Jazz Air IF-080907 Q2 2 -...

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EVENT: JAZZ AIR INCOME FUND Q2 CONFERENCE CALL TIME: 12H30 E.T. REFERENCE: JAZZ AIR INCOME FUND-CC-080907 LENGTH: APPROXIMATELY 43 MINUTES DATE: AUGUST 09, 2007


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OPERATOR: Good afternoon, ladies and gentlemen, and thank you

for standing by. Welcome to the Jazz Air Income Fund second quarter

results conference call.

During today's presentation all parties will be in a listen-only mode.

Following the presentation the conference will be open for questions. If you

have a question please press the * followed by the 1 on your touch-tone

phone. If you'd like to withdraw your question, please press the * followed

by the 2. If you're using speaker equipment please lift the handset before

making your selection.

This conference is being recorded today, Thursday, August 9th,

2007.

I would now like to turn the conference over to our host, Nathalie

Megann, Director, Corporate Reputation and Communications. Please go

ahead, Madam.

NATHALIE MEGANN (Director, Corporate Reputation and

Communications, Jazz Air Income Fund): Thank you, Operator. Hello and

thank you for joining us today for our second quarter 2007 conference call

and audio webcast.


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With me today from Jazz are Joe Randell, President and Chief

Executive Officer, and Allan Rowe, Senior 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'm going to read some standard cautionary language in that certain

statements made in this call may be forward looking and subject to

important risks and uncertainties.

The results indicated in these statements may differ materially from

actual results for a number of reasons, including risk factors and

uncertainties outlined in publicly-filed documents. Any forward-looking

statements made in this call represent expectations of Jazz as of this

current date and as subject to change after such date. Jazz disclaims any

intention or obligation to update or revise forward-looking statements,

whether as a result of new information, future events or otherwise.

I'll now turn the call over to Joe Randell.

JOSEPH RANDELL (President and Chief Executive Officer, Jazz Air

Income Fund): Thank you, Nathalie, and good day everyone. I'm very

pleased with our results for the second quarter. Both our operational and

financial performance are definitely benefiting from the investments we've


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made in our information technology and maintenance infrastructures, as

well as the emphasis we're placing on process improvements and cost

containment.

Let's start by reviewing some of the financial highlights for the

quarter. Our operating revenue of 375.3 million was up 10.3 per cent year

over year. Our EBITDAR of 78.5 million was up 2.6 per cent. Our operating

income of 39.9 million is up 9.4 per cent. And our net income of

40.6 million is up 14 per cent. And we produce a distributable cash of

41.1 million.

As we reported last quarter, we've been very focused on

strengthening the foundation of our business. Our objectives are to deliver

a safe, reliable, efficient operation, along with excellence in customer

service, while at the same time exercising cost control and engaging Jazz

employees.

Our operational performance this quarter was very good and we

continue to be the leader for our rivals within 15 minutes amongst the

publicly-traded regionals in North America.

We are pleased that we met A Level CPA targets for flight

completion and on-time performance for this quarter thanks to careful


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operational planning and focus on the customer. We also achieved a

record high passenger load factor this quarter of 75 per cent.

The concentration on our processes within our maintenance division

has improved our aircraft reliability. We also successfully completed the

first phase of implementation of our new maintenance and engineering

system. In an effort to expand upon the success of Six Sigma we are

extending the focus on continuous improvement even further with the

addition of Lean. Simply put, Lean is the relentless effort to drive out waste

and improve the flow of every activity we perform.

We're also experiencing improved performance at our major airport

hubs due to added staff and stronger focus on processes.

Earlier this year we began a cabin refurbishment program on our

fleet of Dash 8s and this project will involve everything from installing

leather seats to new carpets and currently we completed partial

refurbishment on eight aircraft.

These are partial upgrades because we're still working through the

trial and feedback phase and expect to finalize plans very soon. The

refurbishment of our Dash 8 fleet is being conducted in conjunction with

our regularly-scheduled heavy maintenance work and as a result there's

no incremental cost for any incremental time out of service. This planned


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investment program has always been a component of our capital

expenditure budget in the category of leasehold improvements.

On the people front, employment engagement remains a corporate

priority. This quarter every Jazz airport station and base was visited by a

member of our senior management team and people were provided with a

company update and given an opportunity to provide feedback from the

front-line. Clearly employee morale is healthy and the dedication of our

employees is a major contributor to our success this quarter.

