Air Canada 2008 Annual Report Download - page 92

2008 Air Canada Annual Report
92
largely denominated in foreign currencies. Further, the funding of employee benefit plans for many companies, including
Air Canada, will be impacted during 2009 by the declines in the value of plan assets. In 2009, a number of the Corporation’s
collective agreements expire and uncertainties exist with respect to the outcome of these negotiations. In addition, the
credit markets continued to be constrained throughout the latter part of 2008 raising concerns about available funding for
a number of companies, including Air Canada. These factors have had an impact on the liquidity risk of Air Canada during
2008 and are continuing challenges for Air Canada as well as other airline industry companies.
Liquidity risk is the risk that the Corporation will encounter difficulty in meeting obligations associated with its financial
liabilities and other contractual obligations. The Corporation monitors and manages liquidity risk by preparing rolling cash
flow forecasts, monitoring the condition and value of assets available to be used as security in financing arrangements,
seeking flexibility in financing arrangements, and establishing programs to monitor and maintain compliance with terms of
financing agreements. A key component of managing liquidity risk is also ensuring that operating cash flows are optimized.
The Corporation’s principal objective in managing liquidity risk is to maintain a minimum Cash and cash equivalents and
Short-term investments (“unrestricted cash”) balance in excess of a target liquidity level of 15% of operating revenues.
However, management expects there may be challenges to achieving its target unrestricted cash to operating revenue ratio
of 15% in 2009.
During 2008 and continuing in 2009, management undertook various initiatives and developed a plan to manage its
operating and liquidity risks taking into account the prevailing economic conditions including:
• Adjustedcapacitybyreducingthenumberofightstovariouslocationsasaresultoftheeffectsofthehighfuel
prices. This reduction positioned the Corporation’s capacity, in part, to better respond to the effects of the recession.
The Corporation 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, the Corporation has 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 Note 15. These strategies have reduced
some of the liquidity risk related to the derivatives however the Corporation 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, the Corporation has a liability of $420 for hedging losses offset by a deposit of $328. The
difference between the amount extended and the fair value of fuel hedging contracts of $420 relates to credit lines
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.TheCorporation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during2008and,subject
to fulfillment of certain conditions additional available credit of $50, 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 (approximately $238), of which $99 was received in December and $92 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 remains subject to certain conditions and
is planned for completion in 2009.