Ladies and gentlemen, thank you for standing by and welcome to the Chorus Aviation Inc. third quarter 2020 earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star one on your telephone. Please be advised that today's conference is being recorded. If you require further assistance, please press star zero. Thank you. I'd now like to hand the conference over to your moderator for today, Nathalie Megann, Vice President, Investor Relations and Corporate Affairs. Please go ahead.
Thank you, Jack. Hello, and thank you for joining us today for our third quarter 2020 conference call and audio webcast. With me today from Chorus are Joe Randell, President and Chief Executive Officer, and Gary Osborne, Chief Financial Officer. We'll start by giving a brief overview of the results and then go on to questions from the analyst community. Because some of the discussion in this call may be forward-looking, I direct your attention to the caution regarding forward-looking information and statements, which are subject to various risks, uncertainties, and assumptions that are included or referenced in our management's discussion and analysis of the results and operations of Chorus Aviation Inc. for the period ended September 30th, 2020. The outlook section and other sections of our MD&A where such statements appear.
In addition, some of the following discussion involves certain non-GAAP financial measures, including references to EBITDA, adjusted EBITDA, adjusted EBIT, and adjusted net income. Please refer to our MD&A for a discussion relating to the use of such non-GAAP measures. I'll now turn the call over to Joe Randell.
Thank you, Nathalie, and good morning, everyone. Our efforts continue to focus on ensuring safe operations, preserving our liquidity, and working with Air Canada and other customers to help them navigate through this ongoing pandemic. We're also advocating for government support for the recovery of the Canadian aviation sector. Gary will take you through our financial performance for the third quarter, which delivered earnings of CAD 0.13 per basic share or CAD 0.07 on an adjusted basis. Our liquidity now stands at CAD 218 million. In the quarter, our CPA flying increased from 10%-23% over the second quarter of this year. Our non-CPA lessees are showing moderate signs of more flying activity, as evidenced by an increase from 28% in lease revenue collected in the second quarter to 50% collected in the third quarter.
We were also pleased to see this trend continue further with further improvement in October with the receipt of approximately 58% in billed lease payments. Unfortunately, COVID-19 continues to spread around the world. We're seeing signs of a corresponding stalling in the resumption of flying activity globally. We are encouraged by the public statements made by the Honorable Marc Garneau, Canada's Minister of Transport, on November 8th to begin immediate discussions with airlines on measures to protect Canadians from the impacts of COVID-19 on the air travel sector in Canada, and we are awaiting further details. Canadian airlines are significant contributors to economic growth in Canada. Regional airlines are key to the provision of employment opportunities and are facilitators for travel and tourism, contributing to the overall economic growth of the smaller communities to which they fly. Without this service, communities, businesses, academia, and tourism operators will struggle.
We believe the aviation industry will eventually recover. People will travel again. We still believe the regional sector is the most resilient of the industry, with domestic travel being the first to resume. Demand for regional aircraft remains stronger than other aircraft types, and we're seeing the Airbus A220 leading the pack. In fact, we delivered the third of five new A220-300s to airBaltic of Latvia in September. Without knowing the length and depth of the damage resulting from the virus, it's difficult to predict how our industry and those entities that depend on it will manage. A prolonged pandemic will continue to challenge the passenger aviation industry. We recognize the recovery of passenger traffic will be protracted, sporadic, and will extend well into 2021 and beyond. We are taking all reasonable measures to protect and preserve our company.
Overall, our portfolio of leased aircraft is holding up relatively well in the current environment. As previously reported, Aeromexico filed for voluntary Chapter 11 petitions in the United States on June 30th in order to implement a financial restructuring. We have three E190s on lease to Aeromexico and hold security packages in respect of these aircraft. The aircraft are currently active in Aeromexico's operation, and we're hopeful that they will be retained by the carrier. Voyageur is performing well. We continue to bid on new flying contracts and have had some success, including contract extensions. This is really the norm in the specialized contract flying business. It's an ongoing cycle, and our employees are experts in delivering the highly unique and customized services our customers require.
While our parts sales division is challenged due to the pandemic, our MRO activity has increased after winning several new contracts in the second quarter. It was a welcome piece of good news when Jazz was named amongst Canada's Safest Employers 2020, winning gold in the public transportation category. This is Jazz's fourth consecutive year accepting awards at the Canada's Safest Employers event. Last year, Jazz received gold award in the transportation category. In 2018, Jazz was awarded silver in the transportation and psychological safety categories, and in 2017, Jazz won gold in the transportation category. My sincerest congratulations to the team. It's a great, bright spot to have these days. As mentioned, our Air Canada Express operation is now at 23% of what it was in the same period last year. We continue to work closely with Air Canada to help support its network and to reduce costs.
