20
20
A N N U A L
R E P O R T
1.
Highlights
The financial and operating highlights for Air Canada for the periods indicated are as follows:
(Canadian dollars in millions, except per share data or where indicated)
2020
2019
$ CHANGE
2020
2019
$ CHANGE
Fourth Quarter
Full Year
FINANCIAL PERFORMANCE METRICS
Operating revenues
Operating income (loss)
Income (loss) before income taxes
Net income (loss)
Adjusted pre-tax income (loss)(1)
EBITDA (excluding special items)(1)
Unrestricted liquidity(2)
Net cash flows from (used in) operating activities
Free cash flow(1)
Net debt(1)
Diluted earnings (loss) per share
OPERATING STATISTICS(3)
Revenue passenger miles (“RPM”) (millions)
Available seat miles (“ASM”) (millions)
Passenger load factor %
Passenger revenue per RPM (“Yield”) (cents)
Passenger revenue per ASM (“PRASM”) (cents)
Operating revenue per ASM (cents)
Operating expense per ASM (“CASM”) (cents)
Adjusted CASM (cents)(1)
Average number of full-time-equivalent (“FTE”)
employees (thousands)(4)
Aircraft in operating fleet at period-end(5)
Seats dispatched (thousands)
Aircraft frequencies (thousands)
Average stage length (miles)(6)
Fuel cost per litre (cents)
827
4,429
(3,602)
5,833
19,131
(13,298)
(1,003)
(1,275)
(1,161)
(1,326)
(728)
8,013
(796)
(646)
4,976
(3.91)
2020
2,432
6,000
40.5%
19.5
7.9
13.8
30.5
29.8
17.9
344
3,673
31.1
1,634
50.4
145
172
152
66
665
7,380
677
426
2,841
0.56
(1,148)
(1,447)
(1,313)
(1,392)
(1,393)
(3,776)
(4,853)
(4,647)
(4,425)
(2,043)
633
8,013
(1,473)
(1,072)
2,135
(4.47)
(2,353)
(3,070)
4,976
(16.47)
1,650
1,775
1,476
1,273
3,636
7,380
5,712
2,075
2,841
5.44
(5,426)
(6,628)
(6,123)
(5,698)
(5,679)
633
(8,065)
(5,145)
2,135
(21.91)
2019
% CHANGE
2020
2019
% CHANGE
21,403
26,431
81.0%
(88.6)
(77.3)
(40.5) pp
23,239
37,703
61.6%
94,113
112,814
83.4%
(75.3)
(66.6)
(21.8) pp
18.6
15.0
16.8
16.2
11.9
33.3
403
15,506
130.3
1,705
75.0
5.1
(47.4)
(17.8)
NM(8)
NM
(46.3)
(14.6)
(76.3)
(76.1)
(4.2)
(32.8)
(72.4)
(86.5)
18.9
11.6
15.5
25.5
21.6
21.1
344
18.3
15.3
17.0
15.5
11.1
32.9
403
22,780
64,653
191.5
1,655
61.4
548.5
1,745
76.1
2,153,764
5,713,924
13,760
51,543
3.0
(23.9)
(8.8)
NM
NM
(35.8)
(14.6)
(64.8)
(65.1)
(5.1)
(19.3)
(62.3)
(73.3)
Fuel litres (thousands)
Revenue passengers carried (thousands)(7)
372,204
1,349,573
1,625
12,048
(1) Adjusted pre-tax income (loss), EBITDA (excluding special
items) (earnings before interest, taxes, depreciation and
amortization), free cash flow and adjusted CASM are each
non-GAAP financial measures and net debt is an additional
GAAP measure. Refer to section 19 of Air Canada’s 2020
MD&A for descriptions of Air Canada’s non-GAAP financial
measures and additional GAAP measures.
(2) Unrestricted liquidity refers to the sum of cash, cash
equivalents and short- and long-term investments, and the
amount of available credit under Air Canada’s revolving
credit facilities. At December 31, 2020, unrestricted liquidity
was comprised of cash, cash equivalents and short-term
investments of $7,501 million, and long-term investments
of $512 million. At December 31, 2019, unrestricted liquidity
was comprised of cash, cash equivalents and short-term
investments of $5,889 million, long-term investments of
$512 million and undrawn lines of credit of $979 million.
2
AIR CANADA | 2020 ANNUAL REPORT
(3) Except for the reference to average number of FTE employees,
operating statistics in this table include third party carriers
operating under capacity purchase agreements with
Air Canada.
(4) Reflects FTE employees at Air Canada and its subsidiaries.
Excludes FTE employees at third party carriers operating
under capacity purchase agreements with Air Canada.
(5) The number of aircraft in Air Canada’s operating fleet at
December 31, 2020 includes a number of aircraft that have
been grounded due to the impact of the COVID-19 pandemic
as well as 24 Boeing 737 MAX aircraft which remained
grounded at December 31, 2020. Refer to section 7 “Fleet”
of Air Canada’s 2020 MD&A for additional information.
(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.
(8) “NM” denotes “Not Meaningful” and is included in the table
above where a comparison to prior periods would not be
meaningful.
4
Message from
the President and
Chief Executive
Officer
Calin Rovinescu
Sustainability and
Social Impact
10
Directors
143
Executive Officers
144
Investor
and Shareholder
Information
147
Official Languages
at Air Canada
147
3
TABLE OF CONTENTS
2020 MANAGEMENT’S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
2
23
25
27
33
38
42
44
53
55
56
58
58
61
61
62
64
74
75
77
1. Highlights
2. Introduction and Key Assumptions
3. About Air Canada
4. Strategy and COVID-19 Mitigation and Recovery Plan
5. Results of Operations – Full Year 2020 versus Full Year 2019
6. Results of Operations – Fourth Quarter 2020 versus Fourth Quarter 2019
7. Fleet
8. Financial and Capital Management
44 8.1. Liquidity
45 8.2. Financial Position
46 8.3. Net Debt
46 8.4. Working Capital
47 8.5. Consolidated Cash Flow Movements
49 8.6. Capital Expenditures and Related Financing Arrangements
50 8.7. Pension Funding Obligations
51 8.8. Contractual Obligations
51 8.9. Share Information
9. Quarterly Financial Data
10. Selected Annual Information
11. Financial Instruments and Risk Management
12. Accounting Policies
13. Critical Accounting Estimates and Judgments
14. Off-Balance Sheet Arrangements
15. Related Party Transactions
16. Enterprise Risk Management and Governance
17. Risk Factors
18. Controls and Procedures
19. Non-GAAP Financial Measures
20. Glossary
2020 CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
Statement of Management’s Responsibility for Financial Reporting
Independent Auditor’s Report
Consolidated Statements of Financial Position
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income (Loss)
Consolidated Statements of Changes in Equity
Consolidated Statements of Cash Flow
1. General Information
2. Basis of Presentation and Summary of Significant Accounting Policies
3. Critical Accounting Estimates and Judgments
79
80
85
86
87
87
88
89
90
98
100 4. Special Items
101 5. Investments, Deposits and Other Assets
102 6. Property and Equipment
104 7. Intangible Assets
106 8. Goodwill
107 9. Long-Term Debt and Lease Liabilities
111 10. Pensions and Other Benefit Liabilities
118 11. Provisions for Other Liabilities
119 12. Income Taxes
124 13. Share Capital
126 14. Share-Based Compensation
129 15. Earnings (Loss) per Share
130 16. Commitments
131 17. Financial Instruments and Risk Management
137 18. Contingencies, Guarantees and Indemnities
138 19. Capital Disclosures
139 20. Revenue
141 21. Regional Airlines Expense
141 22. Sale-Leaseback
141 23. Related Party Transactions
142 24. Acquisition of Aeroplan
142 25. Equity Investment in Chorus
142 26. Proposed Acquisition of Transat
AIR CANADA | 2020 ANNUAL REPORT
MESSAGE FROM
THE PRESIDENT AND
CHIEF EXECUTIVE
OFFICER
Calin Rovinescu
Due to the calamitous effects of COVID-19,
2020 was the worst year for commercial
aviation in its 106-year history. Global air
traffic was abruptly cut back amid public health concerns
and as governments imposed severe restrictions and
measures on travel. The pandemic’s impact on trade,
commerce and employment further compounded the
challenges as the economic activity that drives much
of air travel declined precipitously.
Like every other airline in the world, Air Canada endured
significant losses during the year. However, the resiliency
and agility we have developed over the past decade through
our transformation program enabled us to adapt quickly
and continually to the ever-changing circumstances. As a
result, Air Canada often led the industry and governments
in its response to the pandemic — most importantly in
the areas of health and safety. These same qualities give
me every confidence the company has the strengths
to rebound ahead of its competitors as the COVID-19
pandemic recedes.
For 2020, Air Canada reported operating revenue of
$5.833 billion versus $19.131 billion in 2019. EBITDA(1)
was negative $2.043 billion, a decrease of $5.679 billion
from the previous year. We reported an operating loss
(1) EBITDA is a non-GAAP financial measure. Such measure is not a recognized
measure for financial statement presentation under GAAP, does 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. Refer to section 19 of Air Canada’s 2020 MD&A for additional information
on Air Canada’s non-GAAP financial measures.
4
AIR CANADA | 2020 ANNUAL REPORT of $3.776 billion from an income of $1.650 billion in the prior year, a reversal of $5.426 billion. On a
capacity decrease of 67%, system passenger revenues decreased to $4.382 billion from $17.232 billion,
or nearly 75% year-over-year. One bright spot was Air Canada Cargo, whose operating revenues reached
$920 million, up 28% from 2019.
Operating expenses of $9.609 billion decreased $7.872 billion or 45% from 2019, reflecting the reduction in
capacity and the significant progress made on both managing variable costs and reducing fixed expenses.
Air Canada completed a company-wide cost-cutting and capital reduction and deferral program for 2020
that reached $1.7 billion.
There were also significant fleet changes, resulting in the retirement of certain older aircraft and the
renegotiation of contracts for new narrow-body aircraft that will position well for the future. Through
fleet restructuring and other capital reduction initiatives, planned capital expenditures were lowered
by approximately $3.0 billion for the period 2020–23 compared to our original capital expenditure
projections at the end of 2019.
Air Canada also succeeded in concluding a series of financing transactions totalling $6.780 billion in
2020 to support COVID-19 mitigation and recovery measures and to provide additional operational
flexibility. Apart from confirming the market’s confidence in our airline, these transactions increased
net working capital.
Our financings, very importantly, allowed Air Canada to end the year with unrestricted liquidity of
$8.013 billion. This liquidity is expected to be adequate to enable Air Canada to withstand the impact of
COVID-19 and to ensure it has the financial ability to emerge competitively from the pandemic and regain
its previous industry leading position.
That Air Canada will succeed in the post-pandemic world is evidenced by its rapid and effective response to
the COVID-19 pandemic. Our nimble culture and agility enabled us to move almost immediately. Weeks
before the federal government halted flights to China, Air Canada suspended its service to that country.
In April, it mandated masks be worn by all customers on board its aircraft, a month before officials
recommended wearing masks in public. In May, Air Canada instituted pre-boarding temperature checks
for all customers — something the government only mandated a month later — and it also introduced its
comprehensive biosafety program, Air Canada CleanCare+.
Air Canada has also been a strong advocate of testing. In the fall of 2020, it spearheaded a study to
test arriving international passengers at Canada’s biggest airport, Toronto-Pearson. The largest-ever
study of its kind anywhere in the world, it was conducted by the independent research body, McMaster
HealthLabs. The Greater Toronto Airports Authority also took part and, once the study was underway,
the federal government recognized its value and agreed to participate.
The study was conducted in September, October and November of 2020. Preliminary results, based
on 20,000 tests, found 99% of study participants tested negative for COVID-19. Of the 1% that did
test positive, 70% were discovered on arrival while the other 30% were detected by a test seven days
later. These results suggest there are other, more effective means to manage COVID-19 than resorting
to blanket travel bans, lengthy quarantine periods, and broad travel restrictions. This is something the
government has acknowledged as it looks to begin restoring travel responsibly and safely in 2021, guided
by the findings of this and other science-based analyses.
Our strategy for dealing with COVID-19 has been two-pronged. First, our aim was to mitigate the worst
effects, particularly by implementing stringent safety measures for customers and employees and by
ensuring we had sufficient financial resources to withstand a prolonged downturn. Second, we were also
determined to have in place all the necessary elements to recover quickly in a radically different, post-
pandemic aviation environment.
5
AIR CANADA | 2020 ANNUAL REPORT I am absolutely confident about the future of Air Canada under the extremely capable leadership of my
successor, Michael Rousseau, previously our Deputy Chief Executive and Chief Financial Officer, who
worked very closely with me for nearly 12 years. He and the rest of our highly experienced leadership
team have helped to establish a very strong financial position and commercial footprint that will serve
us well into the future.
Above all, it must be remembered that the effects of COVID-19 are transitory whereas the solid
foundations built over the past 12 years are permanent. The airline has been transformed in all its aspects.
It will emerge from the pandemic still a Canadian global champion, with a powerful footprint and brand.
Over time, we will rebuild our global network. Over the past decade we had effectively doubled our
airline’s reach to more than 100 international destinations before COVID-19 forced a retrenchment.
A retrenchment that I am confident is temporary.
Helping us rebuild will be our Star Alliance partners and our revenue-sharing joint ventures with Air China
across the Pacific and A++ with Lufthansa and United Airlines over the Atlantic. In addition, we have a
wealth of codeshare and interline agreements that give us access to every corner of the Earth.
Our success capturing new air freight business during the pandemic also opened incredible new vistas for
Air Canada Cargo, demonstrating our nimbleness and ability to capitalize on new opportunities. In 2020
global demand surged for cargo space to ship urgently required protective equipment and critical goods.
From March to end-December 2020, Air Canada operated more than 4,000 all-cargo international flights,
using a combination of Boeing 787 and Boeing 777 aircraft, as well as four Boeing 777 and three Airbus
A330 aircraft temporarily converted to exclusive cargo use by removing seats from the passenger cabin.
Air Canada plans to permanently convert several of its owned Boeing 767 aircraft into dedicated
freighters to participate in the growth of e-commerce and leverage Air Canada’s global footprint. We
expect to generate incremental cargo revenue by providing specialized e-commerce delivery services
and our goal is to drive end-to-end value using enhanced technology, dynamic pricing and transparency
across the delivery supply chain.
To best serve our network, we have rationalized our fleet. We are permanently retiring certain older
aircraft and adding next-generation, fuel-efficient aircraft. Our wide-body fleet includes the Boeing 777
aircraft with its competitive CASM, and a seat configuration ideally suited to the high-volume leisure and
Visiting Friends and Relatives markets that we expect to rebound first. These are complemented by the
Boeing 787 aircraft with its lower operating costs, mid-size capacity and range flexibility. As well, we retain
options and rights to acquire additional aircraft quickly and affordably, if required.
We are also renewing our narrow-body fleet. Older, less-efficient aircraft are being replaced with modern
and fuel-efficient Airbus A220 and Boeing 737 MAX aircraft types. The A220’s range and economics
create greater deployment opportunities, enabling Air Canada to serve new markets ill-suited to larger
narrow-body aircraft. Early in 2021, we returned the Boeing 737 MAX aircraft to service. Its range gives us
added network flexibility, maintenance cost advantages and greater fuel efficiency.
Beyond improving the operating economics of our fleet, these changes will also help us meet our
environmental and other goals of ESG, which is of interest to all stakeholders and rightly of increasing
importance to the investment community. This is also why, throughout the pandemic, we were careful to
maintain the Air Canada Foundation so that it can continue its vital core mission of improving the lives of ill
or disadvantaged children, assisting in times of disaster both in Canada and abroad, and supporting other
major health-related causes. ESG will remain a central consideration in decision-making at Air Canada.
Reinforcing our network are Air Canada’s Toronto global hub and its gateway hubs of Vancouver and
Montréal. We often compare Canada to Australia and New Zealand, but unlike these countries, Canada
sits in the middle of some of the busiest travel corridors in the world, such as from the U.S. to Europe,
and the U.S. to Asia. The strategy of connecting this traffic through our attractive and highly competitive
hubs is key to our long-term recovery and prosperity. Additionally, our hub cities have the benefit of a
strong local multicultural population base to help sustain our international network with both origin and
destination traffic.
6
AIR CANADA | 2020 ANNUAL REPORT Despite the severe restrictions imposed by COVID-19, we have not forgotten the vital and differentiating
importance of customer service. We provide a customer experience enhanced by competitive products
and services, including lie-flat seats in the Signature Class cabin, concierge services, Maple Leaf Lounges
and the Air Canada Signature Suites, onboard amenities such as in-flight entertainment and Wi-Fi, and a
range of fare products tailored to appeal to each market segment.
Prior to COVID-19, Air Canada was named Best Airline in North America for eight of 10 years and it
remains North America’s only four-star network carrier as rated by Skytrax. During 2020, it continued
to win numerous accolades and recognitions, including being named Global Traveler’s Best Airline in
North America for a second straight year. In January 2021, Air Canada received APEX’s Diamond Status
Certification for Air Canada CleanCare+, which made us the only airline in Canada to attain the highest
APEX ranking.
Our focus on a customer-friendly experience and innovation has carried on throughout the COVID-19
pandemic with new touchless airport services and technology such as our biometric boarding pilot
project. These innovations will remain in place post-COVID-19 because they are convenient and can
speed airport passage.
The transformed Aeroplan program that we launched in late 2020 further enriches the customer
experience and promotes loyalty. The program now offers a wide range of new features such as improved
value on flight rewards, Aeroplan Family Sharing, the ability to use Aeroplan points for travel extras like
cabin upgrades and in-flight Wi-Fi, and expanded merchandise rewards. Aeroplan Elite Status Members
also have access to new benefits including Priority Rewards.
Air Canada has many other attributes, some of which, such as our rich heritage, predate our transformation.
But a final element that I regard most important of all is the entrepreneurial culture that has taken deep
root at our airline. This culture — and the strong commitment and ‘just do it’ mindset of our employees —
is now ingrained in our DNA and was fully on display as we responded to the COVID-19 crisis.
While my tenure is ending, I know that Air Canada’s continued pursuit of excellence, under Michael Rousseau’s
leadership, will not end. Air Canada will continue to innovate and evolve, always focusing on safety and
the customer, and enhancing new products and services.
I will conclude by thanking our employees for their unflagging efforts over the past 12 years, working to
make a reality, the once aspirational goal of Air Canada becoming a Global Champion. I also would like to
thank our shareholders for entrusting us with their investments and for their faith in our plan. And, finally,
I thank the Air Canada Board of Directors for endorsing our transformation strategy and the wise counsel
that members, past and present, generously provided on every step of the long journey to creating the
new Air Canada.
Best regards,
Calin Rovinescu
President and Chief Executive Officer
February 12, 2021
7
AIR CANADA | 2020 ANNUAL REPORT 8
S USTAI NAB I LIT Y AN D
SOC IAL I M PACT
9
AIR CANADA | 2020 ANNUAL REPORT
SUSTAINABILITY AND SOCIAL IMPACT
H I C S
T, ALWAYS & E T
SINESS
U
B
Socio-economic
Development
Innovation
S
IR
F
Y
T
E
F
A
S
SAFET
Y FIR
Health and
Well-being
S
T
,
A
P
E
O
L
W
P
A
L
E
Y
S
Diversity
and
Inclusion
&
E
T
H
C
S
I
Waste
Management
Climate
Action
S
A
F
PLANE T
ETY FIRST, ALWA Y S & E
H IC S
T
The following is an overview of Air Canada’s environmental,
social and governance (“ESG”) achievements in 2020, a year
singularly dominated by the severe impacts of the COVID-19
pandemic, as well as a preview of certain objectives for 2021
and beyond. This overview is presented through Air Canada’s
three sustainability pillars: Business, People, Planet.
A more detailed ESG discussion will be provided in
Air Canada’s upcoming 2020 Corporate Sustainability Report.
10
AIR CANADA | 2020 ANNUAL REPORT
SUSTAINABILITY AND SOCIAL IMPACT | 2020 ACHIEVEMENTS
Business
Air Canada accomplished the following
in 2020, contributing to its long-term
sustainable business plan:
Repatriation flights – Air Canada operated repatriation
flights to bring nearly 10,500 Canadians home from
abroad.
COVID-19 Mitigation and Recovery Plan – In 2020, focusing
on safety, public health and well-being and, as a result of the
pandemic, Air Canada:
— Developed and launched Air Canada CleanCare+, an industry-
leading comprehensive program.
— Implemented health checks and face coverings in advance of any
regulatory requirement to do so.
— Launched TouchFree Bag Check for flights departing Canadian
airports.
— Forged medical and testing collaborations (e.g., MHL Labs,
BlueDot, Cleveland Clinic Canada).
— Introduced optional facial biometrics boarding for certain flights
to Canada from the U.S.
— Offered special benefits and accommodation for Aeroplan
Members in light of COVID-19, including complimentary
Manulife COVID-19 insurance.
— Continued to respond to Transport Canada, IATA/IOSA
requirements for audits and continuously ensured risk to the
organization is mitigated.
— Maintained approximately 50% of its workforce at the end of
2020 despite the severe impact of the COVID-19 pandemic,
including the significant drop in customer traffic compared to
the 2019 levels.
Air Canada quickly reacted to the pandemic by expanding and
modifying its cargo operations, and more than 4,000 cargo-only
flights were operated. In addition:
— An agreement was reached with ACPA (the union representing
its pilots) to allow for expanded cargo operations.
— Aircraft were retrofitted and Transport Canada approval was
received to convert passenger aircraft to all-cargo flights.
Air Canada launched the transformed Aeroplan Loyalty
Program, designed to put the member experience first.
Air Canada Vacations continued efforts with suppliers
and hotel partners to reduce activities related
to attractions involving dolphins and conducted
sustainability practices audits with its hotel partners.
11
4,000+
CARGO-ONLY
FLIGHTS OPERATED
IN 2020
Recognitions
Airline Passenger
Experience Association
(APEX)
— 5-star rating
— Diamond Status Certification
for Air Canada CleanCare+
GT Tested Reader
Survey Awards
(Global Traveler)
— Best Airline in North America
— Best Airline Cabin Cleanliness
(inaugural award)
— Best Frequent-Flyer Award
Redemption – Aeroplan
— Best Airline for Onboard
Entertainment (second
consecutive year)
— Best Airline, Premium
Economy
(second consecutive year)
— Best Airline, Onboard Menu –
Business Class
The Trazees
(aimed at travellers
aged 25-40)
(Global Traveler)
— Favourite Airline in
North America
(second consecutive year)
Wherever Awards
(aimed at the modern
travelling family)
(Global Traveler)
— Best Family-Friendly Airline
in North America (second
consecutive year)
— Best Family-Friendly
International Airline
Institutional Investor
— Top company for corporate
leadership and investor
relations expertise
— Highest ranked organization
in the consumer business
category.
Loyalty360 Awards
— Platinum Award – Innovation
in Corporate Social
Responsibility
— Bronze Award – Business
Transformation
AIR CANADA | 2020 ANNUAL REPORT SUSTAINABILITY AND SOCIAL IMPACT | 2020 ACHIEVEMENTS
People
— In 2020, in response to the COVID-19 pandemic, Air Canada implemented
or initiated:
• COVID-19 rapid response screening facilities for office-based and
operational employees at primary hubs.
• A trial application of COVID-19 contact tracing technology in certain
Toronto workplace facilities, using the Bluetooth-enabled TraceSCAN
app and wearable technology developed by Canadian-based Facedrive
Inc.
• A telework policy for employees.
• A COVID-19 Return to Work manual, providing up-to-date guidelines for
employees when re-entering the workplace.
• A Leadership in COVID-19 training series to support people managers
and employees.
• Weekly COVID-19 communications in collaboration with Cleveland
Clinic Canada for all employees.
— The Virtual Reality Back Injury Prevention Program, leveraging technology
to provide a new training experience for employees.
Return
to work
— The corporate safety pulse survey, with a response rate of above 30%, was
For your safety > Air Canada EmployeeCare+ Kit
conducted.
— A ramp Gamification Program for hazard identification was introduced to
training materials.
— A total of 125 digital learning courses for career and self-development and
specific development opportunities were introduced through conversation
sessions, online learning cohorts, and self-led online programs.
— Unlock the Best in You, Air Canada’s Corporate Wellness Program, was
expanded.
— Air Canada stepped up its diversity and inclusion initiatives and developed
new partnerships.
— Air Canada and the Air Canada Foundation engaged with and supported
communities by distributing in-kind support, engaging in partnerships,
carrying out fundraising initiatives and granting financial support to
Canadian-registered charities.
Recognitions
(seventh consecutive year)
(sixth consecutive year)
WORLD’S BEST
EMPLOYERS
Employment Equity
Achievement Award
Diversity & Inclusion from
Employment and Social
Development Canada (ESDC)
12
AIR CANADA | 2020 ANNUAL REPORT SUSTAINABILITY AND SOCIAL IMPACT | 2020 ACHIEVEMENTS
Planet
Recognitions
YVR Green Excellence Award
(second consecutive year)
Despite the financial impact of the global pandemic, Air Canada continued to advance its
environmental initiatives and reduce its carbon footprint by:
— Installing electric chargers for ground support equipment (GSE) in Montréal.
— Receiving the YVR Green Excellence Award for a second consecutive year in recognition of
Air Canada’s efforts to reduce its energy and water consumption usage.
— Attaining IEnvA stage 2 certification for its Environmental Management System.
— Signing the Buckingham Palace Declaration and attaining International Air Transport
Association (IATA) Illegal Wildlife Trade (IWT) certification for cargo operations.
— Achieving pre-pandemic, 2020 Corporate Waste Strategy targets.
— Repurposing 809 tonnes of Air Canada materials rather than sending them to landfills.
— Making socially responsible items available for sale through Aeroplan eStore.
— Reducing the number of printed brochures at Air Canada Vacations by 60% (year over year)
and engaging with partners to do the same.
13
AIR CANADA | 2020 ANNUAL REPORT SUSTAINABILITY AND SOCIAL IMPACT
Air Canada’s vision for its recovery—to restore and
has built over the past several years, which focuses on the following
four core priorities to continuously improve the customer experience
and employee engagement and to create value for shareholders,
employees, customers, communities, and other stakeholders:
rebuild towards its global champion ambition—is
predicated on leveraging the solid foundation it
Pursuing profitable international growth opportunities
and leveraging competitive attributes.
Engaging customers by continually enhancing their
travel experience and by consistently achieving
customer service excellence.
Identifying and implementing cost-reduction and
revenue-enhancing initiatives.
Fostering positive culture change.
These priorities will continue to be important pillars of Air Canada’s
success, as it seeks to recover from the impact of the COVID-19
pandemic.
Sustainable Culture
At the heart of Air Canada’s culture is its overriding value: Safety First,
Always. It is the foremost consideration of everyone at Air Canada including
customers, employees and the communities it serves. Air Canada also
recognizes that a cornerstone of its success is sustainable development and
that it must also be embedded in Air Canada’s culture. Culture enables and
drives sustainability in various ways and at various levels: it influences long-
term behaviours, builds identity, encourages innovation and contributes to
sustainable management practices. Air Canada’s culture has also been critical
to its agility—its ability to navigate, to quickly and continually adapt to the
pandemic. Air Canada’s culture is what drives our plan of action for people,
the business and the planet.
14
AIR CANADA | 2020 ANNUAL REPORT SUSTAINABILITY AND SOCIAL IMPACT
Business
Please refer to Air Canada’s public disclosure file, including in its fourth quarter
Management Discussion & Analysis, for a description of the efforts deployed
to preserve the sustainability of the business in response to the impact of the
COVID-19 pandemic.
CHANGING THE
HEPA FILTER ON
A BOEING 787-9
DREAMLINER
15
AIR CANADA | 2020 ANNUAL REPORT
2021 Objectives Preview
The following is an overview
of programs to be initiated or
continued in 2021:
BUSINESS
» Continue to promote
Air Canada’s Safety First, Always
culture, through key objectives,
focused on risk management
and reporting, the safe
reintroduction of the Boeing 737
MAX, cargo operations, and new
routes, equipment, initiatives
and projects.
» Continue to support and
promote COVID-19 biosafety
compliance and measures.
» Reduce lost-time injuries (per
10,000 flights) by 8% from 2020
levels.
» Build custom business apps for
compliance monitoring of injury
programs.
» Further sustainable procurement
practices, through procurement
policies and training.
» Act on Air Canada’s 2020–23
Linguistic Action Plan to further
Air Canada’s official languages
maturity.
» Air Canada Vacations will
continue to enhance sustainable
tourism practices with employee
training and raise customer
awareness about responsible
excursions and via promotion
and introduction of additional
initiatives.
» Include SASB standards in 2021
Corporate Sustainability Report.
» Enhance the UN Communication
of Progress accompanying
the Corporate Sustainability
Report and publish a Sustainable
Development Goals index,
identifying Air Canada’s progress
against each goal.
SUSTAINABILITY AND SOCIAL IMPACT
People
Health and Safety
Privacy and Cybersecurity
Air Canada has an extensive health and safety program to prevent
work accidents and injuries. Key to these measures is the Hazard
Prevention Program, which allows health and safety committees to
identify and assess workplace hazards and to determine appropriate
controls for mitigating risks. These committees cover all employee
groups at Air Canada. The Corporate Safety branch, through its
Corporate Safety and Emergency Management department,
is responsible for ensuring that employee safety programs are
documented, implemented, effective and adapted to realize
identified improvements. Among other activities, the Corporate
Safety branch monitors compliance with applicable laws and
regulations while tracking employee safety-related incidents.
Biannual, voluntary and confidential safety culture surveys are
conducted to collect employees’ insight on safety. The results from
the survey effected in 2020 show that the majority of employees
feel safe to report errors, concerns and hazards, understand why
safety operating procedures are created and feel supported in their
ability to learn and be taught new safety procedures.
Air Canada continues to maintain exemplary IATA Operational
Safety Audit results.
16
Air Canada has developed a cybersecurity framework and continues
to implement its privacy action plan to progress its privacy maturity,
cyber security resilience and manage risks through multi-layered
means, including through more robust infrastructure, consistent
processes and effective governance. Privacy efforts are focused
notably in the areas of polices governance, vendor privacy risk
management, record of processing activities, privacy impact
assessments and data subject rights management. As part of
its security efforts, Air Canada implemented a Multi-Factor
Authentication Program for employee and customer-facing
applications. Internal controls and Payment Card Industry Data
Security Standard (PCI DSS) controls are assessed annually in
accordance with the National Instrument 52-109 (NI 52-109)
auditing standard and PCI DSS 3.2.1 respectively.
Wellness
Specific COVID-19 workplace measures were implemented such
as COVID-19 screening facilities for office-based and operational
employees at primary hubs, training to support people managers in
dealing with the new realities, weekly COVID-19 communications
via employee communication channels with Cleveland Clinic Canada,
including live broadcasts, and a telework policy. Air Canada is
AIR CANADA | 2020 ANNUAL REPORT 2021 Objectives Preview
The following is an overview
of programs to be initiated or
continued in 2021:
PEOPLE
» Continue to promote and
improve resources, tools and
programs for employees’
development, engagement
and well-being, especially
in the face of the continued
pandemic, including through:
• Appropriate tools and
continuous workplace safety
measures.
• New and continuous UBY
offerings and other assistance
programs.
• Talent development plans.
» Engage with customers with
adapted offerings, as the
ability to travel gradually
returns.
» Continue to help
communities in need from
coast to coast, through in-
kind donations, employee
volunteering, fundraising or
special initiatives.
» Deepen community relations
by supporting socio-
economic development and
by supporting organizations
focused on innovation, health
and wellness, diversity and
inclusion, official languages
and the environment.
SUSTAINABILITY AND SOCIAL IMPACT
also working with the Creative Destruction Labs Rapid Screening
Consortium on rapid antigen screening in the workplace starting
with pilots in Toronto and Montréal.
Air Canada has other workplace safety measures in place to ensure
the well-being of employees. These include policies on workplace
violence and harassment, drugs and alcohol, and workplace safety
training, and providing automated external defibrillator units in
all facilities.
Employees may benefit from the Employee and Family Assistance
Program (or other similar programs), which provides immediate
and confidential help for any work, health or life concern, and
Air Canada’s unique corporate wellness program, called Unlock
the Best in You (UBY). UBY provides tools, resources and training
in relation to health and wellness, mental health, financial health,
and work health. It was expanded in 2020 with the launch of a
mobile application that offers an extensive pool of resources, tools
and health challenges for employees, as well as a virtual counselling
program for employees’ and their families’ mental health, workplace
training for managers and expert blogs on navigating and managing
the COVID-19 pandemic. A special employee engagement campaign
outlining the importance of mental health was held in October 2020
as well.
17
AIR CANADA | 2020 ANNUAL REPORT SUSTAINABILITY AND SOCIAL IMPACT
Employee and Labour Relations
Air Canada’s deep and strong relationship with its major union
groups is a fundamental pillar of Air Canada’s sustainable future.
This was exemplified through their close and constructive work
to transform cargo operations and mitigate, as best as possible,
the unavoidable workforce reduction effected as a result of the
unprecedented impacts of the COVID-19 pandemic.
Retention and development of employees is the cornerstone of
a healthy work culture and protects the longevity of a business
while setting it up for future success. Air Canada focuses on
building a sustainable workforce and, as such, contributes to
the socio-economic development in Canada. Air Canada is an
important contributor to the travel and tourism sector worldwide.
Notwithstanding the impacts of the COVID-19 pandemic, talent
management and retention remain a key focus for the future of the
organization. Air Canada is committed to providing development
opportunities and career progression to its employees. In
accordance with its Recruitment Policy, recruitment initiatives
emphasize its dedication to encouraging internal transfers
and promotions. Some collective agreements also provide for
opportunities to trial other positions within the Company, while
protecting seniority and job positions for some time.
Diversity and Inclusion
Air Canada believes that diverse perspectives maximize the
effectiveness and quality of decision-making. Air Canada’s
commitment to diversity was affirmed in a written Board Diversity
Policy first adopted by its Board of Directors in February 2015 and,
more recently, affirmed in an amended policy in February 2020.
Air Canada is a member of the 30% Club and a signatory to the
Catalyst Accord 2022, whose objective is to increase the average
percentage of women on boards and in executive positions in
corporate Canada to 30% or greater by 2022. Air Canada established
and exceeded a target of women representing at least 30% of
senior management by 2020. One-third of Air Canada’s Executive
Committee is composed of women, and over 30% of its Board of
Directors is represented by women, and one out of the 12 directors
(8%) of the Board of Directors is a member of a visible minority.
Air Canada pursues a comprehensive diversity management
strategy with the goal of ensuring an inclusive and diverse workplace
based on respect, where all employees feel they belong, which
18
creates an environment in which they can best use their talents.
On March 4, 2021, Air Canada announced that it been named one
of Canada’s Best Diversity Employers for the sixth consecutive year
by MediaCorp Canada Inc. The airline was selected again for its
ongoing commitment to inclusiveness through various initiatives and
programs that promote equal opportunities for all people and a work
environment where all employees feel respected and recognized.
In 2020, Air Canada signed the BlackNorth Initiative CEO pledge
to acknowledge the existence of anti-Black systemic racism and on
creating opportunities for Black people within the company. As part
of the Pledge Air Canada committed to, at a minimum, have 3.5%
of executive and board roles being held by Black leaders by 2025.
Air Canada also launched a new leadership bursary with the Pinball
Clemons Foundation for people of colour.
Air Canada introduced training to facilitate accessible transportation
for persons with disabilities and for all customer-facing employees
and management involved in decision-making or policy or procedure
setting. Air Canada takes great pride in ensuring its customers are
well taken care of during all phases of the journey, from booking
to departure and to their destination arrival. In order to deliver
AIR CANADA | 2020 ANNUAL REPORT SUSTAINABILITY AND SOCIAL IMPACT
accessible services, considerable resources are devoted to meet
the needs of customers. This training, itself built on an inclusive
approach, is an additional layer to these efforts, consistently raising
awareness and providing increased support when needed.
Communities
In a year that was challenging unlike any other and despite the
impact of the pandemic on its business, Air Canada and the
Air Canada Foundation continued to help communities in need from
coast to coast, through in-kind donations, employee volunteering,
fundraising or special initiatives.
Air Canada provided and promoted opportunities for Aeroplan
Members to support communities through special offers, matching
campaigns and donation opportunities, including during the Travel
at Home campaign. In 2020, more than 150 million Aeroplan points
were donated by members to charities.
With the Gift of Travel campaign, Air Canada celebrated the actions
of community heroes who made a memorable impact, helping their
fellow Canadians during the COVID-19 pandemic. It also enabled
the raising of funds and Aeroplan points for charitable organizations
in Canada, while offering customers aspiring to travel a new flexible
travel pass product. More than $135,000 (net) was raised by the
Air Canada Foundation through an inaugural public online auction,
along with over one million Aeroplan points through its annual
Matching Campaign.
Air Canada and the Air Canada Foundation initiated a food rescue
effort across Canada, offering more than 770,000 kilograms of food
from April to December, representing over 1.3 million meals. These
efforts supported more than 70 front-line social service organizations
across eight provinces and averted roughly over 1.5 million kg of
greenhouse gas (GHG) emissions from the avoidance of new food
production, processing or retailoring.
In October, Air Canada Cargo and the Foundation brought Drone
Delivery Canada (DDC), the Pontiac Group, GlobalMedic and
DRONE DELIVERY
SOLUTION FOR THE
BEAUSOLEIL FIRST
NATION COMMUNITY
IN ONTARIO.
IMPLEMENTED BY:
AIR CANADA CARGO AND THE
AIR CANADA FOUNDATION
19
AIR CANADA | 2020 ANNUAL REPORT
generous donors together to implement DDC’s drone delivery
solution for the Beausoleil First Nation Community in Ontario.
