UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION

                             Washington, DC 20549
                             --------------------
                                   FORM 40-F

           (Check One)

           [ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE
                        SECURITIES EXCHANGE ACT OF 1934

                                      or

          [X] ANNUAL REPORT PURSUANT TO SECTION 13(a) OR 15(d) OF THE
                        SECURITIES EXCHANGE ACT OF 1934

     For the fiscal year                              Commission File
   ended December 31, 2006                            Number 0-51034

                           ------------------------
                          ACE AVIATION HOLDINGS INC.
            (Exact Name of Registrant as Specified in Its Charter)

                                Not Applicable
        (Translation of Registrant's Name Into English (if Applicable))


         Canada                      4512                      Not Applicable
  (Province or other           (Primary Standard              (I.R.S. Employer
   Jurisdiction of          Industrial Classification      Identification Number
   Incorporation or               Code Number                 (if Applicable))
    Organization)              (if Applicable))

                      5100 de Maisonneuve Boulevard West
                               Montreal, Quebec,
                                Canada, H4A 3T2
                                (514) 422-5000
  (Address and telephone number of Registrant's principal executive offices)

                             CT Corporation System
                               111 Eighth Avenue
                           New York, New York 10011
                                (212) 894-8940
               (Name, address (including zip code) and telephone
             number (including area code) of agent for service in
                              the United States)
            ------------------------------------------------------

         Securities registered or to be registered pursuant to Section
                              12(b) of the Act.

                                     None

         Securities registered or to be registered pursuant to Section
                              12(g) of the Act.

                        Class A Variable Voting Shares
                             Class B Voting Shares

       Securities for which there is a reporting obligation pursuant to
                          Section 15(d) of the Act.

                                     None

          For annual reports, indicate by check mark the information
                            filed with this Form:

   [X] Annual information form     [X] Audited annual financial statements

         Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period covered by
the annual report.

             The Registrant had 79,498,895 Class A Variable Voting
            Shares, 22,771,872 Class B Voting Shares and 12,500,000
             Preferred Shares outstanding as at December 31, 2006

         Indicate by check mark whether the Registrant by filing the
information contained in this form is also thereby furnishing the information
to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act
of 1934 (the "Exchange Act"). If "Yes" is marked, indicate the file number
assigned to the Registrant in connection with such Rule.

<PAGE>

               Yes          82-                             No    X
                  -------      --------                        --------

         Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.

               Yes   X                                      No
                  -------                                      --------

<PAGE>

                   DOCUMENTS FILED UNDER COVER OF THIS FORM
                   ----------------------------------------

Document No. 1:    Annual Information Form for the fiscal year ended
                   December 31, 2006.

Document No. 2:    Audited Consolidated Financial Statements for the fiscal year
                   ended December 31, 2006, prepared in accordance with Canadian
                   generally accepted accounting principles and reconciled to
                   U.S. generally accepted accounting principles in accordance
                   with Item 18 of Form 20-F.

Document No. 3:    Management's Discussion and Analysis of Results of Operations
                   and Financial Condition for the fiscal year ended December
                   31, 2006.


<PAGE>

                                                                Document No. 1

<PAGE>



                                     {LOGO}
                           ACE AVIATION HOLDINGS INC.


                                     ANNUAL
                                   INFORMATION
                                      FORM


                                 MARCH 27, 2007



<PAGE>

                                TABLE OF CONTENTS

                                                                            Page


GLOSSARY.......................................................................1

EXPLANATORY NOTES..............................................................1

THE CORPORATION................................................................2

REGULATORY ENVIRONMENT.........................................................7

INDUSTRY OVERVIEW AND COMPETITIVE ENVIRONMENT.................................12

THREE-YEAR SUMMARY: EVOLUTION OF BUSINESS.....................................15

OVERVIEW OF THE BUSINESS......................................................22

AIR CANADA SERVICES...........................................................24

AEROPLAN......................................................................34

JAZZ..........................................................................48

ACTS LP.......................................................................57

RISK FACTORS..................................................................59

MARKET FOR SECURITIES.........................................................74

DIVIDEND RECORD...............................................................75

DESCRIPTION OF CAPITAL STRUCTURE..............................................75

DIRECTORS AND OFFICERS........................................................81

AUDIT COMMITTEE...............................................................84

INTEREST OF MANAGEMENT AND OTHERS IN MATERIAL TRANSACTIONS....................86

TRANSFER AGENT AND REGISTRAR..................................................86

LEGAL PROCEEDINGS.............................................................87

MATERIAL CONTRACTS............................................................87

EXPERTS.......................................................................87

ADDITIONAL INFORMATION........................................................87

APPENDIX A -  CHARTER OF THE AUDIT, FINANCE AND RISK COMMITTEE...............A-1


                                      -i-

<PAGE>

                                    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 Quebec;

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 LP 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 of the Corporation
carried on by ACGHS LP (and its United States subsidiary, ACGHS US Inc.) and Air
Canada that provide  passenger and aircraft  related ground  handling  services,
including  check-in,  gate  management,  baggage  and  cargo  handling  and ramp
services;

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;

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
Limited Partnership; 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,
2006, unless otherwise indicated.

ACE AVIATION  HOLDINGS  INC. AND THE  CORPORATION  --  References in this Annual
Information  Form to "ACE" are references to ACE Aviation  Holdings Inc.  itself
and  references  to the  "Corporation"  include  references,  as the context may
require,  to ACE and its subsidiaries  collectively,  ACE and one or more of its
subsidiaries, one or more of ACE's subsidiaries, or ACE itself.

CURRENCY -- All currency  amounts  used in this  document are stated in Canadian
dollars, unless otherwise indicated.

<PAGE>
                                      -2-


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  the   Corporation   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 for a number of factors,  including without  limitation,  energy prices,
general  industry,  market and  economic  conditions,  war,  terrorist  attacks,
changes in demand due to the  seasonal  nature of the  business,  the ability to
reduce  operation  costs  and  employee  counts,   employee  relations,   labour
negotiations or disputes,  pension issues, currency exchange and interest rates,
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.



                                 THE CORPORATION

      ACE  is an  investment  holding  company  of  various  aviation  interests
including Air Canada,  Aeroplan  Limited  Partnership,  Jazz Air LP, ACTS LP and
other investments.

      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  grants  authority to the board of
directors
<PAGE>
                                      -3-


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.

      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,  Quebec,  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. ACE held
as of March 27,  2007,  a direct and  indirect  75%  ownership  interest  in Air
Canada.

      With the  completion  of the initial  public  offering,  Air Canada put in
place 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. Air
Canada has not, as of March 27, 2007, 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 Cote  Vertu  Boulevard
West,  Saint-Laurent,  Quebec,  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 Mile 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  pursuant
to the statutory  arrangement by way of reduction of capital,  pursuant to which
ACE  shareholders  of  record on  January  10,  2007,  the  record  date

<PAGE>
                                      -4-

for the distribution,  would receive 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
were entitled to receive  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. Following this distribution,  ACE held
as  of  March  27,  2007,  a  40.1%  ownership   interest  in  Aeroplan  Limited
Partnership, indirectly through its holding of Aeroplan Income Fund.

      The units of  Aeroplan  Income Fund are listed on the TSX under the symbol
AER.UN.

      The  principal  and  head  office  of  Aeroplan  is  located  at  5100  de
Maisonneuve  Boulevard West, Montreal,  Quebec,  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 were entitled to receive
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.
As of March 27, 2007, ACE held a 58.8% interest in Jazz Air Limited Partnership,
directly or indirectly through its holding of Jazz Air Income Fund units.

      The units of Jazz Air  Income  Fund are listed on the TSX under the symbol
JAZ.UN.

      The principal and head office of Jazz LP is located at 5100 de Maisonneuve
Boulevard   West,   Montreal,   Quebec,   Canada,   H4A  3T2.   Its  website  is
www.flyjazz.com  (for  greater  certainty,  this  website  is  not  in  any  way
incorporated herein by reference).


ACTS LP

      ACTS  LP is a  full  service  aircraft  maintenance  repair  and  overhaul
organization  that  competes  on a  global  basis.  ACTS  LP  is a  wholly-owned
subsidiary of ACE.

      On February 13,  2007,  ACTS LP acquired  80% of  Aeromantenimiento,  S.A.
("Aeroman"),  the aircraft  maintenance  division of Grupo TACA Holdings Limited
("Grupo TACA") of El Salvador. Total consideration for
<PAGE>
                                      -5-


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. The size of
the equity  stake to be acquired by Grupo TACA in ACTS LP will be  confirmed  at
the time of the  monetization  of ACTS LP and is expected to represent less than
7% of the total equity of ACTS LP at the time of the monetization. Prior to ACTS
LP's  monetization,  Grupo TACA can put its right to  acquire  equity in ACTS LP
back to ACE at a discounted value from US$40.4 million and accreting up to a cap
of US$50.5 million over 12 months or the date of monetization, if earlier.

<PAGE>
                                      -6-


CORPORATE STRUCTURE

      The following  table lists the ACE principal  investments  as of March 27,
2007, including their jurisdictions of constitution and the percentage of equity
held or controlled directly or indirectly by ACE:

<TABLE>
<CAPTION>

<S>       <C>                                      <C>                                         <C>                  <C>

                                                    ---------------------------                100%
                                                  | ACE Aviation Holdings Inc. |_____________________________________
                                                  |          (Canada)          |                                     |
                                                    ---------------------------                                      |
                                                                 |                                      ---------------------
                                                                 |                                     | 1141679 Alberta Ltd.|
                                                                 |                                     |    (Alberta)(5)     |
                                                                 |                                      ---------------------
                ________________________________________________________________________________________
               |                         |                           |                      |           |
               |                         |                           |                      |           |
        75%    |                40.1%    |                   58.8%   |              100%    |       49% |
        ----------------        --------------------        ------------------      ---------------     |
       |    Air Canada  |      |  Aeroplan Limited  |      |    Jazz Air LP   |    |  ACTS LP      |    |
       |   (Canada)(1)  |      |  Partnership       |      |    (Quebec)(4)   |    |  (Quebec)(3)  |    |
        ----------------       |  (Quebec)(7)       |       ------------------      ---------------     |
            |        |          --------------------                                                    |
            |        |                   |                                                              |
      100%  |        |                   |                                                              |
 -----------------   |       100%        |                                                              |
| 1209265 Alberta |  |        -----------------------                                                   |
|     Ltd.        |  |       |  1209233 Alberta Ltd. |                                                  |
| (Alberta)(6)    |  |       |     (Alberta)(8)      |                                                  |
 -----------------   |        -----------------------                                                   |
                     |                                                                                  |
                     |______________________________________________________________________________    |
                     |                                       |                                      |   |
                     |                                       |                                      |   |
          100%       |                                100%   |                                 51%  |   |
      --------------------                            ---------------                          ----------------
     |  AC Cargo Limited  |                          | ACGHS Limited |                        | Touram Limited |
     |  Partnership       |                          | Partnership(3)|                        |  Partnership   |
     |  (Quebec)(3)       |                           ---------------                         |  (Quebec)(2)   |
      --------------------                                                                     ----------------
</TABLE>

------------

(1)   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.
(2)   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 LP. ACE holds a 49% interest and Air Canada holds a 51% interest in
      Touram General Partner Inc.
(3)   AC Cargo General Partner Inc. and ACGHS General Partner Inc., corporations
      incorporated  under the laws of Canada,  are the  general  partners  of AC
      Cargo  Limited  Partnership  and  ACGHS  Limited  Partnership  and  hold a
      0.00001%  interest  in AC Cargo  Limited  Partnership  and  ACGHS  Limited
      Partnership,  respectively  Air Canada holds a 100% interest in each of AC
      Cargo General Partner Inc. and ACGHS General Partner Inc.
(4)   Following the initial  public  offering of Jazz Air Income Fund, ACE holds
      an interest in the general  partner of Jazz which is  proportional  to its
      interest in Jazz Air LP. ACE holds a 58.8% ownership  interest in Jazz Air
      LP, directly  and indirectly.
(5)   1141679  Alberta Ltd. holds and manages excess cash and investments of ACE
      on its behalf.
(6)   1209265  Alberta Ltd. holds and manages excess cash and investments of Air
      Canada on its behalf.
(7)   ACE holds a 40.1% ownership  interest in Aeroplan,  indirectly through its
      holding of Aeroplan Income Fund units.
(8)   1209233 Alberta Ltd. holds and manages the investment of a majority of the
      Aeroplan Miles redemption reserve on behalf of Aeroplan.

      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 the  Corporation,  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 the  Corporation  at December 31,
2006, have been omitted.
<PAGE>
                                      -7-


                             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  company,  is
responsible for providing air navigation  services in Canada.  In addition,  all
major Canadian airports are operated by local Canadian airport  authorities that
are also 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. Air Canada's management cannot predict if or when such
proposed legislation will be re-introduced in the House of Commons.

      On April 27, 2004, the Government of Canada amended the Canadian  Computer
Reservation Systems (CRS) Regulations adopted under the Aeronautics Act (Canada)
to lessen the  regulatory  requirements  and place  greater  reliance  on market
forces in the  distribution  system that will result in 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 May 4, 2006, 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), was tabled for first reading in the House of

<PAGE>
                                      -8-


Commons.  It passed third  reading on February 28, 2007 and was tabled for first
reading in the Senate on March 1, 2007. Bill C-11 seeks,  among other things, to
amend the CTA with  respect to the air  transportation  sector,  in  relation to
complaints  processes,  the  advertising  of  prices  for air  services  and 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.  Air Canada's management cannot predict
if or when such proposed legislation will enter into force.

      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.  Air  Canada's
management  cannot predict if or when such proposed  legislation will enter into
force.


TRANSBORDER SERVICES

      In February 1995, a new air services agreement (the "1995 Canada-U.S.  Air
Services  Agreement")  was  implemented  between  Canada and the United  States,
replacing  the  previous   bilateral   agreement,   which  had  imposed  greater
restrictions  on market  access and fares.  This  agreement  gave  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, continued to be prohibited.

      Under the 1995 Canada-U.S.  Air Services  Agreement,  rules governing fare
levels and the  requirement  to file  tariffs  (excluding  rules  tariffs)  with
government  authorities were eliminated.  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 U.S.  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. As a result, Air Canada increased its code-sharing
with certain Star Alliance(R) partners via Canada and the United States and some
of  these  Star  Alliance(R)  partners'  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.  The
Open Skies  Agreement was initially  expected to come into force on September 1,
2006, but was delayed due to the then pending  immunity  application  filed with
the  U.S.  Department  of  Transportation  by some  Star  Alliance(R)  carriers,
including Air Canada. The final order from the U.S. Department of Transportation
concerning  the immunity  application  was issued on February 13, 2007. The Open
Skies  Agreement  came into force on March 12,  2007.  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 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  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

<PAGE>
                                      -9-


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 February 2001, the Minister of Transport  launched an international air
services policy review to address competition in the international  markets with
the objective of liberalizing  Canada's policy for scheduled  international  air
services,  including how Canada approaches the negotiation and management of air
traffic rights with other 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.
Under the new policy,  Canada will 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.  Air Canada provided its views on the new
policy expressing,  among other things,  that it fully supports a liberalization
based on the principle of balanced economic  opportunities  which yield mutually
beneficial commercial opportunities for carriers of both contracting states.

      Transport Canada has also engaged  stakeholders on key longer-term  issues
that are not part of the new policy such as the  exploration of a  comprehensive
Canada-European Union air transport agreement, a review of ownership and control
regimes of foreign air  carriers,  the movement  towards the creation of a North
American  aviation  market and the adoption of a  multilateral  approach to some
negotiations.  Air Canada provided its views on such  longer-term  issues during
the  consultation  period  following  the release of the  consultation  document
introducing the Blue Sky international air transportation policy.


CHARTER SERVICES

      Charter  operations  are  generally  not covered by bilateral  agreements,
although charter  services are covered under the 1995  Canada-U.S.  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.


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

<PAGE>
                                      -10-


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 it owns 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)  (the  "Bill  C-47"),  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 October 18, 2006, Bill
C-29,  An Act to amend the Air Canada  Public  Participation  Act (Canada)  (the
"Bill C-29") was tabled in the House of Commons.  Bill C-29 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.  Air Canada's
priority has been to ensure the safety and security of all  passengers  and crew
members on all flights. 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  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.

<PAGE>
                                      -11-


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 instill 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. On
April 27,  2006,  Bill  C-6,  An Act to amend  the  Aeronautics  Act and to make
consequential  amendments  to other Acts (Canada)  ("Bill C-6"),  was tabled for
first  reading in the House of Commons.  On  November  7, 2006,  Bill C-6 passed
second  reading  and  was  referred  to the  Standing  Committee  on  Transport,
Infrastructure  and Communities.  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. Air Canada's management cannot predict if or when such
proposed legislation will enter into force.

      Air Canada is in the process of implementing its safety management systems
in accordance with the recent amendments to the Canadian  Aviation  Regulations.
The President and Chief Executive Officer of Air Canada, Montie Brewer, has been
appointed  as the  executive  currently  accountable  for  Air  Canada's  safety
management system.


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.  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 specific purposes specified 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 law in Canada and elsewhere.


AEROPLAN


PRIVACY

      Aeroplan is subject to  applicable  privacy  laws.  Aeroplan has a privacy
policy which is designed to meet or exceed the  requirements of PIPEDA.  Quebec,
Alberta and British  Columbia also have private  sector  privacy  legislation in
force.  Aeroplan's  management  believes  that its privacy  policy and practices
comply with 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.

<PAGE>
                                      -12-


JAZZ


SAFETY INITIATIVES

      Jazz implemented a safety  management system in accordance with the recent
amendments  to the  Canadian  Aviation  Regulations.  The  President  and  Chief
Executive  Officer  of  Jazz,  Joseph  D.  Randell,  has been  appointed  as the
executive  currently  accountable for Jazz's safety management system and Jazz's
Director of Corporate Safety is responsible for the implementation of the safety
management   system.   Jazz  is  in  compliance  or  surpasses  all   regulatory
requirements.


PRIVACY

      Jazz  has a  privacy  policy  which  is  designed  to meet or  exceed  the
requirements of PIPEDA.  Jazz's management  believes that its privacy policy and
practices comply with the applicable law.


OTHERS

      For  additional  information  with respect to the  regulatory  environment
applicable to Jazz, please see the following sections: "Regulatory Environment -
Air  Canada  -  Domestic  Services",  "Regulatory  Environment  - Air  Canada  -
Transborder Services", "Regulatory Environment - Air Canada - Charter Services",
"Regulatory  Environment  - Air Canada - Official  Languages  Act",  "Regulatory
Environment - Air Canada - Security Initiatives", "Regulatory Environment - Jazz
- Safety Initiatives" and "Regulatory Environment - Air Canada - Privacy".


ACTS LP

      ACTS LP is certified by Transport Canada to perform  aircraft  maintenance
and related activities on aeronautical  products.  Transport Canada has recently
judged the safety  management system ("SMS") of ACTS LP to be in compliance with
the new SMS regulations affecting Canadian aviation services providers.  ACTS LP
is approved to perform work on U.S.  registered  aircraft under Federal Aviation
Regulation 43.17 and the Canadian U.S. Bi-lateral Airworthiness Agreement.  ACTS
LP also holds  certificates  from the European  Aviation  Safety  Agency and the
national  airworthiness  authorities of Trinidad & Tobago,  China,  Vietnam, and
Bermuda.  Aeroman,  operating under the regulating authority of El Salvador,  is
certified to perform maintenance and related activities on aeronautical products
governed by the regulating  authorities  of El Salvador,  Peru,  Bolivia,  Costa
Rica, Guatemala and the United States of America.



                  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  industries  and  competitive
environments of other ACE investments.


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.

      Over the past two 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 global  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

<PAGE>
                                      -13-


operational  model and product  offering,  low-cost carriers are able to operate
profitably while offering  substantially  lower fares 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,  where air  transportation is offered from a
local  airport  to a  central  airport  from  which  long-distance  flights  are
available.

      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 network  carriers  have had to  restructure  or are currently
restructuring  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 benefit  from their  competitive  advantages  in the global
marketplace.


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 3.2% from 1994 through 2004 and are expected to grow at
a compound annual rate of 3.0% from 2005 through 2009.

      Air Canada is Canada's largest domestic airline. Based on Official Airline
Guide ("OAG") data, during the period from January 1, 2006 to December 31, 2006,
Air Canada led the Canadian airline industry's  domestic scheduled capacity with
an estimated  market share of  approximately  60% as measured by Available  Seat
Miles.

      Jazz, Air Canada's regional affiliate,  is the largest regional airline in
Canada and Canada's  second  largest  airline  based on fleet size and number of
routes operated.  (See "Industry Overview and Competitive  Environment - Jazz").
WestJet  Airlines Ltd.  ("WestJet") is Canada's  third largest  airline based on
fleet size and  number of routes  operated.  CanJet  Airlines  discontinued  its
scheduled  passenger  services  on  September  10,  2006.  CanJet  Airlines  had
previously  provided  scheduled  passenger  services  to a  number  of  domestic
destinations,  with a particular focus on Eastern Canada. During the period from
January 1, 2006 to August 31, 2006, CanJet Airlines provided approximately 3% of
the Canadian airline  industry's  overall domestic  scheduled  capacity based on
Available Seat Miles. CanJet Airlines cited high fuel costs, rising landing fees
and  increases  in  competitive  capacity on its  primary  routes as the primary
reasons for its decision to discontinue its scheduled passenger services.


TRANSBORDER MARKET

      As of December  31,  2006,  there were 1,055 daily  scheduled  transborder
flights operated between Canada and the United States. 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 3.4% from 1994 to 2004 and are  expected  to grow at a
compound annual rate of 4.3% from 2005 to 2009.

      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.  Based on OAG data, during the period from January 1, 2006 to
December 31, 2006, Air Canada provided more transborder  scheduled capacity than
any other airline with an estimated market share of  approximately  38% based on
Available Seat Miles.  Competition in the  transborder

<PAGE>
                                      -14-


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,  2006,  Air  Canada,  together  with  Jazz,  serviced  46 U.S.  destinations
(including six seasonal  destinations) from Canada, while U.S. carriers serviced
31 U.S.  destinations  from  Canada.  In addition,  one U.S.  low cost  carrier,
Frontier Airlines, operates service from Denver to Calgary.

      Canadian  low-cost  carriers  also operate  transborder  services and have
expressed  an  intention  to expand  these  operations  in the  future.  WestJet
currently provides transborder services to 11 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 and, more recently, to Asian
destinations  via polar routes.  Toronto  Pearson  Airport offers over 495 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 210 daily departures, of which 9%
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 300  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 5.2%
from 1994 to 2004 and are  expected  to grow at a compound  annual  rate of 5.2%
from  2005 to  2009.  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 scheduled  international  carrier and has a
broad portfolio of  international  route rights.  Based on OAG data,  during the
period from  January 1, 2006 to December  31,  2006,  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 43% 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  Alliance(R),
oneworld(R)  and  SkyTeam(R)  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 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 and gasoline retailers.

      For each of Aeroplan's marketing services, Aeroplan expects competition to
remain intense in its market.  In addition,  competitors of the Aeroplan Program
may target its  Accumulation  Partners  (as  defined  in the  section  "Business
Overview - Aeroplan  -  Overview")  and  members  as well as draw  rewards  from
Aeroplan's  Redemption

<PAGE>
                                      -15-


Partners (as defined in the section "Business  Overview - Aeroplan - Overview").
Aeroplan's  ability to  generate  Gross  Billings  (as  defined  in the  section
"Business  Overview - Aeroplan -  Aeroplan's  Business  Model - Sale of Aeroplan
Miles and Marketing Services to Sales Partners") from its Accumulation  Partners
(as  defined in the  section  "Business  Overview - Aeroplan -  Overview")  will
depend on its ability to differentiate  itself through the products and services
it offers and the  attractiveness  of its  Aeroplan  Program to  consumers.  The
continued  attractiveness  of the Aeroplan  Program will depend in large part on
its ability to remain  affiliated with commercial  partners that are valuable to
consumers  and to offer  rewards  that are both  attainable  and  attractive  to
consumers.  For Aeroplan's database marketing services,  its ability to continue
to capture  detailed  transaction  data on  consumers  is critical to  providing
effective   customer   relationship   management   strategies   for   Aeroplan's
Accumulation Partners.


JAZZ

      As Canada's  only  nationwide  regional  airline and as the only  regional
carrier in Canada operating  regional jets, Jazz enjoys a unique position in the
Canadian regional airline market.

      Jazz's fleet is ten times  larger than that of the next  largest  Canadian
regional airline. All other carriers in the Canadian regional airline market are
smaller  operators  of  primarily  turboprop  aircraft,  most of  which  operate
aircraft  in  the  19  to  50  seat  range.  These  carriers  operate  primarily
independent  services,  flying in niche markets.  Few other regional airlines in
Canada  operate  under  capacity  purchase  agreements,  and  those  who do have
relationships  with Air Canada for  turboprop  aircraft with less than 19 seats.
All of these carriers are privately held or family-run companies.  None of these
carriers  approach the size and scope of operation of Jazz as their fleets range
from  one to 12  aircraft.  These  smaller  regional  carriers  include  Central
Mountain Air,  Hawkair,  Corporate  Express and Transwest Air in Western Canada;
Calm Air and Air  Creebec in Central  Canada;  Provincial  Airlines  in Atlantic
Canada;  and First Air, Air Norterra  and Air Inuit in Canada's  North.  WestJet
also competes with Air Canada on certain routes in Canada operated by Jazz.


ACTS LP

      The maintenance,  repair and overhaul  ("MRO") business in North,  Central
and South America  represents a market size of US$18 billion.  It is the largest
segment of the US$42 billion global MRO market.  Aircraft MRO services stem from
three primary customer sources (airlines, original equipment manufacturers,  and
other MRO providers).  The MRO industry's performance is predominantly dependent
on the airline  industry's  economic  performance,  although  applicable  safety
regulations  may require a given aircraft to undergo  periodic MRO regardless of
the aircraft's load factor.

      As airlines add capacity and increase traffic,  the MRO market is expected
to grow in parallel and as airline cost pressures continue to mount,  global MRO
outsourcing is expected to continue to grow. A 2006 Mercer Management Consulting
survey of 97 industry executives revealed that 85% of MRO providers expect their
revenues  to increase  during the next three  years.  Furthermore,  AeroStrategy
forecasts  world MRO  spending to increase  from US$41  billion in 2006 to US$58
billion in 2016.

      Going forward, successful full-service MRO providers will be ones that can
provide  `one-stop'  solutions for their customers.  Increasingly,  airlines and
leasing companies already prefer to deal with a single MRO provider that has the
expertise  required  to  manage  all of  their  MRO  work,  including  airframe,
component,  and engine repairs as well as  specialized  services.  However,  MRO
operators will continue to be under industry pressure to maintain effective cost
controls to bid competitively in a cost-sensitive marketplace.


                    THREE-YEAR SUMMARY: EVOLUTION OF BUSINESS


AIR CANADA'S CONSOLIDATED PLAN OF REORGANIZATION, COMPROMISE AND ARRANGEMENT

      On April 1, 2003,  Air Canada  obtained an initial  order from the Ontario
Superior  Court of Justice  providing  creditor  protection  under the CCAA. The
initial order was further amended by the Ontario  Superior Court  throughout the
CCAA  proceedings  based on motions  from Air Canada,  its  creditors  and other
interested  parties.  On April 1, 2003, Air Canada,  through Ernst & Young Inc.,
its Ontario Superior  Court-appointed  monitor,  also made a

<PAGE>
                                      -16-


concurrent  petition for recognition  and ancillary  relief under Section 304 of
the U.S.  Bankruptcy Code. The CCAA and U.S.  proceedings covered 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").  Aeroplan,  Touram Inc. and  Destina.ca  were not included in the
CCAA filing. These three subsidiaries  continued to deal with their creditors on
a normal basis, unaffected by the CCAA and U.S. proceedings.

      On September 30, 2004, Air Canada,  and the other 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,   real  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.

      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 Air Canada  Vacations),  which were  already
established  as  stand-alone  entities  under  Air  Canada,  became  stand-alone
entities under ACE, while ACTS Limited Partnership (the predecessor to ACTS LP),
AC Cargo LP and ACGHS LP 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 is 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

<PAGE>
                                      -17-


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 11 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 11
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 preemptive  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 27, 2007, the Cerberus  Affiliate held 9.8 million
Preferred Shares,  representing  78.4% of all outstanding  Preferred Shares. For
further details,  see  "Description of Capital  Structure -- Preferred Shares --
Preemptive Rights".


GECC LEASE RESTRUCTURING AND FINANCING

      In 2003 and 2004,  agreements were signed between GECC and Air Canada (the
"GECC Agreements") which provided for:

      o     the  restructuring  of existing  arrangements for 106 aircraft which
            included  lease  rate  reductions  on 47  aircraft,  termination  of
            obligations with respect to 20 parked aircraft,  the cancellation of
            four future aircraft lease  commitments and the restructuring of the
            overall obligations of six aircraft;

      o     exit  financing  totalling  approximately  US$681  million  in three
            tranches for use upon emergence from the CCAA proceedings.  The loan
            was repaid in full prior to maturity on April 6, 2005;

      o     a  financing  commitment  of up to  US$950  million  to be used  for
            acquisitions  of new regional jet aircraft.  On exit from CCAA,  the
            parties agreed to reduce the commitment to US$500 million; and

      o     the purchase  from GECC by Air Canada on  September  30, 2004 of two
            Boeing 747-400 Combi  aircraft  (which Air Canada was leasing at the
            time) for an aggregate  amount of $353 million.  The purchase  price
            was  paid for  with  $290  million  in cash  and the  issuance  of a
            limited-recourse loan

<PAGE>
                                      -18-


            in the  amount  of  US$50  million.  The two  Boeing  747-400  Combi
            aircraft  were  sold in  December  2004  and  January  2005  and the
            proceeds  from such sale were used to repay the US$50  million  loan
            from GECC.


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 $185 million was
outstanding as at January 31, 2007. 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.


ARRANGEMENTS WITH UNIONS


AIR CANADA

      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.  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  provide  that 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.  It is still  awaiting  the
arbitrator's  decision in respect of its flight attendants,  who are represented
by CUPE.  The CUPE  arbitration  award  decision is  expected  during the second
quarter of 2007. The wage increases  awarded or agreed upon range up to 2.6% per
year until 2009. In March 2007, Air Canada  concluded an agreement with both the
TGWU and Amicus,  which represent Air Canada's ground handling  employees in the
United Kingdom allowing Air Canada to keep certain ground handling activities at
London Heathrow Airport in-house. The agreement provides for a number of changes
to working practices for current employees as well as structural changes for the
future.  Under the agreement,  the existing defined benefit pension plan will be
closed  for newly  hired  employees,  which  will be  covered  by a new  defined
contribution pension plan.


JAZZ

      Jazz has completed wage re-opener  negotiation,  mediation and arbitration
with CAW and Teamsters  Canada,  while  negotiations with all of its unions with
the exception of CALDA,  the union  representing  Jazz's  dispatchers.  The wage
re-opener negotiations with CALDA are continuing.

<PAGE>
                                      -19-


CONTRACT RENEGOTIATION/REPUDIATION DURING CCAA

      During  the  restructuring  period,  Air Canada  reviewed  all of its real
estate  facilities,  resulting in the  elimination  of unused or  under-utilized
facilities and the  consolidation  of its operations to further reduce operating
costs.  In addition,  Air Canada  evaluated  all of its  contracts for goods and
services to identify  opportunities  to  consolidate  its supply base, to better
leverage its buying power, and to take advantage of the opportunity  represented
by the restructuring process to repudiate contracts that were unfavourable.

      In addition, Air Canada conducted extensive negotiations with its aircraft
lessors and financiers to restructure its aircraft  ownership and leasing costs.
Through these efforts,  Air Canada and Jazz achieved:  (i) reduced ownership and
leasing costs more consistent with then current market conditions, (ii) modified
lease  expiry  dates based on planned new aircraft  acquisitions  and  scheduled
heavy  maintenance   requirements,   and  (iii)  satisfactory   aircraft  return
conditions consistent with modified lease expiry dates.


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.  (See "Overview
of the Business - Air Canada Services - Aircraft Fleet - Narrowbody and Regional
Jet Aircraft Fleet - Embraer Orders and Financing Terms".)


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,   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.  ACE still holds 500,000  shares in US Airways  valued at US$23.3
million based on the closing price of such shares on the New York Stock Exchange
on March 27, 2007.


AIRCRAFT PURCHASE AGREEMENT BETWEEN THE BOEING COMPANY AND AIR CANADA

      On  November  4, 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  aircraft.  The  agreements  include firm orders for 18 Boeing 777
aircraft,  plus purchase  rights for an  additional 18 aircraft,  in a yet-to-be
determined mix of the 777

<PAGE>
                                      -20-


family's  newest models.  Deliveries of the Boeing 777 aircraft are scheduled to
commence in March 2007.  Seven of the firm  orders for Boeing 777  aircraft  are
expected to be delivered  in 2007,  nine  aircraft in 2008,  and two aircraft in
2009. The agreements  also include firm orders for 14 Boeing 787 aircraft,  plus
options and purchase  rights for an additional 46 aircraft.  Air Canada's  first
Boeing 787 aircraft is scheduled for delivery in 2010.


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
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. ACE held
as of March 27,  2007,  a direct and  indirect  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.


ACQUISITION BY ACTS LP OF MAJORITY STAKE OF AEROMAN

      On February  13,  2007,  ACTS LP  acquired  80% of Grupo  TACA's  aircraft
maintenance division, Aeroman. Total consideration for this acquisition includes
cash and a right to acquire an equity  stake in ACTS LP. The cash  component  of
US$44.7  million  consists of cash of US$42.7 million on closing and a milestone
payment of up to US$2 million,  funded by ACTS LP through ACE's  available  cash
resources. The size of the equity stake in ACTS LP will be confirmed at the time
of the monetization of ACTS LP, as described below, and is expected to represent
less than 7% of the total equity of ACTS LP at the time of  monetization.  Prior
to ACTS LP's  monetization,  Grupo

<PAGE>
                                      -21-


TACA can put its right to acquire equity back to ACE at a discounted  value from
US$40.4  million and accreting up to a cap of US$50.5  million over 12 months or
the date of monetization, if earlier.


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 were entitled to receive  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.
Following this  distribution,  ACE held as of March 27, 2007, a 40.1%  ownership
interest  in  Aeroplan  Limited  Partnership  indirectly  through its holding of
Aeroplan Income Fund units and a 58.8% interest in Jazz Air Limited Partnership,
directly and indirectly.


POTENTIAL MONETIZATION OF ACTS LP

      After conducting a strategic review,  ACE has determined that the value of
the ACTS LP market  position  and  growth  prospects  could be  enhanced  by the
introduction of a third party  investor.  The  monetization  process of ACTS LP,
which commenced in late 2006, is expected to be completed by mid-2007.

<PAGE>
                                      -22-


                            OVERVIEW OF THE BUSINESS

      ACE  is an  investment  holding  company  of  various  aviation  interests
including Air Canada,  Aeroplan  Limited  Partnership,  Jazz Air LP, ACTS LP and
other investments.

                                    [Graphic Omitted]


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 LP, together with Air Canada, is Canada's largest provider of air
cargo services.

      ACGHS LP is a passenger and ground handling service provider.

      Air Canada  Vacations is a major Canadian tour operator  offering  leisure
vacation.  51% of its units are held by Air Canada and 49% of its units are held
by ACE.

      (See "Overview of the Business - Air Canada Services").


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
"Overview of the Business - Aeroplan").

<PAGE>
                                      -23-


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 "Overview of the Business - Jazz").


ACTS LP

      ACTS  LP is a  full-service  aircraft  maintenance,  repair  and  overhaul
organization  that competes on a global basis.  (See "Overview of the Business -
ACTS LP").


EMPLOYEES

      ACE has eight employees that constitute the management team of ACE.


STRATEGY

      As part of the Plan, a new  corporate  structure was  established  for the
investments of ACE. This new corporate structure is 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; (c) the initial public  offering and secondary  public
offering of Air Canada on November 24, 2006; and (d) a potential monetization of
ACTS LP.

<PAGE>
                                      -24-


BUSINESS OF ACE

      ACE's  investments  are operated  through four  reportable  segments which
include: (i) Air Canada services;  (ii) Aeroplan;  (iii) Jazz; and (iv) ACTS LP.
ACE has eight  employees.  The table  below  sets forth the  relative  financial
results of each segment for the year ended December 31, 2006:

<TABLE>
<CAPTION>
                                    ------------------------------------------------------------------------------------------
                                                                    YEAR ENDED DECEMBER 31, 2006
                                    ------------------------------------------------------------------------------------------
                                                                            (in millions)

                                     AIR CANADA
                                      SERVICES       AEROPLAN(1)     JAZZ(2)        ACTS LP          CIE (3)      CONSOLIDATED
                                    ------------    ------------   ------------   ------------    ------------    ------------
<S>                                       <C>                <C>              <C>          <C>            <C>           <C>
Operating Revenue
 Passenger Revenue ................ $      8,887               -              -              -    $         82    $      8,969
 Cargo Revenue ....................          625               -              -              -               -             625
 Other Revenue ....................          558             759              7            228            (489)          1,063
                                    ------------    ------------   ------------   ------------    ------------    ------------
External Revenue ..................       10,070             759              7            228            (407)         10,657
Inter-segment Revenue .............          169              10          1,374            627          (2,180)              -
                                    ------------    ------------   ------------   ------------    ------------    ------------
....................................       10,239             769          1,381            855          (2,587)         10,657
Special charge for Aeroplan Miles .         (102)              -              -              -               -            (102)
                                    ------------    ------------   ------------   ------------    ------------    ------------
Total Revenue(4) ..................       10,137             769          1,381            855          (2,587)         10,555
Operating Expenses(5) .............       10,023             629          1,237            857          (2,586)         10,160
                                    ------------    ------------   ------------   ------------    ------------    ------------
Operating Income .................. $        114    $        140   $        144   $         (2)   $         (1)   $        395
                                    ============    ============   ============   ============    ============    ============
</TABLE>

-------------


(1)  ACE held a 75.3% ownership interest in Aeroplan as at December 31, 2006 and
     currently holds a 40.1% ownership interest in Aeroplan,  indirectly through
     its holdings of units of Aeroplan Income Fund.
(2)  Includes Jazz's operations under the capacity  purchase  agreement with Air
     Canada. ACE held a 79.7% ownership interest in Jazz as at December 31, 2006
     and  currently  holds a 58.8%  ownership  interest  in  Jazz,  directly  or
     indirectly through holding units of Jazz Air Income Fund.
(3)  Corporate Items and Eliminations ("CIE") includes the corporate,  financing
     and investing  activities of ACE. 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 LP (completed  contract for engine and component
     maintenance  services)  versus the  expense  recognition  in Air Canada and
     Jazz, which is as the work is completed.
(4)  Total revenue  includes a special charge of $102 million in connection with
     Air Canada's obligation for the redemption of pre-2002 Aeroplan miles.
(5)  Operating expenses include a special charge for labour restructuring of $25
     million.


                               AIR CANADA SERVICES


ROUTES AND SCHEDULES

      Air  Canada  operates,   on  average,   approximately  580  average  daily
departures to 15  destinations  in Canada,  31 destinations in the United States
and   56   destinations   in   the   Canada-Europe,    Canada-Pacific,   Canada-
Caribbean/Central   America  and   Canada/South   America   markets.   Domestic,
transborder  and  international   departures  account  for  50%,  33%  and  17%,
respectively,  of the approximately  580 average daily departures.  Air Canada's
current route network extends to 40 countries and territories.

      Air Canada,  together with Jazz,  operates on average  approximately 1,300
scheduled  flights each day and carries over 32 million  passengers  annually in
the domestic,  transborder and international markets. Air Canada,  together with
Jazz,  provides  direct  passenger  service  to 161  destinations  and,  through
commercial   agreements  with  other  unaffiliated   regional  airlines,  to  an
additional  15  destinations,  for a total of 176  direct  destinations  on five
continents.

<PAGE>
                                      -25-


      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, 2006,  Air Canada  operated on average 182 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,
2006,  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, 2006, Air Canada operated on average 58
daily departures from Montreal.  Calgary  International  Airport is Air Canada's
fourth largest hub. For the year ended December 31, 2006, Air Canada operated on
average 39 daily departures from Calgary.

Domestic Services

      As of December  31, 2006,  Air Canada,  together  with Jazz,  provides the
largest network and most extensive  product  offering in Canada,  with scheduled
direct  passenger  service  to 59  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 several short-haul  commuter 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.

      Unaffiliated  regional  carriers  replace Jazz in markets not sufficiently
large enough to be served  directly.  As of December 31,  2006,  these  airlines
operate  flights under Air Canada's  designator  code and provide  service to an
additional  eight domestic  destinations  under  commercial  agreements with Air
Canada. Air Canada does not own equity interests in any of these carriers.

      Following  CanJet  Airlines'  announcement  to  discontinue  its scheduled
passenger services on September 10, 2006, Air Canada,  together with Jazz, added
flights and larger  aircraft to serve  Eastern  Canada on an as-needed  basis in
September  2006 and increased  capacity,  as measured by ASMs, by 16% in Eastern
Canada during the period starting from October 1, 2006 to December 31, 2006.

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 serves 46 U.S. destinations (including six seasonal destinations) as of
December 31, 2006. Air Canada's network reach is also increased by its extensive
connections to, and code-sharing flights with, United Airlines,  one of its Star
Alliance(R) partners.

      During March 2007,  Air Canada  significantly  increased the number of its
flights from Canada to leisure destinations such as Florida,  California and Las
Vegas. Air Canada added 31 more non-stop flights per week to Florida for a total
of 184 weekly flights. In addition, Air Canada flew 10 more non-stop flights per
week to  California  for a total of 143 weekly  flights.  Air Canada  also added
eight  more  non-stop  flights  per week to Las  Vegas  for a total of 52 weekly
flights. This total increase in flights represents a 15 % increase in the number
of seats  offered  by Air  Canada on routes  between  Canada  and these  leisure
destinations compared to last winter.

International Services

      Air  Canada  is  uniquely   positioned  as  Canada's   largest   scheduled
international  airline.  As at December 31, 2006, Air Canada provided  scheduled
service directly to 56 destinations in Europe, the Middle East, Asia, Australia,
the Caribbean/Central America and South America.

<PAGE>
                                      -26-


      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 is planning to operate 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.

      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 and  Shanghai),  Hong Kong (out of Vancouver and Toronto) and
Korea  (Vancouver  and Toronto to Seoul).  In the summer of 2007,  a key area of
capacity  growth for the  Corporation  is  expected  to be China.  Air Canada is
planning to  increase  capacity  by 50% to China,  based on ASMs.  Air Canada is
planning to increase  its non-stop  flights  from  Vancouver to Beijing from one
daily  flight to two daily  flights.  In  addition,  Air Canada is  planning  to
increase its non-stop  flights from Toronto to Shanghai.  During the peak summer
period,  Air Canada is planning to operate five daily non-stop  flights  between
Canada and China.

      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. For its March 2007 schedule, Air Canada added 22 more non-stop
flights  per week from  Canada to Mexico  for a total of 59 weekly  flights  and
introduced  five more non-stop  flights from Canada to the Caribbean for a total
of 104 weekly flights.


AIRCRAFT FLEET

Fleet Structure Simplification and Fleet Renewal

      The fleet  structure  simplification  which began in October 2004 includes
the  elimination of older,  less efficient  aircraft which are not  economically
viable in the new market  environment  and the  increased  utilization  in North
America of new large  Embraer and  Bombardier  regional jet aircraft  which have
lower trip costs and are well suited for  point-to-point  flying.  Air  Canada's
fleet  renewal  program  will  provide cost  efficiencies;  the Embraer  ERJ-190
aircraft  generates 18% lower trip costs as compared to the Airbus 319 aircraft.
These new aircraft are integral to Air Canada's North American  strategy,  which
involves offering high flight frequency on key domestic and transborder  routes,
while  maintaining  competitive  frequency  on other  domestic  and  transborder
routes.  The use of regional jet aircraft also allows Air Canada to better match
capacity with demand by reducing the average seating capacity per departure, and
supports  the  more  efficient  use of  Air  Canada's  network  and  hubs,  This
initiative  will result in Air Canada,  together with Jazz,  having added 90 new
regional jet aircraft to their fleet by January 2008.

      In order to support its business  strategy and deliver a superior aircraft
product in its international markets, Air Canada is scheduled to start receiving
19 Boeing  777  aircraft  beginning  in March  2007 and 14 Boeing  787  aircraft
beginning in 2010. All of the new aircraft will be used to modernize and re-size
the fleet, improve passenger load factors and yields, and reduce operating costs
through  fuel  efficiencies.  The Boeing  aircraft  offer  superior  comfort and
operating  economics  through  greater  fuel  efficiency  and  maintenance  cost
savings.  Air Canada estimates that the fuel usage and maintenance  costs of the
Boeing  787  aircraft  will be  approximately  30% less than that of the  Boeing
767-300  aircraft.  The Boeing 787  aircraft  also  feature  better  operational
performance  in terms of speed and flight  range and provide Air Canada with the
ability to serve new markets that could not be previously served in an efficient
manner.  The fleet  structure  simplification  is also  focused on reducing  the
number of aircraft types in order to reduce the costs related to maintenance and
pilot training.

Refurbishment of Existing Aircraft

      In  addition  to  acquiring  new  aircraft,  Air Canada  commenced a major
refurbishment  of the  interior of its existing  aircraft in 2006.  All existing
aircraft,  except for the Airbus A340 aircraft, will have refurbished interiors,
including  new seats and personal  in-flight  entertainment  systems and in-seat
power outlets at every seat in Economy

<PAGE>
                                      -27-


Class and  Executive  Class.  For  aircraft  that  will be flying  international
routes, seats in the Executive Class cabin will also convert into lie-flat beds.
The new Boeing and Embraer  aircraft are being  delivered with the new seats and
in-flight  entertainment  systems already  installed.  As of March 27, 2007, Air
Canada has completed the  refurbishment of 20 Airbus A320 aircraft,  five Boeing
767-300  aircraft  and two Airbus  A319  aircraft.  The  aircraft  refurbishment
process is scheduled to be completed by the middle of 2008.


WIDEBODY AIRCRAFT FLEET

Current Fleet of Widebody Aircraft

      As at  December  31,  2006,  Air  Canada's  operating  widebody  fleet was
comprised of 64 aircraft,  each configured in two classes of service:  Executive
First  or  Executive  Class,  and  Economy  Class.  The  Airbus  A340-300  is  a
four-engine  286-seat  aircraft  that  serves  Air  Canada's  trans-Pacific  and
trans-Atlantic  routes.  The Airbus  A330-300  aircraft,  with 274  seats,  is a
twin-engine  variant of the Airbus  A340-300  aircraft that Air Canada  operates
mainly  on  trans-  Atlantic  routes.  The  Boeing  767-300  ER is a  long-range
203-222-seat aircraft used mainly on international routes. The Boeing 767-200 is
a 207-seat aircraft used on domestic and international routes.

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  aircraft.
The agreements  include firm orders for 18 Boeing 777 aircraft and 14 Boeing 787
aircraft  and  options  and  purchase  rights  for an  additional  18 Boeing 777
aircraft and 46 Boeing 787 aircraft. In addition,  Air Canada has entered into a
10-year lease agreement with International  Lease Finance  Corporation  ("ILFC")
for one Boeing  777-300ER  aircraft,  which is  scheduled to be delivered in May
2007.

      As a result,  Air Canada is  scheduled  to start  receiving  19 Boeing 777
aircraft,  beginning  in March 2007,  and 14 Boeing 787  aircraft,  beginning in
2010.  Air Canada  plans to take  delivery of five Boeing  777-300ERs  and three
Boeing  777-200LRs in 2007 and six Boeing 777-300ERs and three Boeing 777-200LRs
in 2008. The two Boeing 777-200F aircraft scheduled to be delivered in 2009 have
been converted into two Boeing 777 passenger aircraft,  the models of which have
yet to be  confirmed.  The 14 Boeing 787 aircraft are  scheduled to be delivered
during 2010 and 2011.

      The  operating   costs  of  the  Boeing  777  and  787  aircraft  will  be
significantly  lower  than the  operating  costs of the  aircraft  they  will be
replacing.  A Boeing  777-200LR  aircraft  uses on average 11% less fuel than an
Airbus A340-500 aircraft. Maintenance costs for the Boeing 777 aircraft are also
lower than the Airbus A340  aircraft as the Boeing 777  aircraft has two engines
to maintain  while the Airbus A340 has four engines.  Air Canada  estimates that
the  fuel  usage  and  maintenance  costs of the  Boeing  787  aircraft  will be
approximately  30% less than that of the Boeing  767-300  aircraft  they will be
replacing.  The Boeing 787 aircraft also feature better operational  performance
with  respect to speed and flight  range and will  provide  Air Canada  with the
ability to serve new markets  that cannot  currently  be served in an  efficient
manner. As a result of the new committed Boeing 777 and 787 aircraft, Air Canada
expects to eventually  remove from  operation 10 Airbus A340 aircraft as well as
most of its Boeing 767-200 aircraft.

      Air Canada has received  financing  commitments from Boeing and the engine
manufacturer  covering all firm  aircraft  orders for  approximately  90% of the
capital  expenditure,  with the remainder to be funded from internally available
resources.  Air Canada is evaluating  financing  arrangement for the first seven
Boeing 777 aircraft deliveries in 2007.

<PAGE>
                                      -28-


NARROWBODY AND REGIONAL JET AIRCRAFT FLEET

Current Fleet of Narrowbody and Regional Jet Aircraft

      As at December 31, 2006,  Air Canada  operated  135  narrowbody  aircraft,
including 102 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 offers 120
seats and is essentially a shortened  version of the Airbus A320 aircraft,  with
the same engines, operating systems and flight deck. The twin-engine Airbus A321
is the largest  narrowbody  aircraft in the Airbus family,  with 166 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.  As of March 13, 2007, Air Canada has taken delivery of all 15
Embraer  ERJ-175  aircraft and 20 Embraer  ERJ-190  aircraft.  An  additional 25
Embraer  ERJ-190  aircraft  are  currently  scheduled to be delivered by January
2008,  for a total  Embraer  fleet of 60  aircraft.  The  Embraer  aircraft  are
introduced in Air Canada's fleet both for growth and replacement of a portion of
Air Canada's  older Airbus A319 and A320  aircraft.  As of the date hereof,  Air
Canada has rights to exercise  options for up to 43 additional  Embraer  ERJ-190
aircraft. The purchase agreement also allows Air Canada to convert its orders to
other Embraer models.

      Air Canada  received loans from a syndicate of banks and the  manufacturer
covering  approximately  80% of the  capital  expenditure  of the  first 18 firm
Embraer ERJ-190  aircraft,  all of which were delivered as at December 31, 2006.
Air Canada has also  received  loan  commitments  from a third  party and from a
syndicate of banks covering  approximately 80% of the capital expenditure of the
remaining 27 firm Embraer  ERJ-190  aircraft  deliveries.  The  remainder of the
capital  expenditures  is  expected  to  be  funded  from  internally  available
resources.

<PAGE>
                                      -29-


CURRENT AND PLANNED OPERATING FLEET

      Air  Canada's  operating  fleet as at  December  31,  2006 and the planned
operating fleets for 2007 to 2008 are shown below:

<TABLE>
<CAPTION>
                                                                                       PLANNED
                                                                                      OPERATING
                                                                                    AIRCRAFT BASED
                                                                                      ON FUTURE
                                   NUMBER OF          PLANNED          PLANNED        COMMITTED
                                   OPERATING         OPERATING        OPERATING      AIRCRAFT NET
                                 AIRCRAFT AS AT    AIRCRAFT AS AT   AIRCRAFT AS AT   OF PROJECTED
                                   DECEMBER 31,     DECEMBER 31,     DECEMBER 31,      AIRCRAFT
                                      2006             2007             2008          REMOVALS(5)
                                 --------------   --------------   --------------   --------------
<S>                                         <C>              <C>              <C>              <C>
WIDEBODY AIRCRAFT
Airbus A340-300                              10                5                0               --
Airbus A340-500                               2                2                2                2
Airbus A330-300                               8                8                8                8
Boeing 767-300 ER                            33               32               29               25
Boeing 767-200/200ER                         11                9                8                2
Boeing 777-200LR(1 )                          0                3                6                6
Boeing 777-300ER(1) (2)                       0                5               11               13
Boeing 787(1)                                 0                0                0               14
                                 --------------   --------------   --------------   --------------
   TOTAL WIDEBODY AIRCRAFT                   64               64               64               70

NARROWBODY AIRCRAFT
Airbus A321                                  10               10               10               10
Airbus A320                                  47               42               42               42
Airbus A319                                  45               35               35               35
Embraer ERJ-190(3)                           18               43               45               45
Embraer ERJ-175                              15               15               15               15
                                 --------------   --------------   --------------   --------------
   TOTAL NARROWBODY AIRCRAFT                135              135              147              147

   TOTAL OPERATING AIRCRAFT(4)              199              209              211              217
                                 ==============   ==============   ==============   ==============
</TABLE>

------------
(1)   The  following  aircraft are  scheduled to be  delivered  after 2008:  two
      Boeing 777 are  scheduled  to be  delivered  in 2009 and 14 Boeing 787 are
      scheduled to be delivered in 2010 and 2011.  In December 2006 and February
      2007,  Air Canada  exercised its  conversion  rights to convert two Boeing
      777-200F  aircraft  into two Boeing 777 passenger  aircraft,  the model of
      which have yet to be confirmed.
(2)   Air Canada has entered into a 10-year  lease  agreement  with ILFC for one
      Boeing 777-300ER aircraft, which is scheduled to be delivered in May 2007.
(3)   The  deliveries  of  45  Embraer  ERJ-190  aircraft  are  scheduled  to be
      completed by January 2008.
(4)   In addition to operating aircraft, as at December 31, 2006, Air Canada had
      11 widebody aircraft and 20 narrowbody aircraft that were parked.
(5)   These aircraft changes are expected to be completed by 2011.

FUEL

      Aircraft  fuel is a major  expense  in the  airline  industry.  During the
period from  January 1, 2006 to December 31,  2006,  the price of Western  Texas
Intermediate  ("WTI")  crude  oil  ranged  from a low of  US$55.86  to a high of
US$76.95.  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 2006  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  2006 fuel  expense by  approximately  C$27  million or US$24
million (excluding the impact of fuel surcharges and fuel hedging).

      In order to manage the  airline's  exposure to the  volatility of jet fuel
prices,  the Corporation  has hedged a portion of its 2007  anticipated jet fuel
requirements using mostly swap and collar option structures.  The swap structure
allows the  Corporation to fix jet fuel price at a specific  level,  whereas the
collar  option  structure  creates a

<PAGE>
                                      -30-


ceiling and a floor price,  allowing the  Corporation  to protect itself against
prices above the ceiling but exposing the  Corporation to the floor if the price
falls below the floor.  As at December 31, 2006, the  Corporation had 39% of its
fuel requirement for 2007 hedged at prices that can fluctuate between an average
of US$74 to US$85 per barrel for its heating oil-based contracts,  an average of
US$58 to US$69 per barrel for its WTI crude  oil-based  contracts and an average
of US$81 to US$85 for jet-fuel  based  contracts.  Since  December 31, 2006, the
Corporation  has  entered  into  new  hedging  positions,  using  collar  option
structures,  which have added 5% coverage to 2007  increasing  the total  hedged
volume for 2007 to 44%, as well as an  additional  1%  coverage  to 2008.  As at
March 20,  2007,  for 2007,  the  Corporation  has  hedged  its  projected  fuel
requirements  as follows:  57% for the first quarter of 2007, 44% for the second
quarter  of 2007,  36% for the  third  quarter  of 2007  and 39% for the  fourth
quarter of 2007.


STAR ALLIANCE(R)

      Air  Canada is a  founding  member of the Star  Alliance(R)  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  Alliance(R)  network has grown to
include as of February  2007 the  following  17  airlines:  Air Canada,  Air New
Zealand, All Nippon Airways, Asiana Airlines, Austrian Airlines, bmi, LOT Polish
Airlines,  Lufthansa,  SAS, Singapore Airlines, South African Airways,  Spanair,
Swiss International  Airlines, Thai Airways, US Airways, United Airlines and TAP
Portugal.  The Star  Alliance(R)  network also includes three regional  members:
Adria Airways, Blue 1 and Croatia Airlines.

      As  of  March  2007,   through  Air  Canada's   strategic  and  commercial
arrangements  with Star  Alliance(R)  members and several  other  airlines,  Air
Canada's  customers have access to over 855 destinations in 155 countries,  with
reciprocal  participation in frequent flyer programs and use of airport lounges.
The Star  Alliance(R)  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 Alliance(R)  members,  except US Airways,  TAP Portugal,  South African
Airways and the three regional  members.  In August 2005,  the Star  Alliance(R)
implemented an electronic interline ticketing service which enables customers to
travel  across the entire Star  Alliance(R)  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 LP,  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 uses two chartered all
freighter aircraft for Canada-Europe and Canada-Asia services.

      Air Canada's primary  customers for these cargo services are large freight
forwarding companies and businesses whose products are most effectively marketed
by using air cargo  services.  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 Jazz
destinations  in North America.  AC Cargo LP, 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 routes on which
Air Canada offers cargo services are Canada-Germany, Canada-China, Canada-United
Kingdom and Canada-Japan. The new Boeing 777 aircraft ordered by Air Canada will
provide further  opportunities for growth of the cargo services on international
routes as these new aircraft offer more cargo capacity than the Airbus  aircraft
they will be replacing.

      Air Canada's  cargo terminal at Toronto  Pearson  Airport is equipped with
modern cargo handling technology to ensure efficient cargo handling and meet 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,  United  Airlines and Northwest  Airlines,  in
co-operation  with Unisys,  are the founding

<PAGE>
                                      -31-


members of the Cargo Portal Service introduced in 2003.  Endorsed by key freight
forwarders  globally and their industry  associations,  this portal represents a
one-stop-shop  web tool for air cargo shipping  requirements by offering a large
number of services on a growing number of major air carriers.


GROUND HANDLING SERVICES

      Air  Canada  provides  Ground  Handling  Services  to  numerous  airlines,
including major foreign airlines at Canadian and international  airports.  These
services include passenger check-in, gate management, baggage and cargo handling
and processing, as well as aircraft ramp services.


AIR CANADA VACATIONS

      ACE holds a 49% interest and Air Canada holds a 51% interest in Air Canada
Vacations,  a tour operator  which also conducts  business  under the trade name
Touram.  Air Canada  Vacations is the fourth  largest  Canadian  tour  operator,
offering  a variety  of leisure  vacation  package  options  which  include  air
transportation  supplied by Air Canada and its Star Alliance(R) partners,  hotel
accommodation,  cruises,  Aeroplan  miles and  airport  transfer/car  rentals to
popular  destinations  for Canadians in the Caribbean,  Asia,  Central and South
America and the United  States,  including  Las Vegas,  Florida and Hawaii.  Air
Canada Vacations also sells surplus seat inventory to travel agencies. This part
of the  business  is  conducted  through  its  national  consolidator  division,
Netair(R).

      Approximately  77% of  vacation  packages  currently  sold  by Air  Canada
Vacations  are from Canada to  destinations  in the  Caribbean  and Mexico.  Air
Canada Vacations has recently  introduced new packages from Canada to Europe. It
also plans on  introducing  inbound  vacation  programs  from Europe and Asia to
North America with the intent of eventually  offering  packages for vacations to
and from most of Air Canada's foreign destinations.


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, 2006:

<TABLE>
<CAPTION>
                                                                      APPROX.
 PRINCIPAL PROPERTIES                      DESCRIPTION            SQUARE FOOTAGE              NATURE OF TITLE
---------------------------         --------------------------    --------------       -------------------------------
<S>                                 <C>                                <C>             <C>
Montreal -- Air Canada              Head office and training             272,000       Owned facilities on leased land
Centre                              facilities
Air Canada Headquarters
Montreal Trudeau Airport            Offices, computer centre,          1,858,000       Owned facilities on leased land
Maintenance Base                    aircraft maintenance,
                                    hangars, workshops and
                                    training facilities
Toronto Pearson Airport             Counters, offices, passenger         266,000       Leased
                                    and baggage handling
                                    facilities and commuter
                                    terminal
Toronto Pearson Airport             Offices, simulator, hangars        1,106,207       Owned facilities on leased land
Maintenance Base                    and workshops
Toronto -- Cargo Facility           Offices, cargo and equipment         426,000       Leased
                                    maintenance facilities
Vancouver -- Technical              Offices, hangars, shops and        1,076,000       Owned facilities on leased land
Operations Centre                   simulator
Vancouver -- South Hangar           Offices, hangars, shops,             250,000       Owned facilities on leased land
                                    stores
Calgary International Airport       Hangar, commissary, ground           234,000       Owned facilities on leased land
                                    support equipment and
                                    warehouse
Winnipeg -- Air Canada              Offices and computer centre          392,000       Leased facilities on owned land
Building
Winnipeg Airport                    Offices, aircraft maintenance        300,000       Owned facilities on leased land
Maintenance Base                    hangars and workshops
</TABLE>

<PAGE>
                                      -32-


      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.  Most of the  hangar  space  and  aircraft
maintenance facilities in Montreal,  Vancouver,  Winnipeg and Toronto are leased
or subleased by Air Canada to ACTS LP at market terms.


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
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 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.  These  measures  will come into force for  international
flights as of June 4,  2007.  Air Canada  had  proactively  implemented  similar
procedures since the events of September 11, 2001.

      Air Canada  continues to work with the  appropriate  authorities to ensure
full compliance with regulatory  requirements,  including new programs that will
affect the airline industry:

      o     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.

      o     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 U.S.  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.

      o     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 entered into by Air Canada dated April 6, 2005 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 27, 2007, there was no amount drawn under the Amended Credit Facility. The
total  amount  available  for  borrowing  under the Amended  Credit  Facility is

<PAGE>
                                      -33-


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 LP are also eligible for inclusion in the borrowing  base
if AC Cargo LP  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  Lenders 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.

      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(R),   Air  Canada  Jazz(R),   Jazz(TM),   Air  Canada
Vacations(R),  Vacances Air Canada(R),  Executive First(R),  Executive Class(R),
Expedair(R), AC Expedair(TM),  AC Priority(TM), AC Air Freight(TM), AC Lynx(TM),
Hospitality  Service(R),  Service Hospitalite(R),  Rapidair(R),  Maple Leaf(TM),
Feuille d'Erable(TM), AC WEBSAVER(TM),  Super Elite(TM) and Super Elite(TM). Air
Canada has  granted  Aeroplan LP a license to use Air  Canada(R)  and Air Canada
Roundel(R)  trademarks  around the world solely in association with the Aeroplan
program.  Air  Canada  protects  its  proprietary  information,   including  its
trademarks and database,  through  trademark  laws,  contractual  provisions and
confidentiality  procedures.  Employees,  service  providers  and  partners  are
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, 2006,  Air Canada had  23,101(3)  full-time  equivalent
("FTE")  employees.  The  following  table  provides a breakdown of Air Canada's
average FTE employees  for the fourth  quarter of 2006 and 2005 and for the full
year 2006 and 2005 together with the unions that represent them.


<TABLE>
<CAPTION>
                                                       FOURTH     FOURTH
                                                       QUARTER    QUARTER
EMPLOYEE GROUP                         UNION(1)         2006       2005       2006       2005
------------------------------         -------         -------    -------    -------    -------
<S>                                     <C>              <C>        <C>        <C>        <C>
Management and Administrative
  Support(3)                            N/A(2)           3,017      3,504      3,191      3,410
Pilots                                  ACPA             2,708      2,541      2,625      2,546
Flight Attendants                       CUPE             5,985      6,011      6,062      6,167
Customer Sales and Service Agents(3)    CAW/IBT          3,650      3,975      3,767      3,962
Technical Services, Ramp and Cargo(3)   IAMAW            6,812      6,924      6,812      6,766
United Kingdom Unionized Employees      Amicus/TGWU        697        682        691        704
Other Unionized                                            478        479        482        488
                                                       -------    -------    -------    -------
AIR CANADA SERVICES                                     23,347     24,116     23,630     24,043
</TABLE>


<PAGE>
                                      -34-


--------------
(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 853 FTE employees as
     at December 31, 2006 and 852 FTE  employees as at December 31, 2005.  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 has
     agreed to reimburse  Air Canada on a  fully-allocated  basis for all costs,
     including salary and benefits,  related to a group of unionized and a group
     of non-unionized  employees currently working for the benefit of ACTS. Such
     groups  represented  3,923 FTE  employees as at December 31, 2006 and 4,063
     FTE employees as at December 31, 2005.  These employees are not included in
     the numbers  presented  above.  On March 6, 2007, ACTS LP announced that it
     would permanently  reduce 700 jobs at its Vancouver facility because of the
     early  termination of its contract with Delta Air Lines for  maintenance of
     the Delta Air Lines' Boeing 767 aircraft.

      Air Canada has long-term 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 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. It is
still awaiting the  arbitrator's  decision in respect of its flight  attendants,
who are  represented  by CUPE. The CUPE  arbitration  award decision is expected
during the second  quarter of 2007.  The wage  increases  awarded or agreed upon
range up to 2.6% per year until 2009.

      In 2006,  Air Canada  continued to reduce its  workforce of  non-unionized
employees.  As part of a decision to proceed with the reduction of non-unionized
staffing levels by 20% in order to further enhance  efficiencies  and in view of
the  difficult  fuel cost  environment,  Air Canada has  implemented a workforce
reduction  program for this employee group. As of March 27, 2007,  approximately
78% of the planned non-unionized workforce reductions had been completed.


                                    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"),  Bell  Canada,  Canadian  Imperial  Bank of  Commerce
("CIBC"),  Imperial Oil (Esso), Star Alliance member airlines and numerous hotel
chains and car rental companies.

      Aeroplan offers its approximately  five million 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). In 2006, approximately 70 billion
Aeroplan Miles were  accumulated by members  representing  an equivalent of over
$50 billion in consumer spending to earn these Aeroplan Miles. 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
by Aeroplan's redemption partners ("Redemption  Partners").  Upon the redemption
of  Aeroplan  Miles by its  members,  Aeroplan  incurs the cost to  acquire  the
desired reward.

