Jazz completes corporate conversion, as earnings drop by a quarter

See related article: Jazz Air Income Fund revenue eases 0.1%, profits down in 3Q2010

Read CAPA's JazzAir profile

CEO Joseph Randell told analysts during yesterday's third quarter conference call the conversion was in the best interest of the JazzAir Income Fund and would promote effective capital management, attract new investors and provide a more liquid market for its securities. He added that it would remove uncertainties as well as make comparisons with its regional airline peers easier. He also said it provides an opportunity for growth and expansion. Jazz expects court approval Wednesday.

The conversion was based on a court-approved plan of arrangement, as Jazz put it, under which 99.9% of votes cast favoured the conversion. Also approved was the JazzAir Income Fund's new long-term incentive plan through which participants can be granted restrictive share units that vest over time or if specific performance goals are met. Completion of the arrangement is expected on 31-Dec-2010.

Carrier weathers a busy 3Q

The company clearly had a busy third quarter because the conversion came on top of its launch earlier this month, with new mainline B757s, its new charter operation with Thomas Cook which included service between Toronto and Cancun, Puerto Vallarta, Montego Bay and Punta Cana. It launches new service from Halifax on 17-Dec and from Montreal and Ontario on 18-Dec. The seasonal operation is expected to generate approximately USD100 million in additional annual revenues for Jazz. As if that were not enough, the company concluded labour negotiations with all work groups as well as a five-year contract with Thomas Cook.

Units of the fund can now be exchanged for shares in the capital of Chorus Aviation Inc, Jazz's new public corporation, which will assume any fund obligations on its outstanding convertible debentures.

In addition, the company announced the Toronto Stock Exchange conditionally approved the listing of the Class A Variable Voting Shares, Class B Voting Shares and convertible debentures assumed by Chorus subject to the satisfaction of certain customary requirements under the respective stock symbols CHR.A, CHR.B, CHR.DB.

"The benefits of our corporate conversion will deliver ongoing value as we pursue our objectives of growth and diversification," said President and CEO Joseph Randell. "Post conversion, Chorus will offer investors one of the highest dividend-paying stocks in the industry."

Analysts were curious about its failure to gain Air Canada's Toronto City work, but Randell re-assured them that the ties between the two carriers remain strong. Jazz remains in negotiation with Air Canada as to the reimbursement rates for the 15 Q400s Jazz is acquiring which begin delivery next May. CFO Allan Rowe indicated that much of the first quarter will be taken up hammering out the details for the aircraft which will replace 12 CRJ200s.

EBITDA was CAD34.3 million compared with CAD42.5 million in 2009, down CAD8.2 million or 19.3%. The airline cited foreign exchange rates and other pass-through costs for the decline in net income along with a 1.1% reduction in billable block hours under the Air Canada CPA and a reduction in the mark-up charged to Air Canada. It also experienced a 0.7% increase in departures as well as an increase in pass-through costs, according to Rowe.

He added the company earned 70% of its available performance incentives under the CPA, lower than normal, but Randell indicated work is now underway to turn that around. He also noted that year to date, the company has earned 77% of incentive payments.

Total operating expenses increased from CAD344.9 million to CAD352.2 million, an increase of CAD7.3 million or 2.1%. Salaries, wages and benefits increased by CAD4.1 million on wage and scale increases under new contracts and increased pension expense resulting from a revised actuarial valuation. This was offset by decreased incentive compensation expenses. Aircraft maintenance expense decreased by CAD2.0 million as a result of a lower US dollar exchange rate on certain material purchases of CAD1.0 million; and a decrease in block hours flown of CAD0.5 million. Maintenance costs rose CAD0.5 million.

Non-operating expenses amounted to CAD0.7 million, representing a decrease of CAD0.8 million on forex changes.