CAIR Issue No. 34 - October 2005 by Leah Dupuis

INTERVISTAS ’ CANADIAN AVIATION INTELLIGENCE REPORT

In this issue… Features Columns:

Regular Reports:

• Government Response to SCoT Interim Report (p. 1) • Global Distribution Systems: A Current Snapshot (p. 3) • Inbound Travel Market to China (p. 5) • Canada – U.S. Cargo Open Skies: A Balanced Opportunity for Domestic Canadian Cargo Carriers (p. 15)

• • • • • • •

Airline Data (p. 6) Airport Data (p. 8) Industry News (p.10) Airport Best Practices (p.14) Ottawa Report (p.17) Washington Report (p.18) InterVISTAS’ News (p. 19)

GOVERNMENT RESPONSE TO THE STANDING COMMITTEE’S INTERIM REPORT October 2005

Josh Drury Transportation Analyst

In May 2005, the Standing Committee on Transport (SCoT) released an interim report entitled Air Liberalisation and the Canadian Airports System, containing a number of recommendations on airport rents and charges and funding for government services. The federal government reviewed these recommendations and in September issued its response. The response will be disappointing to Canadian airports and other stakeholders that had been consulted, as it effectively dismisses all recommendations put forward by the Committee. The responses to the individual recommendations are summarised below. •

Airport Rent. The Committee recommended that the federal government immediately reduce rent by 75%, that airports with less than two million passengers per year pay no rent, and that the rent be reinvested in the Canadian Airports system. The Committee stated it appreciated that the government finally acted on rent, but that the federal response “falls far short of what is required.” The government, on the other hand, sees no need for further rent reduction, arguing that the revised formula met the objectives of the rent review, in that it is “equitable, consistent, and responsive to market conditions” as it is based on a progressive rate scale. With respect to the application of rent and the use of collected revenues, the government states that it is consistent with their real property policy, in that it represents a fair return on public assets leased to private or commercialised entities. The government further states that dedicating this revenue to the airport system would be inconsistent with this approach, and that they already provide financial assistance to airports (albeit non-NAS airports) for capital projects.

•

Airport Capital Assistance Program (ACAP). The Committee recommended that the federal government ensure airport rent revenues be used to increase funding to ACAP, that funding should be long term and stable, and application for funding should be simpler and less costly. The government position is that ACAP funding is sufficient for addressing airports’ safety related capital projects, and that funding is secured through March 2010 at near current levels. Their position regarding the application process is that it is necessary to ensure projects meet the criteria, and note that the costs can be claimed as part of the funding requested (if the application is successful). The government pointed to two evaluations of the program conducted in 2000 and 2004, stating they both concluded the program was meeting its objectives. Notably, however, the most recent report indicated that some eligible projects were not being funded – including groundside safety-related projects – and indicated a future demand for funding that was in excess of that which is planned.

•

Security Charges. The committee recommended that the federal government remove the Air Travellers Security Charge (ATSC) and pay for security out of general revenues, noting that in no other mode are transport users required to pay for security measures. The Committee stated that the application to air transportation is “arbitrary and wrong.” The government position is that air passengers are the primary beneficiaries of air transport security and that the ATSC is fair and reasonable. They did not address the inconsistency with other modes.

Page 1 October 2005

GOVERNMENT RESPONSE TO THE STANDING COMMITTEE’S INTERIM REPORT – CON’T •

Customs Services. The Committee recommended that the federal government pay for CBSA services at airports that can demonstrate they have regular transborder or international services. The Committee noted that the requirements to pay for services were not applied consistently for all airports, with some required to pay for some services while others are not. The government countered that charging for services has been government policy for decades and meets the Treasury Board’s charging policy that has existed since 1989; specifically, the federal government should not bear all costs where an identifiable recipient receives a benefit from the service. However, they did not address the issue of inequitable application of these charges.

•

Regulatory Burden. The Committee recommended that the federal government ensure that if downloading regulations onto smaller airports results in a significant increase to costs, the government will bear such costs. The government position is that, as a rule, they do not provide funding for costs arising from compliance of airport safety and security requirements. They view this as a return to subsidies and counter to the objectives of the NAP. In response to the burden of costs these present, the government notes that regulations are developed in consultation with stakeholders, that they are working on developing ‘smart’ regulations which will allow operators flexibility in determining the method of compliance, and that the ACAP provides assistance for start-up capital costs related to meeting regulatory requirements, though not ongoing costs. They also note that they are in the process of revising rescue and fire-fighting regulations, which will lessen the burden on less busy airports.

•

Government Exemptions. The Committee recommended that the government end its policy and repeal statutes where certain government departments and agencies receive free services from airport authorities. The government response is that they agree unreasonable demands should not be placed on airport authorities, but disagree with this recommendation. They are currently examining options for the accommodation of departments and agencies in terminal buildings. The response did not contain a specific justification on why airport services should continue to be provided free of charge.

In addition to the issues covered in these recommendations, the Committee is also investigating issues concerning the liberalisation of international air transport policy, indicating in its interim report that these required further study before making concrete recommendations. The Committee’s final report containing recommendations on all issues discussed will be released following further study, though an exact timeline has not been specified.

