Air Canada 2008 Annual Report Download - page 59

2008 Management’s Discussion and Analysis
59
13. OFF-BALANCE SHEET ARRANGEMENTS
The following is a summary of Air Canada’s more significant off-balance sheet arrangements.
Guarantees
Performance Obligations Relating to Aircraft Leasing Agreements
With respect to 45 Air Canada aircraft leases, the difference between the amended rents as a result of the implementation of the
Plan of Reorganization, Compromise and Arrangement (the “Plan”) under the Companies’ Creditors Arrangement Act (“CCAA”)
on September 30, 2004 and amounts due under the original lease contracts will be forgiven at the expiry date of the leases if no
material defaults have occurred. If a material default occurs, this difference plus interest will become due and payable and all future
rent will be based on the original contracted rates. Rent expense is being recorded on the renegotiated lease agreements, and any
liability would be recorded only at the time management believes the amount is likely to occur.
Guarantees in Fuel Facilities Arrangements
Air Canada participates in fuel facility arrangements operated through Fuel Facility Corporations, along with other airlines
that contract for fuel services at various major airports in Canada. The Fuel Facility Corporations operate on a cost recovery
basis. The purpose of the Fuel Facility Corporations is to own and finance the system that distributes the fuel to the
contracting airlines, including leasing the land rights under the land lease. The aggregate debt of the five Fuel Facility
Corporations in Canada that have not been consolidated by Air Canada under AcG-15 was approximately $127 million as
at December 31, 2008 ($119 million as at December 31, 2007), which is Air Canada’s maximum exposure to loss without
taking into consideration any cost sharing that would occur amongst the other contracting airlines. Air Canada’s views
this loss potential as remote. Each contracting airline participating in a Fuel Facility Corporation shares pro-rata, based on
system usage, in the guarantee of this debt.
Indemnification Agreements
Air Canada enters into real estate leases or operating agreements, which grant a license to Air Canada to use certain
premises, in substantially all cities that it serves. It is common in such commercial lease transactions for Air Canada, as the
lessee, to agree to indemnify the lessor and other related third parties for tort or similar extra-contractual liabilities that
arise out of or relate to the Corporation’s use or occupancy of the leased or licensed premises. Exceptionally, this indemnity
extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities
caused by their gross negligence or willful misconduct. Additionally, Air Canada typically indemnifies such parties for any
environmental liability that arises out of or relates to its use or occupancy of the leased or licensed premises.
In aircraft financing or leasing agreements, Air Canada typically indemnifies the financing parties, trustees acting on their
behalf and other related parties and/or lessors against liabilities that arise from the manufacture, design, ownership,
financing, use, operation and maintenance of the aircraft and for tort liability, whether or not these liabilities arise out
of or relate to the negligence of these indemnified parties, except for their gross negligence or willful misconduct. In
addition, in aircraft financing or leasing transactions, including those structured as leveraged leases, Air Canada typically
provides indemnities in respect of various tax consequences including in relation to the leased or financed aircraft, the use,
possession, operation, maintenance, leasing, subleasing, repair, insurance, delivery, import, export of such aircraft, the lease
or finance arrangements entered in connection therewith, changes of law and certain income, commodity and withholding
tax consequences.
When Air Canada, as a customer, enters into technical service agreements with service providers, primarily service providers
who operate an airline as their main business, Air Canada has from time to time agreed to indemnify the service provider
against liabilities that arise from third party claims, whether or not these liabilities arise out of or relate to the negligence
of the service provider, but excluding liabilities that arise from the service provider’s gross negligence or willful misconduct.
Under its general by-laws and pursuant to contractual agreements between the Corporation and each of its officers
and directors, Air Canada has indemnification obligations to its directors and officers. Pursuant to such obligations, the
Corporation indemnifies these individuals, to the extent permitted by law, against any and all claims or losses (including
amounts paid in settlement of claims) incurred as a result of their service to Air Canada.
The maximum amount payable under the foregoing indemnities cannot be reasonably estimated. Air Canada expects that
it would be covered by insurance for most tort and similar extra-contractual liabilities and certain related contractual
indemnities described above.