MONTREAL — Chorus Aviation has won a lengthy battle with Air Canada over the markups its charges on flights, but the larger war over long-term cost reductions in an increasingly competitive market remain unresolved.
An arbitration panel on Tuesday 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 ruling relieves Chorus from paying retroactive payments to the country’s largest airline (TSX:AC.B).
The two sides have 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.
Chorus CEO Joseph Randell said the ruling means the company, which sells most of its fleet capacity to Air Canada, can “now move forward with certainty.”
“Our long-term partnership with Air Canada continues to be a core component of our business and we believe this ruling provides us with additional flexibility to continue to operate as an industry leader and deliver value for all our stakeholders,” he said in a news release.
The company plans to maintain its current 30 cents per share annual dividend as it review alternatives to enhance shareholder value.
Analysts said the ruling wasn’t a surprise, but Chorus continues to face the challenge of reducing costs, competition from WestJet’s Encore regional service and Air Canada’s threat to find an alternative carrier to Jazz service to the United States.
Randell said Chorus understands Air Canada’s desire to reduce costs and has “developed a framework of strategic options” to address Jazz’s cost structure. But unless the two sides can agree on changes, terms of the CPA remain in force until Dec. 31, 2020.
Chorus and Air Canada will begin negotiations next year to set CPA rates for 2015 to 2017.
“In line with Air Canada’s priority for cost reduction and sustainable profitability, Air Canada will both work with Jazz to explore cost reduction initiatives and continue to pursue its regional airline diversification strategy that includes the request for proposal process underway for certain existing U.S. regional transborder routes,” Air Canada said in a release.
Chorus’ (TSX:CHR.B) shares surged more than 28 per cent after the company announced its arbitration win.