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An Air Transat Airbus A330 is shown during the unveiling of the new interior design of Transat jets in Montreal, Thursday, May 17, 2012.Graham Hughes/The Canadian Press

Transat AT's shares surged Thursday after the travel company handsomely beat expectations by posting its first profit in more than a year despite challenges in the European market.

The parent of Air Transat and numerous travel-related businesses earned $9.4-million or 25 cents per diluted share in its third quarter, breaking a string of losses for the Montreal-based company.

A year earlier, Transat reported a $2.8-million net loss or seven cents per share.

Transat's B shares gained more than 15 per cent, rising 61 cents at $4.60 in morning trading on the Toronto Stock Exchange.

Transat's adjusted after-tax income improved to $10.5-million or 28 cents from $2.8-million or 7 cents per share in the year-earlier period.

Revenue was down, however, falling 3 per cent from a year earlier to $909.1-million from $937-million due to planned capacity reductions.

Analysts had expected an eight cents per share loss on $922-million of revenue.

The Montreal-based company said transatlantic travel was satisfactory during the quarter, which spanned the months of May, June and July that mark the start of the summer vacation travelling season.

"The improvement in margin stems from our commercialization efforts and cost reduction measures," stated president and CEO Jean-Marc Eustache.

North American business units earned $11.1-million compared to an operating loss of $15.8-million last year as average selling prices and load factors increased. Revenues dropped $15.6-million due a lower number of travellers following reduced capacity on the transatlantic market and sun destinations.

European operations earned $11-million, down from $30.5-million in 2011. The decrease is partly attributable to the expiration of Transat's contract with Thomas Cook Airways and intense competition in France, where market conditions remain very difficult, especially to North Africa.

Revenue decreased by $12.3-million due to a lower number of travellers and the currency exchange.

Transat's cash position grew to $293-million as it sold asset-backed commercial paper for $57-million.

The company said the outlook for the current fourth quarter from August through October has showed improved business conditions, although the situation remains demanding.

The transatlantic market accounts for a significant portion of Transat's business in the summer. Capacity is about 10 per cent lower but more than 85 per cent of seats have been sold and prices are higher than last year.

Capacity to sun destinations from Canada are down 17 per cent, while load factors and prices are slightly lower.

Bookings in France are slightly higher and prices are similar to last year.

Transat said implementation of its plan to return to profitability is proceeding and it expects increased margin in the fourth quarter.

But Benoît Poirier of Desjardins Capital Markets said Sunwing's plans to boost capacity in sun destinations by 30 per cent this winter will continue to put pressure on Transat.

David Tyerman of Canaccord Genuity said the much stronger results were "a nice surprise" but he remains cautious about the company due to volatile results in recent years."We remain cautious about the outlook, as Transat results have whipsawed between significant upside and downside surprises, largely due to competition factors over which Transat has limited or no control," he wrote in a report.

While the company's profit improvement efforts should help, Mr. Tyerman expects competition will continue to be the main driver of the company's outlook.

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