First Quarter 2013 Interim Unaudited Condensed Consolidated Financial Statements … · 2020-05-15 · Condensed Consolidated Financial Statements and Notes Quarter 1 2013 2 CONSOLIDATED

Condensed Consolidated Financial Statements and Notes Quarter 1 2013

0

First Quarter 2013

Interim Unaudited

Condensed Consolidated Financial Statements and Notes

May 3, 2013


1

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

Unaudited March 31, 2013

December 31, 2012

January 1, 2012 (Canadian dollars in millions)

ASSETS

Current

Cash and cash equivalents $ 849 $ 754 $ 777

Short-term investments 1,207 1,219 1,251

Total cash, cash equivalents and short-term investments 2,056 1,973 2,028

Restricted cash 53 96 76

Accounts receivable 721 550 712

Aircraft fuel inventory 87 84 92

Spare parts and supplies inventory 72 66 93

Prepaid expenses and other current assets 229 232 255

Total current assets 3,218 3,001 3,256

Property and equipment 4,670 4,711 4,938

Intangible assets 313 314 312

Goodwill 311 311 311

Deposits and other assets 509 510 595

Total assets $ 9,021 $ 8,847 $ 9,412

LIABILITIES

Current

Accounts payable and accrued liabilities $ 1,199 $ 1,161 $ 1,175

Advance ticket sales 1,982 1,599 1,554

Current portion of long-term debt and finance leases Notes 3 & 12 487 499 419

Total current liabilities 3,668 3,259 3,148

Long-term debt and finance leases Notes 3 & 12 3,253 3,259 3,707

Pension and other benefit liabilities Note 4 4,583 4,686 5,563

Maintenance provisions 599 571 548

Other long-term liabilities 408 419 463

Total liabilities $ 12,511 $ 12,194 $ 13,429

EQUITY

Shareholders' equity

Share capital 813 813 840

Contributed surplus 63 62 58

Deficit (4,426) (4,281) (4,989)

Total shareholders' equity (3,550) (3,406) (4,091)

Non-controlling interests 60 59 74

Total equity (3,490) (3,347) (4,017)

Total liabilities and equity $ 9,021 $ 8,847 $ 9,412

The accompanying notes are an integral part of the condensed consolidated financial statements.


2

CONSOLIDATED STATEMENT OF OPERATIONS

Unaudited Three months ended March 31

(Canadian dollars in millions except per share figures) 2013 2012

Operating revenues

Passenger $ 2,527 $ 2,524

Cargo 111 122

Other 314 315

Total revenues 2,952 2,961

Operating expenses

Aircraft fuel 870 889

Wages, salaries and benefits Note 4 564 536

Capacity purchase agreements Note 11 272 264

Airport and navigation fees 232 242

Aircraft maintenance 175 182

Depreciation, amortization and impairment Note 5 170 177

Sales and distribution costs 164 166

Aircraft rent 81 88

Food, beverages and supplies 66 69

Communications and information technology 49 49

Other 415 390

Total operating expenses 3,058 3,052

Operating loss (106) (91)

Non-operating income (expense)

Foreign exchange gain (loss) (40) 87

Interest income 7 9

Interest expense (73) (80)

Interest capitalized 8 2

Net financing expense relating to employee benefits Note 4 (52) (73)

Loss on financial instruments recorded at fair value Note 8 (2) (7)

Loss on investments in Aveos Note 10 - (65)

Other (2) (1)

Total non-operating expense (154) (128)

Loss before income taxes and discontinued operations (260) (219)

Income taxes - -

Net loss for the period from continuing operations $ (260) $ (219)

Net loss for the period from discontinued operations - Aveos Note 10 - (55)

Net loss for the period $ (260) $ (274)

Net income (loss) attributable to:

Shareholders of Air Canada (261) (275)

Non-controlling interests 1 1

$ (260) $ (274)

Net loss per share attributable to shareholders of Air Canada Note 6

Basic and diluted loss per share from continuing operations $ (0.95) $ (0.79)

Basic and diluted loss per share from discontinued operations $ - $ (0.20)

Basic and diluted loss per share $ (0.95) $ (0.99)



3

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)


(Canadian dollars in millions) 2013 2012

Comprehensive income (loss)


Other comprehensive income, net of taxes of nil:

Items that will not be reclassified to net income

Remeasurements on employee benefit liabilities Note 4 116 135

Total comprehensive loss $ (144) $ (139)

Comprehensive income (loss) attributable to:

Shareholders of Air Canada $ (145) $ (140)

Non-controlling interests 1 1

$ (144) $ (139)

Comprehensive loss attributable to shareholders of Air Canada from:

Continuing operations $ (145) $ (85)

Discontinued operations - (55)

$ (145) $ (140)

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

Unaudited (Canadian dollars in millions)

Share capital Contributed

surplus Deficit

Total shareholders'

equity

Non-controlling interests

Total equity

January 1, 2012 $ 840 $ 58 $ (4,989) $ (4,091) $ 74 $ (4,017)

