Transat A.T. Inc.
2014 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.
Revenues
(In millions of dollars)
2014
2013
2012
2011
2010
3,752
3,648
3,714
3,654
3,497
Cash flows related
to operating activities
(In millions of dollars)
Aircraft fuel
(In millions of dollars)
2014
2013
2012
2011
2010
106.2
123.0
8.9
90.7
119.1
2014
2013
2012
2011
2010
462.9
417.9
505.4
447.6
302.3
Adjusted operating income 1
(In millions of dollars)
Net income (loss) attributable
to shareholders
(In millions of dollars)
2014
2013
2012
2011
2010
91.8
116.6
17.0
43.1
126.1
2014
2013
2012
2011
2010
1 See Non-IFRS Financial
Measures section on page 7.
22.9
58.0
(16.7)
(14.7)
64.5
Highlights
(In thousands of dollars, except per share amounts and ratios)
2014
2013
Variance
$
Variance
%
Revenues
3,752,198
3,648,158
104,040
2,9
Adjusted operating income 1
91,835
116,646
(24,811)
(21.3)
Net income
Net income attributable to shareholders
Diluted income per share
Cash flows relating to operating activities
Cash and cash equivalents
Total assets
26,066
22,875
0.59
106,240
61,202
57,955
1.51
123,039
308,887
1,375,030
265,818
1,290,073
Long-tem debt (including current portion)
Debt ratio 2
Return on average shareholders’ equity (%) 3
Book value per share 4
—
0.65
4.9
12.47
—
0.66
14.4
11.47
Stock price as at October 31 (TRZ.B)
Oustanding shares, end of year (in thousands)
8.60
38,742
12.87
38,468
(35,136)
(35,080)
(1.00)
(16,799)
43,069
84,957
N.A.
(0.01)
(9.5)
1.00
(4.27)
274
(57.4)
(60.5)
(60.8)
(13.7)
16.2
6.6
N.A.
(1.5)
(66.0)
8.7
(33.2)
0.7
1 Adjusted operating income: Operating income before depreciation and amortization expense, restructuring charge
and other significant unusual items
2 Debt ratio: Total liabilities divided by total assets
3 Return on average shareholders’ equity: Net income divided by average shareholders’ equity
4 Book value per share: Shareholders’ equity divided by total number of shares oustanding
Message to Shareholders
Focused on the future
wholly owned business unit Transat Discoveries, into
Transat Tours Canada. And, of course, we completed
the implementation of Air Transat’s flexible-fleet strategy,
achieved notably via the introduction of narrow-body
Boeing 737 aircraft. Other measures were taken, targe-
ting greater flexibility for customers as well as improve-
ments in our margins. On our Sun routes, passengers
are now offered a buy-on-board bistro menu, which
replaces free meal service. Moreover, as of fall 2014, all
our flights now feature Eco Fares: three rate options for
economy-class seating that mean more flexible condi-
tions for passengers.
We have also taken several steps to more
closely match product and service supply to consumers’
evolving expectations, and to enhance their travel
experience. We increased our supply of à la carte hotels,
refined our collections, introduced our Club Lookéa
beach resorts to Canadian travellers, and made consi-
derable enhancements to our online shopping tools,
which now stand out clearly from those of the competi-
tion. Our customers continue to be the prime focus of
our concerns and strategies, in all facets of our work. In
2014, Air Transat was named Best North American
Leisure Airline for the third year in a row at the annual
Skytrax World Airline Awards, and was also second in
the world in the same category.
In France, where the travel market remains
demanding because of wavering economic conditions,
our operations remain profitable, and we continue to
stand out from our main competitors in that regard. We
have maintained our extremely strong performance in
the medium-haul segment, thanks in large part to our
Lookéa product offering. The long-haul market has pro-
ved more challenging, but the outlook remains promi-
sing. In addition, for the past two years we have been
expanding our activities in distribution, with enriched
supply from other travel providers as part of a strategy
Transat had a good year in 2014. As in 2013,
however, the organization’s winter and summer results
were a reflection of the vastly different market dynamics
that it faces depending on the season. Although we
were unable to deliver a new record performance during
the summer, as we did in 2013, we posted very good
results for that period despite the oversupply on the
transatlantic market, which represents the lion’s share of
our summer business. Our winter results would normally
have shown significant year-over-year improvement,
but a sudden, substantial and most untimely decline in
the strength of the Canadian dollar exerted an adverse
effect, which we were fortunately able to contain, in
large part. We posted an adjusted operating income of
$120 million for the summer, and an adjusted operating
loss of $28 million for the winter. Our adjusted operating
income for the fiscal year was $92 million.
We continued implementing our cost-reduc-
tion plan, which is proceeding according to schedule
and resulted in savings of $20 million during 2014. The
plan calls for recurring cost reductions with a cumulative
impact of $75 million over four years (2012–2015), and
we expect to meet and possibly exceed that target.
In 2014, among other initiatives, we fully inte-
grated the operations of Vacances Tours Mont-Royal, a
company we acquired in 2012, as well as those of our
increasing ancillary revenues and more tightly managing
hotel costs; enriching our product supply and develo-
ping new markets, both as a producer, with our own
products, but also via a distribution strategy allowing for
more marketing of products packaged by third parties;
and optimizing our networks of agencies in Canada and
France.
Economic ups and downs are inevitable—
witness the continued uncertainty in Europe—but all
signs point to the travel market continuing to grow at a
steady pace. We have taken action, these past few
years, to transform Transat. Some of these measures
have yet to yield results, while others, like the upgrades
to certain information systems, have yet to be fully
implemented. But we are moving ahead with our plan,
and the tangible results so far are encouraging. I thank
all of our employees for their determination and open-
mindedness, our partners and shareholders, and of
course the members of the Board of Directors, for their
continued invaluable support.
Jean-Marc Eustache
Chairman of the Board,
President and Chief Executive Officer
December 12, 2014
to build traveller loyalty. The year 2014 also saw Transat
formally integrate its operations in France, following the
merger of the Vacances Transat and Look Voyages busi-
ness units in the fall of 2013.
For several years now, Transat has followed
a multi-channel distribution strategy, which has clearly
proven to be the right choice; we now plan to take that
strategy to the next level. This major project has several
components: bring more added value to our websites
and improve their usability; develop and roll out a stra-
tegy for mobile devices; achieve ever greater customer
proximity; grow the Transat Travel brand; and most
important of all, enrich our offering per se, among other
things by distributing products packaged by other travel
companies.
We remain steadfastly committed to sustai-
nable development, and our efforts in this regard were
acknowledged in 2014. Transat made the top 20 on the
Corporate Knights organization’s list of Canada’s best
corporate citizens. Air Transat, meanwhile, received an
award for sustainable tourism innovation from French
magazine L’Écho Touristique, and Quebec’s Grand Prix
Novae as corporate citizen of the year, in recognition of
its pilot project, implemented with partners, for the
green dismantling of end-of-life-cycle aircraft. Air Transat
also became the first airline in North America to com-
plete the first stage of the International Air Transport
Association’s (IATA) Environmental Assessment (IEnvA)
certification. Air Transat has once again ranked as the
most climate-efficient airline in North America, accor-
ding to NGO atmosfair. To build on past accomplish-
ments and structure its efforts going forward, Transat
has made the decision to seek a tour operator and tra-
vel agent sustainability certification, beginning in 2015.
Our principal objectives for 2015 are as fol-
lows: continue with our cost-cutting and margin-impro-
vement initiatives, which implies, among other things,
Jean-Marc Eustache
Chairman of the Board
President and Chief Executive Officer,
Transat A.T. Inc.
Jean-Yves Leblanc
Lead Director
Corporate Director
Raymond Bachand
Strategic Advisor,
Norton Rose Fulbright
Louis-Marie Beaulieu
Chairman of the Board and
President and Chief Executive Officer,
Groupe Desgagné inc.
Lina De Cesare
Director
Jean Pierre Delisle
Corporate Director
and Executor of estates
W. Brian Edwards
Corporate Director
Susan Kudzman
First Senior Vice-President,
Human Resources,
Banque Laurentienne
Tony Mignacca
Chief Executive Officer
and Chairman of the Board,
SAIL Outdoors Inc.
Jacques Simoneau
President and CEO
and Director Gestion Univalor, s.e.c.
Philippe Sureau
Director
Committee
Executive
Committee
Jean-Marc Eustache
(President)
W. Brian Edwards
Jean-Yves Leblanc
Jacques Simoneau
Human
Resources and
Compensation
Committee
W. Brian Edwards
(President)
Susan Kudzman
Jean-Yves Leblanc
Audit Committee
Jean-Yves Leblanc
(President)
Jean Pierre Delisle
Jacques Simoneau
Corporate
Governance
and Nominating
Committee
Jacques Simoneau
(President)
Jean Pierre Delisle
W. Brian Edwards
Jean-Marc Eustache
Chairman of the Board
President and Chief Executive Officer
Transat A.T. Inc.
Joseph Adamo
General Manager
Transat Distribution Canada
Patrice Caradec
President and General Manager
Transat France
André De Montigny
President, Transat International
Vice-President, Corporate Development
Transat A.T. Inc.
Annick Guérard
General Manager
Transat Tours Canada
Jean-François Lemay
General Manager
Air Transat
Michel Bellefeuille
Vice-President
and Chief Information Officer
Transat A.T. Inc.
Bernard Bussières
Vice-President, General Counsel
and Corporate Secretary
Transat A.T. Inc.
Daniel Godbout
Senior Vice-President,
Transport and Yield Management
Transat A.T. Inc.
Christophe Hennebelle
Vice-President, Human Resources
and Talent Management
Transat A.T. Inc.
Michel Lemay
Vice-President, Communications
and Corporate Affairs
and Chief Brand Officer, Transat A.T. Inc.
Denis Pétrin
Vice-President, Finance and Administration
and Chief Financial Officer
Transat A.T. Inc.
MANAGEMENT’S DISCUSSION & ANALYSIS
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, 2014, compared with the year ended October 31, 2013, and should be read in conjunction with the
audited consolidated financial statements and notes thereto. The information contained herein is dated as of December 10, 2014. 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
the year ended October 31, 2014 and Annual Information Form.
Our financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). We
occasionally refer to non-IFRS financial measures in the MD&A. See the Non-IFRS financial measures section for more information. All dollar
figures in this MD&A 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.
This Management’s Discussion and Analysis consists of the following sections:
CAUTION REGARDING FORWARD-LOOKING STATEMENTS ........................................................................................ 6
NON-IFRS FINANCIAL MEASURES ................................................................................................................................... 7
FINANCIAL HIGHLIGHTS .................................................................................................................................................. 10
OVERVIEW ........................................................................................................................................................................ 11
CONSOLIDATED OPERATIONS ....................................................................................................................................... 14
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES ................................................................................... 22
OTHER ............................................................................................................................................................................... 26
ACCOUNTING ................................................................................................................................................................... 26
RISKS AND UNCERTAINTIES .......................................................................................................................................... 32
CONTROLS AND PROCEDURES ..................................................................................................................................... 38
OUTLOOK .......................................................................................................................................................................... 39
MANAGEMENT’S REPORT ............................................................................................................................................... 40
INDEPENDENT AUDITORS’ REPORT ............................................................................................................................. 41
5
Transat A.T. Inc.
2014 Annual Report
Management’s Discussion and Analysis
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,” “potential,”
“predict,” “project,” “will,” “would,” the negative of these terms and similar terminology, including references to assumptions. All such
statements 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, fuel prices, armed conflicts,
terrorist attacks, 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, collective bargaining and labour disputes, pension
issues, exchange and interest rates, availability of financing in the future, statutory changes, adverse regulatory developments or
procedures, 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 place 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, statements concerning:
•
•
•
•
•
The outlook whereby the Corporation should have the resources it needs to meet its 2015 objectives and continue building on
its long-term strategies.
The outlook whereby the Corporation expects revenues to increase and total travellers to be lower compared with fiscal 2014.
The outlook whereby the Corporation expects to generate positive cash flows from operating activities in 2015.
The outlook whereby additions to property, plant and equipment and intangible assets could amount to approximately
$50.0 million.
The outlook whereby the Corporation will be able to meet its obligations with cash on hand, cash flows from operations and
drawdowns under existing credit facilities.
In making these statements, the Corporation has assumed, among other things, that travellers will continue to travel, that credit
facilities will continue to be made available as in the past, that management will continue to manage changes in cash flows to fund working
capital requirements for the full fiscal year and that fuel prices, foreign exchange rates and hotel and other destination-based costs will
remain steady. If these assumptions prove incorrect, actual results and developments may differ materially from those contemplated by the
forward-looking statements contained in this MD&A.
The Corporation considers the assumptions on which these forward-looking statements are based to be reasonable.
These statements reflect current expectations regarding future events and operating performance, speak only as of the date this
MD&A is issued, 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 applicable securities legislation.
6
Transat A.T. Inc.
2014 Annual Report
NON-IFRS FINANCIAL MEASURES
Management’s Discussion and Analysis
This MD&A was prepared using results and financial information determined under IFRS. In addition to IFRS financial measures,
management uses non-IFRS measures to assess the Corporation’s operational performance. It is likely that the non-IFRS financial
measures used by the Corporation will not be comparable to similar measures reported by other issuers or those used by financial analysts
as their measures may have different definitions. The measures used by the Corporation are furnished to provide additional information and
should not be considered in isolation or as a substitute for IFRS financial performance measures.
Generally, a non-IFRS financial measure is a numerical measure of an entity’s historical or future financial performance, financial
position or cash flows that is neither calculated nor recognized under IFRS. Management believes that such non-IFRS financial measures
are important as they provide users of our financial statements with a better understanding of the results of our recurring operations and their
related trends, while increasing transparency and clarity into our operating results. Management also believes these measures to be useful in
assessing the Corporation’s capacity to discharge its financial obligations.
By excluding from results items that arise mainly from long-term strategic decisions and/or do not, in our opinion, reflect the
Corporation’s operating performance for the period, such as the change in fair value of derivative financial instruments used for aircraft fuel
purchases, restructuring charges, impairment of goodwill, depreciation and amortization and other significant unusual items, we believe this
MD&A helps users to better analyze the Corporation’s results and ability to generate cash flows from operations. Furthermore, the use of
non-IFRS measures helps users by enabling better comparability of results from one period to another and better comparability with other
businesses in our industry.
The non-IFRS measures the Corporation uses to assess operational performance include adjusted operating income (loss), adjusted
pre-tax income (loss) and adjusted net income (loss).
Management also uses total debt and total net debt to assess the Corporation’s debt level, cash position, future cash needs and
financial leverage ratio. Management believes these measures to be useful in assessing the Corporation’s capacity to discharge its current
and future financial obligations.
7
Transat A.T. Inc.
2014 Annual Report
Management’s Discussion and Analysis
The non-IFRS measures used by the Corporation are as follows:
Adjusted operating
income (loss)
Operating income (loss) before depreciation and amortization expense, restructuring charge and other
significant unusual items.
Adjusted pre-tax
income (loss)
Income (loss) before income tax expense before change in fair value of derivative financial instruments used
for aircraft fuel purchases, gain (loss) on investments in ABCP, gain on disposal of a subsidiary, restructuring
charge, impairment of goodwill and other significant unusual items.
Adjusted net income
(loss)
Net income (loss) attributable to shareholders before change in fair value of derivative financial instruments
used for aircraft fuel purchases, gain (loss) on investments in ABCP, gain on disposal of a subsidiary,
restructuring charge, impairment of goodwill and other significant unusual items, net of related taxes.
Adjusted net income
(loss) per share
Adjusted net income (loss) divided by the adjusted weighted average number of outstanding shares used in
computing diluted earnings (loss) per share.
Adjusted operating
leases
Aircraft rental expense for the past four quarters multiplied by 5.
Total debt
Long-term debt plus the amount for adjusted operating leases.
Total net debt
Total debt less cash and cash equivalents and investments in ABCP (the Corporation has had no investments
in ABCP since November 9, 2012).
8
Transat A.T. Inc.
2014 Annual Report
Management’s Discussion and Analysis
The following table reconciles the non-IFRS financial measures to the most comparable IFRS financial measures:
(in thousands of Canadian dollars, except per share amounts)
Operating income (loss)
Restructuring charge
Amortization
Adjusted operating income
Income (loss) before income tax expense
Change in fair value of derivative financial instruments used for
aircraft fuel purchases
Gain on investments in ABCP
Gain on disposal of a subsidiary
Write-off and impairment of goodwill
Restructuring charge
Adjusted pre-tax income (loss)
Net (income) loss attributable to shareholders
Change in fair value of derivative financial instruments used for
aircraft fuel purchases
Gain on investments in ABCP
Gain on disposal of a subsidiary
Write-off and impairment of goodwill
Restructuring charge
Tax impact
Adjusted net income (loss)
Adjusted net income (loss)
Adjusted weighted average number of outstanding shares used
in computing earnings per share
Adjusted net income (loss) per share
Aircraft rent
Multiple
Adjusted operating leases
Long-term debt
Adjusted operating leases
Total debt
Total debt
Cash and cash equivalents
Investments in ABCP
Total net debt
9
2014
$
38,746
6,387
46,702
91,835
2013
$
71,838
5,740
39,068
116,646
2012
$
(23,838)
—
40,793
16,955
29,824
80,712
(16,950)
23,822
—
—
369
6,387
60,402
493
—
—
—
5,740
86,945
(701)
(7,936)
(5,655)
15,000
—
(16,242)
22,875
57,955
(16,669)
23,822
—
—
369
6,387
(8,211)
45,242
493
—
—
—
5,740
(1,621)
(701)
(7,936)
(5,655)
15,000
—
689
62,567
(15,272)
45,242
62,567
(15,272)
39,046
1.16
38,472
1.63
38,142
(0.40)
October 31, October 31, October 31,
2012
$
2014
$
2013
$
87,229
5
436,145
—
436,145
436,145
436,145
(308,887)
—
127,258
81,270
5
88,361
5
406,350
441,805
—
406,350
406,350
406,350
(265,818)
—
140,532
—
441,805
441,805
441,805
(171,175)
(27,350)
243,280
Transat A.T. Inc.
2014 Annual Report
FINANCIAL HIGHLIGHTS
(in thousands of Canadian dollars, except per share amounts)
Consolidated Statements of Income
Revenues
Adjusted operating income(1)
Net income (loss) attributable to shareholders
Basic earnings (loss) per share
Diluted earnings (loss) per share
Adjusted net income (loss)
Adjusted net income (loss) per share(1)
Consolidated Statements of Cash Flows
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash
and cash equivalents
Net change in cash and cash equivalents
Consolidated Statements of Financial Position
Cash and cash equivalents
Cash and cash equivalents in trust or otherwise reserved
(current and non-current)
Investments in ABCP
Total assets
Debt (current and non-current)
Total debt(1)
Total net debt(1)
1 SEE NON-IFRS FINANCIAL MEASURES
Management’s Discussion and Analysis
2014
$
2013
$
2012
$
3,752,198
91,835
22,875
0.59
0.59
45,242
1.16
3,648,158
116,646
57,955
1.51
1.51
62,567
1.63
3,714,219
16,955
(16,669)
(0.44)
(0.44)
(15,272)
(0.40)
106,240
(61,100)
191
(2,262)
43,069
123,039
(28,289)
(1,817)
1,710
94,643
8,872
(11,024)
(4,361)
(3,888)
(10,401)
As at
As at
As at
October 31, October 31, October 31,
2012
$
2014
$
2013
$
Change
2014
%
2.9
(21.3)
(60.5)
(60.9)
(60.9)
(27.7)
(28.8)
(13.7)
(116.0)
110.5
(232.3)
(54.5)
2013
%
(1.8)
588.0
447.7
443.2
443.2
509.7
506.2
1,286.8
(156.6)
58.3
144.0
1,009.9
Change
2014
%
Change
2013
%
308,887
265,818
171,175
16.2
55.3
380,184
—
689,071
1,375,030
—
436,145
403,468
—
669,286
1,290,073
—
406,350
370,291
27,350
568,816
1,163,301
—
441,805
127,258
140,532
243,280
(5.8)
—
3.0
6.6
—
7.3
(9.4)
9.0
(100.0)
17.7
10.9
—
(8.0)
(42.2)
10
Transat A.T. Inc.
2014 Annual Report
OVERVIEW
HOLIDAY TRAVEL INDUSTRY
Management’s Discussion and Analysis
The holiday travel industry consists mainly of tour operators, traditional and online travel agencies, destination service providers or
hotel operators, and air carriers. Each of these subsectors includes companies with different operating models.
Generally, 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, through travel agencies or via the Web. 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. Destination service providers are based at destination and sell a range of optional services to travellers onsite
for spontaneous consumption, such as excursions or sightseeing tours. These companies also provide outgoing tour operators with logistical
support services, such as ground transfers between airports and hotels. Travel agencies, operating independently or in networks, are
distributors serving as intermediaries between tour operators and consumers. Air carriers sell seats through travel agencies or through tour
operators that use them in building packages, or directly to consumers.
CORE BUSINESS, VISION AND STRATEGY
CORE BUSINESS
Transat is one of the largest integrated tour operators in the world. 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 consists in developing and marketing holiday travel
services in package and air-only formats. We operate as both an outgoing and incoming tour operator by bundling services bought in
Canada and abroad and reselling them primarily in Canada, France, the U.K. and in ten other European countries, directly or through
intermediaries, as part of a multi-channel distribution strategy. Transat is also a retail distributor, both online and through travel agencies,
some of which it owns. Transat deals with numerous air carriers, but relies on its subsidiary Air Transat for a significant portion of its needs.
in
Transat offers destination services
Caribbean Investments B.V. (operating under the Ocean Hotels banner), a hotel business which owns, operates or manages properties in
Mexico, the Dominican Republic and Cuba.
the Dominican Republic and Greece. Transat holds an
to Canada, Mexico,
interest
VISION
As a leader in holiday travel, Transat intends to pursue growth by inspiring trust in travellers and by offering them an experience that
is exceptional, heart-warming and reliable. Our customers are our primary focus, and sustainable development of tourism is our passion. We
intend to expand our business to other countries where we see high growth potential for an integrated tour operator specializing in holiday
travel.
STRATEGY
To deliver on its vision, the Corporation intends to continue: deriving synergies from its vertical integration model and particularly from
its position as both a major producer and distributor in Canada, which distinguishes it from several of its rivals; growing its market share in
France, where it ranks among the largest tour operators; and tapping into new markets or expanding operations in markets not yet fully
served. To increase its buying power for its traditional destinations, Transat is targeting new markets with potential demand for these routes.
Alongside these initiatives, Transat intends to leverage targeted technology investments and efficiency gains from changes to its
internal management structure to improve its operating income and maintain or grow market share in all its markets. Cost management
remains a core strategic issue in light of the tourism industry’s slim margins.
Transat acknowledges the growing strategic importance of sustainable development in the holiday and air travel industries. Given this
trend, Transat has undertaken to adopt avant-garde policies on corporate responsibility and sustainable tourism.
11
Transat A.T. Inc.
2014 Annual Report
Management’s Discussion and Analysis
For fiscal 2015, Transat has set the following objectives:
1. Transat remains committed under a cost reduction and unit margin improvement program, which it expects to generate
$20 million in savings in fiscal 2015, compared with fiscal 2014. The Corporation aims to improve its winter results and
maintain its summer profitability in fiscal 2015, in particular through improved efficiency.
