AC sues Jazz?

[Franky Jr]

So AC is asking Chorus to repay them 26M from 2010. AC is no longer happy with the current CPA markup that Jazz receives and they want to change it and have Chorus back pay them for the last two years (2011 repayment amount is still TBD). So as with everything at AC these days it is going to arbitration. CR (CrazyRovinescu) is try to regain money any possible way.

[gcanuel]

http://www.winnipegfreepress.com/busine ... 45338.html

Now I understand why the share dropped even though they reported good Q3 results...

[teacher]

AC at it again. Trying to change the rules mid game, who's next?

[ChallengerDan]

The benchmarking argument has been going on for a while (more than a year). Apparently AC might have the upper hand ragrding this issue.

[vanishing point]

Typical. Agree to terms in a contract then when you're not happy down the road, get the courts involved.

10 years to retirement....can I make it?

[prop2jet]

I don't believe there is any lawsuit going on. The dispute has been ongoing and as per terms in the CPA if both sides cannot come to an agreement it is turned over to binding arbitration. No surprise that there has not been any "amicable" agreement. AC wants to lower all costs and Jazz wants to maintain it's distribution to shareholders.

[airmech07]

So how many employees will be laid off if they have to pay back 26 million?

[teacher]

Cameron Doerksen of National Bank Financial said Chorus seems to have a solidly defensible position,

With $97-million in cash, Chorus could pay a retroactive settlement to Air Canada.

http://www.theglobeandmail.com/globe-in ... le2229653/

But the two have been locked in a dispute over methodology to determine the rate. Air Canada wants to adopt a different methodology, which it says would reduce the mark- up rate to 9.54%, while Chorus said it wants to use the industry standard measure of unit costs, which would keep the rate at 12.5%.

“We were surprised by the content of Air Canada’s filing. Most particularly by the amount of its claim and the use of a peculiar methodology for benchmarking,” said Joseph Randell, Chorus chief executive, on a conference call Tuesday. “Because of where we are in the arbitration process, we currently have little insight into Air Canada’s findings and the details of their methodology. In our view, and the view of many industry experts, the Air Canada approach is not a recognized industry standard for benchmarking.”

http://business.financialpost.com/2011/ ... -dividend/

No layoffs but a dividend cut would probably be required. Keep in mind that AC set up Jazz/Chorus to pay this dividend to raise the share price so AC could make money on the IPO and after. AC and Chorus are in arbitration not a court fight. From what I understand AC is trying to change the formula used to calculate the price paid for the CPA and Chorus wants it to remain the same until the CPA is renegotiated in 2015. Chorus already lowered their mark up costs in 2009 to help AC save money when they almost went back into CCAA in 2009. Now AC wants another cut. AC always wants industry standard OR a new calculation which ever is lower. Sound familiar?

[rudder]

No layoffs but a dividend cut would probably be required. Keep in mind that AC set up Jazz/Chorus to pay this dividend to raise the share price so AC could make money on the IPO and after. AC and Chorus are in arbitration not a court fight. From what I understand AC is trying to change the formula used to calculate the price paid for the CPA and Chorus wants it to remain the same until the CPA is renegotiated in 2015. Chorus already lowered their mark up costs in 2009 to help AC save money when they almost went back into CCAA in 2009. Now AC wants another cut. AC always wants industry standard OR a new calculation which ever is lower. Sound familiar?

Do not confuse 'renegotiation' with the prescribed events described in the CPA with respect to benchmarking and rate setting. These are normal and anticipated events. The term of the CPA now extends to 2020. The current dispute is with respect to the mandated benchmarking exercise which may have an effect on the markup rate that applies. What this is not is a renegotiation. That would have to be voluntary (as it was in 2009). Or perhaps AC is trying to induce a renegotiation?

It is entirely possible that AC is trying to generate leverage by creating uncertainty around Chorus in order to precipitate a discussion that would see some or all of the extra Q400's optioned into the CPA but done so with an agreed reduction in fleet and block hour guarantees as more CRJ50 and Dash 8 classics are removed from service.

Therefore, AC not only wants to reduce the margin on Chorus services but to reduce the overall Chorus expense on the AC income statement. Just a theory

[Mig29]

AC at it again. Trying to change the rules mid game, who's next?

You got that right....

And that's why I don't buy airline shares anymore....

[teacher]

A little recap provided by CIBC World Markets for your reading pleasure...............

Air Canada Seeks To Reduce The Controllable Mark-Up

The 2009 benchmarking study between Air Canada (AC.B-SP) and Chorus has
been an ongoing process over the past couple of years, with both parties
agreeing on February 3, 2011 to proceed with binding arbitration.

A Recap Of The Benchmarking Study

Chorus’ controllable mark-up of 12.5% may be reduced as a result of
benchmarking Chorus’ controllable costs to those of a group of comparable
operators (Mesa, Pinnacle [PNCL-O], ExpressJet [XJT-NYSE], and Skywest
[SKYW-O]). Under the CPA, this benchmarking was to be effective in 2010 and
in 2016. 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 12-month period from July 1, 2006 to June 30,
2007, the controllable mark-up is to be reduced accordingly, effective January 1,
2010 until December 31, 2020 (unless as a result of the 2015 Benchmark it is
further reduced). The mark-up would be 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.

Air Canada Seeks A Lower Controllable Mark-up To 9.54%

On October 3, 2011, Air Canada delivered its claim to the arbitrator (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 (CUCD). Under this methodology, Air Canada is seeking a
reduction of the controllable mark-up from 12.50% to 9.54%, effective from
January 2010. Air Canada claims that, if the mark-up is reduced to this level,
Chorus would be required to repay Air Canada $26.0 million in respect of
payments made by Air Canada to Chorus in 2010.

Chorus Files Its Counterclaim

On November 7, 2011, Chorus delivered its defense and counterclaim in the
arbitration (the “Chorus Claim”). In the Chorus Claim, the company asserts that
the relevant provisions of the CPA provide that the preferred methodology to be
applied for comparing Chorus’ unit costs should be on a cost per available seat
mile (CASM) basis. Chorus further asserts that if a CASM methodology is
applied, then no adjustment to the controllable mark-up will be required as a
result of the 2009 Benchmark. As a result, Chorus argues that it 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% until at least the 2015
Benchmark. Chorus also adds 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. Furthermore, 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 would still not result in an
adjustment to the controllable mark-up.