More than 4,000 cargo-only flights were operated in 2020, providing
needed global capacity to ensure the flow of essential goods in the
supply chain, including personal protective equipment (PPE). As of
December 2020, more than 2.6 million kg of PPE were transported.
Air Canada Cargo underwent an extensive preparedness exercise
in 2020 to ensure all aspects of its operations were up to date and
reflective of current requirements and standards for transporting
vaccines. COVID-19 vaccines are being transported around the world,
and Air Canada Cargo, a trusted supply chain partner, is proudly
involved in bringing the vaccines to Canadians.
Over 300 employees helped their local communities across the
country, supporting The Canadian Red Cross efforts in the fight
against COVID-19. Becoming Santa for a day, brightening the spirits
of more than 200 children in need, they assembled backpacks full of
brand-new gifts for youth experiencing homelessness or they raised
funds for various causes.
SUSTAINABILITY AND SOCIAL IMPACT
Planet
Air Canada’s environmental focus is two-fold: Leave less: less energy
use through operations, less carbon in the atmosphere, less waste
on land and in water, and less noise in communities; and Do more to
address environmental issues: more collaboration and participation
with industry partners, and more involvement in communities and
with employees and customers.
Air Canada has developed an Environmental Policy, consistent with
the requirements of IEnvA and ISO 14001:2015, which documents
its environmental commitments. The Environmental Policy is the
basis of Air Canada’s Environmental Management System (EMS)
through which Air Canada maintains environmental management
programs to meet regulatory compliance requirements and other
additional commitments to which it has subscribed.
In support of its efforts to reduce waste, pollution and GHG
emissions and to improve environmental performance, Air Canada
advanced to a third-party certified system through the IATA IEnvA
program. IEnvA is a two-stage certification process, specific for
airlines that complies with and demonstrates equivalency to the
ISO 14001: 2015 environmental management systems standard.
Air Canada is proud to be the first airline in North America to be
IEnvA Stage 2 certified, which provides recognition that its existing
environmental compliance activities and sustainability initiatives
are more integrated into Air Canada’s operations.
In June 2020, Air Canada signed the Buckingham Palace
Declaration, which confirms its commitment to stop traffickers
of illegal wildlife trade from moving their contraband. On
September 30, 2020, Air Canada became Illegal Wildlife Trade
(“IWT”) certified — the first airline in North America to achieve this
industry standard. Introduced in 2019 by IATA, the IWT certification
incorporates the 11 commitments of the United for Wildlife
Buckingham Palace Declaration for airlines engaged in fighting
the trade in illegal wildlife. Air Canada Vacations also acted on its
commitment to no longer sell or promote packages to, or generate
revenue from, attractions that involve the captivity of current
or future generations of dolphins, working with its suppliers and
contracted hotels to continuously reduce the practice of keeping
dolphins in captivity.
Climate Action
A global challenge that knows no national borders, climate
change requires international solutions and coordination to help
countries lower their carbon emissions. Commercial aviation
produces around 2% of the total man-made carbon emissions.
Air Canada monitors its GHG emissions closely and is committed
to mitigating its environmental footprint. As 99% of the airline’s
carbon dioxide (CO2) emissions are generated from aircraft engine
combustion, there is a strong positive correlation between meeting
20
Environmental and
sustainability strategy
LESSCARBON
LESSNOISE
LESSWASTE
MOINS DE DÉCHETS
LESSENERGY
DOMORE
MOINS D’ÉNERG IE
EN FAIR E PLU S
Climate protection plan
Plan de lutte pour le climat
Stratégie
environnementale et de
développement durable
MOINS DE CAR BONE
MOINS
D'ÉMISSIONS
SONORES
its environmental targets and reducing fuel burn, emissions and
operating costs.
IATA’s aviation industry climate action plan has set targets to
mitigate CO2 emissions from air transport:
— An average improvement in fuel efficiency of 1.5% per year
from 2009 to 2020.
— A cap on net aviation CO2 emissions from 2020 (carbon-neutral
growth).
— A reduction in net aviation CO2 emissions of 50% by 2050,
relative to 2005 levels .
IATA’s stated approach to achieving these targets is through more
efficient aircraft operations, improved technology and sustainable
aviation fuels, infrastructure improvements and single, global
market-based measures to address remaining emissions gaps.
Air Canada has adopted this collective industry approach and has
worked towards these targets.
Air Canada continues to bolster its climate change strategy to
further improve on its emissions and has subscribed to ambitious
goals and targets going forward. To date, Air Canada is engaged in
the following notable actions:
— Fleet Modernization: Air Canada’s fleet modernization
program offers substantive fuel efficiency improvements and
meaningfully contributes to its environmental impact and
emissions reduction efforts. In May 2020, Air Canada announced
the permanent retirement of certain older aircraft from its
fleet, consisting of its Airbus A319, Embraer 190 and some
select Boeing 767 aircraft, leaving it with a more modern and
fuel-efficient fleet. The Boeing 787-8 and Boeing 787-9, also
known as Dreamliner, deliver an approximate 20% improvement
AIR CANADA | 2020 ANNUAL REPORT SUSTAINABILITY AND SOCIAL IMPACT
in fuel efficiency over the aircraft they replaced. The airline is
also renewing its narrow-body fleet with the Airbus A220 and
the Boeing 737 MAX. These aircraft are expected to average
approximately 20% less fuel consumption per seat and emit
approximately 20% less CO2 and 50% less nitrogen oxide than
the aircraft they replace.
— Fuel Efficiency Working Group: Air Canada created a fuel
efficiency working group that identifies opportunities to reduce
weight on board its aircraft and reduce fuel consumption. Since
2016, over 100 projects were achieved, resulting in more than
135,000 tCO2e avoided.
— Sustainable Fuels: Air Canada has been involved in
advancement and development of sustainable aviation fuel since
2012, having performed eight biofuel flights and contributing to
important Canadian initiatives on biojet supply chain knowledge
and research on the impact of biojet on contrail development.
Air Canada is a supporting airline of “The Sky’s the Limit”
Challenge, through Natural Resources Canada, an initiative to
accelerate innovation of sustainable aviation fuel in Canada.
Through the National Airlines Council of Canada (“NACC”),
Air Canada engages with governments in Canada on policy
discussions for mechanisms needed to support a Canadian
biofuel supply chain.
— CORSIA: Air Canada has endorsed the aviation industry’s
climate action targets and recognizes the ongoing work to be
done in collaboration with the industry, to cap the emissions
growth of international aviation at 2020 levels. The Government
of Canada has adopted the voluntary phase of ICAO’s Carbon
Offsetting and Reduction Scheme for International Aviation
(CORSIA), applicable to certain Air Canada international flights.
CORSIA is designed to complement the basket of mitigation
measures the air transport industry is already pursuing to reduce
its CO2 emissions and will be the first global sector carbon
offset scheme for a single industry. Emissions monitoring in
2019 form the 2020 baseline, with CORSIA obligations in effect
January 1, 2021.
— Canada Action Plan: Air Canada is also a signatory, through
the NACC, to the Canadian Action Plan to Reduce Greenhouse
Gas Emissions from Aviation. This multiparty action plan between
aviation industry stakeholders and the federal government
outlines how the parties intend to reduce greenhouse gas
emissions from aviation activities.
Information on Air Canada’s carbon footprint, targets and climate
protection strategy have been reported through the CDP for the past
13 years. The CDP questionnaire incorporates and aligns with the Task
Force on Climate-related Financial Disclosures (“TCFD”) framework.
To access Air Canada’s CDP response, visit www.cdp.net. In addition to
reporting through the CDP, Air Canada also plans on further aligning
with the TCFD framework for its 2021 ESG disclosures.
Less Waste
Despite the operational and financial impacts of the pandemic,
Air Canada diverted 64.8% of its waste from landfill in offices and
facilities and has maintained its commitment to waste reduction
under its Corporate Waste Strategy. The strategy is focused on
decreasing the amount of waste generated and sent to landfill
21
2021 Objectives Preview
The following is an overview of programs
to be initiated or continued in 2021:
PLANET
» Advance Air Canada’s climate change
strategy and partnerships, focusing
on the following ambitious goal and
targets:
• 2050 goal:
− net-zero GHG emissions from all Air Canada
operations
• 2030 targets:
− 20% absolute GHG reductions from flights
compared to 2019
− 30% absolute GHG reductions from ground
operations compared to 2019
• Investments in sustainable fuels and carbon
compensation mechanisms
» Incorporate TCFD framework in 2021
climate-related reporting.
» Demonstrate commitment to the
Buckingham Palace Declaration through
specific activities designed to raise
awareness of illegal wildlife trafficking.
» Continue advancing Air Canada’s IEnvA
certified environmental management
system.
» Evolve the next set of Corporate Waste
Strategy targets.
» Implement a water conservation
program.
by (1) reducing waste by 20% in offices, Maple Leaf Lounges and
other facilities; and (2) recycling 50% of approved items on board
domestic flights. The Corporate Waste Strategy targets have been
achieved, and Air Canada will now evaluate new goals taking into
consideration the COVID-19 pandemic. This includes developing
solutions for new waste steams created by the pandemic and
working with departmental partners to re-evaluate the way waste
is produced, disposed of, and tracked across all lines of business.
In 2020, 809 tonnes of Air Canada materials were donated for use
rather than sent to landfill. This consisted of donations of banners,
duvets, uniforms, food from its in-flight kitchens and other items.
Socially responsible items are also now available for sale through
the Aeroplan eStore: members have the ability to purchase carbon
offsets, support ocean plastic reduction and acquire upcycled items,
such as leather bags, from Air Canada aircraft.
AIR CANADA | 2020 ANNUAL REPORT MANAG E M E NT ’S
D ISCUSS I O N
AN D ANALYS IS
O F RES U LTS O F
O PE R ATI O N S
AN D FI NAN C IAL
CO N D ITI O N
22
AIR CANADA | 2020 ANNUAL REPORT
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
under the brand name Air Canada Vacations® (“Air Canada
Vacations”), Air Canada Rouge LP, doing business under the brand
name Air Canada Rouge® (“Air Canada Rouge”) and Aeroplan Inc.
(“Aeroplan”). 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 2020. This
MD&A should be read in conjunction with Air Canada’s audited
consolidated financial statements and notes for 2020. 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 20 “Glossary” of this MD&A. Except as
otherwise noted or where the context may otherwise require, this
MD&A is current as of February 11, 2021.
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 17 “Risk Factors” of this MD&A. Air Canada issued a
news release dated February 12, 2021 reporting on its results for
the fourth quarter and full year 2020. 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.
23
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
relate to analyses and other information that are 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 guidance, strategies, expectations, planned operations
or future actions. Forward-looking statements are identified using
terms and phrases such as “preliminary”, “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 in this MD&A and the
documents incorporated by reference herein and are subject to
important risks and uncertainties. Forward-looking statements
cannot be relied upon due to, among other things, changing
external events and general uncertainties of the business of
Air Canada. Actual results may differ materially from results
indicated in forward-looking statements due to a number of
factors, including those discussed below.
Air Canada, along with the rest of the global airline industry,
continues to face a severe drop in traffic and a corresponding
decline in revenue and cash flows as a result of the COVID-19
pandemic and the travel restrictions imposed in many countries
around the world, and particularly in Canada. The impact of the
COVID-19 pandemic began to be felt in traffic and sales figures
commencing in early March 2020. These impacts include drastic
declines in earnings and cash flow from operations. There is very
limited visibility on travel demand given changing government
restrictions in place around the world and the severity of the
restrictions in Canada; these restrictions and concerns about travel
due to the COVID-19 pandemic as well as passenger concerns
and expectations about the need for certain precautions, such as
physical distancing, are severely inhibiting demand. The COVID-19
pandemic is also having significant economic impacts, including on
business and consumer spending, which may in turn significantly
impact demand for travel. Air Canada cannot predict the full
impact or the timing for when conditions may improve. Air Canada
is actively monitoring the situation and will respond as the impact
of the COVID-19 pandemic evolves, which will depend on a
number of factors including the course of the virus, availability of
rapid, effective testing, vaccinations and treatments for the virus,
government actions, and passenger reaction, as well as timing of a
recovery in international and business travel which are important
segments of Air Canada’s markets, none of which can be predicted
with any degree of certainty.
AIR CANADA | 2020 ANNUAL REPORT Other factors which may cause results to differ materially from
results indicated in forward-looking statements include economic
and geopolitical conditions, Air Canada’s ability to successfully
achieve or sustain positive net profitability, industry and market
conditions and the demand environment, Air Canada’s ability to
pay its indebtedness and maintain or increase liquidity, including
through government financial assistance, competition, energy
prices, Air Canada’s dependence on technology, cybersecurity risks,
Air Canada’s ability to successfully implement appropriate strategic
and other important initiatives (including Air Canada’s ability to
reduce operating costs), other epidemic diseases, terrorist acts, war,
Air Canada’s dependence on key suppliers, casualty losses, changes
in laws, regulatory developments or proceedings, Air Canada’s
ability to successfully operate its new loyalty program, climate
change and environmental factors (including weather systems
and other natural phenomena and factors arising from man-made
sources), interruptions of service, Air Canada’s dependence on
regional and other carriers, Air Canada’s ability to preserve and grow
its brand, employee and labour relations and costs, Air Canada’s
dependence on Star Alliance and joint ventures, limitations due to
restrictive covenants, pending and future litigation and actions by
third parties, currency exchange, the grounding of the Boeing 737
MAX aircraft in certain jurisdictions and risks generally relating to
the grounding of aircraft fleet types, pension plans, Air Canada’s
ability to attract and retain required personnel, 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 17 “Risk Factors” of this MD&A. Furthermore,
the acquisition of Transat A.T. Inc. is subject to regulatory approvals
and certain conditions, and there are no assurances that the
acquisition will be completed as described in this MD&A or at all.
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
Air Canada, along with the rest of the global airline industry,
continues to face a severe drop in traffic and a corresponding
decline in revenue as a result of the COVID-19 pandemic. In light of
the COVID-19 pandemic, as well as the economic environment and
the recent significant volatility in fuel price and foreign exchange
rates, Air Canada is not providing any assumptions relating to GDP,
fuel prices or foreign exchange rates.
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.
24
AIR CANADA | 2020 ANNUAL REPORT 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. Its mission is connecting Canada and the World.
Air Canada enhances its domestic and transborder network through
capacity purchase agreements (“CPAs”) with regional airlines
operating flights on behalf of Air Canada under the Air Canada
Express banner. Regional carriers form an integral part of the
airline’s international network strategy, providing valuable traffic
feed to Air Canada and Air Canada Rouge routes.
In 2020, 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 CPAs, operated, on
average, 544 daily scheduled flights to 192 direct destinations on six
continents, comprised of 61 Canadian destinations, 50 destinations
in the United States and a total of 81 international destinations
(though operations to many destinations were suspended or did
not operate continually as they otherwise would throughout
the year as a result of the COVID-19 pandemic). In comparison, in
2019, Air Canada, together with its CPA carriers, operated, on
average, 1,531 daily scheduled flights to 217 direct destinations on six
continents, comprised of 62 Canadian destinations, 56 destinations
in the United States and a total of 99 international destinations.
The significant decline in flight operations in 2020 was due to the
severe impact of the COVID-19 pandemic which is further discussed
in section 4 “Strategy and Covid-19 Mitigation and Recovery Plan”
of this MD&A.
At December 31, 2020, Air Canada mainline had an operating fleet of
169 aircraft, comprised of 91 Boeing and Airbus narrow-body aircraft
(including 24 Boeing 737 MAX aircraft which were grounded in 2020
and some of which resumed commercial flying on February 1, 2021),
78 Boeing and Airbus wide-body aircraft, while Air Canada Rouge
had an operating fleet of 39 aircraft, comprised of 14 Airbus A321
aircraft, five Airbus A320 aircraft and 20 Airbus A319 aircraft. At
December 31, 2020, the Air Canada Express fleet was comprised of
49 Mitsubishi regional jets, 62 De Havilland Dash-8 turboprop aircraft
and 25 Embraer 175 aircraft for a total of 136 aircraft. In comparison,
at December 31, 2019, Air Canada mainline had an operating fleet of
188 aircraft, comprised of 94 Boeing and Airbus narrow-body aircraft
(including 24 Boeing 737 MAX aircraft which were grounded for the
duration of the year in March 2019), 80 Boeing and Airbus wide-body
aircraft, and 14 Embraer 190 regional jets, while Air Canada Rouge
operated a fleet of 64 aircraft, comprised of 14 Airbus A321 aircraft,
three Airbus A320 aircraft, 22 Airbus A319 aircraft and 25 Boeing
767-300ER aircraft. At December 31, 2019, the Air Canada Express
fleet was comprised of 48 Mitsubishi regional jets, 73 De Havilland
Dash-8 turboprop aircraft and 25 Embraer 175 aircraft for a total
of 146 aircraft. At December 31, 2019, a total of five 18-passenger
Beech 1900 aircraft were also operated by regional airlines on behalf
of Air Canada.
25
AIR CANADA | 2020 ANNUAL REPORT Air Canada is a founding member of the Star Alliance® network.
Through the 26-member airline network, Air Canada offers its
customers access to a vast global network, as well as reciprocal
participation in frequent flyer programs and the use of airport
lounges and other common airport facilities.
Air Canada’s Aeroplan program is Canada’s premier travel loyalty
program. The Aeroplan program allows individuals to enrol as
members and accumulate Aeroplan points through travel on
Air Canada and select partners, as well as through the purchase
of products and services from participating partners and suppliers.
Members can redeem Aeroplan points for a variety of travel,
merchandise, gift card, and other rewards provided directly by
participating partners, or made available through Aeroplan’s
suppliers. Aeroplan Elite Status recognizes Air Canada’s frequent
flyers, as well as Aeroplan’s most engaged members, with a range
of priority travel services and membership benefits.
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 offering cruise packages in North America,
Europe and the Caribbean. Air Canada Rouge is Air Canada’s
leisure carrier.
Air Canada Cargo is a global cargo service provider, offering cargo
services through scheduled flights and via chartered, specialized
flights. In addition to transporting freight on Air Canada’s aircraft
operating scheduled passenger services, in 2020, Air Canada Cargo
started transporting freight on cargo-only flights using Air Canada’s
mainline wide-body aircraft, as well as four converted Boeing 777
and three converted Airbus 330 aircraft where it has increased
available cargo space by removing seats from the passenger cabin.
26
AIR CANADA | 2020 ANNUAL REPORT
4.
Strategy and COVID-19 Mitigation and Recovery Plan
Air Canada, along with the rest of the global airline industry,
continues to face a severe and abrupt drop in traffic and a
corresponding decline in revenue and cash flows as a result of the
COVID-19 pandemic and the travel restrictions imposed in many
countries around the world, and particularly in Canada. The impacts
of the COVID-19 pandemic began to be felt in traffic and sales figures
commencing in early March 2020. These impacts include drastic
declines in earnings and cash from operations. Canada has among
the strictest travel restrictions and quarantine requirements in the
world, including barring most inbound travel by non-Canadians and
imposing a 14-day quarantine on passengers returning from abroad.
In addition, effective January 7, 2021, international travellers five
years of age or older entering Canada are required to present, prior
to boarding a flight, a negative COVID-19 PCR test. On January 29,
2021, the Government of Canada announced further restrictions to
international travel including PCR testing upon arrival and mandatory
quarantine in a government-approved hotel for three days at the
travellers’ expense (and, for travellers with a positive COVID-19 test,
an additional quarantine in government facilities). Additional details
on the measures announced on January 29, 2021 are expected to be
announced in the coming days or weeks.
COVID-19 Mitigation
and Recovery Plan
Air Canada has implemented or will be implementing the following
measures as part of its COVID-19 Mitigation and Recovery Plan:
Customer Service and Safety
Air Canada makes safety its first consideration in all that it
does and has been continually updating its health and safety
policies and procedures for travellers and employees in airports,
onboard aircraft and in other workplaces to account for new
information about COVID-19 as it becomes available. This includes
a requirement for customers and crew to wear a protective face
covering, as well as enhanced protective personal equipment for
airport agents and crews, the reinforcement of safe practices such
as frequent handwashing and collaborating with the Canadian
federal government to screen passengers to help determine fitness
for flying.
— To underscore its commitment to customer and employee
safety, Air Canada introduced Air Canada CleanCare+. This
program is designed to reduce the risk of exposure to COVID-19
through such measures as enhanced aircraft grooming,
mandatory preflight customer temperature checks and facial
coverings, in addition to required health questionnaires and
providing all customers with care kits for hand cleaning and
hygiene. In January 2021, Air Canada received the Diamond
certification from the Airline Passenger Experience Association
(APEX) Health Safety powered by SimpliFlying. The Diamond
27
Certification recognized the airline for achieving hospital-grade
levels of biosecurity across multiple passenger touchpoints. The
certification program aims to create a global standard for health
and safety measures focused on airline customers.
— Air Canada has introduced numerous touchless processes
throughout the customer journey, including: TouchFree Bag
Check for flights departing from Canadian airports, the ability
to order food directly in Maple Leaf Lounges from smartphones
and tablets, touchless self-entry to the Air Canada Café for when
it reopens, and provisioning of all newspapers and magazines in
digital format via PressReader.
— Air Canada has undertaken several medical collaborations to
continue advancing biosafety across its business, including with
Cleveland Clinic Canada in Toronto, a renowned global health
care leader, to provide additional science-based evidence in
our ongoing COVID-19 response; with Ottawa-based Spartan
Bioscience to explore rapid COVID-19 testing in an aviation
environment; and, since early 2019, with Toronto-based BlueDot,
a company that monitors infectious diseases globally in real time
to provide accurate, relevant information to make business and
safety decisions quickly.
— Air Canada partnered with McMaster HealthLabs and the
Greater Toronto Airports Authority in a study of international
travellers arriving at Toronto Pearson International Airport.
Preliminary results have indicated that testing can provide an
effective, responsible alternative to facilitate the safe relaxation
of quarantines. Final results are currently being analyzed and
are expected to be published by McMaster HealthLabs and the
University of Toronto during the first quarter of 2021.
— Air Canada is finalizing an initial order of Abbott’s ID NOW
COVID-19 rapid response tests as part of its ongoing evaluation
of COVID-19 testing technology and protocols, one of the first
private sector companies to do so.
— Air Canada recently conducted a trial with the application of
COVID-19 contact tracing technology in its workplace using the
AIR CANADA | 2020 ANNUAL REPORT Bluetooth-enabled TraceSCAN app and wearable technology
developed by Canadian-based Facedrive Inc. Following an initial
pilot, the use of this technology is being further expanded on a
trial basis in other Air Canada workplaces.
Act under two different orders (one for United States arrivals
and one for all other international arrivals), subject to limited
exceptions (for example, for family members, compassionate
reasons, and international students).
— Air Canada is collaborating with Shoppers Drug Mart to provide
— 14-day quarantine requirements under the Quarantine Act for
Air Canada customers with the opportunity to take a pre-
departure COVID-19 PCR test to support compliance with
international travel requirements. The test is now available to
travellers in Ontario, Alberta, and British Columbia.
— Air Canada is working with the Creative Destruction Labs rapid
testing consortium on rapid antigen screening in the workplace
starting with pilots in Toronto and Montréal.
— Air Canada is the first Canadian airline to offer its customers
the safety and convenience of a new boarding option utilizing
facial biometrics. The technology is now available for customers
departing from San Francisco International Airport. The airline
plans to expand biometric boarding options to other U.S. airports
in the near future and is currently exploring options which could
be viable at Canadian airports.
Capacity and Route Network
As a result of the impact of the COVID-19 pandemic and related
travel restrictions, Air Canada reduced ASM capacity by 67% in
2020 compared to 2019 and plans to reduce first quarter 2021
capacity approximately 85% compared to the first quarter of 2019
(also represents a reduction of approximately 83% compared to
the first quarter of 2020). The airline will continue to dynamically
adjust capacity and take other measures as required to adjust for
demand, including as a result of health warnings, travel restrictions,
quarantines, border closures and market and regulatory conditions.
Canadian travel and quarantine restrictions include the following:
— Travel bans prohibiting all foreign nationals from entering Canada
by air under provisions of the Aeronautics Act and Quarantine
28
all travellers entering Canada, including Canadians.
— Interprovincial restrictions on travel and/or quarantines in
numerous provinces, including Nova Scotia, New Brunswick,
Prince Edward Island, Newfoundland, Manitoba, and in the three
territories — for all persons including Canadians.
— The Government of Canada also has a global travel advisory in
place advising Canadians to avoid all nonessential travel outside
of Canada.
— Effective January 7, 2021, the Government of Canada requires
airline passengers five years of age or older entering Canada from
an international destination to provide, prior to boarding a flight,
a negative COVID-19 PCR test, subject to limited exceptions
(for example, airline crews re-entering Canada and aircraft
maintenance engineers). Despite a negative COVID-19 PCR test,
all customers entering Canada are required to complete the full
mandatory 14-day quarantine.
— On January 29, 2021, the Canadian government announced the
following additional restrictions and measures:
• Effective February 4, 2021, all scheduled international
passenger flights into Canada must land at the following four
airports: Montréal-Trudeau International Airport, Toronto
Pearson International Airport, Calgary International Airport,
and Vancouver International Airport.
• All Canadian airlines have suspended flight to Mexico and the
Caribbean between February 1 and April 30, 2021.
• All air travellers arriving in Canada, with limited exceptions,
will shortly be required to take a COVID-19 PCR test upon
arrival and quarantine at a Government of Canada-approved
hotel at their own expense while they await their results. If
AIR CANADA | 2020 ANNUAL REPORT the result of the COVID-19 PCR test is negative, travellers will
be able to complete the 14-day mandatory quarantine at a
suitable location of their choice that allows them to observe
their quarantine. If the COVID-19 PCR result is positive,
travellers will have to complete the mandatory 14-day
quarantine at a Government of Canada-supervised facility.
Financing and Liquidity
Air Canada concluded a series of financing transactions in 2020,
totalling $6,780 million, to support the implementation of its
planned mitigation and recovery measures in response to the
COVID-19 pandemic and provide it with additional operational
flexibility.
— In March 2020, Air Canada drew down its US$600 million and
$200 million revolving credit facilities for aggregate net proceeds
of $1,027 million.
— In June 2020, Air Canada concluded an underwritten public
offering of 35,420,000 Class A variable voting shares and/or
Class B voting shares of Air Canada at a price of $16.25 per share,
for aggregate proceeds of $576 million, and a concurrent private
placement of convertible senior unsecured notes due 2025 for
aggregate proceeds of US$748 million ($1,011 million).
— In June 2020, Air Canada completed a private offering of
$840 million aggregate principal amount of 9.00% Second Lien
Secured Notes due 2024, which were sold at 98% of par.
— In June 2020, Air Canada completed a private offering of one
tranche of Class C Enhanced Equipment Trust Certificates
(“EETCs”) with a combined aggregate face amount of
approximately US$316 million ($426 million), which were
sold at 95.002% of par.
— In September 2020, Air Canada concluded a private offering
of two tranches of EETCs, the proceeds of which were used to
purchase equipment notes issued by Air Canada and secured by
three Boeing 787-9 aircraft, three Boeing 777-300ER aircraft, one
Boeing 777-200LR and nine Airbus A321-200 aircraft. The two
tranches of certificates have a combined aggregate face amount
of US$553 million ($740 million) and a weighted average interest
rate of 5.73%. Air Canada used the proceeds from this financing
together with cash on hand to repay in full the US$600 million
($803 million) 364-day term loan originally put in place in April
2020 and discussed in Air Canada’s second quarter 2020 MD&A.
— In September 2020, Air Canada concluded a committed secured
facility totalling $788 million to finance the purchase of the
first 18 Airbus A220 aircraft. As aircraft are financed under
this facility, the bridge financing of $788 million put in place in
April 2020 (and discussed in Air Canada’s second quarter 2020
MD&A) will be repaid concurrently. At December 31, 2020, there
were 15 Airbus A220 aircraft financed under this facility with the
corresponding bridge financing repaid.
— In October 2020, Air Canada completed sale and leaseback
transactions for nine Boeing 737 MAX 8 aircraft for total proceeds
of US$365 million ($485 million). The nine aircraft were
delivered to Air Canada in the past three years.
— In December 2020, Air Canada concluded an underwritten public
offering of 35,420,000 Class A variable voting shares and/or
Class B voting shares of Air Canada at a price of $24 per share,
29
for aggregate proceeds of $850 million. In January 2021, the
underwriters exercised their over-allotment option to purchase
an additional 2,587,000 shares at a price of $24 per share, for
gross proceeds of $62 million.
— Air Canada’s unencumbered asset pool (excluding the value
of Aeroplan, Air Canada Vacations and Air Canada Cargo)
amounted to approximately $1.7 billion at December 31, 2020.
As part of Air Canada’s ongoing efforts to maintain adequate
liquidity levels, additional financing arrangements continue to
be assessed and may be pursued.
— Air Canada suspended share purchases under its Normal Course
Issuer Bid in early March 2020 and did not renew its issuer bid
upon its expiry in the second quarter of 2020.
Refer to section 8.1 “Liquidity” of this MD&A for a discussion on
Air Canada’s unrestricted liquidity and section 8.5 “Consolidated
Cash Flow Movements” of this MD&A for a discussion on
Air Canada’s net cash burn.
Cost Reduction and Capital Reduction and
Deferral Program
— Air Canada completed a company-wide cost reduction and
capital reduction and deferral program for 2020 which reached
$1.7 billion. On a capacity reduction of 67%, 2020 operating
expenses decreased $7,872 million or 45% from 2019, reflecting
the significant progress made on both managing variable
costs and reducing fixed expenses. Air Canada continues to
seek additional opportunities for cost reduction and cash
preservation.
— Air Canada completed a workforce reduction of approximately
20,000 employees, representing more than 50% of its workforce.
This was achieved through layoffs, terminations of employment,
voluntary separations, early retirements, and special leaves.
In January 2021, Air Canada announced another workforce
reduction of approximately 1,700 employees. The airline is
working with its unions on mitigation programs.
— Air Canada adopted the Canada Emergency Wage Subsidy
(CEWS) for most of its workforce effective March 15, 2020. The
net benefit for employee wages under this program in 2020 was
$554 million. In September 2020, the Government of Canada
announced an extension of the program to June 2021. Air Canada
intends to continue its participation in the CEWS program,
subject to meeting the eligibility requirements.
— Air Canada is permanently retiring certain older aircraft from its
fleet – consisting of its less efficient Boeing 767, Airbus A319 and
Embraer 190 aircraft. Their retirement will reduce Air Canada’s
cost structure, simplify the airline’s overall fleet, and lower its
carbon footprint.
— Air Canada concluded an amendment to the purchase agreement
for Airbus A220-300 aircraft which became effective in early
November 2020 and pursuant to which Air Canada has deferred
18 aircraft deliveries over 2021 and 2022. Also, Air Canada
will not be purchasing the last 12 Airbus A220 aircraft from
its original order of 45 aircraft.
AIR CANADA | 2020 ANNUAL REPORT — In early November 2020, Air Canada also amended its agreement
with Boeing to cancel 10 Boeing 737 MAX 8 aircraft deliveries
from its firm order of 50 aircraft and to defer its remaining
16 aircraft deliveries over the late 2021 to 2023 period.
— Through its fleet restructuring and other capital reduction
initiatives, Air Canada lowered its planned capital expenditures
by approximately $3.0 billion for the 2020 to 2023 period
compared to its projected capital expenditures at the end
of 2019.
Strategy
Air Canada’s vision for its recovery is predicated on leveraging the
solid foundations it has built over the past several years to restore and
rebuild towards its global champion ambition. This involves rebuilding
a strong global network with a focus on hub to hub flying providing
seamless connectivity with Air Canada’s partners, delivering
consistent and superior customer service and diversifying the revenue
base, including through Aeroplan and Air Canada Cargo. Seeking
and implementing measures to reduce costs and increase revenues
remain key priorities. This is being progressed while mitigating the
effects of the COVID-19 pandemic through a variety of strategic
initiatives such as fleet modernization, the airline’s expanded suite
of branded fare products, a renewed and improved loyalty program,
the expansion of Air Canada Cargo, and investments in technology.
Air Canada has a modern and efficient fleet, including the Boeing 777
aircraft with its competitive cost per available seat mile particularly
adapted to service high-volume leisure markets and the Boeing 787
aircraft with its lower operating costs, mid-size capacity and range
flexibility. The airline has also renewed its narrow-body fleet. At
December 31, 2020, Air Canada had taken delivery of 15 Airbus
A220 aircraft. The Airbus A220 aircraft replaces the Embraer
190 aircraft and, with its longer range and better efficiency,
30
offers 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. Air Canada also has
24 Boeing 737 MAX 8 aircraft in its fleet (of a firm order of 40).
The Boeing 737 MAX aircraft has a longer range and offers greater
maintenance and fuel efficiencies than the aging mainline narrow-
body Airbus aircraft it replaces.
Over the last several years, Air Canada Rouge, Air Canada’s
leisure carrier, has been deployed to Caribbean destinations and
leisure destinations in the United States and in Canada, as well
as to international leisure markets. Air Canada Rouge leverages
the strengths of Air Canada, including its extensive network with
enhanced connection options, operational expertise, and frequent
flyer program. Air Canada Rouge seeks to maintain a cost structure
consistent with that of its leisure market competitors, effectively
lowering CASM on leisure routes through increased seat density,
lower wage rates, more efficient work standards, and reduced
overhead costs. Air Canada Rouge also provides Air Canada with the
ability to compete against lower-cost carriers and ultra-low-cost
carriers. In 2021, the Air Canada Rouge fleet will be comprised of
narrow-body aircraft only. Subject to the impact of the COVID-19
pandemic, the Air Canada Rouge fleet will be operated primarily to
leisure destinations in the U.S., the Caribbean and Canada.
As the impact of the COVID-19 pandemic subsides, Air Canada
expects that the leisure and Visiting Friends & Relatives (“VFR”)
markets will lead the recovery, followed by the business market.
Air Canada’s hubs of Toronto, Vancouver and Montréal each
offer complementary geography and demographics. Not only
are these hubs well positioned to capture global traffic flows,
but they also have the benefit of a strong local multicultural
population base which offers Air Canada a variety of opportunities
globally. Air Canada’s wide-body aircraft are not only more fuel
AIR CANADA | 2020 ANNUAL REPORT efficient, but also offer best-in-class seating density which lowers the CASM and thereby reduces the overall
dependence on premium business travel during the recovery.
Air Canada has the ability to enhance its network 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. Air Canada’s network may also be
enhanced through numerous codeshare and interline agreements. Prior to the onset of the COVID-19 pandemic,
Air Canada had been focused on growing global connecting traffic via Canada (“sixth freedom traffic”) through
its world-class hub in Toronto and its strong international gateways in Montréal and Vancouver. The further
development of commercial alliances with major international carriers and the airline’s sixth freedom strategy
are important elements of Air Canada’s recovery plan.
Air Canada is also well positioned to retain its leadership in the North America market through its fleet
investments. The narrow-body fleet is being transformed away from older, less efficient aircraft to modern and
fuel-efficient Airbus A220 and Boeing 737 MAX aircraft types. This will allow Air Canada to better compete
during the recovery through improved operating economics. Air Canada Rouge will also play an important role
in the recovery, competing with an efficient Airbus A319, A320 and A321 fleet to a variety of sun and leisure
destinations in the U.S., the Caribbean and Canada. Air Canada Rouge will also be used strategically in the
leisure segment of the domestic market, in addition to tactical leisure markets.
Air Canada leverages its suite of branded fare products, allowing it to further segment its customer base and
offer a variety of fare options and a customized onboard experience. Branded fares provide customers with
a wide range of choices and are designed to stimulate sales based on specific attributes, driving incremental
revenue. Air Canada also seeks to optimize its ancillary revenue from its “à la carte” services, such as those
related to baggage, ticket changes, seat selection, preferred seating, and upgrades.
In 2020, Air Canada announced special benefits and accommodations for Aeroplan Members in response to
the COVID-19 pandemic. These include pausing the expiration of Aeroplan points, extending 2020 Aeroplan
Elite Status through the end of 2021, waiving certain change and cancellation fees for Aeroplan flight rewards,
and launching special offers to help members earn Elite Status and additional points, without leaving home.
In 2021, Air Canada is aiming to leverage its fully transformed Aeroplan program. The program now offers a
wide range of new features such as: an improved value on flight rewards, Aeroplan Family Sharing, the ability
to use Aeroplan points for travel extras such as cabin upgrades and in-flight Wi-Fi, and expanded merchandise
& travel rewards. In addition, Aeroplan Elite Status Members have access to new benefits, including Priority
Rewards, Status Pass and Everyday Status Qualification. Finally, the new Aeroplan co-branded credit cards
issued by TD Bank, American Express and CIBC will also enable members to earn points faster. In late 2020,
JPMorgan Chase & Co. (“Chase”) and Air Canada announced a strategic partnership that will make Chase the
exclusive issuer of the airline’s Aeroplan U.S. credit card. This multi-year agreement is designed to provide U.S.
customers with improved access to the unique rewards and flexibility offered by the Aeroplan program. The
new Aeroplan credit card from Chase is scheduled to launch in late 2021. Building upon its successful relaunch,
in 2021, Aeroplan intends to introduce additional program features, while expanding its partnership network in
various categories, to further grow and engage its membership base.
31
AIR CANADA | 2020 ANNUAL REPORT Air Canada expects to generate incremental cargo revenue
by entering the e-commerce business, providing specialized
e-commerce delivery services using its existing fleet. The airline’s
goal is to drive end-to-end value through enhanced technology,
dynamic pricing, and transparency across the delivery supply chain.
This new initiative will be implemented in phases and is expected
to be completed over the next year or so in Canada. In addition,
Air Canada plans to convert several of its owned Boeing 767 aircraft
to dedicated freighters to leverage the growth of e-commerce and
Air Canada’s global footprint.
