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1 THERE IS SOMETHING DIFFERENT IN THE AIR ANNUAL REPORT

2 contents 03 Corporate Boards 05 Organisation Chart 07 Performance 08 Operating Activities 12 Commercial Activities 12 Aircraft Handling Activities 13 Maintenance Activities 14 Flight Operations 14 Quality and Security 15 Human Resources 20 Information Systems 22 Economic and Financial Performance 28 Proposal for Appropriation of Profit 29 Financial Statements 30 Balance Sheet 32 Profit and Loss Account by Nature 34 Profit and Loss Account by Function 35 Cash Flow Statements 36 Notes to the Financial Statements 57 Legal Certification of the Accounts 58 Report and Opinion of the Statutory Auditor 60 Legal Certification of the Accounts 62 Annual Report on the Audit Work Performed 64 Audit Report

3 CORPORATE BOARDS 03

4 CORPORATE BOARDS General Assembly Chairman: Ana Maria Soares de Albergaria Pacheco Gouveia Vice-Presidente: João Manuel Beliz Trabuco Ana Maria Furtado Soares Albergaria Pacheco Gouveia Secretaries: Mónica Silvia dos Anjos Vaz de Medeiros Fernandes Maria Alexandra Celorico Pacheco Vieira Board of Directors Chairman: António José Vasconcelos Franco Gomes de Menezes 14 Manuel António Carvalho Cansado 15 Members: Luísa Maria Estrela Rego Miranda Schanderl 16 António Maurício do Couto Tavares de Sousa Luís Filipe Soares Borges da Silveira José Adriano Pires Ávila 17 Statutory Auditor: Manuel Herberto de Medeiros Quaresma (auditor no. 675) 14 Took up duties on 1 November 15 Stepped down on 31 October 16 Took up duties on 1 November 17 Stepped down on 31 October 1947 SATA IS BORN SATA Sociedade Açoreana de Transportes Aéreos is created and spreads its wings with a Beechcraft named Açor. The Azores are now closer to the rest of the world. 04

5 ORGANISATION CHART OF SATA INTERNACIONAL, SA 05

6 ORGANISATION CHART OF SATA INTERNACIONAL, SA Board of Directors General Secretariat Quality Office Management Control Office Legal Office Image and Publicity Office Security Office Human Resources Division Accident Prevention Office Finance Division Information Systems Division General Commercial Division General Operations Division Planning and Operation Division Marketing and Sales Division Continuing Airworthiness Division Flight Operations Division Ground Operations Division 1957 SATA HELPS VICTIMS OF THE CAPELINHOS TRAGEDY SATA in partnership with Slick Airways provides travel assistance to victims of the Capelinhos Volcano tragedy, flying them from the Lajes air base to the United States. 06

7 PERFORMANCE 07

8 PERFORMANCE Operating Activities was marked by further expansion of the company, with the arrival of a new Airbus aircraft, in April. New routes such as Terceira Boston, Terceira Oakland, Terceira Oporto, Ponta Delgada Dublin and other charter operations to the Caribbean, Brazil, Sal and Porto Santo were added to the existing network. Overall, 641 more commercial flights were operated and 82,226 more passengers were carried compared with the previous year. However, the market did not react in the same proportion as the offer generated, and there was a fall of two percentage points in the load factor, compared with Year 2006 Variation Flights Operated (No.) 6,498 7, Passengers Carried (No.) 847, , ,226 Load factor RPK/ASK (%) 75,18% 73.08% -2,10 p.p. Network Scheduled Domestic There were two small changes in the scheduled domestic network compared with the previous year: 1) the Funchal Oporto Funchal route was discontinued from 24 January ; 2) during the period from 21 June to 30 August a new route was operated, Terceira Oporto Terceira, outside public service obligations. Otherwise, the same network pattern and operation rules were maintained, under the public service obligations and under a code-share arrangement with TAP Portugal, as was already the case in Lisbon Ponta Delgada Lisbon Lisbon Terceira Lisbon 1959 SATA PURCHASES TWA STRUCTURE IN SANTA MARIA SATA acquires the TWA structure at the airport of Santa Maria, to realise its strategy of growth and expansion. 08

9 PERFORMANCE Lisbon Horta Lisbon Lisbon Santa Maria Lisbon Lisbon Funchal Lisbon Oporto Ponta Delgada Oporto Oporto Funchal Oporto (discontinued from 24 January ) Funchal Ponta Delgada Funchal Terceira Oporto Terceira (from 21 June to 30 August, outside public service obligations) The national network reported growth of 4% in the number of passengers carried; however the load factor fell 1.29 pp. compared with Year 2006 Variation Flights Operated (No.) 4,650 4, Passengers Carried (No.) 574, ,299 20,265 Load factor (%) 69.84% 68.55% p.p. European Among European routes, the destinations Frankfurt, London, Amsterdam and Madrid were maintained. In the case of London, an additional weekly flight during the period from June to September was introduced. The city of Dublin was added to SATA Internacional's map of scheduled routes, from Ponta Delgada, with a weekly flight during the IATA summer season. The Funchal Zurich Funchal route was discontinued at the end of the previous year and replaced by Funchal Paris Funchal, from the IATA summer season, with great success. Overall, there was a significant increase in supply, but with modest results in terms of demand generated. Year 2006 Variation lights Operated (No.) assengers Carried (No.)3 6,5713 9,533+ 2,962 oad factor RPK/ASK (%) 71.83%6 2.26% p.p SATA PURCHASES ITS FIRST DC-3 SATA receives its first DC-3 aircraft, from the Irish company Aer Lingus. 09

