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ANNUAL REPORT 2010

Table of contents

  • Page 1
    ANNUAL REPORT 2010

  • Page 2
    ... for cargo investigation, net % (1) (2) EBITDAR margin % (2) Cash, cash equivalents and short-term investments Free cash flow (3) Adjusted debt to debt plus equity ratio % (4) Earnings (loss) per share - Diluted Operating Statistics Revenue passenger miles (millions) (RPM) Available seat miles...

  • Page 3
    ... ...19. Controls and Procedures ...20. Non-GAAP Financial Measures ...21. Glossary ...Management's Report ...Auditors' Report ...Consolidated Financial Statements and Notes 2010 ...Officers and Directors ...Investor and Shareholder Information...Official Languages at Air Canada ...Corporate Profile...

  • Page 4
    ...Canada is the preferred airline of 71 per cent of Canadian business travellers, the third consecutive year of improvement in our ratings. We made significant progress in 2010 toward the goal of achieving long-term, sustained profitability. Although we benefited from the general upturn in the global...

  • Page 5
    ... from the United States through our main Canadian hubs to international destinations. We are well-positioned to continue attracting "sixth freedom traffic" because of our strong brand franchise and industryleading product, featuring amenities such as lie-flat suites in long-haul Executive First...

  • Page 6
    2010 Air Canada Annual Report 2. INTRODUCTION In this Management's Discussion and Analysis of Results of Operations and Financial Condition ("MD&A"), the "Corporation" refers to, as the context may require, Air Canada and/or one or more of Air Canada's subsidiaries. Air Canada's 2010 MD&A ...

  • Page 7
    ...on international flights on routes between Canada and major markets in Europe, Asia, South America and Australia. Air Canada Vacations is one of Canada's leading tour operators. Based in Montreal and Toronto, Air Canada Vacations operates its business in the outbound leisure travel market (Caribbean...

  • Page 8
    ... airline's history. See section 20 "Non-GAAP Financial Measures" of this MD&A for additional information. Air Canada's financial strategy is to continue to improve both the level and sustainability of its earnings and, in turn, maximize long-term value for its stakeholders. In 2011, Air Canada plans...

  • Page 9
    ... on its international service. Air Canada has one of the youngest fleets among North American legacy carriers, with an average age of 10.7 years at December 31, 2010. The airline's investment in Boeing 777 and Embraer aircraft and industry-leading on-board products, including personal in-flight...

  • Page 10
    ... internal departments working better together, Air Canada has become more efficient with the use of its fleet. This past summer, the airline flew 3,700 more flights or 12,630 more hours and carried 400,000 more customers with almost the same number of aircraft that it operated in 2009. This positive...

  • Page 11
    ... communication and information technology costs from 2009. Higher credit card fees and an increase in expenses related to ground packages at Air Canada Vacations were also contributing factors to the operating expense increase year-over-year. Operating expense increases were partly offset by several...

  • Page 12
    ... table and discussion compares the results of Air Canada for the fourth quarter of 2010 versus the fourth quarter of 2009. (Canadian dollars in millions, except per share figures) Operating revenues Passenger Cargo Other Operating expenses Aircraft fuel Wages, salaries and benefits Airport and...

  • Page 13
    ... is consistent with one of Air Canada's 2010 key priorities to expand its international operations and to leverage its hub at Toronto Pearson International Airport as a global transfer point for travelers en route to domestic, U.S. transborder and international destinations. The table below provides...

  • Page 14
    2010 Air Canada Annual Report passenger revenues. The stronger Canadian dollar in the fourth quarter of 2010 versus the fourth quarter of 2009 decreased the Canadian dollar value of sales in foreign countries and had a negative impact of $32 million on system passenger revenues. t "OBEKVTUFE...

  • Page 15
    ... the use of larger aircraft and between Toronto and San Francisco through an increase in frequencies; An increase in capacity on routes to Florida between Toronto and Fort Lauderdale, and Toronto and Miami through an increase in frequencies; An earlier start-up of Air Canada's seasonal service...

  • Page 16
    ..., Montreal-Athens, as well as additional frequencies on Toronto-Tel Aviv commencing in June 2010. "OBEKVTUFEZJFMEJNQSPWFNFOUPGGSPNUIFGPVSUIRVBSUFSPG XIJDISFGMFDUFEBHSFBUFSQSPQPSUJPOPG higher-yield premium traffic, a notable return in business travel demand and the airline...

  • Page 17
    ... 2010, additional frequencies from Vancouver to Beijing and Shanghai, the use of larger aircraft on routes to Japan and additional frequencies on routes to Korea. The strong year-over-year traffic gains were driven by attracting passengers originating from Air Canada's international points of sale...

  • Page 18
    ... 6% from the fourth quarter of 2009 Other revenues consist primarily of revenues from the sale of the ground portion of vacation packages, ground handling services, and other airline-related services, as well as revenues related to the lease or sublease of aircraft to third parties. Other revenues...