Air Canada has been investing in technology and transforming
core operational process. In 2020, Air Canada concluded the last
phase of its cutover to its new passenger service system — the
Amadeus Altéa Suite. Altéa, as a shared infrastructure solution,
enables simplification and lowers costs in Air Canada’s technology
environments while improving operational efficiency, including
automation of functions. The new system also enables revenue
enhancements and growth opportunities as well as significant
customer service improvements. Air Canada also has a multi-year
distribution agreement in place with Amadeus, supporting its focus
on delivering a consistent brand and customer experience across
all channels. Amadeus users worldwide can access Air Canada’s
industry-leading customizable fare products and availability via
the Amadeus Global Distribution System, as well as Air Canada’s
ancillary offerings. In 2020 with the launch of the new Aeroplan
program, Air Canada completed significant investments in
technology related to the delivery of this digital-first program.
Leveraging artificial intelligence (“AI”) has also become a key part of
Air Canada’s strategy as it moves forward on a series of technology-
driven initiatives that will help shape its future.
In 2021, Air Canada plans to continue to leverage the following
competitive advantages:
— A widely recognized and powerful brand.
— A strong safety culture.
— A global network, well positioned to meet demand from various
customer segments, and enhanced by the airline’s membership in
Star Alliance and by numerous commercial arrangements.
— A simple, modern, fuel efficient and versatile fleet.
— High environmental, social and governance standards.
— A customer experience enhanced by competitive products and
services, including lie-flat seats in the Signature Class cabin,
concierge services, Maple Leaf Lounges™ and fully transformed
Aeroplan program.
— Air Canada Rouge, a lower-cost leisure carrier.
— Geographically well-positioned hubs (Toronto, Montréal, and
Vancouver) with efficient in-transit facilities.
— A strong and resilient employee culture supported by strong
relationships with various union groups.
— New core technologies, including PROS (revenue management
system), Amadeus Altéa Suite (passenger service systems) and
the new Aeroplan loyalty system.
— The transformation of content and sales capabilities to move
from a “one-size-fits-all” strategy to customized offers that offer
meaningful revenue upside potential.
32
Being a global champion involves being a responsible corporate
citizen and doing what is right for the longer-term interest of its
shareholders, employees, customers, communities, and other
stakeholders; it includes supporting research and development
of innovative ways to reduce its environmental footprint and
governing its business responsibly, safely, and ethically. Air Canada’s
social and environmental achievements are reported through
its Corporate Sustainability Report “Citizens of the World” in
accordance with the Global Reporting Initiative (“GRI”) standards.
Internationally recognized as a leader in sustainability reporting
standards, GRI standards help maintain transparency in corporate
reporting related to performance on governance, environmental,
and social matters. Seven indicators, including Scope 1 and 2
emissions, are verified by an independent external party, following
internationally recognized standards. Air Canada also reports
through the CDP. The CDP questionnaire aligns with the Task Force
on Climate-related Financial Disclosures (“TCFD”) framework. To
access the CDP, please visit: www.cdp.net.
Air Canada is also committed to pursuing the Sustainable
Development Goals (“SDGs”) and has joined the UN Global
Compact, an organization that encourages all businesses to adopt
sustainable, socially responsible practices. The 17 SDGs are at the
heart of the 2030 Agenda for Sustainable Development, adopted
by all United Nations Member States in 2015 and provide a shared
blueprint for peace and prosperity for people and the planet, now
and into the future.
Air Canada’s Corporate Sustainability Report, GRI Content Index
(and related charts), and the United Nations Communication of
Progress are available at www.aircanada.com/citizensoftheworld.
Proposed Acquisition of Transat
On October 10, 2020, Air Canada announced amendments to the
acquisition transaction with Transat A.T. Inc. (“Transat”) previously
disclosed. The acquisition agreement provides for the acquisition by
Air Canada of all the shares of Transat for $5.00 per share, payable
at the option of Transat shareholders in cash or shares of Air Canada
at a fixed exchange ratio of 0.2862 Air Canada share for each Transat
share (representing a price for the Air Canada shares of $17.47).
However, the transaction remains subject to certain conditions
including, notably, the ongoing approval process of regulatory
authorities, and while Air Canada has endeavoured to adequately
address all relevant considerations in all jurisdictions, there can be
no assurance that all required regulatory approvals will be granted,
that relevant delays for completion will be extended or that the
transaction will be successfully completed.
Under the acquisition agreement with Transat, closing of the
transaction was to be completed no later than February 15, 2021;
it may be extended at any time by agreement of the parties and
remains in force unless terminated by either of them.
AIR CANADA | 2020 ANNUAL REPORT 5.
Results of Operations – Full Year 2020 versus Full Year 2019
The table and discussion below provide and compare results of Air Canada for the periods indicated.
(Canadian dollars in millions, except per share figures)
2020
2019
$ CHANGE
% CHANGE
Full Year
OPERATING REVENUES
Passenger
Cargo
Other
Total revenues
OPERATING EXPENSES
Aircraft fuel
Wages, salaries, and benefits
Regional airlines expense, excluding fuel
Depreciation and amortization
Aircraft maintenance
Airport and navigation fees
Sales and distribution costs
Ground package costs
Catering and onboard services
Communications and information technology
Special items
Other
Total operating expenses
Operating income (loss)
NON-OPERATING INCOME (EXPENSE)
Foreign exchange gain (loss)
Interest income
Interest expense
Interest capitalized
Net financing expense relating to employee benefits
Gain (loss) on financial instruments recorded at fair value
Gain on sale and leaseback of assets
Other
Total non-operating income (expense)
Income (loss) before income taxes
Income tax recovery (expense)
Net income (loss)
Diluted earnings (loss) per share
EBITDA (excluding special items)(1)
Adjusted pre-tax income (loss)(1)
(75)
28
(55)
(70)
(70)
(30)
(44)
(7)
(32)
(45)
(71)
(60)
(62)
(6)
NM(2)
(43)
(45)
$
4,382
920
531
5,833
$
17,232
717
1,182
19,131
$ (12,850)
203
(651)
(13,298)
1,322
2,242
1,086
1,849
681
545
252
250
171
372
(116)
955
9,609
(3,776)
(293)
132
(656)
25
(27)
(242)
18
(34)
(1,077)
(4,853)
206
$ (4,647)
$ (16.47)
$ (2,043)
$ (4,425)
4,347
3,184
1,956
1,986
1,004
990
874
627
445
397
-
1,671
17,481
1,650
499
164
(515)
35
(39)
23
-
(42)
125
1,775
(299)
1,476
5.44
3,636
1,273
$
$
$
$
(3,025)
(942)
(870)
(137)
(323)
(445)
(622)
(377)
(274)
(25)
(116)
(716)
(7,872)
(5,426)
(792)
(32)
(141)
(10)
12
(265)
18
8
(1,202)
(6,628)
505
$ (6,123)
$ (21.91)
$ (5,679)
$ (5,698)
(1) EBITDA (excluding special items) and adjusted pre-tax income (loss) are non-GAAP financial measures. Refer to section 19 “Non-GAAP Financial Measures” of this MD&A for additional information.
(2) “NM” denotes “Not Meaningful” and is included in the table above where a comparison to prior periods would not be meaningful.
33
AIR CANADA | 2020 ANNUAL REPORT System Passenger Revenues
The system-wide negative impact of the COVID-19 pandemic, including government-regulated travel restrictions, began in early March 2020
and resulted in a system ASM capacity reduction of 66.6% in 2020 compared to 2019.
In 2020, passenger revenues of $4,382 million decreased $12,850 million or 74.6% from 2019.
On a system basis, in 2020, traffic declined 75.3% while yield increased 3.0% compared to 2019. The yield increase is mainly the result of the
significant change in traffic mix and, given the low revenue base, is not a meaningful indicator.
In 2020, PRASM decreased 23.9% from 2019, reflecting a passenger load factor decline of 21.8 percentage points versus 2019, partly offset by
the yield improvement noted above.
Due to the abrupt and severe impact of the COVID-19 pandemic, a more in-depth discussion of passenger revenues and of factors influencing
year-over-year changes in traffic and yield by geographic region would not be meaningful and is therefore not provided.
The table below provides passenger revenues by geographic region for the full year 2020 and the full year 2019.
(Canadian dollars in millions)
Canada
U.S. transborder
Atlantic
Pacific
Other
System
Full Year
2020
2019
$ CHANGE
% CHANGE
$ 1,640
840
909
468
525
$ 4,382
$ 5,233
3,795
4,468
2,449
1,287
$ 17,232
$
(3,593)
(2,955)
(3,559)
(1,981)
(762)
$ (12,850)
(68.7)
(77.9)
(79.7)
(80.9)
(59.2)
(74.6)
The table below provides year-over-year percentage changes in passenger revenues and operating statistics for the full year 2020 versus the full
year 2019.
Full Year 2020 versus Full Year 2019
Passenger
Revenue
Capacity
(ASMs)
Traffic
(RPMs)
Passenger
Load Factor
Yield
PRASM
% CHANGE
% CHANGE
% CHANGE
PP CHANGE
% CHANGE
% CHANGE
(68.7)
(77.9)
(79.7)
(80.9)
(59.2)
(74.6)
(57.4)
(71.8)
(67.8)
(75.3)
(55.5)
(66.6)
(68.3)
(77.1)
(79.6)
(82.0)
(60.1)
(75.3)
(21.1)
(15.3)
(30.7)
(22.7)
(8.7)
(21.8)
(1.0)
(3.3)
(0.5)
5.9
2.1
3.0
(26.4)
(21.5)
(36.8)
(22.6)
(8.3)
(23.9)
Canada
U.S. transborder
Atlantic
Pacific
Other
System
34
AIR CANADA | 2020 ANNUAL REPORT Cargo Revenues
In 2020, cargo revenues of $920 million increased $203 million or 28% from 2019 on a system-wide capacity reduction of 61%. During 2020,
yield increased 105% while traffic declined 37% compared to 2019. The triple-digit yield increase reflected the considerably reduced industry
capacity, due to a significant number of passenger aircraft grounded globally during the COVID-19 pandemic at the time of a sudden surge in
demand for cargo space to meet the urgent global demand for protective equipment and critical goods, particularly in the first half of 2020. To
meet this demand, Air Canada operated more than 4,000 all-cargo international flights since March 22, 2020 using a combination of Boeing 787
and Boeing 777 aircraft as well as four converted Boeing 777 and three converted Airbus 330 aircraft where it has increased available cargo space
by removing seats from the passenger cabin.
The table below provides cargo revenues by geographic region for the full year 2020 and the full year 2019.
(Canadian dollars in millions)
Canada
U.S. transborder
Atlantic
Pacific
Other
System
Other Revenues
2020
$
90
35
387
354
54
$ 920
Full Year
2019
$ 113
48
258
241
57
$ 717
$ CHANGE
% CHANGE
$ (23)
(13)
129
113
(3)
$ 203
(20.1)
(27.1)
49.6
47.3
(6.8)
28.2
In 2020, other revenues of $531 million decreased $651 million or 55% from 2019, mainly due to a reduction in ground package revenues at
Air Canada Vacations and, to a lesser extent, a reduction in passenger and airline-related fees, both due to lower passenger volumes resulting
from the COVID-19 pandemic.
Operating Expenses
In 2020, on a capacity reduction of 67%, operating expenses of $9,609 million decreased $7,872 million or 45% from 2019, reflecting the
reduction in capacity and the significant progress made on both managing variable costs and reducing fixed expenses. Refer to section 4 “Strategy
and COVID-19 Mitigation and Recovery Plan” of this MD&A for additional discussion on Air Canada’s 2020 cost reduction and capital reduction
and deferral program.
The more notable year-over-year changes in operating expenses in 2020 compared to 2019 are summarized below.
Aircraft Fuel
In 2020, aircraft fuel expense of $1,322 million decreased $3,025 million or 70% versus 2019, reflecting a lower volume of fuel litres consumed,
accounting for a decrease of $2,666 million, and the impact of lower jet fuel prices (before the impact of foreign exchange), accounting for a
decrease of $332 million.
Wages, Salaries and Benefits
In 2020, wages, salaries and benefits expense of $2,242 million decreased $942 million or 30% from 2019. In 2020, Air Canada had an average of
21,113 full-time equivalent (“FTE”) employees versus 32,903 FTEs in 2019, a reduction of 35.8%. A decrease in expenses related to employee profit
sharing programs, a reduction in stock-based compensation expense reflecting a decline in Air Canada’s share price, particularly in the first quarter
of 2020, and management wage reductions for active employees were also contributing factors to the decrease in wages, salaries, and benefits
expense year-over-year. As further discussed below under special items, Air Canada adopted the Canada Emergency Wage Subsidy (CEWS) in the
second quarter of 2020 retroactively to March 15, 2020. The net benefit of this program was $554 million in 2020.
Regional Airlines
In 2020, regional airlines expense (excluding fuel) of $1,086 million decreased $870 million or 44% from 2019, reflecting the impact of reduced
flying by Jazz and other airlines operating flights on behalf of Air Canada.
35
AIR CANADA | 2020 ANNUAL REPORT Depreciation and Amortization
In 2020, depreciation and amortization expense of $1,849 million decreased $137 million or 7% from 2019, reflecting, in large part, aircraft that
have been retired or impaired due to the accelerated retirement of certain older aircraft, partially offset by the impact of new aircraft deliveries.
The impairment charge recorded in 2020 is further described below under Special Items.
Aircraft Maintenance
In 2020, aircraft maintenance expense of $681 million decreased $323 million or 32% from 2019, reflecting a lower volume of maintenance
activity due to reduced flying year-over-year and the retirement of the Embraer 190 fleet and certain other aircraft. In 2020, and as a result of
updated cost estimates in preparing these aircraft for return to lessors upon lease expiry, a favourable adjustment to aircraft maintenance expense
of $76 million was recorded primarily related to Airbus A320 and regional aircraft. The updated cost estimates include the impact of reduced
flying (as a result of the COVID-19 pandemic) since the last maintenance event projected at the lease expiry date.
Special Items
In 2020, Air Canada recorded special items amounting to a net operating expense reduction of $116 million. The breakdown of these special items
is described below.
(Canadian dollars in millions)
Impairments
Workforce reduction provision
Canada Emergency Wage Subsidy, net
Other
Special items
Full Year
2020
$ 315
127
(554)
(4)
$ (116)
Impairments
In response to capacity reductions related to the impact of the COVID-19 pandemic, Air Canada is accelerating the retirement of certain older
aircraft from its fleet consisting of Boeing 767, Airbus A319 and Embraer 190 aircraft.
A non-cash impairment charge of $283 million was recorded in 2020 reflecting the write-down of right-of-use assets for leased aircraft
and reduction of carrying values of owned aircraft to expected disposal proceeds. Changes to the estimates around the expected disposal
proceeds may result in adjustments to the impairment charge in future periods.
In addition, Air Canada recorded an impairment charge of $32 million in 2020 related to previously capitalized costs incurred for the
development of technology based intangible assets which are now cancelled.
Workforce Reduction Provisions
As a result of the impact of COVID-19, Air Canada undertook a workforce reduction of approximately 20,000 employees in the second
quarter of 2020, representing more than 50% of its staff. These reductions were achieved through layoffs, terminations of employment,
early retirements and special leaves. A workforce reduction provision of $78 million was recorded related to these measures. Payments of
$32 million have been made for the year, resulting in a remaining obligation of $46 million at December 31, 2020. The provision includes the
estimated notice of termination and severance costs under Air Canada’s collective agreements and applicable law, which amount is subject to
adjustment depending on a number of factors such as the relevant notice period and the duration and number of employees who remain on
layoff status. In addition, termination benefits and curtailments of $49 million related to the pension and benefit obligations were recorded.
Canada Emergency Wage Subsidy
In April 2020, the Government of Canada announced the Canada Emergency Wage Subsidy (“CEWS”) to help employers retain and/or return
Canadian-based employees to payrolls in response to challenges posed by the COVID-19 pandemic.
Air Canada determined that it met the employer eligibility criteria and applied for the CEWS retroactively to March 15, 2020. Air Canada has
recorded a total gross subsidy under the CEWS program of $656 million for the year 2020. Cash payments of $586 million have been received
in 2020. In July 2020, the program was redesigned and extended until December 2020. In September and November 2020, the Government
of Canada announced further extensions of the program to June 2021. Air Canada intends to continue its participation in the CEWS program,
subject to meeting the eligibility requirements. The amount of the CEWS recorded in special items is net of the cost for inactive employees
who were eligible for the wage subsidy under the program.
36
AIR CANADA | 2020 ANNUAL REPORT Non-operating Income (Expense)
In 2020, non-operating expense amounted to $1,077 million versus non-operating income of $125 million in 2019.
In 2020, losses on foreign exchange amounted to $293 million compared to gains on foreign exchange of $499 million in 2019. The December 31,
2020 closing exchange rate was US$1=C$1.2725 while the December 31, 2019 closing exchange rate was US$1=C$1.2990. The losses on foreign
exchange in 2020 included losses on foreign currency derivatives of $583 million and foreign exchange gains on long-term debt and lease liabilities
of $346 million.
When compared to 2019, interest expense increased $141 million due to higher debt levels as a result of financings concluded in 2020, partially
offset by the impact of lower interest rates. The convertible notes, which are further discussed in section 11 “Financial Instruments and Risk
Management” of this MD&A, were initially measured at the net present value of the liability without conversion option using a discount rate
reflective of a liability instrument without a conversion factor. The non-cash accretion related to the convertible notes in interest expense was
$39 million.
The loss on financial instruments recorded at fair value was mainly related to a non-cash charge of $214 million pertaining to the equity
settlement option within the convertible notes. This reflected the increase in the market price of the bonds which was largely driven by the
increase in Air Canada’s share price since issuance.
Income Taxes
Income taxes recorded in 2020 and 2019 are summarized below.
(Canadian dollars in millions)
Current income tax recovery (expense)
Deferred income tax recovery (expense)
Income tax recovery (expense)
Full Year
2020
$
42
164
$ 206
2019
$ (72)
(227)
$ (299)
As a result of the COVID-19 pandemic, there is considerable negative evidence relating to losses incurred in 2020 and uncertainty exists as to
when conditions will improve. Such negative evidence currently outweighs the positive historical evidence and, accordingly, net deferred tax assets
are not being recognized, commencing from the second quarter of 2020. The future tax deductions underlying the unrecognized deferred income
tax assets, which amounted to $1,114 million as at December 31, 2020, remain available for use in the future to reduce taxable income. The
deferred income tax expense recorded in other comprehensive income (loss) related to remeasurements on employee benefit liabilities is offset by
a deferred income tax recovery which was recorded through Air Canada’s consolidated statement of operations.
In consideration of not recording net deferred income tax assets, Air Canada suspended its reporting of adjusted net income as the results are not
meaningfully different than the adjusted pre-tax income measure, which continues to be reported.
37
AIR CANADA | 2020 ANNUAL REPORT 6.
Results of Operations – Fourth Quarter 2020 versus
Fourth Quarter 2019
The table and discussion below provide and compare results of Air Canada for the periods indicated.
(Canadian dollars in millions, except per share figures)
2020
2019
$ CHANGE
% CHANGE
Fourth Quarter
OPERATING REVENUES
Passenger
Cargo
Other
Total revenues
OPERATING EXPENSES
Aircraft fuel
Wages, salaries, and benefits
Regional airlines expense, excluding fuel
Depreciation and amortization
Aircraft maintenance
Airport and navigation fees
Sales and distribution costs
Ground package costs
Catering and onboard services
Communications and information technology
Special items
Other
Total operating expenses
Operating income (loss)
NON-OPERATING INCOME (EXPENSE)
Foreign exchange gain
Interest income
Interest expense
Interest capitalized
Net financing expense relating to employee benefits
Gain (loss) on financial instruments recorded at fair value
Gain on sale and leaseback of assets
Other
Total non-operating income (expense)
Income (loss) before income taxes
Income tax recovery (expense)
Net income (loss)
Diluted earnings (loss) per share
EBITDA (excluding special items)(1)
Adjusted pre-tax income (loss)(1)
(88)
53
(75)
(81)
(82)
(38)
(51)
(16)
(26)
(53)
(87)
(89)
(76)
(27)
NM(2)
(56)
(57)
$
475
286
66
827
$
3,975
186
268
4,429
$ (3,500)
100
(202)
(3,602)
187
507
245
435
185
107
26
14
25
80
(160)
179
1,830
(1,003)
88
26
(182)
5
(1)
(214)
18
(12)
(272)
(1,275)
114
$ (1,161)
(3.91)
$
$
(728)
$ (1,326)
1,013
816
505
520
250
230
194
131
105
109
-
411
4,284
145
92
41
(122)
9
(10)
5
-
12
27
172
(20)
152
0.56
665
66
$
$
$
$
(826)
(309)
(260)
(85)
(65)
(123)
(168)
(117)
(80)
(29)
(160)
(232)
(2,454)
(1,148)
(4)
(15)
(60)
(4)
9
(219)
18
(24)
(299)
(1,447)
134
$ (1,313)
$ (4.47)
$ (1,393)
$ (1,392)
(1) EBITDA (excluding special items) and adjusted pre-tax income (loss) are non-GAAP financial measures. Refer to section 19 “Non-GAAP Financial Measures” of this MD&A for additional information.
(2) “NM” denotes “Not Meaningful” and is included in the table above where a comparison to prior periods would not be meaningful.
38
AIR CANADA | 2020 ANNUAL REPORT
System Passenger Revenues
In the fourth quarter of 2020, on a capacity reduction of 77.3%, passenger revenues of $475 million decreased $3,500 million or 88.1% from the
fourth quarter of 2019.
In the fourth quarter of 2020, traffic on a system basis, declined 88.6% while yield increased 5.1% compared to the fourth quarter of 2019. This
yield increase is mainly the result of the significant change in traffic mix and, given the low revenue base, is not a meaningful indicator.
In the fourth quarter of 2020, PRASM decreased 47.4% compared to the fourth quarter of 2019. This PRASM decrease reflected a passenger load
factor decline of 40.5 percentage points compared to the fourth quarter of 2019, partly offset by the yield improvement noted above.
Due to the abrupt and severe impact of the COVID-19 pandemic, a more in-depth discussion of passenger revenues and of factors influencing
year-over-year changes in traffic and yield by geographic region would not be meaningful and is therefore not provided.
The table below provides passenger revenues by geographic region for the fourth quarter of 2020 and the fourth quarter of 2019.
(Canadian dollars in millions)
Canada
U.S. transborder
Atlantic
Pacific
Other
System
2020
$ 262
47
90
28
48
$ 475
Fourth Quarter
2019
$ CHANGE
% CHANGE
$ 1,258
903
942
555
317
$ 3,975
$
(995)
(856)
(853)
(527)
(270)
$ (3,500)
(79.1)
(94.8)
(90.5)
(94.9)
(85.1)
(88.1)
The table below provides year-over-year percentage changes in passenger revenues and operating statistics for the fourth quarter of 2020 versus
the fourth quarter of 2019.
Fourth Quarter 2020 versus Fourth Quarter 2019
Passenger
Revenue
Capacity
(ASMs)
Traffic
(RPMs)
Passenger
Load Factor
Yield
PRASM
% CHANGE
% CHANGE
% CHANGE
PP CHANGE
% CHANGE
% CHANGE
(79.1)
(94.8)
(90.5)
(94.9)
(85.1)
(88.1)
(62.5)
(91.4)
(73.4)
(85.7)
(79.0)
(77.3)
(77.7)
(95.0)
(88.7)
(95.9)
(86.2)
(88.6)
(32.4)
(32.6)
(46.8)
(58.8)
(28.6)
(40.5)
(6.3)
3.5
(16.0)
24.2
8.2
5.1
(44.3)
(39.4)
(64.4)
(64.2)
(28.9)
(47.4)
Canada
U.S. transborder
Atlantic
Pacific
Other
System
39
AIR CANADA | 2020 ANNUAL REPORT Cargo Revenues
In the fourth quarter of 2020, cargo revenues of $286 million increased $100 million or 53% from the fourth quarter of 2019 on a system-wide
capacity reduction of 61%. In the fourth quarter of 2020, yield increased 127% while traffic declined 33% compared to the fourth quarter of 2019.
The triple-digit yield increase reflected the considerably reduced industry capacity due to a significant number of passenger aircraft grounded
globally during the COVID-19 pandemic at the time of a sudden surge in demand for cargo space.
The table below provides cargo revenues by geographic region for the periods indicated.
(Canadian dollars in millions)
Canada
U.S. transborder
Atlantic
Pacific
Other
System
Other Revenues
2020
$
29
8
131
99
19
$ 286
Fourth Quarter
2019
$
27
11
69
64
15
$ 186
$ CHANGE
% CHANGE
$
2
(3)
62
35
4
$ 100
6.9
(29.2)
88.2
54.7
26.4
53.0
In the fourth quarter of 2020, other revenues of $66 million decreased $202 million or 75% from the same quarter in 2019, reflecting, in large
part, a reduction in ground package revenues at Air Canada Vacations and, to a lesser extent, a reduction in passenger and airline-related fees,
both due to lower passenger volumes resulting from the COVID-19 pandemic.
Operating Expenses
In the fourth quarter of 2020, on a capacity reduction of 77%, operating expenses of $1,830 million decreased $2,454 million or 57% from the
fourth quarter of 2019.
The more notable year-over-year changes in operating expenses in the fourth quarter of 2020 compared to the fourth quarter of 2019 are
summarized below.
Aircraft Fuel
In the fourth quarter of 2020, aircraft fuel expense of $187 million decreased $826 million or 82% versus the fourth quarter of 2019, reflecting
a lower volume of fuel litres consumed, accounting for a decrease of $721 million, and the impact of lower jet fuel prices (before the impact of
foreign exchange), accounting for a decrease of $97 million.
Wages, Salaries and Benefits
In the fourth quarter of 2020, wages, salaries, and benefits expense of $507 million decreased $309 million or 38% from the fourth quarter of
2019. In the fourth quarter of 2020, Air Canada had an average of 17,863 full-time equivalent (“FTE”) employees versus 33,268 FTEs in 2019, a
reduction of 46.3%. A decrease in expenses related to employee profit sharing programs, and management wage reductions for active employees
were also contributing factors to the decrease in wages, salaries and benefits expense year-over-year.
Regional Airlines
In the fourth quarter of 2020, regional airlines expense (excluding fuel) of $245 million decreased $260 million or 51% from the fourth quarter of
2019, reflecting the continued impact of reduced flying by Jazz and Sky Regional due to the COVID-19 pandemic.
Depreciation and Amortization
In the fourth quarter of 2020, depreciation and amortization expense of $435 million decreased $85 million or 16% from the fourth quarter of
2019, reflecting, in large part, aircraft that have been retired or impaired due to the accelerated retirement of certain older aircraft and a lower
volume of capitalized airframe and engine maintenance events on leased aircraft, partially offset by the impact of new aircraft deliveries.
40
AIR CANADA | 2020 ANNUAL REPORT Aircraft Maintenance
In the fourth quarter of 2020, aircraft maintenance expense of $185 million decreased $65 million or 26% from the fourth quarter of 2019,
reflecting a lower volume of maintenance activity due to reduced flying year-over-year and the retirement of the Embraer 190 fleet, partially
offset by an increase in maintenance provisions as a result of updated end-of-lease cost estimates in anticipation of returning aircraft (primarily
De Havilland Dash 8-400 aircraft) to lessors upon lease expiry (over the next 12 months).
Special Items
In the fourth quarter of 2020, Air Canada recorded special items amounting to a net operating expense reduction of $160 million. The table below
provides a breakdown of these special items. Refer to section 5 “Results of Operations – Full Year 2020 versus Full Year 2019” of this MD&A for
additional information.
(Canadian dollars in millions)
Impairments
Workforce reduction provision
Canada Emergency Wage Subsidy, net
Other
Special items
Non-operating Income (Expense)
Fourth Quarter
2020
$
(12)
15
(163)
-
$ (160)
In the fourth quarter of 2020, non-operating expense amounted to $272 million versus non-operating income of $27 million in the fourth quarter
of 2019.
Gains on foreign exchange amounted to $88 million in the fourth quarter of 2020 compared to gains on foreign exchange of $92 million in the
fourth quarter of 2019. The December 31, 2020 closing exchange rate was US$1=C$1.2725 while the December 31, 2019 closing exchange rate
was US$1=C$1.2990. The gains on foreign exchange in the fourth quarter included foreign exchange gains on long-term debt and lease liabilities
of $487 million and foreign exchange losses on foreign currency derivatives of $375 million.
When compared to the fourth quarter of 2019, interest expense increased $60 million due to higher debt levels as a result of financings concluded
in 2020, partially offset by the impact of lower interest rates. The non-cash accretion related to the convertible notes issued in June 2020 in
interest expense for the fourth quarter of 2020 was $17 million.
The loss on financial instruments recorded at fair value was mainly related to a non-cash charge of $220 million pertaining to the equity
settlement option within the convertible notes issued in June 2020. This reflected the increase in the market price of the bonds which was largely
driven by the increase in Air Canada’s share price in the fourth quarter of 2020.
41
AIR CANADA | 2020 ANNUAL REPORT 7.
Fleet
In response to the COVID-19 pandemic, Air Canada, together with regional airlines operating flights on behalf of Air Canada under capacity
purchase agreements, have reduced capacity through the temporary grounding of aircraft and will continue to assess fleet, capacity and schedule
adjustments and other measures as developments warrant. The tables below provide the number of aircraft in Air Canada’s and Air Canada
Rouge’s operating fleet at December 31, 2020 and at December 31, 2021. The fleet plan assumes deliveries of three Boeing 737 MAX and 12 Airbus
A220-300 aircraft in 2021.
Air Canada is permanently retiring certain older aircraft from its fleet. Their retirement will reduce Air Canada’s cost structure, simplify the airline’s
overall fleet, and lower its carbon footprint.
Mainline
WIDE-BODY AIRCRAFT
Boeing 787-8
Boeing 787-9
Boeing 777-300ER
Boeing 777-200LR
Airbus A330-300
NARROW-BODY AIRCRAFT
Boeing 737 MAX 8
Airbus A321
Airbus A320
Airbus A319
Airbus A220-300
Total Mainline
Air Canada Rouge
NARROW-BODY AIRCRAFT
Airbus A321
Airbus A320
Airbus A319
Total Air Canada Rouge
Total Mainline and Air Canada Rouge
Actual
Planned
DECEMBER 31, 2020
2021 FLEET CHANGES
DECEMBER 31, 2021
8
29
19
6
16
24
15
21
16
15
169
14
5
20
39
208
-
-
(1)
-
-
3
-
(6)
(10)
12
(2)
-
-
-
-
(2)
8
29
18
6
16
27
15
15
6
27
167
14
5
20
39
206
Air Canada has a firm order for 40 Boeing 737 MAX 8 aircraft. Air Canada has 24 Boeing 737 MAX 8 aircraft in its operating fleet, with the
remaining 16 aircraft deliveries expected over the late 2021 to 2023 period.
On March 13, 2019, Transport Canada issued a safety notice closing Canadian airspace to Boeing 737 MAX aircraft. Following Transport Canada’s
Airworthiness Directive, on January 20, 2021 lifting the safety notice, the aircraft ungrounding by regulatory bodies worldwide, and Air Canada’s
own independent assessments of the aircraft and operating procedures by its specialized safety and flight operations experts, Air Canada resumed
Boeing 737 MAX commercial operations on February 1, 2021.
At December 31, 2020, Air Canada had taken delivery of 15 Airbus A220 aircraft. The remaining 18 aircraft deliveries are expected over the 2021
and 2022 period.
42
AIR CANADA | 2020 ANNUAL REPORT
Air Canada Express
The table below provides the number of aircraft operated, at December 31, 2020 and the planned fleet as at December 31, 2021, on behalf of
Air Canada, by Jazz and Sky Regional operating flights under the Air Canada Express banner pursuant to capacity purchase agreements with
Air Canada. The table below includes a significant number of aircraft that have been grounded in response to the COVID-19 pandemic.
Air Canada Express
Embraer 175
Mitsubishi CRJ-200
Mitsubishi CRJ-900
De Havilland Dash 8-300
De Havilland Dash 8-400
Total Air Canada Express
Actual
Planned
DECEMBER 31, 2020
2021 FLEET CHANGES
DECEMBER 31, 2021
25
15
34
19
43
136
-
-
1
-
(4)
(3)
25
15
35
19
39
133
43
AIR CANADA | 2020 ANNUAL REPORT 8.
Financial and Capital Management
8.1. Liquidity
Impact of the COVID-19 Pandemic
Air Canada, along with the rest of the global airline industry, continues to face a severe drop in traffic and a corresponding decline in revenue and
cash flows as a result of the COVID-19 pandemic and the travel restrictions imposed in many countries around the world, particularly in Canada.
The impact of the COVID-19 pandemic began to be felt in traffic and sales figures commencing in early March 2020. These impacts include drastic
declines in earnings and cash from operations. The expectation is for continuing considerable negative impact to cash flows and Air Canada’s
liquidity position, including after considering the mitigation responses described in section 4 “Strategy and COVID-19 Mitigation and Recovery
Plan” of this MD&A. In light of the ongoing uncertainty relating to the COVID-19 pandemic, the full extent and duration of any impact remain
unknown.
Air Canada concluded a number of financing transactions in 2020, as described in section 4 “Strategy and COVID-19 Mitigation and Recovery
Plan” of this MD&A, increasing Air Canada’s cash position, thereby allowing for additional flexibility operationally and to support the
implementation of its planned mitigation and recovery measures in response to the COVID-19 pandemic.
Air Canada’s unencumbered asset pool (excluding the value of Aeroplan, Air Canada Vacations and Air Canada Cargo) amounted to approximately
$1.7 billion at December 31, 2020. As part of Air Canada’s ongoing efforts to maintain adequate liquidity levels, additional financing arrangements
continue to be assessed.
Liquidity Risk Management
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 8.6, 8.7 and 8.8 of this MD&A. Air Canada monitors and manages
liquidity risk by preparing rolling cash flow forecasts for a minimum period of at least 12 months, including under various scenarios and
assumptions, 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, 2020, unrestricted liquidity amounted to $8,013 million (comprised of cash, cash equivalents and short-term investments
of $7,501 million and long-term investments of $512 million). This compared to unrestricted liquidity of $7,380 million at December 31, 2019
(comprised of cash, cash equivalents and short-term investments of $5,889 million, undrawn lines of credit of $979 million, and long-term
investments of $512 million).
Given the impact of the COVID-19 pandemic on passenger revenues and advance ticket sales, Air Canada updated its definition of the minimum
cash it requires to support ongoing business operations. The minimum cash estimate has been updated to a fixed amount of $2,400 million,
as compared to the previous minimum cash estimate of 20% of trailing 12 months operating revenue. This minimum cash estimate considers
Air Canada’s various financial covenants, provides adequate coverage for advance ticket sales, and supports Air Canada’s liquidity needs, as
described above. Air Canada no longer reports on excess cash as this metric is not meaningful in the current environment.
44
AIR CANADA | 2020 ANNUAL REPORT 8.2. Financial Position
The table below provides a condensed consolidated statement of financial position of Air Canada as at December 31, 2020 and as at December 31,
2019.
(Canadian dollars in millions)
DECEMBER 31, 2020
DECEMBER 31, 2019
$ CHANGE
ASSETS
Cash, cash equivalents and short-term investments
Other current assets
Current assets
Investments, deposits, and other assets
Property and equipment
Pension assets
Deferred income tax
Intangible assets
Goodwill
Total assets
LIABILITIES
Current liabilities
Long-term debt and lease liabilities
Aeroplan and other deferred revenues
Pension and other benefit liabilities
Maintenance provisions
Other long-term liabilities
Deferred income tax
Total liabilities
Total shareholders’ equity
Total liabilities and shareholders’ equity
$ 7,501
1,170
$ 8,671
833
12,137
2,840
25
1,134
3,273
$ 28,913
$
7,139
11,201
4,032
3,015
1,040
696
75
$ 27,198
$ 1,715
$ 28,913
$ 5,889
1,627
$ 7,516
936
12,834
2,064
134
1,002
3,273
$ 27,759
$ 7,775
8,024
3,136
2,930
1,240
181
73
$23,359
$ 4,400
$ 27,759
$ 1,612
(457)
$ 1,155
(103)
(697)
776
(109)
132
-
$ 1,154
$ (636)
3,177
896
85
(200)
515
2
$ 3,839
$ (2,685)
$ 1,154
Movements in current assets and current liabilities are described in section 8.4 “Working Capital” of this MD&A. Long-term debt and lease
liabilities are discussed in sections 8.3 “Net Debt” and 8.5 “Consolidated Cash Flow Movements” of this MD&A.
At December 31, 2020, net pension and benefit liabilities of $175 million (comprised of pension assets of $2,840 million net of pension and
other benefit liabilities of $3,015 million) decreased $691 million from December 31, 2019. This decrease was mainly due to a net actuarial
gain on remeasurements of employee liabilities of $1,077 million ($765 million, net of tax) recorded on Air Canada’s consolidated statement of
comprehensive income, partially offset by pension and other employee benefits expense recorded during the year. The actuarial gain included
the impact of higher returns on plan assets, partially offset by a 54-basis point decrease in the discount rate used to value the liabilities.
The long-term portion of the Aeroplan and other deferred revenue liability increased $896 million from December 31, 2019. This increase
included both the growth in the program due to the sale of Aeroplan points to program partners exceeding redemptions and a reclassification
of $590 million from current to long-term liabilities as a result of lower current Aeroplan points redemptions due to the impact of the
COVID-19 pandemic.