Page 2 October 2005

GLOBAL DISTRIBUTION SYSTEMS:

A CURRENT SNAPSHOT

Despite the increase in ticket sales via the Internet, Global Distribution Systems (GDSs) continue to play a significant role in the distribution of airline tickets and other travel services. Airlines currently spend an estimated US$5.5 billion in GDS booking fees per year, and together the four largest GDSs (Sabre, Amadeus, Galileo and Worldspan) accounted for 1.2 billion air bookings in 2004. The following table provides an overview of these four GDSs. GDS

Angelica Sparolin Research Manager

Original Owners

# Agency Locations

Air France, Iberia, Lufthansa

65,250

American Airlines, IBM

56,000

Delta, Northwest, Transworld

16,000

11 airlines, incl. UA, BA, KLM, AC

44,000

# Airlines & Hotels 469 airlines 58,000 hotels 400 airlines 60,000 hotels 465 airlines 55,000 hotels 470 airlines 56,000 hotels

2004 Bookings 381 million 343 million 190 million 250 million

Source: “Carrying the load: How deregulation will impact the GDS heavyweights,” Tourism, Hospitality & Leisure Review. Deloitte, 2004 and “Online Plays,” Airline Business. March 2005

The following map provides an overview of the major players in each of the world regions. The market shares vary significantly with Sabre dominating in North and South America, Amadeus dominating in Europe and China-based TravelSky dominating in Asia. On a global basis, Amadeus captures the largest market share at 26%, followed by Sabre at 24%, Galileo at 22% and Worldspan at 14%.

Other 8%

Sabre 4%

Amadeus 15%

Sabre 42%

Worldspan 28%

Worldspan 8% Galileo 15%

TravelSky 35%

Abacus 19%

Worldspan 4%

Galileo 21%

Sabre 13%

Galileo 31% Amadeus 9%

Galileo 8%

Amadeus 48%

Worldspan 6%

Amadeus 37% Sabre 49%

Source: Star Alliance In-depth press briefing “GDS Alternatives”, Nagoya, June 2005.

While airlines have been struggling financially in recent years, the GDSs have all been performing well. In 2004, all the major GDSs reported profits, each reporting increases over 2003.

Page 3 October 2005

GLOBAL DISTRIBUTION SYSTEMS:

A CURRENT SNAPSHOT – CON’T GDS

2004 Revenue

2004 Net Profit

US$2.56 billion

US$259 million

US$2.30 billion

US$190 million

US$503 million

US$63 million

US$1.79 billion for travel distribution (US$10.9 billion Cendant total)

n/a for travel distribution (US$2.1 billion Cendant total)

Source: “Online Plays,” Airline Business. March 2005.

Despite their profitability, the GDSs are facing a number of market threats including: •

Changing patterns of consumer behaviour. Online bookings have continued to grow and airlines continue to encourage the use of these channels by passengers and travel agencies. Some GDSs have responded by purchasing stakes in online agencies. For example, Cendant spent US$2.7 billion to purchase Orbitz, Gullivers Travels (which owns octopustravel.com) and ebookers. Sabre currently owns Travelocity and Amadeus purchased a majority stake in Opodo. Worldspan has taken a different approach; instead of owning online agencies, it provides the booking engines behind a number of online agencies including Expedia, Orbitz and Priceline.

•

Pressure from airlines to lower booking costs. Air carriers have also been applying pressure to GDSs to lower booking fees, which remain around US$4 per travel segment. Fees increased by approximately 3% per year prior to 2002, when a number of GDSs entered into agreements with carriers to freeze or reduce per-segment fees in exchange for access to fares, previously only available online. For those airlines not under such agreements, booking fees have continued to rise (e.g., in 2004, Sabre increased booking fees by 2.3%). Many of the new agreements were for a three year term and are set to expire in 2006. Some carriers are looking to negotiate new contracts with alliance partners and use their collective volume to achieve better terms. Other carriers no longer use GDSs. Ryanair, for example, which started out on all four GDSs, gradually built online sales until it stopped using GDSs completely.

•

New entrants and new technologies. A number of new technologies are being developed to create a lower-cost version of the GDS. These new companies have been called “Global New Entrants” or GNEs and include G2 SwitchWorks (developed by one of the creators of Orbitz) and a yet unnamed product being created by ITA Software. These companies hope to reduce the per- segment booking costs to 40¢. Other technologies are being developed to bypass GDSs altogether. One such example includes a pilot project by SAS to link companies with very large volumes of travel directly into an airline’s fare inventory.

Another relevant change for GDSs is their 2004 deregulation in the United States. Regulation was originally put in place in 1984 to prevent anticompetitive behaviour among GDS-owning airlines (e.g., biasing search results in favour of the airline which owned the GDS). GDS regulations are currently under review in Canada and in Europe. With these market and regulatory changes, GDSs will be forced to continue adapting and evolving in the coming years, but they are also expected to remain an important part of travel distribution into the foreseeable future.

Page 4 October 2005

INBOUND TRAVEL MARKET TO CHINA 14 October 2005

In the August 2005 issue of the InterVISTAS Canadian Aviation Intelligence Report (China’s Outbound Travel Market, p. 3), the outbound travel market from China was examined. This column will assess the inbound travel market to China, and the current air services that serve the CanadaChina market.

