While its US counterparts struggle to restructure, Chorus Aviation, the holding company operating Jazz Airlines, posted net income of CAD13.9 million in the third quarter on CAD411.7 million in operating revenues up 8.6%. Net income was down from the CAD16.3 million posted in the year-ago quarter.
But it is not all easygoing for the Canadian regional since it faces a benchmarking process on costs. Air Canada has already shocked its regional partner with its presumptions, playing with compensation definitions that could cost Chorus CAD26 million. Chorus warned that its controllable mark up may be reduced as a result of the process.
The capacity purchase agreement (CPA) with Air Canada calls for two rate adjustments. The first was scheduled for 2010 based on its 2009 calendar year and the second is set for 2016, based on the 2015 calendar year using a complicated formula that adjusts the markup to market rates of peers.
“We were surprised by the Air Canada filing,” CEO Joe Randell told analysts, “most particularly on the amount of the claim and the peculiarity of its assertions. We think our definition not only meets the intent but the spirit of the contract. Air Canada’s approach is not a recognized industry standard for benchmarking and we think no adjustment will be required.”
Chorus and Air Canada were unable to reach agreement on the 2010 adjustments and the two agreed to go to binding arbitration. When Air Canada delivered its claim to the panel on 03-Oct-2011 it sought a reduction in the controllable markup from 12.5% to 9.54% retroactive to Jan-2010. The result would be a refund from Chorus to Air Canada of CAD26 million. Air Canada is also seeking an adjustment on the 2011 payments it made to Chorus.
Air Canada wants to use a different methodology to calculate the costs. The contract, according to Chorus, calls for a comparison of cost per available seat mile (CASM) with the median CASM of comparable operators. However, Air Canada wants to be granted a new methodology it calls “component unit cost driver (CUCD)" which Chorus points out is not an “alternate market recognized benchmark” as discussed in the actual contract. Chorus further said that even if CUCD were found to be an acceptable alternative, it would not result in the adjustment sought by Air Canada.
Executives noted that Air Canada’s request means they want a benchmark 720 basis points lower than negotiated, which which some suggest is egregious.
In its response to the claim filed 07-Nov-2011, Chorus filed a counterclaim asserting the relevant provisions of the CPA provide that the methodology compares Chorus unit costs to the adjusted controllable unit costs of comparable operators on a CASM basis. In that case, there would be no repayments to Air Canada from either 2010 or 2011. It sought the retention of the 12.5% mark up at least through its next benchmarking process in 2015. Mr Randell said the company is in an excellent cash position should the panel rule against Chorus.
The two await a decision by the three-person arbitration panel, expected in the second quarter of 2012 and, while Chorus expects Air Canada’s claim to fail, the action, as well as those by US major carriers against their regional partner, has only one lesson. While regionals may think they have a contract and may think it is enforceable, major carriers have all sorts of tricks up their sleeve to try to contravene it. For instance, Delta Air Lines imposed such massive schedule changes on SkyWest and Pinnacle as to cost regionals their bonuses or force them to pay penalties. And that is in addition to the millions of additional crew and training costs resulting from those changes.
One analyst even questioned whether or not the contract stated clearly how benchmarking would be measured.
“Yes,” said Mr Randell, signalling the problem. “There is a paragraph in terms of the approach and while it is not specific, it is a direction. That is the process we are now in and that is coming to an agreed interpretation.”
Of course there is one more lesson. There will be a lot of money spent on lawyers to determine who is right as SkyWest is finding as its claim against Delta winds its way slowly through a Georgia court.
Thomas Cook reactivated, Chorus block hours increasing
Chorus’s charter work was launched again in November and its planned billable block hours for the 757 operation as well as Air Canada’s assumptions is expected to increase from 395,000 to 398,000 for 2011.
That suggests capacity is lower for the fourth quarter, one analyst pointed out, and executives noted that hours on 50-seat jets were lower by quite a bit year-on-year.
Operating income reached CAD31.1 million, 15% year-on-year. EBITDA (earnings before interest, taxes, depreciation, amortisation and obsolescence) was CAD43 million, an increase of 15.%. Free cash flow was CAD29.1 million, down 2.3%.
The company cited a 19.8% increase in pass-through costs to CAD160.8 million including CAD24.9 million related to fuel. Passenger revenue, excluding pass-through costs, rose 2.3% or CAD5.5 million on a 3.1% increase in billable block hours.
However, this was offset by a lower US dollar exchange rate which impacted mark-up revenue by CAD500,000. Other revenue rose by CAD500,000.
"I'm pleased with our operations and financial performance in the third quarter," said Mr Randell. "We continued to generate positive operating income and cash flows from operations in the third quarter. Our fleet renewal program is progressing on schedule and we now have seven Q400s in the fleet."
Total operating expenses increased 8.1% to CAD380.6 million, as controllable costs increased 0.9%, including CAD400,000 cost increase associated with the introduction of the Bombardier Q400 in salaries, benefits and training.
The company experienced a CAD7.1 million increase in employee costs on an increase in the number of full-time equivalent employees needed to accommodate capacity growth. Also contributing was new rates resulting from its new collective bargaining agreements as well as increased pension expenses.
Non-operating expenses reached CAD12.6 million, representing an increase of CAD15.8 million largely on a foreign exchange loss of CAD10.1 million.