  • Page 19
    ... and salaries Benefits Ownership (DAR) (1) Airport user fees Capacity purchase with Jazz Aircraft maintenance Food, beverages and supplies Communications and information technology Commissions Other Operating expense, excluding fuel expense (2) Aircraft fuel Total operating expense (1) (2) % 3.1 14...

  • Page 20
    ... of a 4.2% increase in aircraft departures was mostly offset by lower rates for landing and general terminal fees, mainly at Toronto Pearson International Airport, and the favourable impact of a stronger Canadian dollar versus the U.S. dollar compared to the fourth quarter of 2009 on U.S. and other...

  • Page 21
    ... quarter of 2009. The increase in other operating expenses included the impact of the capacity growth, an increase in credit card fees, resulting from higher passenger volumes, and an increase in expenses related to a greater volume of ground packages at Air Canada Vacations. Other operating expense...

  • Page 22
    .... Fourth Quarter 2010 2009 $ 50 49 45 33 31 28 103 $ 339 $ $ 45 47 45 33 35 29 92 326 $ $ Change $ 5 2 (4) (1) 11 13 (Canadian dollars in millions) Credit card fees Air Canada Vacations' land costs Terminal handling Miscellaneous fees and services Building rent and maintenance Crew cycle Remaining...

  • Page 23
    ... and discussion compares the results of Air Canada for the full year of 2010 versus the full year of 2009. (Canadian dollars in millions, except per share figures) Operating revenues Passenger Cargo Other Operating expenses Aircraft fuel Wages, salaries and benefits Airport and navigation fees...

  • Page 24
    ...its business class services. The year-over-year yield improvement was achieved in spite of an unfavourable impact relating to the stronger Canadian dollar on foreign currency denominated passenger revenues. The stronger Canadian dollar in 2010 versus 2009 decreased the Canadian dollar value of sales...

  • Page 25
    ...service in March 2010, the use of larger aircraft on routes from Toronto and Vancouver to Narita, and additional frequencies from Vancouver to Beijing and Shanghai. The strong year-over-year traffic gains were driven by attracting passengers originating from Air Canada's international points of sale...

  • Page 26
    ... higher base fuel prices year-over-year, and increases in wages, salaries and benefits, commissions, ownership, and communication and information technology costs from 2009. Higher credit card fees and an increase in expenses related to ground packages at Air Canada Vacations were also contributing...

  • Page 27
    ... 2010 to Air Canada's operating expenses per ASM for the corresponding period in 2009. Full Year (cents per ASM) Wages and salaries Benefits Ownership (DAR) (1) Airport user fees Capacity purchase with Jazz Aircraft maintenance Food, beverages and supplies Communications and information technology...

  • Page 28
    2010 Air Canada Annual Report The table below provides Air Canada's fuel cost per litre, excluding and including hedging, for the periods indicated. (Canadian dollars in millions, except where indicated) Aircraft fuel expense - GAAP (1) Remove: Fuel hedging gains (losses) reclassified from AOCL into...

  • Page 29
    ... 2009. The increase in Other operating expenses included the impact of the capacity growth, an increase in credit card fees resulting from higher passenger volumes, and an increase in expenses related to a greater volume of ground packages at Air Canada Vacations. Additionally, in 2010, Air Canada...

  • Page 30
    ... expenses. Full Year (Canadian dollars in millions) Credit card fees Air Canada Vacations' land costs Miscellaneous fees and services Building rent and maintenance Crew cycle Terminal handling Remaining other expenses $ $ Change 2009 $ 175 250 117 131 118 188 409 $ 1,388 $ $ 2010 201 272 110 126...

  • Page 31
    ... related to U.S. currency denominated long-term debt, amounted to $145 million in 2010 compared to gains of $657 million in 2009. The gains in 2010 were mainly attributable to a stronger Canadian dollar at December 31, 2010, compared to December 31, 2009. The December 31, 2010 noon day exchange rate...

  • Page 32
    ... Air Canada's statement of financial position. Owned aircraft include aircraft financed under conditional sales agreements. The following table provides the number of aircraft in Air Canada's operating fleet as at December 31, 2009, and December 31, 2010, as well as planned changes to its operating...

  • Page 33
    ... Centre Terminal Corp., for lease of terminal space at the airport. Also, on October 4, 2010, Air Canada announced that it entered into a capacity purchase agreement with Sky Regional Airlines Inc., an associated company of Skyservice Business Aviation, to operate, on behalf of Air Canada, flights...

  • Page 34
    ... of strategies, including by seeking to achieve positive cash from operations, sourcing committed financing for new and existing aircraft and through other financing activities. Covenants in credit card agreements Air Canada has various agreements with companies that process customer credit card...

  • Page 35
    ...and Analysis 9.2 FINANCIAL POSITION The following table provides a condensed statement of financial position of Air Canada as at December 31, 2010, and as at December 31, 2009. (Canadian dollars in millions) Assets Cash, cash equivalents and short-term investments Other current assets Current assets...

