Eustache: quietly but steadily expanding Transat

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In today’s tumultuous North American airline industry, Canadian leisure carrier Air Transat is a rare example of stability
Jean-Marc Eustache established Air Transat in 1987 and exactly 20 years later his airline still has a remarkably similar mission. All of Air Transat’s seats are still sold by the travel agencies and tour operators under the Transat parent company, which Eustache also co-founded and still leads as chief executive and chairman. The airline focuses exclusively on its operation, which has slowly but steadily grown to 15 aircraft. Remarkably, it has stayed out of bankruptcy protection and in the black.
“I’ve seen 22 airlines disappear in Canada,” Eustache says. “I’m the only [Canadian airline] company that hasn’t had financial problems, the only one that has not had to restructure.”
Eustache decided to launch an airline after Quebecair, which supplied capacity for his travel agency Tourbec and tour operator Trafic Voyages, ceased operations. “We lost our supplier and the planes went to [former Canadian carrier] Nationair,” he recalls. “We thought it was a good model to be an integrated tour operator.
He established Transat after completing a C$8.25 million ($7 million) initial public offering (IPO) in 1987, with Transat inheriting Trafic Voyages, acquiring tour operator Vacances Multitour and launching Air Transat as its airline subsidiary.

Expanding empire
With Eustache in charge, Transat has steadily expanded its empire by acquiring several other travel agents and tour operators. In the 20 years since the IPO, the company has seen its revenue base grow from C$20 million to C$2.6 billion.
As its portfolio of tour companies and travel agents quickly grew, so did its airline. “Today the airline represents 20% of our business,” Eustache says.
Last year Transat continued its growth by acquisition strategy by buying Thomas Cook Travel Canada and UK-based tour operator Canadian Affair. The Canadian Affair acquisition allowed Transat to instantaneously double its share of its largest market, Canada-UK. Last summer each company accounted for 200,000 seats in this market. This year they are combining their schedules, resulting in a more efficient operation with more frequencies and more non-stops. Combined, the two will operate this summer 59 flights per week in the UK-Canada market, connecting eight UK and seven Canadian cities with all but one flight operating non-stop.
Eustache claims Transat now has a 24% share of the overall Canada-UK market, including scheduled carriers, or 60 to 65% of the charter market.  From 1996 until last year Transat used Globespan to sell its seats in the UK. Eustache says Globespan managing director Tom Dalrymple tried to convince him to become a partner in his in-house airline, Flyglobespan. But Eustache had to terminate Transat’s relationship with Globespan when he acquired Canadian Affair.
“I told Tom you do what you have to,” Eustache says, adding Flyglobespan is now competing against Air Transat in the UK-Canada market.
While its in-house fleet has grown, Transat continues to use other suppliers to provide capacity. Eustache does not see this strategy ever changing, explaining demand fluctuates seasonally and he does not want his aircraft to sit idle during off-peak periods.
“We’ll always have to rely on outsource,” he says. “I don’t want to have aircraft just for peak season. That’s where you make a mistake.”
Overall, Air Transat provides 75% of Transat’s capacity. About 15% comes from Canadian low-cost carrier WestJet, while the other 10% comes from Air Canada, CanJet and other Canadian carriers. Canadian Affair also continues to use MyTravel and Thomas Cook to provide some seats alongside Air Transat in the Canada-UK market.

Partnership
Transat has been working with WestJet since 2003 and earlier this month extended their partnership for the second time. The new deal involves WestJet operating exclusively for Transat between 20 Canadian cities and 20 resort destinations through to October 2010.
Transat uses WestJet Boeing 737s during weekends, with WestJet operating as many as 100 flights per weekend during downtimes in its domestic schedule. The WestJet aircraft are used mainly to serve smaller Canadian cities that WestJet already serves domestically and that Air Transat could only serve if it repositions aircraft.
“The smaller aircraft like the Airbus A320 and Boeing 737 we take from other airlines,” Eustache says. “We’re the biggest customer of WestJet.”
Air Transat operates 11 259-seat A310s and four 362-seat A330s, mainly on routes to the UK, France and other European destinations in the summer and to Caribbean destinations in the winter. It will add a 12th A310 later this year. Unlike WestJet, Air Transat is a full-service operator, offering in-flight entertainment and meals in a two-class configuration.
“The airline for us is just operations. It doesn’t do any sales,” Eustache says.
The airline has 1,900 employees and a separate management team led by president and chief executive Allen Graham. Transat also has its own handling subsidiary, Handlex, which has 1,100 employees and is led by chief executive Jean-Luc Pariement. Handlex provides ground services, including check-in and cargo handling throughout Canada, for Air Transat and other carriers.
While Air Transat and Handlex are run separately, their management teams report once per month to Eustache. Air Transat is now evaluating possible replacement aircraft but Eustache stresses the final decision will be made by the parent company.
Eustache declines to say which new aircraft are under consideration or when a decision will be made. But he says Air Transat will stick with a mix of new and old aircraft. That may seem like an odd strategy as many airlines are keen to go to all-new fleets to reduce maintenance times and operating costs. But Eustache says having old aircraft allows Air Transat to schedule heavy maintenance cheques between the summer and winter peak seasons.

Atypical model
Air Transat may have an atypical business model but Canada is not your typical market. Eustache explains Canada’s small isolated population makes it difficult for most carriers to serve any market except Montreal and Toronto. “We’re flying everywhere,” he says, pointing out Air Transat has two flights per week to Mexico from Komax, a tiny town of only 100,000.
Unlike their American counterparts, Canadian consumers also still use agents instead of the internet or call centres.
“It will change but it will take time. It doesn’t mean Canadians don’t look at the internet. Canadians look at internet and price compare. But they don’t pay on the internet. They got to the travel agent and pay,” Eustache explains.
Canadians typically take two to three holidays per year. In the winter they go south and in the summer they go to Europe. Transat has exclusive deals with hotels in the Caribbean and many of these hotels do not sell direct. In Cancun, Mexico, where Air Transat operates 31 flights per week in the winter, Transat books 5,000 rooms per day at local hotels
 “The market is different. That doesn’t mean in five years something will change. But right now nothing is there,” Eustache says.
Transat’s relationship with Air Canada also seems unusual as Air Canada has its own holiday division and operates on many of the same routes. But Eustache does not see Air Canada as a competitor.
“They know we’re in the leisure market,” he says. “I try not to compete against them. I have a good relationship with them. They don’t see me as a competitor.”

Low-cost competition
Eustache is also not concerned about competition from new long-haul low cost carriers. He says fuel, maintenance and aircraft cost the same for everyone. Air Transat’s labour costs may be higher than new entrants, but as they only account for 13% of overall operating costs “it won’t make a huge difference at the end of the day”.
So far Eustache has grown the airline organically, although his travel agent and tour operator business has grown through acquisitions. In did acquire a large minority stake in one foreign airline, French leisure carrier Star Airlines, but sold it in 2005. “We couldn’t make any decisions at 49%,” Eustache explains, adding foreign ownership caps prevented him from buying more.
Eventually he sees these types of restrictions easing and, when that happens, Eustache may go on an airline buying spree. Eustache is fond to point out that Air Transat has “quietly” become the seventh largest leisure carrier in the world and even after 20 years at the helm Eustache is not yet ready to stop.
“I’d be happy to own an airline company somewhere in Europe,” he says. “I’m number seven now. I’m pretty sure I’ll be number five in five years.”

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