Transat buys land in Mexico's Yucatan Peninsula to build beach resort

An Air Transat A310 Airbus is shown in this undated photograph. (Jeff McIntosh/The Canadian Press)

MONTREAL -- Transat A.T. has taken its first concrete step toward getting shovels in the sand on its $750-million plan develop a hotel chain in the Riviera Maya and the Caribbean, announcing a deal Tuesday to buy land on Mexico's Yucatan Peninsula.

The Montreal-based travel company said it aims to build a beach resort on a newly purchased lot in the village of Puerto Morelos -- less than 40 kilometres from Cancun -- and on an adjacent property, for which it has signed a promissory agreement.

The combined deal would cost between US$54 million and US$57 million, Transat said.

Chief executive Jean-Marc Eustache has said he plans to spend his final year or so with the company he co-founded in 1987 putting together a network of hotels he hopes will better position the holiday tour operator against heightened competition from Canadian rivals.

"Our company's future growth will be built on hotel development and, obviously, the strength of our leisure travel business," Eustache said in a release.

The company, under the watch of his replacement and chief operating officer Annick Guerard, said it hopes to own or manage 5,000 rooms in Mexico and the Caribbean by 2024, in a bid to defend its turf against Air Canada Rouge, WestJet Vacations and Sunwing.

"For sure we will make money with the hotels. That's where the money is today," Eustache said on an earnings call with investors earlier this month.

Over the last few years, Transat has simplified its fleet to give it more flexibility, improved its digital footprint, beefed up the number of trips it sells directly and improved revenue management.

Last October, it sold its 35 per cent stake in its Ocean Hotels joint venture for $186 million. The next month, Transat signed a deal to sell its Jonview Canada subsidiary to a Japanese company for $44 million.

Headwinds hit the company in May and June, as a fuel spike sent the carrier on course to its least profitable third quarter in a decade.

Transat says the promissory land deal in the Yucatan is expected to close around Nov. 1.

Located on the Riviera Maya, the palm-lined port town of Puerto Morelos sits between Cancun and Playa del Carmen, and about a 20-minute drive from Cancun International Airport -- "an important lever to attract customers," said Benoit Poirier of Desjardins Capital Markets.

The area already hosts about 85 hotels, but only one five-star hotel, Poirier said, making the project "an excellent opportunity for Transat to establish its presence and differentiate itself in the luxury-brand range."

After talking with management, Poirier forecast the beachside resort would, in five years, yield between US$30 million and US$34 million before interest, taxes, depreciation and amortization.

He said the two properties could support up to 900 rooms, which he estimated would cost between $US200 million and US$225 million to build.

Construction, which Poirier expects would be paid for entirely with Transat's "excess cash on hand," is expected to start between seven and nine months from now, with an opening date of winter 2020-21, he said.