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 Metrics
Operating 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) pp
EBITDAR (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) pp
Unrestricted liquidity
(3)
5,725 4,181 1,544 5,725 4,181 1,544
Net 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) pp
Leverage 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 1.3
Average 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 5.0
Revenue 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.
2018 ANNUAL REPORT
3
CONTENTS
Message from the President and Chief Executive Officer 4
Air Canada 2018 Corporate Sustainability Progress Report 8
2018 Management’s Discussion and Analysis of
Results of Operations and Financial Condition 14
1. Highlights 2
2. Introduction and Key Assumptions 15
3. About Air Canada 17
4. Strategy 1
8
5. Overview 2
7
6. Results of Operations – Full Year 2018 versus Full Year 2017 29
7. Results of Operations – Fourth Quarter 2018 versus Fourth Quarter 2017 37
8. Fleet 48
9. Financial and Capital Management 51
9.1. Liquidity 51
9.2. Financial Position 51
9.3. Adjusted Net Debt 52
9.4. Working Capital 53
9.5 Consolidated Cash Flow Movements 54
9.6. Capital Expenditures and Related Financing Arrangements 55
9.7. Pension Funding Obligations 57
9.8. Contractual Obligations 58
9.9. Share Information 59
10. Quarterly Financial Data 60
11. Selected Annual Information 63
12. Financial Instruments and Risk Management 64
13. Critical Accounting Estimates and Judgements 67
14. Accounting Policies 71
15. Off-Balance Sheet Arrangements 74
16. Related Party Transactions 74
17. Sensitivity of Results 75
18. Risk Factors 76
19. Controls and Procedures 87
20. Non-GAAP Financial Measures 88
21. Glossary 94
2018
Consolidated Financial Statements and Notes 96
Statement of Management’s Responsibility for Financial Reporting 97
Independent Auditor’s Report 98
Consolidated Statements of Financial Position 100
Consolidated Statements of Operations 101
Consolidated Statements of Comprehensive Income 102
Consolidated Statements of Changes In Equity 102
Consolidated Statements of Cash Flow 103
1. General Information 104
2. Basis of Presentation and Summary of Significant Accounting Policies 105
3. Critical Accounting Estimates and Judgements 117
4. Property and Equipment 119
5. Intangible Assets 120
6. Goodwill 121
7. Long-Term Debt and Finance Leases 122
8. Pensions and Other Benefit Liabilities 126
9. Provisions for Other Liabilities 135
10. Income Taxes 136
11. Share Capital 139
12. Share-Based Compensation 141
13. Earnings per Share 144
14. Commitments 145
15. Financial Instruments and Risk Management 146
16. Contingencies, Guarantees and Indemnities 153
17. Capital Disclosures 155
18. Revenue 156
19. Regional Airlines Expense 158
20. Special Items 158
21. Sale-Leaseback 158
22. Related Party Transactions 158
23. Subsequent Events 159
Directors 160
Officers 1
61
Investor and Shareholder Information 165
2018 ANNUAL REPORT
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MESSAGE FROM
THE PRESIDENT AND
CHIEF EXECUTIVE
OFFICER
Air Canada’s strong execution capabilities were on full
display in 2018 given the many challenges faced during the
year, including significantly higher fuel costs and economic
and trade uncertainty. The results achieved, including a
strengthened balance sheet and an expanded global franchise,
demonstrated both resiliency and consistency. 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.
We generated record operating revenue of $18.065 billion in
2018 and ended the year with record unrestricted liquidity of
$5.725 billion. Following on a record year in 2017, we reported
a comparably solid performance on other key metrics, such
as EBITDAR of $2.851 billion (including record fourth quarter
EBITDAR of $543 million), operating income of $1.174 billion,
net cash from operating activities of $2.695 billion and
$791 million free cash flow.
Success in any given year depends on many things going right.
In this regard, our 2018 record revenue reflected year-over-
year increases in passenger revenue in all markets we serve.
This underscores both the strength of our network and a
highly efficient fleet deployment across that network.
To put this in perspective, we have achieved nine consecutive
years of revenue growth. Our 2018 passenger revenue was
$16.2 billion, an 11.2% increase over 2017.
This revenue growth was also accompanied by strict cost
discipline within controllable cost categories. In 2018,
Air Canada’s unit costs, or cost per available seat mile (CASM),
increased 6.0% compared to 2017, mostly attributable to an
increase in fuel costs of almost $1.2 billion. Adjusted CASM,
which excludes fuel expense, the cost of ground packages at
Air Canada Vacations and special items, increased only 0.3%,
in line with our projections.
Our free cash flow of $791 million in 2018 was significantly
above guidance. Adjusted net debt of $5.858 billion was down
$258 million from the prior year as an increase in long-term
debt and finance leases was more than offset by an increase
in cash, cash equivalents and short-term investments.
The company’s leverage ratio of 2.1 was unchanged from
December 31, 2017. Our weighted average cost of capital
stood at 7.2% at year-end, 540 basis points lower than our
return on invested capital of 12.6%, resulting in continued
value creation.
Another important record for the year was the number
of customers carried. We flew 50.9 million passengers, an
increase of 5.8% from 2017, with an average load factor of
83.3%. To contextualize these numbers, looking back into our
past, it took us 30 years to fly our first 50 million customers.
More importantly, we carried our customers safely and did
so with increased levels of customer care as the numerous
awards we were privileged to receive in 2018 attest. For the
second year in a row and the seventh time in nine years,
Skytrax named us North America’s Best Airline and we
remain the only four-star international network carrier in
North America. We achieved a five-star rating for our onboard
Calin Rovinescu
2018 ANNUAL REPORT
5
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.
customer experience from the Airline Passenger Experience
Association. As well, we continue to lead in the all-important,
higher-yielding market segment of frequent business travellers,
where Air Canada is the preferred airline for domestic travel
for 92% of this population, according to the Ipsos Reid 2018
Canadian Business Traveller Survey.
Results such as these speak to the extent of the transformation
Air Canada has undergone; one we are committed to pursue even
more vigorously into the future, as we continue to adhere to the
four corporate priorities that have brought us to this point.
The first of these is Revenue Enhancement and Cost Control.
Not only have we successfully grown revenue, but the make-up
of that revenue has also greatly improved. On a stage-length
adjusted basis, in 2018, system yield increased 3.7% and PRASM
improved 5% over 2017. We have done this by attracting a
greater share of business and premium customers as well as
through an effective ancillary fee strategy, which resulted in
a 13% increase in such revenue over 2017.
As mentioned, the counterpart to revenue generation is cost
control. Our ability to contain unit costs below our forecast
is evidence of a cost discipline now engrained throughout our
company. Today, on a local currency basis, we operate at the
same adjusted CASM level on average as our much larger U.S.
competitors, which should further reduce the valuation discount
our company has long been subject to versus our U.S. peers.
We anticipate further cost reductions. Already, at year-end, we
had achieved or identified $220 million of $250 million in annual
savings targeted in a two-year Cost Transformation Program
which began in 2018. Air Canada Rouge, with its 29% lower
adjusted CASM compared to Air Canada mainline, continues to
expand in leisure markets and domestically on routes where we
face low-cost carrier competition.
Our fleet renewal has also been a key driver for CASM
reductions. In 2018, we took delivery of five Boeing 787-9 and
16 Boeing 737 MAX 8 aircraft into the mainline fleet and added
one Airbus A321, two Airbus A319s and one Boeing 767 aircraft
to the Air Canada Rouge fleet. All of these new fleet types have
been designed to produce significant CASM savings over the
aircraft they will replace.
We have structured our fleet renewal program to strengthen
our balance sheet. At present, 55 aircraft, or 23% of our
combined mainline/Rouge fleet, are unencumbered, creating a
pool of assets valued at US$2.6 billion that we can monetize if
needed. This asset pool will increase as we expect to have close
to 100 or almost 40% of our combined mainline/Rouge fleet
unencumbered by the end of 2021.
Fleet renewal has also supported our second priority of
International Expansion. During 2018, Air Canada and
Air Canada Rouge launched 29 new routes, mostly international
and transborder. With our wide-body fleet renewal largely
completed, the pace of capacity growth will taper but we will
continue to add new international routes where margins are
higher and to further diversify and de-risk our network.
An equally important consideration is each new route’s potential
to draw incremental international-connecting traffic through our
hubs. In support of this, we undertook several projects in 2018
2018 ANNUAL REPORT
6
to streamline airport connection processes, notably with new
measures to save connecting and transiting customers significant
time on customs and baggage retrieval. These efforts are bearing
fruit, as over the last five years we have grown such connecting
traffic by 142%.
We augment our network through close partnerships with
other carriers, notably the 28-member Star Alliance. Beyond
this, Air Canada belongs to two important joint ventures, one
with United Airlines and the Lufthansa group of airlines and a
second completed in 2018 with Air China. The latter is the first
joint venture between a Chinese and North American carrier
and it gives us a first mover advantage in the growing Chinese
air transport market, which is expected to become the world’s
largest by 2022.
Our modern fleet and expansive network are essential to our
third priority of Customer Engagement. Along with investing
in aircraft, we have devoted considerable resources to
training, onboard amenities and the airport environment. A
milestone achievement in 2018 was the launch of Air Canada
Signature Service, providing superior curb-to-curb services for
Premium customers travelling internationally and on select
transcontinental itineraries. Other innovations included the
expansion of onboard connectivity to international flights and
the opening of three new Maple Leaf Lounges.
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. Those transactions will smooth the transition
of more than five million active Aeroplan members to Air Canada’s
new program when it launches in 2020. More immediately, it
brings a wealth of talent, technology and data, significantly
de-risking the new program’s launch.
A second major customer service initiative is the replacement of
our decades-old reservation system by a new passenger service
system. After it goes into service later in 2019, it will modernize
our systems for reservations, inventory and departure control,
and allow Air Canada to optimize its flight schedule by providing
the ability to more easily manage inventory between any given
origin and destination. For customers, one key benefit is that it
will automate rebookings during flight disruptions, such as those
caused by extreme weather.
The new reservation system, by giving employees superior
tools to assist customers, will also significantly advance our
fourth priority of Culture Change. While strong finances make
our transformation possible, it is our employees who most
immediately effect change and carry through Air Canada’s
transformation. It is their day-to-day interactions with our
customers and their ability to take ever-better care of them that
ultimately determines the success of our company.
The strength of Air Canada’s culture is widely recognized through
our unprecedented, long-term labour agreements that provide
stability and common purpose for all employee groups. For
the sixth year in a row, we have been ranked among Canada’s
Top 100 employers and during 2018 we received other awards,
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.
2018 ANNUAL REPORT
7
including One of Canada’s Most Attractive Employers, One of the
50 Most Engaged Workplaces, and we were rated fifth in the Top
20 Employer Brands in Canada.
Another significant recognition from 2018 that we are proud of
and bears on employee engagement is the Eco-Airline of the Year
Award from Air Transport World. Studies show that, increasingly,
people, particularly millennials, opt for careers with companies
that act responsibly. This award helps further our recruitment,
retention and engagement efforts, not to mention also appealing
to customers who quite properly demand responsible behaviour
and sustainability commitments from corporations.
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.
However, we are also cognizant that our industry continuously
evolves and that our competition never rests, so we also view all
we have achieved as a prelude to the next chapter. The resiliency
of Air Canada, as shown by its 2018 results relative to its peers,
and its now well-established track record of delivering on its
commitments, gives us every confidence of continued success.
Backstopping this confidence is the unwavering support we
have received from our Board of Directors and shareholders
during every step of our journey. I am deeply appreciative of the
guidance provided by our Board of Directors and the long-term
commitment investors have made, as together we progress
toward our ever-closer goal of an investment grade rating.
Finally, I also thank the 30,000 employees of Air Canada, who
have so wholly embraced change in a rapidly evolving landscape
that they now occupy a leadership role in the global industry. As
well, I also thank our customers and assure them that all of us at
Air Canada are fully committed to earning their loyalty every day
by continuing to transport them safely with the utmost of care
and class.
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
President and Chief Executive Officer
March 1, 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.
Citizens of
the World
8
CORPORATE SUSTAINABILITY: 2018 PROGRESS REPORT
In addition, a Corporate Sustainability
Working Group tasked with the monitoring
and coordinating of Air Canada’s corporate
sustainability initiatives was formed. The group
is comprised of Air Canada senior management
subject-matter experts from diverse
functions, including Environmental Affairs,
Health and Safety, Strategic Procurement,
Legal, Communications and Community
Partnerships, as well as Brand, Investor
Relations and Risk Advisory. The Working
Group reports on Air Canada’s sustainability
performance and makes recommendations to a
Corporate Sustainability Steering Committee,
which includes several Air Canada Executives.
A fulsome discussion of Air Canada’s corporate
sustainability performance, awards and goals
will be available in the company’s forthcoming
Corporate Sustainability Report that will be
available online at aircanada.com.
The report continues to be anchored on
four pillars: (i) safety; (ii) environment;
(iii) employees; and (iv) the communities.
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 opportunity
Corporate citizenship
Employee health and wellness
Human rights
Socio-economic
impact in Canada
Customer
engagement
Energy consumption
Waste management
Water management
Greenhouse gas (GHG) emissions
Biodiversity
Management of climate-related
risks and opportunities
Noise
IMPORTANCE TO STAKEHOLDERS
Sustainable governance
Transparency and disclosure
Ethical business practices and policies
Economic performance of Air Canada
Fleet management
Safety
Data protection and privacy
Labour relations and employee engagement
Customer engagement
Energy consumption
8
6
4
2
7
1
3
10
5
9
IMPORTANCE TO AIR CANADA’S BUSINESS
ENVIRONMENTALSOCIALECONOMICGOVERNANCE
TOP 5 ISSUES
TOP 10 ISSUES
RESULTS OF STAKEHOLDER ANALYSIS CONDUCTED IN 2018
Air Canada’s Materiality Matrix
CORPORATE SUSTAINABILITY: 2018 PROGRESS REPORT
9
SAFETY
ü Provided employees with an updated
Alcohol and Drug Policy to lend guidance
and manage the risks associated with the
legalization of cannabis.
ü Successfully implemented a Multi-Factor
Authenticator pilot program to better
protect employee, customer and company
data, reducing exposure to cyber-risk.
ü Conducted a privacy maturity assessment to
help drive its efforts in protecting employee
and customer data.
ENVIRONMENT
ü Recognized as the 2018 Eco-Airline of the
Year by Air Transport World.
ü Achieved IATA Environmental Assessment
(IEnvA) Certification, Phase 1.
ü Exceeded the collective fuel efficiency
targets of 1.5% set for the airline industry.
ü Continued to modernize its fleet towards
improved fuel efficiency with the addition
of 16 Boeing 737 MAX and five Boeing 787
aircraft.
ü Contributed to saving 160 tonnes of carbon
emissions on 22 domestic flights for Earth
Day through Canada’s Biojet Supply Chain
Initiative (CBSCI), an innovative biojet
fuel research project funded through the
Green Aviation Research & Development
Network (GARDN), developing experience-
based knowledge with biojet integration in
co-mingled fuelling systems at Canadian
airports. As the only commercial airline
partner, Air Canada sourced and integrated
230,000 litres of sustainable biojet fuel into
Pearson International Airport’s multi-user
fuel supply system.
ü Operated, in partnership with the Edmonton
Airport Authority, a biofuel trade mission
flight on May 2, 2018—Air Canada’s eighth
biofuel flight since 2012.
ü Continued to advance its new livery
deployment with a leading technology
paint system known as base coat clear coat
(BCCC) system. This livery system contains
no chrome, lead or other heavy metals
and requires less layers of paint, enabling
operational efficiencies, reducing weight and
reducing the overall carbon footprint.
The following is an overview of Air Canada’s key social and environmental
performance achievements in 2018:
CORPORATE SUSTAINABILITY: 2018 PROGRESS REPORT
10
EMPLOYEES
ü Recognized as one of Canada’s Top 100
Employers and Canada’s Best Diversity
employers, and named one of the top
five most attractive company brands
to work for in Canada and one of
Montréal’s Top Employers.
ü Enhanced the Emerging Leaders
Program, a corporate career
development program for managers.
ü Implemented Buy-Time to Retirement
and Reduced Work Week programs
for senior employees to transition to
retirement, while enabling the transfer
of expertise to their colleagues.
ü Marked International Women’s Day
2018 by operating two intercontinental
flights with all-female staff, from
ground handlers, to check-in, to
pilots and flight attendants, and
welcomed young women considering
employment in aviation during Young
Women in Aviation Day.
ü Celebrated Pride, engaging in five
memorable parades and other events
for its employees and the community.
CORPORATE SUSTAINABILITY: 2018 PROGRESS REPORT
11
COMMUNITIES
ü Established 150 community partnerships, such as those focused on the diversity of the
LGBTQ2+ community in Canada, the Rendez-vous de la Francophonie, the Vimy Foundation,
and the Indspire Awards—the latter designed to recognize the tremendous contributions that
Indigenous People are making across the country.
ü The Air Canada Foundation granted financial and in-kind support to 275 Canadian registered
charities focused on the health and well-being of children and youth and provided assistance to
over 450 fundraising initiatives.
ü Raised a record 7,595,245 Aeroplan Miles in December 2018 through the Air Canada
Foundation’s Matching Miles campaign for children requiring medical care away from home.
In addition, the following business process improvements were made in 2018 in support of Air Canada’s
sustainability efforts:
ü First airline to be certified for CEIV Live Animals by the International Air Transport Association.
ü Launched a “Supplier portal” (available on aircanada.com) to collect key information on existing
and prospective suppliers. In addition to continually improving its Supplier Code of Conduct,
Air Canada’s Strategic Procurement team amended its formal supplier risk assessment process
for new strategic suppliers in order for Air Canada to monitor for possible reputational risk
issues. The assessment focuses on multitude criteria, including environmental, health and
safety, cyber-security, privacy compliance, criminal and other illegal activities.
As well, Air Canada made significant progress in its goal of becoming a sustainably profitable global champion.
Its key accomplishments in this regard are further described in Air Canada’s public disclosure file, including in
its 2018 MD&A.
There are many upcoming programs to further secure Air Canada’s long-term sustainable performance,
including initiatives related to its loyalty business.
CORPORATE SUSTAINABILITY: 2018 PROGRESS REPORT
12
SAFETY
> Rank in the top 3% of airlines included in the IATA Operational Safety Audit.
> Deploy the Multi-Factor Authenticator Program to its entire employee base.
> Pursue the Privacy Action Plan, focusing on six broad areas to improve its privacy maturity.
ENVIRONMENT
> Prepare for the first delivery of the new fuel-efficient Airbus A220 aircraft.
> Continue to act on the 2020 Corporate Waste Strategy with the following key activities
for 2019:
− Single-Use Plastics Reduction Program for both on board and within our workplaces.
− Expansion of the collection and recycling process in the Maple Leaf Lounges.
− Centralization of waste infrastructure at its Montréal headquarters.
− Audit the Onboard Domestic Recycling Program as part of its continuous improvement
focus for domestic flights.
EMPLOYEES
> Support the implementation of Amadeus Altéa Suite passenger service system by initiating
training for more than 7,000 employees.
> Create a change management Centre of Excellence.
> Further develop its Emerging Leaders Program to focus more directly on succession plans in key
areas of the business.
COMMUNITIES
> Develop community partnerships in support of regional network performance, talent acquisition
and socio-economic development.
> Achieve a fundraising goal for the Air Canada Foundation of $2M (net) to support charitable
organizations focusing on the health and wellness of children and youth.
The following is an overview of Air Canada’s corporate sustainability
objectives for 2019:
CORPORATE SUSTAINABILITY: 2018 PROGRESS REPORT
13
2018
MANAGEMENT’S
DISCUSSION AND
ANALYSIS OF RESULTS
OF OPERATIONS AND
FINANCIAL CONDITION
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 15
2. INTRODUCTION AND KEY ASSUMPTIONS
In this Management’s Discussion and Analysis of Results of Operations and Financial Condition (“MD&A”),
the “Corporation” refers, as the context may require, to Air Canada and/or one or more of Air Canada’s
subsidiaries, including its wholly-owned operating subsidiaries, Touram Limited Partnership, doing business
as Air Canada Vacations® (“Air Canada Vacations”) and Air Canada Rouge LP, doing business as Air Canada
Rouge® (“Air Canada Rouge”). This MD&A provides the reader with a review and analysis, from the perspective
of management, of Air Canada’s financial results for the fourth quarter and full year of 2018. This MD&A
should be read in conjunction with Air Canada’s audited consolidated financial statements and notes for 2018.
All financial information has been prepared in accordance with generally accepted accounting principles in
Canada (“GAAP”), as set out in the CPA Canada Handbook – Accounting (“CPA Handbook”), which incorporates
International Financial Reporting Standards (“IFRS”), as issued by the International Accounting Standards Board
(“IASB”), except for any non-GAAP measures and any financial information specifically denoted otherwise.
Except as otherwise noted, monetary amounts are stated in Canadian dollars. For an explanation of certain
terms used in this MD&A, refer to section 21 “Glossary” of this MD&A. Except as otherwise noted or where the
context may otherwise require, this MD&A is current as of February 14, 2019.
Forward-looking statements are included in this MD&A. See “Caution Regarding Forward-Looking Information”
below for a discussion of risks, uncertainties and assumptions relating to these statements. For a description of
risks relating to Air Canada, refer to section 18 “Risk Factors” of this MD&A. Air Canada issued a news release
dated February 15, 2019 reporting on its results for the fourth quarter and the full year of 2018. This news
release is available on Air Canada’s website at aircanada.com and on SEDAR’s website at www.sedar.com. For
further information on Air Canada’s public disclosures, including Air Canada’s Annual Information Form, consult
SEDAR at www.sedar.com.
CAUTION REGARDING FORWARD-LOOKING INFORMATION
Air Canada’s public communications may include forward-looking statements within the meaning of applicable
securities laws. Such forward-looking statements are included in this MD&A and may be included in other
communications, including filings with regulatory authorities and securities regulators. Forward-looking
statements may be based on forecasts of future results and estimates of amounts not yet determinable. These
statements may involve, but are not limited to, comments relating to strategies, expectations, planned operations
or future actions. Forward-looking statements are identified using terms and phrases such as “anticipate”,
“believe”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “will”, “would”, and similar
terms and phrases, including references to assumptions.
Forward-looking statements, by their nature, are based on assumptions, including those described herein and
are subject to important risks and uncertainties. Forward-looking statements cannot be relied upon due to,
amongst other things, changing external events and general uncertainties of the business. Actual results may
differ materially from results indicated in forward-looking statements due to a number of factors, including
without limitation, our ability to successfully achieve or sustain positive net profitability or to realize our
initiatives and objectives, industry, market, credit, economic and geopolitical conditions, energy prices,
currency exchange, competition, our dependence on technology, cybersecurity risks, our ability to successfully
implement appropriate strategic initiatives or reduce operating costs, our ability to successfully integrate and
operate the Aeroplan loyalty business following its acquisition from Aimia Inc. and to successfully launch our
new loyalty program, our ability to preserve and grow our brand, airport user and related fees, high levels of
fixed costs, our dependence on key suppliers including regional carriers, employee and labour relations and
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16 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
costs, our dependence on Star Alliance and joint ventures, interruptions of service, environmental factors
(including weather systems and other natural phenomena and factors arising from man-made sources), our
ability to pay our indebtedness and maintain liquidity, pension issues, limitations due to restrictive covenants,
pending and future litigation and actions by third parties, our ability to attract and retain required personnel,
war, terrorist acts, casualty losses, changes in laws, regulatory developments or proceedings, epidemic
diseases, insurance issues and costs, as well as the factors identified in Air Canada’s public disclosure file
available at www.sedar.com and, in particular, those identified in section 18 “Risk Factors” of this MD&A.
The forward-looking statements contained or incorporated by reference in this MD&A represent Air Canada’s
expectations as of the date of this MD&A (or as of the date they are otherwise stated to be made) and are
subject to change after such date. However, Air Canada disclaims any intention or obligation to update or
revise any forward-looking statements whether because of new information, future events or otherwise,
except as required under applicable securities regulations.
KEY ASSUMPTIONS
Assumptions were made by Air Canada in preparing and making forward-looking statements. As part of its
assumptions, Air Canada assumes continued relatively modest Canadian GDP growth for the first quarter and
full year 2019. Air Canada also expects that the Canadian dollar will trade, on average, at C$1.32 per U.S. dollar
in the first quarter and for the full year 2019 and that the price of jet fuel will average 77 CAD cents per litre in
the first quarter and 82 CAD cents per litre for the full year 2019.
INTELLECTUAL PROPERTY
Air Canada owns or has rights to trademarks, service marks or trade names used in connection with the
operation of its business. In addition, Air Canada’s names, logos and website names and addresses are owned or
licensed by Air Canada. Air Canada also owns or has the rights to copyrights that also protect the content of its
products and/or services. Solely for convenience, the trademarks, service marks, trade names and copyrights
referred to in this MD&A may be listed without the ©, ® and TM symbols, but Air Canada reserves all rights
to assert, to the fullest extent under applicable law, its rights or the rights of the applicable licensors to these
trademarks, service marks, trade names and copyrights.
This MD&A may also include trademarks, service marks or trade names of other parties. Air Canada’s use or
display of other parties’ trademarks, service marks, trade names or products is not intended to, and does not
imply a relationship with, or endorsement or sponsorship of Air Canada by, the trademark, service mark or
trade name owners or licensees.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 17
3. ABOUT AIR CANADA
Air Canada is the largest provider of scheduled passenger services in the Canadian market, the Canada-U.S.
transborder market and in the international market to and from Canada. In 2018, Air Canada, together with Jazz
Aviation LP (“Jazz”), Sky Regional Airlines Inc. (“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 to
222 direct destinations on six continents, 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. In 2018, Air Canada carried a record of 50.9 million passengers, an increase of 5.8% from 2017.
At December 31, 2018, Air Canada mainline operated a fleet of 184 aircraft, comprised of 91 Boeing and
Airbus narrow-body aircraft, 74 Boeing and Airbus wide-body aircraft, and 19 Embraer 190 regional jets, while
Air Canada Rouge operated a fleet of 53 aircraft, comprised of 22 Airbus A319 aircraft, six Airbus A321 aircraft
and 25 Boeing 767-300 aircraft.
Air Canada enhances its domestic and transborder network through capacity purchase agreements
(“CPAs”) with regional airlines, namely Jazz, Sky Regional Airlines Inc. (“Sky Regional”), Air Georgian Limited
(“Air Georgian”) and Exploits Valley Air Services Limited (“EVAS”), each of which operates flights on behalf
of Air Canada. These carriers form an integral part of the airline’s international network strategy, providing
valuable traffic feed to Air Canada and Air Canada Rouge routes. At December 31, 2018, the Air Canada
Express fleet was comprised of 45 Bombardier regional jets, 84 Bombardier Dash-8 turboprop aircraft and
25 Embraer 175 aircraft for a total of 154 aircraft. Air Georgian and EVAS also operated a total of nine
18-passenger Beech 1900 aircraft on behalf of Air Canada.
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 able to build customer loyalty through Air Canada Altitude®, its frequent flyer program and
through the Aeroplan® loyalty program. Air Canada Altitude recognizes and rewards Aeroplan members with a
range of premium travel privileges and benefits corresponding to their travel activity, such as priority check-
in, complimentary checked baggage and upgrades to Business Class, as well as opportunities to earn Aeroplan
Miles on Air Canada flights and those of the other 27 Star Alliance member airlines. Aeroplan members also
have opportunities to redeem their Aeroplan Miles for travel with Star Alliance member airlines.
Air Canada has been pursuing a comprehensive strategy to improve profitability and competitiveness in leisure
markets. This strategy leverages the strengths of Air Canada, Air Canada Rouge, the airline’s lower-cost airline,
and Air Canada Vacations. Through Air Canada Rouge, Air Canada is pursuing opportunities in leisure markets
made viable by Air Canada Rouge’s more competitive cost structure. Air Canada Vacations is a leading Canadian
tour operator, developing, marketing and distributing vacation travel packages, operating in the outbound
leisure travel market (Caribbean, Mexico, U.S., Europe, Central and South America, South Pacific, Australia and
Asia), and the inbound leisure travel market to destinations within Canada, and also offering cruise packages in
North America, Europe and the Caribbean.
Air Canada Cargo, Canada’s largest provider of air cargo services as measured by cargo capacity, provides
direct cargo services to over 150 Canadian, U.S. transborder and international destinations and has sales
representation in over 50 countries. Air cargo services are provided across the Air Canada network.
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18 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
4. STRATEGY
Air Canada’s principal objective is to become a sustainably profitable global champion. In pursuing this goal,
Air Canada seeks to continually improve customer experience and employee engagement and create value for
shareholders by focusing on four core priorities:
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
Margin improvement through the implementation of sustainable cost transformation and profitable revenue-
generating initiatives is a key priority at Air Canada. Air Canada continues to seek and implement measures to
reduce unit costs and expand margins, including through fleet modernization and greater fleet productivity.
Additionally, Air Canada seeks to improve its ability to generate incremental passenger and ancillary revenue,
including through its expanded suite of branded fare products and investments in technology.
Key achievements in 2018
> Record operating revenue of $18,065 million, $1,813 million or 11% above 2017.
> Carried record 50.9 million passengers, an increase of 5.8% from 2017.
> EBITDAR margin of 15.8%, consistent with the 2018 EBITDAR margin of approximately
16% forecast in Air Canada’s news release dated October 31, 2018. Operating income of
$1,174 million in 2018 reflected a decrease of $197 million from 2017. EBITDAR is a non-GAAP
financial measure. Refer to section 20 “Non-GAAP Financial Measures” of this MD&A for
additional information.
> ROIC of 12.6%, consistent with the 2018 ROIC of approximately 12% forecast in Air Canada’s
news release dated October 31, 2018. ROIC is a non-GAAP financial measure. Refer to section 20
“Non-GAAP Financial Measures” of this MD&A for additional information.
> Realized or identified savings of $220 million under the new Cost Transformation Program
intended to secure $250 million in savings. Air Canada expects to achieve the remaining savings
of $30 million by the end of 2019.
> Adjusted CASM increased 0.3% from 2017, in line with the range of no increase to an increase
of 0.75% projected in Air Canada’s news release dated October 31, 2018. CASM increased 6.0%
from 2017. Adjusted CASM is a non-GAAP financial measure. Refer to section 20 “Non-GAAP
Financial Measures” of this MD&A for additional information.
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Management’s Discussion and Analysis of Results of Operations and Financial Condition | 19
> Added one Airbus A321, two Airbus A319 and one Boeing 767 aircraft to the Air Canada Rouge
fleet and five Boeing 787-9 and 16 Boeing 737 MAX 8 aircraft to the mainline fleet.
> Sold and leased back 25 Embraer 190 aircraft, of which six were returned to the lessor in
late 2018.
> Record unrestricted liquidity of $5,725 million.
> Finalized, in November 2018, definitive agreements to acquire Aimia Inc’s Aeroplan loyalty
business as well as commercial agreements related to and in support of this acquisition with
TD, CIBC, and Visa. The acquisition was completed on January 10, 2019.
Air Canada is taking tangible steps to pursue its strategy for sustained value creation and profitability through
the execution of new and on-going strategic initiatives. These include:
Air Canada Rouge
Since its first flight in July 2013, Air Canada Rouge, Air Canada’s low-cost carrier, has been deployed to a
growing number of Caribbean destinations and select leisure destinations in the U.S. and Canada, as well as in
international leisure markets where demand is highly elastic and responds positively to competitively priced,
non-stop capacity. At December 31, 2018, Air Canada Rouge operated 53 aircraft (25 Boeing 767, 22 Airbus A319
and six Airbus A321 aircraft). Air Canada plans to add 10 narrow-body aircraft to Air Canada Rouge’s fleet in 2019.
Refer to section 8 “Fleet” of this MD&A for additional information.
Air Canada Rouge provides Air Canada with the flexibility to shift capacity between markets as well as
between seasons. It also provides Air Canada with the ability to compete against lower-cost carriers as well as
emerging North American ultra-low-cost carriers. Air Canada Rouge offers competitive fares while leveraging
the strengths of Air Canada mainline, including its powerful brand, award-winning products and services,
extensive network with enhanced connection options, distribution capability and operational expertise.
Boeing 787 Aircraft
To date, Air Canada has taken delivery of 35 Boeing 787 Dreamliner aircraft of its firm order of 37 (comprised
of 8 787-8 and 29 787-9 aircraft). Air Canada plans to take delivery of the remaining two Boeing 787-9 aircraft
on firm order by the summer of 2019. The Boeing 787 Dreamliner is driving new opportunities for profitable
growth by opening new international destinations made viable by its lower operating costs, mid-size capacity
and longer range.
Narrow-body Fleet Renewal Program
To date, Air Canada has taken delivery of 20 Boeing 737 MAX 8 aircraft of its firm order of 61 737 MAX aircraft
(comprised of 50 Boeing 737 MAX 8 and 11 Boeing 737 MAX 9 aircraft). The Boeing 737 MAX aircraft are
replacing the Airbus narrow-body aircraft in Air Canada’s mainline fleet. Air Canada plans to add 18 737 Max 8
aircraft to the mainline narrow-body fleet in 2019.
Air Canada estimates that the Boeing 737 MAX 8 aircraft is delivering an 11% lower CASM when compared to
the mainline Airbus A320 aircraft, mainly driven by greater maintenance and fuel efficiencies. This aircraft also
offers greater deployment opportunities in the domestic, U.S. transborder and certain Atlantic markets.
Air Canada has a firm order for 45 Airbus A220-300 aircraft, the first of which Air Canada plans to take delivery of
in late 2019. The first 25 aircraft on delivery will replace the Embraer 190 aircraft in Air Canada’s mainline fleet,
with the incremental aircraft supporting Air Canada’s hub and network growth. Air Canada estimates that the
Airbus A220-300 aircraft will deliver a 12% lower CASM when compared to the Embraer 190 aircraft, mainly
driven by greater maintenance and fuel efficiencies. This aircraft, with its longer range, will also offer greater
deployment opportunities, enabling Air Canada to serve new markets not as well suited to Air Canada’s larger
Boeing 737 MAX or Airbus A321 aircraft. Refer to section 8 “Fleet” of this MD&A for additional information.
2018 ANNUAL REPORT
20 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Improvements to Commercial Agreement with Jazz and Equity Investment in Chorus
In February 2019, Air Canada concluded an agreement to amend and extend its capacity purchase agreement
(“CPA”) with Jazz, a wholly-owned subsidiary of Chorus Aviation Inc. The amendments will provide long term
stability for Chorus, reaffirming Jazz as Air Canada’s most significant Air Canada Express carrier well into the
future. The amendments will bolster the strength and competitiveness of the Air Canada Express brand and its
coast-to-coast regional network, and provide significant CPA savings for Air Canada, while optimizing network
and fleet flexibility when compared to the current agreement.
Highlights of the CPA amendments are as follows:
> An extension of the CPA term by 10 years from January 1, 2026 to December 31, 2035.
> Simplification and modernization of the Jazz fleet with growth through more, larger gauge
aircraft. The amendments include various minimum levels of covered aircraft at different points
in time, providing Air Canada the flexibility to optimize its fleet within its network strategy.
> The continuance of a fixed fee structure, including new terms mitigating risk and market-
oriented compensation to make the CPA more competitive for Air Canada, given new
competitors entering the market.
> In support of Air Canada’s cost transformation program, projected annual savings to Air Canada
of approximately $50 million in 2019 and 2020, and cumulative savings of approximately
$53 million between 2021 and 2025, both as compared to the 2015 CPA frame-work (from both
fixed fee and performance incentive reductions). Beyond 2025, the CPA provides for a market
competitive fixed fee. These projected savings are in addition to the significant benefits expected
from improved network efficiencies relating to this transaction.
> The continuation of a highly successful pilot mobility agreement that provides Air Canada
Express pilots with access to pilot careers at Air Canada on a planned basis.
> The consolidation of more of Air Canada’s overall regional capacity into Jazz’ footprint, thereby
lowering Air Canada’s overall regional costs in the future.
The amendments became effective retroactively as at January 1, 2019.
Concurrent with the CPA amendments, Air Canada made a $97.26 million equity investment in Chorus,
subscribing for 15,561,600 Class B voting shares in the capital of Chorus, representing, at time of issuance,
approximately 9.99% of the issued and outstanding Class A variable voting shares and Class B voting shares
of Chorus on a combined basis. Chorus shares were issued to Air Canada at a price of $6.25 per share,
representing a 5% premium to their five-day volume weighted average price as of the close of trading on
January 10, 2019. Concurrently with the closing of the equity investment, Air Canada and Chorus entered into
an investor rights agreement under which, among other things, Air Canada will hold the investment shares for
a period of at least 60 months, subject to certain limited exceptions. Deputy Chief Executive Officer and Chief
Financial Officer of Air Canada, Michael Rousseau, was also appointed to the board of directors of Chorus.
Other Revenue Optimization and Cost Reduction Initiatives
Air Canada has created a culture of continuous cost transformation and revenue improvement across the
organization, continually seeking productivity, process and other improvements. Initiatives may entail revising
business and operational processes, including supply chain and maintenance operations, improving employee
productivity and asset utilization, and promoting workplace policies to add revenue and lower costs.
Air Canada updated its suite of branded fare products to allow it to further segment its customer base and
offer a variety of fare options and a customized on-board experience. These new re-bundled fares provide a
wider range of choices and stimulate sales based on specific attributes, driving incremental revenue. Air Canada
continues to increase its ancillary revenue from its “à la carte” services, such as those related to baggage, ticket
changes, seat selection, preferred seating and upgrades, and from its onboard offerings, including food, beverage,
duty-free shopping and onboard Wi-Fi Internet. Air Canada is also realizing incremental revenue through
investments in web and mobile platforms and, in 2018, saw a significant acceleration in direct channel share
and core ancillary revenue sales.
Investments in technology will also play an important role in enhancing margins, including the implementation
of a new passenger service system (“PSS”) in late 2019 which is further described below. This new system is
expected to provide annual incremental benefits of over $100 million.
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Management’s Discussion and Analysis of Results of Operations and Financial Condition | 21
2. Leveraging International Network
Air Canada is focused on leveraging its international network and its competitive attributes to appropriately
expand margins, in large part by increasing international connecting traffic through its strategic international
gateways in Toronto, Vancouver and Montreal, and competing effectively in the leisure market to and from
Canada. Air Canada also continues to develop commercial alliances with major international carriers to broaden
its network offerings.
Key developments in 2018
> Introduced non-stop Air Canada mainline service from Vancouver to Paris and Zurich; from
Montreal to Dublin and Tokyo-Narita; and from Toronto to Shannon.
> Launched non-stop Air Canada Rouge service from Montreal to Bucharest, Lisbon, Phoenix and
Victoria; from Toronto to Bucharest, Kamloops, Nanaimo, Porto and Zagreb; and from Edmonton
to Las Vegas.
> Started non-stop Air Canada Express service from Toronto to Omaha and Providence; from
Montreal to Baltimore, London (ON), Pittsburgh, and Windsor; from Vancouver to Sacramento;
from Edmonton to Kelowna, San Francisco and Victoria; and from Calgary to Comox.
> Converted Air Canada Rouge service between Montreal and Casablanca to mainline service
using an Airbus A330 aircraft.
> Concluded a revenue-sharing joint venture agreement with Air China, the first joint venture
agreement between a Chinese and North American airline. The agreement, which is in respect
of all flights between mainland China and Canada, allows for cooperation in various commercial
and operational areas, including network planning, revenue management, sales and distribution,
and airport operations. The joint venture agreement provides customers more flight choices,
seamless travel experiences, optimized flight schedules, harmonized fare products, as well as
reciprocal participation in frequent flyer programs and use of airport lounges. Air Canada and
Air China also enhanced their codeshare agreement to include Zhengzhou, Xiamen, Shenzhen
and Nanjing in domestic China and Victoria, Kelowna, Saskatoon, and Regina in domestic
Canada. Furthermore, the codeshare agreement now includes flights between Montreal and
Havana, and Montreal and Shanghai.
> Expanded the codeshare agreement with Cathay Pacific, further widening the network by
connecting Air Canada’s services to Hong Kong to many Southeast Asian destinations, including
the Philippines, Malaysia, Vietnam and Thailand. As a result, Air Canada now offers codeshare
services to destinations such as Manila, Cebu, Kuala Lumpur, Ho Chi Minh City, Hanoi, Bangkok,
Phuket and Chiang Mai.
> Implemented a new codeshare agreement with Adria Airways, connecting Air Canada’s services
to Germany and Belgium (Frankfurt, Munich and Brussels) to Ljubljana, Slovenia.
> Expanded the codeshare agreement with All Nippon Airways (ANA) with the addition of ANA’s
code on Air Canada’s new Montreal–Narita service, providing customers with additional travel
options to cities within Japan and other Asian destinations.
> Increased sixth freedom traffic (international-to-international, including U.S.) connecting
through Air Canada’s major Canadian hubs by 15% when compared to 2017.
Air Canada has competitive strengths which allows it to profitably pursue international route opportunities. It
has the ability to appreciably increase international-to-international traffic through its strategic international
gateways in Toronto, Vancouver and Montreal, and is broadening its network appeal through its membership
in Star Alliance, its revenue-sharing joint venture with Air China on routes between Canada and China, and
its A++ trans-Atlantic revenue-sharing joint venture with United Airlines and Deutsche Lufthansa AG, which
the parties are focused on enhancing to increase competitiveness, create operating efficiencies and improve
customer experience. Air Canada’s network is also enhanced through numerous codeshare and interline
agreements. Furthermore, Air Canada has access to Canada’s wide portfolio of international route rights, and
Canada’s multi-ethnic demographic profile provides the airline with further opportunities to profitably capture
demand for international travel. These attributes, combined with Air Canada’s powerful brand and industry-
leading products and services, allow it to leverage its network and benefit from the higher margins generally
available in international markets.
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22 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Air Canada plans to continue to selectively and profitably expand its international services by leveraging its
new aircraft and improved cost structure, and by exploiting the following competitive advantages:
> A widely recognized brand and a strong position in the market for trans-Atlantic and trans-
Pacific travel to and from Canada and to and from North and South America via Canada.
> An extensive and expanding global network, enhanced by the airline’s membership in
Star Alliance and by numerous commercial arrangements.
> A flexible fleet mix, enabling the airline to redeploy or otherwise manage capacity to match
changes in demand.
> Air Canada Altitude, Air Canada’s frequent flyer program, which recognizes the airline’s most
frequent flyers by offering them a range of exclusive travel privileges, including the benefits
derived from Air Canada’s Aeroplan program, which allows all customers to earn and redeem
Aeroplan Miles.
> Competitive products and services, including lie-flat suites in the Signature Class cabin,
concierge services, Maple Leaf® lounges and, at its Toronto global hub, an exclusive Air Canada
Signature Suite offering eligible Signature Class customers exclusive amenities, including “à la
carte” meal service in the Suite’s complimentary restaurant.
> Geographically well-positioned hubs (Toronto, Montreal and Vancouver) with efficient in-transit
facilities, accentuating the advantages of flying Air Canada for customers travelling between the
U.S. and Asia or Europe.
> Favourable slot times at busy airports, including Beijing, Shanghai, Hong Kong, Tokyo-Narita,
Tokyo-Haneda, Paris-Charles de Gaulle, Frankfurt, London-Heathrow, New York-LaGuardia, and
Washington-Ronald Reagan National Airport.
In 2019, Air Canada plans to launch additional international services, including non-stop Air Canada year-
round flights from Toronto to Vienna. The flights to Austria’s capital will be operated in cooperation with
Star Alliance joint venture partner Austrian Airlines. Air Canada also plans to launch non-stop summer
seasonal service from Montreal to Bordeaux and increase weekly frequencies from Vancouver to Delhi,
Melbourne and Zurich.
Air Canada enhances its domestic and transborder network through capacity purchase agreements with Jazz,
Sky Regional and other airlines (operating under the Air Canada Express banner). Air Canada Express provides a
network of local traffic, as well as high volumes of feeder traffic that flow into Air Canada’s long-haul network and
support its strategy to grow international transit traffic to and from the U.S. In 2019, Air Canada plans to enhance
services to North Carolina, including with the launch of a new, non-stop daily flight between Montreal and Raleigh.
The airline will also deploy larger aircraft on flights between Toronto and Raleigh and Charlotte to increase
capacity on these routes and introduce Business Class service.
Air Canada continues to increase sixth freedom traffic, particularly from the U.S., with its award-winning
products and services, geographically well-positioned Canadian hubs, extensive network and other competitive
advantages.
Lester B. Pearson International Airport (“Toronto Pearson”) offers a strategic advantage due to its proximity to
densely populated major U.S. markets and serves a large number of business and leisure travellers flying to and
from Toronto, Canada’s largest city. Air Canada’s and its Star Alliance partners’ operations are consolidated in
one terminal at Toronto Pearson, which also has efficient in-transit facilities that allow passengers and their
bags to move seamlessly between Canadian and U.S. Customs and Immigration. For several years, Air Canada
has worked closely with the Greater Toronto Airports Authority (“GTAA”) to transform Toronto Pearson into
the leading North American airport and gain a greater share of the global sixth freedom market.
Air Canada has also been growing its Vancouver hub into a premier gateway to Asia-Pacific markets and
developing Montreal into a complementary trans-Atlantic hub. With convenient connections between
Vancouver and cities across North America, Air Canada offers some of the shortest elapsed travel time
between continental North America and Pacific Asia, providing a better travel experience. The airline’s
Montreal hub not only links North America with key markets in France, but also positions Montreal as a
premier gateway to the Atlantic. Given the improvements that are being made in Toronto, Vancouver and
Montreal, the airline is able to build its network from the U.S. to provide increased connection flows to its
international flights.
Since its inception in 1997, the Star Alliance network has grown to include the following 28 airlines: Adria
Airways, Aegean Airlines, Air Canada, Air China, Air India, Air New Zealand, ANA, Asiana Airlines, Austrian
Airlines, Avianca, Avianca Brasil, Brussels Airlines, Copa Airlines, Croatia Airlines, EGYPTAIR, Ethiopian Airlines,
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 23
EVA Air, LOT Polish Airlines, Lufthansa, Scandinavian Airlines, Shenzhen Airlines, Singapore Airlines, South
African Airways, Swiss International Air Lines AG, TAP Portugal, THAI, Turkish Airlines and United Airlines.
In addition to its membership in Star Alliance and its joint venture agreements, Air Canada’s numerous
codeshare and interline agreements allow it to achieve greater critical mass and network scope. Air Canada has
36 codeshare partners, of which 26 are Star Alliance members and 10 are non-members (Aer Lingus, Central
Mountain Air, Etihad, Eurowings, GOL Linhas Aéreas Inteligentes, Jet Airways, Middle East Airlines, SriLankan
Airlines, Cathay Pacific and Virgin Australia).
Air Canada continues to assess new strategic partnerships in support of its business plan and international
growth strategy.
3. Customer Engagement
Providing a consistently high level of customer service and growing the airline’s premium customer base are
important aspects of Air Canada’s business strategy. Air Canada continually strives to improve customer loyalty
and generate positive referrals to attract new customers. The airline recognizes that its ongoing success is dependent
on consistently delivering superior value and innovative products, providing the highest levels of customer service
and anticipating the changing needs of customers.
Acquisition of Aimia’s Aeroplan Loyalty Business
Air Canada Altitude is designed to recognize and reward its most frequent travellers with exclusive perks and
privileges based on the number of miles or segments customers fly combined with their total spend. These
privileges, including priority airport services, lounge access, and eUpgrade credits, are designed to enhance
the Air Canada experience and encourage loyalty from frequent flyers. Altitude members also benefit from
Air Canada’s Aeroplan program, which provides a wide range of ways to earn and redeem Aeroplan Miles,
including flights and upgrades to over 1,200 destinations worldwide.
On January 10, 2019, Air Canada completed the closing of its purchase of Aimia Canada Inc., owner and
operator of the Aeroplan loyalty business, from Aimia Inc. The aggregate purchase price for the acquisition
consisted of $450 million in cash plus $47 million in cash for pre-closing adjustments. The purchase price is
subject to post-closing adjustments and the acquisition also includes the assumption of the Aeroplan Miles
liability. Air Canada received payments from The Toronto-Dominion Bank (“TD”) and Canadian Imperial Bank
of Commerce (“CIBC”) in the aggregate amount of $822 million. Visa Canada Corporation (“Visa”) also made
a payment to Air Canada and, assuming completion of the Amex Bank of Canada (“AMEX”) agreement referred
to below, AMEX will do likewise.
