Annual Report 2017 Transat A.T. Inc.
That wine-tasting tour of
Europe, that family vacation
down south, that romantic
cruise in the Caribbean…
we were there for it all.
Thirty years of memories
for thirty years of travel…
and counting.
2017 Financial Highlights
(in thousands of dollars, except per share amounts and ratios)
Transat A.T. Inc. is a leading integrated international tourism company specializing
in holiday travel. It serves some 60 destinations in 26 countries in the Americas,
Europe and the Middle East.
Cash flows related to operating activities
Revenues
2017
2016
2015
2014
2013
161,487
43,561
108,992
90,009
102,179
2017
2016
2015
2014
2013
3,005,345
2,889,646
2,897,950
2,996,106
2,969,642
Adjusted operating income1
Net income (loss) attributable to shareholders
2017
2016
2015
2014
2013
102,025
25,776
100,608
86,369
114,302
2017
2016
2015
2014
2013
134,308
(41,748)
42,565
22,875
57,955
2017
2016
Variance ($)
Variance (%)
Revenues
Operating income (loss)
Adjusted operating income1
Net income (loss)
3,005,345
2,889,646
115,699
34,720
(30,335)
102,025
25,776
65,055
76,249
138,372
(36,759)
175,131
Net income (loss) attributable to shareholders
134,308
(41,748)
176,056
Diluted earnings (loss) per share
3.63
(1.13)
4.76
Cash flows related to operating activities
161,487
43,561
117,926
Cash and cash equivalents
593,582
363,664
229,918
Total assets
Long-term debt
Debt ratio2
Stock price as of October 31 (TRZ)
1,453,216
1,277,420
175,796
—
0.60
10.66
—
0.64
6.12
—
(0.04)
4.54
204
Outstanding shares, end of year (in thousands)
37,064
36,859
1 See non-IFRS financial measures section.
2 Debt ratio: total liabilities divided by total assets.
4.0
214.5
295.8
476.4
421.7
421.2
270.7
63.2
13.8
—
(6.3)
74.2
0.6
Senior
Management
Jean-Marc
Eustache
Chairman
of the Board,
President and Chief
Executive Officer,
Transat A.T. Inc.
Jean-François
Lemay
President,
Air Transat A.T. Inc.
Daniel
Godbout
Senior
Vice- President,
Transport and
Yield Management,
Transat A.T. Inc.
Bruno
Leclaire
Chief Information
and Digital Officer,
Transat A.T. Inc.
Annick
Guérard
Chief Operating
Officer,
Transat A.T. Inc.
President,
Transat Tours
Canada Inc.
Bernard
Bussières
Vice-President,
General Counsel
and Corporate
Secretary,
Transat A.T. Inc.
Christophe
Hennebelle
Vice-President,
Human Resources
and Corporate
Affairs,
Transat A.T. Inc.
Denis
Pétrin
Vice-President,
Finance and
Administration,
and Chief Financial
Officer,
Transat A.T. Inc.
It’s our employees
who make us soar
to new heights.
Giuliana
Flight attendant
with Air Transat since 2010
Board
of Directors
Jean-Marc
Eustache
Chairman
of the Board,
President and Chief
Executive Officer,
Transat A.T. Inc.
1
Raymond
Bachand
Strategic Advisor,
Norton Rose
Fulbright Canada
S.E.N.C.R.L., s.r.l./LLP
3
Lucie
Chabot
Vice-President and
Chief Financial Officer,
SAIL Outdoors Inc.
3
Jean-Pierre
Delisle
Corporate Director
Executor of Estates
Susan
Kudzman
Executive Vice-President
and Chief Risk and
Corporate Affairs Officer,
Laurentian Bank of Canada
2 4
Jean-Yves
Leblanc
Lead Director
Corporate Director
1 2 3
Louis-Marie
Beaulieu
Chairman
of the Board,
President and Chief
Executive Officer,
Groupe Desgagnés Inc.
2
Lina
De Cesare
Corporate Director
4
W. Brian
Edwards
Corporate Director
1 2 4
Jacques
Simoneau
President and Chief
Executive Officer,
Gestion Univalor, s.e.c.
1 3 4
Louise
St-Pierre
Corporate Director
Philippe
Sureau
Corporate Director
Committees
1 Executive
Committee
2 Human Resources
and Compensation Committee 3 Audit
Committee 4 Risk Management and Corporate
Governance Committee
Chairman of the Board,
President and
Chief Executive Officer
Jean-Marc Eustache
December 13, 2017
Message to Shareholders
A Pivotal Year
Without a doubt, 2017 will be seen as a
key year in our history. It not only marked
the 30th anniversary of Transat’s founding
as a public company but also featured
several events that concluded our 2015–
2017 strategic plan and that pave the way
for our new 2018–2022 five-year plan.
That plan, called Building Sustainable
Profitability, lays the foundation for a
Transat that will be even more financially
sound and ready to prosper and develop
over the next 30 years.
During 2017, we completed the strategic
refocusing of our operations, with the
sale in late November of Jonview Canada
to Japanese group H.I.S. for $44 million.
Jonview, the leading incoming tour
operator in Canada, has benefited in
recent years from the very favourable
market for Canadian tourism, posting
record income several years in a row,
which helped grow its value considerably.
That transaction came at the end
of a year that began with the sale of
our France- and Greece-based tour
operating business units for $93 million,
and that also saw us divest ourselves of
our minority interest in Ocean Hotels.
Having completed these transactions this
past year, we are now ready to embark
on a new year and new strategic cycle
on two positive notes: we are a leaner
company, focused on optimizing our
primary business line—leisure travel; and
we have gained the means to establish
our new hotel-management venture.
We plan to continue optimizing our
primary segment along the path laid out
in recent years, as illustrated by
a number of initiatives that have seen
progress these last few months.
First, we announced the upcoming
implementation of a new fleet
configuration. This will lead to improved
leveraging of our flexible double fleet
model, whereby we operate mainly
narrow-body aircraft in winter and wide-
body aircraft during the summer season.
We will be leasing 10 Airbus A321neo LRs,
the first of which will be delivered
in early 2019; they will gradually replace
our A310s.
In addition, in the next few years, we will
replace our seasonal Boeing 737s with
A321ceo’s, notably via an agreement
with Thomas Cook Group. Lastly, our
permanent narrow-body aircraft will also
be phased out and replaced with planes
from the A320 family, allowing us to reap
the benefits of the Airbus shared-cockpit
philosophy.
Eventually, Air Transat will have an
all-Airbus fleet, comprising two or three
aircraft types and enabling our pilots
to switch from one to another much
more easily—what Airbus calls Mixed
Fleet Flying. The advantages are many:
lower training costs, simplified flight
operations, greater fuel economy and,
for our passengers, a more standardized
customer experience (with, for example,
Club Class eventually available on all of
our routes).
Furthermore, we took several important
steps in terms of improving our revenue
management and network planning,
especially long-term, and we expect to
continue in the same vein. The benefits
Message aux actionnaires
A Pivotal Year
are beginning to show and are expected
to strengthen in the coming years.
Our cost-reduction and margin-
improvement initiatives, which allowed
us to exceed our $100 million target
during the most recent strategic plan
period (thanks, in part, to strong growth
in ancillary revenue), will, of course,
continue.
On this list of achievements, I am not
forgetting our customers, who are and
will remain our primary focus. This past
year, we rolled out a new customer
relationship management (CRM) system
in our call centres. Among other things,
it allows our agents to recognize a caller
and access their travel history with us. As
a result, our interactions with customers
are both more efficient and friendlier.
We have also continued to grow our
online sales—revenues realized directly
via our websites went up by 28% in
Canada this year. We achieved this
without hurting our agency sales, as
evidenced by the fact that the sales of
Transat products in our agencies have
increased slightly year over year, on a
comparable basis. And, of course, we are
focusing more and more on mobile—as
a sales channel and also as a means of
interacting with the customer at every
stage of the travel experience: before,
during and after their trip.
In short, these are all efforts aimed at
improving our existing core business,
which we will be strengthening and
developing in the years to come, and
which has already led to improved
results this year compared to last. After a
challenging first quarter, we posted winter
results on par with those of the previous
year, with an adjusted operating loss of
$36 million in spite of the weak Canadian
dollar, which put pressure on our costs.
In the summer, we returned to the record
levels recorded in 2015 and earlier years,
posting an adjusted operating income
of $138 million, well above that of 2016.
Overall, we are ending the year with an
adjusted operating income of $102 million
and an adjusted net income of $29
million, while the operating income and
the net income total $35 million and $138
million, respectively.
The Transat of tomorrow, moreover,
will include our new hotel division, the
foundations of which we are laying now.
As I mentioned earlier, during 2017 we
sold our interest in Ocean Hotels, for
which we had partnered with H10 for
10 years. It was a fruitful venture, not
only financially speaking (after acquiring
our 35% stake in 2007 for $66.1 million,
we sold it for $185.6 million), but also in
terms of knowledge gained of the all-
inclusive resort industry in the Caribbean
and Mexico.
After discussions with our partner
and after considering the possibility
of acquiring a 100% interest in Ocean,
we concluded that the best approach
for Transat would be to create our own
division, one hotel at a time, to our own
specifications. We will buy and renovate
some hotels; others will be built; still
others will merely be managed by our
team. We are beginning this project by
recruiting a president, and we expect
to begin operating our first hotel no
later than 2019. Our goal is to have
5,000 rooms either owned or under
management by 2024.
Message aux actionnaires
A Pivotal Year
This past year also saw the appointment
of Annick Guérard as Chief Operating
Officer. In her new duties, Annick will
hone the skills she has gained over the
past 15 years with Transat, acquiring the
experience necessary to succeed me
when the time comes. This is the final
step in reshaping Transat into a company
ready to face a new decade, during
which it will, no doubt, become even
stronger and more profitable than in the
past, especially in winter.
The year 2017 has also been one of
recognition on many fronts. For the sixth
year in a row, Air Transat was named Best
North American Leisure Airline at the
Skytrax World Airline Awards. Transat was
again honoured as Best Tour Operator in
Canada and Air Transat as Best Leisure/
Charter Airline at the Agents’ Choice
Awards presented by Baxter Travel Media.
Our company’s outstanding track
record of corporate responsibility also
continues: for the sixth consecutive year,
Air Transat was ranked Most Climate-
Efficient Carrier in North America by
the Atmosfair Airline Index, and since
2014 Transat has been on the Corporate
Knights list of Canada’s 50 Best
Corporate Citizens.
In conclusion, I wish to thank our
employees—who worked particularly hard
this year to make all of these changes
possible—the members of our Board of
Directors and especially our customers,
without whom we would not exist.
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, 2017, compared with the year ended October 31, 2016, and should be read in conjunction with the
audited consolidated financial statements and notes thereto. The information contained herein is dated as of December 13, 2017. 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, 2017 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
REVISITING OUR SEPTEMBER 6, 2017 OUTLOOK ....................................................................................................... 14
BUSINESS ACQUISITIONS AND DISPOSALS ................................................................................................................. 14
DISCONTINUED OPERATIONS ........................................................................................................................................ 15
CONSOLIDATED OPERATIONS ....................................................................................................................................... 16
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES ................................................................................... 22
OTHER ............................................................................................................................................................................... 27
ACCOUNTING ................................................................................................................................................................... 27
RISKS AND UNCERTAINTIES .......................................................................................................................................... 33
CONTROLS AND PROCEDURES ..................................................................................................................................... 39
OUTLOOK .......................................................................................................................................................................... 40
MANAGEMENT’S REPORT ............................................................................................................................................... 41
INDEPENDENT AUDITORS’ REPORT ............................................................................................................................. 42
5
Transat A.T. Inc.
2017 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 2018 objectives and continue building on
its long-term strategies.
The outlook whereby the Corporation expects revenues and total travellers to increase compared with 2017.
The outlook whereby the Corporation expects to generate positive cash flows from operating activities in 2018.
The outlook whereby additions to property, plant and equipment and intangible assets could amount to approximately
$50.0 million.
The outlook whereby the Corporation will be able to meet its obligations with cash on hand, cash flows from operations and
drawdowns under existing credit facilities.
The outlook whereby for the first six-month period of 2018, the Corporation expects to achieve better results than in the
2017 winter season.
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, selling prices and hotel and other 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.
2017 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 consolidated 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.
7
Transat A.T. Inc.
2017 Annual Report
Management’s Discussion and Analysis
The non-IFRS measures used by the Corporation are as follows:
Adjusted operating
income (loss)
Adjusted pre-tax
income (loss)
Adjusted net income
(loss)
Operating income (loss) before depreciation and amortization expense, restructuring charge, lump-sum
payments related to collective agreements and other significant unusual items, and including premiums for
fuel-related derivatives and other derivatives matured during the period. The Corporation uses this measure to
assess the operational performance of its activities before the aforementioned items to ensure better
comparability of financial results.
Income (loss) before income tax expense before change in fair value of fuel-related derivatives and other
derivatives, gain (loss) on disposal of an investment, restructuring charge, lump-sum payments related to
collective agreements, asset impairment and other significant unusual items, and including premiums for fuel-
related derivatives and other derivatives matured during the period. The Corporation uses this measure to
assess the financial performance of its activities before the aforementioned items to ensure better
comparability of financial results.
Net income (loss) attributable to shareholders before net income (loss) from discontinued operations, change
in fair value of fuel-related derivatives and other derivatives, gain (loss) on disposal of an investment,
restructuring charge, lump-sum payments related to collective agreements, asset impairment and other
significant unusual items, and including premiums for fuel-related derivatives and other derivatives matured
during the period, net of related taxes. The Corporation uses this measure to assess the financial performance
of its activities before the aforementioned items to ensure better comparability of financial results. Adjusted net
income (loss) is also used in calculating the variable compensation of employees and senior executives.
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
Total debt
Aircraft rental expense for the past four quarters multiplied by 5.
Long-term debt plus the amount for adjusted operating leases. Management uses total debt to assess
the Corporation’s debt level, future cash needs and financial leverage ratio. Management believes this
measure is useful in assessing the Corporation’s capacity to meet its current and future financial obligations.
Total net debt
Total debt (described above) less cash and cash equivalents. Total net debt is used to assess the cash
position relative to the Corporation’s debt level. Management believes this measure is useful in assessing
the Corporation’s capacity to meet its current and future financial obligations.
8
Transat A.T. Inc.
2017 Annual Report
Management’s Discussion and Analysis
The following tables reconcile the non-IFRS financial measures to the most comparable IFRS financial measures:
2017
$
34,720
—
2,925
68,470
(4,090)
102,025
151,804
—
2,925
(9,187)
(86,616)
(15,478)
—
(4,090)
39,358
134,308
—
—
2,925
(9,187)
(86,616)
(15,478)
—
(4,090)
7,237
29,099
2016
$
(30,335)
7,263
6,562
50,038
2015
$
54,791
—
—
45,817
(7,752)
25,776
—
100,608
(97,374)
7,263
6,562
(6,901)
843
—
79,708
(7,752)
(17,651)
(41,748)
(49,772)
7,263
6,562
(6,901)
843
—
79,708
(7,752)
(3,745)
(15,542)
61,732
—
—
1,391
—
—
—
—
63,123
42,565
2,355
—
—
1,391
—
—
—
—
(397)
45,914
29,099
(15,542)
45,914
37,040
0.79
36,899
(0.42)
38,558
1.19
(in thousands of Canadian dollars, except per share amounts)
Operating income (loss)
Lump-sum payments related to collective agreements
Restructuring charge
Depreciation and amortization
Premiums related to fuel-related derivatives and other derivatives
matured during the year
Adjusted operating income
Income (loss) before income tax expense
Lump-sum payments related to collective agreements
Restructuring charge
Change in fair value of fuel-related derivatives and other derivatives
Loss (gain) on disposal of an investment
Foreign exchange gain realized on disposal of an investment
Asset impairment
Premiums related to fuel-related derivatives and other derivatives
matured during the year
Adjusted pre-tax income (loss)
Net income (loss) attributable to shareholders
Net loss (income) from discontinued operations
Lump-sum payments related to collective agreements
Restructuring charge
Change in fair value of fuel-related derivatives and other derivatives
Loss (gain) on disposal of an investment
Foreign exchange gain realized on disposal of an investment
Asset impairment
Premiums related to fuel-related derivatives and other derivatives
matured during the year
Tax impact
Adjusted net income (loss)
Adjusted net income (loss)
Adjusted weighted average number of outstanding shares used
in computing diluted earnings (loss) per share
Adjusted net income (loss) per share
9
Transat A.T. Inc.
2017 Annual Report
Management’s Discussion and Analysis
Aircraft rent
Multiple
Adjusted operating leases
Long-term debt
Adjusted operating leases
Total debt
Total debt
Cash and cash equivalents
Total net debt
FINANCIAL HIGHLIGHTS
(in thousands of Canadian dollars, except per share amounts)
Consolidated Statements of Income (Loss)
Revenues
Operating income (loss)
Net income (loss) attributable to shareholders
Basic earnings (loss) per share
Diluted earnings (loss) per share
Adjusted operating income(1)
Adjusted net income (loss)(1)
Adjusted net income (loss) per share(1)
Consolidated Statements of Cash Flows
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents
Consolidated Statements of Financial Position
Cash and cash equivalents
Cash and cash equivalents in trust or otherwise reserved
(current and non-current)
Total assets
Debt (current and non-current)
Total debt(1)
Total net debt(1)
1 SEE NON-IFRS FINANCIAL MEASURES
October 31, October 31, October 31,
2015
$
2016
$
2017
$
132,139
5
660,695
—
660,695
660,695
135,813
5
679,065
—
679,065
679,065
98,859
5
494,295
—
494,295
494,295
660,695
(593,582)
67,113
679,065
(363,664)
315,401
494,295
(336,423)
157,872
2017
$
2016
$
2015
$
3,005,345
34,720
134,308
3.63
3.63
102,025
29,099
0.79
2,889,646
(30,335)
(41,748)
(1.13)
(1.13)
25,776
(15,542)
(0.42)
2,897,950
54,791
42,565
1.11
1.10
100,608
45,914
1.19
161,487
97,901
(3,596)
450
256,242
43,561
5,093
(9,823)
(12,132)
26,699
108,992
(53,854)
(12,672)
3,402
45,868
As at
As at
As at
October 31, October 31, October 31,
2015
$
2016
$
2017
$
Change
2017
%
4.0
214.5
421.7
421.2
421.2
295.8
287.2
288.1
270.7
1,822.3
63.4
103.7
859.7
2016
%
(0.3)
(155.4)
(198.1)
(201.8)
(202.7)
(74.4)
(133.9)
(135.3)
(60.0)
109.5
22.5
(456.6)
(41.8)
Change
2017
%
Change
2016
%
593,582
363,664
336,423
63.2
8.1
309,064
902,646
1,453,216
—
660,695
338,581
702,245
1,277,420
—
679,065
412,099
748,522
1,513,764
—
494,295
67,113
315,401
157,872
(8.7)
28.5
13.8
—
(2.7)
(78.7)
(17.8)
(6.2)
(15.6)
—
37.4
99.8
10
Transat A.T. Inc.
