Transat AT, Inc. Annual Report 2015

Plain-text annual report

Transat A.T. Inc. annual report 2015 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) Cash ﬂows related to operating activities (In millions of dollars) Aircraft fuel (In millions of dollars) Adjusted operating income 1 (In millions of dollars) 1 See Non-IFRS Financial Measures section on page 7. Net income (loss) attributable to shareholders (In millions of dollars) 2015 2014 2013 2012 2011 2015 2014 2013 2012 2011 2015 2014 2013 2012 2011 2015 2014 2013 2012 2011 2015 2014 2013 2012 2011 3,566,368 3,752,198 3,648,158 3,714,219 3,654,167 94,000 106,240 123,039 8,872 90,673 440,804 462,942 417,891 505,422 447,625 100,821 99,929 120,322 20,450 33,853 42,565 22,875 57,955 (16,669) (14,711) 2015 2014 Variance Variance 3,566,368 3,752,198 $ (185,830) 100,821 99,929 892 46,964 42,565 1.10 94,000 26,066 22,875 0.59 106,240 20,898 19,690 0.51 (12,240) 336,423 1,513,764 308,887 1,375,030 27,536 138,734 — 0.65 8.3 14.29 7.71 37,591 — 0.65 4.9 12.47 N/A — 3.4 1.82 8.60 38,742 (0.89) (1,151) (10.3) (3.0) % (5.0) (0.9) 80.2 86.1 86.4 (11.5) 8.9 10.1 N/A — 69.4 14.6 Revenues Adjusted operating income 1 Net income Net income attributable to shareholders Diluted earnings per share Cash ﬂows related to operating activities Cash and cash equivalents Total assets Long-tem debt (including current portion) Debt ratio 2 Return on average shareholders' equity (%) 3 Book value per share 4 Stock price as at October 31 (TRZ.B) Oustanding shares, end of year (in thousands) Highlights (In thousands of dollars, except per share amounts and ratios) 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's equity: Net income attributable to shareholders divided by average shareholders' equity. 4 Book value per share: Shareholders' equity divided by total number of shares oustanding. VERSION_QUARK_RAP_AN 2015-12-14 14:59 Page4 A growth-o A growth-oriented vision Message to Shareholders Taking stock of our achievements in 2015 be- gins with a review of the ﬁrst year of our new 2015–2017 strategic plan. Under this plan, the Company is continuing its efﬁciency and unit-margin-improvement efforts, as well as targeting market development and growth. We achieved our cost-reduction and unit-mar- gin-improvement program objective of $45 million (initially $20 million) in ﬁscal 2015, and our ambition is to exceed the $100 million initially targeted over three years. The main source of operating-costs reduction was the imple- mentation of the so-called double ﬂexible ﬂeet at Air Transat: our carrier operates a variable number of narrow- and wide-body aircraft depending on the season, and it completed the insourcing of narrow-body aircraft in 2014. For the 2016 winter season, approximately 50% of our Sun destination customers will be ﬂying on narrow-body jets, compared with 24% in 2012. In addition, we proﬁta- bly deployed wide-body planes in overseas markets. Other key projects with an impact on our ﬁnan- cial performance include increasing seat capacity on three Airbus A330s dedicated to our high-volume London and Paris routes, as well as boosting frequency on those routes, and implementation of new IT tools that will signi- ﬁcantly grow so-called ancillary revenues. We intend to grow those revenues by at least $20 million during the plan period. In terms of European market development, as planned, we are adding new destinations outbound from Canada: after Prague in 2014, Budapest was added in 2015, and Zagreb will join the roster in 2016. We also in- troduced a domestic feeder-ﬂight program in Canada, en- abling us to broaden product supply in certain markets. Lastly, we’ve reﬁned our market segmentation and mar- keting for our Sun destinations, one result of which has been the introduction of new collections; the response from the public and the industry is promising. We have made considerable progress with the brand. Pursuant to the strategy that we began developing in 2010, we consolidated our entire product offering under the Transat brand in October 2015, as part of additional efforts to simplify the organization’s brand platform. Those efforts will be continuing. The beneﬁts have begun to ma- terialize, and this has allowed us to make more concen- trated marketing investments. In the same vein, we have ofﬁcially begun rolling out the Transat Travel brand in our directly owned distribution network, which means we will be increasingly able to capitalize on that brand in the future. With respect to distribution, we are orchestra- ting the implementation of an integrated ecosystem en- abling us to reach customers through their preferred channels, and provide them with the most personalized service possible. That ecosystem requires, among other things, a high-performance website characterized by 2 oriented vision superior usability, world-class customer care centres, and an efﬁcient, proﬁtable travel agency network. Signiﬁcant progress was made on all three fronts in 2015. in 2014, and an adjusted net income of $42.9 million, compared with $45.2 million in 2014. The plan also calls for us to develop Ocean Hotels, increasing the number of rooms under manage- ment from 2,300 to at least 5,000 by 2017. Since the fall of 2015, Ocean Hotels manages two new hotels in Cuba, with another to follow in Mexico in 2016. We are also planning construction of a new hotel in the Dominican Republic, which should begin in May 2016. Our winter results on Sun destinations routes outbound from Canada improved only slightly; one reason for this was the weakened Canadian dollar. Demand on that market remains very strong, however, and we are cautiously optimistic with regard to the market segment. As far as the summer season is concerned, once again we recorded excellent results on the transat- lantic market, in a context of abundant supply and more direct competition on some routes. In fact, with an adjus- ted operating income of $133.2 million, compared with $123.8 million in 2014, this was our second-best summer ever. The year 2015 was extremely challenging in France, leading to a decline in results in winter and un- dermining those in summer, which otherwise would have improved even more. The Ebola epidemic in Africa and terror attacks in Tunisia contributed to a deferral of some tourist demand into 2016. Case in point: there are signs of ﬁrmer demand for Senegal in winter 2016. I must mention the excellent results achieved by Jonview Canada, the leading incoming tour operator in the country. Although Canada continues to face major challenges as an international travel destination, our business unit is doing remarkably well. It posted record results in 2015, with revenues of $129 million and an ope- rating income of $4.3 million. For the ﬁscal year, we post an adjusted opera- ting income of $100.8 million, compared with $99.9 million 3 We are continuing our commitment to sustai- nable development, which was once again recognized in 2015. Transat was named to Corporate Knights’ list of the top 50 corporate citizens in Canada. Air Transat, meanw- hile, took Corporation of the Year honours in Quebec’s Mercuriades business competition in recognition of its program for the green dismantling of end-of-life aircraft. In addition, we are now formally committed to obtaining Travelife certiﬁcation for our tour operator line of business, with full certiﬁcation targeted by the end of the strategic plan period. Transat moves into ﬁscal 2016 with a robust, growth-oriented strategic plan, several initiatives of which are already underway and, in some cases, nearing com- pletion. We also have a very sound balance sheet, which gives us the means to seize potential development opportunities that could accelerate the organization’s transformation. The international tourism market remains a very dynamic one. It will always bring all manner of challenges, but with our adaptability and leadership po- sition—and, in particular, our quality team—we possess the necessary assets to achieve and even exceed our objectives. As always, I would like to conclude by thanking all of our employees, as well as our partners and share- holders, and of course the members of the Board of Directors, whose contributions are so signiﬁcant. Jean-Marc Eustache Chairman of the Board, President and Chief Executive Ofﬁcer December 9, 2015 VERSION_QUARK_RAP_AN 2015-12-13 18:10 Page6 Board of Directors 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 Desgagnés inc. Lucie Chabot Vice-President and Chief Financial Ofﬁcer SAIL Outdoors Inc. Lina De Cesare Corporate Director Jean Pierre Delisle Corporate Director and Executor of estates W. Brian Edwards Corporate Director Susan Kudzman Executive Vice-President Corporate Affairs and Chief Risk Ofﬁcer Laurentian Bank of Canada Jacques Simoneau President and CEO and Director Gestion Univalor, s.e.c. Philippe Sureau Corporate Director 4 Senior Management Jean-Marc Eustache Chairman of the Board President and Chief Executive Ofﬁcer Transat A.T. Inc. Joseph Adamo General Manager Transat Distribution Canada Inc. Patrice Caradec President and General Manager Transat France S.A.S. André De Montigny President, Transat International and Vice-President, Corporate Development Transat A.T. Inc. Annick Guérard General Manager Transat Tours Canada Inc. Jean-François Lemay General Manager Air Transat A.T. Inc. 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. Committees 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 Louis-Marie Beaulieu Audit Committee Jean-Yves Leblanc (President) Jean Pierre Delisle Jacques Simoneau Raymond Bachand Risk Management and Corporate Governance Committee Jacques Simoneau (President) Jean Pierre Delisle W. Brian Edwards Susan Kudzman 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, 2015, compared with the year ended October 31, 2014, and should be read in conjunction with the audited consolidated financial statements and notes thereto. The information contained herein is dated as of December 9, 2015. 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, 2015 and Annual Information Form. These 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 ................................................................................................................................................................... 27 RISKS AND UNCERTAINTIES .......................................................................................................................................... 33 CONTROLS AND PROCEDURES ..................................................................................................................................... 38 OUTLOOK .......................................................................................................................................................................... 39 MANAGEMENT’S REPORT ............................................................................................................................................... 40 INDEPENDENT AUDITORS’ REPORT ............................................................................................................................. 41 5 Transat A.T. Inc. 2015 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 2016 objectives and continue building on its long-term strategies. The outlook whereby the Corporation expects revenues to increase and total travellers to be higher compared with fiscal 2015. The outlook whereby the Corporation expects to generate positive cash flows from operating activities in 2016. The outlook whereby additions to property, plant and equipment and intangible assets could amount to approximately $60.0 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. The outlook whereby operating income for the winter should improve over last year. 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. 2015 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 fuel-related derivatives and other derivatives, 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. 2015 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 fuel-related derivatives and other derivatives, gain 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 fuel-related derivatives and other derivatives, gain 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 (described above) less cash and cash equivalents. 8 Transat A.T. Inc. 2015 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 Restructuring charge Amortization Adjusted operating income Income before income tax expense Change in fair value of fuel-related derivatives and other derivatives Write-off and impairment of goodwill Restructuring charge Adjusted pre-tax income Net income attributable to shareholders Change in fair value of fuel-related derivatives and other derivatives Write-off and impairment of goodwill Restructuring charge Tax impact Adjusted net income Adjusted net income Adjusted weighted average number of outstanding shares used in computing earnings per share Adjusted net income per share Aircraft rent Multiple Adjusted operating leases Long-term debt Adjusted operating leases Total debt Total debt Cash and cash equivalents Total net debt 2015 $ 49,954 — 50,867 100,821 57,327 528 — — 57,855 42,565 528 — — (150) 42,943 2014 $ 46,840 6,387 46,702 99,929 29,824 23,822 369 6,387 60,402 22,875 23,822 369 6,387 (8,211) 45,242 2013 $ 75,514 5,740 39,068 120,322 80,712 493 — 5,740 86,945 57,955 493 — 5,740 (1,621) 62,567 42,943 45,242 62,567 38,558 1.11 39,046 1.16 38,472 1.63 October 31, October 31, October 31, 2013 $ 2015 $ 2014 $ 98,859 5 494,295 — 494,295 494,295 494,295 (336,423) 157,872 87,229 5 81,270 5 436,145 406,350 — 436,145 436,145 436,145 (308,887) 127,258 — 406,350 406,350 406,350 (265,818) 140,532 9 Transat A.T. Inc. 2015 Annual Report FINANCIAL HIGHLIGHTS (in thousands of Canadian dollars, except per share amounts) Consolidated Statements of Income Revenues Adjusted operating income(1) Net income attributable to shareholders Basic earnings per share Diluted earnings per share Adjusted net income(1) Adjusted net income 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 Management’s Discussion and Analysis 2015 $ 2014 $ 2013 $ 3,566,368 100,821 42,565 1.11 1.10 42,943 1.11 3,752,198 99,929 22,875 0.59 0.59 45,242 1.16 3,648,158 120,322 57,955 1.51 1.51 62,567 1.63 Change 2015 % (5.0) 0.9 86.1 88.1 86.4 (5.1) (4.3) 94,000 (58,009) (12,672) 4,217 27,536 106,240 (61,100) 191 (2,262) 43,069 123,039 (28,289) (1,817) 1,710 94,643 (11.5) 5.1 (6,734.6) 286.4 (36.1) 2014 % 2.9 (16.9) (60.5) (60.9) (60.9) (27.7) (28.8) (13.7) (116.0) 110.5 (232.3) (54.5) Change 2015 % Change 2014 % 8.9 8.4 8.6 10.1 — 13.3 24.1 16.2 (5.8) 3.0 6.6 — 7.3 (9.4) As at As at As at October 31, October 31, October 31, 2013 $ 2014 $ 2015 $ Consolidated Statements of Financial Position Cash and cash equivalents Cash and cash equivalents in trust or otherwise reserved (current and non-current) Total assets Debt (current and non-current) Total debt(1) Total net debt(1) 1 SEE NON-IFRS FINANCIAL MEASURES 336,423 308,887 265,818 412,099 748,522 1,513,764 — 494,295 380,184 689,071 1,375,030 — 436,145 403,468 669,286 1,290,073 — 406,350 157,872 127,258 140,532 10 Transat A.T. Inc. 2015 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, in networks, or online, 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. Transat offers destination services in Canada, Mexico, the Dominican Republic and Greece. Transat holds an interest in a hotel business which owns, operates or manages properties in Mexico, Cuba and the Dominican Republic. 