  • Page 36
    2010 Air Canada Annual Report 9.3 ADJUSTED NET DEBT The following table reflects Air Canada's adjusted net debt balances and net debt to net debt plus equity ratio as at December 31, 2010, and as at December 31, 2009. (Canadian dollars in millions) Total long-term debt and capital leases Current ...

  • Page 37
    2010 Management's Discussion and Analysis At December 31, 2010, adjusted net debt and non-controlling interest decreased $800 million from December 31, 2009, mainly due to positive free cash flow of $746 million recorded in 2010, resulting in an increase in unrestricted cash balances of $785 million...

  • Page 38
    ... information on Air Canada's working capital balances at December 31, 2010 and at December 31, 2009. (Canadian dollars in millions) Cash and short-term investments Accounts receivable Other current assets Accounts payable and accrued liabilities Advance ticket sales Current portion of long-term debt...

  • Page 39
    ...$ (Canadian dollars in millions) Net cash from operating activities, before the under noted items Cash used for fuel hedge settlements, terminations and premiums Fuel hedge collateral deposits, net Excess of employee future benefit funding over expense Changes in non-cash working capital Cash flows...

  • Page 40
    ... be capitalized under International Financial Reporting Standards ("IFRS") beginning on January 1, 2011, as opposed to being recorded in maintenance expense under existing Canadian GAAP. As a result, actual additions to capital assets on Air Canada's consolidated statement of cash flow under IFRS...

  • Page 41
    ... to system development costs, facilities and leasehold improvements. Total contractual obligations exclude commitments for goods and services required in the ordinary course of business. Also excluded are other long-term liabilities mainly due to reasons of uncertainty of timing of cash flows and...

  • Page 42
    ... reports for current service (including the applicable discount rate used or assumed in the actuarial valuation), the plan demographics at the valuation date, the existing plan provisions, existing pension legislation and changes in economic conditions (mainly the return on fund assets and changes...

  • Page 43
    2010 Management's Discussion and Analysis Air Canada's projected pension funding obligations, on a cash basis, for 2011 and for the next two years, are provided in the table below. As of 2014, the Air Canada 2009 Pension Regulations will cease to have effect and Air Canada's pension funding ...

  • Page 44
    2010 Air Canada Annual Report 9.9 SHARE INFORMATION As at January 31, 2011, an aggregate of 278,972,384 Class A variable voting shares and Class B voting shares in the capital of Air Canada are issued and outstanding. The issued and outstanding shares of Air Canada, along with shares potentially ...

  • Page 45
    2010 Management's Discussion and Analysis 10. QUARTERLY FINANCIAL DATA The following table summarizes quarterly financial results and major operating statistics for Air Canada for the last eight quarters. (Canadian dollars in millions, except where indicated) Operating revenues Aircraft fuel ...

  • Page 46
    ... 2010, Air Canada recorded a net reduction of $46 million to this provision. See section 20 "Non-GAAP Financial Measures" in this MD&A for additional information. Total long-term liabilities include long-term debt (including current portion) and capital leases, pension and other benefit liabilities...

  • Page 47
    ... compensation risk and market risk through the use of various interest rate, foreign exchange, fuel and other derivative financial instruments. Air Canada uses derivative financial instruments only for risk management purposes, not for generating trading profit. As such, any change in cash flows...

  • Page 48
    ... fuel derivatives, which are classified as held for trading. Interest expense reflected on Air Canada's Consolidated Statement of Operations relates to financial liabilities recorded at amortized cost. Foreign Exchange Risk Foreign exchange risk is the risk that the fair value or future cash flows...

  • Page 49
    ... Loss and Consolidated Statement of Financial Position. Fourth Quarter 2010 2009 Consolidated Statement of Operations Operating expense Aircraft fuel Realized effective loss on derivatives designated under hedge accounting (Canadian dollars in millions) Full Year 2010 2009 $ (31) $ (85...

  • Page 50
    2010 Air Canada Annual Report (Canadian dollars in millions) Consolidated Statement of Financial Position Prepaid expenses and other current assets Accounts payable and accrued liabilities Shareholders' equity (AOCL) December 31, 2010 December 31, 2009 Collateral deposits for fuel derivatives ...

  • Page 51
    ..., 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...

  • Page 52
    2010 Air Canada Annual Report Under its general by-laws and pursuant to contractual agreements between Air Canada and each of its officers and directors, Air Canada has indemnification obligations to its directors and officers. Pursuant to such obligations, Air Canada indemnifies these individuals,...

  • Page 53
    ... airframe maintenance services to April 2011. This has the result of Air Canada assuming changes in the solvency deficiency for those affected employees from October 16, 2007, being the date of the Pension and Benefits Agreement, to April 1, 2011. As part of the amendment, all letters of credit...

  • Page 54
    ... in deposits and other assets and is carried at amortized cost. Aveos Certification Order On January 31, 2011, the Canada Industrial Relations Board issued an order determining that the sale of Air Canada's former aircraft, engine and component maintenance and repair business had occurred within the...

