Air Canada 2008 Annual Report Download - page 75

2008 Management’s Discussion and Analysis
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dollar) would have had an estimated $30 million unfavourable impact on operating income. Conversely, an opposite change in
the exchange rate would have had the opposite effect. The Corporation incurs significant expenses in US dollars for such items
as fuel, aircraft rental charges, interest payments, debt servicing and computerized reservations system fees, while a substantial
portion of its revenues are generated in Canadian dollars. A significant deterioration of the Canadian dollar relative to the US
dollar would increase the costs of the Corporation relative to its US competitors and could have a material adverse effect on
the Corporation’s business, results from operations and financial condition. In addition, the Corporation may be unable to
appropriately hedge the risks associated with fluctuations in exchange rates.
Labour Costs and Labour Relations
Labour costs constitute one of the Corporation’s largest operating cost items. There can be no assurance that the Corporation
will be able to maintain such costs at levels which do not negatively affect its business, results from operations and financial
condition. There can be no assurance that future agreements with employees’ unions or the outcome of arbitrations will be
on terms consistent with the Corporation’s expectations or comparable to agreements entered into by the Corporation’s
competitors. Any future agreements or outcome of negotiations, mediations or arbitrations including in relation to wages or
other labour costs or work rules may result in increased labour costs or other charges which could have a material adverse
effect on the Corporation’s business, results from operations and financial condition.
Most of the Corporation’s employees are unionized. With the exception of the collective agreement with the IBT representing
certain airport and call centre employees in the United States, which was renewed in 2008 for a term of three years, the most
recent collective agreements with the unions representing the largest groups of employees were concluded in 2003 and 2004
and expire in 2009 (other than the collective agreements covering two groups of crew schedulers, which were concluded more
recently). No strikes or lock-outs may lawfully occur during the term of the collective agreements, nor during the negotiations
of their renewal until a number of pre-conditions, in respect of the unions for Canadian-based employees, prescribed by the
Canada Labour Code, have been satisfied. There can be no assurance that collective agreements will be renewed without labour
conflict or action or that there will not be a labour conflict that could lead to an interruption or stoppage in the Corporation’s
service or otherwise adversely affect the ability of the Corporation to conduct its operations, all of which could have a material
adverse effect on its business, results from operations and financial condition.
If there is a labour disruption or work stoppage by any of the unionized work groups of Jazz, there could also likely be a material
adverse effect on the Corporation’s business, results from operations and financial condition. In addition, labour conflicts at the
Corporation’s Star Alliance® partners could result in lower demand for connecting traffic with the Corporation and, ultimately,
could have a material adverse effect on the Corporation’s business, results from operations and financial condition.
Airline Industry Characterized by Low Gross Profit Margins and High Fixed Costs
The airline industry is characterized by low gross profit margins and high fixed costs. The costs of operating any particular
flight do not vary significantly with the number of passengers carried and, therefore, a relatively small change in the number of
passengers or in fare pricing or traffic mix could have a significant effect on the Corporation’s operating and financial results.
This condition has been exacerbated by aggressive pricing by low-cost carriers, which has had the effect of driving down fares in
general. Accordingly, a shortfall from expected revenue levels could have a material adverse effect on the Corporation’s business,
results from operations and financial condition. The Corporation incurs substantial fixed costs which do not meaningfully
fluctuate with overall capacity. As a result, should the Corporation be required to reduce its overall capacity or the number of
flights operated, it may not be able to successfully reduce certain fixed costs in the short term and may be required to incur
important termination or other restructuring costs, which could have a material adverse effect on the Corporation’s business,
results from operations and financial condition.
Competition
The Corporation operates within a highly competitive industry. Over the past few years, several carriers have entered or
announced their intention to enter into the domestic, the US transborder and international markets in which the Corporation
operates.
Canadian low-cost and other carriers have entered and/or expanded or announced their intention to compete in many of the
Corporation’s key domestic markets and, along with some US carriers have also entered and/or expanded their operations in the US
transborder market. Carriers against which the Corporation may compete, including US carriers, may undergo (and some of whom
who have undergone) substantial reorganizations (including by way of merger with or acquisition by another carrier), creating reduced
levels of indebtedness and lower operating costs and may be in a position to more effectively compete with the Corporation. The
Corporation is also facing increasing competition in international markets as carriers increase their international capacity, both by
expansion and by shifting existing domestic capacity to international operations to avoid low-cost domestic competition.