Air Canada Revises the Terms of its Capacity Purchase Agreement with Chorus Aviation for Regional Flying

[gustind]

Jazz Aviation to become sole operator of Air Canada Express Flights

MONTREAL, March 1, 2021 /CNW Telbec/ - Air Canada today announced an agreement to amend the Capacity Purchase Agreement (CPA) with Jazz Aviation LP, a wholly-owned subsidiary of Chorus Aviation Inc., under which Jazz currently operates certain regional Air Canada Express flights.

Through the revised agreement, Air Canada will transfer operation of its Embraer E175 fleet to Jazz from Sky Regional and Jazz will become the sole operator of Air Canada Express services. The revisions to the CPA are subject to Jazz reaching an agreement with the Air Line Pilots Association, International. If this condition is satisfied, the CPA will be amended on a retroactive basis to January 1, 2021.

"Air Canada is consolidating its regional flying with Jazz in response to the ongoing devastating impact of COVID-19 upon the airline industry. This necessary realignment of our regional services will help Air Canada achieve efficiencies and reduce operating costs and cash burn by consolidating its regional operations with one provider. Moreover, by streamlining the regional fleet, this agreement will also position Air Canada to operate more competitively with a single provider as traffic returns following the pandemic," said Richard Steer, Senior Vice President, Operations and Express Carriers.

"Sky Regional has provided excellent service to Air Canada and its passengers over the past decade with an impeccable safety record and excellent on time performance and cost management. We thank Sky and all of its employees for their effort, dedication and valued partnership," said Michael Rousseau, President and Chief Executive Officer of Air Canada.

As a result of the CPA revisions and consolidation of regional flying, Air Canada expects to realize $400 million in cost reductions over the 15-year term of the agreement ($43 million per year until 2026 and $18 million per year thereafter). This includes:

Increasing near term-cost certainty as a result of the combined fleet under a single operator;
Reducing Air Canada's overall regional flying compensation;
Creating related operational costs savings;
In addition, the revised CPA will lower future contractual capital expenditure and leasing costs through a restructured CPA fleet, avoiding an estimated $193 million in future capital expenditures.


CAUTION REGARDING FORWARD-LOOKING INFORMATION
This news release includes forward-looking statements within the meaning of applicable securities laws. Forward-looking statements relate to analyses and other information that are based on forecasts of future results and estimates of amounts not yet determinable. These statements may involve, but are not limited to, comments relating to guidance, strategies, expectations, planned operations or future actions. Forward-looking statements are identified using terms and phrases such as "preliminary", "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan", "predict", "project", "will", "would", and similar terms and phrases, including references to assumptions. Forward-looking statements, by their nature, are based on assumptions, including those described herein and are subject to important risks and uncertainties. Forward-looking statements cannot be relied upon due to, amongst other things, changing external events and general uncertainties of the business. Actual results may differ materially from results indicated in forward-looking statements due to a number of factors, including the factors identified herein and in Air Canada's public disclosure file available at www.sedar.com including those factors identified in section 17 "Risk Factors" of Air Canada's 2020 MD&A. The forward-looking statements contained or incorporated by reference in this news release represent Air Canada's expectations as of the date of this news release (or as of the date they are otherwise stated to be made) and are subject to change after such date. However, Air Canada disclaims any intention or obligation to update or revise any forward-looking statements whether because of new information, future events or otherwise, except as required under applicable securities regulations.

[tdp19]

Wow! Can’t say I’m surprised! Will be another shit show integration coming to the air canada family.

[montado]

Will the 175 stay, or is this just a paperwork exercise and these aircraft go to the desert?

[47north]

Wow! Can’t say I’m surprised! Will be another shit show integration coming to the air canada family.

I doubt that. Bringing in the Georgian flying and pilots went relatively smooth. Should be no different this time. Doubt there will be much of an issue with an ALPA integration of seniority lists either.

[47north]

Will the 175 stay, or is this just a paperwork exercise and these aircraft go to the desert?

