Transat Downgraded Amidst Travel Sector Worries - RBC Analyst

Nick Morton, transportation analyst at RBC Capital Markets, became the latest on the Street to downgrade his earnings forecast for Transat A.T. (TRZAF.PK) given the warning signs around the economy.

The country’s largest travel tour operator faces a difficult winter ahead, he said, with a prolonged recession in Ontario and Quebec draining discretionary spending there, a weaker loonie shrinking Canadian travel dollars across the country, and the threat of a price war breaking out with its competitors Sunwing and Sunquest adding substantial capacity to the market this year.

Historically, investors have been attracted to the generous cash flow that Transat has been able to maintain, but even that is under pressure for next year, he added.

While Mr. Morton maintained his earnings guidance of C$1.39 a share for 2008, he lowered his forecast for 2009 substantially to C$1.14, from C$2.92, and for 2010 to C$1.55 from C$3.77.

His price target was reduced to C$19 a share, from C$34, accordingly.

There are, however, some opportunities for Transat to unlock some of its intrinsic value, such as selling itself, or at least its European operations, to travel conglomerates TUI or Thomas Cook, he noted.

On Thursday, Mr. Morton said in a note to clients:

It is even possible that WestJet (WJAVF.PK) would be interested in Transat (ex-airline) as a way of building WestJet Vacations and preserving the benefits of flying some of Transat's winter flights. Under these scenarios Air Transat, the airline, could be sold/merged with a charter airline such as Skyservice or Canjet.