Our goal is to remain competitive and we're managing our

controllable costs diligently, as evidenced by our 6-per-cent decrease this

quarter in our controllable Costs per Available Seat Mile, or CASM,

compared to the same period last year.

Further, our total operating costs and our pass-through costs grew

by 10.5 per cent and 13.9 per cent respectively while our controllable costs

only grew by 8.1 per cent.

Going forward, we're already starting our planning for the winter

operations and will be concentrating on opportunities to leverage, expand

and grow our business, most especially outside of North America.


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I'm very pleased with our performance to date. We're tracking well

according to our plan and performing better than last year. We want to see

this trend continue and will do everything we can to ensure that it does.

Thank you for listening, and now I'd like to turn the call over to Allan

to take you through the financials for the last quarter. Allan?.

ALLAN ROWE (Senior Vice President and Chief Financial Officer,

Jazz Air Income Fund): Thank you, Joe, and hello.

The Jazz team delivered a good second quarter for this year and I'm

very pleased with our performance. We're reporting net income of

$40.6 million. Here's how it breaks down for the second quarter: Operating

revenue increased from 340.1 million in 2006 to 375.3 million in 2007,

representing an increase of $35.2 million or 10.3 per cent.

The increase in revenues is attributable to an increase of 13.1 per

cent in the block hours flown, and a $17.1 million increase in pass-through

cost items.

Other revenue increased from 1.6 million to $2.3 million. Other

revenue results from charter flights, maintenance, repair and overhaul

operations and ancillary activities, such as ground-handling services and

flight simulator training.


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Operating expenses increased from $303.7 million in 2006 to

$335.4 million this year, representing an increase of $31.7 million, or

10.5 per cent. Airport and navigation fees and aircraft maintenance,

collectively representing $12.3 million or 38.7 per cent of the total increase

in operating expenses.

These items actually increased on a unit cost basis 3.1 per cent

quarter over quarter, as measured by Cost per Available Seat Mile. These

unit cost increases are reflective of the change in fleet mix and an increase

in block hours attributable to the regional jet fleet. The maintenance unit

cost increase was driven by the additional heavy maintenance work on the

Dash 8 fleet, the start of the heavy check cycle on the new CRJ-705 fleet

and the fact that the majority of the new CRJs in the fleet were still under

warranty last year. Airport and navigational fees are pass-through costs

under the CPA.

These line item unit cost price increases were offset by a decrease

in all other areas on a unit cost basis of 6 per cent quarter over quarter,

resulting in an overall net decrease of 4 per cent as measured by CASM.

Fuel expense increased by $10.1 million or 14.2 per cent, due to an

$11.8 million increase in fuel usage, which corresponds to the 13.1-per-

cent increase in block hours flown.


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Aircraft rent decreased by approximately 0.6 million, due mainly to

lower U.S. dollar exchange rates and new lease arrangements with

respect to certain aircraft.

That brings us to operating income of $39.9 million, compared to

36.5 million recorded in the second quarter last year. Non-operating

income amounted to 0.6 million, an increase of $1.6 million from the

second quarter last year. The change is mainly due to an increase in

interest revenue from short-term investments and favourable fluctuations in

the monthly exchange rate.

As mentioned earlier, net income was $40.6 million, an improvement

of $5 million over the second quarter last year.

EBITDAR was $78.5 million, an increase of $2 million, or 2.6 per

cent, which is the result of increased capacity and cost control. Estimated

distributable cash was $41.1 million for the quarter, compared to

$37.7 million last year.

The controllable adjusted actual margin of 14.89 per cent for the

second quarter exceeds the target margin of 14.09 per cent as established

under the CPA by 80 basis points, or approximately $1.8 million. This

compares to the second quarter of last year, a controllable adjusted margin


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of 14.61 per cent, which was approximately $1.2 million better than the

target level.

During the quarter we earned 86 per cent of the available incentives,

or $4.6 million versus last year's incentives at 96 per cent attainment, or

$4.7 million. Incentives for the comparable period last year were higher

than normal as we had access to additional aircraft accepted during our

growth stage that had not yet been scheduled into operation. These spare

aircraft were used as substitutes during the first half of the year last year to

protect the schedule during mechanical delays or cancellations.

In the second quarter of this year all our aircraft were committed to

commercial service, resulting in having fewer operational spare aircraft to

provide recovery during our regular operations.

