2018 ANNUAL REPORT
2018 ANNUAL REPORT | Management’s Discussion and Analysis of Results of Operations and Financial Condition
1. HIGHLIGHTS
The financial and operating highlights for Air Canada for the periods indicated are as follows:
(Canadian dollars in millions, except where indicated)
Fourth Quarter Full Year
2018 2017 (1) $ Change 2018 2017 (1) $ Change
Financial Performance MetricsOperating revenues 4,246 3,820 426 18,065 16,252 1,813 Operating income 122 133 (11) 1,174 1,371 (197)Income (loss) before income taxes (216) 20 (236) 405 1,286 (881)Net income (loss) (231) 8 (239) 167 2,029 (1,862)Adjusted pre-tax income (2) 68 77 (9) 952 1,165 (213)Adjusted net income (2) 54 60 (6) 677 1,145 (468)Operating margin % 2.9% 3.5% (0.6) pp 6.5% 8.4% (1.9) ppEBITDAR (excluding special items) (2) 543 521 22 2,851 2,928 (77)EBITDAR margin (excluding special items) % (2) 12.8% 13.6% (0.8) pp 15.8% 18.0% (2.2) ppUnrestricted liquidity (3) 5,725 4,181 1,544 5,725 4,181 1,544Net cash flows from operating activities 360 389 (29) 2,695 2,738 (43)Free cash flow (2) 141 (43) 184 791 1,056 (265)Adjusted net debt (2) 5,858 6,116 (258) 5,858 6,116 (258)Return on invested capital (“ROIC”) % (2) 12.6% 15.3% (2.7) pp 12.6% 15.3% (2.7) ppLeverage ratio (2) 2.1 2.1 - 2.1 2.1 -Diluted earnings per share $ (0.85) $ 0.02 $ (0.87) $ 0.60 $ 7.31 $ (6.71)Adjusted earnings per share – diluted (2) $ 0.20 $ 0.22 $ (0.02) $ 2.45 $ 4.11 $ (1.66)
Operating Statistics (4) % Change % Change
Revenue passenger miles (“RPM”) (millions) 20,801 19,396 7.2 92,360 85,137 8.5 Available seat miles (“ASM”) (millions) 25,598 24,191 5.8 110,866 103,492 7.1 Passenger load factor % 81.3% 80.2% 1.1 pp 83.3% 82.3% 1.0 pp Passenger revenue per RPM (“Yield”) (cents) 18.2 17.6 3.8 17.6 17.1 2.5 Passenger revenue per ASM (“PRASM”) (cents) 14.8 14.1 5.2 14.6 14.1 3.8 Operating revenue per ASM (cents) 16.6 15.8 5.1 16.3 15.7 3.8 Operating expense per ASM (“CASM”) (cents) 16.1 15.2 5.7 15.2 14.4 6.0 Adjusted CASM (cents) (2) 11.4 11.3 0.5 10.6 10.6 0.3
Average number of full-time equivalent (“FTE”) employees (thousands) (5) 30.5 28.3 7.6 29.9 27.8 7.4
Aircraft in operating fleet at period-end 400 395 1.3 400 395 1.3Average fleet utilization (hours per day) 9.7 9.7 (0.1) 10.4 10.4 0.1 Seats dispatched (thousands) 15,185 14,522 4.6 63,800 60,820 4.9 Aircraft frequencies (thousands) 137.7 138.4 (0.5) 578.9 569.6 1.6 Average stage length (miles) (6) 1,686 1,666 1.2 1,738 1,702 2.1 Fuel cost per litre (cents) 84.3 67.5 24.8 80.4 62.6 28.4 Fuel litres (thousands) 1,293,063 1,254,111 3.1 5,597,232 5,331,888 5.0Revenue passengers carried (thousands) (7) 11,909 11,314 5.3 50,904 48,126 5.8
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of 2017 amounts.
(2) Adjusted pre-tax income, adjusted net income, adjusted earnings per share – diluted, EBITDAR (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent), EBITDAR margin, leverage ratio, free cash flow, ROIC and adjusted CASM are each non-GAAP financial measures and adjusted net debt is an additional GAAP measure. Refer to sections 8 and 20 of Air Canada’s 2018 MD&A for descriptions of Air Canada’s non-GAAP financial measures and additional GAAP measures. As referenced in the table above, special items are excluded from Air Canada’s reported EBITDAR calculations. Refer to section 6 of Air Canada’s 2018 MD&A for information on the special items.
(3) Unrestricted liquidity refers to the sum of cash, cash equivalents and short-term investments and the amount of available credit under Air Canada’s revolving credit facilities. At December 31, 2018, unrestricted liquidity was comprised of cash, cash equivalents and short-term investments of $4,707 million and undrawn lines of credit of $1,018 million. At December 31, 2017, unrestricted liquidity was comprised of cash, cash equivalents and short-term investments of $3,804 million and undrawn lines of credit of $377 million.
(4) Except for the reference to average number of FTE employees, operating statistics in this table include third party carriers (such as Jazz Aviation LP (“Jazz”), Sky Regional Airlines Inc. (“Sky Regional”), Air Georgian Limited (“Air Georgian”) and Exploits Valley Air Services Ltd. (“EVAS”)) operating under capacity purchase agreements with Air Canada.
(5) Reflects FTE employees at Air Canada. Excludes FTE employees at third party carriers (such as Jazz, Sky Regional, Air Georgian and EVAS) operating under capacity purchase agreements with Air Canada.
(6) Average stage length is calculated by dividing the total number of available seat miles by the total number of seats dispatched.
(7) Revenue passengers are counted on a flight number basis (rather than by journey/itinerary or by leg) which is consistent with the IATA definition of revenue passengers carried.
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CONTENTS
MessagefromthePresidentandChiefExecutiveOfficer 4AirCanada2018CorporateSustainabilityProgressReport 8
2018 Management’s Discussion and Analysis of Results of Operations and Financial Condition 141. Highlights 22. IntroductionandKeyAssumptions 153. AboutAirCanada 174. Strategy 185. Overview 276. ResultsofOperations–FullYear2018versusFullYear2017 297. ResultsofOperations–FourthQuarter2018versusFourthQuarter2017 378. Fleet 489. FinancialandCapitalManagement 51
9.1.Liquidity 519.2.FinancialPosition 519.3.AdjustedNetDebt 529.4.WorkingCapital 539.5ConsolidatedCashFlowMovements 549.6.CapitalExpendituresandRelatedFinancingArrangements 559.7.PensionFundingObligations 579.8.ContractualObligations 589.9.ShareInformation 59
10.QuarterlyFinancialData 6011.SelectedAnnualInformation 6312.FinancialInstrumentsandRiskManagement 6413.CriticalAccountingEstimatesandJudgements 6714.AccountingPolicies 7115.Off-BalanceSheetArrangements 7416.RelatedPartyTransactions 7417. SensitivityofResults 7518.RiskFactors 7619.ControlsandProcedures 8720.Non-GAAPFinancialMeasures 8821.Glossary 94
2018 Consolidated Financial Statements and Notes 96StatementofManagement’sResponsibilityforFinancialReporting 97IndependentAuditor’sReport 98ConsolidatedStatementsofFinancialPosition 100ConsolidatedStatementsofOperations 101ConsolidatedStatementsofComprehensiveIncome 102ConsolidatedStatementsofChangesInEquity 102ConsolidatedStatementsofCashFlow 1031. GeneralInformation 1042. BasisofPresentationandSummaryofSignificantAccountingPolicies 1053. CriticalAccountingEstimatesandJudgements 1174. PropertyandEquipment 1195. IntangibleAssets 1206. Goodwill 1217. Long-TermDebtandFinanceLeases 1228. PensionsandOtherBenefitLiabilities 1269. ProvisionsforOtherLiabilities 13510.IncomeTaxes 13611.ShareCapital 13912.Share-BasedCompensation 14113.EarningsperShare 14414.Commitments 14515.FinancialInstrumentsandRiskManagement 14616.Contingencies,GuaranteesandIndemnities 15317. CapitalDisclosures 15518.Revenue 15619.RegionalAirlinesExpense 15820.SpecialItems 15821.Sale-Leaseback 15822.RelatedPartyTransactions 15823.SubsequentEvents 159Directors 160Officers 161InvestorandShareholderInformation 165
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MESSAGE FROM THE PRESIDENT AND CHIEF EXECUTIVE OFFICER
AirCanada’sstrongexecutioncapabilitieswereonfulldisplayin2018giventhemanychallengesfacedduringtheyear,includingsignificantlyhigherfuelcostsandeconomicandtradeuncertainty.Theresultsachieved,includingastrengthenedbalancesheetandanexpandedglobalfranchise,demonstratedbothresiliencyandconsistency.AirCanadasharesoutperformedindustrypeersaswellastheTSXCompositeIndex,andtheyhavenowreturnedmorethan4,000%sincewefirstsetabouttotransformourselvesadecadeago.
Wegeneratedrecordoperatingrevenueof$18.065billionin2018andendedtheyearwithrecordunrestrictedliquidityof$5.725billion.Followingonarecordyearin2017,wereportedacomparablysolidperformanceonotherkeymetrics,suchasEBITDARof$2.851billion(includingrecordfourthquarterEBITDARof$543million),operatingincomeof$1.174billion,netcashfromoperatingactivitiesof$2.695billionand$791millionfreecashflow.
Successinanygivenyeardependsonmanythingsgoingright.Inthisregard,our2018recordrevenuereflectedyear-over-yearincreasesinpassengerrevenueinallmarketsweserve.Thisunderscoresboththestrengthofournetworkandahighlyefficientfleetdeploymentacrossthatnetwork.
Toputthisinperspective,wehaveachievednineconsecutiveyearsofrevenuegrowth.Our2018passengerrevenuewas$16.2billion,an11.2%increaseover2017.
Thisrevenuegrowthwasalsoaccompaniedbystrictcostdisciplinewithincontrollablecostcategories.In2018,AirCanada’sunitcosts,orcostperavailableseatmile(CASM),increased6.0%comparedto2017,mostlyattributabletoanincreaseinfuelcostsofalmost$1.2billion.AdjustedCASM,whichexcludesfuelexpense,thecostofgroundpackagesatAirCanadaVacationsandspecialitems,increasedonly0.3%,inlinewithourprojections.
Ourfreecashflowof$791millionin2018wassignificantlyaboveguidance.Adjustednetdebtof$5.858billionwasdown$258millionfromtheprioryearasanincreaseinlong-termdebtandfinanceleaseswasmorethanoffsetbyanincreaseincash,cashequivalentsandshort-terminvestments.Thecompany’sleverageratioof2.1wasunchangedfromDecember31,2017.Ourweightedaveragecostofcapitalstoodat7.2%atyear-end,540basispointslowerthanourreturnoninvestedcapitalof12.6%,resultingincontinuedvaluecreation.
Anotherimportantrecordfortheyearwasthenumberofcustomerscarried.Weflew50.9millionpassengers,anincreaseof5.8%from2017,withanaverageloadfactorof83.3%.Tocontextualizethesenumbers,lookingbackintoourpast,ittookus30yearstoflyourfirst50millioncustomers.
Moreimportantly,wecarriedourcustomerssafelyanddidsowithincreasedlevelsofcustomercareasthenumerousawardswewereprivilegedtoreceivein2018attest.Forthesecondyearinarowandtheseventhtimeinnineyears,SkytraxnamedusNorthAmerica’sBestAirlineandweremaintheonlyfour-starinternationalnetworkcarrierinNorthAmerica.Weachievedafive-starratingforouronboard
CalinRovinescu
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Air Canada shares outperformed industry peers as well as the TSX Composite Index, and they have now returned more than 4,000% since we first set about to transform ourselves a decade ago.
customerexperiencefromtheAirlinePassengerExperienceAssociation.Aswell,wecontinuetoleadintheall-important,higher-yieldingmarketsegmentoffrequentbusinesstravellers,whereAirCanadaisthepreferredairlinefordomestictravelfor92%ofthispopulation,accordingtotheIpsosReid2018CanadianBusinessTravellerSurvey.
ResultssuchasthesespeaktotheextentofthetransformationAirCanadahasundergone;onewearecommittedtopursueevenmorevigorouslyintothefuture,aswecontinuetoadheretothefourcorporateprioritiesthathavebroughtustothispoint.
ThefirstoftheseisRevenueEnhancementandCostControl.Notonlyhavewesuccessfullygrownrevenue,butthemake-upofthatrevenuehasalsogreatlyimproved.Onastage-lengthadjustedbasis,in2018,systemyieldincreased3.7%andPRASMimproved5%over2017.Wehavedonethisbyattractingagreatershareofbusinessandpremiumcustomersaswellasthroughaneffectiveancillaryfeestrategy,whichresultedina13%increaseinsuchrevenueover2017.
Asmentioned,thecounterparttorevenuegenerationiscostcontrol.Ourabilitytocontainunitcostsbelowourforecastisevidenceofacostdisciplinenowengrainedthroughoutourcompany.Today,onalocalcurrencybasis,weoperateatthesameadjustedCASMlevelonaverageasourmuchlargerU.S.competitors,whichshouldfurtherreducethevaluationdiscountourcompanyhaslongbeensubjecttoversusourU.S.peers.
Weanticipatefurthercostreductions.Already,atyear-end,wehadachievedoridentified$220millionof$250millioninannualsavingstargetedinatwo-yearCostTransformationProgramwhichbeganin2018.AirCanadaRouge,withits29%loweradjustedCASMcomparedtoAirCanadamainline,continuestoexpandinleisuremarketsanddomesticallyonrouteswherewefacelow-costcarriercompetition.
OurfleetrenewalhasalsobeenakeydriverforCASMreductions.In2018,wetookdeliveryoffiveBoeing787-9and16Boeing737MAX8aircraftintothemainlinefleetandaddedoneAirbusA321,twoAirbusA319sandoneBoeing767aircrafttotheAirCanadaRougefleet.AllofthesenewfleettypeshavebeendesignedtoproducesignificantCASMsavingsovertheaircrafttheywillreplace.
Wehavestructuredourfleetrenewalprogramtostrengthenourbalancesheet.Atpresent,55aircraft,or23%ofourcombinedmainline/Rougefleet,areunencumbered,creatingapoolofassetsvaluedatUS$2.6billionthatwecanmonetizeifneeded.Thisassetpoolwillincreaseasweexpecttohavecloseto100oralmost40%ofourcombinedmainline/Rougefleetunencumberedbytheendof2021.
FleetrenewalhasalsosupportedoursecondpriorityofInternationalExpansion.During2018,AirCanadaandAirCanadaRougelaunched29newroutes,mostlyinternationalandtransborder.Withourwide-bodyfleetrenewallargelycompleted,thepaceofcapacitygrowthwilltaperbutwewillcontinuetoaddnewinternationalrouteswheremarginsarehigherandtofurtherdiversifyandde-riskournetwork.
Anequallyimportantconsiderationiseachnewroute’spotentialtodrawincrementalinternational-connectingtrafficthroughourhubs.Insupportofthis,weundertookseveralprojectsin2018
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tostreamlineairportconnectionprocesses,notablywithnewmeasurestosaveconnectingandtransitingcustomerssignificanttimeoncustomsandbaggageretrieval.Theseeffortsarebearingfruit,asoverthelastfiveyearswehavegrownsuchconnectingtrafficby142%.
Weaugmentournetworkthroughclosepartnershipswithothercarriers,notablythe28-memberStarAlliance.Beyondthis,AirCanadabelongstotwoimportantjointventures,onewithUnitedAirlinesandtheLufthansagroupofairlinesandasecondcompletedin2018withAirChina.ThelatteristhefirstjointventurebetweenaChineseandNorthAmericancarrieranditgivesusafirstmoveradvantageinthegrowingChineseairtransportmarket,whichisexpectedtobecometheworld’slargestby2022.
OurmodernfleetandexpansivenetworkareessentialtoourthirdpriorityofCustomerEngagement.Alongwithinvestinginaircraft,wehavedevotedconsiderableresourcestotraining,onboardamenitiesandtheairportenvironment.Amilestoneachievementin2018wasthelaunchofAirCanadaSignatureService,providingsuperiorcurb-to-curbservicesforPremiumcustomerstravellinginternationallyandonselecttranscontinentalitineraries.OtherinnovationsincludedtheexpansionofonboardconnectivitytointernationalflightsandtheopeningofthreenewMapleLeafLounges.
Duringtheyear,wecontinuedtoworkontwomajorinitiativesthatwillfurtherspurcustomerengagement.Oneoftheseisthedevelopmentofournewloyaltyprogram,whichtookaquantumleapin2018whenAirCanadareachedanagreementtoacquireAeroplanandenteredintoco-brandedcreditcardagreementswithTD,CIBC,Visaand,afteryear-end,theAmexBankofCanada.ThosetransactionswillsmooththetransitionofmorethanfivemillionactiveAeroplanmemberstoAirCanada’snewprogramwhenitlaunchesin2020.Moreimmediately,itbringsawealthoftalent,technologyanddata,significantlyde-riskingthenewprogram’slaunch.
Asecondmajorcustomerserviceinitiativeisthereplacementofourdecades-oldreservationsystembyanewpassengerservicesystem.Afteritgoesintoservicelaterin2019,itwillmodernizeoursystemsforreservations,inventoryanddeparturecontrol,andallowAirCanadatooptimizeitsflightschedulebyprovidingtheabilitytomoreeasilymanageinventorybetweenanygivenoriginanddestination.Forcustomers,onekeybenefitisthatitwillautomaterebookingsduringflightdisruptions,suchasthosecausedbyextremeweather.
Thenewreservationsystem,bygivingemployeessuperiortoolstoassistcustomers,willalsosignificantlyadvanceourfourthpriorityofCultureChange.Whilestrongfinancesmakeourtransformationpossible,itisouremployeeswhomostimmediatelyeffectchangeandcarrythroughAirCanada’stransformation.Itistheirday-to-dayinteractionswithourcustomersandtheirabilitytotakeever-bettercareofthemthatultimatelydeterminesthesuccessofourcompany.
ThestrengthofAirCanada’scultureiswidelyrecognizedthroughourunprecedented,long-termlabouragreementsthatprovidestabilityandcommonpurposeforallemployeegroups.Forthesixthyearinarow,wehavebeenrankedamongCanada’sTop100employersandduring2018wereceivedotherawards,
During the year, we continued to work on two major initiatives that will further spur customer engagement. One of these is the development of our new loyalty program, which took a quantum leap in 2018 when Air Canada reached an agreement to acquire Aeroplan and entered into co-branded credit card agreements with TD, CIBC, Visa and, after year-end, the Amex Bank of Canada.
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includingOneofCanada’sMostAttractiveEmployers,Oneofthe50MostEngagedWorkplaces,andwewereratedfifthintheTop20EmployerBrandsinCanada.
Anothersignificantrecognitionfrom2018thatweareproudofandbearsonemployeeengagementistheEco-AirlineoftheYearAwardfromAir Transport World.Studiesshowthat,increasingly,people,particularlymillennials,optforcareerswithcompaniesthatactresponsibly.Thisawardhelpsfurtherourrecruitment,retentionandengagementefforts,nottomentionalsoappealingtocustomerswhoquiteproperlydemandresponsiblebehaviourandsustainabilitycommitmentsfromcorporations.
Ithasbeen10yearsnowsinceAirCanadafirstundertooktorepairabadlybrokenbusinessmodelwiththeaimoftransformingitselfintoaglobalchampionthatwouldbesustainablyprofitableoverthelong-term.Our2018performance,followingonrecordresultsofrecentyears,canleavenodoubtthatweareachievingtheseambitiousgoals.
However,wearealsocognizantthatourindustrycontinuouslyevolvesandthatourcompetitionneverrests,sowealsoviewallwehaveachievedasapreludetothenextchapter.TheresiliencyofAirCanada,asshownbyits2018resultsrelativetoitspeers,anditsnowwell-establishedtrackrecordofdeliveringonitscommitments,givesuseveryconfidenceofcontinuedsuccess.
BackstoppingthisconfidenceistheunwaveringsupportwehavereceivedfromourBoardofDirectorsandshareholdersduringeverystepofourjourney.IamdeeplyappreciativeoftheguidanceprovidedbyourBoardofDirectorsandthelong-termcommitmentinvestorshavemade,astogetherweprogresstowardourever-closergoalofaninvestmentgraderating.
Finally,Ialsothankthe30,000employeesofAirCanada,whohavesowhollyembracedchangeinarapidlyevolvinglandscapethattheynowoccupyaleadershiproleintheglobalindustry.Aswell,IalsothankourcustomersandassurethemthatallofusatAirCanadaarefullycommittedtoearningtheirloyaltyeverydaybycontinuingtotransportthemsafelywiththeutmostofcareandclass.
It has been 10 years now since Air Canada first undertook to repair a badly broken business model with the aim of transforming itself into a global champion that would be sustainably profitable over the long-term. Our 2018 performance, following on record results of recent years, can leave no doubt that we are achieving these ambitious goals.
Calin Rovinescu PresidentandChiefExecutiveOfficer
March1,2019
Air Canada is committed to conducting its business sustainably and responsibly. To further this objective, the environmental, social and economic aspects of sustainability are integrated into its business and operations.
In 2018, Air Canada undertook a materiality assessment to identify the main sustainability areas of focus of its key stakeholders, defined as investors, customers, employees and suppliers.
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CORPORATE SUSTAINABILITY: 2018 PROGRESS REPORT
Inaddition,aCorporateSustainabilityWorkingGrouptaskedwiththemonitoringandcoordinatingofAirCanada’scorporatesustainabilityinitiativeswasformed.ThegroupiscomprisedofAirCanadaseniormanagementsubject-matterexpertsfromdiversefunctions,includingEnvironmentalAffairs,HealthandSafety,StrategicProcurement,Legal,CommunicationsandCommunityPartnerships,aswellasBrand,InvestorRelationsandRiskAdvisory.TheWorkingGroupreportsonAirCanada’ssustainabilityperformanceandmakesrecommendationstoaCorporateSustainabilitySteeringCommittee,whichincludesseveralAirCanadaExecutives.
AfulsomediscussionofAirCanada’scorporatesustainabilityperformance,awardsandgoalswillbeavailableinthecompany’sforthcomingCorporateSustainabilityReportthatwillbeavailableonlineataircanada.com.
Thereportcontinuestobeanchoredonfourpillars:(i)safety;(ii)environment;(iii)employees;and(iv)thecommunities.
Sustainable governance
Transparency and disclosure
Ethical business practices and policies
Economic performance of Air Canada
Fleet management
Sustainable procurement practices
Safety
Data protection and privacy
Labour relations and employee engagement
Employee training & development
Community involvement
Diversity and equal opportunityCorporate citizenship
Employee health and wellness
Human rights
Socio-economicimpact in Canada
Customer engagement
Energy consumptionWaste management
Water management
Greenhouse gas (GHG) emissions
Biodiversity
Management of climate-relatedrisks and opportunities
Noise
IMPO
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KEH
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Sustainable governance
Transparency and disclosure
Ethical business practices and policies
Economic performance of Air Canada Fleet managementSafety
Data protection and privacy
Labour relations and employee engagementCustomer engagementEnergy consumption
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IMPORTANCE TO AIR CANADA’S BUSINESS
ENVIRONMENTALSOCIALECONOMICGOVERNANCE
TOP 5 ISSUES
TOP 10 ISSUES
RESULTS OF STAKEHOLDER ANALYSIS CONDUCTED IN 2018Air Canada’s Materiality Matrix
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SAFETY
ü ProvidedemployeeswithanupdatedAlcoholandDrugPolicytolendguidanceandmanagetherisksassociatedwiththelegalizationofcannabis.
ü SuccessfullyimplementedaMulti-FactorAuthenticatorpilotprogramtobetterprotectemployee,customerandcompanydata,reducingexposuretocyber-risk.
ü Conductedaprivacymaturityassessmenttohelpdriveitseffortsinprotectingemployeeandcustomerdata.
ENVIRONMENT
ü Recognizedasthe2018Eco-AirlineoftheYearbyAir Transport World.
ü AchievedIATAEnvironmentalAssessment(IEnvA)Certification,Phase1.
ü Exceededthecollectivefuelefficiencytargetsof1.5%setfortheairlineindustry.
ü Continuedtomodernizeitsfleettowardsimprovedfuelefficiencywiththeadditionof16Boeing737MAXandfiveBoeing787aircraft.
ü Contributedtosaving160tonnesofcarbonemissionson22domesticflightsforEarthDaythroughCanada’sBiojetSupplyChainInitiative(CBSCI),aninnovativebiojetfuelresearchprojectfundedthroughtheGreenAviationResearch&DevelopmentNetwork(GARDN),developingexperience-basedknowledgewithbiojetintegrationinco-mingledfuellingsystemsatCanadianairports.Astheonlycommercialairlinepartner,AirCanadasourcedandintegrated230,000litresofsustainablebiojetfuelintoPearsonInternationalAirport’smulti-userfuelsupplysystem.
ü Operated,inpartnershipwiththeEdmontonAirportAuthority,abiofueltrademissionflightonMay2,2018—AirCanada’seighthbiofuelflightsince2012.
ü Continuedtoadvanceitsnewliverydeploymentwithaleadingtechnologypaintsystemknownasbasecoatclearcoat(BCCC)system.Thisliverysystemcontainsnochrome,leadorotherheavymetalsandrequireslesslayersofpaint,enablingoperationalefficiencies,reducingweightandreducingtheoverallcarbonfootprint.
The following is an overview of Air Canada’s key social and environmental performance achievements in 2018:
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EMPLOYEES
ü RecognizedasoneofCanada’sTop100EmployersandCanada’sBestDiversityemployers,andnamedoneofthetopfivemostattractivecompanybrandstoworkforinCanadaandoneofMontréal’sTopEmployers.
ü EnhancedtheEmergingLeadersProgram,acorporatecareerdevelopmentprogramformanagers.
ü ImplementedBuy-TimetoRetirementandReducedWorkWeekprogramsforsenioremployeestotransitiontoretirement,whileenablingthetransferofexpertisetotheircolleagues.
ü MarkedInternationalWomen’sDay2018byoperatingtwointercontinentalflightswithall-femalestaff,fromgroundhandlers,tocheck-in,topilotsandflightattendants,andwelcomedyoungwomenconsideringemploymentinaviationduringYoungWomeninAviationDay.
ü CelebratedPride,engaginginfivememorableparadesandothereventsforitsemployeesandthecommunity.
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COMMUNITIES
ü Established150communitypartnerships,suchasthosefocusedonthediversityoftheLGBTQ2+communityinCanada,theRendez-vousdelaFrancophonie,theVimyFoundation,andtheIndspireAwards—thelatterdesignedtorecognizethetremendouscontributionsthatIndigenousPeoplearemakingacrossthecountry.
ü TheAirCanadaFoundationgrantedfinancialandin-kindsupportto275Canadianregisteredcharitiesfocusedonthehealthandwell-beingofchildrenandyouthandprovidedassistancetoover450fundraisinginitiatives.
ü Raisedarecord7,595,245AeroplanMilesinDecember2018throughtheAirCanadaFoundation’sMatchingMilescampaignforchildrenrequiringmedicalcareawayfromhome.
Inaddition,thefollowingbusinessprocessimprovementsweremadein2018insupportofAirCanada’ssustainabilityefforts:
ü FirstairlinetobecertifiedforCEIVLiveAnimalsbytheInternationalAirTransportAssociation.
ü Launcheda“Supplierportal”(availableonaircanada.com)tocollectkeyinformationonexistingandprospectivesuppliers.InadditiontocontinuallyimprovingitsSupplierCodeofConduct,AirCanada’sStrategicProcurementteamamendeditsformalsupplierriskassessmentprocessfornewstrategicsuppliersinorderforAirCanadatomonitorforpossiblereputationalriskissues.Theassessmentfocusesonmultitudecriteria,includingenvironmental,healthandsafety,cyber-security,privacycompliance,criminalandotherillegalactivities.
Aswell,AirCanadamadesignificantprogressinitsgoalofbecomingasustainablyprofitableglobalchampion.ItskeyaccomplishmentsinthisregardarefurtherdescribedinAirCanada’spublicdisclosurefile,includinginits2018MD&A.
TherearemanyupcomingprogramstofurthersecureAirCanada’slong-termsustainableperformance,includinginitiativesrelatedtoitsloyaltybusiness.
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SAFETY
> Rankinthetop3%ofairlinesincludedintheIATAOperationalSafetyAudit.
> DeploytheMulti-FactorAuthenticatorProgramtoitsentireemployeebase.
> PursuethePrivacyActionPlan,focusingonsixbroadareastoimproveitsprivacymaturity.
ENVIRONMENT
> Prepareforthefirstdeliveryofthenewfuel-efficientAirbusA220aircraft.
> Continuetoactonthe2020CorporateWasteStrategywiththefollowingkeyactivitiesfor2019:
− Single-UsePlasticsReductionProgramforbothonboardandwithinourworkplaces.
− ExpansionofthecollectionandrecyclingprocessintheMapleLeafLounges.
− CentralizationofwasteinfrastructureatitsMontréalheadquarters.
− AudittheOnboardDomesticRecyclingProgramaspartofitscontinuousimprovementfocusfordomesticflights.
EMPLOYEES
> SupporttheimplementationofAmadeusAltéaSuitepassengerservicesystembyinitiatingtrainingformorethan7,000employees.
> CreateachangemanagementCentreofExcellence.
> FurtherdevelopitsEmergingLeadersProgramtofocusmoredirectlyonsuccessionplansinkeyareasofthebusiness.
COMMUNITIES
> Developcommunitypartnershipsinsupportofregionalnetworkperformance,talentacquisitionandsocio-economicdevelopment.
> AchieveafundraisinggoalfortheAirCanadaFoundationof$2M(net)tosupportcharitableorganizationsfocusingonthehealthandwellnessofchildrenandyouth.
The following is an overview of Air Canada’s corporate sustainability objectives for 2019:
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2018
MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
2018 ANNUAL REPORT
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2. INTRODUCTION AND KEY ASSUMPTIONS
InthisManagement’sDiscussionandAnalysisofResultsofOperationsandFinancialCondition(“MD&A”),the“Corporation”refers,asthecontextmayrequire,toAirCanadaand/oroneormoreofAirCanada’ssubsidiaries,includingitswholly-ownedoperatingsubsidiaries,TouramLimitedPartnership,doingbusinessasAirCanadaVacations®(“AirCanadaVacations”)andAirCanadaRougeLP,doingbusinessasAirCanadaRouge®(“AirCanadaRouge”).ThisMD&Aprovidesthereaderwithareviewandanalysis,fromtheperspectiveofmanagement,ofAirCanada’sfinancialresultsforthefourthquarterandfullyearof2018.ThisMD&AshouldbereadinconjunctionwithAirCanada’sauditedconsolidatedfinancialstatementsandnotesfor2018.AllfinancialinformationhasbeenpreparedinaccordancewithgenerallyacceptedaccountingprinciplesinCanada(“GAAP”),assetoutintheCPACanadaHandbook–Accounting(“CPAHandbook”),whichincorporatesInternationalFinancialReportingStandards(“IFRS”),asissuedbytheInternationalAccountingStandardsBoard(“IASB”),exceptforanynon-GAAPmeasuresandanyfinancialinformationspecificallydenotedotherwise.
Exceptasotherwisenoted,monetaryamountsarestatedinCanadiandollars.ForanexplanationofcertaintermsusedinthisMD&A,refertosection21“Glossary”ofthisMD&A.Exceptasotherwisenotedorwherethecontextmayotherwiserequire,thisMD&AiscurrentasofFebruary14,2019.
Forward-lookingstatementsareincludedinthisMD&A.See“CautionRegardingForward-LookingInformation”belowforadiscussionofrisks,uncertaintiesandassumptionsrelatingtothesestatements.ForadescriptionofrisksrelatingtoAirCanada,refertosection18“RiskFactors”ofthisMD&A.AirCanadaissuedanewsreleasedatedFebruary15,2019reportingonitsresultsforthefourthquarterandthefullyearof2018.ThisnewsreleaseisavailableonAirCanada’swebsiteataircanada.comandonSEDAR’swebsiteatwww.sedar.com.ForfurtherinformationonAirCanada’spublicdisclosures,includingAirCanada’sAnnualInformationForm,consultSEDARatwww.sedar.com.
CAUTION REGARDING FORWARD-LOOKING INFORMATION
AirCanada’spubliccommunicationsmayincludeforward-lookingstatementswithinthemeaningofapplicablesecuritieslaws.Suchforward-lookingstatementsareincludedinthisMD&Aandmaybeincludedinothercommunications,includingfilingswithregulatoryauthoritiesandsecuritiesregulators.Forward-lookingstatementsmaybebasedonforecastsoffutureresultsandestimatesofamountsnotyetdeterminable.Thesestatementsmayinvolve,butarenotlimitedto,commentsrelatingtostrategies,expectations,plannedoperationsorfutureactions.Forward-lookingstatementsareidentifiedusingtermsandphrasessuchas“anticipate”,“believe”,“could”,“estimate”,“expect”,“intend”,“may”,“plan”,“predict”,“project”,“will”,“would”,andsimilartermsandphrases,includingreferencestoassumptions.
Forward-lookingstatements,bytheirnature,arebasedonassumptions,includingthosedescribedhereinandaresubjecttoimportantrisksanduncertainties.Forward-lookingstatementscannotbereliedupondueto,amongstotherthings,changingexternaleventsandgeneraluncertaintiesofthebusiness.Actualresultsmaydiffermateriallyfromresultsindicatedinforward-lookingstatementsduetoanumberoffactors,includingwithoutlimitation,ourabilitytosuccessfullyachieveorsustainpositivenetprofitabilityortorealizeourinitiativesandobjectives,industry,market,credit,economicandgeopoliticalconditions,energyprices,currencyexchange,competition,ourdependenceontechnology,cybersecurityrisks,ourabilitytosuccessfullyimplementappropriatestrategicinitiativesorreduceoperatingcosts,ourabilitytosuccessfullyintegrateandoperatetheAeroplanloyaltybusinessfollowingitsacquisitionfromAimiaInc.andtosuccessfullylaunchournewloyaltyprogram,ourabilitytopreserveandgrowourbrand,airportuserandrelatedfees,highlevelsoffixedcosts,ourdependenceonkeysuppliersincludingregionalcarriers,employeeandlabourrelationsand
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costs,ourdependenceonStarAllianceandjointventures,interruptionsofservice,environmentalfactors(includingweathersystemsandothernaturalphenomenaandfactorsarisingfromman-madesources),ourabilitytopayourindebtednessandmaintainliquidity,pensionissues,limitationsduetorestrictivecovenants,pendingandfuturelitigationandactionsbythirdparties,ourabilitytoattractandretainrequiredpersonnel,war,terroristacts,casualtylosses,changesinlaws,regulatorydevelopmentsorproceedings,epidemicdiseases,insuranceissuesandcosts,aswellasthefactorsidentifiedinAirCanada’spublicdisclosurefileavailableatwww.sedar.comand,inparticular,thoseidentifiedinsection18“RiskFactors”ofthisMD&A.Theforward-lookingstatementscontainedorincorporatedbyreferenceinthisMD&ArepresentAirCanada’sexpectationsasofthedateofthisMD&A(orasofthedatetheyareotherwisestatedtobemade)andaresubjecttochangeaftersuchdate.However,AirCanadadisclaimsanyintentionorobligationtoupdateorreviseanyforward-lookingstatementswhetherbecauseofnewinformation,futureeventsorotherwise,exceptasrequiredunderapplicablesecuritiesregulations.
KEY ASSUMPTIONS
AssumptionsweremadebyAirCanadainpreparingandmakingforward-lookingstatements.Aspartofitsassumptions,AirCanadaassumescontinuedrelativelymodestCanadianGDPgrowthforthefirstquarterandfullyear2019.AirCanadaalsoexpectsthattheCanadiandollarwilltrade,onaverage,atC$1.32perU.S.dollarinthefirstquarterandforthefullyear2019andthatthepriceofjetfuelwillaverage77CADcentsperlitreinthefirstquarterand82CADcentsperlitreforthefullyear2019.
INTELLECTUAL PROPERTY
AirCanadaownsorhasrightstotrademarks,servicemarksortradenamesusedinconnectionwiththeoperationofitsbusiness.Inaddition,AirCanada’snames,logosandwebsitenamesandaddressesareownedorlicensedbyAirCanada.AirCanadaalsoownsorhastherightstocopyrightsthatalsoprotectthecontentofitsproductsand/orservices.Solelyforconvenience,thetrademarks,servicemarks,tradenamesandcopyrightsreferredtointhisMD&Amaybelistedwithoutthe©,®andTMsymbols,butAirCanadareservesallrightstoassert,tothefullestextentunderapplicablelaw,itsrightsortherightsoftheapplicablelicensorstothesetrademarks,servicemarks,tradenamesandcopyrights.
ThisMD&Amayalsoincludetrademarks,servicemarksortradenamesofotherparties.AirCanada’suseordisplayofotherparties’trademarks,servicemarks,tradenamesorproductsisnotintendedto,anddoesnotimplyarelationshipwith,orendorsementorsponsorshipofAirCanadaby,thetrademark,servicemarkortradenameownersorlicensees.
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3. ABOUT AIR CANADA
AirCanadaisthelargestproviderofscheduledpassengerservicesintheCanadianmarket,theCanada-U.S.transbordermarketandintheinternationalmarkettoandfromCanada.In2018,AirCanada,togetherwithJazzAviationLP(“Jazz”),SkyRegionalAirlinesInc.(“SkyRegional”)andotherregionalairlinesoperatingflightsonbehalfofAirCanadaundercapacitypurchaseagreements,operated,onaverage,1,613dailyscheduledflightsto222directdestinationsonsixcontinents,comprisedof64Canadiancities,60destinationsintheUnitedStatesandatotalof98citiesinEurope,Africa,theMiddleEast,Asia,Australia,theCaribbean,MexicoandSouthAmerica.In2018,AirCanadacarriedarecordof50.9millionpassengers,anincreaseof5.8%from2017.
AtDecember31,2018,AirCanadamainlineoperatedafleetof184aircraft,comprisedof91BoeingandAirbusnarrow-bodyaircraft,74BoeingandAirbuswide-bodyaircraft,and19Embraer190regionaljets,whileAirCanadaRougeoperatedafleetof53aircraft,comprisedof22AirbusA319aircraft,sixAirbusA321aircraftand25Boeing767-300aircraft.
AirCanadaenhancesitsdomesticandtransbordernetworkthroughcapacitypurchaseagreements(“CPAs”)withregionalairlines,namelyJazz,SkyRegionalAirlinesInc.(“SkyRegional”),AirGeorgianLimited(“AirGeorgian”)andExploitsValleyAirServicesLimited(“EVAS”),eachofwhichoperatesflightsonbehalfofAirCanada.Thesecarriersformanintegralpartoftheairline’sinternationalnetworkstrategy,providingvaluabletrafficfeedtoAirCanadaandAirCanadaRougeroutes.AtDecember31,2018,theAirCanadaExpressfleetwascomprisedof45Bombardierregionaljets,84BombardierDash-8turbopropaircraftand25Embraer175aircraftforatotalof154aircraft.AirGeorgianandEVASalsooperatedatotalofnine18-passengerBeech1900aircraftonbehalfofAirCanada.
AirCanadaisafoundingmemberoftheStarAlliance®network.Throughthe28-memberairlinenetwork,AirCanadaoffersitscustomersaccessto1,317destinationsin193countries,aswellasreciprocalparticipationinfrequentflyerprogramsandtheuseofairportloungesandothercommonairportfacilities.
AirCanadaisabletobuildcustomerloyaltythroughAirCanadaAltitude®,itsfrequentflyerprogramandthroughtheAeroplan®loyaltyprogram.AirCanadaAltituderecognizesandrewardsAeroplanmemberswitharangeofpremiumtravelprivilegesandbenefitscorrespondingtotheirtravelactivity,suchasprioritycheck-in,complimentarycheckedbaggageandupgradestoBusinessClass,aswellasopportunitiestoearnAeroplanMilesonAirCanadaflightsandthoseoftheother27StarAlliancememberairlines.AeroplanmembersalsohaveopportunitiestoredeemtheirAeroplanMilesfortravelwithStarAlliancememberairlines.
AirCanadahasbeenpursuingacomprehensivestrategytoimproveprofitabilityandcompetitivenessinleisuremarkets.ThisstrategyleveragesthestrengthsofAirCanada,AirCanadaRouge,theairline’slower-costairline,andAirCanadaVacations.ThroughAirCanadaRouge,AirCanadaispursuingopportunitiesinleisuremarketsmadeviablebyAirCanadaRouge’smorecompetitivecoststructure.AirCanadaVacationsisaleadingCanadiantouroperator,developing,marketinganddistributingvacationtravelpackages,operatingintheoutboundleisuretravelmarket(Caribbean,Mexico,U.S.,Europe,CentralandSouthAmerica,SouthPacific,AustraliaandAsia),andtheinboundleisuretravelmarkettodestinationswithinCanada,andalsoofferingcruisepackagesinNorthAmerica,EuropeandtheCaribbean.
AirCanadaCargo,Canada’slargestproviderofaircargoservicesasmeasuredbycargocapacity,providesdirectcargoservicestoover150Canadian,U.S.transborderandinternationaldestinationsandhassalesrepresentationinover50countries.AircargoservicesareprovidedacrosstheAirCanadanetwork.
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4. STRATEGY
AirCanada’sprincipalobjectiveistobecomeasustainablyprofitableglobalchampion.Inpursuingthisgoal,AirCanadaseekstocontinuallyimprovecustomerexperienceandemployeeengagementandcreatevalueforshareholdersbyfocusingonfourcorepriorities:
1. Identify and implement cost reduction and revenue enhancing initiatives;
2. Pursue profitable international growth opportunities and leverage its competitive attributes to expand margins, in large part by increasing connecting traffic through its strategic international gateways in Toronto, Vancouver and Montreal, and grow and compete effectively in both the business and leisure market to and from Canada;
3. Engage customers by continually enhancing their travel experience and by consistently achieving customer service excellence; and
4. Foster positive culture change. This includes making meaningful investments in training and other tools that promote improved collaboration to enable Air Canada and its employees to better work together in a supportive and enriching environment.
1. Revenue Enhancement and Cost Transformation
Marginimprovementthroughtheimplementationofsustainablecosttransformationandprofitablerevenue-generatinginitiativesisakeypriorityatAirCanada.AirCanadacontinuestoseekandimplementmeasurestoreduceunitcostsandexpandmargins,includingthroughfleetmodernizationandgreaterfleetproductivity.Additionally,AirCanadaseekstoimproveitsabilitytogenerateincrementalpassengerandancillaryrevenue,includingthroughitsexpandedsuiteofbrandedfareproductsandinvestmentsintechnology.
Key achievements in 2018> Recordoperatingrevenueof$18,065million,$1,813millionor11%above2017.
> Carriedrecord50.9millionpassengers,anincreaseof5.8%from2017.
> EBITDARmarginof15.8%,consistentwiththe2018EBITDARmarginofapproximately16%forecastinAirCanada’snewsreleasedatedOctober31,2018.Operatingincomeof$1,174millionin2018reflectedadecreaseof$197millionfrom2017.EBITDARisanon-GAAPfinancialmeasure.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.
> ROICof12.6%,consistentwiththe2018ROICofapproximately12%forecastinAirCanada’snewsreleasedatedOctober31,2018.ROICisanon-GAAPfinancialmeasure.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.
> Realizedoridentifiedsavingsof$220millionunderthenewCostTransformationProgramintendedtosecure$250millioninsavings.AirCanadaexpectstoachievetheremainingsavingsof$30millionbytheendof2019.
> AdjustedCASMincreased0.3%from2017,inlinewiththerangeofnoincreasetoanincreaseof0.75%projectedinAirCanada’snewsreleasedatedOctober31,2018.CASMincreased6.0%from2017.AdjustedCASMisanon-GAAPfinancialmeasure.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.
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> AddedoneAirbusA321,twoAirbusA319andoneBoeing767aircrafttotheAirCanadaRougefleetandfiveBoeing787-9and16Boeing737MAX8aircrafttothemainlinefleet.
> Soldandleasedback25Embraer190aircraft,ofwhichsixwerereturnedtothelessorinlate2018.
> Recordunrestrictedliquidityof$5,725million.
> Finalized,inNovember2018,definitiveagreementstoacquireAimiaInc’sAeroplanloyaltybusinessaswellascommercialagreementsrelatedtoandinsupportofthisacquisitionwithTD,CIBC,andVisa.TheacquisitionwascompletedonJanuary10,2019.
AirCanadaistakingtangiblestepstopursueitsstrategyforsustainedvaluecreationandprofitabilitythroughtheexecutionofnewandon-goingstrategicinitiatives.Theseinclude:
AirCanadaRouge
SinceitsfirstflightinJuly2013,AirCanadaRouge,AirCanada’slow-costcarrier,hasbeendeployedtoagrowingnumberofCaribbeandestinationsandselectleisuredestinationsintheU.S.andCanada,aswellasininternationalleisuremarketswheredemandishighlyelasticandrespondspositivelytocompetitivelypriced,non-stopcapacity.AtDecember31,2018,AirCanadaRougeoperated53aircraft(25Boeing767,22AirbusA319andsixAirbusA321aircraft).AirCanadaplanstoadd10narrow-bodyaircrafttoAirCanadaRouge’sfleetin2019.Refertosection8“Fleet”ofthisMD&Aforadditionalinformation.
AirCanadaRougeprovidesAirCanadawiththeflexibilitytoshiftcapacitybetweenmarketsaswellasbetweenseasons.ItalsoprovidesAirCanadawiththeabilitytocompeteagainstlower-costcarriersaswellasemergingNorthAmericanultra-low-costcarriers.AirCanadaRougeofferscompetitivefareswhileleveragingthestrengthsofAirCanadamainline,includingitspowerfulbrand,award-winningproductsandservices,extensivenetworkwithenhancedconnectionoptions,distributioncapabilityandoperationalexpertise.
Boeing787Aircraft
Todate,AirCanadahastakendeliveryof35Boeing787Dreamlineraircraftofitsfirmorderof37(comprisedof8787-8and29787-9aircraft).AirCanadaplanstotakedeliveryoftheremainingtwoBoeing787-9aircraftonfirmorderbythesummerof2019.TheBoeing787Dreamlinerisdrivingnewopportunitiesforprofitablegrowthbyopeningnewinternationaldestinationsmadeviablebyitsloweroperatingcosts,mid-sizecapacityandlongerrange.
Narrow-bodyFleetRenewalProgram
Todate,AirCanadahastakendeliveryof20Boeing737MAX8aircraftofitsfirmorderof61737MAXaircraft(comprisedof50Boeing737MAX8and11Boeing737MAX9aircraft).TheBoeing737MAXaircraftarereplacingtheAirbusnarrow-bodyaircraftinAirCanada’smainlinefleet.AirCanadaplanstoadd18737Max8aircrafttothemainlinenarrow-bodyfleetin2019.
AirCanadaestimatesthattheBoeing737MAX8aircraftisdeliveringan11%lowerCASMwhencomparedtothemainlineAirbusA320aircraft,mainlydrivenbygreatermaintenanceandfuelefficiencies.Thisaircraftalsooffersgreaterdeploymentopportunitiesinthedomestic,U.S.transborderandcertainAtlanticmarkets.
AirCanadahasafirmorderfor45AirbusA220-300aircraft,thefirstofwhichAirCanadaplanstotakedeliveryofinlate2019.Thefirst25aircraftondeliverywillreplacetheEmbraer190aircraftinAirCanada’smainlinefleet,withtheincrementalaircraftsupportingAirCanada’shubandnetworkgrowth.AirCanadaestimatesthattheAirbusA220-300aircraftwilldelivera12%lowerCASMwhencomparedtotheEmbraer190aircraft,mainlydrivenbygreatermaintenanceandfuelefficiencies.Thisaircraft,withitslongerrange,willalsooffergreaterdeploymentopportunities,enablingAirCanadatoservenewmarketsnotaswellsuitedtoAirCanada’slargerBoeing737MAXorAirbusA321aircraft.Refertosection8“Fleet”ofthisMD&Aforadditionalinformation.
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ImprovementstoCommercialAgreementwithJazzandEquityInvestmentinChorus
InFebruary2019,AirCanadaconcludedanagreementtoamendandextenditscapacitypurchaseagreement(“CPA”)withJazz,awholly-ownedsubsidiaryofChorusAviationInc.TheamendmentswillprovidelongtermstabilityforChorus,reaffirmingJazzasAirCanada’smostsignificantAirCanadaExpresscarrierwellintothefuture.TheamendmentswillbolsterthestrengthandcompetitivenessoftheAirCanadaExpressbrandanditscoast-to-coastregionalnetwork,andprovidesignificantCPAsavingsforAirCanada,whileoptimizingnetworkandfleetflexibilitywhencomparedtothecurrentagreement.
HighlightsoftheCPAamendmentsareasfollows:
> AnextensionoftheCPAtermby10yearsfromJanuary1,2026toDecember31,2035.
> SimplificationandmodernizationoftheJazzfleetwithgrowththroughmore,largergaugeaircraft.Theamendmentsincludevariousminimumlevelsofcoveredaircraftatdifferentpointsintime,providingAirCanadatheflexibilitytooptimizeitsfleetwithinitsnetworkstrategy.
> Thecontinuanceofafixedfeestructure,includingnewtermsmitigatingriskandmarket-orientedcompensationtomaketheCPAmorecompetitiveforAirCanada,givennewcompetitorsenteringthemarket.
> InsupportofAirCanada’scosttransformationprogram,projectedannualsavingstoAirCanadaofapproximately$50millionin2019and2020,andcumulativesavingsofapproximately$53millionbetween2021and2025,bothascomparedtothe2015CPAframe-work(frombothfixedfeeandperformanceincentivereductions).Beyond2025,theCPAprovidesforamarketcompetitivefixedfee.Theseprojectedsavingsareinadditiontothesignificantbenefitsexpectedfromimprovednetworkefficienciesrelatingtothistransaction.
> ThecontinuationofahighlysuccessfulpilotmobilityagreementthatprovidesAirCanadaExpresspilotswithaccesstopilotcareersatAirCanadaonaplannedbasis.
> TheconsolidationofmoreofAirCanada’soverallregionalcapacityintoJazz’footprint,therebyloweringAirCanada’soverallregionalcostsinthefuture.
TheamendmentsbecameeffectiveretroactivelyasatJanuary1,2019.
ConcurrentwiththeCPAamendments,AirCanadamadea$97.26millionequityinvestmentinChorus,subscribingfor15,561,600ClassBvotingsharesinthecapitalofChorus,representing,attimeofissuance,approximately9.99%oftheissuedandoutstandingClassAvariablevotingsharesandClassBvotingsharesofChorusonacombinedbasis.ChorusshareswereissuedtoAirCanadaatapriceof$6.25pershare,representinga5%premiumtotheirfive-dayvolumeweightedaveragepriceasofthecloseoftradingonJanuary10,2019.Concurrentlywiththeclosingoftheequityinvestment,AirCanadaandChorusenteredintoaninvestorrightsagreementunderwhich,amongotherthings,AirCanadawillholdtheinvestmentsharesforaperiodofatleast60months,subjecttocertainlimitedexceptions.DeputyChiefExecutiveOfficerandChiefFinancialOfficerofAirCanada,MichaelRousseau,wasalsoappointedtotheboardofdirectorsofChorus.
OtherRevenueOptimizationandCostReductionInitiatives
AirCanadahascreatedacultureofcontinuouscosttransformationandrevenueimprovementacrosstheorganization,continuallyseekingproductivity,processandotherimprovements.Initiativesmayentailrevisingbusinessandoperationalprocesses,includingsupplychainandmaintenanceoperations,improvingemployeeproductivityandassetutilization,andpromotingworkplacepoliciestoaddrevenueandlowercosts.
AirCanadaupdateditssuiteofbrandedfareproductstoallowittofurthersegmentitscustomerbaseandofferavarietyoffareoptionsandacustomizedon-boardexperience.Thesenewre-bundledfaresprovideawiderrangeofchoicesandstimulatesalesbasedonspecificattributes,drivingincrementalrevenue.AirCanadacontinuestoincreaseitsancillaryrevenuefromits“àlacarte”services,suchasthoserelatedtobaggage,ticketchanges,seatselection,preferredseatingandupgrades,andfromitsonboardofferings,includingfood,beverage,duty-freeshoppingandonboardWi-FiInternet.AirCanadaisalsorealizingincrementalrevenuethroughinvestmentsinwebandmobileplatformsand,in2018,sawasignificantaccelerationindirectchannelshareandcoreancillaryrevenuesales.
Investmentsintechnologywillalsoplayanimportantroleinenhancingmargins,includingtheimplementationofanewpassengerservicesystem(“PSS”)inlate2019whichisfurtherdescribedbelow.Thisnewsystemisexpectedtoprovideannualincrementalbenefitsofover$100million.
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2. Leveraging International Network
AirCanadaisfocusedonleveragingitsinternationalnetworkanditscompetitiveattributestoappropriatelyexpandmargins,inlargepartbyincreasinginternationalconnectingtrafficthroughitsstrategicinternationalgatewaysinToronto,VancouverandMontreal,andcompetingeffectivelyintheleisuremarkettoandfromCanada.AirCanadaalsocontinuestodevelopcommercialallianceswithmajorinternationalcarrierstobroadenitsnetworkofferings.
Key developments in 2018> Introducednon-stopAirCanadamainlineservicefromVancouvertoParisandZurich;from
MontrealtoDublinandTokyo-Narita;andfromTorontotoShannon.
> Launchednon-stopAirCanadaRougeservicefromMontrealtoBucharest,Lisbon,PhoenixandVictoria;fromTorontotoBucharest,Kamloops,Nanaimo,PortoandZagreb;andfromEdmontontoLasVegas.
> Startednon-stopAirCanadaExpressservicefromTorontotoOmahaandProvidence;fromMontrealtoBaltimore,London(ON),Pittsburgh,andWindsor;fromVancouvertoSacramento;fromEdmontontoKelowna,SanFranciscoandVictoria;andfromCalgarytoComox.
> ConvertedAirCanadaRougeservicebetweenMontrealandCasablancatomainlineserviceusinganAirbusA330aircraft.
> Concludedarevenue-sharingjointventureagreementwithAirChina,thefirstjointventureagreementbetweenaChineseandNorthAmericanairline.Theagreement,whichisinrespectofallflightsbetweenmainlandChinaandCanada,allowsforcooperationinvariouscommercialandoperationalareas,includingnetworkplanning,revenuemanagement,salesanddistribution,andairportoperations.Thejointventureagreementprovidescustomersmoreflightchoices,seamlesstravelexperiences,optimizedflightschedules,harmonizedfareproducts,aswellasreciprocalparticipationinfrequentflyerprogramsanduseofairportlounges.AirCanadaandAirChinaalsoenhancedtheircodeshareagreementtoincludeZhengzhou,Xiamen,ShenzhenandNanjingindomesticChinaandVictoria,Kelowna,Saskatoon,andReginaindomesticCanada.Furthermore,thecodeshareagreementnowincludesflightsbetweenMontrealandHavana,andMontrealandShanghai.
> ExpandedthecodeshareagreementwithCathayPacific,furtherwideningthenetworkbyconnectingAirCanada’sservicestoHongKongtomanySoutheastAsiandestinations,includingthePhilippines,Malaysia,VietnamandThailand.Asaresult,AirCanadanowofferscodeshareservicestodestinationssuchasManila,Cebu,KualaLumpur,HoChiMinhCity,Hanoi,Bangkok,PhuketandChiangMai.
> ImplementedanewcodeshareagreementwithAdriaAirways,connectingAirCanada’sservicestoGermanyandBelgium(Frankfurt,MunichandBrussels)toLjubljana,Slovenia.
> ExpandedthecodeshareagreementwithAllNipponAirways(ANA)withtheadditionofANA’scodeonAirCanada’snewMontreal–Naritaservice,providingcustomerswithadditionaltraveloptionstocitieswithinJapanandotherAsiandestinations.
> Increasedsixthfreedomtraffic(international-to-international,includingU.S.)connectingthroughAirCanada’smajorCanadianhubsby15%whencomparedto2017.
AirCanadahascompetitivestrengthswhichallowsittoprofitablypursueinternationalrouteopportunities.Ithastheabilitytoappreciablyincreaseinternational-to-internationaltrafficthroughitsstrategicinternationalgatewaysinToronto,VancouverandMontreal,andisbroadeningitsnetworkappealthroughitsmembershipinStarAlliance,itsrevenue-sharingjointventurewithAirChinaonroutesbetweenCanadaandChina,anditsA++trans-Atlanticrevenue-sharingjointventurewithUnitedAirlinesandDeutscheLufthansaAG,whichthepartiesarefocusedonenhancingtoincreasecompetitiveness,createoperatingefficienciesandimprovecustomerexperience.AirCanada’snetworkisalsoenhancedthroughnumerouscodeshareandinterlineagreements.Furthermore,AirCanadahasaccesstoCanada’swideportfolioofinternationalrouterights,andCanada’smulti-ethnicdemographicprofileprovidestheairlinewithfurtheropportunitiestoprofitablycapturedemandforinternationaltravel.Theseattributes,combinedwithAirCanada’spowerfulbrandandindustry-leadingproductsandservices,allowittoleverageitsnetworkandbenefitfromthehighermarginsgenerallyavailableininternationalmarkets.
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AirCanadaplanstocontinuetoselectivelyandprofitablyexpanditsinternationalservicesbyleveragingitsnewaircraftandimprovedcoststructure,andbyexploitingthefollowingcompetitiveadvantages:
> Awidelyrecognizedbrandandastrongpositioninthemarketfortrans-Atlanticandtrans-PacifictraveltoandfromCanadaandtoandfromNorthandSouthAmericaviaCanada.
> Anextensiveandexpandingglobalnetwork,enhancedbytheairline’smembershipinStarAllianceandbynumerouscommercialarrangements.
> Aflexiblefleetmix,enablingtheairlinetoredeployorotherwisemanagecapacitytomatchchangesindemand.
> AirCanadaAltitude,AirCanada’sfrequentflyerprogram,whichrecognizestheairline’smostfrequentflyersbyofferingthemarangeofexclusivetravelprivileges,includingthebenefitsderivedfromAirCanada’sAeroplanprogram,whichallowsallcustomerstoearnandredeemAeroplanMiles.
> Competitiveproductsandservices,includinglie-flatsuitesintheSignatureClasscabin,conciergeservices,MapleLeaf®loungesand,atitsTorontoglobalhub,anexclusiveAirCanadaSignatureSuiteofferingeligibleSignatureClasscustomersexclusiveamenities,including“àlacarte”mealserviceintheSuite’scomplimentaryrestaurant.
> Geographicallywell-positionedhubs(Toronto,MontrealandVancouver)withefficientin-transitfacilities,accentuatingtheadvantagesofflyingAirCanadaforcustomerstravellingbetweentheU.S.andAsiaorEurope.
> Favourableslottimesatbusyairports,includingBeijing,Shanghai,HongKong,Tokyo-Narita,Tokyo-Haneda,Paris-CharlesdeGaulle,Frankfurt,London-Heathrow,NewYork-LaGuardia,andWashington-RonaldReaganNationalAirport.
In2019,AirCanadaplanstolaunchadditionalinternationalservices,includingnon-stopAirCanadayear-roundflightsfromTorontotoVienna.TheflightstoAustria’scapitalwillbeoperatedincooperationwithStarAlliancejointventurepartnerAustrianAirlines.AirCanadaalsoplanstolaunchnon-stopsummerseasonalservicefromMontrealtoBordeauxandincreaseweeklyfrequenciesfromVancouvertoDelhi,MelbourneandZurich.
AirCanadaenhancesitsdomesticandtransbordernetworkthroughcapacitypurchaseagreementswithJazz,SkyRegionalandotherairlines(operatingundertheAirCanadaExpressbanner).AirCanadaExpressprovidesanetworkoflocaltraffic,aswellashighvolumesoffeedertrafficthatflowintoAirCanada’slong-haulnetworkandsupportitsstrategytogrowinternationaltransittraffictoandfromtheU.S.In2019,AirCanadaplanstoenhanceservicestoNorthCarolina,includingwiththelaunchofanew,non-stopdailyflightbetweenMontrealandRaleigh.TheairlinewillalsodeploylargeraircraftonflightsbetweenTorontoandRaleighandCharlottetoincreasecapacityontheseroutesandintroduceBusinessClassservice.
