. c n I . . T A t a s n a r T 7 0 0 2 t r o p e R l a u n n A Integrated international tour operator specializing in holiday travel s t h g i l h g H i R evenues up by 17% to $3.0 billion and net earnings of $80.5 million, compared with $2.6 billion and $65.8 million respectively in 2006. S olid growth in the market for winter packages to sun destinations departing from Canada despite a fiercely com- petitive environment. S trong performance in the summer transatlantic market, in particular continental European destinations, despite the fact that overcapacity eroded margins on Canada-United Kingdom routes. E xcellent results posted by Look Voyages, with a 28% increase in revenues and pre-tax earnings of about 6% of revenues. A cquisition of Amplitude Internationale, an outgoing French tour operator specializing in travel to Tunisia, a major destination from France. I ntegration of agencies acquired in 2006 and consolida- tion of our distribution network in Canada and Europe. A ddition of a 16th aircraft to the Air Transat fleet, sign- ing of a seat pooling agreement with MyTravel and renewal of an agreement with WestJet. E arly in fiscal 2008, creation of a 1,600-room joint venture with Barcelona’s H10 Hotels in Mexico and the Dominican Republic, representing an investment of US$55 million for Transat. More than 60 destination countries Transat A.T. Inc. is an integrated international tour operator that specializes in holiday travel. It offers more than 60 destination countries and distributes products in approximately 50 countries. Transat owns an air carrier, offers accomodation and destination services and operates an extensive distribution 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. In thousands of dollars (except amounts per share) Revenues Margin Net income Diluted earnings per share Dividend per share 2007 2006 3,045,917 2,603,746 133,070 126,944 80,480 65,770 2.36 0.34 1.85 0.14 Cash and cash equivalents 166,768 214,887 Cash flows relating to operating activities 121,828 116,160 l s r e d o h e r a h S o t e g a s s e M Staying the course for growth Building on vertical integration F iscal 2007 proved to be a very good year for Transat, at a time when the international tourism industry was particularly vibrant. We stayed the course on our objectives while continuing to combine growth with prof- itability, in spite of a rapidly changing tourism market, fierce competition, increases in certain costs and significant fluc- tuations in exchange rates. We also made progress in implementing our 2006-2008 three-year plan, notably by successfully increasing our market share, completing the integration of acquisitions made in 2006 and establishing a foothold in the hotel industry. The international tourism market remains buoyant. According to the World Tourism Organization (WTO), there were approximately 846 million international arrivals in 2006, and all indications point to its forecasts (a billion interna- tional tourists in 2010 and 1.6 billion in 2020) materializing. Transat is in an excellent position to benefit from this prom- ising situation, with products in more than 60 countries, outgoing tour operators and distribution networks solidly established in Canada and Europe, as well as a first-rate air carrier. However, there remains no shortage of challenges to overcome. Although we have already made significant adjustments to our organization over the past six years, change will likely remain on the agenda as our environment demands considerable ability to adapt. With travellers — our ultimate customers — becoming increasingly sophisti- cated, we have to pull out all the stops to offer them prod- ucts that cater to their every need. The tourism market The growth in international tourism is being fuelled by most areas of the world. Asia and Africa are currently posting the highest growth rates in terms of arrivals, while Latin America, Eastern Europe and Asia are reinforcing their positions as the emerging outbound markets. Following two recent major German-British mergers, Transat has climbed to fifth position among the world’s fully integrated international tour operators and, in this capacity, has all the tools it needs to capitalize on the new trends in tourism. Jean-Marc Eustache Chairman of the Board, President and Chief Executive Officer 2 2007 Annual Report Transat A.T. Inc. Competition is very intense in all our markets and we are relying on several measures to deal with it: a very comprehensive offering, ever-greater efficiency, economies of scale and consistent investments in marketing and advertising. In addition, we are continuing our efforts to increase customer loyalty and to set our products and services apart by ensuring that our customers enjoy an experience with us that they will want to repeat. Lastly, with regard to the very important issue of distribution, we are implementing solutions that are innovative and meet the expectations of our customers — both travellers and travel agents. We intensified our efforts on all these fronts in 2007 and will continue to do so in 2008. The cost structure of any international tour opera- tor depends partly on the conditions prevailing in the airline industry. Transat is therefore closely monitoring ongoing discussions on the “open skies” agreements, which the Canadian government has made a priority, as well as the debate on controlling greenhouse-gas emissions attributed to the aviation industry. The outcome of these complex dis- cussions may provide some companies with a competitive edge. For this reason, we have taken many actions (some publicly), notably since late 2006, to make our positions known in the hope that our concerns will be taken into consideration. Generally speaking, we have indicated our support for the principle of a reciprocal, orderly opening of aviation markets as well as the related lifting of entry barriers, to the extent that the current economic and tax policy framework imposed on Canada’s airports and airlines is overhauled by the federal government. The system currently in place imposes a very heavy burden on companies like Transat, considerably reducing their ability to compete against foreign companies which, in contrast, often receive support from their governments. Transat stands apart from other companies in Canada’s travel industry in that it is also a player in the European market. As a result, from a tourism perspective we are better positioned than others to leverage an “open skies” agreement between Canada and Europe. It is our view that any such agreement should take into account all the companies involved and their individual business mod- els, allowing them to pursue the specific commercial opportunities they envisage. In 2007, Transat began systemizing the adoption of sustainable-tourism practices. Air Transat continued to rigorously implement its fuel-management program, which has helped reduce consumption and greenhouse-gas emissions by more than 5%. In 2008, we will intensify our actions to diminish the impact that our operations have on the environment and climate change in keeping with the Davos Declaration drafted by the WTO in October 2007. On the issue of greenhouse-gas emissions, we favour adopting multilateral solutions — under the auspices of the International Civil Aviation Organization (ICAO) and International Air Transport Association (IATA) for instance — that would pave the way for market conditions that are as uniform and as fair as possible. Outgoing Canadian market The outgoing Canadian market is posting solid growth, but competition remains intense. At the beginning of each season, tour operators set the tone with increases in capacity which, taken globally, inevitably translate into a surplus of supply over demand, even though the latter increases regularly. The “perishable” nature of tourism products entails fierce price competition, which benefits travellers but severely tests the profit margins and nerves of tour operators. Transat Tours Canada (TTC), our main Canadian business unit in the outgoing market, orchestrates all oper- ations conducted under the Transat Holidays, Nolitours and Air Transat brands. In Canada, TTC grew its customer base across the board — 866,000 travellers in the winter season, 527,000 in the summer; 1,042,000 sun packages sold, 351,000 travellers (including Canadian sales of Canadian Affair) to European destinations — for a total of approxi- mately 1,393,000 travellers. Some 72% of these customers flew with Air Transat while the rest travelled on airlines with which we have partnership agreements. Our business model is based on the combina- tion of our own capacity, provided by Air Transat, with those of many other Canadian and European carriers. In line with this model, Transat and British tour operator MyTravel (now Thomas Cook Group), which operates in Canada under the Sunquest Vacations brand, signed a three-year agreement under which both parties can sell each other approximately 120,000 seats for sun destinations, effective November 1, 2007. In addition, our agreement with Canadian carrier WestJet has been extended to October 31, 2010. It allows TTC to charter WestJet aircraft flying out of more than 20 Canadian cities to approximately 20 sun destinations. In 2007, Transat became the leading tour operator in Ontario for winter sun packages. According to our evalu- ation, we are now the leader in every Canadian region in the very targeted segment of all-inclusive packages to sun destinations in the Caribbean, Mexico and Central America. 3 2007 Annual Report Transat A.T. Inc. We are working on many elements to help maintain or grow our market share: selection of destinations and exclusive hotels, pricing, marketing, quality of service and customer satisfaction. We had an excellent summer season in the Continental Europe market. However, as expected, routes into and out of the United Kingdom have been a real bat- tlefield, with supply clearly outstripping demand. Our mar- gins have suffered as we have fought fiercely to protect our market share. The British government compounded the problem when it doubled the duties payable by internation- al air travellers, limiting fare increases that would have been necessary to offset higher fuel costs, for example. In other words, tour operators had to absorb part of these taxes to avoid losing customers. The United Kingdom is the number one transatlantic market for Canada and for Transat. Given the results achieved with our new Madrid program, launched in 2006, we went further in 2007 with Barcelona and Malaga, and Spain is proving a resounding success for TTC. We also introduced Vienna, and we obtained slots at Heathrow Airport departing from Toronto. We will be adding Switzerland to our list of destinations with flights to Basel-Mulhouse, as well as Vancouver-Paris and Calgary-Paris routes in 2008. In 2006, Transat acquired 191 travel agencies, thus creating the leading network of agencies in Canada. In 2007, the integration of these agencies continued smooth- ly and they made an important contribution to the increase in our sales and market shares. At fiscal year-end, all brands combined, the Transat network consisted of 409 agencies across the territory, 304 of them franchises. Sales by this network, combined with those generated through our B2C websites, accounted for more than 25% of sales made in Canada in 2007. In addition, although they remain modest, online sales of mass tourism products are growing strongly, particularly on some of our websites. We remain solidly engaged in the era of multi-channel distribution, which ensures that many distribution strategies blend smoothly. Outgoing European market Transat, which has been operating in France ever since the company’s creation, has entered other European markets over the years. Consequently, we now have a promising platform in Europe, where some countries are worldwide leaders in both outbound and inbound tourism, with more than 400 million international trips. In spite of the gloomy conditions in France’s tourism industry, Look Voyages had a stellar year, thanks in part to an increase in the number of its Lookéa resort clubs to 25 (plus a Lookéa cruise in Egypt) from 17 the previous year. The Lookéa formula is clearly well-adapted to its mar- ket segment, as is clearly confirmed by customer satisfac- tion levels. As a result, Look Voyages saw its sales soar by 28% and it posted pre-tax earnings of 6% of revenues, both remarkable figures. In 2007, we acquired outgoing French tour opera- tor Amplitude Internationale. This specialist in travel to Tunisia combined its efforts with those of Look Voyages, which was already operating four Lookéa resort clubs in the North African country. Founded in 1992, Amplitude Internationale sells 80,000 travel packages to Tunisia every year through traditional and online travel agencies, as well as through large retail stores. For its part, Look Voyages sells approximately 50,000 packages to Tunisia, the second- largest destination market out of France (after Morocco) for packages. Vacances Transat (France) remains the leading French tour operator to Canada and the U.S. It is a major player in France for tours, with a diverse range of destina- tions, including South America, Africa and Asia. Destina- tions include Vietnam, launched in 2007, and Kenya, where the number of passengers has increased significantly since we introduced the destination in 2006. In the last year, its business grew in terms of number of travellers, sales (including group sales) and profit margin. For travel to Canada, Vacances Transat (France) naturally works closely with TTC, particularly to market our air capacity, and with Jonview Canada for the distribution of packages. We have successfully completed the integration of British tour operator The Airline Seat Company — better known as Canadian Affair — which we acquired in August 2006. Working with close to 120 suppliers and two airlines (including Air Transat), Canadian Affair is the foremost tour operator in the United Kingdom for travel to Canada and works daily with TTC. TTC has partners in all the European countries we serve with Air Transat. For example, Air Consultants Europe (ACE), now a wholly owned Transat business unit, sells our air capacity as a wholesaler for travel to Canada from the Netherlands, Germany, Belgium, Austria and Luxembourg. We brought some 366,000 travellers to Canada from approximately 10 European countries (Air Transat, TTC) and from the UK (Canadian Affair), mainly during the summer. We have 69 travel agencies in France, 31 of which are under the Look Voyages banner and 38 under that of Club Voyages. In 2008, we plan to further strengthen the strategic ties between our tour operators and our distribu- 4 2007 Annual Report Transat A.T. Inc. tion network in order to fully capitalize on the fact that, combined, we are one of the largest outgoing tour opera- tors in France. Air transportation The fact that Transat owns a fleet of aircraft and has formal charter agreements with many other carriers remains a core element in our business model. Our craft, as a tour operator, consists largely of managing inventories of products — airline seats and hotel stays — that have a limited lifespan. Being vertically integrated gives us enhanced control over this aspect of our operations. Air Transat, which celebrated its 20th anniversary at the same time as Transat in 2007, remains our primary carrier out of Canada to all our destinations, as well as for travel to Canada from Europe. It turned in a remarkable performance in 2007, as a significant increase in business resulted in the carrier making close to 13,000 flights. Many factors contribute to making Air Transat a leader in its category: highly qualified crews (a determining condition for the quality of service), an exceptional program for young families and young travellers, its Club class, some of the best on-time performance and reliability rates in the industry, etc. In November 2007, Air Transat obtained Phase 2 accreditation from Transport Canada for its Safety Management System (SMS), confirming the carrier's lead- ing edge in this area; it is also about to complete IATA’s International Operational Safety Audit (IOSA) certification process. In 2007, Air Transat implemented an online seat pre- selection system and posted record incidental revenues. Air transportation represents a significant cost centre, and Air Transat is currently reaping the rewards of the many years of work put in by its personnel. In spite of the increase in fuel prices, our cost per available seat mile (CASM) dropped from 2006. In fact, excluding fuel, we posted the lowest CASM in our history; our fixed costs per CASM also decreased. Air Transat was operating 16 Airbus aircraft (4 A330s and 12 A310s) at the end of 2007 and will add a 17th in 2008. In order to improve comfort for passengers, Air Transat will be increasing legroom in all its aircraft, beginning in the summer of 2008. This involves removing 10 seats from our Airbus A310s (down to 249 seats), and 20 from our Airbus A330s (342 seats). Handlex and its approximately 1,200 employees provide airport ground-handling services (passenger check-in, baggage-handling, cargo, aircraft cleaning and ramp services) to some 20 airlines, including Air Transat, at airports in Montreal, Toronto and Vancouver. In 2007, Handlex signed 5 2007 Annual Report Transat A.T. Inc. or renewed several contracts, overhauled its structures, enhanced its staff training efforts and improved its financial performance. Hotel industry Shortly after the close of the fiscal year, we announced the creation of a hotel joint venture with one of our longstanding partners, H10 Hotels of Barcelona. The newly-created company will own and operate five hotels in Mexico and the Dominican Republic with a total of approx- imately 1,600 rooms. This partnership with a first-rate hotel chain is a major step in our effort to develop a dynamic presence in the hotel industry at our key destinations. As planned, we ensure our access to a certain number of top- quality rooms and we maximize the benefits of our vertical structure. Transat has invested US$55 million for a 35% interest in the new company. The Dominican Republic and Mexico are important markets for us: we sell more than a million packages a year to Mexico, the Caribbean and Central America, from Canada and France. This transaction is fully in keeping with our three-year strategic plan and meets all the investment criteria we had set forth. Our incoming markets Our Jonview Canada business unit remains the largest incoming tour operator in Canada with nearly 249,000 customers in 2007 — a 5% increase that is all the more remarkable since international tourism to Canada (especially out of the U.S.) has been on the decline since 2005. Jonview Canada offers its products in approximately 50 countries, not only in Europe – which is its main strong- hold — but also in a growing number of increasingly popular emerging markets. In 2007, we restructured Jonview Canada in order to improve its efficiency and margins. Changes included the sharing of certain management and back-office func- tions with TTC, in order to benefit from synergies starting in 2008. We are also active in the incoming Greek market with tour operator Tourgreece, whose products are distrib- uted internationally, including in the U.S., through Transat and other tour operators. In 2007, Tourgreece penetrated new markets (Japan, South Korea, Mexico and Venezuela) and succeeded in increasing both its sales and its margin. Greece attracts more than 14 million international tourists every year. Our financial position We posted revenues of $3.0 billion for fiscal 2007, compared to $2.6 billion in 2006. Our margin reached $133.1 million, compared with $126.9 million in 2006. Transat posted record net income of $80.5 million or $2.36 per share on a diluted basis ($74.5 million or $2.18 per share on a diluted basis after a provision on ABCP securi- ties, a write-down of goodwill and the favorable impact of new hedge accounting standards, as explained in the MD&A), compared to $65.8 million ($1.85 per share, fully diluted) in 2006. Once again, the year was marked by very high fuel prices, driven of course by the increase in oil prices. Our bill for this essential commodity rose 114% to approx- imately $274 million in 2007 from $128 million in 2004. Our revenues grew by 38% during the same period. We offset part of the rise by actively using hedging strategies and by implementing fuel surcharges (duly approved by the appropriate authorities). The effects of the latter are limited, however, due to pressures on selling prices. Transat remains in a sound financial position. As at October 31, 2007, our debt had decreased and our cash position reached $166.8 million. This figure excludes funds currently locked-up in asset-backed commercial paper (ABCP) trusts. The MD&A provides details on this subject. Staying the course Fiscal 2007 marked the second phase of the three-year strategic plan adopted in 2005. Already, several major milestones of this plan have been reached, namely our entry into the outgoing U.K. market, Look Voyages’ decisive return to profitability, substantial gains in market share in Ontario, the development of our multi-channel distribution network, the acquisition of a tour operator spe- cializing in travel from France to Tunisia and, shortly after the end of the year, the creation of a joint hotel venture with a seasoned partner. As for the U.S. market, we have conducted a thorough review of all major tour operators that could potentially offer a strategic fit with us. We have held discus- sions with many of these tour operators, without a transac- tion in the interest of the company and its shareholders materializing. We still intend to break into that market as a tour operator and in 2008 we will relaunch our efforts on a new basis. Our motto for 2008 will be to stay the course. In addition to initiating the preparation of the next three-year plan (2009-2011), which will take into account the renewal of the Air Transat fleet as of 2012, we will be putting a 6 2007 Annual Report Transat A.T. Inc. significant amount of effort into consolidating our position in Canada and in Europe. For the transatlantic market, TTC will implement a five-year development plan that will include new destinations and the establishment of closer links between our European subsidiaries and Jonview Canada. We will also continue to stimulate the growth of our French tour operators and study the possibility of breaking into new outgoing European markets through acquisitions. I would like to take this opportunity to thank all of Transat’s employees, its management team and the mem- bers of its Board of Directors. Ours is a demanding indus- try and each of us plays a vitally important role in Transat’s success. Jean-Marc Eustache Chairman of the Board President and Chief Executive Officer January 16, 2008 7 2007 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 Amplitude Internationale Tunisia from France 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 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 69 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 8 2007 Annual Report Transat A.T. Inc. www... transat.com transatholidays.com vacancestransat.com nolitours.com look-voyages.fr amplitudevacances.com 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 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. Note 1: This map reflects the situation as of winter 2006-2007 and summer 2007. 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. 