Category Archives: Chorus Aviation

Chorus Aviation completes the acquisition of Voyageur Airways

Voyageur CRJ200 (Flt)(Voyageur)(LR)

Chorus Aviation Inc. (Halifax) on May 1 announced that it has successfully closed its acquisition of 519222 Ontario Limited, a holding company that owns Voyageur Airways Limited (North Bay, Ontario) and its related companies, a leading provider of specialized aviation services with international operations.

The acquisition was first announced on March 12, 2015.

Chorus Aviation continued:

Chorus Aviation logo

The purchase price, on a cash free/debt free basis, represents a total enterprise value of approximately $80 million and is subject to certain post-closing working capital adjustments. Utilizing cash on hand, Chorus paid $47.0 million and issued $8.0 million in Chorus Class B Voting Shares to Max Shapiro, sole owner of Voyageur. Approximately $25 million in deferred cash payments will be paid in separate installments over the next 36 month period. The $80 million purchase price is supported by the appraised value of Voyageur’s owned aircraft, real estate and working capital.

The $80 million purchase price represented an attractive multiple of approximately 4.7 times 2014’s adjusted EBITDA1, and is immediately accretive to Chorus’ consolidated earnings and free cash flow1.

Voyageur Airways logo

Voyageur, a Transport Canada approved air operator, is an integrated provider of specialized aviation services, including contract flying operations both internationally and domestically, and offers advanced engineering and maintenance capabilities. Voyageur was founded almost 50 years ago in 1968, and is a private company headquartered at its 200,000 square foot facility in North Bay, Ontario. The company primarily operates within two aviation services sectors:

Specialized contract flying operations.

The company operates medical, logistical and humanitarian flights serving blue chip clients comprised primarily of government entities and international non-governmental organizations. Voyageur has a total of 18 aircraft of which 13 are owned and 5 leased with the majority being Bombardier DHC-8-300 (below) and CRJ200 aircraft (above). Voyageur currently operates in Canada, Africa and Central Asia.

Voyageur DHC-8-300 C-GHQZ (Tko)(Voyageur)(LR)

Specialized engineering and advanced maintenance operations.

As a certified Design Approval Organization by Transport Canada, the company has developed a number of Supplemental Type Certificates for modifications and improvements for Bombardier regional aircraft. The company is an ‘approved maintenance organization’ under Transport Canada, United States Federal Aviation Administration and European Aviation Safety Agency regulations. The company has full in-house design engineering and aircraft modification capabilities for special mission integration and support requirements along with parts sales and manufacturing. The company also has storage and parking capabilities for up to 65 regional aircraft at its North Bay facility.

Voyageur also operates a small fixed-base operation at the North Bay airport providing services such as aircraft fueling, ground handling and aircraft hangar and storage facilities.

The company has a track record of strong financial performance with solid revenue and consistent free cash flow generation. For the last fiscal year ended December 31, 2014, Voyageur generated adjusted EBITDA1 of approximately $16.9 million.

RBC Capital Markets acted as exclusive financial advisor to Chorus on the transaction, and Osler, Hoskin and Harcourt LLP acted as legal advisor to Chorus. Gowling, Lafleur, Henderson LLP acted as legal advisor to Voyageur.

1 Non-GAAP Financial Measures

EBITDA and Adjusted EBITDA

EBITDA is defined as earnings before net interest expense, income taxes, and depreciation and amortization and is a non-GAAP financial measure. Adjusted EBITDA (net income before net interest expense, income taxes, depreciation and amortization and other items such as asset impairment and foreign exchange gains or losses) is a non-GAAP financial measure used by Chorus, and commonly by other regional airlines in the industry, as a supplemental financial measure of operational performance. Management believes Adjusted EBITDA assists investors in comparing Chorus’ performance on a consistent basis without regard to depreciation and amortization, which are non-cash in nature and can vary significantly depending on accounting methods and factors such as historical cost. Adjusted EBITDA should not be used as an exclusive measure of cash flow because it does not account for the impact of working capital growth, capital expenditures, debt repayments and other sources and uses of cash, which are disclosed in the statement of cash flows, forming part of the financial statements.

Free Cash Flow

Free cash flow is a non-GAAP financial measure used as an indicator of financial strength and performance. Free cash flow is defined as cash flows from operating activities, as reported in accordance with GAAP, less total capital expenditures and dividends.

All images by Voyageur Airways and Chorus Aviation.

