Air Canada 2013 Annual Report Download - page 136

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2013 Air Canada Annual Report
136
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
includes commodity price risk for jet fuel.
Sensitivity Analysis
The following table is a sensitivity analysis for each type of market risk relevant to the significant financial instruments
recorded by the Corporation as at December 31, 2013. The sensitivity analysis is based on a reasonably possible movement in
the relevant risk factor. These assumptions may not be representative of actual movements in these risks and should not be
relied upon. Given potential volatility in the financial and commodity markets, the actual percentage changes may differ
significantly from the percentage changes outlined below. Changes in income generally cannot be extrapolated because the
relationship of the change in assumption to the change in income may not be linear. Each risk is contemplated independent of
other risks. In reality, changes in one factor may result in changes in another, which may magnify or counteract the
sensitivities.
The sensitivity analysis related to derivative contracts is based on the estimated fair value change applicable to the derivative
as at December 31, 2013 considering a number of variables including the remaining term to maturity and does not consider
the fair value change that would be applicable to the derivative assuming the market risk change was applicable to the
maturity date of the derivative contract.
Interest
rate risk(1) Foreign exchange rate risk(2) Other price risk(3)
Income Income Income
1% increase 5% increase 5% decrease 10% increase 10% decrease
Cash and cash equivalents $ 7 $ (4) $ 4 $ – $ –
Short-term investments $ 15 $ (29) $ 29 $ – $ –
Aircraft related deposits $ – $ (3) $ 3 $ – $ –
Long-term debt and finance leases $ (10) $ 195 $ (195) $ – $ –
Fuel derivatives $ – $ – $ – $ 32 $ (17)
Share forward contracts – – – 6 (6)
Foreign exchange derivatives $ – $ (22) $ 24 $ – $ –
Interest rate swaps $ (3) $ – $ – $ – $ –
(1) Due Due to currently low market rates of interest, a 1% decrease in interest rates was not considered a reasonable scenario within the forecast period, being one year.
(2) Increase (decrease) in foreign exchange relates to a strengthening (weakening) of the Canadian dollar versus the U.S. dollar. The impact on long-term debt and finance
leases includes $6 related to the Canadian dollar versus the Japanese yen. The impact of changes in other currencies is not significant to the Corporation’s financial
instruments.
(3) The sensitivity analysis for fuel derivatives is based upon a 10% increase or decrease in the price of the underlying commodity. The sensitivity analysis for share forward
contracts is based upon a 10% increase or decrease in the Air Canada share price.
Covenants in Credit Card Agreements
The Corporation has various agreements with companies that process customer credit card transactions. Approximately 85%
of the Corporation’s sales are processed using credit cards, with remaining sales processed through cash or online banking
based transactions. The Corporation receives payment for a credit card sale generally in advance of when the passenger
transportation is provided.
The terms of the Corporation’s principal credit card processing agreements for credit card processing services in North
America are in effect for another four years each, and the agreements contain triggering events upon which the Corporation is
required to provide the credit card processor with cash deposits. The obligation to provide cash deposits and the required
amount of deposits are each based upon a matrix measuring, on a quarterly basis, both a fixed charge coverage ratio for the
Corporation and the unrestricted cash and short-term investments of the Corporation. In 2013, the Corporation made no cash
deposits under these agreements (nil in 2012).