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) 9 2007 Annual Report Transat A.T. Inc. y t i l i i b s n o p s e r l i a c o S provide dream trips to more than 200 children suffering from a serious illness. The “Change for Kids” program, which encourages our pas- sengers to donate any change in foreign or local currency left over after their trip, has helped raise more than $2.3 million since its creation. We have continued to support the Université du Québec à Montréal (UQÀM) Chair in Tourism, which fosters the growth and prestige of the tourism industry through research, information and training. In 2007, we contributed more than $750,000 directly to philanthropic causes, our employees donated more than $100,000 to Centraide/ United Way as well as other organizations, and we raised approximately $895,000 through our “Change for Kids” program. O ver the years, Transat and its 6,000 employees have remained committed to mak- ing a constant and signifi- cant contribution to society. This starts with creating jobs and making a positive direct and indirect economic impact, but goes much further with philanthropic deeds in the areas of sustainable tourism, environmental protection, tourism research, humani- tarian aid and healthcare. In addition, with the support of Transat, a considerable number of our employees volunteer their time and money to causes they believe in; they collect clothing and other humanitarian aid items we ship, clean up shorelines, participate in sporting events or challenges to raise funds for research into healthcare, the environment, etc. In 2007, as in previous years, we helped popula- tions in need by airlifting humanitarian aid consisting of clothing, books and com- puters on behalf of organi- zations working in the field. Vacances Transat (France) has lent its support to the Enfants du Mékong associa- tion – which strives to pro- tect, educate and improve the lives of children in Southeast Asia – to build a school in Vietnam in 2008. Air Transat’s partnership with the Children’s Wish Founda- tion of Canada, which dates back to 2004, has helped 10 2007 Annual Report Transat A.T. Inc. Sustainable tourism Worldwide, tourism gen- erates significant economic activity and has a very posi- tive effect socially. It can, however, also have less desir- able impacts, in particular on the resources, ecosystems, well-being and cultures of communities. “Sustainable” tourism entails respect for nature, as well as for host communities and their val- ues; it combines positive socio-economic benefits for local populations with an enriching experience for travellers. In that spirit, we are striving to maximize the positive impacts of our oper- ations and reducing their negative impacts. Transat now has a Sus- tainable Tourism Committee, chaired by Lina De Cesare, whose mandate is to devel- op and execute a long-term action plan that covers the environmental, socio-cultural and economic aspects of tourism. The implementation of the resulting sustainable tourism strategy is a consid- erable undertaking that will continue over several years. In 2007, we attained some important milestones with the creation of environmental committees at all our loca- tions, the launch of a com- munity support program and the preparation of a pilot project that will focus on the performance of our sup- pliers in terms of sustainable development. SUPPORTING COMMUNITIES World Wildlife Fund Canada In the spring of 2007, we launched a program to sup- port tourism projects that are based on the principles of sustainable development. The program consists of funding organizations or communities that are taking initiatives aimed at protect- ing and enhancing their natural and cultural heritage or maximizing the positive impacts of tourism. Both within and outside our organ- ization, this grant program is also proving to be a powerful conveyer of Transat’s values. In 2007, out of approximately 100 applications, we select- ed four projects in Canada and Cuba. Transat is proud to be associated with the World Wildlife Fund Canada (WWF- Canada), a world leader in environmental protection, for a three-year project in Cuba. Working with local author- ities, WWF-Canada will lay the groundwork for a sus- tainable tourism policy to help protect the country’s ecosystems, considered to be among the richest in the Caribbean region. The Frontenac Arch Biosphere Reserve Transat has joined forces with the Frontenac Arch Bio- sphere Reserve (a UNESCO biosphere reserve located in Ontario) network, which is t t o t S g e r G / a d a n a C - F W W © “We are very pleased to support communities that are committed to the protection and enhancement of their heritage and environment.” undertaking an important green-accreditation project targeting the area's busi- nesses and organizations. The project is part of an extensive three-year pro- gram aimed at developing a national sustainable tourism model for biosphere reserves. The Seigneurie des Aulnaies Considered to be the most complete interpretation centre of the seigniorial sys- tem in Quebec, the Seigneurie des Aulnaies received fund- ing to implement a five-year plan to protect and develop its historic buildings as well as to modernize its reception structures, enhance its activ- ities and permanent exhibition. The Amis du marais de Saint-Antoine-de-Tilly The Amis du marais not- for-profit organization, found- ed by committed citizens, is developing the recreational- tourism potential of a marsh area and 10-kilometre trail a l o n g t h e b a n k s o f t h e St. Lawrence River at Saint- Antoine-de-Tilly, near Quebec City. 11 2007 Annual Report Transat A.T. Inc. Air Transat estimates that since 2003 its fuel- management program has prevented the release of some 129,000 tonnes of CO2 into the atmosphere, an amount equivalent to the yearly emissions of 21,000 automobiles. In absolute values, however, total annu- al CO2 emissions rose to 1,013,970 tonnes in 2007 as a result of the fleet expan- sion and the increase in the number of flights. Our fuel consumption is 3.17 litres per passenger/100 kilometres, representing CO2 emissions of 8.02 kilograms per pas- senger/100 kilometres. Air Transat is among the carriers that have adopted best industry practices in terms of fuel management. Our employees’ commitment plays a pivotal part in enabling us to succeed. In a quest for ongoing improvement, we are currently evaluating addi- tional initiatives. The implementation of a new flight planning system was one of the key com- ponents of the program. The system takes into account a number of variables — including altitude, speed, wind and cost of fuel — to optimize navigation, which translates into substantial savings. The pilots have also adopted new fuel-saving takeoff and landing pro- cedures. On the ground, single- engine taxiing has become the norm at Air Transat, resulting in a decrease in both greenhouse-gas emis- sions and noise. Other gains have been achieved by using the power supply services provided by airports rather than the airplane auxiliary power unit for the cooling of stationary aircraft, where possible. The company has also reviewed its maintenance program. We now do inter- nal engine washes on a regular basis in order to increase energy efficiency. We also remove chipped paint as well as scratches on the fuselage of the aircraft in order to reduce drag. FUEL MANAGEMENT Given the rise in oil prices and the increasingly pressing issue of greenhouse-gas emissions, the strict manage- ment of aircraft fuel remains 2003, an exceptional per- formance that has generated savings of several million dollars, not to mention avoid- ance of tens of thousands of tonnes of emissions. Fuel- saving initiatives relate to flight operations, flight plan- “Our fuel-management program is one of the most important steps we have taken in the past four years.” a constant priority. As early as 2003, Air Transat intro- duced an ambitious fuel- management program with a twofold objective: to decrease fuel costs and to cut down on greenhouse-gas emissions. The introduction and sys- tematic tracking of new pro- cedures have enabled our carrier to decrease annual fuel consumption. All things being equal, fuel consump- tion has dropped 5.5% since ning, ground services as well as the engineering and the catering services. Below are a few examples of the meas- ures, most of which have been implemented over the past four years: Several measures were aimed at reducing aircraft weight, because of its direct impact on fuel consumption. This includes reducing the amount of potable water carried in aircraft water tanks, decreasing the weight of entertainment systems, replacing cargo containers and tires with light-weight equivalents, etc. 12 2007 Annual Report Transat A.T. Inc. 2007 2006 2005 2007 2006 2005 Europe (Revenues in thousands) North America (Revenues in thousands of dollars) Outgoing tour operators and air transportation Transat Tours Canada (Transat Holidays, Nolitours and Air Transat) Revenues Employees Passengers1 Travellers 2 Rêvatours Revenues Employees Travellers 2,117,000 2,881 1,912,000 1,777,000 2,616 2,918,000 2,625,000 2,504,000 1,200,000 1,140,000 1,348,000 2,667 13,300 27 4,300 18,400 26 6,000 19,600 27 7,000 Incoming tour operators and destination services Jonview Canada Revenues Employees Travellers 121,000 170 249,000 118,000 183 237,000 117,300 169 223,000 Other Revenues Employees 32,000 107 32,000 105 12,000 19 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 Tripcentral.ca Revenues (commissions) Employees Outlets 61,400 83 577 304 36,000 88 597 315 19,500 21 210 190 7,400 100 22 7,700 99 23 2,800 103 16 Other airline services Handlex Revenues Employees 49,500 1,203 41,000 1,108 37,000 1,024 Outgoing tour operators Vacances Transat (France) (Vacances Transat (France), Bennett Voyages and Brokair) Revenues (m) Employees Travellers 211,000 220 155,000 Look Voyages Revenues (m) Employees Passengers Travellers Club Lookéa/summer3 Club Lookéa/winter3 189,000 309 9,000 204,000 26 12 Amplitude Internationale Revenues (m) Employees Travellers 19,000 19 46,000 194,000 163,000 213 97,000 214 141,000 305 3,000 148,000 132,000 275 65,000 164,000 129,000 13 6 18 7 — — — — — — ACE Revenues (commissions) (m) Employees Travellers Canadian Affair Revenues (£) Employees Travellers 3,300 23 46,000 3,200 19 45,000 2,600 21 43,000 71,000 75 161,500 30,500 63 69,700 — — — Incoming tour operators and destination services Tourgreece Revenues (m) Employees Travellers 20,700 30 72,000 19,700 35 71,000 19,000 27 65,000 Retail distribution Club Voyages (France) Revenues (commissions) (m) Employees Outlets 10,300 191 69 9,900 201 72 8,800 170 52 All subsidiaries wholly owned, except: Jonview Canada (80.07%), Tourgreece (90.0%) and Travel Superstore Inc. (Tripcentral.ca) (50.1%). 1 Airlines record flight segments in terms of passengers 2 Tour operators record round-trip travellers 3 Including a Lookéa cruise in Egypt In this table, passengers and travellers data have been compiled based on revenue accounting and may not reflect geography of source mar- kets. In addition some travellers may be allocated to more than one tour operator. 13 2007 Annual Report Transat A.T. Inc. i l i s s y a n A & n o s s u c s D s ’ t n e m e g a n a M i 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 16 22 28 30 30 35 35 38 14 2007 Annual Report Transat A.T. Inc. Caution regarding forward-looking statements This MD&A contains certain forward-looking statements with respect to the Corporation. These forward-looking statements are identified by the use of terms and phrases such as “anticipate”, “believe”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “will”, “would”, as well as the negative of these terms and similar terminology, including references to assumptions. All such statements are made pursuant to applicable Canadian securities leg- islation. Such statements may involve but are not limited to com- ments with respect to strategies, expectations, planned operations or future actions. Forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by these forward-looking statements. Results indicated in forward-looking statements may differ materially from actual results for a number of reasons, including without limitation, extreme weather conditions, armed conflicts, ter- rorist attacks, energy prices, general industry, market and economic conditions, disease outbreaks, changes in demand due to the sea- sonal nature of the business, the ability to reduce operating costs and employee counts, labour relations, labour negotiations and dis- putes, pension issues, exchange and interest rates, changes in laws, adverse regulatory developments or proceedings, pending litigation and actions by third parties, and other risks detailed from time to time in the Corporation’s continuous disclosure documents. The reader is cautioned that the foregoing list of factors is not exhaustive of the factors that may affect any of the Corporation’s forward-looking statements. The reader is also cautioned to consid- er these and other factors carefully and not to put undue reliance on forward-looking statements. The Corporation made a number of assumptions in making forward-looking statements in this MD&A such as certain economic assumptions, market assumptions, operational and financial assump- tions and assumptions about transactions and forward-looking state- ments. Examples of such forward-looking statements include, but are • • • • • not limited to, statements concerning: • Transat has the resources it needs to meet its 2008 objectives and continue building on its long-term strategies. The Corporation will continue investing in the hotel industry in the Caribbean and in Mexico. The total number of travellers in 2008 is expected to be high- er than in 2007. The Corporation’s operating expenses are expected to increase due to the growth in business activities. The Corporation’s expectation that travel reservations will continue to be higher than in the prior year. The Corporation expects to improve its margins in the winter 2008 season. The Corporation’s expectation that cash flow from operations, existing funds and borrowings under its credit facilities will be sufficient to support ongoing working capital requirements. In making these statements, the Corporation has assumed that the trends in reservations will continue throughout the remainder of the season, that the Corporation cannot predict the impact of future energy prices and foreign exchange rates on its financial results, that credit facilities will continue to be made available as in the past, that management will continue to man- age cash flow variations to fund working capital requirements for the full year. If these assumptions prove incorrect, actual results and developments may differ materially from those contemplated by the forward-looking statements contained in this MD&A. • The Corporation considers the assumptions on which these forward-looking statements are based to be reasonable. These statements reflect current expectations regarding future events and operating performance and speak only as of the date of release of this MD&A, and represent the Corpora- tion’s expectations as of that date. The Corporation disclaims any intention or obligation to update or revise any forward-look- ing statements, whether as a result of new information, future events or otherwise, other than as required by law. This Management’s Discussion and Analysis (MD&A) provides a review of Transat A.T. Inc.’s opera- tions, performance and financial position for the year ended October 31, 2007, compared with the year ended October 31, 2006, and should be read in con- junction with the audited Consolidated Financial Statements and notes thereto beginning on page 39. This MD&A contains information as of January 16, 2008. You will find more information about us on Transat’s Web site at www.transat.com and on SEDAR at www.sedar.com, including the Attest Reports for fiscal 2007 and Annual Information Form. Our financial statements are prepared in accor- dance with Canadian generally accepted accounting principles (GAAP). We will occasionally refer to non- GAAP financial measures in the MD&A. These non- GAAP financial measures have no meaning pre- scribed 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 performance prepared in accordance with GAAP. All dollar figures are in Canadian dollars unless otherwise indicated. The terms “Transat,” “we,” “us,” “our” and the “Corporation” mean Transat A.T. Inc. and its sub- sidiaries, unless otherwise indicated. Financial Highlights (In thousands of dollars, except per share data) Consolidated Statements of Income Revenues Margin1 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 Investments in ABCP Assets Debt (short-term and long-term) Total debt1 Net debt1 Consolidated Statements of Cash Flows 2007 $ 2006 $ 2005 $ 3,045,917 133,070 80,480 2.38 2.36 0.34 2,603,746 126,944 65,770 1.88 1.85 0.14 2,364,481 120,631 55,416 1.43 1.33 — Variance 2006 % 10.1 5.2 18.7 31.5 39.1 n/a 2007 % 17.0 4.8 22.4 26.6 27.6 142.9 166,768 214,887 293,495 (22,4) (26,8) 168,196 142,346 477,310 1,097,505 91,837 371,146 62,032 203,613 — 418,500 959,195 87,824 408,161 193,274 182,268 — 475,763 949,537 106,769 463,382 169,887 (17,4) n/a 14.1 14.4 4.6 (9.1) (67.9) 11,7 n/a (12.0) 1.0 (17.7) (11.9) 13.8 Operating activities 121,828 116,160 74,156 4.9 56.6 1 NON-GAAP FINANCIAL MEASURES The terms “margin”, “operating cash flows”, “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 year to year as management uses them to measure Transat’s financial performance. Margin is used by management to assess Transat’s ongoing and recurring operational performance. Margin equals 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 are defined as cash flows from operating activities excluding the net change in non-cash working capital balances related to operations, the net change in the provision for aircraft overhaul and the net change in other assets and liabilities related to operations, 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 debenture) and off-balance sheet arrangements, excluding arrangements with suppliers presented on p.29. Net debt is used by management to assess Transat’s cash position. It corresponds to the total debt (described above) less cash and cash equivalents not held in trust or otherwise reserved, and investments in asset backed commercial paper [“ABCP”]. 15 2007 Annual Report Transat A.T. Inc. OVERVIEW The holiday travel industry The holiday travel industry is composed mainly 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 Organiza- tion, international tourist arrivals reached a record high of 846 million in 2006 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 travel agencies, either as travel packages or separately. ‘Incoming’ tour operators design travel packages or other travel products consisting of services they pur- chase in their local market for sale in foreign markets, generally through other tour operators or travel agen- cies. The companies providing destination 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 trav- el products via transactional Internet Web sites. In both North America and Europe, online travel sales are now made up almost exclusively of air-only tick- ets, with only a small proportion consisting of pack- ages (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 do business in a single industry (holiday travel) and we mainly market our products in two geo- graphic areas (North America and Europe). Transat’s core business involves developing and marketing vacation travel services in air-only or package formats, 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 distributor with a total of approximately 500 travel agencies and a multi-channel distribution system that incorporates Web-based sales. Transat leverages on its subsidiary Air Transat, Canada’s largest international charter air carrier, to meet a substantial portion of its airline seat needs. We also offer destination, hotel man- agement 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 maxi- mizing the benefits of vertical integration. We maintain a leadership position in the Canadian market, where we operate as an outgoing and incoming tour opera- tor and as the country’s leading charter airline. We are also a well-established outgoing tour operator in France and the U.K. and an incoming tour operator in Greece. We offer our customers a broad range of international destinations spanning some 60 coun- tries. Over time, we want to expand our business into other countries where we believe there is high growth potential for an integrated player specializing in holi- day travel, namely the United States and additional European countries. Strategy – We have 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 acquisi- tions while pursuing an aggressive pace of internal growth. Our key strategic focuses are as follows: In Canada, Transat is the leader in all regions. We plan to bolster our presence in Ontario by adding new destinations and expanding our distribution network to 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. 