Chorus Aviation Announces Agreement to Amend and Extend Capacity Purchase Agreement and a $97.26 Million Equity Investment by Air Canada
Jan 14, 2019
- Capacity Purchase Agreement ("CPA") to be amended and extended by an additional 10 years ending December 31, 2035, securing Jazz's place in Air Canada's regional network for the next 17 years.
- $940 million in incremental contracted CPA revenue with overall contracted revenue growing to $2.5 billion over the term of the amended agreement net of near-term fixed fee reductions.
- Reinforcement of strategic partnership through a $97.26 million equity investment in Chorus by Air Canada.
- Proceeds from the Air Canada investment will enable Chorus to invest in its leasing business, including the purchase of new larger-gauge aircraft that will generate additional lease revenue under the CPA.
- Amended CPA to significantly reduce margin risk for Jazz by limiting exposure on controllable costs to a maximum of $2 million annually.
- Chorus expects to continue to generate cash flow to support its current dividend.
- Enhanced pilot mobility agreement to provide Jazz pilots with access to pilot careers at Air Canada.
- Transactions are subject to certain material conditions precedent to closing.
HALIFAX, Jan. 14, 2019 /CNW/ - Chorus Aviation Inc. (TSX: CHR) ("Chorus"), parent company of Jazz Aviation LP ("Jazz"), today announced the parties' agreement to amend and extend the capacity purchase agreement ("CPA") between Jazz and Air Canada and complete a $97.26 million equity investment by Air Canada in Chorus. This agreement will extend the CPA to 2035, creating the longest term strategic partnership between Jazz and Air Canada thus far.
Four years after the last highly-successful amendment to the CPA, the two parties are again taking steps to ensure the long-term competitiveness and strength of their alliance. With this amendment, the parties will effectively address increased domestic and international competition, changing market demand, and fluctuating fuel prices, through significant changes that will modernize and up-gauge the fleet. Chorus and Air Canada have today seized this opportunity to reinforce their strategic partnership.
"This mutually beneficial agreement, proactively and collaboratively, addresses the need to adapt to a challenging, competitive and ever-changing environment," said Joe Randell, President and Chief Executive Officer, Chorus. "Our solid track record of finding solutions for the long-term benefit of Chorus stakeholders has once again delivered an even stronger relationship with Air Canada for the next 17 years. We seized this opportunity to secure an industry-leading time horizon in support of our valued customer; a clear demonstration that the strategic partnership between Chorus and Air Canada is strong. This amended arrangement will provide certainty and predictability for our shareholders, employees and other stakeholders. Chorus expects to continue to generate cash flow to support the current dividend and remains committed to building additional value with continued growth in our leasing business, which is further enabled with this deal."
"Air Canada is deepening its partnership with Chorus through an improved CPA agreement for Jazz flying and our equity investment in Chorus. These will strengthen our respective companies to the benefit of employees, investors and, most importantly, our customers, by enabling us to modernize our regional fleet and respond more nimbly to evolving market conditions and to remain ahead of our competitors," said Calin Rovinescu, President and Chief Executive of Air Canada.
The agreement upholds a history of successfully responding to an ever-changing industry and is extended to December 31, 2035 securing Jazz's place in Air Canada's regional network under the following key terms:
- Chorus and Air Canada become true allies in the aviation industry and reinforce their strategic partnership through a $97.26 million equity investment in Chorus by Air Canada. Air Canada will subscribe for 15,561,600 Class B Voting Shares in the capital of Chorus by way of a private placement for $6.25 per share, which represents a 5.0% premium to the five-day volume weighted average price as of the close of trading on Thursday, January 10, 2019. On closing, it is anticipated that Air Canada will hold approximately 9.99% of Chorus' issued and outstanding Class A Variable Voting Share and Class B Voting Shares on a combined basis. The Toronto Stock Exchange ("TSX") has conditionally approved the issue of the Class B Voting Shares pursuant to the private placement subject to customary conditions.
