R.S.O. 1990, c. S.5, AS AMENDED

-and -




1.By notice of hearing dated July 25, 2001 (the "Notice of Hearing"),the Ontario Securities Commission (the "Commission") announcedthat it proposed to hold a hearing to consider whether, pursuantto sections 127 and 127.1 of the Securities Act, R.S.O. 1990,c. S.5, as amended (the "Act"), it is in the public interestfor the Commission to make an order:

i)approving this settlement agreement entered into by Staffof the Commission ("Staff") and the respondent on July 25,2001;

ii)requiring a review by the respondent's auditor for each ofthe next four quarters to ensure compliance with applicablesecurities law, the Toronto Stock Exchange ("TSE") CompanyManual and Air Canada's corporate policy, as each relatesto selective disclosure, with such reviews to be at the expenseof Air Canada and with such reviews to be submitted to Staffand to Air Canada concurrently and thereafter publicly disclosed;

iii)pursuant to clause six of subsection 127(1) of the Act,that Air Canada be reprimanded; and

iv)pursuant to subsection 127.1(1)(b), the respondent be orderedto make payment by certified cheque to the Commission in theamount of $80,000 in respect of the costs of the Commission'sinvestigation.


1.Staff agree to recommend settlement of the proceeding initiatedin respect of the respondent Air Canada, by the Notice ofHearing in accordance with the terms and conditions set outbelow. The respondent consents to the making of an order againstit in the form attached as Schedule "A" on the basis of thefacts set out below.



2.Staff and the respondent agree, for the purpose of this proceeding,with the facts set out in this Part III.


a)The Respondent

3.Air Canada is a corporation continued on August 25, 1988 underthe Canada Business Corporations Act, R.S.C. 1985, c. C-44,whose head office is located in St. Laurent, Quebec. Air Canadawas, at all material times, a reporting issuer in Ontario.Air Canada's common shares (the "Shares") are listed on theTSE and quoted on NASDAQ.

4.On October 5, 1988, Air Canada and the TSE executed an agreementwhereby in consideration for the listing on the TSE of thesecurities of Air Canada, Air Canada agreed, among other things,to comply with all TSE requirements applicable to listed companies.

5.In or around December 1998 Air Canada's board of directorsapproved the implementation of a policy regarding the publicdisclosure of information ("Air Canada's Public DisclosurePolicy"). Air Canada's Public Disclosure Policy provides,among other things, that:

"AirCanada's spokesperson(s) will not comment, discuss, provideguidance on or disclose material non-public information (suchas quarterly results and earnings estimates and cash flowand earnings projections for the current and following years)during a 'quiet period' which shall begin on the first dayfollowing the end of a quarter and end with the public releaseof Air Canada's quarterly results."

b)The Disclosure

6.On October 5, 2000, five days following the end of Air Canada'sthird quarter, Air Canada informed thirteen analysts coveringAir Canada (the "Analysts") of information pertaining to AirCanada's earnings for its third and fourth quarters (the "EarningsInformation"). The Earnings Information included, among otherthings, advice by Air Canada:

(i)that its earnings per share for the third quarter of the year2000 would be $0.55 to $0.60 less than its original guidanceto analysts of $1.10 to $1.15, and, therefore, an indicationby Air Canada that its third quarter earnings per share wouldbe $0.50 to $0.60; and

(ii)that, in respect of the second half of the year 2000, itsearnings per share would be $0.52 to $0.59 less than previouslyanticipated, plus the negative impact of increased fuel costswhich would amount to an additional downward adjustment of$0.42 per share.

7.The decision to inform the Analysts of the Earnings Informationwas made by Michael Robert Peterson ("Peterson"), who was,at all material times, Executive Vice President and ChiefFinancial Officer of Air Canada.

8.The actual disclosure of the Earnings Information was performedby Valerie Anne Peck ("Peck"), who was, at all material times,Director of Investor Relations of Air Canada and reporteddirectly to Peterson.

9.Commencing at 6:40 p.m. on October 5, 2000, Peck recited theEarnings Information from a prepared script (the "Script")into the telephone voice mail system of each of the Analysts.The Script was prepared by Peterson and Peck. The text ofthe Script is reproduced in Schedule "B" attached hereto.

10.Air Canada's Public Disclosure Policy was in force at thetime Air Canada disclosed the Earnings Information to theAnalysts.

11.The disclosure by Air Canada to the Analysts of the EarningsInformation was made after the close of the TSE's October5, 2000 trading session.

