Exhibit
1.1


ANNUAL
INFORMATION FORM
   
   March
28, 2008
   
  TABLE
OF CONTENTS
  PageGLOSSARY
                
                
                1EXPLANATORY
      NOTES
                
                
                2RELIANCE
      ON PUBLIC INFORMATION
                
                
                2THE
      CORPORATION
                
                
                3REGULATORY
      ENVIRONMENT
                
                
                8INDUSTRY
      OVERVIEW AND COMPETITIVE ENVIRONMENT
                
                
                13THREE-YEAR
      SUMMARY: EVOLUTION OF BUSINESS
                
                
                16OVERVIEW
      OF THE BUSINESS
                
                
                23AIR
      CANADA
                
                
                25AEROPLAN
                
                
                36OTHER
      INVESTMENTS
                
                
                46RISK
      FACTORS
                
                
                48MARKET
      FOR SECURITIES
                
                
                61DIVIDEND
      RECORD
                
                
                62DESCRIPTION
      OF CAPITAL STRUCTURE
                
                
                62DIRECTORS
      AND OFFICERS
                
                
                69AUDIT
      COMMITTEE
                
                
                71INTEREST
      OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS
                
                
                73TRANSFER
      AGENT AND REGISTRAR
                
                
                74LEGAL
      PROCEEDINGS
                
                
                74MATERIAL
      CONTRACTS
                
                
                74EXPERTS
                
                
                74ADDITIONAL
      INFORMATION
                
                
                74APPENDIX
      A - CHARTER OF THE AUDIT, FINANCE AND RISK COMMITTEE OF THE BOARD OF
      DIRECTORS OF ACE AVIATION HOLDINGS INC.
                
                
                A-1
  
  GLOSSARY
  Aeroplan— Means Aeroplan
Limited Partnership together with its general partner, Aeroplan Holding GP Inc.,
and their respective subsidiaries and predecessors;
  Aeroplan
Miles— Means the
currency accumulated by Aeroplan members under the Aeroplan
Program;
  Aeroplan
Program— Means the loyalty marketing program operated by
Aeroplan;
  Air Canada
Vacations— Means Touram Limited Partnership, a limited
partnership established under the laws of the Province of Québec;
  Available Seat
Miles or ASMs — Means the total number of seats available for
passengers multiplied by the miles flown;
  Average Cost of
Rewards per Mile - Means, for any reporting period, the cost of
rewards for the period divided by the number of Aeroplan Miles redeemed for
rewards during the period;
  Cargo
Services — Means the business and operations of Air Canada's
air cargo services, including cargo related products, services and ground
operations, carried on for domestic, transborder and international cargo
services, by AC Cargo Limited Partnership and Air Canada;
  GAAP— Means
generally accepted accounting principles in Canada including those set out in
the Handbook of the Canadian Institute of Chartered Accountants;
  Ground Handling
Services — Means the business and operations carried on by
ACGHS Limited Partnership (and its United States subsidiary, ACGHS US Inc.) and
Air Canada that provide passenger and aircraft related ground handling services,
including check-in, ramp services, cabin cleaning, de-icing services, gate
management and baggage and cargo handling;
  Jazz– Means Jazz Air LP,
together with its general partner, Jazz Air Holding GP Inc., and their
respective subsidiaries and predecessors; and, in particular, reference to Jazz
in respect of a time period prior to October 1, 2004 are references to the
business of Jazz as carried on by Jazz Air Inc., which was liquidated on
September 30, 2004 and references to Jazz in respect of the time period from
October 1, 2004 until closing of the initial public offering are references to
the business of Jazz as carried on by Jazz Air Limited Partnership, unless the
context requires otherwise;
  LMG–
Means the Loyalty Management Group Limited;
  Nectar Program– Means the loyalty marketing program operated by LMG;
  Revenue Passenger
Miles or RPMs — A measure of passenger traffic calculated by
multiplying the total number of revenue passengers carried by the miles they are
carried;
  Technical
Services — Means the heavy maintenance, engine maintenance, component
maintenance, engineering and training business and operations carried on by ACTS
Aero; and
  Yield — Means
average passenger revenue per Revenue Passenger Mile.
  
  EXPLANATORY
NOTES
  The
information in this Annual Information Form is stated as at December 31,
2007, unless otherwise indicated.
  ACE Aviation Holdings
Inc. — References in this Annual Information Form to "ACE" are
references to ACE Aviation Holdings Inc.
  Currency — All
currency amounts used in this document are stated in Canadian dollars, unless
otherwise indicated.
  Statistical
Information — Market data and certain industry forecasts used
throughout this Annual Information Form were obtained from internal surveys,
market research, publicly available information and industry publications.
Industry publications generally state that the information contained therein has
been obtained from sources believed to be reliable, but that the accuracy and
completeness of such information is not guaranteed. Similarly, internal surveys,
industry forecasts and market research, while believed to be reliable, have not
been independently verified, and ACE does not make any representation as to the
accuracy of such information.
  Subsidiaries
– References to the term "subsidiary" or "subsidiaries" refer, in relation to
any entity, to any other entity, including a corporation or a limited
partnership, which is controlled, directly or indirectly, by that
entity.
  Forward-looking
statements — ACE's communications often contain written or oral
forward-looking statements which are included in this Annual Information Form
and may be included in filings with securities regulators in Canada and the
United States. These forward-looking statements are identified by the use of
terms and phrases such as "anticipate", "believe", "could", "estimate",
"expect", "intend", "may", "plan", "predict", "project", "will", "would", and
similar terms and phrases, including references to assumptions. Such statements
may involve but are not limited to comments with respect to strategies,
expectations, planned operations or future actions.
  Forward-looking
statements, by their nature, are based on assumptions and are subject to
important risks and uncertainties. Any forecasts or forward-looking predictions
or statements cannot be relied upon due to, amongst other things, changing
external events and general uncertainties of the business. Results indicated in
forward-looking statements may differ materially from actual results due to a
number of factors, including without limitation, energy prices, general
industry, market and economic conditions, currency exchange and interest rates,
competition, war, terrorist acts, epidemic diseases, insurance issues and costs,
changes in demand due to the seasonal nature of the business, the ability to
reduce operation costs, employee and labour relations, pension issues, supply
issues, changes in laws, adverse regulatory developments or proceedings, pending
litigation and actions by third parties as well as the factors identified
throughout this Annual Information Form and, in particular, those discussed in
the section "Risk Factors". The forward-looking statements contained in this
Annual Information Form represent ACE's expectations as of the date of this
Annual Information Form, and are subject to change after such date. However, ACE
disclaims any intention or obligation to update or revise any forward-looking
statements whether as a result of new information, future events or otherwise,
except as required under applicable securities regulations.
   RELIANCE
ON PUBLIC INFORMATION
  Disclosure
in this annual information form relating to Aeroplan Income Fund and Jazz Air
Income Fund, including disclosure relating to their business, affairs and
operations, is based solely on disclosure contained in publicly-available
documents filed by Aeroplan Income Fund and Jazz Air Income Fund with the
securities regulatory authorities in each of the provinces and territories of
Canada.
   - 2
-
   THE
CORPORATION
  ACE
is an investment holding company of various aviation interests including Air
Canada, Aeroplan Income Fund, Jazz Air Income Fund and Aero Technical Support
& Services Holdings sarl("ACTS
Aero").
  ACE
was incorporated on June 29, 2004 under the Canada Business Corporations
Act ("CBCA") and became the parent holding company of the reorganized Air
Canada and its subsidiaries upon the implementation of the consolidated plan of
reorganization, compromise and arrangement of Air Canada and certain of its
subsidiaries under the CBCA, the Companies' Creditors Arrangement
Act ("CCAA") and the Business Corporations Act
(Alberta) which was implemented on September 30, 2004 (referred to herein
as the "Plan").
  On
April 6, 2005, ACE completed a public offering of an aggregate of 11.35
million Voting Shares and Variable Voting Shares at a price of $37 per share for
gross proceeds of approximately $420 million and approximately
$300 million of 4.25% convertible senior notes due 2035 (the "Notes"). ACE
used approximately $553 million of the aggregate net cash proceeds of the
offerings to repay all of its outstanding debt under the exit credit facility
with General Electric Capital Corporation ("GECC"). On April 13, 2005, following
the exercise of the over-allotment option by the underwriters, ACE issued an
additional 1,135,000 Variable Voting Shares at a price of $37 per share and
$30 million of Notes for additional aggregate gross proceeds of
approximately $72 million. ACE used the additional proceeds for general
corporate purposes.
  On
October 5, 2006, the shareholders of ACE approved a statutory plan of
arrangement pursuant to the CBCA. On October 6, 2006, the Quebec Superior Court
issued a final order approving the statutory plan of arrangement, which became
effective October 10, 2006. The arrangement granted authority to the board of
directors of ACE to make from time to time one or more distributions to ACE
shareholders in an aggregate amount of up to $2 billion by way of reduction of
the stated capital of the Variable Voting Shares, Voting Shares and Preferred
Shares. As described below, during the first half of 2007, ACE shareholders
received distributions under the arrangement in an aggregate amount of
approximately $2 billion.
  On
December 3, 2007, ACE announced a substantial issuer bid to purchase for
cancellation up to $1.5 billion of its Variable Voting Shares and Voting
Shares for an aggregate of 54,151,624 shares. On January 10, 2008, ACE
announced the final results of its offer to purchase $1.5 billion of its
Variable Voting Shares and Voting Shares and confirmed that it had taken up and
accepted for purchase and cancellation a total of 40,023,427 Variable Voting
Shares and 9,894,166 Voting Shares at $30.00 per share for an aggregate purchase
price of approximately $1.498 billion.
  The
Variable Voting Shares and the Voting Shares of ACE are listed on the Toronto
Stock Exchange ("TSX"), under the symbols "ACE.A" and "ACE.B",
respectively.
  The
head office of ACE is located at 5100 de Maisonneuve Boulevard West,
Montreal, Québec, H4A 3T2. Its website is www.aceaviation.com (for greater
certainty, this website is not in any way incorporated by reference
herein).
   Air
Canada
  On
November 24, 2006, ACE and Air Canada completed an initial public offering
and secondary offering of an aggregate 25 million Class A variable voting
shares and Class B voting shares of Air Canada at $21 per share for gross
proceeds of $525 million. Through the initial public offering, Air Canada sold
an aggregate of 9,523,810 Class A variable voting shares and Class B voting
shares for gross proceeds of approximately $200 million. In the secondary
offering, ACE sold an aggregate of 15,476,190 Class A variable voting shares and
Class B voting shares for gross proceeds of approximately $325 million. As of
March 28, 2008, ACE held a 75% ownership interest in Air
Canada.
   - 3
-
  Air
Canada has a $400 million senior secured revolving credit facility pursuant to
an amended and restated credit agreement entered into with a syndicate of
lenders, to be used by Air Canada for working capital and general corporate
purposes. As at March 28, 2008, Air Canada has not drawn on this credit
facility.
  The
shares of Air Canada are listed on the TSX under the symbol AC.A for its Class A
variable voting shares and the AC.B for its Class B voting shares.
  The
head office of Air Canada is located at 7373 Côte Vertu Boulevard West,
Saint-Laurent, Québec, H4Y 1H4. Its website is www.aircanada.com (for
greater certainty, this website is not in any way incorporated herein by
reference).
  Aeroplan
  On
June 29, 2005, Aeroplan Income Fund completed its initial public offering
of 25 million units at a price of $10 per unit for aggregate gross proceeds
of $250 million. On June 30, 2005, following the exercise of the over-allotment
option by the underwriters, Aeroplan Income Fund issued an additional
3.75 million units at a price of $10 per unit for additional gross proceeds
of $37.5 million. In connection with the June 29, 2005 offering, Aeroplan
Limited Partnership completed a $475 million senior secured syndicated
credit facility, $300 million of which was used to fund a portion of the
reserve for Aeroplan Miles redemption.
  On
March 3, 2006, ACE effected a distribution by way of reduction of capital
to its shareholders of record as at such date of 0.18 units of Aeroplan Income
Fund per Variable Voting Share, Voting Share and Preferred Share (on an as
converted basis) of ACE. For the purposes of the distribution, ACE converted
20,204,165 units of Aeroplan Limited Partnership into 20,204,165 units of
Aeroplan Income Fund which were distributed to ACE's shareholders on the record
date.
  On
March 31, 2006, ACE exchanged an additional 500,000 units of Aeroplan
Limited Partnership into 500,000 units of Aeroplan Income Fund and transferred
the 500,000 units of Aeroplan Income Fund to a trustee for purposes of funding
grants to employees under Aeroplan's initial long-term incentive
plan.
  On
December 28, 2006, ACE announced the terms of a distribution under the
statutory arrangement pursuant to which ACE shareholders of record on
January 10, 2007 received a distribution of approximately 0.442 units of
Aeroplan Income Fund per Variable Voting Share, Voting Share and Preferred Share
(on an as converted basis) of ACE. In anticipation of the distribution, on
December 28, 2006, ACE exchanged 50 million units of Aeroplan Limited
Partnership into 50 million units of Aeroplan Income Fund and caused such units
of Aeroplan Income Fund to be distributed to ACE's eligible shareholders of
record on January 10, 2007. ACE also exchanged on January 10, 2007, 60 million
units of Aeroplan Limited Partnership into 60 million units of Aeroplan Income
Fund for internal reorganization purposes.
  On
March 2, 2007, ACE announced a second distribution by way of reduction of
capital to its shareholders under the statutory arrangement approved on
October 5, 2006 pursuant to which ACE's shareholders of record on March 14,
2007 received approximately 0.177 units of Aeroplan Income Fund per
Variable Voting Share, Voting Share and Preferred Share (on an
as converted basis) of ACE. For internal reorganization purposes, on March 14,
2007, ACE also exchanged its remaining 40,545,835 units of Aeroplan Limited
Partnership into 40,545,835 units of Aeroplan Income Fund.
  On
May 11, 2007, ACE announced a third distribution by way of reduction of
capital to its shareholders under the statutory arrangement approved on October
5, 2006 pursuant to which ACE's shareholders of record on May 24, 2007 received
approximately 0.157 units of Aeroplan Income Fund per Variable Voting Share,
Voting Share and Preferred Share (on an as converted basis) of ACE.
  On
October 1, 2007, ACE announced a secondary offering of units of Aeroplan
Income Fund to sell an aggregate of 22 million units of Aeroplan Income Fund at
a price of $21.90 per unit for gross proceeds to ACE of $481.8 million. The
offering closed on October 22, 2007. As of March 28, 2008, ACE held 20.1%
of the issued and outstanding units of Aeroplan Income Fund.
   - 4
-
  On
December 20, 2007, Aeroplan completed the acquisition of Loyalty Management
Group Limited ("LMG"), a loyalty marketing and insight and analysis company that
owns and operates the Nectar Program in the United Kingdom. The acquisition was
completed for total consideration of £355.1 million ($715.4 million) and an
additional amount of £27.1 million ($53.7 million) has been placed in
escrow as contingent consideration pending the outcome of LMG's VAT
litigation.
  On
March 4, 2008, Aeroplan Income Fund announced that in order to ensure that
its capital structure is efficient and that unitholder value is being maximized,
the trustees of Aeroplan Income Fund and the Board of Directors of Aeroplan
Holding GP Inc. have requested that management retain financial advisors to
conduct an in-depth analysis to consider a potential reorganization of Aeroplan
Income Fund's income trust structure to a corporate structure. Aeroplan Income
Fund has disclosed that, although no final decision has been made at this time,
the review may lead to a recommendation in the near future that unitholders of
Aeroplan Income Fund approve a conversion to a corporation.
  The
units of Aeroplan Income Fund are listed on the TSX under the symbol
AER.UN.
  The
head office of Aeroplan is located at 5100 de Maisonneuve Boulevard West,
Montreal, Québec, Canada, H4A 3T2. Its website is www.aeroplan.com (for greater
certainty, this website is not in any way incorporated herein by
reference).
  Jazz
  On
February 2, 2006, ACE completed an initial public offering of the Jazz Air
Income Fund, issuing 23.5 million units at a price of $10 per unit for gross
proceeds of $235 million. In addition, on February 27, 2006, Jazz Air Income
Fund issued an additional 1.5 million units at a price of $10 per unit for
additional gross proceeds of $15 million as a result of the exercise of an
over-allotment option by the underwriters. In addition, a $150 million secured
syndicated credit facility was established with a syndicate of lenders by Jazz
Air Limited Partnership of which approximately $115 million was drawn on closing
of the initial public offering.
  On
March 2, 2007, ACE announced a second distribution by way of reduction of
capital under the statutory arrangement approved on October 5, 2006,
pursuant to which ACE shareholders of record on March 14, 2007 received
approximately 0.219 units of Jazz Air Income Fund per Variable Voting
Share, Voting Share and Preferred Share (on an as converted basis) of ACE. For
the purpose of the distribution, on March 14, 2007, ACE exchanged 25
million units of Jazz Air Limited Partnership into 25 million units of
Jazz Air Income Fund.  ACE also exchanged on March 14, 2007, 25
million units of Jazz Air LP into 25 million units of Jazz Air Income Fund for
internal reorganization purposes.
  On
March 30, 2007, for internal reorganization purposes, ACE exchanged its
remaining 47,226,920 units of Jazz Air LP into 47,226,920 units of Jazz Air
Income Fund.
  On
May 11, 2007, ACE announced a third distribution by way of reduction of
capital to its shareholders under the statutory arrangement approved on October
5, 2006 pursuant to which ACE's shareholders of record on May 24, 2007 received
approximately 0.105 units of Jazz Air Income Fund per Variable Voting Share,
Voting Share and Preferred Share (on an as converted basis) of ACE.
  On
October 1, 2007, ACE announced a secondary offering of units of Jazz Air
Income Fund to sell an aggregate of 35.5 million units of Jazz Air Income Fund
at a price of $7.75 per unit for gross proceeds to ACE of $275.1 million. The
offering closed on October 22, 2007.
  On
January 24, 2008, ACE sold 13 million units of Jazz Air Income Fund on
an exempt trade basis for gross proceeds of approximately $96.85 million
reducing its stake to 9.5%. As a result, ACE no longer had the ability to
appoint the majority of the directors of Jazz Air Holding GP Inc. pursuant to
the Securityholders' Agreement entered into between Jazz Air Income Fund, Jazz
Air Trust, Jazz Air LP and Jazz Air Holding GP Inc.
  The
Securityholders' Agreement was terminated by the parties effective as of
February 7, 2008.
   - 5
-
  As
at March 28, 2008, ACE held 9.5% of the issued and outstanding units of
Jazz Air Income Fund.
  The
units of Jazz Air Income Fund are listed on the TSX under the symbol JAZ.UN. The
head office of Jazz LP is located at 5100 de Maisonneuve Boulevard West,
Montreal, Québec, Canada, H4A 3T2. Its website is www.flyjazz.com (for greater
certainty, this website is not in any way incorporated herein by
reference).
  ACTS
Aero
  ACTS
Aero is a full service aircraft maintenance repair and overhaul organization
that competes on a global basis.
  On
February 13, 2007, ACTS LP, through a wholly-owned subsidiary, acquired 80%
of Aeromantenimiento, S.A. ("Aeroman"), the aircraft maintenance division of
Grupo TACA Holdings Limited ("Grupo TACA") of El Salvador. Total consideration
for this acquisition included cash as well as a right to acquire an equity stake
in ACTS LP. The cash component of US$44.7 million consisted of cash of US$42.7
million on closing and milestone payments of up to US$2 million in the
aggregate, funded by ACTS LP through ACE's available cash resources. A Class A
non-voting exchangeable share in a wholly-owned subsidiary of ACTS LP was issued
to Grupo TACA. Subsequent to the issue, ACE agreed to a transfer of Grupo TACA's
rights to a Grupo TACA related party. The rights attached to the exchangeable
share provide for, upon the closing of the monetization transaction pertaining
to ACTS, the exchangeable share held by Grupo TACA to be exchanged for an equity
stake in ACTS LP. As part of the monetization process, on October 16, 2007, the
exchangeable share was exchanged for a 5% equity stake in ACTS Aero and
approximately $31 million in cash.Grupo TACA can put its
equity in ACTS Aero to ACE at a value of approximately $18.3 million over the
period of 12 months commencing on October 16, 2007.
  On
June 22, 2007, ACE announced that it has agreed to sell a 70% interest in the
business of its wholly owned maintenance, repair and overhaul subsidiary ACTS LP
to a consortium consisting of Sageview Capital LLC, a private investment firm,
and KKR Private Equity Investors, L.P., the publicly traded fund of Kohlberg
Kravis Roberts & Co. The transaction was completed on October 16, 2007 and
ACE received net cash proceeds of $723 million. Within 6 months of closing, ACE
was entitled to receive up to an additional $40 million in cash proceeds, from
funds held in escrow, conditional upon the completion of certain supplier
contracts within specified terms. On January 14, 2008, ACE announced that it had
received the full balance of $40 million. As a result of the transaction, ACE
continues to own 100% of ACTS LP, which is now a non-operating entity, and ACTS
Aero conducts the business previously operated by ACTS LP.
  Following
the redemption of the exchangeable share issued to a party related to Grupo TACA
and the establishment of an initial long-term incentive plan for ACTS Aero, as
at March 28, 2008, ACE held a 23% equity interest in ACTS Aero.
   - 6
-


Corporate
Structure
  The
following table lists ACE's principal aviation interests as of March 28,
2008, including their jurisdictions of constitution and the percentage of equity
held or controlled directly or indirectly by ACE:


____________
  (1)
              ACE
      holds all of the issued and outstanding shares of 1141679 Alberta Ltd., a
      corporation incorporated under the laws of Alberta which holds and manages
      cash and investments of ACE on its
behalf.
 (2)
              Air
      Canada holds all of the issued and outstanding shares of certain
      subsidiaries, including Air Canada Capital Ltd. and Simco Leasing Ltd,
      which are incorporated under the laws of the Province of Alberta. Air
      Canada also holds all of the issued and outstanding shares of 1209265
      Alberta Ltd., a corporation incorporated under the laws of Alberta which
      holds and manages excess cash and investments of Air
    Canada.
 (3)
              Jazz
      Air Income Fund holds all of the trust units and trust notes of Jazz Air
      Trust, which in turns holds all of the (i) shares of Jazz Air Holding GP
      Inc., the general partner of Jazz Air LP, and (ii) units of Jazz Air LP
      other than the unit of Jazz Air LP held by Jazz Air Holding GP Inc. as
      general partner.
 (4)
              Aeroplan
      Income Fund holds all of the trust units and trust notes of Aeroplan
      Trust, which in turns holds all of the (i) shares of Aeroplan Holding GP
      Inc., the general partner of Aeroplan Limited Partnership, and (ii) units
      of Aeroplan Limited Partnership other than the unit of Aeroplan Limited
      Partnership held by Aeroplan Holding GP Inc. as general
      partner.
 (5)
              AC
      Cargo General Partner Inc., a corporation incorporated under the laws of
      Canada, is the general partner of AC Cargo Limited Partnership and holds a
      0.00001% interest in AC Cargo Limited
  Partnership.
 (6)
              ACGHS
      General Partner Inc., a corporation incorporated under the laws of Canada,
      is the general partner of ACGHS Limited Partnership and holds a 0.00001%
      interest in ACGHS Limited
Partnership.
 (7)
              Touram
      General Partner Inc., a corporation incorporated under the laws of Canada,
      is the general partner of, and holds 0.00001% of the units in,
      Touram Limited Partnership.
 (8)
              ACE
      indirectly holds a 23% equity interest in Aero Technical Support &
      Services Holdings sarl (Luxembourg) ("ACTS Aero"), which, in turn, holds a
      100% interest in ACTS Aero Technical Support & Services Inc. (Canada)
      ("ACTS Aero Canada") and an 80% interest in Aeromantenimiento S.A. (El
      Salvador).






