Transat A.T. Inc. - Results for second quarter of 2021

Operations scheduled to resume on July 30 following a quarter without revenues

Transat now has the financing to implement its recovery plan

For the second quarter:

• Revenues of $7.6 million
• Adjusted operating loss1 of $51.0 million (operating loss of $86.5 million)
• Adjusted net loss3 of $103.3 million (net loss attributable to shareholders of $69.6 million)

Financial position and financing:

• Cash and cash equivalents of $346.1 million as at April 30
• Agreement entered into with the Government of Canada for borrowing up to $700.0 million in additional liquidity, of which $310.0 million can be used to refund customers
• Maturity for amounts drawn on existing facilities extended until April 29, 2023.
• In total, the available financing will therefore represent a maximum of $820.0 million, of which $220.0 million was drawn as at April 30, 2021.

Resumption of operations:

• Airline operations suspended since January 29, 2021
• Partial resumption planned for July 30, 2021

Transaction

• Termination of the arrangement with Air Canada by mutual consent
• Implementation of strategic plan and continuing discussions with Gestion MTRHP

Transat A.T. Inc. ("Transat" or the "Corporation"), one of the largest integrated tourism companies in the world and Canada's holiday travel leader, announces its results for the second quarter ended April 30, 2021.

"Following a quarter without revenues, progress made on vaccinations allows us to plan for a gradual resumption starting July 30. We hope that a safe travel recovery plan can be deployed as soon as possible and will lead to a lifting of restrictions in the near future. All indications are that our customers are eager to make use of some of their savings from recent months to travel. We're excited about welcoming them back soon," stated Annick Guérard, President and Chief Executive Officer, Transat.

"The financing we secured will allow us to roll out our plan over the coming years. Our strong brand, our employees' commitment and the transformation we have undertaken and which will continue over the coming years will allow us to position ourselves again as our customers' favourite leisure travel company and become more profitable than before the pandemic," she added.

The global air transportation and tourism industry has faced a collapse in traffic and demand. Travel restrictions, uncertainty about when borders will reopen, both in Canada and at certain destinations the Corporation flies to, the imposition of quarantine measures and testing requirements both in Canada and other countries, as well as concerns related to the pandemic and its economic impacts are creating significant demand uncertainty, at least for fiscal 2021. 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. The Corporation currently expects to resume its operations on July 30. The Corporation cannot predict all the impacts of COVID-19 on its operations and results, or precisely when the situation will improve. 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 the availability of a vaccine makes it possible to hope for the resumption of operations at a certain level during 2021, the Corporation does not expect such level to reach the pre-pandemic level before 2023.

Preserving cash is a priority for the Corporation; with respect to the COVID-19 pandemic, the Corporation has taken the actions discussed in the Overview section of the MD&A included in our 2020 Annual Report. Other opportunities are being evaluated to achieve this objective and the following additional actions in response to the COVID-19 pandemic were taken during the first half of 2021:

• The Corporation completed its efforts to obtain long-term financing. As described in the Financial position section, the available financing therefore represents a maximum of $820.0 million, of which $220.0 million was drawn as at April 30, 2021.
• During the quarter ended January 31, 2021, two Airbus A330s and one Boeing 737-800 were returned to lessors early.
• The Corporation continuously adjusts its flight program as the situation evolves. Before the suspension of its airline operations on January 29, 2021, Transat offered a reduced winter program of international flights departing from Montréal, Toronto and Québec City.
• 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 to finance part of the salaries of its staff still at work and to propose employees temporarily laid off to receive a part of their salary equivalent to the amount of the grant received, with no work required.
• As at April 30, 2021, cash and cash equivalents totalled $346.1 million.

Second-quarter highlights

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. These factors caused the fall in revenues. As a result, the Corporation recognized revenues of $7.6 million during the quarter, a decrease of $563.7 million (98.7%) compared with 2020.

