Jazz Air Income Fund, sweetening the pot with a possible 10-per-cent yield, is hoping investors will embrace the new trust and willingly take on the risks that have sometimes overwhelmed the rewards in the volatile airline industry.
The trust's road show, which began yesterday in Montreal and arrives today in Toronto, stresses steady income in the regional carrier's operations, despite pressure from high fuel prices and stiff fare competition from rivals such as WestJet Airlines Ltd.
"Jazz enables Air Canada to profitably service markets that do not have enough passenger traffic to support Air Canada's larger size fleet," according to a confidential information memorandum issued Monday to institutional investors.
The memo forecasts that Jazz's initial public offering will have a yield of between 9.5 per cent and 10.5 per cent -- a higher range than some analysts had been expecting. That suggests Jazz is a harder sell than Aeroplan Income Fund, which carried an initial 7-per-cent yield, industry observers said yesterday. The average yield of trusts in the S&P/TSX income fund index is 7.6 per cent.
Independent trust analyst Harry Levant said ACE Aviation Holdings Inc. -- parent company of Air Canada, Jazz and Aeroplan -- recognizes that investors want to see a potentially richer reward for risking their money in Jazz. By contrast, the Aeroplan loyalty program is seen as a relatively conservative bet.
Montreal-based ACE sold a 14.4-per-cent Aeroplan stake in a $287.5-million IPO in mid-2005, and now it plans to sell between 15 and 20 per cent of its Jazz division.
At a 10-per-cent yield, the total value of Jazz would be $1.08-billion, with the IPO worth perhaps $175-million. If the first tranche of the Jazz offering at $10 a unit proves to be popular, the overallotment option could be exercised by early next month to boost the IPO's value to $201.2-million.
Some investors may be leery about the airline sector in general, especially amid soaring fuel prices, but Jazz is a relatively good performer in the industry, Mr. Levant said.
He said wage hikes at Jazz are expected this year, but the higher labour costs won't likely be enough to crimp Jazz's appeal to risk-tolerant investors.
Since Air Canada emerged from bankruptcy protection in September, 2004, Jazz has effectively served as a charter airline, collecting fees from reinvigorated Air Canada under a so-called capacity purchase agreement. Halifax-based Jazz passes through one-third of its total costs to Air Canada, including fuel, navigation, landing and terminal fees, according to the memo.
The memo also says Jazz's proposed yield "compares favourably" with a dozen established trusts, including recent yields at Aeroplan (5.3 per cent), TransForce Income Fund (8.3 per cent), Contrans Income Fund (9.1 per cent) and Noranda Income Fund (8.6 per cent).
One trust not mentioned in the memo is Canada's dominant cargo airline, Cargojet Income Fund, whose yield is 11.1 per cent.
A major drawback in investing in Jazz and Aeroplan is the possibility of Air Canada hitting financial difficulties again. A research report on Aeroplan by Veritas Investment Research Corp. pointed out that a general risk factor "would be if Air Canada went under and actually stopped flying." But Veritas said that even under the Companies' Creditors Arrangement Act, Air Canada continued its flights.
For Jazz, "the real issue then becomes the financial strength of ACE and Air Canada," Mr. Levant said. "At this point, the risk of another CCAA situation is likely years away, maybe never."
ACE class B shares fell 10 cents to $39.75 yesterday on the Toronto Stock Exchange, but have risen 15.5 per cent over the past year.
ACE posted a $361-million profit in the first nine months of 2005, compared with an $895-million loss in the same period in 2004.
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Will it fly?
Jazz Air Income Fund's initial public offering will have a juicy yield of between 9.5 per cent and 10.5 per cent - a higher range than what some analysts had been expecting. That suggests Jazz is a harder sell than Aeroplan Income Fund, which carried an initial 7-per-cent yield, industry observers say.
Number of aircraft at end of period
| Dec. 31, 2004 | Sept. 30, 2005 | Dec. 31, 2005 | July 31, 2006 (estimated) | |
| Turboprops | 73 | 66 | 62 | 62 |
| Regional Jets | 18 | 45 | 61 | 73 |
| Total | 91 | 111 | 123 | 135 |
***
Revenue (in $ million)
Nine-month period ended Sept. 30, 2004: $604.4
Nine-month period ended Sept. 30, 2005: $719.2
SOURCES: THOMSON DATASTREAM; BLOOMBERG FINANCIAL SERVICES; AIR CANADA
© The Globe and Mail
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