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 to maximize synergies from its vertical integration model in a targeted manner, according to tourism industry trends. In this respect, in recent years, the Corporation has considerably improved the effectiveness of its airline operations and launched a certain number of actions, including technological initiatives, to become more efficient and improve its performance as a distributor. The strategy also includes entry into new source markets and the launch of new destinations, targeting new markets for its traditional destinations and increasing its buying power for these routes. Alongside these initiatives, Transat intends to leverage targeted technology investments and efficiency gains from changes to its internal management structure and a cost reduction and unit margin improvement program to improve its operating income and maintain or grow market share in all its markets. 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. 2015 Annual Report Management’s Discussion and Analysis For fiscal 2016, Transat has set the following objectives: 1. 2. Implement an integrated distribution and brand strategy, including an enhanced online shopping experience, higher controlled sales, deployment of the Transat brand and finalization of required technological projects. Increase capacity and improve the competitiveness of our sun destination offering, strengthen our presence and increase our capacity in the transatlantic market, and continue deploying the Lookéa club offering. 3. Reduce winter financial losses and maintain summer profitability, in particular by continuing our cost reduction and unit margin improvement program, with gains of $30 million expected in 2016. 4. Enter a new market via acquisition and optimize our hotel strategy, particularly through our interest in Ocean Hotels. 5. Simplify the organizational structure and optimize the succession management plan. 6. Obtain Travelife Partner status. REVIEW OF 2015 OBJECTIVES AND ACHIEVEMENTS The main objectives and achievements for fiscal 2015 were as follows: Transat remains committed to a cost-reduction and unit-margin-improvement program, under which it targeted savings of $20 million in fiscal 2015, compared with 2014. In 2015 the Corporation aims to improve its winter results and maintain its summer profitability, in particular through improved efficiency. The Corporation estimates the savings from the cost-reduction and unit-margin-improvement program at $45 million for 2015—more than double the original objective. The cumulative savings targeted under the program amount to more than $100 million by 2017. The key factors driving improvement are the insourcing of narrow-body aircraft and implementation of Air Transat’s flexible fleet, under which varying numbers of narrow-body and wide-body aircraft operate depending on the season. In 2015, the Corporation posted a modest increase in the margin on its North American operations in winter, which during that season are concentrated on Sun destination routes. The operating loss on that market was $32.0 million, versus $36.7 million in 2014. Owing to under-performance of Transat’s France operations, due among other factors to events in North Africa, the operating loss related to European operations in winter was $25.3 million, compared with one of $9.9 million in 2014. For the summer season, in spite of abundant supply and increased competition, which was direct in the case of several destinations, the Corporation posted an operating income of $107.2 million, compared with $93.5 million in 2014. As a result, for the year, despite the under-performance in France, attributable to outside factors, and in spite of abundant supply and increased competition on all markets, Transat recorded in 2015 a slightly higher margin than in 2014. 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. The Corporation has introduced two new Europe destinations, Prague in 2014 and Budapest in 2015, and announced that it will be adding Zagreb in 2016. A domestic feeder-flight program has also been introduced, which has considerably broadened the supply of transatlantic destinations out of certain Canadian cities (passengers change planes in either Montreal or Toronto). 12 Transat A.T. Inc. 2015 Annual Report Management’s Discussion and Analysis 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 customer reach and enhance customer loyalty. By the end of the fiscal year, Transat had implemented the Transat Travel brand in 25 travel agencies across Canada, and expects to complete transition in its owned agencies during 2016. The results achieved since the launch of this initiative, whether measured in terms of customer acquisition, overall sales growth, or growth in sales of Transat products, are very satisfactory. At the same time, the Corporation successfully completed a restructuring of its distribution network with an eye to improving its profitability. In Canada, the Corporation made significant changes to its online marketing strategy. Its product offerings, regardless of brand, are all sold through the Transat.com website, among others. This new orientation, implemented following introduction of the Transat Travel brand in the retail network, is in logical continuation with the brand strategy developed in 2010. It will contribute to optimization of marketing efforts and budgets, among other things. Other projects are under way: the Corporation will improve its capacity to market its products via mobile devices, for example. In fiscal 2015, Transat will begin structuring its sustainable-development project to secure a certification for its tour operator and travel agency businesses. Transat is now firmly engaged in the certification process. The approach was structured during 2015, with implications including production of a gap analysis and development of an action plan. The Corporation plans to achieve Travelife Partner status in 2016, and full certification within the strategic plan period. 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 higher than 3% of revenues. MARKET SHARE Consolidate or increase market share in all regions in Canada and in Europe. REVENUE GROWTH 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 $336.4 million as at October 31, 2015. Our continued focus on expense reductions and operating income growth should maintain these balances at healthy levels. We can also draw on credit facilities totalling approximately $64.4 million. 13 Transat A.T. Inc. 2015 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 25 years of privileged relationships with many hotels at these destinations and in Europe. Transat has the resources it needs to meet its 2016 objectives and continue building on its long-term strategies. CONSOLIDATED OPERATIONS REVENUES Revenues by geographic area (in thousands of dollars) Americas Europe 2015 $ 2,840,004 726,364 3,566,368 2014 $ 2,921,811 830,387 3,752,198 2013 $ 2,893,353 754,805 3,648,158 Change 2015 % (2.8) (12.5) (5.0) 2014 % 1.0 10.0 2.9 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, 2015, the Corporation’s revenues decreased $185.8 million (5.0%), owing primarily to our winter season during which total travellers were down 7.4% while our product offering for sun destinations, our main market for the period, was reduced by 6.3% compared with 2014. Our summer season product offering in the transatlantic market was 0.9% higher than in 2014, whereas average selling prices were lower than in summer 2014. Overall, during the year, total travellers were down 2.6%. For 2016, we expect revenues and total travellers to increase compared with 2015, mainly as a result of the Corporation’s decision to increase winter and summer season capacity. 14 Transat A.T. Inc. 2015 Annual Report OPERATING EXPENSES Operating expenses (in thousands of dollars) Costs of providing tourism services Aircraft fuel Salaries and employee benefits Aircraft maintenance Commissions Airport and navigation fees Aircraft rent Other Share of net income of an associate Amortization Restructuring charge Total 2015 $ 2014 $ 2013 $ 1,797,890 440,804 387,363 146,006 136,506 117,862 98,859 347,302 (7,045) 50,867 — 3,516,414 2,000,424 462,942 370,904 128,892 170,724 105,440 87,229 333,808 (8,094) 46,702 6,387 3,705,358 1,951,329 417,891 368,477 106,732 163,606 95,635 81,270 346,572 (3,676) 39,068 5,740 3,572,644 Management’s Discussion and Analysis % of revenues Change 2015 % 50.4 12.4 10.9 4.1 3.8 3.3 2.8 9.7 (0.2) 1.4 — 98.6 2014 % 53.3 12.3 9.9 3.4 4.5 2.8 2.3 8.9 (0.2) 1.2 0.2 98.8 2013 % 53.5 11.5 10.1 2.9 4.5 2.6 2.2 9.5 (0.1) 1.1 0.2 97.9 2015 % (10.1) (4.8) 4.4 13.3 (20.0) 11.8 13.3 4.0 (13.0) 8.9 (100.0) (5.1) 2014 % 2.5 10.8 0.7 20.8 4.4 10.3 7.3 (3.7) 120.2 19.5 11.3 3.7 Our total operating expenses decreased $188.9 million (5.1%) during the year compared with 2014. This decrease resulted mainly from our winter season during which we reduced our sun destination product offering by 6.3%. Furthermore, the full effect of insourcing narrow-body aircraft operations to sun destinations as well as the shift toward a flexible fleet at Air Transat, maximizing the use of narrow- body aircraft to service sun destinations with more aircraft in winter while minimizing fixed costs of wide-body aircraft, was felt during the year. These cost savings were partially offset by the dollar’s depreciation against the U.S. dollar. In addition to the anticipated cost savings, insourcing narrow-body aircraft operations resulted in lower costs of providing tourism services (those flights were previously operated by an external air carrier), and higher other operating expenses, excluding commissions. COSTS OF PROVIDING TOURISM SERVICES 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 carriers other than Air Transat. The $202.5 million (10.1%) decrease resulted primarily from a reduction in our flight purchases from air carriers other than Air Transat, owing to the addition of narrow-body Boeing 737s to our aircraft fleet and a reduction in our sun destination product offering during the winter season, partially offset by the dollar’s weakening against the U.S. currency and, to a lesser extent, higher hotel room costs. AIRCRAFT FUEL Aircraft fuel expense was down $22.1 million (4.8%) during the year, mainly as a result of lower fuel price indicators in financial markets. However, the Corporation was unable to fully benefit from this decrease due to the fuel price hedging program it has in place. The dollar’s weakening against the U.S. dollar (fuel is paid mainly in U.S. dollars) and the commissioning of our narrow-body Boeing 737-800s also contributed to mitigate the decrease in aircraft fuel prices. SALARIES AND EMPLOYEE BENEFITS Salaries and employee benefits rose $16.5 million (4.4%) to $387.4 million for the year ended October 31, 2015. The increase resulted mainly from pilot and cabin crew hires following the insourcing of narrow-body aircraft operations and annual salary reviews. AIRCRAFT MAINTENANCE Aircraft maintenance costs consist mainly of engine and airframe maintenance expenses incurred by Air Transat. Compared with 2014, these expenses rose $17.1 million (13.3%) during the year. The increase resulted from the beginning of narrow-body operations and the dollar’s weakening against the U.S. dollar. 15 Transat A.T. Inc. 2015 Annual Report COMMISSIONS Management’s Discussion and Analysis Commissions include the fees paid by tour operators to travel agencies for serving as intermediaries between tour operators and consumers. Commissions amounted to $136.5 million, down $34.2 million (20.0%) compared with fiscal 2014. As a percentage of revenues, commissions decreased and accounted for 3.8% of revenues for the year compared with 4.5% in 2014. This decrease is attributable to the lower revenue base used in calculating commissions. AIRPORT AND NAVIGATION FEES Airport and navigation fees consist mainly of fees charged by airports and air traffic control entities. During the year, these fees rose $12.4 million (11.8%) compared with 2014. The increase was driven by the addition of narrow-body aircraft to our fleet and the dollar’s weakening against the U.S. dollar. AIRCRAFT RENT Aircraft rent rose $11.6 million (13.3%) during the year, as a result of the addition to our permanent fleet of four Boeing 737s and, eight 737s which were integrated gradually into the fleet for the winter season only, as well as the dollar’s weakening against the U.S. dollar. OTHER Other expenses rose $13.5 million (4.0%) during the year, compared with 2014. The increase was mainly due to higher other air costs following the commissioning of our Boeing 737s. 