Air Canada 2008 Annual Report Download - page 61

2008 Management’s Discussion and Analysis
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In addition, the Pension and Benefits Agreement contemplates similar asset and liability transfer and compensation
arrangements in respect of unionized employees, which arrangements would take effect at such future time as those
unionized employees may commence employment with Aveos pursuant to the Transition MOA, as described further
below. However, the solvency deficiencies in respect of transferring unionized employees for which the future quarterly
compensation payments would be made are determined as at October 16, 2007, subject to certain adjustments, and the
discount rate used to compute the accounting liability for the unionized employees’ retiree and disability benefits is fixed
as at October 16, 2007. The compensation payments in respect of these solvency deficiencies and accounting liabilities will
be made quarterly during the five years beginning after the unionized employees are transferred to Aveos, but only if such a
transfer occurs. Until such future time as the assets and obligations under the Air Canada Benefit Arrangement pertaining
to unionized employees may be transferred to Aveos, the current service pension cost and the current service and interest
costs for other employee benefits in respect of Air Canada employees providing services to Aveos are charged to Aveos.
The Pension and Benefits Agreement also required that Air Canada provide letters of credit to Aveos on October 16, 2007,
to secure the above-described payment obligations in respect of the solvency deficiencies of the defined benefit pension
plans and accounting liabilities for other retiree and disability benefit arrangements. The letters of credit initially totaled
$101 million, subject to adjustment once the exact amounts of the relevant solvency deficiencies and accounting liabilities
as at October 16, 2007 were determined by actuarial valuations. The face amount of the letter of credit in respect of
the unionized solvency deficiency is also adjusted annually to recognize past service costs paid by Air Canada to the plan
in respect of unionized employees assigned to Aveos. The face amount of the letters of credit decreases as the related
quarterly funding payments described above are made. During 2008, as described below under “Agreement with Aveos on
Revised Payment Terms”, the Corporation and Aveos also agreed to temporarily cancel certain letters of credit in the amount
of $40 million. Aveos may call the letters of credit in whole or in part, in the event of a default as defined in the Pension
and Benefits Agreement. Collateral equal to the amount of the letters of credit was paid in cash with the asset recorded in
deposits and other assets.
In 2008, Air Canada, Aveos, and the union representing the employees assigned to Aveos continued discussions regarding the
options under which certain unionized employees would commence employment directly with Aveos and the creation of a
separate bargaining unit for those employees at Aveos. On January 8, 2009, these same parties entered into a Memorandum
of Agreement (the “Transition MOA”) in order to resolve certain remaining issues and in order to (i) facilitate the orderly
transition of certain Air Canada employees to Aveos and (ii) to establish terms and conditions of employment that will
apply to those Air Canada employees who elect to become employees of Aveos. In relation to the Transition MOA, the
Corporation and Aveos also entered into certain ancillary agreements (the “Ancillary Transition Agreements”) to address
commercial issues relating to the transition of employees contemplated by the Transition MOA. Before taking effect, the
parties must complete a mediation and, if necessary, arbitration of certain issues they have not yet resolved but have agreed
to submit to these processes, and the application to separate the bargaining unit must be ordered by the Canada Industrial
Relations Board.
Non-Compete and Repair Schemes Transfer Agreement
Aveos and Air Canada are parties to a Non-Compete and Repair Schemes Transfer Agreement, effective as of October 16,
2007. Generally described, repair schemes are processes and methods which may be used in the maintenance and repair
of aircraft and related equipment. The Non-Compete and Repair Schemes Transfer Agreement confirmed an arrangement
and provides for the sale from Air Canada to ACTS Aero (as successor to ACTS LP) of an undivided joint ownership interest
in repair schemes owned by Air Canada or approved under Air Canada’s airworthiness engineering organization as well as
the sale from Aveos to Air Canada of an undivided joint ownership interest in the repair schemes owned or developed by
Aveos and applicable to airframe heavy maintenance services provided by ACTS to Air Canada under the parties’ airframe
heavy maintenance services agreement. However, in September 2004 as part of the implementation of the Corporation’s
plan of arrangement under the CCAA, the Corporation had already granted ACTS full and exclusive right to these schemes
on a royalty free basis.