Upcoming Jazz station closures

[gianthammer]

Cutting costs by getting rid of the overpaid CSAs to be replaced with wannabe pilots by the local operator, what's next is Jazz going to start paying pilots and AMEs below industry standard?

[TrailerParkBoy]

We will look like the US in 5 years.

Mergers of the biggest companies is next! So who will AC be bought out by?

[cj555]

Speaking of mergers, American Airlines & US Airways just announced a merger whcih will form the largest airline in the world.

http://www.cbc.ca/news/business/story/2 ... erger.html

[acer99]

Any undate on these announced closures. Has anyone at Jazz really tried to figure out the opportunities that are out there as far as ground handling goes. In YYJ Jazz handles mutiple airlines and would assume is making a profit at this base. Have they looked at opening up other bases. ie YLW or YMM. Just a thought.

[Splash]

Any undate on these announced closures.

The issue is currently before Tom Hodges for mediation/arbitration 27-29 March.

Jazz has a number of individual contracts at a number of stations for ground handling of UA Express flights. I have no idea how profitable they are.

[Fanblade]

The unions are not going to be able to do a single thing to stop what is about to happen.

This is a fundamental industry reconfiguration and the wheels are already in motion.

Jazz management got it started by being stupid during contract negotiations and
caused mainline to panic. The bubble was popped at that point and the wheels were
set in motion.

We will look like the US in 5 years.

Agreed. However I am not so certain of the timing.

If the Jazz CPA is solid until 2020 then so is your WAWCON. Air Canada expressed repeatedly during negotiations with ACPA the need to up gauge the Jazz fleet to make it more cost competitive. More seats flown faster at basically the same cost. 705's and q400's. Hence why TA1 had up to 60 705's exclusively to Jazz. Albeit those negots are now 1-3 years past tense and AIr Canada removed the exclusivity of 705's to Jazz during arbitration.

However, when the CPA eventually does come up for tender? Jazz will have to compete with everyone. Not just companies like SR, GA, Pasco, Hawkair, Voyageur ect ect. But also companies like Skywest and Republic for trans boarder.

Again "IF" your CPA is solid until 2020 Air Canada needs to refleet Jazz. They can't wait 6 more years with encore on the doorstep. What happens after that will largely depend on the ability of Jazz management and Jazz employees to find the cost savings required to compete with the above.

If the Jazz CPA is not solid past 2016? All bets are off. 3 years ago that was still a long way off. Not any longer.

As near as I can tell no one really understands the potential impact of the reference to 2016 and domestic market share loss within the CPA. I can tell you ACPA believes the CPA is solid until 2020 simply because Air Canada repeatedly talked about the need to up gauge Jazz's fleet in negots. I suspect your ALPA reps would be the most informed.

I personally heard Calin say at the last town hall when asked about former subsiduaries. He stated no one is immune from the cost transformation program. Not us at AC or our vendors. If someone is not cost competitive we will find someone else who is.

All this to say. Yes your likely right. But the timing?

[rudder]

Agreed. However I am not so certain of the timing.

If the Jazz CPA is solid until 2020 then so is your WAWCON. Air Canada expressed repeatedly during negotiations with ACPA the need to up gauge the Jazz fleet to make it more cost competitive. More seats flown faster at basically the same cost. 705's and q400's. Hence why TA1 had up to 60 705's exclusively to Jazz. Albeit those negots are now 1-3 years past tense and AIr Canada removed the exclusivity of 705's to Jazz during arbitration.

However, when the CPA eventually does come up for tender? Jazz will have to compete with everyone. Not just companies like SR, GA, Pasco, Hawkair, Voyageur ect ect. But also companies like Skywest and Republic for trans boarder.

Again "IF" your CPA is solid until 2020 Air Canada needs to refleet Jazz. They can't wait 6 more years with encore on the doorstep. What happens after that will largely depend on the ability of Jazz management and Jazz employees to find the cost savings required to compete with the above.

If the Jazz CPA is not solid past 2016? All bets are off. 3 years ago that was still a long way off. Not any longer.

As near as I can tell no one really understands the potential impact of the reference to 2016 and domestic market share loss within the CPA. I can tell you ACPA believes the CPA is solid until 2020 simply because Air Canada repeatedly talked about the need to up gauge Jazz's fleet in negots. I suspect your ALPA reps would be the most informed.

