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ANNUAL REPORT 2013

Table of contents

  • Page 1
    ANNUAL REPORT 2013

  • Page 2
    ...of benefit plan amendments % (3) (4) EBITDAR margin % (4) Unrestricted liquidity (5) Free cash flow (6) Adjusted net debt (7) Return on invested capital ("ROIC") %(8) Diluted earnings (loss) per share Adjusted net income (loss) per share - diluted (2) Operating Statistics (9) Revenue passenger miles...

  • Page 3
    ... 21. Glossary ...82 Statement of Management's Responsibility for Financial Reporting ...84 Independent Auditor's Report ...85 Consolidated Financial Statements and Notes ...86 Officers and Directors ...146 Investor and Shareholder Information ...147 Official Languages at Air Canada ...147 Corporate...

  • Page 4
    ... by 81 per cent of frequent business travelers, an improvement of 12 percentage points over five years. Finally, our workplace health and safety record was recognized by Canadian Occupational Safety magazine in its annual Canada's Safest Employer Awards for 2013. Among other things, eligibility for...

  • Page 5
    ... between Calgary and Tokyo-Narita to offer daily departures. We also announced our intention to introduce seasonal, nonstop flights by Air Canada rougeâ„¢ from Toronto to Lisbon and Manchester and from Montreal to Barcelona and Nice in 2014. We also plan to offer a year-round service from Toronto to...

  • Page 6
    ... MD&A. Air Canada issued a news release dated February 12, 2014 reporting on its results for the fourth quarter and the full year 2013. This news release is available on Air Canada's website at www.aircanada.com and on SEDAR's website at www.sedar.com. For further information on Air Canada's public...

  • Page 7
    ...the highly competitive leisure market, with a strong value proposition and competitive cost structure, while benefiting from Air Canada's widely-recognized and respected brand, operational expertise, extensive global network, strong airport infrastructure and world-class loyalty program. Through Air...

  • Page 8
    ... incremental revenue. Key achievements in 2013 • Launched Air Canada rouge, the airline's new lower-cost leisure carrier. Introduced four new high-density Boeing 777 aircraft in a three-class configuration, including a premium economy cabin. Announced a mainline narrow-body fleet renewal plan...

  • Page 9
    ...in international leisure markets made viable by Air Canada rouge's lower cost structure. The introduction, in the first quarter of 2014, of the last of five new high-density Boeing 777 aircraft configured for high volume, leisure-oriented international routes. The introduction of Boeing 787 aircraft...

  • Page 10
    ..., combined with a greater number of seats, will allow for a much better unit cost performance - 29% below that of the Boeing 767 aircraft it will replace. Narrow-Body Fleet Renewal Program In December 2013, Air Canada announced an agreement with The Boeing Company ("Boeing") which includes firm...

  • Page 11
    ... from Toronto and Vancouver, and upgraded service between Calgary and Tokyo Narita to offer daily departures. Announced a major expansion of international services to Europe from Toronto, Montreal, Vancouver and Calgary, including from Toronto to Milan, the only non-stop service between Canada and...

  • Page 12
    ...the less cost efficient Boeing 767 aircraft, and will allow Air Canada to fly to new international destinations and return to or enter markets that were not feasible in the past. In 2014, Air Canada plans on expanding its international services to Europe from Toronto, Montreal, Vancouver and Calgary...

  • Page 13
    ...of Air Canada's Dreamliner aircraft in the Asian market and will feature the airline's new seating and cabin amenities. The new route will complement Air Canada's existing service to Tokyo Narita International Airport from Toronto, Calgary and Vancouver, which Air Canada will continue to offer. Both...

  • Page 14
    ... of Air Canada's employees in delivering its world class products and services. Key achievements in 2013 • "Best Airline in North America" by Global Traveler magazine, for a fifth consecutive year; "Best North American Airline for International Travel" and "Best North American Airline In-Flight...

  • Page 15
    ... seat selection and other exclusive special offers. This program, along with other attributes, such as the airline's expansive global network, International Business Class service, Maple Leaf Lounges and Aeroplan and Altitude loyalty programs, are designed to further boost Air Canada's leading...

  • Page 16
    ... financial results for the year ended December 31, 2013, the profit sharing program will pay out $31 million in early 2014. In addition, to further encourage employees to become owners of Air Canada, Air Canada employees have the ability to participate in the airline's Employee Share Ownership Plan...

  • Page 17
    ...2.5% full year 2013 ASM capacity growth projected in Air Canada's news release dated November 8, 2013. The lower than projected ASM capacity growth was due to minor adjustments in the flying schedule versus what Air Canada had assumed in its forecast. RASM growth of 0.6% from 2012, mainly reflecting...

  • Page 18
    ...due to the purchase of four Boeing 777 aircraft in 2013. The airline's adjusted net debt to EBITDAR (excluding benefit plan amendments) ratio was 3.0 at December 31, 2013 versus a ratio of 3.1 at December 31, 2012. Air Canada uses this ratio to manage its financial leverage risk and its objective is...

