Air Canada 2010 Annual Report Download - page 74

2010 Air Canada Annual Report
74
18. RISK FACTORS
The risks described herein may not be the only risks faced by Air Canada. Other risks of which Air Canada is not aware or
which Air Canada currently deems to be immaterial may surface and have a material adverse impact on Air Canada, its
business, results from operations and financial condition.
Risks Relating to Air Canada
Operating Results
Prior to emergence, on September 30, 2004, from its restructuring under the Companies Creditors Arrangement Act, as
amended (“CCAA”), Air Canada had sustained significant losses and Air Canada may sustain significant losses in the future.
Since emergence from CCAA to December 31, 2010, Air Canada has accumulated losses of $620 million. A variety of factors,
including economic conditions and other factors described in this Risk Factors section, may result in Air Canada incurring
significant losses. Despite ongoing strategic and business initiatives, including efforts at securing cost reductions and revenue
improvements, Air Canada may not be able to successfully achieve positive net profitability or realize the objectives of any or
all of its initiatives, including those which seek to improve yield or offset or mitigate risks facing Air Canada, including those
relating to economic conditions, liquidity, pension funding, unexpected volatility in fuel costs and other expenses.
Leverage
Air Canada has, and is expected to continue to have and incur, a significant amount of indebtedness, including substantial
fixed obligations under aircraft leases and financings (including under the private offering of senior secured notes described in
section 9.3 of this MD&A), and as a result of challenging economic or other conditions affecting Air Canada, Air Canada may
incur greater levels of indebtedness than currently exist. The amount of indebtedness that Air Canada currently has and which
it may incur in the future could have a material adverse effect on Air Canada, for example, by (i) limiting Air Canada’s ability
to obtain additional financing, (ii) requiring Air Canada to dedicate a substantial portion of its cash flow from operations to
payments on its indebtedness and fixed cost obligations, thereby reducing the funds available for other purposes, (iii) making
Air Canada more vulnerable to economic downturns, and (iv) limiting Air Canada’s flexibility in planning for, or reacting to,
competitive pressures or changes in its business environment.
The ability of Air Canada to make scheduled payments under its indebtedness will depend on, among other things, its future
operating performance and its ability to refinance its indebtedness, if necessary. In addition, as Air Canada incurs indebtedness
which bears interest at fluctuating interest rates, to the extent these interest rates increase, its interest expense will increase.
There can be no assurance that Air Canada will be able to generate sufficient cash from its operations to pay its debts and lease
obligations. Each of these factors is, to a large extent, subject to economic, financial, competitive, regulatory, operational and
other factors, many of which are beyond Air Canada’s control.
Need for Additional 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 increased competition from international, U.S. transborder and low-cost domestic carriers. Air Canada’s
liquidity levels may be adversely impacted by these as well as by other factors and risks identified in this MD&A. As part of
Air Canada’s efforts to meet such challenges and to support Air Canada’s business strategy, significant liquidity and significant
operating and capital expenditures are, and will in the future be, required. There can be no assurance that Air Canada will
continue to be able to obtain on a timely basis sufficient funds on terms acceptable to Air Canada to provide adequate liquidity
and to finance the operating and capital expenditures necessary to overcome challenges and support its business strategy if
cash flows from operations and cash on hand are insufficient.
Failure to generate additional funds, whether from operations or additional debt or equity financings, could require Air Canada
to delay or abandon some or all of its anticipated expenditures or to modify its business strategy and could have a material
adverse effect on Air Canada, its business, results from operations and financial condition. Furthermore, competitors with
greater liquidity or their ability to raise money more easily and on less onerous terms could create a competitive disadvantage
for Air Canada.
Air Canada’s credit ratings influence its ability to access capital markets and its liquidity. There can be no assurance that Air
Canada’s credit ratings will not be downgraded, which would add to Air Canada’s borrowing and insurance costs, hamper its
ability to attract capital, adversely impact its liquidity, and limit its ability to operate its business, all of which could have a
material adverse effect on Air Canada, its business, results from operations and financial condition.