Air Canada 2011 Annual Report Download - page 64

2011 Air Canada Annual Report
64
Labour Costs and Labour Relations
Labour costs constituted another one of Air Canada’s largest operating cost items in 2011. There can be no assurance that Air
Canada will be able to maintain such costs at levels that do not negatively affect its business, results from operations and
financial condition. There can be no assurance that future agreements with employees’ unions or the outcome of arbitrations
will be on terms consistent with Air Canada’s expectations or comparable to agreements entered into by Air Canada’s
competitors. Any future agreements or outcome of negotiations or arbitrations including in relation to wages or other labour
costs or work rules may result in increased labour costs or other charges, which could have a material adverse effect on Air
Canada, its business, results from operations and financial condition.
Most of Air Canada’s employees are unionized. The collective agreements representing the majority of the unionized
workforce were renewed or extended in 2009 and expired in 2011. In 2011, collective agreements with the unions
representing Air Canada’s customer service employees at airports and call centres, as well as with the union representing its
flight attendants were, respectively, concluded and imposed through arbitration during 2011. Also in 2011, Air Canada entered
into a collective agreement with the union representing the airline’s London-Heathrow based employees. Negotiations
continue or are expected to soon commence with the remaining bargaining units of Canadian-based union represented
employees. No strikes or lock-outs may lawfully occur during the term of the collective agreements, nor during the
negotiations of their renewal until a number of pre-conditions, in respect of the unions for Canadian-based employees,
prescribed by the Canada Labour Code, have been satisfied. There can be no assurance that collective agreements will be
further renewed without labour conflict or action or that there will not otherwise be any labour conflict or action that could
also lead to an interruption or stoppage in Air Canada’s service or otherwise adversely affect the ability of Air Canada to
conduct its operations, any of which could have a material adverse effect on Air Canada, its business, results from operations
and financial condition.
Any labour disruption or work stoppage by any of the unionized work groups of Jazz or other parties with whom Air Canada
conducts business could have a material adverse effect on Air Canada, its business, results from operations and financial
condition. In addition, labour conflicts at Star Alliance partners could result in lower demand for connecting traffic with Air
Canada and, ultimately, could have a material adverse effect on Air Canada, its business, results from operations and financial
condition.
Foreign Exchange
Air Canada’s financial results are sensitive to the fluctuating value of the Canadian dollar. In particular, Air Canada has a
significant annual net outflow of U.S. dollars and is affected by fluctuations in the U.S./Canada dollar exchange rate.
Management estimates that during 2011, a $0.01 strengthening of the Canadian dollar versus the U.S. dollar (i.e., $1.01 to
$1.00 per U.S. dollar) would have had an estimated $31 million favourable impact on operating income and a $65 million
favourable impact on pre-tax income. Conversely, a corresponding opposite change in the exchange rate would have had the
corresponding opposite effect. Air Canada incurs significant expenses in U.S. dollars for items such as fuel, aircraft rental and
maintenance charges, interest payments, debt servicing and computerized reservations system fees, while a substantial
portion of its revenues are generated in Canadian dollars. A significant deterioration of the Canadian dollar relative to the U.S.
dollar would increase the costs of Air Canada relative to its U.S. competitors and could have a material adverse effect on Air
Canada, its business, results from operations and financial condition. In addition, Air Canada may be unable to appropriately
hedge the risks associated with fluctuations in exchange rates.
Competition
Air Canada operates within a highly competitive industry. Over the past few years, several carriers have entered or announced
their intention to enter or expand into the domestic (including regional), the U.S. transborder and international markets in
which Air Canada operates.
Canadian low-cost and other carriers have entered and/or expanded or announced their intention to compete in many of Air
Canada’s key domestic (including regional) markets and, along with some U.S. carriers have also entered and/or expanded
their operations in the U.S. transborder and leisure-oriented markets. Carriers against which Air Canada competes, including
U.S. carriers, may undergo (and some have undergone) substantial reorganizations (including by way of merger with or
acquisition by another carrier), creating reduced levels of indebtedness and lower operating costs and may therefore be in a
position to more effectively compete with Air Canada. Air Canada is also facing increasing competition in international
markets as carriers increase their international capacity, both by expansion and by shifting existing domestic capacity to
international operations to avoid low-cost domestic competition. Expansion or new competition by low-cost or other carriers
in any of the markets served by Air Canada may adversely affect Air Canada’s business results from operations and financial
condition.