Operations generated an operating loss of $86.5 million compared with $29.6 million in 2020, a deterioration of $56.9 million. The decline in operating results was attributable to the suspension of airline operations for the second quarter of 2021. 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. Transat reported an adjusted operating loss1 of $51.0 million compared with adjusted operating income1 of $21.1 million in 2020, a deterioration of $72.1 million.

Net loss attributable to shareholders amounted to $69.6 million or $1.84 per share (diluted) compared with $179.5 million or $4.76 per share (diluted) for the corresponding quarter of last year. Excluding non-operating items, Transat reported an adjusted net loss3 of $103.3 million or $2.74 per share for the second quarter of 2021, compared with $38.8 million or $1.03 per share in 2020.

Six-month period highlights

As a result of the above factors, the Corporation experienced a significant deterioration in its performance for the winter season as a whole. For the six-month period as a whole, the Corporation recognized revenues of $49.5 million, a decrease of $1.2 billion (96.1%) compared with 2020, and operations generated an operating loss of $184.5 million, compared with $54.6 million in 2020, a deterioration of $129.9 million. Transat reported an adjusted operating loss1 of $104.6 million compared with adjusted operating income1 of $48.5 million in 2020, a deterioration of $153.1 million.

Net loss attributable to shareholders amounted to $130.1 million or $3.45 per share (diluted) compared with $213.4 million or $5.65 per share (diluted) for the corresponding six-month period of last year. In 2021, net loss attributable to shareholders included a $62.6 million foreign exchange gain resulting mainly from the remeasurement of lease liabilities, a gain on disposal of assets of $18.9 million following the termination of aircraft leases and a $8.6 million gain related to the favourable change in the fair value of fuel-related derivatives and other derivatives. In 2020, net loss attributable to shareholders included a $99.9 million charge for the change in the fair value of fuel-related derivatives and other derivatives due to the collapse in fuel prices, a $36.0 million foreign exchange loss mainly related to the remeasurement of lease liabilities and a $16.8 million charge to reduce the carrying value of deferred tax assets. Excluding non-operating items, Transat reported an adjusted net loss3 of $212.3 million or $5.63 per share for the first half of 2021, compared with $59.1 million or $1.57 per share in 2020.

Financial position

As at April 30, 2021, cash and cash equivalents amounted to $346.1 million, compared with $733.7 million on the same date in 2020. This decrease was mainly attributable to a significant decrease in business, partially offset by the $170.0 million drawdown on the credit facilities.

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). To supplement the new financing, the amounts already drawn on the Corporation's existing facilities remain in place and have been extended until April 29, 2023. The ratios applicable to the existing facilities will be suspended for a period of 18 months. The undrawn credit of $180.0 million under the short-term subordinated facility is cancelled. In total, the available financing will therefore represent a maximum of $820.0 million, of which $220.0 million was drawn as at April 30, 2021.

Deposits from customers for future travel amounted to $560.4 million, compared with $605.1 million as at April 30, 2020, a decrease of $44.7 million.

The working capital ratio was 0.85, compared with 0.99 as at April 30, 2020. This change was mainly due to the low business volume over the past 12 months, which led to a decrease in cash and cash equivalents and all the other items making up working capital.

As a result of this sudden, unpredictable and unprecedented health crisis and the resulting travel restrictions, the Corporation decided, like other Canadian carriers, to issue travel credits for cancelled trips. Customer deposits as at April 30, 2021 included these travel credits amounting to $504.6 million, 46% of which was placed in trust, with the difference representing deposits made directly with Air Transat or foreign subsidiaries. On April 29, 2021, the Corporation entered into an agreement with the Government of Canada that also allows it to borrow an amount of $310.0 million to issue refunds to certain travellers. Following this agreement, the Corporation had received requests for about 64% of the amount of credits issued and made refunds for more than 70% of amounts claimed, at the end of May 2021. Customers have until August 26, 2021 to submit their refund requests.

