CAIR Issue No.24 - December 2004 by Leah Dupuis

INTERVISTAS MARKET INTELLIGENCE REPORT

THE SPEED OF RECOVERY FROM SARS December 2004

A Global Air Travel Crisis: The SARS Outbreak

Doris Mak Senior Project Manager

Just as the air transport industry was recovering from the 9/11 terrorist attacks and the global economic downturn in 2000 and 2001, the industry was hit by another crisis in early 2003. In March, the SARS (Severe Acute Respiratory Syndrome) outbreak quickly crippled the air travel industry. In the end, SARS killed over 700 people in Asia and 43 in Canada. It is likely the disease originated in China’s Guangdong Province in November 2002 and was spread to other parts of the world by air travellers. The hardest hit Asian countries were China (especially Hong Kong), Singapore and Taiwan. Canada (mainly Toronto) was the only country outside of Asia that had SARS deaths. The disease appeared to have peaked in July 2003 at which time the World Health Organisation (WHO) deemed the outbreak was under control.

A Speedy Air Traffic Recovery

International Traffic by Asia Pacific Carriers

International Traffic by Asia Pacific Carriers 120% 100% 80% 60%

Beginning of SARS Crisis

40% 20% 0% -20%

Oct-04

Sep-04

Jul-04

Aug-04

Jun-04

Apr-04

May-04

Mar-04

Jan-04

Feb-04

Dec-03

Oct-03

Nov-03

Sep-03

Jul-03

Aug-03

Jun-03

Apr-03

-60%

May-03

-40%

Mar-03

Y-O-Y % Change in RPKs

By October 2003, air travel volumes had recovered to pre-SARS levels, only six months after the outbreak began.

International traffic statistics from IATA show that Asia Pacific carriers had fully recovered to pre-SARS levels by October 2003. In contrast, the industry has yet to fully recover from 9/11 as traffic levels are still below 2000. During the SARS outbreak, Asia Pacific carriers saw traffic declines of 50% during the initial months of the crisis.

North America was the only world region Source: IATA International Traffic Statistics outside of Asia that had SARS deaths; however its carriers did not experience the same level of traffic declines (-20% range) compared to their Asian counterparts. IATA’s international traffic statistics showed that North American carriers had recovered to pre-SARS levels by November 2003, showing a small traffic increase of 3% for the month.

Pent Up Travel Demand Abacus International, Asia’s leading travel reservations company, had reported that year-over-year travel bookings beginning in June 2003 exceeded the same month in the previous year, that is, travel booking patterns had returned to levels experienced prior to SARS. The recovery from SARS in essence began only a few short months after the outbreak began.

Page 1 December 2004

InterVISTAS Consulting Inc. Market Intelligence Report ©InterVISTAS Consulting Inc.

RECENT CHANGES IN TRAVEL AGENT COMMISSIONS FOR DOMESTIC TRAVEL December 2004

Although there has been a shift towards greater consumer-direct sales via the Internet and call centres, traditional travel agency channels still represent a significant share of total ticket sales. In order to encourage travel agencies to book with them, all of the major Canadian carriers currently offer commissions on at least some classes of domestic travel. In recent months, there have been some significant changes to domestic commissions, including the reintroduction of select commissions by Air Canada on global distribution system (GDS) bookings, as well as an increase in all commissions by WestJet on GDS bookings.

Angelica Sparolin Research Manager

Air Canada had previously discontinued all domestic commissions in April 2002, similar to carriers in the U.S. Historically, base commissions had been in the rage of 8% to 11%. In 2003, commissions of 9% were reinstated on select fare categories for bookings made via the carrier’s agency website. In mid-2004, Air Canada reintroduced a 5% commission on tickets booked through one select GDS (Sabre) and only in the Latitude fare category. In November 2004, WestJet increased commissions on tickets booked through select GDSs (Sabre, Galileo and Worldspan) from 5% to 9%, matching rates paid on bookings made through the carrier’s agency website. Jetsgo, CanJet and Harmony currently offer the highest domestic base commissions at 10% on Internet bookings. These carriers also offer 5% commissions on domestic GDS bookings. There has been little information provided by the airlines for these recent increases in commissions. Some possible reasons for the changes may include pressure from GDSs as they struggle to maintain market share, as well as pressure from travel agency associations. The greatest influence, however, is likely competitive factors. As the number of carriers in Canada has expanded and their route offerings increased in recent years, there is greater competition for agency bookings. The air carriers appear to be offering commissions on the full range of booking channels (GDS, Internet and call centres) in order to increase the convenience and financial reward of booking with a particular airline.

Carrier Air Canada

WestJet* Jetsgo CanJet Harmony Airways**

Domestic Commission Structure GDS Executive/Freedom Latitude Fun Tango All Classes All Classes All Classes All Classes

Internet 0% 5% 0% 0% 9% 5% 5% 5%

Executive/Freedom Latitude Fun Tango All Classes All Classes All Classes All Classes

0% 5% 9% 9% 9% 10% 10% 10%

Sources: Air carrier websites/press releases, industry publications and travel agency input. *WestJet also offers 5% commissions on agency bookings through their call centre and on group bookings. **Harmony also offers 5% commissions on agency bookings through their call centre.

Page 2 December 2004

InterVISTAS Consulting Inc. Market Intelligence Report ©InterVISTAS Consulting Inc.

THE VIRGIN GROUP OF CARRIERS December 2004

The Virgin group of air carriers, founded by music industry entrepreneur, Richard Branson, has grown globally in recent years with successful operations in Europe and Australia. In 2005, Virgin America will begin operations in the U.S. in addition; Virgin Nigeria will operate African services. Virgin Airlines has expanded globally from its UK base and in the process has impacted the markets in which it serves. The Virgin brand has distinguished itself from other airlines by offering innovative products and services, providing an exceptional level of service and offering low fares giving its customers excellent value for money.

The Beginning: Virgin Atlantic

Doris Mak Senior Project Manager

In June 1984, Virgin Atlantic was born. Branson publicly announced that his new air carrier would provide long haul services between London and New York. This was a surprise to everyone, as Branson did not have any previous dealings in the aviation industry. However, today, Virgin Atlantic is the UK’s second largest long-haul carrier of passengers and freight. The airline currently operates to 25 destinations around the world with a fleet of 24 aircraft. Virgin Atlantic is 51% owned by the Virgin Group. In April 2000, Singapore Airlines purchased a 49% stake in the airline.

Continued Global Expansion of the Virgin Group With the success of Virgin Atlantic, the Virgin Group of air carriers has expanded its low cost operations to other world regions. •

Virgin Express (est. in 1992) is a low fare airline that operates to 13 European destinations from its Brussels hub.

•

Virgin Blue (est. in 1999) is a low fare airline that operates domestic Australia flights. TransTasman flights and other international flights are operated by sister airline, Pacific Blue (est. in 2004) which is based in New Zealand.

