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INDUSTRY REVIEW

Page 1 May 2003

© InterVISTAS Consulting Inc.


AIR CANADA FLEET CHANGES 12 May 2003

Fleet: A Key Component to Restructuring Air Canada Now that Air Canada has received court protection from its creditors, the “to-do list” at the carrier is a long one. One of the keys to making Air Canada a competitive and viable airline is a rejuvenation and simplification of its fleet. In general, Air Canada can reduce fuel and maintenance expenditures by operating newer and more efficient aircraft, and can reduce training, labour and inventory costs by operating fewer aircraft types. Recognising this, AC management has identified immediate fleet changes that will occur.

Immediate Fleet Changes As of December 31, 2002, Air Canada operated 232 aircraft in its mainline fleet, with an additional 104 jets and turboprops operated by Jazz, for a total of 336 aircraft. In its CCAA application, Air Canada confirmed that it will implement what is essentially a three-part plan for its fleet: John Weatherill Senior Airline Analyst

1. AC will remove older, less efficient aircraft. AC has indicated that it will cease operating its entire Boeing 737 (25), 747 (6) and BAe-146 (10) fleets. These removals are in addition to the F28 and DC-9 aircraft types that AC removed in 2002.

Operating Fleet Air Canada Airbus A340-300 Airbus A330-300 Boeing 747-400 Boeing 767-300 Boeing 767-200 Airbus A321 Airbus A320 Airbus A319 Boeing 737-200 CRJ Jazz CRJ BAe-146 Dash 8-300 Dash 8-100

Number 9 8 6 35 15 13 50 46 25 25

10 2. As AC will continue to reduce capacity in the coming 10 months, many of the parked aircraft will not be 26 replaced. However, some new aircraft (primarily 58 regional jets) will be added in the short term. AC has announced that it will add 50-seat CRJs to its fleet (probably for both mainline and Jazz), and is examining 90-seat RJs as well. In addition, it has A319, A320 and A321 aircraft on order and scheduled for delivery in 2003.

3. Renegotiate leases on remaining aircraft. As US Airways and United Airlines have met with success in renegotiating aircraft leases in Chapter 11, AC hopes to negotiate its lease rates down to levels that reflect the current environment.

Potential Future Fleet Changes Beyond the changes identified above, Air Canada will need to make additional fleet decisions in the coming years. Before discussing what these changes might include, it is useful to consider what the future structure of the airline’s passenger service will be. AC has indicated that its newly-formed holding company, Air Canada Enterprises, will include three passenger airline subsidiaries: Air Canada, ZIP, and AC Jazz.

Air Canada Air Canada could conceivably become a primarily international carrier, exiting all but a few trunk routes in the domestic market, to focus on transborder and overseas flights.

Page 1 May 2003

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AIR CANADA F LEET CHANGES - CON’T Following the removal of the 737s and 747s, Air Canada will be left with an all-Airbus operating fleet, with the exception of its 767-200/300s and regional jets. It is expected that the carrier will move towards consolidating its fleet around the A320, A330 and A340 families. With an average age of 17 years, the 767-200s should be the first to go. Air Canada has already parked 8 such aircraft, and of the 15 remaining, 9 are owned by the carrier, and can be removed from service relatively easily. The remaining 6 could be phased out as the operating leases expire or are renegotiated. A reasonable replacement for the 767-200s, which are used primarily on domestic routes, is the 166-seat A321. The 35 767-300s in the AC fleet are used on both domestic and international (Europe & Asia) services. With an average age of 9.5 years, they could remain in the fleet longer than the –200s, but may eventually be replaced by Airbus family aircraft. ZIP Lower-cost ZIP will operate increased services domestically, and has begun the application process for transborder flights. ZIP plans to increase its fleet from 9 to 20 aircraft by the end of 2003. In the short term, the additional aircraft will likely be the 737-200s removed from the mainline fleet. However, these planes have an average age of nearly 22 years, and will need to be replaced as ZIP expands. The 737s could be replaced by A319s, which have seating capacity comparable to the 737, and commonality with the A320/A321. Note, however, that if ZIP becomes more independent of AC and no longer shares pilots, ZIP could adopt its own fleet type, such as next generation 737s. AC Jazz AC Jazz will likely continue to operate domestic and transborder regional flights, but to fewer markets than today. The remaining four-engine BAe-146s are to be replaced with CRJs. In the medium term, there is reason to believe that Jazz will reduce or even eliminate its turboprop fleet. Several industry groups have forecast a declining share for turboprops in the regional market, and Bombardier expects that just 21% of its deliveries to 2020 will be props. Looking five years down the road, the Dash-8s will be, on average, nearly 20 years old. The 50-seat Dash 8-300s may be replaced by CRJ200s, which have similar seat capacity. The smaller Dash 8-100s, with just 35 seats, could be eliminated altogether.

Summary Air Canada’s low-cost competitors achieve cost efficiencies by operating just one aircraft type, and by constraining themselves to routes which can be served by that aircraft type. On the other hand, the network airline model is built on the connection of passengers from regional markets to international markets. As a result, it is not practical for Air Canada to reduce its fleet to just one aircraft type, or even one family of aircraft. However, by simplifying its fleet to the extent possible, Air Canada can achieve part of the cost savings necessary to ensure its long-term survival.

