CAIR Issue No. 53 - June 2007

CANADIAN AVIATION INDUSTRY REVIEW

In this issue…

Features Columns: • Mexico Inbound Market to Canada (p.1) • Canadian Exchange Rate: Strong Start to 2007 (p.3) • The Asia Report (p.12)

• • • • • • • •

Regular Reports: Airline Data – Canada (p.5) Airline Data – U.S. (p.6 ) Selected Canadian Airport Data (p.7) Industry News (p.8) The European Report (p.13) The Ottawa Report (p.15) The Washington Report (p.16) InterVISTAS News (p.17)

MEXICO INBOUND MARKET TO CANADA June 2007

14 Million Outbound Visitors from Mexico in 2006 Outbound travel from Mexico has fluctuated over the past few decades, with peaks in the early 1990’s and generally continued growth after the major declines observed in the mid-1990’s.1 With the exception of 2002/2003, growth rates have ranged between 5% and 13% per annum in recent years.

Total outbound overnight visitors currently stand at approximately 14 million visitors, with just over $4 billion in tourism related expenditures.

Figure 1: Total Outbound Travel From Mexico (1980-2006) 16,000,000

$5,000 Outbound Visitors

14,000,000

Senior Research Specialist, Economics & Transportation

$4,500

Expenditure (US$million)

$4,000 Outbound Visitors

12,000,000 $3,500 10,000,000

$3,000

8,000,000

$2,500

6,000,000

$2,000 $1,500

4,000,000 $1,000 2,000,000

Expenditures (US$millions)

Angelica Sparolin

$500 $0

19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06

0

Source: Banco De Mexico.

The U.S., Europe and Canada are the Top Outbound Markets for Mexican Travellers Based on a survey of Mexican travellers, the U.S. is the most frequently visited destination with 70% of travellers having visited the U.S. in the past three years.

Europe was the next most popular destination, of which Spain was the most popular individual country. Canada was third most popular outbound tourism market, with 18% of respondents having made at least one visit to Canada within the past three years.

Figure 2: Top Outbound Destinations for Leisure Travel from Mexico

United States

70%

Europe

24%

Canada

18%

South America

8% 5%

Caribbean 0%

20%

40%

60%

80%

% of Residents Having Visited Region in Past 3 Years

Source: Canadian Tourism Commission, “From Mexico to Canada!”, Tourism Online, Volume 004, Issue 005, April 2007. Note: Multiple response question.

Note: Outbound Mexico tourist volumes exclude same-day excursions and all trips (same day and overnight) into the 40 km U.S. border zone.

1

Page 1 June 2007

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MEXICO OUTBOUND TRAVEL MARKET – CON’T Outbound Mexican Visits Peak During Spring and Winter Months Outbound overnight travel from Mexico peaks in the second and fourth quarters, coinciding with Easter and Christmas vacation periods.

Figure 3: Seasonality of Outbound Travel From Mexico (2002-2006) 4,500

Outbound Visitors (000)

4,000 3,500 3,000 2,500 2,000 1,500 1,000 500 Q4-2006

Q3-2006

Q2-2006

Q1-2006

Q4-2005

Q3-2005

Q2-2005

Q1-2005

Q4-2004

Q3-2004

Q2-2004

Q1-2004

Q4-2003

Q3-2003

Q2-2003

Q1-2003

Q4-2002

Q3-2002

Q2-2002

Q1-2002

0

Source: Banco de Mexico.

Travel to Canada at 1.5% of Total Outbound Overnight Mexican Market Statistics Canada reported a total of 214,000 customs entries by Mexican residents in 2006, an increase over 194,000 visitors in 2005 and 177,000 visitors in 2004.

According to the Canadian Tourism Commission: •

•

•

Figure 4: Trip Purpose Mexican Travel to Canada

Mexican visitors to Canada were most likely to be traveling for leisure purposes, with 48% traveling for pleasure and an additional 20% visiting friends or relatives. Business travel represented a further 19% of trips.

More than half of Mexican travelers to Canada were under the age of 35 (54% of visitors). A further 32% were between the ages of 35 and 54, only 14% were over 55.

Unlike the overall seasonal pattern in Figure 3, Mexican travel to Canada peaks in the 3rd quarter, representing 41% of annual trips, followed by the 2nd quarter at 25% of trips.

Others 13%

Business 19%

Pleasure 48%

VFR 20%

Source: Canadian Tourism Commission

The average trip party size was 1.5 people, the average trip length of 18 days and the average spend per person per night was $76.

Page 2 June 2007

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CANADIAN EXCHANGE RATE: STRONG START TO 2007 June 2007

Recent Movement in the Exchange Rate Since the start of the calendar year, the Canadian dollar has undergone significant appreciation in value, rallying well past the fourth quarter drop of 2006. In the period from 5 March 2007 to 4 June 2007, the exchange rate increased from U.S. $84.7 to U.S. $94.5 (as seen in Figure 1). Appreciation has also occurred against other key foreign currencies – the European Euro, British Pound and Japanese Yen – indicating relative strength in the Canadian dollar rather than weakness in the U.S. dollar.

