Air Canada 2011 Annual Report Download - page 123

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2011 Consolidated Financial Statements and Notes
123
The following are the current derivatives employed in interest rate risk management activities and the adjustments recorded
during 2011:
Certain payments based upon aircraft rental amounts for the delivery of 15 Q400 aircraft are based on medium-term US
interest rates at the time of delivery. To hedge against the exposure to increases in interest rates until the expected
delivery date, the Corporation entered into forward start interest rate swaps with an aggregate notional value of US$234.
The swaps have contractual terms of maturity that coincide with the term of the rental agreements. However, the
derivatives will be settled on each expected delivery date of the aircraft with maturities ranging to July 2012. The
aggregate notional value outstanding at December 31, 2011 is US$109 for future delivery of seven Q400 aircraft. These
derivatives have not been designated as hedges for accounting purposes. The fair value of these contracts as at
December 31, 2011 is $13 in favour of the counterparties, with a loss of $28 recorded in Loss on financial instruments.
As at December 31, 2011, the Corporation had two interest rate swap agreements in place with terms to July 2022 and
January 2024 relating to two Boeing 767 aircraft financing agreements with an aggregate notional value of $74 (US$73)
(2010 – $80 (US$80)). These swaps convert the lease payments on the two aircraft leases from fixed to floating rates.
The fair value of these contracts as at December 31, 2011 was $15 in favour of the Corporation (2010 – $13 in favour of
the Corporation). These derivative instruments have not been designated as hedges for accounting purposes and are
recorded at fair value. During 2011, a gain of $6 was recorded in Gain on financial instruments recorded at fair value
related to these derivatives (2010 – $6 gain).
Interest income includes $32 (2010 – $15) related to Cash and cash equivalents and Short-term investments, which are
classified as held for trading. Interest expense reflected on the 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 of a financial instrument will fluctuate because of
changes in foreign exchange rates.
The Corporation’s risk management objective is to reduce cash flow risk related to foreign denominated cash flows.
The Corporation’s cash inflows are primarily in Canadian dollars, while a large portion of its outflows are in US dollars. This
unbalanced mix results in an annual US dollar shortfall from operations. In order to mitigate this imbalance, the Corporation
has adopted the practice of converting excess revenues from offshore currencies into US dollars. In 2011, this conversion
generated coverage of approximately 20% of the imbalance. The remaining 80% was covered through the use of a variety of
foreign exchange derivatives, including spot transactions and US dollar investments, which had maturity dates corresponding
to the forecasted shortfall dates. The level of foreign exchange derivatives expiring at any one point in time is dependent upon
a number of factors, which include the amount of foreign revenue conversion available, US dollar net cash flows, as well as the
amount attributed to aircraft and debt payments.
The following are the current derivatives employed in foreign exchange risk management activities and the adjustments
recorded during 2011:
As at December 31, 2011, the Corporation had outstanding foreign currency options and swap agreements to purchase
US dollars against Canadian dollars on $1,008 (US$991) which mature in 2012 (2010 – $223 (US$224) which matured in
2011). The Corporation did not have any agreements outstanding at December 31, 2011 to buy Euro dollars against
Canadian dollars (2010 – Euro dollars against Canadian dollars on $15 (EUR 11) which matured in 2011). The fair value of
these foreign currency contracts as at December 31, 2011 was $5 in favour of the Corporation (2010 – $3 in favour of the
counterparties). These derivative instruments have not been designated as hedges for accounting purposes and are
recorded at fair value. During 2011, a gain of $26 was recorded in Foreign exchange gain (loss) related to these derivatives
(2010 – $2 gain).