AC and Jazz Amend CPA

[TopperHarley]

http://www.newswire.ca/en/releases/arch ... c9297.html

Air Canada and Jazz agree to amend terms and conditions of their Capacity Purchase Agreement; CPA Amendments provide Air Canada with lower capacity rates and greater flexibility

MONTREAL, July 28 /CNW Telbec/ - Air Canada has concluded a Memorandum of
Understanding (MOU) with Jazz Air LP (Jazz) to modify the terms and conditions
of their Capacity Purchase Agreement (CPA), effective August 1, 2009. The CPA
Amendments are subject to Air Canada securing new financing in a minimum
amount of $600 million and certain other conditions.
"The participation of important suppliers and partners such as Jazz is
key to the successful execution of the significant cost reduction program
needed for Air Canada to achieve sustainable profitability," said Calin
Rovinescu, President and CEO of Air Canada. "The CPA Amendments will provide
us with reduced capacity purchase costs that are more consistent with market
realities and will allow us to enjoy greater flexibility in our fleet
deployment. This mutually beneficial agreement with Jazz is an important step
in the restructuring of our business to reflect the new revenue and yield
environment."

Highlights of the revised agreement include:

- A reduction in the mark-up rate paid to Jazz on the first 375,000 block
hours of flying from 16.7 per cent to 12.5 per cent and to 5 per cent
on block hours above 375,000.
- A reduction in Air Canada's commitment to Jazz's minimum fleet from 133
to 125 aircraft.
- A contract term extension of five years (Jan 1, 2016 - Dec 31, 2020),
during which the rates will be subject to a benchmarking review.
- A commitment to work together on Jazz's turboprop fleet renewal
strategy over the term of the contract.

Accordingly, the amendments are expected to provide Air Canada with
significantly reduced capacity purchase costs for the Jazz network feed over
the term of the contract, as extended.

[Inverted2]

Yup, just in time for negotiations. The management will do the same to Jazz workers as they did to AC workers.

[like2fly]

From the Jazz website under investor relations:

The highlights of the amendments, which are subject to Air Canada securing new financing in a minimum amount of $600 million and certain other conditions:

- An industry-leading term commitment whereby the term of the CPA is
extended 5 years from December 31, 2015 to December 31, 2020;
- Air Canada will target a minimum annual block hour forecast of
375,000 block hours;
- The plan is to continue to operate 133 aircraft on behalf of Air Canada
comprised of 125 covered aircraft and 8 'swing aircraft' that will
facilitate CPA flying to 400,000 block hours and beyond.
- The minimum fleet guarantee is reduced from 133 to 125 covered
aircraft, and includes a commitment to commence fleet renewal in 2011;
- Effective August 1, 2009, the current markup on controllable costs of
16.72% is reduced to 12.50% on a permanent basis for the first
375,000 block hours flown, and a 5% markup on block hours in excess of
375,000.
- The minimum utilization guarantee for the fleet is unchanged at
339,000 block hours.

[teacher]

Excerpts from CIBC World Markets Corp:

With the CPA modified, Jazz is reducing distributions by 41% annualized
effective September 2009. Distributions will fall from the current $1.01 to
$0.60 on an annualized basis. The change will save Jazz approximately $50
million per year, lowering the 2010 payout ratio to 59.7%.

Air Canada and Jazz have agreed to commit to working on a fleet renewal
strategy for Jazz with commencement in 2011. The agreement covers only
turboprops, which avoids any conflicts with existing scope clauses. We
expect that the company would most likely be considering Q400 turboprops
manufactured by Bombardier (BBD.B-SO) as they are already an extensive
Bombardier operator and given previous comments by management.

We estimate the reduction in margin translates into approximately a $40
million saving for Air Canada in CPA costs in 2010.

[socrates]

This new deal Air Canada made with Jazz still sucks.

Air Canada should of tried to cut more from them
they're still paying way to much for the service
they get.

New airplanes in 2011 whats up with that?

Air Canadas gotta replace the 320's by then.

If there getting Q400s all the rjs should be moved
back to mainline to make up for it.

[teacher]

huh

How does moving the CRJs back to AC help mainline or make up for a long needed fleet renewal? Many of Jazz's dashes are needing replacement and are older than ACs 320s. As well, many of the dash routes need a larger aircraft on them to accommodate higher loads, west coast flying comes to mind. Are mainline pilots willing to create another lower end payscale to make flying a CRJ profitable?

