Saying the North American regional airline market is saturated, with little room for growth, Jazz Air President and Chief Executive Officer Joseph Randell, said the company has a list of eight or nine possibilities for offshore projects it is pursuing.
Despite repeated questions from analysts, Randell would only say that the opportunities were outside North America and it could include everything from equity investment to doing what other regionals are doing, such as Mesa’s (MESA) joint venture with Shenzhen Airlines to create KunPeng Airlines in China. He indicated there are few restrictions in its Air Canada Capacity Purchase Agreement to preclude such a venture.
“We are working with established carriers to improve the growth of other carriers in other parts of the world,” he said, adding Air Canada has the option to reduce covered aircraft should Jazz take on another CPA. “We are already a separate division under the Air Canada CPA.”
Indeed, Air Canada reduced its ownership from 58.8 percent to 49 percent. On May 24, 2007, ACE Aviation Holdings Inc. distributed 12,000,000 units of Jazz Air Fund to its shareholders through a special distribution. As a result of the transaction, Air Canada Jazz is now consolidated, as a variable interest entity in the accounts of Jazz Air Fund and accordingly, as of May 24, Jazz Air Fund has changed its basis of accounting for its investment in Air Canada Jazz from the equity method to consolidation. For that reason Air Canada no longer consolidates Jazz into its financial statements “based on a reassessment that Air Canada is no longer the primary beneficiary of Jazz Air LP.” Effective May 24, Air Canada has only one business segment: Air Canada. Prior to that date, Air Canada had two business segments: Air Canada Services and Jazz.
The airline also reported that it is entering a period of increased maintenance costs as its Bombardier (BBD) CRJ 705s come off warranty and head into heavy checks. In addition, it is refurbishing its fleet of de Havilland Dash 8s with new interiors, although that would not add much to costs since it would be done at the same time aircraft come in for their checks over the next two years.
Jazz is continuing its drive to lower costs adopting two new systems, one of which – LEAN – uses existing staff to improve processes and eliminate waste. “We will get a very good return for not a lot of investment,” he said.
In announcing its second quarter results, Jazz Air Income Fund, which has 100 percent beneficial ownership interest in Air Canada Jazz, said net income of C$40.6 million, up 14 percent. Operating revenue of C$375.3 million was up 10.3 percent while operating income of C$38.9 million was up 9.4 percent. Distributable cash was C$41.1 million.
The airline cited an increase in block hours of 13.1 percent Air Canada CPA as well as a C$17.1 million increase in pass-through costs. For the three-month period ended June 30, performance incentives amounted to C$4.6 million or 2.0 percent of Jazz's Scheduled Flights Revenue as compared to C$4.7 million or 2.2 percent in the year-ago period. Year over year for the second quarter, other revenue sources increased from C$1.6 million to C$2.3 million including charters and MRO work. The airline also said it was searching for a Dash 8 to add to its charter operations and was now targeting late fall to close a deal because it found previous prices were found to be too onerous.
“I am pleased with our earnings results for the second quarter of 2007," said Joseph Randell, "The investments we have made in information technology, maintenance infrastructure and our focus on service excellence have all positively contributed to our operational and financial performance. I am also encouraged by our continued process improvements and cost containment achievements as evidenced by an approximate six percent reduction in controllable cost per Available Seat Mile this quarter."
In line with the growth in revenue, total operating expenses increased to C$335.4 million, an increase of $31.7 million or 10.5 percent. Pass-through fuel expense increased by $10.1 million or 14.2 percent, owing to an $11.8 million increase in fuel usage, resulting from the increase in flying. Aircraft rent decreased by approximately $0.6 million or 1.8 percent over the previous second quarter mainly owing to U.S. Dollar exchange rate and new lease arrangements. Capacity increased by 15.1 percent. Controllable costs per Available Seat Mile decreased by 6.1 percent from the year-ago period, despite more employees. Randell said that while labor costs in Canadian dollars hurts the airlines, the fact that fuel and other pass-through costs were in U.S. dollars gave it an advantage.
The margin for the second quarter of 2007 was 14.89 percent, which is over the target of 14.09 percent by 80 basis points or approximately $1.8 million, said the airline. This compares to the second quarter of 2006 margin of 14.61 percent which was approximately C$1.2 million better than the target of 14.09 percent.
For the second quarter, Jazz had an average of 4,405 full time equivalent (FTE) employees, up 9.3 percent increase from the first six months of 2006, which the company considers in line with capacity growth of 14.1 percent as measured by ASMs.