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Chorus Aviation announces strong Q3 results

Chorus Aviation Inc. (Chorus) has announced strong third quarter 2016 results, and a pending transaction with Air Nostrum, Lineas Aereas Del Mediterraneo, S.A. (Air Nostrum), a franchise partner of Iberia, for the lease of four new Bombardier CRJ1000 regional jets.  


November 9, 2016
By Chorus Aviation

 
Q3 2016 Overview

  • Adjusted EBITDA1, excluding other items of $70.0 million.
  • Adjusted net income1, excluding other items of $28.7 million.
  • Adjusted net income1, excluding other items per basic share of $0.24.
  • Net income of $20.1 million.
  • Net income per basic share of $0.16.
  • Advanced the business revenue diversification strategy through increased aircraft leasing.
  • Improved Jazz’s cost competitiveness and continued fleet modernization.
  • Established Voyageur Avparts.

“I am pleased to report the seventh consecutive quarter of strong financial and operational performance under the revised Capacity Purchase Agreement (CPA) with Air Canada,” said Joe Randell, president and chief executive officer with Chorus.  “Progress was made in advancing our revenue diversification strategy as evidenced by a 51.0% increase quarter-over-quarter in our aircraft leasing revenue under the CPA. Year-to-date aircraft leasing revenue has grown to $72 million, or by approximately 47.0%. Our focus in the third quarter centred on advancing the business diversification strategy, improving Jazz’s cost competitiveness, fleet modernization, and establishing Voyageur’s Avparts business, as we continue to create additional, long-term value for our shareholders.”
 
Expansion of the aircraft leasing business with Air Nostrum transaction
Chorus is seeking opportunities to increase its regional aircraft leasing activity outside of the CPA as management recognizes regional aircraft leasing as a growing market segment with few established providers. Chorus (through a subsidiary) plans to purchase and lease four new CRJ1000 regional jets to Air Nostrum, and has secured a letter of offer from Export Development Canada (EDC) for debt financing of up to 80% of the net purchase price of each CRJ1000.  The four aircraft are scheduled to be delivered in November and December 2016, and in July and October 2017.  Founded in 1994, and headquartered in Valencia, Spain, Air Nostrum is a leading European regional airline carrying over 4 million passengers annually. With a fleet of 42 modern CRJ and ATR aircraft, Air Nostrum operates over 75,000 flights annually to 54 domestic and international destinations. Since 1997 Air Nostrum has been a franchise partner of Iberia, Spain’s leading national and international carrier, and is an affiliate of the oneworld airline alliance.
 
“This initial leasing arrangement, with a high-quality regional carrier, is a meaningful step and good progress in our strategy to diversify our aircraft leasing revenue over and above our CPA with Air Canada,” Randell said.
 
Chorus expects definitive documentation for the EDC loan facility and leases with Air Nostrum for the 2016 aircraft deliveries to be completed in the fourth quarter of 2016.  These transactions remain subject to the successful negotiation and execution of definitive agreements and related documentation.
 
Financial Results – Third Quarter 2016 Compared to Third Quarter 2015
In the third quarter of 2016, Chorus reported revenue and adjusted EBITDA, excluding other items of $331.1 million, and $70.0 million, respectively, compared to $412.2 million and $68.8 million, respectively in the same period of 2015.  This represents a 19.7% decline in revenue and a 1.6% increase in adjusted EBITDA, excluding other items. The decline in revenue is primarily driven by: (i) fuel and certain other costs no long being included as pass through revenue, and (ii) certain lower operating costs have reduced controllable revenue.
 
Excluding the revenue reductions related to these two items, operating revenue increased by $4.6 million or 1.2%, due mainly due to an increase in aircraft leasing under the CPA of $8.7 million, partially offset by lower charter, contract flying and other revenue of $4.1 million.
 
Adjusted EBITDA, excluding other items was $70.0 million, an increase of $1.1 million, or 1.6%, compared to the same period of 2015, at $68.8 million.  The increase was primarily driven by the $4.6 million increase in revenue, partially offset by:

  • the absence of the $2.8 million curtailment gain under the pilot pension plan recorded in 2015, related to the flow of Jazz pilots to Air Canada;
  • increased operating costs related to a $2.6 million reduction in capitalized labour and maintenance costs on owned aircraft for major maintenance overhauls;
  • increased stock-based compensation of $2.2 million, resulting from fluctuations in Chorus’ stock price;
  • increased expenses related to business development and financing activities outside of the CPA of $1.5 million; and
  • a decrease in other expenses of $5.6 million, including those related to the Voyageur operation.

Adjusted net income, excluding other items of $28.7 million, declined quarter over quarter by $6.5 million, or 18.3%.  The $1.1 million increase in adjusted EBITDA, excluding other items was primarily offset by $5.3 million in additional depreciation expense mainly related to new aircraft, and $1.9 million of additional net interest expense on long-term debt.
 
Net income was $20.1 million, an increase of $13.7 million over 2015.   The increase was due primarily to a $16.6 million decline in unrealized foreign exchange losses on long term debt and a $3.5 million decline in collective agreement signing bonuses, partially offset by the previously noted $6.5 million decline in adjusted net income, excluding other items.
 
For reporting purposes, at each quarter end, Chorus converts its US dollar 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 under the CPA with Air Canada in the underlying currency (US dollars) related to the aircraft debt. As a result of this conversion, in the third quarter of 2016, Chorus had an unrealized foreign exchange loss of $8.5 million versus an unrealized foreign exchange loss of $25.1 million in the same period of 2015.
 
2016 year to date financial results
 For the nine months ended September 30, 2016, Chorus reported revenue and Adjusted EBITDA, excluding other items, of $961.8 million and $178.7 million, respectively, compared to $1,187.3 million and $162.6 million, respectively, in the same period in 2015.  This represents a 19.0% decline in revenue (due primarily to reductions in fuel and controllable cost revenues) and a 9.9% increase in adjusted EBITDA, excluding other items.
 
Excluding the revenue reductions related to these two items, operating revenue increased by $33.3 million or 2.8% due primarily to increases in aircraft leasing under the CPA of $23.1 million, and increased charter, contract flying and other revenue of $9.7 million, mainly related to an additional four months of revenue for Voyageur.  Chorus acquired Voyageur on May 1, 2015, and therefore, the 2016 results include an additional four months of activity for the Voyageur operation.
 
Adjusted EBITDA, excluding other items was $178.7 million for the nine months ended September 30, 2016 and increased $16.1 million or 9.9%, compared to the same period of 2015 at $162.6 million.  The increase was primarily driven by the $33.3 million increase in revenue partially offset by:

  • increased operating costs related to a $4.7 million reduction in capitalized labour and maintenance costs on owned aircraft for major maintenance overhauls;
  • the absence of the $2.8 million curtailment gain under the pilot pension plan recorded in 2015 related to the flow of Jazz pilots to Air Canada;
  • increased expenses related to business development and financing activities outside the CPA of $4.7 million;
  • costs of $1.7 million associated with fleet transition; and
  • an increase in other expenses of $3.3 million, including those related to the Voyageur operation.

Adjusted net income. excluding other items of $70.8 million declined year over year by $10.8 million, or 13.2%.  The $16.1 million increase in Adjusted EBITDA, excluding other items was offset by $17.6 million in additional depreciation expense primarily related to new aircraft and Voyageur, $5.4 million of additional net interest expense on long-term debt, higher net income tax of $0.7 million; and higher net foreign exchange loss (excluding unrealized foreign exchange loss) of $3.2 million.

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Net income was $99.1 million, an increase of $86.1 million over 2015.   The increase was due primarily to a $88.7 million decline in unrealized foreign exchange losses on long term debt and a $8.0 million decline in collective agreement signing bonuses, partially offset by the previously noted $10.8 million decline in adjusted net income, excluding other items.
 
Outlook
Chorus’ subsidiaries continue to deliver results within management’s expectations, supporting positive operating income and cash flows from operations.

This reporting period marks the seventh consecutive quarter of strong operational and financial performance under the CPA with Air Canada, and demonstrates the continued long-term value of this strong, stable revenue source.
 
The progress made in advancing the revenue diversification strategy through growth in aircraft leasing is expected to continue. In 2017, five new CRJ900 regional jets will be added to the fleet of Q400 aircraft leased into the CPA operation. Further, we expect to acquire and lease four new CRJ1000 regional jets to Air Nostrum by the end of October 2017.
 
Chorus remains committed to creating additional shareholder value by strengthening the foundational business with Jazz, growing aircraft leasing revenues, pursuing growth opportunities in the Voyageur operation, such as Voyageur Avparts, and progressing towards further business diversification.