Good morning. My name is Jesse, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Chorus Aviation Conference Call. All on-site employees are muted to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. Nathalie Megann, Vice President of Investor Relations, you may begin your conference.
Thank you, Jesse. I'd like to start by offering our apologies for the very short notice of this call. Unfortunately, we had a delay in the dissemination of our news release, so I'm very pleased that you could join us on this short notice. With me today are Joe Randell, President and Chief Executive Officer, and Jolene Mahody, Executive Vice President and Chief Financial Officer. We'll take you through a presentation, and hopefully, you've all had an opportunity to download it. It is available on our website under Management Presentations. We'll start on slide four, where Joe will have some additional commentary to what's on the slide, and then Jolene will take you through the mechanics of our amended CPA.
Because some of the discussion on this call may be forward-looking, I direct your attention to the caution regarding forward-looking information contained in our news release dated today, January 14, 2019, and on page 3 of the PowerPoint presentation. Joe and Jolene will now take you through the presentation and respond to questions from the analyst community afterwards. Thank you.
Thank you, Nathalie, and good morning, everyone. As Nathalie mentioned, today is truly an exciting day for Chorus. We have successfully negotiated another amendment to the capacity purchase agreement between Jazz and Air Canada. In the aviation industry, it is simply not possible to sit still. Ours is a dynamic industry, and we must work together with our strategic partner, Air Canada, to seize opportunities that make both organizations stronger. Fortunately, Jazz and Air Canada have a history of doing just that. Today, we have jointly seized this opportunity to strike an even better deal, deepening the relationship, ensuring its long-term sustainability, and enhancing our competitive position. Today's announcement is a win for both Jazz and Air Canada. As you know, four years ago, in early 2015, we also announced an amendment to our CPA with Air Canada.
That move proved to be very positive for our business and for the ongoing strategic partnership between Jazz and Air Canada. It created stability in the relationship, cost reductions for both parties, enabled Chorus to further grow its leasing business, and helped align the interests of the two companies for the future. Today, we are announcing a further amendment to the CPA with Air Canada, and I am pleased that, once again, the changes we have negotiated will secure Jazz's place in Air Canada's regional network as we extend our relationship under the agreement by an additional 10 years, out to 2035, and enhance our relevance to Air Canada as they consolidate more of their regional capacity into the Jazz footprint. This marks the longest-term strategic partnership between Jazz and Air Canada thus far, and one of the longest CPAs in the industry.
We have succeeded in addressing needed changes and commitments to our aircraft fleet out to 2035. The necessary modernization of our fleet and the commitments received from Air Canada over the term of the agreement were not available to us under the current CPA. In the current agreement, the fleet is essentially locked down by aircraft type and number for each year until 2025. The amended CPA provides more flexibility to Air Canada to effectively manage the regional route network in a changing operating environment. The economics of the agreement are strong for Chorus, with incremental commitments in fixed fees and aircraft leasing revenue of CAD 940 million and operating fleet commitments that create additional future leasing opportunity past 2025. In total, the 17-year contract will provide CAD 2.5 billion in minimum contracted revenues, of which CAD 1.6 billion will be generated from aircraft leasing.
For Chorus, the amended CPA and investment by Air Canada will support the continued transformation of our business in diversifying and migrating CPA earnings to aircraft leasing. You'll recall our rates under the current agreement are above market until 2020, which is why it contains a scheduled step-down in rates beginning in 2021. This agreement accelerates our planned move to market-based rates in the near term as we reduce our legacy CPA fixed fees. However, we secure incremental additions to the fleet through to 2025, increased leasing opportunities under the CPA, and incremental fixed fees associated with the extended term. Further, the add-on owned aircraft provides us with additional tax shields that will enable significant cash tax deferrals in the near term. One important aspect of the amendment is the introduction of an annual cap on potential controllable cost overruns.
Annually, a comparison will be made between the actual costs incurred and the controllable revenue. If overall actual controllable costs incurred are more or less than $2 million as compared to the controllable revenue, a true-up will be made. This significantly reduces Chorus's margin risk, providing tremendous fixed fee earnings stability. In connection with the amended CPA, Chorus will also secure an equity investment from Air Canada of $97.26 million. Chorus shares will be issued to Air Canada at 6.25, which represents a 5% premium to the five-day VWAP as at the close of trading on January 10. On closing, it is anticipated that Air Canada will hold approximately 9.99% of our issued and outstanding shares.