Figure 1: Daily Exchange Rate U.S. Dollars per CDN Dollar (16 June 2006-15 June 2007)

Kahlil Philander

$0.96

Senior Analyst

4 June

$0.94

U.S. $

$0.92 $0.90 $0.88

5 March

$0.86 $0.84 Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May2006 2006 2006 2006 2006 2006 2006 2007 2007 2007 2007 2007 Source: Bank of Canada

Strong Canadian Economy A healthy Canadian economy has led to increased demand for the Canadian dollar. Robust demand for Canadian goods and services as well as strong commodity prices have continued to benefit Canada’s export sector, although the impact of the elevated dollar may dampen the export sector going forward. The Bank of Canada’s most recent estimate suggests that the economy grew by 3.7% through the first quarter of 2007 – over a full percentage point higher than the Bank’s initial estimate in the April 2007 Monetary Policy Report (MPR).

The dollar is also being driven by expectation of lower interest rates in the U.S. and potentially higher interest rates in Canada. This makes the short term investment in Canadian financial securities more attractive, driving up the dollar.

Page 3 June 2007

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CANADIAN EXCHANGE RATE -

CON’T

Concern over Speculation in Currency Prices In a 13 June 2007 speech, David Dodge, Governor of the Bank of Canada, indicated that the surging dollar may be at a temporary high level due to speculation in the currency. The Governor made mention of, “…a rise in the Canadian dollar that appears to have been stronger than historical experience would have suggested.”

The comments made by Mr. Dodge seem to have been at least partially responsible for a downward correction in the currency value in the days following the speech. However, most Bay Street analysts feel the Bank will continue to increase interest rates by a quarter point on 12 July, in order to curb inflation. Steve Butler, director of foreign exchange at Scotia Capital said on 14 June, “The bank hike looks safe despite some comments from Mr. Dodge yesterday about maybe the currency [sic] has gotten a little bit overextended."

Future Direction of the Dollar The Canadian dollar appears poised to remain strong against the U.S. dollar going forward, but adjustments to lower the speculatory portion of the current price could have a cooling impact on the dollar in the near term. Any unforeseen weakness in commodity prices or domestic spending also has the potential to put downwards pressure on the dollar. Despite these concerns, the expected interest rate hike in July along with projected levels of economic growth should continue to support an elevated exchange rate. Although parity with the U.S. dollar is a possibility, downward corrections in the days since Mr. Dodge’s speech appear to indicate that the accelerated run up of the dollar may be losing momentum.

Predicting the dollar is problematic. Technical analysts point to the recent momentum and predict parity or higher. On the other hand, fundamentalists are of the view that the Canadian dollar will trade in the mid eighty cent range within a few months. The interest rate decisions at the next meeting of the Bank of Canada and the U.S. Federal Reserve Bank will likely provide clarity.

Page 4 June 2007

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AIRLINE DATA – CANADA Traffic and Load Factors on Canada’s Major Air Carriers May 2007 Air Carrier

Passenger Traffic Revenue Passenger Kilometres % Change % Change over 2006 from 2005

Capacity Available Seat Kilometres % Change over 2006

% Change from 2005

Change over 2006

Change from 2005

Air Canada1

-0.2%

+2.6%

-1.0%

-2.1%

+0.6pts (to 83.8%)

+3.9pts (from 79.9%)

Domestic (Mainline)

+1.4%

-1.5%

-0.9%

-1.7%

+1.9pts

+0.7pts

Jazz

+19.8%

+99.5%

+16.9%

+94.9%

+1.8pts

+1.8pts

-1.0%

-2.3%

-0.9%

-1.7%

+0.0pts

+5.4pts

+20.1%

+58.3%

+15.5%

+39.8%

+3.1pts (to 80.0%)

+9.4pts (from 70.6%)

International & Charter

WestJet

Analysis: •

•

• •

1

Load Factor

For the month of May, Air Canada Mainline’s domestic load factor increased by 1.9 percentage points in 2007 over 2006. This is due to passenger traffic growth accompanied by declining seat capacity. Despite Air Canada’s continual transfer of seat capacity to Jazz, Jazz achieved passenger traffic growth that managed to outpace their seat capacity expansion. As a result, Jazz’s May load factor increased by 1.8 percentage points in 2007 over 2006.

Air Canada’s international traffic and seat capacity decreased in May 2007 compared to May 2006, resulting in a fairly static load factor. The Atlantic region was the largest contributor to both the decrease in traffic and seat capacity. May marks the first time in ten months that international traffic and seat capacity decreased from the previous year.

WestJet experienced an increase in load factor by 3.1 percentage points in May 2007 over 2006.2 Overall, both Air Canada Mainline and WestJet experienced record load factors for the month of May, at 83.8 percentage points and 80.0 percentage points respectively.

