Annual Report
Transat A.T. Inc.
2006
Transat A.T. Inc. is an
integrated international
tour operator that
specializes in holiday
travel. It offers more
than 60 destination
countries and distrib-
utes products in
approximately 50
countries. Transat
owns an air carrier,
offers destination
services and operates
an extensive distribu-
tion network. The
Company has a
dedicated team of
thorough and efficient
people who deliver
quality vacation travel
services at affordable
prices to a broad
customer base.
Message to Shareholders
8
Transat Around the World
14
Key Figures
16
Management’s Discussion and Analysis
17
Management’s Report and Auditors’ Report
41
Consolidated Financial Statements
42
Supplementary Financial Data
62
Board of Directors
63
Management
64
Highlights
Revenues totalling $2.6 billion and net earn-
ings of $65.8 million, compared with $2.4 billion
and $55.4 million respectively in 2005.
Strengthening of our presence in Ontario and
Western Canada with the acquisition of 191
travel agencies.
Entry into the outgoing British market with
the acquisition of The Airline Seat Company
(Canadian Affair) for a total cost of $43.7 million.
Increase in our French sales and financial
recovery for Look Voyages in France, which
posted a profit in 2006.
Repurchase of shares totalling $125 million
and introduction of a quarterly dividend.
(In thousands of dollars
except amounts per share)
2006
2005
Revenues
2,603,746
2,364,481
Net income
65,770
55,416
Diluted earnings
per share
Cash and
1.85
1.33
cash equivalents
214,887
293,495
Cash flows relating
to operating
activities
113,279
74,156
In 2007, Transat
turns 20. Established
in 1987, it now ranks
among the largest
integrated tourism
companies in the world.
www.transat20.com.
More than 60 countries for rest or discover y
Cuba • Australia • Greece • Kenya • India • Jamaica • Norway •
Canada • France • Germany • Nicaragua • Japan • Guatemala ...
Cruises, individual or group tours, all-inclusive, air only...
Austria • Thailand • Argentina • United Kingdom • Tanzania • Spain •
China • Czech Republic • Uzbekistan • Honduras • Finland • Ireland ...
For a memorable experience, you will find us in the field
Mexico • Canada • Greece • Dominican Republic • United States •
l
r
e
i
t
u
o
C
n
e
i
t
s
a
b
é
S
/
Q
O
T
M
©
Tunisia • Italy • Senegal • Turkey • Egypt • Morocco • Bulgaria ...
Message to Shareholders
A year marked by growth and expansion in a vibrant market
gateways. In fact, the combined use of Air Transat’s
wide-bodied aircraft and other carriers has enabled
us to offer departures from 22 Canadian centres.
Transat Tours Canada's main brands repre-
sent distinct product ranges and tailored distribution
strategies. Nolitours offers all-inclusive packages to
sun destinations. Travel agents get lower commissions
while Nolitours makes significant marketing efforts
to reach consumers. Nolitours products can also be
purchased on-line. Transat Holidays offers both all-
inclusive South destinations as well as European
destinations, with a focus on more exclusive and
superior hotels. Transat Holidays also offers the finest
cruise itineraries from the world’s leading cruise
lines. Products are available through travel agency
networks across Canada and product information
can be found on-line.
In 2006, Transat Tours Canada implement-
ed a regional sales structure and a national market-
ing organization working on an integrated basis for
Transat Holidays and Nolitours. This new approach
will help enhance our marketing efforts.
On a different front, we have introduced elec-
tronic tickets and other travel documents to replace
paper copies. This move will help reduce costs and
save time.
Given the challenges that the industry has
had to face, 2006 proved to be an excellent year for
Transat. We grew our sales, turned in an enviable
financial performance, made progress with the imple-
mentation of our strategic plan and increased our
size. We are more focused than ever on holiday
travel and offer packages, tours or flights to over
60 destination countries. We market products in
approximately 50 countries, primarily in Canada,
France and the United Kingdom.
The tourism market has remained buoyant
in spite of certain unforeseen events, such as Hurri-
cane Wilma, which considerably affected the winter
season of travel from Canada and France to Cancùn,
Mexico.
Travel is growing steadily; however, interna-
tional tour operators, already dealing on a day-to-
day basis with fierce competition, must also adapt
to a changing landscape, as tourists originate from
increasingly diversified countries, rely more and more
on the Internet, wait until the last minute to book
their trips and select ever-more-varied destinations.
Winter 2006 in the outgoing Canadian market
The outgoing Canadian market was active
in winter 2006. Our two main tour operators, Transat
Holidays and Nolitours, operated by Transat Tours
Canada, generally increased their customer bases.
Still avid sun-seekers, Canadians remained loyal to
all-inclusive packages, by far our star product during
the winter. In this respect, we maintained our lead-
ership position with the most diversified range of
products and services in Canada, not only in terms
of destinations (more than 30 in approximately 15
countries) and hotels (over 300), but also in terms of
8
2006 Annual Report Transat A.T. Inc.
Jean-Marc Eustache,
Chairman of the Board, President and Chief Executive Officer
The most significant business factor remains
the intensity of competition, primarily in Ontario,
and the resulting pressure on margins. Although
demand is on the rise, supply is also growing, due in
part to weakening industry barriers to entry. Given
these circumstances, tour operators have to remain
very attentive and focused on the introduction of
new destinations and exclusive hotels, prices, mar-
keting, quality of service and customer satisfaction.
The cruise market, although smaller than the
market for all-inclusive packages, is growing faster
than the tourism market as a whole. The major ship-
owners with which we work are adapting rapidly and
offer an increasingly diverse range of activities. Our
distribution network and our air capacity between
Canada and Florida, among other factors, have
enabled us to become one of the leaders in this
market in Canada.
Summer 2006: the Canada-Europe
transatlantic market
Although we are maintaining significant
capacity between Canada and sun destinations,
our direct flights between Canada and some 30
European destinations represent the bulk of our
summer business. In Canada, we offer a wide range
of packages, tours (both escorted and independent)
and other travel services to people visiting Europe;
our tour operators and partners in Europe market
similar services for Canadian destinations. Our trans-
atlantic customer base grew in 2006.
Canada-UK routes represent the largest
Canada-Europe market segment, and competition
is especially fierce. In August 2006, we acquired
our main competitor on that market, the British tour
operator The Airline Seat Company, better known
under the Canadian Affair brand. This is the first
time since 1987 that we are entering a new market
as an established outgoing tour operator, and this
acquisition, which represents a total cost of $43.7
million, is a direct outcome of our strategic plan
adopted in 2005. The combined striking force of
Transat and Canadian Affair represents a potential
capacity of 400,000 seats between Canada and the
United Kingdom, up by approximately 200,000. We
are therefore better positioned to operate these
highly coveted routes in the summer of 2007.
The acquisition of Canadian Affair is also
strategic because it is enabling us to significantly
upgrade our distribution network in the United
Kingdom. Whereas for many years we relied exclu-
sively on a single wholesaler to sell our products, we
are now benefiting from a multi-channel system that
will expand our reach by 2007: we will be able to
market our seats through Canadian Affair (which has
a remarkable 80% direct-sale rate, including 50%
online), on our UK websites, directly to travel agen-
cies thanks to our B2B Internet platform and the
airline industry’s global distribution systems (GDS),
or through other tour operators under non-exclusive
agreements.
9
2006 Annual Report Transat A.T. Inc.
In the summer of 2006, we introduced a
new route to Spain (Madrid) from Toronto and
Montreal with a complete program of escorted and
independent tours, accommodation packages and
excursions. This new destination proved to be as
successful as expected and we will move forward
with other new destinations, including in Spain.
As of 2007, our Canadian departures toward
Europe will be marketed entirely by Transat Holidays;
the objective of this move is to fully capitalize on
growing awareness of our brand.
national website and sites specific to local travel
agencies, and meets the expectations of both trav-
ellers and agencies.
In 2006, Transat Tours Canada introduced
Agent Direct, a new Web-based platform geared
toward travel agencies. This latest-generation B2B
tool, which is highly user-friendly and efficient, enables
our tour operators and all travel agencies that sell
our products to work together online. The imple-
mentation work will continue in 2007 with the addi-
tion of new functions.
Canadian distribution network
Although the vast majority of Canadian
vacationers still prefer to deal with a travel agency,
direct sales are up, as an increasing number of trav-
ellers are turning to call centres or websites. Sales
on airtransat.com, for example, have increased sig-
nificantly in 2006.
Transat is consequently developing an
enhanced, multi-faceted approach to meet the pref-
erences of all customers. We are entering an era of
multi-channel distribution and the challenge is to
ensure that many distribution strategies blend
smoothly.
In accordance with our three-year strategic
plan, we have significantly strengthened our pres-
ence on the Canadian market with the acquisition of
191 Marlin Travel and Thomas Cook travel agencies,
primarily in Ontario and Western Canada, at a total
cost of $8.3 million. We have thus become the
largest network of travel agencies in Canada and
increased the number of our outlets in Ontario—the
largest regional market in the country—to close to
140, compared to fewer than 60 prior to the acqui-
sition. The new travel agencies, about 20 of which
offer foreign exchange services, will all operate under
the Marlin Travel banner.
The acquisition, completed in May 2006,
paved the way for the reshaping of our Canadian
distribution network, now known as Transat Distri-
bution Canada (TDC). Headed by Philippe Sureau,
TDC is in charge of all retail distribution in the
Canadian market. TDC’s main objective in 2007 will
be to increase the sale of Transat products through
agencies. With this in mind, we launched a new
Internet platform in fall 2006 aimed at customers of
the Club Voyages banner. It cleverly combines a
Our air transportation subsidiaries:
Air Transat and Handlex
On the Canada-Europe and Canada-sun
destination routes, Transat fulfils approximately
85% of its airline seating requirements through its
wholly owned subsidiary Air Transat, which is still the
largest international charter specializing in holiday
travel in Canada. Our tour operators rely on other
carriers, primarily WestJet, with which we have
an agreement valid until October 2007, to cater to
the remaining 15%. In the summer of 2007, we will
also be using Thomas Cook Airlines and My Travel
Airways for flights between Canada and the United
Kingdom, as both of these airlines are partners of
Canadian Affair. In France, our tour operators use Air
Transat and several European carriers.
At the end of 2006, Air Transat was operat-
ing 15 Airbus aircraft (4 A330s and 11 A310s). A
16th aircraft will join the fleet in 2007.
The performance of our carrier in 2006 was
remarkable on all fronts. The company recorded on-
time performance and fleet reliability rates among
the best in the industry. Surveys indicate that cus-
tomer satisfaction remains very high. Air Transat
once again improved the scope of its services with
the official launch of its Kids Club, which offers a
range of services geared specifically toward families.
In addition, the Air Transat team is recognized for
being at the leading edge of safety-management.
Tight control over operating costs continued
to yield results. Following an in-depth review initiated
in 2003, Air Transat developed and implemented a
fuel-management program that helped reduce con-
sumption (by approximately 5%), costs and green-
house gas emissions.
10
2006 Annual Report Transat A.T. Inc.
Tourgreece, in Athens, is our only European
incoming tour operator. Its products are distributed
internationally through Transat and other tour oper-
ators, including into the United States, where we
saw spectacular growth in 2006.
We have 72 travel agencies in France—
38 under the Look Voyages banner and 34 under
that of Club Voyages. The integration of the approx-
imately 20 agencies acquired in 2005 has now been
completed.
The incoming Canadian market
In the incoming sector, Transat and the
Canadian tourism industry face a transition period.
The main markets from which Canada attracted
its customers in the past, namely the United States
and Western Europe, are showing signs of maturity.
According to the data available, in 2005 Canada
was the only country in the Americas that saw its
foreign tourist numbers decline. This is largely attrib-
utable to the marked decrease in U.S. tourists who,
under normal circumstances, account for approxi-
mately 75% of foreign visitors in Canada. Although
the drop would appear to be partly caused by a
decline in the destination’s attractiveness and the
rise in the value of the Canadian dollar, it is also due
to insufficient government-sponsored promotional
efforts, at a time of rising investments by competing
destinations.
Jonview Canada remains the largest incom-
ing tour operator in Canada with nearly 240,000
customers in 2006—a 6% increase that is quite
remarkable given the market decline. Jonview offers
its products in some 50 countries, not only in
Europe—which is its main stronghold—but also in a
growing number of emerging markets. Its efforts have
yielded positive results, primarily in Latin America.
The World Tourism Organization expects interna-
tional tourism to continue growing and to originate
largely from these new markets, which are clearly in
our sights.
Like all airline companies, especially in
Canada, Air Transat incurs additional costs stem-
ming from the increase in fees payable for the use of
airport facilities and the introduction of increasingly
complex security measures. Like other carriers, it is
therefore seeking additional sources of revenue,
including through the sale of optional services to
travellers.
Handlex provides logistical support to Air
Transat and more than 20 other carriers in Canada.
The services provided include passenger check-in,
baggage-handling, cargo, aircraft cleaning and ramp
services. In 2006, Handlex signed new contracts and
opened a third base in Vancouver, in addition to
those in Montreal and Toronto.
Our outgoing and incoming European tour operators
Our two main tour operators in France—
Look Voyages and Vacances Transat (France)—
posted revenue increases in 2006. The rate of the
increases, higher than the tourism-market average,
indicates gains in market share. Vacances Transat
(France) posted a less considerable increase in rev-
enue due to the impact that Hurricane Wilma had on
Cancùn, Mexico, and the difficulties that France
experienced introducing the new biometric pass-
ports required for entry into the United States.
Vacances Transat (France) remains the lead-
ing French tour operator to Canada and the United
States, and offers a diversified range of destinations,
including countries in South America, Africa and Asia.
The operations of Bennett Voyages, which special-
izes in packages and tours to Scandinavian coun-
tries, the United Kingdom and Eastern Europe, and
which we acquired in 2005, have been integrated
within Vacances Transat (France).
Look Voyages had an excellent year. With
the sale of air-only a thing of the past, we can now
focus on our core product: holiday packages. Look
Voyages is now referenced by the two largest travel
agency networks in France. It has increased its
product range, with more departures from more cities.
A first-tier international tour operator in France, Look
Voyages continues to focus on its Lookéa clubs,
which numbered 17 in summer 2006. These resort
clubs offer French tourists all-inclusive packages
in a francophone environment in Mexico, the
Caribbean, Africa and Europe.
11
2006 Annual Report Transat A.T. Inc.
Financial position
For fiscal 2006, we posted revenues of
$2.6 billion and a margin of $126.9 million. Net earn-
ings stood at $65.8 million, or $1.85 per share (on a
diluted basis). In 2005, revenues amounted to approx-
imately $2.4 billion, the margin reached $120.6
million, and the net earnings totalled $55.4 million,
or $1.33 per share (on a diluted basis). Excluding a
gain on disposal of an equity interest and the rever-
sal of restructuring charges, 2005 earnings were
$48.7 million, or $1.17 per share (on a diluted basis).
Once again, the year was marked by very
high aircraft fuel prices. Our bill for this essential com-
modity increased more than 90% in two years, ris-
ing from $128 million in 2004 to nearly $200 million
in 2005 and nearly $248 million in 2006, while rev-
enues rose only 18% during the same period. We
successfully offset part of the rise through hedging,
which we pursue actively, and surcharges. The effects
of the latter are limited, however, due to pressures
on selling prices.
Transat remains in a healthy financial position.
As at October 31, 2006, our debt had decreased and
our cash position reached $214.9 million. We bought
back approximately 1.8 million shares at $19.40 each
through a $125 million substantial issuer bid closed
on January 3, 2006, and we introduced a quarterly
dividend.
The 2006-2008 three-year strategic plan
The year 2006 was the first of the three-year
strategic plan adopted in 2005. As previously stat-
ed, we have achieved some of the major milestones
of this plan, namely our entry into the outgoing UK
market, the expansion of our Canadian retail distri-
bution network (in particular in Ontario), the intro-
duction of new destinations, the launch of new tech-
nological platforms and the integration of companies
and travel agencies acquired in 2005. In addition,
we succeeded in bringing Look Vacances back into
the black within the anticipated timeframe. In brief,
2006 was marked by decisive advances.
Besides the acquisitions and implementa-
tion of new systems, it is important to highlight that
we have an increasingly clear vision of the multi-
channel distribution system that we are seeking to
introduce, and we have made significant progress in
that regard. The foundations of such a network are
in place in our three key markets—Canada, France
and the United Kingdom—and we continue to fine-
tune the model, which we expect will play a crucial
role in our long-term growth.
We plan to stay the course in 2007, espe-
cially in Ontario where we are aiming to grow our
market share. In addition, our three main priorities
are to establish ourselves as a tour operator in the
United States, to enter the hotel sector at our sun
destinations and to introduce a new growth strategy
in Europe. We have also set several key information
technology projects in motion, for which we have
earmarked adequate resources.
12
2006 Annual Report Transat A.T. Inc.
I would like to thank all our employees. Each
of them plays a significant role in enabling the organ-
ization to grow and deliver a world-class product
to our customers. I would also like to thank all
the members of the Board for their loyalty and con-
tribution.
Jean-Marc Eustache
Chairman of the Board
President and Chief Executive Officer
January 18, 2007
The contribution of the Transat team
The contribution of our employees in all our
offices worldwide is crucial. We currently employ
approximately 6,000 people. In 2006, the total value
of our payroll and benefits amounted to approxi-
mately $290 million. We will continue to work relent-
lessly to build and maintain an organization which, in
spite of borders, remains united, focused and loyal
to our basic values: efficiency, teamwork and cus-
tomer focus. In that respect, we have three major
priorities, namely communication, training and suc-
cession management. Programs have been devel-
oped for each priority area and are overseen directly
by the President and Chief Executive Officer. As an
example, the Académie Air Transat, a partnership
between Air Transat and Université de Sherbrooke,
in Quebec, enables groups of employees to take
management courses during business hours in the
Air Transat offices.
We continue to provide financial assistance
to a large number of organizations that are involved
primarily in healthcare, the fight against poverty, teach-
ing and culture. We supported the Red Cross during
the crisis in Lebanon. Air Transat and its employees
continued their partnership with the Children’s Wish
Foundation of Canada. In 2006, the support we pro-
vided to two teaching institutions was formally rec-
ognized. The language laboratory of the Institut de
tourisme et d'hôtellerie du Québec and the Chaire
de tourisme at Université du Québec à Montréal
now bear the Transat name.
13
2006 Annual Report Transat A.T. Inc.
OUTGOING TOUR OPERATORS
Transat Tours Canada (TTC)
Transat Holidays
Caribbean, Latin America and Mexico
from Canada, Canada-Europe market
and cruises
Nolitours
Caribbean, Latin America, Mexico
and Florida from Canada
Look Voyages
Mediterranean Basin, Africa, Asia,
Caribbean, Mexico, etc. from France,
and Lookéa clubs
Vacances Transat (France)
Americas, Caribbean, Asia, Africa
from France.
Tours in Eastern Europe, Scandinavia,
Scotland, Ireland under the Bennett brand
Brokair
Group tours from France
Canadian Affair
British tour operator specializing in travel
to Canada
Rêvatours
Eastern Europe, Asia, North Africa, etc.
from Canada
Merika Tours
North American destinations from Canada
Air Consultants Europe (ACE)
TTC’s representative in Germany,
the Netherlands, Belgium, Luxembourg
and Austria
INCOMING TOUR OPERATORS
AND DESTINATION SERVICES
Jonview Canada
Tours and packages to Canada
Tourgreece
Tours and packages to Greece
Trafic Tours
Excursions and destination services
in Mexico
Turissimo
Excursions and destination services
in the Dominican Republic
Transat Holidays USA
Destination services
and travel agency in Florida
RETAIL DISTRIBUTION
Transat Distribution Canada
More than 400 travel agencies in Canada
(Marlin Travel, TravelPlus, tripcentral.ca,
Club Voyages, Voyages en Liberté)
and exitnow.ca
Club Voyages (France)
Network of 72 travel agencies in France
(Club Voyages, Look Voyages)
AIR TRANSPORTATION
Air Transat
Charter air carrier specializing
in holiday travel
Handlex
Airport ground services in Montréal, Toronto
and Vancouver
www...
transat.com
transatholidays.com
vacancestransat.com
nolitours.com
look-voyages.fr
vacancestransat.fr
canadavision.fr
bennett.fr
canadianaffair.com
revatours.com
merikatours.com
airtransat.com
airtransat.fr
airtransat.de
airtransat.nl
airtransat.co.uk
air-transat.be
jonview.com
outbyview.com
tourgreecedmc.com
clubvoyages.com
marlintravel.ca
travelplus.ca
tripcentral.ca
exitnow.ca
14
CRUISES
Transat Holidays and Look Voyages offer an
extensive selection of cruises: in the Atlantic
Ocean, Mediterranean and Baltic seas, South
Pacific and Indian oceans; on the Nile and on
Europe’s major rivers; in Alaska, the Bahamas,
Bermuda, Canada, the Caribbean, Hawaii, Mexico,
to the Panama Canal and in South America.
