Air Canada 2008 Annual Report Download - page 134

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2008 Air Canada Annual Report
134
The following are the current derivatives employed in interest rate risk management activities and the adjustments recorded
during 2008:
• During2008,theCorporationenteredintoandsubsequentlyterminated threecross-currencyinterestrateswap
agreements with terms of March 2019, May 2019, and June 2019 respectively, relating to Boeing 777 financing
with an aggregate notional value of $300 (US$283). These swaps converted US denominated debt principal and
interest payments into Canadian denominated debt at a foreign exchange rate of par (US$1/CAD$1) and converted
from a fixed interest rate of 5.208% and 5.640% to a floating interest rate. These derivative instruments were not
designated as hedges for accounting purposes and were fair valued on a quarterly basis. During 2008, a gain of $4
was recorded in Gain on financial instruments recorded at fair value related to these derivatives. These swaps were
terminated on October 1, 2008 with a fair value of $4 in favour of the Corporation.
• AsatDecember31,2008,theCorporationhadenteredintotwointerestrateswapagreementswithtermsofJuly
2022 and January 2024 relating to two B767 aircraft financing agreements with an aggregate notional value of $118
(US$96) (2007 - $103 (US$104)). These swaps convert the lease payments on the two aircraft leases from fixed to
floating rates. The fair value of these contracts as at December 31, 2008 was $21 in favour of the Corporation (2007
- $7 in favour of the Corporation). These derivative instruments have not been designated as hedges for accounting
purposes and are fair valued on a quarterly basis. During 2008, a gain of $14 was recorded in Gain on financial
instruments recorded at fair value related to these derivatives (2007 - $3).
• The Corporation enters into forward interest rate agreements to manage the risks associated with interest rate
movement on US dollar and Canadian dollar floating rate debt and investments. During 2006 the Corporation
entered into 19 interest rate swaps with a notional value of US$414 to receive floating rates and pay a weighted
average fixed rate of 5.81% for the debt to be arranged in relation to the financing of Embraer 190 aircraft between
June 2006 and February 2008. The swaps had 15 year terms from the expected delivery date of the aircraft and
their maturities ranged from June 2021 to December 2022. The Corporation has settled the interest rate swaps upon
delivery of the related aircraft. The Corporation did not apply hedge accounting to these derivative instruments.
During 2008, the Corporation’s one remaining Embraer 190 aircraft interest rate swap contract matured, with a fair
value of $2 in favour of the counterparty (2007 - $2 in favour of the counterparty). No gain or loss was recorded
during the period (2007 – net loss of $10 on 11 contracts).
Interest income includes $47 (2007 - $84) related to Cash and cash equivalents, Short-term investments, and Collateral
deposits for fuel derivatives, which are classified as held for trading. Interest expense reflected on the Consolidated
Statement of Operations relates to financial liabilities recorded at amortized cost.
Foreign Exchange Risk
Foreign exchange risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in foreign exchange rates.
The Corporation’s risk management objective is to reduce cash flow risk related to foreign denominated cash flows.
The Corporation’s cash inflows are primarily in Canadian dollars, while a large portion of its outflows are in US dollars.
This unbalanced mix results in a US dollar shortfall from operations annually. In order to mitigate this imbalance, the
Corporation has adopted the practice of converting excess revenues from offshore currencies into US dollars. In 2008, this
conversion generated coverage of approximately 30% of the imbalance. The remaining 70% was covered through the use
of a variety of foreign exchange derivatives, including spot transactions, which had maturity dates corresponding to the
forecasted shortfall dates. The level of foreign exchange derivatives expiring at any one point in time is dependent upon a
number of factors, which include the amount of foreign revenue conversion available, US dollar net cash flows, as well as
the amount attributed to aircraft and debt payments.