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Chorus Aviation (Jazz Aviation) to buy Voyageur Airways’ holding company

Chorus Aviation Inc. (Jazz Aviation) (Halifax) has announced that it has entered into an agreement to acquire all of the issued and outstanding shares of 519222 Ontario Limited, a holding company that owns Voyageur Airways (North Bay, Ontario) and its related companies, a leading provider of specialized aviation services with international operations.

Voyageur, a Transport Canada approved air operator, is an integrated provider of specialized aviation services, including contract flying operations both internationally and domestically, and offers advanced engineering and maintenance capabilities. Voyageur was founded almost 50 years ago in 1968, and is a private company headquartered at its 200,000 square foot facility in North Bay, Ontario. The company primarily operates within two aviation services sectors:

Specialized contract flying operations. The company operates medical, logistical and humanitarian flights serving blue chip clients comprised primarily of government entities and international non-governmental organizations. Voyageur has a total of 18 aircraft of which 13 are owned and 5 leased with the majority being Bombardier DHC-8-300 and CRJ200 aircraft. Voyageur currently operates in Canada, Africa and Central Asia.

Specialized engineering and advanced maintenance operations. As a certified Design Approval Organization by Transport Canada, the company has developed a number of Supplemental Type Certificates for modifications and improvements for Bombardier regional aircraft. The company is an ‘approved organization’ under Transport Canada, United States Federal Aviation Administration and European Aviation Safety Agency regulations. The company has full in-house design engineering and aircraft modification capabilities for special mission integration and support requirements along with parts sales and manufacturing. The company also has storage and parking capabilities for up to 65 regional aircraft at its North Bay facility.
Voyageur also operates a small fixed-base operation at the North Bay airport providing services such as aircraft fueling, ground handling and aircraft hangar and storage facilities.

The company has a track record of strong financial performance with solid revenue and consistent free cash flow generation. For the last fiscal year ended December 31, 2014, Voyageur generated adjusted EBITDA1 of approximately $16.9 million.

Transaction Details

The purchase price, on a cash free/debt free basis, represents a total enterprise value of approximately $80 million, subject to closing working capital adjustments. Utilizing cash on hand, $47.0 million will be paid at closing, along with the issuance of $8.0 million in Chorus Class B Voting Shares. Approximately, a further $25 million in deferred cash payments will be paid in separate installments over the 36 month period following the closing. The $80 million purchase price is supported by the appraised value of Voyageur’s owned aircraft, real estate and working capital.

The $80 million purchase price represents an attractive multiple of approximately 4.7 times 2014’s adjusted EBITDA1, and will be immediately accretive to Chorus’ consolidated earnings and free cash flow1. This transaction is expected to deliver a healthy return on investment to shareholders, and does not have a negative impact on the current dividend policy.

Closing of the transaction is expected to occur in the second quarter of 2015 and is subject to certain closing conditions, including receipt of TSX, regulatory and other third party approvals, and completion of certain remaining due diligence.

Headquartered in Halifax, Nova Scotia, Chorus was incorporated on September 27, 2010 and is a dividend-paying holding company with various interests including Jazz Aviation Holdings Inc. and Chorus Aviation Holdings II Inc. Chorus Aviation Holdings II Inc. is a holding company to facilitate diversification of Chorus’ business.

Copyright Photo: TMK Photography/AirlinersGallery.com. De Havilland Canada DHC-7-102 Dash 7 C-GLOL (msn 39) arrives at Toronto (Pearson). Since this photo, the aircraft has been operating for the United Nations in Africa.

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Air Canada extends the CPA with Chorus Aviation (Jazz Aviation), orders 13 additional Bombardier Q400s

Air Canada (Montreal) said today that its amended and extended capacity purchase agreement (CPA) with Chorus Aviation Inc., parent company of Jazz Aviation LP (Halifax), has been concluded with all terms and conditions now met. The agreement provides both parties with greater stability and significant cost reductions through a better alignment of their interests.

The airline continued:

Air Canada estimates the new agreement will result in approximately $550 million in financial value over the next six years as compared to the previous CPA, of which two-thirds will be in network optimization benefits. The remaining benefits will be spread across several cost areas. Annual benefits in 2015 are expected to increase operating income by approximately $50 million as Air Canada implements the new CPA, increasing each year throughout the following five years.

The agreement also provides for long-term stability by eliminating the risks, uncertainties and set-up costs of a potential transition to alternative regional providers in 2021. Post 2020, Air Canada expects Jazz will provide competitive costs and continued high service levels.

