Is Air Canada the most dysfunctional airline ever ?

[ModerateChop]

Miltons legacy lives on. I guess this is what happens when you let lawyers run the world ?

http://www.theglobea...article2229653/

Chorus Aviation faces uncertainty over Air Canada dispute

Ross Marowits, Canadian Press, November 8, 2011

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.

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 markup 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 markup from 12.5 per cent to 9.54 per cent, effective from January, 2010.

The markup in the capacity purchase agreement between the two companies can be adjusted based on Chorus's 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 Chorus seems to have a solidly defensible position, but 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.

On an adjusted basis, it earned 17 cents per share, three cents above the consensus forecast of analysts.

[CanadaEH]

So AC is reneging on its deal with Chorus after renegotiating it last year (or was it the year before?)??

[Seeker]

So AC is reneging on its deal with Chorus after renegotiating it last year (or was it the year before?)??

Well, the article does say this: "The markup in the capacity purchase agreement between the two companies can be adjusted based on Chorus's costs relative to its U.S. regional peer group, with 2009 costs to be compared to the 2006-07 period." This seems to imply that AC is simply availing itself of the ability to adjust the rate rather than "reneging".

[rudder]

So AC is reneging on its deal with Chorus after renegotiating it last year (or was it the year before?)??

Chorus MD&A page 18 - Economic Dependence:

Please see below for an update on the 2009 Benchmarking process.

The Controllable Mark-Up may be reduced as a result of benchmarking Chorus’ Controllable Costs to those of a group

of comparable operators (the “Comparable Operators”). Under the CPA, this benchmarking was to be effected in 2010

(based on information from Chorus’ 2009 calendar year – the “2009 Benchmark”) and again in 2016 (using information

from Chorus’ 2015 calendar year – the “2015 Benchmark”). If the 2009 Benchmark reveals that the percentage

difference between Chorus’ Unit Costs and the median controllable unit costs, stage length adjusted, of the Comparable

Operators has increased compared to the percentage difference of these costs for the twelve month period beginning

July 1, 2006 and ending June 30, 2007, the Controllable Mark-Up shall be reduced accordingly with effect as of January

1, 2010 until December 31, 2020 (unless as a result of the 2015 Benchmark it is further reduced) to the lower of 12.50%

or the percentage that is equal to 16.72% minus the change in Controllable Mark-up resulting from the 2009 Benchmark.

If the 2015 Benchmark indicates that percentage difference between Chorus’ Controllable Costs and the median

controllable unit costs, stage length adjusted, of the Comparable Operators has increased compared to the percentage

difference determined during the 2009 Benchmark, the Controllable Mark-Up then in effect shall be reduced based on

the results of the 2015 Benchmark, with effect as of January 1, 2016 until December 31, 2020. The comparison of

Chorus’ Unit Costs to the median controllable unit costs, stage length adjusted, shall be subject to adjustments required

to reflect the differences between Chorus and each Comparable Operator in fleet type and size, aircraft utilization,

currency, geographical deployment and growth relative to Chorus.

Chorus and Air Canada were unable to reach agreement in 2010 on the results of the 2009 Benchmark. On February 3,

2011, Chorus and Air Canada agreed to proceed to binding arbitration in respect of the 2009 Benchmark (the

“Arbitration”). On October 3, 2011, Air Canada delivered its claim in the Arbitration (the “AC Claim”). In the AC Claim, Air

Canada seeks a declaration that the appropriate methodology for comparing Chorus’ Unit Costs to the adjusted median

controllable unit costs of the Comparable Operators is a “component unit cost driver methodology” or “CUCD”. The AC

Claim further seeks a declaration that the proper application of the CUCD for the purpose of the 2009 Benchmark

results in a reduction of the Controllable Mark-Up from 12.50% to 9.54%, effective from January 2010. Air Canada

claims that, if the Controllable Mark-Up is reduced from 12.50% to 9.54%, Chorus would be required to repay Air

Canada the amount of $26.0 million in respect of payments made by Air Canada to Chorus in 2010. Air Canada seeks

an order that Chorus be required to pay Air Canada that amount, or such other amount as the arbitration panel may

determine, as well as any other amount necessary to account for the adjustment of Controllable Mark-Up for payments made by Air Canada to Chorus in 2011 and on a going-forward basis. The AC Claim also alleges that the formula for

calculating the Compensating Mark-Up ought to be adjusted to take into account any reduction in the Controllable MarkUp.

