CEO Interview - A passion for business
Co-Founder, Chairman, President and CEO of Transat
You have a unique business model. Does that help in this time of crisis?
Our business model is not unique, but it is not typical, at least in North America. We are not an airline. We are an integrated tourism company and tourism is a resilient industry.
People travel for leisure even in difficult economic times. They may downgrade their accommodation or go for one week instead of two, but they take their vacation. Even this year, we are growing our business by 2-3%.
That is not to say that we have not been affected by the crisis. Passenger volumes were up in the first half of the year, but fell by about 2.4% in the third quarter. The Canadian market is holding up well, but sales of Canadian tours out of Europe fell off. And, as we are the biggest tour operator into Mexico, Influenza A (H1N1) cost us about $3.2 million (CAD3.5 million).
Unlike airlines, we typically sell the plane ticket with a land component—a tour, cruise, hotel or whatever. And we can make margins on all of these components. The network air carriers have to make most of their money by filling the plane with a large number of business travellers. And that is very difficult—particularly in a crisis.
What are the drivers of success for an integrated business like yours?
Selling a holiday is selling a dream. The dream starts right from the planning period. The aircraft is a means of transportation, to get the customers started on their journey.
Success comes by fulfilling their dreams. Canadians have limited holiday time, so it’s important that they get the most out of their vacation. Affordability is an issue, but helping them use their limited time as efficiently as they can is equally important. That’s why our approach is based on direct, point-to-point service. If the cruise leaves from Venice, then I want to get the passenger to Venice non-stop and just in time to catch the cruise. No airline comes close to our offering of direct, own-aircraft services on more than 60 city-pairs between Canada and over 30 European destinations.
This also gives us the opportunity to build schedules that would not work for network carriers. Our passengers, for example, will accept leaving at 2am on a Saturday on the promise that they will be on the beach only a few hours later. And they will come back on a Saturday night to be home for a Sunday of rest before going to work.
In our business, the onboard product does not have to be elaborate and fancy to meet our clients’ needs. The product can be simple, but the aircraft needs to be clean, the staff courteous, the food acceptable and the whole atmosphere has to be as fun as possible.
Do loyalty programs have a role to play?
Loyalty does not mean a lot in this business. Some people travel frequently with us because they like our products. But this is the mass tourism business; the majority of our customers are travelling once or twice a year at most. Many of them have stable incomes—like public servants—and are not so affected by the economic climate. They come to us because their annual mid-winter break has become part of their lifestyle, or they go to Europe every couple of years.
Most do their homework online, but buy their travel from an agent. So when they come to us, they will have set price and quality expectations. Frequent flyer points are not what interests them.
You make it all sound very easy.
I started the business from scratch in 1979 with two partners who are still here. In 1987 we went public when we needed the funds to start the airline. Today, we are a $3.2 billion (CAD3.5 billion) business with 6,500 employees.
I’ve seen a lot in 30 years. I have stopped counting the tour companies and airlines that have disappeared during that period. Air Transat is the oldest operator of large commercial aircraft services in Canada that has not gone through a bankruptcy or ceased operations.
This is a tough business. In a normal season we will deal with several hurricanes. Every terrorist attack—on buses, subways, cafés or trains—impacts traveler confidence. SARS hurt us badly in 2003 and Influenza A (H1N1) had a big impact on the Mexican market. We experienced soaring fuel prices during the first Gulf War and also know recession very well. We started Transat in 1979 and by 1982 the world was in recession.
I tell my shareholders that I will be the last of the Mohicans. Transat will survive any crisis because we are prepared and well-seasoned. The secret is to have a vision and be faithful to it.
My vision was to develop a tourism business. In 2001, Air Canada bought Canadian Airlines. Many saw this as an opportunity to develop a competitor to replace this latter air carrier. I had pressure from other airlines, politicians and business people to go into the network airline business. I said thank you very much, but we are a tourism company and will stay a tourism company.
Is that all?
You also need to have flexibility to deliver that vision. As a tourism company, we can offer customers options. If people want to spend less on their vacation, we can downgrade the hotel component of the vacation. We can keep a fair margin and the customer chooses her options. Network airlines have less flexibility because everything they do is related to putting people on board the aircraft.
Flexibility stems from creative thinking. Let’s take our fleet as an example. Air Transat operates big planes: our fleet is essentially widebody, and it efficiently provides the bulk of our capacity. But we also use smaller aircraft on a seasonal basis, or for certain routes, that we charter from other Canadian operators. Some of those chartered planes can sometimes be temporarily borrowed from European operators. And we are exploring other such possibilities of gaining flexibility and adjusting supply to demand.
