Air Canada improves CPA with Jazz Aviation and equity investment of $97.26 million in Chorus

Lauren Eldershaw
By Lauren Eldershaw January 15, 2019 16:47

Air Canada improves CPA with Jazz Aviation and equity investment of $97.26 million in Chorus

Air Canada has agreed to amend and extend the Capacity Purchase Agreement (CPA) with Jazz Aviation, a wholly-owned subsidiary of Chorus Aviation, under which Jazz currently operates certain regional Air Canada Express flights.

“We are very pleased to have arrived at this win-win agreement with Jazz and Chorus, which will give us long-term stability, more competitive cost certainty and the flexibility to modernize the regional fleet for the benefit of our customers. The Amendments will allow us to provide regional services more cost effectively so that we can compete more efficiently, deploying the aircraft best suited for a given regional market and also generate additional traffic to feed our international network,” said Calin Rovinescu, President and Chief Executive of Air Canada. “As further demonstration of Air Canada’s commitment to a successful, long-term partnership, upon the CPA Amendments becoming effective, we will make an equity investment of $97.26 million in Chorus. In addition to aligning our mutual interests, we believe it represents excellent value for Air Canada shareholders.”

“We have jointly seized this unique opportunity to strengthen our long-term partnership for the next 17 years,” stated Joe Randell, President and Chief Executive Officer, Chorus. “We look forward to welcoming Mike Rousseau to our board of directors as his expertise will be truly valuable as we continue to execute on the growth and diversification strategy for Chorus.”

The CPA terms have been extended by ten years from January 1, 2026 to December 31, 2035. The Jazz fleet will be simplified and modernised with growth through more, larger gauge aircraft. The amendments will include various minimum levels of covered aircraft at different points in time providing Air Canada the flexibility to optimize its fleet within its network strategy; including the continuance of a fixed fee structure, including new terms mitigating risk and market- oriented compensation to make the CPA more competitive given new competitors entering the market. The projected annual savings to Air Canada are approximately $50 million in each of 2019 and 2020, and cumulative savings of approximately $53 million between 2021 and 2025, both as compared to the 2015 CPA frame-work (from both fixed fee and performance incentive reductions). The pilot mobility agreement that provides Air Canada Express pilots with access to pilot careers at Air Canada on a planned basis will continue. Air Canada will consolidate more of its overall regional capacity into Jazz’s footprint, thereby lowering Air Canada’s overall regional costs in the future.

The amendments will be effective retroactively as at January 1, 2019, subject to a number of conditions, including completion of Air Canada’s equity investment in Chorus and ratification of a new tentative collective agreement between Jazz and the Air Line Pilots Association, International (ALPA), the union representing Jazz pilots.

Under the equity investment agreement, Air Canada has agreed to subscribe for 15,561,600 Class B Voting Shares in the capital of Chorus, representing approximately 9.99% of the issued and outstanding Class A Variable Voting Shares and Class B Voting Shares of Chorus on a combined basis. This represents an investment of ~$97,260,000 by Air Canada.

The Chorus shares will be issued to Air Canada at a price of $6.25, representing a 5% premium to the five-day volume weighted average price of the shares as of the close of trading on Thursday, January 10, 2019.

Air Canada and Chorus will enter into an investor rights agreement under which, among other things, Air Canada will hold the investment shares, for a period of at least 60 months and will participate in Chorus’ dividend reinvestment plan and agree to customary standstill provisions, subject to certain limited exceptions.

On closing of the equity investment, Deputy Chief Executive Officer and Chief Financial Officer of Air Canada, Michael Rousseau, will be appointed to the board of directors of Chorus.

Air Canada does not intend to provide further comment pending the ratification process in respect of the tentative agreement between Jazz and ALPA; a news release updating the market will be issued when all the closing conditions to the completion of the foregoing transactions are met.

Lauren Eldershaw
By Lauren Eldershaw January 15, 2019 16:47