That concludes my overview of the financials. Thank you for

listening in.

Operator, we can open the call to questions from the analyst

community when you're ready.

OPERATOR: Thank you, sir. Ladies and gentlemen, we will not

begin the question-and-answer session. As a reminder, if you have a

question please press the * followed by the 1 on your touch-tone phone. If

you would like to withdraw your question press the * followed by the 2. If


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you are using speaker equipment you will need to lift the handset before

making your selection.

Our first question is from Aaron Bucksberry(ph), with National Bank

Financial. Please go ahead.

AARON BUCKSBERRY: Hi guys.

JOSEPH RANDELL: Good day.

AARON BUCKSBERRY: Just turning to the other revenue. If I recall,

I think in the last quarter you had mentioned you were looking to add a

third Dash 8 to your charter fleet. So maybe if you can just update us on

the status of that?

And then, beyond that, the other revenues categories, such as R&O,

what are the prospectives there? I think you mentioned opportunities

outside of North America. Maybe you can just talk a bit to that?

JOSEPH RANDELL: Okay, well first of all, we did mention on our

last call that we were pursuing a Dash 8-300 and we have been doing that

and as a matter of fact we're close to finalizing an arrangement now.

We've been somewhat delayed in doing that as in going out to the

marketplace we found that the terms and conditions that were available we

felt were a little too onerous for us and we wanted to ensure that we got


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ourselves a better deal. So it was as simple as that. There's still a plan to

have that airplane in place and we're targeting later this fall.

With respect to the offshore opportunities, those specifically were not

in the repair and overhaul side. We, as was mentioned in the comments,

have been very busy with our Dash 8s and our RJs with four heavy

maintenance lines and really at this point have little and really no room for

outside activity.

What we've been talking about in terms of the offshore side of

possibilities are to work with the establishment or improvement or growth

of other carriers in other parts of the world and we are aggressively

pursuing that. We've got about, actually, a list of about eight or nine

possibilities that we're actively working on and later today we will actually

be making an announcement with respect to our organization and Scott

Tapson will become full-time Vice President of Business Development.

And Scott has been with Jazz really since its beginning, is very

familiar with the airline business throughout the world and has been

working with me on a number of these opportunities now for the last

number of months.


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So our interest would really be to work and assist in provision of

assistance infrastructure, etcetera, and that's the offshore opportunities

that we would pursue.

AARON BUCKSBERRY: Okay, it sounds pretty exciting. Next up,

just on the CJR that was involved in the incident, so I guess that was about

out of the fleet for about half the quarter. What kind of impact do you think

that had on your ability to earn incentives? Was...

JOSEPH RANDELL: Well, in terms of the number of hours that we

produce, we actually increased the utilization on the remaining fleet, so we

were able to keep pretty close to the number of hours that we had planned,

even with that aircraft in the fleet.

There is no question that losing essentially a spare airplane, which is

what happened, put an additional challenge on us but the good news is

that our operations folks rose to that challenge and we were able to

achieve A level incentives despite the fact that for almost half the quarter

that aircraft was out of the fleet.

And we're tracking well on our incentives this quarter as well, again

despite not having that aircraft and we are in the process of finalizing an

arrangement to bring in replacement aircraft and again, we anticipate

having that aircraft in our fleet this fall.


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AARON BUCKSBERRY: So would that be another 100?

JOSEPH RANDELL: We're looking at a couple of different options

right now. It would most likely not be a 100.

AARON BUCKSBERRY: Okay. And just finally, it seems the cash in

our balance sheets is growing as we go on here, so what would you be

looking to do with your cash? Would you maybe start a buy-back program,

or a special distribution? What are your thoughts on that?

ALLAN ROWE: Yes, let me take that, if I may. I think there is a bit of

an anomaly. Our cut-off at the second quarter end left us just before we

did our monthly settlement with Canada Revenue in respect of Goods and

Services Taxes, so I think the day after we cut our balance sheet cash

number and we had to remit $13 million. So I wouldn't take that as a

normalized cash level. It was more like 130 million-131 million cash on

balance sheet at quarter end.

So really I guess, I just want to position it as not as extensive cash

accumulation as might appear at first flush. We will, of course, as we've

disclosed previously, consider our cash flow and outlook from time to time

and make recommendations to our board in respect of distributions going

forward.

