Transat AT, Inc. Annual Report 2008

FY2008 Annual Report · Transat AT, Inc.

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Transat A.T. Inc.

2008 Annual Report

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 accommodation

International tour operator

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.

Revenues up by 15%,
from $3.0 billion in 2007
to $3.5 billion in 2008.

Margin of $127.3 million,
compared with $138.1
million in 2007.

Solid growth in all outgoing
markets.

Record year for Jonview
Canada, with 263,000
travellers.

Creation of a hotel
venture in Mexico and the
Dominican Republic.

Intensification of efforts
in the area of sustainable
tourism and publication
of a social responsibility
report.

Revenues
(In millions of dollars)

Cash flows relating
to operating activities
(In millions of dollars)

0
0
2
,
2

5
6
3
,
2

4
0
6
,
2

6
4
0
,
3

3
1
5
,
3

0
9
7
1

4
.
0
7

2
6
1
1

5
4
3
1

2
5
5
1

2004 2005 2006 2007 2008

Highlights
In thousands of Canadian dollars
except per share amounts and ratio

Revenues

Margin1

2008

2007
Restated

Variance

3,512,851

3,045,917

466,934

127,327

138,117

(10,790)

15.3

(7.8)

Net income (loss)

(50,011)

78,503

(128,514)

(163.7)

Diluted earnings (loss) per share ($)

(1.51)

2.30

(3.81)

(165.7)

Cash flows relating to operating activities

155,225

134,457

20,768

Cash and cash equivalents

145,767

166,768

(21,001)

Total assets

1,265,431

1,080,523

184,908

Long-term debt (including the short-term portion)

153,241

91,837

61,404

Debt ratio2

Return on average shareholders’capital3 (%)

Book value per share4 ($)

Stock price as at October 31 (TRZ.B) ($)

Dividend per share ($)

0.73

(15.99)

10.47

11.36

0.36

0.74

26.98

8.43

39.88

0.34

Outstanding shares, end of year (in thousands)

32,678

33,628

1 Margin: Revenues less operating expenses, according to the Consolidated Statements of Income.
2 Debt ratio: total liabilities divided by total assets.
3 Return on average shareholders’capital: Net income (loss) divided by average shareholders’equity.
4 Book value per share: Shareholders’equity divided by total number of shares outstanding.

15.4

(12.6)

17.1

66.9

(1.4)

(0.01)

(42.97)

(159.3)

2.04

(28.52)

0.02

(950)

24.2

(71.5)

5.9

(2.8)

Aircraft fuel
(In millions of dollars)

Margin
(In millions of dollars)

Net income (loss)
(In millions of dollars)

3
.
2
7

4
.
5
5

8
.
5
6

5
.
8
7

)

0
0
5

(

1
8
2
1

4
9
9
1

7
7
4
2

6
3
7
2

5
5
6
3

8
3
6
1

6
0
2
1

9
6
2
1

1
8
3
1

3
7
2
1

2004 2005 2006 2007 2008

Sun vacations
Offering more than 400 resorts in some 30 countries
From 23 airports in Canada and 11 in France
28 Lookéa clubs in 16 countries

Tailored holidays
49 destination countries from France
Tours and stays in 49 countries from Canada
In partnership with 68 airlines

Air Transat and Handlex
14,423 flights in 2008

1,200 travel agents, 300 pilots, 300 mechanics
4 million meals served on board
Ground services to 26 airlines

An incoming tour operator
263,000 packages to Canada
69,000 travellers to Greece

2/3

2008 Annual Report, Transat A.T. Inc.

An international tour operator
More than 60 destination countries
6,466 employees in eight countries and at destination
2.5 million travellers

Serving travellers
504 travel agencies
2,000 travel advisers

Leader in the Europe-Canada market
64 routes between 9 Canadian and 34 European cities
Number one tour operator to Canada from the UK and France
765,000 travellers crossing the Atlantic
Offering of 543 hotels in 12 European countries

In three years, our
revenues have grown
by more than $1 billion,
or more than 48%. This
stems in part from the
vitality of international
tourism during this
period, but it reflects
above all the efforts we
have made to move
closer to consumers,

Message to Sharholder’s

adjust our product
offerings, stimulate
demand and gain market
shares through organic
growth and acquisitions.
And Transat, given its
market power and
its resources,
is fully equipped
to weather economic
turbulence.

4/5

2008 Annual Report, Transat A.T. Inc.

Our 2006 acquisition of close to 200 travel agencies,
combined with accelerated development of our Web
platforms, allowed Transat to become Canada’s largest
travel distribution network, with 437 agencies, including
337 franchisees, at year-end 2008. This increased pres-
ence in the field, along with our multi-channel distribution
strategy, played a paramount role in our sales and market-
share growth, particularly in Ontario. Sales by our cross-
Canada distribution network, all brands combined, totalled
some $1.2 billion in 2008, and sales of Transat products
increased. Sales by our agencies, combined with those
generated through our B2C websites, accounted for more
than 30% of sales made in Canada in 2008.

In Europe, the 2006–2008 period was one of growth for
Transat. We made huge strides in terms of integration, desti-
nation diversification and financial performance—so much
so that we now have a solid platform in the world’s largest
tourism market. In the United Kingdom, still the main
European market for travel to and from Canada, we had
relied until 2006 on an exclusive commercial agreement
with a third party, and our acquisition that year of British
tour operator Canadian Affair has put us in a far better posi-
tion. In France, another key market, Vacances Transat
(France) consolidated its leadership position in the outbound-
to-Canada market while considerably diversifying its long-
haul and tour product offerings. Look Voyages, which was
in a precarious position in 2005, enjoyed renewed growth
and profitability. The 2007 acquisition of L’Européenne de
tourisme (Amplitude Internationale) strengthened our position
in packaged travel from France to Tunisia.

Transat has become
Canada’s largest
travel distribution
network.

A company and a team capable
of weathering economic turbulence

As fiscal 2008 came to a close, we turned the page on
the 2006–2008 strategic plan and a period marked by
growth, several strategic advancements and a strengthening
of Transat’s positioning in all of our markets. In three years,
our revenues have grown by more than $1 billion, or more
than 48%. This stems in part from the vitality of international
tourism during this period, but it reflects above all the efforts
we have made to move closer to consumers, adjust our
product offerings, stimulate demand and gain market shares
through organic growth and acquisitions.

Over the short term, the current climate promises challenges
that we are well prepared to meet. The economic downturn
and outright recessionary conditions affecting certain markets,
together with the credit crisis, will probably deter some
travellers, and will no doubt result in some casualties among
travel industry players. However, as we have seen during
other challenging times in the past, tourism will continue to
grow. And Transat, given its market power and its resources,
is fully equipped to weather this latest economic turbulence.

A look back at the 2006–2008 strategic plan
By 2005, Transat was already the leading outgoing tour
operator in Canada, but that ranking was largely attributa-
ble to the Company’s position in Quebec. Consequently, the
main objective of our strategic plan for the Canadian market
was to consolidate our position in the Western provinces
and, more important, become the number one player in
Ontario. Today, Transat ranks first in all regions of the country,
and can proudly state that it has facilities, employees and
customers all across Canada. This success stems from a host
of initiatives, skilfully orchestrated by the Transat Tours
Canada and Transat Distribution Canada management
teams. We continued to make improvements to our product
offerings, adding exclusive hotels along with new services,
destinations and tours, while ensuring the superior quality of
hotel services by means of an inspection program that is
one of the most rigorous in the industry. Meanwhile, Air
Transat continued to post excellent results in terms of on-time
performance and fleet reliability. In 2008, our air carrier
also made passenger comfort improvements by increasing
legroom in its aircraft. And of course, our cabin crews’
professional attitudes continued to make a huge difference
in our favour. Our marketing efforts also played a vital role,
with new mass communication campaigns strengthening
awareness of our brands throughout the country.

2008 Annual Report, Transat A.T. Inc.

Also in Europe, we actively pursued our bilateral strategy,
which calls for the development of overseas markets served
by Air Transat. In 2007, for instance, we completed our
acquisition of Air Consultants Europe (ACE), our general sales
agent for the Netherlands, Germany, Belgium, Luxembourg
and Austria. ACE handles commercialization of our air
capacity toward Canada.

Eventually, Transat aims to penetrate other outgoing markets.
To this end, we have paid close attention to the United
States market, conducting a thorough review of all major
tour operators likely to offer a strategic fit with Transat. We
have held discussions with several potential candidates,
without a transaction that would truly be in the interest of
Transat and its shareholders materializing.

One of the objectives stated as part of the 2006–2008
plan was Transat’s intention to gain a foothold in the hotel
industry, mainly in its principal sun destination markets,
where supply of quality rooms could become a potential
issue over the long term. This objective was reached in
2008 with the creation of a hotel venture with Spain-based
H10 Hotels. The new company, in which we hold a 35%
interest, owns and operates three hotels in Mexico and
another two in the Dominican Republic. It is expected to
grow and we have acquired land to build a new resort in
the Dominican Republic.

Vertical integration—particularly at destination (destination
services, accommodation, incoming tour operating)—
remains the backbone of Transat’s development. In view of
the current economic and financial climate, however, we
have decided to ease up on prospecting of acquisitions and
increase our focus on mutually advantageous synergies with
our partners. We will nonetheless remain on the lookout for
attractive opportunities of the type than can crop up during
difficult periods.

Transat operates in an industry in which development of
human potential is a fundamental success factor. For this
reason, in recent years we have focused on training
initiatives, including the rollout of new tools and programs
designed to assist succession planning and ensure the
organization’s future. Significant milestones were reached in
this regard in 2008, with 500 managers and executives
receiving training in coaching and another 150 employees
targeted for an accelerated talent development project. A
virtual platform has been created for the project, allowing
employees and their immediate supervisors to measure
progress. Of course, we are pursuing our efforts in this area,
and also plan to proceed with organizational changes to
facilitate information flow and decision- making from an
overall perspective, improve efficiency, optimize our the
workforce

6/7

2008 Annual Report, Transat A.T. Inc.

Jean-Marc Eustache
Chairman of the Board,
President and Chief Executive Officer

In 2008 we offered Canadian travellers an unparalleled
choice of sun destinations, mainly emphasizing the most
in-demand regions: Cuba, the Dominican Republic and
Mexico. To counter pressures on our margins, we made
considerable efforts to control costs. For example, we
pursued an air strategy relying on several carriers and
various aircraft types, leveraging agreements with third
parties.

We also boosted capacity to Europe, introducing routes
between Western Canada and Paris and adding Switzerland
(Basel-Mulhouse) to our roster of destinations. In the summer
of 2008, with the tourism season in Europe at its height,
we offered more than 60 city-pairs, departing from nine
Canadian airports to some 34 European cities in 12 countries.
We also market a wide array of tours and accommodations
on both sides of the Atlantic, including Transat as well
as partner products. Indeed, our product offering in the
Canada-Europe market is unmatched for flexibility and
diversity, meeting holidayers’ expectations better than any
other.

Under the Rêvatours brand, TTC markets tours, stays and
custom-tailored products in 30 countries in Europe, Asia,
Africa and South America (including, as of 2008, Ecuador,
Argentina and Chile). Challenges during fiscal 2008 included
a tightening of conditions imposed by air carriers, rising fuel
prices and fluctuating exchange rates.

TTC implemented measures to improve its product line, move
closer to its distribution networks, develop its relationships
with the other Transat business units, consolidate agreements
with suppliers and optimize its information systems.

Vertical integration
particularly at destination
remains the backbone of
Transat’s development.

and reduce costs. This evolution of our human resources
programs has been amply communicated to the entire
organization in keeping with a philosophy of increased
transparency.

Information systems play a key role in our industry. At year-
end 2005, Transat lagged behind to a certain extent when
it came to technology renewal, and we moved to close the
gap rapidly. The growing importance of the Web for the
travel industry, the shift in operational models to multi-channel
distribution and changing consumer behaviours demand that
Transat make technology choices, which in turn require
major investments. Our current priorities include, among
other things, migrating to a new system for management of
airline seat inventory, distribution and customer relations.

Our future depends on that of our industry, which generates
colossal economic activity as well as more than 200 million
jobs worldwide. For this reason, we intend to play an
increasingly active role in the management of tourism-related
issues. This explains our intention to internalize the concept
of sustainable tourism. We are convinced that the future of
tourism is closely linked to a number of sustainability issues,
including marked concern for the environment, heritage and
destination communities. In this spirit, since 2007 we have
intensified our efforts in this regard, implementing multiple
initiatives and projects with the aim of becoming a North
American leader in sustainable tourism.

In the wake of the 2006–2008 strategic plan, Transat has
enviable business positioning in two growing continental
markets, and can draw on the strengths of an organization
that has made considerable efficiency gains. In the years to
come, we must not only expand into new markets to spur
growth, but also pursue our efforts in talent development and
succession planning, continue to improve our information
systems and our structures, and accelerate adoption of
practices to ensure Transat becomes a benchmark in
sustainable tourism.

The outgoing Canadian market
Transat Tours Canada (TTC), which operates mainly under
the Transat Holidays, Nolitours and Air Transat brands,
grew its customer base across the board—939,000
travellers in the winter season, 553,000 in the summer,
1,137,000 sun packages sold, and 355,000 travellers to
European destinations—for a total of approximately
1,492,000 travellers outbound from Canada. This repre-
sents a 12% increase over the 2007 total of 1,336,000.
This most satisfactory progress was achieved in a highly
competitive market, especially in the sun market, and in
a context of extremely high fuel prices. For this reason,
our margins suffered despite the fact that we reached our
volume objectives (measured in numbers of travellers) and
succeeded in protecting our market shares.

2008 Annual Report, Transat A.T. Inc.

Despite being buffeted by competition and losing ground on
the global market, Canada remains a major international
tourism destination. Countering the trend, Jonview Canada
welcomed 263,000 foreign travellers in 2008 versus
249,000 in 2007—a substantial increase of 6% that
propelled the incoming tour operator to a record year as
measured by sales as well as number of travellers. This
growth is partly explained by enhanced operational and
organizational ties with TTC, Canadian Affair, Vacances
Transat (France) and ACE. Sales were curbed in the U.K.,
Japan and Korea, but grew strongly in France and Germany.
In addition, markets such as Mexico, Brazil and Australia
are promising. Jonview Canada relies on a worldwide
network of close to 1,000 resellers in approximately 50
countries, with the most important ones benefiting from
host-to-host system connections.

Our objectives for 2009
Fiscal 2009 will be the first year in a new three-year plan
that is currently being mapped out. The 2009–2011 plan
will take into account the change in economic conditions
that emerged at year-end 2008, but the objectives estab-
lished for 2009 will be in line with the 2006–2008 plan.

We intend to:

• Increase efficiency, productivity, competitiveness and

agility within the organization through through stringent
management of costs and targeted investments that will
maximize resources; this should be achieved by strategi-
cally combining short-term results with a long-term vision,
without compromising the quality of customer service;

• Strengthen our leadership position as an outgoing tour

operator, maintaining or increasing our market shares by
differentiating our offering, maximizing exclusive products,
launching new products and broadening our reach by
building on the bilateral distribution approach we have
developed;

• Continue developing and implementing our multi-channel
distribution strategy and increase sales for each channel;

• Develop and implement a sustainable tourism plan that
will position Transat in the front ranks of the industry,
increase its influence over the future of our market and
inspire buy-in by employees, suppliers and customers.

The outgoing European market
In France, Look Voyages continued to grow, thanks in part
to an enriched, diversified offering perfectly in keeping with
target customers’ expectations, and a multi-channel distribu-
tion strategy that, year after year, has proven to be the most
promising approach because of its appeal to all market
segments. Look Voyages, now headed by General Manager
Cédric Gobilliard, offered 28 Lookéa clubs and a wide range
of products in 2008. It recorded a significant increase in the
number of travellers, especially because of Transat’s
acquisition of Amplitude Internationale, now successfully inte-
grated. Together, the two brands represented approximately
381,000 travellers in 2008.

Vacances Transat (France) remains the leading France-based
tour operator to Canada and the U.S., flagship destinations
for which it posted remarkable sales increases of 30% and
25% respectively. During 2008, Vacances Transat (France)’s
client base grew by more than 17% to 182,000 travellers,
despite continued anemic growth in the overall French
market. Volume to China, the Dominican Republic and Kenya
declined, but this was offset by other products. One example
is Vietnam, a new destination for which the company
achieved its targets thanks to a comprehensive array of tour
offerings. On the French market, Vacances Transat (France)
enjoys a growing reputation as a specialist in tour products
to the four corners of the globe.

The United Kingdom is a major source market for travel to
Canada, with some 900,000 visitors yearly. The year
2007 had been marked by significant pressure on tour
operators’ margins because of excess capacity, to the point
that one of our competitors disappeared in 2008 and
another was compelled to trim capacity considerably; the
outcome was a return to a more balanced market. Despite
many challenges, Canadian Affair increased passenger
traffic and achieved excellent profitability during the
fiscal year.

We recorded some 410,000 travellers to Canada in 2008
from the 12 European countries we serve—an improvement
of 14% over 2007—along with approximately 500,000
travellers outbound to other destinations. Overall, our
European business units posted very good performance in
2008.

Our incoming markets
In addition to destination services in the Caribbean zone,
we offer incoming tour operator services in Canada and
Greece. In these two countries, our challenge lies in achieving
solid penetration of emerging markets that are the growth
drivers of the future, such as Asia and Latin America, while
battling for our market shares, for example in Europe, where
competition is fierce.

8/9

2008 Annual Report, Transat A.T. Inc.

Financial position
In fiscal 2008, Transat posted $3.5 billion in revenues
(compared with $3.0 billion in 2007), a margin of $127.3
million (compared with $138.1 million in 2007) and a net
loss of $50.0 million ($1.51 per share on a diluted basis).
The loss was mainly due to $152.8 million in non-cash and
non-operating items ($107.6 million after income taxes),
including a $106.4 million loss ($71.5 million after income
taxes) arising from hedge accounting.

The relative decrease in margin in 2008 is attributable
mainly to fuel prices and the intensity of the competition,
especially for outbound travel from Canada. Air Transat’s
fuel costs rose by 33.6%, from $273.6 million in 2007
to $365.5 million in 2008. Besides fuel surcharges, we
employed hedging instruments on fuel and currency to
cushion the impact on our bottom line of the rise in fuel
prices. These mechanisms brought results, although of course
they could not entirely offset the effects of the brutal
fluctuations in oil prices.

What 2009 has in store
Historically, tourism has demonstrated its strong capacity to
withstand economic downturns. While there is no doubt as
to the potential of the tourism market over the medium and
long terms, it is clear that fiscal 2009, and possibly the
following year, will be characterized by tough economic
conditions. We have entered a recession; only its intensity
and duration remain in doubt. At any rate, we will certainly
have to wait until 2010 before we see a reversal of trends.
The tightening of credit conditions will pose a serious chal-
lenge for undercapitalized companies, which are abundant
in the travel and tourism industry. In spite of the drop in
crude oil prices noted at year-end, operating costs for travel
companies like Transat are on the rise, and will increase
even more if the U.S. dollar continues to regain strength.
This analysis of the situation, which is all the more bleak
given that competition remains unrelenting, merits qualifica-
tion in the case of Transat, however: our capital structure is
sound because we have successfully countered the effects
of the freeze in the asset-backed commercial paper market,
we have sufficient cash reserves available, all of our business
units are operationally profitable, we are the leader in
Canada, and we are currently outperforming several of our
competitors in France.

In advance of the implementation of a liberalized air trans-
port agreement between Canada and the European Union,
and considering our support of reciprocal, orderly liberaliza-
tion of air markets, including raising foreign-ownership caps,
we reaffirm that the Canadian government must implement
sweeping reforms to the system of fees and taxes charged
to airports and airlines across the country. This system is a
true burden for companies like Transat and considerably

hinders their ability to compete with foreign companies.
The current environment is harmful to the competitiveness of
Canada and Canadian companies. According to a study
by the World Economic Forum, Canada ranks 114th in the
world when it comes to price competitiveness in the travel
market, and 122nd for airport taxes and fees. There is an
increasingly pressing need for a policy change.

As of 2012, Canadian travel companies’ ability to compete
is also likely to be affected by the European Union’s deci-
sion to unilaterally impose greenhouse gas emissions quotas
on the air transport industry. It is difficult to assess the cost to
a company like Transat resulting from this measure, because
too many parameters (e.g., the price per tonne of CO2 and
exchange rate considerations) remain unknown. Theoretically,
the extra cost would be passed on to travellers. In any
event, Transat does not approve of the European approach,
because of its unilateral nature. Rather, we are in favour of
multilateral solutions developed under the aegis of the
International Civil Aviation Organization (ICAO) and the
International Air Transport Association (IATA), which would
pave the way for the most uniform, fair market conditions
possible.

A team effort
I wish to extend my warm thanks to all Transat personnel,
as well as to the members of the management team and the
Board of Directors for their vital contributions to the success
of the company. I also wish to pay tribute to Jean Guertin,
who passed away in November 2008. Mr. Guertin had
served Transat with extraordinary professionalism as a
member of the Board of Directors since 1995.

The 2009 fiscal year will pose many challenges, but our
shareholders, who do us honour by placing their trust in us,
can rest assured of the continued determination and passion
of the entire Transat team.

Jean-Marc Eustache

Chairman of the Board
President and Chief Executive Officer

January 16, 2009

2008 Annual Report, Transat A.T. Inc.

Transat Overview

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.

10/11

2008 Annual Report, Transat A.T. Inc.

OUTGOING TOUR OPERATORS

Transat Tours Canada (TTC)

Vacances Transat, Nolitours, Air Transat
Caribbean, Latin America and Mexico from Canada,
Canada-Europe market and cruises

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
Look Voyages
Mediterranean basin, Africa, Asia, Caribbean, Mexico, etc.
from France

Amplitude Internationale
Tunisia from France

Vacances Transat (France)
Americas, Caribbean, Asia and Africa from France

Bennett
Tours in Eastern Europe, Scandinavia, Scotland and Ireland

Brokair
Group tours from France

Canadian Affair
Canada-UK market

INCOMING TOUR OPERATORS DESTINATION SERVICES

Jonview Canada (80.07%)
Tours and packages to Canada
Tourgreece (90.0%)
Tours and packages to Greece
Trafic Tours (70.0%)
Excursions and destination services in Mexico
Turissimo (70.0%)
Excursions and destination services in the Dominican Republic
Transat Holidays USA
Destination services and travel agency in Florida

HOTEL MANAGEMENT

Ocean Hotels (35.0%)
Five hotels in Mexico and the Dominican Republic

RETAIL DISTRIBUTION

Transat Distribution Canada (TDC)
Network of 415 travel agencies in Canada (Marlin Travel,
TravelPlus, Club Voyages, Voyages en Liberté) and exitnow.ca
tripcentral.ca (64.6%)
Network of 22 travel agencies in Canada: tripcentral.ca
Club Voyages
Network of 67 Club Voyages and Look Voyages travel agencies
in France

AIR TRANSPORTATION

Air Transat
Charter air carrier specializing in holiday travel
Handlex
Airport ground services in Montreal, Toronto and Vancouver

Unless otherwise indicated, Transat A.T. Inc. holds a 100% interest in all business units.

