Transat AT, Inc. Annual Report 2021

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FY2021 Annual Report · Transat AT, Inc.

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annual report
2021

Senior
Management

Annick
Guérard
President and Chief Executive Officer,
Transat

Joseph
Adamo
President, Transat Distribution Canada
and Chief Sales and Marketing Officer,
Transat

Michèle
Barre
Vice President,
Network, Revenue
Management and
Pricing

Patrick
Bui
Chief Financial
Officer

Bernard
Bussières
Vice-President,
General Counsel and
Corporate Secretary

Christophe
Hennebelle
Vice-President,
Human Resources
and Corporate Affairs

Bruno
Leclaire
Vice-President and
Chief Information
Officer

Jean-François
Lemay
President-General
Manager, Air Transat

Annick
Guérard
President and Chief
Executive Officer,
Transat
1

Louis-Marie
Beaulieu
Chairman of
the Board,
President and Chief
Executive Officer,
Groupe Desgagnés Inc.
2 3

W. Brian
Edwards
Corporate Director
3 4

Louise
St-Pierre
Corporate Director
3 5

Raymond
Bachand
Lead Director

Strategic Advisor,
Norton Rose
Fulbright Canada
S.E.N.C.R.L., s.r.l./LLP
1 2 5

Lucie
Chabot
Corporate Director
2 4 5

Susan
Kudzman
Corporate Director
1 3 4 5

Philippe
Sureau
Corporate Director

Ian
Rae
Founder, President
and Chief Executive
Officer, CloudOps
4 5

Jacques
Simoneau
President and Chief
Executive Officer
and Director,
Gestion Univalor, LP
1 4

Jean-Yves
Leblanc
Corporate Director
1 2 3

Committees

Executive
Committee

Audit
Committee

Human Resources
and Compensation Committee

Risk Management and Corporate
Governance Committee

Governance and
Nominating Committee

2021
Financial Highlights

in thousands of dollars, except per share amounts and ratios

Transat A.T. Inc. is a holiday travel reference worldwide, particularly as an air carrier

under the Air Transat brand.

Revenues

2021
2020
2019
2018
2017

124,818
1,302,069
2,937,130
2,848,955
3,005,345

2021
2020
2019
2018
2017

Cash flows related to operating activities

Net income (loss) attributable to shareholders

Adjusted operating income (loss) 1

2021
2020
2019
2018
2017

(389,559)
(496,545)
(32,347)
6,451
134,308

2021
2020
2019
2018
2017

(518,444)
(46,136)
216,021
68,804
161,487

(213,885)
(122,175)
192,441
17,195
102,025

2021

2020

Variance ($)

Variance (%)

Revenues

Operating loss

Adjusted operating loss 1

Net loss

124,818

1,302,069

(1,177,251)

(401,222)

(425,962)

24,740

(213,885)

(122,175)

(91,710)

(389,438)

(496,765)

107,327

Net loss attributable to shareholders

(389,559)

(496,545)

106,986

Diluted loss per share

(10.32)

(13.15)

2.83

(90.4)

5.8

(75.1)

21.6

21.5

Cash flows related to operating activities

(518,444)

(46,136)

(472,308)

(1,023.7)

Cash and cash equivalents

Total assets

433,195

426,433

6,762

1,897,658

2,016,071

(118,413)

Long-tem debt (including current portion)

463,180

49,980

413,200

Debt ratio 2

Stock price as at October 31 (TRZ)

1.17

4.39

0.97

4.65

Oustanding shares, end of year (in thousands)

37,747

0.20

(0.26)

1.6

(5.9)

826.7

20.6

(5.6)

1 See Non-IFRS financial measures section

2 Debt ratio: total liabilities divided by total assets.

A promising outlook
for our 2022–2026
strategic plan

This past year has been a passageway
of sorts to our 2022–2026 strategic
plan, a period during which we rebuilt
the foundations of the company after
the unprecedented crisis that the
COVID-19 pandemic represented

for our industry.

Our revenues for the year were
$125 million, 4.2% of that in 2019.
The net loss attributable to
shareholders was $390 million,
unsurprisingly reflecting the degree
to which our business was reduced
and the difficult year.

After a very trying 2020,

during which we were forced
to suspend our operations
for almost three months
and temporarily lay off
85% of our workforce,
the year 2021 has brought
its ups and downs.

Despite a relatively limited
winter program, there was
a clear upturn. Then, we had
to completely halt our operations

again on January 29 due to

the surge in cases and the
Government of Canada’s request
that we suspend flights to the South.
We have gradually been resuming
flight operations since July 30 and
are now ready for a much more active
winter season than the last one.
The recent rise in cases in Europe
and the appearance of the omicron
variant tell us that we are not yet
rid of the virus; far from it. We will
probably have to deal with a disease
that has become endemic. But while
the pace is still uncertain, vaccination
rates around the world, particularly in
Canada, give us some assurance that
the recovery will now get stronger.

But during the same period, we did
a lot to prepare the company for
the next chapter.

First, of course, we obtained funding
from the federal government.
This enabled us to reimburse the
travel credits that we were forced
to issue due to the suddenness of the
crisis, but it also gave us the liquidity
we needed to remain in operation
and restart operations. Including
the facilities already in place,
we have loans totalling $820 million,
$650 million of which has been used
as at October 31, 2021. In the short
to medium term, our goal is to revise
our capital structure to replace
the facilities currently in place with
other sources of financing that
are more suited to our needs,
but we are very grateful to have had
this much-needed support.

We have also made great strides
towards refocusing on our core
airline business, which has led
us to wind up our hotel division.

We have accelerated our fleet
transformation, withdrawing all
Airbus A310s and Boeing 737s,

Annick
Guérard
President and Chief Executive
Officer, Transat

and keeping only a reduced number
of A330s, and mainly the A321s,
including 10 long-range aircraft,
which today make up the core of our
fleet and will gradually be increased
to 17 by 2023. We have therefore
simplified our fleet from five types
of aircraft to two much more
compatible ones. In doing so, we are
putting an end to a way of operating
that had its advantages at one time,
but the complexity of which has
considerably affected Transat’s
profitability in recent years. We can
now significantly improve the use
of our aircraft, ease the transition
between our two seasons and lessen
the impact of the off-peak periods
between them.

The increased focus on our
flight operations is also leading
us to densify our network and
concentrate it around Eastern
Canada, particularly in Montreal.
This refocusing will be offset and
complemented by alliances with
other airlines. This will bring more
passengers from multiple points
of origin to the routes we operate
and will enable us to offer our
customers more destinations and
schedule options. We have already
taken the first steps in this strategy
by concluding a first codeshare
agreement, as well as several virtual
interlining agreements: Air Transat’s
connectair service already allows
us to offer more than 130 new
destinations. By strengthening the

network in this way, we are also
able to offer new routes operated
in-house starting in summer 2022,
such as to Amsterdam, Los Angeles
and San Francisco from Montreal
or London from Québec City.

Corporate responsibility will also
be a central aspect of our future
development, with a particular focus
on the environment, as demonstrated
by our recent offtake agreement
with the SAF+ consortium for a large
portion of the production from
its first sustainable-fuel plant, which
will give it the necessary support
to move forward with its project,
based entirely in Montreal. In
addition to our longstanding actions
that have led to our Travelife
certification, we will be stepping up
our efforts in particular in the areas
of employee development,
and diversity and inclusion.

Preserving cash flows and reducing
costs has also been a priority over
the past year. Beyond short-term
measures to defer certain costs,
such as aircraft leases, we were
able to permanently reduce certain
expenses, such as our property costs
in Montreal and Toronto, thanks to
our bold approach to teleworking,
which will also be an asset in attracting
and retaining our employees in a very
competitive market.

At the end of this challenging year,
we are now in an excellent position
to roll out our strategic plan.
The coming years will see us maintain
and pick up the pace on the path
we have mapped out over the past
few months. One of our priorities
will be to ensure that our technology
investments allow us to do this.
While we have once again been
named World’s Best Leisure
Airline, we will step up our efforts
to strengthen our customers’
satisfaction and affection for
our brand. We will also rely on our
employees, whose trust, resilience
and hard work have been key to
getting us through the COVID crisis
and will be even more crucial
in building our future success.

I would like to conclude by thanking
them here expressly for their hard
work and unwavering commitment
to Transat.

As the end of the pandemic
approaches, Transat is ready
to make the most of the recovery
and enter a new period of
profitability for all of its stakeholders,
customers, employees, partners and,
of course, shareholders

The dawn of a new era
for Transat

Entering its 35th year of existence,
Transat opens a new chapter in its
history.

Just as COVID-19 was accelerating a
number of changes already underway,
and disrupting others, and as the

transaction with Air Canada had

been blocked by the European

authorities, Jean-Marc

Eustache retired.

At the end of a long-
established succession
plan, Annick Guérard took
the helm of the company.

Under her leadership,
Transat has adopted an
ambitious strategic plan

focused on the airline’s

strengths, which will enable it to

do well and take advantage of the
current recovery to become an even
stronger and more growth-oriented
company than it was before the crisis.
That plan includes building alliances
to help it better integrate into the
North American and global aviation
ecosystem.

Over the past year, Transat has given
itself the means to pursue this vision
by obtaining funding from the federal
government—which gives it time to set
up a sustainable financing structure—
and by closing the hotel division
launched before the pandemic.

The coming year will see a renewal of
the Board of Directors and an update of
our governance rules.

As we enter this new period, I would
like to thank all the members of the
Board for their important contribution,
especially during the turbulent years
we have just gone through. I would
particularly like to acknowledge the
contribution of Louis-Marie Beaulieu
and Jean-Yves Leblanc who will leave us
at the end of December.

I would also like to extend my heartfelt
thanks to all of Transat’s management
and employees, who continued to
give their all during the storm, and on
whom Transat’s past and future success
depends.

Raymond
Bachand
Lead Director

Strategic Advisor, Norton Rose
Fulbright Canada
S.E.N.C.R.L., s.r.l./LLP

Management's Discussion and analysis

TABLE OF CONTENTS

10.

11.

Caution Regarding Forward-Looking Statements .................................................................... 6

Non-IFRS Financial Measures ........................................................................................................ 8

Financial Highlights ......................................................................................................................... 11

Highlights of 2021 ............................................................................................................................ 12

Overview ............................................................................................................................................ 14

Consolidated Operations ............................................................................................................... 18

Financial Position, Liquidity and Capital Resources ................................................................ 26

Other .................................................................................................................................................. 34

Accounting ........................................................................................................................................ 35

Risks and Uncertainties .................................................................................................................. 42

Controls and Procedures ............................................................................................................... 51

Outlook .............................................................................................................................................. 51

Management's Report ................................................................................................................................... 52

Independent Auditor's Report ..................................................................................................................... 53

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, 2021, compared with the year ended October 31, 2020, and should be
read in conjunction with the audited consolidated financial statements and notes thereto. Unless otherwise indicated, the
information contained herein is dated as of December 8, 2021. 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, 2021 and the Annual Information Form.

The consolidated financial statements have been prepared in accordance with International Financial Reporting
Standards [“IFRS”]. We occasionally refer to non-IFRS financial measures in the MD&A. See the Non-IFRS financial measures
section for more information. All dollar figures in this MD&A are in Canadian dollars unless otherwise indicated. The terms
“Transat,” “we,” “us,” “our” and the “Corporation” mean Transat A.T. Inc. and its subsidiaries, unless otherwise indicated.

1. CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This MD&A contains certain forward-looking statements with respect to the Corporation, including those regarding its
results, its financial position, the impacts of the coronavirus [“COVID-19”] pandemic, its outlook for the future and planned
measures, including in particular the gradual resumption of certain flights and actions to improve its cash flows. 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.

We draw your attention to the MD&A’s section 7, Financial position, liquidity and capital resources and note 2 to the
consolidated financial statements which describe an environment, events and conditions, specifically in the context of a
pandemic, which indicate the existence of material uncertainty that may cast significant doubt on the Corporation’s ability
to continue as a going concern.

The global air transportation and tourism industry has faced a collapse in traffic and demand. Travel restrictions,
uncertainty about when borders will reopen fully, both in Canada and at certain destinations the Corporation flies to, the
imposition of quarantine measures and vaccination and testing requirements both in Canada and other countries, as well
as concerns related to the pandemic and its economic impacts are creating some demand uncertainty, at least for
fiscal 2022. For the first half of winter 2021, the Corporation rolled out a reduced winter program. On January 29, 2021,
following the Canadian government’s request to not travel to Mexico and the Caribbean, and the introduction of new
quarantine measures and COVID-19 testing requirements, the Corporation announced the complete suspension of all its
regular flights and the repatriation of its clients to Canada. Starting July 30, 2021, the Corporation partially resumed its
operations and gradually rolled out a reduced summer program. The Corporation cannot predict all the impacts of
COVID-19 on its operations and results, the pace at which the situation will improve or precisely when conditions will
become normal again. The Corporation has implemented a series of operational, commercial and financial measures,
including new financing and cost reduction measures, aimed at preserving its cash. The Corporation is monitoring the
situation daily to adjust these measures as it evolves. However, until the Corporation is able to resume operations at a
sufficient level, the COVID-19 pandemic will have significant negative impacts on its revenues, cash flows from operations
and operating results. While progress on vaccination and the lifting of certain restrictions have made it possible to resume
operations at a certain level during 2021, the Corporation does not expect such level to reach the pre-pandemic level
before 2023.

Annual Report 2021 Transat A.T. inc. | 6

Management's Discussion and analysis

The 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 until the Corporation is able to resume operations at a sufficient level, the COVID-19
pandemic will have significant negative impacts on its revenues, cash flows from operations and
operating results.

The outlook whereby, subject to going concern uncertainty as discussed in the Basis of preparation and going
concern uncertainty section of the MD&A and note 2 to the interim condensed consolidated financial
statements, the Corporation will be able to meet its obligations with cash on hand, cash flows from operations
and its borrowing capacity.

The outlook whereby, subject to going concern uncertainty as discussed in Section 7. Financial position,
liquidity and capital resources of the MD&A and note 2 to the consolidated financial statements, 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.

In making these statements, the Corporation has assumed, among other things, that travel and border restrictions imposed
by government authorities will be relaxed to allow for a resumption of operations of the type and scale expected, that the
standards and measures imposed by government and airport authorities to ensure the health and safety of personnel and
travellers will be consistent with those announced or currently anticipated, that travellers will continue to travel despite
the new health measures and other constraints imposed as a result of the pandemic, that credit facilities and other terms
of credit extended by its business partners will continue to be made available as in the past, that management will continue
to manage changes in cash flows to fund working capital requirements for the full fiscal year. 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.

Annual Report 2021 Transat A.T. inc. | 7

Management's Discussion and analysis

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 fulfil 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 asset disposals, restructuring charges, asset impairment, depreciation and amortization, foreign
exchange gains (losses) and other significant unusual items, and by including premiums for fuel-related derivatives and
other derivatives 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.

Annual Report 2021 Transat A.T. inc. | 8

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, amortization and asset impairment 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)

Income (loss) before income tax expense before change in fair value of fuel-related derivatives and
other derivatives, revaluation of liability related to warrants, gain (loss) on business disposals,
gain (loss) on asset disposals, restructuring charge, lump-sum payments related to collective
agreements, asset impairment, foreign exchange gain (loss) and other significant unusual items,
and including premiums for fuel-related derivatives and other derivatives that 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.

Adjusted net income
(loss)

Net income (loss) attributable to shareholders before net income (loss) from discontinued
operations, change in fair value of fuel-related derivatives and other derivatives, revaluation of
liability related to warrants, gain (loss) on business disposals, gain (loss) on asset disposals,
restructuring charge, lump-sum payments related to collective agreements, asset impairment,
foreign exchange gain (loss), reduction in the carrying amount of deferred tax assets and other
significant unusual items, and including premiums for fuel-related derivatives and other
derivatives that 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.

Total debt

Long-term debt plus the amount for lease liabilities and the liability related to warrants, net of
deferred financing cost related to the unsecured debt - LEEFF. 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.

Annual Report 2021 Transat A.T. inc. | 9

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 loss
Special items
Depreciation and amortization
Premiums related to fuel-related derivatives and other derivatives
matured during the period
Adjusted operating income (loss)

Loss before income tax expense
Special items
Change in fair value of fuel-related derivatives and other derivatives
Revaluation of liability related to warrants
Loss (gain) on asset disposals
Foreign exchange (gain) loss
Premiums related to fuel-related derivatives and other derivatives
matured during the period
Adjusted pre-tax loss

Net loss attributable to shareholders
Special items
Change in fair value of fuel-related derivatives and other derivatives
Revaluation of liability related to warrants
Loss (gain) on asset disposals
Foreign exchange (gain) loss
Premiums related to fuel-related derivatives and other derivatives
matured during the period
Tax impact
Adjusted net loss

Adjusted net loss
Adjusted weighted average number of outstanding shares used in
computing diluted earnings per share
Adjusted net loss per share

(in thousands of dollars)
Long-term debt
Liability related to warrants
Deferred financing costs
Lease liabilities
Total debt

Total debt
Cash and cash equivalents
Total net debt

2021
$

2020
$

(401,222)
27,572
159,765

(425,962)
99,675
204,112

2019
$
(13,588)
23,875
182,321

—
(213,885)

—
(122,175)

(167)
192,441

(389,415)
27,572
(8,849)
(4,934)
(17,347)
(53,260)

(488,973)
99,675
13,715
—
11,271
3,601

(37,736)
23,875
8,664
—
(9)
(1,110)

—
(446,233)

—
(360,711)

(167)
(6,483)

(389,559)
27,572
(8,849)
(4,934)
(17,347)
(53,260)

(496,545)
99,675
13,715
—
11,271
3,601

—
—
(446,377)

—
12,948
(355,335)

(32,347)
23,875
8,664
—
(9)
(1,110)

(167)
(8,304)
(9,398)

(446,377)

(355,335)

(9,398)

37,747
(11.83)

37,747
(9.41)

37,673
(0.25)

October 31,
2021
$

October 31,
2020
$

463,180
36,557
(19,368)
956,358
1,436,727

49,980
—
—
853,906
903,886

October 31,
2019
$
—
—
—
665,929
665,929

1,436,727
(433,195)
1,003,532

903,886
(426,433)
477,453

665,929
(564,844)
101,085

Annual Report 2021 Transat A.T. inc. | 10

Management's Discussion and analysis

3. FINANCIAL HIGHLIGHTS

(in thousands of Canadian dollars, except per share amounts)
Consolidated Statements of Income (Loss)
Revenues
Operating loss
Net loss attributable to shareholders
Basic loss per share
Diluted loss per share
Adjusted operating income (loss)¹
Adjusted net loss¹
Adjusted net loss per share¹

Consolidated Statements of Cash Flows
Operating activities
Investing activities
Financing activities
Effect of exchange rate changes on cash and cash equivalents
Net change in cash and cash equivalents

Consolidated Statements of Financial Position
Cash and cash equivalents

Cash and cash equivalents in trust or otherwise reserved
(current and non-current)

Total assets
Debt (current and non-current)
Total debt ¹
Total net debt ¹

1 See Non-IFRS financial measures section

2021
$

2020
$

2019
$

124,818 1,302,069 2,937,130
(13,588)
(425,962)
(401,222)
(32,347)
(496,545)
(389,559)
(0.86)
(13.15)
(10.32)
(0.86)
(13.15)
(10.32)
192,441
(122,175)
(213,885)
(9,398)
(355,335)
(446,377)
(0.25)
(9.41)
(11.83)

Difference
2021
%

2020
%

(90.4)
5.8
21.5
21.5
21.5
(75.1)
(25.6)
(25.7)

(55.7)
(3,034.8)
(1,435.1)
(1,429.1)
(1,429.1)
(163.5)
(3,681.0)
(3,664.0)

(518,444)
4,542
522,071
(1,407)
6,762

(46,136)
(60,414)
(33,374)
1,513
(138,411)

216,021
(163,779)
(81,993)
941
(28,810)

(1,023.7)
107.5
1,664.3
(193.0)
104.9

(121.4)
63.1
59.3
60.8
(380.4)

October 31,
2021
$

October 31,
2020
$

October 31,
2019
$

Difference
2021
%

2020
%

433,195 426,433 564,844

1.6

(24.5)

308,647
735,080

352,771
170,311
917,615
603,506
1,897,658 2,016,071 2,324,490
463,180
—
49,980
665,929
1,436,727 903,886
101,085
477,453
1,003,532

(44.8)
(17.9)
(5.9)
826.7
59.0
110.2

(12.5)
(19.9)
(13.3)
100.0
35.7
372.3

Annual Report 2021 Transat A.T. inc. | 11

Management's Discussion and analysis

4. HIGHLIGHTS FOR THE YEAR

TERMINATION OF THE DEFINITIVE ARRANGEMENT AGREEMENT WITH AIR CANADA

On April 2, 2021, the Corporation announced that the contemplated arrangement with Air Canada under the terms of the
revised arrangement agreement between Transat and Air Canada dated October 9, 2020 [the “arrangement agreement”]
had been terminated by mutual consent of Transat and Air Canada. The parties reached this agreement after having been
advised by the European Commission that it would not approve the transaction. A copy of the termination agreement has
been filed on SEDAR at www.sedar.com.

In connection with the termination of the arrangement agreement, Air Canada paid a $12.5 million termination payment to
the Corporation and agreed to waive its entitlement to a $10.0 million termination fee in the event of an acquisition of
Transat by a third party in the twelve months following termination of the arrangement agreement.

END OF DISCUSSIONS FOR THE ACQUISITION OF THE CORPORATION

On June 21, 2021, the Corporation announced that the ongoing discussions with Pierre Karl Péladeau concerning the
potential acquisition of all of the shares of the Corporation through his company Gestion MTRHP inc. [“MTRHP”] had
ended. On April 7, 2021, Mr. Péladeau delivered to the Corporation a non-binding proposal contemplating a transaction
pursuant to which MTRHP would acquire all of the shares of Transat for a consideration of $5.00 per share, payable in cash.

FUNDING OF $700.0 MILLION FROM THE GOVERNMENT OF CANADA

As described in the Financing section, on April 29, 2021, the Corporation entered into an agreement with the Government
of Canada that allows it to borrow up to $700.0 million in additional liquidity through the Large Employer Emergency
Financing Facility ["LEEFF"]. In addition to the new funding, the amounts already drawn on the existing facilities remain in
place and are extended for a period of two years from the implementation of the new financing. The ratios applicable to
the existing facilities will be suspended for a period of 18 months. The undrawn credit under the short-term subordinated
facility is cancelled. In total, the available financing therefore represents a maximum of $820.0 million, of which
$650.0 million was drawn as at October 31, 2021.

CHANGES IN LEADERSHIP

On May 26, 2021, the Corporation announced the implementation of the succession plan for Jean-Marc Eustache, who
retired. Annick Guérard was appointed President and Chief Executive Officer effective May 27, 2021. Ms. Guérard served as
Chief Operating Officer since November 2017.

Mr. Eustache also stepped down from his role on the Board of Directors. Raymond Bachand, Lead Director, took over as
Chair of the Board and Ms. Guérard joined the Board of Directors. These changes were effective May 27, 2021.

On May 31, 2021, Daniel Godbout, Senior Vice-President and Advisor to the President, asserted his retirement rights.
Mr. Godbout will not be replaced in his functions.

On June 23, 2021, the Corporation also announced the departure of Denis Pétrin, Vice-President, Finance and
Administration, and Chief Financial Officer, who left his functions on July 9 and was temporarily replaced by
Jacques Simoneau, member of the Board of Directors of Transat, who served in an interim role until the recruitment
process for Mr. Pétrin’s successor was completed. On October 7, 2021, the Corporation announced the appointment of
Patrick Bui as Chief Financial Officer. Mr. Bui took office on November 15.

Following the announcement of the discontinuation of the hotel activity, the employment contract of Jordi Solé, President
of the hotel division, was terminated on August 31, 2021.

On November 9, 2018, the Corporation had announced the departure of Jean-François Lemay, President of Air Transat,
when the Corporation would find him a successor. Given the circumstances related to the proposed transaction with
Air Canada, then to the COVID-19 pandemic, Mr. Lemay and the Corporation had agreed to postpone the planned
departure. Mr. Lemay’s departure was subsequently postponed until July 31, 2022, in order to identify and put in place his
successor and ensure a smooth transition.

Annual Report 2021 Transat A.T. inc. | 12

Management's Discussion and analysis

In addition, two new members have joined the Corporation's management committee: Michèle Barre, Vice-President,
Network, Revenue Management and Pricing, and Joseph Adamo, Chief Sales and Marketing Officer.

DISCONTINUATION OF THE HOTEL DIVISION

On May 20, 2021, due to the change in strategic objectives and the decline in liquidity as a result of the COVID-19
pandemic, the Corporation’s Board of Directors approved the discontinuation of the hotel division’s operations. During the
year ended October 31, 2021, the hotel division’s operations generated a net loss of $6.7 million.

IMPACT OF THE COVID-19 PANDEMIC

Preserving cash is a priority for the Corporation. During the year ended October 31, 2021, the Corporation took the
following actions with respect to the COVID-19 pandemic and other opportunities are being evaluated to achieve
this objective:

•

The Corporation completed its efforts to obtain long-term financing. As described in the Financing section,
the available financing therefore represents a maximum of $820.0 million, of which $650.0 million was drawn
as at October 31, 2021. Of the drawn down amount, a total of $310.0 million was used to repay travellers who
were scheduled to leave after February 1, 2020, for which a travel credit had been issued due to COVID-19 and
who had requested to be reimbursed.

During the year ended October 31, 2021, four Airbus A330s and one Boeing 737-800 were returned to
lessors early.

The Corporation continuously adjusts its flight program as the situation evolves. After having suspended for
the second time its operations on January 29, 2021, following the Canadian government’s request to not travel
to Mexico and the Caribbean, and the introduction of new quarantine measures and COVID-19 testing
requirements, the Corporation gradually resumed its flights on July 30, 2021, offering a reduced program of
international flights departing from Montréal and Toronto that it enhanced progressively, particularly in order
to train its flight crews and be in a position to deploy a more significant winter program.

The Corporation is negotiating with its suppliers, including aircraft lessors to benefit from cost reductions and
changes in payment terms, and is continuing to implement measures to reduce expenses and investments.

The Corporation is continuing to make use of the Canada Emergency Wage Subsidy [“CEWS”] for its Canadian
workforce, which enabled it, until October 23, 2021, to finance part of the salaries of its staff still at work and,
until August 28, 2021, to offer employees on temporary layoff to receive a portion of their salary equivalent to
the amount of the grant received, with no work required.

As at October 31, 2021, cash and cash equivalents totalled $433.2 million.

Annual Report 2021 Transat A.T. inc. | 13

Management's Discussion and analysis

5. OVERVIEW

THE HOLIDAY TRAVEL INDUSTRY

The holiday travel industry consists primarily of air carriers serving holiday travellers, mainly for tourism, vacation or to visit
family and friends, as well as tour operators, travel agencies (both in-person and online), destination service companies,
hoteliers and airlines. Each of these subsectors includes companies with different operating models.

CORE BUSINESS, VISION AND STRATEGY

Core Business

Founded in Montréal 35 years ago, Transat has grown to become a holiday travel reference worldwide, particularly as an air
carrier under the Air Transat brand. Voted World’s Best Leisure Airline by passengers at the Skytrax World Airline Awards, it
flies to international and Canadian destinations, striving to serve its customers with enthusiasm and friendliness at every
stage of their trip or stay, and emphasizing safety throughout.

Transat has been Travelife-certified since 2018, renewing its fleet with aircraft considered the greenest in their category as
part of a commitment to a healthier environment, knowing that this is essential to the integrity of its operations and the
destinations it serves.

Strategy

In its 2022-2026 strategic plan, Transat set itself the objective of making the Corporation profitable again and complete its
transformation to achieve a level of profitability that exceeds pre-pandemic levels, as well as grow in new markets. This
phase must enable the Corporation to leverage those achievements after 2026 to propel Transat toward a new
growth phase.

