Air Canada 2007 Annual Report Download - page 40

2007 Air Canada Annual Report
40
7.7 CAPITAL EXPENDITURES AND RELATED FINANCING ARRANGEMENTS
In 2004, Air Canada signed defi nitive purchase agreements with Empresa Brasileira de Aeronautica S.A. (“Embraer”) for the
acquisition of regional jet aircraft. In November 2005, Air Canada also concluded agreements with The Boeing Company
(“Boeing”) for the acquisition of Boeing 777 and Boeing 787 aircraft.
Boeing
In November 2005, Air Canada 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, Air
Canada 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, Air
Canada 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 under the purchase agreement with Boeing 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 the Export-Import Bank of the United States (“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% 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 EXIM guarantee support for only fi ve
aircraft in 2008 given the Corporation expects to sell and lease back the other four aircraft (see below).
On October 30, 2007, the Corporation entered into an agreement with a syndicate of banks for the fi nancing of pre-
delivery payments (“PDP”) for 10 Boeing 777 aircraft contemplated in the Corporation’s Purchase Agreement with
Boeing. The PDP fi nancing is a series of loans that are aircraft specifi c with a maximum aggregate commitment of up to
$568 million (US$575 million). The PDP loans have a term of fi ve years, but may be prepaid upon the delivery of the aircraft
without penalty. Air Canada has already prepaid the PDP loans on the fi rst two aircraft delivered in November 2007 and
January 2008. In addition, Air Canada has served notice to the PDP syndicate that it will be prepaying the PDP loans on
delivery of aircraft three to eight. Air Canada’s intent is to prepay all PDP loans upon delivery of the relevant aircraft, using
the committed long-term aircraft fi nancing and leases for the aircraft to be delivered. The tenth and last aircraft in this
PDP fi nancing is currently scheduled for delivery in November 2008, at which time Air Canada expects to have fully repaid
the PDP loans. At year-end 2007, the amount drawn on the PDP loans was $521 million (US$528 million). Air Canada is
using the PDP fi nancing to settle most of the outstanding pre-delivery payments. This results in a signifi cant shift in capital
expenditures from 2008 to 2007 from that which was previously disclosed due to the pre-delivery deposit being recorded
as a capital expenditure when paid.