Growth of Inbound Travel to China. As shown in the graph below, international travel

Project Analyst

International Inbound Travel to China

China Inbound Market Characteristics. Based on 2003 data published by the National Bureau of Statistics of China, about 40% of the visitors were on leisure/visiting friends and family, 25% of the visitors were travelling on business, while the remaining 35% were travelling for other purposes. Top markets of origin include Japan, South Korea, Russia and the U.S., accounting for 56% of total international visitors. In 2003, over 230,000 Canadians visited China, an increase of 79% from 1995.

16,000 13,440

14,000

Number of Travellers ('000s)

Eugene Chu

to China (excluding visitors from Hong Kong, Taiwan and Macau) has nearly doubled from 5.9 million in 1995 to 11.4 million in 2003. The growth in visitors is a result of policy changes and aggressive marketing by the China National Tourism Administration (CNTA). Note that the growth in inbound visitors to China was tempered by the SARS outbreak in 2003. The World Tourism Organisation forecasts that China will receive 62 million international visitors in 2010, and 130 million by 2020, with an average annual growth rate of 7.8% between 1995-2020.

12,000 10,000

8,430

8,000 6,000

11,400

11,230 10,160

5,890

6,740

7,430

7,110

1997

1998

4,000 2,000 0 1995 1996

1999

2000

2001

2002

2003

Notes: Excludes visitors from Hong Kong, Macau and Taiwan. Source: China Statistical Yearbook 2004 - National Bureau of Statistics of China.

Air Services between Canada and China. Currently, Air Canada and Air China both offer daily flights between Vancouver and Beijing. Daily service between Vancouver and Shanghai is operated by both Air Canada and China Eastern Airlines, while Air Canada offers Toronto-Beijing service five times per week. 1 In April 2005, Canada completed a new air service agreement with China. The agreement allows for a three-fold increase in the number of weekly air passenger services between Canada-China, and permits up to nine additional cities in each of Canada and China to be served. 2 Air Canada has already announced plans to increase services to China under the new agreement (including a new VancouverGuangzhou route in 2007), while Harmony Airways has received designation to serve the CanadaChina market.

Implications. The growth of both the outbound travel market from China and inbound market to China from Canada helps to ensure healthy demand for air services in both directions, facilitating the continued growth of Canada-China air services.

Source: Air Canada, Air China and China Eastern Airlines websites. Cities to be named by Canada and China. Page 5 InterVISTAS’ Canadian Aviation Intelligence Report October 2005 Copyright ©2005 InterVISTAS Consulting Inc., all rights reserved.

1 2

AIRLINE DATA – CANADA Traffic and Load Factors on Canada’s Major Air Carriers September 2005 Passenger Traffic

Air Carrier

OTHER CARRIERS: LOAD FACTORS CanJet: not reported

Capacity

Revenue Passenger Kilometres

Load Factor

Available Seat Kilometres

% Change over 2004

% Change from 2003

% Change over 2004

% Change from 2003

Air Canada1

+8.8%

+19.2%

+7.2%

+8.8%

Domestic (Mainline)

+4.1%

+4.6%

+1.9%

Jazz

+68.6%

+81.9%

International & Charter

+10.9%

+17.6%

WestJet

Change over 2004 +1.2 pts (to 80.4%)

Change from 2003 +7.0 pts (from 73.4%)

-8.6%

+1.7 pts

+10.3 pts

+61.8%

+44.4%

+2.8 pts

+14.3pts

+26.4%

+9.6%

+18.0%

+1.0 pts

+5.4 pts

+55.2%

+18.3%

+49.5%

-0.4 pts (to 70.9%)

+2.6 pts (from 68.3%)

Analysis: •

•

Air Canada reported its eighteenth consecutive month of record load factors in September 2005. Domestic traffic rose faster than the addition of capacity, resulting in an improved load factor for the month. Following a previous trend, Air Canada Jazz continues to post double digit growth in traffic and capacity. Over the last several months, Jazz, which serves both domestic Canada and the transborder market, has outpaced WestJet in traffic and capacity growth.

Air Canada Domestic Mainline 10% 5% 0% -5% -10% -15%

Jazz data is not included in this graph

Sep04

Oct

Nov

Dec Jan- Feb 05

Dom RPK

Mar

Apr May

Jun

Jul

Aug

Sep

Dom ASK

Air Canada International 15% 10% 5% 0% -5%

In September 2005, Air Canada’s international traffic and capacity posted the strongest increase since the beginning of the year. Traffic and capacity increased in all major sectors including the U.S., Atlantic, Pacific and Latin America. WestJet’s traffic and capacity recorded double-digit growth in September 2005. For the first time all year, load factor declined as the addition of capacity outpaced traffic growth.

-10% Sep04

Oct

Nov

Dec

Jan- Feb 05

Mar

Int'l RPK

Apr

May

Jun

Jul

Aug Sep

Int'l ASK

WestJet 60% 50% 40% 30% 20% 10% 0% Sep04

Oct Nov

Dec

Jan- Feb 05

RPK

Page 6 October 2005

Mar

Apr

May Jun

Jul

Aug Sep

ASK

AIRLINE DATA – U.S. U.S. Airlines Release September 2005 Traffic Figures Traffic Data – September 2005 Airline

Load Factor

Traffic (RPMs – millions)

(ASMs – millions )

76.2%

10,743

14,095

á2.8 pts

á9.1%

á5.0%

69.2%

676

977

á3.2 pts

á26.2%

á20.4%

70.9%

477

672

á0.2 pts

â44.6%

â44.8%

77.0%

6,192

8,043

á2.5 pts

á9.8%

á6.3%

73.1%

9,397

12,863

á2.6 pts

á8.0%

á4.2%

77.7%

1,519

1,955

á1.1 pts

á30.7%

á28.9%

81.0%

6,005

7,412

á1.8 pts

á4.5%

á2.1%

67.4%

4,734

7,021

á4.2 pts

á18.9%

á11.5%

80.2%

9,130

11,380

á2.7 pts

â1.5%

â4.8%

72.6%

2,870

3,950

á1.9 pts

â4.0%

â6.6%

Notes:

1. 2.