Net income (loss) – – (275) (275) 1 (274)

Remeasurements on employee benefit liabilities – – 135 135 – 135

Total comprehensive income (loss) – – (140) (140) 1 (139)

Share-based compensation – 1 – 1 – 1

Distributions – – – – (19) (19)

March 31, 2012 $ 840 $ 59 $ (5,129) $ (4,230) $ 56 $ (4,174)

January 1, 2013 $ 813 $ 62 $ (4,281) $ (3,406) $ 59 $ (3,347)

Net income (loss) – – (261) (261) 1 (260)

Remeasurements on employee benefit liabilities – – 116 116 – 116

Total comprehensive income (loss) – – (145) (145) 1 (144)

Share-based compensation – 1 – 1 – 1

March 31, 2013 $ 813 $ 63 $ (4,426) $ (3,550) $ 60 $ (3,490)



4

CONSOLIDATED STATEMENT OF CASH FLOW


(Canadian dollars in millions) 2013 2012

Cash flows from (used for)

Operating


Adjustments to reconcile to net cash from operations

Depreciation, amortization and impairment 170 177

Foreign exchange loss (gain) 53 (85)

Employee benefit funding less than expense Note 4 13 31

Fuel and other derivatives Note 8 (9) (9)

Loss on investments in Aveos Note 10 - 65

Discontinued operations - Aveos Note 10 (22) 55

Change in maintenance provisions 14 7

Changes in non-cash working capital balances 300 326

Provision for cargo investigations - (8)

Other 2 (6)

Net cash flows from operating activities 261 279

Financing

Proceeds from borrowings 13 147

Reduction of long-term debt and finance lease obligations (96) (125)

Distributions related to aircraft special purpose leasing entities - (16)

Net cash flows from (used in) financing activities (83) 6

Investing

Short-term investments 17 (226)

Additions to property, equipment and intangible assets (114) (139)

Proceeds from sale of assets 4 2

Other 10 11

Net cash flows used in investing activities (83) (352)

Increase (decrease) in cash and cash equivalents 95 (67)

Cash and cash equivalents, beginning of period 754 777

Cash and cash equivalents, end of period $ 849 $ 710

Cash payments of interest $ 92 $ 95

Cash payments of income taxes $ - $ -



5

Notes to the interim condensed consolidated financial statements (unaudited)

(Canadian dollars in millions – except per share amounts)

1. GENERAL INFORMATION

The accompanying unaudited interim condensed consolidated financial statements (the “financial statements”) are of Air Canada (the “Corporation”). The term “Corporation” also refers to, as the context may require, Air Canada and/or one or more of its subsidiaries, including Touram Limited Partnership (“Air Canada Vacations”) and the subsidiary doing business under the brand name Air Canada rougeTM. These financial statements also include certain aircraft leasing entities, which are consolidated under IFRS 10 Consolidated Financial Statements. Air Canada is incorporated and domiciled in Canada. The address of its registered office is 7373 Côte-Vertu Boulevard West, Saint-Laurent, Quebec.

The Corporation historically experiences greater demand for its services in the second and third quarters of the calendar year and lower demand in the first and fourth quarters of the calendar year. This demand pattern is principally a result of the high number of leisure travelers and their preference for travel during the spring and summer months. The Corporation has substantial fixed costs in its cost structure that do not meaningfully fluctuate with passenger demand in the short term.


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2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Corporation prepares its financial statements in accordance with generally accepted accounting principles in Canada (“GAAP”) as set out in the Handbook of the Canadian Institute of Chartered Accountants – Part 1 (“CICA Handbook”) which incorporates International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). These financial statements have been prepared in accordance with IFRS applicable to the preparation of interim financial statements, including IAS 34 “Interim Financial Reporting”. In accordance with GAAP, these financial statements do not include all of the financial statement disclosures required for annual financial statements and should be read in conjunction with the Corporation’s annual consolidated financial statements for the year ended December 31, 2012. In management’s opinion, the financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim period presented.

These financial statements were approved for issue by the Board of Directors of the Corporation on May 2, 2013.

These financial statements are based on the accounting policies consistent with those disclosed in Note 2 to the 2012 annual consolidated financial statements, except as described below. Refer to Note 2 to the 2012 annual consolidated financial statements for information on new accounting standards and amendments not yet effective.

The Corporation has adopted the following new and revised standards effective January 1, 2013, in accordance with the applicable transitional provisions.

IFRS 10 – Consolidated Financial Statements IFRS 10 requires an entity to consolidate an investee when it is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Under existing IFRS, consolidation is required when an entity has the power to govern the financial and operating policies of an entity so as to obtain benefits from its activities. IFRS 10 replaces SIC-12 Consolidation—Special Purpose Entities and parts of IAS 27 Consolidated and Separate Financial Statements.

The Corporation participates in fuel facilities arrangements operated through fuel facility corporations (the "Fuel Facility Corporations"), along with other airlines to contract for fuel services at various major Canadian airports. The Fuel Facility Corporations are entities incorporated under federal or provincial statutes in order to acquire, finance and lease assets used in connection with the fuelling of aircraft and ground support equipment. The Fuel Facilities Corporations operate on a cost recovery basis.