At December 31, 2020, the long-term portion of maintenance provisions of $1,040 million declined $200 million versus December 31, 2019. This
decline reflected the reclassification of $313 million to current liabilities for leases expiring over the next 12 months. The decline also included
the impact of a $26 million reduction to maintenance provisions as a result of extensions and updated end-of-lease cost estimates in anticipation
of returning aircraft to lessors upon lease expiry (over the next 12 months), which included the impact of reduced flying due to the COVID-19
pandemic, offset by the impact of ongoing maintenance provision expenses.
Air Canada’s option to deliver cash or a combination of cash and shares on its convertible notes issued in June 2020 gives rise to an embedded
derivative financial liability. The fair value of the embedded derivative was $534 million at December 31, 2020 and is included in other
long-term liabilities.
45
AIR CANADA | 2020 ANNUAL REPORT 8.3. Net Debt
The table below reflects Air Canada’s net debt balances at December 31, 2020 and as at December 31, 2019.
(Canadian dollars in millions)
DECEMBER 31, 2020
DECEMBER 31, 2019
$ CHANGE
Total long-term debt and lease liabilities
Current portion of long-term debt and lease liabilities
Total long-term debt and lease liabilities (including current portion)
Less cash, cash equivalents and short- and long-term investments
Net debt(1)
$ 11,201
1,788
$12,989
(8,013)
$ 4,976
$ 8,024
1,218
$ 9,242
(6,401)
$ 2,841
$ 3,177
570
$ 3,747
(1,612)
$ 2,135
(1) 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.
At December 31, 2020, net debt of $4,976 million increased $2,135 million from December 31, 2019, reflecting the impact of net cash used for
operating and investing activities in 2020, partially offset by the proceeds from the equity offerings in 2020. Refer to section 4 “Strategy and
COVID-19 Mitigation and Recovery Plan” of this MD&A for a description of the debt financing activities completed during 2020. The impact of
a stronger Canadian dollar, at December 31, 2020 compared to December 31, 2019, decreased foreign currency denominated debt (mainly U.S.
dollars) by $346 million.
Air Canada suspended reporting its leverage ratio and its weighted average cost of capital (“WACC”) as these metrics are not meaningful given
the COVID-19 pandemic’s severe impact on earnings. In the current environment, liquidity levels (refer to section 8.1 “Liquidity” of this MD&A
for discussion on liquidity levels) and net cash burn (refer to section 8.5 “Consolidated Cash Flow Movements” of this MD&A for discussion on
net cash burn) are part of the key measures monitored by management. Net cash burn is a non-GAAP measure. Refer to section 19 “Non-GAAP
Financial Measures” of this MD&A for additional information.
8.4. Working Capital
The table below provides information on Air Canada’s working capital balances at December 31, 2020 and at December 31, 2019.
(Canadian dollars in millions)
DECEMBER 31, 2020
DECEMBER 31, 2019
$ CHANGE
Cash, cash equivalents and short-term investments
Accounts receivable
Other current assets
Total current assets
Accounts payable and accrued liabilities
Advance ticket sales
Aeroplan and other deferred revenues
Current portion of long-term debt and lease liabilities
Total current liabilities
Net working capital
$ 7,501
644
526
$ 8,671
2,465
2,314
572
1,788
$ 7,139
$ 1,532
$ 5,889
926
701
$ 7,516
2,456
2,939
1,162
1,218
$ 7,775
$ (259)
$ 1,612
(282)
(175)
$ 1,155
9
(625)
(590)
570
$ (636)
$ 1,791
Net working capital of $1,532 million at December 31, 2020 increased $1,791 million from December 31, 2019. Working capital was favourably impacted
by the financings discussed in section 4 “Strategy and COVID-19 Mitigation and Recovery Plan” of this MD&A and by the reclassification of a portion
of Aeroplan deferred revenues from current into long term, reflecting an estimated reduction in Aeroplan redemptions over the next 12 months. These
factors, which increased net working capital, were partially offset by negative cash flows from operating activities, reflecting the operating losses recorded
in 2020 and the decline in advance ticket sales during the period due to the COVID-19 pandemic. Advance ticket sales generally increase in the first and
second quarters prior to the summer peak travel season. However, because of the COVID-19 pandemic and the abrupt decline in travel demand, coupled
with an increase in refunds to customers, the advance ticket sales liability decreased during 2020. In addition, the unused amounts of non-refundable
tickets in respect of flights cancelled due to the COVID-19 pandemic can be converted into either a transferable travel voucher (with no expiry date) or into
Aeroplan points, which may further result in lower advance sales in future periods as these unused amounts are applied to new ticket purchases. Customers
have the ability to use the travel vouchers within the next 12 months and Air Canada does not have an unconditional right to defer settlement beyond the
next 12 months. As such, the entire liability amount related to these vouchers has been recorded in current liabilities even though some could be used after
the next 12 months.
46
AIR CANADA | 2020 ANNUAL REPORT 8.5. Consolidated Cash Flow Movements
The table below provides the cash flow movements for Air Canada for the periods indicated.
(Canadian dollars in millions)
2020
2019
$ CHANGE
2020
2019
$ CHANGE
Fourth Quarter
Full Year
Net cash flows from (used in)
operating activities
Proceeds from borrowings
Reduction of long-term debt
and lease liabilities
Shares purchased for cancellation
Issue of shares
Financing fees
Net cash flows from (used in)
financing activities
Investments, short-term and
long-term
Additions to property, equipment,
and intangible assets
Proceeds from sale of assets
Proceeds from sale and leaseback of assets
Acquisition of Aeroplan
Investment in Chorus
Other
Net cash flows from (used in)
investing activities
Effect of exchange rate changes on
cash and cash equivalents
Increase in cash and cash
equivalents
$ (796)
$
677
$ (1,473)
$ (2,353)
$
5,712
$ (8,065)
254
(508)
-
815
(3)
-
(276)
(125)
1
(1)
254
(232)
125
814
(2)
6,262
(2,719)
(132)
1,369
(78)
-
(1,084)
(373)
9
(1)
6,262
(1,635)
241
1,360
(77)
$
558
$ (401)
$
959
$ 4,702
$ (1,449)
$
6,151
9
67
(335)
(251)
6
485
-
-
(6)
159
(53)
$
$
$ (132)
18
-
-
-
13
$ (153)
$
$
(9)
114
(58)
(84)
(12)
485
-
-
(19)
312
(44)
$
$
$
$
(63)
(255)
(1,202)
(2,025)
12
485
-
-
35
24
-
(517)
(97)
75
192
823
(12)
485
517
97
(40)
(733)
$ (2,795)
$ 2,062
$ (246)
$ 1,568
$ 1,460
(48)
$
(8)
$
$
(40)
108
Net Cash Flows from (used in) Operating Activities
In the fourth quarter of 2020, net cash flows used in operating activities of $796 million deteriorated by $1,473 million from the same quarter in
2019 on lower operating results, reflecting the impact of the COVID-19 pandemic.
In 2020, net cash used in operating activities of $2,353 million deteriorated by $8,065 million from 2019 on lower operating results and lower
cash from working capital due to lower advance ticket sales, both reflecting the impact of the COVID-19 pandemic. The first quarter of 2019 was
favourably impacted by receipts amounting to $1,612 million in conjunction with Air Canada’s acquisition of Aeroplan.
Net Cash Flows from (used in) Financing Activities
In the fourth quarter of 2020, net cash flows from financing activities of $558 million increased $959 million from the fourth quarter of 2019. In
2020, net cash flows from financing activities of $4,702 million increased $6,151 million from 2019. Refer to section 4 “Strategy and COVID-19
Mitigation and Recovery Plan” of this MD&A for a description of the debt and equity financing transactions concluded in 2020.
Net Cash Flows from (used in) Investing Activities
In the fourth quarter of 2020, net cash flows from investing activities of $159 million reflected an increase of $312 million from the fourth quarter
of 2019, mainly due to proceeds received from the sale and leaseback of nine Boeing 737 MAX 8 aircraft.
In 2020, net cash flows used in investing activities of $733 million reflected a reduction of $2,062 million from 2019, mainly due to a lower level of
capital expenditures year-over-year, proceeds from the sale and leaseback of nine Boeing 737 MAX 8 aircraft, and movements between short- and
47
AIR CANADA | 2020 ANNUAL REPORT long-term investments. In 2020, Air Canada took delivery of 15 Airbus A220 aircraft. Additions to property and equipment is net of additional
settlement payments received from Boeing related to the grounding of the 737 MAX fleet. The first quarter of 2019 included the impact of
Air Canada’s acquisition of Aeroplan on January 10, 2019.
Refer to sections 8.4 “Working Capital”, 8.2 “Financial Position”, 8.3 “Net Debt” and 8.9 “Share Information” of this MD&A for
additional information.
Free Cash Flow
The table below provides the calculation of free cash flow for Air Canada for the periods indicated.
(Canadian dollars in millions)
2020
2019
$ CHANGE
2020
2019
$ CHANGE
Fourth Quarter
Full Year
Net cash flows from (used in)
operating activities
Additions to property, equipment, and
intangible assets, net of proceeds from sale
and leaseback transactions
One-time proceeds related to the acquisition
of Aeroplan (as described above)
Free cash flow(1)
$ (796)
$
677
$ (1,473)
$ (2,353)
$ 5,712
$ (8,065)
150
(251)
-
-
401
-
(717)
(2,025)
1,308
-
(1,612)
1,612
$ (646)
$
426
$ (1,072)
$ (3,070)
$ 2,075
$ (5,145)
(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 can generate from operations after
capital expenditures and excluding one-time proceeds related to the acquisition of Aeroplan. Free cash flow is calculated as net cash flows from operating activities minus additions to property, equipment,
and intangible assets, net of proceeds from sale and leaseback transactions. The one-time proceeds related to the acquisition of Aeroplan in 2019 were also excluded from Air Canada’s calculation of free
cash flow. Refer to section 19 “Non-GAAP Financial Measures” of this MD&A for additional information.
In the fourth quarter of 2020, negative free cash flow of $646 million deteriorated by $1,072 million from the fourth quarter of 2019, reflecting
lower cash flows from operating activities due to the impact of the COVID-19 pandemic, partially offset by a lower level of net capital
expenditures.
In 2020, negative free cash flow of $3,070 million deteriorated by $5,145 million from 2019, reflecting lower cash flows from operating activities
due to the impact of the COVID-19 pandemic, partially offset by a lower level of capital expenditures versus 2019.
Net Cash Burn
The table below provides the calculation of net cash burn for Air Canada for the periods indicated.
(Canadian dollars in millions)
Net cash flows used in operating activities
Net cash flows from financing activities
Net cash flows from (used in) investing activities
Remove:
Net proceeds from new financings
Lump-sum debt repayments
Proceeds from sale and leaseback transactions
Investments, short-term and long-term
Net cash burn(1)
Fourth Quarter
Full Year
2020
$ (796)
558
159
(1,066)
255
(485)
(9)
$ (1,384)
2020
$ (2,353)
4,702
(733)
(7,553)
1,687
(485)
63
$ (4,672)
(1) Net cash burn is a non-GAAP financial measure used by Air Canada as a measure of cash used to maintain operations, support capital expenditures, and settle normal debt repayments, all before the net
impact of new financing proceeds. Net cash burn is defined as net cash flows from operating, financing, and investing activities, and excludes proceeds from new financings, any lump sum debt maturities
where Air Canada has refinanced or replaced the amount and proceeds from sale and leaseback transactions. Net cash burn also excludes movements between cash and short- and long-term investments.
In the fourth quarter of 2020, net cash burn of $1,384 million (or approximately $15 million per day, on average) was in line with management’s
net cash burn expectations of an average of $14 million to $16 million per day, discussed in Air Canada’s December 15, 2020 news release.
48
AIR CANADA | 2020 ANNUAL REPORT 8.6. Capital Expenditures and Related Financing
Arrangements
Boeing 737 MAX Aircraft
Air Canada’s agreement with Boeing for the purchase of Boeing 737 MAX aircraft provides for:
— Firm orders for 40 Boeing 737 MAX 8 aircraft.
— Purchase options for 10 Boeing 737 MAX aircraft.
In 2019, Air Canada concluded discussions with Boeing to settle the terms of an arrangement in relation to the grounding of the Boeing 737 MAX
aircraft. The settlement payments contemplated by the arrangement were made to Air Canada during the fourth quarter of 2019 and during the first
and second quarters of 2020. The compensation is accounted for as an adjustment to the purchase price of current and future deliveries and will flow
through Air Canada’s consolidated statement of operations as reduced depreciation expense over the life of the aircraft, and as a reduction to additions
to property and equipment on the consolidated statement of cash flow.
In the first quarter of 2020, Air Canada finalized an amendment to its 2014 order, reducing its initial order by 11 Boeing 737 MAX 9 aircraft
previously scheduled for delivery in 2023 and 2024. This amendment reflected Air Canada’s evolving and long-term fleet planning requirements
at that time.
In early November 2020, Air Canada amended its agreement with Boeing to cancel 10 Boeing 737 MAX 8 aircraft deliveries from its firm order
of 50 aircraft and to defer its remaining 16 aircraft deliveries over the late 2021 to 2023 period. The capital commitments table below has been
updated to reflect the cancellation and the changes to the delivery schedule. As part of this amendment, options for eight aircraft and the rights
to purchase an additional 30 aircraft were also cancelled.
Twenty-four Boeing 737 MAX 8 aircraft have been delivered to date.
Airbus A220-300 Aircraft
Air Canada’s agreement with Airbus Canada Limited Partnership (as successor to Bombardier Inc.) originally provided for an order for 45 Airbus
A220-300 aircraft (formerly called Bombardier C-Series CS300 aircraft) and options for an additional 30 Airbus A220-300 aircraft.
Air Canada concluded an amendment to the purchase agreement effective in early November 2020. As a result, Air Canada deferred 18 aircraft
deliveries over 2021 and 2022 and will not be purchasing the last 12 Airbus A220 aircraft included in the original order.
At December 31, 2020, 15 Airbus A220 aircraft had been delivered.
As disclosed in section 4 “Strategy and COVID-19 Mitigation and Recovery Plan” of this MD&A, in September 2020, Air Canada concluded a
committed secured facility totalling $788 million to finance the purchase of the first 18 Airbus A220 aircraft.
49
AIR CANADA | 2020 ANNUAL REPORT Capital Commitments
As outlined in the table below, the estimated aggregate cost of all aircraft expected to be delivered and other capital purchase commitments at
December 31, 2021 approximates $2,544 million. The table below includes the impact of the capital reduction and deferral program discussed in
section 4 “Strategy and COVID-19 Mitigation and Recovery Plan” of this MD&A.
(Canadian dollars in millions)
2021
2022
2023
2024
2025
THEREAFTER
TOTAL
Projected committed
expenditures
Projected planned but uncommitted
expenditures
Projected planned but uncommitted
capitalized maintenance(1)
Total projected
expenditures(2)
$ 969
$
961
$ 410
$ 204
$
-
$
-
$ 2,544
134
107
452
208
394
283
517
215
894
Not available Not available
264
Not available Not available
$ 1,210
$ 1,621
$ 1,087
$ 936
$ 1,158
Not available Not available
(1) Future capitalized maintenance amounts for 2024 and beyond are not yet determinable, however estimates of $215 million and $264 million have been made for 2024 and 2025.
(2) U.S. dollar amounts are converted using the December 31, 2020 closing exchange rate of US$1=C$1.2725. The estimated aggregate cost of aircraft is based on delivery prices that include estimated escala-
tion and, where applicable, deferred price delivery payment interest calculated based on the 90-day U.S. LIBOR rate at December 31, 2020.
8.7. Pension Funding Obligations
Air Canada maintains several defined benefit pension plans, including domestic registered pension plans, supplemental pension plans and pension
plans for foreign employees. Air Canada also has several defined contribution pension plans as well as plans providing other retirement and post-
employment benefits to its employees.
On a preliminary basis, at January 1, 2021, the aggregate solvency surplus in Air Canada’s domestic registered pension plans was $3.0 billion. The
final valuations will be completed in the first half of 2021. 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.
Total employer defined benefit pension funding contributions (including international and supplemental plans) were $103 million in 2020 and are
forecasted to be $88 million in 2021.
At December 31, 2020, approximately 75% of Air Canada’s pension assets were invested in fixed income instruments to mitigate a significant
portion of the interest rate (discount rate) risk. Air Canada seeks to maintain a high percentage of long-term fixed income products to hedge
pension liabilities.
50
AIR CANADA | 2020 ANNUAL REPORT 8.8. Contractual Obligations
The table below provides Air Canada’s contractual obligations as at December 31, 2020, including those relating to interest and principal
repayment obligations on Air Canada’s long-term debt and lease liabilities and committed capital expenditures.
(Canadian dollars in millions)
2021(2)
2022
2023
2024
2025
THEREAFTER
TOTAL
PRINCIPAL
Long-term debt
Lease liabilities
Total principal obligations
INTEREST
Long-term debt
Lease liabilities
Total interest
Total long-term debt and
lease liabilities
Committed capital
expenditures
Total contractual
obligations(1)
$ 1,244
544
$ 1,788
$
$
394
178
572
$
665
471
$ 1,136
$
353
147
$ 500
$ 2,275
465
$ 2,740
$
320
122
$ 442
$ 1,254
430
$ 1,684
$
231
97
$ 328
$ 1,622
410
$ 2,032
$
$
174
74
248
$ 2,785
1,276
$ 4,061
$
$
260
351
611
$
9,845
3,596
$ 13,441
$
$
1,732
969
2,701
$ 2,360
$ 1,636
$ 3,182
$ 2,012
$ 2,280
$ 4,672
$ 16,142
$
969
$
961
$
410
$ 204
$
-
$
-
$ 2,544
$ 3,329
$ 2,597
$ 3,592
$ 2,216
$ 2,280
$ 4,672
$ 18,686
(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 lease liabilities
due to reasons of uncertainty of timing of cash flows and items that are non-cash in nature.
(2) 2021 debt repayments include $159 million remaining on a bridge loan related to the purchase of Airbus A220 aircraft, as further described in section 4 “Strategy and COVID-19 Mitigation and Recovery
Plan” of this MD&A. After the delivery of the remaining three Airbus A220 aircraft under this loan, a secured facility is in place that allows Air Canada to defer the debt repayment related to these aircraft
over 12 years from the delivery date.
8.9. Share Information
The issued and outstanding shares of Air Canada, along with shares potentially issuable, as of the dates indicated below, are as follows:
ISSUED AND OUTSTANDING SHARES
Class A variable voting shares
Class B voting shares
Total issued and outstanding shares
Convertible notes
Stock options
Total shares potentially issuable
Total outstanding and potentially issuable shares
DECEMBER 31, 2020
DECEMBER 31, 2019
111,926,060
220,246,228
332,172,288
48,687,441
5,903,174
54,590,615
386,762,903
126,664,740
137,151,838
263,816,578
-
4,890,095
4,890,095
268,706,673
51
AIR CANADA | 2020 ANNUAL REPORT Issuer Bid
In response to the COVID-19 pandemic, in early March 2020 Air Canada suspended share purchases under its normal course issuer bid.
Air Canada’s normal course issuer bid expired in May 2020 and Air Canada did not renew it.
Prior to suspending purchases under its normal course issuer bid, in the first quarter of 2020, Air Canada purchased, for cancellation, a total of
2,910,800 shares at an average cost of $43.76 per share for aggregate consideration of $127 million. The excess of the cost over the average book
value of $119 million was charged to Retained earnings.
In 2019, Air Canada purchased, for cancellation, 9,082,487 shares at an average cost of $41.64 per share for aggregate consideration of
$378 million. The excess of the cost over the average book value of $351 million was charged to Retained earnings.
Share Offerings
In June 2020, Air Canada completed an underwritten public offering of 35,420,000 shares at a price of $16.25 per share, for aggregate gross
proceeds of $576 million, which includes the exercise in full by the underwriters of their over-allotment option to purchase up to 4,620,000
shares for gross proceeds of $75 million. After deduction of the underwriters’ fees and expenses of the offering, net proceeds were $552 million.
Air Canada also concluded a concurrent marketed private placement of convertible senior unsecured notes due 2025. Refer to section 4 “Strategy
and COVID-19 Mitigation and Recovery Plan” of this MD&A for additional information.
In December 2020, Air Canada completed an underwritten public offering of 35,420,000 shares at a price of $24.00 per share, for aggregate
proceeds of $850 million. After deduction of the underwriters’ fees and expenses of the offering, net proceeds were $815 million. Air Canada
granted the underwriters an option to purchase up to an additional 15% of the shares in the offering, exercisable in whole or in part at any time
until 30 days after closing of the offering on December 30, 2020. On January 18, 2021, Air Canada announced that the underwriters exercised
their over-allotment option to purchase an additional 2,587,000 shares for gross proceeds of $62 million.
Proposed Acquisition of Transat
As discussed in section 4 “Strategy and COVID-19 Mitigation and Recovery Plan” of this MD&A, on October 10, 2020, Air Canada announced
amendments to the acquisition transaction with Transat. Assuming closing of the acquisition of Transat and that all Transat shareholders elect
to receive Air Canada shares as consideration for their Transat shares (and that no holders of options of Transat exercise their options before the
applicable election deadline and elect to receive Air Canada shares for the Transat shares underlying their options), Air Canada would expect to
issue an aggregate of up to 10,803,217 shares in connection with the acquisition (based on 37,747,090 outstanding shares of Transat, as reported
by Transat). The table above does not reflect the potential issuance of these shares.
52
AIR CANADA | 2020 ANNUAL REPORT 9.
Quarterly Financial Data
The table below summarizes quarterly financial results for Air Canada for the last eight quarters.
2019
2020
(Canadian dollars in millions,
except where indicated)
Operating revenues
Operating expenses
Operating income (loss)
Non-operating income
(expense)
Income (loss) before
income taxes
Income tax recovery (expense)
Net income (loss)
Diluted earnings (loss)
per share
Adjusted pre-tax income (loss)(1)
Q1
Q2
Q3
Q4
$ 4,434
4,307
127
$ 4,738
4,316
422
$ 5,529
4,573
956
$ 4,429
4,284
145
$
Q1
3,722
4,155
(433)
(843)
Q2
$
527
2,082
(1,555)
74
$
Q3
757
1,542
(785)
(36)
Q4
$
827
1,830
(1,003)
(272)
158
285
60
345
1.26
24
$
$
$
18
(78)
440
(97)
343
1.26
326
878
(242)
636
2.35
857
$
$
$
$
$
$
$
$
$
27
172
(20)
152
(1,276)
(1,481)
(821)
(1,275)
227
$ (1,049)
(271)
$ (1,752)
136
(685)
114
$ (1,161)
$
0.56
$ (4.00)
$ (6.44)
$ (2.31)
$ (3.91)
66
$
(520)
$ (1,438)
$ (1,141)
$ (1,326)
(1) Adjusted pre-tax income (loss) is a non-GAAP financial measure. A reconciliation of this measure to a comparable GAAP measure can be found in section 19 “Non-GAAP Financial Measures” of this MD&A.
The table below provides a breakdown of the most significant items included in regional airlines expense for the last eight quarters.
2019
2020
(Canadian dollars in millions)
Capacity purchase fees(1)
Airport and navigation
Sales and distribution costs
Other
Total regional airlines expense
Q1
252
69
36
118
475
Q2
247
74
41
113
475
$
$
Q3
266
78
43
114
501
$
$
Q4
277
71
38
119
505
$
$
$
$
Q1
253
63
33
122
471
Q2
117
12
(1)
44
172
$
$
Q3
127
24
12
35
198
$
$
Q4
139
28
7
71
245
$
$
$
$
(1) Capacity purchase fees exclude the component of fees related to aircraft costs which are accounted for as lease liabilities in accordance with IFRS 16 – Leases.
53
AIR CANADA | 2020 ANNUAL REPORT The table below provides major quarterly operating statistics for Air Canada for the last eight quarters.
2019
2020
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
SYSTEM
PRASM (cents)
CASM (cents)
Adjusted CASM (cents)(1)
Fuel cost per litre (cents)(2)
14.6
16.6
11.6
75.5
15.5
15.5
11.1
79.2
15.8
14.1
10.1
74.7
15.0
16.2
11.9
75.0
13.6
17.7
13.1
69.2
9.2
92.9
76.9
51.8
8.5
25.9
26.1
52.5
7.9
30.5
29.8
50.4
(1) Adjusted CASM is a non-GAAP financial measure. A reconciliation of this measure to a comparable GAAP measure can be found in section 19 “Non-GAAP Financial Measures” of this MD&A.
(2) Includes aircraft fuel expense related to regional airline operations and fuel handling expenses.
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.
2019
2020
Q1
Q2
Q3
Q4
Q1
Q2
Q3
Q4
21,293
26,016
81.8
23,463
27,910
84.1
27,954
32,457
86.1
21,403
26,431
81.0
17,507
23,511
74.5
783
2,243
34.9
4,251
5,274
80.6
4,296
5,341
80.4
4,943
6,177
80.0
4,486
5,367
83.6
3,317
3,857
86.0
5,097
6,068
84.0
3,845
4,686
82.0
7,496
8,882
84.4
5,072
5,971
84.9
1,953
2,303
84.8
6,298
7,474
84.3
4,010
4,764
84.2
10,580
12,068
87.7
5,364
6,217
86.3
1,702
1,934
88.0
4,682
5,861
79.9
3,695
4,700
78.6
6,265
7,710
81.3
4,504
5,456
82.6
2,257
2,704
83.5
3,604
4,930
73.1
3,322
4,741
70.1
4,369
5,964
73.3
3,026
3,957
76.5
3,186
3,919
81.3
376
876
43.0
25
106
23.8
214
888
24.1
113
290
38.9
55
83
66.3
2,517
5,949
42.3
1,413
2,504
56.4
97
250
38.6
694
2,306
30.1
182
658
27.7
131
231
56.8
2,432
6,000
40.5
1,043
2,198
47.4
186
404
46.0
707
2,053
34.4
185
778
23.8
311
567
54.9
SYSTEM
RPMs (millions)
ASMs (millions)
Passenger load factor (%)
DOMESTIC
RPMs (millions)
ASMs (millions)
Passenger load factor (%)
U.S. TRANSBORDER
RPMs (millions)
ASMs (millions)
Passenger load factor (%)
ATLANTIC
RPMs (millions)
ASMs (millions)
Passenger load factor (%)
PACIFIC
RPMs (millions)
ASMs (millions)
Passenger load factor (%)
OTHER
RPMs (millions)
ASMs (millions)
Passenger load factor (%)
54
AIR CANADA | 2020 ANNUAL REPORT 10.
Selected Annual Information
The following table provides selected annual information for Air Canada for the years 2018 through 2020.
(Canadian dollars in millions, except per share figures)
Operating revenues
Operating expenses
Operating income (loss)
Income (loss) before income taxes
Income tax recovery (expense)
Net income (loss)
Basic earnings (loss) per share
Diluted earnings (loss) per share
Cash, cash equivalents and short-term investments
Total assets
Total long-term liabilities
Total liabilities
(1) Air Canada began consolidating Aeroplan’s financial results on the January 10, 2019, the date of its acquisition of Aeroplan.
2020
$
5,833
9,609
(3,776)
(4,853)
206
$ (4,647)
$ (16.47)
$ (16.47)
$
7,501
$ 28,913
$ 20,059
$ 27,198
Full Year
2019 (1)
$
19,131
17,481
1,650
1,775
(299)
1,476
$
5.51
$
$
5.44
$ 5,889
$ 27,759
$ 15,584
$ 23,359
2018
$ 18,003
16,507
1,496
228
(191)
37
$
0.14
$
0.13
$
$
4,707
$ 21,883
$ 12,930
$ 18,606
55
AIR CANADA | 2020 ANNUAL REPORT
11.
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.
(Canadian dollars in millions)
Share forward contracts
Embedded derivative on convertible notes
Gain (loss) on financial instruments recorded at fair value
Fourth Quarter
Full Year
2020
$
6
(220)
$ (214)
2019
$
$
5
-
5
2020
$
(28)
(214)
$ (242)
2019
$
$
23
-
23
Risk Management
Under its risk management policy, Air Canada manages its market risk using various financial derivative instruments. Air Canada 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 Air Canada’s own credit risk as well as the credit risk of the
counterparty.
Fuel Price Risk Management
Fuel price risk is the risk that future cash flows will fluctuate because of changes in jet fuel prices. To manage its exposure to jet fuel prices and to
help mitigate volatility in operating cash flows, Air Canada can elect to enter 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.
There was no fuel hedging activity during 2020 and there were no outstanding fuel derivatives as at December 31, 2020 and December 31, 2019.
Foreign Exchange Risk
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 in 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 Air Canada’s risk
management program. In 2020, these net operating cash inflows totalled approximately US$1.0 billion and U.S.-denominated operating costs
amounted to approximately US$3.0 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$1.5 billion. For 2020, this resulted in a U.S. dollar net cash flow
exposure of approximately US$3.5 billion.
56
AIR CANADA | 2020 ANNUAL REPORT Air Canada has a target coverage of 70% on a rolling 24-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, short- and long-term
investment balances as at December 31, 2020 amounted to $1,747 million (US$1,371 million) ($1,123 million (US$862 million) as at December
31, 2019). 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 24-month net U.S. dollar cash flow exposure. In 2020,
a loss of $69 million (loss of $36 million in 2019) 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, 2020, as further described below, approximately 90% of net
U.S. cash outflows are hedged for 2021 and 21% for 2022, resulting in derivative coverage of 63% over the next 24 months. Operational U.S.
dollar cash and investment reserves combined with derivative coverage results in 68% coverage.
As at December 31, 2020, Air Canada had outstanding foreign currency options and swap agreements, settling in 2021 and 2022, to purchase
at maturity $5,730 million (US$4,499 million) of U.S. dollars at a weighted average rate of $1.3586 per US$1.00 (2019 – $6,599 million
(US$5,080 million) with settlements in 2020 and 2021 at a weighted average rate of $1.2775 per $1.00 U.S. dollar). Air Canada also has
protection in place to sell a portion of its excess Euros, Sterling, YEN, YUAN, and AUD (EUR €464 million, GBP £64 million, JPY ¥4,963 million,
CNH ¥415 million and AUD $88 million) which settle in 2021 and 2022 at weighted average rates of €1.1414, £1.3277, ¥0.0094, ¥0.1463, and
AUD $0.6942 per $1.00 U.S. dollar, respectively (as at December 31, 2019 – EUR €335 million, GBP £202 million, JPY ¥46,655 million, CNH
¥286 million and AUD $209 million with settlements in 2020 and 2021 at weighted average rates of €1.1577, £1.3238, ¥0.0096, ¥0.1469, and
AUD $0.7092 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, 2020 was
$591 million in favour of the counterparties (2019 – $114 million in favour of the counterparties). These derivative instruments have not been
designated as hedges for accounting purposes and are recorded at fair value. During 2020, a loss of $583 million was recorded in Foreign exchange
gain (loss) related to these derivatives (2019 – $92 million gain). In 2020, foreign exchange derivative contracts cash settled with a net fair value of
$106 million in favour of the counterparties (2019 – $173 million in favour of Air Canada).
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.
Air Canada 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. 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 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 flexibility to adjust to prevailing market conditions. The ratio at December 31, 2020
is 74% fixed and 26% floating (83% and 17%, respectively as at December 31, 2019).
57
AIR CANADA | 2020 ANNUAL REPORT 12.
Accounting Policies
Interbank Offered Rate (“IBOR”) Reform
In August 2020, the IASB published amendments to IFRS 9 Financial Instruments, IAS 39 Financial Instruments: Recognition and Measurement,
IFRS 7 Financial Instruments: Disclosures, IFRS 4 Insurance Contracts and IFRS 16 Leases.
The amendments address issues that arise from implementation of IBOR reform, where IBORs are replaced with alternative benchmark rates. For
financial instruments at amortized cost, the amendments introduce a practical expedient such that if a change in the contractual cash flows is as a
result of IBOR reform and occurs on an economically equivalent basis, the change will be accounted for by updating the effective interest rate with
no immediate gain or loss recognized. The amendments also provide additional temporary relief from applying specific IAS 39 hedge accounting
requirements to hedging relationships affected by IBOR reform.
The amendments are effective for fiscal years beginning on or after January 1, 2021 with early adoption permitted. Air Canada will adopt the
amendment on January 1, 2021, electing to apply the practical expedient. Air Canada is in the process of evaluating potential changes to debt
and lease contracts to transition from IBORs to alternative rates prior to the cessation of IBORs. As at December 31, 2020, the amount of debt
and lease contracts likely subject to IBOR reform is US$1,718 million LIBOR. There are also debt and aircraft leases referencing interest rate
benchmarks in multi-rate jurisdictions, including the Canadian Dollar Offered Rate (“CDOR”) of $1,007 million and $5 million of JPY LIBOR.
13.
Critical Accounting Estimates and Judgments
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 judgments, often because of the need to make estimates
and judgments about the effect of matters that are inherently uncertain. Actual results could differ from those estimates and judgments 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.
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 cash flow projections, discount rates and future growth rates.
Income Taxes
Commencing in the second quarter of 2020, the net deferred income tax assets related to unused tax losses and other deductible temporary
differences were not recognized. Management assessed the available positive and negative evidence to estimate whether sufficient future taxable
income will be generated to permit use of the existing deferred tax assets. As a result of the COVID-19 pandemic, there is considerable negative
evidence relating to losses incurred in the current year and uncertainty exists as to when conditions will improve. Such negative evidence currently
outweighs the positive historical evidence and accordingly, the net deferred tax asset was not recognized. Deferred tax assets have only been
recognized to the extent of taxable temporary differences expected to reverse and generate taxable income against which the deferred tax assets
can be utilized. The future income tax deductions underlying the unrecognized deferred income tax assets remain available for use in the future to
reduce taxable income.
58
AIR CANADA | 2020 ANNUAL REPORT Aeroplan Loyalty Program
Loyalty program accounting requires management to make several estimates including the ETV of Aeroplan points issued and the breakage on
Aeroplan points. The ETV of Aeroplan points issued is determined based on the value a passenger receives by redeeming Aeroplan points for a
ticket rather than paying cash. This ETV is estimated with reference to historical Aeroplan redemptions as compared to equivalent ticket purchases
after considering similar fare conditions, advance booking periods and other relevant factors including the selling price of Aeroplan points to third
parties. ETV estimates and assumptions are considered for updates at least annually. A change in the ETV rate is accounted for prospectively on
future Aeroplan points issued.
Breakage represents the estimated Aeroplan points that are not expected to be redeemed. Breakage is estimated by management based on the
terms and conditions of membership and historical accumulation and redemption patterns, as adjusted for changes to any terms and conditions or
other circumstances that may affect future redemptions. Management uses statistical and simulation models to estimate breakage.
A change in assumptions as to the number of Aeroplan points expected to be redeemed could have a material impact on revenue in the year in
which the change occurs.
As at December 31, 2020, the Aeroplan points deferred revenue balance was $3,256 million. For illustrative purposes, a hypothetical 1% change
in the number of outstanding Aeroplan points estimated to be redeemed would result in an approximate impact of $33 million on revenue with a
corresponding adjustment to Aeroplan deferred revenue.
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, 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 million to annual depreciation expense. For aircraft with shorter remaining useful
lives, the residual values are not expected to change significantly.
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 consider 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 at the end of the lease 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 recognized as an adjustment to
the right-of-use asset.
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 compensation increases, and mortality assumptions.
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.
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.
59
AIR CANADA | 2020 ANNUAL REPORT 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:
Discount rate used to determine:
Net interest on the net benefit obligation for the year ended December 31
Service cost for the year ended December 31
Accrued benefit obligation as at December 31
Rate of future increases in compensation used to determine:
Accrued benefit cost for the year ended December 31
Accrued benefit obligation as at December 31
Pension
Benefits
Other Employee
Future Benefits
2020
2019
2020
2019
3.13%
3.20%
2.59%
2.50%
2.50%
3.81%
3.93%
3.13%
2.50%
2.50%
3.13%
3.20%
2.59%
3.81%
3.93%
3.13%
Not applicable Not applicable
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 that used for calculating the liability recognized in the consolidated statement of
financial position.
Sensitivity analysis on 2020 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)
Discount rate on obligation assumption
Pension expense
Net financing expense relating to pension benefit liabilities
Total
Increase (decrease) in pension obligation
0.25 Percentage Point
DECREASE
INCREASE
$
$
21
-
21
$
$
(20)
5
(15)
$ 851
$ (822)
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, 2020, approximately 75% 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 $558 million.
Assumed health care cost trend rates impact the amounts reported for the health care plans. A 5% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2020 (2019 – 5.25%). The rate is assumed to decrease gradually to 4.5% by 2023 (2019 – 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 $6 million and the obligation by $81 million. A one percentage point decrease in assumed health care trend
rates would have decreased the total of current service and interest costs by $5 million and the obligation by $80 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 $65 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 $61 million.
60
AIR CANADA | 2020 ANNUAL REPORT 14.
Off-Balance Sheet Arrangements
Guarantees
Guarantees in Fuel and De-icing Arrangements
Air Canada participates in fuel facility arrangements operated through nine 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 $1,047 million as at December 31, 2020 (December 31, 2019 - $643 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.
15.
Related Party Transactions
At December 31, 2020, 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.
61
AIR CANADA | 2020 ANNUAL REPORT 16.
Enterprise Risk Management and Governance
Overview
The management of opportunities and risks is an integral part of Air Canada’s business processes. Strategic decisions are made by the executive
team with consideration of risk implications to the business and its stakeholders. Risks which may be material to Air Canada are identified and
monitored on an ongoing basis through Air Canada’s Enterprise Risk Management (ERM) program which provides insight on a regular basis to the
Board of Directors through the Board’s Audit, Finance and Risk Committee.
Implications of COVID-19
While confronting the challenges that the COVID-19 pandemic has had and its major impact on Air Canada’s business in 2020, Air Canada has
remained vigilant to continue to maintain the integrity and resiliency of its key governance, oversight and risk management processes as outlined
below. Processes have been adjusted as necessary to reflect changes to Air Canada’s business and working environments; ensuring important risks
continue to be managed appropriately.