Concurrently with the conclusion of the Aeroplan purchase, Air Canada, TD, CIBC, and Visa finalized various
commercial agreements relating to and in support of the acquisition, including credit card loyalty program and
network agreements for future participation in Air Canada’s new loyalty program. In addition, TD and CIBC
made payments to Aimia Canada Inc., now Air Canada’s subsidiary, in the aggregate amount of $400 million as
prepayments to be applied towards future monthly payments in respect of Aeroplan Miles. Air Canada also has
entered into an agreement in principle with AMEX, which also issues Aeroplan co-branded products, to secure
its continued participation in Air Canada’s loyalty program after 2020. Following the closing of the acquisition,
Aimia Canada Inc. changed its name to Aeroplan Inc.
Consistent with its promise of continued investments in the customer experience, Air Canada plans to launch
its new loyalty program in mid-2020. Air Canada believes that the new program will allow it to further
strengthen customer relationships, offer members more flexible rewards, and deliver a more consistent end-
to-end customer experience. The new program will offer broad earning and redemption opportunities, more
personalized service and a better digital experience for Air Canada customers.
Passenger Service System
Air Canada concluded an agreement with Amadeus for the full Amadeus Altéa Suite passenger service system
(PSS) including reservations, inventory and departure control solutions. The new reservation system, scheduled
to be implemented in late 2019, will allow Air Canada to optimize its flight schedule by providing the ability to
more easily manage inventory between any given origin and destination and automate rebookings during flight
disruptions, such as those caused by extreme weather. It will also support Air Canada’s international network
through more seamless booking and customer handling with Star Alliance and interline partners.
2018 ANNUAL REPORT
24 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Products and Services
Investing in products and services remains pivotal to Air Canada’s commitment to customer engagement.
To this end, the airline has partnered with leading brands and continues to invest in premium products that
enhance the customer’s journey.
In 2018, Air Canada launched Air Canada Signature Service, rebranding the lie-flat Business Class product
available on most international mainline flights, as well as select key transcontinental markets. Air Canada
Signature Service provides eligible customers with an end-to-end premium experience, including access to
priority ground products, including select concierge services, as well an exclusive on-board experience in
Air Canada Signature Class.
Air Canada Signature Class was also introduced in North America, replacing Business Class – Transcontinental,
and for the first time showcasing a product specification aligned to international standards in North America.
Air Canada Signature Class is available on select transcontinental routes, including daily overnight flights from
Los Angeles, San Francisco and Vancouver to Toronto. Air Canada Signature Class is also available on flights
between Toronto and Honolulu.
Air Canada provides concierge assistance at 47 airports globally. In 2019, the airline plans to expand this
service to include Dubai and Vienna. The premium agent program, with specially-trained customer sales and
service agents accredited specifically to work at Priority Check-in and inside the Maple Leaf Lounges, is now
available at 10 Canadian airports, with plans to expand to key locations in the U.S. throughout 2019.
Throughout 2018, Air Canada also expanded the use of a fleet of BMW vehicles, operating as part of the
Air Canada Valet Service at Toronto Pearson. At the end of 2018, Air Canada operated a fleet of 20 BMW
7-series limousines, providing select customers connecting from a domestic to an international Air Canada
Signature Class with a personalized airside drive between the gate areas. By 2019, this will make Air Canada
the first airline in North America to provide this type of service to Business Class customers, subject to certain
restrictions.
The Maple Leaf Lounge portfolio has expanded to Saskatoon, with the opening of Air Canada’s 23
rd
lounge
worldwide. Air Canada also opened a new 7,400 square feet Maple Leaf Lounge located inside the new gate
area at New York LaGuardia, as well as a new 3,600 square feet Maple Leaf Lounge at St. John’s International
Airport. The lounges at LaGuardia and St. John’s International are each replacing existing facilities, providing
a significantly improved ground product. In 2019, Air Canada expects to open a new Maple Leaf Lounge at
San Francisco International Airport, as well as starting a comprehensive refurbishment program of existing
facilities at key hubs.
The Air Canada Signature Suite, a premium “à la carte” dining facility available at Toronto Pearson open for
select customers departing in Air Canada Signature Class, opened in late 2017 and has been well received by
customers throughout 2018. Plans are underway to review and possibly expand the concept to Vancouver
International Airport in 2019.
Seamless means of transiting through Air Canada’s hubs at Toronto Pearson, Vancouver and Montreal Trudeau
and enhancements to facilities and processes supporting Air Canada’s sixth freedom traffic strategy now allow
customers connecting from Japan to a domestic destination to not have to claim their bags at the connecting
point, unless otherwise advised by customs. This is in addition to customers connecting from the U.S., Europe
or Australia to a Canadian airport through these hubs. By summer 2019, Air Canada expects to have all
international to domestic connections included in the International to Domestic program. Supporting new
flights to Asia, during 2018, Air Canada also expanded the China Transit Program to include Montreal Trudeau,
providing eligible citizens of the People’s Republic of China the opportunity to connect through Montreal on
select eligible flights without the need for a Canadian visa.
Starting with the Boeing 787 Dreamliner, and then followed by the Boeing 777, Air Canada has been
progressively upgrading its wide-body aircraft with next generation cabin, and in-flight entertainment
products. They have been enthusiastically received by customers and, in 2019, Air Canada will extend these
improvements to its fleet of Airbus A330 aircraft. Air Canada also received its first 18 new Boeing 737 MAX
(two in 2017 and 16 in 2018) and, in late 2019, will take its first delivery of the new Airbus A220 aircraft. These
aircraft bring market-leading cabins and entertainment products to Air Canada’s narrow-body fleet.
Air Canada and Air Canada Rouge have expanded Wi-Fi connectivity to additional aircraft and expect to have
all aircraft connected by the end of 2019. Air Canada introduced complimentary global streaming Wi-Fi service
as a reward option for Altitude Elite 75K and Super Elite 100K members, making Air Canada the first airline in
North America to offer complimentary Wi-Fi to its most frequent flyers.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 25
Air Canada received a number of awards recognizing its industry-leading products and services in 2018,
including being named Best Airline in North America in the 2018 Skytrax World Airline Awards, as well as
Best Business Class in North America. Skytrax also revalidated Air Canada’s ranking as North America’s only
four-star International network carrier as part of a quality audit which assessed more than 1,000 touch-points
on the ground and in the air. As part of the four-star re-certification, Air Canada was awarded high marks for
the Air Canada Signature Class service on select North American transcontinental markets, the new Business
Class seat offered on the Boeing 737 MAX aircraft, the state-of-the-art entertainment system on the Boeing
fleet, as well as the service offered in Premium Economy Class, all reflective of the significant investment
in product and service undertaken over the previous years. In addition, the Air Canada Signature Suite was
considered amongst the best, if not the best in the world for business class pre-flight dining.
In late 2018, the Ipsos Reid 2018 Canadian Business Traveller Survey confirmed Air Canada as the preferred
airline for domestic travel for 92% of frequent business travellers. The national study determined that
Air Canada is the only Canadian airline to see a consistent increase in preference and in usage over the past
five years. Additionally, readers of leading frequent business traveller magazine, Business Traveler, have named
Air Canada Best North American Airline for International Travel, as well as Best North American Airline for
Inflight Experience. Among other things, the survey of frequent business travellers found:
> Overall satisfaction with Air Canada’s service continues to increase, contrasting that of domestic
competitors, climbing six percentage points over 2017 for in-flight and four percentage points
for airports. Air Canada’s highest scores in the last five years were driven by satisfaction in its
schedule, loyalty program, customer service and perception as a dynamic organization.
> Air Canada is the only Canadian airline that has seen an increase in its Net Promoter Score (NPS)
for 2018.
> 96% intend to use Air Canada for domestic business travel in the coming year, significantly more
than those who intended to use other Canadian carriers.
> Air Canada is the preferred airline for travel between Canada and the U.S., increasing by
11 percentage points over the last five years.
> Business travel increased the most internationally to Europe, Asia and other global destinations,
growing by five percentage points over last year.
4. Culture Change
Air Canada continues to evolve its culture, transforming from a transportation company to a customer service
excellence company which treats is employees and its customers with care and class. In 2018, Air Canada
launched a new employee engagement survey which provided stronger analytics and a deeper understanding
of where additional focus is required. With a 30% response rate, the survey yielded meaningful data to
determine an employee net promoter score (eNPS). A total of 78% of employees surveyed were identified as
“promoters” (the truly engaged) or “passives” (those leaning towards positive or are more easily influenced to
become promoters with small incremental actions). Work environment, support and learning opportunities
were identified as key takeaways. The survey also further reinforced the link between customer perceptions and
employee behaviours, while providing meaningful direction for the development of 2018 and 2019 initiatives.
Air Canada also regularly validates the organizational pulse through focus groups and Yammer, its internal
social media platform. The airline also connects with employees through weekly executive messages and
multiple communications channels, including a daily newsletter. Over 5,000 employees participated in
town halls held in hangars across the system which allowed for open Q&A sessions between employees
and executives.
To equip managers to excel at critical face-to-face communications, Air Canada’s management development
programs focus on coaching for soft skills that include relationship building and making authentic connections.
In 2019, Air Canada will focus on the evolution of manager ‘soft skills’ – an essential ingredient in leadership
competency development.
It is expected that Millennials will make up 75% of Air Canada’s workforce within the next 15 years.
Air Canada’s development programs are customized, taking into account different learning and engagement
styles. The airline’s succession strategy is now driven by a Talent Board comprised of executives working
closely with Human Resources to identify and prepare new leadership – both young and seasoned.
Air Canada is also leveraging artificial intelligence and virtual interviews to enhance its hiring practices and
ensure it is attracting the best candidates in the field.
2018 ANNUAL REPORT
26 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
The importance of diversity and inclusion at work is a direct reflection of Air Canada’s broad customer base
and a key element in Air Canada’s hiring strategy. In 2019, a senior leader diversity counsel and company-wide
employee business groups will identify programs and opportunities to promote diversity, including “Women
in Aviation” learning events, scholarships and internships for under-represented groups, such as people with
disability and spectrum limitations.
Air Canada’s achievements can be measured in several ways, including through external recognition such as:
> One of Canada’s Best Diversity Employers – 2018 – Mediacorp Canada
> One of Canada’s Top 100 Employers – 2019 – Mediacorp Canada
> One of Montréal’s Top Employers – 2019 – Mediacorp Canada
> One of Canada’s Most Attractive Employers – 2018 – Universum Global
> One of 50 Most Engaged Workplaces™ – 2018 – Achievers
> One of 2018 North American Candidate Experience Awards winners – Talent Board
> Fifth in the Top 20 Employer Brands in Canada – 2018 – Randstad
Labour
Starting in 2014, Air Canada entered into multiple long-term labour agreements with unions representing its
unionized workforce. These agreements provide additional stability and flexibility, as well as demonstrate a
collaborative partnership supporting its transformation into a global champion. These agreements include the
following:
> ACPA (Pilots) – In 2014, Air Canada and ACPA, representing pilots, ratified a new contract
providing collective agreement terms for 10 years, ending September 29, 2024, subject to
certain renegotiation provisions and benchmarks over this period. In 2017, Air Canada ratified
amendments to its existing long-term labour agreement with ACPA. The amendments to the
10-year agreement provide additional commercial opportunities as well as increased operational
flexibility.
> IAMAW (Maintenance, Operations and Baggage) – In 2016, Air Canada and the IAMAW,
representing technical maintenance, operational support and airport baggage handlers,
concluded a new contract providing collective agreement terms for 10 years, ending
March 31, 2026, subject to certain renegotiation provisions over this period.
> CALDA (Dispatchers) – In 2016, Air Canada and CALDA, representing flight dispatchers,
concluded a new contract providing collective agreement terms for 12 years, ending February 29,
2028, subject to certain renegotiation provisions over this period.
> CUPE (Flight Attendants) – In 2015, Air Canada and CUPE, representing flight attendants,
concluded a new contract providing collective agreement terms for 10 years, ending
March 31, 2025, subject to certain renegotiation provisions over this period.
> Unifor (Customer Service and Sales Agents) – In 2015, Air Canada and Unifor, representing
the airline’s customer service and sales agents concluded a new contract providing collective
agreement terms for five years, ending February 28, 2020.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 27
5. OVERVIEW
Full Year 2018 Financial Summary
The following is an overview of Air Canada’s results of operations and financial position for the full year 2018
compared to the full year 2017.
> Record operating revenues of $18,065 million in 2018 compared to operating revenues of
$16,252 million in 2017, an increase of $1,813 million or 11%. On capacity growth of 7.1%,
record passenger revenues of $16,223 million increased $1,630 million or 11.2% from 2017.
> Operating expenses of $16,891 million in 2018 versus operating expenses of $14,881 million in
2017, an increase of $2,010 million or 14%. CASM increased 6.0% from 2017. Adjusted CASM
increased 0.3% from 2017.
> Operating income of $1,174 million in 2018 compared to operating income of $1,371 million in
2017, a decrease of $197 million.
> EBITDAR of $2,851 million in 2018 compared to EBITDAR of $2,928 million in 2017, a decrease of
$77 million. The airline reported a 2018 EBITDAR margin (EBITDAR as a percentage of operating
revenue) of 15.8%. This compared to an EBITDAR margin of 18.0% in 2017. Special items are
excluded from all of Air Canada’s reported EBITDAR calculations. Refer to section 6 of this
MD&A for information on special items.
> Net income of $167 million or $0.60 per diluted share in 2018 versus net income of $2,029 million
or $7.31 per diluted share in 2017. In 2018, Air Canada recorded foreign exchange losses of
$317 million and a loss on disposal of assets of $188 million. In 2017, Air Canada recorded a
deferred income tax recovery of $759 million and foreign exchange gains of $120 million.
> Adjusted net income of $677 million or $2.45 per diluted share in 2018 versus adjusted net
income of $1,145 million or $4.11 per diluted share in 2017. Refer to section 20 “Non-GAAP
Financial Measures” of this MD&A for additional information.
> Adjusted net debt of $5,858 million at December 31, 2018 versus adjusted net debt of
$6,116 million at December 31, 2017, a decrease of $258 million. In 2018, increases in long-
term debt and finance lease balances of $533 million and capitalized operating lease balances
of $112 million were more than offset by an increase in cash, cash equivalents and short-term
investment balances of $903 million. Adjusted net debt is an additional GAAP measure. Refer to
section 9.3 “Adjusted Net Debt” of this MD&A for additional information.
> Air Canada’s leverage ratio (adjusted net debt to trailing 12-month EBITDAR) was 2.1 at
December 31, 2018, unchanged from December 31, 2017. Leverage ratio is a non-GAAP financial
measure. Refer to section 9.3 “Adjusted Net Debt” of this MD&A for additional information.
> Net cash flows from operating activities of $2,695 million in 2018 versus net cash flows from
operating activities of $2,738 million in 2017. In 2018, free cash flow of $791 million decreased
$265 million from 2017 and exceeded the $500 million to $600 million range projected in
Air Canada’s news release dated October 31, 2018. The better than expected free cash flow
can be attributed to a combination of lower than projected capital expenditures, better than
expected cash from working capital and stronger than anticipated income from operations. Refer
to section 9.5 “Consolidated Cash Flow Movements” of this MD&A for additional information.
2018 ANNUAL REPORT
28 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
> Return on invested capital (“ROIC”) for the 12 months ended December 31, 2018 of 12.6%,
in line with the ROIC of approximately 12% projected in Air Canada’s news release dated
October 31, 2018. This compared to ROIC of 15.3% for the 12 months ended December 31, 2017.
The decrease in ROIC versus 2017 was mainly driven by lower adjusted net income, an increase
in average shareholders’ equity net of excess cash and an increase in aircraft rent expense year-
over-year.
Fourth Quarter 2018 Financial Summary
The following is an overview of Air Canada’s results of operations for the fourth quarter of 2018 compared to
the fourth quarter of 2017.
> Record operating revenues of $4,246 million in the fourth quarter of 2018 compared to
operating revenues of $3,820 million in the fourth quarter of 2017, an increase of $426 million
or 11%. On capacity growth of 5.8%, record passenger revenues of $3,795 million increased
$386 million or 11.3% from the fourth quarter of 2017.
> Operating expenses of $4,124 million in the fourth quarter of 2018 versus operating expenses of
$3,687 million in the fourth quarter of 2017, an increase of $437 million or 12%. CASM increased
5.7% from the fourth quarter of 2017. Adjusted CASM increased 0.5% from the fourth quarter
of 2017, better than the 1.5% to 2.5% increase projected in Air Canada’s news release dated
October 31, 2018. Air Canada’s better than expected adjusted CASM performance was largely
due to lower aircraft maintenance expense, driven by a favourable annual adjustment related
to end-of-lease maintenance provisions, as well as the timing of certain engine maintenance
events.
> Operating income of $122 million in the fourth quarter of 2018 compared to operating income
of $133 million in the fourth quarter of 2017, a decrease of $11 million.
> Record EBITDAR of $543 million in the fourth quarter of 2018 compared to the previous record
EBITDAR of $521 million in the fourth quarter of 2017, an increase of $22 million. The airline
reported a fourth quarter 2018 EBITDAR margin of 12.8% compared to an EBITDAR margin of
13.6% in the fourth quarter of 2017.
> A net loss of $231 million or $0.85 per diluted share in the fourth quarter of 2018 versus net
income of $8 million or $0.02 per diluted share in the fourth quarter of 2017.
> Adjusted net income of $54 million or $0.20 per diluted share in the fourth quarter of 2018
versus adjusted net income of $60 million or $0.22 per diluted share in the fourth quarter
of 2017.
> Net cash flows from operating activities of $360 million in the fourth quarter of 2018 versus net
cash flows from operating activities of $389 million in the fourth quarter of 2017. Free cash flow
of $141 million in the fourth quarter of 2018 represented an improvement of $184 million from
the fourth quarter of 2017.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 29
6. RESULTS OF OPERATIONS –
Full Year 2018 versus Full Year 2017
The following table and discussion provide and compare results of Air Canada for 2018 and 2017:
(Canadian dollars in millions,
except per share figures)
Full Year
2018
2017
(1)
$ Change % Change
Operating revenues
Passenger $ 16,223 $ 14,593 $ 1,630 11
Cargo 803 708 95 13
Other 1,039 951 88 9
Total revenues 18,065 16,252 1,813 11
Operating expenses
Aircraft fuel 3,969 2,927 1,042 36
Regional airlines expense
Aircraft fuel 531 412 119 29
Other 2,311 2,205 106 5
Wages, salaries and benefits 2,873 2,671 202 8
Airport and navigation fees 964 905 59 7
Aircraft maintenance 1,003 938 65 7
Depreciation, amortization and impairment 1,080 956 124 13
Sales and distribution costs 807 770 37 5
Ground package costs 602 538 64 12
Aircraft rent 518 503 15 3
Catering and onboard services 433 383 50 13
Communications and information technology 294 254 40 16
Special items - 30 (30) (100)
Other 1,506 1,389 117 8
Total operating expenses 16,891 14,881 2,010 14
Operating income 1,174 1,371 (197)
Non-operating income (expense)
Foreign exchange gain (loss) (317) 120 (437)
Interest income 108 60 48
Interest expense (331) (311) (20)
Interest capitalized 35 36 (1)
Net financing expense relating to employee benefits (50) (65) 15
Gain (loss) on financial instruments recorded at fair value (1) 23 (24)
Gain on sale and leaseback of assets - 52 (52)
Gain on debt settlements and modifications 9 21 (12)
Loss on disposal of assets (188) - (188)
Other (34) (21) (13)
Total non-operating expense (769) (85) (684)
Income before income taxes 405 1,286 (881)
Income tax (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) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement
of 2017 amounts.
(2) EBITDAR, adjusted pre-tax income, adjusted net income and adjusted earnings per share – diluted are non-GAAP financial measures.
Refer to section 20 “Non-GAAP Financial Measures” of this MD&A for additional information.
2018 ANNUAL REPORT
30 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
System Passenger Revenues
With the adoption of IFRS 15 – Revenue from Contracts with Customers effective January 1, 2018, certain
passenger and cargo related fees were reclassified from Other revenue to Passenger revenue and Cargo revenue
on Air Canada’s consolidated statement of operations, with restatement of 2017 amounts. This reclassification
has no impact on total operating revenue. Concurrent with this change in presentation, Air Canada has revised
the methodology used to calculate yield and PRASM. These measures are now based on total passenger
revenues, with restatement of 2017 amounts on the same basis.
In 2018, system passenger revenues of $16,223 million increased $1,630 million or 11.2% from 2017 on traffic
growth of 8.5% and a yield improvement of 2.5%. On a stage length adjusted basis, yield increased 3.7% when
compared to 2017. Business cabin revenues, on a system-basis, increased $376 million or 13.2% from 2017 on
traffic and yield growth of 9.4% and 3.5%, respectively.
The table below provides passenger revenue by geographic region for the full year 2018 and the full year 2017.
(Canadian dollars in millions)
Passenger Revenues
Full Year
2018
2017
(1)
$ Change % Change
Canada $ 4,894 $ 4,637 $ 257 5.5
U.S. transborder 3,504 3,195 309 9.7
Atlantic 4,237 3,539 698 19.7
Pacific 2,430 2,195 235 10.7
Other 1,158 1,027 131 12.7
System $ 16,223 $ 14,593 $ 1,630 11.2
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
The table below provides year-over-year percentage changes in passenger revenues and operating statistics for
the full year 2018 versus the full year 2017.
Full Year 2018
versus
Full Year 2017
(1)
Passenger
Revenue
Capacity
(ASMs)
Traffic
(RPMs)
Passenger
Load Factor
Yield PRASM
% Change % Change % Change pp Change % Change % Change
Canada 5.5 3.2 2.7 (0.4) 2.7 2.3
U.S. transborder 9.7 6.9 7.1 0.1 2.4 2.6
Atlantic 19.7 10.4 14.7 3.1 4.4 8.4
Pacific 10.7 4.0 5.7 1.4 4.7 6.4
Other 12.7 14.7 12.8 (1.4) - (1.7)
System 11.2 7.1 8.5 1.0 2.5 3.8
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts which are reflected in the table above.
Components of the year-over-year change in full year system passenger revenues included:
> The 8.5% traffic increase which reflected traffic growth in all markets and included gains in
the business and premium economy cabins. Consistent with the airline’s objective of increasing
global international-to-international connecting traffic through its major Canadian hubs (sixth
freedom traffic), the traffic growth in 2018 reflected an increase in connecting traffic via Canada
to international destinations.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 31
> The 2.5% system yield increase which reflected:
− increases in fares and carrier surcharges, growth in high-yielding local traffic and an improved
overall fare mix;
− greater proportional growth of high-yielding business and premium economy class passengers;
− an increase in ancillary revenues, including through baggage fees, advance seat selection/
preferred seating fees and airport paid upgrades; and
− the introduction of an expanded suite of fare offerings on domestic, U.S. transborder and
Atlantic services, resulting in growth in ancillary revenue and an improved fare mix.
These factors were partly offset by an increase in average stage length of 2.1%, due to long-haul
international expansion, which had the effect of reducing system yield by 1.2 percentage points.
Domestic Passenger Revenues
In 2018, domestic passenger revenues of $4,894 million increased $257 million or 5.5% from 2017.
Components of the year-over-year change in full year domestic passenger revenues included:
> The 2.7% traffic increase which reflected traffic growth on all major domestic services as well as
incremental connecting traffic within Canada to international destinations. The traffic growth in
2018 included gains in the business cabin.
> The 2.7% yield increase which reflected yield improvements on all major domestic services. The
overall yield improvement versus 2017 reflected gains in the business cabin as well as the impact
of new fare categories on domestic services, resulting in growth in ancillary revenue, including
baggage fees, and an improved fare mix.
U.S. Transborder Passenger Revenues
In 2018, U.S. transborder passenger revenues of $3,504 million increased $309 million or 9.7% from 2017.
Components of the year-over-year change in full year U.S. transborder passenger revenues included:
> The 7.1% traffic increase which reflected traffic growth on all major U.S. transborder services.
The traffic increase in 2018 reflected strong passenger demand between Canada and the U.S.,
gains in the business cabin and growth in international-to-international connecting passenger
flows from the U.S.
> The 2.4% yield increase which reflected yield growth on all major U.S. transborder services with
the exception of U.S. short-haul routes. The launch of new fare categories on U.S. transborder
services, resulting in growth in ancillary revenue and an improved fare mix, contributed to the
overall yield improvement year-over-year. An unfavourable currency impact of $13 million was
an offsetting factor.
Atlantic Passenger Revenues
In 2018, Atlantic passenger revenues of $4,237 million increased $698 million or 19.7% from 2017.
Components of the year-over-year change in full year Atlantic passenger revenues included:
> The 14.7% traffic increase which reflected traffic growth on all major Atlantic services and
included gains in all cabins. The 10.4% capacity growth year-over-year was mainly due to the
launch of new services from Vancouver to France and Switzerland; from Toronto to Ireland,
Portugal, Romania and Croatia; and from Montreal to Ireland, Romania and Portugal, as well as
to increased frequencies on existing routes.
> The 4.4% yield increase which reflected yield improvements on all major Atlantic services and
included an increase in carrier surcharges year-over-year and a favourable currency impact
of $20 million. The launch of a new fare category on Atlantic services, resulting in growth in
ancillary revenue, including baggage fees, and an improved fare mix, also contributed to the
overall yield improvement year-over-year. An increase in average stage length of 1.5%, which
had the effect of reducing Atlantic yield by 0.9 percentage points, was a partly offsetting factor.
2018 ANNUAL REPORT
32 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Pacific Passenger Revenues
In 2018, Pacific passenger revenues of $2,430 million increased $235 million or 10.7% from 2017.
Components of the year-over-year change in full year Pacific passenger revenues included:
> The 5.7% traffic increase which reflected traffic growth on all major Pacific services with the
exception of services to Hong Kong and Japan where capacity was reduced year-over-year. The
traffic growth included gains in the business and premium economy cabins.
> The 4.7% yield increase which reflected yield growth on all major Pacific services with the
exception of Australia which was slightly below 2017. The yield increase year-over-year
included gains in the business and premium economy cabins. The lower yield on services to
Australia reflected increased industry capacity when compared to 2017. The overall Pacific yield
improvement versus 2017 included an increase in carrier surcharges year-over-year, particularly
in Japan and Korea where surcharges are regulated.
Other Passenger Revenues
In 2018, Other passenger revenues (from routes to and from the Caribbean, Mexico and Central and South
America) of $1,158 million increased $131 million or 12.7% from 2017.
Components of the year-over-year change in full year Other passenger revenues included:
> The 12.8% traffic increase which reflected traffic growth on services to South America and on
routes to traditional sun destinations. The traffic growth in 2018 included gains in all cabins.
> No change in yield when compared to 2017 as yield growth on services to the Caribbean was
offset by yield decreases on services to South America and Mexico. The yield decline on services
to South America was mainly due to a significant increase in average stage length due to the
removal of the short-haul tag between Santiago and Buenos Aires as Air Canada now serves
both markets on a non-stop basis. The yield decline on services to Mexico was mainly driven by
competitive pricing activities due to increased industry capacity. An increase in average stage
length of 4.1% had the effect of reducing yield in the Other markets by 2.3 percentage points.
On a stage length adjusted basis, yield increased 2.3% when compared to 2017.
Cargo Revenues
In 2018, cargo revenues of $803 million increased $95 million or 13.6% from 2017 on yield and traffic growth of 8.1%
and 5.1%, respectively. In 2018, the Atlantic and Pacific markets experienced particularly strong performances.
The table below provides cargo revenue by geographic region for the full year 2018 and the full year 2017.
Cargo Revenues Full Year
(Canadian dollars in millions)
2018
2017
(1)
$ Change % Change
Canada
$ 95
$ 84 $ 11 14.0
U.S. transborder 43 39 4 11.5
Atlantic 278 245 33 13.7
Pacific 325 280 45 16.0
Other 62 60 2 2.6
System $ 803 $ 708 $ 95 13.6
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
Other Revenues
In 2018, other revenues of $1,039 million increased $88 million or 9% when compared to 2017, mainly due to
an increase in ground package revenue at Air Canada Vacations, driven by both higher passenger volumes and
a higher price of ground packages when compared to 2017. An increase in passenger and airline-related fees
versus 2017 was also a contributing factor.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 33
CASM and Adjusted CASM
In 2018, CASM increased 6.0% and adjusted CASM increased 0.3% when compared to 2017.
The table below compares Air Canada’s CASM and adjusted CASM for the full year 2018 to the full year 2017.
(cents per ASM)
Full Year
2018
2017
(1)
¢ Change % Change
Aircraft fuel
¢ 3.58 ¢ 2.83 ¢ 0.75 26.6
Regional airlines expense
Aircraft fuel 0.48 0.40 0.08 20.4
Other 2.08 2.13 (0.05) (2.2)
Wages and salaries 1.96 1.99 (0.03) (1.4)
Benefits 0.63 0.59 0.04 6.4
Airport and navigation fees 0.87 0.87 - (0.6)
Aircraft maintenance 0.90 0.91 (0.01) (0.3)
Depreciation, amortization and impairment 0.97 0.92 0.05 5.4
Sales and distribution costs 0.73 0.74 (0.01) (2.2)
Ground package costs 0.54 0.52 0.02 4.4
Aircraft rent 0.47 0.49 (0.02) (3.8)
Catering and onboard services 0.39 0.37 0.02 5.5
Communications and information technology 0.27 0.25 0.02 7.9
Special items - 0.03 (0.03) (100.0)
Other 1.37 1.34 0.03 1.3
CASM ¢ 15.24 ¢ 14.38 ¢ 0.86 6.0
Remove:
Aircraft fuel expense
(2)
, ground package costs
at Air Canada Vacations and special items
(4.61) (3.78) (0.83) 21.9
Adjusted CASM
(3)
¢ 10.63 ¢ 10.60 ¢ 0.03 0.3
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
(2) Includes aircraft fuel expense related to regional airline operations.
(3) Adjusted CASM is a non-GAAP financial measure. Refer to section 20 “Non-GAAP Financial Measures” of this MD&A for additional
information.
Operating Expenses
In 2018, operating expenses of $16,891 million increased $2,010 million or 14% from 2017 on capacity growth
of 7.1%.
The more notable components of the year-over-year change in operating expenses are described below.
Aircraft Fuel Expense
In 2018, aircraft fuel expense (including fuel expense related to regional airline operations) amounted to
$4,500 million, an increase of $1,161 million or 35% from 2017. This increase reflected:
> higher jet fuel prices (before the impact of foreign exchange), which accounted for an increase of
$918 million;
> a higher volume of fuel liters consumed, which accounted for an increase of $165 million;
> an unfavourable currency impact of $44 million; and
> fuel hedging losses/expenses of $36 million in 2018 versus fuel hedging losses/expenses of
$2 million in 2017, an increase of $34 million.
2018 ANNUAL REPORT
34 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Regional Airlines Expense
In 2018, regional airlines expense of $2,842 million increased $225 million or 9% when compared to 2017,
reflecting, in large part, higher aircraft fuel expense year-over-year, as well as a growth in capacity purchase
fees due to a higher volume of engine maintenance activity when compared to 2017. Higher CPA rates and the
impact of increased flying were also contributing factors.
The table below provides a breakdown of regional airlines expense for the full year 2018 and the full year 2017.
(Canadian dollars in millions)
Full Year
2018
2017 $ Change % Change
Capacity purchase fees $ 1,333 $ 1,267 $ 66 5
Aircraft fuel 531 412 119 29
Airport and navigation fees 296 293 3 1
Sales and distribution costs 153 146 7 5
Depreciation, amortization and impairment 38 28 10 36
Aircraft rent 41 40 1 3
Other 450 431 19 4
Total regional airlines expense $ 2,842 $ 2,617 $ 225 9
Wages, Salaries and Benefits Expense
In 2018, wages and salaries expense of $2,174 million increased $115 million or 6% from 2017, largely due to a
higher number of full-time equivalent (“FTE”) employees, mainly in support of the airline’s capacity growth and
international expansion strategy.
In 2018, employee benefits expense of $699 million increased $87 million or 14% from 2017, higher than
the increase of $75 million projected in Air Canada’s news release dated October 31, 2018. The increase in
employee benefits expenses versus 2017 was mainly due to the higher level of FTE employees and the impact
of lower discount rates which increased the current service cost of defined benefit pension plans.
Airport and Navigation Fees
In 2018, airport and navigation fees of $964 million increased $59 million or 7% from 2017, largely due to
growth in wide-body and international flying. In addition, in 2017, Air Canada received a $15 million one-time
refund from Nav Canada while no such refund was received in 2018. The favourable impact of Air Canada’s
agreement with the Greater Toronto Airports Authority, which is allowing the airline to increase international
connecting traffic at Toronto Pearson International Airport on a more cost-effective basis, and a 3.9% Nav
Canada rate reduction effective September 1, 2017 were offsetting factors.
Aircraft Maintenance Expense
In 2018, aircraft maintenance expense of $1,003 million increased $65 million or 7% from 2017, better than
the increase of $95 million projected in Air Canada’s news release dated October 31, 2018. This better than
anticipated performance was largely due to an annual adjustment related to end-of-lease maintenance
provisions and to timing of engine maintenance events. The increase in aircraft maintenance expense versus
2017 was mainly driven by an increase in engine and components maintenance activity and the impact of
having additional Boeing 787 aircraft in the fleet in 2018, which have engines under power-by-the-hour
arrangements. These increases were largely offset by the impact of having a greater number of aircraft leases
being extended in 2018 and to more favourable end-of-lease conditions on aircraft lease extensions. The
impact of a stronger Canadian dollar on U.S. denominated maintenance expenses was also an offsetting factor.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 35
The table below provides a breakdown of the more significant items included in maintenance expense for the
full year 2018 and the full year 2017.
(Canadian dollars in millions)
Full Year
2018
2017
(1)
$ Change % Change
Technical maintenance $ 923 $ 824
$ 99
12
Maintenance provisions
(1)
51 100 (49) (49)
Other
29 14 15 107
Total aircraft maintenance expense $ 1,003 $ 938 $ 65 7
(1) Maintenance provisions relate to return conditions on aircraft leases which are recorded over the term of the lease.
Depreciation, Amortization and Impairment Expense
In 2018, depreciation, amortization and impairment expense of $1,080 increased $124 million or 13% from
2017, in line with the increase of $125 million projected in Air Canada’s news release dated October 31, 2018.
The increase in depreciation, amortization and impairment expense versus 2017 was largely due to the addition
of Boeing 787 and 737 MAX aircraft into the mainline fleet. The sale of 25 Embraer 190 aircraft (which Air Canada
leased back), in August 2018, was an offsetting factor.
Sales and Distribution Costs
In 2018, sales and distribution costs of $807 million increased $37 million or 5% from 2017, reflecting, in large
part, the growth in passenger revenue. The favourable impact of new commission programs introduced in
North America in April 2018 and growth in direct bookings when compared to 2017 were offsetting factors.
Ground Package Costs
In 2018, the cost of ground packages at Air Canada Vacations of $602 million increased $64 million or 12%
when compared to 2017, mainly due to higher passenger volumes and a higher cost of ground packages (before
the impact of foreign exchange) reflecting, in large part, a change in product mix. A favourable currency
impact was an offsetting factor.
Aircraft Rent
In 2018, aircraft rent expense of $518 million increased $15 million or 3% from 2017, reflecting, in large part,
the impact of a greater number of leased aircraft, including 25 Embraer 190 aircraft which Air Canada sold and
leased back in August 2018, partly offset by the impact of lower rates on certain lease renewals.
Special Items
In the first quarter of 2017, Air Canada recorded a provision of $30 million relating to a fine which was
reinstated by a decision of the European Commission pertaining to cargo investigations. Air Canada paid the
fine in the second quarter of 2017. Air Canada has appealed the decision. While Air Canada cannot predict with
certainty the outcome of its appeal or any related proceedings, Air Canada believes it has reasonable grounds
to challenge the European Commission’s ruling. Refer to “Current legal proceedings” under section 18 “Risk
Factors” of this MD&A for additional information.
2018 ANNUAL REPORT
36 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Other Expenses
In 2018, other expenses of $1,506 million increased $117 million or 8% from 2017, reflecting, in large part, the
capacity growth and Air Canada’s international expansion strategy, as well as an increase in customer service
expense. The increase in customer service expense was partly due to the impact of operational disruptions
caused by severe weather, particularly in the first half of 2018. In addition, the first quarter of 2018 included
expenses of $26 million related to new uniforms.
The table below provides a breakdown of the more significant items included in other expenses for the full year
2018 and the full year 2017.
(Canadian dollars in millions)
Full Year
2018
2017
(1)
$ Change % Change
Terminal handling $ 327 $ 296 $ 31 10
Crew cycle 212 197 15 8
Building rent and maintenance 176 167 9 5
Miscellaneous fees and services 173 164 9 5
Remaining other expenses 618 565 53 9
Total other expenses $ 1,506 $ 1,389 $ 117 8
Non-operating Income (Expense)
In 2018, non-operating expense amounted to $769 million versus non-operating expense of $85 million
in 2017.
Components of the year-over-year change in non-operating expense included:
> In 2018, losses on foreign exchange amounted to $317 million compared to gains on foreign
exchange of $120 million in 2017. The December 31, 2018 closing exchange rate was
US$1=C$1.3637 while the December 31, 2017 closing exchange rate was US$1=C$1.2571.
Foreign exchange losses on long-term debt of $501 million were partly offset by foreign
exchange gains on foreign currency derivatives of $245 million.
> In 2017, Air Canada recorded a gain of $52 million on the sale and leaseback of four Boeing 787-9
aircraft. No such gains were recorded in 2018.
> In 2018, Air Canada recorded a gain of $9 million on debt modifications, which included a gain
of $11 million related to the repricing of the airline’s US$1.2 billion senior secured credit facility.
This compared to a gain on debt modifications of $27 million in 2017, which was also related to
the repricing of the senior secured credit facility.
> In 2018, Air Canada recorded a loss on disposal of assets of $188 million related to the sale of
25 Embraer 190 aircraft. No such loss was recorded in 2017. Air Canada realized net proceeds of
$293 million from the sale of these aircraft in 2018.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 37
7. RESULTS OF OPERATIONS –
Fourth Quarter 2018 versus Fourth Quarter 2017
The following table and discussion provide and compare results of Air Canada for the fourth quarter of 2018
and the fourth quarter of 2017:
(Canadian dollars in millions,
except per share figures)
Fourth Quarter
2018
2017
(1)
$ Change % Change
Operating revenues
Passenger $ 3,795 $ 3,409 $ 386 11
Cargo 217 198 19 10
Other 234 213 21 10
Total revenues 4,246 3,820 426 11
Operating expenses
Aircraft fuel 958 735 223 30
Regional airlines expense
Aircraft fuel 133 112 21 19
Other 575 563 12 2
Wages, salaries and benefits 719 674 45 7
Airport and navigation fees 225 201 24 12
Aircraft maintenance 250 243 7 3
Depreciation, amortization and impairment 267 245 22 9
Sales and distribution costs 182 169 13 8
Ground package costs 126 106 20 19
Aircraft rent 133 126 7 6
Catering and onboard services 104 89 15 17
Communications and information technology 69 62 7 11
Other 383 362 21 6
Total operating expenses 4,124 3,687 437 12
Operating income 122 133 (11)
Non-operating income (expense)
Foreign exchange loss (269) (62) (207)
Interest income 32 18 14
Interest expense (84) (79) (5)
Interest capitalized 8 9 (1)
Net financing expense relating to employee benefits (12) (18) 6
Loss on financial instruments recorded at fair value (3) (1) (2)
Gain on debt settlements and modifications - 24 (24)
Other (10) (4) (6)
Total non-operating expense (338) (113) (225)
Income (loss) before income taxes (216) 20 (236)
Income tax expense (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) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
(2) EBITDAR, adjusted pre-tax income, adjusted net income and adjusted earnings per share – diluted are non-GAAP financial measures.
Refer to section 20 “Non-GAAP Financial Measures” of this MD&A for additional information.
2018 ANNUAL REPORT
38 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
System Passenger Revenues
In the fourth quarter of 2018, system passenger revenues of $3,795 million increased $386 million or 11.3%
from the fourth quarter of 2017 on traffic growth of 7.2% and a yield improvement of 3.8%. On a stage length
adjusted basis, yield increased 4.5% when compared to the same quarter in 2017. Business cabin revenues, on
a system-basis, increased $92 million or 12.5% from the fourth quarter of 2017 on traffic and yield growth of
9.3% and 2.9%, respectively.
The table below provides passenger revenue by geographic region for the fourth quarter of 2018 and the fourth
quarter of 2017.
(Canadian dollars in millions)
Fourth Quarter
Passenger Revenues
2018
2017
(1)
$ Change % Change
Canada $ 1,216 $ 1,151 $ 65 5.6
U.S. transborder
846 746 100 13.4
Atlantic 899 763 136 18.0
Pacific 550 501 49 9.7
Other 284 248 36 14.5
System $ 3,795 $ 3,409 $ 386 11.3
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
The table below provides year-over-year percentage changes in passenger revenues and operating statistics for
the fourth quarter of 2018 versus the fourth quarter of 2017.
Fourth Quarter 2018
versus
Fourth Quarter 2017
(1)
Passenger
Revenue
Capacity
(ASMs)
Traffic
(RPMs)
Passenger
Load
Factor
Yield PRASM
% Change % Change % Change pp Change % Change % Change
Canada 5.6 1.5 1.7 0.2 3.9 4.1
U.S. transborder 13.4 9.7 9.6 (0.1) 3.5 3.4
Atlantic 18.0 9.5 14.5 3.5 3.0 7.7
Pacific 9.7 (0.8) 0.3 0.9 9.3 10.6
Other 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) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts which are reflected in the table above.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 39
The table below provides year-over-year percentage changes in system passenger revenues and operating
statistics for the fourth quarter of 2018 and each of the previous four quarters.
Year-over-Year by Quarter (% Change)
System
Q4’17
(1)
Q1’18 Q2’18 Q3’18
Q4’18
Passenger revenues 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
Passenger load factor (pp change) 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) To provide a more meaningful comparison, the year-over-year percentage changes for the fourth quarter 2017 versus the fourth quarter of
2016 are based on previously reported 2016 and 2017 amounts as 2016 amounts have not been restated for the adoption of IFRS 15.
Components of the year-over-year change in fourth quarter system passenger revenues included:
> The 7.2% traffic increase which reflected traffic growth in all markets and included gains in the
business and premium economy cabins. Consistent with the airline’s objective of increasing
global international-to-international connecting traffic through its major Canadian hubs
(sixth freedom traffic), the traffic growth in the fourth quarter of 2018 reflected an increase
in connecting traffic via Canada to international destinations.
> The 3.8% system yield increase which reflected:
− increases in fares and carrier surcharges, growth in high-yielding local traffic, and an
improvement in the overall fare mix;
− greater proportional growth of high-yielding business and premium economy class passengers;
− an increase in ancillary revenues, including through baggage fees, advance seat selection/
preferred seating fees and airport paid upgrades;
− the introduction of an expanded suite of fare offerings on domestic, U.S. transborder and
Atlantic services, resulting in growth in ancillary revenue and an improved fare mix; and
− a favourable currency impact of $35 million when compared to the fourth quarter of 2017.
These factors were partly offset by an increase in average stage length of 1.2%, due to long-haul
international expansion, which had the effect of reducing system yield by 0.7 percentage points.
2018 ANNUAL REPORT
40 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Domestic Passenger Revenues
In the fourth quarter of 2018, domestic passenger revenues of $1,216 million increased $65 million or 5.6%
from the fourth quarter of 2017.
The table below provides year-over-year percentage changes in domestic passenger revenues and operating
statistics for the fourth quarter of 2018 and each of the previous four quarters.
Year-over-Year by Quarter (% Change)
Canada
Q4’17
(1)
Q1’18 Q2’18 Q3’18
Q4’18
Passenger revenues 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
Passenger load factor (pp change) 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) To provide a more meaningful comparison, the year-over-year percentage changes for the fourth quarter 2017 versus the fourth quarter of
2016 are based on previously reported 2016 and 2017 amounts as 2016 amounts have not been restated for the adoption of IFRS 15.
Components of the year-over-year change in fourth quarter domestic passenger revenues included:
> The 1.7% traffic increase which reflected traffic growth on all major domestic services as well as
incremental connecting traffic within Canada to international destinations. The traffic growth in
the fourth quarter of 2018 included gains in the business cabin.
> The 3.9% yield increase which reflected yield improvements on all major domestic services.
The overall yield improvement versus the fourth quarter of 2017 reflected gains in the business
cabin as well as the impact of new fare categories on domestic services, resulting in growth in
ancillary revenue and an improved fare mix.
U.S. Transborder Passenger Revenues
In the fourth quarter of 2018, U.S. transborder passenger revenues of $846 million increased $100 million or
13.4% from the fourth quarter of 2017.
The table below provides year-over-year percentage changes in U.S. transborder passenger revenues and
operating statistics for the fourth quarter of 2018 and each of the previous four quarters.
Year-over-Year by Quarter (% Change)
U.S. transborder
Q4’17
(1)
Q1’18 Q2’18 Q3’18
Q4’18
Passenger revenues 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
Passenger load factor (pp change) 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) To provide a more meaningful comparison, the year-over-year percentage changes for the fourth quarter 2017 versus the fourth quarter of
2016 are based on previously reported 2016 and 2017 amounts as 2016 amounts have not been restated for the adoption of IFRS 15.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 41
Components of the year-over-year change in fourth quarter U.S. transborder passenger revenues included:
> The 9.6% traffic increase which reflected traffic growth on all major U.S. transborder services.
The traffic increase in the fourth quarter of 2018 reflected strong passenger demand between
Canada and the U.S., gains in the business cabin, and growth in international-to-international
connecting passenger flows from the U.S.
> The 3.5% yield increase which reflected yield growth on all major U.S. transborder services.
The launch of new fare categories on U.S. transborder services, resulting in growth in ancillary
revenue and an improved fare mix, and a favourable currency impact of $10 million contributed
to the overall yield improvement year-over-year. An increase in average stage length of 1.8%,
which had the effect of reducing U.S. transborder yield by 1.0 percentage points, was a partly
offsetting factor.
Atlantic Passenger Revenues
In the fourth quarter of 2018, Atlantic passenger revenues of $899 million increased $136 million or 18.0%
from the fourth quarter of 2017.
The table below provides year-over-year percentage changes in Atlantic passenger revenues and operating
statistics for the fourth quarter of 2018 and each of the previous four quarters.
Year-over-Year by Quarter (% Change)
Atlantic
Q4’17
(1)
Q1’18 Q2’18 Q3’18
Q4’18
Passenger revenues 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
Passenger load factor (pp change) 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) To provide a more meaningful comparison, the year-over-year percentage changes for the fourth quarter 2017 versus the fourth quarter of
2016 are based on previously reported 2016 and 2017 amounts as 2016 amounts have not been restated for the adoption of IFRS 15.
Components of the year-over-year change in fourth quarter Atlantic passenger revenues included:
> The 14.5% traffic increase which reflected traffic growth on all major Atlantic services and
included gains in all cabins. The 9.5% capacity growth year-over-year was due to additional
frequencies from Vancouver to India, an extension of seasonal mainline operations, including
Toronto and Montreal to Italy and Montreal to Israel, and an extension of seasonal services on
many markets operated by Air Canada Rouge.
> The 3.0% yield increase which reflected yield improvements on all major Atlantic services and
included an increase in carrier surcharges year-over-year and a favourable currency impact
of $12 million. The launch of a new fare category on Atlantic services, resulting in growth in
ancillary revenue, including baggage fees, and an improved fare mix, also contributed to the
overall yield improvement year-over-year.
2018 ANNUAL REPORT
42 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Pacific Passenger Revenues
In the fourth quarter of 2018, Pacific passenger revenues of $550 million increased $49 million or 9.7% from
the fourth quarter of 2017.
The table below provides year-over-year percentage changes in Pacific passenger revenues and operating
statistics for the fourth quarter of 2018 and each of the previous four quarters.
Year-over-Year by Quarter (% Change)
Pacific
Q4’17
(1)
Q1’18 Q2’18 Q3’18
Q4’18
Passenger revenues 13.5 14.2 9.9 9.9
9.7
Capacity (ASMs) 12.2 12.0 5.2 1.1
(0.8)
Traffic (RPMs) 13.7 15.9 5.7 2.9
0.3
Passenger load factor (pp change) 1.0 2.8 0.4 1.5
0.9
Yield (0.2) (1.5) 4.0 6.8
9.3
PRASM 1.1 1.9 4.5 8.6
10.6
(1) To provide a more meaningful comparison, the year-over-year percentage changes for the fourth quarter 2017 versus the fourth quarter of
2016 are based on previously reported 2016 and 2017 amounts as 2016 amounts have not been restated for the adoption of IFRS 15.
Components of the year-over-year change in fourth quarter Pacific passenger revenues included:
> The 9.3% yield increase which reflected yield growth on all major Pacific services with the
exception of Australia which was slightly below the fourth quarter of 2017. The lower yield on
services to Australia reflected increased industry capacity when compared to the same quarter
in 2017. The overall Pacific yield improvement versus the fourth quarter of 2017 included an
increase in carrier surcharges year-over-year and a favourable currency impact of $6 million.