12.The opening price for the Shares on October 6, 2000 was $14.00,one dollar less than the previous day's closing price of $15.00.The lowest price at which the Shares traded on October 6,2000 on the TSE was $12.85, a decrease of $2.15 or 14% fromthe closing price on October 5, 2000. The closing price onOctober 6, 2000 of the Shares was $13.25, or a 12% decreasefrom the closing price on October 5, 2000 (and a 5.4% decreasefrom the opening price of $14.00 on October 6, 2000).The day-over-day change in the closing price of the Sharesmeasured as at the close of the October 6, 2000 trading sessionof the TSE, constituted a significant decrease in the marketprice or value of the Shares.

13.At or around the commencement of the October 6, 2000 tradingsession, market surveillance staff of the TSE observed a significantprice decline of the Shares and observed a media account indicatingthat Air Canada guided analysts expectations downward. At9:41 a.m. TSE Staff contacted Air Canada to discuss the tradingactivity and make inquiries into the veracity of the mediaaccount.

14.On October 6, 2000 at 3:57 p.m., Air Canada issued a pressrelease ("Air Canada's Press Release") which expressed disappointmentin the fall in share price during the October 6 trading sessionof the TSE. Air Canada's Press Release stated that Air Canadaexpected that certain charges would be taken in the thirdquarter including those related to integration and passengerservice costs relating to the acquisition of Canadian Airlines,labour costs related to the settlement with Air Canada's pilots,the effect of fuel price increases, and the impact of thethreat of a pilot strike. Air Canada stated that this informationwas reviewed with analysts on October 5 and 6. The text ofAir Canada's Press Release is reproduced in Schedule "C" attachedhereto.

15.Air Canada's Press Release did not disclose the same informationthat Air Canada disclosed to the Analysts the previous evening.In particular, Air Canada's Press Release failed to discloseAir Canada's assessment of the quantitative impact that certainfactors would bear on Air Canada's earnings per share in thethird quarter and second half of the year 2000.

16.The disclosure of the Earnings Information by Air Canada tothe Analysts occurred during Air Canada's defined 'quiet period'and was not in accordance with Air Canada's Public DisclosurePolicy.

c)Statutory and Contractual Obligations of Air Canada RegardingDisclosure

17.Pursuant to subsection 76(2) of the Securities Act, R.S.O.1990, c.S.5, as amended (the "Act"), no reporting issuer andno person in a special relationship with a reporting issuershall inform, other than in the necessary course of business,another person or company of a material fact with respectto the reporting issuer before the material fact has beengenerally disclosed. In addition, the provisions of the TSECompany Manual are applicable to listed companies includingAir Canada. Pursuant to section 401 of the TSE Company Manual,in order to maintain the listing of Air Canada's securitieson the TSE, Air Canada must adhere to certain disclosure relatedobligations, including the following:

S.408A listed company is required to disclose material informationconcerning its business and affairs forthwith upon the informationbecoming known to management .

S.411 Forecasts of earnings and other financial forecastsneed not be disclosed, but where a significant increase ordecrease in earnings is indicated in the near future, suchas in the next fiscal quarter, this fact must be disclosed.

d)Conduct Contrary to the Public Interest

1.The Earnings Information, considered as a whole, was a "materialfact". The Earnings Information was not generally disclosedby Air Canada prior to the disclosure of that informationby Air Canada to the Analysts. By informing the Analysts ofthe Earnings Information before such information was generallydisclosed, as such, Air Canada acted contrary to the publicinterest.

2.The Earnings Information was "material information" as definedin the TSE Company Manual. In the circumstances, by disclosingthe Earnings Information to the Analysts and not generallydisclosing the Earnings Information, as such, in a timelymanner, Air Canada failed to comply with the provisions ofthe TSE Company Manual, as set out above, and thereby actedcontrary to the public interest.


3.Staff has no reason to believe that the conduct describedabove reflects any culture of non-compliance with its publicdisclosure obligations by Air Canada. Air Canada already hada comprehensive disclosure policy in place and no prior historyof compliance problems.

4.Generally, sensitivity to the issue of selective disclosurehas heightened in recent years. Air Canada's disclosure policieshave now been substantially upgraded and include webcasting,posting of speeches on its website, dial-in conference callswith analysts open to the public and media advisories notifyingthe public of such disclosure events.

5.Air Canada has cooperated in the Commission's investigation.