2017 Annual Report
OVERVIEW
THE HOLIDAY TRAVEL INDUSTRY
Management’s Discussion and Analysis
The holiday travel industry consists of tour operators, traditional and online travel agencies, destination service providers, 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 suppliers and consumers. Hotel operators sell accommodation, on an all-inclusive basis or
not, either directly, through travel agencies or through tour operators. Air carriers sell seats through travel agencies or directly to tour
operators that use them in building packages, or directly to consumers.
CORE BUSINESS, VISION AND STRATEGY
CORE BUSINESS
Transat is an integrated international tour operator. We operate solely in the holiday travel industry and market our services 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 purchased 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 strategy. Transat is also a retail distributor, both online and through travel agencies, some of which it owns. Transat relies on
its subsidiary Air Transat for a significant portion of its needs, but also deals with other air carriers as needed. Transat offers destination
services to Canada, Mexico, the Dominican Republic and Jamaica. Transat holds an interest in a hotel business which owns and operates a
property in Mexico.
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
As part of its 2018–2022 strategic plan, Transat set a two-pronged objective of building sustainable profitability: improve and
strengthen its current business model, and pursue hotel development.
Hotel development will be achieved by creating a business unit to operate all-inclusive hotels in the Caribbean and Mexico, some
wholly owned and some not. This hotel chain will strengthen Transat’s profitability, particularly during winter, while enabling it to deliver a
controlled end-to-end experience to its Canadian customers.
Furthermore, Transat will strengthen its current model by maintaining its focus on satisfying the expectations of leisure customers with
user-friendly service at affordable prices. This will be made possible by greater synergy between the Corporation’s various divisions in
Canada, continued efforts to increase efficiency and reduce costs, continuous improvement in the Corporation's digital footprint and a special
focus on the development of certain functions, such as revenue management or air network planning.
Lastly, corporate responsibility, whether in terms of the environment, customers, employees or partners, will remain a key part of
Transat’s strategy.
11
Transat A.T. Inc.
2017 Annual Report
Management’s Discussion and Analysis
For fiscal 2018, Transat has set the following objectives:
1. Launch a wholly-owned Transat hotel chain: set up the team, develop the concept and select the brand, and initiate the
first acquisitions of hotels and/or land.
2.
3.
Improve efficiency, in particular by improving revenue management, pricing and aircraft utilization and by pursuing its cost
reduction policy.
Improve distribution by continuing to grow direct sales, refining channel management and strengthening our presence in
mobile technologies.
4. Enhance customer proximity, particularly through centralized case management and satisfaction metrics.
5. Strengthen our commitment to corporate responsibility, particularly by obtaining Travelife certification and refining our
employee satisfaction metrics.
REVIEW OF OBJECTIVES AND ACHIEVEMENTS FOR 2017
The main objectives and achievements for fiscal 2017 were as follows:
Increase the competitiveness of our distribution, notably by reinforcing our product offering and network, continuing to increase
our controlled sales and client intimacy and optimizing our revenue management.
We continued to grow our controlled sales, with a 28% increase in the value of online sales in Canada and 18% worldwide. We
strengthened our websites with the introduction of a new booking experience, complementing last year’s significantly improved shopping
experience.
We have also begun to improve our revenue management through increasingly automated decision-making and skills building by
hiring external talent.
Continue to improve Air Transat’s operational efficiency and plan for the optimization and renewal of our fleet.
Major milestones were achieved this year in the optimization and future configuration of our fleet. First, the Corporation entered into
lease agreements for ten Airbus A321neo LRs, to be commissioned gradually starting in spring 2019. Second, an agreement was entered
into with Thomas Cook, under which it will lend Airbus A321ceos to Transat in the winter in exchange for one or two A330s.
Eventually, the fleet will be Airbus-only and include only two or three different types of aircraft: A330s and A320 family aircraft, most of
which will be A321s. This configuration will simplify the implementation of Transat’s unique flexible dual-fleet operating model, allowing its
pilots to easily switch from one aircraft to another, with an immediate cost benefit, particularly in terms of training and maintenance.
Customers will also enjoy the real benefit of a seamless offering, including Club seats on all Air Transat routes and aircraft. In addition,
replacing A310s with A321neo LRs will have many advantages, from fuel consumption (which is environmentally and cost effective) to
maintenance, to better suited seat capacity on certain routes, to the possibility for more frequent flights.
In terms of operational efficiency, controllable punctuality was improved to a higher level than in 2015, after a decrease of one to two
points in 2016 (based on reported delays), while irregular operations costs (IRROPS) were reduced by more than a third compared with last
year, despite growth of over 5% in the number of departures.
Increase our presence in hotels and acquire more hotel management competencies.
As part of our negotiations with H10 for the eventual acquisition of Ocean Hotels, we had the opportunity in 2017 to take stock of our
10-year presence in this hotel business and gain deeper knowledge of the market, financing channels and industry acquisition techniques.
It also allowed us to lay the foundations to build the team that will lead our project. Lastly, the disposals in 2016 and 2017 (Transat France,
Tourgreece, Ocean and Jonview) provided the cash required for our planned investment.
12
Transat A.T. Inc.
2017 Annual Report
Management’s Discussion and Analysis
Pursue our cost reduction and unit margin improvement efforts.
The strategic plan’s three-year target of $100 million in margin improvements and cost reductions was achieved, with an additional
$30 million compared with last year, due in part to $19 million in additional cost reductions and $11 million in revenue growth, primarily from
ancillary revenues.
Continue working on employee engagement.
The Corporation’s 30th anniversary year was a wonderful opportunity to build on employees’ sense of belonging, which is very strong
at Transat. A series of events held throughout the year, in addition to our regular recognition, health and wellness and volunteer programs,
have helped us engage our employees with our corporate spirit and history. We also deployed a pilot project to assess team wellness and
engagement at the closest level, in order to improve our responsiveness to their needs and feedback.
This year, we also rolled out a new employer brand platform, modelled after our global brand platform, which will allow us to both
enhance our attractiveness to potential hires and instill pride in our current employees.
KEY PERFORMANCE DRIVERS
The following key performance drivers are essential to the successful implementation of our strategy and the achievement of our
objectives.
ADJUSTED OPERATING INCOME
Obtain an adjusted operating income margin higher than 3% of revenues.
MARKET SHARE
REVENUE GROWTH
Consolidate or increase market share in all regions in Canada and in Europe in
our traditional markets and establish our first all-inclusive hotel banner in the
Caribbean and Mexico.
Grow revenues at the pace of the market, i.e. around 3% per year in our
traditional markets, and operate 5,000 rooms within seven years in the hotel
business.
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
$593.6 million as at October 31, 2017. Our continued focus on expense reductions and
operating income growth should maintain these balances at healthy levels.
A revolving credit facility agreement totalling $50.0 million, among others, is also available for
operating purposes.
13
Transat A.T. Inc.
2017 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.
Our employees work together as a team and are committed to ensuring overall customer
satisfaction and contributing to improving the Corporation’s effectiveness. In addition, we
believe that the Corporation has strong management.
Supplier relationships
We have exclusive access to certain hotels at sun destinations as well as over 30 years of
privileged relationships with many hotels at these destinations and in Europe.
Transat has the resources it needs to meet its 2018 objectives and continue building on its long-term strategies.
REVISITING OUR SEPTEMBER 6, 2017 OUTLOOK
What we said
What we did
Fuel/foreign exchange
effect – transatlantic
market
Fuel/foreign exchange
effect – sun
destination market
Adjusted operating
income1
1.3% decrease
fourth quarter of 2017
in operating expenses
for
the
1.5% decrease
fourth quarter of 2017
in operating expenses
for
the
For the fourth quarter of 2017, the favourable
fuel/foreign exchange effect resulted in a $8.1 million
decrease in operating expenses (1.4%). Operating
expenses were up 9.2% owing primarily to an
8.5% increase in capacity in the transatlantic market,
our main market during that period.
For the fourth quarter of 2017, adjusted operating
income1 similar to 2015, which was $70.8 million for
continuing operations.
For the fourth quarter of 2017, adjusted operating
income1 amounted to $78.5 million, slightly higher
than in 2015, mainly due to improved prices and load
factors in the transatlantic market.
1 SEE NON-IFRS FINANCIAL MEASURES
BUSINESS ACQUISITIONS AND DISPOSALS
On December 21, 2016, following the exercise of a put option by the minority shareholder in the subsidiary Jonview Canada Inc.
[“Jonview”], the Corporation completed the purchase of 19.93% of the shares of its subsidiary Jonview, which has an incoming tour operator
business in Canada, thereby bringing its interest in the subsidiary to 100%. The cash consideration totalled $5.0 million, being the fair value
of the put option at the time of the transaction. In addition, the non-controlling interest was derecognized with no impact on the consolidated
statements of income (loss).
On November 30, 2017, the Corporation completed the sale of its wholly owned subsidiary Jonview to Japanese multinational
H.I.S. Co. Ltd., which specializes in travel distribution, following approval of the transaction by the Competition Bureau of Canada and
compliance with other customary conditions. The expected selling price of $44.0 million, received in cash on that date, may be adjusted
subsequent to the final closing of accounts and completion of their audit within 90 days following the closing of the sale due to a working
capital adjustment.
14
Transat A.T. Inc.
2017 Annual Report
Management’s Discussion and Analysis
As at October 31, 2017, the assets and liabilities of Jonview have been reported as held for sale in the consolidated statements of
financial position. Since Jonview’s operations do not represent a principal and separate line of business for the Corporation, its results are
included in the Corporation’s net income from continuing operations reported in the consolidated statements of income (loss) and
comprehensive income (loss) for the year ended October 31, 2017. The transaction had no other impact on the financial statements of the
Corporation for the year ended October 31, 2017. For the year ended October 31, 2017, Jonview recorded a net income of $6.2 million, with
a net loss of $3.8 million for the first six-month period and a net income of $10.0 million for the second six-month period.
On October 4, 2017, the Corporation completed the sale of its 35% minority interest in Ocean Hotels to H10 Hotels, ahead of the
anticipated November 2, 2017 closing date. As announced on July 19, 2017, the sale closed for US$150.5 million [$187.5 million], received in
cash on October 4, 2017. The disposed interest had a carrying value of $97.3 million as at October 4, 2017. The Corporation recorded a gain
on disposal of an investment of $86.6 million, net of transaction costs of $1.7 million, as well as a foreign exchange gain of $15.5 million
realized on the reclassification of the cumulative exchange differences related to our investment. The selling price remains subject to certain
adjustments, estimated to US$1,5 million [$1,9 million] as of October 31, 2017, which would reduce the selling price to US$149.0 million
[$185.6 million]. Transat remains committed to becoming a full-fledged hotel operator and sold its minority interest in Ocean Hotels to
accelerate the development of its own sun destination hotel chain.
On April 3, 2017, the Corporation invested in a hotel on Puerto Vallarta’s Pacific coast, which operates under the name Rancho
Banderas All Suite Resort, by acquiring a 50% interest in Desarrollo Transimar S.A. de C.V. [“Desarrollo”], its Mexican owner and operator,
for a consideration of US$10.0 million [$13.4 million], of which US$9.5 million [$12.8 million] was paid in cash and US$0.5 million
[$0.6 million] was included in trade and other payables as at October 31, 2017. This amount is payable subject to certain conditions. This
interest in a joint venture is accounted for using the equity method.
DISCONTINUED OPERATIONS
On October 31, 2016, Transat completed the sale of its tour operating businesses in France (Transat France) and Greece
(Tourgreece) for an amount of €63.4 million ($93.3 million) to TUI AG, a multinational tourism company. On January 27, 2017, TUI AG
confirmed that the purchase price will not be subject to any working capital adjustments after the final closing and audit of accounts.
For the year ended October 31, 2016, the tour operating businesses in France and Greece were identified as discontinued operations.
For the year ended October 31, 2016, a gain on disposal of $49.7 million, net of transaction costs of $7.1 million, was also recognized in the
consolidated statement of income (loss) and the proceeds from disposal amounting to $93.3 million, net of cash disposed of, are shown in
the consolidated statement of cash flows. The gain on disposal and the net consideration received are detailed as follows:
Selling price
Transaction costs
Cash and cash equivalents disposed of
Net assets disposed of (excluding cash and cash equivalents)
Consolidated statements
of income
$
93,254
(7,073)
(22,978)
(13,511)
49,692
Consolidated statements
of cash flows
$
93,254
(2,228)
(22,978)
—
68,048
The disposal of Transat France and Tourgreece had no impact on Transat’s transatlantic program or Air Transat’s operations.
15
Transat A.T. Inc.
2017 Annual Report
CONSOLIDATED OPERATIONS
(in thousands of dollars)
Continuing operations
Revenues
Operating expenses
Costs of providing tourism services
Salaries and employee benefits
Aircraft fuel
Aircraft maintenance
Aircraft rent
Airport and navigation fees
Commissions
Other airline costs
Other
Share of net income of an associate and a joint venture
Depreciation and amortization
Special items
Operating income (loss)
Financing costs
Financing income
Change in fair value of fuel-related derivatives and other derivatives
Loss (gain) on disposal of an investment
Foreign exchange gain realized on disposal of an investment
Foreign exchange loss (gain) on non-current monetary items
Asset impairment
Income (loss) before income tax expense
Income taxes (recovery)
Current
Deferred
Net income (loss) from continuing operations
Discontinued operations
Net income (loss) from discontinued operations
Net income (loss) for the year
Net income (loss) attributable to:
Shareholders
Non-controlling interests
Earnings (loss) per share from continuing operations
Basic
Diluted
Earnings (loss) per share
Basic
Diluted
Management’s Discussion and Analysis
2017
$
2016
$
2015
$
3,005,345
2,889,646
2,897,950
Change
%
4.0
1,268,832
371,863
358,558
203,669
132,139
134,665
88,635
225,512
126,500
(11,143)
68,470
2,925
2,970,625
34,720
2,134
(8,363)
(9,187)
(86,616)
(15,478)
426
—
151,804
18,684
(5,252)
13,432
138,372
1,309,430
346,899
329,784
178,317
135,813
128,695
92,018
221,540
119,964
(6,342)
50,038
13,825
2,919,981
(30,335)
1,669
(6,996)
(6,901)
843
—
(1,284)
79,708
(97,374)
(17,188)
6,345
(10,843)
(86,531)
1,260,250
340,280
440,804
146,006
98,859
117,862
95,170
191,383
113,773
(7,045)
45,817
—
2,843,159
54,791
1,775
(7,576)
1,391
—
—
(2,531)
—
61,732
14,041
(1,628)
12,413
49,319
(3.1)
7.2
8.7
14.2
(2.7)
4.6
(3.7)
1.8
5.4
75.7
36.8
(78.8)
1.7
214.5
27.9
19.5
33.1
10,374.7
N/A
(133.2)
(100.0)
255.9
208.7
(182.8)
223.9
259.9
%
(0.3)
3.9
1.9
(25.2)
22.1
37.4
9.2
(3.3)
15.8
5.4
(10.0)
9.2
N/A
2.7
(155.4)
(6.0)
(7.7)
(596.1)
N/A
N/A
(49.3)
N/A
(257.7)
(222.4)
489.7
(187.4)
(275.5)
—
138,372
49,772
(36,759)
(2,355)
46,964
(100.0)
476.4
2,213.5
(178.3)
134,308
4,064
138,372
(41,748)
4,989
(36,759)
42,565
4,399
46,964
3.63
3.63
3.63
3.63
(2.48)
(2.48)
(1.13)
(1.13)
1.17
1.16
1.11
1.10
421.7
(18.5)
476.4
246.4
246.4
421.2
421.2
(198.1)
13.4
(178.3)
(312.0)
(313.8)
(201.8)
(202.7)
16
Transat A.T. Inc.
2017 Annual Report
REVENUES
Management’s Discussion and Analysis
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, 2017, our revenues were up $115.7 million (4.0%). This increase resulted mainly from our summer
season, during which we recorded a higher volume in the transatlantic market, our main market during that season, following a 7.9%
increase in capacity, as well as higher average selling prices across our markets. During the summer, total travellers increased by 14.3%
across all our markets compared with 2016. The revenue increase during the year was partially offset by lower revenues in our winter
season, owing primarily to a higher proportion of flight-only versus holiday package sales compared with 2016. During the winter, we
recorded a 1.4% decrease in total travellers to sun destinations, our main market during that season, which resulted from our decision to
reduce our product offering in that market by 2.3%. Overall, during the year, total travellers were up 8.2%.
For 2018, we expect revenues and total travellers to increase compared with 2017.
OPERATING EXPENSES
Our total operating expenses increased $50.6 million (1.7%) during the year compared with 2016. The increase resulted primarily from
our summer season which saw a rise in total travellers, driven by our decision to increase our product offering in the transatlantic market
by 7.9%. This increase was partially offset by lower operating expenses in our winter season, during which we sold a higher proportion of
flight-only versus holiday packages compared with 2016, despite an unfavourable exchange rate effect that resulted in higher costs.
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 $40.6 million (3.1%) decrease was mainly due to a higher proportion of flight-only
versus holiday package sales compared with 2016, the addition of two Airbus A330s and one Boeing 737 to our fleet compared with 2016,
which resulted in a decrease in the Corporation’s flight purchases from air carriers other than Air Transat, and our decision to reduce our sun
destination product offering by 2.3% during the winter.
SALARIES AND EMPLOYEE BENEFITS
Salaries and employee benefits rose $25.0 million (7.2%) to $371.9 million for the year ended October 31, 2017. The increase
resulted from annual salary reviews, pilot and mechanic hires following the addition of Airbus A330s and Boeing 737s to our aircraft fleet and
the rise in variable compensation compared with 2016.
AIRCRAFT FUEL
Aircraft fuel expense for the year was up $28.8 million (8.7%), owing primarily to an increase in the number of flights compared with
2016. The higher fuel expense was also attributable to a rise in fuel price indices in financial markets.
AIRCRAFT MAINTENANCE
Aircraft maintenance costs consist of the expenses incurred by Air Transat, such as for engine and airframe maintenance on leased
aircraft. Compared with 2016, these expenses rose $25.4 million (14.2%) during the year. This increase was driven primarily by the growth of
our fleet compared with 2016 and, to a lesser extent, upward adjustments to certain planned maintenance costs.
17
Transat A.T. Inc.