10 PERFORMANCE North American In North America, there was also an increase in supply, with the expansion to two new routes during the summer period, Terceira Boston and Terceira Oakland. The operating model was maintained for charters, with the flights chartered by tour operators from the SATA Group, Azores Express and SATA Express respectively. This transatlantic operation comprised the following routes: Ponta Delgada Boston Ponta Delgada Ponta Delgada Toronto Ponta Delgada Ponta Delgada Providence Ponta Delgada Ponta Delgada Montreal Ponta Delgada Terceira Toronto Terceira Terceira Boston Terceira Terceira Oakland - Terceira Lisbon Boston Lisbon Lisbon Toronto Lisbon Oporto Boston Oporto (via Ponta Delgada) Oporto Toronto Oporto (or Faro) Overall, 155 more flights were operated than in the previous year and 16,868 more passengers were carried, a fall of 3 pp in the load factor having been reported, in comparison with the previous year. Year 2006 Variation Flights Operated (No.) Passengers Carried (No.) 128, , ,868 Load factor RPK/ASK (%) 78.24% p.p. Charter For Charter operations in Europe, the traditional series from Funchal to English Provinces, the French Provinces, the island of Jersey and Dublin were maintained, with connections between Faro and Dublin during the summer. These operations were joined by two new routes: Lisbon Sal Lisbon, on an annual basis and reinforced in the high season, and 1968 FRIENDLINESS IS IN THE AIR The Azorean spirit of the SATA service rides the skies, when in 1968 the company's flights begin to employ air hostesses, who impress passengers with their attention and friendliness. 10

11 PERFORMANCE Lisbon Porto Santo Lisbon, during the IATA summer season. In the Spring, there were a weekly operation, Ponta Delgada Vienna Ponta Delgada. Long-haul flights included the continuation of operation between Lisbon and Punta Cana, reinforced during the high season with two more connections, one to Punta Cana and the other to Samaná, also in the Dominican Republic. The Brazilian northeast, in particular the rotation between Porto Seguro and Salvador, from Lisbon, began to operate all year round. In comparison with the previous year, charter operations also reported a significant increase in activity, although the load factor recorded a fall of 5 percentage points. Year 2006 Variation Flights Operated (No.) 721 1, Passengers Carried (No.) 108, , ,131 Load factor RPK/ASK (%) 86.14% 80.89% p.p. Fleet Since the introduction of a new A aircraft, in April, SATA Internacional now has four Airbus and three A Length Span Height Speed Airbus A m m m 900 km/h Airbus A m m m 900 km/h Altitude Range Fuel No. Passengers Airbus A ,900 m 9,200 km 68,260 Lt. 222 Airbus A ,600 m 4,400 km 23,859 Lt. 161 The A320 aircraft flew 4,026 flights, with a total of 9, block hours, while the A310 fleet flew 3,296 flights, with a duration of 12, block hours. These figures include position, training and experience flights SATA REACHES FLORES Slowly, SATA begins to interconnect the islands of the archipelago, and in 1969 starts scheduled flights to the island of Flores. 11

12 PERFORMANCE ACMI charters, in situations of unforeseen immobilisation, totalled 38 flights, with block hours. The following Figure summarises the Company's key performance indicators for the years 2006 and, which illustrate its growth. Commercial Traffic 2006 Variation Flights performed 6,498 7, Km travelled 12,236,181 14,540,515 +2,304,334 ASK (million) , RPK (million) , Load factor RPK/ASK (%) p.p. ATK (million) TKP (million) Load factor TKP/ATK (%) p.p. Punctuality (%) p.p. Commercial Activities Continuing to pursue its expansion policy, SATA Internacional launched the scheduled routes Ponta Delgada/Dublin/Ponta Delgada and Funchal/Paris/Funchal. In the second case, it was a weekly flight throughout the year. In the case of Ponta Delgada/Dublin/Ponta Delgada, it was a weekly flight, but only during the IATA summer season. On the Funchal/Paris route the results were positive, suggesting a consolidation of the Company's position in the short term. Aircraft Handling Activities Self-Handling Coordination Lisbon/Funchal/Oporto The number of self-handled flights (supervision) was 4,987 departures, which corresponds to growth of 34.4% (including SATA Air Açores flights from Funchal): 1969 AIRPORT OPENED IN PONTA DELGADA Nordela Airport, in Ponta Delgada, is opened, with a runway that is 1800 m long and 45 m wide. 12

13 PERFORMANCE STOPOVERS % VAR-05 % VAR-06 Funchal SI 1,163 1,191 1, % -8.4% Funchal SP 0 0 1,117 Lisbon 2,134 2,102 2, % 12.0% Oporto % 1.7% Total 3,677 3,711 4, % 34.4% Training Various training initiatives were implemented: - Training at IATA on components for Apron, Dangerous Goods and Cargo Rates, in order to permit IATA certification. - Continuation of internal training for knowledge consolidation and refreshment,in order to contain costs, but including mandatory training in accordance with JAR OPS, IATA and new National regulations. - Training on Dangerous Goods in accordance with JAR OPS regulations - Initial training for contract workers. Hiring of Permanent Staff Staff were hired in the summer at some stopovers, to supplement the winter season staff. Maintenance Activities was another year of growth in the SATA Internacional fleet: the aircraft CS-TKN (MSN: 624) was phased in (April). This aircraft is equipped with 2 Pratt and Whitney PW4156A-1C engines. As these engines are from a different manufacturer to those in SATA Internacional's remaining A310 fleet, the Company itself and its line engineers were required to be certified in this type of engine, and this certification took place in stages throughout. In addition to this activity, the following events occurred during : * C Inspections by the maintenance Company hired of following aircraft: 1971 FAIAL AIRPORT OPENED Castelo Branco airport opens on the island of Faial, with the first scheduled flights by SATA arriving in

