Air Canada 2007 Annual Report Download - page 69

Management’s Discussion and Analysis of Results and Financial Condition
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regulations were amended retroactive to January 1, 2004. The Corporation is required to make substantial annual cash
contributions, and the level of those contributions will increase in the event of poor pension fund investment performance
and/or further declines in long-term Government of Canada bond rates. See “Management’s Discussion and Analysis —
Critical Accounting Estimates — Employee Future Benefi ts — Sensitivity Analysis”. Underfunded pension plans or a failure
or inability by the Corporation to make required cash contributions to its registered pension plans could have a material
adverse effect on the Corporation’s business, results from operations and fi nancial condition. Refer to section 7.6 of this
MD&A for Air Canada’s projected cash pension funding obligations.
Star Alliance®
The strategic and commercial arrangements with Star Alliance® members provide the Corporation with important benefi ts,
including codesharing, effi cient connections and transfers, reciprocal participation in frequent fl yer programs and use of
airport lounges from the other members. Should a key member leave Star Alliance® or otherwise fail to meet its obligations
thereunder, the Corporation’s business, results from operations and fi nancial condition could be materially adversely
affected.
Interruptions or Disruptions in Service
The Corporation’s business is signifi cantly dependent upon its ability to operate without interruption at a number of hub
airports, including Toronto Pearson Airport. Delays or disruptions in service, including those due to security or other incidents,
weather conditions, labour confl icts with airport workers, baggage handlers, air traffi c controllers and other workers not
employed by the Corporation or other causes beyond the control of the Corporation could have a material adverse impact
on the Corporation’s business, results from operations and fi nancial condition.
Foreign Exchange
The Corporation’s fi nancial results are sensitive to the changing value of the Canadian dollar. In particular, the Corporation
has a signifi cant annual net outfl ow of US dollars and is affected by fl uctuations in the Canada/US dollar exchange
rate. Management estimates that during 2007, a $0.01 increase in the Canada/US dollar exchange rate (i.e., $0.99 to
$0.98 per US dollar) would have had an estimated $25 million favourable impact on operating income and an estimated
$72 million favourable impact on pre-tax income. Conversely, an opposite change in the exchange rate would have had
the opposite effect. The Corporation incurs signifi cant expenses in US dollars for such items as fuel, aircraft rental charges,
interest payments, debt servicing and computerized reservations system fees, while a substantial portion of its revenues
are generated in Canadian dollars. A signifi cant deterioration of the Canadian dollar relative to the US dollar would increase
the costs of the Corporation relative to its US competitors and could have a material adverse effect on the Corporation’s
business, results from operations and fi nancial condition. In addition, the Corporation may be unable to appropriately hedge
the risks associated with fl uctuations in exchange rates.
Current Legal Proceedings
The European Commission, the United States Department of Justice and the Competition Bureau in Canada, among other
competition authorities, are investigating alleged anti-competitive cargo pricing activities, including the levying of certain
fuel surcharges, of a number of airlines and cargo operators, including the Corporation, a number of whom, including
the Corporation, have received a statement of objections from the European Commission that sets out the European
Commission’s preliminary assessment in relation to such matter. Competition authorities have sought or requested
information from the Corporation as part of their investigations. The Corporation is cooperating with these investigations,
which are likely to lead to proceedings against the Corporation and a number of airlines and other cargo operators in certain
jurisdictions. The Corporation is also named as a defendant in a number of class action lawsuits that have been fi led before
the United States District Court and in Canada in connection with these allegations. Management has determined that it is
not possible at this time to predict with any degree of certainty the outcome of these proceedings, but these proceedings
may result in a material liability to the Corporation.
In February 2006, Jazz commenced proceedings before the Ontario Superior Court of Justice against Porter Airlines Inc.
(“Porter”) and other defendants (collectively the “Porter Defendants”) after Jazz became aware that it would be excluded
from operating fl ights from Toronto City Centre (Island) Airport (the “TCCA”). On October 26, 2007, the Porter Defendants
counter-claimed against Jazz and Air Canada alleging various violations of competition law, including that Jazz and
Air Canada’s commercial relationship contravenes Canadian competition laws, and claiming $850 million in damages.
Concurrently with the Ontario Superior Court of Justice proceedings, Jazz commenced judicial review proceedings against
the Toronto Port Authority (”TPA”) before the Federal Court of Canada relating to Jazz’s access to the TCCA. The Porter
Defendants were granted intervener and party status in these proceedings. In January of 2008, Porter fi led a defence