Air Canada 2006 Annual Report Download - page 115

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Fuel Price Risk Management
The Corporation enters into contracts with financial intermediaries to manage its exposure to jet fuel price
volatility. As of December 31, 2006, the Corporation had collar option and swap structures in place to hedge a
portion of its anticipated jet fuel requirements over the 2007 to 2008 period. Since jet fuel is not traded on an
organized futures exchange, liquidity for hedging this commodity is mostly limited to a shorter time horizon.
Crude oil and heating oil contracts are effective commodities for hedging jet fuel and the Corporation mainly
uses these commodities for medium to longer term hedges.
As of December 31, 2006, approximately 39% of the Corporation's anticipated purchases of jet fuel for 2007
were hedged. The Corporation's contracts to hedge anticipated jet fuel purchases over the 2007 period
comprised of jet fuel, heating oil and crude-oil based contract. The Corporation's contracts to hedge anticipated
purchases over the 2008 period are all crude oil-based and covered 8% of the first quarter of 2008 anticipated
jet fuel purchase requirements.
Hedge accounting was applied prospectively from October 1, 2005. Under hedge accounting, gains or losses on
fuel hedging contracts are recognized in earnings as a component of aircraft fuel expense when the underlying
jet fuel being hedged is consumed. Prior to the commencement of the Corporation's hedge accounting being
applied, an unrealized gain of $2 was recorded in other non-operating expense during the nine months ended
September 30, 2005.
For the year ended December 31, 2006, the Corporation recognized a net loss of $43 as a component of fuel
expense on the combined consolidated statement of operations (net loss of $3 for the year ended December
31, 2005) on the settlement of matured contracts and amortization of deferred costs. The fair value of the
Corporation’s fuel hedging contracts as at December 31, 2006 was $24 (US$21) in favour of counterparties
(2005 – $3 in favour of third parties).
During 2006, the Corporation entered into two three-way collar option structures which are composed of one
short put option, one long call option and one short call option. This structure creates a ceiling on the potential
benefits to be realized by the Corporation if commodity prices increase above the threshold of the short call
strike price. Due to the ceiling in these derivative instruments, this type of derivative does not qualify as a
hedging instrument under GAAP. As at December 31, 2006, one of the three-way collar option structures
remains outstanding, the fair value of this derivative instrument is $1 in favour of the counterparty and is
recorded in Accounts payable and accrued liabilities on the combined consolidated statement of financial
position.
During 2005, the Corporation de-designated one contract previously under hedge accounting that was
combined into a new net-written option. The net-written option has a fair value less then zero at the time of
inception and so it does not qualify as a hedging instrument under GAAP. As at December 31, 2006, the fair
value of the net written option was $2 in favour of the counterparty (2005 – less than $1 in favour of the
counterparty) and is recorded in Accounts payable and accrued liabilities on the combined consolidated
statement of financial position.
The Corporation has recognized a net loss of $3 in non-operating expense during the year ended 2006 for
these derivative instruments which do not qualify as hedge accounting instruments.
Concentration of Credit Risk
The Corporation does not believe it is subject to any significant concentration of credit risk. Cash and short-term
investments are in place with major financial institutions, Canadian governments and major corporations.
Accounts receivable are generally the result of sales of tickets to individuals through geographically dispersed
travel agents, corporate outlets, or other airlines, often through the use of major credit cards.
Statement of Combined Consolidated Financial Position Financial Instruments — Fair Values
The carrying amounts reported in the combined consolidated statement of financial position for cash and short-
term investments, accounts receivable and accounts payable approximate fair values due to the immediate or
short-term maturities of these financial instruments.
The fair value of long-term debt and capital lease obligations as at December 31, 2006 and December 31, 2005
approximates its carrying value.
115
Combined Consolidated Financial Statements 2006