Under the guidance of SIC Interpretation 12 – Consolidation of Special Purpose Entities which was applicable to periods prior to January 1, 2013, the Corporation consolidated three of the Fuel Facility Corporations located in Canada. The Corporation assessed its consolidation conclusions at January 1, 2013 and determined that it does not have control over and should not, under IFRS 10, consolidate the three Fuel Facility Corporations that were previously consolidated following the guidance in SIC-12.

The Corporation has accounted for this change in accounting policy using the relevant transitional provisions and derecognized the carrying amount of the assets, liabilities and non-controlling interests of the three Fuel Facility Corporations as at January 1, 2012. The adjustments for each financial statement line item affected are presented in the tables below.


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Adjustments to consolidated statement of financial position

December 31, 2012 January 1, 2012

Cash and cash equivalents $ (4) $ (71)

Short-term investments (49) -

Property and equipment (160) (150)

Current portion of long-term debt (7) (5)

Long-term debt (190) (199)

Other long-term liabilities (8) (6)

Decrease in net assets $ 8 11

Deficit (3) (6)

Non-controlling interests (5) (5)

Equity $ (8) $ (11)

Adjustments to consolidated statement of operations and statement of comprehensive income

Three months

ended March 31, 2012

Other revenues $ (1)

Depreciation, amortization and impairment (3)

Increase in net income and comprehensive income $ 2

Increase in net income and comprehensive income attributable to:

Shareholders of Air Canada 2

Non-controlling interests -

Equity $ 2

These adjustments increased basic and diluted earnings per share by $0.01.

Adjustments to consolidated statement of cash flows

Three months

ended March 31, 2012

Net cash flows from operating activities $ (1)

Net cash flows from financing activities (2)

Net cash flows used in investing activities 10

Increase in cash and cash equivalents $ 7

Cash and cash equivalents, beginning of period (71)

Cash and cash equivalents, end of period $ (64)


8

IFRS 13 – Fair Value Measurement

Under previous IFRS, guidance on measuring and disclosing fair value was dispersed among the specific standards requiring fair value measurements. IFRS 13 is a comprehensive standard for fair value measurement and disclosure requirements for use across all IFRS standards. This new standard clarifies that fair value is the price that would be received to sell an asset, or paid to transfer a liability in an orderly transaction between market participants, at the measurement date. It also establishes disclosures about fair value measurement. The Corporation adopted IFRS 13 on January 1, 2013 on a prospective basis. The adoption of IFRS 13 did not require any adjustments to the valuation techniques used by the Corporation to measure fair value and did not result in any measurement adjustments as at January 1, 2013.

Amendments to IAS 19 – Employee Benefits

The amendments to IAS 19 make significant changes to the recognition and measurement of defined benefit pension expense and termination benefits, and expand the disclosures for employee benefits. Actuarial gains and losses are renamed ‘remeasurements’ and are recognized immediately in other comprehensive income (“OCI”). Remeasurements recognized in OCI will not be recycled through profit or loss in subsequent periods. The amendments also accelerate the recognition of past service costs whereby they are recognized in the period of a plan amendment, irrespective of whether the benefits have vested. The annual expense for a funded benefit plan will be computed based on the application of the discount rate to the net defined benefit asset or liability, including interest on any liability in respect of minimum funding requirements. The Corporation continues to immediately recognize in the deficit all pension and benefit adjustments recognized in OCI. The Corporation also continues to recognize interest expense on net post-employment benefit liabilities in Net financing expense related to employee benefits in the consolidated statement of operations.

A number of other amendments have been made to recognition, measurement and classification including those re-defining short-term and other long-term benefits, guidance on the treatment of taxes related to benefit plans, guidance on risk/cost sharing factors and to provide for other expanded disclosures.

The Corporation adopted these amendments retrospectively and adjusted its equity as at January 1, 2012 to recognize previously unrecognized past service costs. The financing expense and employee benefit expense for the comparable period have been adjusted to reflect the accounting changes for defined benefit plans. The adjustments for each financial statement line item affected are presented in the tables below.

Adjustments to consolidated statement of financial position

March 31, 2013 December 31, 2012 January 1, 2012

Decrease in Pension and other benefit liabilities $ (3) $ (3) $ -

Increase in Equity $ 3 $ 3 $ -


9

Adjustments to consolidated statement of operations

Three months ended March 31

2013 2012

Increase in:

Wages, salaries, and benefits $ - $ -

Net financing expense relating to employee benefits 78 66

Decrease in net income $ 78 $ 66

Decrease in net income after accounting change attributable to:

Shareholders of Air Canada 78 66

Non-controlling interests - -

$ 78 $ 66

These adjustments reduced basic and diluted earnings per share by $0.28 (2012 - $0.24)

Adjustments to consolidated statement of comprehensive income


2013 2012

Increase in other comprehensive income:

