Air Canada 2008 Annual Report Download - page 135

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Consolidated Financial Statements and Notes
135
The majority of the Corporation’s outstanding debt is denominated in US dollars. The US dollar debt acts as an economic
hedge against the related aircraft, which is routinely purchased, leased or sub-leased to third parties, and sold by Air Canada
in US dollars.
The Corporation is also exposed to foreign exchange risk on foreign currency denominated trade receivables and foreign
currency denominated net cash flows.
As noted below, given the substantial depreciation of the Canadian dollar during the fourth quarter of 2008, the Corporation
chose to terminate certain of its foreign currency contracts in order to realize on the positive mark-to-market cash value
of these derivatives. Consistent with the Corporation’s risk management objectives, new derivative positions are being
entered into at current foreign exchange rates.
The following are the current derivatives employed in foreign exchange risk management activities and the adjustments
recorded during 2008:
• AsatDecember31,2008,theCorporationhadenteredintoforeigncurrencyforwardcontractsandoptionagreements
converting US dollars and Euros into Canadian dollars on $632 (US$516) and $5 (EUR 3) which mature in 2009 and
2010 (2007 - $2,132 (US$2,158) and $26 (EUR 18) of future purchases in 2008 and 2009). The fair value of these
foreign currency contracts as at December 31, 2008 was $64 in favour of the Corporation (2007 - $124 in favour of
the counterparties). These derivative instruments have not been designated as hedges for accounting purposes and
are fair valued on a quarterly basis. During 2008, a gain of $327 was recorded in Foreign exchange gain (loss) related
to these derivatives (2007 - $(221) loss).
• Thecross-currencyswapasdescribedaboveunderinterestrateriskmanagementactedasaneconomichedgeofthe
foreign exchange risk on the financing related to two Boeing 777 aircraft with a principal amount of $300 (US$283).
• The Corporation had entered into currency swap agreements for 16 CRJ aircraft operating leases until lease
terminations between 2007 and 2011. The final 11 currency swap agreements matured in January 2008 with a
nominal fair value (2007 - $10 in favour of the Corporation for five agreements). No gain or loss was recorded during
the year (2007 - nil). These currency swaps with third parties had a nominal fair value in favour of the Corporation as
at December 31, 2007 and had a notional amount of $78 (US$79). These were not designated as hedges for hedge
accounting purposes.
Liquidity Risk
Liquidity risk is the risk that the Corporation will encounter difficulty in meeting obligations associated with its financial
liabilities and other contractual obligations.
Refer to the maturity analysis in Note 14.
Credit Card Agreement
The Corporation has various agreements with companies that process customer credit card transactions. Approximately 80%
of the Corporation’s sales are processed using credit cards, with remaining sales processed through cash based transactions.
The Corporation receives payment for a credit card sale generally in advance of when the passenger transportation is
provided.
Under the terms of one credit card processing agreement, the credit card processing company may withhold payment of
funds to Air Canada upon the occurrence of certain events (“triggering events”), which include Cash and cash equivalents
and Short-term investments (“unrestricted cash”) being less than $900 as at the end of any month and operating losses
in excess of certain amounts. The amount of funds withheld (“the deposit”) is based upon a specified percentage of
credit card sales processed through the credit card processing company for which transportation has not been provided
to the passenger. The specified percentage increases based upon the level of unrestricted cash below $900 or the level of
operating losses. If a triggering event occurred, based upon advance sales as at December 31, 2008, the deposit could be
from a minimum of $110 up to a maximum of $425.