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2012 Management's Discussion and Analysis of Results Of 2012 Management’s Discussion and Analysis of Results of Operations and Financial Condition 2012 Management’s Discussion and Analysis of Results of Operations and Financial Condition February 7, 2013 2012 Management’s Discussion and Analysis of Results of Operations and Financial Condition TABLE OF CONTENTS 1. Highlights ............................................................................................................................................................................................... 1 2. Introduction and Key Assumptions .................................................................................................................................................. 3 3. About Air Canada ................................................................................................................................................................................. 4 4. Strategy .................................................................................................................................................................................................. 6 5. Overview ............................................................................................................................................................................................. 12 6. Results of Operations – Full Year 2012 versus Full Year 2011 ............................................................................................... 14 7. Results of Operations – Fourth Quarter 2012 versus Fourth Quarter 2011 ....................................................................... 23 8. Fleet ...................................................................................................................................................................................................... 34 9. Financial and Capital Management ............................................................................................................................................... 38 9.1. Liquidity ..................................................................................................................................................................................... 38 9.2. Financial Position .................................................................................................................................................................... 38 9.3. Adjusted Net Debt .................................................................................................................................................................. 39 9.4. Working Capital ....................................................................................................................................................................... 40 9.5. Consolidated Cash Flow Movements .................................................................................................................................. 41 9.6. Capital Expenditures and Related Financing Arrangements .......................................................................................... 42 9.7. Pension Funding Obligations ................................................................................................................................................ 43 9.8. Contractual Obligations ........................................................................................................................................................ 47 9.9. Share Information ................................................................................................................................................................... 48 10. Quarterly Financial Data ................................................................................................................................................................. 50 11. Selected Annual Information .......................................................................................................................................................... 52 12. Financial Instruments and Risk Management ............................................................................................................................. 53 13. Critical Accounting Estimates ........................................................................................................................................................ 56 14. Accounting Policies ........................................................................................................................................................................... 60 15. Off-Balance Sheet Arrangements .................................................................................................................................................. 63 16. Related Party Transactions .............................................................................................................................................................. 64 17. Sensitivity of Results ........................................................................................................................................................................ 65 18. Risk Factors ......................................................................................................................................................................................... 66 19. Controls and Procedures .................................................................................................................................................................. 77 20. Non-GAAP Financial Measures ....................................................................................................................................................... 78 21. Glossary ............................................................................................................................................................................................... 81 2012 Management’s Discussion and Analysis of Results of Operations and Financial Condition 1. HIGHLIGHTS The financial and operating highlights for Air Canada for the periods indicated are as follows. Fourth Quarter Full Year (Canadian dollars in millions, except where indicated) 2012 2011 Change $ 2012 2011 Change $ Financial Performance Metrics Operating revenues 2,841 2,699 142 12,120 11,612 508 Operating income (loss) 46 (98) 144 437 179 258 Non-operating income (expense) (38) 38 (76) (250) (429) 179 Income (loss) before income taxes and discontinued operations 8 (60) 68 187 (250) 437 Net income (loss) from continuing operations 8 (60) 68 186 (249) 435 Net income (loss) from discontinued operations - Aveos - - - (55) - (55) Net income (loss) 8 (60) 68 131 (249) 380 Adjusted net income (loss) (1) (6) (167) 161 53 (122) 175 Operating margin (%), excluding the impact of benefit plan amendments (2) 1.6% (3.6)% 5.2 pp 2.6% 1.5% 1.1 pp Operating margin % 1.6% (3.6)% 5.2 pp 3.6% 1.5% 2.1 pp EBITDAR, excluding the impact of benefit plan amendments (2) (3) 284 162 122 1,327 1,242 85 EBITDAR (3) 284 162 122 1,451 1,242 209 EBITDAR margin (%), excluding the impact of benefit plan amendments (2) (3) 10.0% 6.0% 4.0 pp 10.9% 10.7% 0.2 pp EBITDAR margin % (3) 10.0% 6.0% 4.0 pp 12.0% 10.7% 1.3 pp Cash, cash equivalents and short-term investments 2,026 2,099 (73) 2,026 2,099 (73) Free cash flow (4) (23) (62) 39 187 356 (169) Adjusted net debt (5) 4,281 4,576 (295) 4,281 4,576 (295) Net income (loss) per share – diluted $ 0.03 $ (0.22) $ 0.25 $ 0.45 $ (0.92) $ 1.37 Adjusted net income (loss) per share – diluted (1) $ (0.02) $ (0.60) $ 0.58 $ 0.19 $ (0.44) $ 0.63 Operating Statistics Change % Change % Revenue passenger miles (millions) (RPM) 12,574 12,065 4.2 55,646 54,223 2.6 Available seat miles (millions) (ASM) 15,484 15,290 1.3 67,269 66,460 1.2 Passenger load factor % 81.2% 78.9% 2.3 pp 82.7% 81.6% 1.1 pp Passenger revenue per RPM ("Yield") (cents) 19.7 19.5 1.2 19.0 18.7 1.8 Passenger revenue per ASM ("RASM") (cents) 16.0 15.4 4.2 15.8 15.3 3.2 Operating revenue per ASM (cents) 18.4 17.7 3.9 18.0 17.5 3.1 Operating expense per ASM ("CASM") (cents) 18.1 18.3 (1.3) 17.4 17.2 1.0 Adjusted CASM (cents) (6) 12.4 12.6 (2.0) 11.8 11.7 1.0 Average number of full-time equivalent (FTE) employees (thousands) (7) 24.1 23.6 2.1 24.0 23.7 1.4 Aircraft in operating fleet at period end (8) 351 352 (0.3) 351 352 (0.3) Average fleet utilization (hours per day) (9) 9.5 9.4 1.3 10.1 10.1 0.6 Revenue frequencies (thousands) 134 133 0.5 557 551 1.1 Average aircraft flight length (miles) (9) 863 857 0.8 891 892 (0.1) Economic fuel cost per litre (cents) (10) 88.8 88.6 0.2 89.7 85.2 5.3 Fuel litres (millions) (9) 924 912 1.3 3,976 3,937 1.0 Revenue passengers carried (millions) (11) 8.3 7.9 5.1 34.9 33.9 2.9 1 2012 Management’s Discussion and Analysis of Results of Operations and Financial Condition (1) Adjusted net income (loss) and adjusted net income (loss) per share – diluted are non-GAAP financial measures. Refer to section 20 “Non-GAAP Financial Measures” of this MD&A for additional information. (2) In the third quarter of 2012, Air Canada recorded an operating expense reduction of $124 million related to changes to the terms of the ACPA collective agreement pertaining to retirement age. (3) EBITDAR (earnings before interest, taxes, depreciation, amortization and impairment, and aircraft rent), excluding the impact of benefit plan amendments, and EBITDAR are non-GAAP financial measures. Refer to section 20 "Non-GAAP Financial Measures" of this MD&A for additional
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