14 PERFORMANCE - C11 CHECK + 5 Y - APR07 - Aircraft CS-TGV - 4C CHECK + 5 Y APR07 - Aircraft CS-TKN at the same time as the aircraft's phase in - CS-TKJ Inspection C6 - OCT/NOV * Replacement / Removal of Engines/APU/Landing Gear - Replacement of CS-TGU landing gears in MAR07 due to end of life. - Removal, workshop repair of APU on CS-TGU in MAY07 and subsequent reinstallation. - Removal, workshop repair of engine #1 of the CS-TGV S/N: in MAY07 * MOD A-3101-R02 Replacement of all tourism class seats on CS-TKM JUN07 * Maintenance of the maintenance and engineering agreements with TAP-Air Portugal and line maintenance with SATA Air Açores, Swiss and Royal International. Flight Operations According to an overall analysis of, the planned commercial network was successfully fulfilled in general. Nevertheless, with the network proposed, similar to that of 2006, this Department continued to experience crew planning problems, due essentially to staggered departures and arrivals between the airports of Oporto, Ponta Delgada and Terceira. To satisfy the increase in in-flight services in the IATA summer season, 50 new cabin crew members were hired. Following the commencement of the AIMS, a positive contribution was made to shared management in the planning of Crews with Sales Department. Quality and Security In order to offer a superior standard of service, in SATA Internacional invested in the area of quality and security SATA AND THE UNIONS After the April Revolution in Portugal, all SATA employees become union members. 14

15 PERFORMANCE Quality Management Bureau In February 2005, a Quality Management Bureau was set up for the General Directorate of Operations, with 2 qualified engineers from the Ponta Delgada and Terceira stopovers being assigned to, with advice from an external consultant, implement the new Project. Awareness-raising and training activities for various groups within the Company, to identify and describe existing processes and their interactions, as well as the creation of various manuals, characterised the activities of this bureau over the last year. Security Quality Activities In compliance with the provisions of the National Civil Aviation Security Quality Control Programme (PNCQSAC) and with Chapter 16 of the SATA Air Açores and SATA Internacional Security Manuals, it is reported that, in, this Security Bureau monitored the security quality, as well as security training, which reveals the growing role of this area in the operations of the two SATA Group airlines. The initiatives that involved the various members of the security bureau are summarised under security, auditing and training activities. Human Resources growth of 28% in staff numbers in the last 4 years SATA Internacional, on 31 December, had 527 employees, 11% more than in the previous year, and of these 42.3% are Ground Staff and 67.7% are Plane Staff (223 cabin crew and 81 engineers). The share of graduates in the company structure was 23.34%. The average age remained close to SATA PROVIDES GROUND HANDLING FOR CONCORDE The most advanced aircraft in the history of civil aviation, Concorde, makes a stopover at Santa Maria airport, with ground handling provided by SATA. 15

16 PERFORMANCE Staff as at 31 December CC FO GC Total as at 31 Dec Cabin Crew Ground Crew Flight Officers Total - Staff 31Dec Staff Qualifications Higher Education Secondary Education Basic Education MILLION PASSENGERS An increasing number of people use SATA flights to link what the sea separates, and in 1977 SATA welcomes its 1 millionth passenger. 16

17 PERFORMANCE SATA Internacional Recruitment Policy maintains the need to hire staff on fixed-term contracts to respond to the seasonality of the company's activity. In there was a considerable rise of 70% in the number of temporary staff, justified by the need to reinforce, during the IATA summer season, the crew base in Ponta Delgada, Lisbon and Funchal, with the seasonal recruitment of 76 cabin crew members. 23 operators were also hired for the Call Centre. However, there has been a significant increase of 40% in the number of contracts without term in the last 4 years (information from 31 December), increasing 6% in compared with Variation in Staff (Breakdown by contract type as at 31 Dec) 100% 80% 60% 40% 20% 0% % 80% 60% 40% 20% 0% Fixed-Term Contract Contract without Term Training and Development Investment in human capital a constant effort is made to provide the company with the appropriate human resources, so that it can be a high quality, motivated workforce, with growing levels of productivity Selection and Recruitment in Ponta Delgada, Lisbon and Funchal. A significant increase compared with PICO AIRPORT OPENED Continuing the process of interconnecting all islands by air, Pico airport is opened. 17

18 PERFORMANCE In, SATA Internacional organised 9 selection procedures (3 procedures in 2006), involving a total of 473 applicants (114 applicants in 2006). 116 trainees resulted from these procedures (43 trainees in 2006), and 51,447 were invested in initial training. This significant increase, compared with 2006, is justified by the need to implement 2 selection procedures for the Call Centre that involved a total of 145 applicants, of whom 32 were selected for Initial training and 23 were hired. 3 selection procedures for cabin crew were held, to be based at Ponta Delgada, Lisbon and Funchal, involving a total of 278 applicants, of which 88 were selected for training and 76 were hired. Vocational Training In its ongoing effort to maximise the efficiency of its human resources through the acquisition of knowledge and vocational skills, the company trained 1,532 employees in, holding 336 training courses (22% more than in 2006), totalling almost 27,025 hours (44% more than in 2006). This increase occurred mainly in the area of Flight Operations. Since 2004 there has been a steady fall in training costs (50% less in 2006 compared with 2003). However, in, justified by the increase of 20% in training courses compared with 2006, there has been a significant increase in Training costs of 71% compared with Training 2,000 30,000 No. of Courses No. of Staff 1,500 1, ,000 20,000 15,000 10,000 5,000 0 No. of Hours Courses held Participants Hours of training 1983 SÃO JORGE AIRPORT OPENED Another step in bringing together the whole archipelago with the opening of São Jorge airport. 18

19 PERFORMANCE Total training costs 1,500 thousand euros 1, Due to a consolidated practice of compliance with standards and legislation, the Flight Operations Division (DOV) and Continuous Airworthiness Division (DCA) are the two areas with the most significant investment in training, the DOV being responsible for 80% of total investment in training. To justify part of the increase in values in, we have the initial qualification of 15 Airbus 310 pilots and 10 A320 pilots. The qualifications of these 25 pilots represented an investment of 376,450. The DCA, with investment of 36,900, is the second most represented area in total training costs, justified by the continuous effort to qualify Aircraft Maintenance Personnel (AMP) in A310 and A320 equipment. In the remaining areas, investment was made in training totalling 148,537, of which 118,998 were in Support Areas, in particular Human Resources, Tax, Accounting and Information Systems. Areas with highest Training costs (EUR) Other 118,998 13% DGC 25,239 3% DOT 4, % DCA 36,900 4% DOV 740,565 80% 1987 SATA RENAMED SATA AIR AÇORES SATA is renamed SATA Air Açores and in the same year it is awarded the silver medal for tourism merit. 19

