.

[Boooooo]

.

[mbav8r]

I believe Jazz/Chorus is guaranteed 2 million over controllable costs, which means AC pulls the strings essentially. If Jazz didn’t work with AC to reduce the costs associated with the reduction in flying, it is likely AC would have used the force majeure clause to terminate or severely alter the CPA.
That being said I haven’t actually looked through the CPA, this is just my understanding through corporate messages and other postings from people who have a better understanding of our situation.

[rudder]

I believe Jazz/Chorus is guaranteed 2 million over controllable costs, which means AC pulls the strings essentially. If Jazz didn’t work with AC to reduce the costs associated with the reduction in flying, it is likely AC would have used the force majeure clause to terminate or severely alter the CPA.
That being said I haven’t actually looked through the CPA, this is just my understanding through corporate messages and other postings from people who have a better understanding of our situation.

Nope. It has been a ‘fixed fee’ CPA since 2015.

https://chorusaviation.com/wp-content/u ... -Feb-1.pdf

Amended and extended January 2019. Still fixed fee.

https://chorusaviation.com/wp-content/u ... t-2019.pdf

https://chorusaviation.com/wp-content/u ... script.pdf

Whatever is happening right now between CHR and AC in terms of the COVID response is likely by consent.

[mbav8r]

Interesting, I can’t find the memo that referenced the 2 million guaranteed profit, I can find the one that references the fixed fee minimum flying.
If Jazz is reducing payroll to this extent, will they pass the savings on to Air Canada, we certainly have not flown the minimum at this point?

[flyingcanuck]

My understanding was the flight has to go to get any income from the CPA. I wouldnt say our savings go to AC, more that Chorus just needs to not spend the money on payroll if we arent getting any money from the CPA.

[Boooooo]

.

[airway]

My understanding was the flight has to go to get any income from the CPA. I wouldnt say our savings go to AC, more that Chorus just needs to not spend the money on payroll if we arent getting any money from the CPA.

I think this is partially true.
My understanding is that there is also a minimum number of hours per year that AC must pay Jazz for, regardless if the flights go or not. Also, I think this number is fairly high, like 85% of the hours Jazz flies normally.

[rudder]

Fixed Fee.

CHR buys an airframe. AC guarantees an associated agreed annual payment (revenue for CHR). AC pays pass through costs (fuel/rents/etc). CHR covers all others. There are no mark ups. AC provides CHR with estimated utilization rate (block hours) so CHR can estimate operating costs which factor in to setting annual fixed fee. Fixed fee is deeply discounted (low resultant margin). CHR derives secondary revenue through leasing division. Leases the aircraft to AC who reallocate it to Jazz.

[mbav8r]

Fixed Fee.

CHR buys an airframe. AC guarantees an associated agreed annual payment (revenue for CHR). AC pays pass through costs (fuel/rents/etc). CHR covers all others. There are no mark ups. AC provides CHR with estimated utilization rate (block hours) so CHR can estimate operating costs which factor in to setting annual fixed fee. Fixed fee is deeply discounted (low resultant margin). CHR derives secondary revenue through leasing division. Leases the aircraft to AC who reallocate it to Jazz.

Where does the MADUG factor into the above?

[rudder]

Where does the MADUG factor into the above?

MADUG no longer relevant.

‘Covered Aircraft’ is the determinant of CPA revenue.


“On January 1, 2015, Chorus and Air Canada entered into a CPA Amending Agreement whereby the parties extended the term of the CPA to December 31, 2025, changed the means by which Air Canada pays Chorus for services delivered under the CPA, created a fleet renewal and transition program for the Covered Aircraft, and introduced certain new or revised terms and conditions related to: (i) the consequences of a severe economic downturn or an event of force majeure, (ii) change of control, (iii) non-competition and (iv) other matters (referred to herein as the "January 1, 2015 Amendment"). With regard to payment for services delivered under the CPA as a result of the January 1, 2015 Amendment, the parties have eliminated the mark-up on Controllable Costs, any future benchmarking process and the Compensating Mark-Up, and replaced them with a simplified combination of fixed fees per Covered Aircraft, conversion of some former Controllable Costs into Pass-Through Costs, compensation for Controllable Costs (other than crew labour costs) by payment of rates generally set on an annual basis, and Air Canada’s assumption of direct responsibility for some significant costs.”


