Air Canada 2008 Annual Report Download - page 55

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2008 Management’s Discussion and Analysis
55
At January 31, 2009, the fair value of outstanding fuel derivatives was $251 million in favour of the counterparties. The
deposits held in collateral with counterparties was $158 million and are expected to cover the hedging losses from maturing
contracts throughout 2009 and a portion of 2010, if oil prices remain at current levels.
At January 31, 2009, approximately 34% of Air Canada’s anticipated purchases of jet fuel for 2009 are hedged at an average
WTI-equivalent capped price of US$99 per barrel, of which 45% is subject to an average WTI-equivalent floor price of
US$81 per barrel. Air Canada has also hedged approximately 13% of its 2010 anticipated jet fuel purchases in crude oil-
based contracts hedged at an average capped price of US$110 per barrel, of which 87% is subject to an average floor price
of US$101 per barrel.
The following table outlines the notional volumes per barrel along with the weighted average floor and ceiling price for
each year currently hedged by type of derivative instruments, updated for the terminated trades subsequent to December
31, 2008:
At January 31, 2009
Derivative Instruments Term Volume (BBLs)
WTI-equivalent
Average Floor Price
(US$perbarrel)
WTI-equivalent
Average Capped Price
(US$perbarrel)
Call Options (1) 2009 4,180,000 n/a 108
2010 400,000 n/a 134
Swaps (1) 2009 1,215,000 99 99
2010 1,070,000 99 99
Collars (1) 2009 2,200,000 71 83
2010 1,560,000 102 112
Put Options (2) 2009 1,000,000 40 n/a
(1) Air Canada is expected to generate fuel hedging gains if oil prices increase above the average capped price and is exposed to fuel hedging losses if oil prices decrease
below the average floor price.
(2) Given the recent significant decrease in oil prices, Air Canada also purchased crude oil put options. Air Canada is expected to generate fuel hedging gains if oil prices
decrease below the average floor price. Their objective is to protect against potential additional collateral requirements caused from further price decreases. The fair
value of these derivative instruments increases as crude oil prices decrease, therefore offsetting in part the exposure on the total portfolio and limiting the
collateral requirements.
InterestRateRisk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes
in market interest rates.
The Corporation enters into both fixed and floating rate debt and also leases certain assets where the rental amount
fluctuates based on changes in short-term interest rates. The Corporation manages interest rate risk on a portfolio basis
and seeks financing terms in individual arrangements that are most advantageous taking into account all relevant factors,
including credit margin, term and basis. The risk management objective is to minimize the potential for changes in interest
rates causing adverse changes in cash flows to the Corporation. The temporary investment portfolio which earns a floating
rate of return is an economic hedge for a portion of the floating rate debt.
The ratio of fixed to floating rate debt outstanding is designed to maintain flexibility in the Corporation’s capital structure
and is based upon a long-term objective of 60% fixed and 40% floating. The ratio at December 31, 2008 was 58% fixed
and 42% floating, including the effects of interest rate swap positions.
The following are the current derivatives employed in interest rate risk management activities and the adjustments recorded
in 2008:
• In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 aircraft financing with an
aggregate notional value of $300 million (US$283 million). 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