AARON BUCKSBERRY: All right, that's great for me. Thanks.


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OPERATOR: Thank you. Our next question comes from the line of

Mike Linenberg with Merrill Lynch. Please go ahead.

LILLY: Hi, good afternoon, Joe, Allan and Nathalie. This is Lilly. My

first question is with regards to that offshore opportunity. I just wanted to

follow up a little bit on that. Are there any restrictions currently in your CPA

with Air Canada that would put some limitation on the opportunities that

you can pursue? I'm thinking along the lines of, if you do partner with

somebody else would you have to do some revenue sharing, you know,

give some of that benefit back to Air Canada because you're able to, say,

reduce your overhead costs just by having a bigger operation?

JOSEPH RANDELL: No, there's nothing in the CPA that would

cause us to have to do that. We're free to enter into other arrangements,

etcetera.

Of course, anything that we can do to lower overhead costs overall

for any of our customers, and of course, including Air Canada, we would

want to do that. But we will be, and looking to, as we get into these

business opportunities, to ensure that we match the costs associated with

that business activity, you know, with the revenues.

Under our CPA, if we do enter into a CPA with another carrier, which

involves us operating a fleet, then we would go to Air Canada under the


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CPA and Air Canada has an option to reduce the covered airplanes, which

they would have to indicate their intention prior to us finalizing an

agreement with anyone else. That is the one condition that exists within

the CPA.

ALLAN ROWE: Just as a point of clarification – Lilly, it's Allan – you

know, we do have separate divisional statements in respect of our

business relationship with Air Canada under the CPA versus separate

accounting entirely in respect of our ancillary or non-CPA business

activities.

LILLY: Got it. Got it. My second question is regards to the Lean

program. I was wondering if you could maybe give a couple of solid

examples about some of the stuff you guys are doing there? And are there

going to be any impacts to our capital expenditure when you start

implementing some of these initiatives?

JOSEPH RANDELL: Yes, presently we're in the process of

introducing Lean and we're in the training mode. This is not a major

investment on our part because aside from the training itself we're just

using our existing staff. And that's the beauty of Lean, is that really you're

utilizing even your line employees in terms of process improvements,

eliminating waste, etcetera. And that's why we're very excited about Lean


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and the fact that we can get some – I believe – some very good returns

here on not a lot of outlay.

LILLY: Great. And finally, Allan, I noticed that you put in some more

language with regards to the whole tax issue for Jazz, you know, come

2011. Do you have any sort of early forecast on how that could impact the

P&L and are you guys thinking about perhaps increasing the dividends so

as to offset some of the tax impacts? Any early thoughts on that?

ALLAN ROWE: I really can't comment beyond saying we understand

the statutory rate to be at 31.5 per cent applied to the pre-tax income at the

income fund level. So that's really what we're anticipating coming into

effect in 2011.

LILLY: Okay. Got it. Well, thank you very much, guys.

JOSEPH RANDELL: Thank you, Lilly.


Ben Venditelli(ph) with BMO Capital Markets. Please go ahead.

BEN VENDITELLI: Good afternoon, gentlemen. I just wanted to

know if the 14.9-per-cent margin on controllable costs is sustainable or if

that's a reflection of some seasonality?


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ALLAN ROWE: It's sustainable to the extent that we continue to

manage our controllable costs at better than the levels that had been set

when we established the CPA rates.

We are – what is this – six quarters into reporting as a public entity

and we have managed to eke out some small out-performance each

quarter we've reported. I'm optimistic we can continue to do so.

BEN VENDITELLI: Okay, so would you say we should be modelling

that into our forecasts or is it really on a quarter per quarter basis?

ALLAN ROWE: I'm trying to say in general terms we are very

focused, as a management group, on out-performing the target 14.09-per-

cent level but I'm trying to avoid giving you a specific number we're

targeting at.

BEN VENDITELLI: Okay.

JOSEPH RANDELL: You know, it was a good for us. I think we did a

good job on the cost side, and of course, the operation performed very well

at the same time which has allowed us to deliver healthy results in our

operational incentives.

BEN VENDITELLI: Okay. In terms of maintenance, you said your

705s are coming off of warranty and they're going into heavy checks. What


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can we expect going forward in terms of maintenance costs? Is this quarter

a good reflection of that or will that be increasing going forward?