2006 Annual Report Transat A.T. Inc.
Main markets
Source and destination markets
Destination markets only
Source countries only
Air Transat gateways and destinations
TTC & Rêvatours: other carriers
TTC & Rêvatours: Air Transat and other carriers
Look Voyages & Vacances Transat (France) : gateways and destinations
Lookéa clubs (Look Voyages)
Note 1: This map reflects the situation as of summer 2006 as well as the planned program for the 2006-2007 winter season.Destinations offered and gateways may vary.
Note 2: “Source only”countries are those where we market Jonview Canada and/or Tourgreece products and to which we offer neither air service,packages or tours.
We offer no products out of “destination only”countries.
15
2006 Annual Report Transat A.T. Inc.
Key Figures
North America
(Revenues in thousands)
2006
2005
2004
2006
2005
2004
Europe
(Revenues in thousands)
Outgoing tour operators
and air transportation
Transat Tours Canada
(Transat Holidays, Nolitours
and Air Transat)
Revenues ($)
Employees
Passengers1
Travellers2
2,667
1,912,000 1,777,000 1,570,000
2,500
2,625,000 2,504,000 2,394,500
1,200,000 1,140,000 1,017,500
2,616
Rêvatours
Revenues ($)
Employees
Travellers
18,400
26
6,000
19,600
27
7,000
19,000
26
7,000
Incoming tour operators
and destination services
Jonview Canada
Revenues ($)
Employees
Travellers
118,000
286
237,000
117,300
169
223,000
108,000
156
206,000
Other
Revenues ($)
Employees
32,000
61
12,000
19
13,000
18
Retail distribution
Transat Distribution Canada
(Club Voyages, Marlin Travel,
TravelPlus, Voyages en Liberté
and exitnow.ca)
Revenues
commissions
and franchise ($)
Outlets owned
Employees
Outlets franchised
36,000
110
597
315
19,500
21
210
190
19,600
22
203
173
Tripcentral.ca
Revenues
commissions ($)
Employees
Outlets
Other airline services
Handlex
Revenues ($)
Employees
7,700
99
23
2,800
103
16
—
—
—
Outgoing tour operators
Vacances Transat (France)
Revenues (m)
Employees
Travellers
167,000
193
121,000
139,000
213
97,000
133,000
177
95,000
Look Voyages
Revenues (m)
Employees
Passengers
Travellers
Brokair
Revenues (m)
Employees
Canadian Affair
Revenues (£)
Employees
Travellers
ACE
Revenues
commissions (m)
Employees
Travellers
148,000
305
3,000
164,000
132,000
275
65,000
129,000
179,000
319
465,000
145,000
27,000
21
24,000
18
24,000
14
30,000
63
68,000
—
—
—
3,200
19
45,000
2,600
21
43,000
—
—
—
—
—
—
Incoming tour operator
and destination services
Tourgreece
Revenues (m)
Employees
Travellers
19,700
35
66,000
19,000
27
65,000
10,400
20
46,000
Retail distribution
Club Voyages (France)
Revenues
commissions (m)
Employees
Outlets
9,900
201
72
8,800
170
52
8,700
167
59
All subsidiaries wholly owned, except:
Air Consultants Europe (70.0%)
Jonview Canada (80.07%)
Tourgreece (90.0%)
Trip Central (50.1%).
41,000
1,108
37,000
1,024
29,000
857
1 Airlines record flight segments in terms of passengers
2 Tour operators record round-trip travellers
16
2006 Annual Report Transat A.T. Inc.
Management’s
Discussion & Analysis
This MD&A is comprised
of the following sections
OVERVIEW
CONSOLIDATED OPERATIONS
LIQUIDITY AND
CAPITAL RESOURCES
OTHER
ACCOUNTING
CONTROLS AND PROCEDURES
RISKS AND UNCERTAINTIES
OUTLOOK
19
21
32
33
34
36
37
40
17
This Management’s Discussion and Analysis
(MD&A) provides a review of Transat A.T. Inc.’s
operations, performance and financial position for
the year ended October 31, 2006, compared with
October 31, 2005, and should be read in conjunc-
tion with the audited Consolidated Financial State-
ments and notes thereto beginning on page 41. The
information contained herein is dated as of January
15, 2007. You will find more information about us on
Transat’s website at www. transat. com and on SEDAR
at www.sedar.com, including the Attest Reports for
fiscal 2006 and Annual Information Form.
We prepare our financial statements in accor-
dance with Canadian generally accepted account-
ing principles (GAAP). We will occasionally refer to
non-GAAP financial measures in this MD&A. These
non-GAAP financial measures have no meaning
prescribed by GAAP and are therefore unlikely to be
comparable to similar measures reported by other
issuers. They provide additional information and should
not be considered a substitute for measures of per-
formance prepared in accordance with GAAP. All
dollar figures are in Canadian dollars unless other-
wise indicated. The terms “Transat,” “we,” “us,” “our”
and the “Corporation” mean Transat A.T. Inc. and its
subsidiaries, unless otherwise indicated.
Caution regarding forward-looking statements
This MD&A contains certain forward-looking statements
with respect to the Corporation. These forward-looking state-
ments, by their nature, necessarily involve risks and uncertain-
ties that could cause actual results to differ materially from those
contemplated by these forward-looking statements. We consid-
er the assumptions on which these forward-looking statements
are based to be reasonable, but caution the reader that these
assumptions regarding future events, many of which are
beyond our control, may ultimately prove to be incorrect since
they are subject to risks and uncertainties that affect us. You will
find elsewhere in this MD&A a discussion of certain risks and
uncertainties affecting us. The Corporation disclaims any inten-
tion or obligation to update or revise any forward-looking state-
ments, whether as a result of new information, future events or
otherwise, other than as required by law.
2006 Annual Report Transat A.T. Inc.
Financial Highlights
(In thousands of dollars, except per share amounts)
2006
$
2005
$
2004
$
Variance
2006
%
2005
%
2,603,746
126,944
—
65,770
1.88
1.85
2,364,481
120,631
(934)
55,416
1.43
1.33
2,199,822
163,755
11,350
72,320
2.07
1.76
10.1
5.2
100.0
18.7
31.5
39.1
7.5
(26.3)
(108.2)
(23.4)
(30.9)
(24.4)
0.14
—
—
n.a.
n.a.
214,887
293,495
310,875
(26.8)
(5.6)
Consolidated statements
of income
Revenues
Margin1
Restructuring charge
Net income
Basic earnings per share
Diluted earnings per share
Dividend –
Class A and B shares
Consolidated balance sheets
Cash and cash equivalents
Cash and cash equivalents
in trust or otherwise
reserved
203,613
418,500
182,268
475,763
157,678
468,553
11.7
(12.0)
Assets
959,195
949,537
838,389
1.0
Debt (short-term and long-term)
Total debt1
Net debt1
87,404
407,741
192,854
106,769
463,382
169,887
33,214
536,746
225,871
(18.1)
(12.0)
13.5
15.6
1.5
13.3
221.5
(13.7)
(24.8)
Consolidated statements
of cash flows
Operating activities
113,279
74,156
184,321
52,8
(59,8)
1 NON-GAAP FINANCIAL MEASURES
The terms margin, operating cash flow, total debt and net debt have no standard definition prescribed by Canadian GAAP and are therefore
unlikely to be comparable to similar measures reported by other issuers. However, these terms are presented on a consistent basis from period
to period. These terms are included because management uses them to measure Transat’s financial performance.
Margin is used by management to assess Transat’s ongoing and recurring operational performance. This term is represented by revenues less
operating expenses, according to the Consolidated Statements of Income.
Operating cash flows is used by management to assess Transat’s operating performance and its capacity to meet its financial obligations.
Operating cash flows is defined as cash flow from operating activities excluding the net change in non-cash working capital balances related to
operations, net change in other liabilities and net change in deposits, expenses and provision for engine and airframe overhaul, according to the
Consolidated Statements of Cash Flows.
Total debt is used by management to assess Transat’s future cash requirements. It represents the combination of balance sheet debt (long-term
debt and debentures) and off-balance sheet arrangements, excluding arrangements with suppliers presented on p. 33.
Net debt is used by management to assess Transat’s cash position. It represents total debt (described above), less cash and cash equivalents
not held in trust or otherwise reserved.
18
2006 Annual Report Transat A.T. Inc.
OVERVIEW
The holiday travel industry
The holiday travel industry is composed main-
ly of tour operators, travel agencies (traditional and
online) and air carriers serving the holiday travel mar-
ket through a combination of scheduled and charter
air services. According to the World Tourism Organ-
ization, international tourist arrivals reached a record
high of 806 million in 2005 and could reach one
billion by 2010.
Tour operators specialized in outgoing services
purchase the various components of a trip (including
certain services purchased abroad) and sell them to
consumers in their local markets, generally via trav-
el agencies, either as travel packages or separately.
‘Incoming’ tour operators design travel packages
or other travel products consisting of services they
purchase in their local market for sale in foreign
markets, generally through other tour operators or
travel agencies. The companies providing destina-
tion services are based at destination and sell a
range of products to travellers onsite for quick or
immediate consumption.
Travel agencies are the intermediaries between
tour operators and consumers. Travel agents meet
with, advise and sell to consumers. Travel agencies
sell holiday packages and plane tickets offered by
tour operators, in addition to plane tickets sold
directly by airline carriers and other travel products
and services. Online travel agencies now offer a large
range of travel products via transactional Internet
Web sites. In both North America and Europe, online
travel sales are now made up almost exclusively of
air-only tickets, with only a small proportion consist-
ing of packages (including airline tickets and hotels).
Sales of online packages, however, are expected to
grow.
Air carriers provide services to travel agencies
and tour operators. These carriers are known as
“scheduled” when they sell services directly to the
public and travel agencies, and as “charter” when
they sell seats in blocks to tour operators.
Core business, vision and strategy
Core business
Transat is one of the largest fully integrated
world-class tour operators in North America. We
conduct our activities in a single industry (holiday
travel) and we mainly market our products in two
geographic areas (North America and Europe).
Transat’s core business involves developing and
marketing vacation travel services in package and
air-only format, including airline seats. We operate
as both an outgoing and incoming tour operator by
bundling services bought in Canada and abroad
and reselling them in Canada, France, the U.K. and
elsewhere, mainly through travel agencies, some of
which we own. Transat is also a major retail distrib-
utor with a total of approximately 500 travel agen-
cies and a multi-channel distribution system that
incorporates Web-based sales. Transat leverages
on its subsidiary Air Transat, Canada’s largest inter-
national charter air carrier, to meet a substantial por-
tion of its airline seat needs. We also offer destina-
tion, hotel management and airport services.
Vision
The international tourism market is growing,
and international tourists have increasingly varied
origin markets and travel destinations. Transat’s
vision is to maximize shareholder value by entering
new markets, increasing our market share and max-
imizing the benefits of vertical integration. We main-
tain a leadership position in the Canadian market,
where we operate as an outgoing and incoming tour
operator; we are also the country’s leading charter
airline. We are also a well-established outgoing tour
operator in France and the U.K. and incoming tour
operator in Greece. We offer our customers a broad
range of international destinations spanning some
60 countries. Over time, we aim to expand our busi-
ness to other countries where we believe there is
high growth potential for an integrated player spe-
cializing in holiday travel, particularly the U.S. and
other European countries.
19
2006 Annual Report Transat A.T. Inc.
•
Strategy
We completed a three-year strategic plan
(2006-2008) focusing on growth and profitability. We
anticipate that increased international tourism will
speed our growth in North America and Europe. To
this end, we will be making new acquisitions while
pursuing an aggressive pace of internal growth. Our
key strategic focuses are as follows:
•
•
•
•
In Canada, Transat is the leader in all regions
except Ontario. We plan to bolster our pres-
ence in Ontario by adding new destinations
and expanding our distribution network to
become and remain the market leader in all
regions of the country.
In Europe, Transat intends to grow its market
share and continue its vertical integration in
France and the U.K., building on its strong
presence in these two high-potential markets.
Transat will also continue its initiatives to
expand into other European countries as a tour
operator specializing in travel to Canada,
among other destinations.
Elsewhere, Transat will strive to invest in new
markets and, in particular, to become a tour
operator in the U.S., a strategic market it has
been analyzing for some time. In addition,
Transat will continue considering the possibility
of penetrating other markets, including Asia
and Latin America.
Transat wishes to step up development of des-
tination services and to assume a portion of its
accommodation needs in order to gain better
control over capacity and product quality and
to boost margins. In practical terms, this may
mean pursuing stakes or acquisitions in the
hotel industry. Markets in which Transat has
already reached critical mass will be reviewed
first.
In light of rapid change in the distribution
industry and travellers’ expectations, and given
the importance of organizational responsive-
ness and productivity, our strategic plan will
include our ongoing technology and training
initiatives and investments. To this end, Transat
will strive to introduce cutting-edge solutions
via agencies and direct sales in order to adapt
to new markets and to continue efficiency
improvements.
Transat anticipates that implementing its
strategic plan will require up to $300 million over
three years, with funding from existing cash
resources, future cash flows and external sources,
as needed.
Review of 2006-2007 objectives
and achievements
(See two-page table, p. 22 to 25)
Key performance drivers
The following key performance drivers are
essential to the successful implementation of our
strategy and to the achievement of our objectives:
Market share
Be the leader in Canada in all provinces and
increase market share in Ontario, across the rest of
the country and in Europe.
Revenue growth
To grow revenues by more than 5%, excluding
acquisitions.
Margin
To generate margins higher than 5%.
Ability to deliver on our objectives
Our ability to deliver on our objectives is
dependent on our financial and non-financial
resources, both of which have contributed to the
success of our strategies and the achievement of
our objectives in the past.
20
2006 Annual Report Transat A.T. Inc.
Our financial resources include:
Cash
Our cash balances not held in trust or otherwise
reserved, totalling $214.9 million as at October 31,
2006, are strong. Our continued focus on expense
reductions and margin increases should maintain our
cash balances at healthy levels, taking into consider-
ation the possible use of cash balances to acquire
businesses.
Our non-financial resources include:
Brand
We have taken all necessary steps, including
the use of a new corporate logo and an integrated
branding platform, to create a unique, strong and
visible identity across our main business units with a
view to maximizing customer awareness in both the
B2C and B2B markets, fully leveraging the contribu-
tion of all business units and creating value.
Structure
Our vertically integrated structure enables us
to ensure a better quality control of our products
and services.
Employees
In recent years, we have intensified our efforts
to build a unified corporate culture based on a clear
vision and shared values. As a result, our employees
work together as a team and are committed to
ensuring overall customer satisfaction and improv-
ing productivity. In addition, we believe we reap the
benefits and expertise of strong leadership, since our
founders are still at the helm.
Relationship with supplier
We have exclusive access to certain hotels at
sunshine destinations as well as almost 20 years of
privileged relationships with many hotels at these
destinations and in Europe.
Transat has the resources it needs to meet its
2007 objectives and to continue building on its long-
term strategies.
CONSOLIDATED OPERATIONS
Acquisitions
During the year ended October 31, 2006, the
Corporation acquired several businesses. These acqui-
sitions were recorded using the purchase method.
The results of these businesses were included in the
Corporation’s results as of their respective dates of
acquisition, unless otherwise indicated.
During the year ended October 31, 2006, the
Corporation acquired the assets, via Travel Super-
store Inc., of six travel agencies for a total consider-
ation of $1.1 million. Of that amount, $0.5 million
was paid in cash on the acquisition dates, with the
$0.6 million balance payable in instalments over
periods ranging from three to five years.
On December 1, 2005, the Corporation acquired
the assets of 20 travel agencies operating in France
from the Carlson Wagonlit Travel network, for a cash
consideration of m3.1 million ($4.3 million). The results
of these agencies were consolidated starting January
1, 2006.
On May 1, 2006, the Corporation acquired 100%
of the issued and outstanding shares of the Thomas
Cook Travel Limited (TCT) travel agency network,
located in Canada, for a cash consideration of $8.3
million. TCT operates a network of 67 wholly owned
agencies and 124 franchised agencies under the
Thomas Cook and Marlin Travel banners. TCT also
operates foreign exchange offices in 22 of its travel
agencies.
On August 1, 2006, the Corporation acquired
100% of the issued and outstanding shares of British
tour operator The Airline Seat Company, which oper-
ates under the Canadian Affair brand, for a cash
consideration of £20.7 million ($43.7 million).
These transactions resulted in a $26.9 million
increase in balance sheet goodwill. Note 17 to the
audited Consolidated Financial Statements presents
the purchase price allocation for the acquired busi-
nesses.
(Cont’d p.26)
21
2006 Annual Report Transat A.T. Inc.
Review of 2006-2007 objectives and achievements
2006 Objectives
Increasing Transat’s competitiveness
in the Canadian and European markets.
We aim to refine our customer segmenta-
tion process and to ensure that our tour operators
develop and implement separate customized mar-
keting strategies, in line with the market. To this end,
we will be upgrading our distribution system, which
is based on three pillars: travel agencies; business-
to-business (B2B) applications involving our tour
operators and their retail network; and online busi-
ness-to-consumer (B2C) distribution. Lastly, we will
continue to integrate certain tour operators’ activi-
ties in both France and Canada, with a view to
reducing costs, particularly via synergies.
Continuing to build on our “new” base
in France.
At Look Voyages, we aim to achieve prof-
itability beginning in the second half of 2006. In light
of our new emphasis on holiday packages, we will
be redefining the “Clubs Lookéa” concept and draw-
ing up a strategic plan accordingly. Although tour
operator Vacances Transat (France) remains strong-
ly focused on Canada, this subsidiary’s growing
diversification will enable us to pursue growth in
continental Europe and the long-haul market while
improving the targeting of our offer. In France, we
will be mobilizing our entire team to build on the
solid base we have already established.
Achieving growth via new markets.
Transat is already a leading outgoing tour
operator in Canada and France. To achieve further
growth, we intend to become a leader in other mar-
kets, particularly in European and North American
markets. In 2006, we will be examining other oppor-
tunities, including the U.K., which is already an impor-
tant market for us, and we will complete a U.S.
market analysis to ensure proper timing of our entry
in that market.
Achievements or progress
as at October 31, 2006
In Canada, we:
• Completed the sharing of products between
Nolitours and Transat Holidays and continued
capitalizing on our separate marketing strategies
for each brand.
• Continued our initiatives to strongly establish the
Nolitours brand among the public at large.
• Decided to focus Nolitours on southern destina-
tions; European products will now be marketed
exclusively by Transat Holidays.
• Implemented e-tickets and e-travel documents.
• Implemented a comprehensive B2B platform for
flight and package sales.
• Enhanced efficiency by combining the sales and
marketing operations of Transat Holidays and
Nolitours.
• Grew our direct sales—particularly online—and
innovated through the implementation of the Club
Voyages sites, all of this part of a multi-channel
distribution system.
• Acquired 191 travel agencies, including 81 in
Ontario.
• Expanded our market share in Ontario in the seg-
ment of vacation packages to Mexico and the
Caribbean during the winter season.