Chorus will enter into an investor rights agreement with Air Canada, which will include a 60-month commitment by Air Canada, with limited exceptions, to hold its investment for five years, to participate in the Chorus dividend reinvestment plan, and abide by customary standstill provisions. Air Canada will also have a seat on the Chorus board and intends to nominate Mike Rousseau, Air Canada's Deputy Chief Executive Officer and CFO. I look forward to welcoming Mike to our board as his expertise will be truly valuable as we continue to execute on our growth and diversification strategy. Taken together with the extended term of the CPA, we view this as a tremendous vote of confidence in Jazz and Chorus by Air Canada. Indeed, this provides stability and strength to our strategic partnership, secures and enhances Jazz's position in Air Canada's regional network, and endorses Chorus's growth and diversification strategy.
The equity investment from Air Canada will help Chorus modernize its fleet with larger aircraft, which lowers perceived operating costs and addresses a growing demand in the industry. Chorus will use approximately 60% of the investment proceeds to purchase 9 new larger-gauge CRJ900 aircraft, which, in turn, will generate additional lease revenue under the CPA. Chorus has conditionally secured the right to acquire these aircraft for delivery in 2020. Chorus will utilize the balance of the proceeds to grow our leasing business outside of the CPA. In total, the CAD 97.26 million equity investment will be levered at approximately 3-to-1, 3-to-4-to-1 ratio to enable an enhanced lease portfolio value of approximately CAD 400 million-CAD 500 million and corresponding growth in our lease revenues.
Further, Air Canada is providing Chorus with preferred partner status on the operation of aircraft up to 50 seats, with a right to match third-party offers. The Jazz pilot mobility program with Air Canada will be enhanced and continued and will contribute to further cost reductions. This is good news for our employees as well, given the certainty of operations out to 2035, at least. We expect to continue to generate the cash flow necessary to support the current dividend and remain committed to building additional value with continued growth in our leasing business, which is further enabled with this deal. I do note that the CPA amendments and the investment by Air Canada are tied, and both are effectively conditional on the ratification of amendments to the collective agreement between Jazz and its pilots, as represented by ALPA.
The tentative agreement is aligned with the term of the amended CPA to 2035. I extend my sincere gratitude to ALPA and the Jazz pilots for working with us on this unique opportunity to enhance the Jazz position in the Air Canada regional network. The ratification vote is expected on or before February 1, and we'll have no further comment until then on this agreement. So the remaining slides have more detail and cover some of the primary changes under the amended CPA. So I'll pass it over to Jolene to take you through those.
Thank you, Joe, and good morning, everyone. I'm going to start on slide 4 of the presentation material that Natalie spoke of earlier. As you are aware, we have 2 primary sources of revenue under the CPA: aircraft leasing revenue and fixed fees related to the contract flying services we provide. The amended CPA provides for minimum contracted revenue of approximately CAD 2.5 billion. Of this total contract value, CAD 1.6 billion represents contracted lease revenue, and CAD 858 million is fixed fees related to contract flying. Aircraft leasing is driving about 65% of this contracted revenue, providing further earnings diversification in line with our strategy. I'll ask you to turn to slide 5.
While we do see an overall combined reduction in contracted revenue in 2019 and 2020 relative to the current agreement, the reduction is more than offset in the 2021 to 2025 period by increased leasing revenue associated with nine incremental CRJ-900 aircraft, which will be added to the fleet in 2020. Substantial value is created over the extension period, with overall incremental revenue of CAD 940 million being achieved under the amended agreement. In addition, there's a significant opportunity for Chorus to increase its contracted lease revenue beyond 2025, and I'll explain this on a subsequent slide. Turning to slide six, I'll provide the additional detail on the CAD 1.6 billion contracted lease revenue associated with the agreement.
We have essentially maintained the existing contracted aircraft lease commitment to the end of 2025, which totals CAD 980 million in lease revenue and includes 3 Q400 aircraft leases which expire in 2023 that will not be renewed. Please note that the debt will be retired concurrent with the 2023 lease expiry, so there's no residual value exposure for Chorus. As indicated earlier, we will add 9 CRJ900 aircraft leases in 2020, and the amended agreement will extend 12 Q400 aircraft leases to 2030. Combined, these leases are valued at CAD 420 million in incremental revenue. The amended contract also includes the addition of 5 more leased aircraft in 2025 at market lease rents. Because the specific type of aircraft and corresponding lease rates have not yet been determined, we've included an estimated lease commitment value of approximately CAD 210 million attributable to these 5 aircraft.
