Backgrounders

What are hedges?

Hedges are financial contracts whereby a company acquires in advance a contract to purchase a good at a predetermined price. This is done to eliminate the risk of volatility in the price of the goods being purchased.

While hedges are used to reduce volatility, it is important to note that they can have either a positive or negative effect based on the actual market prices of the goods during a given time period. Hedges can reduce potential costs if the actual price of the commodity goes up during the contract period. For example, if a company purchases a contract to buy 1,000 gallons of fuel at $3.00 per gallon for a given period in the future, and the price then rises to $4.00 per gallon at any given time during the contract period, the company will pay the locked in price of $3.00 per gallon for the period covered by the contract. However, in the event the price of fuel actually decreases under $3.00 over the contract period, the company cannot benefit from the reduced price and must still pay $3.00 per gallon as per the terms of the forward contract.

Why does Transat use hedges?

A large proportion of Transat’s sales are booked in advance of the actual travel date. Consequently, prices that customers pay us for the travel packages that we sell them are set several weeks and sometimes months before the date on which Transat must pay for the cost of the vacation, including aircraft fuel, aircraft maintenance and hotels. In addition, a significant portion of such expenses are paid in US dollars. Therefore Transat’s margin can fluctuate widely due to the fluctuations in the cost of fuel and currency from the time the customer pays us for the travel package to the time we pay the suppliers for the cost of the travel package. As a result, Transat purchases hedge contracts to limit the fluctuations of fuel prices and US dollar purchases.

How does hedge accounting work?

Under hedge accounting, the company must re-evaluate the value of its hedge contracts at each balance sheet date until the contracts mature. In other words, the company must periodically determine if the contracts it has entered into are positive or negative compared to current rates for new contracts.

For example, the company purchases a contract in September to buy 1,000 gallons of fuel at $4.00 per gallon (total $4,000) for a given period of time in the future, say February. If the price then drops to $3.00 per gallon at balance sheet time in October, this creates a difference of $1,000 as the hedge contract will cost $4,000 (in the future) while the current price of fuel is only $3,000. This $1,000 difference must be reflected in the company’s current income statement as a “loss” even though the actual purchase of the fuel has not yet been incurred and the price of fuel can still change. This is called mark-to-market. In addition, back to our example, any older contracts bought in previous periods, and which had previously been “marked-to-market”, would have to be “re-marked-to-market” in October and the variance incorporated to the income statement.

Now, there are no financial derivative instruments to hedge aircraft fuel. Future aircraft fuel prices are thus determined based on the fluctuations in the price of heating oil, which surprisingly, is the closest cousin in the oil category to aircraft fuel. From an accounting perspective, because hedging aircraft fuel using heating oil is not considered 100% efficient, mark-to-market adjustments on fuel contracts are recorded to the income statement. In other words, hedge accounting for aircraft fuel has an impact (positive or negative depending on the circumstances) on the actual bottom line before the maturity of the hedge contracts even if there is no cash involved until the maturity date.

On the other hand, currency hedging is perfectly efficient because Canadian dollar/US dollar contracts are readily available on the market. Consequently, currency hedge accounting has no impact on the income statement, but is rather recorded in the equity portion of the balance sheet, known as Comprehensive income, according to accounting rules. When the contracts are realized, (when the cash is actually disbursed) the outstanding adjustment is recorded to the income statement as part of the expense that is being covered.

In other words, hedge accounting is about how to account at the present time for an unpredictable, future financial outcome; and the accounting treatment for Transat is different for fuel hedging (immediate mark-to-market impact on income statement) and currency hedging (inclusion in the income statement at the time the outcome becomes actual).

© Transat A.T. Inc. – This text is provided for information purposes only and not for quotation.
Last update: December 16, 2008

Tour operators are, first and foremost, buyers of tourism services, which they “assemble” and market in the form of packages. They purchase significant quantities of components in advance and at wholesale prices that are not available on the retail market. This model enables the providers of these services - such as hotels selling accommodation or airlines selling seats - to transfer some of their business risk to a third party (the tour operator), often far in advance of the tourist season. It then becomes the tour operator's responsibility to sell these products, which by definition are “perishable,” on the market because firm commitments have been made.

This method enables suppliers to “secure” their profit margins; however, tour operators continue to face a few risks, such as the possibility of not being able to sell all the inventory, thereby registering a shortfall, even a loss. They also run the risk of running low on inventories and therefore having to relinquish market shares to competitors. Given that it is difficult to change the inventory position and impossible to find the most popular products during the tourist season, they must be very astute in order to be able to gauge demand at least one season in advance. Tour operators must also have a preferential relationship with the best suppliers available. Later on in the process, they will need sales and marketing skills, as well as the ability to manage supply and demand. In brief, the job of the tour operator is both scientific and artistic; it requires instinct and reasoning. It is largely based on the concept of economies of scale: volume offsets modest unit margins.