2. Transat intends to develop new markets by launching new routes, entering new source markets, building out its existing
source market offering and expanding its overall offering, including where applicable, by marketing third-party products.
3. Building on the successful launch of the Transat Travel banner as a Canadian distributor, Transat intends to improve its
multi-channel distribution strategy, and particularly its online presence, to extend its consumer reach and enhance
customer loyalty.
4.
In fiscal 2015, Transat will begin structuring its sustainable development project to secure a certification for its tour
operator and travel agency businesses.
REVIEW OF 2014 OBJECTIVES AND ACHIEVEMENTS
The main goals and achievements for fiscal 2014 were as follows:
1. Reduce costs, improve winter results and maintain summer profitability.
The cost reduction and operating income improvement program generated cumulative improvements totalling $20 million, $35 million
and $55 million as at the end of fiscal 2012, 2013 and 2014, respectively, as anticipated.
The Corporation’s airline strategy is a key element of the program. The Corporation and its unionized employees at its subsidiary Air
Transat reached agreements in 2012 to transform a portion of fixed compensation into variable compensation, and further agreed to amend
certain processes and procedures, resulting in substantial savings, without monetary concessions from staff. Following those negotiations,
the Corporation moved to insource narrow-body aircraft operations to sun destinations, which had been outsourced since 2003. This move,
completed in the summer 2014, has significantly curbed operating costs, as per the cost reduction and unit margin improvement program
discussed above. Moreover, the Corporation renewed six wide-body aircraft leases in 2013 under terms that will further improve its cost
structure.
For winter 2014, the Corporation reported an adjusted operating loss of $27.8 million, compared with $18.3 million in fiscal 2013.
However, this increase in adjusted operating loss was completely attributable to the sudden mid-season weakening of Canada’s currency
against the U.S. dollar, which alone had a $36 million adverse effect over the winter season. In summer 2014, the Corporation reported
$119.7 million in adjusted operating income, the third best summer performance in the Corporation’s history, compared with $134.9 million
for the record summer of 2013.
2. Shift toward a flexible fleet.
The Corporation has completed its shift toward a flexible fleet at Air Transat, consisting of wide- and narrow-body aircraft, allowing it
to (a) maximize the use of narrow-body aircraft to serve sun destinations, with a variable number of aircraft in line with seasonal demand;
and (b) maximize the use of wide-body aircraft on transatlantic routes thereby minimizing their fixed costs in winter. The full effect of this shift
will be reflected as of winter 2015.
3.
Improve performance, efficiency and unit margins from a product and customer experience standpoint.
The Corporation generally provides customers with excellent value for money through a made-to-measure product offering tailored for
tourists. In the transatlantic market, Transat offers a wide variety of competitively priced direct flights to or from Canada, complemented by
top-quality destination services (such as excursions, hotels, cars and cruises). Over the years in this market segment, Transat has built well-
established distribution networks in both Canada and Europe.
With regard to our sun destinations, our hotel partnership terms have been tightened, the collections have been adjusted as part of a
focused segmentation review and the performance of customer relationship centres has been significantly improved, all of which has driven
an improved customer experience. These initiatives are ongoing and should result in additional improvements in winter 2015 and thereafter.
12
Transat A.T. Inc.
2014 Annual Report
Management’s Discussion and Analysis
4. Refine our distribution strategy for enhanced customer proximity.
In 2014, Transat’s ongoing implementation of a pilot project to introduce the Transat Travel banner to Canadian consumers has met
with encouraging results. At the same time, the Corporation continued developing a distribution strategy moulded around an expanded
offering to be implemented as of 2015. Alongside those initiatives, the Corporation continues to fine-tune its customer relationship
management (CRM) strategy.
5. Conduct a strategic review to revamp its organizational structure.
Transat made further integration inroads in fiscal 2014. As well, Tours Mont-Royal Holidays Inc. and Transat Discoveries were
merged into Transat Tours Canada. In France, following the legal merger carried out in 2013, the integration of the entities has been
completed.
KEY PERFORMANCE DRIVERS
The following key performance drivers are essential to the successful implementation of our strategy and to the achievement of our
objectives.
ADJUSTED OPERATING INCOME
Generate an adjusted operating income margin of 3%.
MARKET SHARE
REVENUE GROWTH
Remain a leader in all Canadian provinces and increase market share in
Ontario, in Canada and in Europe.
Grow revenues by more than 3%, excluding acquisitions.
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 in the
past to the success of our strategies and achievement of our objectives.
Our financial resources are as follows:
Cash
Credit facilities
Our balances of cash and cash equivalents not held in trust or otherwise reserved totalled
$308.9 million as at October 31, 2014. Our continued focus on expense reductions and
operating income growth should maintain these balances at healthy levels.
We can also draw on credit facilities in Canada and Europe totalling $66.2 million.
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Transat A.T. Inc.
2014 Annual Report
Our non-financial resources include:
Management’s Discussion and Analysis
Brand
Structure
Employees
The Corporation has taken the necessary steps to foster a distinctive brand image and raise
its profile, including its sustainable tourism approach.
Our vertically integrated structure enables us to ensure better quality control over our
products and services and facilitates implementing programs to achieve gains in efficiency.
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 the Corporation is managed by a
seasoned leadership team.
Supplier relationships
We have exclusive access to certain hotels at sun destinations as well as over 20 years of
privileged relationships with many hotels at these destinations and in Europe.
Transat has the resources it needs to meet its 2015 objectives and continue building on its long-term strategies.
CONSOLIDATED OPERATIONS
REVENUES
Revenues by geographic area
(in thousands of dollars)
Americas
Europe
2014
$
2,921,811
830,387
3,752,198
2013
$
2,893,353
754,805
3,648,158
2012
$
2,850,874
863,345
3,714,219
Change
2014
%
1.0
10.0
2.9
2013
%
1.5
(12.6)
(1.8)
We derive our revenues from outgoing tour operators, air transportation, travel agencies, distribution, incoming tour operators and
services at travel destinations.
For the year ended October 31, 2014, the Corporation’s revenues were up $104.0 million (2.9%), owing primarily to higher average
selling prices and the strengthening of the euro and pound sterling against the dollar in both our winter and summer seasons. Generally
speaking, average selling prices during the fiscal year were slightly higher than in 2013 while traveller volumes were down 0.3%. We
reduced our sun destination product offering during the winter season by 1.9% compared with the same period of fiscal 2013. Our
transatlantic offering during the summer season was trimmed 1.3% from the same period of 2013.
For fiscal 2015, we expect revenues to increase and total travellers to be lower compared with fiscal 2014, owing primarily to the
Corporation’s move to reduce winter-season capacity.
14
Transat A.T. Inc.
2014 Annual Report
OPERATING EXPENSES
Operating expenses
(in thousands of dollars)
Costs of providing tourism
services
Aircraft fuel
Salaries and employee benefits
Commissions
Aircraft maintenance
Airport and navigation fees
Aircraft rent
Other
Amortization
Restructuring charge
Total
Management’s Discussion and Analysis
% of revenues
Change
2014
$
2013
$
2012
$
2,000,424
462,942
370,904
170,724
128,892
105,440
87,229
333,808
46,702
6,387
3,713,452
1,951,329
417,891
368,477
163,606
106,732
95,635
81,270
346,572
39,068
5,740
3,576,320
1,975,892
505,422
374,980
158,357
119,613
108,112
88,361
366,527
40,793
—
3,738,057
2014
%
53.3
12.3
9.9
4.5
3.4
2.8
2.3
8.9
1.2
0.2
99.0
2013
%
53.5
11.5
10.1
4.5
2.9
2.6
2.2
9.5
1.1
0.2
98.0
2012
%
53.2
13.6
10.1
4.3
3.2
2.9
2.4
9.9
1.1
—
100.6
2014
%
2.5
10.8
0.7
4.4
20.8
10.3
7.3
(3.7)
19.5
11.3
3.8
2013
%
(1.2)
(17.3)
(1.7)
3.3
(10.8)
(11.5)
(8.0)
(5.4)
(4.2)
—
(4.3)
Total operating expenses for fiscal 2014 rose $137.1 million (3.8%) from fiscal 2013, owing primarily to the dollar’s depreciation
against the U.S. dollar, the euro and the pound sterling and a slightly reduced seasonal source market product offering, relative to last year.
In addition, during our summer season, we began operating four Boeing 737-800 narrow-body aircraft rather than outsource to an external
air carrier. Apart from the anticipated cost savings, this initiative will prompt lower costs of providing tourism services and higher other
operating expenses, excluding commissions.
COSTS OF PROVIDING TOURISM SERVICES
The costs of providing tourism services are incurred by our tour operators. They include hotel room costs and the cost of booking
blocks of seats or full flights with air carriers other than Air Transat. Despite the decrease in our seasonal source market product offering, the
costs of providing tourism services were up $49.1 million (2.5%). The increase was driven mainly by the dollar’s weakening against the
U.S. dollar and the euro and higher hotel room costs, partially offset by reduced flight purchases from air carriers other than Air Transat with
the start of our narrow-body Boeing 737-800 operations.
AIRCRAFT FUEL
Aircraft fuel expense for the year was up $45.1 million (10.8%) from the previous year, primarily as a result of the dollar’s weakening
against the U.S. dollar (fuel is paid mainly in U.S. dollar) and the commissioning of our narrow-body Boeing 737-800s, offset by lower fuel
prices.
SALARIES AND EMPLOYEE BENEFITS
Salaries and employee benefits for the year ended October 31, 2014 rose $2.4 million (0.7%) to $370.9 million from the previous year.
The increase stemmed from annual salary reviews and the weakening of the dollar against the euro, the pound sterling and the U.S. dollar,
which was tempered by savings from workforce reductions in fiscal 2013 and 2014 and a decline in short- and long-term incentive program
expense.
COMMISSIONS
Commissions include the fees paid by tour operators to travel agencies for serving as intermediaries between tour operators and
consumers. Commission expense for the year amounted to $170.7 million, up $7.1 million (4.4%) from fiscal 2013. Commissions accounted
for 4.5% of revenues, unchanged from the previous fiscal year.
15
Transat A.T. Inc.
2014 Annual Report
AIRCRAFT MAINTENANCE
Management’s Discussion and Analysis
Aircraft maintenance costs consist mainly of engine and airframe maintenance expenses incurred by Air Transat. Relative to
fiscal 2013, they rose $22.2 million (20.8%) during the year, owing primarily to the dollar’s weakening against the U.S. dollar, two major
breakdowns at the end of the fiscal year, the beginning of our narrow-body aircraft operations and the non-reoccurrence of aircraft
maintenance repayments received by the Corporation in fiscal 2013.
AIRPORT AND NAVIGATION FEES
Airport and navigation fees consist mainly of fees charged by airports and air traffic control entities. Fees for the year were up
$9.8 million (10.3%) compared with 2013, resulting primarily from the addition of narrow-body aircraft to our fleet and the dollar’s weakening
against the U.S. dollar.
AIRCRAFT RENT
Aircraft rent for the year climbed $6.0 million (7.3%) from a year earlier, due to addition four Boeing 737-800s to our fleet and the
dollar’s weakening against the U.S. dollar, partially offset by the effects of certain aircraft lease renewals under more favourable conditions.
OTHER
Other expenses for the year fell $12.8 million (3.7%) compared with fiscal 2013, owing mainly to declines in marketing costs and other
operating expenses.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense, including the depreciation of property, plant and equipment and the amortization of intangible
assets subject to amortization and deferred incentive benefits, was up $7.6 million in fiscal 2014 from a year ago, due to a rise in additions to
property, plant and equipment and intangible assets in recent fiscal years, consisting primarily of fleet upgrades, namely in connection with
the reconfiguration of our Airbus A330s.
RESTRUCTURING CHARGE
In fiscal 2014, the Corporation continued its restructuring program aimed at cost reduction and margin improvement, initiated late in
fiscal 2011. The restructuring charge for fiscal 2014 amounted to $6.4 million, consisting of $5.4 million in termination benefits, $0.6 million in
intangible assets written off and $0.4 million in other expenses. Restructuring also resulted in a $0.4 million write-off of goodwill, discussed
under Other expenses and revenues, on the closure of our French Affair division, which specialized in villa rentals in certain areas of Europe.
The restructuring charge for fiscal 2013 amounted to $5.7 million and consisted of termination benefits.
OPERATING INCOME
In light of the foregoing, the Corporation recorded $38.7 million (1.0%) in operating income for the year compared with $71.8 million
(2.0%) for the previous year. Those results reflect restructuring charges of $6.4 million and $5.7 million for fiscal 2014 and 2013,
respectively. The deterioration in operating income arose from the dollar’s weakening against the U.S. dollar, the effects of which selling
price increases could not fully offset. The dollar’s depreciation resulted in a $69.0 million increase in operating expenses for the year,
compared with fiscal 2013.
The Corporation reported $91.8 million (2.4%) in adjusted operating income for the year compared with $116.6 million (3.2%) in
fiscal 2013. The decline in operating income was mainly attributable to the dollar’s weakening against the U.S. dollar, the impact of which
was not fully offset by selling price increases.
16
Transat A.T. Inc.
2014 Annual Report
GEOGRAPHIC AREAS
AMERICAS
Americas
(in thousands of dollars)
Winter season
Revenues
Operating expenses
Operating loss
Operating loss (%)
Summer season
Revenues
Operating expenses
Operating income
Operating income (%)
Management’s Discussion and Analysis
2014
$
2013
$
2012
$
1,662,652
1,703,305
(40,653)
(2.4)
1,635,128
1,658,733
(23,605)
(1.4)
1,727,821
1,784,628
(56,807)
(3.3)
1,259,159
1,200,129
59,030
4.7
1,258,225
1,170,459
87,766
7.0
1,123,053
1,074,913
48,140
4.3
Change
2014
%
1.7
2.7
(72.2)
(69.4)
0.1
2.5
(32.7)
(32.8)
2013
%
(5.4)
(7.1)
58.4
56.1
12.0
8.9
82.3
62.7
Winter-season revenues at our North American subsidiaries from sales in Canada and abroad were up $27.5 million (1.7%) compared
with 2013, driven by higher average selling prices, while total travellers fell 3.8%. In the winter season, we scaled back our sun destination
product offering by 1.9% and transatlantic routes by 6.2% compared with fiscal 2013. We recognized an operating loss for the winter season
amounting to $40.7 million (2.4%), compared with an operating loss of $23.6 million (1.4%) in 2013. The higher operating loss was mainly
attributable to higher costs driven by the depreciation of the dollar against the U.S. dollar. The operating loss for the year included a
$2.2 million restructuring charge compared with a $3.9 million charge in fiscal 2013.
Summer-season revenues were up $0.9 million (0.1%) year over year. Summer-season capacity in our transatlantic segment, our
main summer-season market, was 1.2% lower in fiscal 2014 than in fiscal 2013. Average selling prices were up 1.4%, whereas total
travellers were 3.3% lower, compared with a year earlier. Our sun destination capacity was 7.5% higher than in fiscal 2013. Traveller
volumes and selling prices were up 6.2% and 2.2%, respectively, from a year earlier. Our operating margin was $59.0 million (4.7%),
compared with $87.8 million (7.0%) in fiscal 2013. The adverse change in operating income originated mainly from the rise in costs sparked
by the dollar’s depreciation against the U.S. dollar. Our second-half operating income included a $4.2 million restructuring charge, compared
with a $1.8 million charge in the same period of 2013.
17
Transat A.T. Inc.
2014 Annual Report
EUROPE
Europe
(in thousands of dollars)
Winter season
Revenues
Operating expenses
Operating loss
Operating loss (%)
Summer season
Revenues
Operating expenses
Operating income
Operating income (%)
Management’s Discussion and Analysis
2014
$
303,190
313,118
(9,928)
(3.3)
527,197
496,900
30,297
5.7
2013
$
277,410
293,866
(16,456)
(5.9)
477,395
453,262
24,133
5.1
2012
$
313,901
335,161
(21,260)
(6.8)
549,444
543,355
6,089
1.1
Change
2014
%
9.3
6.6
39.7
44.8
10.4
9.6
25.5
13.7
2013
%
(11.6)
(12.3)
22.6
12.4
(13.1)
(16.6)
296.3
356.2
Fiscal 2014 winter-season revenues at our European subsidiaries were up $25.8 million (9.3%) year over year, driven by the strength
of the euro and the pound sterling against the dollar. In local currency terms, revenues of our European entities declined slightly following our
decision to reduce our offering. For the winter season, total travellers were down 2.3%, with average selling prices relatively unchanged,
compared with the winter season of fiscal 2013. Our European operations reported a winter-season operating loss of $9.9 million (3.3%) in
fiscal 2014, compared with $16.5 million (5.9%) in fiscal 2013.
Summer-season revenues at our European subsidiaries were up $49.8 million (10.4%) in fiscal 2014 compared with fiscal 2013, due
to a 13.4% increase in total travellers, primarily to medium-haul destinations, and the strength of the euro and the pound sterling. Average
selling prices in foreign currencies were down year over year, due to a shift in the sold product mix which saw medium-haul destinations log
a higher increase in total travellers than long-haul destinations, resulting in a decline in the average selling price. Our European operations
reported $30.3 million (5.8%) in operating income in fiscal 2014, compared with $24.1 million (5.1%) in fiscal 2013. The improvement in our
operating income resulted primarily from sound management of our product offering bolstered by cost reduction initiatives.
OTHER EXPENSES AND REVENUES
(in thousands of dollars)
Financing costs
Financing income
Change in fair value of derivative financial instruments used for
aircraft fuel purchases
Foreign exchange gain on non-current monetary items
Gain on investments in ABCP
Gain on disposal of a subsidiary
Write-off and impairment of goodwill
Share of net income of an associate
FINANCING COSTS
2014
$
1,939
(8,107)
23,822
(1,007)
—
—
369
(8,094)
2013
$
2,512
(7,357)
493
(846)
—
—
—
(3,676)
2012
$
2,962
(6,693)
(701)
(370)
(7,936)
(5,655)
15,000
(3,495)
Change
2014
%
(22.8)
10.2
4,732.0
19.0
—
—
N/A
120.2
2013
%
(15.2)
9.9
170.3
128.6
(100.0)
(100.0)
(100.0)
5.2
Financing costs include interest on long-term debt and other interest, standby fees as well as financial expenses. Financing costs for
fiscal 2014 were down $0.6 million from fiscal 2013.
FINANCING INCOME
Financing income for the year rose $0.8 million from fiscal 2013, resulting in large part from higher cash balances than in fiscal 2013.
18
Transat A.T. Inc.
2014 Annual Report
Management’s Discussion and Analysis
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
period, of the portfolio of derivative financial instruments held and used by the Corporation to manage its exposure to fluctuations in fuel
prices. For the year, the fair value of derivative financial instruments used for aircraft fuel purchases was down $23.8 million compared with a
$0.5 million decrease in fair value in fiscal 2013, in light of the recent drop in fuel prices.
FOREIGN EXCHANGE GAIN ON NON-CURRENT MONETARY ITEMS
The foreign exchange gain on non-current monetary items, which amounted to $1.0 million for the year, arose mainly from a
favourable foreign exchange effect on our foreign currency deposits. The Corporation no longer holds investments in ABCP.
GAIN ON INVESTMENTS IN ABCP
The gain on investments in ABCP results from the change in the fair value of investments in ABCP during the period. In the first
quarter of fiscal 2013, the Corporation sold all of its investments in ABCP. The transaction triggered neither a gain nor a loss. In fiscal 2012,
the gain on investments in ABCP amounted to $7.9 million.
GAIN ON DISPOSAL OF A SUBSIDIARY
On June 12, 2012, the Corporation concluded the sale of its subsidiary Handlex. The Corporation reported a gain on disposal of a
subsidiary of $5.7 million.
WRITE-OFF AND IMPAIRMENT OF GOODWILL
Following the closure of its French Affair division, the Corporation wrote off $0.4 million in related goodwill.
The Corporation performed an annual impairment test to determine whether the carrying amount of cash generating units (CGUs)
were higher than their recoverable amount. On October 31, 2014, the Corporation concluded that no impairment losses need be recorded for
fiscal 2014. The Corporation reached the same conclusion following impairment testing for the fiscal year ended October 31, 2013.
On October 31, 2012, after performing its annual impairment test, the Corporation recognized a $15.0 million goodwill impairment loss
in respect of one of its CGUs in France. The CGU in question includes outgoing tour operators that generate a significant percentage of their
revenues from the sale of products to North Africa, including Tunisia, Morocco and Egypt, and a travel agency network. The impairment loss
recognized resulted primarily from the decrease in the sale of products to North African countries and the CGU’s lower profitability. In
performing the test, management considered, among other factors, the potential impact on its future results of the political climate that
prevailed in North Africa and economic conditions in Europe.
SHARE OF NET INCOME OF AN ASSOCIATE
Our share of net income of an associate represents our share of the net income of our hotel business, Caribbean Investments
[“CIBV”]. Our share of net income of an associate totalled $8.1 million for the current fiscal year compared with $3.7 million for fiscal 2013.
The increase in our share of net income was driven primarily by improved operating profitability and by the reversal of deferred tax liabilities
following amendments to Mexican tax legislation. The deferred tax liabilities had been recognized as of the coming into force, in 2008, of a
piece of tax legislation in Mexico.
INCOME TAXES
Income tax expense for the fiscal year ended October 31, 2014 amounted to $3.8 million compared with $19.5 million for the previous
fiscal year. Excluding the share of net income of an associate, the effective tax rate stood at 17.3% for the fiscal year ended
October 31, 2014 and 25.3% for the preceding year. The change in tax rates between fiscal 2014 and 2013 resulted mainly from differences
between countries in the statutory tax rates applied to taxable income or losses.
19
Transat A.T. Inc.
2014 Annual Report
Management’s Discussion and Analysis
NET INCOME (LOSS) AND NET INCOME (LOSS) ATTRIBUTABLE TO SHAREHOLDERS
In light of the items discussed under Consolidated operations, net income for the year ended October 31, 2014 amounted to
$26.1 million compared with $61.2 million in fiscal 2013. Net income attributable to shareholders stood at $22.9 million or $0.59 per share
(basic and diluted) compared with $58.0 million or $1.51 per share (basic and diluted) the previous fiscal year. The weighted average
number of outstanding shares used to compute basic per share amounts was 38,644,000 for fiscal 2014 and 38,390,000 for fiscal 2013
(39,046,000 and 38,472,000, respectively, for diluted earnings per share).
For the year, the Corporation posted adjusted net income of $45.2 million ($1.16 per share) compared with $62.6 million ($1.63 per
share) in fiscal 2013.
SELECTED QUARTERLY FINANCIAL INFORMATION
The Corporation’s operations are seasonal in nature; consequently, interim operating results do not proportionately reflect the
operating results for a full year. Revenues rose compared with the corresponding quarters. Average selling prices were higher, whereas total
travellers declined for winter season and increased for the summer season. In terms of operating results, increases in average selling prices
coupled with cost reduction and margin improvement initiatives were insufficient to offset the foreign exchange effect arising from the
strength of the U.S. dollar, the euro and the pound sterling. As a result, the following quarterly financial information may vary significantly
from quarter to quarter.