.
• We made a major acquisition, Canadian Affair, at a
total cost of $43.7 million, making Transat an out-
going tour operator in the U.K. This acquisition con-
siderably bolstered our sales network in the U.K.,
where we now have a multi-channel distribution
system that has widened our outreach.
22
2006 Annual Report Transat A.T. Inc.
In France, we:
• Achieved profitability at Look Voyages, which
recorded a substantial increase in sales.
• Grew our direct sales and implemented a new
Web site specializing in Canadian destinations
(canadavision.fr).
• Completed the integration of Bennett Voyages,
Brokair and Vacances Transat (France), with the
pooling of purchasing and back office services,
as well as certain technological exchanges.
• Strengthened the long-haul offering of Vacances
Transat (France), with products spanning several
continents.
2007 Objectives
Enhance our competitiveness in Canada.
In Canada, where competition remains fierce,
we intend to continue growing our Ontario market
share, and maintain or increase our share elsewhere.
We are stepping up capacity, adding new destina-
tions, expanding the scope of our distribution net-
work, which is increasingly efficient at combining
all the channels the market expects, and pursuing
initiatives to reduce costs and maximize revenue
streams, particularly between Canada and the U.K.
In addition, we are preparing the second stage in the
initiative to renew our fleet of aircraft, whose struc-
ture remains a key competitiveness factor.
Become more competitive
and accelerate growth in Europe.
We will be developing a new European
expansion plan based on growth in our tour opera-
tor and distribution operations, through internal
growth and potentially acquisitions. We will focus on
(i) expanding our multi-channel distribution system
combining various distribution strategies, including
direct sales; (ii) growing the Air Transat network; (iii)
optimizing business processes to reduce costs at
our European operations; and of course (iv) integrat-
ing Canadian Affair’s operating and marketing func-
tions and increasing our market share between
Canada and the U.K.
• We actively pursued our search for acquisitions in
the U.S. Key factors include complementary oper-
ations, a quality management team and financial
performance.
Tap into new outgoing markets.
After breaking into the British market in
2006, we continue to actively study the U.S. market
in search of acquisitions, in order to gain a foothold
in this market as an outgoing tour operator. We will
achieve this goal via acquisitions, provided the oppor-
tunity meets our parameters.
23
2006 Annual Report Transat A.T. Inc.
2006 Objectives
Achievements or progress
as at October 31, 2006
Emphasizing vertical integration
of destination services.
We intend to make additional investments in
destination services through partnerships or acquisi-
tions in the hotel and incoming tour operator sectors.
• We actively pursued our search for hotel partners.
The primary targeted markets are Mexico, the
Dominican Republic, the Caribbean and Latin
America.
Creating an environment to enable
continuous knowledge acquisition,
development and sharing.
We aim to use the best tools to identify, pro-
mote and attract talented people, thereby building a
strong and diversified team capable of assuming
responsibility for our ongoing viability. We will also be
developing personal development initiatives for
high-potential employees as part of an aggressive
business succession plan.
Planning and implementing
the next generation of information systems.
We will be developing a long-term plan with
a view to implementing the next generation of infor-
mation systems – the central component of tour
operators’ activities. These are expected to include
a centralized seat inventory management system,
which will be integrated into the operating systems
of Air Transat. In addition, we aim to refine our pre-
ferred B2B applications and online sales systems
(B2C), both in Canada and France. Lastly, we will be
developing the information systems used by our
Canadian incoming tour operator, particularly as
regards to multilingual capability and connectivity
with customers and suppliers.
• All Transat subsidiaries have implemented a com-
mittee in charge of succession planning and skill
sharing, and prepared and began implementing a
work plan.
• We implemented B2B (“Agent Direct” – Nolitours
and Transat Holidays) and B2C (Club Voyages)
Internet platforms in Canada. There were similar
developments in France, including the launch of
the canadavision.fr site.
• We made progress in the selection process for a
new seat and package inventory management
system tool.
24
2006 Annual Report Transat A.T. Inc.
• We set up Transat Destination, an umbrella organ-
ization for Trafic Tours (Mexico) and Turissimo
(Dominican Republic).
• We completed the information system projects at
Jonview Canada, providing greater connectivity.
The number of system-to-system links with cus-
tomers doubled and some fifty connection proj-
ects are underway.
2007 Objectives
Further capitalize on vertical integration
at destination.
This initiative will be threefold: (i) increase the
non-Transat sales of our incoming tour operators
and destination service providers; (ii) target acquisi-
tions in the incoming market; (iii) target acquisitions
or partnerships in the hotel industry in our primary
Southern markets to supply a portion of our room
needs and benefit from the economic performance
of this industry segment.
Implement a knowledge management culture
complete with the necessary processes
to support our growth and continuity.
Acknowledging the vital nature of the
human contribution to realizing our mission state-
ment and the necessity of anticipating our needs to
drive growth, we will (i) improve our training and
development programs; and (ii) ensure that all our
subsidiaries develop or fine-tune their succession
plans, such as through a high-potential employee
development program.
Develop and implement an integrated
information management infrastructure
that supports development and actively
contributes to profitable growth.
Taking into account special geographic con-
siderations, we will continue developing our busi-
ness-to-business (B2B) and business-to-consumer
(B2C) platforms by adding new features to support
greater product sales and tight price management,
thereby enhancing the breadth and flexibility of our
service offering. In addition, we will (i) actively contin-
ue the pooling of assets, investments and resources
among our business units to either upgrade servic-
es, achieve greater harmonization or reduce costs;
(ii) pursue our plan to adopt a more efficient central-
ized seat management system; (iii) and implement
new analytical and decision-making support tools to
lower our response time.
25
2006 Annual Report Transat A.T. Inc.
Geographic Areas
Revenues
We draw our revenues from outgoing tour oper-
ators, air transportation, travel agencies, distribution,
incoming tour operators and services at travel des-
tinations.
Revenues per geographic areas
Years ended October 31 (in thousands of dollars)
Variance
2006
$
2005
$
2004 2006 2005
%
%
$
North
America 2,059,611
544,135
Europe
2,603,746
Total
1,896,487 1,673,530
467,994
8.6 13.3
526,292 16.3 (11.1)
7.5
2,364,481 2,199,822 10.1
The overall increase was due to revenue growth
of 8.6% in North America and 16.3% in Europe. The
terms “travellers” and “passengers” will be used
throughout the MD&A to explain these increases
and decreases. Basically, tour operators record
round-trips in terms of travellers and airlines record
flight segments in terms of passengers. The key fac-
tor driving higher revenues was the number of trav-
ellers, which increased by 8.9% over 2005. This in
turn resulted from a 7.3% increase in the number of
North American travellers and a 17.6% improve-
ment in Europe, excluding Canadian Affair travellers.
The recent acquisition of Canadian Affair helped
increase European revenues by 13.2% compared
with 2005. Rising revenues from European opera-
tions was offset by the dollar’s strength against the
euro.
We expect that the total number of travellers in
2007 will be higher than in 2006. In light of this
increased volume and our recent acquisitions, we
also expect revenues to grow, compared with 2006.
Geographic segmentation
of revenues
North America
Europe
Revenues by season
North America and Europe
(In millions of dollars)
Sources of revenues
2006
79.1%
20.9%
2005
80.2%
19.8%
2004
76.1%
23.9%
2006 Winter 1,373
Summer 1,231
2005 Winter 1,318
Summer 1,046
2004 Winter 1,233
Summer
967
Canada
France
2006
2005
2004
2006
2005
2004
United
2006
Kingdom 2005
2004
Other
2006
2005
2004
78.3%
80.0%
75.7%
17.9%
19.1%
23.9%
2.4%
0.0%
0.0%
1.4%
0.9%
0.4%
26
2006 Annual Report Transat A.T. Inc.
Commissions include the fees paid by tour
operators to travel agencies for serving as interme-
diaries between tour operators and consumers. The
5.8% decline in commissions resulted mainly from
reduced commission rates in North America.
Aircraft maintenance costs relate mainly to the
engine and airframe maintenance expenses incurred
by Air Transat. These expenses were down 11.6%
compared with 2005 despite a higher pace of busi-
ness activity. This decline was mainly due to the
strength of our domestic currency against the U.S.
dollar and the solid performance and reliability of our
aircraft.
Airport and navigation fees relate mainly to
fees charged by airports. The 5.7% growth in fees
compared with the previous year resulted from an
increase in business activity and the airport landing
fees imposed by several airports.
Aircraft rent costs were down due to the strength
of the Canadian dollar against its U.S. counterpart.
Other expenses were up 7.2% compared with
2005 but remained unchanged as a percentage of
revenues. The increase was primarily due to greater
business activity.
Despite our continued efforts to reduce and
control costs, we expect total operating expenses to
increase due to growth in business activity in 2007.
Operating expenses
Our operating expenses consist mainly of direct
costs, salaries and employee benefits, aircraft fuel,
aircraft maintenance, commissions, airport and nav-
igation fees, and aircraft rent.
The overall growth in our operating expenses is
due to a 9.2% increase in North America and a
14.8% increase in Europe. These fluctuations result-
ed primarily from the higher pace of business activi-
ty in both North America and Europe, rising fuel
prices and the impact of our business acquisitions
since 2005. Despite these increases, expenses as a
percentage of revenues remained relatively steady at
95.1% compared with 94.9% in 2005.
Approximately 30% of our operating expenses
are payable in U.S. dollars. We did not fully benefit
from the rebounding Canadian dollar, however, due
to our hedging program.
Direct costs include the costs of the various
trip components sold to consumers via travel agen-
cies and incurred by our tour operators. They also
include hotel room costs and the costs of reserving
blocks of seats or full flights with air carriers other
than Air Transat. In 2006, these costs represented
50.2% of our revenues, compared with 49.4% in
2005. The dollar-figure increases were due to high-
er per-seat costs, caused in particular by growing
fuel costs, business activity and hotel room costs.
Salaries and employee benefits were up
20.1% compared with fiscal 2005, due in part to our
business acquisitions since November 1, 2004 and
increased business activity.
Aircraft fuel costs rose 24.2%, or almost $48.3
million, during the year. This increase resulted prima-
rily from high fuel prices during the year.
Operating expenses
Years ended October 31 (in thousands of dollars)
Direct costs
Salaries and
employee benefits
Aircraft fuel
Commissions
Aircraft maintenance
Airport and
navigation fees
Aircraft rent
Other
Total
2006
$
1,307,732
2005
$
1,168,612
2004
$
1,075,861
290,385
247,697
171,116
81,150
71,833
48,870
258,019
2,476,802
241,776
199,376
181,587
91,778
67,937
52,064
240,720
2,243,850
227,626
128,112
179,873
88,684
59,379
59,640
216,892
2,036,067
As a % of revenues
2005
%
49.4
2006
%
50.2
2004
%
48.9
11.1
9.5
6.6
3.1
2.8
1.9
9.9
95.1
10.2
8.4
7.7
3.9
2.9
2.2
10.2
94.9
10.4
5.8
8.2
4.0
2.7
2.7
9.9
92.6
Variance
2006
%
11.9
20.1
24.2
(5.8)
(11.6)
5.7
(6.1)
7.2
10.4
2005
%
8.6
6.2
55.6
1.0
3.5
14.4
(12.7)
11.0
10.2
27
2006 Annual Report Transat A.T. Inc.
North America
Winter season
In North America, revenues were up 6.0% dur-
ing the 2006 winter season, compared with the same
period in 2005. This increase was mainly due to a
4.3% growth in total travellers compared with the
same period in 2005. Competition was once again
fierce last winter.
For the 2006 winter season, our margin
decreased to 7.2%, compared with 7.7% during the
2005 winter season. The combined effect of price
pressures and rising fuel costs narrowed margins
during the 2006 winter season.
During the 2006 winter season, Air Transat
served some 40 destinations in 18 countries, prima-
rily southern or other sunshine destinations. During
the summer months, Air Transat shifts most of its
capacity to Europe, while maintaining some flights to
southern destinations. In 2006, Air Transat offered
direct flights to some 30 cities in ten European
countries.
Summer season
During the summer season, revenues were up
12.3%. This improvement resulted primarily from a
13.5% increase in travellers. The acquisition of TCT
on May 1, 2006 also partly explains our higher rev-
enues. Competition remained fierce, particularly for
travel between Canada and the U.K. Both sunshine
and European destinations were more popular with
summer travellers. However, one must also factor in
the string of hurricanes that occurred during the
2005 summer season.
As in the winter season, very high fuel prices
continued to squeeze our margin, which declined
from 4.3% in 2005 to 3.8% in 2006.
Europe
Winter season
In Europe, revenues and expenses increased
in euro terms but decreased in Canadian dollar
terms during the 2006 winter season, compared
with the corresponding season of 2005. The
strength of the Canadian dollar against the euro
slowed the upswing in our revenues and expenses
throughout the season. Moreover, we had to reduce
prices for travel to Cancùn after Hurricane Wilma
adversely affected demand for this region early in
the season. Excluding passengers purchasing air-
only flights from Look Voyages, winter travellers
surged 25.8%.
We reported a negative margin of $2.7 million
compared with a negative margin of $5.9 million in
2005. This improvement would have been more sig-
nificant were it not for the aftermath of Hurricane
Wilma.
North America — Winter and summer results
Years ended October 31 (in thousands of dollars)
Winter
Variance
2005
2006
$
$
1,178,532 1,111,924
2004
$
993,373
2006
%
6.0
2005
%
11.9
1,093,342 1,026,033
85,891
7.7
85,190
7.2
884,185
109,188
11.0
6.6
(0.8)
(6.5)
16.0
(21.3)
(30.0)
Revenues
Operating
expenses
Margin
Margin (%)
Europe — Winter and summer results
Years ended October 31 (in thousands of dollars)
Winter
Variance
2006
$
194,613
2005
$
205,760
2004
$
240,051
2006
%
(5.4)
2005
%
(14.3)
197,286
(2,673)
(1.4)
211,614
(5,854)
(2.8)
252,953
(6.8)
(12,902) 54.3
(5.4) 50.0
(16.3)
54.6
48.1
Revenues
Operating
expenses
Margin
Margin (%)
Summer
2006
$
881,079
847,474
33,605
3.8
Summer
2006
$
349,522
338,700
10,822
3.1
Variance
2005
$
784,563
2004
$
680,157
2006
%
12.3
2005
%
15.4
750,778
33,785
4.3
611,786
68,371
12.9
(0.5)
10.1 (11.6)
22.7
(50.6)
(57.4)
Variance
2005
$
262,234
2004
$
286,241
2006
%
33.3
2005
%
(8.4)
255,425
6,809
2.6
287,143
32.6 (11.0)
(902) 58.9 854.9
(0.3) 19.2 966.7
28
2006 Annual Report Transat A.T. Inc.
In 2004, we forecast that the plan would reduce
Look Voyages’ losses by 50% in fiscal 2005 and
that Look Voyages would return to profitability in late
fiscal 2006. These two objectives were exceeded.
In 2005, our review of the measures imple-
mented during the year ended October 31, 2004
resulted in a $0.9 million reversal of the provision,
primarily due to employee training and reclassifica-
tion expenses (as required under French law), lower-
than-expected negotiation expenses related to the
cancellation of contracts and earlier-than-expected
employee departures.
No additional costs are anticipated under this
plan.
Restructuring charge (2003)
In 2003, we undertook to reduce our costs,
while improving our operational efficiencies and
ensuring that all products and services not generating
targeted returns would be either remedied or eliminat-
ed. As part of these efforts, we developed a restruc-
turing program in the second quarter of fiscal 2003.
This program included changes to our management
structure, as well as a fundamental restructuring of
our operations in France and Canada. The war in Iraq
and SARS, both of which drove down demand,
accelerated the need for such a program. These
events also significantly affected our fleet mix.
The 2003 restructuring program is substantially
completed. No additional costs are anticipated under
this plan. We expect to make the final disbursements
related to this program, amounting to less than $0.9
million as at October 31, 2006, during fiscal 2008.
Summer season
For the summer season, revenues were up
33.3%, primarily due to the recognition, as of
August 1, 2006, of the revenues of The Airline Seat
Company (Canadian Affair). Excluding the revenues
of Canadian Affair, revenues from our European com-
panies grew 10.0% whereas travellers increased
12.9%. As in the winter season, the strength of the
Canadian dollar against the euro slowed the upswing
in our revenues and expenses.
The main factor behind our improved European
margins was a return to profitability at Look Voyages.
The recent acquisition of Canadian Affair and the
solid performance of our other European subsidiaries
also contributed positively. However, the profitability
of European operations was impacted by the dollar’s
strength against the euro, compared with the same
season in 2005.
Other expenses and revenues
Amortization is calculated on property, plant
and equipment, intangible assets subject to amorti-
zation, deferred lease inducements and other assets,
consisting mainly of development costs.
Amortization
Years ended October 31 (in thousands of dollars)
2006
$
2005
$
2004
$
2006
%
2005
%
Variance
Amorti-
zation
39,360
37,558
33,027
4.8
13.7
Amortization expense was up 4.8%, mainly as
a result of additions to property, plant and equip-
ment made during the year.
Restructuring charge (2004)
In July 2004, we unveiled a plan to reposition
Look Voyages and to pursue our efforts to bring it
back to profitability. The plan involved discontinuing
certain operations considered non-strategic, name-
ly the marketing and sale of air-only tickets. The plan
called for Look Voyages to boost its holiday pack-
age business and to step up its use of Web-based
technologies with a view to promote sales to travel
agents and the general public. Approximately 90
jobs were eliminated, and Transat recorded an
$11.4 million restructuring charge in the fourth quar-
ter of 2004. This amount included $8.3 million in
cash charges and $3.0 million in asset writedowns.
29
2006 Annual Report Transat A.T. Inc.
Interest
Interest expense and interest revenue
Years ended October 31 (in thousands of dollars)
2006
$
2005
$
2004
$
2006
%
2005
%
Variance
Interest on
long-term
debt and
debentures
Other interest
and financial
expenses
7,264
10,815
7,712 (32.8) 40.2
1,484
1,708
1,907 (13.1) (10.4)
Interest
income
(15,706)
(12,963)
(11,307) 21.2 14.6
Interest on long-term debt
and debentures
The decline compared with 2005 was primarily
attributable to the interest savings resulting from the
repurchase on November 1, 2005 of a $10.0 million
debenture and the early redemption on January 10,
2005 of debentures amounting to $21.9 million. This
early redemption had led to a $1.7 million non-cash
charge reflecting the difference between the deben-
tures’ face value amount and their book value at that
time, in addition to a $0.8 million interest penalty.
Other interest and financial expenses
Our other interest and financial expenses
remained relatively consistent during the year, com-
pared with the previous year. We do not expect that
these expenses will vary significantly in 2007, com-
pared with 2006.
Interest income
Growth in interest income resulted primarily
from higher interest rates. We expect our interest
income to remain stable in 2007.
Foreign exchange gain on long-term
monetary items
For fiscal 2006, the Corporation recorded a
foreign exchange gain on long-term monetary items
due to the Canadian dollar’s continuing appreciation
against the U.S. dollar during the year. A stronger
Canadian dollar reduces the value of our long-term
monetary assets and liabilities. The foreign exchange
gain on long-term monetary items was primarily due
to the positive impact of exchange rates on our debt
levels.
Gain on disposal of investment
In June 2005, we signed an agreement that led
to the sale of our 44.27% stake in Star Airlines S.A.
(Star) for a total consideration of m4.5 million. This trans-
action resulted in a $5.7 million gain on disposal.
Income taxes
Our income tax provision amounted to $32.0
million for the fiscal year ended October 31, 2006,
compared with $36.3 million for fiscal 2005.
Excluding the share in net income of companies
subject to significant influence, the effective tax rates
were 32.3% for the fiscal year ended October 31,
2006 and 39.1% for the preceding fiscal year.
