Air Canada 2009 Annual Report Download - page 131

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Consolidated Financial Statements and Notes
131
Interest rate
risk (1)
Foreign exchange rate
risk (2)
Other price
risk (3)
Income Income Income
1% increase 5% increase 5% decrease 10% increase 10% decrease
Cash and cash equivalents $ 11 $ (7) $ 7 $ - $ -
Short-term investments $ 3 $ (1) $ 1 $ - $ -
Aircraft related deposits $ - $ (8) $ 8 $ - $ -
Long-term debt
and capital leases $ (15) $ 195 $ (195) $ - $ -
Fuel derivatives $ - $ - $ - $ 25 $ (22)
Foreign exchange derivatives $ - $ (6) $ 5 $ - $ -
Interest rate swaps $ 1 $ - $ - $ - $ -
(1) Due to currently low market rates of interest, a 1% decrease in interest rates was not considered a reasonable scenario within the forecast period, being one year.
(2) Increase (decrease) in foreign exchange relates to a strengthening (weakening) of the Canadian dollar.
(3) Other price risk relates to the Corporation’s fuel derivatives. The sensitivity analysis is based upon a 10% decrease or increase in the price of the underlying commodity.
Covenants in Credit Card Agreements
The Corporation has various agreements with companies that process customer credit card transactions. Approximately
85% of the Corporation’s sales are processed using credit cards, with remaining sales processed through cash based
transactions. The Corporation receives payment for a credit card sale generally in advance of when the passenger
transportation is provided.
As at December 31, 2008, under the terms with one of its principal credit card processors, the processor was able to withhold
payment of funds to Air Canada upon the occurrence of certain events (“triggering events”), which included unrestricted
cash (as defi ned per the agreement and generally based on the aggregate sums of Cash and cash equivalents and Short-term
investments) being less than $900 as at the end of any month and operating losses in excess of certain amounts. During
2009, the Corporation entered into amendments with this processor to amend certain credit card processing agreements
under which the triggering events related to operating losses were removed, the levels of unrestricted cash required to be
maintained by Air Canada were reduced to $800 and Air Canada provides the processor with deposits, to be accumulated
over time, and security. The agreements provide that should Air Canada maintain unrestricted cash of more than $1,200 for
two consecutive months, the unrestricted cash requirement increases to $1,100 at which time the processor will return to
Air Canada all deposits and security previously provided by Air Canada. This occurred during the third quarter of 2009, and
as a result, no deposit was provided under these processing agreements as at December 31, 2009. As long as unrestricted
cash remains at or above $1,100 at each month-end, Air Canada will have no obligation to provide deposits or security to
the processor. In addition, should the Corporation’s unrestricted cash be less than $1,100 at any month-end, its obligation
to provide deposits to the processor would be capped at an amount not to exceed $75, provided unrestricted cash is not
less than $800. The current agreement expires in May 2010.
Credit Risk
Credit risk is the risk of loss due to a counterparty’s inability to meet its obligations. As at December 31, 2009, the
Corporation’s credit risk exposure consists mainly of the carrying amounts of Cash and cash equivalents, Short-term
investments and Accounts receivable as well as Collateral deposits for fuel derivatives extended to counterparties. Cash and
cash equivalents and Short-term investments are in place with major fi nancial institutions, the Canadian government, and
major corporations. Accounts receivable are generally the result of sales of tickets to individuals, often through the use of major
credit cards, through geographically dispersed travel agents, corporate outlets, or other airlines. Credit rating guidelines are
used in determining counterparties for fuel hedging. In order to manage its exposure to credit risk and assess credit quality, the
Corporation reviews counterparty credit ratings on a regular basis and sets credit limits when deemed necessary.