Air Canada 2010 Annual Report Download - page 51

2010 Management’s Discussion and Analysis
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13. OFF-BALANCE SHEET ARRANGEMENTS
The following is a summary of Air Canada’s more significant off-balance sheet arrangements.
Guarantees
Performance Obligations Relating to Aircraft Leasing Agreements
With respect to 44 Air Canada aircraft leases, the difference between the reduced rents as a result of the implementation
of the Plan of Reorganization, Compromise and Arrangement under the Companies’ Creditors Arrangement Act (“CCAA”)
on September 30, 2004, and amounts which would have been due under the original lease contracts will be forgiven at the
expiry date of the leases if no material default has occurred by such date. In the event of a material default, which does not
include any cross defaults to other unrelated agreements (including agreements with the counterparties of these aircraft
leases), 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 additional liability would be recorded
only at the time management believes the amount is likely to be incurred.
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 finance the system
that distributes the fuel to the contracting airlines, including leasing the land rights under the land lease. The aggregate debt of
the five 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 $171 million as at December 31, 2010 ($162 million
as at December 31, 2009), 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.
Indemnification Agreements
In the ordinary course of Air Canada’s business, Air Canada enters into a variety of agreements, some of which may
provide for indemnifications to counterparties that may require Air Canada to pay for costs and/or losses incurred by such
counterparties. Air Canada cannot reasonably estimate the potential amount, if any, it could be required to pay under
such indemnifications. Such amount would also depend on the outcome of future events and conditions, which cannot
be predicted. While certain agreements specify a maximum potential exposure, certain others do not specify a maximum
amount or a limited period. Historically, Air Canada has not made any significant payments under these indemnifications.
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 Air Canada’s use or occupancy of the leased or licensed premises. Exceptionally, this indemnity
extends to related liabilities arising from the negligence of the indemnified parties, but usually excludes any liabilities
caused by their gross negligence or willful misconduct. Additionally, Air Canada typically indemnifies 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 financing or leasing agreements, Air Canada typically indemnifies the financing parties, trustees acting on their
behalf and other related parties and/or lessors against liabilities that arise from the manufacture, design, ownership,
financing, 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 indemnified parties, except for their gross negligence or willful misconduct. In
addition, in aircraft financing 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 financed aircraft, the use,
possession, operation, maintenance, leasing, subleasing, repair, insurance, delivery, import, export of such aircraft, the lease
or finance 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 certain liabilities that arise from third party claims, which may relate to the services performed by the service
provider.