Yanking of Jazz Thomas Cook contract underscores ever-growing difficulty in regional airlines
A decision by travel package operator Thomas Cook to end a five-year charter agreement three years early with Canada's Jazz Aviation reflects the stark realities regional carriers face in attempting to meaningfully diversify their core business of providing feed to network legacy airlines.
While Thomas Cook ended the deal due to souring demand, it leaves Jazz again with just one client, Air Canada. Tensions between Jazz and Air Canada have flared over a dispute on rates paid to Jazz that could result in the regional carrier having to pay its partner CAD26 million (USD26.2 million) if an arbitrator later this year rules in Air Canada's favour.
- Thomas Cook's decision to end its charter agreement with Jazz Aviation reflects the challenges faced by regional carriers in diversifying their business.
- Jazz Aviation is left with only one client, Air Canada, after the termination of the Thomas Cook deal.
- Tensions between Jazz and Air Canada have arisen over a rate dispute, potentially resulting in a significant payment by Jazz to Air Canada.
- The Thomas Cook operation accounted for a small fraction of Jazz's fleet and revenue but leaves a revenue gap that needs to be filled.
- Diversification opportunities in the North American market are limited, as seen by the bankruptcy of Pinnacle Airlines and integration issues faced by SkyWest.
- Jazz and SkyWest have made offshore investments to diversify their revenue base, but these have not been successful in generating significant returns.
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For the last two years from November through April Jazz has operated six Boeing 757s on behalf of Thomas Cook from Calgary, Toronto and Vancouver to sun destinations in the US, Mexico, Dominican Republic, Bahamas, Jamaica, Aruba, Curacao and Costa Rica. Just last month the CEO of Jazz parent Chorus Aviation Joseph Randell said the second season of flights was off to a great start. Thomas Cook has now entered into an exclusive agreement with WestJet that expands capacity supplied by WestJet to Thomas Cook for the 2012-2013 winter season. WestJet stated it would be the only airline providing capacity to Thomas Cook in the Canadian market.
Even though the six aircraft operated on behalf of Thomas Cook were a tiny fraction of the 125 turboprops and regional jets Jazz operates on behalf of Air Canada, the Thomas Cook operation did enable Jazz to garner roughly CAD100 million (USD101 million) in annual revenue from the partnership, which was relatively low risk since Jazz leased the 757s from Thomas Cook. Jazz now needs to find another source to fill the revenue gap being vacated by Thomas Cook.
Breakdown of Jazz fleet among its three lines of business: 2012
Source: Jazz Aviation
But the reality is those opportunities are few and far between in the ever-maturing North American market. Across the border, efforts at partner diversification ultimately drove US regional group Pinnacle Airlines into bankruptcy protection as it shuns unprofitable flying for United Airlines and US Airways, which will leave Delta Air Lines as its sole partner by year-end. Integration headaches between its two subsidiaries Atlantic Southeast Airlines and ExpressJet Airlines pushed SkyWest into its first yearly loss in 23 years.
See article: Pinnacle's bankruptcy underlies growing weakness of US regional carriers
Both Jazz and SkyWest have also made offshore investments as small ways to diversify their revenue base. Jazz in 2010 completed a USD15 million investment in Latin American Regional Aviation Holding, which gave Jazz a 25% indirect stake in Uruguayan carrier Pluna. SkyWest several years ago invested in Brazilian regional carrier TRIP, and maxed out its stake at USD30 million for a 20% holding in the carrier. More recently, it invested USD7 million in Vietnamese carrier Air Mekong. But these investments have proven marginal at best, with SkyWest reporting nearly USD12 million in losses on its stakes in TRIP and Air Mekong during the last three quarters of 2011.
Jazz has stated it does not foresee replicating its investment in Pluna elsewhere, and has often cited additional opportunities in the charter market and additional ground handling business as potential new revenue opportunities. At the end of 2011, Jazz had two Bombardier Dash 8 100 turboprops, two Dash 8 300s and one 50-seat CRJ in charter operations, and also had some ground handling contracts. But obviously that is a small portion of the company's business, accounting for only 1% of Jazz Aviation revenues. It is tough to imagine the company's ability to grow this business to significant levels, which means its reliance on Air Canada will continue.
The future remains particularly uncertain for Jazz as its major partner Air Canada remains embroiled in labour disputes that have triggered work slowdowns during the last month. As customer confidence begins to erode in Air Canada's ability to carry-out its schedule, Jazz will no doubt be affected by the fallout. With the Thomas Cook business now dissolved, Jazz must intensify its efforts at finding reliable avenues to diversify its business.