TRANSAT A.T. Inc.
Management’s Discussion and Analysis
Year ended October 31, 2018
Investor Relations
Denis Pétrin
Chief Financial Officer
investorrelations@transat.com
Ticker symbol
TSX: TRZ
Management’s Discussion and Analysis
TABLE OF CONTENTS
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
Caution Regarding Forward-Looking Statements ................................................................ 6
Non-IFRS Financial Measures ............................................................................................. 7
Financial Highlights .......................................................................................................... 10
Overview .......................................................................................................................... 11
Revisiting Our September 13, 2018 Outlook ....................................................................... 15
Business Acquisitions and Disposals ................................................................................. 16
Consolidated Operations .................................................................................................. 17
Financial Position, Liquidity and Capital Resources ........................................................... 23
Other .............................................................................................................................. 27
Accounting ...................................................................................................................... 27
Risks and Uncertainties .................................................................................................... 34
Controls and Procedures ................................................................................................. 39
Outlook ........................................................................................................................... 39
Management’s Report .................................................................................................................. 40
Independent Auditors’ Report ...................................................................................................... 41
Management’s Discussion and Analysis
MANAGEMENT’S DISCUSSION AND 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, 2018, compared with the year ended October 31, 2017, and should be read
in conjunction with the audited consolidated financial statements and notes thereto. The information contained herein is
dated as of December 12, 2018. 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, 2018 and the Annual Information
Form.
The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”). We
occasionally refer to non-IFRS financial measures in this 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.
1. 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, 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, economic conditions,
changes in demand due to the seasonal nature of the business, extreme weather conditions, climatic or geological
disasters, war, political instability, real or perceived terrorism, outbreaks of epidemics or disease, consumer preferences
and consumer habits, consumers’ perceptions of the safety of destination services and aviation safety, demographic
trends, disruptions to the air traffic control system, the cost of protective, safety and environmental measures,
competition, the Corporation’s ability to maintain and grow its reputation and brand, the availability of funding in the
future, fluctuations in fuel prices and exchange rates and interest rates, the Corporation’s dependence on key suppliers,
the availability and fluctuation of costs related to our aircraft, information technology and telecommunications, changes in
legislation, unfavourable regulatory developments or procedures, pending litigation and third party lawsuits, the ability to
reduce operating costs, the Corporation’s ability to attract and retain skilled resources, labour relations, collective
bargaining and labour disputes, pension issues, maintaining insurance coverage at favourable levels and conditions and at
an acceptable cost, and other risks detailed in the Risks and Uncertainties section of this MD&A.
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 forward-looking statements in this MD&A are based on a number of assumptions relating to economic and market
conditions as well as the Corporation’s operations, financial position and transactions. Examples of such forward-looking
statements include, but are not limited to, statements concerning:
•
•
•
•
The outlook whereby our new hotel chain will strengthen Transat’s profitability, particularly during winter.
The outlook whereby the Corporation has the resources it needs to meet its 2019 objectives and to
continue building on its long-term strategies.
The outlook whereby the Corporation expects revenues and total travellers to increase compared with
2018.
The outlook whereby the Corporation expects to generate positive cash flows from operating activities in
2019.
2018 Annual Report Transat A.T. Inc. | 6
Management’s Discussion and Analysis
•
•
•
The outlook whereby additions to property, plant and equipment and intangible assets could amount to
approximately $40.0 million, excluding any land and hotel acquisitions related to the development of our
hotel chain.
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 the Corporation expects that for winter 2019 on the sun destinations market, the
impact of fluctuations in the Canadian dollar, combined with increased fuel costs, will result in a 3.4%
increase in operating expenses if the dollar against the U.S. dollar and aircraft fuel prices remain stable.
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 year and that fuel prices, foreign exchange rates, selling prices and
hotel and other costs will remain stable. 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 that the assumptions on which these forward-looking statements are based are 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.
2. NON-IFRS FINANCIAL MEASURES
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 intended 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
fulfill its financial obligations.
By excluding from our results items that arise mainly from long-term strategic decisions and/or do not, in our opinion,
reflect our operating performance for the period, such as the change in fair value of fuel-related derivatives and other
derivatives, gain (loss) on business disposals, restructuring charges, asset impairment, depreciation and amortization and
other significant unusual items, and by including premiums for fuel-related derivatives and other derivatives that matured
during the period, we believe this MD&A helps users to better analyze our results, as well as our 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.
2018 Annual Report Transat A.T. Inc. | 7
Management’s Discussion and Analysis
The non-IFRS measures used by the Corporation are as follows:
Adjusted operating
income (loss)
Operating income (loss) before depreciation and amortization expense, restructuring charge,
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.
Adjusted pre-tax
income (loss)
Adjusted net income
(loss)
Income (loss) before income tax expense before change in fair value of fuel-related derivatives
and other derivatives, gain (loss) on business disposals, 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
lump-sum payments related to collective
business disposals, restructuring charge,
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.
2018 Annual Report Transat A.T. Inc. | 8
Management’s Discussion and Analysis
The following tables reconcile the non-IFRS financial measures to the most comparable IFRS financial measures:
(in thousands of Canadian dollars, except per share amounts)
Operating income (loss)
Lump-sum payments related to collective agreements
Special items
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
Special items
Change in fair value of fuel-related derivatives and other derivatives
Loss (gain) on business disposals
Foreign exchange gain on business disposal
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
Special items
Change in fair value of fuel-related derivatives and other derivatives
Loss (gain) on business disposals
Foreign exchange gain on business disposal
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
2018
$
(44,575)
—
2,262
59,125
2017
$
34,720
—
2,925
68,470
2016
$
(30,335)
7,263
6,562
50,038
(299)
16,513
(4,090)
102,025
(7,752)
25,776
1,418
—
2,262
1,284
(31,064)
—
—
151,804
—
2,925
(9,187)
(86,616)
(15,478)
—
(97,374)
7,263
6,562
(6,901)
843
—
79,708
(299)
(26,399)
(4,090)
39,358
(7,752)
(17,651)
3,819
—
—
2,262
1,284
(31,064)
—
—
134,308
—
—
2,925
(9,187)
(86,616)
(15,478)
—
(299)
(542)
(24,540)
(4,090)
7,237
29,099
(41,748)
(49,772)
7,263
6,562
(6,901)
843
—
79,708
(7,752)
(3,745)
(15,542)
(24,540)
29,099
(15,542)
37,562
(0.65)
37,040
0.79
36,899
(0.42)
2018 Annual Report Transat A.T. Inc. | 9
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
3. 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
October 31, October 31, October 31,
2016
$
2018
$
2017
$
124,454
5
622,270
—
622,270
622,270
132,139
5
660,695
—
660,695
660,695
135,813
5
679,065
—
679,065
679,065
622,270
(593,654)
28,616
660,695
(593,582)
67,113
679,065
(363,664)
315,401
2018
$
2017
$
2016
$
Change
2018
%
2017
%
2,992,582
(44,575)
3,819
0.10
0.10
16,513
(24,540)
(0.65)
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)
68,804
(93,644)
(430)
(982)
161,487
97,901
(3,596)
450
43,561
5,093
(9,823)
(12,132)
(26,252)
256,242
26,699
As at
As at
As at
October 31, October 31, October 31,
2016
$
2018
$
2017
$
(0.4)
(228.4)
(97.2)
(97.2)
(97.2)
(83.8)
(184.3)
(182.3)
(57.4)
(195.7)
88.0
(318.2)
(110.2)
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
Change
2018
%
Change
2017
%
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 section 2 – Non-IFRS financial measures
593,654
593,582
363,664
0.0
63.2
338,919
932,573
1,559,860
—
622,270
309,064
902,646
1,453,216
—
660,695
338,581
702,245
1,227,420
—
679,065
9.7
3.3
7.3
—
(5.8)
28,616
67,113
315,401
(57.4)
(8.7)
28.5
18.4
—
(2.7)
(78.7)
2018 Annual Report Transat A.T. Inc. | 10
Management’s Discussion and Analysis
4. OVERVIEW
THE HOLIDAY TRAVEL INDUSTRY
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 a leading integrated international tourism company specializing in holiday travel, which operates and markets its
services in the Americas and Europe. It develops and markets holiday travel services in packages, including air travel and
hotel stays, and air-only formats. Transat operates under the Transat and Air Transat brands mainly in Canada, France, the
United Kingdom 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. It offers
destination services in Mexico, the Dominican Republic and Jamaica. Recently, Transat started setting up a division with a
mission to own and operate hotels in the Caribbean and Mexico and to market them, particularly in the United States, in
Europe and in Canada.
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 range of operations and mission to include the hotel
business.
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, European and U.S. customers.
Furthermore, Transat will strengthen its current model by maintaining its focus on satisfying the expectations of leisure
customers with user-friendly service for an affordable price. 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.
2018 Annual Report Transat A.T. Inc. | 11
Management’s Discussion and Analysis
For 2019, Transat has set the following objectives:
1. Develop our hotel division: start construction work on the first hotel in Mexico, acquire a second parcel of
land or a hotel in operation and finish setting up the team
2. Strengthen our air network: increase network density by increasing frequencies on our main routes and
consider potential feeder/defeeder alliances to increase route density
3.
Increase our revenues, by improving ancillary revenue streams and by attaining a higher level of expertise
and the implementation of new practices within the revenue management department
4. Transform our fleet: complete the changes planned for this year, including the introduction of the first
A321neo LRs, finalize fleet planning over 3–5 years, while improving reliability, and integrating new pilot
fatigue rules and the passenger bill of rights
5. Reduce and control costs
6. Optimize distribution, namely by increasing our involvement in direct distribution channels
7.
Increase customer satisfaction, measured by our Net Promoter Score
8. Expand our digital footprint with customers and digitize and automate business processes
9. Unite our teams and maintain their engagement
REVIEW OF OBJECTIVES AND ACHIEVEMENTS FOR 2018
The main objectives and achievements for 2018 were as follows:
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.
We started to establish our hotel division in February with the appointment of Jordi Solé as President of the division. We
then conducted the necessary research and acquired (in September and November) two adjacent parcels of land to build a
hotel resort in Mexico. We pursue our endeavours to acquire additional land or existing hotels. We are in the process of
hiring several other senior managers to complete the division’s team in the coming months.
Improve efficiency, in particular by improving revenue management, pricing and aircraft utilization and by
pursuing its cost reduction policy.
We have made significant changes to our revenue management practices to maximize flight revenues and optimize pricing
methodology. First, we have implemented a pricing strategy to stimulate demand. Second, we now manage our inventory to
allocate our seats by booking class. These changes will allow us to compile a sufficiently robust history to achieve the
optimal allocation of our seats across the classes, as well as the best positioning of our aircraft fleet, while reducing our
operating costs.
Improve distribution by continuing to grow direct sales, refining channel management and strengthening our
presence in mobile technologies.
We continued to improve our multichannel distribution, notably through expansion in direct sales (i.e., with no
intermediary). Today, direct sales account for 50% of our seats sold on air-only flights and nearly 20% of our packages.
We also continued to strengthen our digital initiatives to interact with our customers at all points of contact. As a result, we
have launched a new version of our mobile application which has an integrated booking tool (package, flight, à la carte
hotel and car rental), and allows for the creation of personalized itineraries, online check-in and electronic boarding
passes.
2018 Annual Report Transat A.T. Inc. | 12
Management’s Discussion and Analysis
Enhance customer proximity, particularly through centralized records management and satisfaction metrics.
Centralized management of customer files has enabled us to provide a more personalized and efficient service. We can
now better understand our customer needs and thus increase their satisfaction levels. Since the launch of the centralized
customer file management system at the call centre in summer 2017, we have saved 45 seconds per call and boosted
productivity by 5%. In addition, we have consolidated our air websites on a unified platform offered in 18 languages and
cultures, both mobile and web-based, providing customers with personalized offers while simplifying their shopping and
travel experience.
Strengthen our commitment to corporate responsibility, particularly by obtaining Travelife certification and
refining our employee satisfaction metrics.
On October 18, 2018, Transat became the first major international tour operator to earn a Travelife certification for the full
range of its activities. This recognition is the culmination a 12-year commitment and confirms Transat’s leadership in
sustainable development. To hold this world-leading certification for tourism companies, Transat must comply with more
than 200 criteria covering its workplace practices, product range, business partners and customers. We will now work
steadfastly to pursue the continuous-improvement processes required to maintain this certification and become a
company that shows ever-increasing respect for the principles of sustainable development. And to do so, we rely on the
hard work and shared commitment of our personnel and of our tourism partners.
We also continued the deployment of a tool to measure employee satisfaction in real-time, which is now implemented for
nearly 1,600 employees, or substantially all our non-unionized employees, with a bimonthly response rate of over 80%. This
allows us to ensure that we maintain a high commitment rate, while allowing managers to respond to employee concerns in
a timely manner.
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 six years in the hotel business, either
owned or managed.
2018 Annual Report Transat A.T. Inc. | 13
Management’s Discussion and Analysis
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
Our balances of cash and cash equivalents not held in trust or otherwise reserved
totalled $593.7 million as at October 31, 2018. Our continued focus on expense
reductions and operating income growth should maintain these balances at healthy
levels and support the implementation of our hotel division.
Credit facilities
A revolving credit facility agreement totalling $50.0 million, among others, is also
available for operating purposes.
Our non-financial resources include:
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 2019 objectives and to continue building on its long-term strategies.
2018 Annual Report Transat A.T. Inc. | 14
Management’s Discussion and Analysis
5. REVISITING OUR SEPTEMBER 13, 2018 OUTLOOK
What we said
What we did
Fuel/foreign
exchange effect –
transatlantic market
7.3% increase in operating expenses for the
fourth quarter of 2018.
the
fourth quarter of 2018,
For
the
unfavourable fuel/foreign exchange effect
resulted in a $33.6 million (7.0%) increase in
operating expenses
transatlantic
market, our main market for the period.
the
in
Overall results
For the fourth quarter of 2018, overall results
lower than in 2017.
For the fourth quarter of 2018, adjusted net
income(1) of $16.9 million was lower than in
2017, mainly due to an increase in operating
expenses attributable to higher fuel prices.