Transat Tours Canada (TTC)
Transat Tours Canada (TTC), which operates mainly under the
Transat Holidays, Nolitours and Air Transat brands, grew its
customer base across the board in 2008, posting overall growth
of 11% in the number of travellers. This most satisfactory progress
was achieved in a highly competitive market, especially for sun
destinations, and in a context of very high fuel prices.

The leading tour operator for holiday travel between Canada and
Europe, TTC also offers Canadians year-round travel to Mexico
and the Caribbean. Lastly, TTC markets cruise travel on all of the
world’s oceans to Canadian customers through agreements with
the best cruise operators. In 2008, this market segment accounted
for some 61,000 travellers. TTC also offers a wide array of tours
and accommodations on both sides of the Atlantic, including
Transat as well as partner products.

Under the Rêvatours brand, TTC markets tours and custom-tailored
products in 30 countries in Europe, Asia, Africa and South
America, including, as of 2008, Ecuador, Argentina and Chile;
under the Merika Tours brand, it offers Canadians a range of
North American destinations.

Air Consultants Europe (ACE)
A major European partner of TTC, ACE strongly intensified its
collaboration with Jonview Canada during 2008. It also pursued
efforts to strengthen its multi-channel distribution platform; the result
was a substantial increase in sales.

Look Voyages
During 2008, Look Voyages maintained its strong performance,
leveraging the winning formula of its Lookéa clubs network
(28 resort clubs in 16 countries as of summer 2008) while diversi-
fying its offering to include a range of summer travel and tour
products. A champion of the multi-channel approach, Look Voyages
controls a significant proportion of its distribution. Look Voyages
recorded 257,000 travellers in 2008, and the company’s customer
satisfaction level held firm at 97%. Amplitude Internationale, which
specializes in Tunisia, also recorded an excellent year, with nearly
124,000 travellers.

Vacances Transat (France)
In 2008, Vacances Transat (France) posted strong growth, with
182,000 travellers and sales up 16% to 231 million euros. Some
95,000 travellers chose organized tours (a Vacances Transat spe-
cialty), another 40,000 opted for resort products, while 80,000
flew to Canada via Air Transat. The leading tour operator in the
French market offering travel to Canada, Vacances Transat (France)
also enjoys a growing reputation as a specialist in tour products
to the four corners of the globe. Also operating under the Bennett
(destinations in Northern Europe) and Brokair (specializing in
group travel) brands, the tour operator offered 34 destination
countries and partnered with some 30 carriers outbound from
France in 2008.

Canadian Affair
As the United Kingdom’s leading tour operator specializing in
travel to Canada, Canadian Affair works hand-in-hand with Transat
Tours Canada, Jonview Canada and two carriers: Air Transat and
Thomas Cook Airlines. In 2008, Canadian Affair had a very high
passenger load factor and posted increased incidental revenues,
resulting in substantial growth in both revenues and margins.
Canadian Affair earned the distinction “Consumer Favourite Tour
Operator” for the fourth year in a row.

Jonview Canada
Jonview Canada, the leading incoming tour operator in Canada,
markets its products in approximately 50 countries, not only in
Europe but also in a growing number of emerging markets.
Jonview Canada also offers products through an innovative
partnership with Via Rail. Fiscal 2008 was a record year for the
company, with sales of approximately $128 million and 263,000
travellers.

Tourgreece
Close to 15 million tourists visit Greece each year, and Tourgreece
handled approximately 69,000 of them, ranking it among the
largest incoming tour operators in the country. In 2008, Tourgreece
broadened its distribution network to include Argentina, Brazil,
Singapore and Malaysia.

Transat Distribution Canada
At year-end 2008, Transat Distribution Canada (TDC) included
415 agencies (including 337 franchises) and approximately
1,800 travel advisors. Sales by this cross-Canada distribution
network, all brands combined, totalled some $1.2 billion, with
sales of Transat products increasing. In 2009, TDC intends to
focus efforts on increasing productivity by, among other things,
improving its systems and developing a customer relationship
management (CRM) program.

Club Voyages
With Club Voyages, we have 67 travel agencies in France,
including 33 under the Look Voyages banner and 34 Club
Voyages–branded agencies. In 2009, we will be strengthening
the strategic links among our tour operators and distribution
structures so as to derive the maximum possible benefits from the
group’s positioning on the French outgoing market.

Air Transat
Air Transat operates a fleet of 18 aircraft (14 Airbus A310s and
four Airbus A330s). Its on-time, fleet-reliability and fuel-management
performances remain among the best in the industry. With an eye
to improving passenger comfort, Air Transat has increased legroom
in all of its aircraft. Our air carrier was granted Phase 2 certifica-
tion from Transport Canada for its safety management system in
2007, and received IOSA (IATA Operational Safety Audit)
registration from the International Air Transport Association in
2008, joining the ranks of the most advanced airline companies in
safety management. Several factors combine to make Air Transat a
first-rate airline in its category: its qualified, friendly cabin crews,
an outstanding program for young families and its Club Class.

Handlex
Handlex and its approximately 1,100 employees provide airport
ground services (passenger check-in, baggage and cargo handling,
aircraft cleaning and ramp services, as well as ground-services
equipment maintenance) to 26 carriers—including Air Transat—at
Montreal, Toronto and Vancouver international airports. In 2008,
Handlex posted very good financial and operational results. It
implemented improvements to its management systems, upgraded
certain equipment and continued to offer safe, high-quality service.
The Handlex team provided service for 15,433 departures in
2008.

2008 Annual Report, Transat A.T. Inc.

Here is a summary of our 2008 Corporate Social
Responsibility Report. The complete version is available
on our website at www.transat.com.

Throughout our Company’s history, together with our employees,
we have nurtured close ties with the community. Over the
past two years, however, we have decided to seek the
next level in terms of responsible management, striving to
become a first-class employer and a leader in the area of
sustainable tourism. Sustainable tourism is defined as tourism
that entails respect for nature as well as for host communities
and their values, and that combines positive socio-economic
benefits for local populations with an enriching experience
for travellers.

Transat: A talented team
At Transat, we believe that our people grow along with
our organization and represent the very foundations of our
industry. As such, we consider it our responsibility to help
our team members develop their talents, to raise awareness
of our industry among coming generations, and to work
with the community and partners ready to assist us in the
pursuit of this mission. As at October 31, 2008, Transat
had 6,466 employees.

Our current talent-development philosophy follows from a
broad-based consensus, developed via consultation with
more than 70 executives at different levels and in different
countries. Indeed, this responsibility, so vital to the develop-
ment of our organization, depends above all on our managers.
Training in employee coaching has been provided to nearly
all of them (more than 500) at all levels.

Personnel development from
a perspective of continuity
A responsibility shared between manager
and employee
Ongoing, regular discussions between manager
and employee
An open, transparent process
Emphasis on internal promotions and mobility across
business units
Approach based on work experience accompanied
by effective coaching

•

•
•

•

Throughout its
history, Transat
and its employees
have nurtured
close ties with the
community.
Over the past
two years, however,
we have decided
to seek the next
level in terms of

Social responsibility

responsible
management,
striving to become
a first-class
employer and
a leader in the
area of sustainable
tourism.

12/13

2008 Annual Report, Transat A.T. Inc.

A structured approach to evaluating employee potential has
been implemented with input from an international network
of experts in organizational psychology. Close to 50
employees have undergone assessments aimed at establishing
personalized career development plans for them. A virtual
platform allows employees and their immediate supervisors
to measure progress as well as benefits.

Transat maintains excellent labour relations with all person-
nel. This is particularly evident in the relationships between
management and all of its union partners at Air Transat and
Handlex. Over the past two years, Air Transat has completed
negotiations for all of its collective agreements, and in each
case bargaining has proceeded without conflict. Most of
them are long-term agreements; i.e., for five years.

The environment
In terms of sustainability, one of our first tasks has been to
work on the management of resources. In 2008, we imple-
mented new reduction, reuse and recycling initiatives. At the
same time, we began the complex task of drawing up a
comprehensive environmental baseline, with an eye to quan-
tifying objectives and facilitating long-term planning. Several
employee awareness activities have been implemented and
were greeted with an eagerness to embrace best practices.

As early as 2003, Air Transat, a wholly owned subsidiary
of Transat, developed and began applying a stringent fuel
management program, which has enabled the carrier to
substantially reduce greenhouse gases (GHGs) per passenger.
In 2008, Air Transat’s fuel consumption was 3.26 litres
(8.25 kg of CO2) per passenger/100 kilometres, versus
3.17 litres (8.02 kg of CO2) the previous year. These fuel
consumption statistics compare favourably to those of the
majority of air carriers. The relative increase in 2008 is
attributable to the reduction in the number of seats on our
aircraft, a measure taken to increase legroom to enhance
passenger comfort. In 2008, Air Transat made a total of
approximately 14,400 flights, with corresponding CO2
emissions of 1,137,629 tonnes, compared with about
13,000 flights and 1,013,970 tonnes in 2007.

We have undertaken three other major projects with Air
Transat and Handlex, our air operations business units: we are
seeking LEED-EB (Leadership in Energy and Environmental
Design for Existing Buildings) certification for Air Transat’s
head office and maintenance centre in Montreal, implementing
an environmental management system with a view to obtain-
ing ISO 14001 certification, and integrating 3RV (reduce,
reuse, recycle, valorize) principles into our supply strategy.

In addition, a reference guide of 12 management compe-
tencies has been developed to provide a roadmap for the
organization’s training activities. These competencies were
rigorously selected based on the organization’s strategic
objectives. A competencies curriculum for managers has
also been developed; it is modular, allowing executives with
different experience levels to take training that corresponds
to their needs.

To make it easier for interested employees to pursue and
have access to university studies, we have developed a
certificate program in organization management in partner-
ship with Université de Sherbrooke, Ryerson University in
Toronto and Simon Fraser University in Vancouver. This
initiative, first implemented at Air Transat, was widened and
made available to all Canadian employees in 2008.

New programs have been introduced to reward our
employees’ efforts and successes. The Vega program, for
example, allows anyone in the Transat family to nominate a
deserving colleague, be they an immediate co-worker or
someone in another business unit.

At Transat, we believe
that our people grow
along with our
organization and represent
the very foundations
of our industry.

Significant internal communications efforts are made, using
multiple channels. We encourage our managers to meet
with their personnel regularly to get feedback and share
information, and we provide them with support to facilitate
this task. These meetings, regardless of their scale, are
echoed via our intranet, called “Mundo,” which has been
completely redesigned as of January 2009. The intranet
is an ideal tool for maintaining communication between
management and employees.

2008 Annual Report, Transat A.T. Inc.

Supporting communities
As part of a program that it has developed, Transat supports
projects that aim to preserve or present cultural heritage,
protect natural sites with tourism potential, help communities
reap the economic benefits of tourism, or reduce the environ-
mental impacts of tourism. These projects, assessed on a
merit basis, are submitted by non-profit organizations or
communities.

To date, Transat has supported eight projects in four
countries, all inspired by a similar vision: to develop tourism,
create jobs and generate economic benefits through
initiatives based on conservation and community buy-in.
Together, these projects represent investments in excess of
$300,000. This program seeks to encourage and promote
a specific vision of tourism development, by raising aware-
ness on the part of promoters, decision-makers, travellers
and all those who have the power to influence the future
direction of tourism.

Our sustainable tourism performance depends in part on
that of our suppliers; hence our concern for choosing
responsible partners and instituting a collaborative culture

way for development of an action plan built on awareness-
raising and dialogue. In the future, the program will be
extended to all our hotel suppliers, and then to suppliers in
other service categories. This initiative complements our
hotel inspection program which focuses on 163 safety
criteria.

Transat began initiatives to raise travellers’ awareness of
sustainable tourism issues, via its website, in its commercial
brochures and in Air Transat’s in-flight magazine. To date,
the main objective has been to foster understanding of the
founding concepts of sustainable tourism, including the three
pillars of environmental stewardship, heritage conservation
and respect for cultures, and of responsible development of
the economic potential of tourism.

In 2008, Transat, its business units, employees and
customers donated approximately $1.8 million, in cash or in
kind, to charitable, humanitarian and non-profit organizations.

grounded in a common vision of sustainable tourism. We
can influence working methods and can also draw inspira-
tion from avant-garde practices already put in place by
some of our partners, in turn helping disseminate them to as
many others as possible.

We have created an international working group that is
tasked with laying the foundations for a sustainable supply-
chain policy for travel services, along with an awareness
and continuous-improvement program aimed at suppliers.
The program will be rolled out in stages, beginning with
efforts focused on the hotel industry: in the summer of 2008,
we initiated a pilot project aimed at documenting current
practices with respect to environmental stewardship, local
purchasing, labour relations and community relations. This
initiative will allow us to establish measurable objectives
based on a statistical portrait of the situation, and pave the

Transat began initiatives
to raise travellers’
awareness of sustainable
tourism issues, via its
website, in its commercial
brochures and in
Air Transat’s in-flight
magazine.

14/15

2008 Annual Report, Transat A.T. Inc.

America

Europe

2008

2007

2006

2008

2007

2006

Outgoing tour operators
and air transportation
Transat Tours Canada (TTC)
(Vacances Transat,
Nolitours and Air Transat)

Revenues
Employees
Passengers1
Travellers 2

Rêvatours

Revenues
Employees
Travellers

2,371,000
3,051
3,181,000
1,492,000

2,117,000 1,912,000
2,667
2,625,000
1,200,000

2,881
2,918,000
1,348,000

13,800
25
4,700

13,000
27
4,300

18,400
26
6,000

Incoming tour operators
and destination services
Jonview Canada

Revenues
Employees
Travellers

127,500
288
263,000

121,000
238
249,000

118,000
183
237,000

Transat Holidays USA,
Turissimo and Trafic Tours

Revenues
Employees

43,200
263

32,000
107

32,000
105

Retail distribution
Transat Distribution Canada
(Club Voyages, Marlin Travel,
TravelPlus, Voyages en Liberté
and exitnow.ca)

Revenues (commissions

and franchise)

Outlets owned
Employees
Outlets

Tripcentral.ca

Revenues
Employees
Outlets owned

67,100
78
581
337

61,400
83
577
304

36,000
88
597
315

8,700
110
22

7,400
100
22

7,700
99
23

Other airline services
Handlex

Revenues
Employees

54,200
1,147

49,500
1,203

41,000
1,108

Outgoing tour operators

Vacances Transat (France)
(Vacances Transat (France),
Bennett and Brokair)
Revenues (m)
Employees
Travellers

231,000
240
182,000

211,000
220
155,000

194,000
214
141,000

Look Voyages
Revenues (m)
Employees
Travellers
Club Lookéa/summer3
Club Lookéa / winter3

Amplitude Internationale
Revenues (m)
Employees
Travellers

235,000
342
257,000
28
13

189,000
309
213,000
26
12

148,000
305
167,000
18
7

44,000
18
124,000

19,000
19
46,000

—
—
—

Air Consultants Europe (ACE)
Revenues (commissions) (m)
Employees
Travellers

3,400
26
58,000

3,300
23
46,000

3,200
19
45,000

Canadian Affair

Revenues (£)
Employees
Travellers

89,700
67
176,000

71,000
75
161,500

30,500
63
69,700

Incoming tour operators
and destination services
Tourgreece
Revenues (m)
Employees
Travellers

19,600
34
69,000

Retail distribution
Club Voyages (France)
Revenues (commissions) (m) 10,300
198
Employees
67
Outlets owned

20,700
30
72,000

19,700
35
71,000

10,300
191
69

9,900
201
72

1 Airlines record flight segments in terms of passengers
2 Tour operators record round-trip travellers
3 Including Lookéa cruise in Egypt

All subsidiaries wholly owned, except:
Jonview Canada (80.07%)
Tourgreece (90.0%)
Travel Superstore Inc. (Tripcentral.ca) (64.6%)

2008 Annual Report, Transat A.T. Inc.

Transat is one of
the largest fully
integrated world-class
tour operators in
North America.
We operate solely
in the holiday travel
industry and market
our services mainly
in the Americas
and Europe.

Management’s Discussion & Analysis

As a tour operator,
Transat’s core business
involves developing
and marketing holiday
travel services
in package and
air-only formats.

16/17

2008 Annual Report, Transat A.T. Inc.

OVERVIEW

CONSOLIDATED OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

OTHER

ACCOUNTING

CONTROLS AND PROCEDURES

RISKS AND UNCERTAINTIES

OUTLOOK

This Management’s Discussion and Analysis (MD&A) provides a review
of Transat A.T. Inc.’s operations, performance and financial position for the
year ended October 31, 2008, compared with the year ended October 31,
2007, and should be read in conjunction with the audited Consolidated
Financial Statements and notes thereto beginning on page 36. The informa-
tion contained herein is dated as of January 16, 2009. You will find more
information about us on Transat’s website at www.transat.com and on
SEDAR at www.sedar.com, including the Attest Reports for fiscal 2008 and
the Annual Information Form.

Our financial statements are prepared in accordance 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 prescribed by GAAP and are therefore
unlikely to be comparable to similar measures reported by other issuers.
They provide additional information and should not be considered a substi-
tute for measures of performance prepared in accordance with GAAP. All
amounts are in Canadian dollars unless otherwise indicated. The terms
“Transat,” “we,” “us,” “our” and the “Corporation” mean Transat A.T. Inc.
and its subsidiaries, unless otherwise indicated.

The figures for 2007 have been restated, in certain cases, to take into
account changes in accounting policies relating to the accounting for
aircraft maintenance provisions that came into effect on November 1, 2007
and are summarized in note 3 to the consolidated financial statements.
The figures for 2006 (and prior years) have not been restated to take into
account this accounting change.

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,” “could,” “estimate,”
“expect,” “intend,” “may,” “plan,” “predict,” the negative of these terms
and similar terminology, including references to assumptions. All such state-
ments are made pursuant to applicable Canadian securities legislation.
Such statements may involve but are not limited to comments 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, terrorist attacks, energy prices, general industry, market
and economic conditions, disease outbreaks, changes in demand due to

the seasonal nature of the business, the ability to reduce operating costs
and employee counts, labour relations, labour negotiations and disputes,
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 consider 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, market, operational
and financial assumptions and assumptions about transactions and forward-
looking statements.

Examples of such forward-looking statements include, but are not limited to,
the following:
• Transat should have the resources it needs to meet its 2009 objectives

and continue building on its long-term strategies.

• The total number of travellers in 2009 is expected to be higher than in

2008.

• The Corporation’s operating expenses are expected to increase due to

greater business activity.

• Travel reservations will continue to be higher than in the prior year.
• The Corporation expects margins to be significantly lower in the 2009

winter season than in winter 2008.

• The Corporation expects that it will be difficult in winter 2009 to match

the margins achieved in Europe in the 2008 winter season.

• Cash flows from operations, cash on hand and drawdowns from 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 available as in the past, that management will continue to manage 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 are 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 Corporation’s expectations as of that date. The
Corporation disclaims any intention or obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, other than as required by law.

2008 Annual Report, Transat A.T. Inc.

Financial Highlights

(In thousands of dollars, except per share amounts)

Consolidated Statements of Income (loss)

Revenues
Margin1
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) 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

2008

3,512,851
127,327
(50,011)
(1.51)
(1.51)
0.36

2007
Restated
$

3,045,917
138,117
78,503
2.33
2.30
0.34

2006

2,603,746
126,944
65,770
1.88
1.85
0.14

Variance

2008
%

15.3
(7.8)
(163.7)
(164.8)
(165.7)
5.9

2007
%

17.0
8.8
19.4
23.9
24.3
142.9

145,767

166,768

214,887

(12.6)

(22.4)

256,697
86,595

489,059

168,196
142,346

477,310

203,613
—

418,500

52.6
(39.2)

2.5

(17.4)
N/A

14.1

Assets

1,265,431

1,080,523

959,195

17.1

12.6

Debt (short-term and long-term)
Total debt1
Net debt1

153,241
450,335
217,973

91,837
371,146
62,032

87,824
408,161
193,274

66.9
21.3
251.4

4.6
(9.1)
(67.9)

Consolidated Statements of Cash Flows

Operating activities

155,225

134,457

116,160

15.4

15.8

1NON-GAAP FINANCIAL MEASURES

The terms “margin,” “total debt” and “net debt” have no standard definition
prescribed by Canadian GAAP and are therefore unlikely to be compara-
ble 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 the Corporation’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.

Total debt is used by management to assess the Corporation’s future cash
requirements. It represents the combination of balance sheet debt (long-term
debt and debenture) and off-balance sheet arrangements, excluding the
arrangements with suppliers discussed on p. 28.

Net debt is used by management to assess Transat’s cash position. It is
defined as total debt (described above) less cash and cash equivalents not
held in trust or otherwise reserved and investments in asset-backed commer-
cial paper (“ABCP”).

OVERVIEW

Holiday travel industry
The holiday travel industry consists mainly of tour operators,
traditional and online travel agencies, destination service providers
or hotel operators, and air carriers serving travellers with scheduled
or charter flights.

“Outgoing” tour operators purchase the various components of
a trip locally or abroad and sell them separately or in packages to
consumers in their local markets, generally through travel agencies.
“Incoming” tour operators design travel packages or other travel
products consisting of services they purchase in their local market
for sale in foreign markets, generally through other tour operators
or travel agencies.

The destination service providers 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. Air carriers provide services to travel
agencies and tour operators. These carriers are known as “sched-
uled” 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 operate solely in
the holiday travel industry and market our services mainly in the
Americas and Europe. As a tour operator, Transat’s core business
involves developing and marketing holiday travel services in
package and air-only formats. We operate as both outgoing and
incoming tour operator by bundling services bought in Canada
and abroad and reselling them in Canada, France, the U.K. and
in 10 other countries, mainly through travel agencies, some of
which we own (as in France and Canada). Transat is also a major
retail distributor with a total of approximately 500 travel agencies
(including 337 franchisees) and a multi-channel distribution system

18/19

2008 Annual Report, Transat A.T. Inc.

incorporating Web-based sales. Since 2008, Transat has held
an interest in a hotel business owning and operating properties
in Mexico and the Dominican Republic. Transat relies on 60 air
carriers, but primarily on its subsidiary Air Transat for a large
portion of its needs. Transat also offers destination and airport
services.

Vision – According to the World Tourism Organization, there were
some 900 million international tourists in 2007, and this market
is growing. Travellers’ origins and destinations are increasingly
diverse. Transat’s vision is to optimize shareholder value by entering
new markets, increasing its market share and maximizing the
benefits of vertical integration. We maintain a leadership position
in the Canadian market, where we operate as an outgoing and
incoming tour operator. We are 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 countries. Over time, we intend to
expand our business to other countries where we believe there is
high growth potential for an integrated tour operator specializing
in holiday travel.

Strategy – From 2006 to 2008, Transat executed a three-year
strategic growth plan. During that period, revenues grew approxi-
mately $1 billion, or 48%, driven by acquisitions and strong
organic growth. The Corporation strengthened its leadership posi-
tion in all regions of Canada, as well as in France, where it ranks
among the country’s largest tour operators, and in the U.K., where
Transat acquired a tour operator, further boosting outbound sales to
Canada. As anticipated, Transat successfully entered the hotel
industry. During the three-year period, Transat also acquired travel
agencies, bolstered its online presence and developed a high-per-
formance multichannel distribution platform.