STRATEGIC PLAN

To that end, Transat will implement or continue certain changes:

•

Refocus airline operations and redefine the network by ensuring a greater presence in Eastern
Canada and Montréal and forging alliances to strengthen the network;

Reduce costs and increase flexibility, particularly by renegotiating some commitments (fleet, real
estate, etc.), by refocusing on airline businesses (discontinuation of the hotel division) and a
significant simplifying of the organization;

Optimize financing structure over the long term;

Increase efficiency by streamlining the fleet and bringing its average age down, around two types of
Airbus aircraft, improving aircraft usage, reducing seasonal fluctuations and enhancing revenue
management practices.

The Corporation will continue to rely on and leverage its strengths:

•

A leisure travel brand popular with travellers, at a time when vacations and visiting family and friends
will be the driving factors for the rebound in air travel;

A strong commitment to the environment since many years;

Engaged teams with a history of strong sense of belonging to the Corporation;

Long-term roots in Québec.

Annual Report 2021 Transat A.T. inc. | 14

Management's Discussion and analysis

For fiscal 2022, which is the first year of the plan, Transat has set the following objectives and performance drivers:

1. Continue to resume operations by increasing volumes and employment levels during the winter and

summer seasons to prepare for a return to pre-pandemic levels by 2023 at the latest.

2. Preserve liquidity and optimize cash to support the recovery and development of activities.

3. Continue to streamline the fleet, in particular with the addition of new A321neoLR aircraft and Mixed

Fleet Flying accreditation, and prepare the necessary changes for the next five years.

4. Deploy the alliance strategy by initiating multiple interline or codeshare agreements.

5. Reconsider existing financing and optimize capital structure.

6. Deploy a global corporate responsibility strategy and set concrete objectives for decarbonizing our

business.

REVIEW OF OBJECTIVES AND ACHIEVEMENTS FOR 2021

The main objectives and achievements for fiscal 2021 were as follows:

Obtain the regulatory authorizations necessary to close the transaction with Air Canada, operate in full
compliance with the conditions set by Air Canada, and if applicable, complete the transaction

Continue efforts to reduce costs, preserve cash and tailor the offering to the volatile situation triggered by the
COVID-19 pandemic

During the year ended October 31, 2021, four Airbus A330s and one Boeing 737-800 were returned to lessors early.

The Corporation continuously adjusted its flight program as the situation evolves. After having suspended for the second
time its operations on January 29, 2021, following the Canadian government’s request to not travel to Mexico and the
Caribbean, and the introduction of new quarantine measures and COVID-19 testing requirements, the Corporation
gradually resumed its flights on July 30, 2021, offering a reduced program of international flights departing from Montréal
and Toronto that it enhanced progressively, particularly in order to train its flight crews and be in a position to deploy a
more significant winter program.

Throughout the fiscal year, the Corporation had negotiations with its suppliers, including aircraft lessors to benefit from
cost reductions and changes in payment terms, and is continuing to implement measures to reduce expenses
and investments.

The Corporation made use of the CEWS for its Canadian workforce, which enabled it, until October 23, 2021, to finance
part of the salaries of its staff still at work and, until August 28, 2021, to offer employees on temporary layoff to receive a
portion of their salary equivalent to the amount of the grant received, with no work required.

Annual Report 2021 Transat A.T. inc. | 15

Management's Discussion and analysis

Maintain intact the capacity to operate independently and develop a medium- to long-term post-COVID-19
recovery plan

By securing the financing discussed in the following section and by implementing the measures described in the previous
paragraph, the Corporation has the means to resume its operations, which it has been doing gradually since July 30, 2021,
following a suspension for the second time in early 2021.

Through the use of the CEWS and proximity management of its teams, the Corporation has ensured that it has not only
reduced its personnel costs in order to cope with the significant reduction in its revenues, but also that it has the staff
required to handle the recovery amid a labour shortage.

In conjunction with these short-term efforts, the Corporation has developed a 2022-2026 strategic plan setting out the
path for its recovery and growth in the years ahead.

Secure the long-term financing required for the post-COVID-19 recovery

As described in the Financing section, on April 29, 2021, the Corporation entered into an agreement with the Government
of Canada that allows it to borrow up to $700.0 million in additional liquidity through the LEEFF. In addition to the new
funding, the amounts already drawn on the existing facilities remain in place and are extended for a period of two years
from the implementation of the new financing. The ratios applicable to the existing facilities will be suspended for a period
of 18 months. The undrawn credit under the short-term subordinated facility is cancelled. In total, the available financing
therefore represents a maximum of $820.0 million, of which $650.0 million was drawn as at October 31, 2021.

Continue to resize the company in terms of fleet, workforce, installations and resources in line with the plan
in the medium and long term

During the year ended October 31, 2021, four Airbus A330s and one Boeing 737-800 were returned to lessors early. These
are in addition to the three Boeing 737-800s and one Airbus A330 that were returned in advance to their lessors during the
fiscal year ended October 31, 2020. The Corporation also took delivery of ten Airbus A321neoLRs, including four during the
year ended October 31, 2021. All these changes, plus the aircraft that the Corporation will take delivery of during
fiscal 2022, will allow the Corporation to deploy a fleet adapted to the post-pandemic recovery.

In terms of workforce, the Corporation had a headcount of 5,100 pre-pandemic in Canada. As at October 31, 2021, it was
reduced to about 4,300, 2,100 of which were active and 2,200 still temporarily laid off. During 2022, the Corporation
intends to lay off some staff due to the still reduced business volume, while ensuring that it recruits the staff necessary to
handle the greater workload and a prospective full recovery in the longer term.

In addition, the implementation of working from home has allowed the Corporation to review its real estate needs and
renegotiate its property leases, resulting in a significant reduction in leased square footage in fiscal 2022, particularly in
downtown Montréal and Toronto.

Redefine the financial structure of the hotel chain based on the new economic environment

Annual Report 2021 Transat A.T. inc. | 16

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

Credit facilities

Our balances of cash and cash equivalents not held in trust or otherwise reserved
totalled $433.2 million as at October 31, 2021 .

For operational purposes, we can also rely on, among other resources, a $50.0 million
revolving term credit facility and a $70.0 million subordinated short-term credit
facility maturing on April 29, 2023. In addition, as described in the Financing section,
on April 29, 2021, the Corporation entered into an agreement with the Government of
Canada that allows it to borrow up to $700.0 million in additional liquidity through the
LEEFF. Section 7. Financial position, liquidity and capital resources of this MD&A and
note 2 to the consolidated financial statements contain more detail on this issue.

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 maintained over 30 years of privileged relationships with many hotels at sun
destinations and in Europe.

Subject to the going concern uncertainty described in Section 7. Financial position, liquidity and capital resources of this
MD&A and note 2 to the consolidated financial statements, Transat has the resources it needs to meet its 2022 objectives
and continue building on its long-term strategies.

Annual Report 2021 Transat A.T. inc. | 17

Management's Discussion and analysis

6. CONSOLIDATED OPERATIONS

(in thousands of dollars)
Revenues
Operating expenses
Salaries and employee benefits
Aircraft maintenance
Costs of providing tourism services
Aircraft fuel
Airport and navigation fees
Sales and distribution costs
Aircraft rent
Other airline costs
Other
Share of net loss of a joint venture
Depreciation and amortization
Special items

Operating loss
Financing costs
Financing income
Change in fair value of fuel-related derivatives
and other derivatives
Revaluation of liability related to warrants
Loss (gain) on asset disposals
Foreign exchange (gain) loss
Pre-tax loss
Income taxes (recovery)

Current
Deferred

Net loss for the year

Net income (loss) attributable to:
Shareholders
Non-controlling interests

Loss per share:

Basic
Diluted

2021
$

2020
$

2019
$

124,818 1,302,069 2,937,130

Difference

%
(90.4)

%
(55.7)

122,770
48,832
31,958
22,373
13,032
13,020
—
24,643
57,371
4,704
159,765
27,572

412,375
239,250
229,909
110,413
808,937
431,562
517,588
258,947
77,622
175,833
97,086 209,344
46,803
23,358
251,560
109,424
90,923
75,410
1,250
1,172
182,321
204,112
23,875
99,675
526,040 1,728,031 2,950,718
(13,588)
37,935
(21,332)

(425,962)
48,049
(13,625)

(401,222)
77,024
(4,441)

(8,849)
(4,934)
(17,347)
(53,260)
(389,415)

13,715
—
11,271
3,601
(488,973)

(52)
75
23
(389,438)

(4,376)
12,168
7,792
(496,765)

8,664
—
(9)
(1,110)
(37,736)

1,028
(9,048)
(8,020)
(29,716)

(48.7)
(55.8)
(92.6)
(91.4)
(83.2)
(86.6)
(100.0)
(77.5)
(23.9)
301.4
(21.7)
(72.3)
(69.6)
5.8
60.3
(67.4)

164.5
100.0
253.9
1,579.0
20.4

98.8
(99.4)
(99.7)
21.6

(42.0)
(52.0)
(46.7)
(50.0)
(55.9)
(53.6)
(50.1)
(56.5)
(17.1)
(6.2)
12.0
317.5
(41.4)
(3,034.8)
26.7
(36.1)

(58.3)
—
N/A
(424.4)
(1,195.8)

(525.7)
234.5
197.2
(1,571.7)

(389,559)
121
(389,438)

(496,545)
(220)
(496,765)

(32,347)
2,631
(29,716)

21.5
155.0
21.6

(1,435.1)
(108.4)
(1,571.7)

(10.32)
(10.32)

(13.15)
(13.15)

(0.86)
(0.86)

21.5
21.5

(1,429.1)
(1,429.1)

Annual Report 2021 Transat A.T. inc. | 18

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, 2021, revenues were down $1,177.3 million (90.4%). Since mid-March of 2020, restrictions
on international travel and government-imposed quarantine measures have made travel sales very difficult. Due to the
global COVID-19 pandemic, the Corporation suspended its airline operations on January 29, 2021 for the second time since
March 2020, until their partial resumption on July 30, 2021. For the first half of winter 2021, demand was very weak and the
Corporation’s capacity represented a fraction of the 2020 level. These factors caused the fall in revenues. For the summer
season, demand remains very weak due to the COVID-19 pandemic with the Corporation’s capacity representing a fraction
of the 2019 level

OPERATING EXPENSES

Total operating expenses were down $1,202.0 million (69.6%) for the year compared with 2020. The decrease was
attributable to the suspension of airline operations for the second and third quarters of 2021 and a significant reduction in
capacity deployed in the first half of winter due to demand remaining well below prior year level because of the COVID-19
pandemic. In 2020, airline operations were suspended from April 1 to July 22.

Salaries and employee benefits

Salaries and employee benefits were down $116.5 million (48.7%) to $122.8 million for the year ended October 31, 2021. The
decrease resulted from significant temporary layoffs. During the year ended October 31, 2021, the Corporation made use of
the CEWS for its Canadian workforce and accordingly an amount of $25.8 million was recognized related to the active
employees, compared with $38.8 million for 2020. Lastly, an amount of $80.9 million was recorded for inactive employees,
which corresponds to the salaries paid to them, compared with $74.8 million for 2020.

Aircraft maintenance

Aircraft maintenance costs consist mainly of non-capitalizable engine and airframe maintenance expenses incurred by
Air Transat for aircraft as well as in connection with the provision for return conditions. Compared with 2020, these
expenses decreased by $61.6 million (55.8%) during the year. This decrease was attributable to a significant reduction in
capacity deployed due to the COVID-19 pandemic and the suspension of our airline operations for the second and third
quarters of 2021. Moreover, during the year ended October 31, 2021, in connection with future repairs that will not take
place, the Corporation wrote off maintenance deposits with lessors and reversed provisions for return conditions,
resulting in a net unfavourable effect of $11.8 million. Aircraft maintenance costs also take into account changes in
assumptions.

Costs of providing tourism services

Costs of providing tourism services are incurred by our tour operators. They include primarily hotel room costs and the
cost of booking blocks of seats or full flights with carriers other than Air Transat as well as transfer and excursion costs.
The $399.6 million decrease (92.6%) resulted primarily from a sharp decline in the number of packages sold compared
with 2020 due to the COVID-19 pandemic.

Aircraft fuel

Aircraft fuel expense was down $236.6 million (91.4%) for the year. The decrease was attributable to the suspension of
airline operations for the second and third quarters of 2021 and a significant reduction in capacity deployed in the first half
of winter due to demand remaining well below prior year level because of the COVID-19 pandemic.

Annual Report 2021 Transat A.T. inc. | 19

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 were down $64.6 million (83.2%) compared with 2020. This decrease was attributable to a significant reduction in
capacity deployed due to the COVID-19 pandemic and the suspension of our airline operations for the second and third
quarters of 2021.

Sales and distribution costs

Sales and distribution costs include commissions, which are expenses paid by tour operators to travel agencies for their
services as intermediaries between the tour operator and the consumer, credit card fees, distribution expenses and
marketing expenses. Sales and distribution costs amounted to $13.0 million, down $84.1 million (86.6%) compared with
fiscal 2020. The decrease was attributable to the fall in revenues.

Aircraft rent

Aircraft rent was down $23.4 million (100.0%) for the year, compared with 2020. As part of its cost reduction program and
in connection with the transformation of its fleet, the Corporation did not enter into leases for a seasonal fleet in
winter 2021.

Other airline costs

Other airline costs consist mainly of handling, crew, catering costs and other costs related to the airline. Other airline costs
were down $84.8 million (77.5%) for the year, compared with 2020. This decrease was attributable to a significant
reduction in capacity deployed due to the COVID-19 pandemic and the suspension of our airline operations for the second
and third quarters of 2021.

Other

Other expenses were down $18.0 million (23.9%) for the year, compared with 2020. The decrease resulted from the cost
reduction measures implemented by the Corporation in connection with the COVID-19 pandemic.

Share of net income (loss) of a joint venture

Share of net income (loss) of a joint venture represents our share of the net income (loss) of Desarrollo Transimar, our
hotel joint venture. For fiscal 2021, our share of net loss totalled $4.7 million, compared with $1.2 million for 2020.
Operations at our hotel joint venture were substantially scaled down due to the COVID-19 pandemic, and the volume of
business was gradually increased during summer 2021.

Depreciation and amortization

Depreciation and amortization expense includes depreciation and amortization as well as impairment losses relating to
property, plant and equipment and intangible assets. Depreciation and amortization expense was down $44.3 million
(21.7%) in fiscal 2021. The decrease was due to the decline in the carrying amount of right-of-use assets related to the
fleet. During the last quarter of 2020, the carrying amount of right-of-use assets related to the fleet declined following the
recognition of impairment charges in respect of ten leased aircraft, namely five Airbus A330s, three Airbus A321ceos and
two Boeing 737-800s, as well as the early return of three Boeing 737-800s and one Airbus A330. The lower depreciation
and amortization expense was partially offset by the commissioning of four Airbus A321neoLRs in 2021 and the accelerated
amortization of certain right-of-use assets related to the fleet.

Annual Report 2021 Transat A.T. inc. | 20

Management's Discussion and analysis

Special items

Special items related to the transaction with Air Canada

Termination payment
Professional fees
Reversal of compensation expense

Other special items

Impairment of contract costs and other assets
Impairment of the fleet (including right-of-use assets)
Severance
Provision for return conditions of impaired leased aircraft
Impairment of the land in Mexico
Impairment of the investment in a joint venture
Impairment of trademarks

2021
$

(12,500)
6,106
(6,223)
(12,617)

24,333
9,117
6,739
—
—
—
—
40,189
27,572

2020
$

—
7,753
(4,491)
3,262

—
50,817
891
6,395
32,826
3,100
2,384
96,413
99,675

Special items related to the transaction with Air Canada

Special items generally include restructuring charges and other significant unusual items as well as impairment losses.
During the year ended October 31, 2021, the agreed upon amount of $12.5 million in termination fees for the arrangement
agreement settled by Air Canada, $6.1 million in professional fees as well as $6.2 million in reversals of compensation
expenses were recorded in connection with the terminated transaction with Air Canada, compared with $7.8 million in
professional fees and $4.5 million in reversals of compensation expenses for the previous fiscal year. The compensation
expenses are mainly related to the stock-based compensation plans which include a change of control clause and to
adjustments related to stock-based compensation plan provisions. Compensation expenses recorded as special items
resulted from Air Canada’s offer, which made it likely that the change of control criteria included in some of the
Corporation’s stock-based compensation plans would be met, and also change the vesting period. Following the
termination of the arrangement agreement with Air Canada, the Corporation recognized reversals of impairment expenses
to reduce or even cancel certain provisions related to stock-based compensation plans, for which the performance criteria
threshold has not been met.

Other special items

As at October 31, 2021, other special items included $21.9 million for impairment of contract balances related to
commissions, costs related to the global distribution system and credit card fees that will not be reimbursed to the
Corporation in connection with refunds made to travellers. The Corporation also recorded an impairment expense of
$2.4 million for the deposits related to the impaired aircraft.

Due to the COVID-19 pandemic occurring worldwide, the global tourism industry has faced a collapse in demand. As a
result, the Corporation had to scale back its capacity significantly and recognize impairment charges accordingly. These
impairment charges are included under Special items. During the year ended October 31, 2021, it was determined that a
leased Airbus A330 will no longer be used until its return to the lessor. An impairment charge of $9.1 million was recognized
in this respect.

Due to the COVID-19 pandemic, the Corporation started reducing its workforce through permanent layoffs. Termination
benefits in the amount of $6.7 million ($0.9 million in 2020) were recognized in 2021, of which $5.2 million was included in
trade and other payables as at October 31, 2021. The provision includes the costs estimated for termination notices and
benefits provided for in the collective agreements of the Corporation and applicable laws, the amount of which could be
adjusted based on various factors such as the relevant advanced notice, the number of employees being laid off and the
period during which they will remain laid off.

During the year ended October 31, 2020, ten leased aircraft, namely five Airbus A330s, three Airbus A321ceos and two
Boeing 737-800s were written down. The Corporation recognized an asset impairment charge of $50.8 million related to
these leased aircraft, which is equal to the total carrying amount of the right-of-use assets, maintenance components and

Annual Report 2021 Transat A.T. inc. | 21

Management's Discussion and analysis

leasehold improvements of the aircraft. In addition, adjustments of $6.4 million were recorded in connection with the
provision for return conditions of these aircraft.

On May 20, 2021, due to the change in strategic objectives and the decline in liquidity as a result of the COVID-19
pandemic, the Corporation’s Board of Directors approved the discontinuation of the hotel division’s operations. As at
October 31, 2021 and 2020, the land held in Mexico did not meet the required criteria to be presented as an asset held for
sale. Given the above-mentioned factors and the uncertainty surrounding future use of the land in Mexico, an assessment
of its recoverable amount compared with its carrying amount made as at October 31, 2021 and 2020. The recoverable
amount of the land was determined based on the fair value less costs to sell, according to a valuation prepared by an
independent, external valuator as at October 19, 2021 and October 12, 2020, respectively. As at October 31, 2021, the
recoverable amount of the land in Mexico was equal to its carrying amount and accordingly, no impairment charge was
required. As at October 31, 2020, the recoverable amount of the land in Mexico was less than its carrying amount.
Accordingly, as at October 31, 2020, the Corporation recognized an impairment charge of $32.8 million related to its land
in Mexico under Special items in order for the carrying amount of the land to be equal to its recoverable amount as at
October 31, 2020.

The Corporation recognized asset impairment charges of $3.1 million related to its investment in a joint venture and
$2.4 million related to its trademarks during the year ended October 31, 2020.

OPERATING RESULTS

Given the above, we recorded an operating loss of $401.2 million for the year, compared with $426.0 million in 2020.
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 (loss)
Operating income (loss) (%)

2021
$

2020
$

2019
$

Difference
2021
%

2020
%

49,489 1,264,097 1,544,979
1,318,714 1,597,367
234,017
(52,388)
(184,528)
(3.4)
(372.9)

(54,617)
(4.3)

(96.1)
(82.3)
(237.9)
(8,529.9)

(18.2)
(17.4)
(4.3)
(27.4)

75,329
292,023
(216,694)
(287.7)

37,972

1,392,151
409,317 1,353,351
38,800
(371,345)
2.8
(977.9)

98.4
(28.7)
41.6
70.6

(97.3)
(69.8)
(1,057.1)
(35,188.8)

We recognized an operating loss for the winter season amounting to $184.5 million (372.9%) compared with $54.6 million
(4.3%) in 2020. The decline in operating results was attributable to the suspension of airline operations for the second
quarter of 2021 and a significant reduction in capacity deployed in the first half of winter 2021 due to demand remaining
well below prior year level because of the COVID-19 pandemic. Despite the cost reduction measures implemented to deal
with the COVID-19 pandemic, the Corporation had to maintain certain fixed costs; as a result, the fall in revenues was more
pronounced than the decrease in operating expenses.

During the summer season, the Corporation recorded an operating loss of $216.7 million (287.7%) compared with
$371.3 million (977.9%) for the previous year. Airline operations were suspended for the third quarters of 2021 and 2020.
For the fourth quarters of 2021 and 2020, since the resumption of airline operations, demand remains very weak and the
Corporation’s capacity represents a fraction of the 2019 level; however, the recovery of demand is stronger in 2021
compared with 2020. Despite the cost reduction measures implemented to deal with the COVID-19 pandemic, the
Corporation had to maintain certain fixed costs; as a result, the fall in revenues was more pronounced than the decrease in
operating expenses. In 2020, the decline in operating results was accentuated by the special items and the unfavourable
settlement of fuel-related derivative contracts. The improvement in operating results in summer 2021 compared with the
prior year was driven by these factors.

Annual Report 2021 Transat A.T. inc. | 22

Management's Discussion and analysis

During the winter season, the Corporation recorded an adjusted operating loss of $104.6 million (211.3%), compared with
an adjusted operating income of $48.5 million (3.8%) in 2020. For the summer season, we recorded an adjusted operating
loss of $109.3 million (145.1%) compared with $170.7 million (449.5%) in 2020. Overall, for the fiscal year, the Corporation
recorded an adjusted operating loss of $213.9 million (171.4%), compared with $122.2 million (9.4%) in 2020.

OTHER EXPENSES AND REVENUES

Financing costs

Financing costs include interest on lease liabilities, long-term debt and other interest, standby fees, arrangement fees as
well as financial expenses, net of proceeds from deferred government grant. Financing costs increased by $29.0 million
(60.3%) in 2021, compared with 2020. The increase resulted from interest expenses, standby and arrangement fees related
to the $70.0 million subordinated credit facility, interest on the credit facilities arranged with the Government of Canada
through the LEEFF as well as interest on lease liabilities related to aircraft following the commissioning of four Airbus
A321neoLRs in 2021.

Financing income

Financing income was down $9.2 million (67.4%) during the year compared with 2020, as a result of decreases in average
balances of cash and cash equivalents and interest rates compared with 2020.

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 as well as the change in fair value of the pre-payment option on the
unsecured debt - LEEFF. Since April 30, 2021, all the fuel-related derivatives and foreign exchange derivatives held by the
Corporation have matured and the Corporation no longer holds any fuel-related derivatives and foreign exchange
derivatives. For the year, the fair value of fuel-related derivatives and other derivatives was up $8.8 million, compared with
a decrease in fair value of $13.7 million in 2020. The increase in the fair value of fuel-related derivatives and other
derivatives was mainly attributable to the maturing of fuel-related derivatives.

Revaluation of liability related to warrants

The revaluation of the liability related to warrants represents the change in fair value of warrants during the period. During
the year ended October 31, 2021, the fair value of warrants decreased by $4.9 million, driven by the decrease in the closing
price of the share from $4.80 to $4.39 between the date of initial recognition of warrants, that is April 29, 2021, and
October 31, 2021.

Loss (gain) on asset disposals

The loss (gain) on asset disposals relates to asset disposals and lease terminations. Due to the global COVID-19 pandemic,
the global tourism industry has faced a collapse in demand and as a result, the Corporation has early terminated certain
leases. For the year ended October 31, 2021, the $17.3 million gain was primarily attributable to the termination of aircraft
leases for four Airbus A330s and one Boeing 737-800. The gain on termination of aircraft leases of $14.6 million resulted
from the reversal of lease liabilities of $20.0 million, property, plant and equipment of $9.3 million and the provision for
return conditions of $3.9 million. The carrying amount of right-of-use assets for four of these terminated aircraft leases
were fully impaired during the year ended October 31, 2020. Moreover, during the year ended October 31, 2021, the
Corporation recognized a gain on real estate lease termination of $2.6 million that stemmed from the reversal of
$22.1 million lease liabilities and $19.5 million property plant and equipment.

The loss of $11.3 million for the year ended October 31, 2020 was mainly attributable to the loss on the termination of
certain aircraft leases and travel agencies of $18.8 million and $0.6 million, respectively. The loss on termination of aircraft
leases resulted from the reversal of lease liabilities of $12.8 million, property, plant and equipment of $31.3 million and
other assets of $0.3 million. The loss was partially offset by an $8.1 million gain on the disposal of Airbus A310 engines.

Annual Report 2021 Transat A.T. inc. | 23

Management's Discussion and analysis

Foreign exchange (gain) loss

For the year, the Corporation recognized a $53.3 million foreign exchange gain, compared with a foreign exchange loss of
$3.6 million in 2020. In 2021, foreign exchange gain resulted mainly from the favourable exchange effect on lease liabilities
related to aircraft, following the strengthening of the dollar against the U.S. dollar.

INCOME TAXES

For the year, the income tax expense amounted to $0.0 million, compared with $7.8 million in 2020. The effective tax rate
was -0.0% for the year ended October 31, 2021 and -1.6% for the previous year.

During the quarter ended April 30, 2020, the Corporation stopped recognizing deferred tax assets and wrote down
deferred tax asset balances whose recognition could no longer be justified under IFRS due to the unfavourable impact of
the COVID-19 pandemic on our results and the high level of uncertainty related to demand for fiscal 2021 and 2020.
Accordingly, during the year ended October 31, 2021, no deferred tax assets were recognized.

NET LOSS

Considering the items discussed in the Consolidated operations section, net loss for the year ended October 31, 2021 was
$389.4 million compared with $496.8 million in 2020.

NET LOSS ATTRIBUTABLE TO SHAREHOLDERS AND ADJUSTED NET LOSS

For the year, net loss attributable to shareholders amounted to $389.6 million or $10.32 per share (basic and diluted)
compared with $496.5 million or $13.15 per share (basic and diluted) for the previous year. The weighted average number of
outstanding shares used to compute basic per share amounts was 37,747,000 for fiscal 2021 and 37,747,000 for fiscal 2020
(37,747,000 and 37,747,000, respectively, for diluted per share amounts).

For the year ended October 31, 2021, adjusted net loss amounted to $446.4 million ($11.83 per share) compared with
$355.3 million ($9.41 per share) in 2020.

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, revenues were down
in the winter (Q1 and Q2) but up in the summer (Q3 and Q4). During winter (Q1 and Q2), the fall in revenues was attributable
to the suspension of our airline operations for the second quarter of 2021, combined with the sharp decline in our capacity
during the partial resumption of airline operations due to the COVID-19 pandemic. For the summer season (Q3 and Q4), the
higher revenues resulted from the partial resumption of operations at a higher level in 2021 compared with 2020.

The increase in operating loss during winter (Q1 and Q2) was mainly attributable to the suspension of our airline operations
combined with a significant decrease in our capacity during the partial resumption of airline operations due to the
COVID-19 pandemic, as a result of which the decline in revenues was greater than the decrease in operating expenses. For
the 2020 summer season (Q3 and Q4), the decline in operating results was accentuated by the special items and the
unfavourable settlement of fuel-related derivative contracts. For the second part of summer (Q4), the recovery of demand
was stronger in 2021 than in 2020, and accordingly operating results for the 2021 summer season improved compared with
2020. As a result, the following quarterly financial information may vary significantly from quarter to quarter.

