Air Transat seeking to reduce $20 million of costs to boost competitive position

MONTREAL – Air Transat is seeking to cut $20 million in annual operating cost as part of its parent company’s efforts to restore profitability in the face of toughening competition.

Executives told employees Wednesday that the airline needs to realize the savings in order to operate a fleet of Boeing 737 aircraft and replace those flown under subcontract by Nova Scotia-based Canjet since 2009.

The Canjet contract ends in April 2014. It follows an earlier deal in 2003 with WestJet Airlines (TSX:WJA).

“We continue to reflect on our strategy concerning small planes and the meetings with our employees are designed to report on this issue,” spokeswoman Debbie Cabana said in an email.

The first in a series of meetings took place at company headquarters in Montreal and will be followed by additional sessions over the coming days in Toronto and Vancouver.

Some of the savings will come from unspecified concessions by employees, who last year accepted a two-year wage freeze. But this time, the company isn’t seeking to touch salaries, Cabana said.

She said the $20 million in cost savings will help parent company Transat AT (TSX:TRZ.B) realize its goal of improving its pre-tax operating profit (EBITDA) by $50 million over three years through a series of cost reductions and moves to boost sales.

Carol Lavoie, president of the pilots union, said Wednesday that he doesn’t view the employer’s demands as “excessive.”

He said pilots were prepared, for example, to stay in hotels near airports instead of downtown, which would allow the airline to realize considerable savings.

The union representing flight attendants said it will take a few days to study Air Transat’s plan to better control its costs and ensure employment stability.

“We all have a stake in Air Transat returning to profitability and maintaining jobs,” Peter Buzzell, president of the Air Transat component of the Canadian Union of Public Employees (CUPE), said in a release.

He said the union proved its goodwill last summer by accepting a three-year extension in cost-of-living salary increases.

“The project, although interesting, will involve measures to reduce costs. Though no formal proposal is on the table, we will hold discussions with all unions of Air Transat and then consult our members.”

If Air Transat decides to operate the narrowbody planes, between six and 14 aircraft would be added to its fleet of 23 Airbus A310 and A330s.

David Tyerman of Canaccord Genuity said Transat’s move reflects what management indicated in its recent first-quarter conference call.

“They definitely would need to be competitive if they were going to bring the jobs in-house and that makes a lot of sense,” he said in an interview.

He said the company could be seeking to reduce costs or use the talks with employees to put pressure on Canjet or another partner to reduce its contract price.

Tyerman said Transat needs to get its costs down to remain competitive, especially as Air Canada (TSX:AC.B) prepares to launch its low-cost carrier Rouge this summer.

“It’s going to get more competitive potentially with Rouge because you’re going to add as many as 30 new narrowbodies into the market at some point and unless you’re very, very competitive you’re going to have a hard time,” he said.

Operating the aircraft internally could lead to the recall of some of the 50 pilots and hundreds of flight attendants who were laid off after Air Transat decided to reduce its capacity.

On the Toronto Stock Exchange, Transat’s shares closed down four cents at $5.96 on Wednesday.