AirCanadacontinuestoincreasesixthfreedomtraffic,particularlyfromtheU.S.,withitsaward-winningproductsandservices,geographicallywell-positionedCanadianhubs,extensivenetworkandothercompetitiveadvantages.
LesterB.PearsonInternationalAirport(“TorontoPearson”)offersastrategicadvantageduetoitsproximitytodenselypopulatedmajorU.S.marketsandservesalargenumberofbusinessandleisuretravellersflyingtoandfromToronto,Canada’slargestcity.AirCanada’sanditsStarAlliancepartners’operationsareconsolidatedinoneterminalatTorontoPearson,whichalsohasefficientin-transitfacilitiesthatallowpassengersandtheirbagstomoveseamlesslybetweenCanadianandU.S.CustomsandImmigration.Forseveralyears,AirCanadahasworkedcloselywiththeGreaterTorontoAirportsAuthority(“GTAA”)totransformTorontoPearsonintotheleadingNorthAmericanairportandgainagreatershareoftheglobalsixthfreedommarket.
AirCanadahasalsobeengrowingitsVancouverhubintoapremiergatewaytoAsia-PacificmarketsanddevelopingMontrealintoacomplementarytrans-Atlantichub.WithconvenientconnectionsbetweenVancouverandcitiesacrossNorthAmerica,AirCanadaofferssomeoftheshortestelapsedtraveltimebetweencontinentalNorthAmericaandPacificAsia,providingabettertravelexperience.Theairline’sMontrealhubnotonlylinksNorthAmericawithkeymarketsinFrance,butalsopositionsMontrealasapremiergatewaytotheAtlantic.GiventheimprovementsthatarebeingmadeinToronto,VancouverandMontreal,theairlineisabletobuilditsnetworkfromtheU.S.toprovideincreasedconnectionflowstoitsinternationalflights.
Sinceitsinceptionin1997,theStarAlliancenetworkhasgrowntoincludethefollowing28airlines:AdriaAirways,AegeanAirlines,AirCanada,AirChina,AirIndia,AirNewZealand,ANA,AsianaAirlines,AustrianAirlines,Avianca,AviancaBrasil,BrusselsAirlines,CopaAirlines,CroatiaAirlines,EGYPTAIR,EthiopianAirlines,
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EVAAir,LOTPolishAirlines,Lufthansa,ScandinavianAirlines,ShenzhenAirlines,SingaporeAirlines,SouthAfricanAirways,SwissInternationalAirLinesAG,TAPPortugal,THAI,TurkishAirlinesandUnitedAirlines.
InadditiontoitsmembershipinStarAllianceanditsjointventureagreements,AirCanada’snumerouscodeshareandinterlineagreementsallowittoachievegreatercriticalmassandnetworkscope.AirCanadahas36codesharepartners,ofwhich26areStarAlliancemembersand10arenon-members(AerLingus,CentralMountainAir,Etihad,Eurowings,GOLLinhasAéreasInteligentes,JetAirways,MiddleEastAirlines,SriLankanAirlines,CathayPacificandVirginAustralia).
AirCanadacontinuestoassessnewstrategicpartnershipsinsupportofitsbusinessplanandinternationalgrowthstrategy.
3. Customer Engagement
Providingaconsistentlyhighlevelofcustomerserviceandgrowingtheairline’spremiumcustomerbaseareimportantaspectsofAirCanada’sbusinessstrategy.AirCanadacontinuallystrivestoimprovecustomerloyaltyandgeneratepositivereferralstoattractnewcustomers.Theairlinerecognizesthatitsongoingsuccessisdependentonconsistentlydeliveringsuperiorvalueandinnovativeproducts,providingthehighestlevelsofcustomerserviceandanticipatingthechangingneedsofcustomers.
AcquisitionofAimia’sAeroplanLoyaltyBusiness
AirCanadaAltitudeisdesignedtorecognizeandrewarditsmostfrequenttravellerswithexclusiveperksandprivilegesbasedonthenumberofmilesorsegmentscustomersflycombinedwiththeirtotalspend.Theseprivileges,includingpriorityairportservices,loungeaccess,andeUpgradecredits,aredesignedtoenhancetheAirCanadaexperienceandencourageloyaltyfromfrequentflyers.AltitudemembersalsobenefitfromAirCanada’sAeroplanprogram,whichprovidesawiderangeofwaystoearnandredeemAeroplanMiles,includingflightsandupgradestoover1,200destinationsworldwide.
OnJanuary10,2019,AirCanadacompletedtheclosingofitspurchaseofAimiaCanadaInc.,ownerandoperatoroftheAeroplanloyaltybusiness,fromAimiaInc.Theaggregatepurchasepricefortheacquisitionconsistedof$450millionincashplus$47millionincashforpre-closingadjustments.Thepurchasepriceissubjecttopost-closingadjustmentsandtheacquisitionalsoincludestheassumptionoftheAeroplanMilesliability.AirCanadareceivedpaymentsfromTheToronto-DominionBank(“TD”)andCanadianImperialBankofCommerce(“CIBC”)intheaggregateamountof$822million.VisaCanadaCorporation(“Visa”)alsomadeapaymenttoAirCanadaand,assumingcompletionoftheAmexBankofCanada(“AMEX”)agreementreferredtobelow,AMEXwilldolikewise.
ConcurrentlywiththeconclusionoftheAeroplanpurchase,AirCanada,TD,CIBC,andVisafinalizedvariouscommercialagreementsrelatingtoandinsupportoftheacquisition,includingcreditcardloyaltyprogramandnetworkagreementsforfutureparticipationinAirCanada’snewloyaltyprogram.Inaddition,TDandCIBCmadepaymentstoAimiaCanadaInc.,nowAirCanada’ssubsidiary,intheaggregateamountof$400millionasprepaymentstobeappliedtowardsfuturemonthlypaymentsinrespectofAeroplanMiles.AirCanadaalsohasenteredintoanagreementinprinciplewithAMEX,whichalsoissuesAeroplanco-brandedproducts,tosecureitscontinuedparticipationinAirCanada’sloyaltyprogramafter2020.Followingtheclosingoftheacquisition,AimiaCanadaInc.changeditsnametoAeroplanInc.
Consistentwithitspromiseofcontinuedinvestmentsinthecustomerexperience,AirCanadaplanstolaunchitsnewloyaltyprograminmid-2020.AirCanadabelievesthatthenewprogramwillallowittofurtherstrengthencustomerrelationships,offermembersmoreflexiblerewards,anddeliveramoreconsistentend-to-endcustomerexperience.Thenewprogramwillofferbroadearningandredemptionopportunities,morepersonalizedserviceandabetterdigitalexperienceforAirCanadacustomers.
PassengerServiceSystem
AirCanadaconcludedanagreementwithAmadeusforthefullAmadeusAltéaSuitepassengerservicesystem(PSS)includingreservations,inventoryanddeparturecontrolsolutions.Thenewreservationsystem,scheduledtobeimplementedinlate2019,willallowAirCanadatooptimizeitsflightschedulebyprovidingtheabilitytomoreeasilymanageinventorybetweenanygivenoriginanddestinationandautomaterebookingsduringflightdisruptions,suchasthosecausedbyextremeweather.ItwillalsosupportAirCanada’sinternationalnetworkthroughmoreseamlessbookingandcustomerhandlingwithStarAllianceandinterlinepartners.
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ProductsandServices
InvestinginproductsandservicesremainspivotaltoAirCanada’scommitmenttocustomerengagement.Tothisend,theairlinehaspartneredwithleadingbrandsandcontinuestoinvestinpremiumproductsthatenhancethecustomer’sjourney.
In2018,AirCanadalaunchedAirCanadaSignatureService,rebrandingthelie-flatBusinessClassproductavailableonmostinternationalmainlineflights,aswellasselectkeytranscontinentalmarkets.AirCanadaSignatureServiceprovideseligiblecustomerswithanend-to-endpremiumexperience,includingaccesstoprioritygroundproducts,includingselectconciergeservices,aswellanexclusiveon-boardexperienceinAirCanadaSignatureClass.
AirCanadaSignatureClasswasalsointroducedinNorthAmerica,replacingBusinessClass–Transcontinental,andforthefirsttimeshowcasingaproductspecificationalignedtointernationalstandardsinNorthAmerica.AirCanadaSignatureClassisavailableonselecttranscontinentalroutes,includingdailyovernightflightsfromLosAngeles,SanFranciscoandVancouvertoToronto.AirCanadaSignatureClassisalsoavailableonflightsbetweenTorontoandHonolulu.
AirCanadaprovidesconciergeassistanceat47airportsglobally.In2019,theairlineplanstoexpandthisservicetoincludeDubaiandVienna.Thepremiumagentprogram,withspecially-trainedcustomersalesandserviceagentsaccreditedspecificallytoworkatPriorityCheck-inandinsidetheMapleLeafLounges,isnowavailableat10Canadianairports,withplanstoexpandtokeylocationsintheU.S.throughout2019.
Throughout2018,AirCanadaalsoexpandedtheuseofafleetofBMWvehicles,operatingaspartoftheAirCanadaValetServiceatTorontoPearson.Attheendof2018,AirCanadaoperatedafleetof20BMW7-serieslimousines,providingselectcustomersconnectingfromadomestictoaninternationalAirCanadaSignatureClasswithapersonalizedairsidedrivebetweenthegateareas.By2019,thiswillmakeAirCanadathefirstairlineinNorthAmericatoprovidethistypeofservicetoBusinessClasscustomers,subjecttocertainrestrictions.
TheMapleLeafLoungeportfoliohasexpandedtoSaskatoon,withtheopeningofAirCanada’s23rdloungeworldwide.AirCanadaalsoopenedanew7,400squarefeetMapleLeafLoungelocatedinsidethenewgateareaatNewYorkLaGuardia,aswellasanew3,600squarefeetMapleLeafLoungeatSt.John’sInternationalAirport.TheloungesatLaGuardiaandSt.John’sInternationalareeachreplacingexistingfacilities,providingasignificantlyimprovedgroundproduct.In2019,AirCanadaexpectstoopenanewMapleLeafLoungeatSanFranciscoInternationalAirport,aswellasstartingacomprehensiverefurbishmentprogramofexistingfacilitiesatkeyhubs.
TheAirCanadaSignatureSuite,apremium“àlacarte”diningfacilityavailableatTorontoPearsonopenforselectcustomersdepartinginAirCanadaSignatureClass,openedinlate2017andhasbeenwellreceivedbycustomersthroughout2018.PlansareunderwaytoreviewandpossiblyexpandtheconcepttoVancouverInternationalAirportin2019.
SeamlessmeansoftransitingthroughAirCanada’shubsatTorontoPearson,VancouverandMontrealTrudeauandenhancementstofacilitiesandprocessessupportingAirCanada’ssixthfreedomtrafficstrategynowallowcustomersconnectingfromJapantoadomesticdestinationtonothavetoclaimtheirbagsattheconnectingpoint,unlessotherwiseadvisedbycustoms.ThisisinadditiontocustomersconnectingfromtheU.S.,EuropeorAustraliatoaCanadianairportthroughthesehubs.Bysummer2019,AirCanadaexpectstohaveallinternationaltodomesticconnectionsincludedintheInternationaltoDomesticprogram.SupportingnewflightstoAsia,during2018,AirCanadaalsoexpandedtheChinaTransitProgramtoincludeMontrealTrudeau,providingeligiblecitizensofthePeople’sRepublicofChinatheopportunitytoconnectthroughMontrealonselecteligibleflightswithouttheneedforaCanadianvisa.
StartingwiththeBoeing787Dreamliner,andthenfollowedbytheBoeing777,AirCanadahasbeenprogressivelyupgradingitswide-bodyaircraftwithnextgenerationcabin,andin-flightentertainmentproducts.Theyhavebeenenthusiasticallyreceivedbycustomersand,in2019,AirCanadawillextendtheseimprovementstoitsfleetofAirbusA330aircraft.AirCanadaalsoreceiveditsfirst18newBoeing737MAX(twoin2017and16in2018)and,inlate2019,willtakeitsfirstdeliveryofthenewAirbusA220aircraft.Theseaircraftbringmarket-leadingcabinsandentertainmentproductstoAirCanada’snarrow-bodyfleet.
AirCanadaandAirCanadaRougehaveexpandedWi-Ficonnectivitytoadditionalaircraftandexpecttohaveallaircraftconnectedbytheendof2019.AirCanadaintroducedcomplimentaryglobalstreamingWi-FiserviceasarewardoptionforAltitudeElite75KandSuperElite100Kmembers,makingAirCanadathefirstairlineinNorthAmericatooffercomplimentaryWi-Fitoitsmostfrequentflyers.
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AirCanadareceivedanumberofawardsrecognizingitsindustry-leadingproductsandservicesin2018,includingbeingnamedBest Airline in North Americainthe2018SkytraxWorldAirlineAwards,aswellasBest Business Class in North America.SkytraxalsorevalidatedAirCanada’srankingasNorthAmerica’sonlyfour-starInternationalnetworkcarrieraspartofaqualityauditwhichassessedmorethan1,000touch-pointsonthegroundandintheair.Aspartofthefour-starre-certification,AirCanadawasawardedhighmarksfortheAirCanadaSignatureClassserviceonselectNorthAmericantranscontinentalmarkets,thenewBusinessClassseatofferedontheBoeing737MAXaircraft,thestate-of-the-artentertainmentsystemontheBoeingfleet,aswellastheserviceofferedinPremiumEconomyClass,allreflectiveofthesignificantinvestmentinproductandserviceundertakenoverthepreviousyears.Inaddition,theAirCanadaSignatureSuitewasconsideredamongstthebest,ifnotthebestintheworldforbusinessclasspre-flightdining.
Inlate2018,theIpsosReid2018CanadianBusinessTravellerSurveyconfirmedAirCanadaasthepreferredairlinefordomestictravelfor92%offrequentbusinesstravellers.ThenationalstudydeterminedthatAirCanadaistheonlyCanadianairlinetoseeaconsistentincreaseinpreferenceandinusageoverthepastfiveyears.Additionally,readersofleadingfrequentbusinesstravellermagazine,Business Traveler,havenamedAirCanadaBest North American Airline for International Travel,aswellasBest North American Airline for Inflight Experience.Amongotherthings,thesurveyoffrequentbusinesstravellersfound:
> OverallsatisfactionwithAirCanada’sservicecontinuestoincrease,contrastingthatofdomesticcompetitors,climbingsixpercentagepointsover2017forin-flightandfourpercentagepointsforairports.AirCanada’shighestscoresinthelastfiveyearsweredrivenbysatisfactioninitsschedule,loyaltyprogram,customerserviceandperceptionasadynamicorganization.
> AirCanadaistheonlyCanadianairlinethathasseenanincreaseinitsNetPromoterScore(NPS)for2018.
> 96%intendtouseAirCanadafordomesticbusinesstravelinthecomingyear,significantlymorethanthosewhointendedtouseotherCanadiancarriers.
> AirCanadaisthepreferredairlinefortravelbetweenCanadaandtheU.S.,increasingby11percentagepointsoverthelastfiveyears.
> BusinesstravelincreasedthemostinternationallytoEurope,Asiaandotherglobaldestinations,growingbyfivepercentagepointsoverlastyear.
4. Culture Change
AirCanadacontinuestoevolveitsculture,transformingfromatransportationcompanytoacustomerserviceexcellencecompanywhichtreatsisemployeesanditscustomerswithcareandclass.In2018,AirCanadalaunchedanewemployeeengagementsurveywhichprovidedstrongeranalyticsandadeeperunderstandingofwhereadditionalfocusisrequired.Witha30%responserate,thesurveyyieldedmeaningfuldatatodetermineanemployeenetpromoterscore(eNPS).Atotalof78%ofemployeessurveyedwereidentifiedas“promoters”(thetrulyengaged)or“passives”(thoseleaningtowardspositiveoraremoreeasilyinfluencedtobecomepromoterswithsmallincrementalactions).Workenvironment,supportandlearningopportunitieswereidentifiedaskeytakeaways.Thesurveyalsofurtherreinforcedthelinkbetweencustomerperceptionsandemployeebehaviours,whileprovidingmeaningfuldirectionforthedevelopmentof2018and2019initiatives.
AirCanadaalsoregularlyvalidatestheorganizationalpulsethroughfocusgroupsandYammer,itsinternalsocialmediaplatform.Theairlinealsoconnectswithemployeesthroughweeklyexecutivemessagesandmultiplecommunicationschannels,includingadailynewsletter.Over5,000employeesparticipatedintownhallsheldinhangarsacrossthesystemwhichallowedforopenQ&Asessionsbetweenemployeesandexecutives.
Toequipmanagerstoexcelatcriticalface-to-facecommunications,AirCanada’smanagementdevelopmentprogramsfocusoncoachingforsoftskillsthatincluderelationshipbuildingandmakingauthenticconnections.In2019,AirCanadawillfocusontheevolutionofmanager‘softskills’–anessentialingredientinleadershipcompetencydevelopment.
ItisexpectedthatMillennialswillmakeup75%ofAirCanada’sworkforcewithinthenext15years.AirCanada’sdevelopmentprogramsarecustomized,takingintoaccountdifferentlearningandengagementstyles.Theairline’ssuccessionstrategyisnowdrivenbyaTalentBoardcomprisedofexecutivesworkingcloselywithHumanResourcestoidentifyandpreparenewleadership–bothyoungandseasoned.
AirCanadaisalsoleveragingartificialintelligenceandvirtualinterviewstoenhanceitshiringpracticesandensureitisattractingthebestcandidatesinthefield.
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TheimportanceofdiversityandinclusionatworkisadirectreflectionofAirCanada’sbroadcustomerbaseandakeyelementinAirCanada’shiringstrategy.In2019,aseniorleaderdiversitycounselandcompany-wideemployeebusinessgroupswillidentifyprogramsandopportunitiestopromotediversity,including“WomeninAviation”learningevents,scholarshipsandinternshipsforunder-representedgroups,suchaspeoplewithdisabilityandspectrumlimitations.
AirCanada’sachievementscanbemeasuredinseveralways,includingthroughexternalrecognitionsuchas:
> OneofCanada’sBestDiversityEmployers–2018–MediacorpCanada
> OneofCanada’sTop100Employers–2019–MediacorpCanada
> OneofMontréal’sTopEmployers–2019–MediacorpCanada
> OneofCanada’sMostAttractiveEmployers–2018–UniversumGlobal
> Oneof50MostEngagedWorkplaces™–2018–Achievers
> Oneof2018NorthAmericanCandidateExperienceAwardswinners–TalentBoard
> FifthintheTop20EmployerBrandsinCanada–2018–Randstad
Labour
Startingin2014,AirCanadaenteredintomultiplelong-termlabouragreementswithunionsrepresentingitsunionizedworkforce.Theseagreementsprovideadditionalstabilityandflexibility,aswellasdemonstrateacollaborativepartnershipsupportingitstransformationintoaglobalchampion.Theseagreementsincludethefollowing:
> ACPA(Pilots)–In2014,AirCanadaandACPA,representingpilots,ratifiedanewcontractprovidingcollectiveagreementtermsfor10years,endingSeptember29,2024,subjecttocertainrenegotiationprovisionsandbenchmarksoverthisperiod.In2017,AirCanadaratifiedamendmentstoitsexistinglong-termlabouragreementwithACPA.Theamendmentstothe10-yearagreementprovideadditionalcommercialopportunitiesaswellasincreasedoperationalflexibility.
> IAMAW(Maintenance,OperationsandBaggage)–In2016,AirCanadaandtheIAMAW,representingtechnicalmaintenance,operationalsupportandairportbaggagehandlers,concludedanewcontractprovidingcollectiveagreementtermsfor10years,endingMarch31,2026,subjecttocertainrenegotiationprovisionsoverthisperiod.
> CALDA(Dispatchers)–In2016,AirCanadaandCALDA,representingflightdispatchers,concludedanewcontractprovidingcollectiveagreementtermsfor12years,endingFebruary29,2028,subjecttocertainrenegotiationprovisionsoverthisperiod.
> CUPE(FlightAttendants)–In2015,AirCanadaandCUPE,representingflightattendants,concludedanewcontractprovidingcollectiveagreementtermsfor10years,endingMarch31,2025,subjecttocertainrenegotiationprovisionsoverthisperiod.
> Unifor(CustomerServiceandSalesAgents)–In2015,AirCanadaandUnifor,representingtheairline’scustomerserviceandsalesagentsconcludedanewcontractprovidingcollectiveagreementtermsforfiveyears,endingFebruary28,2020.
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5. OVERVIEW
Full Year 2018 Financial Summary
ThefollowingisanoverviewofAirCanada’sresultsofoperationsandfinancialpositionforthefullyear2018comparedtothefullyear2017.
> Recordoperatingrevenuesof$18,065millionin2018comparedtooperatingrevenuesof$16,252millionin2017,anincreaseof$1,813millionor11%.Oncapacitygrowthof7.1%,recordpassengerrevenuesof$16,223millionincreased$1,630millionor11.2%from2017.
> Operatingexpensesof$16,891millionin2018versusoperatingexpensesof$14,881millionin2017,anincreaseof$2,010millionor14%.CASMincreased6.0%from2017.AdjustedCASMincreased0.3%from2017.
> Operatingincomeof$1,174millionin2018comparedtooperatingincomeof$1,371millionin2017,adecreaseof$197million.
> EBITDARof$2,851millionin2018comparedtoEBITDARof$2,928millionin2017,adecreaseof$77million.Theairlinereporteda2018EBITDARmargin(EBITDARasapercentageofoperatingrevenue)of15.8%.ThiscomparedtoanEBITDARmarginof18.0%in2017.SpecialitemsareexcludedfromallofAirCanada’sreportedEBITDARcalculations.Refertosection6ofthisMD&Aforinformationonspecialitems.
> Netincomeof$167millionor$0.60perdilutedsharein2018versusnetincomeof$2,029millionor$7.31perdilutedsharein2017.In2018,AirCanadarecordedforeignexchangelossesof$317millionandalossondisposalofassetsof$188million.In2017,AirCanadarecordedadeferredincometaxrecoveryof$759millionandforeignexchangegainsof$120million.
> Adjustednetincomeof$677millionor$2.45perdilutedsharein2018versusadjustednetincomeof$1,145millionor$4.11perdilutedsharein2017.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.
> Adjustednetdebtof$5,858millionatDecember31,2018versusadjustednetdebtof$6,116millionatDecember31,2017,adecreaseof$258million.In2018,increasesinlong-termdebtandfinanceleasebalancesof$533millionandcapitalizedoperatingleasebalancesof$112millionweremorethanoffsetbyanincreaseincash,cashequivalentsandshort-terminvestmentbalancesof$903million.AdjustednetdebtisanadditionalGAAPmeasure.Refertosection9.3“AdjustedNetDebt”ofthisMD&Aforadditionalinformation.
> AirCanada’sleverageratio(adjustednetdebttotrailing12-monthEBITDAR)was2.1atDecember31,2018,unchangedfromDecember31,2017.Leverageratioisanon-GAAPfinancialmeasure.Refertosection9.3“AdjustedNetDebt”ofthisMD&Aforadditionalinformation.
> Netcashflowsfromoperatingactivitiesof$2,695millionin2018versusnetcashflowsfromoperatingactivitiesof$2,738millionin2017.In2018,freecashflowof$791milliondecreased$265millionfrom2017andexceededthe$500millionto$600millionrangeprojectedinAirCanada’snewsreleasedatedOctober31,2018.Thebetterthanexpectedfreecashflowcanbeattributedtoacombinationoflowerthanprojectedcapitalexpenditures,betterthanexpectedcashfromworkingcapitalandstrongerthananticipatedincomefromoperations.Refertosection9.5“ConsolidatedCashFlowMovements”ofthisMD&Aforadditionalinformation.
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> Returnoninvestedcapital(“ROIC”)forthe12monthsendedDecember31,2018of12.6%,inlinewiththeROICofapproximately12%projectedinAirCanada’snewsreleasedatedOctober31,2018.ThiscomparedtoROICof15.3%forthe12monthsendedDecember31,2017.ThedecreaseinROICversus2017wasmainlydrivenbyloweradjustednetincome,anincreaseinaverageshareholders’equitynetofexcesscashandanincreaseinaircraftrentexpenseyear-over-year.
Fourth Quarter 2018 Financial Summary
ThefollowingisanoverviewofAirCanada’sresultsofoperationsforthefourthquarterof2018comparedtothefourthquarterof2017.
> Recordoperatingrevenuesof$4,246millioninthefourthquarterof2018comparedtooperatingrevenuesof$3,820millioninthefourthquarterof2017,anincreaseof$426millionor11%.Oncapacitygrowthof5.8%,recordpassengerrevenuesof$3,795millionincreased$386millionor11.3%fromthefourthquarterof2017.
> Operatingexpensesof$4,124millioninthefourthquarterof2018versusoperatingexpensesof$3,687millioninthefourthquarterof2017,anincreaseof$437millionor12%.CASMincreased5.7%fromthefourthquarterof2017.AdjustedCASMincreased0.5%fromthefourthquarterof2017,betterthanthe1.5%to2.5%increaseprojectedinAirCanada’snewsreleasedatedOctober31,2018.AirCanada’sbetterthanexpectedadjustedCASMperformancewaslargelyduetoloweraircraftmaintenanceexpense,drivenbyafavourableannualadjustmentrelatedtoend-of-leasemaintenanceprovisions,aswellasthetimingofcertainenginemaintenanceevents.
> Operatingincomeof$122millioninthefourthquarterof2018comparedtooperatingincomeof$133millioninthefourthquarterof2017,adecreaseof$11million.
> RecordEBITDARof$543millioninthefourthquarterof2018comparedtothepreviousrecordEBITDARof$521millioninthefourthquarterof2017,anincreaseof$22million.Theairlinereportedafourthquarter2018EBITDARmarginof12.8%comparedtoanEBITDARmarginof13.6%inthefourthquarterof2017.
> Anetlossof$231millionor$0.85perdilutedshareinthefourthquarterof2018versusnetincomeof$8millionor$0.02perdilutedshareinthefourthquarterof2017.
> Adjustednetincomeof$54millionor$0.20perdilutedshareinthefourthquarterof2018versusadjustednetincomeof$60millionor$0.22perdilutedshareinthefourthquarterof2017.
> Netcashflowsfromoperatingactivitiesof$360millioninthefourthquarterof2018versusnetcashflowsfromoperatingactivitiesof$389millioninthefourthquarterof2017.Freecashflowof$141millioninthefourthquarterof2018representedanimprovementof$184millionfromthefourthquarterof2017.
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6. RESULTS OF OPERATIONS – Full Year 2018 versus Full Year 2017
ThefollowingtableanddiscussionprovideandcompareresultsofAirCanadafor2018and2017:
(Canadiandollarsinmillions,exceptpersharefigures)
Full Year
2018 2017(1) $Change %Change
Operating revenuesPassenger $ 16,223 $ 14,593 $ 1,630 11Cargo 803 708 95 13Other 1,039 951 88 9Total revenues 18,065 16,252 1,813 11
Operating expensesAircraftfuel 3,969 2,927 1,042 36Regionalairlinesexpense
Aircraftfuel 531 412 119 29Other 2,311 2,205 106 5
Wages,salariesandbenefits 2,873 2,671 202 8Airportandnavigationfees 964 905 59 7Aircraftmaintenance 1,003 938 65 7Depreciation,amortizationandimpairment 1,080 956 124 13Salesanddistributioncosts 807 770 37 5Groundpackagecosts 602 538 64 12Aircraftrent 518 503 15 3Cateringandonboardservices 433 383 50 13Communicationsandinformationtechnology 294 254 40 16Specialitems - 30 (30) (100)Other 1,506 1,389 117 8Total operating expenses 16,891 14,881 2,010 14 Operating income 1,174 1,371 (197)
Non-operating income (expense) Foreignexchangegain(loss) (317) 120 (437)Interestincome 108 60 48Interestexpense (331) (311) (20)Interestcapitalized 35 36 (1)Netfinancingexpenserelatingtoemployeebenefits (50) (65) 15Gain(loss)onfinancialinstrumentsrecordedatfairvalue (1) 23 (24)Gainonsaleandleasebackofassets - 52 (52)Gainondebtsettlementsandmodifications 9 21 (12)Lossondisposalofassets (188) - (188)Other (34) (21) (13)Total non-operating expense (769) (85) (684)Income before income taxes 405 1,286 (881)Incometax(expense)recovery (238) 743 (981)Net income $ 167 $ 2,029 $ (1,862)Diluted earnings (loss) per share $ 0.60 $ 7.31 $ (6.71)
EBITDAR (2) $ 2,851 $ 2,928 $ (77)Adjusted pre-tax income (2) $ 952 $ 1,165 $ (213)Adjusted net income (2) $ 677 $ 1,145 $ (468)Adjusted earnings per share – diluted (2) $ 2.45 $ 4.11 $ (1.66)
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
(2)EBITDAR,adjustedpre-taxincome,adjustednetincomeandadjustedearningspershare–dilutedarenon-GAAPfinancialmeasures.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.
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System Passenger Revenues
WiththeadoptionofIFRS 15–Revenue from Contracts with CustomerseffectiveJanuary1,2018,certainpassengerandcargorelatedfeeswerereclassifiedfromOtherrevenuetoPassengerrevenueandCargorevenueonAirCanada’sconsolidatedstatementofoperations,withrestatementof2017amounts.Thisreclassificationhasnoimpactontotaloperatingrevenue.Concurrentwiththischangeinpresentation,AirCanadahasrevisedthemethodologyusedtocalculateyieldandPRASM.Thesemeasuresarenowbasedontotalpassengerrevenues,withrestatementof2017amountsonthesamebasis.
In2018,systempassengerrevenuesof$16,223millionincreased$1,630millionor11.2%from2017ontrafficgrowthof8.5%andayieldimprovementof2.5%.Onastagelengthadjustedbasis,yieldincreased3.7%whencomparedto2017.Businesscabinrevenues,onasystem-basis,increased$376millionor13.2%from2017ontrafficandyieldgrowthof9.4%and3.5%,respectively.
Thetablebelowprovidespassengerrevenuebygeographicregionforthefullyear2018andthefullyear2017.
(Canadiandollarsinmillions)
Passenger Revenues
Full Year
2018 2017(1) $Change %Change
Canada $ 4,894 $ 4,637 $ 257 5.5U.S.transborder 3,504 3,195 309 9.7Atlantic 4,237 3,539 698 19.7Pacific 2,430 2,195 235 10.7Other 1,158 1,027 131 12.7System $ 16,223 $ 14,593 $ 1,630 11.2
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
Thetablebelowprovidesyear-over-yearpercentagechangesinpassengerrevenuesandoperatingstatisticsforthefullyear2018versusthefullyear2017.
Full Year 2018 versus Full Year 2017 (1)
Passenger Revenue
Capacity (ASMs)
Traffic (RPMs)
Passenger Load Factor
Yield PRASM
%Change %Change %Change ppChange %Change %Change
Canada 5.5 3.2 2.7 (0.4) 2.7 2.3U.S.transborder 9.7 6.9 7.1 0.1 2.4 2.6Atlantic 19.7 10.4 14.7 3.1 4.4 8.4Pacific 10.7 4.0 5.7 1.4 4.7 6.4Other 12.7 14.7 12.8 (1.4) - (1.7)System 11.2 7.1 8.5 1.0 2.5 3.8
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amountswhicharereflectedinthetableabove.
Componentsoftheyear-over-yearchangeinfullyearsystempassengerrevenuesincluded:
> The8.5%trafficincreasewhichreflectedtrafficgrowthinallmarketsandincludedgainsinthebusinessandpremiumeconomycabins.Consistentwiththeairline’sobjectiveofincreasingglobalinternational-to-internationalconnectingtrafficthroughitsmajorCanadianhubs(sixthfreedomtraffic),thetrafficgrowthin2018reflectedanincreaseinconnectingtrafficviaCanadatointernationaldestinations.
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> The2.5%systemyieldincreasewhichreflected:
− increasesinfaresandcarriersurcharges,growthinhigh-yieldinglocaltrafficandanimprovedoverallfaremix;
− greaterproportionalgrowthofhigh-yieldingbusinessandpremiumeconomyclasspassengers;
− anincreaseinancillaryrevenues,includingthroughbaggagefees,advanceseatselection/preferredseatingfeesandairportpaidupgrades;and
− theintroductionofanexpandedsuiteoffareofferingsondomestic,U.S.transborderandAtlanticservices,resultingingrowthinancillaryrevenueandanimprovedfaremix.
Thesefactorswerepartlyoffsetbyanincreaseinaveragestagelengthof2.1%,duetolong-haulinternationalexpansion,whichhadtheeffectofreducingsystemyieldby1.2percentagepoints.
Domestic Passenger Revenues
In2018,domesticpassengerrevenuesof$4,894millionincreased$257millionor5.5%from2017.
Componentsoftheyear-over-yearchangeinfullyeardomesticpassengerrevenuesincluded:
> The2.7%trafficincreasewhichreflectedtrafficgrowthonallmajordomesticservicesaswellasincrementalconnectingtrafficwithinCanadatointernationaldestinations.Thetrafficgrowthin2018includedgainsinthebusinesscabin.
> The2.7%yieldincreasewhichreflectedyieldimprovementsonallmajordomesticservices.Theoverallyieldimprovementversus2017reflectedgainsinthebusinesscabinaswellastheimpactofnewfarecategoriesondomesticservices,resultingingrowthinancillaryrevenue,includingbaggagefees,andanimprovedfaremix.
U.S. Transborder Passenger Revenues
In2018,U.S.transborderpassengerrevenuesof$3,504millionincreased$309millionor9.7%from2017.
Componentsoftheyear-over-yearchangeinfullyearU.S.transborderpassengerrevenuesincluded:
> The7.1%trafficincreasewhichreflectedtrafficgrowthonallmajorU.S.transborderservices.Thetrafficincreasein2018reflectedstrongpassengerdemandbetweenCanadaandtheU.S.,gainsinthebusinesscabinandgrowthininternational-to-internationalconnectingpassengerflowsfromtheU.S.
> The2.4%yieldincreasewhichreflectedyieldgrowthonallmajorU.S.transborderserviceswiththeexceptionofU.S.short-haulroutes.ThelaunchofnewfarecategoriesonU.S.transborderservices,resultingingrowthinancillaryrevenueandanimprovedfaremix,contributedtotheoverallyieldimprovementyear-over-year.Anunfavourablecurrencyimpactof$13millionwasanoffsettingfactor.
Atlantic Passenger Revenues
In2018,Atlanticpassengerrevenuesof$4,237millionincreased$698millionor19.7%from2017.
Componentsoftheyear-over-yearchangeinfullyearAtlanticpassengerrevenuesincluded:
> The14.7%trafficincreasewhichreflectedtrafficgrowthonallmajorAtlanticservicesandincludedgainsinallcabins.The10.4%capacitygrowthyear-over-yearwasmainlyduetothelaunchofnewservicesfromVancouvertoFranceandSwitzerland;fromTorontotoIreland,Portugal,RomaniaandCroatia;andfromMontrealtoIreland,RomaniaandPortugal,aswellastoincreasedfrequenciesonexistingroutes.
> The4.4%yieldincreasewhichreflectedyieldimprovementsonallmajorAtlanticservicesandincludedanincreaseincarriersurchargesyear-over-yearandafavourablecurrencyimpactof$20million.ThelaunchofanewfarecategoryonAtlanticservices,resultingingrowthinancillaryrevenue,includingbaggagefees,andanimprovedfaremix,alsocontributedtotheoverallyieldimprovementyear-over-year.Anincreaseinaveragestagelengthof1.5%,whichhadtheeffectofreducingAtlanticyieldby0.9percentagepoints,wasapartlyoffsettingfactor.
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Pacific Passenger Revenues
In2018,Pacificpassengerrevenuesof$2,430millionincreased$235millionor10.7%from2017.
Componentsoftheyear-over-yearchangeinfullyearPacificpassengerrevenuesincluded:
> The5.7%trafficincreasewhichreflectedtrafficgrowthonallmajorPacificserviceswiththeexceptionofservicestoHongKongandJapanwherecapacitywasreducedyear-over-year.Thetrafficgrowthincludedgainsinthebusinessandpremiumeconomycabins.
> The4.7%yieldincreasewhichreflectedyieldgrowthonallmajorPacificserviceswiththeexceptionofAustraliawhichwasslightlybelow2017.Theyieldincreaseyear-over-yearincludedgainsinthebusinessandpremiumeconomycabins.TheloweryieldonservicestoAustraliareflectedincreasedindustrycapacitywhencomparedto2017.TheoverallPacificyieldimprovementversus2017includedanincreaseincarriersurchargesyear-over-year,particularlyinJapanandKoreawheresurchargesareregulated.
Other Passenger Revenues
In2018,Otherpassengerrevenues(fromroutestoandfromtheCaribbean,MexicoandCentralandSouthAmerica)of$1,158millionincreased$131millionor12.7%from2017.
Componentsoftheyear-over-yearchangeinfullyearOtherpassengerrevenuesincluded:
> The12.8%trafficincreasewhichreflectedtrafficgrowthonservicestoSouthAmericaandonroutestotraditionalsundestinations.Thetrafficgrowthin2018includedgainsinallcabins.
> Nochangeinyieldwhencomparedto2017asyieldgrowthonservicestotheCaribbeanwasoffsetbyyielddecreasesonservicestoSouthAmericaandMexico.TheyielddeclineonservicestoSouthAmericawasmainlyduetoasignificantincreaseinaveragestagelengthduetotheremovaloftheshort-haultagbetweenSantiagoandBuenosAiresasAirCanadanowservesbothmarketsonanon-stopbasis.TheyielddeclineonservicestoMexicowasmainlydrivenbycompetitivepricingactivitiesduetoincreasedindustrycapacity.Anincreaseinaveragestagelengthof4.1%hadtheeffectofreducingyieldintheOthermarketsby2.3percentagepoints.Onastagelengthadjustedbasis,yieldincreased2.3%whencomparedto2017.
Cargo Revenues
In2018,cargorevenuesof$803millionincreased$95millionor13.6%from2017onyieldandtrafficgrowthof8.1%and5.1%,respectively.In2018,theAtlanticandPacificmarketsexperiencedparticularlystrongperformances.
Thetablebelowprovidescargorevenuebygeographicregionforthefullyear2018andthefullyear2017.
Cargo Revenues Full Year
(Canadiandollarsinmillions) 2018 2017(1) $Change %Change
Canada $ 95 $ 84 $ 11 14.0U.S.transborder 43 39 4 11.5Atlantic 278 245 33 13.7Pacific 325 280 45 16.0Other 62 60 2 2.6System $ 803 $ 708 $ 95 13.6
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
Other Revenues
In2018,otherrevenuesof$1,039millionincreased$88millionor9%whencomparedto2017,mainlyduetoanincreaseingroundpackagerevenueatAirCanadaVacations,drivenbybothhigherpassengervolumesandahigherpriceofgroundpackageswhencomparedto2017.Anincreaseinpassengerandairline-relatedfeesversus2017wasalsoacontributingfactor.
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CASM and Adjusted CASM
In2018,CASMincreased6.0%andadjustedCASMincreased0.3%whencomparedto2017.
ThetablebelowcomparesAirCanada’sCASMandadjustedCASMforthefullyear2018tothefullyear2017.
(centsperASM)
Full Year
2018 2017(1) ¢Change %Change
Aircraftfuel ¢ 3.58 ¢ 2.83 ¢ 0.75 26.6Regionalairlinesexpense
Aircraftfuel 0.48 0.40 0.08 20.4Other 2.08 2.13 (0.05) (2.2)
Wagesandsalaries 1.96 1.99 (0.03) (1.4)Benefits 0.63 0.59 0.04 6.4Airportandnavigationfees 0.87 0.87 - (0.6)Aircraftmaintenance 0.90 0.91 (0.01) (0.3)Depreciation,amortizationandimpairment 0.97 0.92 0.05 5.4Salesanddistributioncosts 0.73 0.74 (0.01) (2.2)Groundpackagecosts 0.54 0.52 0.02 4.4Aircraftrent 0.47 0.49 (0.02) (3.8)Cateringandonboardservices 0.39 0.37 0.02 5.5Communicationsandinformationtechnology 0.27 0.25 0.02 7.9Specialitems - 0.03 (0.03) (100.0)Other 1.37 1.34 0.03 1.3CASM ¢ 15.24 ¢ 14.38 ¢ 0.86 6.0 Remove:
Aircraftfuelexpense(2),groundpackagecostsatAirCanadaVacationsandspecialitems
(4.61) (3.78) (0.83) 21.9
Adjusted CASM (3) ¢ 10.63 ¢ 10.60 ¢ 0.03 0.3
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
(2)Includesaircraftfuelexpenserelatedtoregionalairlineoperations.(3)AdjustedCASMisanon-GAAPfinancialmeasure.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditional
information.
Operating Expenses
In2018,operatingexpensesof$16,891millionincreased$2,010millionor14%from2017oncapacitygrowthof7.1%.
Themorenotablecomponentsoftheyear-over-yearchangeinoperatingexpensesaredescribedbelow.
Aircraft Fuel Expense
In2018,aircraftfuelexpense(includingfuelexpenserelatedtoregionalairlineoperations)amountedto$4,500million,anincreaseof$1,161millionor35%from2017.Thisincreasereflected:
> higherjetfuelprices(beforetheimpactofforeignexchange),whichaccountedforanincreaseof$918million;
> ahighervolumeoffuellitersconsumed,whichaccountedforanincreaseof$165million;
> anunfavourablecurrencyimpactof$44million;and
> fuelhedginglosses/expensesof$36millionin2018versusfuelhedginglosses/expensesof$2millionin2017,anincreaseof$34million.
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Regional Airlines Expense
In2018,regionalairlinesexpenseof$2,842millionincreased$225millionor9%whencomparedto2017,reflecting,inlargepart,higheraircraftfuelexpenseyear-over-year,aswellasagrowthincapacitypurchasefeesduetoahighervolumeofenginemaintenanceactivitywhencomparedto2017.HigherCPAratesandtheimpactofincreasedflyingwerealsocontributingfactors.
Thetablebelowprovidesabreakdownofregionalairlinesexpenseforthefullyear2018andthefullyear2017.
(Canadiandollarsinmillions)
Full Year
2018 2017 $Change %Change
Capacitypurchasefees $ 1,333 $ 1,267 $ 66 5Aircraftfuel 531 412 119 29Airportandnavigationfees 296 293 3 1Salesanddistributioncosts 153 146 7 5Depreciation,amortizationandimpairment 38 28 10 36Aircraftrent 41 40 1 3Other 450 431 19 4Total regional airlines expense $ 2,842 $ 2,617 $ 225 9
Wages, Salaries and Benefits Expense
In2018,wagesandsalariesexpenseof$2,174millionincreased$115millionor6%from2017,largelyduetoahighernumberoffull-timeequivalent(“FTE”)employees,mainlyinsupportoftheairline’scapacitygrowthandinternationalexpansionstrategy.
In2018,employeebenefitsexpenseof$699millionincreased$87millionor14%from2017,higherthantheincreaseof$75millionprojectedinAirCanada’snewsreleasedatedOctober31,2018.Theincreaseinemployeebenefitsexpensesversus2017wasmainlyduetothehigherlevelofFTEemployeesandtheimpactoflowerdiscountrateswhichincreasedthecurrentservicecostofdefinedbenefitpensionplans.
Airport and Navigation Fees
In2018,airportandnavigationfeesof$964millionincreased$59millionor7%from2017,largelyduetogrowthinwide-bodyandinternationalflying.Inaddition,in2017,AirCanadareceiveda$15millionone-timerefundfromNavCanadawhilenosuchrefundwasreceivedin2018.ThefavourableimpactofAirCanada’sagreementwiththeGreaterTorontoAirportsAuthority,whichisallowingtheairlinetoincreaseinternationalconnectingtrafficatTorontoPearsonInternationalAirportonamorecost-effectivebasis,anda3.9%NavCanadaratereductioneffectiveSeptember1,2017wereoffsettingfactors.
Aircraft Maintenance Expense
In2018,aircraftmaintenanceexpenseof$1,003millionincreased$65millionor7%from2017,betterthantheincreaseof$95millionprojectedinAirCanada’snewsreleasedatedOctober31,2018.Thisbetterthananticipatedperformancewaslargelyduetoanannualadjustmentrelatedtoend-of-leasemaintenanceprovisionsandtotimingofenginemaintenanceevents.Theincreaseinaircraftmaintenanceexpenseversus2017wasmainlydrivenbyanincreaseinengineandcomponentsmaintenanceactivityandtheimpactofhavingadditionalBoeing787aircraftinthefleetin2018,whichhaveenginesunderpower-by-the-hourarrangements.Theseincreaseswerelargelyoffsetbytheimpactofhavingagreaternumberofaircraftleasesbeingextendedin2018andtomorefavourableend-of-leaseconditionsonaircraftleaseextensions.TheimpactofastrongerCanadiandollaronU.S.denominatedmaintenanceexpenseswasalsoanoffsettingfactor.
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Thetablebelowprovidesabreakdownofthemoresignificantitemsincludedinmaintenanceexpenseforthefullyear2018andthefullyear2017.
(Canadiandollarsinmillions)
Full Year
2018 2017(1) $Change %Change
Technicalmaintenance $ 923 $ 824 $ 99 12Maintenanceprovisions(1) 51 100 (49) (49)Other 29 14 15 107Total aircraft maintenance expense $ 1,003 $ 938 $ 65 7
(1)Maintenanceprovisionsrelatetoreturnconditionsonaircraftleaseswhicharerecordedoverthetermofthelease.
Depreciation, Amortization and Impairment Expense
In2018,depreciation,amortizationandimpairmentexpenseof$1,080increased$124millionor13%from2017,inlinewiththeincreaseof$125millionprojectedinAirCanada’snewsreleasedatedOctober31,2018.Theincreaseindepreciation,amortizationandimpairmentexpenseversus2017waslargelyduetotheadditionofBoeing787and737MAXaircraftintothemainlinefleet.Thesaleof25Embraer190aircraft(whichAirCanadaleasedback),inAugust2018,wasanoffsettingfactor.
Sales and Distribution Costs
In2018,salesanddistributioncostsof$807millionincreased$37millionor5%from2017,reflecting,inlargepart,thegrowthinpassengerrevenue.ThefavourableimpactofnewcommissionprogramsintroducedinNorthAmericainApril2018andgrowthindirectbookingswhencomparedto2017wereoffsettingfactors.
Ground Package Costs
In2018,thecostofgroundpackagesatAirCanadaVacationsof$602millionincreased$64millionor12%whencomparedto2017,mainlyduetohigherpassengervolumesandahighercostofgroundpackages(beforetheimpactofforeignexchange)reflecting,inlargepart,achangeinproductmix.Afavourablecurrencyimpactwasanoffsettingfactor.
Aircraft Rent
In2018,aircraftrentexpenseof$518millionincreased$15millionor3%from2017,reflecting,inlargepart,theimpactofagreaternumberofleasedaircraft,including25Embraer190aircraftwhichAirCanadasoldandleasedbackinAugust2018,partlyoffsetbytheimpactoflowerratesoncertainleaserenewals.
Special Items
Inthefirstquarterof2017,AirCanadarecordedaprovisionof$30millionrelatingtoafinewhichwasreinstatedbyadecisionoftheEuropeanCommissionpertainingtocargoinvestigations.AirCanadapaidthefineinthesecondquarterof2017.AirCanadahasappealedthedecision.WhileAirCanadacannotpredictwithcertaintytheoutcomeofitsappealoranyrelatedproceedings,AirCanadabelievesithasreasonablegroundstochallengetheEuropeanCommission’sruling.Referto“Currentlegalproceedings”undersection18“RiskFactors”ofthisMD&Aforadditionalinformation.
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Other Expenses
In2018,otherexpensesof$1,506millionincreased$117millionor8%from2017,reflecting,inlargepart,thecapacitygrowthandAirCanada’sinternationalexpansionstrategy,aswellasanincreaseincustomerserviceexpense.Theincreaseincustomerserviceexpensewaspartlyduetotheimpactofoperationaldisruptionscausedbysevereweather,particularlyinthefirsthalfof2018.Inaddition,thefirstquarterof2018includedexpensesof$26millionrelatedtonewuniforms.
Thetablebelowprovidesabreakdownofthemoresignificantitemsincludedinotherexpensesforthefullyear2018andthefullyear2017.
(Canadiandollarsinmillions)
Full Year
2018 2017(1) $Change %Change
Terminalhandling $ 327 $ 296 $ 31 10Crewcycle 212 197 15 8Buildingrentandmaintenance 176 167 9 5Miscellaneousfeesandservices 173 164 9 5Remainingotherexpenses 618 565 53 9Total other expenses $ 1,506 $ 1,389 $ 117 8
Non-operating Income (Expense)
In2018,non-operatingexpenseamountedto$769millionversusnon-operatingexpenseof$85millionin2017.
Componentsoftheyear-over-yearchangeinnon-operatingexpenseincluded:
> In2018,lossesonforeignexchangeamountedto$317millioncomparedtogainsonforeignexchangeof$120millionin2017.TheDecember31,2018closingexchangeratewasUS$1=C$1.3637whiletheDecember31,2017closingexchangeratewasUS$1=C$1.2571.Foreignexchangelossesonlong-termdebtof$501millionwerepartlyoffsetbyforeignexchangegainsonforeigncurrencyderivativesof$245million.
> In2017,AirCanadarecordedagainof$52milliononthesaleandleasebackoffourBoeing787-9aircraft.Nosuchgainswererecordedin2018.
> In2018,AirCanadarecordedagainof$9millionondebtmodifications,whichincludedagainof$11millionrelatedtotherepricingoftheairline’sUS$1.2billionseniorsecuredcreditfacility.Thiscomparedtoagainondebtmodificationsof$27millionin2017,whichwasalsorelatedtotherepricingoftheseniorsecuredcreditfacility.
> In2018,AirCanadarecordedalossondisposalofassetsof$188millionrelatedtothesaleof25Embraer190aircraft.Nosuchlosswasrecordedin2017.AirCanadarealizednetproceedsof$293millionfromthesaleoftheseaircraftin2018.
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7. RESULTS OF OPERATIONS – Fourth Quarter 2018 versus Fourth Quarter 2017
ThefollowingtableanddiscussionprovideandcompareresultsofAirCanadaforthefourthquarterof2018andthefourthquarterof2017:
(Canadiandollarsinmillions,exceptpersharefigures)
Fourth Quarter
2018 2017(1) $Change %Change
Operating revenuesPassenger $ 3,795 $ 3,409 $ 386 11Cargo 217 198 19 10Other 234 213 21 10Total revenues 4,246 3,820 426 11
Operating expensesAircraftfuel 958 735 223 30Regionalairlinesexpense
Aircraftfuel 133 112 21 19Other 575 563 12 2
Wages,salariesandbenefits 719 674 45 7Airportandnavigationfees 225 201 24 12Aircraftmaintenance 250 243 7 3Depreciation,amortizationandimpairment 267 245 22 9Salesanddistributioncosts 182 169 13 8Groundpackagecosts 126 106 20 19Aircraftrent 133 126 7 6Cateringandonboardservices 104 89 15 17Communicationsandinformationtechnology 69 62 7 11Other 383 362 21 6Total operating expenses 4,124 3,687 437 12 Operating income 122 133 (11)
Non-operating income (expense) Foreignexchangeloss (269) (62) (207)Interestincome 32 18 14Interestexpense (84) (79) (5)Interestcapitalized 8 9 (1)Netfinancingexpenserelatingtoemployeebenefits (12) (18) 6Lossonfinancialinstrumentsrecordedatfairvalue (3) (1) (2)Gainondebtsettlementsandmodifications - 24 (24)Other (10) (4) (6)Total non-operating expense (338) (113) (225)Income (loss) before income taxes (216) 20 (236)Incometaxexpense (15) (12) (3)Net income $ (231) $ 8 $ (239)Diluted earnings (loss) per share $ (0.85) $ 0.02 $ (0.87)EBITDAR (2) $ 543 $ 521 $ 22
Adjusted pre-tax income (2) $ 68 $ 77 $ (9)Adjusted net income (2) $ 54 $ 60 $ (6)Adjusted earnings per share – diluted (2) $ 0.20 $ 0.22 $ (0.02)
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
(2)EBITDAR,adjustedpre-taxincome,adjustednetincomeandadjustedearningspershare–dilutedarenon-GAAPfinancialmeasures.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.
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System Passenger Revenues
Inthefourthquarterof2018,systempassengerrevenuesof$3,795millionincreased$386millionor11.3%fromthefourthquarterof2017ontrafficgrowthof7.2%andayieldimprovementof3.8%.Onastagelengthadjustedbasis,yieldincreased4.5%whencomparedtothesamequarterin2017.Businesscabinrevenues,onasystem-basis,increased$92millionor12.5%fromthefourthquarterof2017ontrafficandyieldgrowthof9.3%and2.9%,respectively.
Thetablebelowprovidespassengerrevenuebygeographicregionforthefourthquarterof2018andthefourthquarterof2017.
(Canadiandollarsinmillions) Fourth Quarter
Passenger Revenues 2018 2017(1) $Change %Change
Canada $ 1,216 $ 1,151 $ 65 5.6U.S.transborder 846 746 100 13.4Atlantic 899 763 136 18.0Pacific 550 501 49 9.7Other 284 248 36 14.5System $ 3,795 $ 3,409 $ 386 11.3
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
Thetablebelowprovidesyear-over-yearpercentagechangesinpassengerrevenuesandoperatingstatisticsforthefourthquarterof2018versusthefourthquarterof2017.
Fourth Quarter 2018 versus Fourth Quarter 2017 (1)
Passenger Revenue
Capacity (ASMs)
Traffic (RPMs)
Passenger Load
Factor
Yield PRASM
%Change %Change %Change ppChange %Change %Change
Canada 5.6 1.5 1.7 0.2 3.9 4.1U.S.transborder 13.4 9.7 9.6 (0.1) 3.5 3.4Atlantic 18.0 9.5 14.5 3.5 3.0 7.7Pacific 9.7 (0.8) 0.3 0.9 9.3 10.6Other 14.5 15.2 14.0 (0.9) 0.5 (0.6)System 11.3 5.8 7.2 1.1 3.8 5.2
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amountswhicharereflectedinthetableabove.
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Thetablebelowprovidesyear-over-yearpercentagechangesinsystempassengerrevenuesandoperatingstatisticsforthefourthquarterof2018andeachofthepreviousfourquarters.
Year-over-Year by Quarter (% Change)
System Q4’17(1) Q1’18 Q2’18 Q3’18 Q4’18
Passengerrevenues 11.4 11.8 10.4 11.2 11.3 Capacity(ASMs) 9.5 8.6 7.5 6.7 5.8 Traffic(RPMs) 9.9 11.4 8.2 7.5 7.2 Passengerloadfactor(ppchange) 0.3 2.1 0.5 0.6 1.1 Yield 1.4 0.4 2.0 3.4 3.8 PRASM 1.8 3.0 2.7 4.2 5.2
(1)Toprovideamoremeaningfulcomparison,theyear-over-yearpercentagechangesforthefourthquarter2017versusthefourthquarterof2016arebasedonpreviouslyreported2016and2017amountsas2016amountshavenotbeenrestatedfortheadoptionofIFRS15.
Componentsoftheyear-over-yearchangeinfourthquartersystempassengerrevenuesincluded:
> The7.2%trafficincreasewhichreflectedtrafficgrowthinallmarketsandincludedgainsinthebusinessandpremiumeconomycabins.Consistentwiththeairline’sobjectiveofincreasingglobalinternational-to-internationalconnectingtrafficthroughitsmajorCanadianhubs(sixthfreedomtraffic),thetrafficgrowthinthefourthquarterof2018reflectedanincreaseinconnectingtrafficviaCanadatointernationaldestinations.
> The3.8%systemyieldincreasewhichreflected:
− increasesinfaresandcarriersurcharges,growthinhigh-yieldinglocaltraffic,andanimprovementintheoverallfaremix;
− greaterproportionalgrowthofhigh-yieldingbusinessandpremiumeconomyclasspassengers;
− anincreaseinancillaryrevenues,includingthroughbaggagefees,advanceseatselection/preferredseatingfeesandairportpaidupgrades;
− theintroductionofanexpandedsuiteoffareofferingsondomestic,U.S.transborderandAtlanticservices,resultingingrowthinancillaryrevenueandanimprovedfaremix;and
− afavourablecurrencyimpactof$35millionwhencomparedtothefourthquarterof2017.
Thesefactorswerepartlyoffsetbyanincreaseinaveragestagelengthof1.2%,duetolong-haulinternationalexpansion,whichhadtheeffectofreducingsystemyieldby0.7percentagepoints.
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Domestic Passenger Revenues
Inthefourthquarterof2018,domesticpassengerrevenuesof$1,216millionincreased$65millionor5.6%fromthefourthquarterof2017.
Thetablebelowprovidesyear-over-yearpercentagechangesindomesticpassengerrevenuesandoperatingstatisticsforthefourthquarterof2018andeachofthepreviousfourquarters.
Year-over-Year by Quarter (% Change)
Canada Q4’17(1) Q1’18 Q2’18 Q3’18 Q4’18
Passengerrevenues 5.4 5.9 6.6 4.3 5.6 Capacity(ASMs) 1.4 3.4 3.2 4.3 1.5 Traffic(RPMs) 1.6 3.0 2.6 3.4 1.7 Passengerloadfactor(ppchange) 0.2 (0.3) (0.5) (0.7) 0.2 Yield 3.5 2.8 3.9 0.9 3.9 PRASM 3.8 2.5 3.2 - 4.1
(1)Toprovideamoremeaningfulcomparison,theyear-over-yearpercentagechangesforthefourthquarter2017versusthefourthquarterof2016arebasedonpreviouslyreported2016and2017amountsas2016amountshavenotbeenrestatedfortheadoptionofIFRS15.
Componentsoftheyear-over-yearchangeinfourthquarterdomesticpassengerrevenuesincluded:
> The1.7%trafficincreasewhichreflectedtrafficgrowthonallmajordomesticservicesaswellasincrementalconnectingtrafficwithinCanadatointernationaldestinations.Thetrafficgrowthinthefourthquarterof2018includedgainsinthebusinesscabin.
> The3.9%yieldincreasewhichreflectedyieldimprovementsonallmajordomesticservices.Theoverallyieldimprovementversusthefourthquarterof2017reflectedgainsinthebusinesscabinaswellastheimpactofnewfarecategoriesondomesticservices,resultingingrowthinancillaryrevenueandanimprovedfaremix.
U.S. Transborder Passenger Revenues
Inthefourthquarterof2018,U.S.transborderpassengerrevenuesof$846millionincreased$100millionor13.4%fromthefourthquarterof2017.
Thetablebelowprovidesyear-over-yearpercentagechangesinU.S.transborderpassengerrevenuesandoperatingstatisticsforthefourthquarterof2018andeachofthepreviousfourquarters.
Year-over-Year by Quarter (% Change)
U.S. transborder Q4’17(1) Q1’18 Q2’18 Q3’18 Q4’18
Passengerrevenues 6.3 6.9 8.9 9.7 13.4 Capacity(ASMs) 6.7 5.5 6.8 5.9 9.7 Traffic(RPMs) 7.1 6.7 6.6 5.6 9.6 Passengerloadfactor(ppchange) 0.3 0.9 (0.1) (0.3) (0.1)Yield (0.7) 0.1 2.2 3.8 3.5 PRASM (0.3) 1.3 2.0 3.5 3.4
(1)Toprovideamoremeaningfulcomparison,theyear-over-yearpercentagechangesforthefourthquarter2017versusthefourthquarterof2016arebasedonpreviouslyreported2016and2017amountsas2016amountshavenotbeenrestatedfortheadoptionofIFRS15.
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Componentsoftheyear-over-yearchangeinfourthquarterU.S.transborderpassengerrevenuesincluded:
> The9.6%trafficincreasewhichreflectedtrafficgrowthonallmajorU.S.transborderservices.Thetrafficincreaseinthefourthquarterof2018reflectedstrongpassengerdemandbetweenCanadaandtheU.S.,gainsinthebusinesscabin,andgrowthininternational-to-internationalconnectingpassengerflowsfromtheU.S.
