Air Canada will amend and extend the Capacity Purchase Agreement (CPA) with Jazz Aviation LP, a wholly-owned subsidiary of Chorus Aviation Inc., under which Jazz currently operates certain regional Air Canada Express flights.
The amendments should provide long term stability for Chorus, reaffirming Jazz as Air Canada's most significant Express carrier well into the future, as well as enabling growth on Chorus' leasing business through Air Canada's equity investment and the predictability of Jazz's cash flow from CPA operations until 2035.
The amendments will bolster the strength and competitiveness of the Air Canada Express brand and its coast-to-coast regional network, and provide significant CPA savings for Air Canada, while optimizing network and fleet flexibility when compared to the current agreement.
Highlights of the CPA Amendments
- Extension of the CPA term by ten years from Jan. 1, 2026 to Dec. 31, 2035;
- Simplification and modernization of the Jazz fleet 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;
- 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;
- Projected annual savings to Air Canada of 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 framework (from both fixed fee and performance incentive reductions); Beyond 2025 - a market competitive fixed fee for the extension period. This supports Air Canada's Cost Transformation Programs;
- Continuation of a highly successful pilot mobility agreement that provides Air Canada Express pilots with access to pilot careers at Air Canada on a planned basis;
- 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.
Highlights of the Equity Investment
- 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 five per cent premium to the five-day volume weighted average price of the shares as of the close of trading on Thursday, Jan. 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 CEO and CFO of Air Canada, Michael Rousseau, will be appointed to the board of directors of Chorus.