The highlights of the new CPA include:

Extension of the term by five years to December 31, 2025;

Establishment of a pilot mobility agreement that provides Jazz pilots with access to pilot vacancies at Air Canada, thus allowing a significant reduction in Jazz operating costs;

Simplification and modernization of the Jazz fleet which will provide improved service and greater efficiency through the addition of 23 Bombardier Q400 aircraft;

Reduction in Air Canada and Jazz costs derived from a combination of improved fleet economics, greater network flexibility and reduced operating and labour costs. This supports Air Canada’s cost reduction initiatives; and

Modification of Jazz’s CPA fee structure, moving from a “cost plus” mark-up to a more industry standard fixed fee compensation structure. This will provide more cost certainty and better align the cost reduction goals of both Air Canada and Jazz. This eliminates non-value added costs and the necessity of the 2015 benchmarking exercise.

As a result,  Bombardier Commercial Aircraft and Chorus Aviation Inc., parent company of Jazz Aviation LP announced today that they have signed a firm purchase agreement whereby Chorus will acquire 13 Q400 NextGen aircraft and options for 10 Q400 NextGen aircraft. Once delivered, the aircraft will be operated by Jazz under the Air Canada Express banner.

The Companies also announced Chorus and Jazz as the launch customer and operator for the industry’s first Dash 8-300 aircraft Extended Service Program that will extend the life of the Dash 8-300 turboprop to 120,000 flight cycles from the original 80,000 flight cycles.

Copyright Photo: TMK Photography/AirlinersGallery.com. Jazz Aviation’s Bombardier DHC-8-402 (marketed as the Q400) C-GGOI (msn 4381) arrives in Toronto (Pearson).

Air Canada aircraft slide show:

Air Canada Express-Jazz aircraft slide show:

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Jazz Aviation’s parent, Chorus Aviation, posts a higher 2Q net profit of $36.5 million

Chorus Aviation (Halifax), the parent of Jazz Aviation (Air Canada Express) (Halifax), reported a second quarter net profit of C$36.5 million ($33.5 million). This basically quadruples its second quarter 2013 net income of C$7.9 million (&.2 million) of the previous year.

Here is the full report:

For the second quarter 2014, Chorus reported EBITDA of $50.7 million compared to $48.0 million in the same quarter 2013, an increase of $2.7 million. Operating income was $34.3 million, $2.6 million higher than the same period 2013. Adjusted net income of $22.2 million or $0.18 per basic share was up by $0.8 million or $0.01 per basic share over the second quarter 2013. Chorus incurred $4.5 million in employee separation program costs in the second quarter versus $2.2 million in the same period in 2013. Chorus has invested $17.2 million in employee separation since the inception of this cost savings program in the first quarter of 2013.

For reporting purposes, at each quarter end, Chorus converts its US denominated aircraft debt into equivalent Canadian dollars based on the prevailing exchange rate. Chorus manages its exposure to currency risk on such long-term debt by billing related lease payments within the Capacity Purchase Agreement (‘CPA’) with Air Canada in the underlying currency (US dollars) related to the aircraft debt. In the second quarter of 2014, Chorus had an unrealized foreign exchange gain of $14.3 million versus an unrealized foreign exchange loss of $13.5 million in the same period of 2013.

Financial Performance –Second Quarter 2014 Compared to Second Quarter 2013

Operating revenue increased from $410.3 million to $417.8 million, representing an increase of $7.5 million or 1.8%. Controllable revenue increased by $9.0 million or 3.5%. This increase occurred primarily as a result of rate increases made pursuant to the CPA of $5.8 million, a favourable US dollar exchange rate of $5.2 million, and a $0.3 million increase in incentives earned under the CPA with Air Canada. These increases were offset by decreased CPA Billable Block Hours of $2.3 million.

Pass-through revenue decreased by $2.1 million or 1.4% from $148.7 million to $146.6 million, which included a decrease of $8.7 million related to airport and navigation fees and terminal handling services. (Effective January 1, 2014, Air Canada entered into a commercial agreement with the Greater Toronto Airport Authority (‘GTAA’) that encompasses Chorus’ Air Canada Express operations. GTAA costs related to landing, terminal and other airport user fees, which are treated as pass-through costs under the CPA, are now paid directly by Air Canada pursuant to this agreement.) This decrease was offset by an increase of $7.3 million related to fuel costs driven primarily by an increase in jet fuel prices. The sale of consignment inventory was the primary factor in other revenue increasing by $0.6 million.