20 PERFORMANCE Information Systems for Information Systems was marked above all by two different major projects, one focusing on administrative and financial procedures (MySAP ERP) and the other with a significant impact on the service provided to our customers, namely frequent flyers (Crane). The MySAP ERP project was soon established as a true process of change for SATA that can be considered quite ambitious, since its aim is to cover all the major functional back office areas: Financial (General Accounting, Accounts Payable, Accounts Receivable, Treasury and Assets), Human Resources (Personnel Administration, Salary Processing, Training, Recruitment, Assessment and Performance and Occupational Medicine), Logistics (Supplies and Warehouse Management), Sales and Invoicing and Ground Equipment Maintenance, as well as advancing at the same time with a Document Management process (accounting documents) and an Attendance Management process. Decision taking for the implementation of MySAP ERP can be considered strategic, if not crucial, for the future of all the SATA companies, since, while it is not a business application, it can guarantee the proper functioning of business support processes. The first transaction using this new application was performed on 1 January and the remaining modules were phased into production over the following months. This process of change can be considered to have been successfully concluded, although there is still room for consolidation of processes in the future. Electronic Tickets were launched by SATA in 2005, initially introduced for travel agencies and then (last quarter of 2006) launched in full strength for all SATA agencies. During the Interline eticket (IET) process was implemented with our main business partner, thus extending the services available associated with the existing code share. With the implementation of this functionality, SATA is now 100% eligible with regard to the IATA adoption of Electronic Ticketing under its Simplifying the Business (StB) initiative. No less significant was the expansion of eligibility to issue Electronic Tickets to routes to and from the United States of America, this market now enjoying all associated functionalities ATPs ARRIVE IN THE AZORES SATA acquires its first ATPs, which continue to guarantee air connections within the archipelago today. 20

21 PERFORMANCE In May the Crane project went live and was soon introduced in all the areas of the company in a way that can be considered non-intrusive for business procedures in progress. This change resulted from the need felt to adapt the support application to the business procedures associated with the management of members of Clube SATA, and all the objectives of this project were achieved with the entry into production of this application. The value generated for members of the club is considerably higher than with the previous solution and a platform has been created for the progress and development of the club. Internet sales, as a direct sales channel, play an increasingly important role in the life of companies that seek to be competitive in their market, both as a matter of processing efficiency and as a means to achieve greater presence and market penetration. Airline companies are not uninvolved with this technology, and the success of both low-cost and traditional airlines is directly related to how they sell their products on the Internet. To provide SATA with an internet sales channel that allows it to achieve the group's sales objectives, a project is being organised that has been given the name SOBE SATA Booking Engine. The plan for this project was the execution of a series of activities with an expected duration of more than 1 year and the main functionalities are due to be made available in The first stage of this project was first developed in December and is expected to be concluded in May It will permit full online reservations and payments and the issuing of electronic tickets CHANGE AND EXPANSION SATA experiences a historical occasion: the era of the AVRO HS 748 comes to an end, twenty years later; it joins the International Air Transport Association IATA and the European Regional Airlines Association ERA; it acquires the Canadian Pacific Airlines offices in Lisbon; and receives two ATP aircraft. 21

22 PERFORMANCE Economic and Financial Performance Economic Situation Performance Net profit ( k) 4,000 3,000 2,000 1, Unit: k Operating income 167, , , , ,662 Operating costs (167,716) (142,682) (132,118) (117,565) (105,912) Operating profit (309) 965 (1,114) 2,332 2,750 Financial profit (84) (330) 770 (584) (1,068) Current profit (393) 635 (344) 1,748 1,682 Extraordinary profit 2,558 1, (114) Tax on profit for the year 498 (72) (69) (1) (1) Net profit for the year 2,663 1, ,289 1, SATA AIR AÇORES AWARDED MEDAL OF HONOUR As recognition for the quality of its flights and its operating method, SATA Air Açores is awarded a coveted medal of honour by the International Civil Aviation Organization (ICAO). 22

23 PERFORMANCE For the sixth year running, the Company achieved a Net Profit ( k 2,663), due essentially to the increase in revenue. Total operating income representing more than 95.65% of the Total Income was up k 23,760 on the figure for the previous year. This increase is due, in part, to the performance of Income generated by the growth in scheduled traffic and also by the significant increase in charter operations. The income structure highlights the growing importance of charter operations, representing around 48%, a fact that reflects in the strategic orientation of the Company aimed at improving and diversifying its operations, reducing dependence on the PDL/LIS/PDL route. Operating Costs and Income Unit: k (thousand euros) Scheduled Passengers and Cargo 75,705 70,523 68,636 Non-scheduled Passengers and Cargo 77,301 67,066 55,722 Total Passengers and Cargo 153, , ,358 Compensatory payments 6,754 5,592 6,278 Other operating income 7, Operating income 167, , ,004 External supplies and services 130, , ,510 Personnel costs 20,276 17,001 16,011 Other operating costs 16,782 9,997 6,597 Operating costs 167, , ,118 Operating profit (309) 965 (1,114) Operating Costs increased by 17.5% compared with the previous year, maintaining a level of activity around 9.6% higher of air transport operations SATA CONTINUES TO GROW SATA takes another step towards internationalisation, with its first charter flight outside Portugal. 23