> The3.5%yieldincreasewhichreflectedyieldgrowthonallmajorU.S.transborderservices.ThelaunchofnewfarecategoriesonU.S.transborderservices,resultingingrowthinancillaryrevenueandanimprovedfaremix,andafavourablecurrencyimpactof$10millioncontributedtotheoverallyieldimprovementyear-over-year.Anincreaseinaveragestagelengthof1.8%,whichhadtheeffectofreducingU.S.transborderyieldby1.0percentagepoints,wasapartlyoffsettingfactor.
Atlantic Passenger Revenues
Inthefourthquarterof2018,Atlanticpassengerrevenuesof$899millionincreased$136millionor18.0%fromthefourthquarterof2017.
Thetablebelowprovidesyear-over-yearpercentagechangesinAtlanticpassengerrevenuesandoperatingstatisticsforthefourthquarterof2018andeachofthepreviousfourquarters.
Year-over-Year by Quarter (% Change)
Atlantic Q4’17(1) Q1’18 Q2’18 Q3’18 Q4’18
Passengerrevenues 22.2 23.9 17.8 20.3 18.0 Capacity(ASMs) 13.9 9.6 11.9 10.3 9.5 Traffic(RPMs) 14.4 17.5 15.5 13.1 14.5 Passengerloadfactor(ppchange) 0.3 5.4 2.6 2.2 3.5 Yield 6.8 5.4 1.9 6.4 3.0 PRASM 7.3 13.0 5.3 9.1 7.7
(1)Toprovideamoremeaningfulcomparison,theyear-over-yearpercentagechangesforthefourthquarter2017versusthefourthquarterof2016arebasedonpreviouslyreported2016and2017amountsas2016amountshavenotbeenrestatedfortheadoptionofIFRS15.
Componentsoftheyear-over-yearchangeinfourthquarterAtlanticpassengerrevenuesincluded:
> The14.5%trafficincreasewhichreflectedtrafficgrowthonallmajorAtlanticservicesandincludedgainsinallcabins.The9.5%capacitygrowthyear-over-yearwasduetoadditionalfrequenciesfromVancouvertoIndia,anextensionofseasonalmainlineoperations,includingTorontoandMontrealtoItalyandMontrealtoIsrael,andanextensionofseasonalservicesonmanymarketsoperatedbyAirCanadaRouge.
> The3.0%yieldincreasewhichreflectedyieldimprovementsonallmajorAtlanticservicesandincludedanincreaseincarriersurchargesyear-over-yearandafavourablecurrencyimpactof$12million.ThelaunchofanewfarecategoryonAtlanticservices,resultingingrowthinancillaryrevenue,includingbaggagefees,andanimprovedfaremix,alsocontributedtotheoverallyieldimprovementyear-over-year.
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Pacific Passenger Revenues
Inthefourthquarterof2018,Pacificpassengerrevenuesof$550millionincreased$49millionor9.7%fromthefourthquarterof2017.
Thetablebelowprovidesyear-over-yearpercentagechangesinPacificpassengerrevenuesandoperatingstatisticsforthefourthquarterof2018andeachofthepreviousfourquarters.
Year-over-Year by Quarter (% Change)
Pacific Q4’17(1) Q1’18 Q2’18 Q3’18 Q4’18
Passengerrevenues 13.5 14.2 9.9 9.9 9.7Capacity(ASMs) 12.2 12.0 5.2 1.1 (0.8)Traffic(RPMs) 13.7 15.9 5.7 2.9 0.3Passengerloadfactor(ppchange) 1.0 2.8 0.4 1.5 0.9Yield (0.2) (1.5) 4.0 6.8 9.3PRASM 1.1 1.9 4.5 8.6 10.6
(1)Toprovideamoremeaningfulcomparison,theyear-over-yearpercentagechangesforthefourthquarter2017versusthefourthquarterof2016arebasedonpreviouslyreported2016and2017amountsas2016amountshavenotbeenrestatedfortheadoptionofIFRS15.
Componentsoftheyear-over-yearchangeinfourthquarterPacificpassengerrevenuesincluded:
> The9.3%yieldincreasewhichreflectedyieldgrowthonallmajorPacificserviceswiththeexceptionofAustraliawhichwasslightlybelowthefourthquarterof2017.TheloweryieldonservicestoAustraliareflectedincreasedindustrycapacitywhencomparedtothesamequarterin2017.TheoverallPacificyieldimprovementversusthefourthquarterof2017includedanincreaseincarriersurchargesyear-over-yearandafavourablecurrencyimpactof$6million.
> The0.3%trafficincreasewhichreflectedtrafficgrowthonservicestoAustralia,KoreaandChina,offsetbytrafficdecreasesonservicestoHongKong,JapanandTaiwanwherecapacitywasreducedyear-over-year.Thetrafficgrowthincludedgainsinthebusinessandpremiumeconomycabins.
Other Passenger Revenues
Inthefourthquarterof2018,Otherpassengerrevenues(fromroutestoandfromtheCaribbean,MexicoandCentralandSouthAmerica)of$284millionincreased$36millionor14.5%fromthefourthquarterof2017.
Thetablebelowprovidesyear-over-yearpercentagechangesinOtherpassengerrevenuesandoperatingstatisticsforthefourthquarterof2018andeachofthepreviousfourquarters.
Year-over-Year by Quarter (% Change)
Other Q4’17(1) Q1’18 Q2’18 Q3’18 Q4’18
Passengerrevenues 23.7 17.7 7.6 7.9 14.5 Capacity(ASMs) 18.7 15.0 11.7 16.8 15.2 Traffic(RPMs) 17.9 15.6 8.6 11.1 14.0 Passengerloadfactor(ppchange) (0.6) 0.4 (2.4) (4.3) (0.9)Yield 4.8 1.9 (0.9) (2.8) 0.5 PRASM 4.1 2.4 (3.7) (7.6) (0.6)
(1)Toprovideamoremeaningfulcomparison,theyear-over-yearpercentagechangesforthefourthquarter2017versusthefourthquarterof2016arebasedonpreviouslyreported2016and2017amountsas2016amountshavenotbeenrestatedfortheadoptionofIFRS15.
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Componentsoftheyear-over-yearchangeinfourthquarterOtherpassengerrevenuesincluded:
> The14.0%trafficincreasewhichreflectedtrafficgrowthonservicestoSouthAmericaandonroutestotraditionalsundestinations.Thetrafficgrowthinthefourthquarterof2018includedgainsinallcabins.
> The0.5%yieldincreasewhichreflectedyieldgrowthonservicestotheCaribbeanandMexico,largelyoffsetbyayielddecreaseonservicestoSouthAmerica.TheyielddeclineonservicestoSouthAmericawasmainlydueasignificantincreaseinaveragestagelengthduetotheremovaloftheshort-haultagbetweenSantiagoandBuenosAiresasAirCanadanowservesbothmarketsonanon-stopbasis.Anincreaseinaveragestagelengthof6.1%hadtheeffectofreducingyieldintheOthermarketsby3.4percentagepoints.Onastagelengthadjustedbasis,yieldincreased3.9%whencomparedtothefourthquarterof2017.
Cargo Revenues
Inthefourthquarterof2018,cargorevenuesof$217millionincreased$19millionor10.0%fromthesamequarterin2017onyieldandtrafficgrowthof6.8%and2.9%,respectively.Inthefourthquarterof2018,theAtlanticandPacificmarketsexperiencedparticularlystrongperformances.
Thetablebelowprovidescargorevenuebygeographicregionforthefourthquarterof2018andthefourthquarterof2017.
Cargo Revenues Fourth Quarter
(Canadiandollarsinmillions) 2018 2017(1) $Change %Change
Canada $ 27 $ 23 $ 4 21.3U.S.transborder 12 10 2 23.2Atlantic 72 66 6 8.5Pacific 88 81 7 9.2Other 18 18 - (2.5)System $ 217 $ 198 $ 19 10.0
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
Other Revenues
Inthefourthquarterof2018,otherrevenuesof$234millionincreased$21millionor10%whencomparedtothefourthquarterof2017,mainlyduetoanincreaseingroundpackagerevenueatAirCanadaVacations.Thisincreasewasdrivenbyhigherpassengervolumesand,toalesserextent,ahigherpriceofgroundpackageswhencomparedtothefourthquarterof2017.Anincreaseinpassengerandairline-relatedfeesversusthefourthquarterof2017wasalsoacontributingfactortotheincreaseinotherrevenue.
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CASM and Adjusted CASM
Inthefourthquarterof2018,CASMincreased5.7%andadjustedCASMincreased0.5%whencomparedtothefourthquarterof2017.
ThetablebelowcomparesAirCanada’sCASMandadjustedCASMforthefourthquarterof2018tothefourthquarterof2017.
(centsperASM)
Full Year
2018 2017(1) ¢Change %Change
Aircraftfuel ¢ 3.74 ¢ 3.04 ¢ 0.70 23.1Regionalairlinesexpense
Aircraftfuel 0.52 0.46 0.06 12.0Other 2.25 2.33 (0.08) (3.3)
Wagesandsalaries 2.18 2.26 (0.08) (3.4)Benefits 0.63 0.53 0.10 18.4Airportandnavigationfees 0.88 0.83 0.05 5.5Aircraftmaintenance 0.98 1.01 (0.03) (3.1)Depreciation,amortizationandimpairment 1.04 1.01 0.03 2.8Salesanddistributioncosts 0.71 0.70 0.01 1.3Groundpackagecosts 0.49 0.44 0.05 11.6Aircraftrent 0.52 0.52 - 0.4Cateringandonboardservices 0.41 0.37 0.04 11.0Communicationsandinformationtechnology 0.27 0.26 0.01 4.4Other 1.49 1.48 0.01 0.8CASM ¢ 16.11 ¢ 15.24 ¢ 0.87 5.7 Remove:
Aircraftfuelexpense(2),groundpackagecostsatAirCanadaVacationsandspecialitems
(4.75) (3.94) (0.81) 20.5
Adjusted CASM (3) ¢ 11.36 ¢ 11.30 ¢ 0.06 0.5
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
(2)Includesaircraftfuelexpenserelatedtoregionalairlineoperations.(3)AdjustedCASMisanon-GAAPfinancialmeasure.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditional
information.
Operating Expenses
Inthefourthquarterof2018,operatingexpensesof$4,124millionincreased$437millionor12%fromthefourthquarterof2017oncapacitygrowthof5.8%.
Inthefourthquarterof2018,theunfavourableimpactofaweakerCanadiandollaronforeigncurrencydenominatedoperatingexpenses(mainlyU.S.dollars),comparedtothesamequarterin2017,increasedoperatingexpensesby$64million(comprisedof$37millionrelatedtoaircraftfuelexpenseandanaggregateof$27millionrelatingtonon-fueloperatingexpenses).
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Themorenotablecomponentsoftheyear-over-yearchangeinoperatingexpensesaredescribedbelow.
Aircraft Fuel Expense
Inthefourthquarterof2018,aircraftfuelexpense(includingfuelexpenserelatedtoregionalairlineoperations)amountedto$1,091million,anincreaseof$244millionor29%fromthefourthquarterof2017.Thisincreasereflected:
> higherjetfuelprices(beforetheimpactofforeignexchange),whichaccountedforanincreaseof$151million;
> anunfavourablecurrencyimpactof$37million;
> ahighervolumeoffuellitresconsumed,whichaccountedforanincreaseof$27million;and
> fuelhedginglosses/expensesof$26millioninthefourthquarterof2018versusfuelhedginggains(netofexpenses)of$3millioninthefourthquarterof2017,anincreaseof$29million.
Regional Airlines Expense
Inthefourthquarterof2018,regionalairlinesexpenseof$708millionincreased$33millionor5%whencomparedtothefourthquarterof2017,reflecting,inlargepart,higheraircraftfuelexpenseyear-over-year,aswellasagrowthincapacitypurchasefeesduetohigherCPAratesyear-over-year.
Thetablebelowprovidesabreakdownofregionalairlinesexpenseforthefourthquarterof2018andthefourthquarterof2017.
(Canadiandollarsinmillions)
Fourth Quarter
2018 2017 $Change %Change
Capacitypurchasefees $ 336 $ 330 $ 6 2Aircraftfuel 133 112 21 19Airportandnavigationfees 73 71 2 3Salesanddistributioncosts 34 35 (1) (3)Depreciation,amortizationandimpairment 11 7 4 57Aircraftrent 10 10 - -Other 111 110 1 1Total regional airlines expense $ 708 $ 675 $ 33 5
Wages, Salaries and Benefits Expense
Inthefourthquarterof2018,wagesandsalariesexpenseof$557millionincreased$11millionor2%fromthesamequarterin2017,largelyduetoahighernumberofFTEemployeesmainlyinsupportoftheairline’scapacitygrowthandinternationalexpansionstrategy.
Inthefourthquarterof2018,employeebenefitsexpenseof$162millionincreased$34millionor27%fromthefourthquarterof2017,mainlyduetothehigherlevelofFTEemployeesandtheimpactoflowerdiscountrateswhichincreasedthecurrentservicecostofdefinedbenefitpensionplans.Inaddition,thefourthquarterof2017reflectedafavourableimpactof$9millionrelatedtoanannualvaluationpertainingtoworkers’compensationversusanunfavourableimpactof$4millioninthefourthquarterof2018.
Airport and Navigation Fees
Inthefourthquarterof2018,airportandnavigationfeesof$225millionincreased$24millionor12%fromthefourthquarterof2017,largelyduetogrowthinwide-bodyandinternationalflying.Inaddition,inthefourthquarterof2017,AirCanadareceiveda$15millionone-timerefundfromNavCanadawhilenosuchrefundwasreceivedinthefourthquarterof2018.ThefavourableimpactofAirCanada’sagreementwiththeGreaterTorontoAirportsAuthority,whichisallowingtheairlinetoincreaseinternationalconnectingtrafficatTorontoPearsonInternationalAirportonamorecost-effectivebasis,wasanoffsettingfactor.
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Aircraft Maintenance Expense
Inthefourthquarterof2018,aircraftmaintenanceexpenseof$250millionincreased$7millionor3%fromthefourthquarterof2017.
Thetablebelowprovidesabreakdownofthemoresignificantitemsincludedinmaintenanceexpenseforthefourthquarterof2018andthefourthquarterof2017.
(Canadiandollarsinmillions)
Fourth Quarter
2018 2017(1) $Change %Change
Technicalmaintenance $ 222 $ 206 $ 16 8Maintenanceprovisions(1) 17 31 (14) (45)Other 11 6 5 83Total aircraft maintenance expense $ 250 $ 243 $ 7 3
(1)Maintenanceprovisionsrelatetoreturnconditionsonaircraftleaseswhicharerecordedoverthetermofthelease.
Depreciation, Amortization and Impairment Expense
Inthefourthquarterof2018,depreciation,amortizationandimpairmentexpenseof$267millionincreased$22millionor9%fromthefourthquarterof2017,largelyduetotheadditionofBoeing787and737MAXaircraftintothemainlinefleet.Thesaleof25Embraer190aircraft(whichAirCanadaleasedback)inAugust2018wasanoffsettingfactor.
Sales and Distribution Costs
Inthefourthquarterof2018,salesanddistributioncostsof$182millionincreased$13millionor8%fromthesamequarterin2017,reflecting,inlargepart,thegrowthinpassengerrevenue.ThefavourableimpactofnewcommissionprogramsintroducedinNorthAmericainApril2018andgrowthindirectbookingswhencomparedtothefourthquarterof2017wereoffsettingfactors.
Ground Package Costs
Inthefourthquarterof2018,thecostofgroundpackagesatAirCanadaVacationsof$126millionincreased$20millionor19%whencomparedtothesamequarterin2017duetoahighercostofgroundpackages(beforetheimpactofforeignexchange)reflecting,inlargepart,achangeinproductmix,andhigherpassengervolumesyear-over-year.
Aircraft Rent
Inthefourthquarterof2018,aircraftrentexpenseof$133millionincreased$7millionor6%fromfourthquarterof2017,reflecting,inlargepart,theimpactofagreaternumberofleasedaircraft,including25Embraer190aircraftwhichAirCanadasoldandleasedbackinAugust2018,andanunfavourablecurrencyimpactwhencomparedtothefourthquarterof2017.Theimpactoflowerratesoncertainleaserenewalswasanoffsettingfactor.
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Other Expenses
Inthefourthquarterof2018,otherexpensesof$383millionincreased$21millionor6%fromthesamequarterin2017,reflecting,inlargepart,thecapacitygrowthandAirCanada’sinternationalexpansionstrategy.
Thetablebelowprovidesabreakdownofthemoresignificantitemsincludedinotherexpensesforthefourthquarterof2018andthefourthquarterof2017.
(Canadiandollarsinmillions)
Fourth Quarter
2018 2017 $Change %Change
Terminalhandling $ 77 $ 69 $ 8 12Crewcycle 52 51 1 2Buildingrentandmaintenance 47 41 6 15Miscellaneousfeesandservices 50 45 5 11Remainingotherexpenses 157 156 1 1Total other expenses $ 383 $ 362 $ 21 6
Non-operating Income (Expense)
Inthefourthquarterof2018,non-operatingexpenseamountedto$338millionversusnon-operatingexpenseof$113millioninthefourthquarterof2017.
Componentsoftheyear-over-yearchangeinnon-operatingexpenseincluded:
> Inthefourthquarterof2018,lossesonforeignexchangeamountedto$269millioncomparedtolossesonforeignexchangeof$62millioninthefourthquarterof2017.TheDecember31,2018closingexchangeratewasUS$1=C$1.3637whiletheSeptember30,2018closingexchangeratewasUS$1=C$1.2908.Foreignexchangelossesonlong-termdebtof$333millionwerepartlyoffsetbyforeignexchangegainsonforeigncurrencyderivativesof$75million.
> Inthefourthquarterof2017,AirCanadarecordedagainof$27millionondebtmodificationsrelatedtotherepricingoftheairline’sUS$1.2billionseniorsecuredcreditfacility.Nosuchgainswererecordedinthefourthquarterof2018.
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8. FLEET
Mainline and Air Canada Rouge
ThefollowingtableprovidesAirCanada’sandAirCanadaRouge’soperatingfleetasatDecember31,2018.RefertotheAirCanadaExpresssectionbelowforinformationonthefleetofaircraftoperatedbyregionalairlinesoperatingflightsonbehalfofAirCanadaundercapacitypurchaseagreementswithAirCanada.
Total Seats
Number of Operating
Aircraft
Average Age
Owned Finance Lease
Operating Lease
MainlineWide-body aircraftBoeing787-8 255 8 4.2 8 - -Boeing787-9 298 27 2.1 21 - 6Boeing777-300ER 450/400 19 8.5 10 1 8Boeing777-200LR 300 6 11.1 4 - 2Boeing767-300ER 211 6 29.5 3 - 3AirbusA330-300 292 8 18.2 8 - -Narrow-body aircraftBoeing737MAX8 169 18 0.8 18 - -AirbusA321 190 15 15.7 5 - 10AirbusA320 146 42 25.2 1 - 41AirbusA319 120 16 21.2 5 - 11Embraer190 97 19 11.3 - - 19Total Mainline 184 13.6 83 1 100
Air Canada RougeWide-body aircraftBoeing767-300ER(1) 282 25 21.6 3 2 20Narrow-body aircraftAirbusA321 200 6 3.7 - - 6AirbusA319(1) 136 22 20.2 17 - 5Total Air Canada Rouge 53 19.0 20 2 31
Total Mainline and Air Canada Rouge
237 14.8 103 3 131
(1)TheBoeing767aircraftandtheAirbusA319aircraftreflectedasownedinthetableaboveareownedbyAirCanadaandleasedtoAirCanadaRouge.
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ThetablebelowprovidesthenumberofaircraftinAirCanada’soperatingfleetasatDecember31,2018aswellasAirCanada’splannedoperatingfleet,includingaircraftoperatingandexpectedtobeoperatedbyAirCanadaRouge,asatDecember31,2019andDecember31,2020.
Actual PlannedDecember 31,
20182019FleetChanges
December31,2019
2020FleetChanges
December31,2020
MainlineWide-body aircraft Boeing787-8 8 - 8 - 8Boeing787-9 27 2 29 - 29Boeing777-300ER 19 - 19 - 19Boeing777-200LR 6 - 6 - 6Boeing767-300ER 6 (6) - - -AirbusA330-300 8 4 12 1 13Narrow-body aircraft Boeing737MAX8 18 18 36 14 50AirbusA321 15 - 15 - 15AirbusA320 42 (13) 29 (13) 16AirbusA319 16 - 16 - 16AirbusA220-300 - 1 1 14 15Embraer190 19 (5) 14 (14) -Total Mainline 184 1 185 2 187
Air Canada RougeWide-body aircraftBoeing767-300ER 25 - 25 - 25Narrow-body aircraftAirbusA321 6 4 10 - 10AirbusA320 - 6 6 1 7AirbusA319 22 - 22 - 22Total Air Canada Rouge 53 10 63 1 64
Total wide-body aircraft 99 - 99 1 100Total narrow-body aircraft 138 11 149 2 151
Total Mainline and Air Canada Rouge
237 11 248 3 251
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Sale of Embraer 190 Aircraft
InAugust2018,AirCanadafinalizedthesaleandleasebackof25Embraer190aircraft.Sixoftheseaircraftwerereturnedtothelessorin2018.AirCanadawillcontinuetooperatetheremaining19untiltheygraduallyexitthefleetin2019and2020.
Air Canada Express
Thetablebelowprovidesthenumberofaircraftoperated,asatDecember31,2018,andplanned,asatDecember31,2019andDecember31,2020,onbehalfofAirCanada,byJazz,SkyRegionalandotherairlinesoperatingflightsundertheAirCanadaExpressbannerpursuanttocapacitypurchaseagreementswithAirCanada.
Actual PlannedDecember31,
20182019FleetChanges
December31,2019
2020FleetChanges
December31,2020
Embraer175 25 - 25 - 25BombardierCRJ-100/200 24 (2) 22 (7) 15BombardierCRJ-900 21 5 26 9 35BombardierDash8-100 15 (15) - - -BombardierDash8-300 25 (2) 23 (4) 19BombardierDash8-Q400 44 - 44 (8) 36Total Air Canada Express 154 (14) 140 (10) 130
Other Aircraft with CPA Carriers
Atotalofnine18-passengerBeech1900aircraftarealsooperatedbyCPAcarriersonbehalfofAirCanada.
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9. FINANCIAL AND CAPITAL MANAGEMENT
9.1.LIQUIDITY
AirCanadamanagesitsliquidityneedsthroughavarietyofstrategies,includingbyseekingtosustainandimprovecashfromoperationsandfreecashflow,sourcingcommittedfinancing,asnecessary,fornewandexistingaircraft,andthroughotherfinancingactivities.
Liquidityneedsareprimarilyrelatedtomeetingobligationsassociatedwithfinancialliabilities,capitalcommitments,ongoingoperations,contractualandotherobligations,whicharefurtherdiscussedinsections9.6,9.7and9.8ofthisMD&A.AirCanadamonitorsandmanagesliquidityriskbypreparingrollingcashflowforecasts,monitoringtheconditionandvalueofassetsavailableforuseaswellasthoseassetsbeingusedassecurityinfinancingarrangements,seekingflexibilityinfinancingarrangements,andestablishingprogramstomonitorandmaintaincompliancewithtermsoffinancingagreements.AtDecember31,2018,unrestrictedliquidityamountedto$5,725million(comprisedofcash,cashequivalentsandshort-terminvestmentsof$4,707millionandundrawnlinesofcreditof$1,018million.Thiscomparedtounrestrictedliquidityof$4,181millionatDecember31,2017(comprisedofcash,cashequivalentsandshort-terminvestmentsof$3,804millionandundrawnlinesofcreditof$377million).Inaddition,AirCanadamonitorsitsfinancialleverageasmeasuredbytheadjustednetdebttoEBITDARratio,asfurtherdescribedinsection9.3ofthisMD&A.
9.2.FINANCIALPOSITION
ThefollowingtableprovidesacondensedconsolidatedstatementoffinancialpositionofAirCanadaasatDecember31,2018andasatDecember31,2017.
(Canadiandollarsinmillions)
December 31, 2018
December31,2017(1)
$Change
AssetsCash,cashequivalentsandshort-terminvestments $ 4,707 $ 3,804 $ 903Othercurrentassets 1,594 1,593 1Current assets $ 6,301 $ 5,397 $ 904Depositsandotherassets 444 465 (21)Propertyandequipment 9,729 9,252 477Pensionassets 1,969 1,583 386Deferredincometax 39 456 (417)Intangibleassets 404 318 86Goodwill 311 311 -Total assets $ 19,197 $ 17,782 $ 1,415LiabilitiesCurrentliabilities $ 5,099 $ 5,101 $ (2)Long-termdebtandfinanceleases 6,197 5,448 749Pensionandotherbenefitliabilities 2,547 2,592 (45)Maintenanceprovisions 1,118 1,003 115Otherlong-termliabilities 151 167 (16)Deferredincometax 52 49 3Total liabilities $ 15,164 $ 14,360 $ 804Total shareholders’ equity $ 4,033 $ 3,422 $ 611Total liabilities and shareholders’ equity $ 19,197 $ 17,782 $ 1,415
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
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Movementsincurrentassetsandcurrentliabilitiesaredescribedinsection9.4“WorkingCapital”ofthisMD&A.Long-termdebtandfinanceleasesarediscussedinsections9.3“AdjustedNetDebt”and9.5“ConsolidatedCashFlowMovements”ofthisMD&A.
AtDecember31,2018,propertyandequipmentamountedto$9,729million,anincreaseof$477millionfromDecember31,2017.Thisincreasewasmainlyduetoadditionstopropertyandequipmentof$2,039million,offsetbytheimpactofdepreciationexpenseof$1,066millionandtheimpactofthesaleof25Embraer190aircraftin2018.
In2018,additionstopropertyandequipmentincludedfiveBoeing787-9aircraftand16Boeing737MAX8aircraft.FourBoeing787andnineBoeing737MAXaircraftwerefinancedwithproceedsfromthesaleofenhancedequipmenttrustcertificates(EETCs)issuedthroughaU.S.dollarprivateofferingin2017,oneBoeing787andfourBoeing737MAXaircraftwerefinancedwithproceedsfromthesaleofEETCsissuedthroughaCanadiandollarprivateofferingin2018,andthreeBoeing737MAXaircraftwerepurchasedwithcash.AdditionalinformationontheseEETCprivateofferingscanbefoundinsection9.8“ContractualObligations”ofthisMD&A.In2018,additionstopropertyandequipmentalsoincludedprogresspaymentsonfutureaircraftdeliveriesandcapitalizedmaintenancecosts.
Thenetlong-termpensionandotherbenefitliabilitiesof$578million(comprisedofpensionandotherbenefitliabilitiesof$2,547millionnetofpensionassetsof$1,969million)decreased$431millionfromDecember31,2017.Thisdecreasewasmainlyduetoa21-basispointincreaseinthediscountrateusedtovaluetheliabilitiesandtheimpactofreviseddemographicassumptions,resultinginanetgainonremeasurementsonemployeeliabilitiesof$688millionfortheyearendedDecember31,2018($503million,netoftax)recordedonAirCanada’sconsolidatedstatementofcomprehensiveincome.Thereviseddemographicassumptionsrelatemainlytoupdatedactuarialassumptionsregardingretirementrates,whichresultedinadecreasetotheactuarialliabilityof$277million.
9.3.ADJUSTEDNETDEBT
ThefollowingtablereflectsAirCanada’sadjustednetdebtbalancesasatDecember31,2018andasatDecember31,2017.
(Canadiandollarsinmillions)December 31,
2018December31,
2017$Change
Totallong-termdebtandfinanceleases $ 6,197 $ 5,448 $ 749Currentportionoflong-termdebtandfinanceleases 455 671 (216)
Total long-term debt and finance leases (including current portion)
$ 6,652 $ 6,119 $ 533
Lesscash,cashequivalentsandshort-terminvestments (4,707) (3,804) (903)Net debt $ 1,945 $ 2,315 $ (370)Capitalizedoperatingleases(1) 3,913 3,801 112Adjusted net debt (1) $ 5,858 $ 6,116 $ (258)EBITDAR (trailing 12 months) $ 2,851 $ 2,928 $ (77)Adjusted net debt to EBITDAR ratio (2) 2.1 2.1 -
(1)AdjustednetdebtisanadditionalGAAPfinancialmeasureandakeycomponentofthecapitalmanagedbyAirCanadaandprovidesmanagementwithameasureofitsnetindebtedness.AirCanadaincludescapitalizedoperatingleaseswhichisameasurecommonlyusedintheindustrytoascribeavaluetoobligationsunderoperatingleases.Commonindustrypracticeistomultiplyannualizedaircraftrentexpenseby7.ThisdefinitionofcapitalizedoperatingleasesisusedbyAirCanadaandmaynotbecomparabletosimilarmeasurespresentedbyotherpubliccompanies.Aircraftrent(includingaircraftrentexpenserelatedtoregionalairlineoperations)was$559millionforthe12monthsendedDecember31,2018and$543millionforthe12monthsendedDecember31,2017.
(2)Adjustednetdebttotrailing12-monthEBITDARratio(alsoreferredtoas“leverageratio”inthisMD&A)isanon-GAAPfinancialmeasureandisusedbyAirCanadaasameanstomeasurefinancialleverage.Leverageratioiscalculatedbydividingadjustednetdebtbytrailing12-monthEBITDAR.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.
AtDecember31,2018,totallong-termdebtandfinanceleases(includingcurrentportion)of$6,652millionincreased$533millionfromDecember31,2017.TheunfavourableimpactofaweakerCanadiandollar,asatDecember31,2018comparedtoDecember31,2017,increasedforeigncurrencydenominateddebt(mainlyU.S.dollars)by$501million.In2018,newaircraft-relatedborrowingsof$1,210millionwerelargelyoffsetbydebtrepaymentsof$1,167million.
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AtDecember31,2018,adjustednetdebtof$5,858milliondecreased$258millionfromDecember31,2017asincreasesinlong-termdebtandfinanceleasebalancesof$533millionandcapitalizedoperatingleasebalancesof$112millionweremorethanoffsetbyanincreaseincash,cashequivalentsandshort-terminvestmentbalancesof$903million.AtDecember31,2018,AirCanada’sleverageratio(adjustednetdebttotrailing12-monthEBITDARratio)was2.1,unchangedfromDecember31,2017.
AtDecember31,2018,AirCanada’sweightedaveragecostofcapital(“WACC”),onapre-taxbasis,was7.2%(comparedto7.6%atDecember31,2017).WACCisbasedonanestimatebymanagementandconsistsofanestimatedcostofequityof20.0%andanaveragecostofdebtandfinanceleasesof4.4%(comparedtoanestimatedcostofequityof20.0%andanaveragecostofdebtandfinanceleasesof4.5%atDecember31,2017).
9.4.WORKINGCAPITAL
ThetablebelowprovidesinformationonAirCanada’sworkingcapitalbalancesasatDecember31,2018andasatDecember31,2017.
(Canadiandollarsinmillions)December 31,
2018December31,
2017$Change
Cash,cashequivalentsandshort-terminvestments $ 4,707 $ 3,804 $ 903Accountsreceivable 796 814 (18)Othercurrentassets 798 779 19Total current assets $ 6,301 $ 5,397 $ 904Accountspayableandaccruedliabilities 1,927 1,961 (34)Advanceticketsales 2,717 2,469 248Currentportionoflong-termdebtandfinanceleases 455 671 (216)Total current liabilities $ 5,099 $ 5,101 $ (2)Net working capital $ 1,202 $ 296 $ 906
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
Thenetworkingcapitalof$1,202millionatDecember31,2018representedanimprovementof$906millionfromDecember31,2017.
Thenetcashflowbenefitofpositiveoperatingresultsin2018morethanoffsettheimpactofnetcapitalexpenditures.Netcashoutflowrelatingtocapitalexpenditureswas$838million(afterdeductingproceedsdrawnonthedeliveryoffiveBoeing787and13Boeing737MAXaircraftof$1,210million,andproceedsonthesaleof25Embraer190aircraftof$293millionlesstherepaymentoftheassociateddebtof$144million).In2018,AirCanadaalsomadeanadditionaldebtrepaymentof$268millioninconjunctionwiththeamendmentofthe2016CreditFacility(refertosection9.3“AdjustedNetDebt”ofthisMD&Aforadditionalinformation)andpurchasedthreeBoeing737MAXaircraftusingcash.
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9.5CONSOLIDATEDCASHFLOWMOVEMENTS
ThetablebelowprovidesthecashflowmovementsforAirCanadafortheperiodsindicated.
Fourth Quarter Full Year
(Canadiandollarsinmillions) 2018 2017 $Change 2018 2017 $Change
Net cash flows from operating activities $ 360 $ 389 $ (29) $ 2,695 $ 2,738 $ (43)Proceedsfromborrowings - - - 1,210 733 477
Reductionoflong-termdebtandfinanceleaseobligations
(361) (240) (121) (1,170) (814) (356)
Sharespurchasedforcancellation (50) (35) (15) (73) (71) (2)Issueofshares - 2 (2) 5 9 (4)Financingfees (4) (11) 7 (12) (26) 14
Net cash flows used in financing activities
$ (415) $ (284) $ (131) $ (40) $ (169) $ 129
Short-terminvestments 36 (167) 203 (848) (998) 150
Additionstoproperty,equipmentandintangibleassets
(219) (432) 213 (2,197) (2,422) 225
Proceedsfromsaleofassets 1 2 (1) 11 5 6Proceedsfromsale-leasebackofassets - - - 293 740 (447)Other (1) (24) 23 47 (16) 63Net cash flows used in investing activities $ (183) $ (621) $ 438 $(2,694) $ (2,691) $ (3)
Effect of exchange rate changes on cash and cash equivalents
$ 16 $ 12 $ 4 $ 27 $ (23) $ 50
Increase (decrease) in cash and cash equivalents
$ (222) $ (504) $ 282 $ (12) $ (145) $ 133
ThefollowingtableprovidesthecalculationoffreecashflowforAirCanadafortheperiodsindicated.
Fourth Quarter Full Year
(Canadiandollarsinmillions) 2018 2017 $Change 2018 2017 $Change
Net cash flows from operating activities $ 360 $ 389 $ (29) $ 2,695 $ 2,738 $ (43)
Additionstoproperty,equipmentandintangibleassets,netofproceedsfromsaleandleasebacktransactions
(219) (432) 213 (1,904) (1,682) (222)
Free cash flow (1) $ 141 $ (43) $ 184 $ 791 $ 1,056 $ (265)
(1) Freecashflowisanon-GAAPfinancialmeasureusedbyAirCanadaasanindicatorofthefinancialstrengthandperformanceofitsbusiness,indicatinghowmuchcashitisabletogeneratefromoperationsandaftercapitalexpenditures.Freecashflowiscalculatedasnetcashflowsfromoperatingactivitiesminusadditionstoproperty,equipmentandintangibleassets,andisnetofproceedsfromsaleandleasebacktransactions.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.
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Free Cash Flow
Inthefourthquarterof2018,netcashflowsfromoperatingactivitiesof$360milliondecreased$29millionwhencomparedtothesamequarterin2017.Thecashflowbenefitofanimprovementinoperatingincomequarteroverquarterwasmorethanoffsetbyadecreaseincashfromworkingcapital.Freecashflowof$141millionincreased$184millionfromthefourthquarterof2017duetoalowerlevelofcapitalexpenditures.
In2018,netcashflowsfromoperatingactivitiesof$2,695milliondecreased$43millionwhencomparedto2017.In2018,freecashflowof$791milliondecreased$265millionfrom2017.In2018,AirCanadareceivedproceedsof$293millionfromthesaleandleasebackof25Embraer190aircraft.In2017,AirCanadareceivedproceedsof$740millionfromthesaleandleasebackoffourBoeing787aircraft.
Net Cash Flows from (used in) Financing Activities
Reductionoflong-termdebtandfinanceleaseobligationsamountedto$361millioninthefourthquarterof2018and$1,170millionforthefullyear2018whileproceedsfromborrowingswerenilinthefourthquarterof2018andtotaled$1,210millionin2018.
Refertosections9.4“WorkingCapital”,9.2“FinancialPosition”and9.3“AdjustedNetDebt”ofthisMD&Aforadditionalinformation.
9.6.CAPITALEXPENDITURESANDRELATEDFINANCINGARRANGEMENTS
Boeing 787 Aircraft
AsofthedateofthisMD&A,AirCanadahasoutstandingpurchasecommitmentswithTheBoeingCompany(“Boeing”)fortwoBoeing787aircrafttobedeliveredin2019.AirCanadaalsohaspurchaseoptionsfor13Boeing787aircraft(entitlingAirCanadatopurchaseaircraftbasedonpreviouslydeterminedpricinganddeliverypositions),andpurchaserightsfor10Boeing787aircraft(entitlingAirCanadatopurchaseaircraftbasedonBoeing’sthencurrentpricingandavailabledeliverypositions).
Boeing 737 MAX Aircraft
AirCanadahasanagreementwithBoeingforthepurchaseofBoeing737MAXaircraftwhichprovidesfor:
> Firmordersfor61737MAXaircraft,consistingof50737MAX8and11737MAX9aircraftwithsubstitutionrightsbetweenthemaswellasforthe737MAX7aircraft.
> Purchaseoptionsfor18Boeing737MAXaircraft.
> Certainrightstopurchaseanadditional30Boeing737MAXaircraft.
AsofthedateofthisMD&A,18Boeing737MAX8aircrafthavebeendelivered,withtheremaining43Boeing737MAXaircraftscheduledfordeliveryfrom2019to2024.
InApril2018,AirCanadaconcludedanamendmenttoitsBoeing737purchaseagreement,pursuanttowhichcertainaircraftdeliverypositionswereacceleratedandothersdeferred.Theamendmentacceleratesthedeliveryoffive737MAXaircraftbyoneyear,to2020,anddefersthedeliveryof11737MAXaircraftbyupto36months.
Subjecttocertainconditions,AirCanadaalsohasfinancingcommitmentscovering25firmBoeing737MAXaircraftscheduledfordeliveryin2020,2023and2024.Thefinancingtermsarefor80%oftheaircraftdeliverypriceandthetermtomaturityis10yearswithmortgage-stylerepayments.
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Airbus A220-300 Aircraft
InJune2016,AirCanadaandBombardierInc.(“Bombardier”)finalizedapurchaseagreementwhichincludesafirmorderfor45AirbusA220-300aircraft(formerlycalledBombardierC-SeriesCS300aircraft)andoptionsforanadditional30AirbusA220-300aircraft.Deliveriesarescheduledtobegininlate2019andextendto2022.Thefirst25aircraftondeliveryareexpectedtoreplaceAirCanada’sexistingmainlinefleetofEmbraer190aircraft,withincrementalaircraftsupportingAirCanada’shubandnetworkgrowth.
Reconfiguration of Airbus A330 Aircraft
Inordertoprovidecustomerswithaproductthatisconsistentacrossitswide-bodyfleet,AirCanadaplansonreconfiguring12AirbusA330aircraft(eightofwhicharecurrentlyinserviceandfourscheduledtobeaddedin2019)tothenewBoeing787state-of-the-artstandard.ThereconfigurationoftheAirbusA330aircraftisexpectedtobegininlate2019forcompletioninthefirsthalfof2020.Thecapitalexpenditurerelatedtothisrefurbishmentprogram(whichisincludedintheprojectedcommittedexpendituresinthetablebelow)isapproximately$275million.
Capital Commitments
Asoutlinedinthetablebelow,theestimatedaggregatecostofthefuturefirmBoeing787,Boeing737MAXandAirbusA220-300aircraftdeliveriesandothercapitalpurchasecommitmentsasatDecember31,2018approximates$6,076million.ThetablebelowalsoincludestheimpactoftheamendmenttotheBoeing737purchaseagreementdiscussedabove.
(Canadiandollarsinmillions) 2019 2020 2021 2022 2023 Thereafter Total
Projectedcommittedexpenditures
$ 2,382 $ 1,556 $ 815 $ 753 $ 375 $ 195 $ 6,076
Projectedplannedbutuncommittedexpenditures
324 441 440 228 186Not
availableNot
available
Projectedplannedbutuncommittedcapitalizedmaintenance(1)
212 183 166Not
availableNot
availableNot
availableNot
available
Total projected expenditures (2) $ 2,918 $ 2,180 $ 1,421 $ 981 $ 561
Not available
Not available
(1) Futurecapitalizedmaintenanceamountsfor2022and2023andbeyondarenotyetdeterminable.(2)U.S.dollaramountsareconvertedusingtheDecember31,2018closingexchangerateofUS$1=C$1.3637.Theestimatedaggregatecost
ofaircraftisbasedondeliverypricesthatincludeestimatedescalationand,whereapplicable,deferredpricedeliverypaymentinterestcalculatedbasedonthe90-dayU.S.LIBORrateatDecember31,2018.
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9.7.PENSIONFUNDINGOBLIGATIONS
AirCanadamaintainsseveraldefinedbenefitpensionplans,includingdomesticregisteredpensionplans,supplementalpensionplansandinternationalpensionplans.AirCanadaalsohasseveraldefinedcontributionpensionplansaswellasplansprovidingotherretirementandpost-employmentbenefitstoitsemployees.
AsatJanuary1,2018,theaggregatesolvencysurplusinthedomesticregisteredpensionplanswas$2.6billion.Basedonpreliminaryestimates,includingactuarialassumptions,asatJanuary1,2019,theaggregatesolvencysurplusinAirCanada’sdomesticregisteredpensionplansisprojectedtobe$2.4billion.ThefinalvaluationstobemadeasatJanuary1,2019willbecompletedinthefirsthalfof2019.Basedonpreliminaryestimates,AirCanadadoesnotexpecttomakeanypastservicepaymentsin2019.
Aspermittedbyapplicablelegislationandsubjecttoapplicableplanrules,amountsinexcessof105%onasolvencybasismaybeusedtoreducecurrentservicecontributionsunderthedefinedbenefitcomponentortofundtheemployercontributiontoadefinedcontributioncomponentwithinthesamepensionplan.
Onacashbasis,totalemployerpensionfundingcontributions(includingtheinternationalandsupplementalplans)amountedto$94millionin2018,asdescribedinthetablebelow.
(Canadiandollarsinmillions) 2018
Currentservicedomesticregisteredplans $ 1Otherpensionarrangements(1) 93Total employer pension funding contributions $ 94
(1) Includesretirementcompensationarrangements,supplementalplansandinternationalplans.
Onacashbasis,totalpensionfundingcontributions(includingtheinternationalandsupplementalplans)areforecastedtobe$93millionin2019,asdescribedinthetablebelow.
(Canadiandollarsinmillions) 2019
Currentservicedomesticregisteredplans $ 2Otherpensionarrangements(1) 91Total projected employer pension funding contributions $ 93
(1) Includesretirementcompensationarrangements,supplementalplansandinternationalplans.
AsatDecember31,2018,takingintoaccounttheeffectoffinancialinstrumentriskmanagementtools,approximately81%ofAirCanada’spensionliabilitieswerematchedwithfixedincomeproductstomitigateasignificantportionoftheinterestrate(discountrate)risk.AirCanadamaycontinuetoincreasethepercentageoffixedincomeproductsmatchedtopensionliabilities,subjecttofavourablemarketconditions.
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9.8.CONTRACTUALOBLIGATIONS
ThetablebelowprovidesAirCanada’scontractualobligationsasatDecember31,2018,includingthoserelatingtointerestandprincipalrepaymentobligationsonAirCanada’slong-termdebtandfinanceleaseobligations,operatingleaseobligationsandcommittedcapitalexpenditures.
(Canadiandollarsinmillions) 2019 2020 2021 2022 2023 Thereafter Total
PrincipalLong-termdebtobligations $407 $640 $ 1,003 $ 342 $ 1,450 $ 2,731 $ 6,573Financeleaseobligations 48 50 17 15 16 41 187Total principal obligations $ 455 $ 690 $ 1,020 $ 357 $ 1,466 $ 2,772 $ 6,760 Interest Long-termdebtobligations 273 258 214 176 151 346 1,418Financeleaseobligations 14 10 6 5 4 10 49Total interest obligations $ 287 $ 268 $ 220 $ 181 $ 155 $ 356 $ 1,467
Total long-term debt and finance lease obligations
$ 742 $ 958 $ 1,240 $ 538 $ 1,621 $ 3,128 $ 8,227
Operating lease obligations $ 679 $ 527 $ 383 $ 294 $ 230 $ 868 $ 2,981
Committed capital expenditures
$ 2,382 $ 1,556 $ 815 $ 753 $ 375 $ 195 $ 6,076
Total contractual obligations (1) $ 3,803 $ 3,041 $ 2,438 $ 1,585 $ 2,226 $ 4,191 $ 17,284
(1)Totalcontractualobligationsexcludecommitmentsforgoodsandservicesrequiredintheordinarycourseofbusiness.Alsoexcludedarelong-termliabilitiesotherthanlong-termdebtandfinanceleaseobligationsduetoreasonsofuncertaintyoftimingofcashflowsanditemsthatarenon-cashinnature.
Covenants in Credit Card Agreements
AirCanada’sprincipalcreditcardprocessingagreementsforcreditcardprocessingservicescontaintriggeringeventsuponwhichAirCanadaisrequiredtoprovidetheapplicablecreditcardprocessorwithcashdeposits.Theobligationstoprovidecashdepositsandtherequiredamountofdepositsareeachbaseduponamatrixmeasuring,onaquarterlybasis,bothafixedchargecoverageratioforAirCanadaandtheunrestrictedcash,cashequivalentsandshort-terminvestmentsofAirCanada.In2018,AirCanadamadenocashdepositsundertheseagreements(nilin2017).
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9.9.SHAREINFORMATION
TheissuedandoutstandingsharesofAirCanada,alongwithsharespotentiallyissuable,asofthedatesindicatedbelow,areasfollows:
December 31, 2018
December31,2017
Issued and outstanding shares
Variablevotingshares 125,214,350 115,986,084Votingshares 145,515,561 157,090,562Total issued and outstanding shares 270,729,911 273,076,646
Class A variable voting and Class B voting shares potentially issuable
Stockoptions 6,014,464 6,121,252Total shares potentially issuable 6,014,464 6,121,252Total outstanding and potentially issuable shares 276,744,375 279,197,898
Issuer Bid
InMay2018,AirCanadareceivedapprovalfromtheTorontoStockExchangefortherenewalofitsnormalcourseissuerbidforitsClassAvariablevotingsharesandClassBvotingshares(collectivelythe“shares”),authorizing,betweenMay31,2018andMay30,2019,thepurchaseofupto24,040,243shares,representing10%ofAirCanada’spublicfloatasatMay17,2018.In2018,AirCanadapurchased,forcancellation3,013,822sharesatanaveragecostof$24.11pershareforaggregateconsiderationof$73million.AtDecember31,2018,atotalof21,940,639sharesremainedavailableforrepurchaseundertheexistingissuerbid.
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10. QUARTERLY FINANCIAL DATA
ThetablebelowsummarizesquarterlyfinancialresultsforAirCanadaforthelasteightquarters.
(Canadiandollarsinmillions,exceptwhereindicated)
2017(1) 2018
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Passenger $ 3,120 $ 3,550 $ 4,514 $ 3,409 $ 3,489 $ 3,921 $ 5,018 $ 3,795Cargo 148 168 194 198 168 200 218 217Other 374 192 172 213 414 212 179 234Operating revenues 3,642 3,910 4,880 3,820 4,071 4,333 5,415 4,246 Aircraftfuel 659 701 832 735 825 964 1,222 958Regionalairlinesexpense
Aircraftfuel 95 96 109 112 114 135 149 133Other 537 552 553 563 561 607 568 575
Wages,salaries&benefits 644 663 690 674 700 711 743 719Airportandnavigationfees 210 230 264 201 221 237 281 225Aircraftmaintenance 228 226 241 243 256 220 277 250Depreciation,amortizationandimpairment 228 242 241 245 267 278 268 267Salesanddistributioncosts 181 188 232 169 189 199 237 182Groundpackagecosts 256 103 73 106 276 114 86 126Aircraftrent 122 130 125 126 125 123 137 133Cateringandonboardservices 85 97 112 89 96 108 125 104Communicationsandinformationtechnology 71 58 63 62 79 67 79 69Specialitems 30 - - - - - - -Other 326 332 369 362 376 344 403 383Operating expenses 3,672 3,618 3,904 3,687 4,085 4,107 4,575 4,124Operating income (loss) (30) 292 976 133 (14) 226 840 122Foreignexchangegain(loss) 70 68 44 (62) (112) (25) 89 (269)Interestincome 12 14 16 18 20 24 32 32Interestexpense (79) (80) (73) (79) (83) (84) (80) (84)Interestcapitalized 9 9 9 9 13 7 7 8
Netfinancingexpenserelatingtoemployeebenefits
(16) (16) (15) (18) (12) (13) (13) (12)
Gain(loss)onfinancialinstrumentsrecordedatfairvalue
- 7 17 (1) 1 (9) 10 (3)
Gainonsaleandleasebackofassets 26 26 - - - - - -
Gain(loss)ondebtsettlementsandmodifications
- - (3) 24 11 (1) (1) -
Lossondisposalofassets - - - - - (186) (2) -Other (5) (6) (6) (4) (8) (10) (6) (10)Total non-operating income (expense) 17 22 (11) (113) (170) (297) 36 (338)Income (loss) before income taxes (13) 314 965 20 (184) (71) 876 (216)Incometax(expense)recovery - (3) 758 (12) 14 (6) (231) (15)Net income (loss) $ (13) $ 311 $ 1,723 $ 8 $ (170) $ (77) $ 645 $ (231)Diluted earnings (loss) per share $ (0.05) $ 1.13 $ 6.22 $ 0.02 $ (0.62) $ (0.28) $ 2.34 $ (0.85)
EBITDAR (2) $ 366 $ 681 $ 1,360 $ 521 $ 397 $ 646 $ 1,265 $ 543Adjusted pre-tax income (loss) (2) $ (63) $ 229 $ 922 $ 77 $ (72) $ 163 $ 793 $ 68Adjusted net income (loss) (2) $ (63) $ 226 $ 922 $ 60 $ (52) $ 114 $ 561 $ 54Adjusted earnings (loss) per share – diluted (2) $ (0.23) $ 0.82 $ 3.33 $ 0.22 $ (0.19) $ 0.41 $ 2.03 $ 0.20
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.(2)EBITDAR,adjustedpre-taxincome(loss),adjustednetincome(loss)andadjustedearnings(loss)pershare–dilutedarenon-GAAPfinancialmeasures.Reconciliationsof
thesemeasurestocomparableGAAPmeasurescanbefoundinsection20“Non-GAAPFinancialMeasures”ofthisMD&AandinAirCanada’sMD&Areports,availableataircanada.com.
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Thetablebelowprovidesabreakdownofthemostsignificantitemsincludedinregionalairlinesexpenseforthelasteightquarters.
(Canadiandollarsinmillions)
2017 2018
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
Capacitypurchasefees $ 308 $ 314 $ 315 $ 330 $ 319 $ 360 $ 318 $ 336Aircraftfuel 95 96 109 112 114 135 149 133Airportandnavigationfees 69 73 80 71 69 76 78 73Salesanddistributioncosts 37 40 34 35 34 41 44 34Depreciation,amortizationandimpairment 6 7 8 7 9 9 9 11Aircraftrent 10 10 10 10 10 10 11 10Other 107 108 106 110 120 111 108 111Total regional airlines expense $ 632 $ 648 $ 662 $ 675 $ 675 $ 742 $ 717 $ 708
ThetablebelowprovidesmajorquarterlyoperatingstatisticsforAirCanadaforthelasteightquarters.
2017(1) 2018
System Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
PassengerPRASM(cents) 13.6 14.0 14.5 14.1 14.0 14.4 15.1 14.8CASM(cents) 16.0 14.3 12.6 15.2 16.4 15.1 13.8 16.1AdjustedCASM(cents)(2) 11.5 10.7 9.3 11.3 11.5 10.6 9.4 11.4Fuelcostperlitre(cents)(3) 63.2 61.3 59.4 67.5 73.3 80.3 83.0 84.3
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.(2)AdjustedCASMisanon-GAAPfinancialmeasure.AreconciliationofthismeasuretoacomparableGAAPmeasurecanbefoundinsection20“Non-GAAPFinancial
Measures”ofthisMD&AandinAirCanada’sMD&Areports,availableataircanada.com.(3)Includesaircraftfuelexpenserelatedtoregionalairlineoperations.Includesfuelhandlingexpenses.
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ThetablebelowprovidesAirCanada’srevenuepassengermiles(RPMs),availableseatmiles(ASMs)andpassengerloadfactors,onasystem-basisandbymarket,forthelasteightquarters.
2017 2018
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
SystemRPMs(millions) 18,341 20,928 26,472 19,396 20,440 22,654 28,465 20,801ASMs(millions) 22,894 25,357 31,050 24,191 24,862 27,269 33,137 25,598Passengerloadfactor(%) 80.1 82.5 85.3 80.2 82.2 83.1 85.9 81.3%
DomesticRPMs(millions) 4,101 4,875 6,130 4,607 4,226 5,003 6,339 4,684ASMs(millions) 5,108 5,837 7,173 5,584 5,280 6,026 7,482 5,667Passengerloadfactor(%) 80.3 83.5 85.4 82.5 80.0 83.0 84.7 82.7%
U.S. transborderRPMs(millions) 3,782 3,609 3,951 3,408 4,037 3,848 4,172 3,734ASMs(millions) 4,687 4,376 4,683 4,252 4,945 4,673 4,962 4,662Passengerloadfactor(%) 80.7 82.5 84.4 80.1 81.6 82.3 84.1 80.1%
AtlanticRPMs(millions) 3,891 6,131 9,406 5,076 4,573 7,084 10,642 5,813ASMs(millions) 5,248 7,661 11,087 6,582 5,753 8,571 12,231 7,206Passengerloadfactor(%) 74.1 80.0 84.8 77.1 79.5 82.7 87.0 80.6%
PacificRPMs(millions) 3,943 4,671 5,471 4,501 4,572 4,936 5,630 4,514ASMs(millions) 4,862 5,540 6,412 5,586 5,447 5,829 6,484 5,541Passengerloadfactor(%) 81.1 84.3 85.3 80.6 83.9 84.7 86.8 81.5%
OtherRPMs(millions) 2,624 1,642 1,514 1,804 3,032 1,783 1,682 2,056ASMs(millions) 2,989 1,943 1,695 2,187 3,437 2,170 1,978 2,522Passengerloadfactor(%) 87.8 84.5 89.3 82.5 88.2 82.1 85.0 81.6%
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11. SELECTED ANNUAL INFORMATION
ThefollowingtableprovidesselectedannualinformationforAirCanadafortheyears2016through2018.
Full Year
(Canadiandollarsinmillions,exceptpersharefigures) 2018 2017(1) 2016(1)
Operatingrevenues $ 18,065 $16,252 $ 14,677Operatingexpenses(2) 16,891 14,881 13,332Operating income 1,174 1,371 1,345Incomebeforeincometaxes 405 1,286 877Recoveryof(provisionfor)incometaxes(3) (238) 743 (1)Net income $ 167 $ 2,029 $ 876EBITDAR (4) $ 2,851 $ 2,928 $ 2,768Adjusted pre-tax income (4) $ 952 $ 1,165 $ 1,148Adjusted net income (4) $ 677 $ 1,145 $ 1,147Basic earnings per share $ 0.61 $ 7.44 $ 3.16Diluted earnings per share $ 0.60 $ 7.31 $ 3.10Adjusted earnings per share – diluted (4) $ 2.45 $ 4.11 $ 4.06Cash, cash equivalents and short-term investments $ 4,707 $ 3,804 $ 2,979Total assets (5) $ 19,197 $ 17,782 $ 15,114Total long-term liabilities (6) $ 10,520 $ 9,930 $ 10,178Total liabilities $ 15,164 $ 14,360 $ 13,895
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.2016amountshavenotbeenrestatedfortheadoptionofthisnewaccountingstandard.
(2)In2017,AirCanadarecordedaprovisionof$30millionrelatingtoafinewhichwasreinstatedbyadecisionoftheEuropeanCommissionpertainingtocargoinvestigations.In2016,AirCanadarecordedapastservicecostexpenseof$91milliontoreflecttheestimatedcostofpensionincreasesapplicabletoACPA-representedpilotswhoparticipateinadefinedbenefitplan.
(3)In2017,AirCanadarecordedataxrecoveryof$743million(representingadeferredincometaxrecoveryof$759millionandacurrentincometaxexpenseof$16million).Thisdeferredincometaxrecoverywasexcludedfromadjustednetincomeasitreflectedaone-timerecognitionofpreviouslyunrecognizedincometaxassets.
(4)EBITDAR,adjustedpre-taxincome,adjustednetincomeandadjustedearningspershare–dilutedarenon-GAAPfinancialmeasures.ReconciliationsofthesemeasurestocomparableGAAPmeasurescanbefoundinsection20“Non-GAAPFinancialMeasures”ofthisMD&AandinAirCanada’sMD&Areports,availableataircanada.com.
(5)In2017,AirCanadarecordedadeferredincometaxassetof$456million.(6)Totallong-termliabilitiesincludelong-termdebt(includingcurrentportion)andfinanceleases,pensionandotherbenefitliabilities,
maintenanceprovisionsandotherlong-termliabilities.
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12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Summary of Gain (Loss) on Financial Instruments Recorded at Fair Value
Thefollowingisasummaryofgains(losses)onfinancialinstrumentsrecordedatfairvalueincludedinnon-operatingincome(expense)onAirCanada’sconsolidatedstatementofoperationsfortheperiodsindicated.
Fourth Quarter Full Year
(Canadiandollarsinmillions) 2018 2017 2018 2017
Shareforwardcontracts $ (3) $ - $ - $ 26Fuelderivatives - (1) (1) (3)Financial instruments recorded at fair value $ (3) $ (1) $ (1) $ 23
Risk Management
Underitsriskmanagementpolicy,AirCanadamanagesitsfuelpricerisk,foreignexchangeriskandinterestrateriskthroughtheuseofvariousfinancialderivativeinstruments.AirCanadausestheseinstrumentssolelyforriskmanagementpurposesandnotforgeneratingtradingprofit.Assuch,anychangeincashflowsassociatedwithderivativeinstrumentsisdesignedtobeaneconomichedgeandoffsetbychangesincashflowsoftherelevantriskbeinghedged.
Thefairvaluesofderivativeinstrumentsrepresenttheamountoftheconsiderationthatcouldbeexchangedinanarm’slengthtransactionbetweenwillingpartieswhoareundernocompulsiontoact.Thefairvalueofthesederivativesisdeterminedusingpricesinactivemarkets,whereavailable.Whennosuchmarketisavailable,valuationtechniquessuchasdiscountedcashflowanalysisareapplied.Thevaluationtechniquesincorporateallfactorsthatwouldbeconsideredinsettingaprice,includingAirCanada’sandthecounterparty’srespectivecreditrisk.
Fuel Price Risk Management
Fuelpriceriskistheriskthatfuturecashflowswillfluctuatebecauseofchangesinjetfuelprices.Inordertomanageitsexposuretojetfuelpricesandtohelpmitigatevolatilityinoperatingcashflows,AirCanadaentersintoderivativecontractswithfinancialintermediaries.AirCanadamayusederivativecontractsbasedonjetfuel,heatingoilandcrude-oil.AirCanada’spolicypermitshedgingofupto75%oftheprojectedjetfuelpurchasesforthecurrentcalendaryear,50%oftheprojectedjetfuelpurchasesforthenextcalendaryear,and25%ofprojectedjetfuelpurchasesforanycalendaryearthereafter.Thesearemaximum(butnotmandated)limits.Thereisnominimummonthlyhedgingrequirement.AirCanadaperformsregularreviewstoassessmarketconditionsandadjustitshedgingstrategywheremanagementconsidersitwarranted.
In2018:
> Hedginglossesonthesettlementoffuelderivativesof$19millionandtheassociatedpremiumcostsof$17million,forahedginglossof$36millionwerereclassifiedfromothercomprehensiveincometoaircraftfuelexpense(netfuelhedginglossof$2millionwasreclassifiedfromothercomprehensiveincometoaircraftfuelexpensein2017).Nohedgeineffectivenesswasrecorded.
