Air Canada 2008 Annual Report Download - page 40

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2008 Air Canada Annual Report
40
- Sale and leaseback arrangements for five Boeing 777 aircraft which generated net proceeds of $144 million. Future
lease payments required under these operating leases are disclosed in section 9.5 of this MD&A. Management will
continue to consider other opportunities to enter into sale and leaseback arrangements to provide funding if and
when necessary.
At December 31, 2008, Air Canada had cash, cash equivalents and short-term investments of $1,005 million, which
represented 9% of 2008 operating revenues. At January 31, 2009, Air Canada had cash, cash equivalents and short-term
investments of approximately $985 million.
Management continues to closely monitor the cash flows to ensure Air Canada has adequate cash resources to meet its
obligations and commitments when they become due.
Air Canada has equity in Boeing 777 aircraft and Embraer aircraft, based upon estimated fair value in excess of loan value
which would be available to support additional financings going forward. Management has developed estimates of the
current value of these assets and identified potential opportunities. However, given the current and continuing instability
of credit markets and economic conditions, there can be no assurance that Air Canada will be able, if needed, to conclude
further transactions, including on acceptable terms, or that Air Canada’s assets will generate the expected proceeds.
Air Canada is faced with several risks that may have a material impact on future operating results and liquidity. While
management believes it has developed planned courses of action and identified other opportunities to mitigate the
operating and liquidity risks, there is no assurance that management will be able to, if needed, achieve any or all of the
opportunities it has identified or obtain sufficient liquidity, including, if events or conditions develop that are not consistent
with management’s expectations and planned courses of actions.
In addition to the risks related to the economic conditions as described above, the following are the key risks that Air
Canada is monitoring which may impact operating results and liquidity:
• Marketrisks
• Pensionfundingobligations
• Covenantsincreditcardagreements
• Cargoinvestigations
MarketRisks
Market risk includes the risk that future cash flows will fluctuate because of changes in market prices, including foreign
exchange rates, interest rates and commodity prices. During 2008, the Corporation’s operating results and cash flows were
significantly affected by historically high and volatile fuel prices during the first half of the year and the weakening of the
Canadian dollar during the second half of the year. While management is able to mitigate certain of these risks through
certain hedging activities, the volatility of the markets has created challenges to mitigating the full extent of some of these
risks. The price of fuel, foreign exchange rates and interest rates are beyond the control of management and it is reasonably
possible market volatility will continue in the future which may adversely impact operating results and cash flows.
Sustained lower fuel prices in 2009 would have a positive impact on the Corporation’s cash flows. Based on 2008 levels of
activity, each $1 change in the price per barrel of crude oil impacts the Corporation’s operating cash flows by approximately
$25 million on an annual basis, excluding the impact of fuel surcharges and fuel hedges. As at February 12, 2009, the 2009
average West Texas Intermediate (“WTI”) crude oil price was approximately $50 per barrel versus an average of $104 per
barrel in 2008.
PensionFundingObligations
Air Canada maintains several defined benefit pension plans. As further explained in section 9.6 of this MD&A, Air Canada’s
pension funding obligations are likely to rise significantly starting in the second half of 2009. Based on preliminary estimates,
the solvency deficit as at January 1, 2009 in the registered pension plans, which is used to determine funding requirements,
is estimated to be approximately $3,200 million, a significant increase versus the $1,175 million determined as at January 1,
2008. Based on pension funding legislation and regulations as at December 31, 2008, this solvency deficit would be funded
over five years which would require an approximate $410 million increase to cash funding obligations for 2009.