24 PERFORMANCE Operating income Operating income % 5% 4% 0% 91% 96% Total Passengers and Cargo Compensatory payments Other operating income Total Passengers and Cargo Compensatory payments Other operating income Operating costs Operating costs % 10% 4% 0% 78% 96% External Supplies and supplies Personnel costs Other operating costs External Supplies and supplies Personnel costs Other operating costs Given the realisation levels in 2006, External supplies and services recorded an increase of k 14,974, representing an increase of 12.9%, due above all to the variable component associated with operations. Personnel costs increased by k 3,275, 19.26% higher than the previous year, justified by the increase in activities and by salary increases SATA AWARDED AOC SATA Internacional, with a Boeing 737, begins to diversify SATA destinations and is awarded its AOC (Air Operator's Certificate), finally entering the competitive world of civil aviation. 24

25 PERFORMANCE Financial Profit/Loss The financial loss was k 84, k 246 less than in The performance of the financial function was motivated above all by the foreign exchange differences in payments and receipts in. EBITDAR The free cash flow available for investments measured by the EBITDAR (Earnings Before Interest, Taxes, Depreciation, Amortization, and Restructuring or Lease Costs) was k 15,853, higher than k 2,598 of the previous year. Unit: k (thousand euros) EBITDAR 15,853 13,255 13,611 Financial Situation The Company's Net Assets reported an increase of k 16,539, which represented a positive variation of 28.9% reflecting to a great extent the effect of: iii) Increase of k 3,826 on Fixed Assets; iv) Increase of k 9,759 in bank deposits Changes in Net Assets 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10, SATA GUARANTEES NEW ROUTES SATA Internacional wins the concession for routes between Ponta Delgada and the cities of Lisbon, Oporto and Funchal, with a Boeing 737 and, subsequently, the new A

26 PERFORMANCE Changes in Net Worth 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, ECONOMIC AND FINANCIAL INDICATORS The analysis of economic and financial indicators shows once again a significant increase in the Net Worth of the Company which reached k 14,271 in, a figure that represents an increase of around 22.9%, in other words k 2,663. Ratios Operating Profitability -0.18% 0.67% -0.85% Return on Equity 18.66% 15.02% 4.10% Return on Assets 3.62% 3.05% 0.79% Equity to Debt Ratio 24.04% 25.52% 23.82% Debt 80.62% 79.67% 80.76% Equity to Assets Ratio 19.38% 20.33% 19.24% Operating profitability fell due to the increase in Operating costs compared with Operating income. The Return on Equity shows an increase, affected by the high Net Profit for the year FLIGHTS TO NORTH AMERICA SATA starts scheduled flights to the United States of America and Canada, strengthening ties with the Azores Diaspora. 26

27 PERFORMANCE The Equity to Assets Ratio was 19.38%, with a fall of 0.95 pp compared with Equally, the Equity to Debt Ratio of 24.04% shows a reduction of 1.48 pp. Changes in Liabilities 70,000 60,000 50,000 40,000 30,000 20,000 10, The Company's Liabilities increased by 30.5%, in other words, a further k 13,875, due essentially to the creation of Provisions for other risks and charges, to face future contingencies. Contribution to the Revenue of the State and the Region The contribution of SATA Internacional and its employees to the Revenue of the Autonomous Region of the Azores rose to 6,599,188 Euros, divided as follows: Company Employees Total Social Security Contribution 2,842,535 1,320,058 4,162,593 Personal Income Tax 2,307,670 2,307,670 Corporation Tax 128, ,925 2,971,460 3,627,728 6,599, NEW EQUIPMENT SATA receives two new Airbus A320 with which it will increase flights to Europe. 27

28 PERFORMANCE Proposal for Appropriation of Profit In accordance with legal and statutory provisions, the following application of net profit calculated in the year of, amounting to 2,662,895.74, is proposed. - Legal Reserve 133, Retained Earnings 2,529, Ponta Delgada, 14 March 2008 THE BOARD OF DIRECTORS António José Vasconcelos Franco Gomes de Menezes (Chairman) Luísa Maria Estrela Rego Miranda Schanderl (Director) António Maurício do Couto Tavares de Sousa (Director) Luís Filipe Soares Borges da Silveira (Director) 2005 NEW ROUTES SATA launches new routes to Europe. London and Madrid are the airline company's new commitments for the IATA summer season. 28

29 FINANCIAL STATEMENTS 29

30 FINANCIAL STATEMENTS BALANCE SHEETS AS AT 31 DECEMBER AND 2006 SATA - SOCIEDADE DE TRANSPORTES AÉREOS, SGPS, S.A. (Amounts in euros) 2006 Gross Depreciation Net Net Assets Notes assets and adjustments assets assets FIXED ASSETS: Tangible fixed assets: Plant and machinery 10 33,035,590 (14,649,209) 18,386,381 12,077,297 Vehicles ,015 (110,981) 26,034 37,309 Tools and utensils 10 77,046 (64,473) 12,573 31,311 Fixtures and fittings ,084 (544,256) 164, ,132 Outras imobilizações corpóreas ,978 (526,001) 213, ,638 Other tangible fixed assets Advances on tangible fixed assets ,389,458 34,698,713 (15,894,920) 18,803,793 14,978,145 CURRENT ASSETS: Inventory: Raw materials and consumables 21 e ,602 (103,753) 409, ,955 Accounts receivable - Short term: Trade debtors 10,463,818-10,463,818 8,719,360 Doubtful debts 21 e 23 79,992 (79,992) - - Advances to suppliers 646, , ,300 Group companies 16 2,040,908-2,040,908 3,545,260 Taxes and contributions recoverable , ,679 1,049,042 Other debtors 49 22,798,606-22,798,606 22,180,690 36,361,940 (79,992) 36,281,948 35,707,652 Banks and cash: Bank deposits 55 14,611,142-14,611,142 4,852,291 Cash in hand ,143 14,611,240-14,611,240 4,861,434 ACCRUALS AND DEFERRALS: Accrued income , , ,520 Deferred costs , ,154 1,035,135 Deferred tax assets 6 1,829,814-1,829,814-3,480,656-3,480,656 1,150,655 Total depreciation (15,894,920) Total adjustments (183,745) Total assets 89,666,151 (16,078,665) 73,587,486 57,088,841 The notes form an integral part of the balance sheet as at 31 December. THE CHARTERED ACCOUNTANT António Jorge Ferreira da Silva 30