I personally heard Calin say at the last town hall when asked about former subsiduaries. He stated no one is immune from the cost transformation program. Not us at AC or our vendors. If someone is not cost competitive we will find someone else who is.

All this to say. Yes your likely right. But the timing?

The bullseye is on 2020. And FYI - that is December 31, 2020 not January 1st. And there is no provision to start drawing down the fleet other than by mutual consent so one can reasonably presume that it could take up to 12-18 months after Dec. 31, 2020 to transition all of the Jazz lift to other providers.

What is the significance of 2016? Obviously it is the 'market share' clause. However, like much of the language in the CPA it is not specific in measurement, application, or consequence. So one can reasonably presume that if AC takes an overly aggressive posture over the clause then the matter will end up dealt with via the dispute resolution provisions of the CPA likely limiting the impact to something less draconian than might otherwise be the case if AC could act unilaterally.

Perhaps both parties time could be better spent between now and then looking for mutually beneficial outcomes rather than prepping the war drums and increasing the funds on account with their respective legal advisors for yet another in a long string of CPA disputes. You suggested that Jazz should be up gauged. That was obvious almost a decade ago and change has come at a relative snail's pace in that regard and for many different reasons. And there is also no reason for Jazz to add debt to the balance sheet on an asset that only has a revenue stream currently guaranteed for just 7 more years. Having said that, AC has never had greater ability to expand or modify CPA lift than it does right now.

So what are the answers? Both sides need to stop looking for homeruns and instead accept singles and doubles. AC is stuck with Jazz for many more years in an agreement worth over $10B. And to boot, a portion of the lift is inefficient. Therefore, it would seem obvious that AC would want to participate in any discussions that would financially improve their deal with Jazz. For Jazz's part, to do nothing means to simply let the CPA run its course status quo and then expire. That would mean the demise of the company post 2020 unless it diversifies between now and then (heard any good rumours lately?). So, Jazz should be willing to relax fleet and margin guarantees in exchange for a possible extension to the CPA beyond 2020, in particular for any airframe substitutions that are being financed exclusively by Jazz.

Will any of this happen? Who knows.

[Fanblade]

Rudder wrote'

"What is the significance of 2016? Obviously it is the 'market share' clause. However, like much of the language in the CPA it is not specific in measurement, application, or consequence. "

Here is where the uncertainty is. What we read is not the actual language. We are reading a summary of it. Unless you have better access?

We know enough to presume there is a specific measurement that is undisclosed.

We have been given nothing on application. Example unilateral block hour change. What about fleet number guarantee?

We know what the consequence is if the measurement is met. Unilateral block hour change. But again there are more guarantees than just block hour.

So what does it mean?

Based on what ACPA was told and looking at the situation. I agree with you.

I thinknit is about negotiating leverage. Jazz will get refleeted when they negotiate a reduced CPA. The possibility of a Draconian decision in 2016 will eventually force those negotiations.

It will happen because both sides need a deal.

Suffice to say once again. I don't see Jazz disappearing any time soon. Maybe shrunk but not gone. Of course that is what happened to Comair over a decade.

[rudder]

I thinknit is about negotiating leverage. Jazz will get refleeted when they negotiate a reduced CPA. The possibility of a Draconian decision in 2016 will eventually force those negotiations.

It will happen because both sides need a deal.

Suffice to say once again. I don't see Jazz disappearing any time soon. Maybe shrunk but not gone. Of course that is what happened to Comair over a decade.

The trend in the CPA consensual negotiations on fleet substitutions has been zero capacity growth (ASM's). I expect that theme will continue in any further up gauge initiatives.

Biggest stumbling block is that it makes NO SENSE for Jazz to finance aircraft without a minmum of a 10 year associated revenue stream for that aircraft. Therefore, the CPA has to either be extended in it's entirety or there must be a provision that extends the term for those aircraft being substituted that will live on the Jazz balance sheet. Jazz's inducement to AC for the more universal term extension would be to put the margin rate on the table for discussion.

A common sense solution would benefit both parties. But that is the case in most disagreements yet it rarely is the outcome.

[Fanblade]

The trend in the CPA consensual negotiations on fleet substitutions has been zero capacity growth (ASM's). I expect that theme will continue in any. urther up gauge initiatives.

Biggest stumbling block is that it makes NO SENSE for Jazz to finance aircraft without a minmum of a 10 year associated revenue stream for that aircraft. Therefore, the CPA has to either be extended in it's entirety or there must be a provision that extends the term for those aircraft being substituted that will live on the Jazz balance sheet. Jazz's inducement to AC for the more universal term extension would be to put the margin rate on the table for discussion.

