Air Canada 2014 Annual Report Download - page 72

72 2014 Annual Report
Underfunded pension plans or a failure or inability by
Air Canada to make required cash contributions to its
registered pension plans may have a material adverse
effect on Air Canada, its business, results from
operations and financial condition.
REVENUE AND ALLIANCE ENVIRONMENT
Air Canada encounters substantial price competition.
The prevalence of low-cost carriers, Internet travel
websites and other travel products distribution
channels, have resulted in a substantial increase
in discounted and promotional fares initiated by
Air Canada’s competitors. A decision to match
competitors’ fares to maintain passenger traffic
results in reduced yields which, in turn, could have a
material adverse effect on Air Canada, its business,
results from operations and financial condition.
Furthermore, Air Canada’s ability to reduce its
fares in order to effectively compete with other
carriers is dependent on Air Canada’s ability to
achieve acceptable operating margins and may also
be limited by government policies to encourage
competition. Likewise, competitors continue to pursue
commissions/incentive actions and, in many cases,
increase these payments. The decision to modify
Air Canada’s current programs in order to remain
competitive and maintain passenger traffic could
result in increased costs to Air Canada’s business.
Furthermore, consolidation within the airline industry
could result in increased competition as some airlines
emerging from such consolidations and entering into
integrated commercial cooperation arrangements,
such as joint ventures, may be able to compete more
effectively, which could have a material adverse effect
on Air Canada.
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 “Contractual Obligations” of this
MD&A for information on Air Canada’s credit card
processing agreements.
AIRPORT USER FEES AND AIR
NAVIGATION FEES
With the privatization of airports and air navigation
authorities in Canada, airport and air navigation
authorities have significantly increased their fees.
Air Canada may not be in a position to prevent or