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Chorus and Air Canada to compete with WestJet

Feb. 22, 2012, Halifax - The parent company of regional carrier Jazz Air will work to help Air Canada compete with Calgary-based WestJet when their rival launches a low-fare airline serving smaller domestic markets, Chorus Aviation chief executive Joe Randell said Tuesday.


February 22, 2012
By The Canadian Press

"It's Air Canada that makes the commercial decisions in response to any competitive reality that they face,'' Randell told analysts on a conference call.

"We'll certainly be working with Air Canada in terms of how and if there's any change to the network or the plans. Obviously, it's of great importance to us,'' Randell said, a day after Chorus reported a net quarterly profit of $22.7 million.

WestJet recently announced it will launch a low-fare, no frills regional airline, expected to intensify competition in smaller domestic markets with rival Air Canada and regional partner Jazz Air for business and leisure class travellers.

"I think it's really premature to say exactly how it will affect Air Canada and therefore us, but suffice to say it is a significant factor and we'll be watching this very closely, and I think as time goes on things will become evident in the marketplace,'' Randell said.

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Halifax-based Chorus began operations in the fall of 2010 and is a dividend-paying holding company that owns Jazz
Aviation LP and other companies. Jazz Air sells most of its capacity to Air Canada, its former owner.

Randell said the agreement with Air Canada is extensive and covers 83 destinations with 125 Jazz aircraft operating for the mainline airline.

"So we're able to efficiently serve a lot of markets. We've got a lot of flexibility in terms of the aircraft type, the aircraft size….,'' he said.

WestJet has said it's considering buying either Bombardier's Q400 NextGen 70 to 80-seat aircraft designed for short
hauls or Italian-French company ATR's 72-600 series. The Calgary airline has said its regional airline will be up and running before the end of 2013.

Randell also said Chorus faces some challenges ahead because of a payment dispute and rate re-setting with Air Canada.

He said an arbitration hearing is set for June to deal with the mark up in the capacity purchase agreement that Air Canada pays Chorus.

Air Canada has urged the arbitrator to reduce the mark up from 12.50 per cent to 9.54 per cent, effective from January 2010. Chorus has said the current mark up should remain in place until at least 2015.

National Bank Financial analyst Cameron Doerksen has lowered Chorus Aviation shares to underperform due to concerns about the cost benchmarking uncertainty with Air Canada and WestJet's decision to start a new regional airline.

"A major overhand on Chorus shares is the pending arbitration hearing over the cost benchmarking within the Air Canada CPA (capacity purchase agreement),'' Doerksen wrote in a research note.

"Recall that in a worst-case outcome for Chorus, we estimate that the company would have to reduce its dividend by 30 per cent, while our valuation on the stock would be reduced by a similar percentage,'' he said.

But Doerksen said Chorus Aviation's fourth quarter results were basically in line with his expectations.

In its financial results released late on Monday, Chorus Aviation Inc. said it earned $22.7 million in its fourth quarter compared with a loss a year ago.

The profit amounted to 18 cents per share for the fourth quarter compared with a loss of $11.9 million or 10 cents per share a year ago when the airline recorded a $8.9-million loss on derivatives.

Excluding unrealized foreign exchange gains and losses on long-term debt and finance leases, Chorus reported an adjusted profit of $19.6 million or 16 cents per share for the quarter compared with a loss of $12.4 million or 10 cents per share in the last three months of 2010.

Operating revenue increased to $407.7 million in operating revenue, which was up from $392.7 million a year ago.

Chorus said operating revenue was up due to higher costs for fuel, offset by lower airport and navigational fees and de-icing costs.

Passenger revenue, excluding pass-through costs, increased by $11.1 million due to higher U.S. dollar exchange rate, a $2.5-million increase in incentives earned under its deal with Air Canada and rate increases. These were offset by a decrease in billable block hours.