•

Virgin America (est. in 2003) is anticipated to begin low cost operations in the U.S. in 2005. The airline’s operational base will be in San Francisco with corporate headquarters in New York.

•

Virgin Nigeria (est. in 2004) will replace Nigeria Airways. The airline will be majority owned by local investors. The Virgin Group will be a strategic investor and technical partner. The airline will be based in Lagos and will operate domestic flights and international flights to Europe, the U.S. and the Middle East.

•

Recent news indicates that Branson is also interested in making an investment in India.

The Future: Virgin Galactic As the Virgin group of carriers continues to expand its operations globally, Branson has also announced that Virgin Galactic will provide space travel by 2007.

Page 3 December 2004

InterVISTAS Consulting Inc. Market Intelligence Report ©InterVISTAS Consulting Inc.

AIRLINE DATA – CANADA Traffic and Load Factors on Canada’s Major Air Carriers - November 2004 Passenger Traffic

Air Carrier

OTHER CARRIERS:

CanJet: not reported

Capacity

% Change from 2002

% Change over 2003

% Change from 2002

Change over 2003 +5.4 pts (to 74.6%)

Change from 2002

+3.9%

+1.4%

-3.6%

-8.8%

Domestic (Mainline)

+2.6%

+3.2%

-8.5%

-13.1%

+8.3 pts

+12.2 pts

Jazz

+0.8%

+4.2%

International & Charter

-13.8%

-16.9%

+9.7 pts

+13.5 pts

+4.5%

+0.5%

-1.3%

-6.7%

+4.1 pts

+5.3 pts

WestJet

+19.4%

+76.1%

+30.9%

+88.3%

Jetsgo

+36.5%

+458%

+45.5%

+493%

Analysis:

+7.5 pts

-5.6 pts (to 58.5%) -4.3 pts (to 65.2%)

-4.0 pts -4.1 pts

Air Canada Domestic Mainline Mainline

• Air Canada recorded its eighth consecutive month of record domestic and system load factor in November 2004. Domestic traffic surpassed November 2002 levels as capacity continues to be reduced. • For the first time in nine months, Air Canada’s international capacity decreased although traffic was up (+4.5%). The largest decline was in the transborder sector (-16%) and European services (-9.0%). Total international capacity is still below 2002 levels. • In November 2004, WestJet’s capacity outgrew traffic, resulting in a lowered load factor of about 59%. WestJet’s President and CEO, Clive Beddoe, attributed the decline in load factor to computer failures involving the carrier’s revenue and inventory management system, which affected WestJet’s ability to adjust fares and report seat inventory accurately, limiting the carrier’s ability to stimulate the market with low fares. In 2003, WestJet’s break even load factor is estimated to have been roughly 61%.

1Air

Load Factor

Available Seat Kilometres

% Change over 2003

Air Canada1

LOAD FACTORS

Revenue Passenger Kilometres

20% 15% 10% 5% 0% -5% -10% -15%

Jazz data is not included in this graph

Nov- Dec 03

Jan- Feb 04

Mar April May Jun July Aug

Dom RPK

Sep

Oct

Nov

Dom ASK

Air Canada International 40% 30% 20% 10% 0% -10% Nov- Dec 03

Jan04

Feb

Mar April May Jun

Int'l RPK

July

Aug

Sep

Oct

Nov

Int'l ASK

WestJet WestJet 60% 50% 40% 30% 20% 10% 0% Nov- Dec 03

Jan- Feb 04

Mar

April May Jun July

RPK

Aug Sep

Oct

Nov

ASK

Canada Mainline consists of all Air Canada with the exception of Jazz.

Page 4 December 2004

InterVISTAS Consulting Inc. Market Intelligence Report ©InterVISTAS Consulting Inc.

AIRLINE DATA – U.S. U.S. Airlines Release November 2004 Traffic Figures Traffic Data – November 2004 Airline

Notes:

1. 2.

Load Factor

Traffic (RPMs – millions)

(ASMs – millions )

Capacity

73.4%

10,157

13,835

á2.8 pts

á8.2%

á4.1%

67.1%

555

827

á1.5pts

á31.3%

á28.4%

70.5%

850

1,207

á7.0 pts

â6.0%

â15.3%

77.6%

5,227

6,736

á2.3 pts

á10.1%

á6.9%

73.4%

8,800

11,984

á2.4 pts

á9.7%

á6.1%

83.8%

1,382

1,649

á2.2 pts

á40.5%

á36.7%

77.7%

5,768

7,421

á1.4 pts

á10.7%

á8.7%

65.5%

4,292

6,558

á1.8 pts

á14.1%

á11.1%

76.1%

8,746

11,487

á0.4 pts

á3.6%

á2.9%

73.1%

3,084

4,220

á0.5 pts

á2.0%

á1.3%

Mainline Load factor includes scheduled service only

Sources: Carrier traffic reports.

Page 5 December 2004

InterVISTAS Consulting Inc.Market Intelligence Report ©InterVISTAS Consulting Inc.

Summary of Total Year-Over-Year Passenger Traffic Performance at Selected Canadian Airports

