#12023 Consolidated Financial Statements and Notes AIR CANADA February 16, 2024 1-1 C-FRTG DREAMLINER 849 AIR CANADA A STAR ALLIANCE MEMBER#2AIR CANADA 2023 Consolidated Financial Statements and Notes 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 ("IFRS Accounting Standards"). 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 auditor, 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. (signed) Michael Rousseau Michael Rousseau President and Chief Executive Officer (signed) John Di Bert John Di Bert Executive Vice President and Chief Financial Officer February 15, 2024 1#3pwc 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, 2023 and 2022, 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 Accounting Standards). What we have audited The Corporation's consolidated financial statements comprise: • • the consolidated statements of financial position as at December 31, 2023 and 2022; 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 (deficiency) for the years then ended; • • the consolidated statements of cash flow for the years then ended; and the notes to the consolidated financial statements, comprising material accounting policy information 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. PricewaterhouseCoopers LLP 1250 René-Lévesque Boulevard West, Suite 2500, Montréal, Quebec, Canada H3B 4Y1 T: +1 514 205 5000, F: +1 514 876 1502, [email protected] "PwC" refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership. 2#4pwc 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, 2023. 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. Key audit matter Passenger and cargo revenue recognition Refer to note 2 - Basis of presentation and summary of material accounting policies and note 19 - Revenue to the consolidated financial statements. Passenger and cargo revenues are recognized when the transportation is provided. Total passenger and cargo revenues recognized for the year ended December 31, 2023 amounted to $19,403 million and $924 million, respectively. Such transactions rely on multiple Information Technology (IT) systems and controls to process, record, and recognize a high volume of low value revenue transactions through a combination of IT systems and outsourced service providers. We considered this 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. How our audit addressed the key audit matter Our approach to addressing the matter included the following procedures, among others: Tested the operating effectiveness of internal controls and performed substantive testing on certain aspects related to passenger and cargo revenue recognition, which included the following: Tested the controls and performed certain substantive procedures 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 the transportation was provided for passengers or cargo. 3#5pwc Key audit matter Measurement of the total benefit obligations Refer to note 2 - Basis of presentation and summary of material accounting policies, note 3 - Critical accounting estimates and judgments, and note 9 - Pensions and other benefit liabilities to the consolidated financial statements. The Corporation has net benefit assets of $648 million, which include total benefit obligations associated with pension benefit obligations of $18,309 million and other employee future benefit obligations of $1,098 million as at December 31, 2023. The total benefit obligations associated with pension benefit obligations and other employee future benefit obligations are actuarially determined annually as at December 31 and are prepared by the Corporation's consulting actuaries (management's experts). The total benefit obligations are determined using the projected unit credit method. Management applied significant judgment in determining the discount rates and mortality assumptions to develop the estimates for the total benefit obligations. We considered this a key audit matter due to the significance of the total benefit obligations and the significant judgment made by management, including the use of management's experts, in determining the discount rates and mortality assumptions, which resulted in a high degree of auditor judgment and subjectivity in performing procedures related to those assumptions. The audit effort involved the use of professionals with specialized skill and knowledge in the field of actuarial services. How our audit addressed the key audit matter Our approach to addressing the matter included the following procedures, among others: Tested how management developed the estimates for the total benefit obligations which included the following: The work of management's experts was used in performing the procedures to evaluate the reasonableness of the total benefit obligations associated with pension benefit obligations and other employee future benefit obligations. As a basis for using this work, management's experts' competence, capabilities and objectivity were evaluated, the work performed was understood and the appropriateness of the work as audit evidence was evaluated. The procedures performed also included evaluating the methods and assumptions used by management's experts, testing the data used by management's experts and evaluating their findings. Professionals with specialized skill and knowledge in the field of actuarial services assisted in evaluating the appropriateness of the projected unit credit method and the reasonableness of the discount rates and mortality assumptions. Tested the disclosures, including the sensitivity analysis, made in the consolidated financial statements with regard to the measurement of the pension benefit obligations and other employee future benefit obligations. 4#6pwc 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 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 Accounting Standards, 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. 5#7pwc 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. 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. 16#8pwc 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 Mario Longpré. PricewaterhouseCoopers LLP' Montréal, Quebec February 15, 2024 1CPA auditor, public accountancy permit No. A123498 7#9AIR CANADA 2023 Consolidated Financial Statements and Notes CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (Canadian dollars in millions) ASSETS Current December 31, 2023 December 31, 2022 Cash and cash equivalents Short-term investments Total cash, cash equivalents and short-term investments Accounts receivable EA $ 2,817 $ 2,693 5,734 5,295 8,551 7,988 Note 19 1,121 1,037 Aircraft fuel inventory 169 200 Spare parts and supplies inventory Note 2P 168 118 Prepaid expenses and other current assets Note 19 251 322 Total current assets 10,260 9,665 Investments, deposits and other assets Note 4 1,009 1,073 Property and equipment Note 5 11,933 11,950 Pension assets Deferred income tax Intangible assets Goodwill Note 9 2,588 2,444 Note 11 50 48 Note 6 1,084 1,054 Note 7 3,273 3,273 $ 30,197 $ 29,507 Total assets LIABILITIES Current Accounts payable and accrued liabilities Advance ticket sales $ 3,328 $ 2,691 Note 19 4,341 4,104 Aeroplan and other deferred revenue Note 19 1,473 1,295 Current portion of long-term debt and lease liabilities Note 8 866 1,263 Total current liabilities 10,008 9,353 Long-term debt and lease liabilities Note 8 12,996 15,043 Aeroplan and other deferred revenue Note 19 2,989 3,160 Pension and other benefit liabilities Maintenance provisions Other long-term liabilities Deferred income tax Note 9 1,875 1,770 Note 10 1,227 1,352 233 311 Note 11 73 73 Total liabilities $ 29,401 $ 31,062 SHAREHOLDERS' EQUITY (DEFICIENCY) Share capital Contributed surplus Accumulated other comprehensive loss Deficit Total shareholders' equity (deficiency) Total liabilities and shareholders' equity (deficiency) Note 12 2,744 133 (57) (2,024) 118 2,743 (46) (4,370) 796 (1,555) 30,197 $ 29,507 The accompanying notes are an integral part of the consolidated financial statements. On behalf of the Board of Directors: (signed) Vagn Sørensen Vagn Sørensen Chair of the Board of Directors (signed) Christie J.B. Clark Christie J.B. Clark Chair of the Audit, Finance and Risk Committee 80#10AIR CANADA 2023 Consolidated Financial Statements and Notes 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 2023 2022 Note 19 $ 19,403 $ 14,238 Note 19 924 1,266 1,506 1,052 21,833 16,556 Operating expenses Aircraft fuel 5,318 5,276 Wages, salaries and benefits Note 9 3,955 3,260 Depreciation, amortization, and impairment Note 5 1,703 1,644 Airport and navigation fees 1,418 1,213 Sales and distribution costs 1,097 797 Capacity purchase fees Note 2D 858 763 Aircraft maintenance Note 2J 1,083 706 Ground package costs 720 474 Communications and information technology 555 468 Catering and onboard services 628 425 Other 2,219 1,717 Total operating expenses 19,554 16,743 Operating income (loss) 2,279 (187) Non-operating income (expense) Foreign exchange gain (loss) 389 (732) Interest income 416 168 Interest expense Note 8 (944) (909) Interest capitalized 14 13 Financial instruments recorded at fair value Note 16 115 133 Loss on debt settlements Note 8 (10) (14) Other (47) 4 Total non-operating expense (67) (1,337) Income (loss) before income taxes 2,212 (1,524) Income tax recovery (expense) Note 11 64 (176) Net income (loss) $ 2,276 $ (1,700) Net income (loss) per share Note 14 Basic earnings (loss) per share Diluted earnings (loss) per share The accompanying notes are an integral part of the consolidated financial statements. 69 69 $ 6.35 $ 5.96 5959 $ (4.75) $ (4.75) 6#11AIR CANADA 2023 Consolidated Financial Statements and Notes CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) For the year ended December 31 (Canadian dollars in millions) Comprehensive income (loss) Net income (loss) Other comprehensive income (loss), net of tax: 2023 2022 2,276 $ (1,700) Note 11 Items that will not be reclassified to net income Remeasurements on net employee benefits Remeasurements on equity investments Note 9 70 115 Note 4 (11) (1) Total comprehensive income (loss) $ 2,335 $ (1,586) CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIENCY) Contributed Share capital (Canadian dollars in millions) surplus Accumulated OCI Deficit Total shareholders' equity (deficiency) January 1, 2022 $ 2,735 $ 104 $ (45) $ Net income (loss) (2,785) (1,700) $ 9 (1,700) I 115 115 Remeasurements on net employee benefits Remeasurements on equity investments Total comprehensive income (loss) Share-based compensation Shares issued (Note 12) December 31, 2022 Net income (loss) Remeasurements on net employee benefits Remeasurements on equity investments Total comprehensive income (loss) $ 69 8 2,743 $ I (1) (1) (1) (1,585) (1,586) 16 16 (2) 6 118 69 $ (46) $ (4,370) 2,276 $ (1,555) 2,276 I 70 70 (11) (11) (11) 2,346 2,335 Share-based compensation 15 15 Shares issued (Note 12) 1 1 December 31, 2023 $ 2,744 $ 133 $ (57) $ (2,024) $ 796 The accompanying notes are an integral part of the consolidated financial statements. 10#12AIR CANADA 2023 Consolidated Financial Statements and Notes 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 2023 2022 $ 2,276 $ (1,700) Deferred income tax Depreciation, amortization, and impairment Note 11 Note 5 (47) 129 1,703 1,644 Foreign exchange (gain) loss (239) 735 Employee benefit funding less than expense Note 9 59 128 Financial instruments recorded at fair value Note 16 (115) (133) Loss on debt settlements Note 8 10 14 Change in maintenance provisions 56 111 Changes in non-cash working capital balances 711 1,498 Other (94) (58) Net cash flows from (used in) operating activities 4,320 2,368 Financing Proceeds from borrowings Note 8 84 202 Repayment of long-term debt and lease liabilities Note 8 (2,452) (1,814) Issue of shares Note 12 1 6 Financing fees Note 8 (1) (6) Net cash flows from (used in) financing activities (2,368) (1,612) Investing Investments, short-term and long-term Note 16 (245) (959) Additions to property, equipment and intangible assets (1,564) (1,572) Proceeds from sale of assets 9 36 Other (27) (3) Net cash flows (used in) investing activities (1,827) (2,498) Effect of exchange rate changes on cash and cash equivalents (1) 20 Increase (decrease) in cash and cash equivalents 124 (1,722) Cash and cash equivalents, beginning of year 2,693 4,415 Cash and cash equivalents, end of year $ 2,817 $ 2,693 The accompanying notes are an integral part of the consolidated financial statements. 