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 B.V. [“CIBV”]. Our share of net income of an associate for the current fiscal year totalled $7.0 million compared with $8.1 million for 2014. The decrease in our share of net income was attributable to the reversal, in 2014, of deferred tax liabilities following amendments to Mexican tax legislation in 2014. The deferred tax liabilities had been recognized as of the coming into force, in 2008, of a piece of tax legislation in Mexico. DEPRECIATION AND AMORTIZATION Depreciation and amortization expense includes the depreciation of property, plant and equipment, and the amortization of intangible assets subject to amortization and deferred incentive benefits. Depreciation and amortization expense rose $4.2 million during fiscal 2015. The increase resulted from additions and improvements made to our aircraft fleet, mainly involving the reconfiguration of our Airbus A330s. RESTRUCTURING During fiscal 2014, the restructuring charge amounted to $6.4 million including $5.4 million in termination benefits, $0.6 million in intangible assets written off and $0.4 million in other expenses. In 2014, restructuring also resulted in a $0.4 million write-off of goodwill, discussed in the Other expenses and revenues section, following the closure of our French Affair division, which specialized in villa rentals in certain areas of Europe. OPERATING RESULTS In light of the foregoing, we recorded $50.0 million (1.4%) in operating income for the year compared with $46.8 million (1.2%) for the previous fiscal year. The growth in our operating income resulted from a $24.1 million improvement in operating results in the Americas, partially offset by a $21.0 million adverse change in operating results in Europe. In addition, our cost reduction initiatives combined with the decrease in fuel prices more than offset the dollar’s weakening against the U.S. dollar which increased operating expenses for the year by $102.0 million, compared to 2014. During the year, we reported $100.8 million (2.8%) in adjusted operating income, compared with $99.9 million (2.7%) in 2014. 16 Transat A.T. Inc. 2015 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 2015 $ 2014 $ 2013 $ 1,548,644 1,580,625 (31,981) (2.1) 1,662,652 1,699,367 (36,715) (2.2) 1,635,128 1,655,109 (19,981) (1.2) 1,291,360 1,208,839 82,521 6.4 1,259,159 1,195,973 63,186 5.0 1,258,225 1,170,407 87,818 7.0 Change 2015 % (6.9) (7.0) 12.9 6.5 2.6 1.1 30.6 27.3 2014 % 1.7 2.7 (83.7) (80.7) 0.1 2.2 (28.0) (28.1) Winter-season revenues of our North American subsidiaries from sales in Canada and abroad were down $114.0 million (6.9%) compared with 2014. The decrease resulted from our decision to reduce our sun destination product offering by 6.3% and transatlantic routes by 3.2%, which lowered traveller volumes by 7.4% across our markets while average selling prices were slightly higher. For the winter season, we reported an operating loss of $32.0 million (2.1%), compared with an operating loss of $36.7 million (2.2%) in 2014. The decrease in our operating loss was mainly due to our cost reduction initiatives which resulted in a decrease in operating expenses, and to a lesser extent, an increase in selling prices. Furthermore, the decrease in operating loss was partially offset by the dollar’s weakening against the U.S. dollar, which, even combined with the decrease in fuel prices, led to a $21.0 million rise in operating expenses across our markets. Summer-season revenues were up $32.2 million (2.6%). Summer-season capacity in our transatlantic segment, our main summer- season market, was 0.9% higher than in 2014. In the transatlantic market, average selling prices were down 2.0% while total travellers increased 0.3%. Our sun destination capacity was 12.6% higher than in 2014. Traveller volumes and selling prices were up 10.9% and 1.0%, respectively. Revenue growth was also driven by the introduction of a new reservation platform, which for European travellers, favours purchasing seats directly from our Air Transat subsidiary instead of through our European subsidiaries. Our operating margin was $82.5 million (6.4%), compared with $63.2 million (5.0%) in 2014. The improvement in operating income was accentuated by lower fuel costs, which, even combined with the dollar’s weakening against the U.S. currency, decreased operating expenses by $35.0 million across our markets. In the aggregate, for our transatlantic market, we recorded a smaller increase in costs than growth in revenues. 17 Transat A.T. Inc. 2015 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 2015 $ 258,435 283,689 (25,254) (9.8) 467,929 443,261 24,668 5.3 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 Change 2015 % (14.8) (9.4) (154.4) (198.4) (11.2) (10.8) (18.6) (8.3) 2014 % 9.3 6.6 39.7 44.8 10.4 9.6 25.5 13.7 Winter-season revenues at our European subsidiaries from sales in Europe and Canada were down $44.8 million (14.8%) in 2015. The decrease resulted from lower total travellers. In local currency terms, revenues at our European entities decreased. This was due to a decrease in sales to destinations in North Africa and Senegal, which contributed to the 11.8% decrease in total travellers for the winter season, compared to 2014, while our average selling prices were similar to the same period of 2014. Our European operations reported an operating loss of $25.3 million (9.8%) for the winter season, compared with an operating loss of $9.9 million (3.3%) in 2014. The higher operating loss was mainly attributable to the decrease in total travellers and, to a lesser extent, slimmer margins in tour revenues. Summer-season revenues at our European subsidiaries were down $59.3 million (11.2%). On one hand, the decrease in revenues resulted in large part from the introduction of a new reservation platform, which for European travellers, favours purchasing seats directly from our Air Transat subsidiary instead of through our European subsidiaries, which resulted in a 13.8% decrease in total travellers. The decrease in revenues is also attributable to lower sales to North African destinations and of North American tours, and the demand was affected by the decrease of the euro. Our average selling prices were slightly higher than in summer season of 2014, owing in part to a different product mix. In local currency terms, revenues at our European entities decreased. Our European operations reported $24.7 million (5.3%) in operating income, compared with $30.3 million (5.7%) in 2014. The lower operating income was primarily due to France, where market conditions were very difficult, as well as to lower tour margins and, to a lesser extent, a decrease in total travellers. OTHER EXPENSES AND REVENUES (in thousands of dollars) Financing costs Financing income Change in fair value of fuel-related derivatives and other derivatives Foreign exchange gain on non-current monetary items Write-off and impairment of goodwill FINANCING COSTS 2015 $ 2,229 (7,606) 528 (2,524) — 2014 $ 1,939 (8,107) 23,822 (1,007) 369 2013 $ 2,512 (7,357) 493 (846) — Change 2015 % 15.0 (6.2) (97.8) 150.6 (100.0) 2014 % (22.8) 10.2 4,732.0 19.0 N/A Financing costs comprise interest on long-term debt and other interest, standby fees, and financial expenses. Financing costs rose $0.3 million in 2015, compared with 2014. FINANCING INCOME Financing income decreased $0.5 million during the year, compared with 2014. 18 Transat A.T. Inc. 2015 Annual Report Management’s Discussion and Analysis CHANGE IN FAIR VALUE OF FUEL-RELATED DERIVATIVES AND OTHER DERIVATIVES The change in fair value of fuel-related derivatives and other derivatives 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 and foreign exchange. During the year, the fair value of fuel-related derivatives and other derivatives rose $0.5 million, compared with a $23.8 million decrease in fair value in 2014. FOREIGN EXCHANGE GAIN ON NON-CURRENT MONETARY ITEMS The foreign exchange gain on non-current monetary items, amounting to $2.5 million for the year compared with $1.0 million in 2014, resulted mainly from a favourable foreign exchange effect on our foreign currency deposits. WRITE-OFF AND IMPAIRMENT OF GOODWILL In 2014, following the closure of its French Affair division, the Corporation wrote off $0.4 million in related goodwill. INCOME TAXES For the year ended October 31, 2015, income tax expense amounted to $10,4 million compared with $3.8 million for the previous fiscal year. Excluding the share of net income of an associate, the effective tax rate stood at 20.6% for the fiscal year ended October 31, 2015 and 17.3% for the preceding fiscal year. The change in tax rates between fiscal 2015 and 2014 resulted mainly from differences between countries in the statutory tax rates applied to taxable income or losses. NET INCOME AND NET INCOME ATTRIBUTABLE TO SHAREHOLDERS In light of the items discussed in the Consolidated operations section, our net income for the year ended October 31, 2015 amounted to $47.0 million, compared with a net income of $26.1 million in 2014. Net income attributable to shareholders stood at $42.6 million or $1.11 per share basic ($1,10 per share on a diluted basis), compared with $22.9 million or $0.59 per share (basic and diluted) during the previous fiscal year. The weighted average number of outstanding shares used to compute basic per share amounts was 38,442,000 for fiscal 2015 and 38,644,000 for fiscal 2014 (38,558,000 and 39,046,000, respectively, for diluted earnings per share). For the year, adjusted net income amounted to $42.9 million ($1.11 per share), compared with $45.2 million ($1.16 per share) for fiscal 2014. 19 Transat A.T. Inc. 2015 Annual Report Management’s Discussion and Analysis 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 decreased compared with the corresponding quarters. Average selling prices were up while total travellers were down for the winter season (Q1 and Q2). For the summer season (Q3 and Q4), average selling prices were lower in 2015 due to the decline in fuel prices while total travellers were higher. In terms of operating results, increases in average selling prices in winter combined with cost reduction and margin improvement initiatives were insufficient to offset the foreign exchange effect arising from the strength of the U.S. dollar. For the summer season, the decline in fuel prices more than offset the stronger U.S. dollar. As a result, the following quarterly financial information may vary significantly from quarter to quarter. Q1-2014 $ 847,222 19,170 (33,614) (23,892) (24,860) 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 (25,649) (0.67) (0.67) (23,288) (0.60) Q2-2014 $ 1,118,620 19,853 (13,029) 4 (6,606) (7,903) (0.20) (0.20) (7,553) Q3-2014 $ 941,702 23,350 36,091 47,789 26,296 25,820 0.67 0.66 26,730 Q4-2014 $ 844,654 24,856 57,392 76,028 31,236 30,607 0.79 0.79 49,353 Q1-2015 $ 788,581 23,167 (47,491) (35,753) (63,088) (64,314) (1.66) (1.66) (32,447) Q2-2015 $ 1,018,498 24,684 (9,744) 3,395 26,267 24,704 0.64 0.64 (6,623) Q3-2015 $ 920,123 24,702 34,913 46,472 13,820 13,067 0.34 0.34 27,216 Q4-2015 $ 839,166 26,306 72,276 86,707 69,965 69,108 1.82 1.82 54,797 (0.19) 0.69 1.27 (0.84) (0.17) 0.71 1.44 20 Transat A.T. Inc. 2015 Annual Report FOURTH-QUARTER HIGHLIGHTS Management’s Discussion and Analysis For the fourth quarter, the Corporation generated $839.2 million in revenues, down $5.5 million (0.6%) from $844.7 million for the corresponding period of 2014. This decrease is due primarily to the decrease in average selling prices. Fourth-quarter total travellers increased 3.9% in 2015 compared with the same period in 2014. In the Americas, revenues of subsidiaries were up $17.1 million (2.9%), compared with the same period in 2014. On the transatlantic routes, our main market, the capacity deployed increased 3.6% compared with 2014. Average selling prices were down 1.7%, whereas total travellers were 1.8% higher. Our sun destination capacity was 10.8% higher than in 2014. Revenue growth was also attributable to the introduction of a new reservation platform, which for European travellers, favours purchasing seats directly from our Air Transat subsidiary instead of through our European subsidiaries. Traveller volumes were up 10.7% while selling prices increased by 3.5%. North American operations generated operating income of $56.2 million, compared with $42.4 million, which also took into account a $4.2 million restructuring charge in 2014. The improvement in operating income was accentuated by a decline in fuel costs, which, even combined with the dollar’s weakening against the U.S. currency, decreased operating expenses by $18.0 million across our markets. Compared with 2014, revenues at our European subsidiaries were down $22.6 million (9.2%). On one hand, the decrease in revenues resulted from the introduction of a new reservation platform, which for European travellers, favours purchasing seats directly from our Air Transat subsidiary instead of through our European subsidiaries, resulting in a 13.3% decrease in total travellers. The decrease in revenues is also attributable to lower sales to North African destinations and of North American tours. Average selling prices were slightly higher than in the same period of 2014, due partly to a different product mix. Our European operations reported $16.1 million in operating income, compared with $15.0 million in 2014. The improvement in our operating income resulted primarily from sound management of our product offering combined with cost reduction initiatives. The Corporation’s fourth-quarter operating income amounted to $72.3 million (8.6%), compared with $54.2 million (6.4%) in 2014. The increase in operating income resulted from, among other factors, the decline in fuel costs and cost reduction initiatives. The Corporation recorded fourth-quarter net income amounting to $70.0 million, compared with $31.2 million in 2014. Net income attributable to shareholders amounted to $69.1 million ($1.82 per share basic and diluted) compared with $30.6 million ($0.79 per share basic and diluted) in 2014. The Corporation’s fourth-quarter net adjusted income amounted to $54.8 million ($1.44 per share) compared with $49.4 million ($1.27 per share) in 2014. 