Our lower tax rate was due in part to the deci-
sion to write down $5.6 million in future tax assets in
2005. This amount had been recorded based on the
unused tax losses generated by our French opera-
tions up to July 31, 2004. This writedown was record-
ed based on our analysis (from an accounting per-
spective) of whether our unused tax losses related
to our French operations could be used to realize
future tax benefits. Excluding the writedown of future
tax assets, however, our effective tax rate for fiscal
2005 would have been 33.5% if we had recorded
tax recoveries on losses generated by our French
operations.
30
2006 Annual Report Transat A.T. Inc.
Net income
As a result of the items discussed in “Consol-
idated operations” of this MD&A, our net income was
$65.8 million, or $1.88 per share, for fiscal 2006,
compared with net income of $55.4 million, or $1.43
per share, for fiscal 2005. The weighted average
number of outstanding shares used to compute per
share amounts was 34,907,000 for the current year
and 37,863,000 for fiscal 2005.
On a diluted per share basis, earnings per
share for fiscal 2006 amounted to $1.85 per share,
compared with $1.33 per share for fiscal 2005.
The adjusted weighted average number of out-
standing shares used to compute diluted earnings
per share was 35,660,000 for the current year and
41,684,000 for 2005. The significant decrease in the
weighted average number of shares in 2006 result-
ed mainly from the share repurchase of January 3,
2006.
Excluding the reversal of restructuring charges
and the gain on disposal of our investment in Star,
net income amounted to $48.7 million or $1.17 per
fully diluted share in 2005.
(See note 13 to the audited Consolidated
Financial Statements.)
Selected unaudited quarterly
financial information
Overall, revenues in 2006 were up compared
with 2005, primarily due to an increase in the num-
ber of travellers and to the acquisitions made since
fiscal 2005.
Our margins fluctuated in fiscal 2006, com-
pared with 2005. In general, they were under great
pressure throughout the year from surging fuel prices
and price competition.
Selected unaudited quarterly financial information
(In thousands of dollars, except per share data)
Revenues by quarter
(In millions of dollars)
Q1 2006 581
2005 589
2004 537
Q2 2006 792
2005 729
2004 696
Q3 2006 611
2005 552
2004 499
Q4 2006 619
2005 494
2004 467
Fourth-quarter highlights
In the fourth quarter of fiscal 2006, we record-
ed revenues of $619.5 million, compared with $493.9
million for the same period in 2005, representing an
increase of $125.6 million, or 25.4%. This increase
was mainly attributable to revenues generated by
Canadian Affair and the higher revenues of our
Canadian tour operators.
We generated a margin of $28.8 million, or 4.7%,
during the quarter, compared with $23.4 million, or
4.7%, in 2005.
Net income for the quarter amounted to $13,6
million, or $0,39 per share on a fully diluted basis,
compared with $18.0 million, or $0.44 per share on
a fully diluted basis for the same period in 2005. Net
of the reversal of certain restructuring charges and
the gain on disposal of the investment in Star, 2005
quarterly net income amounted to $11.3 million, or
$0.28 per share on a fully diluted basis.
Revenues
Margin
Net income
(loss)
Earnings (loss)
per share
Diluted
earnings (loss)
per share
Q1
Q2
Q3
Q4
2006
$
581,576
14,030
2005
$
588,740
13,833
2006
$
791,569
68,487
2005
$
728,944
66,204
2006
$
611,107
15,606
2005
$
552,897
17,214
2006
$
619,494
28,821
2005
$
493,900
23,380
5,168
(1,800)
42,845
38,400
0.14
(0.08)
1.27
1.05
4,205
0.12
794
0.02
13,552
18,022
0.40
0.45
0.13
(0.08)
1.24
0.91
0.12
0.02
0.39
0.44
31
2006 Annual Report Transat A.T. Inc.
LIQUIDITY AND
CAPITAL RESOURCES
As at October 31, 2006, cash and cash equiv-
alents amounted to $214.9 million, compared with
$293.5 million in 2005. Cash and cash equivalents
in trust or otherwise reserved were $203.6 million at
the end of fiscal 2006, compared with $182.3 million
in 2005. Our balance sheet included $97.6 million
in working capital, or a ratio of 1.2, compared with
$225.8 million in 2005, or a ratio of 1.6. With regard
to our French operations, we also have access to
unused lines of credit totalling m11.8 million ($16.9
million).
Total assets increased by $9.7 million, or 1.0%,
to $959.2 million from $949.5 million as at October
31, 2005. Shareholders’ equity amounted to $296.0
million as at October 31, 2006, down $66.3 million
from $362.3 million as at October 31, 2005. This
decrease resulted primarily from the share repur-
chases during the year, which totalled $132.4 mil-
lion, which was offset by net income for the year in
the amount of $65.8 million.
Operating activities
Cash flows totalling $113.3 million were gener-
ated from operating activities, up $39.1 million from
2005. This increase resulted from an improvement in
net income during the year, given that net income
required fewer adjustments in respect of items not
resulting in cash inflows. In 2005, these items includ-
ed a gain on disposal of an investment and higher
future income taxes than in 2006. In addition, the
net change in working capital balances related to
Cash flows
Years ended October 31 (in thousands of dollars)
operations for 2006 was positive compared with
2005, primarily as a result of higher balances of
accounts payable and accrued liabilities and income
taxes payable than in 2005.
We expect to continue to generate positive
cash flows from our operating activities in 2007.
Investing activities
During the year, cash flows used for investing
purposes decreased by $1.0 million to $42.2 million,
compared with $43.2 million in 2005. During the
year, the Corporation spent $47.6 million more than
in 2005 on business acquisitions. However, this
amount was offset by the cash and cash equivalents
of the acquired businesses which exceeded $40.2
million over the businesses acquired in 2005.
Compared with 2005, the net change in cash and
cash equivalents in trust or otherwise reserved was
favourable. Finally, additions to property, plant and
equipment were lower than expected, down $4.8
million from the previous year. In 2007, we expect
that additions to property, plant and equipment will
total between $30.0 million and $35.0 million.
Financing activities
During the year, cash flows totalling $152.0
million were used from financing activities, up
$108.0 million compared with 2005. This increase
resulted primarily from share repurchases during the
year. These repurchases were more substantial than
in 2005, up $109.9 million.
Cash flows –
operating activities
Cash flows –
investing activities
Cash flows –
financing activities
Effect of exchange rate changes
on cash and cash equivalents
Net change in cash and cash equivalents
2006
$
2005
$
2004
$
113,279
74,156
184,321
Variance
2006
%
52.8
2005
%
(59.8)
(42,173)
(43,190)
(84,475)
2.4
48.9
(152,046)
(44,091)
(35,359)
(244.8)
(24.7)
2,332
(78,608)
(4,255)
(17,380)
3,436
67,923
154.8
(352.2)
(223.8)
(125.6)
The above table summarizes the cash flow activity and should be read in conjunction with the audited Consolidated Statements of
Cash Flows.
32
2006 Annual Report Transat A.T. Inc.
Off-balance sheet arrangements
and contractual obligations
In the normal course of business, Transat
enters into arrangements and incurs obligations that
will impact its future operations and cash flows. Some
of these obligations are reflected as liabilities in the
Corporation’s Consolidated Financial Statements.
Total debt obligations amounted to $87.4 million
as at October 31, 2006 ($106.8 million in 2005).
Obligations not reflected as liabilities are considered
off-balance sheet arrangements. These contractual
arrangements are entered into with non-consolidat-
ed entities and are made up of:
• Guarantees (see notes 9 and 22 to the audited
Consolidated Financial Statements)
• Operating leases (see note 21 to the audited
Consolidated Financial Statements)
• Agreements with suppliers (see note 21 to the
audited Consolidated Financial Statements)
The 2006 off-balance sheet debt that can be
estimated was approximately $550.8 million as at
October 31, 2006 ($520.0 million in 2005) and is
detailed as follows:
(In thousands of dollars)
2006
$
2005
$
Guarantees
Irrevocable letters of credit
(notes 9 and 22)
Security contracts (note 22)
Operating leases
Commitments under
5,751
780
17,238
1,260
operating leases (note 21)
313,806
338,115
Agreements with
suppliers (note 21)
Total
230,418
163,377
550,755
519,990
In the normal course of business, guarantees
are required in the travel industry to provide indem-
Contractual obligations — Payments due by period
Years ended October 31 (in thousands of dollars)
nification and guarantees to counterparties in trans-
actions such as operating leases, irrevocable letters
of credit and security contracts. Historically, Transat
has not made any significant payments under such
guarantees. Operating leases are entered into to
enable the Corporation to lease certain items rather
than acquire them. Agreements with suppliers are
negotiated to reserve hotel rooms, blocks of seats
and flights.
We believe that the Corporation will be able to
meet its obligations with existing funds, operating
cash flows and borrowings under existing credit
facilities.
OTHER
Issuer bid
On November 14, 2005, the Corporation
announced an issuer bid to repurchase and cancel
its Class A Variable Voting Shares and Class B
Voting Shares. A maximum of 7,142,857 shares, or
approximately 18% of the Corporation’s 40,156,450
issued and outstanding Class A Variable Voting
Shares and Class B Voting Shares could have been
repurchased at a price of not less than $17.50 per
share and not more than $20.00 per share, for a
total of $125 million. The issuer bid expired on
December 22, 2005.
its
issuer bid,
In accordance with
the
Corporation repurchased, on January 3, 2006, a
total of 6,443,299 voting shares, consisting of
1,780,797 Class A Variable Voting Shares and
4,662,502 Class B Voting Shares, for a cash consid-
eration of $125,0 million.
Debentures
Long-term debt
Operating leases (aircraft)
Operating leases (other)
Agreements with suppliers
2007
$
—
26,885
63,537
19,028
165,629
2008
$
—
57,363
60,438
14,109
41,884
Total
275,079
173,794
2009
$
3,156
—
44,040
10,702
20,973
78,871
2010
$
—
—
24,901
6,454
966
32,321
2011
$
—
—
12,242
3,194
966
16,402
2012 and
Total
thereafter
$
$
3,156
—
— 84,248
206,212
107,594
— 230,418
1,054
54,107
55,161
631,628
The above table summarizes the Corporation’s obligations and commitments to make future payments under contracts, including long-
term debt, leases, debentures and agreements with suppliers. Additional information is contained in notes 10, 11 and 21 to the audited
33
2006 Annual Report Transat A.T. Inc.
Normal course issuer bid
On June 7, 2006, the Board of Directors of
Transat filed a notice to extend the normal course
issuer bid for a 12-month period; the bid was origi-
nally scheduled to expire on June 14, 2006. In the
notice, the Corporation stated its intention to pur-
chase for cancellation up to a maximum of
3,270,939 of its Class A Variable Voting Shares and
Class B Voting Shares, representing 10% of the
publicly held Class A Variable Voting Shares and
Class B Voting Shares. As at June 2, 2006, there
was a total of 33,768,158 Class A Variable Voting
Shares and Class B Voting Shares issued and out-
standing.
This program allows the Corporation to pur-
chase Class A Variable Voting Shares and Class B
Voting Shares in the normal course of business, i.e.,
when the Corporation believes that the Class A
Variable Voting Shares and Class B Voting Shares
are undervalued by the market.
These purchases are to be made via the
Toronto Stock Exchange in accordance with its pol-
icy on normal course issuer bids. The price the
Corporation will pay for any Class A Variable Voting
Shares and Class B Voting Shares will be the mar-
ket price at the time of acquisition, plus brokerage
fees. Purchases began on June 15, 2004, and will
terminate no later than June 14, 2007.
During the year, 287,000 voting shares, made
up of Class A Variable Voting Shares and Class B
Voting Shares, were purchased for cancellation for a
cash consideration of $7.4 million.
Dividend
On June 8, 2006, the Corporation announced
that its Board of Directors had approved the intro-
duction of a quarterly dividend of $0.07 per Class B
Voting Share and Class A Variable Voting Share.
During the year, the Corporation declared and paid
dividends totalling $4.7 million.
Shares issued and outstanding
As at October 31, 2006, the number of Class A
Shares and Class B Shares amounted to 2,794,011
and 30,853,586 respectively.
ACCOUNTING
Financial instruments
In the normal course of business, the Corpora-
tion is exposed to risks related to exchange rate
variations for certain currencies and fuel price varia-
tions. The corporation manages these risks through
various financial instruments. Management is respon-
sible for determining the acceptable level of risk and
only uses financial instruments to hedge existing
commitments or obligations and not to realize a
profit on trading activities.
Credit risk related to financial instruments
The theoretical risk to which the Corpora-
tion is exposed in relation to financial instruments
is limited to the replacement cost of contracts at
market prices in the event of default by one of the
parties. Management is of the opinion that the
credit risk related to financial instruments is well
controlled because the Corporation only enters
into agreements with large financial institutions.
Management of fuel price and foreign
exchange risks
The Corporation has entered into fuel forward
contracts maturing in less than two years to manage
fuel price fluctuation risks. To manage foreign
exchange risks, it also entered into foreign exchange
forward contracts, expiring in less than two years,
for the purchase and sale of foreign currencies.
Credit risk
The Corporation believes it is not exposed to a
significant concentration of credit risk. Cash and
cash equivalents are invested on a diversified basis
in investment-grade corporations. Accounts receiv-
able generally arise from the sale of vacation pack-
ages to individuals through retail travel agencies and
the sale of seats to tour operators, which are dis-
persed over a wide geographic area.
Fair value of financial instruments
reported in the balance sheets
Due to the short-term nature of current finan-
cial assets and liabilities reported in the consolidat-
ed balance sheets, their carrying amount approxi-
mates their fair value.
Due to the nature of long-term debt reported in
the consolidated balance sheets, its carrying amount
approximates its fair value.
The fair value of the debentures could not be
34
2006 Annual Report Transat A.T. Inc.
determined with sufficient reliability due to their spe-
cific nature.
Note 23 to the audited Consolidated Financial
Statements for the year ended October 31, 2006
(included in this 2006 Annual Report) contains addi-
tional information on financial instruments.
Related party transactions and balances
In the normal course of business, the Corpora-
tion enters into transactions with related companies.
These transactions are measured at the exchange
amount, which is the amount of consideration deter-
mined and agreed to by the related parties. Related
party transactions and balances are not material.
Critical accounting estimates
The preparation of financial statements in
accordance with GAAP requires management to make
certain estimates. We periodically review these esti-
mates, which are based on historical experience,
changes in the business environment and other fac-
tors that management considers reasonable under
the circumstances. Our estimates involve judgements
we make based on the information available to
us. Actual results may differ materially from these
estimates.
In the discussion below, we have identified a
number of critical accounting estimates that required
us to make assumptions about matters that were
uncertain at the time the estimates were made. Our
results, financial position and cash flows might be
substantially different if we had used different esti-
mates in the current period or if these estimates
were likely to change in the future.
This discussion addresses only those esti-
mates that we consider important based on the
degree of uncertainty and the likelihood of a materi-
al impact if we had used different estimates. There
are many other areas in which we use estimates
about uncertain matters.
Aircraft maintenance/Provision
for engine and airframe overhaul
The Corporation provides for engine and air-
frame overhaul expenses for its aircraft based on an
estimate of all such future expenses until the expiry
of the leases for these aircraft, or on their estimated
useful lives when owned by the Corporation. These
expenses are amortized over the total number of
engine cycles and the total number of estimated air-
frame hours over the same periods. These expenses
are charged to income according to the number of
cycles used or over the completed fiscal months, by
a provision for future costs or the amortization of the
capitalized overhaul costs, as the case may be. Any
changes in demand for air travel or in the economy
as a whole, or any additional actions by manage-
ment, could alter the factors used to estimate this
provision. This may result in charges that could
materially affect our results, financial position and
cash flows. In general, the main assumptions used
to calculate this provision would have to be reduced
by approximately 15%, resulting in additional charges
that could have a material impact on our results,
financial position and cash flows.
Goodwill and intangible assets
We record material balance sheet amounts
under goodwill and other intangible assets calculat-
ed using the historical cost method. We are required
to measure goodwill and intangible assets that have
indefinite lives, such as trademarks, each year, or
more often if events or changes in circumstances
indicate it is more likely than not that they might be
impaired. Our review is based on an asset’s ability to
generate future cash flows. We carry out an analysis
by estimating the discounted cash flows attributable
to each asset. This analysis requires us to make a
variety of judgements concerning our future opera-
tions. The cash flow forecasts used to determine
asset values may change in the future due to mar-
ket conditions, competition and other factors. Any
changes may result in non-cash charges that could
materially affect our results and financial position. In
general, the main assumptions would have to be
reduced by 30%-70% (depending on the operating
unit), resulting in a significant loss in value for the
operating unit and a material impact on our results
and financial position. However, reducing these
assumptions would only result in a non-cash charge
and would not affect our cash flows.
Property, plant and equipment
Property, plant and equipment in the balance
sheet includes material amounts based on histori-
cal costs. These assets are reviewed for impair-
ment whenever events or changes in circum-
stances indicate that the carrying amount may not
be recoverable. Our review is based on an asset’s
ability to generate future cash flows. We carry out
an analysis by estimating the net undiscounted
cash flows attributable to each asset. This analy-
sis requires us to make a variety of judgements
concerning our future operations. The cash flow
35
2006 Annual Report Transat A.T. Inc.
forecasts used to determine asset values may
change in the future due to market conditions or
other factors. Any changes may result in non-cash
charges that could materially affect our results and
financial position. In general, the main assump-
tions would have to be reduced by 60%, resulting
in a loss in value and a material impact on our
results and financial position. However, reducing
these assumptions would not result in cash out-
flows and would not affect our cash flows.
Future accounting changes
On January 27, 2005, the CICA issued three
new accounting standards: Section 1530 (“Compre-
hensive Income”), Section 3855 (“Financial Instruments
— Recognition and Measurement”) and Section
3865 (“Hedges”). These standards became effective
November 1, 2006. We do not anticipate that these
changes will have a significant impact on the
Corporation’s results.
Comprehensive income
This new standard describes how comprehen-
sive income (and its components) should be pre-
sented. Comprehensive income corresponds to the
variation in an enterprise’s net assets resulting from
transactions, events and circumstances from non-
shareholder sources. The main components include
unrealized currency translation adjustments arising
from self-sustaining foreign operations and fair value
adjustments of the effective portion of hedging
instruments.
Financial Instruments —
Recognition and Measurement
This new standard establishes the timing and
method of accounting for financial instruments in the
balance sheet. In some cases, fair value may be
used; in other cases, a method based on the histor-
ical cost may apply. This standard also describes
how gains and losses on financial instruments
should be presented.
Hedges
Hedge accounting is discretionary. This standard
makes it possible for entities to apply accounting
treatments other than those set out in Section 3855
(“Financial Instruments — Recognition and Meas-
urement”) to eligible transactions that the entities
choose to designate (for accounting purposes) as
components of a hedging relationship. This new stan-
dard adds to Accounting Guideline no. 13 (AcG-13),
Hedging Relationships, and Section 1650 (“Foreign
Currency Translation”) by specifying how hedge
accounting may be applied and the related disclo-
sure requirements.
CONTROLS AND PROCEDURES
The implementation of the Canadian Securities
Administrators Multilateral Instrument 52-109 repre-
sents a continuous improvement process, which has
prompted the Corporation to formalize existing
processes and control measures and introduce new
ones. Transat has chosen to make this a corporate-
wide project, which will result in operational improve-
ments and better management.
In accordance with this instrument, the Corpo-
ration has filed certificates signed by the President
and Chief Executive Officer and the Vice-President,
Finance and Administration and Chief Financial
Officer, that, among other things, report on the design
and effectiveness of disclosure controls and proce-
dures and the design of internal control over financial
reporting.
information relating
Management has designed disclosure controls
and procedures to provide reasonable assurance
the
that material
Corporation is made known to the President and
Chief Executive Officer and the Vice-President,
Finance and Administration and Chief Financial
Officer, particularly during the period in which the
annual filings are being prepared.
to
These two certifying officers evaluated the
effectiveness of the Corporation’s disclosure controls
and procedures as of October 31, 2006, and based
on their evaluation, they have concluded that these
controls and procedures are effective. This evalua-
tion, among other things, took into consideration the
Corporation’s Corporate Disclosure Policy, the sub-
certification process that has been implemented,
and the functioning of its Disclosure Committee.
