Air Canada 2007 Annual Report Download - page 73

Management’s Discussion and Analysis of Results and Financial Condition
73
Third Party War Risk Insurance
There is a risk that the Government of Canada may not continue to provide an indemnity for third party war risk liability
coverage, which it currently provides to the Corporation and certain other carriers in Canada. In the event that the
Government of Canada does not continue to provide such indemnity or amends such indemnity, the Corporation and
other industry participants would have to turn to the commercial insurance market to seek such coverage. The Corporation
estimates that such coverage would cost the Corporation approximately $15 million per year. Alternative solutions, such as
those envisioned by the International Civil Aviation Organization (“ICAO”) and the International Air Transport Association
(“IATA”), have not developed as planned, due to actions taken by other countries and the recent availability of supplemental
insurance products. ICAO and IATA are continuing their efforts in this area, however, the achievement of a global solution is
not likely in the immediate or near future. The US federal government has set up its own facility to provide war risk coverage
to US carriers, thus removing itself as a key component of any global plan.
Furthermore, the London aviation insurance market has introduced a new standard war and terrorism exclusion clause which
is applicable to aircraft hull and spares war risk insurance, and intends to introduce similar exclusions to airline passenger
and third party liability policies. Such clause excludes claims caused by the hostile use of a dirty bomb, electromagnetic
pulse device, or biochemical materials. The Government of Canada indemnity program is designed to address these types
of issues as they arise, but the Government of Canada has not yet decided to extend the existing indemnity to cover
this exclusion. Unless and until the Government of Canada does so, the loss of coverage exposes the Corporation to this
new uninsured risk and may result in the Corporation being in breach of certain regulatory requirements or contractual
arrangements, which may have a material adverse effect on the Corporation’s business, results from operations and fi nancial
condition.
Risks Related to the Corporation’s Relationship with ACE
Control of the Corporation and Related Party Relationship
ACE owns shares of Air Canada representing 75% of the voting interests in Air Canada. Voting control will enable ACE to
determine substantially all matters requiring security holder approval as a result of its voting interest in Air Canada. ACE
may exercise control over corporate transactions submitted to Air Canada’s board of directors and/or Air Canada’s security
holders for approval. ACE effectively has suffi cient voting power to prevent a change in control of Air Canada. This voting
control may discourage transactions involving a change of control of Air Canada, including as a result, transactions in which
the public shareholders of Air Canada might otherwise receive a premium for their shares over the then-current market
price.
The interests of ACE may confl ict with those of other shareholders.
Future Sales of Shares by or for ACE
Sales of substantial amounts of Air Canada’s shares by ACE, or the possibility of those sales by ACE, could adversely affect
the market price of the shares and impede Air Canada’s ability to raise capital through the issuance of equity securities.
ACE has no contractual obligation to retain any of the Air Canada shares. The registration rights agreement that Air Canada
entered into with ACE concurrently with the Air Canada IPO granted ACE the right to require Air Canada to fi le a prospectus
and otherwise assist with a public offering of shares that ACE holds in specifi ed circumstances. In addition, Air Canada could
issue and sell shares. Any sale by ACE or Air Canada of shares in the public market, or the perception that sales could occur
could adversely affect prevailing market prices of the shares.