Air Canada 2009 Annual Report Download - page 73

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2009 Management’s Discussion and Analysis
73
Economic and Geopolitical Conditions
Airline operating results are sensitive to economic and geopolitical conditions which can have a signifi cant impact on Air
Canada. For example, economic and geopolitical conditions may impact demand for air transportation in general or to or
from certain destinations, as well as Air Canada’s operating costs, pension plan contributions and costs and availability of
capital and supplies required by Air Canada. Especially in light of Air Canada’s substantial fi xed cost structure, any prolonged
or signifi cant impact arising from economic and geopolitical conditions, including weakness of the Canadian, U.S. or world
economies could have a material adverse effect on Air Canada, its business, results from operations and fi nancial condition.
Airline fares and passenger demand have fl uctuated signifi cantly in the past and are likely to fl uctuate signifi cantly in the
future. Air Canada is not able to predict with certainty market conditions and the fares that Air Canada 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 Air Canada, 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
Air Canada’s profi tability.
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 indefi nite plan continuation) and a solvency basis (essentially assuming
immediate plan termination).
Pension plan solvency valuations are infl uenced primarily by long-term interest rates and by the investment return on plan
assets, which in turn may be dependent on a variety of factors, including economic conditions. The interest rate used to calculate
benefi t 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 signifi cant increases in Air Canada’s funding obligations, which
could have a material adverse effect on Air Canada, its business, results from operations and fi nancial condition.
Refer to section 10.6 of this MD&A for additional information relating to Air Canada’s pension funding obligations. In particular,
as of 2014, the Air Canada 2009 Pension Regulations will cease to have effect and Air Canada’s pension funding obligations may
vary signifi cantly based on several factors, including regulatory developments, assumptions and methods used and changes
in the economic conditions (mainly the return on fund assets and changes in interest rates). Underfunded pension plans or
a failure or inability by Air Canada to make required cash contributions to its registered pension plans could have a material
adverse effect on Air Canada, its business, results from operations and fi nancial condition.
Fuel Costs
Fuel costs constituted the largest percentage of the total operating costs of Air Canada in 2009. Fuel prices fl uctuate widely
depending on many factors including international market conditions, geopolitical events and the Canada/U.S. dollar exchange
rate. Air Canada cannot accurately predict fuel prices. During 2006, 2007 and 2008, fuel prices increased and fl uctuated near
or at historically high levels. Should fuel prices fl uctuate signifi cantly or increase signifi cantly above current levels, fuel costs
could have a material adverse effect on Air Canada, its business, results from operations and fi nancial condition. Due to the
competitive nature of the airline industry, Air Canada may not be able to pass on increases in fuel prices to its customers by
increasing its fares. Based on 2009 volumes, management estimates that a US$1 per barrel movement in the average price of
WTI crude oil would have resulted in an approximate $25 million change in 2009 fuel expense for Air Canada (excluding any
impact of fuel surcharges, foreign exchange rates and fuel hedging), assuming fl ying capacity remained unchanged and that
refi ning spreads between WTI crude oil and jet fuel as well as foreign exchange rates remained constant.