Air Canada 2014 Annual Report Download

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ANNUAL REPORT
2014

Table of contents

  • Page 1
    ANNUAL REPORT 2014

  • Page 2
    ...information. Reï¬,ects FTE employees at Air Canada. Excludes FTE employees at third party carriers (such as Jazz and Sky Regional) operating under capacity purchase agreements with Air Canada. Average stage length is calculated by dividing the total number of available seat miles by the total number...

  • Page 3
    ...9.2. Financial Position 9.3. Adjusted Net Debt 9.4. Working Capital 9.5. Consolidated Cash Flow Movements 9.6. Capital Expenditures and Related Financing Arrangements 9.7. Pension Funding Obligations 9.8. Contractual Obligations 9.9. Share Information 10. Quarterly Financial Data 11. Selected Annual...

  • Page 4
    ...revenue climbing 7.1 per cent over 2013. As anticipated and planned, passenger yield on a stage length adjusted basis decreased 1.3 per cent, attributable to our strategy of profitably increasing long-haul international flying, particularly in the leisure market using incremental lower cost capacity...

  • Page 5
    ... strategy and our early success is witnessed by a 23 per cent increase in such traffic during the year. The ongoing expansion of our international network in 2014 saw the introduction of mainline service to Milan, Tokyo-Haneda, Rio de Janeiro and Panama City as well as new Air Canada rouge service...

  • Page 6
    ... 2014, Air Canada was ranked among the top five North America airlines in the FlightStats 2014 Airline On-time Performance Service Awards. Delivering superior customer service requires motivated employees, therefore we have made Culture Change another central priority. One effective way of advancing...

  • Page 7
    ...-looking statements due to a number of factors, including without limitation, industry, market, credit and economic conditions, the ability to reduce operating costs and secure financing, energy prices, currency exchange and interest rates, competition, employee and labour relations, pension issues...

  • Page 8
    ... opportunities in international leisure markets made viable by Air Canada rouge's 8 2014 Annual Report more competitive cost structure. Air Canada Vacations is a leading Canadian tour operator. Based in Montreal and Toronto, Air Canada Vacations operates its business in the outbound leisure travel...

  • Page 9
    ... Cargo is Canada's largest provider of air cargo services as measured by cargo capacity. Air cargo services are provided on domestic and U.S. transborder flights and on international flights on routes between Canada and major markets in Europe, Asia, South America and Australia. 2014 Management...

  • Page 10
    ... opportunities for profitable growth in international leisure markets. To date, Air Canada rouge has exceeded management expectations. Since its first flight in July 2013, Air Canada rouge has been deployed to a growing number of Caribbean destinations and select leisure destinations in the United...

  • Page 11
    ... in the leisure market. Air Canada has effectively lowered its CASM on leisure routes through increased seat density, lower wage rates, more efficient work rules, and reduced overhead costs. Air Canada rouge launched its operations in 2013 with four aircraft and by the end of 2014 its fleet grew to...

  • Page 12
    ... to Maple Leaf Lounges. These Aeroplan co-brand financial card partner agreements included the introduction of TD co-branded cards as well as the renewal of the American Express and CIBC card partnerships. To better monetize its ancillary offerings and increase related revenues, in August 2014, Air...

  • Page 13
    ... only Canadian network carrier operating between Canada and Panama • Introduced Air Canada rouge service from Montreal to Nice, Toronto Pearson to Lisbon and Toronto Pearson to Manchester • Converted the airline's routes from Vancouver to Shanghai and Vancouver to Toyko-Narita to 787 Dreamliner...

  • Page 14
    ... and redeem Aeroplan® Miles with Canada's leading coalition loyalty program • Competitive products and services, including lie-flat beds in the International Business Class cabin, concierge services and Maple Leaf® lounges • Geographically well-positioned hubs (Toronto, Montreal, Vancouver and...

  • Page 15
    ... in a transatlantic revenue sharing joint venture with United Airlines and Deutsche Lufthansa AG, referred to as A++. By coordinating pricing, scheduling and sales, Air Canada is better able to serve customers by offering more travel options, while reducing travel times. Air Canada is also achieving...

  • Page 16
    ... its expansive global network, International Business Class service, Maple Leaf Lounges, concierge service, and Aeroplan and Altitude loyalty programs, are designed to further boost Air Canada's leading position as the carrier of choice among Canadian business travellers. Air Canada Altitudeâ„¢, Air...

