Chorus Aviation Inc., the parent company of Jazz Aviation LP, announced an agreement to revise the capacity purchase agreement between Jazz and Air Canada.
The revision addresses the COVID-related reduction in air travel demand by optimizing the Jazz fleet. The revisions to the CPA are conditional on 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.
These proposed changes refer mainly to the Covered Aircraft. “The COVID-19 pandemic continues to challenge the aviation industry. With the Jazz fleet operating at a fraction of the capacity it flew a year ago, now is the time to update the CPA to help preserve regional flying and Jazz’s place within it,” commented Joe Randell, President and Chief Executive Officer, Chorus in a statement.
“The Jazz fleet is up-gauging to larger regional jet aircraft and replacing smaller turboprop fleet sooner than contemplated in the previous fleet plan…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,” he added.
Revisions to the CPA include the following:
Consolidating 25 Embraer 175s into Jazz’s Covered Aircraft fleet, Jazz operating the 25 E175s under the CPA, having Jazz become the exclusive Air Canada Express operator of 70+ seat aircraft until the end of 2025. Revisions also include an increase in fixed fees by $46.0 million over the term, with annual minimum fixed fees increasing by $1.2 million per year.
Removal of 19 Dash 8-300s from Jazz’s Covered Aircraft fleet
19 Dash 8-300s will be removed from the fleet in 2021 to 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.
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.
Upon becoming effective, these revisions to the CPA optimizes the Jazz fleet for Air Canada and makes it the exclusive provider for over seventy seat capacity in the Air Canada Express network until 2025, while providing significant cost savings and network planning flexibility for Air Canada.