2017 Annual Report
AIRCRAFT RENT
Management’s Discussion and Analysis
During winter 2017, Air Transat’s permanent fleet consisted of fourteen Airbus A330s, nine Airbus A310s and seven Boeing 737-800s.
Of this number, two Airbus A330s and three Boeing 737-800s were commissioned in summer 2016. For its flexible fleet, the Corporation had
seasonal lease agreements for thirteen Boeing 737s compared with fifteen during winter 2016. During summer 2017, Air Transat’s
permanent fleet consisted of sixteen Airbus A330s, nine Airbus A310s and seven Boeing 737-800s. Of those aircraft, two Airbus A330s were
commissioned in summer 2017 and two Airbus A310s were retired from the fleet at the end of the season.
The $3.7 million (2.7%) decrease in aircraft rent during the year resulted from the renegotiation of lease agreements for Airbus A330s,
partially offset by the addition of two Airbus A330s compared with 2016.
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
$6.0 million (4.6%) compared with 2016. This increase resulted from a higher number of flights compared with 2016.
COMMISSIONS
Commissions include the fees paid by tour operators to travel agencies for serving as intermediaries between tour operators and
consumers. Commissions amounted to $88.6 million, down $3.4 million (3.7%) compared with fiscal 2016. As a percentage of revenues,
commissions decreased and accounted for 2.9% of our revenues for the year compared with 3.2% in 2016. This decrease was attributable to
the lower revenue base used in calculating commissions and higher direct sales.
OTHER AIR COSTS
Other air costs consist mainly of handling, crew and catering costs. Other air costs were up $4.0 million (1.8%) for the year, compared
with 2016. The increase was attributable to a higher number of flights compared with 2016, partly offset by lower crew costs.
OTHER
Other expenses were up $6.4 million (5.3%) during the year, compared with 2016. The increase was driven by higher business
volume compared with 2016.
SHARE OF NET INCOME OF AN ASSOCIATE AND A JOINT VENTURE
Our share of net income of an associate and a joint venture represents our share of the net income of Caribbean Investments B.V.
[“CIBV”], the sale of which closed on October 4, 2017, and Desarrollo, a hotel joint venture acquired in 2017. Our share of net income of an
associate and a joint venture for the current fiscal year totalled $11.1 million compared with $6.3 million for 2016. The increase in our share
resulted from CIBV’s higher operating profitability, coupled with an unfavourable foreign exchange effect in 2016.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense includes depreciation and amortization as well as impairment losses relating to property, plant
and equipment, intangible assets and deferred lease inducements. Depreciation and amortization expense was up $18.4 million in
fiscal 2017. This increase was due to recent maintenance work on our Airbus A310s and improvements to our aircraft fleet.
SPECIAL ITEMS
Special items include the restructuring charge, lump-sum payments related to collective agreements and other significant unusual
items. During the year ended October 31, 2107, a restructuring charge of $2.4 million was recognized for termination benefits. In 2016,
lump-sum payments in the amount of $7.3 million were recognized in connection with the renewal of the collective agreement with cabin
crews, in addition to a restructuring charge of $6.6 million, comprising mainly termination benefits related to the closure of call centres and a
tour operator in the Netherlands.
18
Transat A.T. Inc.
2017 Annual Report
OPERATING RESULTS
Management’s Discussion and Analysis
In light of the foregoing, we recorded $34.7 million (1.2%) in operating income for the year compared with an operating loss of
$30.3 million (1.0%) for the previous year. Operating results by season are summarized as follows:
(in thousands of dollars)
Winter season
Revenues
Operating expenses
Operating loss
Operating loss (%)
Summer season
Revenues
Operating expenses
Operating income
Operating income (%)
2017
$
2016
$
2015
$
1,573,642
1,639,374
(65,732)
(4.2)
1,613,944
1,668,187
(54,243)
(3.4)
1,559,102
1,596,641
(37,539)
(2.4)
1,431,703
1,331,251
100,452
7.0
1,275,702
1,251,794
23,908
1.9
1,338,848
1,246,518
92,330
6.9
Change
2017
%
(2.5)
(1.7)
(21.2)
(24.3)
12.2
6.3
320.2
274.4
2016
%
3.5
4.5
(44.5)
(39.6)
(4.7)
0.4
(74.1)
(72.8)
We recognized an operating loss for the winter season amounting to $65.7 million (4.2%) compared with $54.2 million (3.4%) in 2016.
The deterioration in our operating loss was due to a rise in air costs and to the unfavourable foreign exchange effect which, combined with an
increase in fuel prices, resulted in a $39.3 million increase in operating expenses for the six-month period, that the higher average selling
prices for sun destination packages could not offset.
During the summer, operating income totalled $100.5 million (7.0%) compared with $23.9 million (1.9%) for the previous year. The
improvement in our operating income was driven primarily by higher average selling prices, capacity and load factors across our markets.
The improvement in operating income was accentuated by the strengthening of the dollar against the U.S. dollar, which, when combined with
higher fuel costs, reduced operating expenses by $10.9 million across our markets.
During the winter season, we reported an adjusted operating loss of $35.6 million (2.3%) compared with $36.7 million (2.3%) in 2016.
For the summer season, we recorded adjusted net income of $137.6 million (9.6%) compared with $62.5 million (4.9%) in 2016. Overall, for
the fiscal year, we reported adjusted operating income of $102.0 million (3.4%) compared with $25.8 million (0.9%) in 2016.
OTHER EXPENSES AND REVENUES
FINANCING COSTS
Financing costs comprise interest on long-term debt and other interest, standby fees, and financial expenses. Financing costs were up
$0.5 million in 2017, compared with 2016.
FINANCING INCOME
Financing income increased by $1.4 million during the year compared with 2016, as a result of rising interest rates and higher cash
and cash equivalents compared with 2016.
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 was up $9.1 million, compared with a $6.9 million
increase in fair value in 2016. The increase was primarily driven by a favourable change in the dollar against the U.S. dollar in relation to
outstanding foreign exchange derivatives.
19
Transat A.T. Inc.
2017 Annual Report
LOSS (GAIN) ON DISPOSAL OF AN INVESTMENT
Management’s Discussion and Analysis
On October 4, 2017, the Corporation completed the sale of its 35% minority interest in Ocean Hotels to H10 Hotels for a total cash
consideration of US$150.5 million [$187.5 million], paid in cash on that date. The Corporation recognized a gain on disposal of an investment
of $86.6 million.
On April 1, 2016, the Corporation closed the sale of its Travel Superstore subsidiary for a total cash consideration of $0.3 million and
recorded a $0.8 million loss on disposal of a subsidiary.
FOREIGN EXCHANGE GAIN ON DISPOSAL OF AN INVESTMENT
The $15.5 million foreign exchange gain on disposal of an investment was realized on the reclassification of the cumulative exchange
differences related to the sale of our 35% minority interest in Ocean Hotels to H10 Hotels.
FOREIGN EXCHANGE LOSS (GAIN) ON NON-CURRENT MONETARY ITEMS
The foreign exchange loss on non-current monetary items, amounting to $0.4 million for the year compared with a $1.3 million gain
in 2016, resulted mainly from an unfavourable foreign exchange effect on our foreign currency deposits.
ASSET IMPAIRMENT
During the fiscal year ended October 31, 2016, the Corporation recognized a $79.7 million asset impairment charge consisting of
$15.8 million in impairment of trademarks and $63.9 million in impairment of goodwill.
The accounting policies adopted by the Corporation require that intangible assets with indefinite lives be tested for impairment
annually on April 30. Accordingly, the Corporation performed an impairment test on April 30, 2016 to determine if the carrying amounts of the
cash-generating units (“CGUs”), for the purposes of goodwill and trademarks, were higher than their recoverable amounts. After performing
the test, the Corporation recognized a $15.8 million asset impairment charge in respect of its trademarks. The impairment resulted from the
implementation of an integrated distribution and brand strategy, including the introduction of a new reservation platform which, for European
travellers, favours the purchasing of seats directly from our Air Transat subsidiary instead of through our European subsidiaries, and the
greater use of the Transat brand while decreasing the use of certain trademarks held by the Corporation.
As at October 31, 2016, important changes in the environment in which the Corporation operates, such as significant capacity
increases in markets served by the Corporation and their effect on selling prices and load factors, volatile exchange rates and fuel prices and
the deterioration in results of the 2016 summer season led management to review its assumptions for future cash flows and to perform a new
impairment test. Following this impairment test, the Corporation recognized a goodwill impairment charge of $63.9 million, representing the
balance of goodwill of its sole CGU.
INCOME TAXES
For the year ended October 31, 2017, income tax expense amounted to $13.4 million compared with an income tax recovery of
$10.8 million for the previous fiscal year. Excluding the share of net income of an associate, the effective tax rate stood at 9.5% for the fiscal
year ended October 31, 2017 and 10.5% for the preceding fiscal year. The change in tax rates between fiscal 2017 and 2016 resulted mainly
from differences between countries in the statutory tax rates applied to taxable income or losses.
NET INCOME (LOSS) FROM CONTINUING OPERATIONS
In light of the items discussed in the Consolidated operations section, net income for the year ended October 31, 2017 amounted to
$138.4 million, compared with a net loss from continuing operations of $86.5 million in 2016.
For the year ended October 31, 2017, adjusted net income amounted to $29.1 million ($0.79 per share) compared with an adjusted
net loss of $15.5 million ($0.42 per share) in 2016.
20
Transat A.T. Inc.
2017 Annual Report
Management’s Discussion and Analysis
NET INCOME (LOSS) FROM DISCONTINUED OPERATIONS
As mentioned in the Discontinued operations section, for the year ended October 31, 2016, the net income of our subsidiaries Transat
France and Tourgreece, which is generated from sales made to clients in Europe and Canada, was reported as net income (loss) from
discontinued operations.
For the year ended October 31, 2016, net income from discontinued operations amounted to $49.8 million.
NET INCOME (LOSS) ATTRIBUTABLE TO SHAREHOLDERS
Net income attributable to shareholders amounted to $134.3 million or $3.63 per share, basic and diluted, compared with a net loss
attributable to shareholders of $41.8 million or $1.13 per share (basic and diluted) for the previous fiscal year. The weighted average number
of outstanding shares used to compute basic per share amounts was 36,995,000 for fiscal 2017 and 36,899,000 for fiscal 2016 (37,040,000
and 36,899,000, respectively, for diluted per share amounts).
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. Compared with the corresponding quarters of the previous year, quarterly revenues were lower in the winter
season, yet higher in the summer season. For winter season, following our decision to reduce our product offering in the sun destination
market, total travellers decreased and average selling prices increased. In the transatlantic market, we increased our product offering while
average selling prices were down. For the summer season, total travellers and average selling prices were up across our markets compared
with the previous year.
In terms of operating results, increases in average selling prices for sun destination packages in winter combined with cost reduction
and margin improvement initiatives were not sufficient to offset the foreign exchange effect on our costs. For the summer season, the
improvement in our operating income was driven by an increase in total travellers, combined with higher average selling prices and load
factors across our markets. As a result, the following quarterly financial information may vary significantly from quarter to quarter.
Q1-2016
$
(61,155)
(1.64)
(1.64)
725,723
32,275
(40,542)
(59,803)
Selected unaudited quarterly financial information
(in thousands of dollars, except per
share data)
Revenues
Aircraft rent
Operating income (loss)
Net income (loss)
Net income (loss) attributable to
shareholders
Basic earnings (loss) per share
Diluted earnings (loss) per share
Net income (loss) from continuing
operations attributable to
shareholders
Basic earnings (loss) per share
from continuing operations
Diluted earnings (loss) per share
from continuing operations
Adjusted operating income (loss)(1)
Adjusted net income (loss)(1)
Adjusted net income (loss)
per share(1)
1 SEE NON-IFRS FINANCIAL MEASURES
(1.44)
(31,683)
(53,394)
(30,380)
(1.44)
(0.82)
Q2-2016
$
888,221
38,749
(13,701)
(23,817)
(24,952)
(0.68)
(0.68)
Q3-2016
$
663,591
31,946
(2,990)
10,548
9,439
0.26
0.26
Q4-2016
$
612,111
32,843
26,898
36,313
34,920
0.95
0.95
Q1-2017
$
689,332
36,103
(50,671)
(31,054)
(32,073)
(0.87)
(0.87)
Q2-2017
$
884,310
37,361
(15,061)
(6,155)
(8,354)
(0.23)
(0.23)
Q3-2017
$
733,152
32,390
40,952
27,168
26,588
0.72
0.72
Q4-2017
$
698,551
26,285
59,500
148,413
148,147
4.00
3.97
(25,333)
7,704
(20,497)
(32,073)
(8,354)
26,588
148,147
(0.69)
0.21
(0.56)
(0.87)
(0.23)
0.72
4.00
(0.69)
(5,002)
(11,868)
0.21
15,964
2,523
(0.56)
46,497
24,183
(0.87)
(37,079)
(36,039)
(0.23)
1,508
(8,100)
0.72
59,055
26,857
3.97
78,541
46,381
(0.32)
0.07
0.66
(0.98)
(0.22)
0.73
1.24
21
Transat A.T. Inc.
2017 Annual Report
FOURTH-QUARTER HIGHLIGHTS
Management’s Discussion and Analysis
For the fourth quarter, the Corporation generated $698.6 million in revenues, up $86.4 million (14.1%), from $612.1 million for the
corresponding period of 2016. This increase was mainly due to an 8.7% increase in total travellers in the transatlantic market, our main
market for that period, while average selling prices were up 4.0%. In this market, the Corporation increased capacity by 8.5% compared with
2016, while overall capacity was up nearly 5%. In the sun destination market, our capacity was down 3.8% compared with 2016 due to
hurricanes Irma and Maria, which resulted in the repatriation of passengers particularly in Cuba and the Dominican Republic and the
cancellation of certain flights. As a result, total passengers were down 2.7% in that market, while average selling prices rose 7.2%. Our
operations generated operating income of $59.5 million, including a restructuring charge of $1.6 million, compared with operating income
from continuing operations of $26.9 million in 2016, which reflected a restructuring charge of $5.9 million. The improvement in operating
income was driven primarily by higher average selling prices across our markets, as well as by higher capacity and load factors in the
transatlantic market.
For the fourth quarter of 2016, net income from discontinued operations from tour operator businesses in France and Greece
amounted to $55.4 million, including a $49.7 million gain on disposal of subsidiaries Transat France and Tourgreece.
Fourth-quarter net income amounted to $148.4 million, compared with $35.9 million in 2016. Net income attributable to shareholders
stood at $148.1 million ($4.00 per share, basic and $3.97 per share, diluted), compared with $34.9 million ($0.95 per share, basic and
diluted) in 2016.
Fourth-quarter adjusted net income amounted to $46.4 million ($1.24 per share) compared with $24.2 million ($0.66 per share)
in 2016.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As at October 31, 2017, cash and cash equivalents totalled $593.6 million, compared with $363.7 million as at October 31, 2016.
Cash and cash equivalents in trust or otherwise reserved amounted to $309.1 million as at the end of fiscal 2017, compared with
$338.6 million as at the end of fiscal 2016. The Corporation’s statement of financial position reflected $386.6 million in working capital, for a
ratio of 1.51, compared with $192.5 million and a ratio of 1.28 as at October 31, 2016.
Total assets increased by $175.8 million (13.8%) from $1,277.4 million as at October 31, 2016 to $1,453.2 million as at
October 31, 2017. This increase was mainly attributable to higher cash and cash equivalents in trust or otherwise reserved as a result of the
sale of our 35% minority interest in Ocean Hotels and positive cash flows generated from our operations. Equity increased $113.5 million
from $464.4 million as at October 31, 2016 to $577.9 million as at October 31, 2017. This increase resulted primarily from our net income of
$138.4 million, partially offset by the reversal of $15.5 million in cumulative exchange differences related to our 35% minority interest in
Ocean Hotels following the sale of our interest and the $6.8 million foreign exchange loss on translation of the financial statements of our
foreign subsidiaries.
22
Transat A.T. Inc.
2017 Annual Report
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 and cash equivalents related to
continuing operations
Net cash flows related to discontinued operations
OPERATING ACTIVITIES
Management’s Discussion and Analysis
2017
$
161,487
97,901
(3,596)
450
256,242
—
2016
$
43,561
5,093
(9,823)
(12,132)
26,699
542
2015
$
108,992
(53,854)
(12,672)
3,402
45,868
(18,332)
Change
2017
%
270.7
1,822.3
63.4
103.7
859.7
(100.0)
2016
%
(60.0)
109.5
22.5
(456.6)
(41.8)
103.0
Operating activities generated $161.5 million in cash flows, compared with $43.6 million in 2016. This favourable difference was
attributable to increases of $64.1 million in the net change in non-cash working capital balances related to operations, $43.2 million in our
profitability, and $9.2 million in the net change in provision for overhaul of leased aircraft.
We expect to continue to generate positive cash flows from our operating activities in 2018.
INVESTING ACTIVITIES
Cash flows generated by investing activities totalled $97.9 million for the year, up $92.8 million compared with 2016. During the year,
following the sale of our 35% minority interest in Ocean Hotels to H10 Hotels, we received proceeds of $187.5 million. We also invested
$15.3 million to acquire 50% of the shares of Desarrollo and paid $5.0 million to acquire all of the shares of our subsidiary Jonview Canada
Inc. In 2017, our additions to property, plant and equipment and intangible assets totalled $69.5 million and consisted primarily of aircraft
improvements resulting from the growth in our aircraft fleet and computer hardware and software. In 2016, the proceeds from the disposal of
subsidiaries, net of cash disposed of, amounted to $68.0 million.
In 2018, additions to property, plant and equipment and intangible assets could amount to approximately $50.0 million.
FINANCING ACTIVITIES
Cash flows used in financing activities totalled $3.6 million, compared with $9.8 million in 2016. The decrease in cash flows used
compared with 2016 resulted primarily from $7.1 million in share repurchases in 2016, compared with no share repurchases in 2017.
CASH FLOWS RELATED TO DISCONTINUED OPERATIONS
In 2016, discontinued operations generated $0.5 million in cash flows, primarily due to $4.8 million in cash flows generated by
operations, partially offset by $4.3 million in cash flows used in investing activities.
23
Transat A.T. Inc.
