Canada’s Chorus Aviation Inc. (TSX: CHR.B, CHR.A) is to buy all of the issued shares of 519222 Ontario Ltd. A holding company that owns North Bay, Ontario based Voyageur Airways and its affiliated companies for around $C 80.0 million to be its ‘low cost’ DHC-8-100/300 operator, a mini version of Rouge, which is Air Canada’s low cost leisure airline. I do not believe that a regional LCC (low cost carrier) works, you do not have the flexibility to increase seating density and utilization with regional aircraft like you do with A320’s/B737’s, and that is the core of a LCC cost savings, aircraft productivity first and foremost and then ‘lower wages’ to employees, but there are not enough savings in labor costs alone to justify a regional LCC, no way.
Read my Blog of January 31, 2013 on “Consolidation through mergers and acquisitions in the Canadian regional airline industry and how to value them ?”
Read my blog of December 2, 2014 on “Fast growing Exchange Income Corporation (EIC)”
Voyageur Airways has done well on the international scene (Above PHOTO DHC-8-300), operating aircraft for the United Nations in all the major hot spots in the past 10+ years (Afghanistan, DRC, Chad, Sudan, Ivory Coast, Uganda, etc.), the contracts are good, I know from my years of experience from arranging fixed ACMI (aircraft, crew, maintenance and insurance) leases and working with airlines in Africa, the UN is great customer. The terms are fixed with a minimum monthly utilization, and margins are real good, as is the risk to crews and aircraft-sometimes. In 2014, the UN Procurement Division spent $774 million on air transport for peacekeeping (24.1% of the $3.2 billion budget), it was the #1 expense, followed by petroleum products and chemicals and food rations/catering services
Note: Canada received $ 79 million or 2.4% of the UN Procurement Budget in 2014, it was the 11th largest procurement by country, #1 was USA $582 million, #2 was UAE $442 million ?? #3 Russia $377 million ?? #4 UK $143 million #5 Panama $125 million ?? A rare NO COMMENT from me on this, I have spent years working in less developed countries, and I think I have seen it all from all sides, and some of these numbers do not make sense to me at all.
Read my August 24, 2014 blog on LM-100J Hercules and the unscrupulous side of commercial aviation
This deal comes 2 months after Chorus announced that it has reached an agreement to amend and extend the CPA (capacity purchase agreement) with Air Canada to 2025, from which it derived 99.2% of its $C 1.666 billion in operating revenue in 2014 as its Air Canada Express partner with 122 aircraft (25 x CRJ-200’s, 16 x CRJ-705’s, 26 x DHC-8-300’s, 34 x DHC-8-100’s and 21 x Q400’s). The current fleet average age is :
1. DHC-8-100’s are 27 years old.
2. DHC-8-300’s are 25 years old.
3. CRJ200’s are 13 years old.
4. CRJ705’s are 10 years old.
5. Q400’s are 4 years old.
Voyageur Airways was formed in 1968 as small flight school under current President and CEO Max Shapiro, who bought it in the 1970’s and grew the business, and at one time I remember they operated a dozen plus A100 King Air’s on scheduled services throughout Eastern Ontario and Quebec. Today the operation mainly operates highly profitable ACMI (aircraft, crew, maintenance and insurance) contracts for the United Nations and other international organizations using a fleet that is constantly changing but numbers around 20 aircraft (4 x DHC-7’s, 6 x DHC-8-300’s, 10 x CRJ-200’s) and has or had operations in Chad, Afghanistan, DRC (Congo), Ivory Coast, Sudan and Uganda.
Voyageur Airways has a 200,000 square foot facility in North Bay, and it can handle MRO on all DHC-8’s, CRJ-200/100’s, DHC-7’s and with this deal, North Bay will surely get busier in time.