Annual Report 2021 Transat A.T. inc. | 24

Management's Discussion and analysis

Selected unaudited quarterly financial information
(in thousands of dollars,
except per share data)
Revenues
Operating loss
Net loss
Net loss attributable to shareholders
Basic loss per share

(0.90)

Diluted loss per share
Adjusted operating income (loss)(1)
Adjusted net loss(1)
Adjusted net loss per share(1)
1 See non-IFRS financial measures

Q1-2020 Q2-2020 Q3-2020 Q4-2020 Q1-2021 Q2-2021 Q3-2021 Q4-2021
$
12,548
62,781
7,569
(86,480)
(98,368) (118,326)
(69,537) (138,059) (121,339)
(69,561) (138,125) (121,339)

9,546 28,426 41,920
(98,048)
(60,503)
(60,534)

692,799 571,298
(25,066)
(29,551)
(179,712)
(32,962)
(33,805) (179,548)

(132,013) (239,332)
(45,721) (238,370)
(45,115) (238,077)

(0.90)

(4.76)

(1.20)

(6.31)

(1.60)

(1.84)

(3.66)

(3.21)

27,393

21,108

(79,941)

(90,735)

(53,632)

(50,963)

(50,928)

(58,362)

(20,303)
(0.54)

(38,792) (139,848) (156,392) (109,049) (103,287)
(2.74)

(2.89)

(3.70)

(1.03)

(4.14)

(115,641) (118,400)
(3.14)

(3.06)

FOURTH-QUARTER HIGHLIGHTS

For the fourth quarter, the Corporation generated $62.8 million in revenues, up $34.4 million (120.9%) from $28.4 million
for the corresponding period of 2020. This increase resulted from the partial resumption of operations at a higher level in
2021 compared with 2020. However, the Corporation’s maintained a significant reduction in capacity compared with 2019
due to the COVID-19 pandemic, with demand remaining very weak since the resumption of airline operations suspension on
July 30, 2021. Operations generated an operating loss of $118.3 million compared with an operating loss of $239.3 million in
2020. Operating results improved compared with 2020 but the decline in revenues continued to be greater than the
decrease in operating expenses. Despite the fall in revenues and the cost reduction measures implemented to deal with
the COVID-19 pandemic, the Corporation had to maintain certain fixed costs. In 2021, the operating loss was aggravated by
special items of $20.3 million, including an aircraft impairment charge of $9.1 million, termination benefits of $6.7 million
and impairment of contract balances of $4.5 million. In 2020, the operating loss was aggravated by special items totalling
$96.7 million and unfavourable settlements of fuel-related derivative contracts. In 2020, the special items included
impairment charges totalling $86.7 million, comprising $50.8 million for assets related to leased aircraft that will no longer
be used until they are returned to the lessors, $32.8 million for the land in Mexico and $3.1 million for the investment in a
joint venture. The special items also include additional provisions for return conditions of $6.4 million for leased aircraft
that will no longer be used until they are returned to the lessors, professional fees and reversal of compensation expenses
of $2.7 million related to the transaction with Air Canada and termination benefits of $0.9 million.

We recorded a net loss of $121.3 million in the fourth quarter, compared with a net loss of $238.4 million in 2020. Net loss
attributable to shareholders was $121.3 million ($3.21 per share, basic and diluted), compared with a net loss of
$238.1 million ($6.31 per share, basic and diluted) in 2020.

For the fourth quarter, adjusted net loss amounted to $118.4 million ($3.14 per share) compared with an adjusted net loss
of $156.4 million ($4.14 per share) in 2020.

Annual Report 2021 Transat A.T. inc. | 25

Management's Discussion and analysis

7. FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

BASIS OF PREPARATION AND GOING CONCERN UNCERTAINTY

As part of the preparation of the financial statements, management is responsible for identifying any event or situation that
may cast significant doubt on the Corporation’s ability to continue as a going concern. Significant doubt regarding the
Corporation’s ability to continue as a going concern exists if events or conditions, considered collectively, indicate that the
Corporation will be unable to honour its obligations as they fall due during a period of at least, and not limited to,
12 months from October 31, 2021. If the Corporation concludes that events or conditions cast significant doubt on its
ability to continue as a going concern, it must assess whether the plans developed to mitigate these events or conditions
will remove any possible significant doubt.

Due is to the global COVID-19 pandemic, the Corporation’s operations have been severely disrupted and its financial results
significantly impacted. As a result, the Corporation reported a net loss of $389.4 million and generated negative cash flows
related to operations totalling $518.4 million for the year ended October 31, 2021. However, on April 29, 2021, the
Corporation entered into an agreement with the Government of Canada that allows it to borrow up to $700.0 million in
additional liquidity through the LEEFF. To supplement the new financing, the amounts already drawn on existing facilities
remain in place and are extended for a period of two years, until April 29, 2023. The ratios applicable to existing facilities
are suspended for a period of 18 months, until October 31, 2022. The undrawn credit under the short-term subordinated
facility is cancelled. Therefore, available credit amounts to a maximum of $820.0 million, of which an amount of
$650.0 million was drawn down as at October 31, 2021.

The Corporation’s ability to continue as a going concern for the next 12 months involves significant judgment and is
dependent on the impact of the COVID-19 pandemic and related government restrictions on the Corporation’s operations
and liquidity (including the Corporation’s ability to resume normal operations at a sufficient level), the Corporation’s ability
to increase revenues to generate positive cash flows from operations, and the continued support of its financial
institutions, suppliers, lessors, credit card processors and other creditors. As discussed above, the Corporation entered
into an agreement with the Government of Canada that allows it to borrow additional cash resources up to a maximum of
$700.0 million through the LEEFF, bringing total available financing to a maximum of $820.0 million. Management is also
continuing to monitor possible government assistance programs.

Given the gradual resumption of its airline operations and the uncertainty with respect to a resurgence in demand, 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.

There can be no assurance that financial institutions, suppliers, lessors, credit card processors and other creditors will
continue to support the Corporation. The COVID-19 pandemic significantly strained the Corporation’s ability to return to
profitability. As a result, there can be no assurance that the Corporation will be able to generate positive cash flows from
operating activities in the next twelve months.

The situation indicates material uncertainty casting significant doubt on the Corporation’s ability to continue as a going
concern and, thereby, realize its assets and repay its debt in its normal course of business.

The consolidated financial statements as at October 31, 2021 have been prepared on a going concern basis which assumes
that the Corporation will continue to be in operation for the foreseeable future and will be able to realize its assets and
discharge its liabilities, and meet its obligations in the normal course of business. The consolidated financial statements as
at October 31, 2021 and for the year then ended do not include adjustments to the value and classification of assets,
liabilities and recorded expenses that would otherwise be required if the going concern basis proved to be inappropriate.
Such adjustments may be significant.

Annual Report 2021 Transat A.T. inc. | 26

Management's Discussion and analysis

CONSOLIDATED FINANCIAL POSITION

As at October 31, 2021, cash and cash equivalents totalled $433.2 million, compared with $426.4 million as at
October 31, 2020. Cash and cash equivalents in trust or otherwise reserved amounted to $170.3 million as at the end of the
fourth quarter of 2021, compared with $308.6 million as at October 31, 2020. The Corporation’s statement of financial
position reflected $89.7 million in working capital, for a ratio of 1.14, compared with $163.2 million in negative working
capital and a ratio of 0.84 as at October 31, 2020. The improvement in our working capital resulted mainly from the travel
credits refunded during the year and financed partly by the drawdowns on credit facilities.

Total assets decreased by $118.4 million (5.9%) from $2,016.1 million as at October 31, 2020 to $1,897.7 million as at
October 31, 2021. This decrease is explained in the financial position table provided below. Equity decreased by
$381.4 million, from $66.3 million as at October 31, 2020 to negative equity of $315.1 million as at October 31, 2021. This
decrease resulted primarily from the $389.6 million net loss attributable to shareholders, partially offset by a $9.4 million
change in fair value of non-controlling interest liabilities.

(in thousands of dollars)

Assets
Cash and cash equivalents

Cash and cash equivalents
otherwise reserved
Trade and other receivables

October 31,
2021
$

October 31,

2020 Difference
$

Main reasons for significant differences

433,195 426,433

6,762 See Cash flows section

170,311 308,647

(138,336) Travel credits refunded during the year

108,857

95,334

13,523 Increase in amounts receivable from credit card

Income taxes receivable
Inventories
Prepaid expenses

16,220
10,514
16,465

17,477
10,024
47,164

processors, partially offset by cash security
deposits receivable from lessors
(1,257) Collection of income taxes recoverable

490 Increase in inventory of consumable parts

(30,699) Impairment of contract balances and decrease in

prepaid amounts due to the passage of time

Deposits

122,174

153,375

(31,201) Decrease due to write-offs of non-recoverable

deposits related to future repairs that will not take
place and strengthening of the dollar against the
U.S. dollar

Property, plant and equipment

974,229 916,382

57,847 Four new aircraft leases, partially offset by

Intangible assets
Derivative financial instruments
Investment
Other assets

16,849
—
9,476
19,368

25,509
964
14,509
253

depreciation, changes to real estate leases and
impairment of an aircraft
(8,660) Amortization for the year

(964) Maturing of foreign exchange derivatives

(5,033) Share of net loss of a joint venture
19,115 Deferred financing costs related to the unsecured

debt - LEEFF

Annual Report 2021 Transat A.T. inc. | 27

Management's Discussion and analysis

(in thousands of dollars)
Liabilities
Trade and other payables

Income taxes payable
Customer deposits and deferred
revenues
Derivative financial instruments

Long-term debt and lease liabilities

October 31,
2021
$

October 31,

2020 Difference
$

Main reasons for significant differences

141,413 232,243

(90,830) Payments made during the year and repurchase of

1,354

203
292,158 608,890

the minority interest in Trafictours
1,151 Collection of income taxes recoverable
(316,732) Refund of travel credits, partially offset by

bookings

—

10,055

(10,055) Maturing of fuel-related and foreign exchange

derivatives
1,419,538 903,886 515,652 Drawdowns on the credit facilities and four new

aircraft leases, partially offset by principal
repayments, the strengthening of the dollar against
the U.S. dollar, changes to leases, and the early
return of five aircraft

Provision for return conditions

126,244

143,598

(17,354) Future repairs that will not take place, expiry of

Liability related to warrants

36,557

—

leases for two aircraft, early return of five aircraft
and the strengthening of the dollar against the U.S.
dollar, partially offset by the passage of time and
the higher number of leased aircraft
36,557 Issuance of warrants, partially offset by the

decrease of their fair value during the year

Deferred government grant

167,394

—

167,394 Drawdowns on the credit facility related to travel

Other liabilities
Deferred tax liabilities

Equity
Share capital

27,497
613

50,215
674

(22,718) Settlement of pension agreements

(61) No significant difference

credits

221,012

— No difference

Share-based payment reserve

15,948

— No difference

Deficit

(544,881)

(164,138)

(380,743) Net loss

Unrealized gain (loss) on cash flow

—

(522)

522 No significant difference

Cumulative exchange differences

(7,189)

(5,993)

(1,196) Foreign exchange loss on translation of financial

statements of foreign subsidiaries

Annual Report 2021 Transat A.T. inc. | 28

Management's Discussion and analysis

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

Operating activities

2021
$

(518,444)
4,542
522,071
(1,407)
6,762

2020
$

(46,136)
(60,414)
(33,374)
1,513
(138,411)

2019
$

216,021
(163,779)
(81,993)
941
(28,810)

2021
%

(1,023.7)
107.5
1,664.3
(193.0)
104.9

Difference
2020
%
(121.4)
63.1
59.3
60.8
(380.4)

Operating activities used $518.4 million in cash flows, compared with $46.1 million in 2020. The decrease resulted from a
$362.3 million decline in the net change in non-cash working capital balances related to operations combined with a
$70.0 million increase in net loss before operating items not involving an outlay (receipt) of cash, a $43.9 million decrease
in the net change in other assets and liabilities related to operations and a $3.9 million increase in the net change in the
provision for return conditions.

The deterioration in cash flows related to operating activities resulted mainly from the suspension of airline operations for
the second and third quarters of 2021, combined with a significant reduction in capacity deployed in the first half of
winter, due to demand remaining below prior year level because of the COVID-19 pandemic, and the travel credits
refunded during the summer and payments made to suppliers.

Investing activities

Cash flows generated by investing activities amounted to $4.5 million for the current fiscal year, compared with cash
outflows of $60.4 million in 2020. In 2021, cash flows generated by investing activities stemmed primarily from the
$25.5 million decrease in the cash and cash equivalents reserved balance, partially offset by the $15.0 million consideration
paid to acquire the 30% interest held by the minority shareholder in Trafictours Canada inc. [”Trafictours”] on
May 31, 2021, in which the Corporation already held 70% of shares.

For the year ended October 31, 2021, additions to property, plant and equipment and intangible assets amounted to
$5.6 million, consisting primarily in leasehold improvements to aircraft, compared with $61.4 million for the corresponding
period of 2020. The decreases in additions to property, plant and equipment and intangible assets resulted primarily from
the investment reduction measures implemented by the Corporation in connection with the COVID-19 pandemic. During
the year ended October 31, 2020, the Corporation purchased a spare engine for an Airbus A321neoLR in the amount of
$16.6 million.

Financing activities

Cash flows generated by financing activities amounted to $522.1 million compared with cash outflows of $33.4 million
in 2020. During the year ended October 31, 2021, the Corporation made drawdowns on its credit facilities amounting to
$599.9 million, compared with $50.0 million in 2020. In addition, during the year ended October 31, 2021, the Corporation
made repayments on its lease liabilities amounting to $74.5 million compared with $82.5 million in 2020. The $8.0 million
decrease in repayments is attributable to deferred payments, as well as early returns of aircraft and leases maturing
in 2021. Since March 2020, the Corporation renegotiated with aircraft lessors, as well as other lessors, to defer a number
of monthly lease payments and the early return of nine aircraft, namely five Airbus A330s and four Boeing 737-800s.
Furthermore, the aircraft leases for two Airbus A330s matured during the quarter ended January 31, 2021.

Annual Report 2021 Transat A.T. inc. | 29

Management's Discussion and analysis

FINANCING

Funding of $700.0 million from the Government of Canada

On April 29, 2021, the Corporation entered into an agreement with the Government of Canada that allows it to borrow up
to $700.0 million in additional liquidity through the LEEFF. The new fully repayable credit facilities made available by the
Canada Enterprise Emergency Funding Corporation ["CEEFC"] under the LEEFF, which Transat would use only on an as-
needed basis, are as follows:

Secured debt – LEEFF

An amount of $78.0 million that may be drawn down up to October 29, 2022 in the form of a non-revolving and secured
credit facility maturing on April 29, 2023; the facility is secured by a first-ranking charge on the assets of Canadian,
Mexican, Caribbean and European subsidiaries of the Corporation, subject to certain exceptions. The facility bears interest
at bankers’ acceptance rate plus a premium of 4.5% or at the financial institution’s prime rate plus a premium of 3.5%. This
credit facility becomes immediately payable in the event of a change in control. The terms of the agreement require the
Corporation to comply with certain financial ratios and covenants. As at October 31, 2021, the Corporation benefited from
a temporary suspension of the application of certain financial ratios and covenants by its lenders until October 31, 2022
and $44.0 million was drawn down under this credit facility, which has a carrying amount of $43.8 million.

Unsecured debt – LEEFF

An amount of $312.0 million that may be drawn down up to October 29, 2022 in the form of a non-revolving and unsecured
credit facility maturing on April 29, 2026, bearing interest at a rate of 5.0% in the first year, increasing to 8.0% in the
second year, and by 2.0% per annum thereafter, with the possibility of capitalization of interest in the first two years. This
credit facility becomes immediately payable in the event of a change in control. As at October 31, 2021, $176.0 million was
drawn down under the credit facility, which has a carrying amount of $158.0 million.

In the context of the financing arrangement related to the unsecured financing facility - LEEFF, the Corporation issued a
total of 13,000,000 warrants for the purchase of an equivalent number of shares of the Corporation (subject to certain
limitations described below), with customary adjustment provisions, at an exercise price of $4.50 per share (representing
the volume-weighted average trading price for the five trading days preceding the issuance of the warrants) over a 10-year
period, representing 18.75% of the total commitment available under the unsecured debt - LEEFF. The warrants are to vest
in proportion to the drawings that will be made, and 50% would be forfeited if the loan were to be repaid
before April 29, 2022.

The number of shares issuable upon exercise of the warrants may not exceed 25% of the current number of issued and
outstanding shares, nor may it result in the holder owning 19.9% or more of the outstanding shares upon exercise of the
warrants. In the event of exercise of warrants that surpasses these thresholds, the excess will be payable in cash on the
basis of the difference between the market price of Transat's shares and the exercise price. Finally, in the event that the
unsecured debt - LEEFF is repaid in full by its maturity, Transat will have the right to redeem all of the warrants for a
consideration equal to their fair market value. The warrants will not be transferable prior to the expiry of the period giving
rise to the exercise of such redemption right. In addition, the holder of the warrants will benefit from registration rights to
facilitate the sale of the underlying shares and the warrants themselves (once the transfer restriction has been lifted).

Under the limitations set out in the preceding paragraph, if the 13,000,000 warrants are exercised:

•

a maximum of 9,436,772 warrants could be exercised through the issuance of shares;

3,563,228 warrants would be payable in cash on the basis of the difference between the market price of Transat's
shares and the exercise price.

Annual Report 2021 Transat A.T. inc. | 30

Management's Discussion and analysis

Unsecured credit facility related to travel credits

An amount of $310.0 million in the form of an unsecured credit facility, which can be drawn down up to December 31, 2021,
for the sole purpose of making refunds to travellers who were scheduled to depart on or after February 1, 2020 and to
whom a travel credit was issued as a result of COVID–19. This credit facility matures on April 29, 2028 and bears interest at
the rate of 1.22%. In the event the secured debt – LEEFF and the unsecured debt – LEEFF have not been repaid, this credit
facility could become immediately payable in case of default related to the debt – LEEFF, including in the event of a change
in control, and in the absence of a waiver by the lenders to enforce them or in the event of a change of control without the
consent of the lenders. As at October 31, 2021, the credit facility was fully drawn down. As at October 31, 2021, the carrying
amount of the credit facility amounted to $140.6 million, and an amount of $167.4 million was also recognized as deferred
government grant related to these drawdowns.

In connection with the arrangement of these credit facilities, the Corporation has made certain commitments, including:

•

Making refunds to travellers who were scheduled to depart on or after February 1, 2020 and to whom travel credits
have been issued due to COVID-19. The Corporation started making refunds in early May 2021. As per the
agreement, to be eligible, customers had to indicate their desire for a refund before August 26, 2021;

Complying with restrictions on dividends, stock repurchases and executive compensation;

Maintaining active employment at its level of April 28, 2021.

Renewal of existing credit facilities

In addition to the new funding of $700.0 million from the Government of Canada, the amounts already drawn on the
existing facilities will remain in place.

Revolving credit facility

On April 29, 2021, the Corporation amended its $50.0 million revolving credit facility agreement for operating purposes.
The amended agreement, which expires on April 29, 2023, may be extended for a year at each anniversary date subject to
lender approval and the balance becomes immediately payable in the event of a change in control. Under the terms of the
agreement, funds may be drawn down by way of bankers’ acceptances or bank loans, denominated in Canadian dollars and
U.S. dollars. The agreement is secured by a first movable hypothec on the universality of assets, present and future, of the
Corporation’s Canadian, Mexican, Caribbean and European subsidiaries, subject to certain exceptions. The facility bears
interest at bankers’ acceptance rate or at LIBOR in U.S. dollars plus a premium of 4.5% or at the financial institution’s
prime rate plus a premium of 3.5%. The terms of the agreement require the Corporation to comply with certain financial
ratios and covenants. As at October 31, 2021, the Corporation benefited from a temporary suspension of the application of
certain financial ratios and covenants by its lenders until October 31, 2022 and the credit facility was fully drawn down.

Subordinated credit facility

On April 29, 2021, the Corporation amended its subordinated credit facility for operating purposes, reducing the amount
from $250.0 million to $70.0 million The amended agreement expires on April 29, 2023 and becomes immediately payable
in the event of a change in control. The agreement is secured by a second movable hypothec on the universality of assets,
present and future, of the Corporation’s Canadian, Mexican, Caribbean and European subsidiaries, subject to certain
exceptions. The credit facility bears interest at the bankers’ acceptance rate, plus a 6.0% premium, or the financial
institution’s prime rate, plus a 5.0% premium. Until October 31, 2022, an additional capitalizable premium of 3.75% will be
added to interest. The terms of the agreement require the Corporation to comply with certain financial ratios and
covenants. As at October 31, 2021, the Corporation benefited from a temporary suspension of the application of certain
financial ratios and covenants by its lenders until October 31, 2022 and the credit facility was fully drawn down.

Annual Report 2021 Transat A.T. inc. | 31

Management's Discussion and analysis

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 consolidated financial statements.

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 14 and 26 to the audited consolidated financial statements)

Leases related to undelivered aircraft for which commitments have been made with a term of less than 12
months and/or for low value assets (see note 25 to the audited consolidated financial statements)

Purchase obligations (see note 25 to the audited consolidated financial statements)

Off-balance sheet arrangements that can be estimated, excluding agreements with suppliers and other obligations,
amounted to approximately $549.8 million as at October 31, 2021 ($872.2 million as at October 31, 2020) and are detailed
as follows:

OFF-BALANCE SHEET ARRANGEMENTS
(in thousands of dollars)
Guarantees

Irrevocable letters of credit

Collateral security contracts

Leases

Lease obligations

Agreements with suppliers

2021
$

6,951

425

542,397

549,773
21,344
571,117

2020
$

23,813

468

847,872

872,153
28,659
900,812

In the normal course of business, guarantees are required in the travel industry to provide indemnifications and guarantees
to counterparties in transactions such as leases, irrevocable letters of credit and collateral security contracts. Historically,
Transat has not made any significant payments under such guarantees. Leases are entered into to enable the Corporation
to lease rather than acquire certain items.

As at June 29, 2021, the Corporation amended its annually renewable revolving credit facility agreement for issuing letters
of credit, reducing the amount from $75.0 million to $74.0 million. Under this agreement, the Corporation must pledge
cash totalling 100% of the amount of the issued letters of credit. As at October 31, 2021, $38.2 million had been drawn
down under the facility ($60.3 million as at October 31, 2020), $30.7 million ($56.3 million as at October 31, 2020) of which
was to secure obligations under senior executives 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. As at October 31, 2021, the
decrease reflects the payment of amounts previously guaranteed by the letter of credit for certain executives who retired
during the year.

Following the Government of Canada funding and amendments to the existing revolving credit facility agreement and
subordinated credit facility agreement, on May 28, 2021, the lender terminated the guarantee facility that allowed the
Corporation to issue letters of credit to certain of its service providers, for a maximum term of three years and for a total
amount of $13.0 million, without pledging cash for the total amount of letters of credit issued. As at October 31, 2021, an
amount of $6.0 million was drawn down under this credit facility maturing on February 28, 2022.

For its U.K. operations, the Corporation has a bank line of credit for issuing letters of credit secured by deposits of
£2.3 million ($3.9 million), which has been fully drawn down.

Annual Report 2021 Transat A.T. inc. | 32

Management's Discussion and analysis

As at October 31, 2021, the off-balance sheet arrangements, excluding agreements with suppliers and other obligations,
had decreased by $322.4 million compared with October 31, 2020. This decrease resulted primarily from the addition of
four Airbus A321neoLRs to our fleet in 2021, combined with the strengthening of the dollar against the U.S. dollar.

Subject to going concern uncertainty discussed in Section 7. Financial position, liquidity and capital resources and note 2 to
the consolidated financial statements, 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
Lease liabilities
Leases (off-balance sheet)
7,516
Agreements with suppliers and other obligations 30,848

2022
$

2023
$

2024
$

2025
$

2027 and
up
$

2026
$

Total
$

13,038

787,717
114,408 480,139 1,189,433
45,198 394,657 542,397
20,791 69,086
266,668 349,095 184,228 199,169 378,208 1,211,265 2,588,633

29,122 217,207 315,678
118,735
45,198
6,114

187,433 25,239
122,581
32,198
4,210

215,266 138,304
17,630
5,728

1,395

Debt levels

The Corporation reported $463.2 million in long-term debt on the consolidated statement of financial position.

The Corporation’s total debt stood at $1,436.7 million as at October 31, 2021, up $532.8 million from October 31, 2020. This
increase was mainly due to $599.9 million in drawdowns on credit facilities, combined with the addition of four Airbus
A321neoLRs to our fleet in 2021. The increase was partially offset by the strengthening of the dollar against the U.S. dollar,
the early return to lessors of four Airbus A330s and a Boeing 737-800 during the year, and the payment of lease liabilities.

Total net debt increased by $526.1 million, from $477.5 million as at October 31, 2020 to $1,003.5 million as at
October 31, 2021. The increase in total net debt resulted primarily from an increase in total debt.

Outstanding shares

As at October 31, 2021, 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 3, 2021, there were 37,747,090 total voting shares outstanding.

Stock options

As at December 3, 2021, there were a total of 509,542 stock options outstanding, 359,542 of which were exercisable.

Warrants

As at October 31, 2021 and as at December 3, 2021, a total of 13,000,000 warrants was issued. As at October 31, 2021 and
as at December 3, 2021, a total of 7,333,333 warrants had vested following drawdowns on the credit facility and no
warrants had been exercised.

Annual Report 2021 Transat A.T. inc. | 33

Management's Discussion and analysis

8. OTHER

FLEET

As at October 31, 2021, Air Transat’s fleet consisted of thirteen Airbus A330s (332 or 345 seats), ten Airbus A321neoLRs (199
seats), seven Airbus A321ceos (199 seats) and one Boeing 737-800 (189 seats). Due to the COVID-19 pandemic and the
resulting significant capacity reductions, four Airbus A330s and one Boeing 737-800 were returned to lessors early during
the year ended October 31, 2021. In addition, two leased aircraft, consisting of one Airbus A330 and one Boeing 737-800
will no longer be used until they are returned to the lessors; the carrying amount of these leased aircraft are fully
written down.

The Corporation took delivery of four Airbus A321neoLRs during the year ended October 31, 2021, which is central to the
transformation of its fleet.

LITIGATION

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 and 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 specifically involving directors and officers, not the Corporation. In addition, the Corporation holds
professional liability and general civil liability insurance for lawsuits related to any non-bodily or bodily injuries sustained. In
all these lawsuits, the Corporation has and will continue to vigorously defend its position.

As a result of the COVID-19 pandemic, the Corporation has been the subject of a number of petitions for class actions in
connection with the reimbursement of customer deposits for airline tickets and packages that had to be cancelled.
However, under the unsecured credit facility related to travel credits, travel credits issued as a result of flight cancellations
arising from the COVID-19 pandemic are now eligible for refund. Consequently, petitions for class actions that have not yet
been settled may become moot. In any event, the Corporation has defended its position in the past and will continue to do
so with vigour. If the Corporation had to pay an amount related to class actions, the unfavourable effect of the settlement
would be recognized in the consolidated statement of income and could have an unfavourable effect on cash.
Nevertheless, during the fiscal year ended October 31, 2021, the Corporation had almost completed the process of
reimbursing travel credits to customers who submitted a request, which could mitigate the impact of any unfavourable
decision on cash flow and results.

Annual Report 2021 Transat A.T. inc. | 34

Management's Discussion and analysis

9. ACCOUNTING

CRITICAL ACCOUNTING ESTIMATES

The preparation of consolidated financial statements requires management to make estimates and judgments about the
future. We periodically review these estimates, which are based on historical experience, changes in the business
environment and other factors, including expectations of future events, that management considers reasonable under the
circumstances. Our estimates involve judgments we make based on the information available to us. However, accounting
estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability
affected in future periods.

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date that have
a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next fiscal year
are described below. The Corporation based its assumptions and estimates on parameters available when the consolidated
financial statements were prepared. However, existing circumstances and assumptions about future developments may
change due to market events or to circumstances beyond the Corporation’s control. Such changes are reflected in the
assumptions when they occur.

This discussion addresses only those estimates that we consider important based on the degree of uncertainty and the
likelihood of a material impact if we had used different estimates. There are many other areas in which we use estimates
about uncertain matters.