Q1-2013
$
805,714
20,419
(29,936)
(21,017)
(13,940)
Selected unaudited quarterly financial information
(in thousands of dollars, except per
share data)
Revenues
Aircraft rent
Operating income (loss)
Adjusted operating income (loss)
Net income (loss)
Net income (loss) attributable to
shareholders
Basic earnings (loss) per share
Diluted earnings (loss) per share
Adjusted net income (loss)
Adjusted net income (loss) per
share
(15,137)
(0.39)
(0.39)
(21,564)
(0.56)
Q2-2013
$
1,106,824
20,556
(10,125)
2,730
(21,556)
(22,760)
(0.59)
(0.59)
(1,432)
Q3-2013
$
927,004
20,530
41,803
54,371
41,469
41,129
1.07
1.07
30,759
Q4-2013
$
808,616
19,765
70,096
80,562
55,229
54,723
1.42
1.40
54,804
Q1-2014
$
847,222
19,170
(33,534)
(23,812)
(24,860)
(25,649)
(0.67)
(0.67)
(23,288)
Q2-2014
$
1,118,620
19,853
(17,047)
(4,014)
(6,606)
(7,903)
(0.20)
(0.20)
(7,553)
Q3-2014
$
941,702
23,350
35,100
46,798
26,296
25,820
0.67
0.66
26,730
Q4-2014
$
844,654
24,856
54,227
72,863
31,236
30,607
0.79
0.79
49,353
(0.04)
0.80
1.40
(0.60)
(0.19)
0.69
1.27
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Transat A.T. Inc.
2014 Annual Report
FOURTH-QUARTER HIGHLIGHTS
Management’s Discussion and Analysis
For the fourth quarter, the Corporation generated $844.7 million in revenues, up $36.0 million (4.5%), from $808.6 million for the
corresponding period of fiscal 2013. The increase stemmed primarily from higher average selling prices and the strengthening of the euro
and the pound sterling against the dollar. Fourth-quarter total travellers rose 5.4% in fiscal 2014 compared with fiscal 2013.
In the Americas, fourth-quarter revenues were up $28.8 million (5.0%) in fiscal 2014, compared with fiscal 2013, owing mainly to
3.3% overall growth in total travellers, as well as to higher average selling prices. On our transatlantic routes, our main market, fourth-quarter
capacity in fiscal 2014 was relatively unchanged from fiscal 2013. Year over year in the transatlantic segment, average selling prices were up
0.3% while total travellers declined 1.4%. For sun destinations in the fourth quarter of fiscal 2014, our capacity, total travellers and selling
prices increased 6.5%, 5.3% and 0.9%, respectively, compared with the same period of fiscal 2013. Our North American operations reported
$39.2 million in operating income, compared with $59.6 million in the same period of fiscal 2013. The decline in operating income originated
mainly from the rise in costs due to the Canadian dollar’s depreciation against the U.S. dollar, which could not be offset by a matching rise in
selling prices. Our fourth-quarter operating income also included a $4.2 million restructuring charge in fiscal 2014, compared with a
$0.5 million charge in the same period of fiscal 2013.
Fourth-quarter revenues at our European subsidiaries were up $7.2 million (3.0 %) in fiscal 2014 compared with fiscal 2013, due to a
15.1% increase in total travellers, primarily to medium-haul destinations, and the strength of the euro and the pound sterling. Europe average
selling prices in foreign currencies were down year over year, due to a shift in the sold product mix which saw medium-haul destinations log
a higher increase in total travellers than long-haul destinations, resulting in a decline in the average selling price. Our European operations
reported $15.0 million in operating income, compared with $10.5 million in fiscal 2013. The improvement in our operating income resulted
primarily from sound management of our product offering bolstered by cost reduction initiatives.
The Corporation’s fourth-quarter operating income totalled $54.2 million (6.4%) in fiscal 2014, compared with $70.1 million (8.7%) in
fiscal 2013. The year-over-year decline in quarterly operating income was mainly attributable to the dollar’s weakening against the U.S.
dollar, the impact of which was not fully offset by selling price increases. The dollar’s depreciation resulted in a $15.0 million increase in
operating expenses for the period, compared with the fourth quarter of fiscal 2013.
The Corporation recorded fourth-quarter net income amounting to $31.2 million in fiscal 2014, compared with $55.2 million a year
earlier. Fourth-quarter net income attributable to shareholders stood at $30.6 million ($0.79 per share basic and diluted) in fiscal 2014
compared with $54.7 million ($1.40 per share basic and diluted) in the previous fiscal year.
The Corporation’s fourth-quarter net adjusted income totalled $49.4 million ($1.27 per share) in fiscal 2014 compared with
$54.8 million ($1.40 per share) in fiscal 2013.
21
Transat A.T. Inc.
2014 Annual Report
Management’s Discussion and Analysis
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As at October 31, 2014, cash and cash equivalents totalled $308.9 million compared with $265.8 million as at October 31, 2013. As at
the end of fiscal 2014, cash and cash equivalents held in trust or otherwise reserved amounted to $380.2 million compared with
$403.5 million as at October 31, 2013. The Corporation’s statement of financial position for fiscal 2014 reflected $96.0 million in working
capital, for a ratio of 1.12, compared with $81.1 million in working capital and a ratio of 1.10 as at October 31, 2013.
Total assets grew $85.0 million (6.6%) to $1,375.0 million as at October 31, 2014 from $1,290.1 million as at October 31, 2013, driven
primarily by a $43.1 million increase in cash and cash equivalents, an increase in investments and other assets owing to the strength of the
U.S. dollar and increases in property, plant and equipment. The Corporation recorded a $41.6 million increase in equity to $482.9 million as
at October 31, 2014 from $441.4 million as at October 31, 2013, resulting essentially from the recognition of $26.1 million in net income and
a $8.2 million foreign exchange gain on the translation of the financial statements of foreign subsidiaries.
CASH FLOWS
(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
Net change in cash
OPERATING ACTIVITIES
2014
$
106,240
(61,100)
191
(2,262)
43,069
2013
$
123,039
(28,289)
(1,817)
1,710
94,643
2012
$
8,872
(11,024)
(4,361)
(3,888)
(10,401)
Change
2014
%
(13.7)
(116.0)
110.5
(232.3)
(54.5)
2013
%
1,286.8
(156.6)
58.3
144.0
1,009.9
Operating activities generated $106.2 million in cash flows, compared with $123.0 million in fiscal 2013. The $16.8 million decrease
for the year resulted mainly from our $19.4 million decrease in profitability compared with fiscal 2013.
We expect to continue to generate positive cash flows from our operating activities in fiscal 2015.
INVESTING ACTIVITIES
Cash flows used in investing activities totalled $61.1 million for the current year, up $32.8 million from fiscal 2013. Compared with
fiscal 2013, additions to property, plant and equipment and other intangible assets rose $9.5 million to $65.0 million and consisted mainly of
purchases of computer hardware and software and aircraft enhancements following our cabin refurbishment program. In fiscal 2013, we also
received $27.4 million following the sale of our last investments in ABCP.
In fiscal 2015, additions to property, plant and equipment and intangible assets could amount to approximately $50.0 million.
FINANCING ACTIVITIES
Cash flows generated by financing activities totalled $0.2 million for year, up $2.0 million from cash flows used in financing activities of
$1.8 million in fiscal 2013, owing to $3.0 million in share issuances in fiscal 2014, compared with $1.0 million in fiscal 2013.
22
Transat A.T. Inc.
2014 Annual Report
CONSOLIDATED FINANCIAL POSITION
Management’s Discussion and Analysis
October 31, October 31,
2013
$
2014
$
Difference
$
Main reasons for significant differences
Assets
Cash and cash equivalents
Cash and cash equivalents in trust or otherwise
reserved
Trade and other receivables
308,887
380,184
265,818
403,468
43,069
(23,284)
123,489
112,738
10,751
Income taxes receivable
3,329
5,645
(2,316)
See the Cash flows section
Decrease in balances pledged as collateral security against
letters of credit
Increase in cash security deposits receivable from lessors
following aircraft maintenance
Decrease in income taxes recoverable given subsidiaries’
taxable income
No significant difference
No significant difference
Favorable change in fuel prices with respect to forward
contracts entered into
Increase in deposits paid to certain service providers
Increase in differed tax related to derivative financial
instruments, provision for overhaul of leased aircraft and
employee retirement benefits
10,434
74,932
16,596
43,932
30,051
13,143
73,453
7,720
36,575
22,048
(2,709)
1,479
8,876
7,357
8,003
128,560
95,601
72,769
86,266
115,025
94,723
67,333
72,384
13,535
878
5,436
13,882
Additions during the year, offset by depreciation
Foreign exchange difference
Additions during the year, offset by depreciation
Share of net income of an associate and foreign exchange
difference
Inventories
Prepaid expenses
Derivative financial instruments
Deposits
Deferred tax assets
Property, plant and equipment
Goodwill
Intangible assets
Investments and other assets
Liabilities
Trade and other payables
Provision for overhaul of leased aircraft
338,633
36,312
326,687
28,057
11,946
8,255
Income taxes payable
1,721
19,729
(18,008)
Customer deposits and deferred revenues
424,468
410,340
14,128
Derivative financial instruments
24,679
4,675
20,004
Foreign exchange difference
Increase in the number of aircraft and impact of the repair
schedule
Decrease following payment of tax instalments related to
fiscal 2014 income tax expense
Increase in average selling prices and foreign exchange
difference
Unfavorable change in the exchange rate between the
Canadian dollar and the US dollar with respect to forward
contracts entered into
Other liabilities
Deferred tax liabilities
53,926
12,345
48,096
11,096
5,830
1,249
Increase in present value of defined benefit obligation
No significant difference
Equity
Share capital
Share-based payment reserve
Retained earnings
Unrealized gain (loss) on cash flow hedges
224,679
15,444
227,872
11,712
221,706
15,391
206,835
2,380
2,973
53
21,037
9,332
Cumulative exchange differences
3,239
(4,919)
8,158
Issued from treasury
Share-based payment expense
Net income
Net gain on financial instruments designated as cash flow
hedges
Foreign exchange gain on translation of financial
statements of foreign subsidiaries
23
Transat A.T. Inc.
2014 Annual Report
FINANCING
Management’s Discussion and Analysis
As at December 10, 2014, the Corporation had several types of financing, consisting primarily of a revolving term credit facility as well
as lines of credit for issuing letters of credit.
On November 14, 2014, the Corporation renewed its $50 million revolving credit facility agreement for operating purposes. Under the
new agreement, which expires in 2019, the Corporation may increase the credit limit to $100 million, subject to lender approval. The
agreement may be extended for a year at each anniversary date subject to lender approval and the balance becomes immediately payable
in the event of a change in control. Under the terms of the 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. The agreement is secured by a first movable hypothec on a
universality of assets, present and future, of the Corporation’s Canadian subsidiaries subject to certain exceptions and is further secured by
the pledging of certain marketable securities of its main European subsidiaries. The credit facility bears interest at the bankers’ acceptance
rate, the financial institution’s prime rate or LIBOR, plus a premium. The terms of the agreements require the Corporation to comply with
certain financial criteria and ratios. As at October 31, 2014, all the financial ratios and criteria were met and the credit facility was undrawn.
With regard to our French operations, we also have access to undrawn lines of credit totalling €11.5 million [$16.2 million].
OFF-BALANCE SHEET ARRANGEMENTS
In the normal course of business, Transat enters into arrangements and incurs obligations that will impact the Corporation’s future
operations and liquidity, some of which are reflected as liabilities in the consolidated financial statements. The Corporation did not report any
obligations in the statements of financial position as at October 31, 2014 and October 31, 2013.
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 15 and 24 to the audited consolidated financial statements)
Operating leases (see note 23 to the audited consolidated financial statements)
Purchase obligations (see note 23 to the audited consolidated financial statements)
Off-balance sheet arrangements that can be estimated amounted to approximately $936.3 million as at October 31, 2014
($853.8 million as at October 31, 2013), and are detailed as follows:
OFF-BALANCE SHEET ARRANGEMENTS
(in thousands of dollars)
Guarantees
Irrevocable letters of credit
Collateral security contracts
Operating leases
Obligations under operating leases
Agreements with suppliers
2014
$
2013
$
31,267
1,361
21,850
1,137
657,639
690,267
246,056
936,323
632,804
655,791
198,007
853,798
In the normal course of business, guarantees are required in the travel industry to provide indemnifications and guarantees to
counterparties in transactions such as operating leases, irrevocable letters of credit and collateral 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.
The Corporation has a $75.0 million annually renewable revolving credit facility for issuing letters of credit in respect of which the
Corporation must pledge cash totalling 100% of the amount of the issued letters of credit as collateral security. As at October 31, 2014,
$59.5 million had been drawn down.
24
Transat A.T. Inc.
2014 Annual Report
Management’s Discussion and Analysis
The Corporation has a $35.0 million guarantee facility renewable annually. Under this agreement, the Corporation may issue collateral
security contracts with a maximum three-year term. As at October 31, 2014, $20.2 million was drawn down under this credit facility for
issuing letters of credit to some of our service providers.
For its French operations, the Corporation has guarantee lines of credit amounting to €20.1 million [$28.4 million], of which
€7.5 million had been drawn down [$10.6 million].
For its French operations, the Corporation also has access to bank lines of credit for issuing letters of credit secured by deposits. As
at October 31, 2014, €5.3 million had been drawn down [$7.5 million].
For its U.K. operations, the Corporation has a bank line of credit for issuing letters of credit secured by deposits of £18.1 million
[$32.7 million], which has been fully drawn down.
As at October 31, 2014, off-balance sheet arrangements had increased by $82.5 million, due to entering into seasonal lease
agreements for eight Boeing 737-800s and the dollar’s weakening against the U.S. dollar, offset by repayments made during the year.
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.
CONTRACTUAL OBLIGATIONS BY YEAR
Year ending October 31
Contractual obligations
Long-term debt
Leases (aircraft)
Leases (other)
Agreements with suppliers and
other obligations
DEBT LEVELS
2015
$
—
102,487
29,893
193,994
326,374
2016
$
—
94,169
22,314
2017
$
—
87,642
19,697
2018
$
—
86,851
14,798
42,759
159,242
14,299
121,638
2,099
103,748
2020
and beyond
$
2019
$
—
63,839
11,896
2,165
77,900
—
54,154
69,899
26,612
150,665
Total
$
—
489,142
168,497
281,928
939,567
The Corporation did not report any debt on its statement of financial position while our off-balance sheet arrangements, excluding
agreements with suppliers and other obligations, rose $34.5 million to $690.3 million as at October 31, 2014 from $655.8 million as at
October 31, 2013, due to entering into aircraft lease agreements during the year and the dollar’s weakening against the U.S. dollar, offset by
repayments made during the year.
The Corporation’s total debt rose by $29.8 million to $436.1 million as at October 31, 2014 from its October 31, 2013 level, owing
primarily to the strength of the U.S. dollar and higher aircraft rent following the addition of Boeing 737s to our aircraft fleet. Total net debt fell
$13.3 million to $127.3 million as at October 31, 2014 from $140.5 million as at October 31, 2013. The decline in total net debt stemmed from
higher cash and cash equivalent balances at year-end than as at October 31, 2013.
SHARES ISSUED AND OUTSTANDING
As at October 31, 2014, the Corporation had three authorized classes of shares: an unlimited number of Class A Variable Voting
Shares, an unlimited number of Class B Voting Shares and an unlimited number of preferred shares. The preferred shares are non-voting
and issuable in series, with each series bearing the number of shares, designation, rights, privileges, restrictions and conditions as
determined by the Board of Directors.
As at November 28, 2014, there were 1,663,027 Class A Variable Voting Shares outstanding and 37,090,686 Class B Voting Shares
outstanding.
STOCK OPTIONS
As at December 10, 2014, there were a total of 2,654,817 stock options outstanding, 1,262,520 of which were exercisable.
25
Transat A.T. Inc.
2014 Annual Report
OTHER
FLEET
Management’s Discussion and Analysis
Air Transat’s fleet currently consists of twelve Airbus A330s (345 seats), nine Airbus A310s (250 seats) and four Boeing 737-800s
(189 seats).
The Corporation also has seasonal winter rentals for eight Boeing 737-800s and two Boeing 737-700s (149 seats). Therefore, with
respect to current agreements, eight Boeing 737s will be added to the fleet for the fiscal 2015 winter season, five in fiscal 2016, six in
fiscal 2017, seven in fiscal 2018 and eight in fiscal 2019.
ACCOUNTING
CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements requires management to make estimates and judgments about the future. We
periodically review these estimates, which are based on historical experience, changes in the business environment and other factors,
including expectations of future events, that management considers reasonable under the circumstances. Our estimates involve judgments
we make based on the information available to us. However, accounting estimates could result in outcomes that require a material
adjustment to the carrying amount of the asset or liability affected in future periods.
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a
significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fiscal year are described
below. The Corporation based its assumptions and estimates on parameters available when the consolidated financial statements were
prepared. However, existing circumstances and assumptions about future developments may change due to market events or to
circumstances beyond the Corporation’s control. Such changes are reflected in the assumptions when they occur.
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.
DEPRECIATION AND AMORTIZATION AND IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT, AND INTANGIBLE ASSETS
GOODWILL AND INTANGIBLE ASSETS
Material amounts recorded under goodwill and intangible assets in the statement of financial position are calculated using the
historical cost method. We are required to perform impairment tests on goodwill and intangible assets with indefinite lives, such as
trademarks, annually or when events or circumstances indicate that the carrying amount may be impaired.
Impairment exists when the carrying amount of an asset or CGU, in the case of goodwill, exceeds its recoverable amount, which is
the higher of fair value less costs to sell the asset or CGU and value in use. To identify CGUs, management has to take into account the
contributions made by each subsidiary and the inter-relationships among them in light of the Corporation’s vertical integration and the goal of
providing a comprehensive offering of tourism services in the markets served by the Corporation. The fair value less costs to sell calculation
is based on available data from arm’s length transactions for similar assets or observable market prices less incremental costs to sell. The
value in use calculation is based on a discounted cash flow model. Cash flows are generally derived from the budget or financial forecasts
for the next five fiscal years and do not include restructuring activities that the Corporation is not yet committed to or significant future
investments that will enhance the performance of the asset of the CGU being tested. The recoverable amount is most sensitive to the
discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation
purposes. These analyses require us to make a variety of judgments concerning our future operations. The cash flow forecasts used to
determine the values of assets of CGUs may change in the future due to market conditions, competition and other risk factors (see Risks and
uncertainties).
26
Transat A.T. Inc.
2014 Annual Report
Management’s Discussion and Analysis
The Corporation performed an impairment test as at October 31, 2014 to determine whether the carrying amount of CGUs were
higher than their recoverable amount. No impairment was identified. The Corporation prepares cash flow forecasts derived from the most
recently approved annual budgets and strategic plans of the relevant businesses. The cash flow forecasts reflect the risk associated with
each asset or CGU. Cash flow forecasts beyond three years are extrapolated based on estimated growth rates that do not exceed the
average long-term growth rates for the relevant markets.
An after-tax discount rate of 10.3% was used for testing the other CGUs for impairment as at October 31, 2014 [10.5% as at
October 31, 2013]. The perpetual growth rate used for impairment testing was 1% as at October 31, 2014 [1% as at October 31, 2013].
On October 31, 2014, a 1% increase in the after-tax discount rate used for impairment tests, assuming that all other variables had
remained the same, would not have required any other impairment charge.
On October 31, 2014, a 1% decrease in the long-term growth rate used for impairment tests, assuming that all other variables had
remained the same, would not have required any other impairment charge.
On October 31, 2014, a 10% decrease in the cash flows used for impairment tests, assuming that all other variables had remained the
same, would not have required any other impairment charge.
PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS WITH FINITE LIVES
Property, plant and equipment reported in the statement of financial position represent material amounts based on historical costs.
Property, plant and equipment and intangible assets with finite lives are reviewed for impairment annually or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable.
Property, plant and equipment are depreciated over their estimated useful lives taking into account their residual value. Aircraft and
aircraft components account for a major class of property, plant and equipment. Depreciation expense depends on several assumptions
including the period over which the aircraft will be used, the fleet renewal schedule and the estimate of the residual value of aircraft and
aircraft components at the time of their anticipated disposal. The amortization period is determined based on the fleet renewal schedule,
currently slated for completion by 2018. The estimate of the residual value of aircraft and aircraft components at the time of their anticipated
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 depreciation expense. Generally speaking,
the main assumptions would have to be reduced by 10% to produce 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.
No event or change in situation arising during the year ended October 31, 2014 could have required an impairment of property, plant
and equipment and intangible assets with finite lives.
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of derivative financial instruments is the amount for which the instrument could be exchanged between knowledgeable,
willing parties in an arm’s length transaction. 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. The
Corporation also takes into account its own credit risk and the credit risk of the counterparty in determining fair value for its derivative
financial instruments based on whether they are financial assets or financial liabilities. 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
transactions involving other instruments that are substantially the same, discounted cash flow analysis or other techniques, where
appropriate. The Corporation ensures, to the extent practicable, that its valuation technique incorporates all factors that market participants
would consider in setting a price and that it is consistent with accepted economic methods for pricing financial instruments, including the
credit risk of the party involved.
27
Transat A.T. Inc.
2014 Annual Report
PROVISION FOR OVERHAUL OF LEASED AIRCRAFT
Management’s Discussion and Analysis
Under 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. The
estimates used to determine the provision for overhaul of leased aircraft are based on historical experience, historical costs and repairs,
information from external suppliers, forecasted aircraft utilization, planned renewal of the aircraft fleet, leased aircraft return conditions, and
other facts and reasonable assumptions in the circumstances. Generally speaking, the main assumptions used to calculate this provision
would have to be reduced by 5% to 15% to result in additional expenses that could have a material impact on our results, financial position
and cash flows.
NON-CONTROLLING INTERESTS
Non-controlling interests in respect of which the shareholders may require the Corporation to buy back their shares are reclassified as
liabilities at their estimated redemption value, deeming exercise of this option. In the absence of a predetermined calculation formula, the
estimated redemption value is established using fair value. The fair value calculation is based on a discounted cash flow model. The cash
flows are derived from the budget and financial forecasts for the next five years and do not include restructuring activities that the
Corporation is not yet committed to or significant future investments that will enhance the subsidiary’s performance. The fair value is most
sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used
for extrapolation purposes. Generally speaking, the main assumptions used to calculate this provision would have to be adversely changed
by between 25% and 50% to generate additional expenses that could have a material impact on our comprehensive income, financial
position and cash flows.
EMPLOYEE FUTURE BENEFITS
The Corporation offers defined benefit pension arrangements to certain senior executives. The pension expense for these employees
is determined from annual actuarial calculations using the projected unit credit method and management’s best estimate assumptions for the
increase in eligible earnings and the retirement age of employees. Plan obligations are discounted using current market interest rates. Given
that various assumptions are used in determining the cost and obligations associated with employee future benefits, the actuarial valuation
process involves some inherent measurement uncertainty. Actual results will differ from estimated results based on assumptions.
A 0.25 percentage point increase in the actuarial assumptions below would have the following impacts, all other actuarial assumptions
remaining the same:
Increase (decrease)
Discount rate
Rate of increase in eligible earnings
TAXES
Cost of retirement benefits
for the year ended
October 31, 2014
$
(4)
9
Retirement benefit
obligations as at
October 31, 2014
$
(1,033)
38
From time to time, the Corporation is subject to audits by tax authorities that give rise to questions regarding the fiscal treatment of
certain transactions. Certain of these matters could entail significant costs that will remain uncertain until one or more events occur or fail to
occur. Although the outcome of such matters is not predictable with assurance, the tax claims and risks for which there is a probable
unfavourable outcome are recognized by the Corporation using the best possible estimates of the amount of the loss. The tax deductibility of
losses reported by the Corporation in previous fiscal years with regard to investments in ABCP was challenged by tax authorities and notices
of assessment were received subsequent to year end. No provisions are made for this situation, which could result in future cash outflows of
approximately $16,000, as the Corporation intends to defend itself vigorously with respect thereto and firmly believes it has sufficient facts
and arguments to obtain a favourable final outcome.