> The 0.3% traffic increase which reflected traffic growth on services to Australia, Korea and
China, offset by traffic decreases on services to Hong Kong, Japan and Taiwan where capacity
was reduced year-over-year. The traffic growth included gains in the business and premium
economy cabins.
Other Passenger Revenues
In the fourth quarter of 2018, Other passenger revenues (from routes to and from the Caribbean, Mexico and
Central and South America) of $284 million increased $36 million or 14.5% from the fourth quarter of 2017.
The table below provides year-over-year percentage changes in Other passenger revenues and operating
statistics for the fourth quarter of 2018 and each of the previous four quarters.
Year-over-Year by Quarter (% Change)
Other
Q4’17
(1)
Q1’18 Q2’18 Q3’18
Q4’18
Passenger revenues 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
Passenger load factor (pp change) (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) To provide a more meaningful comparison, the year-over-year percentage changes for the fourth quarter 2017 versus the fourth quarter of
2016 are based on previously reported 2016 and 2017 amounts as 2016 amounts have not been restated for the adoption of IFRS 15.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 43
Components of the year-over-year change in fourth quarter Other passenger revenues included:
> The 14.0% traffic increase which reflected traffic growth on services to South America and on
routes to traditional sun destinations. The traffic growth in the fourth quarter of 2018 included
gains in all cabins.
> The 0.5% yield increase which reflected yield growth on services to the Caribbean and Mexico,
largely offset by a yield decrease on services to South America. The yield decline on services to
South America was mainly due a significant increase in average stage length due to the removal
of the short-haul tag between Santiago and Buenos Aires as Air Canada now serves both markets
on a non-stop basis. An increase in average stage length of 6.1% had the effect of reducing yield
in the Other markets by 3.4 percentage points. On a stage length adjusted basis, yield increased
3.9% when compared to the fourth quarter of 2017.
Cargo Revenues
In the fourth quarter of 2018, cargo revenues of $217 million increased $19 million or 10.0% from the same
quarter in 2017 on yield and traffic growth of 6.8% and 2.9%, respectively. In the fourth quarter of 2018, the
Atlantic and Pacific markets experienced particularly strong performances.
The table below provides cargo revenue by geographic region for the fourth quarter of 2018 and the fourth
quarter of 2017.
Cargo Revenues Fourth Quarter
(Canadian dollars in millions)
2018
2017
(1)
$ Change % Change
Canada $ 27 $ 23 $ 4 21.3
U.S. transborder 12 10 2 23.2
Atlantic 72 66 6 8.5
Pacific 88 81 7 9.2
Other 18 18 - (2.5)
System $ 217 $ 198 $ 19 10.0
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
Other Revenues
In the fourth quarter of 2018, other revenues of $234 million increased $21 million or 10% when compared
to the fourth quarter of 2017, mainly due to an increase in ground package revenue at Air Canada Vacations.
This increase was driven by higher passenger volumes and, to a lesser extent, a higher price of ground packages
when compared to the fourth quarter of 2017. An increase in passenger and airline-related fees versus the
fourth quarter of 2017 was also a contributing factor to the increase in other revenue.
2018 ANNUAL REPORT
44 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
CASM and Adjusted CASM
In the fourth quarter of 2018, CASM increased 5.7% and adjusted CASM increased 0.5% when compared to the
fourth quarter of 2017.
The table below compares Air Canada’s CASM and adjusted CASM for the fourth quarter of 2018 to the fourth
quarter of 2017.
(cents per ASM)
Full Year
2018
2017
(1)
¢ Change % Change
Aircraft fuel
¢ 3.74 ¢ 3.04 ¢ 0.70 23.1
Regional airlines expense
Aircraft fuel 0.52 0.46 0.06 12.0
Other 2.25 2.33 (0.08) (3.3)
Wages and salaries 2.18 2.26 (0.08) (3.4)
Benefits 0.63 0.53 0.10 18.4
Airport and navigation fees 0.88 0.83 0.05 5.5
Aircraft maintenance 0.98 1.01 (0.03) (3.1)
Depreciation, amortization and impairment 1.04 1.01 0.03 2.8
Sales and distribution costs 0.71 0.70 0.01 1.3
Ground package costs 0.49 0.44 0.05 11.6
Aircraft rent 0.52 0.52 - 0.4
Catering and onboard services 0.41 0.37 0.04 11.0
Communications and information technology 0.27 0.26 0.01 4.4
Other 1.49 1.48 0.01 0.8
CASM ¢ 16.11 ¢ 15.24 ¢ 0.87 5.7
Remove:
Aircraft fuel expense
(2)
, ground package costs
at Air Canada Vacations and special items
(4.75) (3.94) (0.81) 20.5
Adjusted CASM
(3)
¢ 11.36 ¢ 11.30 ¢ 0.06 0.5
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
(2) Includes aircraft fuel expense related to regional airline operations.
(3) Adjusted CASM is a non-GAAP financial measure. Refer to section 20 “Non-GAAP Financial Measures” of this MD&A for additional
information.
Operating Expenses
In the fourth quarter of 2018, operating expenses of $4,124 million increased $437 million or 12% from the
fourth quarter of 2017 on capacity growth of 5.8%.
In the fourth quarter of 2018, the unfavourable impact of a weaker Canadian dollar on foreign currency
denominated operating expenses (mainly U.S. dollars), compared to the same quarter in 2017, increased
operating expenses by $64 million (comprised of $37 million related to aircraft fuel expense and an aggregate
of $27 million relating to non-fuel operating expenses).
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 45
The more notable components of the year-over-year change in operating expenses are described below.
Aircraft Fuel Expense
In the fourth quarter of 2018, aircraft fuel expense (including fuel expense related to regional airline
operations) amounted to $1,091 million, an increase of $244 million or 29% from the fourth quarter of 2017.
This increase reflected:
> higher jet fuel prices (before the impact of foreign exchange), which accounted for an increase of
$151 million;
> an unfavourable currency impact of $37 million;
> a higher volume of fuel litres consumed, which accounted for an increase of $27 million; and
> fuel hedging losses/expenses of $26 million in the fourth quarter of 2018 versus fuel hedging
gains (net of expenses) of $3 million in the fourth quarter of 2017, an increase of $29 million.
Regional Airlines Expense
In the fourth quarter of 2018, regional airlines expense of $708 million increased $33 million or 5% when
compared to the fourth quarter of 2017, reflecting, in large part, higher aircraft fuel expense year-over-year,
as well as a growth in capacity purchase fees due to higher CPA rates year-over-year.
The table below provides a breakdown of regional airlines expense for the fourth quarter of 2018 and the
fourth quarter of 2017.
(Canadian dollars in millions)
Fourth Quarter
2018
2017 $ Change % Change
Capacity purchase fees $ 336 $ 330 $ 6 2
Aircraft fuel 133 112 21 19
Airport and navigation fees 73 71 2 3
Sales and distribution costs 34 35 (1) (3)
Depreciation, amortization and impairment 11 7 4 57
Aircraft rent 10 10 - -
Other 111 110 1 1
Total regional airlines expense $ 708 $ 675 $ 33 5
Wages, Salaries and Benefits Expense
In the fourth quarter of 2018, wages and salaries expense of $557 million increased $11 million or 2% from
the same quarter in 2017, largely due to a higher number of FTE employees mainly in support of the airline’s
capacity growth and international expansion strategy.
In the fourth quarter of 2018, employee benefits expense of $162 million increased $34 million or 27% from
the fourth quarter of 2017, mainly due to the higher level of FTE employees and the impact of lower discount
rates which increased the current service cost of defined benefit pension plans. In addition, the fourth quarter
of 2017 reflected a favourable impact of $9 million related to an annual valuation pertaining to workers’
compensation versus an unfavourable impact of $4 million in the fourth quarter of 2018.
Airport and Navigation Fees
In the fourth quarter of 2018, airport and navigation fees of $225 million increased $24 million or 12% from
the fourth quarter of 2017, largely due to growth in wide-body and international flying. In addition, in the
fourth quarter of 2017, Air Canada received a $15 million one-time refund from Nav Canada while no such
refund was received in the fourth quarter of 2018. The favourable impact of Air Canada’s agreement with the
Greater Toronto Airports Authority, which is allowing the airline to increase international connecting traffic at
Toronto Pearson International Airport on a more cost-effective basis, was an offsetting factor.
2018 ANNUAL REPORT
46 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Aircraft Maintenance Expense
In the fourth quarter of 2018, aircraft maintenance expense of $250 million increased $7 million or 3% from
the fourth quarter of 2017.
The table below provides a breakdown of the more significant items included in maintenance expense for the
fourth quarter of 2018 and the fourth quarter of 2017.
(Canadian dollars in millions)
Fourth Quarter
2018
2017
(1)
$ Change % Change
Technical maintenance $ 222 $ 206 $ 16 8
Maintenance provisions
(1)
17 31 (14) (45)
Other 11 6 5 83
Total aircraft maintenance expense $ 250 $ 243 $ 7 3
(1) Maintenance provisions relate to return conditions on aircraft leases which are recorded over the term of the lease.
Depreciation, Amortization and Impairment Expense
In the fourth quarter of 2018, depreciation, amortization and impairment expense of $267 million increased
$22 million or 9% from the fourth quarter of 2017, largely due to the addition of Boeing 787 and 737 MAX
aircraft into the mainline fleet. The sale of 25 Embraer 190 aircraft (which Air Canada leased back) in August
2018 was an offsetting factor.
Sales and Distribution Costs
In the fourth quarter of 2018, sales and distribution costs of $182 million increased $13 million or 8% from
the same quarter in 2017, reflecting, in large part, the growth in passenger revenue. The favourable impact
of new commission programs introduced in North America in April 2018 and growth in direct bookings when
compared to the fourth quarter of 2017 were offsetting factors.
Ground Package Costs
In the fourth quarter of 2018, the cost of ground packages at Air Canada Vacations of $126 million increased
$20 million or 19% when compared to the same quarter in 2017 due to a higher cost of ground packages
(before the impact of foreign exchange) reflecting, in large part, a change in product mix, and higher passenger
volumes year-over-year.
Aircraft Rent
In the fourth quarter of 2018, aircraft rent expense of $133 million increased $7 million or 6% from fourth
quarter of 2017, reflecting, in large part, the impact of a greater number of leased aircraft, including
25 Embraer 190 aircraft which Air Canada sold and leased back in August 2018, and an unfavourable currency
impact when compared to the fourth quarter of 2017. The impact of lower rates on certain lease renewals was
an offsetting factor.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 47
Other Expenses
In the fourth quarter of 2018, other expenses of $383 million increased $21 million or 6% from the same
quarter in 2017, reflecting, in large part, the capacity growth and Air Canada’s international expansion strategy.
The table below provides a breakdown of the more significant items included in other expenses for the fourth
quarter of 2018 and the fourth quarter of 2017.
(Canadian dollars in millions)
Fourth Quarter
2018
2017 $ Change % Change
Terminal handling $ 77 $ 69 $ 8 12
Crew cycle 52 51 1 2
Building rent and maintenance 47 41 6 15
Miscellaneous fees and services 50 45 5 11
Remaining other expenses 157 156 1 1
Total other expenses $ 383 $ 362 $ 21 6
Non-operating Income (Expense)
In the fourth quarter of 2018, non-operating expense amounted to $338 million versus non-operating expense
of $113 million in the fourth quarter of 2017.
Components of the year-over-year change in non-operating expense included:
> In the fourth quarter of 2018, losses on foreign exchange amounted to $269 million compared to
losses on foreign exchange of $62 million in the fourth quarter of 2017. The December 31, 2018
closing exchange rate was US$1=C$1.3637 while the September 30, 2018 closing exchange rate
was US$1=C$1.2908. Foreign exchange losses on long-term debt of $333 million were partly
offset by foreign exchange gains on foreign currency derivatives of $75 million.
> In the fourth quarter of 2017, Air Canada recorded a gain of $27 million on debt modifications
related to the repricing of the airline’s US$1.2 billion senior secured credit facility. No such gains
were recorded in the fourth quarter of 2018.
2018 ANNUAL REPORT
48 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
8. FLEET
Mainline and Air Canada Rouge
The following table provides Air Canada’s and Air Canada Rouge’s operating fleet as at December 31, 2018.
Refer to the Air Canada Express section below for information on the fleet of aircraft operated by regional
airlines operating flights on behalf of Air Canada under capacity purchase agreements with Air Canada.
Total
Seats
Number of
Operating
Aircraft
Average
Age
Owned Finance
Lease
Operating
Lease
Mainline
Wide-body aircraft
Boeing 787-8 255 8 4.2 8 - -
Boeing 787-9 298 27 2.1 21 - 6
Boeing 777-300ER 450/400 19 8.5 10 1 8
Boeing 777-200LR 300 6 11.1 4 - 2
Boeing 767-300ER 211 6 29.5 3 - 3
Airbus A330-300 292 8 18.2 8 - -
Narrow-body aircraft
Boeing 737 MAX 8 169 18 0.8 18 - -
Airbus A321 190 15 15.7 5 - 10
Airbus A320 146 42 25.2 1 - 41
Airbus A319 120 16 21.2 5 - 11
Embraer 190 97 19 11.3 - - 19
Total Mainline 184 13.6 83 1 100
Air Canada Rouge
Wide-body aircraft
Boeing 767-300ER
(1)
282 25 21.6 3 2 20
Narrow-body aircraft
Airbus A321 200 6 3.7 - - 6
Airbus A319
(1)
136 22 20.2 17 - 5
Total Air Canada Rouge 53 19.0 20 2 31
Total Mainline and
Air Canada Rouge
237 14.8 103 3 131
(1) The Boeing 767 aircraft and the Airbus A319 aircraft reflected as owned in the table above are owned by Air Canada and leased to
Air Canada Rouge.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 49
The table below provides the number of aircraft in Air Canada’s operating fleet as at December 31, 2018 as well
as Air Canada’s planned operating fleet, including aircraft operating and expected to be operated by Air Canada
Rouge, as at December 31, 2019 and December 31, 2020.
Actual Planned
December 31,
2018
2019 Fleet
Changes
December 31,
2019
2020 Fleet
Changes
December 31,
2020
Mainline
Wide-body aircraft
Boeing 787-8 8 - 8 - 8
Boeing 787-9 27 2 29 - 29
Boeing 777-300ER 19 - 19 - 19
Boeing 777-200LR 6 - 6 - 6
Boeing 767-300ER 6 (6) - - -
Airbus A330-300 8 4 12 1 13
Narrow-body aircraft
Boeing 737 MAX 8 18 18 36 14 50
Airbus A321 15 - 15 - 15
Airbus A320 42 (13) 29 (13) 16
Airbus A319 16 - 16 - 16
Airbus A220-300 - 1 1 14 15
Embraer 190 19 (5) 14 (14) -
Total Mainline 184 1 185 2 187
Air Canada Rouge
Wide-body aircraft
Boeing 767-300ER 25 - 25 - 25
Narrow-body aircraft
Airbus A321 6 4 10 - 10
Airbus A320 - 6 6 1 7
Airbus A319 22 - 22 - 22
Total Air Canada Rouge 53 10 63 1 64
Total wide-body aircraft 99 - 99 1 100
Total narrow-body aircraft 138 11 149 2 151
Total Mainline and
Air Canada Rouge
237 11 248 3 251
2018 ANNUAL REPORT
50 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Sale of Embraer 190 Aircraft
In August 2018, Air Canada finalized the sale and leaseback of 25 Embraer 190 aircraft. Six of these aircraft
were returned to the lessor in 2018. Air Canada will continue to operate the remaining 19 until they gradually
exit the fleet in 2019 and 2020.
Air Canada Express
The table below provides the number of aircraft operated, as at December 31, 2018, and planned, as at
December 31, 2019 and December 31, 2020, on behalf of Air Canada, by Jazz, Sky Regional and other airlines
operating flights under the Air Canada Express banner pursuant to capacity purchase agreements with
Air Canada.
Actual Planned
December 31,
2018
2019 Fleet
Changes
December 31,
2019
2020 Fleet
Changes
December 31,
2020
Embraer 175 25 - 25 - 25
Bombardier CRJ-100/200 24 (2) 22 (7) 15
Bombardier CRJ-900 21 5 26 9 35
Bombardier Dash 8-100 15 (15) - - -
Bombardier Dash 8-300 25 (2) 23 (4) 19
Bombardier Dash 8-Q400 44 - 44 (8) 36
Total Air Canada Express 154 (14) 140 (10) 130
Other Aircraft with CPA Carriers
A total of nine 18-passenger Beech 1900 aircraft are also operated by CPA carriers on behalf of Air Canada.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 51
9. FINANCIAL AND CAPITAL MANAGEMENT
9.1. LIQUIDITY
Air Canada manages its liquidity needs through a variety of strategies, including by seeking to sustain and
improve cash from operations and free cash flow, sourcing committed financing, as necessary, for new and
existing aircraft, and through other financing activities.
Liquidity needs are primarily related to meeting obligations associated with financial liabilities, capital
commitments, ongoing operations, contractual and other obligations, which are further discussed in sections 9.6,
9.7 and 9.8 of this MD&A. Air Canada monitors and manages liquidity risk by preparing rolling cash flow forecasts,
monitoring the condition and value of assets available for use as well as those assets being used as security in
financing arrangements, seeking flexibility in financing arrangements, and establishing programs to monitor and
maintain compliance with terms of financing agreements. At December 31, 2018, unrestricted liquidity amounted
to $5,725 million (comprised of cash, cash equivalents and short-term investments of $4,707 million and undrawn
lines of credit of $1,018 million. This compared to unrestricted liquidity of $4,181 million at December 31, 2017
(comprised of cash, cash equivalents and short-term investments of $3,804 million and undrawn lines of credit
of $377 million). In addition, Air Canada monitors its financial leverage as measured by the adjusted net debt to
EBITDAR ratio, as further described in section 9.3 of this MD&A.
9.2. FINANCIAL POSITION
The following table provides a condensed consolidated statement of financial position of Air Canada as at
December 31, 2018 and as at December 31, 2017.
(Canadian dollars in millions)
December 31,
2018
December 31,
2017
(1)
$ Change
Assets
Cash, cash equivalents and short-term investments $ 4,707 $ 3,804 $ 903
Other current assets 1,594 1,593 1
Current assets $ 6,301 $ 5,397 $ 904
Deposits and other assets 444 465 (21)
Property and equipment 9,729 9,252 477
Pension assets 1,969 1,583 386
Deferred income tax 39 456 (417)
Intangible assets 404 318 86
Goodwill 311 311 -
Total assets $ 19,197 $ 17,782 $ 1,415
Liabilities
Current liabilities $ 5,099 $ 5,101 $ (2)
Long-term debt and finance leases 6,197 5,448 749
Pension and other benefit liabilities 2,547 2,592 (45)
Maintenance provisions 1,118 1,003 115
Other long-term liabilities 151 167 (16)
Deferred income tax 52 49 3
Total liabilities $ 15,164 $ 14,360 $ 804
Total shareholders’ equity $ 4,033 $ 3,422 $ 611
Total liabilities and shareholders’ equity $ 19,197 $ 17,782 $ 1,415
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
2018 ANNUAL REPORT
52 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Movements in current assets and current liabilities are described in section 9.4 “Working Capital” of this
MD&A. Long-term debt and finance leases are discussed in sections 9.3 “Adjusted Net Debt” and 9.5
“Consolidated Cash Flow Movements” of this MD&A.
At December 31, 2018, property and equipment amounted to $9,729 million, an increase of $477 million from
December 31, 2017. This increase was mainly due to additions to property and equipment of $2,039 million,
offset by the impact of depreciation expense of $1,066 million and the impact of the sale of 25 Embraer
190 aircraft in 2018.
In 2018, additions to property and equipment included five Boeing 787-9 aircraft and 16 Boeing 737 MAX 8
aircraft. Four Boeing 787 and nine Boeing 737 MAX aircraft were financed with proceeds from the sale of
enhanced equipment trust certificates (EETCs) issued through a U.S. dollar private offering in 2017, one Boeing 787
and four Boeing 737 MAX aircraft were financed with proceeds from the sale of EETCs issued through a
Canadian dollar private offering in 2018, and three Boeing 737 MAX aircraft were purchased with cash.
Additional information on these EETC private offerings can be found in section 9.8 “Contractual Obligations”
of this MD&A. In 2018, additions to property and equipment also included progress payments on future
aircraft deliveries and capitalized maintenance costs.
The net long-term pension and other benefit liabilities of $578 million (comprised of pension and other benefit
liabilities of $2,547 million net of pension assets of $1,969 million) decreased $431 million from December 31,
2017. This decrease was mainly due to a 21-basis point increase in the discount rate used to value the liabilities
and the impact of revised demographic assumptions, resulting in a net gain on remeasurements on employee
liabilities of $688 million for the year ended December 31, 2018 ($503 million, net of tax) recorded on
Air Canada’s consolidated statement of comprehensive income. The revised demographic assumptions relate
mainly to updated actuarial assumptions regarding retirement rates, which resulted in a decrease to the actuarial
liability of $277 million.
9.3. ADJUSTED NET DEBT
The following table reflects Air Canada’s adjusted net debt balances as at December 31, 2018 and as at
December 31, 2017.
(Canadian dollars in millions)
December 31,
2018
December 31,
2017
$ Change
Total long-term debt and finance leases $ 6,197 $ 5,448 $ 749
Current portion of long-term debt and finance leases 455 671 (216)
Total long-term debt and finance leases
(including current portion)
$ 6,652 $ 6,119 $ 533
Less cash, cash equivalents and short-term investments (4,707) (3,804) (903)
Net debt $ 1,945 $ 2,315 $ (370)
Capitalized operating leases
(1)
3,913 3,801 112
Adjusted 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) Adjusted net debt is an additional GAAP financial measure and a key component of the capital managed by Air Canada and provides
management with a measure of its net indebtedness. Air Canada includes capitalized operating leases which is a measure commonly used
in the industry to ascribe a value to obligations under operating leases. Common industry practice is to multiply annualized aircraft rent
expense by 7. This definition of capitalized operating leases is used by Air Canada and may not be comparable to similar measures presented
by other public companies. Aircraft rent (including aircraft rent expense related to regional airline operations) was $559 million for the
12 months ended December 31, 2018 and $543 million for the 12 months ended December 31, 2017.
(2) Adjusted net debt to trailing 12-month EBITDAR ratio (also referred to as “leverage ratio” in this MD&A) is a non-GAAP financial measure and
is used by Air Canada as a means to measure financial leverage. Leverage ratio is calculated by dividing adjusted net debt by trailing 12-month
EBITDAR. Refer to section 20 “Non-GAAP Financial Measures” of this MD&A for additional information.
At December 31, 2018, total long-term debt and finance leases (including current portion) of $6,652 million
increased $533 million from December 31, 2017. The unfavourable impact of a weaker Canadian dollar, as at
December 31, 2018 compared to December 31, 2017, increased foreign currency denominated debt (mainly
U.S. dollars) by $501 million. In 2018, new aircraft-related borrowings of $1,210 million were largely offset by
debt repayments of $1,167 million.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 53
At December 31, 2018, adjusted net debt of $5,858 million decreased $258 million from December 31, 2017 as
increases in long-term debt and finance lease balances of $533 million and capitalized operating lease balances
of $112 million were more than offset by an increase in cash, cash equivalents and short-term investment
balances of $903 million. At December 31, 2018, Air Canada’s leverage ratio (adjusted net debt to trailing
12-month EBITDAR ratio) was 2.1, unchanged from December 31, 2017.
At December 31, 2018, Air Canada’s weighted average cost of capital (“WACC”), on a pre-tax basis, was 7.2%
(compared to 7.6% at December 31, 2017). WACC is based on an estimate by management and consists of an
estimated cost of equity of 20.0% and an average cost of debt and finance leases of 4.4% (compared to an
estimated cost of equity of 20.0% and an average cost of debt and finance leases of 4.5% at December 31, 2017).
9.4. WORKING CAPITAL
The table below provides information on Air Canada’s working capital balances as at December 31, 2018 and as
at December 31, 2017.
(Canadian dollars in millions)
December 31,
2018
December 31,
2017
$ Change
Cash, cash equivalents and short-term investments $ 4,707 $ 3,804 $ 903
Accounts receivable 796 814 (18)
Other current assets 798 779 19
Total current assets $ 6,301 $ 5,397 $ 904
Accounts payable and accrued liabilities 1,927 1,961 (34)
Advance ticket sales 2,717 2,469 248
Current portion of long-term debt and finance leases 455 671 (216)
Total current liabilities $ 5,099 $ 5,101 $ (2)
Net working capital $ 1,202 $ 296 $ 906
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
The net working capital of $1,202 million at December 31, 2018 represented an improvement of $906 million from
December 31, 2017.
The net cash flow benefit of positive operating results in 2018 more than offset the impact of net capital
expenditures. Net cash outflow relating to capital expenditures was $838 million (after deducting proceeds drawn
on the delivery of five Boeing 787 and 13 Boeing 737 MAX aircraft of $1,210 million, and proceeds on the sale
of 25 Embraer 190 aircraft of $293 million less the repayment of the associated debt of $144 million). In 2018,
Air Canada also made an additional debt repayment of $268 million in conjunction with the amendment of the 2016
Credit Facility (refer to section 9.3 “Adjusted Net Debt” of this MD&A for additional information) and purchased three
Boeing 737 MAX aircraft using cash.
2018 ANNUAL REPORT
54 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
9.5 CONSOLIDATED CASH FLOW MOVEMENTS
The table below provides the cash flow movements for Air Canada for the periods indicated.
Fourth Quarter Full Year
(Canadian dollars in millions)
2018
2017 $ Change
2018
2017 $ Change
Net cash flows from operating activities $ 360 $ 389 $ (29) $ 2,695 $ 2,738 $ (43)
Proceeds from borrowings -
- -
1,210 733 477
Reduction of long-term debt and finance
lease obligations
(361) (240) (121) (1,170) (814) (356)
Shares purchased for cancellation (50) (35) (15) (73) (71) (2)
Issue of shares - 2 (2) 5 9 (4)
Financing fees (4)
(11) 7
(12) (26) 14
Net cash flows used in financing
activities
$ (415) $ (284) $ (131) $ (40) $ (169) $ 129
Short-term investments 36
(167) 203
(848) (998) 150
Additions to property, equipment and
intangible assets
(219) (432) 213 (2,197) (2,422) 225
Proceeds from sale of assets 1 2 (1) 11 5 6
Proceeds from sale-leaseback of assets - - - 293 740 (447)
Other (1)
(24) 23
47 (16) 63
Net 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
The following table provides the calculation of free cash flow for Air Canada for the periods indicated.
Fourth Quarter Full Year
(Canadian dollars in millions)
2018
2017 $ Change
2018
2017 $ Change
Net cash flows from operating activities $ 360 $ 389 $ (29) $ 2,695 $ 2,738 $ (43)
Additions to property, equipment and
intangible assets, net of proceeds from
sale and leaseback transactions
(219) (432) 213 (1,904) (1,682) (222)
Free cash flow
(1)
$ 141 $ (43) $ 184 $ 791 $ 1,056 $ (265)
(1) Free cash flow is a non-GAAP financial measure used by Air Canada as an indicator of the financial strength and performance of its business,
indicating how much cash it is able to generate from operations and after capital expenditures. Free cash flow is calculated as net cash flows
from operating activities minus additions to property, equipment and intangible assets, and is net of proceeds from sale and leaseback
transactions. Refer to section 20 “Non-GAAP Financial Measures” of this MD&A for additional information.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 55
Free Cash Flow
In the fourth quarter of 2018, net cash flows from operating activities of $360 million decreased $29 million when
compared to the same quarter in 2017. The cash flow benefit of an improvement in operating income quarter
over quarter was more than offset by a decrease in cash from working capital. Free cash flow of $141 million
increased $184 million from the fourth quarter of 2017 due to a lower level of capital expenditures.
In 2018, net cash flows from operating activities of $2,695 million decreased $43 million when compared to
2017. In 2018, free cash flow of $791 million decreased $265 million from 2017. In 2018, Air Canada received
proceeds of $293 million from the sale and leaseback of 25 Embraer 190 aircraft. In 2017, Air Canada received
proceeds of $740 million from the sale and leaseback of four Boeing 787 aircraft.
Net Cash Flows from (used in) Financing Activities
Reduction of long-term debt and finance lease obligations amounted to $361 million in the fourth quarter of
2018 and $1,170 million for the full year 2018 while proceeds from borrowings were nil in the fourth quarter of
2018 and totaled $1,210 million in 2018.
Refer to sections 9.4 “Working Capital”, 9.2 “Financial Position” and 9.3 “Adjusted Net Debt” of this MD&A for
additional information.
9.6. CAPITAL EXPENDITURES AND RELATED FINANCING ARRANGEMENTS
Boeing 787 Aircraft
As of the date of this MD&A, Air Canada has outstanding purchase commitments with The Boeing Company
(“Boeing”) for two Boeing 787 aircraft to be delivered in 2019. Air Canada also has purchase options for 13 Boeing 787
aircraft (entitling Air Canada to purchase aircraft based on previously determined pricing and delivery positions), and
purchase rights for 10 Boeing 787 aircraft (entitling Air Canada to purchase aircraft based on Boeing’s then current
pricing and available delivery positions).
Boeing 737 MAX Aircraft
Air Canada has an agreement with Boeing for the purchase of Boeing 737 MAX aircraft which provides for:
> Firm orders for 61 737 MAX aircraft, consisting of 50 737 MAX 8 and 11 737 MAX 9 aircraft with
substitution rights between them as well as for the 737 MAX 7 aircraft.
> Purchase options for 18 Boeing 737 MAX aircraft.
> Certain rights to purchase an additional 30 Boeing 737 MAX aircraft.
As of the date of this MD&A, 18 Boeing 737 MAX 8 aircraft have been delivered, with the remaining
43 Boeing 737 MAX aircraft scheduled for delivery from 2019 to 2024.
In April 2018, Air Canada concluded an amendment to its Boeing 737 purchase agreement, pursuant to which
certain aircraft delivery positions were accelerated and others deferred. The amendment accelerates the
delivery of five 737 MAX aircraft by one year, to 2020, and defers the delivery of 11 737 MAX aircraft by up to
36 months.
Subject to certain conditions, Air Canada also has financing commitments covering 25 firm Boeing 737 MAX
aircraft scheduled for delivery in 2020, 2023 and 2024. The financing terms are for 80% of the aircraft delivery
price and the term to maturity is 10 years with mortgage-style repayments.
2018 ANNUAL REPORT
56 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Airbus A220-300 Aircraft
In June 2016, Air Canada and Bombardier Inc. (“Bombardier”) finalized a purchase agreement which includes
a firm order for 45 Airbus A220-300 aircraft (formerly called Bombardier C-Series CS300 aircraft) and options
for an additional 30 Airbus A220-300 aircraft. Deliveries are scheduled to begin in late 2019 and extend to
2022. The first 25 aircraft on delivery are expected to replace Air Canada’s existing mainline fleet of Embraer
190 aircraft, with incremental aircraft supporting Air Canada’s hub and network growth.
Reconfiguration of Airbus A330 Aircraft
In order to provide customers with a product that is consistent across its wide-body fleet, Air Canada plans on
reconfiguring 12 Airbus A330 aircraft (eight of which are currently in service and four scheduled to be added
in 2019) to the new Boeing 787 state-of-the-art standard. The reconfiguration of the Airbus A330 aircraft is
expected to begin in late 2019 for completion in the first half of 2020. The capital expenditure related to this
refurbishment program (which is included in the projected committed expenditures in the table below) is
approximately $275 million.
Capital Commitments
As outlined in the table below, the estimated aggregate cost of the future firm Boeing 787, Boeing 737 MAX
and Airbus A220-300 aircraft deliveries and other capital purchase commitments as at December 31, 2018
approximates $6,076 million. The table below also includes the impact of the amendment to the Boeing 737
purchase agreement discussed above.
(Canadian dollars in millions)
2019 2020 2021 2022 2023 Thereafter Total
Projected committed
expenditures
$ 2,382 $ 1,556 $ 815 $ 753 $ 375 $ 195 $ 6,076
Projected planned but
uncommitted expenditures
324 441 440 228 186
Not
available
Not
available
Projected planned but
uncommitted capitalized
maintenance
(1)
212 183 166
Not
available
Not
available
Not
available
Not
available
Total projected
expenditures
(2)
$ 2,918 $ 2,180 $ 1,421 $ 981 $ 561
Not
available
Not
available
(1) Future capitalized maintenance amounts for 2022 and 2023 and beyond are not yet determinable.
(2) U.S. dollar amounts are converted using the December 31, 2018 closing exchange rate of US$1=C$1.3637. 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 U.S. LIBOR rate at December 31, 2018.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 57
9.7. PENSION FUNDING OBLIGATIONS
Air Canada maintains several defined benefit pension plans, including domestic registered pension plans,
supplemental pension plans and international pension plans. Air Canada also has several defined contribution
pension plans as well as plans providing other retirement and post-employment benefits to its employees.
As at January 1, 2018, the aggregate solvency surplus in the domestic registered pension plans was $2.6 billion.
Based on preliminary estimates, including actuarial assumptions, as at January 1, 2019, the aggregate solvency
surplus in Air Canada’s domestic registered pension plans is projected to be $2.4 billion. The final valuations
to be made as at January 1, 2019 will be completed in the first half of 2019. Based on preliminary estimates,
Air Canada does not expect to make any past service payments in 2019.
As permitted by applicable legislation and subject to applicable plan rules, amounts in excess of 105% on a
solvency basis may be used to reduce current service contributions under the defined benefit component or to
fund the employer contribution to a defined contribution component within the same pension plan.
On a cash basis, total employer pension funding contributions (including the international and supplemental
plans) amounted to $94 million in 2018, as described in the table below.
(Canadian dollars in millions)
2018
Current service domestic registered plans $ 1
Other pension arrangements
(1)
93
Total employer pension funding contributions $ 94
(1) Includes retirement compensation arrangements, supplemental plans and international plans.
On a cash basis, total pension funding contributions (including the international and supplemental plans) are
forecasted to be $93 million in 2019, as described in the table below.
(Canadian dollars in millions)
2019
Current service domestic registered plans $ 2
Other pension arrangements
(1)
91
Total projected employer pension funding contributions $ 93
(1) Includes retirement compensation arrangements, supplemental plans and international plans.
As at December 31, 2018, taking into account the effect of financial instrument risk management tools,
approximately 81% of Air Canada’s pension liabilities were matched with fixed income products to mitigate a
significant portion of the interest rate (discount rate) risk. Air Canada may continue to increase the percentage
of fixed income products matched to pension liabilities, subject to favourable market conditions.
2018 ANNUAL REPORT
58 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
9.8. CONTRACTUAL OBLIGATIONS
The table below provides Air Canada’s contractual obligations as at December 31, 2018, including those
relating to interest and principal repayment obligations on Air Canada’s long-term debt and finance lease
obligations, operating lease obligations and committed capital expenditures.
(Canadian dollars in millions) 2019 2020 2021 2022 2023 Thereafter Total
Principal
Long-term debt obligations $ 407 $ 640 $ 1,003 $ 342 $ 1,450 $ 2,731 $ 6,573
Finance lease obligations 48 50 17 15 16 41 187
Total principal obligations $ 455 $ 690 $ 1,020 $ 357 $ 1,466 $ 2,772 $ 6,760
Interest
Long-term debt obligations 273 258 214 176 151 346 1,418
Finance lease obligations 14 10 6 5 4 10 49
Total 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) Total contractual obligations exclude commitments for goods and services required in the ordinary course of business. Also excluded are
long-term liabilities other than long-term debt and finance lease obligations due to reasons of uncertainty of timing of cash flows and items
that are non-cash in nature.
Covenants in Credit Card Agreements
Air Canada’s principal credit card processing agreements for credit card processing services contain triggering
events upon which Air Canada is required to provide the applicable credit card processor with cash deposits.
The obligations to provide cash deposits and the required amount of deposits are each based upon a matrix
measuring, on a quarterly basis, both a fixed charge coverage ratio for Air Canada and the unrestricted cash,
cash equivalents and short-term investments of Air Canada. In 2018, Air Canada made no cash deposits under
these agreements (nil in 2017).
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 59
9.9. SHARE INFORMATION
The issued and outstanding shares of Air Canada, along with shares potentially issuable, as of the dates
indicated below, are as follows:
December 31,
2018
December 31,
2017
Issued and outstanding shares
Variable voting shares 125,214,350 115,986,084
Voting shares 145,515,561 157,090,562
Total issued and outstanding shares 270,729,911 273,076,646
Class A variable voting and Class B
voting shares potentially issuable
Stock options 6,014,464 6,121, 252
Total shares potentially issuable 6,014,464 6,121,252
Total outstanding and potentially issuable shares 276,744,375 279,197, 89 8
Issuer Bid
In May 2018, Air Canada received approval from the Toronto Stock Exchange for the renewal of its normal
course issuer bid for its Class A variable voting shares and Class B voting shares (collectively the “shares”),
authorizing, between May 31, 2018 and May 30, 2019, the purchase of up to 24,040,243 shares, representing
10% of Air Canada’s public float as at May 17, 2018. In 2018, Air Canada purchased, for cancellation 3,013,822
shares at an average cost of $24.11 per share for aggregate consideration of $73 million. At December 31, 2018,
a total of 21,940,639 shares remained available for repurchase under the existing issuer bid.
2018 ANNUAL REPORT
60 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
10. QUARTERLY FINANCIAL DATA
The table below summarizes quarterly financial results for Air Canada for the last eight quarters.
(Canadian dollars in millions,
except where indicated)
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 $ 3,795
Cargo 148 168 194 198 168 200 218 217
Other 374 192 172 213 414 212 179 234
Operating revenues 3,642 3,910 4,880 3,820 4,071 4,333 5,415 4,246
Aircraft fuel 659 701 832 735 825 964 1,222 958
Regional airlines expense
Aircraft fuel 95 96 109 112 114 135 149 133
Other 537 552 553 563 561 607 568 575
Wages, salaries & benefits 644 663 690 674 700 711 743 719
Airport and navigation fees 210 230 264 201 221 237 281 225
Aircraft maintenance 228 226 241 243 256 220 277 250
Depreciation, amortization and impairment 228 242 241 245 267 278 268 267
Sales and distribution costs 181 188 232 169 189 199 237 182
Ground package costs 256 103 73 106 276 114 86 126
Aircraft rent 122 130 125 126 125 123 137 133
Catering and onboard services 85 97 112 89 96 108 125 104
Communications and information technology 71 58 63 62 79 67 79 69
Special items 30 - - - - - - -
Other 326 332 369 362 376 344 403 383
Operating expenses 3,672 3,618 3,904 3,687 4,085 4,107 4,575 4,124
Operating income (loss) (30) 292 976 133 (14) 226 840 122
Foreign exchange gain (loss) 70 68 44 (62) (112) (25) 89 (269)
Interest income 12 14 16 18 20 24 32 32
Interest expense (79) (80) (73) (79) (83) (84) (80) (84)
Interest capitalized 9 9 9 9 13 7 7 8
Net financing expense relating to
employee benefits
(16) (16) (15) (18) (12) (13) (13) (12)
Gain (loss) on financial instruments
recorded at fair value
- 7 17 (1) 1 (9) 10 (3)
Gain on sale and leaseback of assets 26 26 - - - - - -
Gain (loss) on debt settlements and
modifications
- - (3) 24 11 (1) (1) -
Loss on disposal of assets - - - - - (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)
Income tax (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 $ 543
Adjusted pre-tax income (loss)
(2)
$ (63) $ 229 $ 922 $ 77 $ (72) $ 163 $ 793 $ 68
Adjusted net income (loss)
(2)
$ (63) $ 226 $ 922 $ 60 $ (52) $ 114 $ 561 $ 54
Adjusted earnings (loss) per share – diluted
(2)
$ (0.23) $ 0.82 $ 3.33 $ 0.22 $ (0.19) $ 0.41 $ 2.03 $ 0.20
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of 2017 amounts.
(2) EBITDAR, adjusted pre-tax income (loss), adjusted net income (loss) and adjusted earnings (loss) per share – diluted are non-GAAP financial measures. Reconciliations of
these measures to comparable GAAP measures can be found in section 20 “Non-GAAP Financial Measures” of this MD&A and in Air Canada’s MD&A reports, available at
aircanada.com.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 61
The table below provides a breakdown of the most significant items included in regional airlines expense for the last eight quarters.
(Canadian dollars in millions)
2017
2018
Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4
Capacity purchase fees $ 308 $ 314 $ 315 $ 330 $ 319 $ 360 $ 318 $ 336
Aircraft fuel 95 96 109 112 114 135 149 133
Airport and navigation fees 69 73 80 71 69 76 78 73
Sales and distribution costs 37 40 34 35 34 41 44 34
Depreciation, amortization and impairment 6 7 8 7 9 9 9 11
Aircraft rent 10 10 10 10 10 10 11 10
Other 107 108 106 110 120 111 108 111
Total regional airlines expense $ 632 $ 648 $ 662 $ 675 $ 675 $ 742 $ 717 $ 708
The table below provides major quarterly operating statistics for Air Canada for the last eight quarters.
2017
(1)
2018
System
Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4
Passenger PRASM (cents) 13.6 14.0 14.5 14.1 14.0 14.4 15.1 14.8
CASM (cents) 16.0 14.3 12.6 15.2 16.4 15.1 13.8 16.1
Adjusted CASM (cents)
(2)
11.5 10.7 9.3 11.3 11.5 10.6 9.4 11.4
Fuel cost per litre (cents)
(3)
63.2 61.3 59.4 67.5 73.3 80.3 83.0 84.3
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of 2017 amounts.
(2) Adjusted CASM is a non-GAAP financial measure. A reconciliation of this measure to a comparable GAAP measure can be found in section 20 “Non-GAAP Financial
Measures” of this MD&A and in Air Canada’s MD&A reports, available at aircanada.com.
(3) Includes aircraft fuel expense related to regional airline operations. Includes fuel handling expenses.
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62 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
The table below provides Air Canada’s revenue passenger miles (RPMs), available seat miles (ASMs) and passenger load factors, on a
system-basis and by market, for the last eight quarters.
2017
2018
Q1 Q2 Q3 Q4
Q1 Q2 Q3 Q4
System
RPMs (millions) 18,341 20,928 26,472 19,396 20,440 22,654 28,465 20,801
ASMs (millions) 22,894 25,357 31,050 24,191 24,862 27,269 33,137 25,598
Passenger load factor (%) 80.1 82.5 85.3 80.2 82.2 83.1 85.9 81.3%
Domestic
RPMs (millions) 4,101 4,875 6,130 4,607 4,226 5,003 6,339 4,684
ASMs (millions) 5,108 5,837 7,173 5,584 5,280 6,026 7,482 5,667
Passenger load factor (%) 80.3 83.5 85.4 82.5 80.0 83.0 84.7 82.7%
U.S. transborder
RPMs (millions) 3,782 3,609 3,951 3,408 4,037 3,848 4,172 3,734
ASMs (millions) 4,687 4,376 4,683 4,252 4,945 4,673 4,962 4,662
Passenger load factor (%) 80.7 82.5 84.4 8 0.1 81.6 82.3 84.1 8 0.1%
Atlantic
RPMs (millions) 3,891 6,131 9,406 5,076 4,573 7,084 10,642 5,813
ASMs (millions) 5,248 7,661 11,087 6,582 5,753 8,571 12,231 7,20 6
Passenger load factor (%) 74.1 80.0 84.8 77.1 79.5 82.7 87.0 80.6%
Pacific
RPMs (millions) 3,943 4,671 5,471 4,501 4,572 4,936 5,630 4,514
ASMs (millions) 4,862 5,540 6,412 5,586 5,447 5,829 6,484 5,541
Passenger load factor (%) 81.1 84.3 85.3 80.6 83.9 84.7 86.8 81.5%
Other
RPMs (millions) 2,624 1,642 1,514 1,804 3,032 1,783 1,682 2,056
ASMs (millions) 2,989 1,943 1,695 2,187 3,437 2,170 1,978 2,522
Passenger load factor (%) 87.8 84.5 89.3 82.5 88.2 82.1 85.0 81.6%
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 63
11. SELECTED ANNUAL INFORMATION
The following table provides selected annual information for Air Canada for the years 2016 through 2018.
Full Year
(Canadian dollars in millions, except per share figures)
2018
2017
(1)
2016
(1)
Operating revenues $ 18,065 $ 16,252 $ 14,677
Operating expenses
(2)
16,891 14,881 13,332
Operating income 1,174 1,371 1,345
Income before income taxes 405 1,286 877
Recovery of (provision for) income taxes
(3)
(238) 743 (1)
Net income $ 167 $ 2,029 $ 876
EBITDAR
(4)
$ 2,851 $ 2,928 $ 2,768
Adjusted pre-tax income
(4)
$ 952 $ 1,165 $ 1,148
Adjusted net income
(4)
$ 677 $ 1,145 $ 1,147
Basic earnings per share $ 0.61 $ 7.44 $ 3.16
Diluted earnings per share $ 0.60 $ 7. 31 $ 3.10
Adjusted earnings per share – diluted
(4)
$ 2.45 $ 4.11 $ 4.06
Cash, cash equivalents and short-term investments $ 4,707 $ 3,804 $ 2,979
Total assets
(5)
$ 19,197 $ 17,782 $ 15,114
Total long-term liabilities
(6)
$ 10,520 $ 9,930 $ 10,178
Total liabilities $ 15,164 $ 14,360 $ 13,895
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts. 2016 amounts have not been restated for the adoption of this new accounting standard.
(2) In 2017, Air Canada recorded a provision of $30 million relating to a fine which was reinstated by a decision of the European Commission
pertaining to cargo investigations. In 2016, Air Canada recorded a past service cost expense of $91 million to reflect the estimated cost of
pension increases applicable to ACPA-represented pilots who participate in a defined benefit plan.
(3) In 2017, Air Canada recorded a tax recovery of $743 million (representing a deferred income tax recovery of $759 million and a current income
tax expense of $16 million). This deferred income tax recovery was excluded from adjusted net income as it reflected a one-time recognition
of previously unrecognized income tax assets.
(4) EBITDAR, adjusted pre-tax income, adjusted net income and adjusted earnings per share – diluted are non-GAAP financial measures.
Reconciliations of these measures to comparable GAAP measures can be found in section 20 “Non-GAAP Financial Measures” of this MD&A
and in Air Canada’s MD&A reports, available at aircanada.com.
(5) In 2017, Air Canada recorded a deferred income tax asset of $456 million.
(6) Total long-term liabilities include long-term debt (including current portion) and finance leases, pension and other benefit liabilities,
maintenance provisions and other long-term liabilities.
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64 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
12. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Summary of Gain (Loss) on Financial Instruments Recorded at Fair Value
The following is a summary of gains (losses) on financial instruments recorded at fair value included in non-
operating income (expense) on Air Canada’s consolidated statement of operations for the periods indicated.
Fourth Quarter Full Year
(Canadian dollars in millions)
2018
2017
2018
2017
Share forward contracts $ (3) $ - $ - $ 26
Fuel derivatives - (1) (1) (3)
Financial instruments recorded at fair value $ (3) $ (1) $ (1) $ 23
Risk Management
Under its risk management policy, Air Canada manages its fuel price risk, foreign exchange risk and interest
rate risk through the use of various financial derivative instruments. Air Canada uses these instruments
solely for risk management purposes and not for generating trading profit. As such, any change in cash flows
associated with derivative instruments is designed to be an economic hedge and offset by changes in cash
flows of the relevant risk being hedged.
The fair values of derivative instruments represent the amount of the consideration that could be exchanged
in an arm’s length transaction between willing parties who are under no compulsion to act. The fair
value of these derivatives is determined using prices in active markets, where available. When no such
market is available, valuation techniques such as discounted cash flow analysis are applied. The valuation
techniques incorporate all factors that would be considered in setting a price, including Air Canada’s and the
counterparty’s respective credit risk.
Fuel Price Risk Management
Fuel price risk is the risk that future cash flows will fluctuate because of changes in jet fuel prices. In order
to manage its exposure to jet fuel prices and to help mitigate volatility in operating cash flows, Air Canada
enters into derivative contracts with financial intermediaries. Air Canada may use derivative contracts based
on jet fuel, heating oil and crude-oil. Air Canada’s policy permits hedging of up to 75% of the projected jet fuel
purchases for the current calendar year, 50% of the projected jet fuel purchases for the next calendar year, and
25% of projected jet fuel purchases for any calendar year thereafter. These are maximum (but not mandated)
limits. There is no minimum monthly hedging requirement. Air Canada performs regular reviews to assess
market conditions and adjust its hedging strategy where management considers it warranted.
