Jazz deal could help Air Canada avert bankruptcy

Wed Jul 29, 2009 1:44pm EDT
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By Nicole Mordant

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.   Continued...