Air Canada 2009 Annual Report Download - page 51

2009 Management’s Discussion and Analysis
51
Covenants in credit card agreements
The Corporation has various agreements 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 of certain credit card processing agreements with one of its principal credit
card processors, the processor was entitled 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 agreements and generally based on the
aggregate sums of cash and cash equivalents and short-term investments) being less than $900 million 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 million 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 million for two consecutive months, the unrestricted
cash requirement increases to $1,100 million 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
million at each month-end, Air Canada has no obligation to provide deposits or security to the processor. In addition,
should the Corporation’s unrestricted cash be less than $1,100 million at any month-end, its obligation to provide deposits
to the processor would be capped at an amount not to exceed $75 million, provided unrestricted cash is not less than
$800 million. The current agreements with this credit card processor expire in May 2010.
Cargo investigations and proceedings
The Corporation is exposed to potential liabilities related to the proceedings and investigations of alleged anti-competitive
cargo pricing activities, as described in section 19 of this MD&A. The preliminary estimate recorded by the Corporation
during 2008 is based upon the current status of the investigations and proceedings and the Corporation’s assessment as
to the potential outcome for certain of them. This provision does not address the proceedings in all jurisdictions, but only
where there is suffi cient information to do so. Management has determined it is not possible at this time to predict with any
degree of certainty the outcome of all proceedings. Additional material provisions may be required. Amounts could become
payable within the year and may be materially different than management’s preliminary estimate.
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, 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.
At January 31, 2010, the Corporation has $55 million in collateral deposits extended to fuel hedge counterparties. Credit risk
related to these deposits is offset against the related liability to the counterparty under the fuel derivative.
Refer to the “Asset Backed Commercial Paper” section below for information on credit risks.
Market risks
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.