10% 5%

Air Canada Domestic Mainline Jazz data is not included in this graph

0% -5% -10% Mar- Apr May Jun July Aug Sept Oct Nov Dec Jan- Feb Mar Apr May 06 07

Dom RPK

Dom ASK

Air Canada International 10% 8% 6% 4% 2% 0% -2% Mar- Apr May Jun July Aug Sept Oct Nov Dec Jan- Feb Mar Apr May 06 07

Int'l RPK

Int'l ASK

WestJet 35% 30% 25% 20% 15% 10% 5% 0% Mar- Apr May Jun July Aug Sept Oct Nov Dec Jan- Feb Mar Apr May 06 07

RPK

ASK

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

This is mainly due to traffic outpacing the increase in seat capacity for the month. WestJet’s May load factor is up 9.4% over 2005.

2

Page 5 June 2007

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AIRLINE DATA – U.S. U.S. Airlines Release May 2007 Traffic Figures

1

2

2

Notes:

(RPMs – millions)

(ASMs – millions)

Capacity

Load Factor

2,218

2,703

82.0%

↑16.9%

↑12.7%

↑2.9 pts

802

1,063

75.5%

↓0.9%

↑1.3%

↓1.7 pts

6,268

8,473

74.0%

↑5.2%

↑9.2%

↓2.8 pts

8,136

9,981

81.5%

↑6.4%

↑5.8%

↑0.5 pts

10,209

12,065

84.6%

↑0.5%

↓0.5%

↑0.8 pts

11,888

14,456

81.7%

↓2.9%

↓4.0%

↑1.0 pts

10,081

12,482

80.8%

↑5.9%

↑0.6%

↑4.1 pts

6,712

7,963

84.3%

↑0.0%

↑1.9%

↓1.6 pts

5,565

6,830

81.5%

↑0.1%

↓1.8%

↑1.6 pts

350

397

88.2%

↑9.6%

↓5.7%

↑12.3 pts

1,466

1,919

76.4%

↑22.0%

↑21.0%

↑0.6 pts

865

1,088

79.6%

↑13.4%

↑13.4%

↓0.2 pts

Traffic

Airline

1. Mainline operations only.

2. Load factor includes scheduled service only.

Sources: Carrier traffic reports.

Page 6 June 2007

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Summary of Year-over-Year Passenger Traffic Performance at Selected Canadian Airports Toronto

Vancouver

1st Quarter

+1.4%

+1.3%

MontréalTrudeau +3.4%

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

+8.9%

+11.6%

+1.8%

+1.4%

+3.8%

+0.9%

+15.5%

+4.4%

-0.8%

St. John’s +2.6%

April

+6.2%

+4.3%

+6.5%

+19.6%

+20.7%

+3.8%

+0.6%

+6.8%

+4.2%

+17.9%

+9.5%

+13.9%

+13.1%

May

+4.8%

+2.7%

+8.3%

+16.0%

+20.6%

+0.3%

+6.4%

+8.4%

+10.3%

+13.2%

+7.7%

+23.3%

+15.1%

June

+2.9%

+2.6%

+4.5%

+9.5%

+13.2%

+1.8%

+4.1%

+0.7%

+8.6%

+13.4%

+5.3%

+12.5%

+3.9%

2nd Quarter

+4.6%

+3.2%

+6.4%

+14.8%

+18.1%

+1.9%

+3.8%

+5.2%

+7.8%

+14.7%

+7.4%

+16.3%

+10.3%

July

+2.2%

+4.8%

+1.9%

+7.4%

+13.8%

-2.1%

+4.9%

+8.5%

+7.4%

+14.4%

+5.9%

+7.1%

+13.2%

August

+6.8%

+3.9%

+3.5%

+10.2%

+18.2%

+2.2%

+8.5%

+7.1%

+11.3%

+12.2%

+5.8%

+15.9%

+11.7%

September

+2.2%

+2.1%

+2.6%

+10.0%

+13.1%

0.0%

+8.8%

+4.9%

+6.9%

+16.6%

+6.9%

+10.4%

-0.5%

3rd

+3.8%

+3.7%

+2.7%

+9.2%

+15.1%

+0.1%

+7.3%

+6.9%

+8.6%

+14.3%

+6.2%

+11.1%

+8.7%

October

+2.6%

+2.3%

+3.9%

+9.9%

+18.4%

+2.3%

+7.7%

+6.2%

+8.9%

+13.7%

+7.1%

+6.2%

+1.7%

November

+3.9%

+3.7%

+8.6%

+14.1%

+15.4%

+3.0%

+8.3%

+0.6%

+2.7%

+14.5%

+2.7%

+3.7%

+0.2%

Quarter

December

+6.4%

+6.2%

+8.7%

+11.4

+18.2%

+3.8%

+3.4%

-2.4%

-0.1%

+14.5%

+3.7%

+10.2%

-1.1%

4th Quarter

+4.3%

+4.1%

+7.0%

+11.7

+17.4%

+3.0%

+6.4%

+1.7%

+3.9%

+14.3%

+4.5%

+6.7%

+0.3%

Full Year January February March 1st Quarter April

+3.5% +3.0% +2.0% +1.5% +2.2% +0.7%

+3.1% +5.5% +2.7% +3.6% +3.9% +4.2%

+4.7% +10.2% +7.0% +8.9% +8.7% +8.9%

+11.1 +10.8% +10.4% +9.5% +10.2% +11.9%

+15.5% +18.3% +18.3% +17.1% +17.9% +18.8%

+1.7% +5.9% +8.3% +4.9% +6.3% +8.0%

+4.8% +3.2% +6.8% +5.4% +5.1% +12.2%

+4.6% +2.3% +2.0% -1.2% +0.9% +0.5%

+5.4% +4.7% +4.0% +7.9% +5.6% +9.6%

+14.7% +15.2% +12.9% +15.6% +14.6% +20.8%

+5.6% +6.6% +10.9% +5.7% +7.8% +12.1%

+8.0% +18.8% +24.2% +8.2% +17.0% +6.1%

+6.0% -4.6% +0.0% -1.1% -1.9% -4.8%

Source: Transport Canada and individual airports’ traffic reports. N/A: not available at press time.