Remeasurements of post-employment benefit liabilities $ 78 $ 66

Decrease in net income (78) (66)

Change in total comprehensive income $ - $ -

With retrospective application of the amended standard as at January 1, 2013, restated net income for 2012 is lower than originally reported under the previous accounting standard. The decrease arises from net financing expense relating to the pension benefit liability which is calculated using the discount rate used to value the benefit obligation. As the discount rate is lower than the expected rate of return on plan assets, financing expense increases as the interest attributable to plan assets declines. The difference between the actual rate of return on plan assets and the discount rate is included in OCI as a remeasurement. Also, under the amended standard, the interest cost on the additional minimum funding liability is recorded in the consolidated statement of operations, whereas it was reported in other comprehensive income under the previous standard. The impact of this change is that restated net income for 2012 decreases and other comprehensive income increases by the same amount, with no net impact on total comprehensive income.

The amended standard does not have any net impact on the consolidated statement of cash flows.

Amendments to IAS 1 – Financial Statement Presentation

The amendments to IAS 1 require entities to separate items presented in OCI into two groups, based on whether or not they may be recycled to profit or loss in the future. Items that will not be recycled such as remeasurements related to IAS 19 will be presented separately from items that may be recycled in the future. Entities that choose to present OCI items before tax will be required to show the amount of tax related to the two groups separately.

The Corporation has adopted the amendments to IAS 1 effective January 1, 2013. These changes did not result in any adjustments as the components of OCI for 2013 and the comparative period only includes items relating to remeasurements on post-employment benefit plans which are not reclassified to net income.


10

The table below provides the 2012 quarterly and full year consolidated statements of operations for Air Canada under the new and revised standards which took effect January 1, 2013 as described above.

Unaudited Q1 Q2 Q3 Q4 Full Year

(Canadian dollars in millions except per share figures) 2012 2012 2012 2012 2012

Operating revenues

Passenger $ 2,524 $ 2,671 $ 3,029 $ 2,513 $ 10,737

Cargo 122 122 118 126 488

Other 315 195 179 200 889

Total revenues 2,961 2,988 3,326 2,839 12,114

Operating expenses

Aircraft fuel 889 888 963 821 3,561

Wages, salaries and benefits 536 518 528 528 2,110

Benefit plan amendments - - (127) - (127)

Capacity purchase agreements 264 266 279 263 1,072

Airport and navigation fees 242 248 271 231 992

Aircraft maintenance 182 174 155 161 672

Depreciation, amortization and impairment 177 167 170 155 669

Sales and distribution costs 166 152 152 133 603

Aircraft rent 88 82 85 81 336

Food, beverages and supplies 69 73 81 68 291

Communications and information technology 49 47 45 47 188

Other 390 310 301 304 1,305

Total operating expenses 3,052 2,925 2,903 2,792 11,672

Operating income (loss) (91) 63 423 47 442


Foreign exchange gain (loss) 87 (61) 71 9 106

Interest income 9 9 10 9 37

Interest expense (80) (80) (76) (68) (304)

Interest capitalized 2 3 6 7 18

Net financing expense relating to employee benefits (73) (71) (72) (72) (288)

Gain (loss) on financial instruments recorded at fair value (7) (23) 3 7 (20)

Loss on investments in Aveos (65) - - - (65)

Other (1) - (6) 1 (6)

Total non-operating expense (128) (223) (64) (107) (522)

Income (loss) before income taxes and discontinued operations (219) (160)

359 (60) (80)

Income taxes - (1) - - (1)

Net income (loss) for the period from continuing operations $ (219) $ (161) $

359 $ (60) $ (81)

Net loss for the period from discontinued operations - Aveos (55) -

- - (55)

Net income (loss) for the period $ (274) $ (161) $ 359 $ (60) $ (136)

Net income (loss) attributable to:

Shareholders of Air Canada (275) (162) 358 (61) (140)

Non-controlling interests 1 1 1 1 4

$ (274) $ (161) $ 359 $ (60) $ (136)

Income (loss) per share - Basic $

(0.99)$

(0.59)$

1.29 $

(0.22)$

(0.51)

Income (loss) per share - Diluted $

(0.99)$

(0.59)$

1.28 $

(0.22)$

(0.51)


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3. LONG-TERM DEBT AND FINANCE LEASES

Final Maturity Weighted

Average Interest Rate (%)

March 31 2013

December 31 2012

Aircraft financing

Fixed rate US dollar financing 2013 – 2021 7.50 $ 1,264 $ 1,278

Floating rate US dollar financing 2015 – 2021 2.48 644 650

Floating rate Japanese yen financing 2020 0.30 138 152

Senior secured notes – US dollar 2015 – 2016 9.94 813 796

Senior secured notes – CDN dollar 2015 10.13 300 300

Other secured financing – US dollar 2013 – 2015 6.31 226 245

Other secured financing – CDN dollar 2013 – 2032 8.75 48 26

Long-term debt 3,433 3,447

Finance lease obligations 2013-2033 10.06 354 363

Total debt and finance leases 3,787 3,810

Unamortized discount (8) (9)

Unamortized debt issuance costs (39) (43)

Current portion (487) (499)

Long-term debt and finance leases $ 3,253 $ 3,259

The terms and conditions of the instruments referred to in the above table are consistent with those disclosed in Note 8 to the 2012 annual consolidated financial statements of the Corporation except as related to the impact of the deconsolidation of the three Fuel Facility Corporations upon adoption of IFRS 10 as described in Note 2, which reduced Other secured financing –CDN dollar by $197 at December 31, 2012.