  • Page 17
    ... Canada and in the U.S., and the information collected will help remove roadblocks and enable employees to better do their jobs, with greater empowerment and decision-making capabilities. NEW GLOBAL OPERATIONS CENTRE IN TORONTO Air Canada opened its Global Operations Centre in January 2014. The new...

  • Page 18
    ... where employees around the world celebrated being named by Skytrax as "Best Airline in North America" for the fifth consecutive year, Boeing 787 events held in Montreal, Vancouver, Toronto and Calgary, and Family Days in those same cities. In October 2014, Air Canada concluded a 10-year collective...

  • Page 19
    ...be rewarded for their contributions and share in the financial success of the airline. Based on the financial results for the year ended December 31, 2014, the profit sharing program will pay out $46 million in early 2015, an increase of $15 million or 48% when compared to 2013. Air Canada employees...

  • Page 20
    ...of 7.8% from 2013, in line with the 7.0% to 8.0% full year 2014 ASM capacity growth projected in Air Canada's news release dated November 6, 2014. The capacity growth in 2014 was primarily driven by increased seat density from Air Canada rouge and the introduction of six Boeing 787 aircraft and five...

  • Page 21
    ... made to ACPA members pursuant to the ACPA collective agreement concluded in October 2014. In the fourth quarter of 2013, Air Canada recorded an operating expense reduction of $82 million related to amendments to defined benefit pension plans. Air Canada reported an operating margin of 3.4% compared...

  • Page 22
    ...Boeing 787-8 aircraft, as well as changes in non-cash working capital, particularly the timing of fuel payments when compared to the same quarter in 2013. Free cash flow (cash flows from operating activities less additions to property, equipment and intangible assets) is a non-GAAP financial measure...

  • Page 23
    ...2014 $ 11,804 $ CHANGE $ $ 783 2013 11,021 % 7 6 9 7 6 2 100 5 5 15 10 (6) 15 (2) 7 7 6 6 OPERATING REVENUES Passenger Cargo Other TOTAL REVENUES OPERATING EXPENSES Aircraft fuel Wages, salaries and benefits (1) Benefit plan amendments (2) Capacity purchase agreements Airport and navigation fees...

  • Page 24
    ... points, the impact of higher proportional growth of loweryielding international-to-international passenger flows in support of the airline's international expansion strategy, a higher proportion of seats into long-haul leisure markets, and the use of lower-cost Boeing 777 high-density aircraft...

  • Page 25
    ... percentage points, a higher proportion of seats into leisure-focused long-haul markets, additional Atlantic services being served with lower-cost Boeing 777 higher2014 Management's Discussion and Analysis 25 U.S. TRANSBORDER PASSENGER REVENUES INCREASED 9.4% FROM 2013 In 2014, on capacity growth...

  • Page 26
    ... to the airline's services to Hong Kong, Air Canada operates a lower-cost Boeing 777 higher-density aircraft on its Vancouver-Hong Kong route which has a larger economy cabin. The use of this lower-cost aircraft on high-volume routes, such as Vancouver-Hong Kong, is allowing the airline to access...

  • Page 27
    ...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 2014, Other revenues of $966 million increased $79 million or 9% from 2013 mainly due to higher ground package revenues at Air Canada...

  • Page 28
    ... (excluding the impact of benefit plan amendments) 1 In 2013, Air Canada recorded an operating expense reduction of $82 million related to amendments to defined benefit pension plans. CASM Remove: Fuel expense, ground package costs at Air Canada Vacations, benefit plan amendments and unusual items...

  • Page 29
    ...in 2013, and an increase in expense accruals related to the annual employee profit sharing programs. These increases were partly offset by the favourable impact of Air Canada having outsourced its London ground handling operations to a third party provider in 2014. In 2014, employee benefits expense...

  • Page 30
    ...sheet date, thus reducing maintenance expense in the period. These increases were partly offset by the impact of favourable terms and discounts negotiated on new maintenance service agreements. GROUND PACKAGE COSTS INCREASED 15% FROM 2013 In 2014, the cost of ground packages at Air Canada Vacations...

  • Page 31
    ... 12 "Financial Instruments and Risk Management" of this MD&A for additional information. • In 2013, Air Canada recorded a charge of $95 million in interest expense pertaining to the purchase of its senior secured notes due in 2015 and 2016, comprised of $61 million related to premium costs paid...

