Air Canada 2007 Annual Report Download - page 67

Management’s Discussion and Analysis of Results and Financial Condition
67
The Corporation also encounters substantial price competition. The expansion of low-cost carriers in recent years, along with
the advent of Internet travel websites and other travel products distribution channels, has resulted in a substantial increase
in discounted and promotional fares initiated by the Corporation’s competitors. The decision to match competitors’ fares, to
maintain passenger traffi c, results in reduced yields which, in turn, could have a material adverse effect on the Corporation’s
business, results from operations and fi nancial condition. Furthermore, the Corporation’s ability to reduce its fares in order
to effectively compete with other carriers is dependent on the Corporation’s ability to achieve acceptable operating margins
and may also be limited by government policies to encourage competition.
In addition, consolidation in the airline industry could result in increased competition as some airlines emerging from such
consolidations may be able to compete more effectively against the Corporation which could have a material adverse effect
on the Corporation’s business, results from operations and fi nancial condition.
Limitations Due to Restrictive Covenants
Some of the fi nancing and other major agreements of the Corporation contain restrictive covenants which affect and,
in some cases, signifi cantly limit or prohibit, among other things, the manner in which the Corporation may structure or
operate its business, including by limiting the Corporation’s ability to incur indebtedness, create liens, sell assets, make
capital expenditures and engage in acquisitions, mergers or restructurings. In addition, certain fi nancing arrangements
require the Corporation to maintain fi nancial ratios. Any future borrowings may also be subject to similar covenants which
limit Air Canada’s operating and fi nancial fl exibility, which could materially and adversely affect Air Canada’s profi tability.
A failure by the Corporation to comply with its contractual obligations (including restrictive covenants), or to pay its
indebtedness and fi xed costs could result in a variety of material adverse consequences, including the acceleration of its
indebtedness, the withholding of credit card proceeds by the credit card service providers and the exercise of remedies by
its creditors and lessors, and such defaults could trigger additional defaults under other indebtedness or agreements. In such
a situation, it is unlikely that the Corporation would be able to repay the accelerated indebtedness or fulfi ll its obligations
under certain contracts, make required aircraft lease payments or otherwise cover its fi xed costs. Also, the lenders under
the fi nancing arrangements could foreclose upon all or substantially all of the assets of the Corporation which secure the
Corporation’s obligations.
Strategic, Business, Technology and Other Important Initiatives
In order to operate its business, achieve its goals and remain competitive, the Corporation continuously seeks to identify
and devise, invest in and implement strategic, business, technology and other important initiatives, such as those relating
to the aircraft fl eet restructuring program, the aircraft refurbishment program, the new revenue model, the reservation
and airport customer service initiative (which will also support the revenue model), the business process initiatives as
well as other initiatives. These initiatives, including activities relating to their development and implementation, may be
adversely impacted by a wide range of factors, many of which are beyond the Corporation’s control. Such factors include the
performance of third parties, including suppliers, the implementation and integration of such initiatives into the Corporation’s
other activities and processes as well as the adoption and acceptance of initiatives by the Corporation’s customers, suppliers
and personnel. A delay or failure to suffi ciently and successfully identify and devise, invest in or implement these initiatives
could adversely affect the Corporation’s ability to operate its business, achieve its goals and remain competitive and could
have a material adverse effect on the Corporation’s business, results from operations and fi nancial condition.
For instance, a key component of the Corporation’s business plan is the restructuring of its aircraft fl eet, including the
elimination and replacement of older, less effi cient aircraft, the introduction of new regional jet aircraft, and the modernization
of its international wide-body fl eet through the acquisition of new and more effi cient aircraft. A delay or failure in the
completion of the Corporation’s fl eet restructuring, including a delay by the manufacturers in the delivery of the wide-body
aircraft, or an inability to remove, as planned, certain aircraft from the fl eet in coordination with the planned entry into
service of new aircraft, could adversely affect the implementation of the Corporation’s business plan which may, in turn,
have a material adverse effect on the Corporation’s business, results from operations and fi nancial condition.
Another important component of the Corporation’s business plan is the replacement of its legacy systems for passenger
reservation and airport customer service with a newly developed web-enabled system in order to support the rapid and
effi cient implementation of the Corporation’s revenue model. A delay or failure in the implementation of the Corporation’s
new system could adversely affect the implementation of the Corporation’s business plan which may, in turn, have a
material adverse effect on the Corporation’s business, results from operations and fi nancial condition.