Impact of COVID-19 pandemic on significant accounting estimates and judgments

Due to the magnitude and global scale of the COVID-19 pandemic, the estimates used and judgments made by management
in preparing the Corporation’s financial statements may change in the short term and the effect of such changes may be
material, which could result in, among other things, impairment of certain assets and/or an increase in certain liabilities. In
addition, these risks could have a significant adverse impact on the Corporation’s operating results and financial position in
the coming months.

Amortization and impairment of non-financial assets

Depreciation of property, plant and equipment

Property, plant and equipment are depreciated over their estimated useful lives taking into account their residual value.
The right-of-use assets of the fleet, the aircraft, their components and leasehold improvement are significant sub-
categories 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. In
general, these changes are accounted for on a prospective basis and included in the 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.

Impairment of non-financial assets

Impairment exists when the carrying amount of an asset or cash-generating unit [“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.

Annual Report 2021 Transat A.T. inc. | 35

Management's Discussion and analysis

CGU level. 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. 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 or CGU is considered impaired and is
written down to its recoverable amount. Impairment losses are recognized through profit or loss.

As at October 31, 2021, the Corporation has determined that the significant declines in revenues and demand owing to the
COVID-19 pandemic, and the resulting significant reductions in capacity are indications of impairment of its CGUs.
Accordingly, the Corporation performed a new impairment test on its CGUs. The recoverable amount of CGUs was
determined based on their useful value, applying a discounted cash flow model. This model is based on Level 3 inputs
within the fair value hierarchy. Cash flows are derived from the financial forecasts for the next five fiscal years of the
Corporation’s 2022–2026 strategic plan, which are consistent with management’s best estimates and have been approved
by the Board of Directors, and take into account current and expected market conditions, including the impact of the
COVID-19 pandemic, which will be felt for several more years. The Corporation has used various assumptions in the
preparation of these projections, which are by their nature uncertain and may change unpredictably; accordingly, it is
possible that these projections will not be achieved, particularly if demand remains at lower-than-expected levels and
travel restrictions persist over time.

The significant assumptions used in the impairment test are as follows:

•

An average discount rate of 14.75%, which is the Corporation’s weighted average capital cost. This rate was
determined taking into account a number of factors such as the risk-free interest rate, the required return on equity
investments, risk factors specific to the air transportation
industry and risk factors specific to the
Corporation’s CGUs;

A long-term growth rate of 2.0% beyond the 5-year period, based on the Bank of Canada’s target inflation rate;

A per gallon fuel price between US$1.93 and US$2.53, based on management's best estimates.

As at October 31, 2021, no impairment in the carrying amount of the Corporation’s two CGUs was recognized, as their
recoverable amount remained higher than their carrying amount. Sensitivity analyses were performed on the significant
assumptions used in the discounted cash flow model and no impairment would have resulted from a change in
those assumptions.

As at October 31, 2020, the Corporation has determined that the significant declines in revenues and demand owing to the
COVID-19 pandemic, and the resulting significant reductions in capacity were indications of impairment of its CGUs.
Accordingly, the Corporation performed an impairment test on its CGUs. The recoverable amount of CGUs was determined
based on fair value less costs to sell and using a transaction price of $5.00 per share under the arrangement with Air
Canada dated October 9, 2020, which was in effect on October 31, 2020. No impairment in the carrying amount of the
Corporation’s CGUs was recognized, as their recoverable amount remains higher than their carrying amount.

Property, plant and equipment

As at October 31, 2021, a leased Airbus A330 will no longer be used until its return to the lessor. An impairment charge
representing the entire carrying amount of the right-of-use assets, maintenance components and leasehold improvements
for this aircraft was recognized in the consolidated statement of loss under Special items; these impairment charges
totalled $9.1 million.

As at October 31, 2020, due to the significant COVID-19 pandemic-related capacity reductions, ten leased aircraft, i.e., five
Airbus A330s, three Airbus A321ceos and two Boeing 737-800s, will no longer be used until they are returned to the lessors.
An impairment charge representing the entire carrying amount of the right-of-use assets, maintenance components and
leasehold improvements for these aircraft was recognized in the consolidated statement of loss under Special items; these
impairment charges totalled $50.8 million.

Annual Report 2021 Transat A.T. inc. | 36

Management's Discussion and analysis

recoverable amount compared with its carrying amount was made as at October 31, 2021 and 2020. The recoverable
amount of the land was determined based on fair value less costs to sell. Fair value less costs to sell was estimated using
level 3 input data, according to a valuation prepared by an independent, external valuator as at October 19, 2021 and
October 12, 2020, respectively. As at October 31, 2021, the recoverable amount of the land in Mexico was equal to its
carrying amount and accordingly, no impairment charge was required. As at October 31, 2020, the recoverable amount of
the land in Mexico was less than its carrying amount. Accordingly, as at October 31, 2020, the Corporation recognized a
$32.8 million impairment charge related to the land in Mexico under Special items in order for the carrying amount of the
land to be equal to its recoverable amount of $50.7 million as at October 31, 2020.

Intangible assets

The Corporation performed its annual impairment test as at October 31, 2021 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. As at October 31, 2020, after performing the test, the Corporation recognized $2.4 million in
asset impairment charges in respect of its trademarks.

Investment

As at October 31, 2021, the Corporation determined that there was no objective evidence of impairment of its investment
in a joint venture and that there was no increase in the value of the investment.

As at October 31, 2020, the Corporation determined that the declines in Desarrollo Transimar’s revenues and demand due
to the COVID-19 pandemic were objective evidence of impairment of its investment in a joint venture. Accordingly, the
Corporation performed an impairment test on its investment to compare its recoverable amount with its carrying amount.
The recoverable amount of the investment was determined based on the fair value less costs to sell. Fair value less costs to
sell was established based on a valuation prepared by an external and independent appraiser as at October 31, 2020, using
a discounted cash flow model based on Level 3 inputs. The cash flows used are management’s most plausible projections
given current and expected market conditions. The recoverable amount of the investment determined is less than its
carrying amount. Accordingly, as at October 31, 2020, the Corporation recognized a $3.1 million impairment charge related
to its investment under Special items in order for the carrying amount of the investment to be equal to its recoverable
amount as at October 31, 2020. The pre-tax discount rate used for the investment’s impairment test was 7.1%.

Discount rate of lease liabilities

The Corporation uses its incremental borrowing rate to calculate lease liabilities. The Corporation estimates the
incremental borrowing rate at the commencement of the lease by considering several factors, including the risk-free rate
at lease inception, the Corporation’s creditworthiness, the lease currency, the lease term and the nature of the leased
property. Given that various assumptions are used in determining the discount rate of lease liabilities, the calculation
involves some inherent measurement uncertainty.

Provision for return conditions

Aircraft- and equipment-related leases contain obligations arising from the conditions under which the assets must be
returned to the lessor on expiry of the lease [the “return conditions”]. The Corporation records a provision arising from the
return conditions of leased aircraft and engines upon commencement of the lease based on the degree of use until
maintenance to meet the return condition or until expiry of the lease. The provision is adjusted to reflect any change in the
related maintenance expenses anticipated and the significant accounting estimates and judgments used; these changes are
accounted for under “Aircraft maintenance” in the consolidated statement of income (loss) in the period during which they
are incurred. The provision is discounted using the risk-free pre-tax Canadian government bond rate as at the reporting
date for a term equal to the average remaining term to maturity before the related cash outflow.

The Corporation makes deposits to lessors based on the use of the leased aircraft in connection with certain future
maintenance work, namely maintenance deposits with lessors. Deposits made between the last maintenance performed by
the Corporation and expiry of the lease, as well as certain deposits made in excess of the actual cost of maintenance work,
will not be refunded to the Corporation when the maintenance is performed. These deposits are included in the provision
for return conditions of leased aircraft and engines.

Annual Report 2021 Transat A.T. inc. | 37

Management's Discussion and analysis

The estimates used to determine the provision for return conditions are based on historical experience, actual costs of
work and the inflation rate of those costs, information from external suppliers, forecasted aircraft utilization, expected
timing of repairs, 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 return conditions, the calculation involves some
inherent measurement uncertainty. Actual results will differ from estimated results based on assumptions.

Liability related to warrants

Due to the existence of settlement mechanisms on a net cash or share basis, the warrants are recorded as derivative
financial instruments in the Corporation’s liabilities. As at the issuance date, the liability related to warrants, totalling
$41.5 million, was valued using the Black-Scholes model. The initial fair value of the warrants was also recorded under other
assets as a deferred financing cost related to the unsecured debt - LEEFF.

The liability related to warrants is remeasured at the end of each period at fair value through profit or loss. It is classified in
Level 3 of the fair value hierarchy. At each reporting date, the fair value of the liability related to warrants is determined
using the Black-Scholes model, which uses significant inputs that are not based on observable market data, hence the
classification in Level 3.

Employee future benefits

The Corporation offers defined benefit pension arrangements to certain senior executives. Pension expense is based on
actuarial calculations performed annually 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. 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
Growth rate of eligible earnings

Taxes

Cost of retirement benefits
for the year ended
October 31, 2021
$
(6)
18

Pension benefit
obligations as at
October 31, 2021
$
(931)
109

Since the second quarter of the year ended October 31, 2020, due to the adverse impact of the COVID-19 pandemic on our
results, the Corporation ceased to recognize deferred tax assets and reduced the carrying amount of deferred tax asset
balances for which it was no longer able to justify recognition under IFRS. The Corporation measured the available
indicators to determine whether sufficient taxable income could be realized to utilize the existing deferred tax assets. As
discussed in Section 7. Financial position, liquidity and capital resources of this MD&A and note 2 to the consolidated
financial statements, due to the COVID-19 pandemic, the losses generated during the years ended October 31, 2021 and
2020 and the uncertainty related to the timing of the return of demand for leisure travel are adverse indications that
deferred tax assets may be realized. For the years ended October 31, 2021 and 2020, these adverse indications outweighed
the historical favourable indications and the Corporation did not record any deferred tax assets for the year ended
October 31, 2021 and reduced the balance of its deferred tax assets by $18.4 million in 2020. The tax deductions underlying
these deferred tax assets remain available for future use against taxable income.

Annual Report 2021 Transat A.T. inc. | 38

Management's Discussion and analysis

with respect thereto and firmly believes it has sufficient facts and arguments to obtain a favourable final outcome.
However, the Corporation already paid $15.1 million 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, 2021 and 2020.

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, lease liabilities, 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. In the three years prior to 2021, approximately 69% of the Corporation’s costs were incurred in a
currency other than the measurement currency of the reporting unit incurring the costs, whereas approximately 17% of
revenues were earned in a currency other than the measurement currency of the reporting unit making the sale. To
safeguard the value of commitments and anticipated transactions, the Corporation has a foreign currency risk management
policy that authorizes the use of forward exchange forward contracts and other types of derivative financial instruments
for the purchase and/or sale of foreign currencies based on anticipated foreign exchange rate trends, expiring in generally
less than 18 months. Due to the COVID-19 pandemic and the resulting lack of visibility on its future needs, the Corporation
has not contracted any new foreign exchange derivatives since March 2020. The Corporation will reassess the situation
from time to time.

The Corporation documents certain foreign exchange derivatives as hedging instruments and regularly demonstrates that
these instruments are sufficiently effective to continue using hedge accounting. These foreign exchange derivatives are
designated as cash flow hedges.

All derivative financial instruments are recorded at fair value in the consolidated statement of financial position. The
Corporation has defined a hedging ratio of 1:1 for its hedging relationships. 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 (loss), 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 (loss) account in which the hedged item
is recognized.

Annual Report 2021 Transat A.T. inc. | 39

Management's Discussion and analysis

Management of fuel price risk

The Corporation is particularly exposed to fluctuations in fuel prices. Due to competitive pressures in the industry, there
can be no assurance that the Corporation would be able to pass along any increase in fuel prices to its customers by
increasing prices, or that any eventual price increase would fully offset higher fuel costs, which could in turn adversely
impact its business, financial position or operating results. To mitigate fuel price fluctuations, the Corporation has
implemented a fuel price risk management policy that authorizes foreign exchange forward contracts, and other types of
derivative financial instruments, expiring in generally less than 18 months. Due to the COVID-19 pandemic and the resulting
lack of visibility on its future needs, the Corporation has not contracted any new fuel-related derivatives since March 2020.
The Corporation will reassess the situation from time to time.

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 (loss). 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 consolidated statement of financial position
totalled $9.8 million as at October 31, 2021 ($5.6 million as at October 31, 2020). Trade accounts receivable consist of
balances receivable from 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, 2021
and 2020. As at October 31, 2021, approximately 11% (approximately 18% as at October 31, 2020) of accounts receivable
were over 90 days past due, whereas approximately 85% (approximately 77% as at October 31, 2020) 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.

Receivables
October 31, 2020). The credit risk for these receivables is negligible.

included receivables from two credit card processors totalling $77.7 million ($19.2 million as at

Pursuant to certain agreements entered into with its service providers, primarily hotel operators, the Corporation pays
deposits to capitalize on special benefits, including pricing, exclusive access and room allotments. These deposits totalled
$7.5 million as at October 31, 2021 ($9.3 million as at October 31, 2020). These deposits are offset by purchases of person-
nights at these hotels and purchases from suppliers. Risk arises from the fact that these hotels might not be able to honour
their obligations to provide the agreed number of person-nights and that the suppliers might not be able to provide the
required services. The Corporation strives to minimize its exposure by limiting deposits to recognized and reputable hotel
operators and suppliers in its active markets. These deposits are spread across a large number of hotels and suppliers 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 $33.9 million as at
October 31, 2021 ($40.5 million as at October 31, 2020) 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, 2021, the cash security deposits with lessors that
have been claimed totalled $1.6 million ($19.0 million as at October 31, 2020) 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. The credit risk for these receivables is negligible.

Annual Report 2021 Transat A.T. inc. | 40

Management's Discussion and analysis

For financial institutions including the various counterparties, the maximum credit risk as at October 31, 2021 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, 2021.

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 [refer to Section 7. Financial position, liquidity and capital
resources]. 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 change in accounting policies

Interbank Offered Rates [“IBOR”] Reform - Phase 2

In August 2020, the IASB published its Interest Rate Benchmark Reform - Phase 2 amendments to IFRS 9, Financial
Instruments; IAS 39, Financial Instruments - Recognition and Measurement; IFRS 7, Financial Instruments - Disclosures;
IFRS 4, Insurance Contracts; and IFRS 16, Leases. The amendments complement those issued in 2019 and focus on the
effects on financial statements when a company replaces the old benchmark rate with an alternative as a result of
the reform.

For financial instruments at amortized cost, the amendments introduce a practical expedient such that if a change in
contractual cash flows is a direct result of IBOR reform and occurs on an economically equivalent basis to the previous
determination, the change will result in no immediate recognition of gain or loss. For hedge accounting, the practical
expedient allows hedging relationships that are directly affected by the reform to continue. However, it may be necessary
to account for additional inefficiencies.

Application of the standard is mandatory and will be effective for the Corporation’s fiscal year beginning on
November 1, 2021. Implementation of these amendments is expected to have no impact on the Corporation's consolidated
financial statements as of the date of adoption.

Annual Report 2021 Transat A.T. inc. | 41

Management's Discussion and analysis

10. 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. These include risks directly related to the COVID-19 pandemic, of which several have materialized.

This section 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 of the
Corporation 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 Committee (strategic and
operational risks).

Managing these risks is also shared between members of the Corporation’s management and the members of the Board of
Directors using consistent mapping and language in order to eliminate a silo approach to risk management. As a result of
the COVID-19 pandemic, all risks to which the Corporation is exposed have been re-assessed in detail by the Corporation’s
officers. As part of this essential process, risks were reprioritized based on their level of probability of occurrence and
their quantitative and qualitative impact on the Corporation’s business. The outcome of this annual exercise comprised a
total of 52 risks, rated in order of importance: red for the 11 high-priority risks, orange for the 11 priority risks, yellow for
the 13 moderate risks and green for the 17 low risks. These risks were then grouped according to the subject matter for
ease of reference, as set out in the following paragraphs.

KEY RISKS

An overview of each of the 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 purchased for some of these risks, and operational mitigating actions are in place, there
can be no assurance that these actions would 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.

Annual Report 2021 Transat A.T. inc. | 42

Management's Discussion and analysis

RISKS RELATING TO THE ABILITY TO CONTINUE AS A GOING CONCERN

As discussed in Section 7. Financial position, liquidity and capital resources of this MD&A and note 2 to the consolidated
financial statements, there are material uncertainties that cast significant doubt about the Corporation’s ability to continue
as a going concern and, therefore, realize its assets and discharge its liabilities in the normal course of business. The
consolidated financial statements as at October 31, 2021 have been prepared on a going concern basis which assumes that
the Corporation will continue to be in operation for the foreseeable future and will be able to realize its assets and
discharge its liabilities, and meet its obligations in the normal course of business. The consolidated financial statements as
at October 31, 2021 and for the year then ended do not include adjustments to the book value and classification of assets,
liabilities and recorded expenses that would otherwise be required if the going concern basis proved to be inappropriate.
Such adjustments may be significant.

The Corporation is making every effort and remains confident of returning to profitability under its strategic plan, based on
current market conditions and the gradual resumption of its operations. However, there can be no assurance that
additional funds available under the short-term and medium term credit facilities, including the LEEFF will be sufficient to
finance the Corporation’s operations until the maturity of the credit facilities, that the Corporation will be able to again
borrow sufficient amounts to meet its needs, or that it will be able to do so on acceptable terms, or that suppliers, lessors,
credit card processors and other creditors will continue to support the Corporation. The COVID-19 pandemic significantly
strained the Corporation’s ability to return to profitability. As a result, there can be no assurance that the Corporation will
be able to generate positive cash flows from operating activities in the next twelve months.

COVID-19-RELATED RISKS

This section provides an overview of the specific risks to which Transat and its subsidiaries have been and/or will be
exposed as a result of the persisting COVID-19 pandemic. While the Corporation has resumed its airline operations since
July 30, 2021, there are still cross-border travel restrictions imposed by domestic government authorities and the
countries that the Corporation serves. This situation is still resulting in a significant decrease in cash flows from operations
despite the mitigation actions taken by the Corporation and considering that Transat does not expect operations to reach
pre-pandemic levels before 2023.

The crisis surrounding the COVID-19 pandemic is continuously evolving and is affecting the entire global tourism industry as
well as the air transportation sector. The extent of the potential impact of COVID-19 on the Corporation and its operations
will depend on the evolution of the pandemic, which remains highly uncertain and cannot be accurately predicted. The
outlook for travel demand to destinations served by the Corporation for the coming years remains very difficult to
determine. The Corporation is monitoring the situation very closely and continues to take appropriate measures as the
COVID-19 pandemic evolves (particularly the variants and the vaccines).

The potential negative impacts of the COVID‑19 pandemic include but are not limited to:

•

A significant reduction in demand for the Corporation’s products and services, both for its flights offered on Air
Transat and for its vacation packages, resulting from, among other things, government travel and border
restrictions, travellers’ concerns about COVID-19, new constraints imposed on travellers at airports and on flights
due to COVID-19 such as mask wearing and temperature screening, lower discretionary consumer spending, job
losses or salary reductions resulting from a decline in economic activity, service disruptions resulting from
COVID-19 and changes in consumer travel patterns, which could have a material adverse effect on cash flows
from operations;

Disruptions in operations related to the inability of the Corporation’s employees, its subcontractors or other
business partners to work in a normal manner as a result of COVID‑19 restrictions, including quarantines;

Impact of new laws, new regulations and other government interventions resulting from the COVID-19 pandemic,
including travel-related measures different from those currently in place that could result in additional costs to
the Corporation, a lower load factor and increases in the price of the Corporation’s products and services that
could adversely affect demand for such products and services;

Tighter credit conditions proposed by the Corporation’s business partners to manage their own cash flows;

Amounts that may be withheld by credit card processors would delay the availability of these funds for the
Corporation, creating additional adverse pressure on the Corporation’s cash flows;

Annual Report 2021 Transat A.T. inc. | 43

Management's Discussion and analysis

•

Heightened volatility of fuel prices and exchange rates and the resulting adverse effect on operating expenses and
cash flow from operations;

• Write-down of assets as well as non-recurring expenses resulting from adjustments to the Corporation’s

cost structure;

•

Given the large number of early terminations completed to date, and the decision to pay only legal indemnities,
the Corporation is more exposed to a risk of legal action by these employees;

Refunds to clients holding travel credits were made following the receipt of funding from the Government of
Canada, but delays deemed too long for some may result in new class action lawsuits, which would be added to
those filed since last year, before the refunds were put in place. Accordingly, the outcome of these class actions is
impossible to predict with certainty and the financial effect that could result from it cannot be reliably estimated.
If the Corporation had to pay an amount related to class actions, the unfavourable effect of the settlement would
be recognized in the consolidated statement of income and could have a very unfavourable effect on cash.

Until the Corporation is able to resume operations at a sufficient level, the situation will affect its cash position. The
Corporation continues to review various options to refinance a portion of the existing debt on more advantageous terms
than those currently in place. The Corporation cannot guarantee it will have access to such sources of financing or
acceptable financing terms, or that such supplementary measures will enable it to mitigate the risks arising from the
COVID-19 pandemic, including those mentioned above.

HUMAN RESOURCE RISKS

The Corporation’s ability to achieve its plan to resume operations is a function of the experience of its key executives and
employees, and their expertise in the tourism, travel and air carrier industries. In the current economic and tourism
industry environment, it is difficult to retain the resources needed for recovery due to the limited ability to compensate
employees at their fair value. As a result, the loss of key employees could adversely affect our business and operating
results. Further, our recruitment program, salary structure, performance management programs, succession plan,
retention 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. Retention risk is all the more likely amid the
COVID-19 pandemic, which is putting strong pressure on all of the Corporation’s employees, given the outlook of a very
slow recovery in the tourism industry and the talent shortage in general, in Québec and in Canada.

In terms of workforce, the Corporation had a headcount of 5,100 pre-pandemic in Canada. As at October 31, 2021, it was
reduced to about 4,300, including 2,100 active headcount and 2,200 still temporarily laid off. During 2022, the
Corporation intends to lay off some staff due to the still reduced business volume, while ensuring that it recruits the staff
necessary to handle the greater workload and a prospective full recovery in the longer term. Although Canadian employees,
both active and inactive, have benefited from employee subsidy programs of the Canadian government, labour costs are a
significant component of the Corporation's operating expenses. 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 Air Transat subsidiary is the only subsidiary with unionized employees, who are governed by five
collective agreements, two of which have expired in 2021 and three will expire in 2022. The agreement with the
International Association of Machinists and Aerospace Workers, which covers employees involved in crew planning, etc.,
expired on July 31, 2021. The agreement governing flight attendants, namely the Canadian Union of Public Employees
(Airline Division), expired on October 31, 2021. Furthermore, it is possible that negotiations to renew these collective
agreements could give rise to work stoppages or slowdowns or higher labour costs in the coming years that could
unfavourably impact our operations and operating income.

Annual Report 2021 Transat A.T. inc. | 44

Management's Discussion and analysis

CYBER ATTACK RISKS

The Corporation gathers, uses and retains over a fixed period of time large amounts of customer data for commercial,
marketing and other purposes in our various computer systems. This data is stored and processed in our facilities and in
third-party facilities, including, for example, in a cloud-based environment hosted by a third party. The integrity and
protection of the data of our customers, employees and business, as well as the continued operation of our systems and
other third-party service providers, are essential to our operations. Security and privacy regulations and contractual
obligations are increasingly demanding and have onerous penalties for non-compliance.

Despite our efforts to protect against unauthorized access to our systems and sensitive information, due to the scope and
complexity of their information technology structure, our reliance on third parties to support and protect our structure
and data, and a constantly evolving cyber threat environment, our systems and those of third parties we rely on are subject
to disruptions, failures, unauthorized access, cyber terrorism, employee errors, negligence, fraud or other misuse. In
addition, given the sophistication of hackers to gain unauthorized access to our sensitive information, we may be unable to
detect the violation for long periods of time, or even not at all. Such events, whether accidental or intentional, could result
in the theft, unauthorized access or disclosure, loss, misuse or unlawful use of customer data that could damage our
reputation, disrupt our services or result in business loss, as well as repair and other costs, fines, investigations, legal
actions or proceedings. As a result, future incidents could have a material adverse effect on the Corporation, including our
business, financial condition, liquidity and operating results.

FINANCIAL RISKS

Due to the COVID-19 related risks discussed previously as well as those described below under economic and general risks,
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.

The Corporation's current credit facilities are subject to compliance with certain financial ratios and covenants, which
have been suspended up to October 31, 2022. There can be no assurance 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.

In addition, in the normal course of business, the Corporation is facing a number of short-term maturities related to
service contracts with credit card processors. These agreements will have to be renewed or replaced under market
conditions prevailing at the time of their expiry, which could result in more onerous borrowing and operating terms and
conditions for the Corporation or an inability to renew or replace such contracts.

The Corporation is negotiating with its suppliers to obtain cost reductions and changes to its payment terms, and has
implemented measures to reduce expenses and investments.

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 liabilities relating to its aircraft fleet. If the Corporation’s operations do not
return to sufficient levels, 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 fixed- and variable-rate debt instruments, which in
turn could affect our interest income and interest expenses.

Annual Report 2021 Transat A.T. inc. | 45

Management's Discussion and analysis

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. In addition, credit card processors could take mitigation measures such as withholding funds until the service
is re-established. 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 also 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.

Lastly, 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.

COMPETITION RISKS

Transat operates in an industry in which competition has always been intense, despite the slow resumption of operations
by all industry players. Some of them are larger, with strong brand name recognition and an established presence in
specific geographic areas, substantial financial resources, including government subsidies, 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 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.

Annual Report 2021 Transat A.T. inc. | 46

Management's Discussion and analysis

ECONOMIC AND GENERAL RISKS

The holiday travel industry is sensitive to global, national, regional and local economic conditions, particularly since the
pandemic situation that we have been experiencing starting in March 2020. 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. To date, with the pandemic still persisting at several levels, signs of
recovery in the tourism industry are weak for the destinations served by the Corporation, and financial markets could
continue their negative economic growth.

Despite the existence of COVID-19 vaccines, the rules for its use and requirements change over the months and are not
consistent across countries. These factors are creating feelings of anxiety among the Corporation's customers, affecting
demand for leisure travel. As a result, revenues might not be sufficient to cover the fixed expenses related to the
resumption of operations and bring about profitability in the medium term.

Seasonal planning of flight and person-night capacity is another risk in the tourism industry. For the Corporation, it entails
forecasting traveller demand in advance and anticipating trends in future preferred destinations. This is all the more
difficult during a pandemic. Poor planning for those needs could unfavourably impact our business, financial situation and
operating results.

In addition to the foregoing factors, 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, new 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 reservations.

REPUTATION AND ESG RISKS

The market and travelers are increasingly requiring that a public company, such as Transat, be recognized as a socially
responsible company and that it adhere to environmental, social and governance ["ESG"] criteria, i.e. factors that have an
impact on the environment, that are related to the social involvement of the Corporation and that are related to the way
the Corporation runs its business governs itself. In this respect, over the years, the Corporation has adopted multiple
measures related to these factors, especially its Travelife certification program, its agreement with SAF+ Consortium, its
new fleet of more efficient, less polluting Airbus A321neoLR aircraft, its ISO and LEED certifications, its involvement with
communities in Canada and where it flies, its approach to managing human resources and corporate governance, and many
others. Despite these initiatives, it is possible that, in the eyes of current and future clients, certain organizations,
institutions or shareholders, the Corporation may not fully meet the definition of a socially responsible company, which
could also tarnish the Corporation’s reputation.

In addition, 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, such as the COVID-19 pandemic, 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.

Annual Report 2021 Transat A.T. inc. | 47

Management's Discussion and analysis

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, Rolls‑Royce, General Electric, Lufthansa Technik, A.J. Walter or Pratt & Whitney
means that we could be adversely affected by problems connected with Airbus 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 a large number of hotels. In general, these suppliers can terminate or modify existing
agreements with us on relatively short notice. The potential inability to replace these agreements, to find similar suppliers,
or to renegotiate agreements at reduced rates could have an adverse effect on our business, financial position and
operating results.

