Jazz is working on a restructuring plan to accommodate the tax reform on income trusts, such as Jazz, passed in Canada last year. The reform is effective in 2011 and the company, which said the conversion costs – between CAD2 and CAD3 million this year – would not be recoverable. It has made completing the plan by year end one of its top priorities. It is currently reviewing options along with timing of potential changes in its corporate structure.
Remain a trust or convert to a corporation
In reporting year-end and fourth quarter results, the company indicated the amended capacity purchase agreement with Air Canada has had a definite impact. See related report: Jazz continues income streak, opts for Q400s
The agreement reduced the markup of controllable costs from 16.7% to 12.5% for the remainder of the contract, which was extended for five years until 2020. Based on that change and the reduction in billable block hours to between 370,000 and 380,000 for this year, it expects a payout ratio of between 70% and 80% for the year. Essentially, Jazz has two options: remain a trust or convert to a corporation. If it converts to a corporation its worst-case tax rate would be 17%.
It also projects controllable operating margins under the CPA to be between 8.25% to 9.25% for 2010. CEO, Joe Randell, added that incentives and ancillary margins would be added to that.
The amended CPA called for a complete fleet renewal which was evidenced by the Jazz order for 15 Bombardier Q400s. Air Canada CEO Calin Rovenescu indicated that 25 regional jets would come out of the Air Canada/Jazz system in the next two years to be replaced by the Q400s. Jazz also holds options for another 15 Q400s. However, Randell also noted that there would be eight “swing” RJs held in case Air Canada needs more capacity.
The Q400s will be financed through operating leases with payments made at the signing of the purchase agreement and again commencing six months before delivery. Jazz declined to specify payments. It is now in the process of returning 10 CRJs bringing its fleet to 123 where it will remain until May 2011 when the first Q400 is due. One it takes delivery of three Q400s, each subsequent delivery will mean the a CRJ will come out of the fleet for a total of 13, according to Randell.
Diversification, Toronto City Center and pilots
Jazz is targeting diversification for this year. The CPA accounts for 99% of revenues with the remaining 1% coming from charter, ground handling, training and buy-onboard products. Charter, largely to the oil fields, took a hit last year but the airline is reporting an uptick in that market as well. It also reported new contracts for grand handling.
In response to a question about Air Canada’s suit against the Toronto Port Authority for refusing to allow it access to the Toronto City Center airport, Jazz it is a party to the suit filed yesterday and is “seeking fair and equal access to a federally owned and operated facility and we are continuing with our case in the Federal Court.” The only operator at the airport now is Porter Airlines, another Q400 operator.
Jazz is in negotiations with pilots, flight attendants and crew schedulers. It is also working through the conciliation process with dispatchers. It also has new collective agreements in place with its maintenance at in its airport division.
Randell was particularly exercised about the security problems associated with trans-border flights in the two months since the Christmas Day attempt on a Northwest Airlines aircraft.
“This is a concern within industry,” he said, calling on the airline industry to drive the needed changes. “The impact highlights the need for more unconventional thinking and policies to deal with threats. The business as usual approach to reacting on the fly and simply adding more layers of screening on passengers resulted in network disruptions, thousands of frustrated and inconvenienced travelers and, of course, costs to be absorbed by industry. This is no longer sustainable and must change. We need to be proactive by invest in smart technology and eliminate redundant procedures. We must focus our limited resources on the real threats and do a better job of identifying the terrorists well before they get on the aircraft.”
In addition to restructuring and preparing for the 2011 deliveries of the Q400s, other priorities include ensuring operational excellence for the CPA and exploring further options to grow and diversify revenue.