21 Transat A.T. Inc. 2015 Annual Report Management’s Discussion and Analysis FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES As at October 31, 2015, cash and cash equivalents totalled $336.4 million compared with $308.9 million as at October 31, 2014. Cash and cash equivalents held in trust or otherwise reserved amounted to $412.1 million as at the end of fiscal 2015, compared with $380.2 million in 2014. The Corporation’s statement of financial position reflected $80.4 million in working capital, for a ratio of 1.09, compared with $96.0 million in working capital and a ratio of 1.12 as at October 31, 2014. Total assets increased by $138.7 million (10.1%) from $1,375.0 million as at October 31, 2014 to $1,513.8 million as at October 31, 2015. This increase is mainly attributable to a $31.9 million increase in cash and cash equivalents in trust or otherwise reserved, a $27.5 million increase in cash and cash equivalents, a $15.0 million increase in deposits and a $13.9 million increase in investments and other assets. Equity increased $54.3 million, from $482.9 million as at October 31, 2014 to $537.3 million as at October 31, 2015. This increase resulted essentially from the $47.0 million net income and a $20.0 million foreign exchange gain on the translation of the financial statements of foreign subsidiaries, partiallly offset by the repurchase of shares totalling $9.4 million and by other changes in non-controlling liabilities in the amount of $4.2 million. 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 2015 $ 94,000 (58,009) (12,672) 4,217 27,536 2014 $ 106,240 (61,100) 191 (2,262) 43,069 2013 $ 123,039 (28,289) (1,817) 1,710 94,643 Change 2015 % (11.5) 5.1 (6,734.6) 286.4 (36.1) 2014 % (13.7) (116.0) 110.5 (232.3) (54.5) Operating activities generated $94.0 million in cash flows, compared with $106.2 million in 2014. This $12.2 million decrease during the fiscal year resulted from a $17.8 million decrease in the net change in non-cash working capital balances related to operations, partially offset by a $6.9 million increase in profitability. We expect to continue to generate positive cash flows from our operating activities in fiscal 2016. INVESTING ACTIVITIES Cash flows used in investing activities totalled $58.0 million for the fiscal year, down $3.1 million from 2014. Compared with 2014, additions to property, plant and equipment and other intangible assets decreased $5.7 million to $59.3 million and consisted mainly of purchases of computer hardware and software and aircraft enhancements. The cash and cash equivalents reserved (non-current) balance rose by $5.4 million and we received a $6.7 million dividend from our associate. In 2014, we also received a $3.0 million balance of sale price receivable related to the disposal of a subsidiary in 2012. In 2016, additions to property, plant and equipment and intangible assets could amount to approximately $60.0 million. FINANCING ACTIVITIES Cash flows used in financing activities totalled $12.7 million, compared with $0.2 million in cash flows generated in 2014. Higher utilization of cash flows than in 2014 resulted from the $9.4 million repurchase of shares during the period, and a $1.4 million increase in dividends (totalling $4.2 million) paid to a non-controlling interest. Proceeds from share issuances amounted to $1.0 million in 2015, down $2.0 million compared with 2014. 22 Transat A.T. Inc. 2015 Annual Report CONSOLIDATED FINANCIAL POSITION Management’s Discussion and Analysis October 31, October 31, 2014 $ 2015 $ Difference $ Main reasons for significant differences 27,536 31,915 See the Cash flows section Increase in funds received from clients Assets Cash and cash equivalents Cash and cash equivalents in trust or otherwise reserved Trade and other receivables Income taxes receivable Inventories Prepaid expenses Derivative financial instruments 336,423 412,099 129,223 16,900 9,079 80,318 25,573 308,887 380,184 123,489 3,329 10,434 74,932 16,596 5,734 13,571 (1,355) 5,386 8,977 Deposits 58,901 43,932 14,969 Deferred tax assets Property, plant and equipment Goodwill Intangible assets Investment in an associate 32,939 133,502 99,527 79,863 97,897 30,051 128,560 95,601 72,769 83,949 2,888 4,942 3,926 7,094 13,948 Other assets 1,520 2,317 (797) Liabilities Trade and other payables Provision for overhaul of leased aircraft Income taxes payable Customer deposits and deferred revenues Derivative financial instruments 355,656 42,962 1,431 489,622 23,203 338,633 36,312 1,721 424,468 24,679 17,023 6,650 (290) 65,154 (1,476) Other liabilities 52,026 53,926 (1,900) Deferred tax liabilities 11,612 12,345 (733) Increase in amounts receivable from government Increase due to payment of notices of assessment related to ABCPs No significant difference Increase in prepaid amounts to hotel operators Favourable change in the dollar compared with the U.S. currency with respect to forward contracts entered into Increase in deposits paid to certain service providers and foreign exchange difference Increase in differed tax related to non-deductible provisions Additions during the year, partially offset by depreciation Foreign exchange difference Additions during the year, partially offset by depreciation Share of net income of an associate and foreign exchange difference, partially offset by dividend received No significant difference Foreign exchange difference Additions to aircraft fleet, foreign exchange difference and impact of maintenance schedule No significant difference Increase in reservations and average selling prices Favourable change in fuel prices with respect to forward contracts entered into Decrease in deferred incentive benefits, partially offset by the increase in value of defined benefit obligation No significant difference Equity Share capital Share-based payment reserve Retained earnings Unrealized gain on cash flow hedges Cumulative exchange differences 218,134 17,105 263,812 14,960 23,241 224,679 15,444 227,872 11,712 3,239 (6,545) 1,661 35,940 3,248 20,002 Repurchase of shares, net of shares issued from treasury Share-based payment expense Net income No significant difference Foreign exchange gain on translation of financial statements of foreign subsidiaries 23 Transat A.T. Inc. 2015 Annual Report FINANCING Management’s Discussion and Analysis As at December 9, 2015, 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 the 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, 2015, 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 €10.0 million [$14.4 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 and others in the notes to the financial statements. The Corporation did not report any obligations in the statements of financial position as at October 31, 2015 and October 31, 2014. 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 $998.6 million as at October 31, 2015 ($936.3 million as at October 31, 2014), 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 2015 $ 2014 $ 36,838 1,490 31,267 1,361 675,385 713,713 284,878 998,591 657,639 690,267 246,056 936,323 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. 24 Transat A.T. Inc. 2015 Annual Report Management’s Discussion and Analysis The Corporation has a $75.0 million annually renewable revolving credit facility 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, 2015, $66.9 million had been drawn down, of which $44.9 million is to insure the benefits to participants under senior executives defined benefit pension agreements; such irrevocable letters of credit are held by a third party trustee. In the event of a change of control, the irrevocable letters of credit issued to insure the benefit to the participants under the senior executives defined benefit pension agreements will be drawn down. In addition, 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, 2015, $22.0 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 €17.6 million [$25.4 million], of which €9.9 million had been drawn down [$14.3 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, 2015, €2.7 million had been drawn down [$3.8 million]. For its U.K. operations, the Corporation has a bank line of credit for issuing letters of credit secured by deposits of £14.8 million [$29.9 million], which has been fully drawn down. As at October 31, 2015, off-balance sheet arrangements were up $62.3 million. This increase resulted from the seasonal lease agreements entered into for six additional Boeing 737-800s and the dollar’s weakening against the U.S. dollar, partially offset by repayments made during the fiscal 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 2016 $ 2017 $ 2018 $ 2019 $ — 130,576 31,126 201,304 363,006 — 115,716 26,520 66,053 208,289 — 112,939 21,583 22,840 157,362 — 86,236 15,087 2,327 103,650 2021 and beyond $ 2020 $ — 34,781 12,161 2,327 49,269 — 28,056 60,604 29,292 117,952 Total $ — 508,304 167,081 324,143 999,528 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, increased by $23.4 million, from $690.3 million as at October 31, 2014 to $713.7 million as at October 31, 2015. This increase was 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 amounts to $494.3 million, up $58.2 million compared with 2014 due 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 increased by $30.6 million, from $127.3 million as at October 31, 2014 to $157.9 million as at October 31, 2015. The increase in total net debt results from higher aircraft rent following the addition of Boeing 737s to our aircraft fleet, partially offset by higher cash and cash equivalent balances than in 2014. 25 Transat A.T. Inc. 2015 Annual Report OUTSTANDING SHARES Management’s Discussion and Analysis As at October 31, 2015, 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 including the number of shares, designation, rights, privileges, restrictions and conditions as determined by the Board of Directors. As at December 4, 2015, there were 37,351,176 total voting shares outstanding. Since November 16, 2015 Class A Variable Voting Shares and Class B Voting Shares of the Corporation are traded on the Toronto Stock Exchange under a single symbol, namely “TRZ.” STOCK OPTIONS As at December 4, 2015, there were a total of 2,740,523 stock options outstanding, 1,877,384 of which were exercisable. OTHER FLEET Air Transat’s fleet currently consists of twelve Airbus A330s (345 or 375 seats), nine Airbus A310s (249 seats) and four Boeing 737-800s (189 seats). The Corporation also had lease agreements, during the 2015 winter season, for six Boeing 737-800s (189 seats) and two Boeing 737-700s (149 seats). Under current agreements, 15 Boeing 737s will be added to the fleet for the 2016 winter season. NORMAL COURSE ISSUER BID On April 10, 2015, the Corporation announced that it had received the required regulatory approvals to go forward with a normal course issuer bid for a 12-month period. Pursuant to its normal course issuer bid, the Corporation is authorised to purchase for cancellation up to a maximum of 2,274,921 Class A Variable Voting Shares and Class B Voting Shares, representing approximately 10% of the public float of Class A Variable Voting Shares and Class B Voting Shares. The normal course issuer bid is designed to allow the Corporation proper utilization, depending on the circumstances and in a wise manner, of a portion of the Corporation’s excess cash. Purchases under the Corporation’s normal course issuer bid will be made on the open market through the TSX in accordance with its policy on normal course issuer bids. The price paid by the Corporation for repurchased shares will be the market price at the time of acquisition plus brokerage fees, where applicable. Purchases began as of April 15, 2015 and will terminate no later than April 14, 2016. During the year ended October 31, 2015, the Corporation repurchased 1,296,090 Class B Voting Shares for a cash consideration of $9.4 million. 26 Transat A.T. Inc. 2015 Annual Report ACCOUNTING CRITICAL ACCOUNTING ESTIMATES Management’s Discussion and Analysis 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). The Corporation performed an impairment test as at April 30, 2015 to determine whether the carrying amount of CGUs was 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. As at April 30, 2015, an after-tax discount rate of 10.3% was used for testing the various CGUs for impairment [10.3% as at October 31, 2014]. The perpetual growth rate used for impairment testing was 1% as at April 30, 2015 [1% as at October 31, 2014]. 27 Transat A.T. Inc. 2015 Annual Report Management’s Discussion and Analysis On April 30, 2015, a 1% increase in the after-tax discount rate used for the impairment testing, assuming that all other variables had remained the same, would not have required any impairment charge. On April 30, 2015, a 1% decrease in the long-term growth rate used for the impairment testing, assuming that all other variables had remained the same, would not have required any impairment charge. On April 30, 2015, a 10% decrease in the cash flows used for the impairment testing, assuming that all other variables had remained the same, would not have required any 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, 2015 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. 