ALLAN ROWE: Yes, I think this quarter is probably a pretty good

basis for a go-forward run rate, Ben.

BEN VENDITELLI: All right, perfect. Thank you very much.

JOSEPH RANDELL: You're welcome.


Cameron Doerksen with Versant Partners. Please go ahead.

CAMERON DOERKSEN: Good afternoon. I just wanted to go back

to the CRJ that was written off. Is it safe to say that's all going to be

covered by insurance?

JOSEPH RANDELL: That aircraft, of course, is ultimately owned by

Air Canada and any insurance settlement would be in Air Canada's favour.

CAMERON DOERKSEN: Okay.

JOSEPH RANDELL: We have leased that aircraft and that aircraft

was under lease from Air Canada.

ALLAN ROWE: So there won't be... I mean, don't anticipate any

pickup or one-time gain at the Jazz level. The ultimate ownership was with

Air Canada and that's where the insurance proceeds will be recorded.

JOSEPH RANDELL: It was one of the older CRJ-100s.


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CAMERON DOERKSEN: Right, but there's not going to be any

material or incremental cost to Jazz as a result of that accident?

JOSEPH RANDELL: No.

ALLAN ROWE: No.

CAMERON DOERKSEN: Okay. Just on that, I guess the same

issue, you mentioned that you're close to finally having a deal to get a

replacement aircraft. Is there a chance that that replacement aircraft could

be a 75-seater or is it likely to be a 50-seater?

JOSEPH RANDELL: It will be a jet and we're in the process of

finalizing that right now and we should be able to make comment on that

soon.

CAMERON DOERKSEN: Okay. You brought some aircraft on, I

guess, on balance sheet on capital leases. I'm just wondering if you could

maybe talk about the reason for that. I assume that's a cost savings for

Jazz?

ALLAN ROWE: Well, there were some lease renewals in respect of

some Dash 8s that had been longstanding members of the fleet and just

terms and conditions at the time of this renewal put us into the position of

having capital versus an operating lease obligation.


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CAMERON DOERKSEN: Okay. Is the expense roughly the same as

what you were paying before?

ALLAN ROWE: Very close.

CAMERON DOERKSEN: Okay.

ALLAN ROWE: No material differences in aircraft rent expense,

Cameron.

CAMERON DOERKSEN: Okay. Just on the block hours you've

maintained your forecasts for this year. I know it's probably a little early,

but what's the... this is an early look at what 2008 looks like or what's Air

Canada telling you? Are they looking to get a few more block hours out of

the same number of aircraft next year or just any kind of colour you could

provide on that would be good?

JOSEPH RANDELL: We're in the process of working through next

year's plan now with Air Canada and we don't anticipate any major

changes in terms of the production level.

CAMERON DOERKSEN: Okay. And just one final question for me

on the level of staffing. The number of employees per aircraft was up a bit

year over year and I assume that's helping you on the incentive line and

customer service and things like that. I'm just wondering where the staffing

level goes from here. Is it going to stay at a relatively steady state?


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JOSEPH RANDELL: We're at a steady state now. We had some

catch up to do in a couple of areas, catching up with the growth that we

incurred, in particular in the maintenance area. And so we have no plans

with this existing sized operation to increase staff. And as a matter of fact,

we'll continue to look for efficiencies and how we can improve no those

levels.

But it is obvious that our investment in staff in some of these areas

has really helped us better perform, especially when it comes to the

operational incentives.

CAMERON DOERKSEN: Good.

ALLAN ROWE: Okay, just to add to that, certainly there have been

absolute dollar increases in expense and absolute headcount increases in

terms of numbers of employees. But very importantly, if you focus back on

our unit cost performance, we have this quarter delivered fully a 4-per-cent

reduction in our CASM Q2 this year versus Q2 last year.

CAMERON DOERKSEN: Right. That's great. That's all I had.

Thanks very much.



Nick Morton with RBC Capital Markets. Please go ahead.


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NICK MORTON: Good afternoon. I have two questions. One is on

this idea of offshore work, I guess, using a new approach, I guess. I'm not

quite sure what it is? Is it helping people set up new airlines in Africa or

somewhere, or Asia? What are you contemplating?

JOSEPH RANDELL: There are a couple of areas of the world where

we see there being opportunities to do this and in fact, we're having

discussions with a number and I prefer not to get into exactly who at this

point, because they are very preliminary. But there have been examples

and continued examples of other carriers that have done this sort of thing

in parts of the world where regional operations and the type of operation

that Jazz performs is just not there or a relatively new concept.

