Air Canada 2011 Annual Report Download - page 63

2011 Management’s Discussion and Analysis
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Air Canada’s credit ratings influence its ability to access capital markets and its liquidity. There can be no assurance that Air
Canada’s credit ratings will not be downgraded, which would add to Air Canada’s borrowing and insurance costs, hamper its
ability to attract capital, adversely impact its liquidity, and limit its ability to operate its business, all of which could have a
material adverse effect on Air Canada, its business, results from operations and financial condition.
Economic and Geopolitical Conditions
Airline operating results are sensitive to economic and geopolitical conditions which can have a significant impact on Air
Canada. For example, economic and geopolitical conditions may impact demand for air transportation in general or to or from
certain destinations, and may also impact Air Canada’s operating costs, pension plan contributions, fuel costs, and costs and
availability of capital and supplies required by Air Canada. Especially in light of Air Canada’s substantial fixed cost structure,
any prolonged or significant impact arising from economic and geopolitical conditions, including weakness of the Canadian,
U.S. or world economies could have a material adverse effect on Air Canada, its business, results from operations and financial
condition.
Airline fares and passenger demand have fluctuated significantly in the past and may fluctuate significantly in the future. Air
Canada is not able to predict with certainty market conditions and the fares that Air Canada may be able to charge. Customer
expectations can change rapidly and the demand for lower fares may limit revenue opportunities. Travel, especially leisure
travel, is a discretionary consumer expense. Demand for business and premium travel are also impacted by economic
conditions. Depressed economic conditions in North America and other areas served by Air Canada, as well as geopolitical
instability in various areas of the world, concerns about the environmental impacts of air travel and tendencies towards
“green” travel initiatives where consumers reduce their travel activities, could have the effect of reducing demand for air
travel in Canada and abroad and could materially adversely impact Air Canada’s profitability.
Pension Plans
Canadian federal pension legislation requires that the funded status of registered pension plans be determined periodically, on
both a going concern basis (essentially assuming indefinite plan continuation) and a solvency basis (essentially assuming
immediate plan termination).
Pension plan solvency valuations are influenced primarily by long-term interest rates and by the investment return on plan
assets, which in turn may be dependent on a variety of factors, including economic conditions. The interest rate used to
calculate benefit obligations for solvency purposes is a prescribed rate derived from the interest rates on long-term
Government of Canada bonds. Deteriorating economic conditions or prolonged period of low interest rates may result in
significant increases in Air Canada’s funding obligations, which could have a material adverse effect on Air Canada, its business,
results from operations and financial condition.
Refer to section 9.8 of this MD&A for additional information relating to Air Canada’s pension funding obligations. In particular,
as of 2014, the Air Canada 2009 Pension Regulations will cease to have effect and Air Canada’s pension funding obligations
may vary significantly based on several factors, including regulatory developments, assumptions and methods used and
changes in the economic conditions (mainly the return on fund assets and changes in interest rates). Underfunded pension
plans or a failure or inability by Air Canada to make required cash contributions to its registered pension plans could have a
material adverse effect on Air Canada, its business, results from operations and financial condition.
Fuel Costs
Fuel costs constituted the largest percentage of the total operating costs of Air Canada in 2011. Fuel prices fluctuate widely
depending on many factors including international market conditions, geopolitical events, jet fuel refining costs and the
Canada/U.S. dollar exchange rate. Air Canada cannot accurately predict fuel prices. During the last five years, fuel prices
increased and fluctuated near or at historically high levels. Should fuel prices fluctuate significantly or increase significantly
above current levels, fuel costs could have a material adverse effect on Air Canada, its business, results from operations and
financial condition. Due to the competitive nature of the airline industry, Air Canada may not be able to pass on increases in
fuel prices to its customers by increasing its fares. Based on 2011 volumes, management estimates that a US$1 per barrel
movement in the average price of West Texas Intermediate (“WTI”) crude oil would have resulted in an approximate
$24 million change in 2011 fuel expense for Air Canada (excluding any impact of fuel surcharges, foreign exchange rates and
fuel hedging), assuming flying capacity remained unchanged and that refining spreads between WTI crude oil and jet fuel as
well as foreign exchange rates remained constant.