Page 7 June 2007

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NEWS ARTICLES AIR CANADA JAZZ INTRODUCES TWO NEW CALGARY ROUTES

AIR CANADA UPDATE AIR CANADA ANNOUNCES DAILY VANCOUVER-YELLOWKNIFE SERVICE Air Canada announced the launch of daily, non-stop service between Vancouver and Yellowknife for the seasonal period from December 2007 to April 2008. This flight will be operated by Air Canada Jazz using the 50-seat Bombardier CRJ aircraft.

AIR CANADA LAUNCHES NON-STOP SEASONAL MONTRÉAL-ROME SERVICE

On 1 June, Air Canada began daily, non-stop summer service between Montréal and Rome, using the 207-seat Boeing 767-200ER aircraft.

This seasonal service provides an important link between Canada and Italy, with Rome connecting to many popular destinations in Italy via flights operated by Air Canada’s Lufthansa partner airline, Air One.

AIR CANADA INTRODUCES UNLIMITED ONTARIO/QUÉBEC FLIGHT PASSES

Air Canada introduced two new flight passes, available for sale on 5/6 June, that offers unlimited travel within Ontario or Québec for the months of July and August. For the Ontario Pass, point-to-point travel is prohibited between Ottawa and Toronto; however, pass holders are allowed to make connections involving the two cities. The Québec Pass does not include travel to or from Iles de la Madeleine.

AIR CANADA EXPANDS LAS VEGAS FLIGHT NETWORK

Air Canada plans to add a year-round, non-stop flight between Ottawa and Las Vegas. This enhances its current service to Las Vegas with 53 weekly flights from Vancouver, Calgary, Edmonton, Toronto, Ottawa, and Montréal.

Starting 6 September 2007, this twice-weekly flight will be operated using 120-seat Airbus A319.

Page 8 June 2007

Air Canada introduced two new non-stop flights from Calgary -- to Prince George, BC, and to Seattle, WA, in response to increased demand for travel to and from Calgary, Canada’s energy centre. Air Canada Jazz will operate these two new routes using the 50-seat Bombardier CRJ regional jet aircraft.

AIR CANADA PARTNERS WITH ZEROFOOTPRINT TO PROMOTE CARBON OFFSETTING Air Canada is providing its customers with the option to purchase carbon offsets – a voluntary payment that offsets the environmental effects of travel by contributing to greenhouse gas reduction projects. By cooperating with Zerofootprint, a not-for-profit organization that manages these carbon offset programs, this allows Air Canada to limit its operation’s impact on the environment.

WESTJET UPDATE WESTJET BEGINS KITCHENERWATERLOO ROUTES On 14 May 2007, WestJet began operating its seasonal non-stop service for the routes: Kitchener-Waterloo to Cambridge (Ontario), Saint John (New Brunswick), Deer Lake (Newfoundland and Labrador). The new routes increase WestJet’s total destinations to 26 across Canada and 12 in the U.S. and the Caribbean.

WESTJET INTRODUCES NEW MOBILE CHECK-IN SERVICE

WestJet has become the first Canadian airline to allow domestic travellers with checked baggage to check-in for their flights using mobile devices such as Blackberrys, PDAs and smartphones. Mobile check-in services can be used by guests travelling with or without checked baggage and seats can be selected from 24 hours to 30 minutes prior to their flight.

InterVISTAS’ Canadian Aviation Intelligence Report Copyright ©2007 InterVISTAS Consulting Inc., all rights reserved.

NEWS ARTICLES OTHER CANADIAN AIRLINE NEWS SKYSERVICE TO FLY BETWEEN CANADA AND JAMAICA The Honourable Lawrence Cannon, Minister of Transport, Infrastructure and Communities, has designated Skyservice Airlines to operate scheduled air services between Canada and Jamaica, as allowed by the current bilateral air transport agreement between the two countries. Skyservice plans to fulfill its designation of scheduled air services through conversion of its existing charter services.

U.S. AIRLINES NEWS NORTHWEST AIRLINES ANNOUNCES MINNEAPOLIS/ST.PAUL SERVICE TO VANCOUVER AND OTTAWA Northwest Airlines announced plans to increase services between Minneapolis/St. Paul and two Canadian cities: Vancouver and Ottawa. Beginning 1 August 2007, Pinnacle Airlines (Northwest’s partner airline) will begin operating daily, non-stop Minneapolis/St. Paul-Ottawa service using 50seat CRJ aircraft. Compass Airlines (Northwest’s wholly-owned subsidiary) will serve the Minneapolis/St. Paul-Vancouver route between 15 October and 2 May 2007, altering the seasonal route to year-round.

