By: Benj Gallander

Published: May 7, 2025

Ready to take to the skies this summer? Montreal-based Air Transat Inc. would love to welcome you aboard. The industry is not exactly flying high as many Canadians turn their backs on flying to Donald Trump’s United States of America, and stay closer to home instead.

We have flown with this carrier many times, and its often very competitive pricing made it one of our frequent choices back in the day when our wallets were much thinner. Fortunately, our frames were slim, and thus it was not a challenge to squeeze into the minimal space allotted. Still, we beggars could not really be choosers as flying had to be had at a reasonable – read “cheap”– price.

But how does Transat look as an investment? Well, this is a classic example of a huge potential reward, accompanied by the ultimate risk – bankruptcy. In 2020, the stock traded north of $16. At that point, Transat was in play as Air Canada was keen on buying the enterprise. That deal fell through as it could not get European Commission approval.

The best way for the stock price to jump would be another takeover bid, but that does not seem very likely unless the company has to be rescued and perhaps the government cajoles Air Canada into making a bid, which is not out of the question. Might a foreign entity in the aviation field make a takeover run? Don’t bet on it. And again, getting approval could be very difficult. The stock has slumped to about $1.50.

Let us look at some of the numbers. Revenues last quarter were up to about $829.5-million, a lovely jump from $785.5-million a year ago. Free cash flow was $129.1-million, a huge leap from $39.1-million. But while these numbers are pleasing to the page and appear to bode well, the bottom-line loss more than doubled to $122.5-million. Ay caramba!

Fortunately, creditors are being “kind,” with the LEEFF (Large Employer Emergency Financing) subordinated debt financing of $312-million being extended one year to April, 2027, and the LEEFF secured financing maturities to November, 2026, from February, 2026. The company’s line of credit was also extended to November, 2026. Worth noting is that the carrier’s main lender is the federal government and that negotiations initiated about 18 months ago are continuing. It would not surprise us to see Ottawa defer some of the debt or lower or relinquish the interest fees.

Debt relief would be a welcome development as Transat’s balance sheet is terrible. In addition to begging the government to lend them money and extend maturities, the current debtratio is under one, far below where you’d ideally want it to be.Any one of these features on their own would be enough of a challenge for any enterprise, but together the crappy current ratio, high debt, and negative equity could crash the company.

It’s no wonder that with the stock price is hovering at $1.50, there is the smell of desperation. New baggage fees ranging from $35 to $50, while certainly a help, can only do so much, especially since customers now often use carry-ons to avoid them. And one must wonder after passengers get stuck with the baggage fees once, if they might look at other airlines in the future.

Transat’s future depends partly on the economy. In good times people travel more by airplane; in not-so-good times, they vacation less or hop in the car for trips. This time around, in addition to a potential economic contraction, the U.S. is facing a trade war backlash. According to OAG Aviation Worldwide, bookings to the U.S. have dropped by more than 70 per cent for every month through September, 2025.

In response to this contraction, Transat has reduced capacity to the U.S. by 10 per cent. It may have to cut volume again. Fortunately, journeys from Canada to other locations have picked up some of the slack.

Meanwhile, major competitor Air Canada is not thriving. The stock price has been almost halved from where it was toward the end of last year. That is contrary to what one would expectas revenue in 2024 was up 2 per cent year-over-year to a record $22.3-billion, with free cash flow of $1.3-billion. The bottom line was black, to the tune of $1.72-billion. More than 20 million shares were purchased and cancelled. Oh wait, the loss last quarter was $644-million, which is certainly a primary reason for the downdraft in the stock price. More will be known soon when the company presents results at the end of this week. We can see why many investors would consider this outfit as a buy, with an initial sell target in the $25 range. For us though, we would like to see at least the initial sell target be at least a double from the current valuation of around $14.65.

But how are we playing Air Transat? Quite simply, at this time, we are not. This could be one of those situations where paying double the current price for shares, when the corporate future is more secure, is a better deal than purchasing now. Our due diligence is continuing and perhaps during our primary buying season in tax-loss selling in December, we could jump in. Odds are that the acquisition would be light, given the uncertainty of the enterprise’s future. We temper the amount that we’re willing to plunk on the table when the investment is as speculative as this.