Air Canada picks Air Georgian for additional regional routes, including to U.S.

MONTREAL - Air Canada is expanding its relationship with Air Georgian as it looks to reduce costs and protect its turf from WestJet's growing regional Encore service.

The national carrier said Tuesday that Toronto-based Air Georgian will operate additional routes in Canada and the United States in mid-2014. The charter and commercial aircraft company was selected following a request for proposals.

Air Canada (TSX:AC.B) said the regional airline, which became a partner in 2000 and flies under the brand Air Canada Express, will service the new routes using Canadair aircraft.

However, it declined to provide any details about how many routes and which destinations will be serviced by Air Georgian or whether there will be an impact on its other regional partners, including Chorus Aviation's (TSX:CHR.B) Jazz.

"We are pleased to expand our long-standing commercial relationship with Air Georgian that will allow Air Canada to introduce more cost-competitive operations in a number of our key regional markets," said Kevin Howlett, Air Canada's senior vice-president, regional markets.

Air Georgian was selected over several Canadian and U.S. regional operators based on operational safety, efficiency, cost and service, Howlett said.

"The award of additional flying to Air Georgian is an important step in our regional airline diversification strategy and ongoing cost transformation program," he said.

Air Georgian president Eric Edmondson said the company was excited to be getting the new business.

"The selection of Air Georgian for this expanded role is based on our proven ability to offer seamless connections and service for Air Canada customers that is of mutual benefit for both airlines," he said in a news release.

Air Canada currently has capacity purchase agreements with four regional airline partners that operate under the Air Canada Express banner: Jazz, Sky Regional, Air Georgian and EVAS.

Air Georgian currently carries more than 350,000 passengers a year for Air Canada from airports in Toronto, Montreal, Halifax and Calgary to 19 Canadian and U.S. destinations. It has a fleet of 16 Beechcraft 1900 planes.

Air Georgian and a division of Calgary-based Avmax Group formed a joint venture in November to create Regional Express Aviation Ltd., an aviation company with operations in Canada, the United States and Africa. Avmax Aircraft Leasing is the world's largest private owner of Dash 8 aircraft and has other aircraft, including Bombardier CRJs.

David Tyerman of Canaccord Genuity said the financial impact on Air Canada will be modest but the move is a "shot across Chorus Aviation's bow on costs."

Under its capacity purchase agreement with Chorus, Air Canada can reduce flying to 331,000 block hours from around 380,000 this year. However, Air Canada must fund any profits lost by Chorus if flying drops below 367,000 block hours.

"We remain worried that Chorus profitability could come under significant pressure due to Air Canada's desire to reduce costs, particularly given the new WestJet (TSX:WJA) Encore regional flying initiative," he wrote in a report.

Tyerman said the use of alternative regional partners positions Air Canada to lean more strongly on Chorus for a better deal when its CPA expires at the end of 2020, or sooner.

Chorus said its commercial agreement with Air Canada is not exclusive.

"Air Canada has always had the ability to select other regional carriers for a portion of their regional flying — this is nothing new," spokeswoman Manon Stuart wrote in an email, adding that Chorus has no details about Air Canada's deployment plans.

She noted that the CPA contains several guarantees that will protect Chorus revenues, including the operation of at least 122 aircraft and compensation if flying hours dip below the 367,000 hours threshold.

Earlier Tuesday, the Halifax-based company partially restored a cut in its dividend by increasing the payout by 50 per cent in the wake of an arbitration win against Air Canada.

On the Toronto Stock Exchange, Air Canada's shares were down 22 cents or nearly three per cent at $7.49 Tuesday afternoon.