Does the regulatory regime provide adequate flexibility?
We are making progress, but it could be a lot better. Transat is working closely with the Canadian government to steadily achieve air transport liberalization in our key international markets. While we were generally pleased with the new Canada-EU air agreement concluded last November, we nevertheless felt it could have gone much further in providing Canadian airlines with enhanced access to EU-third country markets, which would have allowed us to provide better long-haul airlift support to our European travel distribution assets.
Transat is also open to progressively removing restrictions on foreign airline ownership. We even tried to own a European airline in the mid-90s. We once had about 46% of Star Airlines (now XL France). We were the largest shareholder, but that is very different from being the owner. I would have preferred to own the company, but it was impossible because of the protectionist foreign ownership and control rules applicable in France at the time. So we sold our interest.
These barriers will disappear as a natural extension of governments getting out of the airline business. I believe that we could see big changes in the next five to ten years.
Does your structure give you cost advantages over scheduled airlines?
Yes. We keep it simple. We only do point-to-point. Our airline concentrates on operations: we want it to be safe, and on-time, and Air Transat does a great job at both. It’s our tour operator units that have all the sales and marketing costs. They even decide on the onboard catering.
That said, moving to a single aircraft type from the current two will help us cut costs from crew training to spare parts inventories. And don’t forget: we also have a defined slow period—from 21 October to 15 December. This allows us to consolidate heavy maintenance, leave, and training in a way that scheduled carriers cannot.
How does Canada’s Crown Rent system at airports impact the business?
I have told everybody that I can from the Minister on down that this indirect tax must be abolished. There is no similar tax for the train system. And we get absolutely nothing for the $276 million (CAD300 million) that the government collects. The airports feel the same way. At the end of the long-term leases, everything, including the multi-billion dollar airport infrastructure improvements paid for largely by air carriers and their customers, will revert back to the Crown.
Have we seen the last of fuel volatility?
I am an economist. Oil at $147 a barrel did not reflect the real price of oil. Saying that it could go to $200 was just fuelling speculation. That made money for lots of people, including governments who taxed fuel. I don’t believe that oil will run out any time soon. We are finding it all the time. Right now there is a lot of activity in northern Canada with Russians, Americans and Canadians all looking. It could cost more to find and extract. But stories about fuel shortages are only self-serving to promote speculation.
We have changed our approach to fuel. We used to hedge fuel starting with a small percentage from two years out. By the beginning of the season, we would be about 50% hedged. But our customers are booking much later. We have just announced to our shareholders a hedging policy that reflects we normally sell 30% of our capacity by the start of the season. The rest of the volatility, we will eventually cover with surcharges.
Are we on the right track with our approach to environment?
Sustainable travel is important. We promote that in our own organization and with our customers, and we are taking a number of initiatives to raise the bar for us and for the industry. Climate change is a reality, and we need to be part of the solution. That said, some European environmentalists have become crazy ideologues with respect to aviation greenhouse gas emissions and don’t understand we have a business to run that is critical to the global economy.
IATA’s four pillar strategy is the right way. We cannot accept punitive taxation as the solution for the environment. We are already over-taxed. Europeans think we are luxury but we serve mass markets with margins of between 1-4%. So along with the discussion on new taxes, we need more action to improve infrastructure, for example. When you wait an hour to land in London, or are number 40 for take-off in Paris, there is an environmental cost. Let’s fix that to improve environmental performance and improve the business.
Have we got it right with security?
We are selling dreams, but the airport security experience can be a nightmare. Technology could do a lot more.
There is also a lot of room for a friendlier attitude. We treat people as if they are all criminals until the screening process proves them innocent. This needs to change.
How do your keep your employees motivated in such a risky business?
First, I love what I am doing. I started the company and watched it grow. So, I know every aspect of the business. I work long days. I might get up at 4:30am in the morning and leave the office late. I thoroughly enjoy what I am doing and I put all of my energy into this company.
Second, the company is like a family. Many employees have been with us from the beginning. I know about 1,000 employees personally. I go to their retirement parties and in some cases I welcome their children to the workforce as a second generation. Even if our company is public, we have managed to keep the feeling of a private, family-run business. The shareholders know this very special relationship that we have and they have confidence in our management.
I tell the employees that we can do great things together because I believe in them and in the company. They know that they are critical to our success. This is what motivates them.
I also treat them well. We all went through this difficult time and only laid off 54 people. I am proud that we were able to contain it at just 54.
And lastly there is passion. We don’t have enough of it in this world. It is not just about making money. It is about believing in what you are doing. We have a passionate team at Transat. And that makes all the difference in the world.