Chorus Aviation Inc
TSX:CHR
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Chorus Aviation Inc
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Good morning. My name is Sheryl, and I will be your conference operator today. At this time, I would like to welcome everyone to the Chorus Aviation Inc. Fourth Quarter and Year-end 2018 Earnings Analysts Call. [Operator Instructions] Ms. Nathalie Megann, Vice President, Investor Relations & Corporate Affairs, you may begin your conference.
Thank you, operator. Hello, and thank you for joining us today for our fourth quarter and year-end 2018 conference call and audio webcast. With me today from Chorus are Joe Randell, President and Chief Executive Officer; and Jolene Mahody, Executive Vice President and 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 statements and information which are subject to various risks, uncertainties and assumptions that are included or referenced on Page 55 of our management's discussion and analysis of the results and operations of Chorus Aviation Inc. for the period ended December 31, 2018, 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 and adjusted net income. Please refer to Section 18 of our MD&A for a discussion related to the use of such non-GAAP measures.I'll now turn the call over to Joe Randell.
Thank you, Nathalie. Good morning, everyone, and thank you for joining us. I am tremendously pleased with how we ended 2018 and with our start to 2019. On total revenues of $1.5 billion, we generated adjusted EBITDA of $343 million in 2018, a 19.4% increase over 2017. Each of our operations performed well and reached important milestones that strengthen our company. These successes help advance our vision to transform into a worldwide provider of regional aviation services.In January, we announced we had successfully negotiated an amendment and extension to the capacity purchase agreement revitalizing our strategic partnership with Air Canada and marking a pivotal development in our transformation. The change has secured Jazz's place in Air Canada's regional network, extending our relationship under the agreement by an additional 10 years out to 2035 and enhancing our relevance to Air Canada as they consolidate more of the regional -- overall regional capacity into Jazz.This is the longest term strategic partnership between Jazz and Air Canada thus far, and one of the longest CPAs in the industry, providing long-term certainty for our employees, investors and other stakeholders. The economics of the agreement are strong for Chorus with incremental commitments in fixed fees and aircraft leasing revenue at $940 million and operating fleet commitments that create additional future leasing opportunity post 2025.In total, the 17-year contract will provide a minimum of $2.5 billion in contracted revenues of which $1.6 billion will be generated from aircraft leasing. For Chorus, the amended CPA and investment by Air Canada supports the continued transformation of our business by migrating CPA earnings to aircraft leasing.The $97.26 million equity investment from Air Canada will help us modernize the Jazz fleet with larger aircraft which lowers per seat operating costs and addresses a growing trend in the industry. We 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.These new aircraft will be delivered in 2020, and will be equipped with Bombardier new Atmosphere cabin which features a larger passenger living space, increased overhead bin capacity, more spacious lavatories, and overall improved aesthetic details to enhance the passenger experience. With the modernization and simplification of the Jazz fleet, we anticipate conducting up to 60 aircraft transitions over the next 2 years.We plan to induct 5 CRJ900s this year, which will be sourced by Air Canada. We will also add CRJ200s which are currently operated by Air Georgian. The Dash 8-100 aircraft will be exiting the CPA covered fleet earlier than planned, and we will be pursuing various alternatives for this equipment which is owned by Chorus.Once the fleet transitions are completed, we anticipate operating close to 80% of the Air Canada Express network capacity and we are well-positioned for future growth. As a reminder, an important aspect of the CPA 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 our margin risk, providing much improved fixed fee earning stability. This amended contract would not have been possible without the Jazz pilots and I commend them for recognizing and seizing this opportunity. The unprecedented term extension of their collective agreement to 2035 and the enhanced pilot mobility with Air Canada provide both labor stability and improved cost competitiveness. As Air Canada's preferred regional partner, we've become an employer of choice given the career growth opportunities under CPA.Now turning to our growing leasing business, yesterday we announced an agreement to acquire a portfolio of 6 regional aircraft with leases attached. The portfolio consists of 2 ATR 72-600s on lease to Azul of Brazil and 4 Q400s on lease with 2 of our existing customers that remain