In 2014, Voyageur Airways had a $C 16.9 million EBITDA (earnings before interest, tax, depreciation and amortization), and I estimate annual revenue of around $68 million and therefore the $C 80 million acquisition is priced at rather high 4.7 times EBITDA, and around a price to revenue of 0.85 (est.) which from my previous articles on regional airline valuations, is in the range of recent Canadian deals :
- Calm Air sold to EIC 3.78 x EBITDA and price to revenue of 0.70 (est.)
- Bearskin Airlines sold to EIC at 3.91 x EBITDA and price to revenue of 0.65 (est.)
- Provincial Aerospace (PAL) sold to EIC 5.3 x EBITDA and price to revenue of 1.33 (est.)
This acquisition is part of the CPA amendment deal, as part of its Fleet Transition strategy, it was decided that Chorus Aviation will operate two separate operating units. The first unit, Jazz will operate a mix of larger and newer generation aircraft (CRJ-705’s, CRJ-200’s and Q400’s) while the second unit will operate the older DHC-8-100’s and DHC-8-300’s with a separate lower cost work force.
So the acquisition of Voyageur Airways in NOT a big surprise, it had to set up a new unit so it was going to do it internally or externally, and if it is to be a low cost unit then, it had to be external and this way Chorus Aviation gets its ‘second unit’ to operate the older DHC-8 fleet at a lower cost. In its Annual Report, Chorus already had identified the “Leasing risk related to the Dash 8-100 aircraft”, as the company is very concerned that when the aircraft leave the “covered fleet” there is a risk that Chorus will be unable to find use for these aircraft to generate equivalent revenue, and any such inability to utilize the aircraft could have an adverse effect on its business.
In short, the Voyageur Airways acquisition was a planned strategic move to find a lower cost operator, and a place where Chorus can utilize the DHC-8’s on incremental revenue through an expanded international customer base and where they can maximize the value still left in those older aircraft. It will also serve as a low cost operation for continued DHC-8 operation on behalf of Air Canada, something I am sure other Canadian operators like Air Georgian and SkyRegional were eyeing as Chorus Aviation CASM (cost per ASM) was making their operation too expensive and un-competitive.
With 2014 salaries, wages and benefits of $C 410.4 million (average is a very high $95,442 per employee versus $87,700 at Air Canada) representing 26.8% of total operating costs of $C 1.528 billion, the CASM (4Q/2014) of 28.11 cents, it means that roughly 7.53 cents is salaries, wages and benefits, and even if you save say 25% on future salaries, wages and benefits you would only lower CASM by 1.9 cents to 26.21, and all else equal add $C 102 million to operating income. A separate division for say 25% of the employees (1,075 employees) to operate the DHC-8’s and saving 25% on salaries, wages and benefits, Chorus would save around $C 26 million a year paying for the acquisition of Voyageur Airways in 38 months ! There is something wrong with the fact that the average salary, wage and benefits per employee at Chorus is 9% higher than at Air Canada, how did a regional airline get so expensive and lose control of its expenses ?
This “low cost” thing I really do not understand with regional airlines, the LCC model gets most of its low cost through more productivity from the aircraft by increasing seating density and daily utilization (e.g. LCC A320 with 178 seats and 11 hours per day will generate 45% more daily ASM’s than a network carrier A320 with 150 seats and 9 hours per day utilization), which means lower CASM. Rouge, the Air Canada Leisure LCC generates savings of 21-27% with its A319’s and B767-300’s versus Air Canada mainly do to the increased seating (by the way too tight for my liking), I calculate 75%+ of the savings are due to the seating pitch, add in more daily flying and the savings are huge, with relatively little (5-10%) attributed to the lower salaries and benefits of pilots, FA’s, etc.
On a regional aircraft you cannot put more seats in, for instance, a DHC-8-300 can seat 54, but most have 50, yes the Q400 can now have 86 seats over the standard 76-78 seats, but that works in Asia and not on your average North American. You cannot increase seating density, and a CPA already assumes a certain daily utilization, so the only savings can come from paying everyone less, but the difference is very small, as I said 5-10% at best on your CASM.