2017 Annual Report
CONSOLIDATED FINANCIAL POSITION
Management’s Discussion and Analysis
October 31, October 31,
2016
$
2017
$
Difference
$
Main reasons for significant differences
Assets
Cash and cash equivalents
Cash and cash equivalents in trust or otherwise
reserved
Trade and other receivables
Income taxes receivable
Inventories
Prepaid expenses
Deposits
Assets held for sale
Deferred tax assets
Property, plant and equipment
Intangible assets
Derivative financial instruments
Investments
593,582
309,064
363,664
338,581
229,918
(29,517)
121,618
105,003
16,615
17,418
12,790
64,245
52,129
47,472
16,286
134,672
49,604
18,058
15,888
39,858
12,354
58,657
42,044
—
15,055
134,959
50,327
18,517
97,668
(22,440)
436
5,588
10,085
47,472
1,231
(287)
(723)
(459)
(81,780)
Other assets
390
733
(343)
Liabilities
Trade and other payables
245,013
247,795
(2,782)
Provision for overhaul of leased aircraft
Income taxes payable
Derivative financial instruments
47,917
8,102
8,278
40,861
976
21,358
7,056
7,126
(13,080)
See the Cash flows section
Decrease in funds received from clients to be held in trust
or otherwise reserved
Increase in receivables from lessors due to aircraft
maintenance
Receipt of recoverable balances
No significant difference
Increase in prepaid amounts to hotel operators
Increase in deposits related to aircraft and hotel operators
Signing of an agreement for the disposal of Jonview
Increase in non-capital losses carried forward
No significant difference
Amortization for the year, offset by acquisitions
No significant difference
Sale of our interest in Ocean Hotels, partially offset by the
acquisition of an investment in a hotel business
No significant difference
Reclassification of Jonview’s liabilities as held for sale,
partially offset by higher salaries payable due to the cut-off
Additions to aircraft and impact of maintenance schedule
Taxable income of subsidiaries
Maturity of foreign exchange derivatives and favourable
change in the dollar against the U.S. currency relating to
outstanding forward contracts
33,109
24,852
8,802
(2,771)
Signing of an agreement for the disposal of Jonview
Increases in reservations and selling prices
Increase in deferred aircraft lease inducements
Increase in non-capital losses carried forward
1,194
(32)
132,317
2,321
Shares issued from treasury and options exercised
Share-based payment expense, net of options exercised
and PSUs vested
Net income for the year
Net gain on financial instruments designated as cash flow
hedges
Sale of our interest in Ocean Hotels and foreign exchange
loss on translation of financial statements of foreign
subsidiaries
Liabilities related to assets held for sale
Customer deposits and deferred revenues
Other liabilities
Deferred tax liabilities
Equity
Share capital
Share-based payment reserve
Retained earnings
Unrealized gain on cash flow hedges
33,109
433,897
96,813
2,217
215,444
17,817
351,138
4,532
—
409,045
88,011
4,988
214,250
17,849
218,821
2,211
Cumulative exchange differences
(11,061)
11,255
(22,316)
24
Transat A.T. Inc.
2017 Annual Report
FINANCING
Management’s Discussion and Analysis
As at December 13, 2017, the Corporation had several types of financing, consisting primarily of a revolving term credit facility and
lines of credit for issuing letters of credit.
The Corporation has a $50 million revolving credit facility agreement for operating purposes. Under the agreement, which expires in
2020, 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, 2017, all the financial ratios and criteria were met and the credit facility was undrawn.
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. As at October 31, 2017 and October 31, 2016, no obligations were reported by the Corporation in the statements of
financial position.
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 18 and 27 to the audited consolidated financial statements)
Operating leases (see note 26 to the audited consolidated financial statements)
Purchase obligations (see note 26 to the audited consolidated financial statements)
Off-balance sheet arrangements that can be estimated, excluding agreements with suppliers and other obligations, amounted to
approximately $1,745.2 million as at October 31, 2017 ($710.3 million as at October 31, 2016) 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
2017
$
2016
$
27,137
701
17,723
721
1,717,383
1,745,221
94,640
1,839,861
691,841
710,285
109,845
820,130
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.
25
Transat A.T. Inc.
2017 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, 2017, $54.8 million had been drawn down
under the facility, of which $50.1 million was to secure obligations under senior executive defined benefit pension agreements; this
irrevocable letter of credit is held by a third party trustee. In the event of a change of control, the irrevocable letter of credit issued to secure
obligations under senior executive defined benefit pension agreements will be drawn down.
In addition, the Corporation has a $35.0 million guarantee facility renewable annually in February. Under this agreement,
the Corporation may issue collateral security contracts with a maximum three-year term. This facility allows the Corporation, among other
things, to issue collateral security contracts to some suppliers to whom letters of credit were previously issued and for which the Corporation
had to pledge cash for the total amount of the outstanding letters of credit. As at October 31, 2017, $27.1 million was drawn down under this
credit facility for issuing letters of credit to some of our service providers.
For its U.K. operations, the Corporation has a bank line of credit for issuing letters of credit secured by deposits of £8.2 million
[$14.0 million], which has been fully drawn down.
As at October 31, 2017, off-balance sheet arrangements, excluding agreements with suppliers and other obligations, were
$1,034.9 million higher than as at October 31, 2016. This increase resulted primarily from the agreements entered into during the year to
lease ten Airbus A321neo LRs, to be gradually integrated into our fleet starting in spring 2019, as our A310s are retired, and the agreements
entered into for four Airbus A330s and renegotiations of agreements for Airbus A330s already in our fleet. The increase was partially offset
by the repayments made and by the strengthening of the dollar against the U.S. dollar.
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
2018
$
2019
$
2020
$
2021
$
2023
and beyond
$
2022
$
Total
$
—
139,804
25,489
95,598
260,891
—
130,839
21,278
2,496
154,613
—
155,482
18,350
2,486
176,318
—
161,541
15,924
2,480
179,945
—
147,389
11,053
2,523
160,965
—
835,665
54,569
—
1,570,720
146,663
29,821
920,055
135,404
1,852,787
DEBT LEVELS
The Corporation did not report any debt on its statement of financial position.
The Corporation’s total debt fell $18.4 million to $660.7 million compared with 2016, owing primarily to the renegotiation of lease
agreements for Airbus A330s.
Total net debt fell $248.3 million to $67.1 million as at October 31, 2017 from $315.4 million as at October 31, 2016. The decrease in
total net debt resulted primarily from higher cash and cash equivalent balances at year-end than as at October 31, 2016.
26
Transat A.T. Inc.
2017 Annual Report
OUTSTANDING SHARES
Management’s Discussion and Analysis
As at October 31, 2017, 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 8, 2017, there were 37,086,283 total voting shares outstanding.
Class A Variable Voting Shares and Class B Voting Shares of the Corporation are traded on the Toronto Stock Exchange under a
single symbol: “TRZ.”
STOCK OPTIONS
As at December 8, 2017, there were a total of 2,241,328 stock options outstanding, 1,909,981 of which were exercisable.
OTHER
FLEET
As of December 13, 2017, Air Transat’s fleet consisted of seventeen Airbus A330s (332, 345 or 375 seats), two of which were
commissioned in the summer of 2017 and two will be commissioned in the winter of 2018, seven Airbus A310s (250 seats), following the
retirement of two aircraft at the end of the 2017 summer season, and seven Boeing 737-800s (189 seats).
During winter 2017, the Corporation also benefited from seasonal lease agreements for ten Boeing 737-800s (189 seats) and
three Boeing 737-700s (149 seats). Under current agreements, fourteen Boeing 737s will be added to the fleet for the 2018 winter season.
During the year ended October 31, 2017, the Corporation entered into agreements to lease ten Airbus A321neo LRs, to be
commissioned gradually starting in spring 2019.
ACCOUNTING
CRITICAL ACCOUNTING ESTIMATES
The preparation of consolidated financial statements requires management to make estimates and judgments about the future. We
periodically review these estimates, which are based on historical experience, changes in the business environment and other factors,
including expectations of future events, that management considers reasonable under the circumstances. Our estimates involve judgments
we make based on the information available to us. However, accounting estimates could result in outcomes that require a material
adjustment to the carrying amount of the asset or liability affected in future periods.
The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have a
significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fiscal year are described
below. The Corporation based its assumptions and estimates on parameters available when the consolidated financial statements were
prepared. However, existing circumstances and assumptions about future developments may change due to market events or to
circumstances beyond the Corporation’s control. Such changes are reflected in the assumptions when they occur.
This discussion addresses only those estimates that we consider important based on the degree of uncertainty and the likelihood of a
material impact if we had used different estimates. There are many other areas in which we use estimates about uncertain matters.
DEPRECIATION AND AMORTIZATION AND IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT, AND INTANGIBLE ASSETS
GOODWILL
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.
27
Transat A.T. Inc.
2017 Annual Report
Management’s Discussion and Analysis
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 the Risks
and uncertainties section).
As at October 31, 2016, important changes in the environment in which the Corporation operates, such as significant capacity
increases in markets served by the Corporation and their effect on selling prices and load factors, volatile exchange rates and fuel prices and
the deterioration in results of the 2016 summer season have led management to review the assumptions for future cash flows and to perform
a new impairment test. Following this impairment test, the Corporation recognized a goodwill impairment charge of $63.9 million which
corresponds to the balance of goodwill of its sole CGU as at October 31, 2016.
INTANGIBLE ASSETS
The Corporation performed an impairment test as at April 30, 2017 to determine whether the carrying amount of trademarks was
higher than their recoverable amount.
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. Cash flow forecasts
reflect the risk associated with each asset, as well as the most recent economic indicators. Cash flow forecasts beyond three years are
extrapolated based on nil growth rates. The cash flow forecasts used also reflect the effects of implementing the Corporation’s integrated
distribution and brand strategy aiming to further expand the Transat brand, therefore decreasing the use of certain trademarks held by
the Corporation.
As at April 30, 2017, after-tax discount rates used for impairment testing for trademarks ranged from 10.0% to 18.0% [between 10.3%
and 18.0% as at April 30, 2016].
On April 30, 2017, 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 resulted in any impairment charge.
On April 30, 2017, a 10% decrease in the cash flows used for the impairment testing, assuming that all other variables had remained
the same, would not have resulted in any impairment charge.
As at October 31, 2017, there was no indication that could lead us to believe that the conclusions of the test might have changed
since April 30, 2017.
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.
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Management’s Discussion and Analysis
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. 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, 2017 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.
NON-CONTROLLING INTERESTS
Non-controlling interests in respect of which the shareholders may require the Corporation to buy back their shares are reclassified as
liabilities at their estimated redemption value, deeming exercise of this option. In the absence of a predetermined calculation formula, the
estimated redemption value is established using fair value. The fair value calculation is based on a discounted cash flow model. The cash
flows are derived from the budget and financial forecasts for the next five years and do not include restructuring activities that the Corporation
is not yet committed to or significant future investments that will enhance the subsidiary’s performance. The fair value is most sensitive to the
discount rate used for the discounted cash flow model as well as the expected future cash inflows and the growth rate used for extrapolation
purposes. Generally speaking, the main assumptions used to calculate this provision would have to be adversely changed by 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.
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Management’s Discussion and Analysis
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, 2017
$
(3)
13
Retirement benefit
obligations as at
October 31, 2017
$
(1,223)
65
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 ended October 31, 2015. 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 resulted in outflows of $15.1 million
during the year ended October 31, 2016. As there was no change in circumstances during fiscal 2017, this amount is recognized as income
taxes receivable as at October 31, 2017.
FINANCIAL INSTRUMENTS
In the normal course of business, the Corporation is exposed to credit and counterparty risk, liquidity risk and market risk arising from
changes in certain foreign exchange rates, changes in fuel prices and changes in interest rates. The Corporation manages these risk
exposures on an ongoing basis. In order to limit the effects of changes in foreign exchange rates, fuel prices and interest rates on its
revenues, expenses and cash flows, the Corporation can avail itself of various derivative financial instruments. The Corporation’s
management is responsible for determining the acceptable level of risk and only uses derivative financial instruments to manage existing or
anticipated risks, commitments or obligations based on its past experience.
FOREIGN EXCHANGE RISK MANAGEMENT
The Corporation is exposed 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 61%
of the Corporation’s costs are incurred in a currency other than the measurement currency of the reporting unit incurring the costs, whereas
approximately 16% 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 foreign exchange derivatives as hedging instruments and regularly demonstrates that these
instruments are sufficiently effective to continue using hedge accounting. These foreign exchange derivatives 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.
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MANAGEMENT OF FUEL PRICE RISK
Management’s Discussion and Analysis
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 $39.6 million as at
October 31, 2017. Trade accounts receivable consist of a large number of customers, including travel agencies. 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, 2017, approximately
4% of accounts receivable were over 90 days past due, whereas approximately 84% were current, that is, under 30 days. Historically,
the Corporation has not incurred any significant losses in respect of its trade accounts receivable.
Pursuant to certain agreements entered into with its service providers consisting primarily of hotel operators, the Corporation pays
deposits to capitalize on special benefits, including pricing, exclusive access and room allotments. As at October 31, 2017, these deposits
totalled $24.1 million 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 $28.0 million as at October 31, 2017 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, 2017, the cash security deposits with lessors
that had been claimed totalled $46.5 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, 2017 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, 2017.
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LIQUIDITY RISK
Management’s Discussion and Analysis
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 fiscal year, the Corporation recorded $24.8 million in person-nights purchased at hotels belonging to CIBV, an
associate of the Corporation until October 4, 2017, compared with $32.3 million in 2016. As at October 31, 2017, following the sale of our
interest in CIBV, no balance payable to CIBV was included in trade and other payables, compared with $0.9 million as at October 31, 2016.
CHANGE IN ACCOUNTING POLICY
IFRS, SHARE-BASED PAYMENT
In June 2016, the International Accounting Standards Board [“IASB”] issued amendments included in IFRS 2, Share-based Payment.
The amendments are intended to provide changes that relate, in particular, to the accounting for share-based payment transactions that
include net settlement terms to satisfy withholding tax obligations. The amendments to IFRS 2 will be effective for the Corporation’s fiscal
year beginning on November 1, 2018, with earlier adoption permitted. The Corporation elected to early adopt the amendments to IFRS 2 for
the year ended October 31, 2017. Early adoption of the amendments to IFRS 2 had no significant impact.
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.
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Management’s Discussion and Analysis
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. The IFRS 9 transition rules include an exemption allowing companies to continue to
apply current hedge accounting under IAS 39 until the final hedge model is effective.
Application of IFRS 9 will be effective from the Corporation’s fiscal year beginning on November 1, 2018, with earlier adoption
permitted. Other than the potential impact of adopting optional hedge accounting in accordance with IFRS 9, the Corporation does not expect
the adoption of IFRS 9 to have a material impact on its financial statements. The Corporation continues to assess the impact of the adoption
of IFRS 9 on its financial statements, including the hedge accounting transition decision.
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 and expects to complete its analysis in the coming
quarters.
IFRS 16, LEASES
In January 2016, the IASB issued IFRS 16, Leases, which supersedes IAS 17, Leases. Leasing is an important and flexible source of
financing for many companies. However, under the current IAS 17 standard, it is difficult to obtain a clear picture of the assets and liabilities
related to the leasing agreements of an entity. IFRS 16 introduces a single lessee accounting model under which most of lease-related
assets and liabilities are recognized in the statement of financial position. For the lessor, substantially all the current accounting requirements
remain unchanged. Certain exemptions will apply to short-term and low-value leases.
Considering that the Corporation is committed under numerous operating leases in accordance with IAS 17, the Corporation expects
that the adoption of IFRS 16 will have a significant impact on its financial statements. The Corporation will be required to recognize an asset
related to the right of use and a liability at the present value of future lease payments. Amortization of the right-of-use asset and interest
expense on the lease obligation will replace rent expense related to operating leases.
The application of IFRS 16 is mandatory and will be effective for the Corporation’s fiscal year beginning on November 1, 2019, with
earlier adoption permitted if the new IFRS 15 standard on revenue has also been applied. The Corporation continues to assess the impact of
the adoption of this new standard on its financial statements and has not determined which transition method it will use.
RISKS AND UNCERTAINTIES
This section provides an overview of the general risks as well as specific risks to which Transat and its subsidiaries are exposed, and
which are likely to have a significant impact on the Corporation’s financial position, operating results and activities. It does not purport to
cover all contingencies or to describe all factors that are likely to affect the Corporation or its activities. Moreover, the risks and uncertainties
described may or may not materialize, and may develop differently or have consequences other than those contemplated in this MD&A.
Additional risks and uncertainties not currently known to the Corporation or that are currently considered immaterial could also materialize in
the future and adversely affect the Corporation.
To improve its risk management capacities, the Corporation has set up a framework for identifying, assessing and managing the
different risks applicable to its industry and to companies in general. This framework is based on the following principles:
• Promote a culture of risk awareness at the head office and in subsidiaries; 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.
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Management’s Discussion and Analysis
In addition, the Corporation has adopted an on-going risk management process that includes a quarterly assessment of risk
exposures for the Corporation and its subsidiaries, under the oversight of the Audit Committee (financial risks), the Human Resources and
Compensation Committee (human resource risks) and the Risk Management and Corporate Governance Committee (strategic and
operational risks).
All business risks are also presented to the members of the Board of Directors using consistent mapping and language. Business
risks are thus classified to facilitate an overall understanding of risks to which the Corporation is exposed. The different types of business
risks are discussed below:
ECONOMIC AND GENERAL RISKS
The holiday travel industry is sensitive to global, national, regional and local economic conditions. Economic factors such as a
significant downturn in the economy, a recession or a decline in consumer purchasing power or the employment rate in North America,
Europe or key international markets could have a negative impact on our business and operating results by affecting demand for our
products and services. Although there are signs of economic recovery in certain tourist areas served by the Corporation, financial markets
could slide back into negative economic growth.
Seasonal planning of flight and person-night capacity is a risk in the tourism industry. For the Corporation, it entails forecasting
traveller demand in advance and anticipating trends in future preferred destinations. Poor planning for those needs could unfavourably
impact our business, financial situation and operating results.
Our operating results could also be adversely affected by factors beyond Transat’s control, including the following: extreme weather
conditions, climate-related or geological disasters, war, political instability, terrorism whether actual or apprehended, epidemics or disease
outbreaks, consumer preferences and spending patterns, consumer perceptions of destination-based service and airline safety, demographic
trends, disruptions to air traffic control systems, and costs of safety, security and environmental measures. Furthermore, our revenues are
sensitive to events affecting domestic and international air travel as well as the level of car rentals and hotel and cruise reservations.
COMPETITION RISKS
Transat operates in an industry in which competition has been intense for several years. Air carriers and tour operators have
expanded their presence in markets long 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 intense 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. Widespread adoption of the Internet now makes it easier for travellers to access
information on travel products and services directly from suppliers, thus bypassing not only tour operators such as Transat, but also retail
travel agents through whom we generate a portion of our revenues. Since our available seat capacity and person-nights are also influenced
by market forces, our business model is called into question in some respects. The Corporation’s inability to rapidly meet those expectations
in a proactive manner could adversely impact its competitive positioning while reducing profitability of its products.