Furthermore, any decline in the quality of travel products or services provided by these suppliers, or any perception by
travellers of such a decline, could adversely affect our reputation. Any loss of contracts, changes to our pricing
agreements, access restrictions to travel suppliers’ products and services or negative shifts in public opinion regarding
certain travel suppliers resulting in lower demand for their products and services could have a significant effect on
our results.

AVIATION RISKS

To carry on business or extend its outreach, the Corporation requires access to aircraft that are largely operated by its
subsidiary Air Transat. This fleet consists primarily of aircraft leased for several years, sometimes under renewable leases,
with varying renewal dates and conditions. If the Corporation were unable to renew its leases for long-term or seasonal
leasing, 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 two types of Airbus aircraft (A321 and A330) 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 again
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.

Annual Report 2021 Transat A.T. inc. | 48

Management's Discussion and analysis

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.

In addition to the cyber attacks discussed previously, 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 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 or in a timely manner. 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 the
Corporation’s reputation, its operating results and financial position.

Furthermore, several of those information technology systems depend on third-party providers, such as Softvoyage,
Datalex and Radixx. Those suppliers sell more external solutions (through partnerships or cloud services) requiring
additional control measures. If these providers were to become incapable of maintaining or improving efficient technology
solutions in a profitable and timely manner, the Corporation would be unable to react effectively to information security
attacks, obtain new systems to meet growth in its customer base or support new products offered by the Corporation.
Consequently, such situations could generate additional expenses, which would unfavourably impact the Corporation’s
financial position.

REGULATORY RISKS

The industry in which Transat operates is subject to extensive Canadian and foreign government regulations. These relate
to, among other things, security, safety, consumer rights, permits, licensing, intellectual property rights, privacy,
competition, pricing and the environment. Consequently, Transat’s future results may vary depending on the actions of
government authorities with jurisdiction over our operations. These actions include the granting and timing of certain
government approvals or 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.

Canada’s Clean Fuel Standard, which could require airlines to reduce their carbon intensity by using sustainable aviation
fuel or purchasing compliance credits, is currently in the consultation phase. The Standard will be finalized in the spring of
2022 and become applicable in early 2023. The final legislation will determine the financial implications for Air Transat. 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 addition, under the Greenhouse Gas Pollution Pricing Act, Canada established a minimum royalty for carbon pollution.
This is in the form of a fossil fuel charge and a regulatory greenhouse gas emissions trading system called the Output-Based
Pricing System. It currently applies only to interprovincial flights in certain provinces, such as British Columbia. Air Transat
is currently not affected by this legislation. However, the federal government has indicated it could broaden the scope of
the legislation to include interprovincial (domestic) flights. No timeline was given for this initiative, but it could have a
significant financial impact on Air Transat if it is applied. Note that Air Transat is subject to the Carbon Offsetting and
Reduction Scheme for International Aviation [“CORSIA”] for most of its international flights. The Corporation is required to
purchase carbon offsets to cover growth on applicable routes.

Annual Report 2021 Transat A.T. inc. | 49

Management's Discussion and analysis

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.

INSURANCE COVERAGE RISKS

We hold and maintain full force insurance policies for amounts conforming to industry standards. Our liability insurance for
our tour operator and travel agency activities covers the liability for bodily harm or property damage suffered by travellers
or third parties. In the context of our activities as a tour operator, we use reasonable efforts to ensure that our service
providers also have insurance covering bodily harm or property damage suffered by travellers. Furthermore, in
collaboration with an insurer, we established a voluntary professional liability insurance (errors and omissions) plan for
our franchisees.

We also hold and maintain in full force insurance policies for amounts in accordance with airline industry standards and in
compliance with applicable statutory requirements and the covenants of our aircraft lease agreements. 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 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$1.0 billion for any single event
in the aggregate.

In addition, the Corporation has directors’ and officers’ liability insurance and professional liability insurance to pay the
amounts the Corporation may be required to disburse in connection with lawsuits specifically involving directors and
officers, not the Corporation.

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.

Annual Report 2021 Transat A.T. inc. | 50

Management's Discussion and analysis

11. 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 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 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 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 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, 2021.

Lastly, no significant changes in ICFR occurred during the fourth quarter ended October 31, 2021 that materially affected
the Corporation’s ICFR.

12. OUTLOOK

Impact of the coronavirus on outlook - Across all of our markets, average capacity for winter 2022 is 60% of 2019 capacity,
increasing from 50% to 75% over the course of the season. On the sun destinations program, the Corporation’s main
program for winter season, Transat’s capacity in 2022 represents 55% of 2019 capacity. On the transatlantic program,
where it is the low season, Transat’s capacity represents 65% of 2019 capacity. In addition, the Corporation is increasing its
presence in the cross-border market with capacity growth of 45% compared to 2019 winter season capacity.

The Corporation continues to apply a series of operational, commercial and financial measures, including cost reduction,
aimed at preserving its cash. The Corporation continues to monitor the situation daily to adjust these measures as
it evolves.

Despite recent uncertainty related to the emergence of a new variant, the current situation shows encouraging signs such
as the level of bookings observed and the increase in the vaccination rate. However, it remains impossible for the moment
to predict the impact of the COVID-19 pandemic on future bookings, and on financial results. Consequently, for now the
Corporation is not providing an outlook for winter 2022.

Annual Report 2021 Transat A.T. inc. | 51

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 consolidated 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 consolidated 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.

Annick Guérard
President and Chief Executive Officer

Patrick Bui
Chief Financial Officer

Annual Report 2021 Transat A.T. inc. | 52

INDEPENDENT AUDITOR’S REPORT

To the Shareholders of Transat A.T. Inc.,

Opinion

We have audited the consolidated financial statements of Transat A.T. Inc. and its subsidiaries [the “Group”], which
comprise the consolidated statement of financial position as at October 31, 2021 and 2020 and the consolidated
statements of loss, the consolidated statements of comprehensive loss, the consolidated statements of changes in equity
and the consolidated statements of cash flows for the years then ended, and notes to the consolidated financial
statements, including a summary of significant accounting policies.

In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the
consolidated financial position of the Group as at October 31, 2021 and 2020 and its consolidated financial performance
and its consolidated cash flows for the years then ended, in accordance with International Financial Reporting
Standards [”IFRS”].

Basis for opinion

We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities under
those standards are further described in the Auditor’s Responsibilities for the Audit of the Consolidated Financial
Statements section of our report. We are independent of the Group in accordance with the ethical requirements that are
relevant to our audit of the consolidated financial statements in Canada, and we have fulfilled our other ethical
responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.

Material uncertainty related to going concern

We draw attention to note 2 to the consolidated financial statements, which indicates that the Group incurred a net loss of
$389.4 million and generated negative cash flows from operations totalling $518.4 million for the year ended
October 31, 2021. As stated in note 2, these events or conditions, along with other matters as set forth in note 2, indicate
that a material uncertainty exists that may cast significant doubt on the Group’s ability to continue as a going concern. Our
opinion is not modified in respect of this matter.

Key audit matters

Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the
consolidated financial statements of the current period. In addition to the matters described in the "Material uncertainty
related to going concern" section of our report, we have determined the matter described below to be the key audit
matter to be communicated in our report. These matters were addressed in the context of our audit of the consolidated
financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these
matters. For each matter below, our description of how our audit addressed the matter is provided in that context.

We have fulfilled the responsibilities described in the Auditor’s responsibilities for the audit of the consolidated financial
statements section of our report, including in relation to these matters. Accordingly, our audit included the performance
of procedures designed to respond to our assessment of the risks of material misstatement of the consolidated financial
statements. The results of our audit procedures, including the procedures performed to address the matters below,
provide the basis for our audit opinion on the accompanying consolidated financial statements.

Annual Report 2021 Transat A.T. inc. | 53

Key audit matter
Impairment of long-lived non-financial assets
As at October 31, 2021, the Corporation held
$1,000.6 million in long-lived non-financial assets,
including property, plant and equipment, intangible
assets and a long-term investment.
As indicated in notes 3, 4, 9, 10 and 11, the Corporation
assesses at each reporting date whether there is any
indication that an asset or a cash-generating unit
(“CGU”) may be impaired. If any indication exists, or
when annual impairment testing for an asset or a CGU is
required, the Corporation estimates the recoverable
amount of the asset or CGU. The recoverable amount is
defined as the higher of the asset’s fair value less costs
to sell and its value in use.
We determined that auditing the impairment of long-
lived non-financial assets is a key audit matter due to the
significance of the balance and the degree of subjectivity
in evaluating management’s significant assumptions
relating to the discount rate, long-term growth rate and
per gallon price of fuel in its model.

How our audit addressed the key audit matter

Our approach to addressing the matter included the following
procedures, among others:

– We assessed management’s documentation of the

CGUs;

– We involved our valuation specialists to assist in

evaluating the discount rate, the long-term growth
rates and the per gallon fuel price used by the
Corporation and the valuation methods used;

– We tested the reasonableness of cash flow projections
by comparing them to external economic data from
the airline and tourism industry and to the
Corporations past results;

– We conducted sensitivity testing to assess the
potential impact of changes in the significant
assumptions used by management in its models;
– We examined the adequacy of the disclosures relating
to CGUs, impairment tests and impairment charges
presented in notes 3, 4, 9, 10, and 11 to the
Corporation’s consolidated financial statements.

Other information

Management is responsible for the other information. The other information comprises:

– Management’s Discussion and Analysis

–

The information, other than the consolidated financial statements and our auditor’s report thereon, in the
Annual Report.

Our opinion on the consolidated financial statements does not cover the other information and we do not express any form
of assurance conclusion thereon.

In connection with our audit of the consolidated financial statements, our responsibility is to read the other information,
and in doing so, consider whether the other information is materially inconsistent with the consolidated financial
statements or our knowledge obtained in the audit or otherwise appears to be materially misstated.

We obtained Management’s Discussion and Analysis and the Annual Report prior to the date of this auditor’s report. If,
based on the work we have performed, we conclude that there is a material misstatement of this other information, we are
required to report that fact in this auditor’s report. We have nothing to report in this regard.

Annual Report 2021 Transat A.T. inc. | 54

Responsibilities of management and those charged with governance for the consolidated financial statements

Management is responsible for the preparation and fair presentation of the consolidated financial statements in
accordance with IFRSs, 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.

In preparing the consolidated financial statements, management is responsible for assessing the Group’s ability to continue
as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of
accounting unless management either intends to liquidate the Group or to cease operations, or has no realistic alternative
but to do so.

Those charged with governance are responsible for overseeing the Group’s financial reporting process.

Auditor’s Responsibilities for the Audit of the Consolidated Financial Statements

Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole are free
from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion.
Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with
Canadian generally accepted auditing standards will always detect a material misstatement when it exists. Misstatements
can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be
expected to influence the economic decisions of users taken on the basis of these consolidated financial statements.

As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional judgment
and maintain professional skepticism throughout the audit. We also:

–

Identify and assess the risks of material misstatement of the consolidated financial statements, whether due
to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence
that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material
misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve
collusion, forgery, intentional omissions, misrepresentations, or the override of internal control.

Obtain an understanding of internal control relevant to the audit 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 Group’s internal control.

Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates
and related disclosures made by management.

Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that
may cast significant doubt on the Group’s ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in our auditor’s report to the related
disclosures in the consolidated financial statements or, if such disclosures are inadequate, to modify our
opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor’s report.
However, future events or conditions may cause the Group to cease to continue as a going concern.

Evaluate the overall presentation, structure and content of the consolidated financial statements, including
the disclosures, and whether the consolidated financial statements represent the underlying transactions
and events in a manner that achieves fair presentation.

Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the Group to express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the Group audit. We remain solely
responsible for our audit opinion.

We communicate with those charged with governance regarding, among other matters, the planned scope and timing of
the audit and significant audit findings, including any significant deficiencies in internal control that we identify during
our audit.

Annual Report 2021 Transat A.T. inc. | 55

We also provide those charged with governance with a statement that we have complied with relevant ethical requirements
regarding independence, and to communicate with them all relationships and other matters that may reasonably be
thought to bear on our independence, and where applicable, related safeguards.

From the matters communicated with those charged with governance, we determine those matters that were of most
significance in the audit of the consolidated financial statements of the current period and are therefore the key audit
matters. We describe these matters in our auditor’s report unless law or regulation precludes public disclosure about the
matter or when, in extremely rare circumstances, we determine that a matter should not be communicated in our report
because the adverse consequences of doing so would reasonably be expected to outweigh the public interest benefits of
such communication.

The engagement partner on the audit resulting in this independent auditor’s report is Sylvain Boucher.

Montréal, Canada

December 8, 2021

1 CPA auditor, CA, public accountancy permit No. A113209

Annual Report 2021 Transat A.T. inc. | 56

TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

[Note 2, Uncertainty related to going concern]

(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
Current assets
Cash and cash equivalents reserved
Deposits
Income taxes receivable
Property, plant and equipment
Intangible assets
Investment
Other assets
Non-current assets

LIABILITIES
Trade and other payables
Income taxes payable
Customer deposits and deferred revenues
Derivative financial instruments
Current portion of lease liabilities
Current portion of liability related to warrants
Current portion of provision for return conditions
Current liabilities
Long-term debt and lease liabilities
Liability related to warrants
Deferred government grant
Provision for return conditions
Other liabilities
Deferred tax liabilities
Non-current liabilities
NEGATIVE EQUITY
Share capital
Share-based payment reserve
Deficit
Unrealized loss on cash flow hedges
Cumulative exchange differences

See accompanying notes to consolidated financial statements
On behalf of the Board,

As at
October 31,
2021
$

As at
October 31,
2020
$

Notes

5
6
22

7
8

5
8
25
9
10
11
12

7
14
15
16

14
15
14
16
17
22

433,195
139,583
108,857
1,120
10,514
16,465
—
10,130
719,864
30,728
112,044
15,100
974,229
16,849
9,476
19,368
1,177,794
1,897,658

141,413
1,354
292,158
—
171,557
20,622
3,065
630,169
1,247,981
15,935
167,394
123,179
27,497
613
1,582,599

221,012
15,948
(544,881)
—
(7,189)
(315,110)
1,897,658

426,433
252,379
95,334
2,377
10,024
47,164
964
16,471
851,146
56,268
136,904
15,100
916,382
25,509
14,509
253
1,164,925
2,016,071

232,243
203
608,890
10,055
147,980
—
14,963
1,014,334
755,906
—
—
128,635
50,215
674
935,430

221,012
15,948
(164,138)
(522)
(5,993)
66,307
2,016,071

Director

Annual Report 2021 Transat A.T. inc. | 57

TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF LOSS

[Note 2, Uncertainty related to going concern]

Years ended October 31

(in thousands of Canadian dollars, except per share amounts)
Revenues

Operating expenses

Salaries and employee benefits

Aircraft maintenance

Costs of providing tourism services

Aircraft fuel

Airport and navigation fees

Sales and distribution costs

Aircraft rent

Other airline costs

Other

Share of net loss of a joint venture
Depreciation and amortization

Special items

Operating loss

Financing costs

Financing income

Change in fair value of fuel-related derivatives and other derivatives

Revaluation of liability related to warrants

Loss (gain) on asset disposals

Foreign exchange (gain) loss

Loss before income tax expense

Income taxes (recovery)

Current

Deferred

Net loss for the year

Net income (loss) attributable to:
Shareholders
Non-controlling interests

Loss per share

Basic
Diluted

See accompanying notes to consolidated financial statements

2021

2020

Notes
19

124,818

$
1,302,069

19, 23

122,770

239,250

48,832

31,958

22,373

13,032

13,020

—

110,413

431,562

258,947

77,622

97,086

23,358

24,643

109,424

57,371

4,704

75,410

1,172

159,765

204,112

27,572
526,040

99,675
1,728,031

(401,222)

(425,962)

77,024

(4,441)

(8,849)

(4,934)

(17,347)

(53,260)

48,049

(13,625)

13,715

—

11,271

3,601

(389,415)

(488,973)

(52)

(4,376)

12,168

7,792

(389,438)

(496,765)

(389,559)
121
(389,438)

(496,545)
(220)
(496,765)

(10.32)
(10.32)

(13.15)
(13.15)

11
19

Annual Report 2021 Transat A.T. inc. | 58

TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

[Note 2, Uncertainty related to going concern]

Years ended October 31

(in thousands of Canadian dollars)
Net loss for the year

Other comprehensive income (loss)

Items that will be reclassified to net income (loss)

Change in fair value of derivatives designated as cash flow hedges
Reclassification to net income (loss)

Deferred taxes

Foreign exchange gain (loss) on translation of financial
statements of foreign subsidiariesfor the year

Items that will never be reclassified to net income (loss)

Retirement benefits – Net actuarial losses

Deferred taxes

Total other comprehensive income

Comprehensive loss for the period

Comprehensive income (loss) attributable to:

Shareholders

Non-controlling interests

See accompanying notes to consolidated financial statements

2021

2020

Notes

(389,438)

$
(496,765)

—

447

522

(1,191)

12,925

(3,080)

8,654

(1,196)

1,333

(597)

—
(597)

(1,271)

(827)

(3,837)
(4,664)

5,323

(390,709)

(491,442)

(386,822)

(491,885)

(3,887)

443

(390,709)

(491,442)

Annual Report 2021 Transat A.T. inc. | 59

TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

[Note 2, Uncertainty related to going concern]

(in thousands of Canadian dollars)
Balance as at October 31, 2019

Net loss for the year
Other comprehensive income
(loss)
Comprehensive income (loss) for
the year
Dividends

Fair value changes of non-
controlling interest liabilities

Reclassification of non-controlling
interest liabilities

Reclassification of non-controlling
interest exchange difference

Balance as at October 31, 2020

Net income (loss) for the year
Other comprehensive income
(loss)
Comprehensive income (loss) for
the year

Fair value changes of non-
controlling interest liabilities

Reclassification of non-controlling
interest liabilities

Reclassification of non-controlling
interest exchange difference

Accumulated other
comprehensive income
(loss)

Share-
based
payment
reserve
$

Retained
earnings
(deficit)
$

Unrealized
gain (loss)
on cash
flow hedges
$

Cumulative
exchange
differences
$

Share
capital
$

Total
$

221,012

15,948 336,993

(9,176)

(7,326)

557,451

Non-
controlling
interests
$
—

Total equity
$
557,451

—

(496,545)

—

(496,545)

(220)

(496,765)

—

(4,664)

8,654

670

4,660

663

5,323

—

(501,209)

8,654

670

(491,885)

443

(491,442)

—

(849)

(78)

—

1,147

663

741

(663)

(443)

—

298

221,012

15,948

(164,138)

(522)

(5,993)

66,307

—

66,307

—

(389,559)

—

(389,559)

121

(389,438)

—

(597)

522

2,812

2,737

(4,008)

(1,271)

—

(390,156)

522

2,812

(386,822)

(3,887)

(390,709)

—

9,413

—

9,413

—

9,413

(9,413)

—

9,292

(4,008)

4,008

—

(4,008)

5,405

3,887

9,292

(7,189)

(315,110)

—

(315,110)

Balance as at October 31, 2021

221,012

15,948

(544,881)

See accompanying notes to consolidated financial statements

Annual Report 2021 Transat A.T. inc. | 60

TRANSAT A.T. INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

[Note 2, Uncertainty related to going concern]

Years ended October 31

(in thousands of Canadian dollars)

OPERATING ACTIVITIES
Net loss for the year

Operating items not involving an outlay (receipt) of cash:

Depreciation and amortization

Change in fair value of fuel-related derivatives and other derivatives

Revaluation of liability related to warrants

Loss (gain) on asset disposals

Foreign exchange (gain) loss

Asset impairment

Share of net loss of a joint venture
Capitalized interests on long term debt and lease liabilities

Deferred taxes

Employee benefits

Net change in non-cash working capital balances related to operations

Net change in provision for return conditions

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

Decrease (increase) in cash and cash equivalents reserved

Proceeds from sale of assets

Consideration paid for the buyback of a non-controlling interest

Capital contribution to a joint venture

Cash flows related to investing activities

FINANCING ACTIVITIES

Proceeds from borrowings

Transaction costs

Repayment of lease liabilities

Dividends paid by a subsidiary to a non-controlling shareholder

Cash flows related to financing activities

Effect of exchange rate changes on
cash and cash equivalents
Net change in cash and cash equivalents

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

Supplementary information (as reported in operating activities)

Net income taxes recovered

Interest paid

See accompanying notes to consolidated financial statements

Notes

2021

2020

(389,438)

(496,765)

159,765

(8,849)

(4,934)

(17,347)

(53,260)

33,450

4,704

41,537

75
5,754
(228,543)

(267,096)

(7,653)

(15,152)

(518,444)

(5,599)

25,540

422

(15,000)

(821)

4,542

599,852

(3,242)

(74,539)

—

204,112

13,715

—

11,271

3,601

89,127

1,172

—

12,168
3,009
(158,590)

95,202

(11,522)

28,774

(46,136)

(61,422)

(5,044)

8,094

—

(2,042)

(60,414)

49,980

—

(82,505)

(849)

522,071

(33,374)

(1,407)

6,762

426,433

433,195

1,513

(138,411)

564,844

426,433

(2,383)

18,288

(245)

1,769

Annual Report 2021 Transat A.T. inc. | 61

Transat A.T. inc.
Notes to Consolidated Financial Statements

October 31, 2021 and 2020

[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 and traded under a single ticker, namely “TRZ.”

Transat A.T. Inc. is an integrated company specializing in the organization, marketing and distribution of holiday travel. The
core of its business consists of a Canadian leisure airline, offering international and Canadian destinations, and is vertically
integrated with its other services of holiday packages, distribution through a dynamic travel agency network and value-
added services at travel destinations.

The consolidated financial statements of Transat A.T. Inc. for the year ended October 31, 2021 were approved by the
Corporation’s Board of Directors on December 8, 2021.

Note 2

Uncertainty related to going concern

Due is to the global COVID-19 pandemic, the Corporation’s operations have been severely disrupted and its financial results
significantly impacted. As a result, the Corporation reported a net loss of $389,438 and generated negative cash flows
related to operations totalling $518,444 for the year ended October 31, 2021. However, as discussed in note 14, on
April 29, 2021, the Corporation entered into an agreement with the Government of Canada enabling it to borrow additional
cash resources up to a maximum of $700,000 through the Large Employer Emergency Financing Facility ["LEEFF"]. To
supplement the new financing, the amounts already drawn on existing facilities remain in place and are extended for a
period of two years, until April 29, 2023. The ratios applicable to existing facilities are suspended for a period of 18 months,
until October 31, 2022. The undrawn credit under the short-term subordinated facility is cancelled. Therefore, available
credit amounts to a maximum of $820,000, including an amount of $650,000 that was drawn down as at October 31, 2021.

Annual Report 2021 Transat A.T. inc. | 62

Transat A.T. inc.
Notes to Consolidated Financial Statements

institutions, suppliers, lessors, credit card processors and other creditors. As discussed above, the Corporation entered
into an agreement with the Government of Canada that allows it to borrow additional cash resources up to a maximum of
$700,000 through the LEEFF, bringing total available financing to a maximum of $820,000. Management is also continuing
to monitor possible government assistance programs.

Given the gradual resumption of airline operations and the uncertainty with respect to a resurgence in demand, 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.

These consolidated financial statements have been prepared on a going concern basis which assumes that the Corporation
will continue to be in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities,
and meet its obligations in the normal course of business. These consolidated financial statements as at October 31, 2021
and for the year then ended do not include adjustments to the value and classification of assets, liabilities and recorded
expenses that would otherwise be required if the going concern basis proved to be inappropriate. Such adjustments may
be significant.

Note 3

Significant accounting policies

Basis of preparation

These consolidated financial statements of the Corporation and its subsidiaries have been prepared in accordance with
International Financial Reporting Standards [“IFRS”], as issued by the International Accounting Standards Board [“IASB”]
and as adopted by the Accounting Standards Board of Canada.

These consolidated financial statements are presented in Canadian dollars, the Corporation’s functional currency, except
where otherwise indicated. Each entity of the Corporation determines its own functional currency and items included in
the financial statements of each entity are measured using that functional currency.

These consolidated financial statements have been prepared on a going concern basis, using historical cost accounting,
except for certain financial assets and liabilities classified as financial assets/liabilities at fair value through profit or loss
and measured at fair value.

Basis of consolidation

The consolidated financial statements include the financial statements of the Corporation and its subsidiaries.

Subsidiaries

Subsidiaries are entities over which the Corporation has control. Control is achieved where the Corporation has the power
to govern the financial and operating policies of an investee entity so as to obtain benefits from its activities. Subsidiaries
are fully consolidated from the date of acquisition, being the date on which the Corporation obtains control, and continue
to be consolidated until the date when such control ceases.

Annual Report 2021 Transat A.T. inc. | 63

Transat A.T. inc.
Notes to Consolidated Financial Statements

The acquisition method of accounting is used to account for the acquisition of subsidiaries as follows:

•

Cost is measured as the fair value of the assets acquired, equity instruments issued and liabilities incurred or
assumed at the date of exchange, excluding transaction costs which are expensed as incurred;

Identifiable assets acquired and liabilities assumed are measured at their fair values at the acquisition date;

The excess of acquisition cost over the fair value of the identifiable net assets acquired is recorded as goodwill;

If the acquisition cost is less than the fair value of the net assets acquired, the fair value of the net assets is
re-assessed and any remaining difference is recognized directly in the statement of income;

Contingent consideration is measured at fair value on the acquisition date, with subsequent changes in the fair
value recorded through the statement of income when the contingent consideration is a financial liability;

Upon gaining control in a step acquisition, the existing ownership interest is re-measured to fair value through the
statement of income; and

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.

The non-controlling interest, which represent the portion of net income and net assets in subsidiaries that are not 100%
owned by the Corporation, is reported separately within equity in the consolidated statement of financial position. The
non-controlling interest in respect of which shareholders hold an option entitling them to require the Corporation to buy
back their shares is reclassified from equity to liabilities, deeming exercise of the option. The carrying amount of the
reclassified interest is also adjusted to match its 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.

Investment in a joint venture

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 investment in a joint venture is accounted for using the equity method as follows:

•

Investment is initially recognized at cost;

Investment in an associate includes goodwill identified on acquisition, net of any accumulated impairment loss;

The Corporation’s share of post-acquisition net income (loss) is recognized in the statement of income and is also
added to (netted against) the carrying amount of the investment; and

Gains on transactions between the Corporation and the joint venture are eliminated to the extent of the
Corporation’s interest in this entity and losses are eliminated unless the transaction provides evidence of an
impairment of the asset transferred.

Foreign currency translation

Transactions and balances

Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates
of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated using the functional
currency spot rate of exchange at the reporting date.

Annual Report 2021 Transat A.T. inc. | 64

Transat A.T. inc.
Notes to Consolidated Financial Statements

Foreign exchange gains and losses resulting from the settlement of such transactions as well as from the translation of
monetary assets and liabilities not denominated in the functional currency of the subsidiary are recognized in the
statement of income, except for qualifying cash flow hedges, which are deferred and presented as Unrealized gain (loss) on
cash flow hedges in Accumulated other comprehensive income (loss) in the statement of changes in equity.

Group companies

Assets and liabilities of entities with functional currencies other than the Canadian dollar are translated at the period-end
rates of exchange, and the results of their operations are translated at average rates of exchange for the period. The
exchange differences arising from translation are recognized in Cumulative exchange differences in Accumulated other
comprehensive income (loss) in equity. On disposal of an interest, the exchange difference component relating to that
particular interest is recognized in net 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 fuel, 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. Inventories are presented net of
the provision for impairment of inventories, if applicable. The Corporation did not record a provision for impairment of
inventories in 2021 and 2020.

Leases

The Corporation is party to leases, primarily for aircraft, aircraft engines, real estate and automotive equipment. At the
commencement date of the lease, the Corporation recognizes a right-of-use asset and a lease liability at the present value
of future lease payments, using the Corporation’s incremental borrowing rate. The Corporation has elected to separate
lease and non-lease components of lease agreements.