28
Transat A.T. Inc.
2014 Annual Report
FINANCIAL INSTRUMENTS
Management’s Discussion and Analysis
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 to foreign exchange risk, 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, as the case may be. Approximately 30%
of the Corporation’s costs are incurred in a currency other than the measurement currency of the reporting unit incurring the costs, whereas
less than 10% of revenues are 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 15 months, 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 regularly
demonstrates that these instruments are sufficiently effective to continue using hedge accounting. These derivative financial instruments are
designated as cash flow hedges.
All derivative financial instruments are recorded at fair value in the consolidated statement of financial position. For the derivative
financial instruments designated as cash flow hedges, changes in value of the effective portion are recognized in Other comprehensive
income (loss) in the consolidated statement of comprehensive income (loss). Any ineffectiveness within a cash flow hedge is recognized
through profit or loss as it arises in the same account in the consolidated statement of income (loss) as the hedged item when realized.
Should the hedging of a cash flow hedge relationship become ineffective, previously unrealized gains and losses remain within Unrealized
gain (loss) on cash flow hedges 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 (loss)
until the related hedged item is settled, at which time amounts recognized in Unrealized gain (loss) on cash flow hedges are reclassified to
the same income (loss) statement account in which the hedged item is recognized.
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 mitigate fuel price fluctuations, the Corporation has implemented a fuel price risk management policy that authorizes foreign
exchange forward contracts, and other types of derivative financial instruments, expiring in generally less than 15 months.
The 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.
29
Transat A.T. Inc.
2014 Annual Report
CREDIT AND COUNTERPARTY RISK
Management’s Discussion and Analysis
Credit risk stems primarily from the potential inability of customers, service providers, aircraft and engine lessors and financial
institutions, including the other counterparties to cash equivalents and derivative financial instruments, to discharge their obligations.
Trade accounts receivable included under Trade and other receivables in the statement of financial position totalled $70.9 million as
at October 31, 2014. 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 dispersed over a wide geographic area. No customer represented more than 10% of total accounts receivable. As
at October 31, 2014, approximately 7% of accounts receivable were over 90 days past due, whereas approximately 79% were current, that
is, under 30 days. Historically, the Corporation has not incurred any significant losses in respect of its trade accounts receivable.
Pursuant to certain agreements entered into with its service providers consisting primarily of hotel operators, the Corporation pays
deposits to capitalize on special benefits, including pricing, exclusive access and room allotments. As at October 31, 2014, these deposits
totalled $29.8 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 $14.2 million as at October 31, 2014 and will be 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. 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, 2014, the cash security deposits with lessors that
had been claimed totalled $20.2 million and are included under Trade and other receivables. 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, 2014 relates to cash and cash
equivalents, including cash and cash equivalents in trust or otherwise reserved and derivative financial instruments accounted for in assets.
These assets are held or traded with a limited number of financial institutions and other counterparties. 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 only 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.
The Corporation does not believe it was exposed to a significant concentration of credit risk as at October 31, 2014.
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’s oversight, the Treasury Department manages the Corporation’s cash resources based on financial forecasts and
anticipated cash flows. 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.
INTEREST RATE RISK
The Corporation is exposed to interest rate fluctuations, primarily due to its variable-rate credit facility. 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.
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RELATED PARTY TRANSACTIONS AND BALANCES
In the normal course of business, the Corporation enters into transactions with related companies. These transactions are carried out
at arm’s length. During the year, the Corporation recorded $13.7 million in person-nights purchased at hotels belonging to its associate CIBV,
compared with $13.6 million in 2013. As at October 31, 2014 and 2013, a $0.2 million amount payable to CIBV was included under Trade
and other payables.
CHANGES IN ACCOUNTING POLICIES
IFRS 10, CONSOLIDATED FINANCIAL STATEMENTS
In May 2011, the IASB issued IFRS 10, Consolidated Financial Statements, which replaces SIC-12, Consolidation: Special Purpose
Entities, and parts of IAS 27, Consolidated and Separate Financial Statements. IFRS 10 builds on existing principles by identifying the
concept of control as the determining factor in whether an entity should be included within the consolidated statements of an entity. The
standard provides additional guidance to assist in the determination of control where this is difficult to assess. IFRS 10 became effective on
November 1, 2013. Adoption of this standard had no impact on the Corporation’s financial statements.
IFRS 12, DISCLOSURE OF INTERESTS IN OTHER ENTITIES
In May 2011, the IASB issued IFRS 12, Disclosure of Interests in Other Entities. IFRS 12 is a new and comprehensive standard on
disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, structured entities and other off-
balance sheet vehicles. The standard requires an entity to disclose information on the nature of, and risks associated with, its interests in
other entities and the effects of those interests on its financial position, financial performance and cash flows. IFRS 12 became effective on
November 1, 2013. Except for additional disclosures, adoption of this standard had no impact on the Corporation’s financial statements.
IFRS 13, FAIR VALUE MEASUREMENT
In May 2011, the IASB issued IFRS 13, Fair Value Measurement. IFRS 13 will improve consistency and reduce complexity by
providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS.
IFRS 13 became effective on November 1, 2013. Adoption of this standard had no impact on the Corporation’s financial statements.
IAS 19, EMPLOYEE BENEFITS
In June 2011, the IASB amended IAS 19, Employee Benefits. The amendments eliminate the option to defer the recognition of gains
and losses, known as the corridor method, which improves comparability and faithfulness of presentation. The amendments also streamline
the presentation of changes in assets and liabilities arising from defined benefit plans, including requiring remeasurements arising from
changes in estimates to be presented in other comprehensive income (loss), thereby separating those changes from changes that are often
perceived as resulting from the Corporation’s day-to-day operations. The amendments also require entities to compute the financing cost
component of defined benefit plans by applying the discount rate used to measure post-employment benefit obligations to the net post-
employment benefit obligations. Under the previous IAS 19, interest income was presented separately from interest expense and calculated
based on the expected return on plan assets. Finally, the amendments enhance the disclosure requirements for defined benefit plans,
providing better information about the characteristics of defined benefit plans and the risks that the Corporation is exposed to through
participation in those plans. The amendments made to IAS 19 became effective on November 1, 2013. Except for additional disclosures,
adoption of this standard had no impact on the Corporation’s financial statements.
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FUTURE CHANGES IN ACCOUNTING POLICIES
Management’s Discussion and Analysis
Standards issued but not yet effective are discussed below. The Corporation has not early adopted these new standards.
IFRS 9, FINANCIAL INSTRUMENTS
In July 2014, the IASB completed its three-part project to replace IAS 39, Financial Instruments: Recognition and Measurement by
issuing IFRS 9, Financial Instruments. IFRS 9 addresses the classification and measurement of financial assets and financial liabilities, and
introduces a forward-looking expected-loss impairment model as well as a substantially-reformed approach to hedge accounting.
IFRS 9 uses a new approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the many
different rules in IAS 39. The approach recommended by IFRS 9 is based on how an entity manages its financial instruments and the
contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of
financial liabilities were carried forward in IFRS 9. However, the portion of the changes in fair value related to the entity’s own credit risk, in
measuring a financial liability at fair value through profit or loss, will be presented in other comprehensive income (loss) rather than in the
statement of income (loss).
IFRS 9 also introduces a new expected-loss impairment model that will require more timely recognition of expected credit losses.
Specifically, entities will be required to account for expected credit losses from when financial instruments are first recognized and to
recognize full lifetime expected credit losses on a more timely basis.
Lastly, IFRS 9 introduces a new hedge accounting model, together with corresponding disclosures about risk management activities.
The new hedge accounting model represents a substantial overhaul of hedge accounting that will enable entities to better reflect their risk
management activities in their financial statements.
Application of IFRS 9 will be effective from the Corporation’s fiscal year beginning on November 1, 2018, with earlier adoption
permitted. The Corporation is currently assessing the impact of adopting this standard on its financial statements.
IFRS 15, REVENUE FROM CONTRACTS WITH CUSTOMERS
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, a new standard that specifies the steps and timing
for issuers to recognize revenue as well as requiring them to provide more informative, relevant disclosures. The core principle of IFRS 15 is
that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 supersedes IAS 11, Construction
Contracts, and IAS 18, Revenue, as well as various interpretations regarding revenue. The application of Adoption of IFRS 15 is mandatory
and will be effective from the Corporation’s fiscal year beginning on November 1, 2017, with earlier adoption permitted. The Corporation is
currently assessing the impact of adopting this standard on its financial statements.
RISKS AND UNCERTAINTIES
This section provides an overview of the general risks as well as specific risks to which Transat and its subsidiaries are exposed, and
which are likely to have a significant impact on the Corporation’s financial position, operating results and activities. It does not purport to
cover all contingencies or to describe all factors that are likely to affect the Corporation or its activities. Moreover, the risks and uncertainties
described may or may not materialize, and may develop differently or have consequences other than those contemplated in this MD&A.
Additional risks and uncertainties not currently known to the Corporation or that are currently considered immaterial could also materialize in
the future and adversely affect the Corporation.
To improve its risk management capacities, the Corporation has set up a framework for identifying, assessing and managing the
different risks applicable to its industry and to companies in general. This framework is based on the following principles:
• Promote a culture of risk awareness at the head office and in subsidiaries;
•
•
Integrate risk management into strategic, financial and operating objectives;
For each risk, designate an owner responsible and accountable for designing and implementing measures to mitigate the
consequences of risks and/or limit the likelihood of risks materializing.
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Management’s Discussion and Analysis
In addition, the Corporation has adopted an on-going risk management process that includes a quarterly assessment of risk
exposures for the Corporation and its subsidiaries, under the oversight of the Audit Committee (financial risks), the Human Resources and
Compensation Committee (human resource risks) and the Corporate Governance and Appointments Committee (strategic and
operational risks).
Business risks are classified to facilitate an overall understanding of risks to which the Corporation is exposed. The different types of
business risks are discussed below:
ECONOMIC AND GENERAL RISKS
The holiday travel industry is sensitive to global, national, regional and local economic conditions. Economic factors such as a
significant downturn in the economy, a recession or a decline in consumer purchasing power or 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. Although there are signs of economic recovery in certain tourist areas served by the Corporation, financial markets
could slide back into negative economic growth.
Seasonal planning of flight and person-night capacity is a risk in the tourism industry. For the Corporation, it entails forecasting
traveller demand in advance and anticipating trends in future preferred destinations. Poor planning for those needs could unfavourably
impact our business, financial situation and operating results.
Our operating results could also be adversely affected by factors beyond Transat’s control, including the following: extreme weather
conditions, climate-related or geological disasters, war, political instability, terrorism whether actual or apprehended, epidemics or disease
outbreaks, consumer preferences and spending patterns, consumer perceptions of destination-based service and 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 RISKS
Transat operates in an industry where competition is intense. In recent years, a number of tour operators and air carriers have
entered or expanded their presence into markets served by Transat. 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. The Corporation could thus be unable to
compete successfully against existing or potential competitors, and increased competition could have a material adverse effect on its
operations, prospects, revenues and profit margin.
In addition, traveller needs dictate how our industry evolves. In recent years, travellers have demanded higher value, better product
selection and personalized service, all at competitive prices. 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, thus bypassing not
only vacation providers such as Transat, but also retail travel agents through whom we generate a substantial portion of our revenues. Since
our available seat capacity and person-nights are also influenced by market forces, our business model is called into question in some
respects. The Corporation’s inability to rapidly meet those expectations in a proactive manner could adversely impact its competitive
positioning while reducing profitability of its products.
Further, given that 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 impact the Corporation.
These competitive pressures could adversely impact our revenues and margins since we would likely have to match competitors’
prices. The Corporation’s performance in all of the countries in which it operates will depend on its continued ability to offer quality products
at competitive prices.
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REPUTATION RISK
Management’s Discussion and Analysis
The ability to maintain favourable relationships with its existing customers and attract new customers greatly depends on Transat’s
service offering and its reputation. While the Corporation has already implemented sound governance practices, including a code of ethics,
and developed certain mechanisms over the years to prevent its reputation from being adversely affected, there can be no assurance that
Transat will continue to enjoy a good reputation or that events beyond its control will not tarnish its reputation. The loss or tarnishing of its
reputation could have a material unfavourable effect on the Corporation’s operations, prospects, financial position and operating results.
FINANCIAL RISKS
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, comparisons of our operating results between quarters or between six-month periods are not necessarily
meaningful and should not be relied on as indicators of future performance. Furthermore, due to the economic and general factors described
herein, 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.
Transat may need additional funds in the future to capitalize on growth opportunities or to respond to competitive pressures. The
availability of financing under our existing credit facilities is subject to compliance with certain criteria and financial ratios. There can be no
guarantee that, in the future, our ability to use our existing credit facilities or to obtain additional financing will not be jeopardized. Moreover,
financial market volatility could limit access to credit and raise borrowing costs, hampering access to additional funding under satisfactory
terms and conditions. Our business, financial position and operating results could be adversely affected as a result.
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 such fare increase would
offset higher fuel costs, which could in turn adversely impact our business, financial position or operating results.
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 business.
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 exchange rate fluctuations could increase
our operating costs or decrease our revenues. Changes in interest rates could also impact interest income from our cash and cash
equivalents as well as interest expenses on our variable rate debt instruments, which in turn could affect our interest income and interest
expenses.
In the normal course of business, we receive customer deposits and advance payments. If funds from advance payments were to
diminish or be unavailable to pay our suppliers, we would be required to secure alternative capital funding. There could be no assurance that
additional funding would be available under terms and conditions suitable to the Corporation, which could adversely affect our business.
Moreover, these advance payments generate interest income for Transat. 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.
As a Corporation that processes information with respect to credit cards used by our customers, we must comply with the regulatory
requirements of our credit card processors. Failure to comply with certain rules regarding deposits or bank card data security may result in
penalties or in the suspension of service by credit card processors. The inability to use credit cards could have a significant negative impact
on our reservations and consequently on our operating results and profitability.
Last, it is sometimes difficult to foresee how certain Canadian or international tax laws will be interpreted by the appropriate tax
authorities. Subsequent to interpretation of these laws by the different authorities, the Corporation may have to review its own interpretations
of tax laws, which in turn could have an adverse impact on our profit margin.
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2014 Annual Report
KEY SUPPLIES AND SUPPLIER RISKS
Management’s Discussion and Analysis
Despite being well positioned due to our vertical integration, we depend on third parties who supply us with certain components of our
packages. Any significant interruption in the flow of goods and services from these suppliers, which may be outside our control, could have a
significant adverse impact on our business, financial position and operating results.
Our dependence, among others, on Airbus, Boeing, Rolls-Royce and General Electric means that we could be adversely affected by
problems connected with Airbus aircraft and Rolls-Royce or General Electric engines or components, including defective material,
mechanical problems or negative perceptions among travellers. The Corporation also relies on certain suppliers for its information system
security and maintenance. See Technological risks.
We are also dependent on non-group airlines and a large number of hotels, several of which are exclusive to the Corporation. 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 business,
financial position and operating 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.
AVIATION RISKS
To carry on business or extend its outreach, the Corporation requires access to aircraft that are largely operated by its subsidiary Air
Transat. This fleet consists primarily of aircraft leased for several years, sometimes under renewable leases, with varying renewal dates and
conditions. If the Corporation were unable to renew its leases, secure timely access to appropriate aircraft under adequate conditions or
retire certain aircraft as anticipated, such an outcome could adversely affect the Corporation.
Our focus on three types of aircraft could result in significant downtime for part of our fleet if mechanical problems arise or if the
regulator releases any mandatory inspection or maintenance directives applicable to our types of aircraft. If our operations are disrupted due
to aircraft unavailability, the loss of associated revenues could have an adverse impact on our business, financial position and operating
results.
An incident involving one of our aircraft during our operations could give rise to repair costs or major replacement costs for the
damaged aircraft, service interruption, and potential claims. Consequently, such an event could have an unfavourable impact on the
Corporation’s reputation.
The Corporation also requires access to airport facilities in its source markets and multiple destinations. In particular, the Corporation
must have access to takeoff and landing slots and gates under conditions that allow it to be competitive. Accordingly, any difficulty in
securing such access or disruptions in airport operations caused, for instance, by labour conflicts or other factors could adversely affect our
business.
With the privatization of airports and air navigation authorities over the past decade in Canada, new airports and air navigation
authorities have imposed significant increases in airport user fees and air navigation fees. This is particularly the case given that some of
those airports are located in U.S. cities in close proximity to the Canadian border and are not subject to such fees. If these user and
navigation fees were to increase substantially, our business, financial position and operating results could be adversely affected, which
would result in certain routes being conceded to our U.S. competitors.
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2014 Annual Report
TECHNOLOGICAL RISKS
Management’s Discussion and Analysis
Transat relies heavily on various information and telecommunications technologies to operate its business, increase its revenues and
reduce its operating expenses. Our business depends on our ability to access information, manage reservation systems, including handling
high telephone call volumes on a daily basis, monitor product profitability and inventory, adjust prices quickly, protect such information, stave
off information system intrusions and distribute our products to retail travel agents and other travel intermediaries. Rapid changes in these
technologies could require higher-than-anticipated capital expenditures to improve customer service; this could impact our operating results.
These technology systems may be vulnerable to a variety of sources of failure, interruption or misuse, including by reason of third
party suppliers’ acts or omissions, natural disasters, terrorist attacks, telecommunication systems failures, power failures, computer viruses,
computer hacking, unauthorized or fraudulent users, and other operational and security issues. While Transat continues to invest in
initiatives, including security initiatives and disaster recovery plans, these measures may not be adequate or implemented properly. Any
systems failures or outages could materially and adversely affect the Corporation’s operations and its customer relationships and could have
an adverse effect on its operating results and financial position.
Furthermore, several of those information technology systems depend on third-party providers. If those providers were to become
incapable of maintaining or improving the efficient technology solutions in a profitable and timely manner, the Corporation would be unable to
react effectively to the information security attacks, obtain new systems to meet growth in its customer base or support new products offered
by the Corporation. Consequently, such situations could generate additional expenses, which would unfavourably impact the Corporation’s
financial position.
REGULATORY RISKS
The industry in which Transat operates is subject to extensive Canadian and foreign government regulations relating to, among other
things, security, safety, consumer rights, permits, licensing, intellectual property rights, privacy, competition, pricing and the environment.
Consequently, 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 or different
regulatory frameworks or amendments to existing legislation or regulations and tax policy changes could affect our operations, particularly as
regards hotel room taxes, car rental taxes, airline taxes and airport fees.
Numerous jurisdictions around the world are seeking to implement measures, particularly taxes, to penalize greenhouse gas
emissions, which cover the airline industry, with a view to fighting climate change. In light of its airline operations, the Corporation is directly
exposed to such measures, which generally give rise to additional costs that the Corporation might be unable to fully pass on through its
product selling prices. In such a scenario, its margin would be adversely affected.
In the course of our business in the air carrier and travel industry, the Corporation is exposed to claims and legal proceedings,
including class action suits. Litigation and claims could adversely affect our business and operating results.
HUMAN RESOURCE RISKS
Labour costs constitute one of Transat’s largest operating cost items. There can be no assurance that Transat will be able to maintain
such costs at levels that do not negatively affect its business, results from operations and financial position.
The Corporation’s ability to achieve its business plan is a function of the experience of its key executives and employees, and their
expertise in the tourism, travel and air carrier industries. The loss of key employees could adversely affect our business and operating
results. Further, our recruitment program, salary structure, performance management programs, succession plan, as well as our training plan
carry risks that could have adverse effects on our ability to attract and retain the skilled resources needed to sustain the Corporation’s growth
and success.
As at October 31, 2014, the Corporation had approximately 5,200 employees, 50% or more of whom are unionized personnel covered
by six collective agreements. Negotiations to renew some of those collective agreements could give rise to work stoppages or slowdowns or
higher labour costs that could unfavourably impact our operations and operating income.
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2014 Annual Report
INSURANCE COVERAGE RISKS
Management’s Discussion and Analysis
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 related to damages resulting from injury or death of
passengers, is US$1.25 billion, with the exception of War Risk Bodily Injury/Property Damage to Third Parties excluding passengers where
the limit is US$150 million for any single event and in the aggregate. As a result, governments are still required to cover air carriers above
this US$150 million limit until commercial insurers do so at a reasonable cost. The Canadian government covers domestic air carriers
accordingly. In addition, some insurers that could provide coverage in excess of US$150 million are not licensed to transact business in
Canada, which further limits availability.
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. If that were to happen, we would be required to deal
with private insurers to attempt to secure such coverage, and there could be no assurance that we would be able to secure coverage
providing favourable levels and conditions at an acceptable cost.
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.
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2014 Annual Report
CONTROLS AND PROCEDURES
Management’s Discussion and Analysis
The implementation of the Canadian Securities Administrators National 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 (DC&P) and the design and effectiveness of internal control over financial reporting (ICFR).
The President and Chief Executive Officer and the Vice-President, Finance and Administration and Chief Financial Officer have
designed DC&P or caused them to be designed under their supervision to provide reasonable assurance that material information relating to
the Corporation has been made known to them and that information required to be disclosed in the Corporation’s filings is recorded,
processed, summarized and reported within the prescribed time periods under securities legislation.
Also, the President and Chief Executive Officer and the Vice-President, Finance and Administration and Chief Financial Officer have
designed ICFR or have caused it to be designed under their supervision to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for financial reporting purposes in accordance with IFRS.
EVALUATION OF DC&P AND ICFR
An evaluation of the design and operating effectiveness of DC&P and ICFR was carried out under the supervision of the President
and Chief Executive Officer and the Vice-President, Finance and Administration and Chief Financial Officer. This evaluation consisted of a
review of documentation, audits and other procedures that management considered appropriate in the circumstances. Among other things,
the evaluation took into consideration the Corporate Disclosure Policy, the code of professional ethics, the sub-certification process and the
operation of the Corporation’s Disclosure Committee.
Based on this evaluation and using the criteria set by the Committee of Sponsoring Organizations of the Treadway Commission on
Internal Control – Integrated Framework (COSO-Framework 1992) and in connection with the preparation of its year-end financial
statements, the two certifying officers concluded that the design of DC&P and ICFR were effective as at October 31, 2014.
Lastly, no significant changes in ICFR occurred during the year ended October 31, 2014 that materially affected, or are likely to
materially affect, the Corporation’s ICFR.
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OUTLOOK
Management’s Discussion and Analysis
On the Sun destinations market outbound from Canada, Transat's capacity is approximately 6% lower than that offered last year and
41% of that capacity has been sold. Load factors are up 1.2% and selling prices are 1.4% higher compared to last year at the same date.
On the transatlantic market, where it is low season, Transat’s capacity is down 2% compared to that offered last winter. To date, 44%
of that capacity has been sold. Load factors are up 2% and selling prices are similar.
In France, also in low season in winter, bookings are down 5% and selling prices are similar, compared with last year at the same
date.
The impact of the weaker Canadian dollar, net from lower fuel costs, will be a 1.3% increase in operating costs if the dollar and fuel
costs stay at their current level.
