Air Canada 2008 Annual Report Download - page 94

2008 Air Canada Annual Report
94
MarketRisks
Market risk includes the risk that future cash flows will fluctuate because of changes in market prices, including foreign
exchange rates, interest rates, and commodity prices. During 2008, the Corporation’s operating results and cash flows were
significantly affected by historically high and volatile fuel prices during the first half of the year and the weakening of the
Canadian dollar during the second half of the year. While management is able to mitigate certain of these risks through
certain hedging activities, the volatility of the markets has created challenges to mitigating the full extent of some of these
risks. The price of fuel, foreign exchange rates and interest rates are beyond the control of management and it is reasonably
possible market volatility will continue in the future which may adversely impact operating results and cash flows. Note 15
discloses sensitivity analysis with respect to our market risks related to financial instruments outstanding as at December
31, 2008.
PensionFundingObligations
The Corporation maintains several defined benefit pension plans as described in Note 8. The Corporation’s pension funding
obligations are likely to rise significantly starting in the second half of 2009. Based on preliminary estimates, the solvency
deficit as at January 1, 2009 in the registered pension plans, which is used to determine funding requirements, is estimated
to be approximately $3,200, a significant increase versus the $1,175 determined as at January 1, 2008. Based on pension
funding legislation and regulations as at December 31, 2008, this solvency deficit would be funded over five years causing
an approximate $410 increase to cash funding obligations for 2009.
The Government of Canada has proposed certain amendments to the general pension funding requirements for federally
registered pension plans to address concerns over the impact of the 2008 decline in value of pension assets. These proposals
include increasing the limit for smoothing asset valuation fluctuations over five years and increasing the period for funding
a solvency deficiency from five years to ten years, subject to certain conditions. In particular, both members and retirees
would need to agree to the extended schedule, or the difference between the 5 and 10 year payment schedules would need
to be secured by a letter of credit. One of these two conditions would need to be met by December 31, 2009. If agreement
by plan members and retirees or a letter of credit were not secured by the end of 2009, the plan would be required to fund
the deficiency over the following 5 years. If these provisions are finalized, and based on the above preliminary estimates,
the Corporation estimates funding requirements for 2009 will increase by approximately $150 versus 2008, resulting in
estimated aggregate pension funding payments of approximately $605 during 2009. The estimated funding payments of
$605 include the estimated impact of funding changes to current service costs as well as other pension arrangements which
amount to a reduction of approximately $10. Management is monitoring the government’s actions and dialoguing with
government officials on this matter. Until the government finalizes this proposal and the funding valuation is completed
during the first half of 2009, uncertainty as to the amount and timing of additional pension funding continue to exist. There
can be no assurance that the proposed funding relief will be implemented. Any increase in funding obligations for 2009 will
be paid in the second half of the year as the funding in the first half of the year is based upon the January 1, 2008 actuarial
valuation reports.
Covenants in Credit Card Agreements
The Corporation has various agreements with companies that process customer credit card transactions. Approximately 80%
of the Corporation’s sales are processed using credit cards, with remaining sales processed through cash based transactions.
The Corporation receives payment for a credit card sale generally in advance of when the passenger transportation is
provided.
Under the terms of one credit card processing agreement, the credit card processing company may withhold payment
of funds to Air Canada upon the occurrence of certain events (“triggering events”), which include Cash, cash equivalents
and Short-term investments (“unrestricted cash”) being less than $900 as at the end of any month and operating losses
in excess of certain amounts. The amount of funds withheld (“the deposit”) is based upon a specified percentage of
credit card sales processed through the credit card processing company for which transportation has not been provided
to the passenger. The specified percentage increases based upon the level of unrestricted cash below $900 or the level of
operating losses. If a triggering event occurred, based upon advance sales as at December 31, 2008, the deposit could be
from a minimum of $110 up to a maximum of $425.