> AirCanadapurchasedcrude-oilcalloptionsandswapscoveringaportionof2018fuelexposure.Thecashpremiumrelatedtothesecontractswas$17million($18millionin2017for2017exposures).
> Fuelderivativecontractscashsettledwithafairvalueof$19millioninfavourofthecounterparties($26millioninfavourofAirCanadain2017).
TherewerenooutstandingfuelderivativesasatDecember31,2018andDecember31,2017.
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Foreign Exchange Risk Management
AirCanada’sfinancialresultsarereportedinCanadiandollars,whilealargeportionofitsexpenses,debtobligationsandcapitalcommitmentsareinforeigncurrencies,primarilyU.S.dollars.Foreignexchangeriskistheriskthatfluctuationsinforeignexchangeratesmayhaveonoperatingresultsandcashflows.AirCanada’sriskmanagementobjectiveistoreducecashflowriskrelatedtoforeigndenominatedcashflows.
AirCanadageneratescertainsalesinU.S.dollarsandinotherforeigncurrencieswhichareconvertedtoU.S.dollarsundertheCorporation’sriskmanagementprogram.In2018,thesenetoperatingcashinflowstotaledapproximatelyUS$4.2billionandU.S.denominatedoperatingcostsamountedtoapproximatelyUS$6.4billion.Non-operatingcashoutflowsinU.S.dollars,primarilyrelatedtointerestpaymentsonU.S.dollardenominateddebtandnetfinancingoutflows,amountedtoapproximatelyUS$1.9billion.For2018,thisresultedinaU.S.dollarnetcashflowexposureofapproximatelyUS$4.1billion.
AirCanadahasatargetcoverageof70%onarolling18-monthbasistomanagethenetU.S.dollarcashflowexposuredescribedaboveutilizingthefollowingriskmanagementstrategies:
> HoldingU.S.dollarcashreservesasaneconomichedgeagainstchangesinthevalueoftheU.S.dollar.U.S.dollarcashandshort-terminvestmentbalancesasatDecember31,2018amountedto$863million(US$635million)($686million(US$542million)asatDecember31,2017).Aportionofthecashandinvestmentreservesareaneconomichedgeagainstlong-termU.S.dollardebtwhiletheremainderofthecashisoperationalcashandinvestmentreserveswhichareappliedagainsttherolling18-monthnetU.S.dollarcashflowexposure.In2018,againof$62million(lossof$58millionin2017)wasrecordedinforeignexchangegain(loss)reflectingthechangeinCanadianequivalentmarketvalueoftheU.S.dollarcash,cashequivalentsandshort-terminvestmentbalancesheld.
> LockingintheforeignexchangeratethroughtheuseofavarietyofforeignexchangederivativeswhichhavematuritydatescorrespondingtotheforecasteddatesofU.S.dollarnetoutflows.
Thelevelofforeignexchangederivativesenteredintoandtheirrelatedmaturitydatesaredependentuponanumberoffactors,whichincludetheamountofforeignrevenueconversionavailable,U.S.dollarnetcashoutflows,aswellastheamountattributedtoaircraftanddebtpayments.BasedonthenotionalamountofcurrencyderivativesoutstandingatDecember31,2018,asfurtherdescribedbelow,approximately77%ofnetU.S.cashoutflowsarehedgedfor2019and48%for2020,resultinginderivativecoverageof68%overthenext18months.OperationalU.S.dollarcashandinvestmentreservescombinedwithderivativecoverageresultsin75%coverage.
AsatDecember31,2018,AirCanadahadoutstandingforeigncurrencyoptionsandswapagreements,settlingin2019and2020,topurchaseatmaturity$4,987million(US$3,659million)ofU.S.dollarsataweightedaveragerateof$1.2645perUS$1.00(2017–$3,400million(US$2,704million)withsettlementsin2018and2019ataweightedaveragerateof$1.2703per$1.00U.S.dollar).AirCanadaalsohasprotectioninplacetosellaportionofitsexcessEuros,Sterling,YEN,andAUD(EUR€103million,GBP£208million,JPY¥25,922million,andAUD$105million)whichsettlein2019and2020atweightedaverageratesof€1.1910,£1.3567,¥0.0092,andAUD$0.7448per$1.00U.S.dollar,respectively(asatDecember31,2017-EUR€101million,GBP£105million,JPY¥8,623million,CNY¥41million,andAUD$32millionwithsettlementin2018atweightedaverageratesof€1.1664,£1.3259,¥0.0090,¥0.1468andAUD$0.7576respectivelyper$1.00U.S.dollar).
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Thehedgingstructuresputinplacehavevariousoptionpricingfeatures,suchasknock-outtermsandprofitcaplimitationsand,basedontheassumedvolatilityusedinthefairvaluecalculation,thenetfairvalueoftheseforeigncurrencycontractsasatDecember31,2018was$33millioninfavourofthecounterparties(2017–$215millioninfavourofthecounterparties).Thesederivativeinstrumentshavenotbeendesignatedashedgesforaccountingpurposesandarerecordedatfairvalue.In2018,againof$245millionwasrecordedinforeignexchangegain(loss)relatedtothesederivatives(2017–$274millionloss).In2018,foreignexchangederivativecontractscashsettledwithanetfairvalueof$63millioninfavourofAirCanada(2017–$55millioninfavourofthecounterparties).
Interest Rate Risk Management
Interestrateriskistheriskthatthefairvalueorfuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarketinterestrates.
AirCanadaentersintobothfixedandfloatingratedebtandleasescertainassetswheretherentalamountfluctuatesbasedonchangesinshort-terminterestrates.AirCanadamanagesinterestrateriskonaportfoliobasisandseeksfinancingtermsinindividualarrangementsthataremostadvantageoustakingintoaccountallrelevantfactors,includingcreditmargin,termandbasis.TheriskmanagementobjectiveistominimizethepotentialforchangesininterestratestocauseadversechangesincashflowstoAirCanada.Thecash,cashequivalentsandshort-terminvestmentportfolio,whichearnsafloatingrateofreturn,isaneconomichedgeforaportionofthefloatingratedebt.
TheratiooffixedtofloatingrateobligationsoutstandingisdesignedtomaintainflexibilityinAirCanada’scapitalstructureandisbaseduponalong-termobjectiveof60%fixedand40%floatingbutallowstheflexibilitytoadjusttoprevailingmarketconditions.TheratioatDecember31,2018,was81%fixedand19%floating(73%and27%,respectively,asatDecember31,2017).
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13. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
CriticalaccountingestimatesarethoseestimatesofmanagementthataremostimportanttotheportrayalofAirCanada’sfinancialconditionandresultsofoperations.Theyrequiremanagement’smostdifficult,subjectiveorcomplexJudgements,oftenbecauseoftheneedtomakeestimatesandJudgementsabouttheeffectofmattersthatareinherentlyuncertain.ActualresultscoulddifferfromthoseestimatesandJudgementsunderdifferentassumptionsorconditions.
AirCanadahasidentifiedthefollowingareasthatdependoncriticalaccountingestimatesutilizedinthepreparationofitsconsolidatedfinancialstatements.
Employee Future Benefits
AirCanadamaintainsseveraldefinedbenefitplansprovidingpension,otherretirementandpost-employmentbenefitstoitsemployees.ThecostandrelatedliabilitiesofAirCanada’spensions,otherpost-retirementandpost-employmentbenefitprogramsaredeterminedusingactuarialvaluations.Theactuarialvaluationsinvolveassumptions,includingdiscountrates,futuresalaryincreases,mortalityratesandfuturebenefitincreases.Also,duetothelong-termnatureoftheseprograms,suchestimatesaresubjecttosignificantuncertainty.
Assumptions
ManagementisrequiredtomakesignificantestimatesaboutactuarialandfinancialassumptionstodeterminethecostandrelatedliabilitiesofAirCanada’semployeefuturebenefits.
FinancialAssumptions
Discount RateThediscountrateusedtodeterminethepensionobligationwasdeterminedbyreferencetomarketinterestratesoncorporatebondsrated“AA”orbetterwithcashflowsthatapproximatethetimingandamountofexpectedbenefitpayments.
Futureincreasesincompensationarebaseduponthecurrentcompensationpolicies,labourandemploymentagreementsandeconomicforecasts.
ThesignificantweightedaverageassumptionsusedtodetermineAirCanada’saccruedbenefitobligationsandcostareasfollows:
Pension Benefits
Other Employee Future Benefits
2018 2017 2018 2017
Discount rate used to determine:
NetinterestonthenetbenefitobligationfortheyearendedDecember31
3.60% 3.90% 3.60% 3.90%
ServicecostfortheyearendedDecember31 3.70% 4.10% 3.70% 4.10%AccruedbenefitobligationasatDecember31 3.81% 3.60% 3.81% 3.60%
Rate of future increases in compensation used to determine:
AccruedbenefitcostfortheyearendedDecember31
2.50% 2.50%Not
applicableNot
applicable
AccruedbenefitobligationasatDecember31
2.50% 2.50%Not
applicableNot
applicable
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Sensitivity Analysis
Sensitivityanalysisisbasedonchangingoneassumptionwhileholdingallotherassumptionsconstant.Inpractice,thismaybeunlikelytooccur,andchangesinsomeoftheassumptionsmaybecorrelated.Whencalculatingthesensitivityofthedefinedbenefitobligationtovariationsinsignificantactuarialassumptions,thesamemethod(presentvalueofthedefinedbenefitobligationcalculatedwiththeprojectedunitcreditmethodattheendofthereportingperiod)hasbeenappliedasthatusedforcalculatingtheliabilityrecognizedintheconsolidatedstatementoffinancialposition.
Sensitivityanalysison2018pensionexpenseandnetfinancingexpenserelatingtopensionbenefitliabilities,basedondifferentactuarialassumptionswithrespecttodiscountrateissetoutbelow.Theeffectsoneachpensionplanofachangeinanassumptionareweightedproportionatelytothetotalplanobligationtodeterminethetotalimpactforeachassumptionpresented.
(Canadiandollarsinmillions)
0.25 Percentage Point
Decrease Increase
Discount rate on obligation assumption Pensionexpense $ 22 $ (21)Netfinancingexpenserelatingtopensionbenefitliabilities 23 (21)Total $ 45 $ (42)Increase (decrease) in pension obligation $ 703 $ (680)
Theincrease(decrease)inthepensionobligationfora0.25percentagepointchangeinthediscountraterelatestothegrossamountofthepensionliabilitiesandisbeforetheimpactofanychangeinplanassets.AsatDecember31,2018,approximately81%ofAirCanada’spensionliabilitieswerematchedwithfixedincomeproductstomitigateasignificantportionoftheinterestrate(discountrate)risk.
Anincreaseofone-yearlifeexpectancywouldincreasethepensionbenefitobligationby$478million.
Assumedhealthcarecosttrendrateshaveasignificanteffectontheamountsreportedforthehealthcareplans.A5.5%annualrateofincreaseinthepercapitacostofcoveredhealthcarebenefitswasassumedfor2018(2017–5.8%).Therateisassumedtodecreasegraduallyto5%by2020(2017–assumedtodecreasegraduallyto5%by2020).Aonepercentagepointincreaseinassumedhealthcaretrendrateswouldhaveincreasedthetotalofcurrentserviceandinterestcostsby$4millionandtheobligationby$55million.Aonepercentagepointdecreaseinassumedhealthcaretrendrateswouldhavedecreasedthetotalofcurrentserviceandinterestcostsby$4millionandtheobligationby$58million.
A0.25percentagepointdecreaseindiscountrateforotheremployeefuturebenefitswouldhaveincreasedthetotalofcurrentandinterestcostsbylessthan$1millionandtheobligationby$47million.A0.25percentagepointincreaseindiscountratewouldhavedecreasedthetotalofcurrentandinterestcostsbylessthan$1millionandtheobligationby$44million.
Depreciation and Amortization Period for Long-lived Assets
AirCanadamakesestimatesabouttheexpectedusefullivesoflong-livedassetsandtheexpectedresidualvalueoftheassetsbasedontheestimatedcurrentandfuturefairvaluesoftheassets,AirCanada’sfleetplansandthecashflowstheygenerate.Changestotheseestimates,whichcanbesignificant,couldbecausedbyavarietyoffactors,includingchangestomaintenanceprograms,changesinjetfuelpricesandotheroperatingcosts,changesinutilizationoftheaircraft,andchangingmarketpricesfornewandusedaircraftofthesameorsimilartypes.Estimatesandassumptionsareevaluatedatleastannually.Generally,theseadjustmentsareaccountedforonaprospectivebasis,throughdepreciationandamortizationexpense.Forthepurposesofsensitivityanalysisontheseestimates,a50%reductiontoresidualvaluesonaircraftwithremainingusefullivesgreaterthanfiveyearsresultsinanincreaseof$14milliontoannualdepreciationexpense.Foraircraftwithshorterremainingusefullives,theresidualvaluesarenotexpectedtochangesignificantly.
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Impairment Considerations of Long-lived Assets
Long-livedassetsincludepropertyandequipment,definitelivedintangibleassets,indefinitelivedintangibleassetsandgoodwill.Assetsthathaveanindefiniteusefullife,includinggoodwill,aretestedannuallyforimpairmentorwheneventsorcircumstancesindicatethatthecarryingvaluemaynotberecoverable.Assetsthataresubjecttodepreciationoramortizationarereviewedforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountmaynotberecoverable.Whenrequired,animpairmenttestisperformedbycomparingthecarryingamountoftheassetorcashgeneratingunittotheirrecoverableamount.Recoverableamountiscalculatedasthehigherofanasset’sorcash-generatingunit’sfairvaluelesscoststodisposeanditsvalueinuse.Forthepurposeofassessingimpairment,assetsaregroupedatthelowestlevelsforwhichthereareseparatelyidentifiablecashflows(cash-generatingunitsorCGUs).Managementhasdeterminedthattheappropriatelevelforassessingimpairmentsisatthenarrow-bodyandwide-bodyfleetlevelsforaircraftandrelatedassetssupportingtheoperatingfleet.Parkedaircraftnotusedinoperationsandaircraftleasedorsubleasedtothirdpartiesareassessedforimpairmentattheindividualassetlevel.Fairvaluelesscoststodisposemaybecalculatedbaseduponadiscountedcashflowanalysis,whichrequiresmanagementtomakeanumberofsignificantmarketparticipantassumptionsincludingassumptionsrelatingtofutureoperatingplans,discountratesandfuturegrowthrates.Animpairmentlossisrecognizedfortheamountbywhichtheasset’scarryingamountexceedsitsrecoverableamount.
Maintenance Provisions
Therecordingofmaintenanceprovisionsrelatedtoreturnconditionsonaircraftleasesrequiresmanagementtomakeestimatesofthefuturecostsassociatedwiththemaintenanceeventsrequiredundertheleasereturnconditionandestimatesoftheexpectedfuturemaintenanceconditionoftheaircraftatthetimeofleaseexpiry.Theseestimatestakeintoaccountcurrentcostsofthesemaintenanceevents,estimatesofinflationsurroundingthesecostsaswellasassumptionssurroundingutilizationoftherelatedaircraft.Anydifferenceintheactualmaintenancecostincurredandtheamountoftheprovisionisrecordedinaircraftmaintenanceexpenseintheperiod.Theeffectofanychangesinestimates,includingchangesindiscountrates,inflationassumptions,costestimatesorleaseexpiries,isalsorecognizedinmaintenanceexpenseintheperiod.Assumingtheaggregatecostforreturnconditionsincreasesby5%,holdingallotherfactorsconstant,therewouldbeacumulativebalancesheetadjustmenttoincreasetheprovisionby$62millionatDecember31,2018andanincreasetoaircraftmaintenanceexpensein2019ofapproximately$6million.Expectedfuturecashflowstosettletheobligationarediscounted.Ifthediscountratesweretoincreaseby1%,holdingallotherfactorsconstant,therewouldbeacumulativebalancesheetadjustmenttodecreasetheprovisionby$21millionatDecember31,2018.Anequivalentbutoppositemovementinthediscountratewouldresultinasimilarimpactintheoppositedirection.
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Income Taxes
Incometaxassetsandliabilitiesaremeasuredattheamountthatisexpectedtoberealizedorincurreduponultimatesettlementwithtaxationauthorities.Suchassessmentsarebasedupontheapplicableincometaxlegislation,regulationsandinterpretations,allofwhichmaybesubjecttochangeandinterpretation.Deferredincometaxassetsandliabilitiesarecomposedofthetaxeffectoftemporarydifferencesbetweenthecarryingamountandtaxbasisofassetsandliabilities,aswellastheincometaxeffectofundeductedincometaxlosses.Thetimingofthereversaloftemporarydifferencesisestimatedandtheincometaxratesubstantivelyenactedfortheperiodsofreversalisappliedtothetemporarydifference.Thecarryingamountsofassetsandliabilitiesaresubjecttotheaccountingestimatesthatareinherentinthosebalances.Assumptionsastothetimingofreversaloftemporarydifferencesincludeexpectationsaboutthefutureresultsofoperationsandfuturecashflows.Changesintaxlaws,taxratesorexpectedtimingofreversalmayhaveasignificantimpactontheamountsrecordedfordeferredincometaxassetsandliabilities.
IncometaxrecordedonAirCanada’sconsolidatedstatementofoperationsispresentedbelow.
(Canadiandollarsinmillions)
Fourth Quarter Full Year
2018 2017 2018 2017
Currentincometax $ 3 $ - $ (6) $ (16)Deferredincometax (18) (12) (232) 759Income tax (expense) recovery $ (15) $ (12) $ (238) $ 743
Inthethirdquarterof2017,AirCanadadeterminedthatitwasprobablethatsubstantiallyallofthedeferredincometaxassetswouldberealized.Accordingly,AirCanadarecordedataxrecoveryof$774million,whichwasrevisedto$755millionwith$19millionrelatedtoshare-basedcompensationreclassifiedtoRetainedearningsinthefourthquarterof2017.
Incometaxexpenseisrecognizedineachinterimperiodbasedonthebestestimateoftheweightedaverageannualincometaxrateexpectedforthefullyear.AirCanada’seffectivetaxratefor201826.78%(26.60%for2017).Theincometaxexpensediffersfromtheamountscomputedbyapplyingthestatutorytaxrate,principallyduetotheimpactofunrecognizedtaxbenefitsonforeignexchangecapitallossesandtheeffectofnon-deductibleexpenses.
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14. ACCOUNTING POLICIES
IFRS 16 – Leases
IFRS16replacesIAS17Leasesandrelatedinterpretations.Thecoreprincipleisthatalesseerecognizesassetsandliabilitiesforallleaseswithaleasetermofmorethan12months.Alesseeisrequiredtorecognizearight-of-useassetrepresentingitsrighttousetheunderlyingleasedassetandaleaseliabilityrepresentingitsobligationtomakeleasepayments.Assetsandliabilitiesarisingfromaleaseareinitiallymeasuredonapresentvaluebasis.Themeasurementoftheleaseliabilityincludesnon-cancellableleasepayments(includinginflation-linkedpayments),andalsoincludespaymentstobemadeinoptionalperiodsifthelesseeisreasonablycertaintoexerciseanoptiontoextendthelease,ornottoexerciseanoptiontoterminatethelease.Purchaseoptionswhicharereasonablycertainofbeingexercisedarealsoincludedinthemeasurementoftheleaseliability.Leasepaymentswillnotincludevariableleasepaymentsotherthanthosethatdependonanindexorrate.Theright-of-useassetwillbederivedfromthecalculationoftheleaseliabilityandwillalsoincludeanyprovisionsthelesseewilloweforreturnconditionsonleasedassets.
Thenewstandardisintendedtoprovideanimprovedrepresentationofleasingtransactions,inparticularthosethatdonotcurrentlyrequirethelesseetorecognizeanassetandliabilityarisingfromanoperatinglease.IFRS16iseffectiveforannualperiodsbeginningonJanuary1,2019.EntitieshavetheoptionofadoptingafullretrospectiveapproachoramodifiedretrospectiveapproachontransitiontoIFRS16.
AirCanadawillapplythestandardeffectiveJanuary1,2019andwilltransitionwithafullretrospectiveapproachwithrestatementtoeachpriorreportingperiodpresented.AirCanadahaselectedthepackageofpracticalexpedientstonotreassesspriorconclusionsrelatedtocontractscontainingleasesandtoapplytherecognitionexemptionforshort-termleasesandcontractsforwhichtheunderlyingassethasalowvalue.
ThisstandardwillhaveasignificantimpactonAirCanada’sconsolidatedbalancesheet,alongwithachangetotherecognition,measurementandpresentationofleaseexpensesintheconsolidatedstatementofoperations.
AircraftLeases
AsofDecember31,2018,AirCanadahad126aircraftunderoperatingleases(111aircraftasatDecember31,2017),andAirCanadawillrecordsuchaircraftasright-of-useassetsandleaseliabilitiesofAirCanadainaccordancewiththerequirementsofthenewstandard.Additionally,theCorporationhasidentifiedthat,underIFRS16,AirCanadaisthelesseeinrespectofaircraftusedbyregionalcarriersprovidingservicesundertherespectivecapacitypurchaseagreements(“CPA”),andwillrecordsuchaircraftasright-of-useassetsandleaseliabilitiesofAirCanada.AsatDecember31,2018,therewere132aircraft(134aircraftasatDecember31,2017)operatingunderthesearrangementsonbehalfofAirCanada.
PropertyLeases
AirCanadahasleasesrelatedtoairportterminaloperationsspaceandotherrealestateleases.Forleasesrelatedtoterminaloperationsspace,therearegenerallyeffectivesubstitutionrightsinthehandsofthelessorandthereforethesearenotconsideredleasecontractsunderthestandard.Leaseswithreciprocalterminationrightswithanoticeperiodoflessthan12monthswouldbeconsideredshort-termleasesandthereforewouldbeexcludedfrombalancesheetrecognitionunderthepracticalexpedient.Finally,thoseairportterminalcontractswithvariableleasepaymentswillalsobeexcludedsincevariableleasepayments,otherthanthosebasedonanindexorrate,areexcludedfromthemeasurementoftheleaseliability.Thisresultsinaportfolioofpropertyleasesthatareexpectedtoberecordedasright-of-useassetsandleaseliabilitiesunderthestandardwhichrelatetodedicatedspaceinAirCanada’shublocationsofToronto,MontrealandVancouver,leasecontractsonbuildingspacededicatedtoAirCanadaforoffices,airportandmaintenanceoperations,MapleLeafLoungesandlandleases.
AccountingforLeasesandRight-of-UseAssets
Leasesarerecognizedasaright-of-useassetandcorrespondingliabilityatthedateofwhichtheleasedassetisavailableforusebytheCorporation.Eachleasepaymentisallocatedbetweentheliabilityandinterestexpense.Theinterestcostischargedtotheconsolidatedstatementofoperationsovertheleaseperiodtoproduceaconstantperiodicrateofinterestontheremainingbalanceoftheliabilityforeachperiod.
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Right-of-useassetswillbeaccountedforunderIAS16Property,PlantandEquipment.Aircraftrecordedasright-of-useassetswillhavethesameaccountingpoliciesasdirectlyownedaircraft,meaningtheright-of-useassetswillbecomponentizedanddepreciatedovertheleaseterm.Consistentwithownedaircraft,anyqualifyingmaintenanceeventswillbecapitalizedanddepreciatedoverthelesseroftheleasetermandexpectedmaintenancelife.
Maintenanceprovisionsforend-of-leasereturnobligationswillberecorded,asapplicable,onaircraftleasesasamaintenanceexpenseoverthetermofthelease.Anychangestotheprovisionforend-of-leaseconditionswillberecognizedasanadjustmenttotheright-of-useassetandsubsequentlyamortizedtotheincomestatementovertheremainingtermofthelease.
TheapplicationofIFRS16requiresassumptionsandestimatesinordertodeterminethevalueoftheright-of-useassetsandtheleaseliabilitieswhichmainlyrelatetotheimplicitinterestrateforaircraftleasesandtheincrementalborrowingrateatcommencementdateofthecontractforpropertyleases.Judgementmustalsobeappliedastowhetherrenewaloptionsarereasonablycertainofbeingexercised.
IncomeStatementImpacts
Theimpactsontheincomestatementwillbeaneliminationofaircraftrentandbuildingrent,whichisrecordedinotheroperatingexpenses,forthosecontractswhicharerecognizedasleases,andinsteadwillbereplacedbyanamortizationoftheright-of-useassetandinterestcostsontheleaseliability.Maintenanceexpenseisexpectedtodecreaseunderthestandardasqualifyingmaintenanceeventsfortheformeroperatingleaseswillbecapitalizedaspartoftheright-of-useassetanddepreciatedovertheirexpectedmaintenancelife.Thiswillbepartiallyoffsetbyhighermaintenanceprovisionexpenserecordedonallaircraftright-of-useassetswhichcontainendofleasemaintenancereturnconditions.Regionalairlinesexpenseisexpectedtodecreasetotheextentaircraftrentisremovedandrecordedindepreciationandinterestexpenseoutsideoftheregionalairlinesexpense.
SincealltheaircraftleasecontractsaredenominatedinUSdollars,theremaybeadditionalvolatilityintheforeignexchangerecognizedintheincomestatementduetotherevaluationoftheleaseliabilitiesandmaintenanceprovisionstotherateofexchangeineffectatthedateofthebalancesheet.
AnticipatedImpactto2018Results
Selectadjustedfinancialstatementinformation,whichreflectstheanticipatedimpactofadoptionofIFRS16onJanuary1,2018,ispresentedbelow.Lineitemsthatarenotexpectedtobeaffectedbythechangeinaccountingpolicyhavenotbeenincluded.Asaresult,thesub-totalsandtotalsdisclosedcannotberecalculatedfromthenumbersprovided.Insummary,thefollowingadjustmentsareanticipatedtobemadetotheamountsrecognizedinAirCanada’sconsolidatedstatementoffinancialpositionforthedateofinitialapplicationonJanuary1,2018.
(Canadiandollarsinmillions)
December31,2017as
PreviouslyReported
AirCanadaAircraft
RegionalAircraft
PropertyLeases Expected January 1, 2018
as Restated
Accountsreceivable $ 814 $ (3) $ - $ - $ 811Depositsandotherassets 465 (63) - - 402Propertyandequipment 9,252 1,649 766 160 11,827Deferredincometax 456 71 144 13 684Total assets $ 17,782 $ 1,654 $ 910 $ 173 $ 20,519Accountspayableandaccruedliabilities 1,961 (22) (12) - 1,927
Currentportionoflong-termdebtandleaseliabilities
671 357 146 12 1,186
Totalcurrentliabilities 5,101 335 134 12 5,582Long-termdebtandleaseliabilities 5,448 1,452 1,092 198 8,190Maintenanceprovisions 1,003 70 78 - 1,151Otherlong-termliabilities 167 (8) - - 159Total liabilities $ 14,360 $ 1,849 $ 1,304 $ 210 $ 17,723Retainedearnings 2,554 (195) (394) (37) 1,928Total shareholders’ equity $ 3,422 $ (195) $ (394) $ (37) $ 2,796Total liabilities and shareholders’ equity $ 17,782 $ 1,654 $ 910 $ 173 $ 20,519
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TheexpectedimpactoftheadoptionofIFRS16onAirCanada’s2018consolidatedstatementofoperationsispresentedbelow.
(Canadiandollarsinmillions)
December 31, 2018 as
Previously Reported
Air Canada Aircraft
Regional Aircraft
Property Leases
Expected December 31,
2018 as Restated
Operating revenuesPassenger $ 16,223 $ - $ - $ - $ 16,223Cargo 803 - - - 803Other 1,039 - - - 1,039Total revenues 18,065 - - - 18,065
Operating expensesAircraftfuel 3,969 - - - 3,969Regionalairlinesexpense 2,842 - (323) - 2,519Wages,salariesandbenefits 2,873 - - - 2,873Airportandnavigationfees 964 - - - 964Aircraftmaintenance 1,003 (100) - - 903Depreciation,amortizationandimpairment 1,080 424 197 16 1,717Salesanddistributioncosts 807 - - - 807Groundpackagecosts 602 - - - 602Aircraftrent 518 (512) - - 6Cateringandonboardservices 433 - - - 433
Communicationsandinformationtechnology
294 - - - 294
Other 1,506 - - (27) 1,479Total operating expenses 16,891 (188) (126) (11) 16,566Operating income 1,174 188 126 11 1,499
Non-operating income (expense)Foreignexchangeloss (317) (155) (105) (1) (578)Interestincome 108 - - - 108Interestexpense (331) (131) (91) (14) (567)Interestcapitalized 35 - - - 35
Netfinancingexpenserelatingtoemployeebenefits
(50) - - - (50)
Lossonfinancialinstrumentsrecordedatfairvalue
(1) - - - (1)
Gainondebtsettlementsandmodifications 9 - - - 9Lossondisposalofassets (188) - - - (188)Other (34) (2) - - (36)Total non-operating expense (769) (288) (196) (15) (1,268)Income before income taxes 405 (100) (70) (4) 231Incometaxexpense (238) 27 19 1 (191)Net income $ 167 $ (73) $ (51) $ (3) $ 40EBITDAR $ 2,851 $ 100 $ 244 $ 27 $ 3,222
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15. OFF-BALANCE SHEET ARRANGEMENTS
Guarantees
GuaranteesinFuelandDe-icingArrangements
AirCanadaparticipatesinfuelfacilityarrangementsoperatedthrougheightFuelFacilityCorporations,andthreeaircraftde-icingservicefacilities,alongwithotherairlinesthatcontractforfuelandde-icingservicesatvariousmajorairportsinCanada.Theseentitiesoperateonacostrecoverybasis.TheaggregatedebtoftheseentitiesthathasnotbeenconsolidatedbyAirCanadaunderIFRS10ConsolidatedFinancialStatementsisapproximately$571millionasatDecember31,2018(December31,2017-$529million),whichisAirCanada’smaximumexposuretolossbeforetakingintoconsiderationthevalueoftheassetsthatsecuretheobligationsandanycostsharingthatwouldoccuramongsttheothercontractingairlines.AirCanadaviewsthislosspotentialasremote.Eachcontractingairlineparticipatingintheseentitiessharesprorata,basedonsystemusage,intheguaranteeofthisdebt.Thematuritiesofthesedebtarrangementsvarybutgenerallyextendbeyondfiveyears.
IndemnificationAgreements
IntheordinarycourseofAirCanada’sbusiness,AirCanadaentersintoavarietyofagreements,suchasrealestateleasesoroperatingagreements,aircraftfinancingorleasingagreements,technicalserviceagreements,anddirector/officercontracts,andothercommercialagreements,someofwhichmayprovideforindemnificationstocounterpartiesthatmayrequireAirCanadatopayforcostsand/orlossesincurredbysuchcounterparties.AirCanadacannotreasonablyestimatethepotentialamount,ifany,itcouldberequiredtopayundersuchindemnifications.Suchamountwouldalsodependontheoutcomeoffutureeventsandconditions,whichcannotbepredicted.Whilecertainagreementsspecifyamaximumpotentialexposure,certainothersdonotspecifyamaximumamountoralimitedperiod.Historically,AirCanadahasnotmadeanysignificantpaymentsundertheseindemnifications.
AirCanadaexpectsthatitwouldbecoveredbyinsuranceformosttortliabilitiesandcertainrelatedcontractualindemnities.
16. RELATED PARTY TRANSACTIONS
AtDecember31,2018,AirCanadahadnotransactionswithrelatedpartiesasdefinedintheCPAHandbook,exceptthosepertainingtotransactionswithkeymanagementpersonnelintheordinarycourseoftheiremploymentordirectorshipagreements.
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17. SENSITIVITY OF RESULTS
AirCanada’sfinancialresultsaresubjecttomanydifferentinternalandexternalfactorswhichcanhaveasignificantimpactonoperatingresults.Thefollowingtabledescribes,onanindicativebasis,thefinancialimpactthatchangesinfuelpricesandthevalueoftheCanadiandollarwouldgenerallyhavehadonAirCanada’spastoperatingresults.Anequivalentbutoppositemovementofthesensitivityfactorinthetablebelowwouldhavegenerallyresultedinasimilarbutoppositeimpact.Theseguidelineswerederivedfrom2018levelsofactivityandmakeuseofmanagementestimates.Theimpactsarenotadditive,donotreflecttheinterdependentrelationshipoftheelementsandmaynotbeindicativeoffuturetrendsorresultswhichmayvarysignificantlyduetoawiderangeoffactorsmanyofwhicharebeyondthecontrolofAirCanada.
Key Variable 2018 Measure
Sensitivity Factor Favourable/ (Unfavourable)
Estimated Operating
Income Impact(Canadiandollarsinmillions)
FuelFuel–Jetfuelprice(US$/barrel)(1) 93.0 US$1/barrelincrease $ (46)Fuel–Jetfuelprice(CADcents/litre)(1) 80.4 1%increase $ (43)Currency ExchangeC$toUS$ C$1=US$1.33 1centincrease
(i.e.$1.33to$1.32perUS$)
Operating income (2) $ 19Netinterestexpense $ 2
Revaluationoflong-termdebt,U.S.dollarcash,cashequivalentsandshort-terminvestmentsandotherlong-termmonetaryitems,net
$ 44
Remeasurementofoutstandingcurrencyderivatives
$ (37)
Pre-tax Income Impact $ 28
(1) Excludestheimpactoffuelsurchargesandfuelhedging.Refertosection12“FinancialInstrumentsandRiskManagement”ofthisMD&AforinformationonAirCanada’sfuelderivativeinstruments.
(2)Theoperatingincomeimpactofcurrencyexchangemovementsisbeforetheimpactofhedgingactivities,suchasthroughtheuseofforeigncurrencyderivativesandholdingU.S.dollarcashreserves.Thegainsandlossesrelatedtothesehedgingactivitiesarerecordedinnon-operatingincome(expense)onAirCanada’sconsolidatedstatementofoperations.
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18. RISK FACTORS
TherisksdescribedbelowshouldbereadcarefullywhenevaluatingAirCanada’sbusinessandtheforward-lookingstatementscontainedinthisreportandotherstatementsAirCanadamaymakefromtimetotime.AnyoftheseriskscouldmateriallyandadverselyaffectAirCanada’sbusiness,operatingresults,financialconditionandtheoutcomeofmattersastowhichforward-lookingstatementsaremade.Inaddition,theserisksmaynotbetheonlyrisksfacedbyAirCanada.OtherrisksofwhichAirCanadaisnotawareorwhichAirCanadacurrentlydeemsnottobematerialmaysurfaceandhaveamaterialandadverseimpactonAirCanada,itsbusiness,resultsfromoperations,financialconditionandtheoutcomeofmattersastowhichforward-lookingstatementsaremade.
Risks Relating to Air Canada
Operating results –AirCanadamaysustainsignificantlossesandnotbeabletosuccessfullyachieveand/orsustainpositivenetprofitabilityorrealizetheobjectivesofanyorallofitsinitiatives
Avarietyoffactors,includingeconomicconditionsandotherfactorsdescribedinthis“RiskFactors”section,mayresultinAirCanadaincurringsignificantlosses.Despiteongoingstrategicandbusinessinitiatives,AirCanadamaynotbeabletosuccessfullyachieveand/orsustainpositivenetprofitabilityorrealizetheobjectivesofanyorallofitsinitiatives,includingthosewhichseektoincreaserevenues,decreasecosts,improvemargins,profitablydeployadditionalcapacity,generatesufficientreturnsonitscapitalexpendituresoroffsetormitigaterisksfacingAirCanada,includingthosedescribedinthis“RiskFactors”section.
Economic and geopolitical conditions –ChangesineconomicandgeopoliticalconditionscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
AirlineoperatingresultsaresensitivetoeconomicandgeopoliticalconditionswhichcanhaveasignificantimpactonAirCanada.Forexample,economicandgeopoliticalconditionsmayimpactdemandforairtransportationingeneralortoorfromcertaindestinations,andmayalsoimpactAirCanada’soperatingcosts,operatingrevenues,costsandavailabilityoffuel,foreignexchangecosts,pensionplan
contributions,andcostsandavailabilityofcapitalandsuppliesrequiredbyAirCanada.EspeciallyinlightofAirCanada’ssubstantialfixedcoststructure,anyprolongedorsignificantimpactarisingfromeconomicandgeopoliticalconditions,includingweaknessoftheCanadian,U.S.orworldeconomies,changestopoliticaloreconomicrelationshipswithinorbetweenjurisdictionswhereAirCanadaoperates,orthreatenedoractualoutbreaksofhostilitiesinoradjacenttoregionsAirCanadaservesoroverwhichitoperatesflights(ortoregionsitplanstooperate),couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Airlinefaresandpassengerdemandhavefluctuatedsignificantlyinthepastandmayfluctuatesignificantlyinthefuture.AirCanadaisnotabletopredictwithcertaintymarketconditionsandthefaresthatAirCanadamaybeabletocharge.Customerexpectationscanchangerapidlyandthedemandforlowerfaresmaylimitrevenueopportunities.Travel,especiallyleisuretravel,isadiscretionaryconsumerexpense.Demandforbusinessandpremiumtravelisalsoimpactedbyeconomicconditions.DepressedeconomicconditionsinareasservedbyAirCanada,geopoliticalinstabilityinvariousareasoftheworldandconcernsabouttheenvironmentalimpactsofairtravelandtendenciestowardslessenvironmentallyimpactfultravelwherecustomersmayreduceoraltertheirtravelactivities,couldeachhavetheeffectofreducingdemandforairtravelinCanadaandabroadandcouldmateriallyadverselyimpactAirCanada,itsbusiness,resultsofoperationsandfinancialcondition.
Fuel costs –SignificantfluctuationsorincreasesinfuelpricescouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
FuelcostsconstituteoneofAirCanada’slargestoperatingcostitems.Fuelpriceshaveandmaycontinuetofluctuatewidelydependingonmanyfactors,includinginternationalmarketconditions,geopoliticalevents,jetfuelrefiningcostsandtheCanada/U.S.dollarexchangerate.AirCanadacannotaccuratelypredictthefuturepriceoffuel.Duetothecompetitivenatureoftheairlineindustry,AirCanadamaynotbeabletopassonincreasesinfuelpricestoitscustomersbyincreasingitsfares.Inaddition,AirCanadamaybeunabletoappropriatelyorsufficiently,ormaynot,hedgetherisksassociatedwithfluctuationsinfuelprices.Furthermore,theimpactoflowerjetfuelpricescouldbeoffsetbyincreasedpricecompetition,andaresultingdecreaseinrevenues,forallaircarriers.Significantfluctuations(includingincreases)infuelpricescouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
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Foreign exchange –AsignificantdeteriorationoftheCanadiandollarrelativetotheU.S.dollarcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
AirCanada’sfinancialresultsaresensitivetothefluctuatingvalueoftheCanadiandollar.AirCanadaincurssignificantexpensesinU.S.dollarsforitemssuchasfuel,aircraftpurchases,aircraftleasingandmaintenance,airportcharges,groundpackagecosts,salesanddistributioncosts,interestanddebtservicingpayments,whileasubstantialportionofitsrevenuesaregeneratedinCanadiandollars.Duetothecompetitivenatureoftheairlineindustryandcustomersensitivitytotravelcosts,AirCanadamaynotbeabletopassonincreasesinforeignexchangecoststoitscustomersbyincreasingitsfares.Inaddition,AirCanadamaybeunabletoappropriatelyorsufficientlyhedgetherisksassociatedwithfluctuationsinexchangerates.AsignificantdeteriorationoftheCanadiandollarrelativetotheU.S.dollarorotherforeigncurrencieswouldincreasethecostsofAirCanadarelativetoitsU.S.orotherforeigncompetitors.AnyofthesefactorscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Competition –AirCanadaoperatesinahighlycompetitiveenvironmentandfacesincreasingcompetitioninNorthAmericaandinternationally
AirCanadaoperateswithinahighlycompetitiveindustryandcontinuouslyencounterssubstantialpricecompetition.Carriers,includinglow-cost,ultra-low-cost,domestic,U.S.andforeigncarriers,haveentered,announcedtheirintentiontoenterorcontinuetoenterorexpandintomarketsAirCanadaoperatesinorplanstooperatein,includingdomestic,U.S.transborder,internationalandleisure-orientedmarkets.
CarriersagainstwhichAirCanadacompetes,includingU.S.carriers,mayalsoundergo(andsomehaveundergone)substantialreorganizations(includingbywayofmergerwithoracquisitionbyanothercarrier),creatingreducedlevelsofindebtedness,loweroperatingcostsandothercompetitiveadvantages,andmaythereforebeabletomoreeffectivelycompeteagainstAirCanada.Consolidationwithintheairlineindustryandcarriersincreasinglyenteringintointegratedcommercialcooperationarrangements,suchasjointventures,whichmaybeabletocompetemoreeffectively,couldresultinincreasedcompetition.
TheproximityofseveralAmericanairportsincitiesclosetotheCanadianborderhasalsopresentedanadditionalchallengeforAirCanada.Highertaxes,chargesandfeesforpassengersdepartingfrom
CanadahasredirectedappreciablepassengertrafficawayfromCanadianairportstoairportsintheUnitedStates.CarriersoperatingfromtheUnitedStateshaveandmaycontinuetoincreasetheircapacityattheseairportsandattractCanadian-originating,price-sensitivecustomers.
TheprevalenceofInternettravelwebsitesandothertravelproductdistributionchannelshasalsoresultedinasubstantialincreaseindiscountedandpromotionalfaresinitiatedbyAirCanada’scompetitors.Competitorsalsocontinuetopursuecommissions/incentiveactionsand,inmanycases,increasethesepayments.
AirCanada’sabilitytoreduceitsfaresinordertoeffectivelycompeteisdependentonAirCanada’sabilitytoachieveacceptableoperatingmarginsandmaybelimitedbyapplicablelawsorgovernmentpoliciestoencouragecompetition.
Increasedcompetition,fromexisting,emergingornewcompetitors,includingcompetitorsenteringintoneworexpandedjointventuresandotherarrangements,orutilizingdisruptivebusinessmodelsortechnologies,andothercompetitiveactions,orbenefitingfromforeignsubsidiesorotheradvantagesnotavailabletoAirCanada,couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Dependence on technology –AirCanadareliesheavilyontechnologytooperateitsbusinessandanytechnologysystemsfailureordatabreachcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
AirCanadareliesheavilyontechnologytooperateitsbusiness,increaseitsrevenuesandreduceitscosts.ThesesystemsincludethoserelatingtoAirCanada’scommunications,websites,reservations,airportcustomerservicesandflightoperations.AirCanadadependsontheperformanceofitsmanysuppliers,whoseperformanceisinturndependentupontheirrespectivetechnologies.
Aspartofregularbusinessoperations,AirCanadacollects,processesandstoressensitivedata,includingpersonalinformationofourpassengers,employeesandinformationofourbusinesspartners.Thesecureoperationofthenetworksandsystemsonwhichthistypeofinformationisstored,processedandmaintainediscriticaltoourbusiness.
Technologysystemsmaybevulnerabletoavarietyofsourcesoffailure,interruptionormisuse,includingbyreasonofhumanerror,thirdpartysuppliers’actsoromissions,naturaldisasters,terroristattacks,telecommunicationsfailures,powerfailures,
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unauthorizedorfraudulentusers(includingcyber-attacks,malware,ransomware,computervirusesandthelike),andotheroperationalandsecurityissues.
Itisgenerallyviewedthatcyber-attackshaveincreasedandwillcontinuetoincreaseinbothprevalenceandsophistication.AirCanadainvestsininitiatives,includingsecurityinitiativesanddisasterrecoveryplans;however,theseinitiativesmaynotbesuccessfuloradequatelyaddressahighlydynamicandcontinuallyevolvingthreatlandscape.Anytechnologysystemsfailure,interruptionormisuse,securitybreachorfailuretocomplywithapplicabledataconfidentiality,privacy,securityorotherrelatedobligations,whetheratAirCanadaorathirdpartyonwhomAirCanadarelies,couldadverselyaffectAirCanada’sreputationandexposeAirCanadatolitigation,claimsforcontractbreach,fines,sanctionsorotherwisemateriallyandadverselyaffectAirCanada’soperations,anyofwhichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Strategic, business, technology and other important initiatives –Adelayorfailuretoidentifyanddevise,investinandimplementcertainimportantinitiativescouldhaveamaterialimpactonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
Inordertooperateitsbusiness,achieveitsgoalsandremaincompetitive,AirCanadacontinuallyseekstoidentifyanddevise,investin,implementandpursuestrategic,business,technologyandotherimportantinitiatives,suchasthoserelatingtotheimplementationofAmadeusAltéaSuitetoreplaceitsexistingpassengerservicessystem,theintegrationoftheAeroplanloyaltybusinessfollowingitsacquisitioninearly2019,thelaunchofAirCanada’snewloyaltyprogram,itsaircraftfleetrenewalprogram(includingtheplannedre-fleetingofitsnarrow-bodyaircraftwithBoeing737MAXaircraftandAirbusA220(formerlyBombardierC-Series)aircraftanddisposalofaircraftthatarebeingreplaced),participationintheleisureorlowercostmarket(includingthroughAirCanadaRouge),jointventurearrangements,revenueenhancementinitiatives,businessprocesses,informationtechnology,revenuemanagement,costtransformation,improvingpremiumpassengerrevenues,expansionofflyingcapacity(includinginrespectofnewaircraftandroutes),corporateculturetransformationinitiativesseekingtoensureaconsistentlyhigh-qualitycustomerserviceexperienceandothers.Theseinitiatives,includingactivitiesrelatingtotheirdevelopmentandimplementation,maybeadverselyimpactedbyawiderangeoffactors,manyofwhicharebeyondAirCanada’scontrol.Suchfactorsincludetheneedto
seeklegalorregulatoryapprovals,theperformanceofthirdparties(includingsuppliers),theimplementationandintegrationofsuchinitiativesintoAirCanada’sotheractivitiesandprocessesaswellastheadoptionandacceptanceoftheseinitiativesbyAirCanada’scustomers,suppliersandpersonnel.Adelayorfailuretosufficientlyandsuccessfullyidentifyanddevise,investinorimplementanyoftheseinitiativescouldadverselyaffectAirCanada’sabilitytooperateitsbusiness,achieveitsgoalsandremaincompetitiveandcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Key supplies and suppliers –AirCanada’sfailureorinabilitytoobtaincertaingoodsandservicesfromkeysuppliersonfavourabletermscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
AirCanadaisdependentuponitsabilitytosource,onfavourabletermsandcosts,sufficientquantitiesofgoodsandservicesofdesirablequality,inatimelymanner,includingthoseavailableatairportsorfromairportauthorities,orotherwiserequiredforAirCanada’sbusinessoroperations,suchasfuel,aircraftandrelatedparts,airportservices,aircraftmaintenanceservices,andinformationtechnologysystemsandservices.Incertaincases,AirCanadamayonlybeabletoaccessgoodsandservicesfromalimitednumberofsuppliers(orfromsolesourcesuppliers)andthetransitiontoneworalternativesuppliers,whichmaybenecessitatedbyreasonofsuchsuppliersincreasingtheirratesorbytheirfailuretoperform,maynotbepossibleormaytakeasignificantamountoftimeorrequiresignificantresources.Afailure,refusalorinabilityofasuppliermayariseasaresultofawiderangeofcauses,manyofwhicharebeyondAirCanada’scontrol.AnyfailureorinabilityofAirCanadatosuccessfullysourcegoodsandservices,ortosourcegoodsandservicesofdesirablequalityontermsandpricingandwithinthetimeframesacceptabletoAirCanada,couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
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Aeroplan loyalty program –Lossofredemptionpartners,increasedredemptionratesofloyaltypoints,ordisruptionsorotherinterruptionsofservicesaffectingtheAeroplanloyaltyprogramcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
InJanuary2019,AirCanadacompletedtheacquisitionofAimiaCanadaInc.,ownerandoperatoroftheAeroplanloyaltybusinessandprogram.ThroughAeroplan,AirCanadaoffersitscustomerswhoareAeroplanmemberstheopportunitytoearnAeroplanMiles,whichmanagementbelievesisasignificantfactorinmanycustomers’decisiontotravelwithAirCanadaandcontributestobuildingcustomerloyalty.ThesuccessoftheAeroplanprogramisdependentonmaintainingsufficientaccumulationandredemptionpartners.IncreasesinredemptionratesforoutstandingAeroplanpointsmayalsohaveamaterialadverseeffect.DifficultiesintegratingtheAeroplanbusinessintoAirCanada’sbusiness,anyfailurestoadequatelyoperatetheAeroplanprogramorinterruptionsordisruptionsofAeroplanprogramservices,couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
BuildingontheAeroplanprogram,AirCanadaisworkingtoimplementanewloyaltyprogramwhichinvolvessignificantinvestmentsaswellascertainrisksanduncertainties,includingrisksrelatingtoattractingnewandretainingcurrentmembers,implementingtherequiredinformationtechnologyandloyaltymanagementsystems,successfullyconcludingstrategiccommercialarrangements,andtransitioningfromtheAeroplanprogramtothenewloyaltyprogram.ThoughAirCanadabelievesitwouldbeabletomitigateandovercomerisksandsuccessfullycreateandlaunchitsnewloyaltyprogram,thetransitionfromtheAeroplanprogramandthelaunchandoperationofAirCanada’snewloyaltyprogramentailriskswhichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Air Canada’s brand –ThefailuretopreserveorgrowthevalueofAirCanada’sbrandcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
AirCanadabelievesthatitssuccessisdependentonthevalueofitsbrandandonAirCanada’sabilitytopreserve,growandleveragethatvalue.TheAirCanadabrandisrecognizedthroughouttheworld,andAirCanadahasreceivedhighratings
inexternalbrandvaluestudies,basedinpartonconsumerperceptionsonavarietyofsubjectivequalities.AirCanadabelievesithasandcontinuestobuildanexcellentreputationgloballyforthesafetyandqualityofitsservices,andforthedeliveryofaconsistentlypositivepassengerexperience.AirCanada’sreputationandbrandcouldalsobedamagedifexposedtosignificantadversepublicitythroughsocialmedia.Adversepublicity,whetherjustifiedornot,canrapidlyspreadthroughsocialordigitalmedia.Totheextentweareunabletorespondtimelyandappropriatelytoadversepublicity,ourbrandandreputationmaybedamaged.AnyfailuretopreserveorgrowAirCanada’sbrand,includingbyreasonoftheconductofAirCanadaoranyofitsbusinesspartnersorotherexternalparties,couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Airport user fees and air navigation fees –IncreasesinairportuserfeesandairnavigationfeescouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationandfinancialcondition
Airportandairnavigationauthoritieshaveorcouldsignificantlyincreasetheirfees.Thoughcertainauthoritieshaveimplementedsomefeereductions,ifauthoritiesinCanadaorelsewhereweretosignificantlyincreasetheirfees,AirCanada,itsbusiness,resultsfromoperationsandfinancialconditioncouldbemateriallyadverselyaffected.
Leverage –AirCanadahasasignificantamountofindebtedness,andtherecanbenoassurancethatitwillbeabletosatisfyitsdebt,leaseandotherobligations
AirCanadahasasignificantamountofindebtedness,includingsubstantialfixedobligationsunderaircraftleases,aircraftpurchasesandotherfinancings,andasaresultofanychallengingeconomicorotherconditionsaffectingAirCanada,AirCanadamayincurgreaterlevelsofindebtednessthancurrentlyexistorareplanned.AlthoughAirCanadahasbeenfocusingonreducingitslevelofindebtednessandimprovingitsleverageratios,theamountofindebtednessthatAirCanadahasandwhichitmayincurinthefuturecouldhaveamaterialadverseeffectonAirCanada,forexample,by(i)limitingAirCanada’sabilitytoobtainadditionalfinancing,(ii)requiringAirCanadatodedicateasubstantialportionofitscashbalancesorcashflowfromoperationstopaymentsonitsindebtednessandfixedcostobligations,therebyreducingthefundsavailableforotherpurposes,(iii)makingAirCanadamorevulnerabletoeconomicdownturnsand(iv)limitingAirCanada’sflexibility
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inplanningfor,orreactingtochangesinitsbusinessenvironment,includingcompetitivepressures.
TheabilityofAirCanadatomakescheduledpaymentsunderitsindebtednesswilldependon,amongotherthings,itsfutureoperatingperformanceanditsabilitytorefinanceitsindebtedness,ifnecessary.Inaddition,asAirCanadaincursindebtednesswhichbearsinterestatfloatinginterestrates,totheextenttheseinterestratesincrease,itsinterestexpensewillincrease.Moreover,AirCanadaincursasignificantproportionofitsindebtednessinforeigncurrencies,primarilyinU.S.dollars,andasaresult,futuredebtservicingrepaymentsaresubjecttoforeignexchangeriskandtheCanadianequivalentamountofindebtednessmayincrease.TherecanbenoassurancethatAirCanadawillatalltimesbeabletogeneratesufficientcashfromitsoperationstosatisfyitsdebts,leaseandotherobligations.Eachofthesefactorsis,toalargeextent,subjecttoeconomic,financial,competitive,regulatory,operationalandotherfactors,manyofwhicharebeyondAirCanada’scontrol.
High fixed costs and low margins –Theairlineindustrymaysufferfromlowprofitmarginsandhighfixedcosts
Theairlineindustryhashistoricallybeencharacterizedbylowprofitmarginsandhighfixedcosts.Thecostsofoperatingaflightdonotvarysignificantlywiththenumberofpassengerscarriedand,therefore,arelativelysmallchangeinthenumberofpassengers,farepricingortrafficmixcouldhaveasignificantimpactonAirCanada’soperatingandfinancialresults.Thisconditionmaybeexacerbatedbyaggressivepricingbycompetitors,whichcouldhavetheeffectofdrivingdownfaresincertainmarkets.AlthoughAirCanada’smarginshaveimprovedinrecentyears,ashortfallfromexpectedrevenuelevelsorprofitmarginscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.AirCanadahasfocusedonimprovingresiliencytoweatherdownturnsinitsbusiness;however,sucheffortsmaynotbesuccessful.Asaresultofhighfixedcosts,shouldAirCanadaberequiredtoreduceitsoverallcapacityorthenumberofflightsoperated,itmaynotbeabletosuccessfullyreducecertainfixedcostswithinatimeframerequiredtosufficientlymitigatetheeffectsofanydownturns,andAirCanadamayalsoberequiredtoincursignificantterminationorotherrestructuringcosts,anyofwhichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Regional carriers –ThefailurebyregionalcarrierstofulfilltheirobligationstoAirCanadacouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
AirCanadaseekstoenhanceitsnetworkthroughcapacitypurchaseagreementswithregionalairlinessuchasJazz,SkyRegionalandotherairlinesoperatingflightsonbehalfofAirCanada.PursuanttothetermsoftheJazzCPA,AirCanadapaysJazzanumberoffees,someofwhicharefixedandotherswhicharedeterminedbaseduponcertaincostsincurredbyJazz.AirCanadaalsoreimbursesJazzforcertainpass-throughcostsincurredbyJazz(orarrangestoprovidetherelatedsuppliestoJazz),suchasfuel,navigation,landingandterminalfees.Inaddition,theJazzCPArequiresthatJazzmaintainaminimumfleetsizeandcontainsaminimumaveragedailyutilizationguaranteewhichrequiresAirCanadatoutilizeJazzforthatamountofflying.SignificantincreasesinJazz’scosts,thefailurebyJazztoadequatelyfulfillitsobligationsundertheJazzCPA,factorswhichmayreducetheutilizationoftheJazzfleet,includingeconomicormarketdownturns,andunexpectedinterruptionsorcessationofJazz’sservicescouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
ThefailurebyAirCanada’sotherregionalcarrierstofulfilltheirobligationsundertheirrespectiveagreements,orunexpectedinterruptionsordisruptionsoftheirservices,aswellasminimumguaranteesincapacitypurchaseagreementswhichmaylimitAirCanada’sabilitytoeffectivelymanageregionalcapacityinresponsetoeconomicdownturns,marketpressuresorotherexternalevents,couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Labour costs and labour relations –AirCanadamaynotbeabletomaintainlabourcostsatappropriatelevelsorsecurelabouragreementswhichpermitittosuccessfullypursueitsstrategicinitiatives.Therecanbenoassurancethatcollectivebargainingagreementswillbefurtherrenewedwithoutlabourconflictsand/ordisruptions
LabourcostsconstituteoneofAirCanada’slargestoperatingcostitems.TherecanbenoassurancethatAirCanadawillbeabletomaintainsuchcostsatlevelsthatdonotnegativelyaffectitsbusiness,resultsfromoperationsandfinancialcondition.MostofAirCanada’semployeesareunionized.WhileAirCanadahasestablishedlongtermarrangementswithunionsrepresentingasignificantportionofits
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unionizedemployees,therecanbenoassurancethatfutureagreementswithemployees’unionsortheoutcomeofarbitrationswillbeontermsconsistentwithAirCanada’sexpectationsorcomparabletoagreementsenteredintobyAirCanada’scompetitors.Anyfutureagreementsoroutcomesofnegotiationsorarbitrations,includinginrelationtowagesorotherlabourcostsorworkrules,mayresultinincreasedlabourcostsorothercharges,ortermsandconditionsrestrictingorreducing,AirCanada’sabilitytosustainitsbusinessobjectivesorpursueitsstrategicinitiatives,whichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Therecanbenoassurancethatcollectiveagreementswillbefurtherrenewedwithoutlabourconflictoractionorthattherewillnototherwisebeanylabourconflictoractionthatcouldalsoleadtoadegradation,interruptionorstoppageinAirCanada’sserviceorotherwiseadverselyaffecttheabilityofAirCanadatoexecuteonitsbusinessplansoroperateitsbusiness,eitherofwhichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.InrespectoftheunionsforCanadian-basedemployees,strikesorlock-outsmaylawfullyoccurfollowingthetermandnegotiationsoftherenewalofcollectiveagreementsonceanumberofpre-conditionsprescribedbytheCanada Labour Codehavebeensatisfied.
AnylabourdisruptionorworkstoppagebyanyoftheunionizedworkgroupsofJazz,orotherairlinesoperatingflightsonbehalfofAirCanada,orotherkeysuppliers,orofotherpartieswithwhomAirCanadaconductsbusinessorreliesoncouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.Inaddition,labourconflictsatStarAlliance®partnersorinvolvingtheoperationsofkeyairportscouldresultinlowerdemandforconnectingtrafficwithAirCanada,whichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Star Alliance and Joint Ventures –DepartureofakeymemberfromStarAllianceorthefailurebyakeymembertomeetitsobligations,includingunderjointventuresarrangements,couldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
ThestrategicandcommercialarrangementswithStarAlliancemembers,includingAirCanada’sA++jointventurecounterparties,LufthansaAGandUnitedAirlines,provideAirCanadawithimportantbenefits,includingcodesharing,efficientconnectionsand
transfers,reciprocalparticipationinfrequentflyerprogramsanduseofairportloungesfromtheothermembers.ShouldakeymemberleaveStarAllianceorotherwisefailtomeetitsobligationstowardsAirCanada,AirCanada,itsbusiness,resultsfromoperationsandfinancialconditioncouldbemateriallyadverselyaffected.
Interruptions or disruptions in service –InterruptionsordisruptionsinservicecouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
AirCanada’sbusinessissignificantlydependentuponitsabilitytooperatewithoutinterruptiontoorfromanumberofhubairports,includingTorontoPearson.Delaysordisruptionsinservice,includingthoseduetosecurity,computermalfunctionsorotherincidents,weatherconditions,labourconflictswithairportworkers,baggagehandlers,airtrafficcontrollers,securitypersonnel,andotherworkersnotemployedbyAirCanadaorothercausesbeyondthecontrolofAirCanadacouldhaveamaterialadverseimpactonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Interruptionsanddisruptionsinservicemaybecausedby,andthedemandandcostofairtravelmaybeadverselyimpactedby,environmentalconditions,technologyissuesandfactorsinadditiontothoserelatingtotheweather.Environmentalconditionsandfactors,suchasthosearisingfromvolcaniceruptionsorothernaturalphenomena,aswellasthosearisingfromman-madesources,couldcauseinterruptionsanddisruptionsinservice,increaseAirCanada’scostsoradverselyimpactdemandforairtravel,anyofwhichcouldhaveamaterialadverseimpactonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Need for capital and liquidity –AirCanadamaynotbeabletoobtainsufficientfundsinatimelywayandonacceptabletermstoprovideadequateliquidityandtofinancenecessaryoperatingandcapitalexpenditures
AirCanada’sliquiditylevelsmaybeadverselyimpactedbyrisksidentifiedinthisMD&A,includingeconomicconditions,foreignexchangerates,increasedcompetitionfromdomestic,international,andU.S.transbordercarriers,includinglowercostcarriers,volatilefuelprices,labourissues,andcontractualcovenants(whichrequireAirCanadatomaintainminimumcashreservesandwhichcouldrequireAirCanadatodepositcashcollateralwiththirdparties).AspartofAirCanada’seffortstomanage
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suchchallengesandtosupportAirCanada’sbusinessstrategy,significantliquidityandsignificanton-goingoperatingandcapitalexpendituresarerequired.