Board Oversight
Risk management is an integral part of Air Canada’s corporate governance. The Board of Directors has established board committees (Audit,
Finance and Risk Committee; Safety, Health, Environment and Security Committee; Governance and Nominating Committee; and Human
Resources and Compensation Committee) to assist in the oversight responsibilities.
Risk information is reviewed by the Board or the relevant board committee on a quarterly basis. In addition, board committees review and discuss
with management, on a regular basis, all key enterprise risk exposures based on their respective terms of reference set out in committee charters
and the steps taken that seek to monitor/control and mitigate those exposures to satisfy themselves as to the effective risk management of the
individual risks. These processes seek to appropriately mitigate rather than eliminate risk.
The Audit, Finance and Risk Committee is responsible for the oversight of the ERM program and the work carried out by the Corporate Audit and
Advisory department, as stated in its committee charter.
ERM risk reporting is maintained by the Corporate Audit and Advisory department, which provides an independent update as to the state of each
enterprise risk on a quarterly basis.
Risk Management Framework and Structure
Air Canada’s enterprise risk management framework has been developed to support governance and oversight over the Corporation’s most
important strategic risks and is aligned to the ISO 31000 standard and COSO ERM 2017 framework.
Formal policies and management committees are in place to manage specific risks such as safety, security, fraud, information security, privacy,
environment and fuel price.
Sound business practices and ethical behaviour are also fundamental to Air Canada’s risk governance culture. Air Canada has in place (and
updates, as required) a Corporate Policy and Guidelines on Business Conduct (“Code of Conduct”), which sets out guiding principles and ethical
standards that apply to all Air Canada’s corporate activities. A confidential, anonymous reporting process and ethics committee are also in place
to oversee adherence to the Code of Conduct.
62
AIR CANADA | 2020 ANNUAL REPORT Air Canada’s risk management structure is aligned with the “Three Lines of Defence” approach to risk management:
— 1st line - Business functions are expected to integrate risk management when performing their day-to-day core commercial and operational
activities.
— 2nd line - Support functions establish policies, provide guidance and expertise, and risk oversight (e.g., Safety, Security, Legal and Compliance,
Finance/Treasury/Tax, Sourcing and Procurement, Government Affairs, People, Environment, IT Operations and IT Security).
— 3rd line - Corporate Audit and Advisory department provides an independent and objective perspective on Air Canada’s governance, risk
management practices and controls.
Air Canada’s ERM and governance structure is as follows:
BOARD OF DIRECTORS
BOARD COMMITTEES
EXECUTIVE LEADERSHIP TEAM / RISK OWNERS
MANAGEMENT RISK OVERSIGHT / CORPORATE SUPPORT FUNCTIONS / COMMITTEES
(2ND LINE)
CORPORATE AUDIT AND
ADVISORY / INDEPENDENT
RISK REPORTING
(3RD LINE)
LINE MANAGERS AND CORE BUSINESS ACTIVITIES
(1ST LINE)
Although the risk management framework described in this section is aligned with industry best practices, there can be no assurance that it will
be sufficient to prevent the occurrence of events that could have a material adverse effect on our financial position, financial performance, cash
flows, business or reputation.
63
AIR CANADA | 2020 ANNUAL REPORT 17.
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, individually or in combination,
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. Should a risk
materialize, circumstances at the time may also cause that risk to
have a different impact than that which might otherwise have been
expected. 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.
COVID-19 – The effects of the COVID-19 pandemic have
materially affected Air Canada and could have a further material
adverse impact on Air Canada’s financial position and results of
operations
Air Canada, along with the rest of the global airline industry,
continues to face a severe drop in traffic and a corresponding
decline in revenue and cash flows as a result of the COVID-19
pandemic and the travel restrictions imposed in many countries
around the world, and particularly in Canada. The impact of the
COVID-19 pandemic began to be felt in traffic and sales figures
commencing in early March 2020. These impacts include drastic
declines in earnings and cash flow from operations. Travel demand
has been drastically suppressed, and there is very limited visibility
on when travel demand might recover. Given changing government
restrictions and advisories in place in Canada and around the world
and the severity of restrictions in Canada as well as concerns about
travel due to the COVID-19 pandemic and passenger concerns
and expectations about the need for certain precautions, such
as physical distancing, demand remains severely inhibited. The
COVID-19 pandemic is also having significant economic impacts,
including on business and consumer spending, which may in turn
significantly impact demand for travel. Air Canada cannot predict
the full impact or the timing for when conditions may improve.
Air Canada is actively monitoring the situation and will continue
to respond as the impact of the COVID-19 pandemic evolves,
which will depend on a number of factors including the course of
the virus (including any variants), availability and effectiveness
of rapid testing, screening, vaccinations and treatments for the
virus, government actions, travel restrictions and advisories, and
passenger reaction, as well as timing of a recovery in international
and business travel which are important segments of Air Canada’s
markets, none of which can be predicted with any degree of
certainty.
Air Canada has taken and implemented a number of safety
measures in light of the COVID-19 pandemic, including the
Air Canada CleanCare+ program and has publicly appealed to
governments and other parties in an effort to recognize the efficacy
of such safety measures and to allow for a measured and
64
responsible reduction of travel restrictions. Air Canada continues
to be adversely impacted to the extent that travel restrictions
and advisories remain in place over time. Air Canada as well as its
brand and reputation may also be adversely impacted to the extent
that safety measures introduced are not perceived to adequately
address the risks of transmission of COVID-19 or justify relaxing
the travel restrictions and advisories issued by governments or by
perceptions that any efforts Air Canada makes to mitigate the risk
of transmission of COVID 19 during the course of a journey
or otherwise to support or promote travel are designed to induce
travel and are inconsistent with public health interests.
Air Canada’s operations could also be adversely impacted further if
its employees (or third-party employees such as those of airports or
suppliers) are unable or restricted in their ability to work, including
by reasons of being quarantined or becoming ill as a result of
exposure to COVID-19, or if they are subject to government or
other restrictions.
Air Canada is providing customers who booked with Air Canada and
who are affected by COVID-19 related cancellations with the option
to convert their ticket to an Air Canada travel voucher that has no
expiry date and is fully transferable. Alternatively, customers may
convert the unused value of their ticket into Aeroplan points and
receive additional bonus Aeroplan points. Air Canada is refunding
refundable fares according to the terms and conditions that govern
them. Air Canada may be required to refund non-refundable fares
depending on the laws of the jurisdictions applicable to such
flights. Not refunding non-refundable tickets exposes Air Canada
to litigation, as well as enforcement action by regulators in certain
jurisdictions, and may also adversely impact Air Canada’s brand and
reputation. Class actions claiming the refund of non-refundable
tickets or tour packages have been filed against Air Canada, and
other carriers, in Canada and in the United States, and additional
class actions or other proceedings may be instituted in these or
other jurisdictions. In countries where refund requirements are or
will be enhanced, maintained or enforced, ensuing refunds may
adversely impact Air Canada’s liquidity and the impact of all these
risks could be material.
COVID-19 has also materially disrupted Air Canada’s strategic
operating plans in the near-term, and there are risks to it and
Air Canada’s business, operating results and financial condition
associated with executing Air Canada’s strategic operating plans
in the long-term. In recent years, Air Canada developed several
strategic operating plans, including several revenue-generating
initiatives and plans to optimize Air Canada’s revenue, such as plans
to add capacity, including international expansion, initiatives and
plans to optimize and control Air Canada’s costs and opportunities
to enhance segmentation and improve the customer experience
at all points in air travel. In developing strategic operating plans,
Air Canada makes certain assumptions, including, but not limited
to, those related to customer demand, competition, market
consolidation, the availability of aircraft and the global economy.
Actual economic, market and other conditions have been and may
continue to be different from Air Canada’s assumptions. In 2020,
AIR CANADA | 2020 ANNUAL REPORT demand was, and is expected to continue to be in 2021, significantly
impacted by COVID-19, which has materially disrupted the timely
execution of Air Canada’s strategic operating plans, including
plans to add capacity in 2020. If Air Canada does not successfully
develop, execute or adjust Air Canada’s strategic operating plans
in the long-term, or if actual conditions and results continue to
vary significantly from the assumptions on which they are based,
Air Canada’s business, operating results and financial condition
could be materially and adversely impacted.
These risks have materially affected Air Canada and could have a
further material adverse impact on Air Canada’s financial position
and results of operations. The COVID-19 pandemic may also
exacerbate or increase the likelihood of the occurrence of other risk
factors described in this MD&A, including in relation to operating
results, financial leverage, economic and geopolitical conditions,
fares and market demand and strategic, business, technology
and other important initiatives. In addition, the impact of the
COVID-19 pandemic on Air Canada’s financial condition may reduce
Air Canada’s ability to adequately respond to these and other risks
that may arise.
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
Air Canada’s operating results, like those of other airlines, are
sensitive to and may be significantly impacted by economic
and geopolitical conditions, which may impact demand for air
transportation in general or to or from certain destinations,
operating costs, operating revenues, costs and availability of fuel,
foreign exchange costs, tax costs and costs and availability of
capital and supplies. Any prolonged or significant impact arising
from economic and geopolitical conditions, including the COVID-19
pandemic, weakness of the Canadian, U.S. or world economies,
changes to political, economic, fiscal or trade relationships within
or between jurisdictions where Air Canada operates flights or
does business, or threatened or actual outbreaks of hostilities in
or adjacent to regions Air Canada serves or over which it operates
flights or does business could have a material adverse effect on
Air Canada, its business, results from operations and financial
condition.
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 MD&A, may result in Air Canada incurring
significant losses. The airline industry has historically been
characterized by low profit margins and high fixed costs and the
costs of operating a flight do not vary significantly with the number
of passengers carried. Therefore, a relatively small change in the
number of passengers, fare pricing or traffic mix, or increased
costs, could have a significant impact on Air Canada’s operating
and financial results. Due to the competitive nature of the airline
industry and customer sensitivity to travel costs, Air Canada may
not be able to pass on cost increases to its customers. Despite a
focus on improving resiliency to downturns in its business as well as
65
ongoing and planned strategic and business initiatives, Air Canada
may not be able to successfully achieve and/or sustain positive
net profitability or realize all of its objectives, 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 MD&A.
Fares and market demand – Fluctuations in fares and demand for
air travel and could materially adversely impact Air Canada, its
business, results of operations and financial condition
Air Canada fares and passenger demand, like those of other
airlines, have fluctuated significantly in the past and may fluctuate
significantly in the future, including due to the impact of the
COVID-19 pandemic. Air Canada is not able to predict with
certainty market conditions and the fares that Air Canada may be
able to charge. Customer expectations and perception can change
rapidly due to many factors, and the demand for lower fares or
alternative modes of transportation may impact revenues. Travel,
especially leisure travel, is a discretionary consumer expense.
Demand for business and premium travel is also impacted by
economic conditions. Depressed economic conditions, geopolitical
instability, security, health 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 and could materially adversely impact Air Canada, its
business, results of operations and financial condition.
Financial Leverage – Air Canada has a significant amount of
financial leverage, 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 financial leverage from
fixed obligations, including substantial 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 prior to the COVID-19 pandemic Air Canada had 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. 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. 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. 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.
AIR CANADA | 2020 ANNUAL REPORT 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
Competition – Air Canada operates in a highly competitive
environment, faces increasing competition in North America
and internationally and competes against carriers that receive
significant government aid
Air Canada’s liquidity levels may be adversely impacted by risks
identified in this MD&A, including the effects of the COVID-19
pandemic, geopolitical, economic and public health conditions,
foreign exchange rates, increased competition, 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 such challenges and to support
Air Canada’s business strategy, significant liquidity and significant
ongoing operating and capital expenditures are required.
In addition, in response to the travel restrictions, decreased demand
and other effects the COVID-19 pandemic has had and is expected
to have on Air Canada’s business, Air Canada has sought and may
seek material amounts of additional financial liquidity, which
may include the issuance of additional unsecured or secured debt
securities, equity securities and equity-linked securities, the sale
of assets as well as additional secured and/or unsecured credit
facilities, among other items. There can be no assurance as to the
timing of any such issuance, or that any such additional financing
will be completed on favourable terms, or at all.
Air Canada’s substantial level of indebtedness, particularly following
the additional liquidity transactions completed and contemplated
in response to the impacts of the COVID-19 pandemic, as well as
market conditions and the availability of assets as collateral for
loans or other indebtedness, which may be reduced as Air Canada
continues to seek material amounts of additional financial liquidity,
together with the effect the COVID-19 pandemic has had on the
global economy generally and the air transportation industry
specifically, may make it difficult for Air Canada to raise additional
capital if needed to meet its liquidity needs on acceptable terms, or
at all.
Although Air Canada’s current liquidity levels exceed the minimum
cash it requires to support ongoing business operations, 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,
including a major decline in capital markets in general, a
downgrade in Air Canada’s credit ratings, 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 negatively
impact Air Canada’s ability to raise capital, issue debt, borrow
on acceptable terms, attract and/or retain key employees, make
strategic acquisitions, enter into business arrangements or operate
its business, and such factors may contribute to volatility in
Air Canada’s securities.
66
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 other
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.
Certain carriers against which Air Canada competes have received
airline sector-specific government aid in relation to the COVID-19
pandemic which may strengthen their ability to compete, including
against Canadian airlines who have not received such government
support. Carriers against which Air Canada competes, including
U.S. and Canadian carriers, may also undergo (and some have
undergone) substantial reorganizations (including by way of merger
with or acquisition by another carrier or entity), creating greater
access to capital, 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 may also
strengthen the ability of carriers to compete.
The prevalence of Internet travel websites and other travel product
distribution channels has also resulted in a substantial increase in
new routings and 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, government aid 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.
Government Financial Assistance – There can be no assurance
that government financial assistance will be made available to
Air Canada
Unlike in many other countries, including the United States and
many European countries, the Canadian government has not
provided any financial assistance or other relief specifically for
Canadian airlines in response to the COVID-19 pandemic. In the
second quarter of 2020, the Canadian government announced
a program entitled the “Large Employer Emergency Financing
Facility” (“LEEFF”), addressed to “large Canadian employers”. Due to
its terms, as of the date hereof, Air Canada has not applied and does
not intend to seek financial assistance under the LEEFF but may seek
AIR CANADA | 2020 ANNUAL REPORT financial assistance under other programs discussed below or which
may be available in future.
In the fourth quarter of 2020, the Canadian government announced
it is “developing a package of assistance to Canadian airlines,
airports and the aerospace sector” and indicated that any assistance
provided as part of such package would (i) include conditions to
protect Canadians and the public interest, (ii) require airlines to
provide ticket refunds for flights postponed or cancelled in relation
to the COVID-19 pandemic, and (iii) ensure Canadians and regional
communities retain air connections within Canada.
The application of the above conditions, as well as the specific
terms and conditions, pursuant to which Air Canada could receive
any government financial assistance or any other government
aid initiative, are not clear. Any such financial assistance and, in
turn, the conditions imposed in connection with operations and in
connection with receipt of financial assistance, may significantly
limit Air Canada’s corporate activities, and its terms could
adversely impact its business and operations. Financing under any
government aid program or otherwise could require Air Canada to
(i) issue ticket refunds for flights postponed or cancelled in relation
to the COVID-19 pandemic; (ii) offer and/or maintain service to
regional communities within Canada; (iii) seek amendments or
waivers under agreements governing Air Canada’s existing or future
indebtedness; (iv) issue warrants to purchase equity securities
(or provide cash consideration equivalent to the value of the
warrants); (v) restrict or otherwise limit Air Canada’s ability to
declare dividends; or (vi) be subject to other limitations, covenants
or restrictions on its business and operations. As a result of the
foregoing, there can be no assurance that any government financial
assistance will be made available to Air Canada on terms that
provide a net benefit to Air Canada, are acceptable to it, or at all.
As indicated under 4 “Strategy and COVID-19 Mitigation and
Recovery Plan”, as part of its ongoing efforts to increase liquidity
levels, Air Canada continues to pursue additional financing
arrangements. Such financings may include secured or unsecured
credit agreements or debt securities, as well as the issuance of
additional Shares or equity-linked instruments. If Air Canada
determines to pursue government funding under a government
financial assistance program but is unable to secure it, or if such
program or other assistance is not made available to Air Canada
on terms acceptable to it, the amount of financing that Air Canada
would be required to seek from other third parties would be
increased accordingly. However, no assurance can be made that any
such replacement financing will be available on acceptable terms or
at all. See 4 “Strategy and COVID-19 Mitigation and Recovery Plan”
for additional information.
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, carbon
pricing, as further described below, and the Canada/U.S. dollar
exchange rate. Air Canada cannot accurately predict the future
67
price of fuel, and it may not be able to sufficiently, or may not,
hedge the risk associated with fluctuations in fuel prices. 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. Furthermore, the impact of lower jet fuel prices could
trigger increased competition, resulting in a decrease in revenues
for all 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.
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,
including to increase its revenues and reduce its costs. These
systems include those relating to Air Canada’s websites, passenger
services, reservations, airport customer services, flight operations,
communications and loyalty program. Air Canada’s websites and
other technology systems must efficiently accommodate a high
volume of traffic and securely, and accurately deliver information
and process information critical to Air Canada’s business and
operations. Air Canada also 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, Aeroplan Members, 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 Air Canada’s 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, unauthorized
or fraudulent users (including cyber-attacks, malware, ransomware,
computer viruses and the like), and other operational and security
issues.
Technology Systems are at risk of cybersecurity incidents and
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 system failure,
degradation, interruption or misuse, security breach, efficiency of
migration to a new system, 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,
remediation costs 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.
AIR CANADA | 2020 ANNUAL REPORT 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 recent
implementation of its passenger services system, 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 aircraft and disposal
of aircraft that are being replaced), participation in the leisure or
lower cost market (including through Air Canada Rouge), expanding
its cargo business, including operating dedicated cargo freighter
aircraft, 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 and reliability of third
parties (including suppliers), their services and their products, 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.
Infectious diseases – Infectious diseases could impact passenger
demand for air travel
Outbreaks or the threat of outbreaks of viruses or other contagions
or infectious diseases, including an epidemic, a pandemic such as
COVID-19, 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 have a material adverse effect
on Air Canada, its business, results from operations and financial
condition. Refer to the COVID-19 risk factor above and elsewhere
in this MD&A for more information on the risks related to the
COVID-19 pandemic.
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 travelling 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 travelling
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, 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
source certain goods and services from key suppliers, including
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 or within planned timeframes,
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, and
to address the impact of the COVID-19 pandemic. In certain
cases, Air Canada may only be able to source 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, refusal or inability to deliver or perform, may not
be possible or may take a significant amount of time or require
significant resources. A failure, refusal, delay or inability of a
supplier, may arise as a result of a wide range of causes including
as a result of the COVID-19 pandemic, 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.
68
AIR CANADA | 2020 ANNUAL REPORT 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 travelling 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,
security breaches, equipment failures, human error, severe weather,
lightning strikes and other natural phenomenon, bird strikes as well
as the increasing prevalence of unmanned aerial vehicles.
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, accessibility of transportation, flight crew and
other labour rules, privacy, data security, advertising, 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, may impose significant costs (including taxes and/or
levies), 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, including as a result
of the COVID-19 pandemic. 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 airport 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
69
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 or consummate acquisitions or
other transactions may be challenged by applicable Canadian and
international authorities or third parties, and are and may subject
to conditions or receipt of approvals, from applicable Canadian and
international authorities, 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 known as the Carbon Offsetting Reduction
Scheme for International Aviation (“CORSIA”), adopted in 2016,
includes emissions from applicable international flights. CORSIA
is being 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 CORSIA, 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 based on greenhouse
gas emissions from all fossil fuel 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 British Columbia and
Québec have implemented a carbon pricing system; others have
had the federal carbon pricing backstop system applied. Air Canada
and regional carriers operating flights on behalf of Air Canada
have been subject to a carbon tax for flights operating on an
intra-provincial basis.
Air Canada cannot predict whether, or the manner in which,
these or other initiatives will ultimately be implemented or their
impact on Air Canada, and 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
AIR CANADA | 2020 ANNUAL REPORT 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 in all countries which
may assert jurisdiction over Air Canada, including in countries
where Air Canada operates, conducts business or processes or
stores data. 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 complexities, operating costs and potential exposure
to fines and penalties, 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.
In December 2020, the Minister of Transport mandated the
Canadian Transportation Agency to develop a new regulation
regarding passenger refunds, stating it would apply to “future
flights that are cancelled for reasons outside an air carrier’s control,
such as a pandemic, and where it is not possible for the carrier to
complete the passenger’s itinerary within a reasonable timeframe.”
The Canadian Transportation Agency, announced the opening of
consultations on these regulations, stated its intention to pass
these new regulations by summer 2021. Air Canada cannot predict
whether, or the manner in which, these new regulations will
ultimately be implemented or their impact on Air Canada.
Certain jurisdictions (including Canada, the United States, European
Union countries and other jurisdictions where Air Canada operates
or conducts business or which may assert jurisdiction over
Air Canada) have enacted and implemented, and they and domestic
regulators may in the future enact and implement, consumer
protection and passenger rights and accessibility measures. 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.
Aeroplan loyalty program – Loss of redemption or accrual
partners, changes to accrual or redemption settlement rates,
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
After completing the acquisition of Aeroplan Inc. (formerly
Aimia Canada Inc.), owner and operator of the Aeroplan loyalty
business and program in January 2019, Air Canada implemented,
in November 2020 a new, redesigned Aeroplan loyalty program.
Air Canada offers its customers who are Aeroplan Members the
opportunity to earn Aeroplan points, 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 attracting new
and retaining current members and on maintaining sufficient
70
accumulation and redemption partners. Increases in redemption
rates for outstanding Aeroplan points, 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.
Climate Change – Changes in environmental conditions,
environmental regulations and public opinion regarding air travel
could have a material adverse effect on Air Canada, its business,
results from operations and financial condition
Air Canada, like other airlines, is subject to climate change-
related risks, including in relation to other factors described in this
MD&A. The airline industry is a source of carbon dioxide and other
greenhouse gases and faces extensive related laws and regulations,
including those described in this MD&A. Climate change may
increase the frequency and intensity of severe weather on the
ground and at altitude (including turbulence events) which could
impact many aspects of airline operations and increase operating
costs. Severe weather events at airports or destinations served
by Air Canada may impact the viability or cost of flying to such
destinations. Concern about climate change and the impact of
carbon emissions from flights may result in additional regulation,
expanded aviation fuel taxes and levies, reduced demand for air
travel and adversely impact public perception of Air Canada and its
brand. Climate change as well as a failure to adapt to and address
evolving related regulations, or changes in public opinion, failure
to implement technologies which adequately reduce climate or
environmental impacts, improve sustainability of its operations or
otherwise respond to climate change-related challenges, in a timely
manner, could have a material adverse effect on Air Canada, its
brand, its business, results from operations and financial condition.
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, epidemics, pandemics
and public health restrictions 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, including those identified in
this MD&A. Environmental conditions and factors, such as those
arising from volcanic eruptions or other natural phenomena, those
arising from man-made sources, and those arising from increases
in the frequency, strength and duration of severe weather events,
including as a result of climate change, could cause interruptions
and disruptions in service, increase Air Canada’s costs or adversely
AIR CANADA | 2020 ANNUAL REPORT 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.
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 certain airlines and regional airlines such as Jazz
and Sky Regional 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, as well as similar circumstances relating
to other airlines from whom Air Canada sources capacity, could
have a material adverse effect on Air Canada, its business, results
from operations and financial condition.
The significant decline in demand for air travel services resulting
from the COVID-19 pandemic has materially and adversely
impacted demand for regional carrier services and, as a result,
Air Canada’s utilization of its regional network is significantly
reduced and is expected to remain so for the foreseeable future.
Air Canada expects the disruption to services resulting from the
COVID-19 pandemic to continue to adversely affect its regional
carriers. If, as a result of the COVID-19 pandemic or another
significant disruption to the Air Canada’s regional network, one or
more of the regional carriers with which Air Canada has relationships
is unable to perform its obligations over an extended period of time,
there could be a material adverse effect on Air Canada’s business,
operating results 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
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
71
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.
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 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.
AIR CANADA | 2020 ANNUAL REPORT 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.
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.
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.
Moreover, as a result of Air Canada’s recent financing activities
in response to the COVID-19 pandemic including as described in
this MD&A, the number of financings with respect to which such
covenants and provisions apply has increased, thereby subjecting
Air Canada to more substantial risk of cross-default and cross-
acceleration in the event of breach, and additional covenants and
provisions could become binding on Air Canada as it continues to
seek additional liquidity.
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.
72
Legal proceedings – Air Canada may be subject to legal
proceedings which could have a material adverse impact
In the course of conducting its business, Air Canada is 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.
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. In addition, Air Canada may not be able to sufficiently, or
may not, hedge the risk 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.
Boeing 737 MAX Aircraft – The grounding of the Boeing 737
MAX aircraft in certain jurisdictions and negative passenger
perceptions could materially adversely impact Air Canada, its
business, results of operations and financial condition as may the
grounding of other fleet types should they occur
In March 2019, the European Aviation Safety Agency (“EASA”),
Transport Canada and the Federal Aviation Administration (“FAA”)
closed their respective airspace to the operation of Boeing 737
MAX aircraft and Boeing announced it would suspend Boeing
737 MAX deliveries to airline customers. On November 18, 2020,
the FAA rescinded its order grounding Boeing 737 MAX aircraft
and has permitted their return to service in U.S. airspace upon
compliance with certain conditions, including compliance with
a new airworthiness directive and pilot training requirements. In
January 2021, Transport Canada issued an Airworthiness Directive
mandating the aircraft modifications required for a return to
service in Canadian airspace, as well as an interim order with
additional crew training requirements. Effective on January 20,
2021, Transport Canada allowed the Boeing 737 MAX to return to
service in Canada, subject to compliance with the Airworthiness
Directive and interim order. EASA has not yet authorized the Boeing
737 MAX’s return to service in European airspace. The continued
grounding of the Boeing 737 MAX aircraft in the airspace of certain
jurisdictions could negatively affect operations, future network
plans, reduce revenues and increase costs, based on a number of
factors, including the period of time the aircraft remain unavailable
to operate in such jurisdictions, and the circumstances of any
reintroduction of the aircraft to service. In addition, passengers’
perceptions of the safety of the Boeing 737 MAX aircraft could
AIR CANADA | 2020 ANNUAL REPORT 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 insurance industry in general, including the aviation insurance
industry, has been experiencing increasing losses and decreased
insurer profitability in recent years, resulting in reduced capacity
levels and premium increases. These conditions may adversely
affect some of Air Canada’s existing insurance carriers or
Air Canada’s ability to obtain future insurance coverage, including
desired levels of coverage or on terms acceptable to Air Canada. To
the extent that Air Canada’s existing insurance carriers are unable or
unwilling to provide 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.
negatively impact Air Canada’s ability to successfully re-introduce
the Boeing 737 MAX into its operations.
Similar factors arising in relation to other fleet types, as well as
issues or grounding of other aircraft or fleet types which Air Canada
may operate, 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). In
addition, current service contributions in respect of a domestic
registered plan are required except to the extent they are funded
(and if permitted subject to applicable plan rules and legislation)
through a sufficient surplus in such plan. 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, changes to pension asset
investment strategies, assumptions and methods used and changes
in economic conditions (mainly the return on fund assets and
changes in interest rates) and other factors. Deteriorating economic
conditions or a significant decline in Air Canada’s revenues could
cause Air Canada’s funding obligations to have, a material adverse
effect on Air Canada, its business, results from operations and
financial condition. See section 8.7 “Pension Funding Obligations”
of this MD&A for additional information.
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, technology 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.
73
AIR CANADA | 2020 ANNUAL REPORT 18.
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, 2020, 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, 2020,
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 2020 that have materially affected, or are
reasonably likely to materially affect, its internal controls over financial reporting.
74
AIR CANADA | 2020 ANNUAL REPORT 19.
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.
EBITDA
EBITDA (earnings before interest, taxes, depreciation and amortization) is commonly used in the airline industry and is used by Air Canada as a
means to view operating results before interest, taxes, depreciation and amortization 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 EBITDA as these items may distort
the analysis of certain business trends and render comparative analysis to other airlines less meaningful.
EBITDA is reconciled to GAAP operating income (loss) as follows:
(Canadian dollars in millions)
2020
2019
$ CHANGE
2020
2019
$ CHANGE
Fourth Quarter
Full Year
Operating income (loss) – GAAP
Add back:
Depreciation and amortization
EBITDA (including special items)
Remove effect of special items
EBITDA (excluding special items)
Adjusted CASM
$ (1,003)
435
(568)
(160)
(728)
$
$
$
$
$
145
$ (1,148)
$ (3,776)
$
1,650
$ (5,426)
520
665
-
665
(85)
$ (1,233)
(160)
$ (1,393)
1,849
$ (1,927)
(116)
$ (2,043)
1,986
$ 3,636
-
$ 3,636
(137)
$ (5,563)
(116)
$ (5,679)
Air Canada uses adjusted CASM 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 a more meaningful analysis of Air Canada’s operating expense performance and a more meaningful comparison to that of other airlines.
Adjusted CASM is reconciled to GAAP operating expense as follows:
(Canadian dollars in millions, except where indicated)
2020
2019
$ CHANGE
2020
2019
$ CHANGE
Fourth Quarter
Full Year
Operating expense – GAAP
Adjusted for:
Aircraft fuel expense
Ground package costs
Special items
Operating expense, adjusted for the
above- noted items
ASMs (millions)
Adjusted CASM (cents)
75
$ 1,830
$ 4,284
$ (2,454)
$ 9,609
$ 17,481
$ (7,872)
(187)
(14)
160
(1,013)
(131)
-
826
117
160
(1,322)
(250)
116
(4,347)
(627)
-
3,025
377
116
$
1,789
$
3,140
$ (1,351)
$
8,153
$ 12,507
$ (4,354)
6,000
¢ 29.82
26,431
11.88
¢
(77.3)%
150.9%
37,703
21.62
¢
112,814
11.09
¢
(66.6)%
95.1%
AIR CANADA | 2020 ANNUAL REPORT Adjusted Pre-tax Income (Loss)
Adjusted pre-tax income (loss) 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.
Adjusted pre-tax income (loss) is reconciled to GAAP income (loss) before income taxes as follows:
(Canadian dollars in millions)
2020
2019
$ CHANGE
2020
2019
$ CHANGE
Fourth Quarter
Full Year
Income (loss) before income taxes – GAAP
Adjusted for:
Special items
Foreign exchange (gain) loss
Net financing expense relating
to employee benefits
(Gain) loss on financial instruments
recorded at fair value
Gain on sale and leaseback of assets
Gain on debt settlements and
modifications
Gain on disposal of assets
Adjusted pre-tax income (loss)
$ (1,275)
$
172
$ (1,447)
$ (4,853)
$
1,775
$ (6,628)
(160)
(88)
1
214
(18)
-
$ (1,326)
$
-
(92)
10
(5)
-
(6)
(13)
66
(160)
4
(9)
219
(18)
6
13
$ (1,392)
(116)
293
27
242
(18)
-
$ (4,425)
$
-
(499)
39
(23)
-
(6)
(13)
1,273
(116)
792
(12)
265
(18)
6
13
$ (5,698)
Free Cash Flow
Air Canada uses free cash flow as an indicator of the financial strength and performance of its business, indicating the amount of cash Air Canada
can 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. Free cash flow in 2019 also
excludes the one-time proceeds related to the Aeroplan acquisition. Refer to section 8.5 “Consolidated Cash Flow Movements” of this MD&A for a
reconciliation of this non-GAAP financial measure to the nearest measure under GAAP.
Net Cash Burn
Air Canada uses net cash burn as a measure of cash used to maintain operations, support capital expenditures, and settle normal debt
repayments, all before the net impact of new financing proceeds. Net cash burn is defined as net cash flows from operating, financing, and
investing activities, and excludes proceeds from new financings, lump sum debt maturities made where the Corporation has refinanced or
replaced the amount, and proceeds from sale and leaseback transactions. Net cash burn also excludes movements between cash and short- and
long-term investments. Refer to section 8.5 “Consolidated Cash Flow Movements” of this MD&A for a reconciliation of this non-GAAP financial
measure to the nearest measure under GAAP.
76
AIR CANADA | 2020 ANNUAL REPORT 20.
Glossary
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 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. Adjusted net
income (loss) is a non-GAAP financial measure.
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. Adjusted CASM is a non-
GAAP financial measure. Refer to section 19 “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 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. Adjusted pre-tax income (loss) is a non-GAAP financial
measure. Refer to section 19 “Non-GAAP Financial Measures” of
this MD&A for additional information.
Aeroplan – Refers to Aeroplan Inc.
Atlantic passenger and cargo revenues – Refers 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.
CASM – Refers to operating expense per ASM.
De Havilland – Refers to De Havilland Aircraft of Canada Limited.
Domestic passenger and cargo revenues – Refers to revenues
from flights within Canada.
EBITDA – Refers to earnings before interest, taxes, depreciation
and amortization. EBITDA is a non-GAAP financial measure. Refer
to section 19 “Non-GAAP Financial Measures” of this MD&A for
additional information. Air Canada excludes special items from
EBITDA.
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 in 2019 also excludes the one-time proceeds
related to the Aeroplan acquisition. Free cash flow is a non-GAAP
financial measure. Refer to sections 8.5 “Consolidated Cash Flow
Movements” and 19 “Non-GAAP Financial Measures” of this MD&A
for additional information.
77
Jazz – Refers to Jazz Aviation LP.
Jazz CPA – Refers to the capacity purchase agreement between
Air Canada and Jazz.
Leverage ratio – Refers to the ratio of net debt to trailing 12-month
EBITDA (calculated by dividing net debt by trailing 12-month
EBITDA). Leverage ratio is a non-GAAP financial measure.
Loss (gain) on debt settlements and modifications – Refers 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.
Mitsubishi – Refers to Mitsubishi Heavy Industries, Ltd.
Net cash burn – Refers to net cash flows from operating, financing,
and investing activities, and excludes proceeds from new financings,
lump sum debt maturities made where the Corporation has
refinanced or replaced the amount, and proceeds from sale and
leaseback transactions. Net cash burn also excludes movements
between cash and short- and long-term investments. Refer to
sections 8.5 “Consolidated Cash Flow Movements” and 19 “Non-
GAAP Financial Measures” of this MD&A for additional information.
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.
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 – Refer to a measure of
passenger traffic calculated by multiplying the total number of
revenue passengers carried by the miles they are carried.
Seats dispatched – Refer 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 – Refers 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.
Yield – Refers to average passenger revenue per RPM.
AIR CANADA | 2020 ANNUAL REPORT CO N SO LI DATE D
FI NAN C IAL
STATE M E NTS
AN D N OTES
78
AIR CANADA | 2020 ANNUAL REPORT
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 judgments 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
President and Chief Executive Officer
Michael Rousseau
Deputy Chief Executive Officer and
Chief Financial Officer
February 11, 2021
79
AIR CANADA | 2020 ANNUAL REPORT 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, 2020 and 2019, and its financial performance and its cash flows for the years then
ended 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, 2020 and 2019;
— the consolidated statements of operations for the years then ended;
— the consolidated statements of comprehensive income (loss) for the years then ended;
— the consolidated statements of changes in equity for the years then ended;
— the consolidated statements of cash flow for the years then ended; and
— the notes to the consolidated financial statements, which include significant accounting policies and other explanatory information.
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.
Key audit matters
Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the consolidated financial
statements for the year ended December 31, 2020. These matters were addressed in the context of our audit of the consolidated financial
statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters.
80
AIR CANADA | 2020 ANNUAL REPORT
Key audit matter
How our audit addressed the
key audit matter
Passenger and cargo revenue recognition
Refer to Note 2, Basis of presentation and summary of significant
accounting policies and Note 20, Revenue to the consolidated
financial statements.
Our approach to addressing the matter involved the following
procedures, amongst others:
— Tested the operating effectiveness of internal controls relating to
passenger and cargo revenue recognition:
• Tested the controls over the relevant IT systems that
management used to recognize passenger and cargo revenues;
• For the IT systems or processes that are outsourced to third
party service providers, assessed the assurance reports
attesting to the appropriateness and effectiveness of the
internal control systems established by the service providers.
— Tested a sample of passenger and cargo revenue transactions
recorded during the year by inspecting the consideration
received and the evidence of when transportation is provided for
passengers or cargo, including supporting documentation from
clearing houses and other partner airlines as applicable.
Our approach to addressing the matter included the following
procedures, amongst others:
— Tested how management developed the estimates for the total
benefit obligation:
• The work of management’s experts was used in performing
the procedures to evaluate the reasonableness of the total
benefit obligation associated with pension benefits and
other employee future benefits. As a basis for using this
work, management’s experts’ competence, capability
and objectivity were evaluated, their work performed was
understood and the appropriateness of their work as audit
evidence was evaluated by considering the relevance and
reasonableness of the assumptions, methods and findings.
• Tested the underlying data used in the determination of the
total benefit obligation.
— Professionals with specialized skill and knowledge in the field of
actuarial services assisted in assessing the appropriateness of the
method and evaluation of the reasonableness of the discount
rates, future increases in compensation, mortality rates and
health care costs.
— Tested the disclosures, including the sensitivity analysis, made
in the consolidated financial statements with regard to the
measurement of the total benefit obligation.
Airline passenger and cargo revenues are key measures of financial
performance and recognized as revenues when the transportation
is provided. Total passenger and cargo revenues recognized for the
year ended December 31, 2020 amounted to $4,382 million and
$920 million, respectively.
Such transactions rely on Information and Technology (IT) systems
and controls to process, record and recognize a high volume of
low value revenue transactions. Multiple processes and transfer
points of large amounts of data exist between a combination of IT
systems, outsourced service providers, industry clearing houses and
other partner airlines.
