JAZZ and 757

[GDR]

From TD Waterhouse

Jazz Air Income Fund

(JAZ.UN-T) C$4.60

Jazz Gets Exposure to the Sun

Event

Jazz Air announced before the open on April 5th that it had entered into a

two-year (five-year potential) agreement with Thomas Cook to operate

aircraft on Canada sun destination routes on their behalf during the winter

season beginning this November.

Impact - POSITIVE

We are increasing our target price to $5.00 from $4.50 previously and

maintaining our BUY recommendation. Our target increases due to the

combined impact of upward revisions to our target valuation metrics and

slightly higher financial forecasts as a result of the Thomas Cook agreement.

We are increasing our EV/EBITDAR multiple to 5.75x from 5.5x and

reducing our target distribution yield to 12.5% from 13.0% previously. We

are revising our target multiples higher on Jazz to reflect comparable

company multiple expansion, improving sentiment towards airline related

investments and our view of the declining risk profile in Air Canada, Jazz’s

key customer. While we believe the Thomas Cook announcement supports

these changes, we note that it was not the primary basis for the revision.

We believe this agreement is a good first step towards management’s longstanding

goal of diversifying Jazz’s business away from Air Canada and

seeking small incremental growth opportunities. Jazz has partnered with a

large, reputable (and financially secure) tour operator in Thomas Cook, and

added $100 million to its revenue base. The arrangement compliments Jazz’s

current seasonal flying schedule.

We believe the agreement has been structured in a similar way to the current

Capacity Purchase Agreement with Air Canada, limiting Jazz’s direct market

risk. There is very limited information available regarding the profitability of

the agreement for Jazz and the potential earnings and cash flow impact. The

sun destination market is extremely competitive and we believe the contract

was subject to a competitive bidding process over the past several months. As

a result, at this time, we are assuming that the margins on the contract will be

lower than Jazz’s current corporate margins.

Transportation/Aerospace

Recommendation: BUY

Unchanged

Risk: HIGH

12-Month Target Price: C$5.00↑

Prior: C$4.50

12-Month Total Return: 21.7%

Action Notes April 6, 2010

Equity Research 4 of 32

Details

• Jazz expects to generate $100 million in annual revenue from the contract, inclusive of pass-through cost

recoveries, concentrated between the months of November and April. For context, total revenues for Jazz

were $1,474 million in FY09, or $986 million excluding pass-through cost recoveries.

• Under the contract, Jazz will operate no less than six Boeing 757-200 aircraft (~230-seats) on behalf of

Sunquest Vacations, Thomas Cook’s Canadian tour operator, on various sun destination routes between

November and April.

• A press release from Thomas cook indicated that Jazz would operate a fleet of “up to 11 Boeing 757

jets,” providing some additional upside to the $100 million revenue guideline in Jazz’s release. We have

not factored this additional upside potential into our estimates at this point.

• The initial contract term will run through April 2012, or through April 2015 if the two parties can agree

on pricing for years three to five of the contract by May 30, 2010.

• Jazz will sublease the aircraft from Thomas Cook. The aircraft will be branded as Thomas Cook Airlines

beginning in January 2011.

Outlook

• Jazz management has been considering opportunities for incremental growth and diversifying the

business away from Air Canada for the past several years. While the agreement is expected to represent

only about 6% of Jazz’s consolidated revenue, we believe it is a good first step towards that goal. Jazz

has partnered with a large, reputable (and financially secure) tour operator in Thomas Cook, and added

$100 million to its revenue base (with the potential for more should additional capacity be required). The

agreement compliments Jazz’s current seasonal flying schedule which is weighted more heavily towards

the summer season.

• We believe that investors will view a partnership with a global industry leader such as Thomas Cook,

with publicly disclosed financials, more positively than a similar venture with a private, independent

operator given the recent failure of a number of private airlines/operators.

• There are relatively limited details available regarding the structure of the agreement. We believe the

agreement has been structured in a similar way to the current Capacity Purchase Agreement with Air

Canada, limiting Jazz’s direct market risk. However, the sun destination market is extremely competitive

with narrow margins. We believe the contract was subject to a competitive bidding process over the past

several months. As a result, we expect that the margins on the contract will be below those of Jazz’s

current CPA margins.

• We expect that Jazz will incur incremental costs related to type certifying (training) pilots on Boeing 757

aircraft in 2H/10 and will require additional flight attendants given the significantly larger aircraft seating

capacity.

• Our forecasts for Jazz now include the $100 million in revenue disclosed by the company related to the

new Thomas Cook agreement and EBIT of 6.6% on the revenue. This margin assumption falls between

our forecast EBIT margin for Jazz’s legacy business in FY10 and our expectation for existing margins on

sun destination routes under normal operating and market conditions.