Off-balance-sheet agreements, excluding contracts with service providers, stood at $747.8 million as at April 30, 2021. This amount was mainly composed of commitments to take delivery of the ten A321neos undelivered as at that date.

Outlook

In the current situation, despite some encouraging signs such as the increase in the rate of vaccination, it remains impossible for the moment to predict the impact of the COVID-19 pandemic on future bookings, the partial resumption of flight operations and financial results.

The Corporation has implemented 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. Please see the Risks and Uncertainties section of the Corporation's MD&A for the year ended October 31, 2020 for a more detailed discussion of the main risks and uncertainties facing the Corporation.

Consequently, for now the Corporation is not providing an outlook for summer 2021

Strategic plan

The Corporation has developed its plan for future years, setting the following objectives:

• During 2021, stabilize the business by streamlining operations and laying the foundations for a recovery that will ensure the Corporation's long-term viability after the pandemic;
• During the 2022-2026 period, make 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;
• After 2026: leverage those achievements to propel Transat toward a new growth phase.

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.

And 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.

Termination of the arrangement agreement with Air Canada and discussions relating to the sale of the Corporation

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.

Since the termination of the arrangement agreement with Air Canada, Transat is implementing its strategic plan. Besides, discussions with Mr. Pierre Karl Péladeau are continuing. There is no certainty that a transaction will result from them. On April 7, 2021, Mr Péladeau delivered to the Corporation a non-binding proposal contemplating a transaction pursuant to which his management company Gestion MTRHP inc. would acquire all of the shares of Transat for a consideration of $5.00 per share, payable in cash.

Discontinuation of the hotel division

On May 20, 2021, due to the decline in liquidity as a result of the COVID-19 pandemic, and in line with the objectives of the new strategic plan, the Corporation's Board of Directors approved the discontinuation of the hotel division's operations.

Additional Information

The results were affected by non-operating items, as summarized in the following table:

Highlights and impacts of non-operating items on results

(In thousands of C$)

Hedging - The Corporation records in the statement of income any gains or losses resulting from mark-to-market adjustments of the derivative financial instruments used to manage aircraft fuel-price risk, as well any gains or losses resulting from mark-to-market adjustments of certain hedging instruments used to mitigate exchange-rate exposure stemming from its expenses and/or revenues in foreign currencies. In the second quarter of 2021, this resulted in a $3.4 million non-cash gain, compared with a $89.1 million non-cash loss in 2020. For the six-month period, this resulted in an $8.6 million non-cash gain, compared with a $99.9 million non-cash loss ($97.0 million after income taxes) in 2020.

The Corporation uses hedging instruments to mitigate exchange-rate exposure stemming from its expenses and/or revenues in foreign currencies. Accordingly, under applicable accounting standards, any fluctuations resulting from mark-to-market adjustments of these instruments are recorded in the consolidated statement of financial position and consolidated statement of comprehensive income rather than in the consolidated statement of income. For the second quarter of 2021, Transat recorded a nil change in the fair value of these foreign exchange derivatives, compared with a gain of $12.1 million ($8.9 million after income taxes) in 2020. For the six-month period, Transat recorded a gain of $0.4 million ($0.5 million after income taxes) on these foreign exchange derivatives, compared with a gain of $11.4 million ($8.4 million after income taxes) in 2020.

About Transat

Transat A.T. Inc. is a leading integrated international tourism company specializing in holiday travel. Under the Transat and Air Transat banners, the Corporation offers vacation packages, hotel stays and air travel to some 60 destinations in over 25 countries in the Americas and Europe. Transat is firmly committed to sustainable tourism development, as reflected in its multiple corporate responsibility initiatives over the past 14 years and obtained Travelife certification in 2018. The Corporation is based in Montréal (TSX: TRZ).

NOTES

The following are non-IFRS financial measures used by management as indicators to evaluate ongoing and recurring operational performance.

1. 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.
2. 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.
3. 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.