In 2018:
> Hedging losses on the settlement of fuel derivatives of $19 million and the associated premium
costs of $17 million, for a hedging loss of $36 million were reclassified from other comprehensive
income to aircraft fuel expense (net fuel hedging loss of $2 million was reclassified from other
comprehensive income to aircraft fuel expense in 2017). No hedge ineffectiveness was recorded.
> Air Canada purchased crude-oil call options and swaps covering a portion of 2018 fuel exposure.
The cash premium related to these contracts was $17 million ($18 million in 2017 for 2017
exposures).
> Fuel derivative contracts cash settled with a fair value of $19 million in favour of the
counterparties ($26 million in favour of Air Canada in 2017).
There were no outstanding fuel derivatives as at December 31, 2018 and December 31, 2017.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 65
Foreign Exchange Risk Management
Air Canada’s financial results are reported in Canadian dollars, while a large portion of its expenses, debt
obligations and capital commitments are in foreign currencies, primarily U.S. dollars. Foreign exchange risk is
the risk that fluctuations in foreign exchange rates may have on operating results and cash flows. Air Canada’s
risk management objective is to reduce cash flow risk related to foreign denominated cash flows.
Air Canada generates certain sales in U.S. dollars and in other foreign currencies which are converted to
U.S. dollars under the Corporation’s risk management program. In 2018, these net operating cash inflows
totaled approximately US$4.2 billion and U.S. denominated operating costs amounted to approximately
US$6.4 billion. Non-operating cash outflows in U.S. dollars, primarily related to interest payments on U.S.
dollar denominated debt and net financing outflows, amounted to approximately US$1.9 billion. For 2018,
this resulted in a U.S. dollar net cash flow exposure of approximately US$4.1 billion.
Air Canada has a target coverage of 70% on a rolling 18-month basis to manage the net U.S. dollar cash flow
exposure described above utilizing the following risk management strategies:
> Holding U.S. dollar cash reserves as an economic hedge against changes in the value of the U.S.
dollar. U.S. dollar cash and short-term investment balances as at December 31, 2018 amounted
to $863 million (US$635 million) ($686 million (US$542 million) as at December 31, 2017). A
portion of the cash and investment reserves are an economic hedge against long-term U.S.
dollar debt while the remainder of the cash is operational cash and investment reserves which
are applied against the rolling 18-month net U.S. dollar cash flow exposure. In 2018, a gain of
$62 million (loss of $58 million in 2017) was recorded in foreign exchange gain (loss) reflecting
the change in Canadian equivalent market value of the U.S. dollar cash, cash equivalents and
short-term investment balances held.
> Locking in the foreign exchange rate through the use of a variety of foreign exchange derivatives
which have maturity dates corresponding to the forecasted dates of U.S. dollar net outflows.
The level of foreign exchange derivatives entered into and their related maturity dates are dependent upon
a number of factors, which include the amount of foreign revenue conversion available, U.S. dollar net cash
outflows, as well as the amount attributed to aircraft and debt payments. Based on the notional amount of
currency derivatives outstanding at December 31, 2018, as further described below, approximately 77% of
net U.S. cash outflows are hedged for 2019 and 48% for 2020, resulting in derivative coverage of 68% over
the next 18 months. Operational U.S. dollar cash and investment reserves combined with derivative coverage
results in 75% coverage.
As at December 31, 2018, Air Canada had outstanding foreign currency options and swap agreements, settling in
2019 and 2020, to purchase at maturity $4,987 million (US$3,659 million) of U.S. dollars at a weighted average
rate of $1.2645 per US$1.00 (2017 – $3,400 million (US$2,704 million) with settlements in 2018 and 2019
at a weighted average rate of $1.2703 per $1.00 U.S. dollar). Air Canada also has protection in place to sell a
portion of its excess Euros, Sterling, YEN, and AUD (EUR €103 million, GBP £208 million, JPY ¥25,922 million,
and AUD $105 million) which settle in 2019 and 2020 at weighted average rates of €1.1910, £1.3567, ¥0.0092, and
AUD $0.7448 per $1.00 U.S. dollar, respectively (as at December 31, 2017 - EUR €101 million, GBP £105 million,
JPY ¥8,623 million, CNY ¥41 million, and AUD $32 million with settlement in 2018 at weighted average rates of
€1.1664, £1.3259, ¥0.0090, ¥0.1468 and AUD $0.7576 respectively per $1.00 U.S. dollar).
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66 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
The hedging structures put in place have various option pricing features, such as knock-out terms and profit
cap limitations and, based on the assumed volatility used in the fair value calculation, the net fair value of
these foreign currency contracts as at December 31, 2018 was $33 million in favour of the counterparties
(2017 – $215 million in favour of the counterparties). These derivative instruments have not been designated
as hedges for accounting purposes and are recorded at fair value. In 2018, a gain of $245 million was recorded
in foreign exchange gain (loss) related to these derivatives (2017 – $274 million loss). In 2018, foreign exchange
derivative contracts cash settled with a net fair value of $63 million in favour of Air Canada (2017 – $55 million
in favour of the counterparties).
Interest Rate Risk Management
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market interest rates.
Air Canada enters into both fixed and floating rate debt and leases certain assets where the rental amount
fluctuates based on changes in short-term interest rates. Air Canada manages interest rate risk on a portfolio
basis and seeks financing terms in individual arrangements that are most advantageous taking into account
all relevant factors, including credit margin, term and basis. The risk management objective is to minimize the
potential for changes in interest rates to cause adverse changes in cash flows to Air Canada. The cash, cash
equivalents and short-term investment portfolio, which earns a floating rate of return, is an economic hedge
for a portion of the floating rate debt.
The ratio of fixed to floating rate obligations outstanding is designed to maintain flexibility in Air Canada’s
capital structure and is based upon a long-term objective of 60% fixed and 40% floating but allows the
flexibility to adjust to prevailing market conditions. The ratio at December 31, 2018, was 81% fixed and 19%
floating (73% and 27%, respectively, as at December 31, 2017).
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 67
13. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
Critical accounting estimates are those estimates of management that are most important to the portrayal of
Air Canada’s financial condition and results of operations. They require management’s most difficult, subjective
or complex Judgements, often because of the need to make estimates and Judgements about the effect of
matters that are inherently uncertain. Actual results could differ from those estimates and Judgements under
different assumptions or conditions.
Air Canada has identified the following areas that depend on critical accounting estimates utilized in the
preparation of its consolidated financial statements.
Employee Future Benefits
Air Canada maintains several defined benefit plans providing pension, other retirement and post-employment
benefits to its employees. The cost and related liabilities of Air Canada’s pensions, other post-retirement and
post-employment benefit programs are determined using actuarial valuations. The actuarial valuations involve
assumptions, including discount rates, future salary increases, mortality rates and future benefit increases.
Also, due to the long-term nature of these programs, such estimates are subject to significant uncertainty.
Assumptions
Management is required to make significant estimates about actuarial and financial assumptions to determine
the cost and related liabilities of Air Canada’s employee future benefits.
Financial Assumptions
Discount Rate
The discount rate used to determine the pension obligation was determined by reference to market interest
rates on corporate bonds rated “AA” or better with cash flows that approximate the timing and amount of
expected benefit payments.
Future increases in compensation are based upon the current compensation policies, labour and employment
agreements and economic forecasts.
The significant weighted average assumptions used to determine Air Canada’s accrued benefit obligations and
cost are as follows:
Pension
Benefits
Other Employee
Future Benefits
2018
2017
2018
2017
Discount rate used to determine:
Net interest on the net benefit obligation for
the year ended December 31
3.60% 3.90% 3.60% 3.90%
Service cost for the year ended December 31 3.70% 4.10% 3.70% 4.10%
Accrued benefit obligation as at December 31 3.81% 3.60% 3.81% 3.60%
Rate of future increases in compensation
used to determine:
Accrued benefit cost for the year ended
December 31
2.50% 2.50%
Not
applicable
Not
applicable
Accrued benefit obligation as at
December 31
2.50% 2.50%
Not
applicable
Not
applicable
2018 ANNUAL REPORT
68 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Sensitivity Analysis
Sensitivity analysis is based on changing one assumption while holding all other assumptions constant. In
practice, this may be unlikely to occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to variations in significant actuarial assumptions,
the same method (present value of the defined benefit obligation calculated with the projected unit credit
method at the end of the reporting period) has been applied as that used for calculating the liability recognized
in the consolidated statement of financial position.
Sensitivity analysis on 2018 pension expense and net financing expense relating to pension benefit liabilities,
based on different actuarial assumptions with respect to discount rate is set out below. The effects on each
pension plan of a change in an assumption are weighted proportionately to the total plan obligation to
determine the total impact for each assumption presented.
(Canadian dollars in millions)
0.25 Percentage Point
Decrease Increase
Discount rate on obligation assumption
Pension expense $ 22 $ (21)
Net financing expense relating to pension benefit liabilities 23 (21)
Total $ 45 $ (42)
Increase (decrease) in pension obligation $ 703 $ (680)
The increase (decrease) in the pension obligation for a 0.25 percentage point change in the discount rate
relates to the gross amount of the pension liabilities and is before the impact of any change in plan assets. As
at December 31, 2018, approximately 81% of Air Canada’s pension liabilities were matched with fixed income
products to mitigate a significant portion of the interest rate (discount rate) risk.
An increase of one-year life expectancy would increase the pension benefit obligation by $478 million.
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care
plans. A 5.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for
2018 (2017 – 5.8%). The rate is assumed to decrease gradually to 5% by 2020 (2017 – assumed to decrease
gradually to 5% by 2020). A one percentage point increase in assumed health care trend rates would have
increased the total of current service and interest costs by $4 million and the obligation by $55 million. A one
percentage point decrease in assumed health care trend rates would have decreased the total of current service
and interest costs by $4 million and the obligation by $58 million.
A 0.25 percentage point decrease in discount rate for other employee future benefits would have increased the
total of current and interest costs by less than $1 million and the obligation by $47 million. A 0.25 percentage
point increase in discount rate would have decreased the total of current and interest costs by less than
$1 million and the obligation by $44 million.
Depreciation and Amortization Period for Long-lived Assets
Air Canada makes estimates about the expected useful lives of long-lived assets and the expected residual
value of the assets based on the estimated current and future fair values of the assets, Air Canada’s fleet plans
and the cash flows they generate. Changes to these estimates, which can be significant, could be caused by a
variety of factors, including changes to maintenance programs, changes in jet fuel prices and other operating
costs, changes in utilization of the aircraft, and changing market prices for new and used aircraft of the same
or similar types. Estimates and assumptions are evaluated at least annually. Generally, these adjustments are
accounted for on a prospective basis, through depreciation and amortization expense. For the purposes of
sensitivity analysis on these estimates, a 50% reduction to residual values on aircraft with remaining useful
lives greater than five years results in an increase of $14 million to annual depreciation expense. For aircraft
with shorter remaining useful lives, the residual values are not expected to change significantly.
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Management’s Discussion and Analysis of Results of Operations and Financial Condition | 69
Impairment Considerations of Long-lived Assets
Long-lived assets include property and equipment, definite lived intangible assets, indefinite lived intangible
assets and goodwill. Assets that have an indefinite useful life, including goodwill, are tested annually for
impairment or when events or circumstances indicate that the carrying value may not be recoverable. Assets
that are subject to depreciation or amortization are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. When required, an impairment
test is performed by comparing the carrying amount of the asset or cash generating unit to their recoverable
amount. Recoverable amount is calculated as the higher of an asset’s or cash-generating unit’s fair value less
costs to dispose and its value in use. For the purpose of assessing impairment, assets are grouped at the lowest
levels for which there are separately identifiable cash flows (cash-generating units or CGUs). Management
has determined that the appropriate level for assessing impairments is at the narrow-body and wide-body
fleet levels for aircraft and related assets supporting the operating fleet. Parked aircraft not used in operations
and aircraft leased or subleased to third parties are assessed for impairment at the individual asset level. Fair
value less costs to dispose may be calculated based upon a discounted cash flow analysis, which requires
management to make a number of significant market participant assumptions including assumptions relating
to future operating plans, discount rates and future growth rates. An impairment loss is recognized for the
amount by which the asset’s carrying amount exceeds its recoverable amount.
Maintenance Provisions
The recording of maintenance provisions related to return conditions on aircraft leases requires management
to make estimates of the future costs associated with the maintenance events required under the lease return
condition and estimates of the expected future maintenance condition of the aircraft at the time of lease
expiry. These estimates take into account current costs of these maintenance events, estimates of inflation
surrounding these costs as well as assumptions surrounding utilization of the related aircraft. Any difference
in the actual maintenance cost incurred and the amount of the provision is recorded in aircraft maintenance
expense in the period. The effect of any changes in estimates, including changes in discount rates, inflation
assumptions, cost estimates or lease expiries, is also recognized in maintenance expense in the period.
Assuming the aggregate cost for return conditions increases by 5%, holding all other factors constant, there
would be a cumulative balance sheet adjustment to increase the provision by $62 million at December 31,
2018 and an increase to aircraft maintenance expense in 2019 of approximately $6 million. Expected future
cash flows to settle the obligation are discounted. If the discount rates were to increase by 1%, holding all
other factors constant, there would be a cumulative balance sheet adjustment to decrease the provision by
$21 million at December 31, 2018. An equivalent but opposite movement in the discount rate would result
in a similar impact in the opposite direction.
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70 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Income Taxes
Income tax assets and liabilities are measured at the amount that is expected to be realized or incurred upon
ultimate settlement with taxation authorities. Such assessments are based upon the applicable income tax
legislation, regulations and interpretations, all of which may be subject to change and interpretation. Deferred
income tax assets and liabilities are composed of the tax effect of temporary differences between the carrying
amount and tax basis of assets and liabilities, as well as the income tax effect of undeducted income tax losses.
The timing of the reversal of temporary differences is estimated and the income tax rate substantively enacted
for the periods of reversal is applied to the temporary difference. The carrying amounts of assets and liabilities
are subject to the accounting estimates that are inherent in those balances. Assumptions as to the timing
of reversal of temporary differences include expectations about the future results of operations and future
cash flows. Changes in tax laws, tax rates or expected timing of reversal may have a significant impact on the
amounts recorded for deferred income tax assets and liabilities.
Income tax recorded on Air Canada’s consolidated statement of operations is presented below.
(Canadian dollars in millions)
Fourth Quarter Full Year
2018
2017
2018
2017
Current income tax $ 3 $ - $ (6) $ (16)
Deferred income tax (18) (12) (232) 759
Income tax (expense) recovery $ (15) $ (12) $ (238) $ 743
In the third quarter of 2017, Air Canada determined that it was probable that substantially all of the deferred
income tax assets would be realized. Accordingly, Air Canada recorded a tax recovery of $774 million, which
was revised to $755 million with $19 million related to share-based compensation reclassified to Retained
earnings in the fourth quarter of 2017.
Income tax expense is recognized in each interim period based on the best estimate of the weighted average
annual income tax rate expected for the full year. Air Canada’s effective tax rate for 2018 26.78% (26.60%
for 2017). The income tax expense differs from the amounts computed by applying the statutory tax rate,
principally due to the impact of unrecognized tax benefits on foreign exchange capital losses and the effect
of non-deductible expenses.
2018 ANNUAL REPORT
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14. ACCOUNTING POLICIES
IFRS 16 – Leases
IFRS 16 replaces IAS 17 Leases and related interpretations. The core principle is that a lessee recognizes assets and
liabilities for all leases with a lease term of more than 12 months. A lessee is required to recognize a right-of-
use asset representing its right to use the underlying leased asset and a lease liability representing its obligation
to make lease payments. Assets and liabilities arising from a lease are initially measured on a present value
basis. The measurement of the lease liability includes non-cancellable lease payments (including inflation-
linked payments), and also includes payments to be made in optional periods if the lessee is reasonably certain
to exercise an option to extend the lease, or not to exercise an option to terminate the lease. Purchase options
which are reasonably certain of being exercised are also included in the measurement of the lease liability.
Lease payments will not include variable lease payments other than those that depend on an index or rate. The
right-of-use asset will be derived from the calculation of the lease liability and will also include any provisions
the lessee will owe for return conditions on leased assets.
The new standard is intended to provide an improved representation of leasing transactions, in particular those
that do not currently require the lessee to recognize an asset and liability arising from an operating lease.
IFRS 16 is effective for annual periods beginning on January 1, 2019. Entities have the option of adopting a full
retrospective approach or a modified retrospective approach on transition to IFRS 16.
Air Canada will apply the standard effective January 1, 2019 and will transition with a full retrospective
approach with restatement to each prior reporting period presented. Air Canada has elected the package of
practical expedients to not reassess prior conclusions related to contracts containing leases and to apply the
recognition exemption for short-term leases and contracts for which the underlying asset has a low value.
This standard will have a significant impact on Air Canada’s consolidated balance sheet, along with a change to
the recognition, measurement and presentation of lease expenses in the consolidated statement of operations.
Aircraft Leases
As of December 31, 2018, Air Canada had 126 aircraft under operating leases (111 aircraft as at December 31,
2017), and Air Canada will record such aircraft as right-of-use assets and lease liabilities of Air Canada in
accordance with the requirements of the new standard. Additionally, the Corporation has identified that, under
IFRS 16, Air Canada is the lessee in respect of aircraft used by regional carriers providing services under the
respective capacity purchase agreements (“CPA”), and will record such aircraft as right-of-use assets and lease
liabilities of Air Canada. As at December 31, 2018, there were 132 aircraft (134 aircraft as at December 31,
2017) operating under these arrangements on behalf of Air Canada.
Property Leases
Air Canada has leases related to airport terminal operations space and other real estate leases. For leases
related to terminal operations space, there are generally effective substitution rights in the hands of the lessor
and therefore these are not considered lease contracts under the standard. Leases with reciprocal termination
rights with a notice period of less than 12 months would be considered short-term leases and therefore would
be excluded from balance sheet recognition under the practical expedient. Finally, those airport terminal
contracts with variable lease payments will also be excluded since variable lease payments, other than those
based on an index or rate, are excluded from the measurement of the lease liability. This results in a portfolio
of property leases that are expected to be recorded as right-of-use assets and lease liabilities under the
standard which relate to dedicated space in Air Canada’s hub locations of Toronto, Montreal and Vancouver,
lease contracts on building space dedicated to Air Canada for offices, airport and maintenance operations,
Maple Leaf Lounges and land leases.
Accounting for Leases and Right-of-Use Assets
Leases are recognized as a right-of-use asset and corresponding liability at the date of which the leased asset
is available for use by the Corporation. Each lease payment is allocated between the liability and interest
expense. The interest cost is charged to the consolidated statement of operations over the lease period to
produce a constant periodic rate of interest on the remaining balance of the liability for each period.
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72 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Right-of-use assets will be accounted for under IAS 16 Property, Plant and Equipment. Aircraft recorded as right-of-use assets will
have the same accounting policies as directly owned aircraft, meaning the right-of-use assets will be componentized and depreciated
over the lease term. Consistent with owned aircraft, any qualifying maintenance events will be capitalized and depreciated over the
lesser of the lease term and expected maintenance life.
Maintenance provisions for end-of-lease return obligations will be recorded, as applicable, on aircraft leases as a maintenance
expense over the term of the lease. Any changes to the provision for end-of-lease conditions will be recognized as an adjustment to
the right-of-use asset and subsequently amortized to the income statement over the remaining term of the lease.
The application of IFRS 16 requires assumptions and estimates in order to determine the value of the right-of-use assets and
the lease liabilities which mainly relate to the implicit interest rate for aircraft leases and the incremental borrowing rate at
commencement date of the contract for property leases. Judgement must also be applied as to whether renewal options are
reasonably certain of being exercised.
Income Statement Impacts
The impacts on the income statement will be an elimination of aircraft rent and building rent, which is recorded in other operating
expenses, for those contracts which are recognized as leases, and instead will be replaced by an amortization of the right-of-
use asset and interest costs on the lease liability. Maintenance expense is expected to decrease under the standard as qualifying
maintenance events for the former operating leases will be capitalized as part of the right-of-use asset and depreciated over their
expected maintenance life. This will be partially offset by higher maintenance provision expense recorded on all aircraft right-of-use
assets which contain end of lease maintenance return conditions. Regional airlines expense is expected to decrease to the extent
aircraft rent is removed and recorded in depreciation and interest expense outside of the regional airlines expense.
Since all the aircraft lease contracts are denominated in US dollars, there may be additional volatility in the foreign exchange
recognized in the income statement due to the revaluation of the lease liabilities and maintenance provisions to the rate of exchange
in effect at the date of the balance sheet.
Anticipated Impact to 2018 Results
Select adjusted financial statement information, which reflects the anticipated impact of adoption of IFRS 16 on January 1, 2018, is
presented below. Line items that are not expected to be affected by the change in accounting policy have not been included. As a
result, the sub-totals and totals disclosed cannot be recalculated from the numbers provided. In summary, the following adjustments
are anticipated to be made to the amounts recognized in Air Canada’s consolidated statement of financial position for the date of
initial application on January 1, 2018.
(Canadian dollars in millions)
December 31,
2017 as
Previously
Reported
Air Canada
Aircraft
Regional
Aircraft
Property Leases
Expected
January 1, 2018
as Restated
Accounts receivable $ 814 $ (3) $ - $ - $ 811
Deposits and other assets 465 (63) - - 402
Property and equipment 9,252 1,649 766 160 11,827
Deferred income tax 456 71 144 13 684
Total assets $ 17,782 $ 1,654 $ 910 $ 173 $ 20,519
Accounts payable and accrued liabilities 1,961 (22) (12) - 1,927
Current portion of long-term debt
and lease liabilities
671 357 146 12 1,186
Total current liabilities 5,101 335 134 12 5,582
Long-term debt and lease liabilities 5,448 1,452 1,092 198 8,19 0
Maintenance provisions 1,003 70 78 - 1,151
Other long-term liabilities 167 (8) - - 159
Total liabilities $ 14,360 $ 1,849 $ 1,304 $ 210 $ 17,723
Retained earnings 2,554 (195) (394) (37) 1,928
Total shareholders’ equity $ 3,422 $ (195) $ (394) $ (37) $ 2,796
Total liabilities and shareholders’ equity $ 17,782 $ 1,654 $ 910 $ 173 $ 20,519
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 73
The expected impact of the adoption of IFRS 16 on Air Canada’s 2018 consolidated statement of operations is presented below.
(Canadian dollars in millions)
December 31,
2018 as
Previously
Reported
Air Canada
Aircraft
Regional
Aircraft
Property
Leases
Expected
December 31,
2018 as
Restated
Operating revenues
Passenger $ 16,223 $ - $ - $ - $ 16,223
Cargo 803 - - - 803
Other 1,039 - - - 1,039
Total revenues 18,065 - - - 18,065
Operating expenses
Aircraft fuel 3,969 - - - 3,969
Regional airlines expense 2,842 - (323) - 2,519
Wages, salaries and benefits 2,873 - - - 2,873
Airport and navigation fees 964 - - - 964
Aircraft maintenance 1,003 (100) - - 903
Depreciation, amortization and impairment 1,080 424 197 16 1,717
Sales and distribution costs 807 - - - 807
Ground package costs 602 - - - 602
Aircraft rent 518 (512) - - 6
Catering and onboard services 433 - - - 433
Communications and information
technology
294 - - - 294
Other 1,506 - - (27) 1,479
Total operating expenses 16,891 (188) (126) (11) 16,566
Operating income 1,174 188 126 11 1,499
Non-operating income (expense)
Foreign exchange loss (317) (155) (105) (1) (578)
Interest income 108 - - - 108
Interest expense (331) (131) (91) (14) (567)
Interest capitalized 35 - - - 35
Net financing expense relating to employee
benefits
(50) - - - (50)
Loss on financial instruments recorded at
fair value
(1) - - - (1)
Gain on debt settlements and modifications 9 - - - 9
Loss on disposal of assets (188) - - - (188)
Other (34) (2) - - (36)
Total non-operating expense (769) (288) (196) (15) (1,268)
Income before income taxes 405 (100) (70) (4) 231
Income tax expense (238) 27 19 1 (191)
Net income $ 167 $ (73) $ (51) $ (3) $ 40
EBITDAR $ 2,851 $ 100 $ 244 $ 27 $ 3,222
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74 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
15. OFF-BALANCE SHEET ARRANGEMENTS
Guarantees
Guarantees in Fuel and De-icing Arrangements
Air Canada participates in fuel facility arrangements operated through eight Fuel Facility Corporations, and
three aircraft de-icing service facilities, along with other airlines that contract for fuel and de-icing services at
various major airports in Canada. These entities operate on a cost recovery basis. The aggregate debt of these
entities that has not been consolidated by Air Canada under IFRS 10 Consolidated Financial Statements is
approximately $571 million as at December 31, 2018 (December 31, 2017 - $529 million), which is Air Canada’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. Air Canada views this loss
potential as remote. Each contracting airline participating in these entities 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.
Indemnification Agreements
In the ordinary course of Air Canada’s business, Air Canada enters into a variety of agreements, such as
real estate leases or operating agreements, aircraft financing or leasing agreements, technical service
agreements, and director/officer contracts, and other commercial agreements, some of which may provide for
indemnifications to counterparties that may require Air Canada to pay for costs and/or losses incurred by such
counterparties. Air Canada cannot reasonably estimate the potential amount, if any, it could be required to pay
under such indemnifications. Such amount would also depend on the outcome of future events and conditions,
which cannot be predicted. While certain agreements specify a maximum potential exposure, certain others
do not specify a maximum amount or a limited period. Historically, Air Canada has not made any significant
payments under these indemnifications.
Air Canada expects that it would be covered by insurance for most tort liabilities and certain related contractual
indemnities.
16. RELATED PARTY TRANSACTIONS
At December 31, 2018, Air Canada had no transactions with related parties as defined in the CPA Handbook,
except those pertaining to transactions with key management personnel in the ordinary course of their
employment or directorship agreements.
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Management’s Discussion and Analysis of Results of Operations and Financial Condition | 75
17. SENSITIVITY OF RESULTS
Air Canada’s financial results are subject to many different internal and external factors which can have a
significant impact on operating results. The following table describes, on an indicative basis, the financial
impact that changes in fuel prices and the value of the Canadian dollar would generally have had on
Air Canada’s past operating results. An equivalent but opposite movement of the sensitivity factor in the table
below would have generally resulted in a similar but opposite impact. These guidelines were derived from 2018
levels of activity and make use of management estimates. The impacts are not additive, do not reflect the
interdependent relationship of the elements and may not be indicative of future trends or results which may
vary significantly due to a wide range of factors many of which are beyond the control of Air Canada.
Key Variable 2018
Measure
Sensitivity Factor Favourable/
(Unfavourable)
Estimated
Operating
Income Impact
(Canadian dollars in millions)
Fuel
Fuel – Jet fuel price (US$/barrel)
(1)
93.0 US$1/barrel increase $ (46)
Fuel – Jet fuel price (CAD cents/litre)
(1)
80.4 1% increase $ (43)
Currency Exchange
C$ to US$ C$1 = US$1.33 1 cent increase
(i.e. $1.33 to $1.32 per US$)
Operating income
(2)
$ 19
Net interest expense $ 2
Revaluation of long-term
debt, U.S. dollar cash, cash
equivalents and short-term
investments and other long-
term monetary items, net
$ 44
Remeasurement of outstanding
currency derivatives
$ (37)
Pre-tax Income Impact $ 28
(1) Excludes the impact of fuel surcharges and fuel hedging. Refer to section 12 “Financial Instruments and Risk Management” of this MD&A for
information on Air Canada’s fuel derivative instruments.
(2) The operating income impact of currency exchange movements is before the impact of hedging activities, such as through the use of foreign
currency derivatives and holding U.S. dollar cash reserves. The gains and losses related to these hedging activities are recorded in non-
operating income (expense) on Air Canada’s consolidated statement of operations.
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76 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
18. RISK FACTORS
The risks described below should be read carefully
when evaluating Air Canada’s business and the
forward-looking statements contained in this report
and other statements Air Canada may make from
time to time. Any of these risks could materially and
adversely affect Air Canada’s business, operating
results, financial condition and the outcome of
matters as to which forward-looking statements
are made. In addition, these risks may not be the
only risks faced by Air Canada. Other risks of which
Air Canada is not aware or which Air Canada currently
deems not to be material may surface and have
a material and adverse impact on Air Canada, its
business, results from operations, financial condition
and the outcome of matters as to which forward-
looking statements are made.
Risks Relating to Air Canada
Operating results – Air Canada may
sustain significant losses and not be able to
successfully achieve and/or sustain positive
net profitability or realize the objectives of
any or all of its initiatives
A variety of factors, including economic conditions
and other factors described in this “Risk Factors”
section, may result in Air Canada incurring significant
losses. Despite ongoing strategic and business
initiatives, Air Canada may not be able to successfully
achieve and/or sustain positive net profitability or
realize the objectives of any or all of its initiatives,
including those which seek to increase revenues,
decrease costs, improve margins, profitably deploy
additional capacity, generate sufficient returns on its
capital expenditures or offset or mitigate risks facing
Air Canada, including those described in this “Risk
Factors” section.
Economic and geopolitical
conditions – Changes in economic
and geopolitical conditions could have
a material adverse effect on Air Canada,
its business, results from operations and
financial condition
Airline operating results are sensitive to economic and
geopolitical conditions which can have a significant
impact on Air Canada. For example, economic and
geopolitical conditions may impact demand for
air transportation in general or to or from certain
destinations, and may also impact Air Canada’s
operating costs, operating revenues, costs and
availability of fuel, foreign exchange costs, pension plan
contributions, and costs and availability of capital and
supplies required by Air Canada. Especially in light
of Air Canada’s substantial fixed cost structure, any
prolonged or significant impact arising from economic
and geopolitical conditions, including weakness of
the Canadian, U.S. or world economies, changes to
political or economic relationships within or between
jurisdictions where Air Canada operates, or threatened
or actual outbreaks of hostilities in or adjacent to
regions Air Canada serves or over which it operates
flights (or to regions it plans to operate), could have
a material adverse effect on Air Canada, its business,
results from operations and financial condition.
Airline fares and passenger demand have fluctuated
significantly in the past and may fluctuate
significantly in the future. Air Canada is not able to
predict with certainty market conditions and the fares
that Air Canada may be able to charge. Customer
expectations can change rapidly and the demand for
lower fares may limit revenue opportunities. Travel,
especially leisure travel, is a discretionary consumer
expense. Demand for business and premium travel
is also impacted by economic conditions. Depressed
economic conditions in areas served by Air Canada,
geopolitical instability in various areas of the world
and concerns about the environmental impacts of air
travel and tendencies towards less environmentally
impactful travel where customers may reduce or alter
their travel activities, could each have the effect of
reducing demand for air travel in Canada and abroad
and could materially adversely impact Air Canada, its
business, results of operations and financial condition.
Fuel costs – Significant fluctuations or
increases in fuel prices could have a material
adverse effect on Air Canada, its business,
results from operations and financial
condition
Fuel costs constitute one of Air Canada’s largest
operating cost items. Fuel prices have and may
continue to fluctuate widely depending on many
factors, including international market conditions,
geopolitical events, jet fuel refining costs and the
Canada/U.S. dollar exchange rate. Air Canada cannot
accurately predict the future price of fuel. Due
to the competitive nature of the airline industry,
Air Canada may not be able to pass on increases in
fuel prices to its customers by increasing its fares. In
addition, Air Canada may be unable to appropriately
or sufficiently, or may not, hedge the risks associated
with fluctuations in fuel prices. Furthermore, the
impact of lower jet fuel prices could be offset by
increased price competition, and a resulting decrease
in revenues, for all air carriers. Significant fluctuations
(including increases) in fuel prices could have a
material adverse effect on Air Canada, its business,
results from operations and financial condition.
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Foreign exchange – A significant
deterioration of the Canadian dollar relative
to the U.S. dollar could have a material
adverse effect on Air Canada, its business,
results from operations and financial
condition
Air Canada’s financial results are sensitive to the
fluctuating value of the Canadian dollar. Air Canada
incurs significant expenses in U.S. dollars for items
such as fuel, aircraft purchases, aircraft leasing
and maintenance, airport charges, ground package
costs, sales and distribution costs, interest and debt
servicing payments, while a substantial portion of
its revenues are generated in Canadian dollars. Due
to the competitive nature of the airline industry and
customer sensitivity to travel costs, Air Canada may
not be able to pass on increases in foreign exchange
costs to its customers by increasing its fares. In
addition, Air Canada may be unable to appropriately
or sufficiently hedge the risks associated with
fluctuations in exchange rates. A significant
deterioration of the Canadian dollar relative to the
U.S. dollar or other foreign currencies would increase
the costs of Air Canada relative to its U.S. or other
foreign competitors. Any of these factors could have
a material adverse effect on Air Canada, its business,
results from operations and financial condition.
Competition – Air Canada operates in a
highly competitive environment and faces
increasing competition in North America
and internationally
Air Canada operates within a highly competitive
industry and continuously encounters substantial
price competition. Carriers, including low-cost, ultra-
low-cost, domestic, U.S. and foreign carriers, have
entered, announced their intention to enter or continue
to enter or expand into markets Air Canada operates
in or plans to operate in, including domestic, U.S.
transborder, international and leisure-oriented markets.
Carriers against which Air Canada competes, including
U.S. carriers, may also undergo (and some have
undergone) substantial reorganizations (including
by way of merger with or acquisition by another
carrier), creating reduced levels of indebtedness, lower
operating costs and other competitive advantages, and
may therefore be able to more effectively compete
against Air Canada. Consolidation within the airline
industry and carriers increasingly entering into
integrated commercial cooperation arrangements, such
as joint ventures, which may be able to compete more
effectively, could result in increased competition.
The proximity of several American airports in cities
close to the Canadian border has also presented an
additional challenge for Air Canada. Higher taxes,
charges and fees for passengers departing from
Canada has redirected appreciable passenger traffic
away from Canadian airports to airports in the United
States. Carriers operating from the United States
have and may continue to increase their capacity at
these airports and attract Canadian-originating, price-
sensitive customers.
The prevalence of Internet travel websites and
other travel product distribution channels has also
resulted in a substantial increase in discounted
and promotional fares initiated by Air Canada’s
competitors. Competitors also continue to pursue
commissions/incentive actions and, in many cases,
increase these payments.
Air Canada’s ability to reduce its fares in order to
effectively compete is dependent on Air Canada’s
ability to achieve acceptable operating margins and
may be limited by applicable laws or government
policies to encourage competition.
Increased competition, from existing, emerging or new
competitors, including competitors entering into new
or expanded joint ventures and other arrangements,
or utilizing disruptive business models or technologies,
and other competitive actions, or benefiting from
foreign subsidies or other advantages not available to
Air Canada, could have a material adverse effect on
Air Canada, its business, results from operations and
financial condition.
Dependence on technology –
Air Canada relies heavily on technology to
operate its business and any technology
systems failure or data breach could have
a material adverse effect on Air Canada,
its business, results from operations and
financial condition
Air Canada relies heavily on technology to operate its
business, increase its revenues and reduce its costs.
These systems include those relating to Air Canada’s
communications, websites, reservations, airport
customer services and flight operations. Air Canada
depends on the performance of its many suppliers,
whose performance is in turn dependent upon their
respective technologies.
As part of regular business operations, Air Canada
collects, processes and stores sensitive data, including
personal information of our passengers, employees
and information of our business partners. The secure
operation of the networks and systems on which this
type of information is stored, processed and maintained
is critical to our business.
Technology systems may be vulnerable to a variety
of sources of failure, interruption or misuse, including
by reason of human error, third party suppliers’
acts or omissions, natural disasters, terrorist
attacks, telecommunications failures, power failures,
2018 ANNUAL REPORT
78 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
unauthorized or fraudulent users (including cyber-
attacks, malware, ransomware, computer viruses and
the like), and other operational and security issues.
It is generally viewed that cyber-attacks have
increased and will continue to increase in both
prevalence and sophistication. Air Canada invests in
initiatives, including security initiatives and disaster
recovery plans; however, these initiatives may not be
successful or adequately address a highly dynamic
and continually evolving threat landscape. Any
technology systems failure, interruption or misuse,
security breach or failure to comply with applicable
data confidentiality, privacy, security or other related
obligations, whether at Air Canada or a third party
on whom Air Canada relies, could adversely affect
Air Canada’s reputation and expose Air Canada to
litigation, claims for contract breach, fines, sanctions or
otherwise materially and adversely affect Air Canada’s
operations, any of which could have a material
adverse effect on Air Canada, its business, results from
operations and financial condition.
Strategic, business, technology and
other important initiatives – A delay
or failure to identify and devise, invest in
and implement certain important initiatives
could have a material impact on Air Canada,
its business, results from operations and
financial condition
In order to operate its business, achieve its goals
and remain competitive, Air Canada continually
seeks to identify and devise, invest in, implement
and pursue strategic, business, technology and
other important initiatives, such as those relating
to the implementation of Amadeus Altéa Suite to
replace its existing passenger services system, the
integration of the Aeroplan loyalty business following
its acquisition in early 2019, the launch of Air Canada’s
new loyalty program, its aircraft fleet renewal program
(including the planned re-fleeting of its narrow-
body aircraft with Boeing 737 MAX aircraft and
Airbus A220 (formerly Bombardier C-Series) aircraft
and disposal of aircraft that are being replaced),
participation in the leisure or lower cost market
(including through Air Canada Rouge), joint venture
arrangements, revenue enhancement initiatives,
business processes, information technology, revenue
management, cost transformation, improving premium
passenger revenues, expansion of flying capacity
(including in respect of new aircraft and routes),
corporate culture transformation initiatives seeking
to ensure a consistently high-quality customer
service experience and others. These initiatives,
including activities relating to their development
and implementation, may be adversely impacted by
a wide range of factors, many of which are beyond
Air Canada’s control. Such factors include the need to
seek legal or regulatory approvals, the performance of
third parties (including suppliers), the implementation
and integration of such initiatives into Air Canada’s
other activities and processes as well as the adoption
and acceptance of these initiatives by Air Canada’s
customers, suppliers and personnel. A delay or failure
to sufficiently and successfully identify and devise,
invest in or implement any of these initiatives could
adversely affect Air Canada’s ability to operate its
business, achieve its goals and remain competitive
and could have a material adverse effect on Air Canada,
its business, results from operations and financial
condition.
Key supplies and suppliers –
Air Canada’s failure or inability to obtain
certain goods and services from key
suppliers on favourable terms could have
a material adverse effect on Air Canada,
its business, results from operations and
financial condition
Air Canada is dependent upon its ability to source,
on favourable terms and costs, sufficient quantities
of goods and services of desirable quality, in a timely
manner, including those available at airports or
from airport authorities, or otherwise required for
Air Canada’s business or operations, such as fuel,
aircraft and related parts, airport services, aircraft
maintenance services, and information technology
systems and services. In certain cases, Air Canada
may only be able to access goods and services from
a limited number of suppliers (or from sole source
suppliers) and the transition to new or alternative
suppliers, which may be necessitated by reason of such
suppliers increasing their rates or by their failure to
perform, may not be possible or may take a significant
amount of time or require significant resources. A
failure, refusal or inability of a supplier may arise as
a result of a wide range of causes, many of which are
beyond Air Canada’s control. Any failure or inability of
Air Canada to successfully source goods and services,
or to source goods and services of desirable quality
on terms and pricing and within the timeframes
acceptable to Air Canada, could have a material
adverse effect on Air Canada, its business, results
from operations and financial condition.
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Aeroplan loyalty program – Loss of
redemption partners, increased redemption
rates of loyalty points, or disruptions or
other interruptions of services affecting
the Aeroplan loyalty program could have a
material adverse effect on Air Canada,
its business, results from operations and
financial condition
In January 2019, Air Canada completed the acquisition
of Aimia Canada Inc., owner and operator of the
Aeroplan loyalty business and program. Through
Aeroplan, Air Canada offers its customers who are
Aeroplan members the opportunity to earn Aeroplan
Miles, which management believes is a significant
factor in many customers’ decision to travel with
Air Canada and contributes to building customer
loyalty. The success of the Aeroplan program is
dependent on maintaining sufficient accumulation
and redemption partners. Increases in redemption
rates for outstanding Aeroplan points may also have
a material adverse effect. Difficulties integrating
the Aeroplan business into Air Canada’s business, any
failures to adequately operate the Aeroplan program
or interruptions or disruptions of Aeroplan program
services, could have a material adverse effect on
Air Canada, its business, results from operations and
financial condition.
Building on the Aeroplan program, Air Canada is
working to implement a new loyalty program which
involves significant investments as well as certain
risks and uncertainties, including risks relating to
attracting new and retaining current members,
implementing the required information technology
and loyalty management systems, successfully
concluding strategic commercial arrangements,
and transitioning from the Aeroplan program to the
new loyalty program. Though Air Canada believes
it would be able to mitigate and overcome risks
and successfully create and launch its new loyalty
program, the transition from the Aeroplan program
and the launch and operation of Air Canada’s new
loyalty program entail risks which could have a
material adverse effect on Air Canada, its business,
results from operations and financial condition.
Air Canada’s brand – The failure to
preserve or grow the value of Air Canada’s
brand could have a material adverse effect
on Air Canada, its business, results from
operations and financial condition
Air Canada believes that its success is dependent
on the value of its brand and on Air Canada’s ability
to preserve, grow and leverage that value. The
Air Canada brand is recognized throughout the
world, and Air Canada has received high ratings
in external brand value studies, based in part on
consumer perceptions on a variety of subjective
qualities. Air Canada believes it has and continues to
build an excellent reputation globally for the safety
and quality of its services, and for the delivery
of a consistently positive passenger experience.
Air Canada’s reputation and brand could also be
damaged if exposed to significant adverse publicity
through social media. Adverse publicity, whether
justified or not, can rapidly spread through social or
digital media. To the extent we are unable to respond
timely and appropriately to adverse publicity, our
brand and reputation may be damaged. Any failure
to preserve or grow Air Canada’s brand, including
by reason of the conduct of Air Canada or any of its
business partners or other external parties, could have
a material adverse effect on Air Canada, its business,
results from operations and financial condition.
Airport user fees and air navigation
fees – Increases in airport user fees and
air navigation fees could have a material
adverse effect on Air Canada, its business,
results from operation and financial
condition
Airport and air navigation authorities have or
could significantly increase their fees. Though
certain authorities have implemented some fee
reductions, if authorities in Canada or elsewhere
were to significantly increase their fees, Air Canada,
its business, results from operations and financial
condition could be materially adversely affected.
Leverage – Air Canada has a significant
amount of indebtedness, and there can be
no assurance that it will be able to satisfy
its debt, lease and other obligations
Air Canada has a significant amount of indebtedness,
including substantial fixed obligations under aircraft
leases, aircraft purchases and other financings, and
as a result of any challenging economic or other
conditions affecting Air Canada, Air Canada may incur
greater levels of indebtedness than currently exist or
are planned. Although Air Canada has been focusing
on reducing its level of indebtedness and improving
its leverage ratios, the amount of indebtedness that
Air Canada has and which it may incur in the future
could have a material adverse effect on Air Canada,
for example, by (i) limiting Air Canada’s ability to
obtain additional financing, (ii) requiring Air Canada
to dedicate a substantial portion of its cash balances
or cash flow from operations to payments on its
indebtedness and fixed cost obligations, thereby
reducing the funds available for other purposes,
(iii) making Air Canada more vulnerable to economic
downturns and (iv) limiting Air Canada’s flexibility
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80 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
in planning for, or reacting to changes in its business
environment, including competitive pressures.
The ability of Air Canada to make scheduled payments
under its indebtedness will depend on, among other
things, its future operating performance and its
ability to refinance its indebtedness, if necessary. In
addition, as Air Canada incurs indebtedness which
bears interest at floating interest rates, to the extent
these interest rates increase, its interest expense will
increase. Moreover, Air Canada incurs a significant
proportion of its indebtedness in foreign currencies,
primarily in U.S. dollars, and as a result, future
debt servicing repayments are subject to foreign
exchange risk and the Canadian equivalent amount of
indebtedness may increase. There can be no assurance
that Air Canada will at all times be able to generate
sufficient cash from its operations to satisfy its debts,
lease and other obligations. Each of these factors
is, to a large extent, subject to economic, financial,
competitive, regulatory, operational and other factors,
many of which are beyond Air Canada’s control.
High fixed costs and low margins –
The airline industry may suffer from low
profit margins and high fixed costs
The airline industry has historically been
characterized by low profit margins and high fixed
costs. The costs of operating a flight do not vary
significantly with the number of passengers carried
and, therefore, a relatively small change in the number
of passengers, fare pricing or traffic mix could have
a significant impact on Air Canada’s operating and
financial results. This condition may be exacerbated
by aggressive pricing by competitors, which could
have the effect of driving down fares in certain
markets. Although Air Canada’s margins have
improved in recent years, a shortfall from expected
revenue levels or profit margins could have a material
adverse effect on Air Canada, its business, results
from operations and financial condition. Air Canada
has focused on improving resiliency to weather
downturns in its business; however, such efforts
may not be successful. As a result of high fixed costs,
should Air Canada be required to reduce its overall
capacity or the number of flights operated, it may
not be able to successfully reduce certain fixed costs
within a timeframe required to sufficiently mitigate
the effects of any downturns, and Air Canada may
also be required to incur significant termination or
other restructuring costs, any of which could have a
material adverse effect on Air Canada, its business,
results from operations and financial condition.
Regional carriers – The failure by
regional carriers to fulfill their obligations to
Air Canada could have a material adverse
effect on Air Canada, its business, results
from operations and financial condition
Air Canada seeks to enhance its network through
capacity purchase agreements with regional airlines
such as Jazz, Sky Regional and other airlines operating
flights on behalf of Air Canada. Pursuant to the terms
of the Jazz CPA, Air Canada pays Jazz a number of
fees, some of which are fixed and others which are
determined based upon certain costs incurred by
Jazz. Air Canada also reimburses Jazz for certain
pass-through costs incurred by Jazz (or arranges to
provide the related supplies to Jazz), such as fuel,
navigation, landing and terminal fees. In addition, the
Jazz CPA requires that Jazz maintain a minimum fleet
size and contains a minimum average daily utilization
guarantee which requires Air Canada to utilize Jazz
for that amount of flying. Significant increases in
Jazz’s costs, the failure by Jazz to adequately fulfill
its obligations under the Jazz CPA, factors which
may reduce the utilization of the Jazz fleet, including
economic or market downturns, and unexpected
interruptions or cessation of Jazz’s services could have
a material adverse effect on Air Canada, its business,
results from operations and financial condition.
The failure by Air Canada’s other regional carriers
to fulfill their obligations under their respective
agreements, or unexpected interruptions or
disruptions of their services, as well as minimum
guarantees in capacity purchase agreements which
may limit Air Canada’s ability to effectively manage
regional capacity in response to economic downturns,
market pressures or other external events, could have
a material adverse effect on Air Canada, its business,
results from operations and financial condition.
Labour costs and labour relations –
Air Canada may not be able to maintain
labour costs at appropriate levels or secure
labour agreements which permit it to
successfully pursue its strategic initiatives.
There can be no assurance that collective
bargaining agreements will be further
renewed without labour conflicts and/or
disruptions
Labour costs constitute one of Air Canada’s largest
operating cost items. There can be no assurance
that Air Canada will be able to maintain such costs
at levels that do not negatively affect its business,
results from operations and financial condition.
Most of Air Canada’s employees are unionized. While
Air Canada has established long term arrangements
with unions representing a significant portion of its
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unionized employees, there can be no assurance that
future agreements with employees’ unions or the
outcome of arbitrations will be on terms consistent
with Air Canada’s expectations or comparable to
agreements entered into by Air Canada’s competitors.
Any future agreements or outcomes of negotiations
or arbitrations, including in relation to wages or other
labour costs or work rules, may result in increased
labour costs or other charges, or terms and conditions
restricting or reducing, Air Canada’s ability to sustain
its business objectives or pursue its strategic initiatives,
which could have a material adverse effect on
Air Canada, its business, results from operations
and financial condition.
There can be no assurance that collective agreements
will be further renewed without labour conflict or
action or that there will not otherwise be any labour
conflict or action that could also lead to a degradation,
interruption or stoppage in Air Canada’s service or
otherwise adversely affect the ability of Air Canada to
execute on its business plans or operate its business,
either of which could have a material adverse effect
on Air Canada, its business, results from operations
and financial condition. In respect of the unions for
Canadian-based employees, strikes or lock-outs may
lawfully occur following the term and negotiations of
the renewal of collective agreements once a number
of pre-conditions prescribed by the Canada Labour
Code have been satisfied.
Any labour disruption or work stoppage by any of
the unionized work groups of Jazz, or other airlines
operating flights on behalf of Air Canada, or other key
suppliers, or of other parties with whom Air Canada
conducts business or relies on could have a material
adverse effect on Air Canada, its business, results
from operations and financial condition. In addition,
labour conflicts at Star Alliance® partners or involving
the operations of key airports could result in lower
demand for connecting traffic with Air Canada, which
could have a material adverse effect on Air Canada,
its business, results from operations and financial
condition.
