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Caisse Desjardins de Lévis Head Office

Maxwell ReillySheng Kong

Etienne Ricard

IceAir AirlinesJanuary 26st, 2016

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Table of Contents

• Current Situation• Decision Process• Hedging & Portfolio Analysis• Recommendation • Implementation

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Objective

To provide an effective hedging strategy for IceAir over the next year, specifically in March, while also setting up a diversified pension portfolio

that can succeed in the long term

4Current Situation Decision Process Recommendation Analysis Implementation

Current Strategy

Company Outlook & Current Strategy

• Full service transportation company offering the organization, distribution, and marketing of vacation packages

• Vertical integration of travel services• Derives revenues from trips to Europe in the

summer season and South America in the winter• Holds fleet of 26 Airbus, with ability to lease more

as demand increases• Focus on family friendly services

Company Outlook

• Economic recovery will boost bottom line• Growth due to high demand in 2014 summer

months• High exposure to fuel prices that must be

mitigated• Defined benefit pension plan that is underfunded

and in need of restructuring• Head of risk management has just left the

company

5Current Situation Decision Process Recommendation Analysis Implementation

Ticker: TSX:ICEStock price: $25

Revenue: $3.7BBProfit: $58MM

Operating Cash Flows: $123MMNet Chance in Cash: $94.6MM

Total Pension Shortfall: $30.9MM

Company Financial Situation

Gross Margin: 17.2%EBIT Margin: 2.2%ROA: 9%

Quick Ratio: 1.1 Cash Ratio: .344

6Current Situation Decision Process Recommendation Analysis Implementation

• Strong economic growth means strong airline industry growth• Industry is moving away from vertical integration, leaving niche space for

IceAir• Trend towards hidden fees and add-on charges

Industry Outlook & Trends

7Current Situation Decision Process Recommendation Analysis Implementation

Energy Prices:• We project a decrease in energy

prices over the short term and long term due to shale deposits, and a lack of cooperation between OPEC members

Macroeconomic Outlook

Interest Rates:• We project flat rates for the short

term, and gradually rising rates over the long term

Economic Growth:• Stable, solid growth in Canadian

markets• Better growth in large cities

8Current Situation Decision Process Recommendation Analysis Implementation

Estimated March consumption

Seasonality of Iceair's fuel consumption 2009 2010 2011 2012 2013 AverageMarch 13% 14% 15% 12% 8% 12%

Projected 2014 March fuel consumption (barrels): 663,120

Projected annual consumption for 2014: 5,526,000

9Current Situation Decision Process Recommendation Analysis Implementation

Fuel Hedging Alternatives

######## 10% 30% 40% 50% 60% 70% 80% 90% 100%80 5,304,960 15,914,880 21,219,840 26,524,800 31,829,760 37,134,720 42,439,680 47,744,640 53,049,60085 5,636,520 16,909,560 22,546,080 28,182,600 33,819,120 39,455,640 45,092,160 50,728,680 56,365,20090 5,968,080 17,904,240 23,872,320 29,840,400 35,808,480 41,776,560 47,744,640 53,712,720 59,680,80095 6,299,640 18,898,920 25,198,560 31,498,200 37,797,840 44,097,480 50,397,120 56,696,760 62,996,400

100 6,631,200 19,893,600 26,524,800 33,156,000 39,787,200 46,418,400 53,049,600 59,680,800 66,312,000105 6,962,760 20,888,280 27,851,040 34,813,800 41,776,560 48,739,320 55,702,080 62,664,840 69,627,600110 7,294,320 21,882,960 29,177,280 36,471,600 43,765,920 51,060,240 58,354,560 65,648,880 72,943,200115 7,625,880 22,877,640 30,503,520 38,129,400 45,755,280 53,381,160 61,007,040 68,632,920 76,258,800

Percentage of fuel costs hedged

Future Pric

e

10Current Situation Decision Process Recommendation Analysis Implementation

Past Performance & Highlights

2013 Return: 5.06%2013 Return (excluding Transat gains): 1.9%

β of Portfolio: 0.17

Current Pension Portfolio Overview

12.66%

63.29%

24.05%

CashTotal BondsTotal Equity

Portfolio Allocation

11Current Situation Decision Process Recommendation Analysis Implementation

Investment Assumptions• Passive Management in ETFs • Light investment in tourism industry• 8% annual return to avoid deficit.• Minimizing the portfolio risk• Higher rates in Canada + US• Growing US + emerging country equity• Neutral on Canada

Management Investment AssumptionOur Economic & Return Forecast

Recession Average Returns Strong Growth Expected Return

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

Return CanadaReturn USEmerging Countries

Economy State Recession Average Returns Strong Growth Expected ReturnProbability 0.1 0.6 0.3Return US -15% 14% 25% 14%Return Canada -20% 8% 15% 7%Emerging Countries -40% 20% 35% 18.50%Alternative Investments -20% 20% 30% 19%

12Current Situation Decision Process Recommendation Analysis Implementation

Problems with Current Portfolio• High allocation to bonds• Extremely high duration, considering potential increases in interest rates• Active management: investment in tourism industry result is high

correlation between performance of company and performance of funds

Alternatives

13Current Situation Decision Process Recommendation Analysis Implementation

• Active Investment Portfolio• Shift weights from bonds to equities• Eliminate tourism portfolio• Move 10% of portfolio to alternative investments to gain diversification

and upside potential

Recommended Portfolio Allocation

14Current Situation Decision Process Recommendation Analysis Implementation

Alternatives

1. Passive Investing

2. Mix of passive and active

3. Pure active investing

5%

45%50%

CashBondsEquitiesAlternative In-vestments

5%

25%

60%

10%

CashBondsEquitiesAlternative In-vestments

5%

35%

50%

10%

CashBondsEquitiesAlternative In-vestments

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Expected Returns Under Each Alternative

Passive Mix Active0%

2%

4%

6%

8%

10%

12%

16Current Situation Decision Process Recommendation Analysis Implementation

Bonds:Short Duration US Bonds, NYSE: EVGShort Duration, Corporate CAN bondsTreasuries Canada

Equities:S&P 500 ETFConsumer Staples ETFFinancials ETF Energy Sector ETFS&P/TSX ETFEmerging CountriesRussia and Chinese ETFs

Specific Investment Ideas

Alternative Investments: REITsMBSs Hedge Funds

17Current Situation Decision Process Recommendation Analysis Implementation

• Currency hedging• Shifting away from defined benefit towards defined contribution

Other Considerations

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Recommendation

19Current Situation Decision Process Recommendation Analysis Implementation

• Fuel Prices continue to increase• Interest rates rise more quickly than anticipated• Higher Beta and volatility in pension plan leads to losses• Employees protest migration to defined contribution plan

Risks & Mitigation

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Key Takeaways

1. Fuel hedges should be entered, but we don’t want to be fully hedged due to belief that prices will fall

2. Pension plan should be completely reallocated to more aggressive mixture of stocks and bonds, removing allocation to tourism industry

3. Shift pension plan to defined contribution for new employees

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Caisse Desjardins de Lévis Head Office

Thank You