  • Page 19
    ... 2012. While operating cash flows improved year-over-year, which was consistent with the improvement in operating earnings, free cash flow was impacted by the addition of two Boeing 777-300ER aircraft delivered in the fourth quarter of 2013. Free cash flow (cash flows from operating activities less...

  • Page 20
    ... Air Canada for the full year of 2013 versus the full year of 2012. (Canadian dollars in millions, except per share figures) Operating revenues Passenger Cargo Other Total revenues Operating expenses Aircraft fuel Wages, salaries, and benefits Benefit plan amendments(1) Capacity purchase agreements...

  • Page 21
    ... region for 2013 and 2012. Passenger Revenue Canada U.S. transborder Atlantic Pacific Other System 2013 $ Million 4,237 2,176 2,263 1,618 727 11,021 2012 $ Million 4,178 2,130 2,114 1,568 747 10,737 $ Change 59 46 149 50 (20) 284 % Change 1.4 2.1 7.1 3.2 (2.7) 2.6 The table below provides year...

  • Page 22
    ... services with the exception of routes within Ontario and Quebec. While overall domestic market capacity increased starting in May 2013, regional competitive pressures mainly increased in the fourth quarter of 2013. Components of the year-over-year change in full year domestic passenger revenues...

  • Page 23
    ... capacity was reduced year-over-year. Air Canada benefits from increased traffic through its transatlantic revenue sharing joint venture with United Airlines and Lufthansa, referred to as A++. In addition, the successful launch of Air Canada rouge on July 1st, 2013 allowed the airline to capture...

  • Page 24
    ... from 2012 Other revenues consist primarily of revenues from the sale of the ground portion of vacation packages, ground handling services, and other airline-related services, as well as revenues related to the lease or sublease of aircraft to third parties. In 2013, Other revenues of $887 million...

  • Page 25
    ... benefit pension plans. In 2012, Air Canada recorded an operating expense reduction of $127 million related to changes to the terms of the ACPA collective agreement pertaining to retirement age. CASM Remove: Fuel expense, the cost of ground packages at Air Canada Vacations, benefit plan amendments...

  • Page 26
    ... and an increase in expense accruals related to the annual employee profit sharing programs. The growth in employment levels was mainly due to the increase in capacity and to a higher proportion of wide-body flying yearover-year. In 2013, employee benefits expense of $543 million increased $57...

  • Page 27
    ... included one-time startup expenses related to the transfer of EMBRAER 175 aircraft to Sky Regional. The following table provides a breakdown of the more significant items included in Other expenses: Full Year (Canadian dollars in millions) Terminal handling Air Canada Vacations' land costs Building...

  • Page 28
    2013 Air Canada Annual Report Factors contributing to the year-over-year change in full year non-operating expense included: • Losses on foreign exchange, mainly related to U.S. denominated long-term debt, which amounted to $120 million in 2013 compared to gains of $106 million in 2012. The ...

  • Page 29
    ... results of Air Canada for the fourth quarter 2013 versus the fourth quarter of 2012. Fourth Quarter (Canadian dollars in millions, except per share figures) Operating revenues Passenger Cargo Other Total revenues Operating expenses Aircraft fuel Wages, salaries, and benefits Benefit plan amendments...

  • Page 30
    2013 Air Canada Annual Report System passenger revenues increased 1.9% from the fourth quarter of 2012 In the fourth quarter of 2013, on capacity growth of 3.5%, system passenger revenues of $2,560 million increased $47 million or 1.9% from 2012 fourth quarter system passenger revenues of $2,513 ...

  • Page 31
    ... capacity increases on transcontinental routes, linking Toronto, Montreal and Ottawa with major western Canadian cities, and on routes within western Canada and to the Maritimes. Components of the year-over-year change in fourth quarter domestic passenger revenues included: • The 2.6% traffic...

  • Page 32
    2013 Air Canada Annual Report The table below provides year-over-year percentage changes in U.S. transborder passenger revenues and operating statistics for the fourth quarter 2013 and each of the previous four quarters. U.S. Transborder Passenger revenues Capacity (ASMs) Traffic (RPMs) Passenger ...

  • Page 33
    2013 Management's Discussion and Analysis Components of the year-over-year change in fourth quarter Atlantic passenger revenues included: • The 1.7% traffic increase which reflected traffic growth on all major Atlantic services with the exception of certain services to the United Kingdom which ...

  • Page 34
    ...11.1 In the fourth quarter of 2013, capacity growth on routes to traditional sun destinations was largely offset by a capacity reduction on services to South America. Components of the year-over-year change in fourth quarter Other passenger revenues included: • The overall 6.5% yield improvement...

  • Page 35
    ... from the fourth quarter of 2012, mainly due to traffic growth of 4.3% as yield declined 2.9% year-over-year. The table below provides cargo revenue by geographic region for the fourth quarter of 2013 and the fourth quarter of 2012. Cargo Revenue Canada U.S. transborder Atlantic Pacific Other System...

