All that Jazz

ACE Aviation Holdings, the parent company of Air Canada, has finally launched the long-delayed spin-off of its Jazz regional carrier into an income trust. Road show presentations to the financial community began last month with executives of the Jazz Air Income Fund touting the benefits of the offering to the folks who have to go out and sell it to the public. It’s already attracting attention from investors. I received an e-mail last week from a reader asking: “What are your thoughts and comments on the Jazz Income Trust?”

Frankly, I am not impressed. In my view, airlines do not fit comfortably into the income trusts model. The best trusts can be counted on to deliver steady returns, year after year, with no surprises. Jazz does not fall into that category in my view.

Granted, the potential return looks attractive. The fund is initially proposing a yield of between 9.5 per cent and 10.5 per cent. The exact figure will be determined when the pricing is finalized but anything in the 10 per cent range appeals to people these days. But remember the cardinal rule of income trusts, or any other security for that matter: the higher the potential return, the higher the risk. at is certainly true in this case. Consider the earlier ACE spin-off, Aeroplan Income Fund. At the time of writing it had a cash yield of about 5.3 per cent. The Jazz Income Fund will come in at almost double that figure. If that doesn’t wave a red flag in your face, I don’t know what will.

The history of the airline industry in Canada is littered with corporate wreckage. Think Canadian Airlines, Canada 3000, Jetsgo, and others. Air Canada itself has only recently emerged from bankruptcy protection. I’m not predicting Jazz will meet a similar fate, only pointing out that this is a highly competitive business and that stability is not one of its attributes. Moreover, it is a cyclical business. In times of recession, airlines are among the first to suffer as businesses cut back on travel and would-be vacationers stay home.

That said, it’s possible the Jazz issue will do well out of the starting gate if only because of the strong name recognition and the continued high demand for yield. But if you decide to take a flyer on it (pun intended), be sure you understand the risk involved.

This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. For more information about becoming an Internet Wealth Builder subscriber, go to