Air Canada 2014 Annual Report Download - page 61

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61
2014 Management’s Discussion and Analysis 61
2014 Management’s Discussion and Analysis
investment portfolio, which earns a floating rate of
return, is an economic hedge for a portion of the
floating rate debt.
The ratio of fixed to floating rate obligations
outstanding is designed to maintain flexibility in
Air Canada’s capital structure and is based upon a
long-term objective of 60% fixed and 40% floating
but allows the flexibility in the short-term to adjust
to prevailing market conditions. The ratio at
December 31, 2014, was 75% fixed and 25%
floating, including the effects of interest rate
swap positions (74% and 26%, respectively, as at
December 31, 2013).
The following are the current derivatives employed
in interest rate risk management activities and the
adjustments recorded during 2014:
• As at December 31, 2014, Air Canada had
two interest rate swap agreements in place
with terms to July 2022 and January 2024
relating to two Boeing 767 aircraft financing
agreements with an aggregate notional value of
$60 million (US$52 million) (2013 – $62 million
(US$58 million)). These swaps convert the lease
payments on the two aircraft leases from fixed
to floating rates. The fair value of these contracts
as at December 31, 2014 was $8 million in favour
of Air Canada (2013 – $10 million in favour of
Air Canada). These derivative instruments have
not been designated as hedges for accounting
purposes and are recorded at fair value. In 2014,
a gain of $2 million was recorded on the two
interest rate swaps in Fuel and other derivatives on
Air Canada’s consolidated statement of operations
(2013 – $1 million loss).
Interest income includes $35 million (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.