Air Canada 2006 Annual Report Download - page 59

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Pension Plans
Canadian federal pension legislation requires that the funded status of registered pension plans be determined
periodically, on both a going concern basis (essentially assuming indefinite plan continuation) and a solvency
basis (essentially assuming immediate plan termination).
The solvency liability is influenced primarily by long-term interest rates and by the investment return on plan
assets. The interest rate used to calculate benefit obligations for solvency purposes is a prescribed rate derived
from the interest rates on long-term Government of Canada bonds. In the current low interest rate environment,
the calculation results in a higher present value of the pension obligations, leading to a larger unfunded
solvency position.
In May 2004, Air Canada and the Office of the Superintendent of Financial Institutions agreed on a protocol
pursuant to which the solvency funding requirements for the Corporation's registered pension plans provided for
in the then existing regulations were amended retroactive to January 1, 2004. The Corporation is required to
make substantial annual cash contributions, and the level of those contributions will increase in the event of
poor pension fund investment performance and/or further declines in long-term Government of Canada bond
rates. See "Management's Discussion and Analysis — Critical Accounting Estimates — Employee Future
Benefits — Sensitivity Analysis". Underfunded pension plans or a failure or inability by the Corporation to make
required cash contributions to its registered pension plans could have a material adverse effect on the
Corporation's business, results from operations and financial condition.
Equal Pay Litigation
CUPE, which represents the Corporation’s flight attendants, has two complaints before the Canadian Human
Rights Commission where it alleges gender-based wage discrimination. CUPE claims the predominantly female
flight attendant group should be paid the same as the predominantly male pilot and mechanics groups because
their work is of equal value. The complaints date from 1991 and 1992 but have not been investigated on the
merits because of a legal dispute over whether the three groups work in the same "establishment" within the
meaning of the Canadian Human Rights Act. On January 26, 2006, the Supreme Court of Canada ruled that
they do work in the same "establishment" and sent the case back to the Canadian Human Rights Commission,
which may now proceed to assess the merits of CUPE's complaints.
As part of the restructuring under the CCAA, it was agreed that any resolution of the complaints would have no
retroactive financial impact prior to September 30, 2004. It is the view of Air Canada that any investigation will
show that Air Canada has complied and continues to comply with the equal pay provisions of the Canadian
Human Rights Act. Nonetheless, should these complaints succeed, the accrued liability and future costs could
be very significant and Air Canada's business, results from operations and financial condition could be
materially adversely affected.
Star Alliance®
The strategic and commercial arrangements with Star Alliance® members provide the Corporation with
important benefits, including codesharing, efficient connections and transfers, reciprocal participation in frequent
flyer programs and use of airport lounges from the other members. Should a key member leave Star Alliance®
or otherwise fail to meet its obligations thereunder, the Corporation's business, results from operations and
financial condition could be materially adversely affected.
Interruptions or Disruptions in Service
The Corporation's business is significantly dependent upon its ability to operate without interruption at a number
of hub airports, including Toronto Pearson Airport. Delays or disruptions in service, including those due to
security or other incidents, weather conditions or work stoppages or strikes by airport workers, baggage
handlers, air traffic controllers and other workers not employed by the Corporation or other causes beyond the
control of the Corporation could have a material adverse impact on the Corporation's business, results from
operations and financial condition.
Foreign Exchange
The Corporation's financial results are sensitive to the changing value of the Canadian dollar. In particular, the
Corporation has a significant annual net outflow of U.S. dollars and is affected by fluctuations in the
Canada/U.S. dollar exchange rate. Management estimates that during 2006, a $0.01 increase in the
Canada/U.S. dollar exchange rate (i.e., $1.13 to $1.14 per U.S. dollar) would have had an estimated $16 million
unfavourable impact on operating income and an estimated $48 million unfavourable impact on pre-tax income.
59
Management's Discussion and Analysis of Results and Financial Condition