Air Canada 2012 Annual Report Download - page 91

2012 Consolidated Financial Statements and Notes
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D) CAPACITY PURCHASE AGREEMENTS
Air Canada has capacity purchase agreements with Jazz and certain other regional carriers, including those operating aircraft
of 18 seats or less, some of which are referred to as Tier III carriers. Under these agreements, Air Canada markets, tickets and
enters into other commercial arrangements relating to these flights and records the revenue it earns under Passenger revenue.
Operating expenses under capacity purchase agreements include the capacity purchase fees, which, under the capacity
purchase agreement between the Corporation and Jazz (the “Jazz CPA”), are based on variable and fixed rates (“CPA Rates”)
plus mark-up and pass-through costs. The CPA Rates are periodically set by the parties for rate periods of three years. The
parties set the rates through negotiations based on, amongst other things, Jazz’s forecasted costs for the applicable rate
period and an operating plan for the applicable rate period provided by Air Canada, and the results of benchmarking exercises,
which compare Jazz costs to other regional carriers. Pass-through costs are non-marked-up costs charged to the Corporation
and include fuel, airport and user fees and other costs. These expenses are recorded in the applicable category within
Operating expenses.
E) AEROPLAN LOYALTY PROGRAM
Air Canada purchases Aeroplan Miles® from Aeroplan, an unrelated party. Air Canada is an Aeroplan partner providing certain
of Air Canada's customers with Aeroplan Miles®, which can be redeemed by customers for air travel or other rewards acquired
by Aeroplan.
Under the CPSA, Aeroplan purchases passenger tickets from Air Canada to meet its obligation for the redemption of Aeroplan
Miles® for air travel. The proceeds from the sale of passenger tickets to Aeroplan are included in Advance ticket sales. Revenue
related to these passenger tickets is recorded in passenger revenues when transportation is provided.
For Aeroplan Miles® earned by Air Canada customers, Air Canada purchases Aeroplan Miles® from Aeroplan in accordance
with the terms of the CPSA. The cost of purchasing Aeroplan Miles® from Aeroplan is accounted for as a sales incentive and
charged against passenger revenues when the points are issued, which occurs upon the qualifying air travel being provided to
the customer.
F) OTHER REVENUES
Other revenue includes revenues from the sale of the ground portion of vacation packages, ground handling services and other
airline related services. Vacation package revenue is recognized as services are provided over the period of the vacation. Other
airline related service revenues are recognized as the products are sold to passengers or the services are provided.
Other revenue also includes revenue related to the lease or sublease of aircraft to third parties. Lease or sublease revenues are
recognized on a straight line basis over the term of the lease or sublease. Rental revenue from operating leases and subleases
amounted to $90 in 2012 (2011 – $97).
In certain subleases of aircraft to Jazz, for accounting purposes, the Corporation acts as an agent and accordingly reports the
sublease revenues net against aircraft rent expense as the terms of the sublease match the terms of the Corporation’s lease.
The Corporation acts as lessee and sublessor in these matters.
G) EMPLOYEE BENEFITS
The cost of pensions, other post-retirement and post-employment benefits earned by employees is actuarially determined
annually as at December 31. The cost is determined using the projected unit credit method and assumptions including market
interest rates, management's best estimate of expected plan investment performance, salary escalation, retirement ages of
employees and health care costs. The expected return on plan assets is based on market expectations at the beginning of the
period for returns over the entire life of the related obligation.
Past service costs are recognized immediately in income unless the changes to the benefits plan are conditional on the
employees remaining in service for a specified period of time (the vesting period). In this case these past service costs are
amortized on a straight line basis over the vesting period. Gains and losses on curtailments or settlements are recognized in
the period in which the curtailment or settlement occurs.