Doubt they will be parked. With the CRJ out of production and no new alternative, it wouldn't be surprising if the 175-E2 replaces the 900 eventually.

[gustind]

"The Jazz fleet is up-gauging to larger regional jet aircraft and replacing smaller turboprop fleet sooner than contemplated in the previous fleet plan. Bringing the Embraer 175 aircraft into the Jazz Covered Aircraft fleet makes Jazz the exclusive Air Canada Express operator of 70+ seat aircraft until 2025 and is a demonstration of our cost competitiveness and strong relationship with Air Canada. Further, quarterly reconciliation of the controllable cost guardrail receivable provides greater certainty in the timing of cash flows and improves our liquidity by eliminating potentially significant draws on working capital," concluded Mr. Randell.

Revisions to the CPA include the following:

• Consolidation of 25 Embraer 175s into Jazz's Covered Aircraft fleet

• Jazz will operate the 25 E175s under the CPA.

• Jazz to provide 100% of Air Canada Express 70+ seat regional capacity until 2025.

• Fixed fees will increase by $46.0 million over the term of the CPA with annual minimum fixed fees increasing by $1.2 million per year from 2021 to 2025, and by approximately $4.0 million per year from 2026 to 2035.

• Removal of 19 Dash 8-300s from Jazz's Covered Aircraft fleet

• 19 Dash 8-300s will be removed from the fleet in 2021. Removal of the Dash 8- 300s will reduce future aircraft leasing revenue under the CPA by approximately $56.0 million over the remaining term of the contract.

• Chorus owns these Dash 8-300s, 15 of which have undergone the Extended Service Program ('ESP') which prolongs their useful life by approximately 15 years. Chorus has the ability to sell or lease these aircraft or convert them for cargo operations.

Controllable Cost Guardrail Receivable

• Uncertainty in the flying schedule caused by the pandemic resulted in the accumulation of a $44.2 million controllable cost guardrail receivable from Air Canada at December 31, 2020.

• The revisions to the CPA will cap the controllable cost guardrail receivable to a maximum of $20.0 million annually and provide for quarterly reconciliations to avoid the accumulation of a receivable in excess of the agreed maximum.

• The 2020 guardrail receivable has been paid; however, without the proposed changes to the guardrail, the 2021 CPA guardrail receivable could be as high as $45 million.

Quarterly reconciliations against the new guardrail receivable cap will reduce Chorus' financial exposure by capping the guardrail receivable and minimize draws on Chorus' available working capital.
As a result of these revisions to the CPA, Chorus anticipates one-time costs, charges, and other fees to range between $90.0 million and $110.0 million, with approximately half of this range being non-cash in nature, and the cash portion paid over several years.

All other material components of the CPA are unchanged, including:

• Contract expiring on December 31, 2035.

• Minimum fleet guarantee of 105 aircraft until 2025, and 80 aircraft from 2026 and beyond.

• Performance incentive compensation.

• Pilot mobility program.

Upon becoming effective, these revisions to the CPA optimizes the Jazz fleet for Air Canada and makes it the exclusive provider 70+ seat regional capacity in the Air Canada Express network until 2025, while providing significant cost savings and network planning flexibility for Air Canada.

[DHC-1 Jockey]

Bringing in the Georgian flying and pilots went relatively smooth. Should be no different this time. Doubt there will be much of an issue with an ALPA integration of seniority lists either.

That was during pre-pandemic times. How will Jazz bring on Sky pilots while their own members are on layoff?

If I were a Jazz pilot and Sky pilots came over to the Jazz list to start up the 175 operation and received full pay and benefits while I sat at home on CEWS, I’d be pretty upset.

[Sharklasers]

It says it’s contingent on the agreement of ALPA. Strictly as a third party I’ll be interested to see how they sell this one to the Jazz pilots. The covered fleet remains unchanged so it’s not like they will be bringing growth, due to the nature of the status pay no one will be making any more money. Sky didn’t have a PML before and now those guys will be competing for those same spots against the Jazz pilots. With so many of their own guys laid off unless ALPA knocked their end out of the park (100% flow, return to pre 2015 pay scales, DB.....) I just don’t see why anyone would vote for this.

[FL030]

The good news for Jazz pilots is they now have a monopoly on AC regional flying until 2025. The bad news is didn't they just sign a collective agreement deal until 2035?

[Yycjetdriver]

Good thing you guys didn’t sign a super long collect agreement with concessions in order to stay competitive against sky/Georgian .... oh wait

[Dias]

I just don’t see why anyone would vote for this.

Didn't you read the Transat thread? Because kumbaya, my brother.

[Sharklasers]

Good thing you guys didn’t sign a super long collect agreement with concessions in order to stay competitive against sky/Georgian .... oh wait

I had forgotten about that. Even from a moral perspective it seems like a kick in the pants to have to give DOH to every operator who cuts the legs out from under you.
Jazz had a world class contract in both regional pay and working conditions and they might never ever get back to where they were pre GGN and sky.

[Ash Ketchum]

With the covered fleet remaining the same and the retirement of the classic dash there will be a surplus of pilots post covid. It will be interesting to see how Jazz will integrate the Sky pilots into the seniority list. I agree that it is not that good of a deal for Jazz pilots on CEWS unless all the Sky pilots go BOTL.

[Arnie Pye]

The press release only states that the planes are moving. Not the pilots. Furloughed Sky pilots haven’t received any email from management or the union.

[Inverted2]

When the GGN pilots came over everybody got a job and there was lots of movement. Now with ~600 Jazz pilots laid off I don’t know how they will do this. If it is DOH then the pilots on lay-off at Jazz won’t be getting their jobs back for a few years likely.

[rudder]

The Jazz pilots have always taken a long term view of the industry when attempting to strategize and I don’t think it will be any different in this instance.

The terms of the CHR CPA made it unlikely there would be any place for Skyregional at Express after 2025. This simply represents an acceleration of the inevitable outcome.

As for the removal of the Dash 8’s, that is also simply an acceleration of the inevitable.

It would be nice for any pilot group in the midst of the COVID crisis to imagine they are in control. But they are not.

They key is survival and a solid footing when recovery takes place. Perhaps this will be an opportunity for Jazz ALPA to fix the embarrassing new-hire pay scales. I presume that this transaction rests on the approval of ALPA?

[Dias]

I presume that this transaction rests on the approval of ALPA?

lol no.

[Sharklasers]

I presume that this transaction rests on the approval of ALPA?

lol no.

“ The revisions to the CPA are subject to Jazz reaching an agreement with the Air Line Pilots Association, International. If this condition is satisfied, the CPA will be amended on a retroactive basis to January 1, 2021.”

[Ash Ketchum]

When the GGN pilots came over everybody got a job and there was lots of movement. Now with ~600 Jazz pilots laid off I don’t know how they will do this. If it is DOH then the pilots on lay-off at Jazz won’t be getting their jobs back for a few years likely.

Wouldn't some of the 600 laid off Jazz pilots be ahead of the Sky pilots in terms of DOH? Assuming there is an equipment bid when the Sky pilots come over some of the more senior laid off Jazz pilots may not wait that much longer for the recall.

[Sharklasers]

When the GGN pilots came over everybody got a job and there was lots of movement. Now with ~600 Jazz pilots laid off I don’t know how they will do this. If it is DOH then the pilots on lay-off at Jazz won’t be getting their jobs back for a few years likely.

Wouldn't some of the 600 laid off Jazz pilots be ahead of the Sky pilots in terms of DOH? Assuming there is an equipment bid when the Sky pilots come over some of the more senior laid off Jazz pilots may not wait that much longer for the recall.

Why should any of them have to wait longer to get recalled? There’s going to be winners and losers in any consolidation and I don’t see why the Jazz pilots have to volunteer to be the losers unless there are major tangible gains to their 17 year contract