Voyageur Airways operates up to 10 CRJ-200’s, and could possibly become a CRJ-200 operator for Chorus Aviation as it plans on phasing those aircraft out in the next few years in favor of more Q400’s. As Chorus plans to replace 34 DHC-8-100’s and 25 CRJ-200’s over the next 11 years !
Under the CPA with Air Canada, Chorus operates around 740 departures per weekday to 54 destinations in Canada and 25 in the United States with the 122 covered aircraft, which is 82.4% of the Air Canada Express fleet above the smaller Tier III Beech 1900D’s. In fact a few years back it was 100% as Air Canada allowed then Jazz Aviation to be the most profitable regional airline in the world by profit margin ace then owner of Air Canada and Jazz, ACE Aviation wanted to raise the value of Jazz, but that led to inefficiencies and high operating costs. The operation goes back to 2001 when Air Canada consolidated its regional airline (Air BC, Air Nova, Air Ontario, Canadian Regional Airlines) into one operation under President and CEO Joe Randell, then running Air Nova out of Halifax. In 2014, Chorus had 258, 518 departures, flew 364,245 block hours and had 4,130 employees and 125 aircraft.
The CPA with Chorus was due to expire at the end of 2018, and it is no secret that Air Canada was not happy with Chorus Aviation, whose costs have been too high, in fact 4Q/2014 it’s CASM was 28.11 cents (22.01 cents-excluding fuel), and I am sure that Chorus Aviation’s President and CEO Joe Randell was worried about the future of his company with Air Canada, especially as his attempts to diversify Chorus Aviation were disastrous, the bankruptcy of Uruguay’s PLUNA operating CRJ-900’s where Chorus had 33% share and the early termination of a 5 year contract to operate 6 x B757’s for Thomas Cook, did not help Mr. Randell to diversify his company away from Air Canada.
The airline had to change, it lost business on 26 aircraft to other operators, its costs were a BIG problem for Air Canada, and now with lower cost WestJet’s Encore operation with 17 Q400’s and going to 45 in 2 years, while Porter Airlines possibly operating CS100’s, Air Canada had to act, and together with Chorus they tackled 3 main issues”
1. Costs, a better fixed fee now for the use of aircraft and services, instead of cost plus 12.5%.
2. New deal with pilots, 85% at Jazz are now at the top of the wage scale, now the pilots have access to 80% of vacancies at Air Canada, which will move high cost pilots to Air Canada and allow new “replacement pilots” to come in at “competitive” rates, so in short get rid of expensive pilots and bring in new cheaper pilots.
3. A new order for 13 x Q400’s plus 10 options at $758 million list price (really not more than $550 million-discounting is BIG on Q400’s these days, actually during most of its production run), and an extended life program with Bombardier on an initial 19 x DHC-8-300’s which will extend their life by up to 15 more years. It is clear that the DHC-8-100 is nearing its end, and Chorus is hoping to find new life with them at Voyageur Airways with ACMI leases overseas or dry leases at very competitive rates below $40,000 per month for sure, 19 are to leave its fleet by 2010. This is challenging REAL, the joint venture that Air Georgian and Regional 1 signed last year to cooperate on global ACMI leases and operating leases, REAL’s President and CEO is Air Georgian’s President and CEO Eric Edmondson, the man behind the growth at Air Georgian the past few years.
Apparently this new agreement will save Chorus Aviation $C 550 million in savings over the next 6 years ($C 91 million a year) and a $C 50 million increase in 2015 operating income ? which is good for Chorus Aviation, but is Air Canada being too generous ? will SkyRegional and Air Georgian get the same terms and conditions in their CPA ?