Operating expenses increased from $378.6 million to $383.6 million, an increase of $5.0 million. Controllable costs increased from $229.9 million to $237.0 million, an increase of $7.0 million or 3.1%. Pass-through costs decreased from $148.7 million to $146.6 million, a decrease of $2.1 million or 1.4%.

Salaries, wages and benefits increased by $2.7 million from $100.7 million to $103.4 million. Adjusted salaries, wages and benefits (adjusted by removing employee separation program costs and capitalized major maintenance overhaul labour costs), which includes pension, incentive compensation and other employee benefits, decreased by $0.9 million after incurring an increase in stock based compensation of $0.8 million due to a change in accounting policy. Employee separation program costs incurred during the three months ended June 30, 2014 were $4.5 million, an increase of $2.3 million over the same period of 2013. These costs include employee separation program costs of $2.1 million in 2014 related to the commencement of outsourcing of passenger handling services under applicable collective agreements. Salaries and wages were also affected by fewer labour costs being capitalized as a result of reduced major maintenance overhauls on owned aircraft of $1.4 million.

Aircraft maintenance expense increased by $4.0 million from $37.9 million to $41.9 million partially as a result of an unfavourable US dollar exchange rate on certain maintenance material purchases of $2.7 million and increased other maintenance costs of $2.6 million. These increases were offset by decreased Block Hours of $1.3 million.

Other expenses decreased by $0.8 million from $32.0 million to $31.2 million. The decrease was the result of reduced general overhead expenses.

Non-operating income increased by $27.8 million from a non-operating expense of $19.2 million to a non-operating income of $8.6 million. The strengthening of the Canadian dollar during the quarter contributed to a foreign exchange gain of $11.8 million compared to a foreign exchange loss of $13.0 million in the same period last year. During the quarter, Chorus redeemed the remaining balance of the convertible debentures, which accounted for a decrease in interest accretion of $0.3 million and a decrease in interest expense of $1.5 million. Interest expense related to long-term debt decreased by $0.8 million due to planned principal repayments. Chorus met employment conditions required in order to obtain the maximum annual forgiveness of a portion of the forgivable loan from the province of Nova Scotia, and as such $0.5 million was recorded in other income.

EBITDA was $50.7 million compared to $48.0 million in 2013, an increase of $2.7 million or 5.7%, producing an EBITDA margin of 12.1%.

Operating income of $34.3 million was up $2.6 million or 8.1% over second quarter 2013 from $31.7 million.

Net income for the second quarter of 2014 was $36.5 million or $0.30 per basic share, an increase of $28.6 million from $7.9 million. On an adjusted basis, net income was $22.2 million or $0.18 per basic share, an increase of $0.8 million from $21.4 million. A reconciliation of these non-GAAP measures to their nearest GAAP measure is provided in Chorus’ Management’s Discussion and Analysis dated August 13, 2014.

Copyright Photo: TMK Photography/AirlinersGallery.com. Bombardier CRJ705 (CL-600-2D15) C-GLJZ (msn 15051) approaches the runway at Toronto’s Lester B. Pearson International Airport (YYZ).

Air Canada Express-Jazz Aviation: AG Slide Show

Chorus Aviation reports on its profitable first quarter

Chorus Aviation (Halifax), the parent of Jazz Aviation (Air Canada Express) (Halifax), reported the following for the first quarter:

For the first quarter 2014, Chorus Aviation reported EBITDA of $47.3 million compared to $34.2 million in the same quarter 2013, an increase of $13.1 million. Operating income was $31.2 million, $10.4 million higher than the same period 2013. Adjusted net income of $20.3 million or $0.17 per basic share, was up by $5.6 million or $0.05 per basic share over first quarter 2013. Chorus incurred $2.8 million in voluntary employee severance in the first quarter versus $5.7 million in the same period in 2013. Chorus has invested $12.7 million since the inception of this cost savings program in the first quarter of 2013.

Net income for the first quarter of 2014 was $5.6 million or $0.05 per basic share, a decrease of $3.6 million from $9.2 million. On an adjusted basis, net income was $20.3 million or $0.17 per basic share, an increase of $5.6 million from $14.7 million. A reconciliation of these non-GAAP measures to their nearest GAAP measure is provided in Chorus’ Management’s Discussion and Analysis dated May 14, 2014.

