ACE and Jazz

[airway]

I found this on another forum:

Here is how I understand it. Feel free to correct me or fill in the blanks.

During CCAA, Air Canada decided that the best way to return money to their investors and creditors was to split up the company and sell off the parts. The theory is that each of the divisions separately would have a higher total stock price. The parts would be stand alone public companies that anybody can buy shares of (or units, if it's an income trust like Jazz,( long story)) on a stock exchange.

In order to do this they first created a new company called ACE and made the separate divisions of the old Air Canada ( Aeroplan, Jazz, AC mainline, Air Canada Technical Services - Maintenance and Ground Handlers, Cargo?, Agents?) wholly owned subsidiaries of ACE.

Now ACE is in the process of making each of the divisions public companies, and selling the shares of the new companies to the public and other institutional investors. They are also giving shares of these new companies to ACE shareholders.

ACE has said that this process should be completed in 2008, and that ACE will no longer exist at that time.

This means that each of the companies will be totally separate, and will be free to operate as they see fit.

Right now, ACE owns 49% of Jazz. The rest is publicly owned. AC mainline does not own any units of Jazz.

In 3 weeks ACE will own 20% of Jazz. In a year or two Ace will be gone.

One wrinkle in this for Jazz is that, right now, Jazz has an agreement with AC mainline (not ACE) to provide feed for them until 2015. This is good for us in a way because we get a guaranteed income (apparently the rate they pay us is quite good). It's also bad in a way because they have a say in the size and number of aircraft we can operate.

In 2009 this agreement has a rate reopener, and AC may want to reduce the rate they pay us.

[mighty mouse]

Also at this time AC pumps most of its profits into Jazz to hide it from the tax man. Jazz being an income trust yields better returns for the share holders (the same share holders as ACE).

[Brick Head]

[quote="airway"] It's also bad in a way because they have a say in the size and number of aircraft we can operate.

quote]

I would say that is a fairly accurate synopsis other than the statement above.

Jazz is a separate company that can seek work anywhere it wants. Jazz can fly any type of aircraft it wants. Jazz can fly feed for any airline it wants. Jazz can go it alone and fly anything it wants to wherever it wants. Tour operators, Cargo.

AC nor ACPA have any control over what Jazz chooses to do. We are separate companies. Jazz has no restrictions, what so ever, imposed on it by Air Canada or ACPA.

Air Canada does however have out sourcing rules imposed on it through it's collective agreement with ACPA.

There is just one caveat to what I wrote above. Under the terms of the present CPA, Air Canada has the right to reduce aircraft operated within the Jazz CPA, on a one for one basis, if Jazz enters into a CPA with another carrier. The combination of the rich CPA with Air Canada, and the above clause, for the moment prevents Jazz from seeking other CPA work. So in a round about way the above statement could be interpreted as correct. For now that is.

I suspect that negotiation in 2008, for the period post Jan 2010, will deal with issues such as this, among other things of course.

[Brick Head]

Also at this time AC pumps most of its profits into Jazz to hide it from the tax man. Jazz being an income trust yields better returns for the share holders (the same share holders as ACE).

Sort of. Yes it is true that unit holders enjoy tax preference on money dispersed from the income trust. And yes the unit holders are getting a handsome return particularly for an airline. They are getting exactly what was promised them in the IPO.

However that explains only a fraction of the money being paid to Jazz by Air Canada. Jazz's consolidated CASM is almost double that of WestJet for example. If Jazz had a CASM in the range that other connector carriers have we would have expected to see a profit in the 500 million range.

AC pays 27 cents CA/ASM. for 5.5 billion seat miles=1.48 Billion/year.
A typical CASM of 17 cents/ASM (allowances for being a regional carrier with props in Canada)would have produced a profit of over 1/2 a billion.
Of course Jazz did not report 1/2 a billion profit because their CASM is listed at 24 cents CA for last year.

24 cents!!!!!!!!???????????

Absolutely not possible.

So you have two choices here.

You either believe that Jazz's cost are that astronomically high or you believe there is something within Jazz's consolidated numbers that is inflating their CASM. I subscribe to the latter.

So the obvious question is. Where is the money going? Who's getting it and what are they doing with it. We will likely never know.

[gonefishin']

BH... WRONG!!

ACPA (actually the Court appointed mediator) has to approve the aquisition of any jet aircraft. That's why it's taking so long to replace the 200 with a 705. Jazz can, however, add as many prop planes IE. DH8's they want.

[The Hammer]

Teplinsky gets involved only if said a/c is used for flying covered in the AC CPA. If it is 705's for, say someone in UAE, then ACPA can kiss Jazz's purple sphincter

[jazzpilot]

also we cannot do any flying directly in competition with any AC routes.(of which is everything we do and anything AC does) which limits us to opportunities.

[. .]

YYZ - YTL. I can't imagine AC stopping that one.

[Brick Head]

BH... WRONG!!

ACPA (actually the Court appointed mediator) has to approve the acquisition of any jet aircraft. .

Gonefishin,

Which one is it? ACPA or Teplitski who has all the control here? ACPA has no control over 50 -74 seat aircraft allocation. Teplitski makes all those decisions. Good gig for an arbitrator don't you think?

The Hammer is right on the mark with his comments.


If Air Canada wants to introduce an aircraft in the 50 -75 seat range. It does not matter where AC may want to put the aircraft, mainline or feeder. Teplitski makes the decision. Not Air Canada. Not ACPA. Not Jazz.

If jazz wants to introduce an aircraft in this range, or larger, for a reason other than flying it on behalf of Air Canada the small jet protocol does not apply. Jazz can order aircraft to its hearts delight. ACPA, nor Teplitski, nor AC can stop you.

I don't see where ACPA has any control when it comes to acquisition of aircraft in the 50 - 74 seat range. We are all at the mercy of Teplitski's decisions.

[Brick Head]

also we cannot do any flying directly in competition with any AC routes.(of which is everything we do and anything AC does) which limits us to opportunities.

You know I have heard this over and over again and really believe it be false. If you have a reference please post it.

There is nothing in the CPA that states such. In fact the CPA has language that describes the rights Air Canada has if Jazz enters into a CPA with another carrier. Your prospectus lists North American carriers as potential growth opportunities as their contracts come up for renewal with there respective feeders.

I know this takes time to get your head wrapped around but the world just changed. Jazz's business model is that of a CPA provider. Jazz's opportunities for growth with Air Canada are limited by the collective agreement Air Canada has with ACPA. Just as Jazz's opportunities for growth with say USair are limited by the contract they have with their pilots. United with there pilots ect. ect. That is the role of a CPA provider. This is the business model Jazz is pursuing. This is what your company does.

Jazz also free to multi task. Free to do say, transcon in widebody aircraft for Cathay, as well as work for AC at the same time. Free to start up sun destination charter operation. Cargo operation ect ect. This is of course up to Jazz management and the business model they decide to pursue.