Demand for air service will only return when people have confidence that their health and safety are protected and when the requirement for quarantine is reduced or eliminated. In Canada, we need a national COVID-19 testing regime that uses scientifically based procedures to help facilitate the safe movement of passengers. This will allow an improved application of any quarantine restrictions. I applaud Air Canada's efforts in working with McMaster Health Labs and the Greater Toronto Airports Authority to demonstrate the validity of testing as a means to ease travel restrictions and quarantine requirements. We'll be watching for developments in this regard as well at Calgary's airport. While the pilot programs underway in Calgary and Toronto to safely test an alternative to the two-week quarantine for international travelers are positive steps, much more such programs are needed, especially with the Atlantic Bubble.
Again, we urge government to act swiftly to implement current science-based approaches to COVID-19 testing of passengers to help support the recovery of passenger demand. In addition to feeling safe, passengers need affordable air transportation. In Canada, the multiple layers of fees and charges levied on passengers and airlines by various levels of government have greatly increased over the years and have had a disproportionately negative impact on regional services. Since the pandemic, NAV CANADA has increased fees by 30%, and many airport authorities across Canada have also increased their charges by similar amounts, adding to higher ticket prices for travelers. In the short term, the Government of Canada needs to urgently consider assisting these service providers in rolling back these fee increases to help encourage travel demand, thereby helping the economy and the transportation sector recover.
I'll conclude my comments first by thanking our employees, including those who are currently on an active status, for supporting our company in these difficult times. I sincerely look forward to the day when we're all at our posts and resuming the meaningful work we've done to grow and diversify our business. Secondly, I will not be providing any comment on the preliminary non-binding acquisition proposal we received last month, except to emphasize that the disclosure was made at the request of IIROC. We do not have anything further to say on this matter at this time. Thank you very much, and now I'll pass the line over to Gary.
Thank you, Joe, and good morning. Our third quarter Adjusted EBITDA was CAD 85.9 million, a CAD 6.8 million decrease over third quarter 2019. Adjusted net income was CAD 10.9 million and a CAD 18.2 million decrease over last year, which led to a decrease in adjusted EPS at CAD 0.07 versus CAD 0.18 last year. Here's how the third quarter of this year compares to 2019. The regional aircraft leasing segment's Adjusted EBITDA decreased by CAD 4 million, primarily due to a CAD 4.1 million expected credit loss provision related to management's assessment of Chorus' lessee credit risk and lower margins due to the loss of revenue resulting from the repossession of 13 aircraft from three lessees, partially offset by growth in aircraft earning leasing revenue.
Due to the impact of COVID-19, the non-cash general aircraft impairment provision of CAD 11.2 million and CAD 0.7 million for lease repossession costs were added back to Adjusted EBITDA. The regional aviation services segment's Adjusted EBITDA decreased by CAD 2.8 million. The results were primarily impacted by decreased capitalization of major maintenance overhauls on owned aircraft operated under the CPA of CAD 2.7 million and a reduction in other revenue due to a decrease in third-party maintenance, repair, and overhaul activity and reduced contract flying due to the economic impact of COVID-19, offset by decreased stock-based compensation of CAD 1.7 million, increased aircraft leasing under the CPA, and decreased general administrative expenses.
Adjusted net income was CAD 10.9 million for the quarter, a decrease of CAD 18.2 million due to a CAD 6.8 million decrease in Adjusted EBITDA as previously described, an increase in depreciation of CAD 4.5 million primarily related to additional aircraft in the regional aircraft leasing segment, an increase in net interest cost of CAD 7.6 million primarily related to the 5.75% unsecured debentures, the unsecured revolving credit facility, and additional aircraft debt in the regional aircraft leasing segment, and an increase of CAD 3 million in realized foreign exchange and unrealized foreign exchange losses on working capital, offset by a CAD 3 million decrease in adjusted income tax expense.
Net income decreased CAD 3.7 million due to the previously noted CAD 18.2 million decrease in adjusted net income, CAD 11.2 million general impairment provision, and CAD 0.7 million in lease repossession costs, offset by the change in net unrealized foreign exchange on long-term debt of CAD 24.9 million and tax recovery on adjusted items of CAD 1.5 million. Liquidity improved in the third quarter by approximately CAD 30 million, with CAD 218 million in liquidity, including CAD 35 million of available room on our committed revolving debt facility. This improvement was primarily due to positive operating cash flows, working capital improvements resulting from increased flight operations, and the financing of previously unencumbered aircraft.
