Air Canada 2009 Annual Report Download - page 47

Download and view the complete annual report

Please find page 47 of the 2009 Air Canada annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 146

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146

2009 Management’s Discussion and Analysis
47
13. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Risk management
Under its risk management policy, the Corporation manages its interest rate risk, foreign exchange risk, and market risk
through the use of various interest rate, foreign exchange, and fuel derivative fi nancial instruments. The Corporation uses
derivative fi nancial instruments only for risk management purposes, not for generating trading profi t.
The Corporation engages in derivative hedging to mitigate various risks. The derivative fair values represent the amount
of the consideration that could be exchanged in an arm’s length transaction between willing parties who are under no
compulsion to act. Fair value of these derivatives is determined using active markets, where available. When no such market
is available, valuation techniques are applied such as discounted cash fl ow analysis. Where practical, the valuation technique
incorporates all factors that would be considered in setting a price, including the Corporation’s own credit risk and the credit
risk of the counterparty.
Interest rate risk
Interest rate 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 interest rates.
The Corporation enters into both fi xed and fl oating rate debt and also leases certain assets where the rental amount
fl uctuates based on changes in short term interest rates. The Corporation manages interest rate risk on a portfolio basis
and seeks fi nancing terms in individual arrangements that are most advantageous taking into account all relevant factors,
including credit margin, term and basis. The risk management objective is to minimize the potential for changes in interest
rates to cause adverse changes in cash fl ows to the Corporation. The temporary investment portfolio which earns a fl oating
rate of return is an economic hedge for a portion of the fl oating rate debt.
The ratio of fi xed to fl oating rate obligations outstanding is designed to maintain fl exibility in the Corporation’s capital
structure and is based upon a long term objective of 60% fi xed and 40% fl oating. The ratio at December 31, 2009 is
59% fi xed and 41% fl oating, including the effects of interest rate swap positions (58% and 42%, respectively, as at
December 31, 2008).
The following are the current derivatives employed in interest rate risk management activities and the adjustments recorded
during 2009:
• In 2009, the Corporation entered into an interest rate swap agreement, with a term to November 2011, relating to
the Credit Facility, with an original notional value of $600 million systematically declining as payments are made
to $450 million 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 million 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 million 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 Boeing 767 aircraft fi nancing agreements with an aggregate notional value of
$92 million (US$88 million) (2008 - $118 million (US$96 million)). 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 million in favour of the Corporation ($21 million in favour of the Corporation in 2008). These derivative
instruments have not been designated as hedges for accounting purposes and are recorded at fair value. In 2009,
a loss of $9 million was recorded in gain on fi nancial instruments recorded at fair value related to these derivatives
(a gain of $14 million in 2008).
Interest income includes $10 million ($47 million in 2008) 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 Air Canada’s
consolidated statement of operations relates to fi nancial liabilities recorded at amortized cost.