Jazz continues income streak, opts for Q400s

After posting solid net income for both the fourth quarter and year-end 2009, Air Canada Jazz announced a letter of intent with Bombardier Commercial Aircraft covering the purchase of 15 Q400 NextGen aircraft and options for another 15.

The move, designed to replace a like number of 50-seat regional jets, comes after the blow Bombardier received when Republic Airways Holdings did just the opposite last week when it announced the scuttling Q400 operations at Frontier along with its regional subsidiary Lynx Aviation in favour of operating Embraer ERJ 170s and 190s.

Deliveries are set for May-2011 in a 74-seat, single-cabin configuration and is in response to the agreement it reached last year to extend its capacity purchase agreements with Air Canada, which prompted a fleet renewal.

Profitability continues

Jazz, which conducts its 4Q2009 webcast this morning, posted net income for the fourth quarter and year-end 2009 at CAD20.8 million and CAD92.6 million, respectively.

The Halifax-based carrier reported operating revenue in 4Q2009 of CAD351.2 million compared to CAD392.7 million, representing a decrease of CAD41.5 million or 10.6%. It also reported operating income of CAD17.3 million during the quarter. In the fourth quarter of 2009, Controllable Adjusted Actual Margin was 14.91%, 82 basis points or approximately CAD1.9 million greater than the target margin of 14.09%.

The airline also reported a corresponding decline in expenses, dropping them 7.7% in the fourth quarter compared to the 10.6% decline in revenues. Total operating expenses decreased from CAD353.0 million to CAD325.9 million, a decrease of CAD27.1 million. Aircraft fuel costs decreased by CAD24.7 million on the declining cost of fuel, which, for Jazz, meant a savings of CAD20.8 million. It also reported a CAD3.9 million decrease in fuel usage on a reduction in the number of Block Hours. Aircraft maintenance expense increased by CAD7.8 million as a result of increased rates under new maintenance contracts of CAD9.8 million, and other maintenance costs of CAD2.7 million. These expenses were offset, the US dollar exchange rate decline on certain material purchases of CAD4.7 million.

Non-operating expenses amounted to CAD2.1 million, a decrease of CAD155.9 million or 98.7%, from CAD158.0 million. The airline cited lower foreign exchange losses, a gain on the disposal of property and equipment, and a goodwill impairment loss of CAD153.2 million in the fourth quarter of 2008; offset by increased net interest expense.

While it posted substantial profits in the quarter, Jazz said revenue declines resulted from a CAD26.4 million decrease resulting from lower pass-through costs which are charged to Air Canada and treated as Jazz revenues; a change in the US/Canadian dollar exchange rate; a 6.6% reduction in Billable Block Hours; a 3.1% reduction in departures; and a reduction in the mark-up charged by Jazz under the CPA, effective 01-Aug-2009; offset by rate increases made pursuant to the CPA.

"Despite the challenges faced by North American airlines during the year, Jazz posted strong operating and financial results every quarter in 2009," said President & CEO Joseph Randell. "The service excellence delivered by our employees greatly contributed to the achievement of our best operational performance to date - earning a record CAD4.6 million in performance incentives for the quarter and CAD19 million for the year. More importantly, we accomplished this safely and as a team."

"Solid management practices and our successful focus on cost control have contributed to maintaining a healthy balance sheet, and our liquidity position was further strengthened by the successful closing of a 9.5% convertible debenture offering in November," Mr Randell continued. "Despite the volatility in capital markets, the offering was very well-received and gross aggregate proceeds were over CAD86 million."

Decline in year’s revenues

For the year, Jazz posted operating revenues of CAD1,473.9 million and operating income of CAD88.8 million compared to CAD1,636.3 million in 2008, representing a decrease of CAD162.4 million or 9.9%. It cited many of the same factors for revenue declines as cited in its 4Q2009 results, including a CAD180.2 million, or a 27.0%, decrease in pass-through costs, a 6% reduction in Billable Block Hours, a 4.2% reduction in departures and a reduction in the mark-up charged by Jazz under the CPA. Again these were offset by a higher US dollar exchange rate and rate increases under the CPA.

Its controllable adjusted margin for year-end 2009 reached 9% but was below the 11.11% target by 211 basis points or approximately CAD4.7 million. The compression caused by reduced block hours resulted in a CAD0.9 million of the short fall from target levels. The airline also cited incentive compensation expense, excluded from the CPA revenue rate development. Prior period rates provided sufficient margin to cover incentive compensation expenses, it said.

Total operating expenses declined from CAD1,488.0 million in 2008 to CAD1,345.5 million, a decrease of CAD142.5 million or 9.6%.

Operations improvement

In addition to the performance incentives paid to employees, Jazz received similar bonuses from Air Canada totaling CAD4.6 million or 2.1% of Jazz's Scheduled Flights Revenue as compared to CAD3.6 million or 1.5%. Jazz therefore earned 89% of the incentives available under the CPA in 2009, versus 65% in the previous year. Incentives earned in this quarter were higher primarily as a result of improvements in on-time performance and flight completion. Other revenue sources decreased from CAD3.7 million to CAD2.2 million.

Jazz earned 84% of the incentives available under the CPA. Performance incentives payable by Air Canada to Jazz under the CPA amounted to CAD19.0 million or 2.0% of Jazz's Scheduled Flights Revenue as compared to CAD5.7 million or 1.7% for 2008. Other revenue sources decreased from CAD13.4 million to CAD10.3 million, representing a decrease of CAD3.1 million or 23.1%.

Non-operating expenses amounted to CD6.4 million, a decrease of CAD160.2 million and the airline cited a property and equipment disposal, the lower Canadian/US exchange rate loss and, in 2008, a goodwill impairment loss of CAD153.2 million; offset by increased net interest expense.

The Controllable Adjusted Actual Margin for the year ended 2009 was 11.21%, which is less than the weighted average target margin established under the CPA of 13.05% by 184 basis points, or approximately CAD17.6 million. The shortfall was primarily attributable to incentive compensation expense which is excluded from the CPA revenue rate. Prior period rates provided sufficient margin to cover incentive compensation expenses. In the year ended 2008, Controllable Adjusted Actual Margin was 13.79%, which was 30 basis points or approximately CAD2.8 million less than the target margin of 14.09%.

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