16 2007 Annual Report Transat A.T. Inc. Elsewhere, Transat plans to target new markets, in particular, to become a tour operator in the U.S., a strategic market which has been analyzed for some time. In addition, Transat will continue considering the possibility of penetrating other markets in North America. Transat wishes to step up development of desti- nation services and to assume a portion of its accom- modation needs in order to gain better control over capacity and product quality, while increasing its mar- gins. In practical terms, this may mean greater invest- ments in the hotel industry in the Caribbean and in Mexico. In light of rapid change in the distribution indus- try and travellers’ expectations, and given the impor- tance of organizational responsiveness and productiv- ity, our strategic plan includes our ongoing technolo- gy and training initiatives and investments. To this end, Transat will strive to introduce cutting-edge solu- tions via agencies and direct sales in order to adapt to new markets and to continue efficiency improve- ments. Transat anticipates to implement its strategic plan with funding from existing cash resources, future cash flows and external sources, as needed. Review of 2006-2007 objectives and achievements (See table, pages 18 to 21) 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 – Grow revenues by more than 5%, excluding acquisitions. Margin – Generate margins higher than 5%. Ability to deliver on our objectives Our ability to deliver on our objectives is depend- ent 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. Our financial resources include: Cash – Cash and cash equivalents not held in trust or otherwise reserved amount to a strong $166.8 million as at October 31, 2007. Moreover, our contin- ued focus on expense control and margin increases should maintain our cash balances at healthy levels, taking into consideration the possible use of cash bal- ances to acquire businesses. We also hold a $142.3 million investment in ABCP. Credit facilities – Since November 2007, we can also count on a revolving credit facility of $150.0 million expiring in 2012. Our non-financial resources include: Brand – We have taken all necessary steps, including the use of a new corporate logo and an inte- grated 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 contribution of all business units and creating value. Structure – Our vertically integrated structure ensures 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 commit- ted to ensuring overall customer satisfaction and improving the efficiency of the Corporation. In addition, we believe we reap the benefits and expertise of strong leadership, since our founders are still at the helm. Relationships with suppliers – We have exclusive access to certain hotels at sunshine desti- nations as well as almost 20 years of preferred rela- tionships with many hotels at these destinations and in Europe. Transat has the resources it needs to meet its 2008 objectives and to continue building on its long-term strategies. (Cont’d p.22) 17 2007 Annual Report Transat A.T. Inc. Review of 2007-2008 objectives and achievements 2007 Objectives Achievements or progress as at October 31, 2007 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 else- where. We are stepping up capacity, adding new destinations, continuing to expand the scope of our distribution network, 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 next stage in the initiative to renew our fleet of aircraft, whose structure remains a key competitive- ness factor. We have: (cid:1) Expanded and protected our market share (in Québec) and improved it (in Ontario and the West) for vacation packages to Mexico and the Caribbean during the winter season. Added new destinations to Europe in the summer (Barcelona, Malaga, Vienna) and achieved one of our objectives: be the leader in all parts of the country. (cid:1) Completed the integration of travel agencies acquired in 2006 and the migration to the Marlin Travel banner; increased sales of Transat products by the group’s agencies; introduced a compensation plan for travel agents that is aligned with the corporate strategy; set up the foundations for a CRM program by launching the initial phase of an outbound marketing effort. Become more competitive and accelerate our growth in Europe. We will be developing a new European expansion plan based on growth in our tour operator 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) inte- grating Canadian Affair’s operating and marketing functions and increasing our market share between Canada and the U.K. We have: (cid:1) Substantially increased our volumes, sales (by 28%) and the EBT at Look Voyages (6% of revenues), confirming the shift completed in 2006. Increased sales at Vacances Transat (France) by 9% and strengthened its long-haul offering (increase in Africa, new des- tinations in Asia). (cid:1) (cid:1) Acquired Amplitude Internationale, an outgoing tour operator specializing on Tunisia, the second most popular foreign des- tination for purchasers of packages in France. 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 acquisi- tions, provided the opportunity meets our parameters. We have: (cid:1) Completed an in-depth analysis of the U.S. market, approached several potential targets and held talks (in the U.S and in Europe) that did not however lead to a transaction beneficial to our shareholders. 18 2007 Annual Report Transat A.T. Inc. (cid:1) Successfully continued the implementation of our multi-chan- nel distribution system, which resulted in sales increases of more than 20% on our B2C Web sites (mainly under the Air Transat brand in summer) and of more than 15% compared with 2006 via global distribution systems (GDS). Implemented online seat pre-selection. (cid:1) Developed a new growth plan for Europe. (cid:1) Maintained Air Transat fleet’s excellent on-time performance and reliability ratio, increased capacity, substantially reduced costs (total costs excluding fuel) in terms of available seat miles and increased incidental revenues. (cid:1) Successfully completed the integration of Canadian Affair. (cid:1) Completed the acquisition of Air Consultants Europe (70% interest already held) and forged closer links between our European subsidiaries working with TTC and Jonview Canada. (cid:1) Revised our entry strategy into the U.S., based on information gathered in 2007. 2008 Objectives Strengthen our leadership position in Canada and the rela- tionships between Transat Tours Canada (TTC) and our European subsidiaries active in the Transatlantic market. (cid:1) Further increase our Ontario market share for Southern desti- nations in winter by leveraging our leadership position achieved in 2007 and maintain or increase market share in all other parts of Canada where we are the leader. (cid:1) Start implementing the five-year expansion plan for the Transatlantic market by adding new destinations and forging closer links between TTC and our European subsidiaries act- ing as sellers/resellers (Canadian Affair, Vacances Transat (France) and Air Consultants Europe (ACE) as well as with Air Transat and Jonview Canada, and capitalize on our presence on both sides of the Atlantic. (cid:1) Continue to strengthen our multi-channel distribution system by consolidating the travel agency network and developing web platforms that are well-adapted to market trends. Increase our margins, particularly by continuing our cost con- trol efforts, e.g. seeking new synergies among subsidiaries. (cid:1) Become more competitive and strengthen our position as an outgoing European tour operator. (cid:1) Continue to diversify destinations offered from France, based on the current business models at Look Voyages and Vacances Transat (France). (cid:1) Continue to strengthen our multi-channel distribution system by strengthening links between our travel agencies and tour operators and by developing web platforms that are well- adapted to markets trends. (cid:1) Develop a strategic growth plan for our organization in France. Tap into new outgoing markets. (cid:1) Seek growth opportunities for outgoing tour operations in new markets, mainly in southern Europe and North America, via acquisitions that match our business model. (cid:1) Continue to seek targets in the U.S. based on new criteria, namely smaller players that are very active on the Internet. 19 2007 Annual Report Transat A.T. Inc. Review of 2007-2008 objectives and achievements (Cont’d) 2007 Objectives Achievements or progress as at October 31, 2007 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) tar- get acquisitions 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 eco- nomic performance of this industry segment. We have: (cid:1) Increased our non-Transat sales at Tourgreece, which has developed new markets: Japan, Venezuela, North Korea and Mexico. (cid:1) Restructured our destination service providers in the Caribbean and Mexico to become the majority shareholder of each of them, have a shared management team and generate substantial savings. Implement a knowledge management culture complete with the necessary processes to support our growth and continu- ity. Acknowledging the vital contribution of human capital to the achievement of our mission statement and the necessity of antic- ipating our needs to drive growth, we will (i) enhance our training and development programs; and (ii) ensure that all our sub- sidiaries develop or fine-tune their succession plans, such as through a high-potential employee development program. We have: (cid:1) Developed a formal process for reviewing organizational design using a multidimensional approach (structure, culture, talent management, management styles). (cid:1) Developed guiding principles and set new succession-related objectives for 2008, based on some 60 meetings with man- agers. Develop and implement an integrated information manage- ment infrastructure that supports development and actively contributes to profitable growth. Taking into account specific geographic considerations, we will continue developing our busi- ness-to-business (B2B) and business-to-consumer (B2C) plat- forms 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 con- tinue the pooling of assets, investments and resources among our business units to either upgrade services, achieve greater harmo- nization or reduce costs; (ii) pursue our plan to adopt a more effi- cient centralized seat management system; (iii) and implement new analytical and decision-making support tools to lower our response time. In 2007, we made sustainable tourism a strategic priority. We have: (cid:1) Developed a three-year IT strategic plan (2008-2010)) aimed at (cid:1) renewing our portfolio of applications. Implemented online seat pre-selection on Air Transat and con- tinued the development of our platforms (B2C). (cid:1) Considerably improved the strength of our systems and their (cid:1) capacity to handle increasing volumes (B2B). Installed a new telephone infrastructure (particularly for call centres) to enhance customer service; built a new external server room to serve all Canadian subsidiaries, thereby strengthening security and our recovery capacity. We have: (cid:1) Set up a Sustainable Tourism Committee headed by Lina De Cesare, who is responsible for planning and implementing a plan that will be developed in 2008 to adapt our processes, products and culture, and make Transat a leader in sustainable tourism in North America. 20 2007 Annual Report Transat A.T. Inc. (cid:1) Held discussions with several incoming tour operators in Europe that did not however lead to a transaction beneficial to our shareholders. (cid:1) Set up a joint venture in the hotel industry in Mexico and the Dominican Republic with H10 Hotels, a Spanish chain: we paid US$55 million for a 35% interest in five top-grade hotels (1,600 rooms), thereby achieving an important objective of the 2006-2008 strategic plan. (cid:1) Provided tailor-made management training courses for almost 600 employees . (cid:1) Launched a management certificate program in cooperation with Ryerson University in Toronto, as part of Air Transat Academy. (cid:1) (cid:1) Carried out a tactical revamping of the current seat manage- ment system and undertook new actions to migrate to a new system that will be purchased in 2008. Implemented new analytical and decision-making tools to lower our response time as well as a new management system for aircraft maintenance, which will help better control costs. Successfully continued SAP deployment in our company. 2008 Objectives Capitalize on vertical integration at destination. (cid:1) Successfully complete the integration of our joint venture in the hotel industry and develop a growth plan. (cid:1) Seek out acquisition targets in the incoming tourism business to increase the number of destinations with a complete offering. Provide additional resources to managers to actively ensure employee development from the perspective of long-term retention and knowledge management. (cid:1) Develop new tools to enhance managers’ coaching skills. (cid:1) Make the process of identifying talent more transparent for (cid:1) employees. Improve succession management by setting up a new system for monitoring employee development plans. Develop and implement an integrated information man- agement infrastructure that supports development and actively contributes to profitable growth. (cid:1) Adapt our Internet strategy by further integrating it into our business model, with respect to both distribution channels and management processes. (cid:1) Test and select second-generation application solutions and initiate migration to such solutions while continuing to strengthen platforms, all of which contributing to profitable growth. (cid:1) Taken several initiatives, namely creating a new philanthropic program to support community-based projects, setting up environmental committees at all Transat sites, implementing an environmental certification initiative at Air Transat and continu- ing our aggressive fuel management program developed and implemented in 2003. (cid:1) Carefully studied the impact of potential European regulations on greenhouse gases emissions starting in 2011 on the renew- al of our fleet slated for 2012. Enhance our structures, processes and strategies to adapt to fast-changing trends in the tourism industry, particularly those resulting from expectations and chal- lenges relating to social responsibility. (cid:1) Develop and adopt a policy and action plan to make Transat the leader in sustainable tourism, in Canada’s mass tourism industry. (cid:1) Develop a medium-term development strategy that reconciles the fleet renewal plan with the potential additional costs result- ing from regulations related to greenhouse gases emissions. 21 2007 Annual Report Transat A.T. Inc. Revenues per geographic areas Years ended October 31 (in thousands of dollars) 2007 $ 2006 $ 2005 $ 2007 2006 % % Variance North America 2,278,116 2,059,611 1,896,487 10.6 Europe Total 8.6 467,994 41.1 16.3 3,045,917 2,603,746 2,364,481 17.0 10.1 544,135 767,801 The overall increase is due to revenue growth of 10.6% in North America and 41.1% in Europe. The key factor driving higher revenues was the number of travellers, which increased by 18.3% over 2006. The growth in the number of travellers resulted from an increase of 6.7% in North America and 74.8% in Europe, due to the acquisition of Canadian Affair in 2006, among other factors. Higher revenues from European operations were also amplified by the weakness of the dollar against the euro and the pound sterling. We expect that the total number of travellers in 2008 will be higher than in 2007. In light of this increased volume and our recent acquisitions, we also expect revenues to grow, compared with 2007. Operating expenses Our operating expenses consist mainly of direct costs, salaries and employee benefits, aircraft fuel, commissions, aircraft maintenance, airport and navi- gation fees, and aircraft rent. The overall growth in operating expenses is due to a 11.4% increase in North America and a 40.1% increase in Europe. These increases resulted primari- ly from the higher pace of business activity, especially in Europe but also in North America, and the impact of acquisitions since 2006. As a percentage of rev- enues, operating expenses have marginally grown to 95.6% from 95.1% in 2006. Approximately 30% of our operating expenses are payable in U.S. dollars. We did not however fully benefit from the rebounding Canadian dollar, due to our hedging program. Direct costs include the cost of the various trip components sold to consumers via travel agencies 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 2007, these costs amounted to 52.6% of our revenues, up from 50.2% in 2006. The dollar-figure increases were mainly due to our acquisition of CONSOLIDATED OPERATIONS Acquisitions During the year ended October 31, 2007, the Corporation acquired several businesses. These acquisitions were recorded using the purchase method. The results of these businesses were includ- ed in the Corporation’s results as of their respective dates of acquisition. On May 1, 2007, the Corporation acquired the balance of the shares (30%) of Air Consultants Europe (ACE) that it did not already own for a cash consider- ation of m1.3 million ($1.9 million). Since this date, ACE is a wholly owned subsidiary. On July 11, 2007, the Corporation acquired 100% of the issued and outstanding shares of French outgoing tour operator L’Européenne de Tourisme (Amplitude Internationale) for a total consideration of m6.0 million ($8.6 million). A cash payment of m4.6 million ($6.2 million) was made on the acquisition date and the balance of m1.4 million ($1.9 million) is due by July 31, 2008. The final purchase price allocation is expected to be completed as soon as the Corpora- tion’s management has gathered all the significant information it deems necessary. These transactions resulted in a $5.6 million increase in balance sheet goodwill. Note 18 to the audit- ed Consolidated Financial Statements presents the purchase price allocation for the acquired businesses. 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. The terms “travellers” and “passengers” will be used throughout the MD&A to explain certain changes. Basically, tour operators record round-trips in terms of travellers and airlines record flight seg- ments in terms of passengers. 22 2007 Annual Report Transat A.T. Inc. Canadian Affair, which almost exclusively uses third party flights, an increased level of business oper- ations, and higher per-seat and hotel room costs. The strength of the euro and the pound sterling against the Canadian dollar also contributed to increasing our direct costs compared to 2006. Salaries and employee benefits rose 15.4% com- pared with fiscal 2006, due in part to our business acquisitions since November 1, 2005, increased busi- ness activity and the addition of two aircraft to our fleet since 2006 that required us to hire more employees. Aircraft fuel costs rose 10.5%, or $25.9 million, during the year. This increase arose mainly from greater business activity, and the addition of one aircraft to the fleet in 2006 and another in the third quarter of 2007. Commissions include the fees paid by tour oper- ators to travel agencies for serving as intermediaries between tour operators and consumers. As a per- centage of revenues, commissions decreased from 6.6% in 2006 to 6.1%, partly due to synergies result- ing from the expansion of our travel agency network following acquisitions in fiscal 2006 and to the fact that most sales at Canadian Affair involve no interme- diaries. Aircraft maintenance costs relate mainly to the engine and airframe maintenance expenses incurred by Air Transat. Despite a higher pace of business activ- ity, these expenses remained stable compared with 2006 due to, among other factors, the strength of our domestic currency against the U.S. dollar and the high reliability of our aircraft. Airport and navigation fees mainly comprise fees charged by airports. The 20.5% increase in fees com- pared with the previous year resulted from greater busi- ness activity and higher airport landing fees imposed by several airports. Aircraft rent remained stable in 2007 compared with 2006. The Canadian dollar strength against the U.S. dollar partially offset new lease payments for air- craft added to our fleet in 2006 and 2007. Aircraft rent will increase in the next fiscal year with the addition of another aircraft to our fleet at the end of the 2008 winter season. Although they fell marginally as a percentage of revenues, other expenses were up 16.0% compared with 2006, primarily as a result of 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 2008. North America Winter season In North America, revenues rose 16.7% during the 2007 winter season, compared with the corre- sponding season in 2006, mainly due to a 13.2% increase in the number of travellers over 2006. Throughout the winter season, competition continued to apply downward pressure on prices, particularly in Québec. Our margin for the 2007 winter season declined to 6.5% from 7.2% in the same period in 2006. As expected, our efforts to increase market share in Ontario, which turned out to be successful, resulted in higher sales and lower margins. Operating expenses Years ended October 31 (in thousands of dollars) Direct costs Salaries and 2007 $ 1,601,652 2006 $ 1,307,732 2005 $ 1,168,612 employee benefits Aircraft fuel Commissions Aircraft maintenance Airport and navigation fees Aircraft rent Other Total 334,973 273,614 186,686 81,146 86,594 48,883 299,299 2,912,847 290,385 247,697 171,116 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 % of revenues 2007 52.6 11.0 9.0 6.1 2.7 2.8 1.6 9.8 95.6 2006 50.2 11.1 9.5 6.6 3.1 2.8 1.9 9.9 95.1 2005 49.4 10.2 8.4 7.7 3.9 2.9 2.2 10.2 94.9 Variance 2007 % 22.5 2006 % 11.9 20.1 15.4 24.2 10.5 9.1 (5.8) — (11.6) 5.7 (6.1) 7.2 10.4 20.5 — 16.0 17.6 23 2007 Annual Report Transat A.T. Inc. During the 2007 winter season, Air Transat served some 40 destinations in 18 countries, primari- ly southern or other sunshine destinations. During the summer months, Air Transat shifts most of its capac- ity to Europe, while maintaining some flights to south- ern destinations. In 2007, Air Transat offered direct flights to some 30 cities in 11 European countries. Summer season During the summer season, moderate price increases boosted revenues by 2.5%. The volume of travellers held steady over the season, compared with the same period in 2006. Competition remained fierce, particularly between Canada and the U.K., contributing to a decline in the margin from 3.8% in 2006 to 3.0% in 2007. Europe Winter season In Europe, revenues were up from the year ended October 31, 2006. In particular, package sales grew at Look Voyages, mainly as a result of height- ened business activity, but also due to the euro’s strength against the dollar. The volume of travellers rose 17.0% during the winter season, compared with the corresponding period of 2006. We reported a negative margin of $1.4 million compared with a negative margin of $2.7 million in 2006. As expected, Canadian Affair generated a negative margin, which is entirely attributable to the seasonal nature of its operations, i.e. mainly in sum- mer. Meanwhile, the margin in France improved over that in 2006. Summer season For the summer season, revenues were up 48.5%, mainly due to the acquisitions of Canadian Affair (in 2006) and Amplitude Internationale in July 2007. The number of travellers surged 66.5%, com- pared with the 2006 season. Excluding the impact of acquisitions, the number of travellers rose 21.0%, mainly due to growth at Look Voyages in France. Our European operations generated a 3.6% margin for the summer season, up from 3.1% in 2006, helped by solid results at Look Voyages and Amplitude Internationale. These results were how- ever partly offset by the loss incurred by Canadian Affair. North America — Winter and summer results Years ended October 31 (in thousands of dollars) Winter 2007 2006 $ $ 1,375,092 1,178,532 2005 $ 1,111,924 1,285,771 1,093,342 85,190 7.2 89,321 6.5 1,026,033 85,891 7.7 Variance 2007 % 16.7 17.6 4.8 (9.7) 2006 % 6.0 6.6 (0.8) (6.5) 2007 $ 903,024 Summer 2006 $ 2005 $ 881,079 784,563 Variance 2007 % 2.5 2006 % 12.3 876,314 26,710 3.0 847,474 750,778 33,785 4.3 33,605 3.8 3.4 (20.5) (21.1) 12.9 (0.5) (11.6) Revenues Operating expenses Margin Margin (%) Europe — Winter and summer results Years ended October 31 (in thousands of dollars) 2007 $ 248,645 Winter 2006 $ 194,613 2005 $ 205,760 250,073 (1,428) (0.6) 197,286 (2,673) (1.4) 211,614 (5,854) (2.8) Variance 2007 % 27.8 26.8 46.6 57.1 2006 % (5.4) (6.8) 54.3 50.0 2007 $ 519,156 Summer 2006 $ 2005 $ 349,522 262,234 500,689 18,467 3.6 338,700 255,425 6,809 2.6 10,822 3.1 Variance 2007 % 48.5 47.8 70.6 16.1 2006 % 33.3 32.6 58.9 19.2 Revenues Operating expenses Margin Margin (%) 24 2007 Annual Report Transat A.T. Inc. Other expenses and revenues Amortization Amortization is calculated on property, plant and equipment, intangible assets subject to amortization, deferred lease inducements and other assets, con- sisting mainly of development costs. Amortization expense was up 9.2%, mainly as a result of additions to property, plant and equipment during the year and previous years. Interest on long-term debt and debenture The 14.2% decrease in interest on long-term debt and debenture compared with 2006 is mainly due to a principal repayment on a long-term debt made in the third quarter of the year ended October 31, 2007, and the strength of the dollar against the U.S. dollar since a significant portion of our long-term debt is denominated in this currency. Other interest and financial expenses Other interest and financial expenses remained relatively unchanged during the year, compared with the previous year. Interest income Growth in interest income resulted primarily from higher interest rates and higher average cash balances than in 2006. Other expenses and revenues Years ended October 31 (in thousands of dollars) Unrealized gain on