Further, given that we rely to some extent on retail travel agencies for access to travellers and revenues, any consumer shift away
from travel agencies and toward direct purchases from travel suppliers could impact the Corporation.
These competitive pressures could adversely impact our revenues and margins since we would likely have to match competitors’
prices. The Corporation’s performance in all of the countries in which it operates will depend on its continued ability to offer quality products
at competitive prices.
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2017 Annual Report
REPUTATION RISK
Management’s Discussion and Analysis
The ability to maintain favourable relationships with its existing customers and attract new customers greatly depends on Transat’s
service offering and its reputation. While the Corporation has already implemented sound governance practices, including a code of ethics,
and developed certain mechanisms over the years to prevent its reputation from being adversely affected, there can be no assurance that
Transat will continue to enjoy a good reputation or that events beyond its control will not tarnish its reputation. The loss or tarnishing of its
reputation could have a material unfavourable effect on the Corporation’s operations, prospects, financial position and operating results.
FINANCIAL RISKS
The travel industry in general and our operations in particular are seasonal. As a result, our quarterly operating results are subject to
fluctuations. In our view, comparisons of our operating results between quarters or between six-month periods are not necessarily meaningful
and should not be relied on as indicators of future performance. Furthermore, due to the economic and general factors described herein, our
operating results in future periods could fall short of the expectations of securities analysts and investors, thus affecting the market price of
our shares.
While Transat has substantial 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 thus be adversely affected.
Transat is particularly exposed to fluctuations in fuel costs. Due to competitive pressures in the industry, there can be no assurance
that we would be able to pass along any increase in fuel prices to our customers by increasing fares, or that any such fare increase would
offset higher fuel costs, which could in turn adversely impact our business, financial position or operating results.
Transat has significant non-cancellable lease obligations relating to its aircraft fleet. If revenues from aircraft operations were to
decrease, the payments to be made under our existing lease agreements could have a substantial impact on our business.
Transat is exposed, due to its many arrangements with foreign-based suppliers, to fluctuations in exchange rates mainly concerning
the U.S. dollar, the euro and the pound sterling against the Canadian dollar and the euro. These exchange rate fluctuations could increase
our operating costs or decrease our revenues. Changes in interest rates could also impact interest income from our cash and cash
equivalents as well as interest expenses on our variable-rate debt instruments, which in turn could affect our interest income and interest
expenses.
In the normal course of business, we receive customer deposits and advance payments. If funds from advance payments were to
diminish or be unavailable to pay our suppliers, we would be required to secure alternative capital funding. There could be no assurance that
additional funding would be available under terms and conditions suitable to the Corporation, which could adversely affect our business.
Moreover, these advance payments generate interest income for Transat. In accordance with our investment policy, we are required to invest
these deposits and advance payments exclusively in investment-grade securities. Any failure of these investment securities to perform at
historical levels could reduce our interest income.
As a Corporation that processes information with respect to credit cards used by our customers, we must comply with the regulatory
requirements of our credit card processors. Failure to comply with certain financial ratios or certain rules regarding deposits or bank card data
security may result in penalties or in the suspension of service by credit card processors. The inability to use credit cards could have a
significant negative impact on our reservations and consequently on our operating results and profitability.
Last, it is sometimes difficult to foresee how certain Canadian or international tax laws will be interpreted by the appropriate tax
authorities. Subsequent to interpretation of these laws by the different authorities, the Corporation may have to review its own interpretations
of tax laws, which in turn could have an adverse impact on our profit margin.
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KEY SUPPLIES AND SUPPLIER RISKS
Management’s Discussion and Analysis
Despite being well positioned due to our vertical integration, we depend on third parties who supply us with certain components of our
packages. Any significant interruption in the flow of goods and services from these suppliers, which may be outside our control, could have a
significant adverse impact on our business, financial position and operating results.
Our dependence, among others, on Airbus, Boeing, Rolls-Royce, General Electric, Lufthansa Technik and Safran means that we
could be adversely affected by problems connected with Airbus and Boeing aircraft and Rolls-Royce or General Electric engines, 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 the Technological risks section.
We are also dependent on non-group airlines and a large number of hotels, several of which are exclusive to the Corporation. In
general, these suppliers can terminate or modify existing agreements with us on relatively short notice. The potential inability to replace these
agreements, to find similar suppliers, or to renegotiate agreements at reduced rates could have an adverse effect on our business, financial
position and operating results.
Furthermore, any decline in the quality of travel products or services provided by these suppliers, or any perception by travellers of
such a decline, could adversely affect our reputation. Any loss of contracts, changes to our pricing agreements, access restrictions to travel
suppliers’ products and services or negative shifts in public opinion regarding certain travel suppliers resulting in lower demand for their
products and services could have a significant effect on our results.
AVIATION RISKS
To carry on business or extend its outreach, the Corporation requires access to aircraft that are largely operated by its subsidiary Air
Transat. This fleet consists primarily of aircraft leased for several years, sometimes under renewable leases, with varying renewal dates and
conditions. If the Corporation were unable to renew its leases, secure timely access to appropriate aircraft under adequate conditions or
retire certain aircraft as anticipated, such an outcome could adversely affect the Corporation.
Our focus on three types of aircraft could result in significant downtime for part of our fleet if mechanical problems arise or if the
regulator releases any mandatory inspection or maintenance directives applicable to our types of aircraft. If our operations are disrupted due
to aircraft unavailability, the loss of associated revenues could have an adverse impact on our business, financial position and operating
results.
An incident involving one of our aircraft during our operations could give rise to repair costs or major replacement costs for the
damaged aircraft, service interruption, and 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 in Canada, airports and air navigation authorities have imposed
significant increases in airport user fees and air navigation fees, particularly since some of these airports are located in U.S. border towns
and are not subject to such fees. If these user and navigation fees were to increase substantially, our business, financial position and
operating results could be adversely affected, which would result in certain routes being conceded to our U.S. competitors.
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TECHNOLOGICAL RISKS
Management’s Discussion and Analysis
Transat relies heavily on various information and telecommunications technologies to operate its business, increase its revenues and
reduce its operating expenses. Our business depends on our ability to manage reservation systems, including handling high telephone call
volumes on a daily basis, monitor product profitability and inventory, adjust prices quickly, access and protect information, distribute our
products to retail travel agents and other travel intermediaries, and stave off information system intrusions. Rapid changes in these
technologies and growing demand for web-based or mobile reservations could require higher-than-anticipated capital expenditures to
improve customer service, which 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. Furthermore, the exploitation of system
vulnerabilities through cyberattacks is increasingly sophisticated and frequent and requires constant management of and developments in
the measures taken. 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, such as Softvoyage, Datalex and
Radixx. Those suppliers sell more external solutions (through partnerships or cloud services) requiring additional control measures. If these
providers were to become incapable of maintaining or improving efficient technology solutions in a profitable and timely manner,
the Corporation would be unable to react effectively to information security attacks, obtain new systems to meet growth in its customer base
or support new products offered by the Corporation. Consequently, such situations could generate additional expenses, which would
unfavourably impact the Corporation’s financial position.
REGULATORY RISKS
The industry in which Transat operates is subject to extensive Canadian and foreign government regulations. 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.
In the fight against climate change, the International Civil Aviation Organization (ICAO) has established an international model
whereby taxes would be imposed on greenhouse gas emissions to offset emissions. For domestic air travel, the federal government plans to
introduce new legislation that would be accompanied by regulations to implement a carbon pricing system. The impact of this new legislation
on the aviation industry is not clear at this time, nor the potential financial implications for Air Transat. However, if this legislation does
materialize, additional costs could result, which 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.
37
Transat A.T. Inc.
2017 Annual Report
HUMAN RESOURCE RISKS
Management’s Discussion and Analysis
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, 2017, the Corporation had approximately 5,000 employees, almost 50% of whom are unionized personnel covered
by six collective agreements. As at October 31, 2017, only one of the six collective agreements had not been renewed. Negotiations to renew
this collective agreement could give rise to work stoppages or slowdowns or higher labour costs that could unfavourably impact our
operations and operating income.
INSURANCE COVERAGE RISKS
The airline insurance market for risks associated with war and terrorist acts has undergone various changes. Our liability insurance for
airline operations covers liability related to damages resulting from injury or death of passengers, as well as to damage suffered by third
parties. The limit for any single event 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$250 million for any single event and in the aggregate.
In this latter regard, additional insurance is carried and maintained for War Risk Bodily Injury/Property Damage to Third Parties
excluding passengers covering the excess of US$250 million up to the limit of US$1 billion any single event and in the aggregate. Through
our Audit Committee and our Risk Management and Corporate Governance Committee, our Board of Directors identifies and evaluates at
least once annually the principal risk factors related to our business and approves strategies and systems proposed to manage such risks,
including those specifically related to the aviation industry.
However, there can be no assurance of all risks being covered in this manner or our ability 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.
38
Transat A.T. Inc.
2017 Annual Report
CONTROLS AND PROCEDURES
Management’s Discussion and Analysis
The implementation of the Canadian Securities Administrators National Instrument 52-109 represents a continuous improvement
process, which has prompted the Corporation to formalize existing processes and control measures and introduce new ones. Transat has
chosen to make this a corporate-wide project, which will result in operational improvements and better management.
In accordance with this instrument, the Corporation has filed certificates signed by the President and Chief Executive Officer and the
Vice-President, Finance and Administration and Chief Financial Officer that, among other things, report on the design and effectiveness of
disclosure controls and procedures (DC&P) and the design and effectiveness of internal control over financial reporting (ICFR).
The President and Chief Executive Officer and the Vice-President, Finance and Administration and Chief Financial Officer have
designed DC&P or caused them to be designed under their supervision to provide reasonable assurance that material information relating to
the Corporation has been made known to them and that information required to be disclosed in the Corporation’s filings is recorded,
processed, summarized and reported within the prescribed time periods under securities legislation.
Also, the President and Chief Executive Officer and the Vice-President, Finance and Administration and Chief Financial Officer have
designed ICFR or have caused it to be designed under their supervision to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for financial reporting purposes in accordance with IFRS.
EVALUATION OF DC&P AND ICFR
An evaluation of the design and operating effectiveness of DC&P and ICFR was carried out under the supervision of the President
and Chief Executive Officer and the Vice-President, Finance and Administration and Chief Financial Officer. This evaluation consisted of a
review of documentation, audits and other procedures that management considered appropriate in the circumstances. Among other things,
the evaluation took into consideration the Corporate Disclosure Policy, the code of professional ethics, the sub-certification process and the
operation of the Corporation’s Disclosure Committee.
Based on this evaluation and using the criteria set by the Committee of Sponsoring Organizations of the Treadway Commission on
Internal Control – Integrated Framework (COSO-Framework 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, 2017.
Lastly, no significant changes in ICFR occurred during the fourth quarter ended October 31, 2017 that materially affected
the Corporation’s ICFR.
39
Transat A.T. Inc.
2017 Annual Report
OUTLOOK
Management’s Discussion and Analysis
For the first six-month period - In the sun destination market outbound from Canada, the Corporation’s main market segment during
the winter, Transat’s capacity is up 8% compared with last year. To date, 50% of that capacity has been sold, bookings are ahead by 9.2%,
and load factors are similar. Due to the strengthening of the Canadian dollar, offset by rising fuel costs, operating expenses are currently
down 2.1%. Margins are currently up 2.0% from the same date last year.
In the transatlantic market, where it is low season, Transat’s capacity is up 20% from last winter. To date, 47% of that capacity has
been sold, bookings are ahead by 15% and load factors are down 2%.Margins are currently down 1.6% from the same date last year.
If these trends continue, Transat expects to achieve better results than in the 2017 winter season.
40
Transat A.T. Inc.
2017 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.
Chairman of the Board,
President and Chief Executive Officer
Jean-Marc Eustache
Vice-President, Finance and Administration
and Chief Financial Officer
Denis Pétrin
41
Transat A.T. Inc.
2017 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, 2017 and 2016, and the consolidated statements of income (loss), comprehensive income (loss),
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, 2017 and 2016 and its financial performance and its cash flows for the years then ended in accordance with International
Financial Reporting Standards.
Montréal, Canada
December 13, 2017
1 CPA auditor, CA, public accountancy permit No. A121006
42
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 8]
Trade and other receivables [note 9]
Income taxes receivable
Inventories
Prepaid expenses
Derivative financial instruments [note 10]
Current portion of deposits
Assets held for sale [note 12]
Current assets
Cash and cash equivalents reserved [note 8]
Deposits [note 11]
Income taxes receivable [note 23]
Deferred tax assets [note 23]
Property, plant and equipment [note 13]
Intangible assets [note 14]
Derivative financial instruments [note 10]
Investments [note 15]
Other assets [note 15]
Non-current assets
LIABILITIES
Trade and other payables [note 16]
Current portion of provision for overhaul of leased aircraft
Income taxes payable
Customer deposits and deferred revenues
Derivative financial instruments [note 10]
Liabilities related to assets held for sale [note 12]
Current liabilities
Provision for overhaul of leased aircraft [note 17]
Other liabilities [note 19]
Derivative financial instruments [note 10]
Deferred tax liabilities [note 23]
Non-current liabilities
EQUITY
Share capital [note 20]
Share-based payment reserve
Retained earnings
Unrealized gain on cash flow hedges
Cumulative exchange differences
See accompanying notes to consolidated financial statements
On behalf of the Board,
2017
$
2016
$
593,582
258,964
121,618
2,318
12,790
64,245
18,024
18,487
47,472
1,137,500
50,100
33,642
15,100
16,286
134,672
49,604
34
15,888
390
315,716
1,453,216
245,013
22,699
8,102
433,897
8,123
33,109
750,943
25,218
96,813
155
2,217
124,403
363,664
292,131
105,003
24,758
12,354
58,657
18,318
13,067
—
887,952
46,450
28,977
15,100
15,055
134,959
50,327
199
97,668
733
389,468
1,277,420
247,795
16,232
976
409,045
21,358
—
695,406
24,629
88,011
—
4,988
117,628
215,444
17,817
351,138
4,532
(11,061)
577,870
1,453,216
214,250
17,849
218,821
2,211
11,255
464,386
1,277,420
Director
Director
43
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF INCOME (LOSS)
Years ended October 31
(in thousands of Canadian dollars, except per share amounts)
Continuing operations
Revenues
Operating expenses
Costs of providing tourism services
Salaries and employee benefits [notes 21 and 25]
Aircraft fuel
Aircraft maintenance
Aircraft rent
Airport and navigation fees
Commissions
Other airline costs
Other
Share of net income of an associate and a joint venture [note 15]
Depreciation and amortization [note 21]
Special items [note 22]
Operating income (loss)
Financing costs
Financing income
Change in fair value of fuel-related derivatives and other derivatives
Loss (gain) on disposal of an investment [note 6]
Foreign exchange gain realized on disposal of an investment [note 6]
Foreign exchange gain on non-current monetary items
Asset impairment [note 14]
Income (loss) before income tax expense
Income taxes (recovery) [note 23]
Current
Deferred
Net income (loss) from continuing operations
Discontinued operations
Net income from discontinued operations [note 7]
Net income (loss) for the year
Net income (loss) attributable to:
Shareholders
Non-controlling interests
Earnings (loss) per share from continuing operations [note 20]
Basic
Diluted
Earnings (loss) per share [note 20]
Basic
Diluted
See accompanying notes to consolidated financial statements
44
2017
$
2016
$
3,005,345
2,889,646
1,268,832
371,863
358,558
203,669
132,139
134,665
88,635
225,512
126,500
(11,143)
68,470
2,925
2,970,625
34,720
2,134
(8,363)
(9,187)
(86,616)
(15,478)
426
—
151,804
18,684
(5,252)
13,432
138,372
1,309,430
346,899
329,784
178,317
135,813
128,695
92,018
221,540
119,964
(6,342)
50,038
13,825
2,919,981
(30,335)
1,669
(6,996)
(6,901)
843
—
(1,284)
79,708
(97,374)
(17,188)
6,345
(10,843)
(86,531)
—
138,372
49,772
(36,759)
134,308
4,064
138,372
(41,748)
4,989
(36,759)
3.63
3.63
3.63
3.63
(2.48)
(2.48)
(1.13)
(1.13)
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Years ended October 31
(in thousands of Canadian dollars)
Net income (loss) from continuing operations
Other comprehensive income (loss) from continuing operations
Items that will be reclassified to net income (loss)
Change in fair value of derivatives designated as cash flow hedges
Reclassification to net income (loss)
Deferred taxes [note 23]
Foreign exchange loss on translation of financial
statements of foreign subsidiaries
Reclass of foreign exchange gain realized on disposal of
an investment [note 6]
Items that will never be reclassified to net income (loss)
Retirement benefits – Net actuarial gains (losses) [note 25]
Deferred taxes [note 23]
Total other comprehensive loss from continuing operations
Comprehensive income (loss) from continuing operations
Net income from discontinued operations [note 7]
Other comprehensive income (loss) from discontinued operations
Comprehensive income from discontinued operations
Comprehensive income (loss) for the year
Attributable to:
Shareholders
Non-controlling interests
See accompanying notes to consolidated financial statements
2017
$
138,372
2016
$
(86,531)
12,537
(9,352)
(864)
2,321
(42,803)
25,723
4,589
(12,491)
(6,838)
(13,673)
(15,478)
—
1,497
(401)
1,096
(18,899)
119,473
—
—
—
119,473
(3,230)
870
(2,360)
(28,524)
(115,055)
49,772
1,093
50,865
(64,190)
116,714
2,759
119,473
(69,811)
5,621
(64,190)
45
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Accumulated other comprehensive
income (loss)
Share-
based
payment
reserve
Unrealized
gain (loss)
on cash
flow hedges
Cumulative
exchange
differences
Reserve
related to
assets held
for sale
Retained
earnings
Non-
controlling
interests
$
—
4,989
632
5,621
—
—
—
—
(4,335)
—
Total
$
537,252
(41,748)
(28,063)
(69,811)
1,219
400
921
(7,107)
—
—
1,049
(1,049)
Total
equity
$
537,252
(36,759)
(27,431)
(64,190)
1,219
400
921
(7,107)
(4,335)
—
—
—
226
(169)
—
632
464,386
134,308
(17,594)
116,714
1,094
69
(312)
311
—
169
226
(632)
(5,621)
—
(8,676)
—
464,386
4,064
(1,305)
2,759
—
—
—
—
(4,447)
138,372
(18,899)
119,473
1,094
69
(312)
311
(4,447)
(3,087)
3,087
—
—
(2,704)
(2,704)
(1,305)
(3,230)
577,870
1,305
(2,759)
—
(5,989)
—
577,870
$
—
—
1,093
1,093
—
—
—
—
—
(1,093)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(1,093)
(3,055)
$
23,241
—
(14,305)
(14,305)
—
—
—
—
—
1,687
—
—
—
632
2,319
11,255
—
(21,011)
(21,011)
—
—
—
—
—
—
—
(1,305)
(1,305)
(in thousands of Canadian dollars)
Balance as at October 31, 2015
Net income (loss) for the year
Other comprehensive income (loss)
Comprehensive income (loss) for the year
Issued from treasury
Exercise of options
Share-based payment expense
Repurchase of shares
Dividends
Discontinued operations
Fair value changes in non-controlling
interest liabilities
Other changes in non-controlling
interest liabilities
Reclassification of non-controlling
interest liabilities
Reclassification of non-controlling
interest exchange difference
Share
capital
$
$
$
218,134
17,105
263,812
—
—
—
1,219
577
—
(5,680)
—
—
—
—
—
—
(3,884)
—
—
—
—
(177)
921
—
—
—
—
—
—
—
744
(41,748)
(2,360)
(44,108)
—
—
—
(1,427)
—
(336)
1,049
(169)
—
—
$
14,960
—
(12,491)
(12,491)
—
—
—
—
—
(258)
—
—
—
—
Balance as at October 31, 2016
214,250
17,849
Net income for the year
Other comprehensive income (loss)
Comprehensive income (loss) for the year
Issued from treasury
Exercise of options
Vesting of PSUs
Share-based payment expense
Dividends
Fair value changes in non-controlling
interest liabilities
Reclassification of non-controlling
interest liabilities
Reclassification of non-controlling
interest exchange difference
—
—
—
1,094
100
—
—
—
—
—
—
1,194
—
—
—
—
(31)
(312)
311
—
—
—
—
(32)
(883)
(258)
218,821
134,308
1,096
135,404
—
—
—
—
—
(3,087)
—
—
(3,087)
2,211
—
2,321
2,321
—
—
—
—
—
—
—
—
—
Balance as at October 31, 2017
215,444
17,817
351,138
4,532
(11,061)
See accompanying notes to consolidated financial statements
46
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended October 31
(in thousands of Canadian dollars)
OPERATING ACTIVITIES
Net income (loss) for the year
Operating items not involving an outlay (receipt) of cash:
Depreciation and amortization [note 21]
Change in fair value of fuel-related derivatives and other derivatives
Loss (gain) on disposal of an investment [note 6]
Foreign exchange gain realized on disposal of an investment [note 6]
Foreign exchange gain on non-current monetary items
Asset impairment
Share of net income of an associate and a joint venture
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
Consideration paid for a business acquisition
Net proceeds from disposal of subsidiary [note 6]
Proceeds from sale of discontinued operations [note 7]
Dividend received from an associate [note 15]
Cash flows related to investing activities
FINANCING ACTIVITIES
Proceeds from issuance of shares
Repurchase of shares
Repurchase of shares related to stock-based compensation
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 related to continuing operations
Net cash flows related to discontinued operations [note 7]
Cash and cash equivalents held for sale [note 12]
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Supplementary information (as reported in operating activities)
Net income taxes paid (recovered)
Interest paid
See accompanying notes to consolidated financial statements
47
2017
$
2016
$
138,372
(86,531)
68,470
(9,187)
(86,616)
(15,478)
426
—
(11,143)
(5,252)
2,732
311
82,635
69,269
7,056
2,527
161,487
(69,523)
(3,650)
(20,321)
187,500
—
3,895
97,901
1,163
—
(312)
(4,447)
(3,596)
450
256,242
—
(26,324)
363,664
593,582
(11,883)
432
50,038
(6,901)
843
—
(1,284)
79,708
(6,342)
6,345
2,657
921
39,454
5,181
(2,101)
1,027
43,561
(70,754)
(1,550)
—
200
68,048
9,149
5,093
1,619
(7,107)
—
(4,335)
(9,823)
(12,132)
26,699
542
—
336,423
363,664
8,162
514
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
October 31, 2017 and 2016
[Unless specified otherwise, amounts are expressed in thousands of Canadian dollars, except for per share amounts]
Note 1
CORPORATE INFORMATION
Transat A.T. Inc. [the “Corporation”], headquartered at 300 Léo-Pariseau Street, Montréal, Québec, Canada, is incorporated under the
Canada Business Corporations Act. The Class A Variable Voting Shares and Class B Voting Shares are listed on the Toronto Stock
Exchange. The 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.”