2003

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

-3.1%

MontréalTrudeau +2.7%

-0.7%

+10.4%

+1.4%

+7.4%

+2.5%

+15.4%

+1.1%

-1.7%

-1.3%

St. John’s +9.4%

+0.1%

+2.2%

+9.0%

+8.0%

+7.2%

+6.5%

+5.8%

-0.05%

+13.7%

+9.6%

-0.3%

+19.8%

+9.4%

December

+1.9%

+2.8%

+8.5%

+5.4%

+4.9%

+6.0%

+2.9%

+16.1%

+9.1%

+0.8%

+2.0%

+13.9%

4th

-0.1%

+0.5%

+6.4%

+3.9%

+7.4%

+4.5%

+6.4%

+1.9%

+15.6%

+6.6%

-0.4%

+6.33% +10.8%

Full Year

-4.6%

-3.7%

+1.3%

+2.7%

+2.9%

+1.3%

+5.1%

+4.2%

+7.3%

+2.9%

-0.5%

+2.4%

+9.4%

January

+2.3%

+1.5%

+8.6%

+3.9%

+7.7%

+3.5%

+6.4%

+3.2%

+12.4%

+5.9%

-2.2%

+8.3%

+12.8%

February

+8.6%

+7.9%

+18.0%

+5.3%

+10.7%

+13.9%

+11.7%

+5.6%

+11.4%

+11.6%

+7.8%

+2.8%

+19.8%

March

+9.3%

+5.2%

+16.4%

+2.0%

+8.0%

+11.4%

+9.0%

+8.2%

+2.6%

-2.4%

+3.9%

+21.3%

Quarter

+6.8%

+4.8%

14.4%

+3.7%

+8.6%

+9.7%

+9.9%

+6.1%

+10.5%

+ 6.5%

+1.1%

+5.0%

+18.0%

April

+30.6%

+20.5%

+29.5%

+11.5%

+8.6%

+20.8%

+11.3%

+16.9%

+12.7%

-0.3%

+10.9%

+2.6%

+20.1%

May

+30.8%

+20.8%

+23.5%

+5.5%

+7.5%

+7.6%

+9.1%

+19.4%

+8.0%

-1.3%

-0.3%

-5.5%

+15.2%

Toronto

Vancouver

October

-2.3%

November

1st

Quarter

2004

June

+18.5%

+16.1%

+16.6%

+8.4%

+2.8%

+12.1%

+9.8%

+7.8%

+8.6%

+3.0%

+1.7%

-4.3%

+16.0%

2nd Quarter

+26.2%

+18.8%

+22.8%

+8.4%

+6.2%

+13.2%

+9.7%

+14.5%

+9.7%

+0.5%

+3.8%

-2.5%

+16.9%

July

+17.2%

+10.4%

+17.2%

+5.0%

+0.8%

+5.7%

+9.0%

+10.5%

+4.7%

-0.5%

+5.5%

+1.4%

+10.6%

August

+16.0%

+4.9%

+16.4%

+1.9%

+2.2%

+6.2%

+7.9%

+6.9%*

-2.0%

-5.9%

+5.4%

+1.5%

+10.1%

September

+16.1%

+11.5%

+13.3%

+13.0%

+6.3%

+7.9%

+9.4%

+8.6%

+8.3%

+12.1%

+5.3%

-0.6%

+13.4%

3rd

+16.5%

+8.7%

+16.7%

+6.2%

+2.9%

+6.6%

+8.4%

+8.6%

+3.3%

+1.1%

+5.4%

+0.8%

+11.2%

+14.8%

+7.0%

+10.6%

+10.7%

-4.0%

+11.9%

+1.1%

+3.7%

-1.4%

+9.1%

+7.9%

+1.9%

+18.2%

Quarter

October

Source: Transport Canada Page 6 December 2004

NEWS ARTICLES AIR CANADA UPDATE

FUEL PRICES December 1, 2004 SPOT OIL PRICES DROP FUTURES PRICES DECREASE Crude Oil Prices: Spot – US $45.49 (down 8% from November) Futures •

6 month - $45.59 (April 2005 delivery)

•

12 month - $43.83 (October 2005 delivery)

•

2 year - $41.40 (October 2006 delivery)

•

5 year - $37.99 (December 2009 delivery)

AIR CANADA ADDS CALGARY-FORT MCMURRAY SERVICE, INCREASES CALGARY-EDMONTON FLIGHTS Air Canada will be adding capacity in Western Canada during winter 2005 as a result of increased activity in the petroleum industry. Beginning 10 January 2005, daily non-stop services will be introduced between Calgary and Fort McMurray. In addition, two additional daily flights will be added between Calgary and Edmonton for a total of 16 daily flights, and all services between Calgary and Grand Prairie will be operated with Dash 8 aircraft to increase capacity (previously, some flights had used the Beech 1900 aircraft).

AIR CANADA ADDS ONE ADDITIONAL VANCOUVER-KELOWNA FLIGHT DURING WINTER PEAK Between 26 December 2004 and 3 January 2005, Air Canada will operate one additional flight between Vancouver and Kelowna on Monday and Sunday of each week to accommodate the winter peak season.

OTHER CANADIAN AIRLINES

Jul y Au g Se ust pte mb er Oc to No ber vem b De er cem ber

Ap ril Ma y Jun e

$60.00 $55.00 $50.00 $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 De cem be r Jan -03 ua ry-0 4 Fe bru ary Ma rch

US$ per Barrel

Monthly Spot Prices

WESTJET CONVERTS B737-600 PURCHASE OPTION WestJet Airlines has decided to purchase one additional B737-600 by converting the second of 12 purchase options into a firm delivery. The aircraft is scheduled to be delivered in 2006.

WESTJET INCORPORATES FUEL SURCHARGE INTO TRANSBORDER AIRFARES WestJet has incorporated its CDN$20/US$15 fuel surcharge on transborder flights into its advertised airfares. The fuel surcharge on fares for flights within Canada was incorporated into its advertised fares in January 2004.

Page 7 December 2004

WESTJET INCREASES COMMISSION FOR GDS BOOKINGS, SIMPLIFIES FARES WestJet has increased the commission it pays to travel agents for bookings made via GDS from five percent to nine percent. The carrier has also reduced advertised fares through its call centre, on GDS, and on its website by $3, so that the same fare information is displayed on both GDS and its website.

WESTJET TO LAUNCH TORONTOKELOWNA AND CALGARY-HALIFAX SERVICES, INCREASES FLIGHTS FROM CALGARY TO REGINA, PHOENIX AND SAN FRANCISCO Starting 10 January 2005, WestJet will launch non-stop services between Toronto and Kelowna as part of its winter schedule. From 9 February 2005, non-stop services between Calgary and Halifax will also be introduced. Other schedule enhancements include one-stop services between Toronto and Victoria, additional non-stop flights between Calgary and Regina, and increased transborder services from Calgary to Phoenix and San Francisco.

JETSGO ADDS REGIONAL ROUTES IN WEST AND EXTENDS SEASONAL SERVICES TO YEAR-ROUND FLIGHTS Starting 10 January 2005, Jetsgo will begin non-stop service between Calgary and Kelowna six days per week, and non-stop service from Saskatoon to Winnipeg and Edmonton daily along with 2 daily weekday and 1 weekend non-stop Winnipeg to Vancouver services. Prince George will receive daily nonstop services to Vancouver beginning 16 January 2005, while Calgary-Fort McMurray service will be operated five days per week beginning 23 January 2005. From 10 January 2005, services from Edmonton to Abbotsford and Victoria will be extended to year-round operations, operating five days per week.

NEWS ARTICLES OTHER CANADIAN AIRLINES – CON’T JETSGO TO LAUNCH TORONTOOTTAWA SHUTTLE Beginning 10 January 2005, Jetsgo will launch weekday shuttle services between Toronto and Ottawa. The service will be operated every two hours between 7 am and 7 pm for a total of 14 flights on the route each weekday. Jetsgo launched shuttle services between Toronto and Montreal earlier in April 2004.

U.S. AND INTERNATIONAL AIRLINES UNITED AIRLINES’ EXCLUSIVITY PERIOD EXTENDED TO END OF JANUARY 2005 United Airlines has received approval from the bankruptcy court to extend the exclusivity period to submit its reorganisation plan through to 31 January 2005. The exclusivity prevents creditors from submitting an alternative reorganisation plan to the court. United Airlines first filed for Chapter 11 bankruptcy protection in December 2002.