  • Page 36
    ... at Air Canada Vacations and an increase in passenger and airline-related fees. These increases were largely offset by a decrease in aircraft sublease revenues, in part due to the expiry of certain Airbus A340 subleases, when compared to the fourth quarter of 2012. CASM (excluding benefit plan...

  • Page 37
    ... the annual employee profit sharing programs as well as higher average salaries. In the fourth quarter of 2013, employee benefits expense of $122 million increased $13 million or 12% from the fourth quarter of 2012, mainly due to the impact of lower discount rates which increase the service cost of...

  • Page 38
    ... in Other expenses: Fourth Quarter (Canadian dollars in millions) Air Canada Vacations' land costs Terminal handling Building rent and maintenance Crew cycle Miscellaneous fees and services Remaining other expenses Other operating expenses $ $ Change $ $ 9 6 2 1 (5) (8) $ 5 2013 66 48 34 30 28 103...

  • Page 39
    ... to aircraft delivery. A decrease in net financing expense relating to employee benefits of $19 million which was mainly due to the impact of lower pension liabilities. Gains related to fair value adjustments on financial instruments which amounted to $22 million in the fourth quarter of 2013 versus...

  • Page 40
    ... 31, 2013 (refer to the Air Canada Express section below for information on the fleet of aircraft operated by regional airlines operating flights on behalf of Air Canada under capacity purchase agreements with Air Canada). Number of Operating Aircraf Owned - Special Purpose Entities(1) Total Seats...

  • Page 41
    ... 31, 2013 Fleet Changes 2014 Fleet Changes 2015 Fleet Changes 2016 Mainline Boeing 787-8 Boeing 787-9 Boeing 777-300 Boeing 777-200 Boeing 767-300 Boeing 737 MAX Airbus A330-300 Airbus A321(1) Airbus A320(1) Airbus A319 EMBRAER 190 Total Mainline Air Canada rouge Boeing 767-300 Airbus A319 Total Air...

  • Page 42
    ... Total 15 25 16 34 26 26 17 159 The following table provides, as at December 31, 2014, the number of aircraft planned to be operated by Jazz, Sky Regional and other airlines operating flights on behalf of Air Canada under the Air Canada Express banner pursuant to capacity purchase agreements with...

  • Page 43
    ... revenues at December 31, 2012. 9.2. Financial Position The following table provides a condensed consolidated statement of financial position of Air Canada as at December 31, 2013 and as at December 31, 2012. (Canadian dollars in millions) Assets Cash, cash equivalents and short-term investments...

  • Page 44
    ...The increase was mainly due to the proceeds received under the private offering of new senior secured notes and a new senior secured credit facility, net of the repayment of the existing senior secured notes. In addition, Air Canada took delivery of four Boeing 777-300ER aircraft which were financed...

  • Page 45
    ...-term debt and finance lease obligations Issue of common shares, net Shares purchased for cancellation Other Net cash flows from (used in) financing activities Short-term investments Additions to property, equipment and intangible assets Proceeds from sale of assets Other Net cash flows from (used...

  • Page 46
    ... from the business after investing in capital assets, which is available to meet ongoing financial obligations, including repaying debt and reinvesting in Air Canada. Free cash flow Free cash flow declined $255 million in the fourth quarter of 2013 and $430 million in the full year 2013 compared to...

  • Page 47
    ... to certain conditions, Air Canada has purchase rights for 13 Boeing 777 aircraft (entitling Air Canada to purchase aircraft based on previously determined pricing). In December 2013, as part of the airline's narrow-body fleet renewal plan, Air Canada announced an agreement with Boeing, which is...

  • Page 48
    ...Annual Report The discount rate used to value the pension obligations is determined pursuant to guidance of the Canadian Institute of Actuaries. The discount rate used at January 1, 2013 was 3.0%. Air Canada applied a prescribed discount rate of 3.9% at January 1, 2014. Every 10 basis points change...

  • Page 49
    2013 Management's Discussion and Analysis Giving effect to the Air Canada 2009 Pension Regulations as outlined above, total employer pension funding contributions during 2013 amounted to $475 million. (Canadian dollars in millions) Past service domestic registered plans Current service domestic ...

  • Page 50
    ...of certain credit card processing services requirements for markets other than North America and for its cargo operations worldwide where such agreements also contain deposit obligations. Ratings Air Canada's corporate credit and/or Air Canada's New Senior Notes are rated (as of the dates indicated...

  • Page 51
    ... 14, 2013, DBRS reaffirmed Air Canada's Issuer Rating of "B" with a stable trend. Ratings are intended to provide investors with an independent view of credit quality. However, they are not a recommendation to buy, sell or hold securities and may be subject to revision or withdrawal at any time by...

  • Page 52
    2013 Air Canada Annual Report 9.9. Share Information The issued and outstanding shares of Air Canada, along with shares potentially issuable, as of the dates indicated below, are as follows: Number of Shares at January 31, 2014 Issued and outstanding shares Class A variable voting shares Class B ...