Page 2 May 2003

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LOWER FUEL PRICES ARE COMING In recent weeks, the price of crude oil has fallen substantially… Back in January, crude oil prices were at historically high price levels. The price of a barrel of crude oil was rising steadily in previous months mainly due to the threat of war in Iraq and the general strike in Venezuela. Today, both factors no longer contribute to high crude oil prices. The End of War in Iraq The U.S. led war in Iraq began on March 19 with the end of the war declared on May 1, just 40 days later. In the weeks prior to the start of the war, crude oil prices reached a high ($39.99 per barrel) in late February. After the war began, the market uncertainty was lifted resulting in oil prices dropping 33% to $26.85 a barrel. Oil Flows in Venezuela Once again, oil flows from Venezuela, the world’s 6th largest oil producer. The general strike that began in December 2002 crippled the country’s oil industry for weeks while depleting world oil stocks in the process. However, with the end of the strike and improving government stability, oil production is slowly proceeding

Recent OPEC Action With the war in Iraq at an end, it is anticipated that Iraq will soon enter the market with oil exports. As a result, on April 23, OPEC announced quota cutbacks on oil production from its member countries. Declining “Futures” Prices The futures market shows the price of crude oil falling to below $25 per barrel by the middle of next year. On May 9, 2003, the futures price of a barrel of crude oil for delivery in June 2004 is $24.99, approximately 10% lower than the current spot price of $27.64 per barrel. The market is indicating a period of stability, good news for the aviation sector. Crude Oil Futures Prices As of May 9, 2003 $30.00

$25.00

Crude oil prices expected to fall below $25 by mid 2004.

$20.00

Dec-08

Sep-08

Jun-08

Mar-08

Dec-07

Sep-07

Jun-07

Mar-07

Dec-06

Sep-06

Jun-06

Mar-06

Dec-05

Sep-05

Jun-05

Mar-05

Dec-04

Sep-04

Jun-04

Mar-04

Dec-03

Sep-03

$15.00 Jun-03

Senior Market Analyst

…And lower prices in the future

US$/Barrel

Doris Mak

Month of Delivery

Page 3 May 2003

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AIRLINE DATA – CANADA Traffic and Load Factors on Canada’s Major Air Carriers – April 2003 Capacity Passenger Traffic Air Carrier

NEW CARRIERS: LOAD FACTORS Jetsgo: Zip:

72.6% not reported

CanJet:

not reported

% Change over 2002

% Change from 2001

Air Canada 1

-22.3%

-20.7%

Domestic (Mainline)

-22.2%

Jazz International & Charter

Load Factor

Available Seat Kilometres

Revenue Passenger Kilometres

% Change over 2002

% Change from 2001

% Change over 2002

% Change from 2001

-16.7%

-15.3%

-5.0 pts (to 69.6%)

-4.7 pts

-19.6%

-13.4%

-7.1%

-7.7 pts (to 68.5%)

-10.6 pts

-9.8%

n/a

-15.4%

n/a

+3.6 pts (to 57.7%)

n/a

-22.3%

-21.2%

-18.1%

-18.6%

-3.8 pts (to 70.1%)

-2.3 pts

-6.5 pts -9.2 pts (to 65.6%) Note: n/a – As Jazz was not reported in 2001, a percentage change from 2001 could not be calculated for Domestic Jazz and Domestic Consolidated. WestJet

+40%

+98%

+54%

+126%

In its first month under bankruptcy protection, Air Canada continued to suffer a decline in load factor. On a year over year basis, its domestic traffic declined by roughly 21%, while domestic capacity was cut only 14%. Air Canada Canada Domestic Mainline 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25%

Air Canada International International

Jazz data is not included in this graph

Dom RPK Dom ASK

May- Jun 02

Jul

Aug Sep

Oct

Nov Dec Jan- Feb Mar Apr 03

WestJet continues to be unable to win increases in traffic that keep up with its aggressive capacity expansion. In April, the gap between its traffic and capacity growth widened to 14%, resulting in a disturbing drop in load factor to just over 65%.

25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25%

Int'l RPK Int'l ASK

May- Jun Jul Aug Sep 02

Oct Nov Dec Jan- Feb Mar 03

Apr

WestJet

80% 70% 60% 50%

RPK ASK

40% 30% 20% 10% 0%

1

May- Jun 02

Jul Aug Sep

Oct Nov Dec

Jan- Feb Mar 03

Apr

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

Page 4 May 2003

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AIRLINE DATA – U.S. U.S. Airlines Release 1 st Quarter 2003 Financial and April 2003 Traffic Figures – Airline

1

2

3

Notes:

Q1-03 Net Income

Q1-02 Net Income

(US$ - Millions)

(US$ - Millions)

$1,043

Load Factor

(RPMs – millions)

Traffic

Capacity

$1,563

70.5%

9,330

13,229

LOSS

LOSS

á 1.2 pts

â 4.8%

â 6.5%

$11

$2

74.8% 3

1,227

1,855

LOSS

PROFIT

â 0.4 pts

á 19.1%

á 30.4%

$221 LOSS

$166 LOSS

72.4%

4,466

6,167

â 1.1 pts

â 8.4%

â 7.0%

$466 LOSS

$354 LOSS

70.5%

7,423

10,532

â 0.6 pts

â 11.2%

â 10.4%

$17

$13

84.1%

898

1,068

PROFIT

PROFIT

â 0.2 pts

á 80.8%

á 80.4%

$396 LOSS

$171 LOSS

71.9%

5,042

7,013

â 4.4 pts

â 13.1%

á 7.8%

$24 PROFIT

$21 PROFIT

66.6%

3,935

5,907

á 0.3 pts

á 5.5%

á 5.0%

$1,343

$510

71.4%

7,477

10,479

LOSS

LOSS

â 0.6 pts

â 13.4%

â 12.6%

$1,613

$298

74.1%

3,078

4,158

PROFIT

LOSS

â 0.3 pts

â 13.5%

â 13.2%

(ASMs – millions)

Includes American Airlines and American Eagle Does not include Express Jet 3. Load factor includes scheduled service only 1. 2.