Sources:

Carrier traffic reports.

Page 7 October 2005

Capacity

Mainline operations only. Load factor includes scheduled service only.

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

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

+1.9%

+2.2%

+6.2%

+7.4%

+6.9%

-2.0%

-5.9%

+5.4%

+1.5%

St. John’s +10.1%

+16.1%

+11.5%

+13.2%

+13.0%

+6.3%

+7.9%

+8.8%

+8.6%

+8.3%

+12.1%

+5.3%

-0.6%

+13.4%

3rd Quarter

+16.4%

+8.7%

+16.7%

+6.2%

+2.9%

+6.6%

+8.2%

+8.6%

+3.3%

+1.1%

+5.4%

+0.8%

+11.2%

October

+14.3%

+7.0%

+10.7%

-4.0%

+11.9%

+1.1%

+3.7%

-1.4%

+9.1%

+7.9%

+1.9%

+18.2%

November

+13.3%

+6.2%

+17.6%

+9.6

+4.7%

+11.4%

+4.4%

+8.3%

+0.3

+5.1%

+8.0%

-11.1%

+9.9%

December

+14.2%

+6.8%

+20.9%

+8.9%

+8.4%

+11.0%

+5.1%

+8.0%

+2.1%

+3.9%

+8.1%

+3.6%

+6.8%

4th Quarter

+14.0%

+6.7%

+16.1%

+9.7%

+3.1%

+11.4%

+3.5%

+6.4%

+0.3%

+5.9%

+8.0%

-2.1%

+11.9%

Full Year

+15.7%

+9.6%

+18.6%

+7.0%

+5.1%

+10.2%

+7.7%

+9.1%

+5.7%

+3.6%

+5.6%

+0.3%

+14.0%

January

+15.0%

+9.8%

+14.4%

+13.2%

+9.6%

+12.9%

+13.6%

+7.0%

+4.7%

+12.4%

+17.7%

+9.7%

+11.9%

February

+8.7%

+4.5%

+3.8%

+10.2%

+7.8%

+5.5%

+7.0%

+4.8%

+7.1%

+15.8%

+10.4%

+8.5%

+1.5%

March

+10.2%

+8.2%

+5.5%

+17.5%

+12.5%

+7.3%

+9.7%

+7.1%

+15.4%

+19.5%

+19.1%

+22.2%

+19.6%

1st Quarter

+11.2%

+7.5%

+7.7%

+13.7%

+10.0%

+8.4%

+10.0%

+6.3%

+9.3%

+16.0%

+15.6%

+13.3%

+11.5%

April

+4.0%

+3.9%

+5.7%

+3.5%

+5.5%

+0.1%

+4.3%

-0.2%

+2.6%

+18.8%

+5.9%

+3.8%

+9.8%

May

+6.7%

+5.5%

+3.7%

+12.2%

+12.0%

+5.5%

+8.0%

-4.5%

+5.8%

+26.3%

+13.4%

+5.7%

+8.5%

June

+6.3%

+4.0%

+7.5%

+10.1%

+13.9%

+3.4%

+2.9%

-0.5%

+6.8%

+22.7%

+11.0%

+12.4%

12.4%

2nd Quarter

+5.7%

+4.5%

+5.7%

+8.6%

+10.4%

+3.1%

+5.0%

-1.8%

+5.1%

+22.6%

+10.2%

+7.3%

+10.3%

July

+3.6%

+3.4%

+3.8%

+11.2%

+11.7%

+4.8%

+4.5%

-9.7%

+1.2%

+15.9%

+5.1%

+10.9%

+14.0%

August -1.1% +2.7% +1.5% +12.7% Source: Transport Canada and individual airports’ traffic reports.

+8.8%

+4.4%

+4.6%

-6.4%

+5.2%

+26.4%

+10.1%

+2.4%

+8.9%

2004

Calgary

+4.9%

MontréalTrudeau +18.1%

Toronto

Vancouver

August

+16.0%

September

2005

If your airport is interested in providing InterVISTAS Consulting Inc. with its monthly passenger statistics, please email Doris Mak at doris_mak@intervistas.com. Page 8 October 2005

U.S. Passenger Market Data for Airports Accurate and Timely Marketing Data: A Key to Air Service Development

InterVISTAS Consulting specialises in developing origin/destination passenger market sizes, travel routings and fare profile data for domestic, transborder and international city-pair markets.

InterVISTAS Consulting Inc. 550-1200 West 73 rd Avenue, Vancouver, BC, V6P 6G5 Canada Telephone: 1-604-717-1800 Facsimile: 1-604-717-1818 E-mail: info@InterVISTAS.com

Origin & Destination Market Data for all Transborder Markets

Identify True Origin & Destination Flows

InterVISTAS recognises the need for a solid base of market knowledge to support air service development. Our market research team specialises in quantifying origin/destination passenger markets, travel patterns, and drive diversion for airports.

