Air Canada 2010 Annual Report Download - page 76

2010 Air Canada Annual Report
76
Foreign Exchange
Air Canada’s financial results are sensitive to the fluctuating value of the Canadian dollar. In particular, Air Canada has a
significant annual net outflow of U.S. dollars and is affected by fluctuations in the U.S./Canada dollar exchange rate.
Management estimates that during 2010, a $0.01 strengthening of the Canadian dollar versus the U.S. dollar (i.e., $1.01 to
$1.00 per U.S. dollar) would have had an estimated $24 million favourable impact on operating income and a $61 million
favourable impact on pre-tax income. Conversely, 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 portion of its revenues are generated
in Canadian dollars. A significant 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 financial condition. In addition, Air Canada may be unable to appropriately hedge the risks associated with
fluctuations 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 financial 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 financial 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 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 satisfied. There can be no assurance that
collective agreements will be further renewed without labour conflict or action or that there will not otherwise be any labour
conflict or action that could also lead 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 financial condition.
Any labour disruption or work stoppage by any of the unionized work groups of Jazz or other parties, with whom Air Canada
conducts business could have a material adverse effect on Air Canada, its business, results from operations and financial
condition. In addition, labour conflicts at Star Alliance® partners could result in lower demand for connecting traffic with Air
Canada and, ultimately, could have a material adverse effect on Air Canada, its business, results from operations and financial
condition.
Airline Industry Characterized by Low Gross Profit Margins and High Fixed Costs
The airline industry is characterized by low gross profit margins and high fixed costs. The costs of operating any particular
flight do not vary significantly with the number of passengers carried and, therefore, a relatively small change in the number
of passengers or in fare pricing or traffic mix would have a significant effect on Air Canada’s operating and financial 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 financial condition. Air Canada incurs substantial fixed costs which do not meaningfully
fluctuate with overall capacity. As a result, should Air Canada be required to reduce its overall capacity or the number of flights
operated, it may not be able to successfully reduce certain fixed 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 financial condition.