As mentioned above, working capital improved in the quarter primarily related to increased accounts payable due to increased airline operations over the second quarter, in addition to increased interest accruals related to the timing of debenture interest payments and interest associated with the loan deferral program, partially offset by an increase in Air Canada receivables and CAC lease deferral receivables. Other key liquidity movements in the quarter include payments on long-term borrowings of CAD 31.6 million and investments in property and equipment, net of financing of CAD 13.2 million. Cash increased in the quarter primarily due to the increase in loan repayment deferrals of CAD 13.5 million, or approximately $10 million, with our largest lender, EDC. These deferrals allow us to defer payments of principal and interest to the end of the year, providing us the ability to better match our debt payments with the lease deferral arrangements.
In the fourth quarter, we expect our liquidity to be relatively constant as we continue with measures to preserve liquidity given the uncertainty related to the duration and impact of COVID-19. As we look ahead, we have seen our rental revenue received in the regional aircraft leasing division increase to 58% in October, and we expect this will continue to improve over the next quarters if travel restrictions ease and airlines are able to increase their revenue-generating capacity. We've reduced our capital expenditure forecast by CAD 6 million since our second report out and forecast maintenance capital expenditures and heavy checks to be within a planned range of CAD 17 million-CAD 23 million for the year.
Aircraft-related acquisitions are expected to be between CAD 417 million and CAD 426 million, down CAD 64 million from previous disclosure as a result of two aircraft for an undisclosed customer being moved to 2021 and a decrease in foreign exchange rate. We estimate our cash outlay for the remaining growth CapEx expenditures to be approximately CAD 10 million net of anticipated financing arrangements. The remaining deliveries are subject to financing and certain closing terms. That concludes my commentary. Thank you for listening. Operator, we are open to call. We open the call to questions from the analyst community when you are ready.
Certainly. At this time, if you'd like to ask a question, please press star one at your telephone keypad. We'll pause for a moment to compile the Q&A roster. Again, that is star one on your telephone keypad. Konark Gupta with Scotiabank, your line is open. Mr. Gupta, your line is open.
Hello, can you hear me? Hello?
Hello.
Hello.
Hello.
Yes, this is Amina Corner, Associate. I do have a question on liquidity. You expect liquidity to remain relatively stable in Q4 with the extension of the CAC loan deferral and the secure financing of the 6 CRJ900s. How should we think about funding the 2 A220s for the airBaltic cash flow operations and working capital in Q4?
So we, Gary, here, we expect to remain relatively constant in the quarter in around CAD 200 million that we talked about in Q2 as far as liquidity goes. As far as the A220s, if you look at the disclosure, we put in around CAD 10 million as being the net amount of financing, net of financing amount that will be the draw related to those. So that's how you can model the A220s.
Okay, thank you. No other questions.
Yep.
Doug Taylor with Canaccord Genuity, your line is open.
Yeah, I'd like to follow that up. First of all, good morning. I would like to follow up with another couple of questions about the liquidity. I mean, are you planning any other liquidity enhancement measures outside of your general cash flow for Q4 to help keep it at that CAD 200 million level?
No, we are not, Doug. That is based on the current status and continuing as we are.
Then in terms of the drain on your liquidity caused by commitments that you made perhaps prior to COVID with respect to the leasing fleet, would you see Q4 now as being kind of the last remaining major kind of hurdle or drain? Then as we look into next year with the capital commitments that you have, you expect the pressure on your liquidity from those commitments to ease? Is that the right way to think about it?
By and large, I think if you look at what we've got, we've got two A220s coming in for roughly CAD 10 million. We still have two to an undisclosed customer sometime next year. The timing of that is quite fluid, and we don't know exactly where it's going to happen, but that is it for the current commitments.
The CRJs will be delivered by the end of Q4.
The other side to note too is back to our disclosure, we did pay all the equity requirements on all the CRJ900s in Q3, so the remaining CRJ900s that come in will not draw any cash because the financing will cover the remainder for those aircraft.
Okay. Maybe last question about liquidity. I mean, just to be clear, the receivable related to the guardrail with Air Canada that has been building up on your balance sheet, can you just confirm for us the timing of the expected collection of that?
It is Q1 next year.
Okay. So I mean, stepping back and looking at the lease portfolio in Q3, would you say Q3 with all of the aircraft that are now being remarketed and have come out of the lease portfolio, is a good baseline in terms of the revenue and profitability of that business? And then these additions in terms of the airBaltic A220s, I mean, should be additive to the earnings power of that portfolio going forward? I mean, in general or qualitatively, is that the right way to think about it?