  • Page 32
    ...the fourth quarter 2014 versus the fourth quarter of 2013. 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 (2) Capacity purchase agreements Airport and...

  • Page 33
    ... natural consequence of the successful implementation of Air Canada's business strategy to profitably increase long-haul international and leisure flying. In the fourth quarter of 2014, system business cabin revenues increased $28 million or 5.0% from 2013 due to a yield improvement of 6.7% partly...

  • Page 34
    ... percentage points, higher proportional growth of lower-yielding international-to-international passenger flows in support of the airline's international expansion strategy, a higher proportion of seats into long-haul leisure markets, and the use of lower-cost Boeing 777 high-density aircraft which...

  • Page 35
    ...rouge flying allowing Air Canada to effectively compete on lower-yielding leisure routes. Additionally, the fourth quarter of 2014 experienced a higher proportion of lower-yielding incremental international-to-international passenger flows in support of the airline's international expansion strategy...

  • Page 36
    ... seats in long-haul leisure markets due to additional Atlantic services being served with lower-cost Boeing 777 higher-density aircraft which have a larger economy cabin, and new and increased lower-cost leisure flying by Air Canada rouge which offers a Premium rouge product but has no international...

  • Page 37
    ... decreases on services to Hong Kong and China. Air Canada operates a lower-cost Boeing 777 higher-density aircraft on its Vancouver-Hong Kong service which has a larger economy cabin. The use of this lower-cost aircraft on high-volume routes, such as Vancouver-Hong Kong, is allowing the airline to...

  • Page 38
    ... year-over-year change in fourth quarter Other passenger revenues included: • The overall 3.0% traffic increase which reflected traffic growth on routes to Mexico and to traditional sun destinations largely offset by a traffic decrease on services to South America where capacity was reduced year...

  • Page 39
    ... the fourth quarter of 2014, Other revenues of $216 million increased $10 million or 5% from the fourth quarter of 2013 mainly due to growth in passenger-related fees and higher ground package revenues at Air Canada Vacations, the result of higher passenger volumes. 2014 Management's Discussion and...

  • Page 40
    ... CASM Remove: Fuel expense, ground package costs at Air Canada Vacations, benefit plan amendments and unusual items (1)(2) Adjusted CASM (3) 1 In the fourth quarter of 2013, Air Canada recorded an operating expense reduction of $82 million related to amendments to defined benefit pension plans. 17...

  • Page 41
    ... model for new long-term disability claims. This increase was largely offset by the impact of higher discount rates which decreased the current service cost of defined benefit pension plans. CAPACITY PURCHASE COSTS INCREASED 5% FROM THE FOURTH QUARTER OF 2013 In the fourth quarter of 2014, capacity...

  • Page 42
    ... pursuant to a Canadian Transportation Agency ruling. An increase in terminal handling expenses of $10 million or 21% was due to Air Canada's international expansion, as well as the airline having outsourced its London ground handling operations to a third party provider in 2014 (the savings...

  • Page 43
    ... income Interest expense Interest capitalized Net financing expense relating to employee benefits Fuel and other derivatives Other TOTAL NON-OPERATING EXPENSE $ $ 2014 (115) 10 (83) 9 (32) 9 (4) (206) $ $ 2013 (55) 10 (73) 10 (53) 22 (2) (141) $ $ CHANGE $ (60) (10) (1) 21 (13) (2) (65) Factors...

  • Page 44
    ...31, 2014 (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 AIRCRAFT OWNED - SPECIAL PURPOSE ENTITIES (1) TOTAL SEATS...

  • Page 45
    ... purchase rights for two Boeing 777-300ER aircraft, with scheduled deliveries in the second quarter of 2016. The configuration of these aircraft will be high-density in a three-cabin configuration, including a premium economy cabin and an International Business Class cabin that will offer Air Canada...

  • Page 46
    ... at December 31, 2015, 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 Air Canada. On February 2, 2015, Air Canada announced that it had...

  • Page 47
    ... lines of credit was $315 million. 9.2. FINANCIAL POSITION The following table provides a condensed consolidated statement of financial position of Air Canada as at December 31, 2014 and as at December 31, 2013. CANADIAN DOLLARS IN MILLIONS ASSETS Cash, cash equivalents and short-term investments...