In 2009, Transat will begin implementing its 2009-2011 three-
year plan, focused primarily on making the Corporation more
competitive in its key markets; adapting its offering to tap into high-
growth market segments; pursuing vertical integration; renewing its
bilateral market development approach; and developing expertise
to maintain and strengthen its competitive positioning, while under-
pinning the Corporation’s long-term viability. Implementation of
this three-year plan factors in the worrisome economic conditions
looming on the horizon at the end of the 2008 calendar year. For
fiscal 2009, Transat has set the following targets:

• Increase efficiency, productivity, competitiveness and agility
within the organization through stringent management of costs
and targeted investments that will maximize resources; this
should be achieved by strategically combining short-term results
with a long-term vision, without compromising the quality of
customer service;

• Strengthen our leadership position as an outgoing tour operator,
maintaining or increasing our market share by differentiating
our offering, maximizing exclusive products, launching new
products and broadening our reach by building on the bilateral
distribution approach we have developed;

Review of 2008 objectives and achievements
(See table on page 20 and 21)

Key performance drivers
The following key performance drivers are essential to the success-
ful implementation of our strategy and to the achievement of our
objectives:

Market share
Remain 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 dependent on our
financial and non-financial resources, both of which have
contributed to the success of our strategies and past achievement
of our objectives.

Our financial resources are as follows:
Cash
Our balances of cash and cash equivalents not held in trust or
otherwise reserved totalled $145.8 million as at October 31,
2008. Our continued focus on expense reductions and margin
improvements should maintain these balances at healthy levels.
In addition, we also hold investments in ABCP with a fair
market value and a face value of $86.5 million and $143.5
million respectively on this date.
Credit facilities
We have revolving term credit facilities currently totalling
$194.0 million ($264.6 million once the ABCP restructuring
plan is finalized) and expiring up to 2013.

Our non-financial resources include:
Brand
The Corporation has taken the necessary steps to foster a
distinctive brand image and bolster its reputation, including its
sustainable tourism approach.
Structure
Our vertically integrated structure enables us to ensure better
quality control of our products and services.
Employees
In recent years, we have intensified our efforts to build a unified
corporate culture based on a clear vision and shared values.
As a result, our employees work together as a team and are
committed to ensuring overall customer satisfaction and
contributing to improving the Corporation’s effectiveness.
Moreover, we believe that the Corporation benefits from a
seasoned leadership team.
Relationships with suppliers
We have exclusive access to certain hotels at sunshine
destinations as well as over 20 years of privileged relationships
with many hotels at these destinations and in Europe.

• Continue developing and implementing our multichannel distri-

bution strategy and increase sales for each channel;

Transat has the necessary resources to meet its 2009 objectives
and continue building on its long-term strategies.

• Develop and implement a sustainable tourism plan that will
keep Transat in the front ranks of the industry, increase its
influence over the future of our market and inspire buy-in by
employees, suppliers and customers alike.

2008 Annual Report, Transat A.T. Inc.

Review of 2008 objectives and achievements

OBJECTIVE 1
Strengthen our leadership position in Canada and the relationships
between Transat Tours Canada (TTC) and our European subsidiaries
active in the transatlantic market.

• Further increase our Ontario market share for southern destinations in win-
ter 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.

• 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 acting as sellers/resellers (Canadian Affair,
Vacances Transat France and Air Consultants Europe (ACE)) as well as
with Air Transat and Jonview Canada, by fully capitalizing on our pres-
ence on both sides of the Atlantic.

• Continue to strengthen our multichannel distribution system by consolidat-
ing the travel agency network and developing Web-based platforms that
can adapt to market changes.

• Increase our margins, particularly by continuing our cost control efforts,

such as by seeking new synergies among subsidiaries.

OBJECTIVE 2
Become more competitive and strengthen our position as an outgoing
European tour operator.

• Continue to diversify departures from France, based on the current business

models at Look Voyages and Vacances Transat (France).

• Continue to improve our multichannel distribution system by strengthening
links between our travel agencies and tour operators and by developing
Web platforms that can adapt to market changes.

• Develop a strategic growth plan for our organization in France.

ACCOMPLISHMENTS
For outbound travel from Canada to southern destinations in winter Transat’s
market share in Ontario held steady, slipped slightly in Québec and
declined in Western Canada, against a backdrop of fierce competition.
However, we remain the top tour operator in all regions of Canada, and
sold more seats than in 2007.

We have begun implementing a plan to ramp up transatlantic opera-
tions, while targeting greater efficiency. This plan includes much closer teaming
between TTC and Jonview Canada, Canadian Affair, Vacances Transat (France)
and ACE. We launched a new destination (Basel-Mulhouse) and new routes
(Vancouver-Calgary-Paris), such that we marketed 64 routes between Canada
and Europe in summer 2008, readily setting us apart from any other carrier
and further strengthening our position in the tourism industry. With this platform,
the Corporation expanded its transatlantic holiday market share in 2008.

We further developed our multichannel distribution platform, which
was key to achieving a 10% increase in volume in 2008 compared with
2007, while approximately 30% of Canadian sales were attributed to Transat-
network travel agencies, call centres or Web sites. We now have 437 agencies
in Canada, including 33 new franchisees. We also implemented a
customer relationship management platform.

Maintaining our margins was a significant challenge in 2008 due

to sharp increases in fuel costs—only partially offset by our fuel hedging
strategies—and to excess market capacity. Incidental revenues were up at
Air Transat, and other measures helped bolster margins. With a view to
combining our subsidiaries’ dealings, several administrative functions were
pooled between Jonview Canada and TTC, which generated compelling
results.

ACCOMPLISHMENTS
Vacances Transat remains a touring and long-haul leader in France and
developed new destinations such as Vietnam, which helped offset a slowdown
in other destinations in 2008, including the Dominican Republic. Look Voyages
operated 28 Clubs Lookéa in summer 2008 and maintained excellent
performance in terms of customer satisfaction. Fiscal 2008 ushered in the
successful integration of Européenne de tourisme (Amplitiude Internationale)
and the appointment of a new general manager at Look Voyages. In 2008,
our tour operators in France outperformed their counterparts, growing faster
than the French market average.

Transat’s multichannel platform in France posted strong results in 2008.

Across the English Channel, where direct distribution plays a central role, our
U.K. operations saw the volume of travellers grow approximately 14%, signifi-
cantly improving on their 2007 margin.

The French strategic plan is under development in step with Transat’s

2009-2011 three-year strategic plan.

OBJECTIVE 3
Tap into new outgoing markets.

• Seek growth opportunities for outgoing tour operations in new markets,
mainly in southern Europe and North America, via acquisitions that
match our business model.

• Continue to seek targets in the U.S. based on new criteria in 2008,

namely smaller players that are very active on the Internet.

ACCOMPLISHMENTS
A number of acquisition projects were identified and examined over the
duration of the three-year plan in the U.S. and Southern Europe. No transactions
occurred, nor were they practicable under conditions meeting our criteria and
our shareholders’ best interests, particularly given the looming market condi-
tions for 2009. Tapping into new markets remains a goal however, especially
in places where we already provide air service and could quickly set up
distribution operations, such as Europe and certain Latin American countries.

20/21

2008 Annual Report, Transat A.T. Inc.

OBJECTIVE 4
Capitalize on vertical integration at destination.

• Successfully complete the integration of our venture in the hotel industry

and develop a growth plan.

• Seek out acquisition targets in the incoming tourism business to increase
the number of destinations with a comprehensive product offering.

ACCOMPLISHMENTS
We successfully integrated our hotel venture, launched in early fiscal 2008.
Transat set up a team to monitor operations, key management positions at
the venture were filled, and the “Ocean” brand was implemented across the
five properties. Growth projects were reviewed in the Caribbean, and we
finalized a land purchase in the Dominican Republic to build a hotel.

Numerous initiatives targeted acquisition opportunities among incoming
tour operators or destination service providers in certain key markets, such as
Southern Europe and Northern Africa. No transactions have been completed
for the time being. The actions taken in 2008 led to considerably stronger
financial results at our Mexican and Dominican Republic destination service
providers.

OBJECTIVE 5
Provide additional resources to managers to actively ensure employee
development from the perspective of long-term retention and
knowledge management.

• Develop new tools to enhance managers’ coaching skills.

• Make the process of identifying talent more transparent for employees.

ACCOMPLISHMENTS
Some 500 managers were trained on coaching techniques in 2008. In addition,
approximately 150 employees were selected for an accelerated development
project, successfully designed and implemented in 2008, to track employee
development plans as part of a broad-based talent management project to
underpin the organization’s long-term viability. A Talent Development Committee,
consisting of all the commercial entities’ presidents and HR vice-presidents,
was also created for enhanced tracking.

Moreover, our new talent development philosophy was presented to

• Improve succession management by setting up a new system for monitoring

all employees during the president’s tour.

employee development plans.

Building on the success of the Air Transat Academy, we set up Transat

Academy to extend access to this program to all of Canadian employees.
Under this program, employees can take university-level courses in the work-
place. Approximately 70 people are currently studying under this program.

Our initiatives will continue uninterrupted and also involve organizational

changes to facilitate information flow and decision-making from a broader
perspective, improve efficiency, optimize employee utilization and reduce costs.

OBJECTIVE 6
Develop and implement an integrated information management
infrastructure that supports development and actively contributes to
profitable growth.

• Adapt our Internet strategy by further integrating it into our business
model, with respect to both distribution channels and management
processes.

• 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.

ACCOMPLISHMENTS
The above objectives are part of a more far-reaching initiative to modernize
and integrate Transat’s key management systems and improve our multichannel
distribution platforms.

We have selected the technological approach for our next-generation

Web-based platform for online travel distribution.

We have identified and acquired the solution to implement a new

centralized seat management system complete with a revenue management
tool. Detailed project planning for an initial implementation slated for 2009 is
well underway.

Finally, in 2008, we completed integration of financial management

at TTC and our head office into our SAP environment; this process will be
undertaken at our French subsidiaries in 2009.

OBJECTIVE 7
Enhance our structures, processes and strategies to adapt to fast-
changing trends in the tourism industry, particularly those resulting
from expectations and challenges relating to social responsibility.

• Develop and adopt a policy and action plan to make Transat the leader

in sustainable tourism, in Canada’s mass tourism industry.

• Develop a medium-term development strategy that reconciles the fleet

renewal plan with the potential additional costs resulting from regulations
related to greenhouse gas emissions.

ACCOMPLISHMENTS
Transat developed and publicly released its sustainable tourism policy,
green-lighted by the Board of Directors in June 2008. A number of initiatives
got underway in connection with a three-year plan to be completed in 2009
under the authority of the Sustainable Tourism Steering Committee, consisting
of all the leaders of Transat’s key subsidiaries. The projects undertaken mainly
seek to improve our environmental performance, identify and promote
generally accepted practices at our main tourism service providers, raise
employee and public awareness of concepts related to sustainable tourism
and obtain buy-in of stakeholders at destination to support our sustainable
tourism projects.

Fleet renewal and the likely additional costs related to greenhouse

gas emissions (GGE) are two complex, interrelated issues that were examined
throughout the year. Various scenarios were contemplated, but industry condi-
tions are rapidly evolving. Transat is targeting 2012 to commission aircraft
best suited to our operating model and environmental requirements.

2008 Annual Report, Transat A.T. Inc.

We expect that revenues and the total number of travellers in 2009
will slightly outpace their 2008 levels. In light of current economic
conditions and excess market capacity, we expect competition to
remain intense throughout fiscal 2009.

Operating Expenses
Our operating expenses consist mainly of direct costs, aircraft fuel,
salaries and employee benefits, commissions, aircraft maintenance,
airport and navigation fees, and aircraft rent. Approximately 30%
of our operating expenses are payable in U.S. dollars.

The overall growth in operating expenses stemmed from increases
of 14.1% and 23.1% in operating expenses in the Americas and
Europe, respectively. These variances resulted mainly from greater
business activity. As a percentage of revenues, operating expenses
rose slightly to 96.4% from 95.5% in 2007.

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 2008, these costs represented 55.0% of our revenues, up from
52.6% in 2007. Direct costs were up 20.7% compared with the
fiscal year ended October 31, 2007. This increase was primarily
driven by greater business activity and higher per-seat costs,
caused in part by rising fuel prices and the euro’s strength against
the dollar.

Aircraft fuel costs rose 33.6%, or $91.8 million, during the year.
This increase resulted primarily from the spike in fuel prices, greater
business activity and the addition of two aircraft to the fleet since
November 1, 2006.

Salaries and employee benefits were up 4.4% compared with
fiscal 2007, due in part to greater business activity and the
addition of two aircraft to our fleet since November 1, 2006,
resulting in new hires, offset however by lower short-term variable
pay plans than in 2007.

Commissions include the fees paid by tour operators to travel
agencies for serving as intermediaries between tour operators and
consumers. Commission expense fell $11.9 million during the year
from its 2007 level. Expressed as a percentage, commission
expense represented 5.0% of our revenues compared with 6.1% in
2007. This decrease resulted mainly from lower commissions in
Canada, and to a lesser extent from greater synergies from the
expansion of our travel agency network through an acquisition in
fiscal 2006 and higher direct sales at our European subsidiaries.

CONSOLIDATED OPERATIONS

Acquisitions
On December 10, 2007, the Corporation acquired a 35% interest
in Caribbean Investments B.V. [“CIBV”], a company operating five
hotels in Mexico and the Dominican Republic, for $51.6 million
[US$51.1 million] in cash and additional payments of up to
US$4.0 million contingent on meeting certain specific terms and
conditions by 2009. This acquisition was recorded using the
equity method, and the share of net income of the acquired
company has been accounted for as of December 10, 2007. The
difference between the cost of the Corporation’s interest in CIBV
and its share of the net assets at the acquisition date amounted to
$16.0 million and was allocated to imputed goodwill.

In addition, on April 9 and November 30, 2008, the Corporation
made capital contributions of $4.2 million [US$4.1 million] and
$5.2 million [US$4.2 million], respectively, to CIBV. These
additional contributions were made to enable CIBV to acquire land
in the Dominican Republic in connection with a hotel complex
development project. The Corporation expects that additional
capital contributions will be required in the next two fiscal years to
cover a portion of costs under the project, which is still in the
evaluation stage.

On July 11, 2008, the Corporation paid contingent consideration
totalling $3.8 million [m2.4 million] in respect of the July 11, 2007
acquisition of L’Européenne de Tourisme (Amplitude Internationale).
A total of $2.2 million [m1.4 million] has already been recognized
as a payable in relation to this contingent consideration. The
Corporation also recognized additional contingent consideration
payable of $0.2 million [m0.1 million]. Subsequent to these
transactions, a total of $1.8 million was recognized in goodwill.

Geographic Areas
We derive our revenues from outgoing tour operators, air trans-
portation, travel agencies, distribution, incoming tour operators
and services at travel destinations. The terms “travellers” and
“passengers” will be used throughout this MD&A to explain certain
variances. Basically, tour operators record round-trips in terms of
travellers, and airlines record flight segments in terms of passengers.

The overall growth in revenues was driven by increases of 11.4%
and 27.1% in the Americas and Europe, respectively. These
increases were mainly attributable to greater business activity (due
to our expanded product offering), a higher volume of seats sold to
third parties (during the winter season) and to a lesser degree to
our 2007 acquisition of Amplitude Internationale (“Amplitude”).
Owing to our expanded product offering in various markets, our
volume of travellers rose 18.0% compared with the previous fiscal
year.

Revenues by Geographic Areas

Years ended October 31 (in thousands of dollars)

Americas
Europe

Total

2008
$
2,536,831
976,020

3,512,851

2007
$
2,278,116
767,801

3,045,917

2006
$
2,059,611
544,135

2,603,746

Variance

2008
%
11.4
27.1

15.3

2007
%
10.6
41.1

17.0

22/23

2008 Annual Report, Transat A.T. Inc.

Aircraft maintenance costs relate to the engine and airframe
maintenance expenses incurred by Air Transat, primarily in U.S.
dollars. Compared with 2007, these expenses rose 28.6%, or
$21.7 million, primarily as a result of the year-end adjustment to
the provision for overhaul of leased aircraft subsequent to the
strengthening of the U.S. dollar against the loonie, the addition of
two aircraft to our fleet since November 1, 2006 and greater
business activity.

Airport and navigation fees mainly comprise fees charged by
airports. The 4.7% increase in fees compared with the previous
year stemmed mainly from greater business activity.

Aircraft rent remained relatively unchanged in 2008 compared
with 2007. The strength of the Canadian dollar against its U.S.
counterpart offset the rise in lease payments for aircraft added to
the fleet in 2007 and 2008.

Although they fell marginally as a percentage of revenues, other
expenses were up 8.5% compared with 2007, due primarily to
greater business activity, and relate mainly to our aircraft’s other
operating costs.

Despite our continued efforts to reduce and control costs, we
expect total operating expenses to increase due to greater business
activity in 2009.

Americas
In the Americas, revenues were up 13.5% during the 2008 winter
season compared with the same period in 2007. This increase
was mainly due to growth of 23.5% in the volume of travellers
compared with the same period in 2007. For the six-month winter
season in 2008, margins fell to 5.6% in 2008 from 6.7% in
2007. These slimmer margins resulted primarily from downward
price pressure due to excess supply in the marketplace and an
environment that remains highly competitive.

During the summer season, revenues grew 8.2% due to higher
average prices for our outbound routes to Europe and a 3.7%
increase in the volume of travellers from the same season of 2007.
The Corporation reported a negative margin of 1.2% for the
summer season compared with a positive margin of 3.2% for the
same season in 2007. This margin inversion stemmed primarily
from fuel prices that scaled record the heights coupled with down-
ward price pressure due to excess supply for southern destinations
and a continuously competitive environment.

This margin underperformance resulted mainly from our inability to
pass along significant fuel cost increases through concurrent selling
price increases, but also from downward price pressure due to
excess supply for southern destinations.

Operating Expenses

Years ended October 31 (in thousands of dollars)

Direct costs
Aircraft fuel
Salaries and employee benefits
Commissions
Aircraft maintenance
Airport and navigation fees
Aircraft rent
Other

2008

$
1,933,706
365,457
349,746
174,740
97,842
90,624
48,628
324,781

2007
Restated
$
1,601,652
273,614
334,973
186,686
76,099
86,594
48,883
299,299

2006

$
1,307,732
247,697
290,385
171,116
81,150
71,833
48,870
258,019

Total

3,385,524

2,907,800

2,476,802

% of revenues

Variance

2008

2007

2008
55.0
10.4
10.0
5.0
2.8
2.6
1.4
9.2

96.4

2007
52.6
9.0
11.0
6.1
2.5
2.8
1.6
9.8

95.5

2006
50.2
9.5
11.1
6.6
3.1
2.8
1.9
9.9

95.1

%
20.7
33.6
4.4
(6.4)
28.6
4.7
(0.5)
8.5

16.4

%
22.5
10.5
15.4
9.1
(6.2)
20.5
0.0
16.0

17.4

Americas

Years ended October 31 (in thousands of dollars)

Winter season

Summer season

Revenues
Operating expenses

Margin
Margin (%)

Revenues
Operating expenses

Margin
Margin (%)

2008

1,560,186
1,473,359

86,827
5.6

976,645
987,931

(11,286)
(1.2)

2007
Restated
$

2006

1,375,092
1,282,623

1,178,532
1,093,342

92,469
6.7

903,024
874,415

28,609
3.2

85,190
7.2

881,079
847,474

33,605
3.8

Variance

2008

2007

13.5
14.9

(6.1)
(16.9)

8.2
13.0

(139.4)
(136.1)

16.7
17.3

8.5
(6.9)

2.5
3.2

(14.9)
(15.8)

2008 Annual Report, Transat A.T. Inc.

Europe
In Europe, revenues and operating expenses were up from the
corresponding six-month winter season in 2007. These increases
stemmed primarily from greater business activity, mainly at our
French subsidiaries, our 2007 acquisition of Amplitude and the
euro’s strength against the dollar. The volume of travellers rose
72.6% during the winter season compared with the corresponding
period of 2007. Excluding Amplitude travellers, the increase was
39.3% for the six-month period. Our European operations reported
a negative margin of $1.5 million in 2008 compared with $1.4
million in the corresponding period of 2007.

For the summer season, revenues were up 29.8%, due primarily to
greater business activity at all our European operations, our 2007
acquisition of Amplitude and the euro’s strength against the dollar.
The volume of travellers was up 18.1% from the 2007 summer
season. Excluding Amplitude travellers, the increase was 11.9% for
the six-month period.

Our European operations reported a margin of $53.3 million
(7.9%) for the summer season compared with $8.5 million
(3.6%) for the same season in 2007. This improved margin
resulted in part from more profitable operations at Canadian Affair
compared with the 2007 summer season.

Other expenses and revenues
Amortization
Amortization is calculated on property, plant and equipment,
intangible assets subject to amortization, deferred lease inducements
and other assets, consisting mainly of commissionning costs.

Amortization expense was up $5.7 million, or 11.1%, mainly as
a result of additions to property, plant and equipment during the
year and previous years and, in particular, information technology
amortized over relatively shorter periods compared with the other
property, plant and equipment as a whole.

Interest on long-term debt and debenture
Interest on long-term debt and debenture rose 21.0% from 2007
owing primarily to higher average long-term debt levels subsequent
to drawdowns from the Corporation’s credit facilities.

Other interest and financial expenses
Other interest and financial expenses remained relatively
unchanged during the year compared with the previous year.

Interest income
Interest income was down $3.6 million, or 18.1%, from 2007.
This decrease resulted mainly from lower average balances of
cash and cash equivalents and lower average interest rates
compared with 2007.

Europe

Years ended October 31 (in thousands of dollars)

Winter season

Summer season

Revenues
Operating expenses

Margin
Margin (%)

Revenues
Operating expenses

Margin
Margin (%)

Other expenses and revenues

Years ended October 31 (in thousands of dollars)

Amortization
Interest on long-term debt and debenture
Other interest and financial expenses
Interest income
Change in fair value of derivative

financial instruments used for
aircraft fuel purchases

Foreign exchange loss (gain) on long-term

monetary items

Write-off of goodwill
Writedown of investments in ABCP
Gain on repurchase of preferred shares

of a subsidiary

Share of net loss (income) of companies

subject to significant influence

2008
$

302,361
303,896

(1,535)
(0.5)

673,659
620,338

53,321
7.9

2007
$

248,645
250,073

(1,428)
(0.6)

519,156
500,689

18,467
3.6

2006
$

194,613
197,286

(2,673)
(1.4)

349,522
338,700

10,822
3.1

Variance

2008
%

21.6
21.5

(7.5)
15.4

29.8
23.9

188.7
119.9

2007
%

27.8
26.8

46.6
57.1

48.5
47.8

70.6
16.1

2008

$
56,649
7,538
1,758
(16,172)

2007
Restated
$
50,990
6,229
1,929
(19,745)

2006

2008

2007

Variance

$
39,360
7,264
1,484
(15,706)

%
11.1
21.0
(8.9)
(18.1)

%
29.5
(14.2)
30.0
25.7

106,435

(26,577)

—

(500.5)

N/A

2,295
—
45,927

(1,605)

427

(3,023)
3,900
11,200

—

(651)

(4,162)
—
—

—

(375)

(175.9)
N/A
310.1

(27.4)
N/A
N/A

N/A

(165.6)

73.6

24/25

2008 Annual Report, Transat A.T. Inc.

Change in fair value of derivative financial instruments
used for aircraft fuel purchases
The change in fair value of derivative financial instruments used
for aircraft fuel purchases represents the change in fair value for
the year of the derivative financial instruments outstanding as at
October 31, 2008, used by the Corporation to manage risks
related to fuel price volatility. The fair value of derivative financial
instruments used for aircraft fuel purchases was down $106.4
million compared with a $26.6 million increase in 2007. This
significant variance resulted from the rapid decline in fuel prices
at the end of the fiscal year relative to the Corporation’s prices
under its fuel purchasing forward contracts that were fixed when
prices were higher.