derivative financial instruments used for aircraft fuel purchases Subsequent to the adoption on November 1, 2006 of new accounting standards and the discontinuation of hedge accounting for its derivative financial instru- ments used for aircraft fuel purchases, the Corpo- ration recognized an unrealized gain on derivative financial instruments used for aircraft fuel purchases amounting to $26.6 million for the year ended October 31, 2007. This gain corresponds to the change, during the fiscal year, in the fair value of derivative financial instruments outstanding as at October 31, 2007, used by the Corporation for managing risks related to fluctuations in fuel prices (see Accounting section for more details). Foreign exchange gain on long-term monetary items The Corporation recorded a foreign exchange gain on long-term monetary items for the fiscal year as the Canadian dollar continued to strengthen 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. Amortization Interest on long-term debt and debenture Other interest and financial expenses Interest income Unrealized gain on derivative financial instruments used for aircraft fuel purchases Foreign exchange gain on long-term monetary items Writeoff of goodwill Writedown of investments in ABCP Gain on disposal of investment Share of net income of companies subject to significant influence Restructuring charge 2007 $ 42,973 6,229 1,929 (19,745) (26,577) (3,023) 3,900 11,200 — (651) — 2006 $ 39,360 7,264 1,484 (15,706) — (4,162) — — — (375) — 2005 $ 37,558 10,815 1,708 (12,963) — (2,309) — — (5,747) (461) (934) Variance 2006 % 4.8 (32.8) (13.1) 21.2 — 80.3 — — n/a (18.7) n/a 2007 % 9.2 (14.2) 30.0 25.7 n/a (27.4) n/a n/a — 73.6 — 25 2007 Annual Report Transat A.T. Inc. Writeoff of goodwill During the quarter ended October 31, 2007, the Corporation performed its annual test for impairment of goodwill and trademarks by discounting future cash flows based on the most recent financial forecasts. The fair value of a reporting unit, Travel Superstore Inc., was less than its net book value, which translated into a $3.9 million impairment of goodwill related to this reporting unit. Writedown of investments in ABCP On August 22, 2007, pursuant to the disruption of credit markets, the Corporation announced that a portion totalling $154.5 million of cash on hand was invested in non-bank ABCP with ten different ABCP trusts. Our results for the year include a writedown of $11.2 million in respect of our ABCP holdings. The Canadian market for third party sponsored ABCP suffered a liquidity disruption in mid-August 2007 following which a group of financial institutions and other parties agreed, pursuant to the Montréal Accord (the “Accord”), to a standstill period in respect of ABCP sold by 23 conduit issuers. Participants to the Accord also agreed in principle to the conversion of the ABCP investments into longer-term financial instruments with maturities corresponding to the under- lying assets. A Pan-Canadian Investors Committee was subsequently set up to successfully restructure the Canadian ABCP market, bring back liquidity, cre- ate transparency and optimize value for holders of notes and to achieve all the foregoing as quickly as possible. The signatories to the Accord, which do not include the Corporation, agreed in principle on December 23, 2007, to restructure all of the conduits except one. The solution would segregate the con- duits into three different categories based on the underlying assets. Information about valuation and specifics of the restructuring is not yet available to investors and wil be sent to investors in the coming week in order to complete the restructuring by the end of March 2008. Since there is no active market for ABCP secu- rities, the Corporation’s management has estimated the fair value of these assets using a valuation model that incorporates management’s best estimates of credit risk attributable to underlying assets, the rel- evant market interest rate, amounts to be received, maturity dates and assumptions regarding the likeli- hood that the restructuring process will proceed as planned by the Investors Committee. As a result of the valuation, the Corporation has recognized an $11.2 million writedown reflecting the estimated decline in fair value of these investments as at October 31, 2007, including a provision for its estimated share of restructuring costs associated with the Accord. The Corporation’s estimate of the fair value of its ABCP investments as at October 31, 2007 is subject to significant uncertainty. While management believes that its valuation technique is appropriate in the cir- cumstances, changes in significant assumptions could substantially affect the value of ABCP securities in the coming quarters. The resolution of these uncertainties could result in the ultimate value of these investments varying significantly from management’s current best estimates and the extent of that difference could have a material effect on our financial results. The liquidity crisis in the Canadian market for third party sponsored ABCP has had no significant impact on the Corporation’s operations or financial position. The Corporation holds or has access to sufficient cash to meet all its financial, operational and regulatory obligations. Cash in trust, representing deposits from customers, as well as cash on hand, are held either as cash or invested in liquid instru- ments (mainly cash and term deposits) with a broad range of major financial institutions and have no exposure whatsoever to the current ABCP market disruption. Subsequent to year-end, the Corporation was repaid $10.8 million in ABCP securities, following the successful restructuring and distribution of the assets of one of the trusts. The nominal value of these secu- rities was $11.0 million. 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. for a total consideration of m4.5 million. This transaction resulted in a $5.7 million gain on disposal. Income taxes Our income tax expense for the fiscal year ended October 31, 2007 amounted to $35.6 million, compared with $32.0 million for fiscal 2006. Excluding the share in net income of companies subject to sig- nificant influence, the effective tax rate was 30.7% for the fiscal year ended October 31, 2007 and 32.5%, for the preceding year. The lower tax rate results mainly from the use by our French companies of a portion of their tax loss 26 2007 Annual Report Transat A.T. Inc. carryforwards for which no income tax assets have been recognized. However, our effective tax rate for fiscal 2007 would have been 37.0% compared with 35.1% in 2006, had we recorded income tax assets related to these loss carryforwards. Net income As a result of the items discussed in “Consoli- dated operations” of this MD&A, our net income totalled $80.5 million, or $2.38 per share, for fiscal 2007, compared with a net income of $65.8 million, or $1.88 per share, for fiscal 2006. For fiscal 2007, the average number of outstanding shares used to deter- mine the per share amounts was 33,763,000, and for fiscal 2006, 34,907,000. On a diluted per share basis, earnings per share for fiscal 2007 amounted to $2.36, compared with $1.85 for fiscal 2006. The adjusted weighted average number of shares used to determine diluted earnings per share was 34,212,000 for the current year and 35,660,000 for 2006 (see note 15 to the audited Consoli- dated Financial Statements). Excluding the unrealized gain on derivative finan- cial instruments used for aircraft fuel purchases, the writeoff of goodwill and the writedown of investments in ABCP, income in 2007 would total $74.5 million or $2.18 per fully diluted share. Selected unaudited quarterly financial information Overall, revenues in 2007 were up compared with 2006, primarily due to an increase in the number of travellers and to the acquisitions made since fiscal 2006. Our margins fluctuated over the different quarters in 2007, compared with 2006, generally shrinking as a result of fierce competition throught the fiscal year. Selected unaudited quarterly financial information (In thousands of dollars, except per share data) Fourth-quarter highlights For the fourth quarter, the Corporation gener- ated revenues of $680.4 million, up $60.9 million or 9.8%, from $619.5 million for the corresponding peri- od in 2006. This increase is primarily attributable to the growth in revenues generated by Canadian tour operators, and higher rev-enues in France resulting from internal growth at Look Voyages and the acqui- sition of Amplitude Internationale in July 2007. The margin for the fourth quarter was $20.5 million, or 3.0%, compared with $28.8 million, or 4.7%, in 2006. Although operations in France gener- ated solid returns, price pressure was extremely strong on Canada-U.K. flights due to greater capaci- ty deployed by other players and higher taxes imposed by the U.K., all of which having a negative impact on the quarter’s margins. The quarterly results were affected by several non-cash items including an $11.2 million write- down ($8.0 million after-tax) in respect of ABCP investments, a $3.9 million writedown of goodwill from the Corporation’ investment in Travel Superstore Inc., a group of travel agencies based in Ontario, and a gain of $13.6 million ($9.1 million after tax) resulting from the changes in the fair value of financial instru- ments used for fuel purchases. Net income for the fourth quarter amounted to $7.7 million, or $0.23 per share on a diluted basis, compared with $13.6 million, or $0.39 per share in 2006. Excluding the above-mentioned non-cash items not related to operations, net income would total $10.4 million ($0.31 per share on a diluted basis) compared with $13.6 million ($0.39 per share on a diluted basis). Revenues Margin Net income Basic earnings per share Diluted earnings per share 2007 712,337 24,674 2,132 0.06 0.06 Q1 2006 581,576 14,030 5,168 0.14 0.13 2007 911,400 63,219 53,944 1.59 1.58 Q2 2006 791,569 68,487 42,845 1.27 1.24 2007 741,762 24,722 16,749 0.50 0.49 Q3 2006 611,107 15,606 4,205 0.12 0.12 2007 680,418 20,455 7,655 0.23 0.23 Q4 2006 619,494 28,821 13,552 0.40 0.39 27 2007 Annual Report Transat A.T. Inc. LIQUIDITY AND CAPITAL RESOURCES As at October 31, 2007, cash and cash equiva- lents totalled $166.8 million, compared with $214.9 mil- lion in 2006. Cash and cash equivalents in trust or oth- erwise reserved amounted to $168.2 million at the end of fiscal 2007, compared with $203.6 million in 2006. Our balance sheet shows a working capital of $71.5 million with a ratio of 1.1, compared with $97.6 million and a ratio of 1.2 in 2006. On November 16, 2007, the Corporation entered into an agreement with a financial institution for an unsecured revolving credit facility of $150.0 mil- lion as well as a revolving credit facility of $60.0 million for the purposes of issuing letters of credit, in respect of which the Corporation must pledge cash as secu- rity for 105% of letters of credit issued. This agree- ment expires on November 16, 2012. Under the terms and conditions of this agreement, funds may be drawn down by way of bankers’ acceptances and bank loans in Canadian dollars, US dollars, euros or pound sterling. Under this agreement, interest is charged at bankers’ acceptance rates, at the financial institu- tion’s prime rate or at LIBOR, plus a premium based on certain financial ratios calculated on a consolidated basis. With regard to our French operations, we also have access to unused lines of credit totalling m11.3 million ($15.5 million). Total assets increased by $137.9 million, or 14.4 %, to $1,097.5 million from $959.6 million as at October 31, 2006. Shareholders’ equity fell by $13.1 million, from $296.0 million as at October 31, 2006 to $282.9 million as at October 31, 2007. The increase in assets and liabilities and the decrease in sharehold- ers’ equity result primarily from the application of new accounting standards on financial instruments leading to the recognition of the fair value of derivative finan- cial instruments in the balance sheet and, for deriva- tive financial instruments designated as hedges for the purposes of hedge accounting, to a decrease in accumulated other comprehensive income reported under shareholders’ equity (see “Accounting” for more details). Operating activities Cash flows totalling $121.8 million were generat- ed from operating activities, up $5.7 million from 2006, mainly as a result of heightened business activities. We expect to continue to generate positive cash flows from our operating activities in 2008. Investing activities Cash flows used in investing activities during the fiscal year increased by $115.7 million to $160.8 mil- lion from $45.1 million in 2006. Besides the reporting of our investments in ABCP as an investing activity, the increase results primarily from the $17.7 million addition to property, plant and equipment, mainly made up of investments in computer hardware and software as well as improvements made to our aircraft fleet, offset by the positive net change in cash and cash equivalents in trust or otherwise reserved. In 2008, we expect that additions to property, plant and equipment will total between $40.0 million and $50.0 million. Summary of Cash Flows Years ended October 31 (in thousands of dollars) Cash flows from operating activities Cash flows from investing activities Cash flows from financing activities Effect of exchange rate changes on cash and cash equivalents Net change in cash and cash equivalents 2007 $ 121,828 (160,757) (14,830) 2006 $ 116,160 (45,054) (152,046) 5,640 (48,119) 2,332 (78,608) 2005 $ 70,434 (39,468) (44,091) (4,255) (17,380) Variance 2007 % 4.9 (256.8) 90.2 141.9 38.8 2006 % 64.9 (14.2) (244.8) 154.8 (352.3) The above table summarizes the cash flow activity and should be read in conjunction with the audited Consolidated Statements of Cash Flows 28 2007 Annual Report Transat A.T. Inc. Financing activities During the year, cash flows used from financing activities totalled $14.8 million for the fiscal year, down $137.2 million compared with 2006, mainly because share repurchases in fiscal 2007 fell by $108.5 million. During the fiscal year, we repaid $26.1 million of our long-term debt, mainly relating to certain aircraft, and in the fourth quarter, we drew an amount of $39.9 mil- lion from our new long-term credit facility. Last, we issued $6.8 million in shares during the fiscal year and paid out $11.5 million in dividends, compared with $1.9 million and $4.7 million respectively in 2006. 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 reported as liabilities in the Corporation’s Consolidated Financial Statements for the year. These obligations totalled $91.8 million as at October 31, 2007 ($87.8 million in 2006). Obligations that are not reported as liabilities are considered off- balance sheet arrangements. These contractual arrangements are entered into with non-consolidated entities and are made up of: • Guarantees (see notes 11 and 23 to the audited Consoli- dated Financial Statements) • Operating leases (see note 22 to the audited Consoli- dated Financial Statements) • Agreements with suppliers (see note 22 to the audit- ed Consolidated Financial Statements) Payments due by period Years ending October 31 (in thousands of dollars) The estimated off-balance sheet debt totalled $504.9 million as at October 31, 2007 ($550.8 million in 2006). Off-balance sheet debt (In thousands of dollars) Guarantees Irrevocable letters of credit Security contracts Operating leases Commitments under operating leases Agreements with suppliers Total 2007 $ 10,751 848 2006 $ 5,751 780 267,710 313,806 225,603 504,912 230,418 550,755 In the normal course of business, guarantees are required in the travel industry to provide indemnifica- tions and guarantees to counterparties in transactions such as operating leases, irrevocable letters of credit and security contracts. Historically, Transat has not made any significant payments under such guaran- tees. With operating leases, the Corporation can 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. Contractual obligations Debenture Long-term debt Operating leases (aircraft) Operating leases (other) Agreements with suppliers Total 2008 — 48,794 44,933 20,492 162,145 276,364 2009 3,156 — 39,446 17,276 37,991 97,869 2010 — — 23,253 15,165 14,634 53,052 2012 2011 — — — 39,887 3,138 12,839 3,770 59,634 12,548 13,440 7,063 33,051 2013 and later — — 379 64,801 — 65,180 Total 3,156 88,681 123,697 144,013 225,603 585,150 The above table summarizes the Corporation’s obligations and commitments to make future payments under contracts, including long-term debt, operating leases, debentures and agreements with suppliers. Additional information is contained in notes 11, 12, 13 and 22 to the audited Consolidated Financial Statements 29 2007 Annual Report Transat A.T. Inc. OTHER the Dominican Republic, for a cash consideration of US$55.0 million. Normal course issuer bid On June 15, 2007, the Corporation renewed, for a 12-month period, the normal course issuer bid that expired on June 14, 2007, with the intention to repur- chase for cancellation up to a maximum of 3,288,003 of its Class A Variable Voting Shares and Class B Voting Shares, representing less than 10% of the pub- licly held Class A Variable Voting Shares and Class B Voting Shares at the date the renewal bid was filed. 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 policy on nor- mal course issuer bids. The price the Corporation will pay for any Class A Variable Voting Shares and Class B Voting Shares will be the market price at the time of acquisition, plus brokerage fees. Purchases began on June 15, 2004, and will terminate no later than June 14, 2008. During the year, 736,100 voting shares, made up of Class A Variable Voting Shares and Class B Voting Shares, were purchased for cancellation for a cash consideration of $23.9 million. Dividends During the year, the Corporation declared and paid dividends totalling $11.5 million. During the 2007 second quarter, the Corporation increased its quarter- ly dividend by $0.02 per share to $0.09 per share. Shares issued and outstanding As at October 31, 2007, the number of Class A Shares and Class B Shares totalled 1,978,743 and 31,649,643, respectively. Stock options As at October 31, 2007, the number of outstand- ing options totalled 506,083, of which 250,993 were exercisable. Subsequent event On December 10, 2007, the Corporation acquired a 35% interest in Caribbean Investments B.V., a company that operates five hotels in Mexico and in ACCOUNTING Financial instruments Management of fuel price and foreign exchange risks In the normal course of business, the Corpora- tion is exposed to risks related to changes in certain foreign exchange rates and in fuel prices. The Corpo- ration manages these risks through various derivative financial instruments. Management is responsible for determining the acceptable level of risk and only uses derivative financial instruments to hedge existing com- mitments or obligations and not to realize a profit on trading activities notwithstanding wether or not hedge accounting is used to account for these financial instruments. The Corporation has entered into fuel purchas- ing forward contracts maturing in less than two years to manage exposure to fuel price fluctuations. To manage foreign exchange risks, it has also entered into foreign exchange forward contracts, expiring in less than two years, for the purchase and sale of for- eign currencies. Note 6 to the audited Consolidated Financial Statements for the year ended October 31, 2007 (included in this Annual Report) contains additional information on derivative financial instruments. Credit risk Except for its investments in ABCP, the Corpora- tion believes it is not exposed to a significant concen- tration of credit risk. The risk to which the Corpora- tion is exposed in relation to derivative financial instru- ments 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 with suitable credit ratings. Cash and cash equivalents are invested on a diversified basis in investment-grade corporations. More than 90% of the Corporation’s investments in ABCP are invested in funds whose assets are ranked 30 2007 Annual Report Transat A.T. Inc. AAA according to the most recent ranking by Dominion Bond Rating Service (DBRS) dated November 6, 2007. Accounts receivable generally arise from the sale of vacation packages to individuals through trav- el agencies and the sale of seats to tour operators, which are dispersed over a wide geographic area. Fair value of financial instruments reported in the balance sheets Following the adoption, on November 1, 2006, of the new recommendations of the Canadian Institute of Chartered Accountants [“CICA”], including Section 3855, “Financial Instruments – Recognition and Measurement,” all the Corporation’s derivative financial instruments are presented at their fair value in the balance sheet. Cash and cash equivalents, cash and cash equivalents in trust or otherwise reserved, and investments in ABCP are also presented at their fair value in the balance sheet. The carrying amounts of the financial assets designated as loans and receivables consisting pri- marily of accounts receivable and short-term financial liabilities classified as other financial liabilities approxi- mate their fair value given that they are expected to be realized or settled in the short term. The carrying amounts of other long-term financial liabilities approx- imate their fair value given that they are subject to terms and conditions, such as interest rates, similar to those available to the Corporation for instruments with comparable terms. The fair value of the derivative financial instru- ments represents the amount of the consideration that could be exchanged in an arm’s length transac- tion between willing parties who are under no compul- sion to act. The Corporation determines the fair value of its derivative financial instruments using the pur- chase or selling price, as appropriate, in the most advantageous active market to which the Corporation has immediate access. When the market for a deriva- tive financial instrument is not active, the Corporation establishes fair value by applying valuation tech- niques, such as using information on recent market transactions involving other instruments that are sub- stantially the same, discounted cash flow analysis or other techniques, where appropriate. The Corporation ensures, to the extent practicable, that its valuation technique incorporates all factors that market partici- pants would consider in setting a price and that it is consistent with accepted economic methods for pric- ing 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 accor- dance with GAAP requires management to make cer- tain 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 esti- mates. 