  • Page 48
    ... operating leases is used by Air Canada and may not be comparable to similar measures presented by other public companies. Aircraft rent was $313 million for the 12 months ended December 31, 2014 and $318 million for the 12 months ended December 31, 2013. At December 31, 2014, total long-term debt...

  • Page 49
    ... information on Air Canada's working capital balances as at December 31, 2014 and as at December 31, 2013. CANADIAN DOLLARS IN MILLIONS Cash, cash equivalents and short-term investments Accounts receivable Other current assets Accounts payable and accrued liabilities Advance ticket sales Current...

  • Page 50
    ... for Air Canada for the periods indicated: FOURTH QUARTER CANADIAN DOLLARS IN MILLIONS NET CASH FLOWS FROM OPERATING ACTIVITIES Proceeds from borrowings Reduction of long-term debt and finance lease obligations Issue of common shares, net Other NET CASH FLOWS FROM FINANCING ACTIVITIES Short-term...

  • Page 51
    ...the acquisition of 31 Boeing 787 aircraft. Deliveries for these aircraft are scheduled from 2015 to 2019. Air Canada also has purchase options for 13 Boeing 787 aircraft (entitling Air Canada to purchase aircraft based on previously determined pricing and delivery positions), and purchase rights for...

  • Page 52
    ...Canada's Canadian-based unions, to seek to include in those collective 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. 52 2014 Annual Report

  • Page 53
    ... 2015. In the event that Air Canada does not opt out and continues funding its domestic registered pension plans under the 2014 Regulations, Air Canada's projected pension funding obligations, on a cash basis, for the years 2015 to 2019 would be as follows: CANADIAN DOLLARS IN MILLIONS Past service...

  • Page 54
    ...short-term investments of Air Canada. In 2014, Air Canada made no cash deposits under these agreements (nil in 2013). Air Canada also has agreements with another processor for the provision of certain credit card processing services requirements for markets other than North America and for its cargo...

  • Page 55
    ... from positive DBRS Ratings On November 11, 2014, DBRS reaffirmed Air Canada's Issuer Rating of "B", and changed the trend to positive from stable. Ratings are intended to provide investors with an independent view of credit quality. They are not a recommendation to buy, sell or hold securities...

  • Page 56
    ...,256,759 286,489,294 Effective November 3, 2014, Air Canada's Class B voting shares and Class A variable voting shares are listed for trading on the Toronto Stock Exchange under the single ticker "AC". Earnings per Share The following reflects the share amounts used in the computation of basic and...

  • Page 57
    ... charge of $24 million related to Airbus A340-300 aircraft. 3 In the fourth quarter of 2013, Air Canada recorded an operating expense reduction of $82 million related to changes to early retirement provisions in Air Canada's defined benefit pension plans. 4 In the second quarter of 2014, Air Canada...

  • Page 58
    ... to changes to early retirement provisions in Air Canada's defined 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. 2 In 2014, one-time payments totaling...

  • Page 59
    ... assets on Air Canada's consolidated statement of financial condition. FUEL PRICE RISK MANAGEMENT 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 mitigate volatility in operating...

  • Page 60
    ... 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 61
    ... (2013 - $29 million) related to Cash and cash equivalents and Short-term investments, which are classified as held for trading. Interest expense reflected on Air Canada's consolidated statement of operations relates to financial liabilities recorded at amortized cost. 2014 Management's Discussion...

  • Page 62
    ... 2013 OTHER EMPLOYEE FUTURE BENEFITS 2014 2013 RATE OF FUTURE INCREASES IN COMPENSATION USED TO DETERMINE: 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...

  • Page 63
    ... care plans. A 5.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2014 (2013 - 6.0%). The rate is assumed to decrease to 5% by 2019. A one percentage point increase in assumed health care trend rates would have increased the total of current service...

  • Page 64
    ... international fleet levels for aircraft and related assets supporting the operating fleet. Parked aircraft not used in operations and aircraft leased or subleased to third parties are assessed for impairment at the individual asset level. Value in use is calculated based upon a discounted cash flow...

  • Page 65
    ... standard changes that Air Canada will be required to adopt in future years. Air Canada continues to evaluate the impact of these standards on its consolidated financial statements. financial assets that are held within a business model whose objective is to collect the contractual cash flows, and...