Foreign exchange loss (gain) on long-term monetary items
The Corporation recorded a $2.3 million foreign exchange loss on
long-term monetary items for the fiscal year compared with a $3.0
million foreign exchange gain in 2007. This loss resulted primarily
from the adverse effect of exchange rates on long-term debt.

Write-off of goodwill
During the year ended October 31, 2008, the Corporation
performed its annual test for impairment of goodwill and trademarks
by discounting the future cash flows of its reporting units, and no
impairment was detected.

The 2007 annual impairment test on goodwill and trademarks
translated into a $3.9 million impairment of goodwill related to its
Travel Superstore Inc. reporting unit.

Writedown of investments in ABCP
As at October 31, 2008, the Corporation held a portfolio of asset
backed commercial paper (“ABCP”) issued by several trusts with
an overall notional value of $143.5 million. In mid-August 2007,
the Canadian third-party ABCP market was hit by a liquidity
disruption. Since then, the securities held by the Corporation have
not traded in an active market.

On August 16, 2007, subsequent to the liquidity disruption, 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. A Pan-Canadian
Investors Committee was subsequently established to oversee the
orderly restructuring of these instruments during this standstill period.

On March 17, 2008, the Pan-Canadian Committee received an
order from the Ontario Superior Court of Justice pursuant to the
provisions of the Companies’ Creditors Arrangement Act (CCAA)
setting forth an approval procedure for noteholders of the
Restructuring Plan filed by the Committee. Under the CCAA, the
Plan must be approved by a simple majority of noteholders as
well as by noteholders representing at least 66 2/3% of the total
aggregate amount of affected ABCP capital.

On March 20, 2008, the Committee released its Restructuring
Plan and other relevant documents. In light of the information so
released, the Corporation allocated the notional value of its ABCP
as follows:
• The Corporation holds $114.8 million in ABCP supported by
synthetic assets or a combination of synthetic and traditional
securitized assets, to be restructured into floating rate notes with
maturities through December 31, 2016. The Corporation
expects to receive replacement notes at the notional value as
follows:

Class A-1: $35.2 million
Class A-2: $65.0 million
$11.2 million
Class B:
$3.4 million
Class C:

• The Corporation holds $12.7 million in ABCP supported mainly
by U.S. sub-prime assets to be restructured on a series-by-series
basis, with each series maintaining its separate exposure to its
own assets and maturing through 2037.

• The Corporation holds $16.0 million in ABCP supported solely
by traditional securitized assets to be restructured on a series-by-
series basis, with each series or trust maintaining its own assets
and maturing through 2016.

On April 25, 2008, the Restructuring Plan proposed by the
Pan-Canadian Committee of ABCP investors was approved by the
noteholders. On June 5, 2008, the Ontario Superior Court of
Justice approved the Committee’s Restructuring Plan. On June 25,
2008, a number of ABCP holders appealed the Ontario Superior
Court of Justice decision to the Ontario Court of Appeal. On
August 18, 2008, the Ontario Court of Appeal upheld the Ontario
Superior Court of Justice decision approving the Committee’s
Restructuring Plan. On August 29, 2008, a number of ABCP
holders appealed the Ontario Court of Appeal decision to the
Supreme Court of Canada. On September 19, 2008, the
Supreme Court of Canada dismissed the appeal filed by certain
ABCP holders. Subsequent to this dismissal, the Pan-Canadian
Committee of ABCP investors announced that the process of tender-
ing existing ABCP securities in exchange for new restructured notes
had begun.

On January 12, 2009, the Pan-Canadian Committee of ABCP
investors announced the implementation of the restructuring plan.
The Committee also announced that interest payments, in respect
of interest accrued since August 2007, net of restructuring costs,
would be made in two instalments based on the ABCP series. The
Corporation has not recorded any interest income since the initial
maturity of the ABCP it holds. The interest will be accounted for as
determined.

In light of the information available during the year ended October
31, 2008, changes in credit market conditions and the review
of assumptions used taking into account this new information, the
Corporation remeasured the fair value of its investments in ABCP.

Since there is no active market for ABCP securities, the Corporation’s
management has estimated the fair value of these assets by
discounting future cash flows determined using a valuation model
that incorporates management’s best estimates based as much as
possible on observable market data, such as the credit risk attribut-
able to underlying assets, relevant market interest rates, amounts to
be received, maturity dates and the assumption that the Accord
restructuring process is highly likely to be completed in early 2009.

For the purposes of estimating future cash flows, the Corporation
estimated that the long-term financial instruments arising from the
conversion of its ABCP would generate interest returns ranging from
0.0% to 4.8% (weighted average rate of 2.6%), depending on the
type of series. These future cash flows were discounted, according
to the type of series, over 5- to 28-year periods (weighted average
period of 7.2 years) and using discount rates ranging from 6.7%
to 103.6% (weighted average rate of 17.4%), which factor in
liquidity. The Corporation also took into account its estimated share
of the restructuring costs associated with the Accord.

As a result of this valuation, the Corporation recognized an addi-
tional $45.7 million writedown in respect of its investments in
ABCP for the year ended October 31, 2008 [$11.2 million
writedown for the year ended October 31, 2007]. The provision
for impairment of ABCP totalled $56.9 million as at October 31,
2008. The writedown of investments in ABCP also included a

2008 Annual Report, Transat A.T. Inc.

$0.2 million loss on the December 2007 disposal of an investment
with a notional value of $11.0 million for a cash consideration of
$10.8 million.

A 1% increase (decrease), representing 100 basis points, in the
estimated discount rates would result in a decrease (increase) of
approximately $4,500 in the estimated fair value of ABCP held by
the Corporation.

The Corporation’s estimate of the fair value of its ABCP investments
as at October 31, 2008 is subject to significant uncertainty. While
management believes that its valuation technique is appropriate
in the circumstances, changes in significant assumptions could
substantially affect the value of ABCP securities over the coming
fiscal year. 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 disruption in the Canadian market for third-party
sponsored ABCP has had no significant impact on the Corporation’s
operations. 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 are invested in
liquid instruments (mainly cash and term deposits) with a broad
range of large financial institutions and have no exposure whatso-
ever to the current ABCP market disruption.

Gain on repurchase of preferred shares of a subsidiary
During the year ended October 31, 2008, the Corporation’s
subsidiary Travel Superstore Inc. repurchased redeemable preferred
shares held by one of its minority shareholders for a cash consider-
ation of $0.3 million. As these redeemable preferred shares were
considered liabilities, $1.9 million was included in other liabilities
in the balance sheet. In light of the classification of these
redeemable preferred shares as liabilities, the $1.6 million gain
was recorded in the consolidated statement of income. A total of
$0.6 million related to this transaction was also included under
non-controlling interest in subsidiaries’ results in the consolidated
statement of income.

Income taxes
Income tax recovery for the fiscal year ended October 31, 2008
amounted to $29.2 million compared with $34.6 million in
income taxes for the previous fiscal year. Excluding the share in net
income (loss) of companies subject to significant influence, the
effective tax rates were 38.7% for the fiscal year ended October
31, 2008 and 30.6% for the preceding year.

The tax rate increase resulted mainly from the use of our French
subsidiaries’ tax loss carryforwards from prior fiscal years previ-

Selected unaudited quarterly financial information

(In thousands of dollars, except per share amounts)

ously unrecognized in future income tax assets and from the tax
treatment of the writedown of investments in ABCP.

Net income (loss)
In light of the items discussed in “Consolidated operations” of this
MD&A, the Corporation reported a net loss of $50.0 million,
or $1.51 per share, for the year compared with net income of
$78.5 million, or $2.33 per share, for fiscal 2007. The weighted
average number of outstanding shares used to compute per share
amounts was 33,108,000 for the current year and 33,763,000
for fiscal 2007.

On a diluted per share basis, the loss was $1.51 per share
compared with earnings of $2.30 per share for the previous year.
The adjusted weighted average number of shares used to determine
diluted earnings per share was 33,108,000 for the current year
and 34,212,000 for 2007 (see note 15 to the Consolidated Financial
Statements).

Excluding non-cash and non-operating items, consisting of a loss
arising from the change in fair value of fuel-related financial instru-
ments, the foreign exchange loss on long-term monetary items, the
write-off of goodwill, the writedown of investments in ABCP and
the gain on repurchase of preferred shares of a subsidiary, adjust-
ed income for the year amounted to $57.5 million, or $1.74 per
fully diluted share, and $70.5 million, or $2.06 per fully diluted
share, in 2007.

Selected unaudited quarterly financial information
As the Corporation’s operations are seasonal in nature, quarterly
operating results do not necessarily proportionately reflect the oper-
ating results for a full fiscal year. Overall, revenues in 2008 were
up from their 2007 level, primarily due to our expanded product
offering and a higher volume of travellers.

Our margins fluctuated over the quarters of 2008, compared with
2007. In general, our revenue streams were up while margins
where squeezed by steep fuel price increases and intense competi-
tion for southern destinations throughout the year.

Fourth-quarter highlights
For the fourth quarter, the Corporation generated $790.4 million
in revenues, up $110.0 million, or 16.2%, from $680.4 million
for the corresponding period in 2007. This increase was driven
mainly by revenue growth at our Canadian and European tour
operators.

The Corporation reported a margin of $29.3 million, or 3.7%, for
the quarter compared with $21.2 million, or 3.1%, for the corre-
sponding period of 2007. These improved margins resulted in part
from more profitable operations at Canadian Affair compared with
2007.

Revenues
Margin
Net income (loss)
Basic earnings (loss)

per share

Diluted earnings (loss)

per share

2008

2007
Restated

2008

2007
Restated

2008

2007
Restated

2008

2007
Restated

787,389
15,944
(10,094)

712,337
26,202
2,014

1,075,158
69,348
40,678

911,400
64,839
53,757

859,880
12,764
(2,449)

741,762
25,907
16,107

790,424 680,418
21,169
6,625

29,271
(78,146)

(0.30)

0.06

1.22

1.59

(0.07)

0.48

(2.41)

0.20

(0.30)

0.06

1.21

1.57

(0.07)

0.47

(2.41)

0.20

26/27

2008 Annual Report, Transat A.T. Inc.

Fourth-quarter results were affected by three non-cash items
consisting of a $120.7 million loss ($81.4 million after taxes)
arising from the change in fair value of fuel-related financial
instruments, a $13.8 million writedown of investments in ABCP
($11.0 million after taxes) and a $2.3 million foreign exchange
loss ($1.5 million after taxes).

In 2007, fourth-quarter results were affected by four non-cash items,
namely a $13.6 million gain ($9.1 million after taxes) arising
from the change in fair value of fuel-related financial instruments,
an $11.2 million writedown of investments in ABCP ($8.0 million
after taxes), a $3.9 million write-off of goodwill ($3.9 million net
after income taxes) and a $0.8 million foreign exchange gain
($0.5 million after taxes).

The Corporation reported a net loss for the fourth quarter of
$78.1 million, or $2.41 per share on a diluted basis, compared
to a net income of $6.6 million, or $0.20 per share, for the
corresponding period of 2007. Before the aforementioned non-
operating non-cash items, Transat posted $15.9 million in adjusted
income, or $0.49 per share on a diluted basis, compared with
$8.8 million, or $0.26 per share on a diluted basis, for the
corresponding period of 2007.

LIQUIDITY AND
CAPITAL RESOURCES

As at October 31, 2008, cash and cash equivalents totalled
$145.8 million compared with $166.8 million as at October 31,
2007. Cash and cash equivalents in trust or otherwise reserved
amounted to $256.7 million at the end of fiscal 2008 compared
with $168.2 million at the end of 2007. Our balance sheet for
2008 included $24.2 million in working capital, or a ratio of
1.0, compared with $51.0 million for 2007, or a ratio of 1.1.

Total assets grew $184.9 million, or 17.1%, to $1,265.4 million
from $1,080.5 million as at October 31, 2007. This growth
resulted from the overall increase in balances of cash and cash
equivalents and a positive change in fair value of derivative
financial instruments compared with the October 31, 2007 levels.
The Corporation’s liabilities rose $126.4 million to $923.4 million,
mainly as a result of drawdowns under the Corporation’s credit
facilities. Shareholders’ equity increased by $58.5 million to
$342.0 million as at October 31, 2008 from $283.5 million as
at October 31, 2007. The higher shareholders’ equity was due to
the increase in accumulated other comprehensive income, which
was offset by the decline in retained earnings caused by the net
loss recorded by the Corporation, compared with 2007. The
$140.4 million increase in accumulated other comprehensive

income was attributable to a positive change in fair value of
derivative financial instruments designed as cash flow hedges
(foreign exchange forward contracts) subsequent to the Canadian
dollar’s depreciation against other currencies.

Financing
As at October 31, 2008, the Corporation had several types of
financing, consisting primarily of three revolving term credit facilities,
loans secured by aircraft and lines of credit.

The Corporation has an $86.4 million revolving credit facility
maturing in 2012 and a $60.0 million revolving credit facility for
issuing letters of credit for which the Corporation must pledge cash
as collateral security against 105% of the letters of credit issued.
Under the terms and conditions of this agreement, funds may be
drawn down by way of bankers’ acceptances or bank loans,
denominated in Canadian dollars, U.S. dollars, euros or pounds
sterling. Under this agreement, interest is charged at bankers’
acceptance rates, at the financial institution’s prime rate or at the
London Interbank Offered Rate (LIBOR), plus a premium based on
certain financial ratios calculated on a consolidated basis. The
revolving credit facility bore interest at an average rate of 3.9%
for the year ended October 31, 2008. Subsequent to the imple-
mentation of the ABCP restructuring plan, the revolving term credit
facility will be increased to 157,0 million.

The Corporation has two revolving credit facilities of $9.5 million
and $98.1 million, maturing in 2010 and 2011, respectively.
Under the terms and conditions of these agreements, funds may be
drawn down by way of bankers’ acceptances or bank loans,
denominated in Canadian dollars, U.S. dollars, euros or pounds
sterling. Under these agreements, interest is charged at bankers’
acceptance rates, at the financial institution’s prime rate or at
LIBOR, plus a premium specific to the type of financing vehicle.
These credit facilities include options, which will become effec-
tive following implementation of the ABCP restructuring plan [see
note 5] and allow the Corporation, at its sole option, to repay
up to 68,4 million of the amounts drawn down, under certain
conditions, using the restructured notes. These options will be
initially reported at fair value, and the corresponding initial gain
will be deferred and recognized in net income over the term of
the credit agreements. The options will then be reported at fair
value at each balance sheet date, and any subsequent change
in fair value of the options will be recorded in net income.

As at October 31, 2008, $100.0 million had been drawn down
under these credit facilities.

Summary of Cash Flows

Years ended October 31 (in thousands of dollars)

Cash flows related to operating activities
Cash flows related to investing activities
Cash flows related to financing activities
Effect of exchange rate changes
on cash and cash equivalents

Net change in cash and cash equivalents

2008

155,225
(202,183)
15,091

10,866
(21,001)

2007
Restated
$

134,457
(173,386)
(14,830)

5,640
(48,119)

2006

116,160
(45,054)
(152,046)

2,332
(78,608)

% Increase (Decrease)

2008

2007

15.4
(16.6)
201.8

15.8
(284.8)
90.2

92.7
56.4

141.9
38.8

The above table summarizes the cash flow activity and should be read in conjunction with the audited Consolidated Statements of Cash Flows.

2008 Annual Report, Transat A.T. Inc.

On August 1, 2008, the Corporation extended its loans secured
by aircraft. Under the new agreements, these loans amount to
US$40.0 million and are secured by aircraft. The loans bear
interest at LIBOR plus 2.15% and 3.25% and are repayable in
equal semi-annual instalments through 2011.

With regard to our French operations, we also have access to
undrawn lines of credit totalling m11.3 million ($17.4 million).

Operating activities
Cash flows totalling $155.2 million were generated from oper-
ating activities, up $20.8 million from 2007. This improvement
resulted mainly from greater business activity and the increase in
the net change in non-cash working capital balances related to
operations arising primarily from a higher balance of customer
deposits and deferred income in 2008 than in 2007.

We expect to continue to generate positive cash flows from our
operating activities in 2009.

Investing activities
During the year, cash flows used for investing purposes rose
$28.8 million to $202.2 million from $173.4 million in 2007.
This increase resulted mainly from the $57.9 million acquisition of
a 35% interest in Caribbean Investments B.V. and a $123.9
million increase in the change in cash and cash equivalents in trust
or otherwise reserved over the year compared with the correspon-
ding period of 2007. Additions to property, plant and equipment,
consisting mainly of aircraft maintenance, computer hardware and
software, and the Look Voyages administrative building, were also
$12.2 million higher than in 2007.

In 2009, we expect additions to property, plant and equipment to
range from $40.0 million to $50.0 million.

Financing activities
During the year, cash flows totalling $15.1 million were generated
by financing activities, compared with $14.8 million in cash flows
used in 2007. During the fiscal year, we repaid $10.6 million in
long-term debt, mainly relating to certain aircraft, and drew down
$60.5 million under our long-term credit facilities. We issued over
$2.0 million in shares during the fiscal year and paid out $11.9
million in dividends compared with $6.8 million and $11.5
million, respectively, in 2007. A total of $24.9 million was used
for share repurchases compared with $23.9 million in 2007.

Off-balance sheet arrangements
and contractual obligations
In the normal course of business, Transat enters into arrangements
and incurs obligations that will impact its future operations and

cash flows. Some of these obligations are reflected as liabilities
in the Corporation’s Consolidated Financial Statements. Total
obligations amounted to $153.2 million as at October 31, 2008
($91.8 million as at October 31, 2007). Obligations that are not
reported as liabilities are considered off-balance sheet arrangements.
These contractual arrangements are entered into with non-
consolidated entities and consist of the following:
• Guarantees (see notes 11 and 23 to the audited Consolidated

Financial Statements)

• Operating leases (see note 22 to the audited Consolidated

Financial Statements)

• Agreements with suppliers (see note 22 to the audited

Consolidated Financial Statements)

The estimated off-balance sheet debt was $583.0 million as at
October 31, 2008 ($504.9 million in 2007), and is detailed as
follows:

Off-balance sheet

(In thousands of dollars)

2008
$

2007
$

Guarantees

Irrevocable letters of credit
Collateral security contracts

7,074
790

10,751
848

Operating leases

Commitments under
operating leases

Agreements with suppliers
Total

289,230

267,710

285,873
582,967

225,603
504,912

In the normal course of business, guarantees are required in the
travel industry to provide indemnifications and guarantees to coun-
terparties in transactions such as operating leases, irrevocable
letters of credit and security contracts. Historically, Transat has not
made any significant payments under such guarantees. Operating
leases are entered into to enable the Corporation to lease certain
items rather than acquire them. Agreements with suppliers are
entered into to reserve hotel rooms, blocks of seats and flights.

We believe that the Corporation will be able to meet its obligations
with cash on hand, cash flows from operations and drawdowns
under existing credit facilities.

Payments due by year

Years ending October 31 (in thousands of dollars)

Contractual obligations

Debenture
Long-term debt
Operating leases (aircraft)
Operating leases (other)
Agreements with suppliers
and other obligations

Total

2009
$

3,156
16,745
60,503
23,018

2010
$

—
17,280
48,937
19,888

2011
$

—
16,060
20,651
17,954

2012
$

—
20,000
6,971
16,440

2013
$

—
80,000
1,518
13,643

2014
and later
$

Total
$

—
3,156
— 150,085
— 138,580
150,626

59,683

180,104
283,526

51,825
137,930

34,938
89,603

15,494
58,905

3,509
98,670

14,262
73,945

300,132
742,579

The above table summarizes the Corporation’s obligations and commitments to make future payments under contracts, including long-term debt, operating leases,
the debenture and agreements with suppliers. Additional information is contained in notes 12, 13 and 22 to the audited Consolidated Financial Statements.

28/29

2008 Annual Report, Transat A.T. Inc.

OTHER

ACCOUNTING

Normal course issuer bid
On June 15, 2008, the Corporation renewed its normal course
issuer bid that expired on June 14, 2008 for a 12-month period.
The renewal is aimed at purchasing for cancellation up to a
maximum of 3,175,506 Class A Variable Voting Shares and
Class B Voting Shares of the Corporation, representing less than
10% of the public float of Class A Variable Voting Shares and
Class B Voting Shares as at the renewal date of the normal course
issuer bid.

This program allows the Corporation to purchase Class A Variable
Voting Shares and Class B Voting Shares in the normal course of
business, 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 normal course issuer bids. The
price to be paid by the Corporation 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, 2009.

During the year, 1,064,200 voting shares, consisting of Class A
Variable Voting Shares and Class B Voting Shares, were purchased
for cancellation for a cash consideration of $24.9 million.

Dividends
During the year, the Corporation declared and paid dividends
totalling $11.9 million.

Shares issued and outstanding
As at December 31, 2008, the number of Class A Shares and
Class B Shares amounted to 1,314,459 and 31,390,867,
respectively.

Stock options
As at December 31, 2008, there were a total of 716,173 stock
options outstanding, 322,884 of which were exercisable.

Subsequent event
On December 18, 2008, the Corporation entered into an
unsecured subordinated financing agreement with a shareholder of
the Corporation for $60,0 million. The Corporation can draw on
the facility until October 31, 2009. This agreement will expire on
December 31, 2012. The company can make early repayments
on the facility subject to premiums. The agreement bears interest
separately for each disbursement at Government of Canada bonds
rates that have maturities equal to the remaining term of the agree-
ment, plus a premium determined in part based on certain factors
specific to unsecured subordinated financing arrangements. In
addition, the agreement provides that the rights with respect to the
purchase of shares held by this shareholder in Jonview Canada
Inc.’s parent company be deferred for three years.

Critical accounting estimates
The preparation of financial statements in accordance with GAAP
requires management to make certain estimates. We periodically
review these estimates, which are based on historical experience,
changes in the business environment and other factors that man-
agement considers reasonable under the circumstances. The main
estimates include the measurement of fair value of the financial
instruments, including derivatives and investments in ABCP, the
provision for aircraft overhaul and the amortization and impairment
of property, plant and equipment and intangible assets including
goodwill. Our estimates involve judgments we make based on the
information available to us. Actual results may differ materially from
these estimates.

We discuss below the 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
liquidity could be substantially different if we had used different
estimates in the current period or were these estimates 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 uncertain
matters.

Fair value of derivative financial instruments
The fair value of the derivative financial instruments represents the
amount of the consideration that would be agreed upon in an arm’s
length transaction between knowledgeable, willing parties who
are under no compulsion to act. The Corporation determines the
fair value of its derivative financial instruments using the purchase
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 determines the fair value by applying valuation
techniques, such as using available information on market trans-
actions 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 that it is
consistent with accepted economic methods for pricing financial
instruments.

Fair value of investments in ABCP
See “Consolidated Operations” section: Writedown of investments in ABCP.