11#13AIR CANADA 2023 Consolidated Financial Statements and Notes For the years ended December 31, 2023 and 2022 (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 to, as the context may require, Air Canada and/or one or more of its subsidiaries, including its principal wholly-owned operating subsidiaries, Aeroplan Inc. ("Aeroplan"), Touram Limited Partnership doing business under the brand name Air Canada Vacations® ("Air Canada Vacations"), and Air Canada Rouge LP doing business under the brand name Air Canada Rouge® ("Air Canada Rouge"). Air Canada is incorporated and domiciled in Canada. The address of its registered office is 7373 Côte-Vertu Boulevard West, Saint-Laurent, Quebec. Air Canada is Canada's largest domestic, U.S. transborder and international airline and the largest provider of scheduled passenger services in the Canadian market, the Canada-U.S. transborder market as well as the international 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" by third parties including Jazz Aviation LP ("Jazz"), a wholly-owned subsidiary of Chorus Aviation Inc. ("Chorus”), through capacity purchase and other commercial agreements. Through Air Canada's global route network, virtually every major market throughout the world is served either directly or through Star Alliance and other carriers. 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 enroll as members and open an Aeroplan account, to 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, 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. 12 12#14AIR CANADA 2023 Consolidated Financial Statements and Notes 2. BASIS OF PRESENTATION AND SUMMARY OF MATERIAL 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 as issued by the International Accounting Standards Board ("IFRS Accounting Standards"). These financial statements were approved for issue by the Board of Directors of the Corporation on February 15, 2024. These financial statements are based on the accounting policies described below. These policies have been consistently applied to all the periods presented. Amendments to IAS 1, Presentation of Financial Statements - Disclosure of Accounting Policies In February 2021, the IASB issued amendments to IAS 1 that require entities to disclose material accounting policy information instead of significant accounting policies. The amendments are effective for annual periods beginning on or after January 1, 2023. The Corporation adopted this amendment effective the 2023 annual period with no substantial impact on the disclosure of its accounting policies. Certain comparative figures have been reclassified to conform to the financial statement presentation adopted for the current year. A) BASIS OF MEASUREMENT These financial statements have been prepared under the historical cost convention, except for the revaluation of cash, cash equivalents, short-term investments, restricted cash, long-term investments, the equity investment in Chorus, and derivative instruments which are measured at fair value. B) PRINCIPLES OF CONSOLIDATION These financial statements include the accounts of Air Canada and its subsidiaries. Subsidiaries are all entities 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 surcharges and revenues from passenger-related services such as seat selection and excess baggage which are recognized when transportation is provided. Passenger revenues are reduced for 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 AGREEMENT Air Canada enhances its domestic and transborder network through commercial agreements with regional carriers, including Jazz. 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. Capacity purchase fees are presented as a separate line item in the consolidated statement of operations and exclude the component of fees related to aircraft costs which are accounted for as lease liabilities in accordance with IFRS 16. Pass-through costs, which are direct costs incurred by the regional carriers and charged to the Corporation and other costs incurred by the Corporation which are directly related to regional carrier operations are included in the line items to which they relate in the consolidated statement of operations. 13#15AIR CANADA 2023 Consolidated Financial Statements and Notes E) AEROPLAN LOYALTY PROGRAM 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: (i) through travel and (ii) 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 (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 Earned through 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 member. 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, on-board sales, lounge pass sales and loyalty program marketing fees. Vacation package revenue is recognized as services are provided over the period of the vacation. Other airline related service revenues are recognized as the products are sold to passengers or the services are provided. 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 capacity purchase fees. The Corporation acts as lessee and sublessor in these matters. G) EMPLOYEE BENEFITS The cost of pensions, other post-retirement and post-employment benefits earned by employees is actuarially determined annually as at December 31 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. 14#16AIR CANADA 2023 Consolidated Financial Statements and Notes The current service cost and any past service cost, gains and losses on curtailments or settlements are recorded in Wages, salaries and benefits generally. The interest arising on the net benefit obligations are presented in Other in Non-operating income (expense). 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 (deficit) 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 applicable, 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 13. 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. 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. Air Canada also maintains an employee share purchase plan. Under this plan, contributions by the Corporation's employees are matched to a specific percentage by the Corporation. Employees must remain with the Corporation and retain their shares until March 31 of the subsequent year for vesting of the Corporation's contributions. These contributions are expensed in Wages, salaries, and benefits expense over the vesting period. J) MAINTENANCE AND REPAIRS Maintenance and repair costs for both leased and owned aircraft are charged to Aircraft maintenance as incurred, with the exception of maintenance and repair costs related to return conditions on aircraft under 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 2Q. 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. 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. In connection with an amended agreement between Air Canada and a third-party service provider concluded in 2022, a favourable adjustment of $159 million was recorded in 2022 in Aircraft maintenance expense arising from the 15#17AIR CANADA 2023 Consolidated Financial Statements and Notes adjustment to maintenance accruals and the recognition of future credits that will be available under the amended agreement. Given the significantly reduced aircraft operations and fleet reductions during the COVID-19 pandemic, this agreement was amended by the parties to convert the nature of the services from a power-by-the-hour basis to a time and materials contract and to reduce the number of items covered under the agreement. 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 and Financial instruments recorded at fair value 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. 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. Subsequent to initial recognition, 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. 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 16#18AIR CANADA 2023 Consolidated Financial Statements and Notes 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. 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 deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized only to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized. O) EARNINGS (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. 17#19AIR CANADA 2023 Consolidated Financial Statements and Notes 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 of the convertible notes, 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 is anti-dilutive. P) AIRCRAFT FUEL INVENTORY AND SPARE PARTS AND SUPPLIES INVENTORY Inventories of aircraft fuel, spare parts and supplies are measured at cost being determined using a weighted average formula, net of related obsolescence provision, as applicable. The Corporation did not recognize any write-downs on inventories or reversals of any previous write-downs during the periods presented. Included in Aircraft maintenance is $62 million related to spare parts and supplies consumed during the year (2022 - $51 million). Q) PROPERTY AND EQUIPMENT Property and equipment are 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 10 years. Ground and other equipment is depreciated over periods ranging from 3 to 25 years. Residual values and useful lives are reviewed at least annually, and depreciation rates are adjusted accordingly on a prospective basis. Gains and losses on disposals of property and equipment are determined by comparing the proceeds with the carrying amount of the asset and are included as part of non-operating gains and losses in the consolidated statement of operations. R) 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. 18#20AIR CANADA 2023 Consolidated Financial Statements and Notes 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. Aircraft Leases As at December 31, 2023 the Corporation had 75 aircraft under right-of-use leases (71 aircraft as at December 31, 2022), and 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 certain aircraft used by its regional carrier, Jazz, providing services under a capacity purchase agreement and recorded such aircraft as right-of-use assets and lease liabilities of Air Canada. As at December 31, 2023, there were 81 aircraft (99 aircraft as at December 31, 2022) 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, Montreal and Vancouver, lease contracts on building space dedicated to the Corporation for offices, airport and maintenance operations, Maple Leaf Lounges and land leases. S) INTANGIBLE ASSETS Intangible assets are initially recorded at cost. Indefinite life intangible assets are not amortized while assets with finite lives are amortized on a straight-line basis over their estimated useful lives. International route rights and slots Marketing-based trade names Technology-based (internally developed) Contract-based (Aeroplan commercial agreements) Remaining Estimated amortization Useful Life period as at December 31, 2023 Indefinite Indefinite 5 to 15 years Not applicable Not applicable 1 to 12 years 11.5 years 7 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 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 and/or a subsidiary's products and services. 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; 19#21AIR CANADA 2023 Consolidated Financial Statements and Notes 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. Configuration or customization costs in a cloud computing arrangement are also included when they meet the capitalization criteria as an intangible asset. T) GOODWILL Goodwill represents the excess of the cost of an acquisition over the fair value of the Corporation's share of the net identifiable assets of the acquired business at the date of acquisition. Goodwill is tested at least annually for impairment and carried at cost less accumulated impairment losses. Impairment losses on goodwill are not reversed. For the purpose of impairment testing, goodwill is tested for impairment at the lowest level within the entity at which the goodwill is monitored for internal management purposes, being the operating segment level (Note 2W). U) 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. The 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. V) 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. W) 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 President and Chief Executive Officer. ✗) ACCOUNTING STANDARD ISSUED BUT NOT YET ADOPTED Amendments to IAS 1, Presentation of Financial Statements – Classification of Liabilities as Current or Non-current In October 2022, the IASB published amendments to the Classification of Liabilities as Current or Non-current in IAS 1 Presentation of Financial Statements. The amendments aim to improve the information companies provide when the right to defer settlement of a liability for at least 12 months is subject to the entity complying with covenants after the reporting date. The amendments specify that covenants to be complied with after the reporting date do not affect the classification of debt as current or non-current at the reporting date. The amendments require an entity to disclose information about these covenants in the notes to the financial statements. 