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Outgoing Transat CEO aims to cap tough decade with new leadership, push into hotel business

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Monday, November 20, 2017 – Page B1

MONTREAL -- Canadian leisure-travel provider Transat A.T. Inc. is betting new senior leadership and a hard push into hotels will reverse its fortunes after a difficult decade on the stock market that wiped out three-quarters of its share value.

Jean-Marc Eustache, 69, a college rabble-rouser who founded Transat 30 years ago with two friends, says he plans to step down and hand the chief executive job to current operations boss Annick Guérard, 46. Mr. Eustache will remain to oversee the company's emerging hotels strategy but will gradually reduce his involvement, also relinquishing the chairmanship. No specific timelines were given.

"I don't believe in dynasties," Mr. Eustache said during a remarkably candid interview at Transat's Montreal headquarters on Nov. 15. "The old man is good but at one point, he's too old. So you have to put a new generation in charge that's going to build the company and bring it somewhere else."

It has been a tough 10 years for Transat shareholders, which include long-time institutional investors such as Letko, Brosseau and Associates and the FTQ Solidarity Fund. Transat's share price has plunged from $41.50 in November, 2007, to roughly $11 today, the result in part of competitive pressure as rivals Air Canada and WestJet increase capacity to sun destinations and gobble up market share.

The trendline since the spring has been much more positive.

Profit for the most recent third quarter came in ahead of expectations as more transatlantic travellers booked trips. Management has signalled that gains the loonie has made against the U.S. dollar since May could help the company end its string of winter-season losses.

Transat has more than $1-billion in costs every fall that it has to pay in U.S. dollars, including fuel. It last posted a winter profit in 2009.

Crucially, Transat is now making a major strategic push into beach hotels it believes will unlock a new stream of earnings power. Mr. Eustache said he's aiming to generate $100-million of annual earnings before interest, taxes, depreciation and amortization from hotels alone within 10 years. That's roughly the level of EBITDA Transat made company-wide in each of fiscal 2014 and 2015.

"One of the reasons [I'm doing this] is I want to make more money for shareholders," Mr. Eustache said, noting profit margins on allinclusive hotel operations in sun spots can top 30 per cent.

"I'm not making a lot of cash with the airline and the tour operators and travel agencies and the internet."

Transat will look to buy one or two existing hotel properties to start, adding to the portfolio later with new buildings of its own.

The company will first target Mexico, the Dominican Republic and Jamaica. Mr. Eustache points to U.S. resort management and tour operator Apple Leisure Group as a potential model. He wants a chain of 5,000 hotel rooms by 2024.

Selling non-core assets such as their France and Greece operations, a minority interest in Ocean Hotels and their Canadian tour operator business has given Transat more breathing room to execute the hotel strategy over time, said Mona Nazir, an analyst at Laurentian Bank Securities in Montreal. The company expects to have roughly $425-million of cash available to fund the hotel push by December, in addition to future cash flows, with access to a similar amount of debt.

"Less than two years ago, Transat's profitability declined by over 80 per cent and there was concern about their competitiveness, strategy and declining cash," Ms. Nazir said.

"But this year, we have seen a marked improvement in income and combined with the recent divestitures, they are in a very strong position. Backed by a strong balance sheet, time is on their side and gives them flexibility to look for the right deal."

As he reflected on 30 years of corporate history, Mr. Eustache, a selfdescribed "quiet person" who doesn't like plane travel, expressed pride in creating a strong airline.

He said he believes that people generally appreciate Air Transat today, despite the odd misstep like this summer's Ottawa airport incident, whereas that wasn't always the case. The carrier continues to modernize and plans to gradually renew its fleet with 10 new Airbus A321 airliners through 2020.

But the CEO also revealed extraordinary regret.

That he waited this long to launch a hotel chain. That many investors in North America still don't seem to understand Transat's vertically integrated business model ("They say 'Woof, what's that, my friend? What are you doing in life?' "). That he didn't look outside the company for the savvy and skill to build it faster, finding out instead how to do things the hard way with those who were already there.

"Now I'm bringing in a lot of new expertise and I'm asking [our longterm staff] to work with these new people and to learn about what they're bringing," Mr. Eustache said.

"And this is changing the company completely."

It's making it younger, for one.

With Ms. Guérard in charge and expanded responsibilities coming for chief digital officer Bruno Leclaire, the Transat executive-team age bracket will shift down to a 45to-55 age range instead of the current 55-to-65, human-resources chief Christophe Hennebelle said. He's 45.

"I think the company really has a new start with another gang coming in," Mr. Eustache said. "A new generation, change the company.

And I think shareholders will be happy with that."

Huh? How did I get here?
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