Provision for aircraft overhaul
Under the aircraft and engine operating leases, the Corporation is
required to maintain the aircraft and engines in serviceable condition
and to follow the maintenance plan. The Corporation accounts for
its leased aircraft and engine 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. Generally speaking, the main assumptions used to
calculate this provision would have to be reduced by approximately
15%, to result in additional expenses that could have a material
impact on our results, financial position and cash flows.

2008 Annual Report, Transat A.T. Inc.

Amortization and impairment of property, plant and equipment
and intangible assets including goodwill
We record material amounts under Goodwill and other intangible
assets calculated using the historical cost method in our balance
sheet. Goodwill and other intangible assets stem primarily from
business acquisitions. We are required to test for impairment of
goodwill and intangible assets that have indefinite lives, such as
trademarks, annually or more often if events or changes in circum-
stances indicate it is more likely than not that they might be
impaired. Our test is based on the ability of the asset or reporting
unit 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 judgments concerning
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
expenses that could materially affect our results and financial
position. Generally speaking, the main assumptions would have to
be reduced by 30% to 70% (depending on the operating unit), to
result in a significant loss in value for the reporting 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 in the balance sheet represent
material amounts based on historical costs. Property, plant and
equipment are amortized, taking into account their residual value,
on a straight-line basis over their estimated useful life. Aircraft
account for a major class of property, plant and equipment. The
amortization period is determined based on the fleet renewal
schedule, currently comprising a horizon of 2011 to 2013. The
estimate of the residual value of aircraft at the time of their antici-
pated disposal is supported by periodically reviewed external
valuations. Our fleet renewal schedule and the realizable value of
our aircraft obtainable upon fleet renewal depend on numerous
factors such as supply and demand for aircraft at the scheduled
fleet renewal date. Changes in estimated useful life and residual
value of aircraft could have a significant impact on amortization
expense. 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. No events or changes in circumstances of this
nature have occurred in recent fiscal years. Generally, the main
assumptions would have to be reduced by 60% to result in a loss
in value and have a material impact on our results and financial
position. However, reducing these assumptions would not result in
cash outflows and would not affect our cash flows.

Accrued benefit liability
The Corporation offers defined benefit pension arrangements to
certain senior executives. The cost of pension benefits earned by
employees is determined from actuarial calculations, performed
annually, using the projected benefit method prorated on services
and management’s best estimate assumptions for the increase in
eligible earnings and the retirement age of employees. Past service
costs and amendments to the arrangements are amortized on a
straight-line basis over the average remaining service period of
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 7.2 years as at November 1, 2007. Plan
obligations are discounted using current market interest rates.

Accounting changes – 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,

30/31

2008 Annual Report, Transat A.T. Inc.

2007, the Corporation accounted for its expenses using the
accrue-in-advance method, as set out in note 2 of the audited
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
entities for fiscal years beginning on or after December 15, 2006.

As a result, effective November 1, 2007, the Corporation discon-
tinued the 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 serviceable condition and follow the mainte-
nance plan. 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
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 airframe, engine
and landing gear overhaul costs. The aircraft and major mainte-
nance 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 maintenance
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.

This change in accounting policy has been adopted retroactively
with restatement of prior periods. The adoption of these new stan-
dards translated into a $2.6 million increase in retained earnings
on November 1, 2006, and into the following changes 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
fiscal 2007, the adoption of these new standards translated 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. Also for the year
ended October 31, 2007, the adoption of these new standards
translated into a $12.6 million increase in cash flows related to
operating activities and a $12.6 million decrease in cash flows
related to investing activities.

Although it could have chosen to account for maintenance
expenses in net income for owned aircraft as incurred, the
Corporation believes that the policies adopted provide better
information to users of financial statements.

upcoming seasons. These expenses were previously recorded in
net income for the related seasons and aircraft commissioning costs
were previously deferred and amortized over a period not
exceeding five years.

Other standards
The Canadian Institute of Chartered Accountants (“CICA”) issued
the following accounting standards that took effect on November
1, 2007 for the Corporation: Section 3862, Financial Instruments
– Disclosures, Section 3863, Financial Instruments – Presentation,
Section 1535, Capital Disclosures, and Section 1506, Accounting
Changes.

Sections 3862 and 3863 replace Section 3861, Financial
Instruments – Disclosure and Presentation, and focus on disclosure
of risks arising from financial instruments, including hedging instru-
ments, and how the entity manages such exposure.

Section 1535 requires supplementary disclosure regarding the
Corporation’s capital management and compliance with any
externally imposed capital requirements.

Section 1506 provides guidance, in particular, on the criteria for
changing accounting policies, the appropriate accounting treatment
in specific circumstances and the required disclosure.

Accounting changes – November 1, 2006
Financial instruments, hedges and comprehensive income
On November 1, 2006, the Corporation adopted retroactively,
without restatement of prior periods, the recommendations of
the following sections of the CICA Handbook: Section 1530,
Comprehensive Income, Section 3855, Financial Instruments –
Recognition and Measurement, and Section 3865, Hedges.

Following the adoption of these standards, the Corporation ceased
using hedge accounting for its derivative financial instruments for
aircraft fuel purchases. Any unrealized gains or losses were
recognized in other comprehensive income at the transition date,
namely November 1, 2006, and were recognized in net income
under “Aircraft fuel” when derivative financial instruments expire
and the related fuel purchases occur. For the year ended October
31, 2007, the Corporation recognized a $12.1 million loss [net
of $6.0 million in related income taxes] under other comprehensive
income representing the portion of unrealized losses related to
derivative financial instruments for aircraft fuel purchases realized
by the transition date. Unrealized losses amounting to $0.4 million
[net of $0.2 million in related income taxes], included in
“Accumulated other comprehensive income” as at October 31,
2007, were reclassified to net income during the year ended
October 31, 2008.

Future accounting changes
In February 2008, the CICA issued Handbook Section 3064,
Goodwill and Intangible Assets, which will supersede Section
3062, Goodwill and Other Intangible Assets, and Section 3450,
Research and Development Costs, effective November 1, 2008
for the Corporation. This new section sets out standards for
recognition, measurement, presentation and disclosure of goodwill
and intangible assets. These new standards will be adopted
retroactively with restatement of prior fiscal years. The adoption of
these new standards will translate into a decrease in retained
earnings of approximately $4.2 million on November 1, 2007
and into the following changes as at October 31, 2008: an
approximate $7.8 million decrease in prepaid expenses, a $0.8
million decrease in other assets, a $2.8 million decrease in future
income tax liabilities and a $1.6 million decrease in retained
earnings in respect of certain marketing expenses related to

Also in February 2008, Canada’s Accounting Standards Board
(AcSB) confirmed that Canadian GAAP, as used by publicly
accountable enterprises, will be superseded by International
Financial Reporting Standards (IFRS) for fiscal years beginning on
or after January 1, 2011. The Corporation will be required to
report under IFRS for its interim and annual financial statements
for the fiscal year ending October 31, 2012. The Corporation is
currently preparing its IFRS conversion plan. The plan is aimed at
identifying the differences between IFRS and the Corporation’s
accounting policies, assessing their impact and, where necessary,
analyzing the various policies that the Corporation could elect to
adopt.

Financial instruments
In the normal course of business, the Corporation is exposed to
credit and counterparty risk, liquidity risk, and market risk arising
from changes in certain foreign exchange rates, changes in fuel
prices and changes in interest rates. The Corporation manages
these risk exposures on an ongoing basis. In order to limit the
effects of changes in foreign exchange rates, fuel prices and
interest rates on its revenues, expenses and cash flows, the
Corporation can avail itself of various derivative financial
instruments. The Corporation’s management is responsible for
determining the acceptable level of risk and only uses derivative
financial instruments to manage existing or anticipated risks,
commitments or obligations based on its past experience.

Foreign exchange risk management
The Corporation is exposed, primarily as a result of its many
arrangements with foreign-based suppliers, aircraft and engine
leases, fuel purchases, long-term debt and revenues in foreign
currencies, and fluctuations in exchange rates mainly with respect
to the U.S. dollar, the euro and the pound sterling against the
Canadian dollar and the euro. Approximately 30% of the
Corporation’s costs are incurred in a currency other than the meas-
urement currency of the reporting unit incurring the costs, whereas
an insignificant percentage of revenues is incurred in a currency
other than the measurement currency of the reporting unit making
the sale. In accordance with its foreign currency risk management
policy and to safeguard the value of anticipated commitments and
transactions, the Corporation enters into foreign exchange forward
contracts, expiring in generally less than two years, for the
purchase and/or sale of foreign currencies based on anticipated
foreign exchange rate trends.

The Corporation documents its derivative financial instruments
related to foreign currencies as hedging instruments and regular-
ly demonstrates that these instruments are sufficiently effective to
continue using hedge accounting. These derivative financial
instruments are designated as cash flow hedges except for the
contracts related to U.S. dollar loans payable secured by aircraft,
which are designated as fair value hedges.

2008 Annual Report, Transat A.T. Inc.

losses remain within “Accumulated other comprehensive income”
until the hedged item is settled and future changes in value of the
derivative are recognized in income prospectively. The change
in value of the effective portion of a cash flow hedge remains in
“Accumulated other comprehensive income” until the related
hedged item settles, at which time amounts recognized in
“Accumulated other comprehensive income” are reclassified to the
same income (loss) statement account that records the hedged
item. For derivative financial instruments designated as fair value
hedges, periodic changes in fair value are recognized in net
income and changes in fair value of U.S. dollar loans secured by
aircraft are also recorded in the same net income accounts.

Management of fuel price risk
The Corporation is particularly exposed to fluctuations in fuel
prices. Due to competitive pressures in the industry, there can be
no assurance that the Corporation would be able to pass along
any increase in fuel prices to its customers by increasing prices, or
that any eventual price increase would fully offset higher fuel costs,
which could in turn adversely impact its business, financial position
or operating results. To hedge against sharp increases in fuel
prices, the Corporation has implemented a fuel price risk manage-
ment policy that authorizes foreign exchange forward contracts,
and other types of derivative financial instruments, expiring in
generally less than two years.

These derivative financial instruments used for fuel purchases
are measured at fair value at the end of each period, and the
unrealized gains or losses arising from remeasurement are recorded
and reported under “Change in fair value of derivative financial
instruments used for aircraft fuel purchases” in the consolidated
statement of income (loss). When realized at maturity of these
derivative financial instruments, any gains or losses are reclassified
to “Aircraft fuel.”

Credit and counterparty risk
Credit risk stems primarily from the potential inability of clients,
service providers, aircraft and engine lessors and financial
institutions, including the other counterparties to cash equivalents,
derivative financial instruments and investments in ABCP, to
discharge their obligations.

Trade accounts receivable included in accounts receivable in the
balance sheet totalled $76.5 million as at October 31, 2008.
Trade accounts receivable consist of a large number of customers,
including travel agencies and other service providers. Trade
accounts receivable generally result from the sale of vacation pack-
ages to individuals through travel agencies and the sale of seats to
tour operators, dispersed over a wide geographic area. No cus-
tomer represented more than 10% of total accounts receivable. As
at October 31, 2008, approximately 6% of accounts receivable
were over 90 days past due, whereas approximately 80% were
up to date, that is, under 30 days. Historically, the Corporation
has not incurred any significant losses in respect of its trade
accounts receivable.

Pursuant to the agreements entered into with its service providers,
consisting primarily of hotel operators, the Corporation pays
deposits to capitalize on special benefits, including pricing, exclu-
sive access and room allotments. As at October 31, 2008, these
deposits totalled $38.5 million and were generally offset by
purchases of person-nights at these hotels. Risk arises from the fact
that these hotels might not be able to honour their obligations to
provide the agreed number of person-nights. The Corporation
strives to minimize its exposure by limiting deposits to recognized
and reputable hotel operators in its active markets. These deposits
are spread across a large number of hotels and, historically, the

Corporation has not been required to write off a considerable
amount for its deposits with suppliers.

Under the terms of its aircraft and engine leases, the Corporation
pays deposits when aircraft and engines are commissioned,
particularly as collateral for remaining lease payments. These
deposits totalled $12.1 million as at October 31, 2008 and will
be returned on lease expiry. The Corporation is also required to
pay cash security deposits to lessors over the lease term to guaran-
tee the serviceable condition of aircraft. Cash security deposits
with lessors are expensed when the funds are disbursed. However,
these cash security deposits with lessors are generally returned to
the Corporation upon receipt of documented proof that the related
maintenance has been performed by the Corporation. As at
October 31, 2008, the cash security deposits with lessors that
have been claimed totalled $8.6 million and have been included
in accounts receivable. Historically, the Corporation has not written
off any significant amount of deposits and claims for cash security
deposits with aircraft and engine lessors.

For financial institutions including the various counterparties, the
maximum credit risk as at October 31, 2008 relates to cash and
cash equivalents, including cash and cash equivalents in trust and
otherwise reserved, investments in ABCP and derivative financial
instruments accounted for in assets. These assets are held or traded
with a limited number of financial institutions and other counterpar-
ties. The Corporation is exposed to the risk that the financial
institutions and other counterparties with which it holds securities or
enters into agreements could be unable to honour their obligations.
The Corporation minimizes risk by entering into agreements with
large financial institutions and other large counterparties with
appropriate credit ratings. The Corporation’s policy is to invest
solely in products that are rated R1-Mid or better by Dominion
Bond Rating Service (DBRS), A1 by Standard & Poor’s or P1 by
Moody’s and rated by at least two rating firms. Exposure to these
risks is closely monitored and maintained within the limits set out in
the Corporation’s various policies. The Corporation revises these
policies on a regular basis.

Except for the investments in ABCP, the Corporation does not
believe it is exposed to a significant concentration of credit risk as
at October 31, 2008.

Liquidity risk
The Corporation is exposed to the risk of being unable to honour
its financial commitments by the deadlines set out under the terms
of such commitments and at a reasonable price. The Corporation
has a Treasury Department in charge, among other things, of
ensuring sound management of available cash resources, financing
and compliance with deadlines within the Corporation’s scope of
consolidation. With senior management oversight, the Treasury
Department manages the Corporation’s cash resources based on
financial forecasts and anticipated cash flows.

Interest rate risk
The Corporation is exposed to interest rate fluctuations, primarily
due to its variable-rate long-term debt. The Corporation manages
its interest rate exposure and could potentially enter into swap
agreements consisting in exchanging variable rates for fixed rates.

Furthermore, interest rate fluctuations could have an effect on the
Corporation’s interest income derived from its cash and cash
equivalents. The Corporation has implemented an investment policy
designed to safeguard its capital and instrument liquidity and
generate a reasonable return. The policy sets out the types of
allowed investment instruments, their concentration, acceptable
credit rating and maximum maturity.

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2008 Annual Report, Transat A.T. Inc.

Related party transactions and balances
In the normal course of business, the Corporation enters into
transactions with related companies. These transactions are
measured at the exchange amount, which is the amount of consid-
eration determined and agreed to by the related parties. During
the year, the Corporation recorded $13.5 million in person-nights
purchased at hotels belonging to CIBV, a company subject to
significant influence.

CONTROLS AND PROCEDURES

The implementation of the Canadian Securities Administrators
Multilateral Instrument 52-109 represents 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 improvements and better management.

In accordance with this instrument, the Corporation has filed
certificates signed by the President and Chief Executive Officer
and the Vice-President, Finance and Administration and Chief
Financial Officer that, among other things, report on the design
and effectiveness of disclosure controls and procedures 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 Administration
and Chief Financial Officer, particularly during the period in which
the annual filings are being prepared.

These two certifying officers evaluated the effectiveness of the
Corporation’s disclosure controls and procedures as of October
31, 2008, and based on their evaluation, they have concluded
that these controls and procedures were adequate and effective.
Among other things, this evaluation took into consideration the
Corporate Disclosure Policy, the sub-certification process, and the
operation of the Corporation’s Disclosure Committee.

Management has also designed internal controls over financial
reporting to provide reasonable assurance 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 filings and believe the design to be adequate to provide
such reasonable assurance.

Finally, there has been no change in the Corporation’s internal
control over financial reporting that occurred during the fourth quarter
of fiscal 2008 that materially affected, or is likely to materially
affect, the Corporation’s internal control over financial reporting.

RISKS AND UNCERTAINTIES

extreme weather conditions; war, political instability or terrorism,
or any threat thereof; epidemics or disease outbreaks; consumer
preferences and spending patterns; consumer 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 reservations.

Competition
We face many competitors in the holiday travel industry. Some
of them are larger, with strong brand name recognition and an
established presence in specific geographic areas, substantial
financial resources and preferred relationships with travel suppliers.
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 would
likely have to match competitors’ prices.

Fluctuations in foreign exchange and interest rates
Transat is exposed, due to its many arrangements with foreign-
based suppliers, to fluctuations in exchange rates mainly concerning
the U.S. dollar, the euro and the pound sterling against the
Canadian dollar and the euro. These fluctuations could increase
our operating costs. Changes in interest rates could also impact
our interest income from our cash and cash equivalents as well as
the interest expense on variable rate debt instruments, which in turn
could affect our income. We currently purchase derivative financial
instruments to hedge against exchange rate fluctuations 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 industry, there can be no assurance
that we would be able to pass along any increase in fuel prices to
our customers by increasing fares, or that any fare increase would
offset higher fuel costs, which could in turn adversely impact our
business, financial 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 operations 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 purchase such products and services directly from suppliers,
thereby bypassing not only vacation providers such as Transat, but
also retail travel agents through whom we generate a substantial
portion of our revenues. For the time being, direct Internet sales
remain limited in the vacation travel segment, but shifts in industry
dynamics in the distribution business occur rapidly and, in this
respect, give rise to risks. In order to address this issue, Transat is
in the process of developing and implementing a multichannel
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.

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 general factors, including the following:

In addition, the phenomenon of the gradual erosion in commissions
paid by travel suppliers, particularly airlines, has weakened the
financial position of many travel agents. Because we rely to some
extent on retail travel agencies for access to travellers and revenues,
any consumer shift away from travel agencies and toward direct
purchases from travel suppliers could have an impact on our
Corporation.

2008 Annual Report, Transat A.T. Inc.

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 third party
airlines and a large number of hotels. In general, these suppliers
can terminate or modify existing agreements with us on 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 services 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 suppliers’
products and services or negative shifts in public 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
products to retail travel agents and other travel intermediaries. To
this end, we rely on a variety of information and telecommunications
technologies. Rapid changes in these technologies could require
higher-than-anticipated capital expenditures to improve customer
service; this could impact our operating results. 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 accordance with our investment policy,
we are required to invest these deposits and advance payments
exclusively in investment-grade securities. Any failure of these
investment securities to perform at historical levels could reduce our
interest income.

Negative working capital
In the normal course of business, we receive customer deposits and
advance payments. In the event that the flow of advance payments
diminished and we were required to find alternative sources of
capital, there can be no assurance that such sources would be
available at terms and conditions acceptable to us. This could have
a significant impact on our business.

Fluctuations in financial results
The travel industry in general and our 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 factors described above, our operating
results in future periods could fall short of the expectations of
securities analysts and investors, thus 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 granting and timing of certain government
approvals or licenses; the adoption of regulations impacting
customer 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 amendments 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 in response to competitive pressures.
There can be no assurance that additional financing will be
available on terms and conditions acceptable to us. This could
adversely affect our business.

Interruption of operations
If our operations are interrupted for any reason, including aircraft
unavailability due to mechanical troubles, the loss of associated
revenues could have an impact on our business, financial position
and operating results.

Insurance coverage
In the wake of the terrorist attacks of September 11, 2001, the airline
insurance market for risks associated with war and terrorist acts has
undergone several changes. The limit on third-party civil liability
coverage 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, governments have to step in and do so. The
Canadian government covers domestic air carriers accordingly.
In addition, 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 covering its own carriers against such risks.
However, there can be no assurance that the Canadian government
will not withdraw its coverage, particularly if the U.S. government
were to 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 larger claims or that the insurer concerned
will be solvent at the time of any covered loss. In addition, there
can be no assurance that we will be able to obtain coverage at
acceptable levels and cost in the future. These uncertainties could
adversely affect our business 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.

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 satisfactory conditions for the type
of aircraft required, our business and operating results may be
adversely affected.

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2008 Annual Report, Transat A.T. Inc.

Environment
As an airline industry company, Transat is exposed to any future
regulations concerning greenhouse 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 regarding upcoming collective agreements
Our operations could be adversely affected in the event of an
inability to reach an agreement with a labour union representing
our employees, including pilots.

OUTLOOK

Winter bookings in North America are tracking slightly higher than
last year at the same date. A weakening Canadian economy and
significant industry capacity for Mexico and the Caribbean have
prompted the Corporation to anticipate significantly lower dollar
margins (EBITDA) than last winter. In Europe, winter bookings are
tracking lower for long-haul travel than last year at the same date,
but higher for medium-haul travel; the Corporation expects that
it will be difficult to match the dollar margins (EBITDA) recorded
in 2008.

2008 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 provide
reasonable assurance that the Corporation’s assets are safeguarded
against loss or unauthorized use and that its books of account may
be relied upon for the preparation of financial statements.

The Board of Directors is responsible for the consolidated financial
statements through its Audit Committee. The Audit Committee reviews
the annual consolidated financial statements and recommends their
approval to the Board of Directors. The Audit Committee is also
responsible for analyzing, on an ongoing basis, the results of
the audits by the external auditors of the accounting methods and
policies used as well as of the internal control systems set up by
the Corporation. These financial statements have been audited
by Ernst & Young LLP, the external auditors. Their report on the
consolidated financial statements appears opposite.

Jean-Marc Eustache
Chairman of the Board,
President and Chief Executive Officer

François Laurin
Vice-President, Finance and Administration
and Chief Financial Officer

To the Shareholders of Transat A.T. Inc.

We have audited the consolidated balance sheets of Transat A.T.
Inc. as at October 31, 2008 and 2007 and the consolidated
statements of income (loss), 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 reasonable assurance whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting 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, 2008 and 2007 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 5, 2008
(Except for notes 5 and 25, which are dated January 12, 2009)

Ernst & Young LLP
Chartered Accountants

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2008 Annual Report, Transat A.T. Inc.

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 receivable
Income taxes receivable
Future income tax assets [note 19]
Inventories
Prepaid expenses
Derivative financial instruments [notes 3 and 6]
Current portion of deposits
Total current assets
Investments in ABCP [note 5]
Deposits [note 7]
Future income tax assets [note 19]
Property, plant and equipment [notes 8 and 13]
Goodwill and other intangible assets [note 9]
Derivative financial instruments [notes 3 and 6]
Investments and other assets [note 10]

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued liabilities
Current portion of provision for overhaul of leased aircraft
Income taxes payable
Future income tax liabilities [note 19]
Customer deposits and deferred income
Derivative financial instruments [notes 3 and 6]
Debenture
Payments on current portion of long-term debt

Total current liabilities
Long-term debt [note 13]
Debenture [note 12]
Provision for overhaul of leased aircraft [note 3]
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 [note 15]
Accumulated other comprehensive income [notes 3, 6 and 16]

Commitments and contingencies [notes 5 and 22]
See accompanying notes to consolidated financial statements.

