Air Canada 2012 Annual Report Download - page 136

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2012 Air Canada Annual Report
136
Sensitivity Analysis
The following table is a sensitivity analysis for each type of market risk relevant to the significant financial instruments
recorded by the Corporation as at December 31, 2012. The sensitivity analysis is based on a reasonably possible movement in
the relevant risk factor. These assumptions may not be representative of actual movements in these risks and should not be
relied upon. Given potential volatility in the financial and commodity markets, the actual percentage changes may differ
significantly from the percentage changes outlined below. Changes in income generally cannot be extrapolated because the
relationship of the change in assumption to the change in income may not be linear. Each risk is contemplated independent of
other risks. In reality, changes in one factor may result in changes in another, which may magnify or counteract the
sensitivities.
Interest
rate risk(1) Foreign exchange rate risk(2) Other price risk(3)
Income Income Income
1% increase 5% increase 5% decrease 10% increase 10% decrease
Cash and cash equivalents $ 8 $ (11) $ 11 $ – $ –
Short-term investments $ 13 $ (13) $ 13 $ – $ –
Aircraft related deposits $ – $ (4) $ 4 $ – $ –
Long-term debt and finance leases $ (12) $ 171 $ (171) $ – $ –
Fuel derivatives $ – $ – $ – $ 26 $ (12)
Foreign exchange derivatives $ – $ (1) $ 1 $ – $ –
Interest rate swaps $ (4) $ – $ – $ – $ –
(1) Due to currently low market rates of interest, a 1% decrease in interest rates was not considered a reasonable scenario within the forecast period, being one year.
(2) Increase (decrease) in foreign exchange relates to a strengthening (weakening) of the Canadian dollar versus the U.S. dollar. The impact on long-term debt and finance
leases includes $8 related to the Canadian dollar versus the Japanese yen. The impact of changes in other currencies is not significant to the Corporation’s financial
instruments.
(3) Other price risk relates to the Corporation’s fuel derivatives. The sensitivity analysis is based upon a 10% increase or decrease in the price of the underlying commodity.
Covenants in Credit Card Agreements
The Corporation has various agreements with companies that process customer credit card transactions. Approximately 85%
of the Corporation’s sales are processed using credit cards, with remaining sales processed through cash or online banking
based transactions. The Corporation receives payment for a credit card sale generally in advance of when the passenger
transportation is provided.
In 2012, the Corporation transitioned its principal credit card processing agreements for credit card processing services in
North America to a new service provider. The terms of the new agreements are for five years each and the agreements
contain triggering events upon which the Corporation is required to provide the credit card processor with cash deposits. The
obligation to provide cash deposits and the required amount of deposits are each based upon a matrix measuring, on a
quarterly basis, both a fixed charge coverage ratio for the Corporation and the unrestricted cash and short-term investments
of the Corporation. In 2012, the Corporation made no cash deposits under these agreements (nil in 2011).
Credit Risk
Credit risk is the risk of loss due to a counterparty’s inability to meet its obligations. As at December 31, 2012, the
Corporation’s credit risk exposure consists mainly of the carrying amounts of Cash and cash equivalents, Short-term
investments and Accounts receivable. Cash and cash equivalents and Short-term investments are in place with major financial
institutions, the Canadian government, and major corporations. Accounts receivable are generally the result of sales of tickets
to individuals, often through the use of major credit cards, through geographically dispersed travel agents, corporate outlets,
or other airlines. Credit rating guidelines are used in determining counterparties for fuel hedging. In order to manage its
exposure to credit risk and assess credit quality, the Corporation reviews counterparty credit ratings on a regular basis and
sets credit limits when deemed necessary.