EMIRATES TO LAUNCH TORONTO FLIGHTS? Emirates Airlines has recently begun to place full page ads in Toronto newspapers. The airline currently only serves New York in North America (launched in June 2004) and its 2005 route plan only shows new routes to the Seychelles, Seoul, Hamburg, and Geneva.

Page 8 December 2004

ALASKA AIRLINES EXPANDS SERVICES FROM VANCOUVER Beginning 13 February 2005, Alaska Airlines will boost services to Vancouver with the launch of daily non-stop flights to San Diego, and seasonal services to Palm Springs five days per week. In addition, two weekly flights will be added between Vancouver and Las Vegas for a total of nine non-stop flights per week.

NORTHWEST TO START TORONTOMILWAUKEE SERVICE Starting 22 February 2005, Northwest Airlines will offer two flights per day between Toronto and Milwaukee. The service will be operated by Northwest Airlink partner Pinnacle Airlines with CRJ aircraft. Air Canada already operates on this route.

RYANAIR NEGOTIATES LOW-COST DEAL AT SHANNON AIRPORT Ryanair has secured a deal with Shannon Airport that includes deeply-discounted landing and passenger fees. As a part of a fiveyear route expansion deal, the low-cost carrier negotiated a landing fee based on a charge per passenger, rather than an aircraft weight based fee. The charge will be €0.50 per passenger on new routes opened from the airport and a fee of €1 per passenger that will increase to no more than €2 based on volume growth on existing routes. Note that the average landing charge at Shannon works out to €7.50 per passenger. Ryanair has announced the addition of two extra routes from Shannon: to London Stansted and to Liverpool. The airline also flies to Frankfurt Hahn, Glasgow Prestwick, Charleroi and Beauvais from Shannon.

NEWS ARTICLES AIRPORTS GTAA UNVEILS PLANS FOR NEW AIRPORT IN PICKERING The Greater Toronto Airports Authority (GTAA) has released a draft plan for the construction of a $2.0 billion airport in Pickering, Ontario, about 30 km east of Toronto. Under the plan, the airport would have two runways, and be open to recreational and private aircraft by 2012, eventually expanding to include commercial carrier traffic-serving as a traffic reliever airport for Toronto Pearson International. The plan will serve as the basis for the Project Description, which includes further studies, analysis and public consultation.

VANCOUVER INTERNATIONAL TO LAUNCH NEXUS AIR PILOT PROGRAM Starting 30 November 2004, a 17-month pilot launch of the Nexus Air program will begin at Vancouver International Airport. The program uses iris scanning technology to check a traveller’s identity, and allows passengers registered in the program faster access through border crossings between Canada and the U.S.

VANCOUVER AIRPORT SERVICES TO MANAGE FOUR AIRPORTS IN HONDURAS Vancouver Airport Services, a subsidiary of the Vancouver International Airport Authority, has finalised a contract to manage and operate four airports in Honduras including Tegucigalpa, San Pedro Sula, La Ceiba, and Roatan. The subsidiary also manages airports in Cranbrook, Fort St. John, Kamloops, Hamilton and Moncton, as well as international airports in New Zealand, Egypt, Turks and Caicos, Jamaica, Chile and the Dominican Republic.

Page 9 December 2004

CALGARY AIRPORT COMPLETES TERMINAL EXPANSION Calgary International Airport has completed the Concourse D Widening Project – a three level expansion of its main terminal. Approximately 20,000 square meters of space has been added to the terminal for a total of 141,000 square meters. The $84 million project brings the total capital investment in the airport by the Calgary Airport Authority to $722 million since taking responsibility of the airport from the Government of Canada in 1992.

AIRCRAFT MANUFACTURERS BOEING’S 737-900X TO BE LAUNCHED INTO SERVICE BY 2007 Boeing will introduce the B737900X, an enhanced model of the B737-900 into commercial service by 2007. The manufacturer expects the model to be certified in 2006, and is already authorised to market the aircraft to carriers. Boeing states that the B737-900X can fly about 2,800 nautical miles with 180 passengers. The aircraft has a maximum seat capacity of 215.

BOMBARDIER ANNOUNCES LOWER THIRD QUARTER PROFITS, CUTS CRJ200 PRODUCTION Bombardier announced consolidated net income of US$10 million on revenues of US$3.6 billion for the third quarter ended 31 October 2004. This is a decrease from a net income of US$133 million in the same period last year. The manufacturer indicated that production of the CRJ-200 will be further reduced from one every four days to one every five days, for a total of 54 deliveries in the next fiscal year.

NEWS ARTICLES AIRCRAFT MANUFACTURERS – CON’T AIRBUS RECEIVES APPROVAL TO INCREASE TIME BETWEEN MAINTENANCE CHECKS Airbus has received approval from the Federal Aviation Administration (FAA), European Aviation Safety Agency and Transport Canada to increase the specified time between scheduled maintenance checks, lowering the cost for air carriers. The time between aircraft checks is usually specified by the manufacturer and based on a combination of calendar time, number of flights and/or flight hours.

AIRBUS RECEIVES APPROVAL FROM BOARD TO OFFER A350 Airbus has received approval from its shareholders, EADS and BAE Systems to start making commercial offers to launch customers for the A350 model. The A350 will have a common type rating with the A330, and be offered in two models. The A350-800 will have a seating capacity of 245 passengers in a three class configuration, and a range of about 15,900 km. The A350-900 will seat 285 passengers in a three class configuration, and have a range of approximately 13,900 km. If the A350 program is eventually launched, the aircraft may enter service in the first half of 2010.

CARGO UPS CANADA TEAMSTERS UNION 24HOUR STRIKE RESOLVED 3,800 members of Teamsters Canada went on strike for 24 hours on 22 Nov, having refused offers by UPS in the negotiation of a new collective agreement. UPS’ new offers were accepted by the Union’s negotiating team but are still subject to a vote by the employees. During the strike, the Independent Pilots Association (UPS’s pilots union) honoured Teamsters Canada’s primary picket lines.

Page 10 December 2004

PROLOGIS ENTERS CANADA WITH DISTRIBUTION FACILITIES ProLogis has acquired 134 acres of land in Mississauga, Ontario to develop seven distribution facilities. The company says that the facilities will allow ProLogis to respond to growing consumer demand in the area. Construction of the first three facilities is slated to begin in March 2005. ProLogis has obtained an interim credit facility provided by the Bank of America through its Canadian branch.

AIR BRIDGE CARGO TO OPERATE DUAL HUB NETWORK Air Bridge Cargo plans to develop two cargo hubs in its network that will link destinations in East Asia, the Commonwealth of Independent States (CIS), Europe and the U.S. The focus cities will be Moscow and Krasnoyarsk (500 km north of the Russia-Mongolia border). From Moscow, the carrier will serve points in India, Turkmenistan, and other CIS countries. The U.S. and China will be served from Krasnoyarsk. The cargo carrier has also taken delivery of two Boeing 747-200s previously owned by Alitalia, and plans to lease a third in 2005.