  • Page 66
    ..., changes of law and certain income, commodity and withholding tax consequences. 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...

  • Page 67
    ... such as through the use of foreign currency derivatives and holding U.S. dollar cash reserves. The gains and losses related to these hedging activities are recorded in non-operating income (expense) on Air Canada's consolidated statement of operations. 2014 Management's Discussion and Analysis 67

  • Page 68
    ... 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 69
    ... effect on Air Canada, its business, results from operations and financial condition. Due to the competitive nature of the airline industry and consumer sensitivity to travel costs, Air Canada may not be able to pass on increases in Canadian dollar costs to its customers by increasing its fares. In...

  • Page 70
    ...domestic, transborder or international markets could have a material adverse effect on Air Canada, its business, results from operations and financial condition. LABOUR COSTS AND LABOUR RELATIONS Labour costs constituted another one of Air Canada's largest operating cost items in 2014. There can be...

  • Page 71
    ...effect on Air Canada, its business, results from operations and financial condition. In respect of the unions for Canadianbased employees, strikes or lock-outs may lawfully occur following the term and negotiations of the renewal of collective agreements once a number of pre-conditions prescribed by...

  • Page 72
    ... 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 72 2014 Annual Report AIRPORT USER FEES AND AIR NAVIGATION FEES...

  • Page 73
    ... its network through capacity purchase agreements, including the Jazz CPA and other capacity purchase agreements with regional airlines, such as Sky Regional, operating flights on behalf of Air Canada. Under the Jazz CPA, Jazz provides Air Canada's customers service in lower density markets and...

  • Page 74
    ... in frequent flyer programs and use of airport lounges from the other members. Should a key member leave Star Alliance® or otherwise fail to meet its obligations thereunder, Air Canada, its business, results from operations and financial condition could be materially adversely affected. Department...

  • Page 75
    ... 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. RISKS RELATING TO THE AIRLINE INDUSTRY...

  • Page 76
    ...or the impact such global MBM may have on Air Canada, its business, results from operations and financial condition. The availability of international routes to Canadian air carriers is regulated by agreements between Canada and foreign governments. Changes in Canadian or foreign government aviation...

  • Page 77
    ... specific insurance be maintained, which may have a material adverse effect on Air Canada, its business, results from operations and financial condition. THIRD PARTY WAR RISK INSURANCE There is a risk that the Government of Canada may not continue to provide an indemnity for third party war risk...

  • Page 78
    ... 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 INTERNAL CONTROLS OVER FINANCIAL REPORTING...

  • Page 79
    ...Change $ 196 1 In 2013, Air Canada recorded an operating expense reduction of $82 million related to amendments to defined benefit pension plans. EBITDAR EBITDAR (earnings before interest, taxes, depreciation, amortization and impairment, and aircraft rent) is a non-GAAP financial measure commonly...

  • Page 80
    ...In 2014, one-time payments totaling $30 million were made to ACPA members under a collective agreement concluded in October 2014. In 2013, Air Canada recorded an operating expense reduction of $82 million related to amendments to defined benefit pension plans. In 2014, Air Canada recorded favourable...

  • Page 81
    ...In 2014, one-time payments totaling $30 million were made to ACPA members under a collective agreement concluded in October 2014. In 2013, Air Canada recorded an operating expense reduction of $82 million related to amendments to defined benefit pension plans. In 2014, Air Canada recorded favourable...

  • Page 82
    ...In 2014, one-time payments totaling $30 million were made to ACPA members under a collective agreement concluded in October 2014. In 2013, Air Canada recorded an operating expense reduction of $82 million related to changes to early retirement provisions in Air Canada's defined benefit pension plans...

  • Page 83
    ... average mile per departure seat and is calculated by dividing total ASMs by total seats dispatched. Boeing - Refers to The Boeing Company. CALDA - Refers to the Canadian Airline Dispatchers Association. CASM - Refers to operating expense per ASM. CAW - Refers to the Canadian Auto Workers Union, the...

  • Page 84
    ...'s estimate of its cost of capital, in which each category of capital is proportionately weighted. Yield - Refers to average passenger revenue per RPM (baggage fee revenues, which are included in passenger revenues, are removed for the purposes of calculating yield). 84 2014 Annual Report

  • Page 85
    2016 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES 2014 Consolidated 2014 Management's FinancialDiscussion Statements and and Analysis Notes 85

  • Page 86
    ...The Board of Directors approves the Corporation's consolidated 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...