And added to this, we will have new opportunities to lease more of the existing aircraft to Air Canada post-2025. The amended CPA stipulates that Jazz will operate a minimum of 80 covered aircraft for the term extension of 2026 to 2035. These aircraft are not laid out by specific type other than the requirement that the 80 aircraft are to be in the 75-78 seat range. On average, between 2026 and 2030, we will have lease commitments from Air Canada for 33 aircraft. And on average, between 2031 and 2035, we will have lease commitments from Air Canada for seven aircraft. However, during the time period from 2026 and beyond, we will own 53 aircraft in the 75-78 seat range, assuming no disposition of currently owned fleet.
As such, the most likely source for Air Canada to meet its operating covered fleet commitment to Jazz is from Chorus-owned aircraft. We've not accounted for any of this opportunity in our contracted lease revenue figures. And also note the debt paydown associated with all aircraft leased under the CPA is concurrent with the expiration of the relevant leases. We, therefore, have no debt exposure on any owned aircraft operated under the CPA. And in addition, 19 of our owned Q400 aircraft leased under the CPA contain put and call rights at the end of the current lease periods, which range from 2025 to 2028, and provide Chorus the ability to put the 19 aircraft to Air Canada at fair market value. Slide seven provides the breakdown of contracted lease revenue over various periods. So you can see in what period the incremental value of CAD 630 million is achieved.
Turning to slide 8, it provides additional detail on the further leasing opportunities that exist under the amended CPA post-2025 that I just spoke to earlier. You can see here the substantial number of Chorus debt-free owned aircraft that are available for lease to enable the 80 covered aircraft minimum. If Air Canada chooses not to utilize these aircraft for operation in the Jazz CPA, Chorus will pursue other opportunities such as leasing to another operator, selling, or parting out the aircraft. Now we'll move to a discussion on the covered aircraft and contracted fixed fee revenue. Turning to slide 9, this table lays out our minimum covered aircraft in the amended agreement and also shows a comparison to the current CPA. The amended CPA provides Jazz a minimum covered fleet commitment from Air Canada that enhances our footprint within Air Canada's regional network.
The current CPA has Jazz exiting the operation of the CRJ-200 fleet by 2020. The amended CPA includes a covered fleet of 15 CRJ-200 aircraft to 2025, and these aircraft will be subleased to Jazz by Air Canada. The amended CPA allows Jazz to further modernize the fleet of covered aircraft. We will be exiting the 37-seat turboprop fleet earlier than planned, while increasing the number of more modern, larger-gauge equipment. This will allow Jazz to continue to serve long-range regional routes and affect an increase of roughly 2% in seats from 2019 to 2025. There's an added benefit with the addition of the 9 new CRJ-900s in 2020. In our Canadian operation, we have been sheltered from cash taxes to date by the use of tax depreciation on aircraft and loss carry forwards, which has limited our cash taxes to $2-$4 million per year.
We are now at a point where we have utilized a substantial portion of those deductions and, as a result, would expect to pay higher cash taxes in the future. The investment in the 9 CRJ-900s will provide substantial tax shelter at a rate of 25% declining balance per year. As a result, we expect the increase in cash taxes will be substantially offset by the impact of these investments. We expect current taxes to be more in the range of $10 million per year for the next number of years. The transition of the fleet is expected to take time to implement. It starts with deliveries of 5 CRJ-900s, which will be sourced and leased by and then leased to Jazz by Air Canada, expected to begin in the first half of 2019.
The Dash 8-100 aircraft that are exiting the fleet are owned by Chorus and do not have any debt associated with them. We will pursue a variety of opportunities with these aircraft. The Dash 8-300 aircraft exiting the fleet are leased from third parties. All 19 owned Dash 8-300 aircraft continue to be part of the covered fleet until 2025. As mentioned earlier, of great value to Jazz, the amendment achieves a minimum covered fleet commitment beyond 2025 of 80 aircraft with at least 75-seat capacity. The amended CPA will generate a total of $858 million in contracted fixed fee revenue over the course of the agreement, an incremental value to Chorus of $310 million, as shown on slide 10. As indicated earlier, the amended CPA includes parameters which limit annual rate erosion to a maximum of $2 million.
This is a stabilizing and significant change from the current CPA, which contains no protections for annual variances. The annual rate-setting process will continue. However, at the end of each year, the parties will reconcile the actual controllable revenue versus the controllable cost, and a true-up of any overall differences that are greater than CAD 2 million will occur. With this change, the previous 10-year rates set with Air Canada for crew costs are no longer valid, as they are now included in this annual true-up. This annual reconciliation limits our downside and upside to CAD 2 million and significantly enhances the stability of the fixed fee earnings. Contracted fixed fee revenue under the amended agreement reduces by CAD 36 million in each of 2019 and 2020, as we early up the move to market-based fees.
