Air Canada 2012 Annual Report Download - page 133

2012 Consolidated Financial Statements and Notes
133
Collateral Held in Leasing Arrangements
The Corporation holds security deposits with a carrying value of $13 (2011 – $10), 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, $6 (2011 – $7) have been assigned as collateral to secure the Corporation's obligations to the lessors and
financiers 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 (loss) on Financial Instruments Recorded at Fair Value
2012 2011
Fuel derivatives $ (43) $ (26)
Prepayment option on senior secured notes Note 8 15 –
Interest rate swaps (1) (22)
Share forward contracts 5 (10)
Other 4 (5)
Loss on financial instruments recorded at fair value $ (20) $ (63)
Risk Management
Under its risk management policy, the Corporation manages its interest rate risk, foreign exchange risk, share-based
compensation risk and market risk (e.g. fuel price risk) through the use of various interest rate, foreign exchange, fuel and
other derivative financial instruments. The Corporation uses derivative financial instruments only for risk management
purposes, not for generating trading profit. As such, any change in cash flows associated with derivative instruments is
designed to be offset by changes in cash flows related to the risk being hedged.
As noted below, the Corporation uses derivative instruments to provide economic hedges 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 prices in active
markets, where available. When no such market is available, valuation techniques are applied such as discounted cash flow
analysis. 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 flows of a financial instrument will fluctuate because of changes
in market interest rates.
The Corporation enters into both fixed and floating rate debt and also leases certain assets where the rental amount
fluctuates based on changes in short term interest rates. The Corporation manages interest rate risk on a portfolio basis and
seeks financing 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 flows to the Corporation. The short-term investment portfolio which earns a floating
rate of return is an economic hedge for a portion of the floating rate debt.
The ratio of fixed to floating rate obligations outstanding is designed to maintain flexibility in the Corporation’s capital
structure and is based upon a long term objective of 60% fixed and 40% floating but allows flexibility to 75% fixed in the
short-term to adjust to prevailing market conditions. The ratio at December 31, 2012 is 71% fixed and 29% floating, including
the effects of interest rate swap positions (69% and 31%, respectively as at December 31, 2011).