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 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. 28 Transat A.T. Inc. 2015 Annual Report NON-CONTROLLING INTERESTS Management’s Discussion and Analysis 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 over 15% 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, 2015 $ (12) 13 Retirement benefit obligations as at October 31, 2015 $ (1,064) 47 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 in this regard were received during the year. No provisions are made in connection with this issue, which could result in expenses of approximately $16.2 million, 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. However, this situation resulted in outflows of $15.1 million during the year ended October 31, 2015. This amount is recognized as income taxes receivable as at October 31, 2015. 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. 29 Transat A.T. Inc. 2015 Annual Report FOREIGN EXCHANGE RISK MANAGEMENT Management’s Discussion and Analysis 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 45% 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 18 months, for the purchase and/or sale of foreign currencies based on anticipated foreign exchange rate trends. The Corporation documents certain 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 in the consolidated statement of comprehensive income. Any ineffectiveness within a cash flow hedge is recognized through profit or loss as it arises in the account Change in fair value of fuel-related derivatives and other derivatives. 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 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 using foreign exchange forward contracts, and other types of derivative financial instruments, expiring in generally less than 18 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 fuel-related derivatives and other derivatives in the consolidated statement of income. When realized, at maturity of fuel-related derivative financial instruments, any gains or losses are reclassified to Aircraft fuel. CREDIT AND COUNTERPARTY RISK Credit risk is primarily attributable to 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 $68.7 million as at October 31, 2015. 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, 2015, approximately 3% of accounts receivable were over 90 days past due, whereas approximately 82% were current, that is, under 30 days. Historically, the Corporation has not incurred any significant losses in respect of its trade accounts receivable. 30 Transat A.T. Inc. 2015 Annual Report Management’s Discussion and Analysis 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 $42.4 million as at October 31, 2015, and are 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 $16.5 million as at October 31, 2015 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 following receipt of documented proof that the related maintenance has been performed by the Corporation. As at October 31, 2015, the cash security deposits with lessors that had been claimed totalled $21.6 million and were 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, 2015 related 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, 2015. 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. 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 $18.4 million in person-nights purchased at hotels belonging to its associate CIBV, compared with $13.7 million in 2014. As at October 31, 2015, a $0.3 million amount payable to CIBV was included under Trade and other payables, compared to $0.2 million as at October 31, 2014. 31 Transat A.T. Inc. 2015 Annual Report Management’s Discussion and Analysis CHANGES IN ACCOUNTING POLICIES PRESENTATION OF THE SHARE OF NET INCOME OF AN ASSOCIATE During the first quarter of 2015, the Corporation modified the presentation of the share of net income of an associate to include it under operating results in the consolidated statements of income. In the past, operating results did not include the share of net income of an associate, i.e. CIBV, which operates hotels in Mexico, the Dominican Republic and Cuba. Hotel operations are part of the Corporation’s activities. By including the share of net income of an associate, operating results more accurately reflect the Corporation’s ongoing activities. The retrospective application of this policy change had no impact on the Corporation’s net income. 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 rather than in the statement of income. 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 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 relevant and comprehensive disclosures. The core principle of IFRS 15 is that an entity should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the expected consideration receivable 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 for 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. 32 Transat A.T. Inc. 2015 Annual Report RISKS AND UNCERTAINTIES Management’s Discussion and Analysis 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; and • Integrate risk management into strategic, financial and operating objectives. For each risk, an owner has been designated as accountable for designing and implementing measures to mitigate the consequences of risks for which he or she is responsible, and/or limit the likelihood of these risks materializing. 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 Risk Management and Corporate Governance 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. 33 Transat A.T. Inc. 2015 Annual Report COMPETITION RISKS Management’s Discussion and Analysis 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. REPUTATION RISK 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. While Transat has cash on hand to respond to competitive pressures or capitalize on growth opportunities, 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. 34 Transat A.T. Inc. 2015 Annual Report Management’s Discussion and Analysis 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. KEY SUPPLIES AND SUPPLIER RISKS 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 and Boeing 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. 35 Transat A.T. Inc. 2015 Annual Report AVIATION RISKS Management’s Discussion and Analysis 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. TECHNOLOGICAL RISKS 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. 36 Transat A.T. Inc. 2015 Annual Report REGULATORY RISKS Management’s Discussion and Analysis The industry in which Transat operates is subject to extensive Canadian and foreign government regulations. These relate 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, 2015, the Corporation had approximately 5,500 employees, almost 50% of whom are unionized personnel covered by six collective agreements. As at October 31, 2015, four of the six collective agreements had expired. Negotiations to renew these collective agreements could give rise to work stoppages or slowdowns or higher labour costs that could unfavourably impact our operations and operating income. INSURANCE COVERAGE RISKS 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 per event 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. 37 Transat A.T. Inc. 2015 Annual Report Management’s Discussion and Analysis The Canadian government continues to cover its air carriers, due to 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. CONTROLS AND PROCEDURES 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 2013) 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, 2015. Lastly, no significant changes in ICFR occurred during the fourth quarter ended October 31, 2015 that materially affected, or are likely to materially affect, the Corporation’s ICFR. 38 Transat A.T. Inc. 2015 Annual Report OUTLOOK Management’s Discussion and Analysis Globally, Transat’s bookings for the first half are ahead by 15% over 2014 at the same date. On the Sun destinations market outbound from Canada, the Corporation’s main market segment in the winter, Transat's capacity is approximately 7% higher than that offered last year and 45% of that capacity has been sold. Bookings are ahead by 12% and load factors are up 2.1%. The impact of the weaker Canadian dollar, net from lower fuel costs, will be a 4.0% increase in operating costs if the dollar and fuel costs stay at their current level. At this moment, margins are similar to last year at the same date. On the transatlantic market, where it is low season, Transat’s capacity is up 19% compared to that offered last winter. To date, 46% of that capacity has been sold, and bookings are ahead by 15%. Load factors are down 1.2% and selling prices are 6.0% lower. The impact of lower fuel costs will be a 3.0% decrease in operating costs if they stay at their current level. In France, also in low season in winter, market conditions in 2015 were very difficult. Bookings are up 21% and selling prices are 1.5% higher, compared with last year at the same date. In light of the above, operating income for the winter should improve over last year. 39 Transat A.T. Inc. 2015 Annual Report 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. 2015 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, 2015 and 2014, 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, 2015 and 2014 and its financial performance and its cash flows for the years then ended in accordance with International Financial Reporting Standards. Montréal, Canada December 9, 2015 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] Income taxes receivable [note 23] Deferred tax assets [note 20] Property, plant and equipment [note 10] Goodwill [note 11] Intangible assets [note 11] Derivative financial instruments [note 8] Investment in an associate [note 12] Other assets 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] Derivative financial instruments [note 8] 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, 2015 $ 2014 $ 336,423 367,199 129,223 1,800 9,079 80,318 25,277 18,298 967,617 44,900 40,603 15,100 32,939 133,502 99,527 79,863 296 97,897 1,520 546,147 1,513,764 355,656 17,281 1,431 489,622 23,188 887,178 25,681 52,026 15 11,612 89,334 218,134 17,105 263,812 14,960 23,241 537,252 1,513,764 308,887 340,704 123,489 3,329 10,434 74,932 16,596 17,833 896,204 39,480 26,099 — 30,051 128,560 95,601 72,769 — 83,949 2,317 478,826 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 Director Director 42 TRANSAT A.T. INC. CONSOLIDATED STATEMENTS OF INCOME (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] Aircraft maintenance Commissions Airport and navigation fees Aircraft rent Other Share of net income of an associate [note 12] Depreciation and amortization [note 18] Restructuring [note 19] Operating results Financing costs Financing income Change in fair value of fuel-related derivatives and other derivatives Foreign exchange gain on non-current monetary items Write-off of goodwill [note 19] 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 2015 $ 3,566,368 2014 $ 3,752,198 1,797,890 440,804 387,363 146,006 136,506 117,862 98,859 347,302 (7,045) 50,867 — 3,516,414 49,954 2,229 (7,606) 528 (2,524) — 57,327 14,766 (4,403) 10,363 46,964 42,565 4,399 46,964 1.11 1.10 2,000,424 462,942 370,904 128,892 170,724 105,440 87,229 333,808 (8,094) 46,702 6,387 3,705,358 46,840 1,939 (8,107) 23,822 (1,007) 369 29,824 13,430 (9,672) 3,758 26,066 22,875 3,191 26,066 0.59 0.59 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 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 2015 $ 46,964 2014 $ 26,066 (69,421) 73,821 (1,152) 3,248 (1,677) 14,599 (3,590) 9,332 20,002 8,158 (879) 342 (537) 22,713 69,677 61,738 7,939 69,677 (3,431) 912 (2,519) 14,971 41,037 36,474 4,563 41,037 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 $ (4,919) 441,393 (in thousands of Canadian dollars) $ $ $ Balance as at October 31, 2013 221,706 15,391 206,835 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 Net income for the year Other comprehensive income (loss) Comprehensive income for the year Issued from treasury Share-based payment expense Repurchase of shares Dividends Other changes in non-controlling interest liabilities Reclassification of non-controlling interest liabilities Reclassification of non-controlling interest exchange difference — — — 857 2,116 — — — — — 2,973 224,679 — — — 973 — (7,518) — — — — — — — — (679) 732 — — — — 53 22,875 (2,519) 20,356 — — — — 681 — — 681 15,444 227,872 — — — — 1,661 — — — — — Balance as at October 31, 2015 See accompanying notes to consolidated financial statements 218,134 17,105 (6,545) 1,661 $ 2,380 — 9,332 9,332 — — — — — — — — 11,712 — 3,248 3,248 — — — — — — — — 14,960 — 6,786 6,786 — — — — — — 1,372 1,372 3,239 — 16,462 16,462 — — — — — — Non- controlling interests Total equity $ — 3,191 1,372 4,563 — — — (2,782) (681) 272 (1,372) (4,563) — 4,399 3,540 7,939 — — — (4,221) $ 441,393 26,066 14,971 41,037 857 1,437 732 (2,782) — 272 — 516 482,946 46,964 22,713 69,677 973 1,661 (9,424) (4,221) 22,875 13,599 36,474 857 1,437 732 — 681 — 1,372 5,079 482,946 42,565 19,173 61,738 973 1,661 (9,424) — (4,182) 4,182 — — (4,360) (4,360) 3,540 3,540 23,241 3,540 (7,432) 537,252 (3,540) (7,939) — — (15,371) 537,252 42,565 (537) 42,028 — — (1,906) — (4,182) — — (6,088) 263,812 45 2015 $ 2014 $ 46,964 26,066 50,867 528 (2,524) — (7,045) (4,403) 3,303 1,661 89,351 (4,835) 6,650 2,834 94,000 (59,295) (5,420) — 6,706 (58,009) 973 (9,424) (4,221) (12,672) 4,217 27,536 308,887 336,423 27,943 513 46,702 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 28,359 680 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 fuel-related derivatives and other derivatives 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 Dividend received from an associate Cash flows related to investing activities FINANCING ACTIVITIES Proceeds from issuance of shares Repurchase 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 Interest paid See accompanying notes to consolidated financial statements 46 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements October 31, 2015 and 2014 [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. Effective November 16, 2015, the Class A Variable Voting Shares and Class B Voting Shares of the Corporation trade under a single ticker, TRZ, 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, 2015 were approved by the Corporation’s Board of Directors on December 9, 2015. 