Air Canada 2007 Annual Report Download - page 36

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2007 Air Canada Annual Report
36
7.3 LIQUIDITY
The Corporation’s principal source of liquidity is cash generated from operations. Such cash generation fl uctuates within any
given year based on seasonal demand patterns. Positive cash from operations would generally take place in the second and
third quarters while negligible or negative cash from operations would generally take place in the other quarters.
Longer term, the Corporation’s ability to generate improved cash from operations is generally impacted by its ability to
achieve a better combination of capacity, load factors, yields and cost effi ciencies. All of these are in turn affected by a
number of factors and subject to a number of risks including those relating to general economic conditions, foreign exchange
rates, fuel prices, competitive forces and our ability to continuously improve our controllable costs. Cash from operations
can also be signifi cantly affected by the fl uctuations in the Company’s pension defi cit which requires funding over time and
is likely to grow in circumstances where investment returns on pension assets are declining and pension liabilities increase
as a result of the lowering of interest rates (see Section 6.6 – Pension Funding Obligations).
The Corporation also has the ability to fund liquidity requirements through its $400 million revolving credit facility, the
issuance of secured debt, the disposal of surplus assets, the monetization of other assets generally through sale and
leaseback transactions and an improved management of working capital. The substantial investment in new aircraft over
the last couple of years has led to a signifi cant increase in the use of secured debt to maintain liquidity at desired levels. This
pattern is expected to continue in 2008 as a result of further new aircraft deliveries. The secured fi nancing for these aircraft
is already committed (refer to section 6.7 of this MD&A).
Liquidity could also be impacted by margin calls on fuel and foreign exchange derivative contracts. These margin calls would
likely occur in circumstances where fuel prices decline sharply or the Canadian dollar appreciates signifi cantly against the
US dollar as compared to current market prices. However both of these events would lead to improved cash from operations
which would likely more than offset the impact of the margin calls.
At December 31, 2007, Air Canada had cash, cash equivalents and short-term investments of $1,239 million. Compared to
December 31, 2006, cash, cash equivalents and short-term investments have decreased by $871 million primarily due to
aircraft acquisitions, net of fi nancing. This signifi cant investment in new aircraft is expected to improve the cash generated
from operations in the long term mostly through sustainable lower operating costs.
Air Canada has a secured syndicated 3-year revolving credit facility of $400 million. As of the date hereof, no amounts have
been drawn on this credit facility.
Actively managing working capital is key to ensuring cash is available to partially support funding of the Corporation’s fl eet renewal
and refurbishment. The following table provides additional information on our working capital balances at December 31, 2007
as compared to December 31, 2006 excluding the consolidation of Jazz operations (previously “Air Canada Services”).
December 31,
2007
December 31,
2006
Change in
Working Capital
Cash and short-term investments $ 1,239 $ 2,110 $ (871 )
Accounts receivable 750 739 11
Other current assets 489 1,223 (734 )
Accounts payable and accrued liabilities (1,243 ) (1,430 ) 187
Other current liabilities (1,713 ) (2,324 ) 611
$ (478 ) $ 318 $ (796 )
The December 31, 2007 working capital defi ciency of $478 million has deteriorated by $796 million over December 31, 2006
largely refl ecting the utilization of cash to fund the additions to capital assets, net of aircraft-related borrowings received.
The change in other current assets and other current liabilities is largely attributable to the settlement of a future income tax
asset and related tax payable of $345 million created in 2006 as part of a tax loss strategy that was planned in conjunction
with the Air Canada IPO and corporate restructuring. This tax payable arose upon a transaction to transfer tax assets from the
Corporation to ACE. This tax payable was recoverable from future income tax assets of the Corporation and was settled in 2007.
These balances are also impacted by the drawdown of a prepaid maintenance to ACTS and related note payable to ACTS in the
amount of $535 million. Refer to Note 3 to Air Canada’s 2007 consolidated fi nancial statements for additional information.