We considered this is a key audit matter due to the significance of
passenger and cargo revenues and the volume of these transactions
resulting in significant audit effort to test the revenue recognized.
Measurement of the total benefit obligation
Refer to Note 2 – Basis of presentation and summary of significant
accounting policies, Note 3 – Critical accounting estimates and
judgments, and Note 10 – Pension and other benefit liabilities to the
consolidated financial statements.
The Corporation has a net benefit obligation of $237 million,
which includes a total benefit obligation associated with pension
benefits of $23,720 million and other employee future benefits of
$1,562 million as at December 31, 2020.
The total benefit obligation associated with pension benefits
and other employee future benefits is actuarially determined
annually as at December 31 and is prepared by the Corporation’s
consulting actuaries (management’s experts). The total benefit
obligation is determined using the projected unit credit method,
including assumptions such as discount rates, future increases in
compensation, mortality rates and health care costs. Management
applied significant judgment in determining the appropriate
discount rates and mortality assumptions to determine the present
value of total benefit obligation.
We considered this is a key audit matter due to the significance
of the total benefit obligation and the significant judgment made
by management, including the use of management’s experts,
in determining the appropriate discount rates and mortality
assumptions, which resulted in the high degree of auditor judgment
and subjectivity in performing procedures relating to those
assumptions. The audit effort involved the use of professionals with
specialized skill and knowledge in the field of actuarial services.
81
AIR CANADA | 2020 ANNUAL REPORT Key audit matter
How our audit addressed the
key audit matter
Impairment assessment of property and equipment and
intangible assets of the narrow body and wide body cash
generating units (CGU)
Refer to Note 2 – Basis of presentation and summary of significant
accounting policies, Note 3 – Critical accounting estimates and
judgments and Note 7 – Intangible assets to the consolidated financial
statements.
The Corporation had $13,271 million of property and equipment
and intangible assets as at December 31, 2020. A significant portion
of these assets relate to the narrow body and wide body CGUs
(the CGUs). When impairment indicators exist, an impairment
assessment is conducted at the level of the CGU. An impairment
loss is recognized if the carrying amount of a CGU exceeds its
recoverable amount.
Our approach to addressing the matter included the following
procedures, among others:
— Tested how management estimated the recoverable amounts of
the CGUs, which included the following:
• Evaluated the appropriateness of the method and model used.
• Tested the reasonableness of the cash flow projections and
long-term growth rates by comparing them with external
airline industry economic data and the results historically
achieved by the Corporation.
• With the assistance of professionals with specialized skill
and knowledge in the field of valuation, assessed the
reasonableness of the discount rates applied.
• Tested underlying data used in the discounted cash flow
model.
An assessment of the recoverable amounts of the CGUs compared
to their carrying values was performed based on updated cash flow
projections in light of the current COVID-19 pandemic.
— Tested the disclosures made in the consolidated financial
statements with respect to the key assumptions and related
sensitivity.
Management has estimated the recoverable amount of each of the
CGUs based on the fair value less cost of disposal method, using a
discounted cash flow model. The cash flow projections are based
on current and anticipated market conditions covering a five-year
period. However, management has disclosed that these projections
are inherently uncertain due to the recent and fluidly evolving
impact of the COVID-19 pandemic. The key assumptions applied by
management in estimating the recoverable amounts of the CGUs
included: the cash flow projections, long-term growth rates after
the five year period and discount rates.
We considered this a key audit matter due to the significant
judgment made by management in estimating the recoverable
amounts of the CGUs, including the application of key assumptions.
This in turn resulted in significant audit effort and subjectivity
in performing audit procedures to test the recoverable amounts
estimated by management. Professionals with specialized skill and
knowledge in the field of valuation assisted us in performing our
procedures.
82
AIR CANADA | 2020 ANNUAL REPORT 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.
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 judgment 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.
83
AIR CANADA | 2020 ANNUAL REPORT — 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.
From the matters communicated with those charged with governance, we determine those matters that were of most significance in the audit of
the consolidated financial statements of the current period and are therefore the key audit matters. We describe these matters in our auditor’s
report unless law or regulation precludes public disclosure about the matter or when, in extremely rare circumstances, we determine that a matter
should not be communicated in our report because the adverse consequences of doing so would reasonably be expected to outweigh the public
interest benefits of such communication.
The engagement partner on the audit resulting in this independent auditor’s report is Michael Trudeau.
Montréal, Québec
February 11, 2021
1
CPA auditor, CA, public accountancy permit No. A113048
84
AIR CANADA | 2020 ANNUAL REPORT Consolidated Statements of Financial Position
(Canadian dollars in millions)
ASSETS
Current
Cash and cash equivalents
Short-term investments
Total cash, cash equivalents and short-term investments
Restricted cash
Accounts receivable
Aircraft fuel inventory
Spare parts and supplies inventory
Prepaid expenses and other current assets
Total current assets
Investments, deposits and other assets
Property and equipment
Pension assets
Deferred income tax
Intangible assets
Goodwill
Total assets
LIABILITIES
Current
Accounts payable and accrued liabilities
Advance ticket sales
Aeroplan and other deferred revenue
Current portion of long-term debt and lease liabilities
Total current liabilities
Long-term debt and lease liabilities
Aeroplan and other deferred revenue
Pension and other benefit liabilities
Maintenance provisions
Other long-term liabilities
Deferred income tax
Total liabilities
SHAREHOLDERS’ EQUITY
Share capital
Contributed surplus
Accumulated other comprehensive income (loss)
Retained earnings (deficit)
Total shareholders’ equity
Total liabilities and shareholders’ equity
DECEMBER 31,
2020
DECEMBER 31,
2019
$
3,658
3,843
7,501
106
644
41
125
254
8,671
833
12,137
2,840
25
1,134
3,273
$ 28,913
$
2,465
2,314
572
1,788
7,139
11,201
4,032
3,015
1,040
696
75
$ 27,198
2,150
98
(39)
(494)
1,715
$ 28,913
$
2,090
3,799
5,889
157
926
102
110
332
7,516
936
12,834
2,064
134
1,002
3,273
$ 27,759
$
2,456
2,939
1,162
1,218
7,775
8,024
3,136
2,930
1,240
181
73
$ 23,359
785
83
25
3,507
4,400
$ 27,759
Note 2P
Note 20
Note 2Q
Note 20
Note 5
Note 6
Note 10
Note 12
Note 7
Note 8
Note 20
Note 20
Note 9
Note 9
Note 20
Note 10
Note 11
Note 12
Note 13
On behalf of the Board of Directors:
The accompanying notes are an integral part of the consolidated financial statements.
Vagn Sørensen
Chairman
85
Christie J.B. Clark
Chair of the Audit, Finance and Risk Committee
AIR CANADA | 2020 ANNUAL REPORT
Consolidated Statements of Operations
For the year ended December 31
(Canadian dollars in millions except per share figures)
OPERATING REVENUES
Passenger
Cargo
Other
Total revenues
OPERATING EXPENSES
Aircraft fuel
Wages, salaries and benefits
Regional airlines expense, excluding fuel
Depreciation and amortization
Aircraft maintenance
Airport and navigation fees
Sales and distribution costs
Ground package costs
Catering and onboard services
Communications and information technology
Special items
Other
Total operating expenses
Operating income (loss)
NON-OPERATING INCOME (EXPENSE)
Foreign exchange gain (loss)
Interest income
Interest expense
Interest capitalized
Net financing expense relating to employee benefits
Gain (loss) on financial instruments recorded at fair value
Gain on sale and leaseback of assets
Other
Total non-operating income (expense)
Income (loss) before income taxes
Income tax recovery (expense)
Net income (loss)
Net income (loss) per share
Basic earnings (loss) per share
Diluted earnings (loss) per share
2020
2019
Note 20
Note 20
$
4,382
920
531
5,833
$ 17,232
717
1,182
19,131
Note 21
Note 6
Note 3
Note 4
Note 9
Note 10
Note 17
Note 22
Note 12
Note 15
1,322
2,242
1,086
1,849
681
545
252
250
171
372
(116)
955
9,609
(3,776)
(293)
132
(656)
25
(27)
(242)
18
(34)
(1,077)
(4,853)
206
$ (4,647)
$ (16.47)
$ (16.47)
4,347
3,184
1,956
1,986
1,004
990
874
627
445
397
-
1,671
17,481
1,650
499
164
(515)
35
(39)
23
-
(42)
125
1,775
(299)
1,476
5.51
5.44
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
86
AIR CANADA | 2020 ANNUAL REPORT Consolidated Statements of Comprehensive Income (Loss)
For the year ended December 31
(Canadian dollars in millions)
COMPREHENSIVE INCOME
Net income (loss)
Other comprehensive income, net of tax expense:
Items that will not be reclassified to net income
Remeasurements on employee benefit liabilities
Remeasurements on equity investments
Total comprehensive income (loss)
2020
2019
Note 12
Note 10
$ (4,647)
$
1,476
765
(64)
$ (3,946)
(22)
25
1,479
$
Consolidated Statements of Changes in Equity
(Canadian dollars in millions)
January 1, 2019
Net income (loss)
Remeasurements on employee benefit liabilities
Remeasurements on equity investments
Total comprehensive income (loss)
Share-based compensation
Shares issued
Shares purchased and cancelled under issuer bid
December 31, 2019
Net income (loss)
Remeasurements on employee benefit liabilities
Remeasurements on equity investments
Total comprehensive income (loss)
Share-based compensation
Shares issued, net (Note 13)
Shares purchased and cancelled under issuer bid
December 31, 2020
SHARE
CAPITAL
CONTRIBUTED
SURPLUS
ACCUMULATED
OCI
RETAINED
EARNINGS
(DEFICIT)
TOTAL
SHAREHOLDERS’
EQUITY
$
$
$
798
–
–
–
–
–
14
(27)
785
–
–
–
–
–
1,373
(8)
2,150
$
$
$
75
–
–
–
–
13
(5)
–
83
–
–
–
–
15
–
–
98
$
$
$
–
–
–
25
25
–
–
–
25
–
–
(64)
(64)
–
–
–
(39)
$
$
$
2,404
1,476
(22)
–
1,454
–
–
(351)
3,507
(4,647)
765
–
(3,882)
–
–
(119)
(494)
$
3,277
1,476
(22)
25
1,479
13
9
(378)
$ 4,400
(4,647)
765
(64)
(3,946)
15
1,373
(127)
1,715
$
The accompanying notes are an integral part of the consolidated financial statements.
87
AIR CANADA | 2020 ANNUAL REPORT Consolidated Statements of Cash Flow
For the year ended December 31
(Canadian dollars in millions)
Cash flows from (used for)
OPERATING
Net income (loss)
Adjustments to reconcile to net cash from operations
Deferred income tax
Depreciation and amortization
Foreign exchange (gain) loss
Card agreement proceeds
Aeroplan points prepayment proceeds
Gain on sale and leaseback of assets
Employee benefit funding less than expense
Financial instruments recorded at fair value
Change in maintenance provisions
Changes in non-cash working capital balances
Special items
Other
Net cash flows from (used in) operating activities
FINANCING
Proceeds from borrowings
Reduction of long-term debt and lease liabilities
Shares purchased for cancellation
Issue of shares
Financing fees
Net cash flows from (used in) financing activities
INVESTING
Investments, short-term and long-term
Additions to property, equipment and intangible assets
Proceeds from sale of assets
Proceeds from sale and leaseback of assets
Acquisition of Aeroplan
Investment in Chorus
Other
Net cash flows used in investing activities
Effect of exchange rate changes on cash and cash equivalents
Increase in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Note 12
Note 6
Note 17
Note 24
Note 24
Note 22
Note 10
Note 17
Note 4
Note 9
Note 9
Note 13
Note 13
Note 22
Note 24
Note 25
2020
2019
$ (4,647)
$
1,476
(164)
1,849
82
-
-
(18)
260
242
(54)
(236)
315
18
(2,353)
6,262
(2,719)
(132)
1,369
(78)
4,702
(63)
(1,202)
12
485
-
-
35
(733)
(48)
1,568
2,090
$ 3,658
227
1,986
(361)
1,212
400
-
210
(37)
49
566
-
(16)
5,712
-
(1,084)
(373)
9
(1)
(1,449)
(255)
(2,025)
24
-
(517)
(97)
75
(2,795)
(8)
1,460
630
$ 2,090
The accompanying notes are an integral part of the consolidated financial statements.
88
AIR CANADA | 2020 ANNUAL REPORT
For the years ended December 31, 2020 and 2019
(Canadian dollars except where otherwise indicated)
1.
General Information
The accompanying audited consolidated financial statements (the “financial statements”) are of Air Canada (the “Corporation”). The term
“Corporation” also refers, as the context may require, to 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”),
Air Canada Rouge LP doing business under the brand name Air Canada Rouge® (“Air Canada Rouge”), and Aeroplan Inc. (“Aeroplan”).
Air Canada is incorporated and domiciled in Canada. The address of its registered office is 7373 Côte-Vertu Boulevard West, Saint-Laurent,
Québec.
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 market 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”). 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.
Aeroplan operates a loyalty rewards and recognition program that allows individuals to enrol as members and open an Aeroplan account, to
accumulate Aeroplan points through the purchase of products and services from participating partners and suppliers and to redeem Aeroplan
points for a variety of travel, merchandise, gift card, and other rewards provided directly by participating partners or made available through
Aeroplan’s intermediary suppliers.
Air Canada, along with the rest of the global airline industry, is facing a severe and abrupt drop in traffic and a corresponding decline in revenue
and cash flows as a result of the coronavirus (“COVID-19”) pandemic and the travel restrictions imposed in many countries around the world,
and particularly in Canada. The impact of the COVID-19 pandemic began to be felt in traffic and sales figures commencing in early March 2020.
These impacts include drastic declines in earnings and cash flow from operations. There is very limited visibility on travel demand given changing
government restrictions in place around the world and the severity of the restrictions in Canada; these restrictions and concerns about travel due
to the COVID-19 pandemic as well as passenger concerns and expectations about the need for certain precautions, such as physical distancing, are
severely inhibiting demand. The COVID-19 pandemic is also having significant economic impacts, including on business and consumer spending,
which may in turn significantly impact demand for travel. Air Canada cannot predict the full impact or the timing for when conditions may
improve. Air Canada is actively monitoring the situation and will respond as the impact of the COVID-19 pandemic evolves, which will depend on
a number of factors including the course of the virus, availability of rapid, effective testing, vaccinations and treatments for the virus, government
actions, and passenger reaction, as well as timing of a recovery in international and business travel which are important segments of Air Canada’s
market, none of which can be predicted with any degree of certainty. Refer to Note 17 for information on financing activities and other actions
taken in response to the COVID-19 crisis. Refer to Note 3 for considerations related to critical accounting estimates and judgments updated to
reflect the currently known impact of the COVID-19 pandemic. Since mid-March, capacity has been significantly reduced when compared to 2019
and is expected to continue to be at significantly reduced levels in 2021. The airline continues to dynamically adjust capacity as required.
89
AIR CANADA | 2020 ANNUAL REPORT 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 11, 2021.
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.
Aircraft fuel expense related to regional airline operations is now
presented within Aircraft fuel on the consolidated statement of
operations. Previously included in Regional airlines expense, this
reclassification provides improved presentation of the total cost of
fuel associated with the Corporation’s operations.
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, long-term
investments, and derivative instruments which are measured at
fair value.
surcharges and revenues from passenger-related services such
as seat selection and excess baggage which are recognized when
the transportation is provided. Passenger revenues are reduced
for the amount of any passenger compensation for delayed and
cancelled flights paid directly to a customer. Airline passenger and
cargo advance sales are deferred and included in Current liabilities.
The Corporation records an estimate of breakage revenue, which
is recorded at the time when transportation was scheduled to be
provided, for tickets that will expire unused. These estimates are
based on historical experience and other considerations.
D) Capacity Purchase Agreements
Air Canada has capacity purchase agreements with 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, excluding
fuel. Capacity purchase fees exclude the component of fees related
to aircraft costs which are accounted for as lease liabilities in
accordance with IFRS 16. Aircraft fuel expense related to regionals
is presented within Aircraft fuel for presentation of the total cost of
fuel associated with the Corporation’s operations.
B) Principles of Consolidation
E) Aeroplan Loyalty Program
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
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
90
The Aeroplan loyalty program generates customer loyalty by
rewarding customers who travel with Air Canada. This program
allows program members to earn Aeroplan points by flying on
Air Canada, Star Alliance partners and other airlines that participate
in the Aeroplan loyalty program. When travelling, program
members earn redeemable Aeroplan points based on a number of
factors including the passenger’s loyalty program status, distance
travelled, booking class and travel fare paid. Members can also earn
Aeroplan points through participating Aeroplan program partners
such as credit card companies, hotels, car rental agencies and other
program partners. Aeroplan points are redeemable by members
for air travel on Air Canada and other participating airlines, and
for other program awards, such as hotel, car rentals, gift cards,
merchandise and other non-air rewards.
Aeroplan Members can earn Aeroplan points: (1) through travel and
(2) based on spending with program partners.
Points Earned with Travel
Passenger ticket sales earning Aeroplan points under the Aeroplan
loyalty program provide members with (1) air transportation and
AIR CANADA | 2020 ANNUAL REPORT (2) Aeroplan points. As a revenue arrangement with multiple
performance obligations, each performance obligation is valued
on a relative standalone fair value basis. The value of Aeroplan
points issued is determined based on the value a passenger receives
by redeeming points for a ticket rather than paying cash, which is
referred to as Equivalent Ticket Value (“ETV”). The ETV is adjusted
for points that are not expected to be redeemed (“breakage”). The
consideration allocated to the ETV for points earned with travel is
recorded in Aeroplan deferred revenue.
Points Sold to Program Partners
Aeroplan Members can earn Aeroplan points based on their
spending with participating Aeroplan partners such as credit
card companies, hotels and car rental agencies and other
program partners. Aeroplan points issued under program partner
agreements are accounted for as a single performance obligation
being the future delivery of a redemption reward to the Aeroplan
Members. The consideration received for Aeroplan points issued
to Aeroplan Members under these agreements is recorded as
Aeroplan deferred revenue.
Breakage represents the estimated Aeroplan points that are not
expected to be redeemed by Aeroplan Members. The amount of
revenue recognized related to breakage is based on the number
of Aeroplan points redeemed in a period in relation to the total
number of Aeroplan points expected to be redeemed. The number
of Aeroplan points redeemed in a period also factors into any
revised estimate for breakage. Changes in breakage are accounted
for as follows: in the period of change, the deferred revenue balance
is adjusted as if the revised estimate had been used in prior periods
with the offsetting amount recorded as an adjustment to passenger
revenue; and for subsequent periods, the revised estimate is used.
F) Other Revenues
Other revenue is primarily comprised of revenues from the sale
of the ground portion of vacation packages, ground handling
services, onboard 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.
Redemption of Aeroplan points for non-air goods and services
is recorded in other revenue. For non-air redemptions, the
Corporation has determined that, for accounting purposes, it is
not the principal in the transaction between the member and
the ultimate supplier of the goods or service. When points are
redeemed for non-air goods and services, the net margin is recorded
in other revenue when the performance obligation is satisfied.
In certain subleases of aircraft to Jazz, for accounting purposes, the
Corporation acts as an agent and accordingly reports the sublease
revenues net against regional airlines expense. The Corporation acts
as lessee and sublessor in these matters.
91
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 and is prepared by the Corporation’s consulting
actuaries. The cost is determined using the projected unit credit
method and assumptions including discount rates, future increases
in compensation, 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 14. PSUs and RSUs are
notional share units which are exchangeable on a one-to-one basis
for Air Canada shares or the cash equivalent, as determined by the
Board of Directors.
AIR CANADA | 2020 ANNUAL REPORT 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.
PSUs and RSUs are accounted for as 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 liabilities. Refer to Note 17 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. The Corporation’s
matching of employee contributions was suspended May 1, 2020,
refer to Note 14.
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 lease, which are accrued over the term of the lease,
and major maintenance expenditures on owned and 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 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. Maintenance provisions for end-of-lease return
obligations are recorded, as applicable, on aircraft leases as a
maintenance expense over the term of the lease, 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 to the provision for end-of-
lease conditions are recognized as an adjustment to the right-of-use
asset and subsequently amortized to the income statement over
the remaining term of the lease. Any difference in the actual
maintenance cost incurred and the amount of the provision are
recorded in Aircraft maintenance.
92
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,
Restricted cash, and Long-term investments 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.
• The equity investment in Chorus is classified as an asset at fair
value through other comprehensive income and any period
change in fair value is recorded through other comprehensive
income in the consolidated statement of comprehensive
income, 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.
AIR CANADA | 2020 ANNUAL REPORT 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
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 below. Derivative instruments are
recorded in Prepaid expenses and other current assets, Deposits
and other assets, Accounts payable and accrued liabilities, and
Other long-term liabilities based on the terms of the contractual
agreements. All cash flows associated with purchasing and selling
derivatives are classified as operating cash flows in the consolidated
statement of cash flow.
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.
93
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.
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.
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
AIR CANADA | 2020 ANNUAL REPORT deferred income tax asset is realized or the deferred income tax
liability is settled.
Q) Aircraft Fuel Inventory and Spare Parts and
Supplies Inventory
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.
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.
O) Earnings (Loss) per Share
Basic earnings (loss) per share (“EPS”) is calculated by dividing the
net income (loss) 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 and convertible notes. 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.
The weighted average number of shares outstanding in diluted
EPS is also adjusted for the number of shares that would be issued
on the conversion of the convertible notes. Additionally, the net
income (loss) is adjusted for the after-tax effect of any changes to
net income (loss) that would result from the conversion, including
interest recognized in the period, foreign exchange recognized
on the debt principal, and the mark to market revaluation of the
embedded derivative, unless the result of the adjustments 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.
Restricted cash with maturities greater than one year from the
balance sheet date is recorded in Investments, 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.
94
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 $48 million
related to spare parts and supplies consumed during the year
(2019 – $72 million).
R) Property and Equipment
Property and equipment is recognized using the cost model.
Property under leases, recognized as right-of-use assets, and the
related obligation for future lease payments are initially recorded
at an amount equal to the lesser of fair value of the asset 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 lease 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
five years. Ground and other equipment is depreciated over three
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.
AIR CANADA | 2020 ANNUAL REPORT Sale and Leaseback
For sale and leaseback transactions, the Corporation applies the
requirements of IFRS 15 Revenue to determine whether the transfer
of the asset should be accounted for as a sale, and is generally
considered as such if there is no repurchase option on the asset at
the end of the lease term. If the transfer of the asset is a sale, the
Corporation de-recognizes the underlying asset and recognizes a
right-of-use asset arising from the leaseback equal to the retained
portion of the previous carrying amount of the sold asset. The
residual is recognized through the statement of operations as a gain
on sale and leaseback of assets.
Aircraft Leases
As at December 31, 2020 the Corporation had 107 aircraft under
right-of-use leases (127 aircraft as at December 31, 2019), and
Air Canada recorded such aircraft as right-of-use assets and lease
liabilities of Air Canada in accordance with the requirements of IFRS
16. Additionally, Air Canada is the lessee in respect of aircraft used
by regional carriers providing services under the respective capacity
purchase agreements (“CPA”) and recorded such aircraft as right-
of-use assets and lease liabilities of Air Canada. As at December 31,
2020, there were 121 aircraft (131 aircraft as at December 31, 2019)
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 are considered
short-term leases and therefore excluded from balance sheet
recognition under the practical expedient. Finally, those airport
terminal contracts with entirely variable lease payments are also
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 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, Montréal and Vancouver, lease contracts on
building space dedicated to the Corporation for offices, airport and
maintenance operations, Maple Leaf Lounges and land leases.
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 as 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
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 rate of interest on the remaining balance of the
liability for each period.
Right-of-use assets are accounted for under IAS 16 Property, Plant
and Equipment. Aircraft recorded as right-of-use assets have the
same accounting policies as directly owned aircraft, meaning
the right-of-use assets are componentized and depreciated over
the lease term. Consistent with owned aircraft, any qualifying
maintenance events are capitalized and depreciated over the lesser
of the lease term and expected maintenance life.
Changes to the terms and conditions, or events impacting the
extension of a lease would usually require an assessment of whether
it is a lease modification which could involve recalculating lease
assets and liabilities using a revised discount rate.
Maintenance provisions for end-of-lease return obligations are
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 are recognized as an adjustment to the right-of-use
asset and subsequently amortized to the income statement over
the remaining term of the lease.
95
AIR CANADA | 2020 ANNUAL REPORT U) Intangible Assets
V) Goodwill
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, 2020
Indefinite
not applicable
International route rights
and slots
Marketing based trade names
Indefinite
not applicable
Technology based (internally
developed)
Contract based (Aeroplan
commercial agreements)
5 -15 years
1 to 15 years
11.5 years
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, implementation, 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.
Contract based and marketing based trade name intangible assets
were recorded upon the acquisition of Aeroplan. The contract based
intangible assets have an estimated remaining useful life of 10
years, being the term of the primary commercial agreements with
program partners, which expire in 2030. The marketing-based trade
name is considered an indefinite life intangible asset.
96
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 2AA).
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 including aircraft that are parked but are
expected to be so, temporarily, and returned to service) 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 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.
AIR CANADA | 2020 ANNUAL REPORT X) Non-Current Assets (Or Disposal Groups)
Held For Sale
CC) Accounting Standards and Amendments
Issued But Not Yet Adopted
Interbank Offered Rate (“IBOR”) Reform
In August 2020, the IASB published amendments to IFRS 9 Financial
Instruments, IAS 39 Financial Instruments: Recognition and
Measurement, IFRS 7 Financial Instruments: Disclosures, IFRS 4
Insurance Contracts and IFRS 16 Leases.
The amendments address issues that arise from implementation of
IBOR reform, where IBORs are replaced with alternative benchmark
rates. For financial instruments at amortized cost, the amendments
introduce a practical expedient such that if a change in the
contractual cash flows is as a result of IBOR reform and occurs on
an economically equivalent basis, the change will be accounted
for by updating the effective interest rate with no immediate
gain or loss recognized. The amendments also provide additional
temporary relief from applying specific IAS 39 hedge accounting
requirements to hedging relationships affected by IBOR reform.
The amendments are effective for fiscal years beginning on or after
January 1, 2021 with early adoption permitted. The Corporation
will adopt the amendment on January 1, 2021, electing to apply the
practical expedient. The Corporation is in the process of evaluating
potential changes to debt and lease contracts to transition from
IBORs to alternative rates prior to the cessation of IBORs. As at
December 31, 2020, the amount of debt and lease contracts likely
subject to IBOR reform is $1,718 million USD LIBOR. There are also
debt and aircraft leases referencing interest rate benchmarks in
multi-rate jurisdictions, including the Canadian Dollar Offered Rate
(“CDOR”) of $1,007 million and $5 million of JPY TIBOR.
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. Refer
to Note 4.
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) Government Grants
The Corporation recognizes government grants when there is
reasonable assurance that the Corporation will comply with the
conditions of the grant and the grant will be received. Government
grants receivable are recorded in Accounts receivable on the
consolidated statement of financial position. The Corporation
recognizes government grants in the consolidated statement of
operations in the same period as the expenses for which the grant
is intended to compensate. In cases where a government grant
becomes receivable as compensation for expenses already incurred
in prior periods, the grant is recognized in profit or loss in the period
in which it becomes receivable.
97
AIR CANADA | 2020 ANNUAL REPORT 3.
Critical Accounting Estimates and Judgments
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 judgments 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 judgments 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:
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 cash flow projections, discount
rates and future growth rates. Refer to Note 7.
Employee Future Benefits
The cost and related liabilities of the Corporation’s pension, other
post-retirement and post-employment benefit programs are
determined using actuarial valuations. The actuarial valuations
involve assumptions and estimates including discount rates, future
increases in compensation, and mortality assumptions. Also, due
to the long-term nature of these programs, such estimates are
subject to significant uncertainty. Refer to Note 10 for additional
information.
Income Taxes
Commencing in the second quarter of 2020, the net deferred
income tax assets related to unused tax losses and other deductible
temporary differences were not recognized. Management assessed
the available positive and negative evidence to estimate whether
sufficient future taxable income will be generated to permit use of
the existing deferred tax assets. As described in Note 1, as a result
of the COVID-19 pandemic, there is considerable negative evidence
relating to losses incurred in the current year and uncertainty
exists as to when conditions will improve. Such negative evidence
currently outweighs the positive historical evidence and accordingly,
the net deferred tax asset was not recognized. Deferred tax assets
have only been recognized to the extent of taxable temporary
98
differences expected to reverse and generate taxable income
against which the deferred tax assets can be utilized. The future
income tax deductions underlying the unrecognized deferred
income tax assets remain available for use in the future to reduce
taxable income. Refer to Note 12.
Aeroplan Loyalty Program
Loyalty program accounting requires management to make several
estimates including the ETV of Aeroplan points issued and the
breakage on Aeroplan points. The ETV of Aeroplan points issued is
determined based on the value a passenger receives by redeeming
points for a ticket rather than paying cash. This ETV is estimated
with reference to historical Aeroplan redemptions as compared to
equivalent ticket purchases after considering similar fare conditions,
advance booking periods and other relevant factors including
the selling price of points to third parties. ETV estimates and
assumptions are considered for updates at least annually. A change
in the ETV rate is accounted for prospectively on future points
issued.
Breakage represents the estimated points that are not expected to
be redeemed. Breakage is estimated by management based on the
terms and conditions of membership and historical accumulation
and redemption patterns, as adjusted for changes to any terms
and conditions or other circumstances that may affect future
redemptions. Management uses statistical and simulation models
to estimate breakage. A change in assumptions as to the number of
points expected to be redeemed could have a material impact on
revenue in the year in which the change occurs.
As at December 31, 2020, the Aeroplan points deferred revenue
balance was $3,256 million. For illustrative purposes, a hypothetical
1% change in the number of outstanding points estimated to be
redeemed would result in an approximate impact of $33 million
on revenue with a corresponding adjustment to Aeroplan deferred
revenue.
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
AIR CANADA | 2020 ANNUAL REPORT 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.
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 at the end of the lease 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 recognized as an adjustment to the right-of-use asset.
Refer to Note 11(a) for additional information.
99
AIR CANADA | 2020 ANNUAL REPORT 4.
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.
Special items recorded within operating expenses consist of the following:
(Canadian dollars in millions)
Impairments
Workforce reduction provisions
Canada emergency wage subsidy, net
Other
Special items
Impairments
2020
2019
$
$
315
127
(554)
(4)
(116)
$
$
-
-
-
-
-
In response to capacity reductions related to the impact of the COVID-19 pandemic, Air Canada is accelerating the retirement of certain older
aircraft from its fleet consisting of Boeing 767, Airbus A319 and Embraer 190 aircraft. These aircraft are being retired and removed from the
cash-generating units for evaluation of whether impairments exist. A fair value less cost to dispose model based on level 3 inputs was used in
the evaluation of impairment. The recoverable amount of the owned aircraft is $91 million, equal to expected proceeds on disposal reflecting
management’s best estimate including inputs from published pricing guides adjusted to reflect management’s best estimate of the current market
environment. The recoverable amount for the leased aircraft was determined as the estimated net obligation to settle the leases comprised of
contractual future lease payments and end of lease return costs.
A non-cash impairment charge of $283 million was recorded reflecting the write-down of right-of-use assets for leased aircraft and reduction of
carrying values of owned aircraft to expected disposal proceeds. Changes to the estimates around the expected disposal proceeds may result in
adjustments to the impairment charge in future periods.
In addition, the Corporation recorded an impairment charge of $32 million in the year ended December 31, 2020, related to previously capitalized
costs incurred for the development of technology based intangible assets which are now cancelled.
Workforce Reduction Provisions
As a result of COVID-19, Air Canada undertook a workforce reduction of approximately 20,000 employees in the second quarter of 2020,
representing more than 50% of its staff, achieved through layoffs, terminations of employment, early retirements and special leaves. A workforce
reduction provision of $78 million was recorded related to these measures. Payments of $32 million have been made for the year, resulting in a
remaining obligation of $46 million at December 31, 2020. The provision includes the estimated notice of termination and severance costs under
the Corporation’s collective agreements and the applicable law, which amount is subject to adjustment depending on a number of factors such
as the relevant notice period and the duration and number of employees who remain on layoff status. In addition to such provision, termination
benefits and curtailments of $49 million related to the pension and benefit obligations were recorded.
Canada Emergency Wage Subsidy
In April 2020, the Government of Canada announced the Canada Emergency Wage Subsidy (“CEWS”) in order to help employers retain and/or
return Canadian-based employees to payrolls in response to challenges posed by the COVID-19 pandemic.
Air Canada determined that it met the employer eligibility criteria and applied for the CEWS retroactively to March 15, 2020. The Corporation has
recorded a total gross subsidy under the CEWS program of $656 million for the year 2020. Cash payments of $586 million have been received in
the year 2020. In July 2020, the program was redesigned and extended until December 2020. In September and November 2020, the Government
of Canada announced further extensions of the program to June 2021. Air Canada intends to continue its participation in the CEWS program,
subject to meeting the eligibility requirements. The amount of the CEWS recorded in Special items is net of the cost for inactive employees
who were eligible for the wage subsidy under the program. There are no unfulfilled conditions or other contingencies attaching to the current
CEWS program.
100
AIR CANADA | 2020 ANNUAL REPORT 5.
Investments, Deposits and Other Assets
(Canadian dollars in millions)
Long-term investments
Investment in Chorus
Restricted cash
Aircraft related deposit
Prepayments under maintenance agreements
Share forward contracts
Other deposits
Note 25
Note 2P
Note 17
2020
2019
$
$
512
58
87
79
72
14
11
833
$
$
512
126
102
98
56
27
15
936
101
AIR CANADA | 2020 ANNUAL REPORT 6.
Property and Equipment
(Canadian dollars in millions)
OWNED TANGIBLE ASSETS
Aircraft and flight equipment
Buildings and leasehold improvements
Ground and other equipment
Purchase deposits and assets under development
Owned tangible assets
Air Canada aircraft
Regional aircraft
Land and buildings
Right-of-use assets
Property and equipment
DECEMBER 31, 2020
DECEMBER 31, 2019
COST
ACCUMULATED
DEPRECIATION
NET
BOOK VALUE
COST
ACCUMULATED
DEPRECIATION
NET
BOOK VALUE
$ 13,251
1,033
665
754
$ 15,703
5,019
$
2,002
510
7,531
$
$ 23,234
$
5,419
553
439
-
6,411
3,340
1,169
177
$ 4,686
$ 11,097
$
$
$
7,832
480
226
754
$ 9,292
1,679
$
833
333
$ 2,845
$ 12,137
$ 12,920
923
640
1,041
$ 15,524
5,055
$
1,893
447
7,395
$
$ 22,919
$
4,616
501
395
-
5,512
3,282
1,135
156
$ 4,573
$ 10,085
$
$
$
8,304
422
245
1,041
$ 10,012
1,773
$
758
291
$ 2,822
$ 12,834
Additions to owned aircraft in 2020 include 14 new Airbus A220 aircraft.
As described in Note 4, an impairment charge of $283 million was recorded in 2020 in Special items related to the accelerated retirement of
certain older aircraft and ancillary equipment from Air Canada’s fleet and which charge is aggregated with accumulated depreciation in the table
above.
Included in aircraft and flight equipment are 15 aircraft and 15 spare engines (2019 – 16 aircraft and 15 spare engines) which are leased to CPA
carriers with a cost of $389 million (2019 – $353 million) less accumulated depreciation of $172 million (2019 – $154 million) for a net book
value of $217 million (2019 – $199 million). Depreciation expense for 2020 for these aircraft and flight equipment amounted to $24 million
(2019 – $21 million).
As further described in Note 22, during 2020, the Corporation sold and leased back nine Boeing 737 MAX aircraft.
Certain property and equipment are pledged as collateral as further described under the applicable debt instruments in Note 9.
(Canadian dollars in millions)
OWNED TANGIBLE ASSETS
Aircraft and flight equipment
Buildings and leasehold improvements
Ground and other equipment
Purchase deposits and assets under development
Owned tangible assets
Right-of-use assets
Air Canada aircraft
Regional aircraft
Land and buildings
Right-of-use assets
Property and equipment
JANUARY 1,
2020
ADDITIONS
RECLASSIFI-
CATION
DISPOSALS
DEPRECIATION
AND
IMPAIRMENT
DECEMBER 31,
2020
$ 8,304
422
245
1,041
$ 10,012
$
1,773
758
291
$ 2,822
$ 12,834
$
$
$
$
$
720
-
28
94
842
573
257
75
905
1,747
$
$
$
$
$
269
112
-
(381)
-
-
-
-
-
-
$
(419)
-
-
-
$ (419)
$
-
(6)
(3)
$
(9)
$ (428)
$ (1,042)
(54)
(47)
-
$ (1,143)
$
(667)
(176)
(30)
$ (873)
$ (2,016)
$
7,832
480
226
754
$ 9,292
$
1,679
833
333
$ 2,845
$ 12,137
102
AIR CANADA | 2020 ANNUAL REPORT (Canadian dollars in millions)
JANUARY 1,
2019
ADDITIONS
RECLASSIFI-
CATION
DISPOSALS
DEPRECIATION
DECEMBER 31,
2019
OWNED TANGIBLE ASSETS
Aircraft and flight equipment
Buildings and leasehold improvements
Ground and other equipment
Purchase deposits and assets under development
Owned tangible assets
Right-of-use assets
Air Canada aircraft
Regional aircraft
Land and buildings
Right-of-use assets
Property and equipment
$ 8,109
404
197
933
$ 9,643
$
1,620
707
213
$ 2,540
$ 12,183
$
893
26
66
525
$ 1,510
$
704
234
104
$ 1,042
$ 2,552
$
$
$
$
$
355
41
21
(417)
-
-
-
-
-
-
$
$
$
$
$
(14)
-
(1)
-
(15)
(7)
(7)
-
(14)
(29)
$ (1,039)
(49)
(38)
-
$ (1,126)
$
(544)
(176)
(26)
$ (746)
$ (1,872)
$ 8,304
422
245
1,041
$ 10,012
$
1,773
758
291
$ 2,822
$ 12,834
Depreciation and amortization recorded in the consolidated statement of operations is detailed as follows.