  • Page 55
    ... financial statements. Passenger and Cargo Revenues Airline passenger and cargo advance sales are deferred and included in current liabilities. Advance sales also include the proceeds from the sale of flight tickets to Aeroplan, a corporation that provides loyalty program services to Air Canada...

  • Page 56
    ... to the Statement of Investment Policy and Objectives of the Air Canada Pension Funds as amended during 2010. The investment return objective of the Fund is to achieve a total annualized rate of return that exceeds by a minimum of 1.0% before investment fees on average over the long term (i.e.10...

  • Page 57
    ...Impact on 2010 pension expense (Canadian dollars in millions) Discount rate on obligation assumption Long-term rate of return on plan assets assumption Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. An 8.25% annual rate of increase...

  • Page 58
    ... assets requires significant management estimates on discount rates to be applied in the analysis and future cash flows to be generated by the assets, including the estimated useful life of the assets. Discount rates are determined with reference to estimated risk adjusted market rates of return...

  • Page 59
    2010 Management's Discussion and Analysis 16. ACCOUNTING POLICIES 16.1 UPDATE ON THE PROGRESS OF THE INTERNATIONAL FINANCIAL REPORTING STANDARDS CONVERSION PLAN The following information is provided solely for the purpose of allowing investors and others to obtain a better understanding of the ...

  • Page 60
    2010 Air Canada Annual Report Key Activities Business activities Compensation arrangements Identification of impact on compensation arrangements. Status The Corporation has analyzed its compensation policies that rely on indicators derived from the financial statements and has implemented the ...

  • Page 61
    ... on pension and other post-retirement benefit plans as at January 1, 2010 directly in Deficit. The Corporation expects to apply IAS 23R for annual periods beginning on or after January 1, 2010, the date of transition to IFRS. Under existing Canadian GAAP, the Corporation had an accounting policy of...

  • Page 62
    2010 Air Canada Annual Report Summary of significant accounting policy changes under IFRS The Corporation has identified the following significant differences between its current accounting policies and those required or expected to apply in preparing IFRS financial statements which are summarized ...

  • Page 63
    ... actual plan assets. Differences from existing Canadian GAAP: Under existing Canadian GAAP, a market-related value of assets was used whereby the difference between actual and expected return was gradually recognized over four years. The Limit on a Defined Benefit Asset, Minimum Funding Requirements...

  • Page 64
    2010 Air Canada Annual Report Accounting Policy Employee Benefits Significant Accounting Policy Changes under IFRS and Expected Impact Presentation of employee benefits expense Policy choices: IAS19 does not specify the presentation of current service cost, interest cost and the expected return on ...

  • Page 65
    ... no policy choices available under IFRS. Expected impact to the opening balance sheet: As described under Principles of consolidation, 21 capital leases are expected to be treated as owned aircraft financings upon the consolidation of the special purpose leasing entities. Other long-term liabilities...

  • Page 66
    ... asset or group of assets to their recoverable amount. Recoverable amount is calculated as the higher of an asset's or cash-generating unit's fair value less costs to sell and its value in use. Value in use is calculated based upon a discounted cash flow analysis. In addition, IAS 36 requires, under...

  • Page 67
    ...market assumptions into account). Cash flow estimates are discounted to present value using a credit adjusted discount rate. Lease return conditions Maintenance costs for lease return conditions are booked only for short term leases under the Corporation's accounting policies under existing Canadian...

  • Page 68
    2010 Air Canada Annual Report Accounting Policy Significant Accounting Policy Changes under IFRS and Expected Impact Expected impact to the opening balance sheet: Asset Retirement Obligations Property & Equipment is expected to increase by $7 million, Other long-term liabilities are expected to ...

  • Page 69
    2010 Management's Discussion and Analysis Estimated Adjustments to the Consolidated Statement of Operations on Adoption of IFRS Following the opening IFRS Consolidated Statement of Financial Position below is the 2010 Canadian GAAP Consolidated Statement of Operations as compared to the estimated ...

  • Page 70
    ... Current liabilities Long-term debt and capital leases Future income taxes Pension and other benefit liabilities Other long-term liabilities 3,002 4,054 85 1,163 455 8,759 201 $ Non-controlling interest Other employee future benefits (IAS 19) Unaudited As at January 1, 2010 (Canadian dollars...

  • Page 71
    ... 6 (27) Other Operating expenses Aircraft fuel Wages, salaries and benefits Airport and navigation fees Capacity purchase with Jazz Depreciation and amortization Aircraft maintenance Food, beverages and supplies Communications and information technology Aircraft rent Commissions Other...

  • Page 72
    ... (Canadian dollars in millions) IFRS 2010 Air Canada Annual Report Operating revenues Passenger Cargo Other Operating expenses Aircraft fuel Wages, salaries and benefits Airport and navigation fees Capacity purchase with Jazz Depreciation and amortization Aircraft maintenance Food...