subject to customary closing conditions.In just over 2 years, Chorus Aviation capital has grown its portfolio to 40 aircraft valued at approximately USD 850 million with approximately USD 655 million in future contract lease revenue. This includes pending acquisitions and lease commitments for future aircraft deliveries. The portfolio is well-diversified, consisting of both turboprops and regional jets from all 3 regional aircraft equipment manufacturers and placed with 12 customers based on 6 continents.When you factor in the aircraft leased under the CPA, including those CRJ900 aircraft to be delivered in 2020, we currently have 107 aircraft under lease contract valued at approximately CAD 2.3 billion. We're maturing and building scale as a worldwide lessor. Since the start of 2017, we've raised net proceeds up CAD 401 million for equity investment in aircraft which if levered at a ratio of 3:1 yields approximately CAD 1.6 billion in investment capital.With the establishment of our new $300 million warehouse facility and the cash we have on hand, I'm confident the momentum achieved in our growth strategy will continue to build. The combination of being a highly experienced regional operator and our ability to manage every stage of aircraft life from origination to disposition, it's a strength that differentiates us from our competition.We can provide a wide range of services and can leverage the synergies across our organization to support our lessees. The addition of Q400 spare parts to our supply chain sales inventory in 2018 was another step in that direction. This was our first part of an in-production aircraft and is an aircraft type that is highly utilized around the world.We will continue to work on expanding our capabilities and services. We made progress in these areas when we received Transport Canada certification to conduct heavy maintenance on Embraer 135 and 145 regional jets, and welcomed our first international customer to Jazz Technical Services, airBaltic of Latvia to conduct airframe heavy maintenance on 12 Q400s. These accomplishments help build on our vision.Looking ahead to the balance of this year, our focus will be on operationalizing the amendments of the CPA and building our regional aircraft leasing segment. I'm very optimistic about the future and we will build more value for our stakeholders. I congratulate the Chorus team for delivering another standout year, and look forward to our future accomplishments together.Before passing the call over to Jolene, I'd like to say we were very pleased to welcome Mike Rousseau, who is Air Canada's deputy chief executive officer and CFO to our board meeting yesterday. His insight and expertise will certainly contribute to our future success. Having Air Canada as a shareholder of Chorus further strengthens and aligns our 2 companies, and their investment is a strong endorsement of the Chorus strategy.So with that, I'll now turn the call over to Jolene to take you through the fourth quarter financial results.
Thank you, Joe, and good morning, everyone. I'd also like to thank and congratulate our team for our successes in 2018 and so far this year. Together we built a great foundation from which to further grow and strengthen our organization. In the fourth quarter of 2018, we generated total revenue of $359 million versus $356 million in the same period of 2017. Adjusted EBITDA was $92 million, an increase of almost $10 million primarily due to growth in regional aircraft leasing.Quarter-over-quarter, our third-party leasing revenue grew by $10.4 million as we had the equivalent of 27 aircraft earning lease revenue for the quarter as compared to 18 aircraft in the fourth quarter of 2017. Leasing revenue under the CPA increased by $2.4 million, related to the additional Dash 8-300 aircraft that have completed their extension life program and are now earning lease revenue and changes in foreign exchange. These increases were offset in part by declines in performance incentives and other revenue and increases in certain operating costs.Adjusted net income grew by $11.5 million over the period to $35 million, mainly due to the increased adjusted EBITDA I spoke about and lower foreign exchange losses on working capital that amounted to $4.7 million, and a $400,000 decrease in depreciation. These were offset by increases of $1.2 million in interest costs related to debt on new aircraft and income tax expense increases of $2.1 million respectively.Unrealized foreign exchange losses on long-term debt of $30.5 million had the impact of decreasing net income by $18 million over the same period in 2017, bringing it to $2 million. This unrealized loss was offset by the $11.5 million increase in adjusted net income and decreased employee separation costs of $1 million.As a reminder, our aircraft-related debt is denominated predominantly in U.S. dollars. We convert the debt associated with the aircraft leased under the CPA each quarter to Canadian currency, thereby resulting in unrealized foreign exchange gains or losses. Further, debt payments are made in U.S. dollars and the