Air Canada 2008 Annual Report Download - page 38

2008 Air Canada Annual Report
38
9.3 LIQUIDITY
Managing Air Canada’s liquidity position was a key focus in 2008 and remains a key focus going forward. The Corporation’s
strategy for managing liquidity over the last few years was based on achieving positive cash from operations together
with committed financing on new aircraft deliveries. Based on Air Canada’s innovative revenue model, its renewed fleet
combined and with its various cost containment programs, Air Canada had anticipated that cash from operations would
provide adequate liquidity to service its pension funding obligations as well as its various contractual obligations, including
debt repayments. Refer to sections 9.5 and 9.6 of this MD&A for additional information on the Corporation’s contractual
and pension funding obligations, respectively.
While the Corporation believes that it will benefit from its revenue model and achieve positive returns from its investment
in its renewed fleet, as evidenced by yield improvements and positive load factors, the current economic environment, the
volatility in the price of fuel combined with the collateral deposits under fuel derivatives and the increased pension funding
obligations have caused the Corporation to revise its current strategy for managing liquidity, as described further below.
Longer term, the Corporation’s ability to generate improved cash from operations is generally impacted by its ability to
achieve a better combination of capacity, load factors, yields and cost efficiencies. All of these are in turn affected by
a number of factors and subject to a number of risks including those relating to general economic conditions, foreign
exchange rates, fuel prices, competitive forces and the Corporation’s ability to continuously improve its controllable costs.
Cash from operations can also be significantly affected by the fluctuations in the Corporation’s pension deficit which
requires funding over time and grows in circumstances where investment returns on pension assets are declining. Pension
liabilities increase as a result of the lowering of interest rates.
Given the significant volatility in fuel prices and the current recessionary pressures, the Corporation is highly focused on
preserving cash and identifying sources of cash inflows. As part of its efforts to preserve cash, the Corporation has reduced
capacity and the associated expenses where appropriate.
Along with many airline carriers globally, Air Canada faced a number of significant challenges in 2008, including as a
result of volatile fuel prices, foreign exchange, liquidity requirements and the weakening demand for air travel. With the
expectation of a continuing recession in 2009, the industry, including Air Canada, will continue to face significant challenges
throughout 2009. The recession is expected to put significant pressures on passenger and cargo revenues for many airlines,
including Air Canada. At the same time, it is expected that lower fuel prices in 2009 and capacity adjustments made in
2008 as a result of the high fuel prices will provide some relief. Air Canada continues to be significantly leveraged requiring
continuing interest payments and debt payments, which are largely denominated in foreign currencies. Further, the funding
of employee benefit plans for many companies, including Air Canada, will be impacted during 2009 by the declines in
the value of plan assets. In 2009, a number of the Corporation’s collective agreements expire and uncertainties exist with
respect to the outcome of their negotiation. In addition, the credit markets continued to be constrained throughout the
latter part of 2008 raising concerns about available funding for a number of companies, including Air Canada. These factors
have had an impact on the liquidity risk of Air Canada during 2008 and are continuing challenges for Air Canada as well as
other airline industry companies.
Liquidity risk is the risk that Air Canada will encounter difficulty in meeting obligations associated with its financial liabilities
and other contractual obligations. Air Canada monitors and manages liquidity risk by preparing rolling cash flow forecasts,
monitoring the condition and value of assets available to be used as security in financing arrangements, seeking flexibility
in financing arrangements, and establishing programs to monitor and maintain compliance with terms of financing
agreements. A key component of managing liquidity risk is also ensuring that operating cash flows are optimized. Air
Canada’s principal objective in managing liquidity risk is to maintain a minimum cash, cash equivalents and short-term
investments’ (“unrestricted cash”) balance in excess of a target liquidity level of 15% of operating revenues. However,
management expects there may be challenges to achieving its target unrestricted cash to operating revenue ratio of 15%
in 2009.
During 2008 and continuing in 2009, management undertook various initiatives and developed a plan to manage its
operating and liquidity risks taking into account the prevailing economic conditions including:
• Adjustedcapacitybyreducingthenumberofightstovariouslocationsasaresultoftheeffectsofthehighfuel
prices. This reduction positioned Air Canada’s capacity, in part, to better respond to the effects of the recession. Air