Source: Carrier financial and traffic reports .

Page 5 May 2003

© InterVISTAS Consulting Inc.


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

Vancouver

MontrealDorval

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

St. John’s

-8.8%

-13.6%

-1.8%

-11.7%

-11.5%

-16.5%

-13.6%

-8.4%

-2.1%

-6.7%

-7.5%

-10.3%

April

-9.2%

-13.5%

-5.2%

-8.1%

-13.1%

-9.3%

-12.3%

-6.4%

-5.7%

-13.4%

-12.6%

-11.0%

May

-9.3%

-9.5%

-2.3%

-4.9%

-11.4%

-5.7%

-4.7%

-5.1%

-3.8%

-3.0%

-7.2%

-7.3%

June

-7.4%

-9.8%

-4.0%

-7.0%

-12.3%

-6.0%

-1.2%

-7.4%

-8.8%

-9.7%

-13.2%

-16.8%

2nd Quarter

-8.6%

-10.9%

-3.8%

-6.7%

-12.3%

-6.9%

-6.0%

-6.3%

-6.1%

-8.7%

-11.1%

-11.9%

July

-7.2%

-8.3%

-3.6%

-9.4%

-6.6%

-5.1%

+4.4%

-13.1%

-6.3%

-9.5%

-13.0%

-7.0%

August

-7.7%

-7.9%

-2.3%

-7.5%

-8.8%

-2.8%

+7.5%

-8.8%

-1.7%

-13.6%

-10.5%

-8.0%

September

+12.6%

+22.4%

+20.1%

+7.6%

+23.7%

+16.4%

+26.1%

+13.2%

+11.8%

+12.6%

+10.5%

+20.0%

3rd Quarter

-2.5%

-0.2%

+2.9%

-4.4%

+0.50%

+1.2%

+11.2%

-4.8%

+0.2%

-5.4%

-5.8%

-0.8%

October

+12.5%

+15.3%

+14.3%

-0.1%

+6.4%

+5.9%

+7.9%

+0.1%

+5.7%

+1.7%

+4.4%

-0.7%

November

+4.7%

+5.3%

+0.6%

+9.4%

+3.0%

+5.7%

+5.7%

+0.1%

-1.4%

+0.2%

+1.2%

-2.3%

+8.2%

+4.3%

+7.8%

+6.9%

+11.7%

+6.3%

+15.2%

+8.1%

+1.4%

+4.3%

+1.5%

+3.2%

+2.2%

n/a

+7.2%

+9.7%

+7.5%

+6.9%

-5.1%

+8.9%

+7.3%

+0.5%

+3.0%

+1.1%

+3.0%

-0.3%

-7.5%

-3.9%

-4.3%

+1.2%

-4.1%

-5.1%

-3.8%

+0.1%

-4.8%

-1.3%

-5.1%

-5.5%

-5.7%

January

n/a

+3.8%

+7.2%

+6.3%

+3.5%

+6.2%

+13.0%

+4.5%

+2.9%

+4.0%

+6.8%

-0.3%

-5.8%

February

n/a

-0.6%

+3.7%

+5.6%

+3.0%

+3.9%

+12.7%

+13.8%

+7.5%

+2.0%

+6.0%

+8.8%

n/a

n/a n/a

+2.2% +4.0%

+5.1% +10.1%

+11.6% n/a

+0.2% +3.3%

+5.0% +3.7%

-3.7% +3.1%

-4.2% +1.3%

n/a n/a

December 4th Quarter Full Year 2003

n/a n/a n/a +3.7% March st 1 Quarter n/a n/a n/a +5.2% Note: Toronto traffic levels derived from Statistics Canada data.

Page 6 May 2003

CANADIAN AIRPORTS

2002

1st Quarter

InterVISTAS Consulting Inc. ©


Chicago UA - 43% AA - 30% Minneapolis NW - 81% San Francisco UA - 49%

Cleveland CO - 62% Detroit NW - 77%

Pittsburgh US - 73%

Salt Lake DL - 62%

Newark CO - 60%

St. Louis AA - 72% Philadelphia US - 61%

Denver UA - 65%

Cincinnati DL - 92%

Memphis NW - 69% L.A. UA - 22%

Washington UA - 44% Dallas AA - 62%

Charlotte US - 82%

Atlanta DL - 72%

Houston CO - 84%

Miami AA - 50%

San Juan AA - 74%

DOMINANT CARRIER TRAFFIC SHARE AT U.S. AIRLINE HUB AIRPORTS

Seattle AS - 42%

Source: US DOT, 2001, based on share of enplaned passengers

Page 6 May 2003

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NEWS ARTICLES AIR CANADA UPDATE JUDGE LIMITS AIR CANADA’S DISCRETION, SPARES LAYOFFS

Justice James Farley of Ontario’s Superior Court of Justice, who is overseeing the restructuring of Air Canada, has limited AC’s ability to bypass its collective agreements. Justice Farley has also ordered AC to suspend the layoff of 200 Vancouver and Edmontonbased flight attendants. As well, Farley approved a $1.05 billion debtor-in-possession financing from GE Capital Inc and he has also extended AC’s protection against its creditors to June 30.