In theory, tour operators do not need to be asset-rich; rather, they need a good address book and a lot of know-how. The entry barriers are relatively low; the markets are fragmented and the competition is intense.

A vertically integrated tour operator such as Transat is one that is in a position to source its supplies not only from third parties (Transat has thousands of tourism services suppliers, including many airlines), but also from the tourism-related operations it has developed within the Company. Consequently, Transat owns an airline (Air Transat), an airport ground-handling services firm (Handlex), destination services companies, as well as an interest in a hotel chain. This aspect of vertical integration ensures better control of costs and helps protect profits which would otherwise go into the pockets of third parties. It also helps ensure that we provide our customers with high-quality products and memorable experiences and enables us to be more flexible in an industry where efficiency often makes a significant difference. In short, an integrated tour operator is better equipped to adapt, perform and stand apart.

Distribution is the other aspect of vertical integration. Many tour operators have no control over the retail distribution of their products and find themselves having to depend on partners. Transat has always operated travel agencies. Today, although a majority of its products are still sold by third parties, Transat has approximately 500 wholly owned or franchised travel agencies in Canada and France, as well as a significant Internet presence. In addition to the financial advantages that this structure provides, it creates proximity to the customer, which is very important, and a direct connection with the market.

To be a tour operator, a company must have a solid understanding of consumer expectations, as well as of products and destinations. Transat, for instance, has long been aware that the French, British, Quebecers and Western Canadians have different travel habits in terms of destinations, formulas and seasonal preferences. Tour operators often provide the guidance and ground services needed to reassure many travellers. Their staffers are on hand to greet customers and, in some cases, accompany them on their journey to ensure they connect with other suppliers, and to manage any unforeseen circumstances. They have therefore developed, over time, extensive knowledge of the institutions and the methods used at each destination; they also have relationships, often preferential, with local authorities.

Tour operators serve as distributors/consolidators, who sell services from faraway companies in a given market. In fact, tour operators, which can be described as wholesalers, literally keep the tourism industry moving; they search the world and purchase services that suppliers would otherwise not be able to distribute using their own means in markets that are often distant and fragmented. This is the reason why, once they have the critical mass (and Transat certainly has), partnerships with tour operators are very sought-after by “suppliers.”

Suppliers have therefore understood that there is no comparison between an integrated tour operator and a “regular” airline company… they are two very different worlds. In addition, there are marked differences between an integrated tour operator and one that is not. Other examples of vertically integrated tour operators are TUI Travel Plc and Thomas Cook Group Plc, two of the largest in the world.

© Transat A.T. Inc. – This text is provided for information purposes only and not for quotation.
Last update: October 27, 2008

Sustainable tourism is based on the principles of sustainable development, which emerged approximately 20 years ago and is defined as development that meets the needs of the present without compromising the ability of future generations to meet their own.

Simply put, sustainable tourism entails respect for nature as well as for the host communities and their values; it combines positive socio-economic benefits for local populations with an enriching experience for travellers.

The objective of sustainable tourism is therefore to conserve natural resources and biodiversity; to respect and promote cultural diversity, traditions and local values; to preserve and enhance cultural and built heritage and to share the benefits with the local communities, primarily through the creation of jobs. It also aims to minimize the negative impacts of tourism, including the sexual exploitation of children.

Sustainable tourism therefore consists of three pillars - environmental, socio-cultural and economic - and encourages all stakeholders to be more sensitive to these issues.

There is no doubt that the tourism drawing power of destinations is closely tied to the preservation and enhancement of their natural and cultural heritage. Consequently, an increasing number of destinations are adopting and implementing sustainable tourism policies and programs to ensure that their tourism development efforts are better planned and more effectively managed. This will enable them to safeguard their assets and remain “competitive” on the international market as well as ensure their long-term survivability. In addition, it is in the best interests of all concerned - the local communities themselves, tourism companies and travellers.

In order to practise sustainable tourism, tour operators must, first and foremost, commit to a process of ongoing improvement and encourage their tourism services suppliers to do the same. For Transat, this means optimizing our internal processes and management methods in order to maximize the use of resources; raising awareness among our stakeholders, starting with our employees, suppliers and customers; gradually integrating new criteria for the acquisition of goods and services; as well as increasing co-operation with our destinations. By subscribing to a sustainable process, Transat is defining its approach to social and environmental responsibility and joining the ranks of the major travel companies strongly committed to the viable development of tourism in the long term.