  • Page 87
    ... performance and their cash flows for the years ended December 31, 2014 and December 31, 2013 in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board. 1 Montreal, Quebec February 10, 2015 1 CPA auditor, CA, public accountancy permit...

  • Page 88
    ... other assets TOTAL ASSETS LIABILITIES CURRENT Accounts payable and accrued liabilities Advance ticket sales Current portion of long-term debt and finance leases Total current liabilities Long-term debt and finance leases Pension and other benefit liabilities Maintenance provisions Other long-term...

  • Page 89
    ... 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 plan amendments Capacity purchase agreements Airport and navigation fees Aircraft maintenance Sales and...

  • Page 90
    ...OF CHANGES IN EQUITY CANADIAN DOLLARS IN MILLIONS January 1, 2013 Net income Remeasurements on employee benefit liabilities Total comprehensive income Share-based compensation Share units reclassed to equity settled (Note 2i) Repurchase of warrants (Note 13) Shares issued (Note 13) December 31, 2013...

  • Page 91
    ... Reduction of long-term debt and finance lease obligations Issue of common shares, net Other NET CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES INVESTING Short-term investments Additions to property, equipment and intangible assets Proceeds from sale of assets Other NET CASH FLOWS USED IN INVESTING...

  • Page 92
    ...-U.S. transborder routes are operated under the brand name "Air Canada Express" and operated by third parties such as Jazz Aviation LP ("Jazz") and Sky Regional Airlines Inc. ("Sky Regional") through capacity purchase agreements (each a "CPA"). Air Canada also offers scheduled passenger services on...

  • Page 93
    ... purchase agreements with Jazz, Sky Regional 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...

  • Page 94
    ... of the Corporation's 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...

  • Page 95
    ... value of estimated future cash flows. The carrying amount of the asset is reduced by the amount of the loss and the latter is recognized in the consolidated statement of operations. The Corporation enters into interest rate, foreign currency, fuel derivatives and share forward contracts to manage...

  • Page 96
    ... cash flows associated with purchasing and selling derivatives are classified as operating cash flows in the consolidated statement of cash flow. The Corporation has implemented the following classifications: • Cash and cash equivalents and Short-term investments are classified as held-for-trading...

  • Page 97
    ... governing advance ticket sales, as well as funds held in escrow accounts relating to Air Canada Vacations credit card booking transactions, recorded under Current liabilities, for certain travel related activities. Restricted cash with maturities greater than one year from the balance sheet date is...

  • Page 98
    ...collectively, "Trade Names"). These items are marketing based intangible assets as they are primarily 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...

  • Page 99
    ...body aircraft) fleet levels for aircraft and related assets supporting the operating fleet. Parked aircraft not used in operations and aircraft leased or subleased to third parties are assessed for impairment at the individual asset level. Value in use is calculated based upon a discounted cash flow...

  • Page 100
    ... identified as the Chief Executive Officer. Air Canada is managed as one operating segment based on how financial information is produced internally for the purposes of making operating decisions. DD. ACCOUNTING STANDARDS ADOPTED EFFECTIVE JANUARY 1, 2014 The Corporation has adopted the amendments...

  • Page 101
    ... 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 102
    ... GROUND AND OTHER EQUIPMENT PURCHASE DEPOSITS AND ASSETS UNDER DEVELOPMENT TOTAL During 2014, the Corporation took delivery of six Boeing 787 aircraft and one Boeing 777 aircraft. In 2014, the Corporation disposed of two A340-500 aircraft and repaid the financing related to these aircraft...

  • Page 103
    ... The recoverable amount of the cash-generating 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...

  • Page 104
    ... 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 impairment, the Corporation...

  • Page 105
    ... the aircraft benefits from the protections of the Cape Town Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters Specific to Aircraft Equipment, as enacted in Canada. (b) In September 2013, the Corporation completed private offerings of senior secured notes...

  • Page 106
    ... is a revolving credit facility for the financing of jet fuel. Financial covenants under the agreement require the Corporation to maintain certain minimum operating results and cash balances. (f) Finance leases, related to facilities and aircraft, total $283 ($73 and US$181) (2013 - $328 ($76...