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 estimates that we consider important based on the degree of uncertainty and the likelihood of a material impact if we had used different estimates. There are many other areas in which we use estimates about uncer- tain matters. Fair value of investments in ABCP (See “Consolidated Operations: Writedown of investments in ABCP” section.) Provision for aircraft overhaul The Corporation provides for aircraft overhaul expenses, mainly for engines and airframes, for its air- craft based on an estimate of all such future expens- es 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 airframe hours over the same periods. These expenses are charged to income according to 31 2007 Annual Report Transat A.T. Inc. the number of cycles used or over the completed fis- cal 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 management, could alter the factors used to esti- mate this provision. This may result in charges that could materially affect our results, financial position and cash flows. Generally speaking, the main assump- tions used to calculate this provision would have to be reduced by approximately 15%, to produce 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 calculated 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 or oper- ating unit’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 concern- ing our future operations. The cash flow forecasts used to determine asset values may change in the future due to market conditions, competition and other factors. Any changes may result in non-cash charges that could materially affect our results and financial position. Generally speaking, the main assumptions would have to be reduced by 30%-70% (depending on the operating unit), to produce a signif- icant loss in value for the operating unit and have 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 historical costs. These assets are reviewed for impairment whenever events or changes in circumstances indi- cate that the carrying amount may not be recover- able. Our review is based on an asset’s ability to gen- erate future cash flows. We carry out an analysis by estimating the net undiscounted cash flows attributa- ble 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 market conditions or other factors. Any changes may result in non-cash charges that could materially affect our results and financial position. Generally speaking, the main assumptions would have to be reduced by 60%, to produce a loss in value and have a material impact on our results and financial position. However, reduc- ing these assumptions would not result in cash out- flows and would not affect our cash flows. Accounting changes On November 1, 2006, the Corporation adopted retroactively, without restatement of prior periods, the recommendations of the following sections of the Canadian Institute of Chartered Accountants Handbook: Section 1530, “Comprehensive Income,” Section 3855, “Financial Instruments – Recognition and Measurement,” and Section 3865, “Hedges.” Section 1530 requires the presentation of com- prehensive income and its components in a new financial statement. Comprehensive income repre- sents the change in an enterprise’s net assets result- ing from transactions, events and circumstances from non-shareholder sources. Section 3855 prescribes the recognition and measurement standards for financial assets, financial liabilities and derivatives. These standards prescribe when to recognize a financial instrument in the bal- ance sheet and at what amount. Depending on their balance sheet classification, fair value or cost-based measures are used. These standards also specify how financial instrument gains and losses are to be presented. Based on their classification, gains and losses on financial instruments are recognized in net income or other comprehensive income. The Corporation has used the following classifi- cations: • Cash and cash equivalents, cash and cash equivalents in trust or otherwise reserved, short- term investments and derivative financial instru- ments used to manage exposure to fuel price fluctuations are classified as “Assets held-for- trading.” These assets are measured at fair value and the gains or losses arising from subsequent measurements at the end of each period are recorded in net income. 32 2007 Annual Report Transat A.T. Inc. • Accounts receivable are classified under “Loans and receivables.” They are recorded at cost, which on initial recognition represents their fair value. Subsequent valuations are recorded at amortized cost using the effective interest method. • Bank loans, accounts payable and accrued lia- bilities, the debenture and long-term debt are classified under “Other financial liabilities.” They are initially measured at fair value. Subsequent valuations are recorded at amortized cost using the effective interest method. Section 3865 prescribes the standards specify- ing when and how an entity can use hedge account- ing. The adoption of this new standard is discre- tionary. It offers entities the possibility of applying dif- ferent reporting options than those set out in Section 3855 to qualifying transactions that they elect to des- ignate as being part of a hedging relationship for accounting purposes. The Corporation elected to continue applying hedge accounting for its foreign exchange forward contracts, recorded as cash flow hedges, and its U.S. dollar loans secured by aircraft, recorded as fair value hedges. The Corporation also enters into fuel purchasing forward contracts to man- age exposure to fuel price fluctuations. For these derivative instruments, the Corporation decided to cease using hedge accounting. Unrealized gains or losses were recognized in other comprehensive income at the transition date, namely November 1, 2006, and are recognized in net income under “Aircraft fuel” when contracts expire and the related fuel purchases occur. The adoption of these new standards translated, as at November 1, 2006, into a $12.4 million decrease in accumulated other comprehensive income, a $3.5 million increase in derivative financial instruments reported under assets, a $6.1 million increase in future income tax assets, a $21.6 million increase in deriva- tive financial instruments reported under liabilities and a $0.4 million increase in long-term debt. For the year ended October 31, 2007, the Corporation recognized an unrealized loss of $59.0 million (net of $28.5 million in related income taxes) under other comprehensive income representing the effective portion of the change in fair value of the derivatives designated as cash flow hedges. The amount thus recognized was reclassified under “Operating expenses” for the periods during which the operating expenses were affected by the variabil- ity in the hedged item’s cash flows. A $2.2 million gain was recognized in net income during the year ended October 31, 2007. A loss estimated at $81.4 million, included in “Accumulated other comprehensive income” as at October 31, 2007, should be reclassified under net income during the next fiscal year. For the year ended October 31, 2007, the Corpo- ration recognized a loss of $12.1 million (net of $6.0 million in related income taxes) under other compre- hensive income representing the portion of unrealized losses on fuel purchasing contracts realized at the transition date. Unrealized losses amounting to $0.5 million, included in “Accumulated other comprehensive income” as at October 31, 2007, should be reclassi- fied under net income during the next fiscal year. The adoption of these new standards has no impact on the Corporation’s cash flows. However, it increased net income and diluted earnings per share for the year ended October 31, 2007 by $17.8 million and $0.52 respectively. Future accounting changes Aircraft overhaul expenses On November 1, 2007, the Corporation changed its method for accounting for aircraft overhaul expenses. Up until October 31, 2007, the Corporation accounted for its expenses using the accrue-in- advance method, as set out in note 2 to the Con- solidated Financial Statements for the year ended October 31, 2007, in accordance with the accounting methods suggested in the U.S. Audits of Airlines guide issued by the American Institute of Certified Public Accountants. On September 8, 2006, the Financial Accounting Standards Board [“FASB”] issued FASB Staff Position [“FSP”] AUG AIR-1, Accounting for Planned Major Maintenance Activities. This FSP amended the Audits of Airlines guide to preclude the use of accruals as an acceptable method. This FSP is applicable to all enti- ties for fiscal years beginning on or after December 15, 2006. As a result, effective November 1, 2007, the Corporation discontinued use of the accrue-in-advance method and began accounting for aircraft overhaul expenses as follows: 33 2007 Annual Report Transat A.T. Inc. Leased aircraft Under the terms of the leases, the Corporation is required to maintain the aircraft in serviceable condi- tion and follow the maintenance plan. This commit- ment creates an implicit obligation for the lessor whose past events arise from the use of leased air- craft. The Corporation accounts for its leased aircraft maintenance obligation based on utilization until the next maintenance activity. The obligation is adjusted to reflect any change in the related maintenance expenses anticipated. Depending on the type of maintenance, utilization is determined based on the cycles, logged flight time or time between overhauls. The excess of the maintenance obligation over main- tenance deposits made to lessors and unclaimed is included in liabilities under “Provision for overhaul of leased aircraft.” Owned aircraft When aircraft are acquired, a portion of the cost is allocated to “major maintenance activities,” which is related to airframe, engine and landing gear overhaul costs. The aircraft and major maintenance activities are amortized taking into account their expected esti- mated residual value. The aircraft are amortized on a straight-line basis over seven to ten year periods, while major maintenance activities are amortized according to the type of maintenance activity on a straight-line basis or based on the use of the corre- sponding aircraft until the next related major mainte- nance activity. Subsequent major maintenance activi- ty expenses are capitalized as major maintenance activities and are amortized according to their type. Expenses related to other maintenance activities, including unexpected repairs, are recognized in net income as incurred. This change in accounting policy will be adopt- ed retroactively with restatement of prior fiscal years. The adoption of these new standards will translate into the following changes: as at November 1, 2006, a $2.6 million increase in retained earnings and, as at October 31, 2007, a $17.0 million net decrease in property, plant and equipment, a $17.8 million decrease in the provision for aircraft overhaul, a $0.3 million increase in future income tax liabilities and a $0.6 million increase in retained earnings. For the year ended October 31, 2007, the adoption of these new standards will translate into the following changes: a $5.0 million decrease in maintenance expenses, an $8.0 million increase in amortization of property, plant and equipment and a $1.0 million decrease in future income tax expense, for a $2.0 million decrease in net income and a $0.06 decrease in diluted earnings per share. For the year ended October 31, 2007, the adoption of these new standards will also translate into the following changes: a $12.6 million increase in cash flows relating to operating activities and a decrease in cash flows related to investing activities of the same amount. The Corporation could have chosen to account for maintenance expenses for owned aircraft in net income as incurred. We believe that the adopted standards provide better information to users of finan- cial statements. Other standards The CICA has issued the following accounting standards to take effect on November 1, 2007 for the Corporation: Section 3862, “Financial Instruments – Disclosures,” Section 3863, “Financial Instruments – Presentation,” Section 1535, “Capital Disclosures,” Section 3031, “Inventories,” and Section 1506, “Accounting Changes.” Sections 3862 and 3863 will replace section 3861, “Financial Instruments – Disclosure and Presentation,” and increase emphasis on disclosure of the risks arising from financial instruments, includ- ing hedging instruments, and how the entity manages such exposure. Section 1535 will require supplementary disclo- sure regarding the Corporation’s capital management and compliance with any externally imposed capital requirements. Section 3031 will provide guidance on the method for determining the cost of inventories. The new accounting standard recommends that invento- ries be valued at the lower of cost and net realizable value. The standard further requires the reversal of previously recorded writedowns to net realizable value when there is clear evidence that net realizable value has increased. Additional disclosure will also be required under this standard. The adoption of Section 3031 is not expected to have a material effect on the Corporation’s financial statements. Section 1506 provides guidance, in particular, on the criteria for changing accounting policies, the appropriate accounting treatment in specific circum- stances and the required disclosure. 34 2007 Annual Report Transat A.T. Inc. 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-Presi- dent, 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. Management has designed disclosure controls and procedures to provide reasonable assurance that material information relating to the Corporation is made known to the President and Chief Executive Officer and the Vice-President, Finance and Admi- nistration and Chief Financial Officer, particularly during the period in which the annual filings are being prepared. These two certifying officers evaluated the effec- tiveness of the Corporation’s disclosure controls and procedures as of October 31, 2007, and based on their evaluation, they have concluded that these controls and procedures are effective. This evaluation, among other things, took into consideration the Cor- porate Disclosure Policy, the sub-certification process, and the operation of its Disclosure Committee. Management has also designed internal controls over financial reporting to provide reasonable assur- ance regarding the reliability of financial reporting 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 over financial reporting as of the end of the period covered by the annual fil- ings, and believe the design to be sufficient to provide such reasonable assurance. Finally, there has been no change in the Corpo- ration’s internal control over financial reporting that occurred during the fourth quarter of fiscal 2007 that materially affected, or is 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 downturn 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 operating results could also be adversely affected by more gen- eral factors, including the following: extreme weather conditions; war, political instability or terrorism, or any threat thereof; epidemics or disease outbreaks; consumer preferences and spending patterns; con- sumer perceptions of airline safety; demographic trends; disruptions to air traffic control systems; and costs of safety, security and environmental measures. Furthermore, our revenues are sensitive to events affecting domestic and international air travel as well as the level of car rentals and hotel and cruise reser- vations. Investments in ABCP (See “Consolidated Operations: Writedown of investments in ABCP” section.) Competition Competition is fierce in the holiday travel indus- try. Some competitors are large, with strong brand name recognition and an established presence in specific geographic areas, substantial financial resources and preferred relationships with travel sup- pliers. We also face competition from travel suppliers selling directly to travellers at very competitive prices. These competitive pressures could adversely impact our revenues and margins since we might have to match competitors’ prices. Fluctuations in foreign exchange and interest rates Transat is exposed, due to its many arrange- ments with foreign-based suppliers, to fluctuations in 35 2007 Annual Report Transat A.T. Inc. exchange rates mainly concerning the U.S. dollar, the euro and the pound sterling against the Canadian dol- lar 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 as well as the interest expense on variable rate debt instruments, which in turn could affect our earnings. We currently purchase derivative financial instruments to hedge against exchange rate fluctua- tions affecting our long-term debt in U.S. dollars, 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 Transat is particularly exposed to fluctuations in fuel costs. Due to competitive pressures in the indus- try, there can be no assurance that we would be able to pass along any increase in fuel prices to our cus- tomers by increasing prices, or that any price increase would offset higher fuel costs, which could in turn adversely impact our business, financial position or operating results. We purchase forward contracts to hedge against fuel cost fluctuations. Furthermore, if there were a reduction in the supply of fuel, our oper- ations could be adversely impacted. Changing industry dynamics: new distribution methods The widespread popularity of the Internet has resulted in travellers being able to access information about travel products and services and to purchase such products and services directly from suppliers, thereby bypassing not only tour operators such as Transat, but also retail travel agents through whom we generate a substantial portion of our revenues. Although direct Internet sales in the vacation travel segment remain limited for now, risks can arise since shifts in industry dynamics in the distribution business occur rapidly. In order to address this issue, Transat is in the process of developing and implementing a mul- tichannel 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 gradual erosion of commissions paid by travel suppliers, particularly airlines, has weak- ened the financial position of many travel agents. Because we rely to some extent on retail travel agen- cies for access to travellers and revenues, any con- sumer 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 vertical integration, we depend on third parties who supply us with certain components of our packages. We are dependent, for example, on non-group airlines and a large number of hotels. Generally speaking, these suppliers can terminate or modify existing agreements with us at relatively short notice. The potential 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 servic- es provided by these suppliers, 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 sup- pliers’ products and services or negative shifts in pub- lic opinion regarding certain 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), protect such information, and distribute our prod- ucts to retail travel agents and other travel intermedi- aries. To this end, we rely on a variety of information and telecommunications technologies. In the event rapid changes in these technologies require higher- than-anticipated capital expenditures to improve cus- tomer service, our operating results could be affected. In addition, any systems 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 accor- dance with our investment policy, we are required to invest these deposits and advance payments exclu- sively in investment-grade securities. Any failure of these investment securities to perform at historical levels could reduce our interest income. 36 2007 Annual Report Transat A.T. Inc. Negative working capital In the normal course of business, we receive customer deposits and advance payments. If the flow of advance payments diminishes and if Transat is 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 operations in particular are seasonal. As a result, our quarterly 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 performance. Furthermore, due to the economic and general fac- tors described above, our operating results in future periods could fall short of the expectations of securi- ties analysts and investors, thus adversely affecting the market price of our shares. Government regulation and taxation Transat’s future results may vary depending on the actions of government authorities with jurisdiction over our operations. These actions include the grant- ing and timing of certain government approvals or licenses; the adoption of regulations impacting cus- tomer service standards (such as new passenger security standards); the adoption of more stringent 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 to existing ones, or tax policy changes could affect our operations, particularly as regards hotel room taxes, car rental taxes, airline excise taxes and airport taxes and fees. Future capital requirements Transat may need to raise additional funds in the future to capitalize on growth opportunities or to respond 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. Insurance coverage In the wake of the terrorist attacks of September 11, 2001, the airline insurance market for risks asso- ciated with war and terrorist acts has undergone sev- eral changes. The limit on third-party civil liability cov- erage for bodily injury and property damage has been set at US$150 million per claim. Until insurance companies provide coverage above this US$150 million limit to air carriers, govern- ments have to step in and do so. The Canadian gov- ernment covers domestic air carriers accordingly. Moreover, some insurers are not licensed to transact business in Canada. 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 amend its coverage, particularly should the U.S. government change its position. Casualty losses We feel that we and our suppliers have adequate liability insurance to cover risks arising in the normal course of business, including claims for serious 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 coverage, there can be no assurance that our coverage will be sufficient to cover large claims or that the insurer concerned will be sol- vent at the time of any covered loss. In addition, there can be no assurance that we will be able to obtain coverage at acceptable levels and cost in the future. These uncertainties could adversely affect our busi- ness and operating 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. 37 2007 Annual Report Transat A.T. Inc. OUTLOOK Winter reservations in North America are slightly ahead of those last year at the same date. Excess supply and late reservations are applying greater downward pressure than last year on selling prices and first quarter margins. It is too early to comment on volumes and margins for the season as a whole. Reservations for the winter season in Europe are up compared with the previous year and the Corporation expects to improve its margins slightly. Aircraft lease obligations Transat has significant non-cancellable lease obligations relating to its aircraft fleet. If revenues from aircraft operations were to decrease, the payments to be made under our existing lease agreements could have a substantial impact on our operations. Aircraft availability at the end of leases If, at the expiry of existing aircraft leases, we are unable to renew them or to obtain leases with sat- isfactory conditions for the type of aircraft required, our business and operating results may be adversely affected. Environment As an airline industry company, Transat is exposed to any future regulations concerning green- house gas emissions by its aircraft. If Transat finds it difficult to meet any new regulatory requirements with its existing fleet, it could be faced with additional costs, which in turn could adversely affect its financial results. Key personnel Our future success depends on our ability to attract and retain qualified personnel. The loss of key employees could adversely affect our business and operating results. Uncertainty concerning upcoming bargaining agreements Our operations could be adversely affected in the event of any inability to reach an agreement with a labour union representing our employees, particularly pilots. 