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; • Contingent consideration is measured at fair value on the acquisition date, with subsequent changes in the fair value recorded through the statement of income 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; and 47 Transat A.T. Inc. 2015 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 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, 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. 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. 2015 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 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. 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. 49 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements 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 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. 2015 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 some of 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 in the consolidated statement of comprehensive income. Any ineffective portion within a cash flow hedge is recognized in net income, as incurred, in the account Change in fair value of fuel-related derivatives and other derivatives. 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 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 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 as the hedged item. DERIVATIVE FINANCIAL INSTRUMENTS THAT DO NOT QUALIFY FOR HEDGE ACCOUNTING In the normal course of business, the Corporation also enters into derivative financial instruments used for aircraft fuel purchases to manage exposure to fuel pricing instability and into derivative financial instruments related to foreign exchange to manage exposure against future foreign currency fluctuations 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 fuel- related derivatives and other derivatives in the consolidated statement of income. When realized, at maturity of fuel-related 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. FAIR VALUE 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. 51 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements 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 April 30 as of April 30, 2015 and formerly 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 April 30 as of April 30, 2015 and formerly as at October 31] either individually or at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be impaired. REVERSAL OF IMPAIRMENT LOSSES 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. Impairment losses relating to goodwill cannot be reversed in future periods. 52 Transat A.T. Inc. 2015 Annual Report PROVISIONS Notes to Consolidated Financial Statements 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 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. 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. 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. REVENUE RECOGNITION 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 when such transportation is provided. 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 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. 53 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements Deferred tax assets and liabilities are recognized directly through profit or loss, other comprehensive income, 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 and performance share unit plan], the compensation expense is based on the grant date fair value of the share-based 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. Compensation expense related to the stock option plan is calculated using the Black-Scholes model, whereas the performance share unit expense is measured based on the closing price of the shares of the Corporation on the Toronto Stock Exchange at the grant date adjusted to take into account the terms and conditions upon which the units were granted. 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 these awards and the corresponding portion previously credited to the 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 the 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. EMPLOYEE SHARE PURCHASE PLANS 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 PER SHARE Basic earnings per share is computed based on net income 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 per share is calculated by adjusting net income 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. 54 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements 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. 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. 55 Transat A.T. Inc. 2015 Annual Report NON-CONTROLLING INTERESTS Notes to Consolidated Financial Statements 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. Note 4 CHANGE IN ACCOUNTING POLICIES PRESENTATION OF THE SHARE OF NET INCOME OF AN ASSOCIATE During the first quarter of 2015, the Corporation modified the presentation of the share of net income of an associate to include it under operating results in the consolidated statements of income. In the past, operating results did not include the share of net income of an associate, i.e. Caribbean Investments B.V. [“CIBV”], which operates hotels in Mexico, the Dominican Republic and Cuba. Hotel operations are part of the Corporation’s activities. By including the share of net income of an associate, operating results more accurately reflect the Corporation’s ongoing activities. The retrospective application of this policy change had no impact on the Corporation’s net income. 56 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated 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 rather than in the statement of income. 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 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 relevant and comprehensive disclosures. The core principle of IFRS 15 is that an entity should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the expected consideration receivable 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, 2018, 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, 2015, cash and cash equivalents included $310,883 [$276,964 as at October 31, 2014] in funds received from customers, consisting primarily of Canadians, for services not yet rendered or for which the restriction 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 $101,216, of which $44,900 was recorded as non-current assets [$103,220 as at October 31, 2014, of which $39,480 was recorded as non-current assets], which was pledged as collateral security against letters of credit. trust or otherwise reserved in 57 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements Note 7 TRADE AND OTHER RECEIVABLES Trade receivables Due from government Other receivables Note 8 FINANCIAL INSTRUMENTS CLASSIFICATION OF FINANCIAL INSTRUMENTS 2015 $ 2014 $ 68,695 23,400 37,128 129,223 70,892 15,182 37,415 123,489 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 $ 336,423 412,099 105,823 16,530 336,423 412,099 105,823 16,530 180 180 142 871,197 142 871,197 — — — — — — — 312,964 312,964 312,964 — 17,953 17,953 — 32,800 345,764 1,344 32,800 365,061 1,344 32,800 365,061 As at October 31, 2015 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 Derivative financial instruments -Fuel purchasing forward contracts and other fuel-related derivative financial instruments -Other foreign exchange-related derivative financial instruments Financial liabilities Trade and other payables Derivative financial instruments -Fuel purchasing forward contracts and other fuel-related derivative financial instruments -Other foreign exchange-related derivative financial instruments Non-controlling interests 336,423 412,099 — — — — 105,823 16,530 180 — — 122,353 — — — — — 142 748,844 — 17,953 1,344 — 19,297 58 Transat A.T. Inc. 2015 Annual Report 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 $ 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 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 instruments 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]. 59 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements The following table details the fair value hierarchy of financial instruments by level: As at October 31, 2015 Financial assets Derivative financial instruments -Fuel purchasing forward contracts and other fuel-related derivative financial instruments -Foreign exchange forward contracts and other foreign exchange-related derivative financial instruments Financial liabilities Derivative financial instruments -Fuel purchasing forward contracts and other fuel-related derivative financial instruments -Foreign exchange forward contracts and other foreign exchange-related derivative financial instruments Non-controlling interests As at October 31, 2014 Financial assets Derivative financial instruments -Foreign exchange forward contracts and other foreign exchange-related derivative financial instruments Financial liabilities Derivative financial instruments -Fuel purchasing forward contracts and other fuel-related derivative financial instruments -Foreign exchange forward contracts and other foreign exchange-related derivative financial instruments Non-controlling interests Quoted prices in active markets (Level 1) $ Other observable inputs (Level 2) $ Unobservable inputs (Level 3) $ — — — — — — — 180 25,393 25,573 17,953 5,250 — 23,203 — — — — — 32,800 32,800 Quoted prices in active markets (Level 1) $ Other observable inputs (Level 2) $ Unobservable inputs (Level 3) $ — — — — — — 16,596 16,596 24,383 296 — 24,679 — — — — 24,900 24,900 Total $ 180 25,393 25,573 17,953 5,250 32,800 56,003 Total $ 16,596 16,596 24,383 296 24,900 49,579 60 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements 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 interests 2015 $ 24,900 4,399 3,540 (4,221) 4,182 32,800 2014 $ 23,800 3,191 1,372 (2,782) (681) 24,900 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 $68,695 as at October 31, 2015 [$70,892 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, 2015 and 2014. As at October 31, 2015, approximately 3% [approximately 7% as at October 31, 2014] of accounts receivable were over 90 days past due, whereas approximately 82% [approximately 79% as at October 31, 2014] 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 $42,371 as at October 31, 2015 [$29,754 as at October 31, 2014] 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 $16,530 as at October 31, 2015 [$14,178 as at October 31, 2014] 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, 2015, the cash security deposits with lessors that have been claimed totalled $21,587 [$20,169 as at October 31, 2014] 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. 61 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements For financial institutions including the various counterparties, the maximum credit risk as at October 31, 2015 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, 2015. LIQUIDITY RISK The Corporation is exposed to the risk of being unable to honour its financial commitments by the deadlines set out under the terms of such commitments and at a reasonable price. The Corporation has a Treasury Department in charge, among other things, of ensuring sound management of available cash resources, financing and compliance with deadlines within the Corporation’s scope of consolidation. With senior management oversight, the Treasury Department manages the Corporation’s cash resources based on financial forecasts and anticipated cash flows. The maturities of the Corporation’s financial liabilities as at October 31, 2015 are summarized in the following table: Maturing in under 1 year $ 312,964 32,800 23,222 368,986 Maturing in 1 to 2 years $ — — — — Maturing in 2 to 5 years $ — — — — Contractual cash flows Total $ 312,964 32,800 23,222 368,986 Carrying amount Total $ 312,964 32,800 23,203 368,967 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 45% 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 18 months, for the purchase and/or sale of foreign currencies based on anticipated foreign exchange rate trends. 62 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements 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) 2015 Financial statement measurement currency of the group’s companies Euro Pound sterling Canadian dollar Other currencies Total Net assets (liabilities) 2014 Financial statement measurement currency of the group’s companies Euro Pound sterling Canadian dollar Other currencies Total U.S. dollar $ Euro $ Pound sterling $ Canadian dollar $ Other currencies $ (34,967) 97 8,839 (333) (26,364) U.S. dollar $ (27,262) 4 (13,094) (554) (40,906) — 238 2,974 102 3,314 Euro $ — 310 (804) 406 (88) (446) — (3,868) — (4,314) Pound sterling $ (368) — 2,381 — 2,013 (1,886) (215) — (18) (2,119) 11 — (220) 1,884 1,675 Canadian dollar $ Other Currencies $ (521) 468 — (9) (62) 10 — (235) 1,291 1,066 Total $ (37,288) 120 7,725 1,635 (27,808) Total $ (28,141) 782 (11,752) 1,134 (37,977) For the year ended October 31, 2015, 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 $1,307 increase or decrease [$194 in 2014], respectively, in the Corporation’s net income for the year, whereas other comprehensive income would have decreased or increased by $2,213 [$2,738 in 2014], respectively. As at October 31, 2015, 45% of estimated fuel requirements for fiscal 2016 were covered by fuel-related derivative financial instruments [46% of estimated requirements for fiscal 2015 were covered as at October 31, 2014]. 