- 7
-






Certain
subsidiaries, each of which represents not more than 10% of the consolidated
assets and not more than 10% of the consolidated sales and operating revenues of
ACE, and all of which, in the aggregate, represent not more
than 20% of the total consolidated assets and the total consolidated sales and
operating revenues of ACE at December 31, 2007, have been
omitted.
  REGULATORY
ENVIRONMENT
  ACE
is an investment holding company of various aviation interests. Its investments
are subject to various industry regulations, as summarized below.
  Air
Canada
  In
Canada, commercial air transportation, including policy, maintenance standards,
operations standards, safety and ground and navigation facilities, falls wholly
within the jurisdiction of the federal government and is the responsibility of
the Minister of Transport. The Canadian Transportation Agency is responsible for
issuing air carrier licenses for both domestic and international services and
regulates international air fares as well as terms and conditions of carriage.
Since 1996, NAV Canada, a private sector, non-share corporation financed through
publicly-traded debt, is responsible for providing air navigation services in
Canada. All major Canadian airports are operated by local Canadian airport
authorities that are not-for-profit corporations.
  Domestic
Services
  The
1987 deregulation of the domestic airline industry allowed carriers to establish
fares as well as terms and conditions of carriage without government regulation.
The Canada Transportation
Act ("CTA") provides for free market entry to the extent that a carrier
can demonstrate that (i) it is "Canadian", defined in the CTA as being
controlled in fact by Canadians and having at least 75% of its voting interest
owned and controlled by Canadians; (ii) it can operate safely; (iii) it is
suitably insured; and (iv) it meets the minimum financial requirements set out
in the Air Transportation Regulations (Canada) adopted pursuant to the
CTA.
  In
July 2000, the Government of Canada amended the CTA, the Competition Act (Canada) (the
"Competition Act") and the Air
Canada Public Participation Act (Canada) (the "Air Canada Public
Participation Act") to address the competitive airline environment in Canada and
ensure protection for consumers. This legislation included airline-specific
provisions concerning "abuse of dominance" under the Competition Act, later
supplemented by creating "administrative monetary penalties" for a breach of the
abuse of dominance provisions by a dominant domestic air carrier.
  In
July 2003, the Competition Tribunal released its reasons and findings in a
proceeding between the Commissioner of Canada and Air Canada which had
considered the approach to be taken in determining whether Air Canada was
operating below "avoidable costs" in violation of one of the new
airline-specific abuse of dominance provisions. The Competition Tribunal applied
a very broadly crafted cost test in its decision. In September 2004, the
Commissioner of Competition published a letter describing the enforcement
approach that would be taken in future cases involving the airline-specific
abuse of dominance provisions, which included a statement that the Tribunal's
approach to avoidable costs remains relevant.
  In
addition, on November 2, 2004, the Minister of Industry tabled amendments to the
Competition Act in Bill C-19 which, if enacted, would have removed the
airline-specific "abuse of dominance" provisions from the Competition Act.
However, on November 29, 2005, the 38th Parliament of Canada was dissolved. As a
result, the legislative process relating to the adoption of Bill C-19 was
terminated. On October 16, 2007, private Bill C-454 containing provisions
to remove the airline-specific "abuse of dominance" provisions from the
Competition Act was tabled for the first reading in the House of
Commons.  Management of Air Canada cannot predict if or when such
proposed legislation will come into force.
  On
April 27, 2004, the Government of Canada amended the Canadian Computer Reservation
Systems (CRS) Regulations adopted under the Aeronautics Act (Canada) to
reduce the regulatory requirements and place
  - 8
-
   greater
reliance on market forces in the distribution system, in part to generate
greater market efficiencies and reduced costs for airlines. With the amendments,
no airline is required to participate in all CRSs operating in Canada and every
airline has the freedom to select the levels of participation that best serve
its operations. Also, all airlines and CRS vendors are now permitted to freely
negotiate fees on strictly commercial terms.
  On
June 15, 2006, Bill C-20, An
Act respecting airports, airport authorities and other airport operators and
amending the Transportation Appeal Tribunal of Canada Act, was tabled for
first reading in the House of Commons. Bill C-20 provides for, among other
things, a declaration of Canadian airport policy, a number of basic obligations
of airport operators and the powers and capacity of airport authorities and the
scope of their activities. Bill C-20 also introduces principles affecting
airport users such as slot allocation and a framework for the fees imposed by
large airport authorities. Bill C-20 was not re-introduced in the 39th
Parliament – 2nd Session and management of Air Canada cannot predict if or when
such proposed legislation will be re-introduced in the House of Commons or if
re-introduced, if or when such proposed legislation will come into
force.
  On
June 22, 2007, Bill C-11, An Act to amend the Canada
Transportation Act and the Railway Safety Act and to make consequential
amendments to other Acts (Canada), received royal assent and is now into
force except for the provisions which seek to regulate the advertising of prices
for air services. Management of Air Canada cannot predict if or when the
provisions on the advertising of prices for air services will come into force.
Bill C-11, among other things, amends the CTA with respect to the air
transportation sector, in relation to complaints processes, the disclosure of
terms and conditions of carriage, and specific recognition that in the event of
an inconsistency or conflict between an international agreement or convention
respecting air services to which Canada is a party and the Competition Act, the
provisions of the agreement or convention prevail to the extent of the
inconsistency or conflict.
  Transborder
Services
  Transborder
Services between Canada and the United States are provided pursuant to the 1995
Canada-US Air Services Agreement. This agreement gives Canadian air carriers
unlimited route rights to provide "own aircraft" services between points in
Canada and points in the United States. The carriage of local traffic between
points within one country by carriers of the other country, commonly known as
cabotage, continues to be prohibited.
  Under
the 1995 Canada-US Air Services Agreement, carriers of both countries are free
to set their own prices for transborder services according to market forces.
Prices may only be disallowed under special circumstances if the authorities of
both countries agree, for example in response to predatory or monopolistic
pricing behaviour on specific routes. In November 1997, Canada and the United
States concluded an agreement that allows Canadian and US carriers to code share
to, from and via each other's territory, with carriers from other countries
provided the other country allows code sharing and the carriers hold the
underlying rights to serve that country. Air Canada code shares with certain
Star AllianceTMpartners via Canada and the United States and some of these Star
AllianceTMpartners' codes appear on some Jazz operated transborder
flights.
  On
November 11, 2005, Transport Canada announced that the governments of
Canada and the United States had negotiated an open skies agreement (the "Open
Skies Agreement") which further liberalizes air transportation
services.  On March 12, 2007, the Open Skies Agreement came into
force. The Open Skies Agreement allows air carriers of both countries (i) to
pick up passenger and/or cargo traffic in the other country and carry that
traffic to a third country as part of a service to or from the carrier's home
country, (ii) to operate stand-alone all-cargo services between the other
country's territory and third countries, and (iii) greater pricing flexibility
for services between the other country and a third country. Cabotage, the right
to operate flights between two points within the other country, remains
prohibited.
  International
Services
  Scheduled
international air services are regulated by the Canadian and foreign governments
involved. The Minister of Transport has the authority to designate which
Canadian air carriers may serve scheduled international routes. International
route rights are obtained through bilateral negotiations between Canada and
foreign countries. Bilateral agreements provide for the rights which may be
exercised over agreed routings and the conditions under which the carriers may
operate, including, among others, the number of carriers which may operate, the
capacity
   - 9
-
   and/or
flight frequencies that may be provided and the controls over tariffs to be
charged. Most bilateral agreements to which Canada is a party provide for the
designation of more than one Canadian carrier, while some provide for the
designation of only one Canadian carrier. In general, bilateral agreements
between Canada and European countries are more liberal in terms of controls on
capacity and flight frequencies than those between Canada and Asian
countries.
  In
May 2002, the Minister of Transport introduced a liberalized multiple
designation policy applicable to scheduled international air services by
Canadian carriers (excluding services to the United States). Any Canadian
carrier may apply to be designated to serve any foreign country regardless of
the size of the air travel market. If the number of Canadian carriers permitted
is restricted under existing bilateral agreements, the Canadian government has
indicated that it will pursue negotiations with the appropriate countries to
seek the necessary rights for Canadian carriers. In addition, an incumbent
carrier's designation in a particular market will be subject to reallocation
only in circumstances where the bilateral agreement limits designation and the
carrier is not operating its own aircraft or code share services.
  On
November 27, 2006, the Minister of Transport released a new international air
transportation policy called Blue Sky that includes a more liberalized approach
to Canada's bilateral air transportation negotiations. The Government of Canada
indicated that, under the new policy, it would proactively pursue opportunities
to negotiate more liberalized agreements for international scheduled air
transportation that will provide maximum opportunity for passenger and all-cargo
services to be added according to market conditions.
  Charter
Services
  Charter
operations are generally not covered by bilateral agreements, although charter
services are covered under the 1995 Canada-US Air Services Agreement. Canadian
government policy permits any Canadian carrier to operate charter services
between Canada and any point in the world subject to prior approval of the
Canadian and other appropriate regulatory authorities. Charter services are
operated by Air Canada to provide service to foreign points where it is not the
designated airline or to generate additional revenues from aircraft that would
otherwise be idle.
  In
April 2000, the Minister of Transport announced a new policy governing
international passenger charter air services. This policy removed restrictions
such as advance booking, minimum stay requirements and prohibitions on one-way
travel. To preserve a distinction between charter and scheduled international
services, this policy retains the requirements that the entire seating capacity
of an aircraft be chartered and that charter carriers be prohibited from selling
seats directly to the public.
  Emissions
  There
is heightened focus on carbon emissions emanating from the aviation
industry.  In December 2006, the European Commission proposed
legislation to add aviation into the existing European Emission Trading Scheme
("EU ETS"), which caps carbon dioxide ("CO2")
emissions from covered industries while allowing trading of CO2 permits
among those entities.  The European Parliament supported the proposal
in November 2007, but approval from the European Council is still pending. As
currently drafted, the proposed legislation calls for all flights arriving or
departing from a European Union airport to be covered by the EU ETS as of 2011.
The EU has indicated that it remains open to amending its proposed EU ETS
legislation to recognize common emissions trading schemes that may be agreed to
with third countries, so long as such schemes have the same environmental
benefit as the EU ETS.  Air Canada's management cannot predict the
final form of the proposed legislation or whether or when it will come into
force and the impact it may have on the Air Canada's business.
  On
the domestic front, on October 19, 2006, the Government of Canada tabled the
Clean Air Act with the
intention to strengthen the legislative basis for taking action on reducing air
pollution and greenhouse gases ("GHG").  On October 21, 2006, the
Government of Canada published in the Canada Gazette Part I, Notice of intent to
develop and implement regulations and other measures to reduce air
emissions.  At this time, there are no specific targets for aviation
emissions.
   - 10
-
  In
2005, Canada reached a voluntary agreement on the reduction of GHG emissions
with its aviation industry (the "Voluntary Agreement"). This Voluntary Agreement
between the Government of Canada and the members of the Air Transport
Association of Canada ("ATAC") sets out a GHG emission reduction goal on a per
unit basis.  ATAC members are committed to a fuel efficiency
improvement target of 24% from 1990 levels by 2012 (measured in litres of jet
fuel/revenue tonne kilometre). Air Canada is signatory to this Voluntary
Agreement and has already surpassed the fuel efficiency improvement target set
out therein. In 2006, Air Canada set its own new target to further limit the
environmental impact of its fleet by improving the fuel efficiency of its fleet
operations by a further 25% from 2006 to 2020.
  Official
Languages Act
  Air
Canada is subject to the Official Languages Act
(Canada) (the "OLA"). The OLA compels Air Canada to, among other things, ensure
that any member of the traveling public can communicate with and obtain services
in either official language, French and English, where there is significant
demand for those services in that language (Part IV of the OLA) and to allow
employees to work in either official language (Part V of the OLA). In 2000,
Parliament passed amendments to the Air Canada Public Participation Act to
impose on Air Canada the obligation to ensure any of its subsidiaries' customers
can communicate with the subsidiary in respect of air services and incidental
services, and obtain those services, in either official language, where the
number of customers warrants such services.
  In
September 2004, as a result of the emergence of Air Canada from protection under
the CCAA, several internal divisions and former subsidiaries of Air Canada were
spun off into limited partnerships under the direct or indirect control of ACE.
While the linguistic obligations stated above continue to apply to Air Canada
itself, ACE and the successor entities are not currently subject to official
language obligations, except that pursuant to the OLA, where services are
performed on behalf of Air Canada by another party, Air Canada has the duty to
ensure that any member of the public can communicate with and obtain those
services in either official language in any case where those services, if
provided by Air Canada, would be required under the OLA to be provided in either
official language.
  On
May 2, 2005, Bill C-47, An Act to amend the Air Canada Public Participation
Act (Canada), was tabled in the House of Commons. On November 3, 2005,
Bill C-47 passed second reading and was referred to the Standing Committee on
Transport. Bill C-47 sought to amend existing legislation to ensure that Air
Canada's successor entities are subject to official language requirements.
However, on November 29, 2005, the 38th Parliament of Canada was dissolved. As a
result, the legislative process relating to the adoption of Bill C-47 was
terminated. On December 10, 2007, Bill C-36, An Act to amend the Air Canada
Public Participation Act (Canada) was tabled in the House of Commons.
Bill C-36 proposes provisions on official languages similar to those contained
in Bill C-47. Air Canada's management cannot predict if or when such proposed
legislation will enter into force.
  Security
Initiatives
  Following
the September 11, 2001 terrorist attacks, the Minister of Transport issued new
air security measures, including increased passenger and baggage screening and
enhanced security procedures at check-in gates and on board the aircraft. Other
countries such as the United States and the United Kingdom have similarly
imposed additional security requirements. The safety and security of all
passengers and crew members on all flights is Air Canada's priority. In response
to these new measures, Air Canada reinforced the cockpit doors on all of its
mainline operating aircraft and requires passengers to produce valid
identification prior to boarding all flights. In December 2001, the Minister of
Transport announced several security initiatives including a new Canadian Air
Transport Security Authority responsible for the provision of key air security
services, an expanded program of armed police on aircraft to cover selected
domestic and international flights, and an air traveler's security charge. The
air traveler's security charge was introduced on April 1, 2002. The charges have
been revised in subsequent federal budgets. Since April 1, 2005, the maximum
charge is $10 for domestic travel and $17 for transborder and international
travel.
  In
October 2002, the Canadian government implemented its Advance Passenger
Information initiative to identify potentially high risk individuals and address
other border security issues. In March 2003, it also established a Passenger
Name Record program. Canadian and foreign carriers are now required by
regulation to provide the Canada Border Services Agency with specific personal
information on all passengers and crew members on board
   - 11
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  international
flights destined to Canada at the time of departure, as well as to provide
access to passenger name records in the carriers' internal reservation systems.
Foreign countries such as the United States, the United Kingdom, Australia,
Mexico, South Korea, China and countries that are members of the Caribbean
Community and Common Market (CARICOM) have enacted similar information
requirements with respect to flights operating into and/or from their
territory.
  On
May 6, 2004, Bill C-7, An Act
to amend certain Acts of Canada in order to enhance public safety (known
as the Public Safety
Act, 2002) received royal assent. The legislation amends certain
provisions of the Aeronautics
Act (Canada) so as to further develop the scope and objectives of the
existing national aviation security regime. The amendments include requirements
for Canadian carriers and foreign carriers operating into Canada to provide,
upon request, information concerning specified flights or persons to the
Minister of Transport, the Royal Canadian Mounted Police and the Canadian
Security Intelligence Service for transportation security or national security
purposes. These amendments came into force on May 11, 2004.
  Safety
Initiatives
  On
June 15, 2005, the Minister of Transport announced regulatory amendments to
further improve the safety performance of Canadian air operators and increase
accountability in the aviation sector through the implementation of safety
management systems. The goals of safety management systems are to increase
industry accountability, to instil a consistent and positive safety culture, and
to help improve the safety performance of air operators. Amendments to the
Canadian Aviation Regulations require air operators to implement safety
management systems in their organizations and appoint executives who are
accountable for safety. These amendments came into force on May 31, 2005 and Air
Canada has put in place its safety management systems in accordance with such
regulations. On April 27, 2006, Bill C-6, An Act to amend the Aeronautics Act
and to make consequential amendments to other Acts (Canada), was tabled
for first reading in the House of Commons. Bill C-6 seeks, among other things,
to address integrated management systems and to authorize the establishment of
voluntary reporting programs under which information relating to aviation safety
and security may be reported. On October 29, 2007, Bill C-7, which
represents the same version of Bill C-6 as adopted by the House of Commons at
Report Stage, was tabled for first reading in the House of Commons. Air Canada's
management cannot predict if or when such proposed legislation will enter into
force.
  Privacy
  Air
Canada is subject to applicable Canadian and foreign privacy laws regarding the
collection, use, disclosure and protection of passenger and employee data. Among
other things, Canada's federal private sector privacy legislation, the Personal Information Protection and
Electronic Documents Act (Canada) (the "PIPEDA"), governs the collection,
use and disclosure of personal information in the course of commercial
activities by a federally regulated business. In addition, the PIPEDA regulates
the handling of employee personal information by federally regulated employers.
Subject to certain exceptions, the PIPEDA also applies to the collection or
disclosure of personal information across provincial or Canadian international
borders and within provinces without substantially similar private sector
privacy legislation. The PIPEDA requires informed consent by the individuals
whose personal information is collected and used. The personal information may
then only be used for the purposes for which it was originally collected or for
other purposes specified in, or allowed by, in the PIPEDA. Air Canada has a
privacy policy which is designed to meet or exceed the requirements of such
privacy legislation. Air Canada's management believes that its privacy policy
and practices comply with applicable laws in Canada and elsewhere.
  Aeroplan
  Privacy
  A
number of privacy laws have been enacted in Canada. Aeroplan has a privacy
policy which is designed to meet or exceed the requirements of Canada's federal
private sector privacy legislation, the PIPEDA. The PIPEDA governs the
collection, use and disclosure of personal information in the course of
commercial activities. Pursuant to the PIPEDA, organizations may collect, use or
disclose personal information only for purposes that a reasonable person would
consider appropriate in the circumstances. Furthermore, the knowledge and
consent of the individual are required for the collection, use or disclosure of
his or her personal information except in certain circumstances as
   - 12
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  set
out in the PIPEDA. Québec, Alberta and British Columbia also have private sector
privacy legislation and that legislation has been declared substantially similar
to the PIPEDA. Management of Aeroplan believes that its privacy policy and
practices comply with the applicable law. Please see the section "Aeroplan —
Members — Protecting the Privacy of Aeroplan's Members".
  The
Data Protection Act and
various statutory instruments give effect in United Kingdom law to the EC
Directive 94/46/EC. The Data
Protection Act requires LMG, as a business which handles personal
information, to comply with data protection principles which make sure that
personal information is: fairly and lawfully processed, processed for limited
purposes, adequate, relevant and not excessive, accurate and up to date, not
kept for longer than is necessary, processed in line with the individual's
rights, secure and not transferred to other countries without adequate
protection. The Data
Protection Act also provides individuals with important rights, including
the right to find out what personal information is held on computer and most
paper records. The Information Commissioner's Office is the independent public
body set up in the United Kingdom to protect personal information and has legal
powers (including the power to issue information and enforcement notices,
conduct audits and prosecute offenders) to ensure that organizations comply with
the requirements of the Data
Protection Act. LMG has registered with the Information Commissioner's
Office in the United Kingdom as required by the Data Protection Act.
Management of LMG believes that LMG's Policy on Privacy and Data Protection,
cookie policy and practices comply with the applicable law.
  Canadian
Transportation Agency
  The
Canadian Transportation Agency has ruled that air traveler loyalty programs,
such as the Aeroplan Program, are subject to the requirements of the CTA and its
regulations as such programs are considered terms and conditions of carriage.
The Canada Transportation Agency has broad powers to regulate Aeroplan's terms
and conditions of carriage, including the power to suspend, disallow or
substitute the terms or conditions of carriage that it finds do not comply with
the requirements of the CTA or its regulations.
   INDUSTRY
OVERVIEW AND COMPETITIVE ENVIRONMENT
  ACE
is an investment holding company of various aviation investments. The following
is an overview of both the aviation industry and its competitive environment in
general and an overview of the loyalty marketing industry and its competitive
environment.
  General
  The
airline industry has traditionally been dominated by large established network
carriers. Network carriers generally benefit from brand name recognition and a
long operating history. They offer scheduled flights to major domestic and
international cities while also serving smaller cities. They generally
concentrate most of their operations in a limited number of hub cities, serving
most other destinations in their network by providing one-stop or connecting
service through their hubs. Air Canada is a network carrier although its flying
is less concentrated in hubs.
  Over
the past three decades, governments have gradually reduced economic regulation
of commercial aviation. This has resulted in a more open and competitive
environment for domestic, transborder and international airline services, for
both scheduled and leisure charter operations. This deregulation has transformed
the airline industry and allowed the emergence of low-cost carriers, which has
resulted in a rapid shift in the competitive environment. With their relatively
low unit costs largely resulting from lower labour costs and a simplified
operational model and product offering, low-cost carriers are able to operate
profitably while achieving lower yields than network carriers. By offering lower
fares, these carriers have expanded and succeeded in taking market share away
from network carriers. While the majority of low-cost carriers offer
predominantly point-to-point services between designated cities, some utilize a
"hub and spoke" strategy similar to that used by the network
carriers.  WestJet Airlines Ltd. ("WestJet") is the largest low-cost
carrier in Canada and it offers primarily point-to-point services in the
domestic Canadian, transborder and Caribbean markets.
   - 13
-
  In
order to become more competitive with the low-cost carriers and as a result of
the succession of challenging factors impacting the airline industry such as the
events of September 11, 2001, the SARS crisis and continued high fuel
prices, many North American network carriers have had to restructure either
through court-supervised or consensual processes. The degree of restructuring
and the changes being implemented vary from carrier to carrier. Network carriers
have reduced costs and capacity by negotiating labour concessions, renegotiating
aircraft financing and other contracts, rationalizing domestic capacity, and
redeploying their fleet with a focus on long-haul premium business routes. In
order to more efficiently operate their networks, certain network carriers have
also developed extensive relationships with regional airlines, which generally
operate with smaller aircraft in specific geographic areas at a lower cost than
the network carriers. These measures have enabled the network carriers to
increase their competitive advantages in the global marketplace. Air Canada was
engaged in many changes during and after its restructuring under the CCAA in
September 2004. Also, largely as a result of the strength of the Canadian
economy, Air Canada has increased its domestic capacity more than the US network
carriers.
  Air
Canada
  Domestic
Market
  The
Canadian domestic market is characterized by a large geographic territory with a
limited number of high density markets accounting for the majority of passenger
traffic and revenue. This leads to a concentration of routes in Western and
Central Canada around four major hubs: Toronto, Montreal, Vancouver and
Calgary.
  According
to Transport Canada, domestic revenue passengers grew at a compound annual rate
of 3.5% from 1993 through 2006 and are expected to grow at a compound annual
rate of 4.1% from 2006 through 2010.
  Air
Canada is the largest provider of scheduled passenger services in the Canadian
market. Based on Official Airline Guide ("OAG") data, during the period from
January 1, 2007 to December 31, 2007, Air Canada had an estimated market
share of approximately 59% of the domestic scheduled capacity based on Available
Seat Miles ("ASMs").
  Air
Canada is Canada's largest domestic airline. Jazz, which is the largest regional
airline in Canada and Canada's second largest airline based on fleet size and
number of routes operated, operates regional service for Air Canada under the
CPA. Air Canada, together with Jazz, carries more passengers, serves more
non-stop destinations and provides more flights in the domestic market than any
other airline. Competition in the domestic market is primarily from WestJet. As
at December 31, 2007, Air Canada, together with Jazz, serviced 57 domestic
destinations within Canada, while WestJet serviced 26 domestic
destinations.
  WestJet
is Canada's third largest airline based on fleet size and number of routes
operated. WestJet has indicated that, by the end of 2008, it is expecting to
have 77 aircraft in its fleet and to increase its capacity by
16%.  Canada's fourth and fifth largest airlines are Canadian North
and First Air, respectively, based in Yellowknife and Iqaluit, and they operate
services primarily connecting northern Canada to the rest of the
country.
  Transborder
Market
  As
at December 31, 2007, there were 1,087 daily scheduled transborder flights
operated between Canada and the United States across the industry. Toronto
Lester B. Pearson International Airport ("Toronto Pearson Airport"), Air
Canada's largest hub, is the world's largest originator of flights into the
United States.
  According
to Transport Canada, transborder revenue passengers grew at a compound annual
rate of 3.2% from 1993 to 2006 and are expected to grow at a compound annual
rate of 4.8% from 2006 to 2010.
  Air
Canada is the largest provider of scheduled passenger services in the
transborder market. Based on OAG data, during the period from January 1, 2007 to
December 31, 2007, Air Canada provided more transborder scheduled capacity than
any other airline with an estimated market share of approximately 39% based on
ASMs.
   - 14
-
  Air
Canada, together with Jazz, carries more passengers, serves more non-stop
destinations and provides more flights in the transborder market than any other
airline.
  Competition
in the transborder market is primarily from U.S. network carriers and their
regional affiliates, which tend to operate flights between the United States and
Canada via their hubs for connecting flights. U.S. network carriers with
transborder operations include Alaska Airlines, American Airlines, Continental
Airlines, Delta Airlines, Northwest Airlines, United Airlines and U.S. Airways.
As of December 31, 2007, Air Canada, together with Jazz, serviced 46 U.S.
destinations (including five seasonal destinations) from Canada, while U.S.
carriers serviced 29 U.S. destinations from Canada. In addition, one U.S.
low-cost carrier, Frontier Airlines, operates service from Denver to
Vancouver.
  Canadian
low-cost carriers also operate transborder services and have expressed an
intention to expand these operations in the future. As at December 31, 2007,
WestJet provided transborder services to 12 destinations in the United
States.
  International
Market
  Canadian
airlines principally service the international market from three
strategically-positioned airports. Toronto Pearson Airport, Canada's largest, is
located in Canada's largest city and offers regular non-stop flights to numerous
destinations in Europe, Central America/Caribbean/South America and, more
recently, to Asian destinations. Toronto Pearson Airport offers over
510 daily departures, of which 10% are to international destinations.
Montreal-Pierre Elliott Trudeau International Airport ("Montreal Trudeau
Airport") is located in Canada's second largest city, and offers regular
non-stop service to several European destinations and certain Central
American/Caribbean and South American destinations. Montreal Trudeau Airport
offers 227 daily departures, of which 10% are to international destinations.
Vancouver International Airport, located in Canada's third largest city, is
strategically positioned on Canada's west coast and acts as a gateway to many
Asian destinations. Vancouver International Airport offers over 321 daily
departures, of which 7% are to international destinations.
  According
to Transport Canada, international revenue passengers in the international
market to and from Canada grew at a compound annual rate of 5.7% from 1993 to
2006 and are expected to grow at a compound annual rate of 6.3% from 2006 to
2010. According to The Conference Board of Canada, a strong Canadian dollar,
growth in the Canadian economy, an interest by Canadians to visit more distant
destinations, an aging Canadian population and an increase in international air
capacity are key factors that will contribute to stronger growth in outbound
travel spending.
  Air
Canada is Canada's largest provider of scheduled passenger services in the
international carrier market to and from Canada and has a broad portfolio of
international route rights. Based on OAG data, during the period from January 1,
2007 to December 31, 2007, Air Canada provided more international scheduled
capacity in the international market to and from Canada than any other airline
with an estimated market share of approximately 41% based on ASMs. Air Canada is
currently the only Canadian scheduled carrier with routes from Canada to Asia,
although a number of Asian carriers service Canadian destinations. Air Canada is
also the sole Canadian scheduled carrier offering flights to South America and
no South American scheduled network carrier currently provides service to
Canada.
  The
expansion of major airline alliances, such as Star AllianceTM,
oneworld® and
SkyTeam® has led
to more efficient operations in the trans-Atlantic and trans-Pacific markets. In
such markets, Air Canada competes primarily with foreign network carriers and,
to a lesser extent, with charter carriers on higher density routes during peak
travel seasons. In addition, U.S. network carriers compete by flying Canadian
passengers through their hubs to the international market.
  Aeroplan
  Aeroplan
generally competes with other forms of marketing services, including
advertising, promotions and other loyalty incentives, both traditional and
on-line, for a portion of a client's total marketing budget. In addition,
Aeroplan competes against proprietary loyalty programs developed by Aeroplan's
existing and potential
   - 15
-
  commercial
partners. Aeroplan's principal competitors in Canada include the Air MilesTM
program, frequent flyer programs operated by airlines, and loyalty programs
operated by consumer products and services retailers, credit and charge card
institutions including RBC AvionTM and
gasoline retailers.
  Similarly,
LMG generally competes with other forms of marketing services, including
advertising, promotions and other loyalty incentives, both traditional and
on-line, for a portion of a client's total marketing budget. With over 10
million active members, Nectar is the leading loyalty program in the United
Kingdom. The rest of the market is largely fragmented as the vast majority of
loyalty programs in the United Kingdom represent single retailer in-house
programs (the main one being Boots' Advantage card). LMG's principal competitors
which operate coalition loyalty programs are Tesco and the Air MilesTM
program.
  For
each of Aeroplan's and LMG's marketing services, Aeroplan expects competition
will remain intense in the respective market. In addition, competitors of the
Aeroplan and Nectar Programs may target their Accumulation Partners (as defined
in the section "Aeroplan – Overview") and members as well as draw rewards from
Redemption Partners (as defined in the section "Aeroplan – Overview"). The
ability to generate Gross Billings (as defined in the section "Aeroplan –
Aeroplan's Business Model – Sale of Aeroplan Miles and Marketing Services to
Sales Partners") from Accumulation Partners will depend on their ability to
differentiate themselves through the products and services offered and the
attractiveness of the programs to members. The continued attractiveness of the
programs will depend in large part on the ability to remain affiliated with
commercial partners that are valuable to members and to offer rewards that are
both attainable and attractive to members. For database marketing services, the
ability to continue to capture detailed transaction data on members is critical
to providing effective customer relationship management strategies for
Accumulation Partners.
   THREE-YEAR
SUMMARY: EVOLUTION OF BUSINESS
  Air
Canada's Consolidated Plan of Reorganization, Compromise and
Arrangement
  On
September 30, 2004, Air Canada and the following of its then wholly-owned
subsidiaries: Jazz Air Inc., ZIP Air Inc., 3838722 Canada Inc.,
Air Canada Capital Ltd., Manoir International Finance Inc., Simco Leasing
Ltd., and Wingco Leasing Inc. (collectively, the "Applicants") emerged from
creditor protection under the CCAA and implemented the Plan. The purpose of the
Plan, together with Air Canada's new business strategy, was to restructure the
capitalization, operations and cost structure of Air Canada. The Plan and the
new business strategy were designed to:
  (i)
              reduce
      Air Canada's operating costs to a competitive level through the
      renegotiation of collective bargaining agreements, aircraft leases,
      property leases and various other commercial
  agreements;
  (ii)
              implement
      a fleet renewal program to achieve the appropriate number, size and mix of
      aircraft for Air Canada's route
network;
  (iii)
              complete
      a restructuring of Air Canada's debt and lease
  obligations;
  (iv)
              redefine
      Air Canada's core product offerings to enable it to compete effectively in
      the current and future airline industry environment;
  and
  (v)
              reorganize
      Air Canada's corporate structure to enable certain key businesses to
      better compete for third party business and generate value for their
      stakeholders.
  The
implementation of the Plan reduced Air Canada's debt (net of cash and cash
equivalents) and lease obligations (on a present value basis) to approximately
$4 billion as at December 31, 2004 compared to $12 billion as at
December 31, 2002, prior to Air Canada's filing for protection under the
CCAA. Also, as part of the implementation of the Plan, all the preferred shares
of Air Canada were cancelled and all of the holders of common shares and
Class A non-voting shares of Air Canada exchanged their shares for Voting
Shares and Variable Voting Shares. Pursuant to such exchange, the former holders
of common shares and Class A non-voting shares of Air Canada received 0.01% of
the fully diluted equity of ACE upon emergence from the CCAA
proceedings.
   - 16
-
  On
September 30, 2004, as part of the implementation of the Plan, Air Canada
reorganized its corporate structure. Pursuant to such corporate reorganization,
APLN Limited Partnership (a predecessor to Aeroplan), Jazz Air Inc. (the
predecessor to Jazz Air Limited Partnership and Jazz Air LP) and Touram Inc.
(the predecessor to Touram Limited Partnership), which were already established
as stand-alone entities under Air Canada, became stand-alone entities under ACE,
while ACTS Limited Partnership (a predecessor to ACTS LP), AC Cargo Limited
Partnership and ACGHS Limited Partnership were established as stand-alone
limited partnerships under ACE.
  As
a result, ACE is an investment holding company of various aviation interests.
ACE's corporate structure was designed to facilitate the development of each
business unit to its fullest individual potential including, where appropriate,
through the pursuit of third party sources of business, and to maximize the
value of the subsidiaries.
  Rights
Offering
  As
part of the Plan, ACE offered rights to Air Canada's creditors with proven
claims to subscribe for up to $850 million of Voting Shares and/or Variable
Voting Shares ("Shares"). Pursuant to its standby purchase agreement with Air
Canada, Deutsche Bank Securities Inc. ("Deutsche Bank") agreed to act as the
exclusive standby purchaser in respect of the rights offering. Deutsche Bank and
the participants in its syndicate subscribed for all the Shares not otherwise
subscribed for by the creditors at a subscription price per Share of $21.50,
which represented the subscription price of $20 paid by creditors, plus a
premium of $1.50. On September 30, 2004, ACE completed the issuance of
Shares under such rights offering for total gross proceeds of $865 million,
including the amount of the premium paid by Deutsche Bank and the participants
of its syndicate pursuant to the standby purchase agreement.
  Investment
Agreement
  On
September 30, 2004, Promontoria Holding III B.V. ("Cerberus Affiliate")
invested $250 million in ACE in consideration for the issuance to it of
12,500,000 Preferred Shares initially convertible into 9.16% of the fully
diluted equity of ACE upon emergence from the CCAA proceedings. For a summary of
the terms of the Preferred Shares, see "Description of Capital Structure —
Preferred Shares".
  Pursuant
to the investment agreement with the Cerberus Affiliate dated June 23, 2004
("Investment Agreement"), three of the eleven members of the board of directors
of ACE appointed pursuant to the Plan were designated by the Cerberus Affiliate.
The Cerberus Affiliate had the right to designate three of the
eleven members of the board of directors of ACE for a minimum of two years
after September 30, 2004. Since September 30, 2006, for as long
as the Cerberus Affiliate and its affiliates hold at least 75% of the Preferred
Shares (or Shares into which they are converted or convertible) originally
purchased under the Investment Agreement, the Cerberus Affiliate will continue
to have the right to designate three individuals to the board of directors of
ACE. Since September 30, 2006, for as long as the Cerberus Affiliate
and its affiliates hold at least 50% but less than 75% of the Preferred Shares
(or Shares into which they are converted or convertible) originally purchased
under the Investment Agreement, the Cerberus Affiliate will have the right to
designate two individuals to the board of directors of ACE. For as long as the
Cerberus Affiliate and its affiliates hold at least 25% but less than 50% of the
Preferred Shares (or Shares into which they are converted or convertible)
originally purchased under the Investment Agreement, the Cerberus Affiliate will
have the right to designate one member of the board of directors of ACE. For as
long as the Cerberus Affiliate and its affiliates hold at least 2.5% of the
economic equity interests of ACE, the Cerberus Affiliate will have the right, at
reasonable times and upon reasonable notice, to have access to the management of
ACE and to all reasonable financial and operating information of ACE, including
business plans, budgets and quarterly results, in order to consult with
management of ACE and express its views on the business and affairs of ACE and
its subsidiaries. The Preferred Shares (including the Shares into which they are
converted or convertible) were subject to contractual transfer
restrictions.
  The
terms attached to the Preferred Shares provide the Cerberus Affiliate with
pre-emptive rights on any issuance or sale by ACE of Variable Voting Shares or
Voting Shares or other equity securities, rights, options, warrants or other
convertible securities which represent rights to purchase Variable Voting Shares
or Voting Shares. As of March 28, 2008, the Cerberus Affiliate held
6.55 million Preferred Shares, representing 52.4% of all outstanding
Preferred Shares. Carlton D. Donaway, one of the three directors of ACE
appointed by the Cerberus
  - 17
-
    Affiliate,
resigned as of March 4, 2008. For further details, see "Description of Capital
Structure — Preferred Shares — Pre-emptive Rights".
  Air
Canada Pension Plan Arrangements
  The
solvency position of Air Canada's defined benefit registered pension plans
deteriorated significantly in 2002 as a result of various macroeconomic
developments, triggering a series of valuation and funding directions to Air
Canada by the Office of the Superintendent of Financial Institutions ("OSFI"),
the federal pension regulator, in March 2003. On September 30, 2004, after
negotiations with OSFI and representatives of the pension plan stakeholders, the
Air Canada Pension Plan
Solvency Deficiency Funding Regulations came into effect. The regulations
extended the usual five-year amortization period for solvency deficits to ten
years, and provided for the making of variable annual amortization payments
according to an agreed schedule rather than the usual equal annual payments. Air
Canada also issued a series of subordinated secured promissory notes in the
aggregate initial amount of approximately $347 million in favour of the
pension plan trustees, of which approximately $61 million is outstanding as
at January 31, 2008. The promissory notes are secured by a second priority
charge over assets of Air Canada and certain of its affiliates and will be
reduced by the capital portion of the solvency deficit amortization payments
made by Air Canada to the pension plans in accordance with the agreed
schedule.
  Air
Canada's Arrangements with Unions
  Following
its filing for protection under the CCAA, Air Canada concluded in 2003 and
amended in 2004 long-term collective agreements with the International
Association of Machinists and Aerospace Workers ("IAMAW"), the Air Canada Pilots
Association ("ACPA"), the Canadian Union of Public Employees ("CUPE"), the
Canadian Air Line Dispatchers Association ("CALDA"), the National Automobile,
Aerospace, Transportation and General Workers Union of Canada ("CAW") and the
International Brotherhood of Teamsters ("IBT"), which expire in 2009. Air Canada
also concluded agreements with the Transport and General Workers Union ("TGWU")
and Amicus, both in the United Kingdom, which also expire in 2009. All these
labour agreements were ratified by the members of their respective bargaining
units. The agreements provided for a combination of productivity improvements
and wage reductions. All unconditional employment security provisions in the
collective agreements were also eliminated. All scheduled bonus payments and
wage increases were cancelled and all overtime is now paid at one and a half
times the applicable pay rate. Air Canada also entered into "clean slate"
agreements with all of its North American unions where the parties agreed to
resolve, waive or compromise outstanding grievances.
  These
collective agreements also provided for negotiations limited to the subject of
wages (and for pilots, some pension issues) in 2006, subject to mediation and
binding arbitration with no strikes or lock-outs during those negotiations. In
2006, Air Canada concluded wage re-opener agreements, mediations or arbitrations
under the collective agreements with all its union groups. The average of the
wage adjustment agreements and awards represents an increase of approximately 5%
over the three-year period from mid-2006 to mid-2009.
  Embraer
Purchase Agreement
  In
2004, Air Canada signed a definitive purchase agreement with EMBRAER — Empresa
Brasileira de Aeronautica S.A. ("Embraer") covering firm orders for 45 Embraer
ERJ-190 aircraft as well as 15 Embraer ERJ-175 aircraft.  The 15
Embraer ERJ-175 aircraft have all been delivered.
  In
2007, Air Canada took delivery of 24 Embraer ERJ-190 aircraft for a total of 42
Embraer ERJ-190 aircraft delivered as at December 31, 2007.  Since
December 31, 2007, Air Canada has taken delivery of the remaining three Embraer
ERJ-190 aircraft.
  Public
Offering of ACE Voting Shares, Variable Voting Shares and Convertible Senior
Notes due 2035
  On
April 6, 2005, ACE completed a public offering of an aggregate of 11.35
million Voting Shares and Variable Voting Shares at a price of $37 per share for
gross proceeds of approximately $420 million and approximately
$300 million of Notes. ACE used approximately $553 million of the
aggregate net cash proceeds of the offerings to repay all of its outstanding
debt under the exit credit facility with GECC. On April 13, 2005,
  - 18
-
   following
the exercise of the over-allotment option by the underwriters, ACE issued an
additional 1,135,000 Variable Voting Shares at a price of $37 per share and
$30 million of Notes for additional aggregate gross proceeds of
approximately $72 million. ACE used the additional proceeds for general
corporate purposes.
  Initial
Public Offering of Aeroplan Income Fund
  On
June 29, 2005, Aeroplan Income Fund completed its initial public offering
of 25 million units at a price of $10 per unit for aggregate gross proceeds
of approximately $250 million. On June 30, 2005, following the exercise of the
over-allotment option by the underwriters, Aeroplan Income Fund issued an
additional 3.75 million units at a price of $10 per unit for additional
gross proceeds of approximately $37.5 million. In connection with the
June 29, 2005 offering, Aeroplan Limited Partnership completed a
$475 million senior secured syndicated credit facility, $300 million
of which was used to fund a portion of the reserve for Aeroplan Mile
redemption.
  US
Airways Group Inc.
  On
September 27, 2005, ACE invested $87 million (US$75 million) in
US Airways Group Inc. ("US
Airways")
in conjunction with the carrier's exit from US bankruptcy proceedings. In
connection with the equity investment, ACE also received options to purchase
additional common shares in US Airways. On closing of the transaction, ACE sold
these options for proceeds of $1 million. In the second and third quarters
of 2006, ACE disposed of 4.5 million shares of its holdings in US Airways for
net proceeds of $232 million and recorded a gain of $152 million. During 2007,
ACE disposed of the remaining 500,000 shares in US Airways for net proceeds of
$16million.
  Aircraft
Purchase Agreement between The Boeing Company and Air Canada
  In
November 2005, Air Canada concluded agreements with The Boeing Company
("Boeing") for the acquisition of up to 36 Boeing 777 aircraft and up to 60
Boeing 787 Dreamliners. The initial order for the 36 Boeing 777 aircraft was
comprised of firm orders for 18 aircraft plus purchase rights for 18
more.  The initial order for the Boeing 787 aircraft was comprised of
firm orders for 14 aircraft plus purchase rights, options and rolling options
for 46 aircraft.
  During
2007, Air Canada amended agreements with Boeing to cancel orders for two Boeing
777 aircraft scheduled for delivery in 2009. In addition, Air Canada increased
its order for Boeing 787 aircraft by 23, bringing its total firm orders to 37
Boeing 787 aircraft. The first delivery of the Boeing 787 firm aircraft is
scheduled for 2010 and deliveries of all 37 firm aircraft are scheduled to be
completed by 2014.
  In
2007, Air Canada introduced five Boeing 777-300ER aircraft and three 777-200LR
aircraft into its fleet.  Since December 31, 2007, an additional three
Boeing 777-200LR aircraft and one Boeing 777-300ER aircraft were added to the
fleet for a total of 12 Boeing 777 aircraft delivered to
date.
  Initial
Public Offering of Jazz Air Income Fund
  On
February 2, 2006, ACE completed an initial public offering of the Jazz Air
Income Fund, issuing 23.5 million units at a price of $10 per unit for aggregate
gross proceeds of approximately $235 million. In addition, on February 27, 2006,
Jazz Air Income Fund issued an additional 1.5 million units at a price of $10
per unit for additional gross proceeds of $15 million from the exercise of an
over-allotment option. In addition, a $150 million secured syndicated credit
facility was established by Jazz Air Limited Partnership of which approximately
$115 million was drawn on closing of the offering.
  Distribution
of Units of Aeroplan Income Fund by ACE
  On
March 3, 2006, ACE effected a distribution by way of reduction of capital to its
shareholders of record as at such date of 0.18 units of Aeroplan Income Fund per
Variable Voting Share, Voting Share and Preferred Share (on an as converted
basis) of ACE. For the purposes of the distribution, ACE converted 20,204,165
units of Aeroplan Limited Partnership into 20,204,165 units of
   - 19
-
   Aeroplan
Income Fund which were distributed to ACE's shareholders on the record
date.
  Initial
Public Offering and Secondary Public Offering of Air Canada Shares
  On
November 24, 2006, ACE and Air Canada completed an initial public offering and
secondary offering of an aggregate 25 million Class A variable voting
shares and Class B voting shares of Air Canada at $21 per share for gross
proceeds of $525 million. Through the initial public offering, Air Canada sold
an aggregate of 9,523,810 Class A variable voting shares and Class B voting
shares for gross proceeds of approximately $200 million. In the secondary
offering, ACE sold an aggregate of 15,476,190 Class A variable voting shares and
Class B voting shares for gross proceeds of approximately $325
million.
  Prior
to the closing of the initial public offering, ACE proceeded with a
reorganization of its corporate structure. Pursuant to such reorganization, the
partnership interests, as well as the interests in the general partners of ACGHS
Limited Partnership and AC Cargo Limited Partnership not held by Air Canada,
were transferred to Air Canada and ACE transferred a 51% partnership interest
in, as well as a 51% interest in the general partner of, Touram Limited
Partnership to Air Canada.  In 2007, ACE sold to Air Canada its
remaining 49% interest in Touram Limited Partnership causing Touram Limited
Partnership to be 100% owned by Air Canada.
  As
of March 28, 2008, ACE held a 75% ownership interest in Air
Canada.
  Statutory
Arrangement of ACE and Initial Distribution to its Shareholders
  On
October 5, 2006, ACE's shareholders approved a statutory arrangement
pursuant to the CBCA granting authority to the board of directors of ACE to
make, from time to time, one or more distributions in an aggregate amount of up
to $2 billion to ACE shareholders by way of reduction of the stated capital
on the Variable Voting Shares, Voting Shares and Preferred Shares.
  Pursuant
to the statutory arrangement, ACE announced on December 28, 2006, the terms of
an initial distribution of 50 million units of Aeroplan Income Fund to ACE
shareholders. ACE shareholders on January 10, 2007, the record date for the
distribution, received a distribution of approximately 0.442 units of Aeroplan
Income Fund per Variable Voting Share, Voting Share and Preferred Share (on an
as converted basis) of ACE. For the purpose of the distribution, ACE exchanged
50 million Aeroplan Limited Partnership units into 50 million Aeroplan Income
Fund units which were distributed to ACE's shareholders on the record
date.
  ACE
also exchanged on January 10, 2007 60 million units of Aeroplan
Limited Partnership into 60 million units of Aeroplan Income Fund for internal
reorganization purposes.
  Acquisition
by ACTS LP of Majority Stake of Aeroman
  On
February 13, 2007, ACTS LP, through a wholly-owned subsidiary, acquired 80% of
Aeroman, the aircraft maintenance division of Grupo TACA of El Salvador. Total
consideration for this acquisition included cash as well as a right to acquire
an equity stake in ACTS LP. The cash component of US$44.7 million consisted of
cash of US$42.7 million on closing and milestone payments of up to US$2 million
in the aggregate, funded by ACTS LP through ACE's available cash resources. A
Class A non-voting exchangeable share in a wholly-owned subsidiary of ACTS LP
was issued to Grupo TACA. Subsequent to the issue, ACE agreed to a transfer of
Grupo TACA's rights to a Grupo TACA related party. The rights attached to the
exchangeable share provide for, upon the closing of the monetization transaction
pertaining to ACTS, the exchangeable share held by Grupo TACA to be exchanged
for an equity stake in ACTS LP. As part of the monetization process, on October
16, 2007, the exchangeable share was exchanged for a 5% equity stake in ACTS
Aero and approximately $31 million in cash.Grupo TACA can put its
equity in ACTS Aero to ACE at a value of approximately $18.3 million over the
period of 12 months commencing on October 16, 2007.
   - 20
-
   Second
Distribution to ACE Shareholders under Statutory Arrangement
  On
March 2, 2007, ACE announced a second distribution to its shareholders by
way of reduction of stated capital under the statutory arrangement approved on
October 5, 2006, pursuant to which ACE shareholders of record on
March 14, 2007 received approximately 0.177 units of Aeroplan Income
Fund and 0.219 units of Jazz Air Income Fund per Variable Voting Share, Voting
Share and Preferred Share (on an as converted basis) of ACE. For the purpose of
the distribution, on March 14, 2007, ACE exchanged 25 million units of
Jazz Air Limited Partnership into 25 million units of Jazz Air Income Fund,
which were distributed to ACE's shareholders on the record date.
  On
March 14, 2007, ACE also exchanged its remaining 40,545,835 units of
Aeroplan Limited Partnership into 40,545,835 units of Aeroplan Income Fund.
On April 2, 2007, ACE exchanged its remaining 47,226,920 units of Jazz Air LP
into 47,226,920 units of Jazz Air Income Fund.
  Third
Distribution to ACE Shareholders under Statutory Arrangement
  On
May 11, 2007, ACE announced a third distribution to its shareholders by way of
reduction of stated capital under the statutory arrangement approved on
October 5, 2006, pursuant to which ACE shareholders of record on
May 24, 2007 received approximately 0.157 units of Aeroplan Income Fund and
0.105 units of Jazz Air Income Fund per Variable Voting Share, Voting Share and
Preferred Share (on an as converted basis) of ACE.
  Monetization
of ACTS LP
  On
June 22, 2007, ACE announced that it has agreed to sell a 70% interest in the
business of its wholly owned maintenance, repair and overhaul subsidiary ACTS LP
to a consortium consisting of Sageview Capital LLC, a private investment firm,
and KKR Private Equity Investors, L.P., the publicly traded fund of Kohlberg
Kravis Roberts & Co. The transaction was completed on October 16, 2007 and
ACE received net cash proceeds of $723 million. Within 6 months of closing, ACE
was entitled to receive up to an additional $40 million in cash proceeds, from
funds held in escrow, conditional upon the completion of certain supplier
contracts within specified terms. On January 14, 2008, ACE announced that it had
received the full balance of $40 million. As a result of the transaction, ACE
continues to own 100% of ACTS LP, which is now a non-operating entity, and ACTS
Aero conducts the business previously operated by ACTS LP.
  Following
the redemption of the exchangeable share issued to a party related to Grupo TACA
and the establishment of an initial long-term incentive plan for ACTS LP, ACE
holds a 23% equity interest in ACTS Aero.
  Secondary
Offering of units of Aeroplan Income Fund and Jazz Air Income Fund
  On
October 1, 2007, ACE announced that it had entered into an agreement with a
group of underwriters to sell an aggregate of 35.5 million trust units of Jazz
Air Income Fund at a price of $7.75 per unit for gross proceeds of $275.1
million. On the same day, ACE announced that it had also entered into an
agreement with a group of underwriters to sell an aggregate of 22 million trust
units of Aeroplan Income Fund at a price of $21.90 per unit, for gross proceeds
of $481.8 million. On October 22, 2007, ACE completed the secondary offering of
22 million units of Aeroplan Income Fund and 35.5 million units of Jazz Air
Income Fund and received aggregate net proceeds of $726 million.
  Aeroplan
Acquisition of LMG
  On
December 20, 2007, Aeroplan completed the acquisition of LMG, a loyalty
marketing and insight and analysis company that owns and operates the Nectar
Program in the United Kingdom. The acquisition was completed for total
consideration of £355.1 million ($715.4 million) and an additional
amount of £27.1 million ($53.7 million) has been placed in escrow as
contingent consideration pending the outcome of LMG's VAT
litigation.
   - 21
-
   Substantial
Issuer Bid: ACE Repurchases up to $1.5 billion of its Variable Voting Shares and
Voting Shares
  On
December 3, 2007, ACE announced a substantial issuer bid to purchase for
cancellation up to $1.5 billion of its Variable Voting Shares and Voting
Shares for an aggregate of 54,151,624 shares. The offer was made by way of a
"modified Dutch auction" and expired at 5:00 p.m. (Montreal time) on
January 10, 2008. The holders of Preferred Shares were entitled to participate
in the offer by depositing their Preferred Shares on an as-converted basis. On
January 10, 2008, ACE announced the final results of its offer to purchase
$1.5 billion of its Variable Voting Shares and Voting Shares and confirmed that
it had taken up and accepted for purchase and cancellation a total of 40,023,427
Variable Voting Shares and 9,894,166 Voting Shares at $30.00 per share for an
aggregate purchase price of approximately $1.498 billion. No Preferred Shares of
ACE were deposited under the offer.
   Sale
of 13 million units of Jazz Air Income Fund
  On
January 16, 2008, ACE announced its acceptance of an offer to sell a total
of 13 million units of Jazz Air Income Fund on an exempt trade basis to certain
funds and accounts managed by West Face Capital Inc. and to Sunrise Partners
Limited Partnership at a price of $7.45 per unit representing total gross
proceeds to ACE of approximately $96.85 million. The sale closed on
January 24, 2008. As a result, ACE no longer had the ability to appoint the
majority of the directors of Jazz Air Holding GP Inc. pursuant to the
Securityholders' Agreement entered into between Jazz Air Income Fund, Jazz Air
Trust, Jazz Air LP and Jazz Air Holding GP Inc.
  The
Securityholders' Agreement was terminated by the parties effective as of
February 7,2008.
  As
of March 28, 2008, ACE held approximately 9.5% of the issued and outstanding
units of Jazz Air Income Fund.
   - 22
-
   OVERVIEW
OF THE BUSINESS
  ACE
is an investment holding company of various aviation interests including Air
Canada, Aeroplan Limited Partnership, Jazz Air Income Fund and ACTS
Aero.
  Air
Canada
  Air
Canada is Canada's largest domestic and international airline and the largest
provider of scheduled passenger services in the Canadian market, the Canada - US
transborder market and in the international market to and from Canada. AC Cargo
Limited Partnership, together with Air Canada, is Canada's largest provider of
air cargo services. ACGHS Limited Partnership is a passenger and ground handling
service provider. Air Canada Vacations is a major Canadian tour operator
offering leisure vacation. See "Air Canada".
  Aeroplan
  Aeroplan
is Canada's premier loyalty marketing program. Aeroplan provides its commercial
partners, including Air Canada, with loyalty marketing services designed to
stimulate demand for such partners' products and services. See
"Aeroplan".
  Other
Investments
  Jazz
  Jazz
is the largest regional airline and second largest airline in Canada, after Air
Canada, based on fleet size and number of routes operated. Jazz operates both
domestic and US transborder services for Air Canada under a capacity purchase
agreement. See "Other Investments – Jazz").
  ACTS
Aero
  ACTS
Aero is a full-service aircraft maintenance, repair and overhaul organization
that competes on a global basis. (See "Other Investments – ACTS
Aero").
  Strategy
  As
part of the Plan, a new corporate structure was established for the investments
of ACE. This new corporate structure was designed to:
  (i)
              put
      in place separate management and business plans for each business to
      better focus their strategic direction and profit making
      efforts;
  (ii)
              align
      management, capital and human resource needs within each individual
      business;
  (iii)
              facilitate
      the development of each business to its fullest individual potential
      including, where appropriate, through the pursuit of third party business;
      and
  (iv)
              maximize
      the value of investments that has not been fully
    recognized.
  ACE's
value enhancement strategy for its stand-alone entities includes considering
stand-alone financings, sales and distributions of equity interests and
involving outside investors for these and other purposes. Implementation of this
strategy has notably involved: (a) the initial public offering of Aeroplan
Income Fund on June 29, 2005; (b) the initial public offering of Jazz Air Income
Fund on February 2, 2006; and (c) the initial public offering and secondary
public offering of Air Canada on November 24, 2006.
 