In summary, the sun destinations market, where margins are especially thin and volatile, accounts for a very significant portion of
Transat's business in the winter. The following factors make forecast difficult: the overall supply is more than 10% superior to the previous
year, a significant portion of the capacity remains to be sold, bookings are last-minute, the Canadian dollar is weakening, and fuel costs are
decreasing. To date, margins are similar to those of the previous year at the same date. A sudden decrease of the Canadian dollar, which
started at the end of December last year, had a significant negative impact on the Corporation’s results in 2014, making any comparative
forecast for the winter difficult.
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MANAGEMENT’S REPORT
The consolidated financial statements and MD&A of Transat A.T. Inc., and all other information in the financial report, are the responsibility of
management and have been reviewed and approved by the Board of Directors.
The consolidated financial statements have been prepared by management in accordance with IFRS issued by the International Accounting
Standards Board. The MD&A has been prepared in accordance with the requirements of the Canadian Securities Administrators.
Management’s responsibility in these respects includes the selection of appropriate accounting principles as well as the exercise of sound
judgment in establishing reasonable and fair estimates in accordance with IFRS and the requirements of the Canadian Securities
Administrators, and which are adequate in the circumstances. The financial information presented throughout the MD&A and elsewhere in
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 and the MD&A.
The Board of Directors is responsible for the financial information presented in the consolidated financial statements and the MD&A, primarily
through its Audit Committee. The Audit Committee, which is appointed by the Board of Directors and comprised entirely of independent and
financially literate directors, reviews the annual consolidated financial statements and the MD&A 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, the accounting methods and policies used as well as the internal control systems set up by the Corporation. These consolidated
financial statements have been audited by Ernst & Young LLP. Their report on the consolidated financial statements appears on the
next page.
Jean-Marc Eustache
Chairman of the Board, President and Chief Executive Officer
Denis Pétrin
Vice-President, Finance and Administration and Chief Financial Officer
40
Transat A.T. Inc.
2014 Annual Report
INDEPENDENT AUDITORS’ REPORT
To the Shareholders of Transat A.T. Inc.
We have audited the accompanying consolidated financial statements of Transat A.T. Inc., which comprise the consolidated statements of
financial position as at October 31, 2014 and 2013, and the consolidated statements of income, comprehensive income, changes in equity
and cash flows for the years then ended, and a summary of significant accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation
of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with Canadian generally accepted auditing standards. Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of
the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An
audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Transat A.T. Inc. as at
October 31, 2014 and 2013 and its financial performance and its cash flows for the years then ended in accordance with International
Financial Reporting Standards.
Montréal, Canada
December 10, 2014
1 CPA auditor, CA, public accountancy permit No. A121006
41
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at October 31
(in thousands of Canadian dollars)
ASSETS
Cash and cash equivalents
Cash and cash equivalents in trust or otherwise reserved [note 6]
Trade and other receivables [note 7]
Income taxes receivable
Inventories
Prepaid expenses
Derivative financial instruments [note 8]
Current portion of deposits
Current assets
Cash and cash equivalents reserved [note 6]
Deposits [note 9]
Deferred tax assets [note 20]
Property, plant and equipment [note 10]
Goodwill [note 11]
Intangible assets [note 11]
Investments and other assets [note 12]
Non-current assets
LIABILITIES
Trade and other payables [note 13]
Current portion of provision for overhaul of leased aircraft
Income taxes payable
Customer deposits and deferred revenues
Derivative financial instruments [note 8]
Current liabilities
Provision for overhaul of leased aircraft [note 14]
Other liabilities [note 16]
Deferred tax liabilities [note 20]
Non-current liabilities
EQUITY
Share capital [note 17]
Share-based payment reserve
Retained earnings
Unrealized gain on cash flow hedges
Cumulative exchange differences
Commitments and contingencies [note 23]
See accompanying notes to consolidated financial statements
On behalf of the Board,
2014
$
2013
$
308,887
340,704
123,489
3,329
10,434
74,932
16,596
17,833
896,204
39,480
26,099
30,051
128,560
95,601
72,769
86,266
478,826
1,375,030
338,633
10,674
1,721
424,468
24,679
800,175
25,638
53,926
12,345
91,909
224,679
15,444
227,872
11,712
3,239
482,946
1,375,030
265,818
361,743
112,738
5,645
13,143
73,453
7,720
13,267
853,527
41,725
23,308
22,048
115,025
94,723
67,333
72,384
436,546
1,290,073
326,687
11,029
19,729
410,340
4,675
772,460
17,028
48,096
11,096
76,220
221,706
15,391
206,835
2,380
(4,919)
441,393
1,290,073
Director
Director
42
2014
$
3,752,198
2013
$
3,648,158
2,000,424
462,942
370,904
170,724
128,892
105,440
87,229
333,808
46,702
6,387
3,713,452
38,746
1,939
(8,107)
1,951,329
417,891
368,477
163,606
106,732
95,635
81,270
346,572
39,068
5,740
3,576,320
71,838
2,512
(7,357)
23,822
(1,007)
369
(8,094)
29,824
13,430
(9,672)
3,758
26,066
22,875
3,191
26,066
0.59
0.59
493
(846)
—
(3,676)
80,712
18,512
998
19,510
61,202
57,955
3,247
61,202
1.51
1.51
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended October 31
(in thousands of Canadian dollars, except per share amounts)
Revenues
Operating expenses
Costs of providing tourism services
Aircraft fuel
Salaries and employee benefits [notes 18 and 21]
Commissions
Aircraft maintenance
Airport and navigation fees
Aircraft rent
Other
Depreciation and amortization [note 18]
Restructuring [note 19]
Operating results
Financing costs
Financing income
Change in fair value of derivative financial instruments used for
aircraft fuel purchases
Foreign exchange gain on non-current monetary items
Write-off of goodwill [note 19]
Share of net income of an associate [note 12]
Income before income tax expense
Income taxes (recovery) [note 20]
Current
Deferred
Net income for the year
Net income attributable to:
Shareholders
Non-controlling interests
Earnings per share [note 17]
Basic
Diluted
See accompanying notes to consolidated financial statements
43
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended October 31
(in thousands of Canadian dollars)
Net income for the year
Other comprehensive income (loss)
Items that will be reclassified to net income
Change in fair value of derivatives designated as cash flow
hedges
Reclassification to net income
Deferred taxes [note 20]
Foreign exchange gain on translation of financial
statements of foreign subsidiaries
Items that will never be reclassified to net income
Retirement benefits – Net actuarial gains and
losses [note 22]
Deferred taxes [note 20]
Total other comprehensive income
Comprehensive income for the year
Attributable to:
Shareholders
Non-controlling interests
See accompanying notes to consolidated financial statements
2014
$
26,066
2013
$
61,202
(1,677)
14,599
(3,590)
9,332
2,786
1,027
(958)
2,855
8,158
7,550
(3,431)
912
(2,519)
14,971
41,037
36,474
4,563
41,037
2,986
(806)
2,180
12,585
73,787
69,891
3,896
73,787
44
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Accumulated other
comprehensive income (loss)
Share-based
payment
reserve
Share capital
Unrealized
gain (loss) on
cash flow
hedges
Retained
earnings
Cumulative
exchange
differences
$
Total
$
(12,469)
366,326
Non-
controlling
interests
Total equity
$
—
3,247
649
3,896
—
—
—
(2,787)
$
366,326
61,202
12,585
73,787
965
5
2,055
(2,787)
1,502
(1,502)
—
—
1,042
1,042
(649)
(3,896)
—
3,191
1,372
4,563
—
—
—
(2,782)
(681)
272
(1,372)
(4,563)
—
1,280
441,393
26,066
14,971
41,037
857
1,437
732
(2,782)
—
272
—
516
—
482,946
—
6,901
6,901
—
—
—
—
—
—
649
649
57,955
11,936
69,891
965
5
2,055
—
649
5,176
(4,919)
441,393
—
6,786
6,786
—
—
—
—
—
—
1,372
1,372
3,239
22,875
13,599
36,474
857
1,437
732
—
681
—
1,372
5,079
482,946
$
(475)
—
2,855
2,855
—
—
—
—
—
—
—
—
2,380
—
9,332
9,332
—
—
—
—
—
—
—
—
(in thousands of Canadian dollars)
$
$
$
Balance as at October 31, 2012
220,736
13,336
145,198
Net income for the year
Other comprehensive income
Comprehensive income for the year
Issued from treasury
Exercise of options
Share-based payment expense
Dividends
Other changes in non-controlling
interest liabilities
Reclassification of non-controlling
interest liabilities
Reclassification of non-controlling
interest exchange difference
—
—
—
965
5
—
—
—
—
—
970
Balance as at October 31, 2013
221,706
Net income for the year
Other comprehensive income (loss)
Comprehensive income for the year
Issued from treasury
Exercise of options
Share-based payment expense
Dividends
Other changes in non-controlling
interest liabilities
Reclassification of non-controlling
interest liabilities
Reclassification of non-controlling
interest exchange difference
Balance as at October 31, 2014
—
—
—
857
2,116
—
—
—
—
—
2,973
224,679
—
—
—
—
—
2,055
—
—
—
—
2,055
15,391
—
—
—
—
(679)
732
—
—
—
—
53
57,955
2,180
60,135
—
—
—
—
1,502
—
—
1,502
206,835
22,875
(2,519)
20,356
—
—
—
—
681
—
—
681
See accompanying notes to consolidated financial statements
45
15,444
227,872
11,712
2014
$
2013
$
26,066
61,202
46,702
39,068
23,822
(1,007)
1,601
(8,094)
(9,672)
2,307
732
82,457
12,972
8,255
2,556
106,240
(64,976)
876
3,000
—
—
(61,100)
2,973
(2,782)
191
(2,262)
43,069
265,818
308,887
493
(846)
—
(3,676)
998
2,561
2,055
101,855
27,330
(3,812)
(2,334)
123,039
(55,457)
(3,913)
3,000
27,350
731
(28,289)
970
(2,787)
(1,817)
1,710
94,643
171,175
265,818
28,359
680
(6,146)
841
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended October 31
(in thousands of Canadian dollars)
OPERATING ACTIVITIES
Net income for the year
Operating items not involving an outlay (receipt) of cash:
Depreciation and amortization
Change in fair value of derivative financial instruments used for aircraft fuel
purchases
Foreign exchange gain on non-current monetary items
Write-off of goodwill and other intangible assets
Share of net income of an associate
Deferred taxes
Employee benefits
Share-based payment expense
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 and other intangible assets
Increase in cash and cash equivalent reserved
Net proceeds from disposal of subsidiary
Proceeds from sale of investments in ABCP
Dividend received from an associate
Cash flows related to investing activities
FINANCING ACTIVITIES
Proceeds from issuance of shares
Dividends paid by a subsidiary to a non-controlling shareholder
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 (as reported in operating activities)
Income taxes paid (recovered)
Interest paid
See accompanying notes to consolidated financial statements
46
Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
October 31, 2014 and 2013
[Unless specified otherwise, amounts are expressed in thousands of Canadian dollars, except for per share amounts]
Note 1
CORPORATE INFORMATION
Transat A.T. Inc. [the “Corporation”], headquartered at 300 Léo-Pariseau Street, Montréal, Québec, Canada, is incorporated under the
Canada Business Corporations Act. The Class A variable voting shares and Class B voting shares are listed on the Toronto Stock
Exchange.
The Corporation 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 which are vertically integrated with its other
services of air transportation, distribution through a dynamic travel agency network, value-added services at travel destinations, and
accommodations.
The consolidated financial statements of Transat A.T. Inc. for the year ended October 31, 2014 were approved by the Corporation’s
Board of Directors on December 10, 2014.
Note 2
SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PREPARATION
These consolidated financial statements of the Corporation and its subsidiaries have been prepared in accordance with International
Financial Reporting Standards [“IFRS”], as issued by the International Accounting Standards Board [“IASB”] and as adopted by the
Accounting Standards Board of Canada.
These consolidated financial statements are presented in Canadian dollars, the Corporation’s functional currency, except where
otherwise indicated. Each entity of the Corporation determines its own functional currency and items included in the financial statements of
each entity are measured using that functional currency.
These consolidated financial statements have been prepared on a going concern basis, using historical cost accounting, except for
certain financial assets and liabilities classified as financial assets/liabilities at fair value through profit or loss and measured at fair value.
BASIS OF CONSOLIDATION
The consolidated financial statements include the financial statements of the Corporation and its subsidiaries.
SUBSIDIARIES
Subsidiaries are entities over which the Corporation has control. Control is achieved where the Corporation has the power to govern
the financial and operating policies of an investee entity so as to obtain benefits from its activities. Subsidiaries are fully consolidated from
the date of acquisition, being the date on which the Corporation obtains control, and continue to be consolidated until the date when such
control ceases.
The acquisition method of accounting is used to account for the acquisition of subsidiaries as follows:
• Cost is measured as the fair value of the assets acquired, equity instruments issued and liabilities incurred or assumed at
•
•
•
the date of exchange, excluding transaction costs which are expensed as incurred;
Identifiable assets acquired and liabilities assumed are measured at their fair values at the acquisition date;
The excess of acquisition cost over the fair value of the identifiable net assets acquired is recorded as goodwill;
If the acquisition cost is less than the fair value of the net assets acquired, the fair value of the net assets is re-assessed
and any remaining difference is recognized directly in the statement of income (loss);
• Contingent consideration is measured at fair value on the acquisition date, with subsequent changes in the fair value
recorded through the statement of income (loss) when the contingent consideration is a financial liability;
• Upon gaining control in a step acquisition, the existing ownership interest is re-measured to fair value through the statement
of income (loss); and
47
Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
•
For each business combination including non-controlling interests, the acquirer measures the non-controlling interest in the
acquiree either at fair value or at the proportionate share of the acquiree’s identifiable net assets.
Non-controlling interests, which represent the portion of net income (loss) and net assets in subsidiaries that are not 100% owned by
the Corporation, are reported separately within equity in the consolidated statement of financial position. Non-controlling interests in respect
of which shareholders hold an option entitling them to require the Corporation to buy back their shares are reclassified from equity to
liabilities, deeming exercise of the option. The carrying amount of reclassified interests is also adjusted to match the estimated redemption
value. Any changes in the estimated redemption value are recognized as equity transactions in retained earnings.
The financial statements of the subsidiaries are prepared for the same reporting period as the parent company and using consistent
accounting policies. All intragroup balances, transactions, unrealized gains and losses resulting from intragroup transactions and dividends
are fully eliminated on consolidation.
INVESTMENT IN AN ASSOCIATE
An associate is an entity over which the Corporation has significant influence, but no control. The Corporation’s investment in an
associate is accounted for using the equity method as follows:
•
•
•
Investment is initially recognized at cost;
Investment in an associate includes goodwill identified on acquisition, net of any accumulated impairment loss;
The Corporation’s share of post-acquisition net income (loss) is recognized in the statement of income (loss) and is also
added to (netted against) the carrying amount of the investment; and
• Gains on transactions between the Corporation and its equity method investee are eliminated to the extent of the
Corporation’s interest in this entity and losses are eliminated unless the transaction provides evidence of an impairment of
the asset transferred.
FOREIGN CURRENCY TRANSLATION
TRANSACTIONS AND BALANCES
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the
transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the functional currency spot rate of
exchange at the reporting date.
Foreign exchange gains and losses resulting from the settlement of such transactions as well as from the translation of monetary
assets and liabilities not denominated in the functional currency of the subsidiary are recognized in the statement of income (loss), except for
qualifying cash flow hedges, which are deferred and presented as Unrealized gain (loss) on cash flow hedges in Accumulated other
comprehensive income (loss) in the statement of changes in equity.
GROUP COMPANIES
Assets and liabilities of entities with functional currencies other than the Canadian dollar are translated at the period-end rates of
exchange, and the results of their operations are translated at average rates of exchange for the period. The exchange differences arising
from translation are recognized in Cumulative exchange differences in Accumulated other comprehensive income (loss) in equity. On
disposal of an interest, the exchange difference component relating to that particular interest is recognized in the consolidated statement of
income (loss).
CASH EQUIVALENTS
Cash equivalents consist primarily of term deposits and bankers’ acceptances that are highly liquid and readily convertible into known
amounts of cash with initial maturities of less than three months.
48
Transat A.T. Inc.
2014 Annual Report
INVENTORIES
Notes to consolidated financial statements
Inventories, consisting primarily of supplies and aircraft parts, are valued at the lower of cost, determined using the first-in, first-out
method, and net realizable value. Net realizable value is the estimated selling price in the normal course of business less estimated costs to
sell. Replacement cost may be indicative of net realizable value.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost less accumulated depreciation and provision for impairment, if any.
Depreciation on property, plant and equipment is calculated on a straight line basis, unless otherwise specified, and serves to write
down the cost of the assets to their estimated residual value over their expected useful lives as follows:
Aircraft equipment, including spare engines and rotable spare parts
Office furniture and equipment
Leasehold improvements
Administrative building
5–10 years or use
3–10 years
Lease term or useful life
10–45 years
The fleet includes owned aircraft and improvements to aircraft under operating leases. A portion of the cost of owned aircraft is
allocated to the “major maintenance activities” subclass, which relates to airframe, engine and landing gear overhaul costs, and the
remaining cost is allocated to Aircraft. Aircraft and major maintenance activities are depreciated taking into account their expected estimated
residual value. Aircraft are depreciated on a straight-line basis over seven- to ten-year periods, and major maintenance activities are
depreciated 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, or their expected useful lives. Subsequent major maintenance activity expenses are capitalized as
major maintenance activities and are depreciated according to their type. Expenses related to other maintenance activities, including
unexpected repairs, are recognized in net income (loss) as incurred. Improvements to aircraft under operating leases are depreciated on a
straight-line basis over the shorter of the corresponding lease term and their useful life.
Estimated residual values and useful lives are reviewed annually and adjusted as appropriate.
GOODWILL
Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable net assets acquired at the date of
acquisition. Goodwill is tested at least annually for impairment and carried at cost less accumulated impairment losses. For the purposes of
impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each of the Corporation’s cash-
generating units [“CGUs”] that are expected to benefit from the combination, irrespective of whether other assets or liabilities of the acquiree
are assigned to those units.
INTANGIBLE ASSETS
Intangible assets are recorded at cost. The cost of intangible assets acquired in a business combination is recorded at fair value as at
the acquisition date. Internally generated intangible assets include developed or modified application software. These costs are capitalized
when the following criteria are met:
•
•
•
•
•
•
It is technically feasible to complete the software product and make it available for use;
Management intends to complete the software product and use it;
The Corporation has ability to use the software product;
It can be demonstrated how the software product will generate probable future economic benefits;
Adequate technical, financial and other resources to complete the development and use the software product are available;
The expenditures attributable to the software product during its development can be reliably measured.
Costs that qualify for capitalization include both internal and external costs, but are limited to those that are directly related to the
specific project.
49
Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
Following initial recognition, intangible assets are carried at cost less any accumulated depreciation and impairment losses.
The useful lives of intangible assets are assessed as either finite or indefinite.
Intangible assets with finite lives are amortized on a straight-line basis over their respective useful economic lives, as follows:
Software
Customer lists
3–10 years
7–10 years
Intangible assets with finite lives are assessed for impairment whenever there is an indication that the intangible asset may be
impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least annually
and adjusted as appropriate.
Intangible assets with indefinite useful lives, consisting mainly of trademarks, are not amortized but are tested for impairment at least
annually, either individually or at the CGU level. The useful life of those assets is reviewed annually, at a minimum, to determine whether
events and circumstances continue to support an indefinite useful life assessment for the assets. If they do not, the change in useful life
assessment from indefinite to finite is made on a prospective basis.
OPERATING LEASE AND DEFERRED LEASE INDUCEMENTS
Leases where substantially all the risks and rewards of ownership of the asset are not transferred to the Corporation are classified as
operating leases. Operating lease payments are recognized as an expense on a straight-line basis over the related lease term.
Deferred lease inducements consist of lease incentive amounts received from landlords and rent-free lease periods. These lease
inducements are recognized through other liabilities and are amortized over the life of the initial lease term on a straight-line basis as a
reduction of amortization expense.
FINANCIAL INSTRUMENTS
A financial instrument is any contract that gives rise to a financial asset of one party and a financial liability or equity instrument of
another party. Financial assets of the Corporation include cash and cash equivalents, cash and cash equivalents in trust or otherwise
reserved, trade and other receivables other than amounts receivable due from government, deposits on leased aircraft and engines, and
derivative financial instruments with a positive fair value. Financial liabilities of the Corporation include trade and other payables other than
amounts due to government, long-term debt, derivative financial instruments with a negative fair value and put options held by non-
controlling interests.
Financial assets and financial liabilities, including derivative financial instruments, are initially measured at fair value. Subsequent to
initial recognition, financial assets and financial liabilities are measured based on their classification: financial assets/liabilities at fair value
through profit or loss, loans and receivables, or other financial liabilities. Derivative financial instruments, including embedded derivative
financial instruments that are not closely related to the host contract, are classified as financial assets or liabilities at fair value through profit
or loss unless they are designated within an effective hedging relationship. Classification is determined by management on initial recognition
based on the purpose for their acquisition.
CLASSIFICATION OF FINANCIAL INSTRUMENTS
Financial assets and financial liabilities at fair value through profit or loss
Financial assets, financial liabilities and derivative financial instruments classified as financial assets or liabilities at fair value through
profit or loss are measured at fair value at the period-end 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 incurred.
Loans and receivables and other financial liabilities
Financial assets classified as loans and receivables and financial liabilities classified as other financial liabilities are recorded at
amortized cost using the effective interest method.
50
Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGE ACCOUNTING
The Corporation uses derivative financial instruments to hedge against future foreign currency fluctuations in relation to its operating
lease payments, receipts of revenues from certain tour operators and disbursements pertaining to certain operating expenses in foreign
currencies. For hedge accounting purposes, the Corporation designates its derivative financial instruments related to foreign currencies as
hedging instruments.
The Corporation formally documents all relationships between the hedging instruments and hedged items, as well as its risk
management objectives and strategy for undertaking various hedging transactions. This process includes linking all derivative financial
instruments to forecasted cash flows or to a specific asset or liability. The Corporation also formally documents and assesses, both at the
hedge’s inception and on an ongoing basis, whether the hedging instruments are highly effective in offsetting the changes in the fair value or
cash flows of the hedged items.
These derivative financial instruments are designated as cash flow hedges.
All derivative financial instruments are recorded at fair value in the consolidated statements of financial position. For the derivative
financial instruments designated as cash flow hedges, changes in the fair value of the effective portion are recognized in Other
comprehensive income (loss) in the consolidated statement of comprehensive income (loss). Any ineffective portion within a cash flow hedge
is recognized in net income (loss), as incurred, in the same account in the consolidated statement of income (loss) as the hedged item when
realized. Should the cash flow hedge cease to be effective, previously unrealized gains and losses remain within Accumulated other
comprehensive income (loss) as Unrealized gain (loss) on cash flow hedges until the hedged item is settled, and future changes in value of
the derivative instrument are recognized in income (loss) prospectively. Changes in value of the effective portion of a cash flow hedge
remain in Accumulated other comprehensive income (loss) as Unrealized gain (loss) on cash flow hedges until the related hedged item is
settled, at which time amounts recognized in Unrealized gain (loss) on cash flow hedges are reclassified to the same account in the
consolidated statement of income (loss) in which the hedged item is recorded. For derivative financial instruments designated as fair value
hedges, periodic changes in fair value are recognized in the same account in the consolidated statement of income (loss) as the hedged
item.