Refer to Note 12 Subsequent Event for a description of a private offering of enhanced equipment trust certificates issued by the Corporation in connection with the financing of five new Boeing 777-300ER aircraft scheduled for delivery during the period from June 2013 to February 2014.

Refer to Note 7 for the Corporation’s principal and interest repayment requirements as at March 31, 2013.


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4. PENSIONS AND OTHER BENEFIT LIABILITIES

Pension Plan Cash Funding Obligations

As described in Note 9 to the 2012 annual consolidated financial statements, as of 2014, the Air Canada 2009 Pension Regulations will cease to have effect. However, as announced on March 12, 2013, Air Canada and the Government of Canada have agreed to an extension of Air Canada’s pension funding arrangements to January 30, 2021.

Based on the agreement reached with the Government of Canada, the Minister of Finance is expected to propose new regulations under the Pension Benefits Standards Act,1985 in respect of special payments under Air Canada's defined benefit plans applicable to the period between 2014 to 2020 inclusive, expiring January 30, 2021. According to the terms of the agreement, subject to the maximum past service contribution permitted under the Income Tax Act for the plan year, it is expected that under the new regulations, Air Canada will be required to make payments of at least $150 annually with an average of $200 per year, to contribute an aggregate minimum of $1,400 over seven years in solvency deficit payments, in addition to its pension current service payments.

Under the agreement, in respect of the plan years Air Canada benefits from the agreed limits on special payments, Air Canada will be subject to a series of covenants and undertakings, including a prohibition on dividends and share repurchases, as well as certain limitations on executive compensation arrangements. As requested by the Government of Canada, Air Canada has also agreed to use reasonable efforts, during the negotiations of the next collective agreements with Air Canada’s Canadian-based unions, to seek to include in those collective agreements provisions which would have employees contribute fifty per cent of their pension plan normal costs, and has agreed not to implement pension plan benefit improvements without regulatory approval. The agreement permits Air Canada to elect to opt out of the regulations and have special payments in respect of all Air Canada pension plans, collectively, determined in accordance with the normal funding rules.

Air Canada's Canadian-based unions had previously provided approval or support for Air Canada's extension request and the arrangements are subject to successfully concluding a consultation process with Air Canada management and retiree beneficiaries. The new funding arrangements will become effective upon the successful conclusion of the consultation process with Air Canada management and retiree beneficiaries and the subsequent adoption of new regulations under the Pension Benefits Standards Act, subject to Governor in Council approval.

Absent the adoption and implementation of the agreement upon expiry of the Air Canada 2009 Pension Regulations, under generally applicable regulations, Air Canada’s pension funding obligations would be determined by a wide variety of factors, pursuant to normal past service contribution rules which would generally require one fifth of any solvency deficit, determined on the basis of an average over the previous three years, to be funded each year in addition to required current service contributions.


13

Pension and Other Employee Future Benefit Expense

The Corporation has recorded net defined benefit pension and other employee future benefits expense as follows:

Three Months Ended March 31

2013 2012

Consolidated Statement of Operations

Operating expenses

Wages, salaries and benefits

Pension benefits $ 68 $ 55

Other employee benefits 15 14

$ 83 $ 69


Net financing expense relating to employee benefit liabilities

Pension benefits $ (39) $ (59)

Other employee benefits (13) (14)

$ (52) $ (73)

Consolidated Other Comprehensive Income (Loss)

Remeasurements on employee benefit liabilities


Other employee benefits (8) (18)

$ 116 $ 135

The funding of employee benefits as compared to the expense recorded in the consolidated statement of operations is summarized in the table below.


2013 2012

Net defined pension and other future employee benefits expense recorded in the consolidated statement of operations

Wages, salaries and benefits $ 83 $ 69

Net financing expense relating to employee benefit liabilities 52 73

$ 135 $ 142

Employee benefit funding by Air Canada


Other employee benefits 9 11

$ 122 $ 111

Employee benefit funding less than expense $ 13 $ 31


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5. ASSET IMPAIRMENT

During the first quarter of 2013, an impairment charge of $24 was recorded in Depreciation, amortization and impairment expense related to certain A340-300 aircraft (none of which are operated by Air Canada). Certain of the lease agreements relating to the A340-300 aircraft have expired or are expiring during 2013 and these aircraft are being prepared for return or other disposition. The impairment charge is based upon the net proceeds expected upon the return or other disposition of these aircraft.


