Air Canada 2009 Annual Report Download - page 130

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2009 Air Canada Annual Report
130
Management believes however that the signifi cant events as described in Note 1C improve the Corporation’s current
liquidity position. Risks remain such as those related to the current economic environment, including risks related to market
volatility in the price of fuel, foreign exchange and interest rates and increased competitive pressures, as well as risks
relating to restrictive terms under the Corporation’s fi nancing, credit card processing and other arrangements and other risks
identifi ed. These notes to the fi nancial statements contain information regarding the key liquidity risks being monitored
by the Corporation (refer to information below regarding Market risks, Note 8 for information regarding pension funding
obligations, Note 17 for information regarding contingencies including the Cargo investigations, Note 6 regarding covenants
in fi nancing arrangements and below for information regarding covenants in the Corporation’s credit card agreements).
The H1N1 infl uenza virus may also adversely impact demand for air travel. The Corporation is continuing to monitor the
H1N1 infl uenza virus risk. While the Corporation has developed contingency plans related to the H1N1 infl uenza virus
risk, it is unable to predict the likelihood of this risk materializing or the impact on the Corporation to the extent this risk
does materialize. The Corporation is also monitoring the impact on the demand for air travel of the new security measures
imposed December 2009 by Canadian and U.S. government authorities on fl ights from Canada to the U.S.
Liquidity risk is the risk that the Corporation will encounter diffi culty in meeting obligations associated with its fi nancial
liabilities and other contractual obligations. The Corporation monitors and manages liquidity risk by preparing rolling cash
fl ow forecasts, monitoring the condition and value of assets available to be used as well as those assets being used as
security in fi nancing arrangements, seeking fl exibility in fi nancing arrangements, and establishing programs to monitor and
maintain compliance with terms of fi nancing agreements. The Corporation’s principal objective in managing liquidity risk is
to maintain a minimum unrestricted cash balance in excess of a target liquidity level of 15% of annual operating revenues.
At December 31, 2009, Air Canada had Cash and cash equivalents and Short-term investments of $1,407, which represents
14% of 2009 operating revenues. Management continues to closely monitor the cash fl ows as part of its efforts to ensure
the Corporation has adequate cash resources to meet its obligations and commitments when they become due.
A maturity analysis of the Corporation’s fi nancial liabilities, other fi xed operating commitments and capital commitments
is set out in Note 14.
Market Risk
Market 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
market prices. Market risk comprises three types of risk: foreign exchange risk; interest rate risk; and other price risk, which
includes commodity price risk.
The Corporation uses derivative instruments to reduce market exposures from changes in foreign currency rates, interest
rates, and fuel prices. The Corporation uses derivative instruments only for risk management purposes and not for generating
trading profi t. As such, any change in cash fl ows associated with derivative instruments is designed to be offset by changes
in cash fl ows related to the risk being hedged.
Refer to the Asset Backed Commercial Paper section below for information regarding these instruments held by the
Corporation and the associated market risks.
Sensitivity Analysis
The following table is a sensitivity analysis for each type of market risk relevant to the signifi cant fi nancial instruments
recorded by the Corporation as at December 31, 2009. The sensitivity analysis is based on a reasonably possible movement
in the relevant risk factor. These assumptions may not be representative of actual movements in these risks and should
not be relied upon. Given the recent volatility in the fi nancial and commodity markets, the actual percentage changes may
differ signifi cantly from the percentage changes outlined below. Each risk is contemplated independent of other risks.