Chorus Aviation, the parent company of regional carrier Jazz Aviation, has announced an agreement to amend and extend the capacity purchase agreement (CPA) between Jazz and Air Canada by an additional 10 years.
The agreement will extend the CPA to 31 December 2035, which the companies say will create the longest term strategic partnership between Jazz and Air Canada thus far and will secure Jazz’s place in Air Canada’s regional network.
The amended CPA will “significantly” reduce margin risk for Jazz by limiting exposure on controllable costs to a maximum of $2 million annually and Air Canada will consolidate more of its overall regional capacity into Jazz’s footprint.
With the amendment, the parties said they will “effectively address increased domestic and international competition, changing market demand, and fluctuating fuel prices, through significant changes that will modernise and up-gauge the fleet.”
Through the agreement, Air Canada is also to complete a $97.26 million equity investment in Chorus, with proceeds from the investment to enable Chorus to invest in its leasing business, and purchase new larger-gauge aircraft to benefit the CPA.
Chorus will use approximately 60% of the investment proceeds to purchase nine additional new larger-gauge CRJ900 (76-seat) aircraft to modernise Jazz’s fleet and generate additional lease revenue under the CPA. Chorus has conditionally secured the ability to purchase the CRJ900s. The remaining balance will be deployed by Chorus to acquire and lease aircraft outside of the CPA.
“This mutually beneficial agreement, proactively and collaboratively, addresses the need to adapt to a challenging, competitive and ever-changing environment,” said Joe Randell, president and chief executive officer, Chorus.
Randell continued: “We seized this opportunity to secure an industry-leading time horizon in support of our valued customer; a clear demonstration that the strategic partnership between Chorus and Air Canada is strong. This amended arrangement will provide certainty and predictability for our shareholders, employees and other stakeholders. Chorus expects to continue to generate cash flow to support the current dividend and remains committed to building additional value with continued growth in our leasing business, which is further enabled with this deal.”
“Air Canada is deepening its partnership with Chorus through an improved CPA agreement for Jazz flying and our equity investment in Chorus,” said Calin Rovinescu, president and chief executive of Air Canada. “These will strengthen our respective companies to the benefit of employees, investors and, most importantly, our customers, by enabling us to modernize our regional fleet and respond more nimbly to evolving market conditions and to remain ahead of our competitors.”
With Air Canada’s investment in Chorus, the airline is anticipated to hold approximately 9.99% of Chorus’ issued and outstanding Class A Variable Voting Share and Class B Voting Shares on a combined basis, on closing.
Chorus and Air Canada will enter into an investor rights agreement governing the terms of Air Canada’s investment in Chorus and the airline will have a seat on Chorus’ board, nominating Michael Rousseau, Air Canada’s deputy chief executive officer and chief financial officer to the position.
Chorus said in total, the 17-year contract will provide $2.5 billion in minimum contracted revenues of which $1.6 billion, or 65% will be generated from aircraft leasing revenue, which will support the continued transformation of Chorus’ business through the migration of CPA earnings to aircraft leasing. The amended CPA will also provide for total incremental contracted revenue of $940 million; $310 million in fixed fees and $630 million in aircraft leasing under the CPA.
Air Canada meanwhile will achieve cost savings related to fixed fee reductions, predominantly occurring in 2019 and 2020, with a $36 million decrease in each year, as Chorus reduces it above-market fixed fee rates – carried over from its legacy agreement.
The amendments to the CPA and the investment by Air Canada are conditional on each other and remain subject to terms and conditions precedent to closing, including the ratification of amendment to the collective agreement tentatively agreed between Jazz and its pilots – as represented by the Air Line Pilots Association International (ALPA) and satisfaction of the conditions contained in the TSX’s conditional listing approval.
The Jazz Master Executive Council of ALPA has started the ratification process which is expected to be completed by 1 February 2019.
Jazz operates three divisions, one of which is Air Canada Express. Under the capacity purchase agreement with Air Canada, and using the Air Canada Express brand, Jazz provides service to and from lower-density markets as well as higher-density markets at off-peak times across North America.