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6. EARNINGS PER SHARE

The following table outlines the share amounts used in the calculation of basic and diluted earnings per share.


(in millions) 2013 2012

Weighted-average number of shares outstanding – basic 274 277

Effect of potential dilutive securities:

Warrants 4 -

Stock options 3 -

Shares held in Trust for employee share-based compensation award 1 2

8 2

Add back anti-dilutive impact (8) (2)

Adjusted denominator for diluted earnings per share 274 277

Basic EPS is calculated based on the weighted average number of ordinary shares in issue after deducting shares held in trust for the purposes of the Employee Recognition Award.

Excluded from the calculation of diluted earnings per share were outstanding options and warrants where the exercise prices were greater than the average market price of the ordinary shares.


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7. COMMITMENTS

Boeing

As described in Note 16 to the 2012 annual consolidated financial statements, the Corporation has outstanding purchase commitments with The Boeing Company (“Boeing”) for the acquisition of 37 Boeing 787 aircraft and five Boeing 777 aircraft.

Refer to Note 12 Subsequent Event for a description of a private offering of enhanced equipment trust certificates issued by the Corporation in connection with the financing of five new Boeing 777-300ER aircraft scheduled for delivery during the period from June 2013 to February 2014.

Capital Commitments The estimated aggregate cost of the future firm Boeing 787 aircraft deliveries and other capital purchase commitments as at March 31, 2013 approximates $5,150 (of which $3,125 is subject to committed financing, subject to the fulfillment of certain terms and conditions, and subject to closing, additional financing of $726 (US$715) from the expected proceeds from the offering of enhanced equipment trust certificates as described in Note 12 Subsequent Event). US dollar amounts are converted using the March 31, 2013 closing rate of CDN$1.016. The estimated aggregate cost of aircraft is based on delivery prices that include estimated escalation and, where applicable, deferred price delivery payment interest calculated based on the 90-day US LIBOR rate at March 31, 2013. Other capital purchase commitments relate principally to building and leasehold improvement projects.

Remainder

of 2013 2014 2015 2016 2017 Thereafter Total

Capital commitments $ 620 $ 855 $ 585 $ 999 $ 1,276 $ 815 $ 5,150

Maturity Analysis

Principal and interest repayment requirements as at March 31, 2013 on Long-term debt and finance lease obligations are as follows. The tables below exclude the long-term debt and interest obligations associated with the expected issuance of enhanced equipment trust certificates, as further described in Note 12 Subsequent Event.

Principal Remainder


Long-term debt obligations $ 366 $ 269 $ 1,409 $ 477 $ 386 $ 526 $ 3,433

Finance lease obligations 46 57 51 25 26 149 354

$ 412 $ 326 $ 1,460 $ 502 $ 412 $ 675 $ 3,787

Interest Remainder


Long-term debt obligations $ 166 $ 204 $ 142 $ 50 $ 68 $ 31 $ 661

Finance lease obligations 25 28 22 18 16 50 159

$ 191 $ 232 $ 164 $ 68 $ 84 $ 81 $ 820


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8. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Summary of Gain (loss) on Financial Instruments Recorded at Fair Value


2013 2012

Fuel derivatives $ (11) $ (8)

Share forward contracts 9 –

Other – 1

Loss on financial instruments recorded at fair value $ (2) $ (7)

Fuel Price Risk Management

During the first quarter of 2013, the Corporation recorded a loss of $11 in Loss on financial instruments recorded at fair value related to fuel derivatives ($8 loss in 2012). During the first quarter of 2013, the Corporation purchased crude-oil and refined products-based call options covering a portion of 2013 fuel exposure. The cash premium related to these contracts was $11. Fuel derivative contracts cash settled with a net fair value of $1 in favour of the Corporation.

As of March 31, 2013, approximately 30% of the Corporation's anticipated purchases of jet fuel for the remainder of 2013 are hedged at an average West Texas Intermediate (“WTI”) equivalent capped price of US$100 per barrel. The Corporation's contracts to hedge anticipated jet fuel purchases over the 2013 period are comprised of call options and call spreads. The fair value of the fuel derivatives portfolio at March 31, 2013 is $15 in favour of the Corporation ($16 in favour of the Corporation as at December 31, 2012) and is recorded within Prepaid expenses and other current assets.

The following table outlines the notional volumes per barrel along with the WTI equivalent weighted average capped price by type of derivative instruments as at March 31, 2013. The Corporation is expected to generate fuel hedging gains if oil prices increase above the capped price, with call spreads subject to an average maximum price protection of US$102 per barrel.

Derivative Instruments Term Volume (bbls) WTI

Weighted Average Capped Price (US$/bbl)

Call options 2013 5,487,000 $ 100

Call spreads 2013 150,000 $ 97

Financial Instrument Fair Values in the Consolidated Statement of Financial Position

The carrying amounts reported in the Consolidated Statement of Financial Position for short term financial assets and liabilities, which includes Accounts receivable and Accounts payable and accrued liabilities, approximate fair values due to the immediate or short-term maturities of these financial instruments. Cash equivalents and Short-term investments are classified as held for trading and therefore are recorded at fair value.