DHL REQUIRES ABX TO CUT 2005 FLEET DHL has told ABX Air to cut its fleet by 26 aircraft for 2005. ABX Air, under contract as provider of air lift for DHL and Airborne, said that the fleet reduction will reduce their gross revenues by $86 million-$96 million. ABX Air will be required to remove 16 DC-9s and 10 DC8s, affecting 22 routes. ABX will also add four B767 aircraft under its contract with DHL. .

NEWS ARTICLES CARGO – CON’T TOP CARGO INDUSTRY MEMBERS TO PUBLISH STATISTICS Members of Cargo 2000 will publish their flown-asbooked performance statistics on selected routes starting in March 2005. The 30-member group of select IATA members is making their operational statistics publicly available in an effort to become more transparent. The group, which includes top international cargo airlines, launched the project in 1997 and has only recently reached a point where it can provide a standard measurement of its members’ operations. Other statistics will be released in three phases. Phase One includes post-shipment audits of airport-to-airport movements, Phase Two will monitor door-todoor movement, and Phase Three provides for real-time management at the individual piece level.

BAX GLOBAL TO BUILD NEW MEGAHUB IN SINGAPORE BAX Global will boost its warehouse capacity in Singapore to 1.2 million square feet (111,500 m 2), by the end of next year. Construction will start soon on the new US$48 million mega-hub at the Airport Logistics Park of Singapore (ALPS). The new four-storey complex will offer 400,000 square feet to BAX Global’s existing capacity at Changi Business Park, comprising 800,000 square feet of warehouse space.

MARTINAIR CARGO ADDS AIRCRAFT AND DESTINATIONS Martinair Cargo has added an MD-11 to its fleet, and will be deployed on routes serving Africa and the Americas. The new aircraft brings its fleet to 12 aircraft; eight MD-11s and four Boeing 747s. The carrier has also added three new destinations to its route network: Toronto, Dallas-Fort Worth and Tianjin, China.

Page 11 December 2004

LUFTHANSA CARGO, SHENZHEN AIRLINES TO START JOINT-VENTURE AIRLINE The first carrier to have foreign ownership in China will begin operations after the 2005 Chinese New Year Festival under the name Jade Cargo International. The carrier is a joint-venture owned by Shenzhen Airlines (51% ownership), Lufthansa Cargo (25%) and Deutsche Investitions-und Entwicklungsgesellschaft (DEG Invest) (24%). Jade Cargo International will start serving the domestic China and intra-Asia markets with two A300-600 freighters. It plans to expand its route network to include destinations outside of Asia. Rudolf Tewes has been appointed General Manager of the airline.

NEW CHINESE PRIVATE AIRLINE PREPARES FOR 2004 LAUNCH Okay Airways, one of three new private airlines approved by the Civil Aviation Administration of China (CAAC), is due to begin services this year. Based in Tianjin, near Beijing, Okay Airways will concentrate on domestic cargo and charter operations with a fleet of six Boeing aircraft. The other two approved airlines are United Eagle Airlines and Air Spring.

GOVERNMENT AND REGULATORY U.S. DOT WARNS AIRLINES, TRAVEL AGENTS TO ADVERTISE SURCHARGES U.S. Airlines and travel agents have been warned by the U.S. Department of Transportation (DOT) to include new booking fees in advertised fares to avoid violating the full fare advertising rule. Many large and overseas airlines have imposed a $5-10 surcharge for booking tickets over the phone or in person. The Agency said it would pursue enforcement actions if changes were not made.

NEWS ARTICLES GOVERNMENT AND REGULATORY – CON’T TSA TO CREATE STANDARD AIR CARGO SECURITY REQUIREMENTS The Transportation Security Agency (TSA) has posted a notice of proposed rule making (NPRM) on new air cargo security requirements. Included in the proposed rule is a standard security program for cargo carriers operating aircraft with a take-off weight of 45,000 kg or more. This includes new guidelines on how to conduct focused background checks on workers who handle cargo, but are not operating in secure areas. The new requirements will be combined with the TSA’s Known Shipper program and the agency’s explosive detection system pilot program to work towards the goal of 100% at-risk cargo screening.

OTHER INDIAN GOVERNMENT PLANS FOR AIRPORTS PRIVATISATION India plans to set up two jointventure companies to hold the operating leases of its two largest airports. The Indian government’s plans to privatise Mumbai and Delhi airports includes an offer to private firms for 74% stakes in the airports to raise more than US$1 billion needed for upgrades. Ten groups, including international firms, are in the bidding process, which is expected to close by the end of March 2005.

PEOPLE IN THE NEWS Charles R. Chambers has been elected as the 2005 Board of Governors Chair of the Airports Consultants Council (ACC). Mr. Chambers is a Senior Vice President in the Washington D.C. office of InterVISTAS Consulting Inc. and is widely recognised for his expertise in developing analytically driven policy positions and strategies to help airport and transportation clients. The ACC is the international trade association that represents consulting firms involved in the development of associations and organisations engaged in aviation industry-related activities. DHL Americas appointed John Mullen CEO, succeeding John Fellows, who will take up a new role with Deutsche Post World Net. Sam Gilland, President and CEO of Sabre, has been given the additional job of company chairman. Roy Griffins will become the Director General of Airports Council International (ACI) – Europe starting in December 2004. He was previously the U.K. director general of civil aviation. Griffins succeeds Philippe Hamon, who is retiring after having served since 1991. Nigel Turner, CFO of U.K. carrier bmi, has been appointed CEO, succeeding Austin Reid.

Page 12 December 2004

NEWS ARTICLES PEOPLE IN THE NEWS– CON’T Air Canada has announced the following senior executive appointments, effective 24 Nov 2004: §

Sydney Isaacs is named Senior Vice President, Corporate Development and Chief Legal Officer, ACE Aviation Holdings, Inc. David J. Shapiro is promoted to Vice President and General Counsel, Air Canada. Johanne Drapeau is promoted to Corporate Secretary, ACE Aviation Holdings Inc. and Air Canada. Jack McLean is appointed Controller, ACE Aviation Holdings Inc. and Air Canada

On 15 Dec 2004, Air Canada announced the following senior executive appointments: §

Montie Brewer is appointed President and CEO of ACE’s mainline carrier, operating as Air Canada.

Jon Turner has been appointed Vice President, Maintenance, Air Canada.

Duncan Dee is appointed Senior Vice President, Corporate Affairs and Chief Administrative Officer, ACE. Dee was previously Senior Vice President, Corporate Affairs.

Bradley Moore is appointed President and CEO, Air Canada Ground Handling Services.

Claude Morin is appointed President and CEO, Air Canada Cargo.

Donald Carty, former AMR Corp. CEO, has been elected to the board of CHC Helicopter Corp. along with Chairman and CEO of Booth Creek Management Corp. George Gillett and CHC CEO Sylvan Allard.