  • Page 53
    ... of $127 million related to changes to the terms of the ACPA collective agreement pertaining to retirement age. In the third quarter of 2013, Air Canada recorded an interest charge of $95 million related to the purchase of its senior secured notes which were to become due in 2015 and 2016. In the...

  • Page 54
    ... million related to changes to the terms of the ACPA collective agreement pertaining to retirement age. Adjusted CASM is a non-GAAP financial measure. Refer to section 20 "Non-GAAP Financial Measures" of this MD&A for additional information. Includes fuel handling expenses. Economic fuel price per...

  • Page 55
    2013 Management's Discussion and Analysis 11. SELECTED ANNUAL INFORMATION The following table provides selected annual information for Air Canada for the years 2011 through to 2013. Full Year (Canadian dollars in millions, except per share figures) Operating revenues Operating expenses(2) Operating...

  • Page 56
    ... value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Air Canada enters into both fixed and floating rate debt and leases certain assets where the rental amount fluctuates based on changes in short-term interest rates. Air Canada manages...

  • Page 57
    ... cash equivalents and Short-term investments, which are classified as held for trading. Interest expense reflected on the consolidated statement of operations relates to financial liabilities recorded at amortized cost. Foreign Exchange Risk Air Canada's financial results are reported in Canadian...

  • Page 58
    ...regular reviews to adjust the strategy in light of market conditions. In 2013: • Air Canada recorded a loss of $6 million in Loss on financial instruments recorded at fair value on Air Canada's consolidated statement of operations related to fuel derivatives ($43 million loss in 2012). Air Canada...

  • Page 59
    ... and related liabilities of Air Canada's employee future benefits. Financial Assumptions Discount Rate The discount rate used to determine the pension obligation was determined by reference to market interest rates on corporate bonds rated "AA" or better with cash flows that approximate the timing...

  • Page 60
    2013 Air Canada Annual Report Actuarial assumptions Mortality rates The cost and related liabilities of Air Canada's pension plans and other post-retirement and post-employment benefit programs are determined using actuarial valuations. The actuarial valuations include several economic and ...

  • Page 61
    ... cash flows (cash-generating units or CGUs). Management has determined that the appropriate level for assessing impairments in accordance with IFRS is at the North American and international fleet levels for aircraft and related assets supporting the operating fleet. Parked aircraft not used...

  • Page 62
    2013 Air Canada Annual Report 14. ACCOUNTING POLICIES The following is an overview of accounting standard changes that Air Canada will be required to adopt in future years. The Corporation does not expect to adopt any of these standards before their effective dates. The Corporation continues to ...

  • Page 63
    ... Canada under IFRS 10 Consolidated Financial Statements is approximately $394 million as at December 31, 2013 (December 31, 2012 - $390 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...

  • Page 64
    2013 Air Canada Annual Report When Air Canada, as a customer, enters into technical service agreements with service providers, primarily service providers who operate an airline as their main business, Air Canada has from time to time agreed to indemnify the service provider against certain ...

  • Page 65
    ...and Analysis 16. RELATED PARTY TRANSACTIONS At December 31, 2013, Air Canada had no transactions with related parties as defined in the CICA Handbook - Part 1, except those pertaining to transactions with key management personnel in the ordinary course of their employment or directorship agreements...

  • Page 66
    ... following table describes, on an indicative basis, the financial impact that changes in certain assumptions would generally have had on Air Canada's operating results. These guidelines were derived from 2013 levels of activity and make use of management estimates. The impacts are not additive, do...

  • Page 67
    ... Air Canada faces a number of challenges in its business, including in relation to economic conditions, foreign exchange rates, labour issues, volatile fuel prices, contractual covenants (which require Air Canada to maintain minimum cash reserves and which could require Air Canada to deposit cash...

  • Page 68
    ... 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 2013 volumes, management estimates that...

  • Page 69
    ... and financial condition. Most of Air Canada's employees are unionized. In 2011, tentative collective agreements with the CAW, the union representing Air Canada's customer service employees at airports and call centres, as well as with CUPE, the union representing Air Canada's flight attendants...

  • Page 70
    ... prevalence of low-cost carriers, Internet travel websites and other travel products distribution channels, have resulted in a substantial increase in discounted and promotional fares initiated by Air Canada's competitors. A decision to match competitors' fares to maintain passenger traffic results...

  • Page 71
    ... the low-cost market (including the launch and planned growth of Air Canada rouge), the aircraft fleet restructuring (including the scheduled delivery of Boeing 787 aircraft and the planned re-fleeting of narrow-body aircraft with Boeing 737 MAX aircraft), business processes, information technology...

  • Page 72
    ..., its business, results from operations and financial condition. Aeroplan® Through its commercial agreement with Aeroplan, Air Canada is able to offer its customers who are Aeroplan® members the opportunity to earn Aeroplan® Miles. Based on customer surveys, management believes that rewarding...