2021 through 2025 fixed fees are CAD 308 million over the five-year period, as compared to CAD 325 million under the current CPA, a decrease averaging about CAD 3.4 million per year. The 2026 to 2035 extension creates added fixed fee revenue of approximately CAD 400 million, more than offsetting the near-term reductions with positive net present value. The contracted fixed fee revenue noted here does not include amounts related to performance incentives, given they are variable in nature and are to be earned through meeting certain operational targets defined in the agreement. The measures under the new arrangement continue to be the same: on-time performance, flight completion, customer satisfaction, and luggage. Maximum available performance incentives will reduce from CAD 23.4 million in each of 2019 and 2020, and CAD 12.1 million in 2021 through 2025, to levels more consistent with market norms, which average approximately CAD 3.4 million per year over the term of the contract.
And now I'll turn the call back over to Joe to summarize for us.
Thank you, Jolene. As I noted at the beginning, we are very pleased to have achieved this agreement with Air Canada and believe this deal addresses the primary concern permeating the market, being the longevity and strength of our partnership with Air Canada. The new agreement resolutely addresses this issue and provides Chorus the continued cash flows to support the dividend. We trust investors will appreciate the tremendous value this new deal will create, assuming the conditions precedent are met. The amended CPA will address the legacy cost issues by bringing them in line with industry standards. It will set the foundation for the next 17 years from which we can continue to build our regional aviation leasing business and support services worldwide. Air Canada's commitments are a vote of confidence in Chorus and Jazz.
These commitments demonstrate that the strategic partnership between Jazz and Air Canada has never been stronger. I would like to thank our partners at Air Canada for working with us to achieve a win-win for both parties. I'd also like to thank my skilled team here at Chorus and Jazz for their efforts in achieving this agreement. We will remain focused in the coming weeks on satisfying the conditions precedent to this deal and will update the market accordingly. We are truly committed to delivering additional value to our shareholders, employees, and other stakeholders. With that, we will open the questions to questions from the panelists.
At this time, I'd like to remind everyone, in order to ask a question, please press star, then the number one on your telephone keypad. Again, that is star one in order to ask a question.
We will pause for just a moment to compile the Q&A roster. Your first question comes from Doug Taylor with Canaccord Genuity. Your line is open.
Thank you. Good morning and congratulations on the new agreement. I want to start with a couple of questions about the capital required here. You mentioned you're going to use leverage along with the new equity injection to effectively have $400million or $500 million in capital. Now, do you see that as being enough to satisfy all of your commitments with respect to the fleet through 2025, and then there may be additional capital requirements thereafter? How should we think about that?
Well, with the deal, basically 60% of the equity that we're raising, we will be leveraging it at about 4-to-1 to acquire the new CRJ-900s.
So that leaves us with, aside from the capital that we presently have available for third-party leasing, roughly another CAD 40 million, which we expect to deliver 3 to 4 to 1. So we do not have any other commitments for aircraft in the deal with Air Canada until 2025, when we do have a commitment from Air Canada to lease at least 5 of the larger-gauge airplanes at that time. So the fleet is pretty well set now in this agreement out to 2025 with the exit of these Dash 8-100s and a considerable investment in upgauge in additional CRJ-900s.
So effectively in 2025, with additional aircraft, you have to make some choices then with respect to financing whatever aircraft are being added to the fleet based on those aircraft, which are not yet known. Am I understanding that right?
That's correct.
So we have no other obligations to provide airplanes under the CPA at this time other than those 9 aircraft, which will be delivered in 2020 actually next year.
Yeah. We don't intend to hold the money out to 2025. We'll deal with 2025 acquisitions at that time. Yes.
You'd provided previously a schedule in some of your marketing materials or slide decks that kind of showed the breakdown of the fixed fee versus revenue. And you've updated that today. But I just want to understand this updated agreement relative to that previous schedule. I understand. So reducing the fixed fee in 2019 and 2020 to market rates. Now, the average for 2021 to 2025 for the fixed fee portion was previously $65 million. It's slightly less now. And then for the following 10 years, about $40 million a year, pretty much flat or a straight line.
Am I thinking about all that correctly?
Yes, you are. That's correct.
And that $40 million fee for the 20, I mean, I know it's a long way out, but do you consider that to be consistent with market rates then at that point? I just want to understand. Go ahead.
