Chorus Aviation Inc. announces first quarter earnings

Chorus Aviation Inc. (‘Chorus’) has announced its first quarter 2014 earnings. 

• EBITDA of $47.3 million, up 38.3 per cent. 
• EBITDA margin of 11.4 per cent. 
• Operating income of $31.2 million, up 50.0 per cent. 
• Adjusted net income of $20.3 million, up 38.0 per cent. 
• Adjusted net income per share of $0.17 per basic share. 
• $60.0 million early, partial repayment of 9.5 per cent maturing convertible debentures. 

For the first quarter 2014, Chorus reported EBITDA of $47.3 million compared to $34.2 million in the same quarter 2013, an increase of $13.1 million. Operating income was $31.2 million, $10.4 million higher than the same period 2013. Adjusted net income of $20.3 million or $0.17 per basic share, was up by $5.6 million or $0.05 per basic share over first quarter 2013. Chorus incurred $2.8 million in voluntary employee severance in the first quarter versus $5.7 million in the same period in 2013. Chorus has invested $12.7 million since the inception of this cost savings program in the first quarter of 2013. 

“Our solid operational performance and our cost reduction initiatives generated strong operating income and cash flows from operations,” said Joseph Randell, president and chief executive officer, Chorus. “Returns from our cost reduction efforts, including our continuing investment in voluntary employee severance programs, are to the benefit of all our stakeholders. In addition to achieving a 38 per cent increase in EBITDA and a 50 per cent improvement in operating income over the same period last year, we also topped Canada’s other major airlines for the best on-time arrival performance for the tenth consecutive quarter which contributed to a $1.6 million increase in performance incentives quarter-over-quarter as reported by Flight Stats Inc. Our operational expertise has allowed us to build an airline with superior scope and scale, and has earned us a reputation for safe, reliable and efficient service.  I commend our employees for their continued focus on safety and operational excellence. 

“Strong cash flow from operating activities of $45.7 million, an increase of $12.8 million quarter over quarter, has allowed us to announce the early redemption of the remaining $20.2 million in 9.50 per cent convertible debentures. By strengthening our capital structure and increasing our financial flexibility we believe we will deliver additional value to our shareholders as we progress through current and future challenges and opportunities,” concluded Randell. 

For reporting purposes, at each quarter end, Chorus converts its U.S. denominated aircraft debt into equivalent Canadian dollars based on the prevailing exchange rate.  Chorus manages its exposure to currency risk on such long-term debt by billing related lease payments within the Capacity Purchase Agreement (‘CPA’) with Air Canada in the underlying currency related (U.S. dollars) to the aircraft debt.  In the first quarter of 2014, Chorus had an unrealized foreign exchange loss of $14.7 million versus an unrealized foreign exchange loss of $5.6 million in the same period of 2013. 

Financial Performance -First Quarter 2014 Compared to First Quarter 2013 

Operating revenue decreased from $416.3 million to $414.6 million, representing a decrease of $1.7 million or 0.4 per cent.  Passenger revenue, excluding pass-through costs, increased by $9.5 million or 3.8 per cent primarily as a result of rate increases made pursuant to the CPA with Air Canada, a higher U.S. dollar exchange rate and a $1.6 million increase in incentives earned under the CPA with Air Canada; offset by decreased CPA Billable Block Hours. Pass-through costs reimbursed by Air Canada decreased from $162.0 million to $149.9 million, a decrease of $12.1 million or 7.5 per cent, which included a decrease of $1.3 million related to fuel costs, and $9.2 million related to airport and navigation fees and terminal handling services. (Effective January 1, 2014, Air Canada entered into a commercial agreement with the Greater Toronto Airport Authority (‘GTAA’) that encompasses Chorus’ Air Canada Express operations.  GTAA costs related to landing, terminal and other airport user fees which are treated as pass-through costs under the CPA are now paid directly by Air Canada pursuant to this agreement.) Other revenue increased by $0.9 million. 

Operating expenses decreased from $395.5 million to $383.3 million, a decrease of $12.1 million or 3.1 per cent.  Controllable Costs of $233.5 million were consistent with the same period last year. Voluntary employee severance costs of approximately $2.8 million were incurred for the three months ended March 31, 2014. 