38 2007 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 accounting principles which are adequate in the circumstances. The financial information presented throughout this annual 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 pro- vide 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. The Board of Directors is responsible for the consolidated financial statements through its Audit Committee. The Audit Committee reviews the annual consolidated financial state- ments and recommends their approval to the Board of Directors. The Audit Committee is also responsible for ana- lyzing, 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 consolidated financial statements appears opposite. To the Shareholders of Transat A.T. Inc. We have audited the consolidated balance sheets of Transat A.T. Inc. as at October 31, 2007 and 2006 and the consolidated statements of income, comprehensive 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 reason- able assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclo- sures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as at October 31, 2007 and 2006 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 6, 2007 Jean-Marc Eustache Chairman of the Board, President and Chief Executive Officer Ernst & Young LLP Chartered Accountants François Laurin Vice-President, Finance and Administration and Chief Financial Officer 39 2007 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] Investments in ABCP [note 5] Accounts receivables Income tax receivable Future income tax assets [note 19] Inventories Prepaid expenses Derivative financial instruments [notes 3 and 6] Current portion of deposits Total current assets Deposits [note 7] Future income tax assets [note 19] Property, plant and equipment [notes 8 and 12] Goodwill and other intangible assets [note 9] Derivative financial instruments [notes 3 and 6] Other assets [note 10] LIABILITIES AND SHAREHOLDERS’ EQUITY Current liabilities Accounts payable and accrued liabilities Income taxes payable Future income tax liabilities [note 19] Customer deposits and deferred income Derivative financial instruments [notes 3 and 6] Payments on current portion of long-term debt Total current liabilities Long-term debt [notes 11, 12 and 25] Debenture [note 13] Provision for aircraft overhaul Other liabilities [note 14] Derivative financial instruments [notes 3 and 6] Future income tax liabilities [note 19] Shareholders’ equity Share capital [note 15] Retained earnings Contributed surplus Warrants [note 15] Accumulated other comprehensive income [notes 3, 6 and 16] Commitments and contingencies [note 22] and Subsequent events [note 25] See accompanying notes to consolidated financial statements. On behalf of the Board: Jean-Marc Eustache, Director André Bisson, O.C., Director 40 2007 Annual Report Transat A.T. Inc. 2007 $ 2006 $ 166,768 168,196 142,346 109,128 13,037 25,250 8,931 45,981 26,997 31,077 737,711 17,191 9,341 180,000 148,515 316 4,431 1,097,505 281,985 8,757 298 237,898 88,469 48,794 666,201 39,887 3,156 49,527 32,189 6,135 17,542 814,637 156,964 190,534 1,871 — (66,501) 282,868 1,097,505 214,887 203,613 — 87,996 — 1,357 8,312 43,706 420 29,849 590,140 19,350 7,120 181,349 153,681 — 7,975 959,615 236,282 10,122 — 218,875 — 27,305 492,584 57,363 3,156 64,961 31,934 — 13,654 663 652663,652 151,430 142,116 1,379 1,016 22 295,963 959,615 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 17] Interest on long-term debt and debenture Other interest and financial expenses Interest income Unrealized gain on derivative financial instruments related to aircraft fuel purchases Foreign exchange gain on long-term monetary items Write-off of goodwill [note 9] Writedown of investments in ABCP [note 5] Share of net income of companies subject to significant influence Income before the following items Income taxes (recovery) [note 19] 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 15] Diluted earnings per share [note 15] See accompanying notes to consolidated financial statements. 2007 $ 2006 $ 3,045,917 2,603,746 1,601,652 334,973 273,614 186,686 81,146 86,594 48,883 299,299 2,912,847 133,070 42,973 6,229 1,929 (19,745) (26,577) (3,023) 3,900 11,200 (651) 16,235 116,835 28,222 7,396 35,618 81,217 (737) 80,480 2.38 2.36 1,307,732 290,385 247,697 171,116 81,150 71,833 48,870 258,019 2,476,802 126,944 39 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 41 2007 Annual Report Transat A.T. Inc. Consolidated statements of comprehensive income Years ended October 31 (In thousands of dollars) Net income for the year Other comprehensive income Changes in the fair value of derivatives designated as cash flow hedges (net of income taxes of $28,546) Losses on derivatives designated as cash flow hedges before November 1, 2006 included in net income during the period (net of income taxes of $5,950) Foreign exchange gain (loss) on the conversion of financial statements of self-sustaining foreign subsidiaries due to the (appreciation) depreciation of the Canadian dollar compared to the euro and the pound sterling Net comprehensive income for the year See accompanying notes to consolidated financial statements. Consolidated statements of retained earnings Years ended October 31 (In thousands of dollars) Retained earnings, beginning of year Net income for the year Premium paid on share repurchase [note 15] Share repurchase costs, net of related income taxes of $145 Dividends Retained earnings, end of year See accompanying notes to consolidated financial statements. 2007 $ 2006 $ 80,480 65,770 (59,036) 12,080 (7,132) (54,088) 26,392 2007 $ 142,116 80,480 (20,561) — (11,501) 190,534 — — 2,613 2,613 68,383 2006 $ 183,718 65,770 (102,327) (308) (4,737) 142,116 42 2007 Annual Report Transat A.T. Inc. Consolidated statements of cash flows Years ended October 31 (In thousands of dollars) OPERATING ACTIVITIES Net income Operating items not involving an outlay (receipt) of cash: Amortization Unrealized gain on derivative financial instruments related to the purchase of aircraft fuel Foreign exchange gain on long-term monetary items Write-off of goodwill Changes in the fair value of investments in ABCP Share of net income of companies subject to significant influence Non-controlling interest in subsidiaries’ results Future income taxes Pension expense Compensation expense related to stock option plan Net change in non-cash working capital balances related to operations Net change in the provision for aircraft overhaul Net change in other assets and liabilities related to operations Cash flows relating to operating activities INVESTING ACTIVITIES Additions to property, plant and equipment Cash and cash equivalents of acquired companies Consideration paid for acquired companies Acquisition of investments in ABCP Net change in cash and cash equivalents in trust or otherwise reserved Cash flows relating to investing activities FINANCING ACTIVITIES Increase in long-term debt Repayment of long-term debt Repayment of debentures Proceeds from issuance of shares Share repurchase Share repurchase costs 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. 2007 $ 80,480 42,973 (26,577) (3,023) 3,900 11,200 (651) 737 7,396 2,809 1,577 120,821 17,324 (15,434) (883) 121,828 (40,073) 5,607 (8,162) (153,546) 35,417 (160,757) 39,887 (26,088) — 6,816 (23,944) — (11,501) (14,830) 5,640 (48,119) 214,887 166,768 43,391 6,774 2006 $ 65,770 39,360 — (4,162) — — (375) 1,263 (512) 2,572 886 104,802 8,749 1,152 1,457 116,160 (22,366) 49,797 (56,780) — (15,705) (45,054) — (6,312) (10,000) 1,878 (132,422) (453) (4,737) (152,046) 2,332 (78,608) 293,495 214,887 26,348 6,895 43 2007 Annual Report Transat A.T. Inc. 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, Consolida- tion of Variable Interest Entities [“AcG-15”]. This Guideline pres- ents 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 determining when an enterprise includes the assets, liabilities and results of activities of a variable interest entity in its consolidated financial statements. Under AcG-15, an enterprise should consol- idate 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 cer- tain variable interest entities do not represent additional assets that could be used to satisfy claims against the Corporation’s gen- eral 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. Inventories Inventories are valued at the lower of cost, determined according to the first-in, first-out method, and replacement cost. 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 estimated useful life as follows: Aircraft [note 3] Improvements to aircraft under operating leases 7 to 10 years 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 Notes to consolidated financial statements October 31, 2007 and 2006 [Unless specified otherwise, amounts are expressed in thousands of Canadian dollars, except for per share amounts] 1 INCORPORATION AND NATURE OF BUSINESS Transat A.T. Inc. [the “Corporation”], incorporated under the Canada Business Corporations Act, is an integrated company operating in the tourism industry, specializing in the organization, marketing and distribution of holiday travel. The core of its business consists of tour operators based in Canada and Europe. The Corporation is also involved in air transportation and value-added services at travel destinations. Finally, the Corpora- tion has secured a dynamic presence in distribution through travel agency networks. 2 SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements of the Corpora- tion have been prepared by management in accordance with Canadian generally accepted accounting principles. The prepara- tion of financial statements in accordance with generally accept- ed accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The main estimates include the measurement of the fair value of the financial instruments, including derivatives and investments in asset-backed commer- cial paper [“ABCP”], the provision for aircraft overhaul, the amor- tization and impairment of property, plant and equipment and intangible assets including goodwill, allocations in respect of acquired interests and future income tax balances. Actual results could differ from those estimates and differences could be signif- icant. The consolidated financial statements have, in manage- ment’s opinion, been properly prepared within reasonable limits of materiality and within the framework of the accounting policies summarized below. 44 2007 Annual Report Transat A.T. Inc. Goodwill and other intangible assets Goodwill and other intangible assets with an indefi- nite 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 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 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 circumstances 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 discount- ed 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 seven to ten years. Impairment of long-lived assets Property, plant and equipment and intangible assets with finite lives are reviewed for impairment whenever 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 consid- ered 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 investments in companies subject to significant influence. Development costs are amortized over periods not exceeding five years. Investments in companies subject to signif- icant influence are accounted for using the equity method. Provision for aircraft overhaul for aircraft overhaul [note 3] The Corporation provides for aircraft overhaul expenses, primarily for engines and airframes, using the accrue- in-advance method based on an estimate of all future expenses until the expiry of the leases for these aircraft leased under oper- ating leases, or for their estimated useful lives anticipated for the Corporation while held, allocated over the total number of engine cycles and the total number of months anticipated for the airframe and other components 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 capital- ized overhaul costs, as the case may be. The Corporation makes deposits representing a por- tion of expected engine and airframe overhaul expenses to certain aircraft lessors. These deposits are usually recoverable upon pres- entation of claims for eligible 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 air- craft overhaul.” Foreign currency translations (a) Self-sustaining foreign operations The Corporation translates the accounts of its self- sustaining foreign subsidiaries into Canadian dollars using the current rate method. Assets and liabilities are translated at the exchange rates in effect at peri- od-end. Revenues and expenses are translated at average rates of exchange during the period. Foreign exchange gains or losses resulting from the transla- tion are recorded in a separate line item under other comprehensive income. (b) Accounts and transactions in foreign currencies The accounts and transactions of the Corporation denominated in foreign currencies, including the accounts of integrated foreign operations, are trans- lated using the temporal method. At the transaction date, each asset, liability, revenue or expense arising from a foreign currency transaction is translated into Canadian dollars by using the exchange rate in effect at that date. At each balance sheet date, monetary items denominated in a foreign currency are adjust- ed to reflect the exchange rate in effect at the bal- ance sheet date. Any exchange gain or loss that arises on translation is included in the determination of net income for the current period. 45 2007 Annual Report Transat A.T. Inc. 2 SIGNIFICANT ACCOUNTING POLICIES [Cont’d] Stock-based compensation and other compensation plans A description of the stock-based compensation plans offered by the Corporation is included in note 15. 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. The fair value of the options at the grant date is charged to net income over the period from the grant date to the date that the award is vested. Any consideration paid by employees on exercising stock options and the corresponding portion previously credited to contributed surplus are credited to share capital. The Corporation’s contributions to the stock owner- ship incentive and capital accumulation plan and the permanent stock ownership incentive plan are the shares acquired in the marketplace by the Corporation for the benefit of plan participants when participants purchase shares under the stock plan. These contributions are charged to net income over the period from the grant date to the date that the award is vested to the participant. Any consideration paid by the participant to purchase shares under the stock plan is credited to share capital. The Corporation records a deferred share unit plan expense when the units are awarded based on the fair value of the shares at the award date. Fluctuations in the share price subse- quent to the award date are recorded in net income for the peri- od. For the restricted share unit plan, the fair value of the shares at the units’ grant date is charged to net income over the period from the grant date to the date that the award is vested. Fluctuations in the share price subsequent to the award date are recorded in net income over the unit vesting period. 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 on passen- gers’ departure. Commission revenues of travel agencies are rec- ognized at the reservation date. Amounts received from cus- tomers for services not yet rendered are included in current liabil- ities as “Customer deposits and deferred income.” Financial instruments [note 3] Classification of financial instruments The Corporation made the following classifications on November 1, 2006: Cash and cash equivalents, cash and cash equiva- lents in trust or otherwise reserved, investments in asset-backed commercial paper [ABCP] and derivative financial instruments used to manage exposure to fuel price instability are classified as “Held-for-trading assets.” These assets are measured at fair value and the gains or losses arising from the remeasurement at the end of each period are recorded in net income. The portion of the change in fair value attributable to implied interest is presented in the interest income. Accounts receivable are classified under “Loans and receivables.” They are recorded at cost, which on initial recogni- tion represents their fair value. Subsequent valuations are record- ed at amortized cost using the effective interest method. Bank loans, accounts payable and accrued liabilities, the debenture and long-term debt are classified under “Other financial liabilities.” They are initially measured at fair value. Subsequent valuations are recorded at amortized cost using the effective interest method. Hedge accounting and derivative financial instruments The Corporation uses foreign exchange forward contracts to hedge against future currency exchange rate varia- tions related to its long-term debt obligations, operating lease payments, receipts of revenue from certain tour operators and disbursements pertaining to certain operating expenses in other currencies. For hedge accounting purposes, the Corporation des- ignates foreign exchange forward contracts as hedging instru- ments. The Corporation documents its foreign exchange forward contracts as hedging instruments and regularly demonstrates that these instruments are sufficiently effective to continue using hedge accounting. These foreign exchange forward contracts are desig- nated as cash flow hedges except for the contracts related to U.S. dollar loans secured by aircraft, which are designated as fair value hedges. Since November 2006, all foreign exchange forward contracts have been recorded at fair value in the balance sheet. For cash flow hedges, the change in value of the effective portion is recognized in “Other comprehensive income” in the consolidat- ed statement of comprehensive income. Any ineffectiveness with- in an effective cash flow hedge is recognized in income as it aris- es in the same income account as the hedged item when realized. Should the hedging of a cash flow hedge relationship become ineffective, previously unrealized gains and losses remain within “Accumulated other comprehensive income” until the hedged item is settled and, prospectively, future changes in value of the 46 2007 Annual Report Transat A.T. Inc. derivative are recognized in income. The change in value of the effective portion of a cash flow hedge remains in “Accumulated other comprehensive income” until the related hedged item set- tles, at which time amounts recognized in “Accumulated other comprehensive income” are reclassified to the same income account that records the hedged item. For fair value hedges, the periodic change in value is recognized in net income and the change in value of U.S. dollar loans secured by aircraft is also recorded in the same line items in net income. Prior to November 1, 2006, the fair value of foreign exchange forward contracts relat- ed to future transactions was not recognized but was disclosed in the notes to financial statements. The Corporation also enters into fuel purchasing for- ward contracts in the normal course of business to manage expo- sure to fuel pricing instability that have not been designated for hedge accounting. Since November 1, 2006, these derivatives have been measured at fair value at the end of each period and the unrealized gains or losses arising from remeasurement are recorded and presented under “Unrealized gain on derivative financial instruments related to aircraft fuel purchases” in the con- solidated statement of income. When realized at contract maturi- ty, these gains or losses are recorded under “Aircraft fuel.” Prior to November 1, 2006, the Corporation used hedge accounting for fuel derivates and the fair value of these derivatives related to future transactions was not recognized but rather was disclosed in the notes to financial statements. It is the Corporation’s policy not to speculate on deriv- ative instruments; thus, these instruments are normally purchased for risk management purposes and maintained until maturity. 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 differences 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 recognized as a reduction of the amortization expense. Employee future benefits The Corporation offers defined benefit pension arrangements to certain senior executives. The cost of pension benefits earned by employees is determined from actuarial calcu- lations using the projected benefit method prorated on services and management’s most likely estimate of the increase in eligible earnings and the retirement age of employees. The past service costs and amendments to the agreements are amortized on a 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 was 7.7 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 earn- ings per share are calculated using the treasury stock method and take into account all the elements that have a dilutive effect. 3 CHANGES TO ACCOUNTING POLICIES Standards in effect on November 1, 2006 Financial instruments, hedges and comprehensive income On November 1, 2006, the Corporation retroactively adopted, without restatement of prior periods, the recommenda- tions included in the following Sections of the Canadian Institute of Chartered Accountants [“CICA”] Handbook: Section 1530, Comprehensive Income, Section 3855, Financial Instruments – Recognition and Measurement, and Section 3865, Hedges. Section 1530 requires the presentation of compre- hensive income and its components in a new financial statement. Comprehensive income represents the change in an enterprise’s net assets resulting from transactions, events and circumstances from non-shareholder sources. Section 3855 prescribes the recognition and meas- urement standards for financial assets, financial liabilities and derivatives. These standards prescribe when to recognize a finan- cial instrument in the balance sheet and at what amount. Depending on their balance sheet classification, fair value or cost- based measures are used. These standards also specify how financial instrument gains and losses are to be presented. Based on their classification, gains and losses on financial instruments are recognized in net income or other comprehensive income. 