On behalf of the Board:
Jean-Marc Eustache, Director
André Bisson, Director

Consolidated balance sheets

2008

145,767
256,697
—
119,852
4,095
11,382
11,412
53,259
112,259
32,094
746,817
86,595
18,526
16,097
171,294
151,803
11,002
63,297

2007
[restated – note 3]

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
163,018
148,515
316
4,431

1,265,431

1,080,523

282,440
23,231
6,942
16,770
293,537
79,831
3,156
16,745

722,652
133,340
—
13,011
34,517
10,227
9,692

923,439

154,198
109,302
4,619
73,873

341,992

281,985
20,493
8,757
298
237,898
88,469
—
48,794

686,694
39,887
3,156
11,208
32,189
6,135
17,802

797,071

156,964
191,118
1,871
(66,501)

283,452

1,265,431

1,080,523

2008 Annual Report, Transat A.T. Inc.

Consolidated statements of income (loss)

As at 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
Changes in fair value of derivative financial instruments

related to aircraft fuel purchases

Foreign exchange loss (gain) on long-term monetary items
Write-off of goodwill [note 9]
Writedown of investments in ABCP [note 5]
Gain on repurchase of preferred shares of a subsidiary [note 18]
Share of net loss (income) of companies subject to significant influence

Income (loss) before the undernoted items

Income taxes (recovery) [note 19]
Current
Future

Income (loss) before non-controlling interest in subsidiaries’ results
Non-controlling interest in subsidiaries’ results

Net income (loss) for the year

Basic earnings (loss) per share [note 15]
Diluted earnings (loss) per share [note 15]

2008

2007
[restated – note 3]

3,512,851

3,045,917

1,933,706
349,746
365,457
174,740
97,842
90,624
48,628
324,781

3,385,524

127,327

56,649
7,538
1,758
(16,172)

106,435
2,295
—
45,927
(1,605)
427

203,252

(75,925)

19,565
(48,766)

(29,201)

(46,724)
(3,287)

(50,011)

(1.51)
(1.51)

1,601,652
334,973
273,614
186,686
76,099
86,594
48,883
299,299

2,907,800

138,117

50,990
6,229
1,929
(19,745)

(26,577)
(3,023)
3,900
11,200
—
(651)

24,252

113,865

28,222
6,403

34,625

79,240
(737)

78,503

2.33
2.30

See accompanying notes to consolidated financial statements.

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2008 Annual Report, Transat A.T. Inc.

Consolidated statements of comprehensive income

As at October 31
[In thousands of dollars]

Net income (loss) for the year

Other comprehensive income
Changes in fair value of derivatives designated as cash flow hedges
Reclassification in income
Future income taxes

Losses on derivatives designated as fuel hedges

before November 1, 2006 included in net income for the year [note 3]

Future income taxes

Foreign exchange gains (losses) on the translation of

financial statements of self-sustaining foreign subsidiaries due to
the (appreciation) depreciation of the Canadian dollar vs. the euro,
pound sterling and U.S. dollar at the balance sheet date

Comprehensive income for the year

2008

(50,011)

134,592
61,560
(63,852)

132,300

522
(172)

350

7,724

140,374

90,363

2007
[restated – note 3]

78,503

(85,423)
(2,159)
28,546

(59,036)

18,030
(5,950)

12,080

(7,132)

(54,088)

24,415

Consolidated statements of retained earnings

As at October 31
[In thousands of dollars]

Retained earnings, beginning of year, as previously reported
Change in accounting policy [note 3]

Retained earnings, beginning of year
Net income (loss) for the year
Premium paid on share repurchase [note 15]
Dividends

Retained earnings, end of year

2008

190,534
584

191,118
(50,011)
(19,864)
(11,941)

109,302

2007
[restated – note 3]

142,116

2,561

144,677
78,503
(20,561)
(11,501)

191,118

See accompanying notes to consolidated financial statements.

2008 Annual Report, Transat A.T. Inc.

Consolidated statements of cash flows

As at October 31
[In thousands of dollars]

OPERATING ACTIVITIES

Net income (loss)
Operating items not involving an outlay (receipt) of cash

Amortization
Changes in fair value of derivative financial instruments

related to aircraft fuel purchases

Foreign exchange loss (gain) on long-term monetary items
Write-off of goodwill
Changes in fair value of investments in ABCP
Loss on disposal of investments in ABCP
Gain on repurchase of preferred shares of a subsidiary
Share of net loss (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 provision for overhaul of leased aircraft
Net change in other assets and liabilities related to operations

Cash flows related to operating activities

INVESTING ACTIVITIES
Additions to property, plant and equipment
Cash and cash equivalents of acquired companies
Consideration paid for acquired companies
Net change in investments in ABCP [note 5]
Net change in cash and cash equivalents

in trust or otherwise reserved

Cash flows related to investing activities

FINANCING ACTIVITIES
Increase in long-term debt
Repayment of long-term debt
Proceeds from issuance of shares
Share repurchase
Dividends

Cash flows related 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.

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2008 Annual Report, Transat A.T. Inc.

2008

(50,011)

56,649

106,435
2,295
—
45,705
222
(1,605)
427
3,287
(48,766)
3,075
3,012

120,725

29,284
4,541
675

155,225

(64,901)
—
(59,559)
10,778

(88,501)

(202,183)

60,491
(10,565)
1,970
(24,864)
(11,941)

15,091

10,866

(21,001)
166,768

145,767

11,865

6,821

2007
[restated – note 3]

78,503

50,990

(26,577)
(3,023)
3,900
11,200
—
—
(651)
737
6,403
2,809
1,577

125,868

17,324
(7,852)
(883)

134,457

(52,702)
5,607
(8,162)
(153,546)

35,417

(173,386)

39,887
(26,088)
6,816
(23,944)
(11,501)

(14,830)

5,640

(48,119)
214,887

166,768

43,391

6,774

Notes to consolidated financial statements

October 31, 2008 and 2007
[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
specializing in the organization, marketing and distribution of
holiday travel in the tourism industry. The core of its business
consists of tour operators based in Canada and Europe. The
Corporation is also involved in air transportation, value-added
services at travel destinations and accommodations. Finally, the
Corporation has secured a dynamic presence in distribution
through travel agency networks.

2
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements of the Corporation have
been prepared by management in accordance with Canadian
generally accepted accounting principles. The preparation of finan-
cial statements in accordance with generally accepted 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 commercial paper [“ABCP”], the
provision for overhaul of leased aircraft, the amortization 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 significant. The consolidated
financial statements have, in management’s opinion, been properly
prepared within reasonable limits of materiality and within the
framework of the accounting policies summarized below.

Basis of consolidation
The consolidated financial statements include the accounts of the
Corporation, its subsidiaries and its variable interest entities where
the Corporation is the primary beneficiary.

The Corporation consolidates variable interest entities in accordance
with Accounting Guideline 15, Consolidation of Variable Interest
Entities [“AcG-15”]. This Guideline presents clarification on the
application of consolidation principles to certain entities that are
subject to control on a basis other than ownership of voting interests.
AcG-15 provides guidance for 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 consolidate a variable interest entity when
that enterprise has a variable interest, or combination of variable
interests, that will absorb a majority of the entity’s expected losses
if they occur, receive a majority of the entity’s expected residual
returns if they occur, or both [the “primary beneficiary”].

Assets recognized as a result of consolidating certain variable
interest entities do not represent additional assets that could be
used to satisfy claims against the Corporation’s general assets.

Cash equivalents
Cash equivalents consist primarily of term deposits and bankers’
acceptances 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 using the
first-in, first-out method, and net realizable value.

Immobilisations corporelles
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:

Improvements to aircraft under operating leases
Aircraft equipment
Computer hardware and software
Aircraft engines
Office furniture and equipment
Leasehold improvements
Rotable aircraft spare parts
Hangar and administrative buildings

Lease term
5 to 10 years
3 to 7 years
Cycles used
4 to 10 years
Lease term
Use
35 years

When aircraft are acquired, a portion of the cost is allocated to
the “major maintenance activities” subclass, which is related to
airframe, engine and landing gear overhaul costs. Aircraft and
major maintenance activities, included in Aircraft, are amortized
taking into account their expected estimated residual value. Aircraft
are amortized on a straight-line basis over seven- to ten-year periods,
and 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
maintenance 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 [see note 3].

Goodwill and other intangible assets
Goodwill and trademarks with an indefinite life are not amortized.
Goodwill represents the excess of the purchase price over the fair
value of identifiable net assets acquired.

Goodwill and trademarks are 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. A two-step impairment test
is used to identify a potential impairment in goodwill and a trade-
mark, provided that said trademark is used by the reporting unit in
its day-to-day operations, and measure the amount of a goodwill
and trademark impairment loss to be recognized, if any. The first
step consists in comparing the fair value of a reporting unit with its

2008 Annual Report, Transat A.T. Inc.

carrying amount, including goodwill, in order to identify a potential
impairment. When the fair value of a reporting unit exceeds its
carrying amount, goodwill of the reporting unit and/or trademark
associated with the reporting unit is considered not to be impaired.
When the carrying amount of a reporting unit exceeds its fair
value, the second step, where necessary, consists in comparing the
fair value of any goodwill and/or trademark associated with the
reporting unit with the carrying amount of said goodwill and/or
trademark to measure the amount of the impairment loss, if any.
When the carrying amount of any goodwill and/or trademark
associated with a reporting unit exceeds the fair value of said
goodwill and/or trademark, an impairment loss is recognized in
an amount equal to the excess in income for the period in which
the impairment occurred. The Corporation uses the discounted
cash flow method to assess the fair value of its reporting units.
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 considered to be impaired, the impairment
to be recognized is measured by the amount by which the carrying
amount of the assets exceeds their fair value.

Investments and other assets
Investments in companies subject to significant influence but not
control or joint control are accounted for using the equity method.
Other investments are recorded at cost. When there is an other-
than-temporary impairment in an investment, its carrying amount
must be written down to net realizable value. The write-down in
value is taken into account in determining net income.

Other assets include commissioning costs deferred and amortized
over periods not exceeding five years [see note 3].

Provision for overhaul of leased aircraft [see note 3]
Under the aircraft and engine operating leases, the Corporation is
required to maintain the aircraft and engines in serviceable condi-
tion and follow the maintenance plan. The Corporation accounts
for its leased aircraft and engine 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
maintenance deposits made to lessors and unclaimed is included
in liabilities under “Provision for overhaul of leased aircraft.”

Foreign currency translation
a) Self-sustaining foreign operations

The Corporation translates the accounts of its self-sustaining
foreign subsidiaries, including the investment in a foreign com-
pany subject to significant influence, into Canadian dollars
using the current rate method. Assets and liabilities are translated
at the exchange rates in effect at the end of the period. Revenues
and expenses are translated at average rates of exchange
during the period. Foreign exchange gains or losses resulting
from the translation 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 translated 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 adjusted to reflect the exchange rate
in effect at the balance sheet date. Any exchange gain or loss
that arises on translation is included in the determination of net
income for the period.

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 options 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 exercis-
ing stock options and the corresponding portion previously credited
to contributed surplus are credited to share capital.

The Corporation’s contributions to the stock ownership 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 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 granted based on the fair value of the shares at the
grant date. Fluctuations in the share price subsequent to the grant
date are recorded in net income for the period. 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 grant 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 at the time of the departure of the
passengers. Commission revenues of travel agencies are recognized
at the time of reservation. Amounts received from customers for
services not yet rendered are included in current liabilities as
“Customer deposits and deferred income.”

Financial instruments [see note 3]
Financial instruments
The standards require that financial assets and financial liabilities,
including derivative financial instruments, be initially measured at
fair value. Subsequent to initial recognition, financial assets and
financial liabilities are measured based on their classification:
held-for-trading, loans and receivables or other financial assets.
Derivative financial instruments, including embedded derivative
financial instruments that are not closely related to the host contract,

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2008 Annual Report, Transat A.T. Inc.

are classified as held-for-trading unless they are designated within
an effective hedging relationship.

Held-for-trading
Financial assets, financial liabilities and derivative financial
instruments classified as held-for-trading are measured at fair value
at the balance sheet date. Gains and losses realized on disposal
and unrealized gains and losses from changes in fair value are
reflected in the consolidated statement of income (loss) as they
occur.

Loans and receivables and other financial liabilities
Financial assets and financial liabilities classified as loans and
receivables or other liabilities are recorded at amortized cost using
the effective interest method.

Transaction costs
Transaction costs related to held-for-trading financial assets and
financial liabilities are expensed as incurred. Transactions costs
related to financial assets classified as loans and receivables or
other financial liabilities classified as other financial liabilities are
reflected in the carrying amount of the financial asset or financial
liability and are then amortized over the estimated useful life of the
instrument using the effective interest method.

Hedge accounting and derivative financial instruments
The Corporation uses derivative financial instruments to hedge
against future currency exchange rate variations related to its
long-term debt obligations, operating lease payments, receipts of
revenues from certain tour operators and disbursements pertaining
to certain operating expenses in other currencies. For hedge
accounting purposes, the Corporation designates its derivative
financial instruments related to foreign currencies as hedging
instruments.

The Corporation documents its derivative financial instruments
related to foreign currencies as hedging instruments and regularly
demonstrates that these instruments are sufficiently effective to
continue using hedge accounting. These derivative financial
instruments are designated as cash flow hedges except for the
contracts related to U.S. dollar loans payable secured by aircraft,
which are designated as fair value hedges.

All derivative financial instruments are recorded at fair value in the
balance sheet. For the derivative financial instruments designated
as cash flow hedges, changes in value of the effective portion are
recognized in “Other comprehensive income” in the consolidated
statement of comprehensive income. Any ineffectiveness within a
cash flow hedge is recognized in net income as it arises in the
same consolidated income (loss) statement 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 future changes in value of the
derivative are recognized in income prospectively. The change in
value of the effective portion of a cash flow hedge remains in
“Accumulated other comprehensive income” until the related
hedged item settles, at which time amounts recognized in
“Accumulated other comprehensive income” are reclassified to the
same income (loss) statement account that records the hedged
item. For derivative financial instruments designated as fair value
hedges, periodic changes in fair value are recognized in net
income and changes in fair value of U.S. dollar loans secured by
aircraft are also recorded in the same net income accounts.

In the normal course of business and to manage exposure to fuel
pricing instability, the Corporation also enters into derivative financial

instruments used for aircraft fuel purchases that have not been
designated for hedge accounting. These derivatives are measured
at fair value at the end of each period, and the unrealized gains
or losses arising from remeasurement are recorded and reported
under “Change in fair value of derivative financial instruments used
for aircraft fuel purchases” in the consolidated statement of income
(loss). When realized at maturity of these derivative financial
instruments, any gains or losses are reclassified to “Aircraft fuel.”

It is the Corporation’s policy not to speculate on derivative financial
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 basis 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 recognized through other liabilities
are amortized on a straight-line basis over the term of the leases
and are recognized as a reduction of other operating expenses.

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 calculations using the
projected benefit method prorated on services and management’s
best estimate assumptions for the increase in eligible earnings and
the retirement age of employees. The past service costs and
amendments to the arrangements 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 7.2 years as at November 1, 2007. Plan obligations
are discounted using current market interest rates and are included
in “Other liabilities.”

Earnings per share
Earnings per share are calculated based on the weighted average
number of Class A Variable Voting Shares and Class B Voting
Shares outstanding during the year. Diluted earnings per share are
calculated using the treasury stock method and take into account
all the elements that have a dilutive effect.

3
CHANGES TO ACCOUNTING POLICIES
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, in accordance with the accounting
methods suggested in the U.S. Audits of Airlines guide issued by
the American Institute of Certified Public Accountants. Under this
method, the Corporation provided for aircraft overhaul expenses
based on an estimate of all future expenses until expiry of the
leases for the aircraft leased under operating leases, or on their
useful lives estimated by the Corporation while held, amortized
over the total number of engine cycles and the total number of

2008 Annual Report, Transat A.T. Inc.

months anticipated for the airframe and other components over the
same periods.

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 entities for fiscal
years beginning on or after December 15, 2006. As a result,
effective November 1, 2007, the Corporation discontinued the use
of the accrue-in-advance method and began accounting for aircraft
overhaul expenses if the aircraft are leased under operating leases
or are capitalized with property, plant and equipment [see note 2].

This change in accounting policy has been adopted retroactively
with restatement of prior fiscal years. The adoption of these new
standards translated into a $2,561 increase in retained earnings
on November 1, 2006, and into the following changes 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 translated into the
following changes: a $5,048 decrease in maintenance expense,
a $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. Also for the year ended October 31, 2007, the adop-
tion of these new standards translated into a $12,629 increase in
cash flows related to operating activities and a $12,629 decrease
in cash flows related to investing activities.

Although it could have chosen to account for maintenance expenses
in net income for owned aircraft as incurred, the Corporation
believes that the policies adopted provide better information to
users of financial statements.

Other standards
The Canadian Institute of Chartered Accountants [“CICA”] issued
the following accounting standards that took effect on November
1, 2007 for the Corporation: Section 3862, Financial Instruments
– Disclosures, Section 3863, Financial Instruments – Presentation,
Section 1535, Capital Disclosures, and Section 1506, Accounting
Changes.

Section 1535 requires supplementary disclosure regarding the
Corporation’s capital management and compliance with any
externally imposed capital requirements.

Section 1506 provides guidance, in particular, on the criteria
for changing accounting policies, the appropriate accounting
treatment in specific circumstances and the required disclosure.

Standards in effect on November 1, 2006
Financial instruments, hedges and comprehensive income
On November 1, 2006, the Corporation adopted retroactively,
without restatement of prior periods, the recommendations of the
following sections of the CICA Handbook: Section 1530,
Comprehensive Income, Section 3855, Financial Instruments –
Recognition and Measurement, and Section 3865, Hedges.
Following the adoption of these standards, the Corporation
ceased using hedge accounting for its derivative financial instru-

ments for aircraft fuel purchases. Any unrealized gains or losses
were recognized in other comprehensive income at the transition
date, namely November 1, 2006, and were recognized in net
income under “Aircraft fuel” when derivative financial instruments
expire and the related fuel purchases occur. For the year ended
October 31, 2007, the Corporation recognized a loss of
$12,080 [net of $5,950 in related income taxes] under other
comprehensive income representing the portion of unrealized losses
related to derivative financial instruments used for aircraft fuel
purchases realized by the transition date. Unrealized losses
amounting to $350 [net of $172 in related income taxes], included
in “Accumulated other comprehensive income” as at October 31,
2007, were reclassified to net income during the year ended
October 31, 2008.

Future changes in accounting policies
In February 2008, the CICA issued Handbook Section 3064,
Goodwill and Intangible Assets, which will supersede Section
3062, Goodwill and Other Intangible Assets, and Section 3450,
Research and Development Costs, effective November 1, 2008
for the Corporation. This new section sets out standards for recog-
nition, measurement, presentation and disclosure of goodwill and
intangible assets. These new standards will be adopted retroac-
tively with restatement of prior fiscal years. The adoption of these
new standards will translate into a decrease in retained earnings
of approximately $4,200 on November 1, 2007 and into the
following changes as at October 31, 2008: a $7,800 decrease,
approximately, in prepaid expenses, a $800 decrease in other
assets, a $2,800 decrease in future income tax liabilities and a
$1,600 decrease in retained earnings in respect of certain market-
ing expenses related to upcoming seasons. These expenses were
previously recorded in net income for the related seasons and
aircraft commissioning costs were previously deferred and amortized
over a period not exceeding five years.

Also in February 2008, Canada’s Accounting Standards Board
(AcSB) confirmed that Canadian GAAP, as used by publicly
accountable enterprises, will be superseded by International
Financial Reporting Standards (IFRS) for fiscal years beginning on
or after January 1, 2011. The Corporation will be required to
report under IFRS for its interim and annual financial statements for
the fiscal year ending October 31, 2012. The Corporation is
currently preparing its IFRS conversion plan. The plan will be
aimed in particular at identifying the differences between IFRS
and the Corporation’s accounting policies, assessing their impact
and, where necessary, analyzing the various policies that the
Corporation could elect to adopt.

4
CASH AND CASH EQUIVALENTS IN TRUST
OR OTHERWISE RESERVED
As at October 31, 2008, cash and cash equivalents in trust or
otherwise reserved included $210,481 [$168,196 as at October
31, 2007] in funds received from customers for services not yet
rendered and $46,216 [nil as at October 31, 2007] which was
pledged as collateral security against letters of credit and foreign
exchange contracts [note 23].

5
INVESTMENTS IN ABCP
As at October 31, 2008, the Corporation held a portfolio of
asset-backed commercial paper (“ABCP”) issued by several trusts
with an aggregate notional value of $143,500. In mid-August
2007, the Canadian third-party ABCP market was hit by a liquidi-
ty disruption. Since then, the securities held by the Corporation

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2008 Annual Report, Transat A.T. Inc.

have not traded in an active market.On August 16, 2007, subse-
quent to the liquidity disruption, 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. A Pan-Canadian Investors Committee was subse-
quently established to oversee the orderly restructuring of these
instruments during this standstill period.

On March 17, 2008, the Pan-Canadian Committee received an
order from the Ontario Superior Court of Justice pursuant to the
provisions of the Companies’ Creditors Arrangement Act (CCAA)
setting forth an approval procedure for noteholders of the
Restructuring Plan filed by the Committee. Under the CCAA, the
Plan must be approved by a simple majority of noteholders as well
as by noteholders representing at least 66 2/3% of the total
aggregate amount of affected ABCP capital.

• The Corporation holds $114,848 in ABCP supported by syn-

thetic assets or a combination of synthetic and traditional securi-
tized assets, which will be restructured into floating rate notes
with maturities through December 31, 2016. The Corporation
expects to receive replacement notes at the notional value as
follows:

Class A-1: $35,217
Class A-2: $64,997
Class B: $11,188
$3,446
Class C:

• The Corporation holds $12,652 in ABCP supported mainly by
U.S. sub-prime assets to be restructured on a series-by-series
basis, with each series maintaining its separate exposure to its
own assets and maturing through 2037.

• The Corporation holds $16,000 in ABCP supported solely by
traditional securitized assets to be restructured on a series-by-
series basis, with each series or trust maintaining its own assets
and maturing through 2016.

On April 25, 2008, the Restructuring Plan proposed by the
Pan-Canadian Committee of ABCP investors was approved by the
noteholders. On June 5, 2008, the Ontario Superior Court of
Justice approved the Committee’s Restructuring Plan. On June 25,
2008, a number of ABCP holders appealed the Ontario Superior
Court of Justice decision to the Ontario Court of Appeal. On
August 18, 2008, the Ontario Court of Appeal upheld the Ontario
Superior Court of Justice decision approving the Committee’s
Restructuring Plan. On August 29, 2008, a number of ABCP hold-
ers appealed the Ontario Court of Appeal decision to the Supreme
Court of Canada. On September 19, 2008, the Supreme Court
of Canada dismissed the appeal filed by certain ABCP holders.
Subsequent to this dismissal, the Pan-Canadian ABCP Investors
Committee announced that the process of tendering existing ABCP
securities in exchange for new restructured notes had begun.

In light of the information available during the year ended October
31, 2008, changes which occurred in credit market conditions
and the review of assumptions used taking into account this
new information, the Corporation remeasured the fair value of its
investments in ABCP.

Since there is no active market for ABCP securities, the
Corporation’s management has estimated the fair value of these
assets by discounting future cash flows determined using a valua-
tion model that incorporates management’s best estimates based as
much as possible on observable market data, such as the credit
risk attributable to underlying assets, relevant market interest rates,
amounts to be received, maturity dates and the assumption that the
Accord restructuring process is highly likely to be completed in
early 2009.