A common sense solution would benefit both parties. But that is the case in most disagreements yet it rarely is the outcome.

Fleet substitution with no ASM growth? You start replacing -8 100's with 705/Q400's that must mean a fairly substantial block hour drop. Correct?

Since Jazz is paid by the block hour why would Jazz be interested in less block hours ( less revenue) while financing their own fleet renewal this far out from 2021? For example a 20% block hour drop amounts to 2 billion in revenue between now and 2021. No wonder there isn't agreement.

On the flip side of course AC has Encore breathing down its neck at half the cost of Jazz. So you can see why AC would want to move flying away and not extend the time until tender further than it is.

Sounds like a stalemate.

But again. That isn't Jazz's problem. They have a contract and the cash. Cash being King.

The wild card being 2016..............which none of us really understand adequately.

One thing I do know is Calin will exploit any weakness by any means available. No holds barred. When he doesn't get what he wants he gets vengeful. I hope Chorus doesn't make the same mistake as ACPA.

Failing to accuratly assess their bargaining position. By the time they figured out the reality of their deleveraged position, Calin no longer had any interest in negotiations. Cause he had us, he was going for more.

[rudder]

One thing I do know is Calin will exploit any weakness by any means available. No holds barred. When he doesn't get what he wants he gets vengeful. I hope Chorus doesn't make the same mistake as ACPA.

Failing to accuratly assess their bargaining position. By the time they figured out the reality of their deleveraged position, Calin no longer had any interest in negotiations. Cause he had us, he was going for more.

Bingo.

The choice is whether to foster a relationship with CR as an ally or as a foe. I know which one I would pick.

[teacher]

Why the dividend has not been reduced dramatically and some or all of the savings passed onto AC along with a CPA extension is beyond me.

My guess is both sides playing hardball and neither budging.

[Fanblade]

Why the dividend has not been reduced dramatically and some or all of the savings passed onto AC along with a CPA extension is beyond me.
.

Because Chorus's responsibility is to Chorus shareholders. Full stop. The markup on 10 billion of revenue ( now until 2021) is about 1.2 billion.

That is a lot of money. Why should Chorus give a penny of it back to AC? How does that benefit the Chorus shareholder? Have they turned into philanthropist's?

Now you are going to say.......well not doing anything is shortsighted. And you are right.

What if the shortsighted position is much more lucrative for shareholders than a longsighted one? What if Chorus is not sure they could be competetive in the tendering process? Why then give a penny?

You see everything AC is asking for means less for Jazz shareholders and no quid like a CPA extension in return. Why would Jazz agree? Who gives stuff away for free?

On the flip side for AC. A CPA extention is the last thing they want. It delays the eventual tendering process. Any short term cost savings has to be balanced against longer term cost increases as a result of a CPA extention. So any extention has to come with cost saving right now that are of substance. Otherwise what' the point? The closer we get to CPA expirory the greater the immediate cost savings need to be to warrant an extention.

It is not hard to see how a meeting of the minds could be very difficult. There is a lot of money on the table. Both sides fighting for THIER shareholders. Short term benefits overshadowing long term planning.

[rudder]

You see everything AC is asking for means less for Jazz shareholders and no quid like a CPA extension in return. Why would Jazz agree?

On the flip side for AC. A CPA extention is the last thing they want. It delays the eventual tendering process. Any short term cost savings has to be balanced against longer term cost increases as a result of a CPA extention. Do you want one cookie now? Or cookies tomorrow.

It is not hard to see how a meeting of the minds could be very difficult. There is a lot of money on the table. Both sides fighting for THIER shareholders. Short term benefits overshadowing long term planning.

That is why a staggered term Chorus/AC CPA is the answer. It is already partially in effect in that block hours over 375,000 per annum are only subject to a 5% markup rate vs the significantly higher 12.5% normal rate.

CHR should tell AC that any further aircraft substitutions will only occur commensurate with a minimum 10 year guaranteed revenue stream. In return, AC could suggest that a 'blended' margin would apply to the block hours generated by these aircraft. The blend formula would be a function of the current margin and a revised post 2020 margin. It would work similar to replacing an existing mortgage with a new extended mortgage (blend and extend).