BOMBARDIER CEO LEAVES POST Paul Tellier, CEO of Bombardier and former head of Canadian National Railway left Bombardier's top post effective 13 December. At the same time, 2 other board members resigned their positions. These changes suggest that there was disagreement on a strategic issue facing the firm. Current Chairman, Laurent Beaudoin, will assume the role of CEO.

NEW CEO OF HARMONY AIRWAYS Gary Collins, B.C.'s Provincial Finance Minister resigned from public life to pursue a career in the public sector as CEO of Vancouver-based Harmony Airways.

Carlton Donaway has been appointed a member of ACE Aviation Holdings Board of Directors. Donaway was executive chairman of DHL Holdings USA, chairman, president and CEO of Airborne Inc. and president and CEO of ABX Air Inc. Page 13 December 2004

ECONOMIC OUTLOOK FOR 2005 7 December 2004

Real Canadian GDP (Annualised Quarterly % Change)

Canada: improved growth in 2004, likely to continue in 2005. Hit by

6% Historical data

numerous shocks in 2003, such as SARS, mad cow disease and the rising Canadian dollar, the Canadian economy grew by a modest 2% in real terms (i.e., after adjusting for inflation).

Forecast data

5% 4% 3% 2% 1%

So far, it looks like 2004 will be a -1% considerable improvement over 2003. The first three quarters of 2004 saw annualised GDP growth close to or above 3%. Most analysts are predicting Source: Statistics Canada for historical data; OECD for forecast data. that Canada’s GDP growth in 2004 will be around 3% for the year as a whole. 1 This growth has been driven by strong consumer spending and even stronger business investment. Consumer spending grew by 3-4% in each of the first three quarters of the year (on an annualised basis), while business investment on fixed capital increased by 6-7% on an annualised basis. The increased business investment may be due, in part, to the strength of the Canadian dollar, which made imported machinery and equipment cheaper to purchase for Canadian businesses. Q1 2005

Q1 2004

Q1 2003

Q1 2002

The outlook for the Canadian economy in 2005 appears fairly positive. The OECD is forecasting that real GDP will increase by 3.3% in 2005, an improvement over 2004. 2 While exports are expected to weaken as a result of the high Canadian dollar, domestic consumer spending and business investment is expected to remain strong. However, further increases in the Canadian dollar could weaken this economic outlook. Daily Exchange Rate: U.S. Dollar per Canadian Dollar 0.85

Increase since Jan-03: 33.0% Increase since Jan-04: 9.4%

The Canadian dollar: where will it go? As mentioned above, the high

Canadian dollar is expected to weaken exports in 2005. There is evidence of this 0.75 occurring already. Statistics Canada reported that exports declined by 0.5% in 0.70 Q3 2004, the first decline in a year. It should be noted that what is occurring is 0.65 not so much the Canadian dollar strengthening, as the U.S. dollar 0.60 weakening. The U.S. dollar has fallen against many other currencies, most notably the Euro. However, since the U.S. consumes approximately 85% of Canada’s exports, the U.S. dollar exchange rate is a major factor for the Canadian economy. As well, with the Chinese Renminbi pegged to the U.S. dollar, Canadian resource exports to China may decline. Oct-04

Jul-04

Apr-04

Jan-04

Oct-03

Jul-03

Apr-03

Jan-03

Oct-02

Jul-02

0.80

Apr-02

Manager, Economic Analysis

Jan-02

Ian Kincaid

Q1 2001

Source: Prof. Werner Antweiler, University of British Columbia

The Organisation for Economic Co-operation and Development (OECD) and The Economist magazine both predict 3.0% real annual GDP growth for 2004. 2 Source: OECD Economic Outlook No. 76, Preliminary Edition, 30 November 2004. The Economist is also forecasting growth of 3.3%. Page 14 InterVISTAS Consulting Inc. Market Intelligence Report December 2004 ©InterVISTAS Consulting Inc. 1

ECONOMIC OUTLOOK FOR 2005 – CON’T It is expected that the Canadian dollar will remain strong against the U.S. dollar for some time to come. Some analysis are even predicting further increases - Donald Coxe, a global portfolio strategist with BMO Financial Group, predicts that the Canadian dollar could hit $1 U.S. in the next 18 months - a level that has not been seen since the mid-1970s. It appears that the high Canadian dollar may be here to stay for the time being, and may increase even further.

Impact on Canadian airports. The strong Canadian dollar makes Canada a more expensive place for Americans to visit, which could negatively impact on tourism. However, the exchange rate is only one factor affecting tourism. The most important factor may be the health of the U.S. economy which, as discussed below, has improved substantially. The flip side of the strengthening Canadian dollar is that travel to the U.S. has become significantly cheaper, which could mean more outbound travel from Canadian airports. As most Canadian airports handle more outbound travel than inbound, the net result for airport traffic could well be positive. 8%

Historical data

Forecast data

7% 6% 5% 4% 3% 2% 1% 0% -1%

Q1 2005

Q1 2004

Q1 2003

-2%

Q1 2002

quarters of 2004 saw the U.S. economy grow at 3-4% on an annualised basis. The OECD expects real GDP to have grown by 4.4% by the end of 2004, a level of performance not seen since 1999. Business spending has been very strong in 2004 (business spending on equipment and I.T. grew by 8% in Q1 2004 and14% in Q2 2004), while consumer spending has increased by 3-4% each quarter.

Real U.S. GDP (Annualised Quarterly % Change)

Q1 2001

The exchange rate is only one factor affecting tourism … the most important factor may be the health of the U.S. economy.

The U.S. economy: a great 2004, but slowing in 2005. The first three

Source: U.S. Bureau of Economic Analysis for historical data; OECD for forecast data.

The OECD is forecasting that U.S. GDP will grow by 3.3% in real terms in 2005, the same as Canada. The somewhat lower rate of growth forecast for 2005, relative to 2004, is due to expected interest rate increases by the Federal Reserve, a slowing housing market and the lagged effect of high oil prices. While oil prices are expected to moderate in 2005, the effects on demand and on energy costs are expected to slow growth for part of 2005.3 In addition, fiscal policy is also poised to provide less stimulus than in 2004, with lower government spending increases and little in the way of new tax cuts expected.

Overall, the signs are positive for 2005, but risks remain. Canada is forecast to continue its

fairly healthy economic growth into 2005, fuelled by both consumers and businesses. The major risk for Canada is further appreciation in the Canadian dollar (relative to the U.S. dollar) which could reduce exports and inbound tourism. Growth in the U.S. economy is forecast to moderate in 2005 but remain healthy, matching that of Canada. While oil prices are expected to decline in 2005, any future price shocks, due to war, terrorism or demand/supply issues, could slow growth in the U.S. economy.