Travellers must also do their part. They must journey responsibly and respect local communities and their natural environments. This primarily means treating their hosts with respect and open-mindedness; using resources in moderation; striving to protect the natural environment and fragile sites; as well as contributing more to the development of the host communities, for instance by supporting local craftspersons and artists. If travellers adopt these attitudes and behaviours, they will be helping to make tourism more sustainable while they experience a richer and more memorable stay.

Therefore international tourism - the leading industry worldwide - is on the one hand a formidable tool for socio-economic development and in the fight to eradicate poverty in the host communities. On the other, it increases pressure on resources and generates undesirable social impacts. Sustainable tourism, however, is a balanced approach aimed at maximizing the positive benefits of tourist operations and minimizing the negative impacts.

United Nations' conceptual definition of sustainable tourism

The United Nations has defined the concept of sustainable tourism thus:

Sustainable tourism development guidelines and management practices are applicable to all forms of tourism at all types of destinations, including mass tourism and the various niche tourism segments. Sustainability principles refer to the environmental, economic and socio-cultural aspects of tourism development, and a suitable balance must be established between these three dimensions to guarantee its long-term sustainability.

As a result, sustainable tourism should:

• make optimal use of environmental resources that constitute a key element in tourism development, maintaining essential ecological processes and helping to conserve natural heritage and biodiversity;
• respect the socio-cultural authenticity of host communities, conserve their built and living cultural heritages and traditional values, and contribute to inter-cultural understanding and tolerance;
• ensure viable, long-term economic operations, providing socio-economic benefits to all stakeholders that are fairly distributed, including stable employment and income-earning opportunities and social services to host communities, and contributing to poverty alleviation.

Sustainable tourism development requires the informed participation of all stakeholders, as well as strong political leadership to ensure broad participation and consensus-building. Achieving sustainable tourism is a continuous process and requires constant monitoring of impacts, which implies introducing the necessary preventive and/or corrective measures whenever necessary.

Sustainable tourism should also maintain a high level of tourist satisfaction and ensure a meaningful experience for tourists, raising their awareness about sustainability issues and encouraging them to adopt sustainable tourism practices.

© Transat A.T. Inc. – This text is provided for information purposes only and not for quotation.
Last update: October 27, 2008

Air Transat is a wholly owned subsidiary of Transat A.T. Inc. The Canadian airline company, which made its inaugural flight on November 14, 1987, specializes in holiday travel. Based on fiscal 2007 (November 1, 2006, to October 31, 2007) figures, Air Transat makes approximately 13,000 flights (6,500 return flights) annually, transporting some 2.9 million passengers (1.45 million return travellers. It serves sun destinations in Mexico, the Caribbean and certain Latin American countries from Canada and offers many routes between Canada and Europe. With more than 60 direct city-pairs connecting nine Canadian cities and 32 European destinations, no other airline surpasses Air Transat's transatlantic offering in summer. Its winter services to sun destinations is also unparalleled; the airline serves some 30 such destinations (data based on fiscal 2008).

As at November 1, 2008, Air Transat owns a fleet of 18 wide-body Airbus aircraft (14 Airbus A310s with 249 seats; four Airbus A330s with 342 seats). It employs more than 2,100 people, including 1,200 cabin crew, 300 pilots, 300 engineers and 300 office staff.

Air Transat's capacity is primarily marketed by its sister company Transat Tours Canada, a business unit of Transat that operates as a tour operator in Canada under the Transat Holidays/Vacances Transat, Nolitours and Rêvatours brands; and in Europe under the Air Transat brand and through other Transat business units. Customer service falls essentially under the responsibility of Transat Tours Canada.

Air Transat has licences to operate regular flights between Canada and 13 European countries (Ireland, United Kingdom, France, Belgium, the Netherlands, Spain, Austria, Portugal, Italy, Switzerland, Greece, Germany and Poland) on top of five in North and Central America (United States, Mexico, Cuba, Dominican Republic, Panama).

Air Transat became a member of the International Air Transport Association (IATA) in 2008. It has also been awarded IOSA (IATA Operational Safety Audit) accreditation by IATA. The IOSA program comprises more than 900 internationally recognized standards applicable to management, flight operations, operational control, aircraft engineering and maintenance, cabin operations, ground handling, cargo operations and security. IOSA registration means an airline has complied with all the IOSA standards and confirms its commitment to safety.

Air Transat is a private enterprise that is not listed on the stock market. Its financial results are consolidated with those of its sister company Transat Tours Canada and then with those of Transat A.T. Inc., its publicly held parent company, from which they cannot be dissociated. Some financial data is available in the Management's Discussion and Analysis. Further information is available in the Investors section.