corresponding lease revenue is earned in U.S. dollars, which helps mitigate the impact on cash flow.For the year ended December 31, 2018, we grew adjusted EBITDA by 19.4% to $343 million. This growth was generated by $47.3 million increase in the regional aviation leasing segment as we had the equivalent of 24 aircraft earning lease revenue compared to 9 for the year 2017. Increased earnings in regional aviation services of $8.5 million also contributed to this growth. This was generated primarily by aircraft leasing income under the CPA, associated with the completion of ESPs on Dash 8-300 aircraft and the annualization of the leasing revenue on 5 CRJ900 aircraft that began earning lease revenue in the second quarter of 2017.Adjusted net income was $121.8 million for the year, an increase from 2017 of $6.4 million or 5.5%. And this was due to the $55.8 million increase in adjusted EBITDA previously described; lower foreign exchange losses on working capital which amounted to $1.6 million offset by increased income taxes of $20.5 million; additional -- an additional $17.4 million in depreciation primarily related to new aircraft; an increase in interest cost of $12.8 million related to additional aircraft debt in convertible units; and an increase in other expenses of $0.3 million.Net income was $67 million for the year, a decrease of $100.3 million for the same period of 2017. This decrease was primarily due to year-over-year changes in unrealized foreign exchange losses on long-term debt of $110.4 million and foreign exchange gain on cash held for deposits of $1.6 million. And these were offset by decreased employee separation program costs of $5.3 million and the previously noted $6.4 million increase in the adjusted net income.Looking ahead to the balance of this year, capital expenditure for 2019 excluding those for the acquisition of aircraft and the ESP and including capitalized major maintenance overhauls are expected to be between $36 million and $42 million. Capital expenditure for ESP and aircraft acquisitions are expected to be between $299 million and $302 million in 2019, and this does not include capital for future to-be-announced aircraft acquisitions.Given the fleet transition to occur as we implement the amended CPA and the fact that block hours do not impact compensation, we will not provide billable block hour guidance going forward. The amended CPA further simplifies the fee structure as we now have only a fixed fee margin for the range of operational services we provide under the Air Canada Express banner. As such, for each of 2019 and 2020, we anticipate earning $75.5 million in fixed fees per year as compared to $111.3 million in 2019.It is also worth noting that the maximum future available performance incentives reduced from $23.4 million in 2019 and 2020 to an annual average maximum available of $3.4 million for the term of the CPA. The near-term reductions are more than offset over the term of the CPA by incremental contracted revenue secured with the extension of the agreement including both fixed fees and aircraft leasing.As of today, approximately 3/4 of the total net proceeds of the $401 million raised to grow the leasing business has been committed and this includes deposits on future commitments and the investment in 9 CRJ900s that will be leased into the CPA operation. We anticipate investing the balance by early 2020 in new to midlife aircraft with long-term leases to a diverse group of high-quality customers around the world.For additional information supporting our projected guidance for the balance of this year, I'll refer you to Section 4 of the 2019 outlook section of our MD&A for the year ended December 31, 2018. In addition, we continue to evaluate the impact of the new standard for IFRS 16, and which -- for IFRS 16 which we'll have on the consolidated financial statements and also the transition approach that will be applied. We anticipate an increase in both total assets and total liabilities of approximately $10 million to $15 million as at January 1, 2019. Please see Note 3 of our 2018 financial statement for further information.Given our new segmented reporting format, I'll direct you to Section 21 of the MD&A for a breakdown of revenue in the regional aviation services segment and to Section 22 for the consolidated statements of income.And that concludes my commentary. Thank you for listening. Operator, we can now open the call for questions from the analyst community.
[Operator Instructions] Our first question comes from Walter Spracklin, RBC Capital Markets.
So Joe, leasing is -- you're pretty much 3/4 you mentioned through your $1.6 billion in committed capital. What percent do you like to go to or do you feel comfortable going to before you start looking at the new avenues of reloading on that? And given you've tried a few different avenues, can you talk a bit about some of the alternatives? Are you looking at one of the avenues that you've done before or could there be other opportunities now? Obviously, Air Canada is in the mix, just curious your thoughts on your opportunities there.