This areement is good for both companies.

[rudder]

This new deal Air Canada made with Jazz still sucks.

Air Canada should of tried to cut more from them
they're still paying way to much for the service
they get.

New airplanes in 2011 whats up with that?

Air Canadas gotta replace the 320's by then.

If there getting Q400s all the rjs should be moved
back to mainline to make up for it.

The modified terms effectively remove at least 18 50 seat jets from the CPA. Some will be replaced by Q400's (?) - some will not. New aircraft will be financed by Jazz therefore improving AC's balance sheet by removing the overpriced leases that they hold on almost all the Jazz CRJ's. Any debt associated with fleet renewal under the CPA will be on the Jazz balance sheet.

The margin paid on flying over 375,000 block hours per annum is rock bottom (5% of controllable costs). Analysts estimate that AC will save at least $40M per year which translates to $440M over the term of the CPA.

Time for AC to now look in its own pantry to eliminate waste and increase efficiency. If not, its off to CCAA again and obbsessive complaining about the Jazz CPA will not stop the train.

[Jaques Strappe]

Fleet renewal in 2011 huh? Coincidentally, that is when the new TA expires with ACPA. Interesting times!

I will say something about Calin, love him or hate him, he is at least doing something. He has done more in his short tenure here than Montie ever did and I am really starting to see some operational improvements on the line.

[scopiton]

He has done more in his short tenure here than Montie ever did and I am really starting to see some operational improvements on the line.

what kind of improvement, just curious ?

[Treetopflyer]

I myself have actually noticed less waits for ground crews.

[Jaques Strappe]

He has done more in his short tenure here than Montie ever did and I am really starting to see some operational improvements on the line.

what kind of improvement, just curious ?

I have seen a cultural shift. Before, it seemed that middle and lower management would never make a decision for fear it might be the wrong one. Calin has introduced the " just do it " philosophy and has empowered his management to take a harder line with suppliers like ACGHS for instance.

For the most part, I am now seeing ground crews at the gate waiting for us rather than the other way around. Ground power and environmental is put on the airplane in favor of running the APU. Load finals are often in hand before pushback, so no waiting around there either. There has been a more active role to track ground delays. He seems to be actively trying to grow markets rather than run from them.

This sort of stuff, which is so basically fundamental, was seriously lacking when Montie was around. Just my opinion of course but this the observation I have seen.

[tonysoprano]

Calin has been able to bring all labor groups together at a time when management and labor were far apart and vote in favor of a crucial contract to restructure the company. He has been able to secure a billion dollars in cash and rewrite the Jazz CPA. He also sees the glass half full by being smart about growth opportunities while eliminating weak markets. He has warned against giving in to the so called experts who have never run an airline before but rather sit at the sidelines being arm chair quarterbacks telling him he needs to shrink the company. He has brought a positive mentality at a time when AC employees need it. AC is by far not out of the woods. Many challenges and hurdles still remain. Some things will never change. The rewards of Calin's efforts will take time to have effect but I for one like what he has done in the short term.

[flyer 1492]

The new financing that Air Canada has secured will only buy them time. To date, I have not seen any changes that will help in the long term survival. I can see a return to ccaa around the time the 21 months expire.

Flyer

[tonysoprano]

Wow, it only took 19 minutes for an armchair quarterback to show up.

[Jastapilot]

Heads up everyone. Only Tony is allowed to voice an opinion. Everyone else is an armchair quarterback!

[tonysoprano]

We all know what your opinion is Jast. You're so predictable it's boring. Get a life twirp.

[flyer 1492]

Arm chair Quaterback? I have been in the industry for over 20 years and have seen the best and worst of times. Air Canada is a broken model that needs to be fixed. It should have been done in the last ccaa, but nobody had the guts to do it. All milton wanted to do was to get as much out of it as he could. Now look at the mess. What did Air Canada promise to use as collateral, is there anything left to burn?

Flyer

[tonysoprano]

Flyer.
I'd say your emotions got in the way of your 20 years experience. Are you trying to tell us something new? Please, it's not the model that's broken, it's that old model "record" that's broken. First of all, we were on the topic of CR, not Milton. Second of all CR has been on the job a few short weeks and I believe all we were trying to say is that for what it's worth, CR so far has impressed and done some things right. Give him time. Maybe he'll take your advise. I also stated that it will take time to see if change really is coming. You already have made up your mind. Just another opportunity to stick pins in the doll, right?