36
2006 Annual Report Transat A.T. Inc.
travel as well as the level of car rentals and hotel and
cruise reservations.
Competition
We face many competitors in the holiday trav-
el industry. Some of them are larger, with strong
brand name recognition and an established pres-
ence in specific geographic areas, substantial finan-
cial resources and preferred relationships with travel
suppliers. We also face competition from travel sup-
pliers selling directly to travellers at preferential
prices. These competitive pressures could adverse-
ly impact our revenues and margins since we would
likely have to match competitors’ prices.
Fluctuations in foreign exchange
and interest rates
We are exposed, due to our many arrange-
ments with foreign-based suppliers, to fluctuations
in exchange rates between the U.S. dollar, the
Canadian dollar and the euro. These fluctuations
could increase our operating costs. Changes in
interest rates could also impact our interest income
from our cash and cash equivalents and interest
expense from variable-rate debt instruments, in turn
affecting our earnings. We currently purchase deriv-
ative financial instruments to hedge against
exchange-rate fluctuations affecting our long-term
debt, our off-balance sheet financing obtained for
aircraft and the revenues and operating expenses
that the Corporation settles in foreign currencies.
Fuel costs and supply
In particular, Transat is exposed to fluctuations
in fuel costs. Due to competitive pressures in the
industry, there can be no assurance that we would
be able to pass along any increase in fuel prices to
our customers by increasing fares, or that any fare
increase would offset higher fuel costs, which could
in turn adversely impact our business, financial posi-
tion or operating results. We purchase futures con-
tracts to hedge against fuel cost fluctuations.
Furthermore, if there were a reduction in the supply
of fuel, our operations could be adversely impacted.
Management has also designed internal con-
trols over financial reporting to provide reasonable
assurance regarding the reliability of financial report-
ing and the preparation of financial statements for
external purposes in accordance with Canadian
GAAP. The President and Chief Executive Officer
and the Vice-President, Finance and Administration
and Chief Financial Officer have evaluated the design
of the Corporation’s internal controls and proce-
dures over financial reporting as of the end of the
period covered by the annual filings, and believe the
design to be sufficient to provide such reasonable
assurance.
On August 1, 2006, the Corporation purchased
U.K.-based Canadian Affair, whose annual revenues
represent approximately 5% of Transat’s consolidat-
ed revenues. In the upcoming quarters, manage-
ment will review internal control over financial report-
ing for this newly acquired subsidiary. At year-end,
risks were mitigated, however, as Transat was fully
apprised of any material events affecting this com-
pany. In addition, this subsidiary was integrated with
regard to the aspects of internal control at the entity
level.
Finally, other than additional formal policies and
specific procedures, there has been no change in
the Corporation’s internal control over financial
reporting that occurred during the fourth quarter of
fiscal 2006 that materially affected, or is reasonably
likely to materially affect, the Corporation’s internal
control over financial reporting.
RISKS AND UNCERTAINTIES
Economic and general factors
Economic factors such as a significant down-
turn in the economy, a recession or a decline in the
employment rate in North America, Europe or key
international markets could have a negative impact
on our business and operating results by affecting
demand for our products and services. Our operat-
ing results could also be adversely affected by more
general factors, including the following: extreme
weather conditions; war, political instability or terror-
ism, or any threat thereof; epidemics or disease out-
breaks; consumer preferences and spending pat-
terns; consumer perceptions of airline safety; demo-
graphic trends; disruptions to air traffic control sys-
tems; and costs of safety, security and environmen-
tal measures. Furthermore, our revenues are sensi-
tive to events affecting domestic and international air
37
2006 Annual Report Transat A.T. Inc.
Changing industry dynamics:
new distribution methods
The widespread popularity of the Internet has
resulted in travellers being able to access informa-
tion about travel products and services and to pur-
chase such products and services directly from sup-
pliers, thereby bypassing not only vacation providers
such as Transat, but also retail travel agents through
whom we generate a substantial portion of our rev-
enues. For the time being, direct Internet sales
remain limited in the vacation travel segment, shifts
in industry dynamics in the distribution business
occur rapidly and, in this respect, give rise to risks.
In order to address this issue, Transat is in the
process of developing and implementing a multi-
channel distribution system to strike a harmonious
balance between a variety of distribution strategies
such as travel agencies, direct sales (including via
Internet), third-party sales and the use of electronic
booking systems.
In addition, the phenomenon of the gradual
erosion of commissions paid by travel suppliers,
particularly airlines, has weakened the financial posi-
tion of many travel agents. Because we rely to some
extent on retail travel agencies for access to trav-
ellers and revenues, any consumer shift away from
travel agencies and toward direct purchases from
travel suppliers could have an impact on our
Corporation.
Reliance on contracting travel suppliers
Despite being well positioned due to our verti-
cal integration, we depend on third parties who sup-
ply us with certain components of our packages.
We are dependent, for example, on non-group air-
lines and a large number of hotels. In general, these
suppliers can terminate or modify existing agree-
ments with us on relatively short notice. The poten-
tial inability to replace these agreements, to find
similar suppliers, or to renegotiate agreements at
reduced rates could have an adverse effect on our
results. Furthermore, any decline in the quality of
travel products or services provided by these suppli-
ers, or any perception by travellers of such a decline,
could adversely affect our reputation. Any loss of
contracts, changes to our pricing agreements, access
restrictions to travel suppliers’ products and servic-
es or negative shifts in public opinion regarding cer-
tain travel suppliers resulting in lower demand for
their products and services could have a significant
effect on our results.
Dependence on technology
Our business depends on our ability to access
information, manage reservation systems (including
handling high telephone call volumes on a daily basis)
and distribute our products to retail travel agents
and other travel intermediaries. To this end, we rely
on a variety of information and telecommunications
technologies. Rapid changes in these technologies
could require higher-than-anticipated capital expen-
ditures to improve customer service; this could
impact our operating results. In addition, any sys-
tems failures or outages could adversely affect our
business, customer relationships and operating
results.
Dependence on customer
deposits and advance payments
Transat derives significant interest income from
customer deposits and advance payments. In
accordance with our investment policy, we are
required to invest these deposits and advance pay-
ments exclusively in investment-grade securities.
Any failure of these investment securities to perform
at historical levels could reduce our interest income.
Negative working capital
In the normal course of business, we receive
customer deposits and advance payments. In the
event that the flow of advance payments diminished
and Transat were required to find alternative sources
of capital, there can be no assurance that such
sources would be available at terms and conditions
acceptable to us. This could have a significant impact
on our business.
Fluctuations in financial results
The travel industry in general and our opera-
tions in particular are seasonal. As a result, our quar-
terly operating results are subject to fluctuations. In
our view, quarter-to-quarter comparisons of our
operating results are not necessarily meaningful and
should not be relied on as indicators of future per-
formance. Furthermore, due to the economic and
general factors described above, our operating
results in future periods could fall short of the expec-
tations of securities analysts and investors, thus
affecting the market price of our shares.
38
2006 Annual Report Transat A.T. Inc.
Government regulation and taxation
Transat’s future results may vary depending on
the actions of government authorities with jurisdic-
tion over our operations. These actions include the
granting and timing of certain government approvals
or licenses; the adoption of regulations impacting
customer service standards (such as new passen-
ger security standards); the adoption of more strin-
gent noise restrictions or curfews; and the adoption
of provincial regulations impacting the operations of
retail and wholesale travel agencies. In addition, the
adoption of new regulatory frameworks (or amend-
ments thereto) or tax policy changes could affect
our operations, particularly as regards hotel taxes,
car rental taxes, airline excise taxes and airport
taxes and fees.
Future capital requirementsl
Transat may need to raise additional funds in
the future to capitalize on growth opportunities or
in response to competitive pressures. There can
be no assurance that additional financing will be
available on terms and conditions acceptable to
us. This could adversely affect our business.
Interruption of operations
If our operations are interrupted for any reason
(including aircraft unavailability due to mechanical
troubles), the loss of associated revenues could
have an impact on our business, financial position
and operating results.c
Insurance coverage
In the wake of the terrorist attacks of September
11, 2001, the airline insurance market gave notice
that it intended to cancel all aircraft third-party lia-
bility coverage for risks associated with war and ter-
rorist acts. Although this notice was subsequently
rescinded, the limit on third-party civil liability cover-
age for bodily injury and property damage was
reduced to US$50 million per incident.
Over the past few years, a commercial market
has become available to cover these risks. However,
the reasonableness of the terms and conditions has
been a subject of some discussion, and some insur-
ers are not licensed to transact business in Canada.
Since no commercial market was immediately avail-
able to provide airlines with third-party civil liability
coverage against war and terrorist acts in excess of
US$150 million at commercially reasonable terms, it
was necessary for individual governments to cover
locally-based airlines against this risk until commer-
cial insurance became available The Canadian gov-
ernment covers domestic air carriers accordingly.
The Canadian government continues to cover its
air carriers, prompted by the licensing situation and by
the U.S. government’s decision to continue protecting
its own carriers against such risks. However, there can
be no assurance that the Canadian government will
not withdraw its protection, particularly if the U.S. gov-
ernment should change its position.
Casualty losses
We feel that we and our suppliers have ade-
quate liability insurance to cover risks arising in the
normal course of business, including claims for seri-
ous injury or death arising from accidents involving
aircraft or other vehicles carrying our customers.
Although we have never faced a liability claim for
which we did not have adequate insurance cover-
age, there can be no assurance that our coverage
will be sufficient to cover larger claims or that the
insurer concerned will be solvent at the time of any
covered loss. In addition, there can be no assurance
that we will be able to obtain coverage at accept-
able levels and cost in the future. These uncertain-
ties could adversely affect our business and operat-
ing results.
Slot and gate availability
Access to landing and departure runway slots,
airport gates and facilities is critical to our operations
and growth strategy. Future availability or cost of
these facilities could have an adverse effect on our
operations.
Aircraft lease obligations
Transat has significant non-cancellable lease
obligations relating to its aircraft fleet. If revenues
from aircraft operations were to decrease, the pay-
ments to be made under our existing lease agree-
ments could have a substantial impact on our oper-
ations.
Key personnel
Our future success depends on our ability to
attract and retain qualified personnel. The loss of
key individuals could adversely affect our business
and operating results.
39
2006 Annual Report Transat A.T. Inc.
Bargaining agreements
Our operations could be adversely affected in
the event of an inability to reach an agreement with
a labour union representing our employees, includ-
ing pilots.
OUTLOOK
Generally, international tourism is expanding,
and the Corporation considers that thanks to its ver-
tical integration and international footprint, it is well
positioned to continue growing and face challenges,
in particular certain operating expenses over which
it has little or no control (such as fuel costs or airport
and navigation fees) and the impact of competition,
which remains fierce.
At the time this annual report was being
issued, the Corporation’s bookings in North America
for winter 2007 where sharply higher than at the
same period in 2006, whereas bookings in Europe
were slightly higher than at the same time in 2006.
40
2006 Annual Report Transat A.T. Inc.
MANAGEMENT’S REPORT
AND AUDITOR’S REPORT
The consolidated financial statements are the
responsibility of management and have been approved
by the Board of Directors. Management’s responsibility in
this respect includes the selection of appropriate
accounting principles as well as the exercise of sound
judgment in establishing reasonable and fair estimates in
accordance with Canadian generally accepted account-
ing principles which are adequate in the circumstances.
The financial information presented throughout this annu-
al report is consistent with that appearing in the financial
statements.
The Corporation and its affiliated companies have
set up accounting and internal control systems designed
to provide reasonable assurance that the Corporation’s
assets are safeguarded against loss or unauthorized use
and that its books of account may be relied upon for the
preparation of financial statements.
through
financial statements
The Board of Directors is responsible for the con-
solidated
its Audit
Committee. The Audit Committee reviews the annual
consolidated financial statements and recommends their
approval to the Board of Directors. The Audit Committee
is also responsible for analyzing, on an ongoing basis, the
results of the audits by the external auditors of the
accounting methods and policies used as well as of the
internal control systems set up by the Corporation. These
financial statements have been audited by Ernst & Young
LLP, the external auditors. Their report on the consolidat-
ed financial statements appears opposite.
Jean-Marc Eustache
Chairman of the Board,
President and Chief Executive Officer
François Laurin
Vice-President, Finance and Administration
and Chief Financial Officer
To the Shareholders of Transat A.T. Inc.
We have audited the consolidated balance sheets
of Transat A.T. Inc. as at October 31, 2006 and 2005 and
the consolidated statements of income, retained earnings
and cash flows for the years then ended. These financial
statements are the responsibility of the Corporation’s
management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with
Canadian generally accepted auditing standards. Those
standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial state-
ments are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting princi-
ples used and significant estimates made by manage-
ment, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial state-
ments present fairly, in all material respects, the financial
position of the Corporation as at October 31, 2006 and
2005 and the results of its operations and its cash flows
for the years then ended in accordance with Canadian
generally accepted accounting principles.
Montréal, Canada
December 7, 2006
Ernst & Young LLP
Chartered Accountants
41
2006 Annual Report Transat A.T. Inc.
CONSOLIDATED BALANCE SHEETS
As at October 31 (In thousands of dollars)
ASSETS
Current assets
Cash and cash equivalents
Cash and cash equivalents in trust or otherwise reserved [note 4]
Accounts receivable
Future income tax assets [note 18]
Inventories
Prepaid expenses
Current portion of deposits
Total current assets
Deposits [note 5]
Future income tax assets [note 18]
Property, plant and equipment [notes 6 and 10]
Goodwill and other intangible assets [note 7]
Other assets [note 8]
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities
Income taxes payable
Customer deposits and deferred income
Debentures [note 11]
Payments on current portion of long-term debt
Total current liabilities
Long-term debt [note 10]
Debentures [note 11]
Provision for engine and airframe overhaul in excess of deposits
Other liabilities [note 12]
Future income tax liabilities [note 18]
Shareholders’ equity
Share capital [note 13]
Retained earnings
Contributed surplus
Warrants [notes 11 and 13]
Accumulated translation adjustments [note 15]
Commitments and contingencies [note 21]
See accompanying notes to consolidated financial statements.
2006
$
2005
$
214,887
203,613
87,996
1,357
8,312
43,706
29,849
589,720
19,350
7,120
181,349
153,681
7,975
959,195
236,282
10,122
218,875
—
26,885
492,164
57,363
3,156
64,961
31,934
13,654
663,232
151,430
142,116
1,379
1,016
22
295,963
959,195
293,495
182,268
69,611
70
7,524
40,576
29,259
622,803
24,127
5,106
195,131
93,741
8,629
949,537
193,277
4,763
182,752
10,000
6,199
396,991
87,414
3,156
63,809
30,833
5,051
587,254
179,438
183,718
531
1,187
(2,591)
362,283
949,537
On behalf of the Board:
Jean-Marc Eustache, Director
André Bisson, O.C., Director
42
2006 Annual Report Transat A.T. Inc.
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
As at October 31 (In thousands of dollars)
Retained earnings, beginning of year, as previously reported
Change in accounting policy [note 3]
Retained earnings, beginning of year
Net income for the year
Premium paid on share repurchase [note 13]
Share repurchase costs, net of related income taxes of $145
Dividends
Interest on equity component of debentures,
net of related income taxes of $648
Retained earnings, end of year
CONSOLIDATED STATEMENTS OF INCOME
Years ended October 31 (In thousands of dollars, except per share amounts)
Revenues
Operating expenses
Direct costs
Salaries and employee benefits
Aircraft fuel
Commissions
Aircraft maintenance
Airport and navigation fees
Aircraft rent
Other
Amortization [note 16]
Restructuring charge [note 18]
Interest on long-term debt and debentures
Other interest and financial expenses
Interest income
Foreign exchange gain on long-term monetary items
Gain on disposal of investment [note 8]
Share of net income of companies subject to significant influence
Income before the following items
Income taxes (recovery) [note 18]
Current
Future
Income before non-controlling interest in subsidiaries’ results
Non-controlling interest in subsidiaries’ results
Net income for the year
Basic earnings per share [note 13]
Diluted earnings per share [note 13]
See accompanying notes to consolidated financial statements.
2006
$
183,718
—
183,718
65,770
(102,327)
(308)
(4,737)
—
142,116
2006
$
2,603,746
1,307,732
290,385
247,697
171,116
81,150
71,833
48,870
258,019
2,476,802
126,944
39,360
—
7,264
1,484
(15,706)
(4,162)
—
(375)
27,865
99,079
32,558
(512)
32,046
67,033
(1,263)
65,770
1.88
1.85
2005
$
135,322
12,151
147,473
55,416
(17,731)
—
—
(1,440)
183,718
2005
$
2,364,481
1,168,612
241,776
199,376
181,587
91,778
67,937
52,064
240,720
2,243,850
120,631
37,558
(934)
10,815
1,708
(12,963)
(2,309)
(5,747)
(461)
27,667
92,964
48,705
(12,403)
36,302
56,662
(1,246)
55,416
1.43
1.33
43
2006 Annual Report Transat A.T. Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
As at October 31 (In thousands of dollars)
OPERATING ACTIVITIES
Net income
Operating items not involving an outlay (receipt) of cash
Amortization
Foreign exchange gain on long-term monetary items
Gain on disposal of investment
Share of net income of companies subject to significant influence
Non-controlling interest in subsidiaries’ results
Future income taxes
Interest on debentures
Pension expense
Compensation expense related to stock option plan
Net change in non-cash working capital balances related to operations
Net change in other liabilities
Net change in deposits, expenses and provision for engine
and airframe overhaul
Cash flows relating to operating activities
INVESTING ACTIVITIES
Increase in deposits
Repayment of deposits
Additions to property, plant and equipment
Disposal of property, plant and equipment
Proceeds from disposal of investment
Cash and cash equivalents from acquired companies
Consideration paid for acquired companies
Net change in cash and cash equivalents in trust or otherwise reserved
Net change in other assets
Cash flows relating to investing activities
FINANCING ACTIVITIES
Repayment of long-term debt
Interest paid on convertible debentures
Proceeds from issuance of shares
Share repurchase
Share repurchase costs
Repayment of debentures
Dividends
Cash flows relating to financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplementary information
Income taxes paid
Interest paid
See accompanying notes to consolidated financial statements.
2006
$
2005
$
65,770
55,416
39,360
(4,162)
—
(375)
1,263
(512)
—
2,572
886
104,802
8,749
(1,424)
1,152
113,279
(3,152)
6,582
(22,366)
—
—
49,797
(56,780)
(15,705)
(549)
(42,173)
(6,312)
—
1,878
(132,422)
(453)
(10,000)
(4,737)
(152,046)
2,332
(78,608)
293,495
214,887
37,558
(2,309)
(5,747)
(461)
1,246
(12,403)
1,807
2,400
507
78,014
(8,565)
3,716
991
74,156
(11,069)
8,601
(27,213)
5,001
6,900
9,637
(9,203)
(24,590)
(1,254)
(43,190)
(6,766)
(2,868)
9,988
(22,545)
—
(21,900)
—
(44,091)
(4,255)
(17,380)
310,875
293,495
26,348
6,895
72,486
6,226
44
2006 Annual Report Transat A.T. Inc.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
October 31, 2006 and 2005
(Amounts are expressed in thousands of dollars, except for share
capital, stock option plans, warrants, deferred share units and amounts
per share)
1)
INCORPORATION AND NATURE OF BUSINESS
Transat A.T. Inc. [the “Corporation”], incorporated
under the Canada Business Corporations Act, is an inte-
grated company specializing in the organization, market-
ing and distribution of holiday travel. The core of its busi-
ness consists of tour operators based in Canada and
Europe. The Corporation is also involved in air transporta-
tion and value-added services at travel destinations.
Finally, the Corporation has secured a dynamic presence
in distribution through travel agency networks.