The carrying amounts of interest rate swaps, share forward contracts, foreign exchange, and fuel derivatives are equal to fair value, which is based on the amount at which they could be settled based on estimated current market rates.

In measuring the fair value of the prepayment option on the senior secured notes, which is categorized as Level 3 in the fair value hierarchy, the Corporation takes into account various factors including the prepayment terms in the notes, market rates of interest, the current conditions in credit markets and the current estimated credit margins applicable to the Corporation.

Management estimated the fair value of its long-term debt based on valuation techniques taking into account market rates of interest, the condition of any related collateral, the current conditions in credit markets and the current estimated credit margins applicable to the Corporation based on recent transactions. Based on significant observable inputs (Level 2 in the fair value hierarchy), the estimated fair value of debt approximates its carrying value of $3,740 (December 31, 2012 - $3,758).


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Following is a classification of fair value measurements recognized in the Consolidated Statement of Financial Position using a fair value hierarchy that reflects the significance of the inputs used in making the measurements.

Fair value measurements at reporting date using:

March 31, 2013

Quoted prices in active markets for

identical assets (Level 1)

Significant other observable inputs

(Level 2)

Significant unobservable

inputs (Level 3)

Financial Assets

Held–for–trading securities

Cash equivalents $ 221 $ – $ 221 $ –

Short–term investments 1,207 – 1,207 –

Deposits and other assets

Prepayment option on senior secured notes 15 – – 15

Derivative instruments

Fuel derivatives 15 – 15 –

Share forward contracts 23 – 23 –

Foreign exchange derivatives 10 – 10 –

Interest rate swaps 13 – 13 –

Total $ 1,504 $ – $ 1,489 $ 15

Financial assets held by financial institutions in the form of cash and restricted cash have been excluded from the fair value measurement classification table above as they are not valued using a valuation technique.

The Corporation’s policy is to recognize transfers into and transfers out of fair value hierarchy levels as of the date of the event or change in circumstances that caused the transfer. There were no transfers within the fair value hierarchy during the three months ended March 31, 2013.

There was no change in the fair value of level 3 assets during the three months ended March 31, 2013.


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9. CONTINGENCIES AND GUARANTEES

Contingencies and Litigation Provisions

Billy Bishop Toronto City Airport In February 2006, Jazz commenced proceedings before the Ontario Superior Court of Justice against Porter Airlines Inc. (“Porter”) and other defendants (collectively the “Porter Defendants”) after Jazz became aware that it would be excluded from operating flights from Billy Bishop Toronto City Airport. On October 26, 2007, the Porter Defendants counterclaimed against Jazz and Air Canada alleging various violations of competition law, including that Jazz and Air Canada’s commercial relationship contravenes Canadian competition laws, and claiming $850 in damages. On October 16, 2009, Jazz discontinued its suit in the Ontario Superior Court against Porter.

The counterclaim filed by Porter in the Ontario Superior Court of Justice against Jazz and Air Canada was stayed pending the outcome of a mirror counterclaim made by Porter in the Federal Court in relation to proceedings in the Federal Court; all Federal Court proceedings have since been discontinued. On March 20, 2013, an agreement was concluded providing for the dismissal of the counterclaim in the Ontario Superior Court of Justice against Air Canada and Jazz and an order to that effect was rendered on March 27, 2013.

Pay Equity The Canadian Union of Public Employees (“CUPE”), which represents Air Canada’s flight attendants, filed a complaint in 1991 before the Canadian Human Rights Commission alleging gender-based wage discrimination. CUPE claims the predominantly female flight attendant group should be paid the same as the predominantly male pilot and mechanics groups because their work is of equal value. Litigation of a preliminary matter was pursued through to the Supreme Court of Canada, and the Commission did not begin investigating the complaint on the merits until March 2007. The Commission concluded its investigation in 2011 and decided not to refer the complaint to the Canadian Human Rights Tribunal for inquiry. CUPE initiated proceedings before the Federal Court to challenge this determination. In the first quarter of 2013, the Federal Court denied CUPE’s challenge and upheld the Commission’s decision, and the formal deadline by which the Federal Court’s decision could be appealed to the Federal Court of Appeal has expired.

Guarantees

Guarantees in Fuel Facilities Arrangements The following disclosure is updated as a result of the deconsolidation of the three Fuel Facility Corporations upon adoption of IFRS 10 as described in Note 2. There are now eight Fuel Facility Corporations that are not consolidated by the Corporation. Under previous accounting standards, the Corporation did not consolidate five of the eight Fuel Facility Corporations.