Yes, well, Walter, we're always looking at going forward how we fund our growth and we look at the opportunities that are there. And frankly, we're finding that as we grow, our opportunities live in terms of how we finance the growth. I think the achievement of the warehouse was a significant milestone for us. And our equity is expensive and the yield is high and that creates a challenge for us. But we are looking at a combination of things and of course, when you're in the leasing business, it is very much capital intensive and -- et cetera. So we are evaluating a lot of alternatives. We're looking ahead now. We've said that the capital that we have will allow us to move into 2020. And the pipeline actually looks very good. The opportunities are certainly there. And as we see our share price change as well, that changes our outlook as well. So we'll be looking at a number of alternatives.
Next question is on Air Georgian. Obviously, that contract with Air Canada has completed or terminated. Can you give any comment as to whether -- I mean it seems that you're set up nicely for that? Any comments there?
Yes -- no, the Air Georgian has approximately 14 CRJ200s, so we will be seeing some of those airplanes come over. We also will be welcoming their pilots and those that would like to come over, so that disruption there is minimized from an employee point of view. We already have CRJ200s in our fleet and this will increase the number that we operate for Air Canada. And the CRJ operation and all the Bombardier fleet now will be consolidated within Jazz. And I made a comment there in the script that our footprint is increasing. We've been at about 70% and that's sort of measured on a seat basis of the Air Canada Express network. And this -- and with this change will move us up to about 70%. And this will give us I think a lot more flexibility in terms of the movement of a fleet for Air Canada being able to deploy fleet in various operating environments, et cetera. And it's a significant transition. There's a lot of growth going on and a lot of changes, et cetera. And our focus certainly within Jazz over the next number of months will be managing that transition in a seamless way. So that's what we see happening now. So it's very busy, but it's -- it's exciting to be able to do this and to play a greater role in the Air Canada network.
And then Air Canada also announced a little bit of a reorganization of its domestic flying, some up-gauging into Rouge on eastern routes, I guess redeployment on the queue in the west. So net of Air Georgian, net of all of that, do you see yourself as being -- as doing net more, less or roughly the same level of block hours for Air Canada on a go-forward basis?
Well, I tend to look at it more in terms of fleet and that sort of thing. And I think the fleet is looking to be higher than it was under our original CPA. There's a lot of transition going on. I think the big change is the early retirement of the Dash 8-100s. There were 15 of those that we have been operating in the fleet. But of course, we're bringing in the 900s et cetera. So we're going to have from a fleet point of view a very large footprint in the Air Canada network. Beyond 2025 in the agreement, there's a minimum of 80, 75 or 76-seat aircraft. And of course, that's a big up-gauge to from a lot of the aircraft that we presently operate. The movement of Rouge on some of these flights and the consolidation makes a lot of sense. I think we're seeing though the redeployment of the Q400s in roles that are probably a little more suitable because the Q400 was operating on some stage lengths that were particularly long, 800 miles et cetera. And -- and I think it puts Air Canada in a stronger competitive position there. And we're seeing our equipment deployed and a combination of new routes, replacing Dash 8-100s and of course then the growth that comes from consolidating Air Georgian into -- a lot of the Air Georgian fleet into Jazz.
Last question here, Sky Regional, can you update us on when their contract with Air Canada ends and whether you'll be a bidder on that? Would that be an avenue for you to further expand your integration with Air Canada if that were to come up?
Well, I can't comment on the Air Georgian -- sorry, the Sky Regional contract, but we will be looking at opportunities in the 50-seat and underside, I think that's part of our agreement with Air Canada here. And going forward, we're going to continue to work with Air Canada to seize any opportunity that may be there for us. But I think Air Canada has a strong relationship with Sky Regional and it's there for some time. So we'll work with Air Canada and we will with Sky Regional be providing Air Canada with its Express network.
Our next question comes from Doug Taylor, Canaccord Genuity.
I'd like to talk about the third-party leasing business. First of all, yields have moved around quite a bit here in the last few months. I wonder if you'll comment on the pricing environment and the lease factors you're seeing with the -- within the regional aircraft leasing market?