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 18 months. For the year ended October 31, 2015, a 10% increase or decrease in fuel prices, assuming that all other variables had remained the same, would have resulted in a $3,322 decrease or increase [$12,722 in 2014], respectively, in the Corporation’s net income for the year. As at October 31, 2015, 36% of estimated requirements for fiscal 2016 were covered by fuel-related derivative financial instruments [42% of estimated requirements for fiscal 2015 were covered as at October 31, 2014]. 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. 63 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements 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, 2015, a 25 basis point increase or decrease in interest rates, assuming that all other variables had remained the same, would have resulted in a $1,815 increase or decrease [$1,772 in 2014], 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. 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 adjusted 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 Adjusted debt/equity ratio 2015 $ 2014 $ — 494,295 (336,423) 157,872 537,252 29.4% — 436,145 (308,887) 127,258 482,946 26.4% 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, 2015, 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. 64 Transat A.T. Inc. 2015 Annual Report Note 9 DEPOSITS Deposits on leased aircraft and engines Deposits with suppliers Less current portion Note 10 PROPERTY, PLANT AND EQUIPMENT Cost Balance as at October 31, 2014 Additions Write-off Exchange difference Balance as at October 31, 2015 Accumulated depreciation Balance as at October 31, 2014 Amortization Write-off Exchange difference Balance as at October 31, 2015 Net book value as at October 31, 2015 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 Notes to Consolidated Financial Statements 2015 $ 16,530 42,371 58,901 18,298 40,603 2014 $ 14,178 29,754 43,932 17,833 26,099 Aircraft equipment Office furniture and equipment Building and leasehold improvements $ $ $ 84,670 4,371 (148) — 88,893 70,036 2,411 (148) — 72,299 16,594 71,607 6,569 (14,103) 870 64,943 58,703 6,234 (14,103) 579 51,413 13,530 46,529 2,582 (2,511) 339 46,939 31,717 2,753 (2,511) 170 32,129 14,810 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 Total $ 480,719 41,796 (19,024) 1,209 504,700 352,159 37,314 (19,024) 749 371,198 133,502 Total $ 488,920 48,611 (56,998) 186 480,719 373,895 35,001 (56,998) 261 352,159 128,560 Fleet $ 277,913 28,274 (2,262) — 303,925 191,703 25,916 (2,262) — 215,357 88,568 Fleet $ 289,036 35,044 (46,167) — 277,913 214,184 23,686 (46,167) — 191,703 86,210 65 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements Note 11 GOODWILL AND OTHER INTANGIBLE ASSETS Cost Balance as at October 31, 2014 Additions Write-off Exchange difference Balance as at October 31, 2015 Accumulated amortization and impairment Balance as at October 31, 2014 Amortization Write-off Exchange difference Balance as at October 31, 2015 Net book value as at October 31, 2015 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 Goodwill $ 110,601 — — 3,926 114,527 15,000 — — — 15,000 99,527 Goodwill $ 109,723 — (369) 1,247 110,601 15,000 — — — 15,000 95,601 Software $ Trademarks $ Customer lists $ 142,642 17,499 (1,877) 649 158,913 92,096 11,356 (1,877) 375 101,950 56,963 20,429 — — 1,612 22,041 — — — — — 22,041 13,043 — — 1,219 14,262 11,249 1,061 — 1,093 13,403 859 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 Total $ 286,715 17,499 (1,877) 7,406 309,743 118,345 12,417 (1,877) 1,468 130,353 179,390 Total $ 270,091 16,365 (2,458) 2,717 286,715 108,035 10,711 (857) 456 118,345 168,370 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 2015 2014 Goodwill $ 67,537 21,016 10,974 99,527 Trademarks $ 22,041 — — 22,041 Goodwill $ 65,235 19,855 10,511 95,601 Trademarks $ 20,429 — — 20,429 66 Transat A.T. Inc. 2015 Annual Report IMPAIRMENT TEST IN 2015 Notes to Consolidated Financial Statements For the six-month period ended April 30, 2015, operating results were lower than the forecasted results used for the purpose of the annual impairment test performed on October 31, 2014 due to several factors, including a sudden and rapid depreciation of our currency against the U.S. dollar and the unstable geopolitical environment in certain countries. In addition, the Corporation’s market capitalization has been below the carrying amount of its net assets for several consecutive quarters. These factors could suggest that the amounts of goodwill and trademarks may have become impaired since October 31, 2014. Accordingly, interim impairment testing was performed on April 30, 2015 to determine if the carrying amounts of the cash generating units (CGUs) were higher than their recoverable amounts. Following the impairment test, no impairment of goodwill or trademarks was identified by the Corporation as at April 30, 2015. For practical reasons, the Corporation has determined that the annual impairment test will be performed henceforth on April 30. The recoverable amount is determined based on value in use, using a discounted cash flow model. The Corporation prepares cash flow forecasts based on the most recently approved annual budgets and three-year plans of the relevant business. The cash flow forecasts reflect the risk associated with each asset or CGU, as well as the most recent economic indicators. 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. As at April 30, 2015, an after-tax discount rate of 10.3% was used for testing the various CGUs for impairment [10.3% as at October 31, 2014]. The perpetual growth rate used for impairment testing was 1% as at April 30, 2015 [1% as at October 31, 2014]. On April 30, 2015, a 1% increase in the after-tax discount rate used for impairment testing, assuming that all other variables had remained the same, would not have required any impairment charge. On April 30, 2015, a 1% decrease in the long-term growth rate used for impairment testing, assuming that all other variables had remained the same, would not have required any impairment charge. On April 30, 2015, a 10% decrease in the cash flows used for impairment testing, assuming that all other variables had remained the same, would not have required any impairment charge. On April 30, 2015, the Corporation performed its annual impairment test for trademarks and no impairment was identified. Management is of the opinion that no reasonable change in the key assumptions used in its annual impairment test could have produced carrying amounts for trademarks that are significantly higher than the calculated fair values. 67 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements Note 12 INVESTMENTS AND OTHER ASSETS Investment in an associate – Caribbean Investments B.V. [“CIBV”] Deferred costs, unamortized Sundry 2015 $ 97,897 355 1,165 99,417 2014 $ 83,949 484 1,833 86,266 Transat has a 35% interest in CIBV, which 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 The following table shows the condensed financial information regarding CIBV as at September 30: 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 68 2015 $ 83,949 7,045 (6,706) 13,609 97,897 2014 $ 70,041 8,094 — 5,814 83,949 2015 $ 2014 $ 56,987 375,441 49,619 103,102 279,707 97,897 116,389 20,129 7,045 53,819 333,906 50,046 97,824 239,855 83,949 104,316 23,126 8,094 2015 $ 2014 $ 184,357 68,970 59,637 32,800 9,892 355,656 180,283 69,740 57,438 23,780 7,392 338,633 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements Note 14 PROVISION FOR OVERHAUL OF LEASED AIRCRAFT Balance as at October 31, 2014 Additional provisions Utilization of provisions Balance as at October 31, 2015 Current provisions Non-current provisions Balance as at October 31, 2015 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 $ 36,312 19,702 (13,052) 42,962 17,281 25,681 42,962 $ 28,057 15,299 (6,614) (430) 36,312 10,674 25,638 36,312 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, 2015, 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 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, 2015, $66,943 had been drawn down under the facility [$59,545 as at October 31, 2014], of which $44,900 is to insure the benefits to participants under senior executives defined benefit pension agreements; such irrevocable letters of credit are held by a third-party trustee. In the event of a change of control, the irrevocable letters of credit issued to insure the benefit to the participants under the senior executives defined benefit pension agreements will be drawn down. Operating lines of credit totalling €10,000 [$14,446] [€11,500 ($16,246) in 2014] have been granted to certain French subsidiaries. These operating lines of credit are renewable annually and were undrawn as at October 31, 2015 and 2014. 69 Transat A.T. Inc. 2015 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 2015 $ 39,265 12,761 32,800 84,826 (32,800) 52,026 2014 $ 35,872 16,934 24,900 77,706 (23,780) 53,926 (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) By 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 any further action on the part of the Corporation or of the holder if [i] the Class A Share is or becomes owned or 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. 70 Transat A.T. Inc. 2015 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 any 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, 2013 Issued from treasury Exercise of options Balance as at October 31, 2014 Issued from treasury Repurchase and cancellation of shares Balance as at October 31, 2015 Number of shares 38,468,487 96,328 176,712 38,741,527 145,310 (1,296,090) 37,590,747 $ 221,706 857 2,116 224,679 973 (7,518) 218,134 On April 10, 2015, the Corporation announced that it had received the required regulatory approvals to go forward with a normal course issuer bid for a 12-month period. Pursuant to its normal course issuer bid, the Corporation is authorised to purchase for cancellation up to a maximum of 2,274,921 Class A Variable Voting Shares and Class B Voting Shares, representing approximately 10% of the public float of Class A Variable Voting Shares and Class B Voting Shares. The Corporation repurchased 1,296,090 Class B Voting Shares during the year ended October 31, 2015, for a cash consideration of $9,424. As at October 31, 2015, the number of Class A Shares and Class B Shares stood at 1,410,985 and 36,179,762, respectively [1,633,027 and 37,078,500 as at October 31, 2014]. As of November 16, 2015, the Class A Variable Voting Shares and Class B Voting Shares of the Corporation trade under a single ticker, TRZ, on the Toronto Stock Exchange. The change does not involve any amendment to the Corporation’s articles of incorporation, by-laws or share capital structure, nor to the terms and conditions or the voting and ownership restrictions attaching to the Class A variable voting shares and the Class B voting shares. 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. 71 Transat A.T. Inc. 2015 Annual Report STOCK OPTION PLAN Notes to Consolidated Financial Statements At the AGM held on March 12, 2015, the shareholders approved the implementation of a new reserve of 850,000 shares issuable in addition to the balance remaining under the stock option plan. Under this plan, the Corporation may grant up to a maximum of 891,934 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. The option exercise period and the performance criteria are determined on each grant. The options granted between January 14, 2009 and October 31, 2015 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. Starting November 1, 2015, for options granted from this date, vesting will no longer depend on meeting performance criteria. The options granted before October 31, 2013 are exercisable over a ten-year period, whereas those granted after that date are exercisable over or a seven-year period, respectively. 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 230,403 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 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. Starting November 1, 2015, for options granted from this date, vesting will no longer depend on meeting performance criteria. 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. 