AlthoughAirCanada’sliquiditylevelshavesignificantlyimprovedoverthelastseveralyears,therecanbenoassurancethatAirCanadawillcontinuetomaintainsufficientliquidity,whetherfromoperationsorbyobtainingfundsontermsacceptabletoAirCanada,tofinancetheoperatingandcapitalexpendituresnecessarytomanageanychallengesandsupportitsbusinessstrategy.
AmajordeclineinthemarketpriceofAirCanada’ssecuritiesmaynegativelyimpactAirCanada’sabilitytoraisecapital,issuedebt,retainemployees,makestrategicacquisitionsorenterintobusinessarrangements.DifferencesbetweenAirCanada’sactualoranticipatedfinancialresultsandthepublishedexpectationsoffinancialanalysts,aswellaseventsaffectingourbusinessoroperatingenvironment,maycontributetovolatilityinAirCanada’ssecurities.Amajordeclineinthecapitalmarketsingeneral,oranadjustmentinthemarketpriceortradingvolumesofAirCanada’ssecurities,maynegativelyaffectourabilitytoraisecapital,issuedebt,retainseniorexecutivesandotherkeyemployees,makestrategicacquisitionsorenterintobusinessarrangements.
Failuretomaintainorgeneraterequiredfunds,whetherfromoperationsorfinancings,couldrequireAirCanadatodelayorabandonsomeorallofitsanticipatedexpendituresortomodifyitsbusinessstrategyandthiscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.Furthermore,competitorswithgreaterliquidityortheabilitytoraisemoneymoreeasilyoronlessoneroustermscouldrepresentacompetitivedisadvantagetoAirCanada.
AirCanada’screditratingsinfluenceitsabilitytoaccesscapitalmarketsandmaintainrequiredliquiditylevels.TherecanbenoassuranceastoAirCanada’screditratings,anddowngradesorimprovementstocreditratingsthatdonotmaterializeandthatmayotherwisebeanticipatedbythemarket,mayadverselyimpactAirCanada’sborrowingcosts,itsabilitytoattractcapital,itsliquidityanditsabilitytooperateitsbusiness,allofwhichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Pension plans –FailureorinabilitybyAirCanadatomakerequiredcashcontributionstoitspensionplanscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
AirCanadamaintainsseveraldefinedbenefitpensionplans,includingdomesticregisteredpensionplans,supplementalpensionplansandinternationalpensionplans.Canadianfederalpensionlegislationrequiresthatthefundedstatusofregisteredpensionplansbedeterminedperiodically,onbothagoingconcernbasis(essentiallyassumingindefiniteplancontinuation)andasolvencybasis(essentiallyassumingimmediateplantermination).
AirCanada’spensionfundingobligations(includingprojectedfundingobligations)mayvarysignificantlybasedonawidevarietyoffactors,includingpensionplansolvencyvaluations,regulatorydevelopments,plandemographics,changestoplanprovisions,assumptionsandmethodsusedandchangesineconomicconditions(mainlythereturnonfundassetsandchangesininterestrates)andotherfactors,aswellastheapplicationofnormalpastservicecontributionruleswhichwouldgenerallyrequireonefifthofanysolvencydeficitinadomesticregisteredplan,determinedonthebasisofanaverageoverthepreviousthreeyears,tobefundedeachyear.Actualcontributionsthataredeterminedonthebasisoffuturevaluationreportsfiledannuallymayvarysignificantlyfromprojections.Inaddition,currentservicecontributionsinrespectofadomesticregisteredplanarerequiredunlesstheyarefunded(ifpermittedsubjecttoapplicableplanrulesandlegislation)throughasufficientsurplusinsuchplan.DeterioratingeconomicconditionsoraprolongedperiodoflowordecreasinginterestratesmayresultinsignificantincreasesinAirCanada’sfundingobligations,whichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.UnderfundedpensionplansorafailureorinabilitybyAirCanadatomakerequiredcashcontributionstoitspensionplanscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.Seesection9.7“PensionFundingObligations”ofthisMD&Aforadditionalinformation.
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Limitations due to restrictive covenants –CovenantscontainedinagreementstowhichAirCanadaisapartymayaffectand,insomecases,significantlylimitorprohibitthemannerinwhichAirCanadaoperatesitsbusiness
SomeofthefinancingandothermajoragreementstowhichAirCanadaisapartycontain,andinthefuturemaycontain,restrictive,financial(includinginrelationtoassetvaluations,liquidity,fixedchargecoverageratio)andothercovenantswhichaffectand,insomecases,significantlylimitorprohibit,amongotherthings,themannerinwhichAirCanadamaystructureoroperateitsbusiness,includingbyreducingAirCanada’sliquidity,limitingAirCanada’sabilitytoincurindebtedness,createliens,sellassets,paydividends,makecapitalexpenditures,andengageinacquisitions,mergersorrestructuringsorachangeofcontrol.AlthoughAirCanadahas,inthelastfewyears,beenabletonegotiatemorefavourableandlessrestrictivecovenants,therecanbenoassurancethatitwillbeabletocontinuetodoso.FuturefinancingandothersignificantagreementsmaybesubjecttosimilarorstrictercovenantswhichlimitAirCanada’soperatingandfinancialflexibility,whichcouldmateriallyandadverselyaffectAirCanada’sabilitytooperateitsbusinessanditsprofitability.
AfailurebyAirCanadatocomplywithitscontractualobligations(includingrestrictive,financialandothercovenants),ortopayitsindebtednessandfixedcosts,couldresultinavarietyofmaterialadverseconsequences,includingtheaccelerationofitsindebtedness,thewithholdingofcreditcardproceedsbythecreditcardserviceprovidersandtheexerciseofremediesbyitscreditors,lessorsorotherco-contractingparties,andsuchdefaultscouldtriggeradditionaldefaultsunderotherindebtednessoragreements.Insuchasituation,AirCanadamaynotbeabletorepaytheacceleratedindebtednessorfulfillitsobligationsundercertaincontracts,makerequiredaircraftleasepaymentsorotherwisecoveritsfixedcosts.Also,thelendersunderthefinancingarrangementscouldforecloseuponallorsubstantiallyalloftheassetsofAirCanadawhichsecureAirCanada’sobligations.
Refertosection9.8“ContractualObligations”ofthisMD&A forinformationonAirCanada’screditcardprocessingagreements.
Current legal proceedings –AirCanadaisinvolvedinormaybesubjecttolegalproceedingswhichcouldmateriallyadverselyimpactAirCanada
Investigations by Competition Authorities Relating to Air Canada Cargo TheEuropeanCommission,theUnitedStatesDepartmentofJusticeandtheCompetitionBureauinCanada,amongothers,investigatedallegedanti-competitivecargopricingactivities,includingthelevyingofcertainfuelsurcharges,ofanumberofairlinesandcargooperators.TheinvestigationsconductedbytheU.S.DepartmentofJusticeandbytheCompetitionBureauinCanadaconcludedwithnoproceedingsagainstAirCanada.
Afterhavingrenderedadecisionagainstanumberofairlines,includingAirCanadain2010,whichwasoverturnedbytheEuropeanGeneralCourtinDecember2015,inMarch2017,theEuropeanCommissionrenderedanotherdecisionfindingthat12aircargocarriers,includingAirCanada,hadinfringedEuropeanUnioncompetitionlawinthesettingofcertaincargochargesandratesforvariousperiodsbetween1999and2006,imposingafineof21millionEuros(approximately$29million)onAirCanada.AirCanadapaidthefineasrequiredinthesecondquarterof2017,pendingtheoutcomeofanappealtotheEuropeanGeneralCourt.WhileAirCanadacannotpredictwithcertaintytheoutcomeofitsappealoranyrelatedproceedings,AirCanadabelievesithasreasonablegroundstochallengetheEuropeanCommission’sruling.
AirCanadaisalsonamedasadefendantorisotherwiseinvolvedinanumberofclassactionlawsuitsandotherproceedingsinCanada,EuropeandtheUnitedStatesinconnectionwiththeseallegations.TheclassactionproceedingintheUnitedStatesweresettledbyAirCanadain2012,andcertainthird-partyproceedingsintheUnitedKingdomrelatingtothesameallegationsweresettledin2018.
AsatDecember31,2018,AirCanadahasaprovisionof$17million($17millionasatDecember31,2017)relatingtooutstandingclaimsinthesematters,whichisrecordedinAccountspayableandaccruedliabilities.ThisprovisionisanestimatebaseduponthestatusofinvestigationsandproceedingsatthistimeandAirCanada’sassessmentastothepotentialoutcomeforcertainofthem.Theprovisiondoesnotaddresstheproceedingsandinvestigationsinalljurisdictions,butonlywherethereissufficientinformationtodoso.AirCanadahasdetermineditisnotpossibleatthistimetopredictwithanydegreeofcertaintytheoutcomeofallremainingproceedingsandinvestigations.Basedontheoutcomeofanydevelopmentsregardingproceedingsandinvestigations,AirCanadamayadjusttheprovisioninitsresultsforsubsequentperiodsasrequired.
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Mandatory RetirementAirCanadahasbeenengagedinanumberofproceedingsinvolvingchallengestothemandatoryretirementprovisionsofcertainofitscollectiveagreements.TheremainingcasesrelatetoretirementwhichoccurredpursuanttothepreviousAirCanada-AirCanadaPilotsAssociationcollectiveagreement,whichoriginallyincorporatedprovisionsofthepensionplantermsandconditionsapplicabletopilotsrequiringthemtoretireatage60.Thoseprovisionswerelateramendedandsince2012avarietyofretirementruleshavebeeninforce.Someofthosenewrules,notablyaboutbenefitcoverageforpilotsentitledtoanunreducedpensionandAirCanada’sdutytoaccommodatepilotsoverage65whowishtocontinueworking,arebeingchallenged.AirCanadahasfullyorpartiallyprevailedindefendingsomeofthesecomplaintsandisdefendingtheremainingones.Atthistime,itisnotpossibletodeterminewithanydegreeofcertaintytheextentofanyfinancialliabilitythatmayarisefromAirCanadabeingunsuccessfulinitsdefenceoftheseproceedings,thoughanysuchfinancialliability,ifimposed,wouldnotbeexpectedtobematerial.
Future legal proceedings
Inthecourseofconductingtheirbusiness,airlinesaresubjecttovariousclaimsandlitigation(includingclassactionclaims),includingwithrespecttoitscontractualarrangementsandcurrentornewlawsandregulations.AnyfutureclaimsorlitigationcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Key personnel –AirCanadaisdependentonkeyemployeesandcouldbemateriallyadverselyaffectedbyashortfallorsubstantialturnover
AirCanadaisdependentontheindustryexperience,qualificationsandknowledgeofavarietyofemployees,includingitsexecutiveofficers,managers,airlineflightandoperationspersonnelandotherkeyemployeestoexecuteitsbusinessplanandoperateitsbusiness.IfAirCanadaweretoexperienceashortfallorasubstantialturnoverinitsleadershiporotherkeyemployees,AirCanada,itsbusiness,resultsfromoperationsandfinancialconditioncouldbemateriallyadverselyaffected.Additionally,AirCanadamaybeunabletoattractandretainadditionalqualifiedkeypersonnelasneededinthefuture.
Risks Relating to the Airline Industry
Terrorist attacks and security measures –TerroristattacksandrelatedconsequencescouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
Thepotentialforterroristattacksandterroristactivitycausesconcernanduncertaintyinthemindsofthetravelingpublic.Theoccurrenceofaterroristattack,anattemptedattackortheperceivedthreatofone(whetherornotinvolvingAirCanadaoranothercarrier,orinvolvingAirCanada’sdestinations,orotherdestinationsorregions),andrestrictivesecuritymeasures,suchasthoserelatingtothecontentofcarry-onbaggage,passengeridentificationdocumentrequirements,andpassengerscreeningprocedures,couldhaveamaterialadverseeffectonpassengerdemandforairtravelandonthenumberofpassengerstravelingonAirCanada’sflights.Itcouldalsoleadtoasubstantialincreaseininsurance,securityandothercosts,includinghigheroperatingcoststoavoidflyingoverairspacenearconflictzones.Anyresultingreductioninpassengerrevenuesand/orincreasesincosts,includinginsurance,securityorothercostscouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Casualty losses –AirCanada’sbusinessmakesitsubjecttolargeliabilityclaimsforseriouspersonalinjuryordeatharisingoutofaccidentsordisasters
Duetothenatureofitscorebusiness,AirCanadamaybesubjecttoliabilityclaimsarisingoutofaccidentsordisastersinvolvingaircraftonwhichAirCanada’scustomersaretravelingorinvolvingaircraftofothercarriersmaintainedorotherwiseservicedbyAirCanadaorthroughthirdpartiesprovidingservicestoAirCanada,includingclaimsforseriouspersonalinjuryordeath.AnysuchaccidentordisastermaysignificantlyharmAirCanada’sreputationforsafety,whichwouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.TherecanbenoassurancethatAirCanada’sinsurancecoveragewillbesufficienttocoveroneormorelargeclaimsandanyshortfallmaybematerial.
Accidentsanddisastersmayoccurdespiteallappropriatemeasuresbeingtaken,andasaresultofavarietyoffactorsbeyondAirCanada’scontrolincludingactsofterrorismandsabotage,severeweather,lightningstrikesandothernaturalphenomenon,birdstrikesaswellastheincreasingprevalenceofunmannedaerialvehicles.
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Regulatory matters –AirCanadaissubjecttoextensiveandevolvingdomesticandforeignregulationinawiderangeofmatters
Theairlineindustryissubjecttoextensivelegal,regulatoryandadministrativecontrolsandoversight,includinginrelationtotaxes,airportfeesandoperations,routerights,security,passengerandconsumerrights,flightcrewandotherlabourrules,advertising,privacy,datasecurity,licensing,competition,pensions,environment(includingnoiselevelsandcarbonemissions),foreignexchangecontrolsand,insomemeasure,pricing.
CompliancewithcurrentorfutureCanadianandinternationallaws,regulationsandadministrativerequirements,includingpotentiallyinconsistentorconflictinglawsorregulations,orlawsorregulationswhichdisproportionallyapplytoCanadianairlinesorAirCanadaspecifically(suchastheAir Canada Public Participation Act),mayimposesignificantcosts,impedimentsand/orcompetitivedisadvantages,andtherecannotbeanyassurancethatcurrentorfuturelaws,regulationsandadministrativerequirementswillnotadverselyaffectAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
TheabilityofAirCanadatooperateflightsorotherwiseofferairservicesoninternationalroutesbetweenairportsinCanadaandothercountriesmaybesubjecttochange.ApplicablearrangementsbetweenCanadaandforeigngovernments,whichgovernmanyareasincludingtrafficrights,maybeamendedfromtimetotime,rulesandpolicieswithrespecttoairportoperationsmayberevised,andtheavailabilityofappropriateslotsorfacilitiesmaychange.AirCanadacurrentlyoperatesanumberofflightsoninternationalroutesundergovernmentarrangements,regulationsorpoliciesthatdesignatethenumberofcarrierspermittedtooperateonsuchroutes,thecapacityofthecarriersprovidingservicesonsuchroutes,theairportsatwhichcarriersmayoperateinternationalflights,orthenumberofcarriersallowedaccesstoparticularairports.Anyfurtherlimitations,additionsormodificationstosucharrangements,regulationsorpoliciescouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.Additionally,ifCanadaweretoadoptamoreliberalizedapproachinrelationtoairservicesarrangementswithforeigncountries,suchanapproachcouldhaveamaterialadverseimpactonAirCanada,itsbusiness,resultsfromoperationsandfinancialconditionandcouldresultintheimpairmentofmaterialamountsofrelatedtangibleandintangibleassets.
AirCanada’scurrentandfutureplanstoenterintoorexpandrevenue-sharingjointventuresandotheralliancearrangementsonvariousinternationalroutesareandmaybesubjecttoreceiptofapprovalsfromapplicableCanadianandinternationalauthorities,
totheirnotchallengingthem,andtosatisfyingthenecessaryapplicableregulatoryrequirements.Therecanbenoassurancethatsuchconditionswillbemetorwillcontinueineffectorthatexisting,orchangesin,regulatoryrequirementsorstandardscanbesatisfied.
ManyaspectsofAirCanada’soperationsmayalsobesubjecttotheproliferationofincreasinglystringentlawsandregulationsrelatingtoenvironmentalreforms,suchasintheareaofclimatechange,andincludingthefollowing:
TheInternationalCivilAviationOrganization(“ICAO”)globalmarket-basedmeasure(“GMBM”),adoptedin2016,includesemissionsfrominternationalflights.TheGMBMissettobeimplementedinphases,withthefirsttwophases(occurringfrom2021to2023,and2024to2026,respectively)tobevoluntaryandwiththethirdphase(from2027to2035)tobemandatory.Canadavoluntarilyadoptedthefirstphase.OnthebasisoftheGMBM,theEuropeanParliamentandCouncilhascontinuedexemptingflightsbetweenEuropeandthirdcountriesfromtheEuropeanUnion(“EU”)emissionstradingsystem(“ETS”).
In2016,theCanadianFederalGovernmentproposedapan-CanadianbenchmarkforcarbonpricingtobeimplementedinallCanadianjurisdictionsby2018,withpricingtobebasedongreenhousegasemissionsfromallfossilfuelssourcesincludingjetfuelandotherfuelsusedbyAirCanadaingroundoperationsandstationarycombustionequipment.Canadianprovincesmayeitherapplyanexplicitprice-basedsystem,suchasacarbontaxorlevy,oracapandtradesystem.Certainprovinces,suchasAlberta,BritishColumbiaandQuébechaveimplementedacarbonpricingsystem;othershavehadthefederalcarbonpricingbackstopsystemapplied.Since2017,AirCanadaandregionalcarriersoperatingflightsonbehalfofAirCanadahavebeensubjecttoacarbontaxforflightsoperatinginBritishColumbiaandinAlberta.
AirCanadacannotpredictwhether,orthemannerinwhich,theseorotherinitiativeswillultimatelybeimplementedortheirimpactonAirCanada;however,futuredevelopmentsinCanadaandabroadcouldadverselyimpactAirCanada,includingbyincreasingitscosts.WhileAirCanadaiscontinuallyfocusedonefficiencyimprovements,includingcarbonfootprintreductioninitiatives,theimpacttoAirCanadaofclimatechangeandotherenvironmentalinitiativesmay,inpart,dependupontheextenttowhichtheincreasedcostsrelatingsuchinitiatives,ifany,couldberecovered,includingintheformofhigherpassengerfaresandcargorates.
AirCanadaisalsosubjecttodomesticandforeignlawsregardingprivacyandsecurityofpassenger,employeeandotherdata,includingadvancepassengerinformationandaccesstoairlinereservationsystems,whicharenotconsistent
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inallcountrieswhichmayassertjurisdictionoverAirCanada,includingincountrieswhereAirCanadaoperatesorconductsbusiness.Theselawsandregulationsareproliferating,arebecomingincreasinglystringentandmayconflictwithoneanother.Theneedtocomplywiththeselawsandregulatoryregimesresultsinadditionaloperatingcostsandcomplexities,andfurtherregulationinthisareaornon-compliance,includinginrelationtodataprivacyandsecurityrequirements,couldhaveamaterialadverseeffectonAirCanada,itsbusiness(includingbyimpactingAirCanada’sgoodwillandreputation),resultsfromoperationsandfinancialcondition.
Certainjurisdictions(includingCanada,theUnitedStates,EuropeanUnioncountriesandotherjurisdictionswhereAirCanadaoperatesorconductsbusiness)haveenactedandimplemented,andtheyanddomesticregulatorsmayinthefutureenactandimplement,consumerprotectionandpassengerrightsmeasureswhicharebeingincreasinglyadopted.Suchmeasuresmayimposesignificant,unique,inconsistentorevenconflictingobligationsonAirCanada,whichmayresultinincreasedliabilityandcoststoAirCanadaandwhichcouldadverselyimpactAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
In2018,theFederalGovernmentproposedtheAir Passenger Protection RegulationspursuantforadoptionundertheCanada Transportation Act,whicharestatedtogovernflightsto,fromandwithinCanada,includingconnectingflights.Theproposedregulations,whichhavebeenpublishedforcommentsandarescheduledtobeinforceonJuly1,2019,specifyrequirementsgoverningacarrier’sobligationsinthecaseofflightdelay,cancellationordenialofboarding,aswellasminimumstandardsoftreatment,compensationandassistanceincompletingtheplanneditinerary.Theregulationsprescribeminimumcompensationforlostordamagedbaggage,obligationswithrespecttodelaysoverthreehourswhereanaircraftisonthetarmac,andacarrier’sobligationtoseatyoungchildrennearaparent,guardianortutor.TheMinisterofTransportisalsoauthorizedtoordertheCanadianTransportationAgencytomakeregulationsrespectinganyofacarrier’sotherobligationstowardspassengers.
Epidemic diseases –Epidemicdiseasescouldimpactpassengerdemandforairtravel
Outbreaksorthethreatofoutbreaksofvirusesorothercontagionsorepidemicdiseases,includinginfluenza,SARS,Ebola,Zika,aswellasanytravelorotheradvisoriesrelatingtosame,whetherdomesticorinternationalorwhetherrelatingtoCanadiancitiesorregionsorothercities,regionsorcountries,couldhaveamaterialadverseeffectondemandforairtravelandcouldresultinamajornegativeimpactontrafficonAirCanada’snetwork.AnyresultingreductionintrafficinthemarketsservedbyAirCanadacouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
Availability of insurance coverage and increased insurance costs –IncreasesininsurancecostsorreductionininsurancecoveragecouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition
Theaviationinsuranceindustryhasbeencontinuallyre-evaluatingtheterrorismrisksthatitcoverswhichmayadverselyaffectsomeofAirCanada’sexistinginsurancecarriersorAirCanada’sabilitytoobtainfutureinsurancecoverage(includingwarriskinsurancecoverage).TotheextentthatAirCanada’sexistinginsurancecarriersareunableorunwillingtoprovideitwithinsurancecoverageandintheabsenceofmeasuresbytheGovernmentofCanadatoprovidetherequiredcoverage,AirCanada’sinsurancecostsmayincreasefurtherandmayresultinAirCanadabeinginbreachofregulatoryrequirementsorcontractualarrangementsrequiringthatspecificinsurancebemaintained,whichcouldhaveamaterialadverseeffectonAirCanada,itsbusiness,resultsfromoperationsandfinancialcondition.
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19. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Internal Controls over Financial Reporting
DisclosurecontrolsandprocedureswithintheCorporationhavebeendesignedtoprovidereasonableassurancethatallrelevantinformationisidentifiedtoitsPresidentandChiefExecutiveOfficer(“CEO”),itsDeputyChiefExecutiveOfficerandChiefFinancialOfficer(“CFO”)anditsDisclosurePolicyCommitteetoensureappropriateandtimelydecisionsaremaderegardingpublicdisclosure.
Internalcontrolsoverfinancialreportinghavebeendesignedbymanagement,underthesupervisionof,andwiththeparticipationoftheCorporation’sCEOandCFO,toprovidereasonableassuranceregardingthereliabilityoftheCorporation’sfinancialreportinganditspreparationoffinancialstatementsforexternalpurposesinaccordancewithGAAP.
TheCorporationwillfilecertifications,signedbytheCorporation’sCEOandCFO,withtheCanadianSecuritiesAdministrators(“CSA”)uponfilingoftheCorporation’sAnnualInformationForm.Inthosefilings,theCorporation’sCEOandCFOwillcertify,asrequiredbyNationalInstrument52-109,theappropriatenessofthefinancialdisclosure,thedesignandeffectivenessoftheCorporation’sdisclosurecontrolsandproceduresandthedesignandeffectivenessofinternalcontrolsoverfinancialreporting.TheCorporation’sCEOandCFOalsocertifytheappropriatenessofthefinancialdisclosuresintheCorporation’sinterimfilingswithsecuritiesregulators.Inthoseinterimfilings,theCorporation’sCEOandCFOalsocertifythedesignoftheCorporation’sdisclosurecontrolsandproceduresandthedesignofinternalcontrolsoverfinancialreporting.
TheCorporation’sAudit,FinanceandRiskCommitteereviewedthisMD&Aandtheauditedconsolidatedfinancialstatements,andtheCorporation’sBoardofDirectorsapprovedthesedocumentspriortotheirrelease.
Management’s Report on Disclosure Controls and Procedures
Management,underthesupervisionofandwiththeparticipationoftheCorporation’sCEOandCFO,evaluatedtheeffectivenessoftheCorporation’sdisclosurecontrolsandprocedures(asdefinedunderNationalInstrument52-109)andconcluded,asatDecember31,2018,thatsuchdisclosurecontrolsandprocedureswereeffective.
Management’s Report on Internal Controls over Financial Reporting
Management,underthesupervisionofandwiththeparticipationoftheCorporation’sCEOandCFO,evaluatedtheeffectivenessoftheCorporation’sinternalcontrolsoverfinancialreporting(asdefinedunderNationalInstrument52-109).Inmakingthisevaluation,managementusedthecriteriasetforthbytheCommitteeofSponsoringOrganizationsoftheTreadwayCommissions(“COSO”)inInternalControl-IntegratedFramework(2013).Basedonthatevaluation,managementandtheCEOandCFOhaveconcludedthat,asatDecember31,2018,theCorporation’sinternalcontrolsoverfinancialreportingwereeffective.ThisevaluationtookintoconsiderationtheCorporation’sCorporateDisclosurePolicyandthefunctioningofitsDisclosurePolicyCommittee.
Changes in Internal Controls over Financial Reporting
TherehavebeennochangestotheCorporation’sinternalcontrolsoverfinancialreportingduringtheyearendedDecember31,2018thathavemateriallyaffected,orarereasonablylikelytomateriallyaffect,itsinternalcontrolsoverfinancialreporting.
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20. NON-GAAP FINANCIAL MEASURES
Belowisadescriptionofcertainnon-GAAPfinancialmeasuresusedbyAirCanadatoprovidereaderswithadditionalinformationonitsfinancialandoperatingperformance.SuchmeasuresarenotrecognizedmeasuresforfinancialstatementpresentationunderGAAP,donothavestandardizedmeanings,maynotbecomparabletosimilarmeasurespresentedbyotherentitiesandshouldnotbeconsideredasubstitutefororsuperiortoGAAPresults.
EBITDAR
EBITDAR(earningsbeforeinterest,taxes,depreciation,amortization,impairmentandaircraftrent)iscommonlyusedintheairlineindustryandisusedbyAirCanadaasameanstoviewoperatingresultsbeforeinterest,taxes,depreciation,amortization,impairmentandaircraftrentasthesecostscanvarysignificantlyamongairlinesduetodifferencesinthewayairlinesfinancetheiraircraftandotherassets.AirCanadaexcludesspecialitemsfromEBITDARastheseitemsmaydistorttheanalysisofcertainbusinesstrendsandrendercomparativeanalysistootherairlineslessmeaningful.
EBITDARisreconciledtooperatingincomeasfollows:
Fourth Quarter Full Year
(Canadiandollarsinmillions) 2018 2017(1) $Change 2018 2017(1) $Change
Operating income – GAAP $ 122 $ 133 $ (11) $ 1,174 $ 1,371 $ (197)
Add back (as reflected on Air Canada’s consolidated statement of operations):
Depreciation,amortizationandimpairment 267 245 22 1,080 956 124Aircraftrent 133 126 7 518 503 15
Add back (included in Regional airlines expense):
Depreciation,amortizationandimpairment 11 7 4 38 28 10Aircraftrent 10 10 - 41 40 1EBITDAR (including special items) $ 543 $ 521 $ 22 $ 2,851 $2,898 $ (47)Removeeffectofspecialitems(2) - - - - 30 (30)EBITDAR (excluding special items) $ 543 $ 521 $ 22 $ 2,851 $ 2,928 $ (77)
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
(2)Inthefirstquarterof2017,AirCanadarecordedaprovisionof$30millionrelatingtoafinewhichwasreinstatedbyadecisionoftheEuropeanCommissionpertainingtocargoinvestigations.
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Adjusted CASM
AirCanadausesadjustedCASMasameanstoassesstheoperatingandcostperformanceofitsongoingairlinebusinesswithouttheeffectsofaircraftfuelexpense,thecostofgroundpackagesatAirCanadaVacationsandspecialitemsastheseitemsmaydistorttheanalysisofcertainbusinesstrendsandrendercomparativeanalysistootherairlineslessmeaningful.
IncalculatingadjustedCASM,aircraftfuelexpenseisexcludedfromoperatingexpenseresultsasitfluctuateswidelydependingonmanyfactors,includinginternationalmarketconditions,geopoliticalevents,jetfuelrefiningcostsandCanada/U.S.currencyexchangerates.AirCanadaalsoincursexpensesrelatedtogroundpackagesatAirCanadaVacationswhichsomeairlines,withoutcomparabletouroperatorbusinesses,maynotincur.Inaddition,thesecostsdonotgenerateASMsandthereforeexcludingthesecostsfromoperatingexpenseresultsprovidesforamoremeaningfulcomparisonacrossperiodswhensuchcostsmayvary.
Excludingaircraftfuelexpense,thecostofgroundpackagesatAirCanadaVacationsandspecialitemsfromoperatingexpensesgenerallyallowsformoremeaningfulanalysisofAirCanada’soperatingexpenseperformanceandamoremeaningfulcomparisontothoseofotherairlines.
AdjustedCASMisreconciledtoGAAPoperatingexpenseasfollows:
Fourth Quarter Full Year
(Canadiandollarsinmillions,exceptwhereindicated) 2018 2017(1) $Change 2018 2017(1) $Change
Operating expense – GAAP $ 4,124 $ 3,687 $ 437 $16,891 $14,881 $ 2,010Adjusted for:
Aircraftfuelexpense(asreflectedonAirCanada’sconsolidatedstatementofoperations)
(958) (735) (223) (3,969) (2,927) (1,042)
Aircraftfuelexpense(includedinRegionalairlinesexpense)
(133) (112) (21) (531) (412) (119)
Groundpackagecosts (126) (106) (20) (602) (538) (64)Specialitems(2) - - - - (30) 30
Operating expense, adjusted for the above-noted items
$ 2,907 $ 2,734 $ 173 $ 11,789 $ 10,974 $ 815
ASMs (millions) 25,598 24,191 5.8% 110,866 103,492 7.1%Adjusted CASM (cents) ¢ 11.36 ¢ 11.30 0.5% ¢ 10.63 ¢ 10.60 0.3%
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
(2)Inthefirstquarterof2017,AirCanadarecordedaprovisionof$30millionrelatingtoafinewhichwasreinstatedbyadecisionoftheEuropeanCommissionpertainingtocargoinvestigations.
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Adjusted Pre-tax Income
Adjustedpre-taxincomeisusedbyAirCanadatoassesstheoverallpre-taxfinancialperformanceofitsbusinesswithouttheeffectsofforeignexchangegainsorlosses,netfinancingexpenserelatingtoemployeebenefits,gainsorlossesonfinancialinstrumentsrecordedatfairvalue,gainsorlossesonsaleandleasebackofassets,gainsorlossesondebtsettlementsandmodifications,gainsorlossesondisposalofassets,andspecialitemsastheseitemsmaydistorttheanalysisofcertainbusinesstrendsandrendercomparativeanalysistootherairlineslessmeaningful.AirCanadausesadjustedpre-taxincomebeforeinteresttodeterminereturnoninvestedcapital.
Adjustedpre-taxincomeisreconciledtoGAAPincome(loss)beforeincometaxesasfollows:
Fourth Quarter Full Year
(Canadiandollarsinmillions) 2018 2017(1) $Change 2018 2017(1) $Change
Income (loss) before income taxes $ (216) $ 20 $ (236) $ 405 $ 1,286 $ (881)Adjusted for:Specialitems(2) - - - - 30 (30)Foreignexchange(gain)loss 269 62 207 317 (120) 437
Netfinancingexpenserelatingtoemployeebenefits
12 18 (6) 50 65 (15)
(Gain)lossonfinancialinstrumentsrecordedatfairvalue
3 1 2 1 (23) 24
Gainonsaleandleasebackofassets - - - - (52) 52
(Gain)lossondebtsettlementsandmodifications
- (24) 24 (9) (21) 12
Lossondisposalofassets(3) - - - 188 - 188Adjusted pre-tax income $ 68 $ 77 $ (9) $ 952 $ 1,165 $ (213)
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
(2)Inthefirstquarterof2017,AirCanadarecordedaprovisionof$30millionrelatingtoafinewhichwasreinstatedbyadecisionoftheEuropeanCommissionpertainingtocargoinvestigations.
(3)In2018,AirCanadarecordedalossondisposalofassetsof$188millionrelatedtothesaleof25Embraer190aircraft.
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Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per Share – Diluted
AirCanadausesadjustednetincome(loss)andadjustedearnings(loss)pershare–dilutedasameanstoassesstheoverallfinancialperformanceofitsbusinesswithouttheafter-taxeffectsofforeignexchangegainsorlosses,netfinancingexpenserelatingtoemployeebenefits,gainsorlossesonfinancialinstrumentsrecordedatfairvalue,gainsorlossesonsaleandleasebackofassets,gainsorlossesondebtsettlementsandmodifications,gainsorlossesondisposalofassets,andspecialitemsastheseitemsmaydistorttheanalysisofcertainbusinesstrendsandrendercomparativeanalysistootherairlineslessmeaningful.Startingasofandincludingthefourthquarterof2017,adjustednetincomeisdeterminednetoftax.Accordingly,the2018and2017informationinthetablebelowisnotdirectlycomparable.
AdjustednetincomeisreconciledtoGAAPnetincome(loss)asfollows:
Fourth Quarter Full Year
(Canadiandollarsinmillions,exceptpersharefigures) 2018 2017(1) $Change 2018 2017(1) $Change
Net income (loss) $ (231) $ 8 $ (239) $ 167 $ 2,029 $ (1,862)Adjusted for: Specialitems(2) - - - - 30 (30)
Recoveryofdeferredincometaxes(one-time)(3) - - - - (759) 759
Foreignexchange(gain)loss 273 57 216 339 (125) 464
Netfinancingexpenserelatingtoemployeebenefits
10 13 (3) 37 60 (23)
Gainonfinancialinstrumentsrecordedatfairvalue
3 - 3 1 (23) 24
Gainonsaleandleasebackofassets - - - - (52) 52Lossondebtsettlementsandmodifications (5) (18) 13 (4) (15) 11Lossondisposalofassets(4) 4 - 4 137 - 137Adjusted net income $ 54 $ 60 $ (6) $ 677 $ 1,145 $ (468)
Weightedaveragenumberofoutstandingsharesusedincomputingdilutedincomepershare(inmillions)
275 278 (3) 276 278 (2)
Adjusted earnings per share – diluted $ 0.20 $ 0.22 $ (0.02) $ 2.45 $ 4.11 $ (1.66)
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
(2)Inthefirstquarterof2017,AirCanadarecordedaprovisionof$30millionrelatingtoafinewhichwasreinstatedbyadecisionoftheEuropeanCommissionpertainingtocargoinvestigations
(3)In2017,AirCanadarecordedataxrecoveryof$743million(representingadeferredincometaxrecoveryof$759millionandacurrentincometaxexpenseof$16million).Thisdeferredincometaxrecoverywasexcludedfromadjustednetincomeasitreflectedaone-timerecognitionofpreviouslyunrecognizedincometaxassets.
(4)In2018,AirCanadarecordedalossondisposalofassetsof$188millionrelatedtothesaleof25Embraer190aircraft.
Thefollowingreflectstheshareamountsusedinthecomputationofbasicanddilutedearningspershareonanadjusted-earningspersharebasis:
Fourth Quarter Full Year
(inmillions) 2018 2017 2018 2017
Weighted average number of shares outstanding – basic 271 274 272 273Effectofdilution 4 4 4 5Weighted average number of shares outstanding – diluted 275 278 276 278
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92 | Management’sDiscussionandAnalysisofResultsofOperationsandFinancialCondition
Return on Invested Capital
AirCanadausesreturnoninvestedcapital(“ROIC”)asameanstoassesstheefficiencywithwhichitallocatesitscapitaltogeneratereturns.Returnisbasedonadjustedpre-taxincome(orloss,asapplicable),excludinginterestexpenseandimplicitinterestonoperatingleases.Investedcapitalincludes(i)averageyear-over-yearlong-termdebt,averageyear-over-yearfinanceleaseobligations,averageyear-over-yearshareholders’equityand(ii)thevalueofcapitalizedoperatingleases(calculatedbymultiplyingannualizedaircraftrentby7).AirCanadacalculatesinvestedcapitalbasedonabookvalue-basedmethodofcalculatingROIC,asdescribedabove.FollowinganincreaseinAirCanada’stotalcash,cashequivalentsandshort-terminvestments,AirCanadareviseditsmethodologytoreducetheaverageyear-over-yearbookvalueofshareholders’equitybyexcesscashnotrequiredtorunitscorebusinessoperations.AirCanadausesaverageyear-over-yearadvanceticketsalesasaproxyfortheminimumcashrequiredforongoingcorebusinessoperations.Thischangeresultsininvestedcapitalmorecloselyreflectingoperatingcapital.Refertothedefinitionofadjustedpre-taxincome(loss)foradiscussionastowhyAirCanadausesthismeasuretoassesstheoverallpre-taxfinancialperformanceofitsbusiness.
ReturnoninvestedcapitalisreconciledtoGAAPincomebeforeincometaxesasfollows:
12 Months Ended
(Canadiandollarsinmillions,exceptwhereindicated)December 31,
2018December31,
2017(1)$Change
Income before income taxes $ 405 $ 1,286 $ (881)Remove:Specialitems(2) - 30 (30)Foreignexchangeloss(gain) 317 (120) 437Netfinancingexpenserelatingtoemployeebenefits 50 65 (15)Loss(gain)onfinancialinstrumentsrecordedatfairvalue 1 (23) 24Gainonsaleandleasebackofassets - (52) 52Gainondebtsettlementsandmodifications(3) (9) (21) 12Lossondisposalofassets(4) 188 - 188Adjusted pre-tax income $ 952 $ 1,165 $ (213)Adjusted for:Interestexpense 331 311 20Implicitinterestonoperatingleases(5) 274 266 8Adjusted pre-tax income before interest $ 1,557 $ 1,742 $ (185)Invested capital:Averagelong-termdebtandfinanceleaseobligations 6,386 6,369 17Averageshareholders’equity,netofexcesscash 2,065 1,249 816Capitalizedoperatingleases(6) 3,913 3,801 112Invested capital $ 12,364 $ 11,419 $ 945Return on invested capital (%) 12.6 15.3 (2.7) pp
(1)AirCanadaadoptedaccountingstandardIFRS15-RevenuefromContractswithCustomerseffectiveJanuary1,2018withrestatementof2017amounts.
(2)Specialitemsforthe12monthsendedDecember31,2017includedaprovisionof$30millionrelatedtocargoinvestigations.(3)Gainondebtsettlementsandmodificationsforthe12monthsendedDecember31,2018of$9millionincludedagainof$11millionrelated
totherepricingofitsUS$1.1billionseniorsecuredcreditfacilityandalossof$2millionrelatedtotheprepaymentoffixedratedebt. Gainondebtsettlementsandmodificationsforthe12monthsendedDecember31,2017of$21millionincludedagainof$27millionrelated
totherepricingofitsUS$1.1billionseniorsecuredcreditfacility,alossof$3millionrelatedtotheearlyexerciseofapurchaseoptionforanAirbus330aircraftandalossof$2millionrelatedtotheprepaymentoffixedratedebtonfourEmbraer190aircraft.
(4)In2018,AirCanadadisposedof25Embraer190aircraftresultinginalossondisposalof$188million.(5)Interestimplicitonoperatingleasesisequalto7.0%of7timesthetrailing12monthsofaircraftrent.7.0%isaproxyanddoesnot
necessarilyrepresenttheactualimplicitinterestonoperatingleasesforanygivenperiod.(6)Capitalizedoperatingleasesarecalculatedbymultiplyingthetrailing12monthsofaircraftrentby7.Aircraftrenttotaled$559millionforthe
12monthsendedDecember31,2018and$543millionforthe12monthsendedDecember31,2017(includesaircraftrentrelatedtoregionaloperations).
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Adjusted Net Debt to Trailing 12-Month EBITDAR (Leverage Ratio)
Adjustednetdebttotrailing12-monthEBITDARratio(alsoreferredtoas“leverageratio”inthisMD&A)iscommonlyusedintheairlineindustryandisusedbyAirCanadaasameanstomeasurefinancialleverage.Leverageratioiscalculatedbydividingadjustednetdebtbytrailing12-monthEBITDAR.Asmentionedabove,AirCanadaexcludesspecialitemsfromEBITDARresults(whichareusedtodetermineleverageratio)assuchitemswoulddistorttheanalysisofcertainbusinesstrendsandrendercomparativeanalysistootherairlineslessmeaningful.Refertosection9.3“AdjustedNetDebt”ofthisMD&Aforareconciliationofthisnon-GAAPfinancialmeasuretothenearestmeasureunderGAAP.
Free Cash FlowFreecashflowiscommonlyusedintheairlineindustryandisusedbyAirCanadaasanindicatorofthefinancialstrengthandperformanceofitsbusiness,indicatingtheamountofcashAirCanadaisabletogeneratefromoperationsandaftercapitalexpenditures.Freecashflowiscalculatedasnetcashflowsfromoperatingactivitiesminusadditionstoproperty,equipmentandintangibleassets,andisnetofproceedsfromsaleandleasebacktransactions.Refertosection9.5“ConsolidatedCashFlowMovements”ofthisMD&Aforareconciliationofthisnon-GAAPfinancialmeasuretothenearestmeasureunderGAAP.
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21. GLOSSARY
Adjusted CASM–ReferstooperatingexpenseperASMadjustedtoremovetheeffectsofaircraftfuelexpense,groundpackagescostsatAirCanadaVacations,andspecialitems.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.
Adjusted net income (loss)–Referstotheconsolidatednetincome(loss)ofAirCanadaadjustedtoremovetheafter-taxeffectsofforeignexchangegainsorlosses,netfinancingincome(expense)relatingtoemployeebenefits,gainsorlossesonfinancialinstrumentsrecordedatfairvalue,gainsorlossesonsaleandleasebackofassets,gainsorlossesondebtsettlementsandmodifications,gainsorlossesondisposalofassets,andspecialitems.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.
Adjusted pre-tax income (loss)–Referstotheconsolidatedincome(loss)ofAirCanadabeforeincometaxesandadjustedtoremovetheeffectsofforeignexchangegainsorlosses,netfinancingincome(expense)relatingtoemployeebenefits,gainsorlossesonfinancialinstrumentsrecordedatfairvalue,gainsorlossesonsaleandleasebackofassets,gainsorlossesondebtsettlementsandmodifications,gainsorlossesondisposalofassets,andspecialitems.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.
Air Georgian –ReferstoAirGeorgianLimited.
Atlantic passenger and cargo revenues–RefertorevenuesfromflightsthatcrosstheAtlanticOceanwithoriginsanddestinationsprincipallyinEurope,India,theMiddleEastandNorthAfrica.
Available seat miles or ASMs–Referstoameasureofpassengercapacitycalculatedbymultiplyingthetotalnumberofseatsavailableforpassengersbythemilesflown.
Average stage length–ReferstotheaveragemileperdepartureseatandiscalculatedbydividingtotalASMsbytotalseatsdispatched.
Boeing–ReferstoTheBoeingCompany.
Bombardier–ReferstoBombardierInc.
CALDA–ReferstotheCanadianAirlineDispatchersAssociation.
CASM–ReferstooperatingexpenseperASM.
CUPE–ReferstotheCanadianUnionofPublicEmployees.
Domestic passenger and cargo revenues–RefertorevenuesfromflightswithinCanada.
EBITDAR–Referstoearningsbeforeinterest,taxes,depreciation,amortization,impairmentandaircraftrent.EBITDARisanon-GAAPfinancialmeasure.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.AirCanadaexcludesspecialitemsfromEBITDAR.
EVAS–ReferstoExploitsValleyAirServicesLimited.
Free cash flow–Referstonetcashflowsfromoperatingactivitiesminusadditionstoproperty,equipmentandintangibleassets,andisnetofproceedsfromsaleandleasebacktransactions.Freecashflowisanon-GAAPfinancialmeasure.Refertosections9.5and20ofthisMD&Aforadditionalinformation.
IAMAW–ReferstotheInternationalAssociationofMachinistsandAerospaceWorkers.
Jazz–ReferstoJazzAviationLP.
Jazz CPA–ReferstothecapacitypurchaseagreementbetweenAirCanadaandJazzdatedJanuary1,2015whichbecameeffectiveonJanuary1,2015.
Leverage ratio–Referstotheratioofadjustednetdebttotrailing12-monthEBITDAR(calculatedbydividingadjustednetdebtbytrailing12-monthEBITDAR).Leverageratioisanon-GAAPfinancialmeasure.Refertosections9.3and20ofthisMD&Aforadditionalinformation.
Loss (gain) on debt settlements and modifications–Refertogainsorlossesrelatedtodebtsettlementsandmodificationsthat,inmanagement’sview,aretobeseparatelydisclosedbyvirtueoftheirsizeorincidencetoenableafullerunderstandingoftheCorporation’sfinancialperformance.
Other passenger and cargo revenues –RefertorevenuesfromflightswithoriginsanddestinationsprincipallyinCentralandSouthAmerica,theCaribbeanandMexico.
Pacific passenger and cargo revenues–RefertorevenuesfromflightsthatcrossthePacificOceanwithoriginsanddestinationsprincipallyinAsiaandAustralia.
Passenger load factor–ReferstoameasureofpassengercapacityutilizationderivedbyexpressingRevenuePassengerMilesasapercentageofAvailableSeatMiles.
Passenger revenue per available seat mile or PRASM–ReferstoaveragepassengerrevenueperASM.
Percentage point (pp)–Referstoameasureforthearithmeticdifferenceoftwopercentages.
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Return on invested capital or ROIC–Referstoreturnoninvestedcapitalandisameasureusedtoassesstheefficiencywithwhichacompanyallocatesitscapitaltogeneratereturns.Refertosection20“Non-GAAPFinancialMeasures”ofthisMD&Aforadditionalinformation.
Revenue passenger carried –ReferstotheInternationalAirTransportAssociation’s(IATA)definitionofpassengercarriedwherebypassengersarecountedonaflightnumberbasisratherthanbyjourney/itineraryorbyleg.
Revenue passenger miles or RPMs –Referstoameasureofpassengertrafficcalculatedbymultiplyingthetotalnumberofrevenuepassengerscarriedbythemilestheyarecarried.
Seats dispatched–Referstothenumberofseatsonnon-stopflights.Anon-stopflightreferstoasingletakeoffandlanding.
Sky Regional –ReferstoSkyRegionalAirlinesInc.
Special items–Refertothoseitemsthat,inmanagement’sview,aretobeseparatelydisclosedbyvirtueoftheirsignificancetothefinancialstatements,toenableafullerunderstandingoftheCorporation’sfinancialperformance.
Toronto Pearson–referstoLesterB.PearsonInternationalAirport.
Unifor–ReferstothetradeunioninCanada,launchedin2013,asamergeroftheCanadianAutoWorkersandCommunications,EnergyandPaperworkersunions.
Weighted average cost of capital or WACC–Referstomanagement’sestimateofitscostofcapital,inwhicheachcategoryofcapitalisproportionatelyweighted.
Yield–ReferstoaveragepassengerrevenueperRPM.
2018
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
PHOTOS
EXTERIORAIRBUSS.A.S2019–COMPUTERRENDERINGBYFIXION.PHOTOBYDREAMSTIME–MMS–2019
INTERIOROFAIRCANADABOEING737MAX8.PHOTOBYBRIANLOSITO
2018 ANNUAL REPORT
ConsolidatedFinancialStatementsandNotes | 97
STATEMENT OF MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL REPORTING
Theconsolidatedfinancialstatementshavebeenpreparedbymanagement.ManagementisresponsibleforthefairpresentationoftheconsolidatedfinancialstatementsinconformitywithgenerallyacceptedaccountingprinciplesinCanadawhichincorporatesInternationalFinancialReportingStandards,asissuedbytheInternationalAccountingStandardsBoard.Managementisresponsiblefortheselectionofaccountingpoliciesandmakingsignificantaccountingjudgementsandestimates.Managementisalsoresponsibleforallotherfinancialinformationincludedinmanagement’sdiscussionandanalysisandforensuringthatthisinformationisconsistent,whereappropriate,withtheinformationcontainedintheconsolidatedfinancialstatements.
Managementisresponsibleforestablishingandmaintainingadequateinternalcontroloverfinancialreportingwhichincludesthosepoliciesandproceduresthatprovidereasonableassuranceoverthesafeguardingofassetsandoverthecompleteness,fairnessandaccuracyoftheconsolidatedfinancialstatementsandotherfinancialinformation.
TheAudit,FinanceandRiskCommittee,whichiscomprisedentirelyofindependentdirectors,reviewsthequalityandintegrityoftheCorporation’sfinancialreportingandprovidesitsrecommendations,inrespectoftheapprovalofthefinancialstatements,totheBoardofDirectors;overseesmanagement’sresponsibilitiesastotheadequacyofthesupportingsystemsofinternalcontrols;providesoversightoftheindependence,qualificationsandappointmentoftheexternalauditor;and,pre-approvesaudit,audit-related,andnon-auditfeesandexpenses.TheBoardofDirectorsapprovestheCorporation’sconsolidatedfinancialstatementsandmanagement’sdiscussionandanalysisdisclosurespriortotheirrelease.TheAudit,FinanceandRiskCommitteemeetswithmanagement,theinternalauditorsandexternalauditorsatleastfourtimeseachyeartoreviewanddiscussfinancialreporting,disclosures,auditingandothermatters.
Theexternalauditors,PricewaterhouseCoopersLLP,conductanindependentauditoftheconsolidatedfinancialstatementsinaccordancewithCanadiangenerallyacceptedauditingstandardsandexpresstheiropinionthereon.Thosestandardsrequirethattheauditisplannedandperformedtoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsasawholearefreeofmaterialmisstatement.TheexternalauditorshaveunlimitedaccesstotheAudit,FinanceandRiskCommitteeandmeetwiththeCommitteeonaregularbasis.
Calin Rovinescu Michael Rousseau PresidentandChiefExecutiveOfficer DeputyChiefExecutiveOfficerand ChiefFinancialOfficer
February14,2019
2018 ANNUAL REPORT
98 | ConsolidatedFinancialStatementsandNotes
INDEPENDENT AUDITOR’S REPORT
TotheShareholdersofAirCanada
Our opinionInouropinion,theaccompanyingconsolidatedfinancialstatementspresentfairly,inallmaterialrespects,thefinancialpositionofAirCanadaanditssubsidiaries(together,theCorporation)asatDecember31,2018and2017andJanuary1,2017,anditsfinancialperformanceanditscashflowsfortheyearsendedDecember31,2018and2017inaccordancewithInternationalFinancialReportingStandardsasissuedbytheInternationalAccountingStandardsBoard(IFRS).
WhatwehaveauditedTheCorporation’sconsolidatedfinancialstatementscomprise:
> theconsolidatedstatementsoffinancialpositionasatDecember31,2018and2017andJanuary1,2017;> theconsolidatedstatementsofoperationsfortheyearsendedDecember31,2018and2017;> theconsolidatedstatementsofcomprehensiveincomefortheyearsendedDecember31,2018and2017;> theconsolidatedstatementsofchangesinequityfortheyearsendedDecember31,2018and2017;> theconsolidatedstatementsofcashflowfortheyearsendedDecember31,2018and2017;and> thenotestotheconsolidatedfinancialstatements,whichincludeasummaryofsignificantaccountingpolicies.
Basis for opinionWeconductedourauditinaccordancewithCanadiangenerallyacceptedauditingstandards.OurresponsibilitiesunderthosestandardsarefurtherdescribedintheAuditor’s responsibilities for the audit of the consolidated financial statements sectionofourreport.
Webelievethattheauditevidencewehaveobtainedissufficientandappropriatetoprovideabasisforouropinion.
IndependenceWeareindependentoftheCorporationinaccordancewiththeethicalrequirementsthatarerelevanttoourauditoftheconsolidatedfinancialstatementsinCanada.Wehavefulfilledourotherethicalresponsibilitiesinaccordancewiththeserequirements.
Other informationManagementisresponsiblefortheotherinformation.TheotherinformationcomprisestheManagement’sDiscussionandAnalysis,whichweobtainedpriortothedateofthisauditor’sreportandtheinformation,otherthantheconsolidatedfinancialstatementsandourauditor’sreportthereon,includedintheannualreport,whichisexpectedtobemadeavailabletousafterthatdate.
Ouropinionontheconsolidatedfinancialstatementsdoesnotcovertheotherinformationandwedonotandwillnotexpressanopinionoranyformofassuranceconclusionthereon.
Inconnectionwithourauditoftheconsolidatedfinancialstatements,ourresponsibilityistoreadtheotherinformationidentifiedaboveand,indoingso,considerwhethertheotherinformationismateriallyinconsistentwiththeconsolidatedfinancialstatementsorourknowledgeobtainedintheaudit,orotherwiseappearstobemateriallymisstated.
If,basedontheworkwehaveperformedontheotherinformationthatweobtainedpriortothedateofthisauditor’sreport,weconcludethatthereisamaterialmisstatementofthisotherinformation,wearerequiredtoreportthatfact.Wehavenothingtoreportinthisregard.Whenwereadtheinformation,otherthantheconsolidatedfinancialstatementsandourauditor’sreportthereon,includedintheannualreport,ifweconcludethatthereisamaterialmisstatementtherein,wearerequiredtocommunicatethemattertothosechargedwithgovernance.
Responsibilities of management and those charged with governance for the consolidated financial statementsManagementisresponsibleforthepreparationandfairpresentationoftheconsolidatedfinancialstatementsinaccordancewithIFRS,andforsuchinternalcontrolasmanagementdeterminesisnecessarytoenablethepreparationofconsolidatedfinancialstatementsthatarefreefrommaterialmisstatement,whetherduetofraudorerror.
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Inpreparingtheconsolidatedfinancialstatements,managementisresponsibleforassessingtheCorporation’sabilitytocontinueasagoingconcern,disclosing,asapplicable,mattersrelatedtogoingconcernandusingthegoingconcernbasisofaccountingunlessmanagementeitherintendstoliquidatetheCorporationortoceaseoperations,orhasnorealisticalternativebuttodoso.
ThosechargedwithgovernanceareresponsibleforoverseeingtheCorporation’sfinancialreportingprocess.
Auditor’s responsibilities for the audit of the consolidated financial statementsOurobjectivesaretoobtainreasonableassuranceaboutwhethertheconsolidatedfinancialstatementsasawholearefreefrommaterialmisstatement,whetherduetofraudorerror,andtoissueanauditor’sreportthatincludesouropinion.Reasonableassuranceisahighlevelofassurance,butisnotaguaranteethatanauditconductedinaccordancewithCanadiangenerallyacceptedauditingstandardswillalwaysdetectamaterialmisstatementwhenitexists.Misstatementscanarisefromfraudorerrorandareconsideredmaterialif,individuallyorintheaggregate,theycouldreasonablybeexpectedtoinfluencetheeconomicdecisionsofuserstakenonthebasisoftheseconsolidatedfinancialstatements.
AspartofanauditinaccordancewithCanadiangenerallyacceptedauditingstandards,weexerciseprofessionalJudgementandmaintainprofessionalskepticismthroughouttheaudit.Wealso:
> Identifyandassesstherisksofmaterialmisstatementoftheconsolidatedfinancialstatements,whetherduetofraudorerror,designandperformauditproceduresresponsivetothoserisks,andobtainauditevidencethatissufficientandappropriatetoprovideabasisforouropinion.Theriskofnotdetectingamaterialmisstatementresultingfromfraudishigherthanforoneresultingfromerror,asfraudmayinvolvecollusion,forgery,intentionalomissions,misrepresentations,ortheoverrideofinternalcontrol.
> Obtainanunderstandingofinternalcontrolrelevanttotheauditinordertodesignauditproceduresthatareappropriateinthecircumstances,butnotforthepurposeofexpressinganopinionontheeffectivenessoftheCorporation’sinternalcontrol.
> Evaluatetheappropriatenessofaccountingpoliciesusedandthereasonablenessofaccountingestimatesandrelateddisclosuresmadebymanagement.
> Concludeontheappropriatenessofmanagement’suseofthegoingconcernbasisofaccountingand,basedontheauditevidenceobtained,whetheramaterialuncertaintyexistsrelatedtoeventsorconditionsthatmaycastsignificantdoubtontheCorporation’sabilitytocontinueasagoingconcern.Ifweconcludethatamaterialuncertaintyexists,wearerequiredtodrawattentioninourauditor’sreporttotherelateddisclosuresintheconsolidatedfinancialstatementsor,ifsuchdisclosuresareinadequate,tomodifyouropinion.Ourconclusionsarebasedontheauditevidenceobtaineduptothedateofourauditor’sreport.However,futureeventsorconditionsmaycausetheCorporationtoceasetocontinueasagoingconcern.
> Evaluatetheoverallpresentation,structureandcontentoftheconsolidatedfinancialstatements,includingthedisclosures,andwhethertheconsolidatedfinancialstatementsrepresenttheunderlyingtransactionsandeventsinamannerthatachievesfairpresentation.
> ObtainsufficientappropriateauditevidenceregardingthefinancialinformationoftheentitiesorbusinessactivitieswithintheCorporationtoexpressanopinionontheconsolidatedfinancialstatements.Weareresponsibleforthedirection,supervisionandperformanceofthegroupaudit.Weremainsolelyresponsibleforourauditopinion.
Wecommunicatewiththosechargedwithgovernanceregarding,amongothermatters,theplannedscopeandtimingoftheauditandsignificantauditfindings,includinganysignificantdeficienciesininternalcontrolthatweidentifyduringouraudit.
Wealsoprovidethosechargedwithgovernancewithastatementthatwehavecompliedwithrelevantethicalrequirementsregardingindependence,andtocommunicatewiththemallrelationshipsandothermattersthatmayreasonablybethoughttobearonourindependence,andwhereapplicable,relatedsafeguards.
Theengagementpartnerontheauditresultinginthisindependentauditor’sreportisMichaelTrudeau.
Montreal,QuebecFebruary14,2019
1CPAauditor,PublicaccountancypermitNO.A113048
2018 ANNUAL REPORT
100 | ConsolidatedFinancialStatementsandNotes
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Canadiandollarsinmillions)
December 31,2018
December31,2017
Restated-Note2
January1,2017
Restated-Note2
AssetsCurrentCashandcashequivalents $ 630 $ 642 $ 787Short-terminvestments 4,077 3,162 2,192
Totalcash,cashequivalentsandshort-terminvestments
4,707 3,804 2,979
Restrictedcash Note2p 161 148 126Accountsreceivable Note18 796 814 707Aircraftfuelinventory 109 91 79Sparepartsandsuppliesinventory Note2q 111 115 107Prepaidexpensesandothercurrentassets Note18 417 425 447Totalcurrentassets 6,301 5,397 4,445Depositsandotherassets 444 465 468Propertyandequipment Note4 9,729 9,252 8,520Pensionassets Note8 1,969 1,583 1,153Deferredincometax Note10 39 456 -Intangibleassets Note5 404 318 315Goodwill Note6 311 311 311Total assets $ 19,197 $ 17,782 $ 15,212
LiabilitiesCurrentAccountspayableandaccruedliabilities $ 1,927 $ 1,961 $ 1,644Advanceticketsales Note18 2,717 2,469 2,119
Currentportionoflong-termdebtandfinanceleases
Note7 455 671 707
Totalcurrentliabilities 5,099 5,101 4,470Long-termdebtandfinanceleases Note7 6,197 5,448 5,911Pensionandotherbenefitliabilities Note8 2,547 2,592 2,436Maintenanceprovisions Note9 1,118 1,003 922Otherlong-termliabilities 151 167 153Deferredincometax Note10 52 49 49Total liabilities $ 15,164 $ 14,360 $ 13,941
Shareholders’ EquitySharecapital Note11 798 799 797Contributedsurplus 75 69 83Hedgingreserve - - 3Retainedearnings 3,160 2,554 388Totalshareholders’equity 4,033 3,422 1,271Total liabilities and shareholders’ equity $ 19,197 $ 17,782 $ 15,212
Theaccompanyingnotesareanintegralpartoftheconsolidatedfinancialstatements.