Yeah. We do. The market generally on fixed fees has decreased over the last number of years, and it's gotten to a level, frankly, that we feel there's not a lot of room for it to go down further. The other thing that you have to consider on the fixed fees when we compare ourselves to other operators is the risk that operators have on the costs. And that's one thing that we have addressed here by having these guardrails in place so that we can never be more than $2 million off on the controllable costs.
So we expect then to see the full result of the fixed fees going to the bottom line. So we believe that that is where the market is and will continue to be because we don't see anything driving up the market for fixed fees. We've seen them come down to these levels. And that's why, of course, we're diverting more of our earnings into aircraft leasing. And we will start to see a pickup in 2020 as a result of these 9 aircraft coming in. And as we've said, when you look at our contracted revenue, 65% of those revenues come from leasing. And we take great comfort in that. It's a market that we now know and understand and believe that the quality of that revenue stream is certainly a good one.
So it's really been a trade-off to some extent on the fixed fee for the increased lease revenue, which we like.
And I'll just add one more thing to Joe's comments. The minimum covered fleet reduces from 105 to an 80 minimum in 2026 as well. So you have to take that into consideration kind of when assessing the fixed fee level.
Okay. The reduction in the fleet with a significant increase in the number of larger aircraft that have not yet been sourced.
Understood. Two more small ones for me. One, can you update us on the Dash 8-300 reinvestment or refurbishment program, if there's any changes made to that and what's remaining? And then the second, you'd had, as part of your previous agreement, been buying out some of the contracts for some of your, I guess, longer-tenured pilots and things like that.
Is there any change in your outlook in how much capital or the spending level on those types of activities as part of this new agreement? I'll pass the line. Thank you.
Well, certainly with the 300s, we completed 8 life extensions on the 300s. And as you can see from the fleet table, there's a continued commitment on that fleet out to 2025. So there's no change at all anticipated in the program. As we complete those aircraft, they will be leased to Air Canada. And on the pilot agreement, we do not anticipate early retirement packages, etc. That's not something that we're planning on here. And as we've said, now with the rates, the pilot rates are really part of our controllable revenues and costs and will be part of the true-up going forward.
Thank you. Next question comes from Tim James with TD Securities.
Your line is open.
Thank you. Good morning. I'm just wondering if you could talk about what catalysts might occur over the long term, really, that might drive this potential increase in additional lease extensions or renewals that you talk about.
Well, under the contract that we have here, we have a number of 75-seat airplanes that are scheduled to enter into the fleet. And those are the aircraft that are the opportunities for us going forward beyond the additional 9 that we have coming in in 2020. And I think Jolene alluded to that in her comments.
Yeah. Sure, Tim. Slide 8 of the presentation lays out the fleet that we have under commitment as far as leased fleet throughout to 2035. We've laid it out to show you kind of the end-of-year fleet counts that we have lease commitments for.
So you can see between 2026 and 2030, we moved from 44 aircraft being committed at the end of 2026 to 26 aircraft being committed under lease at the end of 2030. Then you can kind of see it continue along there to 5 aircraft under lease commitment as at the end of 2035. We have, with the CPA, though, a minimum covered fleet commitment for Jazz to operate of 80 aircraft in the 75-78-seat range. So the opportunity for us is to lease those aircraft that we own that are not currently committed under lease to enable Air Canada to meet that 80 minimum fleet commitment. And we've not accounted for any of those dollars when we talk about contracted incremental revenue. So the $940 million, which $630 is contracted lease revenue, we haven't factored in anything beyond what we know we have in hand.
Okay.
And I guess where I'm trying to go with this is just to understand, if I take the view over the long term that Air Canada is going to keep its regional capacity flat or grow it slightly in line with GDP, whatever metric you want to use, and I want to assume that Chorus continues to be a partner with equal significance to what it is today, is it fair to assume that it's likely Air Canada will take up and use that capacity that would otherwise be declining? I mean, is that what I need to is that the view I need to have to kind of believe that that opportunity will get fulfilled over time?
Yeah. I think you might be mixing up the covered fleet perhaps with the lease commitments.
So we have a fleet commitment that Air Canada will operate, Jazz will operate on behalf of Air Canada, 80 aircraft in the 75-78-seat range from 2026 and beyond. We've just not named those aircraft by type.
Okay. I see. I see. Yeah. Yeah. No, I was getting too crossed over there. Okay. Okay. My next question, just kind of a big picture question here. What could go wrong with this in terms of where are the risks going forward? I mean, it sounds very positive getting the extension, the better visibility through 2035. I mean, where do the risks lie in this? What could go wrong? What could cause earnings or cash flow to be less than anticipated?
