July 29, 2009 / 2:55 PM / in 9 years

UPDATE 1-Jazz deal could save Air Canada C$40 mln in 2010

* Deal will help keep Air Canada from bankruptcy filing

* Jazz management sees no future distribution cuts

* Jazz units slump 8 pct to C$3.30 (Recasts with analyst comments, details, background)

VANCOUVER, British Columbia, July 29 (Reuters) - Jazz Air Income Fund’s JAZ_u.TO renegotiated deal with Air Canada ACa.TO could save the cash-strapped national carrier about C$40 million ($37 million) next year and help to keep it out of bankruptcy court, analysts said on Wednesday.

Jazz, which is the regional feeder airline to Air Canada, announced overnight that it will slash its annual distribution by 40 percent as it reduces its fleet and changes the terms of its deal with Air Canada to help the larger airline attain “sustainable profitability”.

“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.

Jazz’s units, however, slumped 8 percent, or 28 Canadian cents, to C$3.30 on the Toronto Stock Exchange on Wednesday morning as many investors who hold the security primarily for its monthly cash distributions dumped it.

Jazz’s management tried to allay investor fears that there would be no more cuts to the now 60 cent a year annual payout.

“We do believe we can sustain that even when we become taxable in 2011,” Jazz President and Chief Executive Joseph Randell said on a conference call.

Debt-laden Air Canada, which is working against the clock to raise financing to keep it out of bankruptcy court, is Jazz’s primary customer.

Analysts have said that Air Canada needs better deals with Jazz and with its Aeroplan AER.TO loyalty program manager 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.

Air Canada’s B shares were down 1 Canadian cent at C$1.50. Its A shares were unchanged at C$1.50.

$1=$1.09 Canadian Reporting by Nicole Mordant; editing by Rob Wilson

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