Air Canada 2009 Annual Report Download - page 75

2009 Management’s Discussion and Analysis
75
Competition
Air Canada operates within a highly competitive industry. Over the past few years, several carriers have entered or
announced their intention to enter or expand into the domestic, the U.S. transborder and international markets in which
Air Canada operates.
Canadian low-cost and other carriers have entered and/or expanded or announced their intention to compete in many of
Air Canada’s key domestic markets and, along with some U.S. carriers have also entered and/or expanded their operations
in the U.S. transborder and leisure-oriented markets. Carriers against which Air Canada may compete, including U.S. 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 Air Canada. Air Canada 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.
If Canadian low-cost and other carriers are successful in entering or expanding into Air Canada’s domestic and the U.S.
transborder markets, if additional U.S. or other carriers against which Air Canada competes are successful in entering
Air Canada’s transborder market or if carriers are successful in their expansion in international markets of Air Canada,
Air Canada’s business results from operations and fi nancial condition could be materially adversely affected.
Air Canada also encounters substantial price competition. The expansion of low-cost carriers in recent years, along with the
advent of Internet travel websites and other travel products distribution channels, has resulted in a substantial increase in
discounted and promotional fares initiated by Air Canada’s competitors. The decision to match competitors’ fares to maintain
passenger traffi c, results in reduced yields which, in turn, could have a material adverse effect on Air Canada, its business, results
from operations and fi nancial condition. Furthermore, Air Canada’s ability to reduce its fares in order to effectively compete
with other carriers is dependent on Air Canada’s ability to achieve acceptable operating margins and may also be limited by
government policies to encourage competition. Likewise, competitors continue to pursue commission/incentive actions and,
in many cases, increase these payments. The decision to modify Air Canada’s current programs in order to remain competitive
and maintain passenger traffi c could result in increased costs to Air Canada’s business.
In addition, consolidation in the airline industry could result in increased competition as some airlines emerging from such
consolidations may be able to compete more effectively against Air Canada which could have a material adverse effect on
Air Canada, its business, results from operations and fi nancial condition.
Limitations Due to Restrictive Covenants
Some of the fi nancing and other major agreements to which Air Canada is a party contain restrictive, fi nancial (including in
relation to liquidity, minimum EBITDAR, fi xed charge coverage ratio and debt coverage ratios) and other covenants which affect
and, in some cases, signifi cantly limit or prohibit, among other things, the manner in which Air Canada may structure or operate
its business, including by reducing Air Canada’s liquidity, limiting Air Canada’s ability to incur indebtedness, create liens, sell
assets, pay dividends, make capital expenditures, and engage in acquisitions, mergers or restructurings or a change of control.
Future fi nancing and other major agreements may also be subject to similar covenants which limit Air Canada’s operating and
fi nancial fl exibility, which could materially and adversely affect Air Canada’s ability to operate its business and its profi tability.
A failure by Air Canada to comply with its contractual obligations (including restrictive, fi nancial and other covenants), or to
pay its indebtedness and fi xed costs could result in a variety of material adverse consequences, including the acceleration of
its indebtedness, the withholding of credit card proceeds by the credit card service providers and the exercise of remedies by
its creditors and lessors, and such defaults could trigger additional defaults under other indebtedness or agreements. In such
a situation, it is unlikely that Air Canada would be able to repay the accelerated indebtedness or fulfi ll its obligations under
certain contracts, make required aircraft lease payments or otherwise cover its fi xed costs. Also, the lenders under the fi nancing
arrangements could foreclose upon all or substantially all of the assets of Air Canada which secure Air Canada’s obligations.
Refer to section 13 of this MD&A for a description of restrictive covenants relating to one of Air Canada’s credit card
processing agreements.