6.The respondent agrees to the following terms of settlement:

i)that upon the approval of this settlement agreement, Air Canadawill make a total payment to the Commission in the amountof $500,000, such payment to be payable in four equal installments,with the first payment to be made immediately upon approvalof this settlement agreement and thereafter in three equalinstallments payable at 90 day intervals, to be allocatedto such third parties as the Commission may determine forpurposes that benefit Ontario investors; and

anOrder of the Commission:

ii)approving this settlement agreement entered into by Staffand the respondent on July 25, 2001;

iii)requiring a review by the respondent's auditor for each ofthe next four quarters to ensure compliance with applicablesecurities law, the TSE Company Manual and Air Canada's PublicDisclosure Policy, as each relates to selective disclosure,with such reviews to be at the expense of Air Canada and withsuch reviews to be submitted to Staff and to Air Canada concurrentlyand thereafter publicly disclosed;

iv)pursuant to clause six of subsection 127(1) of the Act,that Air Canada be reprimanded; and

v)pursuant to subsection 127.1(1)(b), that Air Canada will makepayment by certified cheque to the Commission in the amountof $80,000 in respect of the costs of the Commission's investigation.


1.If this settlement is approved by the Commission, Staff willnot initiate any complaint to the Commission or request theCommission to hold a hearing or issue any other order in respectof any conduct or alleged conduct of the respondent or anyofficer, director or employee of the respondent in relationto the facts set out in Part III of this agreement.

2.If this settlement is approved by the Commission, Staff willnot initiate any other proceeding against the respondent orany officer, director or employee of the respondent in relationto the facts set out in Part III of this agreement.


3.Approval of the settlement set out in this agreement shallbe sought at the public hearing of the Commission scheduledfor July 27, 2001, or such other date as may be agreed toby Staff and the respondent, in accordance with the proceduresdescribed in this agreement.

4.Staff and the respondent agree that if this agreement is approvedby the Commission, it will constitute the entirety of theevidence to be submitted respecting the respondent in thismatter, and the respondent agrees to waive its rights to afull hearing and appeal of the matter under the Act.

5.Staff and the respondent agree that if this settlement isapproved by the Commission, no party to this agreement willmake any public statement inconsistent with this agreement.

6.If, at the conclusion of the settlement hearing, and for anyreason whatsoever, this settlement is not approved by theCommission or an order in the form attached as Schedule 'A'is not made by the Commission:

(i)this settlement agreement and all negotiations leading upto it shall be without prejudice to the Staff and the respondentand each of Staff and the respondent will be entitled to allavailable proceedings, remedies and challenges, includingproceeding to a hearing of the allegations in the Notice ofHearing and Statement of Allegations, unaffected by this agreementor the settlement negotiations;

(ii)the terms of this agreement will not be referred to in anysubsequent proceeding, or disclosed to any person, exceptwith the written consent of Staff and the respondent or asmay be required by law; and

(iii)the respondent agrees that it will not, in any proceeding,refer to or rely upon this agreement or the negotiation orprocess of approval of this agreement as the basis for anyattack on the Commission's jurisdiction, alleged bias, appearanceof bias, alleged unfairness or any other remedies or challengesthat may otherwise be available.


7.Counsel for Staff or for the respondent may refer to any partor all of this agreement in the course of the hearing convenedto consider this agreement. Otherwise, this agreement andits terms will be treated as confidential by all parties tothe agreement until approved by the Commission, and foreverif, for any reason whatsoever, this settlement is not approvedby the Commission, except with the written consent of allparties or as may be required by law.

8.Any obligations of confidentiality shall terminate upon approvalof this settlement by the Commission.


9.This Settlement Agreement may be signed in one or more counterpartswhich together shall constitute a binding agreement and afacsimile copy of any signature shall be as effective as anoriginal signature.

Datedthis 25th day of July, 2001




JohnM. Baker
Senior Vice President and General Counsel



Director, Enforcement Branch




R.S.O.1990, c.S.5, AS AMENDED




(Subsections127(1) and 127.1)

WHEREAS on July 25, 2001, the Ontario Securities Commission(the "Commission") issued a Notice of Hearing pursuant tosections 127(1) and 127.1 of the Securities Act,R.S.O. 1990 c.S.5, as amended (the "Act") in respect of AirCanada;

ANDWHEREAS Air Canada entered into a settlement agreementdated July 25, 2001 (the "Settlement Agreement") in whichit agreed to a proposed settlement of the proceeding, subjectto the approval of the Commission;

AND UPON reviewing the Settlement Agreementand the Statement of Allegations of Staff of the Commission("Staff"), and upon hearing submissions from counsel for AirCanada and from Staff;

AND WHEREAS the Commission is of the opinionthat it is in the public interest to make this Order;


1.the Settlement Agreement dated July 25, 2001, attached tothis Order is hereby approved;

2.Air Canada will submit to a review by its auditor for eachof the next four quarters to ensure compliance with applicablesecurities law, the TSE Company Manual and Air Canada's PublicDisclosure Policy, as each relates to selective disclosure,with such reviews to be at the expense of Air Canada and withsuch reviews to be submitted to Staff and to Air Canada concurrentlyand thereafter publicly disclosed;

3.pursuant to clause six of subsection 127(1) of the Act,Air Canada is hereby reprimanded; and

4.pursuant to subsection 127.1(1)(b), the Air Canada is orderedto make payment by certified cheque to the Commission in theamount of $80,000.00 in respect of the Commission's costsof the investigation.


