2023 Consolidated Financial Statements and Notes

AIR 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

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