2)
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the
Corporation have been prepared by management in
accordance with Canadian generally accepted account-
ing principles. The preparation of financial statements in
accordance with generally accepted accounting princi-
ples requires management to make estimates and assump-
tions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could
differ from those estimates. The consolidated financial
statements have, in management’s opinion, been proper-
ly prepared within reasonable limits of materiality and
within the framework of the accounting policies summa-
rized below.
Basis of consolidation
The consolidated financial statements include the
accounts of the Corporation, its subsidiaries and its vari-
able interest entities where the Corporation is the primary
beneficiary.
The Corporation consolidates the variable interest
entities in accordance with Accounting Guideline 15,
“Consolidation of Variable Interest Entities” [“AcG-15”].
This Guideline presents clarification on the application
of consolidation principles to certain entities that are
subject to control on a basis other than ownership of
voting interests. AcG-15 provides guidance for deter-
mining when an enterprise includes the assets, liabili-
ties and results of activities of a variable interest entity
in its consolidated financial statements. Under AcG-15,
an enterprise should consolidate a variable interest
entity when that enterprise has a variable interest, or
combination of variable interests, that will absorb a
majority of the entity’s expected losses if they occur,
receive a majority of the entity’s expected residual
returns if they occur, or both (the “primary beneficiary”).
Assets recognized as a result of consolidating
certain variable interest entities do not represent addi-
tional assets that could be used to satisfy claims
against the Corporation’s general assets.
Cash equivalents
Cash equivalents consist primarily of term deposits,
bankers’ acceptances and commercial paper that are
readily convertible into known amounts of cash with initial
maturities of less than three months. These investments
are recorded at cost plus accrued interest, and their car-
rying value approximates their fair market value.
Inventories
Inventories are valued at the lower of cost, deter-
mined according to the first-in, first-out method, and
replacement cost.
45
2006 Annual Report Transat A.T. Inc.
2)
SIGNIFICANT ACCOUNTING POLICIES [Cont’d]
Property, plant and equipment
Property, plant and equipment are recorded at
cost and are amortized, taking into account their
residual value, on a straight-line basis over their esti-
mated useful life as follows:
Aircraft
Improvements to aircraft
under operating leases
Aircraft equipment
Computer hardware and software
Aircraft engines
Office furniture and equipment
Leasehold improvements
Rotable aircraft spare parts
Hangar and administrative buildings
Lease term
5 to 10 years
3 to 7 years
Cycles used
4 to 10 years
Lease term
Use
35 years
4 to 5 years
Goodwill and other intangible assets
Goodwill and other intangible assets having an
indefinite life have not been amortized.
Goodwill represents the excess of the purchase
price over the fair value of identifiable net assets acquired.
Goodwill is tested for impairment annually or more often
if events or changes in circumstances indicate that it is
more likely than not that it is impaired. The impairment
test consists of a comparison of the fair value of the
reporting unit to which goodwill is assigned with its carry-
ing amount. Any impairment loss in the carrying amount
compared with the fair value is charged to income in the
period in which the loss is recognized. The Corporation
uses the discounted cash flow method to assess the fair
value of its reporting units.
Intangible assets acquired that have an indefinite
life, such as trademarks, are also tested for impairment
annually or more often if events or changes in circum-
stances indicate that it is more likely than not that they are
impaired. The impairment test consists of a comparison
of the fair value of intangible assets with their carrying
amount. Any impairment loss in the carrying amount
compared with the fair value is charged to income in the
period in which the loss is recognized. The Corporation
uses the discounted cash flow method to assess the fair
value of its intangible assets.
Intangible assets with definite useful lives, such as
customer lists, are amortized on a straight-line basis over
terms ranging from three to ten years.
Impairment of long-lived assets
Property, plant and equipment and intangible
assets with finite lives are reviewed for impairment when-
ever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable.
Impairment is assessed by comparing the carrying amount
of an asset with its expected future net undiscounted
cash flows from use together with its residual value [net
recoverable value]. If such assets are considered to be
impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the
assets exceeds their fair value.
Other assets
Other assets consist in particular of development
costs and long-term investments over which the Corpora-
tion has the ability to exercise significant influence.
Development costs are amortized over periods not
exceeding five years. Long-term investments are account-
ed for using the equity method.
Deposits, expenses and provision for engine
and airframe overhaul
The Corporation provides for engine and airframe
overhaul expenses for its aircraft based on an estimate of
all such future expenses until the expiry of the leases for
these aircraft, or for their estimated useful lives anticipat-
ed for the Corporation while held, amortized over the total
number of engine cycles and the total number of months
anticipated for the airframe over the same periods.
These expenses are charged to income according
to the number of cycles used or over the completed fis-
cal months, by a provision for future costs or the amorti-
zation of the capitalized overhaul costs, as the case may
be. Actual results could differ from those estimates and
differences could be significant.
The Corporation makes deposits representing a
portion of expected engine and airframe overhaul
expenses to certain aircraft lessors. These deposits are
usually recoverable upon presentation of claims for eligi-
ble overhaul expenses. Amounts so claimed are included
in assets as “Accounts receivable.” The excess of the
provision for future overhaul expenses over deposits
made and unclaimed is included in liabilities as “Provision
for engine and airframe overhaul in excess of deposits.”
The unamortized balance related to engine and airframe
overhaul expenses is included, if any, in assets as
“Deposits.”
46
2006 Annual Report Transat A.T. Inc.
A description of the stock-based compensation plans
offered by the Corporation is included in note 13.
Revenue recognition
The Corporation recognizes revenues once all the
significant risks and rewards of the service have been
transferred to the customer. As a result, revenues earned
from passenger transportation are recognized upon each
return flight. Revenues of tour operators and the related
costs are recognized at the time of the departure of the
passengers. Commission revenues of travel agencies are
recognized at the time of reservation. Amounts received
for services not yet rendered are included in current liabil-
ities as “Customer deposits and deferred income.”
Financial instruments
The Corporation uses foreign exchange forward
contracts to hedge against future currency exchange rate
variations related to its long-term debt obligations, oper-
ating lease payments, payments on long-term debt,
receipts of revenue from certain tour operators and dis-
bursements pertaining to certain operating expenses in
other currencies. The gains or losses on contracts desig-
nated as hedges resulting from exchange rate variations
are recorded in income when the related hedging trans-
actions are realized.
To protect itself against variations in fuel costs, the
Corporation has entered into fuel price hedging con-
tracts. The gains or losses resulting from designated
hedge contracts are recorded in fuel costs as purchases
of fuel are made.
The gains or losses on contracts not designated as
hedges or that cease being designated as such are rec-
ognized at their fair value in the balance sheet and any
subsequent change in fair value is recognized in the
statement of income.
Amounts receivable or payable on hedging instru-
ments, which are used to hedge foreign currency debt
obligations are recorded concurrently with the unrealized
translation gains and losses on the obligation being
hedged.
It is the Corporation’s policy not to speculate on
financial instruments; thus, these instruments are normal-
ly designated as hedges and maintained until maturity
according to the primary objective of hedging risks.
(a)
(b)
Foreign currency translation
Self-sustaining foreign operations
The Corporation translates the accounts of its self-
sustaining foreign subsidiaries using the current
rate method. All assets and liabilities of self-sustain-
ing foreign operations are translated at the exchange
rates in effect at year-end. Revenues and expenses
are translated at average rates of exchange during
the period. Net gains or losses resulting from the
translation of assets and liabilities are shown in
accumulated translation adjustments under share-
holders’ equity.
Accounts and transactions in foreign currencies
The accounts and transactions of the Corporation
denominated in foreign currencies are translated
using the temporal method. Under this method, mon-
etary items on the balance sheet are translated at the
exchange rates in effect at year-end, while non-mon-
etary items are translated at the historical rates of
exchange. Revenues and expenses are translated at
the rates of exchange on the transaction date or at
the average exchange rates for the period. Gains or
losses resulting from the translation are included in
the consolidated statement of income.
Stock-based compensation plans
The Corporation accounts for its stock option plan for
executives and employees in respect of stock option
awards granted after October 31, 2003 using the fair value
method. The fair value of stock options at the grant date is
determined using an option pricing model. Compensation
expense is recognized in income over the vesting period of
the stock options.
Prior to November 1, 2003, the Corporation account-
ed for its stock option plan for executives and employees as
capital transactions. Accordingly, the issuance of options
did not give rise to compensation expenses. The Corpo-
ration disclosed the impact of applying the fair value-based
method by presenting pro forma net income and pro forma
earnings per share by way of a note to the consolidated
financial statements for the awards granted during 2003.
The Corporation’s contributions to the stock owner-
ship incentive and capital accumulation plan for officers and
the permanent stock ownership incentive plan for senior
executives are recognized in income when the shares are
awarded based on the fair value of the shares at the time of
grant. No compensation expense is recognized for the
other plans where the shares are issued to directors, exec-
utives and employees. Any consideration paid by directors,
executives and employees upon purchasing shares is cred-
ited to share capital.
47
2006 Annual Report Transat A.T. Inc.
2)
SIGNIFICANT ACCOUNTING POLICIES [Cont’d]
Income taxes
The Corporation provides for income taxes using
the liability method. Under this method, future income tax
assets and liabilities are calculated based on differences
between the carrying value and tax bases of assets and
liabilities and measured using substantively enacted tax
rates and laws expected to be in effect when the differ-
ences reverse. A valuation allowance has been recorded
to the extent that it is more likely than not that future
income tax assets will not be realized.
Deferred lease inducements
Deferred lease inducements are amortized on a
straight-line basis over the term of the leases and are rec-
ognized as a reduction of the amortization expense.
Employee future benefits
The Corporation offers defined benefit plans to cer-
tain members of senior management. The cost of pen-
sion benefits earned by employees is determined from
actuarial calculations using the projected benefit method
prorated on services and management’s most likely esti-
mate of the increase in eligible earnings and the retire-
ment age of employees. The past service costs and
amendments to the agreements are amortized on straight
-line basis over the average remaining service period
of the active employees generally affected thereby. The
excess of net actuarial gains and losses over 10% of the
benefit obligation is amortized over the average remaining
service period of active employees, which is 8.7 years as
at November 1, 2006. Plan obligations are discounted
using current market interest rates and are included in
“Other liabilities.”
Earnings per share
Earnings per share are calculated based on the
weighted average number of Class A Variable Voting
Shares and Class B Voting Shares outstanding during the
year. Diluted earnings per share are calculated using the
treasury stock method and take into account all the ele-
ments that have a dilutive effect.
3)
CHANGES TO ACCOUNTING POLICIES
Consolidation of variable interest entities
The Corporation has conducted certain aircraft
financing transactions whereby it guaranteed a portion of
the residual value at the end of the lease term involving
special purpose entities. These entities are considered
variable interest entities and the Corporation is consid-
ered to be the primary beneficiary thereof. The adoption
of AcG-15 resulted in a $12,151 increase in the Corpora-
tion’s retained earnings as at November 1, 2004, a
$116,009 net increase in property, plant and equipment,
and a $103,858 increase in liabilities, including $101,773
[US$83,372] for long-term debt. The adoption of this
Guideline had no impact on the Corporation’s cash flows.
However, it resulted in a decline of $2,034 in net income
for the year ended October 31, 2005 and $0.05 in basic
earnings per share.
4)
CASH AND CASH EQUIVALENTS IN TRUST OR
OTHERWISE RESERVED
As at October 31, 2006, cash and cash equivalents
in trust or otherwise reserved included $168,164
[$140,675 as at October 31, 2005] in funds received from
customers for services not yet rendered and $35,449
[$41,593 as at October 31, 2005] was pledged as collat-
eral security against letters of credit and foreign exchange
forward contracts [note 20].
5)
DEPOSITS
Deposits on leased aircraft
and engines
Deposits with suppliers
Less current portion
2006
$
10,036
39,163
49,199
29,849
19,350
2005
$
10,125
43,261
53,386
29,259
24,127
48
2006 Annual Report Transat A.T. Inc.
6)
PROPERTY, PLANT AND EQUIPMENT
Aircraft
Improvements to aircraft
under operating leases
Aircraft equipment
Computer hardware and software
Aircraft engines
Office furniture and equipment
Leasehold improvements
Rotable aircraft spare parts
Hangar and administrative buildings
Accumulated amortization
Net book value
2006
2005
Accumulated
amortization
$
60,230
15,054
31,133
73,161
7,768
21,681
15,295
9,426
380
234,128
Cost
$
150,937
26,525
36,603
98,789
20,358
28,853
27,328
25,234
850
415,477
234,128
181,349
Accumulated
amortization
$
47,579
10,015
29,079
63,436
6,482
18,439
11,674
7,464
339
194,507
Cost
$
150,937
23,643
35,669
87,106
20,358
24,531
21,432
25,118
844
389,638
194,507
195,131
7)
GOODWILL AND OTHER
INTANGIBLE ASSETS
8)
OTHER ASSETS
Goodwill
Trademarks
Customer lists
2006
$
121,138
18,454
14,089
153,681
2005
$
93,741
—
—
93,741
Deferred costs,
unamortized balance
Investments in companies
subject to significant influence
and other investments
Miscellaneous
The change in goodwill is detailed as follows:
2006
$
2005
$
3,387
4,380
874
3,714
7,975
1,071
3,178
8,629
Balance, beginning of year
Acquisitions [note 17]
Translation adjustment
2006
$
93,741
26,866
531
121,138
2005
$
86,966
8,541
(1,766)
93,741
On June 6, 2005, the Corporation sold its 44.27%
ownership interest in Star for a cash consideration of
m4,500 [$6,900], subject to approval by authorities
in France. On August 5, 2005, the French authorities
approved the transaction and, as a result, the Corpora-
tion accounted for a $5,747 gain on that date.
Other intangible assets are detailed as follows:
2006
Accumulated
amortization
$
2005
Accumulated
amortization
$
Cost
$
Cost
$
Intangible assets
subject to
amortization
Customer lists
Intangible assets
not subject to
amortization
14,683
594 —
—
Trademarks
18,454
— —
—
9)
BANK LOANS
For its Canadian operations, the Corporation has a
revolving credit facility renewable annually amounting to
$60,000. Under the terms and conditions of the agree-
ment, funds may be drawn by issuing letters of credit.
As at October 31, 2006, letters of credit had been issued
for a total of $33,166 [$39,613 as at October 31, 2005],
thereby reducing the undrawn balance of the revolving
term credit facility by the same amount.
Operating lines of credit totalling m11,800 [$16,921]
[m11,800 [$16,702] in 2005] have been authorized for
certain French subsidiaries. These operating lines of
credit are renewable annually and were unused as at
October 31, 2006 and 2005.
49
2006 Annual Report Transat A.T. Inc.
2006
$
2005
$
On November 1, 2005, Transat Tours repaid the
$10,000 debenture.
9)
BANK LOANS [Cont’d]
For its European operations, the Corporation has
guarantee facilities renewable annually amounting to
m17,893 [$25,660] [m17,793 [$25,184] in 2005]. As at
October 31, 2006, letters of guarantee had been issued
totalling m3,747 [$5,373] [m11,906 [$16,851] in 2005].
10)
LONG-TERM DEBT
Loans secured by aircraft amount-
ing to US$54,000 [US$57,828
as at October 31, 2005], bearing
interest at the LIBOR rate plus
2.15% and 3.25% and maturing
in 2008
Loans secured by aircraft amount-
ing to US$18,905 [US$20,311
as at October 31, 2005], bearing
interest at the LIBOR rate plus
2.95% and 3.64% and maturing
in 2007
Other
Less current portion
60,314
68,243
21,116
23,969
2,818
84,248
26,885
57,363
1,401
93,613
6,199
87,414
Payments on long-term debt due in the next two
years are as follows:
2007
2008
$
26,885
57,363
11) DEBENTURES
(a)
The $10,000 debenture of the subsidiary Transat
Tours Canada Inc. [“Transat Tours”] bears interest
at 17.5% and matured on November 1, 2005. The
debenture is repayable at the option of Transat
Tours at a price such that the holder earns a com-
pound annual return of 20.5% from its issuance on
November 1, 1995, taking into consideration annu-
al interest already paid and recorded at a rate of
17.5%. The debenture, if not redeemed, is convert-
ible into 25% of the common shares of Transat
Tours.
The debenture is collateralized by certain intercor-
porate guarantees and by a movable hypothec
on the shares of a number of the Corporation’s sub-
sidiaries and on all of the tangible assets of the
subsidiary Air Transat A.T. Inc. [“Air Transat”] and of
Transat Tours. Should the Corporation be subject to
a takeover bid, the lender has the option to acquire
all of the outstanding shares of Transat Tours at a
price determined under an agreed formula.
(b) On January 10, 2002, the Corporation and Air
Transat issued debentures to certain shareholders
and executives of the Corporation in the amount of
$21,865, bearing interest at a rate of 6% and
maturing in January 2009. The debentures are
redeemable early as of January 2005 in return for
payment of a penalty equal to three months’ inter-
est. The Corporation and Air Transat must also pay
the holders a premium at maturity, upon early
redemption or at conversion, such that the holders
would earn a compound annual return of 15%, tak-
ing into consideration interest already paid at a rate
of 6%.
In the course of this financing, the Corporation
issued 1,421,225 warrants entitling the holders to
subscribe to the same number of Class B Voting
Shares of the Corporation at an exercise price of
$6.75 each. These warrants expire on January 10,
2007.
On January 10, 2005, the Corporation redeemed
these debentures with a nominal value of $21,865
in advance. The early redemption resulted in a total
payment of $30,009, including accrued interest
amounting to $7,324 and an $820 penalty, which
was recorded at redemption. Furthermore, this
early redemption resulted in an additional non-cash
charge at the redemption date of $1,644 corre-
sponding to the difference between the nominal
value of the debentures and their carrying amount
at that time.
50
2006 Annual Report Transat A.T. Inc.
Each issued and outstanding Class A Share shall
be automatically converted into one Class B Voting Share
without any further act on the part of the Corporation or
of the holder if (i) the Class A Share is or becomes owned
and controlled by a Canadian as defined by the CTA; or
(ii) the provisions contained in the CTA relating to foreign
ownership restrictions are repealed and not replaced with
other similar provisions.
Class B Voting Shares
An unlimited number of Class B Voting Shares
[“Class B Shares”], participating, which may be owned
and controlled by Canadians as defined by the CTA only
and shall confer the right to one vote per Class B Share
at all meetings of shareholders of the Corporation.
Each issued and outstanding Class B Share shall
be converted into one Class A Share automatically with-
out any further act on the part of the Corporation or the
holder if the Class B Share is or becomes owned or con-
trolled by a non-Canadian as defined by the CTA.
Preferred shares
An unlimited number of preferred shares, non-vot-
ing, issuable in series, each series bearing the number of
shares, designation, rights, privileges, restrictions and
conditions as determined by the Board of Directors.
Issued and outstanding
On March 4, 2005, the Corporation’s common shares
were restructured into two classes of shares: Class A
Shares and Class B Shares. Each issued and outstand-
ing share that was not owned or controlled by a Canadian
as defined by the CTA was converted into one Class A
Share of the share capital of the Corporation and can-
celled. Each issued and outstanding share owned and
controlled by a Canadian as defined by the CTA was con-
verted into one Class B Share of the share capital of the
Corporation and cancelled. Immediately following the
conversion, the number of Class A Shares and Class B
Shares amounted to 7,818,212 and 27,228,227 respec-
tively. The unissued common shares of the Corporation
were cancelled and the Class A Shares and Class B
Shares were substituted for the exercise of all rights to
subscribe, purchase or convert the common shares thus
cancelled.
(c)
On April 6, 2004, a subsidiary of the Corporation
issued a debenture in the amount of $3,156, bear-
ing interest at a rate of 6%. The debenture is
repayable in one instalment in September 2009 in
cash or shares of the Corporation at the Corpora-
tion’s option. The debenture is also redeemable in
advance at the subsidiary’s option as of April 2007
in return for a premium whereby the holder would
earn a return of 9% from its issuance, taking into
consideration annual interest already paid and
recorded at the rate of 6%.