In North America this is a very mature business, and of course with

the issues that we have in terms of the ownership restrictions and the

operational issues between those posed between Canada and the U.S.,

opportunities in North America are very limited for us.

So we have a very good reputation with others throughout the world,

and with manufacturers, especially Bombardier, etcetera, and we look to

leverage those to provide assistance, and we have a very experienced

work force, very good record, and some talent that we feel we have

available to exploit those opportunities.


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NICK MORTON: Would you take an equity interest in these airlines?

JOSEPH RANDELL: I wouldn't rule out anything other than whatever

we do we have to ensure that it's going to be accretive and not diminish

the results of Jazz as it stands.

And so we're taking a cautious approach, and presently we're not

looking at making any type of major equity investments or anything of that

nature. But certainly to take an equity interest in an operation in return for

certain support services or other things that we may be able to provide is

something that we would clearly consider.

NICK MORTON: That's interesting. And on the CASM reduction that

you've achieved, how do you feel that compares to U.S. competition? How

have they done unit cost wise?

JOSEPH RANDELL: Well, we feel like we're holding ground but of

course the big issue in Canada is the Canadian dollar versus the U.S.

dollar and with our labour costs and other things in Canadian dollars that

hurts us a little. On the other hand, of course, we do benefit from the fact

that a lot of our expenses are in U.S. dollars, especially things like our

pass-through costs and fuel and things of that nature.

But overall, we don't feel that we've certainly lost any ground and we

feel that we have one of the strongest-performing operations of any of the


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regions in North America which I believe accounts for a lot, and of course

that's shown in our operational incentives.

NICK MORTON: Great, thank you very much.


Michael Mills with Beacon Securities. Please go ahead.

MICHAEL MILLS: Good afternoon. Just want to ask for an update on

the Toronto Airport appeal and what's happening there.

JOSEPH RANDELL: Okay, well, I guess really since we last had the

call on July the 27th... sorry, on June 14th, the Federal Court reversed the

order dismissing our judicial review application. And really what that meant

is that Air Canada Jazz's action would be heard on its merits, which was

something we were looking for all along because we believe we have a

very strong case based upon the merits of the case.

And, of course, then in turn the Toronto Port Authority appealed this

appeal. But then, as of yesterday actually, the Federal Court registry

advised us that the expedited appeal will be heard on September 24th.

So we're very pleased to see that, and remain determined, along

with Air Canada, and optimistic that if fairness and justice is to prevail that

we will be operating back at that airport.


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MICHAEL MILLS: Okay. And in terms of the refurbishment of your

Dash 8 fleet, can you give us a timeline in terms of doing the whole fleet

and any impact on your capex expectations for the remainder of this year?

JOSEPH RANDELL: Well, it will take us a couple of years to get

through this because we're only doing it as the aircraft come in for their

heavy maintenance. So really it's not going to have a significant cost

impact at all. We normally replace carpets. As we replace them we're

putting the new carpets in. We normally replace seat covers. We're doing

that. We're actually redoing some of the interior fittings and that.

So we're taking a very conservative approach, but the end result...

and we've received some very positive feedback so far from our customers

and our crew members on the Dash 8s. So we're very pleased with it so

far. But it will take us two to three years to get through this program.

MICHAEL MILLS: And my final question is on the U.S. dollar and if

there's been any thought to actually locking in using hedging products to

guarantee the positive exchange rate?

ALLAN ROWE: We haven't taken any action in respect of hedging

activities on the U.S. dollar and have no plans to do that at this time.

MICHAEL MILLS: Thank you.



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Jacques Kavafian with Research Capital. Please go ahead.

SUSAN CHENG: Hi there. This is Susan Cheng calling on behalf of

Jacques. Two questions. Firstly, was there any particular reason why the

block hours jumped quite a bit compared to Q2 of last year?

JOSEPH RANDELL: We actually have more fleet in operation. Last

year we had taken early delivery of a number of aircraft but have not really

put them into full service whereas this year we see the result of having our

entire fleet active.

ALLAN ROWE: Yes, you won't really see comparables on similar

levels of fleet in service until we report on our third quarter.

