Air Canada 2008 Annual Report Download - page 136

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2008 Air Canada Annual Report
136
Under the terms of the credit card processing agreement, beginning at the end of the second quarter of 2009, the triggering
events for deposits will change and be based upon a matrix of unrestricted cash and a debt service coverage ratio. The
ratio is based upon an EBITDAR (earnings before interest, income taxes, depreciation, amortization, aircraft rentals, certain
non operating income (expense) and special items) to fixed charges (principal, interest and aircraft rentals) ratio for the
preceding four quarters. Under these triggering events, beginning at the end of the second quarter 2009, the unrestricted
cash required in order to avoid a deposit could be as much as $1.3 billion. The basis for calculating the amount of the
deposit, if required, remains consistent, as described above.
Refer to Note 1c for a further discussion on liquidity risk.
Market Risk
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
market prices. Market risk comprises three types of risk: foreign exchange risk; interest rate risk; and other price risk, which
includes commodity price risk.
The Corporation uses derivative instruments to reduce market exposures from changes in foreign currency rates, interest
rates, and fuel prices. The Corporation uses derivative instruments only for risk management purposes and not for generating
trading profit. As such, any change in cash flows associated with derivative instruments is designed to be offset by changes
in cash flows related to the risk being hedged.
Refer to the Asset Backed Commercial Paper section below for information regarding these instruments held by the
Corporation and the associated market risks.
Sensitivity Analysis
The following table is a sensitivity analysis for each type of market risk relevant to the significant financial instruments
recorded by the Corporation as at December 31, 2008. The sensitivity analysis is based on a reasonably possible movement
within the forecast period, being one year. These assumptions may not be representative of actual movements in these risks
and should not be relied upon. Given the recent volatility in the financial and commodity markets, the actual percentage
changes may differ significantly from the percentage changes outlined below. Each risk is contemplated independent of
other risks.
Interest rate
risk(1)
Foreign exchange rate
risk(2) Otherpricerisk(3) Otherpricerisk(3)
Income Income Income OCI, net Income OCI, net
1% change 5% increase 5% decrease 10% decrease 10% increase
Cash and cash equivalents $ 5 $ - $ - $ - $ - $ - $ -
Short-term investments $ 5 $ - $ - $ - $ - $ - $ -
Aircraft related deposits $ - $ (11) $ 11 $ - $ - $ - $ -
Long-term debt
and capital leases $ 17 $ 262 $ (262) $ - $ - $ - $ -
Foreign exchange derivatives $ - $ (26) $ 24 $ - $ - $ - $ -
Fuel derivatives $ - $ - $ - $ (37) $ (16) $ 37 $ 16
(1) Changes in interest rates will impact income favourably or unfavourably by approximately the same amount, based on current price levels and assumptions.
(2) Increase (decrease) in foreign exchange relates to a strengthening (weakening) of the Canadian dollar.
(3) Other price risk relates to the Corporation’s fuel derivatives. The sensitivity analysis is based upon a 10% decrease or increase in the price of the underlying commodity.
It also assumes that hedge accounting is 100% effective for the period and that changes in the fair value for derivatives that mature within one year are recorded in
income whereas derivatives maturing beyond one year are recorded in OCI.