Star Alliance and Joint Ventures –
Departure of a key member from Star
Alliance or the failure by a key member
to meet its obligations, including under
joint ventures arrangements, could have
a material adverse effect on Air Canada,
its business, results from operations and
financial condition
The strategic and commercial arrangements with Star
Alliance members, including Air Canada’s A++ joint
venture counterparties, Lufthansa AG and United
Airlines, provide Air Canada with important benefits,
including codesharing, efficient connections and
transfers, reciprocal participation in frequent flyer
programs and use of airport lounges from the other
members. Should a key member leave Star Alliance
or otherwise fail to meet its obligations towards
Air Canada, Air Canada, its business, results from
operations and financial condition could be materially
adversely affected.
Interruptions or disruptions in
service – Interruptions or disruptions in
service could have a material adverse effect
on Air Canada, its business, results from
operations and financial condition
Air Canada’s business is significantly dependent upon
its ability to operate without interruption to or from
a number of hub airports, including Toronto Pearson.
Delays or disruptions in service, including those due
to security, computer malfunctions or other incidents,
weather conditions, labour conflicts with airport
workers, baggage handlers, air traffic controllers,
security personnel, and other workers not employed
by Air Canada or other causes beyond the control of
Air Canada could have a material adverse impact on
Air Canada, its business, results from operations and
financial condition.
Interruptions and disruptions in service may be
caused by, and the demand and cost of air travel may
be adversely impacted by, environmental conditions,
technology issues and factors in addition to those
relating to the weather. Environmental conditions and
factors, such as those arising from volcanic eruptions
or other natural phenomena, as well as those arising
from man-made sources, could cause interruptions
and disruptions in service, increase Air Canada’s
costs or adversely impact demand for air travel, any
of which could have a material adverse impact on
Air Canada, its business, results from operations and
financial condition.
Need for capital and liquidity –
Air Canada may not be able to obtain
sufficient funds in a timely way and on
acceptable terms to provide adequate
liquidity and to finance necessary operating
and capital expenditures
Air Canada’s liquidity levels may be adversely
impacted by risks identified in this MD&A, including
economic conditions, foreign exchange rates, increased
competition from domestic, international, and U.S.
transborder carriers, including lower cost carriers,
volatile fuel prices, labour issues, and contractual
covenants (which require Air Canada to maintain
minimum cash reserves and which could require
Air Canada to deposit cash collateral with third
parties). As part of Air Canada’s efforts to manage
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82 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
such challenges and to support Air Canada’s business
strategy, significant liquidity and significant on-going
operating and capital expenditures are required.
Although Air Canada’s liquidity levels have
significantly improved over the last several years,
there can be no assurance that Air Canada will
continue to maintain sufficient liquidity, whether
from operations or by obtaining funds on terms
acceptable to Air Canada, to finance the operating
and capital expenditures necessary to manage any
challenges and support its business strategy.
A major decline in the market price of Air Canada’s
securities may negatively impact Air Canada’s
ability to raise capital, issue debt, retain employees,
make strategic acquisitions or enter into business
arrangements. Differences between Air Canada’s
actual or anticipated financial results and the
published expectations of financial analysts, as
well as events affecting our business or operating
environment, may contribute to volatility in
Air Canada’s securities. A major decline in the capital
markets in general, or an adjustment in the market
price or trading volumes of Air Canada’s securities,
may negatively affect our ability to raise capital,
issue debt, retain senior executives and other key
employees, make strategic acquisitions or enter into
business arrangements.
Failure to maintain or generate required funds,
whether from operations or financings, could require
Air Canada to delay or abandon some or all of its
anticipated expenditures or to modify its business
strategy and this could have a material adverse effect
on Air Canada, its business, results from operations
and financial condition. Furthermore, competitors
with greater liquidity or the ability to raise money
more easily or on less onerous terms could represent
a competitive disadvantage to Air Canada.
Air Canada’s credit ratings influence its ability to
access capital markets and maintain required liquidity
levels. There can be no assurance as to Air Canada’s
credit ratings, and downgrades or improvements
to credit ratings that do not materialize and that
may otherwise be anticipated by the market, may
adversely impact Air Canada’s borrowing costs, its
ability to attract capital, its liquidity and its ability to
operate its business, all of which could have a material
adverse effect on Air Canada, its business, results from
operations and financial condition.
Pension plans – Failure or inability
by Air Canada to make required cash
contributions to its pension plans
could have a material adverse effect on
Air Canada, its business, results from
operations and financial condition
Air Canada maintains several defined benefit pension
plans, including domestic registered pension plans,
supplemental pension plans and international pension
plans. Canadian federal pension legislation requires
that the funded status of registered pension plans be
determined periodically, on both a going concern basis
(essentially assuming indefinite plan continuation)
and a solvency basis (essentially assuming immediate
plan termination).
Air Canada’s pension funding obligations (including
projected funding obligations) may vary significantly
based on a wide variety of factors, including pension
plan solvency valuations, regulatory developments,
plan demographics, changes to plan provisions,
assumptions and methods used and changes in
economic conditions (mainly the return on fund
assets and changes in interest rates) and other
factors, as well as the application of normal past
service contribution rules which would generally
require one fifth of any solvency deficit in a domestic
registered plan, determined on the basis of an average
over the previous three years, to be funded each
year. Actual contributions that are determined on
the basis of future valuation reports filed annually
may vary significantly from projections. In addition,
current service contributions in respect of a domestic
registered plan are required unless they are funded
(if permitted subject to applicable plan rules and
legislation) through a sufficient surplus in such plan.
Deteriorating economic conditions or a prolonged
period of low or decreasing interest rates may
result in significant increases in Air Canada’s funding
obligations, which could have a material adverse effect
on Air Canada, its business, results from operations
and financial condition. Underfunded pension plans or
a failure or inability by Air Canada to make required
cash contributions to its pension plans could have a
material adverse effect on Air Canada, its business,
results from operations and financial condition. See
section 9.7 “Pension Funding Obligations” of this
MD&A for additional information.
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Limitations due to restrictive
covenants – Covenants contained in
agreements to which Air Canada is a party
may affect and, in some cases, significantly
limit or prohibit the manner in which
Air Canada operates its business
Some of the financing and other major agreements
to which Air Canada is a party contain, and in the
future may contain, restrictive, financial (including
in relation to asset valuations, liquidity, fixed charge
coverage ratio) and other covenants which affect
and, in some cases, significantly limit or prohibit,
among other things, the manner in which Air Canada
may structure or operate its business, including by
reducing Air Canada’s liquidity, limiting Air Canada’s
ability to incur indebtedness, create liens, sell assets,
pay dividends, make capital expenditures, and engage
in acquisitions, mergers or restructurings or a change of
control. Although Air Canada has, in the last few years,
been able to negotiate more favourable and less
restrictive covenants, there can be no assurance that
it will be able to continue to do so. Future financing
and other significant agreements may be subject to
similar or stricter covenants which limit Air Canada’s
operating and financial flexibility, which could
materially and adversely affect Air Canada’s ability
to operate its business and its profitability.
A failure by Air Canada to comply with its contractual
obligations (including restrictive, financial and
other covenants), or to pay its indebtedness and
fixed costs, could result in a variety of material
adverse consequences, including the acceleration
of its indebtedness, the withholding of credit card
proceeds by the credit card service providers and
the exercise of remedies by its creditors, lessors or
other co-contracting parties, and such defaults could
trigger additional defaults under other indebtedness
or agreements. In such a situation, Air Canada may
not be able to repay the accelerated indebtedness or
fulfill its obligations under certain contracts, make
required aircraft lease payments or otherwise cover
its fixed costs. Also, the lenders under the financing
arrangements could foreclose upon all or substantially
all of the assets of Air Canada which secure
Air Canada’s obligations.
Refer to section 9.8 “Contractual Obligations” of this
MD&A for information on Air Canada’s credit card
processing agreements.
Current legal proceedings – Air Canada
is involved in or may be subject to legal
proceedings which could materially
adversely impact Air Canada
Investigations by Competition Authorities
Relating to Air Canada Cargo
The European Commission, the United States
Department of Justice and the Competition Bureau
in Canada, among others, investigated alleged anti-
competitive cargo pricing activities, including the
levying of certain fuel surcharges, of a number of
airlines and cargo operators. The investigations
conducted by the U.S. Department of Justice and by
the Competition Bureau in Canada concluded with
no proceedings against Air Canada.
After having rendered a decision against a number
of airlines, including Air Canada in 2010, which
was overturned by the European General Court
in December 2015, in March 2017, the European
Commission rendered another decision finding
that 12 air cargo carriers, including Air Canada, had
infringed European Union competition law in the
setting of certain cargo charges and rates for various
periods between 1999 and 2006, imposing a fine
of 21 million Euros (approximately $29 million) on
Air Canada. Air Canada paid the fine as required in
the second quarter of 2017, pending the outcome
of an appeal to the European General Court. While
Air Canada cannot predict with certainty the outcome
of its appeal or any related proceedings, Air Canada
believes it has reasonable grounds to challenge the
European Commission’s ruling.
Air Canada is also named as a defendant or is otherwise
involved in a number of class action lawsuits and
other proceedings in Canada, Europe and the United
States in connection with these allegations. The
class action proceeding in the United States were
settled by Air Canada in 2012, and certain third-party
proceedings in the United Kingdom relating to the
same allegations were settled in 2018.
As at December 31, 2018, Air Canada has a provision
of $17 million ($17 million as at December 31, 2017)
relating to outstanding claims in these matters, which
is recorded in Accounts payable and accrued liabilities.
This provision is an estimate based upon the status
of investigations and proceedings at this time and
Air Canada’s assessment as to the potential outcome
for certain of them. The provision does not address
the proceedings and investigations in all jurisdictions,
but only where there is sufficient information to do
so. Air Canada has determined it is not possible at
this time to predict with any degree of certainty the
outcome of all remaining proceedings and investigations.
Based on the outcome of any developments regarding
proceedings and investigations, Air Canada may adjust
the provision in its results for subsequent periods as
required.
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Mandatory Retirement
Air Canada has been engaged in a number of
proceedings involving challenges to the mandatory
retirement provisions of certain of its collective
agreements. The remaining cases relate to retirement
which occurred pursuant to the previous Air Canada-
Air Canada Pilots Association collective agreement,
which originally incorporated provisions of the
pension plan terms and conditions applicable to pilots
requiring them to retire at age 60. Those provisions
were later amended and since 2012 a variety of
retirement rules have been in force. Some of those
new rules, notably about benefit coverage for pilots
entitled to an unreduced pension and Air Canada’s
duty to accommodate pilots over age 65 who wish to
continue working, are being challenged. Air Canada
has fully or partially prevailed in defending some of
these complaints and is defending the remaining ones.
At this time, it is not possible to determine with any
degree of certainty the extent of any financial liability
that may arise from Air Canada being unsuccessful
in its defence of these proceedings, though any such
financial liability, if imposed, would not be expected to
be material.
Future legal proceedings
In the course of conducting their business, airlines
are subject to various claims and litigation (including
class action claims), including with respect to its
contractual arrangements and current or new laws
and regulations. Any future claims or litigation
could have a material adverse effect on Air Canada,
its business, results from operations and financial
condition.
Key personnel – Air Canada is dependent
on key employees and could be materially
adversely affected by a shortfall or
substantial turnover
Air Canada is dependent on the industry experience,
qualifications and knowledge of a variety of employees,
including its executive officers, managers, airline flight
and operations personnel and other key employees to
execute its business plan and operate its business. If
Air Canada were to experience a shortfall or a substantial
turnover in its leadership or other key employees,
Air Canada, its business, results from operations and
financial condition could be materially adversely affected.
Additionally, Air Canada may be unable to attract and
retain additional qualified key personnel as needed in
the future.
Risks Relating to the Airline Industry
Terrorist attacks and security
measures – Terrorist attacks and related
consequences could have a material adverse
effect on Air Canada, its business, results
from operations and financial condition
The potential for terrorist attacks and terrorist activity
causes concern and uncertainty in the minds of the
traveling public. The occurrence of a terrorist attack, an
attempted attack or the perceived threat of one (whether
or not involving Air Canada or another carrier, or
involving Air Canada’s destinations, or other destinations
or regions), and restrictive security measures, such
as those relating to the content of carry-on baggage,
passenger identification document requirements, and
passenger screening procedures, could have a material
adverse effect on passenger demand for air travel and
on the number of passengers traveling on Air Canada’s
flights. It could also lead to a substantial increase in
insurance, security and other costs, including higher
operating costs to avoid flying over airspace near conflict
zones. Any resulting reduction in passenger revenues
and/or increases in costs, including insurance, security
or other costs could have a material adverse effect on
Air Canada, its business, results from operations and
financial condition.
Casualty losses – Air Canada’s business
makes it subject to large liability claims for
serious personal injury or death arising out
of accidents or disasters
Due to the nature of its core business, Air Canada
may be subject to liability claims arising out of
accidents or disasters involving aircraft on which
Air Canada’s customers are traveling or involving
aircraft of other carriers maintained or otherwise
serviced by Air Canada or through third parties
providing services to Air Canada, including claims for
serious personal injury or death. Any such accident
or disaster may significantly harm Air Canada’s
reputation for safety, which would have a material
adverse effect on Air Canada, its business, results
from operations and financial condition. There can
be no assurance that Air Canada’s insurance coverage
will be sufficient to cover one or more large claims
and any shortfall may be material.
Accidents and disasters may occur despite all
appropriate measures being taken, and as a
result of a variety of factors beyond Air Canada’s
control including acts of terrorism and sabotage,
severe weather, lightning strikes and other natural
phenomenon, bird strikes as well as the increasing
prevalence of unmanned aerial vehicles.
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Regulatory matters – Air Canada is
subject to extensive and evolving domestic
and foreign regulation in a wide range of
matters
The airline industry is subject to extensive legal,
regulatory and administrative controls and oversight,
including in relation to taxes, airport fees and operations,
route rights, security, passenger and consumer
rights, flight crew and other labour rules, advertising,
privacy, data security, licensing, competition, pensions,
environment (including noise levels and carbon
emissions), foreign exchange controls and, in some
measure, pricing.
Compliance with current or future Canadian and
international laws, regulations and administrative
requirements, including potentially inconsistent or
conflicting laws or regulations, or laws or regulations
which disproportionally apply to Canadian airlines or
Air Canada specifically (such as the Air Canada Public
Participation Act), may impose significant costs,
impediments and/or competitive disadvantages, and
there cannot be any assurance that current or future
laws, regulations and administrative requirements
will not adversely affect Air Canada, its business,
results from operations and financial condition.
The ability of Air Canada to operate flights or otherwise
offer air services on international routes between
airports in Canada and other countries may be subject
to change. Applicable arrangements between Canada
and foreign governments, which govern many areas
including traffic rights, may be amended from time to
time, rules and policies with respect to airport operations
may be revised, and the availability of appropriate slots
or facilities may change. Air Canada currently operates
a number of flights on international routes under
government arrangements, regulations or policies that
designate the number of carriers permitted to operate
on such routes, the capacity of the carriers providing
services on such routes, the airports at which carriers
may operate international flights, or the number of
carriers allowed access to particular airports. Any
further limitations, additions or modifications to such
arrangements, regulations or policies could have a
material adverse effect on Air Canada, its business,
results from operations and financial condition.
Additionally, if Canada were to adopt a more liberalized
approach in relation to air services arrangements with
foreign countries, such an approach could have a material
adverse impact on Air Canada, its business, results from
operations and financial condition and could result in the
impairment of material amounts of related tangible and
intangible assets.
Air Canada’s current and future plans to enter into
or expand revenue-sharing joint ventures and other
alliance arrangements on various international routes
are and may be subject to receipt of approvals from
applicable Canadian and international authorities,
to their not challenging them, and to satisfying the
necessary applicable regulatory requirements. There
can be no assurance that such conditions will be met
or will continue in effect or that existing, or changes in,
regulatory requirements or standards can be satisfied.
Many aspects of Air Canada’s operations may also be
subject to the proliferation of increasingly stringent
laws and regulations relating to environmental
reforms, such as in the area of climate change,
and including the following:
The International Civil Aviation Organization (“ICAO”)
global market-based measure (“GMBM”), adopted in
2016, includes emissions from international flights. The
GMBM is set to be implemented in phases, with the first
two phases (occurring from 2021 to 2023, and 2024 to
2026, respectively) to be voluntary and with the third
phase (from 2027 to 2035) to be mandatory. Canada
voluntarily adopted the first phase. On the basis of
the GMBM, the European Parliament and Council has
continued exempting flights between Europe and third
countries from the European Union (“EU”) emissions
trading system (“ETS”).
In 2016, the Canadian Federal Government proposed
a pan-Canadian benchmark for carbon pricing to be
implemented in all Canadian jurisdictions by 2018,
with pricing to be based on greenhouse gas emissions
from all fossil fuels sources including jet fuel and
other fuels used by Air Canada in ground operations
and stationary combustion equipment. Canadian
provinces may either apply an explicit price-based
system, such as a carbon tax or levy, or a cap and
trade system. Certain provinces, such as Alberta,
British Columbia and Québec have implemented a
carbon pricing system; others have had the federal
carbon pricing backstop system applied. Since 2017,
Air Canada and regional carriers operating flights on
behalf of Air Canada have been subject to a carbon
tax for flights operating in British Columbia and in
Alberta.
Air Canada cannot predict whether, or the manner
in which, these or other initiatives will ultimately be
implemented or their impact on Air Canada; however,
future developments in Canada and abroad could
adversely impact Air Canada, including by increasing
its costs. While Air Canada is continually focused on
efficiency improvements, including carbon footprint
reduction initiatives, the impact to Air Canada of
climate change and other environmental initiatives
may, in part, depend upon the extent to which
the increased costs relating such initiatives, if any,
could be recovered, including in the form of higher
passenger fares and cargo rates.
Air Canada is also subject to domestic and foreign
laws regarding privacy and security of passenger,
employee and other data, including advance
passenger information and access to airline
reservation systems, which are not consistent
2018 ANNUAL REPORT
86 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
in all countries which may assert jurisdiction
over Air Canada, including in countries where
Air Canada operates or conducts business. These
laws and regulations are proliferating, are becoming
increasingly stringent and may conflict with one
another. The need to comply with these laws and
regulatory regimes results in additional operating
costs and complexities, and further regulation in
this area or non-compliance, including in relation to
data privacy and security requirements, could have
a material adverse effect on Air Canada, its business
(including by impacting Air Canada’s goodwill and
reputation), results from operations and financial
condition.
Certain jurisdictions (including Canada, the United
States, European Union countries and other
jurisdictions where Air Canada operates or conducts
business) have enacted and implemented, and they
and domestic regulators may in the future enact
and implement, consumer protection and passenger
rights measures which are being increasingly adopted.
Such measures may impose significant, unique,
inconsistent or even conflicting obligations on
Air Canada, which may result in increased liability and
costs to Air Canada and which could adversely impact
Air Canada, its business, results from operations and
financial condition.
In 2018, the Federal Government proposed the
Air Passenger Protection Regulations pursuant for
adoption under the Canada Transportation Act, which
are stated to govern flights to, from and within
Canada, including connecting flights. The proposed
regulations, which have been published for comments
and are scheduled to be in force on July 1, 2019,
specify requirements governing a carrier’s obligations
in the case of flight delay, cancellation or denial of
boarding, as well as minimum standards of treatment,
compensation and assistance in completing the
planned itinerary. The regulations prescribe minimum
compensation for lost or damaged baggage,
obligations with respect to delays over three hours
where an aircraft is on the tarmac, and a carrier’s
obligation to seat young children near a parent,
guardian or tutor. The Minister of Transport is also
authorized to order the Canadian Transportation
Agency to make regulations respecting any of a
carrier’s other obligations towards passengers.
Epidemic diseases – Epidemic diseases
could impact passenger demand for air
travel
Outbreaks or the threat of outbreaks of viruses or
other contagions or epidemic diseases, including
influenza, SARS, Ebola, Zika, as well as any travel or
other advisories relating to same, whether domestic
or international or whether relating to Canadian
cities or regions or other cities, regions or countries,
could have a material adverse effect on demand for
air travel and could result in a major negative impact
on traffic on Air Canada’s network. Any resulting
reduction in traffic in the markets served by Air Canada
could have a material adverse effect on Air Canada,
its business, results from operations and financial
condition.
Availability of insurance coverage
and increased insurance costs –
Increases in insurance costs or reduction in
insurance coverage could have a material
adverse effect on Air Canada, its business,
results from operations and financial
condition
The aviation insurance industry has been continually
re-evaluating the terrorism risks that it covers
which may adversely affect some of Air Canada’s
existing insurance carriers or Air Canada’s ability to
obtain future insurance coverage (including war risk
insurance coverage). To the extent that Air Canada’s
existing insurance carriers are unable or unwilling to
provide it with insurance coverage and in the absence
of measures by the Government of Canada to provide
the required coverage, Air Canada’s insurance costs
may increase further and may result in Air Canada
being in breach of regulatory requirements or
contractual arrangements requiring that specific
insurance be maintained, which could have a material
adverse effect on Air Canada, its business, results
from operations and financial condition.
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Management’s Discussion and Analysis of Results of Operations and Financial Condition | 87
19. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures and Internal Controls over Financial
Reporting
Disclosure controls and procedures within the Corporation have been designed to provide reasonable assurance
that all relevant information is identified to its President and Chief Executive Officer (“CEO”), its Deputy
Chief Executive Officer and Chief Financial Officer (“CFO”) and its Disclosure Policy Committee to ensure
appropriate and timely decisions are made regarding public disclosure.
Internal controls over financial reporting have been designed by management, under the supervision of, and
with the participation of the Corporation’s CEO and CFO, to provide reasonable assurance regarding the
reliability of the Corporation’s financial reporting and its preparation of financial statements for external
purposes in accordance with GAAP.
The Corporation will file certifications, signed by the Corporation’s CEO and CFO, with the Canadian Securities
Administrators (“CSA”) upon filing of the Corporation’s Annual Information Form. In those filings, the
Corporation’s CEO and CFO will certify, as required by National Instrument 52-109, the appropriateness of
the financial disclosure, the design and effectiveness of the Corporation’s disclosure controls and procedures
and the design and effectiveness of internal controls over financial reporting. The Corporation’s CEO and CFO
also certify the appropriateness of the financial disclosures in the Corporation’s interim filings with securities
regulators. In those interim filings, the Corporation’s CEO and CFO also certify the design of the Corporation’s
disclosure controls and procedures and the design of internal controls over financial reporting.
The Corporation’s Audit, Finance and Risk Committee reviewed this MD&A and the audited consolidated
financial statements, and the Corporation’s Board of Directors approved these documents prior to their release.
Management’s Report on Disclosure Controls and Procedures
Management, under the supervision of and with the participation of the Corporation’s CEO and CFO,
evaluated the effectiveness of the Corporation’s disclosure controls and procedures (as defined under National
Instrument 52-109) and concluded, as at December 31, 2018, that such disclosure controls and procedures
were effective.
Management’s Report on Internal Controls over Financial Reporting
Management, under the supervision of and with the participation of the Corporation’s CEO and CFO, evaluated the
effectiveness of the Corporation’s internal controls over financial reporting (as defined under National Instrument
52-109). In making this evaluation, management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commissions (“COSO”) in Internal Control - Integrated Framework (2013). Based on
that evaluation, management and the CEO and CFO have concluded that, as at December 31, 2018, the Corporation’s
internal controls over financial reporting were effective. This evaluation took into consideration the Corporation’s
Corporate Disclosure Policy and the functioning of its Disclosure Policy Committee.
Changes in Internal Controls over Financial Reporting
There have been no changes to the Corporation’s internal controls over financial reporting during the year
ended December 31, 2018 that have materially affected, or are reasonably likely to materially affect, its
internal controls over financial reporting.
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88 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
20. NON-GAAP FINANCIAL MEASURES
Below is a description of certain non-GAAP financial measures used by Air Canada to provide readers with
additional information on its financial and operating performance. Such measures are not recognized measures
for financial statement presentation under GAAP, do not have standardized meanings, may not be comparable
to similar measures presented by other entities and should not be considered a substitute for or superior to
GAAP results.
EBITDAR
EBITDAR (earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent) is
commonly used in the airline industry and is used by Air Canada as a means to view operating results before
interest, taxes, depreciation, amortization, impairment and aircraft rent as these costs can vary significantly
among airlines due to differences in the way airlines finance their aircraft and other assets. Air Canada
excludes special items from EBITDAR as these items may distort the analysis of certain business trends and
render comparative analysis to other airlines less meaningful.
EBITDAR is reconciled to operating income as follows:
Fourth Quarter Full Year
(Canadian dollars in millions)
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, amortization and impairment 267 245 22 1,080 956 124
Aircraft rent 133 126 7 518 503 15
Add back (included in Regional
airlines expense):
Depreciation, amortization and impairment 11 7 4 38 28 10
Aircraft rent 10 10 - 41 40 1
EBITDAR (including special items) $ 543 $ 521 $ 22 $ 2,851 $ 2,898 $ (47)
Remove effect of special items
(2)
- - - - 30 (30)
EBITDAR (excluding special items) $ 543 $ 521 $ 22 $ 2,851 $ 2,928 $ (77)
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
(2) In the first quarter of 2017, Air Canada recorded a provision of $30 million relating to a fine which was reinstated by a decision of the
European Commission pertaining to cargo investigations.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 89
Adjusted CASM
Air Canada uses adjusted CASM as a means to assess the operating and cost performance of its ongoing airline
business without the effects of aircraft fuel expense, the cost of ground packages at Air Canada Vacations
and special items as these items may distort the analysis of certain business trends and render comparative
analysis to other airlines less meaningful.
In calculating adjusted CASM, aircraft fuel expense is excluded from operating expense results as it fluctuates
widely depending on many factors, including international market conditions, geopolitical events, jet fuel
refining costs and Canada/U.S. currency exchange rates. Air Canada also incurs expenses related to ground
packages at Air Canada Vacations which some airlines, without comparable tour operator businesses, may
not incur. In addition, these costs do not generate ASMs and therefore excluding these costs from operating
expense results provides for a more meaningful comparison across periods when such costs may vary.
Excluding aircraft fuel expense, the cost of ground packages at Air Canada Vacations and special items
from operating expenses generally allows for more meaningful analysis of Air Canada’s operating expense
performance and a more meaningful comparison to those of other airlines.
Adjusted CASM is reconciled to GAAP operating expense as follows:
Fourth Quarter Full Year
(Canadian dollars in millions, except where indicated)
2018
2017
(1)
$ Change
2018
2017
(1)
$ Change
Operating expense – GAAP $ 4,124 $ 3,687 $ 437 $16,891 $14,881 $ 2,010
Adjusted for:
Aircraft fuel expense (as reflected on
Air Canada’s consolidated statement
of operations)
(958) (735) (223) (3,969) (2,927) (1,042)
Aircraft fuel expense (included in
Regional airlines expense)
(133) (112) (21) (531) (412) (119)
Ground package costs (126) (106) (20) (602) (538) (64)
Special items
(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) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
(2) In the first quarter of 2017, Air Canada recorded a provision of $30 million relating to a fine which was reinstated by a decision of the
European Commission pertaining to cargo investigations.
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90 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Adjusted Pre-tax Income
Adjusted pre-tax income is used by Air Canada to assess the overall pre-tax financial performance of its
business without the effects of foreign exchange gains or losses, net financing expense relating to employee
benefits, gains or losses on financial instruments recorded at fair value, gains or losses on sale and leaseback of
assets, gains or losses on debt settlements and modifications, gains or losses on disposal of assets, and special
items as these items may distort the analysis of certain business trends and render comparative analysis to
other airlines less meaningful. Air Canada uses adjusted pre-tax income before interest to determine return
on invested capital.
Adjusted pre-tax income is reconciled to GAAP income (loss) before income taxes as follows:
Fourth Quarter Full Year
(Canadian dollars in millions)
2018
2017
(1)
$ Change
2018
2017
(1)
$ Change
Income (loss) before income taxes $ (216) $ 20 $ (236) $ 405 $ 1,286 $ (881)
Adjusted for:
Special items
(2)
- - - - 30 (30)
Foreign exchange (gain) loss 269 62 207 317 (120) 437
Net financing expense relating to employee
benefits
12 18 (6) 50 65 (15)
(Gain) loss on financial instruments recorded
at fair value
3 1 2 1 (23) 24
Gain on sale and leaseback of assets - - - - (52) 52
(Gain) loss on debt settlements and
modifications
- (24) 24 (9) (21) 12
Loss on disposal of assets
(3)
- - - 188 - 188
Adjusted pre-tax income $ 68 $ 77 $ (9) $ 952 $ 1,165 $ (213)
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
(2) In the first quarter of 2017, Air Canada recorded a provision of $30 million relating to a fine which was reinstated by a decision of the
European Commission pertaining to cargo investigations.
(3) In 2018, Air Canada recorded a loss on disposal of assets of $188 million related to the sale of 25 Embraer 190 aircraft.
2018 ANNUAL REPORT
Management’s Discussion and Analysis of Results of Operations and Financial Condition | 91
Adjusted Net Income (Loss) and Adjusted Earnings (Loss) per Share – Diluted
Air Canada uses adjusted net income (loss) and adjusted earnings (loss) per share – diluted as a means to
assess the overall financial performance of its business without the after-tax effects of foreign exchange
gains or losses, net financing expense relating to employee benefits, gains or losses on financial instruments
recorded at fair value, gains or losses on sale and leaseback of assets, gains or losses on debt settlements and
modifications, gains or losses on disposal of assets, and special items as these items may distort the analysis
of certain business trends and render comparative analysis to other airlines less meaningful. Starting as of and
including the fourth quarter of 2017, adjusted net income is determined net of tax. Accordingly, the 2018 and
2017 information in the table below is not directly comparable.
Adjusted net income is reconciled to GAAP net income (loss) as follows:
Fourth Quarter Full Year
(Canadian dollars in millions, except per share figures)
2018
2017
(1)
$ Change
2018
2017
(1)
$ Change
Net income (loss) $ (231) $ 8 $ (239) $ 167 $ 2,029 $ (1,862)
Adjusted for:
Special items
(2)
- - - - 30 (30)
Recovery of deferred income taxes
(one-time)
(3)
- - - - (759) 759
Foreign exchange (gain) loss 273 57 216 339 (125) 464
Net financing expense relating to employee
benefits
10 13 (3) 37 60 (23)
Gain on financial instruments recorded
at fair value
3 - 3 1 (23) 24
Gain on sale and leaseback of assets - - - - (52) 52
Loss on debt settlements and modifications (5) (18) 13 (4) (15) 11
Loss on disposal of assets
(4)
4 - 4 137 - 137
Adjusted net income $ 54 $ 60 $ (6) $ 677 $ 1,145 $ (468)
Weighted average number of outstanding
shares used in computing diluted income
per share (in millions)
275 278 (3) 276 278 (2)
Adjusted earnings per share – diluted $ 0.20 $ 0.22 $ (0.02) $ 2.45 $ 4.11 $ (1.66)
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
(2) In the first quarter of 2017, Air Canada recorded a provision of $30 million relating to a fine which was reinstated by a decision of the
European Commission pertaining to cargo investigations
(3) In 2017, Air Canada recorded a tax recovery of $743 million (representing a deferred income tax recovery of $759 million and a current income
tax expense of $16 million). This deferred income tax recovery was excluded from adjusted net income as it reflected a one-time recognition
of previously unrecognized income tax assets.
(4) In 2018, Air Canada recorded a loss on disposal of assets of $188 million related to the sale of 25 Embraer 190 aircraft.
The following reflects the share amounts used in the computation of basic and diluted earnings per share on an
adjusted-earnings per share basis:
Fourth Quarter Full Year
(in millions)
2018
2017
2018 2017
Weighted average number of shares outstanding – basic 271 274 272 273
Effect of dilution 4 4 4 5
Weighted average number of shares outstanding – diluted 275 278 276 278
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92 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
Return on Invested Capital
Air Canada uses return on invested capital (“ROIC”) as a means to assess the efficiency with which it allocates
its capital to generate returns. Return is based on adjusted pre-tax income (or loss, as applicable), excluding
interest expense and implicit interest on operating leases. Invested capital includes (i) average year-over-
year long-term debt, average year-over-year finance lease obligations, average year-over-year shareholders’
equity and (ii) the value of capitalized operating leases (calculated by multiplying annualized aircraft rent by 7).
Air Canada calculates invested capital based on a book value-based method of calculating ROIC, as described
above. Following an increase in Air Canada’s total cash, cash equivalents and short-term investments, Air Canada
revised its methodology to reduce the average year-over-year book value of shareholders’ equity by excess cash
not required to run its core business operations. Air Canada uses average year-over-year advance ticket sales as
a proxy for the minimum cash required for ongoing core business operations. This change results in invested
capital more closely reflecting operating capital. Refer to the definition of adjusted pre-tax income (loss) for
a discussion as to why Air Canada uses this measure to assess the overall pre-tax financial performance of its
business.
Return on invested capital is reconciled to GAAP income before income taxes as follows:
12 Months Ended
(Canadian dollars in millions, except where indicated)
December 31,
2018
December 31,
2017
(1)
$ Change
Income before income taxes $ 405 $ 1,286 $ (881)
Remove:
Special items
(2)
- 30 (30)
Foreign exchange loss (gain) 317 (120) 437
Net financing expense relating to employee benefits 50 65 (15)
Loss (gain) on financial instruments recorded at fair value 1 (23) 24
Gain on sale and leaseback of assets - (52) 52
Gain on debt settlements and modifications
(3)
(9) (21) 12
Loss on disposal of assets
(4)
188 - 188
Adjusted pre-tax income $ 952 $ 1,165 $ (213)
Adjusted for:
Interest expense 331 311 20
Implicit interest on operating leases
(5)
274 266 8
Adjusted pre-tax income before interest $ 1,557 $ 1,742 $ (185)
Invested capital:
Average long-term debt and finance lease obligations 6,386 6,369 17
Average shareholders’ equity, net of excess cash 2,065 1,249 816
Capitalized operating leases
(6)
3,913 3,801 112
Invested capital $ 12,364 $ 11,419 $ 945
Return on invested capital (%) 12.6 15.3 (2.7) pp
(1) Air Canada adopted accounting standard IFRS 15 - Revenue from Contracts with Customers effective January 1, 2018 with restatement of
2017 amounts.
(2) Special items for the 12 months ended December 31, 2017 included a provision of $30 million related to cargo investigations.
(3) Gain on debt settlements and modifications for the 12 months ended December 31, 2018 of $9 million included a gain of $11 million related
to the repricing of its US$1.1 billion senior secured credit facility and a loss of $2 million related to the prepayment of fixed rate debt.
Gain on debt settlements and modifications for the 12 months ended December 31, 2017 of $21 million included a gain of $27 million related
to the repricing of its US$1.1 billion senior secured credit facility, a loss of $3 million related to the early exercise of a purchase option for an
Airbus 330 aircraft and a loss of $2 million related to the prepayment of fixed rate debt on four Embraer 190 aircraft.
(4) In 2018, Air Canada disposed of 25 Embraer 190 aircraft resulting in a loss on disposal of $188 million.
(5) Interest implicit on operating leases is equal to 7.0% of 7 times the trailing 12 months of aircraft rent. 7.0% is a proxy and does not
necessarily represent the actual implicit interest on operating leases for any given period.
(6) Capitalized operating leases are calculated by multiplying the trailing 12 months of aircraft rent by 7. Aircraft rent totaled $559 million for the
12 months ended December 31, 2018 and $543 million for the 12 months ended December 31, 2017 (includes aircraft rent related to regional
operations).
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Adjusted Net Debt to Trailing 12-Month EBITDAR (Leverage Ratio)
Adjusted net debt to trailing 12-month EBITDAR ratio (also referred to as “leverage ratio” in this MD&A) is
commonly used in the airline industry and is used by Air Canada as a means to measure financial leverage.
Leverage ratio is calculated by dividing adjusted net debt by trailing 12-month EBITDAR. As mentioned above,
Air Canada excludes special items from EBITDAR results (which are used to determine leverage ratio) as such
items would distort the analysis of certain business trends and render comparative analysis to other airlines
less meaningful. Refer to section 9.3 “Adjusted Net Debt” of this MD&A for a reconciliation of this non-GAAP
financial measure to the nearest measure under GAAP.
Free Cash Flow
Free cash flow is commonly used in the airline industry and is used by Air Canada as an indicator of the financial
strength and performance of its business, indicating the amount of cash Air Canada is able to generate from
operations and after capital expenditures. Free cash flow is calculated as net cash flows from operating activities
minus additions to property, equipment and intangible assets, and is net of proceeds from sale and leaseback
transactions. Refer to section 9.5 “Consolidated Cash Flow Movements” of this MD&A for a reconciliation of this
non-GAAP financial measure to the nearest measure under GAAP.
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94 | Management’s Discussion and Analysis of Results of Operations and Financial Condition
21. GLOSSARY
Adjusted CASM – Refers to operating expense per ASM
adjusted to remove the effects of aircraft fuel expense,
ground packages costs at Air Canada Vacations, and
special items. Refer to section 20 “Non-GAAP Financial
Measures” of this MD&A for additional information.
Adjusted net income (loss) – Refers to the
consolidated net income (loss) of Air Canada adjusted
to remove the after-tax effects of foreign exchange
gains or losses, net financing income (expense) relating
to employee benefits, gains or losses on financial
instruments recorded at fair value, gains or losses on
sale and leaseback of assets, gains or losses on debt
settlements and modifications, gains or losses on
disposal of assets, and special items. Refer to section 20
“Non-GAAP Financial Measures” of this MD&A for
additional information.
Adjusted pre-tax income (loss) – Refers to the
consolidated income (loss) of Air Canada before
income taxes and adjusted to remove the effects of
foreign exchange gains or losses, net financing income
(expense) relating to employee benefits, gains or
losses on financial instruments recorded at fair value,
gains or losses on sale and leaseback of assets, gains
or losses on debt settlements and modifications, gains
or losses on disposal of assets, and special items. Refer
to section 20 “Non-GAAP Financial Measures” of this
MD&A for additional information.
Air Georgian – Refers to Air Georgian Limited.
Atlantic passenger and cargo revenues – Refer to
revenues from flights that cross the Atlantic Ocean
with origins and destinations principally in Europe,
India, the Middle East and North Africa.
Available seat miles or ASMs – Refers to a measure of
passenger capacity calculated by multiplying the total
number of seats available for passengers by the miles
flown.
Average stage length – Refers to the average mile per
departure seat and is calculated by dividing total ASMs
by total seats dispatched.
Boeing – Refers to The Boeing Company.
Bombardier – Refers to Bombardier Inc.
CALDA – Refers to the Canadian Airline Dispatchers
Association.
CASM – Refers to operating expense per ASM.
CUPE – Refers to the Canadian Union of Public
Employees.
Domestic passenger and cargo revenues – Refer to
revenues from flights within Canada.
EBITDAR – Refers to earnings before interest, taxes,
depreciation, amortization, impairment and aircraft
rent. EBITDAR is a non-GAAP financial measure. Refer
to section 20 “Non-GAAP Financial Measures” of this
MD&A for additional information. Air Canada excludes
special items from EBITDAR.
EVAS – Refers to Exploits Valley Air Services Limited.
Free cash flow – Refers to net cash flows from
operating activities minus additions to property,
equipment and intangible assets, and is net of proceeds
from sale and leaseback transactions. Free cash flow
is a non-GAAP financial measure. Refer to sections 9.5
and 20 of this MD&A for additional information.
IAMAW – Refers to the International Association of
Machinists and Aerospace Workers.
Jazz – Refers to Jazz Aviation LP.
Jazz CPA – Refers to the capacity purchase agreement
between Air Canada and Jazz dated January 1, 2015
which became effective on January 1, 2015.
Leverage ratio – Refers to the ratio of adjusted net
debt to trailing 12-month EBITDAR (calculated by
dividing adjusted net debt by trailing 12-month
EBITDAR). Leverage ratio is a non-GAAP financial
measure. Refer to sections 9.3 and 20 of this MD&A
for additional information.
Loss (gain) on debt settlements and modifications –
Refer to gains or losses related to debt settlements and
modifications that, in management’s view, are to be
separately disclosed by virtue of their size or incidence
to enable a fuller understanding of the Corporation’s
financial performance.
Other passenger and cargo revenues – Refer to
revenues from flights with origins and destinations
principally in Central and South America, the Caribbean
and Mexico.
Pacific passenger and cargo revenues – Refer to
revenues from flights that cross the Pacific Ocean
with origins and destinations principally in Asia and
Australia.
Passenger load factor – Refers to a measure of
passenger capacity utilization derived by expressing
Revenue Passenger Miles as a percentage of Available
Seat Miles.
Passenger revenue per available seat mile or
PRASM – Refers to average passenger revenue per ASM.
Percentage point (pp) – Refers to a measure for the
arithmetic difference of two percentages.
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Return on invested capital or ROIC – Refers to return
on invested capital and is a measure used to assess the
efficiency with which a company allocates its capital
to generate returns. Refer to section 20 “Non-GAAP
Financial Measures” of this MD&A for additional
information.
Revenue passenger carried – Refers to the
International Air Transport Association’s (IATA)
definition of passenger carried whereby passengers
are counted on a flight number basis rather than by
journey/itinerary or by leg.
Revenue passenger miles or RPMs – Refers to a
measure of passenger traffic calculated by multiplying
the total number of revenue passengers carried by the
miles they are carried.
Seats dispatched – Refers to the number of seats on
non-stop flights. A non-stop flight refers to a single
takeoff and landing.
Sky Regional – Refers to Sky Regional Airlines Inc.
Special items – Refer to those items that, in
management’s view, are to be separately disclosed by
virtue of their significance to the financial statements,
to enable a fuller understanding of the Corporation’s
financial performance.
Toronto Pearson – refers to Lester B. Pearson
International Airport.
Unifor – Refers to the trade union in Canada, launched
in 2013, as a merger of the Canadian Auto Workers and
Communications, Energy and Paperworkers unions.
Weighted average cost of capital or WACC – Refers to
management’s estimate of its cost of capital, in which
each category of capital is proportionately weighted.
Yield – Refers to average passenger revenue per RPM.
2018
CONSOLIDATED
FINANCIAL
STATEMENTS
AND NOTES
PHOTOS
EXTERIOR AIRBUS S.A.S 2019 – COMPUTER RENDERING BY FIXION.
PHOTO BY DREAMSTIME – MMS – 2019
INTERIOR OF AIR CANADA BOEING 737 MAX 8. PHOTO BY BRIAN LOSITO
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 97
STATEMENT OF MANAGEMENT’S
RESPONSIBILITY FOR FINANCIAL
REPORTING
The consolidated financial statements have been prepared by management. Management is responsible for the fair
presentation of the consolidated financial statements in conformity with generally accepted accounting principles
in Canada which incorporates International Financial Reporting Standards, as issued by the International
Accounting Standards Board. Management is responsible for the selection of accounting policies and making
significant accounting judgements and estimates. Management is also responsible for all other financial
information included in management’s discussion and analysis and for ensuring that this information is consistent,
where appropriate, with the information contained in the consolidated financial statements.
Management is responsible for establishing and maintaining adequate internal control over financial reporting
which includes those policies and procedures that provide reasonable assurance over the safeguarding of assets
and over the completeness, fairness and accuracy of the consolidated financial statements and other financial
information.
The Audit, Finance and Risk Committee, which is comprised entirely of independent directors, reviews the
quality and integrity of the Corporation’s financial reporting and provides its recommendations, in respect of
the approval of the financial statements, to the Board of Directors; oversees management’s responsibilities
as to the adequacy of the supporting systems of internal controls; provides oversight of the independence,
qualifications and appointment of the external auditor; and, pre-approves audit, audit-related, and non-audit
fees and expenses. The Board of Directors approves the Corporation’s consolidated financial statements and
management’s discussion and analysis disclosures prior to their release. The Audit, Finance and Risk Committee
meets with management, the internal auditors and external auditors at least four times each year to review
and discuss financial reporting, disclosures, auditing and other matters.
The external auditors, PricewaterhouseCoopers LLP, conduct an independent audit of the consolidated financial
statements in accordance with Canadian generally accepted auditing standards and express their opinion
thereon. Those standards require that the audit is planned and performed to obtain reasonable assurance
about whether the consolidated financial statements as a whole are free of material misstatement. The external
auditors have unlimited access to the Audit, Finance and Risk Committee and meet with the Committee on a
regular basis.
Calin Rovinescu Michael Rousseau
President and Chief Executive Officer Deputy Chief Executive Officer and
Chief Financial Officer
February 14, 2019
2018 ANNUAL REPORT
98 | Consolidated Financial Statements and Notes
INDEPENDENT AUDITOR’S REPORT
To the Shareholders of Air Canada
Our opinion
In our opinion, the accompanying consolidated financial statements present fairly, in all material respects, the
financial position of Air Canada and its subsidiaries (together, the Corporation) as at December 31, 2018 and 2017
and January 1, 2017, and its financial performance and its cash flows for the years ended December 31, 2018 and
2017 in accordance with International Financial Reporting Standards as issued by the International Accounting
Standards Board (IFRS).
What we have audited
The Corporation’s consolidated financial statements comprise:
> the consolidated statements of financial position as at December 31, 2018 and 2017 and January 1, 2017;
> the consolidated statements of operations for the years ended December 31, 2018 and 2017;
> the consolidated statements of comprehensive income for the years ended December 31, 2018 and 2017;
> the consolidated statements of changes in equity for the years ended December 31, 2018 and 2017;
> the consolidated statements of cash flow for the years ended December 31, 2018 and 2017; and
> the notes to the consolidated financial statements, which include a summary of significant accounting policies.
Basis for opinion
We conducted our audit in accordance with Canadian generally accepted auditing standards. Our responsibilities
under those standards are further described in the Auditor’s responsibilities for the audit of the consolidated
financial statements section of our report.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our
opinion.
Independence
We are independent of the Corporation in accordance with the ethical requirements that are relevant to our
audit of the consolidated financial statements in Canada. We have fulfilled our other ethical responsibilities in
accordance with these requirements.
Other information
Management is responsible for the other information. The other information comprises the Management’s
Discussion and Analysis, which we obtained prior to the date of this auditor’s report and the information, other
than the consolidated financial statements and our auditor’s report thereon, included in the annual report, which
is expected to be made available to us after that date.
Our opinion on the consolidated financial statements does not cover the other information and we do not and will
not express an opinion or any form of assurance conclusion thereon.
In connection with our audit of the consolidated financial statements, our responsibility is to read the other
information identified above and, in doing so, consider whether the other information is materially inconsistent
with the consolidated financial statements or our knowledge obtained in the audit, or otherwise appears to be
materially misstated.
If, based on the work we have performed on the other information that we obtained prior to the date of this auditor’s
report, we conclude that there is a material misstatement of this other information, we are required to report that
fact. We have nothing to report in this regard. When we read the information, other than the consolidated financial
statements and our auditor’s report thereon, included in the annual report, if we conclude that there is a material
misstatement therein, we are required to communicate the matter to those charged with governance.
Responsibilities of management and those charged with governance for the
consolidated financial statements
Management is responsible for the preparation and fair presentation of the consolidated financial statements in
accordance with IFRS, and for such internal control as management determines is necessary to enable the preparation of
consolidated financial statements that are free from material misstatement, whether due to fraud or error.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 99
In preparing the consolidated financial statements, management is responsible for assessing the Corporation’s
ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the
going concern basis of accounting unless management either intends to liquidate the Corporation or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Corporation’s financial reporting process.
Auditor’s responsibilities for the audit of the consolidated financial
statements
Our objectives are to obtain reasonable assurance about whether the consolidated financial statements as a whole
are free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes
our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted
in accordance with Canadian generally accepted auditing standards will always detect a material misstatement
when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of
these consolidated financial statements.
As part of an audit in accordance with Canadian generally accepted auditing standards, we exercise professional
Judgement and maintain professional skepticism throughout the audit. We also:
> Identify and assess the risks of material misstatement of the consolidated financial statements, whether due to
fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is
sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement
resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control.
> Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the
Corporation’s internal control.
> Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and
related disclosures made by management.
> Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based
on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that
may cast significant doubt on the Corporation’s ability to continue as a going concern. If we conclude that a
material uncertainty exists, we are required to draw attention in our auditor’s report to the related disclosures
in the consolidated financial statements or, if such disclosures are inadequate, to modify our opinion. Our
conclusions are based on the audit evidence obtained up to the date of our auditor’s report. However, future
events or conditions may cause the Corporation to cease to continue as a going concern.
> Evaluate the overall presentation, structure and content of the consolidated financial statements, including
the disclosures, and whether the consolidated financial statements represent the underlying transactions and
events in a manner that achieves fair presentation.
