Deleveraging And Network Diversification Will Support Stronger Long Term Travel Demand

Catalysts

About Transat A.T

Transat A.T operates leisure-focused air travel and tour operations, connecting Canadian travelers to sun and transatlantic destinations.

What are the underlying business or industry changes driving this perspective?

• Deleveraging following the restructuring of government debt and preferred share redemptions substantially lowers interest expense, directly supporting future net income growth.
• Progress on resolving the Pratt and Whitney engine issues and the gradual return of grounded A321LR aircraft unlocks additional capacity and higher utilization, improving revenue and operating margins.
• Network diversification with longer haul routes such as Istanbul and Rio de Janeiro, plus 14 new winter routes, expands year round demand and should lift revenues and stabilize seasonal earnings volatility.
• The Elevation program, targeting $100 million in adjusted EBITDA gains by mid 2026, combines cost reductions and revenue management upgrades that are poised to widen net margins as benefits back end into results.
• Deepening partnerships with Porter Airlines and Turkish Airlines, along with a planned loyalty program launch in fiscal 2026, enhances customer stickiness and connecting traffic, supporting higher yields and sustained revenue growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Transat A.T's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 8.7% today to 0.0% in 3 years time.
• Analysts expect earnings to reach CA$1.8 million (and earnings per share of CA$0.02) by about December 2028, down from CA$295.6 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CA$2.7 million in earnings, and the most bearish expecting CA$951.2 thousand.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 106.8x on those 2028 earnings, up from 0.4x today. This future PE is greater than the current PE for the CA Airlines industry at 31.1x.
• Analysts expect the number of shares outstanding to grow by 2.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.17%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The leisure travel cycle is vulnerable to sustained pressure on consumer discretionary spending. Management is already seeing softer load factors, more last minute bookings and downward trends in yields, which could cap revenue growth and compress net margins over time.
• Intensifying competition on core European and South routes from both Canadian and foreign carriers, including new low cost entrants and disruptive pricing, risks structurally lower yields and load factors, putting long term pressure on revenue and earnings.
• The long running Pratt and Whitney GTF engine issues have kept a meaningful share of the fleet grounded for more than two years. Any prolongation or new technical constraints would limit capacity growth, reduce aircraft utilization and weigh on operating margins and earnings.
• Recent profitability is boosted by one time debt extinguishment gains and temporary tailwinds from lower fuel prices. If fuel costs normalize higher or efficiency programs underdeliver, the underlying business could remain structurally low margin with weaker net income.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of CA$3.23 for Transat A.T based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CA$5.5, and the most bearish reporting a price target of just CA$2.25.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be CA$3.7 billion, earnings will come to CA$1.8 million, and it would be trading on a PE ratio of 106.8x, assuming you use a discount rate of 11.2%.
  
• Given the current share price of CA$2.65, the analyst price target of CA$3.23 is 18.0% higher. Despite analysts expecting the underlying business to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.