(1) See section 2 – Non-IFRS financial measures
2018 Annual Report Transat A.T. Inc. | 15
Management’s Discussion and Analysis
6. BUSINESS ACQUISITIONS AND DISPOSALS
JONVIEW CANADA INC.
On November 30, 2017, the Corporation completed the sale of its wholly owned subsidiary Jonview Canada Inc. [“Jonview”],
which has an incoming tour operator business in Canada, 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. Under the terms of the agreement, the selling price totalled $48.9 million, of which $46.7 million was
received in cash, with the balance of $2.2 million receivable under certain contractual conditions prior to May 31, 2019. The
disposed subsidiary’s net assets amounted to $13.4 million on November 30, 2017. The Corporation recognized a gain on
business disposal of $31.3 million, net of transaction costs of $0.5 million and of $3.7 million due to the Fonds de Solidarité
des Travailleurs du Québec [“Fonds”], of which $3.3 million was paid in cash during the year, as an additional consideration
to the repurchase price of the 19.93% interest held by the Fonds in December 2016.
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
and comprehensive income for the years ended October 31, 2018 and 2017. As at October 31, 2017, the assets and liabilities
of Jonview were reported as held for sale in the consolidated statements of financial position.
For the year ended October 31, 2018, Jonview recorded a net loss of $0.9 million. 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.
OCEAN HOTELS
On October 4, 2017, the Corporation completed the sale of its 35% minority interest in Ocean Hotels to H10 Hotels for an
amount of US$150.5 million [$187.5 million], received in cash. The disposed interest had a carrying value of $97.3 million as
at October 4, 2017. During the year ended October 31, 2017, the Corporation recognized a gain on business disposal 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 the investment.
Under the terms of the agreement, on March 8, 2018, the selling price was adjusted downward by US$1.5 million
[$1.9 million] to US$149.0 million [$185.6 million]. As a result of additional transaction costs incurred in connection with the
closing of the transaction, the Corporation recognized a downward adjustment of $0.2 million to the gain on business
disposal, bringing the total amount of the gain on disposal of Ocean Hotels to $86.4 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.
DESARROLLO TRANSIMAR
On April 3, 2017, the Corporation invested in a hotel on Puerto Vallarta’s Pacific coast, which operates under the name
Rancho Banderas All Suites Resort, by acquiring a 50% interest in Desarrollo Transimar S.A. de C.V. [“Desarrollo
Transimar”], 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 [$0.7 million] was included in trade and other payables as at
October 31, 2018. This amount was paid on November 5, 2018. This interest in a joint venture is accounted for using the
equity method.
2018 Annual Report Transat A.T. Inc. | 16
Management’s Discussion and Analysis
7. CONSOLIDATED OPERATIONS
(in thousands of dollars)
Continuing operations
Revenues
Operating expenses
Costs of providing tourism services
Aircraft fuel
Salaries and employee benefits
Aircraft maintenance
Airport and navigation fees
Aircraft rent
Commissions
Other airline costs
Other
Share of net loss (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 business disposals
Foreign exchange gain on business disposal
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 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
2018
$
2017
$
2016
$
Change
%
%
2,992,582
3,005,345
2,889,646
(0.4)
4.0
1,091,924
498,512
386,898
237,918
149,699
124,454
87,763
263,272
135,225
105
59,125
2,262
3,037,157
(44,575)
2,061
(17,935)
1,268,832
358,558
371,863
203,669
134,665
132,139
88,635
225,512
126,500
(11,143)
68,470
2,925
2,970,625
34,720
2,134
(8,363)
1,309,430
329,784
346,899
178,317
128,695
135,813
92,018
221,540
119,964
(6,342)
50,038
13,825
2,919,981
(30,335)
1,669
(6,996)
1,284
(31,064)
—
(339)
—
1,418
(6,494)
551
(5,943)
7,361
(9,187)
(86,616)
(15,478)
426
—
151,804
18,684
(5,252)
13,432
138,372
(6,901)
843
—
(1,284)
79,708
(97,374)
(17,188)
6,345
(10,843)
(86,531)
(13.9)
39.0
4.0
16.8
11.2
(5.8)
(1.0)
16.7
6.9
(100.9)
(13.6)
(22.7)
2.2
(228.4)
(3.4)
114.5
(114.0)
(64.1)
(100.0)
(179.6)
N/A
(99.1)
(134.8)
110.5
(144.2)
(94.7)
(3.1)
8.7
7.2
14.2
4.6
(2.7)
(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
—
7,361
—
138,372
49,772
(36,759)
—
(94.7)
(100.0)
476.4
3,819
3,542
7,361
134,308
4,064
138,372
(41,748)
4,989
(36,759)
0.10
0.10
0.10
0.10
3.63
3.63
3.63
3.63
(2.48)
(2.48)
(1.13)
(1.13)
(97.2)
(12.8)
(94.7)
(97.2)
(97.2)
(97.2)
(97.2)
421.7
(18.5)
476.4
246.4
246.4
421.2
421.2
2018 Annual Report Transat A.T. Inc. | 17
Management’s Discussion and Analysis
REVENUES
We generate 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, 2018, revenues were down $12.8 million (0.4%). This decrease resulted mainly from the sale
of our Jonview subsidiary. For the year ended October 31, 2018, the Corporation recognized $0.8 million in revenues from
Jonview, compared with $182.0 million in 2017. During the summer, the decrease in our revenues, due to the sale of
Jonview, was partially offset by a 13.2% increase in the number of travellers in the transatlantic market, our main market
during that season, as a result of our decision to increase our capacity by 13.8% in this market, despite slightly lower
average selling prices. The decrease in revenues recorded during the year was also partially offset by the increase in
revenues for the winter season, which saw a 5.4% rise in the number of travellers in the sun destinations market, our main
market for the period, resulting from our decision to increase our capacity by 7.7% in that market. The increase in revenues
for the winter season was also accentuated by an 18.1% addition to our capacity in the transatlantic market, resulting in a
14.8% rise in the number of travellers in that market. In addition, average selling prices slightly increased across all of our
markets during the winter season.
For 2019, we expect revenues and total travellers to increase compared with 2018.
OPERATING EXPENSES
Total operating expenses increased by $66.5 million (2.2%) during the year compared with 2017. The increase was mainly
attributable to our winter season, which saw a rise in the number of travellers in the sun destinations market, our main
market for the period, partially offset by the strengthening of the dollar against the U.S. dollar. The increase also results
from the summer season, during which there was a rise in fuel price indices, combined with an increase in the number of
travellers across all of our markets. During the summer, the increase in operating expenses was partially offset by the
decrease in the number of person-nights sold in Canada, following the sale of our Jonview subsidiary, and by the
strengthening of the dollar against the U.S. dollar.
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 $176.9 million (13.9%) decrease resulted
primarily from a reduction in the number of person-nights sold in Canada, following the sale of our Jonview subsidiary, and
the strengthening of the dollar against the U.S. dollar.
Aircraft fuel
Aircraft fuel expense rose $140.0 million (39.0%) during the year, owing primarily to a rise in fuel price indices in financial
markets, combined with higher capacity compared with 2017. The increase in aircraft fuel expense was partially offset by
the strengthening of the dollar against the U.S. dollar.
Salaries and employee benefits
Salaries and employee benefits rose $15.0 million (4.0%) to $386.9 million for the year ended October 31, 2018. The
increase resulted from annual salary reviews and the hiring of pilots and flight attendants due to higher capacity compared
with 2017, offset by lower variable compensation compared with 2017.
Aircraft maintenance
Aircraft maintenance costs consist mainly of engine and airframe maintenance expenses incurred by Air Transat for leased
aircraft. Compared with 2017, these expenses rose $34.2 million (16.8%) during the year, due to our increase in capacity
compared with last year.
2018 Annual Report Transat A.T. Inc. | 18
Management’s Discussion and Analysis
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 $15.0 million (11.2%) compared with 2017, driven by an increase in our capacity from 2017.
Aircraft rent
The $7.7 million (5.8%) decrease in aircraft rent for the year resulted from the renegotiation of lease agreements for
Airbus A330s which are already part of our fleet and the strengthening of the dollar against the U.S. dollar, despite the fact
that the number of leased aircraft has increased compared with last year.
Commissions
Commissions include the fees paid by tour operators to travel agencies for serving as intermediaries between tour
operators and consumers. Commissions amounted to $87.8 million, down $0.9 million (1.0%) compared with 2017. As a
percentage of revenues, commissions remained stable and accounted for 2.9% of revenues for the year.
Other air costs
Other air costs consist mainly of handling, crew and catering costs. Other air costs were up $37.8 million (16.7%) for the
year, compared with 2017. This increase resulted from a higher capacity compared with 2017.
Other
Other expenses were up $8.7 million (6.9%) during the year, compared with 2017. The increase was primarily due to higher
marketing costs.
Share of net income of an associate and a joint venture
In 2018, our share of net income of an associate and a joint venture represents our share of the net income of Desarrollo
Transimar, our hotel joint venture acquired in 2017. In 2017, our share of net income of an associate and a joint venture
mainly represented our share of the net income of Ocean Hotels, which was sold on October 4, 2017. Our share of net loss
of a joint venture for the current year amounted to $0.1 million, compared with the share of net income of an associate and
a joint venture of $11.1 million for 2017. This decrease in our share was due to the sale of our interest in Ocean Hotels.
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 incentives. Depreciation and amortization expense was
down $9.3 million (13.6%) for 2018. This decrease resulted from a reduction in capitalized maintenance on Airbus A310s,
which will be retired from the fleet over the next two years, and an extension of the amortization period of leasehold
improvements as a result of the renegotiation of lease agreements for Airbus A330s that are already part of our 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, 2018, a restructuring charge of $2.3 million was recognized for
termination benefits, compared with a restructuring charge of $2.9 million in 2017.
2018 Annual Report Transat A.T. Inc. | 19
Management’s Discussion and Analysis
OPERATING RESULTS
Given the above, we recorded an operating loss of $44.6 million (1.5%) for the year, compared with an operating income of
$34.7 million (1.2%) 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 (%)
2018
$
2017
$
2016
$
1,627,763
1,682,305
(54,542)
(3.4)
1,573,642
1,639,374
(65,732)
(4.2)
1,613,944
1,668,187
(54,243)
(3.4)
1,364,819
1,354,852
9,967
0.7
1,431,703
1,331,251
100,452
7.0
1,275,702
1,251,794
23,908
1.9
Change
2018
%
3.4
2.6
17.0
19.8
(4.7)
1.8
(90.1)
(89.6)
2017
%
(2.5)
(1.7)
(21.2)
(24.3)
12.2
6.3
320.2
274.4
We recognized an operating loss for the winter season amounting to $54.5 million (3.4%) compared with $65.7 million
(4.2%) in 2017. The decrease in our operating loss was primarily due to a higher number of travellers, combined with a slight
increase in average selling prices across all of our markets, as well as the favourable foreign exchange effect which,
combined with higher fuel prices, resulted in a $30.4 million decrease in operating expenses. The decrease in our operating
loss was offset by lower load factors across all of our markets.
During the summer, operating income totalled $10.0 million (0.7%) compared with $100.5 million (7.0%) for the previous
year. The decrease in our operating results was attributable to the increase in fuel prices which, combined with the foreign
exchange effect, resulted in a $75.6 million increase in our operating expenses. The decrease in our operating results was
accentuated by the disposal of our wholly owned subsidiary Jonview and our minority interest in Ocean Hotels, which
contributed $15.0 million to operating results in 2017.
For the winter season, the Corporation recorded an adjusted operating loss of $24.5 million (1.5%), compared with
$35.6 million (2.3%) in 2017. For the summer season, the Corporation reported an adjusted operating income of
$41.0 million (3.0%), compared with $137.6 million (9.6%) in 2017. Overall, the Corporation reported an adjusted operating
income of $16.5 million (0.6%) for the year, compared with $102.0 million (3.4%) in 2017.
OTHER EXPENSES AND REVENUES
Financing costs
Financing costs include interest on long-term debt and other interest, standby fees, as well as financial expenses. Financing
costs were down $0.1 million in 2018, compared with 2017.
Financing income
Financing income rose $9.6 million during the year compared with 2017, as a result of an increase in cash and cash
equivalents and higher interest rates than in 2017.
Change in fair value of fuel-related derivatives and other derivatives
The change in fair value of fuel-related derivatives and other derivatives corresponds to 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. For the year, the fair value of fuel-related derivatives and other derivatives
was down $1.3 million, compared with an increase in fair value of $9.2 million in 2017. The decrease was primarily due to the
maturing of fuel-related derivatives.
2018 Annual Report Transat A.T. Inc. | 20
Management’s Discussion and Analysis
Loss (gain) on business disposals
On November 30, 2017, the Corporation completed the sale of its wholly owned subsidiary Jonview for a consideration of
$48.9 million, of which $46.7 million has been collected. The Corporation recognized a gain on business disposal of
$31.3 million.
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 business disposal of $86.6 million for the year ended October 31, 2017. During the year ended October 31, 2018, the
Corporation recorded a $0.2 million downward adjustment to the gain on business disposal related to the sale of
Ocean Hotels.
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 business disposal.
Foreign exchange gain on business disposal
In 2017, a $15.5 million foreign exchange gain on business disposal was recorded 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
For the year, the Corporation recognized a $0.3 million foreign exchange gain on non-current monetary items, compared
with a foreign exchange loss of $0.4 million in 2017. This gain was principally due to favourable exchange rates on foreign
currency deposits.
INCOME TAXES
For the year ended October 31, 2018, income tax recovery amounted to $5.9 million compared with an income tax expense
of $13.4 million for the previous year. Excluding the gain on business disposals and the share of net loss (income) of an
associate and a joint venture, the effective tax rate was 21.3% for the year ended October 31, 2018 and 24.0% for the
previous year. The change in tax rates between fiscal 2018 and 2017 resulted mainly from greater unfavourable permanent
differences in 2018.
NET INCOME
Considering the items discussed in the Consolidated operations section, net income for the year ended October 31, 2018
amounted to $7.4 million, compared with $138.4 million in 2017.