[the original tony]

I do agree that after a short time on the field, the man with such a bad rep has done what he said he would.
A far cry from what others have tried, failed, blamed and got rich from.
My main concern as always is what the fundamental restructuring and remodeling is going to entail.
Our agreement was so hush hush that not all the hands dealt were face up.
For cost cutting, are there going to be staff cuts? more farming out? what is going to be cut, how and when?
just curious as the road shows didn't answer, or weren't allowed to answer all the questions.

Tony

[tonysoprano]

I don't think it's in the best interest of the company to have the competition and the speculators know the details of the plan if there really is one in place. He's not that stupid. Those privy to that plan are the BODs and the union leaders. When we voted, we voted on a general resolution. As employees, we will see changes on a daily basis but it will take time before we can finally say the plan worked or it didn't. In my opinion that will take years and will be hugely affected by the economy. I believe some very unpopular and harsh decisions will be made in the next few months. If you want a general idea of what that plan might be, read his info letters on the Aeronet or the web casts he has done on the G&M or BNN.

[Stan_Cooper]

I love when people use the word "broken model" to describe Air Canada. The market took a shit kicking, Nortel (AC's biggest customer) took a dump, AC has a DB pension plan to fund, and somehow the model is broken? When Air Canada had an operating income of $433,000,000 in 2007, was the model broken then? Was the model different then?

[the original tony]

I have read his posts and viewed his videos.
Maybe im not the quickest guys on this site but when it comes to specifics, there aren't many that I saw. Can't pay bills on speculation nor trial end error.
I guess it's the usual wait and see, but that could be too late as well, depending on what the harsh decisions are going to be.
Anyway, we signed on, so we're in it till they tell us different. Things are looking up as far as the business side goes, if all employees are around to benefit is yet to be seen.

Tony

oh, any word on the training allowance??
gotta look forward to something!!

[rudder]

I love when people use the word "broken model" to describe Air Canada. The market took a shit kicking, Nortel (AC's biggest customer) took a dump, AC has a DB pension plan to fund, and somehow the model is broken? When Air Canada had an operating income of $433,000,000 in 2007, was the model broken then? Was the model different then?

AC has always employed a 'blue skies' business plan - all facets of the business (economy/ fuel/ yield/ competition/ etc) must be firing on all cylinders in order to make a profit. AC needs a model that still provides (diminished) profitabilty even when areas beyond their control are not optimum (call it the '75% plan').

Perhaps that is what Calin has in mind.

[tonysoprano]

Tony

oh, any word on the training allowance??
gotta look forward to something!!

I believe it's going to be mailed in August. It's not much but I know those on flat pay can sure use it.

[tonysoprano]

I love when people use the word "broken model" to describe Air Canada. The market took a shit kicking, Nortel (AC's biggest customer) took a dump, AC has a DB pension plan to fund, and somehow the model is broken? When Air Canada had an operating income of $433,000,000 in 2007, was the model broken then? Was the model different then?

AC has always employed a 'blue skies' business plan - all facets of the business (economy/ fuel/ yield/ competition/ etc) must be firing on all cylinders in order to make a profit. AC needs a model that still provides (diminished) profitabilty even when areas beyond their control are not optimum (call it the '75% plan').

Perhaps that is what Calin has in mind.

Most legacy airlines were at one point government owned. While that system was great for labor peace it was not great for the taxpayer. The model was never invented to get through the tough times. The low cost model was astute enough to recognize that and when deregulation came up they took full advantage of their new way of flying but it does have its limits of service. To date, any successful low cost runs a domestic and limited international service, limited by the equipment they use which normally can only fly medium haul. Anything outside of this range would go against the success of the model. Far from what the legacy carriers do. Both have their place in the market but both limit each others' potential. It won't be easy to invent a low cost legacy carrier. It won't be easy to invent a legacy carrier that's low cost. Apples and oranges. To my knowledge, nobody has done this. Air Lingus apparently is a low cost legacy carrier but I don't really see them that way. There are many legacy carriers that quite profitable (current situation aside). AC just has to find its way again.