  • Page 73
    2010 Management's Discussion and Analysis 17. SENSITIVITY OF RESULTS Air Canada's financial results are subject to many different internal and external factors which can have a significant impact on operating results. The following table describes, on an indicative basis, the financial impact that ...

  • Page 74
    ... Capital and Liquidity Air Canada faces a number of challenges in its business, including in relation to economic conditions, pension plan funding, volatile fuel prices, contractual covenants which could require Air Canada to deposit cash collateral with third parties, foreign exchange rates and...

  • Page 75
    ... based on several factors, including regulatory developments, assumptions and methods used and changes in the economic conditions (mainly the return on fund assets and changes in interest rates). Underfunded pension plans or a failure or inability by Air Canada to make required cash contributions to...

  • Page 76
    ..., an opposite change in the exchange rate would have had the opposite effect. Air Canada incurs significant 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...

  • Page 77
    ...which Air Canada may structure or operate its business, including by reducing Air Canada's liquidity, limiting Air Canada's ability to incur indebtedness, create liens, sell assets, pay dividends, make capital expenditures, and engage in acquisitions, mergers or restructurings or a change of control...

  • Page 78
    ...authorities or otherwise required for Air Canada's operations such as fuel, aircraft and related parts and aircraft maintenance services (including maintenance services obtained from Aveos). In certain cases, Air Canada may only be able to access goods and services from a limited number of suppliers...

  • Page 79
    ... and higher density markets at offpeak times throughout Canada and to and from certain destinations in the United States and also provides valuable traffic feed to Air Canada's mainline routes. Pursuant to the terms of the Jazz CPA, Air Canada pays Jazz a number of fees which are determined based...

  • Page 80
    ... the pension plan terms and conditions applicable to pilots requiring them to retire at age 60. Air Canada is defending these challenges. At this time, it is not possible to determine with any degree of certainty the extent of any financial liability that may arise from Air Canada being unsuccessful...

  • Page 81
    ... key employees, Air Canada's business, results from operations and financial condition could be materially adversely affected. Additionally, Air Canada may be unable to attract and retain additional qualified key personnel as needed in the future. Risks Relating to the Airline Industry Terrorist...

  • Page 82
    ..., including in the form of higher passenger fares and cargo rates. The availability of international routes to Canadian air carriers is regulated by agreements between Canada and foreign governments. Changes in Canadian or foreign government aviation policy could result in the alteration or...

  • Page 83
    ...and Chief Financial Officer ("CFO") and its Disclosure Policy Committee to ensure appropriate and timely decisions are made regarding public disclosure. Internal controls over financial reporting have been designed by management, under the supervision of and with the participation of the Corporation...

  • Page 84
    2010 Air Canada Annual Report 20. NON-GAAP FINANCIAL MEASURES EBITDAR EBITDAR (earnings before interest, taxes, depreciation and amortization, and aircraft rent) is a non-GAAP financial measure commonly used in the airline industry to view operating results before depreciation and amortization, and...

  • Page 85
    2010 Management's Discussion and Analysis 21. GLOSSARY Atlantic passenger and cargo revenues - Refers to revenues from flights that cross the Atlantic Ocean with origins and destinations principally in Europe. Available Seat Miles or ASMs - A measure of passenger capacity calculated by multiplying ...

  • Page 86
    ... and audit-related fees and expenses. The Board of Directors approves the Corporation's consolidated financial statements, management's discussion and analysis and annual report disclosures prior to their release. The Audit, Finance and Risk Committee meets with management, the internal auditors and...

  • Page 87
    ... financial position of Air Canada and its subsidiaries as at December 31, 2010 and 2009 and the results of their operations and their cash flows for the years then ended in accordance with Canadian generally accepted accounting principles. Chartered Accountants 1 Montreal, Quebec February 9, 2011...

  • Page 88
    2010 Air Canada Annual Report CONSOLIDATED STATEMENT OF OPERATIONS For the year ended December 31 (Canadian dollars in millions except per share figures) Operating revenues Passenger Cargo Other Operating expenses Aircraft fuel Wages, salaries and benefits Airport and navigation fees Capacity ...

  • Page 89
    ... Current Accounts payable and accrued liabilities Advance ticket sales Current portion of long-term debt and capital leases Long-term debt and capital leases Future income taxes Pension and other benefit liabilities Other long-term liabilities Non-controlling interest SHAREHOLDERS' EQUITY Share...

  • Page 90
    2010 Air Canada Annual Report CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY For the year ended December 31 (Canadian dollars in millions) Share Capital Common shares, beginning of year Shares issued Total share capital Contributed surplus Balance, beginning of year Fair value of stock ...

  • Page 91
    ... Fuel hedge collateral deposits, net Provision adjustment for cargo investigations, net Changes in non-cash working capital balances Other Financing Proceeds from borrowings Shares issued Warrants issued under the public offering and credit facility Reduction of long-term debt and capital lease...