We're seeing, as I mentioned, Doug, we've got a good pipeline of opportunities. This latest one was a portfolio buy and it's competitive, it's not a lot different than it was really a couple of months ago. As a matter of fact, I think the pipeline is probably a little more robust than it was last year. So we're optimistic on it. It is competitive. And so I don't really say that the yields have decreased significantly in this area. I think it has, they have probably more on the narrow-body side and wide-body side, we're seeing some -- from what I understand some significant compression there, but we have not witnessed that in our segment of the business.
And we're still pretty pleased, Doug, with what we're seeing. And it's still in the range of what we expect and what we kind of started with in our original business plan.
And so a transaction like the one you announced yesterday, I mean, should we think that the lease factors there -- I would assume that some of the aircraft are perhaps a little in midlife -- approaching midlife and that's filling out that kind of side of your portfolio? Can you talk to the lease factors on transactions like that relative to a new or near new aircraft?
Well, not going to kind of provide indication of those specifics on this deal, but when you look at a portfolio acquisition you're looking at a value of kind of the asset value and in combination, you're buying a lease attached as well, right? So that kind of go with the economics of the entire transaction. But with portfolio acquisitions, and we've done some in the past, we've done some back in 2017 when we started in with this one, the LRF will be different based on the age of the aircraft, but I can say they're still in our zone, right? We had indicated a 0.8% to 1% monthly lease rate factor is kind of the zone that we expect to see and we continue to see those.
And the average age of the aircraft in this portfolio is between 3 and 4 years. And I think I mentioned previously on calls that midlife is actually quite interesting to us though because we see some opportunities in the midlife aircraft side of there. And when we look at those in terms of residual value and looking at opportunities for that aircraft -- for that age of aircraft we're now in the part of parts business. And we look at that, the residual value both in terms of re-lease or sale, but also in terms of the asset and the economics it would deliver in a part of. So it makes a lot of sense. That will have the impact of increasing our average age as we move forward, but the returns are actually quite good. And I think we've got a good amount of comfort in terms of residual value.
So that leads me to my next question. I mean, the option overlooked other businesses which is MRO, the contract flying, the [ part-out ], the financials show a little bit of a decline still. Can you talk a little bit about the outlook there? And then as a second part, with some of the aircraft that are exiting the fleet related to the CPA, I mean, is there an opportunity for a little extra growth there? Is that where we would see it? Is that going to be material? And is the capital that you expect to recover from some of those aircraft meaningful in any way relative to the CapEx and as a source of CapEx?
Right. So a very good question. So with respect to the other revenues there, I think we've mentioned previously that we've seen some decline in some of the contract revenue in particular that Voyageur has been doing. It still has a very good footprint there, but we have seen some decline there. With regard to the MRO side, JTS has been very busy with the third party, et cetera. We do have more capacity in North Bay that we intend on focusing on more now that we've gotten our Air Canada relationship set up and now we're -- we've got the leasing really coming on to its own. So it will be more of a focus for us certainly going forward. And with these assets though in North Bay, we've been quite busy with these older assets. So some of them, the ones that we've already taken out, and we can expect the ones to be taken out we'd be pursuing more of these options. We've leased 2 other parties. In some cases, we parted them out. We're on our third freighter conversion of a Dash 8-100 and we think there are opportunities there. And some of the early Dash 8s that we took out frankly were starting to run up close to their 80,000 cycles, whereas now the Dash 8s that we will be taking out of the Jazz fleet have more life. So that gives us even more opportunities I think with those aircraft to pursue things. So again, we don't have a specific plan there that's included in our projections, but it's going to be a focus and North Bay will play a pretty significant role on those.
So the -- should we assume any material amount of capital recovered from the aircraft exiting or would you suggest that we treat that as upside if and when you do achieve that?
Yes, I think I would just treat it as upside because the other thing we -- we don't really have nailed down the actual fleet transition plan yet as to when those Dashes are coming out. There's still a lot of work to be done on the detail. So for your modeling, I would just treat it as it comes.
Our next question comes from Cameron Doerksen, National Bank Financial.