2020
2019
$
930
54
47
1,031
496
176
30
702
1,733
14
102
$ 1,849
$
1,039
49
38
1,126
544
176
26
746
1,872
19
95
$ 1,986
(Canadian dollars in millions)
Aircraft and flight equipment
Buildings and leasehold improvements
Ground and other equipment
Owned tangible assets
Air Canada aircraft
Regional aircraft
Land and buildings
Right-of-use assets
Property and equipment
Spare part and supplies inventory
Intangible assets
Depreciation and amortization
103
AIR CANADA | 2020 ANNUAL REPORT 7.
Intangible Assets
(Canadian dollars in millions)
YEAR ENDED DECEMBER 31, 2019
At January 1, 2019
Additions
Amortization
At December 31, 2019
AT DECEMBER 31, 2019
Cost
Accumulated amortization
YEAR ENDED DECEMBER 31, 2020
At January 1, 2020
Additions
Amortization and impairment
At December 31, 2020
AT DECEMBER 31, 2020
Cost
Accumulated amortization
INTERNATIONAL
ROUTE RIGHTS
AND SLOTS
CONTRACT
BASED
MARKETING
BASED TRADE
NAMES
TECHNOLOGY
BASED
(INTERNALLY
DEVELOPED)
$
$
$
$
$
$
$
$
97
-
-
97
97
-
97
97
-
-
97
97
-
97
$
$
$
$
$
$
$
$
-
225
(19)
206
225
(19)
206
206
-
(19)
187
225
(38)
187
$
$
$
$
$
$
$
$
88
90
-
178
178
-
178
178
-
-
178
178
-
178
$
$
$
$
$
$
219
378
(76)
521
928
(407)
521
521
259
(108)
672
$ 1,051
(379)
672
$
TOTAL
$
404
693
(95)
$ 1,002
$ 1,428
(426)
$ 1,002
$ 1,002
259
(127)
$ 1,134
$ 1,551
(417)
$ 1,134
In 2020, technology-based assets with cost and accumulated amortization of $110 million (2019 – $29 million) were retired.
Certain international route rights and slots are pledged as security for senior secured notes as described in Note 9.
Impairment Assessment
An assessment of the recoverable amount of the Corporation’s cash-generating units compared to their carrying values was performed based on
cash flow projections taking into account the COVID-19 pandemic. This review was also performed in conjunction with the annual impairment
review conducted on all intangible assets that have an indefinite life. The allocation of the indefinite lived intangible assets to the cash-generating
units was $165 million to wide-body aircraft and $110 million to narrow-body aircraft. The recoverable amount of the cash-generating units has
been measured based on 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. The cash flows are management’s best projections using current and
anticipated market conditions covering a five-year period. The COVID-19 pandemic and its impact on the economy are expected to last several
years. These projections are inherently uncertain and continually evolving in an unpredictable manner which present many variables and
contingencies for modeling.
It is possible that long-term underperformance relative to these projections could occur if passenger demand is below projected levels and travel
restrictions continue to prevail with a duration and impact greater than currently anticipated.
The recoverable amount of both cash-generating units exceeded their respective carrying values by an aggregate amount ranging from
approximately $2 billion to $5 billion under different scenarios. Management has considered reasonably possible changes in key assumptions using
multiple modeling scenarios and sensitivity analysis and determined such changes would not cause the recoverable amount of each CGU to be less
than the carrying value.
104
AIR CANADA | 2020 ANNUAL REPORT
Key assumptions used for the fair value less cost to dispose calculations in fiscal 2020 were as follows:
Key Assumption
Average discount rate
2020
9.25%
Approach used to determine values
Derived from market participant assumptions regarding the Corporation’s weighted
average cost of capital adjusted for taxes and specific risks applicable to each cash-
generating unit being tested.
Inputs to the various scenarios ranged from 9.5%-11% for the wide-body CGU and
7.5%-9% for the narrow-body CGU.
Long-term growth rate
2.5%
Cash flows beyond the five-year period are projected to increase at 2.5% 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.
Jet fuel price range per barrel
US$66 – US$89
Jet fuel prices are assumed to follow the global market recovery and represent
management’s best estimate of the range of future market conditions.
Emerging issues in climate-related matters, such as change in regulations, may impact
this assumption in future years.
An impairment assessment of the aircraft that will be permanently leaving the fleet was done separately from the Corporation’s CGUs with an
impairment charge of $283 million recorded in Special items in 2020 as described in Note 4.
105
AIR CANADA | 2020 ANNUAL REPORT 8.
Goodwill
Goodwill is tested at least annually for impairment. 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, 2020 and 2019. Reasonably possible changes in key
assumptions would not cause the recoverable amount of goodwill to fall below the carrying value.
106
AIR CANADA | 2020 ANNUAL REPORT 9.
Long-Term Debt and Lease Liabilities
Aircraft financing (a)
Fixed rate U.S. dollar financing
Floating rate U.S. dollar financing
Fixed rate CDN dollar financing
Floating rate CDN dollar financing
Fixed rate Japanese yen financing
Floating rate Japanese yen financing
Convertible notes (b)
Senior and Second Lien secured notes – CDN dollar (c)
Senior unsecured notes – U.S. dollar (d)
Other secured financing – U.S. dollar (e)
Other secured financing – CDN dollar (e)
Long-term debt
Lease liabilities
Air Canada aircraft
Regional aircraft
Land and buildings
Lease liabilities (f)
Total debt and lease liabilities
Unamortized debt issuance costs and discounts
Current portion – Long-term debt
Current portion – Air Canada aircraft
Current portion – Regional aircraft
Current portion – Land and buildings
Long-term debt and lease liabilities
FINAL
MATURITY
WEIGHTED
AVERAGE
INTEREST RATE
2021 – 2030
2026 – 2027
2026 – 2030
2021 – 2032
2027
2027
2025
2023 – 2024
2021
2023
2022
2021 – 2029
2023 – 2035
2021 – 2078
(%)
4.86
2.12
3.78
2.50
1.84
3.00
4.00
8.18
7.75
1.90
2.92
4.36
5.31
6.51
5.23
5.69
4.72
DECEMBER 31, 2020
DECEMBER 31, 2019
(Canadian dollars
in millions)
(Canadian dollars
in millions)
$
3,791
483
232
1,007
145
5
667
1,040
509
1,483
199
9,561
1,996
1,171
429
3,596
13,157
(168)
(1,244)
(340)
(179)
(25)
$ 11,201
$
3,200
544
259
264
141
8
-
200
520
737
-
5,873
1,924
1,149
386
3,459
9,332
(90)
(587)
(418)
(185)
(28)
$ 8,024
(a) Aircraft financing (US$3,359 million, CDN $1,239 million and JPY ¥12,159 million) (2019 – US$2,882 million, CDN $523 million and JPY
¥12,425 million) is secured primarily by specific aircraft with a carrying value of $6,037 million (2019 – $4,777 million). 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$138 million and CDN $228 million of the financing is supported by a loan guarantee by the Export-Import Bank of the United States
(“EXIM”).
In September 2020, Air Canada concluded a private offering of two tranches of Enhanced Equipment Trust Certificates (“EETCs”), the
proceeds of which were used to purchase equipment notes issued by Air Canada and secured by three Boeing 787-9 aircraft, three Boeing 777-
300ER aircraft, one Boeing 777-200LR and nine A321-200 aircraft. The two tranches of certificates have a combined aggregate face amount
of US$553 million ($740 million) and a weighted average interest rate of 5.73%. The offering is comprised of Class A Certificates and Class B
Certificates. The Class A Certificates totaling US$453 million ($606 million) have an interest rate of 5.25% per annum and a final expected
distribution date of April 1, 2029. The Class B Certificates totaling US$100 million ($134 million) have an interest rate of 9.00% per annum
and a final expected distribution date of October 1, 2025. Air Canada used the proceeds from this financing together with cash on hand to
repay in full the US$600 million ($803 million) 364-day term loan originally put in place in April 2020.
In September 2020, Air Canada concluded a committed secured facility totaling $788 million to finance the purchase of the first 18 Airbus
A220 aircraft. As aircraft are financed under this new Canadian dollar facility, the bridge financing of $788 million put in place in April 2020
will be repaid concurrently. As at December 31, 2020, 15 Airbus A220 aircraft were financed under this facility with the corresponding bridge
financing repaid. Any amount left unpaid under the bridge financing will be repaid following the financing of the 18th A220 aircraft expected
107
AIR CANADA | 2020 ANNUAL REPORT
in the first quarter of 2021. The security facility has a term of 12 years from delivery of each aircraft on a floating interest basis based on
CDOR. This equates to an interest rate of approximately 2.36% using CDOR rates at December 31, 2020.
In June 2020, Air Canada completed a private offering of one tranche of Class C EETCs with a combined aggregate face amount of approximately
US$316 million, which were sold at 95.002% of par, for net proceeds of $392 million. The Class C tranche ranks junior to the previously issued
Series 2015-1, Series 2015-2, and Series 2017-1 EETCs, and is secured by liens on the 27 aircraft financed under these previously issued Series. The
Class C EETCs have an interest rate of 10.500% per annum, and a final expected distribution date of July 15, 2026.
(b) In June 2020, Air Canada closed US$748 million ($1,011 million) of convertible unsecured notes (“Convertible Notes”), for net proceeds of
$986 million. The Convertible Notes bear interest semi-annually in arrears at a rate of 4.000% per annum and will mature on July 1, 2025,
unless earlier repurchased, redeemed or converted. The conversion rate of the Convertible Notes is 65.1337 shares per US$1,000 principal
amount of Convertible Notes, or a conversion price of approximately US$15.35 per share. The Convertible Notes will be convertible, at the
Corporation’s election, into cash or into Class A Variable Voting shares and/or Class B Voting shares of the Corporation, or a combination
thereof.
The Corporation’s option to deliver cash or a combination of cash and shares on the conversion date in lieu of shares (based on the daily
conversion values for 40 consecutive trading days) gives rise to an embedded derivative financial liability measured separately at fair value
through profit or loss. On initial recognition, the derivative financial liability is measured at fair value, and the carrying value of the underlying
notes is measured as the difference between this amount and the proceeds of issue. Subsequent to initial recognition, the Corporation
measures the derivative financial liability at fair value at each reporting date, recognizing changes in the fair value in Gain (loss) on financial
instruments recorded at fair value in the statement of operations, and accretes the carrying value of the underlying notes to their face value
using the effective interest method, which results in an effective interest rate of 10.76%. The fair value of the embedded derivative at initial
recognition was $320 million and is recorded in Other long-term liabilities. At December 31, 2020, the fair value was $534 million and the
Corporation recorded an unrealized loss of $214 million for the year. Refer to Note 17.
(c) In June 2020, Air Canada completed a private offering of $840 million aggregate principal amount of 9.00% Second Lien Secured Notes
due 2024 (the “2024 Notes”), which were sold at 98% of par, for net proceeds of $812 million. The 2024 Notes are secured obligations of
Air Canada, secured on a second lien basis by certain real estate interest, ground service equipment, certain airport slots and gate leaseholds,
and certain routes and the airport slots and gate leaseholds utilized in connection with those routes.
The senior secured notes also include a private offering of $200 million aggregate principal amount of 4.75% senior secured first lien notes
due 2023 (the “2016 Senior Notes”), which were sold at par. Air Canada may redeem at any time and from time to time prior to October 6,
2021, during any 12-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.
(d) Private offering of US$400 million 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.
(e) Other secured financing consists of a US$600 million term loan, maturing in 2023, a US$600 million revolving credit facility expiring in 2023
(collectively with the term loan, the “2016 Credit Facility”), and a $200 million revolving credit facility available until 2022.
In March 2020, Air Canada drew down in full on its US$600 million revolving credit facility and its Canadian $200 million revolving credit
facility (interest rate of 175 basis points over LIBOR and Bankers Acceptances plus 2%, respectively).
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.
(f) Lease liabilities, related to facilities and aircraft, total $3,596 million ($377 million, US$2,503 million and GBP £15 million) (2019 –
$3,459 million ($346 million, US$2,369 million and GBP £15 million)). The carrying value of aircraft and facilities under lease liabilities
amounted to $2,512 million and $333 million respectively (2019 – $2,532 million and $291 million).
Cash interest paid on Long-term debt and lease liabilities in 2020 by the Corporation was $528 million (2019 – $493 million).
108
AIR CANADA | 2020 ANNUAL REPORT
The Corporation has recorded Interest expense as follows:
(Canadian dollars in millions)
Interest on debt
Interest on lease liabilities
Air Canada aircraft
Regional aircraft
Land and buildings
Interest expense
2020
2019
$
449
$
284
110
76
21
656
$
126
83
22
515
$
The consolidated statement of operations includes the followings amounts related to leases which have not been recorded as right-of-use assets
and lease liabilities.
(Canadian dollars in millions)
Short-term leases
Variable lease payments not included in lease liabilities
Expense related to leases (included in Other operating expenses)
2020
2019
$
$
62
32
94
$
$
83
31
114
Total cash outflows for payments on lease liabilities was $870 million for the year ended December 31, 2020 (2019 – $882 million), of which
$663 million was for principal repayments (2019 – $651 million).
Maturity Analysis
Principal and interest repayment requirements as at December 31, 2020 on Long-term debt and lease liabilities are as follows. U.S. dollar amounts
are converted using the December 31, 2020 closing rate of CDN$1.2725.
(Canadian dollars in millions)
2021
2022
2023
2024
2025
THEREAFTER
TOTAL
PRINCIPAL
Long-term debt obligations(1)
$ 1,244
$
665
$ 2,275
$ 1,254
$ 1,622
$ 2,785
$ 9,845
Air Canada aircraft
Regional aircraft
Land and buildings
Lease liabilities
Total long-term debt and
lease liabilities
INTEREST
340
179
25
544
277
169
25
471
271
171
23
465
262
145
23
430
255
132
23
410
591
375
310
1,276
1,996
1,171
429
3,596
$ 1,788
$ 1,136
$ 2,740
$ 1,684
$ 2,032
$ 4,061
$ 13,441
Long-term debt obligations(1)
$
394
$
353
$
320
$
231
$
174
$
260
$ 1,732
Air Canada aircraft
Regional aircraft
Land and buildings
Lease liabilities
Total long-term debt and
lease liabilities
89
68
21
178
71
56
20
147
58
45
19
122
46
33
18
97
33
24
17
74
45
98
208
351
342
324
303
969
$
572
$
500
$
442
$
328
$
248
$
611
$ 2,701
(1) Assumes the principal balance of the convertible notes remains unconverted and includes estimated interest payable until maturity.
109
AIR CANADA | 2020 ANNUAL REPORT Principal repayments for 2021 include $159 million remaining on the April 2020 bridge financing and, subsequent to delivery of the remaining
three Airbus A220 aircraft, a secured facility is in place that allows Air Canada to defer this debt repayment over the next 12 years from the
delivery date.
Principal repayments in the table above exclude discounts and transaction costs of $168 million which are offset against Long-term debt and lease
liabilities in the consolidated statement of financial position.
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.
JAN. 1,
2020
Cash Flows
Non-Cash Changes
BORROWINGS REPAYMENTS
FINANCING
FEES
FOREIGN
EXCHANGE
ADJUSTMENTS
AMORTIZA-
TION OF
FINANCING
FEES AND
OTHER
ADJUSTMENTS
NEW LEASE
LIABILITIES
(NEW AND
RENEWED
CONTRACTS)
DEC. 31,
2020
$ 5,873
$
6,300
$ (2,056)
$
-
$
(280)
$
(276)
$
-
$
9,561
1,924
1,149
386
3,459
(90)
-
-
-
-
(38)
(447)
(188)
(28)
(663)
-
-
-
-
-
(78)
(43)
(23)
-
(66)
-
-
-
-
-
38
562
233
71
866
-
1,996
1,171
429
3,596
(168)
$ 9,242
$ 6,262
$ (2,719)
$
(78)
$
(346)
$
(238)
$
866
$ 12,989
(Canadian dollars in millions)
Long-term debt
Air Canada aircraft
Regional aircraft
Land and buildings
Lease liabilities
Unamortized debt issuance costs
Total liabilities from financing
activities
JAN. 1,
2019
Cash Flows
Non-Cash Changes
BORROWINGS REPAYMENTS
FINANCING
FEES
FOREIGN
EXCHANGE
ADJUSTMENTS
AMORTIZA-
TION OF
FINANCING
FEES AND
OTHER
ADJUSTMENTS
NEW LEASE
LIABILITIES
(NEW AND
RENEWED
CONTRACTS)
DEC. 31,
2019
$ 6,573
$
1,926
1,233
297
3,456
(108)
$ 9,921
$
-
-
-
-
-
-
-
$
(433)
$
-
$
(266)
$
(1)
$
-
$
5,873
(453)
(177)
(21)
(651)
-
-
-
-
-
(1)
(93)
(57)
(1)
(151)
-
-
-
-
-
19
544
150
111
805
-
1,924
1,149
386
3,459
(90)
$ (1,084)
$
(1)
$
(417)
$
18
$
805
$ 9,242
(Canadian dollars in millions)
Long-term debt
Air Canada aircraft
Regional aircraft
Land and buildings
Lease liabilities
Unamortized debt issuance costs
Total liabilities from financing
activities
110
AIR CANADA | 2020 ANNUAL REPORT 10.
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 defined benefit components of the Domestic
Registered Plans are closed to new members, except for the hybrid component of three plans which are open to new members. The Corporation
also has a U.S. plan, a UK plan and a Japan plan, which 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.
As at January 1, 2020, the aggregate solvency surplus in the Domestic Registered Plans was $2.5 billion. The next required valuation to be made
as at January 1, 2021 will be completed in the first half of 2021. With the Corporation’s Domestic Registered Plans in a solvency surplus position
as at January 1, 2020, past service contributions were not required in 2020. 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 2020 amounted to $90 million ($103 million employer contribution
net of $13 million used to fund employer contribution in defined contribution components of the same plans). Pension funding obligations for
2021 are expected to be $88 million.
Benefit Obligation and Plan Assets
These consolidated financial statements include all the assets and liabilities of all Corporation-sponsored plans. The amounts recorded in the
statement of financial position are as follows:
(Canadian dollars in millions)
2020
2019
2020
2019
2020
2019
Pension
Benefits
Other Employee
Future Benefits
Total
NON-CURRENT ASSETS
Pension assets
CURRENT LIABILITIES
$ 2,840
$ 2,064
$
-
$
-
$ 2,840
$ 2,064
Accounts payable and accrued liabilities
-
-
62
65
62
65
NON-CURRENT LIABILITIES
Pension and other benefit liabilities
Net benefit obligation (asset)
111
1,515
$ (1,325)
1,477
$ (587)
1,500
$ 1,562
1,453
$ 1,518
3,015
237
$
2,930
931
$
AIR CANADA | 2020 ANNUAL REPORT The current portion of the net benefit obligation represents an estimate of other employee future benefits claims to be paid during 2021.
The following table presents financial information related to the changes in the pension and other post-employment benefits plans:
(Canadian dollars in millions)
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year
Acquisition of Aeroplan
Current service cost
Past service cost
Interest cost
Employees’ contributions
Benefits paid
Remeasurements:
Experience loss (gain)
Loss (gain) from change in demographic assumptions
Loss (gain) from change in financial assumptions
Foreign exchange loss (gain)
Total benefit obligation
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year
Acquisition of Aeroplan
Return on plan assets, excluding amounts included in Net financing expense
Interest income
Employer contributions
Employees’ contributions
Benefits paid
Administrative expenses paid from plan assets
Foreign exchange gain (loss)
Total plan assets
(Surplus) deficit at end of year
Asset ceiling / additional minimum funding liability
Net benefit obligation (asset)
The actual return on plan assets was $3,248 million (2019 – $3,132 million).
The pension benefit deficit of only those plans that are not fully funded is as follows:
(Canadian dollars in millions)
Domestic Registered Plans
International plans
Supplementary plans
Pension
Benefits
Other Employee
Future Benefits
2020
2019
2020
2019
$ 21,931
-
275
46
664
66
(936)
(48)
(51)
1,774
(1)
23,720
23,424
-
2,537
711
90
66
(936)
(9)
4
25,887
(2,167)
842
$ (1,325)
$ 19,690
181
271
-
751
81
(880)
17
(189)
2,027
(18)
21,931
20,857
161
2,350
782
96
81
(880)
(9)
(14)
23,424
(1,493)
906
(587)
$
$
$
$
$
1,518
-
45
(3)
45
-
(42)
(56)
3
56
(4)
1,562
-
-
-
-
42
-
(42)
-
-
-
1,562
-
1,562
$
$
1,279
19
35
(1)
51
-
(48)
29
5
159
(10)
1,518
-
-
-
-
48
-
(48)
-
-
-
1,518
-
1,518
2020
2019
8
99
1,408
1,515
$
$
44
86
1,347
1,477
The weighted average duration of the defined benefit obligation is 14.4 years (2019 – 14.9 years).
112
AIR CANADA | 2020 ANNUAL REPORT Pension and Other Employee Future Benefit Expense
The Corporation has recorded net defined benefit pension and other employee future benefits expense as follows:
(Canadian dollars in millions)
CONSOLIDATED STATEMENT OF OPERATIONS
Components of cost
Current service cost
Past service cost
Administrative and other expenses
Actuarial losses (gains), including foreign exchange
Total cost recognized in Wages, salaries and benefits
Total cost recognized in Special items (note 4)
Net financing expense relating to employee benefits
Total cost recognized in statement of operations
CONSOLIDATED OTHER COMPREHENSIVE (INCOME) LOSS
Remeasurements:
Experience loss (gain), including foreign exchange
Loss (gain) from change in demographic assumptions
Loss (gain) from change in financial assumptions
Return on plan assets
Change in asset ceiling
Total cost (income) recognized in OCI
Pension
Benefits
Other Employee
Future Benefits
2020
2019
2020
2019
$
$
$
$
$
275
-
9
-
284
46
(18)
312
(53)
(51)
1,774
(2,660)
(93)
$ (1,083)
$
$
$
$
$
$
271
-
9
-
280
-
(12)
268
13
(189)
2,027
(2,363)
361
(151)
$
$
$
$
$
$
45
(6)
-
(7)
32
3
45
80
(48)
-
54
-
-
6
$
$
$
$
$
$
35
(1)
-
1
35
-
51
86
19
5
159
-
-
183
The funding of employee benefits as compared to the expense recorded in the consolidated statement of operations is summarized in the table
below.
(Canadian dollars in millions)
2020
2019
NET DEFINED PENSION AND OTHER FUTURE EMPLOYEE BENEFITS EXPENSE
RECORDED IN THE CONSOLIDATED STATEMENT OF OPERATIONS
Wages, salaries and benefits
Special items
Net financing expense relating to employee benefit liabilities
EMPLOYEE BENEFIT FUNDING BY AIR CANADA
Pension benefits
Other employee benefits
Employee benefit funding less than expense
$
$
$
$
$
316
49
27
392
90
42
132
260
$
$
$
$
$
315
-
39
354
96
48
144
210
113
AIR CANADA | 2020 ANNUAL REPORT 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:
Bonds
Canadian equities
Foreign equities
Alternative investments
2020
65%
3%
7%
25%
100%
2019
71%
3%
7%
19%
100%
TARGET ALLOCATION
65%
3%
7%
25%
100%
For the Domestic Registered Plan assets, approximately 80% of assets as of December 31, 2020 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 (2019 – 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 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 $402 million at December 31, 2020 (2019 – $856 million), however after giving effect to the asset ceiling, the recognized accounting value
of the trust asset is nil.
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, 2020 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, 2020, approximately
75% of Air Canada’s pension assets were invested in fixed income instruments 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.
114
AIR CANADA | 2020 ANNUAL REPORT 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.
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, 2020, approximately 75% of Air Canada’s pension assets were invested in fixed income
instruments 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.
Mortality Assumptions
In 2014, the Canadian Institute of Actuaries (“CIA”) published a report on Canadian Pensioners’ Mortality (“Report”). The Report contained
Canadian pensioners’ mortality tables and improvement scales based on experience studies conducted by the CIA. The CIA’s conclusions were
taken into account in selecting management’s best estimate mortality assumption used to calculate the projected benefit obligation as at
December 31, 2020 and 2019.
115
AIR CANADA | 2020 ANNUAL REPORT The significant weighted average assumptions used to determine the Corporation’s accrued benefit obligations and cost are as follows:
Discount rate used to determine:
Net interest on the net defined benefit obligation for the
year ended December 31
Service cost for the year ended December 31
Accrued benefit obligation as at December 31
Pension
Benefits
Other Employee
Future Benefits
2020
2019
2020
2019
3.13%
3.20%
2.59%
3.81%
3.93%
3.13%
3.13%
3.20%
2.59%
3.81%
3.93%
3.13%
Rate of future increases in compensation used to determine:
Accrued benefit cost and service cost for the year ended December 31
Accrued benefit obligation as at December 31
2.50%
2.50%
2.50%
2.50%
Not applicable Not applicable
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 2020 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)
Discount rate on obligation assumption
Pension expense
Net financing expense relating to pension benefit liabilities
Increase (decrease) in pension obligation
0.25 Percentage Point
DECREASE
INCREASE
$
$
$
21
-
21
$
$
(20)
5
(15)
851
$ (822)
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, 2020, approximately 75% of Air Canada’s pension
assets were invested in fixed income instruments 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 $558 million.
Assumed health care cost trend rates impact the amounts reported for the health care plans. A 5% annual rate of increase in the per capita cost of
covered health care benefits was assumed for 2020 (2019 – 5.25%). The rate is assumed to decrease gradually to 4.5% by 2023 (2019 – 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 $6 million and the obligation by $81 million. A one percentage point decrease in assumed health care trend
rates would have decreased the total of current service and interest costs by $5 million and the obligation by $80 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 $65 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 $61 million.
116
AIR CANADA | 2020 ANNUAL REPORT 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,
$13 million of surplus in the defined benefit components of the Domestic Registered Plans was used to cover the employer contributions in the
defined contribution components during 2020 (2019 – $13 million).
The Corporation’s expense for these pension plans amounted to $33 million for the year ended December 31, 2020 (2019 – $40 million). 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 2021 are $17 million.
117
AIR CANADA | 2020 ANNUAL REPORT 11.
Provisions for Other Liabilities
The following table provides a continuity schedule of all recorded provisions. Refer to Note 18 for additional information on Litigation provisions.
Current provisions are recorded in Accounts payable and accrued liabilities.
(Canadian dollars in millions)
At December 31, 2019
Current
Non-current
Provisions arising during the year
Amounts utilized
Changes in estimated costs
Accretion expense
Foreign exchange gain
At December 31, 2020
Current
Non-current
MAINTENANCE(a)
ASSET
RETIREMENT(b)
LITIGATION
TOTAL
PROVISIONS
$
$
$
162
1,240
1,402
173
(182)
(26)
18
(32)
$ 1,353
313
$
1,040
$ 1,353
$
$
$
$
$
$
-
33
33
-
-
1
1
-
35
-
35
35
$
$
$
$
$
$
34
-
34
11
(4)
(3)
-
-
38
38
-
38
$
$
$
$
$
$
196
1,273
1,469
184
(186)
(28)
19
(32)
1,426
351
1,075
1,426
(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 2021 to 2035 with the average remaining lease term of approximately 3 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 $51 million at December 31,
2020 and an increase to maintenance expense in 2021 of approximately $7 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 $23 million at December 31, 2020. An equivalent but opposite movement in the discount rate would
result in a similar impact in the opposite direction.
In 2020 and as a result of updated cost estimates in preparation for returning certain aircraft to lessors upon lease expiry, a favorable
adjustment to Aircraft maintenance expense of $76 million was recorded primarily related to Airbus A320 and regional aircraft. These aircraft
leases are expiring in accordance with their terms and are not part of the accelerated retirements discussed in Note 4. The cost to meet
contractual return conditions on upcoming lease returns has been favorably impacted due to reduced flying since the last maintenance event
and projected to the lease expiry dates as a result of the COVID-19 pandemic.
(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 2021 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.
118
AIR CANADA | 2020 ANNUAL REPORT
12.
Income Taxes
Income Tax Recovery (Expense)
Income tax recorded in the consolidated statement of operations is presented below.
(Canadian dollars in millions)
Current income tax recovery (expense)
Deferred income tax recovery (expense)
Income tax recovery (expense)
2020
2019
$
$
42
164
206
$
(72)
(227)
$ (299)
The income tax recovery (expense) differs from the amount that would have resulted from applying the statutory income tax rate to income
before income tax expense as follows:
(Canadian dollars in millions)
2020
2019
(Loss) income before income taxes
Statutory income tax rate based on combined federal and provincial rates
Income tax recovery (expense) based on statutory tax rates
Effects of:
Non-taxable portion of capital gains
Recognition of (unrecognized) deferred income tax assets
Non-deductible items
Tax rate changes on deferred income taxes
Unrecognized deferred income tax liability on outside basis difference
Other
Income tax recovery (expense)
$(4,853)
26.54%
1,288
20
(1,018)
(82)
-
-
(2)
206
$
$ 1,775
26.73%
(474)
32
37
(24)
(5)
126
9
$ (299)
The applicable statutory tax rate is 26.54% (2019 – 26.73%). The Corporation’s applicable tax rate is the Canadian combined tax rate applicable
in the jurisdiction in which the Corporation operates. The income tax recovery (expense) in the consolidated statement of operations differs from
the amount that would have resulted from applying the statutory income tax rate to the (loss) income before income taxes in the consolidated
statement of operations primarily due to not recognizing all deferred income tax assets.
Income tax recorded in the consolidated statement of comprehensive income is presented below.
(Canadian dollars in millions)
Remeasurements on employee benefit liabilities
- current income tax (expense) recovery
- deferred income tax (expense) recovery
Remeasurements on equity investments
- deferred income tax (expense) recovery
Income tax (expense) recovery
2020
2019
$
(33)
(279)
4
$ (308)
$
$
-
10
(4)
6
119
AIR CANADA | 2020 ANNUAL REPORT The income tax 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:
(Canadian dollars in millions)
Other comprehensive income (loss) before income taxes
Statutory income tax rate based on combined federal and provincial rates
Income tax (expense) recovery based on statutory tax rates
Non-deductible portion of capital loss
Unrecognized deferred income tax assets
Tax rate changes on deferred income taxes
Other
Income tax (expense) recovery
Deferred Income Tax
2020
2019
$ 1,009
26.54%
(268)
(9)
(28)
1
(4)
$ (308)
$
(3)
26.73%
1
-
-
5
-
6
$
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.
As a result of the COVID-19 pandemic, there is considerable negative evidence relating to losses incurred in the current year and uncertainty exists
as to when conditions will improve. Such negative evidence currently outweighs the positive historical evidence and, accordingly, net deferred tax
assets are not being recognized, commencing from the second quarter of 2020. The future tax deductions underlying the unrecognized deferred
income tax assets of $1,114 million remain available for use in the future to reduce taxable income. The deferred income tax expense recorded in
Other comprehensive income (loss) related to remeasurements on employee benefit liabilities is offset by a deferred income tax recovery which
was recorded through the statement of operations. As such, a deferred income tax recovery of $164 million was recorded for the year, which is
partially offsetting the deferred income tax expense of $275 million recorded in Other comprehensive income (loss).
Deferred tax assets and liabilities of $25 million are recorded net as a noncurrent deferred income tax asset and deferred tax liabilities of
$75 million 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 $275 million have indefinite lives and accordingly, the associated deferred income tax liability
of $73 million (2019 – $73 million) 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.
120
AIR CANADA | 2020 ANNUAL REPORT The significant components of deferred income tax assets and liabilities were as follows:
(Canadian dollars in millions)
2020
2019
DEFERRED INCOME TAX ASSETS
Non-capital losses
Post-employment obligations – other employee future benefits
Accounting provisions not currently deductible for tax
Investment tax credits and recoverable taxes
Lease liabilities
Maintenance provisions
Other
DEFERRED INCOME TAX LIABILITIES
Post-employment obligations – pension
Property, equipment, technology-based and other intangible assets
Indefinite-lived intangible assets
Other
Net recognized deferred income tax (liabilities) assets
BALANCE SHEET PRESENTATION
Deferred income tax assets
Deferred income tax liabilities
Net recognized deferred income tax (liabilities) assets
$ 1,126
-
9
-
1,110
215
-
2,460
(353)
(2,023)
(73)
(61)
(2,510)
(50)
25
(75)
(50)
$
$
$
$
$
48
402
85
22
1,092
372
197
2,218
(154)
(1,930)
(73)
-
(2,157)
61
134
(73)
61
121
AIR CANADA | 2020 ANNUAL REPORT The following table presents the variation of the components of deferred income tax balances:
(Canadian dollars in millions)
Non-capital losses
Post-employment obligations – other employee future benefits
Accounting provisions not currently deductible for tax
Investment tax credits and recoverable taxes
Lease liabilities
Maintenance provisions
Other deferred tax assets
Post-employment obligations – pension
Property, equipment, technology-based
and other intangible assets
Indefinite-lived intangible assets
Other deferred tax liabilities
Total recognized deferred income tax assets (liabilities)
JANUARY 1,
2020
2020 INCOME
STATEMENT
MOVEMENT
2020 OCI
MOVEMENT
DECEMBER 31,
2020
$
48
402
85
22
1,092
372
197
(154)
(1,930)
(73)
-
61
$
$
$
1,078
(382)
(76)
(22)
18
(157)
(201)
60
(93)
-
(61)
164
$
-
(20)
-
-
-
-
4
(259)
-
-
-
$ (275)
$
1,126
-
9
-
1,110
215
-
(353)
(2,023)
(73)
(61)
(50)
$
(Canadian dollars in millions)
Non-capital losses
Post-employment obligations –other employee future benefits
Accounting provisions not currently deductible for tax
Investment tax credits and recoverable taxes
Lease liabilities
Maintenance provisions
Other deferred tax assets
Post-employment obligations – pension
Property, equipment, technology-based and
other intangible assets
Indefinite-lived intangible assets
Other deferred tax liabilities
Total recognized deferred income tax assets (liabilities)
JANUARY 1,
2019
2019 INCOME
STATEMENT
MOVEMENT
2019 OCI
MOVEMENT
AEROPLAN
ACQUISITION
DECEMBER 31,
2019
$
353
342
67
37
1,125
386
-
(171)
(1,791)
(49)
(37)
262
$
$ (305)
6
12
(15)
(42)
(14)
228
51
(185)
-
37
$ (227)
$
$
-
49
-
-
-
-
(4)
(39)
-
-
-
6
$
$
-
5
6
-
9
-
(27)
5
46
(24)
-
20
$
48
402
85
22
1,092
372
197
(154)
(1,930)
(73)
-
61
$
At December 31, 2020, the Corporation has deductible temporary differences of an operating and 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 income and capital gains. Net
capital losses do not have an expiry date.
122
AIR CANADA | 2020 ANNUAL REPORT The following are the temporary differences and tax loss carryforwards for which no deferred income tax assets could be recognized:
(Canadian dollars in millions)
2020
2019
Recognized non-capital losses carryforwards
Lease liabilities
Maintenance provisions
Less: Property, equipment, technology-based and other intangible assets
Less: Post-employment obligations – pension
Less: Other deferred tax liabilities
Total recognized net temporary differences
Unrecognized non-capital losses carryforwards
Post-employment obligations - other employee future benefits
Accounting provisions not currently deductible for tax
Maintenance provision
Deferred revenue
Unrecognized net capital losses carryforwards
Unrealized foreign exchange (gains) losses
Unrealized net capital gain on investment
Other
Total unrecognized net temporary differences
Deferred income tax rate based on combined federal and provincial rates
Unrecognized recoverable taxes
Total unrecognized net deferred income tax assets
The following are the Federal non-capital tax losses expiry dates:
(Canadian dollars in millions)
2030
2031
2032
2033
2034
2036
2037
2038
2040
Non-capital losses carryforwards
Cash income taxes paid in 2020 by the Corporation were $8 million (2019 – $62 million).
-
-
-
-
-
-
-
-
-
-
-
-
91
101
(14)
-
$
178
26.54%
47
-
47
$
$ 4,255
4,168
811
(7,840)
(1,333)
(61)
-
30
1,562
323
542
1,461
154
(18)
-
8
$ 4,062
26.51%
1,077
37
$ 1,114
TAX LOSSES
$
11
6
2
1
3
3
2
2
4,178
$ 4,208
123
AIR CANADA | 2020 ANNUAL REPORT 13.
Share Capital
At January 1, 2019
Shares issued on the exercise of stock options
Shares purchased and cancelled under issuer bid
At December 31, 2019
Shares issued on the exercise of stock options
Shares issued on settlement of performance share units
Shares issued in public offering
Shares purchased and cancelled under issuer bid
At December 31, 2020
The issued and outstanding shares of Air Canada, along with the potential shares, were as follows:
ISSUED AND OUTSTANDING
Class A variable voting shares
Class B voting shares
Total issued and outstanding
POTENTIAL SHARES
Convertible notes
Stock options
Total outstanding and potentially issuable shares
NUMBER OF SHARES
VALUE
(Canadian dollars in millions)
270,729,911
2,069,354
(8,982,687)
263,816,578
285,138
241,172
70,840,000
(3,010,600)
332,172,288
$
$
$
798
14
(27)
785
2
4
1,367
(8)
2,150
2020
2019
111,926,060
220,246,228
332,172,288
126,664,740
137,151,838
263,816,578
Note 9
Note 14
48,687,441
5,903,174
386,762,903
-
4,890,095
268,706,673
An additional 2,587,000 shares were issued in January 2021 in connection with the underwriters’ exercise of an over-allotment option as described
below under Share Offering.