JUDGE APPOINTS MEDIATOR

Justice James Farley has appointed a judge to act as a mediator between Air Canada and its unions. Air Canada and its unions will have 10 days to resolve their differences.

JUDGE OPENS DOOR TO OTHER AEROPLAN OFFERS

Justice James Farley has decided to put a hold on a deal between Air Canada and CIBC and open the process to other bidders until May 10, after a last-minute bid for the unit was put forth by MBNA Corp. The ruling was based on a recommendation by Air Canada’s monitor, Ernst & Young, to open up CIBC’s exclusive Aeroplan agreement for 10 days of bids. Following the decision, a total of 5 bids were received.

AIR CANADA TO CUT $770 MILLION IN LABOUR COSTS

Air Canada plans to cut an extra C$120 million in labour costs per year if it intends to succeed in its restructuring efforts. The carrier had originally planned to save C$650 million but now is increasing the figure to C$770 million. The carrier has requested for a 60-day pay cut of 10% from its unions, a cut that would apply to all employee groups including executive management, with the exception of employees earning less than $25,000 a year.

Page 7 May 2003

AIR CANADA REPORTS Q1 OPERATING LOSS

Air Canada reported a preliminary unaudited operating loss for the first quarter of $354 million compared to a loss of $160 million for the same period in 2002. The carrier also announced measures to reduce operating costs. These measures include: • reduction in capacity by 17% year over year for June, July, and potentially August. Asian and transborder routes are most affected; • temporary suspension until Labour Day of service between Toronto-Kansas City, Toronto-New Orleans, and Toronto-St. Louis; • suspension of service until the summer schedule of 2004 on Calgary-Chicago, Montréal-Atlanta, Montréal-San Francisco, Toronto-San Diego, Toronto-Tokyo/Narita, Vancouver-Washington/Dulles, and Vancouver-Nagoya; • suspension of Dayton and Grand Rapids service; and the grounding of 40 aircraft.

TANGO TO BE DOWNSIZED

Air Canada will cut capacity on its Tango flights by more than 40% in July and August. Starting in May, Tango’s capacity will decrease by 31.5%. After that, Tango’s capacity drops 21.8% in June, 41.6% in July and 41.1% in August. Air Canada stated that its discount capacity is being shifted to Zip Air Inc, which is planning to grow to 20 aircraft by the end of the year.

NAV CANADA FORCES AIR CANADA TO PAY UP

On April 22, Nav Canada filed a judicial order to force Air Canada to pay for services. Air Canada had not paid for navigation services since it received temporary bankruptcy protection on April 1. On May 5, Air Canada reached a settlement with Nav Canada, although neither party released any details concerning the agreement.

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NEWS ARTICLES AIR CANADA LAUNCHES SEAT SALE, UP TO 40% DISCOUNT

CANJET POSTPONES FREDERICTON SERVICE

OTHER CANADIAN AIRLINES

TRANSAT CUTS CAPACITY BY 15%

Air Canada and Air Canada Jazz announced fare reductions of up to 40% for spring/summer travel to over 150 destinations worldwide. The sale begins on May 7 through May 16.

WESTJET Q1 PROFITS FALL 89%

First quarter 2003 net earnings for WestJet Airlines dropped 89%, to C$778,000. Operating revenues increased 26% to C$172 million. Several factors contributed to the decline in profits: • fuel price increases; • price-cutting among Canadian carriers forcing WJ to sell 45% of its seats at deeply discounted prices; and • the war in Iraq.

WESTJET OFFERS SERVICE TO MONTRÉAL

On April 24, WestJet commenced its new daily non-stop Montréal-Calgary service. On July 21, the carrier will enhance its Montréal schedule to include new non-stop Montréal-Hamilton service as well as a non-stop Montréal-Vancouver service.

WESTJET DROPS SAULT STE. MARIE & SUDBURY SERVICE

Effective September 9th and 10th WestJet will drop service from Sault Ste. Marie and Sudbury. The decision to withdraw was a result of the inability to sustain year-round ridership.

CANJET INTRODUCES FREQUENT FLYER PROGRAM

On May 1, CanJet Airlines unveiled its “SmartRewards” customer loyalty program. This marks the first Canadian discount carrier to create such a program. Customers will earn 1,000 reward points for each one-way trip, and when they reach 6,000 points customers can redeem them for a free one-way flight. The carrier plans to bring in partners such as hotels, restaurants and car rental firms. Page 8 May 2003

Due to current market conditions, on May 7, CanJet Airlines decided to postpone its scheduled Fredericton-Toronto service that was slated to begin on June 2. Transat AT Inc. will lay off 500 employees, or 18% of its workforce. The company’s charter airline, Air Transat, will lose 400 employees while Air Transat Holidays and Nolitour/World of Vacations will lose 100 employees. In addition, the airline plans to cut capacity by 15% this summer.

PACIFIC COASTAL FLYING TO CRANBROOK

Beginning early July, Pacific Coastal Airlines will offer daily Vancouver-Cranbrook service.

U.S. & INTERNATIONAL AIRLINES U.S. WEEKLY TRAFFIC STEADYING

For the week ending May 4, 2003, U.S. carrier traffic began to show an upswing. Domestic traffic has recovered and seems solid. The decline in transpacific traffic seems to have halted but is not yet entering a recovery mode.

