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Chorus Aviation faces uncertainty over AC arbitration

Nov. 8, 2011, Montreal - Chorus Aviation Inc. shares faced some turbulence Tuesday after an analyst warned investors to avoid the stock as a result of a payment dispute between Chorus and Air Canada.


November 8, 2011
By The Canadian Press

The Halifax-based company's shares were down 12 cents or 2.6 per cent at $3.68 in morning trading on the Toronto Stock Exchange, a day after reporting stronger than expected third-quarter results.

Chorus, parent of Jazz Air, warned analysts that its arbitration with the mainline carrier over the mark up it is paid could force the company to reimburse $26 million in payments it received from Air Canada last year and even more in 2011.

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.

The mark up in the capacity purchase agreement between the two companies can be adjusted based on Chorus' costs relative to its U.S. regional peer group, with 2009 costs to be compared to the 2006-07 period.

Chorus responded in its arbitration submission Monday that the current mark up should remain in place until at least 2015.

Chorus, which began operations in the fall of 2010, 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.

Cameron Doerksen of National Bank Financial said while Chorus seems to have a solidly defensible position, he warned investors to avoid the stock because the outcome is impossible to predict.

"The bottom line is that the disclosure of Air Canada's position in the benchmarking arbitration has created significant uncertainty for Chorus,'' he wrote in a report.

"We would avoid the stock until there is more clarity on the outcome of the arbitration process.''

Doerksen said an Air Canada win would have serious consequences for Chorus.

With $97 million in cash, Chorus could pay a retroactive settlement to Air Canada. But its ability to sustain a dividend beyond 2012 was already at risk. Lower profits resulting from an adverse arbitration ruling would likely require an immediate dividend cut, he said.

He suggested the current 60 cents per share annual payout would have to be cut to at least 40 cents per share.

Chorus' EPS in 2012 would be reduced to about 33 cents per share from his current estimate of 49 cents. The target share price for Chorus shares would also decrease to $2.45 from the current forecast of $3.50.

Meanwhile, Chorus reported Monday that its third-quarter profit was cut by more than half as foreign exchange losses, taxes and higher operating expenses offset higher revenue at the regional aircraft operator.

Net income fell to $13.9 million or 11 cents per share in the three months ended Sept. 30, down from 54 per cent from $30.2 million a year earlier.