Page 9 June 2007

CARGO NEWS 777F DESIGN ON TRACK FOR COMPLETION Boeing recently announced that their engineers have completed 50% of the design for the new 777 freighter.

This means that the company is on track to meet its commitments, with the first aircraft scheduled to be delivered in the fourth quarter of 2008. To date, Boeing records 71 orders from a total of 11 customers.

AIR CANADA, WORLD AIRWAYS EXTEND CONTRACT World Airways extended their contract with Air Canada to provide international cargo services between Toronto and Frankfurt, Germany, effective 1 July 2007.

Under the one year $22.5 million contract, World Airways will continue to operate the single MD11 freighter on Air Canada’s direct TorontoFrankfurt route and their connecting TorontoHalifax-Victoria-Frankfurt services.

FEDEX REMAINS INTERESTED IN A380

FedEx expressed that their interest in the A380 freighter has not been completely ruled out, despite cancelling the $2.3 billion order in November 2006 and replacing the order with 15 Boeing 777 freighters. Fred Smith, FedEx’s Chairman, President and CEO, stated that the A380 freighter will remain an option for FedEx in the distant future.

InterVISTAS’ Canadian Aviation Intelligence Report Copyright ©2007 InterVISTAS Consulting Inc., all rights reserved.

NEWS ARTICLES WESTJET WELCOMES PUGLIESE AS EXECUTIVE VP, PEOPLE

PEOPLE IN THE NEWS NEW APPOINTMENTS TO CATSA’S BOARD OF DIRECTORS The Honourable Lawrence Cannon, Minister of Transport, Infrastructure and Communities, announced that Ian Glen, Michael D. Campbell, and Donald K. Robinson have been appointed to the Canadian Air Transport Security Authority (CATSA) board of directors. Glen has accepted a five-year term to serve as the third chair of CATSA, while Campbell, the chief executive officer at the Charlottetown Airport Authority, will serve a four-year term and Robinson, a retired lawyer, has been appointed to the board for two years.

AIR CANADA FILLS EXECUTIVE POSITIONS Air Canada announced the appointment of Sean Menke and Benjamin Smith to new positions on Air Canada’s executive board, effective 22 May 2007. Sean Menke, formerly Executive Vice Sean Menke President and Chief Commercial Officer, has been appointed to Executive Vice President, Commercial Strategy, to focus on long-term commercial strategy.

Benjamin Smith will be taking Benjamin over Menke’s former Smith responsibilities as Executive Vice President, Commercial.

Page 10 June 2007

WestJet expands its executive team through the appointment of Ferio Pugliese as Executive Vice President, People.

Effective 4 June 2007, Pugliese is responsible for overseeing the core human resources management and competency programs for more than 6,000 employees at WestJet.

DON BELL, CO-FOUNDER AND EXECUTIVE VP OF WESTJET, RETIRES

WestJet announced the retirement of Don Bell, Executive Vice President, Culture, effective 2 July 2007.

As one of the founders of WestJet, Bell has contributed significantly to developing WestJet’s customer experience and corporate culture.

GTAA RESTRUCTURES ITS EXECUTIVE TEAM

As part of the organizational changes of the Greater Toronto Airports Authority, the newly restructured executive team includes Howard Bohan as Vice President (VP), Operations, Todd McIntosh as VP, Finance and Chief Financial Officer, Brian Lackey as VP, Strategic Planning and Airport Development, Toby Lennox as VP, Corporate Affairs, Gary Long as VP, IT&T and Chief Information Officer, Vito Lotito as VP, Human Resources and Administration, Doug Love as VP, General Counsel and Secretary, Pat Neville as VP, Facilities, and Steve Shaw as VP, Marketing and Business Development.

InterVISTAS’ Canadian Aviation Intelligence Report Copyright ©2007 InterVISTAS Consulting Inc., all rights reserved.

NEWS ARTICLES PEOPLE IN THE NEWS – CON’T GTAA ANNOUNCES ORGANIZATIONAL CHANGES The Greater Toronto Airports Authority reinforced several organizational changes as part of their new strategic approach.

Effective 14 May 2007, organizational changes include the split of the Operations department into separate Facilities and Operations departments, the introduction of the new Marketing and Business Development department, and the incorporation of benchmarking and strategic planning activities into the Planning and Development department.

OTHER QANTAS BEGINS SEASONAL SAN FRANCISCO-VANCOUVER SERVICE

Qantas Airways began flying non-stop between San Francisco and Vancouver on 13 June. Using the Boeing 747-400 aircraft, this service will operate three times per week for the summer season until 12 August 2007. The route will also be offered in the upcoming winter season.

EMIRATES PLANS FIRST GATEWAY TO CANADA: TORONTO Emirates, the Dubai-based international airline, recently announced plans for a new service between Toronto and Dubai, beginning 29 October 2007. Toronto is Emirates’ first gateway to Canada. The nonstop flight will be operated three times per week using 354-seat Boeing 777-300ER aircraft in a three-class configuration with some cargo space. The proposed service is currently subject to government approval.

