Air Canada 2009 Annual Report Download - page 49

2009 Management’s Discussion and Analysis
49
In 2009, fuel derivative contracts cash settled with a fair value of $88 million in favour of the counterparties ($129 million
in favour of the Corporation in 2008).
After considering the costs and benefi ts specifi c to the application of cash fl ow hedge accounting, the Corporation elected
to discontinue hedge accounting for all fuel derivatives effective the third quarter of 2009. Therefore as of July 1, 2009,
all fuel hedging contracts were considered “economic hedges” and the periodic change in their fair market value was
recorded in other non-operating income under gain (loss) on fi nancial instruments recorded at fair value. A fair value gain
of $102 million was recognized in 2009 (a loss of $9 million in 2008).
While applying hedge accounting, the Corporation had recorded losses under accumulated other comprehensive loss
(“AOCL”) which will be recognized under fuel expense in the period where the derivative is schedule to mature. Throughout
2009, $419 million has been recognized into fuel expense. As at December 31, 2009, the net amount of existing losses
reporting in AOCL that is expected to be reclassifi ed to operating income (loss) during the following 12 months is $183 million
before tax (Q1: $58 million, Q2 $52 million, Q3: $42 million, Q4: $31 million). Due to the discontinuation of hedge
accounting, the AOCL balance related to fuel hedging contracts will be completely depleted as of December 31, 2010.
In 2009, the Corporation modifi ed its fuel hedge portfolio with the termination of swap and put option contracts for
$192 million in favour of the counterparties. The collateral held by the counterparties covered the majority of the settlement
amount, therefore minimal additional cash outfl ows resulted. Certain of these contracts were previously designated under
hedge accounting. The value of the AOCL balance recognized in connection with these derivatives while designated under
hedge accounting will be taken into fuel expense in the period where the derivative was scheduled to mature.
The types of derivative instruments used by the Corporation within its hedging program, such as swaps and put options
within collar structures, expose the Corporation to the potential of providing collateral deposits to its counterparties. When
fuel prices decrease causing the Corporation’s derivative position to be in a liability position below the set credit thresholds
with counterparties, the Corporation is responsible for extending collateral to the counterparties. As at December 31, 2009,
the Corporation had extended $43 million of collateral to counterparties ($328 million as at December 31, 2008).
Below is a table summarizing the impact of fuel derivatives on the Corporation’s consolidated statement of operations,
consolidated statement of comprehensive loss and consolidated statement of fi nancial position.
Fourth Quarter Full Year
(Canadian dollars in millions) 2009 2008 2009 2008
Consolidated Statement of Operations
Operating expense
Aircraft fuel Realized effective gain (loss) –
derivatives designated under
hedge accounting $ (85) $ (111) $ (419) $ 79
Non-operating income (expense)
Gain (loss) on fi nancial instruments
recorded at fair value
Ineffective gain (loss) – derivatives
designated under hedge accounting
Fair market value gain (loss) –
economic hedges
n/a
$ 24
$ 59
$ (40)
$ -
$ 102
$ 83
$ (9)
Consolidated Statement of Comprehensive Income (Loss)
Effective gain (loss) – derivatives designated
under hedge accounting
Tax expense on effective gain
Reclassifi cation of net realized (gain) loss
on fuel derivatives designated under hedge
accounting to aircraft fuel expense
Tax on reclassifi cation
n/a
$ -
$ 85
$ -
$ (678)
$ 44
$ 111
$ (39)
$ (1)
$ -
$ 419
$ 4
$ (605)
$ -
$ (79)
$ 22