  • Page 73
    ... in Service Air Canada's business is significantly dependent upon its ability to operate without interruption at a number of hub airports, including Toronto Pearson International Airport. Delays or disruptions in service, including those due to security or other incidents, weather conditions, labour...

  • Page 74
    ... by or on behalf of Air Canada or an aircraft of another carrier receiving line maintenance services from Air Canada may significantly harm Air Canada's reputation for safety, which would have a material adverse effect on Air Canada, its business, results from operations and financial condition. 74

  • Page 75
    ...or termination of these agreements and could adversely affect Air Canada and its international operations. Air Canada is subject to domestic and foreign laws regarding privacy of passenger and employee data, including advance passenger information and access to airline reservation systems, which are...

  • Page 76
    ... to seek such coverage. Air Canada estimates that such coverage would cost Air Canada approximately US$2.5 million per year. Alternative solutions, such as those envisioned by the ICAO and the International Air Transport Association ("IATA"), have not developed as planned, due to actions taken by...

  • Page 77
    ...design of internal controls over financial reporting. The Corporation's Audit, Finance and Risk Committee reviewed this MD&A and the audited consolidated financial statements, and the Corporation's Board of Directors approved these documents prior to their release. Management's Report on Disclosure...

  • Page 78
    ...benefit pension plans. In 2012, Air Canada recorded an operating expense reduction of $127 million related to changes to the terms of the ACPA collective agreement pertaining to retirement age. EBITDAR EBITDAR (earnings before interest, taxes, depreciation, amortization and impairment, and aircraft...

  • Page 79
    ... presented by other public companies. Adjusted CASM is reconciled to GAAP operating expense as follows: (Canadian dollars in millions, except where indicated) GAAP operating expense Adjusted for: Aircraft fuel Cost of ground packages at Air Canada Vacations Benefit plan amendments(1) Impairment...

  • Page 80
    ..., related to Air Canada's commitment under an employee separation program. The following reflects the share amounts used in the computation of basic and diluted earnings per share on an adjusted net income per share basis: Fourth Quarter 2013 Weighted average number of shares outstanding - basic...

  • Page 81
    ... long-term debt, average finance lease obligations, the value of capitalized operating leases (calculated by multiplying annualized aircraft rent expense by 7) and the average market capitalization of Air Canada's outstanding shares. This measure is not a recognized measure for financial statement...

  • Page 82
    ... the total number of seats available for passengers by the miles flown. CASM - Refers to operating expense per ASM. CUPE - Refers to the Canadian Union of Public Employees. Domestic passenger and cargo revenues - Refer to revenues from flights within Canada. EBITDAR - Refers to earnings before...

  • Page 83
    2013 Management's Discussion and Analysis Revenue Passenger Miles or RPMs - Refers to a measure of passenger traffic calculated by multiplying the total number of revenue passengers carried by the miles they are carried. Revenue Ton Miles or RTMs - Refers to the mathematical product of weight in ...

  • Page 84
    ... financial statements, management's discussion and analysis and annual report disclosures prior to their release. The Audit, Finance and Risk Committee meets with management, the internal auditors and external auditors at least four times each year to review and discuss financial reporting issues...

  • Page 85
    ..., statement of changes in equity and statement of cash flow for the years ended December 31, 2013 and December 31, 2012, and the related notes, which comprise a summary of significant accounting policies and other explanatory information. Management's responsibility for the consolidated financial...

  • Page 86
    2013 Air Canada Annual Report CONSOLIDATED STATEMENT OF FINANCIAL POSITION (Canadian dollars in millions) ASSETS Current Cash and cash equivalents Short-term investments Total cash, cash equivalents and short-term investments Restricted cash Accounts receivable Aircraft fuel inventory Spare parts ...

  • Page 87
    2013 Consolidated Financial Statements and Notes CONSOLIDATED STATEMENT OF OPERATIONS For the year ended December 31 (Canadian dollars in millions except per share figures) Operating revenues Passenger Cargo Other Total revenues Operating expenses Aircraft fuel Wages, salaries and benefits Benefit ...

  • Page 88
    2013 Air Canada Annual Report CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME For the year ended December 31 (Canadian dollars in millions) Comprehensive income Net income (loss) Other comprehensive income, net of taxes of nil: Remeasurements on employee benefit liabilities Total comprehensive ...

  • Page 89
    ... Issue of common shares, net Shares purchased for cancellation Distributions related to aircraft special purpose leasing entities Other Net cash flows from (used in) financing activities Investing Short-term investments Additions to property, equipment and intangible assets Proceeds from sale...

  • Page 90
    ...America, South Pacific, Australia and Asia) by developing, marketing and distributing vacation travel packages. Air Canada Vacations also offers cruise packages in North America, Europe and the Caribbean. Air Canada rouge launched its operations on July 1, 2013 with a start-up fleet of four aircraft...

