Air Canada 2009 Annual Report Download - page 129

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Consolidated Financial Statements and Notes
129
The following are the current derivatives employed in interest rate risk management activities and the adjustments recorded
during 2009:
• During 2009, the Corporation entered into an interest rate swap agreement, with a term to November 2011, relating to
the Credit Facility as described in Note 6, with an original notional value of $600 systematically declining as payments
are made to $450 by the end of its two-year term. This swap converts the Credit Facility’s bankers’ acceptance
rate setting from “in advance” to “in arrears minus 0.2%”. The fair value of this contract as at December 31, 2009 was
$1 in favour of the counterparty. This derivative instrument has not been designated as a hedge for accounting
purposes and is recorded at fair value. During 2009, a loss of $1 was recorded in Gain on fi nancial instruments
recorded at fair value related to this derivative.
• As at December 31, 2009, the Corporation had two interest rate swap agreements in place with terms to July
2022 and January 2024 relating to two B767 aircraft fi nancing agreements with an aggregate notional value of
$92 (US$88) (2008 - $118 (US$96)). These swaps convert the lease payments on the two aircraft leases from fi xed
to fl oating rates. The fair value of these contracts as at December 31, 2009 was $12 in favour of the Corporation
(2008 - $21 in favour of the Corporation). These derivative instruments have not been designated as hedges for
accounting purposes and are recorded at fair value. During 2009, a loss of $9 was recorded in Gain on fi nancial
instruments recorded at fair value related to these derivatives (2008 - $14 gain).
Interest income includes $10 (2008 - $47) related to Cash and cash equivalents, Short-term investments, and Collateral
deposits for fuel derivatives, which are classifi ed as held for trading. Interest expense refl ected on the Consolidated
Statement of Operations relates to fi nancial liabilities recorded at amortized cost.
Foreign Exchange Risk
Foreign exchange risk is the risk that the fair value or future cash fl ows of a fi nancial instrument will fl uctuate because of
changes in foreign exchange rates.
The Corporation’s risk management objective is to reduce cash fl ow risk related to foreign denominated cash fl ows.
The Corporation’s cash infl ows are primarily in Canadian dollars, while a large portion of its outfl ows are in US dollars.
This unbalanced mix results in a US dollar shortfall from operations annually. In order to mitigate this imbalance, the
Corporation has adopted the practice of converting excess revenues from offshore currencies into US dollars. In 2009, this
conversion generated coverage of approximately 29% of the imbalance. The remaining 71% was covered through the use
of a variety of foreign exchange derivatives, including spot transactions and USD investments, which had maturity dates
corresponding to the forecasted shortfall dates. The level of foreign exchange derivatives expiring at any one point in time
is dependent upon a number of factors, which include the amount of foreign revenue conversion available, US dollar net
cash fl ows, as well as the amount attributed to aircraft and debt payments.
The following are the current derivatives employed in foreign exchange risk management activities and the adjustments
recorded during 2009:
• As at December 31, 2009, the Corporation had outstanding foreign currency option agreements converting US
dollars into Canadian dollars on $99 (US$95) which mature in 2010 (2008 - $632 (US$516) and $5 (EUR 3)).
The fair value of these foreign currency contracts as at December 31, 2009 was $4 in favour of the counterparties
(2008 - $64 in favour of the Corporation). These derivative instruments have not been designated as hedges for
accounting purposes and are recorded at fair value. During 2009, a loss of $7 was recorded in Foreign exchange gain
(loss) related to these derivatives (2008 - $327 gain).
Liquidity Risk
Along with many airline carriers globally, Air Canada faced a number of signifi cant challenges in 2008 and 2009 as a result
of volatile fuel prices and the weakening demand for air travel. The recession put signifi cant pressures on passenger and
cargo revenues for many airlines, including Air Canada. At the same time, lower fuel prices in 2009 and capacity adjustments
made in 2008 and 2009 provided some relief.