  • Page 107
    ... the defined benefit pension plans, determined in accordance with new collective agreements during 2011 and 2012 and changes applicable to non-unionized employees as communicated to them in 2013, were approved by OSFI and became effective January 1, 2014. 2014 Consolidated Financial Statements and...

  • Page 108
    ... Corporation would transfer to the Aeroplan defined pension plan all the pension plan assets and obligations related to pension benefits accrued by certain Air Canada employees who chose to transition to employment at Aeroplan in 2009. The Corporation continued to retain plan assets and report plan...

  • Page 109
    ... table presents financial information related to the changes in the pension and other postemployment benefits plans: PENSION BENEFITS 2014 CHANGE IN BENEFIT OBLIGATION Benefit obligation at beginning of year Current service cost Past service cost Interest cost Employees' contributions Benefits paid...

  • Page 110
    ...(2013 - 13.3 years). 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 2014 CONSOLIDATED STATEMENT OF OPERATIONS Components of cost Current service cost Past service cost...

  • Page 111
    ... benefit obligation for accounting purposes, are 17,647,059 Class B Voting Shares of Air Canada with a fair value of $209 (2013 - $131) which were issued in 2009 in connection with pension funding agreements reached with all of the Corporation's Canadian-based unions. All future net proceeds of sale...

  • Page 112
    ... pension obligation was determined by reference to market interest rates on corporate bonds rated "AA" or better with cash flows that approximate the timing and amount of expected benefit payments. Future increases in compensation are based upon the current compensation policies, labour agreements...

  • Page 113
    ...plans. A 5.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2014 (2013 - 6%). The rate is assumed to decrease gradually to 5% by 2019. A one percentage point increase in assumed health care trend rates would have increased the total of current service...

  • Page 114
    ...contractual return conditions on aircraft under operating leases. The provision relates to leases with expiry dates ranging from 2015 to 2024 with the average remaining lease term of approximately four years. The maintenance provisions take into account current costs of maintenance events, estimates...

  • Page 115
    ... tax rate is 26.81% (2013 - 26.57%). The Corporation's applicable tax rate is the Canadian combined rates applicable in the jurisdictions in which the Corporation operates. The increase is mainly due to changes in the level of activity by province. 2014 Consolidated Financial Statements and...

  • Page 116
    The income tax expense relating to components of Other comprehensive income is as follows: 2014 Net gain on remeasurements on employee benefit liabilities Recognition of previously unrecognized deferred income tax assets Tax rate changes on deferred income taxes INCOME TAX EXPENSE IN OTHER ...

  • Page 117
    ... 31, 2013 Shares issued on the exercise of stock options Shares in trust for employee recognition award AT DECEMBER 31, 2014 274,443,803 2,064,264 7,916,667 107,705 284,532,439 619,478 1,337,377 286,489,294 VALUE $ 813 4 12 (2) 827 2 6 $ 835 The issued and outstanding common shares of Air Canada...

  • Page 118
    ... expiring July 30, 2013 for an aggregate purchase price of $2, representing the average trading price, at the time of purchase, of Air Canada shares on the Toronto Stock Exchange less the exercise price of $1.51 of each warrant. In addition, the outstanding number of common shares increased by 7,916...

  • Page 119
    ...to purchase one common share at the stated exercise price. The terms of the Long-term Incentive Plan specify that following retirement an employee may exercise options granted with the rights to exercise continuing for the three years after the retirement date. The number of Air Canada stock options...

  • Page 120
    ... 442,500 - 577,828 346,112 - 1,609,601 WEIGHTED AVERAGE EXERCISE PRICE/ SHARE $ 14.71 8.51 1.30 - 2.34 1.00 - $ 3.61 RANGE OF EXERCISE PRICES $11.08 - 18.60 $8.51 $0.97 - $1.59 $1.78 - $1.91 $2.34 $0.96 - $1.28 $2.49 - $5.69 EXPIRY DATES 2014 2015 2016 2017 2018 2019 2020 120 2014 Annual Report

  • Page 121
    ... 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 and RSUs in 2014 was $8 (2013 - $12). A summary of the Long-term Incentive Plan share unit activity is as follows...