Valuation

Jazz is currently trading at 5.9x 2010 and 5.4x 2011 estimated EBITDAR. U.S. regional airline comps are

currently trading at 5.6x 2010 and 5.7x 2011 estimated EBITDAR.

Justification of Target Price

Our target is based on the average value arrived at through applying a 5.75x multiple to estimated EBITDAR

for the four quarter period ending December 31, 2011 and the price implied by a target yield of 12.5%. Our

target yield is based on our estimate of the average historical unit yield, excluding outlier periods. We recently

introduced a yield based valuation methodology based on our view that the stock is increasingly trading on the

distribution yield as Air Canada concerns subside and the market gains comfort in the sustainability of the

distribution.

[skyline]

Numbers from Airline Pilot Central (all figures based on top scale Captain pay).

Air Transat $167,000 per year (after 10 years) [works out to $163 an hour]

Canjet $11,667 per month (after 10 years) [works out to $137 an hour]

Cargojet $122,500 per year (after 10 years) [works out to $120 an hour]

First Air $142,129 per year (after 8 years) [works out to $139 an hour]

Kelowna Flightcraft $10,010 per month (after 10 years) [works out to $118 an hour]

Westjet $172 an hour (after 12 years)

Air Canada Jazz $106 (Current Jazz top scale)

Can someone include Air Canada Mainline to compare. I know we can Manipulate figures but this is the best I can get. Anyone else have different one?

[Johnny]

Why would ACE have anything to say about this? They have zero economic interest now in Jazz and no board representation. They own 27 percent of Air Canada, and have no board representation. I see no reason whatsoever for ACE's participation in this issue. There is no gain here for ACE.

Hard to imagine that Rovinescu isn't involved and that Jazz did this deal without AC's blessing. After 25 years of Dehavilland servitude, ALPA (Jazz) would sell their soul for 757's.

...as would (most) Pilot groups.

[AME]

I wonder how Jazz afforded to outbid Sunwing and Canjet and Enerjet et al on this work. Typically vacation charters are low margin, going ONLY to the lowest bidder. So, given Jazz is a legacy airline with legacy work rules and contracts (DB pensions, unionized, good benefits, old workforce) unlike the other players in the market, how the H-E-double hockeysticks did they get this work? Would not the new, crummy companies listed above have been able to bid lower, as is their entire raison d'etre?

Either Jazz will be flying the 757 for utter crap wages (in which case, thanks Jazz ALPA, nice job...NOT), or their operation is so highly subsidised by a sweetheart deal with a much larger entity that this work was costed and bid for on a marginal and not fully allocated basis. In other words, is Air Canada subsidising Jazz' ability to compete against them? Unless there is a Machiavellian labour backstory to this development (pitting ACPA against ALPA, again) I will be interested to see how this affects the Jazz/AC relationship. Talk about a hornet's nest.

This is from the second post in this thread

This agreement is expected to generate approximately $100 million in additional annual revenues with conservative margins. The terms and conditions of the transaction are confidential.

[JW]

Question -- Skyservice flew 757s for Thomas Cook. Thomas Cook puts Skyservice into liquidation. Skyservice 757 employees out of work. A Thomas Cook and Jazz deal for 757s magically appears. Isn't there a right to "follow work" in Canada?

[AME]

Question -- Skyservice flew 757s for Thomas Cook. Thomas Cook puts Skyservice into liquidation. Skyservice 757 employees out of work. A Thomas Cook and Jazz deal for 757s magically appears. Isn't there a right to "follow work" in Canada?

Pilots can't even play nice when their companies are merged, can you imagine the lawyer bills if they were allowed to "Follow Work"

[JW]

Pilots can't even play nice when their companies are merged, can you imagine the lawyer bills if they were allowed to "Follow Work"

There will be x-Skyservice people other that pilots looking for work. Does Jazz do in-house maintenance?

[better4me]

Question for pilots and ATC types out there; could Jazz use the following radio announcement to identify themselves: "Jazz 123, Thomas Cook colours". I know Northwest used this for a while with "Northwest 123, Delta colors", does similar concept work in Canada?

[AME]

There will be x-Skyservice people other that pilots looking for work. Does Jazz do in-house maintenance?

Sorry I assumed you were a Pilot... Yes, Jazz does their own maintenance, and I believe they are already starting the process to hire some of the Skyservice Engineers (this is a second hand rumour only!!!!).

[Airbus_rookie]

That doesn't answer my question. What does their contract say about the addition of a new aircraft type?

There wouldn't be much extra cost if the British guys were to come with the aircraft.............. Seems odd to train up Canadians for 5-6 months a year.

[AME]

There wouldn't be much extra cost if the British guys were to come with the aircraft.............. Seems odd to train up Canadians for 5-6 months a year.

You have to look at it as the glass half full, and say that the Canadian guys can fly the aircraft in Europe when they are not working here

[ModerateChop]

There wouldn't be much extra cost if the British guys were to come with the aircraft

How many British pilots came over to Skyservice this winter ? Did any fly the A320 ?

