Air Canada 2006 Annual Report Download - page 27

conditions on short-term leases and future return to lessor expenses were also factors in the increase over
2005.
Food, beverage and supplies expense decreased $4 million or 1 per cent versus 2005 on a passenger traffic
increase of 5 per cent. The volume-related increase was more than offset by cost reduction initiatives and the
impact of new catering programs, including the buy-on-board program.
Commission expense decreased $16 million or 6 percent in 2006 on combined passenger and cargo revenue
growth in 2006 of 8 percent. The decrease in commission expense was largely due to the impact of a change in
the base commission structure together with other commercial initiatives to reduce commission expense which
more than offset the volume-related increase. Commissions, as a percent of passenger and cargo revenues,
declined from 2.9 percent in 2005 to 2.5 percent in 2006. Approximately 61 percent of domestic bookings were
via the web in December 2006, up approximately 11 percentage points from the same month last year.
For 2006, capacity fees paid to Jazz, pursuant to the Jazz CPA, amounted to $871 million compared to $693
million in 2005, pursuant to the Initial Jazz CPA. The increase of 26 percent was mainly driven by a growth of
12 covered aircraft in Jazz’s operating fleet, resulting in a 27 percent increase in block hours over 2005. ASM
capacity for flights operated by Jazz increased 51 percent over 2005.
For 2006, other expenses increased $47 million over 2005. Increases included credit card fees, consulting and
advisory fees, advertising and promotion expenses, building rent and crew cycle expenses.
Non-operating expense amounted to $191 million for 2006 compared to non-operating expense of $224 million
for 2005. For 2006, net interest expense decreased $39 million from 2005. The increase in interest expense,
largely driven by the financing of additional aircraft, was more than offset by capitalized interest relating to the
acquisition of the Boeing 777 and 787 aircraft and growth in interest income due to higher cash balances and
higher average interest rates. In 2006, loss on sale and provision on assets of $6 million was recorded. The Air
Canada Services segment recorded an impairment loss of $7 million on one of its buildings in Quarter 4 2006
and a gain on sale of assets of $5 million on one of its commercial real estate properties in Quarter 3 2006. In
2005, loss on sale and provision on assets amounted to $31 million of which approximately half related to the
write-down of Boeing 747 inventory.
For 2006, gains from the revaluation of foreign currency monetary items amounted to $12 million, attributable to
a stronger Canadian dollar at December 31, 2006 compared to December 31, 2005. This compared to foreign
exchange gains of $47 million recorded in 2005.
Segment loss of $74 million was recorded in 2006 compared to a segment loss of $20 million in 2005, a
deterioration of $54 million, for the reasons disclosed above.
8.2 Summary of Jazz Segment Results
For 2006, operating income amounted to $144 million, pursuant to the Jazz CPA, compared to operating
income of $129 million in 2005, pursuant to the Initial Jazz CPA. EBITDAR for 2006 improved $72 million over
2005. The increase in operating income and EBITDAR in 2006 was mainly due to a growth in fleet size
consistent with Jazz’s plan to increase its relative share of the North American ASM capacity, an increase in
hours of contract flying under the Jazz CPA, as well as cost control.
The Jazz CPA came into effect on January 1, 2006. The major changes from the Initial Jazz CPA include: a
longer term, a larger number of Covered Aircraft with a guaranteed minimum of 133 aircraft throughout the term,
and Jazz expenses now reimbursed by Air Canada at a higher mark-up for controllable costs, and on an at-cost
basis by Air Canada for other expenses.
Operating revenues for 2006 increased $358 million or 35 percent over 2005. The significant increase in
revenues was due to a net addition of 14 aircraft operated by Jazz resulting in a 27 percent increase in block
hours flown over 2005 as well as higher pass-though costs charged to Air Canada under the Jazz CPA.
Operating expenses increased $343 million or 38 percent over 2005 and included an increase in pass-through
costs of $177 million or 55 percent, driven largely by a capacity increase of 51 percent. Unit cost for 2006
decreased 12 percent compared to 2005, in part due to an increase in long-haul flying which generally results in
lower unit costs per ASM. Excluding fuel expense, unit cost for 2006 was down 10 percent. Unit cost
reductions were achieved in all expense categories with the exception of fuel expense and aircraft rent. The
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Management's Discussion and Analysis of Results and Financial Condition