Air Canada 2007 Annual Report Download - page 49

Management’s Discussion and Analysis of Results and Financial Condition
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11. OFF-BALANCE SHEET ARRANGEMENTS
The following is a summary of the more signifi cant off-balance sheet arrangements.
Guarantees
Performance Obligations Relating to Aircraft Leasing Agreements
With respect to 45 Air Canada aircraft leases, the difference between the amended rents as a result of the implementation
of the Plan of Reorganization, Compromise and Arrangement (the “Plan”) under the Companies’ Creditors Arrangement Act
(“CCAA”) on September 30, 2004 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 the amount is likely to occur.
Guarantees in Fuel Facilities Arrangements
Air Canada participates in fuel facility arrangements operated through fuel facility corporations (“Fuel Facility Corporations”),
along with other airlines that contract for fuel services at various major airports in Canada. The Fuel Facility Corporations
operate on a cost recovery basis. The purpose of the Fuel Facility Corporations is to own and fi nance the system that
distributes the fuel to the contracting airlines, including leasing the land rights under the land lease. The aggregate debt of
the fi ve Fuel Facility Corporations in Canada that have not been consolidated by Air Canada under AcG-15 was approximately
$119 million as at December 31, 2007 ($108 million as at December 31, 2006), which is Air Canada’s maximum exposure
to loss without taking into consideration any cost sharing that would occur amongst the other contracting airlines. Air
Canada’s views this loss potential as remote. Each contracting airline participating in a Fuel Facility Corporation shares pro-
rata, based on system usage, in the guarantee of this debt.
Indemnifi cation Agreements
Air Canada enters into real estate leases or operating agreements, which grant a license to Air Canada to use certain
premises, in substantially all cities that it serves. It is common in such commercial lease transactions for Air Canada, as the
lessee, to agree to indemnify the lessor and other related third parties for tort liabilities that arise out of or relate to the
Corporation’s use or occupancy of the leased or licensed premises. Exceptionally, this indemnity extends to related liabilities
arising from the negligence of the indemnifi ed parties, but usually excludes any liabilities caused by their gross negligence
or willful misconduct. Additionally, Air Canada typically indemnifi es such parties for any environmental liability that arises
out of or relates to its use or occupancy of the leased or licensed premises.
In aircraft fi nancing or leasing agreements, Air Canada typically indemnifi es the fi nancing parties, trustees acting on their
behalf and other related parties and/or lessors against liabilities that arise from the manufacture, design, ownership,
fi nancing, use, operation and maintenance of the aircraft and for tort liability, whether or not these liabilities arise out
of or relate to the negligence of these indemnifi ed parties, except for their gross negligence or willful misconduct. In
addition, in aircraft fi nancing or leasing transactions, including those structured as leveraged leases, Air Canada typically
provides indemnities in respect of various tax consequences including in relation to the leased or fi nanced aircraft, the use,
possession, operation, maintenance, leasing, subleasing, repair, insurance, delivery, import, export of such aircraft, the lease
or fi nance arrangements entered in connection therewith, changes of law and certain income, commodity and withholding
tax consequences.
When Air Canada, as a customer, enters into technical service agreements with service providers, primarily service providers
who operate an airline as their main business, Air Canada has from time to time agreed to indemnify the service provider
against liabilities that arise from third party claims, whether or not these liabilities arise out of or relate to the negligence of
the service provider, but excluding liabilities that arise from the service provider’s gross negligence or willful misconduct.
Under its general by-laws, Air Canada has indemnifi cation obligations to its directors and offi cers. Pursuant to such
obligations, the Corporation indemnifi es these individuals, to the extent permitted by law, against any and all claims or
losses (including amounts paid in settlement of claims) incurred as a result of their service to Air Canada.
The maximum amount payable under the foregoing indemnities cannot be reasonably estimated. Air Canada expects that it
would be covered by insurance for most tort liabilities and certain related contractual indemnities described above.