  • Page 92
    ...Canada Cargo. Air Canada offers international cargo services on routes between Canada and major markets in Europe, Asia, South America and Australia using cargo capacity on Boeing 777 and other wide body aircraft operated by Air Canada. Air Canada Ground Handling Services provided passenger handling...

  • Page 93
    ... on a straight-line basis over the period during which the travel pass is valid. The Corporation has formed alliances with other airlines encompassing loyalty program participation, code sharing and coordination of services including reservations, baggage handling and flight schedules. Revenues are...

  • Page 94
    ...passenger revenues when the points are issued, which occurs upon the qualifying air travel being provided to the customer. F) OTHER REVENUES Other revenue includes revenues from the sale of the ground portion of vacation packages, ground handling services and other airline related services. Vacation...

  • Page 95
    ... annual payment under the plan. I) STOCK-BASED COMPENSATION PLANS Certain employees of the Corporation participate in Air Canada's Long-Term Incentive Plan, which provides for the grant of stock options and performance share units ("PSUs"), as further described in Note 10. The fair value of stock...

  • Page 96
    ... handling, professional fees and services, crew meals and hotels, advertising and promotion, insurance costs, credit card fees, ground costs for Air Canada Vacations packages, and other expenses. Expenses are recognized as incurred. L) FINANCIAL INSTRUMENTS Under the Corporation's risk management...

  • Page 97
    ... Statement of Operations, as applicable. t t t t Fuel Derivatives Prior to the Corporation discontinuing hedge accounting for all fuel derivatives effective the third quarter of 2009 as described below, it had designated certain of its fuel derivatives as cash flow hedges. In a cash flow...

  • Page 98
    ... RESTRICTED CASH The Corporation has recorded $80 (2009 - $78) in Restricted cash, under Current assets, representing funds held in trust by Air Canada Vacations in accordance with regulatory requirements governing advance ticket sales, recorded under Current liabilities, for certain travel related...

  • Page 99
    .... Indefinite life assets are not amortized while assets with finite lives are amortized on a straight line basis to nil over their estimated useful lives. Estimated Useful Life International route rights and slots Air Canada trade name Other marketing based trade names Star Alliance membership Other...

  • Page 100
    2010 Air Canada Annual Report X) ASSET RETIREMENT OBLIGATIONS The Corporation records an asset and related liability for the costs associated with the retirement of long-lived tangible assets when a legal liability to retire such assets exists. The fair value of a liability for an asset retirement ...

  • Page 101
    ... for aircraft leasing entities and $155 (2009 - $165) consolidated for fuel facility corporations, both of which are consolidated under AcG-15. As at December 31, 2010, flight equipment included 17 aircraft (2009 - 17) that are retired from active service with a net carrying value of $4 (2009 - $22...

  • Page 102
    2010 Air Canada Annual Report During 2009: t 5IF$PSQPSBUJPOUPPLEFMJWFSZPGPOF#PFJOHBJSDSBGU5IFBJSDSBGUXBTGJOBODFEXJUIHVBSBOUFFTVQQPSUGSPNUIF Export-Import Bank of the United States ("EXIM"). 5IF$PSQPSBUJPOFOUFSFEJOUPBTBMFMFBTFCBDLUSBOTBDUJPOGPSB#PFJOHBJSDSBGU ...

  • Page 103
    Consolidated Financial Statements and Notes 4. INTANGIBLE ASSETS 2010 Indefinite life assets International route rights and slots Air Canada trade name Other marketing based trade names Finite life assets Star Alliance membership Other contract and customer based Technology based Accumulated ...

  • Page 104
    2010 Air Canada Annual Report 5. DEPOSITS AND OTHER ASSETS Aircraft related deposits (a) Restricted cash Investment in Aveos Accrued pension benefit asset Aircraft lease payments in excess of rent expense Deposit related to the Pension and Benefits Agreement Asset backed commercial paper Other...

  • Page 105
    ... Financial Statements and Notes 6. LONG-TERM DEBT AND CAPITAL LEASES Base Currency Final Maturity Actual Interest Rate (%) 2.18 - 8.49 0.29 - 5.69 0.33 9.25 10.13 12.00 $ 2010 2009 Embraer aircraft financing (a) Boeing aircraft financing (b) Boeing aircraft financing (c) Senior...

  • Page 106
    ... July 2009, the Corporation received financing proceeds of $600, less financing fees of $20, under a secured term credit facility (the "Credit Facility") pursuant to which the Corporation also issued warrants for the purchase of Air Canada's Class A Variable Voting Shares or Class B Voting Shares as...

  • Page 107
    Consolidated Financial Statements and Notes As described above under (d), total outstanding debt under this facility of $700 was repaid upon the issuance of the Notes in August 2010. Based on the change in cash flows under the Credit Facility due to its repayment, the Corporation recorded a charge ...

  • Page 108
    2010 Air Canada Annual Report of applicable fees. (h) Conditional sales agreements amount to US$124 principal outstanding at December 31, 2010 (US$133 as at December 31, 2009) on acquisitions of two A340-500 aircraft financed through conditional sales agreements. Principal and interest are paid ...