20#22AIR CANADA 2023 Consolidated Financial Statements and Notes The amendments are effective for annual periods beginning on or after January 1, 2024. The Corporation is evaluating the impact of the amendments. IAS 12 Income Taxes In May 2023, the IASB issued an amendment to IAS 12. The amendment addresses accounting for the global minimum tax as outlined in the two-pillar plan for international tax reform developed by the Organisation for Economic Co-operation and Development. The objective of the tax reform is to ensure that large multinational enterprises are subject to a minimum income tax rate of 15% in each jurisdiction they operate. The amendment to IAS 12 includes temporary mandatory relief from recognizing and disclosing deferred taxes related to the implementation of Pillar Two global minimum tax rules. As of December 31, 2023, the Pillar Two legislation has not yet been enacted or substantively enacted in any of the jurisdictions where the Corporation has a constituent entity for the purposes of Pillar Two. As such, the Corporation has yet to apply the temporary exemption. The Corporation will disclose known or reasonably estimable information related to the Corporation's exposure to Pillar Two income taxes when it is enacted or substantively enacted in a jurisdiction where the Corporation has a constituent entity and will disclose separately current tax related to Pillar Two income taxes when it is in effect. 21#23AIR CANADA 2023 Consolidated Financial Statements and Notes 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 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 6. 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 and mortality assumptions. Also, due to the long-term nature of these programs, such estimates are subject to significant uncertainty. Refer to Note 9 for additional information. 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. 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 significant impact on revenue in the year in which the change occurs. Given the unique impact the COVID-19 pandemic had on travel demand and consumer spending patterns, and considering the launch of the new Aeroplan program in 2020 and the special benefits and accommodations for Aeroplan members in response to the COVID-19 pandemic, the breakage estimate is unchanged in 2023 and is based on a qualitative update of the prior assessment. In addition, the estimate is based on management's long-term expectations of breakage over the life of the program. As at December 31, 2023, the Aeroplan Points deferred revenue balance was $3,562 million. For the purposes of sensitivity analysis, a 1% change in the number of outstanding Points estimated to be redeemed would result in an approximate impact of $36 million on revenue with a corresponding adjustment to Aeroplan deferred revenue. Breakage Breakage estimates and resulting amount of breakage revenues recorded are estimated based on historical breakage patterns and are subject to measurement uncertainty. Estimates of breakage may vary in future periods. These estimates have been impacted by the COVID-19 pandemic including: (i) flight cancellations, (ii) the conversion of certain tickets into non-expiring travel vouchers for flights that were cancelled with travel dates after February 1, 2020 and purchased before April 13, 2021, and (iii) changes in ticket usage and exchange patterns. 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, 22#24AIR CANADA 2023 Consolidated Financial Statements and Notes 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 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 10(a) for additional information. Income Taxes Since 2020, the net deferred income tax assets related to unused tax losses and other deductible temporary differences have not been recognized. As a result of the COVID-19 pandemic, there was considerable negative evidence relating to losses that were incurred at that time and assumptions as to the timing of reversal of temporary differences include expectations about the future results of operations and future cash flows. Management continues to assess 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. 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. Refer to Note 11 Income taxes for additional information. 23#25AIR CANADA 2023 Consolidated Financial Statements and Notes 4. INVESTMENTS, DEPOSITS AND OTHER ASSETS (Canadian dollars in millions) Long-term investments Investment in Chorus (a). Restricted cash (b) Aircraft related deposit Prepayments under maintenance agreements Other investments Other deposits 2023 2022 $ 744 $ 823 40 51 89 79 47 47 47 53 36 13 6 7 $ 1,009 $ 1,073 (a) The investment represents Air Canada's holding of 15,561,600 class B voting shares in the capital of Chorus. (b) Restricted cash represents funds held in trust with various financial institutions as collateral for letters of credit and other items. 24#26AIR CANADA 5. PROPERTY AND EQUIPMENT 2023 Consolidated Financial Statements and Notes December 31, 2023 December 31, 2022 Cost (Canadian dollars in millions) Accumulated depreciation Net book value Cost Accumulated depreciation Net book value Owned tangible assets Aircraft and flight equipment $ 15,589 $ 6,986 $ 8,603 $ 14,777 $ 6,152 $ 8,625 Buildings and leasehold improvements 1,122 676 446 1,091 646 445 Ground and other equipment 697 488 209 664 491 173 Purchase deposits and assets 685 685 470 470 under development Owned tangible assets $ 18,093 $ 8,150 $ 9,943 $ 17,002 $ 7,289 $ 9,713 Right-of-use assets Air Canada aircraft $ 4,143 $ 2,966 $ 1,177 $ 4,042 $ 2,750 $ 1,292 Regional aircraft 1,591 Land and buildings Right-of-use assets Property and equipment 601 $ $ 6,335 $ 24,428 $ 1,130 249 4,345 $ 1,990 $ 12,495 $ 11,933 $ 461 1,982 1,394 588 352 578 221 357 6,602 $ 23,604 $ 4,365 $ 2,237 11,654 $ 11,950 Additions to owned aircraft in 2023 include one new Airbus A220 and one new Boeing 787-9. Additions through the purchase of leased aircraft include three Airbus A321, one Boeing 777-300ER, eight Mitsubishi CRJ-200 and 10 Mitsubishi CRJ-900. Additions to owned aircraft in 2022 included five new Airbus A220, nine new Boeing 737 MAX-8 and two new Boeing 767 freighter aircraft. Included in aircraft and flight equipment are 28 aircraft and 13 spare engines (2022 - 15 aircraft and 13 spare engines) which are leased to Jazz with a cost of $485 million (2022 - $425 million) less accumulated depreciation of $252 million (2022 $215 million) for a net book value of $233 million (2022 - $210 million). Depreciation expense for 2023 for these aircraft and flight equipment amounted to $60 million (2022 - $29 million). - Certain property and equipment are pledged as collateral as further described under the applicable debt instruments in Note 8. 25#27AIR CANADA 2023 Consolidated Financial Statements and Notes (Canadian dollars in millions) January 1, 2023 Additions Reclass Disposals Depreciation December 31, 2023 Owned tangible assets Aircraft and flight equipment $ 8,625 $ 764 $ 171 $ (5) $ (952) $ 8,603 Buildings and leasehold improvements 445 1 48 (48) 446 Ground and other equipment 173 67 3 (34) 209 Purchase deposits and assets under development 470 437 (222) Owned tangible assets $ 9,713 $ 1,269 $ $ SA (5) SA 685 (1,034) $ 9,943 Right-of-use assets Air Canada aircraft Regional aircraft $ EA 1,292 $ 257 $ SA E EA $ 588 5 Land and buildings 357 23 Right-of-use assets $ 2,237 $ 285 $ $ Property and equipment $ 11,950 $ 1,554 $ $ 50 SA $ (372) $ 1,177 (132) 461 (28) 352 $ (532) $ 1,990 $ (1,566) $ 11,933 January 1, 2022 Additions Reclass Disposals (Canadian dollars in millions) Depreciation and impairment December 31, 2022 Owned tangible assets Aircraft and flight equipment $ 8,094 $ 954 $ Buildings and leasehold improvements 451 3 464 39 $ (18) $ (869) $ 8,625 (48) 445 Ground and other equipment 184 26 2 (39) 173 Purchase deposits and assets under development 549 426 (505) Owned tangible assets $ 9,278 $ 1,409 $ $ (18) $ SA 470 (956) $ 9,713 Right-of-use assets Air Canada aircraft $ 1,484 $ 181 $ $ (2) $ (371) $ 1,292 Regional aircraft 670 72 (154) 588 Land and buildings 308 75 (26) 357 Right-of-use assets $ 2,462 $ 328 $ $ (2) $ (551) $ 2,237 Property and equipment $ 11,740 $ 1,737 $ - $ (20) SA $ (1,507) $ 11,950 26#28AIR CANADA 2023 Consolidated Financial Statements and Notes Depreciation and amortization recorded in the consolidated statement of operations is detailed as follows. (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 2023 2022 $ 952 $ 869 48 48 34 39 1,034 956 372 371 132 154 28 26 532 551 1,566 1,507 11 8 126 125 Spare part and supplies inventory Intangible assets Impairment 4 Depreciation, amortization and impairment $ 1,703 $ 1,644 27 27#29AIR CANADA 2023 Consolidated Financial Statements and Notes 6. INTANGIBLE ASSETS (Canadian dollars in millions) Year ended December 31, 2022 At January 1, 2022 Additions Amortization At December 31, 2022 At December 31, 2022 Cost Accumulated amortization Year ended December 31, 2023 At January 1, 2023 Additions Amortization At December 31, 2023 At December 31, 2023 Cost Accumulated amortization International route rights and slots Contract- based Marketing- based trade names Technology- based (internally developed) Total $ 97 69 69 $ 167 $ 178 $ 638 $ 1,080 99 99 (19) 97 $ 148 $ (106) (125) 178 SA $ 631 $ 1,054 EA SA 97 $ 225 178 EA $ 1,106 $ 1,606 (77) (475) (552) 97 EA $ 148 $ 178 $ 631 $ 1,054 $ 97 $ EA SA $ 97 148 178 $ 631 $ 1,054 156 156 (19) EA $ 129 $ 178 $ (107) (126) SA 680 $ 1,084 97 $ 225 178 $ 1,259 $ 1,759 (96) (579) (675) 97 $ 129 178 $ 680 $ 1,084 In 2023, technology-based assets with cost and accumulated amortization of $3 million (2022 - $14 million) were retired. International route rights and slots are pledged as security for Senior Secured Notes and debt as described in Note 8. Impairment Assessment of Indefinite Lived Intangibles Due to the recoverable amount of the cash-generating units exceeding their respective carrying values by an aggregate amount of approximately $13 billion, the most recent calculation from the 2021 period was carried forward and used in the impairment test in the current period. Management considered reasonably possible changes in key assumptions using multiple modelling scenarios and sensitivity analysis and determined such changes would not cause the recoverable amount of each CGU to be less than the carrying value. In addition, management has updated the impairment review to take into account the most recent projections from the annual business plan and these did not impact this conclusion. The assessment of the recoverable amount of the Corporation's cash-generating units compared to their carrying values was performed based on cash flow projections prepared in 2021. This review was 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 was measured based on fair value less cost to dispose, using a discounted cash flow model. The discounted cash flow model represents a level 3 fair value measurement within the IFRS 13 fair value hierarchy. The cash flows are management's best estimates using current and anticipated market conditions covering a five-year period. 28#30AIR CANADA 2023 Consolidated Financial Statements and Notes Key assumptions used for the fair value less cost to dispose calculations in fiscal 2021 were as follows: Key Assumption 2021 Average 9.25% discount rate Long-term growth rate 2.5% Jet fuel price US$92 US$97 range per barrel 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. 