The Corporation is an integrated company specializing in the organization, marketing and distribution of holiday travel in the tourism
industry. As at October 31, 2017, the core of its business consists of a tour operator based in Canada which is 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, 2017 were approved by the Corporation’s
Board of Directors on December 13, 2017.
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;
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• Upon gaining control in a step acquisition, the existing ownership interest is re-measured to fair value through the statement
•
of income; and
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 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.
INVESTMENTS IN AN ASSOCIATE AND A JOINT VENTURE
An associate is an entity over which the Corporation has significant influence, but no control. A joint venture is an entity in which the
parties that have joint control over the entity have rights to the net assets of the entity. The Corporation’s investments in an associate and a
joint venture are 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 and the joint venture are eliminated to the
extent of the Corporation’s interest in these entities 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 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.
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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.
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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 useful 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 indefinite 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.
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 foreign currency derivatives as hedging instruments.
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Notes to Consolidated Financial Statements
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 statement 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. The change in value of the effective portion of a cash flow hedge remains 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 consolidated statement of income account in which the
hedged item is recognized. 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 uses fuel-related derivatives to manage its exposure to unstable fuel prices as
well as certain foreign currency derivatives to offset the future risks of fluctuations in foreign currencies 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.
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.
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Notes to Consolidated Financial Statements
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] 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] 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.
PROVISIONS
Provisions are recognized when the Corporation has a present, legal or constructive obligation as a result of a past event, it is
probable that an outflow of resources will be required to settle the obligation and the cost can be reliably estimated. Provisions are measured
at their present value.
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PROVISION FOR OVERHAUL OF LEASED AIRCRAFT
Notes to Consolidated Financial Statements
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 statement 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. Revenues from air transportation services are
recognized when the corresponding service is rendered on the date of each flight. 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.
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.
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Notes to Consolidated Financial Statements
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], including share-based payment
transactions with a net settlement feature to satisfy withholding tax obligations, 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.
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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 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 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 14.
Property, plant and equipment are depreciated over their estimated useful lives taking into account their residual value. Aircraft,
aircraft components and leasehold improvements 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.
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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 POLICY
IFRS 2, SHARE-BASED PAYMENT
In June 2016, the International Accounting Standards Board [“IASB”] issued amendments included in IFRS 2, Share-based Payment.
The amendments are intended to provide changes that relate, in particular, to the accounting for share-based payment transactions that
include net settlement terms to satisfy withholding tax obligations. The amendments to IFRS 2 will be effective for the Corporation’s fiscal
year beginning on November 1, 2018, with earlier adoption permitted. The Corporation elected to early adopt the amendments to IFRS 2 for
the year ended October 31, 2017. Early adoption of the amendments to IFRS 2 had no significant impact.
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.
57
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
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. The IFRS 9 transition rules include an exemption allowing companies to continue to
apply current hedge accounting under IAS 39 until the final hedge model is effective.
Application of IFRS 9 will be effective from the Corporation’s fiscal year beginning on November 1, 2018, with earlier adoption
permitted. Other than the potential impact of adopting optional hedge accounting in accordance with IFRS 9, the Corporation does not expect
the adoption of IFRS 9 to have a material impact on its financial statements. The Corporation continues to assess the impact of the adoption
of IFRS 9 on its financial statements, including the hedge accounting transition decision.
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 and expects to complete its analysis in the coming
quarters.
IFRS 16, LEASES
In January 2016, the IASB issued IFRS 16, Leases, which supersedes IAS 17, Leases. Leasing is an important and flexible source of
financing for many companies. However, under the current IAS 17 standard, it is difficult to obtain a clear picture of the assets and liabilities
related to the leasing agreements of an entity. IFRS 16 introduces a single lessee accounting model under which most of lease-related
assets and liabilities are recognized in the statement of financial position. For the lessor, substantially all the current accounting requirements
remain unchanged. Certain exemptions will apply to short-term and low-value leases.
Considering that the Corporation is committed under numerous operating leases in accordance with IAS 17, the Corporation expects
that the adoption of IFRS 16 will have a significant impact on its financial statements. The Corporation will be required to recognize an asset
related to the right of use and a liability at the present value of future lease payments. Amortization of the right-of-use asset and interest
expense on the lease obligation will replace rent expense related to operating leases.
The application of IFRS 16 is mandatory and will be effective for the Corporation’s fiscal year beginning on November 1, 2019, with
earlier adoption permitted if the new IFRS 15 standard on revenue has also been applied. The Corporation continues to assess the impact of
the adoption of this new standard on its financial statements and has not determined which transition method it will use.
58
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
Note 6
BUSINESS ACQUISITIONS AND DISPOSALS
On October 4, 2017, the Corporation completed the sale of its 35% minority interest in Ocean Hotels to H10 Hotels, ahead of the
anticipated November 2, 2017 closing date. As announced on July 19, 2017, the sale closed for US$150,500 [$187,500], received in cash on
October 4, 2017. The disposed interest had a carrying value of $97,252 as at October 4, 2017. The Corporation recorded a gain on disposal
of an investment of $86,616, net of transaction costs of $1,697, as well as a foreign exchange gain of $15,478 realized on the reclassification
of the cumulative exchange differences related to our investment. The selling price remains subject to certain adjustments, estimated to
US$1,500 [$1,935] as of October 31, 2017, which would reduce the selling price to US$149,000 [$185,565].
On April 3, 2017, the Corporation acquired a 50% interest in Desarrollo Transimar S.A. de C.V. [“Desarrollo”], a Mexican company
operating a hotel, for a consideration of US$10,000 [$13,425], of which US$9,500 [$12,754] was paid in cash and US$500 [$622] was
included in trade and other payables as at October 31, 2017. This amount is payable subject to certain conditions. This interest in a joint
venture is accounted for using the equity method [see note 15].
On December 21, 2016, following the exercise of a put option by the minority shareholder in the subsidiary Jonview Canada Inc.
[“Jonview”], the Corporation completed the purchase of 19.93% of the shares of its subsidiary Jonview, which has an incoming tour operator
business in Canada, thereby bringing its interest in the subsidiary to 100%. The cash consideration totalled $4,983, being the fair value of the
put option at the time of the transaction. In addition, the non-controlling interest was derecognized with no impact on the consolidated
statements of income (loss).
On April 1, 2016, the Corporation concluded the sale of its subsidiary Travel Superstore, which operates the website tripcentral.ca and
27 travel agencies. The cash consideration totalled $300 and the carrying value of net assets disposed of stood at $1,312, which resulted in
a reversal of retained earnings of $169 and a loss on disposal of a subsidiary of $843.
Note 7
DISCONTINUED OPERATIONS
On October 31, 2016, the Corporation completed the sale of its tour operating business in France (Transat France) and Greece
(Tourgreece) for an amount of €63,428 ($93,254) to TUI AG, a multinational tourism company. On January 27, 2017, TUI AG confirmed that
the purchase price will not be subject to any working capital adjustments following the final closing and audit of accounts.
As at October 31, 2016, the tour operating businesses in France and Greece were identified as discontinued operations. Accordingly,
the consolidated statements of income (loss) and comprehensive income (loss) present for fiscal 2016 after-tax net income from
discontinued operations as a single amount, separately from continuing operations. Unless otherwise specified, all other notes to
consolidated financial statements include amounts from continuing operations.
For the fiscal year ended October 31, 2016, a gain on disposal of $49,692, net of transaction costs of $7,073, was also recognized in
the consolidated statement of income (loss) and the proceeds of disposal of $93,254, net of cash disposed of, are shown in the consolidated
statement of cash flows.
59
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
The net income from discontinued operations is entirely attributable to common shareholders of the Corporation and is detailed as
follows:
Revenues
Operating expenses and other expenses
Income from operating activities
Income tax expense
Net income from operating activities
Gain on disposal of discontinued operations
Foreign exchange loss realized on disposal of discontinued operations
Gain realized on foreign exchange derivatives on disposal of discontinued operations
Net income from discontinued operations
Earnings per share from discontinued operations
Basic
Diluted
The net change in cash flows related to discontinued operations is as follows:
Cash flows related to operating activities
Cash flows related to investing activities
Net cash flows related to discontinued operations
The assets and liabilities disposed of in connection with discontinued operations are as follows:
Cash and cash equivalents
Cash and cash equivalents in trust or otherwise reserved
Trade and other receivables
Income taxes receivable
Prepaid expenses
Derivative financial instruments
Deposits
Deferred tax assets
Property, plant and equipment
Goodwill
Intangible assets
Trade and other payables
Customer deposits and deferred revenues
Other liabilities
Deferred tax liabilities
Net assets disposed of
Cash consideration received
Cash-settled transaction costs
Cash and cash equivalents disposed of
Cash flows from the disposal of discontinued operations
60
2016
$
685,780
683,709
2,071
1,677
394
49,692
(854)
540
49,772
1.35
1.35
2016
$
4,811
(4,269)
542
2016
$
(22,978)
(3,893)
(32,590)
(2,666)
(14,731)
(567)
(18,489)
(9,322)
(9,229)
(31,255)
(18,869)
83,857
38,701
5,111
431
(36,489)
93,254
(2,228)
(22,978)
68,048
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
Note 8
CASH AND CASH EQUIVALENTS IN TRUST OR OTHERWISE RESERVED
As at October 31, 2017, cash and cash equivalents in trust or otherwise reserved included $239,974 [$254,311 as at
October 31, 2016] 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 $69,090, of which $50,100 was recorded as non-current
assets [$84,270 as at October 31, 2016, of which $46,450 was recorded as non-current assets], which was pledged as collateral security
against letters of credit.
Note 9
TRADE AND OTHER RECEIVABLES
Trade receivables
Government receivables
Cash receivable from lessors
Other receivables
2017
$
2016
$
33,516
21,603
46,548
19,951
121,618
39,571
15,262
21,277
28,893
105,003
61
Transat A.T. Inc.
2017 Annual Report
Note 10
FINANCIAL INSTRUMENTS
CLASSIFICATION OF FINANCIAL INSTRUMENTS
Notes to Consolidated Financial Statements
The classification of financial instruments, other than derivative financial 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
$
593,582
309,064
—
—
8,471
2,054
913,171
—
212
2,656
—
2,868
—
—
100,015
28,033
—
—
128,048
—
—
—
—
—
—
—
—
—
—
—
—
593,582
309,064
100,015
28,033
593,582
309,064
100,015
28,033
8,471
2,054
1,041,219
8,471
2,054
1,041,219
226,170
226,170
226,170
—
—
26,400
252,570
212
2,656
26,400
255,438
212
2,656
26,400
255,438
As at October 31, 2017
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 currency derivatives
Financial liabilities
Trade and other payables
Derivative financial instruments
-Fuel purchasing forward contracts and other fuel-related
derivative financial instruments
-Other foreign currency derivatives
Non-controlling interests
62
Transat A.T. Inc.
2017 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
$
363,664
338,581
—
—
8,614
2,208
713,067
—
2,619
13,878
—
16,497
—
—
89,741
20,043
—
—
109,784
—
—
—
—
—
—
—
—
—
—
—
—
363,664
338,581
89,741
20,043
8,614
2,208
822,851
363,664
338,581
89,741
20,043
8,614
2,208
822,851
227,862
227,862
227,862
—
—
29,984
257,846
2,619
13,878
29,984
274,343
2,619
13,878
29,984
274,343
As at October 31, 2016
Financial assets
Cash and cash equivalents
Cash and cash equivalents in trust or
Trade and other receivables
Deposits on leased aircraft and engines
Derivative financial instruments
-Fuel purchasing forward contracts and other fuel-related
derivative financial instruments
-Other foreign currency derivatives
Financial liabilities
Trade and other payables
Derivative financial instruments
-Fuel purchasing forward contracts and other fuel-related
derivative financial instruments
-Other foreign currency derivatives
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 and other intangible assets with indefinite lives impairment test [see note 14].
63
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
The following table details the fair value hierarchy of financial instruments by level:
As at October 31, 2017
Financial assets
Derivative financial instruments
-Fuel purchasing forward contracts and other fuel-related
derivative financial instruments
-Foreign exchange forward contracts and other foreign currency derivatives
Financial liabilities
Derivative financial instruments
-Fuel purchasing forward contracts and other fuel-related
derivative financial instruments
-Foreign exchange forward contracts and other foreign currency derivatives
Non-controlling interests
As at October 31, 2016
Financial assets
Derivative financial instruments
-Fuel purchasing forward contracts and other fuel-related
derivative financial instruments
-Foreign exchange forward contracts and other foreign currency derivatives
Financial liabilities
Derivative financial instruments
-Fuel purchasing forward contracts and other fuel-related
derivative financial instruments
-Foreign exchange forward contracts and other foreign currency derivatives
Non-controlling interests
Quoted prices in
active markets
(Level 1)
$
Other
observable
inputs
(Level 2)
$
Unobservable
inputs
(Level 3)
$
—
—
—
—
—
—
—
8,471
9,587
18,058
212
8,066
—
8,278
—
—
—
—
—
26,400
26,400
Quoted prices in
active markets
(Level 1)
$
Other
observable
inputs
(Level 2)
$
Unobservable
inputs
(Level 3)
$
—
—
—
—
—
—
—
8,614
9,903
18,517
2,619
18,739
—
21,358
—
—
—
—
—
29,984
29,984
Total
$
8,471
9,587
18,058
212
8,066
26,400
34,678
Total
$
8,614
9,903
18,517
2,619
18,739
29,984
51,342
64
Transat A.T. Inc.
2017 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 (loss)
Dividends
Acquisitions and disposals of subsidiaries
Change in fair value of non-controlling interests
2017
$
29,984
4,064
(1,305)
(4,447)
(4,983)
3,087
26,400
2016
$
32,800
4,989
632
(4,335)
(3,053)
(1,049)
29,984
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 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 consolidated statement of financial position
totalled $33,516 as at October 31, 2017 [$39,571 as at October 31, 2016]. Trade accounts receivable consist of a large number of
customers, including travel agencies. 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, 2017 and 2016. As at October 31, 2017, approximately 4% [approximately 8% as at
October 31, 2016] of accounts receivable were over 90 days past due, whereas approximately 84% [approximately 75% as at
October 31, 2016] 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. As at October 31, 2017, these deposits
totalled $24,096 [$22,001 as at October 31, 2016], 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 $28,033 as at October 31, 2017 [$20,043 as at
October 31, 2016] 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, 2017, the cash security
deposits with lessors that have been claimed totalled $46,548 [$21,277 as at October 31, 2016] and are included in 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.
