Air Canada 2008 Annual Report Download - page 137

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Consolidated Financial Statements and Notes
137
Credit Risk
Credit risk is the risk of loss due to a counterparty’s inability to meet its obligations. As at December 31, 2008, the
Corporation’s credit risk exposure consists mainly of the carrying amounts of Cash and cash equivalents, Short-term
investments and Accounts receivable as well as Collateral deposits for fuel derivatives extended to counterparties. Cash
and cash equivalents and Short-term investments are in place with major financial institutions, the Canadian government,
and major corporations. Accounts receivable are generally the result of sales of tickets to individuals, often through the
use of major credit cards, through geographically dispersed travel agents, corporate outlets, or other airlines. Credit rating
guidelines are used in determining counterparties for fuel hedging. In order to manage its exposure to credit risk and assess
credit quality, the Corporation reviews counterparty credit ratings on a regular basis and sets credit limits when deemed
necessary.
The Corporation has $328 in collateral deposits extended to fuel hedge counterparties. Any credit risk related to these
deposits is offset against the related liability to the counterparty under the fuel derivative.
During 2008 a counterparty defaulted under a number of derivative agreements with the Corporation. As a result, the
Corporation recorded a loss of $6 and $2 related to these foreign exchange and fuel derivatives, respectively. The loss is
recorded in Non-operating income (expense).
Refer to the Asset Backed Commercial Paper section below for further credit risk information.
Fuel Price Risk
In order to manage its exposure to jet fuel prices and to help mitigate volatility in operating cash flows, the Corporation
enters into derivative contracts with financial intermediaries. The Corporation uses derivative contracts on jet fuel and also
on other crude oil-based commodities, heating oil and crude oil, due to the relative limited liquidity of jet fuel derivative
instruments on a medium to long term horizon, since jet fuel is not traded on an organized futures exchange. Throughout
2008 a systematic hedging strategy was applied by adding hedging positions on a regular basis. The Corporation’s policy
permits hedging of up to 75% of the projected jet fuel purchases for the next 12 months, 50% for the next 13 to 24 months
and 25% for the next 25 to 36 months. These are maximum (but not mandated) limits. There is no minimum monthly
hedging requirement. There are regular reviews to adjust the strategy in light of market conditions. The Corporation does
not purchase or hold any derivative financial instruments for trading purposes.
The types of derivative instruments used by the Corporation within its hedging program, such as swaps and the put options
within collar structures, expose the Corporation to the potential to have to make collateral deposits. When fuel prices
decrease causing the Corporation’s derivative position to be in a liability position below the set credit thresholds with
counterparties, the Corporation is responsible for extending collateral to the counterparties. As at December 31, 2008 the
Corporation had extended $328 of collateral to counterparties (2007 – nil). $322 of this amount relates to cash outflows
reflected in Fuel hedge collateral deposits, net and $6 relates to foreign exchange revaluation reflected in Foreign exchange
(gain) loss within Operating activities on the Consolidated Statement of Cash Flow.
As of December 31, 2008, approximately 35% of the Corporation’s anticipated purchases of jet fuel for 2009 are hedged
at an average WTI-equivalent capped price of USD$100 per barrel, of which 79% is subject to an average WTI-equivalent
floor price of US$86 per barrel. The Corporation’s contracts to hedge anticipated jet fuel purchases over the 2009 period
is comprised of jet fuel, heating oil and crude-oil based contracts. The Corporation also hedged approximately 14% of its
2010 anticipated jet fuel purchases in crude-oil based contracts at an average capped price of USD$110/bbl and subject to
an average WTI floor price of USD$103/bbl.