  • Page 91
    ...in relation to the acquisition of five Boeing 777 aircraft, four of which were delivered in 2013. The Corporation has concluded that it controls these entities because the lease or other agreements with these structured entities give Air Canada the power to control the principal economic decision on...

  • Page 92
    ... during which the travel pass is valid. The Corporation has formed alliances with other airlines encompassing loyalty program participation, interline agreements and code sharing and coordination of services including reservations, baggage handling and flight schedules. Revenues are allocated based...

  • Page 93
    ... 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...

  • Page 94
    ...of operations Year ended December 31 2013 Increase in: Wages, salaries, and benefits Benefit plan amendments Net financing expense relating to employee benefits Decrease in net income Decrease in net income after accounting change attributable to: Shareholders of Air Canada Non-controlling interests...

  • Page 95
    ... the Board of Directors based on factors such as the remaining number of shares authorized for issuance under the Long-Term Incentive Plan as described in Note 14, for Air Canada shares, or the cash equivalent. The options and PSUs granted contain both time and performance based vesting features as...

  • Page 96
    ... in Other operating expenses are expenses related to building rent and maintenance, airport terminal handling costs, professional fees and services, crew meals and hotels, advertising and promotion, insurance costs, ground costs for Air Canada Vacations packages, and other expenses. Other operating...

  • Page 97
    ... statement of financial position at fair value in Prepaid expenses and other current assets, Deposits and other assets, Accounts payable and accrued liabilities, or Other long-term liabilities based on the terms of the contractual agreements. All cash flows associated with purchasing and selling...

  • Page 98
    2013 Air Canada Annual Report Deferred income tax is recognized, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, deferred tax liabilities are not recognized if ...

  • Page 99
    ... 50 years or the term of any related lease, whichever is less. Leasehold improvements are amortized over the lesser of the lease term or 5 years. Ground and other equipment is depreciated over 3 to 25 years. Residual values and useful lives are reviewed at least annually and depreciation rates are...

  • Page 100
    ... used in the selling and promotion of Air Canada's products and services. The Trade Names create brand recognition with customers and potential customers and are capable of contributing to cash flows for an indefinite period of time. Air Canada intends to continuously re-invest and market the Trade...

  • Page 101
    ... Officer. Air Canada is managed as one operating segment based on how financial information is produced internally for the purposes of making operating decisions. EE) ACCOUNTING STANDARDS ADOPTED ON JANUARY 1, 2013 In addition to the adoption of the accounting standard changes for IAS 19 - Employee...

  • Page 102
    ... collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortized cost at the end of subsequent accounting periods. All other financial assets including equity investments are...

  • Page 103
    2013 Consolidated Financial Statements and Notes IFRS 9 was amended in November 2013, to (i) include guidance on hedge accounting, (ii) allow entities to early adopt the requirement to recognize changes in fair value attributable to changes in an entity's own credit risk, from financial liabilities...

  • Page 104
    ... asset's or cash-generating unit's fair value less costs to sell and its value in use. Value in use is calculated based upon a discounted cash flow analysis, which requires management to make a number of significant assumptions including assumptions relating to future operating plans, discount rates...

  • Page 105
    2013 Consolidated Financial Statements and Notes 4. PROPERTY AND EQUIPMENT Aircraft and flight equipment Buildings, and leasehold improvements Ground and other equipment Purchase deposits, including capitalized interest $ 96 282 (54) - - $ 324 $ $ Total Year ended December 31, 2012 At January 1,...

  • Page 106
    ...units has been measured based on their value in use, using a discounted cash flow model. Cash flow projections are based on the annual business plan approved by the Board of Directors of Air Canada. In addition, management-developed projections are made covering a three-year period. These cash flows...

  • Page 107
    ...-tax discount rate Long-term growth rate Jet fuel price range per barrel 15.6% 2.5% $125 - $135 The recoverable amount of both cash-generating units based on value in use exceeded their respective carrying values by approximately $1,400. If the discount rate were increased by 380 basis points, the...

  • Page 108
    ..., goodwill is tested for impairment using the fair value less cost to sell model at the operating segment level. Air Canada is managed as one operating segment based on how financial information is produced internally for the purposes of making operating decisions. In assessing the goodwill for...

  • Page 109
    ... Financial Statements and Notes 7. DEPOSITS AND OTHER ASSETS 2013 2012 $ 188 105 50 72 10 29 25 31 $ 510 Restricted cash Aircraft related deposits (a) Aircraft lease payments in excess of rent expense Prepayments under maintenance agreements Share forward contracts Deposit related to the pension...

  • Page 110
    ...-Import Bank of the United States ("EXIM"). On May 9, 2013, in connection with the financing of five new Boeing 777-300ER aircraft, four of which were delivered in 2013, with the remaining aircraft scheduled for delivery in February 2014, Air Canada completed a private offering of three tranches of...

  • Page 111
    2013 Consolidated Financial Statements and Notes The equipment notes issued are secured by each of the five Boeing 777-300ER aircraft being acquired, and the security interest in each of the aircraft benefits from the protections of the Cape Town Convention on International Interests in Mobile ...