65
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
For financial institutions including the various counterparties, the maximum credit risk as at October 31, 2017 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, 2017.
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.
The maturities of the Corporation’s financial liabilities as at October 31, 2017 are summarized in the following table:
Maturing in
under 1 year
$
226,170
—
8,136
234,306
Maturing in
1 to 2 years
$
—
—
155
155
Maturing in
2 to 5 years
$
—
26,400
—
26,400
Contractual
cash flows
Total
$
226,170
26,400
8,291
260,861
Carrying
amount
Total
$
226,170
26,400
8,278
260,848
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 61%
of the Corporation’s costs are incurred in a currency other than the measurement currency of the reporting unit incurring the costs, whereas
approximately 16% 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.
66
Transat A.T. Inc.
2017 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)
2017
Financial statement measurement
currency of the group’s companies
Euro
Pound sterling
Canadian dollar
Other currencies
Total
Net assets (liabilities)
2016
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
$
6,130
30
17,609
(515)
23,254
—
214
12,068
37
12,319
U.S. dollar
$
Euro
$
9,356
(4,155)
(10,296)
(673)
(5,768)
—
100,963
(6,862)
19
94,120
—
—
15,543
—
15,543
Pound
sterling
$
—
—
3,287
—
3,287
—
4,085
—
24
4,109
—
—
(933)
1,271
338
Canadian
dollar
$
Other
Currencies
$
—
671
—
(6)
665
—
—
(1,339)
876
(463)
Total
$
6,130
4,329
44,287
817
55,563
Total
$
9,356
97,479
(15,210)
216
91,841
As at October 31, 2016, the proceeds of disposal of subsidiaries Transat France and Tourgreece were received in euros by a
subsidiary in the United Kingdom.
For the year ended October 31, 2017, 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 $983 increase or decrease [$3,199 in 2016], respectively, in the Corporation’s
net income for the year, whereas other comprehensive loss would have decreased or increased by $2,996 [$3,085 in 2016], respectively. For
sensitivity analysis purposes, the impact of any single currency on the Corporation’s income would not be material.
As at October 31, 2017, 60% of estimated requirements for fiscal 2018 were covered by foreign exchange derivatives [37% of
estimated requirements for fiscal 2017 were covered as at October 31, 2016].
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, 2017, a 10% increase or decrease in fuel prices, assuming that all other variables had remained the
same, would have resulted in a $5,987 decrease or increase [$6,170 in 2016], respectively, in the Corporation’s net income for the year.
As at October 31, 2017, 31% of estimated requirements for fiscal 2018 were covered by fuel-related derivative financial instruments
[48% of estimated requirements for fiscal 2017 were covered as at October 31, 2016].
67
Transat A.T. Inc.
2017 Annual Report
INTEREST RATE RISK
Notes to Consolidated Financial Statements
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.
For the year ended October 31, 2017, a 25 basis point increase or decrease in interest rates, assuming that all other variables had
remained the same, would have resulted in a $1,781 increase or decrease [$1,727 in 2016], 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 the 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
2017
$
2016
$
—
660,695
(593,582)
67,113
577,870
11.6%
—
679,065
(363,664)
315,401
464,386
67.9%
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, 2017, 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.
68
Transat A.T. Inc.
2017 Annual Report
Note 11
DEPOSITS
Deposits on leased aircraft and engines
Deposits with suppliers
Less current portion
Note 12
ASSETS HELD FOR SALE
Notes to Consolidated Financial Statements
2017
$
28,033
24,096
52,129
18,487
33,642
2016
$
20,043
22,001
42,044
13,067
28,977
On November 30, 2017, the Corporation completed the sale of its wholly owned subsidiary Jonview to Japanese multinational
H.I.S. Co. Ltd., which specializes in travel distribution, following approval of the transaction by the Competition Bureau of Canada and
compliance with other customary conditions. The expected selling price of $44,000, received in cash on that date, may be adjusted
subsequent to the final closing of accounts and completion of their audit within 90 days following the closing of the sale, due to a working
capital adjustment.
As at October 31, 2017, the assets and liabilities of Jonview have been reported as held for sale in the consolidated statements of
financial position. Since Jonview’s operations do not represent a principal and separate line of business for the Corporation, its results are
included in the Corporation’s net income from continuing operations reported in the consolidated statements of income (loss) and
comprehensive income (loss) for the year ended October 31, 2017. The transaction had no other impact on the financial statements of the
Corporation for the year ended October 31, 2017.
Note 13
PROPERTY, PLANT AND EQUIPMENT
Cost
Balance as at October 31, 2016
Additions
Write-offs
Assets held for sale
Exchange difference
Balance as at October 31, 2017
Accumulated amortization
Balance as at October 31, 2016
Amortization and depreciation
Write-offs
Assets held for sale
Exchange difference
Balance as at October 31, 2017
Net book value as at October 31, 2017
Aircraft
equipment
Office furniture
and equipment
Building and
leasehold
improvements
$
$
$
97,777
9,023
—
—
—
106,800
75,858
7,248
—
—
—
83,106
23,694
48,886
10,604
(1,583)
(92)
(16)
57,799
37,308
8,955
(1,583)
(78)
(79)
44,523
13,276
33,470
1,627
(1,263)
(608)
(4)
33,222
25,563
2,007
(1,263)
(526)
9
25,790
7,432
Total
$
519,582
58,418
(35,892)
(700)
(20)
541,388
384,623
58,659
(35,892)
(604)
(70)
406,716
134,672
Fleet
$
339,449
37,164
(33,046)
—
—
343,567
245,894
40,449
(33,046)
—
—
253,297
90,270
69
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
Cost
Balance as at October 31, 2015
Additions
Disposals of subsidiaries
Write-offs
Exchange difference
Balance as at October 31, 2016
Accumulated amortization
Balance as at October 31, 2015
Amortization and depreciation
Disposals of subsidiaries
Write-offs
Exchange difference
Balance as at October 31, 2016
Net book value as at October 31, 2016
Note 14 GOODWILL AND OTHER INTANGIBLE ASSETS
Cost
Balance as at October 31, 2016
Additions
Write-offs and impairment
Assets held for sale
Exchange difference
Balance as at October 31, 2017
Accumulated amortization and impairment
Balance as at October 31, 2016
Amortization
Write-offs and impairment
Assets held for sale
Exchange difference
Balance as at October 31, 2017
Net book value as at October 31, 2017
Total
$
504,700
53,119
(27,785)
(9,765)
(687)
519,582
371,198
40,669
(17,069)
(9,765)
(410)
384,623
134,959
Total
$
237,183
11,105
(801)
(3,235)
300
244,552
186,856
9,368
(801)
(491)
16
194,948
49,604
Aircraft
equipment
Office furniture
and equipment
Building and
leasehold
improvements
$
$
$
88,893
8,884
—
—
—
97,777
72,299
3,559
—
—
—
75,858
21,919
64,943
5,035
(11,362)
(9,043)
(687)
48,886
51,413
4,654
(9,306)
(9,043)
(410)
37,308
11,578
46,939
3,676
(16,423)
(722)
—
33,470
32,129
1,919
(7,763)
(722)
—
25,563
7,907
Fleet
$
303,925
35,524
—
—
—
339,449
215,357
30,537
—
—
—
245,894
93,555
Goodwill
$
Software
$
Trademarks
$
Customer lists
$
140,815
11,105
(801)
(3,235)
144
148,028
94,929
9,368
(801)
(491)
16
103,021
45,007
20,250
—
—
—
156
20,406
15,809
—
—
—
—
15,809
4,597
12,219
—
—
—
—
12,219
12,219
—
—
—
—
12,219
—
63,899
—
—
—
—
63,899
63,899
—
—
—
—
63,899
—
70
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
Cost
Balance as at October 31, 2015
Additions
Disposals of subsidiaries
Write-offs and impairment
Exchange difference
Balance as at October 31, 2016
Accumulated amortization and impairment
Balance as at October 31, 2015
Amortization
Disposals of subsidiaries
Write-offs and impairment
Exchange difference
Balance as at October 31, 2016
Net book value as at October 31, 2016
IMPAIRMENT TEST IN 2017
Goodwill
$
114,527
—
(47,087)
—
(3,541)
63,899
15,000
—
(15,000)
63,899
—
63,899
—
Software
$
Trademarks
$
Customer lists
$
158,913
17,635
(35,525)
(124)
(84)
140,815
101,950
8,591
(15,484)
(124)
(4)
94,929
45,886
22,041
—
—
—
(1,791)
20,250
—
—
—
15,809
—
15,809
4,441
14,262
—
—
—
(2,043)
12,219
13,403
775
—
—
(1,959)
12,219
—
Total
$
309,743
17,635
(82,612)
(124)
(7,459)
237,183
130,353
9,366
(30,484)
79,584
(1,963)
186,856
50,327
The Corporation performed its annual impairment test as at April 30, 2017 to determine whether the carrying amount of trademarks
was higher than their recoverable amount. Following this impairment test, the Corporation did not identify any impairment of its trademarks,
which total $4,597 as at October 31, 2017.
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 businesses. Cash flow forecasts
reflect the risk associated with each asset, as well as the most recent economic indicators. Cash flow forecasts beyond three years are
extrapolated based on nil growth rates. The cash flow forecasts used also reflect the effects of implementing the Corporation’s integrated
distribution and brand strategy aiming to further expand the Transat brand, therefore decreasing the use of certain trademarks held by
the Corporation.
As at April 30, 2017, after-tax discount rates used for impairment testing for trademarks ranged from 10.0% to 18.0% [between 10.3%
and 18.0% as at April 30, 2016].
On April 30, 2017, 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 resulted in any impairment charge.
On April 30, 2017, a 10% decrease in the cash flows used for the impairment testing, assuming that all other variables had remained
the same, would not have resulted in any impairment charge.
As at October 31, 2017, there was no indication that could lead us to believe that the conclusions of the test might have changed
since April 30, 2017.
IMPAIRMENT CHARGE IN 2016
For the fiscal year ended October 31, 2016, the Corporation recognized a $79,708 asset impairment charge consisting of $63,899 in
impairment of goodwill and $15,809 in impairment of trademarks.
As at October 31, 2016, following the goodwill impairment test, the Corporation recognized an impairment charge of $63,899 which
corresponded to the balance of goodwill of its sole CGU as at October 31, 2016. After impairment, the Corporation’s goodwill totalled $0.
71
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
The recoverable amount of the Corporation’s sole CGU was determined based on value in use, using a discounted cash flow model.
The impairment charge recognized resulted mainly from the important changes in the environment in which the Corporation operates, such
as significant capacity increases in markets served by the Corporation and their effect on selling prices and load factors, volatile exchange
rates and fuel prices and the recent deterioration in results of the summer season.
As at April 30, 2016, following the annual trademarks impairment test, the Corporation recognized a $15,809 impairment charge. After
impairment, the Corporation’s trademarks totalled $4,441 as at October 31, 2016.
The recoverable amount of the trademarks was determined based on value in use, using a discounted cash flow model. The
impairment charge recognized resulted mainly from the effects of implementing the Corporation’s integrated distribution and brand strategy
aiming to further expand the Transat brand, therefore decreasing the use of certain trademarks held by the Corporation.
Note 15
INVESTMENTS AND OTHER ASSETS
Investment in an associate – Caribbean Investments B.V. [“CIBV”]
Investment in a joint venture – Desarrollo Transimar S.A. de C.V. [“Desarrollo”]
Deferred costs, unamortized
Sundry
2017
$
—
15,888
244
146
16,278
2016
$
97,668
—
299
434
98,401
On October 4, 2017, the Corporation completed the sale of its 35% minority interest in CIBV, which operates Ocean Hotels, to
H10 Hotels [see note 6]. Until that date, the Corporation held a 35% interest in CIBV, which owns and operates hotels in Mexico, the
Dominican Republic and Cuba. CIBV’s fiscal year-end is December 31, and the Corporation recognized its investment using the equity
method and results for the 12-month period ended September 30 of each year.
On April 3, 2017, the Corporation acquired a 50% interest in Desarrollo, a Mexican company operating a hotel [see note 6]. This
interest in a joint venture is accounted for using the equity method.
The change in the investments in CIBV and Desarrollo is detailed as follows:
Balance, beginning of year
Acquisition
Capital contribution
Share of net income
Dividend received
Translation adjustment
Disposal
CIBV
$
97,668
—
—
10,956
(3,895)
(7,477)
(97,252)
—
Desarrollo
$
—
13,425
2,584
187
—
(308)
—
15,888
2017
Total
$
97,668
13,425
2,584
11,143
(3,895)
(7,785)
(97,252)
15,888
CIBV
$
97,897
—
—
6,342
(9,149)
2,578
—
97,668
Desarrollo
$
—
—
—
—
—
—
—
—
2016
Total
$
97,897
—
—
6,342
(9,149)
2,578
—
97,668
72
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
The following table shows the condensed financial information regarding Desarrollo as at October 31, 2017 and CIBV as at
September 30, 2016:
Statement of financial position:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
Carrying amount of investment
Statement of comprehensive
Revenues
Net income and comprehensive income
Share of net income
Note 16 TRADE AND OTHER PAYABLES
Trade payables
Accrued expenses
Salaries and employee benefits payable
Government remittances
Non-controlling interests [note 6]
2017
$
2016
$
6,234
26,800
752
507
31,775
15,888
2,429
373
187
47,811
386,903
46,795
108,867
279,052
97,668
131,889
18,120
6,342
2017
$
2016
$
132,816
37,348
56,006
18,843
—
245,013
117,258
58,133
52,471
14,949
4,984
247,795
Note 17
PROVISION FOR OVERHAUL OF LEASED AIRCRAFT
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. The change in the provision for overhaul of leased aircraft for the year ended
October 31, 2017 is detailed as follows:
Balance as at October 31, 2016
Additional provisions
Utilization of provisions
Balance as at October 31, 2017
Current provisions
Non-current provisions
Balance as at October 31, 2017
$
40,861
23,466
(16,410)
47,917
22,699
25,218
47,917
73
Transat A.T. Inc.
2017 Annual Report
Note 18
LONG-TERM DEBT
Notes to Consolidated Financial Statements
The Corporation has a $50,000 revolving credit facility agreement for operating purposes. Under the agreement, which expires
in 2020, the Corporation may increase the credit limit to $100,000, 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, 2017, 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, 2017, $54,847 had been drawn down
under the facility [$66,220 as at October 31, 2016], of which $50,100 was to secure obligations under senior executive defined benefit
pension agreements; this irrevocable letter of credit is held by a third-party trustee. In the event of a change of control, the irrevocable letter
of credit issued to secure obligations under senior executive defined benefit pension agreements will be drawn down.
Note 19 OTHER LIABILITIES
Employee benefits [note 25]
Deferred lease inducements
Non-controlling interests [note 10]
Less non-controlling interests included in Trade and other payables [note 16]
NON-CONTROLLING INTEREST
2017
$
40,764
29,649
26,400
96,813
—
96,813
2016
$
40,400
22,611
29,984
92,995
(4,984)
88,011
The minority shareholder of
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.
the subsidiary Trafictours Canada
the Corporation purchase
Inc. could require
that
Note 20
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.
74
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
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.
CLASS B VOTING SHARES
An unlimited number of Class B Voting Shares [“Class B Shares”], participating, which may be owned and controlled by Canadians as
defined by the CTA only and shall confer the right to one vote per Class B Share at all meetings of shareholders of the Corporation. Each
issued and outstanding Class B Share shall be converted into one Class A Share automatically without 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, 2015
Issued from treasury
Repurchase and cancellation of shares
Exercise of options
Balance as at October 31, 2016
Issued from treasury
Exercise of options
Balance as at October 31, 2017
Number of shares
37,590,747
187,359
(978,831)
59,890
36,859,165
195,240
9,221
37,063,626
$
218,134
1,219
(5,680)
577
214,250
1,094
100
215,444
On March 4, 2016, the Corporation completed its normal course issuer bid for a 12-month period launched on April 10, 2015; as of
that date, the Corporation had repurchased a total of 2,274,921 Class B Shares for a total cash consideration of $16,531. The Corporation
repurchased 978,831 Class B Shares during the year ended October 31, 2016, for a cash consideration of $7,107.
As at October 31, 2017, the number of Class A Shares and Class B Shares stood at 3,457,571 and 33,606,055, respectively
[2,476,020 and 34,383,145 as at October 31, 2016].
75
Transat A.T. Inc.
2017 Annual Report
SUBSCRIPTION RIGHTS PLAN
Notes to Consolidated Financial Statements
At the Annual General Meeting [“AGM”] held on March 16, 2017, the shareholders approved the update and renewal of the
shareholders’ subscription rights plan [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. Besides the cosmetic changes relating to dates, the new rights plan contains amendments such as the extension in the time limit for
a permitted bid from 60 days to 105 days and the change in the definition of a competing permitted bid. The rights plan will terminate on the
day after the 2020 AGM, unless terminated prior to said AGM.
STOCK OPTION PLAN
Under the stock option plan, the Corporation may grant up to a maximum of 986,931 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. For options granted starting November 1, 2015, 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.
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 21.36
2017
2016
Number of
options
2,611,891
135,406
(9,221)
(332,178)
(159,866)
2,246,032
1,911,981
Weighted
average
price
$
11.94
8.97
7.48
11.23
30.43
10.57
Number of
options
2,741,856
—
(59,890)
(70,075)
—
2,611,891
Weighted
average
price
$
11.81
—
6.68
11.10
—
11.94
10.71
2,400,323
12.08
Outstanding options
Options exercisable
Number of options
outstanding as at October
31, 2017
Weighted
average
remaining
life
872,636
522,906
568,414
282,076
2,246,032
4.7
3.7
2.8
1.7
3.6
Weighted
average
price
$
6.68
9.82
12.37
20.40
10.57
Number of options
exercisable as at
October 31, 2017
872,636
276,896
480,373
282,076
1,911,981
Weighted
average
price
$
6.68
10.67
12.34
20.40
10.71
76
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
COMPENSATION EXPENSE RELATED TO STOCK OPTION PLAN
During the year ended October 31, 2017, the Corporation granted 135,406 stock options [nil in 2016] to certain key executives and
employees. The average fair value of each option granted is 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
2017
1.43%
4 years
42.0%
0.0%
3.09 $
2016
—
—
—
—
—
During the year ended October 31, 2017, the Corporation recorded a compensation expense of $115 [$401 in 2016] 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. Starting in 2017, PSUs
awarded vest 100% in mid-January three years following the award, provided the performance criteria determined on the award are met.