Thefollowing is a basic overview of quarter 3 and the year 2000adjusted for:

  •   recordedone-time gains;
  •   anupdated fuel view, and
  •   estimatedone-time labour and incremental integration costs andthe   revenue effect of labour uncertainty at AirCanada and United    Airlines.


Generally speaking, with the exception of higherthan anticipated fuel and these one-time integration and labour-relatedissues, we are essentially at the earlier estimates.

Ouroriginal Q3 guidance of about $1.10 to $1.15 has to be adjustedfor about 10 cents of additional fuel costs. In addition,the quarter will reflect 20 cents of one-time costs for ACPAbonuses and approximately 5 to 10 cents of one-time integrationcosts relating to our 180-day commitment (extra heads, overtime,IT, etc.). Finally, we estimate the revenue impact resultingfrom pilot uncertainty and/or actions at Air Canada and Unitedto be in the range of 20 cents a share.

For quarter 4,increased WTI and crack spreads will cause fuel to take about32 cents off our previous quarterly estimate of 4 to 5 cents.We also expect to expense another 7 to 9 cents a share forone-time integration expenses affecting operations. Potentialrisks for the fourth quarter are:
  •  potential revenue risk if UA labour action continues;
  •   anyfurther volatility in fuel prices. Our current estimateis based on  $33 WTI; sensitivity for the quarter is pretax$10 million per dollar   of WTI.
  • As well,there may potentially be a one-time charge for bonusesrelating to intermingling, such as those to which we havealready agreed with CAW (alternatively, the bonuses couldbe accounted for through goodwill).

Insummary, the second half of the year is currently estimatedto include approximately 32 to 39 cents of previously unanticipated,one-time integration costs and 20 cents of revenue hit fromlabour uncertainty in addition to the increased fuel.

Stepping back togain perspective, even with all the integration noise andchallenges, improved operations will have contributed enoughearnings to have absorbed somewhere around 90% of the entire$150 year-over-year Q3 increase in fuel. With fuel pricesas currently estimated for quarter four, we expect that year-over-yearearnings improvement will exceed the year-over-year increasein fuel. The same is true for the year, in face of a fuelincrease of close to one-half billion dollars. This indicatesthat the underlying operational performance is generatingpositive results, even in a profoundly transitional period.

With regard to2001, we maintain our view that we will be able to achieve$700 million of steady state operating synergies, commencingsometime in quarter two. In our view, the biggest swing factorwill be fuel, which we originally estimated at $25 WTI. Ourcurrent sensitivity to 2001 fuel is pretax $50 million fora U.S. $1 change in WTI, excluding any fare action or furtherhedges.


Friday, October 6, 3:57 pm Eastern Time

Press Release

SOURCE: Air Canada

Air Canada Comments On Share Price Drop

MONTREAL, Oct.6/CNW/- Air Canada expressed disappointment in today's fall in shareprice given that it appears to be based on previously availableor previously disclosed information. The company believesthat the retreat in share price since August was due mainlyto the market's reflection of information already in the publicdomain.

"Allof the components of the one-time reduction in third quarterearnings were previously in the public domain, and are notexpected to have ongoing impact," said Rob Peterson, ExecutiveVice-President and Chief Financial Officer.

Theone-time charges that are expect to be taken in the thirdquarter include charges for integration and passenger servicecosts relating to the acquisition of Canadian Airlines, one-timelabour costs related to the settlement with Air Canada's pilots,the effect of fuel price increases, and the impact of boththe pilot strike threat and the impact of United Airlines'recent operational problems on Air Canada revenue. The companyreviewed this information with analysts on October 5 and 6.

"The integrationand passenger service costs are expected to amount to approximately$25-$27 million higher than previously anticipated earlierin the year as was the case in the second quarter. The one-timepilot contract settlement costs of $50 million were well publicizedfollowing the federal mediator's report. Fuel price increasesare well known and their impact on airlines in particularhas been widely reported. We have previously discussed theimpact of the pilot strike threat and United Airlines' operationalproblems are well known." Said Mr. Peterson.

"When the above-mentionedhigher than anticipated fuel increases in September and one-timeintegration and labour contract settlement costs are factoredout, we meet earlier analyst expectations. The fundamentalbusiness of Air Canada remains unchanged," concluded Mr. Peterson.

For further information

NicoleCouture-Simard (Montreal), (514)422-5788
LauraCooke (Toronto), (416)263-5578
AngelaMah (Vancouver), (604)643-5660