Page 11 June 2007

AIR NEW ZEALAND UPGRADES VANCOUVER-AUCKLAND FLIGHTS TO YEAR-ROUND SERVICE

Air New Zealand announced that its original schedule to offer non-stop flights between Vancouver and Auckland, New Zealand, between November 2007 and March 2008 will be extended to year-round service.

Using the Boeing 777-200ER aircraft, this flight will be offered three times per week from November to March and July to August, and available two times per week for the remaining months.

ICELANDAIR INTRODUCES HALIFAXICELAND SERVICE Icelandair recently began regular three per week service between Halifax International Airport and Iceland’s Reykjavik-Keflavik International Airport, using 188-seat Boeing 757200 winglets.

IATA PRESENTS THE EAGLE AWARD TO VANCOUVER AIRPORT

The International Air Transport Association (IATA) presented the Vancouver International Airport Authority with the prestigious Eagle Award at IATA’s Annual General Meeting and World Air Transport summit that was held on 4 June 2007. The Eagle Awards are granted to those airports and air navigation service providers who demonstrate exceptional customer satisfaction, cost efficiency and continuous improvements in performance.

InterVISTAS’ Canadian Aviation Intelligence Report Copyright ©2007 InterVISTAS Consulting Inc., all rights reserved.

THE ASIA REPORT June 2007

This month, we introduce The Asia Report, a new feature in CAIR.

Asia to Lead World Growth in Air Traffic According to Airbus, world air traffic is expected to triple in 20 years from 4 trillion revenue passenger kilometres to 10 trillion in 2025. The growth in air traffic is expected to be led by China, India and the Middle East. Passenger traffic in the Asia-Pacific region has grown by 51% since 2000. China and India passenger traffic has grown 141% and 110% respectively since 2000. Overall, global air traffic has grown 28% since 2000.

China Southern Airlines to Increase International Cargo Operations Doris Mak Manager, Special Projects

China Southern Airlines has set out to capture a greater proportion of the international cargo market.

The airline intends to acquire 14 freighters by 2010. This will result in China Southern having the largest cargo fleet among Chinese air carriers. The airline plans to convert six A330 passenger aircraft into cargo aircraft, as well as procure six Boeing 777s over the next two years. Most of the boost to air cargo capacity will be allocated to serving international markets. The altered A330s will be used to service the Asia-Pacific region, building a medium-haul network, while the 777s will be used for the development of overseas markets, along with existing 747s owned by the airline.

Indian Airlines Strike Leaves Passengers Stranded A strike by 12,000 Indian Airlines employees has resulted in many cancelled flights, leaving thousands of passengers stranded. The strike came about as a result of concerns amongst ground crews that benefits may be lost after a planned merger with Air India. The airline mainly provides domestic flights, while Air India is India’s main international airline. Recently, Indian Airlines had begun flying to select international destinations in Asia and the Middle East. According to a senior Indian Airlines official, all flights to major cities were either delayed or cancelled, with the exception of flights to New Delhi. The hardest hit city was Mumbai, where over 3,000 ground staff, baggage handlers and a segment of the cabin crew went on strike.

Air Asia to Fly to India by 2008 Low cost Malaysian air carrier, Air Asia, recently announced that the airline intends to fly to Indian cities such as Kolkata, Cochin, and Amritsar by the end of 2008. Currently, Air India Express, a low cost offering from Air India, is the only airline to offer discount flights to India. With growing demand for low cost air travel, the move will create some healthy competition for the air carrier. One point of contention, however, is that Malaysian Airlines recently objected to the landing rights of Air India Express. In response to this, Air India CEO, Tony Fernandes, pointed out that both countries have the right to fly to each other’s destinations according to the bilateral air agreement signed by both parties.

Page 12 June 2007

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THE EUROPEAN REPORT June 2007

Airline Incentives – Differing Trends Between North America and Europe As in North America, the use of airline incentives in Europe has expanded considerably in the past decade. As airlines have become more aggressive in demanding incentives, and airports have recognized the competitive nature of air service development, incentives for new routes have become increasingly generous.

However, there are important differences between airline incentive trends in Europe and those in North America. In general, these differences arise from regulatory restrictions and from airline business models.

John Weatherill Director, Airline Planning InterVISTAS Consulting Inc. UK Office

Government Involvement is Severely Restricted Following several decisions regarding the compliance of state aid for new routes at a number of airports, including the famous case of Ryanair and Brussels Charleroi, the European Commission developed formal guidelines for airports offering airline incentives. The guidelines set out the types and amount of aid that the state (local, regional or national governments) can offer so as to remain compliant with state aid regulations (in general, state aid which distorts competition and affects trade between member countries, as airline incentives often do, is considered incompatible with the common market).

The EC guidelines apply to incentive funding provided by the state, regardless of whether the airport itself is publicly or privately owned. The guidelines list 12 conditions which must be met for aid to be considered compliant. The most critical are: •

Incentives can only be offered on routes to/from a regional airport, defined as having fewer than 5 million passengers per year (aid provided for new routes between airports of over 5 million passengers would generally be considered noncompliant);

•

Incentives must decrease over time, and are generally limited to three years in duration;

•

The amount of incentive must be directly linked to the incremental start-up costs incurred by the airline to initiate the new route (e.g., marketing, promotions, and airport start-up costs).

