Air Canada 2006 Annual Report Download - page 61

Risks Relating to the Industry
Airline Reorganizations
Since September 11, 2001, a number of U.S. air carriers have sought to reorganize under Chapter 11 of the
United States Bankruptcy Code or outside the scope of formal reorganization proceedings. Successful
completion of such reorganizations could present the Corporation with competitors having reduced levels of
indebtedness and significantly lower operating costs derived from labour, supply and financing contracts
renegotiated under the protections of the United States Bankruptcy Code or outside the scope of formal
reorganization proceedings. In addition, certain air carriers, including those involved in reorganizations, may
undertake substantial fare discounting in order to maintain cash flows and to enhance continued customer
loyalty. Such fare discounting could result in lower yields for the Corporation which, in turn, could have a
material adverse effect on the Corporation's business, results from operations and financial condition.
Economic and Geopolitical Conditions
Airline operating results are sensitive to economic and geopolitical conditions which can have a significant
impact on the demand for air transportation. Airline fares and passenger demand have fluctuated significantly in
the past and may fluctuate significantly in the future. The Corporation is not able to predict with certainty market
conditions and the fares that the Corporation may be able to charge. Customer expectations can change rapidly
and the demand for lower fares may limit revenue opportunities. Travel, especially leisure travel, is a
discretionary consumer expense. A downturn in economic growth in North America, as well as geopolitical
instability in various areas of the world, could have the effect of reducing demand for air travel in Canada and
abroad and, together with the other factors discussed herein, could materially adversely impact the
Corporation's profitability. Any prolonged or significant weakness of the Canadian or world economies could
have a material adverse effect on the Corporation's business, results from operations and financial condition,
especially given the Corporation's substantial fixed cost structure.
Airline Industry Characterized by Low Gross Profit Margins and High Fixed Costs
The airline industry generally and scheduled service in particular are characterized by low gross profit margins
and high fixed costs. The costs of operating any particular flight do not vary significantly with the number of
passengers carried and, therefore, a relatively small change in the number of passengers or in fare pricing or
traffic mix could have a significant effect on the Corporation's operating and financial results. This condition has
been exacerbated by aggressive pricing by low-cost carriers, which has had the effect of driving down fares in
general. Accordingly, a shortfall from expected revenue levels could have a material adverse effect on the
Corporation's business, results from operations and financial condition. The Corporation incurs substantial fixed
costs which do not meaningfully fluctuate with overall capacity. As a result, should the Corporation be required
to reduce its overall capacity or the number of flights operated, it may not be able to successfully reduce certain
fixed costs in the short term and may be required to incur important termination or other restructuring costs,
which could have a material adverse effect on the Corporation's business, results from operations and financial
condition.
Terrorist Attacks and Security Measures
The September 11, 2001 terrorist attacks and subsequent terrorist activity, notably in the Middle East,
Southeast Asia and Europe, caused uncertainty in the minds of the traveling public. The occurrence of a major
terrorist attack (whether domestic or international and whether involving the Corporation or another carrier or no
carrier at all) and increasingly restrictive security measures, such as the current restrictions on the content of
carry-on baggage, could have a material adverse effect on passenger demand for air travel and on the number
of passengers traveling on the Corporation's flights. It could also lead to a substantial increase in insurance,
airport security and other costs. Any resulting reduction in passenger revenues and/or increases in insurance,
security or other costs could have a material adverse effect on the Corporation's business, results from
operations and financial condition.
Epidemic Diseases (Severe Acute Respiratory Syndrome (SARS), Influenza or Other Epidemic Diseases)
As a result of the international outbreaks of Severe Acute Respiratory Syndrome (SARS) in 2003, the World
Health Organization (the "WHO") issued on April 23, 2003 a travel advisory, which was subsequently lifted on
April 30, 2003, against non-essential travel to Toronto, Canada. The seven day WHO travel advisory relating to
Toronto, the location of the Corporation's primary hub, and the international SARS outbreak had a significant
adverse effect on passenger demand for air travel destinations served by the Corporation and Jazz, and on the
number of passengers traveling on the Corporation's and Jazz's flights and resulted in a major negative impact
on traffic on the entire network. The WHO warns that there is a substantial risk of an influenza pandemic within
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Management's Discussion and Analysis of Results and Financial Condition