Transat banks on new hotel unit

‘We should have done this a long time ago’

is eyeing locations in Mexico and the Caribbean for its newly formed hotel division, a move analysts say will bring greater stability to the company as it looks for new ways to achieve growth.

The Montreal-based airline and tour operator has said it intends to add 5,000 five and four-and-a-half star rooms over the next several years.

Led by the newly hired Jordi Solé, who previously oversaw operations at various international hotel chains, the hotel division is already looking at its first potential destinations in Cancun and the Riviera Maya in Mexico and Punta Cana in the Dominican Republic.

The hotel strategy was one that Transat had been considering for years. After selling its 35 per cent minority stake of Ocean Hotels back to owner H10 Hotels for $190.1 million in 2017, as well as its tour operating unit Jonview Canada for $44 million, chief executive JeanMarc Eustache said the timing was finally right.

“We should have done this a long time ago,” Eustache said in an interview with the Financial Post.

“Now, after making good money with Ocean Hotels and having that experience (that allowed us to) understand the hotel business, we are ready.”

Eustache said he had initially made an offer to H10 Hotels founder and president Josep Espelt to buy out his 65 per cent stake and turn Ocean Hotels into a Transat operation, but the offer was rejected. Instead, Transat decided to start its own division.

Solé, who will be based out of Miami, said that Transat plans to spend $750 million to launch the network of 5,000 hotel rooms, 3,000 of which would be owned by the company while the remaining 2,000 would be managed rooms. He expects to begin with 1,800 rooms in Cancun, 1,000 in Punta Cana and 700 in Jamaica’s Montego Bay. The division’s target market will be mixed, with 50 to 60 per cent coming from the U.S., 20 to 30 from Canada and the remaining 10 to 20 per cent from Europe and South America.

“We already have a few options on the table that we could invest in, including existing opportunities where we can refurbish hotels and introduce it as a new brand, and also some empty land that is available for a new build,” Solé said.

The hotels will be either five or four-and-a-half star luxury brands, which the company believes present the best opportunity in terms of margins. According to Laurentian Bank analyst Mona Nazir, the hotel business is expected to eventually rival its air and leisure business in terms of earnings before interest, taxes, depreciation and amortization (EBITDA), though with significantly better margins of 25 per cent, as compared to Transat’s margin of three per cent. On a recent call with analysts, chief financial officer Denis Pétrin indicated the Ocean Hotel margin was 35 per cent at the time that Transat sold its stake.

Many analysts have been receptive to the strategy so far.

Desjardins Capital Markets analyst Benoit Poirier wrote in a note earlier this month that despite uncertainty, Transat’s hotel strategy “remains the right one for unlocking shareholder value.”

Nazir wrote in a note to clients last week that the shift to hotels was “a paramount move.”

“The move to slowly bring its newly formed hotel business to 3,000 owned room and 2,000 managed rooms is a necessity which should bring greater stability, a higher margin profile and valuation multiple,” Nazir wrote.

“Should the company’s strategy prove successful, we continue to believe investors could see a doubling of EBITDA to the $200 million range, which could push the stock price to the $24 level.”

Transat’s stock was hovering at $8.30 on the Toronto Stock Exchange as of midday on Thursday.

The hotel strategy comes as Transat is facing increased competition from Air Canada and WestJet, as well as international players, in the transatlantic leisure market.

Eustache brushed off the competition and added that while the hotel strategy will be capital intensive in the short-term, it will pay off in the long-term and put the company in a better position going forward.

“It will take a while ... but in seven years, we will have full capacity,” he said. “It was time to do it.”