The BMO Financial Group forecasts that oil prices will be at US$33 per barrel by the end of 2005, close to long-term averages and well below the peak in 2004 of US$52 per barrel. Page 15 InterVISTAS Consulting Inc. Market Intelligence Report December 2004 ©InterVISTAS Consulting Inc. 3

OTTAWA REPORT 7 December 2004

Lapierre Outlines Remainder of Transport Canada’s 2004/05 Budget Estimates Transport Minister Jean C. Lapierre has announced the department’s budget estimates for 2004/05. The last Parliament approved interim funds for the department’s requirements for the first nine months of the fiscal year. On 9 December the House will debate the main and supplementary estimated requirements for the remainder of the fiscal year. Top priorities for the department include:

Sam Barone Regional Vice President Ottawa, ON

Promoting a safe and secure transportation system;

Enhancing trade corridors and improving infrastructure; and

Encouraging sustainable transportation.

Approximately half of the funding flows through the department to Crown corporations and other government agencies. The department itself has about $1.2 billion to support strategic initiatives. One of the largest flow through payments includes $466 million to fund the operations of the Canadian Air Transport Security Authority (CATSA). CATSA services include pre-board screening of passengers and baggage, the deployment of Explosive Detection Systems at airports, the restricted area pass system, and the screening of non-passengers who enter restricted areas at major Canadian airports. The estimate also includes funding for the Airports Capital Assistance Program, which assists regional airports with the financing of capital projects and expansion. A total of 38 projects were selected this year including projects in Dawson Creek, B.C.; Lynn Lake, Manitoba; Moosonee, Ontario; and Sydney, Nova Scotia. Estimates for research and development include testing of new de-icing fluids and the publication of guidelines for removing snow and ice from aircraft wings. The supplementary estimates include approximately $41 million for Transport Canada’s financial relief for airport authorities which was announced in July 2003, as result of a series of market shocks that hit the industry including SARS and the terrorist attacks of September 11th. A $37 million increase in payments is provided to CATSA for capital expenditures related to the deployment of Explosives Detection System (EDS) equipment. This is money that was allocated for 2003-04 but could not be spent due to delays in the deployment of equipment. CATSA expects to have the EDS equipment deployed by 1 January 2006 in partnership with airport authorities.

Proposed Amendments to Canadian Aviation Regulations Announced to Improve Runway Approaches The Transport Minister also announced proposed amendments to the Canadian Aviation Regulations to improve the safety of runway approaches in poor weather and visibility. The principle is that in poor visibility conditions, the crew must be able to see the runway environment, and have sufficient time to position for a safe landing before an approach is attempted. Currently, pilots must be able to see at least 350 m before attempting a landing when visibility is reported by an automated visibility sensor. The new requirements will extend this from 550 m to 1,200 m depending on the type of instrument approach and runway environment. The amendments will ensure that Canadian regulations are on par with international standards, and incorporate recommendations from the Transportation Safety Board. Page 16 December 2004

THE WASHINGTON REPORT 24 November 2004

Secretary Mineta to Remain in Bush Cabinet On 8 December 2004, Secretary of Transportation, Norman Mineta was asked to stay on another term in the Bush cabinet. Mineta had considered stepping down in the event Bush was re-elected, but decided along with his family to stay on if the President asked.

Congress Could Vote On Extending FAAâ&#x20AC;&#x2122;s Reach to Space

Charles Chambers Senior Vice President InterVISTAS-ga2 Washington, D.C.

The Commercial Space Launch Amendments of 2004 was passed by Congress on 19 November, giving the Federal Aviation Administration (FAA) the authority to regulate manned sub-orbital space flight to some extent. The amendment updates the Commercial Space Launch Act of 1984 to create a framework for space flight similar to how airlines are currently regulated. The bill would allow an Associate Administrator for Commercial Space Transportation (AST) to issue experimental permits, facilitating the launch of reusable sub-orbital rockets and regulating safety and liability of reusable sub-orbital rockets. The FAA would have eight years to regulate this new sector, but opponents argue that the bill does not adequately protect passengers. Congress also wants to establish regulations for spacecraft manufacture in preparation for an emerging sub-orbital rocket flight market.

Bush Administration May Re-Attempt Increase Of Foreign Ownership Levels In its second term, the Bush Administration will try again to get Congress to raise airline foreign ownership levels from 25% to 49%. It is not yet clear if the Bush Administration and the DOT will make the same proposal as last term. Karan Bhatia, U.S. Department of Transportation deputy assistant secretary for aviation and international affairs indicated that it is too early to determine what, if anything, the White house will propose.

FedEx to Challenge DOT Repayment Federal Express says it will challenge a ruling by the U.S. Department of Transportation (DOT) that it must repay US$29 million of the $101 million it received under the Air Transportation Safety and Stabilisation Act in 2002. The U.S. DOT released a final determination that FedEx is only eligible for $72 million under the act, and must repay the difference.

U.S. And Mexico to Liberalise New Air Services Agreement The U.S. and Mexico will hold formal negotiations to liberalise their air services agreement Dec. 8-9 in Washington. The current aviation bilateral, last updated in 1999, is restrictive and limits the number of carriers and city-pair markets that carriers from either nation can operate on. Passenger service is restricted to only two combination carriers from each country per city pair and four carriers per country to provide codeshare services between city pairs. On the cargo side, the limit is five carriers per country on each city pair.

Final Order Issued from TSA Requiring PNR Data from Airlines

The Transportation Security Administration (TSA) has issued a final order requiring U.S. airlines to submit Passenger Name Records (PNR) data as a part of its Secure Flight program development. Data must arrive by 23 November for all travel taking place between 1 June and 30 June 2004. The TSA may choose to exclude travel between Europe and the U.S. in order to not violate European Union privacy laws. Under Secure Flight, the TSA will be responsible for comparing PNR data to its database of known or suspected terrorists.

Page 17 December 2004

InterVISTAS Consulting Inc. Market Intelligence Report ÂŠInterVISTAS Consulting Inc.

CARGO CAPERS 26 November 2004

A look ahead. As we near the halfway point of the decade, it is timely to think ahead to what cargo

developments we might see in the second half. There is potential for changes in air policy, industry structure, international service, freighters, and the role of Canadian airports in the global supply chain.

Co-Terminalisation. Expect restrictions on cargo co-terminalisation in the

Robert Andriulaitis Director Transportation & Logistics Studies

Canada-U.S. air bilateral to be lifted. They exist to force U.S. integrators such as FedEx and UPS to use Canadian operators for flying between Canadian airports, even for packages originating in or destined to the U.S. While some say this provision is needed to counter scope clauses in the U.S. integrator labour agreements, such protectionism is increasingly out of step. Minister Lapierre has already indicated it is time to reconsider our dated approach.

Open Skies. Though Canada will not have all the open skies bilaterals it should in this timeframe, it will have taken major steps in that direction. These agreements will include cargo fifths, which will be an important step for Canada’s airports to develop fully as key gateways to the NAFTA marketplace.