Well, I think Air Canada itself is very healthy, and they've done a tremendous job with the airline in terms of its prospects and its results, etc.
As Air Canada remains healthy, we're a big part of Air Canada's network. As a matter of fact, we're growing the footprint for Jazz as a result of this arrangement. The revenues, as we've said, are contracted. There's no provision other than certain force majeures or something along those lines, which would change that. It's one of the benefits of being in a capacity purchase agreement is that generally you are protected from the ups and downs of the business, etc. This is the third time now that we have renegotiated the CPA with Air Canada. The difference this time, I think, is that with this change now, all our costs are at market, really, with respect to Air Canada.
So a lot of the issues in the past have been driven by the fact that some of our costs are above market as a result of the original CPA, which we entered into in 2006. Now that has been really totally addressed by this change. And as a matter of fact, we've even de-risked it further, as we talked about, by having the guardrails on the rates. So we feel that this is, of all the amendments that we've made, certainly the most predictable and stable approach to the business. And I think with Air Canada's investment and support as well and coming on the board, I think that is an indication that the issues of the past have been really addressed and that, from our point of view, this agreement has been significantly de-risked.
Okay. That's great. Congratulations. Thanks very much.
Thanks, Tim.
Your next question comes from Kevin Chiang with CIBC. Your line is open.
Hi. Good morning and congrats on getting this across the finish line here. Just a couple of, I guess, maybe housekeeping questions for me. You've noted in your presentation and in your press release as well that it sounds like Jazz will become, I guess, a preferred partner as you've extended out the CPA. I'm just trying to figure out what it is. Is that a measurable piece of data we can look at? Is it based on market share or percentage of block hours that go into regional flying that has to go to you? Or does it maybe reflect increasing work you'll do on their behalf? I know you do some ground handling and some ticket agency stuff.
Is there more of that to be done, or is this more qualitative in nature and maybe not easily measurable kind of on a year-in-and-year-out basis?
Well, I think we are increasing Jazz's footprint as a result of this agreement. We will see CRJ 200s operating beyond the original time frames. We will see really an additional, it's actually 14 CRJ 900s because 5 will be entering the fleet this year, as we mentioned, which actually Air Canada sourced. And then, of course, we have the 9 that we are purchasing and leasing in 2020. So by all of those measures, we are increasing our footprint and our relevance within the Air Canada network. And the recognition that Jazz will be the 75-78-seat operator from 26-35, which is where regional operations are going.
Although the fleet hasn't been finally determined, they've really signed up for that with us. I think all of those things are votes of confidence by Air Canada in terms of Jazz. And for Chorus as well, we've also negotiated the arrangement on less than 50 seats, where we are the preferred source of aircraft for those going forward as they are required as well, which was something that we previously did not have. And again, I think that shows an increase in the Chorus and the Jazz footprint and its relevance to Air Canada.
That's helpful. And then on the Air Canada investment into equity investment into Chorus, you note that 40% of that capital can be deployed outside or will be deployed outside of the CPA. Just wondering, have there been any changes in your outlook, I guess, related to CAC?
Have you become more bullish and so looking to raise capital to reflect that pipeline? Just wondering if anything's changed in the past few months or quarters that may require more capital to be injected into that operation.
So we have, I believe, some good opportunities there that we're working on right now and hope to be able to get some of these across the line before too long. I think we've said before that the capital that we had, we were looking at mid this year. This does give us additional capital, which allows us to continue to grow that business, but probably give us another six to eight months beyond that. So we're in pretty good shape. And I think given the fact that we have this capital, we're able to look at some more significant opportunities in the marketplace as well. So that's actually helpful.
So what this does for us is really gives us the stability. And there has been some concern about where does Jazz fit in Air Canada's plans and how long is the relationship going to go, etc. And what this does is, I think, effectively puts those concerns to bed, and we're able to get on with it. And that's what's important to us, is to grow and diversify the business.
That's helpful. And maybe last one for me. When you originally raised capital for Chorus Aviation Capital, it was through convertibles with an exercise price of CAD 8.25. I think you raised equity about a year later, say 18 months later, at a higher price. And now you're issuing equity to Air Canada at CAD 6.25. I'm wondering, did you have any conversations with Fairfax as a key stakeholder given their early investment into your leasing business?
Were they, I guess, any thoughts that they had on an equity issuance price that was, I think, roughly $2 below their exercise price?
Well, we have a good relationship with Fairfax. And I think in the past, we've spoken with them about the Air Canada relationship and the strength of that and that sort of thing. So I don't anticipate any problems with that and issues.