31 FINANCIAL STATEMENTS Equity and liabilities Notes 2006 EQUITY: Capital 36, 37 e 40 5,000,000 5,000,000 Supplementary capital contributions 40 17,446,294 17,446,294 Legal reserve , ,294 Free reserves , ,178 Retained earnings 40 (11,525,643) (13,182,133) Net profit for the year 40 2,662,896 1,743,674 Total equity 14,271,203 11,608,307 PROVISIONS: Other provisions 34 15,750,773 6,184,162 LIABILITIES: Accounts payable - Medium and long term: Trade accounts payable, fixed assets 15 6,604,340 2,539,559 Accounts payable - Short Term: Trade creditors 11,929,109 11,745,376 Trade accounts payable, fixed assets 15 5,972,366 4,580,500 Advances from customers 161,452 - Group companies 16 8,776,172 11,712,702 Taxes and contributions payable 48 1,653, ,261 Other creditors 51 1,567,472 2,743,297 Advances from customers (tickets to be used) 3.e) 2,858,805 1,614,283 32,919,318 32,831,419 ACCRUALS AND DEFERRALS: Accrued costs 50 3,255,942 3,149,595 Deferred income , ,799 4,041,852 3,925,394 Total liabilities 59,316,283 45,480,534 Total equity and liabilities 73,587,486 57,088,841 The notes form an integral part of the balance sheet as at 31 December. THE BOARD OF DIRECTORS António José Vasconcelos Franco Gomes de Menezes (Chairman) Luísa Maria Estrela Rego Miranda Schanderl (Director) António Maurício do Couto Tavares de Sousa (Director) Luís Filipe Soares Borges da Silveira (Director) 31

32 FINANCIAL STATEMENTS PROFIT AND LOSS ACCOUNTS BY NATURE FOR THE YEARS ENDED 31 DECEMBER AND 2006 SATA - SOCIEDADE DE TRANSPORTES AÉREOS, SGPS, S.A. (Amounts in euros) COSTS AND LOSSES Notes 2006 Cost of materials consumed , ,703 External supplies and services ,657, ,684,105 Personnel costs: Salaries 15,453,341 13,152,743 Social charges 4,822,545 20,275,886 3,848,738 17,001,481 Depreciation of tangible fixed assets 10 6,138,705 5,141,585 Adjustments 21 5,963 39,309 Provisions 34 9,630,602 15,775,270 3, ,132,001 Taxes 13,630 30,470 Other operating expenses 20,857 34,487 9,928 40,398 (A) 167,716, ,681,688 Interest payable and similar charges 45 4,904,188 2,616,482 (C) 172,620, ,298,170 Extraordinary expenses , ,438 (E) 172,882, ,450,608 Income tax for the year 6 (497,462) 71,986 (G) 172,384, ,522,594 Net profit for the year 2,662,896 1,743, ,047, ,266,268 The notes form an integral part of the profit and loss account by nature for the year ended 31 December. THE CHARTERED ACCOUNTANT António Jorge Ferreira da Silva 32

33 FINANCIAL STATEMENTS INCOME AND GAINS Notes 2006 Services rendered ,310, ,589,731 Supplementary income 323, ,589 Operating subsidies 3.f) e 53 6,753,981 5,592,447 Reversals of depreciation and adjustments 21 18,604 7,096,374 55,076 6,057,112 (B) 167,407, ,646,843 Interest receivable and similar income 45 4,820,390 2,286,753 (D) 172,227, ,933,596 Extraordinary income 46 2,819,928 1,332,672 (F) 175,047, ,266,268 Operating profit/loss: (B) - (A) (308,670) 965,155 Financial profit/loss: (D-B) - (C-A) (83,798) (329,729) Current profit/loss: (D) - (C) (392,468) 635,426 Profit before taxes: (F) - (E) 2,165,434 1,815,660 Net profit for the year: (F) - (G) 2,662,896 1,743,674 The notes form an integral part of the profit and loss account by nature for the year ended 31 December. THE BOARD OF DIRECTORS António José Vasconcelos Franco Gomes de Menezes (Chairman) Luísa Maria Estrela Rego Miranda Schanderl (Director) António Maurício do Couto Tavares de Sousa (Director) Luís Filipe Soares Borges da Silveira (Director) 2005 SATA AERÓDROMOS CREATED The latest SATA group company, SATA Aeródromos, is set up to manage and maintain 4 of the 9 aerodromes in the Azores. SATA Aeródromos designs and implements the new Aerodromes on the islands of Pico, Flores, São Jorge and Graciosa. 33

34 FINANCIAL STATEMENTS PROFIT AND LOSS ACCOUNTS BY FUNCTION FOR THE FINANCIAL YEARS ENDED 31 DECEMBER AND 2006 SATA - SOCIEDADE DE TRANSPORTES AÉREOS, SGPS, S.A. (Amounts in euros) Notes 2006 Goods sold and services rendered ,310, ,589,731 Cost of goods sold and services rendered 56 (138,444,101) (112,860,672) Gross profit 21,866,888 24,729,059 Other operating income 56 9,916,302 7,568,493 Distribution costs 56 (11,826,804) (18,283,901) Administrative costs 56 (1,649,001) (2,395,184) Other operating expenses 56 (16,074,088) (9,295,753) Operating profit 2,233,297 2,322,714 Net interest (67,863) (507,054) Current profit 2,165,434 1,815,660 Tax on current profit 6 497,462 (71,986) Net profit 2,662,896 1,743,674 Earnings per share 2,663 1,744 The notes form an integral part of the profit and loss account by function for the year ended 31 December. THE CHARTERED ACCOUNTANT António Jorge Ferreira da Silva THE BOARD OF DIRECTORS António José Vasconcelos Franco Gomes de Menezes (Chairman) Luísa Maria Estrela Rego Miranda Schanderl (Director) António Maurício do Couto Tavares de Sousa (Director) Luís Filipe Soares Borges da Silveira (Director) 34

