Air Canada 2009 Annual Report Download - page 48

Download and view the complete annual report

Please find page 48 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 Air Canada Annual Report
48
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 U.S. dollars.
This unbalanced mix results in a U.S. 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 U.S. dollar 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, U.S. 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 in 2009:
As at December 31, 2009, the Corporation had outstanding foreign currency option agreements converting U.S. dollars
into Canadian dollars on $99 million (US$95 million) which mature in 2010 and ($632 million (US$516 million) in 2008)
$5 million (€3 million) which mature in 2010 (2008 - $632 million (US$516 million) and $5 million (€3 million)). The
fair value of these foreign currency contracts as at December 31, 2009 was $4 million in favour of the counterparties
($64 million in 2008 in favour of the Corporation). These derivative instruments have not been designated as hedges for
accounting purposes and are recorded at fair value. In 2009, a loss of $7 million was recorded in foreign exchange gain (loss)
related to these derivatives ($327 million gain in 2008).
Fuel price risk
In order to manage its exposure to jet fuel prices and to help mitigate volatility in operating cash fl ows, the Corporation
enters into derivative contracts with fi nancial intermediaries. The Corporation uses derivative contracts on jet fuel and
other crude oil-based commodities, heating oil and crude oil. Heating oil and crude oil commodities are used due to the
relative limited liquidity of jet fuel derivative instruments on a medium to long-term horizon since jet fuel is not traded on
an organized futures exchange. The Corporation’s policy permits hedging of up to 75% of the projected jet fuel purchases
for the next 12 months, 50% for the next 13 to 24 months and 25% for the next 25 to 36 months. These are maximum
(but not mandated) limits. There is no minimum monthly hedging requirement. There are regular reviews to adjust the
strategy in light of market conditions. The Corporation does not purchase or hold any derivative fi nancial instrument for
speculative purposes.
In 2009, the Corporation purchased crude oil call options. The premium related to these contracts was $6 million.
At January 31, 2010, approximately 21% of the Corporation’s anticipated purchases of jet fuel for the remainder of 2010
is hedged at an average West Texas Intermediate (“WTI”) capped price of USD$93 per barrel, and approximately 10% is
subject to an average fl oor price of US$96 per barrel. The Corporation’s contracts to hedge anticipated jet fuel purchases
over the 2010 period is comprised of jet fuel and crude-oil based contracts.
The following table outlines the notional volumes per barrel outstanding at January 31, 2010, along with the WTI-weighted
average fl oor and capped price for each year currently hedged by type of derivative instruments.
Outstanding at January 31, 2010
Derivative Instruments Term Volume (BBLs)
WTI-weighted
Average Floor Price
(US$ per barrel)
WTI-weighted
Average Capped Price
(US$ per barrel)
Call Options (1) 2010 2,345,000 n/a 90
Swaps (1) 2010 975,000 99 99
Collars (1) 2010 1,055,000 93 95
(1) Air Canada is expected to generate fuel hedging gains if oil prices increase above the average capped price and is exposed to fuel hedging losses if oil prices decrease below
the average fl oor price.