Transat A.T. Inc. - Results for Fiscal 2004 - Record year for Transat

Montreal, Qc, Canada, January 13, 2005

 

- Revenues of $2.2 billion, an overall increase of 4.9% compared with 2003.

- Margin(1) of $163.8 million, more than double the 2003 margin of $75.0 million.

- Net income of $83.8 million or $2.04 per share fully diluted excluding the restructuring charge of $11.4 million related to Look Voyages, compared with a net income from continuing operations of $22.2 million or $0.58 per share fully diluted in 2003.

- Cash and cash equivalents in the amount of $468.6 million (including $157.7 million held in trust or otherwise reserved) compared with $349.1 million (including $106.1 million held in trust or otherwise reserved) in 2003.

Transat A.T. Inc., one of the most important holiday travel companies in the world and the leader in Canada, recorded revenues of $2,199.8 million for the year ended October 31, 2004, compared with $2,096.6 million in 2003, an increase of 4.9%. The Corporation recorded a margin of $163.8 million, more than twice the $75.0 million margin recorded in 2003.

Excluding the effect of the restructuring charges, net income was $83.8 million or $2.04 per share on a fully diluted basis in 2004 compared with net income from continuing operations of $22.2 million or $0.58 per share on a fully diluted basis in 2003. There were no income tax recoveries recorded on the results of our French operations as of August 1, 2004 due to the continued losses being generated by our French operations.

"2004 was our best year ever thanks in large part to the commitment of our employees, the loyalty of our customers, and the changes to our strategic position we put in place over the past two years. More specifically, our cost control efforts and our determination to focus on our core business proved to be very beneficial. We will relentlessly pursue our efforts in 2005.

In Canada we want to increase our market share particularly in Ontario and complete our cost reduction efforts at the airline. In France, we want to reduce our losses at Look Voyages by 50% and develop our Internet strategy. We also want to identify growth opportunities on both sides of the Atlantic. We are in the best financial position ever and we will be in a growth mode. I continue to believe that the long-term fundamentals of this business are excellent. However, in the short-term, we see significant increased capacity in the marketplace, especially in Ontario which we expect will impact us in the near term", stated Jean-Marc Eustache, President and Chief Executive Officer of Transat A.T. Inc.

The Corporation ended the year with $468.6 million in cash and cash equivalents (including $157.7 million held in trust or otherwise reserved) compared with $349.1 million as at October 31, 2003 (including $106.1 million held in trust or otherwise reserved). Working capital was $204.3 million compared with working capital of $144.5 million as at October 31, 2003.

Debt levels as at October 31, 2004 have decreased compared with October 31, 2003. The balance sheet debt dropped by $34.5 million to $30.8 million from $65.3 million and the off-balance sheet debt also dropped $26.4 million from $529.9 million to $503.5 million resulting in a total debt(2) reduction of $60.9 million compared with October 31, 2003. When deduction is made of cash and cash equivalents that are not in trust or otherwise reserved from total debt, the net debt(3) drops to $223.4 million from $352.3 million, a 36.6% decrease.

Fiscal 2004 Highlights
The overall increase in revenues is due to a 9.7% growth in revenues in Canada, offset by a 7.8% decrease in revenues in the Corporation's French operations. The number of travellers (tour operators record round-trips in terms of travellers) increased by 11.1% overall compared with 2003. This increase is the result of an 11.0% increase in Canada and an 11.2% increase in France. In France however, the increase in travellers was offset by a 37.5% decrease in the number of passengers (airlines record flight segments in terms of passengers) for air-only at Look Voyages. This decrease in passengers is mainly due to Transat's abandonment of its air-only operations at Look Voyages in accordance with its announced strategy. Increases in prices in Canada also contributed to the increase in revenues.

Canada
In Canada, revenues increased slightly in the 2004 winter season compared with the corresponding season in 2003. This increase is due to an increase in the number of travellers by 5.3% compared with the corresponding season in 2003, offset by a reduction in sales made to external tour operators (i.e. tour operators outside the Transat group of companies). Demand was strong for destinations to the Caribbean, Europe, and Florida. Higher prices also contributed to these increases.