On November 7, 2011, Chorus delivered its Defence and Counterclaim in the Arbitration (the “Chorus Claim”). In the

Chorus Claim, Chorus asserts that the relevant provisions of the CPA provide that the preferred methodology to be

applied for comparing Chorus’ Unit Costs to the adjusted median controllable unit costs of the Comparable Operators

shall be on a “cost per available seat mile” or “CASM” basis. Chorus further asserts that, if a CASM methodology is

applied with the appropriate normalizations and adjustments no adjustment to the Controllable Mark-Up will be required

as a result of the 2009 Benchmark. As a result, Chorus is not required to repay Air Canada any amounts in respect of

payments made in 2010 or 2011 and its Controllable Mark-Up will remain at 12.50% going forward until at least the 2015

Benchmark. In the alternative, Chorus asserts that, even if the arbitration panel were to accept that CASM was not an

appropriate methodology, the CUCD methodology proposed by Air Canada in the AC Claim is not an “alternate market

recognized benchmark” as contemplated by the CPA. In the further alternative, the Chorus Claim asserts that, even if

CUCD were to be found to be an “alternate recognized benchmark”, a proper application of the CUCD methodology with

the appropriate normalizations and adjustments would not result in the adjustment to the Controllable Mark-Up claimed

by Air Canada. Finally, Chorus states that the CPA does not provide for any adjustment to the Compensating Mark-Up

formula resulting from an adjustment to the Controllable Mark-Up as a consequence of the 2009 Benchmark exercise.

Although Chorus believes that the methodology it has proposed is both fair and reasonable and consistent with the

relevant provisions of the CPA, there can be no assurances that the methodology Chorus has proposed will ultimately

be the basis of conducting the 2009 Benchmark exercise as a result of the arbitration process. If Chorus’ methodology is

not consistent with any arbitration decision, operating results, financial condition and liquidity may be negatively

impacted by any resulting reduction in the Controllable Mark-Up.

No amounts have been recorded in the accounts of Chorus in 2010 or 2011 related to this claim as management has

determined that it is not probable that the AC claim will be successful and it is not practicable to determine an estimate

of the possible financial effect, if any, with sufficient reliability.

[props2you]

If you pay peanuts, you get Colgans.

[rudder]

Language from the original Jazz Air Income Fund Prospectus circa November 2005:

The specified percentage mark-up on Jazz's estimated Controllable Costs, and thus the specified margin on Jazz's

estimated Scheduled Flights Revenue, is subject to (i) revision in 2009 and 2012 with the revised margin being the

greater of the initial margin of 14.09% and the average actual margin on Scheduled Flights Revenue achieved by Jazz

in each of the prior three years (after giving effect to any margin sharing with Air Canada); and (ii) potential reduction

in 2010 if the changes in Jazz's Controllable Costs per ASM between the twelve-month period ending June 30, 2007

and the twelve-month period ending December 31, 2009 are lower than the median of changes to the equivalent costs

of a group of comparable North American regional carriers for the same period (adjusted to reflect, among other things,

the fleet composition and size, stage length, aircraft utilization, geographical deployment, currency and growth relative

to that of Jazz), based on a benchmarking exercise involving such comparable regional carriers to be completed by Jazz

and Air Canada.

And from the Jazz Air Income Fund Debenture Prospectus circa August 2009:

The CPA Amending Agreement also amended the Rates established for the rate period commencing January 1, 2009

and ending on December 31, 2011 (the “2009-2011 Rate Period”). The Rates negotiated and reflected in the Rate Amending

Agreement were established to enable Jazz to achieve a Controllable Target Margin of 14.32%, corresponding to a Controllable

Target Mark-Up of 16.72% on Jazz’s Controllable Costs. However, pursuant to the terms of the CPA Amending Agreement, Air

Canada and Jazz agreed that the Controllable Mark-Up of 16.72% shall only apply as of and from January 1, 2009 through to

July 31, 2009. Effective commencing August 1, 2009, an agreed set of revised Rates became effective, under which Jazz

achieves a Controllable Target Margin of 11.11%, corresponding to a Controllable Mark-Up of 12.50% on Jazz’s Controllable

Costs.