•

InterVISTAS’ transborder market data relies on a number of sources including travel agency ticket sales, which represent one of the most comprehensive and detailed sources of air travel data between Canada and the United States. By combining air ticket sales data with other aviation data sources and years of industry knowledge, InterVISTAS offers custom reporting on transborder air markets.

Understand Competition within Airport Catchment Areas

Page 9 October 2005

Quantify city-pair market sizes for air service development initiatives

Analyse Hub Activity & Routings •

•

Identify key routing patterns to support air service proposals

Quantify traffic leakage to determine true market sizes

For more information, contact: Nancy Keen Market Research & Analysis InterVISTAS Consulting Inc. Telephone: 1-604-717-1822 Email: nancy_keen@InterVISTAS.com

NEWS ARTICLES AIR CANADA EXPANDS SERVICE TO INDIA

AIR CANADA UPDATE AIR CANADA AND ACPA REACH AGREEMENT ON PROCESS TO RESOLVE ISSUES ON BOEING ORDER On September 23, Air Canada announced that it had reached an agreement with the Air Canada Pilots Association (ACPA) on a process to resolve all issues related to the carrier’s previously announced acquisition of Boeing 777 and 787 aircraft. Following resolution of the issues, Air Canada will reengage Boeing to finalise the agreement on acquisition of the aircraft.

ACE COMPLETES PLANNED INVESTMENT IN MERGED US AIRWAYSAMERICA WEST

Air Canada announced that starting October 30th, it will be expanding service to India through a codeshare arrangement with SWISS International Airlines. Air Canada will offer its own flights daily from Toronto to Delhi via Zurich, on which SWISS will sell seats on a codeshare basis. In addition, SWISS will offer daily flights from Zurich to Mumbai and from Montreal to Zurich, codesharing with Air Canada on both flights.

OTHER CANADIAN AIRLINE NEWS WESTJET COVERTS 737-700 OPTION INTO FIRM DELIVERY

ACE Aviation Holdings, parent company of Air Canada, announced on September 27 that it had completed its planned investment of US$75 million in the merged US Airways-America West entity. The move coincided with US Airways exit from bankruptcy proceedings.

WestJet Airlines announced on October 6 that its Board of Directors had approved the purchase of an additional 737-600 aircraft by converting a purchase option into a firm order. The aircraft will be delivered in December 2006.

AIR CANADA JAZZ LAUNCHES DIRECT TORONTO-SASKATOON AND TORONTO-REGINA CRJ SERVICE

ZOOM TO START TORONTO-HONOLULU SERVICE

On October 3, Air Canada Jazz commenced new direct air services between Toronto and Saskatoon, and between Toronto and Regina. Both services are operated using 75-seat CRJ705 aircraft and will operate three times daily through the winter, plus one additional frequency for Saskatoon-Toronto through the end of October. The new services replace shared circle routes that included stops in both cities as well as Toronto.

ACE SHELVES PLANS TO SPIN OFF JAZZ

Zoom Airlines announced plans to operate weekly service this winter between Toronto and Honolulu. The service will run Saturdays from December 17, 2005 to April 29, 2006, using 767-300 aircraft.

WESTJET COMMENCES SERVICE TO FORT MYERS On October 13, WestJet commenced its nonstop service operating between Toronto and Fort Myers, Florida. The service operates four times weekly using 737-700 aircraft.

ACE Aviation Holdings is putting on hold plans to spin off Air Canada Jazz into an income trust, indicating current conditions in the trust market were not favourable. ACE has stated they will proceed with the plans as market conditions warrant. Page 10 October 2005

NEWS ARTICLES OTHER CANADIAN AIRLINE NEWS – CON’T WESTJET EXTENDS FUEL HEDGING WestJet announced on October 12 that it is expanding the fuel hedging strategy it had announced in October. The strategy uses financial instruments to protect the carrier against volatile fuel prices, which represent a risk where tickets are purchased in advance and future fuel costs are uncertain. WestJet has hedged approximately 50% of its fuel costs in October, 25% in November, and 12.5% in December.

CANADIAN AIRPORTS VANCOUVER AIRPORT AWARDS DUTY FREE CONTRACT Vancouver International Airport Authority announced on October 13 that it has awarded the duty free concession contract at Vancouver International Airport to Aldeasa, a Madrid-based company that is the fourth largest airport retailer in the world. The contract is for eight years plus a two-year option.

VANCOUVER AIRPORT LAUNCHES COMMON-USE CHECK-IN KIOSKS On September 27, Vancouver International Airport Authority officially launched commonuse self service (CUSS) check-in kiosks at two Delta hotels in Vancouver and Richmond. The new kiosks allow guests at the hotels to check in for flights departing from the airport before leaving the hotel. Currently the service applies to WestJet flights, with more airlines to join the program later this year.

Page 11 October 2005

VANCOUVER INTERNATIONAL AIRPORT AUTHORITY FORMS PROJECT MANAGEMENT COMPANY Vancouver International Airport Authority announced the establishment of YVR Project Management, a wholly owned subsidiary, to oversee major projects at the airport. The initial focus of the subsidiary will be the expansion of the International Terminal Building, valued at $420 million.