- Chorus will use approximately 60% of the investment proceeds to purchase nine additional new larger-gauge CRJ900 (76-seat) aircraft to modernize Jazz's fleet and generate additional lease revenue under the CPA. Chorus has conditionally secured the ability to purchase the CRJ900s.The remaining balance will be deployed by Chorus to acquire and lease aircraft outside of the CPA.
- Chorus and Air Canada will enter into an investor rights agreement governing the terms of Air Canada's investment in Chorus. Air Canada will have a seat on Chorus' board and will nominate Michael Rousseau, Air Canada's Deputy Chief Executive Officer and Chief Financial Officer to the position. Air Canada will, subject to certain limited exceptions, hold its investment for at least 60 months and support Chorus' growth strategy through participation in the dividend reinvestment plan and adherence to customary standstill provisions. Air Canada will also have pro rata pre-emptive rights to maintain its ownership percentage in Chorus.
- In total, the 17-year contract will provide $2.5 billion in minimum contracted revenues of which $1.6 billion, or 65%, will be generated from aircraft leasing revenue, supporting the continued transformation of Chorus' business through the migration of CPA earnings to aircraft leasing.
- The amended CPA will provide for total incremental contracted revenue of $940 million; $310 million in fixed fees and $630 million in aircraft leasing under the CPA.
- Incremental fleet acquisitions will provide Chorus significant tax shield and cash tax deferrals through increased tax depreciation deductions.
- Air Canada will achieve cost savings related to fixed fee reductions, predominantly occurring in 2019 and 2020 with a $36 million decrease in each year, as Chorus reduces its above-market fixed fee rates, carried over from its legacy agreement. Maximum available performance incentives will reduce to levels more consistent with market norms and, assuming attainment consistent with historical performance, performance incentive revenue will decrease by an estimated $12 to $14 million in each of 2019 and 2020.
- The near-term fixed fee and performance incentive revenue reductions are significantly more than offset by incremental aircraft leasing revenue under the CPA, starting in 2020, and the extended term to 2035.
- The amended CPA will significantly reduce margin risk for Jazz by limiting exposure on controllable costs to a maximum of $2 million annually.
- Air Canada will consolidate more of its overall regional capacity into Jazz's footprint, thereby further securing Jazz's place in Air Canada's regional network.
- The minimum Covered Fleet of 105 aircraft to 2025 and a minimum of 80 75-seat aircraft between 2026 and 2035 will provide a predictable minimum contracted revenue stream for 17 years.
- Five CRJ900s sourced by Air Canada will initiate the fleet changes with deliveries expected to begin in the first half of 2019.
- Chorus will secure preferred partner status on the operation of aircraft with up to 50 seats through a right to match third-party offers, thus enhancing growth opportunities.
- Enhanced pilot mobility agreement that will provide Jazz pilots with access to pilot careers at Air Canada.
- Chorus expects to continue to generate cash flow to support the current dividend.
Given the 10-year extension in the amended CPA, Jazz and its employees will benefit from greater certainty of operations.
The amendments to the CPA and the investment by Air Canada are conditional on each other and remain subject to a number of terms and conditions precedent to closing, including the ratification of amendments to the collective agreement tentatively agreed between Jazz and its pilots, as represented by the Air Line Pilots Association International ("ALPA"), and satisfaction of the conditions contained in the TSX's conditional listing approval. The Jazz Master Executive Council of ALPA has started the ratification process which is expected to be completed by February 1, 2019. If all conditions are satisfied, the CPA amendments will become effective January 1, 2019.
Investor Conference Call / Webcast
Chorus will hold an analyst call at 10:00 a.m. ET on Monday, January 14, 2019 to discuss the amend CPA with Air Canada. The call may be accessed by dialing 1-888-231-8191. The call will be simultaneously audio webcast via:
To view and download the presentation slides, please visit http://www.chorusaviation.ca/download/CPA+Amendment+2019.pdf.
The conference call webcast will be archived on Chorus' website at www.chorusaviation.ca under Reports > Executive Management Presentations. A playback of the call can also be accessed until midnight ET, January 22, 2019 by dialing toll-free 1-855-859-2056, and passcode 8983833#.