12) OTHER LIABILITIES
Deferred lease inducements
Non-controlling interest
Accrued benefit liability
2006
$
15,260
8,264
8,410
31,934
2005
$
16,219
8,776
5,838
30,833
13) SHARE CAPITAL
Authorized
Class A Variable Voting Shares
An unlimited number of Class A Variable Voting
Shares [“Class A Shares”], participating, which may be
owned or controlled by non-Canadians as defined by the
Canada Transportation Act [“CTA”], carrying one vote per
Class A Share unless (i) the number of issued and out-
standing Class A Shares exceeds 25% of the total num-
ber of all issued and outstanding voting shares (or any
higher percentage that the Governor in Council may
specify pursuant to the CTA); or (ii) the total number of
votes cast by or on behalf of holders of Class A Shares at
any meeting exceeds 25% (or any higher percentage that
the Governor in Council may specify pursuant to the CTA)
of the total number of votes that may be cast at such
meeting.
If either of the above-noted thresholds is sur-
passed, the vote attached to each Class A Share will
decrease automatically, without further act or formality.
Under the circumstance described in subparagraph (i)
above, the Class A Shares as a class cannot carry more
than 25% (or any higher percentage that the Governor in
Council may specify pursuant to the CTA) of the aggre-
gate votes attached to all issued and outstanding voting
shares of the Corporation. Under the circumstance
described in subparagraph (ii) above, the Class A Shares
as a class cannot, for a given shareholders’ meeting,
carry more than 25% (or any higher percentage that the
Governor in Council may specify pursuant to the CTA) of
the total number of votes that may be cast at the said
meeting.
51
2006 Annual Report Transat A.T. Inc.
13) SHARE CAPITAL [Cont’d]
The changes affecting the Class A Shares and the
Class B Shares were as follows:
Number of shares
$
Balance as at
October 31, 2004
Issued from treasury
Exercise of options
Conversion of warrants
Conversion of debentures
Repurchase and cancellation
of shares
Balance as at
October 31, 2005
Issued from treasury
Exercise of options
Conversion of warrants
Repurchase and cancellation
of shares
Balance as at
33,954,825
23,102
456,992
967,550
5,835,081
120,306
477
3,074
9,338
51,057
(1,081,100)
(4,814)
40,156,450
38,392
123,904
59,150
179,438
768
748
571
(6,730,299)
(30,095)
October 31, 2006
33,647,597
151,430
As at October 31, 2006, the number of Class A
Shares and Class B Shares amounted to 2,794,011 and
30,853,586 respectively [7,598,306 and 32,558,144 as
at October 31, 2005].
Normal course issuer bid
On November 14, 2005, the Corporation announced
an issuer bid to repurchase and cancel Class A Shares
and Class B Shares. A maximum of 7,142,857 shares,
or approximately 18% of the Corporation’s 40,156,450
issued and outstanding Class A Shares and Class B
Shares could have been repurchased at a price of not
less than $17.50 per share and not more than $20.00 per
share, for a total of $125,000. The issuer bid expired on
December 22, 2005.
In accordance with its issuer bid, the Corporation
repurchased, on January 3, 2006, a total of 6,443,299
voting shares, consisting of 1,780,797 Class A Shares and
4,662,502 Class B Shares, for a cash consideration of
$125,000.
On June 13, 2006, he Corporation renewed its nor-
mal course issuer bid, which began on June 14, 2005, for
a 12-month period. With this renewal, the Corporation
intends to purchase for cancellation up to a maximum of
3,270,939 Class A Shares and Class B Shares, represent-
ing less than 10% of the issued and outstanding Class A
Shares and Class B Shares at the offer renewal date
[3,935,000 Class A Shares and Class B Shares, represent-
ing less than 10% of the issued and outstanding Class A
Shares and Class B Shares as at June 8, 2005]. Shares are
purchased at market prices plus brokerage fees.
In accordance with its normal course issuer bids,
the Corporation repurchased, during the year ended
October 31, 2006, a total of 287,000 voting shares, con-
sisting of Class A Shares and Class B Shares, for a cash
consideration of $7,422 [1,081,100 voting shares, con-
sisting of Class A Shares and Class B Shares, for a cash
consideration of $22,545 in 2005].
Subscription rights plan
At the annual meeting held on April 27, 2005, the
shareholders ratified the renewal, by the Corporation, of a
shareholders’ subscription rights plan [“rights plan”]. The
rights plan entitles holders of Class A and Class B Shares
to acquire, under certain conditions, additional shares at
a price equal to 50% of their market value at the time the
rights are exercised. The rights plan is designed to give
the Board of Directors time to consider offers, thus allow-
ing shareholders to receive full and fair value for their
shares. The rights plan will terminate at the annual share-
holders’ meeting in 2008, unless it is terminated earlier by
the Corporation’s Board of Directors.
Share purchase plan
A share purchase plan is available to eligible
employees of the Corporation and its subsidiaries. Under
the plan, as at October 31, 2006, the Corporation was
authorized to issue up to 611,483 Class B Shares. The
plan allows each eligible employee to purchase shares for
a subscription limit up to 10% of his or her annual salary
in effect at the time of the subscription. The purchase
price of the shares under the plan is equal to the weight-
ed average price of the Class B Shares during the five
trading days prior to the issue of the shares, less 10%.
During the year, the Corporation issued 38,392 Class
B Shares [23,102 Class B Shares in 2005] for a total of
$768 [$477 in 2005] under the share purchase plan.
Stock ownership incentive and capital accumu-
lation plan
Subject to participation in the share purchase plan
offered to all eligible employees of the Corporation, the
Corporation attributes annually to each eligible officer a
number of Class B Shares, the aggregate subscription
price of which is equal to an amount ranging from 20% to
60% of the maximum percentage of salary contributed,
which may not exceed 5%. Shares so attributed by the
Corporation will vest gradually to the eligible officer, sub-
ject to the eligible officer’s retaining, during the first six
months of the vesting period, all the shares subscribed
for under the Corporation’s share purchase plan.
52
2006 Annual Report Transat A.T. Inc.
During the year ended October 31, 2006, the
Corporation accounted for a compensation expense of
$79 [$65 in 2005] related to its stock ownership incentive
and capital accumulation plan.
Permanent stock ownership incentive plan
Subject to participation in the share purchase plan
offered to all eligible employees of the Corporation, the
Corporation attributes annually to each eligible senior
executive a number of Class B Shares, the aggregate
subscription price of which is equal to the maximum per-
centage of salary contributed, which may not exceed
10%. Shares so attributed by the Corporation will vest
gradually to the eligible senior executive, subject to the
senior executive’s retaining, during the vesting period, all
the shares subscribed for under the Corporation’s share
purchase plan.
During the year ended October 31, 2006, the
Corporation accounted for a compensation expense of
$207 [$194 in 2005] related to its permanent stock own-
ership incentive plan.
Deferred share unit plan
Deferred share units [“DSUs”] are awarded in con-
nection with the senior executive deferred share unit plan
and the independent director deferred share unit plan.
Under these plans, each eligible senior executive or inde-
pendent director receives a portion of his or her compen-
sation in the form of DSUs. The value of a DSU is determined
based on the average closing price of the Class B Shares
for the five trading days prior to the award of the DSUs.
The DSUs are repurchased by Corporation when a senior
executive or a director ceases to be a plan participant. For
the purpose of repurchasing DSUs, the value of a DSU is
determined based on the average closing price of the
Class B Shares for the five trading days prior to the repur-
chase of the DSUs.
As at October 31, 2006, the number of DSUs award-
ed amounted to 31,653 [19,719 as at October 31, 2005].
During the year ended October 31, 2006, the Corporation
accounted for a compensation expense of $501 [$316
in 2005] related to its deferred share unit plan.
Stock option plan
Options are granted under a stock option plan for
executives and employees. Under the plan, as at October
31, 2006, the Corporation may grant 995,999 additional
Class A or Class B Shares to eligible persons at a share
price equal to the weighted average price of the shares
during the five trading days prior to the granting of the
options. Options granted may be exercised during a ten-
year period subject to a maximum of one-third during the
first two years after the grant date, an additional third in
the third year and a final third after the start of the fourth
year. The tables below summarize all outstanding options:
2006
2005
Beginning of year
Granted
Exercised
Cancelled
End of year
Options exercisable, end of year
Number
of options
796,069
129,927
(123,904)
(91,630)
710,462
480,027
Weighted
average price
$
10.69
22.84
5.73
8.42
14.07
10.89
2006
Range of exercice
prices
$
3.00 to 4.50
6.01 to 7.50
7.51 to 9.00
9.01 to 11.50
15.01 to 17.00
22.01 to 25.00
Number of options
outstanding as at
October 31, 2006
Outstanding options
Weighted
average
remaining life
138,813
56,388
17,973
109,263
128,922
259,103
710,462
6.5 years
4.7 years
3.5 years
4.4 years
7.6 years
9.1 years
Weighted
average
price
$
3.82
6.86
7.95
9.80
15.68
22.57
14.07
Number
of options
1,125,678
127,383
(456,992)
—
796,069
369,947
Weighted
average price
$
7.69
22.27
6.52
—
10.69
10.19
Exercisable options
Number of options
exercisable as at
October 31, 2006
138,813
56,388
17,973
101,763
81,190
83,900
480,027
Weighted
average
price
$
3.82
6.86
7.95
9.82
15.68
22.57
10.89
53
2006 Annual Report Transat A.T. Inc.
13) SHARE CAPITAL [Cont’d]
Compensation expense related to stock option
plan
During the year ended October 31, 2006, the
Corporation granted 129,927 stock options [127,383 in
2005] to certain key employees. The average fair value of
each option granted was estimated on the date of grant
using the Black-Scholes option pricing model. The
assumptions used and the weighted average fair value of
the options on the date of grant are as follows:
Risk-free interest rate
Expected life
Expected volatility
Dividend yield
Weighted average
grant-date fair value
2006
4.48%
6 years
55.6%
—
2005
4.12%
6 years
54.7 %
—
Warrants
On January 10, 2002, the Corporation granted
1,421,225 warrants [note 11(b)]. As at October 31,
2006, the balance of the warrants amounted to 350,325
[409,475 as at October 31, 2005], and 59,150 warrants
were exercised during the year [967,550 in 2005].
Earnings per share
Basic earnings per share and diluted earnings per
share were computed as follows:
(In thousands, except per share amounts)
2006
$
2005
$
NUMERATOR
Net income
Interest on convertible
65,770
55,416
12.70 $
12.26 $
debentures
—
(1,440)
During the year ended October 31, 2006, the
Corporation recorded a compensation expense of $886
[$507 in 2005] related to its stock option plan. A total of
$38 [$95 in 2005] was recognized in share capital subse-
quent to the exercise of options.
Pro forma disclosure of fair value of stock options
Prior to November 1, 2003, the Corporation account-
ed for options granted under its stock option plan as
capital transactions. The following table shows what the
impact on the financial statements would have been had
the Corporation recorded the options granted between
November 1, 2002 and October 31, 2003 using the fair
value method. The pro forma figures do not take into
account stock options granted prior to November 1, 2002.
Net income
Adjustment – stock-based
compensation
Pro forma net income
Pro forma basic earnings
per share
Pro forma diluted earnings
per share
2006
$
65,770
(292)
65,478
1.88
1.84
2005
$
55,416
(292)
55,124
1.42
1.33
The assumptions used and the weighted average
fair value of the options on the date of grant for the year
ended October 31, 2003 are as follows:
Risk-free interest rate
Expected life
Expected volatility
Dividend yield
Weighted average grant-date fair value
4.73%
6 years
55%
—
2.09$
54
Income attributable
to voting shareholders
Interest on convertible
debentures
Interest on debentures
that may be settled
in voting shares
Income used to calculate
65,770
53,976
—
1,440
129
129
diluted earnings per share
65,899
55,545
DENOMINATOR
Weighted average number
of outstanding shares
34,907
37,863
Effect of dilutive securities
Convertible debentures
Debentures that may
be settled in voting shares
Stock options
Warrants
Adjusted weighted average
number of outstanding shares
used in computing diluted
earnings per share
—
141
330
282
2,668
135
612
406
35,660
41,684
Basic earnings per share
Diluted earnings per share
1.88
1.85
1.43
1.33
For the purposes of calculating diluted earnings per
share for the year ended October 31, 2006, 129,927
stock options were excluded since the exercise price of
these options was higher than the average price of the
Corporation’s shares.
2006 Annual Report Transat A.T. Inc.
14) CONVERTIBLE DEBENTURES
16) AMORTIZATION
On February 19, 2002, the Corporation issued
$51,105 of convertible unsecured subordinated deben-
tures maturing on March 1, 2007. The debentures bore
interest at 9%, payable semi-annually in cash or in com-
mon shares of the Corporation, at its option. The deben-
tures were convertible into common shares of the
Corporation, at a conversion price of $8.75 per share, at
the holder’s option at any time.
On or after March 1, 2005 and prior to March 1, 2006,
the debentures were redeemable at par by the Corpora-
tion provided its common shares were traded at a price
of $10.94 or more for 20 consecutive trading days
before the notice of redemption. After March 1, 2006, the
debentures were redeemable at par. The Corporation had
the option to repay the debentures, in whole or in part, in
cash or by delivering a number of common shares
obtained by dividing the principal amount of the deben-
tures by 95% of the market price of the Corporation’s
shares at the redemption date or at maturity.
On March 24, 2005, the Corporation sent a redemp-
tion notice to the holders of its convertible unsecured
subordinated debentures. Under the notice, on April 25,
2005, the Corporation redeemed, at their nominal value,
$35 of such debentures, representing all outstanding
debentures as at that date. During the year ended
October 31, 2005, but prior to the redemption date, a
total of $51,057 in convertible debentures was converted
into 5,835,081 shares, consisting of Class A Shares and
Class B Shares.
15) ACCUMULATED TRANSLATION ADJUSTMENTS
Accumulated translation adjustments are detailed
as follows:
Balance, beginning of year
Effect of foreign currency
exchange rate changes
on translation of net assets
of self-sustaining foreign
operations
Balance, end of year
2006
$
(2,591)
2005
$
274
2,613
22
(2,865)
(2,591)
Property, plant and equipment
Intangible assets subject
to amortization
Other assets
Deferred lease inducements
2006
$
38,301
590
2,226
(1,757)
39,360
2005
$
36,991
—
2,327
(1,760)
37,558
17) BUSINESS ACQUISITIONS
During the years ended October 31, 2006 and
2005, the Corporation acquired several businesses.
These acquisitions were recorded using the purchase
method. The results of these businesses were included in
the Corporation’s results as of their respective dates of
acquisition, unless otherwise indicated.
2006 Acquisitions
On December 1, 2005, the Corporation acquired the
assets of 20 travel agencies operating in France and
belonging to the Carlson Wagonlit Travel network for a total
cash consideration of m3,102 [$4,314]. Goodwill amount-
ing to $3,920 was recorded subsequent to this transac-
tion. The results of these agencies have been consolidat-
ed as of January 1, 2006.
During the year ended October 31, 2006, the Corpo-
ration acquired the assets, via Travel Superstore Inc., of six
travel agencies for a total consideration of $1,096. Of that
amount, $338 was paid in cash on the acquisition dates,
with the $619 balance payable in instalments over periods
ranging from three to five years. Goodwill amounting to
$925 was recognized subsequent to these transactions.
The results of these agencies have been consolidated as
of their respective acquisition dates.
On May 1, 2006, the Corporation acquired 100% of
the issued and outstanding shares of the Thomas Cook
Travel Limited [“TCT”] travel agency network, located in
Canada, for a cash consideration of $8,297. TCT operates
a network of 67 wholly owned agencies and 124 fran-
chised agencies under the Thomas Cook and Marlin Travel
banners. TCT also operates 22 foreign exchange offices.
Subsequent to this transaction, the Corporation under-
took a restructuring program that it completed prior to the
end of the fiscal year ended October 31, 2006. A total of
$1,651, consisting mainly of employee termination bene-
fits, was reflected in purchase price allocation with regard
to this restructuring. The Corporation does not foresee
any further disbursements in respect of this integration.
Goodwill amounting to $732 was recognized subsequent
to this transaction.
55
2006 Annual Report Transat A.T. Inc.
17) BUSINESS ACQUISITIONS [Cont’d]
On August 1, 2006, the Corporation acquired 100%
of the issued and outstanding shares of British tour oper-
ator The Airline Seat Company, which operates under the
Canadian Affair brand, for £20,670 [$43,692] in cash.
Goodwill amounting to $21,289 was recognized subse-
quent to this transaction.
2005 Acquisitions
On November 1, 2004, the Corporation acquired a
70% ownership interest in Air Consultants Europe [“ACE”],
a Dutch outgoing tour operator, for a total consideration
of m1,050 [$1,634]. A cash consideration of m950 [$1,473]
was paid on the date of acquisition. The balance of m100
is payable in two staggered instalments through November
1, 2006. As a result of this acquisition, goodwill increased
by $1,579.
On May 1, 2005, the Corporation acquired a 50.1%
ownership interest in Travel Superstore Inc., a Canadian
company operating a travel agency network, for a cash
consideration of $4,478. As a result of this acquisition,
goodwill increased by $2,799.
Business acquisitions are summarized as follows:
On June 26, 2005, the Corporation acquired all of
the outstanding shares of Bennett Voyages, a French out-
going tour operator, for a total consideration of m1,773
[$2,629]. A cash consideration of m1,075 [$1,594] was
paid on the date of acquisition. The balance of m698
[$1,035] is payable in staggered monthly instalments
through December 31, 2006. As a result of this acquisi-
tion, goodwill increased by $1,971.
On August 1, 2005, the Corporation acquired the
assets of Blenus Travel Service Limited and Fundy Travel
Limited, both Canadian companies operating a travel
agency network, for a total consideration of $1,259. On
the date of acquisition, a cash consideration of $260 was
paid and the balance of $999 is payable over a five-year
period without interest. As a result of this acquisition,
goodwill increased by $1,117.
On October 31, 2005, the Corporation acquired the
assets of Turissimo Caribe & Excursiones C. Por A., an
incoming tour operator in the Dominican Republic, for a
cash consideration of US$1,185 [$1,398]. As a result of
this acquisition, goodwill increased by $1,075.
Assets acquired
Cash and cash equivalents
Cash and cash equivalents in trust
or otherwise reserved
Other current assets
Property, plant and equipment
Intangible assets
Trademarks
Customer lists
Future income taxes
Goodwill
Liabilities assumed
Current liabilities
Future income tax liabilities
Long-term debt
Net assets acquired at fair value
2006
Thomas Cook
Travel Ltd.
$
The Airline Seat
Company Ltd.
$
3,478
779
3,710
1,284
2,600
2,900
1,736
732
17,219
7,907
—
1,015
8,922
8,297
46,319
4,861
7,229
420
15,642
11,626
—
21,289
107,386
56,712
6,982
—
63,694
43,692
2005
Total
$
Total
$
49,797
7,025
5,640
11,095
2,113
18,242
14,526
1,736
26,866
130,015
64,619
6,982
1,015
72,616
57,399
—
14,912
699
—
—
—
8,541
31,177
19,523
—
256
19,779
11,398
Other
$
—
—
156
409
—
—
—
4,845
5,410
—
—
—
—
5,410
56
2006 Annual Report Transat A.T. Inc.
18)
INCOME TAXES
Income taxes at the statutory rate
Change in income taxes arising from the following:
Effect of differences in Canadian
and foreign tax rates
Non-deductible items
Recognition of previously unrecorded tax benefits
Effect of tax rate changes
Unrecorded tax benefits
Valuation allowance
Other
2006
2005
$
32,662
(390)
2,701
(2,545)
516
—
—
(898)
32,046
%
33.0
(0.4)
2.7
(2.6)
0.5
—
—
(0.9)
32.3
$
30,802
—
900
(2,269)
—
1,165
5,591
113
36,302
%
33.1
—
1.0
(2.4)
—
1.3
6.0
0.1
39.1
Income taxes as reported differ from the amount
calculated by applying the statutory income tax rates to
income before income taxes and non-controlling interest
in subsidiaries’ results.