Initial measurement of lease liabilities includes fixed lease payments and variable lease payments that depend on an index
or a rate, during the non-cancellable period of the lease and for extension options reasonably certain to be exercised by
the Corporation. The initial value of lease liabilities is reduced by lease incentives receivable.

The initial value of right-of-use assets is obtained through the calculation of lease liabilities. Right-of-use assets are
recognized in accordance with IAS 16, Property, Plant and Equipment, and depreciated over the term of the lease.

The Corporation presents right-of-use assets under Property, plant and equipment and lease liabilities under Lease
liabilities in the consolidated statement of financial position. The current portion of lease liabilities is reported under
Current liabilities.

Variable lease payments that do not depend on an index or a rate are recognized as a lease expense in the consolidated
statement of income (loss) in the period during which the event or condition that triggers the payment occurs. Expenses
associated with lease payments under leases with terms of less than 12 months and low-value leases are recognized as
lease expenses in the consolidated statement of income (loss) on a straight-line basis over the term of the lease.

Property, plant and equipment

Property, plant and equipment are carried at cost less accumulated depreciation and provision for impairment, if any.
Right-of-use assets under leases are recognized at the lower of the current value of future lease payments, using the
Corporation’s incremental borrowing rate and fair value.

Annual Report 2021 Transat A.T. inc. | 65

Transat A.T. inc.
Notes to Consolidated Financial Statements

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
Right-of-use assets and leasehold improvements
Administrative building

5–10 years or use
3–10 years
Lease term or useful life
10-20 years

Land and property, plant and equipment under construction or development are not depreciated.

The fleet includes owned aircraft and improvements to leased aircraft. A portion of the cost of owned aircraft is allocated
to the “major maintenance activities” subclass, which relates to airframe, engine and landing gear overhaul costs, and the
remaining cost is allocated to Aircraft. Aircraft and major maintenance activities are depreciated taking into account their
expected estimated residual value. Aircraft are depreciated on a straight-line basis over seven- to ten-year periods, and
major maintenance activities are depreciated according to the type of maintenance activity on a straight-line basis or
based on the use of the corresponding aircraft until the next related major maintenance activity, or their expected useful
lives. Subsequent major maintenance activity expenses are capitalized as major maintenance activities and are depreciated
according to their type. Expenses related to other maintenance activities, including unexpected repairs, are recognized in
net income (loss) as incurred. Improvements to aircraft under operating leases are depreciated on a straight-line basis over
the shorter of the corresponding lease term and their useful life.

Estimated residual values and useful lives are reviewed annually and adjusted as appropriate.

Right-of-use assets

For leased aircrafts, on initial recognition, right-of-use assets are broken down between the airframe, engines and major
maintenance components. Eligible maintenance costs related to engines and major maintenance components are
capitalized and depreciated over the shorter of the lease term or expected useful life. The total of these items is recorded
under Right‑of‑use assets related to the fleet. Subsequently, eligible maintenance costs over the lease term are capitalized
and depreciated over the shorter of the lease term or expected useful life.

The Corporation is party to real estate leases, in particular for spaces in airports, offices and travel agencies. Moreover, the
Corporation is party to equipment and aircraft engine leases, including automotive equipment. Right-of-use assets are
recognized in respect of such leases, except for leases with terms of less than 12 months and leases with substantial
substitution rights.

Goodwill

Goodwill represents the excess of the cost of an acquisition over the fair value of the identifiable net assets acquired at the
date of acquisition. Goodwill is tested at least annually for impairment and carried at cost less accumulated impairment
losses. For the purposes of impairment testing, goodwill acquired in a business combination is, from the acquisition date,
allocated to each of the Corporation’s cash-generating units [“CGUs”] that are expected to benefit from the combination,
irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

Intangible assets

Intangible assets are recorded at cost. The cost of intangible assets acquired in a business combination is recorded at fair
value as at the acquisition date. Internally generated intangible assets include developed or modified application software.
These costs are capitalized when the following criteria are met:

•
•
•
•
•

•

It is technically feasible to complete the software product and make it available for use;
Management intends to complete the software product and use it;
The Corporation has ability to use the software product;
It can be demonstrated how the software product will generate probable future economic benefits;
Adequate technical, financial and other resources to complete the development and use the software product
are available;
The expenditures attributable to the software product during its development can be reliably measured.

Annual Report 2021 Transat A.T. inc. | 66

Transat A.T. inc.
Notes to Consolidated Financial Statements

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. 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.

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, lease liabilities, liabilities related to warrants, 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, at fair value through other comprehensive income (loss), or at
amortized cost. The classification of financial assets is determined based on the business model under which risks are
managed and the contractual cash flow characteristics of the financial assets. Financial liabilities are classified by default at
amortized cost except for derivative financial instruments and non-controlling interests. 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; in that event, they are classified as financial assets or liabilities at fair value through other comprehensive
income (loss).

Classification of financial instruments

Financial assets and financial liabilities at fair value through profit or loss

Financial assets, financial liabilities and derivative financial instruments classified as financial assets or liabilities at fair
value through profit or loss are measured at fair value at the period-end date. Gains and losses realized on disposal and
unrealized gains and losses from changes in fair value are reflected in the consolidated statement of income (loss) as
incurred.

Financial assets and financial liabilities at fair value through other comprehensive income (loss)

Derivative financial instruments designated within an effective hedging relationship classified as financial assets or financial
liabilities at fair value through other comprehensive income (loss) are measured at fair value as at the reporting date.

Annual Report 2021 Transat A.T. inc. | 67

Transat A.T. inc.
Notes to Consolidated Financial Statements

Amortized cost

Financial assets and financial liabilities classified at amortized cost are measured 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
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.

The Corporation enters into foreign currency contract options and designates the intrinsic value of these contracts as cash
flow hedging on future purchases of foreign currencies. The time value of these options, including premiums paid, is
recognized in Other comprehensive income (loss) in the consolidated statement of comprehensive income (loss) for
effective hedging relationships. The time value of these options, including premiums paid, remains in Accumulated other
comprehensive income (loss) as “Unrealized gain (loss) on cash flow hedges” until the settlement of the underlying hedged
item, at which time the premiums paid accounted for under “Unrealized gain (loss) on cash flow hedges” are reclassified
under the same account in the consolidated statement of income (loss) than the underlying hedged item.

For derivative financial instruments designated as fair value hedges, periodic changes in fair value are recognized in the
same account in the consolidated statement of income (loss) as the hedged item.

Derivative financial instruments that do not qualify for hedge accounting

In the normal course of business, 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 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 (loss). 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 (loss) 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.

Annual Report 2021 Transat A.T. inc. | 68

Transat A.T. inc.
Notes to Consolidated Financial Statements

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 or to financial liabilities
classified at amortized cost 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 at amortized cost

The Corporation assesses at each reporting date whether there is any objective evidence that a financial asset or a group of
financial assets classified at amortized cost is impaired. A financial asset or a group of financial assets is deemed to be
impaired 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. In addition, the Corporation
assesses expected credit losses related to its financial assets classified at amortized cost. Accordingly, the Corporation
must determine whether credit risk has increased significantly by comparing the risk of a default occurring on the asset as
at each reporting date with the risk of a default occurring on the asset as at the initial recognition date, taking into account
the information it has been able to obtain, including relevant forward-looking information. Impairment losses are
recognized through profit or loss. For Trade and other receivables, the Corporation applies the simplified approach
permitted by IFRS 9 which requires that full lifetime expected credit losses be recognized starting from initial recognition.

Impairment of non-financial assets

The Corporation assesses at each reporting date whether there is any indication that an asset or a CGU may be impaired. If
any indication exists, or when annual impairment testing for an asset or a CGU is required, the Corporation estimates the
recoverable amount of the asset or CGU. An asset’s recoverable amount is the higher of an asset’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; in which case, the impairment test is performed at the
CGU level. 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. 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 or CGU is considered impaired and is
written down to its recoverable amount. Impairment losses are recognized through profit or loss. These criteria are also
applied in assessing impairment of specific assets:

Annual Report 2021 Transat A.T. inc. | 69

Transat A.T. inc.
Notes to Consolidated Financial Statements

Intangible assets

Intangible assets with indefinite useful lives, such as trademarks, are tested for impairment annually and when
circumstances indicate that the carrying value may be impaired.

Reversal of impairment losses

For assets excluding goodwill, an assessment is made at each reporting date as to whether there is any indication that
previously recognized impairment losses may no longer exist or have decreased. If such indication exists, the Corporation
estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has
been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was
recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount or
exceed the carrying amount that would have been determined, net of depreciation or amortization, had no impairment loss
been recognized for the asset in prior years. The reversal is recognized in the statement of income (loss). Impairment
losses relating to goodwill cannot be reversed in future periods.

Provisions

Provisions are recognized when the Corporation has a present, legal or constructive obligation as a result of a past event, it
is probable that an outflow of resources will be required to settle the obligation and the cost can be reliably estimated.
Provisions are measured at their present value.

Provision for return conditions

Employee future benefits

The Corporation offers defined benefit pension arrangements to certain senior executives. Pension expense is based on
actuarial calculations performed annually by independent actuaries using the projected unit credit method. The
determination of benefit expense requires assumptions such as the discount rate to measure obligations, expected
mortality and expected rate of future compensation. Actual results will differ from estimated results based on
assumptions. The vested portion of past service cost arising from plan amendments is recognized immediately in the
statement of income (loss). The unvested portion is amortized on a straight-line basis over the average remaining period
until the benefits vest.

The liability recognized in the consolidated 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 (loss).

Contributions to defined contribution pension plans are expensed as incurred, which is as the related employee service
is rendered.

Annual Report 2021 Transat A.T. inc. | 70

Transat A.T. inc.
Notes to Consolidated Financial Statements

Revenue recognition

The Corporation recognizes revenue when it satisfies the performance obligation, that is, when the service is transferred
to the customer and the customer obtains control of that service. Amounts received from customers for services not yet
rendered, including amounts received from customers for trips that had to be cancelled and for which the Corporation has
issued travel credits, are included in current liabilities as Customer deposits and deferred revenues.

Revenue from contracts with customers includes revenue from passenger air transportation, revenue from the land portion
of holiday packages and commission revenue from travel agencies. Revenue from passenger air transportation is
recognized when such transportation is provided. Revenue from the land portion of holiday packages includes hotel
services, among others, and the related costs are recognized when the corresponding services are rendered over the
course of the stay. Commission revenue from travel agencies is recognized when passengers depart.

Other revenue includes, among others, aircraft subleasing, cargo and franchising revenue.

Revenue for which the Corporation provides multiple services, such as air transportation, hotel and travel agency services,
is recognized once the service is provided to the customer based on the Corporation’s accounting policy for revenue
recognition. These different services are considered as separate units of accounting, as each service has value to the
customer on a stand-alone basis, and the selling price is allocated using the expected cost plus a reasonable market
margin approach.

Breakdown of revenue from contracts with customers

The Corporation has determined that it conducts its activities in a single industry segment, namely holiday travel. With
respect to geographic areas, the Corporation operates mainly in the Americas, and serves two main programs that also
represent its two main product lines: the transatlantic program and the Americas program, which includes the sun
destinations program.

Contract balances

Contract balances with customers are included in Trade and other receivables, Prepaid expenses and Customer deposits
and deferred revenues in the consolidated statement of financial position. Trade accounts receivable included under Trade
and other receivables comprise receivables related to passenger air transportation, the land portion of holiday packages
and commissions. Payment is generally received before services are provided, but some tour operators make payments
after services are provided. Amounts receivable from credit card processors are included in Trade and other receivables.
Contract assets in Prepaid expenses include additional costs incurred to earn revenue from contracts with customers,
consisting of hotel room costs, costs related to the worldwide distribution system and credit card fees. These costs are
capitalized upon payment and expensed when the related revenue is recognized. Customer deposits and deferred revenues
represent amounts received from customers for services not yet provided.

Given that contracts with customers have a duration of one year or less, the Corporation applies the practical expedient
set forth in paragraph 121 of IFRS 15, Revenue from Contracts with Customers, under which no information is disclosed
about the remaining performance obligations that are part of a contract that has a duration of one year or less.

Government grants

When there is reasonable assurance that grant-related conditions will be met and grants will be received, the Corporation
recognizes income-related government grants as deduction from the related expenses.

The difference between the fair value of drawdowns under the unsecured credit facility related to travel credits and their
nominal value was recognized as Deferred government grant at the time of the drawdown. The proceeds from the deferred
government grant are recognized on the consolidated statement of income (loss) as a reduction of the corresponding
financing costs using the effective interest method.

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.

Annual Report 2021 Transat A.T. inc. | 71

Transat A.T. inc.
Notes to Consolidated Financial Statements

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 offers to certain employees various equity-settled and cash-settled share-based compensation plans
under which it receives services from employees.

Equity-settled transactions

For equity-settled share-based compensation [stock option plan and performance share unit plan], including share-based
payment transactions with a net settlement feature to satisfy withholding tax obligations, the compensation expense is
based on the grant date fair value of the share-based awards expected to vest over the period in which the performance
and/or service conditions are fulfilled, with a corresponding increase in the share-based payment reserve. Compensation
expense related to the stock option plan is calculated using the Black-Scholes model, whereas the performance share unit
expense is measured based on the closing price of the shares of the Corporation on the Toronto Stock Exchange at the
grant date adjusted to take into account the terms and conditions upon which the units were granted. For awards with
graded vesting, the fair value of each tranche is recognized through profit or loss over its respective vesting period. Any
consideration paid by employees on exercising these awards and the corresponding portion previously credited to the
share-based payment reserve are credited to share capital.

Cash-settled transactions

For cash-settled share-based compensation [deferred share unit plan and restricted share unit plan], the expense is
determined based on the fair value of the liability at the end of the reporting period until the award is settled. The value of
the compensation is measured based on the closing price of the shares of the Corporation on the Toronto Stock Exchange
adjusted to take into account the terms and conditions upon which the units were granted, and is based on the units that
are expected to vest. The expense is recognized over the period in which the performance or service conditions are
satisfied. At the end of each reporting period, the Corporation re-assesses its estimates of the number of awards that are
expected to vest and recognizes the impact of the revisions through profit or loss.

Employee share purchase plans

The Corporation’s contributions to the employee share purchase plans [stock ownership incentive and capital
accumulation plan and permanent stock ownership incentive plan] consist of shares acquired in the marketplace by the
Corporation. These contributions are measured at cost and are recognized over the period from the acquisition date to the
date that the award vests to the participant. Any consideration paid by the participant to purchase shares under the share
purchase plan is credited to share capital.

Earnings per share

Basic earnings per share is computed based on net income attributable to shareholders of the Corporation, divided by the
weighted-average number of Class A Variable Voting Shares and Class B Voting Shares outstanding during the year.

Diluted earnings per share is calculated by adjusting net income (loss) attributable to shareholders of the Corporation for
any changes in income or expense that would result from the exercise of dilutive elements. The weighted-average number
Class A Variable Voting Shares and Class B Voting Shares outstanding is increased by the weighted-average number of
additional Class A Variable Voting Shares and Class B Voting Shares that would have been outstanding assuming the exercise
of all dilutive elements.

Annual Report 2021 Transat A.T. inc. | 72

Transat A.T. inc.
Notes to Consolidated Financial Statements

Future change in accounting policies

Interbank Offered Rates [“IBOR”] Reform - Phase 2

Note 4

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.

Impact of COVID-19 pandemic on significant accounting estimates and judgments.

Amortization and impairment of non-financial assets

Depreciation of property, plant and equipment

Annual Report 2021 Transat A.T. inc. | 73

Transat A.T. inc.
Notes to Consolidated Financial Statements

Impairment of non-financial 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, that were approved by the Corporation’s Board of Directors, and do not include restructuring activities that
the Corporation is not yet committed to or significant future investments that will enhance the performance of the asset of
the CGU being tested. The recoverable amount is most sensitive to the discount rate used for the discounted cash flow
model as well as the expected future cash inflows and the growth rate used for extrapolation purposes.

The significant assumptions used in the impairment test are as follows:

–

An average discount rate of 14.75%, which is the Corporation’s weighted average capital cost. This rate was determined
taking into account a number of factors such as the risk-free interest rate, the required return on equity investments,
risk factors specific to the air transportation industry and risk factors specific to the Corporation’s CGUs;

A long-term growth rate of 2.0% beyond the 5-year period, based on the Bank of Canada’s target inflation rate;

A per gallon fuel price between US$1.93 and US$2.53, based on management's best estimates.

Impairment tests of the fleet of aircraft that will not be used between now and the expiry of their lease, the land held in
Mexico, the investment in a joint venture and trademarks were performed independent of the test performed on the
Corporation’s CGUs. The key assumptions used to determine the recoverable amount of non-financial assets, including a
sensitivity case analysis, are discussed in notes 9, 10 and 11. Given that various assumptions are used in determining
impairment charges, some inherent measurement uncertainty exists regarding such charges. Actual results will differ from
estimated results based on assumptions.

Annual Report 2021 Transat A.T. inc. | 74

Transat A.T. inc.
Notes to Consolidated Financial Statements

Discount rate of lease liabilities

Provision for return conditions

Liability related to warrants

Due to the existence of settlement mechanisms on a net cash or share basis, the warrants are recorded as derivative
financial instruments in the Corporation’s liabilities. As at the issuance date, the liability related to warrants, totalling
$41,491, was valued using the Black-Scholes model. The initial fair value of the warrants was also recorded under other
assets as a deferred financing cost related to the unsecured debt – LEEFF.

Employee future benefits

The cost of defined benefit pension plans and other post-employment benefits and the present value of the associated
obligations are determined using actuarial valuations. These actuarial valuations require the use of assumptions such as the
discount rate to measure obligations, expected mortality and expected rate of future compensation. Given that various
assumptions are used in determining the cost and obligations associated with employee future benefits, the actuarial
valuation process involves some inherent measurement uncertainty. Actual results will differ from estimated results based
on assumptions.

Taxes

Uncertainties exist with respect to the interpretation of complex tax regulations, changes in tax legislation and the amount
and timing of future taxable income. Given the Corporation’s wide range of international business relationships,
differences arising between actual results and the assumptions made, or future changes in such assumptions, could give
rise to future adjustments in the amounts of income taxes previously reported. Such interpretive differences may arise in a
variety of areas depending on the conditions specific to the respective tax jurisdiction of the Corporation’s subsidiaries.
The Corporation establishes provisions, based on reasonable estimates, for possible consequences of audits by the tax
authorities of the respective countries in which it operates. The amount of such provisions is based on various factors,
such as experience of previous tax audits and interpretations of tax regulations by the taxable entity and the responsible
tax authority.

Deferred income tax assets are recognized for all unused tax losses to the extent that it is probable that taxable profit will
be available against which the losses can be utilized. Significant judgment is required by management to determine the
amount of deferred income tax assets that can be recognized, based upon the likely timing and the level of future taxable
income together with future tax planning strategies.

Annual Report 2021 Transat A.T. inc. | 75

Transat A.T. inc.
Notes to Consolidated Financial Statements

Since the second quarter of the year ended October 31, 2020, due to the adverse impact of the COVID-19 pandemic on
our results, the Corporation ceased to recognize deferred tax assets and reduced the carrying amount of deferred tax
asset balances for which it was no longer able to justify recognition under IFRS. The Corporation measured the available
indicators to determine whether sufficient taxable income could be realized to utilize the existing deferred tax assets. As
discussed in note 2, due to the COVID-19 pandemic, the losses generated during the years ended October 31, 2021 and
2020 and the uncertainty related to the timing of the return of demand for leisure travel are adverse indications that
deferred tax assets may be realized. For the years ended October 31, 2021 and 2020, these adverse indications outweighed
the historical favourable indications and the Corporation did not record any deferred tax assets for the year ended
October 31, 2021 and reduced the balance of its deferred tax assets by $18,396 in 2020. The tax deductions underlying
these deferred tax assets remain available for future use against taxable income.

Note 5

Cash and cash equivalents in trust or otherwise reserved

As at October 31, 2021, cash and cash equivalents in trust or otherwise reserved included $128,154 [$242,622 as at
October 31, 2020] 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 an amount
of $42,157, $30,728 of which was recorded as non-current assets [$66,025 as at October 31, 2020, $56,268 of which was
recorded as non-current assets], which was pledged as collateral security against letters of credit.

Note 6

Trade and other receivables

Trade receivables

Government receivables

Cash receivable from lessors
Credit card processors receivables
Other receivables

2021
$

9,775

13,111

1,610
77,733

6,628

108,857

2020
$

5,565

26,017

18,970
19,177

25,605

95,334

As at October 31, 2021, government receivables included an amount of $1,296 related to the Canada Emergency Wage
Subsidy [“CEWS”] program [note 19] [$16,061 as at October 31, 2020].

Annual Report 2021 Transat A.T. inc. | 76

Transat A.T. inc.
Notes to Consolidated Financial Statements

Note 7

Financial instruments

Classification of financial instruments

The classification of financial instruments and their carrying amounts and fair values are detailed as follows:

As at October 31, 2021
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

- Prepayment option

Financial liabilities
Trade and other payables
Long-term debt
Liability related to warrants

As at October 31, 2020
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

- 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
Long-term debt

Carrying amount

Fair value
through other
comprehensive

income Amortized cost
$

Total
$

Fair value
$

Fair value
through net
income
$

433,195

170,311
—
—

1,377
604,883

—
—
36,557
36,557

—

—
—
—

—
—

—
—
—
—

—

433,195

—
95,746
33,926

170,311
95,746
33,926

—
129,672

1,377
734,555

130,632
464,557
—
595,189

130,632
464,557
36,557
631,746

130,632
466,557
36,557
633,746

Carrying amount

Fair value
through other
comprehensive

income Amortized cost
$

Total
$

Fair value
$

Fair value
through net
income
$

426,433

308,647
—
—

964
736,044

—

—
—
—

—
—

—

426,433

—
69,317
40,470

308,647
69,317
40,470

—
109,787

964
845,831

—

189,309

9,233
454
37,800
—
47,487

—
368
—
—
368

—
—
—
49,980
239,289

9,233
822
37,800
49,980
287,144

9,233
822
37,800
49,871
287,035

Annual Report 2021 Transat A.T. inc. | 77

Transat A.T. inc.
Notes to Consolidated Financial Statements

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 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 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 the value of financial assets and its own credit risk when determining the value of financial liabilities.

The fair value of the pre-payment option related to the unsecured debt – LEEFF was determined using a trinomial tree
approach based on the Hull-White model [note 14].

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 on a formula that
factors in financial indicators.

The fair value of long-term debt is measured using a generally accepted valuation method, i. e., by discounting long-term
debt-related cash outflows based on the prevailing market interest rate for similar debt, taking into account guarantees,
current credit market conditions and the Corporation’s credit risk.

The fair value of the liability related to warrants was measured using the Black-Scholes model [note 15].

The following table details the fair value hierarchy of financial instruments by level:

As at October 31, 2021
Financial assets
Derivative financial instruments

- Prepayment option

Financial liabilities
Liability related to warrants

Quoted prices
in active
markets
(Level 1)
$

Other
observable
inputs
(Level 2)
$

Unobservable
inputs
(Level 3)
$

Total
$

—
—

1,377
1,377

36,557
36,557

Annual Report 2021 Transat A.T. inc. | 78

Transat A.T. inc.
Notes to Consolidated Financial Statements

As at October 31, 2020
Financial assets
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)
$

Total
$

—
—

—

—
—
—

964
964

—
—

964
964

9,233

—

9,233

822
—
10,055

—
37,800
37,800

822
37,800
47,855

On May 31, 2021, following a mutual agreement between the two parties, the Corporation acquired the 30% interest held
by the minority shareholder of Trafictours, Canada inc. ["Trafictours"], thereby increasing its interest to 100%. Trafictours
is an incoming tour operator that offers excursions and other services to travellers vacationing in Mexico, the Dominican
Republic and Jamaica. The purchase price amounted to $24,500, which is lower than the amount of $37,800 recorded in
the Corporation’s consolidated financial statements as at October 31, 2020, $15,000 of which was paid on May 31, 2021;
the balance of $9,500 is payable on October 31, 2022.

Up to May 31, 2021, the minority shareholder of the subsidiary Trafictours could require that the Corporation purchase its
Trafictours shares at a price equal to a pre-determined formula, subject to adjustment according to the circumstances,
payable in cash. As at October 31, 2020, the fair value of this option was taken into account in the carrying amount of the
non-controlling interest.

The change in the non-controlling interest is as follows:

Balance, beginning of year
Net income (loss)
Other comprehensive income (loss)
Dividends
Change in fair value of non-controlling interest
Buyback of non-controlling interest

2021
$

37,800
121
(4,008)
—
(9,413)
(24,500)
—

2020
$
38,284
(220)
663
(849)
(78)
—
37,800

Management of risks arising from financial instruments

Annual Report 2021 Transat A.T. inc. | 79

Transat A.T. inc.
Notes to Consolidated Financial Statements

Credit and counterparty risk

Trade accounts receivable included under Trade and other receivables in the consolidated statement of financial position
totalled $9,775 as at October 31, 2021 [$5,565 as at October 31, 2020]. Trade accounts receivable consist of balances
receivable from 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, 2021 and
2020. As at October 31, 2021, approximately 11% [approximately 18% as at October 31, 2020] of accounts receivable were
over 90 days past due, whereas approximately 85% [approximately 77% as at October 31, 2020] 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.

Receivables from two credit card processors totalled $77,733 [$19,177 as at October 31, 2020]. The credit risk for these
receivables is negligible.

Pursuant to certain agreements entered into with its service providers, primarily hotel operators, the Corporation pays
deposits to capitalize on special benefits, including pricing, exclusive access and room allotments. These deposits totalled
$7,471 as at October 31, 2021 [$9,267 as at October 31, 2020]. These deposits are offset by purchases of person-nights at
these hotels and purchases from suppliers. Risk arises from the fact that these hotels might not be able to honour their
obligations to provide the agreed number of person-nights and that the suppliers might not be able to provide the required
services. The Corporation strives to minimize its exposure by limiting deposits to recognized and reputable hotel operators
and suppliers in its active markets. These deposits are spread across a large number of hotels and suppliers 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 $33,926 as at
October 31, 2021 [$40,470 as at October 31, 2020] 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, 2021, the cash security deposits with lessors that
have been claimed totalled $1,610 [$18,970 as at October 31, 2020] 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. The credit risk for these receivables is negligible.

The Corporation does not believe it was exposed to a significant concentration of credit risk as at October 31, 2021.

Annual Report 2021 Transat A.T. inc. | 80

Transat A.T. inc.
Notes to Consolidated Financial Statements

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 [see note 2]. 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, 2021 are summarized in the following table,
excluding lease liabilities, which are disclosed in note 14:

Maturing in
under 1 year
$

130,632
13,038
20,622
164,292

Maturing in
1 to 2 years
$
—
187,433
15,935
203,368

Maturing in
2 to 5 years
$
—
271,568
—
271,568

Maturing in
5 years and
up
$
—
315,678
—
315,678

Contractual
cash flows
Total
$

130,632
787,717
36,557
954,906

Carrying
amount
Total
$
130,632
464,557
36,557
631,746

Accounts payable and accrued liabilities
Long-term debt
Liability related to warrants
Total

Market risk

Foreign exchange risk

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)

2021
Financial statement measurement
currency of the group’s companies
U.S. dollar
Pound sterling
Canadian dollar
Other currencies
Total

U.S. dollar
$

Euro
$

Pound
sterling
$

Canadian
dollar
$

Other
currencies
$

Total
$

—
4
(909,884)
(1,153)
(911,033)

—
116
8,209
4
8,329

—
—
4,029
—
4,029

(13)
40,241
—
—
40,228

(1,280)
—
(850)
780
(1,350)

(1,293)
40,361
(898,496)
(369)
(859,797)

Annual Report 2021 Transat A.T. inc. | 81

Transat A.T. inc.
Notes to Consolidated Financial Statements

For the year ended October 31, 2021, 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 $8,794 increase or decrease in the Corporation’s net
loss for the year, whereas other comprehensive loss would have decreased or increased by $722. For sensitivity analysis
purposes, the impact of the U.S. dollar individually on the Corporation’s net loss for the year would have resulted in an
increase or decrease of $8,902. Also for sensitivity analysis purposes, the impact of any other single currency on the
Corporation’s income would not be material.