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 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. 29#31AIR CANADA 2023 Consolidated Financial Statements and Notes 7. 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, 2023 and 2022. Reasonably possible changes in key assumptions would not cause the recoverable amount of goodwill to fall below the carrying value. 30#32AIR CANADA 2023 Consolidated Financial Statements and Notes 8. LONG-TERM DEBT AND LEASE LIABILITIES Aircraft financing (a) Final Maturity Weighted Average Interest Rate (%) December 31, 2023 (Canadian dollars in millions) December 31, 2022 (Canadian dollars in millions) 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 2025-2030 5.00 $ 2,877 $ 3,408 2027 7.81 296 399 2026 2030 3.78 165 182 1,240 2027 1.84 110 121 Convertible notes (b) Credit facility - CDN dollar (c) 2025 4.00 327 313 2028 1.21 1,091 1,054 Senior secured notes - CDN dollar (d) 2029 4.63 2,000 2,000 Senior secured notes - U.S. dollar (d) 2026 3.88 1,589 1,626 Senior secured credit facility - U.S. dollar (d) 2028 9.13 3,000 3,102 Long-term debt 5.50 11,455 13,445 Lease liabilities Air Canada aircraft Regional aircraft Land and buildings Lease liabilities (e) 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 2024 - 2031 5.24 1,377 1,667 2025-2035 5.70 711 917 2024 - 2078 5.62 449 454 5.44 2,537 3,038 5.48 13,992 16,483 (130) (177) (359) (713) (337) (337) (144) (187) (26) (26) $ 12,996 $ 15,043 (a) Aircraft financing (US$2,396 million, CDN $165 million and JPY ¥11,749 million) (2022 - US$2,809 million, CDN $1,412 million and JPY ¥11,748 million) is secured primarily by specific aircraft with a carrying value of $3,774 million (2022 $5,745 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$43 million of the financing is supported by a loan guarantee by the Export-Import Bank of the United States. In the first quarter of 2023, Air Canada drew on financing for the final two Airbus A220 aircraft under a committed secured facility. The financing on these two aircraft was subsequently prepaid when the Corporation prepaid loans of $1,112 million which had been used to finance the acquisition of 33 Airbus A220-300 aircraft. In addition, financing of $164 million previously used to fund the acquisition of five Boeing 787-8 aircraft was also prepaid. A loss of $10 million was recorded on these debt settlements. As a result of the prepayments, these aircraft have been added to the Corporation's unencumbered asset pool. (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 4.0% per annum and will mature on July 1, 2025, unless earlier repurchased, redeemed or converted. The Convertible Notes are 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 of cash and shares. The Convertible Notes are convertible prior to the close of business on the business day immediately preceding March 1, 2025 only under the circumstances and subject to satisfaction of the conversion conditions set out in the indenture for the Convertible Notes, and at any time on or after March 1, 2025 until the close of business on the second scheduled trading day immediately preceding July 1, 2025, the maturity date of the Convertible Notes, regardless of the foregoing conditions, in each case at the option of 31#33AIR CANADA 2023 Consolidated Financial Statements and Notes the noteholders. 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, subject to adjustment in certain events in accordance with the indenture. 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. The carrying value of the underlying notes is accreted 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 which is recorded in Other long-term liabilities was $320 million at initial recognition. At December 31, 2023, the fair value was $56 million (2022 - $120 million) and the Corporation recorded a gain of $64 million for the year ended December 31, 2023 ($219 million gain for the year 2022). Refer to Note 16. In 2022, the Corporation repurchased $635 million (US$473 million) aggregate principal amount of its outstanding 4% Convertible Notes for an aggregate cash repurchase price of $778 million (US$579 million), including accrued interest. The Corporation recorded a $14 million loss on debt settlement related to this repurchase. As at December 31, 2023, $363 million (US$274 million) aggregate principal amount of Convertible Notes remains outstanding (US$274 million at December 31, 2022). (c) Government of Canada unsecured credit facility to support customer refunds of non-refundable tickets. The facility has a seven-year term maturing April 2028 with a stated annual interest rate of 1.211%, with the balance due on maturity. The carrying value of the debt was recognized at inception using an effective interest rate of 4.90%. The difference accretes the carrying value of the underlying debt upwards to its face value using the effective interest rate method. The debt and equity instruments issued under the financing agreement with the Government of Canada were measured at fair value at inception. The difference between fair value and proceeds received was recognized for accounting purposes as a government grant. The deferred grant income recorded at the inception of the agreement and taking into account the amounts drawn under the ticket refund facility up to December 31, 2021, was $138 million. This deferred grant income reflects the aggregate net fair value adjustments of the ticket refund facility, the shares issued and the vested warrants (which were purchased and cancelled with settlement completed in January 2022), and is being amortized into Other revenues on a straight line basis over three years. The amortization period was based on the Corporation's approximation of the expected timing of the costs for which the grant is intended to compensate. During 2023, grant income of $50 million (2022 - $50 million) was recognized in Other revenues. (d) In August 2021, Air Canada completed a private offering of $2.0 billion of 4.625% senior secured notes due 2029 (the "Canadian Dollar Notes") and US$1.2 billion of 3.875% senior secured notes due 2026 (the "US Dollar Notes", and together with the Canadian Dollar Notes, the "Senior Secured Notes"). Air Canada also closed a US$2.9 billion new senior secured credit facility, comprised of a US$2.3 billion new term loan B maturing in 2028 (the "Term Loan"), together with a new undrawn US$600 million revolving credit facility maturing in 2025 (the "Revolving Facility" and, together with the Term Loan, the "Senior Secured Credit Facilities"). The Senior Secured Notes and Air Canada's obligations under the Senior Secured Credit Facilities are senior secured obligations of the Corporation, secured on a first-lien basis, subject to certain permitted liens, by certain collateral comprised of substantially all of the Corporation's international routes, airport slots and gate leaseholds. The Corporation also has a $200 million Canadian dollar revolving credit facility maturing in December 2026. Both of the revolving credit facilities remained undrawn as of December 31, 2023. (e) Lease liabilities, related to facilities and aircraft, total $2,537 million ($406 million, US$1,593 million and GBP £13 million) (2022 - $3,038 million ($415 million, US$1,923 million and GBP £10 million)). The carrying value of aircraft and facilities under lease liabilities amounted to $1,637 million and $352 million respectively (2022 - $1,882 million and $355 million). Other As at Under Interbank Offered Rate ("IBOR") reform, IBORS are replaced with alternative benchmark rates. December 31, 2023, debt and aircraft leases referencing $3,296 million USD LIBOR were transitioned to term SOFR (Secured Overnight Financing Rate). There was no significant impact to the financial statements as the change in contractual cash flows was on an economically equivalent basis, and therefore the change is accounted for by updating the effective interest rate with no gain or loss recognized. As at December 31, 2023, the Corporation had transitioned all exposure to USD LIBOR settings to alternative reference rates. Cash interest paid on Long-term debt and lease liabilities in 2023 by the Corporation was $858 million (2022 - $761 million). 32#34AIR CANADA 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 2023 Consolidated Financial Statements and Notes 2023 2022 $ 791 $ 748 85 85 45 56 23 20 $ 944 $ 909 The consolidated statement of operations includes the following 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) 2023 2022 $ 25 $ 17 43 39 $ 68 $ 56 Total cash outflows for payments on lease liabilities was $679 million for the year ended December 31, 2023 (2022 - $673 million), of which $526 million was for principal repayments (2022 - $512 million). 33 33#35AIR CANADA 2023 Consolidated Financial Statements and Notes Maturity Analysis Principal and interest repayment requirements as at December 31, 2023 on Long-term debt and lease liabilities are as follows. U.S. dollar amounts are converted using the December 31, 2023 closing rate of CDN$1.3243. Principal 2024 2025 2026 2027 2028 Total Thereafter (Canadian dollars in millions) Long-term debt obligations (1) $ 359 $ 1,092 $ 2,337 $ 1,032 $ 4,222 $ 2,631 $ 11,673 Air Canada aircraft 337 320 260 211 144 105 1,377 Regional aircraft 144 138 50 40 39 300 711 Land and buildings 26 27 27 28 27 314 449 Lease liabilities 507 485 337 279 210 719 2,537 Total long-term debt and lease liabilities $ 866 $ 1,577 $ 2,674 $ 1,311 $ 4,432 $ 3,350 $ 14,210 Interest 2024 2025 2026 2027 2028 Thereafter Total (Canadian dollars in millions) Long-term debt obligations (1) $ 630 $ 604 $ 546 $ 451 $ 323 119 $ 2,673 Air Canada aircraft 71 54 39 26 16 7 213 Regional aircraft 35 26 20 18 16 55 170 Land and buildings 24 Lease liabilities 130 102 22 22 21 20 18 220 325 80 64 50 282 708 Total long-term debt and lease liabilities $ 760 $ 706 $ 626 $ 515 $ 373 $ 401 $ 3,381 (1) Assumes the principal balance of the convertible notes, $363 million (US$274 million), remains unconverted and includes estimated interest payable until maturity in 2025. The full principal balance of $1,273 million for the unsecured credit facility is included and the carrying value is described in Note 8(c). Principal repayments in the table above exclude discounts and transaction costs of $130 million which are offset against Long-term debt and lease liabilities in the consolidated statement of financial position. 34#36AIR CANADA 2023 Consolidated Financial Statements and Notes 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. $ (Canadian dollars in Jan. 1, 2023 Borrowings millions) Long-term debt 13,445 $ 84 $ (1,926) $ Air Canada 1,667 (343) aircraft Regional 917 (154) aircraft Land and 454 (29) buildings Lease 3,038 liabilities (526) (51) Cash Flows Non-Cash Changes Repayments Financing fees Foreign exchange adjustments Amortization of financing fees and other adjustments New lease liabilities (new and modified contracts) Dec. 31, 2023 $ (208) $ 60 $ $ 11,455 (34) (17) 87 1,377 (35) 711 24 449 76 2,537 Unamortized debt issuance costs and (177) (1) 48 (130) other adjustments Total liabilities from 16,306 $ 84 $ (2,452) $ (1) (259) $ 108 $ 76 $ 13,862 financing activities (Canadian dollars in Jan. 1, 2022 Borrowings millions) Long-term $ 13,568 $ 202 $ (1,302) $ Cash Flows Non-Cash Changes Repayments Financing fees Foreign exchange adjustments Amortization of financing fees and other New lease liabilities (new and modified Dec. 31, 2022 adjustments contracts) $ 645 $ 332 $ $ 13,445 debt Air Canada 1,792 (313) aircraft Regional 981 (172) aircraft Land and 406 (27) buildings Lease 3,179 (512) 122 67 1 190 I 66 1,667 41 917 74 454 181 3,038 liabilities Unamortized debt issuance costs and (224) (6) 53 (177) other adjustments Total liabilities from $ 16,523 $ 202 $ (1,814) $ (6) $ 835 $ 385 $ 181 $ 16,306 financing activities 35#37AIR CANADA 2023 Consolidated Financial Statements and Notes 9. PENSIONS AND OTHER BENEFIT LIABILITIES The Corporation maintains several defined benefit and defined contribution pension plans, as well as other post- retirement and post-employment benefit plans. 