NORTHWEST WORKERS TO EXPECT PAY CUTS

In efforts to save US$950 million a year in labour costs, Northwest Airlines plans to cut wages and benefits for U.S.-based employees by 515%. These reductions will be implemented on July 1 and will remain in effect for 6.5 years.

HORIZON AIR OFFERS KAMLOOPSSEATTLE SERVICE

Beginning December 15, Horizon Air will offer twice daily service from Kamloops to Seattle.

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NEWS ARTICLES CARTY STEPS DOWN

After more than 20 years at American Airlines Corp., chairman and CEO Don Carty has resigned. Gerard Aprey will succeed Carty as CEO and Edward Brennan will be named executive chairman.

AMERICAN ANNOUNCES PAY AND JOB CUTS

American Airlines will eliminate jobs and cut salaries as it plans to save US$4 billion a year in operating cost. Beginning May 1, all domestic employees will take pay cuts and close to 7,000 employees could lose their jobs. The cost savings have allowed AA to avoid filing for bankruptcy.

UNITED RATIFIES NEW AGREEMENTS WITH IAM

On April 29, the International Association of Machinist and Aerospace Workers, which represent United’s maintenance, ramp and security employees, ratified a new six-year contract. The agreement will include 13% pay cuts and will save the company US$794 million a year in labour costs.

UNITED PLANS TO SHUT DOWN MAINTENANCE CENTERS

United Airlines plans to close its Indianpolis and Oakland maintenance centers on May 9 and May 31 respectively. The closures will affect close to 1,400 employees.

LUFTHANSA PARKS ADDITIONAL AIRCRAFT

Due to a 20% drop in passenger revenue during April, Lufthansa announced that it will park another 15 aircraft, brining the total to 70 for the carrier. The carrier will also reduce work hours for its ground staff and reduce its weekly Germany-Hong Kong flights from 13 to 3.

CHINA SOUTHERN APRIL TRAFFIC DOWN 37%

China Southern Airlines reported a drop of 37% in traffic for the month of April due to the SARS outbreak. Passenger load factor for the month fell 12 percentage points. Page 9 May 2003

CARGO U.S. DOMESTIC CARGO DECREASES

U.S. Air Transport Association figures for March show a 0.4% decrease in revenue ton miles for domestic cargo and a 5.5% increase in international cargo. Total freight volume for the month increased 2.5% from the previous year.

CARGOJET ENTERS MARKETING ALLIANCES

On May 12, Cargojet entered a marketing and operational alliance with Air France Cargo. Cargojet will provide sales, marketing and operational support to Air France Cargo in Western and Atlantic Canada. Air France Cargo will offer cargo sales, marketing and interline support. Effective May 15, Cargojet entered a similar marketing and operational marketing alliance with BA World Cargo.

DHL UPGRADES CALGARY SERVICE

On May 12, DHL Canada president, Eric de Matt, made an announcement regarding the selection of Calgary as its western Canadian hub airport. DHL will distribute international freight to the Yukon, Northwest Territories, Alberta and Saskatchewan via Calgary. Service will be upgraded from a Farichild Metro to a 727.

UPS 1ST Q PROFITS UP 8.5%

For the quarter ending March 31, UPS reported an increase of 8.5% in net income to US$563 million. Revenue totaled $8 billion, up 5.8% from the same quarter in 2002. Consolidated operating profit fell 0.2% to US$945 million.

CARGOLUX 2002 FINANCIAL RESULTS STRONG

Cargolux reported a net profit of US$49.3 million for 2002, a 220% increase from the prior year. Operating profit increased by 150%. During the year, the carrier flew close to 4.2 million tonne-kilometres, a 10.3% increase from the previous year.

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NEWS ARTICLES LUFTHANSA CARGO FURTHER CUTS SURCHARGE

Effective May 6, Lufthansa Cargo will reduce its fuel surcharge by a further 0.05 euros bringing the surcharge down to 0.15 euros/kg. The cuts are in line with the continuing decline in crude oil and kerosene prices.

ACE FILES FOR BANKRUPTCY PROTECTION

AllCanada Express (ACE) has filed for bankruptcy protection. Recently, ACE lost its contract for domestic lift for its major client, UPS, to Cargojet. With this loss, and the loss of some other smaller contracts, a reorganization became necessary. ACE continues to operate services as it restructures.

AIRPORTS YVR WINS SUPREME COURT APPEAL

On May 8, the Supreme Court of Canada rejected an appeal from three Richmond families over the airplane noise they had to endure since the opening of the Vancouver International Airport’s north runway in 1996.

BC AIRPORTS TO SPLIT $6 MILLION IN GRANTS

Dawson Creek, Fort Nelson, Fort St. John, Nanaimo, Quesnel, Smithers and Terrace airports will be splitting C$6 million in federal grants under the Airports Capital Assistance Program. The largest amounts will go to Fort Nelson ($2.6 million) and Dawson Creek ($1.9 million) for repavement of runways/taxiways and other improvements.

YVR EXPERIENCES CARGO GROWTH IN 2002

Vancouver International Airport (YVR), second behind Los Angeles International, was one of the only two major west coast airports to experience international cargo growth in 2002. YVR year-end overall cargo increased 2.6% over 2001. Growth from passenger bellyhold and international all-freighter segments increased 4.5%, while integrator volume decreased 3.5% from last year. Page 10 May 2003

HAMILTON POISED FOR 2003

John C. Munro Hamilton International airport handled 92,000 tonnes of air freight in 2002. For 2003, it plans to attract international freighter operations. The airport has recently invested C$5.3 million in an extra 33,000m 2 apron, and the addition of a new multi-tenant cargo facility. It also offers customized service for air cargo carriers.

