Air Canada 2012 Annual Report Download - page 71

2012 Management’s Discussion and Analysis
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Furthermore, consolidation within the airline industry could result in increased competition as some airlines emerging from
such consolidations and entering into integrated commercial cooperation arrangements, such as joint ventures, may be able
to compete more effectively, which could have a material adverse effect on Air Canada.
Airline Industry Characterized by Low Gross Profit Margins and High Fixed Costs
The airline industry is characterized by low gross profit margins and high fixed costs. The costs of operating any particular
flight do not vary significantly with the number of passengers carried and, therefore, a relatively small change in the number
of passengers or in fare pricing or traffic mix would have a significant effect on Air Canada’s operating and financial results.
This condition has been exacerbated by aggressive pricing by low-cost carriers, which has had the effect of driving down fares
in general. Accordingly, a shortfall from expected revenue levels could have a material adverse effect on Air Canada, its
business, results from operations and financial condition. As a result of high fixed costs, should Air Canada be required to
reduce its overall capacity or the number of flights operated, it may not be able to successfully reduce certain fixed costs in
the short-term and may be required to incur important termination or other restructuring costs, which could have a material
adverse effect on Air Canada, its business, results from operations and financial condition.
Limitations Due to Restrictive Covenants
Some of the financing and other major agreements to which Air Canada is a party contain, and in the future may contain,
restrictive, financial (including in relation to asset valuations, liquidity, minimum EBITDAR results, fixed charge coverage ratio
and debt coverage ratios) and other covenants which affect and, in some cases, significantly 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 financing and other major agreements may
also be subject to similar covenants which limit Air Canada’s operating and financial flexibility, which could materially and
adversely affect Air Canada’s ability to operate its business and its profitability.
A failure by Air Canada to comply with its contractual obligations (including restrictive, financial and other covenants), or to
pay its indebtedness and fixed 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, lessors or other co-contracting parties, and such defaults could trigger additional defaults under other
indebtedness or agreements. In such a situation, Air Canada may not be able to repay the accelerated indebtedness or fulfill its
obligations under certain contracts, make required aircraft lease payments or otherwise cover its fixed costs. Also, the lenders
under the financing arrangements could foreclose upon all or substantially all of the assets of Air Canada which secure Air
Canada’s obligations.
Refer to section 9.8 of this MD&A for information on Air Canada’s credit card processing agreements.
Strategic, Business, Technology and Other Important Initiatives
In order to operate its business, achieve its goals and remain competitive, Air Canada continuously seeks to identify and devise,
invest in, implement and pursue strategic, business, technology and other important initiatives, such as those relating to
participation in the low-cost market (including the planned launch of Air Canada rougeTM in the second half of 2013) the
aircraft fleet restructuring (including the planned transfer of 15 Embraer 175 aircraft to Sky Regional), business processes,
information technology, revenue management (including the planned implementation of Air Canada’s revenue management
system), cost transformation, improving premium passenger revenues, expansion of flying capacity (including in respect of
new routes), corporate culture transformation, initiatives seeking to ensure a consistently high quality customer service
experience and others. These initiatives, including activities relating to their development and implementation, may be
adversely impacted by a wide range of factors, many of which are beyond Air Canada’s control. Such factors include the need
to seek legal or regulatory approvals, the performance of third parties, including suppliers, the implementation and integration
of such initiatives into Air Canada’s other activities and processes as well as the adoption and acceptance of these initiatives
by Air Canada’s customers, suppliers, unions and personnel. A delay or failure to sufficiently and successfully identify and
devise, invest in or implement these initiatives could adversely affect Air Canada’s ability to operate its business, achieve its
goals and remain competitive and could have a material adverse effect on Air Canada, its business, results from operations and
financial condition.