Air Canada 2012 Annual Report Download - page 55

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2012 Management’s Discussion and Analysis
55
Fuel Price Risk Management
Fuel price risk is the risk that future cash flows relating to jet fuel purchases will fluctuate because of changes in jet fuel prices.
In order to manage its exposure to jet fuel prices and to help mitigate volatility in operating cash flows, Air Canada enters into
derivative contracts with financial intermediaries.
Air Canada uses derivative contracts based on jet fuel, heating oil and crude-oil based contracts. Heating oil and crude-oil
derivatives are used due to the relative limited liquidity of jet fuel derivative instruments on a medium to long-term horizon
since jet fuel is not traded on an organized futures exchange. Air Canada’s policy permits hedging of up to 75% of the
projected jet fuel purchases for the next 12 months, 50% for the next 13 to 24 months and 25% for the next 25 to 36 months.
These are maximum (but not mandated) limits. There is no minimum monthly hedging requirement. There are regular reviews
to adjust the strategy in light of market conditions. Air Canada does not purchase or hold any derivative financial instrument
for speculative purposes.
In 2012:
Air Canada recorded a loss of $43 million in Loss on financial instruments recorded at fair value on Air Canada’s
consolidated statement of operations related to fuel derivatives ($26 million loss in 2011).
Air Canada purchased crude-oil and refined products-based call options and call spreads covering a portion of 2012 and
2013 fuel exposure. The cash premium related to these contracts was $51 million ($35 million in 2011 for 2011 and 2012
exposures).
Fuel derivative contracts cash settled with a net fair value of $3 million in favour of Air Canada ($31 million in favour of
Air Canada in 2011).
As of January 31, 2013, approximately 27% (approximately 24% at December 31, 2012) of Air Canada's anticipated purchases
of jet fuel for 2013 was hedged at an average West Texas Intermediate (“WTI”) equivalent capped price of US$101 per barrel
(US$100 per barrel at December 31, 2012). Air Canada’s contracts to hedge anticipated jet fuel purchases over the 2013
period are comprised of call options and call spreads.
The fair value of the fuel derivatives portfolio at December 31, 2012 was $16 million in favour of Air Canada ($11 million in
favour of Air Canada in 2011) and was recorded within Prepaid expenses and other current assets on Air Canada’s
consolidated statement of financial position.
The following table outlines the notional volumes per barrel along with the WTI equivalent weighted average capped price by
type of derivative instruments as at January 31, 2013. Air Canada is expected to generate fuel hedging gains if oil prices
increase above the average capped price.
Derivative Instruments Term Volume (bbls)
WTI
Weighted Average
Capped Price (US$/bbl)
Call options 2013 6,218,499 $ 101
Call spreads 2013 450,000 $ 92