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 defined benefit 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, Compensation and Pension 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 As at January 1, 2023, the aggregate solvency surplus in the Domestic Registered Plans was $4.6 billion. The next required valuation to be made as at January 1, 2024 will be completed in the first half of 2024. With the Corporation's Domestic Registered Plans in a solvency surplus position as at January 1, 2023, past service contributions were not required in 2023. 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 2023 amounted to $61 million ($86 million employer contribution net of $25 million of surplus used to fund employer contribution in defined contribution components of the same plans). Pension funding obligations for 2024 are expected to be $101 million. Benefit Obligations 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: Pension Benefits Other Employee Future Benefits Total (Canadian dollars in millions) 2023 2022 2023 2022 2023 2022 Non-current assets Pension assets $ 2,588 $ 2,444 $ $ 2,588 $ 2,444 Current liabilities Accounts payable and accrued liabilities 65 62 65 62 29 Non-current liabilities Pension and other benefit liabilities 842 825 1,033 945 1,875 1,770 Net benefit obligations (assets) $ (1,746) $ (1,619) $ 1,098 $ 1,007 $ (648) $ (612) The current portion of the net benefit obligation represents an estimate of other employee future benefits claims to be paid during 2024. 36#38AIR CANADA 2023 Consolidated Financial Statements and Notes The following table presents financial information related to the changes in the pension and other post-employment benefits plans: Pension Benefits Other Employee Future Benefits 2023 2022 2023 2022 (Canadian dollars in millions) Change in benefit obligations Benefit obligations at beginning of year $ 16,927 $ 22,051 $ 1,007 $ 1,463 Current service cost 162 242 32 41 Past service cost Interest cost 12 879 750 53 45 Employees' contributions 73 71 Benefits paid (1,038) (1,045) 6. Remeasurements: Experience loss (gain) Loss (gain) from change in demographic assumptions Loss (gain) from change in financial assumptions Foreign exchange loss (gain) Total benefit obligations (46) (50) 5 10 10 (19) (136) (5) 1,297 (5,149) 76 (368) 4 (10) (3) 12 18,309 16,927 1,098 1,007 Change in plan assets Fair value of plan assets at beginning of year 21,378 26,666 Return on plan assets, excluding amounts included in Net financing expense 373 (5,284) Interest income 1,105 923 Employer contributions 61 70 46 50 Employees' contributions 73 71 Benefits paid (1,038) (1,045) (46) (50) Administrative expenses paid from plan assets (8) (9) Foreign exchange gain (loss) 5 (14) Total plan assets 21,949 21,378 (Surplus) deficit at end of year (3,640) (4,451) 1,098 1,007 Asset ceiling / additional minimum funding liability 1,894 2,832 Net benefit obligations (assets) $ (1,746) $ (1,619) $ 1,098 $ 1,007 The actual return on plan assets was a gain of $1,478 million (2022 - $4,361 million loss). Plan assets include an annuity contract for the UK plan defined benefit pension obligation. 37#39AIR CANADA 2023 Consolidated Financial Statements and Notes 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 2023 2022 $ 7 $ 2 53 57 782 766 $ 842 $ 825 The weighted average duration of the defined benefit obligation is 12.7 years (2022 - 12.5 years). 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 SA $ Pension Benefits Other Employee Future Benefits 2023 2022 2023 2022 162 SA $ 1 8 242 $ 32 12 (2) 9 SA 41 Actuarial losses (gains), including foreign exchange Total cost recognized in Wages, salaries and benefits $ 170 $ 263 $ 24 (9) (32) 21 $ 6 Net interest relating to employee benefits in Non-operating-other $ (78) $ (70) $ 53 $ 46 Total cost recognized in statement of operations 92 22 $ 193 $ 74 $ 55 Consolidated Other Comprehensive (Income) Loss Remeasurements: Experience loss (gain), including foreign exchange 4 14 (14) 121 (96) Loss (gain) from change in demographic assumptions Loss (gain) from change in financial assumptions 1,297 (5,149) 75 (363) Return on plan assets (395) 5,138 Change in asset ceiling (1,085) 492 Total cost (income) recognized in OCI (179) $ 490 $ 61 $ (459) 38#40AIR CANADA 2023 Consolidated Financial Statements and Notes 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) 2023 2022 Net defined pension and other future employee benefits expense recorded in the consolidated statement of operations Wages, salaries and benefits $ 191 $ 272 Net interest relating to employee benefit liabilities (25) (24) 166 248 Employee benefit funding by Air Canada Pension benefits Other employee benefits Employee benefit funding less than expense Composition of Defined Benefit Pension Plan Assets Domestic Registered Plans $ 61 $ 46 $ 107 $ 120 782 70 50 69 $ 59 $ 128 The composition of the Domestic Registered Plan assets and the target allocation are the following: Fixed income investments Canadian equities Foreign equities Alternative investments 2023 2022 Target Allocation 62% 64% 60% 2% 2% 2% 3% 3% 3% 33% 31% 35% 100% 100% 100% For the Domestic Registered Plan assets, approximately 67% of assets as of December 31, 2023 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 (2022 - 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 $330 million at December 31, 2023 (2022 - $342 million), although after giving effect to the asset ceiling, the recognized accounting value of the trust asset is nil. In November 2021, Air Canada announced that its Canadian unions and the Air Canada Pionairs agreed in principle to permit certain other uses of the proceeds of the shares discussed above. If all conditions are met, shares in the trust will be gradually sold over a period of up to 15 years with the net proceeds from the sales used to make lump sum payments to Canadian pensioners and to fund voluntary separation packages for senior unionized employees and non- executive employees. There are several conditions to the completion of the agreement and effecting such sales and payments. These include the conclusion of definitive documentation, and the receipt of all required regulatory and other approvals which remain outstanding. While the satisfaction of the conditions is being pursued, there can be no assurance that these or any other conditions will be satisfied. The financial statements do not reflect any accounting consequences related to this, as these would only be determined upon the conditions and required approvals being met. 39#41AIR CANADA 2023 Consolidated Financial Statements and Notes For the Domestic Registered Defined Benefit Plans, the investments conform to the Statement of Investment Policies and Procedures 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 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 Canada), closely matches the characteristics of the pension liabilities. Recognizing the importance of surplus risk management, Air Canada manages the Domestic Registered Defined Benefit 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: • . The broad equity portfolio (Canadian and foreign equities) is required to be diversified among regions, industries and economic sectors. Limitations are placed on the 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. The Alternative investments portfolio is required to be diversified by asset class, strategy, sector and geography. The fixed income portfolio is 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, 2023, approximately 85% of Air Canada's Domestic Registered Defined Benefit Plans' 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. The trusts for the supplemental plans are invested 50% in a mix of indexed equity investments and alternative 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. Due to unrealized gains and losses on invested assets, the market value of assets could deviate from this allocation from time to time. 40 40#42AIR CANADA 2023 Consolidated Financial Statements and Notes Risks Through its defined benefit pension plans, the Corporation is exposed to a number of risks, the most significant of which are detailed below: Asset risk Asset risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market price. Asset risk comprises currency risk, credit risk, and other price risk. Currency risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates. This risk is mitigated through implementation of hedging strategies. Credit risk is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation. This risk is mitigated by receiving collateral from counterparties based on collateralization agreements and by monitoring the issuers' credit risk. Other price risk is the risk the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices (other than those arising from currency risk), whether those changes are caused by factors specific to the individual financial instrument or its issuer, or factors affecting all similar financial instruments traded in the market. This risk is mitigated through proper diversification of plan assets. Interest rate risk Interest rate risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate because of changes in market interest rates. A decrease in corporate and/or government bond yields will increase plan liabilities, which will be partially offset by an increase in the value of the plans' bond holdings. As at December 31, 2023, approximately 85% of Air Canada's Domestic Registered Defined Benefit Plans' 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 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 Mortality tables and improvement scales issued by the Canadian Institute of Actuaries (revised in 2014) were taken into account in selecting management's best estimate mortality assumption used to calculate the accrued benefit obligation as at December 31, 2023 and 2022. 41#43AIR CANADA 2023 Consolidated Financial Statements and Notes The weighted average assumptions used to determine the Corporation's accrued benefit obligations and cost are as follows: Pension Benefits Other Employee Future Benefits 2023 2022 2023 2022 Discount rate used to determine: Net interest on the net defined benefit obligation for the year ended December 31 5.28% 3.20% 5,28% 3.20% Service cost for the year ended December 31 5.28% 3.37% 5.28% 3.37% Accrued benefit obligation as at December 31 4.64% 5.28% 4.64% 5.28% 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 2.75% 2.75% 2.50% 2.75% 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 2023 pension expense, net interest relating to pension benefit liabilities and pension obligation, based on different actuarial assumptions with respect to discount rate is set out below. The effects on each pension plan of a change in an assumption are weighted proportionately to the total plan obligation to determine the total impact for each assumption presented. (Canadian dollars in millions) 0.25 Percentage Point Decrease Increase Discount rate on obligation assumption Pension expense $ 12 $ (11) Net interest relating to pension benefit liabilities (1) $ 11 $ (11) Increase (decrease) in pension obligation $ 591 $ (573) 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, 2023, approximately 85% 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 $431 million. Assumed health care cost trend rates impact the amounts reported for the health care plans. A 4.50% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2023 and thereafter (2022 - 4.75% and decrease gradually to 4.5% by 2023). A one percentage point increase in assumed health care trend rates would have increased the total of current service and interest costs by $5 million and the obligation by $62 million. A one percentage point decrease in assumed health care trend rates would have decreased the total of current service and interest costs by $4 million and the obligation by $64 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 $36 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 $34 million. 42#44AIR CANADA 2023 Consolidated Financial Statements and Notes 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, $25 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 2023 (2022 - $19 million). The Corporation's expense for these pension plans amounted to $85 million for the year ended December 31, 2023 (2022 $61 million). Net of the surplus in the defined benefit components which can be used to fund the employer contribution to a defined contribution component within the same pension plan, expected total employer contributions for 2024 are $72 million. 