For the year ended October 31, 2018, adjusted net loss amounted to $24.5 million ($0.65 per share) compared with
adjusted net income of $29.1 million ($0.79 per share) in 2017.
NET INCOME (LOSS) ATTRIBUTABLE TO SHAREHOLDERS
Net income attributable to shareholders amounted to $3.8 million or $0.10 per share, basic and diluted, compared with
$134.3 million or $3.63 per share, basic and diluted, for the previous year. The weighted average number of outstanding
shares used to compute basic per share amounts was 37,394,000 for 2018 and 36,995,000 for 2017 (37,562,000 and
37,040,000, respectively, for diluted per share amounts).
2018 Annual Report Transat A.T. Inc. | 21
Management’s Discussion and Analysis
SELECTED QUARTERLY FINANCIAL INFORMATION
The Corporation’s operations are seasonal in nature; consequently, interim operating results do not proportionately reflect
the operating results for a full year. Compared with the corresponding quarters of the previous year, quarterly revenues
were higher in the winter season and lower in the summer season. For the winter season (Q1 and Q2), following our decision
to increase our capacity across all of our markets, the number of travellers and average selling prices were up. For the 2018
summer season (Q3 and Q4), the decrease in revenues was due to the sale of our subsidiary Jonview, partially offset by an
increase in business volume in the transatlantic market, our main market for the period.
In terms of operating results, for the winter season (Q1 and Q2), the decrease in our operating loss was primarily due to a
higher number of travellers, combined with an increase in average selling prices across all of our markets, as well as the
favourable foreign exchange effect on our costs. For the summer season (Q3 and Q4), the deterioration in our operating
results was mainly attributable to higher fuel prices, combined with the foreign exchange effect. The decrease in our
operating results during the summer was accentuated by the disposal of our wholly owned subsidiary Jonview and our
minority interest in Ocean Hotels. As a result, the following quarterly financial information may vary significantly from
quarter to quarter.
Q1-2017
$
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
689,332
36,103
(50,671)
(31,054)
(32,073)
Q2-2017
$
884,310
37,361
(15,061)
(6,155)
(8,354)
Q3-2017
$
Q4-2017
$
733,152
32,390
40,952
27,168
698,551
26,285
59,500
148,413
Q1-2018
$
725,782
30,169
(45,795)
(5,233)
Q2-2018
$
901,981
33,352
(8,747)
8,487
Q3-2018
$
696,551
32,090
(7,994)
(3,685)
Q4-2018
$
668,268
28,843
17,961
7,792
26,588
148,147
(6,588)
6,683
(4,038)
7,762
Basic earnings (loss)
per share
(0.87)
(0.23)
0.72
4.00
(0.18)
0.18
(0.11)
0.21
(0.87)
Diluted earnings (loss)
per share
Adjusted operating income
(loss)(1)
Adjusted net income (loss)(1)
Adjusted net income (loss)
per share(1)
(1) See section 2 – Non-IFRS financial measures
(37,079)
(36,039)
(0.98)
(0.23)
0.72
3.97
(0.18)
0.18
(0.11)
0.21
1,508
(8,100)
59,055
26,857
78,541
46,381
(31,026)
(33,868)
6,563
5,091
(4,548)
(3,026)
35,885
16,902
(0.22)
0.73
1.24
(0.91)
(0.12)
(0.08)
0.45
FOURTH-QUARTER HIGHLIGHTS
For the fourth quarter, the Corporation generated $668.3 million in revenues, down $30.3 million (4.3%) from
$698.6 million for the corresponding period of 2017. This decrease is due to the sale of our Jonview subsidiary. The
decrease in revenues was partially offset by a 14.8% rise in the number of travellers in the transatlantic market, our main
market for the period, despite a 1.5% decrease in average selling prices. In this market, the Corporation increased capacity
by 13.6% compared with 2017, while overall capacity was up nearly 9%. Our operations generated operating income of
$18.0 million, compared with $59.5 million in 2017. The deterioration in our operating income resulted primarily from higher
fuel prices which, combined with the foreign exchange effect, resulted in a $35.3 million increase in our operating
expenses. The decrease in our operating income was partially offset by increased capacity and load factors in the
transatlantic market.
Net income amounted to $7.8 million in the fourth quarter, compared with $148.4 million in 2017. Net income attributable
to shareholders was $7.8 million ($0.21 per share, basic and diluted), compared with $148.1 million ($4.00 per share, basic
and $3.97 per share, diluted) in 2017.
For the fourth quarter, adjusted net income amounted to $16.9 million ($0.45 per share) compared with $46.4 million
($1.24 per share) in 2017.
2018 Annual Report Transat A.T. Inc. | 22
Management’s Discussion and Analysis
8. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As at October 31, 2018, cash and cash equivalents totalled $593.7 million compared with $593.6 million as at
October 31, 2017. Cash and cash equivalents in trust or otherwise reserved amounted to $338.9 million as at the end
of 2018, compared with $309.1 million in 2017. The Corporation’s statement of financial position reflected $315.9 million in
working capital, for a ratio of 1.38, compared with $386.6 million and a ratio of 1.51 as at October 31, 2017.
Total assets increased by $106.6 million (7.3%), from $1,453.2 million as at October 31, 2017 to $1,559.9 million as at
October 31, 2018. This increase was mainly attributable to higher cash and cash equivalents in trust or otherwise reserved,
deferred rent and cash security deposits receivable from lessors due to aircraft maintenance. Equity increased by
$21.5 million from $577.9 million as at October 31, 2017 to $599.4 million as at October 31, 2018. This increase resulted
primarily from net income attributable to shareholders of $3,8 million, combined with share capital issuances, a
$5.2 million unrealized gain on cash flow hedges and a $1.9 million foreign exchange gain on translation of the financial
statements of foreign subsidiaries.
CASH FLOWS
(in thousands of dollars)
Cash flows related to operating activities
Cash flows related to investing activities
Cash flows related to financing activities
Effect of exchange rate changes on cash
Net change in cash and cash equivalents related to
continuing operations
Net cash flows related to discontinued operations
Operating activities
2018
$
68,804
(93,644)
(430)
(982)
2017
$
161,487
97,901
(3,596)
450
2016
$
43,561
5,093
(9,823)
(12,132)
Change
2018
%
(57.4)
(195.7)
88.0
(318.2)
(26,252)
256,242
26,699
(110.2)
—
—
542
—
2017
%
270.7
1,822.3
63.4
103.7
859.7
(100.0)
Operating activities generated $68.8 million in cash flows, compared with $161.5 million in 2017. The decrease resulted from
a $58.8 million decrease in the net change in non-cash working capital balances related to operations and a $40.6 million
decrease in the net income before operating items not involving an outlay (receipt) of cash.
We expect to continue to generate positive cash flows from our operating activities in 2019.
Investing activities
Cash flows used in investing activities amounted to $93.6 million for the current fiscal year, compared with cash inflows of
$97.9 million in 2017. In 2018, following the sale of our Jonview subsidiary, we received a consideration of $28.6 million, net
of cash disposed of. Additions to property, plant and equipment and intangible assets increased by $49.5 million in 2018
compared with last year, following the acquisition of land in 2018, for an amount of $59.9 million. In 2017, additions related
to aircraft maintenance were higher than in 2018. In 2017, following the sale of our 35% minority interest in Ocean Hotels,
we received a consideration of $187.5 million. We also invested $15.3 million to acquire 50% of the shares of Desarrollo
Transimar and paid $5.0 million to acquire all of the shares of our subsidiary Jonview Canada Inc. in 2017.
In 2019, additions to property, plant and equipment and intangible assets could amount to approximately $40.0 million,
excluding any land and hotel acquisitions related to the development of our hotel chain.
Financing activities
Cash flows used in financing activities amounted to $0.4 million compared with $3.6 million in 2017. Cash flow usage was
lower than in 2017 mainly due to options exercised totalling $1.9 million in 2018, compared with $0.1 million in 2017,
combined with a decrease of $1.1 million in the dividend paid by a subsidiary to a non-controlling shareholder.
2018 Annual Report Transat A.T. Inc. | 23
Management’s Discussion and Analysis
CONSOLIDATED FINANCIAL POSITION
Assets
Cash and cash equivalents
Cash and cash equivalents in trust or
otherwise reserved
Trade and other receivables
October 31, October 31,
2018
$
2017 Difference Main reasons for significant differences
$
$
593,654
338,919
593,582
309,064
72
29,855
See the Cash flows section
Increase in business volume
140,009
121,618
18,391
Income taxes receivable
26,505
17,418
9,087
Inventories
Prepaid expenses
Deposits
Assets held for sale
Deferred tax assets
14,464
63,789
61,992
—
13,095
12,790
64,245
52,129
47,472
16,286
1,674
(456)
9,863
(47,472)
(3,191)
Property, plant and equipment
Intangible assets
201,478
42,689
134,672
49,604
66,806
(6,915)
Derivative financial instruments
20,497
18,058
2,439
Investments
Other assets
Liabilities
Trade and other payables
16,084
26,685
15,888
390
196
26,295
294,021
245,013
49,008
Provision for overhaul of leased aircraft
Income taxes payable
Derivative financial instruments
57,228
1,117
3,445
47,917
8,102
8,278
Liabilities related to assets held for sale
Customer deposits and deferred revenues
Other liabilities
—
510,631
92,025
33,109
433,897
96,813
9,311
(6,985)
(4,833)
(33,109)
76,734
(4,788)
Deferred tax liabilities
2,019
2,217
(198)
Equity
Share capital
219,684
215,444
4,240
Share-based payment reserve
Retained earnings
Unrealized gain on cash flow hedges
18,017
361,098
9,732
17,817
351,138
4,532
200
9,960
5,200
Cumulative exchange differences
(9,157)
(11,061)
1,904
Increase in receivables from lessors due to
aircraft maintenance
Increase in income taxes recoverable given
deductible losses
Increase in fuel inventory
No significant difference
Increase in deposits related to ordered aircraft
Sale of Jonview subsidiary in November 2017
Decrease in deferred taxes related to derivative
financial instruments
Land acquisition in Mexico
Amortization for the year, partially offset by
additions
Favourable change in the dollar against the US
dollar related to contracted derivatives
No significant difference
Increase in deferred rent
Increase in current portion of non-controlling
interest, business volume and salaries payable
Increase in number of leased aircraft
Settlement of balances due
Maturity of foreign exchange derivatives during
the year
Sale of Jonview subsidiary in November 2017
Increase in business volume
Decrease in non-current portion of
non-controlling interest, partially offset by the
increase in deferred aircraft lease incentives
No significant difference
Options exercised and shares issued from
treasury
No significant difference
Net income for the year
Net gain on financial instruments designated as
cash flow hedges
Foreign exchange gain on translation of financial
statements of foreign subsidiaries
2018 Annual Report Transat A.T. Inc. | 24
Management’s Discussion and Analysis
FINANCING
As at December 12, 2018, the Corporation had several types of financing, consisting primarily of a revolving term credit
facility and lines of credit for issuing letters of credit.
On May 11, 2018, the Corporation renewed its $50 million revolving credit facility agreement for operating purposes. Under
the new agreement, which expires in 2022, the Corporation may increase the credit limit to $100 million, subject to lender
approval. The agreement may be extended for a year on 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 ratios and conditions. As at October 31, 2018, all financial ratios and conditions 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 cash flows, some of which are reported as liabilities in the consolidated financial
statements and others are disclosed in the notes to the financial statements. The Corporation did not report any
obligations in the statement of financial position as at October 31, 2018 and October 31, 2017.
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 16 and 25 to the audited consolidated financial statements)
• Operating leases (see note 24 to the audited consolidated financial statements)
•
Purchase obligations (see note 24 to the audited consolidated financial statements)
Off-balance sheet arrangements that can be estimated, excluding agreements with suppliers and other obligations,
amounted to approximately $2,506.9 million as at October 31, 2018 ($1,745.2 million as at October 31, 2017) 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
2018
$
2017
$
31,221
419
27,137
701
2,475,276
2,506,916
79,848
1,717,383
1,745,221
94,640
2,586,764
1,839,861
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.
2018 Annual Report Transat A.T. Inc. | 25
Management’s Discussion and Analysis
The Corporation has a $75.0 million annually renewable revolving credit facility for issuing letters of credit in respect of
which the Corporation must pledge cash totalling 100% of the amount of the issued letters of credit as collateral security.
As at October 31, 2018, $56.2 million had been drawn down under the facility, of which $51.2 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.
On February 27, 2018, the Corporation renewed its collateral security facility. Under this agreement, which is now
renewable in 2020, the Corporation may issue collateral security contracts with a maximum three-year term and for a total
amount of $50.0 million. 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, 2018, $31.2 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
£3.9 million ($6.6 million), which has been fully drawn down.
As at October 31, 2018, off-balance sheet arrangements, excluding agreements with suppliers and other obligations, had
increased by $761.7 million compared with October 31, 2017. This increase resulted primarily from the agreements signed to
lease thirteen aircraft, including five Airbus A321neo LR, four Airbus A321neos, two Airbus A321ceos and two Airbus A330s,
and also from the weakening of the dollar against the U.S. dollar, partially offset by repayments made during the year. The
Airbus A321neo LR will gradually integrate our fleet starting in spring 2019 as our A310s are retired and will also replace
certain wide-body Airbus A330s with leases expiring through 2022.
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
Years ending October 31
Contractual obligations
Long-term debt
Leases (aircraft)
Leases (other)
Agreements with suppliers
and other obligations
2019
$
2020
$
2021
$
2022
$
2023
$
2024 and
beyond
$
Total
$
—
173,272
26,390
—
203,104
22,049
—
232,874
19,101
—
228,308
13,610
—
218,379
9,331
—
1,280,214
48,644
—
2,336,151
139,125
63,739
263,401
4,718
229,871
5,155
257,130
5,228
247,146
5,200
232,910
36,196
1,365,054
120,236
2,595,512
Debt levels
The Corporation did not report any debt on its statement of financial position.
The Corporation’s total debt decreased by $38.4 million to $622.3 million compared with 2017, owing primarily to the
renegotiation of lease agreements for Airbus A330s.
Total net debt decreased by $38.5 million, from $67.1 million as at October 31, 2017 to $28.6 million as at October 31, 2018.
