Air Canada 2009 Annual Report Download - page 128

2009 Air Canada Annual Report
128
Collateral Held in Leasing Arrangements
The Corporation holds security deposits with a carrying value of $10 (2008 - $18), which approximates fair value, as security
for certain aircraft leased and sub-leased to third parties. These deposits do not pay interest to the lessee or sub-lessee.
Of these deposits, $7 (2008 - $11) have been assigned as collateral to secure the Corporation’s obligations to the lessors
and fi nanciers of the aircraft, with the remaining cash held by Air Canada being unrestricted during the term of the lease.
Any collateral held by the Corporation is returned to the lessee or sub-lessee, as the case may be, at the end of the lease or
sub-lease term provided there have been no events of default under the leases or sub-leases.
Summary of Gain on Financial Instruments Recorded at Fair Value
2009 2008
Ineffective portion of fuel hedges $ - $ 83
Fuel derivatives not under hedge accounting 102 (9)
Cross currency interest rate swaps - 4
Other (7) 14
Gain on fi nancial instruments recorded at fair value (1) $ 95 $ 92
(1) See Fuel Price Risk for a discussion of losses on fuel derivatives recorded in Other comprehensive income (“OCI”).
Risk Management
Under its risk management policy, the Corporation manages its interest rate risk, foreign exchange risk, and market risk
through the use of various interest rate, foreign exchange, and fuel derivative fi nancial instruments. The Corporation uses
derivative fi nancial instruments only for risk management purposes, not for generating trading profi t.
As noted below, the Corporation engages in derivative hedging to mitigate various risks. The derivative fair values represent
the amount of the consideration that could be exchanged in an arm’s length transaction between willing parties who are
under no compulsion to act. Fair value of these derivatives is determined using active markets, where available. When
no such market is available, valuation techniques are applied such as discounted cash fl ow analysis. Where practical, the
valuation technique incorporates all factors that would be considered in setting a price, including the Corporation’s own
credit risk and the credit risk of the counterparty.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash fl ows of a fi nancial instrument will fl uctuate because of changes
in market interest rates.
The Corporation enters into both fi xed and fl oating rate debt and also leases certain assets where the rental amount
fl uctuates based on changes in short term interest rates. The Corporation manages interest rate risk on a portfolio basis
and seeks fi nancing 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 to cause adverse changes in cash fl ows to the Corporation. The temporary investment portfolio which earns a fl oating
rate of return is an economic hedge for a portion of the fl oating rate debt.
The ratio of fi xed to fl oating rate obligations outstanding is designed to maintain fl exibility in the Corporation’s capital
structure and is based upon a long term objective of 60% fi xed and 40% fl oating. The ratio at December 31, 2009 is
59% fi xed and 41% fl oating, including the effects of interest rate swap positions (58% and 42%, respectively as at
December 31, 2008).