 In
addition, ACE continued to execute
its strategy on several fronts resulting in additional value realization and
significant distributions to ACE shareholders, including (i)
distribution of $2 billion worth of Aeroplan Income Fund and Jazz Air Income
Fund units to ACE shareholders by way of return of capital; (ii) acquisition by
ACTS LP
   - 23
-
  of an 80% interest in Aeroman, a
maintenance, repair andoverhaul operation located in Central
America; (iii)monetization of 70% of ACTS resulting in
the receipt of $763 million of cash and a retained 23% equity interest; (iv)
secondary offerings of Aeroplan Income Fund and Jazz Air Income Fund for net
cash proceeds of $726
million; and (v) launching a $1.5 billion substantial issuer bid in December
2007.
 
 In January 2008, ACE completed the
substantial issuer bid and also sold down more of its stake in Jazz Air Income
Fund by way of an exempt trade for net cashproceeds of $96.85
million.
 
 Going forward, ACE will continue to
execute on its strategy as it realizes its remaining interests in Aeroplan and
Jazz. Finally, to maximize value to ACE shareholders, management and the boardof directors of ACE will explore all options for ACE's remaining 75%
interest in Air Canada.


Business
of ACE
  During
2007, ACE had the following reportable segments: Air Canada, Aeroplan up to
March 14, 2007, Jazz up to May 24, 2007, ACTS LP up to October 16, 2007 and
Corporate Items and Eliminations ("CIE").
 Year
      ended December 31, 2007(1)(in
      millions)Air
      Canada
                Aeroplan(2)
                Jazz(3)
                ACTS(4)
                CIE
      (5)
                ACE
                    ConsolidatedOperating
      RevenuePassenger
      Revenue
                $9,329
                -
                -
                -
                $15
                $9,344Cargo
      Revenue
                548
                -
                -
                -
                -
                548Other
      Revenue
                649
                198
                3
                193
                (109)
                934External
      Revenue
                10,526
                198
                3
                193
                (94)
                10,826Inter-segment
      Revenue
                120
                3
                610
                604
                (1,337)
                -Total
      Revenue
                10,646
                201
                613
                797
                (1,431)
                10,826Operating
      Expenses
                10,213
                161
                551
                777
                (1,329)
                10,373Operating
      Income  (Loss)
                $433
                $40
                $62
                $20
                $(102)
                $453
    (1)
              Segment information has been
      prepared consistent with how financial information is produced internally
      for the purposes of making business decisions. Segments negotiate
      transactions between each other as if they were unrelated parties. See
      note 18 "Segment Information" in ACE's audited consolidated financial
      statements for the year ended December 31, 2007 for additional
      information.
 (2)
              ACE
      held a 20.1% ownership interest in Aeroplan as at December 31, 2007
      through its holdings of 20.1% of the units of Aeroplan Income
      Fund.  Effective March 14, 2007, the results and financial
      position of Aeroplan are not consolidated with ACE.  ACE's
      remaining interest in Aeroplan is accounted for using the equity
      method.
 (3)
              Includes
      Jazz's operations under the capacity purchase agreement with Air Canada.
      ACE held a 20.1% ownership interest in Jazz as at December 31, 2007 and,
      as of March 28, 2008, ACE held a 9.5% ownership interest in Jazz, in both
      cases through its holdings of  units of Jazz Air Income
      Fund.  Effective May 24, 2007, the results and financial
      position of Jazz are not consolidated with ACE.  ACE's remaining
      interest in Jazz is accounted for using the equity
  method.
 (4)   ACE
      helda 23.0% ownership interest in ACTS Aero as at
      December 31, 2007.  Effective October 16, 2007, the results and
      financial position of ACTS are not consolidated with ACE.  ACE's
      remaining interest in ACTS is accounted for using the equity
      method.
 (5)
              Corporate
      Items and Eliminations ("CIE") includes the corporate, financing and
      investing activities of ACE. ACE's investments in Aeroplan, Jazz and ACTS
      Aero were changed in 2007 from the consolidation to equity method of
      accounting reported under the CIE segment.  CIE also includes
      certain consolidation adjustments related to revenue recognition
      differences amongst the operating segments. These consolidation
      adjustments are related to the timing of recognition and the presentation
      of revenue related to Aeroplan redemptions and the timing of revenue
      recognition related to maintenance services provided by ACTS (completed
      contract basis of accounting for engine and component maintenance
      services) versus the expense recognition in Air Canada and Jazz, which is
      as the work is completed. In addition, consolidation adjustments were made
      related to the timing of revenue and expense recognition pertaining to
      power-by-the-hour contracts. Subsequent to the change in accounting for
      ACE's investments in Aeroplan and ACTS, these consolidation adjustments
      are no longer recorded in CIE.  Future income taxes are recorded
      within the applicable taxable entities and are not allocated to
      non-taxable entities.
 
 As
at March 28, 2008, ACE had seven full-time equivalent employees on an
unconsolidated basis.
   - 24
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AIR
CANADA
  Routes
and Schedules
  Air
Canada
  Air
Canada (excluding Jazz) operates, on average, approximately 600 average
daily departures to 14 destinations in Canada, 29 destinations in the
United States and 55 destinations in the Canada-Europe, Canada-Pacific,
Canada-Caribbean/Central America and Canada-South America markets. Domestic,
transborder and international departures account for 51%, 31% and 18%,
respectively, of the approximately 600 average daily departures. Air Canada's
current route network extends to 40 countries and territories.
  In 2007,
Air Canada, together with Jazz, operated on average of approximately 1,370
scheduled flights each day and carried over 33 million passengers in the
domestic, transborder and international markets. Air Canada, together with Jazz,
provided direct passenger service to 158 destinations and, through commercial
agreements with other unaffiliated regional airlines, to an additional 14
destinations, for a total of 172 direct destinations on five
continents.
  Air
Canada's hubs are located in Toronto, Vancouver, Montreal and Calgary, each of
which has extensive access to domestic, transborder and the international
markets.
  Toronto
Pearson Airport is the largest hub in Canada and a significant airline origin
and destination market in North America. For the year ended December 31, 2007,
Air Canada operated on average 183 daily departures from Toronto. Vancouver
International Airport is the second largest hub in Canada and is Air Canada's
gateway to the Pacific Rim. For the year ended December 31, 2007, Air Canada
operated on average 65 daily departures from Vancouver. Montreal Trudeau
Airport is the third most important hub in Air Canada's network. For the year
ended December 31, 2007, Air Canada operated on average 61 daily departures
from Montreal. Calgary International Airport is Air Canada's fourth largest hub.
For the year ended December 31, 2007, Air Canada operated on average
41 daily departures from Calgary.
  Domestic
Services
  As at
December 31, 2007, Air Canada, together with Jazz, provided the largest network
and most extensive product offering in Canada, with scheduled direct passenger
service to 57 Canadian destinations. The most important Canadian routes, in
terms of operating revenues, are the transcontinental routes linking Toronto,
Montreal and Ottawa with major Western Canadian cities, including Vancouver,
Calgary, Edmonton and Winnipeg. Air Canada, together with Jazz, operates a large
number of short-haul routes, including Rapidair routes, linking Toronto,
Montreal and Ottawa. Air Canada also offers frequent service linking major
centres within Western Canada, and operates numerous flights between Calgary and
Vancouver and between Calgary and Edmonton. In addition to transcontinental and
commuter routes, Air Canada, together with Jazz, provides service between and
within Central Canada, the Prairies and the Atlantic provinces.
  Regional
carriers, having commercial agreements with Air Canada, replace Jazz in markets
not sufficiently large enough to be served directly. These airlines operate
flights under Air Canada's designator code and, as at December 31, 2007,
provided service to an additional eight domestic destinations. Air Canada does
not own equity interests in any of these carriers.
  Transborder
Services
  With the
most non-stop destinations and flights from Canada to the United States, Air
Canada, together with Jazz, carries more passengers between Canada and the
United States than any other airline. Air Canada, together with Jazz, directly
served 46 US destinations (including five seasonal destinations) as at
December 31, 2007. Air Canada's network reach is also increased by its
extensive connections to, and code sharing flights with, United Airlines, one of
its Star AllianceTMpartners and its United Express carrier.
  - 25
-
  During
the fourth quarter of 2007,Air Canada increased the
number of its flights from Eastern Canada to California, Florida and along the
US west coast. Air Canada added 7% more non-stop California long-haul flights
and flew 4% more non-stop flights to Florida. Air Canada also added 22% more
flights from Vancouver, Calgary and Edmonton to US west coast cities such as
Seattle, San Francisco and Los Angeles.
  In the
summer of 2008, Air Canada is planning to offer new non-stop flights from
Toronto to Austin, Toronto to Richmond, Ottawa to Washington DCA, and resume
service from Calgary to Chicago. As at December 31, 2007, regional carriers,
operating flights under Air Canada's designator code, provided service to an
additional seven US transborder destinations.
  International
Services
  Air
Canada is well positioned as Canada's largest scheduled international airline.
As at December 31, 2007, Air Canada provided scheduled service directly to
55 destinations in Europe, the Middle East, Asia, Australia, the Caribbean
and Central America and South America.
  Air
Canada offers year-round trans-Atlantic services to the United Kingdom, Germany,
France, Italy, Switzerland and Israel, and seasonal services to Ireland. In the
summer of 2007, Air Canada operated 15 daily flights to London Heathrow,
five daily flights to Frankfurt, one daily flight to Munich, three daily flights
to Paris and two daily flights to Rome.  In summer 2008, Air Canada is
planning to operate new non-stop flights from Toronto to Madrid and Ottawa to
Frankfurt, and to increase Toronto-Tel Aviv service to daily
operations.
  Air
Canada also offers services to the Asia-Pacific market via its Vancouver and
Toronto hubs. Air Canada operates daily non-stop flights to Japan (Vancouver and
Toronto to Tokyo and Vancouver to Osaka), China (Vancouver and Toronto to
Beijing, Shanghai), Hong Kong and Korea (Vancouver and Toronto to Seoul). In the
summer of 2008, a key area of capacity growth for Air Canada is expected to be
China.  China has overtaken the traditionally strong Japan market in
terms of capacity deployment in the Pacific region for Air Canada. Air Canada is
planning to increase capacity to China by 13% in 2008, based on ASMs. Air Canada
has maintained its non-stop flights from Toronto to Shanghai for winter 2008 and
plans to continue these flights for winter 2009.
  In
addition to targeting business travelers, these services also capitalize on the
high volume of passengers who visit friends and relatives in Asia and Canada.
Air Canada believes that the Asia-Pacific market continues to represent an area
of growth for air travel.
  Air
Canada has also expanded its services to South America, Australia and Central
America/Caribbean. Air Canada currently provides service directly to six
destinations in South America, one in Australia, seven in Central America and 23
in the Caribbean.  In December 2007, Air Canada started to operate
Vancouver to Sydney non-stop using the new Boeing 777 aircraft. In the fourth
quarter of 2007, Air Canada added 6% more flights year-over-year to the
Mexico/Caribbean markets and 8% year-over-year to South America. For the summer
of 2008, Air Canada is planning to operate daily flights to Buenos Aires and
Santiago.
  Jazz
  Jazz is
an integral part of Air Canada's North American strategy. Jazz operates both
domestic and transborder services for Air Canada under the CPA. Jazz operates
scheduled passenger service on behalf of Air Canada with approximately 720
average daily departures to 59 destinations in Canada and 31 destinations in the
United States. Domestic and transborder departures account for 79% and 21%,
respectively, of the 720 average daily departures. Approximately 34% of Jazz's
traffic connects to Air Canada's mainline network.
  The route
network operated by Jazz extends coast to coast in Canada from British Columbia
to Newfoundland and Labrador, into the United States as far south as Houston,
Texas, and as far north as Whitehorse, Yukon and Yellowknife, Northwest
Territories. The route network operated by Jazz on behalf of Air Canada
represents one of the largest geographical territories of any regional carrier
in the world today.
 
 - 26
-
  Aircraft
Fleet
  In order
to support the expansion of its international operations and deliver a superior
aircraft product in the international market to and from Canada, Air Canada is
progressively introducing Boeing 777 aircraft into its fleet.  In
2007, Air Canada introduced eight Boeing 777 aircraft into its
fleet.  In 2008, Air Canada plans to take delivery of an additional
nine Boeing 777 aircraft, four of which have already been delivered.The new Boeing 777
aircraft is allowing Air Canada to modernize and re-size its fleet and reduce
operating costs through fuel and maintenance savings in addition to gaining
greater manpower efficiency and economies of scale.  The Boeing
777-300 aircraft has generated a 15% cost saving per seat as compared to the
Airbus 340-300 aircraft. This new aircraft is also providing Air Canada with the
ability to serve new markets that could not be previously served in an efficient
manner.
  To remain
competitive, in addition to acquiring new aircraft, Air Canada commenced a
refurbishment of the interior of its existing aircraft in 2006 in order to offer
its customers a world class product.  The new Embraer and Boeing 777
aircraft are being delivered with the new seats and entertainment systems. Air
Canada continues to refurbish aircraft that fly international routes so that all
seats in the Executive First cabin will convert into lie-flat
beds.  Its Boeing 767-300 aircraft and its Airbus A319/320/321 are
scheduled to have refurbished interiors by June 2008.  The Airbus A330
aircraft are expected to be completed by early 2009.  Refurbished
aircraft will have new seats and personal in-flight entertainment systems and
in-seat power outlets at every seat in Economy Class, Executive Class and
Executive First. As at March 28, 2008, Air Canada has completed the
refurbishment of 31 Airbus A319 aircraft, 33 Airbus A320 aircraft, 10 Airbus
A321 aircraft and 15 Boeing 767-300 aircraft to date, for a total of 89
aircraft.
  As at
March 28, 2008, Air Canada has completed its fleet transition to the planned 60
Embraer aircraft which have been deployed to open new markets and to add
frequencies in previously single daily markets.
  Widebody
Aircraft Fleet
  Current
Fleet of Widebody Aircraft
  As at
December 31, 2007, Air Canada's operating widebody fleet was comprised of
62aircraft, each
configured in two classes of service: Executive First or Executive Class, and
Economy Class. The Airbus A330-300 aircraft is a 274-seat aircraft twin-engine
aircraft that Air Canada operates mainly on trans-Atlantic routes. The Airbus
A340-300 aircraft is a 286-seat four-engine aircraft that Air Canada operates on
Pacific routes. The Boeing 777-300ER aircraft is a 349-seat twin-engine aircraft
used mainly on international routes. The Boeing 777-200LR aircraft is a
long-range 270-seat twin-engine aircraft used mainly on international routes.
The Boeing 767-300ER aircraft is a long-range 191-212-seat aircraft used mainly
on international routes. The Boeing 767-200 aircraft is a 207-seat aircraft used
primarily on North American and Caribbean routes. The Airbus A340-500 aircraft
is four engine aircraft that Air Canada operated mainly on international
routes. Since late October 2007, Air Canada has no Airbus A340-500 aircraft in
its operating fleet.
  Boeing
Orders and Financing Terms
  In
November 2005, Air Canada concluded agreements with Boeing for the acquisition
of up to 36 Boeing 777 aircraft and up to 60 Boeing 787
Dreamliners.
  The
initial order for the 36 Boeing 777 aircraft was comprised of firm orders for 18
aircraft plus purchase rights for 18 more.  The initial order for the
Boeing 787 aircraft was comprised of firm orders for 14 aircraft plus purchase
rights, options and rolling options for 46 aircraft.  In conjunction
with the initial agreements, Air Canada received financing commitments from
Boeing and the engine manufacturer for all firm aircraft orders covering up to
90% of the capital expenditure.
  During
2007, Air Canada amended agreements with Boeing to cancel orders for two Boeing
777 aircraft scheduled for delivery in 2009. In addition, Air Canada increased
its order for Boeing 787 aircraft by 23, bringing its total firm orders to 37
Boeing 787 aircraft. The first delivery of the Boeing 787 firm aircraft is
scheduled for 2010 and deliveries of all 37 firm aircraft are scheduled to be
completed by 2014.  As at March 28, 2008, 18 purchase rights for
Boeing 777 aircraft and 23 options for Boeing 787 aircraft remain
exercisable.  In January 2008, Boeing
  - 27
-
  announced
a delay in the production of its first Boeing 787 aircraft from the end of the
first quarter of 2008 to the end of the second quarter of 2008 due to production
delays.  Air Canada has not been notified that its Boeing 787
deliveries have been affected, however, Air Canada continues to consult with
Boeing to monitor the situation.
  In
conjunction with the amended agreements, Air Canada received additional
financing commitments from Boeing for seven of the additional Boeing 787
aircraft (21 Boeing 787 aircraft in total) on the same terms and conditions as
those provided by Boeing and the engine manufacturer. Should Air Canada not
utilize any of the financing commitments on the Boeing 777 aircraft, the
financing commitments for the Boeing 787 aircraft will be increased to 31
aircraft of which the terms for 28 aircraft would be revised to cover 80% of the
aircraft delivery price and the term to maturity would be reduced to 12 years
with straight-line principal repayments over the term to maturity.
  As at
December 31, 2007, seven of the Boeing 777 firm aircraft under the purchase
agreement with Boeing had been delivered with the remaining nine firm deliveries
expected to be delivered by November 2008.  The first seven
aircraft were financed under a loan guarantee facility with the Export-Import
Bank of the United States ("EXIM").  All of the nine Boeing 777 firm
aircraft deliveries expected in 2008 have commitments for loan guarantee support
to be provided by EXIM which was signed in January 2008.  The loan
guarantee, subject to certain conditions, covers a 12-year loan term for 85% of
the capital expenditure at an interest rate based on a floating rate. This loan
guarantee from EXIM is expected to be used instead of the financing commitments
provided by Boeing and the engine manufacturer described above. As a result, it
is not expected that any of Boeing's and the engine manufacturer's financing
commitments for the Boeing 777 aircraft will be utilized.  Air Canada
intends to use the EXIM loan guarantee facility for only five aircraft in 2008
given that four aircraft will be financed using sale and leaseback
transactions.  As at March 28, 2008, four Boeing 777 were
delivered in 2008, one of which has been financed under the EXIM facility with
the other three subject to sale and leaseback transactions.
  On
October 30, 2007, Air Canada entered into an agreement with a syndicate of banks
for the financing of pre-delivery payments ("PDP") for 10 Boeing 777 aircraft
contemplated in Air Canada's purchase agreement with Boeing.  The PDP
financing is a series of loans that are aircraft specific with a maximum
aggregate commitment of up to $568 million (US$575 million).  The PDP
loans have a term of five years, but may be prepaid upon the delivery of the
aircraft without penalty.  Air Canada has already prepaid the PDP
loans on the first five aircraft delivered between November 2007 and
March 2008.  In addition, Air Canada has served notice to the PDP
syndicate that it will be prepaying the PDP loans on delivery of the next three
aircraft scheduled for delivery between April 2008 and June 2008. Air Canada's
intent is to prepay all PDP loans upon delivery of the relevant aircraft, using
the committed long-term aircraft financing and leases for the aircraft to be
delivered. Air Canada expects to have fully repaid the PDP loans in November
2008.  As at December 31, 2007, the amount drawn on the PDP loans was
$521 million (US$528 million).  Air Canada is using the PDP financing
to settle most of the outstanding pre-delivery payments.
  This PDP
financing replaces a significant portion of the pre-delivery financing
arrangements that Air Canada had in place with Boeing.  This PDP
financing was entered into as it offered more attractive terms than the
arrangements with Boeing.
  As at
March 28, 2008, Air Canada has completed the sale and leaseback of three Boeing
777 aircraft and has agreements for the sale and leaseback of one other aircraft
out of the nine Boeing 777 scheduled for delivery in 2008.  The lease
term for two of the completed sale and leaseback transactions is for 10.5 years,
and Air Canada has an option to extend each for an additional 18
months.  The lease term for the third completed sale and leaseback
transaction and for the fourth aircraft referred to above is 12
years.  All leases are at market rates.  These sale and
leaseback transactions replace an equivalent number of aircraft loan guarantee
commitments provided by EXIM.
  Narrowbody
and Regional Jet Aircraft Fleet
  Current
Fleet of Narrowbody and Regional Jet Aircraft
  As at
December 31, 2007, Air Canada operated 145 narrowbody aircraft, including
88 Airbus narrowbody aircraft. These aircraft are configured in two classes
of service: Executive Class and Economy Class. The Airbus A320 aircraft is a
140-seat, twin-engine aircraft. The twin-engine Airbus A319 aircraft offers 120
seats and is
  - 28
-
  essentially
a shortened version of the Airbus A320 aircraft, with the same engines,
operating systems and flight deck. The twin-engine Airbus A321 aircraft is the
largest narrowbody aircraft in the Airbus family, with 174 seats. The Embraer
ERJ-190 and ERJ-175 aircraft are 93-seat and 73-seat twin-engine aircraft,
respectively. These large regional jets have lower trip operating costs than
conventional narrowbody aircraft. All of these narrowbody aircraft types
primarily serve Air Canada's domestic and transborder routes.
  Embraer
Orders and Financing Terms
  In 2004,
Air Canada signed a definitive purchase agreement with Embraer covering firm
orders for 45 Embraer ERJ-190 aircraft as well as 15 Embraer ERJ-175 aircraft.
By the end of 2006, Air Canada had taken delivery of all 15 Embraer ERJ-175
aircraft, and, by the end of February 2008, all 45 Embraer ERJ-190 aircraft
had been delivered.
  The
Embraer aircraft have been used in Air Canada's fleet both for growth and
replacement of a portion of Air Canada's older Airbus A319 and A320 aircraft.
The purchase agreement also contains rights to exercise options for up to 60
additional Embraer ERJ-190 series aircraft as well as providing for conversion
rights to other Embraer models. As at March 28, 2008, 25 options remained
exercisable.
  Jazz's
Regional Jet and Turboprop Aircraft Fleet
  Pursuant
to the CPA (as defined herein), Air Canada purchases capacity from Jazz on
Jazz's aircraft which are subject to the Jazz CPA (the "Covered Aircraft") in
consideration for the payment of certain fees by Air Canada to Jazz. With the
exception of one Bombardier CRJ-705, which is leased by Jazz from a third party,
all the remaining Bombardier regional jet aircraft in Jazz's fleet are owned or
leased by Air Canada or Air Canada Capital Ltd., a wholly-owned subsidiary of
Air Canada, and leased or subleased to Jazz which operates them.
  As at
December 31, 2007, as part of the Jazz CPA, Jazz operated, on behalf of Air
Canada, 73 Bombardier regional jet aircraft.
  The 50-seat
Bombardier CRJ-100/200 aircraft is a twin engine regional jet aircraft designed
to provide superior performance and operating efficiencies for the regional
airline industry. The Bombardier CRJ-100/200 aircraft is used primarily to serve
lower density markets on routes of less than 1,000 miles, and to serve larger
markets at "off peak" times. The 75-seat Bombardier CRJ-705 aircraft is
configured into 10 Executive Class seats and 65 Economy Class seats and is
considered to be an economical aircraft due to its operational efficiencies and
lower trip costs. These aircraft are used in selected "point-to-point" markets,
transborder markets, and to develop selected domestic markets.
  In
addition, as at December 31, 2007, Jazz operated 60 Bombardier Dash-8 aircraft
as Covered Aircraft under the CPA. The Dash 8-100 aircraft is a twin engine
turboprop medium range aircraft with seating capacity of 37 passengers. The
50-seat Dash 8-300 aircraft has advanced turboprop characteristics that approach
those of a jet aircraft. Turboprop aircraft continue to serve certain segments
of the Canadian domestic market more efficiently than regional or larger jet
aircraft. On short-haul routes with lower traffic volumes, turboprops often
present the most economical and efficient way to serve these markets. Compared
to larger jet aircraft, the turboprop is more profitable to operate on shorter
routes with low levels of passenger demand due to its generally lower break-even
load requirements.
  - 29
-
  Current
and Planned Operating Fleet
  Air
Canada's operating fleet as at December 31, 2007 and the planned operating
fleets for 2008 to 2009 are shown below:




Actual
            PlannedFleet
      Plan
            Year
      End 2006
            New
      Deliveries
            Sublease
      to Third Party
            Lease
      returns
            Sales
            Parked
            Year
      End 2007
            New
      Deliveries
            Sublease/lease
      to Third Party / Sale by Air Canada
            Lease
      returns
            Sales
            Parked
            Year
      End 2008
            Planned
      2009 fleet changes
            Year
      End 2009B777-300
            -
            5
            -
            -
            -
            -
            5
            6
            -
            -
            -
            -
            11
            1
            12B777-200
            -
            3
            -
            -
            -
            -
            3
            3
            -
            -
            -
            -
            6
            -
            6B767-300
            33
            -
            -
            (2)
            -
            -
            31
            -
            -
            (1)
            -
            -
            30
            -
            30B767-200
            11
            -
            -
            -
            -
            (1)
            10
            -
            -
            -
            (4)
            (2)
            4
            -
            4A340-500
            2
            -
            (2)
            -
            -
            -
            -
            -
            -
            -
            -
            -
            -
            -
            -A340-300
            10
            -
            (3)
            (2)
            -
            -
            5
            -
            (5)
            -
            -
            -
            -
            -
            -A330-300
            8
            -
            -
            -
            -
            -
            8
            -
            -
            -
            -
            -
            8
            -
            8A321
            10
            -
            -
            -
            -
            -
            10
            -
            -
            -
            -
            -
            10
            -
            10A320
            47
            -
            -
            (6)
            -
            -
            41
            -
            -
            -
            -
            -
            41
            -
            41A319
            45
            -
            (6)
            -
            (2)
            -
            37
            -
            -
            (2)
            -
            -
            35
            -
            35ERJ-190
            18
            24
            -
            -
            -
            -
            42
            3
            -
            -
            -
            -
            45
            -
            45ERJ-175
            15
            -
            -
            -
            -
            -
            15
            -
            -
            -
            -
            -
            15
            -
            15Total
            199
            32
            (11)
            (10)
            (2)
            (1)
            207
            12
            (5)
            (3)
            (4)
            (2)
            205
            1
            206Average
      age
              (years)
            9.6
            
            
            
            
            
            9.0
            
            
            
            
            
            9.0
            
            10




The fleet
of Covered Aircraft operated as at December 31, 2007 by Jazz on behalf of Air
Canada pursuant to the CPA is shown below:




Number
      of Covered Aircraft
                  under
      the  CPA
                  as
      at December 31, 2007Bombardier
      CRJ Aircraft

                Bombardier
      CRJ-100
              24Bombardier
      CRJ-200
              33Bombardier
      CRJ-705
              16Total
      Bombardier CRJ Aircraft
              73Bombardier
      Dash-8 Aircraft

                Bombardier
      Dash 8-300
              26Bombardier
      Dash 8-100
              34Total Turboprop Aircraft
              60Total Covered Aircraft
              133




Fuel
  Aircraft
fuel is a major expense in the airline industry and the single largest expense
to Air Canada, representing approximately 25% of Air Canada's 2007 total
operating expenses. During the period from January 1, 2007 to December 31, 2007,
the price of Western Texas Intermediate ("WTI") crude oil ranged from a low
of





- 30
-





US$51 to
a high of US$98 per barrel, with an average price of US$70 per barrel for the
year 2007. Fuel prices continue to be susceptible to factors such as political
unrest in various parts of the world, Organization of Petroleum Exporting
Countries ("OPEC") policy, the level of demand from emerging economies such as
China, the level of inventory carried by the industry, the level of fuel
reserves maintained by governments, disruptions to production and refining
facilities, alternative fuels and the weather. Based on 2007 volumes and US
exchange rates, Air Canada's management estimated that a US$1 per barrel
movement in the price of WTI crude oil or in the refining spread between WTI and
jet fuel impacted 2007 fuel expense by approximately $26 million (excluding
any impact of fuel surcharges, foreign exchange rates and fuel hedging),
assuming flying capacity remained unchanged and that refining spreads between
WTI crude oil and jet fuel as well as foreign exchange rates remained
constant.
  To manage
its exposure to the volatility of jet fuel prices and minimize volatility in
operating cash flows, Air Canada enters into derivative contracts with financial
intermediaries.  As at December 31, 2007, Air Canada had mainly collar
options and swap structures in place to hedge a portion of its anticipated jet
fuel requirement over the 2008, 2009 and 2010 periods.  Air Canada
uses derivative contracts on jet fuel and also on other crude oil-based
commodities, such as heating oil and crude oil, due to the relative limited
liquidity of jet fuel derivative instruments on a medium to long term horizon,
since jet fuel is not traded on an organized futures exchange.  Air
Canada does not purchase or hold any derivative financial instruments for
trading purposes.
  As at
December 31, 2007, Air Canada had hedged 20% of its projected fuel requirement
for 2008, 3% of its projected fuel requirement for 2009 and 2% of its fuel
requirement for 2010.  As at March 28, 2008, Air Canada had hedged 32%
of its projected fuel requirement for 2008, 10% of its projected fuel
requirement for 2009 and 5% of its projected fuel requirement for 2010. 2008 is
hedged at prices that can fluctuate between an average of US$103 to US$110 per
barrel for jet-fuel based contracts, an average of US$95 to US$98 per barrel for
heating oil-based contracts and an average of US$80 to US$88per barrel for WTI
crude-oil based contracts.
  Star
AllianceTM
  Air
Canada is a founding member of the Star AllianceTM
network, the world's largest airline alliance group. Air Canada operates an
extended global network in conjunction with its international
partners.
  Since its
inception in 1997, the Star AllianceTM network
has grown to include, as at March 28, 2008, the following 19 airlines: Air
Canada, Air China, Air New Zealand, All Nippon Airways, Asiana Airlines,
Austrian Airlines, bmi, LOT Polish Airlines, Lufthansa, SAS, Shanghai Airlines,
Singapore Airlines, South African Airways, Spanair, Swiss International
Airlines, TAP Portugal, Thai Airways, US Airways and United Airlines. The
Star AllianceTM network
also includes three regional members: Adria Airways, Blue 1 and Croatia
Airlines.
  As at
December 31, 2007, through Air Canada's strategic and commercial arrangements
with Star AllianceTM members
and several other airlines, Air Canada's customers had access to over 897
destinations in 160 countries, with reciprocal participation in frequent flyer
programs and use of airport lounges. The Star AllianceTM
facilitates code sharing and passenger connections and transfers by providing a
higher level of service between network connection points (which may include one
stop check-in). The airlines have implemented initiatives, such as common
utilization of facilities, and are focusing on capturing potential synergies in
additional areas. Air Canada code shares with all Star AllianceTMmembers, except US Airways, TAP Portugal, South African Airways and the
three regional members. In August 2005, the Star AllianceTMnetwork
implemented an electronic interline ticketing service which enables customers to
travel across the entire Star AllianceTM network
using a single electronic ticket.
  Other
Services
  Cargo
Services
  Air
Canada is Canada's largest provider of air cargo services as measured by cargo
capacity. AC Cargo Limited Partnership, with Air Canada, offers cargo services
on domestic, transborder and international routes, using the cargo capacity on
aircraft operated by Air Canada and Jazz. Air Canada also provides Canada-Europe
cargo services using one chartered all-freight MD-11 aircraft.
  - 31
-


Air
Canada's primary customers for these cargo services are large freight forwarding
companies and businesses whose products require the use of air cargo services to
expedite their movement. Cargo services offered by Air Canada include services
for high priority shipments (AC Expedair and AC Priority) and air freight
services (AC Air Freight) to Air Canada destinations worldwide and most Jazz
destinations in North America. AC Cargo Limited Partnership, with Air Canada,
provides direct cargo services to over 150 Canadian and international
destinations and has sales representation in over 50 countries. Air Canada is
one of the largest suppliers of air cargo services to Canada Post Corporation.
The principal international routes on which Air Canada offers cargo services are
Canada-Germany, Canada-China, Canada-United Kingdom and Canada-Japan. The new
Boeing 777 aircraft, that have been delivered, provide increased cargo capacity
on international routes compared to the Airbus aircraft they are
replacing.  Planned deliveries of additional Boeing 777 aircraft in
2008 and 2009 will further increase air cargo capacity offered.
  Air
Canada's cargo terminal at Toronto Pearson Airport is equipped with modern cargo
handling technology to promote an efficient operation that meets the needs of
customers. Air Canada's freight management system, AC Lynx, offers a number of
services including on-line tracking of cargo shipments from initial booking to
delivery. Air Canada is a founding member of Cargo Portal Services
(CPS).  Introduced in 2003, CPS offers a web based booking and an air
cargo management tool that facilitates the movement and tracking of air cargo
and is endorsed by key freight forwarders globally.  In 2007, Air
Canada also joined the Global Freight Exchange (GF-X), a large electronic cargo
distribution channel to offer to cargo customers greater
choice.  These electronic channels offer an improved service
capability for the movement and tracking of air cargo.
   Ground
Handling Services
  Air
Canada Ground Handling Services provides ground handling services to Air Canada
and Jazz and other airlines with a primary focus on Canadian stations. These
services include passenger check-in, ramp services, cabin cleaning, de-icing
services, gate management and baggage and cargo handling.
   Air
Canada Vacations
  Air
Canada Vacations is one of Canada's leading tour operators.  Based in
Montreal and Toronto, Air Canada Vacations operates its business in the outgoing
leisure travel market (Caribbean, Mexico, Europe, Central and South America and
the U.S.) by developing, marketing and distributing vacation travel packages and
services through its website (aircanadavacations.com) and a network of
independent travel agencies across Canada.
  As part
of its growth plans, Air Canada Vacations recently introduced Escapades all-new
short-stay flight and hotel packages to Europe and six major US cities, as well
as across previously offered Caribbean destinations served by a high frequency
of flights.
  Air
Canada Vacations' future plans include inbound leisure packages from Europe and
Asia to North America with the intent of eventually offering vacation packages
to and from most of Air Canada's international destinations.




- 32
-




Facilities
  Air
Canada owns or leases facilities in major airports consisting of offices, hangar
space, aircraft maintenance and ground handling facilities. The following
describes the principal properties owned or leased by Air Canada as of December
31, 2007:


Principal
      Properties
              Description
              Approx.
      Square Footage
              Nature
      of TitleMontreal
      — Air Canada Centre
                Air
      Canada Headquarters
              Head
      office and training facilities
              272,000
              Owned
      facilities on leased landMontreal
      Trudeau Airport –
                Maintenance
      Base
              Offices,
      computer centre, aircraft
                maintenance,
      hangars, workshops and
                training
      facilities
              1,326,664
              Owned
      facilities on leased landToronto
      Pearson Airport –
                Terminal
      Building
              Counters,
      offices, passenger and
                baggage
      handling facilities
              191,000
              LeasedToronto
      Pearson Airport –
                Maintenance
      Base
              Offices,
      hangars, shops and simulators
              1,021,632
              Owned
      facilities on leased landToronto
      Pearson Airport
              Offices,
      shops, training and equipment storage
              170,924
              LeasedToronto
      — Cargo Facility and
                Equipment
      Maintenance
              Offices,
      cargo and equipment
                maintenance
      facilities
              426,000
              LeasedVancouver
      — Technical
                Operations
      Centre
              Offices,
      hangars, shops and simulator
              1,087,985
              Owned
      facilities on leased landVancouver
      — South Hangar
              Offices,
      hangars, shops, stores
              288,083
              Owned
      facilities on leased landCalgary
      International Airport
              Hangar,
      commissary, ground support
                equipment
      and warehouse
              267,891
              Owned
      facilities on leased landWinnipeg
      — Air Canada
                Building
              Offices
      and computer centre
              394,650
              Leased
      facilities on owned landWinnipeg
      Airport —
                Maintenance
      Base
              Offices,
      aircraft maintenance hangars
                and
      workshops
              278,891
              Owned
      facilities on leased land




Air
Canada operates additional office, terminal, maintenance and/or cargo facilities
under long-term leases at Toronto, Montreal, Vancouver, Calgary, London
(England) and Los Angeles. A large portion of the hangar space and aircraft
maintenance facilities in Montreal, Vancouver, Winnipeg and Toronto are leased
or subleased by Air Canada to ACTS Aero Canada, Jazz and other third parties at
market rates.  In addition, a significant portion of Air Canada's
office space in the Winnipeg – Air Canada Building is subleased to third parties
at market rates.
  Safety
and Security
  Air
Canada's first priority is to ensure the safety and security of its customers,
employees and aircraft by maintaining the highest safety and security
standards.
  On August
10, 2006, Transport Canada announced the implementation of heightened security
measures after a foiled attack with liquid explosives at London Heathrow. Since
September 26, 2006, in accordance with new Transport Canada security measures,
Air Canada is able to allow passengers to bring on board limited and prescribed
quantities of liquids, gels and aerosols.
  On
October 27, 2006, Transport Canada announced the details of a new Passenger
Protect Program and draft regulations pursuant to which the Government of Canada
will create a list of specified persons who will be deemed to pose an immediate
threat to aviation security should they attempt to board a flight. Air carriers
will be
  - 33
-


expected
to screen passengers against the specified persons list through a secure online
system. The Government of Canada has also proposed new identity screening
regulations which will require air passengers to present government-issued
identification showing name, date of birth and gender prior to boarding an
aircraft.
  Air
Canada continues to work with the appropriate authorities to ensure full
compliance with security requirements, including new programs that will affect
the airline industry:
  ·
              Air
      Canada is the first carrier in Canada to provide Transport Canada with a
      security management system. The security management system includes an
      oversight cycle that promotes compliance and conformity. It is also linked
      to a performance plan based on resilience and loss
    prevention;
  ·
              Air
      Canada is fully prepared to implement the new measures imposed by
      Transport Canada under the Passenger Protect Program as Air Canada already
      complies with similar requirements imposed by the Transport Security
      Agency, a US government agency, for its "No Fly" and "Selectee" lists.
      Accordingly, the coming into force of the identity screening regulation is
      expected to have minimal, if any, impact on the operations of Air Canada
      as Air Canada had proactively implemented these procedures since
      the  events of September 11, 2001;
and
  ·
              Air
      Canada is also working with the Canadian Air Transport Security Agency and
      other agencies to continuously improve security measures and to ensure
      that any innovation adopted by Air Canada maintains the highest degree of
      security.
   Debt
Financing
  On
October 12, 2006, Air Canada entered into an amended and restated credit
agreement (the "Amended and Restated Credit Agreement") with a syndicate of
lenders (the "Lenders") and an administrative agent (the "Agent"). The Amended
and Restated Credit Agreement was intended to amend and restate the credit
agreement dated April 6, 2005, entered into by Air Canada with a syndicate of
lenders and the Agent.
  At the
closing of the initial public offering and secondary public offering of Air
Canada on November 24, 2006, a $400 million senior secured revolving credit
facility (the "Amended Credit Facility") was established in favour of Air Canada
pursuant to the Amended and Restated Credit Agreement for working capital and
general corporate purposes, of which up to $100 million may be used for the
issuance of letters of credit provided exclusively by the Agent and of which up
to $20 million may be used as a swingline facility provided exclusively by the
Agent for cash management and working capital purposes. As at March 28, 2008,
Air Canada has not drawn any amount under the Amended Credit Facility. The total
amount available for borrowing under the Amended Credit Facility is subject to a
borrowing base restriction based on certain percentages of the values of
eligible accounts receivable and eligible real estate. The accounts receivable
of AC Cargo Limited Partnership are also eligible for inclusion in the borrowing
base if AC Cargo Limited Partnership provides the Agent and the Lenders with a
guarantee of Air Canada's obligations under the Amended Credit Facility together
with a first priority security interest over its present and after-acquired
personal property, subject to certain exclusions and permitted liens, as
security for its guarantee obligations.
  The
Amended Credit Facility has a three year term that can be extended at Air
Canada's option for additional one-year periods on each anniversary of the
closing of the initial public offering and secondary public offering of Air
Canada on November 24, 2006, subject to prior approval of Lenders holding no
less than two thirds of the total commitments under the Amended Credit Facility.
Any non-consenting Lender will be allowed to withdraw from the Amended Credit
Facility at the maturity date and may be replaced by other lenders; provided,
however that the maturity date will not be so extended if the non-consenting
Lenders hold in excess of one third of the total commitments under the Amended
Credit Facility.
  The
Amended and Restated Credit Agreement is secured by a first priority security
interest and hypothec over the present and after-acquired personal property of
Air Canada, subject to certain exclusions and permitted liens, and by a first
priority charge and hypothec over certain owned and leased real property of Air
Canada. Air Canada's obligations under the Amended Credit Facility are also
guaranteed by 1209265 Alberta Ltd., a subsidiary of Air Canada, which has
provided a first priority security interest over its present and after-acquired
personal property, subject to certain exclusions and permitted liens, as
security for its guarantee obligations.
  - 34
-
  The
Amended and Restated Credit Agreement contains customary representations and
warranties and is subject to customary terms and conditions (including negative
covenants, financial covenants and events of default) for borrowings of this
nature, including limitations on paying distributions (including upon the
occurrence and during the continuance of an event of default under the Amended
and Restated Credit Agreement).
  Trademarks
  Air
Canada believes that its trademarks are important to its competitive position.
Air Canada is Air Canada's trade name and trademark. Other trademarks include
Air Canada Jetz®, Air
Canada JazzTM, JazzTM, Air Canada Vacations®,
Vacances Air Canada®,
Executive First®,
Executive Class®,
Expedair®, AC
ExpedairTM, AC PriorityTM, AC Air FreightTM, AC LynxTM, Hospitality Service®, Service
Hospitalité®,
Rapidair®, Maple
LeafTM, Feuille d'ÉrableTM, AC WEBSAVERTM, Flight PassTM, Sun PassTM, Super EliteTM
and Super ÉliteTM. Star AllianceTM is a trademark of Air Canada and other members
of the Star AllianceTM network. Air Canada has granted Aeroplan LP a license to
use Air Canada® and Air
Canada Roundel®
trademarks around the world solely in association with the Aeroplan® program.
Air Canada has granted Jazz a license to use Air Canada JazzTM, JazzTM, Air
Canada®, Air
Canada Design®, Air
Canada and Design® and
other trademarks in Canada and the United States in association with the
provision of scheduled airline services in regions of Canada and across the
Canada — United States border. Air Canada has granted ACTS Aero Canada a license
to use Air Canada®, Air
Canada Design®, Air
Canada and Design® and
other trademarks in Canada and the United States in association with the
provision of aircraft maintenance services. Air Canada protects its proprietary
information, including its trademarks and database, through trademark laws,
contractual provisions, confidentiality procedures and other means. Employees,
service providers and other parties with whom Air Canada carries on business
are, as appropriate, contractually bound to protect Air Canada's proprietary
information in order to control access to and the distribution of any such
information.
  Employees
  As at
December 31, 2007, Air Canada had 23,608(3)full-time equivalent ("FTE") employees. The following table provides a
breakdown of Air Canada's average FTE employees for the fourth quarter of 2007
and 2006 and for the full year 2007 and 2006 together with the unions that
represent them.
  Employee
      Group
                
                Union(1)
                
                Fourth
      quarter
                    2007
                
                Fourth
      quarter
                    2006
                
                2007
                
                2006Management
      and Administrative Support(3)
                N/A(2)
                3,137
                
                3,017
                
                3,148
                
                3,191Pilots
                ACPA
                2,895
                
                2,708
                
                2,829
                
                2,625Flight
      Attendants
                CUPE
                6,094
                
                5,985
                
                6,236
                
                6,062Customer
      Sales and Service Agents(3)
                CAW/IBT
                3,721
                
                3,702
                
                3,703
                
                3,821Technical
      Services, Ramp and Cargo(3)
                IAMAW
                7,048
                
                6,812
                
                6,939
                
                6,812United
      Kingdom Unionized Employees
                Amicus/TGWU
                639
                
                697
                
                665
                
                691Other
      Unionized
                
                396
                
                426
                
                408
                
                428Air
      Canada
                
                23,930
                
                23,347
                
                23,928
                
                23,630


__________
  (1)
              ACPA:
      Air Canada Pilots Association; CUPE: Canadian Union of Public Employees;
      CAW: National Automobile, Aerospace, Transportation and General Workers
      Union of Canada; IBT: International Brotherhood of Teamsters; IAMAW:
      International Association of Machinists and Aerospace Workers; and TGWU:
      Transport and General Workers
Union.
 (2)
              Certain
      administrative support employees are represented by
  IAMAW.
 (3)
              In
      addition to the numbers presented in the table above: (a) pursuant to the
      Aeroplan GSA (as defined herein), Aeroplan has agreed to reimburse Air
      Canada on a fully-allocated basis for all costs, including salary and
      benefits, related to a group of call centre employees who are mainly
      represented by the CAW and a group of non-unionized employees currently
      working for Aeroplan's benefit. Such group represented 891 FTE employees
      as at December 31, 2007 and 853 FTE employees as at December 31, 2006.
      These employees are not included in the numbers presented above. See
      "Overview of the Business – Aeroplan – Long-Term Strategic Relationship
      with Air Canada"). In addition to the numbers presented in the above
      table, ACTS Aero Canada has agreed to reimburse Air Canada on a
      fully-allocated basis for all costs, including salary and benefits,
      related to a group of unionized employees working for the benefit of ACTS
      Aero Canada. Previous arrangements included non-unionized employees
      currently working for the benefit of ACTS Aero Canada but subsequent to
      the monetization of ACTS LP, which occurred on October 16, 2007, the group
      of non-unionized employees was transferred to ACTS Aero Canada. The
      remaining unionized group for which ACTS Aero Canada agreed to reimburse
      Air Canada represented 3,222 FTE employees as at December 31, 2007, while
      the combined groups (unionized and non-unionized) represented 3,923 FTE
      employees as at December 31, 2006. These employees are not included in the
      numbers presented above.
  Air
Canada has collective bargaining agreements with its pilots, flight attendants,
maintenance personnel, certain clerical and finance personnel, customer service
agents, ramp and cargo employees, dispatchers and crew




- 35
-




schedulers
which were concluded in 2003 and 2004 and which expire in 2009. No strikes or
lock-outs may lawfully occur during the term of the collective agreements. In
2006, Air Canada concluded wage re-opener agreements, mediations or arbitrations
under the collective agreements with all its union groups. The average of the
wage adjustment agreements and awards represents an increase of approximately 5%
over the three-year period from mid-2006 to mid 2009.
   AEROPLAN
 Overview
  Aeroplan
is Canada's premier loyalty marketing company. Aeroplan provides its
Accumulation Partners (as defined herein) with loyalty marketing services to
attract and retain customers and to stimulate demand for these partners'
products and services. Aeroplan's objective is to offer (i) its commercial
partners superior value relative to other marketing alternatives through access
to Aeroplan's member base, and (ii) the design and execution of marketing
programs aimed at increasing revenue, market share, and customer
loyalty.
  The
Aeroplan Program is one of Canada's longest standing loyalty programs. It was
founded in 1984 by Air Canada, Canada's largest domestic and full-service
international airline, to manage the airline's frequent flyer program. Aeroplan
benefits from its unique strategic relationship with Air Canada in addition to
its contractual arrangements with leading commercial partners including Amex
Bank of Canada ("AMEX"), Canadian Imperial Bank of Commerce ("CIBC"), Home
Hardware, Imperial Oil (Esso), Star AllianceTM member
airlines and numerous hotel chains and car rental companies.
  Aeroplan
offers its over fourmillion active members
the ability to accumulate Aeroplan Miles throughout its Accumulation Partner
network through purchases of products and services. Aeroplan sells loyalty
marketing services, including Aeroplan Miles, to its extensive network of
partners ("Accumulation Partners"), representing brands, in credit and charge
card, airline and other industries. Today, credit and charge card partners
generate the majority of Aeroplan's Gross Billings (as defined herein). Once
members have accumulated a sufficient number of Aeroplan Miles, they can redeem
through Aeroplan such Aeroplan Miles for air travel and other attractive rewards
offered byAeroplan's redemption
partners("Redemption Partners").
Upon the redemption of Aeroplan Miles by its members, Aeroplan incurs the cost
to acquire the desired reward.
  Recent
Aeroplan Management Initiatives
  Since
Aeroplan's establishment as a wholly-owned limited partnership of Air Canada on
January 1, 2002, Aeroplan's management has initiated a number of significant
changes aimed at improving its operations and achieving growth in profitability.
Most notably, management of Aeroplan implemented the initiatives described
below.
  Member
Services
  Between
2006 and 2007 calls handled at Aeroplan's contact centres were up 6% on a
year-to-year basis with 3.8 million calls being processed and the average
transaction time for calls handled at the contact centres was increased by 4%,
from 9.9 minutes per call to 10.3 minutes. The launch of ClassicPlus FlightTM Rewards
at the end of October 2006 has contributed to the increase in the number of
calls handled and the increased complexity of member requests in an increase of
the average transaction time for calls handled.
  Aeroplan's
customer service levels meet and frequently exceed industry standards in its
comparative groups. With the launch of www.aeroplan.com in May 2002, Aeroplan
invested significantly in the progressive development of its online presence,
products and services. In 2005, a redesigned online redemption tool was launched
for its suite of indulgence rewards, increasing the scope of the program and
significantly improving the redemption experience for members. In 2006, Aeroplan
completely redesigned its website with a major focus on enhancing usability and
the user experience. Aeroplan's new ClassicPlus FlightTM Rewards
were also introduced online in 2006. In the past 18 months, Aeroplan has also
designed and implemented direct connect car rentals and
  - 36
-