43#45AIR CANADA 2023 Consolidated Financial Statements and Notes 10. PROVISIONS FOR OTHER LIABILITIES The following table provides a continuity schedule of all recorded provisions. Current provisions are recorded in Accounts payable and accrued liabilities. (Canadian dollars in millions) At December 31, 2022 Current Maintenance (a) Asset retirement (b) Litigation Total provisions $ 36 $ $ 41 $ 77 Non-current 1,352 36 1,388 Provisions arising during the year Amounts utilized SA SA $ 1,388 $ $ 162 $ SA SA 36 LA SA $ 41 $ 1,465 $ 4 $ 166 (161) (3) (164) Changes in estimated costs 3 (4) (9) Accretion expense 55 1 56 Foreign exchange loss (gain) (33) (33) At December 31, 2023 $ 1,414 $ 29 29 $ 38 $ 1,481 Current $ 187 EA $ SA $ 38 38 $ 225 Non-current 1,227 29 1,256 $ 1,414 $ 29 $ 38 $ 1,481 (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 2024 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 $72 million at December 31, 2023 and an increase to maintenance expense in 2024 of approximately $9 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 $28 million at December 31, 2023. An equivalent but opposite movement in the discount rate would result in a similar impact in the opposite direction. (b) Under the terms of certain land and facilities leases, the Corporation has an obligation to restore the land to vacant condition at the end of the lease and to rectify any environmental damage for which it is responsible. The related leases expire over terms ranging from 2024 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. 44#46AIR CANADA 2023 Consolidated Financial Statements and Notes 11. 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) 2023 2022 $ 17 $ (47) 47 (129) $ 64 $ (176) 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) 2023 2022 Income (loss) before income taxes $ 2,212 $ (1,524) Statutory income tax rate based on combined federal and provincial rates 26.46% 26.46% Income tax (expense) recovery based on statutory tax rates (585) 403 Effects of: Non-taxable (non-deductible) portion of capital gains (losses) Recognition of (unrecognized) deferred income tax assets (Non-deductible) non-taxable items 26 (80) 638 (528) (23) 29 8 $ 64 $ (176) Other Income tax recovery (expense) The applicable statutory tax rate is 26.46% (2022 - 26.46%). 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 in the consolidated statement of operations differs from the amount that would have resulted from applying the statutory income tax rate to the income (loss) before income taxes in the consolidated statement of operations primarily due to recognizing only certain of the deferred income tax assets. 45 45#47AIR CANADA 2023 Consolidated Financial Statements and Notes Income tax recorded in the consolidated statement of comprehensive income is presented below. (Canadian dollars in millions) 2023 Remeasurements on employee benefit liabilities - current income tax (expense) recovery - deferred income tax (expense) recovery Income tax (expense) recovery 2022 $ (3) (45) $ 8 138 $ (48) $ 146 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) 2023 2022 Other comprehensive income (loss) before income taxes $ Statutory income tax rate based on combined federal and provincial rates 107 $ 26.46% (32) 26.46% Income tax (expense) recovery based on statutory tax rates (28) 9 Non-deductible portion of capital loss (1) (Unrecognized) recognition of deferred income tax assets (19) 124 Other Income tax (expense) recovery 13 $ (48) $ 146 Deferred Income Tax Deferred income tax assets are recognized only to the extent that it is probable that future taxable income will be available to realize them. In making this assessment, consideration is given to available positive and negative evidence and relevant assumptions, including, historical financial results, and expectations relating to future taxable income, the overall business environment, and industry-wide trends. As a result of the COVID-19 pandemic, there is considerable negative evidence relating to losses incurred in the prior years. Such negative evidence currently outweighs the positive evidence and, accordingly, net deferred tax assets are not being recognized. The future tax deductions underlying the unrecognized deferred income tax assets of $1,504 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 $47 million (2022 - deferred income tax expense of $129 million) was recorded for the year, which is partially offsetting the deferred income tax expense of $45 million (2022 - deferred income tax recovery of $138 million) recorded in Other comprehensive income (loss). Deferred tax assets and liabilities of $50 million are recorded net as a non-current deferred income tax asset and deferred tax liabilities of $73 million are recorded as a non-current 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 (2022 - $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 non-current deferred income tax liability. 46 46#48AIR CANADA 2023 Consolidated Financial Statements and Notes The significant components of deferred income tax assets and liabilities were as follows: (Canadian dollars in millions) Deferred income tax assets Non-capital losses Accounting provisions not currently deductible for tax Lease liabilities 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 Balance sheet presentation Deferred income tax assets Deferred income tax liabilities Net recognized deferred income tax liabilities SA $ 2023 2022 1,927 $ 1,693 7 7 783 934 2,717 2,634 (460) (423) (2,135) (2,103) (73) (73) (72) (60) (2,740) (2,659) $ (23) $ (25) 50 48 (73) (73) $ (23) $ (25) The following table presents the variation of the components of deferred income tax balances: 2023 income January 1, 2023 statement 2023 OCI movement December 31, 2023 (Canadian dollars in millions) movement Non-capital losses $ 1,693 234 1,927 Accounting provisions not currently deductible for tax 7 7 Lease liabilities 934 (151) 783 Post-employment obligations - pension (423) 8 (45) (460) Property, equipment, technology-based and other intangible assets (2,103) (32) (2,135) Indefinite-lived intangible assets (73) (73) Other deferred tax liabilities (60) (12) (72) Total recognized deferred income tax assets (liabilities) (25) 47 (45) (23) 47#49AIR CANADA 2023 Consolidated Financial Statements and Notes January 1, 2022 (Canadian dollars in millions) 2022 income statement movement 2022 OCI movement December 31, 2022 Non-capital losses 1,502 $ 191 $ $ 1,693 Accounting provisions not currently deductible for tax 6 1 Lease liabilities 978 (44) 7 934 Maintenance provisions 215 (215) Post-employment obligations - pension (593) 32 138 (423) Property, equipment, technology-based and other intangible assets (2,030) (73) (2,103) Indefinite-lived intangible assets (73) (73) Other deferred tax liabilities (39) (21) (60) Total recognized deferred income tax assets (liabilities) (34) $ (129) $ 138 $ (25) At December 31, 2023, 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. The following are the temporary differences and tax loss carryforwards for which no deferred income tax assets could be recognized: (Canadian dollars in millions) 2023 2022 Unrecognized non-capital losses carryforwards $ 1,507 $ 3,820 Post-employment obligations - other employee future benefits 1,104 1,009 Accounting provisions not currently deductible for tax 427 307 Maintenance provision 1,414 1,388 Deferred revenue 754 933 Unrecognized net capital losses carryforwards 131 118 Unrealized foreign exchange losses 202 309 Total unrecognized net temporary differences $ 5,539 $ 7,884 Deferred income tax rate based on combined federal and provincial rates 26.45% 26.45% $ 1,465 $ 2,085 Unrecognized recoverable taxes 39 38 Total unrecognized net deferred income tax assets $ 1,504 $ 2,123 48#50AIR CANADA 2023 Consolidated Financial Statements and Notes The following are the Federal non-capital tax losses expiry dates: (Canadian dollars in millions) 2033 2034 2036 2037 2038 2040 2041 2042 Non-capital losses carryforwards Tax Losses $ 1 Cash income taxes paid in 2023 by the Corporation were $45 million (2022 - $67 million). 3 33 2 2 2,791 4,260 1,630 $ 8,692 49 49#51AIR CANADA 2023 Consolidated Financial Statements and Notes 12. SHARE CAPITAL At January 1, 2022 Shares issued on the exercise of stock options Shares issued on settlement of restricted share units At December 31, 2022 Shares issued on the exercise of stock options At December 31, 2023 Number of shares Value (Canadian dollars in millions) 357,841,857 $ 2,735 350,535 6 169,866 2 358,362,258 2,743 107,028 1 358,469,286 2,744 The issued and outstanding shares of Air Canada, along with the potential shares, were as follows: Issued and outstanding 2023 2022 Class A variable voting shares Class B voting shares Total issued and outstanding 82,887,375 275,581,911 358,469,286 72,431,001 285,931,257 358,362,258 Potential shares Convertible notes Stock options Note 8 Note 13 17,856,599 17,856,599 Total outstanding and potentially issuable shares 6,642,516 382,968,401 5,304,745 381,523,602 Shares As at December 31, 2023, 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 as explained below. 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 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: 50#52AIR CANADA 2023 Consolidated Financial Statements and Notes . 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"), 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. The Rights Plan was renewed at Air Canada's 2023 annual meeting of shareholders for an additional period of three years from 2023 to 2026. Convertible Notes As described in Note 8, in 2022, the Corporation repurchased and cancelled $635 million (US$473 million) aggregate principal amount of its convertible notes. The conversion rate of the convertible notes is 65.1337 shares per US$1,000 principal amount of convertible notes, thereby reducing the potentially issuable shares. 51#53AIR CANADA 2023 Consolidated Financial Statements and Notes 13. SHARE-BASED COMPENSATION Air Canada Long-Term Incentive Plan Certain of the Corporation's employees participate in the Air Canada Long-term Incentive Plan (the "Long-term Incentive Plan"). The Long-term Incentive Plan provides for the grant of stock options, performance share units and restricted share units to senior management and officers of Air Canada. With respect to the stock options, 19,381,792 shares were initially authorized for issuance under the Long-term Incentive Plan of which 3,929,646 remain available for future issuance. The outstanding performance share units and restricted share units will generally not result in the issuance of new shares as these share units will be redeemed for shares purchased on the secondary market (and not issued from treasury) and/or equivalent cash, at the discretion of the Corporation. Stock Options The options to purchase shares granted under the Long-term Incentive Plan have a maximum term of up to ten years and an exercise price based on the fair market value of the shares at the time of the grant of the options. Fifty percent of options are time-based and vest over four years. The remaining options vest based upon performance conditions, which are based on operating margin (operating income over operating revenues) targets established by the Air Canada Board over the same time period. Each option entitles the employee to purchase one share at the stated exercise price. The number of Air Canada stock options granted to employees, the related compensation expense recorded and the assumptions used to determine stock-based compensation expense, using the Black-Scholes option valuation model are as follows: Compensation expense ($ millions) $ SA Number of stock options granted to Air Canada employees Weighted average fair value per option granted ($) 69 69 Aggregated fair value of options granted ($ millions) Weighted average assumptions: Share price Risk-free interest rate Expected volatility Dividend yield Expected option life (years) 2023 2022 15 $ 16 1,644,782 10.01 $ 16 $ 1,242,544 11.39 14 $ 19.88 $ 24.25 2.81%-4.59% 1.43%-3.39% 58.60% 0% 55.64% 0% 5.25 5.25 Expected volatility was determined at the time of grant using the share price on a historical basis. It reflects the assumption that the historical volatility is indicative of future trends, which may not necessarily be the actual outcome. 