Air Canada 2009 Annual Report Download - page 74

2009 Air Canada Annual Report
74
Foreign Exchange
Air Canada’s fi nancial results are sensitive to the fl uctuating value of the Canadian dollar. In particular, Air Canada has a
signifi cant annual net outfl ow of U.S. dollars and is affected by fl uctuations in the Canada/U.S. dollar exchange rate.
Management estimates that during 2009, a $0.01 increase in the Cdn/U.S. dollar exchange rate (i.e., $1.09 to $1.08 per U.S.
dollar) would have had an estimated $23 million favourable impact on operating income and a $57 million favourable impact
on pre-tax income. Conversely, an opposite change in the exchange rate would have had the opposite effect. Air Canada incurs
signifi cant expenses in U.S. dollars for such items as fuel, aircraft rental and maintenance charges, interest payments, debt
servicing and computerized reservations system fees, while a substantial portion of its revenues are generated in Canadian
dollars. A signifi cant deterioration of the Canadian dollar relative to the U.S. dollar would increase the costs of Air Canada
relative to its U.S. competitors and could have a material adverse effect on Air Canada, its business, results from operations
and fi nancial condition. In addition, Air Canada may be unable to appropriately hedge the risks associated with fl uctuations in
exchange rates.
Labour Costs and Labour Relations
Labour costs constitute one of Air Canada’s largest operating cost items. There can be no assurance that Air Canada will be able
to maintain such costs at levels which do not negatively affect its business, results from operations and fi nancial condition.
There can be no assurance that future agreements with employees’ unions or the outcome of arbitrations will be on terms
consistent with Air Canada’s expectations or comparable to agreements entered into by Air Canada’s competitors. Any future
agreements or outcome of negotiations, mediations or arbitrations including in relation to wages or other labour costs or
work rules may result in increased labour costs or other charges which could have a material adverse effect on Air Canada, its
business, results from operations and fi nancial condition.
Most of Air Canada’s employees are unionized. The collective agreements representing the majority of the unionized workforce
were renewed or extended in 2009 and will now expire in 2011. No strikes or lock-outs may lawfully occur during the term
of the collective agreements, nor during the negotiations of their renewal until a number of pre-conditions, in respect of the
unions for Canadian-based employees, prescribed by the Canada Labour Code, have been satisfi ed. There can be no assurance
that collective agreements will be further renewed without labour confl ict or action or that there will not be a labour confl ict
that could lead to a dispute or to an interruption or stoppage in Air Canada’s service or otherwise adversely affect the ability
of Air Canada to conduct its operations, any of which could have a material adverse effect on Air Canada, its business, results
from operations and fi nancial condition.
If there is a labour disruption or work stoppage by any of the unionized work groups of Jazz, there would also likely be a material
adverse effect on Air Canada, its business, results from operations and fi nancial condition. In addition, labour confl icts at
Star Alliance® partners could result in lower demand for connecting traffi c with Air Canada and, ultimately, could have a
material adverse effect on Air Canada, its business, results from operations and fi nancial condition.
Airline Industry Characterized by Low Gross Profi t Margins and High Fixed Costs
The airline industry is characterized by low gross profi t margins and high fi xed costs. The costs of operating any particular
fl ight do not vary signifi cantly with the number of passengers carried and, therefore, a relatively small change in the number
of passengers or in fare pricing or traffi c mix would have a signifi cant effect on Air Canada’s operating and fi nancial results.
This condition has been exacerbated by aggressive pricing by low-cost carriers, which has had the effect of driving down
fares in general. Accordingly, a shortfall from expected revenue levels could have a material adverse effect on Air Canada, its
business, results from operations and fi nancial condition. Air Canada incurs substantial fi xed costs which do not meaningfully
fl uctuate with overall capacity. As a result, should Air Canada be required to reduce its overall capacity or the number of fl ights
operated, it may not be able to successfully reduce certain fi xed costs in the short term and may be required to incur important
termination or other restructuring costs, which could have a material adverse effect on Air Canada, its business, results from
operations and fi nancial condition.