CARGO NEWS MORNINGSTAR CESSNA 208 CRASHES IN WINNIPEG On October 6, a Morningstar Cessna 208 Caravan carrying cargo for Federal Express crashed in central Winnipeg, killing the pilot but causing no other fatalities or significant damage on the ground. The Transportation Safety Board is investigating the cause of the crash, and it is believe weather may have been a factor.

CARGO 2000 TO RELEASE MORE DATA Cargo 2000, an IATA organisation of 30 major airlines, freight forwarders and ground handling agents, began publishing joint airline/forwarder data on “flown/received as planned” performance data on its website in an effort to improve service levels on the cargo supply chain. Starting in January 2006, Cargo 2000 will also publish data on booking quality levels from forwarder to airline. The new data will indicate responsibilities for service failures. By the end of 2006, all shipments between members will be measured globally, whereas now it is measured only on specific routes.

NEWS ARTICLES MILTON NAMED TO US AIRWAYS BOARD

CARGO NEWS AIR CANADA SIGNS MARKETING AGREEMENT WITH AIRBRIDGE CARGO Air Canada and AirBridge Cargo have signed an exclusive marketing agreement on scheduled and charter B747F services to and from Frankfurt and Amsterdam from Russia, CIS and Asia. The agreement, which will run until 31 March 2007, will support the oil and gas industry in Western Canada by linking Air Canada’s MD-11F services into Frankfurt and Amsterdam with AirBridge Cargo’s B747F services to Moscow, Krasnoyarsk, and Yuzhno-Sakhalinsk, with more destinations to be added.

Robert Milton was named to the board of US Airways Group in September after ACE Aviation announced the completion of its investment in the carrier. Robert Milton US Airways recently emerged from bankruptcy protection and merged with America West Airlines. Milton is Chairman of Air Canada, which itself emerged from bankruptcy protection in September 2004.

REMPEL NAMED TO ACI-NA BOARD

FREIGHT CAPACITY INCREASE HIGHER THAN DEMAND INCREASE IN AUGUST World air freight traffic, as measured in freight tonne kilometres (FTKs), grew 2.8% in August 2005 over the previous year. Capacity grew 4.9%, according to the International Air Transport Association.

PEOPLE IN THE NEWS VANCOUVER INTERNATIONAL AIRPORT AUTHORITY ANNOUNCES NEW DIRECTORS On October 12, Vancouver International Airport Authority announced the appointment of three new directors to its board. Peter Dhillon is the CEO of the Richmond Group of Companies and serves on a number of boards including as chairman of the Audit Committee for the Vancouver 2010 Organizing Committee. Phillip Owen is a former Mayor of Vancouver (serving from 1993-2003) and is active in a number of community organisations. Ronald Stern is the president and CEO of large paper mills in Canada and the U.S., and chairman of a number of companies including FP Canadian Newspapers.

Page 12 October 2005

Barry Rempel

Barry Rempel, President and CEO of Winnipeg Airports Authority, has been elected to the board of directors of Airport Council International-North America (ACI-NA). He will begin a three-year term on the board in 2006.

COUTU APPOINTED TO TRANSPORTATION APPEAL TRIBUNAL On October 5, Transport Minister Jean Lapierre announced the appointment of Dr. Pierre Coutu and Dr. John Saba to the Transportation Appeal Tribunal of Canada. Dr. Pierre Coutu Coutu is President of Aviation Strategies International, an international network of aviation advisors, while Dr. Saba is secretary–general of the Institute of Air & Space Law Association. Bryan LaBrecque has been named President and Chief Operating Officer of Atlantic Southeast Airlines (ASA). Before joining ASA, LaBrecque served as director of the Delta Bryan LaBrecque Connection program for Delta Air Lines. ASA was recently sold by Delta to Skywest, Inc. for US$425 million (C$500 million).

NEWS ARTICLES PEOPLE IN THE NEWS - CONT Brian Anderson has been appointed to the board of directors of the Canadian Tourism Commission. Since 2003 he has been the Deputy Minister of Tourism and Parks for the Government of New Brunswick and brings over 20 years of public sector experience.

OTHER U.K. TO GRANT 5TH FREEDOM RIGHTS FOR REGIONAL AIPORTS The United Kingdom’s Department for Transport (DfT) announced in September a change in policy in favour of allowing fifth freedom rights for both passenger and cargo service for foreign carriers operating at regional airports in the UK. The new policy reflects the recommendations made in a study by the country’s Civil Aviation Authority (CAA) on the impacts of such services.

AIRBUS LAUNCHES A350 PROGRAM On October 6, Airbus announced that it had received approval from its shareholders and formally launched its new long-range widebody A350 aircraft. The aircraft will be similar in appearance to the A330 and A340 on which it is largely based and will share the same pilot rating, but will have new components including more efficient engines and a new wing. The aircraft is expected to compete with Boeing’s 787 as a fuel-efficient, long-range, mid-sized widebody aircraft. Airbus has received 140 firm commitments for the aircraft.

Page 13 October 2005

RUSSIA LIFTS BAN ON IL-96-300 FLIGHTS On October 3, Russia’s Transportation Ministry ruled that IL-96-300 could resume flights. The aircraft type had been grounded in August due to faulty components in the braking system.