The decrease in total net debt resulted from a decline in total debt.
2018 Annual Report Transat A.T. Inc. | 26
Management’s Discussion and Analysis
Outstanding shares
As at October 31, 2018, 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 7, 2018, there were 37,583,687 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 ticker symbol: “TRZ”.
Stock options
As at December 7, 2018, there were a total of 1,786,588 stock options outstanding, 1,412,111 of which were exercisable.
9. OTHER
FLEET
Air Transat’s fleet currently consists of twenty Airbus A330s (332, 345 or 375 seats), including four commissioned during
2018, seven Airbus A310s (250 seats), five Boeing 737-800s (189 seats) and two Airbus A321ceos (199 seats) which were
commissioned in the third quarter of 2018.
During winter 2018, the Corporation also had seasonal rentals
four Boeing 737-700s (149 seats) and two Airbus A320s (199 seats).
for twelve Boeing 737-800s
(189 seats),
During the years ended October 31, 2018 and 2017, the Corporation entered into agreements to lease fifteen Airbus
A321neo LRs and two Airbus A321neos, to be commissioned gradually starting in spring 2019.
SUBSEQUENT EVENT
On November 28, 2018, the Corporation acquired land in Puerto Morelos for an amount of US$13.0 million [$17.3 million] of
which US$9.0 million [12.0 million] was paid in cash on that date. The balance of US$4.0 million [$5.3 million] is payable
under certain contractual conditions.
10. 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
2018 Annual Report Transat A.T. Inc. | 27
Management’s Discussion and Analysis
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.
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, 2018 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 the royalty capitalization method. The Corporation
prepares cash flow forecasts based on pre-established royalty rates, which represent what a third party would pay to use
the trademark. The cash flow forecasts, which correspond to after-tax royalties, are then discounted.
As at April 30, 2018, 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, 2017].
On April 30, 2018, 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, 2018, 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, 2018, there was no indication that the conclusions of the test might have changed since April 30, 2018.
2018 Annual Report Transat A.T. Inc. | 28
Management’s Discussion and Analysis
PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS WITH FINITE LIVES
Property, plant and equipment reported in the statement of financial position represent material amounts based on
historical costs. Property, plant and equipment and intangible assets with finite lives are reviewed for impairment annually
or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Property, plant and equipment are depreciated over their estimated useful lives taking into account their residual value.
Aircraft and aircraft components account for a major class of property, plant and equipment. Depreciation expense
depends on several assumptions including the period over which the aircraft will be used, the fleet renewal schedule and
the estimate of the residual value of aircraft and aircraft components at the time of their anticipated disposal. The
amortization period is determined based on the fleet renewal schedule. 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, 2018 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 2% to 4% to result in additional expenses that could have a material impact on our results, financial position
and cash flows.
Non-controlling interest
A non-controlling interest, in respect of which the non-controlling shareholder may require the Corporation to buy back
the shares held, is reclassified as liabilities at the estimated redemption value, thus assuming the option is exercised. 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.
2018 Annual Report Transat A.T. Inc. | 29
Management’s Discussion and Analysis
Employee future benefits
The Corporation offers defined benefit pension arrangements to certain senior executives. The pension expense for these
employees is determined from annual actuarial calculations using the projected unit credit method and management’s best
estimate assumptions for the increase in eligible earnings and the retirement age of employees. Plan obligations are
discounted using current market interest rates. Given that various assumptions are used in determining the cost and
obligations associated with employee future benefits, the actuarial valuation process involves some inherent measurement
uncertainty. Actual results will differ from estimated results based on assumptions.
A 0.25 percentage point increase in the actuarial assumptions below would have the following impacts, all other actuarial
assumptions remaining the same:
Increase (decrease)
Discount rate
Rate of increase in eligible earnings
Taxes
Cost of retirement
benefits for the year
ended October 31, 2018
$
(3)
14
Retirement benefit
obligations as at
October 31, 2018
$
(1,153)
61
From time to time, the Corporation is subject to audits by tax authorities that give rise to questions regarding the tax
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 2018, this
amount is recognized as income taxes receivable as at October 31, 2018.
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 68% of the Corporation’s costs are incurred in a currency other than the
measurement currency of the reporting unit incurring the costs, whereas approximately 19% of revenues are earned 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.
2018 Annual Report Transat A.T. Inc. | 30
Management’s Discussion and Analysis
All derivative financial instruments are recorded at fair value in the consolidated statement of financial position. For the
derivative financial instruments designated as cash flow hedges, changes in value of the effective portion are recognized in
Other comprehensive income in the consolidated statement of comprehensive income. Any ineffectiveness within a cash
flow hedge is recognized through profit or loss as it arises in the account Change in fair value of fuel-related derivatives
and other derivatives. Should the hedging of a cash flow hedge relationship become ineffective, previously unrealized gains
and losses remain within Unrealized gain (loss) on cash flow hedges until the hedged item is settled and future changes in
value of the derivative are recognized in income prospectively. The change in value of the effective portion of a cash flow
hedge remains in Accumulated other comprehensive income (loss) until the related hedged item is settled, at which time
amounts recognized in Unrealized gain (loss) on cash flow hedges are reclassified to the same income statement account in
which the hedged item is recognized.
Management of fuel price risk
The Corporation is particularly exposed to fluctuations in fuel prices. Due to competitive pressures in the industry, there
can be no assurance that the Corporation would be able to pass along any increase in fuel prices to its customers by
increasing prices, or that any eventual price increase would fully offset higher fuel costs, which could in turn adversely
impact its business, financial position or operating results. To mitigate fuel price fluctuations, the Corporation has
implemented a fuel price risk management policy that authorizes using foreign exchange forward contracts, and other
types of derivative financial instruments, expiring in generally less than 18 months.
The derivative financial instruments used for fuel purchases are measured at fair value at the end of each period, and the
unrealized gains or losses arising from remeasurement are recorded and reported under Change in fair value of
fuel-related derivatives and other derivatives in the consolidated statement of income. When realized, at maturity of
fuel-related derivative financial instruments, any gains or losses are reclassified to Aircraft fuel.
Credit and counterparty risk
Credit risk is primarily attributable to the potential inability of customers, service providers, aircraft and engine lessors and
financial institutions, including the other counterparties to cash equivalents and derivative financial instruments, to
discharge their obligations.
Trade accounts receivable included under Trade and other receivables in the statement of financial position totalled
$30.9 million as at October 31, 2018. 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, 2018, approximately 6% of accounts receivable were over 90 days
past due, whereas approximately 80% 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, 2018, these deposits totalled $27.1 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 $34.9 million as at
October 31, 2018 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, 2018, the cash security deposits with lessors that had been claimed
totalled $67.0 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, 2018 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
2018 Annual Report Transat A.T. Inc. | 31
Management’s Discussion and Analysis
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, 2018.
Liquidity risk
The Corporation is exposed to the risk of being unable to honour its financial commitments by the deadlines set out under
the terms of such commitments and at a reasonable price. The Corporation has a Treasury Department in charge, among
other things, of ensuring sound management of available cash resources, financing and compliance with deadlines within
the Corporation’s scope of consolidation. With senior management’s oversight, the Treasury Department manages the
Corporation’s cash resources based on financial forecasts and anticipated cash flows. The Corporation has implemented
an investment policy designed to safeguard its capital and instrument liquidity and generate a reasonable return. The policy
sets out the types of allowed investment instruments, their concentration, acceptable credit rating and maximum maturity.
Interest rate risk
The Corporation is exposed to interest rate fluctuations, primarily due to its variable-rate credit facility. The Corporation
manages its interest rate exposure and could potentially enter into swap agreements consisting in exchanging variable rates
for fixed rates.
Furthermore, interest rate fluctuations could have an effect on the Corporation’s interest income derived from its cash
and cash equivalents.
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. Application of IFRS 9 is effective for the Corporation's annual reporting period
beginning on November 1, 2018 and is to be retrospective.
IFRS 9 uses a new approach to determine whether a financial asset is measured at amortized cost or fair value, replacing
the many different rules in IAS 39. The approach recommended by IFRS 9 is based on how an entity manages its financial
instruments and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for
classification and measurement of financial liabilities were carried forward in IFRS 9. However, the portion of the changes
in fair value related to the entity’s own credit risk, in measuring a financial liability at fair value through profit or loss, will be
presented in other comprehensive income (loss) rather than in the statement of income. The Corporation has determined
that this change would not have a material impact on its financial statements.
IFRS 9 also introduces a new expected-loss impairment model that will require 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 timely basis. The Corporation has determined that this change
would not have a material impact on its financial statements.
Lastly, IFRS 9 introduces a new hedge accounting model, together with corresponding disclosure requirements regarding
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.
2018 Annual Report Transat A.T. Inc. | 32
Management’s Discussion and Analysis
The Corporation will apply the new hedge accounting model and comply with the corresponding disclosure requirements
for risk management activities as of November 1, 2018. The main impact resulting from the application of the new hedge
accounting model is the recognition in other comprehensive income (loss) in the consolidated statement of comprehensive
income of the time value of options designated as hedging instruments. The Corporation does not expect the adoption of
IFRS 9 to have a material impact on its consolidated financial statements.
IFRS 15, Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, a new standard that specifies the steps and
timing of revenue recognition for issuers as well as requiring them to provide relevant and more 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. Application of IFRS 15 is mandatory and will be effective for the Corporation’s annual
reporting period beginning on November 1, 2018. The standard will be applied retrospectively with an adjustment to the
opening consolidated statement of financial position as at November 1, 2017.
The Corporation has completed the following preliminary assessment of the significant changes that will have an impact on
its accounting policies:
• Revenue from the land portion of holiday packages and the related costs which are currently recognized
when passengers depart will be recognized when the corresponding services are rendered over the course
of the stay.
• Commission revenue from travel agencies which is currently recognized when travel is reserved will be
recognized when passengers depart.
• Certain additional costs incurred to earn income from air transportation services, such as costs related to
the worldwide distribution system, which are currently expensed when travel is reserved, will be capitalized
when travel is reserved and expensed when revenue is recognized.
• Certain types of revenues, currently recognized on a gross basis, will be recognized on a net basis due to the
new criteria introduced by IFRS 15. This reclassification will have no impact on operating results.
The Corporation continues to assess the impact of adopting this standard on its financial statements, in particular the
effect of the above-mentioned changes in accounting policies on statement of financial position items, the transition
method, as well as the amendments to disclosure requirements, and will complete its analysis during the next quarter.
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 leases and leases of low value assets.
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 annual reporting period beginning on
November 1, 2019. 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.
2018 Annual Report Transat A.T. Inc. | 33
Management’s Discussion and Analysis
11. 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.
RISK GOVERNANCE
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. This owner
is the first line of defence from a risk management standpoint. The Corporation’s support services, namely the Finance,
Legal Affairs, IT Security and Human Resources functions, constitute a second line of defence through their involvement in
the design and operation of the complementary risk mitigating actions. Lastly, the Internal Audit department is the third
line of defence to provide independent assurance on the effectiveness and efficiency of controls over these mitigating
actions.
In addition, the Corporation has adopted an ongoing 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.
KEY RISKS
An overview of each of the 10 key risk categories is provided below, along with a description of the main measures to
reduce the occurrence and mitigate, where possible, the potential impact of these risks on the Corporation’s business
objectives. Although insurance coverage is sometimes purchased for some of these risks, and mitigating actions are in
place, there can be no assurance that these actions will effectively reduce risks that could have an adverse impact on the
Corporation’s financial position, reputation and/or ability to achieve its strategic and operational objectives.
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 position and operating results.
2018 Annual Report Transat A.T. Inc. | 34
Management’s Discussion and Analysis
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.
REPUTATION RISK
The ability to maintain favourable relationships with its existing customers and attract new customers greatly depends on
Transat’s service offering and its reputation. While the Corporation has already implemented sound governance practices,
including a code of ethics, and developed certain mechanisms over the years to prevent its reputation from being adversely
affected, there can be no assurance that Transat will continue to enjoy a good reputation or that events beyond its control
will not tarnish its reputation. The loss or tarnishing of its reputation could have a material unfavourable effect on the
Corporation’s operations, prospects, financial position and operating results.
FINANCIAL RISKS
The travel industry in general and our operations in particular are seasonal. As a result, our quarterly operating results are
subject to fluctuations. In our view, comparisons of our operating results between quarters or between six-month periods
are not necessarily meaningful and should not be relied on as indicators of future performance. Furthermore, due to the
economic and general factors described herein, our operating results in future periods could fall short of the expectations
of securities analysts and investors, thus affecting the market price of our shares.
While Transat has 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 financial ratios and
conditions. 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.
2018 Annual Report Transat A.T. Inc. | 35
Management’s Discussion and Analysis
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. 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.
KEY SUPPLIES AND SUPPLIER RISKS
Despite being well positioned due to our vertical integration, we depend on third parties who supply us with certain
components of our packages. Any significant interruption in the flow of goods and services from these suppliers, which may
be outside our control, could have a significant adverse impact on our business, financial position and operating results.
Our dependence, among others, on Airbus, Boeing, Rolls-Royce, 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.
2018 Annual Report Transat A.T. Inc. | 36
Management’s Discussion and Analysis
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 five 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.
TECHNOLOGICAL RISKS
Transat relies heavily on various information and telecommunications technologies to operate its business, increase its
revenues and reduce its operating expenses. Our business depends on our ability to 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.
2018 Annual Report Transat A.T. Inc. | 37
Management’s Discussion and Analysis
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 licences; 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.
HUMAN RESOURCE RISKS
Labour costs constitute one of Transat’s largest operating cost items. There can be no assurance that Transat will be able
to maintain such costs at levels that do not negatively affect its business, results from operations and financial position.
The Corporation’s ability to achieve its business plan is a function of the experience of its key executives and employees,
and their expertise in the tourism, travel and air carrier industries. The loss of key employees could adversely affect our
business and operating results. Further, our recruitment program, salary structure, performance management programs,
succession plan, as well as our training plan carry risks that could have adverse effects on our ability to attract and retain
the skilled resources needed to sustain the Corporation’s growth and success.