hotels
reservations using state-of-the-art technology. This allows members to shop and
book car or hotel rewards in one easy step, directly on
www.aeroplan.com.
  Since May
2002, Aeroplan has experienced growth in the adoption and use of its website
which currently accounts for about 57.3% of air travel bookings and about 69% of
all rewards booked (including non-air rewards). Overall, the website issued over
1.3 million rewards.
  Increasing
Gross Billings from Credit and Charge Card Partners
  In April
2003, Air Canada renegotiated its long-term agreement with CIBC (the "CIBC
Agreement"), the operator of Canada's largest retail card franchise and
Aeroplan's largest source of Gross Billings. This renegotiation resulted in an
increase in Gross Billings per Aeroplan Mile sold and also allowed for less
restrictive exclusivity provisions. The CIBC Agreement was assigned by Air
Canada to Aeroplan in July 2004. During the last quarter of 2006, Aeroplan and
CIBC announced an amendment to the CIBC Agreement to include a 50% multiplier
for every dollar spent (1.5 Aeroplan Miles earned) at grocery stores, gas
stations and drug stores in Canada and abroad for Aerogold cardholders. Aeroplan
and Air Canada also entered into a long-term agreement with AMEX in January 2004
in respect of the creation of the AeroplanPlus card products and the inclusion
of Aeroplan in AMEX's Membership Rewards®
program.
  Acquiring
Additional Capacity from Air Canada
  Prior to
2004, Air Canada allocated 10% of its seat capacity to Aeroplan rewards. In
April 2004, such allocation was increased to 15% under the Avenue Rewards
program (which is no longer in effect).
  On
October 16, 2006, in order to improve reward travel choices and provide greater
flexibility to make travel arrangements, Aeroplan introduced ClassicPlus
FlightTM Rewards
which offer Aeroplan members unrestricted access to available seat inventory
across the Air Canada and Jazz networks in both Economy and Executive Class.
ClassicPlus FlightTM Rewards
offer improved flexibility for reward travel, complementing Aeroplan's existing
ClassicFlightTM and
exclusive Star AllianceTM Flight
Rewards. Together, Aeroplan's flight products provide global reward travel
options to more than 890 destinations.
  ClassicPlus
FlightTM Rewards
effectively replaced the Avenue Rewards product launched in April 2004. The
existing ClassicFlightTM Rewards
have not changed and continue to be a core element of Aeroplan's value
proposition to members. These rewards represent 8% of Air Canada and Jazz seat
capacity on every route, every month. ClassicPlus FlightTM Rewards
are currently not available to a limited number of destinations that do not
support electronic tickets. However, electronic ticketing is now available
throughout Canada and most of Air Canada's transborder and international
destinations, with all destinations planned for electronic ticketing in the near
future.
  With
ClassicPlus FlightTM
Rewards, all capacity available over and above the 8% ClassicFlightTM Rewards
capacity, is offered to members at variable mileage levels. Aeroplan uses a new
and innovative availability and booking tool to source seat inventory and to
calculate mileage levels on a real-time basis. The number of Aeroplan Miles
required to redeem for ClassicPlus FlightTM Rewards
is based on actual airline ticket prices – minus Aeroplan's negotiated discounts
as the airline's largest purchaser of seats – and therefore varies in a way
similar to airline pricing, depending on factors such as origin, destination,
seasonality, time and day of travel.
  Adding
Accumulation Partners
  Since
2005, Aeroplan actively pursued opportunities to increase its Accumulation
Partner base with the objective of further expanding its sources of revenue.
Aeroplan signed major, nationally recognized retail brand name partners such as
Imperial Oil (Esso), Home Hardware, ING, Sun Life Financial, Uniprix, Primus and
Groupe Dumoulin. These new partners were selected from retail categories which
represent substantial spending by Aeroplan's member base. Aeroplan will continue
to seek to sign on and leverage highly recognizable national brand names.
Aeroplan also intends to seek product categories where members can "double dip"
on Aeroplan Miles. For
  - 37
-
  example,
if an Aeroplan member purchases gasoline at Esso using a CIBC Aerogold Visa
card, such member receives Aeroplan Miles from both Esso and CIBC.
  On
October 15, 2007, Aeroplan and Bell Canada announced that the Aeroplan Program
agreement between the parties would not be renewed upon its expiry. Bell Canada
had been an Accumulation Partner since 2004. On January 18, 2008, the agreement
expired in accordance with its terms and Aeroplan announced the launch of a
multi-year national partnership with Primus Telecommunications Canada Inc. as a
replacement Accumulation Partner in the telecommunications sector.
  Diversifying
Reward Portfolio
  In 2007,
as part of its continuing strategy to expand and diversify reward opportunities
for its members, Aeroplan added many new rewards to its non-air reward portfolio
which by year-end offered over 600 such rewards to members for redemption.
During 2007, the Aeroplan Music Store was launched, enabling members to exchange
their miles for digital music downloads. Aeroplan members' concerns over the
environment and global warming prompted the launch of a collection of
eco-friendly rewards. Aeroplan also offered its members the option to offset the
carbon emissions of their rewards flights. Aeroplan's online booking engine was
further expanded to include hotel rewards from Starwood hotels including
Sheraton, Westin, Meridien, and W Hotels. Member response has been consistently
positive to the increasing choice and value that non-air rewards
provide.
  Air
travel remains the most popular reward among members, representing approximately
80% of all rewards claimed by Aeroplan members in 2007. Aeroplan issued nearly
ten million air travel rewards over the last ten years, and over 1.5 million in
2007 alone.
  Retail
Ghost Cards
  In early
2007, Aeroplan launched a new member acquisition tool in the retail sector with
its partner Home Hardware, one of the largest home improvement stores in Canada
with over 1,000 participating locations nationwide, as well as pharmacy partner
Uniprix with over 150 participating locations. The ghost card product is a
plastic Aeroplan member card with its own account number, but with no name
attached. The card is packaged with information about the Aeroplan Program and
partners, and is offered by cashiers at the register for instant swiping to
accrue Aeroplan Miles with their purchase. Members then register the ghost card
online following their transaction to assign the card to them individually,
completing the enrolment process. Extensive training, signage and collateral are
implemented at the store level. As a result, Aeroplan has been able to enrol
close to 300,000 members through this channel over a 12 month period, accessing
a valuable market segment - the leisure and infrequent traveler.
  Aeroplan's
Business Model
  In
general terms, Aeroplan's business is based on two major streams of activity:
(i) the sale of Aeroplan Miles and marketing services to Aeroplan's
Accumulation Partners; and (ii) delivering rewards to Aeroplan's members
through the purchase of rewards from its Redemption Partners.
  Sale
of Aeroplan Miles and Marketing Services to Accumulation Partners
  Aeroplan
derives its Gross Billings (as defined herein) from the sale of Aeroplan Miles
and marketing services to its Accumulation Partners. The marketing services
consist primarily of advertising, promotion and data analytics. In addition,
Aeroplan derives service fees for managing Air Canada's tier membership program
for its most frequent flyers.
  Members
accumulate Aeroplan Miles through their purchase of products and services from
an extensive network of Accumulation Partners, representing brands in credit and
charge cards, airline, and other industries.
  The gross
proceeds received by Aeroplan at the time of sale of Aeroplan Miles to its
partners, known as "Gross Billings", are deferred and recognized as revenue upon
the redemption of Aeroplan Miles for GAAP purposes, except for Breakage as
described below. Upon the redemption of Aeroplan Miles, Aeroplan
purchases
  - 38
-
  airline
seats or other products or services in order to deliver the reward chosen by the
member. At such time, Aeroplan incurs and recognizes an expense equal to the
cost of the reward, and the deferred revenue related to the Aeroplan Miles being
redeemed is recognized as earned revenue from the sale of Aeroplan Miles for
GAAP purposes. The other significant expenses incurred by Aeroplan include
contact centre expenses and selling and administrative expenses.
  Based
upon past experience, Aeroplan's management anticipates that a number of
Aeroplan Miles issued will never be redeemed by members. This is known as
Breakage and is presently estimated by Aeroplan's management to be 17% of
current Aeroplan Miles issued. This estimate is supported by two independent
studies conducted in 2004 on behalf of Aeroplan which were updated in 2006.
During 2006, in accordance with its policy to review Breakage every two years,
Aeroplan's management, assisted by independent experts, completed its review of
the estimated Breakage factor used for the Aeroplan Program to determine the
total number of Aeroplan Miles sold which are not expected to be redeemed, on
the basis of data accumulated until the end of 2005. As these studies were based
on data up to December 31, 2005, which did not take into account the impact of
the ClassicPlus FlightTM Rewards
program introduced in October of 2006, management, assisted by an independent
firm of experts, has conducted in 2007 a Breakage review on the basis of data
accumulated until the end of 2006. Based on the results of this update, the
estimated Breakage factor for the Aeroplan Program remains at 17%. In addition,
during 2008, management is conducting a full Breakage review, taking into
consideration a full year's redemption data of ClassicPlus FlightTM Rewards
and other factors. For those Aeroplan Miles that Aeroplan has estimated will
never be redeemed by members, Aeroplan recognizes revenue on a straight-line
basis over the average time between the issuance and redemption of an Aeroplan
Mile, referred to as the life of an Aeroplan Mile, which is currently estimated
at 30 months.
  Aeroplan's management
believes that the issuance and redemption of Aeroplan Miles are influenced by
the nature and volume of Commercial Partners, thetypes of rewards
offered, the general economic activity level and the activity level of competing
loyalty marketing programs. These influences could affect redemption and
breakage rates. As of December 31, 2007, Aeroplan had approximately $1.6 billion
in deferred revenue that will be recognized for GAAP purposes in the future upon
the redemption of outstanding unredeemed Aeroplan Miles.
  On an
ongoing basis, the total estimated redemption cost for outstanding Aeroplan
Miles is determined by Aeroplan as the product of (i) total outstanding number
of unredeemed Aeroplan Miles on a specific measurement date net of estimated
Breakage, and (ii) the average unit cost per Aeroplan Mile redeemed in the
period. Given that the future unit cost per Aeroplan Mile redeemed may
fluctuate, the Future Redemption Costs liability is periodically re-evaluated
using theaverage
unit cost per Aeroplan Mile redeemed in the most recent period. "Future
Redemption Cost" means the total estimated liability of the future cost of
rewards for Aeroplan Miles which have been sold and remain outstanding, net of
Breakage, and valued at the latest available Average Cost of Rewards per Mile
experienced during the most recent quarter (for interim periods) or fiscal year
(for annual reporting purposes).
  Service
fees are charged for the sale of marketing services to Aeroplan's partners and
for the management of Air Canada's frequent flyer tier membership program. In
addition, Aeroplan collects various fees that may be charged to members upon
redemption of Aeroplan Miles, including booking, service and administrative
fees.
  Redemption
Rewards Purchased from Redemption Partners
  Once
members have accumulated a sufficient number of Aeroplan Miles, members are
entitled to redeem their Aeroplan Miles from Aeroplan's reward portfolio offered
through Aeroplan's Redemption Partners. Initially, these rewards were restricted
to air travel. Beginning in 2003, Aeroplan made a strategic shift to expand the
reward portfolio in order to directly respond to all key areas of interest of
the membership. By 2005, in addition to air travel on Air Canada, Jazz and the
Star AllianceTM
carriers, the reward portfolio included worldwide car and hotel rewards, a broad
selection of brand name merchandise and unique experiential
rewards.
  Accumulation
Partners
  Aeroplan
attracts and retains Accumulation Partners based on the value of (i) its
member base as a target market for such Accumulation Partners, (ii) the
loyalty demonstrated by Aeroplan members with their sustained
  - 39
-
  purchases
of partners' products and services, and (iii) the portfolio of value-added
marketing services offered by Aeroplan.
  Today,
Aeroplan has commercial relationships with Accumulation Partners which can be
divided into three main categories: (i) credit and charge cards; (ii) airlines;
and (iii) others.
  Credit
and Charge Cards
  Overall,
the credit and charge card category accounted for approximately 63% of total
Gross Billings in 2007 from the sale of Aeroplan Miles to Aeroplan's three
partners in this sector: CIBC, AMEX and MBNA America Bank, N.A. ("MBNA").
  Airlines
  The
airline category accounted for approximately 30% of total Gross Billings in 2007
from the sale of Aeroplan Miles and is comprised of approximately 30 partners,
most notably Air Canada, Jazz and other Star AllianceTM member
airlines.
  Others
  This
category accounted for approximately 7% of Gross Billings in 2007 from the sale
of loyalty marketing services, including Aeroplan Miles.
  Members
  The
Aeroplan Program currently has over four million active members, consisting of
those members who have completed at least one transaction (either accumulating
or redeeming an Aeroplan Mile) during the last twelve months.
  Pursuant
to the rules and conditions relating to mileage expiry under the Aeroplan
Program (the "Mileage Expiry Policy"), (i) starting January 1, 2007, Aeroplan
Miles that are unused after 7 years (84-months) in a member's account will
expire, and will be deducted from the total balance in the member's account. All
Aeroplan Miles issued prior to January 1, 2007 are considered as having been
accumulated on December 31, 2006 for the purpose of the 7-year period, resulting
in a potential expiry date of December 31, 2013 and (ii) from July 1, 2007,
pursuant to the terms of the Mileage Expiry Policy, as announced in October
2006, members must transact with the Aeroplan Program, through either one
accumulation or one redemption, at least once in the prior consecutive 12-month
period, failing which, accumulated Aeroplan Miles in the account will be
expired. Prior to July 1, 2007, Aeroplan Miles expired in those accounts that
had no activity (accumulation or redemption) for the prior
36-months.
  Expired
Aeroplan Miles may be reinstated for an administrative fee of $30 plus $0.01 per
restored Aeroplan Mile.
  Protecting
the Privacy of Aeroplan's Members
  As set
out in Aeroplan's privacy policy, Aeroplan is committed to protecting the
personal information of its members and of foremost concern is its members'
trust in Aeroplan's custodianship of their personal information. Aeroplan is
committed to constant self-evaluation of its practices and procedures and to
responding to members' comments in order to meet their expectations in this
regard. Aeroplan collects, uses, and discloses member information to administer
the Aeroplan Program and to offer its members rewards, benefits, products, goods
and services under the Aeroplan Program. Aeroplan does not collect, use or
disclose personal information about a member without consent except as may
otherwise be permitted or required by law. Aeroplan's members may opt out of its
marketing lists which are used to promote special offers from Aeroplan and its
partners. Aeroplan uses contractual provisions to ensure that its commercial
partners are bound to protect consumer privacy. Aeroplan's privacy policy is
designed to meet or exceed the requirements of Canadian privacy law, including
PIPEDA, and the principles set forth in the Canadian National Standard for the Protection
of Personal Information (CAN/CSA-
  - 40
-
  Q830-96).
Aeroplan's Code of Ethics and Business Conduct reinforces its commitment to
protecting privacy. Aeroplan's investment in this regard contributes to building
corporate trust, its reputation, and brand.
  Long-Term
Strategic Relationship with Air Canada
  Aeroplan
has a long-term strategic relationship with Air Canada, Canada's largest
domestic and international full-service airline.
  Aeroplan's
management believes that Aeroplan's strategic relationship with Air Canada
results in several competitive advantages to Aeroplan, including:
  ·
              an
      affiliation with the strong Air Canada
brand;
  ·
              Aeroplan's
      role as Air Canada's exclusive loyalty marketing provider based in
      Canada;
  ·
              attractive
      rates for seat capacity on the Air Canada and Jazz networks based on
      Aeroplan's status as Air Canada's largest customer;
  and
  ·
              access
      to Air Canada's passengers for the purposes of acquiring new Aeroplan
      members.
  Aeroplan
is a party to the following five principal agreements with Air Canada:
(i) an Amended and Restated Commercial Participation and Services Agreement
dated June 9, 2004, as amended, including by the agreements dated May 13, 2005,
October 13, 2006 and September 24, 2007 ("CPSA"); (ii) a Database Agreement
dated May 13, 2005, effective January 1, 2002; (iii) an Amended and
Restated Master Services Agreement dated May 13, 2005, effective January 1, 2005
("MSA"); (iv) a General Services Agreement dated May 13, 2005, effective
January 1, 2005 ("Aeroplan GSA"); and (v) Trademark License Agreements
dated May 13, 2005 and November 23, 2006.
  The
LMG Business
  Overview
  LMG is
primarily engaged in the operation of multi-partner coalition loyalty programs
and the provision of related analytical services to retailers and their
suppliers. LMG currently operates in the following principal areas:
  ·
              the
      Nectar Program;
  ·
              Insight
      & Communication; and
  ·
              Rewards
      Management Middle East Limited
("RMMEL")
  LMG also
owns the worldwide rights, trademarks and other intellectual property of the Air
Miles brand and receives royalty income from these assets.
  The
Nectar Program is the United Kingdom's leading coalition loyalty program. It was
launched in September 2002 and enables its over 10 million active members to
earn Nectar Points for making everyday household purchases at leading retailers
and service providers. Current Accumulation Partners include household names
such as BP, American Express, EDF Energy, Ford and Sainsbury's. Members can then
redeem these Nectar Points with Redemption Partners for rewards ranging from
merchandise and shopping discounts to free flights and admissions to leisure
attractions. The Nectar Program enables Accumulation Partners to improve
customer loyalty, influence customer buying behaviour, improve marketing
effectiveness and obtain customer data and analytics. Redemption Partners are
able to access a discrete distribution channel and a large pool of Nectar
members. "Nectar Points" means the currency accumulated by members under the
loyalty marketing program owned and operated by LMG.
  The
Insight & Communication business was established in 2007 to provide
analytical services to retailers and their suppliers. The business combines
customer data, usually, but not exclusively, generated through a loyalty
  - 41
-
  card
program, and electronic point of sale data generated when specific goods and
services are purchased including their price, location and time of purchase.
This data is then analyzed and the insight generated used to enhance decision
making in the pricing, ranging, assortment, supply and promotion of products for
resale by large retail companies.
  RMMEL
manages loyalty programs under the Air Miles Shopping Rewards Trademark. RMMEL
operates in Middle Eastern markets, principally the United Arab Emirates,
Bahrain and Qatar. The RMMEL business model is very similar to that of the
Nectar Program. Commercial Partners in the program include domestic businesses
such as Damas and the grocery retailer, Spinney's, as well as international
companies such as HSBC, Bridgestone, Adidas and Hertz. On January 17, 2008 LMG
increased its interest in RMMEL from the 20% held as at December 31, 2007 to
60%.
  Nectar
Program
  Overview
  The
Nectar Program enables its members to earn Nectar Points for making everyday
household purchases at 13 market leading Accumulation Partners. Current
Accumulation Partners include household names such as American Express, BP, EDF
Energy, Ford and Sainsbury's, all of whom have entered into long-term contracts
with LMG. With most Accumulation Partners, members earn two Nectar Points for
every £1 spent. Members can then redeem these Nectar Points with Redemption
Partners for rewards ranging from merchandise and shopping discounts to flights
and admissions to leisure attractions.
  LMG
enables participating Accumulation Partners to improve customer loyalty,
influence customer buying behaviour, improve marketing effectiveness and obtain
customer data and analytics at a lower cost than can be provided through an
in-house single participant loyalty program. Redemption Partners are able to
access a discrete distribution channel and a large pool of Nectar
members.
  LMG earns
the majority of its Gross Billings by receiving a marketing service fee from its
Accumulation Partners for each Nectar Point issued to members. Accumulation
Partners, generally have long-term contracts containing minimum commitments.
When members redeem Nectar Points for rewards, LMG pays Redemption Partners for
services provided to LMG a fee equivalent to the agreed cost of those
rewards.
  Operating
costs, not included in the cost of providing rewards, include the maintenance of
the systems used to manage Nectar Points balances and securely hold customer
data, marketing costs such as advertising and communications, employee costs and
contact centre costs.
  Nectar
has rapidly emerged as the United Kingdom's leading coalition loyalty program
with over 10 million active members.
  LMG also
operates "Nectar business", a business-to-business loyalty program which enables
small and medium sized businesses to collect Nectar Points. These Nectar Points
can be earned across a range of consumer and dedicated business-to-business
Accumulation Partners and redeemed for rewards in a similar manner using Nectar
Redemption Partners.
  Accumulation
Partners
  The
Nectar Program includes 13 Accumulation Partners as well as a growing list
of leading Accumulation Partners to small businesses. These household names
include American Express, BP, EDF Energy, Ford and Sainsbury's, all of whom have
entered into long-term contracts generating minimum annual Gross Billings. LMG
has targeted these leading market players to develop a broad network to quickly
attract and retain active and engaged members.
  - 42
-
  The
contracts which form the basis of each Accumulation Partner's participation in
the Nectar Program all contain the following characteristics: (i) long-term in
nature (i.e., generally at least two years in length); (ii) annual minimum
financial commitments; and (iii) annual, RPI linked program support
fees.
  These
contract terms result in predictable and recurring cash flow to LMG. In general,
contracts prevent an Accumulation Partner from participating in competitive
programs and provide the Accumulation Partner with the exclusive right to issue
Nectar Points within its category, use the Nectar brand in its marketing
activities and identify Nectar members who are currently not its own customers
via Nectar's marketing initiatives. The Nectar database, together with other
intellectual property used to operate Nectar, is owned exclusively by
LMG.
  LMG
continues to seek opportunities to secure new long-term Accumulation Partner
commitments while maintaining high contract renewal rates on favourable terms.
To the extent possible, the contract term of Accumulation Partner agreements are
staggered in order to minimize concurrent contract renewal
negotiations.
  Redemption
Partners
  Members
have the opportunity to redeem rewards across a wide spectrum of goods and
services. LMG contracts with a wide network of Redemption Partners who can
broadly be divided into three categories:
  In Store
Discounts: Members can redeem Nectar Points to receive immediate
discounts upon making a purchase at various retail locations. Significant retail
suppliers include Sainsbury's and Argos.
  Entertainment and
Gifts: Members can redeem Nectar Points for discounts and gifts from
various entertainment and lifestyle-oriented suppliers such as theme parks,
concerts, video rental and cinema tickets. Significant suppliers of
entertainment and gifts include Blockbuster and Vue Cinemas.
  Travel and
Leisure: Members can redeem Nectar Points for more traditional
rewards such as flights and hotel reservations. eBookers, the online travel
company provides a comprehensive fulfilment system to LMG allowing members to
search for flights and hotels online and complete transactions using Nectar
Points and cash in real-time.
  Logos
and Trademarks
  Management
of Aeroplan believes that its trademarks are important to its competitive
position. Aeroplan LP owns many registered trademarks, including, without
limitation, registrations for the following trademarks in Canada: Aeroplan,
Aéroplan, AeroCorporate, AéroEntreprise, Aeroplan Plus, Aéroplan Plus, Aerogold,
Aéro Or and Aeromove. Air Canada has granted Aeroplan LP a license to use the
Air Canada trade name and the Air Canada trademarks, including Air Canada® and Air
Canada Roundel®, solely
in connection with Air Canada's participation in the Aeroplan
Program.
  LMG is
the registered owner of the following trademarks in the United Kingdom and/or
the European Community: the word marks "Nectar", "LMG", "LMUK", "LMS" and "LMI",
in addition to the Nectar logo, Nectar card, LMG, LMUK, LMS and LMI logos. The
Nectar word, logo and card are also registered in Japan, USA and Australia. The
Nectar card is registered as an EU Registered Community Design. In addition LMG
is the registered owner of the Air Miles, Air Miles Travel the World and Air
Miles Shopping Rewards word marks and logos in various countries and has granted
licenses to use such marks in Canada, USA, Holland, Spain and the Middle
East.
  Aeroplan's
intangible assets are an important part of its business. It benefits from the
goodwill established for its brand names and protects its proprietary
information, including its trademarks and database, through trademark laws,
contractual provisions and confidentiality procedures. Employees, service
providers and commercial partners are contractually bound to protect Aeroplan's
proprietary information in order to control access to and the distribution of
any such information.
  - 43
-
  Debt
Financing
  On
June 29, 2005, concurrently with the closing of Aeroplan Income Fund's
initial public offering, Aeroplan entered into a credit agreement ("Aeroplan
Existing Credit Facilities" and, together with the
Aeroplan Redemption Reserve Term Loan, collectively the "Aeroplan Credit
Facilities") comprising of a $300 million (or the U.S. dollar equivalent
thereof) term credit facility ("Aeroplan Term Facility"), a $100 million
(or the US dollar equivalent thereof) acquisition facility ("Aeroplan
Acquisition Facility") and a $75 million (or the U.S. dollar equivalent
thereof) revolving credit facility ("Aeroplan Revolving Facility"). The Aeroplan
Existing Credit Facilities were subsequently amended by an amendment No. 1 to
credit agreement, dated as of December 23, 2005, an amendment No. 2 to
credit agreement, dated as of August 26, 2006 and, concurrently with the
closing of the Aeroplan Redemption Reserve Term Loan, an amendment No. 3 to
credit agreement ("Amendment No. 3"), dated as of December 19,
2007.
  The
Aeroplan Existing Credit Facilities are provided by a syndicate of lenders
("Aeroplan Existing Lenders") with the Royal Bank of Canada acting as the
administrative agent. Amendment No. 3 provides for, inter alia: (i) the
creation of an additional term credit facility in the amount of
Cdn.$168 million ("Aeroplan Additional Term Facility") and the reduction of
the Term Facility (i.e. existing) in a corresponding amount; and (ii) an
increase to the Aeroplan Revolving Facility up to $150 million. Each of the
facilities under the Aeroplan Existing Credit Facilities will mature on
December 19, 2010.
  The
Aeroplan Term Facility was available in one drawdown on the closing of Aeroplan
Income Fund's initial public offering to fund a portion of a reserve of
Aeroplan's management estimate of Future Redemption Costs in respect of
unredeemed Aeroplan Miles outstanding (the "Aeroplan Miles Redemption Reserve")
and certain capital expenditures in the aggregate amount of $7 million,
with the remainder available to repay the promissory note issued by Aeroplan in
favour of APLN Limited Partnership, as partial consideration under an
acquisition agreement between APLN Limited Partnership and Aeroplan whereby
Aeroplan acquired all or substantially all the assets of APLN Limited
Partnership (subject to certain adjustments) in an amount equal to $125 million.
The Aeroplan Acquisition Facility is available for multiple drawings to fund
permitted acquisitions. Under the Aeroplan Revolving Facility, up to
$25 million was available on the closing of the initial public offering for
general corporate and working capital purposes with the balance fully available
thereafter. A swingline facility of up to $5 million is also available as a
sub-component of the Aeroplan Revolving Facility for cash management and working
capital purposes.
  As at
December 31, 2007, Cdn.$132 million are drawn under the Aeroplan Term
Facility, Cdn.$100 million are drawn under the Aeroplan Acquisition
Facility, Cdn.$168 million are drawn under the Aeroplan Additional Term
Facility and Cdn.$40 million are drawn under the Aeroplan Revolving
Facility.A
substantial part of this drawing is expected to be repaid by the end of
2007.
  The
Aeroplan Redemption Reserve Term Loan provides for a Cdn.$300 million
senior secured bridge credit facility ("Aeroplan Bridge Facility").
  The
Aeroplan Redemption Reserve Term Loan is provided by a syndicate of lenders
("Aeroplan 2007 Lenders") with the Royal Bank of Canada acting as the
administrative agent. Unless prepaid in advance in accordance with the terms of
the Aeroplan Redemption Reserve Term Loan, the Aeroplan Bridge Facility matures
on June 19, 2009 and it may, under certain conditions, be extended, first,
to December 19, 2009 and then, partially, to June 19,
2010.
  The
Aeroplan Bridge Facility was made available for the sole purpose of financing
the Aeroplan Miles Redemption Reserve to an amount equal to
Cdn.$400 million (when combined with borrowings of Cdn.$100 million
under the Aeroplan Existing Credit Facilities) and was fully drawn on
December 19, 2007.
  Each
Aeroplan Credit Facility is secured by, inter alia, substantially all
of the present and future assets of Aeroplan, subject to: (i) certain permitted
encumbrances, and (ii) an intercreditor agreement entered into on December 19,
2007 between the Aeroplan Existing Lenders and the Aeroplan 2007 Lenders, to
which, inter alia,
Aeroplan has intervened.
  - 44
-
  Aeroplan's
obligations in respect of each Aeroplan Credit Facility are guaranteed by
Aeroplan Income Trust, Aeroplan Holding GP Inc., Aeroplan Holdings UK Limited,
Aeroplan Acquisition UK Limited, LMG, Loyalty Management Services Limited,
Loyalty Management UK Limited and Loyalty Management Group Analytics Limited. As
security for its guarantee obligations, Aeroplan Income Trust provided security
over all of its present and future assets, including a pledge of all securities
held by Aeroplan Trust in Aeroplan Limited Partnership and Aeroplan Holding GP
Inc. As security for its guarantee obligations, Aeroplan Holdings GP Inc.
provided a pledge of all securities held by Aeroplan Holdings GP Inc. in
Aeroplan Limited Partnership.
  Each
Aeroplan Credit Facility contains customary representations and warranties and
is subject to customary terms and conditions (including, positive, negative and
financial covenants and a regime of events of default) for facilities of this
nature and size, including limitations on the payment of distributions (see
below) and the incurrence of debt.
  Each
Aeroplan Credit Facility includes certain covenants limiting the aggregate
amount of distributions by Aeroplan to holders of record of units of Aeroplan
exceeding the aggregate distributable cash of Aeroplan during the applicable
period. Distributions by Aeroplan and certain of its subsidiaries are also
prohibited upon the occurrence and continuance of an event of default under the
Aeroplan Credit Facilities.
  Aeroplan
Miles Redemption Reserve
  At the
closing of Aeroplan Income Fund's initial public offering, Aeroplan established
a reserve ("Aeroplan Miles Redemption Reserve") to fund a portion of
management's estimate of the Future Redemption Costs in respect of unredeemed
Aeroplan Miles outstanding at the closing of Aeroplan's initial public offering.
The Aeroplan Miles Redemption Reserve is available to be used to supplement cash
flow generated from operations in order to pay for rewards in the event of
unusually high redemption activity.
  The
Aeroplan Miles Redemption Reserve was initially based on a portion of the
estimated Future Redemption Costs of Aeroplan Miles outstanding at the closing
of Aeroplan's initial public offering. At the closing of such initial public
offering, $400 million was deposited in the Aeroplan Miles Redemption Reserve
account, funded from the net proceeds of the initial public offering and from a
drawdown on the Aeroplan Term Facility. As at December 31, 2007, the
Aeroplan Miles Redemption Reserve amounted to $400 million, representing
34.6% of the Future Redemption Cost liability. To date, Aeroplan has not had to
use the funds held in the Aeroplan Miles Redemption Reserve.
  In
accordance with its investment policy, Aeroplan invests the Aeroplan Miles
Redemption Reserve and excess cash, included in short-term investments and cash
and cash equivalents in commercial paper or corporate bonds with a minimum
rating of R-1(high) or AA(low) and term deposits, subject to certain thresholds
to reduce undue exposure to any one issuer.
  Interest
or other income earned in connection with the investment of amounts held in the
Aeroplan Miles Redemption Reserve account accrues to the benefit of Aeroplan and
does not increase the total amount held in the Aeroplan Miles Redemption Reserve
account.
  In
connection with the operation of the Aeroplan Miles Redemption Reserve,
management may seek such advice and retain such experts as management may deem
prudent or as otherwise may be required by applicable securities
laws.
  - 45
-
  OTHER
INVESTMENTS
  Jazz
  As a
result of the transactions described under "Three-Year Summary – Evolution of
the Business", ACE's interest in Jazz as at March 28, 2008 has decreased to
9.5% through its holdings of 9.5% of the issued and outstanding units of Jazz
Air Income Fund.
  Jazz is
the largest regional airline and the second largest airline in Canada after Air
Canada, based on fleet size and number of routes operated. Jazz forms an
integral part of Air Canada's domestic and transborder market presence and
strategy. Under the Amended and Restated Capacity Purchase Agreement dated
January 1, 2006 (the "CPA") with Air Canada, Jazz provides service to and from
lower density markets as well as higher density markets at off-peak times
throughout Canada and to and from certain destinations in the United States.
Jazz operates scheduled passenger service on behalf of Air Canada with
approximately 825 departures per weekday to 57 destinations in Canada and 27
destinations in the United States with an operating fleet of 133 Covered
Aircraft as of December 31, 2007. At peak demand periods in 2007, Jazz
completed scheduled passenger service on behalf of Air Canada with approximately
877 departures per weekday.
  Jazz is
the focal point of Air Canada's regional passenger strategy, providing Air
Canada with approximately 97% of its regional airline capacity based on ASMs.
Jazz and Air Canada have linked their regional and mainline networks in order to
serve connecting passengers more efficiently and to provide valuable traffic
feed to Air Canada's mainline routes. Jazz's operations also complement Air
Canada's operations by allowing more frequent service in lower density markets
than could be provided economically with conventional large jet
aircraft.
  Pursuant
to the CPA, Air Canada purchases capacity from Jazz on Jazz's aircraft subject
to the CPA (the "Covered Aircraft") in consideration for the payment of certain
fees by Air Canada to Jazz. Since October 1, 2004, Jazz derived
substantially all of its revenues (99%) from the Initial CPA and the CPA. Air
Canada currently purchases capacity representing substantially all of the
capacity of the 133 Covered Aircraft. In addition, the current 2006 – 2008
high level operating plan provided by Air Canada to Jazz for rate setting
purposes only (the "2006 – 2008 High Level Operating Plan") provides
for Air Canada to continue to purchase substantially all of the capacity of the
Covered Aircraft for such period. The 2006 – 2008 High Level Operating
Plan is subject to annual and seasonal (twice-a-year) revisions. Notwithstanding
any such revisions, Air Canada must purchase a minimum amount of capacity from
Jazz until the expiry of the CPA in December 2015.
  Jazz
operates its flights on behalf of Air Canada using the Covered Aircraft, and
provides all crews (flight and cabin), aircraft maintenance and, in some cases,
airport operations for such flights. Air Canada determines routes and controls
scheduling, ticket prices, product distribution, seat inventories, marketing and
advertising for these flights.
  Under the
CPA, Jazz is paid fees by Air Canada on a variety of different metrics based on
an estimate of all costs and expenses to be incurred and paid by Jazz for the
applicable period with respect to Scheduled Flights and other services to
aircraft, other than Jazz's pass-through costs (the "Controllable Costs"),
marked-up by a specified percentage. Such mark-up equates to a specified margin
on an estimate of Jazz's revenues from the flights on the Covered Aircraft whose
routes, schedules and fares are determined by Air Canada in accordance with the
CPA (the "Scheduled Flights") and other services to aircraft for each calendar
year in the applicable period, excluding the revenues resulting from the
reimbursement of Jazz's pass-through costs and the payment of performance
incentives (the "Scheduled Flights Revenue"). Controllable Costs represented
approximately 58.5% of Jazz's total costs for the year ended December 31,
2007. In addition, under the CPA, Jazz is entitled to repayment by Air Canada,
without mark-up, of certain pass-through costs specified in the CPA and incurred
and paid by Jazz with respect to the Scheduled Flights. Pass-through costs
represented approximately 41.5% of Jazz's total costs for the year ended
December 31, 2007.
 