<PAGE>
                                      -35-


         The following charts illustrate the number of Aeroplan Miles issued and
redeemed on an annual  basis for the last five years.  In  addition,  the charts
include Aeroplan Miles that were earned by members prior to January 1, 2002, for
which the  responsibility  to provide air rewards  remains with Air Canada up to
112.4 billion Aeroplan Miles.

      ANNUAL NUMBER OF                             ANNUAL NUMBER OF
    AEROPLAN MILES ISSUED                      AEROPLAN MILES REDEEMED

                                             Issued by Air Canada pre 2002

  2002        55.6 billion                   2002         4.8 billion
  2003        53.8 billion                   2003        18.2 billion
  2004        58.2 billion                   2004        29.3 billion
  2005        62.6 billion                   2005        40.4 billion
  2006        69.7 billion                   2006        49.3 billion

                                             Issued by Air Canada post 2002

                                             2002        36.7 billion
                                             2003        24.8 billion
                                             2004        16.4 billion
                                             2005        11.8 billion
                                             2006         8.5 billion

                [Numerical Representations of Graphic Displays]


For the year ended  December  31, 2006,  Aeroplan  generated  Gross  Billings of
$851.9 million.  Aeroplan's top three Accumulation Partners were responsible for
91% of Gross Billings for the year ended 2006.

The following  chart  illustrates  Gross Billings  generated by Aeroplan for the
years ended December 31, 2002, 2003, 2004, 2005 and 2006.

                                 GROSS BILLINGS

                    2002         $596.1 million
                    2003         $624.8 million
                    2004         $692.3 million
                    2005         $754.8 million
                    2006         $851.9 million

                  [Numerical Representation of Graphic Display]


      Reported amounts for Aeroplan's total revenue for the years ended December
31, 2002, 2003, 2004, 2005 and 2006, were $195.8 million, $380.1 million, $518.0
million, $639.9 million and $769.4 million,  respectively. In addition, reported
amounts for Aeroplan's  operating  income for the years ended December 31, 2002,
2003,  2004, 2005 and 2006, were $14.7 million,  $84.0 million,  $100.5 million,
$101.9 million and $140.5 million, respectively. The following charts illustrate
Aeroplan's  total revenue and operating  income for the years ended December 31,

<PAGE>
                                      -36-


2002,  2003,  2004,  2005 and 2006 and the  increasing  impact  over time of the
higher  proportion of Aeroplan Miles issued and redeemed by Aeroplan on or after
January 1, 2002.

       TOTAL REVENUE                                OPERATING INCOME

  2002      $195.8 million                      2002        $ 14.7 million
  2003      $380.1 million                      2003        $ 84.0 million
  2004      $518.0 million                      2004        $100.5 million
  2005      $639.9 million                      2005        $101.9 million
  2006      $769.4 million                      2006        $140.5 million

                 [Numerical Representation of Graphic Displays]

      Reported  amounts  for  Aeroplan's  net income  (loss) for the years ended
December 31, 2002,  2003,  2004,  2005 and 2006,  were  ($22.2)  million,  $80.2
million, $100.8 million, $100.3 million, and $143.5 million,  respectively.  The
following  chart  illustrates  Aeroplan's  net income (loss) for the years ended
December 31, 2002, 2003, 2004, 2005 and 2006.

                                NET INCOME (LOSS)

                    2002        -$ 22.2 million
                    2003         $ 80.2 million
                    2004         $100.8 million
                    2005         $100.3 million
                    2006         $143.5 million

                 [Numerical Representation of Graphic Display]

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  implemented the initiatives described
below.


IMPROVING MEMBER SERVICES

      Between 2005 and 2006 calls handled at Aeroplan's contact centres remained
flat on a year-to-year  basis with 3.6 million calls being processed.  From 2005
to 2006, however,  the average transaction time for calls handled at the contact
centres was reduced by 6%, from 10.5 minutes per call to 9.9 minutes.

<PAGE>
                                      -37-


      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 Flight
Rewards  were also  introduced  online in 2006.  Since  May 2002,  Aeroplan  has
experienced  growth  in the  adoption  and use of its  website  which  currently
accounts  for  about 50% of air  travel  bookings  and about 55% of all  rewards
booked (including non-air rewards).

              PERCENTAGE OF ONLINE AIR BOOKINGS FOR SELECTED MONTHS

                          January 2002             8%
                          December 2002           16%
                          December 2003           28%
                          December 2004           31%
                          December 2005           41%
                          December 2006           50%

                  [Numerical Representation of Graphic Display]

      In  addition  to  the   development   of  its  contact   centres  and  the
www.aeroplan.com   Internet  site,   Aeroplan  also  has  an  interactive  voice
recognition  system to  facilitate  members'  access to  customer  services.  In
December  2005,  Aeroplan  introduced  an automated  speech  platform to improve
self-service  functionality which was progressively  implemented throughout 2006
and is  expected  to be fully  deployed in 2007.  These  complementary  channels
provide Aeroplan with an effective,  multiple channel distribution strategy that
offers its members a variety of options when redeeming  rewards at significantly
lower operating costs for the Company.


INCREASING REVENUE 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(R) program.


ACQUIRING ADDITIONAL CAPACITY FROM AIR CANADA

      Prior to 2004,  Air Canada  allocated 8% 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
Flight 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  Flight  Rewards offer improved  flexibility  for
reward travel,  complementing  Aeroplan's  existing

<PAGE>
                                      -38-


ClassicFlight and exclusive Star Alliance Flight Rewards.  Together,  Aeroplan's
flight  products   provide  global  reward  travel  options  to  more  than  850
destinations.

      ClassicPlus Flight Rewards effectively replaced the Avenue Rewards product
launched in April 2004. The existing  ClassicFlight Rewards have not changed and
continue to be a core element of Aeroplan's value proposition to members.  These
rewards will  continue to  represent 8% of Air Canada and Jazz seat  capacity on
every route, every month. ClassicPlus Flight 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 Flight Rewards, all capacity available over and above the
8%  ClassicFlight  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  Flight 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 CONSUMER PRODUCTS AND SERVICES PARTNERS

      Over the last three years,  Aeroplan  actively  pursued  opportunities  to
increase its partner base with the objective of further expanding its sources of
revenue. Aeroplan signed major, nationally recognized retail brand name partners
such as Bell Canada and  Imperial  Oil (Esso) and in 2006 signed Home  Hardware.
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 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.


DIVERSIFYING REWARD PORTFOLIO

      In 2006, 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 400 such rewards to members for
redemption.  By the end of 2006, the reward  portfolio had expanded to include a
wide  range  of  brand  name  merchandise,  gift  cards  from  over 20  national
retailers, unique experiential rewards, and the launch of Aeroplan pre-paid gift
cards powered by AMEX in eight different  categories.  Aeroplan's online booking
engine was further  expanded to include car rental  rewards  from  National  Car
Rental and hotel  rewards from Best  Western,  the world's  largest hotel chain.
Member  response has been  consistently  positive to the  increasing  choice and
value that non-air rewards provide.


LAUNCHING A NEW BRAND IDENTITY

      Aeroplan  redesigned its brand strategy and commissioned the creation of a
new brand  identity in late 2003.  Two principal  factors  emerged as drivers of
this initiative:  (i) the needs of the large non-frequent flyer member base, and
(ii) the  requirements  for  branding  in the  emerging  consumer  products  and
services sector of Aeroplan's business. In 2004, Aeroplan launched its new brand
identity through its first mass media campaign. Aeroplan's new logo was an award
winner for  innovation,  being included in the 2004 Design Annual edition of the
prestigious United States based Communication Arts magazine.  Aeroplan initiated
a second  major mass media  campaign  in late 2006 that  featured  the new brand
identity in support of the launch of ClassicPlus Flight Rewards.

<PAGE>
                                      -39-


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 card, 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  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.
Prior to 2004,  Breakage was estimated to be 19% of the Aeroplan Miles sold. 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
estimated life of an Aeroplan Mile, currently 30 months.

      Aeroplan's  management  believes  that  the  issuance  and  redemption  of
Aeroplan Miles are  influenced by the nature and volume of Commercial  Partners,
the types 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, 2006,  Aeroplan had
approximately  $1.5 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  Cost liability is  periodically  reevaluated
using the average 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.

<PAGE>
                                      -40-


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 the Company'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  Alliance  carriers,  the  reward  portfolio
included  worldwide  car and hotel  rewards,  a broad  selection  of brand  name
merchandise and unique experiential rewards.

      On October 16, 2006, in order to improve reward travel choices and provide
greater flexibility to make travel arrangements, Aeroplan introduced ClassicPlus
Flight Rewards,  which offer Aeroplan members  unrestricted  access to available
seat  inventory  across the entire Air Canada and Jazz  networks in both Economy
and Executive Class.  ClassicPlus  Flight Rewards offer  significantly  improved
flexibility for reward travel,  complementing  Aeroplan's existing ClassicFlight
and exclusive Star Alliance Flight Rewards. Together, Aeroplan's flight products
provide global reward travel options to more than 850 destinations.

      ClassicPlus Flight Rewards effectively replaced the Avenue Rewards product
launched in April 2004. The existing  ClassicFlight  Rewards has not changed and
continue to be a core element of Aeroplan's value proposition to members.  These
rewards will  continue to  represent 8% of Air Canada and Jazz seat  capacity on
every route, every month. ClassicPlus Flight 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 Flight Rewards, all capacity available over and above the
8%  ClassicFlight  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  Flight 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.

      In 2006, 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 400 such rewards to members for
redemption.  By year end,  the reward  portfolio  had expanded to include a wide
range of brand name  merchandise,  gift cards from over 20  national  retailers,
unique  experiential  rewards,  and the launch of Aeroplan  pre-paid  gift cards
powered by AMEX in eight different categories.  Aeroplan's online booking engine
was further  expanded to include car rental rewards from National Car Rental and
hotel  rewards  from Best  Western,  the world's  largest  hotel  chain.  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  90% of all rewards claimed by Aeroplan members in 2006.  Aeroplan
issued nearly ten million air travel  rewards over the last ten years,  and over
1.4 million in 2006 alone.


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  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:

      o     credit and charge cards;

      o     airlines; and

<PAGE>
                                      -41-


      o     others.

      The charts below  illustrate Gross Billings in 2005 and 2006 from the sale
of Aeroplan Miles by category.

   2005 GROSS BILLINGS                               2006 GROSS BILLINGS

Credit and Charge Cards  62%                    Credit and Charge Cards  62%
Airlines                 32%                    Airlines                 33%
Others                    6%                    Others                    5%

                 [Numerical Representations of Graphic Displays]

CREDIT AND CHARGE CARDS

      Overall,  the credit and charge card category  accounted for approximately
62% of  total  Gross  Billings  in 2006  from  the  sale of  Aeroplan  Miles  to
Aeroplan's three partners in this sector: CIBC, AMEX and MBNA America Bank, N.A.
("MBNA").

CIBC

      Pursuant to the CIBC Agreement,  CIBC  administers  various Visa and other
products  through which Aeroplan  members can accumulate  Aeroplan Miles through
their credit card and other  spending.  In  exchange,  Aeroplan  receives  Gross
Billings for the Aeroplan Miles credited to participating CIBC Visa cardholders'
accounts  based on the value of the  purchases  charged  to such cards and other
products  purchased.  Members  accumulate  Aeroplan Miles based upon an earnings
ratio  specific to the  particular  type of card or other  product for purchases
charged to such card or amounts spent on other products.  The CIBC Agreement has
a term in excess of five years with renewal provisions.

      Aeroplan's  association with CIBC started in late 1991, with the launch of
the CIBC Aerogold Visa card.  Throughout this long-standing  relationship,  many
card   innovations   have  been   implemented,   enriching  the  portfolio  with
complementary  products  such as CIBC  Aerogold  Visa card for Business and CIBC
AeroCorporate  Visa card for business spending.  Each  CIBC/Aeroplan  co-branded
Visa card offers a unique set of features and benefits.

AMEX

      Pursuant to the AMEX Agreement,  AMEX administers various American Express
products  through which Aeroplan  members can accumulate  Aeroplan Miles through
their card spending.  In exchange,  Aeroplan  receives  revenue for the Aeroplan
Miles credited to participating AMEX cardholders' accounts based on the value of
the purchases charged to such cards. Cardholders accumulate Aeroplan Miles based
upon an earnings  ratio  specific to

<PAGE>
                                      -42-


the  particular  type of card  for  purchases  charged  to such  card.  The AMEX
Agreement has a term in excess of five years with renewal provisions.

      AMEX   currently   offers  three  card   products  for   consumers:   AMEX
AeroplanPlus,  AMEX AeroplanPlus Gold and AMEX AeroplanPlus Platinum.  AMEX also
offers the AMEX AeroplanPlus  Corporate card. Each AMEX card offers a unique set
of features and benefits.

      In  addition,  AMEX  operates  its own points  program  called  Membership
Rewards(R)  that allows  certaiN  participants  to convert  points into Aeroplan
Miles.

MBNA

      On May 15, 2002,  Aeroplan entered into an agreement with MBNA pursuant to
which MBNA agreed to offer jointly  branded  Mastercard  credit card products to
Aeroplan  members who are residents of the United States to allow those Aeroplan
members to  accumulate  Aeroplan  Miles  through  their  credit  card  spending.
Cardholders  accumulate  Aeroplan Miles based upon an earnings ratio specific to
the particular card for purchases charged to such card.


AIRLINES

      The  airline  category  accounted  for  approximately  33% of total  Gross
Billings  in  2006  from  the  sale  of  Aeroplan  Miles  and  is  comprised  of
approximately 20 partners, including airlines, most notably Air Canada, Jazz and
other Star Alliance member airlines.

Air Canada

      Air Canada,  Canada's  largest  domestic  and  international  full-service
airline,  is one of Aeroplan's leading  Accumulation  Partners purchasing a high
volume of Aeroplan Miles annually for the purpose of awarding  Aeroplan Miles to
its  customers.  Aeroplan  members can  accumulate  Aeroplan Miles for travel on
flights operated by Air Canada and Jazz.

Star Alliance

      Aeroplan  members  can  accumulate  Aeroplan  Miles for  travel on flights
operated  by many of the  Star  Alliance  member  airlines.  The  Star  Alliance
network,  the  world's  largest  airline  alliance  group,  has grown  since its
inception  in 1997 to include the  following  17  airlines:  Air Canada,  United
Airlines,  Lufthansa,  SAS, Thai Airways,  Air New Zealand,  All Nippon Airways,
Austrian Airlines,  Singapore Airlines,  British Midland, Asiana Airlines, Swiss
International,  Spanair,  South African Airways, LOT Polish Airlines, US Airways
and TAP Air Portugal.  The Star Alliance  network also includes  three  regional
members: Blue 1 (Finland), Adria Airways and Croatia Airlines.


OTHERS

      This category  accounted for  approximately  5% of Gross  Billings in 2006
from the sale of loyalty marketing services, including Aeroplan Miles.

Cars and Hotels

      Many of the leading Canadian and internationally recognized car rental and
hotel companies have joined the Aeroplan Program.  Aeroplan's broad-reaching car
rental and hotel partner  network  provides its members with the  opportunity to
accumulate Aeroplan Miles at a variety of partner locations and also the benefit
of being recognized as an Aeroplan Program member when they travel  domestically
and internationally.

Consumer Products and Services

      The consumer products and services sector is the newest sector to be added
to the Aeroplan Program.

<PAGE>
                                      -43-


      Aeroplan's  top two  partners in this sector  based on Gross  Billings are
currently Bell Canada and Imperial Oil (Esso). Bell Canada provides wireline and
wireless  communications  services,  Internet  access,  data  services and video
services to  residential  and  business  customers.  Pursuant to a  Canada-wide,
multi-year  relationship entered into in October 2004, Aeroplan members can also
accumulate  Aeroplan  Miles on  purchases  of eligible  products  and  services,
including  fuel,  car washes  and  convenience  items,  at  approximately  2,000
Imperial Oil (Esso) branded retail outlets.

      During  2006  Aeroplan  continued  to  implement  its retail and  consumer
products  strategy  by: (i)  signing Sun Life  Financial,  ING,  Home  Hardware,
Uniprix,  and XM  Radio  as  Accumulation  Partners,  (ii)  signing  promotional
partnerships  with Costco,  Pepsi-QTG and Chrysler,  and (iii) initiating a home
moving services program under the name of AeromoveTM.

      Aeroplan is making  progress in  negotiating  and signing on  Accumulation
Partners in consumer  products  and  services;  however,  this process is taking
longer than originally anticipated.


MEMBERS


MEMBERSHIP

      Aeroplan   currently  has  approximately   five  million  active  members,
consisting of those members who have completed at least one transaction  (either
accumulating or redeeming an Aeroplan Mile) during the last three years.

      Starting  January 1, 2007, 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.

      From July 1, 2007 forward,  the terms of the mileage expiry policy will be
changed to require  members to transact  with the  program,  through  either one
accumulation or one redemption,  at least once in a consecutive 12-month period,
failing which accumulated Aeroplan Miles in the account will be expired.

      Aeroplan anticipates that as a result of this change to its mileage expiry
policy, the number of its active members will be reduced.


COMMUNICATIONS TO MEMBERS

      Regular communication with individual members through newsletters, monthly
statements  and  periodic  special  mailings is a  cornerstone  of the  Aeroplan
Program.  Subsequent  to the  completion  of a  study  in 2003  and  2004 on the
effectiveness  of its  member  communications,  Aeroplan's  portfolio  of member
communications and its list of strategic suppliers were revised in 2005 to offer
members more choice in channels, more flexible tools and increased potential for
highly  targeted and relevant  messages.  The  evolution  of  Aeroplan's  member
communication  continued in 2006 with the implementation of automated  marketing
management  tools  which  increased   Aeroplan's  capacity  to  accommodate  the
communication  needs of its growing list of  Commercial  Partners.  In addition,
both on-line and off-line  communication  vehicles were  re-designed in 2006 for
deployment  in 2007 in order to be  better  positioned  to  leverage  Aeroplan's
segmentation models and increased campaign management effectiveness.

      Over two million members now receive statements and other information from
Aeroplan by electronic mail.


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

<PAGE>
                                      -44-


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- 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.


OPERATIONS


MEMBER SEGMENTATION AND DATA ANALYSIS

      Aeroplan develops member segmentation models using its members' purchasing
behaviour  data. The current model  identifies  different  categories of members
based on key behavioural  indicators  including  flying  patterns,  accumulation
sources and rate, tenure in the Aeroplan Program, and other factors.  Aeroplan's
communications  with its members  have become more  relevant and  meaningful  to
members, and the information emerging from the model drives such communications.
Aeroplan's  capacity to provide targeted  communications  presents a value-added
marketing  tool to its commercial  partners at competitive  rates to alternative
mass media.

      The  objectives  of  such  targeted  communication  are:  (i) to  increase
members' spending and accumulation of Aeroplan Miles with different Accumulation
Partners,  (ii) to  accelerate  the  activation  of new  members,  and  (iii) to
maximize the retention of members in the Aeroplan  Program by encouraging  their
active   participation  in  the  Aeroplan   Program  through   accumulation  and
redemption.

      All  Accumulation  Partners  are given  communications  access to targeted
members through Aeroplan's member  communications,  including direct mail, email
and  new  member   fulfillment   materials,   and   Aeroplan's   Internet   site
www.aeroplan.com. Aeroplan has specialized marketing planning expertise for each
of the major industry sectors in which it has significant Accumulation Partners.
Aeroplan  also  offers   dedicated  and  coalition   marketing   promotions  for
Accumulation  Partners  which  often  take  the form of  multi-channel  national
campaigns,  including point-of-sale promotions,  national advertising and direct
marketing.


MEMBER SERVICING AND DISTRIBUTION

      Prior to 2002,  Aeroplan  rewards  were  exclusively  distributed  through
contact centres. Since then, other channels have been developed and distribution
is now handled through a combination of contact centres and Aeroplan's  Internet
site www.aeroplan.com. In December 2005, Aeroplan began introducing an automated
speech platform to improve  self-service  functionality  which was progressively
implemented  throughout 2006 and is expected to be fully deployed in 2007. These
channels  provide Aeroplan with an effective  distribution  strategy that offers
its members a variety of options when redeeming rewards.

      Contact Centre  Operations.  There are two Aeroplan contact  centres,  one
located in Vancouver and the other in Montreal.  The contact centres are staffed
by a skilled workforce who receive extensive  training upon joining Aeroplan and
on an ongoing basis. The Vancouver and Montreal contact centres are staffed with
approximately 530 and 300 full-time equivalent agents, respectively. The centres
are  managed  by a team of  contact  centre  managers  who are  accountable  for
performance and continued productivity improvements.

      The centres  handle  approximately  3.8 million calls per year,  which are
primarily for booking air reward redemptions.  Agents' knowledge of the Aeroplan
Program  allows  them to guide and advise  members  on how best to  utilize  the
Aeroplan  Program.  In addition,  the contact centres provide product support by
answering  member  queries  and  provide   administrative  support  for  product
fulfillment, including ticketing and account crediting.

      Aeroplan's  Website.aeroplan.com.  Aeroplan's website, first introduced in
2002,  now accounts for about 50% of all air travel  rewards issued by Aeroplan.
It also  accounts  for all non-air  travel  rewards  issued.  Over the last

<PAGE>
                                      -45-


four years, major investments in Aeroplan's  Internet site have allowed Aeroplan
to offer a self-service  alternative to members,  to optimize  communications to
members,  and to lower overall costs.  In 2006,  Aeroplan  implemented  the next
phase of development of its Internet site, introducing enhanced user experience,
a state-of-the-art booking engine with shopping cart functionality and increased
on-line booking functionality.  The number of visits to aeroplan.com was over 20
million in 2006.


SYSTEMS AND INFRASTRUCTURE

      Aeroplan's  technology  organization  consists of skilled individuals with
strong business knowledge. While project management,  systems analysis, strategy
and architecture functions are performed internally, Aeroplan relies on external
technology partners to perform systems operations and applications  development.
All systems and  infrastructure are designed to safeguard and protect Aeroplan's
members' data from unauthorized access, use or disclosure.

      Direct  Marketing  (DM)  System.  Aeroplan's  core system is where  member
profile  information  and  transactional  data is managed  and  stored.  Data is
exchanged   electronically  through  a  set  of  predefined  solutions  to  suit
Aeroplan's partners' requirements.  Connectivity to DM can be batch or real-time
allowing access to up-to-the minute  information.  The DM system was designed by
Aeroplan,  providing it with a competitive advantage. The system has the ability
to host multiple loyalty programs.

      Business    Intelligence   (BI)   Infrastructure.    Aeroplan's   business
intelligence system was implemented in 2004 and uses industry leading analytical
tools.  It  features  three  components  providing  Aeroplan  and  its  partners
significant strategic benefits:

      o     highly   sophisticated   analytical   software  enabling  predictive
            modeling and trend analysis;

      o     on-line campaign management; and

      o     enterprise and partner self-service  reporting,  including daily and
            monthly  accumulation  reporting for financial  purposes and partner
            verification.

      Telephony.  The telephone system used by Aeroplan is a highly advanced and
integrated system.  Together with its call forecasting and workforce  management
system,  it maximizes  use of resources  available at the Vancouver and Montreal
contact centres.


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:

      o     an affiliation with the strong Air Canada brand;

      o     Aeroplan's role as Air Canada's exclusive loyalty marketing provider
            based in Canada;

      o     attractive  rates  for  seat  capacity  on the Air  Canada  and Jazz
            networks  based  on  Aeroplan's   status  as  Air  Canada's  largest
            customer; and

      o     access to Air Canada's  passengers for the purposes of acquiring new
            Aeroplan members.

      Aeroplan  is a party  to the  following  five  major  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 and October 13, 2006 ("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.

<PAGE>
                                      -46-


LOGOS AND TRADEMARKS

      Aeroplan's  management  believes that its  trademarks are important to its
competitive  position.  AeroplanTM,   AeroplanTM,  Aeroplan  DesignTM,  Aeroplan
DesignTM, AeroCorporateTM,  AeroEntrepriseTM,  Aeroplan PlusTM, AerogoldTM, Aero
OrTM and  AeromoveTM  are  registered  trademarks  owned by  Aeroplan in Canada.
Aeroplan  also  owns  additional  trademarks  in  connection  with  its  loyalty
marketing business.  Air Canada has granted Aeroplan LP a license to use the Air
CanadaTM  and Air  Canada  RoundelTM  trademarks  around  the  world  solely  in
association  with the Aeroplan  Program.  The Fund has been granted a license to
use  the  AeroplanTM,   AeroplanTM,  Aeroplan  DesignTM  and  Aeroplan  DesignTM
trademarks in Canada.

      Aeroplan's  intangible  assets  are an  important  part  of its  business.
Aeroplan  benefits from the goodwill  established  for the Aeroplan  brand name.
Aeroplan  protects its  proprietary  information,  including its  trademarks and
database,  through trademark laws,  contractual  provisions and  confidentiality
procedures. Employees, service providers and partners are contractually bound to
protect Aeroplan's proprietary information in order to control access to and the
distribution of any such information.


DEBT FINANCING

      On June 29, 2005,  concurrent  with the closing of Aeroplan  Income Fund's
initial public offering, Aeroplan entered into a credit agreement ("Aeroplan New
Credit Facilities")  comprising of a $300 million (or the U.S. dollar equivalent
thereof) term A facility  ("Aeroplan Term Facility"),  a $100 million (or the US
dollar equivalent  thereof) term B facility ("Aeroplan  Acquisition  Facility"),
and a $75 million  (or the U.S.  dollar  equivalent  thereof)  revolving  credit
facility ("Aeroplan Revolving Facility").

      The Aeroplan New Credit  Facilities are provided by a syndicate of lenders
("Aeroplan  Lenders") with the Royal Bank of Canada acting as the administrative
agent. Each of the Aeroplan Term Facility and the Aeroplan  Acquisition Facility
have a four year term and mature on June 29, 2009, or earlier,  at the option of
Aeroplan. The three year term of the Aeroplan Revolving Facility was extended in
2006 and now matures on June 29, 2009, instead of June 29, 2008.

      The term of the  Aeroplan  Revolving  Facility may be extended at Aeroplan
LP's option for additional  one-year  periods on each anniversary of the closing
of the initial public  offering,  subject to prior approval by Aeroplan  Lenders
holding  no less  than two  thirds of the total  commitment  under the  Aeroplan
Revolving Facility. Non-consenting Aeroplan Lenders are allowed to withdraw from
the Aeroplan  Revolving Facility at the maturity date.  Non-consenting  Aeroplan
Lenders may be replaced by other  lenders,  failing  which the amount  available
under the  Aeroplan  Revolving  Facility  may be  reduced.  All of the  Aeroplan
Lenders  consented  to the said June 29,  2009  extension  to the term under the
Aeroplan Revolving Facility.

      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.

      On the  closing of the initial  public  offering,  $300  million was drawn
under the  Aeroplan  Term  Facility,  and as at December  31,  2006,  the amount
outstanding  under the  Aeroplan  Term  Facility  remains  $300  million.  As at
December  31,  2006,  no  amounts  were  drawn  under the  Aeroplan  Acquisition
Facility.  An amount of $18 million was drawn  under the  Revolving  Facility on
June 29, 2005,  concurrent with the closing of the initial public offering,

<PAGE>
                                      -47-


for general and working  capital  purposes and repaid in September  2005.  As at
December 31, 2006, no amounts were drawn under the Revolving Facility.

      The New Credit  Facilities are secured by substantially all of the present
and future assets of Aeroplan,  subject to a priority  guarantee granted jointly
and  severally by Aeroplan in favour of First Data Loan  Company,  Canada.  This
priority guarantee arises in connection with a merchant services agreement dated
September  30,  2004  entered  into  with  First  Data Loan  Company,  Canada by
Aeroplan,  Air Canada and other ACE  investments.  Aeroplan's  maximum  exposure
under this  guarantee  as at December  31, 2006 and December 31, 2005 was $205.2
million and $155.2 million, respectively.

      Aeroplan's  obligations  in respect of the New Credit  Facilities are also
guaranteed  by  Aeroplan  Trust.  As  security  for its  guarantee  obligations,
Aeroplan  Trust  provided a first  ranking  security over all of its present and
future  assets,  including  a first  ranking  pledge of all  securities  held by
Aeroplan in Aeroplan and Aeroplan Holding GP Inc., subject to certain exclusions
and permitted liens.

      The Aeroplan New Credit Facilities contain customary  representations  and
warranties and are subject to customary terms and conditions (including negative
covenants,  financial and other  covenants and events of default) for borrowings
of this nature, including limitations on paying distributions.

      The terms of the Aeroplan New Credit Facilities  include certain covenants
limiting the aggregate  amount of distributions by Aeroplan to holders of record
of units of Aeroplan during any twelve-month period from exceeding the aggregate
distributable cash of Aeroplan during such period. Distributions by Aeroplan are
also prohibited upon the occurrence and continuance of an event of default under
the Aeroplan New Credit Facilities.


OTHER


FACILITIES

      Aeroplan  is party to two  real  estate  leases  with Air  Canada  for the
following  premises:  (i) 40,902 square feet of office space and contact centres
located  at the  Vancouver  International  Airport  at  6001  Grant  McConachie,
Richmond,  British  Columbia,  and (ii) 11,255 square feet of office space at 50
Bay Street, Toronto,  Ontario.  Aeroplan previously rented 91,476 square feet of
office  space  and  contact  centres  from  Air  Canada  at 5100 de  Maisonneuve
Boulevard West,  Montreal,  Quebec.  In 2006, Air Canada sold its real estate at
5100 de  Maisonneuve  Boulevard  West and since the date of sale,  the lease has
been between Aeroplan and the purchaser of the property.

      All of such  leases are at market  rates for  five-year  terms  commencing
January 1, 2004 with certain renewal and expansion rights.


ENVIRONMENTAL

      Aeroplan's  operations  do  not  create  environmental  consequences,  and
Aeroplan has not identified any existing or potential  environmental  hazards at
any of its leased facilities, nor has it received any inquiry or notice that has
resulted,  or may  reasonably  be  expected  to result in,  actual or  potential
proceedings, claims, lawsuits or losses related to environmental liabilities.


EMPLOYEES

      Aeroplan  has  offices  in   Montreal,   Vancouver   and   Toronto,   with
approximately 830 full-time  equivalent  contact centre agents and approximately
250 management employees.

      The Montreal offices serve as Aeroplan's headquarters and house one of its
contact centres,  with  approximately  300 full-time  equivalent  contact centre
agents. Aeroplan's Vancouver offices house Aeroplan's second contact centre with
approximately 530 full-time equivalent contact centre agents. The Toronto office
serves as Aeroplan's base for commercial development of the Aeroplan Program.

<PAGE>
                                      -48-


      The contact centre agents are currently employees of Air Canada. Access to
such  employees is provided to Aeroplan  pursuant to the Aeroplan GSA. While the
contact  centre  agents are covered by the terms and  conditions of a collective
agreement  between Air Canada and the CAW effective  August 7, 2003 and expiring
on May 31, 2009, Aeroplan supervises this sub-set of the larger bargaining unit.

      Management  resources  across  Aeroplan  are  primarily   concentrated  on
commercial functions (marketing,  Commercial Partner and business  development),
comprising  over 30% of the  management  employees.  Contact  centre  management
represents the next largest group with approximately 30%, followed by technology
and other corporate functions at approximately 20% and 15%, respectively.


                                      JAZZ


OVERVIEW

      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.
During 2006,  Jazz provided  approximately  720 average  daily  departures to 59
destinations in Canada and 31 destinations in the United States.  At peak demand
periods in 2006,  Jazz completed  scheduled  passenger  service on behalf of Air
Canada with  approximately  856  departures  per weekday to 56  destinations  in
Canada and 29  destinations  in the United  States with a fleet of 135 aircraft.
Domestic  departures  account for approximately  77% and transborder  departures
account for approximately 23%.

      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.

      Jazz's business model was transformed upon the emergence of Air Canada and
Jazz  Air  Inc.,  a  corporation  incorporated  under  the  laws of  Canada  and
liquidated   as  of  September   30,  2004  from  the  CCAA  by  virtue  of  the
implementation of significant cost reductions,  the introduction of new regional
jet aircraft and the entering into of the capacity  purchase  agreement  between
Air Canada and Jazz Air Limited Partnership (the "Successor  Partnership") which
was in effect from October 1, 2004 until December 31, 2005 ("Initial CPA").

      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. During the period from October 1,
2004 to December 31, 2006, 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

<PAGE>
                                      -49-


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 60% of Jazz's total costs for the year ended December
31,  2006.  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  40% of Jazz's  total costs for the year ended
December 31, 2006. Jazz's management believes that the CPA is beneficial to Jazz
as it reduces financial and operating risk and results in a more stable business
model than its previous pro-rate revenue sharing agreement.


INTEGRAL PART OF AIR CANADA'S STRATEGY

      Jazz's  operations form an essential part of Air Canada's network strategy
and Jazz's  management  believes  that they are integral to Air Canada's  future
growth.  Air Canada is Canada's  largest  airline,  with an extensive  domestic,
transborder and international  mainline  network.  Jazz complements Air Canada's
operations by feeding  passengers  to the mainline  service and by allowing more
frequent and  competitive  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.  The  complementary  nature of the
relationship  is  evidenced  by  the  fact  that  approximately  34%  of  Jazz's
passengers connect to or from an Air Canada flight.  These passengers connect to
Air Canada's extensive domestic, transborder and international network, which is
further enhanced by Air Canada's membership in the long-standing Star AllianceTM
network, the world's largest airline alliance group.

      Jazz's  management  estimates that during the year 2006, Jazz  contributed
approximately 37% of Jazz and Air Canada's combined domestic  scheduled capacity
and approximately 27% of the combined transborder scheduled capacity of Jazz and
Air Canada based on the number of airline seats available. Jazz's regional jets'
operational capabilities allow it to profitably service markets that do not have
enough passenger traffic to support Air Canada's mainline jet service.  In turn,
Jazz benefits from Air Canada's strong brand, marketing and product distribution
expertise as well as the fact that Air Canada handles all reservation and ticket
sales through its reservations system. In addition, Jazz passengers benefit from
the  AeroplanTM  program  and  other  amenities  made  available  to Air  Canada
passengers.


LEADING MARKET POSITION IN THE CANADIAN REGIONAL AIRLINE INDUSTRY

      Through its affiliation with Air Canada,  Jazz serves more destinations in
Canada than any other airline.  At peak demand periods in 2006, Jazz operates up
to 856 departures per weekday to 56  destinations  in Canada and 29 destinations
in the United States. Jazz's management believes that the scope and diversity of
Jazz's  coverage area is a  significant  competitive  advantage.  Being the only
pan-Canadian  regional airline, Jazz can shift capacity across regions as demand
dictates.

      Of the 105 North American destinations served by Air Canada and Jazz as of
December 31, 2006, 90 (or approximately 86%) of such destinations were served by
Jazz and Jazz was the sole  provider at 59 (or  approximately  56%) of these 105
destinations. As of December 31, 2006, Jazz was the sole operator of aircraft of
37 seats or greater at 18 airports.  Furthermore, Jazz provides customer service
at 48 airports and is the only airline serving all top 30 airports in Canada, as
measured by the Canadian Airports Council, for total domestic passenger traffic.

      Jazz is the only Canadian regional airline with a fleet including regional
jets. As at December 31, 2006, Jazz's fleet of 135 operating  aircraft consisted
of 73 Bombardier regional jets and 62 Dash 8 turboprop aircraft.

      Jazz's  fleet  is  significantly  larger  than  that of the  next  largest
Canadian regional  airline.  All other carriers in the Canadian regional airline
market are  smaller  operators  of  turboprop  aircraft,  most of which  operate
aircraft in the 19 to 50 seats range.  These carriers are primarily  stand-alone
operations, operating in niche markets. None of these carriers approach the size
and scope of operation  of Jazz.  Low-cost  carriers,  including  WestJet,  also
compete with Air Canada on certain routes in Canada operated by Jazz.

<PAGE>
                                      -50-


PREDICTABLE AND STABLE BUSINESS MODEL

      During the period from October 1, 2004 to December 31, 2006,  Jazz derived
substantially  all of its  revenues  (99%) from the Initial CPA and the CPA. The
CPA will  expire on December  31,  2015,  subject to renewal for two  additional
five-year periods.  The CPA protects Jazz's earnings from many of the day-to-day
business  risks of scheduled air service such as passenger  load factor,  flight
cancellations due to weather,  increases in fuel costs, navigation,  landing and
terminal fees, and certain other costs.  Jazz's management believes that the CPA
is beneficial to Jazz because it brings stability and  predictability  to Jazz's
operations,  enabling  Jazz's  management  to  focus on  costs  and  operational
efficiency.

      The benefits of the CPA include:

      o     The  significant  reduction  of Jazz's  former  exposure  to revenue
            volatility  associated with ticket prices and passenger traffic. The
            number of aircraft  operated by Jazz and block hours,  which are the
            number of minutes elapsing from the time the chocks are removed from
            the wheels of an aircraft  until the chocks are next again  returned
            to the wheels of the aircraft,  divided by 60 ("Block  Hours") flown
            by such aircraft are the main drivers  determining  Jazz's revenues.
            Out of the 135  aircraft of Jazz's  fleet,  133 aircraft are Covered
            Aircraft under the CPA.

      o     The  reduction of Jazz's  exposure to cost  volatility  through full
            recovery of all pass-through costs such as fuel, navigation, landing
            and  terminal  fees,  which in the past have been  volatile and have
            undergone  significant  increases.  Pass-through  costs  represented
            approximately  40% of Jazz's total costs for the year ended December
            31, 2006.

      o     Although Jazz bears the risk of changes to its  Controllable  Costs,
            which represented  approximately 60% of its total costs for the year
            ended  December  31,  2006,  it is  compensated  by a mark-up on its
            estimated  Controllable  Costs. Jazz has been able to, and continues
            to seek to,  significantly  reduce its exposure to  fluctuations  in
            certain  of these  Controllable  Costs such as  salaries,  wages and
            benefits,  aircraft  maintenance,  materials and supplies,  aircraft
            rent,  depreciation  on owned  aircraft  and  interest  on  financed
            aircraft  through  agreements with its employees,  MRO suppliers and
            aircraft lessors and financiers.

      o     Jazz has the ability to increase its  profitability  by reducing its
            Controllable  Costs over  time.  In  addition,  Jazz is able to earn
            performance  incentive  payments if it  achieves or exceeds  certain
            operational targets.

      o     The number of Covered  Aircraft is 133 and is scheduled to remain at
            this level until the expiry of the CPA in December  2015.  The total
            number of Covered  Aircraft  cannot be reduced below the numbers set
            forth in the  existing  long  range  fleet plan  without  the mutual
            agreement  of Air Canada  and Jazz,  except if Jazz  enters  into an
            agreement with another carrier to provide regional airline services.

      o     Although  Air Canada's  actual usage of the Covered  Aircraft is not
            fixed,  Air Canada has agreed to pay Jazz for certain minimum levels
            of operating capacity until the expiry of the CPA in December 2015.


COST STRUCTURE

      Jazz's management  believes that Jazz's cost structure is competitive with
North American regional airlines and allows Air Canada to offer services through
Jazz at a lower  cost  than  it  otherwise  could  directly.  Jazz's  management
believes that Jazz's  competitive  cost structure is driven in large part by the
factors described below:

      o     The  renegotiation of labour agreements with all its union groups as
            part  of the  CCAA  process  resulted  in  lower  pilot  and  flight
            attendant  costs and  allowed  Jazz to operate  flights  with labour
            costs that are lower than Air Canada's  labour costs when  operating
            the same size aircraft.

      o     The revised agreements with Teamsters Canada,  CALDA and CAW provide
            Jazz  with  wages and  productivity  levels  for new hires  that are
            competitive with new industry entrants and low-cost

<PAGE>
                                      -51-


            carriers.  In the case of the pilots union group,  Jazz has a status
            pay  system  with  one pay  scale  based  on  seniority  and  status
            regardless  of the  type of  aircraft  flown.  With the  status  pay
            system,  there is less incentive for the pilots to seek  assignments
            on larger  aircraft,  which reduces  relocation and training  costs,
            which are otherwise significant costs for Jazz.

      o     The repudiation and renegotiation of various contractual obligations
            as part of the CCAA  process,  including  those related to aircraft,
            real estate and suppliers.

      o     A simple fleet composed of two aircraft types,  Bombardier  regional
            jet aircraft and  turboprops,  which Jazz's  management  believes is
            well suited to efficiently serve its extensive network across Canada
            and  transborder  to the  United  States  and  allows for lower trip
            costs,  better matching of capacity with demand,  lower maintenance,
            inventory and pilot  training  costs,  and better  synergies in crew
            deployment than its prior fleet configuration.


HISTORY OF OPERATIONAL PERFORMANCE

      Jazz has a  history  of  strong  operational  performance,  along  with an
excellent  safety record.  In addition to the fees Jazz receives from Air Canada
under the CPA, Jazz can earn certain performance  incentive payments up to 2.36%
of its  Scheduled  Flights  Revenue  for the  relevant  period.  In  2006,  Jazz
outperformed the average of a selected group of United States regional  airlines
in terms of  on-time  performance.  Over such  period,  Jazz's  average  on-time
performance  was 9.4  percentage  points  higher than the  average for  selected
United States regional airlines.


FLEET

      Unless otherwise specified herein, information relating to Jazz's fleet is
provided as of December 31, 2006. As at such date,  Jazz's  operating  fleet was
made up of 135  aircraft,  of  which  73 were  regional  jets  and 62  turboprop
aircraft.

      Jazz has  restructured its fleet to support its growth to reduce its costs
by flying fewer types of aircraft and to ensure an efficient operation by better
matching seat  capacity  with demand.  The reduction in the types of aircraft in
Jazz's  fleet has  contributed  to cost  savings  in the  areas of  maintenance,
inventories and pilot training.

      Jazz's  management   currently  believes  that  there  may  be  attractive
opportunities to acquire additional regional aircraft. In the event that more of
these  modern  aircraft are  acquired,  it is  currently  anticipated  that such
aircraft would be substituted for aircraft operated by Jazz.

      Jazz's operating fleet as at December 31, 2005 and December 31, 2006 is as
follows:

<TABLE>
<CAPTION>
                                                            OPERATING FLEET AS AT
                                             ------------------------------------------------
AIRCRAFT (NUMBER OF SEATS)                   DECEMBER 31, 2005              DECEMBER 31, 2006
------------------------------------------   -----------------              -----------------
<S>                                                 <C>                           <C>
CRJ - 100/200 (50 seats)..................           42                            58
CRJ - 705 (75 seats)......................           15                            15
Dash 8 - 300 (50 seats)...................           26                            26
Dash 8 - 100(1) (37 seats)................           38                            36
TOTAL.....................................          121                           135
                                                    ===                           ===
</TABLE>

-------------

(1)   TWO DASH 8-100  (INCLUDED  IN THE TOTALS FOR ALL  PERIODS  PRESENTED)  ARE
      CURRENTLY DEDICATED TO JAZZ'S CHARTER OPERATIONS.

<PAGE>
                                      -52-


      All aircraft in Jazz's operating fleet as of December 31, 2006 are Covered
Aircraft under the CPA except for two Dash 8-100 aircraft being used for charter
purposes.


CRJ-100/200

      The 50-seat Bombardier  CRJ-100/200 is a twin engine regional jet aircraft
designed to provide  superior  performance  and operating  efficiencies  for the
regional  airline  industry.  The CRJ-200 has more  efficient  engines  than the
CRJ-100  and a  longer  flight  distance  and  pay-load  capability.  Of  the 58
CRJ-100/200  in  Jazz's  fleet,  35 are  subleased  from Air  Canada  and 23 are
subleased  from Air Canada  Capital Ltd., a subsidiary of Air Canada,  with such
subleases expiring between 2007 and 2024.


CRJ-705

      Jazz is the first  carrier  in the world to operate  the  state-of-the-art
Bombardier CRJ-705 regional jet aircraft.  Jazz's CRJ-705s feature leather seats
and are configured into ten Executive Class seats and 65 Hospitality Class seats
and offer more  Hospitality  Class  legroom  than any other  Canadian  carrier's
aircraft  and  boast  ample  underseat  storage.  Jazz has  installed  in-flight
entertainment  in the back of every seat of its  CRJ-705.  The CRJ-705  provides
Jazz with the capability to offer services comparable to a mainline aircraft.

      The CRJ-705 is an economical aircraft due to its operational  efficiencies
and lower trip costs. The efficiency, range, size and versatility of the CRJ-705
should  allow  Jazz to  economically  fly  longer  routes  in  addition  to high
frequency routes and offer superior  comfort and choice in non-stop  services to
its customers. With its cruising speed of approximately 880 kilometers per hour,
Jazz's management  believes that the CRJ-705 is the appropriate  aircraft to fly
on higher  frequency long routes with low volumes such as Edmonton-Los  Angeles,
Vancouver-San Diego and Montreal-Winnipeg.

      All CRJ-705  aircraft  currently  in Jazz's fleet are  subleased  from Air
Canada Capital Ltd., a subsidiary of Air Canada, with such subleases expiring in
2022 and 2024.


DASH 8-300

      The 50-seat Bombardier Dash 8-300 has advanced  turboprop  characteristics
that approach those of a jet aircraft.  Of the 26 Dash 8-300 in Jazz's fleet, 19
are owned by Jazz and seven are leased  from  third  parties,  with such  leases
expiring between 2007 and 2011.


DASH 8-100

      The Dash 8-100 is a twin  engine  turboprop  medium  range  aircraft  with
seating  capacity  of 37  passengers.  Of the 36 Dash 8-100  aircraft  in Jazz's
fleet,  29 are owned by Jazz and seven are leased from Air Canada  Capital Ltd.,
with such leases expiring between 2007 and 2008.


SCOPE CLAUSE

      Scope  clauses are an  industry  norm for network  airlines  operating  in
conjunction  with  regional   carriers  and  are  usually  found  in  collective
agreements  of pilot  union  groups.  Jazz,  like  many  regional  airlines,  is
restricted by scope  provisions in the collective  agreement  between Air Canada
and ACPA.  Prior to the CCAA  restructuring,  Jazz's  operations were limited by
scope  provisions  restricting  Jazz's  operations  to 39 55-seat  regional  jet
aircraft  including ten grandfathered  BAe-146  aircraft,  which have since been
retired.  The scope  provisions  in place at the time also  required that growth
beyond the 39 55-seat regional jet aircraft could only take place with growth in
the Air Canada fleet.

      As a result of the CCAA process,  a unique arrangement was reached between
Air  Canada,  Jazz,  ACPA and  ALPA.  The  agreement,  known as the  small  jets
settlement agreement (the "Small Jets Settlement Agreement"), modifies the scope
clauses  that  existed  prior to the CCAA  restructuring,  provides a process to
allocate the orders of regional jets between Air Canada and Jazz, determines the
types and number of jets that can be flown by Jazz and

<PAGE>
                                      -53-


provides mechanisms for resolving disputes over future regional jet additions to
either fleet.  There are no limits to the number of turboprop aircraft that Jazz
may operate.

      The Small Jets Settlement Agreement provides that:

      o     Jazz may maintain a fleet of 50  CRJ-100s/200s  and 15 CRJ-705s made
            up as follows:  (i) ten CRJ-200s,  15 CRJ-200s and 15 CRJ-705s which
            Air  Canada  ordered  from  Bombardier,   all  of  which  have  been
            delivered,  and (ii) 25 CRJ-100s  originally operated by Air Canada,
            all of which have been transferred to Jazz by the end of July 2006.

      o     If either Air Canada or Jazz seeks to increase the fleet beyond what
            is outlined above,  they must notify ACPA and ALPA in writing of the
            proposed  increase  and then meet with ACPA and ALPA to discuss and,
            if  possible,  agree on the  increase  and any  terms in  connection
            therewith.  Where no agreement is reached, the matter is referred to
            an  arbitrator  or a mediator who will then make a decision,  taking
            into account the business case put forward by the respective parties
            and the  impact  of the  matter  at hand  on the  respective  pilots
            groups.

      o     Jazz may not operate the CRJ-705 aircraft if configured in excess of
            75 seats, inclusive of all classes.

      o     As was previously the case, Air Canada must ensure that a minimum of
            ASMs are flown by Air Canada compared to ASMs flown by Jazz.

      In 2005, Jazz took delivery of an additional 8 CRJ-200 aircraft beyond the
50  aircraft  maximum  described  in the Small Jets  Settlement  Agreement.  The
additional 8 aircraft  were  permitted to be added to Jazz's fleet  following an
arbitration as per the Small Jets Settlement Agreement.


CAPACITY PURCHASE AGREEMENT WITH AIR CANADA

      Pursuant  to the CPA,  Air  Canada  purchases  capacity  from  Jazz on the
Covered Aircraft in consideration  for the payment of certain fees by Air Canada
to Jazz.  During the period from  October 1, 2004 to  December  31,  2006,  Jazz
derived  substantially  all of its  revenues  (99%) from the Initial CPA and the
CPA. Jazz's management expects this to continue under the CPA.

      All of the 135 aircraft in Jazz's  operating fleet as of December 31, 2006
are Covered Aircraft under the CPA except for two Dash 8-100 aircraft being used
for  charter  purposes.  (See  "Business  Overview - Jazz - Fleet").  Air Canada
currently  purchases  capacity from Jazz  representing  substantially all of the
capacity of the 133 Covered  Aircraft.  In addition,  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  revisions  to the 2006 - 2008 High  Level  Operating
Plan,  Air Canada has agreed to pay Jazz for  certain  daily  minimum  levels of
operating  capacity  calculated in terms of a minimum  number of Block Hours for
each Covered Aircraft other than aircraft being modified,  undergoing  scheduled
maintenance  or being painted (the "Active  Aircraft")  type until the expiry of
the CPA in December 2015. The minimum  average daily  utilization  guarantee for
the 2007 calendar year represents  approximately  82% of the planned Block Hours
currently scheduled to be flown by Jazz's Covered Aircraft during such period.

      Under the CPA, 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.  Air Canada is
entitled to all revenues  (except bar and buy-on board sales) resulting from the
Scheduled  Flights and from all  freights,  Canada  Post mail and small  package
service  carried on Scheduled  Flights  including,  without  limitation,  ticket
sales,  baggage  charges,  passenger  charges and employee  pass travel  service
charges.

<PAGE>
                                      -54-


      In addition to being reimbursed for all pass-through  costs,  Jazz is paid
fees by Air Canada on a variety of different  metrics based on Jazz's  estimated
Controllable  Costs for each calendar year in the applicable period marked-up by
a specified  percentage.  Such mark-up  equates to a specified  margin on Jazz's
estimated  Scheduled  Flights  Revenue for each calendar year in the  applicable
period.  The fees  payable by Air  Canada to Jazz on a monthly  basis are broken
down into a number of categories.  These payment  categories fall into two broad
groups:  there are those that are  variable  depending  on the Covered  Aircraft
utilization and those that remain unchanged  regardless of how often or where or
with what load factors the Covered Aircraft are utilized.

      The fleet of Covered Aircraft  operated as at December 31, 2006 by Jazz on
behalf of Air Canada pursuant to the CPA is shown below:

                                                       NUMBER OF COVERED
                                                        AIRCRAFT UNDER
                                                         THE JAZZ CPA
                                                       AS AT DECEMBER 31,
                                                             2006
                                                      --------------------
      BOMBARDIER CRJ AIRCRAFT
      Bombardier CRJ-100.......................               25
      Bombardier CRJ-200.......................               33
      Bombardier CRJ-705.......................               15
                                                      --------------------
        TOTAL BOMBARDIER CRJ AIRCRAFT..........               73
      Bombardier Dash-8 Aircraft:
      Bombardier Dash 8-300....................               26
      Bombardier Dash 8-100....................               34
                                                      --------------------
        TOTAL TURBOPROP AIRCRAFT...............               60
                                                      --------------------
        TOTAL COVERED AIRCRAFT.................              133
                                                      --------------------

OTHER AGREEMENTS

      In  addition  to the CPA,  Jazz has entered  into:  (i) a master  services
agreement with Air Canada dated September 24, 2004; (ii) an agreement with ACGHS
related to certain ground handling  services dated  September 20, 2004;  (iii) a
component  maintenance  agreement  with ACTS LP dated  August 1, 2005;  and (iv)
certain trademark licensing agreements with Air Canada, each dated September 30,
2004.


CHARTER OPERATIONS

      In addition to its operations  under the CPA, Jazz offers charter services
to customers in Canada as well as  transborder  services.  Jazz has been able to
attract a wide  variety of charter  customers  over the years  including  sports
teams,  fishing  lodges,  oil and gas  companies,  various  provincial  forestry
ministries,  musical groups and corporate clients. All revenues from the charter
operations  performed  with  aircraft  other than the  Covered  Aircraft  accrue
directly to Jazz. Generally, margins on charter services are higher as customers
are prepared to pay a premium for flights that fit their needs and schedule.

      Two  Dash  8-100  aircraft  are  currently  dedicated  to  Jazz's  charter
operations and is based in both Western and Eastern Canada. In addition, Jazz is
allowed under the CPA to use the Covered Aircraft for ad hoc charter services in
consideration  for the  payment of a charter fee to Air  Canada,  provided  such
services do not interfere with the CPA schedule.


MAINTENANCE, REPAIR AND OVERHAUL OPERATIONS

      Jazz's technical  operations team performs regional jet and turboprop line
maintenance,  heavy  maintenance  and aircraft  modifications  to support Jazz's
operations. Jazz has two MRO facilities, one located in Halifax and the other in
London,  Ontario.  Supporting in excess of 100  aircraft,  including the largest
Dash 8 fleet in the  world,  the  Jazz  team is  considered  a  leading  service
provider on the Dash 8 product.  Customers  such as Bombardier,  Air Inuit,

<PAGE>
                                      -55-


Air Creebec and Canadian Air Metro have  provided  Jazz with repeat  business on
the Dash 8 aircraft  because of its strong  performance  and  dependability.  As
well,  Jazz  is  an  operator  of  Bombardier  regional  jets  and  is  building
considerable expertise on this fleet type.


ENVIRONMENTAL MATTERS

      Jazz believes  that it is in compliance in all material  respects with the
terms of applicable government regulations.  Jazz is committed to conducting its
operations  in a manner  that  complies  with all legal  requirements  regarding
health and safety and the  environment  and  regularly  evaluates  and  monitors
activities affecting these issues.

      To date,  environmental  laws  and  regulations  have  not had a  material
adverse effect on the business or financial condition of Jazz. However,  changes
in such government  laws and regulations are ongoing and may make  environmental
compliance  increasingly  expensive.  Jazz is not able to predict  future  costs
which may be incurred in order to comply with future environmental regulations.


LOGOS AND TRADEMARKS

      Air Canada JazzTM,  JazzTM, Air CanadaTM,  Air Canada DesignTM, Air Canada
and DesignTM and other  trademarks  are  trademarks  owned or  registered by Air
Canada in Canada and the United States. Air Canada has granted Jazz a license to
use the Air Canada  JazzTM,  JazzTM,  Air Canada  TM, Air Canada  DesignTM,  Air
Canada and  DesignTM  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.  Jazz also owns additional
trademarks in connection with its regional  airline  business.  The Fund and the
Trust have been  granted  licenses  to use the Air Canada  JazzTM,  JazzTM,  Air
CanadaTM,  Air Canada DesignTM,  Air Canada and DesignTM and other trademarks in
Canada.

      Jazz's  trademarks  and brand  name  assets are an  important  part of its
business.  Jazz benefits from the goodwill  established for the Jazz brand name.
Jazz  protects  its  proprietary  information,   including  its  trademarks  and
database,  through trademark laws,  contractual  provisions and  confidentiality
procedures.


FACILITIES

      Jazz  owns  two  buildings,   one  in  Halifax,   where  Jazz's  Corporate
Headquarters  is  located  and one in  London,  Ontario.  Jazz  carries on heavy
maintenance,  repair and overhaul  operations at both of its Halifax and London,
Ontario  facilities.  The Halifax  facility is located at the Halifax  Robert L.
Stanfield International Airport and is comprised of approximately 133,000 square
feet of office and hangar space. The London,  Ontario facility is located at the
London  Airport and is comprised of  approximately  83,800 square feet of office
and hangar  space.  The land  comprising  Jazz's  Halifax  and  London,  Ontario
facilities is leased from the airport authorities.

      Jazz also leases other  facilities  and the  following  describes the four
principal leased facilities of Jazz and two smaller  facilities.  The first five
are leased from Air Canada:

<TABLE>
<CAPTION>
DESCRIPTION                                                       SQUARE FEET       EXPIRY DATE
-----------                                                       -----------   ---------------------
<S>                                                                 <C>         <C>
Hangar, parking and office space at Toronto Pearson ..............  187,713     February 28, 2010
Hangar and office space at Vancouver International Airport .......   86,554     August 31, 2010
Hangar and office space at Calgary International Airport .........   91,964     Current lease
                                                                                expired, new  lease
                                                                                expiring June 1, 2011,
                                                                                pending approval.
Hangar and office  space at  Montreal-Pierre  Elliott ............   86,213     January 31, 2008
Trudeau  International Airport
Jazz GSE Shop Hangar A at Toronto Pearson ........................    2,904     February 28, 2010
Office space at Airway Center across Toronto Pearson .............   21,779     June 30, 2010
</TABLE>

<PAGE>
                                      -56-


      In addition to the  foregoing,  Jazz  currently  leases  airport  terminal
building spaces, hangars, office spaces, counters,  maintenance offices, baggage
make-up,  and  parking  spaces  throughout  Canada.  See "The Jazz  Business  --
Capacity Purchase Agreement with Air Canada -- Facilities".


DEBT FINANCING

      On November 25, 2005, Jazz entered into a commitment  letter with Canadian
chartered banks in respect of the  establishment  of $150 million senior secured
syndicated  credit  facilities  (the "Jazz New Credit  Facilities").  The credit
facilities  made available to Jazz LP consisted of one $115 million (or the U.S.
dollar equivalent  thereof) term facility (the "Jazz Term Facility"),  and a $35
million (or the U.S. dollar equivalent  thereof)  revolving credit facility (the
"Jazz Revolving  Facility"),  subject to the  satisfaction of certain  customary
conditions,  including the completion of the initial public offering of Jazz Air
Income  Fund.  The Jazz New Credit  Facilities  were entered into on February 2,
2006.

      The Jazz New Credit  Facilities  were  provided by a syndicate  of lenders
(the "Jazz  Lenders") with a Canadian  chartered  bank acting as  administrative
agent (the "Jazz Agent").  Each of the Jazz Term Facility and the Jazz Revolving
Facility  have a  three-year  term.  On each  anniversary  of the closing of the
initial public offering, the term of the Jazz Revolving Facility can be extended
at Jazz's request for additional one-year periods,  subject to prior approval by
Jazz Lenders holding no less than two-thirds of the total  commitment  under the
Jazz  Revolving  Facility.  On each  anniversary  of the  closing of the initial
public  offering,  the term of the Jazz Term  Facility can be extended at Jazz's
request for only one additional  one-year  period,  subject to prior approval by
Jazz Lenders holding no less than two-thirds of the total outstanding  principal
amount under the Jazz Term Facility. Non-consenting Jazz Lenders will be allowed
to withdraw  from the Jazz  Revolving  Facility and the Jazz Term  Facility,  as
applicable, at the maturity date. Non-consenting Jazz Lenders may be replaced by
other  lenders,  failing  which the amount  available  under the Jazz  Revolving
Facility may be reduced or the amount  outstanding  under the Jazz Term Facility
may be reduced, as applicable.

      Advances  under  the Jazz  New  Credit  Facilities  bear  interest  at the
prevailing prime rate, U.S. base rate,  bankers'  acceptance rate or LIBOR plus,
in each case,  an  applicable  margin to those  rates that will  initially  vary
between  1.75% and 3.75 % depending on the type of advance and Jazz's  quarterly
total debt to EBITDA  ratios.  (Reference  to "EBITDA"  is to total  debt-to-net
income  of  Jazz  before  interest  expense,   interest  income,  income  taxes,
depreciation,  amortization,  gains  and  losses on  disposal  of  property  and
equipment and other non-operating income and expenses.  EBITDA is not an earning
measure  recognized  under  GAAP  and  does  not  have  a  standardized  meaning
prescribed by GAAP. Therefore,  EBITDA may not be comparable to similar measures
presented by other  issuers.  Investors are cautioned  that EBITDA should not be
construed as an alternative to net income or loss  determined in accordance with
GAAP as an  indicator  of Jazz's  performance  or to cash flows from  operating,
investing and financing activities as a measure of liquidity and cash flows.) In
addition,  a commitment  fee was payable  based on the unused amount of the Jazz
Revolving Facility calculated daily and payable quarterly in arrears.

      The Jazz Term  Facility was  available in one drawdown only on the closing
of the initial public  offering to repay a portion of the promissory  note to be
issued by Jazz in favour of Jazz Air Limited  Partnership  on the closing of the
initial  public  offering of Jazz Air Income Fund, as partial  consideration  in
accordance  with the  acquisition  agreement  pursuant to which Jazz Air Limited
Partnership sold all or substantially  all of its assets to Jazz, to repay other
existing term  indebtedness and for general working capital  purposes.  The Jazz
Revolving  Facility was available on the closing of the initial public  offering
for general corporate and working capital purposes.  A swingline  facility of up
to $5  million  was  also  be  provided  exclusively  by  the  Jazz  Agent  as a
sub-component  of the Jazz  Revolving  Facility for cash  management and working
capital purposes. On the closing of the initial public offering,  Jazz drew $115
million under the Jazz Term Facility.

      The Jazz New Credit  Facilities are secured by a first  priority  security
interest and hypothec over the present and  after-acquired  personal and certain
real property of Jazz, subject to certain exclusions and permitted liens. Jazz's
obligations  in respect of the Jazz New Credit  Facilities is guaranteed by each
of Jazz Air Trust and Jazz Air Holding GP Inc.,  with Jazz Air Trust providing 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,  and with Jazz Air Holding GP Inc. providing a pledge of
its interests in Jazz as security for its guarantee obligations. Jazz Air Income
Fund  provides  certain  covenants in favour of the Jazz  Lenders  pursuant to a
collateral covenant agreement.

<PAGE>
                                      -57-


      The Jazz New  Credit  Facilities  contain  customary  representations  and
warranties and are 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.

      The terms of the Jazz New  Credit  Facilities  include  certain  covenants
limiting the aggregate  amount of  distributions by Jazz to holders of record of
its  units  during  any   twelve-month   period  from  exceeding  the  aggregate
Distributable Cash of Jazz during such period. ("Distributable Cash" for a given
period will consist,  in general,  of Jazz LP's EBITDA for the particular period
less any estimated cash amounts  required for debt service  obligations of Jazz,
if  any,  other  expense  obligations,  capital  expenditures,  taxes,  reserves
(including  reserves  intended to stabilize  distributions to Unitholders),  and
such other amounts as may be considered  appropriate  by the general  partner of
Jazz,  Jazz Air Holding GP Inc.)  Distributions  by Jazz are prohibited upon the
occurrence  and  continuance  of an event of  default  under the Jazz New Credit
Facilities.


EMPLOYEES

      For the year ended  December 31,  2006,  Jazz had an average of 4,144 full
time equivalent  ("FTE") employees compared to an average of 3,582 FTE employees
in 2005.  This  reflects  a 15.7%  increase  over the same  period in 2005.  The
increase in the number of employees  is due to Jazz's  growing  operation.  As a
result, Jazz's operational  departments have grown significantly.  Specifically,
operational  departments  such an  In-flight  Services,  Flight  Operations  and
Maintenance and Engineering grew by 27.4%, 18.7% and 11.2%, respectively. Jazz's
management   carefully  monitors  growth  and  these  employment  increases  are
considered  prudent in comparison  with capacity  growth of 50.8% as measured by
ASMs,  resulting in a 30.4%  improvement  of ASMs per  employee  compared to the
prior year.

      Jazz has completed wage re-opener  negotiation,  mediation and arbitration
with all of its unions with the exception of the CALDA,  the union  representing
Jazz's  dispatchers.  The wage increases awarded range from 1% to 1.75% per year
until 2009. The wage re-opener negotiations with CALDA are continuing.



                                     ACTS LP

      ACTS LP is a full-service  MRO service provider to the airline industry in
the Americas  (North,  Central and South America).  ACTS LP 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's  business  are  located  in
Montreal,  Vancouver,  Winnipeg, Toronto and San Salvador. ACTS LP services more
than 100 global customers,  including Air Canada, US Airways,  the Department of
National Defense of Canada, JetBlue, and Air Transat.

      On February  13,  2007,  ACTS LP  acquired  80% of Grupo  TACA's  aircraft
maintenance division, Aeroman. Total consideration for this acquisition includes
cash and a right to acquire an equity  stake in ACTS LP. The cash  component  of
US$44.7  million  consists of cash of US$42.7 million on closing and a milestone
payment of up to US$2 million,  funded by ACTS LP through ACE's  available  cash
resources. The size of the equity stake in ACTS LP will be confirmed at the time
of the monetization of ACTS LP, as described below, and is expected to represent
less than 7% of the total equity of ACTS LP at the time of  monetization.  Prior
to ACTS LP's  monetization,  Grupo

<PAGE>
                                      -58-


TACA can put its right to acquire equity back to ACE at a discounted  value from
US$40.4  million and accreting up to a cap of US$50.5  million over 12 months or
the date of monetization, if earlier.

      Aeroman, the leading narrow body MRO provider in Central America, provides
ACTS LP with a  strategically  valuable  low  cost  platform  from  which it can
service narrow body aircraft from throughout the Americas region.

      ACTS LP 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  LP  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 LP is also  reviewing
contracts with several major customers.

      ACTS  LP's  combination  of  reputation,   scale,  service   capabilities,
independence,  customer base, and low-cost presence positions ACTS LP to benefit
from anticipated growth in the MRO outsourcing  industry.  To execute its growth
plan, ACTS LP 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  LP  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 LP 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 LP has  already  attracted  a range  of  non-Air
            Canada  customers.  ACTS  LP will  take  advantage  of MRO  industry
            outsourcing trends and build on its strong market position; and


      (iv)  increase leadership  effectiveness and employee alignment:  Over the
            past year,  ACTS LP 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.

