Air Canada 2011 Annual Report Download - page 58

2011 Air Canada Annual Report
58
15. OFF-BALANCE SHEET ARRANGEMENTS
The following is a summary of Air Canada’s more significant off-balance sheet arrangements.
Guarantees
Performance Obligations Relating to Aircraft Leasing Agreements
With respect to 23 Air Canada aircraft leases, the difference between the reduced rents as a result of the implementation of
the Plan of Reorganization, Compromise and Arrangement under the Companies’ Creditors Arrangement Act (“CCAA”) on
September 30, 2004, and amounts which would have been due under the original lease contracts will be forgiven at the expiry
date of the leases if no material default has occurred by such date. In the event of a material default, which does not include
any cross defaults to other unrelated agreements (including agreements with the counterparties of these aircraft leases), this
difference plus interest will become due and payable and all future rent will be based on the original contracted rates. Rent
expense is being recorded on the renegotiated lease agreements, and any additional liability would be recorded only at the
time management believes the amount is likely to be incurred.
Guarantees in Fuel Facilities Arrangements
Air Canada participates in fuel facility arrangements operated through Fuel Facility Corporations, along with other airlines that
contract for fuel services at various major airports in Canada. The Fuel Facility Corporations operate on a cost recovery basis.
The purpose of the Fuel Facility Corporations is to own and finance the system that distributes the fuel to the contracting
airlines, including leasing the Land Rights under the land lease. The aggregate debt of the five Fuel Facility Corporations in
Canada that have not been consolidated by Air Canada under SIC Interpretation 12 – Consolidation of Special Purpose Entities
is approximately $187 million as at December 31, 2011 (2010 – $171 million), which is Air Canada's maximum exposure to
loss before taking into consideration the value of the assets that secure the obligations and any cost sharing that would occur
amongst the other contracting airlines. Air Canada views this loss potential as remote. Each contracting airline participating in
a Fuel Facility Corporation shares pro rata, based on system usage, in the guarantee of this debt. The maturities of these debt
arrangements vary but generally extend beyond five years.
Indemnification Agreements
In the ordinary course of Air Canada’s business, Air Canada enters into a variety of agreements, some of which may provide for
indemnifications to counterparties that may require Air Canada to pay for costs and/or losses incurred by such counterparties.
Air Canada cannot reasonably estimate the potential amount, if any, it could be required to pay under such indemnifications.
Such amount would also depend on the outcome of future events and conditions, which cannot be predicted. While certain
agreements specify a maximum potential exposure, certain others do not specify a maximum amount or a limited period.
Historically, Air Canada has not made any significant payments under these indemnifications.
Air Canada enters into real estate leases or operating agreements, which grant a license to Air Canada to use certain premises,
in substantially all cities that it serves. It is common in such commercial lease transactions for Air Canada, as the lessee, to
agree to indemnify the lessor and other related third parties for tort liabilities that arise out of or relate to Air Canada’s use or
occupancy of the leased or licensed premises. Exceptionally, this indemnity extends to related liabilities arising from the
negligence of the indemnified parties, but usually excludes any liabilities caused by their gross negligence or wilful misconduct.
Additionally, Air Canada typically indemnifies such parties for any environmental liability that arises out of or relates to its use
or occupancy of the leased or licensed premises.
In aircraft financing or leasing agreements, Air Canada typically indemnifies the financing parties, trustees acting on their
behalf and other related parties and/or lessors against liabilities that arise from the manufacture, design, ownership, financing,
use, operation and maintenance of the aircraft and for tort liability, whether or not these liabilities arise out of or relate to the
negligence of these indemnified parties, except for their gross negligence or wilful misconduct. In addition, in aircraft financing
or leasing transactions, including those structured as leveraged leases, Air Canada typically provides indemnities in respect of
various tax consequences including in relation to the leased or financed aircraft, the use, possession, operation, maintenance,
leasing, subleasing, repair, insurance, delivery, import, export of such aircraft, the lease or finance arrangements entered in
connection therewith, changes of law and certain income, commodity and withholding tax consequences.