•

The total incentive must not exceed 30% of the eligible incremental start-up costs.

Since the guidelines were released in late 2005, reaction from the airport community has been generally negative, with complaints that the guidelines put publicly owned airports at a disadvantage relative to those that are privately owned. However, privately owned airports are affected as well, as they are now restricted in the amount and type of incentive support their governments can offer. It has been noted that the guidelines are not law, and that the primary focus of both public and private airports should be on ensuring that their incentive programs comply with Article 81 of the EC Treaty, which prohibits anti-competitive agreements in general. However, most airports are working within the guidelines.

The net result is that government in European airline incentives is severely restricted. Contrast this to the situation in North America, where government involvement in new route incentives is extremely common. In the United States, most airports are owned by municipal governments, who frequently

Page 13 June 2007

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THE EUROPEAN REPORT – CON’T take the lead in underwriting airline incentives.1 In Canada, local and provincial governments are often key contributors to incentive packages, while the U.S. Government itself provides direct funding for new route incentives through the Small Community Air Service Development Grant Program.

Incentive Structure Differences In North America, incentive programs make use of a mix of types, including airport start-up cost reimbursement, marketing support, aeronautical fee discounts, and revenue guarantees, with ticket trusts and other types used to a lesser extent. Revenue guarantees are often the incentive of choice among airlines.

In limited cases, all of these incentive types have been used in Europe. However, in part due to the restrictions discussed above, and in part due to the overwhelming presence of the low cost business model in Europe, incentives are heavily weighted towards airport fee discounts and co-operative marketing support.

Marketing support is a ubiquitous incentive, permissible under the EC state aid guidelines, and easy to implement. Similarly, airport fee discounts are a straightforward incentive, which, while not an acceptable use of state funding, can be offered by both public and private airports so long as they comply with competition law (by being non-discriminatory).

Beyond the legal restrictions, a likely factor in the prominence of airport fee discounts and marketing support in Europe is the business model employed by the continent’s LCCs. Led by Ryanair and replicated to some extent by dozens of others, Europe’s LCCs depend on cost minimization to a much greater extent than North America’s comparatively high cost LCCs. The European model seeks to reduce airfares to incredibly low levels, thereby stimulating exceptional traffic growth, and profiting by generating ancillary revenues from these passengers (food and drink, baggage costs, hotel and ground transportation commissions, etc.).

The general formula is the same in North America, but the implementation is extreme in Europe.

European LCCs will not tolerate free soft drinks, connecting flights, reclining seats or other “frills” common among North American LCCs. The result is that $50 fares, inclusive of fees and taxes, are commonplace.

In this environment, the concept of a revenue guarantee is meaningless, as carriers expect to fly full planes at low yields. In fact, Ryanair CEO Michael O’Leary has spoken of a day when the airline will offer free airfare, making money only off of other sources. Guaranteeing a 90% load factor at a $0 average fare is hardly an effective incentive.

For European LCCs, the most enticing incentive is therefore one which reduces their cost structure, as airport fee discounts do. Similarly, a marketing incentive, over which the airline exercises control, allows a necessary expense to be avoided or reduced. As LCCs are responsible for much of the recent growth in Europe, their preferred incentives have taken over, leaving revenue guarantees and ticket trusts as far less common components.

In the United States, at airports receiving airport improvement grants, the FAA places restrictions how airport revenues can be used for airline incentives. In practice, municipally owned airports claim to offer incentives from general revenues as opposed to airport revenues, although this is being challenged by FAA. 1

Page 14 June 2007

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THE OTTAWA REPORT June 2007

Canada-EU to Pursue Comprehensive Air Services Agreement Prime Minister Stephen Harper announced on 4 June 2007 that Canada intends to negotiate a comprehensive air services agreement with the European Union. The government has indicated that they intend to begin negotiations by Fall 2007, with the objective of an expeditious conclusion.

Air Transport Agreement Established with Kuwait

Brian Kelly Executive Consultant

Effective 17 May 2007, Canada and the State of Kuwait established their first air transport agreement.

The Honourable David Emerson, Minister of International Trade, expects this agreement to create more opportunities for trade between Canada and members of the Gulf Cooperation Council – a group of wealthy Middle Eastern countries including Kuwait, Saudi Arabia, the United Arab Emirates, Qatar, Oman, and Bahrain. Passengers must currently stop in London or Frankfurt in order to travel between the two countries. Kuwait currently holds 10% of the World’s proven crude oil reserves and exhibited an estimated 8% growth in real GDP during 2006.

Ottawa to Ease Passport Requirements On 15 August 2007, the rules surrounding passport renewal will be simplified. Canadians meeting certain eligibility requirements will be able to submit a shorter renewal form, and will not be required to submit documentary evidence of citizenship, supplementary identification or a guarantor declaration.

On 1 October 2007, guarantor requirements will also be changed. As of this date, most Canadian adult passport holders will be able to act as guarantors for first time applicants, including family members.