Shares
As at December 31, 2020, 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.
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.
Air Canada’s articles provide that 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 49% or (ii) the total number of votes cast by
or on behalf of holders of Variable Voting Shares at any meeting exceeds 49% 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 49% 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
124
AIR CANADA | 2020 ANNUAL REPORT do not exceed 49% of the votes that may be cast at such meeting. Air Canada’s articles also provide for the automatic reduction of the voting
rights attached to Variable Voting Shares in the event any of the following limits are exceeded. In such event, the votes attributable to Variable
Voting Shares will be affected as follows:
• first, if required, a reduction of the voting rights of any single non-Canadian holder (including a single non-Canadian holder authorized to
provide an air service) carrying more than 25% of the votes to ensure that such non-Canadian holder never carries more than 25% of the
votes which holders of Voting Shares cast at any meeting of shareholders;
• second, if required and after giving effect to the first proration set out above, a further proportional reduction of the voting rights of all non-
Canadian holders authorized to provide an air service to ensure that such non-Canadian holders authorized to provide an air service, in the
aggregate, never carry more than 25% of the votes which holders of Voting Shares cast at any meeting of shareholders; and
• third, if required and after giving effect to the first two prorations set out above, a proportional reduction of the voting rights for all non-
Canadian holders as a class to ensure that non-Canadians never carry, in aggregate, more than 49% of the votes which holders of Voting
Shares cast at any meeting of shareholders.
Shareholder Rights Plan
Under the terms of the shareholder rights plan agreement (the “Rights Plan”), effective until the day after Air Canada’s 2023 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 response to the COVID-19 pandemic, in early March 2020 Air Canada suspended share purchases under its normal course issuer bid.
Air Canada’s normal course issuer bid expired in May 2020 and Air Canada did not renew it.
Prior to suspending purchases under its normal course issuer bid, in the first quarter of 2020, the Corporation purchased, for cancellation, a total
of 2,910,800 shares at an average cost of $43.76 per share for aggregate consideration of $127 million. The excess of the cost over the average
book value of $119 million was charged to Retained earnings.
In 2019, the Corporation purchased, for cancellation, 9,082,487 shares at an average cost of $41.64 per share for aggregate consideration of
$378 million. The excess of the cost over the average book value of $351 million was charged to Retained earnings.
Share Offering
In June 2020, Air Canada completed an underwritten public offering of 35,420,000 shares at a price of $16.25 per share, for aggregate gross
proceeds of $576 million, which includes the exercise in full by the underwriters of their over-allotment option to purchase up to 4,620,000 shares
for gross proceeds of $75 million. After deduction of the underwriters’ fees and expenses of the offering, net proceeds were $552 million.
In December 2020, Air Canada completed an underwritten public offering of 35,420,000 shares at a price of $24.00 per share, for aggregate
proceeds of $850 million. After deduction of the underwriters’ fees and expenses of the offering, net proceeds were $815 million. Air Canada
granted the underwriters an option to purchase up to an additional 15% of the shares in the offering, exercisable in whole or in part at any
time until 30 days after closing of the offering on December 30, 2020. On January 18, 2021, the Corporation announced that the underwriters
exercised their over-allotment option to purchase an additional 2,587,000 shares for gross proceeds of $62 million.
125
AIR CANADA | 2020 ANNUAL REPORT 14.
Share-Based Compensation
Air Canada Long-Term Incentive Plan
Certain of the Corporation’s employees participate in the Air Canada Long-term Incentive Plan (the “Long-term Incentive Plan”). The Long-term
Incentive Plan provides for the grant of stock options, performance share units and restricted share units to senior management and officers of
Air Canada. With respect to the stock options, 19,381,792 shares were initially authorized for issuance under the Long-term Incentive Plan of
which 6,803,772 remain available for future issuance. The outstanding performance share units and restricted share units will generally not result
in the issuance of new shares as these share units will be redeemed for shares purchased on the secondary market (and not issued from treasury)
and/or equivalent cash, at the discretion of the Corporation.
Stock Options
The options to purchase shares granted under the Long-term Incentive Plan have a maximum term of up to 10 years and an exercise price based
on the fair market value of the shares at the time of the grant of the options. Fifty per cent of options are time-based and vest over four years. The
remaining options vest based upon performance conditions, which are based on operating margin (operating income over operating revenues)
targets established by the Air Canada Board over the same time period. Each option entitles the employee to purchase one share at the stated
exercise price.
The number of Air Canada stock options granted to employees, the related compensation expense recorded and the assumptions used to
determine stock-based compensation expense, using the Black-Scholes option valuation model are as follows:
Compensation expense ($ millions)
Number of stock options granted to Air Canada employees
Weighted average fair value per option granted ($)
Aggregated fair value of options granted ($ millions)
Weighted average assumptions:
Share price
Risk-free interest rate
Expected volatility
Dividend yield
Expected option life (years)
2020
2019
$
$
$
16
1,428,322
8.95
13
31.08
$
0.22%-0.62%
33.35%
0%
5.25
$
$
$
$
13
1,075,182
10.75
12
33.29
1.36%-1.71%
35.0%
0%
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.
A summary of the Long-term Incentive Plan option activity is as follows:
2020
2019
OPTIONS
4,890,095
1,428,322
(285,138)
-
(130,105)
5,903,174
2,414,643
WEIGHTED
AVERAGE EXERCISE
PRICE/SHARE
$ 18.80
31.08
8.78
-
28.66
$ 22.06
$ 13.05
OPTIONS
6,014,464
1,075,182
(2,069,354)
-
(130,197)
4,890,095
1,550,930
WEIGHTED
AVERAGE EXERCISE
PRICE/SHARE
$ 11.40
33.29
4.60
-
22.48
$ 18.80
$ 11.02
Beginning of year
Granted
Exercised
Expired or cancelled
Forfeited
Outstanding options, end of year
Options exercisable, end of year
126
AIR CANADA | 2020 ANNUAL REPORT The weighted average share price on the date of exercise for options exercised in 2020 was $26.22 (2019 – $43.51).
2020 Outstanding Options
2020 Exercisable Options
RANGE OF
EXERCISE PRICES
$5.35 – $5.39
$12.64
$9.23 – $9.61
$12.83 – $26.40
$22.53 – $27.75
$33.11 – $43.22
$15.35 – $32.42
NUMBER OF
OPTIONS
OUTSTANDING
WEIGHTED
AVERAGE
REMAINING LIFE
(YEARS)
WEIGHTED
AVERAGE
EXERCISE
PRICE/SHARE
EXPIRY DATES
2021
2022
2023
2027
2028
2029
2030
347,188
327,827
988,974
859,261
983,085
1,007,192
1,389,647
5,903,174
1
2
3
7
8
9
10
$
5.39
12.64
9.27
14.40
26.46
33.27
31.04
$ 22.06
NUMBER OF
EXERCISABLE
OPTIONS
347,188
327,827
988,974
305,801
241,947
125,906
77,000
2,414,643
WEIGHTED
AVERAGE
EXERCISE
PRICE/SHARE
$
5.39
12.64
9.27
14.25
26.46
33.27
18.02
$ 13.05
2019 Outstanding Options
2019 Exercisable Options
RANGE OF
EXERCISE PRICES
$3.02 – $3.04
$5.35 – $5.39
$12.64
$9.23 – $9.61
$12.83 – $26.40
$22.53 – $27.75
$33.11 – $43.22
NUMBER OF
OPTIONS
OUTSTANDING
WEIGHTED
AVERAGE
REMAINING LIFE
(YEARS)
WEIGHTED
AVERAGE
EXERCISE
PRICE/SHARE
EXPIRY DATES
2020
2021
2022
2023
2027
2028
2029
67,035
368,705
404,843
1,096,332
893,788
1,016,939
1,042,453
4,890,095
1
2
3
4
8
9
10
$
$
3.04
5.39
12.64
9.26
14.38
26.47
33.29
18.80
NUMBER OF
EXERCISABLE
OPTIONS
67,035
368,705
404,843
370,897
214,285
125,165
-
1,550,930
WEIGHTED
AVERAGE
EXERCISE
PRICE/SHARE
$
$
3.04
5.39
12.64
9.26
14.38
26.47
-
11.02
127
AIR CANADA | 2020 ANNUAL REPORT 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 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 (credit) related to PSUs and RSUs in 2020 was $(23) million (2019 – $50 million). The compensation credit in 2020
reflected the decrease in share price during 2020 and the resulting decrease to the compensation liability.
A summary of the Long-term Incentive Plan share unit activity is as follows:
Beginning of year
Granted
Settled
Forfeited
Outstanding share units, end of year
2020
2019
2,085,811
1,124,146
(724,539)
(111,412)
2,374,006
2,500,764
643,186
(984,087)
(74,052)
2,085,811
Refer to Note 17 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. The Corporation’s matching of employee contributions was suspended effective May
1, 2020. For 2020 contributions made between January 1 and April 30, Air Canada will match 33.33% of the contributions made by employees.
During 2020, the Corporation recorded compensation expense of $5 million (2019 – $13 million) related to the Employee Share Purchase Plan.
128
AIR CANADA | 2020 ANNUAL REPORT 15.
Earnings (Loss) per Share
The following table outlines the calculation of basic and diluted earnings (loss) per share:
(in millions, except per share amounts)
NUMERATOR:
Net income (loss)
Effect of assumed conversion of convertible notes
Remove anti-dilutive impact
Adjusted numerator for diluted earnings (loss) per share
DENOMINATOR:
Weighted-average shares
Effect of potential dilutive securities:
Stock options
Convertible notes
Total potential dilutive securities
Remove anti-dilutive impact
Adjusted denominator for diluted earnings (loss) per share
Basic earnings (loss) per share
Diluted earnings (loss) per share
2020
2019
$ (4,647)
216
(216)
$ (4,647)
282
1
28
29
(29)
282
$ (16.47)
$ (16.47)
$
$
$
$
1,476
-
-
1,476
268
4
-
4
-
272
5.51
5.44
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 2020 calculation of diluted earnings per share were 2,817,000 (2019 – 178,000) outstanding options where the options’
exercise prices were greater than the average market price of the shares for the year.
129
AIR CANADA | 2020 ANNUAL REPORT 16.
Commitments
Capital Commitments and Leases
Capital commitments consist of the future firm aircraft deliveries and commitments related to 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, 2020. U.S. dollar amounts are converted using the
December 31, 2020 closing rate of CDN$1.2725. Minimum future commitments under these contractual arrangements are shown below.
(Canadian dollars in millions)
Capital commitments
2021
969
$
2022
961
2023
410
2024
204
$
$
$
2025
THEREAFTER
TOTAL
$
-
$
-
$
2,544
The Corporation leases and subleases certain aircraft and spare engines to its regional carriers 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 10 De Havilland Q400
aircraft, 22 Mitsubishi CRJ-200 aircraft, 20 Mitsubishi CRJ-705/900 aircraft, 25 Embraer 175 aircraft, and 15 spare engines. The lease and sublease
revenue and expense related to these aircraft and engines each amount to $183 million in 2020 (2019 – $181 million).
Other Contractual Commitments
The future minimum non-cancellable commitment for the next 12 months under the capacity purchase agreements is approximately $921 million.
130
AIR CANADA | 2020 ANNUAL REPORT 17.
Financial Instruments and Risk Management
Summary of Financial Instruments
(Canadian dollars in millions)
FINANCIAL ASSETS
Cash and cash equivalents
Short–term investments
Restricted cash
Accounts receivable
Investments, deposits and other assets
Long-term investments
Equity investment in Chorus
Restricted cash
Aircraft related and other deposits
Derivative instruments
Share forward contracts
Foreign exchange derivatives
FINANCIAL LIABILITIES
Accounts payable
Foreign exchange derivatives
Embedded derivative on convertible notes
Current portion of long–term debt and lease liabilities
Long–term debt and lease liabilities
Carrying Amounts
DECEMBER 31, 2020
Financial instruments classification
FAIR VALUE
THROUGH
PROFIT AND
LOSS
FAIR VALUE
THROUGH
OCI
ASSETS AT
AMORTIZED
COST
LIABILITIES
AT
AMORTIZED
COST
TOTAL
DECEMBER 31,
2019
$ 3,658
3,843
106
-
512
-
87
-
20
-
$ 8,226
$
-
591
534
-
-
$ 1,125
$
$
$
$
-
-
-
-
-
58
-
-
-
-
58
-
-
-
-
-
-
$
$
$
$
-
-
-
644
-
-
-
90
-
-
734
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
-
-
-
$ 3,658
3,843
106
644
$ 2,090
3,799
157
926
512
58
87
90
512
126
102
113
20
-
$ 9,018
45
3
$ 7,873
$
1,775
-
-
1,788
11,201
$ 14,764
$
1,775
591
534
1,788
11,201
$ 15,889
$ 2,240
117
-
1,218
8,024
$ 11,599
Summary of Gain (Loss) on Financial Instruments Recorded at Fair Value
(Canadian dollars in millions)
Share forward contracts
Embedded derivative on convertible notes
Gain (loss) on financial instruments recorded at fair value
Note 9
2020
2019
$
(28)
(214)
$ (242)
$
$
23
-
23
131
AIR CANADA | 2020 ANNUAL REPORT 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.
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 for a minimum period of at least 12 months after
each reporting period, 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,
2020, unrestricted liquidity was $8,013 million comprised of Cash
and cash equivalents, Short-term investments, and Long-term
investments.
Cash and cash equivalents include $667 million pertaining to
investments with original maturities of three months or less at
December 31, 2020 ($381 million as at December 31, 2019).
In response to the COVID-19 pandemic, Air Canada has taken the
following actions to support its liquidity position:
• As described in Notes 9, 13, and 22, completed financing
transactions raising a total of $6.8 billion of liquidity since
March 2020.
• Significantly reduced capacity and its workforce since March
2020 when compared to the same period of 2019. The airline
continues to proactively adjust capacity as required.
• In addition to the projected cost savings associated with
capacity reductions, including workforce reductions and other
programs, Air Canada has initiated a company-wide cost
reduction and capital deferral and reduction program.
132
• Suspended purchases under its share repurchase program in
early March 2020 and did not renew its issuer bid upon its
expiry in May 2020
A maturity analysis of the Corporation’s principal and interest
repayment requirements on long-term debt and lease liabilities is
set out in Note 9, and fixed operating commitments and capital
commitments are set out in Note 16.
Market Risk
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. To manage its exposure to
jet fuel prices and to help mitigate volatility in operating cash
flows, the Corporation can elect to enter 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.
There was no fuel hedging activity during 2020 and there were
no outstanding fuel derivatives as at December 31, 2020 and
December 31, 2019.
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 2020, these net
operating cash inflows totalled approximately US$1.0 billion and
U.S.-denominated operating costs amounted to approximately
US$3.0 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$1.5 billion. For 2020, this resulted in a U.S. dollar net cash flow
exposure of approximately US$3.5 billion.
The Corporation has a target coverage of 70% on a rolling 24 month
basis to manage the net U.S. dollar cash flow exposure described
above utilizing the following risk management strategies:
AIR CANADA | 2020 ANNUAL REPORT • Holding U.S. dollar cash reserves as an economic hedge
against changes in the value of the U.S. dollar. U.S.
dollar cash, short- and long-term investment balances
as at December 31, 2020 amounted to $1,747 million
(US$1,371 million) ($1,123 million (US$862 million) as at
December 31, 2019). 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
24 month net U.S. dollar cash flow exposure. In 2020, a loss
of $69 million (loss of $36 million in 2019) 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, 2020, as further
described below, approximately 90% of net U.S. cash outflows are
hedged for 2021 and 21% for 2022, resulting in derivative coverage
of 63% over the next 24 months. Operational U.S. dollar cash and
investment reserves combined with derivative coverage results in
68% coverage.
As at December 31, 2020, the Corporation had outstanding foreign
currency options and swap agreements, settling in 2021 and 2022,
to purchase at maturity $5,730 million (US$4,499 million) of U.S.
dollars at a weighted average rate of $1.3586 per US$1.00 (2019 –
$6,599 million (US$5,080 million) with settlements in 2020 and
2021 at a weighted average rate of $1.2775 per $1.00 U.S. dollar).
The Corporation also has protection in place to sell a portion of its
excess Euros, Sterling, YEN, YUAN, and AUD (EUR €464 million,
GBP £64 million, JPY ¥4,963 million, CNH ¥415 million and AUD
$88 million) which settle in 2021 and 2022 at weighted average
rates of €1.1414, £1.3277, ¥0.0094, ¥0.1463, and AUD $0.6942
per $1.00 U.S. dollar, respectively (as at December 31, 2019 –
EUR €335 million, GBP £202 million, JPY ¥46,655 million, CNH
¥286 million and AUD $209 million with settlements in 2020 and
2021 at weighted average rates of €1.1577, £1.3238, ¥0.0096,
¥0.1469, and AUD $0.7092 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, 2020 was $591 million in favour of the counterparties
(2019 – $114 million in favour of the counterparties). These
derivative instruments have not been designated as hedges for
accounting purposes and are recorded at fair value. During 2020,
a loss of $583 million was recorded in Foreign exchange gain (loss)
related to these derivatives (2019 – $92 million gain). In 2020,
foreign exchange derivative contracts cash settled with a net
133
fair value of $106 million in favour of the counterparties (2019 –
$173 million in favour of the Corporation).
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, 2020 is 74% fixed and 26%
floating (83% and 17%, respectively as at December 31, 2019).
Share-based Compensation Risk
The Corporation issues RSUs and PSUs to certain of its employees,
as described in Note 14, 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 2021 and 2023, 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 869,809 PSUs and RSUs from 2021 to
2023. These contracts were not designated as hedging instruments
for accounting purposes. Accordingly, changes in the fair value of
these contracts are recorded in Gain (loss) on financial instruments
recorded at fair value in the period in which they arise. During 2020,
a loss of $28 million was recorded (2019 – gain of $23 million).
Share forward contracts cash settled with a fair value of $9 million
in favour of the Corporation in 2020 (2019 – $30 million), with
new contract purchases of $12 million for 2023 hedges. As at
December 31, 2020, the fair value of the share forward contracts
is $20 million in favour of the Corporation (2019 – $45 million in
favour of the Corporation), with those contracts maturing in 2021
valued at $6 million recorded in Prepaid expenses and other current
assets and the remainder of $14 million recorded in Deposits and
other assets.
Credit Risk
Credit risk is the risk of loss due to a counterparty’s inability to meet
its obligations. As at December 31, 2020, the Corporation’s credit
risk exposure consists mainly of the carrying amounts of Cash and
AIR CANADA | 2020 ANNUAL REPORT cash equivalents, Short-term investments, Accounts receivable, Long-term investments and derivative instruments. Cash and cash equivalents
and Short- and long-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. Accounts receivable related to the sale of Aeroplan points are mainly with
major financial institutions and any exposure associated with these customers is mitigated by the relative size and nature of business carried on by
such partners. 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.
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, 2020. 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. For purposes of
presentation, each risk is contemplated independent of other risks; however, in reality, 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, 2020 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
Income
Foreign exchange rate risk(1)
Income
Other price risk(2),(3)
Income
(Canadian dollars in millions)
1% INCREASE
1% DECREASE
5% INCREASE
5% DECREASE
10% INCREASE
10% DECREASE
Cash and cash equivalents
Short–term investments
Long-term investments
Aircraft related deposits
Long-term debt and lease liabilities
Share forward contracts
Foreign exchange derivatives
Embedded derivative on
convertible notes
$ 37
$ 38
5
$
$
4
$ (32)
-
$
-
$
$ (37)
$ (38)
$ (5)
$ (4)
$ 10
-
$
-
$
$ (59)
$ (28)
-
$
$
-
$ 529
-
$
$(432)
59
$
28
$
-
$
$
-
$(529)
-
$
$ 529
$
$
$
$
$
$
$
-
-
-
-
-
2
-
-
$
-
$
-
$
-
$
$
-
$ (2)
-
$
$
-
$
-
$
-
$
-
$ (53)
$ 53
(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 lease liabilities includes $5 million 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.
(3) The sensitivity analysis for the embedded derivative on the convertible notes is based on a total 10% change in value.
For Air Canada’s equity investment in Chorus, a 10% increase (decrease) to the Chorus share price would increase (decrease) Other comprehensive
income by $6 million.
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 2020, the Corporation made no cash deposits under these
agreements (nil in 2019).
134
AIR CANADA | 2020 ANNUAL REPORT 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- and long-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 approximates its carrying value of $9,561 million.
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.
(Canadian dollars in millions)
DECEMBER 31, 2020
Fair value measurements at reporting date using:
Recurring measurements
FINANCIAL ASSETS
Held–for–trading securities
Cash equivalents
Short–term investments
Long-term investments
Equity investment in Chorus
Derivative instruments
Share forward contracts
Total
FINANCIAL LIABILITIES
Derivative instruments
Foreign exchange derivatives
Embedded derivative on convertible notes
Total
QUOTED PRICES IN
ACTIVE MARKETS
FOR IDENTICAL
ASSETS
(LEVEL 1)
SIGNIFICANT
OTHER
OBSERVABLE
INPUTS
(LEVEL 2)
SIGNIFICANT
UNOBSERVABLE
INPUTS
(LEVEL 3)
$
667
3,843
512
58
20
$ 5,100
591
534
$ 1,125
$
$
$
-
-
-
58
-
58
-
-
-
$
667
3,843
512
-
20
$ 5,042
591
534
1,125
$
$
$
$
-
-
-
-
-
-
-
-
-
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 2020.
135
AIR CANADA | 2020 ANNUAL REPORT 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 $9 million as at December 31, 2020
($86 million as at December 31, 2019). 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, 2020 and 2019, 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
$
$
$
$
-
-
11
11
$
$
$
$
-
-
(8)
(8)
$
$
$
$
-
-
3
3
$
$
$
$
20
20
45
45
Amounts offset
GROSS
LIABILITIES
GROSS
ASSETS
OFFSET
NET
AMOUNTS
PRESENTED
Amounts
not offset
FINANCIAL
INSTRUMENTS
$
$
$
$
646
646
178
178
$
$
$
$
(55)
(55)
(61)
(61)
$
$
$
$
591
591
117
117
$
$
$
$
-
-
-
-
$
$
$
$
$
$
$
$
20
20
48
48
Net
591
591
117
117
(Canadian dollars in millions)
FINANCIAL ASSETS
December 31, 2020
Derivative assets
December 31, 2019
Derivative assets
(Canadian dollars in millions)
FINANCIAL LIABILITIES
December 31, 2020
Derivative liabilities
December 31, 2019
Derivative liabilities
136
AIR CANADA | 2020 ANNUAL REPORT 18.
Contingencies, Guarantees and Indemnities
Contingencies and Litigation Provisions
Various 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 management that final determination of these claims will not have a material
adverse effect on the financial position or the results of the Corporation.
Guarantees
Guarantees in Fuel Facilities and De-Icing Arrangements
The Corporation participates in fuel facility arrangements operated through nine 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 $1,047 million as at December 31, 2020 (December 31, 2019 – $643 million), 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.
137
AIR CANADA | 2020 ANNUAL REPORT 19.
Capital Disclosures
The Corporation views capital as the sum of Long-term debt and lease liabilities, the embedded derivative on convertible notes, and the book
value of Shareholders’ equity. Air Canada no longer includes excess cash as a reduction to its capital as the amount is not meaningful in the
current environment. The Corporation also monitors its net debt. Net debt is calculated as the sum of Long-term debt and lease liabilities less
Cash and cash equivalents, Short-term investments, and Long-term investments.
The Corporation’s main objectives when managing capital are:
• 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 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 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 net debt as at December 31 are calculated as follows:
(Canadian dollars in millions)
DECEMBER 31, 2020
DECEMBER 31, 2019
Long-term debt and lease liabilities
Current portion of long-term debt and lease liabilities
Total long-term debt and lease liabilities
Embedded derivative on convertible notes
Shareholders’ equity
Total Capital
Total long-term debt and lease liabilities
Less Cash and cash equivalents, Short-term investments, and Long-term investments
Net debt
$ 11,201
1,788
12,989
534
1,715
$ 15,238
$ 12,989
(8,013)
$ 4,976
$ 8,024
1,218
9,242
-
4,400
$ 13,642
$ 9,242
(6,401)
$ 2,841
138
AIR CANADA | 2020 ANNUAL REPORT 20.
Revenue
Disaggregation of revenue
The Corporation disaggregates revenue from contracts with customers according to the nature of the air transportation services. The nature of
services is presented as passenger, cargo and other revenue on its consolidated statement of operations. The Corporation further disaggregates
passenger and cargo 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:
(Canadian dollars in millions)
PASSENGER REVENUES
Canada
U.S. Transborder
Atlantic
Pacific
Other
(Canadian dollars in millions)
CARGO REVENUES
Canada
U.S. Transborder
Atlantic
Pacific
Other
2020
2019
$ 1,640
840
909
468
525
$ 4,382
$ 5,233
3,795
4,468
2,449
1,287
$ 17,232
2020
2019
$
$
90
35
387
354
54
920
$
$
113
48
258
241
57
717
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, redemption of Aeroplan points for non-air goods and services, buy on board and related passenger ancillary services
and charges, and other airline-related services.
Contract balances
The following table provides information about receivables, contract assets, and contract liabilities from contracts with customers.
(Canadian dollars in millions)
DECEMBER 31, 2020
DECEMBER 31, 2019
Receivables, which are included in Accounts receivable
Contract costs which are included in Prepaid expenses and other current assets
Contract liabilities – Advance ticket sales
Contract liabilities – Aeroplan deferred revenue (current and long-term)
Contract liabilities – Other deferred revenue (current and long-term)
$
332
68
2,314
3,256
1,348
$
578
124
2,939
2,825
1,473
139
AIR CANADA | 2020 ANNUAL REPORT
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. Aeroplan points are sold to program partners based on member accumulations and which billings are
generally settled monthly. 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 payment 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 and cargo sales transactions rely on multiple information technology systems and controls to process, record, and recognize a
high volume of low value transactions, including through a combination of internal information technology systems, outsourced service providers,
industry clearing houses, global distribution systems, and other partner airlines. Passenger sales and the ground portion of vacation packages are
deferred and included in Current liabilities. A portion of the passenger sale related to the equivalent ticket value of any Aeroplan points issued is
separated and deferred in Aeroplan deferred revenue. The Advance ticket sales liability is recognized in revenue when the related flight occurs or
over the period of the vacation. 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. The Corporation performs regular evaluations on the advance ticket sales liability.
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.
In response to the COVID-19 pandemic, Air Canada offered customers the option of converting their existing booking into a travel voucher
with no expiry date should their travel plans change. Customers have the ability to use the travel vouchers within the next 12 months and the
Corporation does not have an unconditional right to defer settlement beyond the next 12 months. As such, the entire liability amount related to
these vouchers has been recorded in current liabilities even though some could be used after the next 12 months.
A reconciliation of the Aeroplan deferred revenue is as follows.
(Canadian dollars in millions)
Fair value as at January 10, 2019 acquisition
Proceeds from Aeroplan points issued to program partners
Equivalent ticket value of Aeroplan points issued
Aeroplan points redeemed
Aeroplan deferred revenue, December 31, 2019
Proceeds from Aeroplan points issued to program partners
Equivalent ticket value of Aeroplan points issued
Aeroplan points redeemed
Aeroplan deferred revenue, December 31, 2020
$
$
$
2,779
953
201
(1,108)
2,825
687
63
(319)
3,256
Proceeds from points issued to Aeroplan program partners and the equivalent ticket value of points issued through travel are deferred until the
points are redeemed and the reward is provided to the member. The Corporation expects the majority of the points outstanding will be redeemed
within three years.
In connection with new commercial agreements signed in 2019, Air Canada received payments from TD Bank, CIBC, Visa, and AMEX in the
aggregate amount of $1,212 million. Additionally, TD Bank and CIBC made payments to the Corporation in the aggregate amount of $400 million
as prepayments to be applied towards future monthly payments in respect of Aeroplan points. These considerations are accounted for as a
contract liability within Aeroplan and other deferred revenue.
140
AIR CANADA | 2020 ANNUAL REPORT 21.
Regional Airlines Expense
The Corporation has capacity purchase agreements with 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, which amounts exclude fuel
expense and the component of capacity purchase fees related to aircraft utilization:
(Canadian dollars in millions)
Capacity purchase fees
Airport and navigation fees
Sales and distribution costs
Other operating expenses
Regional airlines expense, excluding fuel
22.
Sale-Leaseback
2020
2019
$
636
127
51
272
$ 1,086
$
1,042
292
158
464
$ 1,956
In 2020, the Corporation completed sale and leaseback transactions for nine Boeing 737 MAX 8 aircraft for total proceeds of US$365 million
($485 million), which resulted in the recognition of a gain on sale of $18 million. The aircraft will continue to be operated under 12-year leases
entered into under such sale-leaseback agreement.
23.
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, Executive Vice President and Chief Commercial Officer, Executive Vice President of Operations, Executive Vice President - Chief
Human Resources and Communications Officer, and Executive Vice President - International and Regulatory Affairs and Chief Legal Officer. Key
management was expanded with these latter two positions added in the 2020 period (2019 comparative figures are not amended). Amounts
reported are based upon the expense as reported in the consolidated financial statements. Compensation to key management is summarized as
follows:
(Canadian dollars in millions)
Salaries and other benefits
Pension and post-employment benefits
Share-based compensation
141
2020
2019
$
$
7
6
(9)
4
$
$
7
5
36
48
AIR CANADA | 2020 ANNUAL REPORT
26.
Proposed Acquisition
of Transat
On June 27, 2019, Air Canada and Transat A.T. Inc. (“Transat”)
announced a definitive arrangement agreement that provides for
Air Canada’s acquisition of all issued and outstanding shares of
Transat. Under the terms of the agreement, Air Canada would have
acquired all outstanding shares of Transat for $13 per share. The
value of the all-cash transaction was, at that time, approximately
$520 million.
On August 11, 2019, Air Canada and Transat announced that
Air Canada had agreed to increase the purchase price for the
acquisition of all issued and outstanding shares of Transat,
from $13 to $18 per share and had amended the Arrangement
Agreement dated June 27, 2019 accordingly. Based on the
increased consideration, the value of the all-cash transaction was
approximately $720 million.
On October 10, 2020, Air Canada announced amendments to the
transaction with Transat. The acquisition agreement provides for
the acquisition by Air Canada of all the shares of Transat for $5.00
per share, payable at the option of Transat shareholders in cash or
shares of Air Canada at a fixed exchange ratio of 0.2862 Air Canada
share for each Transat share (representing a price for the Air Canada
shares of $17.47).
Assuming closing of the acquisition of Transat and that all Transat
shareholders elect to receive Air Canada shares as consideration
for their Transat shares (and that no holders of options of Transat
exercise their options before the applicable election deadline and
elect to receive Air Canada shares for the Transat shares underlying
their options), Air Canada would expect to issue an aggregate of up
to 10,803,217 shares in connection with the acquisition (based on
37,747,090 outstanding shares of Transat, as reported by Transat).
However, the transaction remains subject to certain conditions
including, notably, the ongoing approval process of regulatory
authorities, and while Air Canada has endeavoured to adequately
address all relevant considerations in all jurisdictions, there can be
no assurance that all required regulatory approvals will be granted,
that relevant delays for completion will be extended or that the
transaction will be successfully completed.
Under the acquisition agreement with Transat, closing of the
transaction was to be completed no later than February 15, 2021; it
may be extended at any time by agreement of the parties and
remains in force unless terminated by either of them.
24.
Acquisition of
Aeroplan
On January 10, 2019, Air Canada completed its purchase of Aimia
Canada Inc. (now Aeroplan Inc.). The aggregate purchase price for
the acquisition consisted of $450 million in cash plus $67 million
in cash for closing adjustments (total purchase consideration of
$517 million). The acquisition also included the assumption of the
Aeroplan points liability.
Concurrently with the conclusion of the Aeroplan purchase,
Air Canada, Aeroplan, The Toronto-Dominion Bank (“TD Bank”),
Canadian Imperial Bank of Commerce (“CIBC”), and Visa Canada
Corporation (“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 the Aeroplan program. Similarly, in the first quarter of 2019,
Air Canada, Aeroplan, and AMEX Bank of Canada (“AMEX”)
concluded agreements enabling AMEX’s continued participation
in the Aeroplan program. Air Canada received payments from
TD Bank, CIBC, Visa, and AMEX in the aggregate amount of
$1,212 million. This consideration has been accounted for as
deferred revenue and will be amortized into passenger revenue over
the terms of the related agreements.
In addition, TD Bank and CIBC made payments to the Corporation
in the aggregate amount of $400 million as prepayments to be
applied towards future monthly payments in respect of Aeroplan
points. This consideration is accounted for as a contract liability
within Aeroplan and other deferred revenue.
25.
Equity Investment
in Chorus
In February 2019, Air Canada concluded an agreement to amend
and extend its capacity purchase agreement with Jazz, a wholly-
owned subsidiary of Chorus Aviation Inc., by 10 years from
January 1, 2026 to December 31, 2035.
Concurrently, 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 total issued and outstanding voting
shares of Chorus. This represented an investment of $97 million by
Air Canada.
142
AIR CANADA | 2020 ANNUAL REPORT Directors
Amee Chande
Corporate Director and Strategy Consultant, Los Altos, California
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, Montréal, Québec
Madeleine Paquin
President and Chief Executive Officer, Logistec Corporation, Montréal, Québec
Michael Rousseau
President and Chief Executive Officer, Air Canada, Saint-Lambert, Québec
Vagn Sørensen
Chairman of the Board, Air Canada, 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
143
AIR CANADA | 2020 ANNUAL REPORT Executive Officers(1)
Michael Rousseau
President and Chief Executive Officer
Lucie Guillemette
Executive Vice President and Chief Commercial Officer
Amos S. Kazzaz
Executive Vice President and Chief Financial Officer
Craig Landry
Executive Vice President, Operations
Arielle Meloul-Wechsler
Executive Vice President, Chief Human Resources Officer and Public Affairs
David J. Shapiro
Executive Vice President, International and Regulatory Affairs and Chief Legal Officer
Mark Galardo
Senior Vice President, Network Planning and Revenue Management
Catherine Luelo
Senior Vice President and Chief Information Officer
Mark Nasr
Richard Steer
Murray Strom
Senior Vice President, Products, Marketing and eCommerce
Senior Vice President, Operations and Express Carriers
Senior Vice President, Flight Operations
Carolyn M. Hadrovic
Vice President and Corporate Secretary
(1) Executive officers include the Chief Executive Officer, the Chief Financial Officer,
the Corporate Secretary and all Executive Vice Presidents and Senior Vice
Presidents.
144
AIR CANADA | 2020 ANNUAL REPORT P R O D U C E D I N - H O U S E BY: A I R C A N A DA M U LT I M E D I A C O M M U N I C AT I O N S 2 0 21
146
AIR CANADA | 2020 ANNUAL REPORT For further information
SHAREHOLDER RELATIONS
Telephone: 514-422-6644
Facsimile: 514-422-0296
shareholders.actionnaires@aircanada.ca
INVESTOR RELATIONS
Telephone: 514-422-7849
Facsimile: 514-422-7877
investors.investisseurs@aircanada.ca
HEAD OFFICE
Air Canada Centre
7373 Côte-Vertu Boulevard West
Saint-Laurent, Québec 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
Montréal, Québec 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.
Investor and Shareholder Information
TSX price range and trading volume of Air Canada variable
voting shares and voting shares (AC)
2020
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
HIGH
$52.71
$23.55
$19.48
$28.24
LOW
$9.26
$12.80
$15.02
$14.48
VOLUME TRADED
224,507,798
471,490,629
295,928,353
377,945,401
1,369,872,181
Restrictions on voting securities
In 2018, the Government of Canada passed 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%. At its 2019 annual and special meeting of shareholders,
Air Canada received approval for a plan of arrangement under section 192 of the Canada
Business Corporations Act to effect amendments to Air Canada’s restated articles of
incorporation to align the restrictions on the level of non-Canadian ownership and
voting control with those prescribed by the definition of “Canadian” in section 55(1) of
the recently amended CTA. The Québec Superior Court subsequently issued a final order
approving this plan of arrangement, and Air Canada’s amended articles became effective
on May 8, 2019.
English or French, it’s the customer’s choice
Official Languages at Air Canada
Air Canada is Canada’s largest private sector corporation offering
bilingual services across Canada and globally. We are proud to offer
services in both official languages, demonstrating true leadership
among major Canadian companies in promoting bilingualism.
For Air Canada, offering service in the language chosen by our
customers is essential. Verbal exchanges with customers, public
address announcements at the airport and on board, as well as
briefing of passengers are all central elements of customer service and
call up on our employees’ linguistic skills at all times.
Air Canada puts great efforts to better serve customers in the
language of their choice. Outreach activities with minority language
communities as well as ongoing employee awareness and training
have been key areas of focus over the years.
We are encouraged by feedback from our customers stating the
majority feel that we are continuously improving our bilingual
service offering.
147
AIR CANADA | 2020 ANNUAL REPORT
@aircanada
aircanada.com
Corporate profile
Air Canada is Canada’s largest domestic and
international airline and, in 2020, was among the
top 20 largest airlines in the world. It is Canada’s
flag carrier and a founding member of Star Alliance,
the world’s most comprehensive air transportation
network. 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.
In 2020, Air Canada was named Global Traveler’s
Best Airline in North America — received for the
second straight year. In January 2021, Air Canada
received APEX’s Diamond Status Certification for
the Air Canada CleanCare+ biosafety program for
managing COVID-19 virus, the only airline in Canada
to attain the highest APEX ranking.
The only Four-Star
international network
carrier in North America