I guess a couple questions from me just I guess with regards to some financing decisions. I mean, I guess first thing I wanted to clarify and sort of notice is that the interest rate that you're paying on the leases and the CPA versus the aircraft financed in the third-party leasing business, there's about 100 basis point difference between the interest rate on I guess the debt associated with those aircraft. Just wonder if you can comment on why there's a pretty big discrepancy there?
So Cameron, I think it mostly has to do with timing, like, if you look at the aircraft leased under the CPA, a lot of that debt would have been secured back in 2011 I think when we started an initial kind of modernization campaign on the fleet. The increase in rates that would have occurred more recently would be averaged out in some of those numbers that you're seeing on the CPA, whereas the CAC debt is all relatively new within the last 2 years. So that's driving the predominant difference in the average debt numbers you're seeing there.
So if we think about the CRJ900s that are coming in, in 2020, is it probably more likely to be kind of the rate that you're seeing in the CAC debt that we would expect for those aircraft?
Yes, it's -- it all kind of depends on the kind of the nature of the actual deal and everything. But they will be a little bit higher than what we've seen historically. So you'll have to bump it up a little -- by some basis points.
And I guess a couple questions just on I guess capital. I mean, you mentioned that you've got probably more avenues available for you to raise capital to continue to grow the CAC business. I'm just -- and we definitely think I guess that was -- there's a -- the change with the regulations with regards to foreign ownership limits going higher. I'm just wondering if that was ever an impediment in the past to raising capital, the fact that there was an ownership limit set lower than what the new limit is going to be?
We've not really run into that up to now, but certainly as we grow the business and we get more interest from people outside of Canada and that sort of thing, it may provide us with more flexibility.
And then this final thing from me just on the DRIP. I mean, it wasn't I guess huge dilution, 1.7 million shares in 2018 were issued through the DRIP, but just wondering if you really need to have that anymore? You've got the $300 million in revolver. I'm just wondering if you really need cash and whether it makes more sense to not have the DRIP?
Yes, I mean, we don't see the dilution is hugely significant as you pointed out. And we do have a fairly high participation rate in the DRIP program. It's up in the 20% range. So we're delivering back some good cash to the organization that we are deploying into the leasing business. And we see a better use of that money kind of in the growth opportunity on the leasing side.
Our next question comes from Turan Quettawala from Scotiabank.
I guess first one, I just wanted to -- I was hoping you could help us understand a little bit in terms of the planes that are coming in on the CAC side. So you have 6 more ATRs -- sorry, 6 more planes total 2 ATRs 4Qs coming in, in Q1 of '19. Can you give us a sense of whether -- like, what the timing is on that?
Sure. So in total, we have 9 aircraft that are under -- I guess due to be yet completed, right? So the announcement that we did yesterday, the 6 portfolio acquisition, you can kind of assume for purposes of modeling that those will be all done and in place for I'd say the 1st of March or in and about there. And we have announced previously a couple of aircraft with JamboJet that were to occur in 2019. So those are going to be the tail-end of this year. We also have 3 Lion Air aircraft, if you recall last year we announced the Lion Air deal for 4 aircraft in total. We had one of those aircraft come in in 2018. The remaining 3 we're planning for 2019. We're actually working on some tentative dates now. So for your modeling, I would -- until we kind of nail down those dates, I would push them more towards the end of the year.
Oh, so the end of the year or -- okay. So like Q3-Q4?
Yes. Yes, exactly. Yes.
And then I guess just wondering based on -- so the decline that you're going to see in 2019 on the CPA revenue as well as the incentive revenue I guess it's about $46 million-$47 million of a decline on a year-over-year basis. Is it fair to assume that based on all these contracts that you've signed on the leasing side right now that you should be able to make up all of that?
Sorry, I missed the first part of your question, Turan.
So if you look at the CPA revenue, so you're seeing a decline of about $35 million or so I think from the $111 million to $75 million or something, right, for -- on the CPA side. And then there's another $11 million or so because you earned about $14 million or so of incentive revenue this year, and you're only going to earn max of $3.5 million in 2019, right?
Yes.
So I'm looking at the total revenue of what, $46 million-$47 million I think that you're not going to see from the CPA?
