ACE will keep majority interest in Jazz Air trust

Public offering for regional carrier Ruling by Goodale opened the doors

MONTREAL— Air Canada’s parent company is spinning off a minority stake in its regional carrier Jazz, now that the federal government has taken a handsoff approach to income trusts. ACE Aviation Holdings Inc. and Jazz Air Limited Partnership said yesterday a preliminary prospectus has been filed with securities regulators in Canada for an initial public offering of units in Jazz Air Income Fund.

It is not yet known how much ACE will raise through the offering or what proportion will be sold off. However, Montrealbased ACE said it will retain a majority interest in the spinoff of Canada’s largest regional airline and will use proceeds from the offering for general corporate purposes. ACE had planned the trust conversion for months but put it on hold after the market slumped when federal Finance Minister Ralph Goodale announced a review of incometrust policy and withheld advance tax rulings on conversions. Last week, Goodale announced that trusts would continue to escape corporate taxation while dividend taxes would be reduced. ACE raised $287.5 million when it sold 14.4 per cent of its customer loyalty program Aeroplan in a popular initial public offering in June. ACE chief executive Robert Milton also has plans to spin off a stake in Air Canada’s aircraft maintenance division. The spinoffs provide cash for ACE and boost its stock values.

Halifax- based Jazz is Canada’s largest regional airline and the second- largest airline after Air Canada, based on fleet size and number of routes operated. It serves 55 destinations in Canada and 16 in the United States with a fleet of 118 aircraft that seat 37 to 75 passengers.

However, Calgary- based WestJet Airlines is much larger in terms of capacity measured in available seat miles.

In connection with the offering, ACE said Royal Bank of Canada and CIBC will act as joint lead arrangers for a $ 165 million credit facility for Jazz, of which $ 115 million is expected to be drawn.

Karl Moore, professor of business strategy at McGill University, says some North American regional airlines have had difficulty when their contracts with mainline airlines were cancelled. He said Jazz is protected for now with its feeder contract with Air Canada, by which the mainline carrier pays the regional carrier on a per- flight basis and also pays for Jazz’s fuel.

In addition, Jazz has opportunities through Star Alliance to be a feeder for other U. S. mainline airlines, while Jazz customers benefit from Aeroplan frequentflyer points.

“ The contract and fuel ( provision) take away some of the risk that is inherent in the airline industry, at least in the short- to mid- term,” Moore said.

Air Canada emerged from bankruptcy protection only 14 months ago as a leaner airline, but has racked up $ 361 million in profits so far this year, outpacing other mainline carriers in North America.

Earlier this month, ACE shareholders passed a resolution enabling it to distribute up to $300 million to investors.