> Obtain sufficient appropriate audit evidence regarding the financial information of the entities or business
activities within the Corporation to express an opinion on the consolidated financial statements. We are
responsible for the direction, supervision and performance of the group audit. We remain solely responsible
for our audit opinion.
We communicate with those charged with governance regarding, among other matters, the planned scope and
timing of the audit and significant audit findings, including any significant deficiencies in internal control that we
identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical
requirements regarding independence, and to communicate with them all relationships and other matters that
may reasonably be thought to bear on our independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Michael Trudeau.
Montreal, Quebec
February 14, 2019
1
CPA auditor, Public accountancy permit NO. A113048
2018 ANNUAL REPORT
100 | Consolidated Financial Statements and Notes
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Canadian dollars in millions)
December 31,
2018
December 31,
2017
Restated - Note 2
January 1,
2017
Restated - Note 2
Assets
Current
Cash and cash equivalents $ 630 $ 642 $ 787
Short-term investments 4,077 3,162 2,192
Total cash, cash equivalents and short-term
investments
4,707 3,804 2,979
Restricted cash
Note 2p
161 148 126
Accounts receivable Note 18 796 814 707
Aircraft fuel inventory 109 91 79
Spare parts and supplies inventory Note 2q 111 115 107
Prepaid expenses and other current assets
Note 18
417 425 447
Total current assets 6,301 5,397 4,445
Deposits and other assets 444 465 468
Property and equipment
Note 4
9,729 9,252 8,520
Pension assets Note 8 1,969 1,583 1,153
Deferred income tax Note 10 39 456 -
Intangible assets Note 5 404 318 315
Goodwill
Note 6
311 311 311
Total assets $ 19,197 $ 17,782 $ 15,212
Liabilities
Current
Accounts payable and accrued liabilities $ 1,927 $ 1,961 $ 1,644
Advance ticket sales Note 18 2,717 2,469 2,119
Current portion of long-term debt and
finance leases
Note 7
455 671 707
Total current liabilities 5,099 5,101 4,470
Long-term debt and finance leases
Note 7
6,197 5,448 5,911
Pension and other benefit liabilities Note 8 2,547 2,592 2,436
Maintenance provisions Note 9 1,118 1,003 922
Other long-term liabilities 151 167 153
Deferred income tax
Note 10
52 49 49
Total liabilities $ 15,164 $ 14,360 $ 13,941
Shareholders’ Equity
Share capital Note 11 798 799 797
Contributed surplus 75 69 83
Hedging reserve - - 3
Retained earnings 3,160 2,554 388
Total shareholders’ equity 4,033 3,422 1,271
Total liabilities and shareholders’ equity $ 19,197 $ 17,782 $ 15,212
The accompanying notes are an integral part of the consolidated financial statements.
On behalf of the Board of Directors:
Vagn Sørensen Christie J.B. Clark
Chairman Chair of the Audit, Finance and Risk Committee
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 101
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31
(Canadian dollars in millions except per share figures)
2018
2017
Restated - Note 2
Operating revenues
Passenger Note 18 $ 16,223 $ 14,593
Cargo Note 18 803 708
Other 1,039 951
Total revenues 18,065 16,252
Operating expenses
Aircraft fuel 3,969 2,927
Regional airlines expense Note 19 2,842 2,617
Wages, salaries and benefits 2,873 2,671
Airport and navigation fees 964 905
Aircraft maintenance 1,003 938
Depreciation, amortization and impairment 1,080 956
Sales and distribution costs 807 770
Ground package costs 602 538
Aircraft rent 518 503
Catering and onboard services 433 383
Communications and information technology 294 254
Special items Note 20 - 30
Other 1,506 1,389
Total operating expenses 16,891 14,881
Operating income 1,174 1,371
Non-operating income (expense)
Foreign exchange gain (loss) (317) 120
Interest income 108 60
Interest expense (331) (311)
Interest capitalized 35 36
Net financing expense relating to employee benefits Note 8 (50) (65)
Gain (loss) on financial instruments recorded at fair value Note 15 (1) 23
Gain on sale and leaseback of assets Note 21 - 52
Gain on debt settlements and modifications Note 7 9 21
Loss on disposal of assets Note 21 (188) -
Other (34) (21)
Total non-operating expense (769) (85)
Income before income taxes 405 1,286
Income tax (expense) recovery
Note 10
(238) 743
Net income $ 167 $ 2,029
Net income per share
Note 13
Basic earnings per share $ 0.61 $ 7.44
Diluted earnings per share $ 0.60 $ 7.31
The accompanying notes are an integral part of the consolidated financial statements.
2018 ANNUAL REPORT
102 | Consolidated Financial Statements and Notes
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the year ended December 31
(Canadian dollars in millions)
2018
2017
Restated - Note 2
Comprehensive income
Net income $ 167 $ 2,029
Other comprehensive income, net of tax expense: Note 10
Items that will not be reclassified to net income
Remeasurements on employee benefit liabilities Note 8 503 189
Items that will be reclassified to net income
Fuel derivatives designated as cash flow hedges, net
Note 15
- (3)
Total comprehensive income $ 670 $ 2,215
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Canadian dollars in millions)
Share
capital
Contributed
surplus
Hedging
reserve
Retained
earnings
Total
shareholders’
equity
January 1, 2017
(1)
$ 797 $ 83 $ 3 $ 388 $ 1,271
Net income - - - 2,029 2,029
Remeasurements on employee benefit liabilities - - - 189 189
Fuel derivatives designated as cash flow hedges, net - - (3) - (3)
Total comprehensive income - - (3) 2,218 2,215
Share-based compensation - - - 9 9
Shares issued (Note 11) 14 (5) - - 9
Shares purchased and cancelled under issuer bid (Note 11) (12) - - (59) (71)
Reclassification of equity settled award to cash settled
award (Note 2i)
- (9) - (2) (11)
December 31, 2017
(1)
$ 799 $ 69 $ - $ 2,554 $ 3,422
Net income - - - 167 167
Remeasurements on employee benefit liabilities - - - 503 503
Fuel derivatives designated as cash flow hedges, net - - - - -
Total comprehensive income - - - 670 670
Share-based compensation - 9 - - 9
Shares issued (Note 11) 8 (3) - - 5
Shares purchased and cancelled under issuer bid (Note 11) (9) - - (64) (73)
December 31, 2018 $ 798 $ 75 $ - $ 3,160 $ 4,033
(1) Amounts for prior periods as restated – Refer to Note 2
The accompanying notes are an integral part of the consolidated financial statements.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 103
CONSOLIDATED STATEMENTS OF CASH FLOW
For the year ended December 31
(Canadian dollars in millions except per share figures)
2018
2017
Restated - Note 2
Cash flows from (used for)
Operating
Net income $ 167 $ 2,029
Adjustments to reconcile to net cash from operations
Deferred income tax Note 10 232 (759)
Depreciation, amortization and impairment 1,118 984
Foreign exchange (gain) loss Note 15 328 (183)
Gain on sale and leaseback of assets Note 21 - (52)
Gain on debt settlements and modifications Note 7 (9) (21)
Loss on disposal of assets Note 21 188 -
Employee benefit funding less than expense Note 8 257 237
Financial instruments recorded at fair value Note 15 14 (14)
Change in maintenance provisions
98 125
Changes in non-cash working capital balances 267 342
Other 35 50
Net cash flows from operating activities 2,695 2,738
Financing
Proceeds from borrowings Note 7 1,210 733
Reduction of long-term debt and finance lease obligations Note 7 (1,170) (814)
Shares purchased for cancellation Note 11 (73) (71)
Issue of shares 5 9
Financing fees
Note 7
(12) (26)
Net cash flows used in financing activities (40) (169)
Investing
Short-term investments (848) (998)
Additions to property, equipment and intangible assets (2,197) (2,422)
Proceeds from sale of assets 11 5
Proceeds from sale and leaseback of assets Note 21 293 740
Other
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)
Cash and cash equivalents, beginning of year 642 787
Cash and cash equivalents, end of year $ 630 $ 642
The accompanying notes are an integral part of the consolidated financial statements.
2018 ANNUAL REPORT
104 | Consolidated Financial Statements and Notes
1. GENERAL INFORMATION
The accompanying audited 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 its principal wholly-owned operating subsidiaries, Touram Limited
Partnership doing business under the brand name Air Canada Vacations® (“Air Canada Vacations”) and
Air Canada Rouge LP doing business under the brand name Air Canada Rouge®
(“Air Canada Rouge”).
Air Canada is incorporated and domiciled in Canada. The address of its registered office is 7373 Côte-Vertu
Boulevard West, Saint-Laurent, Quebec.
Air Canada is Canada’s largest domestic, U.S. transborder and international airline and the largest provider
of scheduled passenger services in the Canadian market, the Canada-U.S. transborder market as well as
the international markets to and from Canada. Certain of the scheduled passenger services offered on
domestic and Canada-U.S. transborder routes are operated under the brand name “Air Canada Express” and
operated by third parties such as Jazz Aviation LP (“Jazz”) and Sky Regional Airlines Inc. (“Sky Regional”)
through capacity purchase agreements (each a “CPA”). Air Canada also offers scheduled passenger services
on domestic and Canada-U.S. transborder routes through capacity purchase agreements on other regional
carriers, including those operating aircraft of 18 seats or less, some of which are referred to as Tier III carriers.
Through Air Canada’s global route network, virtually every major market throughout the world is served either
directly or through the Star Alliance network. Air Canada also offers air cargo services on domestic and U.S.
transborder routes as well as on international routes between Canada and major markets in Europe, Asia,
South America and Australia.
For the years ended December 31, 2018 and 2017
(Canadian dollars in millions – except per share amounts)
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 105
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 CPA
Canada Handbook – Accounting (“CPA Handbook”)
which incorporates International Financial Reporting
Standards (“IFRS”) as issued by the International
Accounting Standards Board (“IASB”).
These financial statements were approved for issue
by the Board of Directors of the Corporation on
February 14, 2019.
These financial statements are based on the
accounting policies as described below. These policies
have been consistently applied to all the periods
presented, except as otherwise stated.
Certain comparative figures have been reclassified
to conform to the financial statement presentation
adopted for the current year.
a) Basis of measurement
These financial statements have been prepared under
the historical cost convention, except for the revaluation
of cash, cash equivalents, short-term investments,
restricted cash and derivative instruments which are
measured at fair value.
b) Principles of consolidation
These financial statements include the accounts of
Air Canada and its subsidiaries. Subsidiaries are all entities
(including structured entities) which Air Canada controls.
For accounting purposes, control is established by an
investor when it is exposed to, or has rights to, variable
returns from its involvement with the entity and has the
ability to affect those returns through its power over the
entity. All inter-company balances and transactions are
eliminated.
c) Passenger and cargo revenues
The Corporation adopted IFRS 15 Revenue from
Contracts with Customers on January 1, 2018 and
applied it retrospectively to the previous periods. The
impact of the new standard on the consolidated financial
statements is summarized in Note 2bb.
Passenger and cargo revenues are recognized when
the transportation is provided, except for revenue on
unlimited flight passes which is recognized on a straight-
line basis over the period during which the travel pass is
valid. The Corporation has formed alliances with other
airlines encompassing loyalty program participation,
interline agreements and code sharing and coordination
of services including reservations, baggage handling and
flight schedules. Revenues are allocated based upon
formulas specified in the agreements and are recognized
as transportation is provided. Passenger revenue also
includes certain fees and surcharges and revenues
from passenger-related services such as seat selection
and excess baggage which are recognized when the
transportation is provided.
Airline passenger and cargo advance sales are deferred
and included in Current liabilities. Advance sales also
include the proceeds from the sale of flight tickets to
Aimia Canada Inc. (“Aeroplan”), a corporation that
provides loyalty program services to Air Canada and
purchases seats from Air Canada pursuant to the
Commercial Participation and Services Agreement
between Aeroplan and Air Canada (the “CPSA”). Under
the CPSA, Aeroplan purchases passenger tickets from
Air Canada, which are accounted for as passenger
revenues by Air Canada when transportation is provided.
As further discussed in Note 23, Air Canada acquired
Aimia Canada Inc., owner and operator of the Aeroplan
loyalty business, from Aimia Inc. in January 2019.
d) Capacity purchase agreements
Air Canada has capacity purchase agreements with Jazz,
Sky Regional and certain other regional carriers. Under
these agreements, Air Canada markets, tickets and enters
into other commercial arrangements relating to these
flights and records the revenue it earns under Passenger
revenue when transportation is provided. Operating
expenses under capacity purchase agreements, which
are aggregated in a separate line item in the consolidated
statement of operations titled Regional airlines expense,
include the capacity purchase fees, pass-through costs,
which are direct costs incurred by the regional carrier
and charged to the Corporation, and other costs incurred
by the Corporation which are directly related to regional
carrier operations.
2018 ANNUAL REPORT
106 | Consolidated Financial Statements and Notes
e) Aeroplan loyalty program
Air Canada purchases Aeroplan Miles
®
from Aeroplan.
Air Canada is an Aeroplan partner providing certain
of Air Canada’s customers, who are also members of
Aeroplan, with Aeroplan Miles
®
, which they can redeem
as Aeroplan members for air travel or other rewards
offered by Aeroplan pursuant to its program.
The cost of purchasing Aeroplan Miles
®
from Aeroplan
is accounted for as a sales incentive and charged against
passenger revenues when the points are issued, which
occurs upon the qualifying air travel being provided to
the customer.
As further discussed in Note 23, Air Canada acquired
Aimia Canada Inc., owner and operator of the Aeroplan
loyalty business, from Aimia Inc. in January 2019.
f) Other revenues
Other revenue is primarily comprised of revenues from
the sale of the ground portion of vacation packages,
ground handling services, on-board sales, lounge pass
sales and loyalty program marketing fees. Vacation
package revenue is recognized as services are provided
over the period of the vacation. Other airline related
service revenues are recognized as the products are sold
to passengers or the services are provided.
In certain subleases of aircraft to Jazz, for accounting
purposes, the Corporation acts as an agent and
accordingly reports the sublease revenues net against
aircraft rent expense as the terms of the sublease match
the terms of the Corporation’s lease. The Corporation
acts as lessee and sublessor in these matters.
g) Employee benefits
The cost of pensions, other post-retirement and post-
employment benefits earned by employees is actuarially
determined annually as at December 31. The cost is
determined using the projected unit credit method and
assumptions including market interest rates, salary
escalation, retirement ages of employees, mortality rates,
and health care costs.
Past service costs are recognized in the period of a plan
amendment, irrespective of whether the benefits have
vested. Gains and losses on curtailments or settlements
are recognized in the period in which the curtailment or
settlement occurs.
The current service cost and any past service cost, gains
and losses on curtailments or settlements are recorded
in Wages, salaries and benefits. The interest arising on
the net benefit obligations are presented in Net financing
expense relating to employee benefits. Net actuarial
gains and losses, referred to as remeasurements, are
recognized in Other comprehensive income and Retained
earnings without subsequent reclassification to income.
The current service cost is estimated utilizing different
discount rates derived from the yield curve used to
measure the defined benefit obligation at the beginning
of the year, reflecting the different timing of benefit
payments for past service (the defined benefit obligation)
and future service (the current service cost).
The liability in respect of minimum funding
requirements, if any, is determined using the
projected minimum funding requirements, based
on management’s best estimates of the actuarially
determined funded status of the plan, market discount
rates and salary escalation estimates. The liability
in respect of the minimum funding requirement and
any subsequent remeasurement of that liability are
recognized immediately in Other comprehensive
income and Retained earnings without subsequent
reclassification to income.
Recognized pension assets are limited to the present
value of any reductions in future contributions or any
future refunds.
h) Employee profit sharing plans
The Corporation has employee profit sharing plans.
Payments are calculated based on full calendar year
results and an expense recorded throughout the year as
a charge to Wages, salaries and benefits based on the
estimated annual payments under the plans.
i) Share-based compensation plans
Certain employees of the Corporation participate in
Air Canada’s Long-Term Incentive Plan, which provides
for the grant of stock options, performance share units
(“PSUs”) and restricted share units (“RSUs”), as further
described in Note 12. PSUs and RSUs are notional share
units which are exchangeable, on a one-to-one basis,
as determined by the Board of Directors as described in
Note 12, for Air Canada shares, or the cash equivalent.
Options are expensed using a graded vesting model
over the vesting period. The Corporation recognizes
compensation expense and a corresponding adjustment
to Contributed surplus equal to the fair value of the
equity instruments granted using the Black-Scholes
option pricing model taking into consideration forfeiture
estimates. Compensation expense is adjusted for
subsequent changes in management’s estimate of
the number of options that are expected to vest.
A prospective change in accounting for PSUs and RSUs
was made in 2017 from equity settled instruments
to cash settled instruments based on settlement
experience. In accounting for cash settled instruments,
compensation expense is adjusted for subsequent
changes in the fair value of the PSUs and RSUs taking into
account forfeiture estimates. The liability related to cash
settled PSUs and RSUs is recorded in Other long-term
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 107
liabilities. Refer to Note 15 for a description of derivative
instruments used by the Corporation to economically
hedge the cash flow exposure to PSUs and RSUs.
Air Canada also maintains an employee share purchase
plan. Under this plan, contributions by the Corporation’s
employees are matched to a specific percentage by
the Corporation. Employees must remain with the
Corporation and retain their shares until March 31 of
the subsequent year for vesting of the Corporation’s
contributions. These contributions are expensed in
Wages, salaries, and benefits expense over the
vesting period.
j) Maintenance and repairs
Maintenance and repair costs for both leased and owned
aircraft are charged to Aircraft maintenance as incurred,
with the exception of maintenance and repair costs
related to return conditions on aircraft under operating
lease, which are accrued over the term of the lease, and
major maintenance expenditures on owned and finance
leased aircraft, which are capitalized as described below
in Note 2r.
Maintenance and repair costs related to return conditions
on aircraft leases are recorded over the term of the
lease for the end of lease maintenance return condition
obligations within the Corporation’s operating leases,
offset by a prepaid maintenance asset to the extent of
any related power-by-the-hour maintenance service
agreements or any recoveries under aircraft subleasing
arrangements. The provision is recorded within
Maintenance provisions using a discount rate taking
into account the specific risks of the liability over the
remaining term of the lease. Interest accretion on the
provision is recorded in Other non-operating expense.
Any changes in the maintenance cost estimate, discount
rates, timing of settlement or difference in the actual
maintenance cost incurred and the amount of the
provision are recorded in Aircraft maintenance.
k) Other operating expenses
Included in Other operating expenses are expenses
related to building rent and maintenance, airport terminal
handling costs, professional fees and services, crew
meals and hotels, advertising and promotion, insurance
costs, and other expenses. Other operating expenses are
recognized as incurred.
l) Financial instruments
Recognition
Financial assets and financial liabilities, including
derivatives, are recognized on the consolidated statement
of financial position when the Corporation becomes a
party to the financial instrument or derivative contract.
Classification
The Corporation classifies its financial assets and
financial liabilities in the following measurement
categories i) those to be measured subsequently at fair
value (either through other comprehensive income or
through profit or loss) and ii) those to be measured at
amortized cost. The classification of financial assets
depends on the business model for managing the
financial assets and the contractual terms of the cash
flows. Financial liabilities are classified as those to be
measured at amortized cost unless they are designated
as those to be measured subsequently at fair value
through profit or loss (irrevocable election at the time
of recognition). For assets and liabilities measured at fair
value, gains and losses are either recorded in profit or
loss or other comprehensive income.
The Corporation reclassifies financial assets when and
only when its business model for managing those assets
changes. Financial liabilities are not reclassified.
The Corporation has implemented the following
classifications:
> Cash and cash equivalents, Short-term
investments, and Restricted cash are
classified as assets at fair value through
profit and loss and any period change in
fair value is recorded through Interest
income in the consolidated statement
of operations, as applicable.
> Accounts receivable and Aircraft-related
and other deposits are classified as assets
at amortized cost and are measured
using the effective interest rate method.
Interest income is recorded in the
consolidated statement of operations,
as applicable.
> Accounts payable, credit facilities, and
long-term debt are classified as other
financial liabilities and are measured
at amortized cost using the effective
interest rate method. Interest expense is
recorded in the consolidated statement
of operations, as applicable.
2018 ANNUAL REPORT
108 | Consolidated Financial Statements and Notes
Measurement
All financial instruments are required to be measured
at fair value on initial recognition, plus, in the case of
a financial asset or financial liability not at fair value
through profit or loss, transaction costs that are directly
attributable to the acquisition or issue of the financial
asset or financial liability. Transaction costs of financial
assets and financial liabilities carried at fair value through
profit or loss are expensed in profit or loss. Financial
assets with embedded derivatives are considered in their
entirety when determining whether their cash flows are
solely payment of principal and interest.
Financial assets that are held within a business model
whose objective is to collect the contractual cash flows,
and that have contractual cash flows that are solely
payments of principal and interest on the principal
outstanding are generally measured at amortized cost
at the end of the subsequent accounting periods. All
other financial assets including equity investments are
measured at their fair values at the end of subsequent
accounting periods, with any changes taken through
profit and loss or other comprehensive income
(irrevocable election at the time of recognition).
Impairment
The Corporation assesses all information available,
including, on a forward-looking basis, the expected credit
losses associated with its assets carried at amortized
cost. The impairment methodology applied depends on
whether there has been a significant increase in credit
risk. To assess whether there is a significant increase in
credit risk, the Corporation compares the risk of a default
occurring on the asset as at the reporting date with
the risk of default as at the date of initial recognition
based on all information available, and reasonable and
supportive forward-looking information. For trade
receivables only, the Corporation applies the simplified
approach as permitted by IFRS 9 which requires expected
lifetime losses to be recognized from initial recognition of
receivables.
Derivatives and Hedge Accounting
Derivatives are initially recognized at fair value on
the date a derivative contract is entered into and are
subsequently re-measured to their fair value at the end
of each reporting period. The accounting for subsequent
changes in fair value depends on whether the derivative
is designated as a hedging instrument, and if so, the
nature of the item being hedged and the type of hedge
relationship designated. The Corporation documents at
the inception of the hedging transaction the economic
relationship between hedging instruments and hedged
items including whether the hedging instrument is
expected to offset changes in cash flows of hedged
items. The Corporation documents its risk management
objective and strategy for undertaking various
hedge transactions at the inception of each hedging
relationship.
The Corporation applies hedge accounting for designated
fuel derivatives. Crude oil prices, while not contractually
specified in the Corporation’s jet fuel purchase
contracts, are economically related to jet fuel prices.
The Corporation enters into option contracts on crude
oil and designates the contracts in cash flow hedges of
the crude oil component of its future jet fuel purchases.
The Corporation has established a hedge ratio of 1:1
for its hedging relationships. Under hedge accounting,
to the extent effective, the gain or loss on fuel hedging
derivatives is recorded in other comprehensive income.
Premiums paid for option contracts and the time value of
the option contracts are deferred as a cost of the hedge
in other comprehensive income. Amounts accumulated
in other comprehensive income are presented as hedging
reserve in equity and are reclassified to Aircraft fuel
expense when the underlying hedged jet fuel is used.
Any ineffective gain or loss on fuel hedging derivatives is
recorded in non-operating expense in Gain on financial
instruments recorded at fair value. Refer to Note 15 for
the results from fuel hedge accounting.
When a hedging instrument expires, is sold or terminated,
or when a hedge no longer meets the criteria for hedge
accounting, any cumulative deferred gain or loss and
deferred costs of hedging in equity at that time remains
in equity until the forecast transaction occurs. When the
forecast transaction is no longer expected to occur, the
cumulative gain or loss and deferred costs of hedging that
were reported in equity are immediately reclassified to
profit or loss.
If the hedge ratio for risk management purposes is no
longer optimal but the risk management objective
remains unchanged and the hedge continues to qualify
for hedge accounting, the hedge relationship will
be rebalanced by adjusting either the volume of the
hedged instrument or the volume of the hedged item
so that the hedge ratio aligns with the ratio used for risk
management purposes. Any hedge ineffectiveness is
calculated and accounted for in profit or loss at the time
of the hedge relationship rebalancing.
The Corporation enters into foreign currency, fuel
derivatives and share forward contracts to manage the
associated risks. Derivative instruments are recorded on
the consolidated statement of financial position at fair
value, including those derivatives that are embedded in
financial or non-financial contracts that are required to
be accounted for separately. Changes in the fair value of
derivative instruments are recognized in Non-operating
income (expense), except for effective changes for
designated fuel derivatives under hedge accounting
as described above. Derivative contracts are included
in the consolidated statement of financial position at
fair value in Prepaid expenses and other current assets,
Deposits and other assets, and Accounts payable and
accrued liabilities based on the terms of the contractual
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 109
agreements. All cash flows associated with purchasing
and selling derivatives are classified as operating cash
flows in the consolidated statement of cash flow.
m) Foreign currency translation
The functional currency of Air Canada and its subsidiaries
is the Canadian dollar. Monetary assets and liabilities
denominated in foreign currencies are translated into
Canadian dollars at rates of exchange in effect at
the date of the consolidated statement of financial
position. Non-monetary assets and liabilities, revenues
and expenses arising from transactions denominated
in foreign currencies, are translated at the historical
exchange rate or the average exchange rate during the
period, as applicable. Adjustments to the Canadian dollar
equivalent of foreign denominated monetary assets and
liabilities due to the impact of exchange rate changes are
recognized in Foreign exchange gain (loss).
n) Income taxes
The tax expense for the period comprises current and
deferred income tax. Tax expense is recognized in
the consolidated statement of operations, except to
the extent that it relates to items recognized in other
comprehensive income or directly in equity, in which
case the tax is netted with such items.
The current income tax expense is calculated on the
basis of the tax laws enacted or substantively enacted
at the balance sheet date in the jurisdictions where the
Corporation and its subsidiaries operate and generate
taxable income. Management periodically evaluates
positions taken in tax returns with respect to situations
in which applicable tax regulations are subject to
interpretation. It establishes provisions where appropriate
on the basis of amounts expected to be paid to the tax
authorities.
Deferred income tax is recognized, using the liability
method, on temporary differences arising between
the tax bases of assets and liabilities and their carrying
amounts in the consolidated financial statements.
Deferred income tax is determined using tax rates and
laws that have been enacted or substantively enacted by
the balance sheet date and are expected to apply when
the related deferred income tax asset is realized or the
deferred income tax liability is settled.
Deferred income tax assets are recognized only to the
extent that it is probable that future taxable profit will be
available against which the temporary differences can be
utilized.
o) Earnings per share
Basic earnings per share (“EPS”) is calculated by dividing
the net income for the period attributable to the
shareholders of Air Canada by the weighted average
number of shares outstanding during the period.
Diluted EPS is calculated by adjusting the weighted
average number of shares outstanding for dilutive
potential shares. The Corporation’s potentially dilutive
shares are comprised of stock options. The number of
shares included with respect to time vesting options is
computed using the treasury stock method unless they
are anti-dilutive. Under this method, the proceeds from
the exercise of such instruments are assumed to be used
to purchase shares at the average market price for the
period and the difference between the number of shares
issued upon exercise and the number of shares assumed
to be purchased is included in the calculation. The
number of shares included with respect to performance-
based employee share options is treated as contingently
issuable shares because their issue is contingent upon
satisfying specified conditions in addition to the passage
of time. If the specified conditions are met, then the
number of shares included is also computed using the
treasury stock method unless they are anti-dilutive.
p) Restricted cash
The Corporation has recorded Restricted cash under
Current assets representing funds held in trust by
Air Canada Vacations in accordance with regulatory
requirements governing advance ticket sales, as well as
funds held in escrow accounts relating to Air Canada
Vacations’ credit card agreements for certain travel
related activities.
Restricted cash with maturities greater than one year
from the balance sheet date is recorded in Deposits and
other assets. This restricted cash relates to funds on
deposit with various financial institutions as collateral
for letters of credit and other items.
q) Aircraft fuel inventory and spare
parts and supplies inventory
Inventories of aircraft fuel, spare parts and supplies are
measured at cost being determined using a weighted
average formula, net of related obsolescence provision,
as applicable.
The Corporation did not recognize any write-downs on
inventories or reversals of any previous write-downs
during the periods presented. Included in Aircraft
maintenance is $57 related to spare parts and supplies
consumed during the year (2017 – $54).
2018 ANNUAL REPORT
110 | Consolidated Financial Statements and Notes
r) Property and equipment
Property and equipment is recognized using the cost
model. Property under finance leases and the related
obligation for future lease payments are initially recorded
at an amount equal to the lesser of fair value of the
property or equipment and the present value of those
lease payments.
The Corporation allocates the amount initially recognized
in respect of an item of property and equipment to its
significant components and depreciates separately each
component. Property and equipment are depreciated
to estimated residual values based on the straight-line
method over their estimated service lives. Aircraft and
flight equipment are componentized into airframe,
engine, and cabin interior equipment and modifications.
Airframes and engines are depreciated over periods
not exceeding 25 years, with residual values initially
estimated at 10% of the original cost and updated for
changes in estimates over time. Spare engines and related
parts (“rotables”) are depreciated over the average
remaining useful life of the fleet to which they relate with
residual values initially estimated at 10%. Cabin interior
equipment and modifications are depreciated over the
lesser of eight years or the remaining useful life of the
aircraft. Cabin interior equipment and modifications
to aircraft on operating leases are amortized over the
lesser of eight years or the term of the lease. Major
maintenance of airframes and engines, including
replacement spares and parts, labour costs and/or third-
party maintenance service costs, are capitalized and
amortized over the average expected life between major
maintenance events. Major maintenance events typically
consist of more complex inspections and servicing of
the aircraft. All power-by-the-hour fleet maintenance
contract costs are charged to operating expenses in the
income statement as incurred. Buildings are depreciated
on a straight-line basis over their useful lives not
exceeding 50 years or the term of any related lease,
whichever is less. Leasehold improvements are amortized
over the lesser of the lease term or 5 years. Ground and
other equipment is depreciated over 3 to 25 years.
Residual values and useful lives are reviewed at least
annually, and depreciation rates are adjusted accordingly
on a prospective basis. Gains and losses on disposals of
property and equipment are determined by comparing
the proceeds with the carrying amount of the asset and
are included as part of non-operating gains and losses in
the consolidated statement of operations.
s) Interest capitalized
Borrowing costs are expensed as incurred. For borrowing
costs attributable to the acquisition, construction or
production of an asset that necessarily takes a substantial
period of time to get ready for its intended use, the
costs are capitalized as part of the cost of that asset.
Capitalization of borrowing costs commences when
expenditures for the asset and borrowing costs are
being incurred and the activities to prepare the asset
for its intended use are in progress. Borrowing costs are
capitalized up to the date when the project is completed
and the related asset is available for its intended use.
To the extent that funds are borrowed specifically for
the purpose of obtaining such assets, the amount of
borrowing costs eligible for capitalization is determined
at the actual borrowing costs incurred on that borrowing
during the period less any investment income on the
temporary investment of those borrowings. To the extent
that funds are borrowed generally and used for the
purpose of obtaining a qualifying asset, the amount of
borrowing costs eligible for capitalization is determined
by applying a capitalization rate to the expenditures on
that asset. The capitalization rate is the weighted average
of the borrowing costs applicable to the borrowings of
the Corporation that are outstanding during the period.
Borrowings made specifically for the purpose of obtaining
a qualifying asset are excluded from this calculation until
substantially all the activities necessary to prepare the
asset for its intended use are complete.
t) Leases
Leases are classified as finance leases when the lease
arrangement transfers substantially all the risks and
rewards of ownership to the lessee. All other leases are
classified as operating leases.
Total aircraft operating lease rentals over the lease
term are amortized to operating expense (Aircraft rent)
on a straight-line basis. Included in Deposits and other
assets and Other long-term liabilities are the differences
between the straight-line aircraft rent expense and the
payments as stipulated under the lease agreement.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 111
u) Intangible assets
Intangible assets are initially recorded at cost. Indefinite
life intangible assets are not amortized while assets with
finite lives are amortized on a straight-line basis over
their estimated useful lives.
Estimated
Useful Life
Remaining
amortization
period as at
December 31,
2018
International
route rights
and slots
Indefinite not applicable
Marketing based
trade names
Indefinite not applicable
Technology based
(internally
developed)
5 -10 years 1 to 10 years
Air Canada has international route rights and slots
which enable the Corporation to provide services
internationally. The value of the recorded intangible
assets relates to the cost of route and slot rights at
Tokyo’s Narita International Airport, Washington’s
Reagan National Airport and London’s Heathrow
Airport. Air Canada expects to provide service to these
international locations for an indefinite period.
Air Canada and certain of its subsidiaries have trade
names, trademarks, and domain names (collectively,
“Trade Names”). These items are marketing based
intangible assets as they are primarily used in the sale
and promotion of Air Canada’s products and services.
The Trade Names create brand recognition with
customers and potential customers and are capable of
contributing to cash flows for an indefinite period of
time. Air Canada intends to continually re-invest in, and
market, the Trade Names to support classification as
indefinite life intangibles. If there were plans to cease
using any of the Trade Names, the specific names would
be classified as finite and amortized over the expected
remaining useful life.
Development costs that are directly attributable to the
design, development and testing of identifiable software
products are recognized as technology based intangible
assets if certain criteria are met, including technical
feasibility and intent and ability to develop and use
the technology to generate probable future economic
benefits; otherwise they are expensed as incurred.
Directly attributable costs that are capitalized as part of
the technology based intangible assets include software-
related, employee and third-party development costs
and an appropriate portion of relevant overhead.
v) Goodwill
Goodwill represents the excess of the cost of an
acquisition over the fair value of the Corporation’s
share of the net identifiable assets of the acquired
business at the date of acquisition. Goodwill is tested
at least annually for impairment and carried at cost less
accumulated impairment losses. Impairment losses on
goodwill are not reversed. For the purpose of impairment
testing, goodwill is tested for impairment at the lowest
level within the entity at which the goodwill is monitored
for internal management purposes, being the operating
segment level (Note aa).
w) Impairment of long-lived assets
Long-lived assets include property and equipment,
finite lived intangible assets, indefinite lived intangible
assets and goodwill. Assets that have an indefinite useful
life, including goodwill are tested at least annually for
impairment or when events or circumstances indicate
that the carrying value may not be recoverable. Assets
that are subject to depreciation or amortization are
reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may
not be recoverable. An impairment test is performed by
comparing the carrying amount of the asset or group
of assets to their recoverable amount. Recoverable
amount is calculated as the higher of an asset’s or cash-
generating unit’s fair value less costs to dispose and its
value in use. For the purpose of assessing impairment,
assets are grouped at the lowest levels for which there
are separately identifiable cash inflows (cash-generating
units or CGUs). Management has determined that the
appropriate level for assessing impairments is at the
narrow-body and wide-body fleet levels for aircraft and
related assets supporting the operating fleet. Parked
aircraft not used in operations and aircraft leased or
subleased to third parties are assessed for impairment
at the individual asset level. An impairment loss is
recognized for the amount by which the asset’s or
cash-generating unit’s carrying amount exceeds its
recoverable amount.
Long-lived assets, other than goodwill, that suffered
an impairment are reviewed for possible reversal of
the impairment at each reporting date. Management
assesses whether there is any indication that an
impairment loss recognized in a prior period no longer
exists or has decreased. In assessing whether there is a
possible reversal of an impairment loss, management
considers the indicators that gave rise to the impairment
loss. If any such indicators exist that an impairment loss
has reversed, management estimates the recoverable
amount of the long-lived asset. An impairment loss
recognized in prior periods for an asset other than
goodwill shall be reversed only if there has been a
change in the estimates used to determine the asset’s
recoverable amount since the last impairment loss was
recognized. The carrying amount of any individual asset
2018 ANNUAL REPORT
112 | Consolidated Financial Statements and Notes
in the CGU is not increased above the carrying value that
would have been determined had the original impairment
not occurred. A reversal of an impairment loss is
recognized immediately in the consolidated statement
of operations.
x) Non-current assets (or disposal
groups) held for sale
Non-current assets (or disposal groups) are classified
as assets held for sale when their carrying amount is
to be recovered principally through a sale transaction,
such assets are available for immediate sale in present
condition, and a sale is considered highly probable. They
are stated at the lower of carrying amount and fair value
less costs to dispose.
y) Provisions
Provisions are recognized when there exists a present
legal or constructive obligation as a result of past events,
it is probable that an outflow of resources will be required
to settle the obligation, and a reliable estimate can be
made of the obligation. If the effect is significant, the
expected cash flows are discounted using a rate that
reflects, where appropriate, the risks specific to the
liability. Where discounting is used, interest accretion on
the provision is recorded in Other non-operating expense.
z) Special items
Special items are those items that in management’s
view are to be separately disclosed by virtue of their
size or incidence to enable a full understanding of the
Corporation’s financial performance.
aa) Segment reporting
Air Canada is managed as one operating segment based
on how financial information is produced internally
for the purposes of making operating decisions. The
operating segment is reported in a manner consistent
with the internal reporting provided to the chief
operating decision maker. The chief operating decision
maker, who is responsible for allocating resources and
assessing performance of operations, has been identified
as the Chief Executive Officer.
bb) Accounting standards adopted on
January 1, 2018
IFRS 15 – Revenue from Contracts with
Customers
IFRS 15 replaces IAS 18 Revenue and related
interpretations. The core principle of the new standard
is to recognize revenue to depict the transfer of goods
or services to customers in amounts that reflect
the consideration to which the entity expects to be
entitled in exchange for those goods or services. The
new standard is intended to enhance disclosures about
revenue, provide more comprehensive guidance for
transactions that were not previously addressed and
improve guidance for multiple-element arrangements.
IFRS 15 is effective for annual periods beginning on
January 1, 2018.
The Corporation adopted the standard effective
January 1, 2018 using the full retrospective method,
which requires each prior reporting period presented to
be restated. The main changes are explained below.
Accounting for costs to obtain a contract
Under IFRS 15, incremental costs of obtaining passenger
revenues, such as credit card fees and global distribution
system charges, are capitalized at time of sale and
expensed at the time of passenger revenue recognition.
Prior to adoption of IFRS 15, these costs were expensed
as incurred at the time the flight ticket was sold. With
this change in accounting policy for contract costs, the
timing of expense recognition is impacted.
The impact on the consolidated statement of financial
position as at January 1, 2017 is an increase to Prepaid
expenses and other current assets of $58 and an
equivalent increase to opening Retained earnings ($65 as
at December 31, 2017). In addition, deferred commission
costs in the amount of $40 as at January 1, 2017,
previously recorded net against the Advance ticket sales
liability, were reclassified to Prepaid expenses and other
current assets ($35 as at December 31, 2017).
Accounting for change fees
Revenue arising from change fees which are collected
by travel agents on Air Canada’s behalf are deferred
and recognized in passenger revenue at the time of
the related flight, rather than at time of collection.
The impact on the consolidated statement of financial
position as at January 1, 2017 is an increase to Advance
ticket sales of $6 and an equivalent decrease to opening
Retained earnings ($6 as at December 31, 2017).
Consolidated Financial Statements and Notes | 113
2018 ANNUAL REPORT
Presentation
Certain passenger and cargo related fees and surcharges were reclassified from Other to Passenger revenue and to Cargo revenue on the
consolidated statement of operations to better reflect the nature and aggregation of similar revenue items. This reclassification has no impact
on total operating revenues.
Impact to previously reported results
Selected adjusted financial statement information, which reflect the adoption of IFRS 15, is presented below. Line items that were
not affected by the change in accounting policy have not been included. As a result, the sub-totals and totals disclosed cannot be recalculated
from the numbers provided. In summary, the following adjustments were made to the amounts recognized in the consolidated statement of
financial position for the date of initial application on January 1, 2017 and at the end of the comparative period, December 31, 2017.
(Canadian dollars in millions)
December 31,
2016 as previously
reported
Reclassification Remeasurements January 1, 2017
as restated
Prepaid expenses and other current assets $ 349 $ 40 $ 58 $ 447
Total assets $ 15,114 $ 40 $ 58 $ 15,212
Advance ticket sales 2,073 40 6 2,119
Total current liabilities $ 4,424 $ 40 $ 6 $ 4,470
Retained earnings 336 - 52 388
Total shareholders’ equity $ 1,219 $ - $ 52 $ 1,271
Total liabilities and shareholders’ equity $ 15,114 $ 40 $ 58 $ 15,212
(Canadian dollars in millions)
December 31,
2017 as previously
reported
Reclassification Remeasurements December 31, 2017
as restated
Prepaid expenses and other current assets $ 325 $ 35 $ 65 $ 425
Deferred income tax 472 - (16) 456
Total assets $ 17,698 $ 35 $ 49 $ 17,782
Advance ticket sales 2,428 35 6 2,469
Total current liabilities $ 5,060 $ 35 $ 6 $ 5,101
Retained earnings 2,511 - 43 2,554
Total shareholders’ equity $ 3,379 $ - $ 43 $ 3,422
Total liabilities and shareholders’ equity $ 17,69 8 $ 35 $ 49 $ 17,782
No deferred income tax was recorded on the restatement as of January 1, 2017 due to deferred income tax assets not being
recognized at that time. Starting in the third quarter of 2017, the adjustments include their corresponding income tax effect resulting
in a $16 decrease of the tax recovery previously recorded in the consolidated statement of operations.
2018 ANNUAL REPORT
114 | Consolidated Financial Statements and Notes
Adoption of the standard impacted the Corporation’s previously reported consolidated statement of operations as follows.
(Canadian dollars in millions)
Year ended
December 31,
2017 as previously
reported
Reclassification Remeasurements Year ended
December 31, 2017
as restated
Operating revenues
Passenger $ 14,471 $ 122 $ - $ 14,593
Cargo 650 58 - 708
Other 1,131 (180) - 951
Total revenues 16,252 - - 16,252
Operating expenses
Sales and distribution costs 777 - (7) 770
Total operating expenses 14,888 - (7) 14,881
Operating income 1,364 - 7 1,371
Income tax (expense) recovery 759 - (16) 743
Net income $ 2,038 $ - $ (9) $ 2,029
Basic earnings per share $ 7.4 8 $ - $ (0.04) $ 7.44
Diluted earnings per share $ 7.34 $ - $ (0.03) $ 7.31
Adoption of IFRS 15 did not have any net impact on the consolidated statement of cash flows.
cc) Accounting standards and amendments issued but not yet adopted
The following is an overview of accounting standard changes that the Corporation will be required to adopt in future years. The
Corporation continues to evaluate the impact of these standards on its consolidated financial statements.
IFRS 16 – Leases
IFRS 16 replaces IAS 17 Leases and related interpretations. The core principle is that a lessee recognizes assets and liabilities for
all leases with a lease term of more than 12 months. A lessee is required to recognize a right-of-use asset representing its right
to use the underlying leased asset and a lease liability representing its obligation to make lease payments. Assets and liabilities
arising from a lease are initially measured on a present value basis. The measurement of the lease liability includes non-cancellable
lease payments (including inflation-linked payments), and also includes payments to be made in optional periods if the lessee is
reasonably certain to exercise an option to extend the lease, or not to exercise an option to terminate the lease. Purchase options
which are reasonably certain of being exercised are also included in the measurement of the lease liability. Lease payments will not
include variable lease payments other than those that depend on an index or rate. The right-of-use asset will be derived from the
calculation of the lease liability and will also include any provisions the lessee will owe for return conditions on leased assets.
The new standard is intended to provide an improved representation of leasing transactions, in particular those that do not currently
require the lessee to recognize an asset and liability arising from an operating lease. IFRS 16 is effective for annual periods beginning
on January 1, 2019. Entities have the option of adopting a full retrospective approach or a modified retrospective approach on
transition to IFRS 16.
The Corporation will apply the standard effective January 1, 2019 and will transition with a full retrospective approach with
restatement to each prior reporting period presented. The Corporation has elected the package of practical expedients to not
reassess prior conclusions related to contracts containing leases and to apply the recognition exemption for short term leases
and contracts for which the underlying asset has a low value.
This standard will have a significant impact on the Corporation’s consolidated balance sheet, along with a change to the recognition,
measurement and presentation of lease expenses in the consolidated statement of operations.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 115
Aircraft Leases
As of December 31, 2018 the Corporation had
126 aircraft under operating leases (111 aircraft as
at December 31, 2017), and Air Canada will record
such aircraft as right-of-use assets and lease liabilities
of Air Canada in accordance with the requirements
of the new standard. Additionally, the Corporation
has identified that, under IFRS 16, Air Canada is the
lessee in respect of aircraft used by regional carriers
providing services under the respective capacity
purchase agreements (“CPA”), and will record such
aircraft as right-of-use assets and lease liabilities of
Air Canada. As at December 31, 2018, there were
132 aircraft (134 aircraft as at December 31, 2017)
operating under these arrangements on behalf of
Air Canada.
Property Leases
The Corporation has leases related to airport terminal
operations space and other real estate leases. For
leases related to terminal operations space, there are
generally effective substitution rights in the hands
of the lessor and therefore these are not considered
lease contracts under the standard. Leases with
reciprocal termination rights with a notice period of
less than 12 months would be considered short-term
leases and therefore would be excluded from balance
sheet recognition under the practical expedient.
Finally, those airport terminal contracts with variable
lease payments will also be excluded since variable
lease payments, other than those based on an index
or rate, are excluded from the measurement of the
lease liability. This results in a portfolio of property
leases that are expected to be recorded as right-of-
use assets and lease liabilities under the standard
which relate to dedicated space in Air Canada’s hub
locations of Toronto, Montreal and Vancouver, lease
contracts on building space dedicated to Air Canada
for offices, airport and maintenance operations,
Maple Leaf Lounges and land leases.
Accounting for Leases and Right-of-Use
Assets
Leases are recognized as a right-of-use asset and
corresponding liability at the date of which the leased
asset is available for use by the Corporation. Each
lease payment is allocated between the liability and
interest expense. The interest cost is charged to the
consolidated statement of operations over the lease
period to produce a constant periodic rate of interest
on the remaining balance of the liability for each
period.
Right-of-use assets will be accounted for under IAS
16 Property, Plant and Equipment. Aircraft recorded
as right-of-use assets will have the same accounting
policies as directly owned aircraft, meaning the right-
of-use assets will be componentized and depreciated
over the lease term. Consistent with owned aircraft,
any qualifying maintenance events will be capitalized
and depreciated over the lesser of the lease term and
expected maintenance life.
Maintenance provisions for end-of-lease return
obligations will be recorded, as applicable, on aircraft
leases as a maintenance expense over the term of the
lease. Any changes to the provision for end-of-lease
conditions will be recognized as an adjustment to the
right-of-use asset and subsequently amortized to the
income statement over the remaining term of the
lease.
The application of IFRS 16 requires assumptions
and estimates in order to determine the value of
the right-of-use assets and the lease liabilities
which mainly relate to the implicit interest rate for
aircraft leases and the incremental borrowing rate
at commencement date of the contract for property
leases. Judgement must also be applied as to whether
renewal options are reasonably certain of being
exercised.
Income Statement Impacts
The impacts on the income statement will be an
elimination of aircraft rent and building rent, which is
recorded in other operating expenses, for those contracts
which are recognized as leases, and instead will be
replaced by an amortization of the right-of-use asset and
interest costs on the lease liability. Maintenance expense
is expected to decrease under the standard as qualifying
maintenance events for the former operating leases
will be capitalized as part of the right-of-use asset and
depreciated over their expected maintenance life. This
will be partially offset by higher maintenance provision
expense recorded on all aircraft right-of-use assets which
contain end of lease maintenance return conditions.
Regional airlines expense is expected to decrease
to the extent aircraft rent is removed and recorded
in depreciation and interest expense outside of the
Regionals airlines expense.
Since all the aircraft lease contracts are denominated
in US dollars, there may be additional volatility in the
foreign exchange recognized in the income statement
due to the revaluation of the lease liabilities and
maintenance provisions to the rate of exchange in
effect at the date of the balance sheet.
Anticipated impact to 2018 results
Select adjusted financial statement information, which
reflects the anticipated impact of adoption of IFRS 16
on January 1, 2018, is presented below. Line items
that are not expected to be affected by the change
in accounting policy have not been included. As a
result, the sub-totals and totals disclosed cannot be
recalculated from the numbers provided. In summary,
the following adjustments are anticipated to be
made to the amounts recognized in the consolidated
statement of financial position for the date of initial
application on January 1, 2018.