  • Page 112
    ...Air Canada Annual Report (c) Other US dollar secured financings are fixed and floating rate financings that are secured by certain assets including assets described in b) above relating to the New Credit Facility. It also includes a revolving credit facility for the financing of jet fuel. Financial...

  • Page 113
    ... reports for current service (including the applicable discount rate used or assumed in the actuarial valuation), the plan demographics at the valuation date, the existing plan provisions, existing pension legislation and changes in economic conditions (mainly the return on fund assets and changes...

  • Page 114
    ... agreements provisions which would have employees contribute fifty per cent of their pension plan normal costs, and has agreed not to implement pension plan benefit improvements without regulatory approval. Giving effect to the Air Canada 2009 Pension Regulations as outlined above, total employer...

  • Page 115
    ... table presents financial information related to the changes in the pension and other post-employment benefits plans: Pension Benefits 2013 Change in benefit obligation Benefit obligation at beginning of year Current service cost Interest cost Employees' contributions Benefits paid Remeasurements...

  • Page 116
    ... Air Canada Annual Report Pension and Other Employee Future Benefit Expense The Corporation has recorded net defined benefit pension and other employee future benefits expense as follows: Pension Benefits 2013 Consolidated Statement of Operations Components of cost Current service cost Past service...

  • Page 117
    ... a quoted market price in an active market are mainly investments in privately held entities. Included in plan assets, for determining the net benefit obligation for accounting purposes, are 17,647,059 Class B Voting Shares of Air Canada with a fair value of $131 (2012 - $31) which were issued in...

  • Page 118
    ... related liabilities of the Corporation's employee future benefits. Financial assumptions Discount Rate The discount rate used to determine the pension obligation was determined by reference to market interest rates on corporate bonds rated "AA" or better with cash flows that approximate the timing...

  • Page 119
    ... with the projected unit credit method at the end of the reporting period) has been applied as for calculating the liability recognized in the statement of financial position. Sensitivity analysis on 2013 pension expense and net financing expense relating to pension benefit liabilities, based...

  • Page 120
    ... to the provision for the costs to meet the contractual return conditions on aircraft under operating leases. The provision relates to leases with expiry dates ranging from 2014 to 2024 with the average remaining lease term of approximately four years. The maintenance provisions take into account...

  • Page 121
    2013 Consolidated Financial Statements and Notes 11. OTHER LONG-TERM LIABILITIES 2013 Proceeds from contractual commitments (a) Deferred income tax Collateral held in leasing arrangements and other deposits Aircraft rent in excess of lease payments Long-term employee liabilities Other Note 10(b) $ ...

  • Page 122
    ... Corporation's applicable tax rate is the Canadian combined rates applicable in the jurisdictions in which the Corporation operates. The income tax expense relating to components of Other comprehensive income is as follows: 2013 Net gain on remeasurements on employee benefit liabilities Recognition...

  • Page 123
    2013 Consolidated Financial Statements and Notes Deferred income tax assets are recognized to the extent that the realization of the related tax benefit is probable. The Corporation has unrecognized tax loss carryforwards of $1,404 and temporary differences of $5,290 for which no deferred income ...

  • Page 124
    2013 Air Canada Annual Report 13. SHARE CAPITAL Number of shares At January 1, 2012 Shares purchased and cancelled under issuer bid Expiration of warrants Shares in trust for employee recognition award At December 31, 2012 Shares issued on the exercise of stock options Shares issued on the exercise...

  • Page 125
    ... persons who are not Qualified Canadians would receive Class A Variable Voting Shares. The Rights Plan is scheduled to expire at the close of business on the date immediately following the date of Air Canada's annual meeting of shareholders to be held in 2014, unless terminated earlier in accordance...

  • Page 126
    ... vesting conditions are based on operating margin (operating income over operating revenues) targets established by the Air Canada Board over the same time period. Each option entitles the employee to purchase one ordinary share at the stated exercise price. The terms of the Long-term Incentive Plan...

  • Page 127
    ... the total number of completed months of active service during the PSU vesting term. The PSUs granted may only be redeemed for Air Canada shares purchased on the secondary market and/or equivalent cash at the discretion of the Board of Directors. The compensation expense related to PSUs in 2013 was...

  • Page 128
    2013 Air Canada Annual Report Refer to Note 17 for a description of derivative instruments used by the Corporation to mitigate the cash flow exposure to the PSUs granted. Employee Recognition Award In 2011, Air Canada's Board of Directors approved a special one-time Employee Recognition Award in ...

  • Page 129
    ... of the Employee Recognition Award. Excluded from the 2013 calculation of diluted earnings per share were 7,027,000 (2012 - 7,865,000) outstanding options where the options' exercise prices were greater than the average market price of the ordinary shares for the year. In 2012, 9,638,190 warrants...

