2023 Consolidated Financial Statements and Notes
AIR 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.
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