 - 46
-
  ACTS
Aero
  Overview
  As a
result of the transactions described under "Three-Year Summary – Evolution of
the Business – Acquisition by ACTS LP of Majority Stake in Aeroman" and
"Three-Year Summary – Evolution of the Business – Monetization of ACTS LP", ACE
held a 23% equity interest in ACTS Aero as at March 28, 2008.
  ACTS Aero
is a full-service MRO service provider to the airline industry in the Americas
(North, Central and South America). ACTS Aero offers the following MRO services
in its portfolio:
  1.
              Airframe
      services;
  2.
              Engine
      and auxiliary power unit services;
  3.
              Component
      services; and
  4.
              Specialized
      services, including aircraft painting, cabin conversions and
      modifications, engineering, fleet management, non-destructive testing,
      regulatory compliance and airworthiness, supply chain management,
      technical training, technical records management, and technical
      publications.
  The major
maintenance facilities of ACTS Aero's business are located in Montreal,
Vancouver, Winnipeg, Toronto and San Salvador. ACTS Aero services more than 100
global customers, including Air Canada, US Airways, the Department of National
Defence of Canada, JetBlue, and Air Transat.
  Aeroman,
the leading narrow body MRO provider in Central America, provides ACTS Aero with
a strategically valuable low-cost platform from which it can service narrow body
aircraft from throughout the Americas region.
  ACTS Aero
has launched strong initiatives to improve efficiencies for both customers and
shareholders. It has taken steps to deepen its management team while bringing an
influx of new perspectives and skills to the company's existing operational
expertise. Several cost reduction strategies have begun: ACTS Aero successfully
executed a real estate floor space reduction, is implementing a new Enterprise
Resource Planning system in 2007 and a lean manufacturing program. As well, it
has initiated company-wide material cost reduction and inventory optimization
initiatives. ACTS Aero is also reviewing contracts with several major
customers.
  ACTS
Aero's combination of reputation, scale, service capabilities, independence,
customer base, and low-cost presence positions ACTS Aero to benefit from
anticipated growth in the MRO outsourcing industry. To execute its growth plan,
ACTS Aero has identified four strategic priorities:
   (i)
              lower
      costs through operational excellence, while maintaining high quality:
      While maintaining its enviable reputation for high quality work, ACTS Aero
      will focus on delivering superior operational performance at lower costs
      in order to improve cost
competitiveness;
   (ii)
              become
      a full-service provider of customized maintenance solutions with expanded
      capabilities: As a leading MRO provider, ACTS Aero will offer customers a
      portfolio of enhanced services to reduce total fleet cost of
      maintenance;
   (iii)
              build
      a customer-centric organization: Based on its existing capabilities, ACTS
      Aero has already attracted a range of non-Air Canada customers. ACTS Aero
      will take advantage of MRO industry outsourcing trends and build on its
      strong market position; and
   (iv)
              increase
      leadership effectiveness and employee alignment: ACTS Aero has
      significantly strengthened its management team, building a strong team
      with lean manufacturing and Six Sigma expertise who draw on backgrounds in
      the aerospace, telecommunications, and logistics
    industries.
  - 47
-
  Employees
and Pension and Benefits Agreement
  Pursuant
to a general services agreement dated September 24, 2004, with respect to
certain unionized employees employed by Air Canada and a general services
agreement dated September 24, 2004, with respect to certain non-unionized
employees of Air Canada, ACTS (ACTS Aero post-monetization) must reimburse Air
Canada on a fully-allocated basis, including salary and benefits related to
certain of the above-mentioned employees, who are unionized and non-unionized
employees of Air Canada who work for the benefit of ACTS Aero.
  In
connection with the monetization by ACE of ACTS LP which occurred on October 16,
2007, Air Canada, ACTS LP and ACTS Aero entered into a Pension and Benefits
Agreement effective as of October 16, 2007, relating to pension and benefits
arrangements pertaining to non-unionized and unionized employees of Air Canada
who were previously assigned to ACTS LP pursuant to general services agreements
between Air Canada and ACTS LP. A description of the terms of such agreement is
included in the 2007 Management's Discussion and Analysis of ACE under the
heading "10. Related Party Transactions – The Relationship Between Air Canada
and ACTS – Pension and Benefits Agreement".
   RISK
FACTORS
  The risks
described in this section may not be the only risks faced by ACE. Other risks of
which ACE is not aware or which ACE currently deems to be immaterial may surface
and have a material adverse impact on ACE's business, results from operations
and financial condition.
  ACE
  Reliance
on Key Personnel
  The
success of ACE depends on the abilities, experience, industry knowledge and
personal efforts of senior management of ACE. The loss of the services of such
key personnel could have a material adverse effect on the business, financial
condition or future prospects of ACE. In addition, ACE may not be able to
attract and retain additional qualified management as needed in the
future.
  Changes
to the Canadian Federal Income Tax Treatment of Income Trusts
  On
October 31, 2006, the Minister of Finance (Canada) announced a "Tax Fairness
Plan" which, in part, proposed changes to the manner in which certain
flow-through entities and the distributions from such entities are taxed (the
"SIFT Rules"). Bill C-52, Budget Implementation Act, 2007, which received Royal
Assent on June 22, 2007, contained the SIFT Rules, which are designed to
implement these proposals. Under the SIFT Rules, Aeroplan Income Fund and Jazz
Air Income Fund, as publicly traded income trusts, are considered SIFTs and will
be subject to trust level taxation as of January 1, 2011, at a rate comparable
to the combined federal and provincial corporate tax rate on certain types of
income. This trust level taxation will reduce the amount of cash available for
future distributions. Loss of the deferred application of the SIFT Rules until
2011 could have a material adverse effect on the value of ACE's interest in
Aeroplan Income Fund and Jazz Air Income Fund.
  Restrictions
on Unitholders of Aeroplan and Jazz
  The
declaration of trust of each of Aeroplan Income Fund and Jazz Air Income Fund
impose various restrictions on unitholders. Non-resident unitholders are
prohibited from beneficially owning more than 49.9% of the units of each of
Aeroplan Income Fund and Jazz Air Income Fund. These restrictions may limit (or
inhibit the exercise of) the rights of certain unitholders, including
non-residents of Canada and US persons, to acquire units, to exercise their
rights as unitholders and to initiate and complete take-over bids in respect of
the units. As a result, these restrictions may limit the demand for units of
Aeroplan Income Fund or Jazz Air Income Fund, as the case may be, from certain
unitholders and thereby adversely affect the liquidity and market value of the
units of Aeroplan Income Fund or Jazz Air Income Fund, as the case may be, which
could have a material adverse effect on the value of ACE's interest in Aeroplan
Income Fund and Jazz Air Income Fund.
  - 48
-
  Dependence
upon Principal Investments
  ACE is a
holding company of various aviation interests and most of ACE's assets are its
ownership interest in Air Canada, Aeroplan Income Fund, JazzAir Income Fundand ACTS Aero. ACE's
cash flows and ability to distribute earnings to its shareholders are dependent
upon the ability of ACE to realize these investments and on the ability of these
entitiesto pay
dividends or distributions to ACE.
  The
ability of these entities to pay dividends or distributions will be dependent
upon their operating performance and profitability, and will be subject to
applicable laws and regulations and contractual restrictions that may be
contained in the instruments governing any indebtedness of those entities. Each
of these separate legal entities has no legal obligation to pay dividends or
distributions to ACE.
  Air
Canada
  Financial
Results
  In the
past, Air Canada has sustained significant operating losses and may sustain
significant losses in the future. On September 30, 2004, Air Canada and certain
of its subsidiaries emerged from protection under the CCAA and implemented the
Plan. For the three years ended December 31, 2003, Air Canada incurred operating
losses before reorganization and restructuring items and non-recurring labour
expenses of over $1.6 billion.
For the nine-month period ended September 30, 2004, Air Canada realized
operating income before reorganization and restructuring items of $120 million
and, for the three-month period ended December 31, 2004, Air Canada incurred an
operating loss of $59 million. For the years ended December 31, 2007, 2006 and
2005, Air Canada realized operating income of $495 million, $259 million
and $318 million, respectively. Despite Air Canada's emergence from creditor
protection under the CCAA, the resulting and ongoing business initiatives and
efforts at cost reductions and its recent results, Air Canada may not be able to
successfully achieve planned business initiatives and cost reductions, including
those which seek to offset significant fuel and other expense, increases or
restore positive net profitability and may sustain significant losses in the
future.
  Leverage
and Liquidity
  Air
Canada has, and is expected to continue to have, a significant amount of
indebtedness, including substantial fixed obligations under aircraft leases and
financings. Air Canada may incur additional debt, including secured debt, in the
future. The amount of indebtedness that Air Canada currently has and which it
may incur in the future could have a material adverse effect on Air Canada, for
example, by (i) limiting Air Canada's ability to obtain additional financing,
(ii) requiring Air Canada to dedicate a substantial portion of its cash flow
from operations to payments on its indebtedness and fixed cost obligations,
thereby reducing the funds available for other purposes, (iii) making Air Canada
more vulnerable to economic downturns, and (iv) limiting Air Canada's
flexibility in planning for, or reacting to, competitive pressures or changes in
its business environment.
  The
ability of Air Canada to make scheduled payments under its indebtedness will
depend on, among other things, its future operating performance and its ability
to refinance its indebtedness, if necessary. Each of these factors is to a large
extent subject to economic, financial, competitive, regulatory, operational and
other factors, many of which are beyond Air Canada's control. In addition, as
Air Canada incurs indebtedness which bears interest at fluctuating interest
rates, to the extent these interest rates increase, its interest expense will
increase. There can be no assurance that Air Canada will be able to generate
sufficient cash from its operations to pay its debts and lease
obligations.
  Need
for Additional Capital
  Air
Canada faces a number of challenges in its current business operations,
including high fuel prices and increased competition from international,
transborder and low-cost domestic carriers. In order to meet such challenges and
to support Air Canada's business strategy, significant operating and capital
expenditures are, and may in the future be, required. There can be no assurance
that Air Canada will continue to be able to obtain on a timely basis sufficient
funds on terms acceptable to Air Canada to provide adequate liquidity and to
finance the operating
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  and
capital expenditures necessary to support its business strategy if cash flows
from operations and cash on hand are insufficient.
  Failure
to generate additional funds, whether from operations or additional debt or
equity financings, may require Air Canada to delay or abandon some or all of its
anticipated expenditures or to modify its business strategy, which could have a
material adverse effect on Air Canada's business, results from operations and
financial condition. Furthermore, the ability of competitors to raise money more
easily and on less onerous terms could create a competitive disadvantage for Air
Canada.
  In
addition, Air Canada's credit ratings influence its ability to access capital
markets. There can be no assurance that Air Canada's credit ratings will not be
downgraded, which would add to Air Canada's borrowing and insurance costs,
hamper its ability to attract capital and limit its ability to operate its
business, all of which could have a material adverse effect on Air Canada's
business, results from operations and financial condition.
  Fuel
Costs
  Fuel
costs constituted the largest percentage of the total operating costs of Air
Canada in 2007. Fuel prices fluctuate widely depending on many factors including
international market conditions, geopolitical events and the
Canada/US dollar exchange rate. Air Canada cannot accurately predict fuel
prices. During 2005, 2006 and 2007, fuel prices increased and fluctuated near or
at historically high levels. Should fuel prices continue at, or continue to
increase above, such high levels, fuel costs could have a material adverse
effect on Air Canada's business, results from operations and financial
condition. Due to the competitive nature of the airline industry, Air Canada may
not be able to pass on increases in fuel prices to its customers by increasing
its fares. Based on 2007 volumes, Air Canada's management estimates that a US$1
per barrel movement in the average price of West Texas Intermediate crude oil
would have resulted in an approximate $26 million change in 2007 fuel
expense for Air Canada (excluding any impact of fuel surcharges, foreign
exchange rates and fuel hedging), assuming flying capacity remained unchanged
and that refining spreads between West Texas Intermediate crude oil and jet fuel
as well as foreign exchange rates remained constant.
  Labour
Costs and Labour Relations
  Labour
costs constitute one of Air Canada's largest operating cost items. There can be
no assurance that Air Canada will be able to maintain such costs at levels which
do not negatively affect its business, results from operations and financial
condition. There can be no assurance that future agreements with employees'
unions or the outcome of arbitrations will be on terms consistent with Air
Canada's expectations or comparable to agreements entered into by Air Canada's
competitors. Any future agreements or outcome of negotiations, mediations or
arbitrations including in relation to wages or other labour costs or work rules
may result in increased labour costs or other charges which could have a
material adverse effect on Air Canada's business, results from operations and
financial condition.
  Most of
Air Canada's employees are unionized. Most of these unionized employees are
subject to long-term collective agreements which were concluded in 2003 and 2004
with terms expiring in 2009. No strikes or lock-outs may lawfully occur during
the term of the collective agreements expiring in 2009. However, there can be no
assurance that there will not be a labour conflict that could lead to an
interruption or stoppage in Air Canada's service or otherwise adversely affect
the ability of Air Canada to conduct its operations, all of which could have a
material adverse effect on its business, results from operations and financial
condition.
  If there
is a labour disruption or work stoppage by any of the unionized work groups of
Jazz, there could also likely be a material adverse effect on Air Canada's
business, results from operations and financial condition. In addition, labour
problems at Air Canada's Star AllianceTMpartners could result in lower demand for connecting traffic with Air
Canada and, ultimately, could have a material adverse effect on Air Canada's
business, results from operations and financial condition.
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  Airport
User Fees and Air Navigation Fees
  With the
privatization of airports and air navigation authorities over the last decade in
Canada, new airport and air navigation authorities have imposed significant
increases in their fees. If authorities in Canada or elsewhere continue to
increase their fees at the rate at which they have increased them in the recent
past, Air Canada's business, results from operations and financial condition
could be materially adversely affected.
  Competition
  Air
Canada operates within a highly competitive industry. Over the past few years,
several carriers have entered or announced their intention to enter into the
domestic, the US transborder and international markets in which Air Canada
operates.
  Canadian
low-cost and other carriers have entered and/or expanded or announced their
intention to compete in many of Air Canada's key domestic markets and, along
with some US carriers have also entered and/or expanded their operations in the
US transborder market. Some US carriers, having recently completed substantial
reorganizations, have reduced levels of indebtedness and lower operating costs
and may be in a position to more effectively compete with Air Canada. Air Canada
is also facing increasing competition in international markets as carriers
increase their international capacity, both by expansion and by shifting
existing domestic capacity to international operations to avoid low-cost
domestic competition.
  If
Canadian low-cost and other carriers are successful in entering or expanding
into Air Canada's domestic and the US transborder markets, if additional US
carriers are successful in entering Air Canada's transborder market or if
carriers are successful in their expansion in international markets of Air
Canada, Air Canada's business results from operations and financial condition
could be materially adversely affected.
  Air
Canada also encounters substantial price competition. The expansion of low-cost
carriers in recent years, along with the advent of Internet travel websites and
other travel products distribution channels, has resulted in a substantial
increase in discounted and promotional fares initiated by Air Canada's
competitors. The decision to match competitors' fares, to maintain passenger
traffic, results in reduced yields which, in turn, could have a material adverse
effect on Air Canada's business, results from operations and financial
condition. Furthermore, Air Canada's ability to reduce its fares in order to
effectively compete with other carriers is dependent on Air Canada's ability to
achieve acceptable operating margins and may also be limited by government
policies to encourage competition.
  In
addition, consolidation in the airline industry could result in increased
competition as some airlines emerging from such consolidations may be able to
compete more effectively against Air Canada which could have a material adverse
effect on Air Canada's business, results from operations and financial
condition.
  Limitations
Due to Restrictive Covenants
  Some of
the financing and other major agreements of Air Canada contain restrictive
covenants which affect and, in some cases, significantly limit or prohibit,
among other things, the manner in which Air Canada may structure or operate its
business, including by limiting Air Canada's ability to incur indebtedness,
create liens, sell assets, make capital expenditures and engage in acquisitions,
mergers or restructurings.  In addition, certain financing
arrangements require Air Canada to maintain financial ratios. Any future
borrowings may also be subject to similar covenants which limit Air Canada's
operating and financial flexibility, which could materially and adversely affect
Air Canada's profitability.
  A failure
by Air Canada to comply with its contractual obligations (including restrictive
covenants), or to pay its indebtedness and fixed costs could result in a variety
of material adverse consequences, including the acceleration of its
indebtedness, the withholding of credit card proceeds by the credit card service
providers and the exercise of remedies by its creditors and lessors, and such
defaults could trigger additional defaults under other indebtedness or
agreements. In such a situation, it is unlikely that Air Canada would be able to
repay the accelerated indebtedness or fulfill its obligations under certain
contracts, make required aircraft lease payments or otherwise
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  cover its
fixed costs. Also, the lenders under the financing arrangements could foreclose
upon all or substantially all of the assets of Air Canada which secure Air
Canada's obligations.
  Strategic,
Business, Technology and Other Important Initiatives
  In order
to operate its business, achieve its goals and remain competitive, Air Canada
continuously seeks to identify and devise, invest in and implement strategic,
business, technology and other important initiatives, such as those relating to
the aircraft fleet restructuring program, the aircraft refurbishment program,
the new revenue model, the reservation and airport customer service initiative
(which will also support the revenue model), the  business process
initiatives as well as other initiatives. These initiatives, including
activities relating to their development and implementation, may be adversely
impacted by a wide range of factors, many of which are beyond Air Canada's
control. Such factors include the performance of third parties, including
suppliers, the implementation and integration of such initiatives into Air
Canada's other activities and processes as well as the adoption and acceptance
of initiatives by Air Canada's customers, suppliers and personnel. A delay or
failure to sufficiently and successfully identify and devise, invest in or
implement these initiatives could adversely affect Air Canada's ability to
operate its business, achieve its goals and remain competitive and could have a
material adverse effect on Air Canada's business, results from operations and
financial condition.
  For
instance, a key component of Air Canada's business plan is the restructuring of
its aircraft fleet, including the elimination and replacement of older, less
efficient aircraft, the introduction of new regional jet aircraft, and the
modernization of its international widebody fleet through the acquisition of new
and more efficient aircraft. A delay or failure in the completion of Air
Canada's fleet restructuring, including a delay by the manufacturers in the
delivery of the widebody aircraft, or an inability to remove, as planned,
certain aircraft from the fleet in coordination with the planned entry into
service of new aircraft, could adversely affect the implementation of Air
Canada's business plan which may, in turn, have a material adverse effect on Air
Canada's business, results from operations and financial condition.
  Another
important component of Air Canada's business plan is the replacement of its
legacy systems for passenger reservation and airport customer service with a
newly developed web-enabled system in order to support the rapid and efficient
implementation of Air Canada's revenue model. A delay or failure in the
implementation of Air Canada's new system could adversely affect the
implementation of Air Canada's business plan which may, in turn, have a material
adverse effect on Air Canada's business, results from operations and financial
condition.
  Dependence
on Technology
  Air
Canada relies on technology, including computer and telecommunications equipment
and software and Internet-based systems, to operate its business, increase its
revenues and reduce its costs. These systems include those relating to Air
Canada's telecommunications, websites, computerized airline reservations and
airport customer services and flight operations.
  These
technology systems may be vulnerable to a variety of sources of failure,
interruption or misuse, including by reason of third party suppliers' acts or
omissions, natural disasters, terrorist attacks, telecommunications failures,
power failures, computer viruses, unauthorized or fraudulent users, and other
operational and security issues. While Air Canada continues to invest in
initiatives, including security initiatives and disaster recovery plans, these
measures may not be adequate or implemented properly. Any such technology
systems failure could materially and adversely affect Air Canada's operations
and could have a material adverse effect on Air Canada's business, results from
operations and financial condition.
  Key
Supplies and Suppliers
  Air
Canada is dependent upon its ability to source, on favourable terms and costs,
sufficient quantities of goods and services in a timely manner, including those
required for Air Canada's operations such as fuel, aircraft and related parts
and aircraft and engine maintenance services (including maintenance services
obtained from ACTS). In certain cases, such goods and services may only be
available from a limited number of suppliers. Such failure, refusal or inability
may arise as a result of a wide range of causes, many of which are beyond Air
Canada's
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  control.
Any failure or inability of Air Canada to successfully source goods and
services, including by reason of a failure, refusal or inability of a supplier,
or to source goods and services on terms and pricing and within the timeframes
acceptable to Air Canada, could have a material adverse effect on Air Canada's
business, results from operations and financial condition.
  Aeroplan
  Through
its relationship with Aeroplan, Air Canada is able to offer its customers who
are Aeroplan® members
the opportunity to earn Aeroplan® miles.
Based on customer surveys, Air Canada's management believes that rewarding
customers with Aeroplan® miles is
a significant factor in customers' decision to travel with Air Canada and Jazz
and contributes to building customer loyalty. The failure by Aeroplan to
adequately fulfill its obligations towards Air Canada under the Aeroplan CPSA
and in connection with the Aeroplan® program,
or other unexpected interruptions of Aeroplan services which are beyond Air
Canada's control could have a material adverse effect on Air Canada's business,
results from operations and financial condition.
  Jazz
  Under the
CPA, Jazz provides Air Canada's customers service in lower density markets and
higher density markets at off-peak times throughout Canada and to and from
certain destinations in the United States and also provides valuable traffic
feed to Air Canada's mainline routes. Air Canada reimburses Jazz, without
mark-up, for certain pass-through costs incurred directly by Jazz, such as fuel,
navigation, landing and terminal fees and certain other costs. Significant
increases in such pass-through costs, the failure by Jazz to adequately fulfill
its obligations towards Air Canada under the CPA, or other unexpected
interruptions of Jazz's services which are beyond Air Canada's control could
have a material adverse effect on Air Canada's business, results from operations
and financial condition. In addition, the CPA requires that Jazz maintain a
minimum fleet size and contains a minimum average daily utilization guarantee
which requires that Air Canada make certain minimum payments to Jazz regardless
of the revenue generated by Jazz.
  Pension
Plans
  Canadian
federal pension legislation requires that the funded status of registered
pension plans be determined periodically, on both a going concern basis
(essentially assuming indefinite plan continuation) and a solvency basis
(essentially assuming immediate plan termination).
  The
solvency liability is influenced primarily by long-term interest rates and by
the investment return on plan assets. The interest rate used to calculate
benefit obligations for solvency purposes is a prescribed rate derived from the
interest rates on long-term Government of Canada bonds. In the current low
interest rate environment, the calculation results in a higher present value of
the pension obligations, leading to a larger unfunded solvency
position.
  In May
2004, Air Canada and the Office of the Superintendent of Financial Institutions
agreed on a protocol pursuant to which the solvency funding requirements for Air
Canada's registered pension plans provided for in the then existing regulations
were amended retroactive to January 1, 2004. Air Canada is required to make
substantial annual cash contributions, and the level of those contributions will
increase in the event of poor pension fund investment performance and/or further
declines in long-term Government of Canada bond rates. Underfunded pension plans
or a failure or inability by Air Canada to make required cash contributions to
its registered pension plans could have a material adverse effect on Air
Canada's business, results from operations and financial condition.
  Star
AllianceTM
  The
strategic and commercial arrangements with Star AllianceTM members
provide Air Canada with important benefits, including code sharing, efficient
connections and transfers, reciprocal participation in frequent flyer programs
and use of airport lounges from the other members. Should a key member leave
Star AllianceTM or
otherwise fail to meet its obligations thereunder, Air Canada's business,
results from operations and financial condition could be materially adversely
affected.
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  Interruptions
or Disruptions in Service
  Air
Canada's business is significantly dependent upon its ability to operate without
interruption at a number of hub airports, including Toronto Pearson Airport.
Delays or disruptions in service, including those due to security or other
incidents, weather conditions, labour conflicts with airport workers, baggage
handlers, air traffic controllers and other workers not employed by Air Canada
or other causes beyond the control of Air Canada could have a material adverse
impact on Air Canada's business, results from operations and financial
condition.
  Foreign
Exchange
  Air
Canada's financial results are sensitive to the changing value of the Canadian
dollar. In particular, Air Canada has a significant annual net outflow of US
dollars and is affected by fluctuations in the Canada/US dollar exchange rate.
Air Canada's management estimates that during 2007, a $0.01 increase in the
Canada/US dollar exchange rate (i.e., from $0.99 to $0.98 per US dollar) would
have had an estimated $25 million favourable impact on operating income and
an estimated $72 million favourable impact on pre-tax income. Conversely,
an opposite change in the exchange rate would have had the opposite effect. Air
Canada incurs significant expenses in US dollars for such items as fuel,
aircraft rental charges, interest payments, debt servicing and computerized
reservations system fees, while a substantial portion of its revenues are
generated in Canadian dollars. A significant deterioration of the Canadian
dollar relative to the US dollar would increase the costs of Air Canada relative
to its US competitors and could have a material adverse effect on Air Canada's
business, results from operations and financial condition. In addition, Air
Canada may be unable to appropriately hedge the risks associated with
fluctuations in exchange rates.
  Current
Legal Proceedings
  The
European Commission, the United States Department of Justice and the Competition
Bureau in Canada, among other competition authorities, are investigating alleged
anti-competitive cargo pricing activities, including the levying of certain fuel
surcharges, of a number of airlines and cargo operators, including Air Canada, a
number of whom, including Air Canada, have received a statement of objections
from the European Commission that sets out the European Commission's preliminary
assessment in relation to such matter. Competition authorities have sought or
requested information from Air Canada as part of their
investigations.  Air Canada is cooperating with these investigations,
which are likely to lead to proceedings against Air Canada and a number of
airlines and other cargo operators in certain jurisdictions.  Air
Canada is also named as a defendant in a number of class action lawsuits that
have been filed before the United States District Court and in Canada in
connection with these allegations.  Management of Air Canada has
determined that it is not possible at this time to predict with any degree of
certainty the outcome of these proceedings, but these proceedings may result in
a material liability to Air Canada.
  In
February 2006, Jazz commenced proceedings before the Ontario Superior Court of
Justice against Porter Airlines Inc. ("Porter") and other defendants
(collectively the "Porter Defendants") after Jazz became aware that it would be
excluded from operating flights from Toronto City Centre (Island) Airport (the
"TCCA"). On October 26, 2007, the Porter Defendants counter-claimed against Jazz
and Air Canada alleging various violations of competition law, including that
Jazz and Air Canada's commercial relationship contravenes Canadian competition
laws, and claiming $850 million in damages. Following the institution of
proceedings in the Ontario Superior Court of Justice, Jazz commenced judicial
review proceedings against the Toronto Port Authority ("TPA") before the Federal
Court of Canada relating to Jazz's access to the TCCA. The Porter Defendants
were granted intervener and party status in these proceedings. In January of
2008, Porter filed a defence and counterclaim against Jazz and Air Canada making
allegations and seeking conclusions similar to those in the Ontario Superior
Court counterclaim. Management of Air Canada views Porter's counterclaims in
both jurisdictions as being without merit.
  In
October 2006, ACPA commenced proceedings before the Ontario Superior Court of
Justice against Air Canada, ACE and certain members of the board of directors of
Air Canada alleging that certain past and future actions are oppressive to it. A
variety of remedies were sought against the parties including an injunction to
impose, among other things, limits on corporate distributions including those
contemplated under the ACE plan of arrangement which became effective on October
10, 2006. Following a hearing in December, 2006, Mr. Justice Cumming of the
Ontario Superior Court of Justice dismissed ACPA's application for an injunction
and granted respondents' cross-motion to dismiss ACPA's claim. ACPA has not
appealed the dismissal of the injunction
  - 54
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  application
but has appealed, to the Ontario Court of Appeal, the order dismissing its claim
and the appeal, while originally scheduled for March 2008, is now scheduled to
be heard on June 27, 2008. Management is of the view that the ACPA claim is
without merit.
  The
Canadian Union of Public Employees ("CUPE"), which represents Air Canada's
flight attendants, has a complaint before the Canadian Human Rights Commission
where it alleges gender-based wage discrimination.  CUPE claims the
predominantly female flight attendant group should be paid the same as the
predominantly male pilot and mechanics groups because their work is of equal
value.  The complaint dates from 1991 but has not been investigated on
the merits because of a legal dispute over whether the three groups work in the
same "establishment" within the meaning of the Canadian Human Rights
Act.  On January 26, 2006, the Supreme Court of Canada ruled that they
do work in the same "establishment" and sent the case back to the Canadian Human
Rights Commission, which may now proceed to assess the merits of CUPE's
complaint.  On March 16, 2007, the Canadian Human Rights Commission
referred the complaint against Air Canada for investigation.  Air
Canada considers that any investigation will show that it is complying with the
equal pay provisions of the Canadian Human Rights Act; however,
management  of Air Canada has determined that it is not possible at
this time to predict with any degree of certainty the final outcome of the
Canadian Human Rights Commission's investigation.
  On
January 10, 2008, a decision was rendered by the Canadian Transportation Agency
(Decision No. 6-AT-A-2008) following an application pursuant to subsection
172(1) of the CTA, as amended, against Air Canada and other air carriers and
parties concerning the fares and charges to be paid by persons with disabilities
who require additional seating to accommodate their disabilities to travel by
air on domestic air services. On February 11, 2008, Air Canada, Jazz and WestJet
applied to the Federal Court of Appeal for leave to appeal the CTA
decision.  Management of Air Canada has determined that it is not
possible at this time to predict with any degree of certainty the outcome of
these proceedings in appeal of the CTA decision or the final effects
thereof.
  Reliance
on Key Personnel
  Air
Canada is dependent on the experience and industry knowledge of its executive
officers and other key employees to execute its business plan. If Air Canada
were to experience a substantial turnover in its leadership or other key
employees, Air Canada's business, results from operations and financial
condition could be materially adversely affected. Additionally, Air Canada may
be unable to attract and retain additional qualified key personnel as needed in
the future.
  Aeroplan
  Dependency
on Top Accumulation Partners
  Aeroplan's
top three Accumulation Partners were responsible for 89% of Gross Billings for
the year ended 2007. Similarly, one accumulation partner accounts for a
significant amount of Gross Billings of LMG. A decrease in sales of Aeroplan
Miles to any significant partner for any reason, including a decrease in pricing
or activity, or a decision to either utilize another service provider or to no
longer outsource some or all of the services provided could have a material
adverse effect on Gross Billings. Subject to the minimum number of Aeroplan
Miles to be purchased by Air Canada under the CPSA, Air Canada can change the
number of Aeroplan Miles awarded per flight without Aeroplan's consent, which
could result in a significant reduction in Gross Billings. There is no assurance
that Aeroplan and LMG will be able to renew their contracts with their principal
Accumulation Partners on similar terms, or at all when they expire.
  Reduction
in Activity Usage and Accumulation of Aeroplan Miles
  A
decrease in Gross Billings from any Accumulation Partner for any reason,
including a decrease in pricing or activity, or a decision to either utilize
another service provider or to no longer outsource some or all of the services
provided, or a decrease in the accumulation of Aeroplan Miles or Nectar Points
by members could have a material adverse effect on Gross Billings and
revenue.
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  Retail
Market / Economic Downturn
  The
markets for the services that Aeroplan and LMG offer may fail to expand or may
contact and this could negatively impact growth and profitability. Loyalty and
database marketing strategies are relatively new to retailers, and there can be
no guarantee that merchants will continue to use these types of marketing
strategies. In addition, Gross Billings are dependent on levels of consumer
spend with Accumulation Partners, and any slowdown or reduction in consumer
activity may have an impact on Aeroplan Miles or Nectar Points
issuance.
  Greater
Than Expected Redemptions for Rewards
  A
significant portion of profitability is based on Aeroplan's estimate of the
number of Aeroplan Miles or Nectar Points that will never be redeemed by the
member base. The percentage of Aeroplan Miles or Nectar Points that are not
expected to be redeemed is known as "Breakage" in the loyalty industry. Under
the Aeroplan Program, the current estimate of Breakage by Aeroplan's management
is based on two independent studies conducted in 2006 on behalf of Aeroplan. As
these studies were based on data up to December 31, 2005, which did not take
into account the impact of the ClassicPlus FlightTM Rewards
program introduced in October 2006, management, assisted by an independent firm
of experts, conducted a Breakage review on the basis of data accumulated until
the end of 2006. Based upon the results of this update the estimated Breakage
factor for the Aeroplan Program remains at 17%. In addition, during 2008,
management is conducting a full Breakage review taking into consideration a full
year's redemption data of ClassicPlus FlightTM rewards
and other factors. Breakage for the Aeroplan and Nectar Programs may decrease as
such programs grow and a greater diversity of rewards become available. If
actual redemptions are greater than Aeroplan's current estimates, profitability
could be adversely affected due to the cost of the excess redemptions.
Furthermore, the actual mix of redemptions between air and non-air rewards could
adversely affect Aeroplan's profitability. Total Broken Miles amounted to
100.7billion miles
as at December 31, 2007 and include 85.4 billion Aeroplan Miles and Nectar
Points. The responsibility to provide rewards for these100.7 billion total
Broken Miles, if ever redeemed, rests with Aeroplan. While management believes
that a material portion of the estimated 85.4 billion Aeroplan Miles and Nectar
Points will not be redeemed, there can be no such assurances.
  Changes
to the Aeroplan and Nectar Programs
  From time
to time Aeroplan and LMG may make changes to the Aeroplan and Nectar Programs
that may not be well received by certain segments of the membership and may
affect their level of engagement. In addition, these members may choose to seek
such legal and other recourses as available to them, which if successful, could
have a negative impact on results of operations and /or reputation.
  Labour
Relations
  Aeroplan
contact centre agents are covered by a collective agreement between the National
Automobile, Aerospace, Transportation and General Workers Union of Canada Local
2002 ("CAW") and Air Canada until 2009. While Aeroplan enjoys positive relations
with the unionized contact centre agents, if Air Canada faces labour
disturbances resulting in work stoppages or other action instigated from within
the larger bargaining unit, this could have a material adverse effect on
Aeroplan's business. Furthermore, if at the expiration of the applicable
collective agreement, the relevant parties are unable to renegotiate the
collective agreement with CAW, it could result in work stoppages and other
labour disturbances which would similarly have a material adverse effect on
Aeroplan's business. In addition, if the Aeroplan GSA is terminated by Air
Canada, it could have a material adverse effect on Aeroplan's business in the
event that Aeroplan is unable to hire a sufficient number of contact centre
agents during the six month termination period under the Aeroplan
GSA.
  Technological
Disruptions and Inability to use Third Party Software
  Aeroplan
and LMG's ability to protect their data and contact centres against damage from
fire, power loss, telecommunications failure and other disasters is critical. In
order to provide many of their services, they must be able to store, retrieve,
process and manage large databases and periodically expand and upgrade their
capabilities. While Aeroplan and LMG have in place, and continue to invest in,
technology security initiatives and disaster recovery plans, these measures may
not be adequate or implemented properly. Any damage to data and
contact
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  centres,
any failure of telecommunication links that interrupts operations or any
impairment of the ability to use licensed software could adversely affect
Aeroplan's ability to meet Commercial Partners' and members' needs and their
confidence in utilizing Aeroplan or LMG in the future.
  In
addition, proper implementation and operation of technology initiatives is
fundamental to the ability to operate a profitable business. Aeroplan and LMG
continuously invest in new technology initiatives to remain competitive, and
their continued ability to invest sufficient amounts to enhance technology will
affect their ability to operate successfully.
  Leverage
and Restrictive Covenants in Current and Future Indebtedness
  The
ability of Aeroplan Income Fund, Aeroplan Trust, Aeroplan Limited Partnership
and LMG to make distributions, pay dividends or make other payments or advances
will be subject to applicable laws and contractual restrictions contained in the
instruments governing any indebtedness (including Aeroplan's credit facilities).
The degree to which Aeroplan is leveraged could have important consequences to
Aeroplan's unitholders, including: (i) that Aeroplan's ability to obtain
additional financing for working capital, capital expenditures or acquisitions
in the future may be limited; (ii) that a significant portion of cash flow from
operations may be dedicated to the payment of the principal of and interest on
its indebtedness, thereby reducing funds available for future operations; (iii)
that certain borrowings will be at variable rates of interest, which exposes
Aeroplan to the risk of increased interest rates; and (iv) that Aeroplan may be
more vulnerable to economic downturns and be limited in its ability to withstand
competitive pressures. These factors may increase the sensitivity of
distributable cash to interest rate variations.
  In
addition, Aeroplan's credit facilities contain a number of financial and other
restrictive covenants that require Aeroplan to meet certain financial ratios and
financial condition tests and limit Aeroplan's ability to enter into certain
transactions. A failure to comply with the obligations in Aeroplan's credit
facilities could result in a default which, if not cured or waived, could result
in a termination of distributions by Aeroplan and permit acceleration of the
relevant indebtedness. If the indebtedness under Aeroplan's credit facilities,
including any possible hedge contracts with the lenders, were to be accelerated,
there can be no assurance that the assets of Aeroplan would be sufficient to
repay in full that indebtedness.
  Aeroplan
may need to refinance its available credit facilities or other debt and there
can be no assurance that it will be able to do so or be able to do so on terms
as favourable as those presently in place. If Aeroplan is unable to refinance
these credit facilities or other debt, or is only able to refinance these credit
facilities or other debt on less favourable and/or more restrictive terms, this
may have a material adverse effect on Aeroplan's financial position, which may
result in a reduction or suspension of cash distributions to unitholders of
Aeroplan Income Fund. In addition, the terms of any new credit facility or debt
may be less favourable or more restrictive than the terms of the existing credit
facilities or other debt, which may indirectly limit or negatively impact the
ability of Aeroplan Income Fund to pay cash distributions.
  Restrictions
on Certain Unitholders and Liquidity of Units
  The
declaration of trust of Aeroplan Income Fund imposes various restrictions on
unitholders of Aeroplan Income Fund. Non-resident unitholders are prohibited
from beneficially owning more than 49.9% of the units of Aeroplan Income Fund.
These restrictions may limit (or inhibit the exercise of) the rights of certain
unitholders, including non-residents of Canada and United States persons, to
acquire units, to exercise their rights as unitholders and to initiate and
complete take-over bids in respect of the units. As a result, these restrictions
may limit the demand for units from certain investors and thereby adversely
affect the liquidity and market value of the units held by the public.
Aeroplan's management regularly monitors the level of non-resident ownership of
Aeroplan Income Fund through declarations obtained from market intermediaries.
Given the limitations in the securities registration system and the lack of any
process for real-time residency information to flow to Aeroplan's trustee and
transfer agent, Aeroplan Income Fund is of the view that the periodic
declarations received from various market intermediaries are currently the most
appropriate method of determining the residency status of its unitholders. Based
on information obtained from market intermediaries, Aeroplan Income Fund
estimates that as of December 31, 2007, 43% of its outstanding units were
held by non-residents. If the level of non-resident ownership of Aeroplan Income
Fund approaches the 49.9% threshold, Aeroplan Income Fund will consider
implementing measures necessary to maintain its status as a mutual fund trust
including the following: requiring residence
  - 57
-
  declarations
from unitholders, refusing to accept a subscription for units from or issue or
register a transfer of units to a non-resident, imposing other limits on unit
ownership by non-residents, and requiring non-resident unitholders to dispose of
all or a portion of their unit holdings.
  Cash
Distributions Are Not Guaranteed and Will Fluctuate with the Business
Performance
  Although
Aeroplan Income Fund intends to distribute cash distributions received from
Aeroplan, less expenses and amounts, if any, paid in connection with the
redemption of units, there can be no assurance regarding the amounts of income
to be generated by Aeroplan's business or ultimately distributed to Aeroplan
Income Fund. The actual amount distributed in respect of the units is not
guaranteed and will depend upon numerous factors, including Aeroplan's operating
cash flows, profitability and its ability to sustain adjusted EBITDA margins and
the fluctuations in Aeroplan's working capital and capital expenditures, all of
which are susceptible to a number of risks.
  If
Aeroplan Income Fund elects to convert from its current income trust structure
to a corporate structure, there can be no assurance that Aeroplan Income Fund
will maintain its current distribution policy and that dividends will be paid to
its shareholders in amounts equivalent to the current monthly distributions paid
to unitholders.
  Risks
Related to the Airline Industry
  Economic
and Geopolitical Conditions
  Airline
operating results are sensitive to economic and geopolitical conditions which
can have a significant impact on the demand for air transportation. Airline
fares and passenger demand have fluctuated significantly in the past and may
fluctuate significantly in the future. Air Canada is not able to predict with
certainty market conditions and the fares that Air Canada may be able to charge.
Customer expectations can change rapidly and the demand for lower fares may
limit revenue opportunities. Travel, especially leisure travel, is a
discretionary consumer expense. A downturn in economic growth in North America,
as well as geopolitical instability in various areas of the world, increased
concerns about the environmental impacts of air travel and tendencies towards
"green" travel initiatives where consumers reduce their travel activities, could
have the effect of reducing demand for air travel in Canada and abroad and,
together with the other factors discussed herein, could have a material adverse
effect on Air Canada's profitability.  Especially in light of Air
Canada's substantial fixed cost structure, any prolonged or significant weakness
of the Canadian, US or world economies could reduce the demand for air
transportation which in turn could have a material adverse effect on Air
Canada's business, results from operations and financial condition
  Airline
Industry Characterized by Low Gross Profit Margins and High Fixed
Costs
  The
airline industry is characterized by low gross profit margins and high fixed
costs. The costs of operating any particular flight do not vary significantly
with the number of passengers carried and, therefore, a relatively small change
in the number of passengers or in fare pricing or traffic mix could have a
significant effect on Air Canada's operating and financial results. This condition has been exacerbated by aggressive pricing by low-cost
carriers, which has had the effect of driving down fares in general.
Accordingly, a shortfall from expected revenue levels could have a material
adverse effect on Air Canada's business, results from operations and financial
condition. Air Canada incurs substantial fixed costs which do not meaningfully
fluctuate with overall capacity. As a result, should Air Canada be required to
reduce its overall capacity or the number of flights operated, it may not be
able to successfully reduce certain fixed costs in the short term and may be
required to incur important termination or other restructuring costs, which
could have a material adverse effect on Air Canada's business, results from
operations and financial condition.
  Terrorist
Attacks and Security Measures
  The
September 11, 2001 terrorist attacks and subsequent terrorist activity, notably
in the Middle East, Southeast Asia and Europe, caused uncertainty in the minds
of the traveling public. The occurrence of a major terrorist attack (whether
domestic or international and whether involving Air Canada or another carrier or
no carrier at all) and increasingly restrictive security measures, such as the
current restrictions on the content of carry-on baggage and current or proposed
passenger identification document requirements, could have a material
adverse
  - 58
-
  effect on
passenger demand for air travel and on the number of passengers traveling on Air
Canada's flights. It could also lead to a substantial increase in insurance,
airport security and other costs. Any resulting reduction in passenger revenues
and/or increases in insurance, security or other costs could have a material
adverse effect on Air Canada's business, results from operations and financial
condition.
  Epidemic
Diseases (Severe Acute Respiratory Syndrome (SARS), Influenza or Other Epidemic
Diseases)
  As a
result of the international outbreaks of Severe Acute Respiratory Syndrome
(SARS) in 2003, the World Health Organization (the "WHO") issued on April 23,
2003 a travel advisory, which was subsequently lifted on April 30, 2003, against
non-essential travel to Toronto, Canada. The seven day WHO travel advisory
relating to Toronto, the location of Air Canada's primary hub, and the
international SARS outbreak had a significant adverse effect on passenger demand
for air travel in Air Canada's markets and resulted in a major negative impact
on traffic on the entire network. The WHO warns that there is a substantial risk
of an influenza pandemic within the next few years. An outbreak of SARS or of
another epidemic disease such as influenza (whether domestic or international)
or a further WHO travel advisory (whether relating to Canadian cities or regions
or other cities, regions or countries) could have a material adverse effect on
passenger demand for air travel. Any resulting reduction in traffic in the
markets served by Air Canada's network could have a material adverse effect on
Air Canada's business, results from operations and financial
condition.
  Casualty
Losses
  Due to
the nature of its core operating business, Air Canada may be subject to
liability claims arising out of accidents or disasters involving aircraft on
which Air Canada's customers are traveling or involving aircraft of other
carriers maintained or repaired by Air Canada, including claims for serious
personal injury or death. There can be no assurance that Air Canada's insurance
coverage will be sufficient to cover one or more large claims and any shortfall
may be material. Additionally, any accident or disaster involving one of Air
Canada's aircraft or an aircraft of another carrier receiving line maintenance
services from Air Canada may significantly harm Air Canada's reputation for
safety, which would have a material adverse effect on Air Canada's business,
results from operations and financial condition.
  Seasonal
Nature of the Business, Other Factors and Prior Performance
  Air
Canada has historically experienced considerably greater demand for its services
in the second and third quarters of the calendar year and significantly lower
demand in the first and fourth quarters of the calendar year. This demand
pattern is principally a result of the preference of a high number of leisure
travelers to travel during the spring and summer months. Air Canada has
substantial fixed costs that do not meaningfully fluctuate with passenger demand
in the short term.
  As
described elsewhere, demand for air travel is also affected by factors such as
economic conditions, war or the threat of war or terrorist attacks, fare levels
and weather conditions. Due to these and other factors, operating results for an
interim period are not necessarily indicative of operating results for an entire
year, and operating results for a historical period are not necessarily
indicative of operating results for a future period.
  Regulatory
Matters
  The
airline industry is subject to extensive Canadian and foreign government
regulations relating to, among other things, security, safety, licensing,
competition, noise levels and the environment and, in some measure, pricing.
With the heightened focus on reducing carbon emissions, governments are enacting
or considering legislation, including in relation to carbon emission trading
schemes, which is aimed at reducing carbon emissions and such legislation may
apply to the airline industry. Additional laws and regulations may be proposed,
and decisions rendered, from time to time which could impose additional
requirements or restrictions on airline operations. The implementation of
additional regulations or decisions by Transport Canada, the Competition Bureau
and/or the Competition Tribunal, the Canadian Transportation Agency, or other
domestic or foreign governmental entities may have a material adverse effect on
Air Canada's business, results from operations and financial condition. Air
Canada cannot give any assurances that new regulations or revisions to the
existing legislation, or decisions, will
  - 59
-
  not be
adopted or rendered. The adoption of such new laws and regulations or revisions,
or the rendering of such decisions, could have a material adverse effect on Air
Canada's business, results from operations and financial condition.
  The
availability of international routes to Canadian air carriers is regulated by
agreements between Canada and foreign governments. Changes in Canadian or
foreign government aviation policy could result in the alteration or termination
of these agreements and could adversely affect Air Canada's international
operations.
  In July
2000, the Government of Canada amended the CTA, the Competition Act and the Air
Canada Public Participation Act to address the competitive airline environment
in Canada and ensure protection for consumers. This legislation included
airline-specific provisions concerning "abuse of dominance" under the
Competition Act, later supplemented by creating "administrative monetary
penalties" for a breach of the abuse of dominance provisions by a dominant
domestic air carrier.
  In July
2003, the Competition Tribunal released its reasons and findings in a proceeding
between the Commissioner of Competition and Air Canada which had considered the
approach to be taken in determining whether Air Canada was operating below
"avoidable costs" in violation of one of the new airline-specific abuse of
dominance provisions. The Competition Tribunal applied a very broadly crafted
cost test in its decision. In September 2004, the Commissioner of Competition
published a letter describing the enforcement approach that would be taken in
future cases involving the airline-specific abuse of dominance provisions, which
included a statement that the Tribunal's approach to avoidable costs remains
relevant.
  On
November 2, 2004, the Minister of Industry tabled amendments to the
Competition Act in Bill C-19 which, if enacted, would have removed the
airline-specific "abuse of dominance" provisions from the Competition Act.
However, on November 29, 2005, the 38th Parliament of Canada was dissolved. As a
result, the legislative process relating to the adoption of Bill C-19 was
terminated. On October 16, 2007, private Bill C-454 containing provisions to
remove the airline-specific "abuse of dominance" provisions from the Competition
Act was tabled for first reading in the House of Commons.  Management
of Air Canada cannot predict if or when such proposed legislation will come into
force.
  If the
Commissioner of Competition commences inquiries or brings similar applications
with respect to significant competitive domestic routes and such applications
are successful, it could have a material adverse effect on Air Canada's
business, results from operations and financial condition.
  Air
Canada is subject to domestic and foreign laws regarding privacy of passenger
and employee data, including advance passenger information and access to airline
reservation systems, which are not consistent in all countries in which Air
Canada operates. Compliance with these regulatory regimes is expected to result
in additional operating costs and could have a material adverse effect on Air
Canada's business, results from operations and financial condition.
  Increased
Insurance Costs
  Since
September 11, 2001, the aviation insurance industry has been continually
re-evaluating the terrorism risks that it covers and this activity may adversely
affect some of Air Canada's existing insurance carriers or Air Canada's ability
to obtain future insurance coverage. To the extent that Air Canada's existing
insurance carriers are unable or unwilling to provide it with insurance
coverage, and in the absence of measures by the Government of Canada to provide
the required coverage, Air Canada's insurance costs may increase further and may
result in Air Canada being in breach of regulatory requirements or contractual
arrangements requiring that specific insurance be maintained, which may have a
material adverse effect on Air Canada's business, results from operations and
financial condition.
  Third
Party War Risk Insurance
  There is
a risk that the Government of Canada may not continue to provide an indemnity
for third party war risk liability coverage, which it currently provides to Air
Canada and certain other carriers in Canada. In the event
  - 60
-
  that
the Government of Canada does not continue to provide such indemnity or amends
such indemnity, Air Canada and other industry participants would have to turn to
the commercial insurance market to seek such coverage. Air Canada estimates that
such coverage would cost Air Canada approximately $15 million per year.
Alternative solutions, such as those envisioned by the International Civil
Aviation Organization ("ICAO") and the International Air Transport Association
("IATA"), have not developed as planned, due to actions taken by other countries
and the recent availability of supplemental insurance products. ICAO and IATA
are continuing their efforts in this area, however the achievement of a global
solution is not likely in the immediate or near future. The US federal
government has set up its own facility to provide war risk coverage to US
carriers, thus removing itself as a key component of any global
plan.
  Furthermore,
the London aviation insurance market has introduced a new standard war and
terrorism exclusion clause which is applicable to aircraft hull and spares war
risk insurance, and intends to introduce similar exclusions to airline passenger
and third party liability policies. Such clause excludes claims caused by the
hostile use of a dirty bomb, electromagnetic pulse device, or biochemical
materials. The Government of Canada indemnity program is designed to address
these types of issues as they arise, but the Government of Canada has not yet
decided to extend the existing indemnity to cover this exclusion. Unless and
until the Government of Canada does so, the loss of coverage exposes Air Canada
to this new uninsured risk and may result in Air Canada being in breach of
certain regulatory requirements or contractual arrangements, which may have a
material adverse effect on Air Canada's business, results from operations and
financial condition.


