Air Canada 2008 Annual Report Download - page 74

2008 Air Canada Annual Report
74
Pension Plans
Canadian federal pension legislation requires that the funded status of registered pension plans be determined periodically,
on both a going concern basis (essentially assuming indefinite plan continuation) and a solvency basis (essentially assuming
immediate plan termination).
In May 2004, the Corporation and OSFI agreed on a protocol pursuant to which the solvency funding requirements for
the Corporation’s registered pension plans provided for in the then-existing federal regulations were amended with effect
retroactive to January 1, 2004. The Corporation is required to make substantial annual cash contributions, and the level of
those contributions increases in the event of poor pension fund investment performance and/or further declines in long-term
Government of Canada bond rates. See “Management’s Discussion and Analysis — Critical Accounting Estimates — Employee
Future Benefits — Sensitivity Analysis”. Underfunded pension plans or a failure or inability by the Corporation to make required
cash contributions to its registered pension plans could have a material adverse effect on the Corporation’s business, results
from operations and financial condition.
The solvency deficit is influenced primarily by long-term interest rates and by the investment return on plan assets, which
in turn may be dependant on a variety of factors, including economic conditions. The interest rate used to calculate benefit
obligations for solvency purposes is a prescribed rate derived from the interest rates on long-term Government of Canada
bonds. Deteriorating economic conditions may result in significant increases in the Corporation’s funding obligations, which
could have a material adverse effect on the Corporation’s business, results from operations and financial condition.
Refer to section 9.6 of this MD&A for information on Air Canada’s pension funding obligations.
Economic and Geopolitical Conditions
Airline operating results are sensitive to economic and geopolitical conditions which can have a significant impact on the
Corporation. For example, economic and geopolitical conditions may impact demand for air transportation, as well as the
Corporation’s operating costs, pension plan contributions and costs and availability of capital and supplies required by the
Corporation. Especially in light of the Corporation’s substantial fixed cost structure, any prolonged or significant impact arising
from economic and geopolitical conditions, including weakness of the Canadian, US or world economies, could have a material
adverse effect on the Corporation’s business, results from operations and financial condition.
Airline fares and passenger demand have fluctuated significantly in the past and may fluctuate significantly in the future. The
Corporation is not able to predict with certainty market conditions and the fares that the Corporation may be able to charge.
Customer expectations can change rapidly and the demand for lower fares may limit revenue opportunities. Travel, especially
leisure travel, is a discretionary consumer expense. Depressed economic conditions in North America and other areas served by
the Corporation, as well as geopolitical instability in various areas of the world, concerns about the environmental impacts of
air travel and tendencies towards “green” travel initiatives where consumers reduce their travel activities, could have the effect
of reducing demand for air travel in Canada and abroad and could materially adversely impact the Corporation’s profitability.
Fuel Costs
Fuel costs constituted the largest percentage of the total operating costs of the Corporation in 2008. Fuel prices fluctuate widely
depending on many factors including international market conditions, geopolitical events and the Canada/US dollar exchange
rate. Air Canada cannot accurately predict fuel prices. During 2006, 2007 and 2008, fuel prices increased and fluctuated near
or at historically high levels. Should fuel prices fluctuate significantly or increase significantly above current levels, fuel costs
could have a material adverse effect on the
Corporation’s business, results from operations and financial condition. Due to the competitive nature of the airline industry,
the Corporation may not be able to pass on increases in fuel prices to its customers by increasing its fares. Based on 2008
volumes, management estimates that a US$1 per barrel movement in the average price of WTI crude oil would have resulted
in an approximate Cdn$25 million change in 2008 fuel expense for the Corporation (excluding any impact of fuel surcharges,
foreign exchange rates and fuel hedging), assuming flying capacity remained unchanged and that refining spreads between
WTI crude oil and jet fuel as well as foreign exchange rates remained constant.
Foreign Exchange
The Corporation’s financial results are sensitive to the changing value of the Canadian dollar. In particular, the Corporation
has a significant annual net outflow of US dollars and is affected by fluctuations in the Canada/US dollar exchange rate.
Management estimates that during 2008, a $0.01 increase in the US dollar/Cdn exchange rate (i.e., $1.23 to $1.24 per US