Canada’s largest charter airline Air Transat faces a dilemma most airlines would love – what to do with a cash surplus of C$498 million ($423 million).
The carrier’s holding company Montreal-based Transat has come under pressure because its share price has slid 22% this year while the company sits on this huge reserve. Two New York hedge funds, which together own 14% of Transat stock, claim the share price is “extremely dislocated” from the company’s value because of this surplus. They have asked Transat to spend at least C$290 million in a share buyback.
Transat’s board responded with a more modest and cautious plan. Jean-Marc Eustache, Transat chairman, says the company will make a “return of capital” of C$125 million. The board will decide whether this will be via a special cash dividend or a share buyback.
With rising costs and declining profits, the board wants to keep C$100 million as a contingency fund for next year, which Transat warns will be “difficult and challenging”. Citing hurricane disruptions at tourist destinations in Mexico and the Caribbean, the fear of an avian flu outbreak, terrorism threats and high fuel prices, Eustache insists that the airline, which sells vacation packages and operates 14 widebody aircraft, needs this buffer.
The board has also decided to commit C$300 million over three years to grow Transat’s presence in tourist markets. As a first step, the carrier says it will buy 20 French travel agencies to control more of the distribution network in France, one of its largest markets. Shareholder response to this emphasis on contingencies and growth has been lukewarm.
Source: Airline Business
