Air Canada 2009 Annual Report Download - page 53

2009 Management’s Discussion and Analysis
53
14. OFF-BALANCE SHEET ARRANGEMENTS
The following is a summary of Air Canada’s more signifi cant off-balance sheet arrangements.
Guarantees
Performance obligations relating to aircraft leasing agreements
With respect to 45 Air Canada aircraft leases, the difference between the amended rents as a result of the implementation
of the Plan of Reorganization, Compromise and Arrangement (the “Plan”) under the Companies’ Creditors Arrangement Act
(“CCAA”) on September 30, 2004 and amounts due under the original lease contracts will be forgiven at the expiry date of
the leases if no material defaults have occurred. If a material default occurs, this difference plus interest will become due and
payable and all future rent will be based on the original contracted rates. Rent expense is being recorded on the renegotiated
lease agreements, and any liability would be recorded only at the time management believes the amount is likely to occur.
Guarantees in fuel facilities arrangements
Air Canada participates in fuel facility arrangements operated through fuel facility corporations (the “Fuel Facility
Corporations”), along with other airlines that contract for fuel services at various major airports in Canada. The Fuel Facility
Corporations operate on a cost recovery basis. The purpose of the Fuel Facility Corporations is to own and fi nance the system
that distributes the fuel to the contracting airlines, including leasing the land rights under the land lease. The aggregate debt of
the fi ve Fuel Facility Corporations in Canada that have not been consolidated by Air Canada under Accounting Guideline 15 –
Consolidated of Variable Interest Entities (“AcG-15”) was approximately $162 million as at December 31, 2009 ($127 million
as at December 31, 2008), which is Air Canada’s maximum exposure to loss without taking into consideration any cost sharing
that would occur amongst the other contracting airlines. Air Canada views this loss potential as remote. Each contracting
airline participating in a Fuel Facility Corporation shares pro-rata, based on system usage, in the guarantee of this debt.
Indemnifi cation agreements
Air Canada enters into real estate leases or operating agreements, which grant a license to Air Canada to use certain
premises, in substantially all cities that it serves. It is common in such commercial lease transactions for Air Canada, as the
lessee, to agree to indemnify the lessor and other related third parties for tort or similar extra-contractual liabilities that
arise out of or relate to the Corporation’s use or occupancy of the leased or licensed premises. Exceptionally, this indemnity
extends to related liabilities arising from the negligence of the indemnifi ed parties, but usually excludes any liabilities
caused by their gross negligence or willful misconduct. Additionally, Air Canada typically indemnifi es such parties for any
environmental liability that arises out of or relates to its use or occupancy of the leased or licensed premises.
In aircraft fi nancing or leasing agreements, Air Canada typically indemnifi es the fi nancing parties, trustees acting on their
behalf and other related parties and/or lessors against liabilities that arise from the manufacture, design, ownership, fi nancing,
use, operation and maintenance of the aircraft and for tort liability, whether or not these liabilities arise out of or relate to the
negligence of these indemnifi ed parties, except for their gross negligence or willful misconduct. In addition, in aircraft fi nancing
or leasing transactions, including those structured as leveraged leases, Air Canada typically provides indemnities in respect of
various tax consequences including in relation to the leased or fi nanced aircraft, the use, possession, operation, maintenance,
leasing, subleasing, repair, insurance, delivery, import, export of such aircraft, the lease or fi nance arrangements entered in
connection therewith, changes of law and certain income, commodity and withholding tax consequences.
When Air Canada, as a customer, enters into technical service agreements with service providers, primarily service providers
who operate an airline as their main business, Air Canada has from time to time agreed to indemnify the service provider
against liabilities that arise from third party claims, whether or not these liabilities arise out of or relate to the negligence
of the service provider, but excluding liabilities that arise from the service provider’s gross negligence or willful misconduct.
Under its general by-laws and pursuant to contractual agreements between the Corporation and each of its offi cers
and directors, Air Canada has indemnifi cation obligations to its directors and offi cers. Pursuant to such obligations, the
Corporation indemnifi es these individuals, to the extent permitted by law, against any and all claims or losses (including
amounts paid in settlement of claims) incurred as a result of their service to Air Canada.
The maximum amount payable under the foregoing indemnities cannot be reasonably estimated. Air Canada expects that
it would be covered by insurance for most tort and similar extra-contractual liabilities and certain related contractual
indemnities described above.