52#54AIR CANADA 2023 Consolidated Financial Statements and Notes A summary of the Long-term Incentive Plan option activity is as follows: Beginning of year Granted Exercised Expired Forfeited Outstanding options, end of year Options exercisable, end of year 2023 2022 Options Weighted Average Exercise Options Weighted Average Exercise Price/Share Price/Share 5,304,745 $ 26.39 4,420,051 $ 25.72 1,644,782 19.88 1,242,544 24.25 (107,028) 10.64 (350,535) 10.47 (306) 12.64 (199,983) 23.44 (7,009) 23.80 6,642,516 $ 25.10 5,304,745 $ 26.39 3,037,801 $ 26.90 2,405,704 $ 25.12 The weighted average share price on the date of exercise for options exercised in 2023 was $20.73 (2022 - $20.30). 2023 Exercisable Options 2023 Outstanding Options Weighted Range of Exercise Prices Expiry Dates Number of Options Outstanding Average Remaining Life (Years) Weighted Average Exercise Price/Share Number of Exercisable Weighted Average Exercise Options Price/Share $9.41 2026 68,498 3 9.41 68,498 9.41 $12.83 $26.40 2027 434,869 $22.53 $27.75 2028 824,758 $33.11 $43.22 2029 828,814 $15.35 $32.42 2030 1,141,435 $23.80 $26.93 2031 541,757 $17.37 $24.61 2032 1,164,354 4567 % 0 14.86 434,869 14.86 26.52 824,758 26.52 33.27 823,249 33.20 31.16 563,295 30.84 8 25.37 167,411 25.39 9 24.29 145,721 24.29 $17.61-$24.19 2033 1,638,031 6,642,516 10 19.88 10,000 24.19 $ 25.10 3,037,801 $ 26.90 2022 Outstanding Options 2022 Exercisable Options Weighted Number of Range of Exercise Prices Expiry Dates Average Options Outstanding Remaining Weighted Average Exercise Weighted Number of Average Exercisable Exercise Life (Years) Price/Share Options Price/Share $9.23 - $9.61 2023 86,327 1 9.34 86,327 9.34 $9.41 2026 68,498 4 9.41 68,498 9.41 $12.83 $26.40 2027 451,405 5 14.82 451,405 14.82 $22.53 $27.75 2028 851,506 6 26.53 846,843 26.52 $33.11 $43.22 2029 837,189 7 33.28 401,914 33.26 $15.35 $32.42 2030 1,183,930 8 30.80 461,819 30.78 $23.80 $26.93 2031 583,346 9 25.35 88,898 25.37 $17.37 $24.61 2032 1,242,544 10 24.25 5,304,745 $ 26.39 2,405,704 $ 25.12 Performance and Restricted Share Units The Long-term Incentive Plan also includes performance share units ("PSUs") and restricted share units ("RSUS"). 75% of PSUs granted vest based on the Corporation achieving its cumulative annual earnings target over a three-year period, while 25% of PSUs vest based on relative total shareholder returns over the same three-year period. RSUs 53#55AIR CANADA 2023 Consolidated Financial Statements and Notes vest after three years from their date of grant. The PSUs and RSUs granted are generally redeemed for Air Canada shares purchased on the secondary market and/or equivalent cash at the discretion of the Board of Directors. The compensation expense related to PSUs and RSUs in 2023 was $23 million (2022 - $16 million). 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 Employee Share Purchase Plan 2023 2022 2,891,925 2,197,983 1,840,914 1,316,113 (574,614) (595,284) (124,134) (26,887) 4,034,091 2,891,925 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. Air Canada will match 33.33% of the contributions made by employees. During 2023, the Corporation recorded compensation expense of $21 million (2022 - $9 million, with the plan effective June 1, 2022) related to the Employee Share Purchase Plan. 54#562023 Consolidated Financial Statements and Notes AIR CANADA 14. EARNINGS (LOSS) PER SHARE The following table outlines the calculation of basic and diluted loss per share: (in millions, except per share amounts) Numerator: 2023 2022 Net income (loss) Effect of assumed conversion of convertible notes $ 2,276 (33) (1,700) (46) Remove anti-dilutive impact 46 Adjusted numerator for diluted earnings (loss) per share $ 2,243 $ (1,700) Denominator: Weighted-average shares Effect of potential dilutive securities: Stock options Convertible notes Remove anti-dilutive impact Adjusted denominator for diluted earnings (loss) per share Basic earnings (loss) per share Diluted earnings (loss) per share 358 358 18 44 (44) 376 358 $ 6.35 $ (4.75) 5.96 (4.75) The calculation of loss 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 2023 calculation of diluted loss per share were 4,975,000 (2022 – 4,341,000) outstanding options where the options' exercise prices were greater than the average market price of the shares for the year. Outstanding options that had exercise prices lower than the average market price of the shares for the year were included in the calculation of diluted loss per share; using the treasury stock method, this resulted in less than one million in potential dilutive securities. 55#57AIR CANADA 2023 Consolidated Financial Statements and Notes 15. 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. U.S. dollar amounts are converted using the December 31, 2023 closing rate of CDN$1.3243. Minimum future commitments under these contractual arrangements are shown below. Capital commitments include the acquisition of 18 Boeing 787-10 aircraft which Air Canada announced in 2023. Deliveries are scheduled to begin in the fourth quarter of 2025 with the last aircraft scheduled for delivery in the first quarter of 2027. The purchase agreement includes options for 12 additional Boeing 787-10 aircraft. This purchase agreement substitutes for a previously announced agreement to purchase two Boeing 777 freighter aircraft and, as a result, Air Canada will no longer take delivery of the two freighters. Capital commitments also include the purchase of two Boeing 787-9 aircraft scheduled to be delivered in 2024 and deliveries for the remaining 27 firm orders of Airbus A220 aircraft planned between 2024 and 2027. Also included below are capital commitments relating to the acquisition of 30 extra-long range (XLR) versions of the Airbus A321neo aircraft (Airbus A321XLR). Deliveries are scheduled to begin in 2025 with the final aircraft scheduled to arrive in 2029. Of the 30 total aircraft, 15 aircraft will be leased and 15 are being acquired under a purchase agreement with Airbus S.A.S that includes purchase rights to acquire up to 10 additional aircraft between 2027 and 2031. The amounts related to the periodic lease payments on the 15 leases are included for the periods noted. Lease payments related to five Boeing 737 MAX 8 aircraft expected to be delivered in 2025 are also included. (Canadian dollars in millions) Capital commitments 2024 2025 2026 2027 2028 $ 2,000 $ 2,204 $ 4,003 $ 1,397 $ 790 $ Thereafter 2,067 Total 12,461 In 2022, the Corporation announced it had entered into a purchase agreement for 30 ES-30 electric-hybrid aircraft under development by Heart Aerospace. Due to the developing design and specifications of the aircraft, the final cost is not yet determinable and not included in the table above, however the agreement provides for a price cap. The regional aircraft are expected to enter service in 2028. The Corporation leases and subleases certain aircraft and spare engines to its regional carrier, Jazz, which are charged back to Air Canada through its capacity purchase agreement with Jazz. These are reported net on the consolidated statement of operations. The leases and subleases relate to 15 Mitsubishi CRJ-200 aircraft, 20 Mitsubishi CRJ-900 aircraft, 25 Embraer 175 aircraft, and 13 spare engines. The lease and sublease revenue and expense related to these aircraft and engines amount to $119 million in 2023 (2022 - $150 million). Other Contractual Commitments The future minimum non-cancellable commitment for the next 12 months under commercial agreements with regional carriers is approximately $1,370 million which includes pass-through costs to sustain the minimum flying commitment. 56#58AIR CANADA 2023 Consolidated Financial Statements and Notes 16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT Summary of Financial Instruments (Canadian dollars in millions) Financial Assets Cash and cash equivalents Short-term investments Accounts receivable Investments, deposits and other assets Carrying Amounts December 31, 2023 Financial instruments classification Fair value through profit and loss Assets at Fair value through OCI amortized cost 2,817 $ $ 5,734 1,121 December 31, 2022 Liabilities at amortized Total cost $ $ 2,817 $ 2,693 5,734 5,295 1,121 1,037 Long-term investments 744 744 823 Equity investment in Chorus 40 40 Restricted cash 89 89 Aircraft related and other deposits 53 53 Other investments 11 25 36 ៨៦ ៥១ ដំ Derivative instruments Share forward contracts I Foreign exchange derivatives 14 $ 9,409 65 1,174 6 14 52 10,648 $ 10,103 Financial Liabilities Accounts payable Foreign exchange derivatives $ FA 179 Embedded derivative on convertible notes 56 Current portion of long-term debt and lease liabilities Long-term debt and lease liabilities $ 235 $ $ $ 3,034 $ 3,034 $ 2,314 179 192 56 120 866 866 1,263 12,996 12,996 15,043 $ $ 16,896 $ 17,131 $ 18,932 Summary of Gain on Financial Instruments Recorded at Fair Value (Canadian dollars in millions) Embedded derivative on convertible notes Short-term and long-term investments Other Gain on financial instruments recorded at fair value 2023 2022 Note 8 $ 64 $ 219 45 (86) 6 $ 115 $ 133 57 45#59AIR CANADA 2023 Consolidated Financial Statements and Notes 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 values of these derivatives are 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 twelve 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, 2023, total liquidity was $10,290 million comprised of cash and cash equivalents, short-term and long- term investments of $9,295 million, and $995 million available under undrawn credit facilities. Cash and cash equivalents include $393 million related to funds held in trust by Air Canada Vacations in accordance with regulatory requirements governing advance sales for tour operators ($386 million at December 31, 2022). Cash and cash equivalents include $364 million pertaining to investments with original maturities of three months or less at December 31, 2023 ($464 million as at December 31, 2022). In 2023, net cashflows used in short-term and long-term investing activities were $245 million and included gross purchases of $1,963 million long-term investments and gross disposals of $1,261 million long-term investments. In 2022, net cashflows used in short-term and long-term investing activities were $959 million and included gross purchases of $1,516 million long-term investments and gross disposals of $764 million long-term investments. A maturity analysis of the Corporation's principal and interest repayment requirements on long-term debt and lease liabilities is set out in Note 8, and fixed operating commitments and capital commitments are set out in Note 15. Market Risks Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market prices. Market risk can be further divided into the following sub-classifications related to the Corporation: fuel price risk, foreign exchange risk, interest rate risk, and share-based compensation risk. Fuel Price Risk Fuel price risk is the risk that future cash flows will fluctuate because of changes in jet fuel prices. 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. During 2023, the Corporation purchased jet fuel call options covering a portion of 2023 fuel exposure. The cash premium related to these contracts was $44 million. Premium costs and any hedging gains and losses are reclassified from other comprehensive income to Aircraft fuel expense on settlement of the derivatives. Fuel derivative contracts cash settled with a fair value of $95 million in favour of the Corporation, with a net hedging gain of $51 million recorded in Aircraft fuel expense. No hedge ineffectiveness was recorded. There were no outstanding fuel derivatives as at December 31, 2023. There was no fuel hedging activity during 2022. 