OnbehalfoftheBoardofDirectors:
Vagn Sørensen Christie J.B. Clark Chairman ChairoftheAudit,FinanceandRiskCommittee
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CONSOLIDATED STATEMENTS OF OPERATIONS
FortheyearendedDecember31
(Canadiandollarsinmillionsexceptpersharefigures)2018 2017
Restated - Note 2
Operating revenuesPassenger Note18 $ 16,223 $ 14,593Cargo Note18 803 708Other 1,039 951Total revenues 18,065 16,252
Operating expensesAircraftfuel 3,969 2,927Regionalairlinesexpense Note19 2,842 2,617Wages,salariesandbenefits 2,873 2,671Airportandnavigationfees 964 905Aircraftmaintenance 1,003 938Depreciation,amortizationandimpairment 1,080 956Salesanddistributioncosts 807 770Groundpackagecosts 602 538Aircraftrent 518 503Cateringandonboardservices 433 383Communicationsandinformationtechnology 294 254Specialitems Note20 - 30Other 1,506 1,389Total operating expenses 16,891 14,881Operating income 1,174 1,371Non-operating income (expense)Foreignexchangegain(loss) (317) 120Interestincome 108 60Interestexpense (331) (311)Interestcapitalized 35 36Netfinancingexpenserelatingtoemployeebenefits Note8 (50) (65)Gain(loss)onfinancialinstrumentsrecordedatfairvalue Note15 (1) 23Gainonsaleandleasebackofassets Note21 - 52Gainondebtsettlementsandmodifications Note7 9 21Lossondisposalofassets Note21 (188) -Other (34) (21)Total non-operating expense (769) (85)Income before income taxes 405 1,286Incometax(expense)recovery Note10 (238) 743Net income $ 167 $ 2,029
Net income per share Note13Basicearningspershare $ 0.61 $ 7.44Dilutedearningspershare $ 0.60 $ 7.31
Theaccompanyingnotesareanintegralpartoftheconsolidatedfinancialstatements.
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FortheyearendedDecember31
(Canadiandollarsinmillions)
2018 2017
Restated-Note2
Comprehensive income Netincome $ 167 $ 2,029Othercomprehensiveincome,netoftaxexpense: Note10
ItemsthatwillnotbereclassifiedtonetincomeRemeasurementsonemployeebenefitliabilities Note8 503 189
ItemsthatwillbereclassifiedtonetincomeFuelderivativesdesignatedascashflowhedges,net Note15 - (3)
Total comprehensive income $ 670 $ 2,215
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Canadiandollarsinmillions)
Share capital
Contributed surplus
Hedging reserve
Retained earnings
Total shareholders’
equity
January1,2017(1) $ 797 $ 83 $ 3 $ 388 $ 1,271Netincome - - - 2,029 2,029Remeasurementsonemployeebenefitliabilities - - - 189 189Fuelderivativesdesignatedascashflowhedges,net - - (3) - (3)Totalcomprehensiveincome - - (3) 2,218 2,215Share-basedcompensation - - - 9 9Sharesissued(Note11) 14 (5) - - 9Sharespurchasedandcancelledunderissuerbid(Note11) (12) - - (59) (71)
Reclassificationofequitysettledawardtocashsettledaward(Note2i)
- (9) - (2) (11)
December31,2017(1) $ 799 $ 69 $ - $ 2,554 $ 3,422Netincome - - - 167 167Remeasurementsonemployeebenefitliabilities - - - 503 503Fuelderivativesdesignatedascashflowhedges,net - - - - -Totalcomprehensiveincome - - - 670 670Share-basedcompensation - 9 - - 9Sharesissued(Note11) 8 (3) - - 5Sharespurchasedandcancelledunderissuerbid(Note11) (9) - - (64) (73)December31,2018 $ 798 $ 75 $ - $ 3,160 $ 4,033
(1)Amountsforpriorperiodsasrestated–RefertoNote2
Theaccompanyingnotesareanintegralpartoftheconsolidatedfinancialstatements.
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CONSOLIDATED STATEMENTS OF CASH FLOW
FortheyearendedDecember31
(Canadiandollarsinmillionsexceptpersharefigures)
2018 2017
Restated-Note2
Cash flows from (used for) Operating Netincome $ 167 $ 2,029Adjustmentstoreconciletonetcashfromoperations
Deferredincometax Note10 232 (759)Depreciation,amortizationandimpairment 1,118 984Foreignexchange(gain)loss Note15 328 (183)Gainonsaleandleasebackofassets Note21 - (52)Gainondebtsettlementsandmodifications Note7 (9) (21)Lossondisposalofassets Note21 188 -Employeebenefitfundinglessthanexpense Note8 257 237Financialinstrumentsrecordedatfairvalue Note15 14 (14)Changeinmaintenanceprovisions 98 125
Changesinnon-cashworkingcapitalbalances 267 342Other 35 50Net cash flows from operating activities 2,695 2,738
Financing Proceedsfromborrowings Note7 1,210 733Reductionoflong-termdebtandfinanceleaseobligations Note7 (1,170) (814)Sharespurchasedforcancellation Note11 (73) (71)Issueofshares 5 9Financingfees Note7 (12) (26)Net cash flows used in financing activities (40) (169)
Investing Short-terminvestments (848) (998)Additionstoproperty,equipmentandintangibleassets (2,197) (2,422)Proceedsfromsaleofassets 11 5Proceedsfromsaleandleasebackofassets Note21 293 740Other 47 (16)Net cash flows used in investing activities (2,694) (2,691)Effect of exchange rate changes on cash and cash equivalents 27 (23)Decrease in cash and cash equivalents (12) (145)Cashandcashequivalents,beginningofyear 642 787Cash and cash equivalents, end of year $ 630 $ 642
Theaccompanyingnotesareanintegralpartoftheconsolidatedfinancialstatements.
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1. GENERAL INFORMATION
Theaccompanyingauditedconsolidatedfinancialstatements(the“financialstatements”)areofAirCanada(the“Corporation”).Theterm“Corporation”alsorefersto,asthecontextmayrequire,AirCanadaand/oroneormoreofitssubsidiaries,includingitsprincipalwholly-ownedoperatingsubsidiaries,TouramLimitedPartnershipdoingbusinessunderthebrandnameAirCanadaVacations®(“AirCanadaVacations”)andAirCanadaRougeLPdoingbusinessunderthebrandnameAirCanadaRouge®(“AirCanadaRouge”).
AirCanadaisincorporatedanddomiciledinCanada.Theaddressofitsregisteredofficeis7373Côte-VertuBoulevardWest,Saint-Laurent,Quebec.
AirCanadaisCanada’slargestdomestic,U.S.transborderandinternationalairlineandthelargestproviderofscheduledpassengerservicesintheCanadianmarket,theCanada-U.S.transbordermarketaswellastheinternationalmarketstoandfromCanada.CertainofthescheduledpassengerservicesofferedondomesticandCanada-U.S.transborderroutesareoperatedunderthebrandname“AirCanadaExpress”andoperatedbythirdpartiessuchasJazzAviationLP(“Jazz”)andSkyRegionalAirlinesInc.(“SkyRegional”)throughcapacitypurchaseagreements(eacha“CPA”).AirCanadaalsooffersscheduledpassengerservicesondomesticandCanada-U.S.transborderroutesthroughcapacitypurchaseagreementsonotherregionalcarriers,includingthoseoperatingaircraftof18seatsorless,someofwhicharereferredtoasTierIIIcarriers.ThroughAirCanada’sglobalroutenetwork,virtuallyeverymajormarketthroughouttheworldisservedeitherdirectlyorthroughtheStarAlliancenetwork.AirCanadaalsooffersaircargoservicesondomesticandU.S.transborderroutesaswellasoninternationalroutesbetweenCanadaandmajormarketsinEurope,Asia,SouthAmericaandAustralia.
FortheyearsendedDecember31,2018and2017(Canadiandollarsinmillions–exceptpershareamounts)
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2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
TheCorporationpreparesitsfinancialstatementsinaccordancewithgenerallyacceptedaccountingprinciplesinCanada(“GAAP”)assetoutintheCPACanadaHandbook–Accounting(“CPAHandbook”)whichincorporatesInternationalFinancialReportingStandards(“IFRS”)asissuedbytheInternationalAccountingStandardsBoard(“IASB”).
ThesefinancialstatementswereapprovedforissuebytheBoardofDirectorsoftheCorporationonFebruary14,2019.
Thesefinancialstatementsarebasedontheaccountingpoliciesasdescribedbelow.Thesepolicieshavebeenconsistentlyappliedtoalltheperiodspresented,exceptasotherwisestated.
Certaincomparativefigureshavebeenreclassifiedtoconformtothefinancialstatementpresentationadoptedforthecurrentyear.
a) Basis of measurement
Thesefinancialstatementshavebeenpreparedunderthehistoricalcostconvention,exceptfortherevaluationofcash,cashequivalents,short-terminvestments,restrictedcashandderivativeinstrumentswhicharemeasuredatfairvalue.
b) Principles of consolidation
ThesefinancialstatementsincludetheaccountsofAirCanadaanditssubsidiaries.Subsidiariesareallentities(includingstructuredentities)whichAirCanadacontrols.Foraccountingpurposes,controlisestablishedbyaninvestorwhenitisexposedto,orhasrightsto,variablereturnsfromitsinvolvementwiththeentityandhastheabilitytoaffectthosereturnsthroughitspowerovertheentity.Allinter-companybalancesandtransactionsareeliminated.
c) Passenger and cargo revenues
TheCorporationadoptedIFRS15RevenuefromContractswithCustomersonJanuary1,2018andapplieditretrospectivelytothepreviousperiods.TheimpactofthenewstandardontheconsolidatedfinancialstatementsissummarizedinNote2bb.
Passengerandcargorevenuesarerecognizedwhenthetransportationisprovided,exceptforrevenueonunlimitedflightpasseswhichisrecognizedonastraight-linebasisovertheperiodduringwhichthetravelpassisvalid.TheCorporationhasformedallianceswithotherairlinesencompassingloyaltyprogramparticipation,interlineagreementsandcodesharingandcoordinationofservicesincludingreservations,baggagehandlingandflightschedules.Revenuesareallocatedbaseduponformulasspecifiedintheagreementsandarerecognizedastransportationisprovided.Passengerrevenuealsoincludescertainfeesandsurchargesandrevenuesfrompassenger-relatedservicessuchasseatselectionandexcessbaggagewhicharerecognizedwhenthetransportationisprovided.
AirlinepassengerandcargoadvancesalesaredeferredandincludedinCurrentliabilities.AdvancesalesalsoincludetheproceedsfromthesaleofflightticketstoAimiaCanadaInc.(“Aeroplan”),acorporationthatprovidesloyaltyprogramservicestoAirCanadaandpurchasesseatsfromAirCanadapursuanttotheCommercialParticipationandServicesAgreementbetweenAeroplanandAirCanada(the“CPSA”).UndertheCPSA,AeroplanpurchasespassengerticketsfromAirCanada,whichareaccountedforaspassengerrevenuesbyAirCanadawhentransportationisprovided.AsfurtherdiscussedinNote23,AirCanadaacquiredAimiaCanadaInc.,ownerandoperatoroftheAeroplanloyaltybusiness,fromAimiaInc.inJanuary2019.
d) Capacity purchase agreements
AirCanadahascapacitypurchaseagreementswithJazz,SkyRegionalandcertainotherregionalcarriers.Undertheseagreements,AirCanadamarkets,ticketsandentersintoothercommercialarrangementsrelatingtotheseflightsandrecordstherevenueitearnsunderPassengerrevenuewhentransportationisprovided.Operatingexpensesundercapacitypurchaseagreements,whichareaggregatedinaseparatelineitemintheconsolidatedstatementofoperationstitledRegionalairlinesexpense,includethecapacitypurchasefees,pass-throughcosts,whicharedirectcostsincurredbytheregionalcarrierandchargedtotheCorporation,andothercostsincurredbytheCorporationwhicharedirectlyrelatedtoregionalcarrieroperations.
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e) Aeroplan loyalty program
AirCanadapurchasesAeroplanMiles®fromAeroplan.AirCanadaisanAeroplanpartnerprovidingcertainofAirCanada’scustomers,whoarealsomembersofAeroplan,withAeroplanMiles®,whichtheycanredeemasAeroplanmembersforairtravelorotherrewardsofferedbyAeroplanpursuanttoitsprogram.
ThecostofpurchasingAeroplanMiles®fromAeroplanisaccountedforasasalesincentiveandchargedagainstpassengerrevenueswhenthepointsareissued,whichoccursuponthequalifyingairtravelbeingprovidedtothecustomer.
AsfurtherdiscussedinNote23,AirCanadaacquiredAimiaCanadaInc.,ownerandoperatoroftheAeroplanloyaltybusiness,fromAimiaInc.inJanuary2019.
f) Other revenues
Otherrevenueisprimarilycomprisedofrevenuesfromthesaleofthegroundportionofvacationpackages,groundhandlingservices,on-boardsales,loungepasssalesandloyaltyprogrammarketingfees.Vacationpackagerevenueisrecognizedasservicesareprovidedovertheperiodofthevacation.Otherairlinerelatedservicerevenuesarerecognizedastheproductsaresoldtopassengersortheservicesareprovided.
IncertainsubleasesofaircrafttoJazz,foraccountingpurposes,theCorporationactsasanagentandaccordinglyreportsthesubleaserevenuesnetagainstaircraftrentexpenseasthetermsofthesubleasematchthetermsoftheCorporation’slease.TheCorporationactsaslesseeandsublessorinthesematters.
g) Employee benefits
Thecostofpensions,otherpost-retirementandpost-employmentbenefitsearnedbyemployeesisactuariallydeterminedannuallyasatDecember31.Thecostisdeterminedusingtheprojectedunitcreditmethodandassumptionsincludingmarketinterestrates,salaryescalation,retirementagesofemployees,mortalityrates,andhealthcarecosts.
Pastservicecostsarerecognizedintheperiodofaplanamendment,irrespectiveofwhetherthebenefitshavevested.Gainsandlossesoncurtailmentsorsettlementsarerecognizedintheperiodinwhichthecurtailmentorsettlementoccurs.
Thecurrentservicecostandanypastservicecost,gainsandlossesoncurtailmentsorsettlementsarerecordedinWages,salariesandbenefits.TheinterestarisingonthenetbenefitobligationsarepresentedinNetfinancingexpenserelatingtoemployeebenefits.Netactuarialgainsandlosses,referredtoasremeasurements,arerecognizedinOthercomprehensiveincomeandRetainedearningswithoutsubsequentreclassificationtoincome.
Thecurrentservicecostisestimatedutilizingdifferentdiscountratesderivedfromtheyieldcurveusedtomeasurethedefinedbenefitobligationatthebeginningoftheyear,reflectingthedifferenttimingofbenefitpaymentsforpastservice(thedefinedbenefitobligation)andfutureservice(thecurrentservicecost).
Theliabilityinrespectofminimumfundingrequirements,ifany,isdeterminedusingtheprojectedminimumfundingrequirements,basedonmanagement’sbestestimatesoftheactuariallydeterminedfundedstatusoftheplan,marketdiscountratesandsalaryescalationestimates.TheliabilityinrespectoftheminimumfundingrequirementandanysubsequentremeasurementofthatliabilityarerecognizedimmediatelyinOthercomprehensiveincomeandRetainedearningswithoutsubsequentreclassificationtoincome.
Recognizedpensionassetsarelimitedtothepresentvalueofanyreductionsinfuturecontributionsoranyfuturerefunds.
h) Employee profit sharing plans
TheCorporationhasemployeeprofitsharingplans.PaymentsarecalculatedbasedonfullcalendaryearresultsandanexpenserecordedthroughouttheyearasachargetoWages,salariesandbenefitsbasedontheestimatedannualpaymentsundertheplans.
i) Share-based compensation plans
CertainemployeesoftheCorporationparticipateinAirCanada’sLong-TermIncentivePlan,whichprovidesforthegrantofstockoptions,performanceshareunits(“PSUs”)andrestrictedshareunits(“RSUs”),asfurtherdescribedinNote12.PSUsandRSUsarenotionalshareunitswhichareexchangeable,onaone-to-onebasis,asdeterminedbytheBoardofDirectorsasdescribedinNote12,forAirCanadashares,orthecashequivalent.
Optionsareexpensedusingagradedvestingmodeloverthevestingperiod.TheCorporationrecognizescompensationexpenseandacorrespondingadjustmenttoContributedsurplusequaltothefairvalueoftheequityinstrumentsgrantedusingtheBlack-Scholesoptionpricingmodeltakingintoconsiderationforfeitureestimates.Compensationexpenseisadjustedforsubsequentchangesinmanagement’sestimateofthenumberofoptionsthatareexpectedtovest.
AprospectivechangeinaccountingforPSUsandRSUswasmadein2017fromequitysettledinstrumentstocashsettledinstrumentsbasedonsettlementexperience.Inaccountingforcashsettledinstruments,compensationexpenseisadjustedforsubsequentchangesinthefairvalueofthePSUsandRSUstakingintoaccountforfeitureestimates.TheliabilityrelatedtocashsettledPSUsandRSUsisrecordedinOtherlong-term
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liabilities.RefertoNote15foradescriptionofderivativeinstrumentsusedbytheCorporationtoeconomicallyhedgethecashflowexposuretoPSUsandRSUs.
AirCanadaalsomaintainsanemployeesharepurchaseplan.Underthisplan,contributionsbytheCorporation’semployeesarematchedtoaspecificpercentagebytheCorporation.EmployeesmustremainwiththeCorporationandretaintheirsharesuntilMarch31ofthesubsequentyearforvestingoftheCorporation’scontributions.ThesecontributionsareexpensedinWages,salaries,andbenefitsexpenseoverthevestingperiod.
j) Maintenance and repairs
MaintenanceandrepaircostsforbothleasedandownedaircraftarechargedtoAircraftmaintenanceasincurred,withtheexceptionofmaintenanceandrepaircostsrelatedtoreturnconditionsonaircraftunderoperatinglease,whichareaccruedoverthetermofthelease,andmajormaintenanceexpendituresonownedandfinanceleasedaircraft,whicharecapitalizedasdescribedbelowinNote2r.
MaintenanceandrepaircostsrelatedtoreturnconditionsonaircraftleasesarerecordedoverthetermoftheleasefortheendofleasemaintenancereturnconditionobligationswithintheCorporation’soperatingleases,offsetbyaprepaidmaintenanceassettotheextentofanyrelatedpower-by-the-hourmaintenanceserviceagreementsoranyrecoveriesunderaircraftsubleasingarrangements.TheprovisionisrecordedwithinMaintenanceprovisionsusingadiscountratetakingintoaccountthespecificrisksoftheliabilityovertheremainingtermofthelease.InterestaccretionontheprovisionisrecordedinOthernon-operatingexpense.Anychangesinthemaintenancecostestimate,discountrates,timingofsettlementordifferenceintheactualmaintenancecostincurredandtheamountoftheprovisionarerecordedinAircraftmaintenance.
k) Other operating expenses
IncludedinOtheroperatingexpensesareexpensesrelatedtobuildingrentandmaintenance,airportterminalhandlingcosts,professionalfeesandservices,crewmealsandhotels,advertisingandpromotion,insurancecosts,andotherexpenses.Otheroperatingexpensesarerecognizedasincurred.
l) Financial instruments
Recognition
Financialassetsandfinancialliabilities,includingderivatives,arerecognizedontheconsolidatedstatementoffinancialpositionwhentheCorporationbecomesapartytothefinancialinstrumentorderivativecontract.
Classification
TheCorporationclassifiesitsfinancialassetsandfinancialliabilitiesinthefollowingmeasurementcategoriesi)thosetobemeasuredsubsequentlyatfairvalue(eitherthroughothercomprehensiveincomeorthroughprofitorloss)andii)thosetobemeasuredatamortizedcost.Theclassificationoffinancialassetsdependsonthebusinessmodelformanagingthefinancialassetsandthecontractualtermsofthecashflows.Financialliabilitiesareclassifiedasthosetobemeasuredatamortizedcostunlesstheyaredesignatedasthosetobemeasuredsubsequentlyatfairvaluethroughprofitorloss(irrevocableelectionatthetimeofrecognition).Forassetsandliabilitiesmeasuredatfairvalue,gainsandlossesareeitherrecordedinprofitorlossorothercomprehensiveincome.
TheCorporationreclassifiesfinancialassetswhenandonlywhenitsbusinessmodelformanagingthoseassetschanges.Financialliabilitiesarenotreclassified.
TheCorporationhasimplementedthefollowingclassifications:
> Cashandcashequivalents,Short-terminvestments,andRestrictedcashareclassifiedasassetsatfairvaluethroughprofitandlossandanyperiodchangeinfairvalueisrecordedthroughInterestincomeintheconsolidatedstatementofoperations,asapplicable.
> AccountsreceivableandAircraft-relatedandotherdepositsareclassifiedasassetsatamortizedcostandaremeasuredusingtheeffectiveinterestratemethod.Interestincomeisrecordedintheconsolidatedstatementofoperations,asapplicable.
> Accountspayable,creditfacilities,andlong-termdebtareclassifiedasotherfinancialliabilitiesandaremeasuredatamortizedcostusingtheeffectiveinterestratemethod.Interestexpenseisrecordedintheconsolidatedstatementofoperations,asapplicable.
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Measurement
Allfinancialinstrumentsarerequiredtobemeasuredatfairvalueoninitialrecognition,plus,inthecaseofafinancialassetorfinancialliabilitynotatfairvaluethroughprofitorloss,transactioncoststhataredirectlyattributabletotheacquisitionorissueofthefinancialassetorfinancialliability.Transactioncostsoffinancialassetsandfinancialliabilitiescarriedatfairvaluethroughprofitorlossareexpensedinprofitorloss.Financialassetswithembeddedderivativesareconsideredintheirentiretywhendeterminingwhethertheircashflowsaresolelypaymentofprincipalandinterest.
Financialassetsthatareheldwithinabusinessmodelwhoseobjectiveistocollectthecontractualcashflows,andthathavecontractualcashflowsthataresolelypaymentsofprincipalandinterestontheprincipaloutstandingaregenerallymeasuredatamortizedcostattheendofthesubsequentaccountingperiods.Allotherfinancialassetsincludingequityinvestmentsaremeasuredattheirfairvaluesattheendofsubsequentaccountingperiods,withanychangestakenthroughprofitandlossorothercomprehensiveincome(irrevocableelectionatthetimeofrecognition).
Impairment
TheCorporationassessesallinformationavailable,including,onaforward-lookingbasis,theexpectedcreditlossesassociatedwithitsassetscarriedatamortizedcost.Theimpairmentmethodologyapplieddependsonwhethertherehasbeenasignificantincreaseincreditrisk.Toassesswhetherthereisasignificantincreaseincreditrisk,theCorporationcomparestheriskofadefaultoccurringontheassetasatthereportingdatewiththeriskofdefaultasatthedateofinitialrecognitionbasedonallinformationavailable,andreasonableandsupportiveforward-lookinginformation.Fortradereceivablesonly,theCorporationappliesthesimplifiedapproachaspermittedbyIFRS9whichrequiresexpectedlifetimelossestoberecognizedfrominitialrecognitionofreceivables.
DerivativesandHedgeAccounting
Derivativesareinitiallyrecognizedatfairvalueonthedateaderivativecontractisenteredintoandaresubsequentlyre-measuredtotheirfairvalueattheendofeachreportingperiod.Theaccountingforsubsequentchangesinfairvaluedependsonwhetherthederivativeisdesignatedasahedginginstrument,andifso,thenatureoftheitembeinghedgedandthetypeofhedgerelationshipdesignated.TheCorporationdocumentsattheinceptionofthehedgingtransactiontheeconomicrelationshipbetweenhedginginstrumentsandhedgeditemsincludingwhetherthehedginginstrumentisexpectedtooffsetchangesincashflowsofhedgeditems.TheCorporationdocumentsitsriskmanagementobjectiveandstrategyforundertakingvarious
hedgetransactionsattheinceptionofeachhedgingrelationship.
TheCorporationapplieshedgeaccountingfordesignatedfuelderivatives.Crudeoilprices,whilenotcontractuallyspecifiedintheCorporation’sjetfuelpurchasecontracts,areeconomicallyrelatedtojetfuelprices.TheCorporationentersintooptioncontractsoncrudeoilanddesignatesthecontractsincashflowhedgesofthecrudeoilcomponentofitsfuturejetfuelpurchases.TheCorporationhasestablishedahedgeratioof1:1foritshedgingrelationships.Underhedgeaccounting,totheextenteffective,thegainorlossonfuelhedgingderivativesisrecordedinothercomprehensiveincome.Premiumspaidforoptioncontractsandthetimevalueoftheoptioncontractsaredeferredasacostofthehedgeinothercomprehensiveincome.AmountsaccumulatedinothercomprehensiveincomearepresentedashedgingreserveinequityandarereclassifiedtoAircraftfuelexpensewhentheunderlyinghedgedjetfuelisused.Anyineffectivegainorlossonfuelhedgingderivativesisrecordedinnon-operatingexpenseinGainonfinancialinstrumentsrecordedatfairvalue.RefertoNote15fortheresultsfromfuelhedgeaccounting.
Whenahedginginstrumentexpires,issoldorterminated,orwhenahedgenolongermeetsthecriteriaforhedgeaccounting,anycumulativedeferredgainorlossanddeferredcostsofhedginginequityatthattimeremainsinequityuntiltheforecasttransactionoccurs.Whentheforecasttransactionisnolongerexpectedtooccur,thecumulativegainorlossanddeferredcostsofhedgingthatwerereportedinequityareimmediatelyreclassifiedtoprofitorloss.
Ifthehedgeratioforriskmanagementpurposesisnolongeroptimalbuttheriskmanagementobjectiveremainsunchangedandthehedgecontinuestoqualifyforhedgeaccounting,thehedgerelationshipwillberebalancedbyadjustingeitherthevolumeofthehedgedinstrumentorthevolumeofthehedgeditemsothatthehedgeratioalignswiththeratiousedforriskmanagementpurposes.Anyhedgeineffectivenessiscalculatedandaccountedforinprofitorlossatthetimeofthehedgerelationshiprebalancing.
TheCorporationentersintoforeigncurrency,fuelderivativesandshareforwardcontractstomanagetheassociatedrisks.Derivativeinstrumentsarerecordedontheconsolidatedstatementoffinancialpositionatfairvalue,includingthosederivativesthatareembeddedinfinancialornon-financialcontractsthatarerequiredtobeaccountedforseparately.ChangesinthefairvalueofderivativeinstrumentsarerecognizedinNon-operatingincome(expense),exceptforeffectivechangesfordesignatedfuelderivativesunderhedgeaccountingasdescribedabove.DerivativecontractsareincludedintheconsolidatedstatementoffinancialpositionatfairvalueinPrepaidexpensesandothercurrentassets,Depositsandotherassets,andAccountspayableandaccruedliabilitiesbasedonthetermsofthecontractual
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agreements.Allcashflowsassociatedwithpurchasingandsellingderivativesareclassifiedasoperatingcashflowsintheconsolidatedstatementofcashflow.
m) Foreign currency translation
ThefunctionalcurrencyofAirCanadaanditssubsidiariesistheCanadiandollar.MonetaryassetsandliabilitiesdenominatedinforeigncurrenciesaretranslatedintoCanadiandollarsatratesofexchangeineffectatthedateoftheconsolidatedstatementoffinancialposition.Non-monetaryassetsandliabilities,revenuesandexpensesarisingfromtransactionsdenominatedinforeigncurrencies,aretranslatedatthehistoricalexchangerateortheaverageexchangerateduringtheperiod,asapplicable.AdjustmentstotheCanadiandollarequivalentofforeigndenominatedmonetaryassetsandliabilitiesduetotheimpactofexchangeratechangesarerecognizedinForeignexchangegain(loss).
n) Income taxes
Thetaxexpensefortheperiodcomprisescurrentanddeferredincometax.Taxexpenseisrecognizedintheconsolidatedstatementofoperations,excepttotheextentthatitrelatestoitemsrecognizedinothercomprehensiveincomeordirectlyinequity,inwhichcasethetaxisnettedwithsuchitems.
ThecurrentincometaxexpenseiscalculatedonthebasisofthetaxlawsenactedorsubstantivelyenactedatthebalancesheetdateinthejurisdictionswheretheCorporationanditssubsidiariesoperateandgeneratetaxableincome.Managementperiodicallyevaluatespositionstakenintaxreturnswithrespecttosituationsinwhichapplicabletaxregulationsaresubjecttointerpretation.Itestablishesprovisionswhereappropriateonthebasisofamountsexpectedtobepaidtothetaxauthorities.
Deferredincometaxisrecognized,usingtheliabilitymethod,ontemporarydifferencesarisingbetweenthetaxbasesofassetsandliabilitiesandtheircarryingamountsintheconsolidatedfinancialstatements.Deferredincometaxisdeterminedusingtaxratesandlawsthathavebeenenactedorsubstantivelyenactedbythebalancesheetdateandareexpectedtoapplywhentherelateddeferredincometaxassetisrealizedorthedeferredincometaxliabilityissettled.
Deferredincometaxassetsarerecognizedonlytotheextentthatitisprobablethatfuturetaxableprofitwillbeavailableagainstwhichthetemporarydifferencescanbeutilized.
o) Earnings per share
Basicearningspershare(“EPS”)iscalculatedbydividingthenetincomefortheperiodattributabletotheshareholdersofAirCanadabytheweightedaveragenumberofsharesoutstandingduringtheperiod.
DilutedEPSiscalculatedbyadjustingtheweightedaveragenumberofsharesoutstandingfordilutivepotentialshares.TheCorporation’spotentiallydilutivesharesarecomprisedofstockoptions.Thenumberofsharesincludedwithrespecttotimevestingoptionsiscomputedusingthetreasurystockmethodunlesstheyareanti-dilutive.Underthismethod,theproceedsfromtheexerciseofsuchinstrumentsareassumedtobeusedtopurchasesharesattheaveragemarketpricefortheperiodandthedifferencebetweenthenumberofsharesissueduponexerciseandthenumberofsharesassumedtobepurchasedisincludedinthecalculation.Thenumberofsharesincludedwithrespecttoperformance-basedemployeeshareoptionsistreatedascontingentlyissuablesharesbecausetheirissueiscontingentuponsatisfyingspecifiedconditionsinadditiontothepassageoftime.Ifthespecifiedconditionsaremet,thenthenumberofsharesincludedisalsocomputedusingthetreasurystockmethodunlesstheyareanti-dilutive.
p) Restricted cash
TheCorporationhasrecordedRestrictedcashunderCurrentassetsrepresentingfundsheldintrustbyAirCanadaVacationsinaccordancewithregulatoryrequirementsgoverningadvanceticketsales,aswellasfundsheldinescrowaccountsrelatingtoAirCanadaVacations’creditcardagreementsforcertaintravelrelatedactivities.
RestrictedcashwithmaturitiesgreaterthanoneyearfromthebalancesheetdateisrecordedinDepositsandotherassets.Thisrestrictedcashrelatestofundsondepositwithvariousfinancialinstitutionsascollateralforlettersofcreditandotheritems.
q) Aircraft fuel inventory and spare parts and supplies inventory
Inventoriesofaircraftfuel,sparepartsandsuppliesaremeasuredatcostbeingdeterminedusingaweightedaverageformula,netofrelatedobsolescenceprovision,asapplicable.
TheCorporationdidnotrecognizeanywrite-downsoninventoriesorreversalsofanypreviouswrite-downsduringtheperiodspresented.IncludedinAircraftmaintenanceis$57relatedtosparepartsandsuppliesconsumedduringtheyear(2017–$54).
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r) Property and equipment
Propertyandequipmentisrecognizedusingthecostmodel.Propertyunderfinanceleasesandtherelatedobligationforfutureleasepaymentsareinitiallyrecordedatanamountequaltothelesseroffairvalueofthepropertyorequipmentandthepresentvalueofthoseleasepayments.
TheCorporationallocatestheamountinitiallyrecognizedinrespectofanitemofpropertyandequipmenttoitssignificantcomponentsanddepreciatesseparatelyeachcomponent.Propertyandequipmentaredepreciatedtoestimatedresidualvaluesbasedonthestraight-linemethodovertheirestimatedservicelives.Aircraftandflightequipmentarecomponentizedintoairframe,engine,andcabininteriorequipmentandmodifications.Airframesandenginesaredepreciatedoverperiodsnotexceeding25years,withresidualvaluesinitiallyestimatedat10%oftheoriginalcostandupdatedforchangesinestimatesovertime.Spareenginesandrelatedparts(“rotables”)aredepreciatedovertheaverageremainingusefullifeofthefleettowhichtheyrelatewithresidualvaluesinitiallyestimatedat10%.Cabininteriorequipmentandmodificationsaredepreciatedoverthelesserofeightyearsortheremainingusefullifeoftheaircraft.Cabininteriorequipmentandmodificationstoaircraftonoperatingleasesareamortizedoverthelesserofeightyearsorthetermofthelease.Majormaintenanceofairframesandengines,includingreplacementsparesandparts,labourcostsand/orthird-partymaintenanceservicecosts,arecapitalizedandamortizedovertheaverageexpectedlifebetweenmajormaintenanceevents.Majormaintenanceeventstypicallyconsistofmorecomplexinspectionsandservicingoftheaircraft.Allpower-by-the-hourfleetmaintenancecontractcostsarechargedtooperatingexpensesintheincomestatementasincurred.Buildingsaredepreciatedonastraight-linebasisovertheirusefullivesnotexceeding50yearsorthetermofanyrelatedlease,whicheverisless.Leaseholdimprovementsareamortizedoverthelesseroftheleasetermor5years.Groundandotherequipmentisdepreciatedover3to25years.
Residualvaluesandusefullivesarereviewedatleastannually,anddepreciationratesareadjustedaccordinglyonaprospectivebasis.Gainsandlossesondisposalsofpropertyandequipmentaredeterminedbycomparingtheproceedswiththecarryingamountoftheassetandareincludedaspartofnon-operatinggainsandlossesintheconsolidatedstatementofoperations.
s) Interest capitalized
Borrowingcostsareexpensedasincurred.Forborrowingcostsattributabletotheacquisition,constructionorproductionofanassetthatnecessarilytakesasubstantialperiodoftimetogetreadyforitsintendeduse,thecostsarecapitalizedaspartofthecostofthatasset.Capitalizationofborrowingcostscommenceswhenexpendituresfortheassetandborrowingcostsarebeingincurredandtheactivitiestopreparetheassetforitsintendeduseareinprogress.Borrowingcostsarecapitalizeduptothedatewhentheprojectiscompletedandtherelatedassetisavailableforitsintendeduse.
Totheextentthatfundsareborrowedspecificallyforthepurposeofobtainingsuchassets,theamountofborrowingcostseligibleforcapitalizationisdeterminedattheactualborrowingcostsincurredonthatborrowingduringtheperiodlessanyinvestmentincomeonthetemporaryinvestmentofthoseborrowings.Totheextentthatfundsareborrowedgenerallyandusedforthepurposeofobtainingaqualifyingasset,theamountofborrowingcostseligibleforcapitalizationisdeterminedbyapplyingacapitalizationratetotheexpendituresonthatasset.ThecapitalizationrateistheweightedaverageoftheborrowingcostsapplicabletotheborrowingsoftheCorporationthatareoutstandingduringtheperiod.Borrowingsmadespecificallyforthepurposeofobtainingaqualifyingassetareexcludedfromthiscalculationuntilsubstantiallyalltheactivitiesnecessarytopreparetheassetforitsintendedusearecomplete.
t) Leases
Leasesareclassifiedasfinanceleaseswhentheleasearrangementtransferssubstantiallyalltherisksandrewardsofownershiptothelessee.Allotherleasesareclassifiedasoperatingleases.
Totalaircraftoperatingleaserentalsovertheleasetermareamortizedtooperatingexpense(Aircraftrent)onastraight-linebasis.IncludedinDepositsandotherassetsandOtherlong-termliabilitiesarethedifferencesbetweenthestraight-lineaircraftrentexpenseandthepaymentsasstipulatedundertheleaseagreement.
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u) Intangible assets
Intangibleassetsareinitiallyrecordedatcost.Indefinitelifeintangibleassetsarenotamortizedwhileassetswithfinitelivesareamortizedonastraight-linebasisovertheirestimatedusefullives.
Estimated Useful Life
Remaining amortization period as at
December 31, 2018
Internationalrouterightsandslots
Indefinite notapplicable
Marketingbasedtradenames
Indefinite notapplicable
Technologybased(internallydeveloped)
5-10years 1to10years
AirCanadahasinternationalrouterightsandslotswhichenabletheCorporationtoprovideservicesinternationally.ThevalueoftherecordedintangibleassetsrelatestothecostofrouteandslotrightsatTokyo’sNaritaInternationalAirport,Washington’sReaganNationalAirportandLondon’sHeathrowAirport.AirCanadaexpectstoprovideservicetotheseinternationallocationsforanindefiniteperiod.
AirCanadaandcertainofitssubsidiarieshavetradenames,trademarks,anddomainnames(collectively,“TradeNames”).TheseitemsaremarketingbasedintangibleassetsastheyareprimarilyusedinthesaleandpromotionofAirCanada’sproductsandservices.TheTradeNamescreatebrandrecognitionwithcustomersandpotentialcustomersandarecapableofcontributingtocashflowsforanindefiniteperiodoftime.AirCanadaintendstocontinuallyre-investin,andmarket,theTradeNamestosupportclassificationasindefinitelifeintangibles.IftherewereplanstoceaseusinganyoftheTradeNames,thespecificnameswouldbeclassifiedasfiniteandamortizedovertheexpectedremainingusefullife.
Developmentcoststhataredirectlyattributabletothedesign,developmentandtestingofidentifiablesoftwareproductsarerecognizedastechnologybasedintangibleassetsifcertaincriteriaaremet,includingtechnicalfeasibilityandintentandabilitytodevelopandusethetechnologytogenerateprobablefutureeconomicbenefits;otherwisetheyareexpensedasincurred.Directlyattributablecoststhatarecapitalizedaspartofthetechnologybasedintangibleassetsincludesoftware-related,employeeandthird-partydevelopmentcostsandanappropriateportionofrelevantoverhead.
v) Goodwill
GoodwillrepresentstheexcessofthecostofanacquisitionoverthefairvalueoftheCorporation’sshareofthenetidentifiableassetsoftheacquiredbusinessatthedateofacquisition.Goodwillistestedatleastannuallyforimpairmentandcarriedatcostlessaccumulatedimpairmentlosses.Impairmentlossesongoodwillarenotreversed.Forthepurposeofimpairmenttesting,goodwillistestedforimpairmentatthelowestlevelwithintheentityatwhichthegoodwillismonitoredforinternalmanagementpurposes,beingtheoperatingsegmentlevel(Noteaa).
w) Impairment of long-lived assets
Long-livedassetsincludepropertyandequipment,finitelivedintangibleassets,indefinitelivedintangibleassetsandgoodwill.Assetsthathaveanindefiniteusefullife,includinggoodwillaretestedatleastannuallyforimpairmentorwheneventsorcircumstancesindicatethatthecarryingvaluemaynotberecoverable.Assetsthataresubjecttodepreciationoramortizationarereviewedforimpairmentwhenevereventsorchangesincircumstancesindicatethatthecarryingamountmaynotberecoverable.Animpairmenttestisperformedbycomparingthecarryingamountoftheassetorgroupofassetstotheirrecoverableamount.Recoverableamountiscalculatedasthehigherofanasset’sorcash-generatingunit’sfairvaluelesscoststodisposeanditsvalueinuse.Forthepurposeofassessingimpairment,assetsaregroupedatthelowestlevelsforwhichthereareseparatelyidentifiablecashinflows(cash-generatingunitsorCGUs).Managementhasdeterminedthattheappropriatelevelforassessingimpairmentsisatthenarrow-bodyandwide-bodyfleetlevelsforaircraftandrelatedassetssupportingtheoperatingfleet.Parkedaircraftnotusedinoperationsandaircraftleasedorsubleasedtothirdpartiesareassessedforimpairmentattheindividualassetlevel.Animpairmentlossisrecognizedfortheamountbywhichtheasset’sorcash-generatingunit’scarryingamountexceedsitsrecoverableamount.
Long-livedassets,otherthangoodwill,thatsufferedanimpairmentarereviewedforpossiblereversaloftheimpairmentateachreportingdate.Managementassesseswhetherthereisanyindicationthatanimpairmentlossrecognizedinapriorperiodnolongerexistsorhasdecreased.Inassessingwhetherthereisapossiblereversalofanimpairmentloss,managementconsiderstheindicatorsthatgaverisetotheimpairmentloss.Ifanysuchindicatorsexistthatanimpairmentlosshasreversed,managementestimatestherecoverableamountofthelong-livedasset.Animpairmentlossrecognizedinpriorperiodsforanassetotherthangoodwillshallbereversedonlyiftherehasbeenachangeintheestimatesusedtodeterminetheasset’srecoverableamountsincethelastimpairmentlosswasrecognized.Thecarryingamountofanyindividualasset
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intheCGUisnotincreasedabovethecarryingvaluethatwouldhavebeendeterminedhadtheoriginalimpairmentnotoccurred.Areversalofanimpairmentlossisrecognizedimmediatelyintheconsolidatedstatementofoperations.
x) Non-current assets (or disposal groups) held for sale
Non-currentassets(ordisposalgroups)areclassifiedasassetsheldforsalewhentheircarryingamountistoberecoveredprincipallythroughasaletransaction,suchassetsareavailableforimmediatesaleinpresentcondition,andasaleisconsideredhighlyprobable.Theyarestatedatthelowerofcarryingamountandfairvaluelesscoststodispose.
y) Provisions
Provisionsarerecognizedwhenthereexistsapresentlegalorconstructiveobligationasaresultofpastevents,itisprobablethatanoutflowofresourceswillberequiredtosettletheobligation,andareliableestimatecanbemadeoftheobligation.Iftheeffectissignificant,theexpectedcashflowsarediscountedusingaratethatreflects,whereappropriate,therisksspecifictotheliability.Wherediscountingisused,interestaccretionontheprovisionisrecordedinOthernon-operatingexpense.
z) Special items
Specialitemsarethoseitemsthatinmanagement’sviewaretobeseparatelydisclosedbyvirtueoftheirsizeorincidencetoenableafullunderstandingoftheCorporation’sfinancialperformance.
aa) Segment reporting
AirCanadaismanagedasoneoperatingsegmentbasedonhowfinancialinformationisproducedinternallyforthepurposesofmakingoperatingdecisions.Theoperatingsegmentisreportedinamannerconsistentwiththeinternalreportingprovidedtothechiefoperatingdecisionmaker.Thechiefoperatingdecisionmaker,whoisresponsibleforallocatingresourcesandassessingperformanceofoperations,hasbeenidentifiedastheChiefExecutiveOfficer.
bb) Accounting standards adopted on January 1, 2018
IFRS15–RevenuefromContractswithCustomers
IFRS15replacesIAS18Revenueandrelatedinterpretations.Thecoreprincipleofthenewstandardistorecognizerevenuetodepictthetransferofgoodsorservicestocustomersinamountsthatreflecttheconsiderationtowhichtheentityexpectstobeentitledinexchangeforthosegoodsorservices.Thenewstandardisintendedtoenhancedisclosuresaboutrevenue,providemorecomprehensiveguidancefortransactionsthatwerenotpreviouslyaddressedandimproveguidanceformultiple-elementarrangements.IFRS15iseffectiveforannualperiodsbeginningonJanuary1,2018.
TheCorporationadoptedthestandardeffectiveJanuary1,2018usingthefullretrospectivemethod,whichrequireseachpriorreportingperiodpresentedtoberestated.Themainchangesareexplainedbelow.
Accounting for costs to obtain a contractUnderIFRS15,incrementalcostsofobtainingpassengerrevenues,suchascreditcardfeesandglobaldistributionsystemcharges,arecapitalizedattimeofsaleandexpensedatthetimeofpassengerrevenuerecognition.PriortoadoptionofIFRS15,thesecostswereexpensedasincurredatthetimetheflightticketwassold.Withthischangeinaccountingpolicyforcontractcosts,thetimingofexpenserecognitionisimpacted.
TheimpactontheconsolidatedstatementoffinancialpositionasatJanuary1,2017isanincreasetoPrepaidexpensesandothercurrentassetsof$58andanequivalentincreasetoopeningRetainedearnings($65asatDecember31,2017).Inaddition,deferredcommissioncostsintheamountof$40asatJanuary1,2017,previouslyrecordednetagainsttheAdvanceticketsalesliability,werereclassifiedtoPrepaidexpensesandothercurrentassets($35asatDecember31,2017).
Accounting for change feesRevenuearisingfromchangefeeswhicharecollectedbytravelagentsonAirCanada’sbehalfaredeferredandrecognizedinpassengerrevenueatthetimeoftherelatedflight,ratherthanattimeofcollection.TheimpactontheconsolidatedstatementoffinancialpositionasatJanuary1,2017isanincreasetoAdvanceticketsalesof$6andanequivalentdecreasetoopeningRetainedearnings($6asatDecember31,2017).
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PresentationCertainpassengerandcargorelatedfeesandsurchargeswerereclassifiedfromOthertoPassengerrevenueandtoCargorevenueontheconsolidatedstatementofoperationstobetterreflectthenatureandaggregationofsimilarrevenueitems.Thisreclassificationhasnoimpactontotaloperatingrevenues.
Impact to previously reported resultsSelectedadjustedfinancialstatementinformation,whichreflecttheadoptionofIFRS15,ispresentedbelow.Lineitemsthatwerenotaffectedbythechangeinaccountingpolicyhavenotbeenincluded.Asaresult,thesub-totalsandtotalsdisclosedcannotberecalculatedfromthenumbersprovided.Insummary,thefollowingadjustmentsweremadetotheamountsrecognizedintheconsolidatedstatementoffinancialpositionforthedateofinitialapplicationonJanuary1,2017andattheendofthecomparativeperiod,December31,2017.
(Canadiandollarsinmillions)
December31,2016aspreviously
reported
Reclassification Remeasurements January1,2017asrestated
Prepaidexpensesandothercurrentassets $ 349 $ 40 $ 58 $ 447Total assets $ 15,114 $ 40 $ 58 $ 15,212Advanceticketsales 2,073 40 6 2,119Total current liabilities $ 4,424 $ 40 $ 6 $ 4,470Retainedearnings 336 - 52 388Total shareholders’ equity $ 1,219 $ - $ 52 $ 1,271Total liabilities and shareholders’ equity $ 15,114 $ 40 $ 58 $ 15,212
(Canadiandollarsinmillions)
December31,2017aspreviously
reported
Reclassification Remeasurements December31,2017asrestated
Prepaidexpensesandothercurrentassets $ 325 $ 35 $ 65 $ 425Deferredincometax 472 - (16) 456Total assets $ 17,698 $ 35 $ 49 $ 17,782Advanceticketsales 2,428 35 6 2,469Total current liabilities $ 5,060 $ 35 $ 6 $ 5,101Retainedearnings 2,511 - 43 2,554Total shareholders’ equity $ 3,379 $ - $ 43 $ 3,422Total liabilities and shareholders’ equity $ 17,698 $ 35 $ 49 $ 17,782
NodeferredincometaxwasrecordedontherestatementasofJanuary1,2017duetodeferredincometaxassetsnotbeingrecognizedatthattime.Startinginthethirdquarterof2017,theadjustmentsincludetheircorrespondingincometaxeffectresultingina$16decreaseofthetaxrecoverypreviouslyrecordedintheconsolidatedstatementofoperations.
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AdoptionofthestandardimpactedtheCorporation’spreviouslyreportedconsolidatedstatementofoperationsasfollows.
(Canadiandollarsinmillions)
YearendedDecember31,
2017aspreviouslyreported
Reclassification Remeasurements YearendedDecember31,2017
asrestated
Operating revenues
Passenger $ 14,471 $ 122 $ - $ 14,593Cargo 650 58 - 708Other 1,131 (180) - 951Total revenues 16,252 - - 16,252
Operating expenses
Salesanddistributioncosts 777 - (7) 770Total operating expenses 14,888 - (7) 14,881Operating income 1,364 - 7 1,371Incometax(expense)recovery 759 - (16) 743Net income $ 2,038 $ - $ (9) $ 2,029Basicearningspershare $ 7.48 $ - $ (0.04) $ 7.44Dilutedearningspershare $ 7.34 $ - $ (0.03) $ 7.31
AdoptionofIFRS15didnothaveanynetimpactontheconsolidatedstatementofcashflows.
cc) Accounting standards and amendments issued but not yet adopted
ThefollowingisanoverviewofaccountingstandardchangesthattheCorporationwillberequiredtoadoptinfutureyears.TheCorporationcontinuestoevaluatetheimpactofthesestandardsonitsconsolidatedfinancialstatements.
IFRS16–Leases
IFRS16replacesIAS17Leasesandrelatedinterpretations.Thecoreprincipleisthatalesseerecognizesassetsandliabilitiesforallleaseswithaleasetermofmorethan12months.Alesseeisrequiredtorecognizearight-of-useassetrepresentingitsrighttousetheunderlyingleasedassetandaleaseliabilityrepresentingitsobligationtomakeleasepayments.Assetsandliabilitiesarisingfromaleaseareinitiallymeasuredonapresentvaluebasis.Themeasurementoftheleaseliabilityincludesnon-cancellableleasepayments(includinginflation-linkedpayments),andalsoincludespaymentstobemadeinoptionalperiodsifthelesseeisreasonablycertaintoexerciseanoptiontoextendthelease,ornottoexerciseanoptiontoterminatethelease.Purchaseoptionswhicharereasonablycertainofbeingexercisedarealsoincludedinthemeasurementoftheleaseliability.Leasepaymentswillnotincludevariableleasepaymentsotherthanthosethatdependonanindexorrate.Theright-of-useassetwillbederivedfromthecalculationoftheleaseliabilityandwillalsoincludeanyprovisionsthelesseewilloweforreturnconditionsonleasedassets.
Thenewstandardisintendedtoprovideanimprovedrepresentationofleasingtransactions,inparticularthosethatdonotcurrentlyrequirethelesseetorecognizeanassetandliabilityarisingfromanoperatinglease.IFRS16iseffectiveforannualperiodsbeginningonJanuary1,2019.EntitieshavetheoptionofadoptingafullretrospectiveapproachoramodifiedretrospectiveapproachontransitiontoIFRS16.
TheCorporationwillapplythestandardeffectiveJanuary1,2019andwilltransitionwithafullretrospectiveapproachwithrestatementtoeachpriorreportingperiodpresented.TheCorporationhaselectedthepackageofpracticalexpedientstonotreassesspriorconclusionsrelatedtocontractscontainingleasesandtoapplytherecognitionexemptionforshorttermleasesandcontractsforwhichtheunderlyingassethasalowvalue.
ThisstandardwillhaveasignificantimpactontheCorporation’sconsolidatedbalancesheet,alongwithachangetotherecognition,measurementandpresentationofleaseexpensesintheconsolidatedstatementofoperations.
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Aircraft LeasesAsofDecember31,2018theCorporationhad126aircraftunderoperatingleases(111aircraftasatDecember31,2017),andAirCanadawillrecordsuchaircraftasright-of-useassetsandleaseliabilitiesofAirCanadainaccordancewiththerequirementsofthenewstandard.Additionally,theCorporationhasidentifiedthat,underIFRS16,AirCanadaisthelesseeinrespectofaircraftusedbyregionalcarriersprovidingservicesundertherespectivecapacitypurchaseagreements(“CPA”),andwillrecordsuchaircraftasright-of-useassetsandleaseliabilitiesofAirCanada.AsatDecember31,2018,therewere132aircraft(134aircraftasatDecember31,2017)operatingunderthesearrangementsonbehalfofAirCanada.
Property LeasesTheCorporationhasleasesrelatedtoairportterminaloperationsspaceandotherrealestateleases.Forleasesrelatedtoterminaloperationsspace,therearegenerallyeffectivesubstitutionrightsinthehandsofthelessorandthereforethesearenotconsideredleasecontractsunderthestandard.Leaseswithreciprocalterminationrightswithanoticeperiodoflessthan12monthswouldbeconsideredshort-termleasesandthereforewouldbeexcludedfrombalancesheetrecognitionunderthepracticalexpedient.Finally,thoseairportterminalcontractswithvariableleasepaymentswillalsobeexcludedsincevariableleasepayments,otherthanthosebasedonanindexorrate,areexcludedfromthemeasurementoftheleaseliability.Thisresultsinaportfolioofpropertyleasesthatareexpectedtoberecordedasright-of-useassetsandleaseliabilitiesunderthestandardwhichrelatetodedicatedspaceinAirCanada’shublocationsofToronto,MontrealandVancouver,leasecontractsonbuildingspacededicatedtoAirCanadaforoffices,airportandmaintenanceoperations,MapleLeafLoungesandlandleases.
Accounting for Leases and Right-of-Use AssetsLeasesarerecognizedasaright-of-useassetandcorrespondingliabilityatthedateofwhichtheleasedassetisavailableforusebytheCorporation.Eachleasepaymentisallocatedbetweentheliabilityandinterestexpense.Theinterestcostischargedtotheconsolidatedstatementofoperationsovertheleaseperiodtoproduceaconstantperiodicrateofinterestontheremainingbalanceoftheliabilityforeachperiod.
Right-of-useassetswillbeaccountedforunderIAS16Property,PlantandEquipment.Aircraftrecordedasright-of-useassetswillhavethesameaccountingpoliciesasdirectlyownedaircraft,meaningtheright-of-useassetswillbecomponentizedanddepreciatedovertheleaseterm.Consistentwithownedaircraft,anyqualifyingmaintenanceeventswillbecapitalized
anddepreciatedoverthelesseroftheleasetermandexpectedmaintenancelife.
Maintenanceprovisionsforend-of-leasereturnobligationswillberecorded,asapplicable,onaircraftleasesasamaintenanceexpenseoverthetermofthelease.Anychangestotheprovisionforend-of-leaseconditionswillberecognizedasanadjustmenttotheright-of-useassetandsubsequentlyamortizedtotheincomestatementovertheremainingtermofthelease.
TheapplicationofIFRS16requiresassumptionsandestimatesinordertodeterminethevalueoftheright-of-useassetsandtheleaseliabilitieswhichmainlyrelatetotheimplicitinterestrateforaircraftleasesandtheincrementalborrowingrateatcommencementdateofthecontractforpropertyleases.Judgementmustalsobeappliedastowhetherrenewaloptionsarereasonablycertainofbeingexercised.
Income Statement ImpactsTheimpactsontheincomestatementwillbeaneliminationofaircraftrentandbuildingrent,whichisrecordedinotheroperatingexpenses,forthosecontractswhicharerecognizedasleases,andinsteadwillbereplacedbyanamortizationoftheright-of-useassetandinterestcostsontheleaseliability.Maintenanceexpenseisexpectedtodecreaseunderthestandardasqualifyingmaintenanceeventsfortheformeroperatingleaseswillbecapitalizedaspartoftheright-of-useassetanddepreciatedovertheirexpectedmaintenancelife.Thiswillbepartiallyoffsetbyhighermaintenanceprovisionexpenserecordedonallaircraftright-of-useassetswhichcontainendofleasemaintenancereturnconditions.RegionalairlinesexpenseisexpectedtodecreasetotheextentaircraftrentisremovedandrecordedindepreciationandinterestexpenseoutsideoftheRegionalsairlinesexpense.
SincealltheaircraftleasecontractsaredenominatedinUSdollars,theremaybeadditionalvolatilityintheforeignexchangerecognizedintheincomestatementduetotherevaluationoftheleaseliabilitiesandmaintenanceprovisionstotherateofexchangeineffectatthedateofthebalancesheet.
Anticipated impact to 2018 resultsSelectadjustedfinancialstatementinformation,whichreflectstheanticipatedimpactofadoptionofIFRS16onJanuary1,2018,ispresentedbelow.Lineitemsthatarenotexpectedtobeaffectedbythechangeinaccountingpolicyhavenotbeenincluded.Asaresult,thesub-totalsandtotalsdisclosedcannotberecalculatedfromthenumbersprovided.Insummary,thefollowingadjustmentsareanticipatedtobemadetotheamountsrecognizedintheconsolidatedstatementoffinancialpositionforthedateofinitialapplicationonJanuary1,2018.
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(Canadiandollarsinmillions)
December31,2017aspreviously
reported
AirCanadaaircraft Regionalaircraft
Propertyleases
Expected January 1, 2018
as restated
Accountsreceivable $ 814 $ (3) $ - $ - $ 811Depositsandotherassets 465 (63) - - 402Propertyandequipment 9,252 1,649 766 160 11,827Deferredincometax 456 71 144 13 684Total assets $ 17,782 $ 1,654 $ 910 $ 173 $ 20,519
Accountspayableandaccruedliabilities
1,961 (22) (12) - 1,927
Currentportionoflong-termdebtandleaseliabilities
671 357 146 12 1,186
Totalcurrentliabilities 5,101 335 134 12 5,582
Long-termdebtandleaseliabilities
5,448 1,452 1,092 198 8,190
Maintenanceprovisions 1,003 70 78 - 1,151Otherlong-termliabilities 167 (8) - - 159Total liabilities $ 14,360 $ 1,849 $ 1,304 $ 210 $ 17,723Retainedearnings 2,554 (195) (394) (37) 1,928Total shareholders’ equity $ 3,422 $ (195) $ (394) $ (37) $ 2,796
Total liabilities and shareholders’ equity
$ 17,782 $ 1,654 $ 910 $ 173 $ 20,519
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3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
ThepreparationoffinancialstatementsinconformitywithGAAPrequiresmanagementtomakeestimatesandassumptionsthataffecttheamountsreportedinthesefinancialstatementsandaccompanyingnotes.Theseestimatesandassociatedassumptionsarebasedonhistoricalexperience,futureoperatingplansandvariousotherfactorsbelievedtobereasonableunderthecircumstances,andtheresultsofsuchestimatesformthebasisofJudgementsaboutcarryingvaluesofassetsandliabilities.Theseunderlyingassumptionsarereviewedonanongoingbasis.Actualresultscoulddiffermateriallyfromthoseestimates.
Significantestimatesandjudgementsmadeinthepreparationofthesefinancialstatementsinclude,butarenotlimitedto,thefollowingareas,withfurtherinformationcontainedintheapplicableaccountingpolicyornote:
> Employeefuturebenefits
− ThecostandrelatedliabilitiesoftheCorporation’spensions,otherpost-retirementandpost-employmentbenefitprogramsaredeterminedusingactuarialvaluations.Theactuarialvaluationsinvolveassumptionsandestimatesincludingdiscountrates,futuresalaryincreases,mortalityratesandfuturebenefitincreases.Also,duetothelong-termnatureoftheseprograms,suchestimatesaresubjecttosignificantuncertainty.RefertoNote8foradditionalinformation.
