Air Canada 2013 Annual Report Download - page 71

2013 Management’s Discussion and Analysis
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Airline Industry Characterized by Low Gross Profit Margins and High Fixed Costs
The airline industry is characterized by low gross profit margins and high fixed costs. The costs of operating any particular
flight do not vary significantly with the number of passengers carried and, therefore, a relatively small change in the number
of passengers or in fare pricing or traffic mix would have a significant effect on Air Canada’s operating and financial results.
This condition may be exacerbated by aggressive pricing by low-cost carriers, which can have the effect of driving down fares
in certain markets. Accordingly, a shortfall from expected revenue levels could have a material adverse effect on Air Canada,
its business, results from operations and financial condition. As a result of high fixed costs, should Air Canada be required to
reduce its overall capacity or the number of flights operated, it may not be able to successfully reduce certain fixed costs in
the short-term and may be required to incur important termination or other restructuring costs, which could have a material
adverse effect on Air Canada, its business, results from operations and financial condition.
Limitations Due to Restrictive Covenants
Some of the financing and other major agreements to which Air Canada is a party contain, and in the future may contain,
restrictive, financial (including in relation to asset valuations, liquidity, minimum EBITDAR results, fixed charge coverage ratio
and debt coverage ratios) and other covenants which affect and, in some cases, significantly limit or prohibit, among other
things, the manner in which Air Canada may structure or operate its business, including by reducing Air Canada’s liquidity,
limiting Air Canada’s ability to incur indebtedness, create liens, sell assets, pay dividends, make capital expenditures, and
engage in acquisitions, mergers or restructurings or a change of control. Future financing and other major agreements may
also be subject to similar covenants which limit Air Canada’s operating and financial flexibility, which could materially and
adversely affect Air Canada’s ability to operate its business and its profitability.
A failure by Air Canada to comply with its contractual obligations (including restrictive, financial and other covenants), or to
pay its indebtedness and fixed costs could result in a variety of material adverse consequences, including the acceleration of
its indebtedness, the withholding of credit card proceeds by the credit card service providers and the exercise of remedies by
its creditors, lessors or other co-contracting parties, and such defaults could trigger additional defaults under other
indebtedness or agreements. In such a situation, Air Canada may not be able to repay the accelerated indebtedness or fulfill its
obligations under certain contracts, make required aircraft lease payments or otherwise cover its fixed costs. Also, the lenders
under the financing arrangements could foreclose upon all or substantially all of the assets of Air Canada which secure
Air Canada’s obligations.
Refer to section 9.8 of this MD&A for information on Air Canada’s credit card processing agreements.
Strategic, Business, Technology and Other Important Initiatives
In order to operate its business, achieve its goals and remain competitive, Air Canada continuously seeks to identify and devise,
invest in, implement and pursue strategic, business, technology and other important initiatives, such as those relating to
participation in 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, revenue management (including the planned
implementation of Air Canada’s revenue management system), cost transformation, improving premium passenger revenues,
expansion of flying capacity (including in respect of new aircraft and routes), corporate culture transformation, initiatives
seeking to ensure a consistently high quality customer service experience and others. These initiatives, including activities
relating to their development and implementation, may be adversely impacted by a wide range of factors, many of which are
beyond Air Canada’s control. Such factors include the need to seek legal or regulatory approvals, the performance of third
parties, including suppliers, the implementation and integration of such initiatives into Air Canada’s other activities and
processes as well as the adoption and acceptance of these initiatives by Air Canada’s customers, suppliers, unions and
personnel. A delay or failure to sufficiently and successfully identify and devise, invest in or implement these initiatives could
adversely affect Air Canada’s ability to operate its business, achieve its goals and remain competitive and could have a
material adverse effect on Air Canada, its business, results from operations and financial condition.
For instance, a key component of Air Canada’s business plan is the acquisition of new and more efficient Boeing 787 and
Boeing 737 MAX aircraft. A delay or failure in the completion of Air Canada’s fleet restructuring, including delays by the
manufacturers in the delivery of the aircraft, or an inability to remove, as planned, certain aircraft from the fleet in
coordination with the planned entry into service of new aircraft, could adversely affect the implementation of Air Canada’s
business plan which may, in turn, have a material adverse effect on Air Canada, its business, results from operations and
financial condition.