Air Canada 2013 Annual Report Download - page 67

2013 Management’s Discussion and Analysis
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18. RISK FACTORS
The risks described herein may not be the only risks faced by Air Canada. Other risks of which Air Canada is not aware or
which Air Canada currently deems to be immaterial may surface and have a material adverse impact on Air Canada, its
business, results from operations and financial condition.
Risks Relating to Air Canada
Operating Results
Air Canada has sustained significant losses in the past and Air Canada may sustain significant losses in the future. A variety of
factors, including economic conditions and other factors described in this Risk Factors section, may result in Air Canada
incurring significant losses. Despite ongoing strategic and business initiatives, including efforts at securing cost reductions,
revenue improvements as well as efforts relating to the launch of Air Canada rouge, Air Canada may not be able to
successfully achieve or sustain positive net profitability or realize the objectives of any or all of its initiatives, including those
which seek to decrease costs, improve yield or offset or mitigate risks facing Air Canada, including those relating to economic
conditions, foreign exchange rates, labour issues, liquidity, competition, and volatility in fuel costs and other expenses.
Leverage
Air Canada has, and is expected to continue to have and incur, a significant amount of indebtedness, including substantial
fixed obligations under aircraft leases and other financings (including the New Senior Notes and New Credit Facility, each
completed in 2013), and as a result of challenging economic or other conditions affecting Air Canada, Air Canada may incur
greater levels of indebtedness than currently exist. The amount of indebtedness that Air Canada currently has and which it
may incur in the future could have a material adverse effect on Air Canada, for example, by (i) limiting Air Canada’s ability to
obtain additional financing, (ii) requiring Air Canada to dedicate a substantial portion of its cash flow from operations to
payments on its indebtedness and fixed cost obligations, thereby reducing the funds available for other purposes, (iii) making
Air Canada more vulnerable to economic downturns, and (iv) limiting Air Canada’s flexibility in planning for, or reacting to,
competitive pressures or changes in its business environment.
The ability of Air Canada to make scheduled payments under its indebtedness will depend on, among other things, its future
operating performance and its ability to refinance its indebtedness, if necessary. In addition, as Air Canada incurs indebtedness
which bears interest at fluctuating interest rates, to the extent these interest rates increase, its interest expense will increase.
There can be no assurance that Air Canada will at all times be able to generate sufficient cash from its operations to pay its
debts and lease obligations. Each of these factors is, to a large extent, subject to economic, financial, competitive, regulatory,
operational and other factors, many of which are beyond Air Canada’s control.
Need for Additional Capital and Liquidity
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 collateral with third parties), and increased competition from international,
U.S. transborder and low-cost domestic carriers. Air Canada’s liquidity levels may be adversely impacted by these as well as by
other factors and risks identified in this MD&A. As part of Air Canada’s efforts to meet such challenges and to support
Air Canada’s business strategy, significant liquidity and significant on-going operating and capital expenditures are required.
There can be no assurance that Air Canada will continue to be able to obtain, on a timely basis, sufficient funds on terms
acceptable to Air Canada to provide adequate liquidity and to finance the operating and capital expenditures necessary to
overcome challenges and support its business strategy if cash flows from operations and cash on hand are insufficient.
Failure to generate additional funds, whether from operations or additional debt or equity financings, could require Air Canada
to delay or abandon some or all of its anticipated expenditures or to modify its business strategy and could have a material
adverse effect on Air Canada, its business, results from operations and financial condition. Furthermore, competitors with
greater liquidity or the ability to raise money more easily or on less onerous terms could represent a competitive disadvantage
to Air Canada.
Air Canada’s credit ratings influence its ability to access capital markets and improve its liquidity. There can be no assurance
that Air Canada’s credit ratings will not be downgraded, which would add to Air Canada’s borrowing costs, hamper its ability
to attract capital, adversely impact its liquidity, and limit its ability to operate its business, all of which could have a material
adverse effect on Air Canada, its business, results from operations and financial condition.