> Depreciationandamortizationperiodforlong-livedassets
− TheCorporationmakesestimatesabouttheexpectedusefullivesoflong-livedassetsandtheexpectedresidualvalueoftheassetsbasedontheestimatedcurrentandfuturefairvaluesoftheassets,theCorporation’sfleetplansandthecashflowstheygenerate.Changestotheseestimates,whichcanbesignificant,couldbecausedbyavarietyoffactors,includingchangestomaintenanceprograms,changesinjetfuelpricesandotheroperatingcosts,changesinutilizationoftheaircraft,andchangingmarketpricesfornewandusedaircraftofthesameorsimilartypes.Estimatesandassumptionsareevaluatedatleastannually.Generally,theseadjustmentsareaccountedforonaprospectivebasis,throughdepreciationandamortizationexpense.Forthepurposesofsensitivityanalysisontheseestimates,a50%reductiontoresidualvaluesonaircraftwithremainingusefullivesgreaterthanfiveyearsresultsinanincreaseof$14toannualdepreciationexpense.Foraircraftwithshorterremainingusefullives,theresidualvaluesarenotexpectedtochangesignificantly.
> Impairmentconsiderationsonlong-livedassets
− Whenrequired,animpairmenttestisperformedbycomparingthecarryingamountoftheassetorcash-generatingunittotheirrecoverableamount,whichiscalculatedasthehigherofanasset’sorcash-generatingunit’sfairvaluelesscoststodisposeanditsvalueinuse.Fairvaluelesscoststodisposemaybecalculatedbaseduponadiscountedcashflowanalysis,whichrequiresmanagementtomakeanumberofsignificantmarketparticipantassumptionsincludingassumptionsrelatingtofutureoperatingplans,discountratesandfuturegrowthrates.
> Maintenanceprovisions
− Therecordingofmaintenanceprovisionsrelatedtoreturnconditionsonaircraftleasesrequiresmanagementtomakeestimatesofthefuturecostsassociatedwiththemaintenanceeventsrequiredundertheleasereturnconditionandestimatesoftheexpectedfuturemaintenanceconditionoftheaircraftatthetimeofleaseexpiry.Theseestimatestakeintoaccountcurrentcostsofthesemaintenanceevents,estimatesofinflationsurroundingthesecostsaswellasassumptionssurroundingutilizationoftherelatedaircraft.AnydifferenceintheactualmaintenancecostincurredandtheamountoftheprovisionisrecordedinAircraftmaintenanceexpenseintheperiod.Theeffectofanychangesinestimates,includingchangesindiscountrates,inflationassumptions,costestimatesorleaseexpiries,isalsorecognizedinAircraftmaintenanceexpenseintheperiod.RefertoNote9(a)foradditionalinformation.
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> Incometaxes
− Incometaxassetsandliabilitiesaremeasuredattheamountthatisexpectedtoberealizedorincurreduponultimatesettlementwithtaxationauthorities.Suchassessmentsarebasedupontheapplicableincometaxlegislation,regulationsandinterpretations,allofwhichmaybesubjecttochangeandinterpretation.Deferredincometaxassetsandliabilitiesarecomposedofthetaxeffectoftemporarydifferencesbetweenthecarryingamountandtaxbasisofassetsandliabilities,aswellastheincometaxeffectofundeductedincometaxlosses.Thetimingofthereversaloftemporarydifferencesisestimatedandtheincometaxratesubstantivelyenactedfortheperiodsofreversalisappliedtothetemporarydifference.Thecarryingamountsofassetsandliabilitiesaresubjecttotheaccountingestimatesthatareinherentinthosebalances.Assumptionsastothetimingofreversaloftemporarydifferencesincludeexpectationsaboutthefutureresultsofoperationsandfuturecashflows.Changesintaxlaws,taxratesorexpectedtimingofreversalmayhaveasignificantimpactontheamountsrecordedfordeferredincometaxassetsandliabilities.RefertoNote10Incometaxesforadditionalinformation.
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4. PROPERTY AND EQUIPMENT
Aircraft and flight equipment
Buildings and leasehold improvements
Ground and other equipment
Purchase deposits and assets under development
Total
Year ended December 31, 2017AtJanuary1,2017 $ 7,030 $ 409 $ 184 $ 897 $ 8,520Additions 1,769 8 29 573 2,379Reclassifications 309 62 36 (407) -Disposals (713) - - - (713)Depreciation (852) (41) (41) - (934)AtDecember31,2017 $ 7,543 $ 438 $ 208 $ 1,063 $ 9,252
At December 31, 2017Cost $ 11,320 $ 899 $ 545 $ 1,063 $ 13,827Accumulateddepreciation (3,777) (461) (337) - (4,575)
$ 7,543 $ 438 $ 208 $ 1,063 $ 9,252
Year ended December 31, 2018AtJanuary1,2018 $ 7,543 $ 438 $ 208 $ 1,063 $ 9,252Additions 1,579 - 31 429 2,039Reclassifications 517 42 - (559) -Disposals (496) - - - (496)Depreciation (980) (44) (42) - (1,066)AtDecember31,2018 $ 8,163 $ 436 $ 197 $ 933 $ 9,729
At December 31, 2018Cost $ 12,123 $ 924 $ 567 $ 933 $ 14,547Accumulateddepreciation (3,960) (488) (370) - (4,818)
$ 8,163 $ 436 $ 197 $ 933 $ 9,729
AsatDecember31,2018,propertyandequipmentincludedfinanceleasedassetsincluding8aircraft(2017–9)withanetbookvalueof$96(2017–$104)andfacilitieswithanetbookvalueof$32(2017–$34).
Includedinaircraftandflightequipmentare21aircraftand16spareengines(2017–21aircraftand14spareengines)whichareleasedtoCPAcarrierswithacostof$395(2017–$387)lessaccumulateddepreciationof$157(2017–$142)foranetbookvalueof$238(2017–$245).Depreciationexpensefor2018fortheseaircraftandflightequipmentamountedto$25(2017–$21).
AsfurtherdescribedinNote21,during2018,theCorporationsold25Embraer190aircraftwithacostof$789lessaccumulateddepreciationof$308foranetbookvalueof$481.
CertainpropertyandequipmentarepledgedascollateralasfurtherdescribedundertheapplicabledebtinstrumentinNote7.TherearenoimpairmentsrecordedasatDecember31,2018.
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5. INTANGIBLE ASSETS
International route rights
and slots
Marketing based trade
names
Technology based
(internally developed)
Total
Year ended December 31, 2017AtJanuary1,2017 $ 97 $ 88 $ 130 $ 315Additions - - 41 41Amortization - - (38) (38)AtDecember31,2017 $ 97 $ 88 $ 133 $ 318
At December 31, 2017Cost $ 97 $ 88 $ 458 $ 643Accumulatedamortization - - (325) (325)
$ 97 $ 88 $ 133 $ 318
Year ended December 31, 2018AtJanuary1,2018 $ 97 $ 88 $ 133 $ 318Additions - - 122 122Amortization - - (36) (36)AtDecember31,2018 $ 97 $ 88 $ 219 $ 404
At December 31, 2018Cost $ 97 $ 88 $ 579 $ 764Accumulatedamortization - - (360) (360)
$ 97 $ 88 $ 219 $ 404
In2018,technology-basedassetswithcostof$1(2017–$38)andaccumulatedamortizationof$1(2017–$38)wereretired.
CertaininternationalrouterightsandslotsarepledgedassecurityforseniorsecurednotesasdescribedinNote7.
Anannualimpairmentreviewisconductedonallintangibleassetsthathaveanindefinitelife.Internationalrouterightsandslotsandmarketingbasedtradenamesareconsideredtohaveanindefinitelife.Theimpairmentreviewiscarriedoutatthecash-generatingunitlevel.Onthisbasis,animpairmentreviewwasperformedatthenarrow-bodyandwide-bodyfleetlevelsforaircraftandrelatedassetssupportingtheoperatingfleet.Theallocationoftheindefinitelivedintangibleassetstothecash-generatingunitswas$138towide-bodyand$47tonarrow-body.
Therecoverableamountofthecash-generatingunitshasbeenmeasuredbasedonthefairvaluelesscosttodispose,usingadiscountedcashflowmodel.Thediscountedcashflowmodelwouldrepresentalevel3fairvaluemeasurementwithintheIFRS13fairvaluehierarchy.CashflowprojectionsarebasedontheannualbusinessplanapprovedbytheBoardofDirectorsofAirCanada.Inaddition,management-developedprojectionsaremadecoveringafive-yearperiod.Thesecashflowsaremanagement’sbestestimateoffutureeventstakingintoaccountpastexperienceandfutureeconomicassumptions,suchastheforwardcurvesforcrude-oilandtheapplicableexchangerates.Cashflowsbeyondthefive-yearperiodareprojectedtoincreaseconsistentwiththelong-termgrowthassumptionoftheairlineindustryconsideringvariousfactorssuchastheCorporation’sfleetplansandindustrygrowthassumptions.ThediscountrateappliedtothecashflowprojectionsisderivedfrommarketparticipantassumptionsregardingtheCorporation’sweightedaveragecostofcapitaladjustedfortaxesandspecificrisksassociatedwiththecash-generatingunitbeingtested.
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Duetotherecoverableamountexceedingthecarryingvalueofthecashgeneratingunitsbyasignificantmargin,themostrecentcalculationfromthe2017periodwascarriedforwardandusedintheimpairmenttestinthecurrentperiod.Keyassumptionsusedforthefairvaluelesscoststodisposecalculationsinfiscal2017wereasfollows:
2017
Discountrate 12.6%Long-termgrowthrate 2.5%Jetfuelpricerangeperbarrel US$66–US$79
Therecoverableamountofbothcash-generatingunitsexceededtheirrespectivecarryingvaluesbyanaggregateamountofapproximately$7,400.ReasonablypossiblechangesinkeyassumptionswouldnotcausetherecoverableamountofeachCGUtobelessthanthecarryingvalue.
6. GOODWILL
Goodwillistestedatleastannuallyforimpairment.Forthepurposeofimpairmenttesting,goodwillistestedforimpairmentusingthefairvaluelesscosttodisposemodelattheoperatingsegmentlevel.AirCanadaismanagedasoneoperatingsegmentbasedonhowfinancialinformationisproducedinternallyforthepurposesofmakingoperatingdecisions,anditisthelowestlevelatwhichgoodwillismonitoredforinternalmanagementpurposes.
Inassessingthegoodwillforimpairment,theCorporationcomparestheaggregaterecoverableamountconsistingofthesumofitsquotedequitymarketcapitalizationandthefairvalueofitsdebttothecarryingvalueofitsnetassetsexcludinglongtermdebt.Animpairmentchargeisrecognizedtotheextentthatthecarryingvalueexceedstherecoverableamount.Noimpairmentlosseshavebeenrecordedagainstthevalueofgoodwillsinceitsacquisition.
NoimpairmentchargeshavearisenasaresultofthereviewsperformedasatDecember31,2018and2017.Reasonablypossiblechangesinkeyassumptionswouldnotcausetherecoverableamountofgoodwilltofallbelowthecarryingvalue.
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7. LONG-TERM DEBT AND FINANCE LEASES
Final Maturity
Weighted Average Interest Rate (%)
2018 2017
Aircraftfinancing(a)FixedrateU.S.dollarfinancing 2020–2030 3.84 $ 3,592 $ 2,828FloatingrateU.S.dollarfinancing 2020–2027 4.39 676 871FixedrateCDNdollarfinancing 2026–2030 3.76 287 -FloatingrateCDNdollarfinancing 2026–2027 2.89 298 332FixedrateJapaneseyenfinancing 2027 1.84 146 131FloatingrateJapaneseyenfinancing 2020–2027 0.88 42 61
Seniorsecurednotes–CDNdollar(b) 2023 4.75 200 200Seniorunsecurednotes–U.S.dollar(c) 2021 7.75 546 503Othersecuredfinancing–U.S.dollar(b) 2023 4.52 786 1,073Long-term debt 4.22 6,573 5,999Financeleaseobligations(d) 2020-2033 9.27 187 223Total debt and finance leases 4.36 6,760 6,222Unamortizeddebtissuancecosts (108) (103)Currentportion (455) (671)Long-term debt and finance leases $ 6,197 $ 5,448
(a) Aircraftfinancing(US$3,130,C$585andJPY¥15,155)(2017–US$2,943,C$332andJPY¥17,208)issecuredprimarilybyspecificaircraftwithacarryingvalueof$5,575(2017–$5,230).Forthemajorityofthefinancing,principalandinterestisrepayablequarterlyuntilmaturityandcanberepaidatanytimewiththepaymentofapplicablefees.US$222,C$298andJPY¥2,482ofthefinancingissupportedbyaloanguaranteebytheExport-ImportBankoftheUnitedStates(“EXIM”).
In2018,inconnectionwiththefinancingoftheacquisitionofonenewBoeing787-9aircraftandfournewBoeing737MAX-8aircraft,AirCanadaenteredintoacertificatepurchaseagreementforaprivateofferingoftwotranchesofenhancedequipmenttrustcertificateswithacombinedaggregatefaceamountof$301andaweightedaverageinterestrateof3.76%perannum,andafinalexpectedmaturitydateof2030.Proceedsfromtheofferingweredisbursedfollowingdeliveryoftheaircraft.TheseproceedsareincludedinfixedrateCDNdollarfinancinginthetableabove.
In2017,inconnectionwiththefinancingoffournewBoeing787-9andninenewBoeing737MAX-8aircraft,AirCanadacompletedtheclosingofaprivateofferingofthreetranchesofenhancedequipmenttrustcertificates(“EETC”)withacombinedaggregatefaceamountofUS$719.TheprivateofferingwascomprisedofClassAAcertificates,ClassAcertificates,andClassBcertificateswithfinalexpectedmaturitydatesbetween2026and2030.Thethreetranchesof
certificateshaveacombinedweightedaverageinterestrateof3.42%.Proceedsfromtheofferingweredisbursedduring2018followingdeliveryoftheaircraft.TheprincipalamountofUS$719isincludedinfixedrateU.S.dollarfinancinginthetableabove.Financingfeespaidinconjunctionwiththeofferingin2017were$10andarereportedinFinancingontheconsolidatedstatementofcashflow.
In2017,inconnectionwiththeacquisitionoffourBoeing787-9aircraft,theCorporationcompletedafinancing,maturingin2027andcomprisedofaprincipalofUS$439subjecttoafloatingrate,JPY¥11,743subjecttoafixedrateandJPY¥1,247subjecttoafloatingrate.ThesefinancingsweresecuredusingJapaneseOperatingLeaseswithaCallOption(“JOLCO”)structureswiththetransactionsrecordedasloansandtheaircraftasownedforaccountingpurposesintheCorporation’sconsolidatedfinancialstatements.Financingfeespaidin2017inconnectionwiththeJOLCOstructureswere$13andarereportedinFinancingontheconsolidatedstatementofcashflow.
InconnectionwiththesalestransactiondescribedinNote21,long-termdebtof$144(US$109)relatedtotheEmbraer190aircraftwasrepaidin2018.ThelossrecordedinGain(loss)ondebtsettlementsandmodificationsinrespectoftheprepaymentofsuchdebtwas$2.
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During2018,principalofUS$35wasprepaidrelatingtothefinancingofthreeBoeing777aircraft.ThelossrecordedinGain(loss)ondebtsettlementsandmodificationsinrespectoftheprepaymentofsuchdebtwaslessthan$1.
During2017,principalofUS$27wasprepaidrelatingtothefinancingofoneA330aircraftandprincipalofUS$25relatingtothefinancingoffourEmbraer190aircraft.Alossof$5isincludedinGain(loss)ondebtsettlementsandmodificationsrelatedtotheprepaymentofsuchfixedratedebt.
(b) InOctober2016,aspartofarefinancingtransaction,AirCanadaenteredintoapurchaseagreementwithasyndicateofinitialpurchasersrelatingtoaprivateofferingof$200aggregateprincipalamountof4.75%seniorsecuredfirstliennotesdue2023(the“2016SeniorNotes”),whichweresoldatpar.AirCanadaalsoreceivedproceedsofaUS$800termloan,maturingin2023,andenteredintoanewUS$300revolvingcreditfacilityexpiringin2021(collectivelywiththetermloan,the“2016CreditFacility”).Therevolvingcreditfacilityhadaninitialinterestrateof275basispointsoverLIBOR(subjecttoaLIBORfloorof75basispoints).
InJune2017,AirCanadacompletedarepricingofitsUS$1.1billion2016CreditFacility,reducingtheinterestrateby50basispoints,toaninterestrateof225basispointsoverLIBOR(subjecttoaLIBORfloorof75basispoints).TheCorporationrecordeda$27Gainondebtsettlementsandmodificationsrelatedtothistransaction.
InFebruary2018,AirCanadacompletedasecondrepricingofitsUS$1.1billion2016CreditFacility,reducingtheinterestrateby25basispoints,toaninterestrateof200basispointsoverLIBOR(subjecttoaLIBORfloorof75basispoints).TheCorporationrecordedan$11Gainondebtsettlementsandmodificationsrelatedtothistransaction.
InDecember2018,AirCanadaamendedthe2016CreditFacility.TheamendmenthadtheeffectofincreasingtherevolvingcreditfacilitytoUS$600,reducingtheoutstandingtermloantoUS$600,concurrentwiththeadditionalrepaymentofUS$192ofoutstandingtermloan,andextendingtherevolvingloancommitmentterminationdateto2023.Thisrepaymentwasmadewithintheinitialtermsoftheloanagreement.
InDecember2018,AirCanadaenteredintoanew$200revolvingcreditfacility.Thefacilityisavailableuntil2021and,ifdrawn,wouldbesecuredbycertaindesignatedaircraft.NoamountshavebeendrawnonthefacilityatDecember31,2018.
AirCanadamayredeemsomeorallofthe2016SeniorNotesatanytimeonorafterOctober6,2019atcertainestablishedredemptionprices,plusaccruedandunpaidinterest.AtanytimepriortoOctober6,2019,AirCanadamayredeemsomeorallofthe2016SeniorNotesatapriceequalto100%oftheirprincipalamountredeemedplusa“make-whole”premiumandaccruedandunpaidinterest.AtanytimepriortoOctober6,2019,AirCanadamayredeemupto35%oftheaggregateprincipalamountofthe2016SeniorNoteswiththeproceedsofcertainequityofferings,atestablishedredemptionprices,plusaccruedandunpaidinterest.Inaddition,atanytimeandfromtimetotimepriortoOctober6,2021,AirCanadamayredeem,duringanytwelve-monthperiod,upto10%oftheoriginalaggregateprincipalamountofthe2016SeniorNotesataredemptionpriceof103%oftheprincipalamount,plusaccruedandunpaidinterest.
The2016SeniorNotesandtheCorporation’sobligationsunderthe2016CreditFacilityareseniorsecuredobligationsofAirCanada,securedonafirstlienbasis,subjecttocertainpermittedliensandexclusions,bycertainrealestateinterests,groundserviceequipment,certainairportslotsandgateleaseholds,andcertainPacificroutesandtheairportslotsandgateleaseholdsutilizedinconnectionwiththosePacificroutes.
OtherU.S.dollarsecuredfinancingsarefloatingratefinancingsthataresecuredbycertainassetsincludingassetsdescribedaboverelatingtothe2016CreditFacility.Asdescribedabove,during2018,theCorporationprepaidUS$192oftheoutstandingtermloan.AsatDecember31,2018,theCorporationhadnotdrawnontherevolvingcreditfacilityandtheoutstandingtermloanprincipalwasUS$598(2017-US$798principal).
(c) PrivateofferingofUS$400of7.75%seniorunsecurednotesdue2021,withinterestpayablesemi-annually.AirCanadamayatanytimeandfromtimetotimeredeemsomeoralloftheseniorunsecurednotesataredemptionpriceequaltothegreaterof(i)100%oftheprincipalamountofthenotesbeingredeemedand(ii)a“make-whole”amount,ifany,plus,ineithercaseaccruedandunpaidinterest.
(d)Financeleases,relatedtofacilitiesandaircraft,total$187($61andUS$92)(2017-$223($64andUS$126)).During2018,theCorporationrecordedinterestexpenseonfinanceleaseobligationsof$19(2017–$23).Thecarryingvalueofaircraftandfacilitiesunderfinanceleasesamountedto$96and$32respectively(2017–$104and$34).
CashinterestpaidonLong-termdebtandfinanceleasesin2018bytheCorporationwas$281(2017–$287).
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Maturity Analysis
PrincipalandinterestrepaymentrequirementsasatDecember31,2018onLong-termdebtandfinanceleaseobligationsareasfollows.U.S.dollaramountsareconvertedusingtheDecember31,2018closingrateofC$1.3637.
2019 2020 2021 2022 2023 Thereafter Total
PrincipalLong-termdebtobligations $407 $640 $ 1,003 $ 342 $ 1,450 $ 2,731 $ 6,573Financeleaseobligations 48 50 17 15 16 41 187
$ 455 $ 690 $ 1,020 $ 357 $ 1,466 $ 2,772 $ 6,760
Interest Long-termdebtobligations 273 258 214 176 151 346 1,418Financeleaseobligations 14 10 6 5 4 10 49
$ 287 $ 268 $ 220 $ 181 $ 155 $ 356 $ 1,467
Principalrepaymentsinthetableaboveexcludetransactioncostsof$108whichareoffsetagainstLong-termdebtandfinanceleasesintheconsolidatedstatementoffinancialposition.
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Cash flows from financing activities
Informationonthechangeinliabilitiesforwhichcashflowshavebeenclassifiedasfinancingactivitiesinthestatementofcashflowsispresentedbelow.
Cash Flows Non-Cash Changes
January 1, 2018
Borrowings Repayments Financing Fees
Foreign exchange
adjustments
Amortization of Financing
Fees
OtherNon-Cash
Adjustments
December 31, 2018
Longtermdebt $ 5,999 $ 1,210 $ (1,122) $ - $ 492 $ - $ (6) $ 6,573Leaseliabilities 223 - (45) - 9 - - 187
Unamortizeddebtissuancecosts
(103) - - (12) - 20 (13) (108)
Total liabilities from financing activities
$ 6,119 $ 1,210 $ (1,167) $ (12) $ 501 $ 20 $ (19) $ 6,652
Cash Flows Non-Cash Changes
January1,2017
Borrowings Repayments FinancingFees
Foreignexchange
adjustments
AmortizationofFinancing
Fees
OtherNon-Cash
Adjustments
December31,2017
Longtermdebt $ 6,447 $ 733 $ (766) $ - $ (392) $ - $ (23) $ 5,999Leaseliabilities 275 - (42) - (10) - - 223
Unamortizeddebtissuancecosts
(104) - - (16) - 17 - (103)
Total liabilities from financing activities
$ 6,618 $ 733 $ (808) $ (16) $ (402) $ 17 $ (23) $ 6,119
In2017,financingfeesof$10paidinconjunctionwiththe2017EETCofferingwerereportedinFinancingontheconsolidatedstatementofcashflowbutexcludedfromthistable.ThesefeeswererecordedinDepositsandotherassetsuntildeliveryoftheaircraftandrelatedrecognitionoflong-termdebt.Lossondebtsettlementsof$3(2017-$6)isincludedinReductionoflong-termdebtandfinanceleaseobligationsontheconsolidatedstatementofcashflowbutexcludedfromthistable.
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8. PENSIONS AND OTHER BENEFIT LIABILITIES
TheCorporationmaintainsseveraldefinedbenefitanddefinedcontributionplansprovidingpension,otherpost-retirementandpost-employmentbenefitstoitsemployees.
TheCorporationistheadministratorandsponsoringemployerofeightDomesticRegisteredPlans(“DomesticRegisteredPlans”)withdefinedbenefitcommitmentsregisteredunderthePensionBenefitsStandardAct,1985(Canada).TheU.S.plan,UKplanandJapanplanareinternationalplanscoveringmembersinthosecountries.Inaddition,theCorporationmaintainsanumberofsupplementarypensionplanswhicharenotregistered.Thedefinedbenefitpensionplansprovidebenefitsuponretirement,terminationordeathbasedonthemember’syearsofserviceandfinalaverageearningsforaspecifiedperiod.Benefitpaymentsarefromtrustee-administeredfunds,howevertherearealsoanumberofunfundedplanswheretheCorporationmeetsthebenefitpaymentobligationasitfallsdue.Planassetsheldintrustsaregovernedbyregulations.Thegovernanceoftheplans,overseeingallaspectsoftheplansincludinginvestmentdecisionsandcontributions,liesprimarilywiththeCorporation.TheHumanResourcesandCompensationCommittee,acommitteeoftheBoardofDirectors,assistsinthemonitoringandoversightoftheplanstoensurepensionliabilitiesareappropriatelyfunded,pensionassetsareprudentlyinvested,riskismanagedatanacceptablelevelandretirementbenefitsareadministeredinaproperandeffectivemanner.
Otheremployeebenefitsincludehealth,lifeanddisability.Thesebenefitsconsistofbothpost-employmentandpost-retirementbenefits.Thepost-employmentbenefitsrelatetodisabilitybenefitsavailabletoeligibleactiveemployees,whilethepost-retirementbenefitsarecomprisedofhealthcareandlifeinsurancebenefitsavailabletoeligibleretiredemployees.
Pension Plan Cash Funding Obligations
Pensionfundingobligations(includingprojectedfundingobligations)mayvarysignificantlybasedonawidevarietyoffactors,includingtheassumptionsusedinthemostrecentlyfiledactuarialvaluationreports(includingtheapplicablediscountrateusedorassumedintheactuarialvaluation),theplandemographicsatthevaluationdate,theexistingplanprovisions,legislativeandregulatorydevelopmentsandchangesineconomicconditions(mainlythereturnonplanassetsandchangesininterestrates)andotherfactors.Actualcontributionsthataredeterminedonthebasisoffuturevaluationreportsmayvarysignificantlyfromprojections.
AsatJanuary1,2018,theaggregatesolvencysurplusinthedomesticregisteredpensionplanswas$2.6billion.ThenextrequiredvaluationtobemadeasatJanuary1,2019willbecompletedinthefirsthalfof2019.WiththeCorporation’sdomesticregisteredpensionplansinasolvencysurpluspositionasatJanuary1,2018,pastservicecostpaymentswerenotrequiredin2018.Inaddition,inaccordancewithlegislationandapplicableplanrules,theexcessover105%onasolvencybasiscanbeusedtoreducecurrentservicecontributionsunderthedefinedbenefitcomponentortofundtheemployercontributiontoadefinedcontributioncomponentwithinthesamepensionplan.Basedonthat,andincludingtheinternationalandsupplementalplans,thetotalemployerpensionfundingcontributionsduring2018amountedto$83($94employercontributionnetof$11usedtofundemployercontributionindefinedcontributioncomponentsofthesameplans).Pensionfundingobligationsfor2019areexpectedtobe$93.
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Benefit Obligation and Plan Assets
TheseconsolidatedfinancialstatementsincludealloftheassetsandliabilitiesofallCorporation-sponsoredplans.Theamountsrecordedinthestatementoffinancialpositionareasfollows:
Pension Benefits
Other Employee
Future Benefits
Total
2018 2017 2018 2017 2018 2017
Non-current assetsPensionassets $ 1,969 $ 1,583 $ - $ - $ 1,969 $ 1,583Current liabilitiesAccountspayableandaccruedliabilities - - 60 61 60 61Non-current liabilities Pensionandotherbenefitliabilities 1,328 1,311 1,219 1,281 2,547 2,592Net benefit obligation (asset) $ (641) $ (272) $ 1,279 $ 1,342 $ 638 $ 1,070
Thecurrentportionofthenetbenefitobligationrepresentsanestimateofotheremployeefuturebenefitsclaimstobepaidduring2019.
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Thefollowingtablepresentsfinancialinformationrelatedtothechangesinthepensionandotherpost-employmentbenefitsplans:
Pension Benefits
Other Employee
Future Benefits
2018 2017 2018 2017
Change in benefit obligationBenefitobligationatbeginningofyear $ 20,260 $ 19,135 $ 1,342 $ 1,301Currentservicecost 304 265 35 30Pastservicecost 5 - (8) -Interestcost 723 739 48 51Employees’contributions 82 81 - -Benefitspaid (862) (845) (48) (47)Remeasurements:
Experienceloss(gain) (11) 34 (28) (45)Loss(gain)fromchangeindemographicassumptions (262) - (14) -Loss(gain)fromchangeinfinancialassumptions (583) 855 (56) 64
Plansettlements - - (6) -Foreignexchangeloss(gain) 34 (4) 14 (12)Totalbenefitobligation 19,690 20,260 1,279 1,342Change in plan assetsFairvalueofplanassetsatbeginningofyear 21,191 19,438 - -
Returnonplanassets,excludingamountsincludedinNetfinancingexpense
(399) 1,708 - -
Interestincome 745 739 - -Employercontributions 83 81 51 47Employees’contributions 82 81 - -Benefitspaid (862) (845) (48) (47)Settlements - - (3) -Administrativeexpensespaidfromplanassets (12) (12) - -Foreignexchangegain(loss) 29 1 - -Totalplanassets 20,857 21,191 - -(Surplus) deficit at end of year (1,167) (931) 1,279 1,342Assetceiling/additionalminimumfundingliability 526 659 - -Net benefit obligation (asset) $ (641) $ (272) $ 1,279 $ 1,342
Theactualreturnonplanassetswas$346(2017–$2,447).
Thepensionbenefitdeficitofonlythoseplansthatarenotfullyfundedisasfollows:
2018 2017
Domesticregisteredplans $ 4 $ 3Internationalplans 85 78Supplementaryplans 1,239 1,230
$ 1,328 $ 1,311
Theweightedaveragedurationofthedefinedbenefitobligationis14.2years(2017–14.3years).
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Pension and Other Employee Future Benefit Expense
TheCorporationhasrecordednetdefinedbenefitpensionandotheremployeefuturebenefitsexpenseasfollows:
Pension Benefits
Other Employee
Future Benefits
2018 2017 2018 2017
Consolidated Statement of OperationsComponentsofcost
Currentservicecost $ 304 $ 265 $ 35 $ 30Pastservicecost 5 - (8) -Plansettlements - - (3) -Administrativeandotherexpenses 12 12 - -Actuarialgains,includingforeignexchange - - (4) (7)
Total cost recognized in Wages, salaries and benefits $ 321 $ 277 $ 20 $ 23Net financing expense relating to employee benefits $ 2 $ 14 $ 48 $ 51Total cost recognized in statement of operations $ 323 $ 291 $ 68 $ 74Consolidated Other Comprehensive (Income) LossRemeasurements:Experienceloss(gain),includingforeignexchange (6) 29 (10) (50)Loss(gain)fromchangeindemographicassumptions (262) - (14) -Loss(gain)fromchangeinfinancialassumptions (583) 855 (56) 64Returnonplanassets 399 (1,708) - -Changeinassetceiling (159) 299 - -Total cost (income) recognized in OCI $ (611) $ (525) $ (80) $ 14
In2018,theCorporationofferedavoluntarybuyoutprogramforretireelifeandhealthbenefits.Theacceptedofferswererecognizedasaplanamendmentandsettlementforacombinedgainof$8.
Certainplanamendmentsmadeinconjunctionwiththe2014ACPAcollectiveagreementwereorareconditionalonmeetingdefinedbusinessplantargetstiedtothenumberofoperatingaircraftinthefleetby2020and2023.DuringtheyearendedDecember31,2018,actuariallossesof$43(2017-actuariallossesof$35)wererecognizedinothercomprehensiveincomerelatedtochangesinassumptionsassociatedwithcostofpensionincreasesapplicabletoaffectedmembersofACPA.
Thefundingofemployeebenefitsascomparedtotheexpenserecordedintheconsolidatedstatementofoperationsissummarizedinthetablebelow.
2018 2017
Net defined pension and other future employee benefits expense recorded in the consolidated statement of operations
Wages,salariesandbenefits $ 341 $ 300Netfinancingexpenserelatingtoemployeebenefitliabilities 50 65
$ 391 $ 365Employee benefit funding by Air Canada Pensionbenefits $ 83 $ 81Otheremployeebenefits 51 47
$ 134 $ 128Employee benefit funding less than expense $ 257 $ 237
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Composition of Defined Benefit Pension Plan Assets
Domestic Registered PlansThecompositionoftheDomesticRegisteredPlanassetsandthetargetallocationarethefollowing:
2018 2017 TargetAllocation
Bonds 71% 70% 60%Canadianequities 3% 3% 7%Foreignequities 6% 7% 13%Alternativeinvestments 20% 20% 20%
100% 100% 100%
FortheDomesticRegisteredPlanassets,approximately80%ofassetsasofDecember31,2018haveaquotedmarketpriceinanactivemarket.Assetsthatdonothaveaquotedmarketpriceinanactivemarketaremainlyinvestmentsinprivatelyheldentities.Theassetcompositioninthetablerepresentstheallocationofplanassetstoeachassettype.
Includedinplanassets,fordeterminingthenetbenefitobligationforaccountingpurposes,are17,646,765(2017-17,646,765)sharesofAirCanadawhichwereissuedtoatrustin2009inconnectionwithpensionfundingagreementsreachedwithalloftheCorporation’sCanadian-basedunions.Thetrustarrangementprovidesthatproceedsofanysaleofthetrustshareswillberetainedandappliedtoreducefuturepensionsolvencydeficits,ifanyshouldmaterialize.WiththeCorporation’sdomesticregisteredpensionplansnowinasurpluspositiononasolvencybasis,theaccountingrulespreventtherecognitionofthevalueofthesharesheldintrustaspartofthepensionassets.Thesharesheldintrusthaveafairvalueof$458atDecember31,2018(2017-$457),howeveraftergivingeffecttotheassetceiling,therecognizedaccountingvalueofthetrustassetisnil.
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FortheDomesticRegisteredPlans,theinvestmentsconformtotheStatementofInvestmentPolicyandObjectivesoftheAirCanadaPensionFunds.Aspermittedundertheinvestmentpolicy,theactualassetmixmaydeviatefromthetargetallocationfromtimetotime.ThedeviationsatDecember31,2018arewithinthelimitsestablishedintheinvestmentpolicy.Theinvestmentreturnobjectiveistoachieveatotalannualizedrateofreturnthatexceedsbyaminimumof1.0%beforeinvestmentfeesonaverageoverthelongterm(i.e.10years)thetotalannualizedreturnthatcouldhavebeenearnedbypassivelymanagingtheLiabilityReplicatingPortfolio.TheLiabilityReplicatingPortfolio,whichisreferencedtowidelyusedCanadianfixedincomeindices(FTSETMXCanada),closelymatchesthecharacteristicsofthepensionliabilities.
Recognizingtheimportanceofsurplusriskmanagement,AirCanadamanagestheDomesticRegisteredPlansinanefforttomitigatesurplusrisk(definedasthedifferencebetweenassetvalueandpensionliabilityvalue),whichisconsideredtobethekeyrisktobeminimizedandmonitored.Inaddition,theobjectiveoftheinvestmentstrategyistoinvesttheplanassetsinaprudentanddiversifiedmannertomitigatetheriskofpricefluctuationofassetclassesandindividualinvestmentswithinthoseassetclassesandtocombinethoseassetclassesandindividualinvestmentsinanefforttoreduceoverallrisk.
Inadditiontothebroadassetallocation,assummarizedintheassetallocationsectionabove,thefollowingpoliciesapplytoindividualassetclassesinvestedwithinthepensionfunds:
> Equitiesarerequiredtobediversifiedamongregions,industriesandeconomicsectors.Limitationsareplacedontheoverallallocationtoanyindividualsecurity.
> Alternativeinvestmentsareinvestmentsinnon-publiclytradedsecuritiesandinnon-traditionalassetclasses.Theymaycomprise,butarenotlimitedto,investmentsinrealestate,agriculture,timber,privateequity,venturecapital,infrastructure,emergingmarketsdebt,highyieldbondsandcommodityfutures.Alternativeinvestmentsarerequiredtobediversifiedbyassetclass,strategy,sectorandgeography.
> Canadianbondsareorientedtowardlongterminvestmentgradesecuritiesrated“BBB”orhigher.WiththeexceptionofGovernmentofCanadasecuritiesoraprovincethereofortheU.S.Government,inwhichtheplanmayinvesttheentirefixedincomeallocation,theseinvestmentsarerequiredtobediversifiedamongindividualsecuritiesandsectors.
Derivativesarepermittedprovidedthattheyareusedformanagingaparticularrisk(includinginterestrateriskrelatedtopensionliabilities)ortocreateexposurestogivenmarketsandcurrenciesandthatcounterpartieshaveaminimumcreditratingofA.TheCorporationmanagesinterestrateriskrelatedtoitsactuarialliabilitiesthroughacombinationoffinancialinstrumentsincluding,butnotlimitedto,bonds,bondrepurchaseandreverserepurchaseagreements,bondforwards,bondfuturesandinterestrateswaps.AsatDecember31,2018,takingintoaccounttheeffectofsuchfinancialinstrumentriskmanagementtools,approximately81%ofAirCanada’spensionliabilitieswerematchedwithfixedincomeproductstomitigateasignificantportionoftheinterestrate(discountrate)risk.Counterpartycreditriskassociatedwithsuchfinancialinstrumentsismitigatedbyreceivingcollateralfromcounterpartiesbasedoncollateralizationagreements,aswellasbymonitoringthecounterparties’creditratingsandensuringcompliancewiththeinvestmentpolicy.ThefairvalueofthesederivativeinstrumentsisincludedintheBondsintheassetcompositiontableandisnotasignificantcomponentoftheaggregatebondfairvaluesoftheportfolio.
Thetrustsforthesupplementalplansareinvested50%inindexedequityinvestments,inaccordancewiththeirinvestmentpolicies,withtheremaining50%heldbytheCanadaRevenueAgencyasarefundabletax,inaccordancewithtaxlegislation.
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Risks
Throughitsdefinedbenefitpensionplans,theCorporationisexposedtoanumberofrisks,themostsignificantofwhicharedetailedbelow:
Assetrisk
Assetriskistheriskthatthefairvalueoffuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarketprice.Assetriskcomprisescurrencyrisk,creditrisk,andotherpricerisk.Currencyriskistheriskthatthefairvalueorfuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinforeignexchangerates.Thisriskismitigatedthroughimplementationofhedgingstrategies.Creditriskistheriskthatonepartytoafinancialinstrumentwillcauseafinanciallossfortheotherpartybyfailingtodischargeanobligation.Thisriskismitigatedbyreceivingcollateralfromcounterpartiesbasedoncollateralizationagreementsandbymonitoringtheissuers’creditrisk.Otherpriceriskistheriskthefairvalueorfuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarketprices(otherthanthosearisingfromcurrencyrisk),whetherthosechangesarecausedbyfactorsspecifictotheindividualfinancialinstrumentoritsissuer,orfactorsaffectingallsimilarfinancialinstrumentstradedinthemarket.Thisriskismitigatedthroughproperdiversificationofplanassets.
Interestraterisk
Interestrateriskistheriskthatthefairvalueoffuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarketinterestrates.Adecreaseincorporateand/orgovernmentbondyieldswillincreaseplanliabilities,whichwillbepartiallyoffsetbyanincreaseinthevalueoftheplans’bondholdings.AsatDecember31,2018,approximately81%ofAirCanada’spensionliabilities(includingtheeffectoffinancialinstrumentriskmanagementtools)werematchedwithfixedincomeproductstomitigateasignificantportionoftheinterestraterisk(discountraterisk).
Fundingrisk
Adversechangesinthevalueofplanassetsorininterestrates,andthereforeinthediscountrateusedtovalueliabilities,couldhaveasignificantimpactonpensionplansolvencyvaluationsandfuturecashfundingrequirements.
Lifeexpectancy
Themajorityoftheplans’obligationsaretoprovidebenefitsforthelifeofthemember,soincreasesinlifeexpectancywillresultinanincreaseintheplans’liabilities.
Assumptions
ManagementisrequiredtomakesignificantestimatesaboutactuarialandfinancialassumptionstodeterminethecostandrelatedliabilitiesoftheCorporation’semployeefuturebenefits.
DiscountRate
Thediscountrateusedtodeterminethepensionobligationwasdeterminedbyreferencetomarketinterestratesoncorporatebondsrated“AA”orbetterwithcashflowsthatapproximatethetimingandamountofexpectedbenefitpayments.
FutureIncreasesinCompensation
Estimatessurroundingassumptionsoffutureincreasesincompensationarebaseduponthecurrentcompensationpolicies,theCorporation’slongrange-plans,labourandemploymentagreementsandeconomicforecasts.
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ThesignificantweightedaverageassumptionsusedtodeterminetheCorporation’saccruedbenefitobligationsandcostareasfollows:
Pension Benefits
Other Employee
Future Benefits
2018 2017 2018 2017
Discount rate used to determine:
NetinterestonthenetdefinedbenefitobligationfortheyearendedDecember31
3.60% 3.90% 3.60% 3.90%
ServicecostfortheyearendedDecember31 3.70% 4.10% 3.70% 4.10%AccruedbenefitobligationasatDecember31 3.81% 3.60% 3.81% 3.60%
Rate of future increases in compensation used to determine:
AccruedbenefitcostandservicecostfortheyearendedDecember31
2.50% 2.50%not
applicablenot
applicable
AccruedbenefitobligationasatDecember31 2.50% 2.50%not
applicablenot
applicable
Sensitivity Analysis
Sensitivityanalysisisbasedonchangingoneassumptionwhileholdingallotherassumptionsconstant.Inpractice,thismaybeunlikelytooccur,andchangesinsomeoftheassumptionsmaybecorrelated.Whencalculatingthesensitivityofthedefinedbenefitobligationtovariationsinsignificantactuarialassumptions,thesamemethod(presentvalueofthedefinedbenefitobligationcalculatedwiththeprojectedunitcreditmethodattheendofthereportingperiod)hasbeenappliedasforcalculatingtheliabilityrecognizedintheconsolidatedstatementoffinancialposition.
Sensitivityanalysison2018pensionexpenseandnetfinancingexpenserelatingtopensionbenefitliabilities,basedondifferentactuarialassumptionswithrespecttodiscountrateissetoutbelow.Theeffectsoneachpensionplanofachangeinanassumptionareweightedproportionatelytothetotalplanobligationtodeterminethetotalimpactforeachassumptionpresented.
0.25 Percentage Point
Decrease Increase
Discount rate on obligation assumption Pensionexpense $ 22 $ (21)Netfinancingexpenserelatingtopensionbenefitliabilities 23 (21)
$ 45 $ (42)Increase (decrease) in pension obligation $ 703 $ (680)
Theincrease(decrease)inthepensionobligationfora0.25percentagepointchangeinthediscountraterelatestothegrossamountofthepensionliabilitiesandisbeforetheimpactofanychangeinplanassets.AsatDecember31,2018,approximately81%ofAirCanada’spensionliabilitieswerematchedwithfixedincomeproductstomitigateasignificantportionoftheinterestrate(discountrate)risk.
Anincreaseofoneyearinlifeexpectancywouldincreasethepensionbenefitobligationby$478.
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Assumedhealthcarecosttrendrateshaveasignificanteffectontheamountsreportedforthehealthcareplans.A5.5%annualrateofincreaseinthepercapitacostofcoveredhealthcarebenefitswasassumedfor2018(2017–5.8%).Therateisassumedtodecreasegraduallyto5%by2020(2017–assumedtodecreasegraduallyto5%by2020).Aonepercentagepointincreaseinassumedhealthcaretrendrateswouldhaveincreasedthetotalofcurrentserviceandinterestcostsby$4andtheobligationby$55.Aonepercentagepointdecreaseinassumedhealthcaretrendrateswouldhavedecreasedthetotalofcurrentserviceandinterestcostsby$4andtheobligationby$58.
A0.25percentagepointdecreaseindiscountrateforotheremployeefuturebenefitswouldhaveincreasedthetotalofcurrentandinterestcostsbylessthan$1andtheobligationby$47.A0.25percentagepointincreaseindiscountratewouldhavedecreasedthetotalofcurrentandinterestcostsbylessthan$1andtheobligationby$44.
Defined Contribution Pension Plans
CertainoftheCorporation’smanagement,administrativeandunionizedemployeesparticipateinadefinedcontributionpensionplan,adefinedcontributioncomponentofaplanwhichalsoincludesadefinedbenefitcomponentoramulti-employerplanwhichareaccountedforasdefinedcontributionplans.TheCorporationcontributesanamountexpressedasapercentageofemployees’contributionswithsuchpercentagevaryingbygroupandforsomegroups,basedonthenumberofyearsofservice.Aspermittedbylegislationandapplicableplanrules,surplusinthedefinedbenefitcomponentcanbeusedtocovertheemployercontributionsinthedefinedcontributioncomponentofsuchplan.Assuch,$11ofsurplusinthedefinedbenefitcomponentsofthedomesticregisteredpensionplanswasusedtocovertheemployercontributionsinthedefinedcontributioncomponentsduring2018(2017–$9).
TheCorporation’sexpenseforthesepensionplansamountedto$30fortheyearendedDecember31,2018(2017–$21).Takingintoaccountavailablesurplusinthedefinedbenefitcomponentsofapplicableplanswhichmaybeexpectedtobeused,expectedtotalemployercontributionsfor2019are$22.
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9. PROVISIONS FOR OTHER LIABILITIES
Thefollowingtableprovidesacontinuityscheduleofallrecordedprovisions.RefertoNote16foradditionalinformationonLitigationprovisions.CurrentprovisionsarerecordedinAccountspayableandaccruedliabilities.
Maintenance (a) Asset retirement (b)
Litigation Total provisions
At December 31, 2017
Current $ 68 $ - $ 17 $ 85Non-current 1,003 30 - 1,033
$ 1,071 $ 30 $ 17 $ 1,118Provisionsarisingduringtheyear $ 145 $ - $ 2 $ 147Amountsdisbursed - - (2) (2)Changesinestimatedcosts (72) - - (72)Accretionexpense 25 1 - 26Foreignexchangeloss 96 - - 96At December 31, 2018 $ 1,265 $ 31 $ 17 $ 1,313Current $ 147 $ - $ 17 $ 164Non-current 1,118 31 - 1,149
$ 1,265 $ 31 $ 17 $ 1,313
(a) Maintenanceprovisionsrelatetotheprovisionforthecoststomeetthecontractualreturnconditionsonaircraftunderoperatingleases.Theprovisionrelatestoleaseswithexpirydatesrangingfrom2019to2029withtheaverageremainingleasetermofapproximatelythreeyears.Themaintenanceprovisionstakeintoaccountcurrentcostsofmaintenanceevents,estimatesofinflationsurroundingthesecostsaswellasassumptionssurroundingutilizationoftherelatedaircraft.Assumingtheaggregatecostforreturnconditionsincreasesby5%,holdingallotherfactorsconstant,therewouldbeacumulativebalancesheetadjustmenttoincreasetheprovisionby$62atDecember31,2018andanincreasetomaintenanceexpensein2019ofapproximately$6.Expectedfuturecashflowstosettletheobligationarediscounted.Ifthediscountratesweretoincreaseby1%,holdingallotherfactorsconstant,therewouldbeacumulativebalancesheetadjustmenttodecreasetheprovisionby$21atDecember31,2018.Anequivalentbutoppositemovementinthediscountratewouldresultinasimilarimpactintheoppositedirection.
(b) Underthetermsofcertainlandandfacilitiesleases,theCorporationhasanobligationtorestorethelandtovacantconditionattheendoftheleaseandtorectifyanyenvironmentaldamageforwhichitisresponsible.Therelatedleasesexpireovertermsrangingfrom2019to2078.Theseprovisionsarebasedonnumerousassumptionsincludingtheoverallcostofdecommissioningandremediationandtheselectionofalternativedecommissioningandremediationapproaches.Thenon-currentprovisionisrecordedinOtherlong-termliabilities.
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10. INCOME TAXES
Income Tax Expense
Incometaxrecordedintheconsolidatedstatementofoperationsispresentedbelow.
2018 2017Restated-Note2
Currentincometax $ (6) $ (16)Deferredincometax (232) 759Income tax (expense) recovery $ (238) $ 743
Theincometaxexpensediffersfromtheamountthatwouldhaveresultedfromapplyingthestatutoryincometaxratetoincomebeforeincometaxexpenseasfollows:
2018 2017Restated-Note2
Incomebeforeincometaxes $ 405 $ 1,286Statutoryincometaxratebasedoncombinedfederalandprovincialrates 26.78% 26.60%Income tax expense based on statutory tax rates (108) (342)Effectsof:
Non-taxable(non-deductible)portionofcapitalgains(losses) (55) 52Unrecognizeddeferredincometaxassetsoncapitallosses (55) -Non-deductibleexpenses (21) (24)Taxratechangesondeferredincometaxes 2 (9)Recognitionofpreviouslyunrecognizeddeferredincometaxassets - 1,062Other (1) 4
Income tax (expense) recovery $ (238) $ 743
Theapplicablestatutorytaxrateis26.78%(2017–26.60%).TheCorporation’sapplicabletaxrateistheCanadiancombinedratesapplicableinthejurisdictionsinwhichtheCorporationoperates.TheincreasetothestatutorytaxrateismainlyduetothenetresultofcorporateincometaxratedecreasesinQuebecandtheYukon,andanincreaseinSaskatchewan,aswellaschangesinthelevelofactivitybyprovince.
Incometaxrecordedintheconsolidatedstatementofcomprehensiveincomeispresentedbelow.
2018 2017
Remeasurementsonemployeebenefitliabilities-deferredincometax $ (188) $ (322)Income tax expense $ (188) $ (322)
Theincometaxexpensediffersfromtheamountthatwouldhaveresultedfromapplyingthestatutoryincometaxratetoothercomprehensiveincomebeforeincometaxexpenseasfollows:
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2018 2017
Othercomprehensiveincomebeforeincometaxes $ 691 $ 508Statutoryincometaxratebasedoncombinedfederalandprovincialrates 26.78% 26.60%Income tax expense based on statutory tax rates (185) (135)Effectsof:
Recognitionofpreviouslyunrecognizeddeferredincometaxliability - (184)Other (3) (3)
Income tax expense $ (188) $ (322)
Incometaxrecordedinshareholders’equityispresentedbelow.
2018 2017
Share-basedcompensation $ - $ 19Income tax recovery $ - $ 19
Deferred Income Tax
Deferredincometaxassetsarerecognizedonlytotheextentthatitisprobablethatfuturetaxableincomewillbeavailabletorealizethem.Inmakingthisassessment,considerationisgiventoavailablepositiveandnegativeevidenceandrelevantassumptions,including,historicalfinancialresults,andexpectationsrelatingtofuturetaxableincome,theoverallbusinessenvironment,andindustry-widetrends.
During2017,AirCanadadeterminedthatitwasprobablethatsubstantiallyallofthedeferredincometaxassets,whichincludenon-capitallosses,wouldberealized.
Deferredtaxassetsandliabilitiesof$39arerecordednetasanoncurrentdeferredincometaxassetanddeferredtaxliabilitiesof$52arerecordedasanoncurrentdeferredincometaxliabilityontheconsolidatedstatementoffinancialposition.Certainintangibleassetswithnominaltaxcostandacarryingvalueof$185haveindefinitelivesandaccordingly,theassociateddeferredincometaxliabilityof$49(2017-$49)isnotexpectedtoreverseuntiltheassetsaredisposedof,becomeimpairedoramortizableandasaresultisincludedaspartofthenoncurrentdeferredincometaxliability.
Thesignificantcomponentsofdeferredincometaxassetsandliabilitieswereasfollows:
2018 2017Restated-Note2
Deferred income tax assetsNon-capitallosses $ 353 $ 649Post-employmentobligations 171 286Accountingprovisionsnotcurrentlydeductiblefortax 67 61Investmenttaxcreditsandrecoverabletaxes 37 31Other 28 34
656 1,061Deferred income tax liabilitiesProperty,equipmentandtechnology-basedintangibles (555) (554)Indefinite-livedintangibleassets (49) (49)Other (65) (51)
(669) (654)Net recognized deferred income tax assets (liabilities) (13) 407
Balance sheet presentationDeferredincometaxassets 39 456Deferredincometaxliabilities (52) (49)Net recognized deferred income tax assets (liabilities) (13) 407
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Thefollowingtablepresentsthevariationofthecomponentsofdeferredincometaxbalances:
January 1, 2018
Restated-Note2
2018 income statement movement
2018 OCI movement
December 31, 2018
Non-capitallosses $ 649 $ (296) $ - $ 353Post-employmentobligations 286 73 (188) 171
Accountingprovisionsnotcurrentlydeductiblefortax
61 6 - 67
Investmenttaxcreditsandrecoverabletaxes
31 6 - 37
Otherdeferredtaxassets 34 (6) - 28
Property,equipmentandtechnology-basedintangibles
(554) (1) - (555)
Indefinite-livedintangibleassets (49) - - (49)Otherdeferredtaxliabilities (51) (14) - (65)
Total recognized deferred income tax assets (liabilities)
$ 407 $ (232) $ (188) $ (13)
AtDecember31,2018,theCorporationhasdeductibletemporarydifferencesofacapitalnatureforwhichnodeferredincometaxassethasbeenrecognizedatthistimeastheabilitytoutilizethesetaxattributesislimitedtofuturetaxablecapitalgains.Netcapitallossesdonothaveanexpirydate.
Thefollowingarethetemporarydifferencesandtaxlosscarryforwardsforwhichnodeferredincometaxassetscouldberecognized:
2018 2017
Unrealizedforeignexchangelosses $ 230 $ 62Unrecognizednetcapitallossescarryforwards 84 40Total unrecognized net temporary differences $ 314 $ 102Deferredincometaxratebasedoncombinedfederalandprovincialrates 26.75% 26.79%Total unrecognized net deferred income tax assets 84 27
ThefollowingaretheFederalnon-capitaltaxlossesexpirydates:
Tax Losses
2029 $ 362030 392031 62032 4892033 4032034 32035 2442036 32037 22038 2Non-capital losses carryforwards $ 1,227
Cashincometaxespaidin2018bytheCorporationwere$32(2017–$1).
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11. SHARE CAPITAL
Number of shares
Value
At January 1, 2017 273,212,802 $ 797Sharesissuedontheexerciseofstockoptions 3,906,662 14Sharespurchasedandcancelledunderissuerbid (4,042,818) (12)At December 31, 2017 273,076,646 $ 799Sharesissuedontheexerciseofstockoptions 667,087 8Sharespurchasedandcancelledunderissuerbid (3,013,822) (9)At December 31, 2018 270,729,911 $ 798
TheissuedandoutstandingsharesofAirCanada,alongwiththepotentialshares,wereasfollows:
2018 2017
Issued and outstandingClassAvariablevotingshares 125,214,350 115,986,084ClassBvotingshares 145,515,561 157,090,562Total issued and outstanding 270,729,911 273,076,646
Potential sharesStockoptions Note12 6,014,464 6,121,252Total outstanding and potentially issuable shares 276,744,375 279,197,898
Shares
AsatDecember31,2018,thesharesissuablebyAirCanadaconsistofanunlimitednumberofClassAVariableVotingShares(“VariableVotingShares”)andanunlimitednumberofClassBVotingShares(“VotingShares”).Thetwoclassesofshareshaveequivalentrightsasshareholdersexceptforvotingrights.HoldersofVariableVotingSharesareentitledtoonevotepershareunless(i)thenumberofVariableVotingSharesoutstanding,asapercentageofthetotalnumberofvotingsharesofAirCanadaexceeds25%or(ii)thetotalnumberofvotescastbyoronbehalfofholdersofVariableVotingSharesatanymeetingexceeds25%ofthetotalnumberofvotesthatmaybecastatsuchmeeting.Ifeitheroftheabovenotedthresholdswouldotherwisebesurpassedatanytime,thevoteattachedtoeachVariableVotingSharewilldecreaseproportionatelysuchthat(i)theVariableVotingSharesasaclassdonotcarrymorethan25%oftheaggregatevotesattachedtoallissuedandoutstandingVotingSharesofAirCanadaand(ii)thetotalnumberofvotescastbyoronbehalfofholdersofVariableVotingSharesatanymeetingdonotexceed25%ofthevotesthatmaybecastatsuchmeeting.
VariableVotingSharesmayonlybeheld,beneficiallyownedorcontrolled,directlyorindirectly,bypersonswhoarenotCanadians(withinthemeaningoftheCanada Transportation Act).AnissuedandoutstandingVariableVotingShareisconvertedintooneVotingShareautomaticallyandwithoutanyfurtheractofAirCanadaortheholder,ifsuchVariableVotingSharebecomesheld,beneficiallyownedandcontrolled,directlyorindirectly,otherwisethanbywayofsecurityonly,byaCanadian,asdefinedintheCanada Transportation Act.
VotingSharesmayonlybeheld,beneficiallyownedandcontrolled,directlyorindirectly,byCanadians.AnissuedandoutstandingVotingShareisconvertedintooneVariableVotingShareautomaticallyandwithoutanyfurtheractofAirCanadaortheholder,ifsuchVotingSharebecomesheld,beneficiallyownedorcontrolled,directlyorindirectly,otherwisethanbywayofsecurityonly,byapersonwhoisnotaCanadian.
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Shareholder Rights Plan
Underthetermsoftheshareholderrightsplanagreement(the“RightsPlan”),effectiveuntilthedayafterAirCanada’s2020annualmeetingofshareholders,oneright(a“Right”)isissuedwithrespecttoeachshareofAirCanadaissuedandoutstanding.TheseRightswouldbecomeexercisableonlywhenaperson,includinganypartyrelatedtoit,acquiresorannouncesitsintentiontoacquire20%ormoreoftheoutstandingsharesofAirCanadacalculatedonacombinedbasis,withoutcomplyingwiththe“PermittedBid”provisionsoftheRightsPlanor,incertaincases,withouttheapprovaloftheBoard.Untilsuchtime,theRightsarenotseparablefromtheshares,arenotexercisableandnoseparaterightscertificatesareissued.Toqualifyasa“PermittedBid”undertheRightsPlan,abidmust,amongotherthings:(i)bemadetoallholdersofshares,(ii)remainopenforaperiodofnotlessthan105days(orsuchshorterminimumperioddeterminedinaccordancewithNationalInstrument62-104-Take-Over Bids and Issuer Bids(“NI62-104”),(iii)providethatnosharesshallbetakenupunlessmorethan50%ofthethenoutstandingshares,otherthanthesharesheldbythepersonpursuingtheacquisitionandpartiesrelatedtoit,havebeentenderedandnotwithdrawn,and(iv)providethatifsuch50%conditionissatisfied,thebidwillbeextendedforatleast10daystoallowothershareholderstotender.
FollowingtheoccurrenceofaneventwhichtriggerstherighttoexercisetheRightsandsubjecttothetermsandconditionsoftheRightsPlan,eachRightwouldentitletheholdersthereof,otherthantheacquiringpersonoranyrelatedpersons,toexercisetheirRightsandpurchasefromAirCanadatwohundreddollars’worthofsharesforonehundreddollars(i.e.ata50%discounttothemarketpriceatthattime).Uponsuchexercise,holdersofrightsbeneficiallyownedandcontrolledbyQualifiedCanadianswouldreceiveClassBVotingSharesandholdersofrightsbeneficiallyownedorcontrolledbypersonswhoarenotQualifiedCanadianswouldreceiveClassAVariableVotingShares.
Issuer Bid
InMay2017,AirCanadareceivedapprovalfromtheTorontoStockExchange(“TSX”)fortherenewalofitsnormalcourseissuerbid,authorizing,betweenMay31,2017andMay30,2018,thepurchaseofupto22,364,183shares,representing10%ofthepublicfloatasatMay17,2017.Therenewalfollowedtheconclusionofthe2016normalcourseissuerbidwhichexpiredonMay29,2017.
In2017,theCorporationpurchased,forcancellation,4,042,818sharesatanaveragecostof$17.49pershareforaggregateconsiderationof$71.Theexcessofthecostovertheaveragebookvalueof$59waschargedtoRetainedearnings.
InMay2018,AirCanadareceivedapprovalfromtheTSXfortherenewalofitsnormalcourseissuerbid,authorizing,betweenMay31,2018andMay30,2019,thepurchaseofupto24,040,243shares,representing10%ofAirCanada’spublicfloatasatMay17,2018.Therenewalfollowedtheconclusionofthe2017normalcourseissuerbidwhichexpiredonMay30,2018.
In2018,theCorporationpurchased,forcancellation,3,013,822sharesatanaveragecostof$24.11pershareforaggregateconsiderationof$73.Theexcessofthecostovertheaveragebookvalueof$64waschargedtoRetainedearnings.AtDecember31,2018,atotalof21,940,639sharesremainavailableforrepurchaseundertheexistingissuerbid.