Yes. So you're looking at it from a revenue perspective only or from a bottom line perspective?
Well, either/or, I mean, I guess maybe you can just help us provide, like give us some sense of...
Yes. So I mean, when you look at the CPA, you can quarterize the impact there, the reduction that we're seeing on the fixed fees. And the performance incentives don't drive a whole lot of impact on the bottom line as we communicated before because a lot of that gets paid out in variable compensation. So I would look at the fixed-fee-only portion of it as far as bottom line impact. And from the leasing that were generated, a lot of the benefits that we're seeing as a result of the CPA doesn't start to come due until 2020 as you know when we take delivery of those CRJ900. So we will see a net reduction year-over-year and quarter-over-quarter for 2019 until we start to build those CRJ900s.
No, but I guess, sorry Jolene, what I meant to say was, all these deals that you find on the third-party leasing side presumably you can offset most of debt from that, is that right or not?
They do provide an offset, although it's not a complete offset, yes.
But not completely?
Yes. And some of the timing of those is later on as well.
Yes. And the revenue from the leasing segment doesn't follow the bottom line the same as the fixed fee because of course the leasing segment is -- we have interest expenses et cetera, so those are things that you would have to factor in.
No, of course, that's great, thank you. And then just one last one from me, in terms of the incentive revenue, so I guess the incentive revenue is now quite low on the [indiscernible] from Air Canada under the new agreement, is there some other mechanism to provide you with an incentive on the operational side at all?
No, there's nothing in the amended CPA that addresses that.
Our next question comes from David Ocampo, Cormark Securities.
You touched on this a little bit earlier, but can you further explain what the rationale is why the regional leasing market is more attractive than the narrow-body and wide-body markets?
Yes, well, first of all, we haven't seen such a overflow of capital into the regional leasing side as you've seen within the narrow-body and wide-body side. In the case of the larger aircraft, we've seen a lot of Asian capital and particularly Chinese investments in some of the leasing companies et cetera and that has resulted in surplus capital and when you had that type of situation, yields tend to decline, lease rate factors tend to decline and we have many competitors in the -- who -- institutions that compete within the narrow-body and wide-body side. So -- and generally these competitors in those segments tend not to focus on the regional side, they've historically taken a negative view because the argument is then the cost is same to do a transaction of A330 as it does a Q400, so we're better off focusing on that particular segment. And it's like anything, it's like the major airline business, there are very few airlines at work that operate everything from small regional aircraft to wide-bodies. People focus where they are, they know the products and they have a critical mass of lessors that they can really deal with so -- and we haven't seen that in the regional side, we haven't seen a overflow of capital coming in. There are not a lot of competitors, as many as you find in the narrow-body side, and of course you've seen GECAS start to pull back in the regional business and GECAS has been historically a very major player in the regional side. And when you're dealing with a different customer-base quite often et cetera, so there are a number of factors there, and historically leasing has not been -- really penetrated within the regional business and of course we're seeing that increase now, but fortunately we've not seen a lot of new competitors, we've got 1 or 2 that recently have come in the market, but at the same time we're seeing some of the narrow-body lessors looking to dispose off some of their regional portfolios as they focus more and sort of double-down on the regional -- on the narrow-body side. So those are some of the factors that I say influence -- they already indicate there's a difference between the regional and the larger aircraft market.
And you mentioned players exiting the market, so Avolon is one that comes to mind, portfolio of aircraft [indiscernible]. Is there a specific reason why they exited or is it simply because they're primarily owned by a Chinese company?
Well, I think that indicates Avolon from what I see, if you look at their portfolio, they just made a decision to focus more on narrow than wide-bodies, and they took that total portfolio and put it out in the marketplace and you'd had another regional lessor pick it up, which was Falko in that case. So I think that was a perfect example of what I talked about earlier where you see these larger lessors packaging up these portfolios and putting them out to the market because they just want to simplify their business and have more of a critical mass and more capital that's available in order to compete in their prime markets.
And do you intend to participate in acquiring these larger portfolio of assets in the future?