Chorus Aviation is a dividend-paying holding company which owns Jazz Aviation LP and a number of other companies involved in aviation related businesses.

Read the full report: CLICK HERE

Copyright Photo: Michael B. Ing/AirlinersGallery.com. Bombardier DHC-8-311 (Q300) C-GABP (msn 257) of Jazz Aviation (Air Canada Express) touches down at Seattle-Tacoma International Airport (SEA).

Jazz Aviation: AG Slide Show

Chorus Aviation’s 1Q net income drops almost 65% to $9.2 million

Chorus Aviation Inc. (Jazz Aviation) (Air Canada Express) (formerly Air Canada Jazz) (Halifax) has issued its first quarter 2013 earnings, and is revising its quarterly dividend to $0.075 per share from $0.15 per share. The company reported first quarter net income of C$9.2 million ($9 million), down almost 65 percent from the $26.2 million profit in the first quarter a year ago.

First Quarter 2013 Highlights:

  • Operating revenue of $416.3 million.
  • EBITDA1 of $34.2 million.
  • Operating income of $20.8 million.
  • Net income of $9.2 million, or $0.07 per basic share.
  • Adjusted net income1 of $14.7 million, or $0.12 per basic share.
  • Billable Block Hours of 97, 202.

“The first quarter delivered solid results; however, two items negatively impacted the bottom line,” said Joseph Randell, President and Chief Executive Officer, Chorus. “In our continued efforts to improve operational efficiency and to reduce costs, we enacted a voluntary separation program for our more senior pilots and maintenance employees.  The severance cost of $5.7 million will provide a return within the next two years as ongoing operational costs are reduced.  This expense, when factored with the unrealized foreign exchange loss of $5.6 million into the adjusted net income for the quarter, increases earnings per share to the current market consensus of $0.17 per basic share.”

DIVIDEND

Chorus and Air Canada are involved in an ongoing complex arbitration process regarding the 2009 Benchmark.  Chorus remains confident in its position that the Controllable Mark-up of 12.5% in the Capacity Purchase Agreement (‘CPA’) should not change as a result of the arbitration.  Accordingly, no amounts have been recorded in the accounts of Chorus in 2010, 2011, 2012 or 2013 related to the Air Canada claim.  Management has determined that it is not probable that the Air Canada claim will be successful, and it is not practicable to determine an estimate of the possible financial effect, if any, with sufficient reliability.

However, in any litigation process there is always some risk of an adverse outcome. This risk combined with the extended duration of the arbitration has created the risk of a material retroactive amount owing to Air Canada for the period commencing January 1, 2010 should Air Canada succeed in its claim for a material fleet age adjustment in its favour.  The longer this process continues without resolution, the larger the amount of any potential retroactive payment.

In addition, Chorus’ $80.2 million convertible debentures come due in December 2014. Chorus anticipates that an increase in liquidity will provide increased flexibility in addressing the maturity of those debentures, in the context of challenging conditions for the airline industry and global economic uncertainty. Those debentures, issued in November 2009, were used to pay part of the term debt of $115.0 million which was established at the time of the Chorus initial public offering in 2006 and matured in February 2010.  As a result, Chorus believes that strengthening its cash position during this period is prudent.

Chorus will continue to manage its financial leverage ratios, such as its adjusted net debt to equity ratio which has increased as a result of the financing of its new Bombardier DHC-8-402 (Q400) aircraft fleet. Such continued accretive investment in fleet renewal may occur either through refurbishment of the classic Bombardier DHC-8-100 and DHC-8-300 series aircraft or further investment in new generation aircraft.

In consideration of these factors, Chorus has reduced its quarterly dividend from $0.15 per share to $0.075 per share going forward. This will enable Chorus to retain additional cash of $9.3 million per quarter.

While Chorus has current cash available to pay the dividend at the previous rate, the Board of Directors has determined that, given the factors discussed above, it is prudent and advisable to conserve Chorus’ financial resources.

“We have, and continue to prudently manage our financial resources,” continued Mr. Randell.  “The regional airline industry is changing dramatically both here and south of the border. Competition is increasing significantly. We must continue in our efforts to reduce costs, strengthen the fundamentals of our business, and improve our financial position to ensure we have the flexibility required to effectively respond and compete in our ever-changing markets.”

The Board of Directors will continue to assess the dividend payment on an ongoing basis.