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12. SHARE-BASED COMPENSATION
Air Canada Long-Term Incentive Plan
CertainoftheCorporation’semployeesparticipateintheAirCanadaLong-termIncentivePlan(the“Long-termIncentivePlan”).TheLong-termIncentivePlanprovidesforthegrantofstockoptions,performanceshareunitsandrestrictedshareunitstoseniormanagementandofficersofAirCanada.Withrespecttothestockoptions,19,381,792shareswereinitiallyauthorizedforissuanceundertheLong-termIncentivePlanofwhich9,046,974remainavailableforfutureissuance.Theoutstandingperformanceshareunitsandrestrictedshareunitswillnotresultintheissuanceofnewsharesastheseshareunitswillberedeemedforsharespurchasedonthesecondarymarket(andnotissuedfromtreasury)and/orequivalentcash,atthediscretionoftheCorporation.
Stock Options
TheoptionstopurchasesharesgrantedundertheLong-termIncentivePlanhaveamaximumtermofsevenyearsandanexercisepricebasedonthefairmarketvalueofthesharesatthetimeofthegrantoftheoptions.Fiftypercentofoptionsaretime-basedandvestoverfouryears.Theremainingoptionsvestbaseduponperformanceconditions,whicharebasedonoperatingmargin(operatingincomeoveroperatingrevenues)targetsestablishedbytheAirCanadaBoardoverthesametimeperiod.Eachoptionentitlestheemployeetopurchaseoneshareatthestatedexerciseprice.TheLong-termIncentivePlanspecifiesthatfollowingretirementanemployeemayexerciseoptionsgrantedwiththerightstoexercisecontinuingforthethreeyearsaftertheretirementdate.
ThenumberofAirCanadastockoptionsgrantedtoemployees,therelatedcompensationexpenserecordedandtheassumptionsusedtodeterminestock-basedcompensationexpense,usingtheBlack-Scholesoptionvaluationmodelareasfollows:
2018 2017
Compensationexpense($millions) $ 9 $ 6NumberofstockoptionsgrantedtoAirCanadaemployees 1,293,091 1,219,976Weightedaveragefairvalueperoptiongranted($) $ 9.27 $ 6.14Aggregatedfairvalueofoptionsgranted($millions) $ 12 $ 7Weightedaverageassumptions:
Shareprice $ 26.28 $ 14.85Risk-freeinterestrate 1.95%-2.48% 0.86%-1.89%Expectedvolatility 38.2% 39.6%-49.3%Dividendyield 0% 0%Expectedoptionlife(years) 5.25 5.25
Expectedvolatilitywasdeterminedatthetimeofgrantusingthesharepriceonahistoricalbasis.Itreflectstheassumptionthatthehistoricalvolatilityisindicativeoffuturetrends,whichmaynotnecessarilybetheactualoutcome.
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AsummaryoftheLong-termIncentivePlanoptionactivityisasfollows:
2018 2017
Options Weighted Average
Exercise Price/Share
Options WeightedAverage
ExercisePrice/Share
Beginningofyear 6,121,252 $ 8.46 8,985,958 $ 4.92Granted 1,293,091 26.28 1,219,976 14.73Exercised (667,087) 7.90 (3,906,662) 2.30Expiredorcancelled - - (35,148) 4.89Forfeited (732,792) 16.32 (142,872) 8.36Outstanding options, end of year 6,014,464 $ 11.40 6,121,252 $ 8.46Options exercisable, end of year 2,800,327 $ 5.18 2,348,815 $ 4.29
Theweightedaveragesharepriceonthedateofexerciseforoptionsexercisedin2018was$26.59(2017-$19.77).
2018 Outstanding Options 2018 Exercisable Options
Range of Exercise Prices
Expiry Dates
Number of Options
Outstanding
Weighted Average
Remaining Life (Years)
Weighted Average
Exercise Price/Share
Number of Exercisable
Options
Weighted Average
Exercise Price/Share
$0.96 2019 22,952 1 $ 0.96 22,952 $ 0.96$2.49–$5.69 2020 1,603,605 2 2.88 1,603,605 2.88$5.35–$8.27 2021 578,680 3 5.39 578,680 5.39
$12.27–$12.64 2022 583,830 4 12.64 193,481 12.64$9.23–$9.61 2023 1,186,834 5 9.26 283,691 9.26
$12.83–$26.40 2024 954,568 6 14.39 117,919 14.26$22.53–$27.75 2025 1,083,995 7 26.49 - -
6,014,464 $ 11.40 2,800,328 $ 5.18
2017OutstandingOptions 2017ExercisableOptions
RangeofExercisePrices
ExpiryDates
NumberofOptions
Outstanding
WeightedAverage
RemainingLife(Years)
WeightedAverage
ExercisePrice/Share
NumberofExercisable
Options
WeightedAverage
ExercisePrice/Share
$0.96 2019 40,604 2 $ 0.96 40,604 $ 0.96$2.49–$5.69 2020 1,711,049 3 2.89 1,711,049 2.89$5.35–$8.27 2021 818,126 4 5.43 257,165 5.44
$12.27–$12.64 2022 852,965 5 12.56 157,649 12.64$9.23–$9.61 2023 1,481,246 6 9.27 182,348 9.27
$12.83–$26.40 2024 1,217,262 7 14.74 - -6,121,252 $ 8.46 2,348,815 $ 4.29
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Performance and Restricted Share Units
TheLong-termIncentivePlanalsoincludesperformanceshareunits(“PSUs”)andrestrictedshareunits(“RSUs”).ThevestingofPSUsisbasedontheCorporationachievingitscumulativeannualearningstargetoverathree-yearperiod,whileRSUswillvestafterthreeyearsfromtheirdateofgrant.Thetermsoftheplanspecifythatupontheretirementofanemployee,thenumberofunitsthatvestareproratedbasedonthetotalnumberofcompletedmonthsofactiveserviceduringthevestingterm.ThePSUsandRSUsgrantedmayonlyberedeemedforAirCanadasharespurchasedonthesecondarymarketand/orequivalentcashatthediscretionoftheBoardofDirectors.
ThecompensationexpenserelatedtoPSUsandRSUsin2018was$21(2017–$33).
AsummaryoftheLong-termIncentivePlanshareunitactivityisasfollows:
2018 2017
Beginningofyear 2,706,261 3,052,028Granted 772,536 922,716Settled (694,111) (1,098,067)Forfeited (283,922) (170,416)Outstanding share units, end of year 2,500,764 2,706,261
RefertoNote15foradescriptionofderivativeinstrumentsusedbytheCorporationtomitigatethecashflowexposuretothePSUsandRSUsgranted.
Employee Share Purchase Plan
Eligibleemployeescanparticipateintheemployeesharepurchaseplanunderwhichemployeescaninvestbetween2%and10%oftheirbasesalaryforthepurchaseofsharesonthesecondarymarket.For2018contributions,AirCanadawillmatch33.33%ofthecontributionsmadebyemployees.During2018,theCorporationrecordedcompensationexpenseof$12(2017–$8)relatedtotheEmployeesharePurchasePlan.
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13. EARNINGS PER SHARE
Thefollowingtableoutlinesthecalculationofbasicanddilutedearningspershare:
(inmillions,exceptpershareamounts)2018 2017
Restated-Note2
Numerator:Numerator for basic and diluted earnings per share:
Netincome $ 167 $ 2,029Denominator:Weighted-average shares 272 273
Effectofpotentialdilutivesecurities:Stockoptions 4 5
Totalpotentialdilutivesecurities 4 5Adjusted denominator for diluted earnings per share 276 278Basic earnings per share $ 0.61 $ 7.44Diluted earnings per share $ 0.60 $ 7.31
Thecalculationofearningspershareisbasedonwholedollarsandnotonroundedmillions.Asaresult,theaboveamountsmaynotberecalculatedtothepershareamountdisclosedabove.
Excludedfromthe2018calculationofdilutedearningspersharewere749,000(2017–101,000)outstandingoptionswheretheoptions’exercisepricesweregreaterthantheaveragemarketpriceofthesharesfortheyear.
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14. COMMITMENTS
Capital Commitments and Operating Leases
Capitalcommitmentsconsistofthefuturefirmaircraftdeliveriesandcommitmentsrelatedtotheacquisitionofotherpropertyandequipment.Theestimatedaggregatecostofaircraftisbasedondeliverypricesthatincludeestimatedescalationand,whereapplicable,deferredpricedeliverypaymentinterestcalculatedbasedonthe90-dayU.S.LIBORrateatDecember31,2018.TheCorporationhasvariousoperatingleaseagreementsforaircraft,equipmentandotherproperty.U.S.dollaramountsareconvertedusingtheDecember31,2018closingrateofCDN$1.3637.Minimumfuturecommitmentsunderthesecontractualarrangementsareshownbelow.
2019 2020 2021 2022 2023 Thereafter Total
Capitalcommitments $ 2,382 $ 1,556 $ 815 $ 753 $ 375 $ 195 $ 6,076Operatingleases
Aircraft 561 435 316 243 194 625 2,374Otherproperty 118 92 67 51 36 243 607
Total $ 3,061 $ 2,083 $ 1,198 $ 1,047 $ 605 $ 1,063 $ 9,057
TheCorporationleasesandsubleasescertainaircraftandspareenginestoJazz,SkyRegionalandAirGeorgian,whicharechargedbacktoAirCanadathroughtheirrespectiveCPAs.Thesearereportednetontheconsolidatedstatementofoperations.TheleasesandsubleasesrelatetofiveBombardierQ400aircraft,12CRJ-200aircraft,25Embraer175aircraft,and16spareengines.Theleaseandsubleaserevenueandexpenserelatedtotheseaircraftandengineseachamountto$95in2018(2017–$92).
Flow-through Leases
Foraccountingpurposes,theCorporationactsasanagentandsubleasescertainaircrafttoJazzonaflow-throughbasis,whicharereportednetontheconsolidatedstatementofoperations.ThesubleaseswithJazzhavethesametermsandmaturityastheCorporation’scorrespondingleasecommitmentstothelessors.ThesesubleasesrelatetofiveBombardierQ400aircraft,tenBombardierCRJ-200aircraft,andfifteenBombardierCRJ-705aircraftwhichhavefinalmaturitiesrangingfrom2021to2025.Thesubleaserevenueandleaseexpenserelatedtotheseaircrafteachamountedto$77in2018(2017–$81).Theoperatingleasecommitmentsundertheseaircraft,whicharerecoveredfromJazz,arenotincludedintheaircraftoperatingleasecommitmentstableabovebutaresummarized,withU.S.dollaramountsconvertedusingtheDecember31,2018closingrateofCDN$1.3637,asfollows:
2019 2020 2021 2022 2023 Thereafter Total
Jazzflow-throughleases $ 81 $ 81 $ 72 $ 56 $ 47 $ 22 $ 359
Other Contractual Commitments
Thefutureminimumnon-cancellablecommitmentforthenext12monthsundertheJazzCPAisapproximately$1,218andunderthecapacitypurchaseagreementswithotherregionalcarriersis$284.AsfurtherdiscussedinNote23,theCorporationconcludedanagreementtoamendandextenditsCPAwithJazzinFebruary2019.
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15. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Summary of Financial Instruments
Carrying Amounts
December 31, 2018December31,
2017Financial instruments classification
Fair value through profit
and loss
Assets at amortized
cost
Liabilities at amortized
cost
Total
Financial AssetsCashandcashequivalents $ 630 $ - $ - $ 630 $ 642Short–terminvestments 4,077 - - 4,077 3,162Restrictedcash 161 - - 161 148Accountsreceivable - 796 - 796 814Prepaidexpensesandothercurrentassets
Collateralonaircraftfinancing - - - - 24Depositsandotherassets
Restrictedcash 171 - - 171 186Aircraftrelatedandotherdeposits - 135 - 135 128
DerivativeinstrumentsShareforwardcontracts 43 - - 43 54Foreignexchangederivatives 24 - - 24 -
$ 5,106 $ 931 $ - $ 6,037 $ 5,158
Financial LiabilitiesAccountspayable $ - $ - $ 1,793 $ 1,793 $ 1,668Foreignexchangederivatives 57 - - 57 215
Currentportionoflong–termdebtandfinanceleases
- - 455 455 671
Long–termdebtandfinanceleases - - 6,197 6,197 5,448$ 57 $ - $ 8,445 $ 8,502 $ 8,002
Summary of Gain (Loss) on Financial Instruments Recorded at Fair Value
2018 2017
Shareforwardcontracts $ - $ 26Fuelderivatives (1) (3)Gain (loss) on financial instruments recorded at fair value $ (1) $ 23
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Risk Management
Underitsriskmanagementpolicy,theCorporationmanagesitsmarketriskthroughtheuseofvariousfinancialderivativeinstruments.TheCorporationusestheseinstrumentssolelyforriskmanagementpurposes,notforgeneratingtradingprofit.Assuch,anychangeincashflowsassociatedwithderivativeinstrumentsisdesignedtobeaneconomichedgeandoffsetbychangesincashflowsoftherelevantriskbeinghedged.
Thefairvaluesofderivativeinstrumentsrepresenttheamountoftheconsiderationthatcouldbeexchangedinanarm’slengthtransactionbetweenwillingpartieswhoareundernocompulsiontoact.Thefairvalueofthesederivativesisdeterminedusingpricesinactivemarkets,whereavailable.Whennosuchmarketisavailable,valuationtechniquessuchasdiscountedcashflowanalysisareapplied.Thevaluationtechniqueincorporatesallfactorsthatwouldbeconsideredinsettingaprice,includingtheCorporation’sowncreditriskaswellasthecreditriskofthecounterparty.
MarketRisks
Marketriskistheriskthatthefairvalueorfuturecashflowsofafinancialinstrumentwillfluctuateduetochangesinmarketprices.Marketriskcanbefurtherdividedintothefollowingsub-classificationsrelatedtotheCorporation:fuelpricerisk,foreignexchangerisk,interestraterisk,andshare-basedcompensationrisk.
FuelPriceRisk
Fuelpriceriskistheriskthatfuturecashflowswillfluctuatebecauseofchangesinjetfuelprices.Inordertomanageitsexposuretojetfuelpricesandtohelpmitigatevolatilityinoperatingcashflows,theCorporationentersintoderivativecontractswithfinancialintermediaries.TheCorporationmayusederivativecontractsbasedonjetfuel,heatingoilandcrude-oilbasedcontracts.TheCorporation’spolicypermitshedgingofupto75%oftheprojectedjetfuelpurchasesforthecurrentcalendaryear,50%oftheprojectedjetfuelpurchasesforthenextcalendaryear,and25%ofprojectedjetfuelpurchasesforanycalendaryearthereafter.Thesearemaximum(butnotmandated)limits.Thereisnominimummonthlyhedgingrequirement.Thereareregularreviewstoadjustthestrategyinlightofmarketconditions.
During2018:
> Hedginglossesonthesettlementoffuelderivativesof$19andtheassociatedpremiumcostsof$17,forahedginglossof$36werereclassifiedfromothercomprehensiveincometoAircraftfuelexpense(netfuelhedginglossof$2wasreclassifiedfromothercomprehensiveincometoAircraftfuelexpensein2017).Nohedgeineffectivenesswasrecorded.
> TheCorporationpurchasedcrude-oilcalloptionsandswapscoveringaportionof2018fuelexposure.Thecashpremiumrelatedtothesecontractswas$17($18in2017for2017exposures).
> Fuelderivativecontractscashsettledwithafairvalueof$19infavourofthecounterparties($26infavouroftheCorporationin2017).
TherewerenooutstandingfuelderivativesasatDecember31,2018andDecember31,2017.
ForeignExchangeRisk
TheCorporation’sfinancialresultsarereportedinCanadiandollars,whilealargeportionofitsexpenses,debtobligationsandcapitalcommitmentsareinforeigncurrencies,primarilyinU.S.dollars.Foreignexchangeriskistheriskthatfluctuationsinforeignexchangeratesmayhaveonoperatingresultsandcashflows.TheCorporation’sriskmanagementobjectiveistoreducecashflowriskrelatedtoforeigndenominatedcashflows.
AirCanadageneratescertainsalesinU.S.dollarsandinotherforeigncurrencieswhichareconvertedtoU.S.dollarsundertheCorporation’sriskmanagementprogram.In2018,thesenetoperatingcashinflowstotaledapproximatelyUS$4.2billionandU.S.denominatedoperatingcostsamountedtoapproximatelyUS$6.4billion.Non-operatingcashoutflowsinU.S.dollars,primarilyrelatedtointerestpaymentsonU.S.dollardenominateddebtandnetfinancingoutflows,amountedtoapproximatelyUS$1.9billion.For2018,thisresultedinaU.S.dollarnetcashflowexposureofapproximatelyUS$4.1billion.
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TheCorporationhasatargetcoverageof70%onarolling18monthbasistomanagethenetU.S.dollarcashflowexposuredescribedaboveutilizingthefollowingriskmanagementstrategies:
> HoldingU.S.dollarcashreservesasaneconomichedgeagainstchangesinthevalueoftheU.S.dollar.U.S.dollarcashandshort-terminvestmentbalancesasatDecember31,2018amountedto$863(US$635)($686(US$542)asatDecember31,2017).Aportionofthecashandinvestmentreservesareaneconomichedgeagainstlong-termU.S.dollardebtwhiletheremainderofthecashisoperationalcashandinvestmentreserveswhichareappliedagainsttherolling18monthnetU.S.dollarcashflowexposure.In2018,againof$62(lossof$58in2017)wasrecordedinForeignexchangegain(loss)reflectingthechangeinCanadianequivalentmarketvalueoftheU.S.dollarcashandshort-terminvestmentbalancesheld.
> LockingintheforeignexchangeratethroughtheuseofavarietyofforeignexchangederivativeswhichhavematuritydatescorrespondingtotheforecasteddatesofU.S.dollarnetoutflows.
Thelevelofforeignexchangederivativesenteredintoandtheirrelatedmaturitydatesaredependentuponanumberoffactors,whichincludetheamountofforeignrevenueconversionavailable,U.S.dollarnetcashoutflows,aswellastheamountattributedtoaircraftanddebtpayments.BasedonthenotionalamountofcurrencyderivativesoutstandingatDecember31,2018,asfurtherdescribedbelow,approximately77%ofnetU.S.cashoutflowsarehedgedfor2019and48%for2020,resultinginderivativecoverageof68%overthenext18months.OperationalU.S.dollarcashandinvestmentreservescombinedwithderivativecoverageresultsin75%coverage.
AsatDecember31,2018,theCorporationhadoutstandingforeigncurrencyoptionsandswapagreements,settlingin2019and2020,topurchaseatmaturity$4,987(US$3,659)ofU.S.dollarsataweightedaveragerateof$1.2645perUS$1.00(2017–$3,400(US$2,704)withsettlementsin2018and2019ataweightedaveragerateof$1.2703per$1.00U.S.dollar).TheCorporationalsohasprotectioninplacetosellaportionofitsexcessEuros,Sterling,YEN,andAUD(EUR€103,GBP£208,JPY¥25,922,andAUD$105)whichsettlein2019and2020atweightedaverageratesof€1.1910,£1.3567,¥0.0092,andAUD$0.7448per$1.00U.S.dollar,respectively(asatDecember31,2017-EUR€101,GBP£105,JPY¥8,623,CNY¥41,andAUD$32withsettlementin2018atweightedaverageratesof€1.1664,£1.3259,¥0.0090,¥0.1468andAUD$0.7576respectivelyper$1.00U.S.dollar).
Thehedgingstructuresputinplacehavevariousoptionpricingfeatures,suchasknock-outtermsandprofitcaplimitations,andbasedontheassumedvolatilityusedinthefairvaluecalculation,thenetfairvalueoftheseforeigncurrencycontractsasatDecember31,2018was$33infavourofthecounterparties(2017–$215infavourofthecounterparties).Thesederivativeinstrumentshavenotbeendesignatedashedgesforaccountingpurposesandarerecordedatfairvalue.During2018,againof$245wasrecordedinForeignexchangegain(loss)relatedtothesederivatives(2017–$274loss).In2018,foreignexchangederivativecontractscashsettledwithanetfairvalueof$63infavouroftheCorporation(2017–$55infavourofthecounterparties).
InterestRateRisk
Interestrateriskistheriskthatthefairvalueorfuturecashflowsofafinancialinstrumentwillfluctuatebecauseofchangesinmarketinterestrates.
TheCorporationentersintobothfixedandfloatingratedebtandalsoleasescertainassetswheretherentalamountfluctuatesbasedonchangesinshortterminterestrates.TheCorporationmanagesinterestrateriskonaportfoliobasisandseeksfinancingtermsinindividualarrangementsthataremostadvantageoustakingintoaccountallrelevantfactors,includingcreditmargin,termandbasis.TheriskmanagementobjectiveistominimizethepotentialforchangesininterestratestocauseadversechangesincashflowstotheCorporation.Thecashandshort-terminvestmentportfoliowhichearnsafloatingrateofreturnisaneconomichedgeforaportionofthefloatingratedebt.
TheratiooffixedtofloatingrateobligationsoutstandingisdesignedtomaintainflexibilityintheCorporation’scapitalstructureandisbaseduponalongtermobjectiveof60%fixedand40%floatingbutallowsflexibilitytoadjusttoprevailingmarketconditions.TheratioatDecember31,2018is81%fixedand19%floating(73%and27%,respectivelyasatDecember31,2017).
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Share-basedCompensationRisk
TheCorporationissuesRSUsandPSUstocertainofitsemployees,asdescribedinNote12,whichentitlestheemployeestoreceiveapaymentintheformofoneshare,cashintheamountequaltomarketvalueofoneshare,oracombinationthereof,atthediscretionoftheBoardofDirectors.
Tohedgethesharepriceexposure,theCorporationenteredintoshareforwardcontractstohedgePSUsandRSUsthatmayvestbetween2019and2021,subjecttothetermsofvestingincludingrealizationofperformancevestingcriteria.Theforwarddatesfortheshareforwardcontractscoincidewiththevestingtermsandplannedsettlementdatesof1,664,142PSUsandRSUsfrom2019to2021.Thesecontractswerenotdesignatedashedginginstrumentsforaccountingpurposes.Accordingly,changesinthefairvalueofthesecontractsarerecordedinGainonfinancialinstrumentsrecordedatfairvalueintheperiodinwhichtheyarise.During2018,againoflessthan$1wasrecorded(2017–gainof$26).Shareforwardcontractscashsettledwithafairvalueof$17infavouroftheCorporationin2018(2017–$12),withnewcontractpurchasesof$6for2021hedges.AsatDecember31,2018,thefairvalueoftheshareforwardcontractsis$43infavouroftheCorporation(2017–$54infavouroftheCorporation),withthosecontractsmaturingin2019valuedat$26recordedinPrepaidexpensesandothercurrentassetsandtheremainderof$17recordedinDepositsandotherassets.
Liquidityrisk
TheCorporationmanagesitsliquidityneedsthroughavarietyofstrategiesincludingbyseekingtosustainandimprovecashfromoperations,sourcingcommittedfinancingfornewandexistingaircraft,andthroughotherfinancingactivities.
Liquidityneedsareprimarilyrelatedtomeetingobligationsassociatedwithfinancialliabilities,capitalcommitments,ongoingoperations,contractualandotherobligations.TheCorporationmonitorsandmanagesliquidityriskbypreparingrollingcashflowforecasts,monitoringtheconditionandvalueofassetsavailabletobeusedaswellasthoseassetsbeingusedassecurityinfinancingarrangements,seekingflexibilityinfinancingarrangements,andestablishingprogramstomonitorandmaintaincompliancewithtermsoffinancingagreements.AtDecember31,2018,unrestrictedliquiditywas$5,725comprisedofCashandcashequivalentsandShort-terminvestmentsof$4,707andundrawnlinesofcreditof$1,018.AnotherimportantaspectofmanagingliquidityriskrelatestomanagingtheCorporation’sfinancialleverage.RefertoNote17CapitalDisclosuresforadiscussiononfinancialleveragetargets.
Cashandcashequivalentsinclude$39pertainingtoinvestmentswithoriginalmaturitiesofthreemonthsorlessatDecember31,2018($30asatDecember31,2017).
AmaturityanalysisoftheCorporation’sprincipalandinterestrepaymentrequirementsonlong-termdebtissetoutinNote7,andfixedoperatingcommitmentsandcapitalcommitmentsaresetoutinNote14.
CreditRisk
Creditriskistheriskoflossduetoacounterparty’sinabilitytomeetitsobligations.AsatDecember31,2018,theCorporation’screditriskexposureconsistsmainlyofthecarryingamountsofCashandcashequivalents,Short-terminvestments,Accountsreceivableandderivativeinstruments.CashandcashequivalentsandShort-terminvestmentsareinplacewithmajorfinancialinstitutions,variouslevelsofgovernmentinCanada,andmajorcorporations.Accountsreceivablearegenerallytheresultofsalesofpassengerticketstoindividuals,largelythroughtheuseofmajorcreditcards,throughgeographicallydispersedtravelagents,corporateoutlets,orotherairlines.Similarly,accountsreceivablerelatedtocargorevenuesrelatetoaccountsfromalargenumberofgeographicallydispersedcustomers.Creditratingguidelinesareusedindeterminingderivativecounterparties.Inordertomanageitsexposuretocreditriskandassesscreditquality,theCorporationreviewscounterpartycreditratingsonaregularbasisandsetscreditlimitswhendeemednecessary.
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SensitivityAnalysis
ThefollowingtableisasensitivityanalysisforeachtypeofmarketriskrelevanttothesignificantfinancialinstrumentsrecordedbytheCorporationasatDecember31,2018.Thesensitivityanalysisisbasedoncertainmovementsintherelevantriskfactor.Theseassumptionsmaynotberepresentativeofactualmovementsintheserisksandmaynotbereliedupon.Givenpotentialvolatilityinthefinancialandcommoditymarkets,theactualmovementsandrelatedpercentagechangesmaydiffersignificantlyfromthoseoutlinedbelow.Changesinincomegenerallycannotbeextrapolatedbecausetherelationshipofthechangeinassumptiontothechangeinincomemaynotbelinear.Eachriskiscontemplatedindependentofotherrisks;however,changesinonefactormayresultinchangesinoneormoreseveralotherfactors,whichmaymagnifyorcounteractthesensitivities.
ThesensitivityanalysisrelatedtoderivativecontractsisbasedontheestimatedfairvaluechangeapplicabletothederivativeasatDecember31,2018consideringanumberofvariablesincludingtheremainingtermtomaturityanddoesnotconsiderthefairvaluechangethatwouldbeapplicabletothederivativeassumingthemarketriskchangewasapplicabletothematuritydateofthederivativecontract.
Interest rate risk Foreign exchange rate risk (1)
Other price risk (2)
Income Income Income1%
increase1%
decrease5%
increase5%
decrease10%
increase10%
decrease
Cashandcashequivalents $ 6 $ (6) $ (10) $ 10 $ - $ -Short–terminvestments $ 41 $ (41) $ (33) $ 33 $ - $ -Aircraftrelateddeposits $ - $ - $ (5) $ 5 $ - $ -Long-termdebtandfinanceleases $ (18) $ 18 $ 297 $ (297) $ - $ -Shareforwardcontracts $ - $ - $ - $ - $ 4 $ (4)Foreignexchangederivatives $ - $ - $ (240) $ 234 $ - $ -
(1) Increase(decrease)inforeignexchangerelatestoastrengthening(weakening)oftheCanadiandollarversustheU.S.dollar.Theimpactonlong-termdebtandfinanceleasesincludes$9relatedtotheCanadiandollarversustheJapaneseyen.TheimpactofchangesinothercurrenciesisnotsignificanttotheCorporation’sfinancialinstruments.
(2)Thesensitivityanalysisforshareforwardcontractsisbasedupona10%increaseordecreaseintheAirCanadashareprice.
CovenantsinCreditCardAgreements
TheCorporation’sprincipalcreditcardprocessingagreementsforcreditcardprocessingservicescontaintriggeringeventsuponwhichtheCorporationisrequiredtoprovidetheapplicablecreditcardprocessorwithcashdeposits.Theobligationstoprovidecashdepositsandtherequiredamountofdepositsareeachbaseduponamatrixmeasuring,onaquarterlybasis,bothafixedchargecoverageratiofortheCorporationandtheunrestrictedcashandshort-terminvestmentsoftheCorporation.In2018,theCorporationmadenocashdepositsundertheseagreements(nilin2017).
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Financial Instrument Fair Values in the Consolidated Statement of Financial Position
Thecarryingamountsreportedintheconsolidatedstatementoffinancialpositionforshorttermfinancialassetsandliabilities,whichincludesAccountsreceivableandAccountspayableandaccruedliabilities,approximatefairvaluesduetotheimmediateorshort-termmaturitiesofthesefinancialinstruments.CashequivalentsandShort-terminvestmentsareclassifiedasheldfortradingandthereforearerecordedatfairvalue.
Thecarryingamountsofderivativesareequaltofairvalue,whichisbasedontheamountatwhichtheycouldbesettledbasedonestimatedcurrentmarketrates.
Managementestimatedthefairvalueofitslong-termdebtbasedonvaluationtechniquesincludingdiscountedcashflows,takingintoaccountmarketinformationandtradedvalueswhereavailable,marketratesofinterest,theconditionofanyrelatedcollateral,thecurrentconditionsincreditmarketsandthecurrentestimatedcreditmarginsapplicabletotheCorporationbasedonrecenttransactions.Basedonsignificantunobservableinputs(Level3inthefairvaluehierarchy),theestimatedfairvalueofdebtandfinanceleasesapproximatesitscarryingvalue.
Followingisaclassificationoffairvaluemeasurementsrecognizedintheconsolidatedstatementoffinancialpositionusingafairvaluehierarchythatreflectsthesignificanceoftheinputsusedinmakingthemeasurements.
December 31, 2018
Fair value measurements at reporting date using:
Quoted prices in active
markets for identical assets
Significant other
observable inputs
Significant unobservable
inputs
Recurring measurements (Level1) (Level2) (Level3)
Financial AssetsHeld–for–tradingsecurities
Cashequivalents $ 39 $ - $ 39 $ -Short–terminvestments 4,077 - 4,077 -
DerivativeinstrumentsShareforwardcontracts 43 - 43 -Foreignexchangederivatives 24 - 24 -
Total $ 4,183 $ - $ 4,183 $ -
Financial LiabilitiesDerivativeinstruments
Foreignexchangederivatives 57 - 57 -Total $ 57 $ - $ 57 $ -
Financialassetsheldbyfinancialinstitutionsintheformofcashandrestrictedcashhavebeenexcludedfromthefairvaluemeasurementclassificationtableaboveastheyarenotvaluedusingavaluationtechnique.
TheCorporation’spolicyistorecognizetransfersintoandtransfersoutoffairvaluehierarchylevelsasofthedateoftheeventorchangeincircumstancesthatcausedthetransfer.Therewerenotransferswithinthefairvaluehierarchyduring2018.
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Offsetting of Financial Instruments in the Consolidated Statement of Financial Position
FinancialassetsandliabilitiesareoffsetandthenetamountreportedintheconsolidatedstatementoffinancialpositionwheretheCorporationhasalegallyenforceablerighttoset-offtherecognizedamountsandthereisanintentiontosettleonanetbasisorrealizetheassetandsettletheliabilitysimultaneously.Inthenormalcourseofbusiness,theCorporationentersintovariousmasternettingarrangementsorothersimilararrangementsthatdonotmeetthecriteriaforoffsettingintheconsolidatedstatementoffinancialpositionbutstillallowfortherelatedamountstobeset-offincertaincircumstances,suchastheterminationofthecontractsorintheeventofbankruptcyordefaultofeitherpartytotheagreement.
AirCanadaparticipatesinindustryclearinghousearrangementswherebycertainaccountsreceivablebalancesrelatedtopassenger,cargoandotherbillingsaresettledonanetbasiswiththecounterpartythroughtheclearinghouse.Thesebillingsaremainlytheresultofinterlineagreementswithotherairlines,whicharecommercialagreementsthatenablethesaleandsettlementoftravelandrelatedservicesbetweenthecarriers.Billedandworkinprocessinterlinereceivablesarepresentedonagrossbasisandamountto$70asatDecember31,2018($75asatDecember31,2017).Thesebalanceswillbesettledatanetvalueatalaterdate;however,suchnetsettlementamountisunknownuntilthesettlementdate.
Thefollowingtablepresentstherecognizedfinancialinstrumentsthatareoffset,orsubjecttoenforceablemasternettingarrangementsorothersimilararrangementsbutnotoffset,asatDecember31,2018and2017,andshowsintheNetcolumnwhatthenetimpactwouldbeontheconsolidatedstatementoffinancialpositionifallset-offrightswereexercised.
Amounts offset Amounts not offset
Net
Grossassets
Grossliabilitiesoffset
Netamountspresented
Financialinstruments
Financial assets
December 31, 2018
Derivativeassets $ 93 $ (69) $ 24 $ 43 $ 67Accountsreceivable 113 (47) 66 - 66
$ 206 $ (116) $ 90 $ 43 $ 133
December 31, 2017
Derivativeassets $ - $ - $ - $ 54 $ 54Accountsreceivable 114 (48) 66 - 66
$ 114 $ (48) $ 66 $ 54 $ 120
Amounts offset Amounts not offset
Net
Grossliabilities
Grossassetsoffset
Netamountspresented
Financialinstruments
Financial liabilities
December 31, 2018
Derivativeliabilities $ 317 $ (260) $ 57 $ - $ 57$ 317 $ (260) $ 57 $ - $ 57
December 31, 2017
Derivativeliabilities $ 286 $ (71) $ 215 $ - $ 215$ 286 $ (71) $ 215 $ - $ 215
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16. CONTINGENCIES, GUARANTEES AND INDEMNITIES
Contingencies and Litigation Provisions
InvestigationsbyCompetitionAuthoritiesRelatingtoCargo
TheEuropeanCommission,theUnitedStatesDepartmentofJusticeandtheCompetitionBureauinCanada,amongothersinvestigatedallegedanti-competitivecargopricingactivities,includingthelevyingofcertainfuelsurcharges,ofanumberofairlinesandcargooperators.TheinvestigationsconductedbytheU.S.DepartmentofJusticeandbytheCompetitionBureauinCanadaconcludedwithnoproceedingsagainstAirCanada.
Afterhavingrenderedadecisionagainstanumberofairlines,includingAirCanadain2010,whichwasoverturnedbytheEuropeanGeneralCourtinDecember2015,inMarch2017,theEuropeanCommissionrenderedanotherdecisionfindingthat12aircargocarriers,includingAirCanada,hadinfringedEuropeanUnioncompetitionlawinthesettingofcertaincargochargesandratesforvariousperiodsbetween1999and2006,imposingafineof21Euros(approximately$29)onAirCanada.AirCanadapaidthefineasrequiredinthesecondquarterof2017,pendingtheoutcomeofanappealtotheEuropeanGeneralCourt.WhileAirCanadacannotpredictwithcertaintytheoutcomeofitsappealoranyrelatedproceedings,AirCanadabelievesithasreasonablegroundstochallengetheEuropeanCommission’sruling.
AirCanadaisalsonamedasadefendantorisotherwiseinvolvedinanumberofclassactionlawsuitsandotherproceedingsinCanada,EuropeandtheUnitedStatesinconnectionwiththeseallegations.TheclassactionproceedingintheUnitedStatesweresettledbyAirCanadain2012,andcertainthird-partyproceedingsintheUnitedKingdomrelatingtothesameallegationsweresettledin2018.
AsatDecember31,2018,AirCanadahasaprovisionof$17($17asatDecember31,2017)relatingtooutstandingclaimsinthesematters,whichisrecordedinAccountspayableandaccruedliabilities.ThisprovisionisanestimatebaseduponthestatusofinvestigationsandproceedingsatthistimeandAirCanada’sassessmentastothepotentialoutcomeforcertainofthem.Theprovisiondoesnotaddresstheproceedingsandinvestigationsinalljurisdictions,butonlywherethereissufficientinformationtodoso.AirCanadahasdetermineditisnotpossibleatthistimetopredictwithanydegreeofcertaintytheoutcomeofallremainingproceedingsandinvestigations.Basedontheoutcomeofanydevelopmentsregardingproceedingsandinvestigations,AirCanadamayadjusttheprovisioninitsresultsforsubsequentperiodsasrequired.
MandatoryRetirement
AirCanadaisengagedinanumberofproceedingsinvolvingchallengestothemandatoryretirementprovisionsofcertainofitscollectiveagreements,includingthepreviousAirCanada-ACPAcollectiveagreement,whichincorporatedprovisionsofthepensionplantermsandconditionsapplicabletopilotsrequiringthemtoretireatage60.AirCanadahasfullyorpartiallyresolvedsomeofthesecomplaintsandisdefendingothers.Atthistime,itisnotpossibletodeterminewithanydegreeofcertaintytheextentofanyfinancialliabilitythatmayarisefromAirCanadabeingunsuccessfulinitsdefenceoftheseproceedings,thoughanysuchfinancialliability,ifimposed,wouldnotbeexpectedtobematerial.
OtherContingenciesVariousotherlawsuitsandclaims,includingclaimsfiledbyvariouslabourgroupsofAirCanadaarependingbyandagainsttheCorporationandprovisionshavebeenrecordedwhereappropriate.Itistheopinionofmanage-mentthatfinaldeterminationoftheseclaimswillnothaveamaterialadverseeffectonthefinancialpositionortheresultsoftheCorporation.
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Guarantees
GuaranteesinFuelFacilitiesandDe-IcingArrangements
TheCorporationparticipatesinfuelfacilityarrangementsoperatedthrougheightFuelFacilityCorporations,andthreeaircraftde-icingservicefacilities,alongwithotherairlinesthatcontractforfuelandde-icingservicesatvariousmajorairportsinCanada.Theseentitiesoperateonacostrecoverybasis.TheaggregatedebtoftheseentitiesthathasnotbeenconsolidatedbytheCorporationunderIFRS10ConsolidatedFinancialStatementsisapproximately$571asatDecember31,2018(December31,2017-$529),whichistheCorporation’smaximumexposuretolossbeforetakingintoconsiderationthevalueoftheassetsthatsecuretheobligationsandanycostsharingthatwouldoccuramongsttheothercontractingairlines.TheCorporationviewsthislosspotentialasremote.Eachcontractingairlineparticipatingintheseentitiessharesprorata,basedonsystemusage,intheguaranteeofthisdebt.Thematuritiesofthesedebtarrangementsvarybutgenerallyextendbeyondfiveyears.
Indemnification Agreements
IntheordinarycourseoftheCorporation’sbusiness,theCorporationentersintoavarietyofagreements,suchasrealestateleasesoroperatingagreements,aircraftfinancingorleasingagreements,technicalserviceagreements,anddirector/officercontracts,andothercommercialagreements,someofwhichmayprovideforindemnificationstocounterpartiesthatmayrequiretheCorporationtopayforcostsand/orlossesincurredbysuchcounterparties.TheCorporationcannotreasonablyestimatethepotentialamount,ifany,itcouldberequiredtopayundersuchindemnifications.Suchamountwouldalsodependontheoutcomeoffutureeventsandconditions,whichcannotbepredicted.Whilecertainagreementsspecifyamaximumpotentialexposure,certainothersdonotspecifyamaximumamountoralimitedperiod.Historically,theCorporationhasnotmadeanysignificantpaymentsundertheseindemnifications.
TheCorporationexpectsthatitwouldbecoveredbyinsuranceformosttortliabilitiesandcertainrelatedcontractualindemnities.
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ConsolidatedFinancialStatementsandNotes | 155
17. CAPITAL DISCLOSURES
TheCorporationviewscapitalasthesumofLong-termdebtandfinanceleases,capitalizedoperatingleases,andthebookvalueofShareholders’equitylessexcesscashnotrequiredtorunitscorebusinessoperations.TheCorporationusesAdvanceticketsalesasaproxyfortheminimumcashrequiredforongoingcorebusinessoperations.Previously,theCorporationusedthemarketvalueofitsoutstandingsharesinthecalculationoftotalcapital.Followingasignificantincreaseinthebookvalueofitsequity,theCorporationdecidedtochangeitsmethodologytousebookvalue.TheCorporationincludescapitalizedoperatingleases,whichisameasurecommonlyusedintheindustryascribingavaluetoobligationsunderoperatingleases.Thevalueisbasedonannualizedaircraftrentexpense,includingaircraftrentexpenserelatedtoregionalcarrieroperations,multipliedby7.0,whichisafactorcommonlyusedintheairlineindustry.Themeasureusedmaynotnecessarilyreflectthefairvalueornetpresentvaluerelatedtothefutureminimumleasepaymentsasthemeasureisnotbasedontheremainingcontractualpaymentsandthefactormaynotrecognizediscountratesimplicitintheactualleasesorcurrentratesforsimilarobligationswithsimilartermsandrisks.
TheCorporationalsomonitorsitsadjustednetdebtandfinancialleverageratio.AdjustednetdebtiscalculatedasthesumofLong-termdebtandfinanceleaseobligationsandcapitalizedoperatingleaseslessCashandcashequivalentsandShort-terminvestments.Financialleverageiscalculatedasadjustednetdebtover12monthstrailingearningsbeforeinterest,taxes,depreciation,amortizationandaircraftrent.
TheCorporation’smainobjectiveswhenmanagingcapitalare:
> Tomaintainfinancialleverageatorbelowtargetedleverageratiosdeterminedbymanagementtobeprudent;
> ToensurecapitalallocationdecisionsgeneratesufficientreturnsandtoassesstheefficiencywithwhichtheCorporationallocatesitscapitaltogeneratereturns.
> TostructurerepaymentobligationsinlinewiththeexpectedlifeoftheCorporation’sprincipalrevenuegeneratingassets;
> ToensuretheCorporationhasaccesstocapitaltofundcontractualobligationsastheybecomedueandtoensureadequatecashlevelstowithstanddeterioratingeconomicconditions;
> Tomaintainanappropriatebalancebetweendebtsuppliedcapitalversusinvestorsuppliedcapital;and
> TomonitortheCorporation’screditratingstofacilitateaccesstocapitalmarketsatcompetitiveinterestrates.
Inordertomaintainoradjustthecapitalstructure,theCorporationmayadjustthetypeoramountofcapitalutilized,includingpurchaseversusdebtfinancingversusleasedecisions,deferorcancelaircraftexpendituresbynotexercisingavailableoptionsorsellingaircraftoptions,redeemingorissuingdebtsecurities,issuingequitysecurities,andrepurchasingoutstandingshares,allsubjecttomarketconditionsandthetermsoftheunderlyingagreements(oranyconsentsrequired)orotherlegalrestrictions.
ThetotalcapitalandadjustednetdebtasatDecember31iscalculatedasfollows:
2018 2017
Long-termdebtandfinanceleases $ 6,197 $ 5,448Currentportionoflong-termdebtandfinanceleases 455 671
6,652 6,119Capitalizedoperatingleases 3,913 3,801Adjusteddebt 10,565 9,920Shareholders’equity,netofexcesscash 2,043 2,087Total Capital $ 12,608 $ 12,007Adjusteddebt $ 10,565 $ 9,920LessCashandcashequivalentsandShort-terminvestments (4,707) (3,804)Adjusted net debt $ 5,858 $ 6,116
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18. REVENUE
Disaggregation of revenueTheCorporationdisaggregatesrevenuefromcontractswithcustomersaccordingtothenatureoftheairtrans-portationservices.Thenatureofservicesispresentedaspassenger,cargoandotherrevenueonitsconsolidatedstatementofoperations.TheCorporationfurtherdisaggregatesairtransportationservicerevenueaccordingtogeographicmarketsegments.
AreconciliationofthetotalamountsreportedbygeographicregionforPassengerrevenuesandCargorevenuesontheconsolidatedstatementofoperationsisasfollows:
Passenger Revenues2018 2017
Restated-Note2
Canada $ 4,894 $ 4,637U.S.Transborder 3,504 3,195Atlantic 4,237 3,539Pacific 2,430 2,195Other 1,158 1,027 $ 16,223 $ 14,593
Cargo Revenues2018 2017
Restated-Note2
Canada $ 95 $ 84U.S.Transborder 43 39Atlantic 278 245Pacific 325 280Other 62 60 $ 803 $ 708
Passengerandcargorevenuesarebasedontheactualflownrevenueforflightswithanoriginanddestinationinaspecificcountryorregion.AtlanticreferstoflightsthatcrosstheAtlanticOceanwithoriginsanddestinationsprincipallyinEurope,India,theMiddleEastandNorthAfrica.PacificreferstoflightsthatcrossthePacificOceanwithoriginsanddestinationsprincipallyinAsiaandAustralia.OtherpassengerandcargorevenuesrefertoflightswithoriginsanddestinationsprincipallyinCentralandSouthAmericaandtheCaribbeanandMexico.
OtheroperatingrevenuesareprincipallyderivedfromcustomerslocatedinCanadaandconsistprimarilyofrevenuesfromthesaleofthegroundportionofvacationpackages,buyonboardandrelatedpassengerancillaryservicesandcharges,andotherairline-relatedservices.
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Contract balances
Thefollowingtableprovidesinformationaboutreceivables,contractassets,andcontractliabilitiesfromcontractswithcustomers.
December 31, 2018
December31,2017
Restated-Note2
January1,2017
Restated-Note2
Receivables,whichareincludedinAccountsreceivable $ 575 $ 587 $ 540
ContractcostswhichareincludedinPrepaidexpensesandothercurrentassets
115 100 98
Contractliabilities–Advanceticketsales 2,717 2,469 2,119
Receivablesincludepassenger,cargoandotherreceivablesfromcontractswithcustomers.TheCorporationsellspassengerticketandrelatedancillaryservicesviacash,creditcardorothercard-basedformsofpaymentwithpaymentgenerallycollectedinadvanceoftheperformanceofrelatedtransportationservices.Passengerticketandancillaryreceivablesareamountsduefromotherairlinesforinterlinetravel,travelagencypaymentprocessingintermediariesorcreditcardprocessorsassociatedwithsalesforfuturetravelandareincludedinAccountsreceivableontheconsolidatedstatementoffinancialposition.Cargoandotheraccountsreceivablerelatetoamountsowingfromcustomers,includingfromfreightforwardersandinterlinepartnersforcargoandotherservicesprovided.
Contractcostsincludecreditcardfees,commissionsandglobaldistributionsystemchargesonpassengertickets.Thesecostsarecapitalizedattimeofsaleandexpensedatthetimeofpassengerrevenuerecognition.
AirlinepassengeradvancesalesandthegroundportionofvacationpackagesaredeferredandincludedinCurrentliabilities.AdvancesalesalsoincludetheproceedsfromthesaleofflightticketstoAeroplan.Thedeferredrevenueisrecognizedwhentherelatedflightoccursorovertheperiodofthevacation.TheCorporationperformsregularevaluationsontheadvanceticketsalesliability.TheCorporationrecordsanestimateofbreakagerevenueforticketsthatwillexpireunused.Theseestimatesarebasedonhistoricalexperience.
Dependingonthefareclass,passengersmayexchangetheirticketsuptothetimeoftheflightorobtainarefund,generallyinexchangeforthepaymentofafee.Fornon-refundableticketsthatremainunusedatthetimeofflight,theCorporationrecognizesthefullamountintorevenueattimewhentransportationwastobeprovided.Forrefundableticketsthatremainunusedatthetimeoftheflight,theCorporationrecognizesthenetrevenueastheyexpireafteranyrefundamountisissuedtothepassenger.
ThepracticalexpedientinIFRS15allowsentitiesnottodisclosetheamountoftheremainingtransactionpricesanditsexpectedtimingofrecognitionforperformanceobligationsifthecontracthasanoriginalexpecteddurationofoneyearorless.TheCorporationelectstousethispracticalexpedientforthepassengertravelperformanceobligationaspassengerticketsexpirewithinayearifunused.
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19. REGIONAL AIRLINES EXPENSE
TheCorporationhascapacitypurchaseagreementswithJazz,SkyRegionalandcertainotherregionalcarriers.Expensesassociatedwiththesearrangementsareclassifiedasregionalairlinesexpenseontheconsolidatedstatementofoperations.Regionalairlinesexpenseconsistsofthefollowing:
2018 2017
Capacitypurchasefees $ 1,333 $ 1,267Aircraftfuel 531 412Airportandnavigationfees 296 293Salesanddistributioncosts 153 146Otheroperatingexpenses 529 499Regional airlines expense $ 2,842 $ 2,617
20. SPECIAL ITEMS In2017,theCorporationrecorded$30relatedtocargoinvestigations,asdescribedinNote16,andpaidthefinetotheEuropeanCommissionasrequired,pendingtheoutcomeofitsappeal.
21. SALE-LEASEBACKIn2018,theCorporationenteredintoasaleandleasebackarrangementfor25Embraer190aircraftfornetproceedsof$293,whichresultedintherecognitionofalossondisposalof$188.Theaircraftwillcontinuetobeoperatedunderleasesenteredintoundersuchsale-leasebackagreementuntiltheyfullyexitthefleetprogressivelythrough2019and2020,inlinewiththeCorporation’scurrentfleetplans.Theleasesareaccountedforasoperatingleases.
During2017,theCorporationtookdeliveryoffour787aircraftthatwerefinancedundersale-leasebacktransactionswithproceedsof$740.Thesaleswereatfairvalueandaccordinglytheresultinggainonsaleof$52wasrecognizedinnon-operatingincome.Theleasesareaccountedforasoperatingleaseswith12yearterms,paidmonthly.
22. RELATED PARTY TRANSACTIONSCompensation of Key Management
KeymanagementincludesAirCanada’sBoardofDirectors,PresidentandChiefExecutiveOfficer,DeputyChiefExecutiveOfficerandChiefFinancialOfficer,andExecutiveVice-PresidentandChiefCommercialOfficer.ThePresident,PassengerAirlinesisalsoincludedinthe2017period.Amountsreportedarebasedupontheexpenseasreportedintheconsolidatedfinancialstatements.Compensationtokeymanagementissummarizedasfollows:
2018 2017
Salariesandotherbenefits $ 8 $ 11Pensionandpost-employmentbenefits 1 5Share-basedcompensation 10 18 $ 19 $ 34
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23. SUBSEQUENT EVENTS
Acquisition of Aimia’s Aeroplan Loyalty Business
OnJanuary10,2019,AirCanadacompletedtheclosingofitspurchaseofAimiaCanadaInc.,ownerandoperatoroftheAeroplanloyaltybusiness,fromAimiaInc.Theaggregatepurchasepricefortheacquisitionconsistedof$450incashplus$47incashforpre-closingadjustments.Thepurchasepriceissubjecttopost-closingadjustmentsandtheacquisitionalsoincludestheassumptionoftheAeroplanMilesliability.AirCanadareceivedpaymentsfromTheToronto-DominionBank(“TD”)andCanadianImperialBankofCommerce(“CIBC”)intheaggregateamountof$822.VisaCanadaCorporation(“Visa”)alsomadeapaymenttoAirCanadaandassumingcompletionoftheAmexBankofCanada(“AMEX”)agreementreferredtobelow,AMEXwilldolikewise.
ConcurrentlywiththeconclusionoftheAeroplanpurchase,AirCanada,TD,CIBC,andVisafinalizedvariouscommercialagreementsrelatingtoandinsupportoftheacquisition,includingcreditcardloyaltyprogramandnetworkagreementsforfutureparticipationinAirCanada’snewloyaltyprogram.Inaddition,TDandCIBCmadepaymentstoAimiaCanadaInc.,nowAirCanada’ssubsidiary,intheaggregateamountof$400asprepaymentstobeappliedtowardsfuturemonthlypaymentsinrespectofAeroplanMiles.AirCanadaalsohasenteredintoanagreementinprinciplewithAMEX,whichalsoissuesAeroplanco-brandedproducts,tosecureitscontinuedparticipationinAirCanada’sloyaltyprogramafter2020.Followingtheclosingoftheacquisition,AimiaCanadaInc.changeditsnametoAeroplanInc.
AirCanada,astheacquirer,willperformbusinesscombinationaccountingasoftheacquisitiondate,whichgenerallyrequiresthattheacquirermeasuretheidentifiableassetsacquiredandliabilitiesassumedattheirfairvalues,subjecttocertainexceptions.TheCorporationisevaluatingtheimpactofthebusinesscombinationaccountingrequirements,whichresultswillbereportedoninAirCanada’sinterimunauditedcondensedconsolidatedfinancialstatementsandnotesforthefirstquarterof2019.
Capacity Purchase Agreement with Jazz and Equity Investment in Chorus
InFebruary2019,AirCanadaconcludedanagreementtoamendandextenditscapacitypurchaseagreement(“CPA”)withJazz,awholly-ownedsubsidiaryofChorusAviationInc.TheamendmentsprovideanextensionoftheCPAtermbytenyearsfromJanuary1,2026toDecember31,2035.Theamendmentsincludevariousminimumlevelsofcoveredaircraftatdifferentpointsintime,providingAirCanadatheflexibilitytooptimizeitsfleetwithinitsnetworkstrategy.TheamendmentsbecameeffectiveretroactivelyasatJanuary1,2019.
ConcurrentlywiththeCPAamendments,AirCanadasubscribedfor15,561,600classBvotingsharesinthecapitalofChorus,representing,attimeofissuance,approximately9.99%oftheissuedandoutstandingclassAvariablevotingsharesandclassBvotingsharesofChorusonacombinedbasis.Thisrepresentsaninvestmentof$97byAirCanada.TheChorusshareswereissuedtoAirCanadaatapriceof$6.25pershare,representinga5%premiumtothefive-dayvolumeweightedaveragepriceofthesharesasofthecloseoftradingonJanuary10,2019.AirCanadaandChorusenteredintoaninvestorrightsagreementunderwhich,amongotherthings,AirCanadawillholdtheinvestmentsharesforaperiodofatleast60months,subjecttocertainlimitedexceptions.
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DIRECTORS
Christie J.B. Clark CorporateDirector,Toronto,Ontario
Gary A. Doer CorporateDirector,Winnipeg,Manitoba
Rob Fyfe CorporateDirector,Auckland,NewZealand
Michael M. Green ChiefExecutiveOfficerandManagingDirector,
TenexCapitalManagement,NewYork,NewYork
Jean Marc Huot Partner,StikemanElliottLLP,Montreal,Quebec
Madeleine Paquin PresidentandChiefExecutiveOfficer,LogistecCorporation,
Montreal,Quebec
Calin Rovinescu PresidentandChiefExecutiveOfficer,AirCanada,Montreal,Quebec
Vagn Sørensen CorporateDirector,London,UnitedKingdom
Kathleen Taylor CorporateDirector,Toronto,Ontario
Annette Verschuren ChairandChiefExecutiveOfficer,NRStorInc.,Toronto,Ontario
Michael M. Wilson CorporateDirector,BraggCreek,Alberta
2018 ANNUAL REPORT
161
OFFICERS
Vagn Sørensen ChairmanoftheBoard
Calin Rovinescu PresidentandChiefExecutiveOfficer
Michael Rousseau DeputyChiefExecutiveOfficerandChiefFinancialOfficer
Lucie Guillemette ExecutiveVicePresidentandChiefCommercialOfficer
Craig Landry ExecutiveVicePresident,Operations
Catherine Dyer SeniorVicePresidentandChiefInformationOfficer
Amos Kazzaz SeniorVicePresident,Finance
Arielle Meloul-Wechsler SeniorVicePresident,People,CultureandCommunications
Ferio Pugliese SeniorVicePresident,GovernmentRelationsandAirCanadaExpress
David J. Shapiro SeniorVicePresident,InternationalandRegulatoryAffairsand
ChiefLegalOfficer
Richard Steer SeniorVicePresident,Operations
Duncan Bureau President,AirCanadaRouge
Samuel Elfassy VicePresident,Safety
Mark Galardo VicePresident,NetworkPlanning
Carolyn M. Hadrovic VicePresidentandCorporateSecretary
Chris Isford VicePresidentandController
John MacLeod VicePresident,GlobalSalesandAlliances
Mark Nasr VicePresident,LoyaltyandeCommerce
Kevin O’Connor VicePresident,SystemOperationsControl
Al Read VicePresident,Airports–NorthAmerica
Renee Smith-Valade VicePresident,In-FlightService
Tim Strauss VicePresident,Cargo
Murray Strom VicePresident,FlightOperations
Jon Turner VicePresident,Maintenance
Andrew Yiu VicePresident,Product
2018 ANNUAL REPORT
TSX price range and trading volume of Air Canada variable voting shares and voting shares (AC)
2018 High Low Volume traded
1st Quarter $ 29.11 $ 22.05 83,265,443
2nd Quarter $ 26.81 $ 20.33 68,206,296
3rd Quarter $ 28.44 $ 20.63 71,010,035
4th Quarter $ 29.39 $ 22.57 90,088,941
312,570,715
Restrictions on voting securities
In 2018, the Canadian Government passed An Act to amend the Canada Transportation Act and other Acts respecting transportation and to make related and consequential amendments to other Acts (also known as the “Transportation Modernization Act”). This Act, among other things, amended the Canada Transportation Act (“CTA”) by increasing, from 25% to 49%, the permitted level of foreign ownership of Canadian air carriers, while capping the voting rights of any single non-Canadian and of the aggregate of non-Canadian air carriers to 25%. Air Canada will seek shareholder approval at its 2019 annual and special meeting of shareholders to amend its articles of incorporation to increase the limits of foreign ownership and control of its voting shares to those permitted by these CTA amendments. The amendments to its articles is being undertaken by way of a court supervised and shareholder approved statutory plan of arrangement and will be subject to shareholder approval and approval of the Quebec Superior Court.
For further informationSHAREHOLDER RELATIONS Telephone: 514-422-6644 Facsimile: 514-422-0296 [email protected]
INVESTOR RELATIONS Telephone: 514-422-7849 Facsimile: 514-422-7877 [email protected]
HEAD OFFICE Air Canada Centre 7373 Côte-Vertu Boulevard West Saint-Laurent, Quebec H4S 1Z3
Internet: aircanada.com
Air Canada complies with the rules adopted by the Toronto Stock Exchange.
TRANSFER AGENT AND REGISTRAR AST Trust Company (Canada) 2001 Robert-Bourassa Boulevard, Suite 1600 Montreal, Quebec H3A 2A6
Telephone: 1-800-387-0825 (Canada and United States) 416-682-3860 (other countries)
Inquiries may also be submitted by email to: [email protected]
Ce rapport annuel est publié dans les deux langues officielles du Canada. Pour en recevoir un exemplaire en français, veuillez communiquer avec les Relations avec les actionnaires.
English or French, it’s the client’s choice
Official Languages at Air Canada
For Air Canada, offering service in the language chosen by its customers is essential. Verbal exchanges with clients, public-address announcements at the airport and on board as well as briefing of passengers with special needs all constitute the very heart of customer service and call upon our employees’ linguistic skills at all times. Our consideration to bilingualism not only makes good sense customerwise but also supports our legal obligations to serve the public in the two official languages of Canada.
Air Canada puts great efforts to better serve clients in the language of their choice. It is through reach-out activities with the minority language communities as well as ongoing employee awareness and training that we can face the daily challenges, whether it is the growing difficulty to recruit bilingual candidates outside the province of Quebec and the national capital region, or for our employees to maintain their language skills with very little opportunities to practice the acquired language in some regions of the country.
INVESTOR AND SHAREHOLDER INFORMATION
IN-HOUSE PRODUCTION BY: AIR CANADA MULTIMEDIA COMMUNICATIONS CENTRE
Air Canada is Canada’s largest domestic and international airline, serving more than 220 airports on six continents. Canada’s flag carrier is among the 20 largest airlines in the world and in 2018 served nearly 51 million customers. In 2018, Air Canada, together with Jazz, Sky Regional and other regional airlines operating flights on behalf of Air Canada under capacity purchase agreements, operated, on average, 1,613 daily scheduled flights, comprised of 64 Canadian cities, 60 destinations in the United States and a total of 98 cities in Europe, Africa, the Middle East, Asia, Australia, the Caribbean, Mexico, and South America.
Air Canada is a founding member of the Star Alliance® network. Through the 28-member airline network, Air Canada offers its customers access to 1,317 destinations in 193 countries, as well as reciprocal participation in frequent flyer programs and the use of airport lounges and other common airport facilities.
Air Canada is the only international network carrier in North America to receive a Four-Star ranking according to independent U.K. research firm Skytrax, which also named Air Canada the Best Airline in North America for 2018.
Corporate profile
aircanada.com
@aircanada