Perfect. That's it for me. Again, congrats on this deal getting across the finish line.
Thank you.
Thank you.
Your next question comes from Cameron Doerksen with National Bank Financial. Your line is open.
Yeah. Thanks. Good morning. Just, I guess, maybe a few clarification questions from me. Just first on the fleet, I mean, the CRJ 900s. So if I understand correctly, 5 are going to come in this year that are sourced from Air Canada.
But it's really the really ones, I guess, that matter from a financial modeling perspective. From our perspective, it's the 9 that you'll acquire in 2020 that'll be leased. Can you just maybe talk about sort of the timing of those? I mean, is that something you expect to have fully in operation at the beginning of 2020, or are they going to kind of come into the fleet over the course of 2020?
Yeah. Cameron, they'll come in over the course of 2020. So for purposes modeling, you can assume 3, say, come in by mid-year and the remaining by the end of the year. And they'll kind of be gradual.
Okay. And I guess a question on the preferred partner for bidding up to 50-seater flying.
Can you just maybe talk a bit about how that works and what opportunities potentially there might be with additional 50-seat aircraft flying in the future?
Yeah. Really, what that is, is that as Air Canada looks at requirement for aircraft in that seat range, that we would be a preferred supplier. So we will have the opportunity to actually take the business if the business is there and make our decision as to whether we want to take advantage of that at that time. So that's really how that works. We have no particular plans right now. I think Air Canada just wanted to get this deal with us cemented, etc. But we will be pursuing opportunities in that regard. So that's, and of course, we do have aircraft that are coming out of the fleet, but it's a different type and style of flying.
We'll be looking at those opportunities.
So basically, if the economics look decent for any potential demand that Air Canada has, then you would basically have that business. But if you don't like the economics of it, some of Air Canada would then go to another bidder?
That's exactly right.
Okay. Okay. Understood. I'm just curious. Also, maybe final question for me, just on how this sort of deal came together. I'm wondering if it was something that was sort of that you mutually agreed to meet to make some changes, or was it something that Chorus initiated or Air Canada initiated? And also, I guess, how the Air Canada investment in Chorus kind of came to pass. Is that something that you guys were looking for specifically, or is that something that Air Canada wanted?
Just any kind of background on how this came together would be very interesting.
Well, as we said in the past, and especially since we did the last CPA amendment, we've had a very good relationship with Air Canada. We're always talking about opportunities to do things better and what's happening in the market. The Canadian market is changing. Air Canada is seeing some of the ultra-low costs there, increased competition, etc., the growth of Encore, etc. We consistently talk with Air Canada about fleet, about the fleet mix, etc., and looking to assist Air Canada in being itself more competitive in the marketplace and being a good partner in doing so.
That led to discussions about where the opportunities are and how we may be able to amend our arrangement, but always in the spirit of finding a win-win solution for both sides, having to work for shareholders of both Air Canada and Chorus. In this deal, it was a number of months being negotiated. It is complex because there are a lot of changes, etc., including, of course, the pilot agreement that goes up for the term of the CPA. So a lot of different moving parts. There was nobody in particular, I think, that initiated it other than the fact that as the markets change, we recognize that Air Canada needs to look at changing to address the market dynamics. I think we're seeing regional carriers move more and more into 75- to the larger gauge aircraft. It gives you a lower operating cost.
Some of the congestion at the airports, you get the larger gauge aircraft. And I think from what we've seen, Air Canada has been using a lot of our 900s on long-haul, especially transborder routes, feeding routes like Chicago, Vancouver, or Dallas, Vancouver, that sort of thing. And I think the 900s seem to be very successful in addressing that market. And the Dash 8-100s are obviously older aircraft and have a higher perceived operating cost, etc. So a lot of those types of things came into the discussion. And I think that's where we set about trying to find how to make this work. And I think the fact that we are moving to market competitive rates on the fixed fees, I think, is good for Air Canada. It helps with its cost reduction program in the near term.
But then we are able to source aircraft, lease them to Air Canada, get an extended term, and strengthen the relationship. And frankly, we are still very excited about the growth of the third-party leasing business. And that's why the equity helps in terms of providing the equity for the CPA fleet and giving us then an amount that we can continue to grow our leasing business without having to go back to capital markets, etc.
Okay. No, that's great. Thanks very much.
Again, if you'd like to ask a question, please press star one. Your next question comes from David Ocampo with Cormark Securities. Your line is open.
Good morning and congrats on getting the deal done.
So since there's more certainty on the revenue from the CPA and the additional CAD 40 million that you can use for CAC here, at what point does CAC grow organically now that there's more visibility there?
