Air Canada 2007 Annual Report Download - page 66

2007 Air Canada Annual Report
66
Fuel Costs
Fuel costs constituted the largest percentage of the total operating costs of the Corporation in 2007. Fuel prices fl uctuate
widely depending on many factors including international market conditions, geopolitical events and the Canada/US dollar
exchange rate. Air Canada cannot accurately predict fuel prices. During 2005, 2006 and 2007, fuel prices increased and
fl uctuated near or at historically high levels. Should fuel prices continue at, or continue to increase above, such high
levels, fuel costs could have a material adverse effect on the Corporation’s business, results from operations and fi nancial
condition. Due to the competitive nature of the airline industry, the Corporation may not be able to pass on increases in
fuel prices to its customers by increasing its fares. Based on 2007 volumes, Management estimates that a US$1 per barrel
movement in the average price of West Texas Intermediate crude oil would have resulted in an approximate Cdn$26 million
change in 2007 fuel expense for the Corporation (excluding any impact of fuel surcharges, foreign exchange rates and fuel
hedging), assuming fl ying capacity remained unchanged and that refi ning spreads between West Texas Intermediate crude
oil and jet fuel as well as foreign exchange rates remained constant.
Labour Costs and Labour Relations
Labour costs constitute one of the Corporation’s largest operating cost items. There can be no assurance that the Corporation
will be able to maintain such costs at levels which do not negatively affect its business, results from operations and fi nancial
condition. There can be no assurance that future agreements with employees’ unions or the outcome of arbitrations will be
on terms consistent with the Corporation’s expectations or comparable to agreements entered into by the Corporation’s
competitors. Any future agreements or outcome of negotiations, mediations or arbitrations including in relation to wages or
other labour costs or work rules may result in increased labour costs or other charges which could have a material adverse
effect on the Corporation’s business, results from operations and fi nancial condition.
Most of the Corporation’s employees are unionized and long-term collective agreements were concluded in 2003 and
2004. No strikes or lock-outs may lawfully occur during the term of the collective agreements expiring in 2009. However,
there can be no assurance that there will not be a labour confl ict that could lead to an interruption or stoppage in the
Corporation’s service or otherwise adversely affect the ability of the Corporation to conduct its operations, all of which
could have a material adverse effect on its business, results from operations and fi nancial condition.
If there is a labour disruption or work stoppage by any of the unionized work groups of Jazz, there could also likely be a material
adverse effect on the Corporation’s business, results from operations and fi nancial condition. In addition, labour confl icts at the
Corporation’s Star Alliance® partners could result in lower demand for connecting traffi c with the Corporation and, ultimately,
could have a material adverse effect on the Corporation’s business, results from operations and fi nancial condition.
Airport User Fees and Air Navigation Fees
With the privatization of airports and air navigation authorities over the last decade in Canada, new airport and air navigation
authorities have imposed signifi cant increases in their fees. If authorities in Canada or elsewhere continue to increase their
fees at the rate at which they have increased them in the recent past, the Corporation’s business, results from operations
and fi nancial condition could be materially adversely affected.
Competition
The Corporation operates within a highly competitive industry. Over the past few years, several carriers have entered or
announced their intention to enter into the domestic, the US transborder and international markets in which the Corporation
operates.
Canadian low-cost and other carriers have entered and/or expanded or announced their intention to compete in many
of the Corporation’s key domestic markets and, along with some US carriers have also entered and/or expanded their
operations in the US transborder market. Some US carriers, having recently completed substantial reorganizations, have
reduced levels of indebtedness and lower operating costs and may be in a position to more effectively compete with
the Corporation. The Corporation is also facing increasing competition in international markets as carriers increase their
international capacity, both by expansion and by shifting existing domestic capacity to international operations to avoid
low-cost domestic competition.
If Canadian low-cost and other carriers are successful in entering or expanding into the Corporation’s domestic and the
US transborder markets, if additional US carriers are successful in entering the Corporation’s transborder market or if
carriers are successful in their expansion in international markets of the Corporation, the Corporation’s business results from
operations and fi nancial condition could be materially adversely affected.