47 2007 Annual Report Transat A.T. Inc. 3 CHANGES TO ACCOUNTING POLICIES [Cont’d] Section 3865 prescribes the standards specifying when and how an entity can use hedge accounting. The adoption of this new standard is discretionary. It offers entities the possibil- ity of applying different reporting options than those set out in Section 3855 to qualifying transactions that they elect to desig- nate as being part of a hedging relationship for accounting pur- poses. The Corporation elected to continue applying hedge accounting for its foreign exchange forward contracts, recorded as cash flow hedges, and its U.S. dollar loans secured by aircraft, recorded as fair value hedges. The Corporation also enters into fuel purchasing forward contracts to manage exposure to fuel price instability. For these derivative instruments, the Corporation decided to cease using hedge accounting. Unrealized gains or losses were recognized in other comprehensive income at the transition date, namely November 1, 2006, and are recognized in net income under “Aircraft fuel” when contracts expire and the related fuel purchases occur. The adoption of these new standards translated into the following changes as at November 1, 2006: a $12,435 decrease in accumulated other comprehensive income, a $3,492 increase in derivative financial instruments under assets, a $6,125 increase in future income tax assets, a $21,632 increase in deriv- ative financial instruments under liabilities and a $420 increase in long-term debt. For the year ended October 31, 2007, the Corpo- ration recognized an unrealized loss of $59,036 (net of $28,546 in related income taxes) under other comprehensive income repre- senting the effective portion of the change in fair value of the derivatives designated as cash flow hedges. This amount thus recognized was reclassified under “Operating expenses” for the periods during which the operating expenses were affected by the variability in the hedged item’s cash flows. A $2,159 gain was recognized in net income during the year ended October 31, 2007. A loss estimated at $81,423, included in “Accumulated other com- prehensive income” as at October 31, 2007, should be reclassified under net income during the next fiscal year. For the year ended October 31, 2007, the Corpora- tion recognized a loss of $12,080 (net of $5,950 in related income taxes) under other comprehensive income representing the por- tion of unrealized losses on fuel purchasing contracts at the tran- sition date that were realized. Unrealized losses amounting to $522, included in “Accumulated other comprehensive income” as at October 31, 2007, should be reclassified into net income dur- ing the next fiscal year. The adoption of this new standard has no impact on the Corporation’s cash flows. However, it increased net income and diluted earnings per share for the year ended October 31, 2007 by $17,807 and $0.52, respectively. Standards in effect on November 1, 2007 Aircraft overhaul expenses On November 1, 2007, the Corporation changed its method for accounting for aircraft overhaul expenses. Up until October 31, 2007, the Corporation accounted for its expenses using the accrue-in-advance method, as set out in note 2, in accordance with the accounting methods suggested in the U.S. Audits of Airlines guide issued by the American Institute of Certified Public Accountants. On September 8, 2006, the Financial Accounting Standards Board [“FASB”] issued FASB Staff Position [“FSP”] AUG AIR-1, Accounting for Planned Major Maintenance Activities. This FSP amended the Audits of Airlines guide to preclude the use of accruals as an acceptable method. This FSP is applicable to entities in all industries for fiscal years beginning after December 15, 2006. As a result, effective November 1, 2007, the Corpora- tion discontinued use of the accrue-in-advance method and began accounting for aircraft overhaul expenses as follows: Leased aircraft Under the terms of the leases, the Corporation is required to maintain the aircraft in sound working order and follow the maintenance plan. This commitment creates an implicit obli- gation for the lessor whose past events arise from the use of leased aircraft. The Corporation accounts for its leased aircraft maintenance obligation based on utilization until the next mainte- nance activity. The obligation is adjusted to reflect any change in the related maintenance expenses anticipated. Depending on the type of maintenance, utilization is determined based on the cycles, logged flight time or time between overhauls. The excess of the maintenance obligation over maintenance deposits made to lessors and unclaimed is included in liabilities under “Provision for overhaul of leased aircraft.” Owned aircraft When aircraft are acquired, a portion of the cost is allocated to “major maintenance activities,” which is related to air- frame, engine and landing gear overhaul costs. The aircraft and major maintenance activities are amortized taking into account their expected estimated residual value. The aircraft are amortized on a straight-line basis over seven to ten year periods, while major maintenance activities are amortized according to the type of maintenance activity on a straight-line basis or based on the use of the corresponding aircraft until the next related major mainte- nance activity. Subsequent major maintenance activity expenses are capitalized as major maintenance activities and are amortized according to their type. Expenses related to other maintenance activities, including unexpected repairs, are recognized in net income as incurred. 48 2007 Annual Report Transat A.T. Inc. This change in accounting policy will be adopted retroactively with restatement of prior fiscal years. The adoption of these new standards will translate into the following changes: as at November 1, 2006, a $2,561 increase in retained earnings and, as at October 31, 2007, a $16,982 net decrease in property, plant and equipment, a $17,826 decrease in the provision for aircraft overhaul, a $260 increase in future income tax liabilities and a $584 increase in retained earnings. For the year ended October 31, 2007, the adoption of these new standards will translate into the following changes: a $5,048 decrease in maintenance expenses, an $8,017 increase in amortization of property, plant and equipment and a $992 decrease in future income tax expense, for a $1,977 decrease in net income and a $0.06 decrease in diluted earnings per share. For the year ended October 31, 2007, the adoption of these new standards will also translate into the following changes: a $12,629 increase in cash flows relating to operating activities and a decrease in cash flows related to investing activities of the same amount. The Corporation could have chosen to account for maintenance expenses for owned aircraft in net income as incurred. The managements believe that the adopted standards provide better information to users of financial statements. Other standards The CICA has issued the following accounting stan- dards that will be effective on November 1, 2007 for the Corpo- ration: Section 3862, Financial Instruments – Disclosures, Section 3863, Financial Instruments – Presentation, Section 1535, Capital Disclosures, Section 3031, Inventories, and Section 1506, Accounting Changes. Sections 3862 and 3863 will replace section 3861, Financial Instruments – Disclosure and Presentation, and increase emphasis on disclosure of the risks arising from financial instru- ments, including hedging instruments, and how the entity man- ages such exposure. Section 1535 will require supplementary disclosure regarding the Corporation’s capital management and compliance with any externally imposed capital requirements. Section 3031 will provide guidance on the method for determining the cost of inventories. The new accounting stan- dard specifies that inventories are to be valued at the lower of cost and net realizable value. The standard further requires the reversal of previously recorded write-downs to net realizable value when there is clear evidence that net realizable value has increased. Additional disclosure will also be required under this standard. The adoption of Section 3031 is not expected to have a material effect on the Corporation’s financial statements. Section 1506 provides guidance, in particular, on the criteria for changing accounting policies, the appropriate account- ing treatment in specific circumstances and the required disclosure. 4 CASH AND CASH EQUIVALENTS IN TRUST OR OTHERWISE RESERVED As at October 31, 2007, cash and cash equivalents in trust or otherwise reserved included $168,196 [$168,164 as at October 31, 2006] in funds received from customers for services not yet rendered and no amount [$35,449 as at October 31, 2006] which was pledged as collateral security against letters of credit and foreign exchange contracts [note 23]. 5 INVESTMENTS IN ABCP On August 22, 2007, pursuant to the disruption of credit markets, the Corporation announced that a portion totalling $154,500 of its cash available was invested in non-bank ABCP with ten different ABCP trusts. Our results for the year include a provision for losses and restructuring costs amounting to $11,200 in respect of our ABCP holdings. The Canadian market for third party sponsored ABCP suffered a liquidity disruption in mid-August 2007 following which a group of financial institutions and other parties agreed, pursuant to the Montréal Accord (the “Accord”), to a standstill period in respect of ABCP sold by 23 conduit issuers. Participants to the Accord also agreed in principle to the conversion of the ABCP investments into longer-term financial instruments with maturities corresponding to the underlying assets. A Pan- Canadian Investors Committee was subsequently established to restructure with success the Canadian market of ABCP, bring liq- uidity and create transparency as well as optimize the value for notes’ holders and realize all this the fastest way possible. The signatories to the Accord recently agreed to extend the standstill period to December 14, 2007. The Corporation is not a signatory to the Accord. Since there is no active market for ABCP securities, the Corporation’s management has estimated the fair value of these assets using a valuation model that incorporates manage- ment’s best estimates of credit risk attributable to underlying assets, the relevant market interest rate, amounts to be received, maturity dates and assumptions regarding the likelihood that the restructuring process will proceed as planned by the Investors Committee. As a result of the valuation, the Corporation has rec- ognized an $11,200 write-down reflecting the estimated decline in fair value of these investments as at October 31, 2007, including a provision for its estimated share of restructuring costs associat- ed with the Accord. 49 2007 Annual Report Transat A.T. Inc. 5 INVESTMENTS IN ABCP [Cont’d] The Corporation’s estimate of the fair value of its ABCP investments as at October 31, 2007 is subject to significant uncertainty. While management believes that its valuation tech- nique is appropriate in the circumstances, changes in significant assumptions could significantly affect the value of ABCP securities in the coming quarters. The resolution of these uncertainties could result in the ultimate fair value of these investments varying signif- icantly from management’s current best estimates and the extent of that difference could have a substantial effect on our financial results. The liquidity crisis in the Canadian market for third party sponsored ABCP has had no significant impact on the Corporation’s operations or financial position. The Corporation holds or has access to sufficient available cash to meet all of its financial, operational and regulatory obligations. Cash in trust, representing deposits from customers, as well as available cash, are held either as cash or invested in liquid instruments (mainly cash and term deposits) with a broad range of major financial institutions and have no exposure whatsoever to the current ABCP market disruption. 6 FINANCIAL INSTRUMENTS Fair value As at October 31, 2007, the carrying amounts of the financial assets designated as loans and receivables consisting primarily of receivables and short-term financial liabilities classified as other financial liabilities approximate their fair value given that they are expected to be realized or settled in the short term. The carrying amounts of other long-term financial liabilities approxi- mate their fair value given that they are subject to terms and con- ditions, such as interest rates, similar to those available to the Corporation for instruments with comparable terms. The fair value of the derivative financial instruments represents the amount of the consideration that could be exchanged in an arm’s length transaction between willing parties who are under no compulsion to act. The Corporation determines the fair value of its derivative financial instruments using the pur- chase or selling price, as appropriate, in the most advantageous active market to which the Corporation has immediate access. When the market for a derivative financial instrument is not active, the Corporation establishes fair value by applying valuation tech- niques, such as using recent market transactions involving other instruments that are substantially the same, discounted cash flow analysis or other techniques, where appropriate. The Corporation ensures, to the extent practicable, that its valuation technique incorporates all factors that market participants would consider in setting a price and is consistent with accepted economic meth- ods for pricing financial instruments. The classification and carrying amounts of the deriv- ative financial instruments as at October 31, 2007 are as follows: Liabilities $ Assets $ Derivative financial instruments designated as cash flow hedges Foreign exchange forward contracts Derivative financial instruments designated as fair value hedges Foreign exchange forward contracts Derivative financial instruments designated as held-for-trading Fuel purchasing forward contracts 1,258 90,969 — 3,629 26,055 27,313 6 94,604 Management of foreign exchange risk and fuel price risk In the normal course of business, the Corporation is exposed to risks related to changes in certain foreign exchange rates and in fuel prices. The Corporation manages these risks through various financial instruments. The Corporation’s manage- ment is responsible for determining the acceptable level of risk and only uses financial instruments to manage risks in respect of existing or anticipated commitments or obligations. 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 foreign exchange risk. As at October 31, 2007, the face value of these foreign exchange forward contracts amounted to $799,615 [$645,878 as at October 31, 2006]. The Corporation has entered into fuel purchasing contracts to manage its exposure to fuel price instability. As at October 31, 2007, 50% of estimated fuel requirements for fiscal 2008 and 2% of estimated requirements for fiscal 2009 were cov- ered by fuel purchasing contracts [53% of estimated requirements for fiscal 2007 and 12% of estimated requirements for fiscal 2008 were covered as at October 31, 2006]. 50 2007 Annual Report Transat A.T. Inc. 7 DEPOSITS Deposits on leased aircraft and engines Deposits with suppliers Less current portion 2007 $ 8,946 39,322 48,268 31,077 17,191 2006 $ 10,036 39,163 49,199 29,849 19,350 Credit risk Except for its investments in ABCP, the Corporation believes it is not exposed to a significant concentration of credit risk. The risk to which the Corporation is exposed in relation to derivative 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 with suitable credit ratings. Cash and cash equivalents are invested on a diversified basis in investment-grade corporations. More than 90% of the Corporation’s investments in ABCP are invested in funds whose assets are ranked AAA according to the most recent ranking by Dominion Bond Rating Service (DBRS) dated November 6, 2007. Accounts receivable generally arise from the sale of vacation packages to individuals through travel agencies and the sale of seats to tour operators, which are dispersed over a wide geographic area. 8 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 2007 2006 Accumulated amortization $ 72,879 21,155 32,986 82,897 9,094 20,667 16,909 11,657 406 268,650 Cost $ 150,937 33,698 38,172 115,444 20,358 31,900 31,008 26,301 832 448,650 268,650 180,000 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 51 2007 Annual Report Transat A.T. Inc. 11 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 agreement, funds may be drawn down by issuing letters of credit. As at October 31, 2007, letters of credit had been issued for a total of $30,008 [$33,166 as at October 31, 2006], thereby reducing the undrawn balance of the revolving term credit facility by the same amount. This agreement expired on November 16, 2007, due to the negotiation of a new banking agreement [note 25]. As at October 31, 2007, the Corporation has a revolving credit facility amounting to $40,000. Under the terms and conditions of this agreement, funds may be drawn down by way of bankers’ acceptances and bank loans in Canadian dollars bearing interest at bankers’ acceptance rates or the prime rate of the financial institution. The revolving credit facility bore interest at an average rate of 4.7% for the year ended October 31, 2007. As at October 31, 2007, $39,887 had been drawn down. On November 16, 2007, the Corporation refinanced its revolving cred- it facility in full following negotiation of its new banking agreement [note 25]. Operating lines of credit totalling m11,300 [$15,529] [m11,800 [$16,921] in 2006] have been authorized for certain French subsidiaries. These operating lines of credit are renewable annually and were undrawn as at October 31, 2007 and 2006. For its European operations, the Corporation has guarantee facilities renewable annually amounting to m13,100 [$18,002] [m17,893 [$25,660] in 2006]. As at October 31, 2007, letters of guarantee had been issued totalling m7,525 [$10,341] [m3,747 [$5,373] in 2006]. 9 GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill Trademarks not subject to amortization Customer lists, net of $1,139 in accumulated amortization [$590 in 2006] The change in goodwill is as follows: Balance, beginning of year Acquisitions [note 18] Writedown of goodwill Translation adjustment 2007 $ 119,614 2006 $ 121,138 17,203 18,454 11,698 148,515 14,089 153,681 2007 $ 121,138 5,624 (3,900) (3,248) 119,614 2006 $ 93,741 26,866 — 531 121,138 During the quarter ended October 31, 2007, the Corporation performed its annual test for impairment of goodwill and trademarks by discounting the future cash flows based on the most recent financial forecasts. The fair value of reporting unit Travel Superstore Inc. is less than the net book value, which trans- lated into an impairment of the goodwill related to this reporting unit amounting to $3,900, which was recorded in income for the year ended October 31, 2007. 10 OTHER ASSETS Deferred costs, unamortized balance Investments in companies subject to significant influence and other investments Other 2007 $ 2,701 628 1,102 4,431 2006 $ 3,387 874 3,714 7,975 52 2007 Annual Report Transat A.T. Inc. 12 LONG-TERM DEBT 15 SHARE CAPITAL Loans secured by aircraft amount- ing to US$49,500 [US$54,000 as at October 31, 2006], bearing interest at the London Interbank Offered Rate [LIBOR] rate plus 2.15% and 3.25% and maturing in 2008. 2007 $ 2006 $ 46,763 60,626 Revolving credit facility maturing in November 2012 [notes 11 and 25] 39,887 — L o a n s s e c u re d b y a n a i rc r a f t amounting to US$18,905 as at October 31, 2006, bearing interest at LIBOR plus 2.95% and 3.64%. The loans were repaid during the year Other Less current portion 13 DEBENTURE — 21,224 2,031 88,681 48,794 39,887 2,818 84,668 27,305 57,363 On April 6, 2004, a subsidiary of the Corporation issued a $3,156 debenture, bearing interest at 6%. The debenture is repayable in one instalment in September 2009 in cash or shares of the Corporation at the Corporation’s option. 14 OTHER ASSETS Deferred lease inducements Non-controlling interest Accrued benefit liability [note 21] 2007 $ 13,832 7,148 11,209 32,189 2006 $ 15,260 8,264 8,410 31,934 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 only 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 outstanding Class A Shares exceeds 25% of the total number 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 surpassed, the vote attached to each Class A Share will decrease automati- cally, without further act or formality. In the scenario 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 aggregate 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 share- holders’ 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. 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 con- trolled only by Canadians as defined by the CTA and shall confer the right to one vote per Class B Share at all meetings of share- holders of the Corporation. Each issued and outstanding Class B Share shall be converted into one Class A Share automatically without any further act on the part of the Corporation or the hold- er if the Class B Share is or becomes owned or controlled by a non-Canadian as defined by the CTA. 53 2007 Annual Report Transat A.T. Inc. 15 SHARE CAPITAL [Cont’d] Preferred shares An unlimited number of preferred shares, non-voting, issuable in series, each series bearing the number of shares, des- ignation, rights, privileges, restrictions and conditions as deter- mined by the Board of Directors. Issued and outstanding The changes affecting the Class A Shares and the Class B Shares were as follows: Balance as at October 31, 2005 Issued from treasury Exercise of options Conversion of warrants Repurchase and cancellation of shares Balance as at October 31, 2006 Issued from treasury Exercise of options Conversion of warrants Repurchase and cancellation of shares Balance as at October 31, 2007 Number of shares 40,156,450 38,392 123,904 59,150 (6,730,299) 33,647,597 35,307 331,257 350,325 $ 179,438 768 748 571 (30,095) 151,430 1,042 4,494 3,381 (736,100) 33,628,386 (3,383) 156,964 As at October 31, 2007, the number of Class A Shares and Class B Shares stood at 1,978,743 and 31,649,643 respectively [2,794,011 and 30,853,586 as at October 31, 2006]. Normal course issuer bid 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 15, 2007, the Corporation renewed its nor- mal course issuer bid, which began on June 13, 2006, for a 12- month period. With this renewal, the Corporation intends to repur- chase for cancellation up to a maximum of 3,288,003 Class A Shares and Class B Shares, representing less than 10% of the issued and outstanding Class A Shares and Class B Shares at the offer renewal date [3,270,939 Class A Shares and Class B Shares, representing less than 10% of the issued and outstand- ing Class A Shares and Class B Shares as at June 13, 2006]. The shares can be repurchased at market prices plus brokerage fees. In accordance with its normal course issuer bids, the Corporation repurchased, during the year ended October 31, 2007, a total of 736,100 voting shares, consisting of Class A Shares and Class B Shares, for a cash consideration of $23,944 [287,000 voting shares, consisting of Class A Shares and Class B Shares, for a cash consideration of $7,422 in 2006]. The excess of the shares’ repurchase value over their carrying amount was charged to retained earnings as share repur- chase premiums. Subscription rights plan At the annual meeting held on April 27, 2005, the shareholders ratified the renewal, by the Corporation, of a share- holders’ subscription rights plan [“rights plan”]. The rights plan entitles holders of Class A Shares 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 con- sider offers, thus allowing shareholders to receive full and fair value for their shares. The rights plan will terminate at the annual shareholders’ meeting in 2008, unless it is terminated earlier by the Corporation’s Board of Directors. Stock option plan Options are granted under a stock option plan for executives and employees. Under the plan, as at October 31, 2007, the Corporation may grant 869,121 additional Class A Shares 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 are exercisable over a ten-year period; a maximum of one-third of options is exercisable in the first two years after the grant date. An additional third is exercisable in the third year and the final third, after the start of the fourth year. For awards subsequent to November 1, 2006, a maximum of two-thirds of options is exer- cisable in the third year with all options becoming exercisable when the fourth year begins. The tables below summarize all out- standing options: 2007 2006 Number Weighted Number Weighted of options average of options average price $ 14,07 37,12 10,29 26,80 22,70 796 069 129 927 (123 904) (91 630) 710 462 price $ 10,69 22,84 5,73 8,42 14,07 710 462 145 099 (331 257) (18 221) 506 083 250 993 14,73 480 027 10,89 Beginning of year Granted Exercised Cancelled End of year Options exercisable, end of year 54 2007 Annual Report Transat A.T. Inc. 2007 Range of exercise prices $ 4.50 3.00 – 7.50 6.01 – 7.51 – 9.00 9.01 – 11.50 15.01 – 17.00 21.01 – 29.00 37.00 – 37.50 Outstanding options Exercisable options Number of options outstanding as at October 31, 2007 Weighted average remaining life 30,228 39,589 8,160 18,122 62,239 210,523 137,222 506,083 5.5 years 3.7 years 2.4 years 3.4 years 6.6 years 8.1 years 9.6 years Weighted average price $ 3.80 6.85 7.86 9.90 15.68 22.67 37.24 22.70 Exercisable options as at October 31, 2007 30,228 39,589 8,160 18,122 62,239 92,655 — 250,993 Weighted average price $ 3.80 6.85 7.86 9.90 15.68 22.57 — 14.73 During the year, the Corporation issued 35,307 Class B Shares [38,392 Class B Shares in 2006] for a total of $1,042 [$768 in 2006] under the share purchase plan. Stock ownership incentive and capital accumulation plan Subject to participation in the share purchase plan offered to all eligible employees of the Corporation, the Corporation awards 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 percent- age of salary contributed, which may not exceed 5%. Shares so awarded by the Corporation will vest gradually to the eligible offi- cer, subject 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. The shares awarded under this plan are bought in the market by the Corporation and deposited in the participant’s account as and when he/she pur- chases shares under the share purchase plan. During the year ended October 31, 2007, the Corpo- ration accounted for a compensation expense of $117 [$79 in 2006] related to its stock ownership incentive and capital accu- mulation plan. Compensation expense related to stock option plan During the year ended October 31, 2007, the Corpo- ration granted 145,099 stock options [129,927 in 2006] 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 2007 4.18% 6 years 40.0% 0.97% 2006 4.48% 6 years 55.6% — fair value $15.05 $12.70 During the year ended October 31, 2007, the Corpo- ration recorded a compensation expense of $1,577 [$886 in 2006] related to its stock option plan. An amount of $1,085 [$38 in 2006] was recognized in share capital subsequent to the exercise of options. Share purchase plan A share purchase plan is available to eligible employ- ees of the Corporation and its subsidiaries. Under the plan, as at October 31, 2007, the Corporation was authorized to issue a maximum of 576,176 Class B shares. The plan allows each eligi- ble employee to purchase shares for a total subscription limit up to 10% of his or her annual salary in effect at the time of the sub- scription. The purchase price of the shares under the plan is equal to the weighted average price of the Class B Shares during the five trading days prior to the issue of the shares, less 10%. 