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Jazz Air Income Fund gave investors plenty of reasons to head for the exits with this quarter's wide earnings miss.

With EBITDA, or earnings before interest, taxes, depreciation and amortization, more than 20 per cent below the consensus estimate, a series of analyst downgrades and estimate cuts followed. And the stock dropped 9.4 per cent Monday, to close at $4.26 - nearly 15 per cent below last Thursday's pre-announcement close.

Yet it wasn't just the downside miss that troubled some analysts, particularly RBC's Walter Spracklin - it was the company's reduced disclosure of its costs. Mr. Spracklin downgraded Jazz on Monday to "sector perform" from "outperform" in large part due to the disclosure issue. (He also cut the target price from $6 to $4.50.)

"A stock's investment quality will be determined on a number of factors, including financial disclosure, and reduced financial disclosure increases risk," he said in an interview with the Globe.

As the low-cost carrier for Air Canada, Jazz has had basically one customer, earning all its revenue from a "capacity purchase agreement" with its sister airline. Air Canada absorbs certain "pass-through" costs like fuel and airport user fees, while Jazz is responsible for "controllable costs" like employee compensation and aircraft rent and maintenance, for example.

Jazz, however, won't have just Air Canada paying its bills going forward. It landed a deal with Thomas Cook Canada Inc. in which the travel agency sells trips to warm weather locales in the Caribbean, Mexico and Central America while Jazz flies them under the brand "Thomas Cook Airlines."

Jazz won the contract through competitive bidding, says spokeswoman Manon Stuart, and it would be "imprudent" to reveal its "pass-through" and "controllable" costs.

"When we do introduce the Thomas Cook results, if we maintain the same detailed disclosure we've had in the past, we feel we'd be exposing ourselves in terms of the competitive information," Ms. Stuart said. "Now that we're becoming active in business development, we cannot make the same level of disclosure."

While the Thomas Cook deal takes effect Nov. 1, Jazz decided to whack the cost disclosure for its first-quarter results. The lack of information left analysts unable to calculate detailed earnings margins for the airline.

Michael Mills of Beacon Securities also noted the disclosure change as he downgraded Jazz from "buy" to "hold" and cut his target price to $5.15 from $5.50. Noting Jazz's weak first-quarter results, he said "unfortunately, the disclosure provided by Jazz Air has shrunk along with the margins. ... Needless to say, we view this change in disclosure negatively as it makes our work more challenging."

Jazz' first-quarter EBITDA of $24.8-million was below the consensus $30-million and Mr. Spracklin's more optimistic $33.3-million. Jazz's EBITDA represented a 37 per cent decline from first-quarter 2009, Mr. Spracklin said. It was lower than the estimates, Mr. Spracklin believes, due to a lower profit margin on its controllable costs - "however, we are unable to verify this" because of the new minimized disclosure.

Mr. Spracklin has a number of other concerns, including one of great import to dividend-conscious investors: With Jazz's new initiatives, including an investment in an Ecuadorean airline, he wonders whether the company's distribution rate will decline if capital needs increase. "Given that the market is largely anticipating no change in dividend, we would consider a lower dividend a negative catalyst."

Jazz's Ms. Stuart reiterated management's current statement: "We feel confident we can maintain the same level of dividend at this time."

Special to The Globe and Mail