SAS INTRODUCES CHECK-IN USING MOBILE PHONES Scandinavia Airlines System (SAS) introduced a service, SAS MobilePortal, to allow passengers to check in for flights using their mobile phones. SAS claims to be the first airline to offer such service via mobile phone. The system has been launched in Sweden and will follow in the other Scandinavian countries later this fall.

GAO REPORT – BANKRUPTCY A SYMPTOM OF STRUCTURAL ISSUES The U.S. General Accounting Office (GAO) released a report in September regarding airline bankruptcies and pension issues, finding that bankruptcy is endemic to the industry due to high capital costs, strong competition, and cyclical demand. The study found mixed results in terms of airlines being able to significantly reduce costs through bankruptcy, though most were able to, and found no clear evidence that bankruptcy harms the industry.

AIRPORT BEST PRACTICES October 2005

Thunder Bay: Entrepreneurial Get Up and Go Traditionally airports have served air carriers, aviation (including cargo) and passenger related business. In exchange for these services, airports have received per-use fees, rents and concession revenue (money made by allowing a company such as a duty-free operation a concession to operate in the terminal building). Airport subsidiaries that operated other airports was a major, post-NAS innovation in Canada, although they have existed in Europe for years.

Rob Beynon Director, Airport Marketing

The Thunder Bay International Airports Authority has taken these entrepreneurial innovations a step further. Although one of the smaller NAS airports, at 600,000 enplaned-deplaned passengers per year, it has a number of subsidiaries including: •

An IT company;

•

A consulting/airport management operation; and

•

A distributor (sales, support & leasing) of snow removal equipment.

In cooperation with a local IT company, Aviation Intertec, the airport offers a fully Internet-based flight information display system (FIDS) solution, known as iFIDS. The system is based on Internet data transfer. An airline installs and sends data to iFIDS to distribute to airport customers. This airport subsidiary also offers Aileron, an airport billing and lease management solution. The airport services subsidiary operates Red Lake Airport on a five-year agreement, which the TBIAA hopes to renew for another five years. Red Lake Airport serves approximately 8,000 passengers annually. This subsidiary also offers airport firefighting training to other NAS airports. A third subsidiary has an exclusive North American marketing and support agreement with Boschung AG, a European manufacturer of airport runway maintenance systems. The airport purchased a sweeper-like piece of equipment from Boshung called a JetBroom. After negotiations, the authority entered into an agreement to provide training, technical support and sales of the equipment. Revenue Generation. In 2004, these initiatives provided 12 percent of the airport authority’s revenue. While it has varied year to year, the TBIAA has consistently showed positive revenue from its outside operations. As airports increasingly seek alternative sources of revenue in response from air carriers for low costs, Thunder Bay may prove a model for entrepreneurial airport innovation.

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CANADA-U.S. CARGO OPEN SKIES:

A BALANCED OPPORTUNITY FOR DOMESTIC CANADIAN CARGO CARRIERS October 2005

Balanced Benefits – the missing element. While the domestic Canadian air cargo carriers strongly oppose Canada-U.S. Cargo Open Skies due to the potential loss of a small amount of domestic connections to the U.S. couriers’ transborder flights, they overlook the balancing opportunity to increase their domestic carriage by moving cargo to new fifth freedom gateways. Domestic benefits from fifth freedom opportunities. The provision of fifth Robert Andriulaitis Director, Transportation & Logistics Studies

freedom rights opens the door to an opportunity for Canadian domestic air carriers to increase Canadian domestic cargo carriage by moving Canadian overseas courier traffic from Canadian points to fifth freedom gateways – traffic currently carried by U.S. integrators from the Canadian gateways to U.S. hubs. To illustrate this, consider Asian bound Canadian cargo. Today cargo from a point such as Winnipeg destined for China is likely going on a routing such as Winnipeg-Omaha-Anchorage-China. However, if UPS had fifth freedom rights, and could fly from the U.S. to China via a point such as Vancouver, Winnipeg originating packages would likely be routed Winnipeg-Vancouver on a Canadian carrier and then onto the UPS flight for delivery to China. UPS benefits as this is one less route segment and a shorter distance to travel. A Canadian carrier such as CargoJet would benefit from the increase in its Winnipeg-Vancouver traffic base. An often-cited example of the co-terminalisation risk to Canadian carriers is in the Edmonton market. However, in a similar fashion to the example above, Edmonton-Vancouver-Asia traffic could offset coterminalisation losses. In other words, even though the Edmonton transborder courier traffic would no longer be carried by Canadian air carriers (and trucks) from Calgary, those carriers would gain the Edmonton-Vancouver leg for the Asia service connection. Edmonton gains the co-terminalisation flight, Vancouver gains the fifth freedom traffic, and Canadian air carriers swap the Calgary-Edmonton co-terminalisation traffic in exchange for the domestic fifth freedom feeder service to Vancouver.