© Transat A.T. Inc. – This text is provided for information purposes only and not for quotation.
Last update: October 27, 2008

Although Transat’s origins date to the late 1970s with student travel agency Tourbec and, later, tour operator Trafic Voyages, it was in 1987 that the company was listed on the stock exchange under the Transat name following an $8.25-million initial public offering. Today Transat has six business units in Canada and employs some 5,000 people across the country.

Transat Tours Canada (TTC) is the group’s main outgoing tour operator, under the Transat Holidays, Nolitours and Rêvatours brands. TTC is actually itself Canada’s largest tour operator, with 2007 sales of more than $2 billion, and also oversees the commercial operations of the group’s carrier, Air Transat. TTC offers Canadians year-round travel to sun destinations, including cruises, out of several cities. In order to do this, it relies on myriad commercial partnerships with Caribbean and Mexican hotel operators, several airlines and large cruise operators. TTC is also a major outgoing tour operator to European destinations, again 12 months of the year. In terms of direct service, its transatlantic offering during the peak summer tourism season is unparalleled.

Jonview Canada, the country’s leading incoming tour operator, sold nearly a quarter of a million packages to Canada in 2007 through its nearly 1,200 commercial partners in more than 50 countries. Jonview Canada plays a key role in Canada’s success as an important international tourism destination and has some 1,800 suppliers, including 800 hotels, in every region of the country.

Transat Distribution Canada (TDC) is Canada’s leading retail distributor of holiday travel, with approximately 430 outlets and several websites. The network includes the Club Voyages, Voyages en Liberté, TravelPlus, Marlin Travel and tripcentral.ca banners, as well as the online agency exit.ca. TDC also works with another Transat distribution company, Travel Superstores.

Air Transat, a wholly owned Transat business unit, is Canada’s leading holiday travel airline. It carries close to 2.5 million passengers annually to nearly 60 destinations in 25 countries. Air Transat has a fleet of 18 Airbus A330s and A310s.

Handlex, another wholly owned Transat business unit, provides airport ground-handling services, including passenger greeting and check-in, baggage- and cargo-handling, aircraft cleaning and ramp services, at Montreal, Toronto and Vancouver international airports. Handlex is a partner of some 20 airlines in Canada, including Air Transat.

North America

(Revenues in thousands of dollars)

¹Airlines record flight segments in terms of passengers.
²Tour operators record round-trip travellers.

© Transat A.T. Inc. – This text is provided for information purposes only and not for quotation.
Last update: October 27, 2008

Transat has been operating in Europe since the Corporation's creation and currently has six business units there employing approximately 1,000 people in four countries.

The Company has two outgoing tour operators in France, making it one of the five largest tour operators in the country. The first, Vacances Transat (France), also operates under the Brokair (for groups) and Bennett brands. It specializes in travel to Canada, Scandinavian countries, tours and long-haul travel and offers French travellers a range of destinations worldwide, including Africa and Asia. It is France's leading tour operator for travel to Canada, a destination that accounts for approximately one-third of its business. The second, Look Voyages, one of the best known tour operators in France, specializes in the all-inclusive resort club format. Its very popular Lookéa clubs, which offer holiday packages in French-speaking environments, are located primarily in the Mediterranean Basin and in the Caribbean. Look Voyages also offers many international destinations; it offers travel to Tunisia under the Amplitude Internationale brand. Vacances Transat (France) and Look Voyages use a variety of airlines. Also in France, the Euro Charter business unit operates almost 70 travel agencies under the Club Voyages and Look Voyages brands.

Transat owns Canadian Affair, an outgoing tour operator in the United Kingdom that specializes in travel to Canada and primarily uses Air Transat and Thomas Cook Airlines.

Tourgreece, which is also a business unit of Transat, is one of the largest incoming tour operators in Greece; it sells products in many countries.

Transat Tours Canada flies travellers on Air Transat between Canada and the United Kingdom, France, Spain, Portugal, Germany, Italy, Switzerland, Austria, Belgium, Ireland and the Netherlands. It flies to 32 airports in 11 countries (2008), more than any other carrier. Outside France and the United Kingdom, Transat's business partners market the Company's services. For instance, Air Consultants Europe (ACE), a Transat business unit located in The Hague, markets the Company's services in Germany, the Netherlands, Belgium, Luxemburg and Austria. In 2007, Air Transat carried 366,000 European tourists to Canadian destinations.

Jonview Canada, a Canadian incoming tour operator and business unit of Transat, sells products originating in almost all European countries to Canada through its commercial partners.

Europe

(Revenues in thousands)

¹Including a Lookéa cruise in Egypt

© Transat A.T. Inc. – This text is provided for information purposes only and not for quotation.
Last update: October 27, 2008