Air Canada 2008 Annual Report Download - page 39

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2008 Management’s Discussion and Analysis
39
Canada continues to monitor the market and its capacity with the objective of matching its capacity to passenger
demand.
• Implemented cost containment initiatives including stafng level reductions, a company-wide fuel efciency
program, a supplier concession program and other cost reduction initiatives. Management continues to monitor
staffing levels and costs and will make adjustments to reflect the capacity reductions and achieve further efficiencies.
During the first quarter of 2009, Air Canada announced further staff reductions to align its costs with the planned
capacity.
• Enteredintohedgingprogramstomanageitsexposuretojetfuelpricesandhelpmitigatevolatilityinoperating
cash flows. With the drop in fuel prices in the latter half of the year, management undertook strategies to alleviate
some of the effects of the hedges and related requirements to post collateral deposits as the fair values became
unfavourable, including terminating certain hedging positions as disclosed in section 12 of this MD&A. These
strategies have reduced some of the liquidity risk related to the derivatives, however Air Canada is exposed to higher
fuel costs as most of the current hedge positions are at much higher prices than today’s WTI levels. Based on current
fuel prices as at December 31, 2008, Air Canada has a liability of $420 million for hedging losses offset by a deposit
of $328 million. Cash collateral deposits of $328 million at December 31, 2008 were extended to counterparties to
cover the exposure on the fair value of fuel hedging contracts. The difference between the amount extended and
the fair value of fuel hedging contracts of $420 million relates to credit extended by certain counterparties as well
as foreign exchange contracts in favour of Air Canada.
• Continueditscapitalexpenditureprogramtoacquiremorefuelefcientaircraft.AirCanadahasalsoarrangedtolease
and sublease certain aircraft to third parties to further manage capacity. In response to current economic conditions,
management has curtailed its capital expenditures program for 2009. Management continues to consider strategies
to monetize its parked aircraft and aircraft leased to others.
• Enteredintonewnancialarrangementswhichprovidedaggregatenetproceedsof$641millionduring2008and,
subject to the fulfillment of certain conditions, additional available credit of $50 million as at December 31, 2008.
The following summarizes the principal financing arrangements undertaken:
- A series of agreements for secured financings with General Electric Capital Corporation (“GECC”) and its affiliates
providing up to US$195 million (approximately $238 million), of which $99 million was received in December
and $92 million was received in January 2009. This financing bears interest at 6.97% and matures in 2014. The
remaining financing agreement with GECC pertains to the sale and leaseback of a Boeing 777 aircraft and remains
subject to certain conditions and is planned for completion in 2009.
- A secured revolving credit facility of up to $100 million with the Canadian Imperial Bank of Commerce (“CIBC”)
with draw downs being subject to certain conditions, of which $50 million was drawn as at December 31, 2008
for net proceeds of $47 million. This facility, which has a one year term, contains a financial covenant requiring
Air Canada to maintain, as of the last business day of each month, a minimum cash level of $900 million, which
includes the unused and available commitment under the facility and an interest coverage ratio test determined
as at the end of each fiscal quarter. As of February 12, 2009, no amounts were drawn under this facility.
- A secured financing transaction with Calyon New York Branch and Norddeutsche Landesbank Girozentrale for a
$143 million loan, of which $97 million was received in December 2008 and the remaining received in January
2009, maturing in December 2013 bearing interest at 5.13%.
- An agreement with Aeroplan to accelerate payments for purchase of seats for the period from October 2008 to
May 2009, in exchange for future credits to be settled in 2009. Payments by Air Canada to Aeroplan for Miles
earned by passengers continue based on the original terms of settlement. Under this arrangement, cash flows
from operations have been favourably impacted by $63 million as at December 31, 2008. This impact will reverse
in 2009 upon expiry of this agreement.
- Two secured financings amounting to proceeds of $92 million and $99 million, respectively, due in 2009 which
bear interest at 6.45%.