Financial Performance -First Quarter 2013 Compared to First Quarter 2012

Operating revenue decreased from $437.1 million to $416.3 million, representing a decrease of $20.8 million or 4.8%.  Passenger revenue, excluding pass-through costs, decreased by $6.4 million or 2.5% primarily as a result of no activity in the quarter for Thomas Cook; offset by rate increases made pursuant to the CPA with Air Canada, an increase in Billable Block Hours of 0.8%, a $0.2 million increase in incentives earned under the CPA, and a higher US dollar exchange rate. Pass-through costs decreased from $176.7 million to $162.0 million; a decrease of $14.7 million or 8.3%, which included a decrease of $1.8 million related to fuel costs. Other revenue increased by $0.2 million.

Operating expenses decreased from $407.4 million to $395.5 million, a decrease of $12.0 million or 2.9%.  Controllable Costs increased by $2.7 million, or 1.2%; offset by a decrease in pass-through costs of $14.7 million.

Salaries, wages and benefits increased by $3.1 million primarily as a result of voluntary employee severance costs related to flight crew and maintenance employees, wage and scale increases under new collective agreements, and increased pension expense resulting from a revised actuarial valuation; offset by a reduction in the number of full time equivalent employees and higher capitalized salaries and wages related to major maintenance overhauls.

Depreciation and amortization expense increased by $0.5 million, primarily related to the purchase of Q400 aircraft, increased capital expenditures on aircraft rotable parts and other equipment, and increased major maintenance overhauls; offset by certain assets having reached full amortization and a change in estimate related to the residual value of the Dash 8-100 and 300 aircraft.

Aircraft maintenance expense decreased by $2.4 million as a result of a $4.6 million reduction related to no activity for Thomas Cook; offset by an increase in engine maintenance activity due to engine charges for the CRJ705 and Dash 8 – 300 aircraft of $1.2 million, increased other maintenance costs of $0.5 million and an increase in the US-dollar exchange rate on certain material purchases of $0.5 million.

Aircraft rent decreased by $5.4 million primarily as a result of no expense in the quarter for Thomas Cook aircraft and the return of CRJ aircraft.

Other expenses increased by $1.3 million primarily due to increased professional fees, increased travel and training costs associated with the Q400 aircraft and increased general overhead expenses.

Non-operating expenses increased by $9.0 million.  This change was mainly attributable to an increase in foreign exchange of $8.8 million (of which $8.9 million was related to an increase in unrealized foreign exchange loss on long-term debt and finance leases) and increased interest expense related to Q400 aircraft financing of $1.0 million; offset by $0.8 million in other income related to a government grant.

EBITDA1 was $34.2 million compared to $42.6 million in 2012, a decrease of $8.4 million or 19.6%, producing an EBITDA margin of 8.2%. Standardized Free Cash Flow was negative $110.9 million, impacted primarily by the continuing growth capital expenditures related to the purchase of Q400 aircraft.

Operating income of $20.8 million was down $8.8 million or 29.7% over first quarter 2012 from $29.6 million.

Net income for the first quarter of 2013 was $9.2 million or $0.07 per basic share, a decrease of $17.0 million or 64.9% from $26.2 million or $0.21 per basic share. On an adjusted basis, net income was $14.7 million or $0.12 per basic share, a decrease of 35.4% or $0.06 per basic share from $22.8 million or $0.18 per basic share.

1Non-GAAP Financial Measures

EBITDA

EBITDA (earnings before interest, taxes, depreciation, amortization and obsolescence) is a non-GAAP financial measure commonly used throughout all industries to view operating results before interest expense, interest income, depreciation and amortization, gains and losses on property and equipment and other non-operating income and expenses.  Management believes EBITDA assists investors in comparing Chorus’ performance on a consistent basis without regard to depreciation and amortization, which are non-cash in nature and can vary significantly depending on accounting methods and non-operating factors such as historical cost.  EBITDA should not be used as an exclusive measure of cash flow because it does not account for the impact on working capital growth, capital expenditures, debt repayments and other sources and uses of cash, which are disclosed in the statement of cash flows which form part of the financial statements.

STANDARDIZED FREE CASH FLOW

Standardized Free Cash Flow is defined as cash flows from operating activities, as reported in accordance with GAAP, less total capital expenditures and dividends.

ADJUSTED NET INCOME

Adjusted net income and adjusted earnings per share are calculated by adjusting net income by the amount of any unrealized foreign exchange gains and losses on long-term debt and finance leases.  During the first quarter of 2013, Chorus recorded an $5.6 million loss in unrealized foreign exchange on long-term debt and finance leases.  These adjustments more clearly reflect earnings from an operating perspective.

