Air Canada 2007 Annual Report Download - page 65

Management’s Discussion and Analysis of Results and Financial Condition
65
17. RISK FACTORS
The risks described herein may not be the only risks faced by the Corporation. Other risks of which the Corporation is not
aware or which the Corporation currently deems to be immaterial may surface and have a material adverse impact on the
Corporation’s business, results from operations and fi nancial condition.
Risks Relating to the Corporation
Operating Results
In the past, the Corporation has sustained signifi cant operating losses and may sustain signifi cant losses in the future.
On September 30, 2004, the Corporation and certain of its subsidiaries emerged from protection under the CCAA and
implemented the Plan. For the three years ended December 31, 2003, Air Canada incurred operating losses before
reorganization and restructuring items and non-recurring labour expenses of over $1.6 billion. For the nine-month period ended
September 30, 2004, Air Canada realized operating income before reorganization and restructuring items of $120 million
and, for the three-month period ended December 31, 2004, the Corporation incurred an operating loss of $59 million. For the
years ended December 31, 2007, 2006 and 2005, the Corporation realized operating income of $495 million, $259 million and
$318 million, respectively. Despite Air Canada’s emergence from creditor protection under the CCAA, the resulting and ongoing
business initiatives and efforts at cost reductions and its recent results, the Corporation may not be able to successfully
achieve planned business initiatives and cost reductions, including those which seek to offset signifi cant fuel and other expense
increases or restore positive net profi tability and may sustain signifi cant losses in the future.
Leverage and Liquidity
The Corporation has, and is expected to continue to have, a signifi cant amount of indebtedness, including substantial
fi xed obligations under aircraft leases and fi nancings. The Corporation may incur additional debt, including secured debt,
in the future. The amount of indebtedness that the Corporation currently has and which it may incur in the future could
have a material adverse effect on the Corporation, for example, by (i) limiting the Corporation’s ability to obtain additional
fi nancing , (ii) requiring the Corporation to dedicate a substantial portion of its cash fl ow from operations to payments
on its indebtedness and fi xed cost obligations, thereby reducing the funds available for other purposes, (iii) making the
Corporation more vulnerable to economic downturns, and (iv) limiting the Corporation’s fl exibility in planning for, or
reacting to, competitive pressures or changes in its business environment.
The ability of the Corporation to make scheduled payments under its indebtedness will depend on, among other things, its
future operating performance and its ability to refi nance its indebtedness, if necessary. Each of these factors is to a large
extent subject to economic, fi nancial, competitive, regulatory, operational and other factors, many of which are beyond the
Corporation’s control. In addition, as the Corporation incurs indebtedness which bears interest at fl uctuating interest rates,
to the extent these interest rates increase, its interest expense will increase. There can be no assurance that the Corporation
will be able to generate suffi cient cash from its operations to pay its debts and lease obligations.
Need for Additional Capital
The Corporation faces a number of challenges in its current business operations, including high fuel prices and increased
competition from international, transborder and low-cost domestic carriers. In order to meet such challenges and to support
the Corporation’s business strategy, signifi cant operating and capital expenditures are, and may in the future be, required.
There can be no assurance that the Corporation will continue to be able to obtain on a timely basis suffi cient funds on terms
acceptable to the Corporation to provide adequate liquidity and to fi nance the operating and capital expenditures necessary
to support its business strategy if cash fl ows from operations and cash on hand are insuffi cient.
Failure to generate additional funds, whether from operations or additional debt or equity fi nancings, may require the
Corporation to delay or abandon some or all of its anticipated expenditures or to modify its business strategy, which could
have a material adverse effect on the Corporation’s business, results from operations and fi nancial condition. Furthermore,
the ability of competitors to raise money more easily and on less onerous terms could create a competitive disadvantage
for Air Canada.
In addition, the Corporation’s credit ratings infl uence its ability to access capital markets. There can be no assurance that the
Corporation’s credit ratings will not be downgraded, which would add to the Corporation’s borrowing and insurance costs,
hamper its ability to attract capital and limit its ability to operate its business, all of which could have a material adverse
effect on the Corporation’s business, results from operations and fi nancial condition.