Air Canada 2008 Annual Report Download - page 42

Download and view the complete annual report

Please find page 42 of the 2008 Air Canada annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 152

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150
  • 151
  • 152

2008 Air Canada Annual Report
42
WorkingCapital
Actively managing working capital is a key element in ensuring cash is available to support liquidity growth objectives.
The following table provides additional information on Air Canada’s working capital balances at December 31, 2008 as
compared to December 31, 2007.
Change in
workingcapital
(Canadian dollars in millions) December31,2008 December31,2007
Cash and short-term investments $ 1,005 $ 1,239 $ (234)
Accounts receivable 702 750 (48)
Collateral deposits for fuel derivatives 328 - 328
Fuel derivatives in current assets - 68 (68)
Other current assets 368 404 (36)
Accounts payable and accrued liabilities (1,440) (1,226) (214)
Fuel derivatives in current liabilties (420) - (420)
Advance ticket sales (1,333) (1,300) (33)
Current portion of lomg-term debt and capital leases (663) (413) (250)
$ (1,453) $ (478) $ (975)
The working capital deficiency of $1,453 million has deteriorated by $975 million from December 31, 2007, reflecting, in
part, the scheduled repayment of long-term debt, the impact of capital expenditures, net of the related aircraft financing,
significant contributions to the Corporation’s pension plans, and a decrease in the fair market value of outstanding
derivatives. The accounts payable balance increase reflected an increase in the current portion of pension funding payments
and the provision for cargo investigations. The increase in other current liabilities included the fair value of outstanding fuel
derivative liabilities of $420 million and the impact of foreign exchange on the current portion of US denominated debt.
In 2008, cash was favourably impacted by net proceeds of $144 million, from the sale and leaseback of five Boeing 777
aircraft. This is derived from the proceeds from the sale and leaseback transactions of $708 million less the final delivery
payments on the aircraft and the repayment of the related pre-delivery financing. In 2008, additions to capital assets,
excluding the sale and leaseback transactions, amounted to $696 million and included three Embraer E190 aircraft, three
Boeing 777 aircraft, expenditures related to the aircraft interior refurbishment program and inventory and spare engines
and is net of the return of certain Boeing 787 pre-delivery deposits. New aircraft financing amounted to $435 million and
was mainly related to committed delivery financing and additional pre-delivery financing.
Collateral Deposits under Fuel Derivatives
The types of derivative instruments used by the Corporation within its hedging program, such as swaps and the put options
within collar structures expose the Corporation to the potential of posting cash collateral deposits. The drastic decrease
in fuel prices observed in the fourth quarter of 2008 has resulted in a significant negative fair value for the Corporation’s
portfolio of fuel hedges. Once the fair value in favour of the counterparty of certain fuel derivatives exceeds the credit
thresholds with those counterparties, the Corporation is responsible for extending collateral to the counterparties. At
January 31, 2009, the total cash collateral deposits held by counterparties amounted to $158 million ($328 million at
December 31, 2008 and nil at December 31, 2007). If oil prices remain at the current levels throughout 2009, the collateral
currently extended would cover the expected losses on fuel hedging contracts maturing in 2009 and would not generate
additional cash outflows to the Corporation. This collateral requirement has put additional pressure on liquidity in the short
term. If fuel prices remain at the current levels throughout 2009, the lower fuel prices will provide significant cash savings
to the Corporation.
At December 31, 2008, Air Canada’s sensitivity on cash collateral deposits was approximately US$5 million for every US$1
change in commodity prices (with increases to commodity prices benefiting the Corporation by lowering cash collateral
deposit requirements and decreases having the reverse impact), excluding any benefits from favourable foreign exchange
positions. As at February 12, 2009, due to the termination discussed below and settled contracts, Air Canada’s sensitivity
on cash collateral deposits was reduced to approximately $3 million for every US$1 change in commodity prices, excluding
any benefits from favourable foreign exchange positions.
In the fourth quarter of 2008, the Corporation used various strategies to mitigate its collateral deposit risk exposure. Air
Canada pursued its systematic hedging program by adding positions with new counterparties providing additional credit,