55 2007 Annual Report Transat A.T. Inc. 15 SHARE CAPITAL [Cont’d] Permanent stock ownership incentive plan Subject to participation in the share purchase plan offered to all eligible employees of the Corporation, the Corpo- ration awards annually to each eligible senior executive a number of Class B Shares, the aggregate subscription price of which is equal to the maximum percentage of salary contributed, which may not exceed 10%. Shares so awarded by the Corporation will vest gradually to the eligible senior executive, subject to the sen- ior executive’s retaining, during the vesting period, all the shares subscribed for under the Corporation’s share purchase plan. The shares awarded under this plan are bought in the market by the Corporation and deposited in the participant’s account as and when he/she purchases shares under the share purchase plan. During the year ended October 31, 2007, the Corpo- ration accounted for a compensation expense of $208 [$207 in 2006] related to its permanent stock ownership 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 independent director receives a portion of his or her compensation 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 the 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 deter- mined based on the average closing price of the Class B Shares for the five trading days prior to the repurchase of the DSUs. As at October 31, 2007, the number of DSUs award- ed amounted to 35,732 [31,653 as at October 31, 2006]. For the year ended October 31, 2007, the Corporation accounted for a compensation expense of $595 [$501 in 2006] related to its deferred share unit plan. Restricted share unit plan Restricted share units [“RSUs”] are awarded annual- ly to eligible employees under the new restricted share unit plan. Under this plan, each eligible employee receives a portion of his or her compensation in the form of RSUs. The value of an RSU is determined based on the weighted average closing price of the Class B Shares for the five trading days prior to the award of the RSUs. The rights related to RSUs are acquired over a period of three years. When acquired, the RSUs are immediately repur- chased by the Corporation, subject to certain conditions and cer- tain provisions relating to the Corporation’s financial performance. For the purpose of repurchasing RSUs, the value of an RSU is determined based on the weighted average closing price of the Class B Shares for the five trading days prior to the repurchase of the RSUs. As at October 31, 2007, the number of RSUs award- ed amounted to 66,784 [nil as at October 31, 2006]. For the year ended October 31, 2007, the Corporation accounted for a com- pensation expense of $887 [nil in 2006] related to its restricted share unit plan. Warrants On January 10, 2002, the Corporation issued 1,421,225 warrants entitling the holders to subscribe the same number of Class B Voting Shares of the Corporation at an exer- cise price of $6.75 each. These warrants expired on January 10, 2007. As at October 31, 2006, the balance of the warrants amounted to 350,325, and these warrants were exercised during the year ended October 31, 2007. Earnings per share Basic earnings per share and diluted earnings per share were computed as follows: NUMERATOR Income attributable to voting shareholders Interest on the debenture that 2007 $ 2006 $ 80,480 65,770 may be settled in voting shares 129 129 Income used to calculate diluted earnings per share 80,609 65,899 DENOMINATOR Weighted average number of outstanding shares Effect of dilutive securities Debenture that may be settled in voting shares Stock options Warrants Adjusted weighted average number of outstanding shares used in computing diluted earnings per share Basic earnings per share Diluted earnings per share 33,763 34,907 94 304 51 141 330 282 34,212 2.38 2.36 35,660 1.88 1.85 56 2007 Annual Report Transat A.T. Inc. For the purposes of calculating diluted earnings per share for the year ended October 31, 2007, 137,222 stock options [129,927 stock options as at October 31, 2006] were excluded since the exercise price of these options was higher than the average price of the Corporation’s shares. 16 ACCUMULATED OTHER COMPREHENSIVE INCOME Accumulated Other comprehensive income Balance, beginning of year Accumulated effect of accounting changes relating to financial instruments [note 3] 2007 $ 2006 $ 22 (2,591) (12,435) — Restated balance, beginning of year Other comprehensive income Balance, end of year (12,413) (54,088) (66,501) (2,591) 2,613 22 The 2006 balance represents the reclassification of deferred translation adjustment to accumulated other compre- hensive income. 17 AMORTIZATION Property, plant and equipment Intangible assets subject to amortization Other assets Deferred lease inducements 18 BUSINESS ACQUISITIONS 2007 $ 41,218 1,600 1,815 (1,660) 42,973 2006 $ 38,301 590 2,226 (1,757) 39,360 During the years ended October 31, 2007 and 2006, 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. 2007 Acquisitions On May 1, 2007, the Corporation made a m1,264 ($1,921) cash payment to acquire the balance of the shares (30%) of Air Consultants B.V. (ACE) that it did not already own. Goodwill amounting to $2,108 was recognized subsequent to this transac- tion. Since this date, ACE is a wholly owned subsidiary. On July 11, 2007, the Corporation acquired 100% of the issued and outstanding shares of French outgoing tour operator L’Européenne de Tourisme (Amplitude Internationale) for a total consideration of m6,044 ($8,631). A cash payment of m4,644 [$6,241] was paid on the acquisition date and the balance of m1,400 [$1,923] is due by July 31, 2008. The final purchase price allocation is expected to be completed as soon as the Corporation’s management has gathered all the significant information it deems necessary. A temporary goodwill amount of $3,516 was recognized subsequent to this transaction. 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 amounting to $3,920 was recorded subsequent to this transaction. The results of these agencies have been consolidated 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 franchised agencies under the Thomas Cook and Marlin Travel banners. TCT also operates 22 foreign exchange offices. Subsequent to this transaction, the Corporation undertook a restructuring program that it completed prior to the end of the fiscal year ended October 31, 2006. An amount of $1,651, mainly comprising employee termination ben- efits, was reflected in the 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. On August 1, 2006, the Corporation acquired 100% of the issued and outstanding shares of British tour operator 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 subsequent to this transaction. 57 2007 Annual Report Transat A.T. Inc. 18 BUSINESS ACQUISITIONS [Cont’d] Business acquisitions are summarized as follows: 2007 Air Consultants L’Européenne de Tourisme $ B.V. $ Total $ 2006 The Airline Seat Company Ltd. $ Thomas Cook Travel Ltd. $ Other $ Total $ 2,363 5,607 7,970 3,478 46,319 — 49,797 — 381 46 — — — 2,108 4,898 2,977 — — 2,977 1,921 — 12,117 79 — — — 3,516 21,319 12,688 — — 12,688 8,631 — 12,498 125 — — — 5,624 26,217 15,665 — — 15,665 10,552 779 3,710 1,284 2,600 2,900 1,736 732 17,219 7,907 — 1,015 8,922 8,297 4,861 7,229 420 15,642 11,626 — 21,289 107,386 56,712 6,982 — 63,694 43,692 — 156 409 5,640 11,095 2,113 — 18,242 — 14,526 1,736 — 4,845 26,866 5,410 130,015 — 64,619 6,982 — — 1,015 — 72,616 57,399 5,410 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 tax assets Goodwill Liabilities assumed Current liabilities Future income tax liabilities Long-term debt Net assets acquired at fair value 19 INCOME TAXES 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 as follows: 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 Valuation allowance Other 2007 2006 $ 37,411 (1,781) 4,858 (7,350) (397) 2,557 320 35,618 % 32.0 (1.5) 4.2 (6.3) (0.3) 2.1 0.3 30.5 $ 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 58 2007 Annual Report Transat A.T. Inc. Significant components of the Corporation’s Significant transactions between related parties are future income tax assets and liabilities are as follows: as follows: 2007 $ 2006 $ Future income taxes Net operating loss carry-forwards and other tax deductions 20,628 24,937 Carrying value of capital assets in excess of tax basis Non-deductible reserves and provisions Taxes related to accumulated other comprehensive income Other Total future income taxes Valuation allowance Net future income tax assets (liabilities) Current future income tax liabilities Long-term future income tax assets Current future income tax liabilities Long-term future income tax liabilities Net future income tax assets (33,765) (35,935) 28,802 27,910 21,115 52 36,832 (20,081) 16,751 25,250 9,341 (298) (17,542) — 354 17,266 (22,443) (5,177) 1,357 7,120 — (13,654) (liabilities) 16,751 (5,177) Non-capital losses carried forward and other tempo- rary 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 m31,266 [$42,966] as at October 31, 2007 [m43,836 [$62,862] as at October 31, 2006]. Of these losses and deductions, an amount of m19,056 [$27,326] will expire in three years; the balance has no specific expiry date. Retained earnings of the Corporation’s foreign sub- sidiaries are considered to be indefinitely reinvested. Accordingly, no provision for income taxes has been provided thereon. Upon distribution of these earnings in the form of dividends or other- wise, the Corporation may be subject to withholding taxes. 20 RELATED PARTY TRANSACTIONS AND BALANCES In the normal course of its operations, the Corpo- ration enters into transactions with related companies. These transactions are measured at the exchange amount, which is the amount of consideration determined and agreed to by the related parties. Revenues from companies subject to significant influence Operating expenses incurred with companies subject to significant influence 2007 $ 2006 $ 262 220 1,365 1,340 The balances receivable from and payable to related 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 2007 $ 239 69 2006 $ 32 54 21 EMPLOYEE FUTURE BENEFITS The Corporation offers defined benefit pension arrangements to certain senior executives. These arrangements provide for payment of benefits based on the number of years of eligible service provided and the average eligible earnings for the five years in which the participant’s eligible earnings were the high- est. These arrangements are not funded; however, to secure its obligations, the Corporation has issued a letter of credit to the trustee amounting to $15,284 [note 11]. The Corporation uses an actuarial estimate to measure the accrued benefit obligation as at October 31 each year. The following table provides a reconciliation of the changes in the accrued benefit obligation: Accrued benefit obligation, beginning of year Current service cost Interest cost Benefits paid Actuarial loss Accrued benefit obligation, end of year 2007 $ 14,349 786 840 (9) 729 2006 $ 11,739 682 756 — 1,172 16,695 14,349 59 2007 Annual Report Transat A.T. Inc. 21 22 EMPLOYEE FUTURE BENEFITS COMMITMENTS AND CONTINGENCIES [Cont’d] The funded status of the pension plan and the amounts recorded in the balance sheet under other liabilities were as follows: Plan assets at fair value Accrued benefit obligation Plan deficit Unamortized past service costs Unamortized net actuarial loss Accrued benefit liability 2007 $ — 16,695 16,695 2,620 2,866 11,209 2006 $ — 14,349 14,349 3,680 2,259 8,410 Pension plan expense is allocated as follows: Current service cost Interest cost Amortization of past service costs Amortization of net actuarial loss Pension expense 2007 $ 786 840 1,060 123 2,809 2006 $ 682 756 1,060 74 2,572 The significant actuarial assumptions adopted to determine the Corporation’s accrued benefit obligation and pen- sion expense were as follows: Accrued benefit obligation Discount rate Rate of increase in eligible earnings Pension expense Discount rate Rate of increase in eligible earnings 2007 $ 5.50 3.00 5.50 3.00 2006 $ 5.50 3.00 5.75 3.00 (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 $493,313 and are broken down as follows: $130,356, US$151,659, m104,531 and £38,312. The annual instalments to be made under these commitments during the next five years are as follows: 2008 2009 2010 2011 2012 $ 227,570 94,713 53,052 33,051 19,747 (b) In 2009, the minority shareholder in Jonview Canada Inc.’s parent company may require the Corporation to buy the shares of Jonview Canada Inc.’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. (c) The minority shareholders of Travel Superstore Inc. could require, between 2011 and 2015, that the Corporation acquires the shares of Travel Superstore Inc. that they hold at a price equal to their fair mar- ket value and payable in cash. (d) In the normal course of its operations, the Corpo- ration 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 provided for or covered by insurance policies and their settlement should not have a significant negative impact on the Corporation’s financial position. 60 2007 Annual Report Transat A.T. Inc. 23 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 operat- ing leases, irrevocable letters 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, 11, 12, 13 and 21 to the financial statements provide information relating to some of these agreements. The fol- lowing 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 expire at various date up to 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 servic- es 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 regulato- ry 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 con- tracts mentioned in notes 4, 11 and 21, the other guarantees pro- vided by the Corporation under letters of credit totalled $410 as at October 31, 2007. Historically, the Corporation has never made any significant payments under such letters of credit. 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 performance of the obli- gations included in mandates by its clients during the term of the licenses granted to the Corporation for its travel agent and whole- saler activities in the province of Québec. These agreements typ- ically cover a one-year period and are renewable annually. As at October 31, 2007, the secured amount totalled $848. Historically, the Corporation has not made any significant payments under such agreements. As at October 31, 2007, no amounts have been accrued with respect to the above-mentioned agreements. 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 infor- mation. With respect to geographic areas, the Corporation oper- ates mainly in North America and in Europe. Geographic interseg- ment sales are accounted for at prices that take into account mar- ket conditions and other considerations. 2007 Revenues from third parties Operating expenses 2006 Revenues from third parties Operating expenses North America $ Europe $ Total $ 2,278,116 767,801 3,045,917 2,162,085 116,031 750,762 17,039 2,912,847 133,070 North America $ Europe $ Total $ 2,059,611 544,135 2,603,746 1,940,816 118,795 535,986 8,149 2,476,802 126,944 61 2007 Annual Report Transat A.T. Inc. 24 SEGMENT DISCLOSURE [Cont’d] Canada France United Kingdom Other 40,711 Revenues (1) 2007 $ 2,257,040 602,058 146,108 40,711 3,045,917 2006 $ 2,038,594 465,728 62,055 137,369 2,603,746 Property, plant and equipment, goodwill and other intangible assets 2007 $ 209,618 63,413 44,384 11,100 328,515 2006 $ 215,899 60,374 49,266 9,491 335,030 (1) Revenues are allocated based on the subsidiary’s country of domicile. 25 SUBSEQUENT EVENTS On November 16, 2007, the Corporation entered into an agreement with a financial institution for an unsecured revolving credit facility of $150,000 as well as a revolving credit facility of $60,000 for the purposes of issuing letters of credit, in respect of which the Corporation must pledge cash as collateral security against 105% of letters of credit issued. This agreement expires on November 16, 2012. Under the terms and conditions of this agree- ment, funds may be drawn down by way of bankers’ acceptances and bank loans in Canadian dollars, US dollars, euros or pound ster- ling. Under this agreement, interest is charged at bankers’ accept- ance rates, at the financial institution’s prime rate or at LIBOR, plus a premium based on certain financial ratios calculated on a consolidat- ed basis. A portion of the credit available under this agreement has been used to repay the balance under the existing agreement prior to this date [note 11]. On December 10, 2007, the Corporation acquired a 35% interest in Caribbean Investments B.V., a company that oper- ates five hotels in Mexico and in the Dominican Republic, for a cash consideration of US$55,000. 62 2007 Annual Report Transat A.T. Inc. Supplementary financial data (In thousands of dollars, except per share data) Consolidated Statements of Income Revenues Operating expenses Other expenses and revenues Amortization Restructuring charge Interest on long-term debt and debenture Other interest and financial expenses Interest income Unrealized gain on derivative financial instruments used for aircraft fuel purchases Foreign exchange loss (gain) on long-term monetary items Writeoff of goodwill Writedown of investments in ABCP Gain on disposal of investment Share of (net income) net loss of companies subject to significant influence Income (loss) from continuing operations for the year 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 (net loss) for the year Basic earnings (loss) per share Continuing operations Discontinued operations Diluted earnings (loss) per share 2 Continuing operations Discontinued operations Cash flows relating to: 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 Cash provided by operations Total assets Long-term debt (including the short-term portion) Debenture Shareholders’ equity Debt ratio1 Book value per share Return on weighted average shareholders’ capital Shareholding statistics (in thousands) Outstanding shares, end of year Weighted average number of outstanding shares (undiluted) Weighted average number of outstanding shares (diluted) 2 1 Total liabilities divided by the sum of liabilities and shareholders’ equity. 2 See note 15 to the audited Consolidated Financial Statements. 2007 2006 2005 2004 2003 3,045,917 2,912,847 133,070 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 42,973 — 6,229 1,929 (19,745) (26,577) (3,023) 3,900 11,200 — (651) 16,235 116,835 35,618 (737) 80,480 — 80,480 2.38 — 2.38 2.36 — 2.36 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 1.27 121,828 (160,757) (14,830) 5,640 116,160 (45,054) (152,046) 2,332 70,434 (39,468) (44,091) (4,255) 179,787 (79,162) (35,359) 3,436 85,495 (17,388) (61,368) (470) (48,119) (78,608) (17,380) 67,923 6,269 — (48,119) 166,768 120,821 1,097,505 88,681 3,156 282,868 0.74 8.41 27.81 33,628 33,763 34,212 — (78,608) 214,887 104,802 959,195 84,668 3,156 295,963 0.69 8.80 19.98 % 33,648 34,907 35,660 — (17,380) 293,495 78,014 949,537 93,613 13,156 362,383 0.62 9.02 16.03 % 40,156 37,863 41,684 — 67,923 310,875 124,039 838,389 — 33,214 311,106 0.63 9.16 25.11 % 33,955 33,374 41,156 77,858 84,127 242,952 52,795 714,757 35,350 31,731 239,596 0.66 7.29 19.32 % 32,864 32,796 32,796 63 2007 Annual Report Transat A.T. Inc. s r o t c e r i D f o d r a o B 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. Jean Pierre Delisle Director 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. Executive Committee Jean-Marc Eustache (President) André Bisson, O.C. H. Clifford Hatch Jr. Jean Guertin Human Resources and Compensation Committee Jean Guertin (President) H. Clifford Hatch Jr. John D. Thompson Dennis Wood, O.C. Audit Committee André Bisson, O.C. (President) Benoît Deschamps Jean Guertin John D. Thompson Corporate Governance and Nominating Committee H. Clifford Hatch Jr. (President) André Bisson, O.C. Benoît Deschamps Jacques Simoneau 64 2007 Annual Report Transat A.T. Inc. t n e m e g a n a M t n e m e g a n a M s e i r a d s b u S i i 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 Jean-Luk Pellerin Corporate Vice-President, Human Resources Air Consultants Europe Marc Koenis 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 General Manager Jonview Canada Nelson Gentiletti 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 l s r e d o h e r a h S r o f n o i t a m r o n f I 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 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 Graphic Design: Claude Angers Illustrations: Jean Aubé Picture of Jean-Marc Eustache: Pierre Charbonneau Photograhs: Transat, except when mentioned otherwise