"While we have made significant progress in our cost reduction efforts, this improved contract will allow us to further address our cost challenges," said Joe Randell, chief executive of Jazz parent Chorus Aviation.
"There is certainty of Jazz's operations for the next 11 years and it places Jazz in a more cost-competitive position over the longer term."
Shares of Chorus (TSX:CHR.B) climbed more than 10 per cent after the announcement and traded as high as $4.96, its highest mark since July 2011.
Industry analysts said the amended capacity purchase agreement supports the continuation of the Chorus dividend.
"On balance, we view a new CPA as positive for Chorus as it removes a major uncertainty for the company," wrote Cameron Doerksen of National Bank Financial.
Chorus shares closed up 56 cents or 12.9 per cent at $4.89 on the Toronto Stock Exchange.
The amended agreement between the airlines changes how the fees charged by Jazz are calculated from a "cost plus" mark-up model to a fixed-fee compensation structure.
The airlines said Jazz is expected to achieve similar returns to its current fee structure until 2020 with a reduction in the fixed-fee compensation plan beginning in 2021.
The deal also gives Jazz pilots access to pilot vacancies at Air Canada.
Air Canada chief executive Calin Rovinescu said the amended agreement will help Air Canada compete more effectively in regional markets. The airline buys most of the capacity on Jazz planes to carry passengers between the main hubs and other smaller cities.
"Our restructured capacity purchase agreement with Jazz represents another important milestone in Air Canada's ongoing cost reduction initiatives and the execution of our commercial strategy," Rovinescu said.
The new agreement comes as Chorus reached a tentative, 11-year labour agreement with its pilots union that will run until the end of 2025 if it is ratified.
Details on wages, working conditions or other terms of the proposed contract reached with the Air Line Pilots Association were not released.
As part of its fleet renewal, Jazz parent Chorus Aviation (TSX:CHR.B) also said Tuesday it plans to add 23 Bombardier Q400 turbopropos to replace 34 older Dash-8 100 and 25 CRJ200 jets.
The Jazz fleet will be cut from 122 to at least 101 by the end of 2020 and 86 by the end of 2025.
However, the addition of the larger and more efficient planes, will reduce capacity by only four per cent in six years and nine per cent in 2025.
In addition to ratification of the pilot agreement, the new deal between Jazz and Air Canada is subject to approval by the boards at both companies and requirements of the pilot mobility agreement being met. The airlines expect the required approvals to be obtained by Feb. 1.
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