Following the expiration of the 2009-2011 Rate Period, the CPA Amending Agreement established the following three

remaining rate periods during the initial term of the CPA: (i) January 1, 2012 to December 31, 2014; (ii) January 1, 2015 to

December 31, 2017 and; (iii) January 1, 2018 to December 31, 2020. Prior to the commencement of each rate period Jazz and

Air Canada shall determine the Rates to be charged by Jazz during each period. Rates for each rate period are determined

pursuant to a Rate reset process set out in the CPA. The CPA provides that Air Canada and Jazz will review and agree in writing

on the Rates for the next rate period. The components of each Rate type to be considered in developing each new Rate are set out in the schedules to the CPA and are based on costs incurred by Jazz. The CPA also specifies that the Rates are to be established

so as to enable Jazz to achieve the Controllable Target Margin which corresponds to the Controllable Mark-Up. If Jazz and Air

Canada can not agree on new Rates, the matter is subject to the arbitration provisions in the CPA.

The CPA Amending Agreement also provides for adjustments to the Controllable Mark-Up in certain circumstances.

Commencing January 1, 2010, if the Annual Delivered Block Hours are less than 375,000 Block Hours, the Controllable MarkUp will be increased, to a maximum of 16.72%, to compensate Jazz for increased unit costs and lost margin due to the reduction

in flying. If, on the other hand, the Annual Delivered Block Hours are greater than 375,000 Block Hours, the Controllable MarkUp of 12.50% shall only apply to Jazz’s fixed controllable charges and the Controllable Mark-Up of 12.50% shall be reduced to

5% on Jazz’s variable controllable charges for Block Hours in excess of 375,000.

The Controllable Mark-Up may also be reduced as a result of benchmarking Jazz’s Controllable Costs to those of a

group of comparable operators (the “Comparator Group”) in 2010 and 2016. Jazz and Air Canada had agreed to compare and

benchmark Jazz’s Controllable Costs to those of the Comparator Group in 2010 for the 2009 calendar year (the “2009

Benchmark”). Pursuant to the terms of the CPA Amending Agreement, Jazz and Air Canada have agreed to a second

benchmarking in 2016 for the 2015 calendar year (the “2015 Benchmark”).

If the 2009 Benchmark indicates that the percentage difference between Jazz’s Controllable Costs and those of the

Comparable Group has increased compared to the percentage difference for the twelve month period beginning July 1, 2006 and

ending June 30, 2007, the Controllable Mark-Up shall be reduced accordingly with effect as of January 1, 2010 until December

31, 2020, unless as a result of the 2015 Benchmark it is further reduced. In the event the 2009 benchmarking results in the

reduction described above, notwithstanding the foregoing, the benchmarking scheduled for the end of 2009 will only serve to

reduce the Controllable Mark-Up from 16.72% and the Controllable Mark-Up will be the lower of 12.50% or (16.72% minus the

amount of the increase described above).

If the 2015 Benchmark indicates that the percentage difference between Jazz’s Controllable Costs and those of the

Comparable Group has increased compared to the percentage difference determined during the 2009 benchmarking, the

Controllable Mark-Up then in effect shall be reduced accordingly by the results of the 2015 Benchmark, with effect as of January

1, 2016 until December 31, 2020.

[wizard]

Air Canada will kill it's own children to get ahead. I think Air Canada now want's to put Jazz out of business, and I think Jazz could no longer exist as a feeder for Air Canada within 5 to 10 years because they are **bleep** at Jazz being involved with Thomas Cook. That was one reason Air Canada did not put Jazz back at YTZ.

[Super 80]

There is also the slight matter of the incredible incompetence on the part of Halifax based Jazz management in the handling of their operation on the island. Who among other things asked Deluce if he was going to evict them, and when told to "consider their tenancy temporary" didn't see fit to pass the message along to Air Canada, make arrangements with Pappalardo or do anything else.

[rudder]

AC has, for almost two decades now, made 100% of the commercial decisions that apply to schedule, routes, fares, and gauge in its tier II network. That includes its level of presence in YTZ.

What appears to be happening now, notwithstanding the commercial concessions made by Jazz in 2009, is that the Jazz CPA has somehow been lumped into the mystical 'Cost Transformation Program' whereby AC now reinterprets commercial agreements with a view to exploiting any possible vagueness to their own economic advantage. Given that this has been normal practice for collective agreements, why would it come as any surprise that it is being expanded to ALL agreements to which AC is a party?

However, the group that seems to have egg on their face is Chorus as the investment community is left wondering how this 'loophole' triggered by lack of specificity of terms of measurement could possibly have been left open. Publicly traded companies are typically held to a much higher credibility standard and that is a lesson yet to be learned by Chorus.

[dagger]

Well, the article does say this: "The markup in the capacity purchase agreement between the two companies can be adjusted based on Chorus's costs relative to its U.S. regional peer group, with 2009 costs to be compared to the 2006-07 period." This seems to imply that AC is simply availing itself of the ability to adjust the rate rather than "reneging".