In the past few years, Air Canada has shown its displeasure with Chorus/Jazz by signing CPA’s with two new regional airlines, and today SkyRegional operates 5 x Q400’s and 15 x E175’s as Air Canada Express while Air Georgian, a long time Tier III Beech 1900D (14) Air Canada Express partner is today operating 6 x CRJ-100’s for Air Canada as well, and both are surely looking at more business opportunities with a rejuvenated and restructured Air Canada, that is now a real global competitor, something it struggled to be for years to become.
This deal for Voyageur Airways is on a cash free/debt free basis, and represents total enterprise value of $C 80 million subject to closing working capital adjustments. The deal will utilize $C 47.0 million in cash, $C 8.0 million in issuance of Chorus Class B voting shares and roughly $C 25 million in deferred cash payments will be paid in separate installments over 36 months.
In 2014, Chorus Aviation had an net income of $C 64.7 million (3.9% NI margin), negative cash flow of $C 45.3 million, EBITDA of $C 176.3 million on $C 1.666 billion in revenue or 10.5% EBITDA margin, as a comparison and to show what is possible in this industry, Exchange Income Corporation (EIC) which owns Canadian regional airlines and charter operators Calm Air, Bearskin Airlines, Perimeter Aviation, Keewatin Air and Provincial Airlines, as well as Custom helicopters and US based Regional One a maintenance support and lessor to the regional airline industry and combined has Canada’s 3rd largest regional airline fleet.
EIC Aviation revenues in 2014 were $C 339.0 million, EBITDA $C 79.5 million for a EBITDA margin of 23.4% ! yes you can make money in this industry, if you have the right finance and business people working together, sadly as I have seen there are too many people in aviation management in Canada that do not understand how to make money in this industry, can’t see outside the ‘box’ they understand and know, it is not a hobby, it is a business like any other.
This is how Mr. Max Shapiro built his business at Voyageur Airways, tried scheduled services, but eventually moved to ACMI work and maintenance and saw opportunities outside of Canada, that is where he made the business what it is today, being able to see outside the “box”. The same goes for Mr. John Gillespie at Flying Colours in Peterborough, now a major global aviation services company undertaking completion work on business jets and helicopters of all sizes, with operations in USA and now China as well.
So with Provincial Aerospace being bought in 2014 by EIC and now Voyageur Airways being bought by Chorus Aviation, what 705 airlines are left that are in private hands ?
- Pacific Coastal owned by the Smith family is doing well in BC with Saab 340s and Beech 1990’s and a few floatplanes as well.
- Transwest Airlines owned by the Campling family does well in Northern Saskatchewan flying Saab 340s, Beech 350’s and 1900’s and a fleet of float aircraft, and is sought by another local operator West Wind Aviation of Saskatoon.
- West Wind continues to serve the mining industry with a fleet of ATR-42’s in Northern Saskatchewan and is owned by the Goll family.
- PASCAN Aviation out of Saint-Hubert in Quebec, still growing in Quebec, Labrador and New Brunswick and under the Charron family operating ATR-42’s, Bae J32’s, PC-12’s.
- Trans Capital Air of Toronto under the Pappalardo family continues with 9 x DHC-7 operating ACMI operations around the world, but still ‘stuck’ to the four engines work horse, and Voyageur Airways has shown that there is more work out there for other types.
The Canadian industry is changing, consolidation is slowly coming, many of the above will not be around in their existing state in 3-5 years, and the few 704 operations with aircraft below 20 passenger seats will slowly fall by the way side as owners die off and the usual problem with the 3rd generation not interested to follow its parents and grand parents footsteps, leaves many of these operations without succession to continue with the business, consolidation is coming as big corporations see that you can make money in this business, better than any family run business could ever dream of, its in the ability to source capital for growth, it is a must for success, and why EIC does well with its Aviation unit, it combines the talents of financial experts with airline experts, period.
Always interesting, I congratulate Mr. Max Shapiro, he worked hard to build Voyageur Airways and he and his family are now going to be very well rewarded financially for his work, that is how it should work.
Till next time, thank you for reading my blog, any comments ? let me know !