Historical description of CPA changes -

On February 2, 2015, Chorus announced that all terms and conditions had been met to establish an amended and restated CPA with Air Canada effective January 1, 2015 (referred to herein as the "January 1, 2015 Amendment") extending the CPA term to December 31, 2025.
Prior to the January 1, 2015 Amendment, Chorus was paid rates which were negotiated and set every three calendar years based on Chorus’ projected Controllable Costs for the relevant three-year period, using certain variables including Block Hours, Flight Hours, aircraft, cycles and passengers carried. Chorus was also paid certain variable and fixed aircraft ownership rates and fixed rates. The rates set for each three-year period were not guaranteed to be the same as actual Controllable Costs incurred by Chorus in providing the Scheduled Flights during that period. Once set, for CPA billing purposes, Chorus applied a mark-up (and the Compensating Mark-Up when applicable) to the rates. Chorus was also entitled to repayment of certain Pass-Through Costs, including fuel, airport and navigation fees, landing and terminal fees and certain other costs. In addition, Chorus was eligible to receive incentive payments each quarter if it achieved certain performance levels related to controllable on-time performance, controllable flight completion, PAWOBS and overall customer satisfaction.
Chorus incurs two types of costs under the CPA:
1) Controllable Costs
2) Pass-Through Costs
Under the January 1, 2015 Amendment, many costs that were formerly Controllable Costs have become Pass-Through Costs; however, Chorus will continue to be entitled to be paid rates, based on Controllable Costs, using the same variables as in prior years such as Block Hours, Flight Hours, cycles and passengers carried as well as certain variable and fixed aircraft ownership rates and fixed rates. With the exception of flight crew costs, aircraft rent, and depreciation and amortization on aircraft and parts, the rates for Controllable Costs are now set annually. Controllable Costs now consist of fewer costs than prior to January 1, 2015 and include costs such as non-crew salaries and wages, general overhead and aircraft maintenance, materials and supplies (for further detail please consult the detailed CPA cost categorization chart found below).
Under the January 1, 2015 Amendment, Air Canada provides Chorus with projected annual Block Hours, Flight Hours, cycles and passengers estimated to be carried in advance of each calendar year during the term. The associated Controllable Costs are determined by Chorus and are paid by Air Canada to Chorus for the Controllable Costs through mutually agreed rates. The rate-setting process is staggered throughout the year and conducted on a rolling basis.
It is expected that annual rate setting related to Controllable Costs will decrease Chorus’ cost risk as the annual rate re-set ensures those costs are reviewed in a timely manner and the corresponding rates reflect the realities of the current environment. With such visibility the accuracy of the rates is better assured in the event there are significant changes in the operation and/or the operating environment.
Pilot and flight attendant crew rates have been set for the term of the CPA to December 31, 2025 and reflect projected crew unit costs for this period. Chorus has negotiated collective agreements with its crews for the term of the January 1, 2015 Amendment which support the projected crew unit costs agreed to with Air Canada. The crew rates are adjusted if the number of Block Hours scheduled, the flow of Jazz pilots to Air Canada, and/or if the efficiency of the crew schedules delivered by Air Canada are outside certain agreed thresholds. In addition, regulatory changes that impact crew unit costs result in adjustments to the crew rates.
Pass-Through Costs are passed through to Air Canada and are fully reimbursed. These include costs such as airport and navigation fees and terminal handling fees. Services provided by Air Canada are provided at no cost to Chorus. These include Air Canada ground handling and facilities leased from Air Canada and, effective November 1, 2015, aircraft fuel.