[blues deville]

I hope Jazz knows what they are getting into and good luck to them.

bd

[Lakelad]

There will be x-Skyservice people other that pilots looking for work.

"The carrier will be in hiring mode, needing six flight attendants for every Boeing 757, as well as bolstering pilots, maintenance and administrative staff. "We're bringing Jazz to new heights and entering the international market," Mr. Randell said."

'Court documents show that Skyservice has returned three Airbus A320s and three Boeing 757s back to the lessor, Thomas Cook Airlines Ltd.'

[blues deville]

"The carrier will be in hiring mode, needing six flight attendants for every Boeing 757, as well as bolstering pilots, maintenance and administrative staff. "We're bringing Jazz to new heights and entering the international market," Mr. Randell said."

'Court documents show that Skyservice has returned three Airbus A320s and three Boeing 757s back to the lessor, Thomas Cook Airlines Ltd.'

I calculate about 180-190 flight attendants and 75-80 pilots to crew six aircraft on a Canadian winter program. The article also mentions the 233 seating configuration.....always a popular seat pitch with Canadians heading south.

bd

[Homerun]

I'm hearing rumblings that this caught AC by surprise. Interesting times.

[rudder]

Can a former SSV'er please explain the process that was necessary for the SSV pilots to operate G registered aircraft in Europe? Also, it is my understanding that up until shutdown there were plans for SSV pilots to operate a CDN based 757 on the YYZ-MAN/GLA route. Were the F/A's on the G registered aircraft UK based? Were the F/A's on the C registered aircraft Canada based?

[Specs]

How will the in-terminal services such as check-in work? Will Jazz purchase the services from from AC?

If I'm on a Rapidair flight (YYZ-YUL) that happens to be operated by Jazz I'll check in with AC.

If I'm taking a charter vacation (YYZ-???) on a Thomas Cook flight I'll check in with Thomas Cook?, Jazz?, AC?

[rob_andrews]

How will the in-terminal services such as check-in work? Will Jazz purchase the services from from AC?

If I'm on a Rapidair flight (YYZ-YUL) that happens to be operated by Jazz I'll check in with AC.

If I'm taking a charter vacation (YYZ-???) on a Thomas Cook flight I'll check in with Thomas Cook?, Jazz?, AC?

Jazz may or may not contract AC ground agents to do the work. I doubt this option though. In my opinion I think Jazz may hire its own agents and train them to operate the check in, reservations etc. Might be a bit cheaper that way, but again this is just my opinion.

As for the flights who to check in with;

If you're flying on an Air Canada Rapid Air operated by Jazz, then you'd continue to use Air Canada for checkin since that is the airline which is supplying the flight, just Jazz operating the aircraft.

If you buy a sun destination charter you'd check in with Jazz agents operating for Thomas Cook. The signage in the terminal will probably be Thomas Cook or Sunquest Vacations at the kiosks....but please don't quote me as these details have been released.

Hope this helps.

Cheers!

[chockalicious]

How will the in-terminal services such as check-in work? Will Jazz purchase the services from from AC?

If I'm on a Rapidair flight (YYZ-YUL) that happens to be operated by Jazz I'll check in with AC.

If I'm taking a charter vacation (YYZ-???) on a Thomas Cook flight I'll check in with Thomas Cook?, Jazz?, AC?

I would think that everything would be contracted out to a handling company like Servisair, Swissport, etc. I can't see AC people touching these charters above or below wing.

[pictues]

I would say most likely Servisair since they currently handle Thomas Cook at all Canadian Bases they fly, but that'll be upto Jazz I guess for this venture

[John S.]

Well, this thread is turning into an interesting read.

Talk about generalizations, suppositions, and propositions from the unknowing for the ill-informed! Someone who just jumped onto this web site would be left wondering what's going on.

Anyway, let me also stir the pot a bit: The one part that Jazz employees can probably take to the bank is: the more ModerateChop rants the better this must be for Jazz.

So, ModerateChop, please keep ranting away! :angryangry:

As of this morning I have yet to hear an official response from ACPA. What's taking so long?

[J.O.]

As of this morning I have yet to hear an official response from ACPA. What's taking so long?

I agree John, that's the next elephant in the room that has so far been sitting quietly.

[ModerateChop]

So, ModerateChop, please keep ranting away

Sorry I forgot how sensitive everyone here is on this forum. Posts have been deleted.

[GTFA]

Get over it folks. This expansion of JAZZ has nothing to do with Air Canada, or ACPA. Other than a commercial agreement, the ties have been severed between these two for good. This is good news for travelers, Thomas Cook, Jazz and probably more than a few ex SSV people who could use some income while looking for a new permanent employment. I am confident that no stone has been left unturned before announcing this development. You never know... AC may even have some kind of benefit through access to connecting passengers in Canada.