The Corporation participates in fuel facility arrangements operated through Fuel Facility Corporations, along with other airlines that contract for fuel services at various major airports in Canada. The Fuel Facility Corporations operate on a cost recovery basis. The purpose of the Fuel Facility Corporations is to own and finance the system that distributes the fuel to the contracting airlines, including leasing the Land Rights under the land leases. The aggregate debt of the eight Fuel Facility Corporations in Canada that have not been consolidated by the Corporation under IFRS 10 Consolidated Financial Statements is approximately $390 as at December 31, 2012 (December 31, 2011 - $390), which is the Corporation's maximum exposure to loss before taking into consideration the value of the assets that secure the obligations and any cost sharing that would occur amongst the other contracting airlines. The Corporation views this loss potential as remote. Each contracting airline participating in a Fuel Facility Corporation shares pro rata, based on system usage, in the guarantee of this debt. The maturities of these debt arrangements vary but generally extend beyond five years.


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10. INVESTMENTS IN AVEOS

In 2012, as a result of Aveos Fleet Performance Inc. (“Aveos”) ceasing operations and filing for court protection pursuant to the Companies’ Creditors Arrangements Act (“CCAA”), Air Canada reduced the carrying value of its investment in Aveos Holding Company, Aveos’ parent company, as well as the carrying value of a long term note receivable from Aveos to nil and recorded an aggregate loss on investments of $65 in Non-operating expense. In addition, Air Canada recorded a liability of $55, which was charged to Discontinued Operations, related to Air Canada’s commitment under a separation program. For the three months ended March 31, 2013, a cash outflow of $22 was generated in relation to this separation program. It is expected that remaining payments of $7 to settle Air Canada’s commitment will be finalized in 2013.

Operating amounts owing between Air Canada and Aveos, including disputed invoices, may be subject to Aveos’ CCAA proceedings and are being reported on a net basis. The ultimate settlement of such amounts may be determined through negotiations or resolved by the court process. As such, certain balances recorded are based on a number of estimates and assumptions and it is not possible to predict the outcome of the claims between the parties. Given the uncertainty as to the ultimate resolution, additional provisions or charges may be required.


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11. CAPACITY PURCHASE AGREEMENTS

Air Canada has capacity purchase agreements with Jazz Aviation LP and certain other regional carriers. The following table outlines the capacity purchase fees and pass-through expenses under these agreements for the periods presented:


2013 2012

Capacity purchase fees $ 272 $ 264

Pass-through fuel expense 106 105

Pass-through airport expense 50 50

Pass-through other expenses 20 13

$ 448 $ 432


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12. SUBSEQUENT EVENT

Private Offering of Enhanced Equipment Trust Certificates

On April 24, 2013, in connection with the financing of five new Boeing 777-300ER aircraft scheduled for delivery during the period from June 2013 to February 2014, Air Canada announced the pricing of a private offering of three tranches of enhanced equipment trust certificates with a combined aggregate face amount of US$715.

The offering is expected to close on May 9, 2013, subject to customary closing conditions.

The private offering is comprised of Class A certificates, Class B certificates and Class C certificates.

• The Class A certificates, with a US$425 face amount, will have an interest rate of 4.125% per annum and a final expected distribution date of May 15, 2025.

• The Class B certificates, with a US$182 face amount, will have an interest rate of 5.375% per annum and a

final expected distribution date of May 15, 2021.

• The Class C certificates, with US$108 face amount, will have an interest rate of 6.625% per annum and a final expected distribution date of May 15, 2018.

The certificates are expected to have a weighted average interest rate of approximately 4.7% per annum.

Pursuant to the terms of the offering, the certificates will represent an interest in three separate pass through trusts. The trusts will consist of a separate trust for the Class A certificates, Class B certificates and Class C certificates, respectively. The trusts will use the proceeds from the offering to acquire equipment notes that will be issued to finance the acquisition of the five new Boeing 777-300ER aircraft. The proceeds from the offering will be held in escrow until the delivery of the respective aircraft.

The equipment notes will be secured by the five Boeing 777-300ER aircraft being acquired, and the security interest in each of the aircraft will benefit from the protections of the Cape Town Convention on International Interests in Mobile Equipment and the Protocol thereto on Matters Specific to Aircraft Equipment, as enacted in Canada.

In respect of the Class A certificates and the Class B certificates, the trustee will distribute all payments of principal, premium (if any) and interest received on the related equipment notes held in each trust to the holders of the Class A certificates and Class B certificates, subject to the subordination provisions applicable to the certificates. Scheduled payments of principal and interest made on the equipment notes will be distributed to the holders of the Class A certificates and Class B certificates on the regular distribution dates of May 15 and November 15, commencing on November 15, 2013.

In respect of the Class C certificates, the trustee will distribute all payments of principal, premium (if any) and interest received on the related equipment notes held in each trust to the holders of the Class C certificates, subject to the subordination provisions applicable to the certificates. Scheduled payments of interest made on the equipment notes will be distributed to the holders of the Class C certificates on the regular distribution dates of May 15 and November 15, commencing on November 15, 2013. The entire principal amount is scheduled to be paid on May 15, 2018.

Documents

First Quarter 2013 Interim Unaudited Condensed Consolidated Financial Statements … · 2020-05-15 · Condensed Consolidated Financial Statements and Notes Quarter 1 2013 2 CONSOLIDATED