Under the January 1, 2015 Amendment, Chorus’ compensation changed from a mark-up on Controllable Costs to fixed fees. The mark-up and Compensating Mark-up concepts have been eliminated. As well, the requirement for benchmarking based on Chorus’ costs in 2015 and the margin adjustment provisions contained in the CPA prior to the January 1, 2015 Amendment are no longer applicable.
Chorus is now compensated by the more industry standard approach of fixed fees. There are two fixed fees which establish the minimum level of compensation for the balance of the term of the CPA:
1) Fixed Margin per Covered Aircraft
2) Infrastructure Fee per Covered Aircraft
The Fixed Margin per Covered Aircraft does not vary regardless of network size, complexity or hours flown. The Infrastructure Fee per Covered Aircraft compensates for the additional services Chorus provides in support of Air Canada’s regional flying network such as airport operations. The word "rates" for purposes of discussion relating to the January 1, 2015 Amendment does not include the Fixed Margin per Covered Aircraft or the Infrastructure Fee per Covered Aircraft.
Combined, these fixed fees based on the Covered Aircraft were set at approximately $109.7 million for 2015, and once all incremental aircraft (refer to discussion in Section 4 - The Chorus Business) are received the fixed fees increase to approximately $111.7 million per year until the year 2020. From the years 2021 to 2025 these fees are also fixed but at a lower annual amount. Chorus anticipates that this decrease will be partially offset by additional margin contribution from aircraft leasing under the CPA.
Jazz Leasing Inc., a subsidiary of Chorus, leases owned Q400s and engines into the Jazz operation under the CPA. Under this arrangement, Chorus earns aircraft leasing revenue under the CPA from Q400s and Q400 engines. For the year ended December 31, 2015, Chorus earned aircraft leasing revenue of $68.8 million. Annually these aircraft and engines currently generate a cash margin (after consideration of debt servicing charges) of approximately 20%.
The new Q400s being added to the Covered Aircraft fleet in 2016 are anticipated to accrue incremental cash margins comparable to those being earned on Chorus' current fleet of Q400s. As well, the movement of 19 Dash 8-300s to market lease rates post ESP events, are anticipated to accrue incremental cash margin to Chorus going forward (refer to Section 3 - Introduction, "Caution regarding forward-looking information").
Performance incentives will continue to be available, under the January 1, 2015 Amendment, for achieving established performance targets for the same categories identified under the CPA prior to the January 1, 2015 Amendment. The maximum annual available incentive for the years 2015 to 2020 is $23.4 million and $12.2 million for the years 2021 to 2025.
In addition to lowering Chorus' risk profile, Chorus believes that the January 1, 2015 Amendment:
• Provides long-term predictable compensation levels that are anticipated to support the current dividend paid to Shareholders.
• Aligns the interests of Chorus and Air Canada and strengthens their relationship.
• Promotes Chorus’ market competitiveness through cost reduction initiatives such as the modernization of its
fleet and the ability to flow Jazz senior pilots to Air Canada.
• Secures long-term market competitive labour agreements with Jazz pilots, flight attendants and dispatchers.
• Reduces reliance on the Fixed Margin and Infrastructure Fee per Covered Aircraft and replaces it with growth
in cash margin from aircraft leasing under the CPA.
• Secures a solid foundation from which to grow and diversify Chorus’ group of companies.



And lastly - Risk Factor(s)

Force Majeure

If either Air Canada or Chorus is prevented from performing its obligations under the CPA in whole or in part due to a force majeure event, the affected party shall be temporarily excused from performing its obligations to the extent it is so prevented.
In addition, if Jazz is affected by a force majeure event which prevents it from performing all of its services under the CPA, Air Canada’s obligation to pay the agreed rates related to certain limited fixed costs would continue, however Air Canada’s obligation to pay the other agreed rates would be temporarily suspended. All other obligations of Air Canada, including, but not limited to, those related to the fleet of Covered Aircraft and minimum average daily utilization guarantee would also be temporarily suspended and inapplicable in respect of the period of the force majeure event. Such force majeure event would also trigger prorated adjustments to be made to Air Canada’s payment obligations in respect of the period of the force majeure event to reflect the level of service Jazz provides during such period.
Either of Air Canada and Chorus may terminate the CPA if the other party is prevented from performing all or substantially all of its obligations hereunder for more than 60 days due to a force majeure event.