A North American Single Market. After talks between the EU and the U.S. on the Transatlantic Common Aviation Area bog down, Canada and the U.S. (and potentially Mexico) will sit down to discuss a North American Single Aviation Market. Talks will include cabotage rights. Although we probably won’t see this in place before 2010, it is coming.

Industry Rationalisation. With Air Canada getting back into freighters, co-terminalisation, ever-

increasing competition from surface transport and intense competition between Canada’s all-cargo carriers, domestic air cargo industry rationalisation is likely. Financial results for privately held carriers such as Cargojet, Kelowna Flightcraft and Morningstar are not available, however, publicly traded Knighthawk lost money in each of the last three years. It is unlikely that the air cargo side will be exempt from the forces that have already forced restructuring of passenger operators.

International Services. Air Canada will acquire its own freighters to operate internationally.

Carriers watching Cargolux in Calgary learn there are untapped international air cargo markets in Canada beyond the traditional gateways of Toronto and Vancouver, and freighter services to secondary Canadian airports will increase significantly in this period.

Freighter Developments. The transition from 727Fs to 757Fs will be well underway. UPS is already using 757s on transborder services; Cargojet and Kelowna Flightcraft are likely to have made at least a partial transition in this timeframe. With the resumption of production, the AN-124 is likely to be a more common sight at Canadian airports. The IL-76 may also make a return with new Stage 3 compliant engines and new avionics. Don’t look for A380 freighters, however; they are unlikely to be serving Canada anytime soon.

The Role of Canadian Airports as NAFTA Gateways. With open skies agreements, international freighter operations by Air Canada, and increased foreign carrier interest in Canada’s air cargo market, Canada’s airports will start playing the role for which they are so well positioned – gateways to the NAFTA marketplace. If a North American Single Aviation Market can be implemented, expect cargo activity at Canadian airports to truly take off, eh. Page 18 December 2004

BLOODBATH IN THE AIR 9 December 2004

Overview The growth of low cost carriers (LCCs) in the United States domestic air travel market has resulted in extensive airfare competition between these type of carriers and network airlines. The competition has been quite fierce. In Canada, low cost carriers are also growing in size with the addition of more aircraft and more non-stop routes throughout the country. As a consequence, Canada is now experiencing the price war phenomenon that has been experienced throughout the United States over the last several years.

U.S. Situation Martin Copeland Vice-President, Airline Marketing & Planning

Currently, there are some half dozen aggressive low cost carriers in the United States including Southwest, JetBlue, AirTran, Spirit and Frontier. The combined seat capacity of these airlines, at this time, amounts to over 500,000 seats per day or 20% of the U.S. domestic total. Furthermore, these airlines are adding a great deal more aircraft than the network carriers with current orders and options amounting to over 900 compared to the 600 aircraft they operate today. As a consequence of this highly evolved level of competition, airfares throughout the United States are lower than ever before. For instance, a recently announced seat sale by AirTran offered a oneway price between Philadelphia and San Francisco at $109.00 USD or on a seat mile basis 4.3 cents per mile. The network carriers have responded by creating their own low cost carrier alternatives such as Delta’s Song and United’s Ted which match the fares, but not necessarily the costs of the LCCs. Because of this airfare bloodbath within the U.S. domestic market, many network carriers have been casting their eyes in other directions to improve their overall financial results. Aircraft used on U.S. domestic routes are now being redeployed to international markets. Some examples are: §

The expansion of Continental into Mexico with 28 cities now served, more cities than even those served by Mexican national carriers;

America West’s major expansion between Western Canada and the United States;

Delta’s increase of services into Atlantic Canada; and

Continental’s expansion of their Newark – Europe flight operations.

Recent Canadian Developments In Canada, three low cost carriers, WestJet, Jetsgo and CanJet, are providing stiff competition to the revitalised, re-organised Air Canada. As well, there are new start-up carriers such as Harmony, Zoom and Regional One. The three main low cost carriers have a current fleet of 88 aircraft devoted mostly to domestic services up against a total Air Canada fleet of some 292 aircraft including Jazz. For domestic operations, the three low cost carriers currently offer 43,000 seats per day or 42% of the domestic total. Furthermore, these carriers have about 70 aircraft on order or on option, which would increase their current fleet size by 77%. Page 19 December 2004

BLOODBATH IN THE AIR – CON’T As a result of this intensive competition, domestic airfares within Canada have fallen dramatically. Last year, we were astounded to see the price of one-way travel between Vancouver and Toronto as low as $119.00. Currently, the standard lowest walk-up fare is some $99.00, but Jetsgo has gone beyond this extremely low fare with a one-way $49.00 fare between Toronto and Vancouver (if you buy a ticket for the return at the lowest available price, which could be $99.00). The $99.00 fare amounts to 4.7 cents per seat mile, which is far below what it costs the airlines to provide the service. This intensive competition is not slowing down. For example, Jetsgo recently announced an aggressive foray into WestJet’s Western Canada territory, with new year-round flights to 6 markets. These new services also come with tantalisingly low price levels in the $49.00 range. In addition, Jetsgo has announced a bi-hourly shuttle service between Toronto and Ottawa, taking Air Canada and WestJet head on. Even crossing the border, prices are starting to fall. Last year’s $99.00 fare between Vancouver and Los Angeles has now been eclipsed by Alaska Airlines $79.00 one-way fare. Furthermore, prices between Vancouver and Palm Springs/Las Vegas/San Diego have also been reduced now down to $74.00. The reaction of Harmony on Palm Springs was rather swift with a new one-way airfare of $59.00.

Implications This airfare war is not financially sustainable. Depending upon how much of a flight load is being carried at these low prices, the return on an average flight could be a substantial operating loss. Even with the apparent 11.1 cents per mile seat cost of WestJet, it doesn’t take too many $99.00 passengers contributing 4.7 cents per seat mile to ensure that the flight is going to be operated at a loss. In the present environment, airlines do not have the power to maintain price increases. Unless the revenue situation improves in the future, some airlines are simply not going to stay in business. It’s a pretty rough re-entry for the re-organised Air Canada, but the reality of today’s competition and low fares would appear to make it very difficult for them to achieve their new financial objectives. Some of the implications for Canadian airports are that those with services of two or more of the four largest scheduled airlines in Canada may see their passenger traffic increase over last year and their airport aeronautical fees rise. However, some of these increased revenues should be set aside next year in a marketing budget to help attract new business if an industry collapse results in one less domestic mainline carrier. If you are a traveller, it’s probably not a bad idea to book your flights now since the competitive environment in the future will no doubt change, restoring prices to a higher norm. This is a collection of information gathered from public sources, such as press releases, media articles, etc., information from confidential sources, and items heard on the street. Thus some of the information is speculative and may not materialise. Prepared by InterVISTAS Consulting Inc.

Page 20 December 2004