      After conducting a strategic review,  ACE has determined that the value of
the ACTS LP market  position  and  growth  prospects  could be  enhanced  by the
introduction  of a third party  investor.  The  monetization  of ACTS LP,  which
commenced in late 2006, is expected to be completed by mid-2007.


EMPLOYEES

       As at December 31, 2006, ACTS LP (through Air Canada and Aeroman)
employed 4,780 workers across its five locations. As at December 31, 2006, ACTS
LP had 3,923 full-time equivalent ("FTE") employees compared to 4,063 FTE
employees as at December 31, 2005. This reflects a 3.8% decrease from the fourth
quarter of 2005. As a result of the acquisition of Aeroman, ACTS LP has
increased its total number of FTE employees by 1,424, for a total of 5,421 FTE
employees at ACTS LP (including Aeroman) as at February 28, 2007.

      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 LP must  reimburse Air Canada on a
fully-allocated  basis,  including salary and benefits related to certain of the
abovementioned  employees,  who are unionized and non-unionized employees of Air
Canada who work for the benefit of ACTS LP.

      ACTS LP announced on March 6, 2007, the early  termination of its contract
with Delta Air Lines for airframe  maintenance of the airline's Boeing 767s (the
"Delta  Contract").  By the end of June 2007,  ACTS LP will start  adjusting its
workforce at its Vancouver  facility.  Out of a workforce of approximately 1,000
employees in Vancouver,  ACTS LP will permanently reduce  approximately 700 jobs
currently supporting the Delta Contract.

<PAGE>
                                      -59-


                                  RISK FACTORS

      The risks described in this section may not be the only risks faced by the
Corporation.  Other  risks of which  the  Corporation  is not aware or which the
Corporation  currently  deems to be  immaterial  may surface and have a material
adverse  impact on the  Corporation'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.


PROPOSED CHANGES TO THE CANADIAN FEDERAL INCOME TAX TREATMENT OF INCOME TRUSTS

      On October 31, 2006,  the Minister of Finance  (Canada)  announced new tax
proposals  concerning  the  taxation  of income  trusts  and other  flow-through
entities  and  tabled a Notice of ways and means  motion to amend the Tax Act in
that regard (the  "October  Proposal").  The October  Proposal  was  followed on
December  21,  2006 by the release of draft  legislation  by the  Department  of
Finance  (Canada)  (the  "draft  legislation"  and,  together  with the  October
Proposal,  the "2006 Proposed  Amendments")  concerning the  distribution tax on
income  trusts and  partnerships.  The 2006 Proposed  Amendments,  if enacted as
currently drafted, will subject Aeroplan Income Fund and Jazz Air Income Fund to
trust level taxation as of January 1, 2011, which will reduce the amount of cash
available  for  distributions  by  income  trusts.  Loss of the  benefit  of the
deferred  application  of the new tax  regime  until  2011 could have a material
adverse effect on the value of ACE's interest in Aeroplan and Jazz.


DEPENDENCE UPON PRINCIPAL INVESTMENTS

      ACE is an investment  holding  company of various  aviation  interests and
most of ACE's assets are its ownership  interest in Air Canada,  Aeroplan,  Jazz
and ACTS LP.  ACE's  cash  flows  and  ability  to  distribute  earnings  to its
shareholders  are dependent  upon the ability of these entities to 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 recent 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 a plan of  arrangement.  For the years ended December 31, 2003,
2002 and 2001, Air Canada incurred  operating losses before  reorganization  and
restructuring  items and  non-recurring  labour  expenses of $684 million,  $192
million  and $731  million,  respectively,  and  incurred  net  losses of $1,867
million,  $828  million and $1,315  million,  respectively.  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, 2006 and 2005,  Air Canada  realized
operating  income of $259 million and $318 million,  respectively,  and incurred
net losses of $74 million and $20 million, respectively.  Prior to September 30,
2004, the operations of Air Canada  included the operations of various  entities
included in the Air Canada Services segment,  as well as those of Jazz, Aeroplan
and ACTS and, as such,  those prior results may not be  comparable.  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

<PAGE>
                                      -60-


significant  fuel and other expenses 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  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.


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

<PAGE>
                                      -61-


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 lease  payments or otherwise  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.


FUEL COSTS

      Fuel costs constituted the largest percentage of the total operating costs
of Air Canada in 2006. Fuel prices  fluctuate  widely  depending on many factors
including   international   market  conditions,   geopolitical  events  and  the
Canada/U.S.  dollar  exchange  rate. Air Canada cannot  accurately  predict fuel
prices. During 2004, 2005 and 2006, 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 2006 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  C$27 million change in 2006 fuel expense
for Air Canada  (excluding  any  impact of fuel  surcharges  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  and  long-term  collective
agreements  were  concluded in 2003 and amended in 2004. 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 Alliance(R)  partners 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.


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 such  authorities  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.

<PAGE>
                                      -62-


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 U.S. transborder and international  markets in which Air
Canada operates.

      Canadian  low-cost  carriers have entered or announced  their intention to
compete in many of Air Canada's  key domestic  markets and have also entered the
U.S.  transborder market. U.S. carriers currently operate routes in Air Canada's
transborder  market.  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 carriers are successful in entering or expanding into
the domestic or the U.S.  transborder  markets,  if additional U.S. 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 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 may be limited by government policies to encourage competition.

      Internet travel websites have enabled  consumers to more  efficiently find
lower  fare   alternatives  by  providing  them  with  access  to  more  pricing
information.  The  increased  price  awareness  of  both  business  and  leisure
travelers  as well as the  growth  in new  distribution  channels  have  further
motivated  airlines  to  price  aggressively  to  gain  fare  and  market  share
advantages.

      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.


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 wide-body 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 regional jet or wide-body  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

<PAGE>
                                      -63-


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. The new system is
expected to be  deployed  in phases  from late 2007 and running  through a major
part of 2008.  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  natural  disasters,
terrorist  attacks,   telecommunications   failures,  power  failures,  computer
viruses,  hackers,  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 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 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

<PAGE>
                                      -64-


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.


EQUAL PAY LITIGATION

      CUPE, which represents Air Canada's flight attendants,  has two complaints
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 complaints date from 1991 and 1992 but
have 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  complaints.  On March 16, 2007, the Canadian Human Rights  Commission
referred the complaint for investigation.

      As part of the  restructuring  under  the  CCAA,  it was  agreed  that any
resolution of the complaints would have no retroactive financial impact prior to
September  30, 2004.  It is the view of Air Canada that any  investigation  will
show that Air Canada has  complied  and  continues  to comply with the equal pay
provisions  of  the  Canadian  Human  Rights  Act.  Nonetheless,   should  these
complaints  succeed,  the  accrued  liability  and  future  costs  could be very
significant  and Air Canada's  business,  results from  operations and financial
condition could be materially adversely affected.


STAR ALLIANCE(R)

      The strategic and commercial  arrangements  with Star Alliance(R)  members
provide Air Canada with importanT  benefits,  including  codesharing,  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  Alliance(R)  or otherwisE  fail to meet its  obligations  thereunder,  Air
Canada's  business,  results from  operations and financial  condition  could be
materially adversely affected.

<PAGE>
                                      -65-


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 or work stoppages or strikes by
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 U.S.  dollars and is  affected  by  fluctuations  in the  Canada/U.S.  dollar
exchange  rate.  Air  Canada's  management  estimates  that during 2006, a $0.01
increase in the Canada/U.S.  dollar exchange rate (i.e., $1.13 to $1.14 per U.S.
dollar) would have had an estimated $16 million unfavourable impact on operating
income and an  estimated  $48  million  unfavourable  impact on pre-tax  income.
Conversely,  an opposite change in the exchange rate would have had the opposite
effect on  operating  income.  Air Canada  incurs  significant  expenses in U.S.
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 U.S. dollar would increase the costs of
Air Canada relative to its U.S.  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.   Competition   authorities  have  sought  or  requested
information  from Air  Canada  as part of their  investigations.  Air  Canada is
cooperating  fully  with  these  investigations.  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.
It is not  possible  at this time to predict  with any degree of  certainty  the
outcome of these proceedings.  It is Air Canada's policy to conduct its business
in full compliance with all applicable competition laws.

      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 them.  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 Air Canada's motion to dismiss
ACPA's claim. ACPA has not appealed the dismissal of the injunction  application
but has appealed the order  dismissing  its claim.  No date has yet been set for
the hearing.

      In addition, see the above risk factor entitled "Equal Pay Litigation".


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.

<PAGE>
                                      -66-


AEROPLAN


DEPENDENCY ON TOP THREE ACCUMULATION PARTNERS

      Aeroplan's top three  Accumulation  Partners were  responsible  for 91% of
Gross Billings for the year ended 2006. A decrease in sales of Aeroplan Miles to
any of Aeroplan's  significant partners 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  Aeroplan provides 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.
Aeroplan  cannot ensure that its contracts  with these,  or other,  Accumulation
Partners will be renewed 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 of Aeroplan's  Accumulation Partners
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  Aeroplan  provides,  or a decrease in the accumulation of Aeroplan
Miles by members  could  have a  material  adverse  effect on  Aeroplan's  Gross
Billings and revenue.


GREATER THAN EXPECTED REDEMPTIONS FOR REWARDS

      A significant portion of Aeroplan's profitability is based on its estimate
of the number of Aeroplan  Miles that will never be redeemed by the member base.
The  percentage of Aeroplan  Miles that are not expected to be redeemed is known
as "Breakage" in the loyalty industry.  Aeroplan's  current estimate of Breakage
is based on two  independent  studies  conducted  in 2006 on behalf of Aeroplan.
Breakage  may decrease  from the current  estimate of 17 percent as the Aeroplan
Program grows and a greater  diversity of rewards  become  available.  If actual
redemptions are greater than Aeroplan's  current  estimates,  its  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  still
outstanding, amounted to 70.0 billion Aeroplan Miles as at December 31, 2006 and
include 46.7 billion Aeroplan Miles. Responsibility to provide rewards for these
70.0 billion  Aeroplan Miles rests with Aeroplan should such Aeroplan Miles ever
be  redeemed.  There  can be no  assurances  that a  material  portion  of these
estimated Broken Aeroplan Miles will not be redeemed.


LABOUR RELATIONS

      Contact  centre  agents are  currently  covered by a collective  agreement
between  the CAW and Air  Canada in place  until  2009.  While  Aeroplan  enjoys
positive employee relations with the unionized call 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 the 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 general services agreement between
Aeroplan and Air Canada 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 call centre agents during the six month termination
period under the agreement.


TECHNOLOGICAL DISRUPTIONS AND INABILITY TO USE THIRD PARTY SOFTWARE

      Aeroplan's  ability to protect its data and contact centres against damage
from  fire,  power  loss,  telecommunications  failure  and other  disasters  is
critical.  In order to provide many of its  services,  Aeroplan  must be able to
store, retrieve,  process and manage large databases and periodically expand and
upgrade its  capabilities.  While Aeroplan has in place, and continues to invest
in, technology security  initiatives and disaster recovery plans, these measures
may not be adequate or implemented  properly.  Any damage to Aeroplan's data and
contact  centres,  any  failure  of  Aeroplan's   telecommunication  links  that
interrupts  its  operations  or any  impairment  of  Aeroplan's

<PAGE>
                                      -67-


ability to use  software  licensed to it could  adversely  affect its ability to
meet Aeroplan's  partners' and members' needs and their  confidence in utilizing
Aeroplan in the future.

      In addition, proper implementation and operation of technology initiatives
is fundamental to Aeroplan's ability to operate a profitable business.  Aeroplan
continuously  invests in new technology  initiatives to remain competitive,  and
its continued  ability to invest sufficient  amounts to enhance  technology will
affect  Aeroplan's  ability to operate  successfully.  An inability to invest in
technological  initiatives  would have a material  adverse  effect on Aeroplan's
business, results from operations and financial condition.


LEVERAGE AND RESTRICTIVE COVENANTS IN CURRENT AND FUTURE INDEBTEDNESS

      The ability of Aeroplan  Income Fund,  Aeroplan Trust and Aeroplan 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  of  Aeroplan  Trust  and/or  Aeroplan   (including
Aeroplan's credit  facilities).  The degree to which Aeroplan is leveraged could
have  important  consequences  to the holders of units of Aeroplan  Income Fund,
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 Aeroplan's 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 of Aeroplan's  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  Aeroplan  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.


ECONOMIC DOWNTURN

      Aeroplan derives its Gross Billings  principally from the sale of Aeroplan
Miles to its Accumulation  Partners which is,  ultimately  dependant on consumer
spending.  Cyclical  deviations  in the  economy,  a prolonged  recession  or an
increase  in  interest  rates  could have a material  adverse  effect on members
spending  with  Aeroplan  Accumulation  Partners  or the use of credit or charge
cards. This could decrease Aeroplan's  attractiveness to its commercial partners
and their participation in the Aeroplan Program. These factors,  individually or
in  combination,  could have a material  adverse effect on Aeroplan's  business,
results from operations and financial condition.


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 by Aeroplan
Income  Fund 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 units is not  guaranteed  and will depend upon

<PAGE>
                                      -68-


numerous factors,  including Aeroplan's profitability and its ability to sustain
EBITDA margins and the  fluctuations  in Aeroplan's  working capital and capital
expenditures, all of which are susceptible to a number of risks.


RESTRICTIONS ON CERTAIN UNITHOLDERS AND LIQUIDITY OF UNITS

      The   declaration  of  trust  of  Aeroplan  Income  Fund  imposes  various
restrictions  on  unitholders.  Non-resident  unitholders  are  prohibited  from
beneficially owning more than 49.9 percent 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 U.S.  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 from certain  unitholders and
thereby adversely affect the liquidity and market value of the units of Aeroplan
Income Fund held by the public.


JAZZ

      Many of the risk  factors in the  nature of those  described  under  "Risk
Factors - Air Canada" and " - Risks Related to the Airline  Industry" could have
a material  adverse  effect on Jazz's  business,  results  from  operations  and
financial  condition.  In addition to those risk  factors,  the  following  risk
factors could also have a material  adverse effect on Jazz's  business,  results
from operations and financial condition.


DEPENDENCE ON AIR CANADA

      Jazz is directly affected by the financial and operational strength of Air
Canada  and its  competitive  position.  In the  event  of any  decrease  in the
financial  or  operational  strength  of Air Canada,  Jazz's  ability to receive
payments  from Air Canada,  and the amount of such  payments,  may be  adversely
affected.

      Air  Canada is the sole  marketing  agent  for  Jazz's  aircraft  capacity
covered  by the CPA (the  "Covered  Aircraft")  and is  solely  responsible  for
establishing  schedule,  routes,  frequency  and ticket  prices for Jazz. To the
extent Air  Canada  does not  effectively  and  competitively  market the routes
serviced  through Jazz, the utilization of the Covered Aircraft could be reduced
with the result that Jazz's operating margin in dollar terms would be reduced.


TERMINATION OF THE CPA

      Substantially  all of Jazz's current revenues are received pursuant to the
CPA with Air Canada  which  currently  covers all of Jazz's  existing  operating
fleet (except two Dash 8 aircraft).  The CPA will terminate on December 31, 2015
and is subject to renewal on terms to be negotiated for two  additional  periods
of five years unless either party terminates the agreement by providing a notice
not less  than  one year  prior to  December  31,  2015 or the end of the  first
renewal term. In addition,  either party is entitled to terminate the CPA at any
time upon the occurrence of certain events of default.

      If  the  CPA  is   terminated,   Jazz's  revenue  and  earnings  would  be
significantly   reduced  or  eliminated  unless  Jazz  is  able  to  enter  into
satisfactory substitute  arrangements.  There is no assurance that Jazz would be
able  to  enter  into   satisfactory   substitute   arrangements  or  that  such
arrangements would be as favourable to Jazz as the CPA.


LABOUR COSTS AND LABOUR RELATIONS

      Labour costs  constitute the largest  percentage of Jazz's total operating
costs that are borne by Jazz.  There can be no assurance  that the  estimates of
Jazz's  future  labour  costs  will be  accurate.  If such costs  exceed  Jazz's
estimates, Jazz may realize decreased profits or even losses under the CPA. Most
of Jazz's  employees  are unionized  and new or modified  collective  bargaining
agreements were concluded in 2003 and 2004. No strikes or lock-outs may lawfully
occur  until  after  the  agreements  expire 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 Jazz's  service.  Any labour  disruption  or work
stoppage  could  adversely  affect the ability of Jazz to conduct its operations
and have a material  adverse effect on its ability to carry out its  obligations
under  the  CPA and on its  business,  results  from  operations  and  financial
condition.  There can be no assurance  that future  agreements  with  employees'
unions  will be on terms in line  with  Jazz's

<PAGE>
                                      -69-


expectations  or  comparable  to  agreements  entered  into  by  other  regional
airlines,  and any future  agreements  may  increase  labour  costs or otherwise
adversely affect Jazz.

      If there is a labour  disruption or work  stoppage by any  unionized  work
group of Air Canada which provides services to Jazz under the CPA, Jazz may lose
access  to  such  services  and  there  can be no  reassurance  that  sufficient
replacement  services  could be obtained or that  replacement  services could be
obtained on a cost effective basis.


IMPACT OF COMPETITION ON AIR CANADA'S NEED TO UTILIZE JAZZ'S SERVICES

      The airline industry is highly competitive. Air Canada competes with other
major carriers as well as low cost carriers on its routes, including routes that
Jazz flies.  Competitors could rapidly enter markets Jazz serves for Air Canada,
and quickly  discount fares,  which could lessen the economic  benefit of Jazz's
regional jet operations to Air Canada.


IMPACT OF  INCREASED  COMPETITION  IN THE  REGIONAL  AIRLINE  INDUSTRY ON JAZZ'S
GROWTH OPPORTUNITIES

      Aside from the limitations under the CPA and the regulatory prohibition on
cabotage,  Jazz's  ability to provide  regional  air  service to a major  United
States  airline  is  limited by  existing  relationships  that all of the United
States network airlines have with other regional operators.  Additionally,  most
of the network  airlines  are subject to scope clause  restrictions  under their
collective  bargaining  agreements with employees that restrict their ability to
add new regional jet capacity.

      In addition, new competitors may enter the regional airline industry. Such
new or existing  competitors  may enter into capacity  purchase  agreements with
airlines, including Air Canada, in respect of routes currently operated by Jazz.
Capacity growth by other regional airlines in the regional jet market would lead
to significantly  greater competition and may result in lower rates of return in
the regional airline industry. Further, many of the network airlines are focused
on  reducing  costs,  which may also  result in lower  operating  margins in the
regional airline industry.


CASH  DISTRIBUTIONS  ARE NOT  GUARANTEED  AND WILL  FLUCTUATE  WITH THE BUSINESS
PERFORMANCE

      Although Jazz Air Income Fund intends to distribute the interest  received
in respect of the Jazz Air Trust trust notes and the cash distributions received
in respect of the Jazz Air Trust trust units, less expenses and amounts, if any,
paid by Jazz Air Income Fund in connection  with the redemption of units of Jazz
Air Income Fund, there can be no assurance regarding the amounts of income to be
generated by Jazz's business or ultimately  distributed to Jazz Air Income Fund.
The actual amount distributed in respect of the units of Jazz Air Income Fund is
not guaranteed and depends upon numerous factors, including Jazz's profitability
and its ability to sustain EBITDA and the fluctuations in Jazz's working capital
and capital expenditures, all of which are susceptible to a number of risks.


RESTRICTIONS ON CERTAIN UNITHOLDERS AND LIQUIDITY OF UNITS

      The  declaration  of  trust  of  Jazz  Air  Income  Fund  imposes  various
restrictions  on unitholders of Jazz Air Income Fund.  Non-resident  unitholders
are prohibited from  beneficially  owning more than 49.9 percent of the units of
Jazz Air Income Fund. In addition, the voting rights of non-resident unitholders
are limited to 25 percent of the aggregate number of outstanding votes attaching
to all  outstanding  units and 25 percent of the aggregate  number of votes that
may be cast at any meeting of the unitholders.  These restrictions may limit (or
inhibit the  exercise of) the rights of certain  unitholders  of Jazz Air Income
Fund,  including  non-residents of Canada and United States persons,  to acquire
units of Jazz Air Income Fund, 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 Jazz Air Income Fund from certain
investors  and thereby  adversely  affect the  liquidity and market value of the
units of Jazz Air Income Fund held by the public.

<PAGE>
                                      -70-


ACTS LP


DEPENDENCY ON AIR CANADA AND OTHER SIGNIFICANT CUSTOMERS

      For the year ended  December  31,  2006,  Air Canada was  responsible  for
approximately  69 percent  of ACTS LP's  revenues.  A  significant  decrease  in
revenues  generated  from  Air  Canada  or from  any of ACTS  LP's  other  major
customers  for any reason,  including a decrease in  activity,  or a decision to
either utilize another service  provider could have a material adverse effect on
ACTS LP's revenues. ACTS LP cannot ensure that its contracts with Air Canada and
other  significant  customers will be renewed on similar  terms,  or at all when
they expire.

      ACTS LP is directly affected by the financial and operational  strength of
its major customers, including Air Canada and their competitive position. In the
event  of any  decrease  in the  financial  or  operational  strength  of  these
customers,  ACTS LP's ability to receive payments from customers, and the amount
of such payments, could be adversely affected.


DEPENDENCY ON THE AIRLINE INDUSTRY

      ACTS LP's business is highly  dependent on the  performance of the airline
industry.  Economic and regulatory  factors and passenger security concerns that
affect the airline  industry  also impact ACTS LP's  business.  Many of the risk
factors in the nature of those  described under "Risk Factors - Risks Related to
the Airline  Industry"  could result in lower demand for ACTS LP's  products and
services  and, as a result,  could have a material  adverse  effect on ACTS LP's
business, results from operations and financial condition.


KEY SUPPLIES AND SUPPLIERS

      ACTS LP is dependent upon its ability to source,  on favourable  terms and
costs,  sufficient  quantities of goods in a timely manner,  including aircraft,
aircraft engine and other related parts. Such goods 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  ACTS LP's  control.
Any failure or inability of ACTS LP to successfully  source goods,  including by
reason of a failure,  refusal or inability of a supplier,  or to source goods on
terms and pricing and within the timeframes  acceptable to ACTS LP, could have a
material  adverse  effect on ACTS LP's  business,  results from  operations  and
financial condition.


LABOUR RELATIONS

      Most of the non-management personnel of ACTS LP are currently covered by a
collective  agreement  between  IAMAW and Air Canada in place until 2009.  While
ACTS  LP  enjoys  positive  employee  relations,  if  Air  Canada  faces  labour
disturbances  resulting in work stoppages or other action from within the larger
bargaining  unit,  this  could  have a  material  adverse  effect  on ACTS  LP's
business.  Furthermore,  if at  the  expiration  of  the  applicable  collective
agreement,  the  relevant  parties  are  unable to  renegotiate  the  collective
agreement  with the IAMAW,  it could result in work  stoppages  and other labour
disturbances  which would similarly have a material  adverse effect on ACTS LP's
business.  In addition,  if the general services  agreements between ACTS LP and
Air Canada are terminated by Air Canada, it could have a material adverse effect
on ACTS LP's  business in the event that ACTS LP is unable to hire a  sufficient
number of employees prior to the termination of the agreements.


HIGHLY REGULATED INDUSTRY

      ACTS LP operates in a highly  regulated  industry.  Governmental  agencies
throughout the world regulate the  manufacture,  repair and overhaul of aircraft
and related parts and accessories.  Regulatory  authorities  monitoring the ACTS
LP's business include  Transport Canada,  the Federal Aviation  Authority in the
U.S., and the European Aviation Safety Agency.  Regulatory  authorities  perform
regular compliance audits,  including to ensure that all ACTS LP's technical and
administrative  processes,   procedures,  equipment  and  facilities  are  being
maintained within the regulatory requirements. New and more stringent regulatory
requirements,  if adopted and enacted,  could have a material  adverse effect on
ACTS' business, financial condition and results of operations.

<PAGE>
                                      -71-


      In  addition,  ACTS LP's  repair and  overhaul  operations  are subject to
certification, including pursuant to regulations established by Transport Canada
and the Federal Aviation  Authority.  Specific  regulations vary from country to
country,   although  compliance  with  Transport  Canada  and  Federal  Aviation
Authority  requirements  generally  satisfies  regulatory  requirements in other
countries.  Any failure to comply with  regulatory  requirements or maintain the
necessary regulatory approvals or any other of ACTS LP's material authorizations
or  approvals  could  have a  material  adverse  effect on ACTS  LP's  business,
financial condition and results of operations.


RISKS RELATED TO THE AIRLINE INDUSTRY


AIRLINE REORGANIZATIONS

      Since  September  11, 2001,  a number of U.S. air carriers  have sought to
reorganize under Chapter 11 of the United States  Bankruptcy Code or outside the
scope  of  formal  reorganization  proceedings.  Successful  completion  of such
reorganizations  could present Air Canada with competitors having reduced levels
of  indebtedness  and  significantly  lower operating costs derived from labour,
supply and financing contracts  renegotiated under the protections of the United
States   Bankruptcy   Code  or  outside  the  scope  of  formal   reorganization
proceedings.  In addition,  certain air carriers,  including  those  involved in
reorganizations, may undertake substantial fare discounting in order to maintain
cash flows and to enhance  continued  customer  loyalty.  Such fare  discounting
could  result in lower  Yields  for Air  Canada  which,  in turn,  could  have a
material  adverse effect on Air Canada's  business,  results from operations and
financial condition.


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,  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.  Any  prolonged  or
significant  weakness  of the  Canadian  or  world  economies  could  materially
adversely  impact Air Canada's  business,  results from operations and financial
condition, especially given Air Canada's substantial fixed cost structure.


AIRLINE INDUSTRY CHARACTERIZED BY LOW GROSS PROFIT MARGINS AND HIGH FIXED COSTS

      The airline  industry  generally and scheduled  service in particular  are
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, could have a material adverse effect on passenger demand for air travel
and on the number of passengers

<PAGE>
                                      -72-


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  destinations served by Air Canada and Jazz, and on the number of
passengers  traveling on Air Canada's and Jazz's flights 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  and on the  number  of
passengers traveling on Air Canada's and Jazz's flights. Any resulting reduction
in traffic on Air  Canada's  and Jazz'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  maintained  or
repaired  by 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.  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,  the  Treasury  Board 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 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.

<PAGE>
                                      -73-


      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 Canada  Transportation
Act, 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.

      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. Air Canada's management cannot predict if or when such
proposed legislation will be re-introduced in the House of Commons.

      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 that 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  reevaluating  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  requirement
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 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 U.S.  federal

<PAGE>
                                      -74-


government  has set up its own  facility  to provide  war risk  coverage to U.S.
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 Toronto
Stock Exchange under the trading symbols "ACE.A" and "ACE.B",  respectively.  On
May 8, 2006,  the trading  symbol for the Variable  Voting  Shares  changed from
ACE.RV to ACE.A.  The  following  table sets forth the price  range and  trading
volume of the Variable  Voting  Shares and the Voting  Shares as reported by the
Toronto  Stock  Exchange for the months of January to, and  including,  December
2006:

<TABLE>
<CAPTION>
                               VARIABLE VOTING SHARES                                         VOTING SHARES
                  ---------------------------------------------------       ---------------------------------------------------
                                                AVERAGE                                                    AVERAGE
                                                DAILY        TOTAL                                         DAILY       TOTAL
                                                TRADING      MONTHLY                                       TRADING     MONTHLY
    2006            HIGH          LOW           VOLUME       VOLUME           HIGH           LOW           VOLUME      VOLUME
----------------  --------      --------       --------    ----------       --------       --------        -------    ---------
<S>               <C>           <C>            <C>         <C>              <C>            <C>             <C>        <C>
January.........  $  40.09      $  35.60        526,222    11,050,653       $  40.13       $  35.63        189,018    3,969,385
February........  $  37.39      $  32.50        736,236    14,724,728       $  37.33       $  32.51        175,791    3,515,821
March(1)........  $  35.26      $  30.26        506,550    11,650,656       $  35.25       $  30.25        211,439    4,863,096
April...........  $  34.49      $  30.50        737,414    14,010,868       $  34.43       $  30.46        177,092    3,364,739
May.............  $  35.10      $  30.75        744,732    16,384,106       $  35.00       $  30.70        206,746    4,548,408
June............  $  33.50      $  30.75        453,024     9,966,536       $  33.39       $  30.75        180,902    3,979,842
July............  $  32.10      $  27.85        301,490     6,029,791       $  32.03       $  27.90        188,200    3,764,001
August..........  $  31.39      $  25.85        549,635    12,091,976       $  31.37       $  25.98        183,797    4,043,524
September.......  $  35.20      $  29.90        605,836    12,116,719       $  35.25       $  29.85        186,159    3,723,170
October.........  $  39.54      $  34.26        758,368    15,925,734       $  39.53       $  34.25        309,055    6,490,153
November........  $  39.60      $  34.01      1,130,067    24,861,477       $  40.01       $  33.10        406,916    8,952,152
December........  $  38.45      $  34.11        787,759    14,967,429       $  38.38       $  34.15        180,091    3,421,736
</TABLE>

----------

(1)   Shareholders  of record of ACE as of March 3, 2006 received a distribution
      by way of reduction  of capital from ACE of 0.18 units of Aeroplan  Income
      Fund per Variable Voting Share, Voting Share and Preferred Share (on an as
      converted  basis) of ACE  representing  $2.23 per Variable  Voting  Share,
      Voting Share and  Preferred  Share based on the closing  price of Aeroplan
      Income  Fund and Jazz Air Income  Fund on March 1, 2006.  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.  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.

<PAGE>
                                      -75-


         The Notes are traded on the Toronto  Stock  Exchange  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 Toronto Stock  Exchange for the months of
January to, and including, December 2006:

                                             NOTES
                        -------------------------------------------------
                                                   AVERAGE
                                                    DAILY        TOTAL
                                                   TRADING       MONTHLY
        2006               HIGH         LOW         VOLUME       VOLUME
---------------------   ----------   ----------   ----------   ----------
January .............   $   101.00   $    97.00        3,424       54,790
February ............   $    98.75   $    94.00        5,450       70,850
March ...............   $    98.50   $    94.25        6,111      103,890
April ...............   $    96.51   $    94.00        8,060       48,360
May .................   $   102.50   $    92.75        9,368      112,410
June ................   $    97.25   $    95.00          710        2,840
July ................   $    95.00   $    94.00          550        1,650
August ..............   $    94.75   $    92.00       15,195      151,950
September ...........   $    97.61   $    94.00        1,587       11,110
October .............   $   103.50   $    98.00       18,738      243,590
November ............   $   102.75   $   100.00        8,719       78,470
December ............   $   102.00   $    98.00       31,180      280,620


                                 DIVIDEND RECORD

      The  Corporation  has not paid  dividends on its Voting  Shares,  Variable
Voting Shares or Preferred Shares for the year ended December 31, 2006.


                        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.

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  Canada  Transportation  Act) 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

<PAGE>
                                      -76-


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 Canada  Transportation  Act
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 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.

<PAGE>
                                      -77-


      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.

Conversion

      Unless the foreign ownership restrictions of the Canada Transportation Act
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.

<PAGE>
                                      -78-


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 to the
Cerberus Affiliate, 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.

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

<PAGE>
                                      -79-


"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 Toronto Stock  Exchange,  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 Toronto Stock Exchange 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  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.

<PAGE>
                                      -80-


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

      ACE currently has an amount of  $329,998,000 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.  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  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.


RATINGS

      Ratings  generally address the ability of a company to repay principal and
interest or dividends on securities. The Notes are rated by Dominion Bond Rating
Service Limited ("DBRS").

      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.

<PAGE>
                                      -81-


      The table below shows the range of credit ratings that DBRS assigns to its
long-term debt instruments.

                               HIGHEST QUALITY OF        LOWEST QUALITY OF
      AGENCY                    SECURITIES RATED         SECURITIES RATED
--------------------------------------------------------------------------------
       DBRS                           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 has received the following credit rating for the Notes it has issued.

                                                           LONG-TERM DEBT
      AGENCY                                               CREDIT RATING
--------------------------------------------------------------------------------
       DBRS                                                   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.


                             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.

<TABLE>
<CAPTION>
NAME AND MUNICIPALITY
OF RESIDENCE                     PRINCIPAL OCCUPATION                         DIRECTOR SINCE            SHARES HELD
---------------------            ------------------------------------------   ------------------        -----------
<S>                              <C>                                          <C>                       <C>
Bernard Attali(4)(6)             Country Advisor /                            September 30, 2004         5,000(2)
Paris, France                    Texas Pacific Group France

Robert E. Brown(4)(5)            President and Chief Executive Officer        September 30, 2004        10,000(1)
Montreal, Quebec                 CAE Inc.

Carlton D. Donaway(4)(6)         Senior Advisor - Operations                  December 15, 2004              Nil
Redmond, Washington              Cerberus Capital Management, L.P.
</TABLE>


<PAGE>
                                      -82-


<TABLE>
<CAPTION>
NAME AND MUNICIPALITY
OF RESIDENCE                     PRINCIPAL OCCUPATION                         DIRECTOR SINCE            SHARES HELD
---------------------            ------------------------------------------   ------------------        -----------
<S>                              <C>                                          <C>                       <C>
Michael M. Green(4)(6)           Managing Director and President-Operations   September 30, 2004             Nil
Radnor, Pennsylvania             Cerberus Capital Management, L.P.

W. Brett Ingersoll(3)(5)         Managing Director                            September 30, 2004             Nil
New York, New York               Cerberus Capital Management, L.P.

Pierre Marc Johnson(4)(5)        Senior Counsel                               September 30, 2004         5,000(1)
Montreal, Quebec                 Heenan Blaikie LLP

Richard H. McCoy(4)(5)(6)        Corporate Director                           August 3, 2005             4,000(1)
Toronto, Ontario

John T. McLennan(3)(6)           Corporate Director                           September 30, 2004        10,000(1)
Mahone Bay, Nova Scotia

Robert A. Milton                 Chairman, President and Chief Executive      June 29, 2004             24,336(1)
Westmount, Quebec                Officer, ACE

David I. Richardson(3)(5)        Corporate Director                           September 30, 2004        10,000(1)
Grafton, Ontario

Marvin Yontef (4)                Senior Partner                               June 29, 2004              5,000(1)
Toronto, Ontario                 Stikeman Elliott LLP
</TABLE>

-------------

(1)   Voting Shares.
(2)   Variable Voting Shares.
(3)   Member of the Audit, Finance and Risk Committee.
(4)   Member of the Governance and Corporate Matters Committee.
(5)   Member of the Human Resources and Compensation Committee.
(6)   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 and President and Chief Executive Officer of Bombardier
from 1999 to 2002. Mr.  Donaway was Executive  Chairman of DHL Holdings USA from
2003 to 2004,  Chairman,  President and Chief Executive Officer of Airborne Inc.
from 2002 to 2003 and President and Chief Executive Officer of ABX Air Inc. from
1992 to 2003. Mr.  Ingersoll was a Partner at J.P.  Morgan Partners from 1994 to
2002. Mr. McLennan was Vice Chairman and Chief Executive  Officer of AT&T Canada
(which  was  renamed  Allstream  Inc.)  from 2000 to 2004.  Mr.  Richardson  was
Chairman, Ernst & Young Inc. and Senior Partner, Ernst & Young LLP (Canada) from
1987 to 2002. 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.


OFFICERS

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

<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF RESIDENCE             POSITION HELD
------------------------------------------     -------------------------------------------------------------------
<S>                                            <C>
Robert A. Milton .........................     Chairman, President and Chief Executive Officer, ACE, Chairman, Air
Westmount, Quebec                              Canada, Chairman, Aeroplan and Chairman, Jazz

Brian Dunne ..............................     Executive Vice President and Chief Financial Officer
Westmount, Quebec
</TABLE>


<PAGE>
                                      -83-

<TABLE>
<CAPTION>
NAME AND MUNICIPALITY OF RESIDENCE             POSITION HELD
------------------------------------------     -------------------------------------------------------------------
<S>                                            <C>
Greg Cote ................................     Senior Vice President, Corporate Finance and Strategy
Toronto, Ontario

Duncan Dee ...............................     Senior Vice President, Corporate Affairs and Chief Administrative
Ottawa, Ontario                                Officer

Sydney John Isaacs .......................     Senior Vice President, Corporate Development and Chief Legal Officer
Westmount, Quebec

Jack McLean ..............................     Controller
Winnipeg, Manitoba

Carolyn M. Hadrovic.......................     Corporate Secretary
Beaconsfield, Quebec
</TABLE>


      Unless otherwise indicated below, each of the officers has held a position
with 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. Duncan Dee was appointed  Executive  Assistant to
the President & Chief Executive Officer, Air Canada in May 2000, Vice President,
Corporate Affairs, Air Canada in November 2002, Senior Vice President, Corporate
Affairs, Air Canada in April 2004 and Senior Vice President, Corporate Affairs &
Chief  Administrative  Officer,  ACE in December 2004. 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 20, 2007,  the  directors  and officers  mentioned  above as a
group owned,  directly or  indirectly,  or had control or direction  over 74,523
Voting Shares representing  approximately 0.32% of the outstanding Voting Shares
and  5,000  Variable  Voting  Shares  representing  approximately  0.01%  of the
outstanding  Variable  Voting Shares of the Company.  As at March 20, 2007,  the
directors and officers mentioned above as a group owned, directly or indirectly,
or had  control  or  direction  over  104,978  units  of  Aeroplan  Income  Fund
representing  approximately  0.32% of the  outstanding  units of Aeroplan Income
Fund.  As at March 20, 2007,  the directors  and officers  mentioned  above as a
group owned,  directly or  indirectly,  or had control or direction  over 75,500
units  of  Jazz  Air  Income  Fund  representing   approximately  0.10%  of  the
outstanding  units of Jazz Air Income Fund. As at March 20, 2007,  the directors
and officers  mentioned above as a group owned,  directly or indirectly,  or had
control or  direction  over  45,500  Class B Shares of Air  Canada  representing
approximately 0.05% of the outstanding units of Air Canada.


CORPORATE CEASE TRADE ORDERS OR BANKRUPTCIES

      To the  knowledge of ACE, in the last ten years,  no director or executive
officer of ACE is or has been a director  or  executive  officer of any  company
that,  while that person was acting in that  capacity,  (a) 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, (b) was the subject of an event that resulted,  after that
person  ceased to be a director or executive  officer,  in the company being the
subject  of a cease  trade  order or similar  order or an order that  denied the
relevant  company access to an exemption  under  securities  legislation,  for a
period of more than 30  consecutive  days or (c) 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  except  for the
following:

<PAGE>
                                      -84-


      (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 Toronto Stock  Exchange 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;

      (v)   Rupert  J.  Duchesne  was  President  and Chief  Executive  Officer,
            Aeroplan  when Air  Canada  filed for  protection  under the CCAA on
            April 1, 2003;

      (vi)  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;

      (vii) Carlton  D.  Donaway  was  a  director  of  Anchor  Glass  Container
            Corporation,  but had  ceased to be a  director  when  such  filed a
            voluntary  petition for  reorganization  under  Chapter 11 of the US
            Bankruptcy Code in August 2005; and

      (viii)Montie R.  Brewer was Senior  Vice  President,  Planning  for United
            Airlines  until March 31,  2002.  UAL Corp.,  the parent  company of
            United  Airlines,  filed for  protection  under Chapter 11 of the US
            Bankruptcy Code on December 9, 2002.


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.

<PAGE>
                                      -85-


COMPOSITION OF AUDIT COMMITTEE

      The Audit  Finance  and Risk  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.


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 also
            a director of Air Canada,  Jazz Air Holding GP Inc. and a trustee of
            Aeroplan Income Fund. 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 the  Managing  Director of Cerberus  Capital
            Management,  L.P.  (private equity investment firm), a senior member
            of its  Private  Equity  Practice  and a  member  of its  Investment
            Committee.  Mr.  Ingersoll is also a director of Aeroplan Holding GP
            Inc. Prior to joining  Cerberus in 2002, Mr. Ingersoll was a Partner
            at JP Morgan Partners (formerly Chase Capital Partners) from 1993 to
            2002 (private equity  investment  firm). Mr. Ingersoll is a director
            of various public and private companies including Coram Health Care,
            IAP Worldwide Services, Inc., AerCap B.V., Talecris Bio Therapeutics
            Inc. and Endura Care,  LLC.  Mr.  Ingersoll  holds a BA in economics
            from Brigham Young University and a MBA from Harvard University.

      (iii) John T. McLennan is a corporate director. Mr. McLennan is a director
            of Amdocs Ltd., Emera,  Manitoba  Telephone Systems  (Vice-Chairman)
            and  Medisys  Health  Services.  Mr.  McLennan  is a director of Air
            Canada and Jazz Air  Holding GP Inc.  and also a trustee of Aeroplan
            Income  Fund Mr.  McLennan  was  recently  Vice-Chairman  and  Chief
            Executive Officer of Allstream. 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 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  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 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 that in the external

<PAGE>
                                      -86-


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 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 the Corporation's  auditing firm
since April 26,  1990.  Fees  payable for the years ended  December 31, 2006 and
December  31,  2005  to  PricewaterhouseCoopers   LLP  and  its  affiliates  are
$9,075,383 and $5,320,697,  respectively. Fees payable to PricewaterhouseCoopers
LLP and its affiliates in 2006 and 2005 are detailed below.


                                       YEAR ENDED      YEAR ENDED
                                       DECEMBER 31,    DECEMBER 31,
                                           2006           2005
                                       ------------    ------------
            Audit fees                  8,445,500    $  5,046,202
            Audit-related fees            599,883    $    252,745
            Tax fees                       30,000    $     21,750
            All other fees                    Nil             Nil
                                     ------------    ------------
                                        9,075,383    $  5,320,697

      The nature of each category of fees is described below.


AUDIT FEES


      Audit fees were paid for professional  services  rendered for the audit of
the Corporation'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
commodity and 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,  Carlton D.
Donaway  and  W.  Brett  Ingersoll,  all  directors  of  ACE,  are  respectively
President-Operations,   Senior   Advisor-Operations  and  Managing  Director  of
Cerberus Capital  Management,  L.P. As of March 20, 2007, the Cerberus Affiliate
holds 9.8 million Preferred Shares, which is 78.4% of all outstanding  Preferred
Shares.


                          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.

<PAGE>
                                      -87-


                                LEGAL PROCEEDINGS

      A description of certain legal proceedings to which ACE is a party appears
under the heading "Contingencies,  Guarantees and Indemnities" in Note 17 to the
consolidated  audited  annual  financial  statements  of ACE for the year  ended
December 31, 2006,  which is  incorporated  herein by  reference.  ACE's audited
annual financial  statements for the year ended December 31, 2006, are available
on SEDAR at www.sedar.com.

      Please  see also the  sections,  "Risk  Factors  - Air  Canada - Equal Pay
Litigation" and "Risk Factors - Air Canada - Current Legal Proceedings".


                               MATERIAL CONTRACTS

      The contracts that are material to the  Corporation  and that were entered
into within the year ended  December  31, 2006 or before such year but which are
still in effect are the following:

      (i)   Investment  Agreement  between Cerberus ACE Investment,  LLC and Air
            Canada dated June 23, 2004;

      (ii)  The Aircraft General Terms Agreement AGTA-ACN and related agreements
            between The Boeing  Company and Air Canada  dated  November 4, 2005;
            and

      (iii) Indenture  dated as of April  6,  2005  with  respect  to the  4.25%
            Convertible Senior Notes due 2035.

      Please refer to the section,  "Three-Year Summary:  Evolution of Business"
for the particulars of such contracts.


                                     EXPERTS

      The  Corporation's  auditors  are  PricewaterhouseCoopers  LLP,  Chartered
Accountants,  who have prepared an independent  auditor's  report dated February
13, 2007 in respect of the Corporation's  consolidated financial statements with
accompanying  notes as at and for the years ended December 31, 2006 and December
31, 2005 and the  Corporation's  internal  control over financial  reporting and
management's assessment thereof as at December 31, 2006.  PricewaterhouseCoopers
LLP has advised that they are independent with respect to the Corporation within
the meaning of the Code of Ethics of the Ordre des  comptables  agrees du Quebec
and the rules of 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 2007 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, 2006. The
above  information and additional  information  relating to ACE are available on
SEDAR at www.sedar.com.

      The  following  documents  can be obtained by sending  your request to the
Corporate  Secretary of ACE, at 5100 de Maisonneuve  Boulevard  West,  Montreal,
Quebec, H4A 3T2 :

      (i)   this  Annual   Information   Form,   together   with  any   document
            incorporated herein by reference;

      (ii)  the  2006  Management's  Discussion  &  Analysis  /  2006  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;

<PAGE>
                                      -88-


      (iii) the Corporation's  management proxy circular for the 2006 annual and
            special shareholder meeting filed with the Securities Commissions on
            September 1, 2006; 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.

<PAGE>


                                  APPENDIX A -
                CHARTER OF THE AUDIT, FINANCE AND RISK COMMITTEE

                                (THE "COMMITTEE")

                        OF THE BOARD OF DIRECTORS OF ACE

                               (THE "CORPORATION")

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:

<PAGE>
                                      A-2


(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  maybe,  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;

      (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

<PAGE>
                                      A-3


      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.

(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.

(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 and subsequently  report to the
            Audit Committee,  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;

      (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.

(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:

<PAGE>
                                      A-4


      (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.

(o)   Review 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  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.

<PAGE>
                                      A-5


(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  Quebec  Securities
      Commission 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)     Set policies  for the hiring of  employees  or former  employees of the
         Corporation's external auditors.

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

<PAGE>
                                      A-6


                  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

         (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.

<PAGE>
                                      A-7


(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.


December 14, 2006








<PAGE>


                                                                Document No. 2


<PAGE>


                         [ACE AVIATION GRAPHIC OMITTED]






                        Consolidated Financial Statements
                                      2006








                                [GRAPHIC OMITTED]










<PAGE>


[PRICEWATERHOUSECOOPERS GRAPHIC OMITTED]
--------------------------------------------------------------------------------
                                               PricewaterhouseCoopers LLP
                                               Chartered Accountants
                                               1250 Rene-Levesque Boulevard West
                                               Suite 2800
                                               Montreal, Quebec
                                               Canada H3B 2G4
                                               Telephone +1 514 205 5000
                                               Facsimile +1 514 876 1502

February 13, 2007


Independent Auditors' Report


To the Shareholders of ACE Aviation Holdings Inc.


We have completed an integrated audit of the consolidated financial statements
and internal control over financial reporting of ACE Aviation Holdings Inc. (the
"Corporation") as of December 31, 2006 and an audit of its December 31, 2005
consolidated financial statements. Our opinions, based on our audits, are
presented below.

Consolidated financial statements
---------------------------------

We have audited the accompanying consolidated statements of financial position
of ACE Aviation Holdings Inc. as of December 31, 2006 and December 31, 2005, and
the related consolidated statements of operations and retained earnings and cash
flows for the years then ended. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audit of the Corporation's financial statements as of December
31, 2006 and for the year then ended in accordance with Canadian generally
accepted auditing standards and the standards of the Public Company Accounting
Oversight Board (United States). We conducted our audit of the Corporation's
financial statements as of December 31, 2005 and for the year then ended in
accordance with Canadian generally accepted auditing standards. Those standards
require that we plan and perform an audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit of
financial statements includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. A financial statement
audit also includes assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Corporation as
of December 31, 2006 and December 31, 2005 and the results of its operations and
its cash flows for the year then ended in accordance with Canadian generally
accepted accounting principles.

As discussed in Note 2 to the financial statements, the Corporation adopted
Emerging Issues Committee Abstract ("EIC") 162, Stock-Based Compensation for
Employees Eligible to Retire before the Vesting Date, which changed its method
of accounting for stock options granted to employees eligible to retire at the
grant date or during the vesting period. As discussed in Note 23, the





PricewaterhouseCoopers refers to the Canadian firm of PricewaterhouseCoopers LLP
and the other member firms of PricewaterhouseCoopers International Limited, each
of which is a separate and independent legal entity.

<PAGE>

[PRICEWATERHOUSECOOPERS GRAPHIC OMITTED]

To the Shareholders of
ACE Aviation Holdings Inc.
February 13, 2007



Corporation adopted Statement of Financial Accounting Standard ("SFAS") 123(R),
Share-Based Payments, which changed its method of accounting for stock-based
compensation and SFAS 158, Employer's Accounting for Defined Benefit Pension and
Other Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and
132(R), which requires the Corporation to recognize the overfunded or
underfunded status of a defined benefit postretirement plan as an asset or
liability in its statement of financial position and to recognize changes in
that funded status in the year in which the changes occur through comprehensive
income.


Internal control over financial reporting
-----------------------------------------

We have also audited management's assessment, "Management's report on internal
control over financial reporting" located in Section 17 of the Corporation's
Management's Discussion and Analysis of Results of Operations and Financial
Condition, ,that the Corporation did not maintain effective internal control
over financial reporting as of December 31, 2006, because of the effect of
limitations in the Corporation's ability to identify all future income tax
assets and liabilities with respect to non-routine and complex business
transactions in the Corporation's December 31, 2006 consolidated financial
statements based on the criteria established in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Corporation's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and on the
effectiveness of the Corporation's internal control over financial reporting
based on our audit.

We conducted our audit of internal control over financial reporting in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of
internal control over financial reporting includes obtaining an understanding of
internal control over financial reporting, evaluating management's assessment,
testing and evaluating the design and operating effectiveness of internal
control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.

A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.

                                                                             (2)
<PAGE>

[PRICEWATERHOUSECOOPERS GRAPHIC OMITTED]

To the Shareholders of
ACE Aviation Holdings Inc.
February 13, 2007



Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.

A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not be prevented
or detected. The following material weakness has been identified and included in
management's assessment. There were limitations in the Corporation's ability to
identify all future income tax assets and liabilities with respect to
non-routine and complex business transactions in the Corporation's December 31,
2006 consolidated financial statements. This control deficiency resulted in
audit adjustments to the December 31, 2006 consolidated financial statements.
This control deficiency could result in a material misstatement in the
Corporation's consolidated financial statements that would not be prevented or
detected. This material weakness was considered in determining the nature,
timing, and extent of audit tests applied in our audit of the December 31, 2006
consolidated financial statements, and our opinion regarding the effectiveness
of the Corporation's internal control over financial reporting does not affect
our opinion on those consolidated financial statements.

In our opinion, management's assessment that the Corporation did not maintain
effective internal control over financial reporting as of December 31, 2006, is
fairly stated, in all material respects, based on criteria established in
Internal Control - Integrated Framework issued by the COSO. Also, in our
opinion, because of the effect of the material weakness described above on the
achievement of the objectives of the control criteria, the Corporation has not
maintained effective internal control over financial reporting as of December
31, 2006 based on criteria established in Internal Control - Integrated
Framework issued by the COSO.


/s/ PricewaterhouseCoopers LLP


Chartered Accountants


                                                                             (3)

<PAGE>


[ACE AVIATION GRAPHIC OMITTED]                 Consolidated Financial Statements
                                                                            2006

<TABLE>

           Consolidated Statement of Operations and Retained Earnings

-----------------------------------------------------------------------------------------------------------------------
<CAPTION>

For the year ended December 31
(in millions - Canadian dollars)                                                             2006                2005
-----------------------------------------------------------------------------------------------------------------------
<S>                                                               <C>           <C>                <C>
Operating revenues
   Passenger                                                                     $          8,969   $           8,269
   Cargo                                                                                      625                 620
   Other                                                                                    1,063                 941
-----------------------------------------------------------------------------------------------------------------------
                                                                                           10,657               9,830
-----------------------------------------------------------------------------------------------------------------------
   Special charge for Aeroplan miles                               note 21                   (102)                  -
-----------------------------------------------------------------------------------------------------------------------
                                                                                           10,555               9,830
-----------------------------------------------------------------------------------------------------------------------

Operating expenses
   Salaries, wages and benefits                                                             2,553               2,517
   Aircraft fuel                                                                            2,546               2,198
   Aircraft rent                                                                              441                 417
   Airport and navigation fees                                                                983                 924
   Aircraft maintenance, materials and supplies                                               471                 367
   Communications and information technology                                                  289                 303
   Food, beverages and supplies                                                               335                 334
                                                                   -------------
   Depreciation, amortization and obsolescence                     note 14                    576                 482
   Commissions                                                                                236                 253
                                                                   -------------
   Special charge for labour restructuring                         note 10                     25                   -
   Other                                                                                    1,705               1,580
-----------------------------------------------------------------------------------------------------------------------
                                                                                           10,160               9,375
-----------------------------------------------------------------------------------------------------------------------

Operating income                                                                              395                 455

Non-operating income (expense)
   Interest income                                                                            120                  66
   Interest expense                                                                          (378)               (315)
   Interest capitalized                                                                        61                  14
                                                                   -------------
   Gain on sale of US Airways shares                               note 6                     152                   -
                                                                   -------------
   Dilution gain - Air Canada                                      note 18                     25                   -
                                                                   -------------
   Dilution gain - Jazz                                            note 19                    220                   -
                                                                   -------------
   Dilution gain - Aeroplan                                        note 22                      -                 190
                                                                   -------------
   Loss on sale of and provisions on assets                        note 3                      (4)                (28)
   Other                                                                                      (14)                (12)
-----------------------------------------------------------------------------------------------------------------------
                                                                                               182                (85)
-----------------------------------------------------------------------------------------------------------------------

Income before the following items                                                             577                 370

   Non-controlling interest                                                                   (72)                (24)
   Foreign exchange gain                                                                       12                  46
                                                                   -------------
   Provision for income taxes                                      Note 8                    (109)               (131)
-----------------------------------------------------------------------------------------------------------------------

Income for the year                                                              $            408   $             261

Retained earnings, beginning of year as originally reported                                   415                 157
                                                                   -------------
Adjustment related to change in accounting policy                  note 2J                    (13)                (16)
-----------------------------------------------------------------------------------------------------------------------

Retained earnings, beginning of year as restated                                              402                 141
-----------------------------------------------------------------------------------------------------------------------

Retained earnings, end of year                                                   $            810   $             402
-----------------------------------------------------------------------------------------------------------------------

Earnings per share
                                                                   -------------
   Basic                                                           note 13       $           4.01   $            2.66
-----------------------------------------------------------------------------------------------------------------------
   Diluted                                                         note 13       $           3.80   $            2.48
-----------------------------------------------------------------------------------------------------------------------

 The accompanying notes are an integral part of the consolidated financial statements.

</TABLE>
--------------------------------------------------------------------------------
                                       4

<PAGE>

[ACE AVIATION GRAPHIC OMITTED]                 Consolidated Financial Statements
                                                                            2006

<TABLE>

                  Consolidated Statement of Financial Position

-----------------------------------------------------------------------------------------------------------------------
<CAPTION>

As at December 31
(in millions - Canadian dollars)                                                             2006                2005
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>      <C>                <C>
ASSETS
Current
                                                                   -------------
   Cash and cash equivalents                                       note 2P       $          1,854   $           1,565
                                                                   -------------
   Short-term investments                                          note 2Q                  1,324                 616
-----------------------------------------------------------------------------------------------------------------------
                                                                                            3,178               2,181
-----------------------------------------------------------------------------------------------------------------------
                                                                   -------------
   Restricted cash                                                 note 2R                    109                  86
   Accounts receivable                                                                        729                 637
   Spare parts, materials and supplies                                                        307                 325
   Prepaid expenses and other current assets                                                  127                 125
                                                                   -------------
   Future income tax                                               note 8                     584                   -
-----------------------------------------------------------------------------------------------------------------------
                                                                                            5,034               3,354
-----------------------------------------------------------------------------------------------------------------------

                                                                   -------------
Property and equipment                                             note 3                   5,989               5,494
                                                                   -------------
Deferred charges                                                   note 4                     116                 145
                                                                   -------------
Intangible assets                                                  note 5                   1,643               2,462
                                                                   -------------
Deposits and other assets                                          note 6                     323                 392
                                                                   -------------
Future income tax                                                  note 8                     336                   -
-----------------------------------------------------------------------------------------------------------------------
                                                                                 $         13,441   $          11,847

-----------------------------------------------------------------------------------------------------------------------

LIABILITIES
Current
   Accounts payable and accrued liabilities                                      $          1,547   $           1,355
   Advance ticket sales                                                                       832                 711
                                                                   -------------
   Current portion of Aeroplan deferred revenues                   note 2F                    857                 680
                                                                   -------------
   Current portion of long-term debt and capital leases            note 7                     367                 265
                                                                   -------------
   Current taxes payable                                           note 8                     345                   -
-----------------------------------------------------------------------------------------------------------------------
                                                                                            3,948               3,011
-----------------------------------------------------------------------------------------------------------------------

                                                                   -------------
Long-term debt and capital leases                                  note 7                   3,759               3,543
                                                                   -------------
Convertible preferred shares                                       note 12                    166                 148
                                                                   -------------
Future income taxes                                                note 8                     136                 221
                                                                   -------------
Pension and other benefit liabilities                              note 9                   1,876               2,154
Aeroplan deferred revenues                                                                    906                 953
                                                                   -------------
Other long-term liabilities                                        note 10                    378                 446
-----------------------------------------------------------------------------------------------------------------------
                                                                                           11,169              10,476
-----------------------------------------------------------------------------------------------------------------------

Non-controlling interest                                                                      695                 203

SHAREHOLDERS' EQUITY
                                                                   -------------
   Share capital and other equity                                  note 12                    742                 747
   Contributed surplus                                                                         25                  19
   Retained earnings                                                                          810                 402
-----------------------------------------------------------------------------------------------------------------------
                                                                                            1,577               1,168
-----------------------------------------------------------------------------------------------------------------------
                                                                                 $         13,441   $          11,847

-----------------------------------------------------------------------------------------------------------------------

             The accompanying notes are an integral part of the consolidated financial statements.
                   Commitments (Note 15); Contingencies, Guarantees and Indemnities (Note 17)

On behalf of the Board of Directors:

Signed                                                                 Signed
--------------------------------                                       -------------------------------------
Robert A. Milton                                                       W. Brett Ingersoll
Chairman, President and Chief Executive Officer                        Director

</TABLE>

--------------------------------------------------------------------------------
                                       5

<PAGE>

[ACE AVIATION GRAPHIC OMITTED]                 Consolidated Financial Statements
                                                                            2006

<TABLE>

                       Consolidated Statement of Cash Flow

------------------------------------------------------------------ ------------- ------------------ -------------------
<CAPTION>
For the year ended December 31
(in millions - Canadian dollars)                                                             2006                2005
------------------------------------------------------------------ ------------- ------------------ -------------------
<S>                                                                     <C>                  <C>
Cash flows from (used for)
Operating
   Income for the year                                                           $            408   $             261
   Adjustments to reconcile to net cash provided by operations
     Depreciation, amortization and obsolescence                                              576                 482
                                                                   -------------
     Gain on sale of US Airways shares                             note 6                    (152)                  -
                                                                   -------------
     Dilution gain - Air Canada                                    note 18                    (25)                  -
                                                                   -------------
     Dilution gain - Jazz                                          note 19                   (220)                  -
                                                                   -------------
     Dilution gain - Aeroplan                                      note 22                      -                (190)
     (Gain) loss on sale of and provisions on assets                                            4                  28
     Foreign exchange (gain) loss                                                               6                 (83)
     Future income taxes                                                                      102                 116
     Employee future benefit funding more than expense                                       (228)                (74)
     Decrease (increase) in accounts receivable                                              (123)                (43)
     Decrease (increase) in spare parts, materials and supplies                                 5                 (92)
     Increase (decrease) in accounts payable and accrued
       liabilities                                                                            104                  45
     Increase (decrease) in advance ticket sales, net of
       restricted cash                                                                         98                 157
     Increase (decrease) in Aeroplan deferred revenues                                         34                  39
                                                                   -------------
     Special charge for Aeroplan Miles                             note 21                    102                   -
     Aircraft lease payments (in excess of) less than rent
       expense                                                                                (16)                 33
     Other                                                                                     57                  (4)
------------------------------------------------------------------ ------------- ------------------ -------------------
                                                                                              732                 675
------------------------------------------------------------------ ------------- ------------------ -------------------
Financing
                                                                   -------------
   Issue of common shares                                          note 12                      8                 452
                                                                   -------------
   Issue of convertible notes                                      note 12                      -                 319
                                                                   -------------
   Issue of Air Canada shares                                      note 18                    187                   -
                                                                   -------------
   Issue of Jazz units                                             note 19                    218                   -
                                                                   -------------
   Issue of Aeroplan units                                         note 22                      -                 232
                                                                   -------------
   Aircraft related borrowings                                     note 7                     397                 404
                                                                   -------------
   Credit facility borrowings - Jazz                               note 7                     113                   -
                                                                   -------------
   Credit facility borrowings - Aeroplan                           note 7                       -                 300
   Reduction of long-term debt and capital lease obligations                                 (278)               (894)
   Distributions paid to non-controlling interests                                            (51)                 (8)
   Other                                                                                       (3)                 (4)
------------------------------------------------------------------ ------------- ------------------ -------------------
                                                                                              591                 801
------------------------------------------------------------------ ------------- ------------------ -------------------
Investing
   Short-term investments                                                                    (708)               (465)
                                                                   -------------
   Proceeds from sale of Air Canada shares                         note 18                    304                   -
                                                                   -------------
   Proceeds from sale of Jazz units                                note 19                     14                   -
                                                                   -------------
   Proceeds from sale of Aeroplan units                            note 22                      -                  35
                                                                   -------------
   Investment in US Airways                                        note 6                       -                 (87)
                                                                   -------------
   Proceeds from sale of US Airways                                note 6                     232                   -
   Additions to capital assets                                                               (920)               (882)
   Proceeds from sale of assets                                                                40                  42
   Cash collaterization of letters of credit                                                    4                 (35)
------------------------------------------------------------------ ------------- ------------------ -------------------
                                                                                           (1,034)             (1,392)
------------------------------------------------------------------ ------------- ------------------ -------------------
Increase in cash and cash equivalents                                                         289                  84
Cash and cash equivalents, beginning of year                                                1,565               1,481
------------------------------------------------------------------ ------------- ------------------ -------------------
Cash and cash equivalents, end of year                                           $          1,854   $           1,565
------------------------------------------------------------------ ------------- ------------------ -------------------

                           Cash and cash equivalents exclude Short-term investments of $1,324 as at
                                  December 31, 2006 ($616 as at December 31, 2005).

                The accompanying notes are an integral part of the consolidated financial statements.

</TABLE>
--------------------------------------------------------------------------------
                                       6
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

For the year ended December 31, 2006
(currencies in millions - Canadian dollars)
--------------------------------------------------------------------------------
1. NATURE OF OPERATIONS AND ACCOUNTING POLICIES
--------------------------------------------------------------------------------

ACE Aviation Holdings Inc. ("ACE") incorporated on June 29, 2004, is an
investment holding company of various aviation interests. Reference to the
"Corporation" in the following notes to the consolidated financial statements
refers to, as the context may require, ACE and its subsidiaries collectively,
ACE and one or more of its subsidiaries, one or more of ACE's subsidiaries, or
ACE itself.

ACE has four reportable segments: Air Canada Services, Aeroplan Limited
Partnership ("Aeroplan"), Jazz Air LP ("Jazz"), and ACTS Limited Partnership
("ACTS").

As at December 31, 2006, ACE holds:
    -    a 75.0 percent direct ownership interest in Air Canada, the principal
         entity  included in the Air Canada Services segment,
    -    a 75.3 percent ownership interest in Aeroplan, including a 50.3 percent
         direct ownership in Aeroplan LP and the remainder held in the Aeroplan
         Income Fund (50.3 percent ownership interest in Aeroplan after January
         10, 2007 as described in Note 24);
    -    a 79.7 percent direct ownership interest in Jazz; and
    -    a 100 percent ownership interest in ACTS.

The Air Canada Services segment is comprised of the entities previously included
within the Transportation Services segment with the exception of the activities
of the ACE stand-alone entity and certain consolidation adjustments that are now
included within Corporate Items and Eliminations ("CIE"). As a result of these
changes, the comparative segment disclosures have been restated to reflect the
current reportable segment structure.

Air Canada Services

Air Canada Services includes the Corporation's principal passenger and cargo
transportation services business operated by Air Canada and related ancillary
services.

These services are provided through Air Canada, AC Cargo Limited Partnership
("Air Canada Cargo"), ACGHS Limited Partnership ("ACGHS"), and Touram Limited
Partnership ("Air Canada Vacations"). The Air Canada Services segment includes
the transportation revenues related to aircraft operated by Jazz Air LP ("Jazz"
or "Jazz LP") and rental income from aircraft leased to Jazz by subsidiaries of
Air Canada and the costs related to fees paid to Jazz, as provided for under a
capacity purchase agreement.

Air Canada is Canada's largest domestic and international full-service airline
and the largest provider of scheduled passenger services in the domestic market,
the US transborder market as well as Canada-International markets to and from
Canada. Through Air Canada's global route network, virtually every major market
throughout the world is served either directly or through the Star Alliance
network. Air Canada is a founding member of the Star Alliance network which is
the world's largest airline alliance group.

Air Canada and Air Canada Cargo provide air cargo services on domestic, US
transborder and international flights. Air Canada Cargo is a major domestic air
cargo carrier and uses the entire cargo capacity on aircraft operated by Air
Canada and Jazz on domestic and transborder routes. Air Canada offers cargo
services on its international flights and currently uses two chartered all
freighter aircraft to supplement Canada-Europe and Canada-Asia services. Air
Canada Cargo manages all international cargo and freighter operations on behalf
of Air Canada.

Air Canada Ground Handling Services provides passenger handling services to Air
Canada, Jazz and other airlines with a primary focus on Canadian stations.
Services covered include passenger check-in, gate management, baggage and cargo
handling and processing, cabin cleaning, de-icing as well as aircraft ramp
services.

Air Canada Vacations (51% owned directly by Air Canada and 49% owned directly by
ACE) is a major Canadian tour operator providing tour operator services and
vacation packages which include air transportation

--------------------------------------------------------------------------------
                                       7
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

supplied by Air Canada, hotel accommodations, car rentals and cruises. Air
Canada Vacations also sells surplus seat inventory to travel agents under the
trade name Netair.