DERIVATIVE FINANCIAL INSTRUMENTS THAT DO NOT QUALIFY FOR HEDGE ACCOUNTING
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 on remeasurement are recorded and presented 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; accordingly, these instruments are normally
purchased for risk management purposes and held to maturity.
TRANSACTION COSTS
Transaction costs related to financial assets and financial liabilities classified as financial assets or liabilities at fair value through profit
or loss are expensed as incurred. Transaction costs related to financial assets classified as loans and receivables or to 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.
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FAIR VALUE
Notes to consolidated financial statements
The fair value of financial instruments that are actively traded in organized financial markets is determined by reference to quoted
prices in an active market at the close of business on the reporting date. For financial instruments where there is no active market, fair value
is determined using valuation techniques. Such techniques may include using recent arm’s length market transactions, reference to the
current fair value of another instrument that is substantially the same, discounted cash flow analysis or other valuation models.
The Corporation categorizes its financial assets and liabilities measured at fair value into one of three different levels depending on
the observability of the inputs used in the measurement.
Level 1:
This level includes assets and liabilities measured at fair value based on unadjusted quoted prices for identical assets and
liabilities in active markets accessible to the Corporation at the measurement date.
Level 2:
This level includes valuations determined using directly or indirectly observable inputs other than quoted prices included within
Level 1. Derivative instruments in this category are valued using models or other industry standard valuation techniques
derived from observable market inputs.
Level 3:
This level includes valuations based on inputs which are less observable, unavailable or where the observable data does not
support a significant portion of the instruments’ fair value.
IMPAIRMENT OF FINANCIAL ASSETS CLASSIFIED AS LOANS AND RECEIVABLES
The Corporation assesses at each reporting date whether there is any objective evidence that a financial asset or a group of financial
assets classified as loans and receivables is impaired. A financial asset or a group of financial assets is deemed to be impaired if, and only if,
there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset [an incurred
loss event] and that incurred loss event has an impact on the estimated future cash flows of the financial asset or the group of financial
assets that can be reliably estimated. Impairment losses are recognized through profit or loss.
IMPAIRMENT OF NON-FINANCIAL ASSETS
The Corporation assesses at each reporting date whether there is any indication that an asset may be impaired. If any indication
exists, or when annual impairment testing for an asset is required, the Corporation estimates the asset’s recoverable amount. An asset’s
recoverable amount is the higher of an asset’s or CGU’s fair value less costs to sell and its value in use and is determined for an individual
asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. Value in
use is calculated using estimated net cash flows, typically based on detailed projections over a five-year period with subsequent years
extrapolated using a growth assumption. The estimated net cash flows are discounted to their present value using a discount rate before
income taxes that reflects current market assessments of the time value of money and the risk specific to the asset or CGU. In determining
fair value less costs to sell, recent market transactions are taken into account, if available. If no such transactions can be identified, an
appropriate valuation model may be used. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is
considered impaired and is written down to its recoverable amount. Impairment losses are recognized through profit or loss.
The following criteria are also applied in assessing impairment of specific assets:
GOODWILL
Goodwill is tested annually [as at October 31] for impairment and when circumstances indicate that the carrying value may be
impaired. Impairment is determined by assessing the recoverable amount of each CGU [or group of CGUs] to which the goodwill relates.
Where the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognized.
INTANGIBLE ASSETS
Intangible assets with indefinite useful lives are tested for impairment annually [as at October 31] either individually or at the CGU
level, as appropriate, and when circumstances indicate that the carrying value may be impaired.
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REVERSAL OF IMPAIRMENT LOSSES
Notes to consolidated financial statements
For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that previously
recognized impairment losses may no longer exist or have decreased. If such indication exists, the Corporation estimates the asset’s or
CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to
determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount
of the asset does not exceed its recoverable amount or exceed the carrying amount that would have been determined, net of depreciation or
amortization, had no impairment loss been recognized for the asset in prior years. The reversal is recognized in the statement of income
(loss). Impairment losses relating to goodwill cannot be reversed in future periods.
PROVISIONS
Provisions are recognized when the Corporation has a present, legal or constructive obligation as a result of a past event, it is
probable that an outflow of resources will be required to settle the obligation and the cost can be reliably estimated. Provisions are measured
at their present value.
PROVISION FOR OVERHAUL OF LEASED AIRCRAFT
Under aircraft and engine operating leases, the Corporation is required to maintain the aircraft and engines in serviceable condition
and adhere to 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. All maintenance work done on aircraft engines under contracts with billing based on flight hours are charged to
operating expenses in the statement of income (loss) are expensed as incurred.
EMPLOYEE FUTURE BENEFITS
The Corporation offers defined benefit pension arrangements to certain senior executives. Certain non-Canadian employees also
benefit from post-employment benefits. The net periodic pension expense for these plans is actuarially determined on an annual basis by
independent actuaries using the projected unit credit method. The determination of benefit expense requires assumptions such as the
discount rate to measure obligations, expected mortality and expected rate of future compensation. Actual results will differ from estimated
results based on assumptions. The vested portion of past service cost arising from plan amendments is recognized immediately in the
statement of income (loss). The unvested portion is amortized on a straight-line basis over the average remaining period until the benefits
vest.
The liability recognized in the consolidated statements of financial position is the present value of the defined benefit obligation at the
end of the reporting period less the fair value of plan assets, together with adjustments for unrecognized past service costs. The present
value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality
corporate bonds that have terms to maturity approximating the term of the related pension liability. All actuarial gains and losses that arise in
calculating the present value of the defined benefit obligation and the fair value of plan assets are recognized immediately in Retained
earnings and included in the statement of comprehensive income (loss).
Contributions to defined contribution pension plans are expensed as incurred, which is as the related employee service is rendered.
In certain jurisdictions, termination benefits are payable when employment is terminated by the Corporation before the normal
retirement date, or whenever an employee accepts voluntary redundancy in exchange for the benefits. The Corporation recognizes
termination benefits when it is demonstrably committed to either terminating the employment of current employees according to a detailed
formal plan without possibility of withdrawal, or providing termination benefits as a result of an offer made to encourage voluntary
redundancy.
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REVENUE RECOGNITION
Notes to consolidated financial statements
The Corporation recognizes revenue once the service is rendered and all the significant risks and rewards of the service have been
transferred to the customer. As a result, revenue earned from passenger transportation is recognized upon each return flight. Revenue from
tour operators and the related costs are recognized when passengers depart. Commission revenue from travel agencies is recognized when
travel is reserved. Amounts received from customers for services not yet rendered are included in current liabilities as Customer deposits
and deferred revenues.
Revenue for which the Corporation provides multiple services such as air transportation, tour operator and travel agency services is
deferred and only recognized once the service is provided to the customer based on the Corporation’s accounting policy for revenue
recognition. The Corporation treats these different services as separate units of accounting as each service has a value to the customer on a
stand-alone basis and the consideration paid for these services is allocated using the relative fair value of each deliverable.
INCOME TAXES
The Corporation provides for income taxes using the liability method. Under this method, deferred 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.
Deferred tax assets and liabilities are recognized directly through profit or loss, other comprehensive income (loss), or equity based
on the classification of the item to which they relate.
Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for all deductible
temporary differences, carryforwards of unused tax credits and unused tax losses, to the extent that it is probable that taxable income will be
available against which the deductible temporary differences, and the carryforwards of unused tax credits and unused tax losses can be
utilized.
Deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current tax liabilities
and the deferred taxes relate to the same taxable entity and the same taxation authority.
SHARE-BASED PAYMENT PLANS
The Corporation operates a number of equity-settled and cash-settled share-based compensation plans under which it receives
services from employees as consideration for equity instruments of the Corporation or cash-settled payments.
EQUITY-SETTLED TRANSACTIONS
For equity-settled share-based compensation [stock option plan], the expense is based on the grant date fair value of the awards
expected to vest over the period in which the performance and/or service conditions are fulfilled, with a corresponding increase in the share-
based payment reserve. The value of the compensation is measured using a Black-Scholes option pricing model. For awards with graded
vesting, the fair value of each tranche is recognized through profit or loss over its respective vesting period. Any consideration paid by
employees on exercising stock options and the corresponding portion previously credited to share-based payment reserve are credited to
share capital.
CASH-SETTLED TRANSACTIONS
For cash-settled share-based compensation [deferred share unit plan and restricted share unit plan], the expense is determined
based on the fair value of the liability at the end of the reporting period until the award is settled. The value of the compensation is measured
based on the closing price of Class B shares of the Corporation on the Toronto Stock Exchange adjusted to take into account the terms and
conditions upon which the units were granted, and is based on the units that are expected to vest. The expense is recognized over the
period in which the performance or service conditions are satisfied. At the end of each reporting period, the Corporation re-assesses its
estimates of the number of awards that are expected to vest and recognizes the impact of the revisions through profit or loss.
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EMPLOYEE SHARE PURCHASE PLANS
Notes to consolidated financial statements
The Corporation’s contributions to the employee share purchase plans [stock ownership incentive and capital accumulation plan and
permanent stock ownership incentive plan] consist of shares acquired in the marketplace by the Corporation. These contributions are
measured at cost and are recognized over the period from the acquisition date to the date that the award vests to the participant. Any
consideration paid by the participant to purchase shares under the share purchase plan is credited to share capital.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed based on net earnings (loss) attributable to shareholders of the Corporation, divided by
the weighted-average number of Class A variable voting shares and Class B voting shares outstanding during the year.
Diluted earnings (loss) per share is calculated by adjusting net income (loss) attributable to shareholders of the Corporation for any
changes in income or expense that would result from the exercise of dilutive elements. The weighted-average number Class A variable
voting shares and Class B voting shares outstanding is increased by the weighted-average number of additional Class A variable voting
shares and Class B voting shares that would have been outstanding assuming the exercise of all dilutive elements.
Note 3
SIGNIFICANT ACCOUNTING ESTIMATES AND JUDGMENTS
The preparation of consolidated financial statements requires management to make estimates and judgments about the future.
Estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future
events that are believed to be reasonable under the circumstances. However, accounting estimates could result in outcomes that require a
material adjustment to the carrying amount of the asset or liability affected in future periods.
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a
significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fiscal year are described
below. The Corporation based its assumptions and estimates on parameters available when the consolidated financial statements were
prepared. However, existing circumstances and assumptions about future developments may change due to market events or to
circumstances beyond the Corporation’s control. Such changes are reflected in the assumptions when they occur.
DEPRECIATION AND AMORTIZATION AND IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT, GOODWILL AND INTANGIBLE ASSETS
Impairment exists when the carrying value of an asset or CGU exceeds its recoverable amount, which is the higher of fair value less
costs to sell and value in use. To identify CGUs, management has to take into account the contributions made by each subsidiary and the
inter-relationships among them in light of the Corporation’s vertical integration and the goal of providing a comprehensive offering of tourism
services in the markets served by the Corporation. The fair value less costs to sell calculation is based on available data from arm’s length
transactions for similar assets or observable market prices less incremental costs to sell. The value in use calculation is based on a
discounted cash flow model. Cash flows are derived from the budget or financial forecasts for the next five fiscal years and do not include
restructuring activities that the Corporation is not yet committed to or significant future investments that will enhance the performance of the
asset of the CGU being tested. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow model as
well as the expected future cash inflows and the growth rate used for extrapolation purposes. The key assumptions used to determine the
recoverable amount for the various CGUs, including a sensitivity analysis, are discussed in note 11.
Property, plant and equipment are depreciated over their estimated useful lives taking into account their residual value. Aircraft and
aircraft components account for a major subclass of property, plant and equipment. Depreciation expense depends on several assumptions
including the period over which the aircraft will be used, the fleet renewal schedule and the estimate of the residual value of aircraft and
aircraft components at the time of their anticipated disposal.
Changes in estimated useful life and residual value of aircraft could have a significant impact on depreciation 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.
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Notes to consolidated financial statements
FAIR VALUE OF DERIVATIVE FINANCIAL INSTRUMENTS
The fair value of derivative financial instruments is the amount for which the instrument could be exchanged between knowledgeable,
willing parties in an arm’s length transaction. 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. The
Corporation also takes into account its own credit risk and the credit risk of the counterparty in determining fair value for its derivative
financial instruments based on whether they are financial assets or financial liabilities. 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
transactions involving other instruments that are substantially the same, discounted cash flow analysis or other techniques, where
appropriate. The Corporation ensures, to the extent practicable, that its valuation technique incorporates all factors that market participants
would consider in setting a price and that it is consistent with accepted economic methods for pricing financial instruments, including the
credit risk of the party involved.
PROVISION FOR OVERHAUL OF LEASED AIRCRAFT
The estimates used to determine the provision for overhaul of leased aircraft are based on historical experience, historical costs and
repairs, information from external suppliers, forecasted aircraft utilization, planned renewal of the aircraft fleet, leased aircraft return
conditions, the U.S. dollar exchange rate and other facts and reasonable assumptions in the circumstances. Given that various assumptions
are used in determining the provision for overhaul of leased aircraft, the calculation involves some inherent measurement uncertainty. Actual
results will differ from estimated results based on assumptions.
NON-CONTROLLING INTERESTS
Non-controlling interests in respect of which the shareholders may require the Corporation to buy back their shares are reclassified as
liabilities at their estimated redemption value, deeming exercise of this option. In the absence of a predetermined calculation formula, the
estimated redemption value is established using fair value. The fair value calculation is based on a discounted cash flow model. The cash
flows are derived from the budget and financial forecasts for the next five years and do not include restructuring activities that the
Corporation is not yet committed to or significant future investments that will enhance the subsidiary’s performance. The fair value is most
sensitive to the discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used
for extrapolation purposes.
EMPLOYEE FUTURE BENEFITS
The cost of defined benefit pension plans and other post-employment benefits and the present value of the associated obligations are
determined using actuarial valuations. These actuarial valuations require the use of assumptions such as the discount rate to measure
obligations, expected mortality and expected rate of future compensation. Given that various assumptions are used in determining the cost
and obligations associated with employee future benefits, the actuarial valuation process involves some inherent measurement uncertainty.
Actual results will differ from estimated results based on assumptions.
TAXES
Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax legislation and the amount and timing
of future taxable income. Given the Corporation’s wide range of international business relationships, differences arising between actual
results and the assumptions made, or future changes in such assumptions, could give rise to future adjustments in the amounts of income
taxes previously reported. Such interpretive differences may arise in a variety of areas depending on the conditions specific to the respective
tax jurisdiction of the Corporation’s subsidiaries. The Corporation establishes provisions, based on reasonable estimates, for possible
consequences of audits by the tax authorities of the respective countries in which it operates. The amount of such provisions is based on
various factors, such as experience of previous tax audits and interpretations of tax regulations by the taxable entity and the responsible tax
authority.
Deferred income tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will be available
against which the losses can be utilized. Significant judgment is required by management to determine the amount of deferred income tax
assets that can be recognized, based upon the likely timing and the level of future taxable income together with future tax planning
strategies.
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Notes to consolidated financial statements
Note 4
CHANGES IN ACCOUNTING POLICIES
IFRS 10, CONSOLIDATED FINANCIAL STATEMENTS
In May 2011, the IASB issued IFRS 10, Consolidated Financial Statements, which replaces SIC-12, Consolidation: Special Purpose
Entities, and parts of IAS 27, Consolidated and Separate Financial Statements. IFRS 10 builds on existing principles by identifying the
concept of control as the determining factor in whether an entity should be included within the consolidated statements of an entity. The
standard provides additional guidance to assist in the determination of control where this is difficult to assess. IFRS 10 became effective on
November 1, 2013. Adoption of this standard had no impact on the Corporation’s financial statements.
IFRS 12, DISCLOSURE OF INTERESTS IN OTHER ENTITIES
In May 2011, the IASB issued IFRS 12, Disclosure of Interests in Other Entities. IFRS 12 is a new and comprehensive standard on
disclosure requirements for all forms of interests in other entities, including joint arrangements, associates, structured entities and other off-
balance sheet vehicles. The standard requires an entity to disclose information on the nature of, and risks associated with, its interests in
other entities and the effects of those interests on its financial position, financial performance and cash flows. IFRS 12 became effective on
November 1, 2013. Except for additional disclosures, adoption of this standard had no impact on the Corporation’s financial statements.
IFRS 13, FAIR VALUE MEASUREMENT
In May 2011, the IASB issued IFRS 13, Fair Value Measurement. IFRS 13 will improve consistency and reduce complexity by
providing a precise definition of fair value and a single source of fair value measurement and disclosure requirements for use across IFRS.
IFRS 13 became effective on November 1, 2013. Adoption of this standard had no impact on the Corporation’s financial statements.
IAS 19, EMPLOYEE BENEFITS
In June 2011, the IASB amended IAS 19, Employee Benefits. The amendments eliminate the option to defer the recognition of gains
and losses, known as the corridor method, which improves comparability and faithfulness of presentation. The amendments also streamline
the presentation of changes in assets and liabilities arising from defined benefit plans, including requiring remeasurements arising from
changes in estimates to be presented in other comprehensive income (loss), thereby separating those changes from changes that are often
perceived as resulting from the Corporation’s day-to-day operations. The amendments also require entities to compute the financing cost
component of defined benefit plans by applying the discount rate used to measure post-employment benefit obligations to the net post-
employment benefit obligations. Under the previous IAS 19, interest income was presented separately from interest expense and calculated
based on the expected return on plan assets. Finally, the amendments enhance the disclosure requirements for defined benefit plans,
providing better information about the characteristics of defined benefit plans and the risks that the Corporation is exposed to through its
participation in those plans. The amendments made to IAS 19 became effective on November 1, 2013. Except for additional disclosures,
adoption of this standard had no impact on the Corporation’s financial statements.
Note 5
FUTURE CHANGES IN ACCOUNTING POLICIES
Standards issued but not yet effective are discussed below. The Corporation has not early adopted these new standards.
IFRS 9, FINANCIAL INSTRUMENTS
In July 2014, the IASB completed its three-part project to replace IAS 39, Financial Instruments: Recognition and Measurement by
issuing IFRS 9, Financial Instruments. IFRS 9 addresses the classification and measurement of financial assets and financial liabilities, and
introduces a forward-looking expected-loss impairment model as well as a substantially-reformed approach to hedge accounting.
IFRS 9 uses a new approach to determine whether a financial asset is measured at amortized cost or fair value, replacing the many
different rules in IAS 39. The approach recommended by IFRS 9 is based on how an entity manages its financial instruments and the
contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for classification and measurement of
financial liabilities were carried forward in IFRS 9. However, the portion of the changes in fair value related to the entity’s own credit risk, in
measuring a financial liability at fair value through profit or loss, will be presented in other comprehensive income (loss) rather than in the
statement of income (loss).
IFRS 9 also introduces a new expected-loss impairment model that will require more timely recognition of expected credit losses.
Specifically, entities will be required to account for expected credit losses from when financial instruments are first recognized and to
recognize full lifetime expected credit losses on a more timely basis.
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Notes to consolidated financial statements
Lastly, IFRS 9 introduces a new hedge accounting model, together with corresponding disclosures about risk management activities.
The new hedge accounting model represents a substantial overhaul of hedge accounting that will enable entities to better reflect their risk
management activities in their financial statements.
Application of IFRS 9 will be effective from the Corporation’s fiscal year beginning on November 1, 2018, with earlier adoption
permitted. The Corporation is currently assessing the impact of adopting this standard on its financial statements.
IFRS 15, REVENUE FROM CONTRACTS WITH CUSTOMERS
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, a new standard that specifies the steps and
timing for issuers to recognize revenue as well as requiring them to provide more informative, relevant disclosures. The core principle of
IFRS 15 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. IFRS 15 supersedes IAS 11,
Construction Contracts, and IAS 18, Revenue, as well as various interpretations regarding revenue. The application of IFRS 15 is mandatory
and will be effective from the Corporation’s fiscal year beginning on November 1, 2017, with earlier adoption permitted. The Corporation is
currently assessing the impact of adopting this standard on its financial statements.
Note 6
CASH AND CASH EQUIVALENTS IN TRUST OR OTHERWISE RESERVED
As at October 31, 2014, cash and cash equivalents in trust or otherwise reserved included $276,964 [$294,473 as at
October 31, 2013] in funds received from customers, consisting primarily of Canadians, for services not yet rendered and for some of which
the availability period had not ended, in accordance with Canadian regulators and the Corporation’s business agreements with certain credit
card processors. Cash and cash equivalents in trust or otherwise reserved also included $103,220, of which $39,480 was recorded as non-
current assets [$108,995 as at October 31, 2013, of which $41,725 was recorded as non-current assets], which was pledged as collateral
security against letters of credit.
Note 7
TRADE AND OTHER RECEIVABLES
Trade receivables
Due from government
Other receivables
2014
$
2013
$
70,892
15,182
37,415
123,489
66,921
17,402
28,415
112,738
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Note 8
FINANCIAL INSTRUMENTS
CLASSIFICATION OF FINANCIAL INSTRUMENTS
Notes to consolidated financial statements
The classification of financial instruments, other than financial derivative instruments designated as hedges, and their carrying
amounts and fair values are detailed as follows:
Carrying amount
Financial
assets/liabilities at
fair value through
profit or loss
$
Loans and
receivables
$
Other
financial
liabilities
$
Total
$
Fair value
$
308,887
380,184
—
—
689,071
—
24,383
—
24,383
—
—
108,307
14,178
122,485
—
—
—
—
—
—
—
—
—
308,887
380,184
108,307
14,178
811,556
308,887
380,184
108,307
14,178
811,556
307,461
307,461
307,461
—
24,900
332,361
24,383
24,900
356,744
24,383
24,900
356,744
As at October 31, 2014
Financial assets
Cash and cash equivalents
Cash and cash equivalents in trust or otherwise reserved
Trade and other receivables
Deposits on leased aircraft and engines
Financial liabilities
Trade and other payables
Derivative financial instruments
-Fuel purchasing forward contracts and other fuel-related
derivative financial statements
Non-controlling interests
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Notes to consolidated financial statements
Carrying amount
Financial
assets/liabilities at
fair value through
profit or loss
$
Loans and
receivables
$
Other
financial
liabilities
$
Total
$
Fair value
$
265,818
403,468
—
—
1,220
670,506
—
1,790
—
1,790
—
—
95,336
12,384
—
107,720
—
—
—
—
—
—
—
—
—
—
265,818
403,468
95,336
12,384
1,220
778,226
265,818
403,468
95,336
12,384
1,220
778,226
298,780
298,780
298,780
—
23,800
322,580
1,790
23,800
324,370
1,790
23,800
324,370
As at October 31, 2013
Financial assets
Cash and cash equivalents
Cash and cash equivalents in trust or
Trade and other receivables
Deposits on leased aircraft and engines
Derivative financial instruments
-Fuel purchasing forward contracts and other fuel-related
derivative financial statements
Financial liabilities
Trade and other payables
Derivative financial instruments
-Fuel purchasing forward contracts and other fuel-related
derivative financial statements
Non-controlling interests
DETERMINATION OF FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of financial instruments is the amount for which the instrument could be exchanged between knowledgeable, willing
parties in an arm’s length transaction. The following methods and assumptions were used to measure fair value:
The fair value of cash and cash equivalents, in trust or otherwise reserved or not, trade and other receivables, and accounts payable
and accrued liabilities approximates their carrying amount due to the short-term maturity of these financial instruments.