As at October 31, 2018, the Corporation had approximately 5,000 employees, almost 50% of whom are unionized personnel
covered by six collective agreements. As at October 31, 2018, 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.
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.
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.
2018 Annual Report Transat A.T. Inc. | 38
Management’s Discussion and Analysis
12. CONTROLS AND PROCEDURES
The implementation of the Canadian Securities Administrators National Instrument 52-109 represents a continuous
improvement process, which has prompted the Corporation to formalize existing processes and control measures and
introduce new ones. Transat has chosen to make this a corporate-wide project, which will result in operational
improvements and better management.
In accordance with this instrument, the Corporation has filed certificates signed by the President and Chief Executive
Officer and the Vice-President, Finance and Administration and Chief Financial Officer that, among other things, report on
the design and effectiveness of disclosure controls and procedures (“DC&P”) and the design and effectiveness of internal
control over financial reporting (“ICFR”).
The President and Chief Executive Officer and the Vice-President, Finance and Administration and Chief Financial Officer
have designed DC&P or caused them to be designed under their supervision to provide reasonable assurance that material
information relating to the Corporation has been made known to them and that information required to be disclosed in the
Corporation’s filings is recorded, processed, summarized and reported within the prescribed time periods under securities
legislation.
Also, the President and Chief Executive Officer and the Vice-President, Finance and Administration and Chief Financial
Officer have designed ICFR or have caused it to be designed under their supervision to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for financial reporting purposes in
accordance with IFRS.
EVALUATION OF DC&P AND ICFR
An evaluation of the design and operating effectiveness of DC&P and ICFR was carried out under the supervision of the
President and Chief Executive Officer and the Vice-President, Finance and Administration and Chief Financial Officer. This
evaluation consisted of a review of documentation, audits and other procedures that management considered appropriate
in the circumstances. Among other things, the evaluation took into consideration the Corporate Disclosure Policy, the code
of professional ethics, the sub-certification process and the operation of the Corporation’s Disclosure Committee.
Based on this evaluation and using the criteria set by the Committee of Sponsoring Organizations of the Treadway
Commission on Internal Control – Integrated Framework (“COSO-Framework 2013”) and in connection with the preparation
of its year-end financial statements, the two certifying officers concluded that the design of DC&P and ICFR were effective
as at October 31, 2018.
Lastly, no significant changes in ICFR occurred during the fourth quarter ended October 31, 2018 that materially affected
the Corporation’s ICFR.
13. OUTLOOK
Winter 2019 – In the sun destinations market, the Corporation’s main market for the period, Transat's capacity is higher by
2% than the previous year. To date, 52% of that capacity has been sold, bookings are ahead by 5.6%, and load factors are
3.8% higher compared with 2018. The impact of fluctuations in the Canadian dollar, combined with increased fuel costs,
will result in a 3.4% increase in operating expenses if the dollar against the U.S. dollar and aircraft fuel prices remain stable.
Margins are currently at similar levels compared with the same date last year.
In the transatlantic market, where it is low season, load factors are tracking 9% higher than last winter. Prices are currently
down 3.3% from the same date last year.
However, the Corporation considers that it is still too early to give any guidance regarding final results for the winter
season.
2018 Annual Report Transat A.T. Inc. | 39
2018 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
2018 Annual Report Transat A.T. Inc. | 40
2018 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, 2018 and 2017, and the consolidated statements of income,
comprehensive income, changes in equity and cash flows for the years then ended, and a summary of significant
accounting policies and other explanatory information.
Management’s responsibility for the consolidated financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in
accordance with International Financial Reporting Standards, and for such internal control as management determines is
necessary to enable the preparation of consolidated financial statements that are free from material misstatement,
whether due to fraud or error.
Auditors’ responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted
our audits in accordance with Canadian generally accepted auditing standards. Those standards require that we comply
with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated
financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of
material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk
assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the
consolidated financial statements in order to design audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes
evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our
audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
Transat A.T. Inc. as at October 31, 2018 and 2017 and its financial performance and its cash flows for the years then ended
in accordance with International Financial Reporting Standards.
Montréal, Canada
December 12, 2018
1 CPA auditor, CA, public accountancy permit No. A121006
2018 Annual Report Transat A.T. Inc. | 41
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
As at October 31
(in thousands of Canadian dollars)
ASSETS
Cash and cash equivalents
Cash and cash equivalents in trust or otherwise reserved
Trade and other receivables
Income taxes receivable
Inventories
Prepaid expenses
Derivative financial instruments
Current portion of deposits
Assets held for sale
Current assets
Cash and cash equivalents reserved
Deposits
Income taxes receivable
Deferred tax assets
Property, plant and equipment
Intangible assets
Derivative financial instruments
Investments
Other assets
Non-current assets
LIABILITIES
Trade and other payables
Current portion of provision for overhaul of leased aircraft
Income taxes payable
Customer deposits and deferred revenues
Derivative financial instruments
Liabilities related to assets held for sale
Current liabilities
Provision for overhaul of leased aircraft
Other liabilities
Derivative financial instruments
Deferred tax liabilities
Non-current liabilities
EQUITY
Share capital
Share-based payment reserve
Retained earnings
Unrealized gain on cash flow hedges
Cumulative exchange differences
Commitments and contingencies [note 24]
See accompanying notes to consolidated financial statements
On behalf of the Board,
Note
2018
$
2017
$
6
7
8
9
5
6
9
21
21
10
11
8
12
13
14, 20
15
8
5
15
17
8
21
18
593,654
287,735
140,009
11,405
14,464
63,789
20,413
20,250
—
1,151,719
51,184
41,742
15,100
13,095
201,478
42,689
84
16,084
26,685
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
408,141
315,716
1,559,860
1,453,216
294,021
27,313
1,117
510,631
2,766
—
835,848
29,915
92,025
679
2,019
124,638
245,013
22,699
8,102
433,897
8,123
33,109
750,943
25,218
96,813
155
2,217
124,403
219,684
18,017
361,098
9,732
(9,157)
215,444
17,817
351,138
4,532
(11,061)
599,374
577,870
1,559,860
1,453,216
Director
Director
2018 Annual Report Transat A.T. Inc. | 42
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended October 31
(in thousands of Canadian dollars, except per share amounts)
Revenues
Operating expenses
Costs of providing tourism services
Aircraft fuel
Salaries and employee benefits
Aircraft maintenance
Airport and navigation fees
Aircraft rent
Commissions
Other airline costs
Other
Share of net loss (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
Gain on business disposals
Foreign exchange gain on business disposal
Foreign exchange (gain) loss on non-current monetary items
Income before income tax expense
Income taxes (recovery)
Current
Deferred
Net income for the year
Net income attributable to:
Shareholders
Non-controlling interest
Earnings per share
Basic
Diluted
See accompanying notes to consolidated financial statements
Note
19, 23
5, 12
19
20
5
5
21
18
2018
$
2017
$
2,992,582
3,005,345
1,091,924
498,512
386,898
237,918
149,699
124,454
87,763
263,272
135,225
105
59,125
2,262
1,268,832
358,558
371,863
203,669
134,665
132,139
88,635
225,512
126,500
(11,143)
68,470
2,925
3,037,157
2,970,625
(44,575)
2,061
(17,935)
1,284
(31,064)
—
(339)
34,720
2,134
(8,363)
(9,187)
(86,616)
(15,478)
426
1,418
151,804
(6,494)
551
(5,943)
18,684
(5,252)
13,432
7,361
138,372
3,819
3,542
7,361
0.10
0.10
134,308
4,064
138,372
3.63
3.63
2018 Annual Report Transat A.T. Inc. | 43
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended October 31
(in thousands of Canadian dollars)
Net income for the year
Note
2018
$
2017
$
7,361
138,372
Other comprehensive income (loss)
Items that will be reclassified to net income
Change in fair value of derivatives designated as cash flow hedges
Reclassification to net income
Deferred taxes
Foreign exchange gain (loss) on translation of
financial statements of foreign subsidiaries
Reclassification of foreign exchange gain
on business disposal
Items that will never be reclassified to net income
Retirement benefits – Net actuarial gains
Deferred taxes
Total other comprehensive income (loss)
Comprehensive income for the year
Attributable to:
Shareholders
Non-controlling interest
See accompanying notes to consolidated financial statements
21
5
23
21
12,459
(5,385)
(1,874)
5,200
12,537
(9,352)
(864)
2,321
1,904
(6,838)
—
1,904
2,219
(595)
1,624
8,728
16,089
(15,478)
(22,316)
1,497
(401)
1,096
(18,899)
119,473
11,870
4,219
16,089
116,714
2,759
119,473
2018 Annual Report Transat A.T. Inc. | 44
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(in thousands of Canadian dollars)
Balance as at October 31, 2016
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
Balance as at October 31, 2017
Net income for the year
Other comprehensive income
Comprehensive income 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
Share-
based
payment
reserve
$
17,849
—
—
—
—
(31)
(312)
311
—
—
—
—
(32)
17,817
—
—
—
—
(812)
(1,198)
2,210
—
—
—
—
200
Share
capital
$
214,250
—
—
—
1,094
100
—
—
—
—
—
—
1,194
215,444
—
—
—
1,555
2,685
—
—
—
—
—
—
4,240
Accumulated other
comprehensive income
(loss)
Retained
earnings
$
Unrealized
gain on cash
flow hedges
$
Cumulative
exchange
differences
$
Non-
controlling
interests
$
Total
$
Total
equity
$
218,821
134,308
1,096
135,404
—
—
—
—
—
(3,087)
—
—
(3,087)
351,138
3,819
1,624
5,443
—
—
—
—
—
4,517
—
—
4,517
2,211
—
2,321
2,321
—
—
—
—
—
—
—
—
—
4,532
—
5,200
5,200
—
—
—
—
—
—
—
—
—
11,255
—
(21,011)
464,386
134,308
(17,594)
—
4,064
(1,305)
464,386
138,372
(18,899)
(21,011)
—
—
—
—
—
116,714
1,094
69
(312)
311
—
2,759
—
—
—
—
(4,447)
119,473
1,094
69
(312)
311
(4,447)
—
—
(3,087)
3,087
—
—
(2,704)
(2,704)
(1,305)
(1,305)
(11,061)
—
1,227
(1,305)
(3,230)
577,870
3,819
8,051
11,870
1,555
1,873
(1,198)
2,210
—
1,305
(2,759)
—
3,542
677
4,219
—
—
—
—
(3,302)
—
(5,989)
577,870
7,361
8,728
16,089
1,555
1,873
(1,198)
2,210
(3,302)
4,517
(4,517)
—
—
4,277
4,277
677
9,634
(677)
(4,219)
—
5,415
1,227
—
—
—
—
—
—
—
677
677
Balance as at October 31, 2018
See accompanying notes to consolidated financial statements
219,684
18,017
361,098
9,732
(9,157)
599,374
—
599,374
2018 Annual Report Transat A.T. Inc. | 45
TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended October 31
(in thousands of Canadian dollars)
OPERATING ACTIVITIES
Net income for the year
Non-cash operating items:
Depreciation and amortization
Change in fair value of fuel-related derivatives and other derivatives
Gain on business disposals
Foreign exchange gain on business disposal
Foreign exchange (gain) loss on non-current monetary items
Share of net loss (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 received on business disposals, net of cash disposed of
Consideration paid for business acquisitions
Dividend received from an associate
Cash flows related to investing activities
FINANCING ACTIVITIES
Proceeds from issuance 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
Cash and cash equivalents held for sale
Cash and cash equivalents held for sale, beginning of year
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
Note
2018
$
2017
$
19
5
5
5
12
5
7,361
138,372
59,125
1,284
(31,064)
—
(339)
105
551
2,799
2,210
42,032
10,467
9,311
6,994
68,804
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
(119,053)
(1,084)
26,493
—
—
(93,644)
(69,523)
(3,650)
187,500
(20,321)
3,895
97,901
3,428
(556)
(3,302)
(430)
1,163
(312)
(4,447)
(3,596)
(982)
(26,252)
—
26,324
593,582
450
256,242
(26,324)
—
363,664
593,654
593,582
10,670
334
(11,883)
432
2018 Annual Report Transat A.T. Inc. | 46
Transat A.T. Inc.
Notes to Consolidated Financial Statements
October 31, 2018 and 2017
[Amounts are expressed in thousands of Canadian dollars, except for per share amounts or unless specified otherwise]
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. Its Class A Variable Voting Shares and Class B Voting Shares are
listed on the Toronto Stock Exchange. The Corporation’s Class A Variable Voting Shares and Class B Voting Shares are
traded on the Toronto Stock Exchange under a single ticker 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, 2018, 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, 2018 were approved by the
Corporation’s Board of Directors on December 12, 2018.
Note 2
Significant accounting policies
Basis of preparation
These consolidated financial statements of the Corporation and its subsidiaries are 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, at historical cost, except for
financial assets and liabilities classified as financial assets/liabilities at fair value through profit or loss which are 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;
2018 Annual Report Transat A.T. Inc. | 47
Transat A.T. Inc.
Notes to Consolidated Financial Statements
•
If the acquisition cost is less than the fair value of the net assets acquired, the fair value of the net assets is re-
assessed and any remaining difference is recognized directly in the statement of income;
• Contingent consideration is measured at fair value on the acquisition date, with subsequent changes in the fair
value recorded through the statement of income when the contingent consideration is a financial liability;
• Upon gaining control in a step acquisition, the existing ownership interest is re-measured to fair value through the
statement of income; and
•
For each business combination including the non-controlling interest, 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 balances, transactions and unrealized gains and losses resulting from intragroup
transactions and all intragroup 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
2018 Annual Report Transat A.T. Inc. | 48
Transat A.T. Inc.
Notes to Consolidated Financial Statements
comprehensive income (loss) in equity. On disposal of an interest, the exchange difference component relating to that
particular interest is recognized in the consolidated statement of income.
Cash equivalents
Cash equivalents consist primarily of term deposits and bankers’ acceptances that are highly liquid and readily convertible
into known amounts of cash with initial maturities of less than three months.
Inventories
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 with finite lives 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
Land and property, plant and equipment under construction or development are not depreciated.
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;
2018 Annual Report Transat A.T. Inc. | 49
Transat A.T. Inc.
