with other people, I guess?

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Jean-Marc Eustache, Transat A.T. Inc. - Co-Founder, Chairman of the Board, President & CEO [69]

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What we're looking right now to see partnership is -- depend what you call partnership. If you talk something like easyJet, with GatwickConnects, that we're doing a partnership with easyJet so like that or people can fly easyJet and after that Transat, for sure, we're looking for a partnership like that. If you talk about partnership, someone coming in the company, no, we're -- there's no new shareholder coming or something like that or us going in another company, we don't have those type of discussion at all right now. So it depends what you call partnership.

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Operator [70]

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There are no further questions at this time.

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Christophe Hennebelle, Transat A.T. Inc. - VP of HR & Public Affairs [71]

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Okay. So thank you, everyone. Let me remind you that our first quarter results will be released on March 14, 2019. I would also like to point out that our shareholders' meeting is scheduled for April 30, 2019. On that date, we will hold both the annual and a special meeting. The purpose of the special meeting will be to approve changes to our articles of incorporation to reflect the new foreign ownership regulatory constraints for Canadian air carriers. The meeting is therefore held slightly later than usual to provide sufficient time to allow for the implementation of such changes. With that, thank you, and have a very good day.

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Operator [72]

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(Spoken in French) Ladies and gentlemen, that does conclude the conference call for today. We thank you, and have a great day.