116 | Consolidated Financial Statements and Notes
2018 ANNUAL REPORT
(Canadian dollars in millions)
December 31,
2017 as previously
reported
Air Canada aircraft Regional
aircraft
Property
leases
Expected
January 1, 2018
as restated
Accounts receivable $ 814 $ (3) $ - $ - $ 811
Deposits and other assets 465 (63) - - 402
Property and equipment 9,252 1,649 766 160 11,827
Deferred income tax 456 71 144 13 684
Total assets $ 17,782 $ 1,654 $ 910 $ 173 $ 20,519
Accounts payable and accrued
liabilities
1,961 (22) (12) - 1,927
Current portion of long-term
debt and lease liabilities
671 357 146 12 1,186
Total current liabilities 5,101 335 134 12 5,582
Long-term debt and lease
liabilities
5,448 1,452 1,092 198 8,19 0
Maintenance provisions 1,003 70 78 - 1,151
Other long-term liabilities 167 (8) - - 159
Total liabilities $ 14,360 $ 1,849 $ 1,304 $ 210 $ 17,723
Retained earnings 2,554 (195) (394) (37) 1,928
Total shareholders’ equity $ 3,422 $ (195) $ (394) $ (37) $ 2,796
Total liabilities and
shareholders’ equity
$ 17,782 $ 1,654 $ 910 $ 173 $ 20,519
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 117
3. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS
The preparation of financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in these financial statements and accompanying notes. These
estimates and associated assumptions are based on historical experience, future operating plans and various
other factors believed to be reasonable under the circumstances, and the results of such estimates form the
basis of Judgements about carrying values of assets and liabilities. These underlying assumptions are reviewed
on an ongoing basis. Actual results could differ materially from those estimates.
Significant estimates and judgements made in the preparation of these financial statements include, but are not
limited to, the following areas, with further information contained in the applicable accounting policy or note:
> Employee future benefits
− The cost and related liabilities of the Corporation’s pensions, other post-retirement and
post-employment benefit programs are determined using actuarial valuations. The actuarial
valuations involve assumptions and estimates including discount rates, future salary increases,
mortality rates and future benefit increases. Also, due to the long-term nature of these
programs, such estimates are subject to significant uncertainty. Refer to Note 8 for additional
information.
> Depreciation and amortization period for long-lived assets
− The Corporation makes estimates about the expected useful lives of long-lived assets and the
expected residual value of the assets based on the estimated current and future fair values of
the assets, the Corporation’s fleet plans and the cash flows they generate. Changes to these
estimates, which can be significant, could be caused by a variety of factors, including changes
to maintenance programs, changes in jet fuel prices and other operating costs, changes in
utilization of the aircraft, and changing market prices for new and used aircraft of the same
or similar types. Estimates and assumptions are evaluated at least annually. Generally, these
adjustments are accounted for on a prospective basis, through depreciation and amortization
expense. For the purposes of sensitivity analysis on these estimates, a 50% reduction to residual
values on aircraft with remaining useful lives greater than five years results in an increase of $14
to annual depreciation expense. For aircraft with shorter remaining useful lives, the residual values
are not expected to change significantly.
> Impairment considerations on long-lived assets
− When required, an impairment test is performed by comparing the carrying amount of the
asset or cash-generating unit to their recoverable amount, which is calculated as the higher
of an asset’s or cash-generating unit’s fair value less costs to dispose and its value in use. Fair
value less costs to dispose may be calculated based upon a discounted cash flow analysis, which
requires management to make a number of significant market participant assumptions including
assumptions relating to future operating plans, discount rates and future growth rates.
> Maintenance provisions
− The recording of maintenance provisions related to return conditions on aircraft leases requires
management to make estimates of the future costs associated with the maintenance events
required under the lease return condition and estimates of the expected future maintenance
condition of the aircraft at the time of lease expiry. These estimates take into account current
costs of these maintenance events, estimates of inflation surrounding these costs as well
as assumptions surrounding utilization of the related aircraft. Any difference in the actual
maintenance cost incurred and the amount of the provision is recorded in Aircraft maintenance
expense in the period. The effect of any changes in estimates, including changes in discount
rates, inflation assumptions, cost estimates or lease expiries, is also recognized in Aircraft
maintenance expense in the period. Refer to Note 9(a) for additional information.
2018 ANNUAL REPORT
118 | Consolidated Financial Statements and Notes
> Income taxes
− Income tax assets and liabilities are measured at the amount that is expected to be realized
or incurred upon ultimate settlement with taxation authorities. Such assessments are based
upon the applicable income tax legislation, regulations and interpretations, all of which may be
subject to change and interpretation. Deferred income tax assets and liabilities are composed
of the tax effect of temporary differences between the carrying amount and tax basis of assets
and liabilities, as well as the income tax effect of undeducted income tax losses. The timing
of the reversal of temporary differences is estimated and the income tax rate substantively
enacted for the periods of reversal is applied to the temporary difference. The carrying
amounts of assets and liabilities are subject to the accounting estimates that are inherent
in those balances. Assumptions as to the timing of reversal of temporary differences include
expectations about the future results of operations and future cash flows. Changes in tax laws,
tax rates or expected timing of reversal may have a significant impact on the amounts recorded
for deferred income tax assets and liabilities. Refer to Note 10 Income taxes for additional
information.
Consolidated Financial Statements and Notes | 119
2018 ANNUAL REPORT
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, 2017
At January 1, 2017 $ 7,030 $ 409 $ 184 $ 897 $ 8,520
Additions 1,769 8 29 573 2,379
Reclassifications 309 62 36 (407) -
Disposals (713) - - - (713)
Depreciation (852) (41) (41) - (934)
At December 31, 2017 $ 7,543 $ 438 $ 208 $ 1,063 $ 9,252
At December 31, 2017
Cost $ 11,320 $ 899 $ 545 $ 1,063 $ 13,827
Accumulated depreciation (3,777) (461) (337) - (4,575)
$ 7,543 $ 438 $ 208 $ 1,063 $ 9,252
Year ended December 31, 2018
At January 1, 2018 $ 7,543 $ 438 $ 208 $ 1,063 $ 9,252
Additions 1,579 - 31 429 2,039
Reclassifications 517 42 - (559) -
Disposals (496) - - - (496)
Depreciation (980) (44) (42) - (1,066)
At December 31, 2018 $ 8,163 $ 436 $ 197 $ 933 $ 9,729
At December 31, 2018
Cost $ 12,123 $ 924 $ 567 $ 933 $ 14,547
Accumulated depreciation (3,960) (488) (370) - (4,818)
$ 8,163 $ 436 $ 197 $ 933 $ 9,729
As at December 31, 2018, property and equipment included finance leased assets including 8 aircraft (2017 – 9) with a net book
value of $96 (2017 – $104) and facilities with a net book value of $32 (2017 – $34).
Included in aircraft and flight equipment are 21 aircraft and 16 spare engines (2017 – 21 aircraft and 14 spare engines) which are
leased to CPA carriers with a cost of $395 (2017 – $387) less accumulated depreciation of $157 (2017 – $142) for a net book value of
$238 (2017 – $245). Depreciation expense for 2018 for these aircraft and flight equipment amounted to $25 (2017 – $21).
As further described in Note 21, during 2018, the Corporation sold 25 Embraer 190 aircraft with a cost of $789 less accumulated
depreciation of $308 for a net book value of $481.
Certain property and equipment are pledged as collateral as further described under the applicable debt instrument in Note 7. There
are no impairments recorded as at December 31, 2018.
2018 ANNUAL REPORT
120 | Consolidated Financial Statements and Notes
5. INTANGIBLE ASSETS
International
route rights
and slots
Marketing
based trade
names
Technology
based
(internally
developed)
Total
Year ended December 31, 2017
At January 1, 2017 $ 97 $ 88 $ 130 $ 315
Additions - - 41 41
Amortization - - (38) (38)
At December 31, 2017 $ 97 $ 88 $ 133 $ 318
At December 31, 2017
Cost $ 97 $ 88 $ 458 $ 643
Accumulated amortization - - (325) (325)
$ 97 $ 88 $ 133 $ 318
Year ended December 31, 2018
At January 1, 2018 $ 97 $ 88 $ 133 $ 318
Additions - - 122 122
Amortization - - (36) (36)
At December 31, 2018 $ 97 $ 88 $ 219 $ 404
At December 31, 2018
Cost $ 97 $ 88 $ 579 $ 764
Accumulated amortization - - (360) (360)
$ 97 $ 88 $ 219 $ 404
In 2018, technology-based assets with cost of $1 (2017 – $38) and accumulated amortization of $1 (2017 – $38)
were retired.
Certain international route rights and slots are pledged as security for senior secured notes as described in Note 7.
An annual impairment review is conducted on all intangible assets that have an indefinite life. International route
rights and slots and marketing based trade names are considered to have an indefinite life. The impairment review
is carried out at the cash-generating unit level. On this basis, an impairment review was performed at the narrow-
body and wide-body fleet levels for aircraft and related assets supporting the operating fleet. The allocation of the
indefinite lived intangible assets to the cash-generating units was $138 to wide-body and $47 to narrow-body.
The recoverable amount of the cash-generating units has been measured based on the fair value less cost
to dispose, using a discounted cash flow model. The discounted cash flow model would represent a level 3
fair value measurement within the IFRS 13 fair value hierarchy. Cash flow projections are based on the
annual business plan approved by the Board of Directors of Air Canada. In addition, management-developed
projections are made covering a five-year period. These cash flows are management’s best estimate of future
events taking into account past experience and future economic assumptions, such as the forward curves for
crude-oil and the applicable exchange rates. Cash flows beyond the five-year period are projected to increase
consistent with the long-term growth assumption of the airline industry considering various factors such as
the Corporation’s fleet plans and industry growth assumptions. The discount rate applied to the cash flow
projections is derived from market participant assumptions regarding the Corporation’s weighted average cost
of capital adjusted for taxes and specific risks associated with the cash-generating unit being tested.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 121
Due to the recoverable amount exceeding the carrying value of the cash generating units by a significant
margin, the most recent calculation from the 2017 period was carried forward and used in the impairment test
in the current period. Key assumptions used for the fair value less costs to dispose calculations in fiscal 2017
were as follows:
2017
Discount rate 12.6%
Long-term growth rate 2.5%
Jet fuel price range per barrel US$66 – US$79
The recoverable amount of both cash-generating units exceeded their respective carrying values by an
aggregate amount of approximately $7,400. Reasonably possible changes in key assumptions would not
cause the recoverable amount of each CGU to be less than the carrying value.
6. GOODWILL
Goodwill is tested at least annually for impairment. For the purpose of impairment testing, goodwill is tested
for impairment using the fair value less cost to dispose model at the operating segment level. Air Canada
is managed as one operating segment based on how financial information is produced internally for the
purposes of making operating decisions, and it is the lowest level at which goodwill is monitored for internal
management purposes.
In assessing the goodwill for impairment, the Corporation compares the aggregate recoverable amount
consisting of the sum of its quoted equity market capitalization and the fair value of its debt to the carrying
value of its net assets excluding long term debt. An impairment charge is recognized to the extent that the
carrying value exceeds the recoverable amount. No impairment losses have been recorded against the value
of goodwill since its acquisition.
No impairment charges have arisen as a result of the reviews performed as at December 31, 2018 and 2017.
Reasonably possible changes in key assumptions would not cause the recoverable amount of goodwill to fall
below the carrying value.
2018 ANNUAL REPORT
122 | Consolidated Financial Statements and Notes
7. LONG-TERM DEBT AND FINANCE LEASES
Final
Maturity
Weighted
Average
Interest
Rate (%)
2018
2017
Aircraft financing (a)
Fixed rate U.S. dollar financing 2020 – 2030 3.84 $ 3,592 $ 2,828
Floating rate U.S. dollar financing 2020 – 2027 4.39 676 871
Fixed rate CDN dollar financing 2026 – 2030 3.76 287 -
Floating rate CDN dollar financing 2026 – 2027 2.89 298 332
Fixed rate Japanese yen financing 2027 1.84 146 131
Floating rate Japanese yen financing 2020 – 2027 0.88 42 61
Senior secured notes – CDN dollar (b) 2023 4.75 200 200
Senior unsecured notes – U.S. dollar (c) 2021 7.75 546 503
Other secured financing – U.S. dollar (b) 2023 4.52 786 1,073
Long-term debt 4.22 6,573 5,999
Finance lease obligations (d) 2020 - 2033 9.27 187 223
Total debt and finance leases 4.36 6,760 6,222
Unamortized debt issuance costs (108) (103)
Current portion (455) (671)
Long-term debt and finance leases $ 6,197 $ 5,448
(a) Aircraft financing (US$3,130, C$585 and
JPY ¥15,155) (2017 – US$2,943, C$332 and
JPY ¥17,20 8) is secured primarily by specific aircraft
with a carrying value of $5,575 (2017 – $5,230). For
the majority of the financing, principal and interest
is repayable quarterly until maturity and can be
repaid at any time with the payment of applicable
fees. US$222, C$298 and JPY ¥2,482 of the
financing is supported by a loan guarantee by the
Export-Import Bank of the United States (“EXIM”).
In 2018, in connection with the financing of the
acquisition of one new Boeing 787-9 aircraft and
four new Boeing 737 MAX-8 aircraft, Air Canada
entered into a certificate purchase agreement for
a private offering of two tranches of enhanced
equipment trust certificates with a combined
aggregate face amount of $301 and a weighted
average interest rate of 3.76% per annum, and a
final expected maturity date of 2030. Proceeds
from the offering were disbursed following delivery
of the aircraft. These proceeds are included in fixed
rate CDN dollar financing in the table above.
In 2017, in connection with the financing of four
new Boeing 787-9 and nine new Boeing 737 MAX-8
aircraft, Air Canada completed the closing of a
private offering of three tranches of enhanced
equipment trust certificates (“EETC”) with a
combined aggregate face amount of US$719.
The private offering was comprised of Class AA
certificates, Class A certificates, and Class B
certificates with final expected maturity dates
between 2026 and 2030. The three tranches of
certificates have a combined weighted average
interest rate of 3.42%. Proceeds from the
offering were disbursed during 2018 following
delivery of the aircraft. The principal amount
of US$719 is included in fixed rate U.S. dollar
financing in the table above. Financing fees paid
in conjunction with the offering in 2017 were $10
and are reported in Financing on the consolidated
statement of cash flow.
In 2017, in connection with the acquisition of
four Boeing 787-9 aircraft, the Corporation
completed a financing, maturing in 2027 and
comprised of a principal of US$439 subject to a
floating rate, JPY ¥11,743 subject to a fixed rate
and JPY ¥1,247 subject to a floating rate. These
financings were secured using Japanese Operating
Leases with a Call Option (“JOLCO”) structures
with the transactions recorded as loans and the
aircraft as owned for accounting purposes in the
Corporation’s consolidated financial statements.
Financing fees paid in 2017 in connection with the
JOLCO structures were $13 and are reported in
Financing on the consolidated statement of
cash flow.
In connection with the sales transaction described
in Note 21, long-term debt of $144 (US$109)
related to the Embraer 190 aircraft was repaid
in 2018. The loss recorded in Gain (loss) on debt
settlements and modifications in respect of the
prepayment of such debt was $2.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 123
During 2018, principal of US$35 was prepaid
relating to the financing of three Boeing 777
aircraft. The loss recorded in Gain (loss) on debt
settlements and modifications in respect of the
prepayment of such debt was less than $1.
During 2017, principal of US$27 was prepaid
relating to the financing of one A330 aircraft and
principal of US$25 relating to the financing of four
Embraer 190 aircraft. A loss of $5 is included in
Gain (loss) on debt settlements and modifications
related to the prepayment of such fixed rate debt.
(b) In October 2016, as part of a refinancing
transaction, Air Canada entered into a purchase
agreement with a syndicate of initial purchasers
relating to a private offering of $200 aggregate
principal amount of 4.75% senior secured first lien
notes due 2023 (the “2016 Senior Notes”), which
were sold at par. Air Canada also received proceeds
of a US$800 term loan, maturing in 2023, and
entered into a new US$300 revolving credit facility
expiring in 2021 (collectively with the term loan,
the “2016 Credit Facility”). The revolving credit
facility had an initial interest rate of 275 basis
points over LIBOR (subject to a LIBOR floor of
75 basis points).
In June 2017, Air Canada completed a repricing of
its US$1.1 billion 2016 Credit Facility, reducing the
interest rate by 50 basis points, to an interest rate
of 225 basis points over LIBOR (subject to a LIBOR
floor of 75 basis points). The Corporation recorded
a $27 Gain on debt settlements and modifications
related to this transaction.
In February 2018, Air Canada completed a second
repricing of its US$1.1 billion 2016 Credit Facility,
reducing the interest rate by 25 basis points, to
an interest rate of 200 basis points over LIBOR
(subject to a LIBOR floor of 75 basis points).
The Corporation recorded an $11 Gain on debt
settlements and modifications related to this
transaction.
In December 2018, Air Canada amended the 2016
Credit Facility. The amendment had the effect of
increasing the revolving credit facility to US$600,
reducing the outstanding term loan to US$600,
concurrent with the additional repayment of
US$192 of outstanding term loan, and extending
the revolving loan commitment termination date
to 2023. This repayment was made within the
initial terms of the loan agreement.
In December 2018, Air Canada entered into a
new $200 revolving credit facility. The facility is
available until 2021 and, if drawn, would be secured
by certain designated aircraft. No amounts have
been drawn on the facility at December 31, 2018.
Air Canada may redeem some or all of the 2016
Senior Notes at any time on or after October 6,
2019 at certain established redemption prices, plus
accrued and unpaid interest. At any time prior to
October 6, 2019, Air Canada may redeem some
or all of the 2016 Senior Notes at a price equal
to 100% of their principal amount redeemed
plus a “make-whole” premium and accrued and
unpaid interest. At any time prior to October 6,
2019, Air Canada may redeem up to 35% of the
aggregate principal amount of the 2016 Senior
Notes with the proceeds of certain equity
offerings, at established redemption prices, plus
accrued and unpaid interest. In addition, at any
time and from time to time prior to October 6,
2021, Air Canada may redeem, during any twelve-
month period, up to 10% of the original aggregate
principal amount of the 2016 Senior Notes at a
redemption price of 103% of the principal amount,
plus accrued and unpaid interest.
The 2016 Senior Notes and the Corporation’s
obligations under the 2016 Credit Facility are
senior secured obligations of Air Canada, secured
on a first lien basis, subject to certain permitted
liens and exclusions, by certain real estate
interests, ground service equipment, certain
airport slots and gate leaseholds, and certain
Pacific routes and the airport slots and gate
leaseholds utilized in connection with those
Pacific routes.
Other U.S. dollar secured financings are floating
rate financings that are secured by certain assets
including assets described above relating to the
2016 Credit Facility. As described above, during
2018, the Corporation prepaid US$192 of the
outstanding term loan. As at December 31, 2018,
the Corporation had not drawn on the revolving
credit facility and the outstanding term loan
principal was US$598 (2017 - US$798 principal).
(c) Private offering of US$400 of 7.75% senior
unsecured notes due 2021, with interest payable
semi-annually. Air Canada may at any time and
from time to time redeem some or all of the senior
unsecured notes at a redemption price equal to
the greater of (i) 100% of the principal amount of
the notes being redeemed and (ii) a “make-whole”
amount, if any, plus, in either case accrued and
unpaid interest.
(d) Finance leases, related to facilities and aircraft,
total $187 ($61 and US$92) (2017 - $223 ($64 and
US$126)). During 2018, the Corporation recorded
interest expense on finance lease obligations of
$19 (2017 – $23). The carrying value of aircraft and
facilities under finance leases amounted to $96 and
$32 respectively (2017 – $104 and $34).
Cash interest paid on Long-term debt and finance
leases in 2018 by the Corporation was $281
(2017 – $287).
2018 ANNUAL REPORT
124 | Consolidated Financial Statements and Notes
Maturity Analysis
Principal and interest repayment requirements as at December 31, 2018 on Long-term debt and finance
lease obligations are as follows. U.S. dollar amounts are converted using the December 31, 2018 closing rate
of C$1.3637.
2019 2020 2021 2022 2023 Thereafter Total
Principal
Long-term debt obligations $ 407 $ 640 $ 1,003 $ 342 $ 1,450 $ 2,731 $ 6,573
Finance lease obligations 48 50 17 15 16 41 187
$ 455 $ 690 $ 1,020 $ 357 $ 1,466 $ 2,772 $ 6,760
Interest
Long-term debt obligations 273 258 214 176 151 346 1,418
Finance lease obligations 14 10 6 5 4 10 49
$ 287 $ 268 $ 220 $ 181 $ 155 $ 356 $ 1,467
Principal repayments in the table above exclude transaction costs of $108 which are offset against Long-term
debt and finance leases in the consolidated statement of financial position.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 125
Cash flows from financing activities
Information on the change in liabilities for which cash flows have been classified as financing activities in the statement of cash flows
is presented below.
Cash Flows Non-Cash Changes
January 1,
2018
Borrowings Repayments Financing
Fees
Foreign
exchange
adjustments
Amortization
of Financing
Fees
Other
Non-Cash
Adjustments
December 31,
2018
Long term debt $ 5,999 $ 1,210 $ (1,122) $ - $ 492 $ - $ (6) $ 6,573
Lease liabilities 223 - (45) - 9 - - 187
Unamortized debt
issuance costs
(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
January 1,
2017
Borrowings Repayments Financing
Fees
Foreign
exchange
adjustments
Amortization
of Financing
Fees
Other
Non-Cash
Adjustments
December 31,
2017
Long term debt $ 6,447 $ 733 $ (766) $ - $ (392) $ - $ (23) $ 5,999
Lease liabilities 275 - (42) - (10) - - 223
Unamortized debt
issuance costs
(104) - - (16) - 17 - (103)
Total liabilities
from financing
activities
$ 6,618 $ 733 $ (808) $ (16) $ (402) $ 17 $ (23) $ 6,119
In 2017, financing fees of $10 paid in conjunction with the 2017 EETC offering were reported in Financing on the consolidated
statement of cash flow but excluded from this table. These fees were recorded in Deposits and other assets until delivery of the
aircraft and related recognition of long-term debt. Loss on debt settlements of $3 (2017 - $6) is included in Reduction of long-term
debt and finance lease obligations on the consolidated statement of cash flow but excluded from this table.
2018 ANNUAL REPORT
126 | Consolidated Financial Statements and Notes
8. PENSIONS AND OTHER BENEFIT LIABILITIES
The Corporation maintains several defined benefit and defined contribution plans providing pension, other
post-retirement and post-employment benefits to its employees.
The Corporation is the administrator and sponsoring employer of eight Domestic Registered Plans (“Domestic
Registered Plans”) with defined benefit commitments registered under the Pension Benefits Standard Act, 1985
(Canada). The U.S. plan, UK plan and Japan plan are international plans covering members in those countries.
In addition, the Corporation maintains a number of supplementary pension plans which are not registered. The
defined benefit pension plans provide benefits upon retirement, termination or death based on the member’s
years of service and final average earnings for a specified period. Benefit payments are from trustee-administered
funds, however there are also a number of unfunded plans where the Corporation meets the benefit payment
obligation as it falls due. Plan assets held in trusts are governed by regulations. The governance of the plans,
overseeing all aspects of the plans including investment decisions and contributions, lies primarily with the
Corporation. The Human Resources and Compensation Committee, a committee of the Board of Directors,
assists in the monitoring and oversight of the plans to ensure pension liabilities are appropriately funded,
pension assets are prudently invested, risk is managed at an acceptable level and retirement benefits are
administered in a proper and effective manner.
Other employee benefits include health, life and disability. These benefits consist of both post-employment
and post-retirement benefits. The post-employment benefits relate to disability benefits available to eligible
active employees, while the post-retirement benefits are comprised of health care and life insurance benefits
available to eligible retired employees.
Pension Plan Cash Funding Obligations
Pension funding obligations (including projected funding obligations) may vary significantly based on a wide
variety of factors, including the assumptions used in the most recently filed actuarial valuation reports
(including the applicable discount rate used or assumed in the actuarial valuation), the plan demographics
at the valuation date, the existing plan provisions, legislative and regulatory developments and changes
in economic conditions (mainly the return on plan assets and changes in interest rates) and other factors.
Actual contributions that are determined on the basis of future valuation reports may vary significantly from
projections.
As at January 1, 2018, the aggregate solvency surplus in the domestic registered pension plans was $2.6 billion.
The next required valuation to be made as at January 1, 2019 will be completed in the first half of 2019. With
the Corporation’s domestic registered pension plans in a solvency surplus position as at January 1, 2018, past
service cost payments were not required in 2018. In addition, in accordance with legislation and applicable
plan rules, the excess over 105% on a solvency basis can be used to reduce current service contributions under
the defined benefit component or to fund the employer contribution to a defined contribution component
within the same pension plan. Based on that, and including the international and supplemental plans, the total
employer pension funding contributions during 2018 amounted to $83 ($94 employer contribution net of $11
used to fund employer contribution in defined contribution components of the same plans). Pension funding
obligations for 2019 are expected to be $93.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 127
Benefit Obligation and Plan Assets
These consolidated financial statements include all of the assets and liabilities of all Corporation-sponsored
plans. The amounts recorded in the statement of financial position are as follows:
Pension
Benefits
Other
Employee
Future
Benefits
Total
2018
2017
2018
2017
2018
2017
Non-current assets
Pension assets $ 1,969 $ 1,583 $ - $ - $ 1,969 $ 1,583
Current liabilities
Accounts payable and accrued liabilities - - 60 61 60 61
Non-current liabilities
Pension and other benefit liabilities 1,328 1,311 1,219 1,281 2,547 2,592
Net benefit obligation (asset) $ (641) $ (272) $ 1,279 $ 1,342 $ 638 $ 1,070
The current portion of the net benefit obligation represents an estimate of other employee future benefits
claims to be paid during 2019.
2018 ANNUAL REPORT
128 | Consolidated Financial Statements and Notes
The following table presents financial information related to the changes in the pension and other post-
employment benefits plans:
Pension
Benefits
Other
Employee
Future
Benefits
2018
2017
2018
2017
Change in benefit obligation
Benefit obligation at beginning of year $ 20,260 $ 19,135 $ 1,342 $ 1,301
Current service cost 304 265 35 30
Past service cost 5 - (8) -
Interest cost 723 739 48 51
Employees’ contributions 82 81 - -
Benefits paid (862) (845) (48) (47)
Remeasurements:
Experience loss (gain) (11) 34 (28) (45)
Loss (gain) from change in demographic assumptions (262) - (14) -
Loss (gain) from change in financial assumptions (583) 855 (56) 64
Plan settlements - - (6) -
Foreign exchange loss (gain) 34 (4) 14 (12)
Total benefit obligation 19,690 20,260 1,279 1,342
Change in plan assets
Fair value of plan assets at beginning of year 21,191 19,438 - -
Return on plan assets, excluding amounts included in Net
financing expense
(399) 1,708 - -
Interest income 745 739 - -
Employer contributions 83 81 51 47
Employees’ contributions 82 81 - -
Benefits paid (862) (845) (48) (47)
Settlements - - (3) -
Administrative expenses paid from plan assets (12) (12) - -
Foreign exchange gain (loss) 29 1 - -
Total plan assets 20,857 21,191 - -
(Surplus) deficit at end of year (1,167) (931) 1,279 1,342
Asset ceiling / additional minimum funding liability 526 659 - -
Net benefit obligation (asset) $ (641) $ (272) $ 1,279 $ 1,342
The actual return on plan assets was $346 (2017 – $2,447).
The pension benefit deficit of only those plans that are not fully funded is as follows:
2018
2017
Domestic registered plans $ 4 $ 3
International plans 85 78
Supplementary plans 1,239 1,230
$ 1,328 $ 1,311
The weighted average duration of the defined benefit obligation is 14.2 years (2017 – 14.3 years).
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 129
Pension and Other Employee Future Benefit Expense
The Corporation has recorded net defined benefit pension and other employee future benefits expense as follows:
Pension
Benefits
Other
Employee
Future
Benefits
2018
2017
2018
2017
Consolidated Statement of Operations
Components of cost
Current service cost $ 304 $ 265 $ 35 $ 30
Past service cost 5 - (8) -
Plan settlements - - (3) -
Administrative and other expenses 12 12 - -
Actuarial gains, including foreign exchange - - (4) (7)
Total cost recognized in Wages, salaries and benefits $ 321 $ 277 $ 20 $ 23
Net financing expense relating to employee benefits $ 2 $ 14 $ 48 $ 51
Total cost recognized in statement of operations $ 323 $ 291 $ 68 $ 74
Consolidated Other Comprehensive (Income) Loss
Remeasurements:
Experience loss (gain), including foreign exchange (6) 29 (10) (50)
Loss (gain) from change in demographic assumptions (262) - (14) -
Loss (gain) from change in financial assumptions (583) 855 (56) 64
Return on plan assets 399 (1,708) - -
Change in asset ceiling (159) 299 - -
Total cost (income) recognized in OCI $ (611) $ (525) $ (80) $ 14
In 2018, the Corporation offered a voluntary buyout program for retiree life and health benefits. The accepted
offers were recognized as a plan amendment and settlement for a combined gain of $8.
Certain plan amendments made in conjunction with the 2014 ACPA collective agreement were or are
conditional on meeting defined business plan targets tied to the number of operating aircraft in the fleet by
2020 and 2023. During the year ended December 31, 2018, actuarial losses of $43 (2017 - actuarial losses of
$35) were recognized in other comprehensive income related to changes in assumptions associated with cost
of pension increases applicable to affected members of ACPA.
The funding of employee benefits as compared to the expense recorded in the consolidated statement of
operations is summarized in the table below.
2018
2017
Net defined pension and other future employee benefits expense recorded in
the consolidated statement of operations
Wages, salaries and benefits $ 341 $ 300
Net financing expense relating to employee benefit liabilities 50 65
$ 391 $ 365
Employee benefit funding by Air Canada
Pension benefits $ 83 $ 81
Other employee benefits 51 47
$ 134 $ 128
Employee benefit funding less than expense $ 257 $ 237
2018 ANNUAL REPORT
130 | Consolidated Financial Statements and Notes
Composition of Defined Benefit Pension Plan Assets
Domestic Registered Plans
The composition of the Domestic Registered Plan assets and the target allocation are the following:
2018
2017 Target
Allocation
Bonds 71% 70% 60%
Canadian equities 3% 3% 7%
Foreign equities 6% 7% 13%
Alternative investments 20% 20% 20%
100% 100% 100%
For the Domestic Registered Plan assets, approximately 80% of assets as of December 31, 2018 have a quoted
market price in an active market. Assets that do not have a quoted market price in an active market are mainly
investments in privately held entities. The asset composition in the table represents the allocation of plan
assets to each asset type.
Included in plan assets, for determining the net benefit obligation for accounting purposes, are 17,646,765
(2017 - 17,646,765) shares of Air Canada which were issued to a trust in 2009 in connection with pension
funding agreements reached with all of the Corporation’s Canadian-based unions. The trust arrangement
provides that proceeds of any sale of the trust shares will be retained and applied to reduce future pension
solvency deficits, if any should materialize. With the Corporation’s domestic registered pension plans now in
a surplus position on a solvency basis, the accounting rules prevent the recognition of the value of the shares
held in trust as part of the pension assets. The shares held in trust have a fair value of $458 at December 31,
2018 (2017 - $457), however after giving effect to the asset ceiling, the recognized accounting value of the
trust asset is nil.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 131
For the Domestic Registered Plans, the investments conform to the Statement of Investment Policy and
Objectives of the Air Canada Pension Funds. As permitted under the investment policy, the actual asset mix
may deviate from the target allocation from time to time. The deviations at December 31, 2018 are within the
limits established in the investment policy. The investment return objective is to achieve a total annualized
rate of return that exceeds by a minimum of 1.0% before investment fees on average over the long term (i.e. 10
years) the total annualized return that could have been earned by passively managing the Liability Replicating
Portfolio. The Liability Replicating Portfolio, which is referenced to widely used Canadian fixed income indices
(FTSE TMX Canada), closely matches the characteristics of the pension liabilities.
Recognizing the importance of surplus risk management, Air Canada manages the Domestic Registered
Plans in an effort to mitigate surplus risk (defined as the difference between asset value and pension liability
value), which is considered to be the key risk to be minimized and monitored. In addition, the objective of the
investment strategy is to invest the plan assets in a prudent and diversified manner to mitigate the risk of price
fluctuation of asset classes and individual investments within those asset classes and to combine those asset
classes and individual investments in an effort to reduce overall risk.
In addition to the broad asset allocation, as summarized in the asset allocation section above, the following
policies apply to individual asset classes invested within the pension funds:
> Equities are required to be diversified among regions, industries and economic sectors.
Limitations are placed on the overall allocation to any individual security.
> Alternative investments are investments in non-publicly traded securities and in non-traditional
asset classes. They may comprise, but are not limited to, investments in real estate, agriculture,
timber, private equity, venture capital, infrastructure, emerging markets debt, high yield bonds
and commodity futures. Alternative investments are required to be diversified by asset class,
strategy, sector and geography.
> Canadian bonds are oriented toward long term investment grade securities rated “BBB” or
higher. With the exception of Government of Canada securities or a province thereof or the U.S.
Government, in which the plan may invest the entire fixed income allocation, these investments
are required to be diversified among individual securities and sectors.
Derivatives are permitted provided that they are used for managing a particular risk (including interest rate risk
related to pension liabilities) or to create exposures to given markets and currencies and that counterparties
have a minimum credit rating of A. The Corporation manages interest rate risk related to its actuarial liabilities
through a combination of financial instruments including, but not limited to, bonds, bond repurchase and
reverse repurchase agreements, bond forwards, bond futures and interest rate swaps. As at December 31,
2018, taking into account the effect of such financial instrument risk management tools, approximately 81%
of Air Canada’s pension liabilities were matched with fixed income products to mitigate a significant portion
of the interest rate (discount rate) risk. Counterparty credit risk associated with such financial instruments
is mitigated by receiving collateral from counterparties based on collateralization agreements, as well as by
monitoring the counterparties’ credit ratings and ensuring compliance with the investment policy. The fair
value of these derivative instruments is included in the Bonds in the asset composition table and is not a
significant component of the aggregate bond fair values of the portfolio.
The trusts for the supplemental plans are invested 50% in indexed equity investments, in accordance with
their investment policies, with the remaining 50% held by the Canada Revenue Agency as a refundable tax,
in accordance with tax legislation.
2018 ANNUAL REPORT
132 | Consolidated Financial Statements and Notes
Risks
Through its defined benefit pension plans, the Corporation is exposed to a number of risks, the most significant
of which are detailed below:
Asset risk
Asset risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of
changes in market price. Asset risk comprises currency risk, credit risk, and other price risk. Currency risk is
the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in
foreign exchange rates. This risk is mitigated through implementation of hedging strategies. Credit risk is the
risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge
an obligation. This risk is mitigated by receiving collateral from counterparties based on collateralization
agreements and by monitoring the issuers’ credit risk. Other price risk is the risk the fair value or future cash
flows of a financial instrument will fluctuate because of changes in market prices (other than those arising
from currency risk), whether those changes are caused by factors specific to the individual financial instrument
or its issuer, or factors affecting all similar financial instruments traded in the market. This risk is mitigated
through proper diversification of plan assets.
Interest rate risk
Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate
because of changes in market interest rates. A decrease in corporate and/or government bond yields will
increase plan liabilities, which will be partially offset by an increase in the value of the plans’ bond holdings. As
at December 31, 2018, approximately 81% of Air Canada’s pension liabilities (including the effect of financial
instrument risk management tools) were matched with fixed income products to mitigate a significant portion
of the interest rate risk (discount rate risk).
Funding risk
Adverse changes in the value of plan assets or in interest rates, and therefore in the discount rate used to
value liabilities, could have a significant impact on pension plan solvency valuations and future cash funding
requirements.
Life expectancy
The majority of the plans’ obligations are to provide benefits for the life of the member, so increases in life
expectancy will result in an increase in the plans’ liabilities.
Assumptions
Management is required to make significant estimates about actuarial and financial assumptions to determine
the cost and related liabilities of the Corporation’s employee future benefits.
Discount Rate
The discount rate used to determine the pension obligation was determined by reference to market interest
rates on corporate bonds rated “AA” or better with cash flows that approximate the timing and amount of
expected benefit payments.
Future Increases in Compensation
Estimates surrounding assumptions of future increases in compensation are based upon the current
compensation policies, the Corporation’s long range-plans, labour and employment agreements and economic
forecasts.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 133
The significant weighted average assumptions used to determine the Corporation’s accrued benefit obligations
and cost are as follows:
Pension
Benefits
Other
Employee
Future
Benefits
2018
2017
2018
2017
Discount rate used to determine:
Net interest on the net defined benefit obligation
for the year ended December 31
3.60% 3.90% 3.60% 3.90%
Service cost for the year ended December 31 3.70% 4.10% 3.70% 4.10%
Accrued benefit obligation as at December 31 3.81% 3.60% 3.81% 3.60%
Rate of future increases in compensation
used to determine:
Accrued benefit cost and service cost for the
year ended December 31
2.50% 2.50%
not
applicable
not
applicable
Accrued benefit obligation as at December 31 2.50% 2.50%
not
applicable
not
applicable
Sensitivity Analysis
Sensitivity analysis is based on changing one assumption while holding all other assumptions constant. In
practice, this may be unlikely to occur, and changes in some of the assumptions may be correlated. When
calculating the sensitivity of the defined benefit obligation to variations in significant actuarial assumptions,
the same method (present value of the defined benefit obligation calculated with the projected unit credit
method at the end of the reporting period) has been applied as for calculating the liability recognized in the
consolidated statement of financial position.
Sensitivity analysis on 2018 pension expense and net financing expense relating to pension benefit liabilities,
based on different actuarial assumptions with respect to discount rate is set out below. The effects on each
pension plan of a change in an assumption are weighted proportionately to the total plan obligation to
determine the total impact for each assumption presented.
0.25 Percentage Point
Decrease Increase
Discount rate on obligation assumption
Pension expense $ 22 $ (21)
Net financing expense relating to pension benefit liabilities 23 (21)
$ 45 $ (42)
Increase (decrease) in pension obligation $ 703 $ (680)
The increase (decrease) in the pension obligation for a 0.25 percentage point change in the discount rate
relates to the gross amount of the pension liabilities and is before the impact of any change in plan assets. As
at December 31, 2018, approximately 81% of Air Canada’s pension liabilities were matched with fixed income
products to mitigate a significant portion of the interest rate (discount rate) risk.
An increase of one year in life expectancy would increase the pension benefit obligation by $478.
2018 ANNUAL REPORT
134 | Consolidated Financial Statements and Notes
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care
plans. A 5.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for
2018 (2017 – 5.8%). The rate is assumed to decrease gradually to 5% by 2020 (2017 – assumed to decrease
gradually to 5% by 2020). A one percentage point increase in assumed health care trend rates would have
increased the total of current service and interest costs by $4 and the obligation by $55. A one percentage
point decrease in assumed health care trend rates would have decreased the total of current service and
interest costs by $4 and the obligation by $58.
A 0.25 percentage point decrease in discount rate for other employee future benefits would have increased the
total of current and interest costs by less than $1 and the obligation by $47. A 0.25 percentage point increase
in discount rate would have decreased the total of current and interest costs by less than $1 and the obligation
by $44.
Defined Contribution Pension Plans
Certain of the Corporation’s management, administrative and unionized employees participate in a defined
contribution pension plan, a defined contribution component of a plan which also includes a defined benefit
component or a multi-employer plan which are accounted for as defined contribution plans. The Corporation
contributes an amount expressed as a percentage of employees’ contributions with such percentage varying by
group and for some groups, based on the number of years of service. As permitted by legislation and applicable
plan rules, surplus in the defined benefit component can be used to cover the employer contributions in the
defined contribution component of such plan. As such, $11 of surplus in the defined benefit components of the
domestic registered pension plans was used to cover the employer contributions in the defined contribution
components during 2018 (2017 – $9).
The Corporation’s expense for these pension plans amounted to $30 for the year ended December 31, 2018
(2017 – $21). Taking into account available surplus in the defined benefit components of applicable plans which
may be expected to be used, expected total employer contributions for 2019 are $22.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 135
9. PROVISIONS FOR OTHER LIABILITIES
The following table provides a continuity schedule of all recorded provisions. Refer to Note 16 for additional
information on Litigation provisions. Current provisions are recorded in Accounts payable and accrued
liabilities.
Maintenance
(a)
Asset
retirement
(b)
Litigation Total
provisions
At December 31, 2017
Current $ 68 $ - $ 17 $ 85
Non-current 1,003 30 - 1,033
$ 1,071 $ 30 $ 17 $ 1,118
Provisions arising during the year $ 145 $ - $ 2 $ 147
Amounts disbursed - - (2) (2)
Changes in estimated costs (72) - - (72)
Accretion expense 25 1 - 26
Foreign exchange loss 96 - - 96
At December 31, 2018 $ 1,265 $ 31 $ 17 $ 1,313
Current $ 147 $ - $ 17 $ 164
Non-current 1,118 31 - 1,149
$ 1,265 $ 31 $ 17 $ 1,313
(a) Maintenance provisions relate to the provision for the costs to meet the contractual return conditions
on aircraft under operating leases. The provision relates to leases with expiry dates ranging from 2019 to
2029 with the average remaining lease term of approximately three years. The maintenance provisions
take into account current costs of maintenance events, estimates of inflation surrounding these costs
as well as assumptions surrounding utilization of the related aircraft. Assuming the aggregate cost for
return conditions increases by 5%, holding all other factors constant, there would be a cumulative balance
sheet adjustment to increase the provision by $62 at December 31, 2018 and an increase to maintenance
expense in 2019 of approximately $6. Expected future cash flows to settle the obligation are discounted. If
the discount rates were to increase by 1%, holding all other factors constant, there would be a cumulative
balance sheet adjustment to decrease the provision by $21 at December 31, 2018. An equivalent but
opposite movement in the discount rate would result in a similar impact in the opposite direction.
(b) Under the terms of certain land and facilities leases, the Corporation has an obligation to restore the
land to vacant condition at the end of the lease and to rectify any environmental damage for which it is
responsible. The related leases expire over terms ranging from 2019 to 2078. These provisions are based on
numerous assumptions including the overall cost of decommissioning and remediation and the selection of
alternative decommissioning and remediation approaches. The non-current provision is recorded in Other
long-term liabilities.
2018 ANNUAL REPORT
136 | Consolidated Financial Statements and Notes
10. INCOME TAXES
Income Tax Expense
Income tax recorded in the consolidated statement of operations is presented below.
2018
2017
Restated - Note 2
Current income tax $ (6) $ (16)
Deferred income tax (232) 759
Income tax (expense) recovery $ (238) $ 743
The income tax expense differs from the amount that would have resulted from applying the statutory income
tax rate to income before income tax expense as follows:
2018
2017
Restated - Note 2
Income before income taxes $ 405 $ 1,286
Statutory income tax rate based on combined federal and provincial rates 26.78% 26.60%
Income tax expense based on statutory tax rates (108) (342)
Effects of:
Non-taxable (non-deductible) portion of capital gains (losses) (55) 52
Unrecognized deferred income tax assets on capital losses (55) -
Non-deductible expenses (21) (24)
Tax rate changes on deferred income taxes 2 (9)
Recognition of previously unrecognized deferred income tax assets - 1,062
Other (1) 4
Income tax (expense) recovery $ (238) $ 743
The applicable statutory tax rate is 26.78% (2017 – 26.60%). The Corporation’s applicable tax rate is the
Canadian combined rates applicable in the jurisdictions in which the Corporation operates. The increase to the
statutory tax rate is mainly due to the net result of corporate income tax rate decreases in Quebec and the
Yukon, and an increase in Saskatchewan, as well as changes in the level of activity by province.
Income tax recorded in the consolidated statement of comprehensive income is presented below.
2018
2017
Remeasurements on employee benefit liabilities - deferred income tax $ (188) $ (322)
Income tax expense $ (188) $ (322)
The income tax expense differs from the amount that would have resulted from applying the statutory income
tax rate to other comprehensive income before income tax expense as follows:
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 137
2018
2017
Other comprehensive income before income taxes $ 691 $ 508
Statutory income tax rate based on combined federal and provincial rates 26.78% 26.60%
Income tax expense based on statutory tax rates (185) (135)
Effects of:
Recognition of previously unrecognized deferred income tax liability - (184)
Other (3) (3)
Income tax expense $ (188) $ (322)
Income tax recorded in shareholders’ equity is presented below.
2018
2017
Share-based compensation $ - $ 19
Income tax recovery $ - $ 19
Deferred Income Tax
Deferred income tax assets are recognized only to the extent that it is probable that future taxable income
will be available to realize them. In making this assessment, consideration is given to available positive and
negative evidence and relevant assumptions, including, historical financial results, and expectations relating
to future taxable income, the overall business environment, and industry-wide trends.
During 2017, Air Canada determined that it was probable that substantially all of the deferred income tax
assets, which include non-capital losses, would be realized.
Deferred tax assets and liabilities of $39 are recorded net as a noncurrent deferred income tax asset and
deferred tax liabilities of $52 are recorded as a noncurrent deferred income tax liability on the consolidated
statement of financial position. Certain intangible assets with nominal tax cost and a carrying value of $185
have indefinite lives and accordingly, the associated deferred income tax liability of $49 (2017 - $49) is not
expected to reverse until the assets are disposed of, become impaired or amortizable and as a result is
included as part of the noncurrent deferred income tax liability.
The significant components of deferred income tax assets and liabilities were as follows:
2018
2017
Restated - Note 2
Deferred income tax assets
Non-capital losses $ 353 $ 649
Post-employment obligations 171 286
Accounting provisions not currently deductible for tax 67 61
Investment tax credits and recoverable taxes 37 31
Other 28 34
656 1,061
Deferred income tax liabilities
Property, equipment and technology-based intangibles (555) (554)
Indefinite-lived intangible assets (49) (49)
Other (65) (51)
(669) (654)
Net recognized deferred income tax assets (liabilities) (13) 407
Balance sheet presentation
Deferred income tax assets 39 456
Deferred income tax liabilities (52) (49)
Net recognized deferred income tax assets (liabilities) (13) 407
2018 ANNUAL REPORT
138 | Consolidated Financial Statements and Notes
The following table presents the variation of the components of deferred income tax balances:
January 1, 2018
Restated - Note 2
2018 income
statement
movement
2018 OCI
movement
December 31,
2018
Non-capital losses $ 649 $ (296) $ - $ 353
Post-employment obligations 286 73 (188) 171
Accounting provisions not currently
deductible for tax
61 6 - 67
Investment tax credits and
recoverable taxes
31 6 - 37
Other deferred tax assets 34 (6) - 28
Property, equipment and
technology-based intangibles
(554) (1) - (555)
Indefinite-lived intangible assets (49) - - (49)
Other deferred tax liabilities (51) (14) - (65)
Total recognized deferred income
tax assets (liabilities)
$ 407 $ (232) $ (188) $ (13)
At December 31, 2018, the Corporation has deductible temporary differences of a capital nature for which
no deferred income tax asset has been recognized at this time as the ability to utilize these tax attributes is
limited to future taxable capital gains. Net capital losses do not have an expiry date.
The following are the temporary differences and tax loss carryforwards for which no deferred income tax
assets could be recognized:
2018
2017
Unrealized foreign exchange losses $ 230 $ 62
Unrecognized net capital losses carryforwards 84 40
Total unrecognized net temporary differences $ 314 $ 102
Deferred income tax rate based on combined federal and provincial rates 26.75% 26.79%
Total unrecognized net deferred income tax assets 84 27
The following are the Federal non-capital tax losses expiry dates:
Tax Losses
2029 $ 36
2030 39
2031 6
2032 489
2033 403
2034 3
2035 244
2036 3
2037 2
2038 2
Non-capital losses carryforwards $ 1,227
Cash income taxes paid in 2018 by the Corporation were $32 (2017 – $1).
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 139
11. SHARE CAPITAL
Number of
shares
Value
At January 1, 2017 273,212,802 $ 797
Shares issued on the exercise of stock options 3,906,662 14
Shares purchased and cancelled under issuer bid (4,042,818) (12)
At December 31, 2017 273,076,646 $ 799
Shares issued on the exercise of stock options 667,0 87 8
Shares purchased and cancelled under issuer bid (3,013,822) (9)
At December 31, 2018 270,729,911 $ 798
The issued and outstanding shares of Air Canada, along with the potential shares, were as follows:
2018
2017
Issued and outstanding
Class A variable voting shares 125,214,350 115,986,084
Class B voting shares 145,515,561 157,090,562
Total issued and outstanding 270,729,911 273,076,646
Potential shares
Stock options
Note 12
6,014,464 6,121,252
Total outstanding and potentially issuable shares 276,744,375 279,197,89 8
Shares
As at December 31, 2018, the shares issuable by Air Canada consist of an unlimited number of Class A Variable
Voting Shares (“Variable Voting Shares”) and an unlimited number of Class B Voting Shares (“Voting Shares”).