WAA RELEASES STRONG 1ST QUARTER 2003 RESULTS

For the first quarter of 2003, Winnipeg Airports Authority Inc. reported revenues of $11.5 million, an 18% increase from the previous year. The excess of revenues over expenses totaled $3.3 million, up 22% over the previous year.

GTAA COMPLETES ISSUE OF NOTES

The Greater Toronto Airports Authority (GTAA) has completed an issue of $375 million principal amount of 5-year Medium Term Notes. The proceeds of the issue will go towards the funding of the Airport Development Program.

AIRCRAFT MANUFACTUERS BOMBARDIER, EMBRAER SPLIT US AIRWAYS ORDER

US Airways has ordered 170 regional jets worth US$4.3 billion from both Bombardier and Embraer. The agreement with Bombardier is for 60 CRJ200s and 25 CRJ700s. The first CRJ200s will be delivered in October to US Airways subsidiary PSA Airlines. The remainder will be delivered by April 2005. The other 85 firm orders are for the 70-seat Embraer 170 with delivery slated for November.

GOVERNMENT AND REGULARTORY CHINA OFFERS AID TO CARRIERS

The Ministry of Finance announced it will make discounted loans available to Chinese airlines and travel agencies to help them weather the impact of the SARS outbreak. Loans will be for 6 months or one-year terms at rates slightly above 5%. © InterVISTAS Consulting Inc.


NEWS ARTICLES PEOPLE IN THE NEWS SITA APPOINTS NEW PRESIDENT

Peter Buecking will be moving from Vancouver to Geneva to take over as President of SITA. Currently, Peter has been managing Director of the oneWorld Alliance, following 17 years with Cathay Pacific.

MIRABEL APPOINTS VP CARGO & INDUSTRIAL DEVELOPMENT

FUEL PRICES May 2, 2003 SPOT OIL PRICES DROPPING FUTURES PRICES STILL LOW Crude Oil Prices:

Montréal-Mirabel International has hired Jean Tesdale as vice president cargo and industrial development.

SAULT STE. MARIE MOVES FORWARD ON AIR CARGO STUDY

Sault Ste. Marie has received approval to move forward on an air cargo study, which comprise of two phases. The first focuses on determining if the city can create a niche in the air cargo market with either a call centre component or a logistic integrator component. The second will build on the successes of the first phase. It includes work on infrastructure design and cost estimates, determination of warehouse needs, air cargo marketing, and the seeking of funds to work with air carriers.

OTHER 2001 CHARTER STATISTICS RELEASED

Seventeen months after the end of the year, Statistics Canada has finally released its 2001 Charter statistics publication.

Spot – US$25.73 (down 9% from April) Future • 6 month - $25.75 (November 2003 delivery) • 12 month – $24.61 (May 2004 delivery) • 2 year - $24.07 (April 2005 delivery) • 5 year - $24.25 (April 2008 delivery) Monthly Monthly Spot Spot Prices Prices $40.00

US$ per Barrel

$35.00 $30.00 $25.00 $20.00 $15.00 Dec-02

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Feb

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© InterVISTAS Consulting Inc.


SARS

THE GLOBAL AIR TRAVEL CRISIS C ONTINUES During the past month, the situation has not improved much for the global airline and tourism industries due to SARS (Severe Acute Respiratory Syndrome). In particular, the disease has continued to severely impact Asia’s tourism and travel industries. However, the situation in Hong Kong, one of cities hardest hit by the disease, has seen modest improvement during the past four weeks. But, China’s capital, Beijing, now has the highest number of reported SARS cases in the world, with the number of infections increasing daily. The situation in Taiwan has also worsened substantially in recent days. In an attempt to limit the spread of the disease, Taiwan has issued a ban on visitors from all countries to which the World Health Organization (WHO) has issued a travel advisory. In late April, the WHO included Toronto in its travel advisory, labeling the city as a SARS hotspot, the only one outside of Asia. On May 14, the WHO officially removed Toronto from its travel advisory list. In the past 20 days, Toronto has not reported any further spread of SARS. To date, there are over 7,000 SARS cases worldwide with the majority in China (67%) and Hong Kong (23%).

Doris Mak Senior Market Analyst Lifting of WHO Travel Advisory The WHO travel advisory remains in effect for most countries (China, Hong Kong, Singapore and Taiwan), with the exception of Vietnam and Canada, whose travel advisories have been lifted.

Airport Impact Airports in the Asia-Pacific region have suffered greatly since the outbreak of the disease. In April, 42% of Hong Kong’s scheduled flights were cancelled resulting in a 60% decline in passenger traffic. Similarly, passenger traffic at Beijing Airport has dropped 50%. Airline Impact Weekly traffic statistics published by the Air Transport Association (ATA) reports that traffic to Asia-Pacific carried by U.S. carriers hit a low, down 40% during the week of April 20th compared to a year ago. System-wide capacity for ATA member airlines are 12% below last year's levels. In the last two weeks, Asia-Pacific traffic has increased slightly, although traffic is still down in the -40% range. To put this in perspective, note that domestic traffic has recovered and is now in positive territory.