MARKET
FOR SECURITIES
  The
Variable Voting Shares and the Voting Shares are traded on the TSX under the
trading symbols "ACE.A" and "ACE.B", respectively. The following table sets
forth the price range and trading volume of the Variable Voting Shares and the
Voting Shares as reported by the TSX for the months of January to, and
including, December 2007:




Variable Voting
      Shares
              Voting
      Shares2007
              High
              Low
              Average
      Daily    Trading Volume
              Total
                Monthly Volume
              High
              Low
              Average
      Daily    Trading Volume
              Total
      MonthlyVolumeJanuary(1)
              38.99
              30.80
              728,119
              16,018,624
              39.00
              31.00
              205,065
              4,511,428February
              38.08
              33.90
              614,409
              12,288,170
              38.00
              33.95
              265,562
              5,311,247March(2)
              36.60
              30.12
              437,017
              9,614,370
              36.63
              30.12
              284,469
              6,258,320April
              32.08
              29.35
              515,774
              10,315,476
              32.05
              29.31
              222,769
              4,455,385May(3)
              30.24
              25.30
              1,166,770
              25,668,942
              30.19
              25.50
              214,718
              4,723,800June
              27.19
              25.75
              760,532
              15,971,175
              27.14
              25.80
              611,086
              12,832,800July
              28.14
              25.40
              356,102
              7,478,143
              28.14
              25.43
              196,113
              4,118,373August
              25.65
              23.15
              687,703
              15,129,455
              25.65
              23.12
              192,637
              4,238,021September
              26.74
              23.90
              708,975
              13,470,526
              26.68
              23.85
              199,947
              3,798,984October
              29.89
              26.39
              654,254
              14,393,580
              29.92
              26.36
              238,099
              5,238,173November
              30.23
              26.65
              492,039
              10,824,850
              30.25
              26.55
              233,658
              5,140,471December
              28.82
              27.36
              926,214
              17,598,063
              28.84
              27.40
              294,145
              5,588,753




______________
  - 61
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  (1)
              Shareholders
      of record of ACE on January 10, 2007 received a distribution by way of
      reduction of capital of approximately 0.442 units of Aeroplan Income Fund
      per Variable Voting Share, Voting Share and Preferred Share (on an as
      converted basis) of ACE.
 (2)
              Shareholders
      of record of ACE on March 14, 2007 received a distribution by way of
      reduction of capital of 0.177 units of Aeroplan Income Fund and 0.219
      units of Jazz Air Income Fund per Variable Voting Share, Variable Share
      and Preferred Share (on an as converted basis) of ACE.
 (3)
              Shareholders
      of record of ACE on May 24, 2007 received a distribution by way of
      reduction of capital of approximately 0.157 unit of Aeroplan Income Fund
      and 0.105 unit of Jazz Air Income Fund per Variable Voting Share, Voting
      Share and Preferred Share (on an as converted basis) of
    ACE.
   The Notes
are traded on the TSX under the trading symbol "ACE.NT.A". The following table
sets forth the price range and trading volume of the Notes as reported by the
TSX for the months of January to, and including, December 2007:


Notes2007
              High
              Low
              Average
      Daily Trading
                Volume
              Total
                Monthly
      VolumeJanuary
              107.25
              101.00
              4,189
              92,150February
              114.00
              109.00
              2,363
              47,255March
              114.00
              111.00
              1,832
              40,300April
              109.50
              109.00
              418
              8,350May
              109.00
              106.00
              1,241
              27,300June
              110.50
              106.00
              9,994
              209,870July
              111.25
              109.50
              299
              6,280August
              106.00
              105.00
              91
              2,000September
              110.00
              106.00
              433
              8,230October
              115.15
              114.00
              5,133
              112,920November
              117.00
              109.73
              4,673
              102,810December
              113.00
              100.00
              71
              1,350




DIVIDEND
RECORD
  ACE has
not paid dividends on its Voting Shares, Variable Voting Shares or Preferred
Shares for the year ended December 31, 2007.
   DESCRIPTION
OF CAPITAL STRUCTURE
  The share
capital of ACE is composed of an unlimited number of Variable Voting Shares and
Voting Shares and of 12,500,000 Preferred Shares. In addition, ACE has issued
debt securities in the form of Notes. The following summary describes the
rights, privileges, restrictions and conditions that are attached to the
Variable Voting Shares, Voting Shares and Preferred Shares, and includes a
description of the Notes and the ratings ascribed to them. This summary does not
purport to be complete and is subject to, and is qualified in its entirety by,
reference to the terms of the ACE Articles of Arrangement.
  - 62
-
  Variable
Voting Shares
  Voting
  The
holders of the Variable Voting Shares shall be entitled to receive notice of,
and to attend and vote at, all meetings of the shareholders of ACE, except where
the holders of a specified class are entitled to vote separately as a class as
provided in the CBCA.
  The
Variable Voting Shares may be held only by persons who are not Canadians (as
such term is defined in the CTA) and are entitled to one vote per Variable
Voting Share unless (i) the number of Variable Voting Shares outstanding
(including the Preferred Shares, on an as converted basis), as a percentage of
the total number of votes attaching to Voting Shares outstanding exceeds 25% or
(ii) the total number of votes cast by or on behalf of holders of Variable
Voting Shares (including the Preferred Shares, on an as converted basis) at any
meeting exceeds 25% 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
(including the Preferred Shares on an as converted basis) do not carry more than
25% of the aggregate votes attached to all issued and outstanding voting shares
of ACE and (ii) the total number of votes cast by or on behalf of holders
of Variable Voting Shares (including the Preferred Shares on an as converted
basis) at any meeting do not exceed 25 % of the votes that may be cast at such
meeting.
  Dividends
  Subject
to the rights, privileges, restrictions and conditions attaching to the shares
of ACE of any other class ranking senior to the Variable Voting Shares, the
holders of the Variable Voting Shares shall, at the discretion of the directors,
be entitled to receive, out of monies, assets or property of ACE properly
applicable to the payment of dividends, any dividends declared and payable by
ACE on the Variable Voting Shares and the Variable Voting Shares shall rank
equally as to dividends on a share for share basis with the Voting Shares and
the Preferred Shares participating on an as converted basis. All dividends
declared in any fiscal year of ACE shall be declared in equal or equivalent
amounts per share on all Variable Voting Shares, Voting Shares and the Preferred
Shares participating on an as converted basis at the time outstanding, without
preference or distinction.
  Subdivision
or Consolidation
  No
subdivision or consolidation of the Variable Voting Shares or the Voting Shares
shall occur unless, simultaneously, the shares of the other class are subdivided
or consolidated in the same manner, so as to maintain and preserve the relative
rights of the holders of the shares of each of the said classes.
  Rights
upon Liquidation, Dissolution or Winding Up
  Subject
to the rights, privileges, restrictions and conditions attaching to the shares
of ACE ranking prior to the Variable Voting Shares, including the Preferred
Shares, upon liquidation, dissolution or winding up of ACE or other distribution
of ACE's assets among its shareholders for the purpose of winding up its
affairs, the holders of the Variable Voting Shares and Voting Shares shall be
entitled to receive the remaining property of ACE and shall be entitled to share
equally, share for share, in all distributions of such assets.
  Conversion
  Each
issued and outstanding Variable Voting Share shall be converted into one Voting
Share, automatically and without any further act of ACE or of the holder, if
(i) such Variable Voting Share becomes held, beneficially owned and
controlled, directly or indirectly, otherwise than by way of security only, by a
Canadian; or (ii) the provisions contained in the CTA relating to foreign
ownership restrictions are repealed and not replaced with other similar
provisions.
  In the
event that an offer is made to purchase Voting Shares and the offer is one which
must, pursuant to applicable securities legislation or the rules of a stock
exchange on which the Voting Shares are then listed, be made
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-
  to all or
substantially all the holders of the Voting Shares in a province of Canada to
which the requirement applies, each Variable Voting Share shall become
convertible at the option of the holder into one Voting Share that shall be
subject to the offer at any time while the offer is in effect and until one day
after the time prescribed by applicable securities legislation for the offeror
to take up and pay for such shares as are to be acquired pursuant to the offer.
The conversion right may only be exercised in respect of Variable Voting Shares
for the purpose of depositing the resulting Voting Shares in response to the
offer and the transfer agent shall deposit the resulting Voting Shares on behalf
of the shareholder.
  If the
Voting Shares resulting from the conversion and deposited pursuant to the offer
are withdrawn by the shareholder or are not taken up by the offeror or the offer
is abandoned or withdrawn, the Voting Shares resulting from the conversion shall
be reconverted automatically and without further act from ACE or the holder,
into Variable Voting Shares.
  There
shall be no right to convert the Variable Voting Shares into Voting Shares or to
convert Voting Shares into Variable Voting Shares, except in accordance with the
conversion procedure set forth in the ACE Articles of Arrangement.
  Constraints
on Ownership of Shares
  The
Variable Voting Shares may only be held, beneficially owned or controlled,
directly or indirectly, by persons who are not Canadians.
  Voting
Shares
  Voting
  The
holders of the Voting Shares shall be entitled to receive notice of, and to
attend and vote at, all meetings of the shareholders of ACE (except where the
holders of a specified class are entitled to vote separately as a class as
provided in the CBCA) and each Voting Share shall confer the right to one vote
in person or by proxy at all meetings of shareholders of ACE.
  Dividends
  Subject
to the rights, privileges, restrictions and conditions attaching to the shares
of ACE of any other class ranking senior to the Voting Shares, the holders of
the Voting Shares shall, at the discretion of the directors, be entitled to
receive, out of monies, assets or property of ACE properly applicable to the
payment of dividends, any dividends declared and payable by ACE on the Voting
Shares and the Voting Shares shall rank equally as to dividends on a share for
share basis with the Variable Voting Shares and the Preferred Shares
participating on an as converted basis and all dividends declared in any fiscal
year of ACE shall be declared in equal or equivalent amounts per share on all
Voting Shares, Variable Voting Shares and the Preferred Shares on an as
converted basis at the time outstanding, without preference or
distinction.
  Subdivision
or Consolidation
  No
subdivision or consolidation of the Voting Shares or the Variable Voting Shares
shall occur unless, simultaneously, the shares of the other class are subdivided
or consolidated in the same manner, so as to maintain and preserve the relative
rights of the holders of the shares of each of the said classes.
  Rights
upon Liquidation, Dissolution or Winding Up
  Subject
to the rights, privileges, restrictions and conditions attaching to the shares
of ACE ranking senior to the Voting Shares, including the Preferred Shares, upon
liquidation, dissolution or winding up of ACE or other distribution of ACE's
assets among its shareholders for the purpose of winding up its affairs, the
holders of the Voting Shares and Variable Voting Shares shall be entitled to
receive the remaining property of ACE and shall be entitled to share equally,
share for share, in all distributions of such assets.
  - 64
-
  Conversion
  Unless
the foreign ownership restrictions of the CTA are repealed and not replaced with
other similar restrictions, an issued and outstanding Voting Share shall be
converted into one Variable Voting Share, automatically and without any further
act of ACE 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.
  Constraints
on Ownership of Shares
  The
Voting Shares may only be held, beneficially owned and controlled, directly or
indirectly, by Canadians.
  Preferred
Shares
  Voting
  The
holders of Preferred Shares will be entitled to vote on an as converted basis
with the Variable Voting Shares and the Voting Shares and to the extent that
they are held by persons who are not Canadians they shall be subject to the same
proportionate reduction in voting percentage as if, for voting purposes only,
the Preferred Shares had been converted into Variable Voting
Shares.
  Participation
  The
holders of Preferred Shares shall participate on an as converted basis with the
Variable Voting Shares and the Voting Shares with respect to all dividends,
distributions, spin off, split-off, subscription rights or other offers or
rights made available to holders of Variable Voting Shares and the Voting Shares
and any other similar transactions.
  Liquidation
Preference
  In the
event of any liquidation, dissolution or winding up of ACE (with each holder of
the Preferred Shares being entitled to treat the occurrence of a merger,
amalgamation, sale of all or substantially all of the assets of ACE or other
similar transaction involving a change in control of ACE as a liquidation for
these purposes), then the holders of the Preferred Shares shall be entitled to
receive, prior to and in preference to the holders of Variable Voting Shares and
the Voting Shares, an amount per Preferred Share equal to the Fully Accreted
Value of such Preferred Shares, determined as of the date of such event. For the
purposes of the terms of the Preferred Shares, "Fully Accreted Value" means,
with respect to each Preferred Share issued on September 30, 2004 as of any
date, the initial purchase price of such Preferred Share, increased at a rate of
5% per annum, compounded semi annually from the date of issuance of such
Preferred Shares.
  Optional
Conversion
  The
Preferred Shares shall be convertible at the option of the holders thereof at
any time into Variable Voting Shares, if held by a non Canadian, or into Voting
Shares, if held by a Canadian, at a conversion rate equal to the Fully Accreted
Value per Preferred Share (as of the conversion date) divided by the Conversion
Price. For the purposes of the terms of the Preferred Shares, "Conversion Price"
is equal to $26 or 130% of the initial per share value attributed to the
Variable Voting Shares and Voting Shares on September 30, 2004 of $20. The
Conversion Price of the Preferred Shares is subject to (i) adjustment as
described in "Mandatory Redemption/Conversion" below and (ii) customary
public company anti-dilution protection for stock splits, stock dividends,
subdivisions, combinations and similar transactions. There shall be no special
adjustment for below market or below Conversion Price issuances.
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  Mandatory
Redemption/Conversion
  The
holders of Preferred Shares shall be required to convert the Preferred Shares
into Variable Voting Shares (if the Preferred Shares are not owned and
controlled by a Canadian) or Voting Shares (if the Preferred Shares are owned
and controlled by a Canadian), within 10 days after the seventh anniversary
of the date of issuance of the Preferred Shares (the "Initial Mandatory
Conversion Date") provided, however, that if the closing price of Variable
Voting Shares or Voting Shares, as the case may be, does not exceed the Fully
Accreted Value of a Preferred Share on at least 30 of the 100 trading
days immediately prior to the Initial Mandatory Conversion Date then the holders
thereof shall not be required to convert their Preferred Shares into Variable
Voting Shares or Voting Shares, as the case may be, and on the Initial Mandatory
Conversion Date the then applicable Conversion Price shall automatically be
reduced by 3.75%.
  In the
event the Preferred Shares have not been converted on or prior to the Initial
Mandatory Conversion Date, on each six month anniversary of the Initial
Mandatory Conversion Date (each a "Subsequent Mandatory Conversion Date") until
and including the 10 year anniversary of the date of issuance of the
Preferred Shares (the "Final Maturity Date"), the Preferred Shares shall be
subject to mandatory conversion within 10 days of any Subsequent Mandatory
Conversion Date if, and only if, the closing price of Variable Voting Shares or
Voting Shares, as the case may be, exceeds the Fully Accreted Value of a
Preferred Share on at least 30 of the 100 trading days immediately prior to
such Subsequent Mandatory Conversion Date and, if such threshold is not met, the
then applicable Conversion Price shall automatically be reduced by an additional
3.75% on each such Subsequent Mandatory Conversion Date. If the foregoing test
is not met with respect to the Subsequent Mandatory Conversion Date that is the
Final Maturity Date, the holders of Preferred Shares shall have the right to
require ACE to redeem each of the Preferred Shares in cash on the Final Maturity
Date at a per share redemption price equal to the Fully Accreted Value (as at
the Final Maturity Date).
  Notwithstanding
the foregoing, the Preferred Shares shall not be subject to mandatory conversion
as described above unless the Variable Voting Shares and Voting Shares are then
listed and posted on the TSX, and a registration statement, prospectus or
similar offering document permitting the distribution and sale of such Variable
Voting Shares and Voting Shares throughout Canada and/or the United States of
America is then effective covering all of the Variable Voting Shares and Voting
Shares into which the Preferred Shares are convertible at the time of such
mandatory conversion.
  Mandatory
Conversion
  If at any
time during (i) the period commencing on the date of issuance of the
Preferred Shares and ending on and including the first anniversary thereof the
closing price of the Variable Voting Shares or Voting Shares, as the case may
be, for each of 30 consecutive trading days exceeds 200% of the then applicable
Conversion Price or (ii) any period after the first anniversary of the date
of issuance of the Preferred Shares the closing price of the Variable Voting
Shares or Voting Shares, as the case may be, for each of 30 consecutive
trading days exceeds 175% of the then applicable Conversion Price, and, in each
case, if the Variable Voting Shares or Voting Shares are then listed and posted
on the TSX and a registration statement, prospectus or other similar
offering document permitting the distribution and sale of such Variable Voting
Shares and Voting Shares throughout Canada and/or the United States of America
is then effective covering all of the Variable Voting Shares and Voting Shares
into which the Preferred Shares are convertible, then ACE may require the
holders of Preferred Shares to convert the Preferred Shares into Variable Voting
Shares, if the Preferred Shares are not owned by a Canadian, or Voting Shares,
if the Preferred Shares are owned by a Canadian.
  Organic
Change
  With
respect to any recapitalization, reorganization, reclassification,
consolidation, amalgamation, arrangement, merger, sale of all or substantially
all of ACE's assets to another person or other transaction which is effected in
such a way that holders of Variable Voting Shares and Voting Shares are entitled
to receive (either directly or upon subsequent liquidation) stock, securities or
assets with respect to or in exchange for Variable Voting Shares or Voting
Shares, as the case may be (each an "Organic Change") which includes a sale of
all or substantially all of ACE's assets or where ACE is not the surviving
entity, the holders of the Preferred Shares shall be entitled to cause ACE to
either (i) require that the surviving entity or its publicly traded parent
issue to the holders of Preferred
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  Shares in
exchange for such shares, a security of the surviving or publicly traded parent
entity evidenced by a written instrument substantially similar in form and
substance to the Preferred Shares, including, without limitation, having the
same economic rights and preferences as the Preferred Shares and having a rank
senior to all capital stock of such issuing entity or (ii) make appropriate
adjustments contemporaneously to the rights attached to the Preferred Shares so
as to preserve in all respects the benefits conferred on the holders of the
Preferred Shares by the terms of the Preferred Shares.
  With
respect to any reorganization, amalgamation, arrangement, merger or other
similar transaction that does not constitute an Organic Change, appropriate
adjustments shall contemporaneously be made to the rights (including, without
limitation, the conversion right) attached to the Preferred Shares so as to
preserve in all respects the benefits conferred on the holders of the Preferred
Shares by the terms of the Preferred Shares.
  Pre-emptive
Rights
  If ACE
proposes to issue or sell any Variable Voting Shares or Voting Shares or other
equity securities, rights, options, warrants or other convertible securities
which represent rights to purchase Variable Voting Shares or Voting Shares, as
the case may be, each holder of Preferred Shares shall be entitled to purchase a
number of such Variable Voting Shares or Voting Shares, as the case may be, or
other equity securities, rights, options, warrants or other convertible
securities sufficient to allow such holder to maintain its proportionate equity
ownership in ACE, on a fully diluted basis at the level of such interest
immediately prior to such issuance or sale, subject to exceptions for issuances
under management and employee stock incentive plans approved by the board of
directors of ACE.
  Notes
  4.25%
Convertible Senior Notes
  As of
March 28, 2008, ACE had an amount of $322,796,000 in 4.25% Convertible
Senior Notes (the "Notes") issued and outstanding. The Notes are senior
unsecured obligations of ACE and rank equally in right of payment to all other
senior unsecured indebtedness of ACE and senior in right of payment to any
subordinated indebtedness of ACE. The Notes are subordinated to all existing and
future secured indebtedness of ACE. In addition, the Notes are effectively
subordinated to all existing and future indebtedness and other liabilities and
commitments of the subsidiaries of ACE.
  Each Note
is convertible at the option of the holder into Voting Shares (if the Notes are
owned and controlled by a Canadian) or into Variable Voting Shares (if the Notes
are not owned and controlled by a Canadian) at an initial conversion ratio of
approximately 20.8333 Shares per $1,000 principal amount of Notes, subject to
adjustment in certain events in accordance with the indenture governing the
Notes. On March 22, 2006, ACE announced that, following the distribution of
0.18 units of Aeroplan Income Fund per Variable Voting Share, Voting Share
and Preferred Share, the conversion ratio in effect immediately prior to the
opening of business on March 22, 2006 was adjusted to 22.2838 Shares for each
$1,000 principal amount of Notes. On January 29, 2007, ACE announced that, in
connection with its previously announced distribution of units of Aeroplan
Income Fund to its shareholders as of a record date of January 10, 2007, the
conversion ratio was being adjusted again, effective January 29, 2007, to
27.6987 Shares for each $1,000 principal amount of Notes. On April 2, 2007, ACE
announced that, in connection with its previously announced distribution of
units of Aeroplan Income Fund and Jazz Air Income Fund to its shareholders as of
a record date of March 14, 2007, the conversion ratio was being adjusted again,
effective April 2, 2007, to 32.5210 Shares for each $1,000 principal amount of
Notes. On June 12, 2007, ACE announced that, in connection with its previously
announced distribution of units of Aeroplan Income Fund and Jazz Air Income Fund
to its shareholders as of a record date of May 24, 2007, the conversion ratio
was being adjusted again, effective June 12, 2007, to 37.6879 Shares for each
$1,000 principal amount of Notes. On January 11, 2008, ACE announced that, in
connection with the previously announced results of its offer to purchase $1.5
billion of its Variable Voting Shares and Voting Shares pursuant to a
substantial issuer bid that expired on January 10, 2008, the conversion ratio
was being adjusted again, effective January 11, 2008, to 39.0341 Shares for each
$1,000 principal amount of Notes.
  Holders
converting their Notes will not receive any payment upon conversion representing
accrued but unpaid interest on such Notes. Subject to the satisfaction of
certain conditions, ACE may, in lieu of delivering
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  Voting
Shares or Variable Voting Shares upon conversion of all or a portion of the
Notes, elect to pay cash or a combination of cash and Voting Shares or Variable
Voting Shares.
  Prior to
June 6, 2008, ACE may not redeem the Notes, except upon the occurrence of
certain changes to the laws governing Canadian withholding taxes. At any time on
or after June 6, 2008, ACE may, on not more than 60 days and not less than 30
days prior written notice, redeem the Notes either in whole or in part at a
specified redemption price, plus accrued and unpaid interest to, but excluding,
the redemption date.
  Each
holder of Notes may require ACE to purchase all or a portion of that holder's
Notes on June 1, 2010, June 1, 2015, June 1, 2020, June 1, 2025, and June 1,
2030, at a purchase price equal to 100% of the principal amount of the Notes
plus accrued and unpaid interest to, but excluding, the date of
purchase.
  Subject
to the satisfaction of certain conditions, ACE may, at its option, elect to
satisfy its obligation to repay the principal amount of the Notes, together with
accrued and unpaid interest thereon, on redemption, purchase or repayment at
maturity by, in whole or in part, the issuance of Variable Voting Shares or
Voting Shares.
   Ratings
  Ratings
generally address the ability of a company to repay principal and interest or
dividends on securities.
  This
section describes the credit ratings that ACE has received for its Notes. These
ratings provide investors with an independent measure of credit quality of an
issue of securities. Each rating should be evaluated independently.
  These
ratings are not recommendations to purchase, hold or sell the Notes, or a
comment on the market price or suitability for a particular investor. There is
no assurance that any rating will remain in effect for any given period of time
or that any rating will not be revised or withdrawn in the future by a rating
agency.
  The Notes
were rated by DBRS Limited ("DBRS") until November 22, 2007. As of November 22,
2007, DBRS withdrew its ratings of the Notes at the request of ACE.
  The table
below shows the range of credit ratings that DBRS assigns to long-term debt
instruments.
  Agency
                Highest
      Quality of Securities
                  Rated
                Lowest
      Quality of Securities
                  RatedDBRS
                AAA
                D


The DBRS
long-term debt rating scale indicates the risk that a company may not meet its
obligations to pay interest and principal in a timely manner. Every DBRS rating
is based on quantitative and qualitative considerations relevant to the
borrowing entity.
  ACE had
received the following credit rating for the Notes it has issued until DBRS
withdrew its ratings for the Notes at the request of ACE as described above:


Agency
              Long-Term
      Debt Credit RatingDBRS
              B
      (high)




The DBRS
B (high) rating on long-term debt rank 14th among
the 26 long-term debt credit ratings given by DBRS. According to DBRS, a company
with a long-term debt rated B is considered highly speculative and there is a
reasonably high level of uncertainty as to the ability of the entity to pay
interest and principal on a continuing basis in the future, especially in
periods of economic recession or industry adversity.




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DIRECTORS
AND OFFICERS
  Directors
  The name,
municipality of residence and principal occupation of each of the directors are,
as of the date hereof, as set forth below. Such individuals have served as
directors of ACE since the dates and hold the number of shares of ACE set forth
opposite their respective names.


Name
      and Municipality
                of
      Residence
              Principal
      Occupation
              Director
      SinceBernard
      Attali (2)(4)
                Paris,
      France
              Senior
      Advisor (France)
                TPG
      Capital
              September 30,
      2004Robert
      E. Brown(2)(3)
                Montreal,
      Québec
              President
      and Chief Executive Officer
                CAE
      Inc.
              September 30,
      2004Michael
      M. Green (2)(4)
                Wayne,
      Pennsylvania
              Managing
      Director
                Cerberus
      Capital Management, L.P.
              September 30,
      2004W.
      Brett Ingersoll (1)(3)
                New
      York, New York
              Managing
      Director
                Cerberus
      Capital Management, L.P.
              September 30,
      2004Pierre
      Marc Johnson (2)(3)
                Montreal,
      Québec
              Senior
      Counsel
                Heenan
      Blaikie LLP
              September 30,
      2004Richard
      H. McCoy (2)(3)(4)
                Toronto,
      Ontario
              Corporate
      Director
              August
      3, 2005John
      T. McLennan (1)(4)
                Mahone
      Bay, Nova Scotia
              Corporate
      Director
              September 30,
      2004Robert
      A. Milton
                London,
      England
              Chairman,
      President and Chief Executive Officer, ACE
              June
      29, 2004David
      I. Richardson (1)(3)
                Grafton,
      Ontario
              Corporate
      Director
              September 30,
      2004Marvin
      Yontef (2)
                Toronto,
      Ontario
              Senior
      Partner
                Stikeman
      Elliott LLP
              June
      29, 2004




(1)
              Member
      of the Audit, Finance and Risk
Committee.
 (2)
              Member
      of the Governance and Corporate Matters
  Committee.
 (3)
              Member
      of the Human Resources and Compensation
  Committee.
 (4)
              Member
      of the Nominating Committee.
  Unless
otherwise indicated below, each of the directors has held the occupation listed
above for more than five years. Mr. Brown was Chairman of Air Canada from
2003 to 2004. Mr. McLennan was Vice Chairman and Chief Executive Officer of
AT&T Canada (which was renamed Allstream Inc.) from 2000 to
2004.  Mr. McCoy was Vice Chairman, Investment Banking at TD
Securities from 1997 to 2003.
  The term
of office of all of the above directors will expire at the next annual meeting
of shareholders of ACE or until their successors are appointed or
elected.




