RBC Analyst: Transat Should Survive Industry Shakeup

RBC Capital Markets said in a report:

Canada’s largest tour operator, Transat A.T. (TRZAF.PK), will be acquired in the next few years, as leading players follow the consolidation trend in Europe and recognize the value of the package holiday industry.

Until then, analyst Nick Morton expects a major shake-up in the industry that will send poorly capitalized names for the exits.

However, as he told clients:

Transat should survive, given its strong balance sheet and will likely buy back more shares.

In the near-term, recent declines in the price of fuel are expected to alleviate some of Transat’s margin pressures.

Mr. Morton said:

The company’s disappointing third quarter results were partly blamed on sharply higher fuel prices, its largest expense, and Transat has huge leverage to lower oil prices. It went into the third quarter with 72% of its fuel hedged and 53% of its estimated 2008/2009 winter fuel needs hedged close to current prices.

Meanwhile, the collapse of Zoom Airlines should provide a boost to Transatlantic profits, since Transat plans to add 25% more capacity there next summer.

Mr. Morton said:

This winter, competition will remain intense as competitors including SunWing, Sunquest, Signature, Air Canada Vacations and WestJet Vacations add substantial capacity at a time when consumers are stretched.

He hiked his price target to C$37 from C$34 and upgraded Transat shares to “outperform” from “sector perform.”