During the summer season in Canada revenues increased by 23.8% due to an increase in the number of travellers by over 20% compared with the 2003 summer season and by the additional revenues generated by the recent acquisition of Jonview corporation ("Jonview") of approximately $35.0 million. The comparative season also had a reduced number of travellers due to the impact of SARS in 2003. Demand was strong for destinations to Europe, especially the United Kingdom and France. Higher prices contributed to these increases as well.

The restructuring efforts undertaken in 2003 were felt in the current year. The consolidation of the Canadian tour operators and distribution activities resulting in a better management of airline seats and hotel rooms combined with a better utilization of the aircraft along with reduced expenses and increased demand by travellers have led to increased margins. For the 2004 winter season, margins increased to 11.0% compared with 5.6% in the corresponding season in 2003. For the summer season margins increased to 10.1% from 6.6% in 2003.

France and other
In France both revenues and expenses decreased in the 2004 winter season compared with the corresponding season in 2003 resulting in negative margins. Despite increases in the number of travellers in the 2004 winter season of 8.9%, the French operations recorded lower revenues and negative margins due to a drop in passengers for air-only travel at Look Voyages of approximately 22%. The increase in travellers was mostly due to increased demand for long- haul travel from Europe to Caribbean destinations both at Vacances Transat (France) and Look Voyages at lower prices overall as a result of competitive pressure.

In France, although revenues decreased in the summer season, margins were almost breakeven which was a significant improvement compared with the 2003 summer season. The reasons for this improvement were decreased losses at Look Voyages, increased demand for long-haul travel from Europe to Canada and the US at Vacances Transat (France) and the positive effects of foreign exchange at Vacances Transat (France). The number of travellers increased by almost 13% compared with 2003 but these increases were offset by a 64% decrease in air-only passengers.

In 2004, the Corporation also reported the following:
- In accordance with an agreement reached in January 2004 between Transat and Aéroports de Montréal (ADM), Air Transat moved all its Montreal flights, in November 2004, from Montreal-Mirabel to Montreal-Trudeau, in Dorval. New maintenance facilities and offices were also made available in December and the Air Transat head office and Montreal operations have now moved.

- In 2004 the plan announced on September 11, 2003 for the phasing out of our six Lockheed L-1011-500s was implemented. Four Airbus A310 were also added to Air Transat's fleet in 2004. The resulting harmonization and simplification of the fleet, now smaller and all-Airbus, was key to Air Transat successfully reducing its operating expenses. In addition to reduced costs derived from simplified maintenance and training, Air Transat has successfully pursued its efforts at enhancing its operational performance, resulting in both high levels of customer satisfaction and other cost reductions ahead of plan.

- Moreover, fiscal 2004 was the first full year of operation under a partnership agreement between Transat's Canadian outgoing tour operators and WestJet Airlines Ltd. ("WestJet") announced on August 20, 2003.

- In June of 2004, the Corporation acquired an additional 50% participation in Tourgreece S.A., an incoming tour operator, for a total consideration of $3.0 million (1.8 million euros) in cash. Pursuant to this transaction, the Corporation held a 90% interest in Tourgreece.

- In April of 2004, the Corporation completed the acquisition of the remaining 50% participation in Jonview, an incoming tour operator, in partnership with a minority shareholder of Jonview for $12.8 million. The Corporation's percentage ownership in Jonview is 80.07% as a result of this transaction.

- In July of 2004 a plan to reposition Look Voyages and pursue all efforts to bring it back to profitability was announced. The plan involves the abandonment of certain operations considered non-strategic, namely the marketing and sale of air-only. The plan also calls for Look Voyages to intensify the development of its holiday packages business and to increase the use of Web-based technologies to stimulate sales to both travel agents and the general public. This led to a staff reduction of approximately 90 individuals. Implementation of this plan resulted in the recording of a restructuring charge in the amount of $11.4 million in the fourth quarter of 2004. It is expected that Look Voyages will return to profitability in the latter part of fiscal 2006.

Fourth Quarter Highlights
For the fourth quarter, the Corporation posted revenues of $467.3 million, compared with $404.6 million for the same period in the previous year representing an increase of $62.7 million or 15.5% despite pricing pressures. There was an overall increase in passengers of over 16% broken down between Canada at almost 19% and France at over 10%. Air-only passengers at Look Voyages fell by almost 54% during the quarter. The increase in Canada was mainly due to the Corporation's strategy of increasing the utilization of its aircraft in October.