PSUs awarded prior to 2017 vest in three tranches of 16.67% in mid-January 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-January three years following
their award, provided the plan member is still an employee of the Corporation.
During the year ended October 31, 2017, the Corporation granted 258,298 PSUs [nil in 2016] to its key executives and employees. As
at October 31, 2017, the number of PSUs awarded amounted to 356,432. For the year ended October 31, 2017, the Corporation recognized
a compensation expense of $196 [$520 in 2016] for its performance share unit plan.
SHARE PURCHASE PLAN
A share purchase plan is available to eligible employees of the Corporation and its subsidiaries. Under the plan, as at
October 31, 2017, the Corporation was authorized to issue up to 114,437 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 195,240 Class B Shares [187,359 Class B Shares in 2016] for a total of $1,094 [$1,219 in
2016] 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, 2017, the Corporation accounted for a compensation expense of $179 [$189 in 2016] for its stock
ownership incentive and capital accumulation plan.
77
Transat A.T. Inc.
2017 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, 2017, the Corporation recognized a compensation expense of $266 [$242 in 2016] for its
permanent stock ownership incentive plan.
DEFERRED SHARE UNIT PLAN
Deferred share units [“DSUs”] are awarded in connection with the independent director deferred share unit plan. Under this plan, each
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 share price for the five trading days prior to the award of the DSUs. The DSUs are repurchased by the Corporation when 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 share price for the five trading days prior to the repurchase of the DSUs.
As at October 31, 2017, the number of DSUs awarded amounted to 231,227 [190,611 as at October 31, 2016]. For the year ended
October 31, 2017, the Corporation recognized a compensation expense of $1,228 [$55 in 2016] 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 share price 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 share price for the five trading days prior to the repurchase of the RSUs.
As at October 31, 2017, the number of RSUs awarded amounted to 1,075,534 [1,098,377 as at October 31, 2016]. During the year
ended October 31, 2017, the Corporation recorded a nil compensation expense [a compensation expense reversal of $977 in 2016] for its
restricted share unit plan.
78
Transat A.T. Inc.
2017 Annual Report
EARNINGS (LOSS) PER SHARE
Basic and diluted earnings (loss) per share were computed as follows:
[In thousands, except per share amounts]
NUMERATOR
Net income (loss) attributable to shareholders
Net income (loss) from discontinued operations
Net income (loss) from continuing operations attributable to shareholders
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 (loss) per share
Earnings (loss) per share
Basic
Diluted
Earnings (loss) per share from continuing operations
Basic
Diluted
Notes to Consolidated Financial Statements
2017
$
2016
$
134,308
—
134,308
(41,748)
49,772
(91,520)
36,995
36,899
45
—
37,040
36,899
3.63
3.63
3.63
3.63
(1.13)
(1.13)
(2.48)
(2.48)
For the purposes of calculating diluted earnings (loss) per share for the year ended October 31, 2017, 1,772,084 outstanding stock
options [2,611,891 in 2016] were excluded from the calculation, as their exercise price exceeded the Corporation’s average market share
price.
Note 21
ADDITIONAL DISCLOSURE ON EXPENSES
SALARIES AND EMPLOYEE BENEFITS
Salaries and other employee benefits
Long-term employee benefits [note 25]
Share-based payment expense
DEPRECIATION AND AMORTIZATION
Property, plant and equipment
Intangible assets subject to amortization
Other assets
Deferred lease inducements
79
2017
$
368,820
2,732
311
371,863
2017
$
58,659
9,368
683
(240)
68,470
2016
$
343,321
2,657
921
346,899
2016
$
40,669
9,366
243
(240)
50,038
Transat A.T. Inc.
2017 Annual Report
Note 22
SPECIAL ITEMS
Notes to Consolidated Financial Statements
Special items include the restructuring charge, lump-sum payments related to collective agreements and other significant unusual
items. During the year ended October 31, 2017, the Corporation recorded a restructuring charge of $2,925, comprising mainly termination
benefits, of which an amount of $811 was unpaid as at October 31, 2017 and included under accounts payable and accrued liabilities. During
the year ended October 31, 2016, lump-sum payments in the amount of $7,263 were recognized in connection with the renewal of the
collective agreement with the cabin crews, in addition to the restructuring charge of $6,562, comprising mainly termination benefits, related to
the closure of call centres and a tour operator in the Netherlands, of which an amount of $5,919 was unpaid as at October 31, 2016 and
included under accounts payable and accrued liabilities.
Note 23
INCOME TAXES
The major components of the income tax expense for the years ended October 31 are:
Consolidated statements of income (loss)
Current
Current income taxes
Adjustment to taxes payable for prior years
Deferred
Relating to temporary differences
Adjustment to deferred taxes for prior years
Income tax expense (recovery)
Income taxes on items in other comprehensive income (loss) are:
Consolidated statements of comprehensive income (loss)
Deferred
Change in fair value of derivatives designated as cash flow
hedges
Change in defined benefit plans
- Actuarial gain (loss) on the obligation
Income tax expense (recovery) on comprehensive income (loss)
2017
$
15,378
3,306
18,684
(2,366)
(2,886)
13,432
2016
$
(16,555)
(633)
(17,188)
6,345
—
(10,843)
2017
$
2016
$
864
(4,589)
401
1,265
(870)
(5,459)
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 (non-taxable) items
Derecognition of a future income tax asset
Adjustments for prior years
Effect of tax rate changes
Other
2017
2016
%
26.8
(2.4)
(16.4)
0.3
0.3
0.1
0.1
8.8
$
40,709
(3,629)
(24,670)
402
420
114
132
13,432
%
26.9
3.4
(19.3)
(0.9)
0.8
0.1
0.1
11.1
$
(26,194)
(3,347)
18,809
824
(787)
(86)
(62)
(10,843)
80
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
The applicable statutory income tax rate was 26.8% for the year ended October 31, 2017 [26.9% for the year ended
October 31, 2016]. The 0.1% rate decrease is due to the reduction in the applicable Québec tax rate which was lowered from 11.9%
to 11.8%. The Corporation’s applicable statutory income tax rate is the applicable combined Canadian (federal and Québec) tax rate.
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
Deferred tax
The changes in net deferred tax assets are as follows:
Balance, beginning of year
Recognized in the consolidated statements of income (loss) as continuing operations
Recognized in the consolidated statements of income (loss) as discontinued operations
Recognized in other comprehensive income (loss) as continuing operations
Recognized in other comprehensive income (loss) as discontinued operations
Assets held for sale
Disposal of discontinued operations
Other
The deferred tax assets are detailed below:
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets
Consolidated statements
of financial position
2017
2016
$
$
112
1,467
Consolidated statements
of income (loss)
2016
$
(128)
2017
$
1,360
(12,646)
837
(2,750)
1,289
13,151
10,802
1,919
14,069
(13,537)
922
1,804
953
8,288
10,868
657
10,067
770
(82)
(3,690)
337
4,863
335
1,359
5,252
2017
$
10,067
5,252
—
(1,265)
—
109
—
(94)
14,069
(2,001)
4,735
(5,045)
(948)
(3,293)
68
267
(6,345)
2016
$
21,327
(6,345)
(1,246)
4,589
789
—
(9,502)
455
10,067
2017
$
16,286
(2,217)
14,069
2016
$
15,055
(4,988)
10,067
As at October 31, 2017, non-capital losses carried forward and other unrecognized tax deductions available to reduce future taxable
income of certain subsidiaries in Mexico, totalled MXP 89,217 [$6,013] [MXP 87,451 [$6,191] as at October 31, 2016]. These losses and
deductions expire in 2020 and thereafter.
81
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
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 31, 2017,
there are no taxable temporary differences for which no deferred income tax liability were recorded.
Note 24
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.
Transat Tours Canada inc.
Transat Distribution Canada inc.
Jonview Canada Inc. [note 6]
The Airline Seat Company Ltd.
Air Consultants France S.A.S.
Air Consultant Europe B.V.
Caribbean Investments B.V. [note 6]
Caribbean Transportation Inc.
CTI Logistics Inc.
Sun Excursion Caribbean Inc.
Propiedades Profesionales Dominicanas Carhel S.R.L.
Servicios y Transportes Punta Cana S.R.L.
TTDR Travel Company S.A.S.
Turissimo Carribe Excusiones Dominican Republic C por A
Turissimo Jamaica Ltd.
Trafictours de Mexico S.A. de C.V.
Promotora Turística Regional S.A. de C.V.
Desarrollo Transimar S.A. de C.V. [note 6]
Country of
incorporation
Canada
Canada
Canada
Canada
United Kingdom
France
Netherlands
Netherlands
Barbados
Barbados
Barbados
Dominican Republic
Dominican Republic
Dominican Republic
Dominican Republic
Jamaica
Mexico
Mexico
Mexico
Interest (%)
2016
100.0
100.0
100.0
80.1
100.0
100.0
100.0
35.0
70.0
70.0
70.0
70.0
70.0
70.0
70.0
70.0
70.0
100.0
—
2017
100.0
100.0
100.0
100.0
100.0
100.0
100.0
—
70.0
70.0
70.0
70.0
70.0
70.0
70.0
70.0
70.0
100.0
50.0
The Corporation entered into transactions in the normal course of business with its associate until its sale on October 4, 2017. These
transactions are carried out at arm’s length. Significant transactions are as follows:
Costs of providing tourism services
Outstanding balances with our associate were as follows as at October 31, 2016:
Trade and other payables
2017
$
2016
$
24,815
32,250
2017
$
—
2016
$
869
82
Transat A.T. Inc.
2017 Annual Report
COMPENSATION OF KEY SENIOR EXECUTIVES
Notes to Consolidated Financial Statements
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 were as follows:
Salaries and other employee benefits
Long-term employee benefits
Share-based payment expense
Note 25
EMPLOYEE FUTURE BENEFITS
2017
$
4,302
1,252
276
2016
$
3,235
1,055
605
The Corporation offers defined benefit pension arrangements to certain senior executives and defined contribution plans to certain
employees.
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.
These arrangements are not funded; however, to secure its obligations related to defined benefit pension arrangements, the Corporation has
issued a $50,100 letter of credit to the trustee [see note 8]. 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: The other benefits were related to termination benefits for the subsidiaries Transat France and Tourgreece which were disposed
of on October 31, 2016 [see note 7]. The amount of the obligation related to other benefits included in the consolidated statement of financial
position therefore amounted to nil as at October 31, 2017 and 2016:
Present value of obligations, beginning of year
Current service cost
Financial costs
Benefits paid
Experience losses (gains)
Actuarial loss (gain) on obligation
Effect of exchange rate changes
Disposal of subsidiaries
Present value of obligations, end of year
Retirement benefits
Other benefits
Total
2017
$
40,400
1,388
1,344
(871)
(224)
(1,273)
—
—
40,764
2016
$
35,327
1,212
1,445
(814)
3,191
39
—
—
40,400
2017
$
—
—
—
—
—
—
—
—
—
2016
$
3,938
296
85
—
—
517
67
(4,903)
—
2017
$
40,400
1,388
1,344
(871)
(224)
(1,273)
—
—
40,764
2016
$
39,265
1,508
1,530
(814)
3,191
556
67
(4,903)
40,400
The following table provides the components of retirement benefit expense for the years ended October 31. The costs of other
benefits are included under discontinued operations in the consolidated statements of income (loss):
Retirement benefits
Other benefits
Total
Current service cost
Interest cost
Total cost of retirement benefits
2016
$
1,212
1,445
2,657
2017
$
—
—
—
2016
$
296
85
381
2017
$
1,388
1,344
2,732
2016
$
1,508
1,530
3,038
2017
$
1,388
1,344
2,732
83
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
The following table indicates projected payments under defined benefit pension plan arrangements as at October 31, 2017:
Under one year
One to five years
Between five and 10 years
Between 10 and 15 years
Between 15 and 20 years
$
958
9,986
13,139
12,086
10,565
46,734
The weighted average duration of the defined benefit obligation related to pension arrangements was 12.9 years as at
October 31, 2017.
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
2017
%
3.50
2.75
3.25
2.75
2016
%
3.25
2.75
4.00
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, 2017
$
(3)
13
Retirement benefit
obligations as at
October 31, 2017
$
(1,223)
65
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
2017
$
—
40,764
40,764
2016
$
—
40,400
40,400
84
Transat A.T. Inc.
2017 Annual Report
Notes to Consolidated Financial Statements
Changes in the cumulative amount of net actuarial losses recognized in other comprehensive income (loss) and presented as a
separate component of retained earnings were as follows:
Gains (losses)
October 31, 2015
Actuarial losses
Income taxes
Discontinued operations
October 31, 2016
Actuarial gains
Income taxes
October 31, 2017
$
(8,368)
(3,747)
1,051
1,160
(9,904)
1,497
(401)
(8,808)
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 $11,673 for the year ended
October 31, 2017 [$10,534 for the year ended October 31, 2016].
Note 26
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
2017
$
165,293
661,856
890,234
1,717,383
2016
$
168,975
415,317
107,549
691,841
The lease expense totalled $151,652 for the year ended October 31, 2017 [$160,659 for the year ended October 31, 2016].
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
2017
$
94,640
—
—
94,640
2016
$
109,845
—
—
109,845
85
Transat A.T. Inc.
2017 Annual Report
LITIGATION
Notes to Consolidated Financial Statements
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, subject to the paragraph hereunder. The Corporation has directors’ and officers’ liability insurance as
well as professional liability insurance and the amount of coverage under said insurance policies is usually sufficient to pay the amounts the
Corporation may be required to disburse in connection with these lawsuits. In all these lawsuits, the Corporation has and will continue to
vigorously defend its position.
The Corporation is currently involved in a particular litigation in which Plaintiffs allege misappropriation of confidential information and
solicitation of employees. Although the Amended Complaint fails to disclose a specific amount of monetary damages, Plaintiffs’ principal,
during his deposition, asserted that the damages sought were at least US$30,000 [$38,700]. The Corporation is of the view that these
proceedings are not well-founded and lack merit. As such, it will continue to vigorously defend this lawsuit. The Corporation is also of the
view that Plaintiffs have not provided sufficient evidence to substantiate the whole of their claim or the quantum of damages being sought.
Therefore, at this stage, it is not possible to determine with any degree of certainty the extent of any financial liability that may arise should
the Corporation be unsuccessful in its defence of this lawsuit. No amounts have been accrued with respect to this lawsuit as of
October 31, 2017.
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. 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, the Corporation already paid $15,100 to the tax authorities in respect of this matter during the fiscal year ended October 31, 2015
and objected to the notices of assessment received. This amount is recognized as income taxes receivable as at October 31, 2017 and
2016.
86
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2017 Annual Report
Note 27 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 8, 10, 18, 25 and 26 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 guarantees 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, 2017, these guarantees totalled $701. Historically, the Corporation has not made
any significant payments under such agreements. As at October 31, 2017, 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, 2017, $27,137 had been drawn down under the facility.
Note 28 SEGMENTED DISCLOSURE
The Corporation has determined that it conducts its activities in a single industry segment, namely holiday travel. With respect to
geographic areas, the Corporation’s continuing operations are mainly in the Americas. Revenues and non-current assets outside the
Americas are not material. Therefore, the consolidated statements of income (loss) and consolidated statements of financial position include
all the required information.
87
Transat A.T. Inc.
2017 Annual Report
Additional financial information
[in thousands of Canadian dollars, except per share amounts]
Consolidated statements of income (loss)
Continuing operations
Revenues
Operating expenses
Depreciation and amortization
Special items
Operating income (loss)
Financing costs
Financing income
Change in fair value of derivative financial instruments used for
aircraft fuel purchases
Foreign exchange gain
Impairment of assets
Loss (gain) on disposal of an investment
Income (loss) before income tax expense
Income taxes (recovery)
Net income (loss) from continuing operations
Discontinued operations
Net income (loss) from discontinued operations
Net income (loss) for the year
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)
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.
2017
2016
2015
2014
2013
3,005,345
2,899,230
68,470
2,925
34,720
2,889,646
2,856,118
50,038
13,825
(30,335)
2,897,950
2,797,342
45,817
—
54,791
2,996,106
2,909,737
43,581
6,387
36,401
2,969,642
2,855,340
36,423
5,740
72,139
2,134
(8,363)
(9,187)
(15,052)
—
(86,616)
151,804
13,432
138,372
—
138,372
4,064
134,308
3.63
3.63
161,487
97,901
(3,596)
450
256,242
593,582
1,453,216
—
577,870
0.60
15.59
1,669
(6,996)
(6,901)
(1,284)
79,708
843
(97,374)
(10,843)
(86,531)
49,772
(36,759)
4,989
(41,748)
(1.13)
(1.13)
43,561
5,093
(9,823)
(12,132)
26,699
363,664
1,277,420
—
464,386
0.64
12.60
1,775
(7,576)
1,391
(2,531)
—
—
61,732
12,413
49,319
(2,355)
46,964
4,399
42,565
1.11
1.10
1,541
(7,872)
21,978
(1,123)
369
—
21,508
1,724
19,784
6,282
26,066
3,191
22,875
0.59
0.59
2,091
(7,233)
732
(566)
—
—
77,115
18,046
59,069
2,133
61,202
3,247
57,955
1.51
1.51
108,992
(53,854)
(12,672)
3,402
45,868
336,423
1,513,764
—
537,252
0.65
14.29
90,009
(52,683)
191
(2,262)
35,255
308,887
1,375,030
—
482,946
0.65
12.47
102,179
(21,092)
(1,817)
1,710
80,980
171,175
1,290,073
—
441,393
0.66
11.47
37,064
36,859
37,591
38,742
38,468
36,995
37,040
36,899
36,899
38,442
38,558
38,644
39,046
38,390
38,472
88
Head Office
Transat A.T. Inc.
Place du Parc
300 Léo-Pariseau St.
Suite 600
Montreal, Quebec
H2X 4C2
Telephone:
514.987.1660
Fax:
514.987.8035
www.transat.com
info@transat.com
Information
www.transat.com
Transfer Agent
and Registrar
For additional
information, write to the
Vice-President, Finance and
Administration, and Chief
Financial Officer.
Ce rapport annuel
est disponible en français.
Stock Exchange
Toronto Stock
Exchange (TSX)
TRZ
AST Trust Company (Canada)
2001 Robert-Bourassa Blvd.
Suite 1600
Montreal, Quebec
H3A 2A6
Toll-free: 1.800.387.0825
inquiries@astfinancial.com
www.astfinancial.com/ca-en
Auditors
Ernst & Young LLP
Montreal, Quebec
Annual General Meeting
of Shareholders
Thursday, March 15, 2018
10:00 a.m.
McGill - New Residence Hall
Ballroom - Level C
3625 Parc Ave.
Montreal, Quebec
H2X 3P8
www.resp.transat.com
www.transat.com