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 8.73 to 11.22 12.25 to 12.49 19.24 to 24.78 37.25 2015 2014 Number of options 2,654,817 236,447 — (74,184) (75,224) 2,741,856 1,807,423 Weighted average price $ 12.39 8.73 — 12.19 22.34 11.81 Number of options 2,692,544 374,374 (176,712) (206,506) (28,883) 2,654,817 Weighted average price $ 12.18 12.49 8.15 13.01 15.68 12.39 12.89 1,262,520 15.25 Outstanding options Options exercisable Number of options outstanding as at October 31, 2015 Weighted average remaining life 1,069,746 485,299 693,745 401,860 91,206 2,741,856 6.7 4.8 4.8 3.1 1.5 5.2 Weighted average price $ 6.69 10.04 12.37 20.82 37.25 11.81 Number of options exercisable as at October 31, 2015 716,349 258,080 390,337 351,451 91,206 1,807,423 Weighted average price $ 6.71 11.19 12.32 21.05 37.25 12.89 72 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements COMPENSATION EXPENSE RELATED TO STOCK OPTION PLAN During the year ended October 31, 2015, the Corporation granted 236,447 stock options [374,374 in 2014] 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 2015 1.33% 4 years 58.2% — 2014 2.72% 4 years 58.6% — $ 3.52 $ 4.53 During the year ended October 31, 2015, the Corporation recorded a compensation expense of $1,110 [$732 in 2014] for its stock option plan. PERFORMANCE SHARE UNIT PLAN Performance share units [“PSUs”] are awarded in connection with the performance share unit plan for senior executives. Under this plan, each eligible senior executive receives a portion of his or her compensation in the form of PSUs. PSUs consist of a number equal to a percentage of the participant’s basic salary, divided by the fair market value of Class B Shares as at the award date. Once vested, PSUs give the participant the right to receive an equal number of shares or a cash payment, at the Corporation’s discretion. PSUs awarded vest in three tranches of 16.67% in mid-December of each year for three years following the award, provided the performance criteria determined on each award are met. The remaining 50% of PSUs awarded vest in mid-December three years following their award, provided the plan member is still an employee of the Corporation. As at October 31, 2015, the number of PSUs awarded amounted to 176,003. For the year ended October 31, 2015, the Corporation recognized a compensation expense of $551 for its performance share unit plan. SHARE PURCHASE PLAN A share purchase plan is available to eligible employees of the Corporation and its subsidiaries. At the AGM held March 12, 2015, shareholders approved the implementation of a new reserve of 525,000 shares issuable in addition to the remaining balance under the plan. Under the plan, as at October 31, 2015, the Corporation was authorized to issue up to 497,036 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 145,310 Class B Shares [96,328 Class B Shares in 2014] for a total of $973 [$857 in 2014] under the share purchase plan. STOCK OWNERSHIP INCENTIVE AND CAPITAL ACCUMULATION PLAN Subject to participation in the share purchase plan offered to all eligible employees of the Corporation, the Corporation awards annually to each eligible officer a number of Class B Shares, the aggregate purchase price of which is equal to an amount of 30% or 60% of the maximum percentage of salary contributed, which may not exceed 5%. Shares so awarded by the Corporation will vest to the eligible employee, 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, 2015, the Corporation accounted for a compensation expense of $166 [$105 in 2014] for its stock ownership incentive and capital accumulation plan. 73 Transat A.T. Inc. 2015 Annual Report PERMANENT STOCK OWNERSHIP INCENTIVE PLAN Notes to Consolidated Financial Statements 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, 2015, the Corporation accounted for a compensation expense of $231 [$241 in 2014] 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, 2015, the number of DSUs awarded amounted to 146,641 [108,031 as at October 31, 2014]. During the year ended October 31, 2015, the Corporation recorded a compensation expense of $224 [compensation expense reversal of $276 in 2014, subsequent to the decrease in its share price] 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, 2015, the number of RSUs awarded amounted to 815,249 [844,582 as at October 31, 2014]. For the year ended October 31, 2015, the Corporation recognized a compensation expense of $1,428 [$128 in 2014] for its restricted share unit plan. 74 Transat A.T. Inc. 2015 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 2015 $ 2014 $ 42,565 22,875 38,442 38,644 116 402 38,558 39,046 1.11 1.10 0.59 0.59 For the purposes of calculating diluted earnings per share for the year ended October 31, 2015, 1,672,110 outstanding stock options [1,565,727 in 2014] were excluded from the calculation, as their exercise price exceeded the Corporation’s average market share price. Note 18 ADDITIONAL DISCLOSURE ON EXPENSES 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 2015 $ 382,399 3,303 1,661 387,363 2014 $ 367,865 2,307 732 370,904 2015 $ 37,314 12,417 1,376 (240) 50,867 2014 $ 35,001 10,711 1,230 (240) 46,702 75 Transat A.T. Inc. 2015 Annual Report Note 19 RESTRUCTURING CHARGE Notes to Consolidated Financial Statements During the year ended October 31, 2014, the Corporation developed a restructuring plan mainly aimed at reducing direct costs and operating expenses, and improving its margins. Accordingly, the Corporation reviewed its processes and reduced its headcount. Under this plan, the Corporation recorded a total restructuring charge of $6,756 for the year ended October 31, 2014. The restructuring charge consists of termination benefits totalling $5,855 payable in cash, write-offs of trademarks and client lists totalling $532 and goodwill write-offs of $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 loss on the obligation Income tax expense on comprehensive income 2015 $ 14,676 90 14,766 (4,403) 10,363 2014 $ 14,759 (1,329) 13,430 (9,672) 3,758 2015 $ 2014 $ 1,152 3,590 (342) 810 (912) 2,678 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 Adjustments for prior years Effect of tax rate changes Other 2015 2014 % 26.9 (7.0) 1.3 (3.1) — — 18.1 $ 15,421 (3,989) 730 (1,785) (21) 7 10,363 % 26.9 (7.2) 0.7 (6.5) (1.6) 0.3 12.6 $ 8,022 (2,152) 228 (1,945) (476) 81 3,758 The applicable statutory income tax rate was 26.9% for the years ended October 31, 2015 and 2014. The Corporation’s applicable statutory income tax rate is the applicable combined Canadian (federal and Québec) tax rate. 76 Transat A.T. Inc. 2015 Annual Report 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 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 2015 2014 $ $ 11,445 7,041 Consolidated statements of income 2014 $ (1,066) 2015 $ (4,404) (9,599) (1,469) 1,201 1,901 11,115 10,686 451 21,327 (7,443) (3,062) 2,433 138 3,141 9,613 1,441 17,706 (2,156) 1,593 (80) 1,763 7,946 731 (990) 4,403 2015 $ 17,706 4,403 (810) 28 21,327 947 (54) 6,656 1,381 1,839 418 (449) 9,672 2014 $ 10,952 9,672 (2,678) (240) 17,706 2015 $ 32,939 (11,612) 21,327 2014 $ 30,051 (12,345) 17,706 As at October 31, 2015, 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 85,585 [$6,840] [MXP 81,802 [$6,840] as at October 31, 2014]. 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. As of October 31st, 2015, there are no taxable temporary differences for which no deferred income tax liability were recorded. 77 Transat A.T. Inc. 2015 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(1) Transat Tours Canada inc. Transat Distribution Canada inc. Jonview Canada Inc. Travel Superstore inc. The Airline Seat Company Ltd. Transat France S.A.S. Tourgreece Tourist Enterprises S.A. Air Consultant Europe B.V. Caribbean Investments B.V. Caribbean Transportation Inc. CTI Logistics Inc. Sun Excursion Caribbean Inc. Servicios y Transportes Punta Cana S.R.L. 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 Canada Canada Canada Canada Canada Canada United Kingdom France Greece Netherlands Netherlands Barbados Barbados Barbados Dominican Republic Dominican Republic Mexico Mexico Interest (%) 2014 100.0 100.0 100.0 100.0 80.1 64.6 100.0 99.7 100.0 100.0 35.0 70.0 70.0 70.0 — 70.0 70.0 100.0 2015 100.0 — 100.0 100.0 80.1 64.6 100.0 99.7 100.0 100.0 35.0 70.0 70.0 70.0 70.0 70.0 70.0 100.0 (1) On November 1, 2014, Vacances Tours Mont-Royal merged with Transat Tours Canada Inc. 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 Outstanding balances with our associate are as follows: Trade and other payables COMPENSATION OF KEY SENIOR EXECUTIVES 2015 $ 2014 $ 18,359 13,693 2015 $ 256 2014 $ 195 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 78 2015 $ 4,562 974 1,022 2014 $ 6,237 821 757 Transat A.T. Inc. 2015 Annual Report Note 22 EMPLOYEE FUTURE BENEFITS Notes to Consolidated Financial Statements 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 $44,900 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 Financial costs Benefits paid Experience gains Actuarial loss on obligation Effect of exchange rate changes Present value of obligations, end of year Retirement benefits Other benefits Total 2015 $ 33,912 1,204 1,398 (799) (629) 241 — 35,327 2014 $ 28,973 977 1,330 (799) (273) 3,704 — 33,912 2015 $ 1,960 625 76 — — 1,267 10 3,938 2014 $ 1,967 — — — — — (7) 1,960 2015 $ 35,872 1,829 1,474 (799) (629) 1,508 10 39,265 The following table provides the components of retirement benefit expense for the years ended October 31, 2015: Current service cost Interest cost Total cost of retirement benefits Retirement benefits Other benefits Total 2015 $ 1,204 1,398 2,602 2014 $ 977 1,330 2,307 2015 $ 625 76 701 2014 $ — — — 2015 $ 1,829 1,474 3,303 The following table indicates projected payments under defined benefit pension plan arrangements as at October 31, 2015: Under one year One to five years Between five and 10 years Between 10 and 15 years Between 15 and 20 years 2014 $ 30,940 977 1,330 (799) (273) 3,704 (7) 35,872 2014 $ 977 1,330 2,307 $ 799 9,175 12,627 13,781 14,624 51,006 The weighted average duration of the defined benefit obligation related to pension arrangements was 12.8 years as at October 31, 2015. 79 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements 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 2015 % 4.00 2.75 4.00 2.75 2014 % 4.00 2.75 4.50 2.75 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, 2015 $ (12) 13 Retirement benefit obligations as at October 31, 2015 $ (1,064) 47 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 2015 $ — 35,327 35,327 2014 $ — 33,912 33,912 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, 2013 Actuarial losses Income taxes October 31, 2014 Actuarial losses Income taxes October 31, 2015 $ (5,312) (3,431) 912 (7,831) (879) 342 (8,368) 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 $9,400 for the year ended October 31, 2015 [$9,608 for the year ended October 31, 2014]. 80 Transat A.T. Inc. 2015 Annual Report Notes to Consolidated Financial Statements 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 2015 $ 161,702 425,023 88,660 675,385 2014 $ 132,380 401,206 124,053 657,639 The lease expense totalled $123,683 for the year ended October 31, 2015 [$113,884 for the year ended October 31, 2014]. OTHER COMMITMENTS 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 2015 $ 200,505 84,373 — 284,878 2014 $ 193,195 52,861 — 246,056 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 in this regard were received during the year. No provisions are made in connection with this issue, which could result in expenses of approximately $16,200, 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. However, this situation resulted in outflows of $15,100 during the year ended October 31, 2015. This amount is recognized as income taxes receivable as at October 31, 2015. 81 Transat A.T. Inc. 2015 Annual Report Note 24 GUARANTEES Notes to Consolidated Financial Statements 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. COLLATERAL SECURITY CONTRACTS 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, 2015, these guarantees totalled $1,490. Historically, the Corporation has not made any significant payments under such agreements. As at October 31, 2015, 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, 2015, $21,961 had been drawn down under the facility. For its European operations, the Corporation has guarantee facilities renewable annually amounting to €17,620 [$25,454]. As at October 31, 2015, letters of guarantee had been issued totalling €9,925 [$14,338]. 82 Transat A.T. Inc. 2015 Annual Report Note 25 SEGMENTED DISCLOSURE Notes to Consolidated Financial Statements The Corporation has determined that it conducts its activities in a single industry segment, namely holiday travel. Therefore, the consolidated 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. 2015 Revenues from third parties Operating expenses 2014 Revenues from third parties Operating expenses Canada France United Kingdom Other (1) Revenues are allocated based on the subsidiary’s country of domicile. Americas $ Europe $ Total $ 2,840,004 2,789,464 50,540 2,921,811 2,895,340 26,471 726,364 726,950 (586) 3,566,368 3,516,414 49,954 830,387 810,018 20,369 3,752,198 3,705,358 46,840 2015 $ 2,782,831 630,021 64,885 88,631 3,566,368 Revenues (1) 2014 $ 2,871,887 728,112 79,189 73,010 3,752,198 Property, plant and equipment, goodwill and other intangible assets 2014 $ 200,863 46,965 34,273 14,829 296,930 2015 $ 210,702 48,401 37,962 15,827 312,892 83 Transat A.T. Inc. 2015 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 Write-off and impairment of goodwill Gain on investments in ABCP Gain on disposal of a subsidiary and repurchase of preferred shares of a subsidiary 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 (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. . 2015 IFRS 2014 IFRS 2013 IFRS 2012 IFRS 3,566,368 3,465,547 50,867 — 49,954 3,752,198 3,652,269 46,702 6,387 46,840 3,648,158 3,527,836 39,068 5,740 75,514 3,714,219 3,693,769 40,793 — (20,343) 2,229 (7,606) 528 (2,524) — — — 57,327 10,363 (4,399) 42,565 1.11 1.10 94,000 (58,009) (12,672) 4,217 27,536 1,939 (8,107) 23,822 (1,007) 369 — — 29,824 3,758 (3,191) 22,875 0.59 0.59 2,512 (7,357) 493 (846) — — — 80,712 19,510 (3,247) 57,955 1.51 1.51 106,240 (61,100) 191 123,039 (28,289) (1,817) (2,262) 43,069 1,710 94,643 336,423 308,887 265,818 1,513,764 — 537,252 0.65 14.29 8.3% 1,375,030 — 482,946 0.65 12.47 4.9% 1,290,073 — 441,393 0.66 11.47 14.4% 2010(4) (restated) GAAP 3,654,167 3,620,314 43,814 16,543 (26,504) 3,499 (7,395) 1,278 1,654 — (8,113) — (17,427) (5,775) (3,059) (14,711) (0.39) (0.39) 90,673 (56,683) (29,470) 2,962 (6,693) (701) (370) 15,000 (7,936) (5,655) (16,950) (3,414) (3,133) (16,669) (0.44) (0.44) 8,872 (11,024) (4,361) (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%) 37,591 38,742 38,468 38,296 38,022 38,442 38,558 38,644 39,046 38,390 38,472 38,142 38,142 37,930 37,930 84 Information Head Ofﬁce Information 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 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 Transfer Agent and Registrar CST Trust Company 2001 Blvd. Robert-Bourassa, 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 10, 2016, 10:00 a.m. McGill – New Residence Hall Ballroom - level C 3625 Avenue du Parc Montreal QC H2X 3P8 n i l e m a H y m m J i : s e v i t u c e x e d n a s r o t c e r i d f o s h p a r g o t o h P s r e g n A e d u a C l i : n g s e D c h p a r G i www.transat.com www.resp.transat.com

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