SUSAN CHENG: Great. And secondly, I noticed when cancelling

your distributable cash in the past you've held back 10 per cent and this

time around there was no hold-back. Is there a reason why? And can we

expect this calculation this time around to continue going forward?

ALLAN ROWE: Yes, we decided to change our reporting practice. I

believe the new presentation is consistent with industry practice. And we

will report on our generation of estimated distributable cash and we will

report on actual levels of distributions.

SUSAN CHENG: Okay, great. Those are all the questions.


28

JOSEPH RANDELL: Thank you.


Tim James with CIBC World Markets. Please go ahead.

TIM JAMES: Thank you. Good afternoon. Just looking at your

maintenance costs for a moment and the fact a number of aircraft are

coming off warranty and that, I assume, puts a little bit of an upward bias

on your maintenance cost. Is it fair to say that this has all been anticipated

and priced into the mark-up that you would receive through the CPA

related to controllable costs?

ALLAN ROWE: Yes.

TIM JAMES: Second question is, the payout ratio, I believe it was

around 75 per cent in the second quarter. Should we expect a similar trend

to what we saw last year? Your target rate, or I believe how you set

distributions was based on 90 per cent, so is it fair to say that the payout

ratio trend for the balance of the year will look similar to what it was last

year?

ALLAN ROWE: I'd prefer to answer the question not in terms of a

payout ratio but in terms of the amount of cash distribution we will pay. And

as I think I said earlier, in response to somebody else's question, Tim, we

will, on a regular basis as management, review our cash generation and


29

our outlook going forward and make recommendations to our board to

increase distributions as we see fit.

TIM JAMES: Maybe let me sort of put it another way. Is there any

reason why the seasonality of your flying hours and the seasonality in your

capital expenditure requirements for the balance of the year would be

significantly different than what we saw last year?

ALLAN ROWE: No, shouldn't be any real difference, relative quarter

to quarter.

TIM JAMES: Yes, okay. That's it. Thanks very much.


Ryan (inaudible), with TD Newcrest. Please go ahead.

RYAN: Yes, good afternoon. Allan, I just wanted to follow up on a

question with respect to the FX. It seems like you are benefiting from some

of the U.S. dollar denominated expenses, specifically aircraft rent. What's

the reasoning – you said there's no plan to enter into foreign exchange

contracts – what's the reasoning behind having no plans to potentially

hedge your forward cash flows?

ALLAN ROWE: I'd really say – and I think we've discussed this in the

past – you know, we are pretty much naturally hedged in respect of our

U.S. dollar transaction expenses. The gains that we've realized this year


30

are really in the category of our net U.S. dollar working capital position on

balance sheet adjusted for the month-end exchange rate.

RYAN: Okay. Okay. Just a simple follow-up question here. The non-

operating income, your other income, 791,000 here, what's in that

balance?

ALLAN ROWE: The majority of that is FX gain. The 790.

RYAN QUIRT: Okay, thanks very much.

OPERATOR: Thank you. Our next question is a follow-up question

from the line of Ben Venditelli. Please go ahead.

BEN VENDITELLI: I just wanted to know, you had guided to

$27 million of capex for 2007 and 2008. I wanted to know if that was still

valid or if there's been any changes in that?

ALLAN ROWE: Yes, I'm glad you asked that question, Ben. I think it

would be appropriate for us to provide updated guidance in respect of

capex. We had earlier indicated that for fiscal 2007 our capital expenditure

plans were in the order of $27.5 million. We've recently updated our project

plans and our outlook for activities for the remainder of the year and I think

we will fall a little short of our original plans. I would indicate now probably

$25 million level of capital expenditures for the year 2007.

BEN VENDITELLI: Okay. And for 2008 is the 27 million still valid?


31

ALLAN ROWE: No change indicated yet.

BEN VENDITELLI: Perfect. Thank you very much.

ALLAN ROWE: Okay.

OPERATOR: Thank you. Ladies and gentlemen, once again, if you

would like to ask a question please press the * followed by the 1 on your

touch-tone phone.

And thank you, gentlemen, we do not have any further questions at

this time. Please continue.

NATHALIE MEGANN: Okay, well thank you, Operator, and thank

you, everyone, for being present on the call. We will look forward to

speaking with you again next quarter.

OPERATOR: Ladies and gentlemen, that does conclude our

conference today. Thank you for your participation and for using ACT

Conferencing. You may now disconnect.

****

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