Lift of American travel ban to Cuba could renew Transat’s U.S. interests

MONTREAL — Transat A.T. Inc. (TSX:TRZ.B) says its longstanding desire to purchase a U.S. tour operator could be bolstered by moves south of the border to lift the ban on travel to Cuba by Americans.

MONTREAL — Transat A.T. Inc. (TSX:TRZ.B) says its longstanding desire to purchase a U.S. tour operator could be bolstered by moves south of the border to lift the ban on travel to Cuba by Americans.

“For sure, we’re still looking at the U.S. market,” president and CEO Jean-Marc Eustache said in a conference call.

“We believe that one day Transat has to be in that market.”

Transat swung to a profit in the fourth quarter despite lower revenues as the travel company benefited from a dramatic reduction in hotel costs along with other savings.

It earned $18.1 million or 52 cents per share for the quarter ended Oct. 31. That was up from a year-ago net loss of $82.4 million or $2.54 per share.

Revenues for the quarter totalled $719.7 million, down from $790.4 million last year as it suffered from lower prices and fewer travellers, particularly in its operations in France.

As the world’s largest tour operator to Cuba, the Montreal-based tourism company is in a strong position to profit from an opportunity to cater to the millions of Americans that would likely vacation in the Caribbean’s largest island.

A bill winding its way through Congress could see the ban on travel lifted as early as spring. Although the legislation doesn’t yet have enough support to pass, U.S. public opinion supports the policy change.

It also has the support of the agriculture lobby, which hopes to increase food exports to Cuba.

American tour operators estimate that nearly two million U.S. travellers could initially visit the Communist country annually. That would contribute $1 billion to airlines and travel agents. Some estimates suggest five million visitors could visit annually within five years.

These days about 2.5 million travellers visit the island each year. Most come from Canada, including 300,000 transported by Transat. But it is also a destination for sun seekers from Britain, Italy, Spain and France.

Before the 1959 Cuban revolution, about 85 per cent of visitors to the island came from the U.S.

Eustache said it could still take time before the country is opened to American travellers. Although it doesn’t own any hotels in Cuba, Transat has multi-year agreements that would protect it from a sudden inflow of new travellers.

Doug Cooper of Paradigm Capital said that although Transat indicated no immediate acquisitions plans, the recession provides the company with the best opportunity to strike a good deal with a U.S. operator.

“If Cuba does open up to U.S. tourists, which I think it will, it’s a huge opportunity and I think they would be interested,” he said in an interview.

As the largest tour operator with the best capital structure, Transat would potentially be “quickest off the block,” Cooper added.

Transat said its nine per cent decline in revenue was largely due to a decrease in average sale prices and a drop in the number of travellers as a result of a weak economy and the spread of the H1N1 virus.

Lower input costs increased Transat operating margin to 4.9 per cent, well ahead of forecasts of 3.7 per cent as direct costs fell 10.5 per cent to $350.2 million.

The primary reason was a dramatic reduction of hotel costs as the weak economy reduced the number of travellers from the United States and Europe.

Profits have grown in the fourth quarter despite having the same number of customers as last year because of lower hotel, airline, fuel and administrative overhead expenses, said Eustache.

“Input costs have been going down for the entire industry and at Transat we have been able to reduce our input costs maybe more than others,” he said.

Transat has reduced its capacity for the first quarter by nine per cent and would also cut in the key February-to-April period to preserve profits if demand slows.

While most competitors are acting responsibly by not increasing capacity, Eustache said Air Canada Vacations and WestJet Vacations have been adding seats unnecessarily.

“It’s because of guys like that we don’t make the money that we should make,” he said.

David Newman of National Bank Financial said Transat’s annual cost savings could total $30 million to $40 million.

“We believe the cost savings achieved by Transat lead to a more favourable outlook” for the company, he said, raising his price target for its stock by $3 to $23.

On the Toronto Stock Exchange, Transat’s shares soared to their highest level in 17 months, gaining more than 14 per cent, or $2.53 to $20.12 in afternoon trading Thursday.

For the fiscal year, Transat earned $61.8 million on $3.55 billion of revenues. That compares to $49.4 million on $3.51 billion of revenues in 2008.

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