As at October 31, 2021, 0% of estimated requirements for fiscal 2022 were covered by foreign exchange derivatives. As at
October 31, 2020, due to a significant COVID-19 pandemic-related decrease in our capacity, 100% of estimated
requirements for winter 2021 were covered while no foreign exchange derivatives had been contracted for summer 2021.

Risk of fluctuations in fuel prices

As at October 31, 2021, since the Corporation did not contract any new fuel-related derivatives since March 2020, 0% of
estimated requirements for fiscal 2022 were covered by fuel-related derivatives [100% of estimated requirements for
winter 2021 were covered as at October 31, 2020].

Interest rate risk

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, 2021, a 25 basis point increase or decrease in interest rates, assuming that all other
variables had remained the same, would have resulted in a $301 increase or decrease in the Corporation’s net loss.

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 uses non-IFRS financial ratios to
evaluate its capitalization. These ratios are described in the following paragraphs.

Due to the COVID-19 pandemic and the revision of capital risk management, the Corporation is suspending its strategy of
maintaining its adjusted debt/equity ratio below 1. Until October 31, 2020, the Corporation monitored its capitalization
using the adjusted debt/equity ratio. This ratio is calculated by dividing total net debt by equity. Total net debt is equal to
the aggregate of long-term debt and lease obligations, less cash and cash equivalents [not held in trust or otherwise
reserved]. Although commonly used, this measure does not reflect the fair value of leases as it does not take into account
current rates for similar obligations with similar terms and risks.

Annual Report 2021 Transat A.T. inc. | 82

Transat A.T. inc.
Notes to Consolidated Financial Statements

Since October 31, 2021, the Corporation monitors its capitalization using the total net debt/total capitalization ratio,
targeting a ratio under 50% in the medium term. This ratio is calculated by dividing total net debt by total capitalization,
which is the sum of total net debt and market capitalization. Although commonly used, this measure does not reflect the
fair value of leases as it does not take into account current rates for similar obligations with similar terms and risks. The
calculation of the total net debt/total capitalization is summarized as follows:

Total net debt
Long-term debt
Liability related to warrants
Deferred financing costs
Lease liabilities
Cash and cash equivalents

Number of outstanding shares (in thousands)
Closing share price
Market capitalization
Total net debt
Total capitalization
Total net debt/Total capitalization ratio

2021
$

2020
$

463,180
36,557
(19,368)
956,358
(433,195)
1,003,532
37,747
4.39
165,710
1,003,532
1,169,242

49,980
—
—
853,906
(426,433)
477,453
37,747
4.65
175,524
477,453
652,977

85.8 %

73.1 %

The Corporation’s credit facilities are subject to certain covenants including a ratio related to operating results and a
minimum level of cash and cash equivalents. These ratios are monitored by management and submitted to the
Corporation’s Board of Directors on a quarterly basis. As at October 31, 2021, due to the COVID-19 pandemic, the
Corporation benefited from a temporary suspension of these ratios by its lenders up to October 31, 2022. Except for the
credit facility covenants, the Corporation is not subject to any third-party capital requirements.

Note 8

Deposits

Maintenance deposits with lessors
Deposits on leased aircraft and engines
Deposits with suppliers

Less current portion

2021
$

80,777
33,926
7,471
122,174
10,130
112,044

2020
$
103,638
40,470
9,267
153,375
16,471
136,904

Annual Report 2021 Transat A.T. inc. | 83

Transat A.T. inc.
Notes to Consolidated Financial Statements

Note 9

Property, plant and equipment

Fleet
$

Aircraft
equipment
$

Office
furniture
and
equipment
$

Land, building
and leasehold
improvements
$

Right of use
Fleet
$

Right of use
Real estate
and other
$

Total
$

162,773
3,160
(46,562)
(69)
(2,184)
—

136,183
713
(790)
(620)
—
—

58,649
580
(174)
(1,741)
—
(121)

82,966
—
—
(773)
—
(3,509)

1,457,559
241,754
(379,552)
(12,760)
(6,933)
—

148,971 2,047,101
246,639
(446,531)
(23,058)
(9,117)
(4,035)

432
(19,453)
(7,095)
—
(405)

117,118

135,486

57,193

78,684 1,300,068

122,450

1,810,999

102,260
10,808
(45,722)
(69)
—

71,272
8,850
(699)
(620)
—

39,844
5,225
(60)
(1,741)
(88)

29,591
1,394
—
(773)
(44)

806,496
117,268
(371,217)
(12,760)
—

81,256
7,045
(3,367)
(7,095)
(284)

1,130,719
150,590
(421,065)
(23,058)
(416)

67,277

78,803

43,180

30,168

539,787

77,555

836,770

49,841

56,683

14,013

48,516

760,281

44,895

974,229

Cost
Balance as at
October 31, 2020
Additions
Disposals
Write-offs
Depreciation
Exchange difference
Balance as at
October 31, 2021

Accumulated depreciation
Balance as at
October 31, 2020
Depreciation
Disposals
Write-offs
Exchange difference
Balance as at
October 31, 2021
Net book value as at
October 31, 2021

Annual Report 2021 Transat A.T. inc. | 84

Transat A.T. inc.
Notes to Consolidated Financial Statements

Fleet
$

Aircraft
equipment
$

Office
furniture
and
equipment
$

Land, building
and leasehold
improvements
$

Right of use
Fleet
$

Right of use
Real estate
and other
$

Total
$

328,737
6,839
(47,628)
(121,053)
(4,122)
—

125,102
25,852
(14,600)
—
(171)
—

60,037
5,089
(369)
(6,038)
—
(70)

115,558
1,294
—
(1,885)
(32,826)
825

1,344,885
269,227
(109,891)
(138)
(46,524)
—

130,017 2,104,336
332,949
24,648
(173,537)
(1,049)
(133,936)
(4,822)
(83,643)
—
932
177

162,773

136,183

58,649

82,966

1,457,559

148,971

2,047,101

250,001
18,372
(45,060)
(121,053)
—

74,717
11,152
(14,597)
—
—

40,388
5,642
(209)
(6,038)
61

29,167
2,392
—
(1,885)
(83)

741,597
145,810
(80,773)
(138)
—

77,021
9,262
(130)
(4,822)
(75)

1,212,891
192,630
(140,769)
(133,936)
(97)

102,260

71,272

39,844

29,591

806,496

81,256

1,130,719

60,513

64,911

18,805

53,375

651,063

67,715

916,382

Cost
Balance as at
October 31, 2019
Additions
Disposals
Write-offs
Depreciation
Exchange difference
Balance as at
October 31, 2020

Accumulated depreciation
Balance as at
October 31, 2019
Depreciation
Disposals
Write-offs
Exchange difference
Balance as at
October 31, 2020
Net book value as at
October 31, 2020

Fleet-related property, plant and equipment

During the year ended October 31, 2021, the Corporation early returned to lessors five leased aircraft, namely four Airbus
A330s and one Boeing 737-800, while two Airbus A330 leases expired. These returns resulted in disposals of property,
plant and equipment and accumulated amortization balances of $426,114 and $416,939, respectively. Moreover, a leased
Airbus A330 will no longer be used until its return to the lessor. An impairment charge representing the entire carrying
amount of the right-of-use assets, maintenance components and leasehold improvements for this aircraft was recognized
in the consolidated statement of loss under Special items; these impairment charges totalled $9,117 [note 20].

During the year ended October 31, 2020, the Corporation early returned four leased aircraft to the lessors: three Boeing
737-800s and one Airbus A330. These returns resulted in disposals of property, plant and equipment and accumulated
amortization balances of $118,886 and $91,341, respectively. Moreover, due to the significant COVID-19 pandemic-related
capacity reductions, ten leased aircraft, i.e., five Airbus A330s, three Airbus A321ceos and two Boeing 737-800s, will no
longer be used until they are returned to the lessors. An impairment charge corresponding to the full carrying amount of
the right-of-use assets, maintenance components and leasehold improvements for these aircraft was recorded under
Special items in the consolidated statement of loss; these impairment charges totalled $50,817 [note 20].

Land, building and leasehold improvements

During the year ended October 31, 2021, the Corporation renegotiated leases, resulting in a $19,453 reduction in real estate
right-of-use assets [note 21].

Annual Report 2021 Transat A.T. inc. | 85

Transat A.T. inc.
Notes to Consolidated Financial Statements

On May 20, 2021, due to the change in strategic objectives and the decline in liquidity as a result of the COVID-19
pandemic, the Corporation’s Board of Directors approved the discontinuation of the hotel division’s operations. As at
October 31, 2021 and 2020, the land in Mexico did not meet the required criteria to be presented as an asset held for sale.
Given the above-mentioned factors and the uncertainty surrounding future use of the land in Mexico, an assessment of its
recoverable amount compared with its carrying amount was made as at October 31, 2021 and 2020. The recoverable
amount of the land was determined based on fair value less costs to sell. Fair value less costs to sell was estimated using
level 3 input data, according to a valuation prepared by an independent, external valuator as at October 19, 2021 and
October 12, 2020, respectively. As at October 31, 2021, the recoverable amount of the land in Mexico was equal to its
carrying amount and accordingly, no impairment charge was required. As at October 31, 2020, the recoverable amount of
the land in Mexico was less than its carrying amount. Accordingly, as at October 31, 2020, the Corporation recognized an
impairment charge of $32,826 related to its land in Mexico, under Special items, in order to bring the carrying value of the
land to its recoverable amount of $50,675 as at October 31, 2020 [note 20].

Note 10

Intangible assets

Cost
Balance as at October 31, 2020

Additions

Write-offs

Exchange difference
Balance as at October 31, 2021

Accumulated amortization and impairment
Balance as at October 31, 2020
Amortization
Write-offs
Exchange difference
Balance as at October 31, 2021
Net book value as at October 31, 2021

Cost

Balance as at October 31, 2019

Additions

Write-offs and impairment

Exchange difference

Balance as at October 31, 2020

Accumulated amortization and impairment
Balance as at October 31, 2019

Amortization

Write-offs and impairment

Exchange difference

Balance as at October 31, 2020
Net book value as at October 31, 2020

Software
$

Trademarks Customer lists
$

Total
$

158,543

20,418

12,594

191,555

560

(2,720)

(104)
156,279

135,391
9,128
(2,720)
(86)
141,713
14,566

—

(27)
20,391

18,193
—
—
—
18,193
2,198

—

—
12,594

12,462
47
—
—
12,509
85

560

(2,720)

(131)
189,264

166,046
9,175
(2,720)
(86)
172,415
16,849

Software
$

Trademarks Customer lists
$

Total
$

162,800

20,381

12,789

195,970

2,456
(6,737)
24

—
—
37

12
(207)
—

2,468
(6,944)
61

158,543

20,418

12,594

191,555

130,710

15,809

12,599

11,410

(6,737)

135,391

23,152

—

2,384

—

18,193

2,225

(207)

—

12,462

132

159,118

11,480

(4,560)

166,046

25,509

Annual Report 2021 Transat A.T. inc. | 86

Transat A.T. inc.
Notes to Consolidated Financial Statements

Impairment test in 2021

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 October 31, 2020, the Corporation concluded that the recoverable value of the Canadian Affair trademark,
determined on a value-in-use basis, was lower than its carrying amount as a result of a decrease in revenues and expected
profitability for this trademark due to the COVID-19 pandemic. As a result, the Corporation recognized a $1,884
impairment charge.

As at October 31, 2020, the Corporation concluded that the recoverable value of its wholly owned agency trademark Marlin
Travel, determined based on value in use, was lower than its carrying amount as a result of a decrease in revenues and
expected profitability for this trademark due to the COVID-19 pandemic. As a result, the Corporation recognized a $500
impairment charge.

Note 11

Investment

The Corporation holds a 50% interest in Desarrollo Transimar, a Mexican company operating a hotel, the Marival Armony.
This interest in a joint venture is accounted for using the equity method.

The change in the investment in Desarrollo Transimar is detailed as follows:

Opening balance
Capital contribution
Share of net loss
Impairment
Translation adjustment
Closing balance

2021
$

14,509
821
(4,704)
—
(1,150)
9,476

2020
$
16,533
2,042
(1,172)
(3,100)
206
14,509

The investment was translated at the USD/CAD closing rate of 1.2397 as at October 31, 2021 [1.3336 as at October 31, 2020].

As at October 31, 2021, , the Corporation determined that there was no objective evidence of impairment of its investment
in a joint venture and that there was no increase in the value of the investment.

As at October 31, 2020, the Corporation determined that the declines in Desarrollo Transimar’s revenues and demand due
to the COVID-19 pandemic were objective evidence of impairment of its investment in a joint venture. Accordingly, the
Corporation performed an impairment test on its investment to compare its recoverable amount with its carrying amount.
The recoverable amount of the investment was determined based on the fair value less costs to sell. Fair value less costs to
sell was established based on a valuation prepared by an external and independent appraiser as at October 31, 2020, using
a discounted cash flow model based on Level 3 inputs. The cash flows used are management’s most plausible projections
given current and expected market conditions. The recoverable amount of the investment determined is less than its
carrying amount. Accordingly, as at October 31, 2020, the Corporation recognized a $3,100 impairment charge related to
its investment under Special items in order for the carrying amount of the investment to be equal to its recoverable
amount as at October 31, 2020. The pre-tax discount rate used for the investment’s impairment test was 7.1%.

Annual Report 2021 Transat A.T. inc. | 87

Transat A.T. inc.
Notes to Consolidated Financial Statements

The following table shows the condensed financial information regarding Desarrollo Transimar as at October 31, 2021 and
2020:

Statement of financial position:
Current assets
Non-current assets
Current liabilities
Non-current liabilities
Net assets
Impairment [note 20]
Carrying amount of investment

Statement of comprehensive income:
Revenues
Net loss and comprehensive loss
Share of net loss

Note 12

Other assets

Deferred financing costs

Sundry

2021
$

6,667
80,335
3,875
64,175
18,952
—
9,476

2020
$

7,830
97,323
5,654
64,282
35,217
(3,100)
14,509

12,402
(9,408)
(4,704)

11,054
(2,344)
(1,172)

2021
$

19,368

—

19,368

2020
$

—

253

The initial fair value of the warrants was also recorded under other assets as a deferred financing cost related to the
unsecured debt – LEEFF. Upon drawdown of the unsecured debt – LEEFF, the deferred financing costs recorded as an
asset are applied against the initial carrying amount of the liabilities recorded, pro rata to the amounts drawn [note 15].
Deferred financing costs also included financing costs related to the unused portion of the LEEFF credit facilities [note 14].

Note 13

Trade and other payables

Trade payables
Accrued expenses
Salaries and employee benefits payable
Government remittances
Non-controlling interest [note 7]

2021
$

2020
$

71,750
22,046
36,836
10,781
—
141,413

90,750
15,743
82,816
5,134
37,800
232,243

Annual Report 2021 Transat A.T. inc. | 88

Transat A.T. inc.
Notes to Consolidated Financial Statements

Note 14

Long-term debt and lease liabilities

The following table details the maturities and weighted average interest rates related to long-term debt and lease liabilities
as at October 31, 2021 and October 31, 2020. The current portion of lease liabilities includes deferred rent payments
related to aircraft leases and real estate leases of $80,989 and $2,340, respectively [$44,808 and $2,819 in
2020, respectively]:

Long-term debt

Unsecured debt - LEEFF
Unsecured credit facility - Travel credits
Subordinated credit facility
Revolving credit facility
Secured debt - LEEFF

Long-term debt
Lease liabilities

Fleet
Real estate and other

Lease liabilities
Total long-term debt and lease liabilities
Current portion of lease liabilities
Long-term debt and lease liabilities

Final maturity

2026
2028
2023
2023
2023

2022-2033
2021-2037

Weighted
average
effective
interest rate
%

13.03
14.28
10.22
4.93
5.43
11.39

5.31
5.36
5.31
7.30

2021
$

157,985
140,590
70,973
49,805
43,827
463,180

904,922
51,436
956,358
1,419,538
(171,557)
1,247,981

2020
$

—
—
—
49,980
—
49,980

772,925
80,981
853,906
903,886
(147,980)
755,906

Funding of $700,000 from the Government of Canada

On April 29, 2021, the Corporation entered into an agreement with the Government of Canada that allows it to borrow up
to $700,000 in additional liquidity through the LEEFF. The new fully repayable credit facilities made available by the Canada
Enterprise Emergency Funding Corporation ["CEEFC"] under the LEEF, which Transat would use only on an as-needed
basis, are as follows:

Secured debt - LEEFF

An amount of $78,000 that may be drawn down up to October 29, 2022 in the form of a non-revolving and secured credit
facility maturing on April 29, 2023; the facility is secured by a first-ranking charge on the assets of Canadian, Mexican,
Caribbean and European subsidiaries of the Corporation, subject to certain exceptions. The facility bears interest at
bankers’ acceptance rate plus a premium of 4.5% or at the financial institution’s prime rate plus a premium of 3.5%. This
credit facility becomes immediately payable in the event of a change in control. The terms of the agreement require the
Corporation to comply with certain financial ratios and covenants. As at October 31, 2021, the Corporation benefited from
a temporary suspension of the application of certain financial ratios and covenants by its lenders until October 31, 2022
and $44,000 was drawn down under this credit facility, which had a carrying amount of $43,827.

Unsecured debt - LEEFF

An amount of $312,000 that may be drawn down up to October 29, 2022 in the form of a non-revolving and unsecured
credit facility maturing on April 29, 2026, bearing interest at a rate of 5.0% in the first year, increasing to 8.0% in the
second year, and by 2.0% per annum thereafter, with the possibility of capitalization of interest in the first two years. This
credit facility becomes immediately payable in the event of a change in control. As at October 31, 2021, $176,000 was drawn
down under the credit facility, which has a carrying amount of $157,985. The credit facility included a pre-payment option,
which is an embedded derivative, whose fair value is recorded as a reduction of the carrying amount of the credit facility.
This embedded derivative is separated from the host contract and designated as at fair value through profit or loss, with
changes in its fair value recorded in the consolidated statement of income (loss) under Change in fair value of fuel-related
derivatives and other derivatives. As at October 31, 2021, the fair value of the pre-payment option of $1,377 was determined
using a trinomial tree approach based on the Hull-White model.

Annual Report 2021 Transat A.T. inc. | 89

Transat A.T. inc.
Notes to Consolidated Financial Statements

In the context of the financing arrangement, the Corporation issued a total of 13,000,000 warrants [note 15] related to
unsecured financing facility - LEEFF.

Unsecured credit facility related to travel credits

An amount of $310,000 in the form of an unsecured credit facility, which can be drawn down up to December 31, 2021, for
the sole purpose of making refunds to travellers who were scheduled to depart on or after February 1, 2020 and to whom a
travel credit was issued as a result of COVID–19. This credit facility matures on April 29, 2028 and bears interest at the rate
of 1.22%. In the event the secured debt – LEEFF and the unsecured debt – LEEFF have not been repaid, this credit facility
could become immediately payable in case of default related to the debt – LEEFF, including in the event of a change in
control, and in the absence of a waiver by the lenders to enforce them or in the event of a change of control without the
consent of the lenders. As at October 31, 2021, the credit facility was fully drawn down. As at October 31, 2021, the carrying
amount of the credit facility amounted to $140,590, and an amount of $167,394 was also recognized as deferred
government grant related to these drawdowns. During the year ended October 31, 2021, an amount of $5,056 was
recognized as proceeds from government grants as a reduction of financing costs.

In connection with the arrangement of these credit facilities, the Corporation has made certain commitments, including:

•

Making refunds to travellers who were scheduled to depart on or after February 1, 2020 and to whom travel
credits have been issued due to COVID-19. The Corporation started making refunds in early May 2021. As per
the agreement, to be eligible, customers had to indicate their desire for a refund before August 26, 2021;

Complying with restrictions on dividends, stock repurchases and executive compensation;

Maintaining active employment at its level of April 28, 2021.

Renewal of existing credit facilities

In addition to the new funding of $700,000 from the Government of Canada, the amounts already drawn on the existing
facilities will remain in place.

Revolving credit facility

On April 29, 2021,the Corporation amended its $50,000 revolving credit facility agreement for operating purposes. The
amended agreement, which expires on April 29, 2023, may be extended for a year at each anniversary date subject to
lender approval and the balance becomes immediately payable in the event of a change in control. Under the terms of the
agreement, funds may be drawn down by way of bankers’ acceptances or bank loans, denominated in Canadian dollars and
U.S. dollars. The agreement is secured by a first movable hypothec on the universality of assets, present and future, of the
Corporation’s Canadian, Mexican, Caribbean and European subsidiaries, subject to certain exceptions. The facility bears
interest at bankers’ acceptance rate or at LIBOR in U.S. dollars plus a premium of 4.5% or at the financial institution’s
prime rate plus a premium of 3.5%. The terms of the agreement require the Corporation to comply with certain financial
ratios and covenants. As at October 31, 2021, the Corporation benefited from a temporary suspension of the application of
certain financial ratios and covenants by its lenders until October 31, 2022 and the credit facility was fully drawn down.

Subordinated credit facility

On April 29, 2021, the Corporation amended its subordinated credit facility for operating purposes, reducing the amount
from $250,000 to $70,000 The amended agreement expires on April 29, 2023 and becomes immediately payable in the
event of a change in control. The agreement is secured by a second movable hypothec on the universality of assets, present
and future, of the Corporation’s Canadian, Mexican, Caribbean and European subsidiaries, subject to certain exceptions.
The credit facility bears interest at the bankers’ acceptance rate, plus a 6.0% premium, or the financial institution’s prime
rate, plus a 5.0% premium. Until October 31, 2022, an additional capitalizable premium of 3.75% will be added to interest.
The terms of the agreement require the Corporation to comply with certain financial ratios and covenants. As at
October 31, 2021, the Corporation benefited from a temporary suspension of the application of certain financial ratios and
covenants by its lenders until October 31, 2022 and the credit facility was fully drawn down.

Annual Report 2021 Transat A.T. inc. | 90

Transat A.T. inc.
Notes to Consolidated Financial Statements

Revolving credit facility agreement - Letters of credit

As at June 29, 2021, the Corporation amended its annually renewable revolving credit facility agreement for issuing letters
of credit, reducing the amount from $75,000 to $74,000. Under this agreement, the Corporation must pledge cash totalling
100% of the amount of the issued letters of credit. As at October 31, 2021, $38,161 had been drawn down under the facility
[$60,266 as at October 31, 2020], $30,728 of which 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.

Financing costs

Interest expense for the years ended October 31, 2021 and 2020 is detailed as follows:

Interest on lease liabilities
Accretion on provision for return conditions
Interest on long-term debt
Other interest
Financing costs

2021
$

45,567
983
16,520
13,954
77,024

2020
$
40,781
2,454
1,361
3,453
48,049

Other interest for the year ended October 31, 2021 consisted mainly of interest expense and standby and arrangement fees
related to the $70,000 subordinated credit facility.

Rent expense

Rent expense for the years ended October 31, 2021 and 2020 is detailed as follows:

Variable lease payments
Short-term leases
Aircraft rent
Variable lease payments
Short-term leases
Low value leases

2021
$
—
—
—
—
950
558
1,508

2020
$
4,810
18,548
23,358
1,002
3,618
556
28,534

Annual Report 2021 Transat A.T. inc. | 91

Transat A.T. inc.
Notes to Consolidated Financial Statements

Cash flows related to lease liabilities

The following table details cash flows related to repayments of lease liabilities for the year ended October 31, 2021:

Opening balance

Repayments
New lease liabilities (new contracts and
amendments)
Interest portion of deferred rent payments
Offset of rent payments and lease terminations
Exchange difference

2021

Non-cash
changes
$

Cash flows
$

Total Cash flows
$

2020

Non-cash
changes
$

853,906

Total
$

665,929

(74,539)

—

(74,539)

(82,505)

—

(82,505)

—
—
—

—

241,605
33,174
(45,222)

(52,566)

—
—
—

—

275,118
17,708
(25,022)

2,678

Closing balance

(74,539)

176,991 956,358

(82,505)

270,482 853,906

Analysis of maturities

Repayment of principal and interest on long-term debt and lease liabilities as at October 31, 2021 is detailed as follows.
Interest on long-term debt includes interest payable as at October 31, 2021 only. Lease liabilities denominated in
U.S. dollars were translated at the USD/CAD closing rate of 1.2397 as at October 31, 2021:

Year ended October 31

2022
$

2023
$

2024
$

2025
$

2026
$

2027 and
up
$

Total
$

Long-term debt obligations
Fleet

—
203,899

164,605
134,501

—
119,387

—
113,148

Real estate and other
Lease liabilities
Total

11,367

3,803

3,194

5,587

215,266
138,304
215,266 302,909

122,581
122,581

118,735
118,735

157,985
109,116

140,590 463,180
439,188 1,119,239
70,194
114,408 480,139 1,189,433
272,393 620,729 1,652,613

40,951

5,292

Note 9 provides the information required for right-of-use assets and depreciation. Note 25 details the information
required with respect to leases of aircraft that will be delivered in the coming years.

Note 15

Liability related to warrants

In the context of the financing arrangement related to the unsecured debt – LEEFF [note 14], on April 29, 2021, the
Corporation issued to the Government of Canada a total of 13,000,000 warrants for the purchase of an equivalent number
of shares of the Corporation (subject to certain limitations described below), with customary adjustment provisions, at an
exercise price of $4.50 per share exercisable over a 10-year period, representing 18.75% of the total commitment available
under the above unsecured debt – LEEFF. The warrants are to vest in proportion to the drawings that will be made. and
50% would be forfeited if the loan were to be repaid before April 29, 2022.

The number of shares issuable upon exercise of the warrants may not exceed 25% of the current number of issued and
outstanding shares, nor may it result in the holder owning 19.9% or more of the outstanding shares upon exercise of the
warrants. In the event of exercise of warrants that surpasses these thresholds, the excess will be payable in cash on the
basis of the difference between the market price of Transat's shares and the exercise price. Finally, in the event that the
unsecured debt – LEEFF is repaid in full by its maturity, Transat will have the right to redeem all of the warrants for a
consideration equal to their fair market value. The warrants will not be transferable prior to the expiry of the period giving
rise to the exercise of such redemption right. In addition, the holder of the warrants will benefit from registration rights to
facilitate the sale of the underlying shares and the warrants themselves (once the transfer restriction has been lifted).

Annual Report 2021 Transat A.T. inc. | 92

Transat A.T. inc.
Notes to Consolidated Financial Statements

Under the limitations set out in the preceding paragraph, if the 13,000,000 warrants are exercised:

•

a maximum of 9,436,772 warrants could be exercised through the issuance of shares;

3,563,228 warrants would be payable in cash on the basis of the difference between the market price of
Transat's shares and the exercise price.

Moreover, the parties may, by mutual agreement, exercise the 9,436,772 warrants for a settlement in cash. To the extent
that Transat shares are listed on a public market, the Corporation could also choose to settle the exercise of these
9,436,772 warrants on a net share basis, that is, by issuing shares based on the difference between Transat’s share market
price and the exercise price of warrants.

As at October 31, 2021, a total of 7,333,333 warrants had vested following drawdowns on the unsecured debt – LEEFF and
no warrants had been exercised.

Due to the existence of settlement mechanisms on a net cash or share basis, the warrants are recorded as derivative
financial instruments in the Corporation’s liabilities. As at the issuance date, using the Black-Scholes model, the fair value
of the 13,000,000 warrants issued was estimated at $41,491 and recorded as a liability. In its model, the Corporation used a
risk-free interest rate of 1.66%, expected volatility of 55.8% and a contractual term of 10 years. The initial fair value of the
warrants was also recorded under other assets as a deferred financing cost related to the unsecured debt – LEEFF. Upon
drawdown of the unsecured debt – LEEFF, the deferred financing costs recorded as an asset are applied against the initial
carrying amount of the liabilities recorded, pro rata to the amounts drawn. The resulting discount will be included in the
calculation of the effective rate of each drawdown in conjunction with the expected cash flows to repay such drawdowns

The liability related to warrants is remeasured at the end of each period at fair value through profit or loss. It is classified in
Level 3 of the fair value hierarchy.

