Air Canada 2007 Annual Report Download - page 31

Management’s Discussion and Analysis of Results and Financial Condition
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Other operating expenses increased 3% from 2006
Other operating expenses, largely comprised of terminal handling expenses, credit card fees, building rent and maintenance,
the cost of ground packages at Air Canada Vacations and miscellaneous fees and services, amounted to $1,420 million in
2007, an increase of $37 million from 2006.
An increase of $29 million relating to the cost of ground packages at Air Canada Vacations as a result of higher passenger
volumes was a signifi cant factor in the growth in other operating expenses over 2006. The increase in costs was driven by
higher passenger volumes mainly in the fi rst quarter of 2007.
Non-operating expense decreased $69 million from 2006
Non-operating expense amounted to $122 million in 2007, a decrease of $69 million compared to 2006. Factors contributing
to the year-over-year change in non-operating income (expense) included:
■ A decrease in net interest expense of $21 million. A $35 million increase in interest expense, largely driven by
the fi nancing of additional aircraft, was more than offset by a growth in interest income and a higher amount of
capitalized interest relating to new aircraft.
■ In 2007, Air Canada recorded gains of $14 million related to a damaged aircraft and gains of $5 million mainly
pertaining to the sale of one real estate property.
■ In 2006, Air Canada recorded an impairment provision of $7 million relating to one real estate property, other
losses on disposal amounting to $4 million and a gain on sale of $5 million pertaining to one of its commercial real
estate properties.
■ Gains relating to fair value adjustment on certain derivatives instruments amounted to $26 million in 2007 versus
losses of $18 million in 2006.
Net gains on foreign currency monetary items amounted to $317 million in 2007
Net gains on foreign currency monetary items amounted to $317 million in 2007, attributable to a stronger Canadian
dollar at December 31, 2007 compared to December 31, 2006. This compared to gains of $12 million in 2006. The net gains
recorded in 2007 were comprised of gains of $541 million relating to the mark-to-market of US denominated monetary
items partially offset by losses of $224 million relating to the mark-to-market of foreign currency forward contracts.
Effective income tax rate is 31%
The income tax provision was $190 million in 2007 and represented an effective tax rate of 31%. In 2006, the income tax
recovery was $3 million.
The effective income tax rate for 2007 was favorably impacted by the capital portion of certain foreign exchange gains
reported in the year, which are tax-affected at 50% of the income tax rate. In addition, the favorable impact of a reduction
in the federal corporate income tax rate was recognized in 2007. In addition to the federal changes, the Corporation also
recorded a current tax expense of $10 million related to the harmonization of Ontario and federal income taxes. This change
in tax law results in a tax liability of $10 million payable over a period of fi ve years, beginning in the 2009 taxation year.
Net income increased $503 million from 2006
Net income of $429 million was recorded in 2007 compared to a net loss of $74 million in 2006. 2006 results included the
special charge for Aeroplan miles of $102 million and a special charge for labour restructuring of $20 million.