The two classes of shares have equivalent rights as shareholders except for voting rights. Holders of Variable
Voting Shares are entitled to one vote per share unless (i) the number of Variable Voting Shares outstanding, as a
percentage of the total number of voting shares of Air Canada exceeds 25% or (ii) the total number of votes cast
by or on behalf of holders of Variable Voting Shares at any meeting exceeds 25% of the total number of votes that
may be cast at such meeting. If either of the above noted thresholds would otherwise be surpassed at any time,
the vote attached to each Variable Voting Share will decrease proportionately such that (i) the Variable Voting
Shares as a class do not carry more than 25% of the aggregate votes attached to all issued and outstanding Voting
Shares of Air Canada and (ii) the total number of votes cast by or on behalf of holders of Variable Voting Shares at
any meeting do not exceed 25% of the votes that may be cast at such meeting.
Variable Voting Shares may only be held, beneficially owned or controlled, directly or indirectly, by persons
who are not Canadians (within the meaning of the Canada Transportation Act). An issued and outstanding
Variable Voting Share is converted into one Voting Share automatically and without any further act of
Air Canada or the holder, if such Variable Voting Share becomes held, beneficially owned and controlled,
directly or indirectly, otherwise than by way of security only, by a Canadian, as defined in the Canada
Transportation Act.
Voting Shares may only be held, beneficially owned and controlled, directly or indirectly, by Canadians. An
issued and outstanding Voting Share is converted into one Variable Voting Share automatically and without
any further act of Air Canada or the holder, if such Voting Share becomes held, beneficially owned or controlled,
directly or indirectly, otherwise than by way of security only, by a person who is not a Canadian.
2018 ANNUAL REPORT
140 | Consolidated Financial Statements and Notes
Shareholder Rights Plan
Under the terms of the shareholder rights plan agreement (the “Rights Plan”), effective until the day after
Air Canada’s 2020 annual meeting of shareholders, one right (a “Right”) is issued with respect to each share
of Air Canada issued and outstanding. These Rights would become exercisable only when a person, including
any party related to it, acquires or announces its intention to acquire 20% or more of the outstanding shares
of Air Canada calculated on a combined basis, without complying with the “Permitted Bid” provisions of the
Rights Plan or, in certain cases, without the approval of the Board. Until such time, the Rights are not separable
from the shares, are not exercisable and no separate rights certificates are issued. To qualify as a “Permitted
Bid” under the Rights Plan, a bid must, among other things: (i) be made to all holders of shares, (ii) remain
open for a period of not less than 105 days (or such shorter minimum period determined in accordance with
National Instrument 62-104 - Take-Over Bids and Issuer Bids (“NI 62-104”), (iii) provide that no shares shall
be taken up unless more than 50% of the then outstanding shares, other than the shares held by the person
pursuing the acquisition and parties related to it, have been tendered and not withdrawn, and (iv) provide that
if such 50% condition is satisfied, the bid will be extended for at least 10 days to allow other shareholders to
tender.
Following the occurrence of an event which triggers the right to exercise the Rights and subject to the terms
and conditions of the Rights Plan, each Right would entitle the holders thereof, other than the acquiring person
or any related persons, to exercise their Rights and purchase from Air Canada two hundred dollars’ worth of
shares for one hundred dollars (i.e. at a 50% discount to the market price at that time). Upon such exercise,
holders of rights beneficially owned and controlled by Qualified Canadians would receive Class B Voting Shares
and holders of rights beneficially owned or controlled by persons who are not Qualified Canadians would
receive Class A Variable Voting Shares.
Issuer Bid
In May 2017, Air Canada received approval from the Toronto Stock Exchange (“TSX”) for the renewal of
its normal course issuer bid, authorizing, between May 31, 2017 and May 30, 2018, the purchase of up
to 22,364,183 shares, representing 10% of the public float as at May 17, 2017. The renewal followed the
conclusion of the 2016 normal course issuer bid which expired on May 29, 2017.
In 2017, the Corporation purchased, for cancellation, 4,042,818 shares at an average cost of $17.49 per share
for aggregate consideration of $71. The excess of the cost over the average book value of $59 was charged to
Retained earnings.
In May 2018, Air Canada received approval from the TSX for the renewal of its normal course issuer bid,
authorizing, between May 31, 2018 and May 30, 2019, the purchase of up to 24,040,243 shares, representing
10% of Air Canada’s public float as at May 17, 2018. The renewal followed the conclusion of the 2017 normal
course issuer bid which expired on May 30, 2018.
In 2018, the Corporation purchased, for cancellation, 3,013,822 shares at an average cost of $24.11 per share
for aggregate consideration of $73. The excess of the cost over the average book value of $64 was charged to
Retained earnings. At December 31, 2018, a total of 21,940,639 shares remain available for repurchase under
the existing issuer bid.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 141
12. SHARE-BASED COMPENSATION
Air Canada Long-Term Incentive Plan
Certain of the Corporation’s employees participate in the Air Canada Long-term Incentive Plan (the “Long-term
Incentive Plan”). The Long-term Incentive Plan provides for the grant of stock options, performance share units
and restricted share units to senior management and officers of Air Canada. With respect to the stock options,
19,381,792 shares were initially authorized for issuance under the Long-term Incentive Plan of which 9,046,974
remain available for future issuance. The outstanding performance share units and restricted share units will
not result in the issuance of new shares as these share units will be redeemed for shares purchased on the
secondary market (and not issued from treasury) and/or equivalent cash, at the discretion of the Corporation.
Stock Options
The options to purchase shares granted under the Long-term Incentive Plan have a maximum term of seven
years and an exercise price based on the fair market value of the shares at the time of the grant of the options.
Fifty percent of options are time-based and vest over four years. The remaining options vest based upon
performance conditions, which are based on operating margin (operating income over operating revenues)
targets established by the Air Canada Board over the same time period. Each option entitles the employee
to purchase one share at the stated exercise price. The Long-term Incentive Plan specifies that following
retirement an employee may exercise options granted with the rights to exercise continuing for the three years
after the retirement date.
The number of Air Canada stock options granted to employees, the related compensation expense recorded
and the assumptions used to determine stock-based compensation expense, using the Black-Scholes option
valuation model are as follows:
2018
2017
Compensation expense ($ millions) $ 9 $ 6
Number of stock options granted to Air Canada employees 1,293,091 1,219,976
Weighted average fair value per option granted ($) $ 9.27 $ 6.14
Aggregated fair value of options granted ($ millions) $ 12 $ 7
Weighted average assumptions:
Share price $ 26.28 $ 14.85
Risk-free interest rate 1.95%-2.48% 0.86%-1.89%
Expected volatility 38.2% 39.6%-49.3%
Dividend yield 0% 0%
Expected option life (years) 5.25 5.25
Expected volatility was determined at the time of grant using the share price on a historical basis. It reflects
the assumption that the historical volatility is indicative of future trends, which may not necessarily be the
actual outcome.
142 | Consolidated Financial Statements and Notes
2018 ANNUAL REPORT
A summary of the Long-term Incentive Plan option activity is as follows:
2018
2017
Options Weighted
Average
Exercise Price/
Share
Options Weighted
Average
Exercise Price/
Share
Beginning of year 6,121, 252 $ 8.46 8,985,958 $ 4.92
Granted 1,293,091 26.28 1,219,976 14.73
Exercised (667,087) 7.9 0 (3,906,662) 2.30
Expired or cancelled - - (35,148) 4.89
Forfeited (732,792) 16.32 (142,872) 8.36
Outstanding options, end of year 6,014,464 $ 11.40 6,121, 252 $ 8.46
Options exercisable, end of year 2,800,327 $ 5.18 2,348,815 $ 4.29
The weighted average share price on the date of exercise for options exercised in 2018 was $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
2017 Outstanding Options 2017 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 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
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 143
Performance and Restricted Share Units
The Long-term Incentive Plan also includes performance share units (“PSUs”) and restricted share units
(“RSUs”). The vesting of PSUs is based on the Corporation achieving its cumulative annual earnings target
over a three-year period, while RSUs will vest after three years from their date of grant. The terms of the plan
specify that upon the retirement of an employee, the number of units that vest are prorated based on the
total number of completed months of active service during the vesting term. The PSUs and RSUs granted may
only be redeemed for Air Canada shares purchased on the secondary market and/or equivalent cash at the
discretion of the Board of Directors.
The compensation expense related to PSUs and RSUs in 2018 was $21 (2017 – $33).
A summary of the Long-term Incentive Plan share unit activity is as follows:
2018
2017
Beginning of year 2,706,261 3,052,028
Granted 772,536 922,716
Settled (694,111) (1,098,067)
Forfeited (283,922) (170,416)
Outstanding share units, end of year 2,500,764 2,706,261
Refer to Note 15 for a description of derivative instruments used by the Corporation to mitigate the cash flow
exposure to the PSUs and RSUs granted.
Employee Share Purchase Plan
Eligible employees can participate in the employee share purchase plan under which employees can invest
between 2% and 10% of their base salary for the purchase of shares on the secondary market. For 2018
contributions, Air Canada will match 33.33% of the contributions made by employees. During 2018, the
Corporation recorded compensation expense of $12 (2017 – $8) related to the Employee share Purchase Plan.
2018 ANNUAL REPORT
144 | Consolidated Financial Statements and Notes
13. EARNINGS PER SHARE
The following table outlines the calculation of basic and diluted earnings per share:
(in millions, except per share amounts)
2018
2017
Restated - Note 2
Numerator:
Numerator for basic and diluted earnings per share:
Net income $ 167 $ 2,029
Denominator:
Weighted-average shares
272 273
Effect of potential dilutive securities:
Stock options 4 5
Total potential dilutive securities 4 5
Adjusted denominator for diluted earnings per share 276 278
Basic earnings per share $ 0.61 $ 7.44
Diluted earnings per share $ 0.60 $ 7.31
The calculation of earnings per share is based on whole dollars and not on rounded millions. As a result, the
above amounts may not be recalculated to the per share amount disclosed above.
Excluded from the 2018 calculation of diluted earnings per share were 749,000 (2017 – 101,000) outstanding
options where the options’ exercise prices were greater than the average market price of the shares for the year.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 145
14. COMMITMENTS
Capital Commitments and Operating Leases
Capital commitments consist of the future firm aircraft deliveries and commitments related to the acquisition
of other property and equipment. 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 U.S. LIBOR rate at December 31, 2018. The Corporation has various operating lease agreements
for aircraft, equipment and other property. U.S. dollar amounts are converted using the December 31, 2018
closing rate of CDN$1.3637. Minimum future commitments under these contractual arrangements are shown
below.
2019 2020 2021 2022 2023 Thereafter Total
Capital commitments $ 2,382 $ 1,556 $ 815 $ 753 $ 375 $ 195
$ 6,076
Operating leases
Aircraft 561 435 316 243 194 625
2,374
Other property 118 92 67 51 36 243
607
Total $ 3,061 $ 2,083 $ 1,198 $ 1,047 $ 605 $ 1,063 $ 9,057
The Corporation leases and subleases certain aircraft and spare engines to Jazz, Sky Regional and Air Georgian,
which are charged back to Air Canada through their respective CPAs. These are reported net on the
consolidated statement of operations. The leases and subleases relate to five Bombardier Q400 aircraft,
12 CRJ-200 aircraft, 25 Embraer 175 aircraft, and 16 spare engines. The lease and sublease revenue and
expense related to these aircraft and engines each amount to $95 in 2018 (2017 – $92).
Flow-through Leases
For accounting purposes, the Corporation acts as an agent and subleases certain aircraft to Jazz on a flow-
through basis, which are reported net on the consolidated statement of operations. The subleases with Jazz
have the same terms and maturity as the Corporation’s corresponding lease commitments to the lessors.
These subleases relate to five Bombardier Q400 aircraft, ten Bombardier CRJ-200 aircraft, and fifteen
Bombardier CRJ-705 aircraft which have final maturities ranging from 2021 to 2025. The sublease revenue
and lease expense related to these aircraft each amounted to $77 in 2018 (2017 – $81). The operating
lease commitments under these aircraft, which are recovered from Jazz, are not included in the aircraft
operating lease commitments table above but are summarized, with U.S. dollar amounts converted using the
December 31, 2018 closing rate of CDN$1.3637, as follows:
2019 2020 2021 2022 2023 Thereafter Total
Jazz flow-through leases $ 81 $ 81 $ 72 $ 56 $ 47 $ 22
$ 359
Other Contractual Commitments
The future minimum non-cancellable commitment for the next 12 months under the Jazz CPA is approximately
$1,218 and under the capacity purchase agreements with other regional carriers is $284. As further discussed
in Note 23, the Corporation concluded an agreement to amend and extend its CPA with Jazz in February 2019.
2018 ANNUAL REPORT
146 | Consolidated Financial Statements and Notes
15. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
Summary of Financial Instruments
Carrying Amounts
December 31, 2018
December 31,
2017
Financial instruments classification
Fair value
through profit
and loss
Assets at
amortized
cost
Liabilities at
amortized
cost
Total
Financial Assets
Cash and cash equivalents $ 630 $ - $ - $ 630 $ 642
Short–term investments 4,077 - - 4,077 3,162
Restricted cash 161 - - 161 148
Accounts receivable - 796 - 796 814
Prepaid expenses and other current assets
Collateral on aircraft financing - - - - 24
Deposits and other assets
Restricted cash 171 - - 171 186
Aircraft related and other deposits - 135 - 135 128
Derivative instruments
Share forward contracts 43 - - 43 54
Foreign exchange derivatives 24 - - 24 -
$ 5,106 $ 931 $ - $ 6,037 $ 5,158
Financial Liabilities
Accounts payable $ - $ - $ 1,793 $ 1,793 $ 1,668
Foreign exchange derivatives 57 - - 57 215
Current portion of long–term debt
and finance leases
- - 455 455 671
Long–term debt and finance leases - - 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
Share forward contracts $ - $ 26
Fuel derivatives (1) (3)
Gain (loss) on financial instruments recorded at fair value $ (1) $ 23
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 147
Risk Management
Under its risk management policy, the Corporation manages its market risk through the use of various financial
derivative instruments. The Corporation uses these instruments solely for risk management purposes, not for
generating trading profit. As such, any change in cash flows associated with derivative instruments is designed
to be an economic hedge and offset by changes in cash flows of the relevant risk being hedged.
The fair values of derivative instruments represent the amount of the consideration that could be exchanged
in an arm’s length transaction between willing parties who are under no compulsion to act. The fair value
of these derivatives is determined using prices in active markets, where available. When no such market is
available, valuation techniques such as discounted cash flow analysis are applied. The valuation technique
incorporates all factors that would be considered in setting a price, including the Corporation’s own credit risk
as well as the credit risk of the counterparty.
Market Risks
Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to
changes in market prices. Market risk can be further divided into the following sub-classifications related to the
Corporation: fuel price risk, foreign exchange risk, interest rate risk, and share-based compensation risk.
Fuel Price Risk
Fuel price risk is the risk that future cash flows will fluctuate because of changes in jet fuel prices. In order to
manage its exposure to jet fuel prices and to help mitigate volatility in operating cash flows, the Corporation
enters into derivative contracts with financial intermediaries. The Corporation may use derivative contracts
based on jet fuel, heating oil and crude-oil based contracts. The Corporation’s policy permits hedging of up to
75% of the projected jet fuel purchases for the current calendar year, 50% of the projected jet fuel purchases
for the next calendar year, and 25% of projected jet fuel purchases for any calendar year thereafter. These are
maximum (but not mandated) limits. There is no minimum monthly hedging requirement. There are regular
reviews to adjust the strategy in light of market conditions.
During 2018:
> Hedging losses on the settlement of fuel derivatives of $19 and the associated premium costs
of $17, for a hedging loss of $36 were reclassified from other comprehensive income to Aircraft
fuel expense (net fuel hedging loss of $2 was reclassified from other comprehensive income to
Aircraft fuel expense in 2017). No hedge ineffectiveness was recorded.
> The Corporation purchased crude-oil call options and swaps covering a portion of 2018
fuel exposure. The cash premium related to these contracts was $17 ($18 in 2017 for 2017
exposures).
> Fuel derivative contracts cash settled with a fair value of $19 in favour of the counterparties
($26 in favour of the Corporation in 2017).
There were no outstanding fuel derivatives as at December 31, 2018 and December 31, 2017.
Foreign Exchange Risk
The Corporation’s financial results are reported in Canadian dollars, while a large portion of its expenses, debt
obligations and capital commitments are in foreign currencies, primarily in U.S. dollars. Foreign exchange
risk is the risk that fluctuations in foreign exchange rates may have on operating results and cash flows. The
Corporation’s risk management objective is to reduce cash flow risk related to foreign denominated cash flows.
Air Canada generates certain sales in U.S. dollars and in other foreign currencies which are converted to
U.S. dollars under the Corporation’s risk management program. In 2018, these net operating cash inflows
totaled approximately US$4.2 billion and U.S. denominated operating costs amounted to approximately
US$6.4 billion. Non-operating cash outflows in U.S. dollars, primarily related to interest payments on U.S. dollar
denominated debt and net financing outflows, amounted to approximately US$1.9 billion. For 2018, this
resulted in a U.S. dollar net cash flow exposure of approximately US$4.1 billion.
2018 ANNUAL REPORT
148 | Consolidated Financial Statements and Notes
The Corporation has a target coverage of 70% on a rolling 18 month basis to manage the net U.S. dollar cash
flow exposure described above utilizing the following risk management strategies:
> Holding U.S. dollar cash reserves as an economic hedge against changes in the value of the
U.S. dollar. U.S. dollar cash and short-term investment balances as at December 31, 2018
amounted to $863 (US$635) ($686 (US$542) as at December 31, 2017). A portion of the cash
and investment reserves are an economic hedge against long-term U.S. dollar debt while the
remainder of the cash is operational cash and investment reserves which are applied against
the rolling 18 month net U.S. dollar cash flow exposure. In 2018, a gain of $62 (loss of $58 in
2017) was recorded in Foreign exchange gain (loss) reflecting the change in Canadian equivalent
market value of the U.S. dollar cash and short-term investment balances held.
> Locking in the foreign exchange rate through the use of a variety of foreign exchange derivatives
which have maturity dates corresponding to the forecasted dates of U.S. dollar net outflows.
The level of foreign exchange derivatives entered into and their related maturity dates are dependent upon
a number of factors, which include the amount of foreign revenue conversion available, U.S. dollar net cash
outflows, as well as the amount attributed to aircraft and debt payments. Based on the notional amount of
currency derivatives outstanding at December 31, 2018, as further described below, approximately 77% of
net U.S. cash outflows are hedged for 2019 and 48% for 2020, resulting in derivative coverage of 68% over
the next 18 months. Operational U.S. dollar cash and investment reserves combined with derivative coverage
results in 75% coverage.
As at December 31, 2018, the Corporation had outstanding foreign currency options and swap agreements,
settling in 2019 and 2020, to purchase at maturity $4,987 (US$3,659) of U.S. dollars at a weighted average
rate of $1.2645 per US$1.00 (2017 – $3,400 (US$2,704) with settlements in 2018 and 2019 at a weighted
average rate of $1.2703 per $1.00 U.S. dollar). The Corporation also has protection in place to sell a portion
of its excess Euros, Sterling, YEN, and AUD (EUR €103, GBP £208, JPY ¥25,922, and AUD $105) which settle
in 2019 and 2020 at weighted average rates of €1.1910, £1.3567, ¥0.0092, and AUD $0.7448 per $1.00 U.S.
dollar, respectively (as at December 31, 2017 - EUR €101, GBP £105, JPY ¥8,623, CNY ¥41, and AUD $32
with settlement in 2018 at weighted average rates of €1.1664, £1.3259, ¥0.0090, ¥0.1468 and AUD $0.7576
respectively per $1.00 U.S. dollar).
The hedging structures put in place have various option pricing features, such as knock-out terms and profit
cap limitations, and based on the assumed volatility used in the fair value calculation, the net fair value of
these foreign currency contracts as at December 31, 2018 was $33 in favour of the counterparties (2017 –
$215 in favour of the counterparties). These derivative instruments have not been designated as hedges
for accounting purposes and are recorded at fair value. During 2018, a gain of $245 was recorded in Foreign
exchange gain (loss) related to these derivatives (2017 – $274 loss). In 2018, foreign exchange derivative
contracts cash settled with a net fair value of $63 in favour of the Corporation (2017 – $55 in favour of the
counterparties).
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate
because of changes in market interest rates.
The Corporation enters into both fixed and floating rate debt and also leases certain assets where the rental
amount fluctuates based on changes in short term interest rates. The Corporation manages interest rate risk
on a portfolio basis and seeks financing terms in individual arrangements that are most advantageous taking
into account all relevant factors, including credit margin, term and basis. The risk management objective is to
minimize the potential for changes in interest rates to cause adverse changes in cash flows to the Corporation.
The cash and short-term investment portfolio which earns a floating rate of return is an economic hedge for a
portion of the floating rate debt.
The ratio of fixed to floating rate obligations outstanding is designed to maintain flexibility in the Corporation’s
capital structure and is based upon a long term objective of 60% fixed and 40% floating but allows flexibility
to adjust to prevailing market conditions. The ratio at December 31, 2018 is 81% fixed and 19% floating (73%
and 27%, respectively as at December 31, 2017).
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 149
Share-based Compensation Risk
The Corporation issues RSUs and PSUs to certain of its employees, as described in Note 12, which entitles the
employees to receive a payment in the form of one share, cash in the amount equal to market value of one
share, or a combination thereof, at the discretion of the Board of Directors.
To hedge the share price exposure, the Corporation entered into share forward contracts to hedge PSUs and
RSUs that may vest between 2019 and 2021, subject to the terms of vesting including realization of performance
vesting criteria. The forward dates for the share forward contracts coincide with the vesting terms and planned
settlement dates of 1,664,142 PSUs and RSUs from 2019 to 2021. These contracts were not designated as hedging
instruments for accounting purposes. Accordingly, changes in the fair value of these contracts are recorded in
Gain on financial instruments recorded at fair value in the period in which they arise. During 2018, a gain of less
than $1 was recorded (2017 – gain of $26). Share forward contracts cash settled with a fair value of $17 in favour
of the Corporation in 2018 (2017 – $12), with new contract purchases of $6 for 2021 hedges. As at December 31,
2018, the fair value of the share forward contracts is $43 in favour of the Corporation (2017 – $54 in favour of the
Corporation), with those contracts maturing in 2019 valued at $26 recorded in Prepaid expenses and other current
assets and the remainder of $17 recorded in Deposits and other assets.
Liquidity risk
The Corporation manages its liquidity needs through a variety of strategies including by seeking to sustain and
improve cash from operations, sourcing committed financing for new and existing aircraft, and through other
financing activities.
Liquidity needs are primarily related to meeting obligations associated with financial liabilities, capital
commitments, ongoing operations, contractual and other obligations. The Corporation monitors and manages
liquidity risk by preparing rolling cash flow forecasts, monitoring the condition and value of assets available to
be used as well as those assets being used as security in financing arrangements, seeking flexibility in financing
arrangements, and establishing programs to monitor and maintain compliance with terms of financing
agreements. At December 31, 2018, unrestricted liquidity was $5,725 comprised of Cash and cash equivalents
and Short-term investments of $4,707 and undrawn lines of credit of $1,018. Another important aspect of
managing liquidity risk relates to managing the Corporation’s financial leverage. Refer to Note 17 Capital
Disclosures for a discussion on financial leverage targets.
Cash and cash equivalents include $39 pertaining to investments with original maturities of three months or
less at December 31, 2018 ($30 as at December 31, 2017).
A maturity analysis of the Corporation’s principal and interest repayment requirements on long-term debt is
set out in Note 7, and fixed operating commitments and capital commitments are set out in Note 14.
Credit Risk
Credit risk is the risk of loss due to a counterparty’s inability to meet its obligations. As at December 31, 2018,
the Corporation’s credit risk exposure consists mainly of the carrying amounts of Cash and cash equivalents,
Short-term investments, Accounts receivable and derivative instruments. Cash and cash equivalents and
Short-term investments are in place with major financial institutions, various levels of government in Canada,
and major corporations. Accounts receivable are generally the result of sales of passenger tickets to individuals,
largely through the use of major credit cards, through geographically dispersed travel agents, corporate
outlets, or other airlines. Similarly, accounts receivable related to cargo revenues relate to accounts from a
large number of geographically dispersed customers. Credit rating guidelines are used in determining derivative
counterparties. In order to manage its exposure to credit risk and assess credit quality, the Corporation reviews
counterparty credit ratings on a regular basis and sets credit limits when deemed necessary.
2018 ANNUAL REPORT
150 | Consolidated Financial Statements and Notes
Sensitivity Analysis
The following table is a sensitivity analysis for each type of market risk relevant to the significant financial
instruments recorded by the Corporation as at December 31, 2018. The sensitivity analysis is based on certain
movements in the relevant risk factor. These assumptions may not be representative of actual movements in
these risks and may not be relied upon. Given potential volatility in the financial and commodity markets, the
actual movements and related percentage changes may differ significantly from those outlined below. Changes
in income generally cannot be extrapolated because the relationship of the change in assumption to the change
in income may not be linear. Each risk is contemplated independent of other risks; however, changes in one factor
may result in changes in one or more several other factors, which may magnify or counteract the sensitivities.
The sensitivity analysis related to derivative contracts is based on the estimated fair value change applicable
to the derivative as at December 31, 2018 considering a number of variables including the remaining term to
maturity and does not consider the fair value change that would be applicable to the derivative assuming the
market risk change was applicable to the maturity date of the derivative contract.
Interest rate risk Foreign exchange
rate risk
(1)
Other
price risk
(2)
Income Income Income
1%
increase
1%
decrease
5%
increase
5%
decrease
10%
increase
10%
decrease
Cash and cash equivalents $ 6 $ (6) $ (10) $ 10 $ - $ -
Short–term investments $ 41 $ (41) $ (33) $ 33 $ - $ -
Aircraft related deposits $ - $ - $ (5) $ 5 $ - $ -
Long-term debt and finance leases $ (18) $ 18 $ 297 $ (297) $ - $ -
Share forward contracts $ - $ - $ - $ - $ 4 $ (4)
Foreign exchange derivatives $ - $ - $ (240) $ 234 $ - $ -
(1) Increase (decrease) in foreign exchange relates to a strengthening (weakening) of the Canadian dollar versus the U.S. dollar. The impact
on long-term debt and finance leases includes $9 related to the Canadian dollar versus the Japanese yen. The impact of changes in other
currencies is not significant to the Corporation’s financial instruments.
(2) The sensitivity analysis for share forward contracts is based upon a 10% increase or decrease in the Air Canada share price.
Covenants in Credit Card Agreements
The Corporation’s principal credit card processing agreements for credit card processing services contain
triggering events upon which the Corporation is required to provide the applicable credit card processor with
cash deposits. The obligations to provide cash deposits and the required amount of deposits are each based
upon a matrix measuring, on a quarterly basis, both a fixed charge coverage ratio for the Corporation and the
unrestricted cash and short-term investments of the Corporation. In 2018, the Corporation made no cash
deposits under these agreements (nil in 2017).
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 151
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 derivatives are equal to fair value, which is based on the amount at which they could
be settled based on estimated current market rates.
Management estimated the fair value of its long-term debt based on valuation techniques including discounted
cash flows, taking into account market information and traded values where available, 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 unobservable
inputs (Level 3 in the fair value hierarchy), the estimated fair value of debt and finance leases approximates its
carrying value.
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.
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
(Level 1) (Level 2) (Level 3)
Financial Assets
Held–for–trading securities
Cash equivalents $ 39 $ - $ 39 $ -
Short–term investments 4,077 - 4,077 -
Derivative instruments
Share forward contracts 43 - 43 -
Foreign exchange derivatives 24 - 24 -
Total $ 4,183 $ - $ 4,183 $ -
Financial Liabilities
Derivative instruments
Foreign exchange derivatives 57 - 57 -
Total $ 57 $ - $ 57 $ -
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 2018.
2018 ANNUAL REPORT
152 | Consolidated Financial Statements and Notes
Offsetting of Financial Instruments in the Consolidated Statement
of Financial Position
Financial assets and liabilities are offset and the net amount reported in the consolidated statement of financial
position where the Corporation has a legally enforceable right to set-off the recognized amounts and there is an
intention to settle on a net basis or realize the asset and settle the liability simultaneously. In the normal course of
business, the Corporation enters into various master netting arrangements or other similar arrangements that do
not meet the criteria for offsetting in the consolidated statement of financial position but still allow for the related
amounts to be set-off in certain circumstances, such as the termination of the contracts or in the event of bankruptcy
or default of either party to the agreement.
Air Canada participates in industry clearing house arrangements whereby certain accounts receivable balances related
to passenger, cargo and other billings are settled on a net basis with the counterparty through the clearing house.
These billings are mainly the result of interline agreements with other airlines, which are commercial agreements that
enable the sale and settlement of travel and related services between the carriers. Billed and work in process interline
receivables are presented on a gross basis and amount to $70 as at December 31, 2018 ($75 as at December 31, 2017).
These balances will be settled at a net value at a later date; however, such net settlement amount is unknown until the
settlement date.
The following table presents the recognized financial instruments that are offset, or subject to enforceable
master netting arrangements or other similar arrangements but not offset, as at December 31, 2018 and
2017, and shows in the Net column what the net impact would be on the consolidated statement of financial
position if all set-off rights were exercised.
Amounts offset Amounts
not offset
Net
Gross
assets
Gross liabilities
offset
Net amounts
presented
Financial
instruments
Financial assets
December 31, 2018
Derivative assets $ 93 $ (69) $ 24 $ 43 $ 67
Accounts receivable 113 (47) 66 - 66
$ 206 $ (116) $ 90 $ 43 $ 133
December 31, 2017
Derivative assets $ - $ - $ - $ 54 $ 54
Accounts receivable 114 (48) 66 - 66
$ 114 $ (48) $ 66 $ 54 $ 120
Amounts offset Amounts
not offset
Net
Gross
liabilities
Gross assets
offset
Net amounts
presented
Financial
instruments
Financial liabilities
December 31, 2018
Derivative liabilities $ 317 $ (260) $ 57 $ - $ 57
$ 317 $ (260) $ 57 $ - $ 57
December 31, 2017
Derivative liabilities $ 286 $ (71) $ 215 $ - $ 215
$ 286 $ (71) $ 215 $ - $ 215
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 153
16. CONTINGENCIES, GUARANTEES AND INDEMNITIES
Contingencies and Litigation Provisions
Investigations by Competition Authorities Relating to Cargo
The European Commission, the United States Department of Justice and the Competition Bureau in Canada,
among others investigated alleged anti-competitive cargo pricing activities, including the levying of certain
fuel surcharges, of a number of airlines and cargo operators. The investigations conducted by the U.S.
Department of Justice and by the Competition Bureau in Canada concluded with no proceedings against
Air Canada.
After having rendered a decision against a number of airlines, including Air Canada in 2010, which was
overturned by the European General Court in December 2015, in March 2017, the European Commission
rendered another decision finding that 12 air cargo carriers, including Air Canada, had infringed European Union
competition law in the setting of certain cargo charges and rates for various periods between 1999 and 2006,
imposing a fine of 21 Euros (approximately $29) on Air Canada. Air Canada paid the fine as required in the
second quarter of 2017, pending the outcome of an appeal to the European General Court. While Air Canada
cannot predict with certainty the outcome of its appeal or any related proceedings, Air Canada believes it has
reasonable grounds to challenge the European Commission’s ruling.
Air Canada is also named as a defendant or is otherwise involved in a number of class action lawsuits and other
proceedings in Canada, Europe and the United States in connection with these allegations. The class action
proceeding in the United States were settled by Air Canada in 2012, and certain third-party proceedings in the
United Kingdom relating to the same allegations were settled in 2018.
As at December 31, 2018, Air Canada has a provision of $17 ($17 as at December 31, 2017) relating to
outstanding claims in these matters, which is recorded in Accounts payable and accrued liabilities. This
provision is an estimate based upon the status of investigations and proceedings at this time and Air Canada’s
assessment as to the potential outcome for certain of them. The provision does not address the proceedings
and investigations in all jurisdictions, but only where there is sufficient information to do so. Air Canada has
determined it is not possible at this time to predict with any degree of certainty the outcome of all remaining
proceedings and investigations. Based on the outcome of any developments regarding proceedings and
investigations, Air Canada may adjust the provision in its results for subsequent periods as required.
Mandatory Retirement
Air Canada is engaged in a number of proceedings involving challenges to the mandatory retirement provisions
of certain of its collective agreements, including the previous Air Canada-ACPA collective agreement, which
incorporated provisions of the pension plan terms and conditions applicable to pilots requiring them to retire
at age 60. Air Canada has fully or partially resolved some of these complaints and is defending others. At
this time, it is not possible to determine with any degree of certainty the extent of any financial liability that
may arise from Air Canada being unsuccessful in its defence of these proceedings, though any such financial
liability, if imposed, would not be expected to be material.
Other Contingencies
Various other lawsuits and claims, including claims filed by various labour groups of Air Canada are pending by
and against the Corporation and provisions have been recorded where appropriate. It is the opinion of manage-
ment that final determination of these claims will not have a material adverse effect on the financial position or
the results of the Corporation.
2018 ANNUAL REPORT
154 | Consolidated Financial Statements and Notes
Guarantees
Guarantees in Fuel Facilities and De-Icing Arrangements
The Corporation participates in fuel facility arrangements operated through eight Fuel Facility Corporations,
and three aircraft de-icing service facilities, along with other airlines that contract for fuel and de-icing services
at various major airports in Canada. These entities operate on a cost recovery basis. The aggregate debt of
these entities that has not been consolidated by the Corporation under IFRS 10 Consolidated Financial Statements is
approximately $571 as at December 31, 2018 (December 31, 2017 - $529), 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 these entities 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.
Indemnification Agreements
In the ordinary course of the Corporation’s business, the Corporation enters into a variety of agreements,
such as real estate leases or operating agreements, aircraft financing or leasing agreements, technical service
agreements, and director/officer contracts, and other commercial agreements, some of which may provide for
indemnifications to counterparties that may require the Corporation to pay for costs and/or losses incurred
by such counterparties. The Corporation cannot reasonably estimate the potential amount, if any, it could be
required to pay under such indemnifications. Such amount would also depend on the outcome of future events
and conditions, which cannot be predicted. While certain agreements specify a maximum potential exposure,
certain others do not specify a maximum amount or a limited period. Historically, the Corporation has not
made any significant payments under these indemnifications.
The Corporation expects that it would be covered by insurance for most tort liabilities and certain related
contractual indemnities.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 155
17. CAPITAL DISCLOSURES
The Corporation views capital as the sum of Long-term debt and finance leases, capitalized operating leases,
and the book value of Shareholders’ equity less excess cash not required to run its core business operations.
The Corporation uses Advance ticket sales as a proxy for the minimum cash required for ongoing core business
operations. Previously, the Corporation used the market value of its outstanding shares in the calculation
of total capital. Following a significant increase in the book value of its equity, the Corporation decided to
change its methodology to use book value. The Corporation includes capitalized operating leases, which
is a measure commonly used in the industry ascribing a value to obligations under operating leases. The
value is based on annualized aircraft rent expense, including aircraft rent expense related to regional carrier
operations, multiplied by 7.0, which is a factor commonly used in the airline industry. The measure used may
not necessarily reflect the fair value or net present value related to the future minimum lease payments as the
measure is not based on the remaining contractual payments and the factor may not recognize discount rates
implicit in the actual leases or current rates for similar obligations with similar terms and risks.
The Corporation also monitors its adjusted net debt and financial leverage ratio. Adjusted net debt is
calculated as the sum of Long-term debt and finance lease obligations and capitalized operating leases less
Cash and cash equivalents and Short-term investments. Financial leverage is calculated as adjusted net debt
over 12 months trailing earnings before interest, taxes, depreciation, amortization and aircraft rent.
The Corporation’s main objectives when managing capital are:
> To maintain financial leverage at or below targeted leverage ratios determined by management
to be prudent;
> To ensure capital allocation decisions generate sufficient returns and to assess the efficiency
with which the Corporation allocates its capital to generate returns.
> To structure repayment obligations in line with the expected life of the Corporation’s principal
revenue generating assets;
> To ensure the Corporation has access to capital to fund contractual obligations as they become
due and to ensure adequate cash levels to withstand deteriorating economic conditions;
> To maintain an appropriate balance between debt supplied capital versus investor supplied
capital; and
> To monitor the Corporation’s credit ratings to facilitate access to capital markets at competitive
interest rates.
In order to maintain or adjust the capital structure, the Corporation may adjust the type or amount of capital
utilized, including purchase versus debt financing versus lease decisions, defer or cancel aircraft expenditures
by not exercising available options or selling aircraft options, redeeming or issuing debt securities, issuing
equity securities, and repurchasing outstanding shares, all subject to market conditions and the terms of the
underlying agreements (or any consents required) or other legal restrictions.
The total capital and adjusted net debt as at December 31 is calculated as follows:
2018
2017
Long-term debt and finance leases $ 6,197 $ 5,448
Current portion of long-term debt and finance leases 455 671
6,652 6,119
Capitalized operating leases 3,913 3,801
Adjusted debt 10,565 9,920
Shareholders’ equity, net of excess cash 2,043 2,087
Total Capital $ 12,608 $ 12,007
Adjusted debt $ 10,565 $ 9,920
Less Cash and cash equivalents and Short-term investments (4,707) (3,804)
Adjusted net debt $ 5,858 $ 6,116
2018 ANNUAL REPORT
156 | Consolidated Financial Statements and Notes
18. REVENUE
Disaggregation of revenue
The Corporation disaggregates revenue from contracts with customers according to the nature of the air trans-
portation services. The nature of services is presented as passenger, cargo and other revenue on its consolidated
statement of operations. The Corporation further disaggregates air transportation service revenue according to
geographic market segments.
A reconciliation of the total amounts reported by geographic region for Passenger revenues and Cargo
revenues on the consolidated statement of operations is as follows:
Passenger Revenues
2018
2017
Restated - Note 2
Canada $ 4,894 $ 4,637
U.S. Transborder 3,504 3,195
Atlantic 4,237 3,539
Pacific 2,430 2,195
Other 1,158 1,027
$ 16,223 $ 14,593
Cargo Revenues
2018
2017
Restated - Note 2
Canada $ 95 $ 84
U.S. Transborder 43 39
Atlantic 278 245
Pacific 325 280
Other 62 60
$ 803 $ 708
Passenger and cargo revenues are based on the actual flown revenue for flights with an origin and destination
in a specific country or region. Atlantic refers to flights that cross the Atlantic Ocean with origins and
destinations principally in Europe, India, the Middle East and North Africa. Pacific refers to flights that cross
the Pacific Ocean with origins and destinations principally in Asia and Australia. Other passenger and cargo
revenues refer to flights with origins and destinations principally in Central and South America and the
Caribbean and Mexico.
Other operating revenues are principally derived from customers located in Canada and consist primarily
of revenues from the sale of the ground portion of vacation packages, buy on board and related passenger
ancillary services and charges, and other airline-related services.
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 157
Contract balances
The following table provides information about receivables, contract assets, and contract liabilities from
contracts with customers.
December 31,
2018
December 31,
2017
Restated - Note 2
January 1,
2017
Restated - Note 2
Receivables, which are included in Accounts receivable $ 575 $ 587 $ 540
Contract costs which are included in Prepaid expenses
and other current assets
115 100 98
Contract liabilities – Advance ticket sales 2,717 2,469 2,119
Receivables include passenger, cargo and other receivables from contracts with customers. The Corporation
sells passenger ticket and related ancillary services via cash, credit card or other card-based forms of payment
with payment generally collected in advance of the performance of related transportation services. Passenger
ticket and ancillary receivables are amounts due from other airlines for interline travel, travel agency payment
processing intermediaries or credit card processors associated with sales for future travel and are included in
Accounts receivable on the consolidated statement of financial position. Cargo and other accounts receivable
relate to amounts owing from customers, including from freight forwarders and interline partners for cargo
and other services provided.
Contract costs include credit card fees, commissions and global distribution system charges on passenger
tickets. These costs are capitalized at time of sale and expensed at the time of passenger revenue recognition.
Airline passenger advance sales and the ground portion of vacation packages are deferred and included
in Current liabilities. Advance sales also include the proceeds from the sale of flight tickets to Aeroplan.
The deferred revenue is recognized when the related flight occurs or over the period of the vacation. The
Corporation performs regular evaluations on the advance ticket sales liability. The Corporation records an
estimate of breakage revenue for tickets that will expire unused. These estimates are based on historical
experience.
Depending on the fare class, passengers may exchange their tickets up to the time of the flight or obtain a
refund, generally in exchange for the payment of a fee. For non-refundable tickets that remain unused at the
time of flight, the Corporation recognizes the full amount into revenue at time when transportation was to be
provided. For refundable tickets that remain unused at the time of the flight, the Corporation recognizes the
net revenue as they expire after any refund amount is issued to the passenger.
The practical expedient in IFRS 15 allows entities not to disclose the amount of the remaining transaction
prices and its expected timing of recognition for performance obligations if the contract has an original
expected duration of one year or less. The Corporation elects to use this practical expedient for the passenger
travel performance obligation as passenger tickets expire within a year if unused.
2018 ANNUAL REPORT
158 | Consolidated Financial Statements and Notes
19. REGIONAL AIRLINES EXPENSE
The Corporation has capacity purchase agreements with Jazz, Sky Regional and certain other regional carriers.
Expenses associated with these arrangements are classified as regional airlines expense on the consolidated
statement of operations. Regional airlines expense consists of the following:
2018
2017
Capacity purchase fees $ 1,333 $ 1,267
Aircraft fuel 531 412
Airport and navigation fees 296 293
Sales and distribution costs 153 146
Other operating expenses 529 499
Regional airlines expense $ 2,842 $ 2,617
20. SPECIAL ITEMS
In 2017, the Corporation recorded $30 related to cargo investigations, as described in Note 16, and paid the
fine to the European Commission as required, pending the outcome of its appeal.
21. SALE-LEASEBACK
In 2018, the Corporation entered into a sale and leaseback arrangement for 25 Embraer 190 aircraft for net
proceeds of $293, which resulted in the recognition of a loss on disposal of $188. The aircraft will continue
to be operated under leases entered into under such sale-leaseback agreement until they fully exit the
fleet progressively through 2019 and 2020, in line with the Corporation’s current fleet plans. The leases are
accounted for as operating leases.
During 2017, the Corporation took delivery of four 787 aircraft that were financed under sale-leaseback
transactions with proceeds of $740. The sales were at fair value and accordingly the resulting gain on sale of
$52 was recognized in non-operating income. The leases are accounted for as operating leases with 12 year
terms, paid monthly.
22. RELATED PARTY TRANSACTIONS
Compensation of Key Management
Key management includes Air Canada’s Board of Directors, President and Chief Executive Officer, Deputy Chief
Executive Officer and Chief Financial Officer, and Executive Vice-President and Chief Commercial Officer. The
President, Passenger Airlines is also included in the 2017 period. Amounts reported are based upon the expense
as reported in the consolidated financial statements. Compensation to key management is summarized as
follows:
2018
2017
Salaries and other benefits $ 8 $ 11
Pension and post-employment benefits 1 5
Share-based compensation 10 18
$ 19 $ 34
2018 ANNUAL REPORT
Consolidated Financial Statements and Notes | 159
23. SUBSEQUENT EVENTS
Acquisition of Aimia’s Aeroplan Loyalty Business
On January 10, 2019, Air Canada completed the closing of its purchase of Aimia Canada Inc., owner and
operator of the Aeroplan loyalty business, from Aimia Inc. The aggregate purchase price for the acquisition
consisted of $450 in cash plus $47 in cash for pre-closing adjustments. The purchase price is subject to
post-closing adjustments and the acquisition also includes the assumption of the Aeroplan Miles liability.
Air Canada received payments from The Toronto-Dominion Bank (“TD”) and Canadian Imperial Bank of
Commerce (“CIBC”) in the aggregate amount of $822. Visa Canada Corporation (“Visa”) also made a payment
to Air Canada and assuming completion of the Amex Bank of Canada (“AMEX”) agreement referred to below,
AMEX will do likewise.
Concurrently with the conclusion of the Aeroplan purchase, Air Canada, TD, CIBC, and Visa finalized various
commercial agreements relating to and in support of the acquisition, including credit card loyalty program
and network agreements for future participation in Air Canada’s new loyalty program. In addition, TD and
CIBC made payments to Aimia Canada Inc., now Air Canada’s subsidiary, in the aggregate amount of $400 as
prepayments to be applied towards future monthly payments in respect of Aeroplan Miles. Air Canada also has
entered into an agreement in principle with AMEX, which also issues Aeroplan co-branded products, to secure
its continued participation in Air Canada’s loyalty program after 2020. Following the closing of the acquisition,
Aimia Canada Inc. changed its name to Aeroplan Inc.
Air Canada, as the acquirer, will perform business combination accounting as of the acquisition date, which
generally requires that the acquirer measure the identifiable assets acquired and liabilities assumed at their fair
values, subject to certain exceptions. The Corporation is evaluating the impact of the business combination
accounting requirements, which results will be reported on in Air Canada’s interim unaudited condensed
consolidated financial statements and notes for the first quarter of 2019.
Capacity Purchase Agreement with Jazz and Equity Investment in Chorus
In February 2019, Air Canada concluded an agreement to amend and extend its capacity purchase agreement
(“CPA”) with Jazz, a wholly-owned subsidiary of Chorus Aviation Inc. The amendments provide an extension
of the CPA term by ten years from January 1, 2026 to December 31, 2035. The amendments include various
minimum levels of covered aircraft at different points in time, providing Air Canada the flexibility to optimize
its fleet within its network strategy. The amendments became effective retroactively as at January 1, 2019.
Concurrently with the CPA amendments, Air Canada subscribed for 15,561,600 class B voting shares in the
capital of Chorus, representing, at time of issuance, approximately 9.99% of the issued and outstanding class A
variable voting shares and class B voting shares of Chorus on a combined basis. This represents an investment
of $97 by Air Canada. The Chorus shares were issued to Air Canada at a price of $6.25 per share, representing
a 5% premium to the five-day volume weighted average price of the shares as of the close of trading on
January 10, 2019. Air Canada and Chorus entered into an investor rights agreement under which, among other
things, Air Canada will hold the investment shares for a period of at least 60 months, subject to certain limited
exceptions.
2018 ANNUAL REPORT
160
DIRECTORS
Christie J.B. Clark Corporate Director, Toronto, Ontario
Gary A. Doer Corporate Director, Winnipeg, Manitoba
Rob Fyfe Corporate Director, Auckland, New Zealand
Michael M. Green Chief Executive Officer and Managing Director,
Tenex Capital Management, New York, New York
Jean Marc Huot Partner, Stikeman Elliott LLP, Montreal, Quebec
Madeleine Paquin President and Chief Executive Officer, Logistec Corporation,
Montreal, Quebec
Calin Rovinescu President and Chief Executive Officer, Air Canada, Montreal, Quebec
Vagn Sørensen Corporate Director, London, United Kingdom
Kathleen Taylor Corporate Director, Toronto, Ontario
Annette Verschuren Chair and Chief Executive Officer, NRStor Inc., Toronto, Ontario
Michael M. Wilson Corporate Director, Bragg Creek, Alberta
2018 ANNUAL REPORT
161
OFFICERS
Vagn Sørensen Chairman of the Board
Calin Rovinescu President and Chief Executive Officer
Michael Rousseau Deputy Chief Executive Officer and Chief Financial Officer
Lucie Guillemette Executive Vice President and Chief Commercial Officer
Craig Landry Executive Vice President, Operations
Catherine Dyer Senior Vice President and Chief Information Officer
Amos Kazzaz Senior Vice President, Finance
Arielle Meloul-Wechsler Senior Vice President, People, Culture and Communications
Ferio Pugliese Senior Vice President, Government Relations and Air Canada Express
David J. Shapiro Senior Vice President, International and Regulatory Affairs and
Chief Legal Officer
Richard Steer Senior Vice President, Operations
Duncan Bureau President, Air Canada Rouge
Samuel Elfassy Vice President, Safety
Mark Galardo Vice President, Network Planning
Carolyn M. Hadrovic Vice President and Corporate Secretary
Chris Isford Vice President and Controller
John MacLeod Vice President, Global Sales and Alliances
Mark Nasr Vice President, Loyalty and eCommerce
Kevin O’Connor Vice President, System Operations Control
Al Read Vice President, Airports – North America
Renee Smith-Valade Vice President, In-Flight Service
Tim Strauss Vice President, Cargo
Murray Strom Vice President, Flight Operations
Jon Turner Vice President, Maintenance
Andrew Yiu Vice President, 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
1
st
Quarter $ 29.11 $ 22.05 83,265,443
2
nd
Quarter $ 26.81 $ 20.33 68,206,296
3
rd
Quarter $ 28.44 $ 20.63 71,010,035
4
th
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 information
SHAREHOLDER RELATIONS
Telephone: 514-422-6644
Facsimile: 514-422-0296
shareholders.actionnair[email protected]
INVESTOR RELATIONS
Telephone: 514-422-7849
Facsimile: 514-422-7877
investors.investisseur[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: inquiries@astfinancial.com
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