Aeroplan

Aeroplan is a premier loyalty program which offers miles accumulation and
redemption to members as an incentive to the Corporation's and other commercial
partners' customers. Members may redeem accumulated mileage for travel rewards
or for goods and services from non-airline partners.

Jazz

Jazz is a regional carrier which provides service to Air Canada's customers in
lower density markets and in higher density markets at off-peak times throughout
Canada and to certain destinations in the United States under a capacity
purchase agreement between Air Canada and Jazz that came into effect September
30, 2004 (the "Initial Jazz CPA"), which was amended and restated effective
January 1, 2006 (the "Jazz CPA"). Under the Jazz CPA, Jazz focuses on flight
operations and customer service and Air Canada is responsible for scheduling,
marketing, pricing and related commercial activities of the regional operations.
Under the Jazz CPA, Jazz records revenues from Air Canada based upon fees
relating to flight operations performed, passengers carried and other items
covered by the agreement. These inter-company transactions are eliminated in
these consolidated financial statements. The Air Canada Services segment records
the revenue on flights operated under the Jazz CPA in Passenger revenue.

ACTS

ACTS provides technical services and competes on a global basis as an aircraft
maintenance, repair and overhaul service provider.



Additional financial information on ACE operating segments is outlined in Note
14, Segment Information.


--------------------------------------------------------------------------------
                                       8
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
--------------------------------------------------------------------------------

A) BASIS OF VALUATION

In accordance with Section 1625 of the CICA Handbook, Comprehensive Revaluation
of Assets and Liabilities ("CICA 1625"), ACE adopted fresh start reporting on
September 30, 2004. As a result of the financial reorganization under CCAA, the
assets and liabilities of the consolidated entity, excluding goodwill, were
comprehensively revalued to fair values. A revaluation adjustment of $1,655 was
recorded to shareholders' equity.

B) PRINCIPLES OF CONSOLIDATION

These consolidated financial statements include the accounts of the Corporation
and its subsidiaries operations described in Note 1, with provisions for
non-controlling interests. The consolidated financial statements of the
Corporation include the accounts of variable interest entities for which the
Corporation is the primary beneficiary. All inter-company and inter-entity
balances and transactions are eliminated.

C) USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.

D) PASSENGER AND CARGO REVENUES

Airline passenger and cargo advance sales are deferred and included in current
liabilities. Passenger and cargo revenues are recognized when the transportation
is provided, except for revenue on unlimited flight passes which is recognized
on a straight-line basis over the period during which the travel pass is valid.
The Corporation has formed alliances with other airlines encompassing loyalty
program participation, code sharing and coordination of services including
reservations, baggage handling and flight schedules. Revenues are allocated
based upon formulas specified in the agreements and are recognized as
transportation is provided. As described further under Aeroplan Loyalty Program,
the estimated fair value of Aeroplan Miles earned through qualifying air travel
is deferred at the time the qualifying air travel is provided. Deferred revenues
from the issue of Miles ("Miles") to customers, including Miles sold to loyalty
program partners are recorded as passenger revenues when the transportation is
provided. Redemptions for non-passenger services are included in other revenues.

The Corporation performs regular evaluations on the deferred revenue liability
which may result in adjustments being recognized as revenue. Due to the complex
pricing structures; the complex nature of interline and other commercial
agreements used throughout the industry; historical experience over a period of
many years; and other factors including refunds, exchanges and unused tickets,
certain relatively small amounts are recognized as revenue based on estimates.
Events and circumstances may result in actual results that are different from
estimates; however these differences have historically not been material.

E) CAPACITY PURCHASE AGREEMENTS

Air Canada has capacity purchase agreements with certain unaffiliated regional
carriers, which are referred to as Tier III carriers, operating aircraft of 18
seats or less. Under these agreements, Air Canada is responsible for the
marketing, ticketing and commercial arrangements relating to these flights and
records the revenue it earns under passenger revenue. For the year ended
December 31, 2006, passenger revenues under capacity purchase agreements with
Tier III carriers amounted to $68 ($70 - 2005). Operating expenses under
capacity purchase agreements with Tier III carriers are recorded primarily in
the aircraft fuel, airport and navigation fees and other operating expense
categories.

F) AEROPLAN LOYALTY PROGRAM

Miles earned by members through transportation services provided by the
Corporation and the transportation services are treated as multiple elements.
Miles are recorded at fair values with the residual allocated to transportation
services. The proceeds from the sale of Miles to loyalty program commercial
partners are deferred.

--------------------------------------------------------------------------------
                                       9
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

Revenues from Miles issued to members are recognized at the time the Miles are
redeemed except for breakage as noted below. Miles redeemed for travel on Air
Canada and Jazz are included in Passenger revenue and Miles redeemed for other
than travel are included in Other revenues.

Based on historical experience and current program policies the Corporation
estimates the percentage of Miles that are not expected to be redeemed, defined
as breakage. Breakage is estimated by the Corporation based on the terms and
conditions of membership and historical accumulation and redemption patterns as
adjusted for changes to any terms and conditions that affect members' redemption
practices. The estimated breakage factor is 17%. Changes in the breakage factor
are accounted for as follows: in the period of change, the deferred revenue
balance is adjusted as if the revised estimate had been used in prior periods
with the offsetting amount recorded as an adjustment to Other revenues; and for
subsequent periods, the revised estimate is used. The amount allocated to
breakage is recognized in Other revenues on a straight line basis over a period
of 30 months, which is the estimated average life of a Mile.

The current portion of Aeroplan loyalty program deferred revenues of $857 (2005
- $680) is based on Management's estimate as to the portion of the liabilities
that will be redeemed in the next twelve months. The remainder of the
liabilities is carried in Aeroplan deferred revenues.

G) OTHER REVENUES

Other revenue includes certain loyalty program revenues, as described above, as
well as revenues from technical services maintenance and other airline related
services.

Revenues relating to airframe maintenance services are recognized as the
services are performed. Revenues and costs relating to engine and component
maintenance services are deferred and only recognized once the work has been
completed.

Certain maintenance contracts are referred to as power by the hour whereby the
customer makes payments based on their aircraft utilization. Customer receipts
under a power by the hour contract are deferred in current liabilities and
recognized as revenues as maintenance services are performed.

Other airline related service revenues are recognized as services are provided.

H) EMPLOYEE FUTURE BENEFITS

The cost of pensions, other post-retirement and post-employment benefits earned
by employees is actuarially determined using the projected benefit method
prorated on service, market interest rates, and management's best estimate of
expected plan investment performance, salary escalation, retirement ages of
employees and expected health care costs.

A market-related valuation method is used to value plan assets for the purpose
of calculating the expected return on plan assets. Under the selected method,
the differences between investment returns during a given year and the expected
investment returns are amortized on a straight line basis over 4 years.

Past service costs arising from plan amendments are amortized on a straight-line
basis over the average remaining service period of employees active at the date
of amendment. This period does not exceed the average remaining service period
of such employees up to the full eligibility date. The average remaining service
life for the plans is between 7 and 17 years.

Cumulative unrecognized net actuarial gains and losses in excess of 10% of the
greater of the projected benefit obligation or market-related value of plan
assets at the beginning of the year are amortized over the remaining service
period of active employees.

I) EMPLOYEE PROFIT SHARING PLAN

The Corporation has employee profit sharing plans. Payments are calculated
annually on full calendar year results and recorded throughout the year as a
charge to salary and wage expense based on the estimated annual payment under
the plan.

--------------------------------------------------------------------------------
                                       10
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

J) STOCK-BASED COMPENSATION PLANS

Certain employees of the Corporation participate in the ACE, Air Canada,
Aeroplan and Jazz stock based compensation plans, as described in Note 11.

On July 6, 2006, the Emerging Issues Committee of the Accounting Standards Board
of Canada issued EIC-162 - Stock-based compensation for employees eligible to
retire before the vesting date. Prior to the adoption of EIC-162, the fair value
of stock options granted was recognized as a charge to salaries and wages
expense on a straight line basis over the applicable vesting period, without
regard to when an employee was eligible to retire. EIC-162 is applicable to the
Corporation as the terms of the Corporation's stock option plan specify that
upon the retirement of the employee, options granted may be exercised as the
rights to exercise accrue.

The Corporation adopted EIC-162 during 2006 with restatement of prior periods.
The impact in these financial statements of adopting EIC-162 is a charge to
retained earnings of $16 as at January 1, 2005 and $13 as at January 1, 2006, a
decrease to Salaries, wages and benefits expense of $3 for the year ended
December 31, 2005 offset against Contributed Surplus. The basic and diluted
earnings per share increased by $0.03 for the year ended December 31, 2005 as a
result of adopting EIC-162.

The fair value of stock options or units granted to Corporation employees is
recognized as compensation expense and a credit to contributed surplus on a
straight line basis over the applicable vesting period. For a stock option or
unit award attributable to an employee who is eligible to retire at the grant
date, the fair value of the stock option or unit award is expensed on the grant
date. For a stock option or unit award attributable to an employee who will
become eligible to retire during the vesting period, the fair value of the stock
option or unit award is recognized over the period from the grant date to the
date the employee becomes eligible to retire. The amount of compensation cost
recognized at any date at least equals the value of the vested portion of the
options at that date.

ACE, Air Canada, Aeroplan and Jazz also maintain employee share and unit
purchase plans for shares and units. Under these plans, contributions by the
Corporation's employees are matched to a specific percentage by the Corporation.
These contributions are included in salaries, wages and benefits expense.

K) MAINTENANCE AND REPAIRS

Maintenance and repair costs are charged to operating expenses as incurred, with
the exception of maintenance and repair costs related to return conditions on
short-term aircraft leases, which are accrued over the term of the lease.

L) OTHER OPERATING EXPENSES

Included in other operating expenses are expenses related to building rent and
maintenance, terminal handling, professional fees and services, crew meals and
hotels, advertising and promotion, insurance costs, credit card fees, Aeroplan
Miles redeemed for other than travel, ground costs for Air Canada Vacations
packages, and other expenses. Expenses are recognized as incurred.

M) FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

Under the Corporation's risk management policy, derivative financial instruments
are used only for risk management purposes, not for generating trading profits.
When the Corporation utilizes derivatives in hedge accounting relationships, the
Corporation identifies, designates and documents those transactions and
regularly tests the transactions to demonstrate effectiveness in order to
continue hedge accounting. To the extent that a derivative financial instrument
does not qualify for hedge accounting or for those that are not designated as
hedges, the fair value of the derivative financial instrument is recorded on the
consolidated statement of financial position and changes in its fair value are
recorded in income in the period when the change occurs.

Changes in the fair value of foreign currency forward contracts, option
agreements and currency swap agreements used for foreign exchange risk
management but not designated as hedges for accounting purposes, are recorded in
foreign exchange gain (loss). These contracts are included in the consolidated
statement of financial position at fair value in Accounts receivable and
Accounts payable and accrued liabilities.

The Corporation from time to time enters into interest rate swaps to manage the
risks associated with interest rate movement on US and Canadian floating rate
debt and investments, including anticipated debt transactions.

--------------------------------------------------------------------------------
                                       11
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

Changes in the fair value of these swap agreements, which are not designated as
hedges for accounting purposes, are recognized in income in Other non-operating
income and are recorded on the consolidated statement of financial position in
Other assets and Other long-term liabilities.

Derivatives under the fuel-hedging program are designated as hedges for
accounting purposes and hedge accounting is being applied prospectively from
October 1, 2005. Under hedge accounting, gains or losses on fuel hedging
contracts are recognized as a component of aircraft fuel expense when the
underlying jet fuel being hedged is consumed. Premiums paid for option contracts
and the excluded time value of the options is deferred as a cost of the hedge in
the consolidated statement of financial position in Other assets and recognized
in Fuel expense at the same time as the hedged jet fuel is consumed. Similarly,
the value of the derivatives previously measured at fair value where the
Corporation did not apply hedge accounting is also treated as a cost of the
hedge and accounted for in the same way. Prior to these derivative instruments
being designated as hedges for accounting purposes, gains or losses are recorded
in other non-operating expense.

The Corporation will discontinue hedge accounting when the hedge item matures,
expires, is sold, terminated, cancelled or exercised, the Corporation terminates
its designation of the hedging relationship, the hedging relationship ceases to
be effective, or the anticipated transaction is no longer probable.

When a hedging item ceases to exist and is not replaced, any gains, losses,
revenues or expenses associated with the hedging item that have been deferred
previously as a result of applying hedge accounting are carried forward to be
recognized in income in the same period as the corresponding gains, losses,
revenues or expenses associated with the hedged item.

When a hedged item ceases to exist or an anticipated transaction is no longer
probable, any gains, losses, revenues or expenses associated with the hedging
item that had been deferred previously as a result of hedge accounting are
realized in the current period's statement of operations.

N) FOREIGN CURRENCY TRANSLATION

Monetary assets and liabilities denominated in foreign currencies are translated
into Canadian dollars at rates of exchange in effect at the date of the
consolidated statement of financial position. Non-monetary assets, non-monetary
liabilities, revenues and expenses arising from transactions denominated in
foreign currencies, are translated at rates of exchange in effect, which is
based on an average for the month. Adjustments to the Canadian dollar equivalent
of foreign denominated monetary assets and liabilities due to the impact of
exchange rate changes are classified on the consolidated statement of operations
as a foreign exchange gain or loss.

O) INCOME TAXES

The Corporation utilizes the liability method of accounting for income taxes
under which future income tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amount and the tax basis of assets and liabilities.
Future income tax assets and liabilities are measured using substantively
enacted tax rates in effect for the year in which those temporary differences
are expected to be recovered or settled. The effect on future income tax assets
and liabilities of a change in tax rates is recognized in earnings in the period
that includes the enactment date. Future income tax assets are recognized to the
extent that realization is considered more likely than not.

P) CASH AND CASH EQUIVALENTS

Cash includes $1,730 pertaining to investments with original maturities of three
months or less at December 31, 2006 (2005 - $1,540). Investments include bankers
acceptances, bankers discount notes, and commercial paper, which may be
liquidated promptly and have original maturities of three months or less. The
weighted average interest rate on investments as at December 31, 2006 is 4.30%
(2005 - 3.31%).

Q) SHORT-TERM INVESTMENTS

Short-term investments, comprised of bankers acceptances and bankers discount
notes, have original maturities over three months, but not more than one year.
The weighted average interest rate on short-term investments as at December 31,
2006 is 4.31% (2005 - 3.04 %).

--------------------------------------------------------------------------------
                                       12
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

R) RESTRICTED CASH

As at December 31, 2006, the Corporation has recorded $109 (2005 - $86) in
restricted cash, under current assets, representing funds held in trust by Air
Canada Vacations in accordance with regulatory requirements governing advance
ticket sales, recorded under current liabilities, for certain travel related
activities.

S) SPARE PARTS, MATERIALS AND SUPPLIES

Spare parts, materials and supplies are valued at the lower of average cost and
net realizable value. A provision for the obsolescence of flight equipment spare
parts is accumulated over the estimated service lives of the related flight
equipment to a 30% residual value.

T) PROPERTY AND EQUIPMENT

Property and equipment is originally recorded at cost. Property under capital
leases and the related obligation for future lease payments are initially
recorded at an amount equal to the lesser of fair value of the property or
equipment and the present value of those lease payments. On the application of
fresh start accounting effective September 30, 2004, the cost of the
Corporation's property and equipment was adjusted to fair value. In addition,
the estimated useful lives of certain assets were also adjusted, including
buildings where useful lives were extended to periods not exceeding 50 years.

Property and equipment are depreciated to estimated residual values based on the
straight-line method over their estimated service lives. Property and equipment
under capital leases and variable interest entities are depreciated to estimated
residual values over the life of the lease. Aircraft and flight equipment are
depreciated over 20 to 30 years, with 10% to 20% estimated residual values.
Aircraft reconfiguration costs are amortized over 3 years. Betterments to owned
aircraft are capitalized and amortized over the remaining service life of the
aircraft. Betterments to aircraft on operating leases are amortized over the
term of the lease.

Buildings are depreciated over their useful lives not exceeding 40 to 50 years
on a straight line basis. An exception to this is where the useful life of the
building is greater than the term of the land lease. In these circumstances, the
building is depreciated over the life of the lease. Leasehold improvements are
amortized over the lesser of the lease term or 5 years. Ground and other
equipment is depreciated over 3 to 25 years.

U) INTEREST CAPITALIZED

Interest on funds used to finance the acquisition of new flight equipment and
other property and equipment is capitalized for periods preceding the dates that
the assets are available for service. Capitalized interest related to the
acquisition of new flight equipment and other property and equipment is included
in purchase deposits within Property and equipment (refer to Note 3).
Capitalized interest also includes financing costs charged by the manufacturer
on capital commitments as described in Note 15.

V) DEFERRED FINANCING COSTS

Deferred financing costs are amortized on an effective interest basis over the
term of the related obligation.

W) INTANGIBLE ASSETS

As a result of the application of fresh start reporting, intangible assets were
recorded at their estimated fair values at September 30, 2004. Indefinite life
assets are not amortized while assets with finite lives are amortized to nil
over their estimated useful lives.

================================================================================
                                                            Estimated Useful
                                                            Life
--------------------------------------------------------------------------------
International route rights and slots                         Indefinite
Air Canada trade name                                        Indefinite
Aeroplan trade name                                          Indefinite
Other marketing based trade names                            Indefinite
Aeroplan contracts                                           25 years
Star Alliance membership                                     25 years
Other contract and customer based intangible assets          10 to 15 years
Technology based intangible assets                           1 to 25 years
================================================================================

--------------------------------------------------------------------------------
                                       13
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


X) IMPAIRMENT OF LONG-LIVED ASSETS

Long-lived assets are tested for impairment whenever circumstances indicate that
the carrying value may not be recoverable. When events or circumstances indicate
that the carrying amount of long-lived assets, other than indefinite life
intangibles, are not recoverable, the long-lived assets are tested for
impairment by comparing the estimate of future expected cash flows to the
carrying amount of the assets or groups of assets. If the carrying value is not
recoverable from future expected cash flows, any loss is measured as the amount
by which the asset's carrying value exceeds fair value. Recoverability is
assessed relative to undiscounted cash flows from the direct use and disposition
of the asset or group of assets.

Indefinite life intangible assets are subjected to impairment tests under
Canadian GAAP on an annual basis or when events or circumstances indicate a
potential impairment. If the carrying value of such assets exceeds the fair
values, the assets are written down to fair value.

Y) INVESTMENTS

Investments not subject to significant influence are carried at cost and any
declines in value that are determined to be other than temporary are included in
earnings. Earnings from such investments are recognized only to the extent
received or receivable.

Z) AIRCRAFT LEASE PAYMENTS IN EXCESS OF OR LESS THAN RENT EXPENSE

Total aircraft operating lease rentals over the lease term are amortized to
operating expense on a straight-line basis. Included in deferred charges and
long-term liabilities is the difference between the straight line aircraft rent
expense and the payments as stipulated under the lease agreement.

AA) ASSET RETIREMENT OBLIGATIONS

The Corporation records an asset and related liability for the costs associated
with the retirement of long-lived tangible assets when a legal liability to
retire such assets exists. The fair value of a liability for an asset retirement
obligation is recognized in the period in which it is incurred if a reasonable
estimate of fair value can be made. The associated asset retirement costs are
capitalized as part of the carrying amount of the long-lived asset and then
amortized over its estimated useful life. In subsequent periods, the asset
retirement obligation is adjusted for the passage of time and any changes in the
amount of the underlying cash flows through charges to earnings. A gain or loss
may be incurred upon settlement of the liability.

BB) VARIABLE INTEREST ENTITIES

Aircraft and Engine Leasing Transactions
----------------------------------------

Air Canada has entered into aircraft and engine leasing transactions with a
number of special purpose entities that are variable interest entities (a "VIE")
under Accounting Guideline 15 of the CICA Handbook, Variable Interest Entities
("AcG-15"). As a result of the adoption of AcG-15 and the Corporation being the
primary beneficiary of these VIEs, the Corporation consolidates leasing entities
covering 51 aircraft and 22 engines.

Fuel Facilities Arrangements
----------------------------

Air Canada participates in fuel facilities arrangements operated through fuel
facility corporations (the "Fuel Facility Corporations"), along with other
airlines to contract for fuel services at various major Canadian airports. The
Fuel Facility Corporations are organizations incorporated under federal or
provincial business corporations acts in order to acquire, finance and lease
assets used in connection with the fuelling of aircraft and ground support
equipment. The Fuel Facilities Corporations operate on a cost recovery basis.

Under AcG-15, Air Canada is the primary beneficiary of three of the Fuel
Facilities Corporations in Canada. Five of the Fuel Facility Corporations in
which Air Canada participates in Canada that have not been consolidated have
assets of approximately $128 and debt of approximately $108, which is Air
Canada's maximum exposure to loss without taking into consideration any cost
sharing and asset retirement obligations that would occur amongst the other
contracting airlines. Air Canada considers this loss potential as remote.

--------------------------------------------------------------------------------
                                       14
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

CC) FUTURE ACCOUNTING STANDARD CHANGES

The following is an overview of accounting standard changes that the Corporation
will be required to adopt in future years:

Financial Instruments and Hedges
--------------------------------

The Accounting Standards Board has issued three new standards dealing with
financial instruments: (i) Financial Instruments -- Recognition and Measurement
(ii) Hedges and (iii) Comprehensive Income. The key principles under these
standards are that all financial instruments, including derivatives, are to be
included on a company's balance sheet and measured, either at their fair values
or, in limited circumstances when fair value may not be considered most
relevant, at cost or amortized cost. Financial instruments intended to be
held-to-maturity should be measured at amortized cost. Existing requirements for
hedge accounting are extended to specify how hedge accounting should be
performed. Also, a new location for recognizing certain unrealized gains and
losses -- other comprehensive income -- has been introduced. This provides the
ability for certain unrealized gains and losses arising from changes in fair
value to be temporarily recorded outside the income statement but in a
transparent manner. The new standards are effective for the Corporation
beginning January 1, 2007. The standards do not permit restatement of prior
years' financial statements however the standards have detailed transition
provisions. The Corporation has evaluated the consequences of the new standards,
which may have a material impact on the Corporation's financial statements. See
additional disclosure on the impact of the new standards in Note 16.

DD) COMPARATIVES
----------------

Certain comparative figures have been reclassified to conform to the financial
statement presentation adopted in the current year.

--------------------------------------------------------------------------------
                                       15
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

--------------------------------------------------------------------------------
3. PROPERTY AND EQUIPMENT
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------

                                                                          2006                2005
----------------------------------------------------------------------------------------------------
<S>                                                           <C>                <C>
Cost
   Flight equipment                                           $          3,663   $           3,007
   Assets under capital leases (a)                                       1,813               1,758
   Buildings and leasehold improvements                                    674                 649
   Ground and other equipment                                              172                 165
----------------------------------------------------------------------------------------------------
                                                                         6,322               5,579
----------------------------------------------------------------------------------------------------
Accumulated depreciation and amortization
   Flight equipment                                                        476                 184
   Assets under capital leases (a)                                         285                 142
   Buildings and leasehold improvements                                     99                  54
   Ground and other equipment                                               40                  29
----------------------------------------------------------------------------------------------------
                                                                           900                 409
----------------------------------------------------------------------------------------------------
                                                                         5,422               5,170

Purchase deposits, including capitalized interest (b)                      567                 324
----------------------------------------------------------------------------------------------------
Property and equipment at net book value (c)                  $          5,989   $           5,494
----------------------------------------------------------------------------------------------------
</TABLE>

(a)  Included in capital leases as at December 31, 2006 are 37 aircraft (2005 --
     35) with a cost of $1,739 (2005 -- $1,684) less accumulated depreciation of
     $265 (2005 -- $130) for a net book value of $1,474 (2005 -- $1,554),
     computer equipment with a cost of $28 (2005 -- $28) less accumulated
     depreciation of $16 (2005 -- $9) for a net book value of $12 (2005 -- $19)
     and facilities with a cost of $46 (2005 -- $46) less accumulated
     depreciation $4 (2005 -- $3) for a net book value of $42 (2005 -- $43).

(b)  Includes $287 (2005 -- $189) for Boeing B777/787 aircraft, $66 (2005 --
     $65) for Embraer aircraft, $174 (2005 -- $25) for the aircraft interior
     refurbishment program and $40 (2005 -- $45) for equipment purchases and
     internal projects.

(c)  Net book value of Property and equipment includes $1,137 (2005 -- $1,224)
     consolidated for aircraft and engine leasing entities, and $111 (2005 --
     $109) consolidated for fuel facility corporations, all of which are
     consolidated under AcG-15.

During 2006 the Corporation sold one of its buildings for proceeds of $40 with a
carrying value of $35. The gain on sale of $5 has been deferred in these
consolidated financial statements as a result of the leaseback of a portion of
the property by subsidiaries of the Corporation. The deferred gain will be
amortized into consolidated net income on a weighted average basis over the term
of the leaseback transaction, which will result in the gain being fully
recognized by December 2008. The amortization of the gain recorded during 2006
of $1 offset building lease costs included in Other operating expenses. As at
December 31, 2006 the remaining deferred gain on sale of $4 is included in Other
long-term liabilities.

During 2005, the Corporation recorded provisions of $17, including $13 for spare
parts, to reflect the excess of the carrying value over fair value.

As at December 31, 2006, flight equipment included 28 aircraft (2005 -- 32),
that are retired from active service with a net carrying value of $5 (2005 --
$10), which approximates fair value.

Interest capitalized during 2006 amounted to $61 (2005 - $14) with $33 at an
interest rate of LIBOR plus 3.0% and $28 at an interest rate of 8.05%.

--------------------------------------------------------------------------------
                                       16
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

--------------------------------------------------------------------------------
4. DEFERRED CHARGES
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------

                                                                       2006                2005
-------------------------------------------------------------------------------------------------
<S>                                                        <C>                <C>
Aircraft lease payments in excess of rent expense          $             83   $             106
Financing costs                                                          33                  39
-------------------------------------------------------------------------------------------------
                                                           $            116   $             145
-------------------------------------------------------------------------------------------------

</TABLE>

--------------------------------------------------------------------------------
                                       17
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

--------------------------------------------------------------------------------
5. INTANGIBLE ASSETS
--------------------------------------------------------------------------------

                                                     2006                2005
--------------------------------------------------------------------------------
Indefinite life assets
   International route rights and slots  $            430   $             653
   Air Canada trade name                              393                 595
   Aeroplan trade name                                 75                 109
   Other marketing based trade names                   50                 118
--------------------------------------------------------------------------------
                                                      948               1,475
--------------------------------------------------------------------------------
Finite life assets
   Aeroplan contracts                                 291                 407
   Star Alliance membership                           158                 239
   Other contract and customer based                  257                 247
   Technology based                                   196                 206
--------------------------------------------------------------------------------
                                                      902               1,099
--------------------------------------------------------------------------------
Accumulated depreciation and amortizatio
   Aeroplan contracts                                 (40)                (23)
   Star Alliance membership                           (22)                (12)
   Other contract and customer based                  (90)                (40)
   Technology based                                   (55)                (37)
--------------------------------------------------------------------------------
                                                     (207)               (112)
--------------------------------------------------------------------------------
Finite life assets, net                               695                 987
--------------------------------------------------------------------------------
                                         $          1,643   $           2,462
--------------------------------------------------------------------------------

As a result of recognizing the benefit of future income tax assets that existed
at fresh start, and for which a valuation allowance was recorded, for the year
ended December 31, 2006, intangible assets were reduced on a pro-rata basis by
$733, including the impact of the reversal of the $504 income tax valuation
allowance as described in Note 8 and the reduction in future income tax assets
of $65 related to the March 2006 special distribution of Aeroplan units
described in Note 20. In addition, amortization of intangible assets in 2006
amounted to $95 (2005 - $96).

In 2005, as a result of the dilution gain described in Note 22, intangible
assets related to Aeroplan were reduced by $77.

--------------------------------------------------------------------------------
                                       18
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

--------------------------------------------------------------------------------
6. DEPOSITS AND OTHER ASSETS
--------------------------------------------------------------------------------

                                                 2006                2005
----------------------------------------- ------------------ -------------------

Aircraft related deposits and
derivative instruments                     $            172   $             167
Collateral under letters of
credit and other deposits                               133                 127
Investment in US Airways (a)                              9                  87
Other                                                     9                  11
----------------------------------------- ------------------ -------------------
                                           $            323   $             392
----------------------------------------- ------------------ -------------------

(a)  During 2005 the Corporation made an investment of $87 (US$75) in US Airways
     Group, Inc. ("US Airways") for 5 million shares accounted for using the
     cost method. In connection with the equity investment, the Corporation also
     received options to purchase additional common stock in US Airways. On
     closing of the transaction, ACE sold these options for proceeds of $1.

     During 2006 the Corporation disposed of 4.5 million shares of its holding
     in US Airways. The net proceeds from the sale transactions amounted to $232
     (US$206). The Corporation recorded a pre-tax gain of $152 ($126 after tax)
     during 2006 as a result of these transactions.

     As at December 31, 2006, the Corporation continued to hold 0.5 million
     shares in US Airways with a market value of US$27 ($31), representing less
     than 1% of the equity of US Airways.


--------------------------------------------------------------------------------
                                       19
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
7. LONG-TERM DEBT AND CAPITAL LEASES
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

--------------------------------------------------- -------------- ----------------- ----------------- ----------------
                                                              Final Stated Interest
                                                           Maturity            Rate             2006             2005
--------------------------------------------------- -------------- ----------------- ----------------- ----------------
<S>                                                 <C>            <C>               <C>               <C>
ACE:
   Convertible senior notes (a)                              2035              4.25  $           263   $          247
Air Canada:
   Embraer aircraft financing (b)                     2017 - 2021       6.89 - 8.49              776              393
   Conditional sales agreements (c)                          2019       8.26 - 8.28              184              193
   Lufthansa cooperation agreement (d)                       2009              6.50               44               59
   GE loan (e)                                               2015             11.12               48               51
   Revolving credit facility (f)                             2010                 -                -                -
Aeroplan:
   Credit facilities (g)                                     2009              5.30              300              300
Jazz:
   Senior syndicated credit facility (h)                     2009              7.09              115                -
   Term loans and credit facilities                                                                -               14
Other                                                 2007 - 2010       4.32 - 9.10                5                8
--------------------------------------------------- -------------- ----------------- ----------------- ----------------
Direct Corporation debt                                                                        1,735            1,265
--------------------------------------------------- -------------- ----------------- ----------------- ----------------
Air Canada:
   Aircraft and engine leasing entities - debt (i)                                             1,051            1,125
   Fuel facility corporations - debt (j)                                                          59               53
--------------------------------------------------- -------------- ----------------- ----------------- ----------------
Debt consolidated under AcG-15                                                                 1,110            1,178
--------------------------------------------------- -------------- ----------------- ----------------- ----------------
Air Canada:                                           2008 - 2027                              1,281            1,365
   Capital lease obligations (k)
--------------------------------------------------- -------------- ----------------- ----------------- ----------------

Total debt and capital leases                                                                  4,126            3,808
--------------------------------------------------- -------------- ----------------- ----------------- ----------------

Current portion                                                                                 (367)            (265)
--------------------------------------------------- -------------- ----------------- ----------------- ----------------
Long-term debt and capital leases                                                    $         3,759   $        3,543
--------------------------------------------------- -------------- ----------------- ----------------- ----------------
The Stated Interest Rate in the table above is the rate as of December 31, 2006.
</TABLE>

Principal repayment requirements as at December 31, 2006 on long-term debt and
capital lease obligations, and aircraft, engine and fuel facility debt
consolidated as variable interest entities under AcG-15 are as follows:

<TABLE>
<CAPTION>

-------------------------------------- ------------ ------------ ------------ ------------- ------------ --------------
                                             2007         2008         2009          2010         2011     Thereafter
-------------------------------------- ------------ ------------ ------------ ------------- ------------ --------------
<S>                                    <C>          <C>          <C>          <C>           <C>          <C>
Direct Corporation debt                $       67   $       85   $      485   $       55    $       70   $        973
Debt consolidated under AcG-15                120          117           60           118          248            447
Capital lease principal obligation            180          179           92            90           87            653
-------------------------------------- ------------ ------------ ------------ ------------- ------------ --------------
Total                                  $      367   $      381   $      637   $      263    $      405   $      2,073
-------------------------------------- ------------ ------------ ------------ ------------- ------------ --------------
</TABLE>

(a)  During 2005 ACE issued $330 of Convertible Senior Notes due 2035
     ("Convertible Notes") for net proceeds of $319. For accounting purposes,
     the Convertible Notes are presented as a compound instrument. At the date
     of issuance, the value ascribed to the holders' conversion option, which is
     presented as equity, was $94 less allocated fees of $2; the value ascribed
     to the financial liability was $236. The financial liability was calculated
     by discounting the stream of future payments of interest and principal at
     the prevailing rate for a similar liability that does not have an
     associated conversion feature. The financial liability will increase to the
     face value of the debt over a five year period to June 1, 2010, the first
     date on which the holder can require ACE to purchase all or a portion of
     the Convertible Notes, as described further below, resulting in an
     effective interest rate of 12% on the financial liability.

     The Convertible Notes bear interest at a rate of 4.25% per annum payable
     semi-annually in arrears on June 1 and December 1 in each year commencing
     December 1, 2005. Holders may convert their Convertible Notes into Class B
     Voting Shares (if the holder is Canadian) or into Class A Variable Voting
     Shares (if the holder is not a Canadian) prior to maturity based on an
     initial conversion rate of 20.8333 Shares per $1,000.00 principal amount of
     Convertible Notes. Upon notice of conversion, ACE will have the option to
     deliver cash, shares or a combination of cash and shares for the
     Convertible Notes surrendered.

--------------------------------------------------------------------------------
                                       20
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


     In connection with the special distribution in March 2006 of units of
     Aeroplan Income Fund to the shareholders of ACE (Note 20), the conversion
     rate has been adjusted from 20.8333 to 22.2838. This adjustment was
     effective on March 22, 2006 and has been determined in accordance with the
     terms of indenture governing the Convertible Notes. Subsequent to December
     31, 2006 a further adjustment was made to the conversion factor (Note 24).

     At any time on or after June 6, 2008, ACE may redeem all or a portion of
     the Convertible Notes at a redemption price equal to 100% of the principal
     amount of the Convertible Notes, plus accrued interest. Holders may require
     ACE to purchase all or a portion of the Convertible 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 to be purchased,
     plus accrued and unpaid interest. Upon specified change of control events,
     holders of Convertible Notes will have the option to require ACE to
     purchase all or any portion of the Convertible Notes at a price equal to
     100% of the principal amount of the Convertible Notes to be purchased, plus
     accrued and unpaid interest.

     ACE may, at its option and subject to certain conditions, elect to satisfy
     its obligation to repay all or any portion of the principal amount of the
     Convertible Notes that are to be redeemed, purchased or that are to be
     repaid at maturity, by issuing and delivering Class A Variable Voting
     Shares (if the holder is not a Canadian) and Class B Voting Shares (if the
     holder is Canadian). The number of Shares a holder will receive in respect
     of each Convertible Note will be determined by dividing the principal
     amount of the Convertible Notes that are to be redeemed, purchased or
     repaid at maturity, as the case may be, and that are not paid in cash, by
     95% of the average closing price (defined as the weighted average, by
     volume, of the reported last sale price of each class of shares) of the
     shares on the Toronto Stock Exchange ("TSX") for the ten consecutive
     trading days ending on the third trading day preceding the date fixed for
     redemption, purchase or maturity date, as the case may be.

(b)  The following table summarizes the loans that Air Canada drew to finance
     the acquisition of Embraer aircraft that are secured by the delivered
     aircraft:

<TABLE>
<CAPTION>
------------------- -------------- --------------- -------------- ------------------- -------------------
                       Number of        Interest                       Original US$       Original CDN$
                        Aircraft            Rate       Maturity         Loan Amount         Loan Amount
------------------- -------------- --------------- -------------- ------------------- -------------------
<S>                 <C>            <C>             <C>            <C>                 <C>
2006 Year
    Embraer 175                1           7.34%           2018       $          20           $      23
    Embraer 190               15           8.07%           2021                 330                 374
------------------- -------------- --------------- -------------- ------------------- -------------------
2005 Year
    Embraer 175               14           7.14%           2017                 277                 329
    Embraer 190                3           7.80%           2020                  65                  75
------------------- -------------- --------------- -------------- ------------------- -------------------
Total                                                                 $         692           $     801
------------------- -------------- --------------- -------------- ------------------- -------------------
</TABLE>

     During 2006, the interest rate margins on outstanding financing relating to
     all EMB 175 aircraft (US$297) were re-priced from 3.25% down to 2.35% and
     eight loans that bear interest at a floating interest rate were converted
     to fixed interest rate loans. The Interest Rate above represents the
     weighted average fixed interest rates as at December 31, 2006 of the loans
     that Air Canada drew relating to the Embraer aircraft financing (7.81% -
     weighted average rate of the fixed and floating interest rate loans
     outstanding as at December 31, 2005).

(c)  US$158 principal outstanding on purchases of two A340-500 aircraft financed
     through conditional sales agreements. Principal and interest is paid
     quarterly until maturity in 2019. The purchase price installments bear
     interest at a three month LIBOR rate plus 2.9% (8.27% as at December 31,
     2006 and 7.26% as at December 31, 2005).

(d)  US$38 principal outstanding to mature in 2009, with semi annual repayments,
     at a fixed interest rate of 4.495% plus an annual 2.0% guarantee fee.

(e)  US$41 principal outstanding to mature in 2015, with quarterly repayments,
     at a floating interest rate equal to the six month LIBOR rate plus 5.75%
     pre-payable on any interest payment date after December 23, 2007 secured by
     certain flight training equipment with a current carrying value of $55.

(f)  Upon closing of the initial public offering of Air Canada ("Air Canada
     IPO") and satisfaction of certain customary conditions, the revolving
     credit facility was amended and restated. The amended agreement established
     a $400 million senior secured revolving credit facility (the "Amended
     Credit Facility") with a three-year term. The Amended Credit Facility has a


--------------------------------------------------------------------------------
                                       21
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

     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 Air Canada IPO,
     subject to prior approval of Lenders holding no less than two thirds of the
     total commitments 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 of Air Canada. The
     Amended Credit Facility 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 are guaranteed by 1209265 Alberta
     Ltd., a subsidiary of Air Canada, which provides 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 contains customary representations
     and warranties and is subject to customary terms and conditions (including
     negative covenants, financial covenants and events of default). The
     interest rate margin ranges from LIBOR plus 2.25% to 3.25% or prime plus
     1.25% to 2.25% (based on Air Canada's earnings before interest, taxes,
     depreciation, amortization and obsolescence and aircraft rent). As at
     December 31, 2006, no amount was drawn under this facility.

(g)  Aeroplan has arranged for senior secured credit facilities in the amount of
     $475. The credit facilities consist of one $300 (or the U.S. dollar
     equivalent thereof) term facility (the "Term Facility"), a $100 (or the
     U.S. dollar equivalent thereof) acquisition facility (the "Acquisition
     Facility") and a $75 (or the U.S. dollar equivalent thereof) revolving term
     facility (the "Revolving Term Facility").

     The Term Facility and the Acquisition Facility mature on June 29, 2009, or
     earlier at the option of Aeroplan and bear interest at rates ranging from
     Canadian prime rate and U.S. base rate to Canadian prime rate and U.S. base
     rate plus 0.75% and the Bankers' Acceptance rate and LIBOR plus 1.0% to
     1.75%. At December 31, 2006, borrowings under the Term Facility were in the
     form of Bankers' Acceptances with a 90 day term (2005 - 91 day term) and an
     effective interest rate of 5.3% (2005 - 4.4%). The Term Facility was drawn
     in order to fund a portion of the $400 Aeroplan Miles Redemption Reserve,
     included in Cash and cash equivalents and Short-term investments. The
     remaining $100 was funded from the proceeds of the Aeroplan offering
     described in Note 22. During the year, the term of the Revolving Term
     Facility was extended to mature on June 29, 2009, from June 29, 2008, or
     earlier at the option of Aeroplan. As at December 31, 2006, no amounts were
     drawn under the Acquisition Facility (2005 - nil).

     Borrowings under the Aeroplan credit facilities are secured by
     substantially all the present and future assets of Aeroplan, subject to a
     merchant services agreement with First Data Loan Company, Canada that
     includes a guarantee to fulfill obligations related to airline and tour
     tickets sold in advance and charged to the credit cards processed under the
     agreement. As at December 31, 2006, the maximum exposure related to this
     guarantee was estimated to be $215 and would rank ahead of the security
     granted under the credit facilities, which is included in the Advance
     ticket sales liability.

     The terms of the New Credit Facilities include certain covenants. The
     continued availability of the credit facilities are subject to Aeroplan's
     ability to maintain certain leverage, debt service and interest coverage
     covenants, as well as other affirmative and negative covenants.

(h)  In connection with the initial public offering of the Jazz Air Income Fund
     ("Jazz IPO"), Jazz arranged for a senior secured syndicated credit facility
     in the amount of $150 (Note 19). On closing of the Jazz IPO, $115 was drawn
     under the credit facility ($113 net of fees). The facility bears interest
     at floating rates and has a three year term maturing in 2009. The
     outstanding credit facility is secured by substantially all the present and
     future assets of Jazz. Jazz entered into swap agreements with third parties
     with a notional value of $115 to receive floating rates and pay fixed rates
     of 7.09%. Subsequent to December 31, 2006, the original term of this
     facility was extended to 2010.


--------------------------------------------------------------------------------
                                       22
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

(i)  Air Canada has entered into aircraft and engine lease transactions with
     several special purpose entities that qualify as VIEs. The debt has a
     weighted average effective interest rate of approximately 8%. The aircraft
     are charged as collateral against the debt by the owners thereof. The
     creditors under these leasing arrangements have recourse to the
     Corporation, as lessee, in the event of default or early termination of the
     lease. Aircraft related debt amounting to US$902 ($1,051) [2005 -- US$965
     ($1,125)] is summarized as follows:

------------------------  ----------------- -------------- ----------------
                                    Final
                                 Maturity           2006             2005
------------------------  ----------------- -------------- ----------------
Canadian Regional Jet         2007 - 2011   $        316   $          329
Boeing 767-300                2011 - 2016            211              231
Engines                              2008             71               78
Airbus 319                    2011 - 2014            304              331
Airbus 321                           2017            149              156
------------------------- ----------------- -------------- ----------------
                                            $      1,051   $        1,125
------------------------- ----------------- -------------- ----------------

(j)  Under AcG-15, Air Canada is the primary beneficiary of certain of the Fuel
     Facility Corporations in Canada. The debt is secured by a general security
     agreement covering all assets of the Fuel Facility Corporations.

(k)  Capital lease obligations, related to computer equipment, facilities and 37
     aircraft, total $1,281 ($80 and US$1,030) [2005 total $1,365 ($87 and
     US$1,096)]. The debt has a weighted average effective interest rate of
     approximately 8% and final maturities range from 2008 to 2027. During 2006
     the Corporation recorded interest expense on capital lease obligations of
     $101 (2005 - $119).

     As at December 31, 2006, obligations under capital leases for future
     minimum lease payments are as follows:

    -------------------------------------------------- -------------------

    2007                                               $             275
    2008                                                             260
    2009                                                             161
    2010                                                             152
    2011                                                             142
    Thereafter                                                       829
    -------------------------------------------------- -------------------
    Total minimum lease payments                                   1,819
    Less amount representing interest                               (538)
    -------------------------------------------------- -------------------
    Total obligation under capital leases              $           1,281
    -------------------------------------------------- -------------------

     Certain aircraft lease agreements contain a fair value test, beginning on
     July 1, 2009, and annually thereafter until lease expiry. This test relates
     to 38 aircraft under lease of which 37 are accounted for as capital leases.
     Under the test, the Corporation may be required to prepay certain lease
     amounts, based on aircraft fair values, as of the date of the test. Any
     amounts prepaid are recoverable to the extent that aircraft fair values
     exceed certain thresholds and to the extent the Corporation has obtained
     residual value support on lease expiry. The maximum amount payable on July
     1, 2009, assuming the related aircraft are worth nil, is US$871. This
     amount declines over time to nil upon lease expiry.

Interest paid on long-term debt and capital lease obligations in 2006 by the
Corporation was $273 (2005 - $220).


--------------------------------------------------------------------------------
                                       23
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
8. FUTURE INCOME TAXES
--------------------------------------------------------------------------------

The following income tax related amounts appear in ACE's consolidated statement
of financial position:

----------------------------------------- ------------------ -------------------

                                                 2006                2005
----------------------------------------- ------------------ -------------------
Future income tax asset recorded
 in current assets (a) and (b)             $            584   $               -
----------------------------------------- ------------------ -------------------
Future income tax asset (b)                $            336   $               -
----------------------------------------- ------------------ -------------------
Current taxes payable (a)                  $           (345)  $               -

----------------------------------------- ------------------ -------------------
Future income tax liability (c)            $           (136)  $           (221)
----------------------------------------- ------------------ -------------------

a)   Current Taxes

As part of a tax loss utilization strategy that was planned in conjunction with
the initial public offering of Air Canada and corporate restructuring, a current
tax payable of $345 was created. This tax payable arose upon a transaction to
transfer tax assets from Air Canada to ACE. This tax payable will be recoverable
from future income tax assets of Air Canada, and as such a future income tax
asset of $345 has been recorded in current assets. The recovery is expected to
settle within twelve months.

b)   Valuation Allowance

The Corporation has determined that it is more likely than not that certain
future income tax assets of $575, of which an amount of $504 was offset by a
valuation allowance, will be realized through a combination of future reversals
of temporary differences and taxable income. As a result a future income tax
asset of $575 is recorded on the consolidated statement of financial position,
with $239 classified as a current future income tax asset based upon the
expected period of reversal. The plan of arrangement as described in Note 24
provides part of the basis for management's assessment of realization due to the
use of future income tax assets involved in the distribution of Aeroplan units.

With the reversal of the valuation allowance, a reduction to intangible assets
(on a pro-rata basis) of $504 was recorded based on the current carrying value
of future income tax assets that existed at fresh start, $16 was recorded as a
recovery of income tax in the consolidated statement of operations for those
future income tax assets arising after fresh start, $12 was recorded as a
recovery of income tax for the current year, and $43 has been recorded as a
deferred tax recovery related to the increase in the effective tax rate
applicable to certain of the Corporation's future income tax assets. This
deferred recovery is recorded in Accounts payable and accrued liabilities and
will reverse to income as the underlying future income tax assets are realized.
The Corporation has determined that it is more likely than not that future
income tax assets of $1,511 are not recoverable and continue to be offset by a
valuation allowance. However, the future tax deductions underlying the future
tax assets remain available for use in the future to reduce taxable income.

c)   Future Income Tax Liability

It has been assumed that certain intangibles and other assets with no underlying
tax cost and a carrying value of approximately $861, have indefinite lives and
accordingly, the associated future income tax liability of $136 is not expected
to reverse until the assets are disposed of or become amortizable, resulting in
the reporting of a future income tax liability of $136.


--------------------------------------------------------------------------------
                                       24
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------- ------------------ -------------------
                                                                                     December 31         December 31
                                                                                         2006                2005
-------------------------------------------------------------------------------- ------------------ -------------------
<S>                                                                              <C>                <C>
Future tax assets
   Non-capital loss carry forward                                                $            413   $             793
   Post-employment obligations                                                                685                 805
   Accounting provisions not currently deductible for tax                                     181                 182
   Tax basis of capital over book basis                                                       309                 400
   Outside basis differences in ACE's investments in Aeroplan                                 359                   -
   Eligible capital expenditures                                                               28                  19
   Unearned revenues                                                                          393                  31
   Intangible assets                                                                          102                 111
   Net other                                                                                   45                  64
-------------------------------------------------------------------------------- ------------------ -------------------
   Total future tax assets                                                                  2,515               2,405
-------------------------------------------------------------------------------- ------------------ -------------------
Future tax liabilities
   Intangible assets                                                                          220                 388
-------------------------------------------------------------------------------- ------------------ -------------------
                                                                                            2,295               2,017
Net future tax assets
-------------------------------------------------------------------------------- ------------------ -------------------
   Less valuation allowance                                                                 1,511               2,238
-------------------------------------------------------------------------------- ------------------ -------------------
Net recorded future income tax asset (liability)                                 $            784   $           (221)
-------------------------------------------------------------------------------- ------------------ -------------------
</TABLE>
The reconciliation of income tax attributable to continuing operations, computed
at the statutory tax rates, to income tax expense is as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------- ------------------ -------------------
                                                                                      December 31         December 31
                                                                                             2006                2005
-------------------------------------------------------------------------------- ------------------ -------------------
<S>                                                                              <C>                  <C>
Provision based on combined federal and provincial rates                         $            184   $             132
Non-taxable portion of capital gains                                                          (24)                 (2)
Large corporations tax                                                                          -                  15
Non-deductible expenses                                                                        35                  25
Taxable capital gain on Aeroplan and Jazz distributions to ACE                                 17                   -
Non-taxable dilution gain on Aeroplan LP                                                        -                 (42)
Non-taxable dilution gain on Jazz LP                                                          (63)                  -
Non-taxable dilution gain on Air Canada                                                        (4)                  -
Effect of tax rate changes on future income taxes                                             (28)                  -
Effect of statutory tax rates substantially enacted during the year                            82                 (38)
Reduction in income tax expense arising from the recognition of a previously
   unrecognized tax loss                                                                      (16)                  -
Other                                                                                           8                   1
-------------------------------------------------------------------------------- ------------------ -------------------
                                                                                              191                  91
-------------------------------------------------------------------------------- ------------------ -------------------
Valuation allowance (refer to b) above)                                                       (82)                 40
-------------------------------------------------------------------------------- ------------------ -------------------
Provision for income taxes                                                       $            109   $             131
-------------------------------------------------------------------------------- ------------------ -------------------
</TABLE>

Significant components of the provision for income taxes attributable to
continuing operations are as follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------- ------------------ -------------------
                                                                                      December 31         December 31
                                                                                             2006                2005
-------------------------------------------------------------------------------- ------------------ -------------------
<S>                                                                              <C>                <C>
Current tax expense                                                              $              7   $              15
Future income tax expense (recovery) relating to temporary differences                        118                 114
Future income tax expense (recovery) from tax rate changes                                     82                 (38)
Reduction in income tax expense arising from the recognition of a previously
   unrecognized tax loss                                                                      (16)                  -
Valuation allowance                                                                           (82)                 40
-------------------------------------------------------------------------------- ------------------ -------------------
Provision for income taxes                                                       $            109   $             131
-------------------------------------------------------------------------------- ------------------ -------------------
</TABLE>

In addition to the above items impacting the provision for income taxes, a
future income tax expense of $59 was recorded in equity related to the ACE
Special Distribution of Aeroplan Units (refer to Note 20).

Taxes paid in 2006 by the Corporation were $1 (2005 - nil).


--------------------------------------------------------------------------------
                                       25
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


The balances of tax attributes as at December 31, 2006, namely the balances of
non-capital loss carry forwards, vary amongst different taxing jurisdictions.
The following are the Federal tax loss expiry dates:

----------------------------------------------- ------------------
                                                      Tax losses
----------------------------------------------- ------------------
2010                                            $              9
2014                                                          20
2015                                                         896
2026                                                         388
----------------------------------------------- ------------------
                                                $          1,313
----------------------------------------------- ------------------



--------------------------------------------------------------------------------
                                       26
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
9. PENSION AND OTHER BENEFIT LIABILITIES
--------------------------------------------------------------------------------

Air Canada maintains several defined benefit and defined contribution plans
providing pension, other retirement and post-employment benefits to its
employees and also to certain employees assigned to work at Aeroplan and ACTS.

Air Canada is the administrator and sponsoring employer of ten Domestic
Registered Plans ("Domestic Registered Plans") under the Pension Benefits
Standard Act, 1985 (Canada). The US plan, UK plan and Japan plan are
international plans covering employees in those countries. In addition, Air
Canada maintains a number of supplementary pension plans, which are not
registered. The defined benefit pension plans provide benefits upon retirement,
termination or death based on the member's years of service and final average
earnings for a specified period.

Jazz also maintains its own defined benefit and defined contribution plans,
providing pension benefits to most of its employees.

The other employee benefits consist of health, life and disability. These
benefits consist of both post-employment and post-retirement benefits. The
post-employment benefits relate to disability benefits available to eligible
active employees, while the post-retirement benefits are comprised of health
care and life insurance benefits available to eligible retired employees.

In 2005, the measurement date used for financial reporting of the pension and
other benefit obligations was revised to November 30 from December 31.


--------------------------------------------------------------------------------
                                       27
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


Benefit Obligation and Plan Assets

The following tables present financial information related to the change in the
pension and other post-employment benefits plans:

<TABLE>
<CAPTION>
-------------------------------------------- ------------------------------------- ------------------------------------
                                                       Pension Benefits              Other Employee Future Benefits
                                             ------------------------------------- ------------------------------------
                                                        2006                2005             2006                2005
-------------------------------------------- ----------------- ------------------- ---------------- -------------------
<S>                                          <C>               <C>                 <C>              <C>
Change in benefit obligation
   Benefit obligation at beginning of year   $        12,921   $          11,207   $          940   $             842
   Current service cost                                  254                 202               77                  85
   Interest cost                                         640                 650               48                  50
   Employees' contributions                               89                  80                -                   -
   Benefits paid                                        (627)               (592)             (60)                (63)
   Actuarial (gain) loss                                 (74)              1,419              (38)                 31
   Foreign exchange                                       32                 (45)              (1)                 (5)
-------------------------------------------- ----------------- ------------------- ---------------- -------------------
                                                      13,235              12,921              966                 940
-------------------------------------------- ----------------- ------------------- ---------------- -------------------
Change in plan assets
   Fair value of plan assets at
     beginning of year                                10,421               9,673               14                  10
   Actual return on plan assets                        1,493               1,016                1                   1
   Employer contributions                                455                 284               47                  54
   Employees' contributions                               89                  80                -                   -
   Benefits paid                                        (627)               (592)             (54)               (51)
   Foreign exchange                                       27                 (40)               -                   -
-------------------------------------------- ----------------- ------------------- ---------------- -------------------
                                                     11,858               10,421                8                  14
-------------------------------------------- ----------------- ------------------- ---------------- -------------------
Deficit at end of year                                 1,377               2,500              958                 926
-------------------------------------------- ----------------- ------------------- ---------------- -------------------
Employer contributions after
   measurement date                                       (7)                 (6)              (6)                 (5)
Unrecognized past service cost                             -                   -                -                   -
Unrecognized net actuarial gain (loss)                  (221)             (1,061)              46                  21
-------------------------------------------- ----------------- ------------------- ---------------- -------------------
Net benefit obligation                                 1,149               1,433              998                 942
-------------------------------------------- ----------------- ------------------- ---------------- -------------------
Weighted average assumptions used to
determine the accrued benefit liability
   Discount rate                                       5.00%               5.00%      5.00 - 5.50%      4.50 - 5.75%
   Rate of compensation increase (a)                   2.50%               4.00%
-------------------------------------------- ----------------- ------------------- ---------------- -------------------
</TABLE>

(a)  As a result of pay awards during 2006, a rate of compensation increase of
     1.75% was used for years 2006 to 2008 in determining the net benefit
     obligation for the pension plan and 2.5% for the remaining years.

The pension benefit deficit at the end of the year by plan is as follows:

------------------------------------- ------------------ -------------------

                                                  2006                2005
------------------------------------- ------------------ -------------------
Domestic registered plans             $            556   $           1,657
US, UK and Japan                                    55                  76
Supplementary plans                                766                 767
------------------------------------- ------------------ -------------------
                                      $          1,377   $           2,500
------------------------------------- ------------------ -------------------

The deficit, on an accounting basis, at December 31, 2006 for pension benefits
was $1,377 compared to $2,500 at December 31, 2005. The decrease in the
accounting deficit is mainly the result of a return on plan assets of
approximately 13.8% for the year and funding of past service employer
contributions of $261. The decrease in the net plan deficit during the year is
expected to result in decreased employer contributions for 2007 as described
below under Pension Plan Cash Funding Obligations.


--------------------------------------------------------------------------------
                                       28
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


The net benefit obligation is recorded in the statement of financial position as
follows:

------------------------------------------------- -------------- --------------
                                                                         2005
                                                          2006
------------------------------------------------- -------------- --------------
Pension benefits                                  $      1,149   $      1,433
Other employee future benefits                             998            942
------------------------------------------------- -------------- --------------
Net benefit obligation                                   2,147          2,375
------------------------------------------------- -------------- --------------
Current portion                                           (271)          (221)
------------------------------------------------- -------------- --------------
Pension and other benefits liability              $      1,876   $      2,154
------------------------------------------------- -------------- --------------

The current portion of Pension benefits represents past service contributions
for the Domestic Registered Plans, scheduled to be paid during 2007 while the
current portion of Other employee future benefits is an estimate of the claims
to be incurred during 2007. The current portion is included in Accounts payable
and accrued liabilities.

Total cash payments for 2006, consisting of cash contributed by the Corporation
to its defined benefit plans, cash payments to beneficiaries for post-employment
and post-retirement plans, and cash contributed to its defined contribution
plans were $520 (2005 - $355).

Pension and Other Employee Future Benefit Expense

The Corporation has recorded net defined benefit pension and other employee
future benefits expense as follows:

<TABLE>
<CAPTION>
----------------------------------------------- ------------------------------------ ----------------------------------
                                                         Pension Benefits             Other Employee Future Benefits
                                                ------------------------------------ ----------------------------------
                                                           2006               2005             2006             2005
----------------------------------------------- ----------------- ------------------ ---------------- -----------------
<S>                                             <C>               <C>                <C>              <C>
Components of
Net Periodic Pension Cost
   Current service cost                         $           254   $            202   $           77   $            85
   Interest cost                                            640                650               48                50
   Actual return on plan assets                          (1,515)              (973)              (1)               (1)
   Actuarial (gain) loss on benefit obligation              (47)             1,362              (43)               19
----------------------------------------------- ----------------- ------------------ ---------------- -----------------
Costs arising in the year                                  (668)             1,241               81               153
----------------------------------------------- ----------------- ------------------ ---------------- -----------------
Differences between costs arising in the year
and costs recognized in the year in respect
of:
   Return on plan assets                                    774                281                -                 -
   Actuarial loss (gain)                                     65             (1,362)              26               (23)
----------------------------------------------- ----------------- ------------------ ---------------- -----------------
                                                            839             (1,081)              26               (23)
----------------------------------------------- ----------------- ------------------ ---------------- -----------------
Net defined benefit pension and other           $           171   $            160   $          107   $           130
   employee benefits expense
----------------------------------------------- ----------------- ------------------ ---------------- -----------------
Weighted average assumptions used to
determine the accrued benefit cost
   Discount rate                                          5.00%              5.75%     5.00 - 5.50%      4.50 - 5.75%
   Expected long-term rate of return
       on plan assets                                     7.50%              7.50%            7.50%             7.50%
   Rate of compensation increase (a)                      4.00%              4.00%
----------------------------------------------- ----------------- ------------------ ---------------- -----------------
</TABLE>

(a)  A rate of compensation increase of 0% in 2005 and 2% in 2006 was used in
     determining the net benefit pension expense and 4% for the remaining years.

Other Benefits -- Sensitivity Analysis

Assumed health care cost trend rates have a significant effect on the amounts
reported for the health care plans. A 9.75% annual rate of increase in the per
capita cost of covered health care benefits was assumed for 2006 (2005 - 10%).
The rate is assumed to decrease gradually to 5% by 2013. A one percentage point
increase in assumed health care trend rates would have increased the service and
interest costs by $1 and the obligation by $17. A one percentage point decrease
in assumed health care trend rates would have decreased the service and interest
costs by $1 and the obligation by $16.


--------------------------------------------------------------------------------
                                       29
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


Pension Plan Cash Funding Obligations

As at December 31, 2006 and based on the January 1, 2006 solvency valuation, the
table below provides projections for the Corporation's cash pension plan funding
obligations for 2007. The final funding obligation for 2007 will be determined
based on the January 1, 2007 valuation.

----------------------------------------------- ------------------
                                                            2007
----------------------------------------------- ------------------
Past service domestic registered plans          $            250
Current service domestic registered plans                    162
Other pension arrangements                                    86
----------------------------------------------- ------------------
                                                $            498
----------------------------------------------- ------------------

The most recent actuarial valuation is as at January 1, 2006 and the effective
date of the next required actuarial valuation is January 1, 2007. For domestic
registered pension plans, the funding requirements are based on the minimum past
service contributions disclosed in the January 1, 2006 actuarial valuations plus
a projection of the current service contributions based upon the January 1, 2006
actuarial valuation used for the purpose. Based on a funding outlook, the
solvency deficit on the registered pension plans at January 1, 2007 is expected
to decrease significantly compared January 1, 2006 and, as a result, employer
contributions determined in accordance with regulations, are expected to decline
by approximately $90 in 2007.

On August 9, 2004, the Government of Canada adopted the Air Canada Pension Plan
Solvency Deficiency Funding Regulations (the "Pension Regulations"). The Pension
Regulations allow Air Canada to fund the solvency deficiencies in its Domestic
Registered Plans as of January 1, 2004 over ten years, rather than the five
years required under the ordinary rules, and to pay down such deficiencies by
way of an agreed schedule of variable annual contributions rather than by way of
equal annual contributions as required under the ordinary rules. The Pension
Regulations came into force upon Air Canada's emergence from CCAA protection on
September 30, 2004, on which date Air Canada issued subordinated secured
promissory Notes in an aggregate amount of approximately $347 in favour of the
pension plan trustee. Such Notes will be reduced as the principal amount of the
solvency deficiencies is paid down, and will only be called on the occurrence of
certain specified events of default. The amount of secured promissory Notes
outstanding as at December 31, 2006 is $219 (2005 - $329. The effect of the
issuance of the subordinated security promissory Notes is included within the
fair value of the obligation for pension benefits as reflected in the
Corporation's balance sheet.

The composition of the Domestic Registered Plan assets and the target allocation
consist of the following:

--------------------------- ----------------- ---------------- -----------------
                                November 30      November 30            Target
                                       2006             2005        Allocation
--------------------------- ----------------- ---------------- -----------------
Equity securities                     59.1%            62.3%             59.0%
Bonds and mortgages                   34.7%            32.1%             41.0%
Real estate                            0.0%             0.1%              0.0%
Short-term and other                   6.2%             5.5%              0.0%
--------------------------- ----------------- ---------------- -----------------
                                     100.0%           100.0%            100.0%
--------------------------- ----------------- ---------------- -----------------

Domestic Registered Plans

For the Domestic Registered Plans, the investments conform to the Statement of
Investment Policy and Objectives of the Air Canada Pension Master Trust Fund.
The investment return objective of the fund is to achieve a total annualized
rate of return that exceeds inflation by at least 3.75% over the long term.

In addition to the broad asset allocation, as summarized in the asset allocation
section above, the following policies apply to individual asset classes:

-    Equity investments can include convertible securities, and are required to
     be diversified among industries and economic sectors. Foreign equities can
     comprise 37% to 43% of the total market value of the trust. Limitations are
     placed on the overall allocation to any individual security at both cost
     and market value. Derivatives are permitted to the extent they are not used
     for speculative purposes or to create leverage.

-    Fixed income investments are oriented toward risk averse, long term,
     investment grade securities rated "A" or higher. With the exception of
     Government of Canada securities or a province thereof, in which the plan
     may invest the entire fixed income allocation, fixed income investments are
     required to be diversified


--------------------------------------------------------------------------------
                                       30
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


     among individual securities and sectors. The target return is comprised of
     40% of the total return of the Scotia Capital Universe Bond Index and 60%
     of the total return of the Scotia Capital Long Term Bond Index.

Similar investment policies are established for the other pension plans
sponsored by the Corporation.

The Corporation's expected long-term rate of return on assets assumption is
selected based on the facts and circumstances that exist as of the measurement
date, and the specific portfolio mix of plan assets. Management reviewed
anticipated future long-term performance of individual asset categories and
considered the asset allocation strategy adopted by the Corporation, including
the longer duration in its bond portfolio in comparison to other pension plans.
These factors are used to determine the average rate of expected return on the
funds invested to provide for the pension plan benefits. While the review
considers recent fund performance and historical returns, the assumption is
primarily a long-term, prospective rate.

Defined Contribution Plans

The Corporation's management, administrative and certain unionized employees may
participate in defined contribution plans. The employees' contributions range
from 3% to 6% of earnings with the Corporation contributing an equal amount. The
Corporation's expense for defined contribution plans amounted to $7 for the year
ended December 31, 2006 (2005 - $6).


--------------------------------------------------------------------------------
                                       31
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
10. OTHER LONG-TERM LIABILITIES
--------------------------------------------------------------------------------

-----------------------------------------   ----------------   ----------------
                                                       2006                2005
-----------------------------------------   ----------------   ----------------
Unfavourable contract liability on
aircraft leases (a)                          $           77      $          107
Aircraft rent in excess of lease payments               121                 126
Long-term employee liabilities (b)                       54                 109
Workplace safety and insurance board liability           45                  53
Other                                                    81                  51
-----------------------------------------   ----------------   ----------------
                                             $          378      $          446
-----------------------------------------   ----------------   ----------------

(a)  The unfavourable contract liability on aircraft leases represents the net
     present value of lease payments in excess of estimated market rents related
     to lease arrangements that existed on fresh start reporting.

(b)  The following table outlines the changes to labour related provisions which
     are included in long-term employee liabilities for balances that existed
     upon the implementation of fresh start reporting on September 30, 2004
     (current portion included in Accounts payable and accrued liabilities):

-----------------------------------------   ----------------   ----------------
                                                      2006                2005
-----------------------------------------   ----------------   ----------------
Beginning of year                             $        144       $         180
Charges recorded in salaries,
 wages and benefits                                      -                   5
Interest accretion                                       8                  12
Adjustment (see below)                                 (23)                  -
Amounts disbursed                                      (52)                (53)
-----------------------------------------   ----------------   ----------------
End of year                                             77                 144
Current portion                                        (32)                (40)
-----------------------------------------   ----------------   ----------------
                                              $         45       $         104
-----------------------------------------   ----------------   ----------------

     During 2006, as a result of a review of the outstanding provisions related
     to programs implemented prior to September 30, 2004, it was determined that
     a portion of the provision amounting to $23 would no longer be required and
     was adjusted. The amount reversed has been applied as an adjustment to
     shareholders' equity as described in Note 12.

