Air Canada 2007 Annual Report Download - page 125

Consolidated Financial Statements and Notes
125
16. COMMITMENTS
In 2004, the Corporation signed defi nitive purchase agreements with Embraer for the acquisition of regional jet aircraft. In
November 2005, the Corporation also concluded agreements with The Boeing Company (“Boeing”) for the acquisition of
Boeing 777 and Boeing 787 aircraft.
Boeing
In November 2005, the Corporation concluded agreements with Boeing for the acquisition of up to 36 Boeing 777 aircraft
and up to 60 Boeing 787 Dreamliners. The initial order for the 36 Boeing 777 aircraft was comprised of fi rm orders for
18 aircraft plus purchase rights for 18 more. The initial order for the Boeing 787 aircraft was comprised of fi rm orders for
14 aircraft plus purchase rights, options and rolling options for 46 aircraft. In conjunction with the initial agreements, the
Corporation received fi nancing commitments from Boeing and the engine manufacturer for all fi rm aircraft orders covering
up to 90% of the capital expenditure. This available fi nancing is based on a fl oating or fi xed rate equivalent and was at
8.70% at December 31, 2007. The term to maturity is 15 years with principal payments made on a mortgage style basis
resulting in equal instalment payments of principal and interest over the term to maturity.
During 2007, the Corporation amended agreements with Boeing to cancel orders for two Boeing 777 aircraft scheduled
for delivery in 2009. In addition, the Corporation increased its order for Boeing 787 aircraft by 23, bringing its total fi rm
orders to 37 Boeing 787 aircraft. The fi rst delivery of the Boeing 787 fi rm aircraft is scheduled for 2010 and deliveries of all
37 fi rm aircraft are scheduled to be completed by 2014. As at December 31, 2007, 18 purchase rights for Boeing 777 aircraft
and 23 options for Boeing 787 aircraft remained exercisable. In January, 2008, Boeing announced a delay in the production
of its fi rst Boeing 787 aircraft from the end of the fi rst quarter of 2008 to the end of the second quarter of 2008 due to
production delays. The Corporation has not been notifi ed that its Boeing 787 deliveries have been affected, however, the
Corporation expects to receive an update towards the end of the fi rst quarter of 2008.
In conjunction with the amended agreements, the Corporation received additional fi nancing commitments from Boeing for
seven of the additional Boeing 787 aircraft (21 Boeing 787 aircraft in total) on the same terms and conditions as described
above. Should the Corporation not utilize any of the fi nancing commitments on the Boeing 777 aircraft, the fi nancing
commitments for the Boeing 787 aircraft will be increased to 31 aircraft of which the terms for 28 aircraft would be
revised to cover 80% of the aircraft delivery price and the term to maturity would be reduced to 12 years with straight-line
principal repayments over the term to maturity.
As at December 31, 2007, seven of the Boeing 777 fi rm aircraft have been delivered with the remaining nine fi rm deliveries
expected to be delivered by end of year 2008. The fi rst seven aircraft were fi nanced under loan guarantee support from
EXIM. All of the nine Boeing 777 fi rm aircraft deliveries expected in 2008 have commitments for loan guarantee support
to be provided by EXIM which was signed in January, 2008. The loan guarantee, subject to certain conditions, covers a
12-year loan term for 85 percent of the capital expenditure at an interest rate based on a fl oating rate. This loan guarantee
from EXIM is expected to be used instead of the fi nancing commitments provided by Boeing and the engine manufacturer
described above. As a result, it is not expected that any of Boeing’s and the engine manufacturer’s fi nancing commitments
for the Boeing 777 aircraft will be utilized. The fi rm commitment fi nancing on capital purchase commitments disclosed
below refl ects this guarantee support for only fi ve aircraft in 2008, given that the Corporation expects to sell and lease back
the other four aircraft (see below).
In January 2008, the Corporation signed letters of intent for the sale and lease back of four of the nine Boeing 777 deliveries
scheduled for delivery in 2008. The lease term for two of the Boeing 777 aircraft is 12 years. The other two Boeing 777 aircraft
each have 10.5 year lease terms and the Corporation has options to extend each for an additional 18 months. All four leases
are at market lease rates. This replaces an equivalent number of aircraft loan guarantee support commitments provided by
EXIM. As a result, the capital expenditure forecast in the table below does not include expenditures relating to these aircraft.
These four aircraft deliveries are included in the operating lease commitments table below. The impact of these leases results
in a signifi cant reduction in capital expenditures from what was previously disclosed. Operating lease commitments have
increased as a result of this change.