As a result of this valuation, the Corporation recognized an
additional $45,705 writedown in respect of its investments
in ABCP during the year ended October 31, 2008 [$11,200
writedown for the year ended October 31, 2007]. The provision
for impairment totalled $56,905 as at October 31, 2008. The
writedown of the investments in ABCP also includes a $222 loss
incurred in December 2007 on disposal of an investment with a
notional amount of $11,000 for which for a cash consideration of
$10,778 was received.

A 1% increase (decrease), representing 100 basis points, in the
estimated discount rates would result in a decrease (increase)
in the estimated fair value of ABCP held by the Corporation of
approximately $4,500.

The Corporation’s estimate of the fair value of its ABCP investments
as at October 31, 2008 is subject to significant uncertainty. While
management believes that its valuation technique is appropriate in
the circumstances, changes in significant assumptions could sub-
stantially affect the value of ABCP securities over the coming fiscal
year. 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 disruption in the Canadian market for third-party spon-
sored ABCP has had no significant impact on the Corporation’s
operations. The Corporation holds or has access to sufficient avail-
able 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 are invested
in liquid instruments (mainly cash and term deposits) with a broad
range of large financial institutions and have no exposure whatso-
ever to the current ABCP market disruption.

2008 Annual Report, Transat A.T. Inc.

6
FINANCIAL INSTRUMENTS
Fair value
Classification of financial instruments
As at October 31, 2008, the classification of the financial
instruments, other than financial derivative instruments designated
as hedges, as well as their carrying amounts, are as follows:

Fair value of financial instruments
As at October 31, 2008 and 2007, the carrying amounts of the
financial assets classified as loans and receivables consisting pri-
marily of receivables and short-term financial liabilities classified as
other financial liabilities approximate their fair value given that
they are expected to be realized in the short term. The carrying
amounts of other long-term financial liabilities approximate their fair
value given that they are subject to terms and conditions, such as
variable interest rates, similar to those available to the Corporation
for instruments with comparable terms.

Classification of financial instruments

2008
Financial assets
Cash and cash equivalents
Cash and cash equivalents in trust or otherwise reserved
Accounts receivable
Investments in ABCP
Derivative financial instruments – Fuel purchasing forward

contracts and other fuel-related derivative financial instruments

Financial liabilities
Accounts payable and accrued liabilities
Long-term debt
Debenture
Derivative financial instruments – Fuel purchasing forward

contracts and other fuel-related derivative financial instruments

2007
Financial assets
Cash and cash equivalents
Cash and cash equivalents in trust or otherwise reserved
Accounts receivable
Investment in ABCP
Derivative financial instruments – Fuel purchasing forward

contracts and other fuel-related derivative financial instruments

Financial liabilities
Accounts payable and accrued liabilities
Long-term debt
Debenture
Derivative financial instruments – Fuel purchasing forward

contracts and other fuel-related derivative financial instruments

The fair value of the derivative financial instruments represents the
amount of the consideration that would be agreed upon in an
arm’s length transaction between knowledgeable, 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 determines fair value by applying valuation tech-
niques, such as using available information on market transactions
involving other instruments that are substantially the same, discount-
ed 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 that it is consistent with accepted
economic methods for pricing financial instruments.

Carrying amount

Fair value

Held-for-trading
$

Loans and
receivables
$

Total
$

145,767
256,697
—
86,595

—
—
119,852
—

145,767
256,697
119,852
86,595

8,498
497,557

—
119,852

8,498
617,409

—
—
—

282,440
150,085
3,156

88,215
88,215

—
435,681

88,215
523,896

Carrying amount

Fair value

Held-for-trading
$

Loans and
receivables
$

Total
$

166,768
168,196
—
142,346

—
—
109,128
—

166,768
168,196
109,128
142,346

26,997
504,307

—
109,128

26,997
613,435

—
—
—

6
6

281,985
88,681
3,156

—
373,822

6
373,828

46/47

2008 Annual Report, Transat A.T. Inc.

The classification and carrying amounts of the financial instruments
as at October 31, 2008 are as follows:

2008
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 classified
as held-for-trading
Fuel purchasing forward
contracts and other
fuel-related derivative
financial instruments

2007
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 classified
as held-for-trading
Fuel purchasing forward
contracts and other
fuel-related derivative
financial instruments

Assets
$

Liabilities
$

111,448

1,843

3,315

—

8,498
123,261

88,215
90,058

1,252

90,969

—

3,629

26,061
27,313

6
94,604

Management of risks arising from financial instruments
In the normal course of business, the Corporation is exposed to
credit and counterparty risk, liquidity risk, and market risk arising
from changes in certain foreign exchange rates, changes in fuel
prices and changes in interest rates. The Corporation manages
these risk exposures on an ongoing basis. In order to limit the
effects of changes in foreign exchange rates, fuel prices and
interest rates on its revenues, expenses and cash flows, the
Corporation can avail itself of various derivative financial instruments.
The Corporation’s management is responsible for determining
the acceptable level of risk and only uses derivative financial
instruments to manage existing or anticipated risks, commitments or
obligations based on its past experience.

Trade accounts receivable included in accounts receivable in
the balance sheet totalled $76,482 as at October 31, 2008.
Trade accounts receivable consist of a large number of customers,
including travel agencies and other service providers. Trade
accounts receivable generally result 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 geo-
graphic area. No customer represented more than 10% of total
accounts receivable. As at October 31, 2008, approximately 6%
of accounts receivable were over 90 days past due, whereas
approximately 80% were up to date, that is, under 30 days.
Historically, the Corporation has not incurred any significant losses
in respect of its trade accounts receivable.

Pursuant to the agreements entered into with its service providers,
consisting primarily of hotel operators, the Corporation pays
deposits to capitalize on special benefits, including pricing, exclu-
sive access and room allotments. As at October 31, 2008, these
deposits totalled $38,492 and were generally offset by purchases
of person-nights at these hotels. Risk arises from the fact that these
hotels might not be able to honour their obligations to provide
the agreed number of person-nights. The Corporation strives to
minimize its exposure by limiting deposits to recognized and
reputable hotel operators in its active markets. These deposits are
spread across a large number of hotels and, historically, the
Corporation has not been required to write off a considerable
amount for its deposits with suppliers.

Under the terms of its aircraft and engine leases, the Corporation
pays deposits when aircraft and engines are commissioned,
particularly as collateral for remaining lease payments. These
deposits totalled $12,128 as at October 31, 2008 and are
returned on lease expiry. The Corporation is also required to pay
cash security deposits to lessors over the lease term to guarantee
the serviceable condition of aircraft. Cash security deposits with
lessors are expensed when the funds are disbursed. However,
these cash security deposits with lessors are generally returned to
the Corporation upon receipt of documented proof that the related
maintenance has been performed by the Corporation. As at
October 31, 2008, the cash security deposits with lessors that
have been claimed totalled $8,576 and have been included in
accounts receivable. Historically, the Corporation has not written
off any significant amount of deposits and claims for cash security
deposits with lessors from aircraft and engine lessors.

Except for the investments in ABCP [see note 5], the Corporation
does not believe it is exposed to a significant concentration of
credit risk as at October 31, 2008.

2008 Annual Report, Transat A.T. Inc.

Liquidity risk
The Corporation is exposed to the risk of being unable to honour its
financial commitments by the deadlines set out under the terms of
such commitments and at a reasonable price. The Corporation has
a Treasury Department in charge, among other things, of ensuring
sound management of available cash resources, financing and
compliance with deadlines within the Corporation’s consolidated
perimeter. With senior management oversight, the Treasury
Department manages the Corporation’s cash resources based on
financial forecasts and anticipated cash flows.

The maturities of the Corporation’s financial liabilities as at October
31, 2008 is summarized in the following table.

Market risk
Foreign exchange risk
Transat is exposed, primarily as a result of its many arrangements
with foreign-based suppliers, aircraft and engine leases, fuel
purchases, long-term debt and revenues in foreign currencies, and
due to fluctuations in exchange rates mainly with respect to the
U.S. dollar, the euro and the pound sterling against the Canadian
dollar and the euro, accordingly. Approximately 30% of the
Corporation’s costs are incurred in a currency other than the meas-
urement currency of the reporting unit incurring the costs, whereas
an insignificant percentage of revenues is incurred in a currency
other than the measurement currency of the reporting unit making
the sale. In accordance with its foreign currency risk management
policy and to safeguard the value of anticipated commitments and
transactions, the Corporation enters into foreign exchange forward
contracts, expiring in generally less than two years, for the purchase
and/or sale of foreign currencies based on anticipated foreign
exchange rate trends.

Expressed in Canadian dollar terms, the net financial assets and
net financial liabilities of the Corporation and its subsidiaries
denominated in currencies other than the measurement currency of
the financial statements as at October 31, 2008, based on their
financial statement measurement currency, are summarized in the
following table.

Risk of fluctuations in fuel prices
Transat is particularly exposed to fluctuations in fuel prices. Due to
competitive pressures in the industry, there can be no assurance
that the Corporation would be able to pass along any increase in
fuel prices to its customers by increasing prices, or that any
eventual price increase would fully offset higher fuel costs, which
could in turn adversely impact its business, financial position or
operating results. To hedge against sharp increases in fuel prices,
the Corporation has implemented a fuel price risk management
policy that authorizes forward contracts, and other types of
derivative financial instruments, expiring in generally less than
two years.

On October 31, 2008, a 10% increase or decrease in fuel
prices, assuming that all other variables had remained the same,
would have resulted in a $18,600 increase or decrease, respec-
tively, in the Corporation’s net income for the year ended October
31, 2008.

As at October 31, 2008, 46% of estimated fuel requirements
for fiscal 2009 and 10% of estimated requirements for fiscal
2010 were covered by fuel-related derivative financial instruments
[50% of estimated requirements for fiscal 2008 and 2% of
estimated requirements for fiscal 2009 were covered as at
October 31, 2007].

Maturing in

under 1 year
$
282,440
79,831
16,745
3,156

Maturing in
1 to 2 years
$
—
10,227
17,280
—

Maturing in
2 to 5 years
$
—
—
116,060
—

382,172

27,507

116,060

Total
$
282,440
90,058
150,085
3,156

525,739

U.S. dollar
$

Euro
$

4,499
1,345
(45,153)
(884)

(40,193)

—
1,935
(1,629)
1 546

1,852

Pound
sterling
$

(161)
—
(288)
—

(449)

Other
currencies
$

Total
$

51
12,154
—
(18)

12,187

(4,169)
—
(1,471)
(167)

(5,807)

220
15,434
(48,541)
477

(32,410)

Liquidity risk

Accounts payable and accrued liabilities
Derivative financial instruments
Long-term debt
Debenture

Total

Market risk

Net assets (liabilities)

Financial statement

measurement currency
of the group’s companies

Euro
Pound sterling
Canadian dollar
Autres devises

Total

48/49

2008 Annual Report, Transat A.T. Inc.

The Corporation’s credit facilities are subject to certain covenants
including a debt/equity ratio and a fixed-charge coverage ratio.
These ratios are monitored by management and submitted to the
Corporation’s Board of Directors on a quarterly basis. As at
October 31, 2008, the Corporation was in compliance with these
ratios. Except for the credit facility covenants, the Corporation is
not subject to any third-party capital requirements.

7
DEPOSITS

DEPOSITS

Deposits on leased aircraft

and engines

Deposits with suppliers

Less current portion

2008
$

2007
$

12,128
38,492
50,620
32,094
18,526

8,946
39,322
48,268
31,077
17,191

On October 31, 2008, a 25 basis point increase or decrease
in interest rates, assuming that all other variables had remained
the same, would have resulted in a $600 increase or decrease,
respectively, in the Corporation’s net income for the year ended
October 31, 2008.

Capital risk management
The Corporation’s capital management objectives are first to ensure
the longevity of its capital so as to support continued operations,
provide its shareholders with a return, generate benefits for its other
stakeholders and maintain the most optimal capitalization possible
with a view to keeping capital costs to a minimum.

The Corporation manages its capitalization in accordance with
changes in economic conditions. In order to maintain or adjust its
capitalization, the Corporation may elect to adjust the amount of
dividends paid to shareholders, return capital to its shareholders
and repurchase its shares in the marketplace or issue new shares.

The Corporation monitors its capitalization using the adjusted
debt/equity ratio. This ratio is calculated as follows: net debt/
shareholders’ equity. Net debt is equal to the aggregate of
long-term debt, the debenture and off-balance sheet arrangements,
excluding supplier agreements, less cash and cash equivalents (not
held in trust or otherwise reserved) and investments in ABCP.

The Corporation’s strategy is to maintain its debt/equity ratio
below 1. The calculation of the debt/equity ratio as at October
31 is summarized as follows:

Debt/equity ratio

Net debt
Long-term debt
Debenture
Off-balance sheet arrangements
Cash and cash equivalents
Investments in ABCP

2008
$

2007
$

150,085
3,156
297,094
(145,767)
(86,595)
217,973

88,681
3,156
279,309
(166,768)
(142,346)
62,032

Shareholders’ equity
Debt/equity ratio

341,992
63.7%

283,452
21.9%

2008 Annual Report, Transat A.T. Inc.

8
PROPERTY, PLANT AND EQUIPMENT

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

9
GOODWILL AND OTHER INTANGIBLE ASSETS
During the quarter ended October 31, 2008, the Corporation
performed its annual test for impairment of goodwill and trade-
marks by discounting future cash flows based on the most recent
financial forecasts of its reporting units, and no impairment was
identified [$3,900 in 2007 related to Travel Superstore].

Goodwill and other
intangible assets

Goodwill
Trademarks not subject

to amortization

Customer lists, net of

$1,496 in accumulated
amortization
[$1,139 in 2007]

The change in goodwill

is as follows:

Balance, beginning of year
Acquisitions [note 18]
Write-off of goodwill
Translation adjustment

2008
$

2007
$

124,444

119,614

17,144

17,203

10,215
151,803

11,698
148,515

2008
$

2007
$

119,614
1,756
—
3,074
124,444

121,138
5,624
(3,900)
(3,248)
119,614

50/51

2008 Annual Report, Transat A.T. Inc.

2008

2007
[restated – note 3]

Accumulated
amortization
$
95,490
28,261
34,891
93,355
10,419
22,356
18,231
14,561
736

318,300

Cost
$
150,304
42,209
42,522
132,322
20,172
30,901
34,540
27,039
9,585

489,594

318,300

171,294

Cost
$
148,282
33,698
38,172
115,444
20,358
31,900
31,008
26,301
832

445,995

282,977

163,018

Accumulated
amortization
$
87,206
21,155
32,986
82,897
9,094
20,667
16,909
11,657
406

282,977

10
INVESTMENTS AND OTHER ASSETS
On December 10, 2007, the Corporation acquired a 35%
interest in Caribbean Investments B.V. [“CIBV”], a company
operating five hotels in Mexico and the Dominican Republic, for
$51,605 [US$51,100] in cash and additional payments poten-
tially totalling US$4,000 contingent on meeting certain specific
terms and conditions by 2009. The acquisition costs for this
transaction amounted to $2,099. This acquisition was recorded
using the equity method, and the share of net income of the
acquired company has been accounted for as of December 10,
2007. The difference between the Corporation’s ownership interest
in CIBV and its share of the net assets at the acquisition date
amounted to $16,000 and was allocated to imputed goodwill.

Investments
and other assets

Investment in

Caribbean Investments B.V.
Deferred costs, unamortized

balance [note 3]
Other investments
Sundry

The change in the investment

in Caribbean Investments B.V.
is detailed as follows:

Balance, beginning of year
Acquisition and capital contribution
Share of net loss
Translation adjustment

2008
$

59,059

2,788
603
847
63,297

2007
$

—

2,701
628
1,102
4,431

2008
$

—
57,854
(427)
1,632
59,059

In addition, on April 9, 2008, the Corporation made a $4,150
capital contribution [US$4,113] to CIBV. The Corporation also
made an additional US$4,200 capital contribution on November
30, 2008.

CIBV’s majority shareholder may demand that the Corporation
provide the necessary funds to repay one of CIBV’s long-term
debts should CIBV be unable to cover the scheduled repayments.
However, the maximum amount that the Corporation could be
required to provide may not exceed its 35% share of said long-term
debt. As at October 31, 2008, the Corporation’s share of the
long-term debt amounted to $13,234 [m8,579].

11
BANK LOANS
Operating lines of credit totalling m11,287 [$17,411] [m11,300]
[$15,529] in 2007] have been authorized for certain French
subsidiaries. These operating lines of credit are renewable
annually and were undrawn as at October 31, 2008 and 2007.

For its European operations, the Corporation has guarantee
facilities renewable annually amounting to m14,118 [$21,778]
[m13,100 [$18,002] in 2007]. As at October 31, 2008, letters
of guarantee had been issued totalling m4,586 [$7,074]
[m7,525 [$10,341] in 2007].

12
DEBENTURE
On April 6, 2004, a subsidiary of the Corporation issued a
$3,156 debenture bearing interest at a rate of 6%. The debenture
is repayable in one instalment in September 2009 in cash or
shares of the Corporation at the Corporation’s option.

13
LONG-TERM DEBT

Long-term debt

Loans secured by aircraft amount-
ing to US$40,000 [US$49,500
as at October 31, 2007], bearing
interest at the London Interbank
Offered Rate [LIBOR] plus 2.15%
and 3.25% and payable in six
equal semi-annual payments
through August 2011(a)
Drawdows from revolving credit
facilities maturing from 2010 up
to 2012

Other

Less current portion

2008
$

2007
$

48,180

46,763

100,000

39,887

1,905

150 085
16,745

133,340

2,031

88,681
48,794

39,887

Payments on long-term debt due in the next five years are as
follows:

Payments on
long-term debt

2009
2010
2011
2012
2013

16,745
17,280
16,060
20,000
80,000
150,085

As at October 31, 2008, the Corporation has a $86,350
revolving credit facility and a $60,000 revolving credit facility for
issuing letters of credit which both mature in 2012; the Corporation
must pledge cash as collateral security against 105% of letters of
credit issued under the latter facility. Under the terms and conditions
of this agreement, funds may be drawn down by way of bankers’
acceptances or bank loans, denominated in Canadian dollars, U.S.
dollars, euros or pounds sterling. Under this agreement, interest is
charged at bankers’ acceptance rates, at the financial institution’s
prime rate or at LIBOR, plus a premium based on certain financial
ratios calculated on a consolidated basis. The revolving credit
facility bore interest at an average rate of 3.9% for the year ended
October 31, 2008. Subsequent to the implementation of the ABCP
restructuring plan [see note 5], the revolving term credit facility will be
increased to $157,000.

As at October 31, 2008, the Corporation had two revolving
credit facilities of $9,485 and $98,140, for a total of $107,625,
the first maturing in 2010 and the second in 2011. Under the
terms and conditions of these agreements, funds may be drawn
down by way of bankers’ acceptances or bank loans, denominated
in Canadian dollars, U.S. dollars, euros or pounds sterling.
Under these agreements, interest is charged at bankers’ acceptance
rates, at the financial institution’s prime rate or at LIBOR, plus a
premium specific to the type of financing vehicle. These credit
facilities include options, which will become effective following
implementation of the ABCP restructuring plan [see note 5] and allow
the Corporation, at its sole option, to repay up to $68,368 of
the amounts drawn down, under certain conditions, using the
restructured notes. These options will be initially reported at fair
value, and the corresponding initial gain will be deferred and
recognized in net income over the term of the credit agreements.
The options will then be reported at fair value at each balance
sheet date, and any subsequent change in fair value of the options
will be recorded in net income.

14
OTHER LIABILITIES

Other liabilities

(a) The initial agreement relative to the loans secured by aircraft
ended on August 1, 2008. During the year, the Corporation
renewed these loans under similar terms for US$40,000, maturing
in 2011.

Deferred lease inducements
Non-controlling interest
Accrued benefit liability [note 21]

2008
$

11,813
8,442
14,262
34,517

2007
$

13,832
7,148
11,209
32,189

2008 Annual Report, Transat A.T. Inc.

15
SHAREHOLDERS’ EQUITY
Authorized share capital
Class A Variable Voting Shares
An unlimited number of participating Class A Variable Voting
Shares [“Class A Shares”] 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 automatically,
without further action. Under the circumstance described in
subparagraph [i] above, the Class A Shares as a class cannot
carry more than 25% (or any higher percentage that the Governor
in Council may specify pursuant to the CTA) of the 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
shareholders’ meeting, carry more than 25% (or any higher
percentage that the Governor in Council may specify pursuant to
the CTA) of the total number of votes that may be cast at said
meeting.

Each issued and outstanding Class A Share shall be automatically
converted into one Class B Voting Share without further action on
the part of the Corporation or of the holder if [i] the Class A Share
is or becomes owned and controlled by a Canadian as defined
by the CTA; or [ii] the provisions contained in the CTA relating to
foreign ownership restrictions are repealed and not replaced with
other similar provisions.

Class B Voting Shares
An unlimited number of Class B Voting Shares [“Class B Shares”],
participating, which may be owned and controlled by Canadians
as defined by the CTA only and shall confer the right to one vote
per Class B Share at all meetings of shareholders of the Corporation.
Each issued and outstanding Class B Share shall be converted into
one Class A Share automatically without further action on the part
of the Corporation or the holder if the Class B Share is or becomes
owned or controlled by a non-Canadian as defined by the CTA.

Preferred shares
An unlimited number of preferred shares, non-voting, issuable in
series, each series bearing the number of shares, designation,
rights, privileges, restrictions and conditions as determined by the
Board of Directors.

Issued and outstanding share capital
The changes affecting the Class A Shares and the Class B Shares
were as follows:

Issued and outstanding
share capital

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

Issued from treasury
Exercise of options
Repurchase and

Number
of shares

33,647,597
35,307
331,257
350,325

151,430
1,042
4,494
3,381

(736,100)

(3,383)

33,628,386
65,635
48,420

156,964
1,331
903

cancellation of shares

(1,064,200)

(5,000)

Balance as at

October 31, 2008

32,678,241

154,198

As at October 31, 2008, the number of Class A Shares and
Class B Shares stood at 1,383,159 and 31,295,082 respec-
tively [1,978,743 and 31,649,643 as at October 31, 2007].

Contributed surplus
The changes in the Corporation’s contributed surplus are
summarized in the following table:

Contributed surplus

Contributed surplus
Balance, beginning of year
Compensation expense related

to stock option plan

Options exercised
Balance, end of year

2008
$

2007
$

1,871

1,379

3,012
(264)
4,619

1,577
(1,085)
1,871

Normal course issuer bid
On June 15, 2008, the Corporation renewed its normal course
issuer bid, which began on June 15, 2007, for a 12-month period.
With this renewal, the Corporation may purchase for cancellation
up to a maximum of 3,175,506 Class A Shares and Class B
Shares, representing less than 10% of the publicly held Class A
Shares and Class B Shares at the offer renewal date [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 as
at June 15, 2007]. 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, 2008, a total of
1,064,200 voting shares, consisting of Class A Shares and Class
B Shares, for a cash consideration of $24,864 [736,100 voting
shares, consisting of Class A Shares and Class B Shares, for a
cash consideration of $23,944 in 2007].

The excess of the shares’ repurchase value over their carrying
amount was charged to retained earnings as share repurchase
premiums.

