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VANCOUVER, British Columbia (Reuters) - Jazz Air Income Fund's renegotiated deal with Air Canada could save the cash-strapped national carrier about C$40 million ($37 million) next year and help to keep it out of bankruptcy court.
Jazz, which is the regional feeder airline to Air Canada, said late Tuesday it would slash its annual distribution by 40 percent as it reduces its fleet and changes the terms of its capacity purchase agreement with Air Canada to help the larger airline attain "sustainable profitability."
Analysts have said that Air Canada would need a more favorable deal with Jazz, as well as with Aeroplan, the manager of its loyalty program, to help it survive in an era of reduced air travel.
The airline has already cut deals with its unions and won extra time from the government to top up its pension fund.
"With the disclosure, the uncertainty surrounding the possibility of a filing by Air Canada is lessened," said Chris Murray, an airlines analyst at CIBC World Markets, who estimated the deal's cost savings for Air Canada at C$40 million in 2010.
Debt-laden Air Canada, which is working against the clock to raise financing to keep it from having to file for bankruptcy for the second time this decade, is Jazz's primary customer.
"The Jazz deal is another piece of the puzzle," helping keep Air Canada out of bankruptcy, said Raymond James analyst Ben Cherniavsky, who estimated the cost-savings at between C$35 million and C$40 million next year.
Jazz Chief Executive Joseph Randell said the distribution cut and the renegotiated agreement was not what Jazz "wanted to do in the near term" but that it was forced into it by a very weak airline market.
"It is important that we are part of the solution (for Air Canada)," he said on a conference call.
Randell said Air Canada had not asked Jazz for any cash loans. The new terms of the agreement are conditional on Air Canada raising C$600 million in new financing.
Jazz's units slumped as much as 15 percent to C$3.12 as many investors who hold the security primarily for its monthly cash distributions dumped it. It later recovered off its lows and by early afternoon was at C$3.40, down 18 Canadian cents or 5 percent.
Jazz's management tried to allay investor fears of more cuts to the annual payout, now at 60 cents a year.
"We do believe we can sustain that even when we become taxable in 2011," Randell said.
Among the changes, Jazz will reduce its fleet to 125 aircraft from 133 and receive lower mark-up rates on the hours it flies on Air Canada's behalf. The agreement has also been extended by five years to run until the end of 2020.
Jazz said it plans to retire 10 CRJ-100 aircraft next year and replace them with at least 10 new turboprop aircraft. It was still deciding whether it would buy or lease the aircraft.
CIBC's Murray said Bombardier Inc's Q400 aircraft would be "a leading choice for Jazz".
Air Canada's B shares jumped 9 percent, or 14 Canadian cents, to C$1.65 on the Toronto Stock Exchange. Its A shares were up 11 Canadian cents at C$1.61.
Reporting by Nicole Mordant; editing by Frank McGurty