(Updates with comments from Air Canada and analyst, Air Canada share price)
TORONTO, Nov 26 (Reuters) - Shares of Chorus Aviation Inc soared 29 percent on Tuesday after an arbitration panel agreed with the markup rate the company charges as a contract carrier for Air Canada.
Following more than a year of arbitration, Halifax, Nova Scotia-based Chorus said a panel had confirmed there would be no change to its 12.5 percent markup, above the 7 percent to 9.5 percent proposed by Air Canada.
A majority of the panel found there was no reason to change the rate and that Chorus need not make retroactive payments to Air Canada, Chorus said.
The markup rate refers to the premium Chorus is paid for its controllable costs in operating flights for Air Canada.
The decision is "a significant win for Chorus," RBC Capital Markets analyst Walter Spracklin said in a note to clients, adding that Chorus may now consider a dividend increase after halving its annual dividend due to concerns over the arbitration outcome.
"Chorus ... management is fully aware of the competitive pressures in the industry and is working hard at lowering unit costs," he wrote. "Following the resolution, we see Air Canada and Chorus engaging in a more constructive manner."
Chorus operates about 120 aircraft for Air Canada, the country's largest airline, under the Jazz Aviation brand. It flies to smaller destinations and to large communities in off-peak hours throughout Canada and into the United States.
But Chorus may need to negotiate lower rates in exchange for an extension of its operating agreement with Air Canada, or other benefits, said National Bank Financial analyst Cameron Doerkson.
Under terms of the pact, which expires in 2020, the two parties will begin talks in 2014 to set rates for the period from 2015 to 2017, Air Canada said.
Chorus may also need to brace for a decline in the time it flies for Air Canada in 2014, Doerkson wrote in a note to clients. In September, Air Canada issued a call for bids from a regional partner to operate certain existing U.S. trans-border routes now flown by Chorus.
"In line with Air Canada's priority for cost reduction and sustainable profitability, Air Canada will both work with Jazz to explore cost reduction initiatives and continue to pursue its regional airline diversification strategy," Montreal-based Air Canada said in a statement.
Chorus stock climbed 81 Canadian cents to C$3.54 on the Toronto Stock Exchange on Tuesday, while Air Canada's more heavily traded Class B shares fell 3 Canadian cents to C$6.86, after earlier modest gains.
(Reporting by Susan Taylor; Editing by John Wallace)