So I guess, David, I think we've talked about this in the past as well, that even without this additional capital that's been raised here with 40% of it being deployed with CAC, on its own, CAC is generating cash flow that can be turned around and invested in the business. So that's already happening. It's just it'll happen to a greater degree. And I guess as far as kind of where we take the business, we'll monitor that as we go as far as the opportunities that exist. We want to continue to diversify, and we see that as a great source of diversification and earnings.
It's a business that we know well and we've executed well on. As far as where we'll take it, we'll see as time moves on here.
What are your thoughts on the dividend here that you guys don't have to go to market? Are you guys committed to the dividend for the long term?
Basically, what we've said is that we continue to have the cash flow to support the dividend. That's our message to the market. So any speculation or change or anything on the dividend is subject to the board. We recognize it is important to our shareholders. It was one of the things that in making these changes, we were very conscious of.
Just some quick ones here.
The pilot mobility program, is that still based on the relative share of your regional capacity with Air Canada, or has that changed?
So because this is part of our collective agreement and its ratification process, we're not able to comment on that at this time.
Okay. And the incentive revenue, the step down there, I'm assuming this is the same as the old agreement that you have, that this does not have a real impact on your earnings since this is kind of paid out in variable comp?
Yeah. As you know, a large portion of what we had been earning was paid out under variable comp. So I agree.
Okay. Thank you. That's all from me.
Your next question comes from Turan Quettawala with Scotiabank. Your line is open.
Yes. Hi. Good morning. And thank you for taking my questions and congratulations on the deal here.
I guess I will just apologize if I missed this maybe earlier in the presentation. But just looking at the Q400 fleet, obviously, there's a change in the aircraft mix here with more CRJs coming in. So just wondering, those 44 Q400s that you have in the fleet right now, those are owned, if I'm not mistaken, and that goes to 36. So what happens to the rest of the aircraft? Does that sort of open up an opportunity for leasing those to third-party?
No. Actually, of the 44 aircraft, only 34 are owned. 10 are actually third-party leases that are done through Air Canada. And we have the continued commitment on the fleet. There is a noted 3 aircraft reduction happening in 2023, where Air Canada has said that they are not interested in extending 3 of the Q400s beyond that date.
I think there's a move afoot here, of course, clearly to move more into CRJ900s. The CRJ900s in a lower fuel price environment and give a lot more flexibility in terms of longer stage lengths and its adaptability to a changing network. And that's what we're seeing here in terms of the change in the fleet plan. So three of those aircraft will be coming out that we own in 2023. As Jolene mentioned, the debt will be paid off, and we will be looking to remarket those airplanes at that time.
Okay. That's helpful. Thank you very much. And I just overall, Joe, if you look at the aircraft and the fleet changes that you're making, it seems overall an increase in the capacity that you guys are going to be flying for Air Canada.
Can you just give us a sense of maybe how much that's going up overall?
I believe we mentioned in the notes there that it was about a 2% increase in seats. Yeah.
Yeah. But what about, I guess, the stage lengths also potentially higher or not really?
Oh, in terms of ASMs, I would say the ASMs would be substantially more because of the type of flying that the CRJ900s would do. And we have not done that calculation. And again, it depends on the fleet deployment by Air Canada. But I think the success of the CRJ900s on long-haul feed groups and in many areas, I think this shows Air Canada's commitment that they've been very pleased with the production of that aircraft.
Perfect. Just last question from me here.
In terms of can you give us a sense of when you think about the third-party leasing and the growth that you're going to have over there under CAC, can you give us a sense of maybe how much of your leasing business will be connected to Air Canada in 2025?
I believe we have that on the chart. We presently have 34 aircraft in CAC on leases.
And yeah, that's not if you're looking for kind of a breakdown of revenue in 2025 between third-party CAC leasing and the Air Canada CPA contract, that's not something that we're sharing, Turan. But I think that from a modeling perspective, you have all the ingredients to kind of work through the deployment of the remaining CAC capital, which is about CAD 140 million when you add in what we have here achieved with this recent raise.
So CAD 140 million to be deployed. And as we indicated earlier, we're adding a bit of timeline to what we had indicated before. So prior, we were saying mid-2019, we would have the additional funds deployed. Now we're adding 6-8 months to that for what we've picked up here.
Okay. Perfect. Thank you very much.
There are no further questions at this time.
Thank you very much. And if there are no further questions, we'll conclude the call. And once again, thank you for jumping on at the last minute. This concludes today's conference call. You may now disconnect.