     The following table outlines the changes to labour related provisions which
     are included in long-term employee liabilities for balances that have been
     created subsequent to the implementation of fresh start reporting on
     September 30, 2004 (current portion included in Accounts payable and
     accrued liabilities):

-----------------------------------------   ----------------   ----------------
                                                      2006                2005
-----------------------------------------   ----------------   ----------------
Beginning of year                             $         13       $          12
Special charge for labour restructuring:
    Initial provision                                   33                   -
    Adjustment to provision                             (8)                  -
Charges recorded in salaries,
  wages and benefits                                     7                   5
Amounts disbursed                                      (13)                 (4)
-----------------------------------------   ----------------   ----------------
End of year                                             32                  13
Current portion                                        (23)                 (8)
-----------------------------------------   ----------------   ----------------
                                              $          9       $           5
-----------------------------------------   ----------------   ----------------

     The Corporation offers certain severance programs to certain employees from
     time to time. The cost of these programs is recorded within operating
     expenses. The Corporation does not have any continuing obligation to offer
     these programs.

     Special charge for labour restructuring

     A workforce reduction plan was announced in February 2006 to reduce
     non-unionized employee levels by 20 percent. A special charge of $28 was
     recorded in the Air Canada Services segment and $5 in ACTS in Quarter 1
     2006 relating to this program. During Quarter 4 2006, the estimated cost of
     this plan to the Air Canada Services segment was revised due to the
     favourable impact of attrition and other factors which

--------------------------------------------------------------------------------
                                       32
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

     reduced the cost of achieving the target. As a result, the Air Canada
     Services segment recorded a reduction of $8 in Quarter 4 2006 to the
     special charge for labour restructuring.


--------------------------------------------------------------------------------
                                       33
<PAGE>

[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
11. STOCK-BASED COMPENSATION
--------------------------------------------------------------------------------

ACE Stock Option Plan

Certain of the Corporation's employees participate in the ACE stock option plan.
Plan participation is limited to employees holding positions that, in ACE
Board's view (or a committee selected by the Board), have a significant impact
on ACE's long term results. The stock option plan provides that the options will
have an exercise price of not less than 100% of the market price of the
underlying shares at the time of grant. Fifty percent of all options vest over
four years. The remaining options vest upon performance conditions that are
based on net income targets established by the ACE Board over the same time
period. All options expire after seven years. The terms of ACE's stock option
plan specify that upon the retirement of the employee, options granted to that
employee may be exercised as the options vest.

The number of ACE stock options granted to employees, the related compensation
expense recorded (post adoption of EIC-162) and the assumptions used to
determine stock-based compensation expense, using the Black-Scholes option
valuation model were as follows:

---------------------------------------------- --------------- ----------------
                                                         2006             2005
---------------------------------------------- --------------- ----------------
Compensation expense ($ millions)                 $         7      $         3

Number of stock options granted                       748,926          770,000
Weighted average fair value per
  option granted ($)                              $     10.61     $       9.46
Aggregated fair value of options
  granted ($ millions)                            $         8     $          7
Weighted average assumptions:
   Risk-free interest rate                              4.02%            3.40%
   Expected volatility                                    35%              35%
   Dividend yield                                          0%               0%
   Expected option life (years)                           4.5              4.5
---------------------------------------------- --------------- ----------------

The risk-free interest rate above is based on the average yield on the
Government of Canada marketable bonds for the contractual life of the option in
effect at the time of the grant. Expected volatilities used are based on
historical volatilities from traded stock of ACE and other factors. A zero
dividend yield is used based on the historical dividend yield of ACE. The
expected life of the stock options represent the period of time that options
granted are expected to be outstanding and is derived from the output of an
option valuation model.

In 2006, the amount credited to share capital for ACE stock options exercised
was $16 (2005 - $11). For ACE stock options exercised, new shares are issued by
the Corporation.

At December 31, 2006, a total of 3,597,798 (2005 - 3,186,908) stock options were
outstanding, and represented approximately 2.9% (2005 - 2.61%) of ACE's fully
diluted equity, which was within the Corporation's guideline of 5%.


--------------------------------------------------------------------------------
                                       34
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


A summary of the activity related to Corporation employees participating in the
ACE stock options' plan is as follows:

<TABLE>
<CAPTION>
--------------------------------------------- ------------------------------------ ------------------------------------
                                                             2006                                 2005
                                              ------------------------------------ ------------------------------------
                                                   Options       Weighted Average       Options        Weighted Average
                                                     (000)   Exercise Price/Share         (000)    Exercise Price/Share
--------------------------------------------- -------------- --------------------- -------------- ---------------------
<S>                                                  <C>     <C>                          <C>     <C>
Beginning of year                                    3,187   $           24.70            3,028   $               20.00
Granted                                                134               37.65              770                   39.44
Exercised                                             (111)              20.00             (522)                  20.00
Forfeited                                              (79)              20.00              (89)                  20.00
--------------------------------------------- -------------- --------------------- -------------- ---------------------
Outstanding options, prior to special                3,131               25.53            3,187                   24.70
   distribution
Adjustment - ACE special distribution (a)              218                                  n/a
--------------------------------------------- -------------- --------------------- -------------- ---------------------
Outstanding options, after special
   distribution (a)                                  3,349               23.87
Granted                                                615               33.33
Exercised                                             (338)              18.80
Forfeited                                              (28)              21.85
--------------------------------------------- -------------- --------------------- -------------- ---------------------
Outstanding options, end of year                     3,598   $           25.98            3,187   $               24.70
--------------------------------------------- -------------- --------------------- -------------- --------------------
Options exercisable, end of year                       613   $           24.50              162   $               23.95
--------------------------------------------- -------------- --------------------- -------------- ---------------------
</TABLE>

(a)  In accordance with the terms of the ACE stock option plan, the special
     distribution in March 2006 (Note 20) triggered an adjustment to the
     weighted average exercise price and the number of options outstanding.
     Effective March 22, 2006, the adjustment was applied to all unexercised ACE
     stock options as of March 1, 2006, whether vested or not, in a consistent
     manner with the adjustment to the conversion rate for the convertible
     senior notes described in Note 7. As at the adjustment date, the weighted
     average option exercise price and number of options outstanding had been
     amended from $25.53 and 3,131,399 options to $23.87 and 3,349,608 options.

The total intrinsic value of options exercised under this plan during 2006 was
$7.

<TABLE>
<CAPTION>
-------------------- -------- ------------------------------------------------------ ----------------------------------
                                            2006 Outstanding Options                     2006 Exercisable Options
                              ------------------------------------------------------ ----------------------------------
                                   Number of   Weighted Average    Weighted Average     Number of      Weighted Average
  Range of Exercise  Expiry          Options     Remaining Life            Exercise   Exercisable              Exercise
             Prices    Dates     Outstanding            (Years)         Price/Share       Options           Price/Share
-------------------- -------- --------------- ------------------ ------------------- -------------- -------------------
<C>                  <C>      <C>             <C>                <C>                 <C>            <C>
             $18.70     2011       2,025,074                  5              $18.70       419,130                $18.70
    $31.89 - $38.91     2012         820,936                  6               36.89       193,867                 37.05
    $30.61 - $36.11     2013         751,788                  7               33.70             -                     -
-------------------- -------- --------------- ------------------ ------------------- -------------- -------------------
                                   3,597,798                                 $25.98       612,997                $24.50
-------------------- -------- --------------- ------------------ ------------------- -------------- -------------------
</TABLE>


<TABLE>
<CAPTION>
-------------------- -------- ------------------------------------------------------ ----------------------------------
                                            2005 Outstanding Options                     2005 Exercisable Options
                              ------------------------------------------------------ ----------------------------------
  Range of Exercise  Expiry        Number of   Weighted Average                         Number of      Weighted Average
                                                                   Weighted Average
                                     Options     Remaining Life            Exercise   Exercisable              Exercise
             Prices    Dates     Outstanding            (Years)         Price/Share       Options           Price/Share
-------------------- -------- --------------- ------------------ ------------------- -------------- -------------------
<C>                  <C>      <C>             <C>                <C>                 <C>            <C>
             $20.00     2011       2,416,908                  6              $20.00       129,923                $20.00
    $34.11 - $41.62     2012         770,000                  7               39.44        32,292                 39.87
-------------------- -------- --------------- ------------------ ------------------- -------------- -------------------
                                   3,186,908                                 $24.70       162,215                $23.95
-------------------- -------- --------------- ------------------ ------------------- -------------- -------------------
</TABLE>


The aggregate intrinsic value of the exercisable options outstanding at December
31, 2006 is $8 and the weighted average remaining life is 5.3 years.

Subsequent to December 31, 2006, a further adjustment was made to the weighted
average exercise price and the number of options outstanding (see Note 24).

Air Canada Long-Term Incentive Plan

Certain of the Air Canada's employees participate in the Air Canada Long-term
Incentive Plan (the "Air Canada LTIP") administered by the Board of Directors of
Air Canada. The Air Canada LTIP which was established at the


--------------------------------------------------------------------------------
                                       35
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

time of the Air Canada IPO in November 2006 provides for the grant of options
and performance share units to senior management and officers of Air Canada.

The options to purchase shares granted under the Air Canada LTIP have a maximum
term of 10 years and an exercise price based on the fair market value of the
shares at the time of the grant of the options. Options granted under the Air
Canada LTIP will vest over four years and will incorporate performance vesting
features. The performance vesting conditions are based on net income targets
established by the Air Canada Board over the same time period. The terms of the
Air Canada LTIP specify that upon the retirement of the employee, options
granted may be exercised as the rights to exercise accrue within three years
from the retirement date.

The number of Air Canada stock options granted to employees, the related
compensation expense recorded and the assumptions used to determine stock-based
compensation expense, using the Black-Scholes option valuation model were as
follows:

-------------------------------------------- ---------------- -----------------
                                                         2006             2005
-------------------------------------------- ---------------- -----------------
Compensation expense ($ millions)              $            3    $           -

Number of stock options granted                     1,699,678                -
Weighted average fair value per option
  granted ($)                                  $         5.40    $           -
Aggregated fair value of options granted
   ($ millions)                                $            9    $           -
Weighted average assumptions:
   Risk-free interest rate                              4.07%                -
   Expected volatility                                    35%                -
   Dividend yield                                          0%                -
   Expected option life (years)                           4.5                -
-------------------------------------------- ---------------- -----------------

The risk-free interest rate above is based on the average yield on the
Government of Canada marketable bonds for the contractual life of the option in
effect at the time of the grant. Expected volatilities used are based on
historical volatilities from traded stock of Air Canada and other factors. A
zero dividend yield is used based on the historical dividend yield of Air
Canada. The expected life of the stock options represent the period of time that
options granted are expected to be outstanding and is derived from the output of
an option valuation model.

A summary of the activity related to Corporation employees participating in the
Air Canada Long-term Incentive Plan is as follows:

<TABLE>
<CAPTION>
------------------------------------------ --------------------------------------- ------------------------------------
                                                            2006                                  2005
                                           --------------------------------------- ------------------------------------
                                                   Options                              Options        Weighted Average
                                                                 Weighted Average
                                                                         Exercise
                                                     (000)        Price/Share (b)         (000)    Exercise Price/Share
------------------------------------------ ----------------- --------------------- -------------- ---------------------
<S>                                         <C>              <C>                <C>             <C>
Beginning of year                                        -   $                  -             -   $             -
Granted                                              1,700                  21.00             -                 -
Exercised                                                -                      -             -                 -
Forfeited                                                -                      -             -                 -
------------------------------------------ ----------------- --------------------- -------------- ---------------------
Outstanding options, end of year                     1,700   $              21.00             -   $             -
------------------------------------------ ----------------- --------------------- -------------- ---------------------
Options exercisable, end of year                         -   $                  -             -   $             -
------------------------------------------ ----------------- --------------------- -------------- ---------------------
</TABLE>


<TABLE>
<CAPTION>
-------------------- -------- ------------------------------------------------------ ----------------------------------
                                            2006 Outstanding Options                     2006 Exercisable Options
                              ------------------------------------------------------ ----------------------------------
                                   Number of   Weighted Average    Weighted Average     Number of      Weighted Average
  Range of Exercise  Expiry          Options     Remaining Life            Exercise   Exercisable              Exercise
             Prices    Dates     Outstanding            (Years)         Price/Share       Options           Price/Share
-------------------- -------- --------------- ------------------ ------------------- -------------- -------------------
<C>                  <C>      <C>             <C>                <C>                 <C>            <C>
             $21.00     2016       1,699,678                 10              $21.00             -                     -
-------------------- -------- --------------- ------------------ ------------------- -------------- -------------------
</TABLE>

Approximately 346,000 performance share units were also granted under the Air
Canada LTIP. The performance share units have a maximum term of three years and
a grant price based on fair market value of the shares at the time of the grant.
Performance share units granted under the Long-term Incentive Plan will vest
over three years commencing January 1, 2007 and will incorporate performance
vesting features. The terms of the Long-term Incentive Plan specify that upon
the retirement of the employee, performance share


--------------------------------------------------------------------------------
                                       36
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

units granted will be prorated at the end of the vested term based on the total
number of completed months of active service during the term of the performance
share units.

Aeroplan Long-Term Incentive Plans

Aeroplan has an Initial Long-Term Incentive Plan ("Aeroplan Initial LTIP") that
grants Aeroplan Fund Units to key employees. On March 31, 2006, ACE transferred
500,000 Aeroplan Fund Units for the purpose of funding the Aeroplan Initial
LTIP. Under the terms of the plan, 50% of the units granted are subject to
vesting conditions based on Aeroplan's performance and 50% vest based on time.
Performance based units vest at the end of each performance period if
distributable cash targets established by the Aeroplan Board of Directors for
each of the periods ended December 31, 2005, 2006 and 2007 are met, or on a
cumulative basis at the end of the following performance period if such targets
are met in the following performance period.

On March 31, 2006 ACE exchanged on a 1:1 basis 500,000 of its Aeroplan Limited
Partnership units into Aeroplan Income Fund units ("Fund Units"). The Aeroplan
Income Fund units were transferred to a trust for the purpose of funding the
Aeroplan Initial LTIP. The transfer was recorded at the carrying amount of the
net assets transferred and does not give rise to a gain or loss within ACE.
Forfeited units that do not meet the vesting conditions and accumulated
distributions thereon accrue back to ACE.

Aeroplan has an On-going Long-Term Incentive Plan ("Aeroplan On-going LTIP")
that grants yearly Aeroplan Fund Units to eligible employees on a basis of a
percentage of their annual base salary. The Aeroplan Fund Units are held in a
trust for the benefit of the eligible employees and vest at the end of a three
year period commencing January 1 of the year in respect of which they are
granted, subject to achieving distributable cash targets established by the
Aeroplan Board of Directors. Aeroplan purchases the units on the secondary
market. Distributions declared by Aeroplan on any units granted under this plan
may be invested in additional units, which will vest concurrently and
proportionately with the units granted. Forfeited units and accumulated
distributions thereon accrue to Aeroplan. The trust is consolidated by Aeroplan
as a variable interest entity.

Aeroplan has an Omnibus Plan in order to attract and/or retain employees. The
Aeroplan Fund Units are held in a trust and vesting conditions vary at the time
of grant but are typically time based, with units vesting 3 years after the
grant. Distributions declared by Aeroplan on any units granted under this plan
may be invested in additional units, which will vest concurrently with the units
granted. Forfeited units and accumulated distributions thereon accrue to
Aeroplan. The trust is consolidated by Aeroplan as a variable interest entity.

As at December 31, 2006, the details of units of Aeroplan Long-term Incentive
Plans described above are as follows:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Aeroplan Fund Units (000)                                 Initial LTIP     On-going LTIP   Omnibus Plan
-------------------------------------------------------   -------------    -------------   -------------
<S>                                                       <C>              <C>             <C>
Beginning of year, units outstanding                               --               --              --
Granted                                                             568             86              66
Forfeited                                                          (103)            --              --
Vested                                                             (197)            --              --
-------------------------------------------------------   -------------    -------------   -------------
End of year, units outstanding                                      268             86              66
-------------------------------------------------------   -------------    -------------   -------------
Weighted average remaining life (years)                             1.3              2             2.5
-------------------------------------------------------   -------------    -------------   -------------
Cost of units purchased during the year                   $         --      $        1     $         1
-------------------------------------------------------   -------------    -------------   -------------
</TABLE>

The Aeroplan segment recorded compensation expense of $3 during 2006 for the
above plans.

Jazz Long-Term Incentive Plan

Jazz has a similar Initial Long-Term Incentive Plan ("Jazz Initial LTIP") that
grants Jazz Fund Units to key employees as a one-time special award. A total of
603,903 Jazz Fund Units were granted. Under the terms of the plan, 50% of the
units granted are subject to vesting conditions based on Jazz's performance and
50% vest on December 31, 2008. The Jazz segment recorded compensation expense of
$2 during 2006 for this plan and the total estimated future commitment under
this plan is $6.

During 2006, the net amount credited to contributed surplus for the stock-based
compensation plans of the Corporation was $19 (2005 - $2).


--------------------------------------------------------------------------------
                                       37
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


Employee Ownership Plans

Employee ownership plans have been established for shares or units of ACE, Air
Canada, Aeroplan or Jazz under which eligible employees are allowed to invest a
portion of their base salary for the purchase of shares or units on the
secondary market (up to 6% of their salary for Jazz employees and up to 5% for
other entities). The Corporation will match between 33% and 100% of the
investments made by the employee. During 2006, the Corporation recorded
compensation expense of $2 in the Air Canada Services segment, less than $1 in
the Aeroplan segment and $2 in the Jazz segment for these employee ownership
plans.


--------------------------------------------------------------------------------
                                       38
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
12. SHAREHOLDER'S EQUITY
--------------------------------------------------------------------------------

The issued and outstanding common shares of ACE as at December 31, 2006, along
with potential common shares, are as follows:

------------------------------------------------- -------------- ---------------
Outstanding shares (000)                                  2006            2005
------------------------------------------------- -------------- ---------------
Issued and outstanding
   Class A variable voting shares (a)                   79,499          76,735
   Class B voting shares (a)                            22,772          25,059
   Shares held in escrow                                     -              28
------------------------------------------------- -------------- ---------------
Total issued and outstanding                           102,271         101,822
------------------------------------------------- -------------- ---------------

Potential common shares
   Convertible preference shares (b)                    10,747          10,228
   Convertible notes (c)                                 7,354           6,875
   Stock options                                         3,598           3,187
------------------------------------------------- -------------- ---------------
Total potential common shares                           21,699          20,290
------------------------------------------------- -------------- ---------------


Share capital as at December 31, 2006 (net of issue costs):

------------------------------------------------- -------------- ---------------
                                                          2006            2005
------------------------------------------------- -------------- ---------------
Share capital
   Common shares (a)                               $     2,188    $      2,231
   Convertible preference shares (b)                       117             117
   Convertible notes (c)                                    92              92
------------------------------------------------- -------------- ---------------
                                                         2,397           2,440
------------------------------------------------- -------------- ---------------
   Adjustment to shareholders' equity (d)               (1,655)         (1,693)
------------------------------------------------- -------------- ---------------
                                                   $       742    $        747
------------------------------------------------- -------------- ---------------

During 2006 the Corporation, issued 449,109 (2005 - 521,976) common shares on
the exercise of stock options for cash consideration of $8 (2005 - $10). In
addition, as a result of the special distribution in March 2006 (Note 20), $59
was recorded as a reduction in Share capital.

In 2005, ACE completed the public offering of an aggregate of 12,485,000 Class A
Variable Voting Shares and Class B Voting Shares at a price of $37.00 per share
for gross proceeds of approximately $462 ($442 net of fees).

Share capital and other equity is comprised of:

(a)  Common shares

     Class A Variable Voting Shares

     The Class A Variable Voting Shares may be held only by persons who are not
     Canadians and are entitled to one vote per Class A Variable Voting Share
     unless (i) the number of Class A Variable Voting Shares outstanding
     (including the Convertible 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 Class A Variable Voting Shares (including the
     Convertible 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 Class A Variable Voting Share will decrease
     proportionately such that (i) the Class A Variable Voting Shares as a class
     (including the Convertible 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 Class A Variable Voting Shares (including the
     Convertible Preferred Shares on an as-converted basis) at any meeting do
     not exceed 25% of the votes that may be cast at such meeting.


--------------------------------------------------------------------------------
                                       39
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


     Class B Voting Shares

     The Class B Voting Shares may be held only by persons who are Canadians.
     Each Class B Voting Share shall confer the right to one (1) vote in person
     or by proxy at all meetings of shareholders of the ACE.

     The changes during 2006 in the outstanding common shares and their
     aggregate stated value were as follows:

---------------------------------------------- ---------------- ----------------
                                                                          2006
                                               ---------------- ----------------
                                                 Number (000)           Amount
---------------------------------------------- ---------------- ----------------
Issued, beginning of year                             101,822   $        2,231
Shares issued on the exercise
  of stock options                                        449               16
Special distribution                                        -              (59)
---------------------------------------------- ---------------- ----------------
                                                      102,271   $        2,188
---------------------------------------------- ---------------- ----------------

(b)  Convertible Preferred Shares

     As at September 30, 2004, 12,500 Convertible Preferred Shares were issued
     for consideration of $250 before fees of $12. These Convertible Preferred
     Shares are convertible into 10,747,346 common shares, based on the
     conversion ratio applicable as at December 31, 2006.

     For accounting purposes, the Convertible Preferred Shares are presented as
     a compound instrument. At the date of issuance, the value ascribed to the
     holders' conversion option, which is presented as equity, was $123 less
     allocated fees of $6; the value ascribed to the financial liability was
     $127. The Convertible Preferred Shares will increase by 5% per annum,
     compounded semi-annually from the date of issuance ("Fully Accreted Value")
     resulting in an accretion on the financial liability at an effective
     interest rate of 12%. The financial liability amounted to $166 at December
     31, 2006 ($148 at December 31, 2005).

     Each preferred share shall confer on its holder the right to that number of
     votes as is equal to the number of ACE shares into which each preferred
     share held by such holder could be converted on the date for determination
     of shareholders entitled to vote at the meeting or on the date of any
     written consent, based on the conversion ratio in effect on such date;
     provided, however, that if any Convertible Preferred Shares are held by
     persons who are not Canadians, such Convertible Preferred Shares shall be
     subject to the same proportionate reduction in voting percentage as
     described for Class A Variable Voting Shares above as if, for voting
     purposes only, such Convertible Preferred Shares had been converted into
     Class A Variable Voting Shares.

     The Convertible Preferred Shares may be converted at any time, at the
     option of the holder thereof, into fully paid and non-assessable Class B
     Voting Shares (if the holder is a Canadian) or fully paid and
     non-assessable Class A Variable Voting Shares (if the holder is not a
     Canadian) at the conversion ratio applicable upon the date of conversion.
     The conversion price is 130% of the subscription price ($20) of each Class
     B Voting Share under the 2004 Rights Offering. The conversion is based upon
     the Fully Accreted Value at the time of conversion.

     Mandatory Conversion

     The holders of the Convertible Preferred Shares will be required to convert
     the Convertible Preferred Shares into fully paid and non-assessable common
     shares at the conversion ratio applicable upon the date of conversion, if
     the closing price of the ACE shares on the principal market for each of
     thirty consecutive trading days exceeded 175% of the conversion price.

     The Convertible Preferred Shares will also be subject to mandatory
     conversion into fully paid and non-assessable common shares within ten days
     of each mandatory conversion date, at the conversion ratio applicable upon
     the date of conversion, upon the following terms and conditions:

     -    if the closing price of the ACE shares on the principal market exceeds
          the Fully Accreted Value of a preferred share on at least thirty of
          the one hundred trading days immediately prior to a particular
          mandatory conversion date; or

     -    if the closing price of the ACE shares on the principal market does
          not exceed the Fully Accreted Value of a preferred share on at least
          thirty of the one hundred trading days immediately prior to a
          particular


--------------------------------------------------------------------------------
                                       40
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

          mandatory conversion date, (i) the holders of the Convertible
          Preferred Shares will not be required to convert their Convertible
          Preferred Shares into ACE shares and (ii) as of such mandatory
          conversion date, the then applicable conversion price shall be
          automatically reduced by 3.75%; and

     -    if the closing price of the ACE shares on the principal market does
          not exceed the Fully Accreted Value of a preferred share on at least
          thirty of the one hundred trading days immediately prior to the final
          maturity date, then holders of Convertible Preferred Shares will be
          entitled, upon written notice to ACE given within ten days following
          the final maturity date, to require ACE to redeem each of the
          Convertible Preferred Shares in cash at a redemption price equal to
          the Fully Accreted Value as of the final maturity date.

     The first mandatory conversion date is seven years from the date of
     issuance.

     Subject to the rights, privileges, restrictions and conditions attaching to
     the shares of ACE ranking prior to the Convertible Preferred Shares, upon
     the liquidation, dissolution or winding-up or distribution of the assets of
     ACE, the holders of the Convertible Preferred Shares will be entitled to
     receive, prior to and in preference to the holders of ACE shares, an amount
     equal to the Fully Accreted Value of the Convertible Preferred Shares as of
     the date of the liquidation, dissolution, winding-up or distribution.

     The holders of Convertible Preferred Shares participate on an as-converted
     basis with respect to all dividends, distributions, spin-off, split-off,
     subscription rights or other offers made to holders of Class A Variable
     Voting Shares and Class B Voting Shares and any other similar transactions.

(c)  Convertible Notes

     During 2005, the Corporation issued $330 of Convertible Senior Notes due
     2035 ("Convertible Notes") for net proceeds of $319. For accounting
     purposes, the Convertible Notes are presented as a compound instrument with
     the conversion option reflected in other equity above. Refer to Note 7 for
     additional information.

(d)  Adjustment to Shareholders' Equity

     Under fresh start reporting, the balance in shareholders' equity after a
     comprehensive revaluation is adjusted to the net value of identifiable
     assets and liabilities. Section 1625 of CICA Handbook, Comprehensive
     Revaluation of Assets and Liabilities, does not permit goodwill to be
     recorded even if the fair value of net assets is less than the fair value
     of the enterprise as a whole.

     During 2006, as a result of a review of outstanding provisions recorded at
     the time of exiting CCAA on September 30, 2004, it was determined that a
     portion of the provision amounting to $38 ($23 related to labour related
     programs) was no longer required. The amount reversed has been applied
     against Share capital as these amounts related to plans established before
     the application of fresh start reporting.


--------------------------------------------------------------------------------
                                       41
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
13. EARNINGS PER SHARE
--------------------------------------------------------------------------------

The following table outlines the calculation of basic and diluted earnings per
share:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------- ------------------ -------------------
(in millions, except per share amounts)                                                      2006                2005
-------------------------------------------------------------------------------- ------------------ -------------------
<S>                                                                               <C>                <C>
Numerator:
   Numerator for basic earnings per share:
     Income for the year                                                         $            408   $             261
   Effect of potential dilutive securities:
     Stock options                                                                              -                   -
     Convertible preferred shares                                                              23                  11
     Convertible notes                                                                         27                  15
   Add back anti-dilutive impact:
     Convertible notes                                                                          -                 (15)
-------------------------------------------------------------------------------- ------------------ -------------------
   Adjusted earnings for diluted earnings per share                              $            458   $             272
-------------------------------------------------------------------------------- ------------------ -------------------

Denominator:
   Denominator for basic earnings per share:
     Weighted-average shares                                                                  102                  98
   Effect of potential dilutive securities:
     Stock options                                                                              1                   1
     Convertible preferred shares                                                              11                  10
     Convertible notes                                                                          7                   5
   Add back anti-dilutive impact:
     Convertible notes                                                                          -                  (5)
-------------------------------------------------------------------------------- ------------------ -------------------
   Adjusted weighted-average shares for diluted earnings per share                            121                 109
-------------------------------------------------------------------------------- ------------------ -------------------

-------------------------------------------------------------------------------- ------------------ -------------------
Basic earnings per share                                                         $           4.01   $            2.66
-------------------------------------------------------------------------------- ------------------ -------------------
Diluted earnings per share                                                       $           3.80   $            2.48
-------------------------------------------------------------------------------- ------------------ -------------------
</TABLE>

The calculation of earnings per share is based on whole dollars and not on
rounded millions. As a result, the above amounts may not be recalculated to the
per share amount disclosed above.

The dilutive effect of outstanding stock options on earnings per share is based
on the application of the treasury stock method. Under this method, the proceeds
from the exercise of such securities are assumed to be used to purchase Class B
Voting Shares.

Excluded from the calculation of diluted earnings per share were 320,886
outstanding options as the option's exercise price was greater than the average
market price of the common shares for the year (2005 - 750,000).


--------------------------------------------------------------------------------
                                       42
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006



--------------------------------------------------------------------------------
14. SEGMENT INFORMATION
--------------------------------------------------------------------------------

A reconciliation of the total amounts reported by each business segment and
geographic region to the applicable amounts in the consolidated financial
statements follows:

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                                                                                               2006
                                             ----------------------------------------------------------------------
                                             Air Canada
                                              Services    Aeroplan        Jazz        ACTS         CIE        Total
------------------------------------------   ----------  ----------  ----------  ----------  ----------  ----------
<S>                                          <C>         <C>         <C>         <C>         <C>         <C>
Passenger revenue                            $    8,887  $     --    $     --    $     --    $       82  $    8,969
Cargo revenue                                       625        --          --          --          --           625
Other revenue                                       558         759           7         228        (489)      1,063
------------------------------------------   ----------  ----------  ----------  ----------  ----------  ----------
   External revenue                              10,070         759           7         228        (407)     10,657
------------------------------------------   ----------  ----------  ----------  ----------  ----------  ----------
Inter-segment revenue                               169          10       1,374         627      (2,180)       --
------------------------------------------   ----------  ----------  ----------  ----------  ----------  ----------
                                                 10,239         769       1,381         855      (2,587)     10,657
------------------------------------------   ----------  ----------  ----------  ----------  ----------  ----------
Special charge for Aeroplan Miles                  (102)       --          --          --          --          (102)
------------------------------------------   ----------  ----------  ----------  ----------  ----------  ----------
   Total revenues                                10,137         769       1,381         855      (2,587)     10,555
------------------------------------------   ----------  ----------  ----------  ----------  ----------  ----------
                                                  1,816          79         311         331          16       2,553
Salaries, wages, and benefits
Aircraft fuel                                     2,544        --           285           1        (284)      2,546
Aircraft rent                                       314        --           134        --            (7)        441
Airport user fees                                   982        --           178        --          (177)        983
Aircraft maintenance materials
    and supplies                                    768        --            98         234        (629)        471
Depreciation of property
    and equipment                                   437        --            21           6           3         467
Amortization of intangible assets                    54          14        --            13          14          95
Obsolescence provisions                               2        --          --            12        --            14
Commissions                                         237        --          --          --            (1)        236
Capacity purchase fees paid to Jazz                 871        --          --          --          (871)       --
Special charge for labour restructuring              20        --          --             5        --            25
Other operating expenses                          1,978         536         210         255        (650)      2,329
------------------------------------------   ----------  ----------  ----------  ----------  ----------  ----------
   Total operating expenses                      10,023         629       1,237         857      (2,586)     10,160
------------------------------------------   ----------  ----------  ----------  ----------  ----------  ----------

Operating income (loss)                             114         140         144          (2)         (1)        395
------------------------------------------   ----------  ----------  ----------  ----------  ----------  ----------
                                                     82          20           6           1          11         120
Interest income
Interest expense                                   (313)        (15)         (8)        (18)        (24)       (378)
Interest capitalized                                 62        --            (1)       --          --            61
Gain on sale of US Airways                         --          --          --          --           152         152
Dilution gain - Air Canada                         --          --          --          --            25          25
Dilution gain - Jazz                               --          --          --          --           220         220
Gain (loss) on sale of and provisions
   on assets                                         (6)       --          --          --             2          (4)
Other non-operating income (expense)                (16)         (1)         (1)          1           3         (14)
Non-controlling interest                            (12)       --          --          --           (60)        (72)
Foreign exchange gain                                12        --          --          --          --            12
Recovery of (provision for)
    income taxes                                      3        --          --          --          (112)       (109)
------------------------------------------   ----------  ----------  ----------  ----------  ----------  ----------

Segment results / income (loss)              $      (74) $      144  $      140  $      (18) $      216  $      408
------------------------------------------   ----------  ----------  ----------  ----------  ----------  ----------
</TABLE>


--------------------------------------------------------------------------------
                                       43
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
                                                                                                          2005
                                             -----------------------------------------------------------------
                                             Air Canada
                                              Services   Aeroplan       Jazz       ACTS        CIE       Total
------------------------------------------   ---------- ---------- ---------- ---------- ---------- ----------
<S>                                          <C>        <C>        <C>        <C>        <C>        <C>
Passenger revenue                            $    8,197 $     --   $        2 $     --   $       70 $    8,269
Cargo revenue                                       620       --         --         --         --          620
Other revenue                                       537        627          8        187       (418)       941
------------------------------------------   ---------- ---------- ---------- ---------- ---------- ----------
   External revenue                               9,354        627         10        187       (348)     9,830
------------------------------------------   ---------- ---------- ---------- ---------- ---------- ----------
Inter-segment revenue                               155         13      1,013        567     (1,748)      --
------------------------------------------   ---------- ---------- ---------- ---------- ---------- ----------
   Total revenues                                 9,509        640      1,023        754     (2,096)     9,830
------------------------------------------   ---------- ---------- ---------- ---------- ---------- ----------
                                                  1,857         71        265        308         16      2,517
Salaries, wages, and benefits
Aircraft fuel                                     2,197       --          177          1       (177)     2,198
Aircraft rent                                       341       --           80       --           (4)       417
Airport user fees                                   924       --          124       --         (124)       924
Aircraft maintenance materials
    and supplies                                    693       --           68        174       (568)       367
Depreciation of property
    and equipment                                   346       --           18          7          2        373
Amortization of intangible assets                    56          8       --           14         18         96
Obsolescence provisions                               2       --         --           11       --           13
Commissions                                         253       --         --         --         --          253
Capacity purchase fees paid to Jazz                 693       --         --         --         (693)      --
Other operating expenses                          1,956        459        162        192       (552)     2,217
------------------------------------------   ---------- ---------- ---------- ---------- ---------- ----------
   Total operating expenses                       9,318        538        894        707     (2,082)     9,375
------------------------------------------   ---------- ---------- ---------- ---------- ---------- ----------
Operating income (loss)                             191        102        129         47        (14)       455
------------------------------------------   ---------- ---------- ---------- ---------- ---------- ----------
                                                     48          6          1       --           11         66
Interest income
Interest expense                                   (270)        (5)       (16)       (14)       (10)      (315)
Interest capitalized                                 14       --         --         --         --           14
Dilution gain - Aeroplan                           --         --         --         --          190        190
Gain (loss) on sale of and provisions
   on assets                                        (31)      --            4       --           (1)       (28)
Other non-operating income (expense)                 15         (3)      --         --          (24)       (12)
Non-controlling interest                            (13)      --         --         --          (11)       (24)
Foreign exchange gain                                47       --         --         --           (1)        46
Provision for income taxes                          (21)      --         --         --         (110)      (131)
------------------------------------------   ---------- ---------- ---------- ---------- ---------- ----------

Segment results / income (loss)              $      (20)$      100 $      118 $       33 $       30 $      261
------------------------------------------   ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>


Geographic Information

------------------------------------------- ----------------- ------------------
Passenger revenues                                     2006               2005
------------------------------------------- ----------------- ------------------
   Canada                                   $         3,710   $          3,447
   US Transborder                                     1,841              1,570
   Atlantic                                           1,814              1,727
   Pacific                                              956                934
   Other                                                648                591
------------------------------------------- ----------------- ------------------
                                            $         8,969   $          8,269
------------------------------------------- ----------------- ------------------

------------------------------------------- ----------------- ------------------

Cargo revenues                                         2006               2005
------------------------------------------- ----------------- ------------------

   Canada                                   $           118   $            126
   US Transborder                                        28                 33
   Atlantic                                             224                228
   Pacific                                              214                188
   Other                                                 41                 45
------------------------------------------- ----------------- ------------------
                                            $           625   $            620
------------------------------------------- ----------------- ------------------


--------------------------------------------------------------------------------
                                       44
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


Passenger and cargo revenues are based on the actual flown revenue for flights
with an origin and destination in a specific country or region. Atlantic refers
to flights that cross the Atlantic Ocean with origin and destinations
principally in Europe. Pacific refers to flights that cross the Pacific Ocean
with origin and destinations principally in Asia.

Other revenues are principally provided to customers located in Canada.

The Air Canada Services segment recorded an impairment loss of $7 within
non-operating expenses on one of its buildings being held for sale in the first
quarter of 2007 to ACTS. The impairment loss is reversed within Corporate Items
and Eliminations ("CIE") as no impairment exists at the ACE consolidated level
for accounting purposes.

Segment Asset Information

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                                                                                 2006
                                         ------------------------------------------------------------------------------
                                         Air Canada
                                           Services   Aeroplan         Jazz           ACTS         CIE          Total
---------------------------------------- ------------ ------------ ------------- ---------- ------------ --------------
<S>                                      <C>          <C>          <C>           <C>        <C>          <C>
Cash and cash equivalents                $    1,312   $    167     $    135      $      -   $      240   $      1,854
Short-term investments                          798        453            -             -           73          1,324
---------------------------------------- ------------ ------------ ------------- ---------- ------------ --------------
                                         $    2,110   $    620     $    135      $      -   $      313   $      3,178
---------------------------------------- ------------ ------------ ------------- ---------- ------------ --------------

Additions to capital assets              $      863   $     25     $     25      $      7   $        -   $        920
---------------------------------------- ------------ ------------ ------------- ---------- ------------ --------------

Total assets                             $   11,388   $    824     $    483      $    989   $     (243)  $     13,441
---------------------------------------- ------------ ------------ ------------- ---------- ------------ --------------
</TABLE>


<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                                                                                 2006
                                         ------------------------------------------------------------------------------
                                         Air Canada
                                           Services   Aeroplan         Jazz           ACTS         CIE          Total
---------------------------------------- ------------ ------------ ------------- ---------- ------------ --------------
<S>                                      <C>          <C>          <C>           <C>        <C>          <C>
Cash and cash equivalents                $    1,000   $    366     $     34      $      -   $      165   $      1,565
Short-term investments                          302         99            -             -          215            616
---------------------------------------- ------------ ------------ ------------- ---------- ------------ --------------
                                         $    1,302   $    465     $     34      $      -   $      380   $      2,181
---------------------------------------- ------------ ------------ ------------- ---------- ------------ --------------

Additions to capital assets              $      849   $     12     $     16      $      5   $        -   $        882
---------------------------------------- ------------ ------------ ------------- ---------- ------------ --------------

Total assets                             $    9,995   $    674     $    504      $    381   $      293   $     11,847
---------------------------------------- ------------ ------------ ------------- ---------- ------------ --------------
</TABLE>


Substantially all of the Corporation's property and equipment are related to
operations in Canada.

The total assets of CIE is net of the inter-company eliminations between each of
the four segments and ACE.

Composition of Business Segments

The Corporation revised its internal financial reporting structure during 2006,
which results in a change to the reportable segments. As a result of the change,
the Corporation has four reportable segments: Air Canada Services, Aeroplan,
Jazz, and ACTS. The Air Canada Services segment is comprised of the entities
previously included within the Transportation Services segment with the
exception that the activities of ACE and certain consolidation adjustments, are
now included within CIE. As a result of these changes, the comparative segment
disclosures have been restated to reflect the current reportable segment
structure.

CIE includes the corporate, financing and investing activities of ACE. 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 for engine and
component maintenance services) versus the expense recognition in Air Canada and
Jazz, which is as the work is completed. CIE also records the non-controlling
interest related to ACE's investment in Aeroplan and Jazz. Future income taxes
are recorded within the applicable taxable entities and are not allocated to
non-taxable entities.

The Aeroplan consolidation adjustments recorded within CIE relate mainly to the
revenue recognition timing difference from when Aeroplan records revenues, which
is at the time a Mile is redeemed for travel, to the consolidated accounting
policy of revenue recognition at the time reward transportation is provided. In
addition,


--------------------------------------------------------------------------------
                                       45
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

Aeroplan records revenue from the redemption of Miles in Other revenue, whereas
on the consolidated financial statements, Miles redeemed for travel on Air
Canada and Jazz are recorded in Passenger revenue. This results in an
elimination of certain Aeroplan Other revenue amounts within CIE to reflect the
consolidated recognition of Aeroplan Miles redeemed for travel on Air Canada and
Jazz within Passenger revenue. This also results in an adjustment to passenger
revenue recorded within CIE. In the Aeroplan segment information, the cost to
Aeroplan of purchasing rewards is recorded in other operating expenses.

Segment financial information has been prepared consistent with how financial
information is produced internally for the purposes of making operating
decisions. Segments negotiate transactions between each other as if they were
unrelated parties.



--------------------------------------------------------------------------------
                                       46
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
15. COMMITMENTS
--------------------------------------------------------------------------------

In 2004, Air Canada signed definitive purchase agreements with Embraer --
Empresa Brasileira de Aeronautica S.A. ("Embraer") for the acquisition of
regional jet aircraft. In November 2005, Air Canada also concluded agreements
with The Boeing Company ("Boeing") for the acquisition of Boeing 777 and Boeing
787 aircraft.

Embraer

The agreement with Embraer covers firm orders for 15 Embraer 175 series aircraft
as well as 45 Embraer 190 series aircraft. The purchase agreement also contains
rights to exercise options for up to 60 additional Embraer 190 series aircraft
as well as providing for conversion rights to other Embraer models. As at
December 31, 2006, 49 options remain exercisable.

Deliveries of the 15 Embraer 175 series aircraft commenced in July 2005 and the
last aircraft was delivered in January 2006. All Embraer 175 deliveries were 80%
financed by a third party as described in Note 7.

The Embraer 190 series deliveries commenced in December 2005 and at December 31,
2006, 18 of the Embraer 190 series firm aircraft orders have been completed. For
the first 18 firm Embraer 190 deliveries, all of which have been delivered, Air
Canada received loans from a syndicate of banks and the manufacturer covering
80% of the capital expenditure as described in Note 7.

Certain aircraft deliveries which were planned to be completed by November 2007
have been delayed with the last delivery expected by January 2008 and the impact
of these delays has been reflected in the projected committed capital
expenditures table below. These projections are based on estimates using
information currently available and are subject to change.

Air Canada also received loan commitments from a third party for an additional
18 Embraer 190 series firm aircraft covering approximately 80% of the capital
expenditure to be repaid in quarterly installments for a 12-year term. Financing
for a maximum of five of these aircraft may be based on fixed rates while the
remaining 13 aircraft will be based on floating rates. The borrowings bear
interest at the 90-day US LIBOR plus 1.90% or the fixed rate equivalent.

Air Canada also received loan commitments from a syndicate of banks for the
remaining nine Embraer 190 series firm aircraft to cover approximately 80% of
the capital expenditure and to be repaid in quarterly installments for a 12-year
term. The borrowings bear interest either at the 90-day US LIBOR plus 1.70% or
the fixed rate equivalent.

Boeing

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 aircraft.

The order for the 36 Boeing 777 aircraft is comprised of firm orders for 18
aircraft plus purchase rights for 18 more, in a yet-to-be determined mix of the
777 family's newest models. As of December 31, 2006, Air Canada has confirmed
with Boeing the delivery of eight Boeing 777-300ER aircraft and six Boeing
777-200LR aircraft. The models of the remaining four Boeing aircraft are yet to
be determined. Delivery of the first Boeing 777 aircraft is scheduled for March
2007.

The order for the 60 Boeing 787 aircraft is comprised of firm orders for 14
aircraft plus options and purchase rights for an additional 46 aircraft. Air
Canada's first Boeing 787 aircraft is scheduled for delivery in 2010.

Air Canada has received financing commitments from Boeing and the engine
manufacturer for all firm aircraft orders covering approximately 90 percent of
the capital expenditure. This available financing would be at an interest rate
of 9.86 percent, based on interest rates as at December 31, 2006. The term to
maturity would be 15 years with principal payments made on a mortgage style
basis resulting in equal installment payments of principal and interest over the
term to maturity. In November 2006, Air Canada made an application for loan
guarantee support from the Export-Import Bank of the United States for the first
seven Boeing 777 aircraft deliveries in 2007. The loan guarantee, if provided,
would cover a 12-year loan term for 85% of the capital expenditure at an
interest rate of approximately 5.36%, based on interest rates as at December 31,
2006.


--------------------------------------------------------------------------------
                                       47
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


Air Canada has signed a 10-year lease for one Boeing 777-300ER from
International Lease Finance Corporation ("ILFC"), which is scheduled to be
delivered in May 2007.

Aircraft Interior Refurbishment Program

In addition to acquiring new aircraft, Air Canada commenced a major
refurbishment of the interior of its existing aircraft in April 2006. All
existing aircraft, except for the Airbus A340 aircraft, will have refurbished
interiors. The aircraft refurbishment program is scheduled to be completed by
the middle of 2008. The capital expenditure associated with this program will be
amortized over a five-year period.

Capital Commitments

As at December 31, 2006, the estimated aggregate cost of the future firm
deliveries as well as other capital purchase commitments approximates $5,863 (of
which $4,745 is subject to firm commitment financing). US dollar amounts are
converted using the December 31, 2006 noon day rate of CDN$1.1653. The estimated
aggregate cost of aircraft is based on delivery prices that include estimated
escalation and, where applicable, deferred price delivery payment interest
calculated based on the 90-day LIBOR rate at December 31, 2006. Committed
payments are as follows:

----------------------------------------------- ------------------
                                                            2006
----------------------------------------------- ------------------
Year ending December 31, 2007                   $          2,153
Year ending December 31, 2008                              1,458
Year ending December 31, 2009                                448
Year ending December 31, 2010                                933
Year ending December 31, 2011                                868
Thereafter                                                     3
----------------------------------------------- ------------------
                                                $          5,863
----------------------------------------------- ------------------

Operating Lease Commitments

As at December 31, 2006 the future minimum lease payments under existing
operating leases of aircraft and other property amount to $2,957 (December 31,
2005 -- $3,416) using year end exchange rates.

<TABLE>
<CAPTION>
-------------------------------------- ----------------------------------------------------------
                                                                                           2006
                                                                    Operating lease commitments
                                       ----------------------------------------------------------
                                               Aircraft      Other property                Total
<S>                                    <C>                <C>                 <C>
Year ending December 31, 2007          $            406   $              66   $             472
Year ending December 31, 2008                       335                  58                 393
Year ending December 31, 2009                       305                  43                 348
Year ending December 31, 2010                       270                  34                 304
Year ending December 31, 2011                       200                  25                 225
Thereafter                                        1,072                 143               1,215
-------------------------------------- ------------------ ------------------- -------------------
                                       $          2,588   $             369   $           2,957
-------------------------------------- ------------------ ------------------- -------------------
</TABLE>


Lease payments for aircraft classified as capital leases and variable interest
entities for accounting purposes are disclosed in Note 7 "Long-Term Debt and
Capital Lease Obligations".

As at December 31, 2006, the future minimum non-cancellable commitments for the
next 12 months under the capacity purchase agreements with unaffiliated regional
carriers is $14.



--------------------------------------------------------------------------------
                                       48
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
16. FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
--------------------------------------------------------------------------------

Under its risk management policy, the Corporation manages its exposure to
changes in interest rates, foreign exchange rates and jet fuel prices through
the use of various derivative financial instruments. The Corporation uses
derivative financial instruments only for risk management purposes, not for
generating trading profit.

Interest Rate Risk Management

Air Canada enters into forward interest rate agreements to manage the risks
associated with interest rate movement on US dollar and Canadian dollar floating
rate debt and investments. During 2006 Air Canada entered into 19 interest rate
swaps with a notional value of US$414 to receive floating rates and pay a
weighted average fixed rate of 5.81% for the debt to be arranged in relation to
the financing of Embraer 190 aircraft between June 2006 and November 2007. The
swaps have 15 year terms from the expected delivery date of the aircraft and
their maturities range from June 2021 to December 2022. Air Canada intends on
settling the interest rate swaps upon delivery of the related aircraft. Air
Canada did not apply hedge accounting to these derivative instruments. Before
December 31, 2006, 7 of these swaps were settled at net loss of $4. As at
December 31, 2006, the fair value of the remaining 12 swaps is $13 in favour of
the counterparty and is recorded in Other long-term liabilities on the
consolidated statement of financial position. The Air Canada Services segment
has recognized a net loss of $17 since inception of these swaps in Quarter 2
2006.

During 2005, Air Canada reached a settlement with a third party related to
interest rate swaps that were terminated as a result of Air Canada's filing for
CCAA on April 1, 2003. A dispute had arisen following termination between Air
Canada and the unrelated third party with respect to replacement arrangements
for the swaps. The settlement agreement provided for a payment to Air Canada of
US$8 related to a portion of the net payments Air Canada would have received had
the swaps not been terminated. The replacement swaps that were put in place with
another unrelated third party had a fair value of $9 in favour of the Air Canada
on inception. As a result of these transactions, the Air Canada Services segment
recorded a gain of $17 net of transaction fees of $3, which has been included in
Deposits and other assets. The swaps have a term to January 2024 and convert
lease payments related to two B767 aircraft leases consolidated under AcG-15,
from fixed to floating rates. These have not been designated as hedges for
accounting purposes. As at December 31, 2006, these two swaps have a fair value
of $4 in favour of Air Canada (December 31, 2005 -- $7 in favour of Air Canada).

During 2006, Jazz entered into interest rate swaps to hedge its exposure to
changes in interest rates on its outstanding senior secured credit facility
(Note 7). The interest rate swap is with third parties with a notional value of
$115, which has effectively resulted in a fixed interest rate of 7.09% for the
term of the senior secured credit facility until February 2, 2009. Effective
February 2, 2006, Jazz is applying hedge accounting to these financial
instruments and no amount is recorded in these consolidated financial
statements. As at December 31, 2006, the fair value of these swaps was less than
$1 in favour of the counterparty.

Foreign Exchange Risk Management

Air Canada enters into certain foreign exchange forward contracts or currency
swaps to manage the risks associated with foreign currency exchange rates. As at
December 31, 2006, Air Canada had entered into foreign currency forward
contracts and option agreements on US$503 of future purchases in 2007. The fair
value of these foreign currency contracts as at December 31, 2006 is $25 in
favour of Air Canada (December 31, 2005 -- $1 in favour of third parties on
US$521 of future purchases in 2006). These derivative instruments have not been
designated as hedges for accounting purposes. The unrealized gain has been
recorded in foreign exchange.

Air Canada has entered into currency swap agreements for 16 Canadair Regional
Jet (CRJ) operating leases until lease terminations between 2007 and 2011.
Currency swaps for five CRJ operating leases, with third parties, were put in
place on the inception of the leases and have a fair value at December 31, 2006
of $10 in favour of the third parties (December 31, 2005 -- $13 in favour of the
third parties), taking into account foreign exchange rates in effect at that
time. Currency swaps for 11 CRJ operating leases with third parties have a fair
value at December 31, 2006 of $3 in favour of Air Canada (December 31, 2005 --
$3 in favour of the Air Canada). These have not been designated as hedges for
hedge accounting purposes. The unrealized changes in fair value have been
recorded in Foreign exchange gain or loss.


--------------------------------------------------------------------------------
                                       49
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


Fuel Price Risk Management

Air Canada enters into contracts with financial intermediaries to manage its
exposure to jet fuel price volatility. As of December 31, 2006, Air Canada had
collar option and swap structures in place to hedge a portion of its anticipated
jet fuel requirements over the 2007 to 2008 period. Since jet fuel is not traded
on an organized futures exchange, liquidity for hedging this commodity is mostly
limited to a shorter time horizon. Crude oil and heating oil contracts are
effective commodities for hedging jet fuel and Air Canada mainly uses these
commodities for medium to longer term hedges.

As of December 31, 2006, approximately 39% of Air Canada's anticipated purchases
of jet fuel for 2007 were hedged. Air Canada's contracts to hedge anticipated
jet fuel purchases over the 2007 period were comprised of jet fuel, heating oil
and crude-oil based contract. Air Canada's contracts to hedge anticipated
purchases over the 2008 period are all crude oil-based and covered 8% of the
first quarter of 2008 anticipated jet fuel purchase requirements.

Hedge accounting was applied prospectively from October 1, 2005. Under hedge
accounting, gains or losses on fuel hedging contracts are recognized in earnings
as a component of aircraft fuel expense when the underlying jet fuel being
hedged is consumed. Prior to the commencement of Air Canada's hedge accounting
being applied, an unrealized gain of $2 was recorded in other non-operating
expense during the nine months ended September 30, 2005.

For the year ended December 31, 2006, the Air Canada Services segment recognized
a net loss of $43 as a component of fuel expense on the consolidated statement
of operations (net loss of $3 for the year ended December 31, 2005) on the
settlement of matured contracts and amortization of deferred costs. The fair
value of Air Canada's fuel hedging contracts as at December 31, 2006 was $24
(US$21) in favour of counterparties (2005 - $3 in favour of third parties).

During 2006, Air Canada entered into two three-way collar option structures
which are composed of one short put option, one long call option and one short
call option. This structure creates a ceiling on the potential benefits to be
realized by Air Canada if commodity prices increase above the threshold of the
short call strike price. Due to the ceiling in these derivative instruments,
this type of derivative does not qualify as a hedging instrument under GAAP. As
at December 31, 2006, one of the three-way collar option structures remains
outstanding, the fair value of this derivative instrument is $1 in favour of the
counterparty and is recorded in Accounts payable and accrued liabilities on the
consolidated statement of financial position.

During 2005, Air Canada de-designated one contract previously under hedge
accounting that was combined into a new net-written option. The net-written
option has a fair value less then zero at the time of inception and so it does
not qualify as a hedging instrument under GAAP. As at December 31, 2006, the
fair value of the net written option was $2 in favour of the counterparty (2005
- less than $1 in favour of the counterparty) and is recorded in Accounts
payable and accrued liabilities on the consolidated statement of financial
position.

The Air Canada Services segment has recognized a net loss of $3 in non-operating
expense during the year ended 2006 for these derivative instruments which do not
qualify as hedge accounting instruments.

Concentration of Credit Risk

The Corporation does not believe it is subject to any significant concentration
of credit risk. Cash and short-term investments are in place with major
financial institutions, Canadian governments and major corporations. Accounts
receivable are generally the result of sales of tickets to individuals through
geographically dispersed travel agents, corporate outlets, or other airlines,
often through the use of major credit cards.

Statement of Consolidated Financial Position Financial Instruments -- Fair
Values

The carrying amounts reported in the consolidated statement of financial
position for cash and short-term investments, accounts receivable and accounts
payable approximate fair values due to the immediate or short-term maturities of
these financial instruments.

The fair value of long-term debt and capital lease obligations as at December
31, 2006 and December 31, 2005 approximates its carrying value.


--------------------------------------------------------------------------------
                                       50
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

Proposed Accounting Policies

The Canadian Institute of Chartered Accountants Accounting Standards Board
issued CICA 3855, Financial Instruments - Recognition and Measurement, CICA
3865, Hedges, and CICA 1530, Comprehensive Income, which will be applied by the
Corporation for its fiscal years beginning on January 1, 2007. CICA 3855
prescribes when a financial asset, financial liability or non-financial
derivative is to be recognized on the balance sheet and the measurement of such
amount. It also specifies how financial instrument gains and losses are to be
presented. CICA 3865 is applicable for designated hedging relationships and
builds on existing Canadian GAAP guidance by specifying how hedge accounting is
applied and what disclosures are necessary when it is applied. CICA 1530
introduces new standards for the presentation and disclosure of components of
comprehensive income. Comprehensive income is defined as the change in net
assets of an enterprise during a reporting period from transactions and other
events and circumstances from non-owner sources. It includes all changes in net
assets during a period except those resulting from investments by owners and
distributions to owners.

When the Corporation adopts the new requirements on January 1, 2007, a new
section of shareholders' equity called other comprehensive income will be
presented. The new section will include gains and losses related to the
mark-to-market of investment securities and cash flow hedges.

The impact of measuring fuel hedging derivatives at fair value on January 1,
2007 will be recognized in opening accumulated other comprehensive income.

The impact of measuring investment securities at fair value on January 1, 2007
will be recognized in opening accumulated other comprehensive income.

Deferred financing costs within deferred charges will be adjusted to the
carrying amount of the related long-term debt and after initial recognition the
related long-term debt will be amortized using an effective interest method.

The Corporation is currently considering further impacts related to the adoption
of such standards on the consolidated financial statements. Prior periods will
not be restated for the impact of these new standards.


--------------------------------------------------------------------------------
                                       51
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
17. CONTINGENCIES, GUARANTEES AND INDEMNITIES
--------------------------------------------------------------------------------

Contingencies

Investigation by Competition Authorities Relating to Cargo

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. Competition authorities have sought or requested
information from Air Canada as part of their investigations. Air Canada is
cooperating fully with these investigations. 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.
It is not possible at this time to predict with any degree of certainty the
outcome of these proceedings. It is Air Canada's policy to conduct its business
in full compliance with all applicable competition laws.

Pay Equity

Complaints filed in 1991 and 1992 with the Canadian Human Rights Commission
against Air Canada and the former Canadian Airlines International on behalf of
flight attendants at the two airlines alleging discrimination in negotiated
wages were referred to the Canadian Human Rights Tribunal in 1996 for inquiry.
By agreement of all parties, the inquiry before the Tribunal was limited to
whether flight attendants at each airline were in the same establishment as
pilots and technical operations personnel. Under the applicable legislation, a
complaint can only compare the value of employees work and their wages if they
work in the same establishment. In December 1998 the Tribunal found that pilots,
flight attendants and technical operations personnel were in different
establishments at each airline. This decision was upheld on judicial review by
the Federal Court Trial Division, but overturned by the Federal Court of Appeal
in 2004. The Supreme Court of Canada in January 2006 dismissed Air Canada's
appeal from this latter decision and has remitted the complaints to the
Commission for investigation. The value of each employee Corporation's work will
be assessed on the basis of the skill, effort and responsibility it demands as
well as the conditions under which it is performed. During the restructuring
under CCAA, it was agreed that any resolution of the complaints would have no
retroactive financial impact prior to September 30, 2004. Air Canada, upon
consultation with legal counsel, considers that any investigation will show that
it is complying with the equal pay provisions of the Canadian Human Rights Act;
however, management is not able to determine the final outcome of the
Commission's investigation.

Claim by the Air Canada Pilots Association

In October 2006, the Air Canada Pilots Association ("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 them. 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 Air Canada's
motion to dismiss ACPA's claim. ACPA has not appealed the dismissal of the
injunction application but has appealed the order dismissing its claim.

Other

Various other lawsuits and claims, including claims filed by various labour
groups of Air Canada and Jazz, are pending by and against the Corporation and
provisions have been recorded where appropriate. It is the opinion of management
that final determination of these claims will not have a significant material
adverse effect on the financial position or the results of the Corporation.

Guarantees

With respect to 45 aircraft leases of Air Canada, the difference between the
amended rents from the restructuring arrangements and amounts due under the
original lease contracts will be forgiven at the expiry date of the leases if no
material defaults have occurred. If a material default occurs, this difference
plus interest will become due and payable by Air Canada and all future rent will
be based on the original contracted rates.


--------------------------------------------------------------------------------
                                       52
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


Rent expense is being recorded on the renegotiated lease agreements and any
liability would be recorded only at the time management believes the amount is
likely to occur.

Guarantees in Fuel Facilities Arrangements

Air Canada participates in fuel facility arrangements operated through fuel
facility corporations ("Fuel Facility Corporations"), along with other airlines
that contract for fuel services at various major airports in Canada. The Fuel
Facility Corporations operate on a cost recovery basis. The purpose of the Fuel
Facility Corporations is to own and finance the system that distributes the fuel
to the contracting airlines, including leasing the Land Rights under the land
lease. The aggregate debt of the five Fuel Facility Corporations in Canada that
have not been consolidated by the Air Canada under AcG-15 is approximately $108
as at December 31, 2006 (2005 $87), which is the Air Canada's maximum exposure
to loss without taking into consideration any cost sharing that would occur
amongst the other contracting airlines. Air Canada views this loss potential as
remote. Each contracting airline participating in a Fuel Facility Corporation
shares pro rata, based on system usage, in the guarantee of this debt.

Under the terms of their respective land leases, the Fuel Facility Corporations
have an obligation to restore the land to vacant condition at the end of the
lease and to rectify any environmental damage for which it is responsible. If it
was found that the Fuel Facility Corporations had to contribute to any
remediation costs, each contracting airline would share pro rata, based on
system usage, in the costs. For Fuel Facility Corporations that are
consolidated, Air Canada has recorded an obligation of $2 ($12 undiscounted)
representing the present value of the estimated decommissioning and remediation
obligations at the end of the lease using an 8% discount rate, with lease term
expiry dates ranging from 2032 to 2039. This estimate is based on numerous
assumptions including the overall cost of decommissioning and remediation and
the selection of alternative decommissioning and remediation approaches. For
Fuel Facilities Corporations that are not consolidated, Air Canada will also be
responsible for any remediation costs that may be incurred. No amount has been
accrued in these financial statements for these future costs.

Indemnification Agreements

Air Canada enters into real estate leases or operating agreements, which grant a
license to Air Canada to use certain premises, in substantially all cities that
it serves. It is common in such commercial lease transactions for Air Canada as
the lessee to agree to indemnify the lessor and other related third parties for
tort liabilities that arise out of or relate to the Air Canada's use or
occupancy of the leased or licensed premises. Exceptionally, this indemnity
extends to related liabilities arising from the negligence of the indemnified
parties, but usually excludes any liabilities caused by their gross negligence
or willful misconduct. Additionally, Air Canada typically indemnifies such
parties for any environmental liability that arises out of or relates to its use
or occupancy of the leased or licensed premises.

In aircraft financing or leasing agreements, Air Canada typically indemnifies
the financing parties, trustees acting on their behalf and other related parties
and/or lessors against liabilities that arise from the manufacture, design,
ownership, financing, use, operation and maintenance of the aircraft and for
tort liability, whether or not these liabilities arise out of or relate to the
negligence of these indemnified parties, except for their gross negligence or
willful misconduct. In addition, in aircraft financing or leasing transactions,
including those structured as leveraged leases, Air Canada typically provides
indemnities in respect of certain tax consequences.

When Air Canada, as a customer, enters into technical service agreements with
service providers, primarily service providers who operate an airline as their
main business, Air Canada has from time to time agreed to indemnify the service
provider against liabilities that arise from third party claims, whether or not
these liabilities arise out of or relate to the negligence of the service
provider, but excluding liabilities that arise from the service provider's gross
negligence or willful misconduct.

Under its general by-laws, the Corporation has indemnification obligations to
its directors and officers. Pursuant to such obligations, the Corporation
indemnifies these individuals, to the extent permitted by law, against any and
all claims or losses (including amounts paid in settlement of claims) incurred
as a result of their service to the Corporation.

The maximum amount payable under the foregoing indemnities cannot be reasonably
estimated. The Corporation expects that it would be covered by insurance for
most tort liabilities and certain related contractual indemnities described
above.


--------------------------------------------------------------------------------
                                       53
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
18. AIR CANADA IPO
--------------------------------------------------------------------------------

On November 24, 2006 ACE Aviation Holdings Inc. and Air Canada completed an
initial public offering of an aggregate 25 million Air Canada shares at $21 per
share for net proceeds of $491, after offering costs of $34.

Through the initial public offering, Air Canada sold an aggregate of 9,523,810
Variable Voting Shares and Voting Shares for net proceeds of $187, after
offering costs of $13. In the secondary offering, ACE sold an aggregate of
15,476,190 Variable Voting Shares and Voting Shares for net proceeds of $304,
after offering costs of $21. The offering costs incurred were allocated between
ACE and Air Canada on a pro rata basis in relation to size of the aggregate
offering.

As a result of the Air Canada IPO, ACE recorded a dilution gain of $25 and a
non-controlling interest on the statement of financial position of $478 as a
result of the dilution of its interest in Air Canada. The dilution gain is the
net proceeds of the offering in excess of ACE's proportionate carrying value of
its investment in Air Canada.

As at December 31, 2006, an aggregate of 100 million Class A Variable Voting
Shares and Class B Voting shares in the capital of Air Canada are issued and
outstanding. ACE retains control of Air Canada through a 75% ownership interest.

A corporate restructuring occurred in connection with the Air Canada IPO of
common shares of Air Canada. Under the corporate restructuring, Air Canada Cargo
and Air Canada Ground Handling became wholly owned subsidiaries of Air Canada
and ACE transferred a 51 percent ownership in Air Canada Vacations to Air
Canada. ACE acquired certain investments held by Air Canada in ACTS for
consideration of $673. In addition, net inter-company balances of $170 due by
ACE to Air Canada Services were settled.


--------------------------------------------------------------------------------
                                       54
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
19. JAZZ IPO
--------------------------------------------------------------------------------

ACE completed an initial public offering of the Jazz Air Income Fund ("Jazz
Fund") on February 2, 2006. The Jazz Fund subscribed for 23.5 million units of
Jazz at a price of $10.00 per unit for net proceeds of $218, net of offering
costs of $17. Concurrent with the closing of the initial public offering, Jazz
received proceeds of $113, after fees of $2, representing the drawing under a
new term credit facility (Note 7).

On February 27, 2006, following the exercise of the over-allotment option by the
underwriters, the Jazz Fund issued an additional 1.5 million units at a price of
$10.00 per unit for additional net proceeds of approximately $14. The Jazz Fund
is an unincorporated, open-ended trust that indirectly holds 20.3% of the
outstanding limited partnership units of Jazz. ACE holds the remaining 79.7% of
the outstanding limited partnership units of Jazz.