At each reporting date, the fair value of the liability related to warrants is determined using the Black-Scholes model, which
uses significant inputs that are not based on observable market data, hence the classification in Level 3.

The change in the liability related to warrants for the year ended October 31 is detailed as follows:

Opening balance

Issuance

Revaluation of liability related to warrants

Closing balance
Current liability

Non-current liability

Closing balance

2021
$

—

41,491

(4,934)

36,557
20,622

15,935

36,557

To remeasure the liability related to warrants classified in Level 3, the Corporation used the Black-Scholes model. The main
non-observable input used in the model is expected volatility, which was estimated at 56.3% as at October 31, 2021. A 5.0%
increase in the expected volatility used in the pricing model would result in a $2,165 increase in the liability related to the
warrants as at October 31, 2021.

Annual Report 2021 Transat A.T. inc. | 93

Transat A.T. inc.
Notes to Consolidated Financial Statements

Note 16

Provision for return conditions

The provision for return conditions relates to contractual obligations to return leased aircraft and engines at the end of the
leases under predetermined maintenance conditions. The change in the provision for return conditions for the year ended
October 31 is detailed as follows:

Opening balance
Additional provisions
Change in estimate
Unused amounts reversed
Accretion
Closing balance
Current provisions
Non-current provisions
Closing balance

2021
$

143,598
28,574
(18,527)
(28,384)
983
126,244
3,065
123,179
126,244

2020
$
155,120
35,791
1,638
(51,405)
2,454
143,598
14,963
128,635
143,598

Changes in estimates mainly include changes to the discount rate for the provision for return conditions. As at
October 31, 2021, the unused amounts recovered included $7,521 related to future repairs to aircraft that will not be made,
$6,610 related to the leases that matured during the year and $14,253 related to reversals of provisions for return
conditions for aircraft whose leases had been terminated.

As at October 31, 2020, additional provisions included $6,395 related to impairment of leased aircraft [note 20]. In
addition, the unused amounts recovered included $16,705 related to reversals of provisions for return conditions for
aircraft whose leases had been terminated.

Note 17

Other liabilities

Employee benefits [note 24]
Other liabilities

Note 18

Equity

Authorized share capital

Class A Variable Voting Shares

2021
$

27,120
377
27,497

2020
$
49,862
353
50,215

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”], carry one vote per share at any meeting of
shareholders subject to an automatic reduction of the voting rights attached thereto in the event that [i] any non-
Canadian, individually or with persons of the same group, holds more than 25% of the votes cast, [ii] any non-Canadian
authorized to provide an air service in any jurisdiction (in aggregate) holds more than 25% of the votes cast, or [iii] the
votes that would be cast by holders of Class A Shares would be more than 49%. If any of the above-mentioned applicable
limitations are exceeded, the votes that should be attributed to holders of Class A Shares will be attributed as follows:

•

first, if applicable, there will be a reduction in the voting rights of any non-Canadian individual
(including a non-Canadian authorized to provide an air service) whose votes total more than 25% of
the votes cast, so that such non-Canadian holder may never hold more than 25% (or such other
percentage as may be prescribed by an act or regulation of Canada and approved or adopted by the
directors of the Corporation) of the total votes cast at a meeting;

next, if applicable, and once the pro rata distribution as described above is made, a further pro rata
reduction will be made in the voting rights of all holders of Class A non-Canadian Shares authorized to

Annual Report 2021 Transat A.T. inc. | 94

Transat A.T. inc.
Notes to Consolidated Financial Statements

provide an air service, so that such non-Canadian holders may never hold votes totalling more than
25% (or such other percentage as may be prescribed by law or regulation of Canada and approved or
adopted by the directors of the Corporation) of the total votes cast, all classes combined, at a
meeting;

•

last, if applicable, and once the two pro rata allocations described above have been made, a
proportional reduction will be made in the voting rights of all holders of Class A Shares, so that all
non-Canadian holders of Class A Shares may never hold votes totalling more than 49% (or such other
percentage as may be prescribed by law or regulation of Canada and approved or adopted by the
directors of the Corporation) of the total votes cast, all classes combined, at a meeting.

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

Class B Voting Shares

An unlimited number of participating Class B Voting Shares [“Class B Shares”], which may only be owned and controlled by
Canadians within the meaning of the CTA, and entitling such Canadians to one vote per Class B Share at any meeting of the
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

During the year ended October 31, 2021 and the year ended October 31, 2020, no changes were made to the Class A and
Class B shares.

As at October 31, 2021, the number of Class A Shares and Class B Shares stood at 1,694,125 and 36,052,965, respectively
[3,785,312 and 33,961,778, respectively, as at October 31, 2020], for a total number of shares of 37,747,090 with a carrying
amount of $221,012.

Subscription rights plan

The shareholders’ subscription rights plan [the “rights plan”] entitles holders of Class A Shares and Class B Shares to
acquire, under certain conditions, additional shares at a price equal to 50% of their market value at the time the rights are
exercised. The rights plan is designed to give the Board of Directors time to consider alternatives, thus allowing
shareholders to receive full and fair value for their shares. The time limit for a permitted bid under the rights plan is
105 days. The rights plan terminated on the day after the annual general meeting on March 12, 2020.

Stock option plan

Under the stock option plan, the Corporation may grant up to a maximum of 1,122,337 additional Class A Shares or
Class B Shares to eligible persons at a share price equal to the weighted average price of the shares during the five trading
days prior to the option grant date. 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. Under the plan, in the event of a change of control, all outstanding
stock options vest.

Annual Report 2021 Transat A.T. inc. | 95

Transat A.T. inc.
Notes to Consolidated Financial Statements

The following tables summarize all outstanding options:

Beginning of year
Granted
Cancelled
Expired
End of year
Options exercisable, end of year

2021

2020

Number of
options
1,738,570
150,000
(128,953)
(651,355)
1,108,262
958,262

Weighted
average price
($)
10.13
4.61
10.96
13.07
7.55
8.01

Number of
options
1,748,570
—
(2,000)
(8,000)
1,738,570
1,557,042

Weighted
average price
($)
10.15
—
19.24
11.82
10.13
10.03

Outstanding options

Options exercisable

Range of exercise price
$
4.61 to 7.48
8.73 to 11.22

Number of
options
outstanding as
at October 31,
2021

Weighted
average
remaining life

722,758
385,504
1,108,262

1.9
1.9
1.9

Number of
options
exercisable as
at October 31,
2021

572,758
385,504
958,262

Weighted
average price
$
6.40
9.71
7.55

Weighted
average price
$
6.87
9.71
8.01

Compensation expense related to stock option plan

During the year ended October 31, 2021, the Corporation granted 150,000 stock options [nil in 2020] to its 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 were
as follows:

Risk-free interest rate
Expected life
Expected volatility
Dividend yield
Weighted average fair value at date of grant

2021
0.96 %
4 years
67.0 %
0.0 %
$2.34

During the year ended October 31, 2021, the Corporation recorded a nil compensation expense [nil compensation expense
in 2020] for its stock option plan.

Performance share unit plan

Performance share units [“PSUs”] are awarded in connection with the performance share unit plan for senior executives.
Under this plan, each eligible senior executive receives a portion of his or her compensation in the form of PSUs. PSUs
consist of a number equal to a percentage of the participant’s basic salary, divided by the fair market value of Class B
Shares as at the award date. Once vested, PSUs entitle participants to receive an equivalent number of shares or a cash
payment, at the Corporation's option awarded vest 100% in mid-January three years following the award, provided the
performance criteria determined on the 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. Under the plan, in the event
of a change of control, all outstanding PSUs vest.

During the years ended October 31, 2021 and 2020, the Corporation granted no PSUs to its key executives and employees.
As at October 31, 2021, there were nil PSUs awarded [435,662 as at October 31, 2020]. During the year ended
October 31, 2021, the Corporation recognized a compensation expense reversal of $1,843 [compensation expense reversal
of $3,807 in 2020] for its performance share unit plan, which was recorded in full as a cash‑settled transaction.

Annual Report 2021 Transat A.T. inc. | 96

Transat A.T. inc.
Notes to Consolidated Financial Statements

Share purchase plan

A share purchase plan is available to eligible employees of the Corporation and its subsidiaries. Under the plan, as at
October 31, 2021, the Corporation was authorized to issue up to 355,790 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 no shares [nil Class B Shares in 2020] 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, 2021, the Corporation recognized no compensation expense [nil compensation expense
in 2020] 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, 2021, the Corporation recognized no compensation expense [no compensation expense
in 2020] for its permanent stock ownership incentive plan.

Deferred share unit plan

Deferred share units [“DSUs”] are awarded in connection with the independent director deferred share unit plan. Under
this plan, each independent director receives a portion of his or her compensation in the form of DSUs. The value of a DSU
is determined based on the average closing share price for the five trading days prior to the award of the DSUs. The DSUs
are repurchased by the Corporation when a director ceases to be a plan participant. For the purpose of repurchasing
DSUs, the value of a DSU is determined based on the average closing share price for the five trading days prior to the
repurchase of the DSUs.

As at October 31, 2021, the number of DSUs awarded amounted to 302,203 [306,775 as at October 31, 2020]. During the
year ended October 31, 2021, the Corporation recorded a compensation expense of $171 [compensation expense reversal
of $3,289 in 2020] for its deferred share unit plan.

Annual Report 2021 Transat A.T. inc. | 97

Transat A.T. inc.
Notes to Consolidated Financial Statements

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. Under the plan, in the event of a change of control, all
outstanding RSUs vest.

As at October 31, 2021, there were no PSUs awarded [149,097 as at October 31, 2020]. During the year ended
October 31, 2021, the Corporation recorded a compensation expense reversal of $4,687 [compensation expense reversal of
$928 in 2020] for its restricted share unit plan.

Warrants

No warrants were exercised during the year ended October 31, 2021. Accordingly, the Corporation issued no shares related
to the exercise of warrants [note 15].

Loss per share

Basic and diluted loss per share was calculated as follows:

(in thousands of dollars, except per share data)

NUMERATOR
Net loss attributable to shareholders used in
computing basic loss per share
Revaluation of liability related to warrants
Net loss attributable to shareholders
used in computing diluted loss per share

DENOMINATOR
Adjusted weighted average number of outstanding shares

Effect of dilutive securities

Stock options

Warrants
Adjusted weighted average number of outstanding shares
used in computing diluted loss per share
Loss per share
Basic
Diluted

2021
$

2020
$

(389,559)
—

(496,545)
—

(389,559)

(496,545)

37,747

—

37,747

(10.32)
(10.32)

(13.15)
(13.15)

Given the loss recorded for the year ended October 31, 2021, the 1,108,262 outstanding stock options and the
13,000,000 warrants issued were excluded from the calculation due to their anti-dilutive effect [1,746,570 stock options
and nil warrants for the year ended October 31, 2020].

Annual Report 2021 Transat A.T. inc. | 98

Transat A.T. inc.
Notes to Consolidated Financial Statements

Note 19

Additional disclosure on revenue and expenses

Breakdown of revenue from contracts with customers

Revenue from contracts with customers is broken down as follows:

Customers

Transatlantic
Americas

Other
Total revenues

Contract balances

Contract balances with customers are detailed as follows:

Trade accounts receivable [note 6]
Other receivables [note 6]
Contract costs, included in Prepaid expenses
Customer deposits and deferred revenues

Salaries and employee benefits

Salaries and other employee benefits
Long-term employee benefits [note 24]

2021
$

2020
$

26,383
88,611
9,824
124,818

164,804
1,102,080
35,185
1,302,069

2021
$

9,775
77,733
5,543
292,158

2020
$
5,565
22,677
14,256
608,890

2021
$

117,016
5,754
122,770

2020
$
236,241
3,009
239,250

Since March 15, 2020, the Corporation made use of the CEWS for its Canadian workforce, which enabled it to finance part
of the salaries of its staff still at work and, until August 28, 2021, to offer employees on temporary layoff to receive a
portion of their salary equivalent to the amount of the grant received, with no work required. The Corporation determined
it fulfilled the employer eligibility criteria and claimed the CEWS for the period from March 15, 2020 to October 23, 2021.

For the year ended October 31, 2021, the Corporation recognized a total deduction of $106,659 from Salaries and other
employee benefits expense related to CEWS, including $25,758 for active employees. For the year ended October 31, 2020,
the Corporation recognized a total deduction of $113,596 from Salaries and other employee benefits expense related to
CEWS, including $38,782 for active employees.

Depreciation and amortization

Property, plant and equipment
Intangible assets subject to amortization
Other assets

2021
$

150,590
9,175
—
159,765

2020
$
192,630
11,480
2
204,112

Annual Report 2021 Transat A.T. inc. | 99

Transat A.T. inc.
Notes to Consolidated Financial Statements

Note 20

Special items

Special items related to the transaction with Air Canada

Termination payment
Professional fees
Reversal of compensation expense

Other special items

Impairment of contract costs and other assets
Impairment of the fleet (including right-of-use assets) [note 9]
Severance
Provision for return conditions of impaired leased aircraft [note 15]
Impairment of the land in Mexico [note 9]
Impairment of the investment in a joint venture [note 11]
Impairment of trademarks [note 10]

2021
$

(12,500)
6,106
(6,223)
(12,617)

24,333
9,117
6,739
—
—
—
—
40,189
27,572

2020
$

—
7,753
(4,491)
3,262

—
50,817
891
6,395
32,826
3,100
2,384
96,413
99,675

Special items related to the transaction with Air Canada

Special items generally include restructuring charges and other significant unusual items as well as impairment losses.
During the year ended October 31, 2021, the agreed upon amount of $12,500 in termination fees for the arrangement
agreement settled by Air Canada, $6,106 in professional fees as well as $6,223 in reversals of compensation expenses were
recorded in connection with the terminated transaction with Air Canada, compared with $7,753 in professional fees and
$4,491 in reversals of compensation expenses for the previous fiscal year. The compensation expenses are mainly related to
the stock-based compensation plans which include a change of control clause and to adjustments related to stock-based
compensation plan provisions. Compensation expenses recorded as special items resulted from Air Canada’s offer, which
made it likely that the change of control criteria included in some of the Corporation’s stock-based compensation plans
would be met, and also change the vesting period. Following the termination of the arrangement agreement with Air
Canada, the Corporation recognized reversals of compensation expenses to reduce or even cancel certain provisions
related to stock-based compensation plans, for which the performance criteria threshold has not been met.

Other special items

As at October 31, 2021, other special items included $21,917 for impairment of contract balances related to commissions,
costs related to the global distribution system and credit card fees that will not be reimbursed to the Corporation in
connection with refunds made to travellers. The Corporation also recorded an impairment charge of $2,416 for the
deposits related to the impaired aircraft.

Due to the COVID-19 pandemic, the Corporation started reducing its workforce through permanent layoffs. Termination
benefits in the amount of $6,739 ($891 in 2020) were recognized in 2021, of which $5,220 was included in trade and other
payables as at October 31, 2021. The provision includes the costs estimated for termination notices and benefits provided
for in the collective agreements of the Corporation and applicable laws, the amount of which could be adjusted based on
various factors such as the relevant advanced notice, the number of employees being laid off and the period during which
they will remain laid off.

Annual Report 2021 Transat A.T. inc. | 100

Transat A.T. inc.
Notes to Consolidated Financial Statements

Note 21

Loss (gain) on asset disposals

Lease termination
Engine disposals
Other

2021
$

(17,193)
—
(154)
(17,347)

2020
$
19,319
(8,094)
46
11,271

The gain on asset disposals relates to asset disposals and lease terminations.

During the year ended October 31, 2021, due to the significant reduction in capacity related to the COVID-19 pandemic, the
Corporation early returned five leased aircraft to the lessors: four Airbus A330s and one Boeing 737-800. The termination
of these aircraft leases gave rise to a gain of $14,580 resulting from the reversal of lease liabilities of $19,992, property,
plant and equipment of $9,274 and the provision for return conditions of $3,862. The carrying amount of right-of-use
assets for four of these terminated aircraft leases were fully impaired during the year ended October 31, 2020. Moreover,
during the year ended October 31, 2021, the Corporation recognized a gain on real estate lease termination of $2,613 that
stemmed from the reversal of $22,066 lease liabilities and $19,453 property plant and equipment.

During the year ended October 31, 2020, due to the significant reduction in capacity related to the COVID-19 pandemic,
the Corporation early returned four leased aircraft to the lessors: three Boeing 737-800s and one Airbus A330, and also
terminated the leases of certain travel agencies. These lease terminations resulted in the recognition of a $19,319 loss. In
addition, during the year ended October 31, 2020, the Corporation disposed of Airbus A310 engines with a nil carrying value
for an amount of $8,094, which corresponds to the amount recorded as a gain on disposal of assets.

Note 22

Income Taxes

The major components of the income tax expense for the years ended October 31 were:

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
Recognition of previously unrecognized temporary difference

Income tax expense

2021
$

(172)
120
(52)

1,837
(19)
(1,743)
75
23

2020
$

(1,905)
(2,471)
(4,376)

10,009
2,159
—
12,168
7,792

Annual Report 2021 Transat A.T. inc. | 101

Transat A.T. inc.
Notes to Consolidated Financial Statements

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-taxable items
Unrecognized losses for the current year
Recognition of previously unrecognized temporary
difference
Derecognition of a future income tax asset
Adjustments for prior years
Effect of tax rate changes
Other

2021

%
26.5

—
(1.0)
(25.9)

0.4
—
—
0.1
(0.1)
—

(103,194)

34
3,845
100,745

(1,743)
—
101
(143)
378
23

2020

26.5

0.4
(0.5)
(24.9)

—
(3.0)
0.1
0.0
(0.1)

(1.6)

(128,774)

(1,737)
2,471
120,925

—
14,559
(312)
43
617
7,792

The applicable statutory income tax rate was 26.5% for the year ended October 31, 2021 [26.5% for the year ended
October 31, 2020].

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 2021 and 2020 were as follows:

Non-capital losses
Excess of tax value over net carrying value of:

Property, plant and equipment and software
Intangible assets, excluding software

Lease liabilities
Derivative financial instruments
Other financial assets and other assets
Provisions
Deferred tax

2021

Balance,
beginning of
year
$

5,279

Recognized
in net
income
$
(270)

Recognized in
other
comprehensive
income
$
—

Exchange
differences
$
—

Balance, end
of year
$
5,009

(209,414)
—
208,686
(68)
(5,349)
192
(674)

(20,409)
111
19,146
(7)
1,513
(159)
(75)

—
—
—
75
—
—
75

61
—
—
—
—
—
61

(229,762)
111
227,832
—
(3,836)
33
(613)

Annual Report 2021 Transat A.T. inc. | 102

Transat A.T. inc.
Notes to Consolidated Financial Statements

2020

Balance,
beginning of
year
$

Recognized
in net
income
$

2,207

Recognized in
other
comprehensive
income
$
—

Exchange
differences
$
—

Balance, end
of year
$
5,279

3,072

(187,091)
702
176,218
1,896
271
13,088
12,451
(2,211)
18,396

Non-capital losses
Excess of tax value over net carrying value of:

Property, plant and equipment and software
Intangible assets, excluding software

Lease liabilities
Derivative financial instruments
Other financial assets and other assets
Provisions
Employee benefits
Deferred donation
Deferred tax

The net deferred tax assets are detailed below:

Deferred tax assets
Deferred tax liabilities
Net deferred tax assets

Non-capital losses recorded in various jurisdictions expire as follows:

Year of expiry
2022 - 2026
2027 - 2031
2032 - 2036
2037 - 2041
With no expiry

(22,338)
(702)
32,468
1,116
(5,620)
(12,896)
(8,614)
2,211
(12,168)

—
—
—
(3,080)
—
—
(3,837)
—
(6,917)

15
—
—
—
—
—
—
—
15

(209,414)
—
208,686
(68)
(5,349)
192
—
—
(674)

2021

2020

$
—
(613)
(613)

$
—
(674)
(674)

Unrecognize Recognized
$
—
—
—
17,719
1,650
19,369

5,050
10,152
706
634,804
4,414
655,126

As at October 31, 2021, non-capital losses carried forward and other unrecognized temporary differences were as follows:

Non-capital losses
Capital losses
Excess of tax value over net carrying value of:
Property, plant and equipment and software
Intangible assets, excluding software

Lease liabilities
Other financial assets and other assets
Provisions
Employee benefits
Deferred donations

Canada

Federal
$

628,955
2,519

Quebec
$

633,088
2,519

10,077
3,148
98,143
17,142
68,578
27,120
749
856,431

9,100
3,148
98,143
17,142
68,578
27,120
1,221
860,059

Mexico
$

13,500
—

25,578
—
76
—
—
—
—
39,154

Other
$

12,671
—

Total
$
655,126
2,519

44
—
45
—
—
—
—
12,760

35,699
3,148
98,264
17,142
68,578
27,120
749
908,345

Annual Report 2021 Transat A.T. inc. | 103

Transat A.T. inc.
Notes to Consolidated Financial Statements

The Corporation recognized a deferred tax liability of $4,900 on retained earnings of one of its foreign subsidiaries. The
Corporation recognized no other deferred tax liability on retained earnings of its foreign subsidiaries and its joint venture
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.

Note 23

Related party transactions and balances

The consolidated financial statements include those 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.
11061987 Florida Inc.
Transat Holidays USA Inc.
The Airline Seat Company Ltd.
Air Consultants France S.A.S.
Caribbean Transportation Inc.
CTI Logistics Inc.
Sun Excursions 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.
Promociones Residencial Morelos S.A. de C.V.
Promotora Turística Regional S.A. de C.V.
Trafictours de Mexico S.A. de C.V.
Desarrollo Transimar S.A. de C.V.

Country of
incorporation

Canada
Canada
Canada
United States
United States
United Kingdom
France
Barbados
Barbados
Barbados
Dominican Republic
Dominican Republic
Dominican Republic
Dominican Republic
Jamaica
Mexico
Mexico
Mexico
Mexico
Mexico

Interest (%)

2020

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
100.0
100.0
70.0
50.0

2021

100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
50.0

On May 31, 2021, the Corporation, which held 70% of the shares of Trafictours, acquired the 30% interest held by the
minority shareholder following a mutual agreement between the two parties [note 7].

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

2021
$

5,876
4,655

2020
$
7,264
1,567

Annual Report 2021 Transat A.T. inc. | 104

Transat A.T. inc.
Notes to Consolidated Financial Statements

Note 24

Employee future benefits

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 $30,728 letter of credit to the trustee [see note 5].
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, 2021 and 2020:

Present value of obligations, beginning of year
Current service cost
Cost of plan amendments
Financial costs
Benefits paid
Experience losses (gains)
Actuarial loss (gain) on obligation
Present value of obligations, end of year

2021
$

49,862
1,360
3,295
1,099
(29,094)
2,350
(1,752)
27,120

The following table provides the components of retirement benefit expense for the years ended October 31:

Current service cost
Cost of plan amendments
Interest cost
Total cost of retirement benefits

2021
$

1,360
3,295
1,099
5,754

2020
$
46,986
1,567
—
1,442
(960)
(656)
1,483
49,862

2020
$
1,567
—
1,442
3,009

The following table indicates projected payments under defined benefit pension plan arrangements as at October 31, 2021:

1 year and less
1 to 5 years
5 to 10 years
10 to 15 years
15 to 20 years

$
1,135
5,195
7,039
7,878
7,422
28,669

The weighted average duration of the defined benefit obligation related to pension arrangements was 15.0 years as at
October 31, 2021.

Annual Report 2021 Transat A.T. inc. | 105

Transat A.T. inc.
Notes to Consolidated Financial Statements

The significant actuarial assumptions used to determine the Corporation’s retirement benefit obligation and expense were
as follows:

Retirement benefit obligation
Discount rate
Rate of increase in eligible earnings

Retirement benefit expense
Discount rate
Rate of increase in eligible earnings

2021
%

3.25
2.75

2.75
2.75

2020
%

2.75
2.75

3.00
2.75

A 0.25 percentage point increase in the actuarial assumptions below would have the following impacts, all other actuarial
assumptions remaining the same:

Increase (decrease)
Discount rate
Rate of increase in eligible earnings

Retirement benefit expense
for the year ended
October 31, 2021
$
(6)
18

Retirement benefit
obligations as at
October 31, 2021
$
(931)
109

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

2021
$
—
27,120
27,120

2020
$
—
49,862
49,862

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, 2019

Actuarial losses
Income taxes
October 31, 2020
Actuarial losses
October 31, 2021

$
(10,590)
(827)
(3,837)
(15,254)
(597)
(15,851)

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 correspond to the cost recognized, amounted to $6,114 for the
year ended October 31, 2021 [$10,656 for the year ended October 31, 2020].

Annual Report 2021 Transat A.T. inc. | 106

Transat A.T. inc.
Notes to Consolidated Financial Statements

Note 25

Commitments and contingencies

Leases and other commitments

As at October 31, 2021, the Corporation was party to agreements to lease seven Airbus A321neos for delivery up to 2023.
The Corporation also had leases with a term of less than 12 months and/or for low value assets, as well as purchase
obligations under various contracts with suppliers, in particular related to information technology service contracts
entered into in the normal course of business. The following table presents the minimum payments due under leases for
aircraft to be delivered over the next few years and leases with a term of less than 12 months and/or for low value assets,
as well as the purchase obligations:

Year ended October 31

Leases (aircraft)
Purchase obligations

Litigation

2022
$
7,516
9,091
16,607

2023
$

17,630
4,555
22,185

2024
$

32,198
2,948
35,146

2025
$

45,198
4,750
49,948

2026
$

2027 and
up
$

Total
$
394,657 542,397
21,344
563,741

45,198
—

—
45,198 394,657

Other

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. No provisions are made in connection with this
issue, which could result in expenses of approximately $16,200, as the Corporation intends to vigorously defend itself 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 was recognized as income taxes receivable as at
October 31, 2021 and 2020.

Annual Report 2021 Transat A.T. inc. | 107

Transat A.T. inc.
Notes to Consolidated Financial Statements

Note 26

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 5, 7, 14, 24 and 25 to the consolidated financial statements provide information about some of these agreements.
The following constitutes additional disclosure.

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. 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,
2021, the total amount of these guarantees unsecured by deposits was $425. Historically, the Corporation has not made
any significant payments under such agreements. As at October 31, 2021, no amounts had been accrued with respect to the
above-mentioned agreements.

Irrevocable credit facility unsecured by deposits

Following the Government of Canada funding and amendments to the existing revolving credit facility agreement and
subordinated credit facility agreement, on May 28, 2021, the lender terminated the guarantee facility that allowed the
Corporation to issue letters of credit to certain of its service providers, for a maximum term of three years and for a total
amount of $13,000, without pledging cash for the total amount of the letters of credit issued. As at October 31, 2021, an
amount of $5,985 was drawn down under this credit facility maturing on February 28, 2022.

Note 27

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 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.

Annual Report 2021 Transat A.T. inc. | 108

Leader
in sustainability

The proof? Transat is the first major international
tour operator to be Travelife Certified for all its activities.

Information

transat.com

For additional
information, write to
the Chief Financial Officer.

Ce rapport annuel
est disponible en français.

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AST Trust Company (Canada)
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Montreal, Quebec
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Toll-free: 1.800.387.0825
inquiries@astfinancial.com
astfinancial.com/ca-en

Auditors
Ernst & Young LLP
Montréal (Québec)

Annual and Special Meeting
of Shareholders
Wednesday, April 27, 2022

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Head Office

Transat A.T. inc.

Place du Parc
300 Léo-Pariseau St.
Suite 600
Montreal, Quebec
H2X 4C2

Telephone: 1.514.987.1660

Fax: 1.514.987.8035

transat.com
info@transat.com