  • Page 109
    ... made under the fair value test for certain aircraft leases pertaining to A340 and A330 aircraft. This cash outflow is reported in Investing on the consolidated statement of cash flow. Interest paid on Long-term debt and capital leases in 2010 by the Corporation was $276 (2009 - $326). Refer to Note...

  • Page 110
    ... tax related amounts appear in the Corporation's Consolidated Statement of Financial Position: Liability Tax payable (a) Future income tax liability (b) $ $ (5) (80) (85) $ $ (10) (85) (95) 2010 2009 (a) Taxes Payable Air Canada has a cash tax payable of $5 of which $2 is included in Accounts...

  • Page 111
    ... (115) 76 41 (5) $ $ Refer to Note 15 for future income taxes recorded in other comprehensive income related to fuel derivatives designated under fuel hedge accounting. Income taxes paid in 2010 by the Corporation were $4 (2009 - recovery of $5). The balances of tax attributes as at December 31...

  • Page 112
    ...over the expected average remaining service life as appropriate. As described in Note 2B, the accounting for pensions requires management to make significant estimates including estimates as to the discount rate applicable to the benefit obligation and the expected rate of return on plan assets. 112

  • Page 113
    ... strategy adopted by Air Canada, including the longer duration in its bond portfolio in comparison to other pension plans. These factors are used to determine the average rate of expected return on the funds invested to provide for the pension plan benefits. The determination of the long-term rate...

  • Page 114
    2010 Air Canada Annual Report Benefit Obligation and Plan Assets The following table presents financial information related to the changes in the pension and other post-employment benefits plans: Change in benefit obligation Benefit obligation at beginning of year Current service cost Interest ...

  • Page 115
    ... to Aveos and Aeroplan Net defined benefit pension and other employee benefits expense Weighted average assumptions used to determine the accrued benefit cost Discount rate Expected long-term rate of return on plan assets Rate of compensation increase (1) (1) Pension Benefits 2010 2009 $ 160 748...

  • Page 116
    ... conform to the Statement of Investment Policy and Objectives of the Air Canada Pension Funds, as amended during 2010. The investment return objective is to achieve a total annualized rate of return that exceeds by a minimum of 1.0% before investment fees on average over the long term (i.e. 10 years...

  • Page 117
    ... 3% to 6% of annual pay for those employees in Canada and 3% to 7% of annual pay for those participants in the United Kingdom. The Corporation contributes an equal amount. The Corporation's expense for defined contribution plans amounted to $2 for the year ended December 31, 2010 (2009 - $1). 117

  • Page 118
    ... (credits) recorded in wages, salaries and benefits Amounts disbursed End of year Current portion in Accounts payable and accrued liabilities $ 2010 61 2 (2) (21) 40 (15) 25 $ 2009 54 3 30 (26) 61 (28) 33 $ $ The Corporation offers certain severance programs to certain employees from time to...

  • Page 119
    ...STOCK-BASED COMPENSATION Air Canada Long-Term Incentive Plan Certain of the Corporation's employees participate in the Air Canada Long-term Incentive Plan (the "Long-term Incentive Plan"). The Long-term Incentive Plan provides for the grant of options and performance share units to senior management...

  • Page 120
    ... for Air Canada shares issued from treasury or purchased on the secondary market and/or equivalent cash at the discretion of the Board of Directors. The compensation expense related to PSUs in 2010 was $4 (2009 was less than $1). A summary of the Long-term Incentive Plan performance share unit...

  • Page 121
    ...in the employee share purchase plan under which employees can invest up to 6% of their base salary for the purchase of shares on the secondary market. Air Canada will match 33.3% of the investments made by the employee. During 2010, the Corporation recorded compensation expense of less than $1 (2009...

  • Page 122
    2010 Air Canada Annual Report 11. SHAREHOLDERS' EQUITY The issued and outstanding common shares of Air Canada, along with the potential common shares, were as follows: As at December 31 Issued and outstanding Class A variable voting shares Class B voting shares Total issued and outstanding ...

  • Page 123
    ...average trading price of the Voting Shares on the TSX is equal to or greater than $4.00 (each, an "Acceleration Event"), Air Canada shall have the right, at its option, within 10 business days after the Acceleration Event, to accelerate the time of expiry of the Warrants. The recorded values related...

  • Page 124
    ... effect of outstanding stock options on earnings per share is based on the application of the treasury stock method. Under this method, the proceeds from the exercise of such securities are assumed to be used to purchase Class B Voting Shares. Contingently issuable shares relate to the dilutive...

  • Page 125
    Consolidated Financial Statements and Notes 13. SEGMENT INFORMATION A reconciliation of the total amounts reported by geographic region for Passenger revenue and Cargo revenue on the Consolidated Statement of Operations is as follows: Passenger revenues Canada US Transborder Atlantic Pacific ...

