Air Canada 2006 Annual Report Download - page 56

In addition, the Corporation's credit ratings influence its ability to access capital markets. There can be no
assurance that the Corporation's credit ratings will not be downgraded, which would add to the Corporation's
borrowing and insurance costs, hamper its ability to attract capital and limit its ability to operate its business, all
of which could have a material adverse effect on the Corporation's business, results from operations and
financial condition.
Limitations Due to Restrictive Covenants
Some of the financing and other major agreements of the Corporation contain restrictive covenants which affect
and, in some cases, significantly limit or prohibit, among other things, the manner in which the Corporation may
structure or operate its business, including by limiting the Corporation's ability to incur indebtedness, create
liens, sell assets, make capital expenditures and engage in acquisitions, mergers or restructurings. In addition,
certain financing arrangements require the Corporation to maintain financial ratios. Any future borrowings may
also be subject to similar covenants which limit Air Canada's operating and financial flexibility, which could
materially and adversely affect Air Canada's profitability.
A failure by the Corporation to comply with its contractual obligations (including restrictive covenants), or to pay
its indebtedness and fixed costs could result in a variety of material adverse consequences, including the
acceleration of its indebtedness, the withholding of credit card proceeds by the credit card service providers and
the exercise of remedies by its creditors and lessors, and such defaults could trigger additional defaults under
other indebtedness or agreements. In such a situation, it is unlikely that the Corporation would be able to repay
the accelerated indebtedness or fulfill its obligations under certain contracts, make required lease payments or
otherwise cover its fixed costs. Also, the lenders under the financing arrangements could foreclose upon all or
substantially all of the assets of the Corporation which secure the Corporation's obligations.
Fuel Costs
Fuel costs constituted the largest percentage of the total operating costs of the Corporation in 2006. Fuel prices
fluctuate widely depending on many factors including international market conditions, geopolitical events and
the Canada/U.S. dollar exchange rate. Air Canada cannot accurately predict fuel prices. During 2004, 2005 and
2006, fuel prices increased and fluctuated near or at historically high levels. Should fuel prices continue at, or
continue to increase above, such high levels, fuel costs could have a material adverse effect on the
Corporation's business, results from operations and financial condition. Due to the competitive nature of the
airline industry, the Corporation may not be able to pass on increases in fuel prices to its customers by
increasing its fares. Based on 2006 volumes, Management estimates that a US$1 per barrel movement in the
average price of West Texas Intermediate crude oil would have resulted in an approximate C$27 million change
in 2006 fuel expense for the Corporation (excluding any impact of fuel surcharges and fuel hedging), assuming
flying capacity remained unchanged and that refining spreads between West Texas Intermediate crude oil and
jet fuel as well as foreign exchange rates remained constant.
Labour Costs and Labour Relations
Labour costs constitute one of the Corporation's largest operating cost items. There can be no assurance that
the Corporation will be able to maintain such costs at levels which do not negatively affect its business, results
from operations and financial condition. There can be no assurance that future agreements with employees'
unions or the outcome of arbitrations will be on terms consistent with the Corporation’s expectations or
comparable to agreements entered into by the Corporation’s competitors. Any future agreements or outcome of
negotiations, mediations or arbitrations including in relation to wages or other labour costs or work rules may
result in increased labour costs or other charges which could have a material adverse effect on the
Corporation's business, results from operations and financial condition.
Most of the Corporation's employees are unionized and long-term collective agreements were concluded in
2003 and 2004. No strikes or lock-outs may lawfully occur during the term of the collective agreements expiring
in 2009. However, there can be no assurance that there will not be a labour conflict that could lead to an
interruption or stoppage in the Corporation's service or otherwise adversely affect the ability of the Corporation
to conduct its operations, all of which could have a material adverse effect on its business, results from
operations and financial condition.
If there is a labour disruption or work stoppage by any of the unionized work groups of Jazz, there could also
likely be a material adverse effect on the Corporation’s business, results from operations and financial
condition. In addition, labour problems at the Corporation's Star Alliance® partners could result in lower demand
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