Notes to Consolidated Financial Statements
•
•
•
•
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.
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 the put option held by the non-controlling interest.
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
of their acquisition.
2018 Annual Report Transat A.T. Inc. | 50
Transat A.T. Inc.
Notes to Consolidated Financial Statements
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.
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 (loss) in the consolidated statement of comprehensive income. Any ineffective
portion within a cash flow hedge is recognized in net income, as incurred, under 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. When realized, at maturity of foreign
currency derivatives that do not qualify for hedge accounting, any gains or losses are reclassified to the same consolidated
statement of income account in which the hedged item is recognized.
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
2018 Annual Report Transat A.T. Inc. | 51
Transat A.T. Inc.
Notes to Consolidated Financial Statements
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.
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:
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.
2018 Annual Report Transat A.T. Inc. | 52
Transat A.T. Inc.
Notes to Consolidated Financial Statements
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.
PROVISION FOR OVERHAUL OF LEASED AIRCRAFT
Under aircraft and engine operating leases, the Corporation is required to maintain the aircraft and engines in serviceable
condition and adhere to the maintenance plan. The Corporation accounts for its leased aircraft and engine maintenance
obligation based on utilization until the next maintenance activity. The obligation is adjusted to reflect any change in the
related maintenance expenses anticipated. Depending on the type of maintenance, utilization is determined based on the
cycles, logged flight time or time between overhauls. The excess of the maintenance obligation over maintenance deposits
made to lessors and unclaimed is included in liabilities under Provision for overhaul of leased aircraft. All maintenance
work done on aircraft engines under contracts with billing based on flight hours is charged to operating expenses in the
statement of income and 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.
2018 Annual Report Transat A.T. Inc. | 53
Transat A.T. Inc.
Notes to Consolidated Financial Statements
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 (loss), or
equity based on the classification of the item to which they relate.
Deferred tax liabilities are recognized for all taxable temporary differences. Deferred tax assets are recognized for all
deductible temporary differences, carryforwards of unused tax credits and unused tax losses, to the extent that it is
probable that taxable income will be available against which the deductible temporary differences, and the carryforwards
of unused tax credits and unused tax losses can be utilized.
Deferred tax assets and liabilities are offset if a legally enforceable right exists to set off current tax assets against current
tax liabilities and the deferred taxes relate to the same taxable entity and the same taxation authority.
Share-based payment plans
The Corporation operates a number of equity-settled and cash-settled share-based compensation plans under which it
receives services from employees as consideration for equity instruments of the Corporation or cash-settled payments.
EQUITY-SETTLED TRANSACTIONS
For equity-settled share-based compensation [stock option plan 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.
2018 Annual Report Transat A.T. Inc. | 54
Transat A.T. Inc.
Notes to Consolidated Financial Statements
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.
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
2018 Annual Report Transat A.T. Inc. | 55
Transat A.T. Inc.
Notes to Consolidated Financial Statements
growth rate used for extrapolation purposes. The key assumptions used to determine the recoverable amount for the
various CGUs, including a sensitivity analysis, are discussed in note 11.
Property, plant and equipment are depreciated over their estimated useful lives taking into account their residual value.
Aircraft, 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.
Non-controlling interest
A non-controlling interest, in respect of which the non-controlling shareholder may require the Corporation to buy back
the shares held, is reclassified as liabilities at the estimated redemption value, thus assuming the option is exercised. 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.
2018 Annual Report Transat A.T. Inc. | 56
Transat A.T. Inc.
Notes to Consolidated Financial Statements
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 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. Application of IFRS 9 is effective for the Corporation's annual reporting period
beginning on November 1, 2018 and is to be retrospective.
IFRS 9 uses a new approach to determine whether a financial asset is measured at amortized cost or fair value, replacing
the many different rules in IAS 39. The approach recommended by IFRS 9 is based on how an entity manages its financial
instruments and the contractual cash flow characteristics of the financial assets. Most of the requirements in IAS 39 for
classification and measurement of financial liabilities were carried forward in IFRS 9. However, the portion of the changes
in fair value related to the entity’s own credit risk, in measuring a financial liability at fair value through profit or loss, will
be presented in other comprehensive income (loss) rather than in the statement of income. The Corporation has
determined that this change would not have a material impact on its financial statements.
IFRS 9 also introduces a new expected-loss impairment model that will require 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 timely basis. The Corporation has determined that this
change would not have a material impact on its financial statements.
Lastly, IFRS 9 introduces a new hedge accounting model, together with corresponding disclosure requirements regarding
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.
The Corporation will apply the new hedge accounting model and comply with the corresponding disclosure requirements
for risk management activities as of November 1, 2018. The main impact resulting from the application of the new hedge
accounting model is the recognition in other comprehensive income (loss) in the consolidated statement of comprehensive
income of the time value of options designated as hedging instruments. The Corporation does not expect the adoption of
IFRS 9 to have a material impact on its consolidated financial statements.
IFRS 15, Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, Revenue from Contracts with Customers, a new standard that specifies the steps and
timing of revenue recognition for issuers as well as requiring them to provide relevant and more comprehensive
2018 Annual Report Transat A.T. Inc. | 57
Transat A.T. Inc.
Notes to Consolidated Financial Statements
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. Application of IFRS 15 is mandatory and will be effective for the Corporation’s annual
reporting period beginning on November 1, 2018. The standard will be applied retrospectively with an adjustment to the
opening consolidated statement of financial position as at November 1, 2017.
The Corporation has completed the following preliminary assessment of the significant changes that will have an impact on
its accounting policies:
• Revenue from the land portion of holiday packages and the related costs which are currently recognized
when passengers depart will be recognized when the corresponding services are rendered over the course
of the stay.
• Commission revenue from travel agencies which is currently recognized when travel is reserved will be
recognized when passengers depart.
• Certain additional costs incurred to earn income from air transportation services, such as costs related to
the worldwide distribution system, which are currently expensed when travel is reserved, will be capitalized
when travel is reserved and expensed when revenue is recognized.
• Certain types of revenues, currently recognized on a gross basis, will be recognized on a net basis due to the
new criteria introduced by IFRS 15. This reclassification will have no impact on operating results.
The Corporation continues to assess the impact of adopting this standard on its financial statements, in particular the
effect of the above-mentioned changes in accounting policies on statement of financial position items, the transition
method, as well as the amendments to disclosure requirements, and will complete its analysis during the next quarter.
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 leases and leases of low value assets.
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 annual reporting period beginning on
November 1, 2019. 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.
Note 5 Business acquisitions and disposals
Jonview Canada Inc.
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 November 30, 2017, the Corporation completed the sale of its wholly owned subsidiary Jonview, which has an incoming
tour operator business in Canada, to Japanese multinational H.I.S. Co. Ltd., which specializes in travel distribution,
2018 Annual Report Transat A.T. Inc. | 58
Transat A.T. Inc.
Notes to Consolidated Financial Statements
following approval of the transaction by the Competition Bureau of Canada and compliance with other customary
conditions. Under the terms of the agreement, the selling price totals $48,896, of which $46,696 was received in cash, with
the balance of $2,200 receivable under certain contractual conditions prior to May 31, 2019. The disposed subsidiary’s net
assets amounted to $13,430 on November 30, 2017. The Corporation recognized a gain on business disposal of $31,264, net
of transaction costs of $486 and of $3,716 due to the Fonds de Solidarité des Travailleurs du Québec [“Fonds”], of which
$3,278 was paid in cash during the year, as an additional consideration to the repurchase price of the 19.93% interest held
by the Fonds in December 2016.
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
and comprehensive income for the years ended October 31, 2018 and 2017. As at October 31, 2017, the assets and liabilities
of Jonview were reported as held for sale in the consolidated statements of financial position.
The assets and liabilities disposed of in connection with Jonview are as follows:
Cash and cash equivalents
Other current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets disposed of
Cash consideration received
Cash consideration paid to the Fonds de Solidarité des Travailleurs du Québec (FSTQ)
Cash-settled transaction costs
Cash and cash equivalents disposed of
Cash flows from the disposal of Jonview
Ocean Hotels
2018
$
(14,304)
(11,275)
(2,945)
14,904
190
(13,430)
46,696
(3,278)
(486)
(14,304)
28,628
On October 4, 2017, the Corporation completed the sale of its 35% minority interest in Ocean Hotels to H10 Hotels for an
amount of US$150,500 [$187,500], received in cash. The disposed interest had a carrying value of $97,252 as at
October 4, 2017. During the year ended October 31, 2017, the Corporation recognized a gain on business disposal 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 the investment.
Under the terms of the agreement, on March 8, 2018, the selling price was adjusted downward by US$1,500 [$1,935] to
US$149,000 [$185,565]. As a result of additional transaction costs incurred in connection with the closing of the
transaction, the Corporation recognized a downward adjustment of $200 to the gain on business disposal, bringing the
total amount of the gain on disposal of Ocean Hotels to $86,416.
Desarrollo Transimar
On April 3, 2017, the Corporation acquired a 50% interest in Desarrollo Transimar S.A. de C.V. [“Desarrollo Transimar”], 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 [$657] was included in trade and other payables as at October 31, 2018. This amount was paid on
November 5, 2018. This interest in a joint venture is accounted for using the equity method [see note 12].
Note 6 Cash and cash equivalents in trust or otherwise reserved
As at October 31, 2018, cash and cash equivalents in trust or otherwise reserved included $276,038 [$239,974 as at
October 31, 2017] in funds received from customers, primarily 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 $62,881, of which
$51,184 was recorded as non-current assets [$69,090 as at October 31, 2017, of which $50,100 was recorded as non-
current assets], which was pledged as collateral security against letters of credit.
2018 Annual Report Transat A.T. Inc. | 59
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Note 7
Trade and other receivables
Trade receivables
Government receivables
Cash receivable from lessors
Other receivables
Note 8
Financial instruments
Classification of financial instruments
2018
$
2017
$
30,861
22,177
67,027
19,944
140,009
33,516
21,603
46,548
19,951
121,618
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
$
593,654
593,654
338,919
117,832
34,874
338,919
117,832
34,874
6,873
11,233
1,103,385
6,873
11,233
1,103,385
—
—
—
—
—
—
—
242,907
242,907
242,907
—
—
22,800
265,707
844
1,996
22,800
268,547
844
1,996
22,800
268,547
As at October 31, 2018
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 interest
593,654
—
338,919
—
—
—
117,832
34,874
6,873
11,233
950,679
—
844
1,996
—
2,840
—
—
152,706
—
—
—
—
—
2018 Annual Report Transat A.T. Inc. | 60
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Carrying amount
Financial
assets/liabilities
at fair value
through profit
or loss
$
Loans and
receivables
$
Other
financial
liabilities
$
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 interest
593,582
—
309,064
—
—
—
100,015
28,033
8,471
2,054
913,171
—
212
2,656
—
2,868
—
—
128,048
—
—
—
—
—
Total
$
Fair value
$
593,582
593,582
309,064
100,015
28,033
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
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 the non-controlling interest in respect of which a shareholder holds an option entitling him to require the
Corporation to buy back his shares corresponds to its 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.
2018 Annual Report Transat A.T. Inc. | 61
Transat A.T. Inc.
Notes to Consolidated Financial Statements
The following table details the fair value hierarchy of financial instruments by level:
As at October 31, 2018
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 interest
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 interest
Quoted prices
in active
markets
(Level 1)
$
Other
observable
inputs
(Level 2)
$
Unobservable
inputs
(Level 3)
$
—
—
—
—
—
—
—
6,873
13,624
20,497
844
2,601
—
3,445
—
—
—
—
—
22,800
22,800
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
Total
$
6,873
13,624
20,497
844
2,601
22,800
26,245
Total
$
8,471
9,587
18,058
212
8,066
26,400
34,678
2018 Annual Report Transat A.T. Inc. | 62
Transat A.T. Inc.
Notes to Consolidated Financial Statements
The change in the non-controlling interest is 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 interest
2018
$
26,400
3,542
677
(3,302)
—
(4,517)
22,800
2017
$
29,984
4,064
(1,305)
(4,447)
(4,983)
3,087
26,400
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 $30,861 as at October 31, 2018 [$33,516 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, 2018 and 2017. As at
October 31, 2018, approximately 6% [approximately 4% as at October 31, 2017] of accounts receivable were over 90 days
past due, whereas approximately 80% [approximately 84% as at October 31, 2017] were current, that is, under 30 days.
Historically, the Corporation has not incurred any significant losses in respect of its trade receivables. Therefore, the
allowance for doubtful accounts at the end of each period and the change recorded for each period is insignificant.
Pursuant to certain agreements entered into with its service providers consisting primarily of hotel operators, the
Corporation pays deposits to capitalize on special benefits, including pricing, exclusive access and room allotments. These
deposits totalled $27,118 as at October 31, 2018 [$24,096 as at October 31, 2017] 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 $34,874 as at
October 31, 2018 [$28,033 as at October 31, 2017] 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, 2018, the cash security deposits with lessors that
have been claimed totalled $67,027 [$46,548 as at October 31, 2017] 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.
2018 Annual Report Transat A.T. Inc. | 63
Transat A.T. Inc.
Notes to Consolidated Financial Statements
For financial institutions including the various counterparties, the maximum credit risk as at October 31, 2018 relates to
cash and cash equivalents, including cash and cash equivalents in trust or otherwise reserved, and derivative financial
instruments accounted for in assets. These assets are held or traded with a limited number of financial institutions and
other counterparties. The Corporation is exposed to the risk that the financial institutions and other counterparties with
which it holds securities or enters into agreements could be unable to honour their obligations. The Corporation minimizes
risk by entering into agreements only with large financial institutions and other large counterparties with appropriate credit
ratings. The Corporation’s policy is to invest solely in products that are rated R1-Mid or better (by Dominion Bond Rating
Service [“DBRS”]), A1 (by Standard & Poor’s) or P1 (by Moody’s) and rated by at least two rating firms. Exposure to these
risks is closely monitored and maintained within the limits set out in the Corporation’s various policies. The Corporation
revises these policies on a regular basis.
The Corporation does not believe it was exposed to a significant concentration of credit risk as at October 31, 2018.
