An arbitration panel has decided that Jazz parent Chorus Aviation will not have to pay retroactive costs to Air Canada under a long-standing dispute over benchmarking provisions in the carriers’ capacity purchase agreement (CPA).
The panel ruled on 25 November that there is no justification to change the 12.5% mark-up of controllable costs such as maintenance spend, salaries and wages that Jazz receives under its flying agreement with the flagship carrier. These items exclude pass-through costs such as jet fuel prices, de-icing and navigational fees.
"We are pleased that the arbitration panel has ruled in favour of Jazz and that we can now move forward with certainty," says Joseph Randell, president and chief executive of both Chorus and Jazz. "Our long-term partnership with Air Canada continues to be a core component of our business, and we believe this ruling provides us with additional flexibility to continue to operate as an industry leader and deliver value for all our stakeholders."
The decision comes after a long back-and-forth between the two carriers about Jazz’s controllable costs should be calculated against those of comparable regional operators, using a benchmark year of 2009. The benchmarked rates were supposed to go into effect in 2010, but the carriers could not come to an agreement on what those rates should be and thus started arbitration in 2011.
Due to the complexity of the negotiations, the estimated costs that Chorus potentially had to pay under the process fluctuated significantly throughout the arbitration period.
Air Canada’s original claim in that arbitration case was that Chorus’ controllable mark-up should be reduced from 12.5% to 9.54%, effective retroactively from the beginning of 2010. At that time, Air Canada calculated that the payments Chorus would have to pay back would total Canadian dollar (C$) 26 million ($24.7 million) in 2010.
Chorus filed a counterclaim, arguing that under a different methodology there should be no change to the mark-up until the next benchmarking period of 2015.
In June 2012, Air Canada argued that Jazz reimburse payments of C$24.4 million and C$24.7 million in 2010 and 2011.
Hearings continued in April and July 2013, when both carriers presented further data to the panel and Air Canada then amended its claim again that the controllable mark-up should be reduced to 7.11%.
In October, two of the three arbitration panel members sided with Air Canada that the methodology used to calculate the controllable costs, but also agreed that certain adjustments should be made in Chorus’ favour. The latest action by the panel represents the final award under the arbitration.
While the CPA runs through 2020, there is an opportunity to assess these controllable costs more frequently. The two carriers will begin negotiations next year to set the CPA rates based on a 2015 benchmark that will last through 2017, says Air Canada.
“In line with Air Canada's priority for cost reduction and sustainable profitability, Air Canada will both work with Jazz to explore cost reduction initiatives and continue to pursue its regional airline diversification strategy that includes the request for proposal (RFP) process underway for certain existing U.S. regional transborder routes,” says Air Canada in a statement.