Well, we will look at any portfolio and as I said, we have a -- with a good pipeline et cetera, but all of these portfolios have their positives and they have their challenges et cetera. That's why quite often they're sold, but we take a lot of time to evaluate the portfolio, the credit risk, the fleet that is there, so we will continue to look for opportunities from around the world. And also you also see some other regional lessors looking to sell the portfolio because this portfolio we've purchased from another regional -- primarily regional lessor and a lot of it is, they look at their balance sheet, they look at their debt, their own situation, and decide that there's a certain part of the fleet that they'd like to dispose off in order to shore up their own business. So -- and these are only the larger narrow-body lessors that we're seeing the opportunities from. And some of the portfolios that we've already purchased, for instance we purchased from Avation in Singapore, way back, a fleet of 6 aircraft et cetera. So it's a combination of things.
[Operator Instructions] Our next question comes from Kevin Chiang from CIBC.
Just a couple from me here. When you look at your covered fleet with Air Canada, just thoughts on -- or have you had any discussions about diversifying outside of primarily a Bombardier fleet there? Like when I look at Sky Regional, it's primarily an Embraer -- I think it's only an Embraer fleet. Like has there been any conversations on your -- and/or any desire to diversify your covered fleet from outside of Bombardier with Air Canada?
We would certainly be open to any diversification of the fleet outside of the Bombardier fleet with Air Canada. I think as you look out to 2035 which is how long the CPA goes, there will be fleet decisions that will have to be made with respect to the fleet mix et cetera and we believe there are good possibilities on those 80 airplanes that are beyond 2025, majority of them have not -- are not presently under lease and we will work with Air Canada and pursue any opportunity to take advantage of any changes in the fleet, fleet mix et cetera. I think it could present a very good opportunity of course.
And then when I think of the lease you do on behalf of or as part of the CPA, you're obviously leasing aircraft that you'll fly as part of your service, there are going to be on A220s. Have you talked about that aircraft being of interest or potentially something you'd fold into the type of aircraft you could look at leasing as part of Chorus Aviation capital? Just thoughts on leasing to Air Canada outside of the CPA, is that -- one, is the A220 is still a viable plane for you? And two, is that an opportunity that you're exploring as well?
Well, first of all on the A220 I think we've said before it's an aircraft of interest to us. That aircraft is really starting to gain traction around the world, and we see that as a positive and we will pursue opportunities if we are competitive to look at that fleet. I think it's potentially a very good investment as long as you achieve the right economics. And with respect to Air Canada, we have a number of airplanes that will be coming off lease as well through the CPA. But as those airplanes come off lease, they will be debt-free, and we will be pursuing opportunities then with Air Canada to further extend the leases on those aircraft. Of course we have the opportunities to put those aircraft out to others at that time should it not be in Air Canada's interest to negotiate an arrangement at that time. So I think we've got a lot of opportunities and a lot of flexibility and I think we've got a pretty wide scope when it comes to looking at the opportunities there.
And just maybe last one from me, it sounds like there's definitely a growing opportunity from parting out aircraft, you had mentioned that in your prepared remarks I believe, and correct me if I'm wrong here, I think when you typically part-out an aircraft you get roughly 15% -- something like mid-teens return on invested capital. Given you're pulling this from your leased fleet, are the returns better for you when you part-out then don't need to buy an old aircraft that has no more green miles on it, and parting out that kind of aircraft, are the returns better, the lifecycle returns better for you when you're pulling it from your leased fleet?
No, well, potentially and actually we're just in the process of acquiring a second Q400 to part-out actually and these airplanes, some of them have life left in them, but when you look at in particular the engines and the components et cetera, it isn't necessarily that the aircraft is at the total end of life. It's a factor as to how strong the market is for the components, the engines et cetera. So we are -- we search for and we've acquired now a number of aircraft outside of our own fleet or part-out -- well, we parted out some of our own, we've acquired CRJ200s, we've acquired 300, so we're going to continue to do that and the returns are good in that segment.
Thank you, and that concludes the questions in the queue today. I'll turn the call back to Ms. Megann for final comments.
Thank you very much, operator, and thank you all for joining us today. We wish you a great rest of the day and weekend.
Thank you very much, ladies and gentlemen. This concludes today's call. You may now disconnect.