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, 2018 are summarized in the following table:
Maturing in
under 1 year
$
242,907
22,800
2,778
268,485
Maturing in
1 to 2 years
$
—
—
679
679
Maturing in
2 to 5 years
$
—
—
—
—
Contractual
cash flows
Total
$
242,907
22,800
3,457
269,164
Carrying
amount
Total
$
242,907
22,800
3,445
269,152
Accounts payable and accrued liabilities
Non-controlling interest
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 68% of the Corporation’s costs are incurred in a currency other than the
measurement currency of the reporting unit incurring the costs, whereas approximately 19% of revenues are earned 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.
2018 Annual Report Transat A.T. Inc. | 64
Transat A.T. Inc.
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)
2018
Financial statement
measurement currency of the
group’s companies
Euro
Pound sterling
Canadian dollar
Other currencies
Total
Net assets (liabilities)
2017
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
$
Total
$
6
(94)
37,295
(911)
36,296
—
201
(9,413)
27
(9,185)
—
—
10,222
—
10,222
—
(1,759)
—
13
(1,746)
—
—
367
597
964
U.S. dollar
$
Euro
$
Pound
sterling
$
Canadian
dollar
$
Other
Currencies
$
6,130
30
17,609
(515)
23,254
—
214
12,068
37
12,319
—
—
15,543
—
15,543
—
4,085
—
24
4,109
—
—
(933)
1,271
338
6
(1,652)
38,471
(274)
36,551
Total
$
6,130
4,329
44,287
817
55,563
For the year ended October 31, 2018, 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 an $854 increase or decrease [$983 in 2017], respectively,
in the Corporation’s net income for the year, whereas other comprehensive income (loss) would have decreased or
increased by $4,146 [$2,996 in 2017], respectively. For sensitivity analysis purposes, the impact of any single currency on
the Corporation’s income would not be material.
As at October 31, 2018, 58% of estimated requirements for fiscal 2019 were covered by foreign exchange derivatives [60%
of estimated requirements for fiscal 2018 were covered as at October 31, 2017].
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, 2018, a 10% increase or decrease in fuel prices, assuming that all other variables had
remained the same, would have resulted in a $4,283 decrease or increase [$5,987 in 2017], respectively, in the
Corporation’s net income for the year.
As at October 31, 2018, 44% of estimated requirements for fiscal 2019 were covered by fuel-related derivative financial
instruments [31% of estimated requirements for fiscal 2018 were covered as at October 31, 2017].
2018 Annual Report Transat A.T. Inc. | 65
Transat A.T. Inc.
Notes to Consolidated Financial Statements
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.
For the year ended October 31, 2018, a 25 basis point increase or decrease in interest rates, assuming that all other
variables had remained the same, would have resulted in a $2,392 increase or decrease [$1,781 in 2017], 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
2018
$
2017
$
—
622,270
(593,654)
28,616
599,374
4.8%
—
660,695
(593,582)
67,113
577,870
11.6%
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, 2018, 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.
2018 Annual Report Transat A.T. Inc. | 66
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Note 9 Deposits
Deposits on leased aircraft and engines
Deposits with suppliers
Less current portion
Note 10 Property, plant and equipment
2018
$
34,874
27,118
61,992
20,250
41,742
2017
$
28,033
24,096
52,129
18,487
33,642
Cost
Balance as at October 31, 2017
Additions
Write-offs
Exchange difference
Balance as at October 31, 2018
Accumulated depreciation
Balance as at October 31, 2017
Depreciation
Write-offs
Exchange difference
Balance as at October 31, 2018
Net book value as at October 31, 2018
Cost
Balance as at October 31, 2016
Additions
Write-offs
Assets held for sale
Exchange difference
Balance as at October 31, 2017
Accumulated depreciation
Balance as at October 31, 2016
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
$
Land, building
and leasehold
improvements
$
106,800
11,879
—
—
118,679
83,106
5,132
—
—
88,238
30,441
57,799
6,941
(11,529)
(109)
53,102
44,523
5,265
(11,529)
76
38,335
14,767
33,222
62,563
(72)
410
96,123
25,790
1,883
(72)
(3)
27,598
68,525
Aircraft
equipment
$
Office
furniture and
equipment
$
Land, 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
Fleet
$
343,567
29,954
(34,428)
—
339,093
253,297
32,479
(34,428)
—
251,348
87,745
Fleet
$
339,449
37,164
(33,046)
—
—
343,567
245,894
40,449
(33,046)
—
—
253,297
90,270
Total
$
541,388
111,337
(46,029)
301
606,997
406,716
44,759
(46,029)
73
405,519
201,478
Total
$
519,582
58,418
(35,892)
(700)
(20)
541,388
384,623
58,659
(35,892)
(604)
(70)
406,716
134,672
2018 Annual Report Transat A.T. Inc. | 67
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Note 11
Intangible assets
Cost
Balance as at October 31, 2017
Additions
Write-offs and impairment
Exchange difference
Balance as at October 31, 2018
Accumulated amortization and impairment
Balance as at October 31, 2017
Amortization
Write-offs and impairment
Exchange difference
Balance as at October 31, 2018
Net book value as at October 31, 2018
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
Software
$
Trademarks Customer lists
$
$
148,028
7,587
(1,781)
(125)
153,709
103,021
14,445
(1,781)
10
115,695
38,014
20,406
—
—
(72)
20,334
15,809
—
—
—
15,809
4,525
12,219
129
—
226
12,574
12,219
44
—
161
12,424
150
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
—
Total
$
180,653
7,716
(1,781)
29
186,617
131,049
14,489
(1,781)
171
143,928
42,689
Total
$
173,284
11,105
(801)
(3,235)
300
180,653
122,957
9,368
(801)
(491)
16
131,049
49,604
2018 Annual Report Transat A.T. Inc. | 68
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Impairment test in 2018
The Corporation performed its annual impairment test as at April 30, 2018 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 totalled $4,525 as at October 31, 2018.
The recoverable amount of trademarks is determined based on value in use, using the royalty capitalization method. The
Corporation prepares cash flow forecasts based on pre-established royalty rates, which represent what a third party would
pay to use the trademark. The cash flow forecasts, which correspond to after-tax royalties, are then discounted.
As at April 30, 2018, after-tax discount rates used for impairment testing for trademarks ranged from 10.0% to 18.0%
[between 10.0% and 18.0% as at April 30, 2017].
On April 30, 2018, 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, 2018, 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, 2018, there was no indication that the conclusions of the test might have changed since April 30, 2018.
2018 Annual Report Transat A.T. Inc. | 69
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Note 12
Investment
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 5]. 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 Transimar, a Mexican company operating a hotel
[see note 5]. This interest in a joint venture is accounted for using the equity method.
The change in the investments in CIBV and Desarrollo Transimar is detailed as follows:
Balance, beginning of year
Acquisition
Capital contribution
Share of net (loss) income
Dividend received
Translation adjustment
Disposal
2018
Desarrollo
Transimar
$
15,888
—
—
(105)
—
301
—
16,084
CIBV
$
97,668
—
—
10,956
(3,895)
(7,477)
(97,252)
—
Desarrollo
Transimar
$
—
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
The investment was translated at the USD/CAD rate of 1.3130 as at October 31, 2018 [1.2898 as at October 31, 2017].
The following table shows the condensed financial information regarding Desarrollo Transimar as at October 31, 2018:
Statement of financial position:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
Carrying amount of investment
Statement of comprehensive income:
Revenues
Net (loss) income and comprehensive (loss) income
Share of net (loss) income
2018
$
2017
$
13,341
52,761
1,272
32,662
32,168
16,084
6,234
26,800
752
507
31,775
15,888
4,558
(210)
(105)
2,429
373
187
2018 Annual Report Transat A.T. Inc. | 70
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Note 13 Other assets
Deferred rent
Sundry
2018
$
26,499
186
26,685
2017
$
244
146
390
The increase in deferred rent as at October 31, 2018 is due to the renegotiation of lease agreements for Airbus A330s which
are already part of the Corporation’s fleet.
Note 14 Trade and other payables
Trade payables
Accrued expenses
Salaries and employee benefits payable
Government remittances
Non-controlling interest [note 8]
2018
$
2017
$
145,582
33,824
63,501
28,314
22,800
294,021
132,816
37,348
56,006
18,843
—
245,013
Note 15 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, 2018 is detailed as follows:
Balance as at October 31, 2017
Additional provisions
Utilization of provisions
Unused amounts reversed
Balance as at October 31, 2018
Current provisions
Non-current provisions
Balance as at October 31, 2018
Note 16 Long-term debt
$
47,917
33,033
(22,384)
(1,338)
57,228
27,313
29,915
57,228
On May 11, 2018, the Corporation renewed its $50,000 revolving credit facility agreement for operating purposes. Under
the new agreement, which expires in 2022, the Corporation may increase the credit limit to $100,000, subject to lender
approval. The agreement may be extended for a year on 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 ratios and conditions. As at October 31, 2018, all financial ratios and conditions were met and
the credit facility was undrawn.
2018 Annual Report Transat A.T. Inc. | 71
Transat A.T. Inc.
Notes to Consolidated Financial Statements
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, 2018,
$56,151 had been drawn down under the facility [$54,847 as at October 31, 2017], of which $51,184 is 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 17 Other liabilities
Employee benefits [note 23]
Deferred lease inducements
Non-controlling interest [note 8]
Less non-controlling interest included in Trade and other payables [note 14]
2018
$
40,388
51,637
22,800
114,825
(22,800)
92,025
2017
$
40,764
29,649
26,400
96,813
—
96,813
Non-controlling interest
The minority shareholder of the subsidiary Trafictours Canada Inc. could require that the Corporation purchase its
Trafictours Canada Inc. shares at a price equal to a pre-determined formula, subject to adjustment according to the
circumstances, payable in cash. The fair value of this option is taken into account in the carrying amount of the non-
controlling interest.
Note 18 Equity
Authorized share capital
CLASS A VARIABLE VOTING SHARES
An unlimited number of participating Class A Variable Voting Shares [“Class A Shares”] which may be owned or controlled
only by non-Canadians as defined by the Canada Transportation Act [“CTA”], carrying one vote per Class A Share unless
[i] the number of issued and outstanding Class A Shares exceeds 25% of the total number of all issued and outstanding
voting shares (or any higher percentage that the Governor in Council may specify pursuant to the CTA); or [ii] the total
number of votes cast by or on behalf of holders of Class A Shares at any meeting exceeds 25% (or any higher percentage
that the Governor in Council may specify pursuant to the CTA) of the total number of votes that may be cast at such
meeting.
If either of the above-noted thresholds is surpassed, the vote attached to each Class A Share will decrease automatically,
without further act or formality. Under the circumstance described in subparagraph [i] above, the Class A Shares as a class
cannot carry more than 25% (or any higher percentage that the Governor in Council may specify pursuant to the CTA) of
the aggregate votes attached to all issued and outstanding voting shares of the Corporation. Under the circumstance
described in subparagraph [ii] above, the Class A Shares as a class cannot, for a given shareholders’ meeting, carry more
than 25% (or any higher percentage that the Governor in Council may specify pursuant to the CTA) of the total number of
votes that can be exercised at the said meeting.
Each issued and outstanding Class A Share shall be automatically converted into one Class B Voting Share without any
further action on the part of the Corporation or of the holder if [i] the Class A Share is or becomes owned or controlled by
a Canadian as defined by the CTA; or [ii] the provisions contained in the CTA relating to foreign ownership restrictions are
repealed and not replaced with other similar provisions.
2018 Annual Report Transat A.T. Inc. | 72
Transat A.T. Inc.
Notes to Consolidated Financial Statements
CLASS B VOTING SHARES
An unlimited number of Class B Voting Shares [“Class B Shares”], participating, which may be owned and controlled only by
Canadians as defined by the CTA 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, 2016
Issued from treasury
Exercise of options
Balance as at October 31, 2017
Issued from treasury
Exercise of options
Balance as at October 31, 2018
Number of shares
36,859,165
195,240
9,221
37,063,626
188,785
292,924
$
214,250
1,094
100
215,444
1,555
2,685
37,545,335
219,684
As at October 31, 2018, the number of Class A Shares and Class B Shares was 2,931,020 and 34,614,315, respectively
[3,457,571 and 33,606,055, respectively, as at October 31, 2017].
Subscription rights plan
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 829,196 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 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.
2018 Annual Report Transat A.T. Inc. | 73
Transat A.T. Inc.
Notes to Consolidated Financial Statements
The following tables summarize all outstanding options:
Beginning of year
Granted
Exercised
Cancelled
Expired
End of year
Options exercisable, end of year
Range of exercise price
$
6.01 to 7.48
8.73 to 11.22
12.25 to 12.49
19.24
2018
2017
Number of
options
2,246,032
157,735
(292,924)
(160,801)
(163,454)
1,786,588
1,412,111
Weighted
average
price
$
10.57
10.94
6.40
13.43
20.46
10.13
10.03
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
10.71
Outstanding options
Options exercisable
Number of options
outstanding as at
October 31, 2018
Weighted
average
remaining
life
594,651
626,269
463,618
102,050
1,786,588
3.6
3.4
1.8
2.2
3.0
Weighted
average
price
$
6.87
10.08
12.37
19.24
10.13
Number of options
exercisable as at
October 31, 2018
594,651
330,352
385,058
102,050
1,412,111
Weighted
average
price
$
6.87
10.16
12.35
19.24
10.03
COMPENSATION EXPENSE RELATED TO STOCK OPTION PLAN
During the year ended October 31, 2018, the Corporation granted 157,735 stock options [135,406 in 2017] 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
2018
1.80%
4 years
39.0%
0.0%
$3,59
2017
1.43%
4 years
42.0%
0.0%
$3,09
During the year ended October 31, 2018, the Corporation recorded a compensation expense of $496 [$115 in 2017] for its
stock option plan.
2018 Annual Report Transat A.T. Inc. | 74
Transat A.T. Inc.
Notes to Consolidated Financial Statements
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, 2018, the Corporation granted 236,492 PSUs [258,298 in 2017] to its key executives and
employees. As at October 31, 2018, the number of PSUs awarded amounted to 469,895. During the year ended
October 31, 2018, the Corporation recognized a compensation expense of $1,714 [$196 in 2017] for its performance share
unit plan.