  • Page 126
    ... Air Canada Annual Report 14. COMMITMENTS Boeing As at December 31, 2010, the Corporation has outstanding purchase commitments with The Boeing Company ("Boeing") for the acquisition of 37 Boeing 787 aircraft. The Corporation also has purchase rights for 18 Boeing 777, purchase options for 13 Boeing...

  • Page 127
    ... minimum requirement for 2011 is $216. The annual commitment is based on 85% of the average total Aeroplan Miles® actually issued in respect of Air Canada flights or Air Canada airline affiliate products and services in the three preceding calendar years. During 2010, the Corporation purchased $262...

  • Page 128
    ... Aircraft related and other deposits Derivative instruments Fuel derivatives Share forward contracts Interest rate swaps Held to maturity Loans and receivables Total $ 1,090 1,102 80 130 29 33 9 13 2,486 $ 185 185 $ Financial Liabilities Accounts payable Current portion of long-term debt...

  • Page 129
    ...compensation risk and market risk through the use of various interest rate, foreign exchange, fuel and other derivative financial instruments. The Corporation uses derivative financial instruments only for risk management purposes, not for generating trading profit. As such, any change in cash flows...

  • Page 130
    ... the employees to receive a payment in the form of one Air Canada common share, cash in the amount equal to market value of one common share, or a combination thereof, at the discretion of the Board of Directors. Stock-based compensation risk refers to the risk that future cash flows to settle...

  • Page 131
    ... terms of financing agreements. The Corporation's principal objective in managing liquidity risk is to maintain a minimum unrestricted cash balance in excess of a target liquidity level of 15% of annual operating revenues. At December 31, 2010, Air Canada had Cash and cash equivalents and Short-term...

  • Page 132
    2010 Air Canada Annual Report Covenants in Credit Card Agreements The Corporation has various agreements with companies 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 ...

  • Page 133
    ... in 2009). t t As of December 31, 2010, approximately 20% of the Corporation's anticipated purchases of jet fuel for 2011 are hedged at an average West Texas Intermediate ("WTI") capped price of US$92 per barrel. The Corporation's contracts to hedge anticipated jet fuel purchases over the 2011...

  • Page 134
    ...market rates. Management estimated the fair value of its long-term debt based on valuation techniques taking into account market rates of interest, the condition of any related collateral, the current conditions in credit markets and the current estimated credit margins applicable to the Corporation...

  • Page 135
    ... at reporting date using: December 31 2010 Financial Assets Held-for-trading securities Cash equivalents Short-term investments Deposits and other assets Asset backed commercial paper Derivative instruments Fuel deriatives Share forward contracts Interest rate swaps Total $ Quoted prices in...

  • Page 136
    2010 Air Canada Annual Report 16. CAPITAL DISCLOSURES The Corporation views capital as the sum of Long-term debt and capital leases, Non-controlling interest, capitalized operating leases, and Shareholders' equity. The Company includes capitalized operating leases, which is a measure commonly used ...

  • Page 137
    ..., the United States Department of Justice and the Competition Bureau in Canada have investigated or are investigating alleged anti-competitive cargo pricing activities, including the levying of certain fuel surcharges, of a number of airlines and cargo operators, including Air Canada. Competition...

  • Page 138
    ... the pension plan terms and conditions applicable to pilots requiring them to retire at age 60. Air Canada is defending these challenges. At this time, it is not possible to determine with any degree of certainty the extent of any financial liability that may arise from Air Canada being unsuccessful...

  • Page 139
    ..., changes of law and certain income, commodity and withholding tax consequences. When the Corporation, as a customer, enters into technical service agreements with service providers, primarily service providers who operate an airline as their main business, the Corporation has from time to time...

  • Page 140
    ... airframe maintenance services to April 2011. This has the result of Air Canada assuming changes in the solvency deficiency for those affected employees from October 16, 2007, being the date of the Pension and Benefits Agreement, to April 1, 2011. As part of the amendment, all letters of credit...

  • Page 141
    ... in Deposits and other assets and is carried at amortized cost. Aveos Certification Order On January 31, 2011, the Canada Industrial Relations Board issued an order determining that the sale of Air Canada's former aircraft, engine and component maintenance and repair business had occurred within the...

  • Page 142
    ...and Chief Financial Officer Executive Vice President and Chief Commercial Officer Senior Vice President, E-Commerce and Chief Information Officer Senior Vice President, Employee Relations Senior Vice President, Operations Senior Vice President, Customer Service Vice President, Air Canada Maintenance...

  • Page 143
    ... exchanges with clients, public-address announcements at the airport and on board as well as briefing of passengers with special needs all constitute the very heart of customer service and call upon our employees linguistic skills at all times. Our consideration to bilingualism not only makes good...

  • Page 144
    ... Alliance® network, Air Canada is able to offer its customers access to approximately 1,160 destinations in 181 countries, as well as reciprocal participation in frequent flyer programs and use of airport lounges. Air Canada also operates a domestic and international cargo division, Air Canada...