Certain of the units held by the Corporation (the "Subordinated Units")
representing 20% of the units issued and outstanding at the closing were
subordinated until December 31, 2006. Distributions on the Subordinated Units
are subordinated in favour of the non-subordinated units. Distributions
(including in respect of accrued deficiencies in distributions) are only paid by
Jazz on the Subordinated Units at the end of the fiscal quarter.

Under the terms of an investor liquidity agreement, the units held by ACE in
Jazz, to the extent not subordinated, are exchangeable for Jazz Fund units on a
one-to-one basis. The subordinated units of Jazz held by ACE became exchangeable
after December 31, 2006. The exchange right expires once all units of Jazz held
by ACE have been exchanged. The investor liquidity agreement also provides for
registration and other liquidity rights that enable it to require the Jazz Fund
to file a prospectus and otherwise assist with a public offering subject to
certain restrictions.

ACE recorded a dilution gain of $220 and a non-controlling interest on the
statement of financial position of $10 as a result of the dilution of its
interests in Jazz. The dilution gain is the net proceeds of the offering in
excess of ACE's proportionate carrying value of its investment in Jazz. In
addition, a future income tax expense of $10 was recorded.


--------------------------------------------------------------------------------
                                       55
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
20. SPECIAL DISTRIBUTION OF AEROPLAN UNITS - MARCH 2006
--------------------------------------------------------------------------------

On February 16, 2006, ACE's Board of Directors declared a special distribution
of units of the Aeroplan Income Fund to ACE's shareholders. The distribution of
0.18 Aeroplan unit per Class A variable voting share, Class B voting share, and
preferred share (on an as converted basis) of ACE was made as a return of
capital and represented in the aggregate approximately 10.1% of the units of
Aeroplan Income Fund on a fully diluted basis. The record date for the purpose
of the special distribution was March 3, 2006. Based on the closing price of the
units of Aeroplan Income Fund on March 3, 2006, the fair value of the units
distributed amounted to $251.

Units of Aeroplan could not be distributed to shareholders of ACE that were
resident in the United States. A total of 7,085,111 units of Aeroplan Income
Fund, representing those Aeroplan units that would have otherwise been delivered
to shareholders of ACE that were resident in the United States, as well as those
units of Aeroplan that would have otherwise been delivered to the registered
shareholders of ACE holding less than 200 shares in the capital of ACE and any
fractional interests in units of Aeroplan, were sold through an orderly sale
process on the Toronto Stock Exchange and the net cash proceeds of such sale of
units were remitted to shareholders. A total of 20,204,165 Aeroplan units were
distributed as part of the special distribution to ACE shareholders, of which
13,119,054 units were delivered to ACE shareholders and the remaining 7,085,111
units were sold on the Toronto Stock Exchange. Following the completion of the
distribution, and the funding of Aeroplan's Initial Long Term Incentive Plan as
described in Note 11, ACE's direct interest in Aeroplan was 75.3% and Aeroplan
Income Fund's interest was 24.7%.

The special distribution to Class A and Class B shareholders totaling 18,347,309
Aeroplan units was a non-monetary non-reciprocal transfer to owners.
Non-monetary non-reciprocal transfers to owners are recorded at the carrying
amount of the net assets transferred and do not give rise to a gain or loss. As
Aeroplan is in a deficit position, in these consolidated financial statements,
no amounts have been reflected for this element of the distribution, other than
accounting entries relating to future income taxes described below.

The special distribution to preferred shareholders of ACE totaled 1,856,856
Aeroplan units. This transaction was considered a non-reciprocal transfer to
non-owners since the holders of the Convertible Preferred Shares are not
considered owners of the Corporation for accounting purposes. The transfer was
measured at fair value at the date of distribution and resulted in net interest
expense of $4 recorded in 2006 and a reduction to intangible assets of $4 as a
result of the dilution of interests. The net interest expense of $4 is the fair
value of the distribution of $23 less a gain recorded of $19, which was the fair
value of the distribution in excess of the Corporation's proportionate carrying
value of its investment in Aeroplan of $4 (including fair value adjustments
recorded on consolidation) at the time of the distribution.

The special distribution had no cash tax consequences. However, the distribution
involved the use of loss carry forwards in ACE giving rise to a reduction in
future income tax assets of $65. Of this amount, $59 related to the distribution
to the Class A and Class B shareholders which was recorded as a reduction in
Share capital and Intangible assets in accordance with the Corporation's
accounting policy on income taxes. The remaining $6 relating to the distribution
to preferred shareholders was recorded as a future income tax expense in the
statement of operations in 2006.

In accordance with the terms of the ACE Convertible Senior Notes, the special
distribution and return of capital triggered a conversion rate adjustment (Note
7). This change in the conversion rate did not have any accounting consequences.
Similarly, ACE's stock option plan provides for amendments to the exercise price
of options and the number of options outstanding (Note 11).


--------------------------------------------------------------------------------
                                       56
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
21. SPECIAL CHARGE FOR AEROPLAN MILS
--------------------------------------------------------------------------------

In 2001, Air Canada established Aeroplan Limited Partnership as a limited
partnership wholly owned by Air Canada. The Aeroplan loyalty program was
previously a division of Air Canada.

Under the Commercial Participation and Services Agreement (CPSA) between Air
Canada and Aeroplan, Air Canada retained responsibility for the 103 billion
Miles to be redeemed from accumulations up to December 31, 2001. Aeroplan
assumed responsibility for all Miles issued beginning January 1, 2002. On
December 31, 2001, there were 171 billion Miles outstanding of which, after
considering breakage, management estimated that 103 billion Miles would be
redeemed.

With the assistance of independent experts, management of Air Canada and
Aeroplan re-estimated the number of Miles expected to be redeemed from
accumulations up to December 31, 2001. Management now expects that 112 billion
Miles will be redeemed compared to the original estimate of 103 billion.
Pursuant to the terms of the CPSA, dated June 9, 2004, as amended, the
management of Air Canada and Aeroplan have agreed to further amend the terms of
the CPSA. Effective October 13, 2006, by amendment, Air Canada has assumed
responsibility for the redemption of up to 112 billion Miles and, as a result,
recorded a special charge of $102 for the incremental 9 billion Miles against
Operating revenues in the year ended December 31, 2006 and increased Aeroplan
deferred revenues. This amendment to the CPSA represents full and final
settlement with Aeroplan of Air Canada's obligations for the redemption of
pre-2002 Miles. Aeroplan is responsible for any redemption of Miles in excess of
the re-estimated 112 billion Miles. The amount of the additional liability was
determined by valuing the incremental Miles at the current fair value.


--------------------------------------------------------------------------------
                                       57
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
22. AEROPLAN IPO
--------------------------------------------------------------------------------

Disposal of interests in Aeroplan

On June 29, 2005, Aeroplan Limited Partnership ("the Predecessor LP")
transferred substantially all of its assets and liabilities into a newly created
Aeroplan Limited Partnership ("Aeroplan LP") in exchange for the issuance of 175
million units of Aeroplan LP and the issuance of two promissory notes (the
Acquisition Promissory Note in the amount of $125 and the Working Capital Note
in the amount of $186). The Predecessor LP was liquidated into ACE at closing.
The Acquisition Promissory Note was settled on June 29, 2005 from the proceeds
of the offering. The Working Capital Note which was due October 31, 2005, was
repaid during the third quarter. These transactions and events did not have any
accounting consequences on the consolidated financial statements.

On June 29, 2005, the Aeroplan Income Fund ("the Fund") sold 25 million units at
a price of $10.00 per unit for net proceeds of $232. On June 30, 2005 the
underwriters exercised in full their over-allotment option to purchase an
additional 3.75 million units at a price of $10.00 per unit for proceeds of $38.
With the proceeds from the over-allotment option, the Fund purchased 3.75
million units from ACE at a cost of $38, reducing the number of units held by
ACE to 171.25 million. Costs of $3 incurred in connection with the exercise of
the over-allotment option were borne by ACE. The Fund is an unincorporated,
open-ended trust established under the laws of the Province of Ontario, created
to indirectly acquire and hold an interest in the outstanding units of Aeroplan
LP. The Fund, through the Aeroplan Trust, held 14.4% of the outstanding limited
partnership units of Aeroplan LP, and ACE held the remaining 85.6% of the
outstanding limited partnership units of Aeroplan LP.

Pursuant to the limited partnership agreement, 20% of Aeroplan units were
subordinated until December 31, 2006, representing 40 million units held by ACE
in favour of the Fund. Distributions on the subordinated units will only be paid
by Aeroplan following the end of a fiscal quarter to the extent that Aeroplan
has met and paid its distributable cash target to the Fund as the holder of
non-subordinated units.

Under the terms of an investor liquidity agreement dated June 29, 2005, the
non-subordinated units held by ACE in Aeroplan are exchangeable for Fund units
on a one-to-one basis. The Fund has reserved 171.25 million units for the
exercise of the exchange right. The subordinated units of Aeroplan held by ACE
became exchangeable after December 31, 2006. The exchange right expires once all
units of Aeroplan held by ACE have been exchanged. In addition, ACE also has
liquidity rights, which require the Trust, on a best efforts basis, to purchase
a number of non-subordinated (exchangeable) Aeroplan units for a cash payment
equal to the net proceeds of an offering of an equivalent number of units of the
Fund. The investor liquidity agreement also provides for registration and
piggy-back rights subject to certain restrictions.

In 2005, ACE recorded a dilution gain of $190 as a result of the dilution of its
interests in Aeroplan LP. The dilution gain is the net proceeds of the offering
in excess of ACE's proportionate carrying value of its investment in Aeroplan
LP, including fair value adjustments recorded on consolidation. In addition, a
future income tax expense of $28 was recorded.

Cash reserves of Aeroplan

In conjunction with the issuance of Units to the Aeroplan Income Fund and the
bank financing (refer to note 7) entered into on June 29, 2005, Aeroplan LP
established the Aeroplan Miles Redemption reserve ("the Reserve"). As at
December 31, 2006 and 2005, the Reserve was $400 and is included in Cash and
cash equivalents and Short-term investments. The amount to be held in the
Reserve, as well as the types of securities it may be invested in, are based on
policies established by management of Aeroplan LP, which will be reviewed
periodically. The Reserve may be used to supplement cash flows generated from
operations in order to pay for rewards during unusually high redemption activity
associated with Aeroplan Miles. Under the terms of the term facility, described
in Note 7, Aeroplan LP was required to deposit the borrowed funds of $300 into
the Reserve. Any deposits of funds in non-Canadian dollar denominated
investments have to be hedged.


--------------------------------------------------------------------------------
                                       58
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
23. RECONCILIATION OF CANADIAN GAAP TO UNITED STATES GAAP
--------------------------------------------------------------------------------

The consolidated financial statements of the Corporation have been prepared in
accordance with Canadian generally accepted accounting principles ("Canadian
GAAP"), which differ in certain respects from accounting principles generally
accepted in the United States ("US GAAP"). The following tables and disclosures
represent the principal reconciling items between US GAAP and Canadian GAAP
affecting the statement of operations and retained earnings and the statement of
financial position, as well as additional disclosures required by US GAAP. A
statement of cash flows prepared under US GAAP is not included because the
differences from the statement of cash flows prepared under Canadian GAAP are
not material.

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
(Canadian dollars - millions except per share data)                                          2006                2005
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                 <C>
Income for the year in accordance with Canadian GAAP                             $            408   $             261
-----------------------------------------------------------------------------------------------------------------------

Convertible securities (1)                                                                     13                  41
Derivative financial instruments (2)                                                          (19)                (11)
Jazz dilution gain (3)                                                                        (41)                  -
Air Canada dilution gain (4)                                                                 (202)                  -
Aeroplan dilution gain (5)                                                                      -                 (82)
Special distribution (6)                                                                        4                   -
Stock-based compensation (7)                                                                   (7)                 (3)
Aircraft leases (8)                                                                            (3)                  -
Goodwill impairment (9)                                                                         -                 (12)
Amortization of intangible assets (9)                                                          (8)                 (3)
Labour related provisions (10)                                                                 23                   -
Post-employment benefits (11)                                                                  48                   -
-----------------------------------------------------------------------------------------------------------------------
Income adjustments for the year before the following                                         (192)                (70)

Income tax adjustment                                                                           7                  19
-----------------------------------------------------------------------------------------------------------------------
Income adjustments                                                                           (185)                (51)
-----------------------------------------------------------------------------------------------------------------------

Income for the year in accordance with US GAAP                                   $            223   $             210
-----------------------------------------------------------------------------------------------------------------------

Minimum pension liability adjustment (a) (13)                                                  74                (162)
Available for sale securities (a) (14)                                                        (89)                108
-----------------------------------------------------------------------------------------------------------------------

Comprehensive income for the year in accordance with US GAAP                     $            208   $             156
-----------------------------------------------------------------------------------------------------------------------

Earnings per share - US GAAP (16)
   - Basic                                                                       $           2.01   $            1.98
-----------------------------------------------------------------------------------------------------------------------
   - Diluted                                                                     $           1.97   $            1.92
-----------------------------------------------------------------------------------------------------------------------
(a) All items in Other Comprehensive Income are shown net of tax.
</TABLE>

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------
                                                                                            2006              2005
-----------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>               <C>
Deferred charges
   Balance under Canadian GAAP                                                   $           116   $            145
   Deferred finance charges (1,8)                                                             (6)                (2)
-----------------------------------------------------------------------------------------------------------------------
Balance under US GAAP                                                            $           110   $            143
-----------------------------------------------------------------------------------------------------------------------

Goodwill
   Balance under Canadian GAAP                                                   $             -   $              -
   Goodwill (9)                                                                              675              1,452
-----------------------------------------------------------------------------------------------------------------------
Balance under US GAAP                                                            $           675   $          1,452
-----------------------------------------------------------------------------------------------------------------------
Intangible assets
   Balance under Canadian GAAP                                                   $         1,643   $          2,462
   Convertible preferred shares (6)                                                            4                  -
   Goodwill (9)                                                                              915                146
-----------------------------------------------------------------------------------------------------------------------
Balance under US GAAP                                                            $         2,562   $          2,608
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


--------------------------------------------------------------------------------
                                       59
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


<TABLE>
<CAPTION>
-------------------------------------------------------------------------------- ------------------ -------------------
                                                                                             2006
                                                                                                                 2005
-------------------------------------------------------------------------------- ------------------ -------------------
<S>                                                                              <C>                <C>
Other assets
   Balance under Canadian GAAP                                                   $            323   $             392
   Derivative financial instruments (2)                                                        (1)                 (8)
   Available-for-sale securities (14)                                                          23                 130
   Pension asset - adoption of FAS 158 (13)                                                    91                   -
-------------------------------------------------------------------------------- ------------------ -------------------
Balance under US GAAP                                                            $            436   $             514
-------------------------------------------------------------------------------- ------------------ -------------------

Accounts payable and other liabilities
   Balance under Canadian GAAP                                                   $          1,547   $           1,355
   Derivative financial instruments (2)                                                        29                   3
-------------------------------------------------------------------------------- ------------------ -------------------
Balance under US GAAP                                                            $          1,576   $           1,358
-------------------------------------------------------------------------------- ------------------ -------------------

Long-term debt and capital leases
   Balance under Canadian GAAP                                                   $          3,759   $           3,543
   Convertible securities (1)                                                                  17                  22
-------------------------------------------------------------------------------- ------------------ -------------------
Balance under US GAAP                                                            $          3,776   $           3,565
-------------------------------------------------------------------------------- ------------------ -------------------

Convertible preferred shares
   Balance under Canadian GAAP                                                   $            166   $             148
   Reclassification of preferred shares (1)                                                  (166)               (148)
-------------------------------------------------------------------------------- ------------------ -------------------
Balance under US GAAP                                                            $              -   $               -
-------------------------------------------------------------------------------- ------------------ -------------------

Pension and other benefit liabilities
   Balance under Canadian GAAP                                                   $          1,876   $           2,154
   Additional minimum pension liability adjustment (13)                                       108                 246
   Pension liability adjustment - adoption of FAS 158 (13)                                    227                   -
   Post-employment benefits (11)                                                              (69)                  -
-------------------------------------------------------------------------------- ------------------ -------------------
Balance under US GAAP                                                            $          2,142   $           2,400
-------------------------------------------------------------------------------- ------------------ -------------------

Future income taxes
   Balance under Canadian GAAP                                                   $            136   $             221
   Goodwill (9)                                                                                88                  22
-------------------------------------------------------------------------------- ------------------ -------------------
Balance under US GAAP                                                            $            224   $             243
-------------------------------------------------------------------------------- ------------------ -------------------

Other long-term liabilities
   Balance under Canadian GAAP                                                   $            378   $             446
   Convertible preferred shares - embedded derivative (1)                                     178                 165
   Convertible notes - embedded derivative (1)                                                 60                  64
-------------------------------------------------------------------------------- ------------------ -------------------
Balance under US GAAP                                                            $            616   $             675
-------------------------------------------------------------------------------- ------------------ -------------------

Non-controlling interest
   Balance under Canadian GAAP                                                   $            695   $             203
   Additional non-controlling interest - Jazz (3)                                              41                   -
   Additional non-controlling interest - Air Canada (4,13)                                    202                   -
-------------------------------------------------------------------------------- ------------------ -------------------
Balance under US GAAP                                                            $            938   $             203
-------------------------------------------------------------------------------- ------------------ -------------------

Temporary equity
   Balance under Canadian GAAP                                                   $              -   $               -
   Reclassification of convertible preferred shares (1)                                       200                 182
-------------------------------------------------------------------------------- ------------------ -------------------
Balance under US GAAP                                                            $            200   $             182
-------------------------------------------------------------------------------- ------------------ -------------------
</TABLE>


--------------------------------------------------------------------------------
                                       60
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

<TABLE>
<CAPTION>
-------------------------------------------------------------------------------- ------------------ -------------------
                                                                                             2006                2005
-------------------------------------------------------------------------------- ------------------ -------------------
<S>                                                                              <C>                <C>
Shareholders' equity
   Share capital and other equity
   Balance under Canadian GAAP                                                   $            742   $             747
   Reclassification of convertible preferred shares and convertible notes (1)                (209)               (209)
   Future income tax (6)                                                                       (6)                  -
   Goodwill recorded at fresh-start (9)                                                     1,596               1,596
   Labour related provisions (10)                                                             (23)                  -
-------------------------------------------------------------------------------- ------------------ -------------------
   Balance under US GAAP                                                         $          2,100   $           2,134

Contributed surplus
   Balance under Canadian GAAP                                                   $             25   $              19
   Stock-based compensation (7)                                                                (6)                (13)
-------------------------------------------------------------------------------- ------------------ -------------------
   Balance under US GAAP                                                         $             19   $               6

Retained earnings
   Balance under Canadian GAAP                                                   $            810   $             402
   Convertible securities (1)                                                                 (38)                (20)
   Current year income adjustments                                                           (185)                (51)
   Cumulative prior year adjustments:
     Stock-based compensation (7)                                                              13                  16
     Future income tax (9)                                                                     17                  (2)
     Goodwill (9)                                                                             (94)                  -
     Intangible asset amortization (9)                                                         (3)                  -
     Derivative financial instruments (2)                                                     (11)                  -
     Convertible securities (1)                                                               (58)                (99)
-------------------------------------------------------------------------------- ------------------ -------------------
   Balance under US GAAP                                                         $            451   $             246

Accumulated comprehensive income
   Balance under Canadian GAAP                                                   $              -   $               -
   Current year adjustments to comprehensive income:
     Minimum pension liability adjustment (13)                                                 74                (162)
     Available-for-sale securities (14)                                                       (89)                108
   Cumulative prior year adjustments to comprehensive income:
     Minimum pension liability adjustment (13)                                               (164)                 (2)
     Available-for-sale securities (14)                                                       108                   -
   Current year adjustment to accumulated other comprehensive
     income - adoption of FAS 158 (13)                                                       (136)                  -
-------------------------------------------------------------------------------- ------------------ -------------------
   Balance under US GAAP                                                         $           (207)  $             (56)
-------------------------------------------------------------------------------- ------------------ -------------------
Balance under US GAAP                                                            $          2,363   $           2,330
-------------------------------------------------------------------------------- ------------------ -------------------
</TABLE>


1.   Convertible securities

Preferred Shares
Under Canadian GAAP, as described in Note 12, the convertible preferred shares
issued in 2004 are presented as a compound instrument. At the date of issuance,
the value ascribed to the holder's conversion option, which is presented in
Share capital and other equity was $123 less allocated fees of $6; the value
ascribed to the financial liability was $127. Under US GAAP, the convertible
preferred shares contain an embedded derivative which has been reported
separately as an Other long-term liability at its fair value of $178 as at
December 31, 2006 ($165 as at December 31, 2005). The convertible preferred
shares were initially recorded at $162 which is the proceeds received less
direct costs of issuance and the fair value of the embedded derivative, as of
the date of issuance, and is included in Temporary equity as the conditions of
redemption are not solely within the control of the Corporation. The adjustment
to Deferred charges reflects applying the direct costs of issuance, recorded in
Deferred charges under Canadian GAAP, against the amount recorded in Temporary
equity.

For the convertible preferred shares, the changes in the fair value of the
embedded derivative are included in income and the accretion of the temporary
equity to the redemption value over the period to redemption is reflected as a
charge to Retained earnings. The change in the fair value of the embedded
derivative includes the 5% accretion per annum on the convertible preferred
shares.


--------------------------------------------------------------------------------
                                       61
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


The adjustment reflects the reversal of interest expense under Canadian GAAP of
$19 (2005 - $17); the increase in the fair value of the embedded derivative
amounted to $13 (2005 - decrease of $15); and the amount charged to Retained
earnings under US GAAP of $18 (2005 - $20).

Convertible Notes
Under Canadian GAAP, as described in Note 7, the convertible notes issued in
2005 are presented as a compound instrument. As the date of issuance, the value
ascribed to the holders' conversion option, which is presented in Share capital
and other equity, was $94 less allocated fees of $2; the value ascribed to the
financial liability was $236. Under US GAAP the convertible notes were initially
recorded at $260 which is the proceeds received before costs of issuance and the
fair value of the embedded derivative, as of the date of issuance of $70. The
direct costs of issuance of $11 are recorded in deferred charges. The adjustment
also reflects a decrease to the liability related to the fair value of the
embedded derivative amounting to $4 (2005 -$7) and reduction to interest expense
of $3 (2005 - $2). The embedded derivative is reported as an Other long-term
liability at its fair value of $60 as at December 31, 2006 ($64 as at December
31, 2005).

2.   Derivative financial instruments
Under Canadian GAAP, derivative financial instruments that are not part of a
designated hedging relationship are recorded at fair value, with changes in fair
value recognized currently in income. Under Canadian GAAP, as described in Note
2, derivatives under Air Canada's fuel-hedging program are designated as hedges
for accounting purposes and hedge accounting is being applied prospectively from
October 1, 2005. Under hedge accounting, gains or losses on fuel hedging
contracts are recognized in earnings as a component of aircraft fuel expense
when the underlying jet fuel being hedged is used. As described in Note 16, Jazz
entered into interest rate swaps to hedge its exposure to changes in interest
rates and is applying hedge accounting, under Canadian GAAP, to these derivative
financial instruments and as such the fair value of the interest rate swap is
not recorded.

Under US GAAP, all derivatives are recorded on the balance sheet at fair value.
The Corporation has elected not to designate any derivatives as hedging
instruments for US GAAP purposes and as such, changes in the fair value of all
derivative financial instruments are recorded in income. The income adjustment
of $19 (2005 - $11) reflects the net change in the fair value of outstanding
derivative contracts, which are recorded in accounts payable under US GAAP in
the amount of $29 in favour of third parties (2005 - $3 in favour of third
parties) and the write-off of the asset recorded under Canadian GAAP of $1 (2005
- $8).

3.   Jazz dilution gain
As described in Note 19, under Canadian GAAP, ACE recorded a dilution gain of
$220 as a result of the dilution of its interest in Jazz. Under US GAAP, the
dilution gain is reduced by $41 due to the impact of adjusting the
non-controlling interest for the portion of goodwill assigned to Jazz.

4.   Air Canada dilution gain
As described in Note 18, under Canadian GAAP, ACE recorded a dilution gain of
$25 ($21 after tax), as a result of the dilution of its interest in Air Canada.
Under US GAAP, the dilution gain is decreased by $202 to a net loss after tax of
$181 due to the impact of adjusting the non-controlling interest for the portion
of additional net assets of Air Canada under US GAAP; which are primarily
related to goodwill.

5.   Aeroplan dilution gain
As described in Note 22, under Canadian GAAP, in the year ended December 31,
2005 ACE recorded a dilution gain of $190 as a result of the dilution of its
interest in Aeroplan LP. Under US GAAP, the dilution gain is reduced by $82 as a
result of the 14.4% disposal of the goodwill that was allocated to the
Predecessor LP at fresh start reporting. In addition, the future income tax
expense of $28 as reported under Canadian GAAP is reduced by $22 to $6 as a
result of the disposal of goodwill. For US GAAP purposes the dilution gain is
$108 less tax of $6.

6.   Special distribution of Aeroplan units
Under Canadian GAAP, as described in Note 20, ACE's Board of Directors declared
a special distribution of units of the Aeroplan Income Fund to ACE's
shareholders. The special distribution to Class A and Class B shareholders is a
non-monetary non-reciprocal transfer to owners, which is recorded at the
carrying amount of the net assets transferred and does not give rise to a gain
or loss. As Aeroplan LP is in a deficit position, in these consolidated
financial statements, no amounts have been reflected for this element of the
distribution, other than accounting entries relating to future income taxes
described below.


--------------------------------------------------------------------------------
                                       62
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


Under Canadian GAAP, the special distribution to preferred shareholders of ACE
is considered a non-reciprocal transfer to non-owners since the host instrument
is classified as debt for accounting purposes. This results in net interest
expense of $4 and a reduction to intangible assets of $4. Under US GAAP, the
special distribution to preferred shareholders of ACE is considered a
non-monetary non-reciprocal transfer to owners since the host instrument is
classified as temporary equity for accounting purposes. Consistent with the
accounting treatment of the special distribution for Class A and Class B
shareholders, a non-monetary non-reciprocal transfer to owners is recorded at
the carrying amount of the net assets transferred and does not give rise to a
gain or loss. The adjustment under US GAAP is a reduction to net interest
expense of $4 and an increase to intangible assets of $4.

Under Canadian GAAP, a $65 reduction in future income tax assets was recorded,
consisting of a $59 reduction in Share capital and Intangible assets for the
portion related to the distribution to the Class A and Class B shareholders and
$6 future income tax expense and reduction to Intangible assets for the portion
related to the distribution to preferred shareholders. Under US GAAP, the $65
reduction in future income tax assets results in a $65 reduction of Share
capital and Goodwill. The adjustment for US GAAP is a $65 increase in Intangible
assets, a $65 decrease in Goodwill; a $6 decrease in future income tax expense
and a $6 decrease in Share capital.

7.   Stock-based compensation
Under Canadian GAAP, as described in Note 2, the Corporation has adopted EIC-162
in the period ended June 30, 2006 with restatement of prior periods. EIC-162
requires that the compensation cost for a stock option award attributable to an
employee who is eligible to retire at the grant date be recognized on the grant
date or for an employee who will become eligible to retire during the vesting
period be recognized over the period from the grant date to the date the
employee becomes eligible to retire (the "non-substantive vesting period
approach").

Under US GAAP, the Corporation adopted Statement of Financial Accounting
Standards ("FAS") No. 123 (revised 2004), "Share-Based Payment" ("FAS 123R") on
January 1, 2006, which has the same requirements as EIC-162 under Canadian GAAP
except FAS 123R is to be applied prospectively from January 1, 2006 to new
option awards that have retirement eligibility provisions. The nominal vesting
period approach is continued for any option awards granted prior to adopting FAS
123R and for the remaining portion of unvested outstanding options. Under US
GAAP, the adjustment reflects the reversal of the charge to retained earnings of
$16 as at January 1, 2005 ($13 as at January 1, 2006) an increase to Salaries,
wages and benefits expense of $3 for the year ended December 31, 2005 and an
increase to Salaries, wage and benefits expense of $7 for the year ended
December 31, 2006, all with an offset to contributed surplus.

Under US GAAP, the impact of applying the non-substantive vesting period
approach for awards granted after January 1, 2006 compared to the nominal
vesting period approach is an increase to Salaries, wage and benefits expense of
$5 for the year ended December 31, 2006. The Salaries, wage and benefits expense
for the year ended December 31, 2006 would decrease by $7 had the
non-substantive vesting period approach been applied retroactively to 2005 and
2004 stock options granted.

8.   Aircraft leases
Under Canadian GAAP, when a lease is extended and the payment terms are
modified, the lessee should continue to account for the lease in accordance with
the terms of the original lease contract until the original lease term expires.
The difference between the modified payment and the payment under the terms of
the original lease is deferred. Under US GAAP, any straight-line rent accruals
and other deferred amounts should be amortized over the combined period of the
remaining original lease term and the new lease term. Under US GAAP, additional
aircraft lease expense of $3 has been recorded with the offset to deferred
charges for the year ended December 31, 2006 (2005 -nil).

9.   Fresh start reporting and goodwill
Under Canadian GAAP, upon emergence from creditor protection, the identifiable
assets and liabilities of an enterprise are revalued based on the fair values of
such assets and liabilities in a manner similar to that used for a business
combination. The difference between the fair value of the Corporations' equity
over the fair value of the identifiable assets and liabilities is not permitted
to be recorded as an asset (goodwill) under Canadian GAAP. US GAAP does not
prohibit the recognition of goodwill to the extent that the reorganization value
exceeds the fair value of the specific tangible and identifiable intangibles of
the Corporation. The resulting goodwill under US GAAP is not amortized and is
subject to an impairment test on an annual basis or earlier if


--------------------------------------------------------------------------------
                                       63
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006

an event occurs or circumstances change that would more likely than not reduce
the fair value of the respective reporting unit below the carrying amount.

Under Canadian GAAP, the benefit of future income tax assets that exist at fresh
start, and for which a valuation allowance is recorded against, will be
recognized first to reduce to nil any remaining intangible assets (on a pro-rata
basis) that were recorded upon fresh start reporting with any remaining amount
as a credit to shareholders' equity. Under US GAAP the benefit of future income
tax assets that exist at fresh start will be recognized first to reduce to nil
any goodwill, then intangibles with any remaining amount taken to income.

The adjustment in 2006 includes:
     -    a cumulative increase to intangibles of $926 (2005 - $149), less
          accumulated amortization of $11 (2005 - $3);
     -    a cumulative increase to future income tax liabilities of $88 (2005 -
          $22);
     -    a cumulative reduction to goodwill of $921 which includes a $21
          reduction of the Goodwill balance described in Item 11 (2005 - $144
          cumulative reduction, including a goodwill impairment loss of $12
          recorded during 2005 related to goodwill recorded in a reporting unit
          within the Air Canada Services segment, and an Aeroplan dilution gain
          adjustment of $82 and tax adjustment of $22);
     -    an increase to future income tax expense of $1 (2005 - decrease of
          $19);
     -    an increase (decrease) to tax expense recorded in Other comprehensive
          Income of $45 (2005- $(60)); and
     -    a cumulative retained earnings adjustment of $(77) (2005 - $(2)).

10.  Labour related provisions
Under Canadian GAAP, as described in Note 10, a review of outstanding labour
provisions implemented prior to September 30, 2004 resulted in a $23 reversal of
the provision applied against Share capital. Under US GAAP, the reversal of the
$23 labour related provision implemented prior to September 30, 2004 is applied
to income in the current year.

11.  Post-employment benefits
Under Canadian GAAP, the actuarial gains and losses related to post-employment
benefits, which are non-accumulating, are amortized over the average expected
period that the benefits will be paid. Under US GAAP, the actuarial gains and
losses related to post-employment benefits, which are non-accumulating, are
included in income in the period that they arise. Under US GAAP, actuarial gains
of $48 are recognized during the year ended December 31, 2006, with an increase
of $69 to Pension and other benefit liabilities and a decrease of $21 to
Goodwill. During the course of preparing the 2006 consolidated financial
statements, it was noted that this GAAP difference had not previously been
recorded. As a result, this adjustment recognized during the year ended December
31, 2006 includes actuarial gains of $21 from the period prior to October 1,
2004 that were adjusted to Goodwill and actuarial gains of $39 for the period
ended December 31, 2004 and year ended December 31, 2005 that were recognized in
income.

12.  Comprehensive income
Under US GAAP, comprehensive income must be reported which is defined as all
changes in equity other than those resulting from investments by owners and
distributions to owners. Other comprehensive income (loss) for the year ended
December 31, 2006 is $30 less tax of $45, which is net of a valuation allowance
(2005 - $(114) less tax recovery of $60). For the years presented, under
Canadian GAAP, the Corporation was not permitted to use the concept of
comprehensive income. The adjustments to cumulative other comprehensive income
relate mainly to the minimum pension liability adjustment described under Item
13 and unrealized gains/losses on available for sale securities described under
Item 14.

13.  Employee future benefits
Prior to the issuance of the new accounting standard for defined benefit plans
as noted below, US GAAP requires the unfunded accumulated benefit obligation to
be recorded as additional minimum liability for the years presented in these
statements. The excess of the unfunded accumulated benefit obligation over the
unrecognized prior service costs is recorded in other comprehensive income. The
adjustment results in a $138 increase less tax of $64 to other comprehensive
income for the change in the additional minimum pension liability from $246 at
December 31, 2005 to $108 at December 31, 2006.

Under US GAAP, the accrued benefit obligation for the defined benefit pension
plans as at December 31, 2006 is $12,629 (2005 - $11,959).


--------------------------------------------------------------------------------
                                       64
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


As at December 31, 2006, the expected benefit payments for the next five years
are as follows:

--------------------------------------------------- -------------------

2007                                                $             653
2008                                                              679
2009                                                              706
2010                                                              734
2011                                                              764
--------------------------------------------------- -------------------
                                                    $           3,536
--------------------------------------------------- -------------------

In September 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans, an amendment of FASB Statements No. 87, 88, 106, and 132
(R)" ("FAS 158"). FAS 158 requires an employer to (i) recognize the overfunded
or underfunded status of a defined benefit plan (other than a multiemployer
plan) as an asset or liability with changes in that funded status recognized
through comprehensive income; and (ii) measure the funded status of a plan as of
the year-end date. FAS 158 also specifies additional disclosure requirements.
The US GAAP requirement to initially recognize the funded status of a defined
benefit plan and to provide the required disclosures is effective as of the end
of the fiscal year ending after December 15, 2006. The US GAAP requirement to
measure plan assets and benefit obligations as of the date of the employer's
fiscal year-end statement of financial position is effective for fiscal years
ending after December 15, 2008. FAS 158 requires prospective application with
the transition asset or liability to be recognized in accumulated other
comprehensive income in shareholders' equity.

Under Canadian GAAP, the over or under funded status of defined benefit plans
are not recognized in the statement of financial position, nor does Canadian
GAAP currently require the recognition of other comprehensive income. Under
Canadian GAAP, the overfunded or underfunded status of a plan is included in the
notes to the financial statements in the form of a reconciliation of the
overfunded or underfunded status to amounts recognized in an employer's
statement of financial position.

The impact of the adoption of this new statement resulted in the recognition of
an additional liability for the unfunded obligation of $200 for pension plans
and $27 for other postretirement plans and a pension asset for the overfunded
obligations of $86 for pension plans and $5 for other postretirement plans. The
offset of these adjustments resulted in a decrease to accumulated other
comprehensive income of $136. The impact of adopting this new statement does not
affect reported US GAAP net income.

The incremental effect of applying FAS 158 on individual line items in the
Statement of Financial Position at December 31, 2006 under US GAAP is as
follows:

<TABLE>
<CAPTION>
---------------------------------------------------------- --------------------- ------------------ -------------------
                                                            Before application                        After application
                                                                    of FAS 158        Adjustments            of FAS 158
---------------------------------------------------------- --------------------- ------------------ -------------------
<S>                                                        <C>                   <C>                <C>
Deposits and other assets                                  $               345   $             91   $             436
Total assets                                                            15,051                 91              15,142
Pension and other benefit liabilities                                    1,915                227               2,142
Total liabilities                                                       11,414                227              11,641
Accumulated other comprehensive income (loss)                              (71)              (136)               (207)

Total shareholders' equity                                               2,499               (136)              2,363
---------------------------------------------------------- --------------------- ------------------ -------------------
</TABLE>

Net actuarial losses of $12 included in accumulated other comprehensive loss at
December 31, 2006 are expected to be recognized as a component of net periodic
benefit cost during the 2007 fiscal year.

14.  Available-for-sale securities
Under Canadian GAAP, portfolio investments are accounted for using the cost
method. Under US GAAP, portfolio investments classified as available-for-sale
securities are carried at market value with unrealized gains or losses reflected
in comprehensive income. Under US GAAP, an unrealized gain of $38 less tax of $6
for the year ended December 31, 2006 (2005 - $130 less tax of $22) has been
recorded as a separate component of shareholders' equity and included in other
comprehensive income, to reflect the fair value of the US Airways investments
held during the year. The fair value of the remaining US Airways investment as
at December 31, 2006 is $31 ($22 at December 31, 2005). This adjustment is in
addition to a decrease in other comprehensive


--------------------------------------------------------------------------------
                                       65
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


income of $145 less tax of $24 for the year ended December 31, 2006 (2005 - nil)
to reverse the unrealized gains previously recorded in other comprehensive
income, as the gain for the disposal of 4.5 million shares during 2006 is
realized under Canadian GAAP.

15.  Provision for loss on assets
Under Canadian GAAP, provisions for loss on assets are permitted to be
classified as non-operating. Under US GAAP, provisions for loss on assets are
classified as operating. Accordingly, under US GAAP operating income would be
decreased by $4 (2005 - $28).

16.  Earnings per share
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------- ------------------ -------------------
(in millions, except per share amounts)                                                      2006                2005
-------------------------------------------------------------------------------- ------------------ -------------------
<S>                                                                              <C>                <C>
Numerator:
   Numerator for basic earnings per share:
     Income for the year                                                         $            223   $             210
     Accretion of convertible preferred shares (a)                                            (18)                (16)
-------------------------------------------------------------------------------- ------------------ -------------------
     Adjusted numerator for earnings per share                                                205                 194
   Effect of potential dilutive securities:
     Convertible preferred shares (b)                                                          18                  16
     Convertible notes (b)                                                                     24                  13
   Add back anti-dilutive impact                                                              (24)                (13)
-------------------------------------------------------------------------------- ------------------ -------------------
   Adjusted earnings for diluted earnings per share                              $            223   $             210
-------------------------------------------------------------------------------- ------------------ -------------------
Denominator:
   Denominator for basic earnings per share:
     Weighted-average shares                                                                  102                  98
   Effect of potential dilutive securities:
     Convertible preferred shares                                                              10                  10
     Convertible notes                                                                          7                   5
     Stock options                                                                              1                   1
   Add back anti-dilutive impact:                                                              (7)                 (5)
-------------------------------------------------------------------------------- ------------------ -------------------
   Adjusted weighted-average shares for diluted earnings per share                            113                 109
-------------------------------------------------------------------------------- ------------------ -------------------
Basic earnings per share                                                         $           2.01   $            1.98
-------------------------------------------------------------------------------- ------------------ -------------------
Diluted earnings per share                                                       $           1.97   $            1.92
-------------------------------------------------------------------------------- ------------------ -------------------
</TABLE>


     (a)  Income is reduced by the accretion of the convertible preferred shares
          under US GAAP to obtain income available to common share holders.

     (b)  The adjustment to the numerator under US GAAP is different than the
          adjustment to the numerator under Canadian GAAP due to the difference
          in the value recorded at inception as described in item 1 and the
          difference in accretion rates.

The calculation of earnings per share is based on whole dollars and not on
rounded millions. As a result, the above amounts may not be recalculated to the
per share amount disclosed above.

17.  Supplementary information under US GAAP

Accounts payable and accrued liabilities

The components of accounts payable and accrued liabilities at December 31 are as
follows:

---------------------------------------- ------------------ -------------------
                                                     2006                2005
---------------------------------------- ------------------ -------------------
Trade payables                           $            413   $             356
Accrued liabilities                                   203                 192
Payroll related liabilities                           542                 508
Other                                                 418                 302
---------------------------------------- ------------------ -------------------
                                         $          1,576   $           1,358
---------------------------------------- ------------------ -------------------


--------------------------------------------------------------------------------
                                       66
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


Consolidated statement of operations
The components of depreciation, amortization and obsolescence for the years
presented below are as follows:

---------------------------------------- ------------------ -------------------
                                                     2006                2005
---------------------------------------- ------------------ -------------------
Depreciation of tangible assets          $            467   $             374
Amortization of intangible assets                     103                  98
Obsolescence provision on spare
  parts, materials and supplies                        14                  13
---------------------------------------- ------------------ -------------------
                                         $            584   $             485
---------------------------------------- ------------------ -------------------

The components of other operating expenses for years presented below are as
follows:

----------------------------------------- ------------------ -------------------
                                                                          2005
                                                      2006
----------------------------------------- ------------------ -------------------
Terminal handling and services            $            208   $             201
Building rent and maintenance                          132                 125
Flight and cabin crew expense                          135                 121
Credit card fees                                       171                 158
Miscellaneous fees and services                        124                 104
Advertising and promotion (a)                           90                  75
Customer maintenance and materials                     125                  82
Other                                                  720                 714
----------------------------------------- ------------------ -------------------
                                          $          1,705   $           1,580
----------------------------------------- ------------------ -------------------

(a) Advertising and promotion costs are expensed when incurred.

Rent expense
Rent expense, including aircraft rent, building and other equipment rentals, for
the year ended December 31, 2006 amounts to $576 (2005 - $557).

Valuation and qualifying accounts and reserves

<TABLE>
<CAPTION>
------------------------------------------------- ---------------- ----------------- ----------------- ----------------
                                                      Balance at         Additions      Deductions /       Balance at
                                                                        charged to
                                                    beginning of         costs and
                                                            year          expenses             Other      end of year
------------------------------------------------- ---------------- ----------------- ----------------- ----------------
<S>                                               <C>              <C>               <C>               <C>
Allowance for obsolescence of spare parts,
materials and supplies
Year ended December 31, 2005                      $            3   $            13   $             -   $           16
Year ended December 31, 2006                      $           16   $            14   $             -   $           30
------------------------------------------------- ---------------- ----------------- ----------------- ----------------
Allowance for uncollectible accounts
Year ended December 31, 2005                      $           16   $             2   $           (5)   $           13
Year ended December 31, 2006                      $           13   $             1   $           (9)   $            5
------------------------------------------------- ---------------- ----------------- ----------------- ----------------
Future income tax valuation allowance
Year ended December 31, 2005                      $        2,334   $             -   $          (17)   $        2,317
                                                  $        2,317   $             -   $         (711)   $        1,606
Year ended December 31, 2006
------------------------------------------------- ---------------- ----------------- ----------------- ----------------
</TABLE>


18.  New accounting policies

Accounting for certain hybrid financial instruments
In February 2006, the Financial Accounting Standards Board (FASB) issued FASB
Statement 155, "Accounting for Certain Hybrid Financial Instruments - an
amendment of FASB Statement No. 133 and 140" ("FAS155"), which permits fair
value remeasurement for any hybrid financial instrument that contains an
embedded derivative that otherwise would require bifurcation, with changes in
fair value recognized in earnings. The fair-value election will eliminate the
need to separately recognize certain derivatives embedded in hybrid financial
instruments under FASB Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities. FAS 155 is effective for all financial instruments
acquired or issued after the beginning of an entity's first fiscal year that
begins after September 15, 2006. The Corporation will adopt this standard as of
Quarter 1 2007 and is in


--------------------------------------------------------------------------------
                                       67
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


the process of assessing the impact of adopting this standard on the
consolidated financial position and results of operations.

Accounting for uncertainty in income taxes
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" ("FIN
48"). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise's financial statements in accordance with FASB Statement No.
109, "Accounting for Income Taxes." The interpretation prescribes a recognition
threshold and measurement attribute for the financial statement accounting
guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Corporation will adopt this standard as
of Quarter 1 2007 and is in the process of assessing the impact of adopting this
standard on the consolidated financial position and results of operations.

Accounting for planned major maintenance activities
In September 2006, the FASB issued FASB Staff Position (FSP) AUG AIR-1,
"Accounting for Planned Major Maintenance Activities", which amends certain
provisions in the AICPA Industry Audit Guide, Audits of Airlines (Airline
Guide), and APB Opinion No. 28 Interim Financial Reporting. This FSP prohibits
the use of the accrue-in-advance method of accounting for planned major
maintenance activities in annual and interim financial reporting periods. This
FSP is effective the first fiscal year beginning after December 15, 2006 and
shall be applied retrospectively for all financial statements presented. This
FSP does not change the current practice of accounting for planned major
maintenance activities for the Corporation and therefore does not impact the
consolidated financial position and results of operations.

Fair value measurements
In September 2006, the FASB issued FASB Statement 157, "Fair Value Measurements"
("FAS 157"), which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles, and expands disclosures
about fair value measurements. This Statement applies under other accounting
pronouncements that require or permit fair value measurements, the Board having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements, however, for some entities, the application of this
Statement will change current practice. FAS 157 is effective for financial
statements issued for fiscal years beginning after November 15, 2007, and
interim periods within those fiscal years. The Corporation will adopt this
standard as of Quarter 1 2008 and is in the process of assessing the impact of
adopting this standard on the consolidated financial position and results of
operations.


--------------------------------------------------------------------------------
                                       68
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]    Notes to the Consolidated Financial Statements
                                                                            2006


--------------------------------------------------------------------------------
24. SUBSEQUENT EVENTS
--------------------------------------------------------------------------------

Initial Distribution of Units of Aeroplan Income Fund Under Plan of Arrangement

At a special meeting of shareholders on October 5, 2006, the shareholders of the
Corporation approved a statutory arrangement pursuant to the Canada Business
Corporations Act. On October 6, 2006, the Quebec Superior Court issued a final
order approving the statutory arrangement, which became effective October 10,
2006. The arrangement grants authority to the board of directors of ACE to make
from time to time one or more special distributions to ACE shareholders in an
aggregate amount of up to $2 billion by way of reduction of the stated capital
of the Class A variable voting shares, Class B voting shares and the preferred
shares of ACE.

On December 28, 2006, ACE announced the terms of a distribution of 50,000,000
units of Aeroplan Income Fund to ACE shareholders under the statutory plan of
arrangement approved by ACE's shareholders at the special meeting held on
October 5, 2006. As a result, on this date the Corporation exchanged 50,000,000
units of Aeroplan LP into 50,000,000 units of Aeroplan Income Fund, see Note 1
(this exchange is not recognized for accounting purposes).

ACE shareholders, on January 10, 2007, the record date for the distribution,
received a non-cash distribution of approximately 0.442 units of Aeroplan Income
Fund per Class A variable voting share, Class B voting share and preferred share
(on an as converted basis) of ACE. Based on a closing price of $17.97 per unit
of Aeroplan Income Fund on the Toronto Stock Exchange on January 10, 2007, the
distribution is valued at approximately $899 million or $7.95 per ACE share.

After the distribution, in aggregate ACE holds a 50.3% interest in Aeroplan LP,
comprised of a 20.3% direct interest in Aeroplan LP and a 37.6% direct interest
in Aeroplan Income Fund.

In connection with the initial distribution under the plan of arrangement, the
conversion rate of ACE's 4.25% Convertible Senior Notes Due 2035 was adjusted
from 22.2838 to 27.6987 Class A variable voting shares or Class B voting shares
per $1,000 principal amount of convertible notes. The adjustment is effective
January 29, 2007 and has been determined in accordance with the terms of the
indenture governing the convertible senior notes. In a consistent manner, the
exercise price of ACE stock options and the number of options outstanding have
been adjusted.

Investment in Aeroman

On December 4, 2006 ACTS and Grupo TACA Holdings Limited ("Grupo TACA") of El
Salvador entered into an agreement for ACTS to acquire 80 percent of Grupo
TACA's aircraft maintenance division, Aeromantenimiento, S.A ("Aeroman"). Total
consideration includes cash and a right to acquire an equity stake in ACTS. The
cash component of US$45 millionl consists of cash of US$43 million on closing
and a milestone payment of up to US$2 million, funded by ACTS through ACE's
available cash resources. The size of the equity stake in ACTS will be confirmed
at the time of the monetization of ACTS and is expected to represent less than 7
percent of the total equity of ACTS. Prior to ACTS' monetization, Grupo TACA can
put its right to acquire equity back to ACE at a discounted value from US$40
million and accreting up to a cap of US$51 million over 12 months or the date of
monetization, if earlier. On February 13, 2007, ACTS completed the acquisition
of Aeroman.


--------------------------------------------------------------------------------
                                       69

<PAGE>


                                                                Document No. 3


<PAGE>


                        [ACE AVIATION GRAPHIC OMITTED]





                                     2006
                          Management's Discussion and
                       Analysis of Results of Operations
                            and Financial Condition

                               [GRAPHIC OMITTED]


                                                             February 14, 2007

<PAGE>


                               Table of Contents

1.      Preface................................................................1

2.      Caution Regarding Forward-Looking Information..........................1

3.      Glossary of Terms......................................................2

4.      Industry Segments......................................................3

5.      Accounting Policies and Estimates......................................4

6.      Significant Events in 2006.............................................4

7.      Fourth Quarter Results of Operations...................................6

   7.1.  Air Canada Services...................................................8
   7.2.  Aeroplan..............................................................9
   7.3.  Jazz.................................................................10
   7.4.  ACTS.................................................................10
   7.5.  Corporate Items and Eliminations ("CIE").............................11

8.      2006 Results of Operations............................................12

   8.1.  Air Canada Services..................................................14
   8.2.  Aeroplan.............................................................15
   8.3.  Jazz.................................................................16
   8.4.  ACTS.................................................................16
   8.5.  Corporate Items and Eliminations ("CIE").............................17

9.      Consolidated Financial Position.......................................18

   9.1.  Consolidated Assets..................................................18
   9.2.  Consolidated Debt and Lease Obligations..............................18
   9.3.  Share Capital and Other Equity.......................................20
   9.4.  Liquidity and Working Capital........................................21
   9.5.  Consolidated Cash flows..............................................21
   9.6.  Capital Expenditures.................................................22
   9.7.  Pension Plan Cash Funding Obligations................................24
   9.8.  Air Canada Fuel Risk Management......................................25

10.     Future Accounting Standard Changes....................................26

11.     Off-Balance Sheet Arrangements........................................27

12.     Changes in Accounting Policies........................................30

13.     Critical Accounting Estimates.........................................31

14.     Risk Factors..........................................................36

15.     Quarterly Financial Data..............................................52

16.     Selected Annual Information...........................................53

17.     Controls and Procedures...............................................54

18.     Subsequent Events.....................................................56

19.     Outlook...............................................................57

20.     Non-GAAP Financial Measures...........................................58


<PAGE>

[ACE AVIATION GRAPHIC OMITTED]

     1.   Preface

     ACE Aviation Holdings Inc. ("ACE"), incorporated on June 29, 2004, is an
     investment holding company of various aviation interests including Air
     Canada Services, Aeroplan Limited Partnership ("Aeroplan"), Jazz Air LP
     ("Jazz"), ACTS LP ("ACTS") and other investments.

     ACE is listed on the Toronto Stock Exchange where its Class A variable
     voting shares and Class B voting shares are traded under the symbols
     ACE.A and ACE.B, respectively.

     Management's Discussion and Analysis ("MD&A") of the financial condition
     and results of operations should be read in conjunction with ACE's
     audited consolidated financial statements and notes thereto. Reference to
     "Corporation" in this MD&A refers to, as the context may require, ACE and
     its subsidiaries collectively, ACE and one or more of its subsidiaries,
     one or more of ACE's subsidiaries, or ACE itself. Except where the
     context otherwise requires, all monetary amounts are stated in millions
     of Canadian dollars.

     Forward-looking statements are included in this MD&A. See "Caution
     Regarding Forward Looking Information" below for a discussion of risks,
     uncertainties and assumptions relating to these statements. For a
     detailed description of the risks affecting the business of ACE and its
     subsidiaries, see "Risk Factors" in this MD&A.

     The MD&A is the responsibility of the management of ACE and, unless
     otherwise noted, is current as of February 14, 2007. The ACE Audit,
     Finance & Risk Committee reviewed this MD&A and the audited consolidated
     financial statements and ACE's Board of Directors approved these
     documents prior to their release. For further information on ACE's public
     disclosure file, including ACE's Annual Information Form, please consult
     ACE's website at www.aceaviation.com, SEDAR at www.sedar.com or EDGAR at
     www.sec.gov/edgar.shtml.

     2.   Caution Regarding Forward-Looking Information

     ACE's communications often contain written or oral forward-looking
     statements which are included in the MD&A 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 for a number of factors, including
     without limitation, energy prices, general industry, market and economic
     conditions, war, terrorist attacks, changes in demand due to the seasonal
     nature of the business, the ability to reduce operation costs and
     employee counts, employee relations, labour negotiations or disputes,
     pension issues, currency exchange and interest rates, changes in laws,
     adverse regulatory developments or proceedings, pending litigation and
     actions by third parties as well as the factors identified throughout
     this MD&A and, in particular, those discussed in section 14 "Risk
     Factors" to this MD&A. The forward-looking statements contained in this
     discussion represent ACE's expectations as of February 14, 2007, 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.


--------------------------------------------------------------------------------
                                      1
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     3.   Glossary of Terms

     EBITDAR -- EBITDAR is earnings before interest taxes, depreciation,
     amortization and obsolescence and aircraft rent and is a non-GAAP
     financial measure;

     EBITDA -- EBITDA is earnings before interest taxes, depreciation,
     amortization and obsolescence and is a non-GAAP financial measure;

     Available Seat Miles or ASMs -- A measure of passenger capacity
     calculated by multiplying the total number of seats available for
     passengers by the miles flown;

     Jazz CPA -- The amended and restated capacity purchase agreement,
     effective January 1, 2006, between Air Canada and Jazz;

     Initial Jazz CPA -- The capacity purchase agreement between Air Canada
     and Jazz Air Limited Partnership which was in effect from October 1, 2004
     until December 31, 2005;

     Passenger Load Factor -- A measure of passenger capacity utilization
     derived by expressing Revenue Passenger miles as a percentage of
     Available Seat Miles;

     Passenger Revenue per Available Seat Mile or RASM -- Average passenger
     revenue per ASM;

     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;

     Yield -- Average passenger revenue per RPM.


--------------------------------------------------------------------------------
                                      2
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     4.   Industry Segments

     ACE's aviation interests are operated through four reportable segments.
     The following is a descriptive listing of these segments and the
     operating companies therein at December 31, 2006.
<TABLE>
<CAPTION>

--------------------- --------------------------------------------------------------------
Segment               Operating Companies                                       Ownership
--------------------- --------------------------------------------------------------------

<S>                   <C>                                                           <C>

Air Canada Services   Air Canada (TSX: AC.A, AC.B), Canada's largest domestic       75.0%
                      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 ("Air Canada Cargo"),
                      together Air Canada and Air Canada Cargo is Canada's
                      largest provider of air cargo services.

                      ACGHS Limited Partnership ("Air Canada Ground
                      Handling"), a passenger and ground handling service
                      provider.

                      Touram Limited Partnership ("Air Canada Vacations"), a
                      major Canadian tour operator offering leisure vacation
                      packages. Air Canada Services has a 51 percent ownership
                      in Air Canada Vacations, while ACE holds 87.25 percent
                      of Air Canada Vacations at the diluted consolidated
                      level.

--------------------- --------------------------------------------------------------------

Aeroplan              Aeroplan, Canada's premier loyalty marketing program.         75.3%
                      and international provides its commercial partners with
                      loyalty marketing services designed to stimulate demand
                      for such partners' products and services. Subsequent to
                      the special distribution of units of Aeroplan Income Fund
                      (TSX: AER.UN) on January 10, 2007, ACE retained a 50.3
                      percent interest in Aeroplan. (See section 18)

--------------------- --------------------------------------------------------------------

Jazz                  Jazz (TSX: JAZ.UN), the largest regional airline and          79.7%
                      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.

--------------------- --------------------------------------------------------------------

ACTS                  ACTS , a full-service aircraft maintenance, repair             100%
                      and overhaul organization that competes on a global basis.
                      On December 4, 2006, ACTS entered into an agreement to
                      acquire 80 percent of Aeromantenimiento, S.A. Refer to
                      section 6 "Significant Events in 2006" for additional
                      information.

--------------------- --------------------------------------------------------------------
</TABLE>



--------------------------------------------------------------------------------
                                      3
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     5.   Accounting Policies and Estimates

     ACE prepares its consolidated financial statements in accordance with
     Canadian Generally Accepted Accounting Principles ("GAAP").

     Significant accounting policies and methods used in preparation of ACE's
     audited consolidated financial statements are described in Note 2 to
     ACE's audited consolidated financial statements.

     The preparation of ACE's consolidated financial statements in conformity
     with Canadian GAAP requires management to make estimates and assumptions
     that affect the reported amounts of assets and liabilities, disclosures
     of contingent liabilities and reported amounts of revenues and expenses
     for the period of the consolidated financial statements. ACE and its
     operating companies evaluate these estimates and assumptions on a regular
     basis, based on historical experience and other relevant factors. Actual
     amounts could differ materially from those estimates and assumptions.
     Refer to section 13 of this MD&A for a discussion of ACE's Critical
     Accounting Estimates.

     6.   Significant Events in 2006

     A number of significant events occurred during the year which affected
     ACE's consolidated results for 2006 and their comparability to results
     for 2005. These events are discussed below.

     ACE completed an initial public offering of the Jazz Air Income Fund
     ("the Fund") on February 2, 2006. The Fund sold 23.5 million units at a
     price of $10.00 per unit for net proceeds of $218 million, after offering
     costs of $17 million. Following the closing of the initial public
     offering, the Fund issued an additional 1.5 million units from the
     exercise of an over-allotment option for net proceeds of approximately
     $14 million bringing the aggregate net proceeds of the offering to
     approximately $232 million. Following the completion of this offering,
     ACE's ownership interest in Jazz was 79.7 percent. In addition, a $150
     million secured syndicated credit facility was established by Jazz of
     which approximately $115 million ($113 million, net of fees of $2
     million) was drawn by Jazz on closing of the offering.

     In March 2006, ACE completed a special distribution of units of the
     Aeroplan Income Fund to its shareholders. The record date for the purpose
     of the special distribution was March 3, 2006. Based on the closing price
     of the units of Aeroplan Income Fund on March 3, 2006, the value of the
     units distributed to ACE's shareholders amounted to $251 million.
     Following the completion of the distribution and the transfer of units in
     connection with the Initial Long Term Incentive Plan of Aeroplan, ACE's
     ownership interest in Aeroplan was 75.3 percent.

     In Quarter 2 and Quarter 3 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.

     At a special meeting of shareholders held on October 5, 2006, the
     shareholders of ACE approved a statutory plan of arrangement pursuant to
     the Canada Business Corporations Act. 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
     grants authority to the board of directors of ACE to make from time to
     time one or more special distributions to ACE shareholders in an
     aggregate amount of up to $2 billion by way of reduction of the stated
     capital of the Class A variable voting shares, Class B voting shares and
     the preferred shares of ACE.


--------------------------------------------------------------------------------
                                      4
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     On November 24, 2006, ACE and Air Canada completed an initial public
     offering and secondary offering of an aggregate 25 million Air Canada
     shares at $21 per share for net proceeds of $491 million, after offering
     costs of $34 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 net proceeds of $187 million, after offering costs of
     $13 million. In the secondary offering, ACE sold an aggregate of
     15,476,190 Class A variable voting shares and Class B voting shares for
     net proceeds of $304 million, after offering costs of $21 million. As at
     December 31, 2006, an aggregate of 100 million Class A variable voting
     shares and Class B voting shares in the capital of Air Canada were issued
     and outstanding. ACE retains control of Air Canada through a 75 percent
     ownership interest.

     On December 4, 2006 ACTS and Grupo TACA Holdings Limited ("Grupo TACA")
     of El Salvador entered into an agreement for ACTS to acquire 80 percent
     of Grupo TACA's aircraft maintenance division, Aeromantenimiento, S.A
     ("Aeroman"). Total consideration includes cash and a right to acquire an
     equity stake in ACTS. The cash component of US$45 million consists of
     cash of US$43 million on closing and a milestone payment of up to US$2
     million, funded by ACTS through ACE's available cash resources. The size
     of the equity stake in ACTS will be confirmed at the time of the
     monetization of ACTS and is expected to represent less than 7 percent of
     the total equity of ACTS. Prior to ACTS' monetization, Grupo TACA can put
     its right to acquire equity back to ACE at a discounted value from US$40
     million and accreting up to a cap of US$51 million over 12 months or the
     date of monetization, if earlier. On February 13, 2007, ACTS completed
     the acquisition of Aeroman.

     The monetization of ACTS, which commenced in late 2006, is expected to be
     completed by mid-2007.

     On December 28, 2006, ACE announced the terms of a distribution of
     50,000,000 units of Aeroplan Income Fund to ACE shareholders under the
     statutory plan of arrangement approved by ACE's shareholders at the
     special meeting held on October 5, 2006. ACE shareholders, on January 10,
     2007, the record date for the distribution, received a non-cash
     distribution of approximately 0.442 units of Aeroplan Income Fund per
     Class A variable voting share, Class B voting share and preferred share
     (on an as converted basis) of ACE. Based on a closing price of $17.97 per
     unit of Aeroplan Income Fund on the Toronto Stock Exchange on January 10,
     2007, the distribution is valued at approximately $899 million or $7.95
     per ACE share.


--------------------------------------------------------------------------------
                                      5
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     7.   Fourth Quarter Results of Operations

     The following table reflects the results of the Corporation, the results
     of its reportable segments and certain non-GAAP measures for the three
     months ended December 31, 2006 and for the three months ended December
     31, 2005.


<TABLE>
<CAPTION>
                                                        Three months ended December 31, 2006
                                                Air Canada
                                                Services    Aeroplan   Jazz   ACTS     CIE    ACE Total
---------------------------------------------- ----------- ---------- ------ ------- ------- ----------
<S>                                            <C>         <C>         <C>   <C>     <C>     <C>
Operating revenue
Passenger revenue                              $     2,071   $      -   $  -   $   -   $  25    $ 2,096
Cargo revenue                                          165          -      -       -       -        165
Other revenue                                          138        205      2      64    (126)       283
---------------------------------------------- ----------- ---------- ------ ------- ------- ----------
External revenue                                     2,374        205      2      64    (101)     2,544
Inter-segment revenue                                   41          3    350     164    (558)         -
---------------------------------------------- ----------- ---------- ------ ------- ------- ----------
                                                     2,415        208    352     228    (659)     2,544
---------------------------------------------- ----------- ---------- ------ ------- ------- ----------

Operating expenses
Salary, wages, and benefits                            443         21     82      85       3        634
Aircraft fuel                                          583          -     69       -     (68)       584
Aircraft rent                                           75          -     34       -      (2)       107
Airport user fees                                      232          -     46       -     (45)       233
Aircraft maintenance, materials, and supplies          205          -     27      56    (164)       124
Depreciation, amortization, and obsolescence           135          3      5       8       6        157
Food, beverages and supplies                            76          -      4       -       -         80
Commissions                                             49          -      -       -      (1)        48
Capacity purchase fees paid to Jazz                    224          -      -       -    (224)         -
Special charge for labour restructuring                 (8)         -      -       -       -         (8)
Other operating expenses                               406        147     52      67    (160)       512
---------------------------------------------- ----------- ---------- ------ ------- ------- ----------
                                                     2,420        171    319     216    (655)     2,471
---------------------------------------------- ----------- ---------- ------ ------- ------- ----------

Operating income (loss)                                 (5)        37     33      12      (4)        73

Non-operating income (expense)
Interest income                                         24          6      2       1       3         36
Interest expense                                       (88)        (4)    (2)     (6)     (5)      (105)
Interest capitalized                                    22          -      -       -       -         22
Dilution gain - Air Canada                               -          -      -       -      25         25
Gain (loss) on sale of and provisions on
assets                                                 (10)         -      -       -       6         (4)

Other non-operating income (expense)                     -          -     (1)      -       -         (1)
---------------------------------------------- ----------- ---------- ------ ------- ------- ----------
                                                       (52)         2     (1)     (5)     29        (27)
---------------------------------------------- ----------- ---------- ------ ------- ------- ----------

Income (loss) before non-controlling                   (57)        39     32       7      25         46

Non-controlling interest                                (3)         -      -       -     (16)       (19)
Foreign exchange gain (loss)                          (107)         -      -       1       1       (105)
Recovery of (provision for) income taxes                23          -      -       -       6         29
---------------------------------------------- ----------- ---------- ------ ------- ------- ----------
Income (loss) for the period                      $   (144)  $     39     32   $   8   $  16    $   (49)
============================================== =========== ========== ====== ======= ======= ==========


EBITDAR(1)                                             205         40     72      20       -        337

EBITDAR(1) excluding special charges                   197         40     72      20       -        329
---------------------------------------------- ----------- ---------- ------ ------- ------- ----------
</TABLE>


<TABLE>
<CAPTION>
                                                         Three months ended December 31, 2005
                                                Air Canada
                                                Services     Aeroplan   Jazz    ACTS    CIE   ACE Total
---------------------------------------------- ------------ ---------- ------- ------ ------- ----------
<S>                                            <C>          <C>        <C>     <C>     <C>     <C>
Operating revenue
Passenger revenue                                 $   1,949    $     -   $   1  $   -   $ 19    $  1,969
Cargo revenue                                           176          -       -      -       -        176
Other revenue                                           111        149       5     39     (87)       217
---------------------------------------------- ------------ ---------- ------- ------ ------- ----------
External revenue                                      2,236        149       6     39     (68)     2,362
Inter-segment revenue                                    35          5     298    153    (491)         -
---------------------------------------------- ------------ ---------- ------- ------ ------- ----------
                                                      2,271        154     304    192    (559)     2,362
---------------------------------------------- ------------ ---------- ------- ------ ------- ----------

Operating expenses
Salary, wages, and benefits                             463         19      75     85       5        647
Aircraft fuel                                           577          -      62      1     (62)       578
Aircraft rent                                            90          -      28      -      (1)       117
Airport user fees                                       222          -      37      -     (37)       222
Aircraft maintenance, materials, and supplies           180          -      18     56    (150)       104
Depreciation, amortization, and obsolescence            106          3       4      8       4        125
Food, beverages and supplies                             78          -       3      -       -         81
Commissions                                              47          -       -      -       -         47
Capacity purchase fees paid to Jazz                     194          -       -      -    (194)         -
Special charge for labour restructuring                   -          -       -      -       -          -
Other operating expenses                                405        102      43     50    (125)       475
---------------------------------------------- ------------ ---------- ------- ------ ------- ----------
                                                      2,362        124     270    200    (560)     2,396
---------------------------------------------- ------------ ---------- ------- ------ ------- ----------

Operating income (loss)                                 (91)        30      34     (8)      1        (34)

Non-operating income (expense)
Interest income                                          14          4       -      -       1         19
Interest expense                                        (74)        (2)     (3)    (4)     (4)       (87)
Interest capitalized                                      6          -       -      -       -          6
Dilution gain - Air Canada                                -          -       -      -       -          -
Gain (loss) on sale of and provisions on
assets                                                  (30)         -       1      -      (1)       (30)

Other non-operating income (expense)                     (2)        (3)      -      -       9          4
---------------------------------------------- ------------ ---------- ------- ------ ------- ----------
                                                        (86)        (1)     (2)    (4)      5        (88)
---------------------------------------------- ------------ ---------- ------- ------ ------- ----------

Income (loss) before non-controlling                   (177)        29      32    (12)      6       (122)

Non-controlling interest                                 (2)         -       -      -      (6)        (8)
Foreign exchange gain (loss)                            (11)         -       -      -       -        (11)
Recovery of (provision for) income taxes                 55          -       -      -     (16)        39
---------------------------------------------- ------------ ---------- ------- ------ ------- ----------
Income (loss) for the period                       $   (135)   $    29    $ 32  $ (12)  $ (16)  $   (102)
============================================== ============ ========== ======= ====== ======= ==========


EBITDAR(1)                                              105         33      66      -       4        208

EBITDAR(1) excluding special charges                    105         33      66      -       4        208
---------------------------------------------- ------------ ---------- ------- ------ ------- ----------
</TABLE>

(1)  Refer to section 20 "Non-GAAP Financial Measures" in this MD&A for a
     reconciliation of EBITDAR to operating income (loss).