Share purchase plan
A share purchase plan is available to eligible employees of the Corporation and its subsidiaries. At the annual meeting held
on March 15, 2018, the shareholders approved the implementation of a new reserve of 600,000 shares issuable in addition
to the balance remaining under the plan. Under the plan, as at October 31, 2018, the Corporation was authorized to issue
up to 525,652 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 shares during the five trading days prior to the issue of the shares, less 10%.
During the year, the Corporation issued 188,785 shares [195,240 Class B Shares in 2017] for a total of $1,555 [$1,094 in 2017]
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 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 retention during the first six months of the vesting period of
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, 2018, the Corporation recognized a compensation expense of $188 [$179 in 2017] for its
stock ownership incentive and capital accumulation plan.
Permanent stock ownership incentive plan
Subject to participation in the share purchase plan offered to all eligible employees of the Corporation, the Corporation
awards annually to each eligible senior executive a number of 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, 2018, the Corporation recognized a compensation expense of $238 [$266 in 2017] for its
permanent stock ownership incentive plan.
2018 Annual Report Transat A.T. Inc. | 75
Transat A.T. Inc.
Notes to Consolidated Financial Statements
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, 2018, the number of DSUs awarded amounted to 274,345 [231,227 as at October 31, 2017]. During the year
ended October 31, 2018, the Corporation recorded a compensation expense reversal of $496 [compensation expense of
$1,228 in 2017] 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, 2018, the number of RSUs awarded amounted to 925,929 [1,075,534 as at October 31, 2017]. During the
year ended October 31, 2018, the Corporation recorded a nil compensation expense [nil compensation expense in 2017] for
its restricted share unit plan.
Earnings per share
Basic and diluted earnings per share were calculated as follows:
[In thousands, except per share amounts]
NUMERATOR
Net income 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 per share
Earnings per share
Basic
Diluted
2018
$
2017
$
3,819
134,308
37,394
36,995
168
45
37,562
37,040
0.10
0.10
3.63
3.63
For the purposes of calculating diluted earnings per share for the year ended October 31, 2018, 911,734 outstanding stock
options [1,772,084 in 2017] were excluded from the calculation, as their exercise price exceeded the Corporation’s average
market share price.
2018 Annual Report Transat A.T. Inc. | 76
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Note 19 Additional disclosure on expenses
Salaries and employee benefits
Salaries and other employee benefits
Long-term employee benefits [note 23]
Share-based payment expense
Depreciation and amortization
Property, plant and equipment
Intangible assets subject to amortization
Other assets
Deferred lease inducements
Note 20 Special items
2018
$
381,889
2,799
2,210
386,898
2017
$
368,820
2,732
311
371,863
2018
$
44,759
14,489
118
(241)
59,125
2017
$
58,659
9,368
683
(240)
68,470
Special items mainly include termination benefits. During the year ended October 31, 2018, the Corporation recorded a
restructuring charge of $2,262 [$2,925 for the year ended October 31, 2017], comprising mainly termination benefits, of
which an amount of $1,772 was unpaid as at October 31, 2018 and included under accounts payable and accrued liabilities.
2018 Annual Report Transat A.T. Inc. | 77
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Note 21
Income taxes
The major components of the income tax expense for the years ended October 31 are:
Consolidated statements of income
Current
Current income taxes
Adjustment to taxes payable for prior years
Deferred
Relating to temporary differences
Adjustment to deferred taxes for prior years
Income tax expense (recovery)
2018
$
(7,505)
1,011
(6,494)
1,083
(532)
551
(5,943)
2017
$
15,378
3,306
18,684
(2,366)
(2,886)
(5,252)
13,432
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
Recognition of previously unrecorded tax benefits
Derecognition of a future income tax asset
Adjustments for prior years
Effect of tax rate changes
Other
2018
%
26.7
(229.0)
(321.8)
(11.0)
61.6
33.8
(0.8)
21.4
(419.1)
$
379
(3,247)
(4,563)
(156)
874
479
(12)
303
(5,943)
2017
%
26.8
(2.4)
(16.4)
—
0.3
0.3
0.1
0.1
8.8
$
40,709
(3,629)
(24,670)
(46)
402
420
114
132
13,432
The applicable statutory income tax rate was 26.7% for the year ended October 31, 2018 [26.8% for the year ended
October 31, 2017]. The 0.1% rate decrease is due to the reduction in the applicable Québec tax rate which was lowered
from 11.8% to 11.7%. The Corporation’s applicable statutory income tax rate is the applicable combined Canadian (federal
and Québec) tax rate.
2018 Annual Report Transat A.T. Inc. | 78
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Deferred taxes reflect the net tax impact of temporary differences between the value of assets and liabilities for
accounting and tax purposes. The main components and changes in temporary differences in deferred tax assets and
liabilities for fiscal years 2018 and 2017 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
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 net deferred tax assets are detailed below:
Deferred tax assets
Deferred tax liabilities
Net deferred tax assets
Balance,
beginning of
year
$
1,467
Recognized in
net income
$
(1,224)
2018
Recognized in
other
comprehensive
income
$
—
(12,646)
837
(2,750)
1,289
13,151
10,802
1,919
14,069
525
9
271
(148)
3,030
496
(3,510)
—
—
(1,874)
—
—
(595)
—
(551)
(2,469)
Exchange
differences
$
—
Balance, end
of year
$
243
18
9
—
—
—
—
—
27
(12,103)
855
(4,353)
1,141
16,181
10,703
(1,591)
11,076
2017
Balance,
beginning of
year
$
112
Recognized in
net income
$
1,360
Recognized in
other
comprehensive
income
$
—
Recognized in
assets held
for sale
$
—
Exchange
differences
$
(5)
Balance, end
of year
$
1,467
(13,537)
922
1,804
953
8,288
10,868
657
10,067
770
(82)
(3,690)
336
4,863
335
1,360
5,252
—
—
(864)
—
—
(401)
—
(1,265)
144
—
—
—
—
—
(34)
110
(23)
(3)
—
—
—
—
(64)
(95)
(12,646)
837
(2,750)
1,289
13,151
10,802
1,919
14,069
2018
$
13,095
(2,019)
11,076
2017
$
16,286
(2,217)
14,069
2018 Annual Report Transat A.T. Inc. | 79
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Non-capital losses recorded in various jurisdictions expire as follows:
Year of expiry
2019 - 2023
2024 - 2028
2029 - 2033
2034 - 2039
With no expiry
Unrecognized
$
5,262
857
124
805
1,506
Recognized
$
—
—
—
—
918
8,554
918
As at October 31, 2018, non-capital losses carried forward and other unrecognized tax deductions available to reduce
future taxable income of certain subsidiaries in Mexico total MXP 91,014 [$5,895] [MXP 89,217 [$6,013] as at
October 31, 2017]. These losses and deductions expire in 2019 and thereafter. Unrecognized capital losses as at
October 31, 2018 total $4,317 ($5,565 as at October 31, 2017).
The Corporation recognized no 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, 2018, there are no taxable temporary differences for which a deferred income tax liability
was recorded.
Note 22 Related party transactions and balances
The consolidated financial statements include the accounts of the Corporation and those of its subsidiaries. The main
subsidiaries and joint venture of the Corporation are listed below:
Air Transat A.T. inc.
Transat Tours Canada inc.
Transat Distribution Canada inc.
Jonview Canada Inc. [note 5]
Transat Holidays USA Inc.
11061987 Florida Inc.
The Airline Seat Company Ltd.
Air Consultants France S.A.S.
Air Consultant Europe B.V.
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.
Laminama S.A. de C.V.
Trafictours de Mexico S.A. de C.V.
Promotora Turística Regional S.A. de C.V.
Desarrollo Transimar S.A. de C.V.
Country of
incorporation
Canada
Canada
Canada
Canada
United States
United States
United Kingdom
France
Netherlands
Barbados
Barbados
Barbados
Dominican Republic
Dominican Republic
Dominican Republic
Dominican Republic
Jamaica
Mexico
Mexico
Mexico
Mexico
Interest (%)
2017
100.0
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
2018
100.0
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
100.0
70.0
100.0
50.0
2018 Annual Report Transat A.T. Inc. | 80
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Compensation of key senior executives
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 23 Employee future benefits
2018
$
5,566
1,331
1,753
2017
$
4,302
1,252
276
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 $51,184 letter of credit to the trustee [see note 6]. The
Corporation uses an actuarial estimate to measure its obligations as at October 31 each year.
The following table provides a reconciliation of changes in the defined benefit obligation as at October 31, 2018 and 2017:
Present value of obligations, beginning of year
Current service cost
Financial costs
Benefits paid
Experience losses (gains)
Actuarial gain on obligation
Present value of obligations, end of year
2018
$
40,764
1,342
1,457
(956)
238
(2,457)
40,388
2017
$
40,400
1,388
1,344
(871)
(224)
(1,273)
40,764
The following table provides the components of retirement benefit expense for the years ended October 31:
Current service cost
Interest cost
Total cost of retirement benefits
2018
$
1,342
1,457
2,799
2017
$
1,388
1,344
2,732
2018 Annual Report Transat A.T. Inc. | 81
Transat A.T. Inc.
Notes to Consolidated Financial Statements
The following table indicates projected payments under defined benefit pension plan arrangements as at October 31, 2018:
Under one year
One to five years
Between five and 10 years
Between 10 and 15 years
Between 15 and 20 years
$
960
10,553
14,100
12,669
10,875
49,157
The weighted average duration of the defined benefit obligation related to pension arrangements was 12.2 years as at
October 31, 2018.
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 expense
Discount rate
Rate of increase in eligible earnings
2018
%
2017
%
4.00
2.75
3.50
2.75
3.50
2.75
3.25
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, 2018
$
(3)
14
Retirement benefit
obligations as at
October 31, 2018
$
(1,153)
61
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
2018
$
—
40,388
40,388
2017
$
—
40,764
40,764
2018 Annual Report Transat A.T. Inc. | 82
Transat A.T. Inc.
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, 2016
Actuarial gains
Income taxes
October 31, 2017
Actuarial gains
Income taxes
October 31, 2018
$
(9,904)
1,497
(401)
(8,808)
2,219
(595)
(7,184)
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 $13,559 for the year
ended October 31, 2018 [$11,673 for the year ended October 31, 2017].
Note 24 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
2018
$
199,662
946,756
1,328,858
2017
$
165,293
661,856
890,234
2,475,276
1,717,383
The lease expense totals $143,805 for the year ended October 31, 2018 [$151,652 for the year ended October 31, 2017].
2018 Annual Report Transat A.T. Inc. | 83
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Other commitments
The Corporation also has purchase obligations under various contracts entered into in the normal course of business. The
purchase obligations are as follows:
Under one year
One to five years
Over five years
Litigation
2018
$
62,779
9,748
7,321
79,848
2017
$
94,640
—
—
94,640
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 [$39,400]. 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, 2018.
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, 2018 and 2017.
2018 Annual Report Transat A.T. Inc. | 84
Transat A.T. Inc.
Notes to Consolidated Financial Statements
Note 25 Guarantees
In the normal course of business, the Corporation has entered into agreements containing clauses meeting the definition
of a guarantee. These agreements provide compensation and guarantees to counterparties in transactions such as
operating leases, irrevocable letters of credit and collateral security contracts.
These agreements may require the Corporation to compensate the counterparties for costs and losses incurred as a result
of various events, including breaches of representations and warranties, loss of or damages to property, claims that may
arise while providing services and environmental liabilities.
Notes 6, 8, 16, 23 and 24 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 licences 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, 2018, the total amount of these guarantees unsecured by deposits was $419. Historically, the Corporation has
not made any significant payments under such agreements. As at October 31, 2018, no amounts had been accrued with
respect to the above-mentioned agreements.
Irrevocable credit facility unsecured by deposits
The Corporation has a $50,000 guarantee facility renewable annually. Under this agreement, the Corporation may issue
collateral security contracts with a maximum three-year term. As at October 31, 2018, $31,221 had been drawn under the
facility [$27,137 in 2017].
Note 26 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 and consolidated
statements of financial position include all the required information.
Note 27 Subsequent event
On November 28, 2018, the Corporation acquired land in Puerto Morelos for an amount of US$13,000 [$17,293] of which
US$9,000 [11,972] was paid in cash on that date. The balance of US$4,000 [$5,321] is payable under certain contractual
conditions.
2018 Annual Report Transat A.T. Inc. | 85
Transat A.T. Inc.
Additional Financial Information
[in thousands of Canadian dollars, except for 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 business disposals
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 related to
continuing operations
2018
2017
2016
2015
2014
2,992,582
2,975,770
59,125
2,262
3,005,345
2,899,230
68,470
2,925
2,889,646
2,856,118
50,038
13,825
2,897,950
2,797,342
45,817
—
2,996,106
2,909,737
43,581
6,387
(44,575)
34,720
(30,335)
54,791
36,401
2,061
(17,935)
2,134
(8,363)
1,669
(6,996)
1,284
(339)
—
(31,064)
1,418
(5,943)
7,361
—
7,361
3,542
3,819
0.10
0.10
(9,187)
(15,052)
—
(86,616)
151,804
13,432
138,372
—
138,372
4,064
134,308
3.63
3.63
(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)
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
68,804
(93,644)
(430)
(982)
161,487
97,901
(3,596)
450
43,561
5,093
(9,823)
(12,132)
108,992
(53,854)
(12,672)
3,402
90,009
(52,683)
191
(2,262)
(26,252)
256,242
26,699
45,868
35,255
Cash and cash equivalents, end of year
593,654
593,582
363,664
336,423
308,887
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.
1,559,860
—
599,374
0.62
15.96
1,453,216
—
577,870
0.60
15.59
1,277,420
—
464,386
0.64
12.60
1,513,764
—
537,252
0.65
14.29
1,375,030
—
482,946
0.65
12.47
37,545
37,064
36,859
37,591
38,742
37,394
37,562
36,995
37,040
36,899
36,899
38,442
38,558
38,644
39,046
2018 Annual Report Transat A.T. Inc. | 86