At the end of the day, on the part of CHR then Dec 31, 2020 no longer represents a 'dop dead' date for 100% of the CPA. And for AC there can be an argument made that it is slowly reducing the CHR CPA costing to closer to prevailing market rates while at the same time up gauging it's CPA lift thereby lowering unit costs. The CPA re-fleeting debt goes on the CHR balance sheet leaving AC free to dedicate 100% of all financing resources on mainline fleet renewal.

It is not that complicated. Or is it?

[Fanblade]

That is why a staggered term Chorus/AC CPA is the answer. It is already partially in effect in that block hours over 375,000 per annum are only subject to a 5% markup rate vs the significantly higher 12.5% normal rate.

CHR should tell AC that any further aircraft substitutions will only occur commensurate with a minimum 10 year guaranteed revenue stream. In return, AC could suggest that a 'blended' margin would apply to the block hours generated by these aircraft. The blend formula would be a function of the current margin and a revised post 2020 margin. It would work similar to replacing an existing mortgage with a new extended mortgage (blend and extend).

At the end of the day, on the part of CHR then Dec 31, 2020 no longer represents a 'dop dead' date for 100% of the CPA. And for AC there can be an argument made that it is slowly reducing the CHR CPA costing to closer to prevailing market rates while at the same time up gauging it's CPA lift thereby lowering unit costs. The CPA re-fleeting debt goes on the CHR balance sheet leaving AC free to dedicate 100% of all financing resources on mainline fleet renewal.

It is not that complicated. Or is it?

Problem is you are only focused on margin.

Not to confuse the issue but CPA also stands for cost plus agreement. In fact the Jazz Capacity Purchase Agreement (CPA) is a cost plus agreement.

Simply put.

AC pays (cost + margin) for Jazz's services.

If you were a banana vendor and were to set up a cost plus agreement for supply who would you pick?

Supplier 1. Cost $100 per crate. 10% markup. $110 per crate.

Supplier 2. Cost $80 per crate. 20% markup. $96 per crate

The problem supplier 1 has is that he could drop his margin to zero and still not compete with supplier 2.

So yes. To focus on margin and ignore the cost side of the equation is overly simplified. Particularly when the part you are ignoring represents probably close to 90% of the actual cost to have bananas on your shelf.

It is about overall cost. If the overall cost is not competitive, even after a margin drop, then the rational for AC to extend the CPA with Jazz is missing.

Hence the stalemate comment above.

[rudder]

Problem is you are only focused on margin.

Not to confuse the issue but CPA also stands for cost plus agreement. In fact the Jazz Capacity Purchase Agreement (CPA) is a cost plus agreement.

Simply put.

AC pays (cost + margin) for Jazz's services.

If you were a banana vendor and were to set up a cost plus agreement for supply who would you pick?

Supplier 1. Cost $100 per crate. 10% markup. $110 per crate.

Supplier 2. Cost $80 per crate. 20% markup. $96 per crate

The problem supplier 1 has is that he could drop his margin to zero and still not compete with supplier 2.

So yes. To focus on margin and ignore the cost side of the equation is overly simplified. Particularly when the part you are ignoring represents probably close to 90% of the actual cost to have bananas on your shelf.

It is about overall cost. If the overall cost is not competitive, even after a margin drop, then the rational for AC to extend the CPA with Jazz is missing.

Hence the stalemate comment above.

Partly correct.

Under the terms of the CHR/AC CPA, the margin is calculated on 'controllable costs' only (I won't bother to list them all but you can find the info on SEDAR contained in documents related to the income trust original IPO). The approximate split between controllable/uncontrollable costs is 60/40.

A majority of the listed controllable costs are the same regardless of service provider. Perhaps the largest variable controllable cost is labour. But as has been often highlighted on this forum, the labour component of CASM is material but is not massively significant.

AC needs to decide what model it wants. It can have the CHR CPA model as described above where the AC balance sheet is unaffected, or it can have the SKY CPA model where AC is the supplier of aircraft, maintenance, terminal space, and fuel and therefore in effect the CPA provider is submitting an hourly bid for labour expense only. Lowest bidder gets the work. Or AC could diversify its risk and balance sheet commitments and use a combination of both (which seems to be what is happening right now).

Bottom line is that this discussion is not a 'blank slate' exercise. Like it or not, AC has a contractual commitment via the CHR CPA that amounts to millions of block hours and billions of dollars. I cannot imagine that status quo with Jazz until Dec 31, 2020 is the preferred route for either AC nor CHR. There have been numerous opportunities to find mutually beneficial modifications to the CPA. Some have been consummated, some have not.

