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12. OFF-BALANCE SHEET ARRANGEMENTS
Refer to Notes 16 and 17 to Air Canada’s combined consolidated financial statements for additional information
regarding derivative financial instruments and guarantees of the Corporation. The following is summary of the
more significant off-balance sheet arrangements.
Guarantees
Performance Obligations Relating to Aircraft Leasing Agreements
With respect to 45 aircraft leases, the difference between the amended lease payments from the CCAA
restructuring arrangements and amounts due under the original lease contracts will be forgiven at the expiry
date of the leases if no material defaults have occurred. If a material default occurs, this difference plus interest
will become due and payable and all future rent will be based on the original contracted rates. Rent expense is
being recorded on the renegotiated lease agreements and any liability would be recorded only at the time
Management believes a material default under the leases is likely to occur.
Derivative Instruments
Under its risk management policy, the Corporation manages its exposure to changes in interest rates, foreign
exchange rates and jet fuel prices through the use of various derivative financial instruments. The Corporation
uses derivative financial instruments only for risk management purposes, not for generating trading profit.
Interest Rate Risk Management
The Corporation from time to time enters into interest rate swaps to manage the risks associated with interest
rate movement on US dollar. and Canadian dollar floating rate debt and investments, including anticipated debt
transactions.
During 2006, the Corporation entered into 19 interest rate swaps with a notional value of US$414 million to
receive floating rates and pay a weighted average fixed rate of 5.81 percent for the debt to be arranged in
relation to the financing of Embraer 190 aircraft between June 2006 and November 2007. The swaps have 15-
year terms from the expected delivery date of the aircraft and their maturities range from June 2021 to
December 2022. The Corporation intends on settling the interest rate swaps upon delivery of the related
aircraft. Before December 31, 2006, seven of these swaps were settled at a net loss of $4 million. As at
December 31, 2006, the fair value of the remaining 12 swaps was $13 million in favour of the counterparty and
is recorded in “other long-term liabilities” on Air Canada's combined consolidated statement of financial position.
The Corporation has recognized a net loss of $17 million in “other” non-operating expense on Air Canada’s
consolidated statement of operations since inception of these swaps in the second quarter of 2006.
During 2006, Jazz entered into interest rate swaps to hedge its exposure to changes in interest rates on its
outstanding senior secured credit facility. The interest rate swap is with third parties with a notional value of
$115 million, which has effectively resulted in a fixed interest rate of 7.09 percent for the term of the senior
secured credit facility until February 2, 2009. Effective February 2, 2006, the Corporation is applying hedge
accounting to these financial instruments and no amount is recorded in Air Canada's combined consolidated
financial statements. As at December 31, 2006, the fair value of these swaps was less than $1 million in favour
of the counterparty.
The Corporation has interest rate swaps with a term to January 2024 and convert-lease payments related to
two Boeing 767 aircraft leases consolidated under AcG-15, from fixed to floating rates. As at December 31,
2006, these two swaps have a fair value of $4 million in favour of the Corporation ($7 million in favour of the
Corporation as at December 31, 2005).
Foreign Exchange Risk Management
Foreign exchange risk exposure is common to an international business such as Air Canada. To manage this
risk exposure, Air Canada enters into various foreign currency hedging structures. These hedging structures
provide protection to Air Canada in the form of reduced risk and volatility with respect to movements in the
foreign exchange markets. At December 31, 2006, the Corporation had entered into foreign currency forward
contracts and option agreements on US$503 million or approximately 31 percent of its projected net 2007 US
dollar shortfall with the majority of hedges occurring in the first half of 2007. Based on foreign currency prices at
December 31, 2006, the average price of the hedge portfolio is $1.1035. The fair value of the foreign currency
contracts as at December 31, 2006 is $25 million in favour of the Corporation ($1 million in favour of third
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