Air Canada 2010 Annual Report Download - page 34

2010 Air Canada Annual Report
34
9. FINANCIAL AND CAPITAL MANAGEMENT
9.1 LIQUIDITY
Liquidity risk is the risk that Air Canada will encounter difficulty in meeting obligations associated with its financial liabilities
and other contractual obligations. Air Canada monitors and manages liquidity risk by preparing rolling cash flow forecasts,
monitoring the condition and value of assets available to be used as well as those assets being used as security in financing
arrangements, seeking flexibility in financing arrangements, and establishing programs to monitor and maintain compliance
with terms of financing agreements. Air Canada’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, cash, cash equivalents and short-term investments amounted to approximately $2,192 million,
or 20% of 2010 operating revenues, exceeding Air Canada’s minimum target liquidity level of 15% of 12-month trailing
operating revenues.
Managing Air Canada’s liquidity position was a particular focus in 2010 and remains a significant priority going forward. In
2010, Air Canada’s unrestricted cash balance increased $785 million due mainly to positive cash from operations of $864
million. Air Canada manages its liquidity through a variety 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 transactions. Approximately 85%
of Air Canada’s sales are processed using credit cards, with remaining sales processed through cash-based transactions. Air
Canada receives payment for a credit card sale generally in advance of when the passenger transportation is provided.
Air Canada’s principal credit card processing agreements for card processing services requirements in North America are
scheduled to terminate at the end of May 2011. Air Canada’s obligation to provide a deposit to the credit card processor
under these agreements, as well as the amount of such deposit, are determined pursuant to a matrix measuring, on a
quarterly basis, both a fixed charge coverage ratio for Air Canada and the unrestricted cash of Air Canada. Air Canada also
has agreements with this processor for the provision of certain credit card processing services requirements for markets
other than North America and for its cargo operations worldwide and such agreements contain deposit obligations similar
to the obligations set forth above.
Air Canada has accepted a proposal from a new service provider for the provision of its principal credit card processing
services requirements in North America for Visa and MasterCard for a five-year term beginning at the expiry of the current
agreements being replaced. Air Canada and the credit card processor have agreed to triggering events upon which Air
Canada would be required to provide the credit card processor with deposits. The obligation to provide, and the amount
of, deposits required would be based upon a matrix measuring, on a quarterly basis, both a fixed charge coverage ratio
and unrestricted cash of Air Canada. The agreement between Air Canada and the credit card processor is subject to certain
conditions, including conclusion of formal documentation.