58#60AIR CANADA 2023 Consolidated Financial Statements and Notes 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 2023, these net operating cash inflows totalled approximately US$4.2 billion and U.S. denominated operating costs amounted to approximately US$7.8 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$2.2 billion. For 2023, this resulted in a U.S. dollar net cash flow exposure of approximately US$5.8 billion. The Corporation has a target coverage of 60% on a rolling 18 month basis to manage the net U.S. dollar cash flow exposure described above utilizing the following risk management strategies: • Holding U.S. dollar cash reserves as an economic hedge against changes in the value of the U.S. dollar. U.S. dollar cash, short and long-term investment balances as at December 31, 2023 amounted to $1,123 million (US$845 million) ($693 million (US$511million) as at December 31, 2022). A portion of the cash and investment reserves are an economic hedge against long-term U.S. dollar debt while the remainder of the cash is operational cash and investment reserves which are applied against the rolling 18 month net U.S. dollar cash flow exposure. In 2023, a loss of $18 million (gain of $72 million in 2022) was recorded in Foreign exchange gain (loss) reflecting the change in Canadian equivalent market value of the U.S. dollar cash, short and long-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, 2023, as further described below, approximately 63% of net U.S. cash outflows are hedged for 2024 and 39% for 2025, resulting in derivative coverage of 56% over the next 18 months. Operational U.S. dollar cash and investment reserves combined with derivative coverage results in 60% coverage over the next 18 months. As at December 31, 2023, the Corporation had outstanding foreign currency options and swap agreements, settling in 2024 and 2025, to purchase at maturity $5,982 million (US$4,542 million) of U.S. dollars at a weighted average rate of $1.3089 per US$1.00 (2022 - $5,798 million (US$4,310 million) with settlements in 2023 and 2024 at a weighted average rate of $1.2986 per $1.00 U.S. dollar). The Corporation also has protection in place to sell a portion of its excess Euros, Sterling, YEN, and AUD (EUR €276 million, GBP £166 million, JPY ¥14,797 million, and AUD $124 million) which settle in 2024 and 2025 at weighted average rates of €1.1292, £1.2790, ¥0.0075, and AUD $0.6920 per $1.00 U.S. dollar, respectively (as at December 31, 2022 - EUR €198 million, GBP £244 million, JPY ¥17,405 million, CNH ¥355 million and AUD $126 million with settlement in 2023 and 2024 at weighted average rates of €1.0828, £1.2467, ¥0.0082, ¥0.1419, and AUD $0.7072 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, 2023 was $165 million in favour of the counterparties (2022 - $140 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 2023, a gain of $139 million was recorded in Foreign exchange gain (loss) related to these derivatives (2022 - $174 million gain). In 2023, foreign exchange derivative contracts cash settled with a net fair value of $163 million in favour of the Corporation (2022 - $46 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. 59#61AIR CANADA 2023 Consolidated Financial Statements and Notes 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, 2023 is 75% fixed and 25% floating (71% and 29%, respectively as at December 31, 2022). Share-based Compensation Risk The Corporation issues RSUs and PSUs to certain of its employees, as described in Note 13, 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 vested in 2023. The forward dates for the share forward contracts coincided with the vesting terms and planned settlement dates of 325,000 PSUs and RSUs in 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 2023, a gain of less than $1 million was recorded (2022 - loss of less than $1 million). Share forward contracts cash settled with a fair value of $6 million in favour of the Corporation in 2023 (2022 - $7 million). There are no share forward contracts outstanding as at December 31, 2023. Credit Risk Credit risk is the risk of loss due to a counterparty's inability to meet its obligations. As at December 31, 2023, the Corporation's credit risk exposure consists mainly of the carrying amounts of cash and 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 agreements for the issuance 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, 2023. 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 any one factor may result in changes in one or more several other factors, which may magnify or counteract the sensitivities. 60 60#62AIR CANADA 2023 Consolidated Financial Statements and Notes The sensitivity analysis related to derivative contracts is based on the estimated fair value change applicable to the derivative as at December 31, 2023 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 1% (Canadian dollars in millions) increase 1% decrease 5% increase 5% decrease 10% increase 10% decrease Cash and cash equivalents $ 28 $ (28) $ (21) $ 21 $ EA $ Short-term investments $ 57 Long-term investments $ 7 $ བཐ $ (57) $ (32) $ 32 FA $ (7) $ (3) $ 3 $ SA A Aircraft related deposits $ $ $ (2) $ 2 $ FA EA Long-term debt and lease liabilities $ (33) $ 33 $ 517 $ (517) $ Foreign exchange derivatives $ Embedded derivative on $ convertible notes SA . $ SA $ (8) $ 8 $ EA $ $ EA $ SA (6) $ 6 (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 $6 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 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 $4 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 2023, the Corporation made no cash deposits under these agreements (nil in 2022). 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 is $10,975 million compared to its carrying value of $11,455 million. 61#63AIR CANADA 2023 Consolidated Financial Statements and Notes December 31, 2023 Following is a classification of fair value measurements recognized in the consolidated statement of financial position using a fair value hierarchy that reflects the significance of the inputs used in making the measurements. Fair value measurements at reporting date using: Significant unobservable Recurring measurements (Canadian dollars in millions) Quoted prices in active markets for identical assets (Level 1) Significant other observable inputs (Level 2) inputs (Level 3) Financial Assets Held-for-trading securities Cash equivalents $ 364 $ $ 364 $ Short-term investments 5,734 5,734 Long-term investments 744 744 Equity investment in Chorus 40 40 Derivative instruments Foreign exchange derivatives 14 14 Total $ 6,896 $ 40 $ 6,856 $ Financial Liabilities Derivative instruments Foreign exchange derivatives $ 179 Embedded derivative on convertible notes Total 56 $ 235 $ 179 56 $ 235 $ 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 2023. 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 $126 million as at December 31, 2023 ($112 million as at December 31, 2022). These balances will be settled at a net value at a later date; however, such net settlement amount is unknown until the settlement date. 62 62#64AIR CANADA 2023 Consolidated Financial Statements and Notes 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, 2023 and 2022, 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 Financial assets (Canadian dollars in millions) Gross Gross liabilities assets Net amounts presented Financial instruments offset December 31, 2023 Derivative assets $ 43 $ (29) $ 14 $ $ 14 $ 43 $ (29) $ 14 $ EA $ 14 December 31, 2022 Derivative assets $ 115 $ (63) $ 52 $ 115 $ (63) $ 52 33 $ SA (о 6 $ EA 58 $ 6 $ 58 Amounts offset Amounts not offset Net Financial liabilities (Canadian dollars in millions) Gross liabilities Gross assets offset Net amounts presented Financial instruments December 31, 2023 Derivative liabilities $ 257 $ (78) $ 179 $ $ 257 $ (78) $ 179 $ SAA December 31, 2022 Derivative liabilities $ SA 245 $ $ 245 SA SA (53) $ 192 $ (53) $ 192 SA SA $ 179 $ EA 179 $ $ 192 $ 192 63#65AIR CANADA 2023 Consolidated Financial Statements and Notes 17. 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 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 $1,215 million as at December 31, 2023 (December 31, 2022 - $1,181 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 extra-contractual liabilities and certain contractual indemnities. 64#66AIR CANADA 2023 Consolidated Financial Statements and Notes 18. 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 (deficiency). The Corporation also monitors its net debt which is calculated as the sum of Long-term debt and lease liabilities less cash and cash equivalents, and short-term 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) Long-term debt and lease liabilities Current portion of long-term debt and lease liabilities December 31, 2023 December 31, 2022 $ Total long-term debt and lease liabilities 12,996 866 13,862 $ 15,043 1,263 16,306 Embedded derivative on convertible notes 56 120 Shareholders' equity (deficiency) 796 (1,555) Total Capital $ 14,714 $ 14,871 Total long-term debt and lease liabilities 13,862 16,306 Less Cash and cash equivalents, and short-term and long-term investments (9,295) (8,811) Net debt $ 4,567 $ 7,495 65#67AIR CANADA 2023 Consolidated Financial Statements and Notes 19. 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: Passenger Revenues (Canadian dollars in millions) Canada U.S. Transborder Atlantic Pacific Other 2023 2022 5,106 $ 4,424 4,123 3,017 6,049 4,381 2,380 1,118 1,745 1,298 $ 19,403 $ 14,238 Cargo Revenues (Canadian dollars in millions) Canada U.S. Transborder Atlantic Pacific Other 2023 2022 $ 94 $ 114 45 51 432 556 222 409 131 136 $ 924 $ 1,266 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. December 31, 2023 December 31, 2022 (Canadian dollars in millions) Receivables, which are included in Accounts receivable $ 852 $ 770 Contract costs which are included in Prepaid expenses and other current assets 127 133 Contract liabilities - Advance ticket sales 4,341 4,104 Contract liabilities - Aeroplan deferred revenue (current and long-term) Contract liabilities - Other deferred revenue (current and long-term) 3,562 3,409 900 1,046 Receivables include passenger, cargo and other receivables from contracts with customers. The Corporation sells passenger tickets 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 66#68AIR CANADA 2023 Consolidated Financial Statements and Notes 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, through a combination of internal information technology systems and outsourced service providers, including 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. Air Canada offers and has issued and outstanding non-expiring travel credits. Customers have the ability to use the travel credits 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 as at December 31, 2023 of $325 million (2022 - $401 million) related to these credits has been recorded in current liabilities even though some could be used after the next 12 months. The following table presents financial information related to the changes in Aeroplan deferred revenue: (Canadian dollars in millions) 2023 2022 Aeroplan deferred revenue, beginning of year $ Proceeds from Aeroplan Points issued pursuant to program partner arrangements 3,409 $ 1,678 3,452 1,253 Equivalent ticket value of Aeroplan Points issued 294 207 Aeroplan Points redeemed (1,819) (1,503) Aeroplan deferred revenue, end of year 3,562 $ 3,409 Proceeds from Points issued pursuant to Aeroplan program partner arrangements 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. 67#69AIR CANADA 2023 Consolidated Financial Statements and Notes 20. RELATED PARTY TRANSACTIONS Compensation of Key Management Key management includes Air Canada's Board of Directors and its Executive Officers (President and Chief Executive Officer, Executive Vice President and Chief Financial Officer, Executive Vice President and Chief Operations Officer, Executive Vice President Marketing and Digital, Executive Vice President, Revenue and Network Planning, Executive Vice President - Chief Human Resources Officer and Public Affairs, and Executive Vice President - Chief Legal Officer and Corporate Secretary). Amounts reported are based upon the expense as reported in the consolidated financial statements, which in the case of Pension and post-employment benefits, includes actuarial gains or losses, as applicable. Compensation to key management is summarized as follows: (Canadian dollars in millions) Salaries and other benefits Pension and post-employment benefits Share-based compensation 2023 2022 $ 9 $ 8 5 (3) 17 15 $ 31 $ 20 68