I think you can look at Q3 as having the sum of all the events that we've seen to date. So you've got the 13 aircraft essentially by and large. You've got the 50% or sorry, 50% as far as revenue collected. So I think it's a good base moving forward, Doug. And then as far as layering things in, we have a couple more A220s to come in. We continue to monitor our lessees. It is a dynamic situation in the marketplace, so it's hard to really give you a lot of guidance around that. We're hoping the rental revenue will increase. It was 58% in October, and we're cautiously optimistic around that, but we continue to evaluate the lessees. So those bumps and things like that that could be associated with that are very difficult to predict.
I think you could look at where we're at today in Q3, and it's not a bad launching-off point for your modeling and where we're going to move from go forward.
That's helpful. And just to be clear, I mean, going from 50%- 58%, the degree of collections does not have bearing on the earnings power. That's more of a balance sheet item.
You got it. Yeah, you're right.
A couple, just a couple credit questions. First of all, I mean, airBaltic, are they among the members of your lessee that are current with their payments?
Yes, they are. We have no issues with airBaltic under their payment terms.
Okay. Then last one for me, the CAD 4.1 million reduction in earnings related to the credit provision you've taken, is that related to a single entity or is that multiple airlines that you've taken some provisions on?
It's across all lessees. We evaluate them for expected credit loss or risk associated with the receivable, and we book a provision related to all of them.
Okay. Probably asked enough questions. I'll pass the line.
David Ocampo with Cormark Securities, your line is open.
Thanks. I just wanted to follow up on Doug's question related to the cost guardrail. I'm just trying to get a sense of the accounting treatment behind that. Was the payments recognized in the income statement for each respective quarter, or is that something that's going to all appear in Q1?
So what happens is we recognize the revenue as we go through each quarter related to the Controllable Cost Guardrail. What ends up happening is you'll see the receivable builds. It'll be in the accounts receivable balance, obviously, reducing our cash. Then in Q1 next year, we'll collect that, and it'll go back into cash.
Okay. That makes sense, Gary. And this is a bit of a longer-term question, so I appreciate it if you can't answer it. But when we look at the 2026 to 2035 period for your CPA agreement, there is a noticeable step down. And I always assumed that this would get backfilled somehow with some sort of leasing revenue. But maybe you can comment on your discussions with Air Canada, and perhaps should we think about this as a more permanent step down now given the state of the industry?
Well, we're obviously speaking with Air Canada frequently and considering the ever-changing market dynamics. There's still a lot of unknowns. For now, we're continuing to focus on the reduction of costs and as well helping Air Canada preserve and plan on how it's going to recover its network here. So we're having those discussions, and the fleet commitment remains in place in the CPA. But of course, as we look forward, we look at various scenarios and working closely with Air Canada to find ways that we can assist and work together to improve our outlook on both sides.
That's great, Joe. Then the last one here for me, just on the aircraft that have been repossessed, how much leniency do you guys have with the remarketing term? I know some of them are short of six months before you may have to make those bullet payments on the debt structures.
If you look at the aircraft that have been repossessed, all but three or all but three have remarketing periods that are 24 months as they're through EDC. We're working with the lender on that remaining amount. It's around $10 million that could potentially come due if circumstances warrant in Q1. We are prepared around that piece. We're not worried at all about that loan call.
That's a great question for me, guys. Thanks.
Okay.
Again, if you'd like to ask a question, please press star one on your telephone keypad. Raul Alcerude with RBC Capital Markets, your line is open.
Hi, good morning. It's Raul calling in for Walter. Just to quickly kind of start off here, I was wondering if you're able to unpack some of the detail in the working capital trend expected during Q4 and perhaps even Q1 as well. It sounds as though receivable headwinds in leasing are expected to be partially offset by security packages. So just kind of trying to wrap my head around this, is it fair to assume a modest working capital headwind in Q4?
Yeah, I think you could assume a modest one. Q4 is always, if you look at even the CPA division and passenger traffic in general, it's always a slower period. And I think the COVID environment is probably a little more than normal. So there'll be a little bit of a draw in that range. But then you know what? I'll turn around and say, "Look, we also are still generating good positive cash from operations. Our receipts from the regional aircraft leasing side are coming in a bit above where we saw in Q3." So I think you can model overall based on the guidance we've given you, the CPA guardrails and the lease receivables in the deferrals, and you can get a pretty good idea. There's a little bit of a draw there.
Okay. Okay.
I know that's helpful. That's it for me too. I'll pass the line. Thanks.
Again, if you'd like to ask a question, please press star one on your telephone keypad. There are no further questions at this time. It's now my pleasure to turn the call back over to Chorus Aviation for closing remarks.
Thank you very much, Jack. We will now conclude the call, and thank everyone for dialing in. Have a great day.
This concludes today's call. We thank you for your participation. You may now disconnect.