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Shares of Chorus Aviation, the company behind the regional carrier Jazz Aviation, soared by almost 30 per cent on Tuesday after an arbitration panel ruled it could maintain its current cost structure on the flights it operates on behalf of Air Canada.MIKE CASSESE/Reuters

Chorus Aviation Inc. has finally taken flight with other airline stocks after winning a long legal battle against its partner Air Canada.

Shares of the company behind the regional carrier Jazz Aviation soared by almost 30 per cent on Tuesday after an arbitration panel ruled it could maintain its current cost structure on the flights it operates on behalf of Air Canada.

The two-year arbitration process had posed a huge risk for Chorus. Losing to Air Canada could have led to a $45-million drop in Chorus's annual cash flow and retroactive payments of up to $180-million, according to RBC Dominion Securities analyst Walter Spracklin.

"With the decision now defined, we believe the market is set to re-base new expectations and positively re-evaluate [Chorus] shares," he said in a note.

While Chorus investors are cheering the win, the celebrations could be short-lived as Air Canada and other airlines continue to look for ways to cut expenses.

"While we are happy today, we know we have some challenges we are going to work through," said Chorus chief executive Joseph Randell. "We just know we can't continue to do business the way we have in the past because it's not really what the new business model requires."

North American airline stocks are flying high as tame prices for fuel and an improving U.S. economy provide a tailwind for the entire sector, while consolidation among U.S. players increases hopes that the industry can avoid its usual spiral of destructive fare-cutting. Air Canada shares have risen 280 per cent over the past year and Delta Air Lines Inc. is up nearly 200 per cent. Southwest Airlines Co. has doubled while WestJet Airlines Ltd. has climbed about 50 per cent.

Chorus, meantime, had seen its shares drop 30 per cent over the past year, before Tuesday's pop. The stock price nosedived in May after the company cut its annual dividend in half to 30 cents per share to conserve costs in case it lost its battle against Air Canada.

Mr. Randell said the company will now consider increasing the dividend, which currently yields 8.5 per cent, as well as other options such as share buybacks.

"We obviously now have increased flexibility," he said. "We do recognize the importance of the dividend to our shareholder base. That was the original reason why a lot of our shareholders bought Chorus shares."

The company's Jazz subsidiary is Air Canada's largest regional carrier, operating flights to 79 destinations across North America. As part of the agreement between the two companies dating back to 2009, Chorus charges a 12.5-per-cent markup on costs such as salaries and maintenance. Air Canada was trying to have those fees slashed to between about 7 and 9.5 per cent.

While the arbitration removes near-term risk around the stock, the companies will be revisiting their agreement before it expires in 2020. Negotiations will begin next year to set the rates for the next three-year period starting in 2015.

"We think it is only a matter of time before [Chorus] will have to offer significantly better cost terms to [Air Canada]. Otherwise, it runs the risk of not having a business after 2020," Canaccord Genuity analyst David Tyerman said in a note. He has a "sell" recommendation on Chorus.

CIBC World Markets analysts Kevin Chiang has a "hold" recommendation on Chorus, saying the arbitration settlement "doesn't fix all of their problems."

He says Air Canada has aggressively cut its costs and will look to squeeze further savings out of Chorus, which does about 98 per cent of its business with the country's largest airline.

In response to the arbitration panel ruling, Air Canada said in a statement that it will work with Jazz on other ways to lower costs. Air Canada is also looking at expanding certain regional routes in the U.S. in 2014, but has yet to choose a partner. Chorus said it was excluded from the bidding process.

About 3.2 million Chorus shares were traded Tuesday on the Toronto Stock Exchange, far above the average daily volume over the past three months of just under 200,000 shares. The stock hit a 52-week high of $4.71 in February and a low of $1.87 in July.

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