The Corporation also generated a margin of $39.4 million or 8.4% for the quarter compared with $27.2 million or 6.7% in 2003 despite the significant increase in fuel prices. The increase in operating expenses during the quarter were mainly due to an increase in business activity. Net income for the quarter was $11.4 million or $0.27 per share on a fully diluted basis ($22.7 million or $0.54 per share excluding the restructuring charge) compared with a net loss from continuing operations of $7.5 million or $0.25 per share fully diluted in 2003 ($17.1 million or $0.50 per share excluding the after- tax effect of the restructuring charge).

In 2003 the net income of the fourth quarter was $46.6 million ($1.40 per share). The 2003 fourth quarter net income included $54.1 million ($1.65 per share) related to the sale and operations of Anyway presented as part of discontinued operations on the consolidated financial statements.

Subsequent events
On January 10, 2005 Transat redeemed debentures in the amount of $21.9 million. These debentures had a maturity date of January 2009 and were redeemable in advance as of January 2005. The cash outlay was approximately $30.0 million, including unpaid interest already recorded since 2001 in the amount of $7.3 million and an interest penalty in the amount of $0.8 million that will be recorded in the first quarter of fiscal 2005. Additionally, this early redemption will also result in a non-cash charge in the amount of $1.7 million that will also be recorded in the first quarter of fiscal 2005 related to the difference between the nominal value and book value of the debentures as at January 10, 2005.

On November 1, 2004 Transat acquired 70% of the operations of Air Consultants Europe ("ACE") at a cost of one million euros. This Dutch company, based in The Hague, is Air Transat's sole commercial representative in Germany and Holland since 1991 and in Belgium. The transaction was accounted for using the purchase method. The results of operation of ACE will be included in the Corporation's results as of November 1, 2004.

Foreign ownership issue and use of cash
On November 15, 2004, based on information then available and following unusually high trading volumes since September 2004, the Corporation published a press release announcing that the level of non-Canadian ownership of Transat was nearing the 25% mark. In light of this uncertainty respecting the percentage of non-Canadian ownership, Transat immediately implemented special procedures as regards the transfer and issue of its voting shares to non-Canadians. These special procedures were implemented pursuant to Transat's Guidelines Respecting Shareholders' Declarations adopted in 1999. The goal of these special procedures is to monitor any change in non-Canadian ownership of Transat's voting shares and ensure continuous compliance with the 25% limit placed on the ownership or control of outstanding voting shares by non-Canadians under the Canada Transportation Act.

The 25% limit is due to the Corporation owning all of Air Transat's issued and outstanding shares, an air carrier.

The Corporation's management considers that the application of the Guidelines Respecting Shareholders' Declarations, combined with the implementation of the special procedures, may not be the most appropriate measures to ensure that Transat's Common Shares circulate freely enough to satisfy the significant interest non-Canadians have shown in the Corporation's Shares particularly since September 2004 as well as to ensure compliance with the restrictions imposed by the Canada Transportation Act.

As a result, a special shareholders' meeting will be convened for February 24, 2005 in order that the shareholders adopt a special resolution authorizing the Corporation to amend its Articles in accordance with the Canada Business Corporations Act in order to issue two new classes of shares, namely the variable voting shares to be held or controlled by non-Canadians and the voting shares to be held and controlled by Canadians. Concurrently with the issue of the Articles of Amendment, the outstanding Common Shares held by Canadians will be converted into voting shares and the outstanding Common Shares held by non-Canadians will be converted into variable voting shares. Going forward, after the initial conversion, the voting shares will be automatically converted into variable voting shares if acquired by a non-Canadian and vice-versa. It is the Corporation's view that this new share capital structure will provide more market liquidity on Transat's securities and will also ensure continuous compliance with the Canada Transportation Act.

This recent development has had an effect on the comments regarding the cash on hand made by the Corporation during its third quarter conference call held on September 9, 2004. During that call, Transat indicated that it was examining several options to optimize its capital structure. The Corporation's management then announced that it expected to present a plan for its use of cash in January 2005. As part of that plan, Transat also communicated that it would consider distributing capital to its shareholders.