35 FINANCIAL STATEMENTS CASH FLOW STATEMENTS FOR THE YEARS ENDED 31 DECEMBER AND 2006 SATA - SOCIEDADE DE TRANSPORTES AÉREOS, SGPS, S.A. (Amounts in euros) Notes 2006 OPERATING ACTIVITIES Net profit for the year 40 2,662,896 1,743,674 Depreciation 10 6,138,705 5,141,585 Changes in provisions and adjustments 21 e 34 9,540,071 3,929,801 Financial profit 83, ,729 Deferred taxes (1,829,814) - Gains on sales of fixed assets - (1,164) Losses on sales of fixed assets - 6,547 Increase in accounts receivable (547,756) (5,461,516) (Increase)/Decrease in inventory (18,894) 14,202 Increase in accounts payable 2,854,780 5,059,835 (Increase)/Decrease in deferred costs 221,981 (158,137) (Increase)/Decrease in deferred income 10,111 (295,250) Increase in accrued income (103,023) 89,928 Increase/(Decrease) in accrued costs 106, ,734 Net cash from operating activities (1) 19,119,202 11,342,968 INVESTMENT ACTIVITIES Receipts relating to: Tangible fixed assets - 1,117 Interest receivable and similar income 312, , , ,498 Payments relating to: Tangible fixed assets (1,908,174) (2,542,778) Net cash from investing activities (2) (1,595,866) (2,370,280) FINANCING ACTIVITIES Payments relating to: Depreciation of finance lease agreements (6,758,279) (5,585,720) Interest payable and similar charges 45 (999,316) (679,819) Net cash from financing activities (3) (7,757,595) (6,265,539) Change in cash and cash equivalents (4)=(1)+(2)+(3) 9,765,741 2,707,149 Effect of exchange differences 15,935 (178,709) Cash and cash equivalents at the beginning of the period 55 4,861,434 1,975,576 Cash and cash equivalents at end of the period 55 14,611,240 4,861,434 The notes form an integral part of the cash flow statements for the year ended 31 December. THE CHARTERED ACCOUNTANT António Jorge Ferreira da Silva THE BOARD OF DIRECTORS António José Vasconcelos Franco Gomes de Menezes (Chairman) Luísa Maria Estrela Rego Miranda Schanderl (Director) António Maurício do Couto Tavares de Sousa (Director) Luís Filipe Soares Borges da Silveira (Director) 35

36 NOTES TO THE FINANCIAL STATEMENTS 36

37 NOTES TO THE FINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS AS AT 31 DECEMBER SATA - SOCIEDADE DE TRANSPORTES AÉREOS, SGPS, S.A. (Amounts in euros - ) INTRODUCTORY NOTE SATA Internacional Serviços e Transportes Aéreos, S.A. ( Company or SATA Internacional ) was incorporated on 10 December 1990, and was known as Oceanair Transportes Aéreos Regionais, S.A. until 20 February The Company is a limited company, with registered office at Avenida Infante D. Henrique, in Ponta Delgada, and has as its corporate purpose the operation of commercial, scheduled and non-scheduled air transport of passengers and their baggage, cargo and mail. In December 2006, the Company was awarded the contract for the operation of public service routes between the Mainland and the Autonomous Region of the Azores and between the Azores and the Autonomous Region of Madeira, on a code share basis with TAP for the period between 1 January and 31 December. As at 31 December, the Company operated with four Airbus A aircraft, of which three under lease agreements and the fourth under an operating lease, as well as three Airbus A320 aircraft under operating leases (Note 54). The notes that follow are in keeping with the sequential numbering as set forth in the Official Chart of Accounts. Notes not included herein are not applicable to the Company or are not relevant to the understanding of the financial statements. 3. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING PRINCIPLES The accompanying financial statements were prepared on the going concern basis from the accounting books and records of the Company, in accordance with generally accepted accounting principles in Portugal. SATA AND THE ARCHIPELAGO OF MADEIRA At the request of the Portuguese Government, SATA Air Açores increases the scope of its role in the Atlantic islands, ensuring the Funchal Porto Santo route. It will also offer charter flights to Las Palmas during the IATA summer season. 37

38 NOTES TO THE FINANCIAL STATEMENTS The main accounting principles used in the preparation of the financial statements were the following: a) Tangible fixed assets Flight equipment The flight equipment, acquired second hand, is recorded in the balance sheet at cost. Depreciations are calculated on cost less residual value (10% of the cost), on a straight-line basis and from the month of acquisition or commissioning, during the remaining useful life of the aircraft. Other tangible fixed assets Other tangible fixed assets are stated at cost. Depreciation is calculated on a straight-line basis, from the month of acquisition or commissioning, and determined based on the estimated useful life of the assets, as follows: Years of useful life Plant and machinery 5-10 Vehicles 7 Tools and utensils 6 Fixtures and fittings 4 Other tangible fixed assets 3-8 Repairs and routine maintenance costs are recorded as costs of the financial year to which they refer. b) Leases Fixed assets acquired by way of finance lease agreements as well as the corresponding liabilities are calculated using the financial method. According to this method the cost of the asset is recorded in tangible assets, the corresponding liability is recorded under liabilities and the interest included in the value of the lease SATA ACQUIRES TWO NEW AIRCRAFT A British Aerospace ATP and one new Airbus A310 arrive at São Miguel and are named on 15 June, the day the company celebrates its 60th anniversary. 38