Copyright Photo: Keith Burton. Bombardier CRJ705 (CL-600-2D15) C-FCJZ (msn 15040) arrives at the Toronto (Pearson) hub.

Jazz Aviation: AG Slide Show

Air Canada Express logo-2

Jazz logo (Jazz)

Jazz’s current route map:

Air Canada Express-Jazz 5:2013 Route Map

Chorus Aviation reports third quarter net income of C$37.2 million

Chorus Aviation Inc. (Jazz Aviation) (Air Canada Regional) (Halifax) has announced its third quarter 2012 earnings, with net income of $37.2 million , or $0.30 per basic share, and adjusted net income of $27.1 million or $0.22 per basic share. The company issued the following statement:

Operating revenue increased from $411.7 million to $435.6 million , representing an increase of $24.0 million or 5.8%.  Passenger revenue, excluding pass-through costs, increased by $19.0 million or 7.6% primarily as a result of a 1.9% increase in Billable Block Hours, rate increases made pursuant to the Capacity Purchase Agreement (‘CPA’) with Air Canada , a higher US dollar exchange rate, and a $1.1 million increase in incentives earned under the CPA. Pass-through costs increased from $160.8 million to $166.1 million , or $5.3 million or 3.3% which included $1.5 million related to fuel. Other revenue decreased by $0.3 million .

Operating expenses increased from $380.6 million to $399.0 million , an increase of $18.4 million or 4.8%.  Controllable Costs increased by $13.1 million , or 6.0%.  Controllable operating expenses were impacted by the changes in the fleet ownership structure for the Q400 aircraft.  CRJ100 aircraft, previously reported under operating leases, are being replaced by owned Q400 aircraft. Related ownership costs are comprised of depreciation (an operating expense), and interest (a non-operating expense). The Q400 aircraft lease revenue under the CPA is reflected in operating revenue, and is designed to provide compensation to Chorus for both depreciation and interest expense.  As interest expense is shown below the operating margin, operating income increased by a similar amount on a quarter over quarter basis.

Depreciation and amortization expense increased by $3.3 million , of which $3.1 million is related to the purchase of Q400 aircraft, with the balance due to increased capital expenditures on aircraft rotable parts and other equipment; offset by decreased major maintenance overhauls and certain assets having reached full amortization.

Aircraft maintenance expense increased by $4.0 million , with increased costs of $0.8 million arising as a result of increased Block Hours, the effect of the increase in the US-dollar exchange rate on certain material purchases of $0.3 million , increased other maintenance costs of $1.4 million , and an increase in engine maintenance activity of $1.5 million .

Salaries, wages and benefits increased by $7.4 million as a result of wage and scale increases under new collective agreements, increased Block Hours, increased incentive compensation expense, increased pension expense resulting from a revised actuarial valuation and lower capitalized salaries and wages related to major maintenance overhauls; offset by a 3.7% reduction in the number of full time equivalent employees.

Other expenses decreased by $0.7 million primarily due to decreased professional fees and general overhead expenses; offset by increased crew expenses increased due to increased activity and rates.

Non-operating income increased $19.8 million .  This change was mainly attributable to a foreign exchange gain of $10.7 million (of which $10.0 million was related to an unrealized foreign exchange gain on long-term debt and finance leases) arising as a result of the change in value of the Canadian dollar relative to the US dollar; offset by increased interest expense related to the Q400 aircraft financing of $1.8 million .

EBITDA1 was $51.8 million compared to $43.0 million in 2011, an increase of $8.8 million or 20.7%, producing an EBITDA margin of 11.9%. Free Cash Flow was $37.8 million , an increase of $8.7 million or 30.0% from $29.1 million .

Operating income of $36.7 million for the three months ended September 30, 2012 , was up $5.6 million or 17.9% over third quarter 2011 from $31.1 million .

Net income for the third quarter of 2012 was $37.2 million or $0.30 per basic share, an increase of $23.3 million or 167.1% from $13.9 million or $0.19 per basic share.

As communicated on October 3 and 4, 2012, the arbitration panel (the ‘Panel’) released its award (the ‘Award’) on the 2009 benchmark exercise between Jazz Aviation LP (‘Jazz’) (a wholly owned subsidiary of Chorus) and Air Canada .

