Transat develop hotel network to generate profits and face competition

MONTREAL _ Transat A.T. plans to spend $750 million over the coming years to develop a hotel chain in Mexico and the Caribbean that it hopes will help to put it in a better position to face heightened competition from Canadian rivals.

Co-founder and CEO Jean-Marc Eustache plans to devote the next 18 to 24 months until he retires to begin developing the chain of hotels while his heir, Annick Guerard, runs the company as chief operating officer.

“It’s our main goal for the development of Transat,” he said Thursday during a conference call about its 2017 results.

Eustache said a president for the hotel division will be hired within weeks to put the plan in action before he “disappears” after retiring and leaving his position as chairman.

Transat (TSX:TRZ) plans to purchase and refurbish one hotel and a piece of land this year as it looks to build a network of 5,000 rooms, 60 per cent of which it will own and manage, over the next five to seven years.

In October, Transat sold its 35 per cent stake in its Ocean Hotels joint venture for $186 million. The company also signed a deal last month to sell its Jonview Canada subsidiary to a Japanese company for $44 million.

Transat said the hotel development and steps it has taken over the last three years to stem losses will enhance its ability to defend its turf against Air Canada Rouge, WestJet Vacations and Sunwing.

The Montreal-based company has simplified its fleet to give it more flexibility, improved its digital footprint, augmented the amount of trips it sells directly and improved revenue management.

“I think we are better armed to face any of those actions coming from our competitors in the future,” chief financial officer Denis Petrin added.

Transat beat expectations as the travel company’s fourth-quarter net income surged due to a strong transatlantic summer season and the sale of its stake in Oceans Hotels.

The company earned $148.1 million or $4 per share, up from $34.9 million or 95 cents per share a year ago.

Revenues for the three months ended Oct. 31 grew 14.1 per cent to $698.6 million, helped by an 8.7 per cent increase in the number of transatlantic customers.

Excluding one-time items, Transat says its adjusted profits doubled to $46.4 million or $1.24 per share.

Transat was expected to earn $1.11 in adjusted profits on $662.6 million in revenues, according to analysts polled by Thomson Reuters.

Analyst Cameron Doerksen of National Bank Financial said the results were strong, but he anticipates the company will face competitive pressure over the long term, noting that the hotel development will take several years to roll out.

The results included a $2 million to $3 million hit in the quarter from hurricanes that disrupted travel to several Caribbean islands.

Petrin said Transat doesn’t expect the storms, which hit 40 per cent of Cuba as well as other islands, will have a significant impact on the winter travel season.

For the full year, Transat’s net earnings attributable to shareholders was $134.3 million on $3 billion of revenues, which compared with a $41.7 million loss on $3.89 billion of revenue last year.