Air Canada 2012 Annual Report Download - page 54

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2012 Air Canada Annual Report
54
The following are the current derivatives employed in interest rate risk management activities and the adjustments recorded
during 2012:
As at December 31, 2012, Air Canada had two interest rate swap agreements in place with terms to July 2022 and
January 2024 relating to two Boeing 767 aircraft financing agreements with an aggregate notional value of $65 million
(US$66 million) (2011 – $74 million (US$73 million)). These swaps convert the lease payments on the two aircraft leases
from fixed to floating rates. The fair value of these contracts as at December 31, 2012 was $13 million in favour of Air
Canada (2011 – $15 million in favour of Air Canada). These derivative instruments have not been designated as hedges
for accounting purposes and are recorded at fair value. In 2012, a gain of $2 million was recorded in Gain on financial
instruments recorded at fair value on Air Canada’s consolidated statement of operations related to these derivatives
(2011 – $6 million gain).
Certain payments based upon aircraft rental amounts for the delivery of 15 Q400 aircraft to Jazz are based on medium-
term U.S. interest rates at the time of delivery. To hedge against the exposure to increases in interest rates until the
expected delivery date, in 2011, Air Canada entered into forward start interest rate swaps with an aggregate notional
value of US$234 million. The swaps had contractual terms of maturity that coincided with the term of the rental
agreements. However, the derivatives were settled on each delivery date of the aircraft with the final maturity in 2012.
The aggregate notional value outstanding at December 31, 2011 was US$109 million for the delivery of seven Q400
aircraft. These derivatives had not been designated as hedges for accounting purposes. In 2012, a loss of $3 million was
recorded in Loss on financial instruments recorded at fair value on Air Canada’s consolidated statement of operations
related to these derivatives (2011 – $28 million loss).
Interest income includes $33 million (2011 – $32 million) related to Cash and cash equivalents and Short-term investments,
which are classified as held for trading. Interest expense reflected on Air Canada’s consolidated statement of operations
relates to financial liabilities recorded at amortized cost.
Foreign Exchange Risk
Foreign exchange risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of
changes in foreign exchange rates.
Air Canada’s risk management objective is to reduce cash flow risk related to foreign denominated cash flows.
Air Canada’s cash inflows are primarily in Canadian dollars, while a large portion of its outflows are in U.S. dollars. This
unbalanced mix results in an annual U.S. dollar shortfall from operations. In order to mitigate this imbalance, Air Canada has
adopted the practice of converting excess revenues from offshore currencies into U.S. dollars. In 2012, this conversion
generated coverage of approximately 19% of the imbalance. The remaining 81% was covered through the use of a variety of
foreign exchange derivatives, including spot transactions and U.S. dollar investments, which had maturity dates corresponding
to the forecasted shortfall dates. The level of foreign exchange derivatives expiring at any one point in time is dependent upon
a number of factors, which include the amount of foreign revenue conversion available, U.S. dollar net cash flows, as well as
the amount attributed to aircraft and debt payments.
The following are the current derivatives employed in foreign exchange risk management activities and the adjustments
recorded in 2012:
As at December 31, 2012, Air Canada had outstanding foreign currency options and swap agreements to purchase U.S.
dollars against Canadian dollars on $1,289 million (US$1,296 million) which mature in 2013 (2011 – $1,008 million
(US$991 million) which matured in 2012). The fair value of these foreign currency contracts as at December 31, 2012
was less than $1 million in favour of Air Canada (2011 – $5 million in favour of Air Canada). These derivative instruments
have not been designated as hedges for accounting purposes and are recorded at fair value. In 2012, a gain of $20 million
was recorded in Foreign exchange gain (loss) on Air Canada’s consolidated statement of operations (2011 – $26 million
gain).