In the Award, two of the three member Panel concluded that the component unit cost driver (‘CUCD’) methodology put forward by Air Canada was the appropriate methodology to use in the 2009 Benchmark to compare Jazz’s Unit Costs to the stage length adjusted median controllable unit costs of the Comparable Operators.  However, the Panel also agreed with Jazz that a number of the additional adjustments proposed by Jazz were also required to be made (the “Adjustments”).The Panel also agreed with Jazz that fleet age impacts the rate at which maintenance costs increase. The Panel directed Air Canada and Jazz to negotiate a further adjustment that would account for the impact of fleet age, failing which the parties will submit new proposals and analysis to the Panel.

There remain disputes between the parties with respect to the interpretation and application of the Award and its impact on the Controllable Mark-Up. Jazz is of the view that, applying the CUCD methodology, and based on the proper application of the Adjustments that the Panel has found are required to be made, the result of the 2009 Benchmark is that Jazz is not required to repay Air Canada any amounts in respect of payments made since January 1, 2010 , and that its Controllable Mark-Up will remain at 12.50% going forward until at least the 2015 Benchmark.

Air Canada , on the other hand, has asserted to Jazz its view that the impact of the Adjustments that the Panel found were required to be made would reduce the Controllable Mark-Up to 11.41%. However, this does not account for any impact that the fleet age adjustment described above would have on the Controllable Mark-Up. Air Canada took the position at the hearing that there should be no such fleet age adjustment. Jazz is of the view that, given its older fleet relative to those of the relevant comparable  operators, any fleet age adjustment would result in a Controllable Mark-Up higher than 11.41%, even if the Panel were to otherwise accept Air Canada’s position concerning the impact of each of the various other Adjustments which the Panel indicated must be made.

The parties have scheduled a further hearing with the Panel to occur in the last week of November 2012 to resolve the outstanding issues in dispute, including the impact of the fleet age adjustment. As a consequence, the impact, if any, to the Controllable Mark-Up on Jazz’s Controllable Costs cannot be stated at this time with reasonable certainty.  Chorus anticipates having all matters settled no later than the first quarter of 2013.

No amounts have been recorded in the accounts of Chorus in 2010, 2011 or 2012 related to this claim as management has determined that it is not probable that the Air Canada claim will be successful, and it is not practicable to determine an estimate of the possible financial effect, if any, with sufficient reliability.

1 Non-GAAP Financial Measures

EBITDA
EBITDA (earnings before interest, taxes, depreciation, amortization and obsolescence) is a non-GAAP financial measure commonly used throughout all industries to view operating results before interest expense, interest income, depreciation and amortization, gains and losses on property and equipment and other non-operating income and expenses.  Management believes EBITDA assists investors in comparing Chorus’ performance on a consistent basis without regard to depreciation and amortization, which are non-cash in nature and can vary significantly depending on accounting methods and non-operating factors such as historical cost.  EBITDA should not be used as an exclusive measure of cash flow because it does not account for the impact on working capital growth, capital expenditures, debt repayments and other sources and uses of cash, which are disclosed in the statement of cash flows which form part of the financial statements.

FREE CASH FLOW
Pre-conversion distributable cash was a key performance indicator used by management to evaluate the ongoing performance of Jazz Air Income Fund.  Distributable cash is not a measure which is commonly utilized in respect of a public corporation. Management believes, however, that it is a term with which its shareholders are familiar and has provided Free Cash Flow as a proxy for previously reported distributable income.  Free Cash Flow is calculated in the same manner as distributable cash. Free Cash Flow is defined as EBITDA less non-operating expenses, Maintenance Capital Expenditures to sustain the operation, and adjusted for any unrealized foreign exchange gain or loss on long-term debt and finance leases and any unusual non-operating one-time items.  Other capital expenditures incurred to facilitate growth of the business are excluded from this calculation.

ADJUSTED NET INCOME
Adjusted net income and adjusted earnings per share are calculated by adjusting net income by the amount of any unrealized foreign exchange gains and losses on long-term debt and finance leases.  During the third quarter of 2012, Chorus recorded a $10.0 million gain in unrealized foreign exchange on long-term debt and finance leases.  This adjustment more clearly reflects earnings from an operating perspective.

Copyright Photo: Keith Burton. Jazz Aviation’s (Air Canada Express) Bombardier DHC-8-402 (Q400) C-GGND (msn 4394) prepares to land at Air Canada’s Toronto (Pearson) hub.

Air Canada Express-Jazz Aviation: