Chorus Aviation Inc. has announced strong third quarter 2015 earnings that included the achievement of its highest third quarter EBITDA1 and operating income since 2010, excluding the Voyageur operation.
Q3 2015 HIGHLIGHTS
- Adjusted EBITDA1 of $65.1 million.
- Adjusted net income1 of $31.4 million.
- Adjusted net income1 per basic share of $0.26.
- Net income of $6.3 million.
- Net income per basic share of $0.05.
- Announced senior executive appointments in support of growth plans.
- Reached new long-term collective agreement with Jazz Flight Attendants.
- Announced the addition of 10 incremental aircraft to the Jazz Capacity Purchase Agreement (‘CPA’) fleet.
“We continue to strengthen the Chorus group of companies, and achieved our highest third quarter EBITDA and operating income since 2010, excluding Voyageur’s contribution,” said Joe Randell, President and Chief Executive Officer, Chorus. “Our recent executive appointments provide Chorus with the talent, expertise and focus to further grow and prosper. The addition of ten incremental aircraft to the planned Jazz CPA fleet less than nine months after establishing an amended and extended commercial agreement with Air Canada demonstrates confidence in Jazz’s operational performance and ever-improving cost competitiveness, and further validates the strengthened relationship with Air Canada. The Voyageur operation continues to deliver solid performance and contributed $4.8 million in adjusted EBITDA in the quarter. Further, I commend the Jazz flight attendants for sharing our vision of being a more formidable competitor in the regional sector by achieving a long-term, market competitive agreement.”
“I am pleased with the strong performance the Chorus team delivered in the third quarter that resulted in adjusted net earnings per basic share of $0.26,” continued Mr. Randell. “Cash flow remains strong and our cost reduction initiatives are taking hold as evidenced by increased operating income and adjusted EBITDA of approximately 25.0% and 16.0% respectively over the third quarter of 2014.”
In the third quarter of 2015, Chorus generated adjusted EBITDA of $65.1 million excluding a foreign exchange loss of $27.5 million on US denominated debt. The strong performance represented by an $8.9 million increase in adjusted EBITDA over the third quarter of 2014 takes into account a $9.7 million increase in operating income; offset by a quarter-over-quarter net $0.8 million decrease in depreciation and amortization expense. This decrease in depreciation and amortization was mainly attributable to a change in the estimated economic useful lives and residual values of certain owned aircraft and flight equipment in the first quarter of 2015 of $4.1 million, and major maintenance overhauls of $0.3 million; offset by the purchase of additional aircraft during 2015 for $0.2 million and a $3.4 million increase in depreciation and amortization expense attributed to Voyageur which contributed $4.8 million in adjusted EBITDA in the quarter.
For reporting purposes, at each quarter, 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 2015, Chorus had an unrealized foreign exchange loss of $25.1 million versus an unrealized foreign exchange loss of $17.8 million in the same period of 2014.
Financial Performance – Third Quarter 2015 Compared to Third Quarter 2014
Operating revenue decreased from $432.6 million to $412.2 million, representing a decrease of $20.4 million, or 4.7%.
Controllable revenue decreased by $18.3 million or 8.2%. Under the amended CPA, certain items provided to Chorus by Air Canada, such as ground handling at the major hubs, have been removed from controllable revenue. Other items, such as third party ground handling, have been re-classified as pass-through costs; and therefore pass-through revenue, and removed from controllable revenue. The controllable revenue reduction related to these changes was $26.3 million, and rate decreases pursuant to the CPA accounted for a decrease of approximately $7.1 million. These decreases were offset by increased CPA billable block hours of 1,433 hours which accounted for a $1.0 million rise in controllable revenue and a favourable US dollar exchange rate that resulted in a $14.1 million increase in the quarter.
Aircraft leasing revenue under the CPA increased by $2.9 million to $16.9 million. The increase was related to a favourable US dollar exchange rate. Aircraft leasing revenue under the CPA is generated from the 21 Q400 aircraft and four Q400 engines owned by Chorus.
Under the amended CPA, Chorus’ compensation is based on fixed fees for the term of the agreement. The annual fixed fee compensation for 2015 is contractually set at $109.7 million or $27.4 million quarterly.
In the third quarter, Chorus earned $4.8 million in performance incentives, or 81.8% of the maximum incentive payment available under the CPA, compared to $5.2 million or 82.9% in the third quarter of 2014.
CPA pass-through revenue decreased by $17.9 million or 11.7% from $152.2 million to $134.4 million, which included a decrease of $30.2 million primarily related to decreased fuel costs. Under the amended CPA, compensation for deicing and certain other costs provided to Chorus by Air Canada are no longer billed. Other costs, such as third party ground handling services, have been reclassified as pass-through costs and therefore increased pass-through revenue in the quarter by $10.8 million. A favourable US dollar exchange rate resulted in a $2.7 million increase.
Charter and other contract flying revenue increased by $11.3 million or 456.4%. New flight revenue from the Voyageur operation accounted for $12.0 million; offset by decreased Jazz charter revenue of $0.7 million.
Other revenue increased by $6.3 million primarily related to new revenue from the Voyageur operation, which includes leasing, and maintenance repair and overhaul; offset by decreased sale of consignment inventory.
Operating expenses decreased from $393.2 million to $363.0 million, a decrease of $30.1 million.
Salaries, wages and benefits were consistent with third quarter 2014 at $103.7 million. Adjusted salaries, wages and benefits increased $3.6 million primarily as a result of $4.7 million of such costs attributable to the Voyageur operation, and $1.7 million mainly related to wage and scale increases; offset by a pension curtailment gain of $2.8 million. Chorus incurred a one-time $3.5 million signing bonus with Jazz’s flight attendants per their new collective agreement. Stock-based compensation decreased primarily as a result of fluctuations in Chorus’ share price. Employee separation program costs incurred during the third quarter were $0.3 million compared to $3.3 million in the same period of 2014. More labour costs were capitalized on owned aircraft for major maintenance overhauls decreased salaries and wages by $1.0 million quarter-over-quarter.
Aircraft maintenance expense increased by $10.0 million from $42.8 million to $52.8 million. An unfavourable US dollar exchange rate on certain maintenance material purchases accounted for a $7.5 million increase, increased block hours accounted $0.5 million, and the Voyageur operation accounted for $3.5 million. These increases were offset by more maintenance costs being capitalized as a result of increased major maintenance overhauls that accounted for a $1.5 million decrease.
Other expenses decreased by $1.9 million from $31.8 million to $29.9 million. Costs for certain services to Chorus provided by Air Canada are no longer billed. These Air Canada costs were $nil in the third quarter compared to $2.7 million in the same period last year. The decrease was offset by increased costs related to the Voyageur operation of $3.7 million, and general overhead increases of $0.9 million.
Non-operating expenses increased by $12.3 million from $19.0 million to $31.3 million. Net interest expense increased by $0.7 million. Interest expense related to long-term debt increased by $0.3 million as a result of an unfavourable US dollar exchange rate and $0.3 million related to interest on consideration payable. The weakening of the Canadian dollar in the quarter contributed to a foreign exchange loss of $27.5 million, compared to a foreign exchange loss of $16.0 million in the previous year.
Operating income of $49.1 million increased by $9.7 million from $39.4 million.
Adjusted EBITDA was $65.1 million compared to $56.2 million in 2014, an increase of $8.9 million.
Adjusted net income for the third quarter 2015 was $31.4 million or $0.26 per basic share compared to $29.0 million or $0.24 per basic share for the same period 2014. Net income in the quarter was $6.3 million or $0.05 per basic share compared to 2014 net income of $11.3 million or $0.09 per basic share.
A reconciliation of these non-GAAP measures to their nearest GAAP measure is provided in Chorus’ Management’s Discussion and Analysis dated November 12, 2015.