Source: Air Transport Association

Air Canada’s overall traffic for the month of April was down 22.3%. The airline’s Asia-Pacific traffic was down 49%. Cathay Pacific has cut back its normal weekly scheduled flight frequencies by 45%. In an effort to stimulate air travel and the Hong Kong economy, Cathay Pacific and other firms in the tourism industry have launched a “We Love Hong Kong” campaign. Qantas Airlines reports a decline in load factor and yields due to SARS. The airline’s bookings to Hong Kong and Japan are down 64% and 30%, respectively. Qantas also reports weak inbound bookings from continental Europe to Australia. The airline will continue its cost cutting initiatives by freezing capital and discretionary spending.

Page 12 May 2003

© InterVISTAS Consulting Inc.


ECONOMIC OUTLOOK 9 May 2003

0.74 0.72 0.70 0.68

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Since our last column on the Canadian dollar in March the loonie has continued its upward climb against the U.S dollar. At the time of writing the Canadian dollar stands at close to 72 U.S. cents, a level not seen since late 1997 and an increase of over 15% from its low of 62 U.S. cents in January 2002.2

Daily Exchange Rate: U.S. Dollar per Canadian Dollar

Jan-01

The Rise of the Loonie: Sustainable?

U.S. Dollar vs Foreign Currencies Index: January 2002 =100 115

110

Much of this rise can be attributed to a general weakness in the U.S. dollar. As can be seen in the graph to the left, a number of major currencies have appreciated against the U.S. dollar since the start of the year including the Australian Dollar and the Euro. However, other currencies such as the British Pound and the Yen have remained flat. The Canadian dollar’s performance is among the strongest of the major currencies.

AUD

Australian Dollar (AUD) Canadian Dollar (CAD) Euro (EUR) Japanese Yen (YEN) UK Pound (UKP)

Strong growth

CAD EUR

105 YEN UKP

100

Stable 95 01-Jan-03

01-Feb-03

01-Mar-03

There has been considerable speculation as to whether the Canadian dollar will continue its rally. It has been argued that some of the factors at play are temporary and that once the U.S. economy eventually gets back on its feet, interest rates will converge and the U.S. dollar will rebound.

01-Apr-03

01-May-03

Futures Exchange Rate: U.S. Dollar per Canadian Dollar 0.74 0.72 0.70 0.68

Spot Rate on 9th May: 71.8 U.S. Cents

0.66

Futures rate, 12 months forward: 70.2 U.S. Cents

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Clues can be found in the futures 0.62 market for the Canadian dollar. 0.60 This gives an indication of the expectations for the value of the Canadian dollar in the future. As Source: BMO Economic Research, www.bmo.com/economic can be seen in the graph to the right, it appears that there is a good chance the Canadian dollar will not appreciate much further, though it will hold onto most of its recent gains. May-03

Ian Kincaid Senior Economist

Source: Prof. Werner Antweiler, University of British Columbia

Page 13 May 2003

Š InterVISTAS Consulting Inc.


OTTAWA SCENE

THE CANADA AIRPORTS ACT 12 May 2003.

The House of Commons continues to make slow headway through several pieces of aviation-related legislation. Canada Airports Act (Bill C-27): Second reading debate continues this week. There appears to be general support from MP’s for the broad principles regarding, governance, transparency, and improved accountability. However, some MP’s have objected to the extensive new reporting and compliance requirements as tantamount to a re-regulation of airports. Others are critical of the lack of sufficient airline representation on airports’ boards and the lack of sufficient controls over AIF’s. Yet others criticize Transport Canada for not addressing airport rents in the new Act.

Roland Dorsay Regional Vice President Ottawa

The Bill will eventually receive second reading and be referred to the Transport Committee for clause by clause consideration. However there is no longer enough time on the legislative calendar for this Bill to pass before the summer parliamentary recess. Passage in the fall session is uncertain at best. The House will recess in June and is not expected to return before October. That leaves only a few weeks before the Liberal leadership convention in November. The Canada Transportation Amendment Act (Bill C-26): is also slowly making its way through Parliament. The Bill is at Committee stage and receiving submissions from interested stakeholders. ATAC focused its criticism in two areas. ATAC asked the Committee to drop the Bill’s so-called “agreements” section which gives the Government new powers to impose commercial agreements on airlines with respect to such matters as interlining, prorates, and loyalty programs. ATAC also asked the Committee to withdraw the “advertising” provisions as technically impractical and in any event not the proper jurisdiction for Transport Canada. Transport Committee members want to travel across Canada to give other stakeholders a good opportunity to make their views known. It is likely that the Committee will want to recommend numerous changes to this Bill but there is little indication as yet that Minister Collenette will want to accommodate any recommended amendments. Foreign Ownership and Control: Also of interest is the Industry Committee’s much anticipated report on foreign ownership of Canadian telecommunications interests. The Committee recommended dismantling the foreign ownership limits on telephone and cable firms for the sake of expanding competition. Whether this translates into similar views on the part of the Transport Committee with respect to the aviation industry remains to be seen but it is at least indicative of a growing recognition that few sectors of the Canadian economy benefit from protective controls over foreign ownership. ATSC: On 18 February 2003, the Minister of Finance put forth a set of budget amendments, including a revision of the ATSC. Bill C-28 implements certain provisions of the budget, including reducing the ATSC (Part 6 of C-28). While the bill has not yet passed, its provisions regarding the ATSC are intended to be retroactive to 1 March 2003, and in practice airlines have been instructed to collect the new fee ($6.55 plus GST or HST), even while awaiting passage. The ATSC changes reduce the ATSC on domestic travel to $7 one way (including GST, higher with HST ), but provides no reduction on transborder or international travel.

