Air Canada 2011 Annual Report Download - page 50

Download and view the complete annual report

Please find page 50 of the 2011 Air Canada annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 150

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91
  • 92
  • 93
  • 94
  • 95
  • 96
  • 97
  • 98
  • 99
  • 100
  • 101
  • 102
  • 103
  • 104
  • 105
  • 106
  • 107
  • 108
  • 109
  • 110
  • 111
  • 112
  • 113
  • 114
  • 115
  • 116
  • 117
  • 118
  • 119
  • 120
  • 121
  • 122
  • 123
  • 124
  • 125
  • 126
  • 127
  • 128
  • 129
  • 130
  • 131
  • 132
  • 133
  • 134
  • 135
  • 136
  • 137
  • 138
  • 139
  • 140
  • 141
  • 142
  • 143
  • 144
  • 145
  • 146
  • 147
  • 148
  • 149
  • 150

2011 Air Canada Annual Report
50
Fuel Price Risk
Fuel price risk is the risk that future cash flows relating to jet fuel purchases will fluctuate because of changes in jet fuel prices.
In order to manage its exposure to jet fuel prices and to help mitigate volatility in operating cash flows, Air Canada enters into
derivative contracts with financial intermediaries. Air Canada uses derivative contracts on jet fuel and other crude oil-based
commodities, heating oil and crude oil. Heating oil and crude oil derivatives are used due to the relative limited liquidity of jet
fuel derivative instruments on a medium to long-term horizon since jet fuel is not traded on an organized futures exchange.
Air Canada’s policy permits hedging of up to 75% of the projected jet fuel purchases for the next 12 months, 50% for the next
13 to 24 months and 25% for the next 25 to 36 months. These are maximum (but not mandated) limits. There is no minimum
monthly hedging requirement. Air Canada performs regular reviews and, if necessary, adjusts the strategy in light of market
conditions. Air Canada does not purchase or hold any derivative financial instrument for speculative purposes.
In 2011:
Air Canada recorded a loss of $26 million in gain (loss) on financial instruments recorded at fair value on Air Canada’s
consolidated statement of operations (2010 – $11 million loss).
Air Canada purchased crude-oil call options and collars covering a portion of 2011 and 2012 fuel exposure. The cash
premium related to these contracts was $35 million.
Fuel derivative contracts cash settled with a net fair value of $31 million in favour of Air Canada ($27 million in favour of
the counterparties in 2010).
As of December 31, 2011, approximately 23% of Air Canada's anticipated purchases of jet fuel for 2012 are hedged at an
average West Texas Intermediate (“WTI”) equivalent weighted average capped price of US$114 per barrel. Air Canada's
contracts to hedge anticipated jet fuel purchases over 2012 are crude-oil based contracts, comprised of call options and call
spreads. The fair value of the fuel derivatives portfolio at December 31, 2011 was $11 million in favour of Air Canada
($33 million in favour of Air Canada in 2010) and is recorded in prepaid and other current assets on Air Canada’s consolidated
statement of financial position.
The following table outlines the notional volumes per barrel along with the WTI weighted average floor and capped price for
each year currently hedged by type of derivative instruments as at December 31, 2011.
Derivative Instruments Term Volume (bbls)
WTI Equivalent
Weighted Average
Floor Price (US$/bbl)
WTI Equivalent
Weighted Average
Capped Price (US$/bbl)
Call options 2012 5,279,106 not applicable $115
Call spreads 2012 360,000 not applicable $107
Air Canada is expected to generate fuel hedging gains if oil prices increase above the average capped price.
Air Canada discontinued applying hedge accounting in the third quarter of 2009. Amounts that were deferred to Accumulated
Other Comprehensive Loss (“AOCL”) for derivatives previously designated under hedge accounting were taken into fuel
expense in the period when the previously forecasted hedge transaction occurred. In 2010, $183 million was reclassified from
AOCL to aircraft fuel expense, leaving no amounts remaining in AOCL.