Headquartered in Halifax, Nova Scotia, Chorus was incorporated on September 27, 2010. Chorus' vision is to deliver regional aviation to the world. Chorus has been leasing its owned regional aircraft into Jazz's Air Canada Express operation since 2009 and has established Chorus Aviation Capital Corp. to become a leading, global provider of regional aircraft leases and support services. Chorus also owns Jazz Aviation LP and Voyageur Aviation Corp. – companies that have long histories of safe and solid operations that deliver excellent customer service in the areas of contract flying operations, engineering, fleet management, and maintenance, repair and overhaul. Chorus Class A Variable Voting Shares and Class B Voting Shares trade on the TSX under the trading symbol 'CHR'.
Jazz has a strong history in Canadian aviation with its roots going back to the 1930s. Jazz is owned by Chorus Aviation Inc. (TSX: CHR). Chorus's vision is to deliver regional aviation to the world.
As the largest regional carrier in Canada, Jazz has a proven track record of industry leadership and exceptional customer service and has leveraged that strength to deliver value to all its stakeholders. Jazz operates more flights and flies to more Canadian destinations than any other airline, and has a workforce of approximately 4,600 professionals, highly experienced in the challenging and complex nature of regional operations.
There are three divisions operated by Jazz: Air Canada Express, Jazz Technical Services and Jazz.
Air Canada Express: Under a capacity purchase agreement with Air Canada, using the Air Canada Express brand, Jazz provides service to and from lower-density markets as well as higher-density markets at off-peak times throughout North America.
Jazz Technical Services: Established in May 2016 as a separate division, Jazz Technical Services ('JTS') is dedicated to heavy maintenance, repair and overhaul ('MRO') of Bombardier and Embraer aircraft. JTS provides MRO services to third parties while maintaining the dedication and commitment to its primary customer, Air Canada.
Jazz: Under the Jazz brand, the airline offers charters throughout North America for corporate clients, governments, special interest groups and individuals seeking more convenience. Jazz also has the ability to offer airline operators services such as ground handling, dispatching, flight load planning, training and consulting.
Caution Regarding Forward-Looking Information
This news release contains "forward-looking information" as defined under applicable Canadian securities laws. Forward-looking information is identified by the use of terms and phrases such as "anticipate", "believe", "could", "estimate", "expect", "intend", "may", "plan", "predict", "project", "will", "would", and similar terms and phrases, including references to assumptions. Such information may involve but is not limited to comments with respect to strategies, expectations, planned operations or future actions.
Forward-looking information relates to analyses and other information that are based on forecasts of future results, estimates of amounts not yet determinable and other uncertain events. Forward-looking information, by its nature, is based on assumptions, including those described below, and is subject to important risks and uncertainties. Any forecasts or forward-looking predictions or statements cannot be relied upon due to, among other things, external events, changing market conditions and general uncertainties of the business. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results, performance or achievements to differ materially from those expressed in the forward-looking information. The coming into force of the CPA amendments and the completion of Air Canada's equity investment in Chorus are conditional on each other and subject to a number of conditions (including ratification of the tentative agreement between Jazz and ALPA on behalf of Jazz's pilots, and satisfaction of the conditions contained in the TSX's conditional listing approval); there are no assurances that they will be completed as described in this news release or at all, or that they will deliver any projected benefits. Other factors that could cause results to differ materially from those expressed in this news release include, without limitation, changes in Air Canada's financial condition or prospects; adverse developments affecting the airline industry generally; risks relating to aircraft leasing (such as the financial condition of lessees, availability of aircraft, access to capital, fluctuations in aircraft market values, competition and political risks); litigation or regulatory action; and future changes (if any) to Chorus' dividend policy. For a further discussion of risks, please refer to Chorus' Annual Information Form dated February 14, 2018, and Management's Discussion and Analysis of Results of Operations and Financial Condition dated February 14, 2018 and November 13, 2018. All forward-looking information in this news release represents Chorus' expectations as of January 14, 2019 and is subject to change after such date. However, Chorus disclaims any intention or obligation to update or revise any forward-looking information whether as a result of new information, future events or otherwise, except as required under applicable securities laws.
SOURCE Chorus Aviation Inc.
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