The fair value of forward purchase contracts and other derivative financial instruments related to fuel or currencies is measured using
a generally accepted valuation method, i.e., by discounting the difference between the value of the contract at expiration determined
according to contract price or rate and the value of the contract at expiration determined according to contract price or rate that the financial
institution would have used had it renegotiated the same contract under the same conditions at the current date. The Corporation also
factors in the financial institution’s credit risk when determining contract value.
The fair value of deposits on leased aircraft and engines approximates their carrying amount given that they are subject to terms and
conditions similar to those available to the Corporation for instruments with comparable terms.
The fair value of non-controlling interests in respect of which non-controlling shareholders hold an option to require the Corporation to
buy back their shares corresponds to their redemption price. The redemption price is based either on a formula that factors in financial and
non-financial indicators or on the fair value of shares held, which is determined using a discounted cash flow model similar to that used for
the goodwill impairment test [see note 11].
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Notes to consolidated financial statements
The following table details the fair value hierarchy of financial instruments by level:
As at October 31, 2014
Financial assets
Derivative financial instruments
- Foreign exchange forward contracts – designated as cash flow hedges
Financial liabilities
Derivative financial instruments
- Fuel purchasing forward contracts and other fuel-related derivative financial
instruments
- Foreign exchange forward contracts – designated as cash flow hedges
Non-controlling interests
Quoted prices in
active markets
(Level 1)
$
Other
observable
inputs
(Level 2)
$
Unobservable
inputs
(Level 3)
$
Total
$
—
—
—
—
—
—
16,596
16,596
24,383
296
—
24,679
—
—
16,596
16,596
—
—
24,900
24,900
24,383
296
24,900
49,579
Quoted prices in
active markets
(Level 1)
$
Other
observable
inputs
(Level 2)
$
Unobservable
inputs
(Level 3)
$
—
—
—
—
—
—
—
1,220
6,500
7,720
1,790
2,885
—
4,675
—
—
—
—
—
23,800
23,800
2014
$
23,800
3,191
1,372
(2,782)
(681)
24,900
Total
$
1,220
6,500
7,720
1,790
2,885
23,800
28,475
2013
$
24,193
3,247
649
(2,787)
(1,502)
23,800
As at October 31, 2013
Financial assets
Derivative financial instruments
- Fuel purchasing forward contracts and other fuel-related derivative financial
instruments
- Foreign exchange forward contracts – designated as cash flow hedges
Financial liabilities
Derivative financial instruments
- Fuel purchasing forward contracts and other fuel-related derivative financial
instruments
- Foreign exchange forward contracts – designated as cash flow hedges
Non-controlling interests
The changes in non-controlling interests are as follows:
Balance, beginning of year
Net income
Other comprehensive income
Dividends
Change in fair value of non-controlling interest
61
Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
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.
CREDIT AND COUNTERPARTY RISK
Credit risk stems primarily from the potential inability of customers, service providers, aircraft and engine lessors and financial
institutions, including the other counterparties to cash equivalents and derivative financial instruments to discharge their obligations.
Trade accounts receivable included under Trade and other receivables in the consolidated statements of financial position totalled
$70,892 as at October 31, 2014 [$66,921 as at October 31, 2013]. 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 dispersed over a wide geographic area. No customer represented
more than 10% of total accounts receivable as at October 31, 2014 and 2013. As at October 31, 2014, approximately 7% [approximately 5%
as at October 31, 2013] of accounts receivable were over 90 days past due, whereas approximately 79% [approximately 82% as at
October 31, 2013] were current, that is, under 30 days. Historically, the Corporation has not incurred any significant losses in respect of its
trade receivables. Therefore, the allowance for doubtful accounts at the end of each period and the change recorded for each period is
insignificant.
Pursuant to certain agreements entered into with its service providers consisting primarily of hotel operators, the Corporation pays
deposits to capitalize on special benefits, including pricing, exclusive access and room allotments. These deposits totalled $29,754 as at
October 31, 2014 [$24,191 as at October 31, 2013] 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 $14,178 as at October 31, 2014 [$12,384 as at
October 31, 2013] and are returned as leases expire. 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 generally returned to the Corporation upon
receipt of documented proof that the related maintenance has been performed by the Corporation. As at October 31, 2014, the cash security
deposits with lessors that have been claimed totalled $20,169 [$9,549 as at October 31, 2013] and are included in Trade and other
receivables. Historically, the Corporation has not written off any significant amount of deposits and claimed cash security deposits with
aircraft and engine lessors.
For financial institutions including the various counterparties, the maximum credit risk as at October 31, 2014 relates to cash and cash
equivalents, including cash and cash equivalents in trust or otherwise reserved, and derivative financial instruments accounted for in assets.
These assets are held or traded with a limited number of financial institutions and other counterparties. 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 only 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.
The Corporation does not believe it is exposed to a significant concentration of credit risk as at October 31, 2014.
62
Transat A.T. Inc.
2014 Annual Report
LIQUIDITY RISK
Notes to consolidated financial statements
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.
The maturities of the Corporation’s financial liabilities as at October 31, 2014 are summarized in the following table:
Maturing in
under 1 year
$
307,461
23,780
24,720
355,961
Maturing in
1 to 2 years
$
—
—
—
—
Maturing in
2 to 5 years
$
—
1,120
—
1,120
Contractual
cash flows
Total
$
307,461
24,900
24,720
357,081
Carrying
amount
Total
$
307,461
24,900
24,679
357,040
Accounts payable and accrued liabilities
Non-controlling interests
Derivative financial instruments
Total
MARKET RISK
FOREIGN EXCHANGE RISK
The Corporation is exposed to foreign exchange risk, 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, as the case may be. Approximately 30%
of the Corporation’s costs are incurred in a currency other than the measurement currency of the reporting unit incurring the costs, whereas
less than 10% of revenues are 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 and other types of derivative financial instruments, expiring in generally less than
15 months, 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, based on their financial
statement measurement currency, are summarized in the following tables:
Net assets (liabilities)
2014
Financial statement measurement
currency of the group’s companies
Euro
Pound sterling
Canadian dollar
Other currencies
Total
U.S. dollar
$
(27,262)
4
(13,094)
(554)
(40,906)
Euro
$
—
310
(804)
406
(88)
Pound
sterling
$
Canadian
dollar
$
Other
currencies
$
(368)
—
2,381
—
2,013
(521)
468
—
(9)
(62)
10
—
(235)
1,291
1,066
Total
$
(28,141)
782
(11,752)
1,134
(37,977)
63
Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
Net assets (liabilities)
2013
Financial statement measurement
currency of the group’s companies
Euro
Pound sterling
Canadian dollar
Other currencies
Total
U.S. dollar
$
(7,847)
14
(2,075)
(283)
(10,191)
Euro
$
—
191
(8,082)
57
(7,834)
Pound
sterling
$
Canadian
dollar
$
Other
Currencies
$
(12)
—
(608)
—
(620)
1,532
625
—
—
2,157
(746)
—
(80)
1,142
316
Total
$
(7,073)
830
(10,845)
916
(16,172)
On October 31, 2014, a 1% rise or fall in the Canadian dollar against the other currencies, assuming that all other variables had
remained the same, would have resulted in a $194 increase or decrease [$188 as at October 31, 2013], respectively, in the Corporation’s net
income for the year ended October 31, 2014, whereas other comprehensive income would have decreased or increased by $2,738 [$1,135
as at October 31, 2013], respectively.
As at October 31, 2014, 46% of estimated fuel requirements for fiscal 2015 were covered by fuel-related derivative financial
instruments [36% of estimated requirements for fiscal 2014 were covered as at October 31, 2013].
RISK OF FLUCTUATIONS IN FUEL PRICES
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 mitigate fuel price fluctuations, the Corporation has implemented a fuel price risk management policy that authorizes foreign
exchange forward contracts, and other types of derivative financial instruments, expiring in generally less than 15 months.
On October 31, 2014, a 10% increase or decrease in fuel prices, assuming that all other variables had remained the same, would
have resulted in a $12,722 increase or decrease [$15,983 as at October 31, 2013], respectively, in the Corporation’s net income for the year
ended October 31, 2014.
As at October 31, 2014, 42% of estimated requirements for fiscal 2015 were covered by fuel-related derivative financial instruments
[46% of estimated requirements for fiscal 2014 were covered as at October 31, 2013].
INTEREST RATE RISK
The Corporation is exposed to interest rate fluctuations, primarily due to its variable-rate credit facility. 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.
For the year ended October 31, 2014, a 25 basis point increase or decrease in interest rates, assuming that all other variables had
remained the same, would have resulted in a $1,772 increase or decrease [$1,165 in 2013], respectively, in the Corporation’s net income.
CAPITAL RISK MANAGEMENT
The Corporation’s capital management objectives are first to ensure the longevity of the Corporation so as to support its 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.
64
Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
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 declare dividends 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 by dividing net debt by equity.
Net debt is equal to the aggregate of long-term debt and obligations under adjusted operating leases, less cash and cash equivalents [not
held in trust or otherwise reserved]. The amount of adjusted operating leases is equal to the annualized aircraft rental expense multiplied by
5.0, a factor used in our industry. Although commonly used, this measure does not reflect the fair value of operating leases as it does not
take into account the remaining contractual payments, the discount rates implicit in the leases or current rates for similar obligations with
similar terms and risks.
The Corporation’s strategy is to maintain its debt/equity ratio below 1. The calculation of the adjusted debt/equity ratio is summarized
as follows:
Net debt
Long-term debt
Adjusted operating leases
Cash and cash equivalents
Equity
Debt/equity ratio
2014
$
2013
$
—
436,145
(308,887)
127,258
482,946
26.4%
—
406,350
(265,818)
140,532
441,393
31.8%
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, 2014, 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.
Note 9
DEPOSITS
Deposits on leased aircraft and engines
Deposits with suppliers
Less current portion
2014
$
14,178
29,754
43,932
17,833
26,099
2013
$
12,384
24,191
36,575
13,267
23,308
65
Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
Note 10
PROPERTY, PLANT AND EQUIPMENT
Cost
Balance as at October 31, 2013
Additions
Write-off
Exchange difference
Balance as at October 31, 2014
Accumulated depreciation
Balance as at October 31, 2013
Amortization
Write-off
Exchange difference
Balance as at October 31, 2014
Net book value as at October 31, 2014
Cost
Balance as at October 31, 2012
Additions
Write-off
Exchange difference
Balance as at October 31, 2013
Accumulated depreciation
Balance as at October 31, 2012
Amortization
Write-off
Exchange difference
Balance as at October 31, 2013
Net book value as at October 31, 2013
Aircraft
equipment
Office furniture
and equipment
Building and
leasehold
improvements
$
$
$
80,401
4,269
—
—
84,670
67,567
2,469
—
—
70,036
14,634
74,527
6,666
(9,747)
161
71,607
62,068
6,131
(9,747)
251
58,703
12,904
44,956
2,632
(1,084)
25
46,529
30,076
2,715
(1,084)
10
31,717
14,812
Aircraft
equipment
Office furniture
and equipment
Building and
leasehold
improvements
$
$
$
78,088
2,313
—
—
80,401
64,200
3,367
—
—
67,567
12,834
67,918
7,899
(2,210)
920
74,527
57,407
6,053
(2,210)
818
62,068
12,459
43,551
1,187
(957)
1,175
44,956
27,683
2,898
(957)
452
30,076
14,880
Total
$
488,920
48,611
(56,998)
186
480,719
373,895
35,001
(56,998)
261
352,159
128,560
Total
$
444,474
45,518
(3,167)
2,095
488,920
348,059
27,733
(3,167)
1,270
373,895
115,025
Fleet
$
289,036
35,044
(46,167)
—
277,913
214,184
23,686
(46,167)
—
191,703
86,210
Fleet
$
254,917
34,119
—
—
289,036
198,769
15,415
—
—
214,184
74,852
66
Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
Note 11 GOODWILL AND OTHER INTANGIBLE ASSETS
Cost
Balance as at October 31, 2013
Additions
Write-off
Exchange difference
Balance as at October 31, 2014
Accumulated amortization and impairment
Balance as at October 31, 2013
Amortization
Write-off
Exchange difference
Balance as at October 31, 2014
Net book value as at October 31, 2014
Cost
Balance as at October 31, 2012
Additions
Write-off
Exchange difference
Balance as at October 31, 2013
Accumulated amortization and impairment
Balance as at October 31, 2012
Amortization
Write-off
Exchange difference
Balance as at October 31, 2013
Net book value as at October 31, 2013
Goodwill
$
109,723
—
(369)
1,247
110,601
15,000
—
—
—
15,000
95,601
Goodwill
$
106,494
—
—
3,229
109,723
15,000
—
—
—
15,000
94,723
Software
$
Trademarks
$
Customer lists
$
128,103
16,365
(1,557)
(269)
142,642
83,359
9,643
(857)
(49)
92,096
50,546
19,711
—
(262)
980
20,429
—
—
—
—
—
20,429
12,554
—
(270)
759
13,043
9,676
1,068
—
505
11,249
1,794
Software
$
Trademarks
$
Customer lists
$
117,674
9,892
(956)
1,493
128,103
74,325
9,172
(956)
818
83,359
44,744
19,232
—
—
479
19,711
—
—
—
—
—
19,711
12,187
—
—
367
12,554
8,237
1,172
—
267
9,676
2,878
Total
$
270,091
16,365
(2,458)
2,717
286,715
108,035
10,711
(857)
456
118,345
168,370
Total
$
255,587
9,892
(956)
5,568
270,091
97,562
10,344
(956)
1,085
108,035
162,056
The aggregate carrying amounts of goodwill and trademarks allocated to each CGU are as follows:
Canada – United Kingdom – Netherlands
France
Other *
Net book value
* Multiple individual CGUs
2014
2013
Goodwill
$
65,235
19,855
10,511
95,601
Trademarks
$
20,429
—
—
20,429
Goodwill
$
64,399
19,913
10,411
94,723
Trademarks
$
19,711
—
—
19,711
67
Transat A.T. Inc.
2014 Annual Report
IMPAIRMENT TEST IN 2014
Notes to consolidated financial statements
The Corporation performed an impairment test as at October 31, 2014 to determine whether the carrying amount of CGUs was higher
than their recoverable amount. No impairment was detected.
The recoverable amount is determined based on value in use, using a discounted cash flow model. The Corporation prepares cash
flow forecasts derived from the most recently approved annual budgets and three-year plans of the relevant businesses. The cash flow
forecasts reflect the risk associated with each asset or CGU. Cash flow forecasts beyond three years are extrapolated based on estimated
growth rates that do not exceed the average long-term growth rates for the relevant markets.
An after-tax discount rate of 10.3% was used for testing the various CGUs for impairment as at October 31, 2014 [10.5% as at
October 31, 2013]. The perpetual growth rate used for impairment reviews was 1% as at October 31, 2014 [1% as at October 31, 2013].
On October 31, 2014, a 1% increase in the after-tax discount rate used for impairment tests, assuming that all other variables had
remained the same, would not have required any impairment charge.
On October 31, 2014, a 1% decrease in the long-term growth rate used for impairment tests, assuming that all other variables had
remained the same, would not have required any impairment charge.
On October 31, 2014, a 10% decrease in the cash flows used for impairment tests, assuming that all other variables had remained the
same, would not have required any impairment charge.
As permitted under IAS 36, Impairment of assets, the Corporation deferred its 2014 annual impairment test for trademarks that do not
generate cash inflows that are largely independent of those of other assets of CGUs to which they relate. Management is of the opinion that
no reasonable change in the key assumptions used in the prior period annual impairment test could have produced carrying amounts for
trademarks that are significantly higher than the calculated fair values [see note 19].
Note 12
INVESTMENTS AND OTHER ASSETS
Investment in an associate – Caribbean Investments B.V. [“CIBV”]
Deferred costs, unamortized
Sundry
2014
$
83,949
484
1,833
86,266
2013
$
70,041
639
1,704
72,384
Transat has a 35% interest in CIBV, which owns and operates hotels in Mexico, the Dominican Republic and Cuba. CIBV’s fiscal
year-end is December 31 and the Corporation recognizes its investment using the equity method and results for the 12-month period ended
September 30 of each year.
The change in the investment in CIBV is detailed as follows:
Balance, beginning of year
Share of net income
Dividend received
Translation adjustment
2014
$
70,041
8,094
—
5,814
83,949
2013
$
64,189
3,676
(731)
2,907
70,041
68
Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
The financial information regarding CIBV as at September 30 is summarized in the following table:
Statement of financial position:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets of CIBV
Carrying amount of investment in CIBV (35% of net assets)
Statement of comprehensive
Revenues
Net income and comprehensive
Share of net income
Note 13
TRADE AND OTHER PAYABLES
Trade payables
Accrued expenses
Salaries and employee benefits payable
Non-controlling interests [note 16]
Amounts due to the government
2014
$
2013
$
53,819
333,906
50,046
97,824
239,855
83,949
104,316
23,126
8,094
33,839
310,366
42,206
101,881
200,118
70,041
91,260
10,503
3,676
2014
$
2013
$
180,283
69,740
57,438
23,780
7,392
338,633
167,782
76,777
54,221
22,680
5,227
326,687
69
Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
Note 14
PROVISION FOR OVERHAUL OF LEASED AIRCRAFT
Balance as at October 31, 2013
Additional provisions
Utilization of provisions
Unused amounts released
Balance as at October 31, 2014
Current provisions
Non-current provisions
Balance as at October 31, 2014
Balance as at October 31, 2012
Additional provisions
Utilization of provisions
Unused amounts released
Balance as at October 31, 2013
Current provisions
Non-current provisions
Balance as at October 31, 2013
$
28,057
15,299
(6,614)
(430)
36,312
10,674
25,638
36,312
$
31,869
13,016
(14,821)
(2,007)
28,057
11,029
17,028
28,057
The provision for overhaul of leased aircraft relates to the maintenance obligation for leased aircraft and spare parts used by the
Corporation’s airline under operating leases.
Note 15
LONG-TERM DEBT
On November 14, 2014, the Corporation renewed its $50,000 revolving credit facility agreement for operating purposes. Under the
new agreement, which expires in 2019, the Corporation may increase the credit limit to $100,000, with the approval of lenders. The
agreement may be extended for a year at each anniversary date subject to lender approval and the balance becomes immediately payable
in the event of a change in control. Under the terms of the 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. The agreement is secured by a first movable hypothec on a
universality of assets, present and future, of the Corporation’s Canadian subsidiaries subject to certain exceptions and is further secured by
the pledging of certain marketable securities of its main European subsidiaries. The credit facility bears interest at the bankers’ acceptance
rate, the financial institution’s prime rate or LIBOR, plus a premium. The terms of the agreements require the Corporation to comply with
certain financial criteria and ratios. As at October 31, 2014, all the financial ratios and criteria were met and the credit facility was undrawn.
The Corporation also has a $75,000 annually renewable revolving credit facility for issuing letters of credit in respect of which the
Corporation must pledge cash totalling 100% of the amount of the issued letters of credit as collateral security. As at October 31, 2014,
$59,545 had been drawn down under the facility [$58,503 as at October 31, 2013].
Operating lines of credit totalling €11,500 [$16,246] [€11,500 [$16,304] in 2013] have been authorized for certain French subsidiaries.
These operating lines of credit are renewable annually and were undrawn as at October 31, 2014 and 2013.
70
Transat A.T. Inc.
2014 Annual Report
Note 16 OTHER LIABILITIES
Employee benefits [note 22]
Deferred lease inducements
Non-controlling interests [note 8]
Less non-controlling interests included in Trade and other payables
NON-CONTROLLING SHAREHOLDERS
Notes to consolidated financial statements
2014
$
35,872
16,934
24,900
77,706
(23,780)
53,926
2013
$
30,940
16,036
23,800
70,776
(22,680)
48,096
(a) The minority shareholder in the subsidiary Jonview Canada Inc., which is also a shareholder of the Corporation, may require the
Corporation to buy its Jonview Canada Inc. shares at a price equal to their fair market value. The price paid may be settled, at the
Corporation’s option, in cash or by a share issue. The fair value of this option is taken into account in the carrying amount of the non-
controlling interest.
(b) Between 2015 and 2018, the minority shareholders of the subsidiary Travel Superstore Inc. could require that the Corporation purchase
their Travel Superstore Inc. shares at a price equal to their fair market value, payable in cash. The fair value of this option is taken into
account in the carrying amount of the non-controlling interest.
(c) The minority shareholder of the subsidiary Trafictours Canada Inc. could require that the Corporation purchase its Trafictours
Canada Inc. shares at a price equal to a pre-determined formula, subject to adjustment according to the circumstances, payable in cash.
The fair value of this option is taken into account in the carrying amount of the non-controlling interest.
Note 17
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 act or formality. Under the circumstance described in subparagraph [i] above, the Class A Shares as a class cannot carry more than
25% (or any higher percentage that the Governor in Council may specify pursuant to the CTA) of the 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 can be exercised at the 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.
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2014 Annual Report
CLASS B VOTING SHARES
Notes to consolidated financial statements
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 Class A Shares and Class B Shares were as follows:
Balance as at October 31, 2012
Issued from treasury
Exercise of options
Balance as at October 31, 2013
Issued from treasury
Exercise of options
Balance as at October 31, 2014
Number of shares
38,295,668
171,503
1,316
38,468,487
96,328
176,712
38,741,527
$
220,736
965
5
221,706
857
2,116
224,679
As at October 31, 2014, the number of Class A Shares and Class B Shares stood at 1,663,027 and 37,078,500, respectively
[672,404 and 37,796,083 as at October 31, 2013]
SUBSCRIPTION RIGHTS PLAN
At the Annual General Meeting [“AGM”] held on March 13, 2014, the shareholders ratified the shareholders’ subscription rights plan
amended and updated on December 11, 2013 [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 alternatives, thus allowing shareholders to receive full and fair value for
their shares. The rights plan will terminate on the day after the 2017 shareholders’ AGM, unless terminated prior to said AGM.
STOCK OPTION PLAN
Under the stock option plan, the Corporation may grant up to a maximum of 1,945,000 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 option grant
date. Options granted are exercisable over a maximum ten-year period, provided the performance criteria are met. The option exercise
period and the performance criteria are determined on each grant. The remaining options available for grant under the former plan totalled
99,039. The options granted are exercisable in three tranches of 33.33% as of mid-December of each year following the grant, provided the
performance criteria determined on each grant are met. The options are exercisable over a ten-year period or a seven-year period,
respectively, depending on whether they were granted prior to or after October 31, 2013. Provided the performance criteria set on grant date
are met, the exercise of any non-vested tranche of options during the first three years following the grant date due to the performance criteria
not being met may be extended three years.
Under the former stock option plan, the Corporation may grant up to a maximum of 260,337 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 option
grant date. Under the plan, cancelled options will be available for grant in future. Options granted are exercisable over a maximum period of
ten years. Options granted after October 31, 2013 are exercisable over a seven-year period, provided the performance criteria determined
on each grant are met. The option exercise period and the performance criteria are determined on each grant. Options granted prior to
October 31, 2013 are exercisable over a ten-year period with no performance criteria; a maximum of one third of options is exercisable in the
second year after the grant date, a maximum of two thirds of options in the third year subsequent to the grant, with all options exercisable at
the outset of the fourth year.
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Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
The following tables summarize all outstanding options:
Beginning of year
Granted
Exercised
Cancelled
Expired
End of year
Options exercisable, end of year
Range of exercise price
$
6.01 to 7.48
10.52 to 12.49
15.68 to 19.24
21.36 to 24.78
37.25
2014
2013
Number of
options
2,692,544
374,374
(176,712)
(206,506)
(28,883)
2,654,817
1,262,520
Weighted
average
price
$
12.18
12.49
8.15
13.01
15.68
12.39
Number of
options
2,199,810
766,620
(1,316)
(272,570)
—
2,692,544
Weighted
average
price
$
13.99
6.01
3.80
9.47
—
12.18
15.25
928,192
18.35
Outstanding options
Options exercisable
Number of options
outstanding as at October
31, 2014
Weighted
average
remaining
life
1,089,090
984,367
159,280
329,096
92,984
2,654,817
7.7
5.5
6.2
2.3
2.5
5.9
Weighted
average
price
$
6.69
12.05
19.24
21.94
37.25
12.39
Number of options
exercisable as at
October 31, 2014
329,788
456,975
53,677
329,096
92,984
1,262,520
Weighted
average
price
$
6.72
11.63
19.24
21.94
37.25
15.25
COMPENSATION EXPENSE RELATED TO STOCK OPTION PLAN
During the year ended October 31, 2014, the Corporation granted 374,374 stock options [766,620 in 2013] 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:
Risk-free interest rate
Expected life
Expected volatility
Dividend yield
Weighted average fair value at date of grant
2014
2.72%
4 years
58.6%
—
$4.53
2013
1.61%
6 years
54.8%
—
$2.59
During the year ended October 31, 2014, the Corporation recorded a compensation expense of $732 [$2,055 in 2013] for its stock
option plan.
STOCK PURCHASE PLAN
A share purchase plan is available to eligible employees of the Corporation and its subsidiaries. Under the plan, as at
October 31, 2014, the Corporation was authorized to issue up to 117,346 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%.
During the year, the Corporation issued 96,328 Class B Shares [171,503 Class B Shares in 2013] for a total of $857 [$965 in 2013]
under the share purchase plan.
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Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
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, 2014, the Corporation accounted for a compensation expense of $105 [$115 in 2013] 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, 2014, the Corporation accounted for a compensation expense of $241 [$284 in 2013] 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, 2014, the number of DSUs awarded amounted to 108,031 [132,566 as at October 31, 2013]. During the year ended
October 31, 2014, subsequent to the decline in its share prices, the Corporation recorded a reversal of compensation expense of
$276 [compensation expense of $1,220 in 2013] for its deferred share unit plan.
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, 2014, the number of RSUs awarded amounted to 844,582 [744,212 as at October 31, 2013]. For the year ended
October 31, 2014, the Corporation recognized a compensation expense of $128 [$3,003 in 2013] for its restricted share unit plan.
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Transat A.T. Inc.
2014 Annual Report
EARNINGS PER SHARE
Basic and diluted earnings per share were computed as follows:
[In thousands, except per share amounts]
NUMERATOR
Net income attributable to shareholders of the Corporation used in computing basic
and diluted earnings per share
DENOMINATOR
Adjusted weighted average number of outstanding shares
Effect of dilutive securities
Stock options
Adjusted weighted average number of outstanding shares used in computing
diluted earnings per share
Earnings per share
Basic
Diluted
Notes to consolidated financial statements
2014
$
2013
$
22,875
57,955
38,644
38,390
402
82
39,046
38,472
0.59
0.59
1.51
1.51
For the purposes of calculating diluted earnings per share for the year ended October 31, 2014, 1,565,727 outstanding stock options
[2,010,909 in 2013] were excluded from the calculation, as their exercise price exceeded the Corporation’s average market share price.
Note 18
ADDITIONAL DISCLOSURE ON EXPENSES
2014
$
367,865
2,307
732
370,904
2013
$
363,861
2,561
2,055
368,477
2014
$
35,001
10,711
1,230
(240)
46,702
2013
$
27,733
10,344
1,231
(240)
39,068
SALARIES AND EMPLOYEE BENEFITS
Salaries and other employee benefits
Long-term employee benefits [note 22]
Share-based payment expense
DEPRECIATION AND AMORTIZATION
Property, plant and equipment
Intangible assets subject to amortization
Other assets
Deferred lease inducements
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Transat A.T. Inc.
2014 Annual Report
Note 19
RESTRUCTURING CHARGE
Notes to consolidated financial statements
During the years ended October 31, 2014 and 2013, the Corporation developed restructuring plans mainly aimed at reducing direct
costs and operating expenses, and improving its margins. Accordingly, the Corporation reviewed its processes and reduced its headcount.
Under these plans, the Corporation recorded a total restructuring charge of $6,756 for the year ended October 31, 2014 [$5,740 for the year
ended October 31, 2013]. The restructuring charge consists of termination benefits totalling $5,855 payable in cash, of which an amount of
$2,220 was unpaid as at October 31, 2014 and included under accounts payable and accrued liabilities [$1,328 in 2013]. The 2014
restructuring charge also includes write-offs of trademarks and client lists ($532) and goodwill ($369) as a result of the closure of the French
Affair division, which specialized in the rental of villas in certain regions of Europe, among other factors.
Note 20
INCOME TAXES
The major components of the income tax expense for the years ended October 31 are:
Consolidated statements of income
Current
Current income taxes
Adjustment to taxes payable for prior years
Deferred
Relating to temporary differences
Income tax expense
Income taxes on items in other comprehensive income are:
Consolidated statements of comprehensive income
Deferred
Change in fair value of derivatives designated as cash flow
hedges
Change in defined benefit plans
- Actuarial gain (loss) on the obligation
Income tax expense on comprehensive income
2014
$
14,759
(1,329)
13,430
(9,672)
3,758
2013
$
18,004
508
18,512
998
19,510
2014
$
2013
$
3,590
958
(912)
2,678
806
1,764
The reconciliation of income taxes, computed at the Canadian statutory rates, to income tax expense was as follows for the years
ended October 31:
Income taxes at the statutory rate
Increase (decrease) resulting from:
Effect of differences in Canadian and foreign tax rates
Non-deductible items
Recognition of previously unrecorded tax benefits
Unrecognized tax benefits
Adjustments for prior years
Effect of tax rate changes
Other
2014
2013
%
26.9
(7.2)
0.7
—
0.3
(6.5)
(1.6)
—
12.6
$
8,022
(2,152)
228
—
81
(1,945)
(476)
—
3,758
%
26.9
(2.5)
3.0
(0.9)
0.7
(2.0)
(1.0)
—
24.2
$
21,711
(1,993)
2,372
(733)
590
(1,676)
(775)
14
19,510
The applicable statutory income tax rate was 26.9% for the years ended October 31, 2014 and 2013. The Corporation’s applicable
statutory income tax rate is the applicable combined Canadian (federal and Québec) tax rate. The change in statutory tax rates is caused by
76
Transat A.T. Inc.
2014 Annual Report
the decrease in the federal corporate tax rate.
Notes to consolidated financial statements
Deferred taxes reflect the net tax impact of temporary differences between the value of assets and liabilities for accounting and tax
purposes. The main components of the deferred tax assets and liabilities were as follows:
Deferred tax losses
Excess of tax value over net carrying value of:
Property, plant and equipment and software
Intangible assets, excluding software
Derivative financial instruments
Other financial assets and other assets
Provisions
Employee benefits
Other financial liabilities and other liabilities
Net deferred tax assets
The changes in net deferred tax assets are as follows:
Balance, beginning of year
Recognized in the consolidated statements of income (loss)
Recognized under other comprehensive income in the
consolidated statements of comprehensive income
Other
The deferred tax assets are detailed below:
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets
Consolidated statements
of financial position
2013
2014
$
$
12,511
11,445
Consolidated statements
of income
2013
$
(3,326)
2014
$
(1,066)
(7,443)
(3,062)
2,433
138
3,141
9,613
1,441
17,706
(8,390)
(3,008)
(633)
(1,243)
1,543
8,283
1,889
10,952
947
(54)
6,656
1,381
1,839
418
(449)
9,672
2014
$
10,952
9,672
(2,678)
(240)
17,706
(702)
433
136
2,236
(5)
416
(186)
(998)
2013
$
13,070
(998)
(1,764)
644
10,952
2014
$
30,051
(12,345)
17,706
2013
$
22,048
(11,096)
10,952
As at October 31, 2014, non-capital losses carried forward and other tax deductions for which a write-down was recorded, available to
reduce future taxable income of certain subsidiaries in Mexico, totalled MXP 81,802 [$6,840] [MXP 79,667 [$5,918] as at October 31,
2013].These losses and deductions expire in 2020 and thereafter.
The Corporation did not recognize any deferred tax liability on retained earnings of its foreign subsidiaries and its associate company
as these earnings are considered to be indefinitely reinvested. However, if these earnings are distributed in the form of dividends or
otherwise, the Corporation may be subject to corporate income tax or withholding tax in Canada and/or abroad. Taxable temporary
differences for which no income tax liability has been recognized amount to approximately $1,241.
77
Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
Note 21
RELATED PARTY TRANSACTIONS AND BALANCES
The consolidated financial statements include those of the Corporation and those of its subsidiaries. The main subsidiaries and
associates of the Corporation are listed below:
Air Transat A.T. Inc.
Vacances Tours Mont-Royal
Transat Tours Canada Inc.
Transat Distribution Canada inc.
Jonview Canada Inc.
Travel Superstore inc.
The Airline Seat Company Ltd.
Transat France S.A.S.
Look Voyages S.A.
Vacances Transat S.A.S
Eurocharter S.A.S.
L’Européenne de Tourisme S.A.
Tourgreece Tourist Enterprises S.A.
Air Consultant Europe B.V.
Caribbean Investments B.V.
Caribbean Transportation Inc.
CTI Logistics Inc.
Sun Excursion Caribbean Inc.
Turissimo Carribe Excusiones Dominican
Republic C por A
Trafictours de Mexico S.A. de C.V.
Promotura Turistica Regiona S.A. de C.V.
Country of
incorporation
Interest (%)
2014
2013
Canada
Canada
Canada
Canada
Canada
Canada
United Kingdom
France
France
France
France
France
Greece
Netherlands
Netherlands
Barbados
Barbados
Barbados
Dominican
Republic
Mexico
Mexico
100
100
100
100
80.1
64.6
100
99.7
—
—
—
—
100
100
35
70
70
70
70
70
100
100
100
100
100
80.1
64.6
100
100
99.7
100
100
100
100
100
35
70
70
70
70
70
100
On November 1, 2013, the companies Look Voyages S.S., Vacances Transat S.A.S., Eurocharter S.A.S. and L’Européenne de
Tourisme S.A. were merged with Transat France S.A.S.
The Corporation enters into transactions in the normal course of business with its associate. These transactions are carried out at
arm’s length. Significant transactions are as follows:
Costs of providing tourism services
2014
$
2013
$
13,693
13,616
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Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
Outstanding balances with our associate are as follows:
Trade and other payables
COMPENSATION OF KEY SENIOR EXECUTIVES
2014
$
195
2013
$
208
The annual compensation and related compensation costs of directors and key senior executives, namely the President and Chief
Executive Officer and the Senior Vice Presidents of the Corporation are as follows:
Salaries and other employee benefits
Long-term employee benefits
Share-based payment expense
Note 22
EMPLOYEE FUTURE BENEFITS
2014
$
6,237
821
757
2013
$
6,643
883
985
The Corporation offers defined benefit pension arrangements to certain senior executives and defined contribution plans to certain
employees. Employees in some foreign subsidiaries benefit from certain post-employment benefits.
DEFINED BENEFIT ARRANGEMENTS AND POST-EMPLOYMENT BENEFITS
The defined benefit pension plans offered to certain senior executives 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.
The post-employment benefits that employees in some foreign subsidiaries are entitled to comprise an allowance paid upon retirement.
These arrangements are not funded; however, to secure its obligations related to defined benefit pension arrangements, the Corporation has
issued a $37,600 letter of credit to the trustee [see note 6]. The Corporation uses an actuarial estimate to measure its obligations as at
October 31 each year.
The following table provides a reconciliation of changes in the defined benefit obligation and in the other post-employment benefit
obligation:
Present value of obligations, beginning of year
Current service cost
Cost of plan amendments
Financial costs
Benefits paid
Experience gains
Actuarial loss (gain) on obligation
Effect of exchange rate changes
Present value of obligations, end of year
Retirement benefits
Other benefits
Total
2014
$
28,973
977
—
1,330
(799)
(273)
3,704
—
33,912
2013
$
30,350
1,066
131
1,163
(751)
(429)
(2,557)
—
28,973
2014
$
1,967
—
—
—
—
—
—
(7)
1,960
2013
$
1,611
133
—
68
—
—
—
155
1,967
2014
$
30,940
977
—
1,330
(799)
(273)
3,704
(7)
35,872
2013
$
31,961
1,199
131
1,231
(751)
(429)
(2,557)
155
30,940
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Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
The following table provides the components of retirement benefit expense for the years ended October 31:
Current service cost
Cost of plan amendments
Interest cost
Total cost of retirement benefits
Retirement benefits
Other benefits
Total
2014
$
977
—
1,330
2,307
2013
$
1,066
131
1,163
2,360
2014
$
—
—
—
—
2013
$
133
—
68
201
2014
$
977
—
1,330
2,307
The following table indicates projected payments under defined benefit pension plan arrangements as at October 31:
Under one year
One to five years
Between five and 10 years
Between 10 and 15 years
Between 15 and 20 years
2013
$
1,199
131
1,231
2,561
$
799
8,461
11,281
12,384
12,729
45,654
The weighted average duration of the defined benefit obligation related to pension arrangements was 11.6 years as at
October 31, 2014.
The significant actuarial assumptions used to determine the Corporation’s retirement benefit obligation and expense were as follows:
Retirement benefit obligation
Discount rate
Rate of increase in eligible earnings
Retirement benefit cost
Discount rate
Rate of increase in eligible earnings
2014
%
4.00
2.75
4.50
2.75
2013
%
4.50
2.75
3.75
2.25
A 0.25 percentage point increase in the actuarial assumptions below would have the following impacts, all other actuarial assumptions
remaining the same:
Increase (decrease)
Discount rate
Rate of increase in eligible earnings
Retirement benefit
expense for
the year ended
October 31, 2014
$
(4)
9
Retirement benefit
obligations as at
October 31, 2014
$
(1,033)
38
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Transat A.T. Inc.
2014 Annual Report
Notes to consolidated financial statements
The funded status of the benefits and the amounts recorded in the statement of financial position under other liabilities were as
follows:
Plan assets at fair value
Accrued benefit obligation
Retirement benefit deficit
2014
$
—
33,912
33,912
2013
$
—
28,973
28,973
Changes in the cumulative amount of net actuarial losses recognized in other comprehensive income and presented as a separate
component of retained earnings were as follows:
Gains (losses)
October 31, 2012
Actuarial gains
Income taxes
October 31, 2013
Actuarial losses
Income taxes
October 31, 2014
$
(7,492)
2,986
(806)
(5,312)
(3,431)
912
(7,831)
DEFINED CONTRIBUTION PENSION PLANS
The Corporation offers defined contribution pension plans to certain employees with contributions based on a percentage of salary.
Contributions to defined contribution pension plans, which are recognized at cost, amounted to $9,608 for the year ended
October 31, 2014 [$8,186 for the year ended October 31, 2013].
Note 23
COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Corporation leases aircraft, buildings, automotive equipment, communications systems and office premises relating to travel
sales. The minimum lease payments under non-cancellable operating leases are as follows:
Under one year
One to five years
Over five years
2014
$
132,380
401,206
124,053
657,639
2013
$
117,347
412,115
103,342
632,804
The lease expense totalled $113,884 for the year ended October 31, 2014 [$104,441 for the year ended October 31, 2013].
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2014 Annual Report
OTHER COMMITMENTS
Notes to consolidated financial statements
The Corporation also has purchase obligations under various contracts entered into in the normal course of business. The purchase
obligations are as follows:
Under one year
One to five years
Over five years
LITIGATION
2014
$
193,195
52,861
—
246,056
2013
$
178,399
19,608
—
198,007
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 individual cases is unpredictable. According to management, these claims and proceedings
are adequately provided for or covered by insurance policies and their settlement should not have a significant negative impact on the
Corporation’s financial position.
OTHER
From time to time, the Corporation is subject to audits by tax authorities that give rise to questions regarding the fiscal treatment of
certain transactions. Certain of these matters could entail significant costs that will remain uncertain until one or more events occur or fail to
occur. Although the outcome of such matters is not predictable with assurance, the tax claims and risks for which there is a probable
unfavourable outcome are recognized by the Corporation using the best possible estimates of the amount of the loss. The tax deductibility of
losses reported by the Corporation in previous fiscal years with regard to investments in ABCP was challenged by tax authorities and notices
of assessment were received subsequent to year end. No provisions are made for this situation, which could result in future cash outflows of
approximately $16,000, as the Corporation intends to defend itself vigorously with respect thereto and firmly believes it has sufficient facts
and arguments to obtain a favourable final outcome.
Note 24 GUARANTEES
The Corporation has entered into agreements in the normal course of business containing clauses meeting the definition of a
guarantee. 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 of or damages to property, claims that may arise while providing services
and environmental liabilities.
Notes 6, 15, 16, 22 and 23 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 expire 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.
82
Transat A.T. Inc.
2014 Annual Report
COLLATERAL SECURITY CONTRACTS
Notes to consolidated financial statements
The Corporation has entered into collateral security contracts with certain suppliers. Under these contracts, the Corporation
guarantees the payment of certain services rendered that it undertook to pay. These contracts typically cover a one-year period and are
renewable.
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 obligations included in mandates by its customers during the term of the licenses
granted to the Corporation for its travel agent and wholesaler operations in the Province of Québec. These agreements typically cover a one-
year period and are renewable annually. As at October 31, 2014, these guarantees totalled $1,361. Historically, the Corporation has not
made any significant payments under such agreements. As at October 31, 2014, no amounts have been accrued with respect to the above-
mentioned agreements.
IRREVOCABLE CREDIT FACILITY UNSECURED BY DEPOSITS
The Corporation has a $35,000 guarantee facility renewable annually. Under this agreement, the Corporation may issue collateral
security contracts with a maximum three-year term. As at October 31, 2014, $20,195 had been drawn down under the facility.
For its European operations, the Corporation has guarantee facilities renewable annually amounting to €20,120 [$28,424] [€11,206
[$15,886] in 2013]. As at October 31, 2014, letters of guarantee had been issued totalling €7,518 [$10,621] [€3,833 [$5,434] in 2013].
Note 25
SEGMENTED DISCLOSURE
The Corporation has determined that it conducts its activities in a single industry segment, namely holiday travel. Therefore, the
statements of income include all the required information. With respect to geographic areas, the Corporation operates mainly in the Americas
and Europe. Sales between geographic areas are accounted for at prices that take into account market conditions and other considerations.
Americas
$
Europe
$
Total
$
2,921,811
2,903,434
18,377
2,893,353
2,829,192
64,161
830,387
810,018
20,369
754,805
747,128
7,677
3,752,198
3,713,452
38,746
3,648,158
3,576,320
71,838
2014
$
2,871,887
728,112
79,189
73,010
3,752,198
Revenues (1)
2013
$
2,839,701
657,626
80,851
69,980
3,648,158
Property, plant and equipment, goodwill
and other intangible assets
2013
$
187,103
42,059
33,073
14,846
277,081
2014
$
200,863
46,965
34,273
14,829
296,930
2014
Revenues from third parties
Operating expenses
2013
Revenues from third parties
Operating expenses
Canada
France
United Kingdom
Other
(1) Revenues are allocated based on the subsidiary’s country of domicile.
83
Transat A.T. Inc.
2014 Annual Report
Additional financial information
[in thousands of Canadian dollars, except per share amounts]
Consolidated statements of income
Revenues
Operating expenses
Amortization
Restructuring
Operating income (loss)
Financing costs
Financing income
Change in fair value of derivative financial instruments used for
aircraft fuel purchases
Foreign exchange (gain) loss on non current monetary items
Restructuring charge – loss (gain) on disposal of assets and
impairment of goodwill
Gain on investments in ABCP
Gain on disposal of a subsidiary and repurchase of preferred
shares of a subsidiary
Share of net (income) loss of associates
Income (loss) before income tax expense
Income taxes (recovery)
Non-controlling interest in subsidiaries’ results
Net income (loss) for the year attributable to shareholders
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
Total assets
Long-term debt (including current portion)
Equity
Debt ratio(1)
Book value per share(2)
Return on average equity(3)
Shareholding statistics (in thousands)
Outstanding shares, end of year
Weighted average number of shares outstanding:
Undiluted
Diluted
2014
IFRS
2013
IFRS
2012
IFRS
2011
IFRS
2010(4)
(restated)
GAAP
3,752,198
3,660,363
46,702
6,387
38,746
3,648,158
3,531,512
39,068
5,740
71,838
3,714,219
3,697,264
40,793
—
(23,838)
3,654,167
3,621,141
43,814
16,543
(27,331)
3,497,408
3,371,295
48,662
—
77,451
1,939
(8,107)
23,822
(1,007)
369
—
—
(8,094)
29,824
3,758
(3,191)
22,875
0.59
0.59
2,512
(7,357)
493
(846)
—
—
—
(3,676)
80,712
19,510
(3,247)
57,955
1.51
1.51
106,240
(61,100)
191
123,039
(28,289)
(1,817)
2,962
(6,693)
(701)
(370)
15,000
(7,936)
(5,655)
(3,495)
(16,950)
(3,414)
(3,133)
(16,669)
(0.44)
(0.44)
8,872
(11,024)
(4,361)
3,499
(7,395)
1,278
1,654
—
(8,113)
—
(827)
(17,427)
(5,775)
(3,059)
(14,711)
(0.39)
(0.39)
90,673
(56,683)
(29,470)
(2,262)
43,069
1,710
94,643
308,887
265,818
1,375,030
—
482,946
0.65
12.47
4.9%
1,290,073
—
441,393
0.66
11.47
14.4%
(3,888)
(10,401)
171,175
1,165,301
—
366,326
0.69
9.57
(4.4%)
(3,571)
949
181,576
1,226,570
—
384,241
0.69
10.11
(3.7%)
4,584
(3,036)
(9,341)
(1,109)
(1,157)
(4,648)
—
490
91,668
23,398
(3,724)
64,546
1.71
1.70
119,131
(27,819)
(81,034)
(10,203)
75
180,627
1,193,184
29,059
403,902
0.66
10.67
16.7%
38,742
38,468
38,296
38,022
37,850
38,644
39,046
38,390
38,472
38,142
38,142
37,930
37,930
37,796
37,993
(1) Total liabilities divided by total assets.
(2) Total equity divided by the number of outstanding shares.
(3) Net income (loss) divided by average equity.
(4) The consolidated statements of financial position items are as of November 1, 2010 and are reported under IFRS.
84
Information
Head Office
Transat A.T. Inc.
Place du Parc
300 Léo-Pariseau Street, Suite 600
Montréal, Québec H2X 4C2
Telephone: 514.987.1660
Fax: 514.987.8035
www.transat.com
info@transat.com
Information
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.
Transfer Agent
and Registrar
CST Trust Company
2001 University Street, Suite 1600
Montréal, Québec H3A 2A6
Toll-free: 1.800.387.0825
inquiries@canstockta.com
www.canstockta.com
Auditors
Ernst & Young LLP
Montréal, Québec
Annual General Meeting
of Shareholders
Thursday, March 12, 2015,
10:00 a.m.
McGill – New Residence Hall
Ballroom
3625 Avenue du Parc
Montreal QC H2X 3P8
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