Skyservice Designated to Fly to Jamaica The Honourable Lawrence Cannon, Minister of Transport, Infrastructure and Communities, has designated Skyservice to operate scheduled air services to Jamaica. Canada’s current air bilateral agreement with Jamaica allows for multiple designated airlines to service flights from any point in Canada to Kingston and Montego Bay. Air Canada, Sunwing Airlines, and WestJet are also designated to fly from Canada to Jamaica, although WestJet does not currently offer any scheduled services to the destination.

Port Management Regulations Changed to Allow Mergers On 30 May 2006, the Port Authorities Management Regulations were amended to permit two or more Canada Port Authorities (CPA) to amalgamate into one CPA. The change in policy will allow the port authorities of Vancouver, Fraser River, and North Fraser to merge into one authority, a key policy of the federal government’s Asia-Pacific Gateway and Corridor Initiative. The amalgamation is expected to allow for better land use planning, operational efficiencies, and an increased profile in transpacific trade.

Federal Government Announces Multiple Gateway Projects The Government of Canada has announced funding for Asia-Pacific Gateway and Corridor Initiative (APGCI) projects in Edmonton, Winnipeg and Saskatoon. Included in the announcement were $20 million for two freeway interchange projects in Saskatoon; $33 million targeted to improve truck access to depots, the Winnipeg Airport, and the CPR freight terminal in Winnipeg; and $75 million to improve intermodal connections between rail and transport vehicles in the Edmonton region. The Prime Minister launched the APGCI in October 2006 with $1 billion committed to the initiative.

Page 15 June 2007

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THE WASHINGTON REPORT June 2007

U.S.-China Expand Bilateral The U.S. and China reached agreement to expand air services on 23 May 2007. The agreement allows one new flight in each of the next two years, then rapidly expands so that 11 new daily are allowed by 2011, so that by 2012 a total of 23 daily flights will be allowed (versus 10 today). 5th freedom stop in Canada on cargo routes would be allowed, although not on new passenger routes.

Chinese carriers have some ability to make 5th freedom stops in Canada en route to the U.S..

Department of Transport Clears Virgin America to Begin Operations

Jon Ash President InterVISTAS-ga2 Consulting Inc. Washington, D.C.

The U.S. DOT announced on 18 May 2007 that start-up airline, Virgin America Airlines, would be able to begin air service operations once it has fulfilled steps to meet U.S. airline requirements. The carrier will receive final approval once it has acquired the necessary FAA security certificates and implements the changes that it has agreed to carry out. Proposed changes to its management and financial structure include the replacement of CEO Fred Reid no later than six months after airline certification, due to his ties to Virgin Group – a UK based company. Virgin America’s first application to begin service was rejected in December 2006 under concerns of substantial foreign control of the company. The San Francisco based airline plans to begin operations with service to New York City, and expand to Washington D.C., Los Angeles, San Diego, and Las Vegas within nine months of launch.

FAA to Expand Airspace Flow Program The FAA has announced that it will expand the Airspace Flow Program to 18 locations this summer.

The program, which was originally launched in the Northeast last year, provides airlines with the option of accepting interruptions or traveling longer routes to avoid inclement weather. In its initial operation, the program resulted in a 9% reduction of weather-related delays.

Senate Committee Approves Reauthorization of FAA The Aviation Investment and Modernization Act of 2007 was approved by the Senate Commerce Committee, authorizing $43.5 billion for FAA programs over the next three years. Highlights of the bill are: •

Funding of $500 million per year to the newly established Aviation Security Capital Fund, which will distribute grants to airports to subsidize capital security costs

•

$16 billion devoted to airport infrastructure grants

•

$133 million for the Essential Air Service program and $300 million to address noise and other environmental issues

•

$400 million per annum to modernize the air traffic control system

•

Set up of the Air Traffic Modernization Fund, which will be funded by a $25 per flight surcharge on commercial and high-end general aviation flights

Page 16 June 2007

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INTERVISTAS NEWS Steve Martin Appointed as Chief Administrative Officer InterVISTAS is pleased to announce that Steve Martin has been appointed as Chief Administration Officer of InterVISTAS-ga2, Washington, D.C., effective 1 June 2007. He will play a key role in implementing the new organizational structure of the InterVISTAS Group by providing overall administrative oversight for the Washington Office. In addition, Steve will continue to play the role of Senior Vice President, Government Relations and Policy Analysis.

InterVISTAS Upcoming Speaking Engagements Dr. Mike Tretheway, Executive Vice President and Chief Economist • University of South Australia 2007 Trade Practices Workshop: Adelaide, South Australia – 19/20 October 2007 Dr. Tretheway will be delivering a presentation titled, “What’s Next in Airline Competition Assessment?”

John Weatherill, Director, Airline Planning • Low Cost Carriers Evolving Business Models Conference: Cologne, Germany – 6/7 November 2007 Mr. Weatherill will be delivering a presentation titled “Adapting Airport Route Development Strategies to Reflect Changing LCC Business Models”.

InterVISTAS’ Canadian Aviation Intelligence Report 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.

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