Chorus Aviation says it is willing to renegotiate its financial relationship with Air Canada now that a contentions arbitration between them over costs has been resolved.
“We’re open to negotiations at any time,” CEO Joseph Randell said in an interview Thursday after releasing the regional carrier’s 2013 results.
The Halifax-based regional airline beat expectations as its net profit, excluding severance and one-time costs, grew 17.5 per cent to $20.8 million in the fourth quarter.
Randell said no negotiations are currently underway but lines of communication are open and the arbitration battle won by Chorus last fall has left no bad blood between the two sides.
“In fact, our relations are quite cordial. We have challenges on both sides and we respect that.”
The current capacity purchase agreement (CPA) expires in 2020, but it has been amended before to give Air Canada (TSX:AC.B) financial relief in exchange for lengthening its expiry date.
Randell said additional changes are possible as long as they benefit both sides.
Air Canada is looking at all opportunities to cut costs to become more competitive with WestJet (TSX:WJA), whose Encore regional service is set to expand to Eastern Canada this summer. It recently added Air Georgian as another lower-cost regional partner, in addition to expanding its relationship with Sky Regional.
Chorus (TSX:CHR.B) has been trying to become more efficient by reducing staffing through the voluntary retirement. It paid $9.9 million in severance last year to senior workers who took buyouts, and has earmarked another $15 million in 2014.
It has also replaced smaller aircraft with larger, more fuel-efficient Bombardier Q400 turboprops. Over three years, 32 older 50-seat regional jets have been removed and replaced with 21 of the 74-seat turbos.
“We see on the fleet side further opportunities to engage and improve the operation for both ourselves and Air Canada,” Randell said.
Cameron Doerksen of National Bank Financial said he doesn’t see the CPA being extended at the current markup rate of 12.5 per on controllable costs and that Air Canada will continue to exert pressure on Chorus to make changes.
“We expect Chorus will ultimately agree to renegotiate the CPA with materially lower rates, likely in exchange for further fleet replacement/growth and a term extension,” he wrote in a report, adding that a new deal will be reached well before the 2020 expiry.
The analyst increased his target price for Chorus shares to $3.25 from $2.25 following the redemption of $60 million of debt.
Chorus estimates that billable block hours will decrease about four per cent in 2014 to between 368,000 and 378,000. However it expects to generate EBITDA of $175 million to $185 million, that is better than analysts forecasted.
Randell said he’s optimistic about the airline’s future acknowledged that the arbitration process created significant uncertainty for the company and caused its share price to suffer as it temporarily cut its dividend before partially restoring it after the November arbitration ruling.
An arbitration panel supported Chorus’s contention that there was no justification for changing the current 12.5 per cent markup on how much its Jazz subsidiary receives from Air Canada.
The two sides had battled over the permitted growth of controllable costs — including salaries and wages, maintenance and overhead — under their capacity purchase agreement or CPA. Both sides agreed to compare or benchmark Jazz costs in 2009 and later in 2015 to those of a specified group of similar operators in the U.S.
The process also delayed efforts to diversify the business such as a recent joint venture with U.S. company GA Telesis to provide spare parts and components to other regional airlines.
“We’re feeling a bit of a new lease on life here,” he said.
Chorus said it ended the year with 17 cents per share in adjusted earnings. That was three cents ahead of analyst forecasts and last year’s results.
Including one-time costs, Chorus said Thursday that its fourth-quarter net income decreased nearly 40 per cent to $8.8 million or seven cents per share.
Operating revenue increased slightly to $413.2 million. Passenger revenue, excluding pass-through costs, increased 2.2 per cent due to rate increases from Air Canada (TSX:AC.B), offset by a decrease in billable block hours.
For the full year, Chorus earned $61.9 million or 50 cents per share, down 38 per cent from $100.2 million or 81 cents per basic share. Adjusted net income was $84.7 million or 69 cents per share, compared with $94.6 million or 76 cents per share in 2012.
Revenues decreased to $1.67 billion from $1.71 billion a year ago.
On the Toronto Stock Exchange, Chorus shares were up 17 cents, or 4.7 per cent, at $3.76 in Thursday afternoon trading.