UPDATE 1-Jazz Air to keep dividend payout in fund conversion

Fri Oct 8, 2010 4:20pm EDT

* Will maintain C$0.60 annual distribution

* Units climb 8.1 pct to C$5.04 on the TSX (Adds detail)

OTTAWA Oct 8 (Reuters) - Jazz Air Income Fund JAZ_u.TO JAZdb.TO shares rose 8.1 percent on Friday after Air Canada's (ACa.TO) regional carrier said it planned to maintain its dividend payout after converting to a corporation.

Like many Canadian-based income funds, Jazz is converting to a corporate structure because changes to Canadian tax laws will eliminate tax advantages for funds starting in 2011.

Halifax, Nova Scotia-based Jazz said it expects to complete its conversion to a new public company called Chorus Aviation Inc on Dec. 31 and maintain its annual dividend of 60 Canadian cents.

That distribution is sustainable because the aviation industry is "experiencing a moderate rebound in travel demand," and the carrier's "core operations" are strong, said Chief Executive Joseph Randell.

Tax-sheltered income trusts were once popular investment vehicles, designed to maximize payouts to investors, but Jazz said investors will keep more of their dividend in a corporate structure.

Under a corporate structure, investors will get 43 Canadian cents of after-tax income from the 60 Canadian cent dividend, Jazz said. That tops the 32 Canadian cent after-tax income under an income trust structure.

The company expects to issue its first dividend, of 15 Canadian cents per Chorus share, for the quarter ending March 31, 2011.

The conversion must be approved by two-thirds of unitholders at a meeting scheduled Nov. 9.

Jazz Air sells the bulk of its capacity to Air Canada, but recently sealed a five-year flight services deal with tour operator Thomas Cook Canada Inc. It is expected to generate about C$100 million ($99 million) in additional annual revenue.

The airline also said last week that it expects to fly between 400,000 and 410,000 hours in 2011. ($1=$1.01 Canadian) (Reporting by Susan Taylor)

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