Page 14 May 2003

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EXPLOSIVE DETECTION SYSTEMS (PART 2): NEW TECHNOLOGICAL DIRECTIONS 10 May 2003

Hold baggage screening at North American airports has to-date been limited to a select few technological solutions. As outlined in this column last month, certified computed tomography (CT) x-ray technologies have proven to be relatively slow and expensive, and have produced high false alarm rates. Furthermore, the issues with CT scanners have become a major concern for Canadian airports due to re-screening requirements for postcleared passengers connecting in the US.

Solomon Wong Director Security & Planning

One promising technology is that of quadrupole resonance (QR) - originally developed for landmine detection during the Vietnam War. Its application in an airport environment dates to the late 1990's through the work of an Australian company, QR Sciences. Testing of its automated screening units has been conducted at airports around the world, including Ottawa.

Radio waves in quadrupole resonance contribute to lower false alarm rates.

machinery to take advantage of QR technologies in combination with CT scanning.

Implications of quadrupole resonance for airports

The advantages of QR technology deployment reside in greater baggage throughput in the processing systems. If integrated into the existing models of hold baggage screening, fewer explosive trace detection machines would be needed as a result. The latter machines are currently used to address the high rate of false alarms for bags through CT scanners. The rate of adoption by security agencies to use this technology may however prove to be a challenge. Time lags relating to the certification of the machinery and training may result in deployment not occurring until after 2005. However, with QR upgrade kits anticipated to be rolled out in late 2003/early 2004, there may be considerable pressures to have rapid adoption across all airports in North America..

Quadrupole resonance uses low-intensity radio waves to determine the presence of specific chemicals, such as explosive substances. As opposed to the results obtained through use of x-rays on CT scanners, QR’s wave structure dramatically reduces false alarms rates. Current equipment tests indicate that QR has a false alarm rate below 3%.

Lower implementation costs for quadrupole resonance.

Currently deployed CT machines cost in excess of $1 million. In comparison, the cost of QR machines are reported to be 50-60% lower due to their different technology components and smaller machine footprint. InVision and L-3, the manufacturers of the majority of the CT machines certified in North America, have responded with planned upgrades to their equipment to include QR. Costing approximately CAD$200-300,000 per machine, this upgrade would allow already deployed Page 15 May 2003

Above: Computed Tomography Units Certified by the US FAA (top to bottom: InVision CTX 9000, CTX 5000 and L3 3DX 6000)

Š InterVISTAS Consulting Inc.


WESTJET: ARE LOWER COSTS IN YOUR F UTURE ? 10 May 2003

A large drop in profits:, WestJet reported an 89% drop in first quarter profits to just under $800 million. Revenues increased by 26%, but this was insufficient to maintain its high profit margins on a capacity increase of just over 50%. We should keep this in perspective, of course. WestJet is at least reporting some profits, while arch rival Air Canada entered its second month under court protected reorganisation. Nevertheless, WestJet is unlikely to tolerate what it considers to be an inadequate profit margin. There are a number of actions it could take, including reducing the rate of deployment of new aircraft, putting pressure on Ottawa to force Air Canada to charge compensatory prices, and pressuring Ottawa to reduce the Air Traveller Security Charge (ATSC).

Michael Tretheway Vice President & Chief Economist

However, cost reductions are also a likely outcome. Recently, I compared WestJet to Ryanair, Europe’s low cost leader. It is interesting to see how each has progressed during the past few years. The first graph shows Ryanair’s break-even and Ryanair actual load factors. Notice the constant downward BE-LF trend in break-even load factor. Most of this is due to 80 LF 75 constant attention to cost reduction, rather than to 70 increasing yields (the other way to lower break-even 65 60 load factor). Ryanair has opened up a 20% gap 55 between actual and break-even load factors. This This wedge allows 50 carrier to survive 45 of 20 percentage points allows it to weather the combined effects of load factor drop 40 recession, fuel prices, terrorism, etc. 1995 1996 1997 1998 1999 2000 2001 Now consider WestJet. Relative to Air Canada and the other network carriers, it has a very low break-even load factor. However, WJ has not been able to achieve the constant downward trend in break-even load factor that Ryanair has. One reason for this is that WestJet has faced reduced yields as a result of the dramatic impact of the ATSC and WestJet reduced fares in the market as Air Canada fought to retain market share. (WestJet alleges that AC’s 80 actions are predatory and the source of its financial 75 demise.) 70 65 60

But while WestJet is a very cost conscious organisation, it has not had the relentless devotion 45 to cost cutting that Ryanair has. WestJet pays 40 1996 1997 1998 1999 2000 2001 2002 commissions to travel agents; Ryanair does not. Does Does not have decline in BELF found at Ryanair WestJet offers free soft drinks; Ryanair charges even for a glass of water. WestJet allows two carry-ons and two checked bags. Ryanair weights everything and charges for any excess weight of carry-ons and for any bags in excess of one light overnight bag. WestJet pays landing fees, while Ryanair has been successful in getting some airports to pay it to fly there. Airports should be forewarned: WestJet will be aggressively seeking reductions in airport costs. 55

B-LF

50

LF

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 materialize. Prepared by InterVISTAS Consulting Inc.

Page 16 May 2003

© InterVISTAS Consulting Inc.


CAIR Issue No. 5 - May 2003