39 NOTES TO THE FINANCIAL STATEMENTS payments and the depreciation of the assets are recorded as costs in the profit and loss account for the year to which they refer. Lease payments in respect of operating lease agreements are stated at cost as incurred. c) Inventory Goods are valued at cost, using the average cost method, which is lower than their market value. d) Accruals basis The Company records revenue and expenditure on an accruals basis whereby revenue and expenditure are recorded when generated, regardless of when they are received or paid. The differences between the amounts received and paid and the corresponding income and expenses are recorded under Accruals and deferrals (Note 50). e) Recognition of transport revenue The value of the sale of passenger transport is recorded as a liability at the time of sale in Advances from customers. When the transport is made, the sale revenue is transferred from Advances from customers to revenue for the year, if provided by the Company, or transferred to accounts payable, if the transport is made by another airline company. f) Financial compensation for public service obligations The financial compensation awarded by the Portuguese State for public service obligations are recognised in the period in which their entitlement originates and are recorded in operating subsidies. This financial compensation is calculated in accordance with the concession contracts for the scheduled airline services between Ponta Delgada and Lisbon, between Ponta Delgada and Oporto and between Ponta Delgada and Funchal (Introductory Note), by reference to number of passengers transported who are resident in the Autonomous Regions. SHUTTLE SERVICE TO EUROPE Increase in the frequency of flights to London and new routes to Dublin and Paris. SATA Internacional links the Archipelagos of Madeira and Azores to Europe. 39

40 NOTES TO THE FINANCIAL STATEMENTS g) Maintenance expenses The Company records as costs for the year expenses to be incurred in the future with general overhauls of aircraft, which are recorded in the profit and loss account for the years by reference to the flight hour costs of each aircraft, under the maintenance agreement, which establishes the payment of a fixed amount per flight hour for each aircraft (Note 34). h) Assets and liabilities in foreign currencies Assets and liabilities in foreign currencies as at 31 December were converted into Euros using the exchange rates in effect on that date, as follows: USD GBP CAD Exchange rate differences, favourable and unfavourable, resulting from differences between exchange rates applicable at the transaction date and those at the date of collection, payment or on the balance sheet date are recorded as income and costs in the profit and loss account. i) Deferred taxes assets Deferred taxes refer to temporary differences between the values of assets and liabilities for accounting purposes and their respective values for taxation purposes. Deferred tax assets and liabilities are calculated and evaluated annually using the taxation rates that are expected to be applicable on the date of the reversion of the temporary differences. Deferred tax assets are recorded exclusively when there are reasonable expectations of sufficient future taxable profit against which they can be utilised. At the end of each reporting period, a review is made of the temporary differences underlying deferred tax assets with a view to recognising deferred tax assets not previously recorded because the conditions to do so were not then extant and/or to reduce - SATA TODAY The SATA Group is today an air transport group comprising two companies: SATA Air Açores and SATA Internacional, two tour operators and a company that manages several aerodromes. It operates more than 18,000 flights a year, and takes the Atlantic spirit to 50 destinations throughout the world This is the result of the dedication of more than 1200 employees who work every day so that with SATA There is Something Different in the Air. 40

41 NOTES TO THE FINANCIAL STATEMENTS the amount of deferred tax assets recorded in the light of present expectations for their future recovery. The main temporary differences and their effect on the financial statements for the year ended 31 December are described in Note TAXES According to legislation in force, tax returns are subject to review and correction by the tax authorities during a period of four years (ten years for Social Security until 2000, inclusive, and five years since 2001). Therefore the Company s tax returns for 2004 to may still be subject to review. The Company's Board of Directors believes that any corrections due to reviews/inspections by tax authorities of those tax returns will not have a significant effect on the financial statements as at 31 December. Corporation tax (IRC) recorded as costs for the year ended 31 December is corrected by the effect of accounting for deferred taxes, as referred to in Note 3.i). The main temporary differences between the values calculated and taxable on 31 December and the corresponding deferred tax assets and their effects on the profit for are as follows: Description (Note 34) Rate Tax Non-tax deductible provisions 9,630, % 1,829,814 With the approval of the Portuguese Local Finances Act, municipalities may vote each year to charge Derrama (municipal surcharge), up to a maximum limit of 1.5% on the taxable profit not free from corporation tax (IRC). Given that approval shall take effect from 1 January, the amount of deferred tax assets and liabilities is calculated based on a maximum rate of 19% (17.5% of taxable income and 1.5% of Derrama ). As at 31 December, the amount recorded in income tax is as follows: Current tax (Note 48) 1,332,352 Deferred tax (1,829,814) (497,462) 41

42 NOTES TO THE FINANCIAL STATEMENTS 7. AVERAGE NUMBER OF EMPLOYEES During the years and 2006, the average number of employees working for the Company was 524 and 463, respectively. 10. CHANGES IN FIXED ASSETS During the year ended 31 December, changes in the values of tangible fixed assets, as well as in their accumulated depreciation, were as follows: Gross assets Opening Disposals Closing Headings balance Increases and write-offs Transfers balance Tangible fixed assets: Plant and machinery 20,795,291 9,870,376 (19,535) 2,389,458 33,035,590 Vehicles 137, ,015 Tools and utensils 77, ,046 Fixtures and fittings 627,749 93,403 (12,068) - 709,084 Other tangible fixed assets 739, ,978 Advances on tang, fixed assets 2,389, (2,389,458) - 24,765,750 9,964,566 (31,603) - 34,698,713 Accumulated depreciation Headings Opening balance Increases Disposals and write-offs Closing balance Tangible fixed assets: Plant and machinery 8,717,994 5,950,750 (19,535) 14,649,209 Vehicles 99,706 11, ,981 Tools and utensils 45,735 18,738-64,473 Fixtures and fittings 495,617 60,495 (11,855) 544,257 Other tangible fixed assets 428,553 97, ,000 9,787,605 6,138,705 (31,390) 15,894,920 The increase in Plant and machinery of 12,259,834, which includes additions for the year and transfers of fixed assets in progress of 9,870,365 and 2,389,458, respectively, refers essentially to the acquisition of an Airbus A aircraft through a lease agreement, for the sum of 9,488,570 (Note 15) and major repairs to TGU and TGV aircraft engines, of approximately 2,630,