Air Canada 2007 Annual Report Download - page 47

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Management’s Discussion and Analysis of Results and Financial Condition
47
The following information summarizes the fi nancial statement impact of derivatives designated under fuel hedge accounting
before the impact of tax:
■ The fair value of outstanding fuel derivatives under hedge accounting at December 31, 2007 was $67 million in
favour of Air Canada.
■ The 2007 benefi t to fuel expense for the year ended December 31, 2007 was $31 million.
■ The non-operating income (expense) for the year ended December 31, 2007 was $12 million. The amount in
non-operating income (expense) represents the ineffective portion of the fair value change in items under hedge
accounting.
■ The effective change in the fair value of derivatives recorded in OCI for the period was $110 million before tax
expense of $28 million. OCI amounts for the year ended December 31, 2007 are presented net of this tax expense
in Air Canada’s consolidated statement of comprehensive income.
■ The estimated net amount of existing gains and losses reported in AOCI that is expected to be reclassifi ed to net
income during 2008 is $68 million.
The following provides the changes in fair value of derivatives not designated under hedge accounting, but held as economic
hedges before the impact of tax during the year ended December 31, 2007:
■ The fair value of outstanding fuel derivatives not under hedge accounting at December 31, 2007 was $10 million in
favour of Air Canada.
■ The non-operating income for the year ended December 31, 2007 was $26 million. The amount in non-operating income
(expense) represents the change in fair value of these contracts (realized and unrealized) since December 31 2006.
Foreign Exchange Risk Management
Air Canada enters into certain foreign exchange forward contracts or currency swaps to manage the risks associated
with foreign currency exchange rates. As at December 31, 2007, Air Canada had entered into foreign currency forward
contracts and option agreements on US$2.158 billion and EUR$18 million of future purchases in 2008 and 2009. The
fair value of these foreign currency contracts as at December 31, 2007 was $124 million in favour of the counterparties
(December 31, 2006 - $25 million in favour of Air Canada on US$503 million of future purchases in 2007). These derivative
instruments have not been designated as hedges for accounting purposes. The unrealized loss has been recorded in foreign
exchange gain (loss).
Air Canada has entered into currency swap agreements for 16 CRJ operating leases until lease terminations between
2007 and 2011. During 2007, fi ve currency swaps were settled with a fair value of $10 million (which was equal to carrying
value) (December 31, 2006 - $10 million in favour of the counterparties). Air Canada has 11 currency swap agreements
remaining. These currency swaps with third parties have a nominal fair value in favour of Air Canada as at December 31, 2007
(December 31, 2006 — $3 million favour of Air Canada). The notional amount under these swaps is US$79 million as at
December 31, 2007 (December 31, 2006 – US$88 million). These have not been designated as hedges for hedge accounting
purposes.
Interest Rate Risk Management
Air Canada enters into forward interest rate agreements to manage the risks associated with interest rate movement on
US dollar and Canadian dollar fl oating rate debt. During 2006, Air Canada entered into 19 interest rate swaps with a notional
value of US$414 million to receive fl oating rates and pay a weighted average fi xed rate of 5.81% for the debt to be arranged
in relation to the fi nancing of Embraer 190 aircraft between June 2006 and February 2008. The swaps have 15-year terms
from the expected delivery date of the aircraft and their maturities range from June 2021 to December 2022. Air Canada
has been settling the interest rate swaps upon delivery of the related aircraft. Air Canada did not apply hedge accounting to
these derivative instruments. As at December 31, 2007, one contract remains outstanding with a fair value of $2 million in
favour of the counterparty (December 31, 2006 - $13 million in favour of the counterparty for 12 contracts outstanding).
During 2007, 11 contracts were settled at a net loss of $10 million.