Air Canada 2008 Annual Report Download - page 41

2008 Management’s Discussion and Analysis
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The Government of Canada has proposed certain amendments to the general pension funding requirements for federally
registered pension plans to address concerns over the impact of the 2008 decline in value of pension assets. These proposals
include increasing the limit for smoothing asset valuation fluctuations over five years and increasing the period for funding
a solvency deficiency from five years to ten years, subject to certain conditions. In particular, both members and retirees
would need to agree to the extended schedule, or the difference between the five and 10-year payment schedules would
need to be secured by a letter of credit. One of these two conditions would need to be met by December 31, 2009. If
agreement by plan members and retirees or a letter of credit were not secured by the end of 2009, the plan would be
required to fund the deficiency over the following five years. If these provisions are finalized, and based on the above
preliminary estimates, Air Canada estimates funding requirements for 2009 will increase by approximately $150 million
versus 2008, resulting in estimated aggregate pension funding payments of approximately $605 million during 2009. The
estimated funding payments of $605 million include the estimated impact of funding changes to current service costs as
well as other pension arrangements which amount to a reduction of approximately $10 million. Air Canada is monitoring the
government’s actions and dialoguing with government officials on this matter. Until the government finalizes this proposal
and the funding valuation is completed during the first half of 2009, uncertainty as to the amount and timing of additional
pension funding continue to exist. There can be no assurance that the proposed funding relief will be implemented. Any
increase in funding obligations for 2009 will be paid in the second half of the year as the funding in the first half of the year
is based on the January 1, 2008 actuarial valuation reports.
Covenants in Credit Card Agreements
Air Canada has various agreements with companies that process customer credit card transactions. Approximately 80%
of Air Canada’s sales are processed using credit cards, with remaining sales processed through cash based transactions. Air
Canada 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, cash equivalents and
short-term investments (“unrestricted cash”) of less than $900 million 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 million 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 million up to a maximum of $425 million.
Under the terms of the above credit card processing agreement, beginning at the end of the second quarter of 2009, the
triggering events for deposits will change and be based upon a matrix of unrestricted cash and a debt service coverage ratio.
The ratio is based upon an EBITDAR (earnings before interest, income taxes, depreciation, amortization, aircraft rentals,
certain non operating income (expense) and special items) to fixed charges (principal, interest and aircraft rentals) ratio
for the preceding four quarters. Under these triggering events, beginning at the end of the second quarter of 2009, the
unrestricted cash required in order to avoid a deposit could be as much as $1.3 billion. The basis for calculating the amount
of the deposit, if required, remains consistent with the above description.
Cargo Investigations
Air Canada is exposed to potential liabilities related to the cargo matter, as described in section 18 of this MD&A. During
2008, Air Canada recorded a provision of $125 million as a preliminary estimate. This estimate is based upon the current
status of the investigations and proceedings and Air Canada’s assessment as to the potential outcome for certain of them.
This provision does not address the proceedings in all jurisdictions, but only where there is sufficient information to do
so. Management has determined it is not possible at this time to predict with any degree of certainty the outcome of all
proceedings. Additional material provisions may be required. Amounts could become payable within the year and may be
materially different than management’s preliminary estimate.