Jazz posts CAD6 million profit

Jazz Air Income Fund posted a first quarter profit of CAD6.5 million on operating revenue of CAD355.6 million, down 3.8%. The profit was a negative swing of CAD14.6 million from CAD21.1 million or 69.1%. The airline reported its expenses were relatively flat from 1Q2009 rising only 0.2%.

The company cited several factors for the change including a lower dollar exchange rate, a 6.1% reduction in billable block hours, a 2.7% reduction in departures, and a reduction in the mark-up charged by Jazz under the CPA. This, said the airline, was offset by rate increases made pursuant to the CPA, and an increase in pass-through costs under the CPA.

Operating revenue was CAD355.4 million, a CAD14.0 million decline from 1Q2009. Total operating expenses increased from CAD337.8 million to CAD338.5 million, an increase of CAD0.7 million or 0.2%. Aircraft fuel costs increased by CAD8.4 million due to an increase of CAD10.9 million in the cost of fuel, offset by CAD2.5 million decline in fuel usage on the reduction in block hours. Aircraft maintenance expense decreased by CAD0.3 million with the change in the US dollar exchange rate on material purchases of CAD2.8 million; and the declining block hours flown of CAD1.4 million. This was offset by increased rates under new maintenance contracts of CAD2.7 million and other maintenance costs of CAD1.2 million.

Non-operating expenses amounted to CAD2.9 million, an increase of CAD0.9 million or 47.9% on increased net interest expense related to the convertible debenture issued by Jazz in November 2009. However, this was offset by a reduction in foreign exchange loss owing to lower US dollar exchange rate.

EBITDA was CAD24.8 million compared to CAD39.1 million in 2009, a decrease of CAD14.3 million or 36.5%. Operating income, before the amortization of the CPA asset, of CAD16.8 million represents a reduction of CAD14.8 million or 46.8 %. Distributable cash was CAD18.5 million, down CAD15.5 million or 45.5% from CAD34.0 million.

President and CEO, Joseph Randell reminded analysts on Friday’s first quarter conference call that the company suffered a 5% reduction in Air Canada flying in 1Q2009 versus 1Q2008 and took an addition 6% reduction in 1Q2010, which, he said, was driving the margin pressure for the company. However, he expects 2010 to be the low point in its flying activity under the Air Canada capacity purchase agreement, with increased flying activity expected in 2011.

"I'm thrilled with the way 2010 is unfolding so far for Jazz," he said. "We've had a very productive quarter, and overall I am pleased with our financial and operational performance. Jazz employees hit the ball out of the park, earning more than 80% of the operational performance incentives available per our CPA during the most challenging months of the year, and continue to do so safely."

Labour and fleet updates

He did not mention the threatened pilot strike when responding to labour questions from analysts, saying only that the company has completed three labour agreements – dispatchers, airport employees and crew schedulers which boosted labour costs about 5% year-on-year. Jazz has also included a kicker presuming the anticipated agreement on pending negotiations covering the 2,000 pilot and flight attendant employees. See related report: Jazz pilots to vote on strike action authorization to back contract demands

Randell pointed its recent acquisition of the Bombardier Q400 as improving its competitive position on costs. The 15 aircraft, which will require another CAD3-3.5 million in progress payments for the balance of the year, in addition to the CAD18 million already placed in the second quarter, will replace a like number of CRJ-100 and -200 regional jets. It also has options for another 15, with deliveries on the firm order beginning in May-2011 and one per month thereafter.

Diversification strategies: Charters, and Latin America

Randell also parried questions on its new deal with Thomas Cook, which the airline expects to add CAD100 million to its coffers with the addition of B757 charter flying for the tour operator. He indicated that talks were under way and progressing well to lock in the third-through-fifth years of the deal, the deadline for which is 30-May-2010. The carrier has contracted to operate no less than six B757s to Thomas Cook’s sun destination beginning in Nov-2010 and continuing through the winter season, ending in Apr-2011. Should they not reach agreement for the additional years, the agreement is set to sunset on 30-Apr-2012.

He was coy in disclosing any details on the deal posed by analysts, saying only to do so would threaten the company’s ability to be successful in gaining other such deals. Jazz is leasing the aircraft from Thomas Cook Airlines Ltd and will adopt the Thomas Cook brand beginning in January-2011. While charter margins, such as the flying the company will be doing for Thomas Cook, are normally higher, he indicated they would be generally based more on what is typical in the regional airline business.

Randall said that, based on the 2010 Air Canada winter schedule and the Thomas Cook forward planning, Jazz will be billing between 378,000 and 383,000 block hours during 2010, with Thomas Cook accounting for between 10,000 and 11,000 block hours for the entire winter season.

"Our new partnership with Thomas Cook Canada Inc and our investment in the South American regional carrier Pluna, are meaningful steps towards building and diversifying Jazz," said Randell. "Looking ahead, we have a great deal of work ahead of us to capitalize and benefit from the opportunities we have before us."

Jazz completed its USD15 million investment in Latin American Regional Aviation Holding Corp ('LARAH') during the first quarter. In return for the investment it is obtaining a 33.3% non-voting, equity interest in the company. LARAH holds an indirect 75% equity interest in Pluna Lineas Aéreas Uruguayas SA ('Pluna'). The remaining 25% equity interest in Pluna is held, indirectly, by the Government of Uruguay. Jazz's investment, together with an additional USD5 million to be invested by the Government of Uruguay, will be used by Pluna to complete the business restructuring and to fund growth.

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