After adjusting for voluntary employee severance and capitalized major maintenance overhaul labour, Chorus’ salaries, wages and benefits (including pension, incentive compensation and other employee benefits) were down $2.5 million period over period. Cost savings initiatives introduced last year, including the voluntary separation program, consolidation of heavy maintenance activities, and management and administrative reductions have been successful in reducing senior full time equivalents by 4.5 per cent and lowering average employee compensation. Voluntary severance costs paid during the three months ended March 31, 2014 were $2.8 million, a decrease of $2.9 million from the $5.7 million paid in the same period of 2013.  Heavy maintenance labour capitalized as a result of major maintenance overhauls on owned aircraft was $1.7 million in the quarter or approximately $0.9 million lower than the same period in 2013. 

Depreciation and amortization expense increased by $2.7 million, primarily related to the Q400 aircraft, a change in the estimated residual value of the Dash 8-100 and 300 aircraft in 2013, and increased capital expenditures on aircraft rotable parts and other equipment; offset by decreased major maintenance overhauls. 

Aircraft maintenance expense increased by $2.4 million as a result of a higher US dollar exchange rate that resulted in an increase on certain maintenance material purchases of $2.6 million; offset by decreased Block Hours and other maintenance costs of $0.2 million. 

Aircraft rent increased by $0.8 million primarily as a result of a higher US dollar exchange rate; offset by the return of CRJ100 aircraft. 

Other expenses decreased by $1.1 million primarily due to decreased general overhead expenses. 

Non-operating expenses increased by $10.4 million.  This change was mainly attributable to an increase of $8.6 million in foreign exchange (of which $9.1 million was related to an increase in unrealized foreign exchange loss on long-term debt and finance leases) and increased interest expense related to Q400 aircraft financing of $0.8 million, increased interest accretion of $1.1 million related to the partial redemption of the Convertible Debentures and the absence in the first quarter, 2014 of $0.8 million in other income related to non-repayable government assistance; offset by decreased interest expense related to the partial redemption of the Convertible Debentures of $0.7 million. 

EBITDA was $47.3 million compared to $34.2 million in 2013, an increase of $13.1 million or 38.3 per cent, producing an EBITDA margin of 11.4 per cent. Standardized free cash flow was $25.3 million. 

Operating income of $31.2 million was up $10.4 million or 50.0 per cent over first quarter 2013 from $20.8 million. 

Net income for the first quarter of 2014 was $5.6 million or $0.05 per basic share, a decrease of $3.6 million from $9.2 million. On an adjusted basis, net income was $20.3 million or $0.17 per basic share, an increase of $5.6 million from $14.7 million. A reconciliation of these non-GAAP measures to their nearest GAAP measure is provided in Chorus’ Management’s Discussion and Analysis dated May 14, 2014. 

Commencing in the third quarter, Chorus intends to move to a monthly dividend in place of its current quarterly dividend policy. The monthly equivalent of the current $0.1125 per share quarterly dividend is $0.0375 per share. Chorus’ Board of Directors evaluates the dividend on a regular basis and the dividend is declared at the discretion of the Board. 

Chorus also announced that it has exercised its right to redeem its remaining outstanding 9.50 per cent Convertible Unsecured Subordinated Debentures (‘Debentures’) maturing on Dec. 31, 2014, in accordance with the terms of the trust indenture governing the Debentures (‘Trust Indenture’).  On June 20, 2014 (the ‘Redemption Date’), Chorus will redeem the remaining $20.21 million of the outstanding balance of Debentures.  On redemption, Chorus will pay to the holders of the redeemed Debentures the outstanding principal amount of the Debentures to be redeemed (the ‘Redemption Price’), together with all accrued and unpaid interest thereon up to but excluding the Redemption Date, for a total of $1,045.00 per $1,000.00 principal amount of Debentures.  The Debentures that are redeemed will cease to bear interest from and after the Redemption Date. Surplus cash from operations will fund this transaction. 

Pursuant to the terms of the Trust Indenture, holders of the Debentures that are to be redeemed have the right until the last business day prior to the Redemption Date to convert their Debentures into Class A Variable Voting Shares (‘Class A Shares’) or Class B Voting Shares (‘Class B Shares’) of Chorus, as applicable, in accordance with the Trust Indenture and the provisions attaching to the Class A Shares and the Class B Shares , at a conversion price of $5.25 per share, being a rate of 190.4762 shares per $1,000.00 principal amount of Debentures. 

“The early, full repayment of the outstanding balance on this 9.5 per cent maturing debt will strengthen our balance sheet as we work to build additional value for our shareholders and strengthen our bottom line,” concluded Randell. 

For more information, please contact Nyari Chifamba at CIBC Mellon Trust Company, the indenture trustee for the Debentures, at telephone 416.933.8524, or email Nyari.Chifamba@bnymellon.com.