It also makes me wonder why Chorus didn't offer an additional concession to AC in 2009 to get rid of the clause in question allowing this arbitration to take place. Perhaps Chorus put its short-term dividend ahead of its long-term financial interests because it felt it had helped the latter enough by extending the CPA. I would have offered AC a few million dollars more, or additional flexibility, to make that clause disappear entirely.

[Super 80]

AC has, for almost two decades now, made 100% of the commercial decisions that apply to schedule, routes, fares, and gauge in its tier II network. That includes its level of presence in YTZ..

These were not commercial decisions. This was an internal failure of Jazz to manage their station and communicate essential information back to Air Canada.

[inchman]

If you pay peanuts, you get Colgans.

If you extend this tenet, then AC should be getting gold plated service from Chorus.

It is well known throughout the industry and financial community that AC's CPA with Chorus was (and still is) one of the richest CPAs in the world especially given its no-downside risk. Even at the low end, it guarantees a 9% return. It is the entire reason why the IPO for Jazz went at such a high price and the entire reason why Milton got his $40 million bonus that everyone at AC hates.

I can understand why Jazz employees might feel threatened by the Golden Goose complaining, but if this goes AC's way, maybe it would be best to accept it for what it was.... a good run.

[rudder]

If you extend this tenet, then AC should be getting gold plated service from Chorus.

It is well known throughout the industry and financial community that AC's CPA with Chorus was (and still is) one of the richest CPAs in the world especially given its no-downside risk. Even at the low end, it guarantees a 9% return. It is the entire reason why the IPO for Jazz went at such a high price and the entire reason why Milton got his $40 million bonus that everyone at AC hates.

I can understand why Jazz employees might feel threatened by the Golden Goose complaining, but if this goes AC's way, maybe it would be best to accept it for what it was.... a good run.

A good run? For whom?

Whether the Chorus BOD and shareholders reward themselves with $millions$ in distributions and dividends or a fraction of that due to a reduced markup should be of little consequence to the Jazz employees. Money out the door is just that - money out the door.

[rudder]

These were not commercial decisions. This was an internal failure of Jazz to manage their station and communicate essential information back to Air Canada.

AC never invested a penny in the YTZ operation. Know why? Because AC didn't want to. Robert Milton did not believe that the AC presence in YTZ was necessary. Under his watch the operation went from dozens of AC code flights per day to just a handful of flights. The famous quote was that "YTZ was stealing traffic from YYZ". The die was cast many months (years?) before Deluce outflanked AC.

[DEFCON]

The AO YTZ operation made a lot of money for AC in spite of all the marketing style restrictions placed on it by AC. Apparently, making money isn’t / wasn't a concept of business that was very well understood at AC? Control, dominance, and other like motivations seem to continue as the driving force at AC?

[Super 80]

AC never invested a penny in the YTZ operation. Know why? Because AC didn't want to. Robert Milton did not believe that the AC presence in YTZ was necessary. Under his watch the operation went from dozens of AC code flights per day to just a handful of flights. The famous quote was that "YTZ was stealing traffic from YYZ". The die was cast many months (years?) before Deluce outflanked AC.

Whatever AC's intentions Jazz was responsible for the operation as long as there was to be one and made a series of unforgivable errors that cut AC off at the knees when Porter launched. AC was oblivious to the fact that Jazz had no lease at CCAL and was at-will with the TPA and could be evicted with 30 days notice.

[DEFCON]

"Whatever AC's intentions Jazz was responsible for the operation as long as there was to be one and made a series of unforgivable errors that cut AC off at the knees when Porter launched. AC was oblivious to the fact that Jazz had no lease at CCAL and was at-will with the TPA and could be evicted with 30 days notice."

Ok...so, why didn't Jazz have a long-term lease?

[Super 80]

Stupidity.

[wizard]

Stupidity.

Is Air Canada now paying the rent or lease at YTZ for the new operations? When you think about it Jazz most likely did not want to commit to a pricey lease with a operation AC was only committing 4 departures a day to YOW under the CPA and Jazz would lose it's shirt on. Stupidity I think not. Under a CPA it is an AC operation and they take full commercial risk and at the end of the day AC should be responsible in protecting the operation not Jazz who is paid to supply the flights. If AC was operating 14 departures a day with let's say 28 movements per day then yes committing to a lease makes sense like back in 1993 when it was AO.