--------------------------------------------------------------------------------
                                      6
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     ACE reported operating income of $73 million in Quarter 4 2006, an
     improvement of $107 million from the operating loss of $34 million
     recorded in Quarter 4 2005. Excluding special charges, operating income
     increased $99 million over 2005.

     On a consolidated basis, for Quarter 4 2006, EBITDAR increased $129
     million over Quarter 4 2005. Excluding special charges, EBITDAR improved
     $121 million over Quarter 4, 2005. EBITDAR increased in all reportable
     segments. For Quarter 4, 2006, the Air Canada Services, Aeroplan, Jazz
     and ACTS segments achieved EBITDAR improvements over Quarter 4, 2005 of
     $100 million, $7 million, $6 million and $20 million, respectively.

     Non-operating expense amounted to $27 million in Quarter 4 2006 compared
     to non-operating expense of $88 million in Quarter 4 2005. For Quarter 4
     2006, net interest expense decreased $15 million from the same period in
     2005. An increase in interest expense, largely driven by the financing of
     additional aircraft, was more than offset by interest capitalized
     relating to the acquisition of Boeing aircraft and growth in interest
     income due to higher cash balances and higher average interest rates.

     Losses from the revaluation of foreign currency monetary items amounted
     to $105 million in Quarter 4 2006, attributable to a weaker Canadian
     dollar at December 31, 2006 compared to September 30, 2006. This compared
     to foreign exchange losses on foreign currency monetary items of $11
     million in Quarter 4 2005.

     The net loss in Quarter 4 2006 amounted to $49 million or $0.48 per
     diluted share compared to a net loss of $102 million or $1.01 per diluted
     share in Quarter 4 2005.


--------------------------------------------------------------------------------
                                      7
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     7.1. Air Canada Services

     Air Canada Services recorded an operating loss of $5 million in Quarter 4
     2006, an improvement of $86 million from Quarter 4 2005. EBITDAR
     increased $100 million over Quarter 4 2005.

     System passenger revenues in Quarter 4 2006 increased $122 million or 6
     percent over Quarter 4 2005, reflecting system traffic and yield
     improvements due to stronger market demand. The system yield improvement
     of 1 percent in Quarter 4 2006 over the same period in 2005 was
     principally due to fuel-related fare increases and increased fuel
     surcharges to offset higher fuel costs and, to a lesser extent, a higher
     average business class fare. The yield increase was partly offset by the
     negative effect of a stronger Canadian dollar on international, US
     transborder and domestic revenues. In Quarter 4 2006, traffic grew 5
     percent on a capacity increase of 4 percent over Quarter 4 2005,
     resulting in a passenger load factor increase of 1.1 percentage points.
     RASM increased 2 percent compared to Quarter 4 2005 due to both the
     improvement in system passenger load factor and the growth in yield.

     Cargo revenues for Quarter 4 2006 decreased $11 million or 6 percent from
     Quarter 4 2005. System traffic declined 4 percent and cargo yield per
     revenue ton mile was down 2 percent. Freighter operations were reduced
     from three to two chartered MD-11 aircraft effective November 2006 as
     compared to three MD-11 aircraft operated in Quarter 4 2005.

     In Quarter 4 2006, other revenues increased $33 million or 23 percent
     over Quarter 4 2005 and included higher revenues from Air Canada
     Vacations, increased flight cancellation/change fees and buy-on-board
     revenues as well as other miscellaneous revenues.

     Operating expenses in Quarter 4 2006 rose $58 million or 2 percent over
     Quarter 4 2005. Unit cost, as measured by operating expense per ASM,
     decreased 1 percent over Quarter 4 2005.

     Operating expense increases included salaries and wages, aircraft fuel,
     airport and navigation fees, aircraft maintenance, materials and
     supplies, ownership costs, comprised of aircraft rent and depreciation,
     amortization and obsolescence, and capacity purchase fees paid to Jazz.
     Capacity purchase fees paid to Jazz increased $30 million or 15 percent,
     driven by a growth of 12 aircraft in Jazz's operating fleet covered by
     the Jazz CPA, and an increase in ASM capacity of 26 percent for flights
     operated by Jazz. Aircraft maintenance, materials and supplies increased
     $25 million or 14 percent in Quarter 4 2006 largely due to increased
     airframe maintenance activity for Boeing 767 aircraft and, to a lesser
     extent, Airbus A320 aircraft, due to cycle timing. Other increases
     included increased engine maintenance activity for Airbus A320 and A340
     aircraft and expenses related to satisfying minimum return conditions on
     short-term leases and future return to lessor expenses. Ownership costs
     increased $14 million in Quarter 4 2006 and included a change in
     assumptions relating to the residual value of certain aircraft and the
     addition of 16 Embraer aircraft to Air Canada's operating fleet. The
     impact of aircraft returns and lease terminations, the transfer of 10
     CRJ-100 aircraft to Jazz, which shifts the ownership cost to the capacity
     purchase expense category, the reduction of one MD-11 freighter aircraft
     and the impact of a stronger Canadian dollar on aircraft rent partly
     offset the increase in ownership costs.

     Non-operating expense amounted to $52 million in Quarter 4 2006 compared
     to non-operating expense of $86 million for Quarter 4 2005. The increase
     in interest expense of $14 million, largely driven by the financing of
     additional aircraft, was more than offset by a higher amount of
     capitalized interest relating to the acquisition of Boeing 777 and 787
     aircraft and growth in interest income due to higher cash balances and
     higher average interest rates

     Losses from the revaluation of foreign currency monetary items amounted
     to $107 million in Quarter 4 2006, attributable to a weaker Canadian
     dollar at December 31, 2006 compared to September 30, 2006. This compared
     to losses of $11 million in Quarter 4 2005.

     A segment loss of $144 million was recorded in Quarter 4 2006 compared to
     a segment loss of $135 million in Quarter 4 2005.

--------------------------------------------------------------------------------
                                      8
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     7.2. Aeroplan

     Aeroplan recorded operating income of $37 million in Quarter 4 2006, an
     increase of $7 million over Quarter 4 2005. EBITDA improved $7 million
     over Quarter 4 2005. The improvement in operating income and EBITDA was
     mainly driven by a 37 percent growth in miles redeemed and higher
     redemption activity.

     Operating revenues in Quarter 4 2006 were up $54 million or 35 percent,
     primarily attributable to higher redemption activity and to higher
     average revenue recognized per Aeroplan mile and an increase of $3
     million in breakage revenues. These increases were partly offset by lower
     revenue generated from the tier management, contact centre management and
     marketing fees from Air Canada for Quarter 4 2006.

     Total operating expenses rose by $47 million or 38 percent in Quarter 4
     2006, largely due to an increase of $37 million in the cost of rewards,
     resulting from increased redemption. Other operating expenses excluding
     the cost of rewards, increased by $10 million over Quarter 4 2005 due to
     higher compensation costs, higher advertising and promotion costs as a
     result of promotional activities, mainly related to the launch of
     ClassicPlus Flight rewards during Quarter 4 2006 and higher technology
     costs.

     In accordance with its policy to review breakage every two years,
     Management completed its review of the estimated breakage factor used to
     determine the number of miles sold which are not expected to be redeemed.
     While there can be no assurance that the breakage factor will remain the
     same in the future, based on the results of the studies, which include
     the impact of the program changes announced on October 16, 2006 but
     exclude the potential impact of the new ClassicPlus Flight rewards, the
     breakage factor has remained unchanged at 17 percent. The studies used
     data only up to December 31, 2005 and will be updated by Management in
     2007.

     Pursuant to an amendment of the Commercial Participation and Service
     Agreement ("CPSA") entered into on October 13, 2006, Air Canada agreed to
     increase its obligation for the cost of air rewards related to the
     redemption of Aeroplan miles earned by members prior to January 1, 2002
     from 103 billion to 112 billion. Refer to Note 21 to ACE's consolidated
     financial statements for additional information.

     On October 16, 2006, and in response to members' demands for improved
     reward travel choices and greater flexibility to make travel
     arrangements, Aeroplan introduced ClassicPlus Flight Rewards which offer
     Aeroplan members unrestricted access to available seat inventory across
     the entire Air Canada and Air Canada Jazz networks in both Economy and
     Executive Class and may be booked until two hours prior to a flight's
     departure should seats remain available.

     Concurrently, Aeroplan also announced the implementation of certain
     Program changes, related to mileage expiry and mileage accumulation,
     which became effective January 1, 2007 and July 1, 2007. The changes have
     been designed to encourage members' active participation in the program
     through accumulation and redemption.


--------------------------------------------------------------------------------
                                      9
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]



     7.3  Jazz
     Jazz recorded operating income of $33 million in Quarter 4 2006, pursuant
     to the Jazz CPA, compared to operating income of $34 million in Quarter 4
     2005, pursuant to the Initial Jazz CPA. EBITDAR for Quarter 4 2006
     improved $6 million over Quarter 4 2005, mainly due to a growth in fleet
     size, an increase in hours of contract flying under the Jazz CPA, as well
     as cost control.

     The Jazz CPA came into effect on January 1, 2006. The major changes from
     the Initial Jazz CPA include: a longer term, a larger number of covered
     aircraft with a guaranteed minimum of 133 aircraft throughout the term,
     and Jazz expenses now reimbursed by Air Canada at a higher mark-up for
     controllable costs, and on an at-cost basis by Air Canada for other
     expenses.

     Operating revenues for Quarter 4 2006 increased $48 million or 16 percent
     from Quarter 4 2005. The significant increase in revenues was due to a
     net addition of 14 aircraft operated by Jazz resulting in a 21 percent
     increase in block hours flown over Quarter 4 2005 as well as higher
     pass-though costs charged to Air Canada under the Jazz CPA.

     Operating expenses increased $49 million or 18 percent compared to
     Quarter 4 2005 and included an increase in pass-through costs of $18
     million or 17 percent in Quarter 4 2006, driven largely by a capacity
     increase of 26 percent over the corresponding period in 2005. Unit cost
     for Quarter 4 2006 decreased 8 percent over the same period in 2005, in
     part due to an increase in longer-haul flying which generally results in
     lower unit costs per ASM. Excluding fuel expense, unit cost for Quarter 4
     2006 was down 5 percent over the corresponding period in 2005. The unit
     aircraft rental cost increase mainly reflected six CRJ-200 aircraft
     deliveries and the transfer of 10 CRJ-100 aircraft from Air Canada partly
     offset by a termination of two Dash-8 aircraft operating leases.

     Segment income of $32 million was recorded in Quarter 4, 2006, unchanged
     from Quarter 4 2005.

     7.4. ACTS

     ACTS recorded operating income of $12 million in Quarter 4, 2006 compared
     to an operating loss of $8 million in Quarter 4 2005, an improvement of
     $20 million, the result of revenue growth and a focus on operating
     efficiencies.

     Operating revenues were up $36 million over Quarter 4 2005, reflecting
     growth of $12 million from Air Canada and $24 million from third party
     customers, while Jazz volumes were relatively flat. Air Canada revenue
     growth came from the airframe and engine divisions as a result of
     additional heavy checks completed in Quarter 4 2006 compared to the same
     period in 2005. The growth in third party revenues came from an increased
     volume of orders delivered by the engine and component divisions as both
     divisions more than doubled revenues from 2005 levels.

     In Quarter 4 2006, operating expenses increased $16 million over 2005 in
     order to support the increased revenues, though labour and material
     efficiencies delivered significantly reduced cost to revenue ratios from
     2005 levels.

     Segment income of $8 million was recorded in Quarter 4 2006 versus a
     segment loss of $12 million for the same period in 2005.

--------------------------------------------------------------------------------
                                      10
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     7.5  Corporate Items and Eliminations ("CIE")
     CIE includes the corporate, financing and investing activities of ACE.
     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 for engine and component maintenance services)
     versus the expense recognition in Air Canada and Jazz, which is as the
     work is completed.

     The Aeroplan consolidation adjustments recorded in CIE relate mainly to
     the revenue recognition timing difference from when Aeroplan records
     revenues, at the time a mile is redeemed for travel, to the consolidated
     accounting policy of revenue recognition, at the time reward
     transportation is provided. In addition, Aeroplan records revenue from
     the redemption of miles in "other" revenue, whereas in ACE's consolidated
     financial statements, revenue for miles redeemed for travel on Air Canada
     and Jazz is recorded in "passenger" revenue. This results in an
     elimination of certain Aeroplan "other" revenue amounts in CIE as the
     consolidated recognition of Aeroplan miles redeemed for travel on Air
     Canada and Jazz is recorded in "passenger" revenue. This also results in
     an adjustment to "passenger" revenue recorded in CIE. In the Aeroplan
     segment information, the cost to Aeroplan of purchasing rewards is
     recorded in "other" operating expenses.

     Included in CIE's Quarter 4 2006 results is a dilution gain of $25
     million as a result of ACE's initial public offering of Air Canada. In
     connection with the offering, ACE acquired certain investments held by
     Air Canada in ACTS for a consideration of $673 million.


--------------------------------------------------------------------------------
                                      11
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]



     8.   2006 Results of Operations

     The following table reflects the results of the Corporation, the results
     of its reportable segments and certain non-GAAP measures for the year
     ended December 31, 2006 and for the year ended December 31, 2005.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
                                                                2006
                                   Air
                                  Canada
                                  Services   Aeroplan      Jazz      ACTS     CIE        ACE Total
-------------------------------- ---------- ------------ --------- -------- --------- ----------------
<S>                              <C>        <C>          <C>       <C>      <C>        <C>
Operating revenue

Passenger revenue                 $   8,887   $        -   $     -   $    -   $    82     $      8,969
Cargo revenue                           625            -         -        -         -              625
Other revenue                           558          759         7      228      (489)           1,063
-------------------------------- ---------- ------------ --------- -------- --------- ----------------
External revenue                     10,070          759         7      228      (407)          10,657
Inter-segment revenue                   169           10     1,374      627    (2,180)               -
-------------------------------- ---------- ------------ --------- -------- --------- ----------------
                                     10,239          769     1,381      855    (2,587)          10,657
Special charge for Aeroplan
 miles                                 (102)            -        -        -         -             (102)
-------------------------------- ---------- ------------ --------- -------- --------- ----------------
                                     10,137          769     1,381      855    (2,587)          10,555
-------------------------------- ---------- ------------ --------- -------- --------- ----------------

Operating expenses
Salary, wages, and benefits           1,816           79       311      331        16            2,553
Aircraft fuel                         2,544            -       285        1      (284)           2,546
Aircraft rent                           314            -       134        -        (7)             441
Airport user fees                       982            -       178        -      (177)             983
Aircraft maintenance,
  materials, and supplies               768            -        98      234      (629)             471
Depreciation, amortization,
  and obsolescence                      493           14        21       31        17              576
Food, beverages and supplies            322            -        15        -        (2)             335
Commissions                             237            -         -        -        (1)             236
Capacity purchase fees paid to
  Jazz                                  871            -         -        -      (871)               -
Special charge for labour
  restructuring                          20            -         -        5         -               25
Other operating expenses              1,656          536       195      255      (648)           1,994
-------------------------------- ---------- ------------ --------- -------- --------- ----------------
                                     10,023          629     1,237      857    (2,586)          10,160
-------------------------------- ---------- ------------ --------- -------- --------- ----------------

Operating income (loss)                 114          140       144       (2)       (1)             395

Non-operating income (expense)
Interest income                          82           20         6        1        11              120
Interest expense                       (313)         (15)       (8)     (18)      (24)            (378)
Interest capitalized                     62            -        (1)       -         -               61
Gain on sale of US Airways
 shares                                   -            -         -        -       152              152
Dilution gain - Air Canada                -            -         -        -        25               25
Dilution gain - Jazz                      -            -         -        -       220              220
Dilution gain - Aeroplan                  -            -         -        -         -                -
Gain (loss) on sale of and
  provisions on assets                   (6)           -         -        -         2               (4)
Other non-operating income
  (expense)                             (16)          (1)       (1)       1         3              (14)
-------------------------------- ---------- ------------ --------- -------- --------- ----------------
                                       (191)           4        (4)     (16)      389              182
-------------------------------- ---------- ------------ --------- -------- --------- ----------------

Income (loss) before the
following items:                        (77)         144       140      (18)      388              577


Non-controlling interest                (12)           -         -        -       (60)             (72)
Foreign exchange gain (loss)             12            -         -        -         -               12
Recovery of (provision for)
  income taxes                            3            -         -        -      (112)            (109)
-------------------------------- ---------- ------------ --------- -------- --------- ----------------

Income (loss) for the period      $     (74)  $      144    $  140   $  (18)  $   216     $        408
================================ ========== ============ ========= ======== ========= ================

EBITDAR(1)                              921          154       299       29         9            1,412
EBITDAR(1) excluding special
 charges                              1,043          154       299       34         9            1,539
-------------------------------- ---------- ------------ --------- -------- --------- ----------------
</TABLE>


<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
                                                              2005
                                   Air
                                  Canada
                                 Services   Aeroplan      Jazz     ACTS     CIE      ACE Total
-------------------------------- ---------- ----------- -------- --------- -------- ------------
<S>                              <C>        <C>          <C>     <C>       <C>       <C>
Operating revenue

Passenger revenue                  $  8,197   $       -   $    2   $     -   $   70    $   8,269
Cargo revenue                           620           -        -         -        -          620
Other revenue                           537         627        8       187     (418)         941
-------------------------------- ---------- ----------- -------- --------- -------- ------------
External revenue                      9,354         627       10       187     (348)       9,830
Inter-segment revenue                   155          13    1,013       567   (1,748)           -
-------------------------------- ---------- ----------- -------- --------- -------- ------------
                                      9,509         640    1,023       754   (2,096)       9,830
Special charge for Aeroplan
 miles                                    -           -        -         -        -            -
-------------------------------- ---------- ----------- -------- --------- -------- ------------
                                      9,509         640    1,023       754   (2,096)        9,830
-------------------------------- ---------- ----------- -------- --------- -------- ------------

Operating expenses
Salary, wages, and benefits           1,857          71      265       308       16        2,517
Aircraft fuel                         2,197           -      177         1     (177)       2,198
Aircraft rent                           341           -       80         -       (4)         417
Airport user fees                       924           -      124         -     (124)         924
Aircraft maintenance,
  materials, and supplies               693           -       68       174     (568)         367
Depreciation, amortization,
  and obsolescence                      404           8       18        32       20          482
Food, beverages and supplies            326           -        8         -        -          334
Commissions                             253           -        -         -        -          253
Capacity purchase fees paid to
  Jazz                                  693           -        -         -     (693)           -
Special charge for labour
  restructuring                           -           -        -         -        -            -
Other operating expenses              1,630         459      154       192     (552)       1,883
-------------------------------- ---------- ----------- -------- --------- -------- ------------
                                      9,318         538      894       707   (2,082)       9,375
-------------------------------- ---------- ----------- -------- --------- -------- ------------

Operating income (loss)                 191         102      129        47      (14)         455

Non-operating income (expense)
Interest income                          48           6        1         -       11           66
Interest expense                       (270)         (5)     (16)      (14)     (10)        (315)
Interest capitalized                     14           -        -         -        -           14
Gain on sale of US Airways
 shares                                   -           -        -         -        -            -
Dilution gain - Air Canada                -           -        -         -        -            -
Dilution gain - Jazz                      -           -        -         -        -            -
Dilution gain - Aeroplan                  -           -        -         -      190          190
Gain (loss) on sale of and
  provisions on assets                  (31)          -        4         -       (1)         (28)
Other non-operating income
  (expense)                              15          (3)       -         -      (24)         (12)
-------------------------------- ---------- ----------- -------- --------- -------- ------------
                                       (224)         (2)     (11)      (14)     166          (85)
-------------------------------- ---------- ----------- -------- --------- -------- ------------

Income (loss) before the
following items:                        (33)        100      118        33      152          370

Non-controlling interest                (13)          -        -         -      (11)         (24)
Foreign exchange gain (loss)             47           -        -         -       (1)          46
Recovery of (provision for)
  income taxes                          (21)          -        -         -     (110)        (131)
-------------------------------- ---------- ----------- -------- --------- -------- ------------

Income (loss) for the period        $   (20)  $     100   $  118   $    33   $   30    $     261
================================ ========== =========== ======== ========= ======== ============

EBITDAR(1)                              936         110      227        79        2        1,354
EBITDAR(1) excluding special
 charges                                936         110      227        79        2        1,354
-------------------------------- ---------- ----------- -------- --------- -------- ------------
</TABLE>

(1) Refer to section 20 "Non-GAAP Financial Measures" in this MD&A for a
reconciliation of EBITDAR to operating income (loss).


--------------------------------------------------------------------------------
                                      12
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     ACE recorded operating income of $395 million in 2006, a decrease of $60
     million from 2005. Excluding special charges of $127 million, operating
     income increased $67 million over 2005.

     Included in 2006 was a special charge of $102 million recorded in
     operating revenues in connection with Air Canada's obligations for the
     redemption of pre-2002 Aeroplan miles and a special charge for labour
     restructuring of $25 million recorded in operating expenses in connection
     with a non-unionized workforce reduction plan.

     On a consolidated basis for 2006, EBITDAR increased $58 million over
     2005. Excluding special charges, EBITDAR improved $185 million over 2005,
     reflecting improvements in all reportable segments with the exception of
     ACTS. In 2006, Air Canada Services, Aeroplan and Jazz segments achieved
     EBITDAR, (excluding special charges) improvements over 2005 of $107
     million, $44 million and $72 million, respectively. Excluding the special
     charge for labour restructuring of $5 million recorded in Quarter 1 2006,
     EBITDA for the ACTS segment decreased $45 million over 2005.

     Non-operating income amounted to $182 million compared to non-operating
     expense of $85 million in 2005. Net interest expense decreased $38
     million over 2005. The increase in interest expense, largely driven by
     the financing of additional aircraft, was more than offset by interest
     capitalized mainly relating to the acquisition of Boeing aircraft and
     growth in interest income due to higher cash balances and higher average
     interest rates. Included in 2006 results was a gain of $152 million
     relating to the sale of shares of US Airways, a dilution gain of $220
     million as a result of ACE's initial public offering of Jazz Income Fund
     and a dilution gain of $25 million as a result of ACE's initial public
     offering of Air Canada.

     Gains from the revaluation of foreign currency monetary items amounted to
     $12 million in 2006, attributable to a stronger Canadian dollar at
     December 31, 2006 compared to December 31, 2005. This compared to foreign
     exchange gains on foreign currency monetary items of $46 million in 2005.

     Net income for 2006 amounted to $408 million or $3.80 per diluted share
     compared to $261 million or $2.48 per diluted share in 2005.


--------------------------------------------------------------------------------
                                      13
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     8.1. Air Canada Services
     For 2006, Air Canada Services recorded operating income of $114 million,
     a decrease of $77 million from the operating income of $191 million
     recorded in 2005. Excluding the special charges of $122 million for
     Aeroplan miles and labour restructuring, operating income increased $45
     million over 2005. EBITDAR decreased $15 million from 2005. Excluding the
     special charge for Aeroplan miles and the special charge for labour
     restructuring, EBITDAR improved $107 million over 2005.

     System passenger revenues for 2006 increased $690 million or 8 percent,
     reflecting yield and traffic improvements due to stronger market demand.
     The system yield improvement of 3 percent in 2006 was principally due to
     fuel-related fare increases and increased fuel surcharges to offset
     higher fuel costs. A higher average business class fare was also a factor
     in the yield increase. The impact of the fuel-related fare increases,
     increased fuel surcharges and a higher business class fare was partially
     offset by the negative effect of a stronger Canadian dollar on
     international, US transborder and domestic revenues, which accounted for
     approximately $200 million in 2006. The August 10, 2006 terrorist threat
     in the United Kingdom and resultant additional security measures also had
     an adverse impact in 2006. For 2006, traffic grew 5 percent on a capacity
     increase of 4 percent over 2005 resulting in a passenger load factor
     improvement of 0.7 percentage points over 2005. RASM increased 4 percent
     compared to 2005 due primarily to the growth in system yield and partly
     to the improvement in passenger load factor.

     Cargo revenues increased $5 million or 1 percent due to a growth in cargo
     traffic of 4 percent partly offset by a 3 percent decline in yield per
     revenue ton mile. Freighter revenues increased $28 million over 2005
     mostly in the Pacific market during the first six months of 2006 where an
     additional MD-11 freighter capacity was deployed. Effective November
     2006, Air Canada reduced the number of chartered MD-11 freighter aircraft
     from three to two.

     Other revenues increased $35 million or 5 percent over 2005. Increases
     included flight cancellation and change fees, buy-on-board revenues as
     well as other miscellaneous revenues.

     Operating expenses increased $705 million or 8 percent largely reflecting
     a 4 percent growth in capacity in addition to a $347 million or 16
     percent increase in fuel expense. For 2006, unit cost increased 4 percent
     over 2005. Excluding fuel expense and the special charge for labour
     restructuring, unit cost increased 1 percent over 2005.

     Operating expenses increases included salaries and wages, aircraft fuel,
     ownership costs, comprised of aircraft rent, depreciation, amortization
     and obsolescence expenses, airport and navigation fees, aircraft
     maintenance, materials and supplies and capacity fees paid to Jazz.
     Capacity fees paid to Jazz, pursuant to the Jazz CPA, amounted to $871
     million compared to $693 million in 2005, pursuant to the Initial Jazz
     CPA. The increases in 2006 were mainly driven by a 27 percent increase in
     block hours over 2005. ASM capacity for flights operated by Jazz
     increased 51 percent over 2005. Aircraft maintenance, materials and
     supplies increased $75 million in 2006 primarily due to growth in Airbus
     A320 aircraft maintenance costs and, to a lesser extent, in Boeing 767
     aircraft maintenance costs. Other engine maintenance increases were due
     to an increase in maintenance activity for Airbus A340 aircraft and
     overall engine price increases. An addition to maintenance reserves
     required to satisfy minimum return conditions on short-term leases and
     future return to lessor expenses were also factors in the increase over
     2005. Ownership costs increased $62 million in 2006 and included a change
     in assumptions relating to the residual value of certain aircraft, the
     addition of 16 Embraer aircraft to Air Canada's operating fleet and
     increased MD-11 freighter aircraft flying in the first half of 2006
     partly offset by the transfer of 10 CRJ-100 aircraft to Jazz, the impact
     of a stronger Canadian dollar on aircraft rent and the impact of aircraft
     returns and terminations. Airport and navigation fees increased $58
     million in 2006, mainly due to a 6 percent increase in aircraft
     departures and increased rates for landing and general terminal fees
     primarily at Toronto's Pearson International Airport.

     Operating expense decreases included employee benefits, commissions and
     food, beverage and supplies expenses. Employee benefits expense decreased
     $35 million or 8 percent over 2005 largely due to a decline in
     post-employment benefits partly offset by higher pension expense which
     reflected a lower


--------------------------------------------------------------------------------
                                      14
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]

     discount rate applied to pension obligations and to a favourable
     adjustment of $8 million related to an updated evaluation of workers'
     compensation liability recorded in Quarter 4 2006. Commission expense
     decreased $16 million or 6 percent in 2006 on combined passenger and
     cargo revenue growth of 8 percent, largely due to the impact of a change
     in the base commission structure together with other commercial
     initiatives to reduce commission expense which more than offset the
     volume-related increase.

     Non-operating expense amounted to $191 million for 2006 compared to
     non-operating expense of $224 million for 2005. In 2006, net interest
     expense decreased $39 million from 2005. The increase in interest
     expense, largely driven by the financing of additional aircraft, was more
     than offset by capitalized interest relating to the acquisition of the
     Boeing 777 and 787 aircraft and growth in interest income due to higher
     cash balances and higher average interest rates.

     In 2006, gains from the revaluation of foreign currency monetary items
     amounted to $12 million, attributable to a stronger Canadian dollar at
     December 31, 2006 compared to December 31, 2005. This compared to foreign
     exchange gains of $47 million recorded in 2005.

     A segment loss of $74 million was recorded in 2006 compared to a segment
     loss of $20 million in 2005.

     8.2. Aeroplan
     Aeroplan recorded operating income of $140 million in 2006 compared to
     $102 million in 2005, an increase of $38 million. EBITDA improved $44
     million over 2005. The increase in operating income and EBITDA was mainly
     driven by an 11 percent growth in miles redeemed and higher reward
     redemption activity with improved margin.

     Operating revenues in 2006 increased $129 million or 20 percent, mainly
     attributable to higher redemption activity and to higher average revenue
     recognized per Aeroplan mile. In 2006, this growth accounted for a $126
     million increase including a $12 million increase in breakage revenues,
     attributable to an increase in miles sold. A higher cumulative average
     selling price per Aeroplan mile, due to contractual price increases, and
     growth in other revenues, consisting primarily of charges to members
     including the mileage transfer program, booking, change and cancellation
     fees, were also factors in the increase. These increases were partly
     offset by lower revenue generated from the tier management, contact
     centre management and marketing fees from Air Canada.

     Operating expenses rose by $91 million or 17 percent in 2006. The
     increase was due to a net rise in the cost of rewards of $68 million,
     attributable to higher redemption activity and a higher number of
     Aeroplan miles redeemed, representing $85 million, partly offset by a $17
     million decrease related to a lower average redemption cost per Aeroplan
     mile redeemed mostly related to air travel rewards. The lower costs are
     attributable to changes to the redemption mix of air rewards as well as
     an increase in non-air reward redemption activity. During 2006,
     depreciation and amortization increased $6 million, mainly due to
     increased software amortization as projects previously under development
     were deployed into service. Other operating expenses, excluding
     depreciation and amortization, increased $17 million over 2005 due to
     higher compensation costs, including stock-based compensation and
     separation costs; higher consulting, advisory and other expenses,
     including public company costs and securities laws compliance; increased
     information technology maintenance costs as development projects are
     deployed into service; and higher advertising and promotion costs as a
     result of promotional activities, mainly related to the launch of
     ClassicPlus Flight rewards.


--------------------------------------------------------------------------------
                                      15
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]




     8.3. Jazz
     In 2006, operating income amounted to $144 million, pursuant to the Jazz
     CPA, compared to operating income of $129 million in 2005, pursuant to
     the Initial Jazz CPA. EBITDAR in 2006 improved $72 million over 2005. The
     increase in operating income and EBITDAR in 2006 was mainly due to a
     growth in fleet size consistent with Jazz's plan to increase its relative
     share of the North American ASM capacity, an increase in hours of
     contract flying under the Jazz CPA, as well as cost control.

     The Jazz CPA came into effect on January 1, 2006. The major changes from
     the Initial Jazz CPA include: a longer term, a larger number of covered
     aircraft with a guaranteed minimum of 133 aircraft throughout the term,
     and Jazz expenses now reimbursed by Air Canada at a higher mark-up for
     controllable costs, and on an at-cost basis by Air Canada for other
     expenses.

     Operating revenues in 2006 increased $358 million or 35 percent over
     2005. The significant increase in revenues was due to a net addition of
     14 aircraft operated by Jazz resulting in a 27 percent increase in block
     hours flown over 2005 as well as higher pass-though costs charged to Air
     Canada under the Jazz CPA.

     Operating expenses increased $343 million or 38 percent over 2005 and
     included an increase in pass-through costs of $177 million or 55 percent,
     driven largely by a capacity increase of 51 percent. Unit cost in 2006
     decreased 12 percent compared to 2005, in part due to an increase in
     longer-haul flying which generally results in lower unit costs per ASM.
     Excluding fuel expense, unit cost for 2006 was down 10 percent. Unit cost
     reductions were achieved in all expense categories with the exception of
     fuel expense and aircraft rent. The unit aircraft rental cost increase
     mainly reflected six CRJ-200 aircraft deliveries and the transfer of 10
     CRJ-100 aircraft from Air Canada partly offset by a termination of two
     Dash 8 aircraft operating leases.

     Segment income of $140 million was recorded in 2006 compared to segment
     income of $118 million in 2005.

     8.4. ACTS
     ACTS recorded operating revenues of $855 million in 2006, an increase of
     $101 million over 2005, enabled by production capacity expansion. The
     revenue growth over 2005 was delivered in all three divisions, airframe,
     engine and component, and across all customer portfolios. Revenues from
     Air Canada, Jazz and third party increased $36 million, $24 million and
     $41 million, respectively.

     Operating expenses in 2006 increased $150 million over 2005. In addition
     to variable expenses associated with increased volume, non-recurring
     charges of $11 million were recorded in Quarter 1 2006. The non-recurring
     items included a special charge for labour restructuring of $5 million
     and net unfavorable adjustments of $6 million relating to 2005. Increased
     salary and wage expense to support growth, material cost increases as a
     result of higher levels of engine life limited part replacements,
     additional outsourced aircraft events, and spending to support strategic
     initiatives to fuel future business growth were also factors in the
     year-over-year increase.

     An operating loss of $2 million was recorded in 2006 compared to
     operating income of $47 million in 2005, a decrease of $49 million. The
     focus through the second half of 2006 on product competencies,
     operational efficiencies, and customer and supplier contract
     re-negotiations enabled ACTS to record significantly improved results in
     Quarter 3 and Quarter 4.

     A segment loss of $18 million was recorded in 2006 compared to segment
     income of $33 million in 2005.


--------------------------------------------------------------------------------
                                      16
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     8.5. Corporate Items and Eliminations ("CIE")
     Included in CIE's 2006 results is a gain of $152 million relating to the
     sale of shares of US Airways. Also included in 2006 results was a
     dilution gain of $220 million as a result of ACE's initial public
     offering of Jazz Income Fund and a dilution gain of $25 million as a
     result of ACE's initial public offering of Air Canada. Included in 2005
     results was a dilution gain of $190 million as a result of ACE's initial
     public offering of Aeroplan Income Fund and charges of $29 million
     related to the extinguishment of a credit facility with General Electric.


--------------------------------------------------------------------------------
                                      17
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]



     9.   Consolidated Financial Position

     9.1. Consolidated Assets

     Consolidated assets increased to $13.4 billion at December 31, 2006 from
     $11.8 billion at December 31, 2005. Assets in the Air Canada Services
     segment represented in excess of 80 percent of consolidated assets.

     Significant growth in consolidated assets in 2006 was realized in cash
     and short-term investments, up $997 million mainly due to the Air Canada
     and Jazz initial public offerings and the sale of most of ACE's interest
     in US Airways. Consolidated cash and short-term investments at December
     31, 2006 amounted $3.2 billion. Growth in property and equipment amounted
     to $495 million mainly as a result of aircraft acquisitions during 2006.

     Intangible assets were affected as a result of a reversal of a tax
     valuation allowance. The Corporation has determined that it is more
     likely than not that certain future income tax assets of $575 million, of
     which an amount of $504 million was offset by a valuation allowance, will
     be realized through a combination of future reversals of temporary
     differences and taxable income. The plan of arrangement which was
     approved on October 5, 2006 provides part of the basis for Management's
     assessment of realization due to the use of future income tax assets
     involved in the distribution of Aeroplan units. Refer to Note 24 of ACE's
     consolidated financial statements for additional information.

     With the reversal of the valuation allowance, a reduction to intangible
     assets (on a pro-rata basis) of $504 million was recorded based on the
     current carrying value of future income tax assets that existed at fresh
     start, $16 million was recorded as a recovery of income tax in ACE's
     consolidated statement of operations for those future income tax assets
     arising after fresh start, $12 million was recorded as a recovery of
     income tax for the current year, and $43 million has been recorded as a
     deferred tax recovery related to the increase in the effective tax rate
     applicable to certain of the Corporation's future income tax assets. This
     deferred recovery is recorded in "accounts payable and accrued
     liabilities" and will reverse to income as the underlying future income
     tax assets are realized. The Corporation has determined that it is more
     likely than not that future income tax assets of $1,511 million are not
     recoverable and continue to be offset by a valuation allowance. However,
     the future tax deductions underlying the future tax assets remain
     available for use in the future to reduce taxable income.

     9.2. Consolidated Debt and Lease Obligations
     Debt
     Consolidated long-term debt and capital leases, including the current
     portion, at December 31, 2006 amounted to $4.1 billion, up $318 million
     from December 31, 2005. The table below summarizes consolidated long-term
     debt and capital leases by entity/segment. The increase in long-term debt
     was primarily due to the financing of Embraer aircraft by Air Canada and
     a drawdown of $115 million by Jazz under its new credit facility.

----------------------------------------- -------------- --------------
($ millions)                                       2006           2005
----------------------------------------- -------------- --------------

ACE convertible senior notes                        263            247


Air Canada Services:
  Direct debt                                     1,052            696
  Consolidated under AcG-15 (1) (2)               1,110          1,178
  Capital lease obligations                       1,281          1,365

Aeroplan                                            300            300

Jazz                                                115             14

Other                                                 5              8
----------------------------------------- -------------- --------------

Consolidated total
                                                  4,126          3,808
----------------------------------------- -------------- --------------

(1)  Accounting Guideline of the CICA Handbook, Consolidation of Variable
     Interest Entities ("AcG-15").


--------------------------------------------------------------------------------
                                      18
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


(2)  Includes end of lease debt principal payments due on aircraft and engine
     leasing entities consolidated under AcG-15 before taking into account the
     anticipated fair value of the aircraft and engines at the time of lease
     expiry.

     The table below summarizes the Corporation's principal repayment
     requirements at December 31, 2006 on long-term debt, capital lease
     obligations, and aircraft, engine and fuel facility debt consolidated as
     VIEs under AcG-15.

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
($ millions)                         2007      2008       2009       2010       2011 Thereafter
------------------------------------------------------------------------------------------------
<S>                                    <C>       <C>       <C>         <C>       <C>        <C>
Direct Corporation debt                67        85        485         55        70         973
Debt consolidated under AcG-15        120       117         60        118       248         447
Capital lease principal obligation    180       179         92         90        87         653
------------------------------------------------------------------------------------------------
Consolidated total                    367       381        637         263      405       2,073
------------------------------------------------------------------------------------------------
</TABLE>

     Lease Obligations

     As a result of the adoption of AcG-15, the Corporation has consolidated
     leasing entities covering aircraft and engine leasing agreements
     previously accounted for as operating leases. Future minimum lease
     payments under existing operating leases of aircraft and other property,
     excluding leases accounted for as capital leases and Variable Interest
     Entities (VIEs), amounted to $3.0 billion at December 31, 2006 compared
     to $3.4 billion at December 31, 2005. Refer to the table below for
     additional information on the Corporation's future minimum lease payments
     under existing operating leases.

     The table below summarizes the Corporation's future minimum lease
     payments under existing operating leases at December 31, 2006.

<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
($ millions)                   2007       2008         2009        2010        2011     Thereafter
---------------------------------------------------------------------------------------------------
<S>                            <C>        <C>         <C>           <C>         <C>          <C>
Air Canada Services
Aircraft operating leases(1)    403        334          304         269         200          1,072
Other property                   53         46           32          27          24            140
---------------------------------------------------------------------------------------------------
Total Air Canada Services       456        380          336         296         224          1,212
---------------------------------------------------------------------------------------------------
Jazz
Aircraft operating leases         3          1            1           1           -              -
Other property                   13         12           11           7           1              3
---------------------------------------------------------------------------------------------------
Total Jazz                       16         13           12           8           1              3
---------------------------------------------------------------------------------------------------
Consolidated total              472        393          348         304         225          1,215
---------------------------------------------------------------------------------------------------
</TABLE>

(1) Includes aircraft leased and subleased to Jazz.


--------------------------------------------------------------------------------
                                      19
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     9.3. Share Capital and Other Equity

     At December 31, 2006, the issued and outstanding common shares of ACE,
     along with common shares potentially issuable, pursuant to convertible
     preferred shares, convertible notes and stock options were as follows:

<TABLE>
<CAPTION>
-------------------------------------------------- ------------------- -----------------------
                                                                       Number of shares (000)
                                                                         At December 31, 2006
-------------------------------------------------- ------------------- -----------------------
<S>                                                                    <C>
Issued and outstanding common shares
  Class A variable voting shares                                                       79,499
  Class B voting shares                                                                22,772
  Shares held in escrow                                                                     -
-------------------------------------------------- ------------------- -----------------------
Total issued and outstanding common shares                                            102,271
-------------------------------------------------- ------------------- -----------------------

-------------------------------------------------- ------------------- -----------------------
                                                                       Number of shares (000)
                                                                         At December 31, 2006
-------------------------------------------------- ------------------- -----------------------
Common shares potentially issuable
  Convertible preferred shares                                                         10,747
  Convertible notes                                                                     7,354
  Stock options                                                                         3,598
-------------------------------------------------- ------------------- -----------------------
Total common shares potentially issuable                                               21,699
-------------------------------------------------- ------------------- -----------------------

-------------------------------------------------- ------------------- -----------------------
                                                                       Number of shares (000)
                                                                         At December 31, 2006
-------------------------------------------------- ------------------- -----------------------
Total outstanding and potentially issuable common shares                              123,970
---------------------------------------------------------------------- -----------------------
</TABLE>


     In connection with the special distribution of units of Aeroplan Income
     Fund to its shareholders as of a record date of January 10, 2007, the
     conversion rate of the 4.25 percent Convertible Senior Notes due 2035
     (convertible notes) of ACE was adjusted resulting in the convertible
     notes being potentially convertible into 9.1 million shares. In a
     consistent manner, the number of ACE stock options outstanding was also
     adjusted. These adjustments are not included in the number of common
     shares potentially issuable in the table above.

     ACE's share capital as at December 31, 2006 was as follows:

----------------------------------------- ------------------------
                                             At December 31, 2006
----------------------------------------- ------------------------
Share capital
  Common shares                                             2,188
  Convertible preferred shares                                117
  Convertible notes                                            92
----------------------------------------- ------------------------
                                                            2,397
----------------------------------------- ------------------------
Adjustment to shareholders' equity                          1,655)
----------------------------------------- ------------------------
                                                              742
----------------------------------------- ------------------------


     Under fresh start reporting, the balance in shareholders' equity after a
     comprehensive revaluation is adjusted to the net value of identifiable
     assets and liabilities.

     During 2006, as a result of a review of the outstanding provisions
     recorded at the time of exiting CCAA on September 30, 2004, it was
     determined that a portion of the provision amounting to $38 million ($23
     million related to labour-related programs) was no longer required. The
     amount reversed was applied against share capital as these amounts
     related to plans established before the application of fresh start
     reporting.

     For further information on ACE's common shares, convertible preferred
     shares and convertible notes, refer to Note 12 to ACE's audited
     consolidated financial statements.


--------------------------------------------------------------------------------
                                      20
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     9.4. Liquidity and Working Capital
     The Corporation maintains considerable liquidity in cash and short-term
     investments along with access to additional funds under various credit
     facilities. At December 31, 2006, the Corporation had cash, cash
     equivalents and short-term investments of $3,178 million and positive
     working capital of $1,086 million. Compared to December 31, 2005, cash,
     cash equivalents (of which $313 million was held by ACE) and short term
     investments increased $997 million and working capital increased $743
     million.

     At December 31, 2006, Air Canada, Aeroplan and Jazz had unused credit
     facilities of $400 million, $175 million and $35 million, respectively.

     9.5. Consolidated Cash flows
     Cash flows from operations decreased $23 million in Quarter 4 2006
     primarily as a result of pension plan funding of $146 million during
     Quarter 4 2006 versus $76 million during Quarter 4 2005, partially offset
     by improved operating results.

     Cash flows from operations increased $57 million in 2006, primarily as a
     result of improved operating results before the special charges for
     Aeroplan miles and labour restructuring offset by higher pension plan
     funding, which reflected an increase of $171 million in 2006.

     During 2006, as described in section 6 of this MD&A, the Corporation
     completed offerings for Air Canada shares and units of the Jazz Air
     Income Fund. Net proceeds from the Air Canada offering were $491 million,
     after offering costs of $34 million. The net proceeds from the Jazz
     offering, including the proceeds from the exercise of the over-allotment
     option, were $232 million, after offering costs of $18 million.
     Concurrent with the closing of the initial public offering, Jazz received
     net proceeds of $113 million representing the drawing under a new term
     credit facility.

     Aircraft-related borrowings amounted to $76 million in Quarter 4 2006 and
     $397 million in 2006 related mainly to the delivery of three Embraer
     aircraft in the quarter and 16 Embraer aircraft in the year. Scheduled
     and other debt and capital lease payments in Quarter 4 2006 and in 2006
     amounted to $71 million and $278 million, respectively.

     In 2006, ACE disposed of 4.5 million shares of its holding in US Airways.
     The net proceeds from the sale transactions amounted to approximately
     $232 million.

     Additions to capital assets totaled $228 million in Quarter 4 2006 and
     $920 million in 2006. These additions included $89 million related to the
     purchase of three Embraer aircraft in Quarter 4 2006 and $481 million
     related to 16 Embraer aircraft in 2006. Other additions to capital assets
     in Quarter 4 2006 and in 2006 included $50 million and $148 million,
     respectively, related to the aircraft interior refurbishment program and
     to the installation of an in-flight entertainment system on Jazz CRJ-705
     aircraft. In addition, pre-delivery payments made on Boeing aircraft
     amounted to $44 million 2006.


--------------------------------------------------------------------------------
                                      21
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     9.6. Capital Expenditures

     The table below provides projections for planned and committed
     expenditures, net of financing, for ACE's reportable segments for the
     years 2007 through to 2011.

<TABLE>
<CAPTION>
----------------------------------------------- ------------ ------------ ------------ ----------- -----------
Projected planned and committed
capital expenditures, net of financing (1)             2007         2008         2009        2010        2011
----------------------------------------------- ------------ ------------ ------------ ----------- -----------
<S>                                             <C>          <C>          <C>          <C>         <C>
Air Canada Services
Projected planned and committed expenditures       $  2,390     $  1,751      $   606    $  1,081    $  1,022

Projected planned and committed financing            (1,533)      (1,293)        (302)       (834)       (732)
----------------------------------------------- ------------ ------------ ------------ ----------- -----------
Air Canada Services, net (2)                            857          458          304         247         290
Jazz                                                     27           28           23          23          23
Aeroplan                                                 20           20           20          20          20
ACTS                                                     71           44           35          27          27
----------------------------------------------- ------------ ------------ ------------ ----------- -----------
                                                        975          550          382         317         360
Inter-company eliminations                             (92)          (19)           -           -           -
----------------------------------------------- ------------ ------------ ------------ ----------- -----------
Consolidated total                                      883          531          382         317         360
----------------------------------------------- ------------ ------------ ------------ ----------- -----------
</TABLE>

(1)  The dollar amounts reflected above do not include obligations pertaining
     to day-to-day operations. US dollar amounts are converted using the
     December 31, 2006 noon day rate of $1.1653. Final aircraft delivery
     prices include estimated escalation and, where applicable, deferred price
     delivery payment interest calculated based on the 90-day USD LIBOR rate
     at December 31, 2006.

(2)  The projected financing amounts include loan commitments obtained as at
     December 31, 2006.

     Air Canada Services
     In 2004, Air Canada signed definitive purchase agreements with Embraer -
     Empresa Brasileira de Aeronautica S.A. ("Embraer") for the acquisition of
     regional jet aircraft.

     The agreement with Embraer covers firm orders for 15 Embraer 175 series
     aircraft as well as 45 Embraer 190 series aircraft. Deliveries of the 15
     Embraer 175 series aircraft commenced in July 2005 and the last aircraft
     was delivered in January 2006. The Embraer 190 series deliveries
     commenced in December 2005. As at December 31, 2006, 18 of the Embraer
     190 series firm aircraft orders have been completed and the last delivery
     is expected by January 2008. The purchase agreement also contains rights
     to exercise options for up to 60 additional Embraer 190 series aircraft
     as well as providing for conversion rights to other Embraer models. As at
     December 31, 2006, 49 options remain exercisable.

     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
     aircraft. The order for the 36 Boeing 777 aircraft is comprised of firm
     orders for 18 aircraft plus purchase rights for 18 more, in a yet-to-be
     determined mix of the 777 family's newest models. As of December 31,
     2006, Air Canada has confirmed with Boeing the delivery of eight Boeing
     777-300ER aircraft and six Boeing 777-200LR aircraft. Delivery of the
     first Boeing 777 aircraft is scheduled for March 2007.

     Air Canada has signed a 10-year lease for one Boeing 777-300ER from
     International Lease Finance Corporation ("ILFC"), which is scheduled to
     be delivered in May 2007.

     In addition to acquiring new aircraft, Air Canada commenced a major
     refurbishment of the interior of its existing aircraft in April 2006. Air
     Canada has completed the refurbishment of its 16th Airbus A320 and its
     fourth Boeing 767-300 aircraft. The refurbishment for the Airbus A319,
     A321 and A330 aircraft is expected to begin in early 2007. The Embraer
     and Boeing 777 aircraft are being delivered with the new seats and
     entertainment systems already installed. The aircraft refurbishment
     program is scheduled to be completed by the middle of 2008. The capital
     expenditure associated with this program will be amortized over a
     five-year period.


--------------------------------------------------------------------------------
                                      22
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     Aeroplan
     Aeroplan's projected planned and committed expenditures for the years
     2007 through to 2011 mainly relate to software development and technology
     initiatives.

     Jazz
     Jazz's projected planned and committed expenditures for the years 2007
     through to 2011 mainly relate to aircraft betterments, computer and
     information technology, ground equipment and facilities.

     ACTS
     ACTS' projected planned and committed capital expenditures for the years
     2007 through to 2011 mainly relate to information technology projects
     development and investment in plant and equipment.


--------------------------------------------------------------------------------
                                      23
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     9.7. Pension Plan Cash Funding Obligations

     As at December 31, 2006 and based on the January 1, 2006 solvency
     valuation, the table below provides projections for Air Canada's pension
     funding obligations for the years 2007 through to 2011. The final funding
     obligation for 2007 will be determined based on the January 1, 2007
     valuation.

<TABLE>
<CAPTION>
--------------------------------------------------------- --------- -------- ---------- ---------- ------------
($ millions)                                                2007      2008      2009       2010       2011
--------------------------------------------------------- --------- -------- ---------- ---------- ------------
<S>                                                       <C>        <C>       <C>        <C>       <C>
Air Canada Services
Past service costs for domestic registered plans             248       242       245        246        246
Current  service  costs for  domestic  registered plans      155       160       165        170        175
Other pension arrangements(1)                                 86        86        65         69         74
--------------------------------------------------------- --------- -------- ---------- ---------- ------------
Total                                                        489       488       475        485        495
--------------------------------------------------------- --------- -------- ---------- ---------- ------------
</TABLE>

(1)  Other pension arrangements include retirement compensation arrangements,
     supplemental plans and international plans.

     The above pension funding requirements are in respect of all Air Canada's
     pension arrangements. For domestic registered pension plans, the funding
     requirements are based on the minimum past service contributions
     disclosed in the January 1, 2006 valuations plus a projection of the
     current service contributions.

     The deficit, on an accounting basis, at December 31, 2006 for pension
     benefits was $1.4 billion compared to $2.5 billion at December 31, 2005.
     The decrease in the accounting deficit was mainly the result of a return
     on plan assets of approximately 13.8 percent during 2006 and funding of
     past service employer contributions of $261 million. The solvency deficit
     on the registered pension plans at January 1, 2007 is also expected to
     decrease significantly compared to January 1, 2006 and, as a result,
     employer contributions determined in accordance with regulations are
     expected to decline by $90 million in 2007 and $120 million each year
     thereafter.

     The table below provides projections for Jazz's pension funding
     obligations from 2006 to 2011:

<TABLE>
<CAPTION>
--------------------------------------------------------- --------- -------- ---------- ---------- ------------
($ millions)                                                2007      2008      2009       2010       2011
--------------------------------------------------------- --------- -------- ---------- ---------- ------------
<S>                                                        <C>       <C>      <C>        <C>       <C>
Jazz
Past service costs for domestic registered plans               2         2         2          2          -
Current  service  costs for  domestic  registered plans        7         7         7          7          7
Other pension arrangements                                     6         6         6          6          7
--------------------------------------------------------- --------- -------- ---------- ---------- ------------
Total                                                         15        15        15         15         14
--------------------------------------------------------- --------- -------- ---------- ---------- ------------
</TABLE>


     The above pension funding requirements are in respect to Jazz's pension
     arrangements. The funding requirements are based on the minimum past
     service contributions from the January 1, 2006 actuarial valuations plus
     a projection of the current plan assets and liabilities over the
     projection period.


--------------------------------------------------------------------------------
                                      24
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]

     9.8. Air Canada Fuel Risk Management

     Aircraft fuel is a major expense in the airline industry. During the
     period from January 1, 2006 to December 31, 2006, the price of Western
     Texas Intermediate ("WTI") crude oil ranged from a low of US$55.86 to a
     high of US$76.95. 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 2006 volumes and US exchange rates, Air Canada
     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
     2006 fuel expense by approximately C$27 million or US$24 million
     (excluding the impact of fuel surcharges and fuel hedging).

     In order to manage the airline's exposure to the volatility of jet fuel
     prices, Air Canada has hedged a portion of its 2007 anticipated jet fuel
     requirements using mostly swap and collar option structures. The swap
     structure allows Air Canada to fix jet fuel price at a specific level,
     whereas the collar option structure creates a ceiling and a floor price,
     allowing Air Canada to protect itself against prices above the ceiling
     but exposing Air Canada to the floor if the price falls below the floor.
     As at December 31, 2006, Air Canada had 39 percent of its fuel
     requirement for 2007 hedged at prices that can fluctuate between an
     average of US$74 to US$85 per barrel for its heating oil-based contracts,
     an average of US$58 to US$69 per barrel for its WTI crude oil-based
     contracts and an average of US$81 to US$85 for jet-fuel based contracts.
     Since December 31, 2006, Air Canada has entered into new hedging
     positions, using collar option structures, which have added 5 percent
     coverage to 2007 increasing the total hedged volume for 2007 to 44
     percent, as well as an additional 1 percent coverage to 2008. As at
     February 14, 2007, for 2007, Air Canada has hedged its projected fuel
     requirements as follows: 57 percent for Quarter 1, 44 percent for Quarter
     2, 36 percent for Quarter 3 and 39 percent for Quarter 4.

     For information on fuel hedging gains and losses recognized in fuel
     expense in 2006 and gains and losses recognized in "other" non-operating
     expense for derivative instruments that do not qualify for fuel hedging
     accounting, refer to section 11 of this MD&A.


--------------------------------------------------------------------------------
                                      25
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     10.  Future Accounting Standard Changes

     The Accounting Standards Board has issued three new standards dealing
     with financial instruments that the Corporation will be required to adopt
     in future years:

     Financial Instruments -- Recognition and Measurement;

     Hedges;

     Comprehensive Income.

     The key principles under these standards are that all financial
     instruments, including derivatives, are to be included on a company's
     balance sheet and measured, either at their fair values or, in limited
     circumstances when fair value may not be considered most relevant, at
     cost or amortized cost. Financial instruments intended to be
     held-to-maturity should be measured at amortized cost. Existing
     requirements for hedge accounting are extended to specify how hedge
     accounting should be performed. Also, a new location for recognizing
     certain unrealized gains and losses -- other comprehensive income -- has
     been introduced. This provides the ability for certain unrealized gains
     and losses arising from changes in fair value to be temporarily recorded
     outside the income statement but in a transparent manner. The new
     standards are effective for the Corporation beginning January 1, 2007.
     The standards do not permit restatement of prior years' financial
     statements however the standards have detailed transition provisions. The
     Corporation has evaluated the consequences of the new standards, which
     may have a material impact on the Corporation's financial statements.
     Refer to Note 16 to ACE's consolidated financial statements for
     additional disclosure on the impact of the new standards.


--------------------------------------------------------------------------------
                                      26
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     11.  Off-Balance Sheet Arrangements

     Refer to Notes 16 and 17 to ACE's consolidated financial statements for
     additional information regarding derivative financial instruments and
     guarantees of the Corporation. The following is summary of the more
     significant off-balance sheet arrangements.

     Guarantees
     Performance Obligations Relating to Aircraft Leasing Agreements
     With respect to 45 aircraft leases, the difference between the amended
     lease payments from the Companies' Creditors Arrangement Act ("CCAA")
     restructuring arrangements and amounts due under the original lease
     contracts will be forgiven at the expiry date of the leases if no
     material defaults have occurred. If a material default occurs, this
     difference plus interest will become due and payable by Air Canada and
     all future rent will be based on the original contracted rates. Rent
     expense is being recorded on the renegotiated lease agreements and any
     liability would be recorded only at the time Management believes a
     material default under the leases is likely to occur.

     Derivative Instruments
     Under its risk management policy, the Corporation manages its exposure to
     changes in interest rates, foreign exchange rates and jet fuel prices
     through the use of various derivative financial instruments. The
     Corporation uses derivative financial instruments only for risk
     management purposes, not for generating trading profit.

     Interest Rate Risk Management
     The Corporation from time to time enters into interest rate swaps to
     manage the risks associated with interest rate movement on US dollar. and
     Canadian dollar floating rate debt and investments, including anticipated
     debt transactions.

     During 2006, Air Canada entered into 19 interest rate swaps with a
     notional value of US$414 million to receive floating rates and pay a
     weighted average fixed rate of 5.81 percent for the debt to be arranged
     in relation to the financing of Embraer 190 aircraft between June 2006
     and November 2007. The swaps have 15-year terms from the expected
     delivery date of the aircraft and their maturities range from June 2021
     to December 2022. Air Canada intends on settling the interest rate swaps
     upon delivery of the related aircraft. Before December 31, 2006, seven of
     these swaps were settled at a net loss of $4 million. As at December 31,
     2006, the fair value of the remaining 12 swaps was $13 million in favour
     of the counterparty and is recorded in "other long-term liabilities" on
     Air Canada's combined consolidated statement of financial position. The
     Air Canada Services segment has recognized a net loss of $17 million in
     "other" non-operating expense on Air Canada's consolidated statement of
     operations since inception of these swaps in the second quarter of 2006.

     During 2006, Jazz entered into interest rate swaps to hedge its exposure
     to changes in interest rates on its outstanding senior secured credit
     facility. The interest rate swap is with third parties with a notional
     value of $115 million, which has effectively resulted in a fixed interest
     rate of 7.09 percent for the term of the senior secured credit facility
     until February 2, 2009. Effective February 2, 2006, Jazz is applying
     hedge accounting to these financial instruments and no amount is recorded
     in Air Canada's combined consolidated financial statements. As at
     December 31, 2006, the fair value of these swaps was less than $1 million
     in favour of the counterparty.

     Air Canada has interest rate swaps with a term to January 2024 and
     convert-lease payments related to two Boeing 767 aircraft leases
     consolidated under AcG-15, from fixed to floating rates. As at December
     31, 2006, these two swaps have a fair value of $4 million in favour of
     Air Canada ($7 million in favour of Air Canada as at December 31, 2005).


--------------------------------------------------------------------------------
                                      27
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     Foreign Exchange Risk Management
     Foreign exchange risk exposure is a common event to an international
     business such as Air Canada. To manage this risk exposure, Air Canada
     enters into various foreign currency hedging structures. These hedging
     structures provide protection to Air Canada in the form of reduced risk
     and volatility with respect to movements in the foreign exchange markets.
     At December 31, 2006, Air Canada had entered into foreign currency
     forward contracts and option agreements on US$503 million or
     approximately 31 percent of its projected net 2007 US dollar shortfall
     with the majority of hedges occurring in the first half of 2007. Based on
     foreign currency prices at December 31, 2006, the average price of the
     hedge portfolio is $1.1035. The fair value of the foreign currency
     contracts as at December 31, 2006 was $25 million in favour of Air Canada
     ($1 million in favour of third parties as at December 31, 2005 on
     currency forward contracts and option agreements on US$521 million).
     These derivative instruments have not been designated as hedges for
     accounting purposes. The unrealized gain has been recorded in "foreign
     exchange gain (loss)".

     Air Canada has entered into currency swap agreements for 16 Bombardier
     regional jet operating leases until lease terminations between 2007 and
     2011. Currency swaps for five Bombardier regional jet operating leases,
     with third parties, were put in place on the inception of the leases and
     have a fair value at December 31, 2006 of $10 million in favour of third
     parties ($13 million in favour of third parties as at December 31, 2005),
     taking into account foreign exchange rates in effect at that time.
     Currency swaps for 11 Bombardier regional jet operating leases with third
     parties have a fair value as at December 31, 2006 of $3 million in favour
     of Air Canada ($3 million in favour of Air Canada as at December 31,
     2005). These swaps have not been designated as hedges for hedge
     accounting purposes. The unrealized changes in fair value have been
     recorded in "foreign exchange gain (loss)".

     Fuel Price Risk Management
     Air Canada enters into contracts with financial intermediaries to manage
     its exposure to jet fuel price volatility. As at December 31, 2006, Air
     Canada had collar option and swap structures in place to hedge a portion
     of its anticipated jet fuel requirements over the 2007 and 2008 period.
     Since jet fuel is not traded on an organized futures exchange, liquidity
     for hedging this commodity is mostly limited to a shorter time horizon.
     Crude oil and heating oil contracts are effective commodities for hedging
     jet fuel and Air Canada mainly uses these commodities for medium to
     longer term hedges.

     Hedge accounting was applied prospectively from October 1, 2005. Under
     hedge accounting, gains or losses on fuel hedging contracts are
     recognized in earnings as a component of aircraft fuel expense when the
     underlying jet fuel being hedged is consumed. Prior to the commencement
     of Air Canada's hedge accounting being applied, an unrealized gain of $2
     million was recorded in "other" non-operating expense.

     In 2006, the Air Canada Services segment recognized a net loss of $43
     million as a component of fuel expense on its combined consolidated
     statement of operations (net loss of $3 million in 2005) on the
     settlement of matured contracts and amortization of deferred costs. The
     fair value of Air Canada's fuel hedging contracts as at December 31, 2006
     was $24 million (US$21 million) in favour of counterparties ($3 million
     in favour of the counterparties as at December 31, 2005).

     During 2006, Air Canada entered into two three-way collar option
     structures which are composed of one short put option, one long call
     option and one short call option. This structure creates a ceiling on the
     potential benefit to be realized by Air Canada if commodity prices
     increase above the threshold of the short call strike price. Due to the
     ceiling in these derivative instruments, this type of derivative does not
     qualify as a hedging instrument under GAAP. As at December 31, 2006, one
     of the three-way collar option structures remains outstanding. The fair
     value of these derivative instruments was $1 million in favour of the
     counterparty and is recorded in "accounts payable and accrued
     liabilities" on Air Canada's consolidated statement of financial
     position.


--------------------------------------------------------------------------------
                                      28
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     During 2005, Air Canada de-designated one contract previously under hedge
     accounting that was combined into a new net-written option. The
     net-written option has a fair value of less than zero at the time of
     inception and so it does not qualify as a hedging instrument under GAAP.
     As at December 31, 2006, the fair value of the net written option was $2
     million in favour of the counterparty (less than $1 million in favour of
     the counterparty as at December 31, 2005) and is recorded in "accounts
     payable and accrued liabilities" on Air Canada's consolidated statement
     of financial position.

     Concentration of Credit Risk
     The Corporation does not believe it is subject to any significant
     concentration of credit risk. Cash and short-term investments are in
     place with major financial institutions, Canadian governments and major
     corporations. Accounts receivable are generally the result of sales of
     tickets to individuals through geographically dispersed travel agents,
     corporate outlets or other airlines, often through the use of major
     credit cards.


--------------------------------------------------------------------------------
                                      29
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]



     12.  Changes in Accounting Policies

     On July 6, 2006, the Emerging Issues Committee of the Accounting
     Standards Board of Canada issued EIC-162 - Stock-based compensation for
     employees eligible to retire before the vesting date ("EIC-162"). EIC-162
     requires that the compensation cost for a stock option award attributable
     to an employee who is eligible to retire at the grant date be recognized
     on the grant date, if the employee can retire from the entity at any
     point and the award's exercisability does not depend on continued
     service. It further requires that the compensation cost for a stock
     option award attributable to an employee who will become eligible to
     retire during the vesting period be recognized over the period from the
     grant date to the date the employee becomes eligible to retire.