Management of Transat believes that an issuer bid would be an appropriate form of capital distribution for Transat and its shareholders. However, due to the 25% limit imposed by the Canada Transportation Act, this option may be difficult to carry out if the proposed amendments to the Corporation's Articles are not approved. Management of Transat therefore believes that the proposed amendments to the Articles, if adopted by the shareholders, would allow Transat to consider an issuer bid should the Corporation decide to proceed with such capital distribution.

Therefore, until the shareholders have pronounced themselves on the proposed amendments and due to the market conditions outlined in the Outlook section of this press release, the Corporation has decided to postpone its decision as to whether to proceed with any capital distribution and is in the process of assessing all of its alternatives.

Appointments
In December 2004, Transat's two Executive Vice-Presidents, Lina De Cesare and Philippe Sureau were respectively named President, Tour Operators and President, Distribution.

In October 2004, Olivier Kervella was appointed General Manager of Look Voyages.

In August 2004, Nelson Gentiletti was appointed to Executive Vice- President, Transat Tours Canada. Mr. Gentiletti will also remain in his current position of Vice-President, Finance & Administration, and Chief Financial Officer until a successor is appointed.

Outlook
Transat completed its best year ever in fiscal 2004 by concentrating on its cost control efforts and remaining committed to its core business. In 2005 the Corporation plans to continue to pursue these efforts while at the same time grow the business on both sides of the Atlantic.

In Canada, Transat's strategy is to increase its market share in Ontario and continue its cost reduction efforts at the airline. Booking trends for the winter season are ahead of last year by approximately 8% but the excess capacity in the marketplace (especially Ontario) has led to pricing pressures which the Corporation expects will result in lower margins for the first quarter of 2005 and possibly for the entire 2005 winter season. However, the Corporation also believes that as a result of these pricing pressures it may have opportunities to expand its market in Ontario faster.

In France, the Corporation intends to reduce its losses at Look Voyages by 50% and develop an Internet strategy at this subsidiary as well. All indications point to the reduced losses being on track for the first quarter of 2005.

Overall therefore the Corporation expects reduced margins in the first quarter of 2005 compared with the comparative period in 2004, which was exceptional, and for a challenging winter season in general.

Despite these anticipated results for the 2005 winter season, the Corporation's balance sheet has never been healthier and the Corporation's management has never been more committed to maximizing shareholder value.

Transat A.T. Inc. with its head office in Montreal is an integrated company specializing in the organization, marketing, and distribution of holiday travel. The core of its business consists of tour operators in Canada and France. Transat is also involved in air transportation, value-added services at travel destinations, as well as in distribution through travel agency networks. Transat is listed on the Toronto Stock Exchange (TSX:TRZ).

Non-GAAP measures
Transat prepares its financial statements in accordance with Canadian generally accepted accounting principles ("GAAP"). We will occasionally refer to non-GAAP financial measures in the news release. These non-GAAP financial measures do not have any meaning prescribed by GAAP and are therefore unlikely to be comparable to similar measures presented by other issuers. They are furnished to provide additional information and should not be considered as a substitute for measures of performance prepared in accordance with GAAP.

1 Revenues less operating expenses (non-GAAP financial measure used by management as an indicator to evaluate ongoing and recurring operational performance).

2 Debt plus off-balance sheet arrangements (non-GAAP financial measure used by management to assess the Corporation's future liquidity requirements).

3 Total debt less cash and cash equivalents not in trust or otherwise reserved (non-GAAP financial measure used by management to assess its liquidity position).

Forward-looking statements
This news release contains certain forward-looking statements with respect to the Corporation. These forward-looking statements, by their nature, necessarily involve risks and uncertainties that could cause actual results to differ materially from those contemplated by these forward-looking statements. The Corporation considers the assumptions on which these forward-looking statements are based to be reasonable, but cautions the reader that these assumptions regarding future events, many of which are beyond its control, may ultimately prove to be incorrect since they are subject to risks and uncertainties that affect the Corporation. For additional information with respect to these and other factors, see the Annual Information Form and Annual Report (Management Discussion and Analysis) filed with Canadian securities commissions. The Corporation disclaims any intention or obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.