  • Page 130
    2013 Air Canada Annual Report 16. COMMITMENTS Boeing As at December 31, 2013, the Corporation has outstanding purchase commitments with The Boeing Company ("Boeing") for the acquisition of 37 Boeing 787 aircraft. The first six deliveries are scheduled for 2014 and the remaining 31 between 2015 and ...

  • Page 131
    ... regional carriers is $109. The rates and mark-up under the Jazz CPA are subject to change based upon, amongst other things, changes in Jazz's costs and the level of flying contracted by Air Canada. Maturity Analysis Principal and interest repayment requirements as at December 31, 2013 on Long-term...

  • Page 132
    ... for 2014 is $218. The annual commitment is based on 85% of the average total Aeroplan Miles® actually issued in respect of Air Canada flights or Air Canada airline affiliate products and services in the three preceding calendar years. During 2013, the Corporation purchased $242 of Aeroplan Miles...

  • Page 133
    ... other assets Restricted cash Aircraft related and other deposits Prepayment option on senior secured notes Derivative instruments Fuel derivatives Share forward contracts Foreign exchange derivatives Interest rate swaps $ Financial Liabilities Accounts payable Current portion of long-term debt and...

  • Page 134
    2013 Air Canada Annual Report Risk Management Under its risk management policy, the Corporation manages its interest rate risk, foreign exchange risk, share-based compensation risk and market risk (e.g. fuel price risk) through the use of various interest rate, foreign exchange, fuel and other ...

  • Page 135
    ... entitles the employees to receive a payment in the form of one Air Canada ordinary share, cash in the amount equal to market value of one ordinary share, or a combination thereof, at the discretion of the Board of Directors. Share-based compensation risk refers to the risk that future cash flows to...

  • Page 136
    2013 Air Canada Annual Report Market Risks Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk comprises three types of risk: foreign exchange risk; interest rate risk; and other price risk, which...

  • Page 137
    ... Corporation reviews counterparty credit ratings on a regular basis and sets credit limits when deemed necessary. Fuel Price Risk Fuel price risk is the risk that future cash flows will fluctuate because of changes in jet fuel prices. In order to manage its exposure to jet fuel prices and to help...

  • Page 138
    ... reporting date using: Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) Significant unobservable inputs (Level 3) December 31, 2013 Recurring measurements Financial Assets Held-for-trading securities Cash equivalents Short-term investments...

  • Page 139
    ... the net impact would be on the consolidated statement of financial position if all set-off rights were exercised. Amounts offset Financial assets December 31, 2013 Derivative assets Accounts receivable $ December 31, 2012 Derivative assets Accounts receivable $ $ 39 154 193 $ $ - (91) (91) $ $ 39...

  • Page 140
    ... and the United States Department of Justice investigated, and the Competition Bureau in Canada is investigating, alleged anti-competitive cargo pricing activities, including the levying of certain fuel surcharges, of a number of airlines and cargo operators, including Air Canada. Competition...

  • Page 141
    ... under IFRS 10 Consolidated Financial Statements is approximately $394 as at December 31, 2013 (December 31, 2012 - $390), which is the Corporation'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...

  • Page 142
    ... of Aveos was returned to Air Canada. Following this, obligations under the other post-retirement and post-employment benefit plans pertaining to transferred unionized Aveos employees are no longer included in the Corporation's consolidated financial statements as at December 31, 2013. In 2012, OSFI...

  • Page 143
    ... refer to flights with origins and destinations principally in South America and the Caribbean. Other operating revenues are principally derived from customers located in Canada and consist primarily of revenues from the sale of the ground portion of vacation packages, ground handling services, and...

  • Page 144
    ...purchase versus lease decisions, defer or cancel aircraft expenditures by not exercising available options or selling current aircraft options, issuing debt or equity securities, and repurchasing outstanding shares, all subject to market conditions and the terms of the underlying agreements or other...

  • Page 145
    ... 22. RELATED PARTY TRANSACTIONS Compensation of Key Management Compensation of key management is reported on the accrual basis of accounting consistent with the amounts recognized on the consolidated statement of operations. Key management includes Air Canada's Board of Directors, President and...

  • Page 146
    ... Information Officer Senior Vice President, Regional Markets Senior Vice President and Chief Legal Officer Vice President, Air Canada Maintenance and Engineering Vice President, Airports, Call Centres and Customer Relations Vice President, Alliances and Regulatory Affairs Vice President, Network...

  • Page 147
    ... OR FRENCH, IT'S THE CLIENT'S CHOICE Official Languages at Air Canada For Air Canada, offering service in the language chosen by its customers is essential. Verbal exchanges with clients, public-address announcements at the airport and on board as well as briefing of passengers with special needs...

  • Page 148
    ... scheduled flights to 181 direct destinations on five continents, comprised of 60 Canadian cities, 54 destinations in the United States and a total of 67 cities in Europe, the Middle East, Asia, Australia, the Caribbean, Mexico and South America. In 2013, Air Canada carried 35.8 million passengers...