Once the distraction of figuring out how to get the 175's off the property and in the air at SKY is complete, perhaps AC will have a moment to refocus on the CHR CPA and look for further win-win solutions.

[teacher]

The banana analogy is great assuming the numbers are correct and I'm sure you're close.

In my opinion though looking out for the shareholders does not include shovelling cash out the door. Even if Air Canada wasn't interested in the savings for an extension as an employee AND and shareholder I would most prefer the company conserve capital for when 1) CPA rate is renegotiated lower 2) CPA is reduced or cancelled 3) explore other opportunities to either diversify or expand in other areas 4) pay or debts and improve the balance sheet in case we are cut loose. A lower dividend means a healthier company and a higher share price in the long run which is better than a stagnant dividend payer.

[atlanticflyer]

Shrink Jazz, grow Sky Regional, grow Rouge. Simple.

[rudder]

Shrink Jazz, grow Sky Regional, grow Rouge. Simple.

There are contracts. There are commercial agreements. There are guarantees, rules, and restrictions. AC even was unable recently to extricate itself from some of the provisions of the the Small Jets Agreement (AC took the position that the SJA was void).

That is reality. So for all of the OTS pilots that hope to capitalise on opportunities at the expense of the AC or Jazz pilots, you may have to wait a while longer.

[Fanblade]

Partly correct.

Under the terms of the CHR/AC CPA, the margin is calculated on 'controllable costs' only (I won't bother to list them all but you can find the info on SEDAR contained in documents related to the income trust original IPO). The approximate split between controllable/uncontrollable costs is 60/40.

Thanks. Good info. I didn't know that. However does it not emphasize the point that cost is a much larger factor than margin in a cost plus agreement? Focusing on cost or margin alone is basically meaningless. It is the total cost which is compared to evaluate competitiveness?

A majority of the listed controllable costs are the same regardless of service provider. Perhaps the largest variable controllable cost is labour. But as has been often highlighted on this forum, the labour component of CASM is material but is not massively significant.

True. If I recall ACPA's statement on the issue. Labor represents about 20% of operating cost. Of that 4% is pilots.

The question I have is this though, because I am having trouble wrapping my head around it. Saretsky stated Encore will have a 50% cost savings over Jazz. How is that even possible? He can't be talking total cost????? Or is he? Labor maybe?

AC needs to decide what model it wants. It can have the CHR CPA model as described above where the AC balance sheet is unaffected, or it can have the SKY CPA model where AC is the supplier of aircraft, maintenance, terminal space, and fuel and therefore in effect the CPA provider is submitting an hourly bid for labour expense only. Lowest bidder gets the work. Or AC could diversify its risk and balance sheet commitments and use a combination of both (which seems to be what is happening right now).

That one is simple. Cost driven. There is an insatiable appetite around AC over cost since CR's arrival. To expect anything else would not be wise. Of course there is savings from assests being of balance sheet. Might be some desperation factor being wagered here? But again this is simple. Total package lowest cost.

Cost is just too much of an overwhelming factor to ignore. By my math. AC pays Jazz just over 50 million for every penny of CASM. A penny drop is 50million in AC's pocket. When viewed this way all of a sudden all variable costs no matter how small become significant.

So although we pilots may want to believe our 4% cost is insignificant? We are just fooling ourselves. My union included. We can say it for spin during negots. Just make sure we don't believe our own BS. Bad things happen when we do.

Bottom line is that this discussion is not a 'blank slate' exercise. Like it or not, AC has a contractual commitment via the CHR CPA that amounts to millions of block hours and billions of dollars. I cannot imagine that status quo with Jazz until Dec 31, 2020 is the preferred route for either AC nor CHR. There have been numerous opportunities to find mutually beneficial modifications to the CPA. Some have been consummated, some have not.

[/quote]

I absolutely agree. AC can't afford to not up gauge Jazz's fleet if the CPA block hours will remain in effect through 2020. At the same time AC very likely will balk at a CPA extention if tied to anything including fleet renewal.

Stalemate.

What I couldn't figure out was why AC just doesn't refleet Jazz with q400's. The CASM drop would be very very large. Just do it. What I didn't know was that a CPA extension was placed on the table with it. Now it makes sense.

What AC can NOT do is operate crj100's and -8-100/300 for another 8 years. That won't happen.

It seems Jazz and AC have declared "Game On"