  • Page 122
    ... trust for the Employee Recognition Award vested in 2014. Excluded from the 2014 calculation of diluted EPS were 2,680,000 (2013 - 7,027,000) outstanding options where the options' exercise prices were greater than the average market price of the common shares for the year. 122 2014 Annual Report

  • Page 123
    ... acquisition of 31 Boeing 787 aircraft. Deliveries for these aircraft are scheduled from 2015 to 2019. The Corporation also has purchase options for 13 Boeing 787 aircraft (entitling Air Canada to purchase aircraft based on previously determined pricing and delivery positions), and purchase rights...

  • Page 124
    ... rates. 2015 Subleases $ 6 2016 $ 1 2017 $ 1 2018 $ 1 2019 $ THEREAFTER $ TOTAL $ 9 Flow-through Leases For accounting purposes, the Corporation acts as an agent and subleases certain aircraft to Jazz on a flow-through basis, which are reported net on the consolidated statement of operations...

  • Page 125
    ... 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 2014, the Corporation purchased $248 of Aeroplan Miles® from Aeroplan. 2014 Consolidated Financial Statements and...

  • Page 126
    ... 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 finance leases Long-term...

  • Page 127
    ..., share-based compensation risk and market risk (e.g. fuel price risk) through the use of various derivative financial instruments. The Corporation uses derivative financial instruments only for risk management purposes, not for generating trading profit. As such, any change in cash flows associated...

  • Page 128
    ... 128 2014 Annual Report Interest Rate Risk Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Corporation enters into both fixed and floating rate debt and also leases certain assets where...

  • Page 129
    ... cash in the amount equal to market value of one common 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 settle the RSUs and PSUs will fluctuate because of changes in the Corporation's share price...

  • Page 130
    ... 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...

  • Page 131
    ...the New Senior Notes issued in 2013, which is categorized as Level 3 in the fair value hierarchy, the Corporation takes into account various factors including the prepayment terms in the notes, market rates of interest, the current conditions in credit markets and the current estimated credit margin...

  • Page 132
    ... 31, 2013 Accounts payable $ 118 $ (48) $ 70 GROSS ASSETS OFFSET $ (11) (49) (60) NET AMOUNTS PRESENTED $ 64 64 AMOUNTS NOT OFFSET FINANCIAL INSTRUMENTS $ (38) (38) $ (36) $ $ NET FINANCIAL LIABILITIES DECEMBER 31, 2014 Derivative liabilities Accounts payable 26 26 34 132 2014 Annual Report

  • Page 133
    ... Air Canada is engaged in a number of proceedings involving challenges to the mandatory retirement provisions of certain of its collective agreements, including the previous Air Canada-Air Canada Pilots Association collective agreement, which incorporated provisions of the pension plan terms...

  • Page 134
    ... airlines, including leasing the land rights under the land leases. The aggregate debt of the eight Fuel Facility Corporations in Canada that have not been consolidated by the Corporation under IFRS 10 Consolidated Financial Statements is approximately $399 as at December 31, 2014 (December 31, 2013...

  • Page 135
    ... 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 other airline-related services...

  • Page 136
    ... the market value of the Corporation's outstanding shares ("market capitalization"). The Corporation includes capitalized operating leases, which is a measure commonly used in the industry ascribing a value to obligations under operating leases. The value is based on annualized aircraft rent expense...

  • Page 137
    ... and Chief Operating Officer, Executive Vice-President and Chief Financial Officer, and the President, Passenger Airlines. Compensation awarded to key management is summarized as follows: 2014 Salaries and other benefits Pension and post-employment benefits Share-based compensation $ 8 4 8 $ 20 2013...

  • Page 138
    ... of the Board, Air Canada, Grafton, Ontario Corporate Director, Toronto, Ontario Chief Executive Officer and Managing Director, Tenex Capital Management, Radnor, Pennsylvania Partner, Stikeman Elliott LLP, Montreal, Quebec Corporate Director, Minneapolis, Minnesota Senior Fellow, Public Policy...

  • Page 139
    ... 2014, Air Canada Class A variable voting shares and Class B voting shares started trading under a single ticker on the the Toronto Stock Exchange. 2014 4th Quarter HIGH $ 12.67 $ LOW 8.87 VOLUME TRADED 100,798,569 RESTRICTIONS ON VOTING SECURITIES Currently, the Air Canada Public Participation...

  • Page 140
    ... to offer its customers access to approximately 1,321 destinations in 193 countries, as well as reciprocal participation in frequent ï¬,yer programs and use of over 1,000 airport lounges worldwide for eligible members. Air Canada is the only international network carrier in North America to receive...