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Officers
  The name,
municipality of residence and position held with ACE of each of the officers are
as set forth below:




Name
      and Municipality of
      Residence
              Position
      HeldRobert
      A. Milton
                London,
      England
              Chairman,
      President and Chief Executive Officer, ACEBrian
      Dunne
                Westmount,
      Québec
              Executive
      Vice President and Chief Financial OfficerGreg
      Cote
                Toronto,
      Ontario
              Senior
      Vice President, Corporate Finance and StrategySydney
      John Isaacs
                Westmount,
      Québec
              Senior
      Vice President, Corporate Development and Chief Legal
    OfficerJack
      McLean
                La
      Salle, Manitoba
              ControllerCarolyn
      M. Hadrovic
                Beaconsfield,
      Québec
              Corporate
      Secretary




Unless
otherwise indicated below, each of the officers has held a position with ACE or
Air Canada similar to that listed above for more than five years. Brian Dunne
was a partner at Arthur Andersen prior to taking up the position of Chief
Financial Officer of Aer Lingus in October 2001. Mr. Dunne joined ACE in
September 2005. Greg Cote was a partner at Ernst & Young since 1997 prior to
joining ACE in September 2005. Sydney John Isaacs joined Air Canada in 2000,
initially in a business development capacity, and subsequently became Senior
Director, Mergers & Acquisitions, and then Senior Director, Restructuring
before being appointed Senior Vice President, Corporate Development and Chief
Legal Officer of ACE in November 2004. Jack McLean was General Manager, Finance,
Air Canada since 1999 before being appointed Controller of ACE in November 2004.
Carolyn Hadrovic was Deputy Secretary of ACE before being appointed Corporate
Secretary in December 2005 and previously, Senior Counsel, Regulatory and
International Law, with Air Canada.
  As at
March 28, 2008, the directors and officers mentioned above as a group owned, or
had control or direction over, directly or indirectly, 48,271 Voting Shares
representing approximately 0.3% of the outstanding Voting Shares and 5,000
Variable Voting Shares representing approximately 0.01% of the outstanding
Variable Voting Shares of ACE. As at March 28, 2008, the directors and officers
mentioned above as a group owned, or had control or direction over, directly or
indirectly, 58,000 Class B voting shares of Air Canada representing
approximately 0.07% of the outstanding Class B voting shares of Air
Canada.
   Corporate
Cease Trade Orders or Bankruptcies
  Other
than as set forth below, to the knowledge of ACE: no director or executive
officer of ACE is, or has been in the last ten years: (i) a director, chief
executive officer or chief financial officer of any company that (A) while that
person was acting in that capacity, was the subject of a cease trade order or
similar order, or an order that denied the relevant company access to any
exemptions under securities legislation, for a period of more than 30
consecutive days, or (B) was the subject of an order of the type referred to in
(A) above that was issued after the director or executive officer ceased to be a
director, chief executive officer or chief financial officer of that company and
which resulted from an event that occurred while that person was acting in a
capacity as director, chief executive officer or chief financial officer of that
company; or (ii) a director or executive officer of any company that, while that
person was acting as director or executive officer of that company, or within a
year of that person ceasing to act in that capacity, became bankrupt, made a
proposal under any legislation relating to bankruptcy or insolvency or was
subject to or instituted any proceedings, arrangement or compromise with
creditors or had a receiver, receiver manager or trustee appointed to hold its
assets:




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(i)
              Following
      the acquisition of Canadian Airlines International Ltd. ("CAIL") by Air
      Canada in 2000, Robert A. Milton became a director of CAIL. Thereafter,
      CAIL restructured under the CCAA pursuant to a plan of compromise which
      became effective on July 5, 2000. CAIL's common shares and non-voting
      shares were suspended from trading by the TSX on June 27, 2000 and
      delisted on July 6, 2000. Robert A. Milton was President and Chief
      Executive Officer and a director of Air Canada when it filed for
      protection under the CCAA on April 1,
2003;
  (ii)
              Pierre
      Marc Johnson was a director of Air Canada when it filed for protection
      under the CCAA on April 1,
2003;
  (iii)
              Robert
      E. Brown was a director of Air Canada when Air Canada filed for protection
      under the CCAA on April 1, 2003 and became chairman of Air Canada on
      May 13, 2003. Mr. Brown was a director of Nortel Networks Corporation
      when, on or about May 31, 2004, cease trade orders were issued against
      directors, officers and certain other current and former employee of
      Nortel Networks Corporation and Nortel Networks Limited (collectively,
      "Nortel Networks"). The management cease trade orders were imposed in
      response to the failure by Nortel Networks to file certain financial
      statements with the Canadian securities
  regulators;
  (iv)
              John
      T. McLennan was the Chief Executive Officer of AT&T Canada when it
      filed for protection under the CCAA on October 15, 2002;
      and
  (v)
              Michael
      M. Green was a director of Anchor Glass Container Corporation when it
      filed a voluntary petition for reorganization under Chapter 11 of the US
      Bankruptcy Code in August 2005.
   Penalties
or Sanctions
  To the
knowledge of ACE, no director or executive officer of ACE, (i) has been
subject to any penalties or sanctions imposed by a court relating to securities
legislation or by a securities regulatory authority or has entered into a
settlement agreement with a securities regulatory authority or (ii) has
been subject to any other penalties or sanctions imposed by a court or
regulatory body that would likely be considered important to a reasonable
investor in making an investment decision.
  Personal
Bankruptcies
  To the
knowledge of ACE, in the last ten years, no director or executive officer has
become bankrupt, made a proposal under any legislation relating to bankruptcy or
insolvency, or was subject to or instituted any proceedings, arrangement or
compromise with creditors, or had a receiver, receiver manager or trustee
appointed to hold the assets of the director or executive officer.
   AUDIT
COMMITTEE
  Audit
Committee Charter
  The
charter of the Audit, Finance and Risk Committee ("Audit Committee") is attached
as Appendix A to this Annual Information Form.
  Composition
of Audit Committee
  The Audit
Committee of ACE consists of David I. Richardson (chairman), W. Brett Ingersoll
and John T. McLennan. Each member of the Audit Committee is independent and
financially literate as defined under Multilateral Instrument 52-110 – Audit
Committees.
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Relevant
Education and Experience of Audit Committee Members
  In
addition to each member's general business experience, the education and
experience of each Audit Committee member that is relevant to the performance of
his or her responsibilities as an Audit Committee member is as
follows:
  (i)
              David
      I. Richardson is a corporate director. Mr. Richardson is a director and
      the Chairman of the board of directors of Air Canada. Mr. Richardson is
      the former Chairman of Ernst & Young Inc. (Canada) and a former
      Executive Partner of Ernst & Young LLP. Mr. Richardson joined its
      predecessor Clarkson, Gordon & Co. in 1963 and was appointed President
      of The Clarkson Company Limited in 1982. Mr. Richardson was also a member
      of the Management and Executive Committees of Ernst & Young LLP,
      national managing partner of the firm's Corporate Finance practice and the
      senior partner in the Corporate Recovery and Restructuring practice until
      retirement from the partnership in 2002. Mr. Richardson holds a
      Bachelor of Commerce degree from the University of Toronto, is a member
      and a Fellow of the Institute of Chartered Accountants of
      Ontario.
  (ii)
              W.
      Brett Ingersoll is Managing Director and Co-Head of Private Equity at
      Cerberus Capital Management, L.P. and a member of the Investment
      Committee. Prior to joining Cerberus in 2002, Mr. Ingersoll was a Partner
      at JP Morgan Partners (formerly Chase Capital Partners) where he worked
      from 1993 to 2002. Mr. Ingersoll focuses primarily on private equity and
      restructuring situations in various industries including government
      services, healthcare, transportation, consumer products, financial
      services and outsourced business services. Mr. Ingersoll is a director of
      various public and private companies including Chrysler, LLC, IAP
      Worldwide Services, Inc., Talecris Bio Therapeutics, Inc., AerCap B.V. and
      Endura Care, LLC. Mr. Ingersoll received his M.B.A. from Harvard
      Business School and received his B.A. from Brigham Young
      University.
  (iii)
              John
      T. McLennan is a corporate director. Mr. McLennan is a director of Amdocs
      Ltd., Emera and Jazz Air Holding GP Inc.  Mr. McLennan was
      Vice-Chairman and Chief Executive Officer of Allstream from May 2000 until
      June 2004. Prior to that position, he served as AT&T Canada's Vice
      Chairman and Chief Executive Officer. He was also the founding President
      of Jenmark Consulting Inc., President and Chief Executive Officer of Bell
      Canada, President of Bell Ontario as well as Chairman, President and Chief
      Executive Officer of BCE Mobile Communications Inc. Mr. McLennan has
      served as President and Chief Executive Officer of Cantel Wireless and
      Executive Vice President of Mitel Communications Inc. Mr. McLennan
      holds a BSc and a MSc in Industrial Management from Clarkson
      University.
  Pre-approval
Policies and Procedures
  The Audit
Committee reviews and approves the nature of all non-audit services, as
permitted by securities legislation and regulations, to be provided by ACE's
external auditor prior to the commencement of such work. In this regard, the
Audit Committee will prepare a report for presentation to the shareholders of
ACE quarterly or annually, as required, regarding the Audit Committee's approval
of such non-audit services in the period.
  The Audit
Committee will also require and review a report from the external auditor of all
relationships between the external auditor and its related entities and ACE and
its related entities, including all work performed and fees paid for such work
of a non-audit nature, that in the external auditor's professional judgment may
reasonably be perceived to bear on its objectivity and independence and
confirming that in the external auditor's professional judgment it is
independent of ACE and discuss this report with the external auditor in order to
evaluate the objectivity and independence of the external auditor. The Audit
Committee will also review steps taken by the external auditor to address any
findings in any of the foregoing reviews.
  Auditors'
Fees
  PricewaterhouseCoopers
LLP has served as ACE's auditing firm since April 26, 1990. Fees payable for the
years ended December 31, 2007 and December 31, 2006 to
PricewaterhouseCoopers LLP and its affiliates are
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  $5,660,432
and $9,075,383, respectively. Fees payable to PricewaterhouseCoopers LLP and its
affiliates in 2007 and 2006 are detailed below.
  Year
      ended
                  December
      31,2007
              Year  ended
                  December 31,2006Audit
      fees
              $5,294,399
              $8,445,500Audit-related
      fees
              $316,009
              $599,883Tax
      fees
              $50,024
              $30,000All
      other fees
              Nil
              Nil$5,660,432
              $9,075,383
  The
nature of each category of fees is described below.
   Audit
fees
  Audit
fees were paid for professional services rendered for the audit of ACE's annual
financial statements and for services that are normally provided in connection
with statutory and regulatory filings or engagements, including services related
to the audit of internal controls over financial reporting.
  Audit-related
fees
  Audit-related
fees were paid for professional services related to pension plan audits,
specified procedures reports and other items related to the audit.
  Tax
fees
  Tax fees
were paid for professional services rendered with respect to income
taxes.
   INTEREST
OF MANAGEMENT AND OTHERS
 IN
MATERIAL TRANSACTIONS
  On
September 30, 2004, as part of Air Canada's restructuring process, the
Cerberus Affiliate invested $250 million in ACE in consideration for the
issuance of 12,500,000 Preferred Shares of ACE. The Cerberus Affiliate is an
affiliate of Cerberus Capital Management, L.P. Michael M. Green and W. Brett
Ingersoll, both directors of ACE, are respectively President-Operations and
Managing Director and Co-Head of Cerberus Capital Management, L.P. As of March
28, 2008, the Cerberus Affiliate holds 6.55 million Preferred Shares, which is
52.4% of all outstanding Preferred Shares.
  On June
22, 2007, ACE announced that it had agreed to sell a 70% interest in the
business of its wholly owned maintenance, repair and overhaul subsidiary ACTS LP
to a consortium consisting of Sageview Capital LLC, a private investment firm,
and KKR Private Equity Investors, L.P., the publicly traded fund of Kohlberg
Kravis Roberts & Co. The transaction was completed on October 16, 2007. As a
result of the transaction, ACE continues to own 100% of ACTS LP, which is now a
non-operating entity, ACTS Aero conducts the business previously operated
by ACTS LP and ACE indirectly holds a 23% equity interest in ACTS Aero.  On
March 7, 2008, Robert A. Milton, Brian Dunne and Greg Cote, all officers of
ACE, acquired shares of ACTS Aero representing in the aggregate 0.3%
of the outstanding shares of ACTS Aero. The investment was made
on the same terms as applicable to the consortium for the purchase of
its 70% interest and was authorized by the board of directors of
ACE.
  - 73
-
  TRANSFER
AGENT AND REGISTRAR
  The
Transfer Agent and registrar for the Variable Voting Shares and Voting Shares of
ACE is CIBC Mellon Trust Company at its principal transfer offices in
Montreal, Toronto, Vancouver, Calgary and Halifax.
  LEGAL
PROCEEDINGS
  A
description of certain legal proceedings to which ACE is a party appears under
the heading "Contingencies, Guarantees and Indemnities" in Note 21 to the
consolidated audited annual financial statements of ACE for the year ended
December 31, 2007, which is incorporated herein by reference. ACE's audited
annual financial statements for the year ended December 31, 2007 are
available on SEDAR at www.sedar.com.
  Please
see also the section "Risk Factors – Air Canada – Current Legal
Proceedings".
  MATERIAL
CONTRACTS
  The
contracts that are material to ACE and that were entered into within the year
ended December 31, 2007 or before such year but which are still in effect,
and which are required to be filed with Canadian securities regulatory
authorities in accordance with Section 12.2 of National Instrument 51-102 —
Continuous Disclosure Obligations, are as follows:
  (i)
              Investment
      Agreement between Cerberus ACE Investment, LLC and Air Canada
      dated June 23, 2004, described under the section "Three-Year History
      – Investment Agreement";
  (ii)
              The
      Aircraft General Terms Agreement AGTA-ACN and related agreements between
      The Boeing Company and Air Canada dated November 4, 2005 described under
      the section "Three-Year History – Aircraft Purchase Agreement between The
      Boeing Company and Air Canada"; and
  (iii)
              Indenture
      dated as of April 6, 2005 with respect to the 4.25% Convertible Senior
      Notes due 2035 described under the section "Description of Capital
      Structure – Notes".
   EXPERTS
  ACE's
independent auditors are PricewaterhouseCoopers LLP, Chartered Accountants, who
have issued an independent auditors' report dated February 7, 2008 in
respect of ACE's consolidated financial statements as at December 31, 2007 and
December 31, 2006 and for each of the years then ended and ACE's internal
control over financial reporting as at December 31, 2007. PricewaterhouseCoopers
LLP has advised that they are independent with respect to ACE within the meaning
of the Code of Ethics of the Ordre des comptables agréés du
Québec and the Securities Exchange Act of 1934 administered by the US
Securities and Exchange Commission.
  ADDITIONAL
INFORMATION
  Additional
information, including directors' and officers' remuneration and indebtedness,
principal holders of the ACE's securities and securities authorized for issuance
under equity compensation plans will be contained in ACE's management proxy
circular for its 2008 annual meeting of shareholders. Additional financial
information is provided in ACE's financial statements and management's
discussion and analysis for the year ended December 31, 2007. The above
information and additional information relating to ACE are available on SEDAR at
www.sedar.com.
  - 74
-
  The
following documents can be obtained by sending your request to the Corporate
Secretary of ACE, at 5100 de Maisonneuve Boulevard West, Montreal,
Québec, H4A 3T2:
  (i)
              this
      Annual Information Form, together with any document incorporated herein by
      reference;
  (ii)
              the
      2007 Management's Discussion & Analysis / 2007 Financial
      Statements and Notes of ACE and any interim financial statements filed
      after the audited financial statements for ACE's most recently completed
      financial year;
  (iii)
              ACE's
      management proxy circular for the 2007 annual and special shareholder
      meeting held on May 29, 2007;
and
  (iv)
              any
      other documents that are incorporated by reference into a preliminary
      short form prospectus or a short form prospectus pursuant to which
      securities of ACE are in the course of a
  distribution.
  Except
when securities of ACE are in the course of distribution pursuant to a short
form prospectus or a preliminary short form prospectus, ACE may require the
payment of a reasonable charge from persons, other than security holders of ACE,
requesting copies of these documents.
 
 - 75
-
  APPENDIX
A - CHARTER OF THE AUDIT, FINANCE AND RISK COMMITTEE OF THE
 BOARD
OF DIRECTORS OF ACE AVIATION HOLDINGS INC.
  1.           Structure,
Procedure, Qualifications
  The
Audit, Finance and Risk Committee (the "Audit Committee") of ACE Aviation
Holdings Inc. (the "Corporation") shall be composed of not less than three
directors, all of whom shall meet the independence, experience and other
membership requirements under applicable laws, rules and regulations as
determined by the Board of Directors (the "Board").  The members of
the Audit Committee shall have no relationships with management, the Corporation
and its related entities that in the opinion of the Board may interfere with
their independence from management and from the Corporation. In addition, an
Audit Committee member shall not receive, other than for service on the Board or
the Audit Committee or other committees of the Board, any consulting, advisory,
or other compensatory fee from the Corporation or any of its related parties or
subsidiaries. The members of the Audit Committee shall possess the mix of
characteristics, experiences and skills to provide an appropriate balance for
the performance of the duties of the Audit Committee and in particular each
member of the Audit Committee shall be "financially literate" and at least one
member shall be a "financial expert" as defined by relevant securities
legislation or regulations.
  A quorum
of the Audit Committee shall be a majority of the members, and a majority of the
members present shall be required to pass a resolution of the Audit Committee.
The Audit Committee shall be responsible to the Board of Directors of the
Corporation. The Chairman and the members of the Audit Committee shall be
appointed annually by the Board.
  2.           Objectives
  (a)           The
objectives of the Audit Committee are as follows:
  (i)
              To
      assist the Board in the discharge of its responsibility to monitor the
      component parts of the Corporation's financial reporting and audit
      process.
  (ii)
              To
      maintain and enhance the quality, credibility and objectivity of the
      Corporation's financial reporting and to satisfy itself and oversee
      management's responsibility as to the adequacy of the supporting systems
      of internal financial and accounting
controls.
  (iii)
              To
      assist the Board of Directors in its oversight of the independence,
      qualifications and appointment of the external
  auditor.
  (iv)
              To
      monitor the performance of the internal financial and accounting controls
      and of the internal and external
auditors.
  (v)
              To
      provide independent communication between the Board and the internal
      auditor and the external auditor.
  (vi)
              To
      facilitate in-depth and candid discussions between the Audit Committee and
      management and the external auditor regarding significant issues involving
      judgment and impacting quality of controls and
  reporting.
  3.           Duties
  To
achieve its objectives, the Audit Committee shall:
  (a)
              Monitor
      and review the quality and integrity of the Corporation's accounting and
      financial reporting process through discussions with management, the
      external auditor and the internal
  
  auditor.
      This will include a review of the annual and quarterly financial
      statements and Management's Discussion and Analyses ("MD&As") to be
      filed with regulatory authorities and provided to shareholders, and
      financial statements and other financial disclosure included in
      prospectuses, earnings press releases and other similar documents. The
      Audit Committee shall also review the Corporation's annual information
      form and other similar documents. These reviews will
    include:
 (i)
              Discussions
      with management and the external auditor and a consideration of the report
      by the external auditor to the Audit Committee of matters related to the
      conduct of an audit;
  (ii)
              discussions
      with the external auditor respecting the auditor's judgment regarding both
      the acceptability and quality of the financial statements including the
      critical accounting policies and practices used by management in their
      preparation, alternative treatments and disclosures of financial
      information within generally accepted accounting principles that have been
      considered by management and their ramifications, the selection of changes
      in significant accounting policies, the method used to account for
      significant unusual transactions, the effect of significant accounting
      policies in controversial or emerging areas, the degree of aggressiveness
      or conservatism, as the case may be, of the accounting policies adopted by
      the Corporation, the process used by management in formulating
      particularly significant accounting estimates and the basis for the
      external auditor's conclusions regarding the reasonableness of those
      estimates;
  (iii)
              a
      review of significant adjustments arising from an
  audit;
  (iv)
              a
      review of disagreements with management over the application of accounting
      policies as well as any disclosure in the financial statements. The Audit
      Committee is responsible for the resolution of disagreements between
      management and the external auditor regarding financial
      reporting;
  (v)
              a
      review of all material off-balance sheet transactions and other
      relationships with non-consolidated entities that may have a material
      current or future effect on the financial condition of the Corporation
      including their disclosure or lack thereof in the applicable quarterly or
      annual financial statements;
  (vi)
              a
      review of the external auditor's suggestions for improvements to the
      Corporation's operations and internal
controls;
  (vii)
              a
      review of the nature and size of unadjusted errors of a non-trivial
      amount;
  (viii)
              a
      review to ascertain that  various covenants are complied with;
      and
  (ix)
              the
      selection of, and changes in, accounting policies and consideration of the
      appropriateness of such selections and
changes.
  (b)
              Determine,
      based on its review and discussion, whether to recommend the approval by
      the Board of such financial statements and the financial disclosure in any
      such annual information forms, earnings press releases, prospectuses and
      other similar documents.
  (c)
              Review
      with management, the internal auditor and the external auditor and, if
      considered appropriate, approve the release of the Corporation's quarterly
      financial statements and related
MD&A.
  (d)
              Review
      with management, the external auditor and legal counsel, the Corporation's
      procedures to ensure compliance with applicable laws and regulations, and
      any significant litigation, claim or
  A -
2
  other
      contingency, including tax assessments, that would have a material effect
      upon the financial position or operating results of the Corporation and
      the disclosure or impact on the results of these matters in the quarterly
      and annual financial statements. The Audit Committee should be satisfied
      that adequate procedures are in place for the review of the Corporation's
      public disclosure of financial information extracted or derived from the
      Corporation's financial statements, and must periodically assess the
      adequacy of those procedures.
 (e)
              Meet
      with the Corporation's external auditor to review and approve their audit
      plan with particular emphasis on risk factors which could lead to a
      material misstatement of the financial statements, the scope and timing of
      the audit, the assumptions and decisions that have been made in developing
      the plan and co-ordination of work between the external auditor and the
      internal audit department. The Audit Committee is responsible for
      overseeing the work of the external auditor engaged for the purpose of
      preparing or issuing an auditor's report or performing other audit, review
      or attest services for the
Corporation.
  (f)
              Review
      and approve estimated audit and audit-related fees and expenses for the
      current year. Pre-approve any significant additional audit and
      audit-related fees over the estimated amount.  Review and
      approve audit and audit-related fees and expenses for the prior year. The
      authority for the determination and payment of fees to the external
      auditor rests solely and exclusively with the Audit
      Committee.  The Corporation shall ensure that funding is
      available to the Audit Committee for payment of compensation to the
      external auditor.
  (g)
              Review
  (i)
              and
      approve, or delegate to a member of the Audit Committee the responsibility
      to review and approve, the nature of all non-audit services, as permitted
      by securities legislation and regulations, to be provided by the
      Corporations' external auditor prior to the commencement of such work. In
      this regard the Audit Committee will prepare a report for presentation to
      the shareholders of the Corporation quarterly or annually, as required,
      regarding the Audit Committee's approval of such non-audit services in the
      period. The pre-approval of non-audit services by a member of the Audit
      Committee to whom such authority is delegated must be presented to the
      Audit Committee at its first scheduled meeting following such
      pre-approval;
  (ii)
              and
      implement from time to time a process in connection with non-audit
      services performed by the external
auditor.
  (h)
              Review
      a report from the external auditor of all relationships between the
      external auditor and its related entities and the Corporation and its
      related entities, including all work performed and fees paid for such work
      of a non-audit nature, that in the external auditor's professional
      judgment may reasonably be perceived to bear on its objectivity and
      independence and confirming, or otherwise, that in the external auditor's
      professional judgment it is independent of the Corporation and discuss
      this report with the external auditor in order to evaluate the objectivity
      and independence of the external auditor. The Audit Committee should
      specifically require the external auditor to confirm that it is a
      registered public accounting firm as prescribed by various applicable
      securities regulations. As well, at least once a year the Audit Committee
      will carry out a review of the credentials of the members of the firm
      including without limitation the biographies of the members, whether there
      has been any enforcement actions, issues related to the firm and law
      suits, if any.  A formal written report will be obtained from
      the external auditor outlining: the auditing firm's internal quality
      control procedures; any material issues raised within the preceding five
      years by the auditing firm's internal quality control review, peer reviews
      or any other inquiry or investigation by governmental or professional
      authority relating to any audit conducted by the firm.  The
      Committee will also review steps taken by the auditing firm to address any
      findings in any of the forgoing
reviews.
  A -
3
  (i)
              Receive
      reports on any consultations between management and other public
      accountants respecting accounting principles to be applied in preparing
      the quarterly or annual financial statements, and on any incidents
      involving fraud or illegal acts of which management, the internal audit
      department or the external auditor become aware. In this regard, review
      the relevant control procedures with management to ensure that such
      matters are adequately guarded
against.
  (j)           At
least once each year:
  (i)
              Meet
      privately with management to assess the performance of the external
      auditor.
  (ii)
              Meet
      privately with the external auditor, amongst other things, to understand
      any restrictions placed on them or other difficulties encountered in the
      course of the audit, including instructions on the scope of their work and
      access to requested information and the level of co-operation received
      from management during the performance of their work and their evaluation
      of the Corporation's financial, accounting and audit personnel and
      systems.
  (k)
              Evaluate
      the performance of the external auditor, and if so determined, recommend
      that the Board either take steps to replace the external auditor or
      provide for the reappointment of the external auditor by the
      shareholders.
  (l)           Regarding
the services provided by the internal audit department, the Audit Committee
will:
  (i)
              meet
      privately with internal audit, amongst other things, to understand any
      restrictions placed on them or other difficulties encountered in the
      course of their audits, including instructions on the scope of their work
      and access to requested information and the level of co-operation received
      from management during the performance of their
  work;
  (ii)
              periodically
      review and approve the mandate, reporting relationships and resources of
      the internal audit group;
  (iii)
              review
      the objectivity, qualifications, adequacy and experience of the internal
      audit staff and approve the appointment, dismissal or replacement of the
      head of the internal audit
department;
  (iv)
              review
      and approve annually the planned scope for the internal audit program, its
      objectives, and the resources required to attain these
      objectives;
  (v)
              periodically
      throughout each year review the reports of the internal audit department
      which describe the activities of the internal audit department for the
      preceding period; and
  (vi)
              review
      the working relationship between the internal audit department and the
      external auditor, and between the internal audit department and
      management.
  (m)
              Obtain
      from both the internal audit department and the Corporation's external
      auditor the major audit findings and internal control recommendations
      reported during the period under review, the response of management to
      those recommendations, and review the follow-up performed by management
      and the internal audit department in order to monitor whether management
      has implemented an effective system of internal accounting
      control.
  (n)
              Review
      significant emerging accounting and reporting issues, including recent
      professional and regulatory pronouncements, and assess their impact on the
      Corporation's financial statements.
  A -
4
  (o)
              Establish
      policies and procedures for the receipt, retention and treatment of
      complaints received by the Corporation from employees, shareholders and
      other stakeholders regarding accounting issues and financial reporting,
      internal accounting controls and internal or external auditing matters.
      The Audit Committee should be satisfied that sufficient controls are in
      place to ensure that all such complaints can be received anonymously and
      with an appropriate degree of confidentiality and that potential employee
      informants are aware of the process that is in place. The Audit Committee
      should also be satisfied that processes are in place to ensure that all
      such complaints, regardless of significance, are presented to the Audit
      Committee.
  (p)
              Review
      policies for approval of senior management
  expenses.
  (q)
              Review
      the process relative to the periodic certifications by the Chief Executive
      Officer and the Chief Financial Officer of the Corporation in respect of
      financial disclosures, the existence of any significant deficiencies in
      the design or operation of internal controls which could adversely affect
      the Corporation's ability to record, process, summarize and report
      financial data and any significant changes in internal controls or changes
      to the environment in which the internal controls operate, including
      corrections of material deficiencies and
  weaknesses.
  (r)
              Review
      with management the Corporation's computer systems, including procedures
      to keep the systems secure and contingency plans developed to deal with
      possible computer failures.
  (s)
              Review
      and approve all related party transactions as such term is defined from
      time to time in Policy Statement Q-27 of the Autorité des marchés
      financiers and Rule 61-501 issued by the Ontario Securities Commission, as
      may be amended from time to time.
  (t)
              Review
      risk management systems and controls, especially in relation to
      derivatives, foreign currency exposure, hedging and
    insurance.
  (u)
              Whenever
      it may be appropriate to do so, retain and receive advice from experts,
      including independent legal counsel and independent public accountants,
      and conduct or authorize the conduct of investigations into any matters
      within the scope of the responsibility of the Audit Committee as the Audit
      Committee may consider appropriate. The Corporation shall ensure that
      funding is available to the Audit Committee in respect of the
      aforementioned activities.
  (v)
              Report
      regularly to the Board in writing on the activities, findings and
      conclusions of the Audit Committee.
  (w)
              Review
      this Charter on an annual basis and recommend to the Board any changes to
      it that the Audit Committee considers
advisable.
  (x)
              Complete
      a self-assessment annually to determine how effectively the Audit
      Committee is meeting its
responsibilities.
  (y)
              Perform
      such other functions as may be delegated from time to time by the
      Board.
  (z)
              Review
      the process for the rotation of the lead audit partner, the concurring
      partner and any other audit engagement team
  partner.
  (aa)
              Review
      and approve the Corporation's hiring policies regarding partners,
      employees and former partners and employees of the present and former
      external auditors of the
Corporation.
  A -
5
  OTHER
  (a)           Public Disclosure
  The Audit
Committee shall:
  (i)
              Review
      and approve the Corporation's Public Disclosure Policy and any changes
      related thereto and ensure consistency with current developments and best
      practices;
  (ii)
              Where
      practicable, management will review with the Audit Committee or the
      Chairman of the Audit Committee draft news releases to be disseminated to
      the public related to earnings warnings or financial results forecasting
      by the Corporation which are expected by management to be material in
      relation to the market price of any of the Corporation's
      securities.
  (b)           Risk
Identification and Management
  The Audit
Committee shall make all reasonable efforts to identify and address material
financial and other risks to the business and affairs of the Corporation and its
subsidiaries and make recommendations in that regard to the Board of Directors
of the Corporation. The Audit Committee shall review and discuss with
management, the internal audit department and the external auditor all major
financial risk exposures and the steps management has taken to monitor/control
those exposures. The Audit Committee shall be entitled, from time to time, to
retain experts and consultants to assist the Audit Committee with the discharge
of such mandate. The Audit Committee shall have the discretion in the discharge
of these duties to address risks to the Corporation's and its subsidiaries'
revenues and costs, as well as potentially corrupt or other practices that may
lead to loss or depreciation of business reputation.
  (c)           Contingent
Liabilities
  The Audit
Committee shall establish processes and procedures to identify and monitor
contingent liabilities of the Corporation and its subsidiaries. In the discharge
of these duties, the Audit Committee shall have the discretion to retain experts
and consultants and to review, without limitation, workplace safety,
environmental issues and any other matters, whether of a financial nature or
otherwise, that can give rise to a contingent liability. The Audit Committee
shall make recommendations, from time to time, to the Board of Directors of the
Corporation on these matters.
  (d)           Corporate
Authorizations Policies
  The Audit
Committee shall:
  (i)
              Periodically
      review and approve policies relative to the financial control, conduct,
      regulation and administration of subsidiary
  companies;
  (ii)
              Periodically
      review any administrative resolutions adopted from time to time pursuant
      to the Corporation's By-laws pertaining to the establishment of procedures
      relative to commitment and transaction authorizations, the determination
      of the officers or other persons by whom any instrument in writing or
      document is to be executed and the manner of execution
      thereof;
  (iii)
              Review,
      monitor and approve the Corporate Donations Policy and any changes thereto
      and the annual Corporate Donations Budget;
and
  A -
6
  (iv)
              Review,
      monitor and approve any other financial expenditure policies that would
      affect the Corporation's and its subsidiaries' financial condition or
      reputation.
  (e)           Performance
to Budget
  The Audit
Committee shall review actual financial performance compared to
budget.
  (f)           Meetings
  (i)
              The
      Audit Committee shall meet at least quarterly at the call of the Chairman
      of the Audit Committee, any other member of the Audit Committee or the
      external auditors.
  (ii)
              An
      "in-camera" session of the members of the Committee shall be held as part
      of each meeting of the Committee.
  (g)           Responsibilities
  Nothing
contained in the above mandate is intended to assign to the Audit Committee the
Board of Directors' responsibility to ensure the Corporation's compliance with
applicable laws or regulations or to expand applicable standards of liability
under statutory or regulatory requirements for the directors or the members of
the Audit Committee.  Even though the Audit Committee has a specific
mandate and its members have financial experience and expertise, it is not the
duty of the Audit Committee to plan or conduct audits, or to determine that the
Corporation's financial statements are complete and accurate and are in
accordance with generally accepted accounting principles.  Such
matters are the responsibility of management, the internal auditor and the
external auditor.
  Members
of the Audit Committee are entitled to rely, absent knowledge to the contrary,
on (i) the integrity of the persons and organizations from whom they receive
information, (ii) the accuracy and completeness of the information provided, and
(iii) representations made by management as to the non-audit services provided
to the Corporation by the external auditor.
  February
7, 2008