The reasons for this difference and the effect on
income taxes are detailed in the table above.
Significant components of the Corporation’s future
income tax assets and liabilities are detailed in the table
below.
Non-capital losses carried forward and other tem-
porary differences, which are available to reduce future
taxable income of certain subsidiaries in Europe, for which
no related income tax benefits have been recognized,
amounted to m43,836 [$62,862] as at October 31, 2006
[m40,545 [$57,388] as at October 31, 2005]. Of these
losses and deductions, an amount of m19,056 [$27 326]
will expire in four years, the balance has no specific expiry
date.
Undistributed earnings of the Corporation’s foreign
subsidiaries are considered to be indefinitely reinvested
and, accordingly, no provision for income taxes has been
provided thereon. Upon distribution of these earnings in
the form of dividends or otherwise, the Corporation may
be subject to withholding taxes.
Future income taxes
Net operating loss carry-forwards and other tax deductions
Carrying value of capital assets in excess of tax basis
Non-deductible reserves and provisions
Other
Total future income taxes
Valuation allowance
Net future income tax assets (liabilities)
Current future income tax assets
Long-term future income tax assets
Long-term future income tax liabilities
Net future income tax assets (liabilities)
2006
$
2005
$
24,937
(35,935)
27,910
354
17,266
(22,443)
(5,177)
1,357
7,120
(13,654)
(5,177)
20,574
(25,089)
27,317
(1,007)
21,795
(21,670)
125
70
5,106
(5,051)
125
57
2006 Annual Report Transat A.T. Inc.
19) RELATED PARTY TRANSACTIONS
The following table provides a reconciliation of the
AND BALANCES
In the normal course of its operations, the
Corporation enters into transactions with related compa-
nies. These transactions are measured at the exchange
amount, which is the amount of consideration deter-
mined and agreed to by the related parties. Significant
transactions between related parties are as follows:
2006
$
2005
$
Revenues from companies
subject to significant influence
220
3 002
changes in the accrued benefit obligation:
2006
$
Accrued benefit obligation,
beginning of year
Current service cost
Cost of plan amendments
Interest cost
Actuarial loss
Accrued benefit obligation,
end of year
11,739
682
—
756
1,172
2005
$
5,348
578
4,213
691
909
14,349
11,739
Operating expenses incurred
from companies subject
to significant influence
1,340
3,996
The funded status of the pension plan and the
amounts recorded in the balance sheet under other liabil-
ities were as follows:
The balances receivable from and payable to relat-
ed parties included in accounts receivable and accounts
payable and accrued liabilities are as follows:
Accounts receivable from
companies subject
to significant influence
Accounts payable and accrued
liabilities due to companies
subject to significant influence
2006
$
32
54
2005
$
240
202
20) EMPLOYEE FUTURE BENEFITS
The Corporation offers defined benefit pension
arrangements to certain senior executives. These arrange-
ments provide for payment of benefits based on the num-
ber of years of eligible service provided and the average
eligible earnings for the five years in which the partici-
pant’s eligible earnings were the highest. These arrange-
ments are not funded; however, to secure its obligations,
the Corporation has issued a letter of credit to the trustee
amounting to $13,146 [note 9]. The Corporation uses an
actuarial estimate to measure the accrued benefit obliga-
tion as at October 31 each year.
Plan assets at fair value
Accrued benefit obligation
Plan deficit
Unamortized past
service costs
Unamortized net
actuarial loss
Accrued benefit liability
2006
$
—
14,349
14,349
2005
$
—
11,739
11,739
3,680
4,740
2,259
8,410
1,161
5,838
Pension plan expense is allocated as follows:
Current service cost
Interest cost
Amortization of past
service costs
Amortization of net
actuarial loss
Pension expense
2006
$
682
756
2005
$
578
691
1,060
1,060
74
2,572
71
2,400
The significant actuarial assumptions adopted to
determine the Corporation’s accrued benefit obligation
and pension expense were as follows:
Accrued benefit obligation
Discount rate
Rate of increase
in eligible earnings
Charge de retraite
Discount rate
Rate of increase
in eligible earnings
2006
$
5.50
3.00
5.75
3.00
2005
$
5.75
3.00
6.25
3.00
58
2006 Annual Report Transat A.T. Inc.
21) COMMITMENTS AND CONTINGENCIES
(a)
The Corporation’s commitments under agreements
with suppliers and operating leases relating to air-
craft, buildings, automotive equipment, telephone
systems, maintenance contracts and office premis-
es amounted to $544,224 and are broken down
as follows: $103,118, US$203,406, m91,118 and
£38,312.
The annual instalments to be made under these
commitments during the next five years are as
follows:
2007
2008
2009
2010
2011
$
248,194
116,431
75,715
32,321
16,402
(b)
(c)
(d)
(e)
In 2009, the minority shareholder in Jonview’s par-
ent company may require the Corporation to buy
the shares of Jonview’s parent company which it
holds at a price equal to the fair market value. The
price paid may be settled, at the Corporation’s
option, in cash or by a share issue.
The minority shareholder of ACE could require,
between now and 2007, that the Corporation
acquires the shares of ACE that it holds according
to a predetermined pricing formula calling for a
cash settlement.
The minority shareholders of Travel Superstore Inc.
could require, between 2011 and 2015, that the
Corporation acquires the shares of Travel Super-
store Inc. that they hold at a price equal to their fair
market value and payable in cash.
In the normal course of its operations, the Corpora-
tion is exposed to various claims and legal pro-
ceedings. These disputes often involve numerous
uncertainties and the outcome of the individual
cases is unpredictable. According to management,
these claims and proceedings are adequately pro-
vided for or covered by insurance policies and their
settlement should not have a significant negative
impact on the Corporation’s financial position.
22) GUARANTEES
In the normal course of business, the Corporation
has entered into agreements that contain features which
meet the definition of a guarantee. These agreements
provide compensation and guarantees to counterparties
in transactions such as operating leases, irrevocable let-
ters of credit and security contracts.
These agreements may require the Corporation to
compensate the counterparties for costs and losses
incurred as a result of various events, including breaches
of representations and warranties, loss of or damages to
property, claims that may arise while providing services
and environmental liabilities.
Notes 4, 9, 10, 11 and 20 to the financial statements
provide information relating to some of these agreements.
The following constitutes additional disclosure.
Operating leases
The Corporation’s subsidiaries have general indem-
nity clauses in many of their airport and other real estate
leases whereby they, as lessee, indemnify the lessor
against liabilities related to the use of the leased property.
These leases mature at various dates through 2034. The
nature of the agreements varies based on the contracts
and therefore prevents the Corporation from estimating
the total potential amount its subsidiaries would have to
pay to lessors. Historically, the Corporation’s subsidiaries
have not made any significant payments under such
agreements and have liability insurance coverage in such
circumstances.
Irrevocable letters of credit
The Corporation has entered into irrevocable letters
of credit with some of its suppliers. Under these letters of
credit, the Corporation guarantees the payment of certain
tourist services such as hotel rooms whether it sells the
services or not. These agreements, which are entered
into for significant blocks of tourist services, typically cover
a one-year period and are renewable. The Corporation
has also issued letters of credit to provincial regulatory
agencies in Ontario and British Columbia guaranteeing
amounts to the Corporation’s clients for the performance
of its obligations. In addition to the letters of credit and
security contracts mentioned in notes 4 and 9, the other
guarantees totalled $378 as at October 31, 2006. Histor-
ically, the Corporation has not made any significant pay-
ments under such letters of credit.
59
2006 Annual Report Transat A.T. Inc.
22) GUARANTEES [Cont’d]
Security contracts
The Corporation has entered into security contracts
whereby it has guaranteed a prescribed amount to its
clients at the request of regulatory agencies for the per-
formance of the obligations included in mandates by its
clients during the term of the licenses granted to the
Corporation for its travel agent and wholesaler activities in
the province of Québec. These agreements typically
cover a one-year period and are renewable annually. As
at October 31, 2006, the secured amount totalled $780.
Historically, the Corporation has not made any significant
payments under such agreements.
As at October 31, 2006, no amounts have been
accrued with respect to the above-mentioned agree-
ments.
The Corporation has entered into foreign exchange
forward contracts, expiring in less than two years, for the
purchase and sale of foreign currencies to manage its for-
eign exchange risk. As at October 31, 2006, the face
value of these contracts for the purchase of foreign cur-
rencies amounted to $645,878 [$427,085 as at October
31, 2005].
The fair value of financial instruments generally
reflects the estimated amounts that the Corporation
would receive from settlements of favourable contracts or
that it would be required to pay to cancel unfavourable
contracts at the balance sheet date. These estimated fair
values are based on the prices obtained from large finan-
cial institutions and multinational companies. As at
October 31, 2006 and 2005, the fair values in the event
of a settlement were as follows:
23)
FINANCIAL INSTRUMENTS
In the normal course of its operations, the
Corporation is exposed to risks related to exchange rate
variations for certain currencies and fuel cost variations.
The Corporation manages these risks through various
financial instruments. The Corporation’s management is
responsible for determining the acceptable level of risk
and only uses financial instruments to hedge existing
commitments or obligations and not to realize a profit on
trading operations.
Credit risk related to financial instruments
The theoretical risk to which the Corporation is
exposed in relation to financial instruments is limited to
the replacement cost of contracts at market prices in
effect in the event of default by one of the parties.
Management is of the opinion that the credit risk related
to financial instruments is well controlled because the
Corporation only enters into agreements with large finan-
cial institutions and multinational companies.
Management of fuel price and foreign exchange
risks
The Corporation has entered into fuel purchasing
contracts to manage fuel price fluctuation risks. As at
October 31, 2006, 53% of estimated fuel requirements
for fiscal 2007 and 12% of estimated requirements for fis-
cal 2008 were covered by fuel purchasing contracts [39%
of fuel requirements for fiscal 2006 were covered as at
October 31, 2005].
2006
Foreign exchange
forward contracts
Fuel purchasing contracts
2005
Foreign exchange
forward contracts
Fuel purchasing contracts
Favourable
$
Unfavourable
$
3,020
52
3,072
3,027
18,605
21,632
Favourable
$
Unfavourable
$
1,095
1,791
2,886
9,400
2,972
12,372
Credit risk
The Corporation believes it is not exposed to a sig-
nificant concentration of credit risk. Cash and cash equiv-
alents are invested on a diversified basis in investment-
grade corporations. Accounts receivable generally arise
from the sale of vacation packages to individuals through
retail travel agencies and the sale of seats to tour opera-
tors which are dispersed over a wide geographic area. As
at October 31, 2006 and 2005, no account represented
more than 10% of the total accounts receivable.
Fair value of financial instruments reported in
the balance sheets
Due to the short-term nature of current financial
assets and liabilities reported in the consolidated balance
sheets, their carrying amount approximates their fair
value.
Due to the nature of long-term debt reported in the
consolidated balance sheets, its carrying amount
approximates its fair value.
The fair value of the debentures could not be
determined with sufficient reliability due to their specific
nature.
60
2006 Annual Report Transat A.T. Inc.
24) SEGMENT DISCLOSURE
The Corporation has determined that it conducts its
activities in a single industry segment, namely holiday travel.
Therefore, the statements of income include all the required
information. With respect to geographic areas, the
Corporation operates mainly in North America and in
Europe. Geographic intersegment sales are accounted for at
prices that take into account market conditions and other
considerations.
2006
Revenues from third parties
Operating expenses
2005
Revenues from third parties
Operating expenses
Canada
France
U.K.
Other
North America
$
Europe
$
Total
$
2,059,611
1,940,816
118,795
544,135
535,986
8,149
2,603,746
2,476,802
126,944
1,896,487
1,776,811
119,676
467,994
467,039
955
2,364,481
2,243,850
120,631
2006
$
2,038,594
465,728
62,055
37,369
2,603,746
Revenues1
2005
$
1,892,749
452,323
—
19,409
2,364,481
Property, plant
and equipment, goodwill
and other intangible assets
2005
2006
$
$
225,492
215,899
53,929
60,374
—
49,266
9,491
9,451
288,872
335,030
1 Revenues are allocated based on the subsidiary’s country of domicile.
25) COMPARATIVE FIGURES
Certain comparative figures were reclassified to
conform to the presentation adopted in the current year.
61
2006 Annual Report Transat A.T. Inc.
SUPPLEMENTARY FINANCIAL DATA
(In thousands of dollars, except per share data)
Consolidated Statements of Income
Revenues
Operating expenses
Expenses and other income
Amortization
Restructuring charge
Interest on long-term debt and debentures
Other interest and financial expenses
Interest income
Foreign exchange (gain) loss on long-term
monetary items
Gain on disposal of investment
Share of net (income) loss of companies subject
to significant influence
Income (loss) before the following items
Income taxes (recovery)
Non-controlling interest in subsidiaries’ results
Income (loss) from continuing operations for the year
Income (loss) from discontinued operations for the year
Net income for the year
Basic earnings (loss) per share
Continuing operations
Discontinued operations
Diluted earnings (loss) per share2
Continuing operations
Discontinued operations
Cash flows from:
Operating activities (continuing operations)
Investing activities (continuing operations)
Financing activities (continuing operations)
Effect of exchange rate changes on cash
and cash equivalents
Net change in cash and cash equivalents
from continuing operations
Net change in cash and cash equivalents
from discontinued operations
Net change in cash and cash equivalents
Cash and cash equivalents, end of year
Operating cash flow
Total assets
Long-term debt (including current portion)
Debentures
Shareholders’ equity
Debt/equity ratio1
Book value per share
Return on weighted average shareholders’ equity
Shareholding statistics (in thousands)
Outstanding shares at year-end
Weighted average number of outstanding shares
2006
2005
2004
2003
2002
2,603,746
2,476,802
126,944
2,364,481
2,243,850
120,631
2,199,822
2,036,067
163,755
2,096,649
2,021,687
74,962
2,073,508
1,999,360
74,148
39,360
—
7,264
1,484
(15,706)
(4,162)
—
(375)
27,865
99,079
32,046
(1,263)
65,770
—
65,770
1.88
—
1.88
1.85
—
1.85
37,558
(934)
10,815
1,708
(12,963)
(2,309)
(5,747)
(461)
27,667
92,964
36,302
(1,246)
55,416
—
55,416
1.43
—
1.43
1.33
—
1.33
33,027
11,350
7,712
1,907
(11,307)
1,474
—
1,509
45,672
118,083
45,010
(753)
72,320
—
72,320
2.07
—
2.07
1.76
—
1.76
42,138
47,972
9,839
3,071
(9,530)
(3,873)
—
(673)
88,944
(13,982)
(5,533)
(766)
(9,215)
54,083
44,868
(0.38)
1.65
1.27
(0.38)
1.65
1.27
43,189
—
12,491
4,563
(5,628)
(984)
—
(919)
52,712
21,436
9,649
(182)
11,605
(1,853)
9,752
0.30
(0.06)
0.24
0.30
(0.06)
0.24
113,279
(42,173)
(152,046)
74,156
(43,190)
(44,091)
184,321
(84,475)
(35,359)
77,257
(9,150)
(61,368)
186,428
(85,347)
14,069
2,332
(4,255)
3,436
(470)
437
(78,608)
(17,380)
67,923
6,269
115,587
—
(78,608)
214,887
104,802
959,195
84,248
3,156
295,963
0.69
8.80
19.98%
—
(17,380)
293,495
78,014
949,537
93,613
13,156
362,283
0.62
9.02
16.03%
—
67,923
310,875
124,039
838,389
—
33,214
311,106
0.63
9.16
25.11%
77,858
84,127
242,952
52,795
714,757
35,350
31,731
239,596
0.66
7.29
19.32%
434
116,021
158,823
73,942
773,468
82,702
30,907
192,062
0.75
5.92
4.76%
33,648
40,156
33,955
32,864
32,460
(before dilution)
34,907
37,863
33,374
32,796
32,418
Weighted average number of outstanding shares
(after dilution)2
1 Represents total liabilities over total liabilities plus shareholders’ equity.
2 See note 11 to audited Consolidated Financial Statements.
35,660
41,684
41,156
32,796
32,497
62
2006 Annual Report Transat A.T. Inc.
Board of Directors
Jean-Marc Eustache
Chairman of the Board,
President and Chief Executive Officer, Transat A.T. Inc.
André Bisson, O.C.
Chairman of the Board, CIRANO
Chancellor Emeritus, Université de Montréal
John P. Cashman
President, Humphrey Management Limited
Lina De Cesare
President, Tour Operators, Transat A.T. Inc.
Benoît Deschamps
President, Champré Capital Inc.
Jean Guertin
Corporate Advisor and Director
Honorary Professor, HEC Montréal
H. Clifford Hatch Jr.
President and Chief Executive Officer,
Cliffco Investments Limited
Jacques Simoneau
Executive Vice President, Investment,
Business Development Bank of Canada
Philippe Sureau
President, Distribution, Transat A.T. Inc.
John D. Thompson
Deputy Chairman,
Montreal Trust Company of Canada
Dennis Wood, O.C.
President and Chief Executive Officer, DWH Inc.
63
2006 Annual Report Transat A.T. Inc.
Executive Committee
Human Resources
and Compensation
Committee
Audit Committee
Corporate Governance
and Nominating
Committee
President
of the Committee
Senior Management
Transat A.T. Inc.
Jean-Marc Eustache
President and Chief Executive Officer
Philippe Sureau
President, Distribution
Lina De Cesare
President, Tour Operators
Bernard Bussières
Vice-President, General Counsel
and Corporate Secretary
Corinne Charette
Vice-President and Chief Information Officer
André De Montigny
Vice-President,
Corporate Development
François Laurin
Vice-President, Finance and Administration
and Chief Financial Officer
Michel Lemay
Vice-President, Communications
and Corporate Affairs
Louise Piché
Corporate Vice-President,
Human Resources
Subsidiaries
Management
Air Consultants Europe
Elisabeth van Raalte
General Manager
Air Transat
Allen B. Graham
President and Chief Executive Officer
Canadian Affair
Anette Rayner
President and General Manager
Club Voyages (France)
Patricia Chastel
General Manager
Handlex
Jean-Luc Paiement
President and Chief Executive Officer
Jonview Canada
Donald Obonsawin
President
Look Voyages
Olivier Kervella
General Manager
Rêvatours
Amina Hafez
General Manager
Tourgreece
Vassilis P. Sakellaris
President
Transat Distribution Canada
Philippe Sureau
President
Transat Tours Canada
Nelson Gentiletti
President
Trip Central
Richard Vanderlubbe
President
Vacances Transat (France)
Patrice Caradec
General Manager
64
2006 Annual Report Transat A.T. Inc.
Information
for Shareholders
Head Office
Transat A.T. Inc.
Place du Parc
300 Léo-Pariseau Street, Suite 600
Montréal, Québec H2X 4C2
Telephone: 514.987.1660
Fax: 514.987.8035
www.transat.com
info@transat.com
Information
Press releases are available
on our website at www.transat.com
For additional information, investors and analysts
are invited to contact, in writing, the Vice-President,
Finance and Administration and Chief Financial
Officer.
Ce rapport annuel est disponible en français :
Pour l'obtenir, écrire au vice-président, finances et
administration et chef de la direction financière.
Stock Exchange
Toronto Stock Exchange (TSX) TRZ.B; TRZ.A.
Transfer Agent and Registrar
CIBC Mellon Trust Company
2001 University Street, Suite 1600
Montréal, Québec
H3A 2A6
Toll-free: 1.800.387.0825
inquiries@cibcmellon.com
www.cibcmellon.com
Auditors
Ernst & Young LLP
Montréal, Québec
Annual General Meeting
of shareholders
March 14, 2007, 10:00 a.m
The Fairmont Royal York Hotel
100 Front St. West
Imperial Room
Toronto, Ontario
Graphic Design: Claude Angers
Pictures of the board members: Yves Renaud
Photographs: Transat, except when mentioned otherwise