     Prior to the adoption of EIC-162, the fair value of stock options granted
     was recognized as a charge to salaries and wages expense on a
     straight-line basis over the applicable vesting period, without regard to
     when an employee was eligible to retire. EIC-162 is applicable to ACE as
     the terms of ACE's stock option plan specify that upon the retirement of
     the employee, options granted may be exercised as the rights to exercise
     accrue.

     ACE adopted EIC-162 during 2006 with restatement of prior periods. The
     impact on ACE's financial statements of adopting EIC-162 is a charge to
     retained earnings of $16 million as at January 1, 2005 and $13 million as
     at January 1, 2006, a decrease to salaries, wages and benefits expense of
     $3 million for the year ended December 31, 2005 offset against
     Contributed Surplus. The basic and diluted earnings per share increased
     by $0.03 for the year ended December 31, 2005, as a result of adopting
     EIC-162.

     The fair value of stock options granted to the Corporation's employees is
     recognized as compensation expense and a credit to contributed surplus
     within ACE's consolidated financial statements on a straight-line basis
     over the applicable vesting period. For a stock option award attributable
     to an employee who is eligible to retire at the grant date, the fair
     value of the stock option award is expensed on the grant date. For a
     stock option award attributable to an employee who will become eligible
     to retire during the vesting period, the fair value of the stock option
     award is recognized over the period from the grant date to the date the
     employee becomes eligible to retire. The amount of compensation cost
     recognized at any date at least equals the value of the vested portion of
     the options at that date.


--------------------------------------------------------------------------------
                                      30
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     13.  Critical Accounting Estimates

     Critical accounting estimates are those that are most important to the
     portrayal of the Corporation's financial condition and results of
     operations. They require management's most difficult, subjective or
     complex judgments, often as a result of the need to make estimates about
     the effect of matters that are inherently uncertain. Actual results could
     differ from those estimates under different assumptions or conditions.

     The Corporation has identified the following areas that contain critical
     accounting estimates utilized in the preparation of its financial
     statements:

     Passenger and Cargo Revenues
     Air Canada passenger and cargo advance sales are deferred and included in
     current liabilities. Advance sales include the proceeds from the sale of
     flight tickets to Aeroplan which provides loyalty program services to Air
     Canada and purchase seats from Air Canada under the CPSA. Passenger and
     cargo revenues are recognized when the transportation is provided, except
     for revenue on unlimited flight passes which is recognized on a
     straight-line basis over the period during which the travel pass is
     valid. Air Canada has formed alliances with other airlines encompassing
     loyalty program participation, code sharing and coordination of services
     including reservations, baggage handling and flight schedules. Revenues
     are allocated based upon formulas specified in the agreements and are
     recognized as transportation is provided.

     Air Canada performs regular evaluations on the deferred revenue liability
     which may result in adjustments being recognized as revenue. Due to the
     complex pricing structures, the complex nature of interline, and other
     commercial agreements used throughout the industry, historical experience
     over a period of many years, and other factors including refunds,
     exchanges and unused tickets, certain relatively small amounts are
     recognized as revenue based on estimates. Events and circumstances may
     result in actual results that are different from estimates, however,
     these differences have historically not been material.

     Employee Future Benefits
     Air Canada maintains several defined benefit and defined contribution
     plans providing pension, other retirement and post-employment benefits to
     its employees, including those employees of Air Canada who are
     contractually assigned to ACTS and Aeroplan. These employees are members
     of Air Canada's sponsored defined benefit pension plans and also
     participate in Air Canada's sponsored health, life and disability future
     benefit plans. Air Canada's combined consolidated financial statements
     include all of the assets and liabilities of all the Air Canada sponsored
     plans.

     Management makes a number of assumptions in the calculation of both the
     accrued benefit obligation as well as the pension costs:

-------------------------------------------------- -------------- --------------
                                                    December 31,   December 31,
                                                            2006           2005
-------------------------------------------------- -------------- --------------
Weighted average assumptions used to
  determine accrued benefit obligation
Discount rate as at period-end                             5.00%          5.00%
Rate of compensation increase (1)                          2.50%          4.00%

Weighted average assumptions used to
  determine pension costs
Discount rate as at period-end                             5.00%          5.75%
Expected long-term rate of return on plan assets           7.50%          7.50%
Rate of compensation increase (2)                          4.00%          4.00%
-------------------------------------------------- -------------- --------------

(1)  As a result of the pay awards during 2006, a rate of compensation
     increase of 1.75 percent was used for the years 2006 to 2008 in
     determining the net benefit obligation for the pension plan and 2.5
     percent for the remaining years.

(2)  A rate of compensation increase of 0 percent in 2005 and 2 percent in
     2006 was used in determining the net benefit pension expense and 4
     percent for the remaining years.


--------------------------------------------------------------------------------
                                      31
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     Discount Rate
     The discount rate used to determine the pension obligation was determined
     by reference to market interest rates on corporate bonds rated "AA" or
     better with cash flows that approximately match the timing and amount of
     expected benefit payments.

     Expected Return on Assets Assumption
     Air Canada's expected long-term rate of return on assets assumption is
     selected based on the facts and circumstances that exist as of the
     measurement date and the specific portfolio mix of plan assets.
     Management, in conjunction with its actuaries, reviews anticipated future
     long-term performance of individual asset categories and considers the
     asset allocation strategy adopted by Air Canada, including the longer
     duration in its bond portfolio in comparison to other pension plans.
     These factors are used to determine the average rate of expected return
     on the funds invested to provide for the pension plan benefits. While the
     review considers recent fund performance and historical returns, the
     assumption is primarily a long-term, prospective rate.

     Asset Allocation
     The composition of the Domestic Registered Plan assets and the target
     allocation consists of the following:

 ------------------------------ ---------------- -------------- ----------------
                                   November 30     November 30           Target
                                          2005            2006       allocation
------------------------------ ----------------  -------------- ----------------
Equity                                   62.3%           59.1%            59.0%
Bonds and Mortgages                      32.1%           34.7%            41.0%
Real Estate                               0.1%            0.0%             0.0%
Short-term and Other                      5.5%            6.2%             0.0%
                               ----------------  -------------- ----------------
Total                                   100.0%          100.0%           100.0%
------------------------------ ----------------  -------------- ----------------

     Domestic Registered Plans
     For the Domestic Registered Plans, the investments conform to the
     Statement of Investment Policy and Objectives of the Air Canada Pension
     Master Trust Fund (Fund). The investment return objective of the Fund is
     to achieve a total annualized rate of return that exceeds inflation by at
     least 3.75 percent over the long term.

     In addition to the broad asset allocation, as summarized in the asset
     allocation section above, the following policies apply to individual
     asset classes:

     o    Equity investments can include convertible securities and are
          required to be diversified among industries and economic sectors.
          Foreign equities can comprise 37 percent to 43 percent of the total
          market value of the trust. Limitations are placed on the overall
          allocation to any individual security at both cost and market value.
          Derivatives are permitted to the extent they are not used for
          speculative purposes or to create leverage.

     o    Fixed income investments are oriented toward risk averse, long-term,
          investment grade securities rated "A" or higher. With the exception
          of Government of Canada securities, or a province thereof, in which
          the plan may invest the entire fixed income allocation, fixed income
          investments are required to be diversified among individual
          securities and sectors. The target return is comprised of 40 percent
          of the total return of the Scotia Capital Universe Bond Index and 60
          percent of the total return of the Scotia Capital Long Term Bond
          Index.

     Similar investment policies are established for the other pension plans
     sponsored by Air Canada.


--------------------------------------------------------------------------------
                                      32
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     Best Estimate of Employer Contributions
     Based upon an agreement, subject to approval of the Office of the
     Superintendent of Financial Institutions (Canada) ("OSFI"), between Air
     Canada and representatives of the unionized and non-unionized employees
     and retirees with respect to the funding of the Domestic Registered
     Plans, the actual 2005 and 2006 contributions are as follows:
<TABLE>
<CAPTION>

------------------------------------------------------------------------------ -------------
                                                                2005              2006
($ millions)                                                 Contributions     Contributions
------------------------------------------------------------------------------ -------------
<S>                                                                <C>              <C>
Past service cost for registered pension plans                     99               224
Current service cost for registered pension plans                 127               140
Other pension arrangements (1)                                     52                83
--------------------------------------------------------------------------------------------
Air Canada Services(2)                                            278               447
--------------------------------------------------------------------------------------------
Jazz                                                                6                 8
--------------------------------------------------------------------------------------------
Consolidated total                                                284               455
--------------------------------------------------------------------------------------------
</TABLE>

(1)  Other pension arrangements include retirement compensation
     arrangements, supplemental plans and international plans.

(2)  Includes obligations relating to employees who have been assigned to
     related parties.

     Sensitivity Analysis
     Sensitivity analysis on the 2006 pension expense based on different
     actuarial assumptions with respect to discount rate and expected return
     on plan assets is as follows:

                                                           0.25 percentage point
Impact on 2006 pension expense in $millions                Decrease     Increase
--------------------------------------------------------------------------------

Discount rate on obligation assumption                          29         (19)
Long-term rate of return on plan assets assumption              25         (25)
--------------------------------------------------------------------------------

     Assumed health care cost trend rates have a significant effect on the
     amounts reported for the health care plans. A 9.75 percent annual rate of
     increase in the per capita cost of covered health care benefits was
     assumed for 2006 (10 percent was assumed for 2005). The rate is assumed
     to decrease gradually to 5 percent by 2013. A one percentage point
     increase in assumed health care trend rates would have increased the
     service and interest costs by $1 million and the obligation by $17
     million. A one percentage point decrease in assumed health care trend
     rates would have decreased the service and interest costs by $1 million
     and the obligation by $16 million.

     Income Taxes
     The Corporation utilizes the liability method of accounting for income
     taxes under which future income tax assets and liabilities are recognized
     for the estimated future income tax consequences attributable to
     differences between the financial statement carrying value amount and the
     tax basis of assets and liabilities. Management uses judgement and
     estimates in determining the appropriate rates and amounts in recording
     future taxes, giving consideration to timing and probability. Actual
     taxes could significantly vary from these estimates as a result of future
     events, including changes in income tax law or the outcome of reviews by
     tax authorities and related appeals. The resolution of these
     uncertainties and the associated final taxes may result in adjustment to
     the Corporation's tax assets and tax liabilities.

     Future income tax assets are recognized to the extent that realization is
     considered more likely than not. The Corporation considers past results,
     current trends and outlooks for future years in assessing realization of
     income tax assets. In 2006, the Corporation has determined that it is
     more likely than not that $575 million of future income tax assets will
     be realized through a combination of future reversals of temporary
     differences and taxable income. A change in assessment of these factors
     could affect the future tax asset. Refer to Note 8 to ACE's consolidated
     financial statements for additional information.


--------------------------------------------------------------------------------
                                      33
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     Impairment of Long-Lived Assets
     Long-lived assets are tested for impairment whenever circumstances
     indicate that the carrying value may not be recoverable. When events or
     circumstances indicate that the carrying value of long-lived assets,
     other than indefinite life intangibles, are not recoverable, the
     long-lived assets are tested for impairment by comparing the estimate of
     future expected cash flows to the carrying amount of the assets or groups
     of assets. If the carrying value of long-lived assets is not recoverable
     from future expected cash flows, any loss is measured as the amount by
     which the asset's carrying value exceeds fair value. Recoverability is
     assessed relative to undiscounted cash flows from the direct use and
     disposition of the asset or group of assets.

     Property and Equipment
     Property and equipment is originally recorded at cost. Property under
     capital leases and the related obligation for future lease payments are
     initially recorded at an amount equal to the lesser of fair value of the
     property or equipment and the present value of those lease payments. On
     the application of fresh start accounting effective September 30, 2004,
     the cost of the Corporation's property and equipment was adjusted to fair
     value. In addition, the estimated useful lives of certain assets were
     adjusted, including buildings where useful lives were extended to periods
     not exceeding 50 years.

     Property and equipment are depreciated to estimated residual values based
     on the straight-line method over their estimated service lives. Property
     and equipment under capital leases and variable interest entities are
     depreciated to estimated residual values over the life of the lease. The
     Corporation's aircraft and flight equipment are depreciated over 20 to 30
     years, with 10 to 20 percent estimated residual values. Aircraft
     reconfiguration costs are amortized over 3 years. Betterments to owned
     aircraft are capitalized and amortized over the remaining service life of
     the aircraft. Betterments to aircraft on operating leases are amortized
     over the term of the lease.

     Buildings are depreciated over their useful lives not exceeding 40 to 50
     years on a straight line basis. An exception to this is where the useful
     life of the building is greater than the term of the land lease. In these
     circumstances, the building is depreciated over the life of the lease.
     Leasehold improvements are amortized over the lesser of the lease term or
     5 years. Ground and other equipment is depreciated over 3 to 25 years.

     Aircraft depreciable life is determined through economic analysis, a
     review of existing fleet plans and comparisons to other airlines
     operating similar fleet types. Residual values are estimated based on the
     Corporation's historical experience with regard to the sale of aircraft
     and spare parts, as well as forward-looking valuations prepared by
     independent third parties.

     Intangible Assets
     The identifiable intangible assets of the Corporation were recorded at
     their estimated fair values at September 30, 2004. Indefinite-life
     intangible assets are subject to impairment tests under Canadian GAAP on
     an annual basis or when events or circumstances indicate a potential
     impairment. If the carrying value of such assets exceeds the fair values,
     the assets are written down to fair value.

     Fair value under Canadian GAAP is defined as "the amount of the
     consideration that would be agreed upon in an arm's length transaction
     between knowledgeable, willing parties who are under no compulsion to
     act". Assessing the fair value of intangible assets requires significant
     management estimates on future cash flows to be generated by the assets,
     including the estimated useful life of the assets.


--------------------------------------------------------------------------------
                                      34
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     Loyalty Program
     The Corporation's loyalty program, Aeroplan, awards mileage credits to
     passengers who fly on Air Canada, Jazz, Star Alliance carriers and
     certain other airlines that participate in the program. Additionally,
     Aeroplan issues miles to members for the purchase of goods and services
     from participating non-airline partners. The outstanding miles may be
     redeemed for travel or other goods and services.

     Based on historical experience and current program policies, the
     Corporation estimates the percentage of miles that are not expected to be
     redeemed, defined as breakage. Breakage is estimated by the Corporation
     based on the terms and conditions of membership and historical
     accumulation and redemption patterns as adjusted for changes to any terms
     and conditions that affect members' redemption practices. The estimated
     breakage factor is 17 percent. Changes in the breakage factor are
     accounted for as follows: in the period of change, the deferred revenue
     balance is adjusted as if the revised estimate had been used in prior
     periods with the offsetting amount recorded as an adjustment to "other"
     revenue; and for subsequent periods, the revised estimate is used. The
     amount allocated to breakage is recognized in "other" revenue on a
     straight- line basis over a period of 30 months, which is the estimated
     average life of a mile.

     The current portion of Aeroplan loyalty program deferred revenues of $857
     million (2005 - $680 million) is based on Management's estimate as to the
     portion of the liabilities that will be redeemed in the next twelve
     months. The remainder of the liabilities is carried in Aeroplan deferred
     revenues.

     At December 31, 2006, the Corporation's estimated outstanding number of
     miles was approximately 190 billion, as compared to 183 billion at the
     end of the prior year. Management has recorded a liability of $1,763
     million for the estimated number of miles expected to be redeemed and the
     unamortized portion of breakage. A change to the estimate of miles
     expected to be redeemed could have a significant impact on the liability
     in the period of change and in future periods.

     In 2006, 58 billion miles (2005 - 52 billion) were redeemed principally
     for travel. These redemptions represented approximately 10 percent of Air
     Canada's total revenue passenger miles in 2006 (2005 - 10 percent).
     Inventory controls over seat allocations keeps displacement of revenue
     passengers to a minimum. Total miles redeemed for travel on Air Canada in
     2006, including awards and upgrades, represented 73 percent of the total
     miles redeemed, of which 63 percent were used for travel within the US
     and Canada. In addition to the awards issued for travel on Air Canada,
     approximately 18 percent of the total miles redeemed in 2006 were used
     for travel on partner airlines and 10 percent were used for goods and
     services from non-airline partners.

     A change to either the redemption patterns of the miles or the award
     options provided could have a significant impact on the Corporation's
     revenues in the year of change as well as in future years.


--------------------------------------------------------------------------------
                                      35
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     14.  Risk Factors

     The risks described herein may not be the only risks faced by the
     Corporation. Other risks which the Corporation is not aware of or which
     the Corporation currently deems to be immaterial may surface and have a
     material adverse impact on the Corporation's business, results from
     operations and financial condition.

     Risks Related to 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.

     Proposed Changes to the Canadian Federal Income Tax Treatment of Income
     Trusts

     On October 31, 2006, the Minister of Finance (Canada) announced new tax
     proposals concerning the taxation of income trusts and other flow-through
     entities and tabled a Notice of ways and means motion to amend the Tax
     Act in that regard (the "October Proposal"). The October Proposal was
     followed on December 21, 2006 by the release of draft legislation by the
     Department of Finance (Canada) (the "draft legislation" and, together
     with the October Proposal, the "2006 Proposed Amendments") concerning the
     distribution tax on income trusts and partnerships. The 2006 Proposed
     Amendments, if enacted as currently drafted, will subject Aeroplan Income
     Fund and Jazz Air Income Fund to trust level taxation as of January 1,
     2011, which will reduce the amount of cash available for distributions by
     income trusts. Loss of the benefit of the deferred application of the new
     tax regime until 2011 could have a material adverse effect on the value
     of ACE's interest in Aeroplan and Jazz.

     Dependence upon Principal Investments

     ACE is an investment holding company of various aviation interests and
     most of ACE's assets are its ownership interest in Air Canada, Aeroplan,
     Jazz and ACTS. ACE's cash flows and ability to distribute earnings to its
     shareholders are dependent upon the ability of these entities to 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.


--------------------------------------------------------------------------------
                                      36
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     Risks Related to the ACE Segments

     Air Canada Services

     Operating Results

     In the recent 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 of arrangement. For the years ended
     December 31, 2003, 2002 and 2001, Air Canada incurred operating losses
     before reorganization and restructuring items and non-recurring labour
     expenses of $684 million, $192 million and $731 million, respectively.
     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, 2006 and 2005, Air Canada realized operating income of $259
     million and $318 million, respectively. Prior to September 30, 2004, the
     operations of Air Canada included the operations of various entities
     included in the Air Canada Services segment, as well as those of Jazz,
     Aeroplan and ACTS and, as such, those prior results may not be
     comparable. 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 expenses
     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
     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


--------------------------------------------------------------------------------
                                      37
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     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.

     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 have a material adverse effect on 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 lease payments or otherwise 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.

     Fuel Costs

     Fuel costs constituted the largest percentage of the total operating
     costs of Air Canada in 2006. Fuel prices fluctuate widely depending on
     many factors including international market conditions, geopolitical
     events and the Canada/U.S. dollar exchange rate. Air Canada cannot
     accurately predict fuel prices. During 2004, 2005 and 2006, 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 2006 volumes, 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 C$27 million change in 2006 fuel expense for
     Air Canada (excluding any impact of fuel surcharges 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.


--------------------------------------------------------------------------------
                                      38
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     Most of Air Canada's employees are unionized and long-term collective
     agreements were concluded in 2003 and 2004. 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 Alliance(R)
     partners 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.

     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 such authorities
     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 U.S. transborder and international markets
     in which Air Canada operates.

     Canadian low-cost carriers have entered or announced their intention to
     compete in many of Air Canada's key domestic markets and have also
     entered the U.S. transborder market. U.S. carriers currently operate
     routes in Air Canada's transborder market. 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 carriers are successful in entering or continuing
     their expansion into the domestic and the U.S. transborder markets, if
     U.S. carriers were to enter 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 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 may be limited
     by government policies to encourage competition.

     Internet travel websites have enabled consumers to more efficiently find
     lower fare alternatives by providing them with access to more pricing
     information. The increased price awareness of both business and leisure
     travelers as well as the growth in new distribution channels have further
     motivated airlines to price aggressively to gain fare and market share
     advantages.

     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.


--------------------------------------------------------------------------------
                                      39
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     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
     wide-body 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 regional jet or wide-body 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. The new system is expected to be deployed in phases from late 2007
     to early 2008. 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 natural
     disasters, terrorist attacks, telecommunications failures, power
     failures, computer viruses, hackers, 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 have a material
     adverse effect on 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
     control. Any failure or inability of Air Canada to successfully source
     goods


--------------------------------------------------------------------------------
                                      40
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     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, 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 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 Jazz 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 Jazz 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 Jazz 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.

     Equal Pay Litigation

     CUPE, which represents Air Canada's flight attendants, has two complaints
     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 complaints
     date from 1991 and 1992 but have not been investigated on the merits
     because of a legal dispute over whether the three groups work in the same


--------------------------------------------------------------------------------
                                      41
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     "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
     complaints.

     As part of the restructuring under the CCAA, it was agreed that any
     resolution of the complaints would have no retroactive financial impact
     prior to September 30, 2004. It is the view of Air Canada that any
     investigation will show that Air Canada has complied and continues to
     comply with the equal pay provisions of the Canadian Human Rights Act.
     Nonetheless, should these complaints succeed, the accrued liability and
     future costs could be very significant and Air Canada's business, results
     from operations and financial condition could be materially adversely
     affected.

     Star Alliance(R)

     The strategic and commercial arrangements with Star Alliance(R) members
     provide Air Canada with important benefits, including codesharing,
     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 Alliance(R) or otherwise fail to meet its
     obligations thereunder, Air Canada's business, results from operations
     and financial condition could be materially adversely affected.

     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 or work
     stoppages or strikes by 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 U.S. dollars and is affected by fluctuations in the
     Canada/U.S. dollar exchange rate. Management estimates that during 2006,
     a $0.01 increase in the Canada/U.S. dollar exchange rate (i.e., $1.13 to
     $1.14 per U.S. dollar) would have had an estimated $16 million
     unfavourable impact on operating income and an estimated $48 million
     unfavourable impact on pre-tax income. Conversely, an opposite change in
     the exchange rate would have had the opposite effect on operating income.
     Air Canada incurs significant expenses in U.S. 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 U.S. dollar would increase the
     costs of Air Canada relative to its U.S. 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. Competition authorities have
     sought or requested information from Air Canada as part of their
     investigations. Air Canada is cooperating fully with these
     investigations. 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. It is
     not possible at this time to predict with any degree of certainty the
     outcome of these proceedings. It is Air Canada's policy to conduct its
     business in full compliance with all applicable competition laws.


--------------------------------------------------------------------------------
                                      42
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     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 them. 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 the Corporation's motion to dismiss ACPA's claim. ACPA has not
     appealed the dismissal of the injunction application but has appealed the
     order dismissing its claim.

     Aeroplan

     Dependency on Top Three Partners

     Aeroplan's top three commercial partners were responsible for 91 percent
     of Gross Billings for the year ended 2006. A decrease in sales of
     Aeroplan miles to any of Aeroplan's significant partners 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 Aeroplan provides 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. Aeroplan
     cannot ensure that its contracts with these, or other, partners will be
     renewed 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 of Aeroplan's partners 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 Aeroplan provides, or a decrease in the accumulation
     of Aeroplan Miles by members could have a material adverse effect on
     Aeroplan's gross billings and revenue.

     Greater than Expected Redemptions for Rewards

     A significant portion of Aeroplan's profitability is based on its
     estimate of the number of Aeroplan Miles that will never be redeemed by
     the member base. The percentage of Aeroplan Miles that are not expected
     to be redeemed is known as "Breakage" in the loyalty industry. Aeroplan's
     current estimate of Breakage is based on two independent studies
     conducted in 2006 on behalf of Aeroplan. Breakage may decrease from the
     current estimate of 17 percent as the Aeroplan program grows and a
     greater diversity of rewards become available. If actual redemptions are
     greater than Aeroplan's current estimates, its 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 still outstanding, amounted to 70.0 billion miles as at December
     31, 2006 and include 46.7 billion Aeroplan Miles. Responsibility to
     provide rewards for these 70.0 billion Aeroplan Miles rests with Aeroplan
     should such Aeroplan Miles ever be redeemed. There can be no assurances
     that a material portion of these estimated Broken Aeroplan Miles will not
     be redeemed.

     Labour Relations

     Call centre agents are currently covered by a collective agreement
     between the National Automobile, Aerospace, Transportation and General
     Workers' Union of Canada ("CAW") and Air Canada in place until 2009.
     While Aeroplan enjoys positive employee relations with the unionized call
     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 the 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 general services


--------------------------------------------------------------------------------
                                      43
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     agreement between Aeroplan and Air Canada 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 call centre agents
     during the six month termination period under the agreement.

     Technological Disruptions and Inability to use Third Party Software

     Aeroplan's ability to protect its data and call centres against damage
     from fire, power loss, telecommunications failure and other disasters is
     critical. In order to provide many of its services, Aeroplan must be able
     to store, retrieve, process and manage large databases and periodically
     expand and upgrade its capabilities. While Aeroplan has in place, and
     continues to invest in, technology security initiatives and disaster
     recovery plans, these measures may not be adequate or implemented
     properly. Any damage to Aeroplan's data and call centres, any failure of
     Aeroplan's telecommunication links that interrupts its operations or any
     impairment of Aeroplan's ability to use software licensed to it could
     adversely affect its ability to meet Aeroplan's partners' and members'
     needs and their confidence in utilizing Aeroplan in the future.

     In addition, proper implementation and operation of technology
     initiatives is fundamental to Aeroplan's ability to operate a profitable
     business. Aeroplan continuously invests in new technology initiatives to
     remain competitive, and its continued ability to invest sufficient
     amounts to enhance technology will affect Aeroplan's ability to operate
     successfully. An inability to invest in technological initiatives would
     have a material adverse effect on Aeroplan's business, results from
     operations and financial condition.

     Leverage and Restrictive Covenants in Current and Future Indebtedness

     The ability of Aeroplan Income Fund, Aeroplan Trust and Aeroplan 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 of Aeroplan Trust and/or Aeroplan
     (including Aeroplan's credit facilities). The degree to which Aeroplan is
     leveraged could have important consequences to the holders of units of
     Aeroplan Income Fund, 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 Aeroplan's 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 of
     Aeroplan's 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 Aeroplan 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.


--------------------------------------------------------------------------------
                                      44
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     Economic Downturn

     Aeroplan derives its revenues principally from the sale of Aeroplan Miles
     to its partners which is, ultimately dependant on consumer spending.
     Cyclical deviations in the economy, a prolonged recession or an increase
     in interest rates could have a material adverse effect on members
     spending with Aeroplan partners or the use of credit or charge cards.
     This could decrease Aeroplan's attractiveness to its commercial partners
     and their participation in the Aeroplan program. These factors,
     individually or in combination, could have a material adverse effect on
     Aeroplan's business, results from operations and financial condition.

     Cash Distributions Are Not Guaranteed and Will Fluctuate with the Business
     Performance

     Although Aeroplan Income Fund intends to distribute cash distributions
     received in respect of Aeroplan Trust units, less expenses and amounts,
     if any, paid by Aeroplan Income Fund 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 units is not
     guaranteed and will depend upon numerous factors, including Aeroplan's
     profitability and its ability to sustain EBITDA margins and the
     fluctuations in Aeroplan's working capital and capital expenditures, all
     of which are susceptible to a number of risks.

     Restrictions on Certain Unitholders and Liquidity of Units

     The declaration of trust of Aeroplan Income Fund imposes various
     restrictions on unitholders. Non-resident unitholders are prohibited from
     beneficially owning more than 49.9 percent 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
     U.S. 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 from certain unitholders and thereby adversely affect the
     liquidity and market value of the units of Aeroplan Income Fund held by
     the public.

     Jazz

     Many of the risk factors in the nature of those described under "Risk
     Factors - Risks related to the ACE Segments - Air Canada Services" and "
     - Risks Related to the Airline Industry" could have a material adverse
     effect on Jazz's business, results from operations and financial
     condition. In addition to those risk factors, the following risk factors
     could also have a material adverse effect on Jazz's business, results
     from operations and financial condition.

     Dependence on Air Canada

     Jazz is directly affected by the financial and operational strength of
     Air Canada and its competitive position. In the event of any decrease in
     the financial or operational strength of Air Canada, Jazz's ability to
     receive payments from Air Canada, and the amount of such payments, may be
     adversely affected.

     Air Canada is the sole marketing agent for Jazz's aircraft capacity
     covered by the Jazz CPA (the "Covered Aircraft") and is solely
     responsible for establishing schedule, routes, frequency and ticket
     prices for Jazz. To the extent Air Canada does not effectively and
     competitively market the routes serviced through Jazz, the utilization of
     the Covered Aircraft could be reduced with the result that Jazz's
     operating margin in dollar terms would be reduced.

     Termination of the Jazz CPA

     Substantially all of Jazz's current revenues are received pursuant to the
     Jazz CPA with Air Canada which currently covers all of Jazz's existing
     operating fleet (except two Dash 8 aircraft). The Jazz CPA will terminate
     on December 31, 2015 and is subject to renewal on terms to be negotiated
     for two additional periods of five years unless either party terminates
     the agreement by providing a notice not less than one


--------------------------------------------------------------------------------
                                      45
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     year prior to December 31, 2015 or the end of the first renewal term. In
     addition, either party is entitled to terminate the Jazz CPA at any time
     upon the occurrence of certain events of default.

     If the Jazz CPA is terminated, Jazz's revenue and earnings would be
     significantly reduced or eliminated unless Jazz is able to enter into
     satisfactory substitute arrangements. There is no assurance that Jazz
     would be able to enter into satisfactory substitute arrangements or that
     such arrangements would be as favourable to Jazz as the Jazz CPA.

     Labour Costs and Labour Relations

     Labour costs constitute the largest percentage of Jazz's total operating
     costs that are borne by Jazz. There can be no assurance that the
     estimates of Jazz's future labour costs will be accurate. If such costs
     exceed Jazz's estimates, Jazz may realize decreased profits or even
     losses under the Jazz CPA. Most of Jazz's employees are unionized and new
     or modified collective bargaining agreements were concluded in 2003 and
     2004. No strikes or lock-outs may lawfully occur until after the
     agreements expire 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 Jazz's service. Any labour disruption or work stoppage could
     adversely affect the ability of Jazz to conduct its operations and have a
     material adverse effect on its ability to carry out its obligations under
     the Jazz CPA and on its business, results from operations and financial
     condition. There can be no assurance that future agreements with
     employees' unions will be on terms in line with Jazz's expectations or
     comparable to agreements entered into by other regional airlines, and any
     future agreements may increase labour costs or otherwise adversely affect
     Jazz.

     If there is a labour disruption or work stoppage by any unionized work
     group of Air Canada which provides services to Jazz under the Jazz CPA,
     Jazz may lose access to such services and there can be no reassurance
     that sufficient replacement services could be obtained or that
     replacement services could be obtained on a cost effective basis.

     Impact of Competition on Air Canada's Need to Utilize Jazz's Services

     The airline industry is highly competitive. Air Canada competes with
     other major carriers as well as low cost carriers on its routes,
     including routes that Jazz flies. Competitors could rapidly enter markets
     Jazz serves for Air Canada, and quickly discount fares, which could
     lessen the economic benefit of Jazz's regional jet operations to Air
     Canada.

     Impact of Increased Competition in the Regional Airline Industry on Jazz's
     Growth Opportunities

     Aside from the limitations under the Jazz CPA and the regulatory
     prohibition on cabotage, Jazz's ability to provide regional air service
     to a major United States airline is limited by existing relationships
     that all of the United States network airlines have with other regional
     operators. Additionally, most of the network airlines are subject to
     scope clause restrictions under their collective bargaining agreements
     with employees that restrict their ability to add new regional jet
     capacity.

     In addition, new competitors may enter the regional airline industry.
     Such new or existing competitors may enter into capacity purchase
     agreements with airlines, including Air Canada, in respect of routes
     currently operated by Jazz. Capacity growth by other regional airlines in
     the regional jet market would lead to significantly greater competition
     and may result in lower rates of return in the regional airline industry.
     Further, many of the network airlines are focused on reducing costs,
     which may also result in lower operating margins in the regional airline
     industry.

     Cash Distributions are not Guaranteed and will Fluctuate with the Business
     Performance

     Although Jazz Air Income Fund intends to distribute the interest received
     in respect of the Jazz Air Trust trust notes and the cash distributions
     received in respect of the Jazz Air Trust trust units, less expenses and
     amounts, if any, paid by Jazz Air Income Fund in connection with the
     redemption of units of Jazz Air Income Fund, there can be no assurance
     regarding the amounts of income to be generated by Jazz's


--------------------------------------------------------------------------------
                                      46
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     business or ultimately distributed to Jazz Air Income Fund. The actual
     amount distributed in respect of the units of Jazz Air Income Fund is not
     guaranteed and depends upon numerous factors, including Jazz's
     profitability and its ability to sustain EBITDA and the fluctuations in
     Jazz's working capital and capital expenditures, all of which are
     susceptible to a number of risks.

     Restrictions on Certain Unitholders and Liquidity of Units

     The declaration of trust of Jazz Air Income Fund imposes various
     restrictions on unitholders of Jazz Air Income Fund. Non-resident
     unitholders are prohibited from beneficially owning more than 49.9
     percent of the units of Jazz Air Income Fund. In addition, the voting
     rights of non-resident unitholders are limited to 25 percent of the
     aggregate number of outstanding votes attaching to all outstanding units
     and 25 percent of the aggregate number of votes that may be cast at any
     meeting of the unitholders. These restrictions may limit (or inhibit the
     exercise of) the rights of certain unitholders of Jazz Air Income Fund,
     including non-residents of Canada and United States persons, to acquire
     units of Jazz Air Income Fund, 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 Jazz Air
     Income Fund from certain investors and thereby adversely affect the
     liquidity and market value of the units of Jazz Air Income Fund held by
     the public.

     ACTS

     Dependency on Air Canada and other Significant Customers

     For the year ended December 31, 2006, Air Canada was responsible for
     approximately 69 percent of ACTS' revenues. A significant decrease in
     revenues generated from Air Canada or from any of ACTS' other major
     customers for any reason, including a decrease in activity, or a decision
     to either utilize another service provider could have a material adverse
     effect on ACTS' revenues. ACTS cannot ensure that it contracts with Air
     Canada and other significant customers will be renewed on similar terms,
     or at all when they expire.

     ACTS is directly affected by the financial and operational strength of
     its major customers, including Air Canada and their competitive position.
     In the event of any decrease in the financial or operational strength of
     these customers, ACTS' ability to receive payments from customers, and
     the amount of such payments, could be adversely affected.


     Dependency on the Airline Industry
     ACTS' business is highly dependent on the performance of the airline
     industry. Economic and regulatory factors and passenger security concerns
     that affect the airline industry also impact ACTS' business. Many of the
     risk factors in the nature of those described under "Risk Factors - Risks
     Related to the Airline Industry" could result in lower demand for ACTS'
     products and services and, as a result, could have a material adverse
     effect on ACTS' business, results from operations and financial
     condition.

     Key Supplies and Suppliers

     ACTS is dependent upon its ability to source, on favourable terms and
     costs, sufficient quantities of goods in a timely manner, including
     aircraft, aircraft engine and other related parts. Such goods 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 ACTS' control. Any failure or inability of ACTS to
     successfully source goods, including by reason of a failure, refusal or
     inability of a supplier, or to source goods on terms and pricing and
     within the timeframes acceptable to ACTS, could have a material adverse
     effect on ACTS' business, results from operations and financial
     condition.


--------------------------------------------------------------------------------
                                      47
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     Labour Relations

     Most of the non-management personnel of ACTS are currently covered by a
     collective agreement between the International Association of Machinists
     and Aerospace Workers ("IAMAW") and Air Canada in place until 2009. While
     ACTS enjoys positive employee relations, 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 ACTS' business. Furthermore, if at the expiration of the
     applicable collective agreement, the relevant parties are unable to
     renegotiate the collective agreement with the IAMAW, it could result in
     work stoppages and other labour disturbances which would similarly have a
     material adverse effect on ACTS' business. In addition, if the general
     services agreements between ACTS and Air Canada are terminated by Air
     Canada, it could have a material adverse effect on ACTS' business in the
     event that ACTS is unable to hire a sufficient number of employees prior
     to the termination of the agreements.

     Highly Regulated Industry

     ACTS operates in a highly regulated industry. Governmental agencies
     throughout the world regulate the manufacture, repair and overhaul of
     aircraft and related parts and accessories. Regulatory authorities
     monitoring the ACTS' business include Transport Canada, the Federal
     Aviation Authority in the U.S., and the European Aviation Safety Agency.
     Regulatory authorities perform regular compliance audits, including to
     ensure that all ACTS' technical and administrative processes, procedures,
     equipment and facilities are being maintained within the regulatory
     requirements. New and more stringent regulatory requirements, if adopted
     and enacted, could have a material adverse effect on ACTS' business,
     financial condition and results of operations.

     In addition, ACTS' repair and overhaul operations are subject to
     certification, including pursuant to regulations established by Transport
     Canada and the Federal Aviation Authority. Specific regulations vary from
     country to country, although compliance with Transport Canada and Federal
     Aviation Authority requirements generally satisfies regulatory
     requirements in other countries. Any failure to comply with regulatory
     requirements or maintain the necessary regulatory approvals or any other
     of ACTS' material authorizations or approvals could have a material
     adverse effect on ACTS' business, financial condition and results of
     operations.

     Risks Related to the Airline Industry

     Airline Reorganizations
     Since September 11, 2001, a number of U.S. air carriers have sought to
     reorganize under Chapter 11 of the United States Bankruptcy Code or
     outside the scope of formal reorganization proceedings. Successful
     completion of such reorganizations could present Air Canada with
     competitors having reduced levels of indebtedness and significantly lower
     operating costs derived from labour, supply and financing contracts
     renegotiated under the protections of the United States Bankruptcy Code
     or outside the scope of formal reorganization proceedings. In addition,
     certain air carriers, including those involved in reorganizations, may
     undertake substantial fare discounting in order to maintain cash flows
     and to enhance continued customer loyalty. Such fare discounting could
     result in lower yields for Air Canada which, in turn, could have a
     material adverse effect on Air Canada's business, results from operations
     and financial condition.

     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, 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


--------------------------------------------------------------------------------
                                      48
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     adverse effect on Air Canada's profitability. Any prolonged or
     significant weakness of the Canadian or world economies could have a
     material adverse effect on Air Canada's business, results from operations
     and financial condition, especially given Air Canada's substantial fixed
     cost structure.

     Airline Industry Characterized by Low Gross Profit Margins and High Fixed
     Costs

     The airline industry generally and scheduled service in particular are
     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, could have a material
     adverse 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
     destinations served by Air Canada and Jazz, and on the number of
     passengers traveling on Air Canada's and Jazz's flights 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 and on the number of passengers traveling on Air
     Canada's and Jazz's flights. Any resulting reduction in traffic on Air
     Canada's and Jazz'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 maintained or repaired by Air
     Canada may significantly


--------------------------------------------------------------------------------
                                      49
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     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. 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, the Treasury Board 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 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 Canada Transportation
     Act, 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 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. Management cannot predict if or
     when such proposed legislation will be re-introduced in the House of
     Commons.


--------------------------------------------------------------------------------
                                      50
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     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 that 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 reevaluating 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 requirement 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 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 U.S.
     federal government has set up its own facility to provide war risk
     coverage to U.S. 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.


--------------------------------------------------------------------------------
                                      51
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     15.  Quarterly Financial Data

     The table below describes quarterly financial results for ACE for the
     eight most recent quarters.
<TABLE>
<CAPTION>

---------------------------------------------------------------------------------------------------------------------
($ millions, except per share amounts)             Q1       Q2       Q3       Q4       Q1       Q2       Q3       Q4
                                                 2005     2005     2005     2005     2006     2006     2006     2006
---------------------------------------------------------------------------------------------------------------------

<S>                                            <C>      <C>      <C>      <C>      <C>      <C>      <C>      <C>
Operating revenues                             $2,177   $2,458   $2,833   $2,362   $2,484   $2,682   $2,947   $2,544
Special charge for Aeroplan miles (1)               -        -        -        -        -        -    (102)        -
                                             ------------------------------------------------------------------------
Operating revenues                             $2,177   $2,458   $2,833   $2,362   $2,484   $2,682   $2,845   $2,544

Operating expenses (2)                         (2,187)  (2,280)  (2,512)  (2,396)  (2,546)  (2,501)  (2,642)  (2,471)
---------------------------------------------------------------------------------------------------------------------
Operating income (loss)                           (10)     178      321      (34)     (62)     181      203       73

Total non-operating income (expense),
non-controlling interest, foreign
exchange gain (loss) and income tax (3)           (67)     (9)      (50)     (68)     180       55     (100)    (122)
---------------------------------------------------------------------------------------------------------------------
Net income (loss)                                ($77)   $169      $271    ($102)    $118     $236     $103     ($49)
=====================================================================================================================

Earnings (loss)
   Per share - basic                           ($0.87)  $1.68     $2.67   ($1.01)   $1.15    $2.32    $1.01   ($0.48)
   Per share - diluted                         ($0.87)  $1.50     $2.33   ($1.01)   $1.12    $2.05    $0.95   ($0.48)
---------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)      Quarter 3 2006 includes a special  charge of $102 million in connection
         with Air Canada's  obligations  for the redemption of
         pre-2002 Aeroplan miles.
(2)      Quarter 1 2006 includes a special charge for labour restructuring of
         $33 million. Quarter 4 2006 includes a $8 million reduction to the
         special charge for labour due to the favourable impact of attrition
         and other factors which reduced the cost of achieving the target to
         $25 million.
(3)      Quarter 3 2005 includes a dilution gain of $190 million and a tax
         provision of $28 million as a result of ACE's IPO of Aeroplan Income
         Fund. Quarter 1 2006 includes a dilution gain of $220 million and a
         tax provision of $10 million as a result of ACE's IPO of Jazz Income
         Fund. Quarter 2 2006 includes a gain of $100 million and a tax
         provision of $17 million relating to the sale of 3.25 million shares
         of its holdings in US Airways. Quarter 3 2006 includes a gain of $52
         million and a tax provision of $9 million relating to the sale of
         1.25 million shares of its holdings in US Airways. Quarter 4 2006
         includes a dilution gain of $25 million and a tax expense of $4
         million related to the Air Canada initial public offering.

     Seasonality
     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 high
     number of leisure travelers and their preference for travel during the
     spring and summer months. The cost structure of the Corporation is such
     that its fixed costs do not fluctuate proportionately with passenger
     demand in the short-term.


--------------------------------------------------------------------------------
                                      52
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     16.  Selected Annual Information

     The following table provides selected annual information for ACE for the
     years 2006 and 2005, as well as the combination of the financial results
     of Air Canada for the nine-month period ended September 30, 2004 and for
     ACE for the three-month period ended December 31, 2004. This combination
     is referred to as "2004 Combined". The financial results of Air Canada
     prior to September 30, 2004 reflected the operations of the various
     entities included in the Air Canada Services segment, as well as those of
     Jazz, Aeroplan and ACTS.
<TABLE>
<CAPTION>

                                                                        2006               2005        2004 Combined
---------------------------------------------------------------------------------------------------------------------

<S>                                                                  <C>                 <C>                  <C>

Operating revenues                                                   $10,657             $9,830               $8,900
Special charge for Aeroplan miles (1)                                   (102)                 -                    -
                                                          -----------------------------------------------------------
Operating revenues                                                    10,555              9,830                8,900
Operating expenses (2)                                               (10,160)            (9,375)              (8,783)
---------------------------------------------------------------------------------------------------------------------
Operating income before reorganization and restructuring items           395                455                  117
Reorganization and restructuring items                                     -                  -                 (871)
Total non-operating income (expense),
non-controlling interest, foreign
exchange gain (loss) and income tax                                       13               (194)                (126)
---------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                        408                261                 (880)
=====================================================================================================================

EBITDAR (3)                                                            1,412              1,354
EBITDAR excluding special charges (3)                                  1,539              1,354

Earning (loss) per share
 - Basic                                                               $4.01              $2.66                  n/a
 - Diluted                                                             $3.80              $2.48                  n/a


Cash, cash equivalents and short-term investments                      3,178              2,181                1,632
Total assets                                                          13,441             11,847                9,386
Total long-term liabilities (4)                                        4,137              3,989                3,848
---------------------------------------------------------------------------------------------------------------------
</TABLE>


(1)  2006 includes a special charge of $102 million in connection with Air
     Canada's obligation for the redemption of pre-2002 Aeroplan miles.
(2)  2006 includes a special charge for labour restructuring of $25 million.
(3)  Refer to section 20 "Non-GAAP Financial Measures" in this MD&A for a
     reconciliation of EBITDAR to operating income (loss).
(4)  Total long-term liabilities include long-term debt and capital leases and
     other long-term liabilities


--------------------------------------------------------------------------------
                                      53
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     17.  Controls and Procedures

     Disclosure Controls and Procedures

     Management of the Corporation, with the participation of the
     Corporation's Chief Executive Officer and Chief Financial Officer, has
     evaluated the effectiveness of the Corporation's disclosure controls and
     procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the U.S.
     Securities Exchange Act of 1934, as amended (the "U.S. Exchange Act"),
     and the rules of the Canadian Securities Administrators ("CSA")). Based
     on that evaluation, the Corporation's Chief Executive Officer and Chief
     Financial Officer have concluded that, as of December 31, 2006, the
     Corporation's disclosure controls and procedures were effective to
     provide reasonable assurance that the information required to be
     disclosed by the Corporation in reports that it files or submits under
     the U.S. Exchange Act or Canadian securities laws is (i) recorded,
     processed, summarized and reported, within the time periods specified in
     the rules and forms of the Securities and Exchange Commission and
     Canadian securities regulators, and (ii) accumulated and communicated to
     management, including its principal executive and principal financial
     officers, or persons performing similar functions, as appropriate to
     allow timely decisions regarding required disclosure.

     Management's Report on Internal Control over Financial Reporting

     Management of the Corporation is responsible for establishing and
     maintaining adequate internal control over financial reporting (as
     defined in Rule 13a - 15(f) under the U.S. Exchange Act). Internal
     control over financial reporting includes those policies and procedures
     that (i) pertain to the maintenance of records that in reasonable detail
     accurately and fairly reflect the transactions and dispositions of the
     assets of the Corporation; (ii) provide reasonable assurance that
     transactions are recorded as necessary to permit preparation and fair
     presentation of published financial statements, and that receipts and
     expenditures of the Corporation are being made only in accordance with
     authorizations of Management and the Board of Directors; and (iii)
     provide reasonable assurance regarding prevention or timely detection of
     unauthorized acquisition, use or disposition of the Corporation's assets
     that could have a material affect on the financial statements.

     All internal control systems, no matter how well designed, have inherent
     limitations. Therefore, even those systems determined to be effective can
     provide only reasonable assurance with respect to financial statement
     preparation and presentation. Because of its inherent limitations,
     internal control over financial reporting may not prevent or detect
     misstatements. Also, projections of any evaluation of effectiveness to
     future periods are subject to the risk that controls may become
     inadequate because of changes in conditions, or that the degree of
     compliance with the policies or procedures may deteriorate.

     Management assessed the effectiveness of the Corporation's internal
     control over financial reporting as at December 31, 2006. In making this
     assessment, management used the criteria set forth by the Committee of
     Sponsoring Organizations of the Treadway Commission ("COSO") in Internal
     Control Integrated Framework. This assessment identified one material
     weakness in the Corporation's internal control over financial reporting
     as at December 31, 2006 with respect to accounting for income taxes.
     There were limitations in the Corporation's ability to identify all
     future income tax assets and liabilities with respect to non-routine and
     complex business transactions in the Corporation's December 31, 2006
     consolidated financial statements. This control deficiency resulted in
     audit adjustments to the December 31, 2006 consolidated financial
     statements. In addition, this control deficiency could result in a
     material misstatement in the Corporation's consolidated financial
     statements that would not be prevented or detected. Based solely on the
     material weakness with respect to accounting for income taxes, Management
     (including the Corporation's Chief Executive Officer and Chief Financial
     Officer) has concluded, the Corporation did not maintain effective
     internal control over financial reporting as at December 31, 2006.

     A material weakness is a control deficiency, or combination of control
     deficiencies, that results in more than a remote likelihood that a
     material misstatement of the annual or interim financial statements will
     not be prevented or detected.


--------------------------------------------------------------------------------
                                      54
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     Management's assessment of the effectiveness of internal control over
     financial reporting as at December 31, 2006, has been audited by
     PricewaterhouseCoopers LLP, the independent auditors, as stated in their
     report which is included herein and which expressed an unqualified
     opinion on Management's assessment and an adverse opinion on the
     effectiveness of the Corporations' internal control over financial
     reporting as of December 31, 2006.

     Remedial Action Plan

     Management has taken remedial action which includes the following:

            o  Engaged the services of a leader in professional recruitment
               searches in order to add additional qualified income tax
               professionals with the appropriate knowledge and experience;
               and

            o  Engaged the services of a qualified third party firm to provide
               supplementary assistance in the area of accounting for income
               taxes on non-routine and complex business transactions.

     Changes in Internal Control over Financial Reporting

     There have been no changes in the Corporation's internal control over
     financial reporting during the year ended December 31, 2006, that have
     materially affected, or are reasonably likely to materially affect its
     internal control over financial reporting.


--------------------------------------------------------------------------------
                                      55
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     18.  Subsequent Events

     Initial Distribution of Units of Aeroplan Income Fund Under a Plan of
     Arrangement

     At a special meeting of shareholders on October 5, 2006, the shareholders
     of ACE approved a statutory arrangement pursuant to the Canada Business
     Corporations Act. On October 6, 2006, the Quebec Superior Court issued a
     final order approving the statutory arrangement, which became effective
     October 10, 2006. The arrangement grants authority to the board of
     directors of ACE to make from time to time one or more special
     distributions to ACE shareholders in an aggregate amount of up to $2
     billion by way of reduction of the stated capital of the Class A variable
     voting shares, Class B voting shares and the preferred shares of ACE.

     ACE shareholders, on January 10, 2007, the record date for the
     distribution, received a non-cash distribution of 50,000,000 units of
     Aeroplan Income Fund representing 0.442 units per Class A variable voting
     share, Class B voting share and preferred share (on an as converted
     basis) of ACE. Based on a closing price of $17.97 per unit of Aeroplan
     Income Fund on the Toronto Stock Exchange on January 10, 2007, the
     distribution is valued at approximately $899 million or $7.95 per ACE
     share.

     On January 10, 2007, ACE exchanged 60,000,000 units of Aeroplan LP into
     60,000,000 units of Aeroplan Income Fund. Following the exchange, ACE
     continues to hold a 50.3 percent direct interest in Aeroplan LP,
     comprised of a 20.3 percent direct interest in Aeroplan LP and a 37.6
     percent direct interest in Aeroplan Income Fund. Aeroplan Income Fund now
     has 159,454,165 units issued and outstanding and holds a 79.7 percent
     interest in Aeroplan LP.

     In connection with the initial distribution, the conversion rate of the
     4.25 percent Convertible Senior Notes Due 2035 (convertible notes) of ACE
     was adjusted from 22.2838 to 27.6987 Class A variable voting shares or
     Class B voting shares per $1,000 principal amount of convertible notes.
     The adjustment was effective on January 29, 2007 and was determined in
     accordance with the terms of the indenture dated April 6, 2005 governing
     the convertible notes.


--------------------------------------------------------------------------------
                                      56
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     19.  Outlook

     In 2007, ACE plans to continue to execute its strategic plan in order to
     maximize shareholder value. In particular, ACE will continue to execute
     the initiatives announced on August 11, 2006 including the monetization
     of ACTS and the pursuit of opportunities that realize the value of its
     investments.


--------------------------------------------------------------------------------
                                      57
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     20.  Non-GAAP Financial Measures

     EBITDAR/EBITDA
     EBITDAR (earnings before interest, taxes, depreciation, amortization and
     obsolescence and aircraft rent) is a non-GAAP financial measure commonly
     used in the airline industry to view operating results before aircraft
     rent and depreciation, obsolescence and amortization, as these costs can
     vary significantly among airlines due to differences in the way airlines
     finance their aircraft and other assets. For segments without aircraft
     rent, such as Aeroplan and ACTS, EBITDA (earnings before interest, taxes,
     depreciation, amortization and obsolescence) is used to view operating
     results before depreciation, amortization and obsolescence, as these
     costs can vary significantly among companies due to differences in the
     way companies finance their assets. EBITDAR and EBITDA are not recognized
     measures for financial statement presentation under GAAP and do not have
     a standardized meaning and are therefore not likely to be comparable to
     similar measures presented by other public companies. EBITDAR and EBITDA
     are reconciled to operating income (loss) as follows:

<TABLE>
<CAPTION>

-------------------------------------------------------------------------------------------------------------------
                                                    Quarter 4
($ millions)                                             2006       2005    Change       2006      2005     Change
-------------------------------------------------------------------------------------------------------------------

<S>                                                        <C>       <C>       <C>        <C>       <C>       <C>

Air Canada Services
GAAP operating income (loss)                               (5)       (91)       86        114       191        (77)
Add back:
Aircraft rent                                              75         90       (15)       314       341        (27)
Depreciation, amortization and obsolescence               135        106        29        493       404         89
-------------------------------------------------------------------------------------------------------------------
EBITDAR                                                   205        105       100        921       936        (15)
Add back:
Special charge for labour restructuring                    (8)         -        (8)        20         -         20
Special charge for Aeroplan miles                           -          -         -        102         -        102
-------------------------------------------------------------------------------------------------------------------
EBITDAR excluding special charges                         197        105        92      1,043       936        107
-------------------------------------------------------------------------------------------------------------------
Aeroplan
GAAP operating income                                      37         30         7        140       102         38
Add back:
Depreciation, amortization and obsolescence                 3          3         -         14         8          6
-------------------------------------------------------------------------------------------------------------------
EBITDA                                                     40         33         7        154       110         44
-------------------------------------------------------------------------------------------------------------------
Jazz
GAAP operating income                                      33         34        (1)       144       129         15
Add back:
Aircraft rent                                              34         28         6        134        80         54
Depreciation, amortization and obsolescence                 5          4         1         21        18          3
-------------------------------------------------------------------------------------------------------------------
EBITDAR                                                    72         66         6        299       227         72
-------------------------------------------------------------------------------------------------------------------
ACTS
GAAP operating income (loss)                               12         (8)       20         (2)       47        (49)
Add back:
Depreciation, amortization and obsolescence                 8          8         -         31        32         (1)
-------------------------------------------------------------------------------------------------------------------
EBITDA                                                     20          -        20         29        79        (50)
-------------------------------------------------------------------------------------------------------------------
Add back:
Special charge for labour restructuring                     -          -         -          5         -          5
-------------------------------------------------------------------------------------------------------------------
EBITDA excluding special charges                           20          -        20         34        79        (45)
-------------------------------------------------------------------------------------------------------------------

Consolidated Total
GAAP operating income (loss)                               73        (34)      107        395       455        (60)
Add back:
Aircraft rent                                             107        117       (10)       441       417         24
Depreciation, amortization and obsolescence               157        125        32        576       482         94
-------------------------------------------------------------------------------------------------------------------
EBITDAR                                                   337        208       129      1,412     1,354         58
Add back:
Special charge for labour restructuring                    (8)         -        (8)        25         -         25
Special charge for Aeroplan miles                           -          -         -        102         -        102
-------------------------------------------------------------------------------------------------------------------
EBITDAR excluding special charges                         329        208       121      1,539     1,354        185
-------------------------------------------------------------------------------------------------------------------
</TABLE>


--------------------------------------------------------------------------------
                                      58
<PAGE>


[ACE AVIATION GRAPHIC OMITTED]


     Operating Income excluding the Special Charge for Aeroplan miles and the
     Special Charge for Labour Restructuring ACE uses operating income
     excluding the special charges for Aeroplan miles and labour restructuring
     to assess the operating performance of its ongoing business without the
     effects of these special charges. These items are excluded from ACE
     financial results and from Air Canada Services and ACTS segment results
     as they could potentially distort the analysis of trends in business
     performance. The special charge for Aeroplan miles is the full and final
     settlement between the parties in connection with Air Canada's
     obligations for the redemption of pre-2002 miles. The special charge for
     labour restructuring is the total cost of the 20 percent non-unionized
     workforce reduction plan announced in February 2006. The special charges
     for Aeroplan miles and labour restructuring are not reflective of ACE
     underlying financial performance.

     The following measure is not a recognized measure for financial statement
     presentation under Canadian GAAP and does not have a standardized meaning
     and is therefore not likely to be comparable to similar measures
     presented by other public companies.

     Operating income excluding the special charge for Aeroplan miles and the
     special charge for labour restructuring is reconciled to operating income
     as follows:

<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------
($ millions)                                                        Quarter 4
                                                                2006     2005     Change      2006     2005    Change
----------------------------------------------------------------------------------------------------------------------

<S>                                                               <C>     <C>        <C>       <C>      <C>      <C>

ACE
GAAP operating income (loss)                                      73      (34)       107       395      455       (60)
Add back:
Special charge for Aeroplan miles                                  -         -         -       102        -       102
----------------------------------------------------------------------------------------------------------------------
Operating income (loss), excluding the special charge for
Aeroplan miles                                                    73      (34)       107       497      455        42
Add back:
Special charge for labour restructuring                           (8)       -         (8)       25        -        25
----------------------------------------------------------------------------------------------------------------------
Operating income (loss), excluding the special charges for
Aeroplan miles and labour restructuring                           65      (34)        99       522      455        67
----------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------
($ millions)                                                        Quarter 4
                                                                2006     2005     Change      2006     2005    Change
----------------------------------------------------------------------------------------------------------------------

ACTS
GAAP operating income (loss)                                      12       (8)        20       (2)       47       (49)
Add back:
Special charge for labour restructuring                            -        -          -         5        -         5
----------------------------------------------------------------------------------------------------------------------
Operating income (loss), excluding the special charge for
labour restructuring                                              12       (8)        20         3       47      (44)
----------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------
($ millions)                                                        Quarter 4
                                                                2006     2005     Change      2006     2005    Change
----------------------------------------------------------------------------------------------------------------------

Air Canada Services
GAAP operating income (loss)                                      (5)     (91)        86       114      191      (77)
Add back:
Special charge for Aeroplan miles                                  -        -          -       102        -       102
----------------------------------------------------------------------------------------------------------------------
Operating income (loss), excluding the special charge for
Aeroplan miles                                                    (5)     (91)        86       216      191        25
Add back:
Special charge for labour restructuring                           (8)       -         (8)       20        -        20
----------------------------------------------------------------------------------------------------------------------
Operating income (loss), excluding the special charges for
Aeroplan miles and labour restructuring                          (13)     (91)        78       236      191        45
----------------------------------------------------------------------------------------------------------------------
</TABLE>


--------------------------------------------------------------------------------
                                      59

<PAGE>



                                   SIGNATURES


         Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.

                                               ACE AVIATION HOLDINGS INC.
                                       -----------------------------------------
                                                     (Registrant)

Date:    February 14, 2007             By:  /s/ Brian Dunne
        -------------------------          ---------------------------------
                                           Name:  Brian Dunne
                                           Title: Executive Vice-President and
                                                  Chief Financial Officer




<PAGE>


A.  Disclosure Controls and Procedures

Disclosure controls and procedures are defined by the U.S. Securities and
Exchange Commission (the "Commission") as those controls and procedures that
are designed to ensure that information required to be disclosed by ACE
Aviation Holdings Inc. (the "Registrant") in reports filed or submitted by it
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the Commission's rules and
forms. The Registrant's Chief Executive Officer and its Chief Financial
Officer have evaluated the Registrant's disclosure controls and procedures as
of the end of the period covered by this Annual Report on Form 40-F and have
determined that such disclosure controls and procedures were effective. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition - Controls and Procedures - Disclosure Controls and Procedures",
included in Document No. 3 to this Annual Report.

B.  Management's Annual Report on Internal Control Over Financial Reporting

See "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Controls and Procedures - Management's Report on
Internal Control over Financial Reporting", included in Document No. 3 to this
Annual Report.

C.  Attestation Report of the Registered Public Accounting Firm

The attestation report, under the heading "Internal control over financial
reporting", is included in PricewaterhouseCoopers LLP's report to the
shareholders of ACE dated February 13, 2007 that accompanies the Registrant's
Audited Consolidated Financial Statements for the fiscal year ended December
31, 2006, filed as part of this Annual Report on Form 40-F.

D.  Changes in Internal Control Over Financial Reporting

Since the most recent evaluation of the Registrant's internal control over
financial reporting, there have been no changes in the Registrant's internal
control over financial reporting that have materially affected or are
reasonably likely to materially affect, the Registrant's internal control over
financial reporting.

E.  Notice of  Pension Fund Blackout Period

The Registrant was not required by Rule 104 of Regulation BTR to send any
notice to any of its directors or executive officers during the fiscal year
ended December 31, 2006.

F.  Audit Committee Financial Expert

The Registrant's board of directors has determined that David I. Richardson,
an individual serving on the audit committee of the Registrant's board of
directors, is an audit committee financial expert within the meaning of
General Instruction B(8)(a) of Form 40-F. Mr. Richardson is independent as
that term is defined in the rules and regulations of the Nasdaq Stock Market,
Inc.

The Securities and Exchange Commission has indicated that the designation of a
person as an audit committee financial expert does not make such person an
"expert" for any purpose, impose any duties, obligations or liability on such
person that are greater than those imposed on members of the audit committee
and the board of directors who do not carry this designation or affect the
duties, obligations or liability of any other member of the audit committee or
board of directors.

G.  Code of Ethics

The Registrant's board of directors has adopted a code of ethics (the "Code")
that applies to its Chief Executive Officer, Chief Financial Officer and
Corporate Controller. The Registrant will provide a copy of the Code, without
charge, to any person that requests a copy by contacting the Registrant's
Secretary at the address that appears on the cover of this Annual Report.

H.  Principal Accountant Fees and Services

<PAGE>

    Audit Fees

The aggregate fees billed by PricewaterhouseCoopers LLP, the Registrant's
principal accountant, for the fiscal years ended December 31, 2005 and 2006
for professional services rendered by it for the audit of the Registrant's
annual financial statements and for services that are normally provided by it
in connection with statutory and regulatory filings or engagements for such
years were Cdn$5,046,202 and Cdn$8,445,500, respectively.

    Audit-Related Fees

The aggregate fees billed by PricewaterhouseCoopers LLP for the fiscal years
ended December 31, 2005 and 2006 for assurance and related services rendered
by it that are reasonably related to the performance of the audit or review of
the Registrant's financial statements and are not reported above as audit fees
were Cdn$252,745 and Cdn$599,883, respectively. 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

The aggregate fees billed by PricewaterhouseCoopers LLP for the fiscal years
ended December 31, 2005 and 2006 for professional services rendered by it were
Cdn$21,750 and Cdn$30,000, respectively. Tax fees were paid for professional
services rendered with respect to commodity and income taxes.

    All Other Fees

Other than the audit fees, audit-related fees and tax fees described above,
PricewaterhouseCoopers LLP has not billed other fees to the Registrant for the
fiscal years ended December 31, 2005 and 2006 for products and services
provided by it.

    Pre-Approval Policies and Procedures

All audit and non-audit services performed by the Registrant's principal
accountant for the years ended December 31, 2005 and December 31, 2006 were
pre-approved by the audit committee of the Registrant.

I.  Off-Balance Sheet Arrangements

See "Management's Discussion and Analysis of Results of Operations and Financial
Condition - Off-Balance Sheet Arrangements", included in Document No. 3 to this
Annual Report.

J.  Tabular Disclosure of Contractual Obligations

See "Management's Discussion and Analysis of Results of Operations and
Financial Condition - Consolidated Debt and Lease Obligations, Capital
Expenditures and Pension Plan Cash Funding Obligations", included in Document
No. 3 to this Annual Report.

I.  Identification of Audit Committee

The Registrant has an audit committee comprised of three individuals: David I.
Richardson (Chair), W. Brett Ingersoll and John T. McLennan. Each of the members
of the audit committee is independent as that term is defined by the rules and
regulations of the Nasdaq Stock Market, Inc.

J.  Critical Accounting Policies

See "Management's Discussion and Analysis of Results of Operations and Financial
Condition - Critical Accounting Estimates", included as Document No. 3 to this
Annual Report.



<PAGE>

                  UNDERTAKING AND CONSENT TO SERVICE OF PROCESS

A.  Undertaking

The Registrant undertakes to make available, in person or by telephone,
representatives to respond to inquiries made by the Commission staff, and to
furnish promptly, when requested to do so by the Commission staff, information
relating to the securities in relation to which the obligation to file an
annual report on Form 40-F arises, or transactions in said securities.

B.  Consent to Service of Process

The Registrant has previously filed with the Commission a Form F-X in
connection with its Class A Variable Voting Shares and Class B Voting Shares.


<PAGE>

                                    EXHIBITS

    The following exhibits are filed as part of this report:

    Exhibit
    Number       Title
    --------     ------

     1.          Consent of PricewaterhouseCoopers LLP
    31.          Certifications  of CEO and CFO  pursuant to Section 302 of the
                 Sarbanes-Oxley Act of 2002
    32.          Certification  of CEO and CFO  pursuant  to Section 906 of the
                 Sarbanes-Oxley Act of 2002


<PAGE>


                                    SIGNATURE

         Pursuant to the requirements of the Exchange Act, the Registrant
certifies that it meets all of the requirements for filing on Form 40-F and
has duly caused this annual report to be signed on its behalf by the
undersigned, thereto duly authorized.


                                             ACE AVIATION HOLDINGS INC.





March 30, 2007                               By:    /s/ BRIAN DUNNE
                                                    ----------------------------
                                             Name:  Brian Dunne
                                             Title: Executive Vice-President and
                                                    Chief Financial Officer


                                  EXHIBIT INDEX

    Number   Document
    ------   ---------

     1.      Consent of PricewaterhouseCoopers LLP
    31.      Certifications of CEO and CFO pursuant to Section 302 of the
             Sarbanes-Oxley Act of 2002
    32.      Certification of CEO and CFO pursuant to Section 906 of the
             Sarbanes-Oxley Act of 2002