Return on Invested Capital

Air Canada uses Return on invested capital (or ROIC) to assess the efficiency with which it allocates its capital to generate returns.  Return is based on Adjusted net income (loss) (as defined above), excluding interest expense and implicit interest on operating leases. Invested capital includes (i) average year-over-year total assets, net of average year-over-year non-interest-bearing operating liabilities, and (ii) the value of capitalized operating leases (calculated by multiplying annualized aircraft rent by 7).  This measure is not a recognized measure for financial statement presentation under GAAP, does not have a standardized meaning and may not be comparable to similar measures presented by other public companies.

In the second quarter of 2014, Air Canada changed its approach in calculating invested capital from a financing method to an operating method. Management believes this change provides more relevant information as the return is based on the book value of invested capital used for operations and is not subject to changes in the market price of Air Canada’s outstanding shares.  For comparative purposes, the information as at September 30, 2013, December 31, 2013, March 31, 2014 and June 30, 2014 provided below reflects this new methodology.

The following table provides Air Canada’s return on invested capital for the periods indicated:

(Canadian dollars in millions, except where indicated)

Sept. 30, 2013

Dec. 31, 2013

March 31, 2014

June 30, 2014

Net income (loss) for the period attributable to shareholders of Air Canada (trailing 12 months)

 

$(48)

 

$6

 

$(75)

 

$171

Remove:

 

 

 

 

 

 

 

 

Benefit plan amendments (1)

 

-

 

(82)

 

(82)

 

(82)

Tax-related provision adjustments (2)

 

-

 

-

 

-

 

(41)

Impairment charge (3)

 

24

 

30

 

6

 

6

Foreign exchange loss

 

56

 

120

 

241

 

127

Interest expense charge (4)

 

95

 

95

 

95

 

95

Net financing expense relating to employee benefits

 

227

 

208

 

190

 

172

Gain on fuel and other derivatives

 

(22)

 

(37)

 

(24)

 

(73)

Adjusted net income (trailing 12 months)

 

$332

 

$340

 

$351

 

$375

    Adjusted for:

 

 

 

 

 

 

 

 

Interest expense (5)

 

297

 

302

 

306

 

310

Implicit interest on operating leases (6)

 

158

 

156

 

155

 

153

Adjusted income before interest (trailing 12 months)

 

$787

 

$798

 

$812

 

$838

    Invested capital:

 

 

 

 

 

 

 

 

Working capital, excluding current portion of long-term
    debt and finance leases

 

469

 

357

 

133

 

60

Long-term non-financial assets

 

5,951

 

6,014

 

6,088

 

6,335

Maintenance provisions

 

(608)

 

(614)

 

(646)

 

(661)

Other operating long-term liabilities

 

(361)

 

(348)

 

(342)

 

(321)

Capitalized operating leases (7)

 

2,261

 

2,226

 

2,212

 

2,191

Invested capital

 

$7,712

 

$7,635

 

$7,445

 

$7,604

Return on invested capital (%)

 

10.2%

 

10.5%

 

10.9%

 

11.0%



(1) In the fourth quarter of 2013, Air Canada recorded an operating expense reduction of $82 million related to changes to early retirement provisions in Air Canada’s defined benefit pension plans. 
(2) In the second quarter of 2014, Air Canada recorded favourable tax-related provisions adjustments of $41 million.
(3) In the first quarter of 2013, Air Canada recorded an impairment charge of $24 million related to Airbus A340-300 aircraft. 
(4) In the third quarter of 2013, Air Canada recorded an interest charge of $95 million related to the purchase of its senior secured notes which were to become due in 2015 and 2016.
(5) Interest expense excludes the non-recurring interest expense charge on the repayment of the senior secured notes recognized in 2013 as described in (4) above.
(6) Interest implicit on operating leases is equal to 7.0% of 7 times the trailing 12 months of aircraft rent. 7.0% is a proxy and does not necessarily represent the actual implicit interest on operating leases for any given period.
(7) Capitalized operating leases are calculated by multiplying the trailing 12 months of aircraft rent by 7.  Aircraft rent totaled $313 million for the twelve months ended June 30, 2014 (for the twelve months ended March 31, 2014 - $316 million, December 31, 2013 - $318 million and September 30, 2013 - $323 million).