52/53

2008 Annual Report, Transat A.T. Inc.

Subscription rights plan
At the Annual General Meeting (“AGM”) held on March 12,
2008, the shareholders ratified the shareholders’ subscription rights
plan amended and updated on January 16, 2008 [the “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 consider offers, thus allowing shareholders to
receive full and fair value for their shares. The rights plan will
terminate at the 2011 shareholders’ AGM, unless terminated prior
to said AGM.

Stock option plan
Options are granted under a stock option plan for executives
and employees. Under the plan, as at October 31, 2008, the
Corporation may grant 610,611 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 exercisable in the third year
with all options exercisable at the outset of the fourth year.

The following tables summarize all outstanding options:

Stock option plan

Beginning of year
Granted
Exercised
Cancelled

End of year

Options exercisable, end of year

Compensation expense for stock option plan
During the year ended October 31, 2008, the Corporation
granted 259,181 stock options [145,099 in 2007] to certain key
executives and 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:

Compensation expense

Risk-free interest rate
Expected life
Expected volatility
Dividend yield
Weighted average fair value

at date of grant

2008

3.66%
6 years
37.6%
1.70%

2007

4.18%
6 years
40.0%
0.97%

$7.42

$15.05

During the year ended October 31, 2008, the Corporation
recorded a compensation expense of $3,012 [$1,577 in 2007]
for its stock option plan. A total of $264 [$1,085 in 2007] was
recognized in share capital subsequent to the exercise of options.

Share purchase plan
A share purchase plan is available to eligible employees of the
Corporation and its subsidiaries. Under the plan, as at October
31, 2008, the Corporation was authorized to issue up to 510,541
Class B Shares. The plan allows each eligible employee to purchase
shares up to an overall limit of 10% of his or her annual salary in
effect at the time of plan enrolment. 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%.

2008

2007

Number of
options

506,083
259,181
(48,420)
(671)

716,173

322,884

Weighted
average
price
$
22.70
21.35
13.21
22.34

22.85

19.90

Number of
options

710,462
145,099
(331,257)
(18,221)

506,083

250,993

Weighted
average
price
$
14.07
37.12
10.29
26.80

22.70

14.73

2008

Outstanding options

Exercisable options

Range of exercise
prices
$
4.50
3.00 –
7.50
6.01 –
9.00
7.51 –
9.01 – 11.50
15.01 – 17.00
21.01 – 29.00
37.00 – 37.50

Number of options
outstanding as at

October 31, 2008

27,526
28,098
8,160
16,511
32,957
465,699
137,222

716,173

Weighted
average
remaining life

4.5 years
2.4 years
1.4 years
2.4 years
5.6 years
8.4 years
8.6 years

Weighted
average price
$
3.80
6.79
7.86
9.90
15.68
21.94
37.24

22.85

Number of options
exercisable as at
October 31, 2008

27,526
28,098
8,160
16,511
32,957
165,184
44,448

322 884

Weighted
average price
$
3.80
6.79
7.86
9.90
15.68
22.58
37.24

19.90

2008 Annual Report, Transat A.T. Inc.

During the year, the Corporation issued 65,635 Class B Shares
[35,307 Class B Shares in 2007] for a total of $1,331 [$1,042
in 2007] 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 purchase price of which is equal to an amount ranging
from 20% to 60% of the maximum percentage of salary contributed,
which may not exceed 5%. Shares so awarded by the Corporation
will vest gradually to the eligible officer, subject to the eligible
officer’s retaining, during the first six months of the vesting period,
all the shares purchased 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 participants’ accounts as and
when they purchase shares under the share purchase plan.

During the year ended October 31, 2008, the Corporation
accounted for a compensation expense of $182 [$117 in 2007]
for its stock ownership incentive and capital accumulation plan.

Permanent stock ownership incentive plan
Subject to participation in the share purchase plan offered to all
eligible employees of the Corporation, the Corporation awards
annually to each eligible senior executive a number of Class B
Shares, the aggregate purchase 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 senior executive’s
retaining, during the vesting period, all the shares purchased 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 participants’ account as and when they purchase shares
under the share purchase plan.

During the year ended October 31, 2008, the Corporation
accounted for a compensation expense of $232 [$208 in 2007]
for its permanent stock ownership incentive plan.

Deferred share unit plan
Deferred share units [“DSUs”] are awarded in connection 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 determined
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, 2008, the number of DSUs awarded amounted
to 42,003 [35,732 as at October 31, 2007]. Subsequent to
the decline in its share prices, the Corporation reduced its compen-
sation expense by $952 [recorded a compensation expense of
$595 in 2007] for its deferred share unit plan during the year
ended October 31, 2008.

Restricted share unit plan
Restricted share units [“RSUs”] are awarded annually 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 repurchased
by the Corporation, subject to certain conditions and certain
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, 2008, the number of RSUs awarded amounted
to 126,892 [66,784 as at October 31, 2007]. Subsequent to
the decline in its share prices, the Corporation reduced its compen-
sation expense by $615 [recorded a compensation expense of
$887 in 2007] for its restricted share unit plan during the year
ended October 31, 2008.

Warrants
On January 10, 2002, the Corporation issued 1,421,225
warrants entitling the holders to purchase the same number of
Class B Voting Shares of the Corporation at an exercise price of
$6.75 each. These warrants expired on January 10, 2007 and
were exercised during the year ended October 31, 2007.

Earnings (loss) per share
Basic earnings (loss) per share and diluted earnings (loss) per share
were computed as follows:

Earnings (loss) per share

NUMERATOR
Income (loss) attributable
to voting shareholders
Interest on the debenture
that may be settled
in voting shares

Income (loss) used to
calculate diluted
earnings (loss) per share

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 (loss) per share

Basic earnings (loss) per share
Diluted earnings (loss) per share

2008

2007
[restated
— note 3]
$

(50,011)

78,503

—

129

(50,011)

78,632

33,108

33,763

—
—
—

94
304
51

33,108
(1.51)
(1.51)

34,212
2.33
2.30

54/55

2008 Annual Report, Transat A.T. Inc.

Debentures that may be settled in voting shares were not taken
into account in calculating the loss per share for the year ended
October 31, 2008 because of their anti-dilutive effect. The potential
impact of these securities on the denominator is 130,000 shares.
In light of the loss recognized for fiscal 2008, the 716,173
outstanding stock options were not included in the calculation
because of their anti-dilutive effect.

In calculating diluted earnings per share for the year ended
October 31, 2007, 137,222 stock options were not included
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
Other comprehensive income

for the year

Balance, end of year

2008
$

2007
$

(66,501)

(12,413)

140,374
73,873

(54,088)
(66,501)

2008

$
55,380

1,458
1,471
(1,660)
56,649

2007
[restated
— note 3]
$
49,235

1,600
1,815
(1,660)
50,990

17
AMORTIZATION

Amortization

Property, plant and equipment
Intangible assets subject

to amortization

Other assets
Deferred lease inducements

Business acquisitions

Assets acquired
Cash and cash equivalents
Other current assets
Property, plant and equipment
Goodwill

Liabilities assumed
Current liabilities
Consideration paid

18
BUSINESS ACQUISITIONS
During the years ended October 31, 2008 and 2007, the
Corporation acquired several businesses. These acquisitions were
recorded using the purchase method. The results of these business-
es were included in the Corporation’s results as of their respective
dates of acquisition, unless otherwise indicated.

2008
During the year, a $1,605 gain was recognized subsequent to the
repurchase of shares classified as other liabilities by the Corporation’s
subsidiary Travel Superstore for a consideration of $330, whereas
these shares had a carrying amount of $1,935. Subsequent to
this transaction, the percentage of the Corporation’s interest in this
subsidiary increased to 64.6% from 50.1%.

In 2008, the Corporation paid 2,502 [$3,994] in additional
consideration in connection with the 2007 acquisition of L’Euro-
péenne de Tourisme (Amplitude Internationale), and $1,756 in
additional goodwill was recognized.

2007
On May 1, 2007, the Corporation made a m1,264 cash payment
[$1,921] to acquire the remainder of the shares [30%] of Air
Consultants Europe [“ACE”] that it did not already own. Goodwill
amounting to $2,108 was recorded subsequent to this transaction.
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’Europé-
enne de Tourisme (Amplitude Internationale) for a total consideration
of m6,044 [$8,631]. A cash consideration of m4,644 [$6,241]
was paid on the acquisition date, and the balance, initially
estimated at m1,400 [$1,923], was paid on July 11, 2008. A
temporary goodwill amount of $3,516 was recognized subsequent
to this transaction.

Air Consultants
Europe
$

2,363
381
46
2,108

4,898

2,977
1,921

2007

L’Européenne
de tourisme
$

5,607
12,117
79
3,516

21,319

12,688
8,631

Total
$

7,970
12,498
125
5,624

26,217

15,665
10,552

2008 Annual Report, Transat A.T. Inc.

19
INCOME TAXES

Income taxes

Income taxes at the statutory rate
Change in income taxes arising from the undernoted items:
Effect of differences in Canadian and foreign tax rates
Non-deductible (non-taxable) items
Recognition of previously unrecorded tax benefits
Effect of tax rate changes
Effect of differences in tax rates on temporary items
Valuation allowance
Other

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 factors explaining this difference and the effect on income
taxes are detailed above.

Significant components of the Corporation’s future income tax
assets and liabilities are as follows:

Future income taxes

Future income taxes
Loss carry-forwards and other

tax deductions

Carrying value of capital assets

in excess of tax basis
Non-deductible reserves

and provisions

Taxes related to accumulated other

comprehensive income and
derivative financial instruments

Other
Total future income taxes
Valuation allowance
Net future income tax assets

(liabilities)

Current future income tax assets
Long-term future income tax assets
Current future income tax liabilities
Long-term future income tax liabilities
Net future income tax assets

(liabilities)

2008

2007
[restated
— note 3]
$

12,263

17,380

(25,338)

(28,536)

36,866

26,561

(10,437)
932
14,286
(13,269)

21,115
52
36,572
(20,081)

1,017

16,491

11,382
16,097
(16,770)
(9,692)

25,250
9,341
(298)
(17,802)

1,017

16,491

Non-capital losses carried forward and other tax deductions for
which a writedown was recorded, available to reduce future
taxable income of certain subsidiaries in Canada and Europe,
respectively totalled $2,388 and m17,102 [$26,382] as at
October 31, 2008 [$2,734 and m31,266 [$42,966] as at
October 31, 2007]. Of these loss carryforwards and deductions,
m17,102 [$26,382] will expire in two years, and the remainder
will expire in 2015 and thereafter.

56/57

2008 Annual Report, Transat A.T. Inc.

2008

2007
[restated — note 3]

$
(23,602)

(2,984)
(555)
(7,827)
1,572
2,030
1,767
398

(29,201)

%
31.1

3.9
0.7
10.3
(2.0)
(2.7)
(2.3)
(0.5)

38.5

$
36,418

(1,781)
4,858
(7,350)
(397)
—
2,557
320

%
32.0

(1.6)
4.3
(6.5)
(0.3)
—
2.2
0.3

34,625

30.4

Retained earnings of the Corporation’s foreign subsidiaries are
considered to be indefinitely reinvested. Accordingly, no provision
for income taxes has been provided thereon. Upon distribution of
this income in the form of dividends or otherwise, the Corporation
may be subject to withholding taxes.

20
RELATED PARTY TRANSACTIONS AND BALANCES
The Corporation enters into transactions in the normal course
of business 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.
Significant transactions between related parties are as follows:

Revenues from companies subject

to significant influence

Operating expenses incurred with
companies subject to significant
influence

2008
$

2007
$

—

262

13,530

1,365

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

2008
$

2007
$

—

239

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 highest. These
arrangements are not funded; however, to secure its obligations,
the Corporation has issued a $24,370 letter of credit to the trustee
[see note 13]. 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 changes in the
accrued benefit obligation:

The significant actuarial assumptions adopted to determine the
Corporation’s accrued benefit obligation and pension expense
were as follows:

Accrued benefit obligation
Discount rate
Rate of increase in eligible earnings
Pension expense
Discount rate
Rate of increase in eligible earnings

2008
$

7.25
3.00

5.50
3.00

2007
$

5.50
3.00

Accrued benefit obligation,

beginning of year
Current service cost
Interest cost
Benefits paid
Actuarial loss (gain)
on the obligation

Accrued benefit obligation,

end of year

2008
$

2007
$

16,695
867
971
(22)

14,349
786
840
(9)

(3,097)

729

15,414

16,695

22
COMMITMENTS AND CONTINGENCIES
[a] The Corporation’s commitments under agreements with

suppliers and operating leases for aircraft, buildings,
automotive equipment, telephone systems, maintenance
contracts and office premises amounted to $575,103 and
are broken down as follows: $132,571, US$135,072,
m132,917 and £38,058.

The annual payments to be made under these commitments
during the next five years are as follows:

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 (gain)
Accrued benefit liability

2008
$

—
15,414
15,414
1,561

(409)
14,262

2007
$

—
16,695
16,695
2,620

2,866
11,209

2009
2010
2011
2012
2013

$
263,625
120,650
73,540
38,905
18,700

[b]

In 2012, the minority shareholder in Jonview Canada Inc.’s
parent company may require the Corporation to buy its shares
of Jonview Canada Inc.’s parent company 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] Between 2011 and 2015, the minority shareholders of Travel
Superstore Inc. could require that the Corporation acquire their
shares of Travel Superstore Inc. at a price equal to the fair
market value, payable in cash.

Pension plan expense is allocated as follows:

[d]

Current service cost
Interest cost
Amortization of past service costs
Amortization of net actuarial loss
Pension expense

2008
$

867
971
1,060
177
3,075

2007
$

786
840
1,060
123
2,809

In the normal course of business, the Corporation is exposed
to various claims and legal proceedings. These disputes often
involve numerous uncertainties and the outcome of the individ-
ual cases is unpredictable. According to management, these
claims and proceedings are adequately provided for or cov-
ered by insurance policies and their settlement should not have
a significant negative impact on the Corporation’s financial
position.

23
GUARANTEES
The Corporation has entered into agreements in the normal course
of business containing clauses meeting the definition of a guaran-
tee. These agreements provide compensation and guarantees to
counterparties in transactions such as operating leases, irrevocable
letters of credit and collateral 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

2008 Annual Report, Transat A.T. Inc.

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 about some of these agreements. The following
constitutes additional disclosure.

Operating leases
The Corporation’s subsidiaries have general indemnity clauses in
many of their airport and other real estate leases whereby they, as
lessee, indemnify the lessor against liabilities related to the use of
the leased property. These leases mature at various dates through
2034. The nature of the agreements varies based on the contracts
and therefore prevents the Corporation from estimating the total
potential amount its subsidiaries would have to pay to lessors.
Historically, the Corporation’s subsidiaries have not made any
significant payments under such agreements and have liability
insurance coverage in such circumstances.

Irrevocable letters of credit
The Corporation has entered into irrevocable letters of credit with
some of its suppliers. Under these letters of credit, the Corporation
guarantees the payment of certain tourist services such as hotel
rooms whether it sells the services or not. These agreements, which
are entered into for significant blocks of tourist services, typically
cover a one-year period and are renewable. The Corporation has
also issued letters of credit to provincial regulatory agencies in
Ontario and British Columbia guaranteeing amounts to the
Corporation’s customers for the performance of its obligations. In
addition to the letters of credit and collateral security contracts
mentioned in notes 4, 11 and 21, the other guarantees provided
by the Corporation under letters of credit totalled $504 as at
October 31, 2008. Historically, the Corporation has not made
any significant payments under such letters of credit.

Collateral security contracts
The Corporation has entered into collateral security contracts
whereby it has guaranteed a prescribed amount to its customers at
the request of regulatory agencies for the performance of the

Segment disclosure

2008

Revenues from third parties
Operating expenses

2007
[restated — note 3]

Revenues from third parties
Operating expenses

obligations included in mandates by its customers during the term
of the licenses granted to the Corporation for its travel agent and
wholesaler activities in the province of Québec. These agreements
typically cover a one-year period and are renewable annually.
As at October 31, 2008, these guarantees totalled $790.
Historically, the Corporation has not made any significant payments
under such agreements.

As at October 31, 2008, 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 state-
ments of income (loss) include all the required information. With
respect to geographic areas, the Corporation operates mainly in
the Americas and in Europe. Geographic intersegment sales are
accounted for at prices that take into account market conditions
and other considerations.

25
SUBSEQUENT EVENTS
Subsequent to implementation of the January 12, 2009 ABCP
restructuring plan discussed in note 5, the Corporation entered into
an unsecured subordinated financing agreement with a share-
holder of the Corporation for $60,000 on December 18, 2008.
The Corporation can draw on the facility until October 31, 2009.
This agreement will expire on December 31, 2012. The company
can make early repayments on the facility subject to premiums.
The agreement bears interest separately for each disbursement at
Government of Canada bonds rates that have maturities equal to
the remaining term of the agreement, plus a premium determined
in part based on certain factors specific to unsecured subordinated
financing arrangements. In addition, the agreement provides that
the rights with respect to the purchase of shares held by this share-
holder in Jonview Canada Inc.’s parent company be deferred for
three years (note 22).

Americas
$
2,536,831
2,461,307

75,524

2,278,116
2,157,038

121,078

Europe
$
976,020
924,217

51,803

767,801
750,762

17,039

Total
$
3,512,851
3,385,524

127,327

3,045,917
2,907,800

138,117

Segment disclosure

Canada
France
United Kingdom
Other

Revenues1

2008

2007

$
2,503,227
779,701
176,739
53,184

3,512,851

$
2,257,040
602,058
146,108
40,711

3,045,917

1 Revenues are allocated based on the subsidiary’s country of domicile.

58/59

2008 Annual Report, Transat A.T. Inc.

Property, plant and equipment,
goodwill and other intangible assets
2008

$
190,222
41,149
79,045
12,681

323,097

2007
[restated — note 3]
$
192,636
63,413
44,384
11,100

311,533

SUPPLEMENTARY FINANCIAL DATA
(In thousands of dollars, except per share amounts)

Consolidated Statements of Income

Revenues
Operating expenses

Expenses and other revenues

Amortization
Restructuring charge
Interest on long-term debt and debentures
Other interest and financial expenses
Interest income
Change in fair value of derivative financial instruments

used for aircraft fuel purchases

Foreign exchange (gain) loss on long-term monetary items
Write-off of goodwill
Writedown of investments in ABCP
Gain on disposal of investment
Gain on repurchase of preferred shares of a subsidiary
Share of net (income) loss of companies subject

to significant influence

Income (loss) before the undernoted items

Income taxes (recovery)
Non-controlling interest in subsidiaries’ results

Net income (loss) for the year

Basic earnings (loss) per share
Diluted earnings (loss) per share

Cash flows related to:
Operating activities
Investing activities
Financing activities

Effect of exchange rate changes on cash

and cash equivalents

Net change in cash and cash equivalents

Cash and cash equivalents, end of year

Cash provided by operations1
Total assets
Long-term debt (including current portion)
Debentures
Shareholders’ equity
Debt/equity ratio2
Book value per share3
Return on average shareholders’ equity4

Shareholding statistics (in thousands)
Outstanding shares, end of year
Weighted average number of outstanding

shares (undiluted)5

Weighted average number of outstanding

shares (diluted)5

2008

2007
[restated —
note 3]

2006

2005

2004

3,512,851
3,385,524

3,045,917
2,907,800

2,603,746
2,476,802

2,364,481
2,243,850

2,199,822
2,036,067

127,327

138,117

126,944

120,631

163,755

56,649
—
7,538
1,758
(16,172)

106,435
2,295
—
45,927
—
(1,605)

50,990
—
6,229
1,929
(19,745)

(26,577)
(3,023)
3,900
11,200
—
—

427

(651)

203,252

24,252

(75,925)
(29,201)
(3,287)

(50,011)

(1.51)
(1.51)

113,865
34,625
(737)

78,503

2.33
2.30

39,360
—
7,264
1,484
(15,706)

—
(4,162)
—
—
—
—

(375)

27,865

99,079
32,046
(1,263)

65,770

1.88
1.85

155,225
(202,183)
15,091

134,457
(173,386)
(14,830)

116,160
(45,054)
(152,046)

37,558
(934)
10,815
1,708
(12,963)

—
(2,309)
—
—
(5,747)
—

(461)

27,667

92,964
36,302
(1,246)

55,416

1.43
1.33

70,434
(39,468)
(44,091)

10,866

(21,001)

5,640

2,332

(4,255)

(48,119)

(78,608)

(17,380)

145,767

166,768

120,725
1,265,431
150,085
3,156
341,992
0.73
10.47
(15.99 %)

125,868
1,080,523
88,681
3,156
283,452
0.74
8.43
26.98%

214,887

104,802
959,195
84,248
3,156
295,963
0.69
8.80
19.98%

293,495

78,014
949,537
93,613
13,156
362,383
0.62
9.02
16.03%

33,027
11,350
7,712
1,907
(11,307)

—
1,474
—
—
—
—

1,509

45,672

118,083
45,010
(753)

72,320

2.07
1.76

179,008
(79,162)
(35,359)

3,436

67,923

310,875

124,039
838,389
—
33,214
311,106
0.63
9.16
25.11%

32,678

33,628

33,648

40,156

33,955

33,108

33,763

34,907

37,863

33,374

33,108

34,212

35,660

41,684

41,156

1 Represents 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 operationsl

2 Total liabilities divided by the total assets.
3 Total shareholders’ equity divided by the number of outstanding shares
4 Net income (loss) divided by the average shareholders’ equity
5 See note 15 to the audited Consolidated Financial Statements.

2008 Annual Report, Transat A.T. Inc.

Board of Directors

Management

Subsidiaries
Management

Jean-Marc Eustache
President
and Chief Executive Officer

Air Consultants Europe
Marc Koenis
General Manager

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

Nelson Gentiletti
Executive Vice-President,
Tour Operators

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 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
Cédric Gobilliard
General Manager

Tourgreece
Vassilis P. Sakellaris
President

Trafic Tours
Turissimo
Alfonso Rizzuto
President

Transat Distribution Canada
Philippe Sureau
President

Transat Tours Canada
Nelson Gentiletti
President

tripcentral.ca
Richard Vanderlubbe
President

Vacances Transat (France)
Patrice Caradec
General Manager

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

H. Clifford Hatch Jr.
President and Chief Executive Officer
of Cliffco Investments Limited

Jean-Yves Leblanc
Director

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.

Human Resources
and Compensation Committee

John D. Thompson (President)
H. Clifford Hatch Jr.
Dennis Wood, O.C.

Audit Committee

André Bisson, O.C. (President)
Jean Pierre Delisle
John D. Thompson

Corporate Governance
and Nominating Committee

H. Clifford Hatch Jr. (President)
André Bisson, O.C.
John P. Cashman
Jacques Simoneau

2008 Annual Report, Transat A.T. Inc.

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
www.transat.com
For additional information, contact in writing
the Vice-President, Finance and Administration
and Chief Financial Officer.

Ce rapport annuel est disponible en français.

Stock Exchange
Toronto Stock Exchange (TSX) TRZ.B; TRZ.A.

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

Information for Shareholders

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 and Special Meeting
of Shareholders
March 11, 2009, 10:00 a.m.
Fairmont Queen Elizabeth Hotel
Marquette-Joliette Room
900 René-Lévesque Boulevard West
Montréal, Québec

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