Air Canada 2011 Annual Report Download - page 125

2011 Consolidated Financial Statements and Notes
125
Sensitivity Analysis
The following table is a sensitivity analysis for each type of market risk relevant to the significant financial instruments
recorded by the Corporation as at December 31, 2011. The sensitivity analysis is based on a reasonably possible movement in
the relevant risk factor. These assumptions may not be representative of actual movements in these risks and should not be
relied upon. Given the recent volatility in the financial and commodity markets, the actual percentage changes may differ
significantly from the percentage changes outlined below. Each risk is contemplated independent of other risks.
Interest
rate risk(1) Foreign exchange rate risk(2) Other price risk(3)
Income Income Income
1% increase 5% increase 5% decrease 10% increase 10% decrease
Cash and cash equivalents $ 8 $ (8) $ 8 $ – $ –
Short–term investments $ 13 $ (11) $ 11 $ – $ –
Aircraft related deposits $ – $ (5) $ 5 $ – $ –
Long–term debt and finance leases $ (13) $ 190 $ (190) $ – $ –
Fuel derivatives $ – $ – $ – $ 10 $ (6)
Foreign exchange derivatives $ – $ (1) $ 11 $ – $ –
Interest rate swaps $ 7 $ – $ – $ – $ –
(1) Due to currently low market rates of interest, a 1% decrease in interest rates was not considered a reasonable scenario within the forecast period, being one year.
(2) Increase (decrease) in foreign exchange relates to a strengthening (weakening) of the Canadian dollar versus the U.S. dollar. The impact of changes in other currencies is
not significant to the Corporation’s financial instruments.
(3) Other price risk relates to the Corporation’s fuel derivatives. The sensitivity analysis is based upon a 10% increase or decrease in the price of the underlying commodity.
Covenants in Credit Card Agreements
The Corporation has various agreements with companies that process customer credit card transactions. Approximately 85%
of the Corporation’s sales are processed using credit cards, with remaining sales processed through cash based transactions.
The Corporation receives payment for a credit card sale generally in advance of when the passenger transportation is provided.
The Corporation’s principal credit card processing agreements for card processing services requirements in North America
have an expiry date of May 2012. Air Canada is in the process of negotiating longer-term arrangements. The Corporation’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 the Corporation and
the unrestricted cash of the Corporation. The Corporation 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.
Credit Risk
Credit risk is the risk of loss due to a counterparty’s inability to meet its obligations. As at December 31, 2011, the
Corporation’s credit risk exposure consists mainly of the carrying amounts of Cash and cash equivalents, Short-term
investments and Accounts receivable. Cash and cash equivalents and Short-term investments are in place with major financial
institutions, the Canadian government, and major corporations. Accounts receivable are generally the result of sales of tickets
to individuals, often through the use of major credit cards, through geographically dispersed travel agents, corporate outlets,
or other airlines. Credit rating guidelines are used in determining counterparties for fuel hedging. In order to manage its
exposure to credit risk and assess credit quality, the Corporation reviews counterparty credit ratings on a regular basis and
sets credit limits when deemed necessary.
Refer to the Asset Backed Commercial Paper section below for further credit risk information.