Small risks from courier co-terminalisation. As noted above, there is a risk that coterminalisation would result in some lost “domestic” traffic for Canadian carriers. In other words, U.S. originating traffic to points beyond the gateway communities of Vancouver, Calgary, Winnipeg, Hamilton/Toronto, Ottawa, Montréal and Halifax that already receive direct service by one or more U.S.-based integrated carriers are potentially at risk. Right now, the U.S. carriers are forced to subcontract with Canadian carriers (air or truck); with co-terminalisation, they would have the option of offering services to beyond communities themselves. 1 InterVISTAS Consulting Inc. has estimated

1 It

has been claimed that the “scope clauses” in the collective agreements of FedEx and UPS mean that traffic would necessarily be lost under co-terminalization and thus this restriction is necessary to force the U.S. carriers to move their product on Canadian carriers. Using trade restrictions to address provisions of U.S. collective bargaining agreements Canadian carriers do not like, however, is inappropriate and could lead to retaliation. Page 15 October 2005

CANADA-U.S. CARGO OPEN SKIES: A BALANCED OPPORTUNITY FOR DOMESTIC CANADIAN CARGO CARRIERS – CON’T this volume to be no more than 6% of the total domestic weekly cargo capacity of Canadian carriers.2 The reason for such a low number stems in large part from the very narrow band of markets that are both large enough to warrant co-terminalisation services by large U.S. jets, yet small enough to not justify non-stop services. While traffic losses could be expected, the potential volume is simply not that large.

Conclusion: a balance of opportunities. All in all, Canada-U.S. Open Skies looks like a balance of opportunities for Canada's domestic cargo carriers. Coupled with the clear benefits to passengers, shippers, airports, the tourism industry, export/import industries and Canadian passenger air carriers, Open Skies is clearly in Canada’s best interests.

The Economics of Cargo Co-Terminalization, prepared by InterVISTAS Consulting Inc. for Aéroports de Montréal, The Greater Toronto Airport Authority, and Vancouver International Airport Authority, 30 June 2005. 2

Page 16 October 2005

OTTAWA REPORT 12 October 2005

Canada and the European Union Sign Agreement on Passenger Data Transfer

Sam Barone Regional Vice President Ottawa, ON

Canada and the European Union signed an agreement on October 3 that will require European carriers flying to Canada to share selected passenger information with Canadian authorities. Under the agreement, carriers will need to share with the Canada Border Services Agency (CBSA) information including names, contact and credit card information. The information sharing is expected to contribute to anti-terrorism measures. The EU concluded a similar agreement with the U.S. in May 2004. The EU-Canada agreement involves the transfer of less information and higher levels of protection than the EU/U.S. agreement.

National Highway System Expansion Announced On September 22, The Council of Ministers responsible for Transportation and Highway Safety agreed on a recommended expansion of the National Highway System. The expansion will add approximately 4,500 km of feeder routes and 5,900 km of remote and northern routes to the system. The National Highway system was established in 1988 and currently consists of about 24,500 km of highways providing key interprovincial and international links. Most of the current system will be classified as core routes, which is one of three classifications of routes along with feeder routes and remote and northern routes. The expanded system will encompass 38,021 km of roads in total.

Pickering Airport Zoning Regulations Come Into Force Transport Canada Announced on September 26 th that the zoning regulations at the Pickering Airport site had come into effect, protecting the lands for development for future transportation needs. The regulations apply to lands adjacent to and in the vicinity of the federal lands comprising the site. The zoning regulations do not imply that the government has made a decision on development of the airport, which would function as a regional and reliever airport complementing Pearson and Hamilton Airports in the Greater Toronto Area. This decision will not be made until at least 2009 following the results of future studies, planning, and due diligence review.

Canadian Transportation Award Winners Announced Transport Minister Jean Lapierre and David Johnstone, President of the Canadian Transportation Agency, announced on September 22 the winners of the 2005 Canadian Transportation Awards. The awards recognise achievement, leadership, and excellence across all modes of Canadian transportation. The Transportation Person of the Year was awarded to Dan Doyle of Burnaby, B.C., who recently retired as Deputy Minister of B.C.’s Ministry of Transportation. The Award of Excellence was awarded to two individuals: Dan Di Tota of Ottawa, the national director of Operation Lifesaver, a public education program aimed at reducing railway crossing accidents, and John Lawson, also of Ottawa, a respected transportation economist who retired this year following a long career with Transport Canada. The Award of Achievement was conferred on Milton Carrasco of Richmond, B.C., the president of Transoft Solutions Inc., responsible for the development of vehicle simulation software that revolutionised the way engineers design intersections, roundabouts, and loading facilities.

Page 17 October 2005

WASHINGTON REPORT 14 October 2005

TSA Won’t Use Commercial Data in Secure Flight Program The U.S. Transportation Security Administration (TSA) said that it will not use commercial data in its Secure Flight program, (to be launched later this year). The commercial data, which TSA had arranged to be compiled by a private data contractor during the test phase of the Secure Flight system, would have come from multiple sources including credit card information. TSA sent a list of PNR (Passenger Name Records) to the contractor who checked the passenger’s identity, then the passenger was checked against TSA’s terrorist watch list. TSA cited privacy concerns in its decision to not use commercial data for Secure Flight.

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

Mexico and U.S. Expand Air Bilateral Mexico and the U.S. have updated their air bilateral agreement for the first time since 1999. Under the new agreement, each country may designate three airlines per city pair between any U.S. point and 14 points in Mexico. The previous agreement allowed two airlines from each country to operate per city pair. Airlines from either country are also allowed to enter codeshare agreements with airlines from third countries. The agreement also increases from four to ten the number of U.S. and Mexican carrier codes that may be carried in each city pair. Any number of all-cargo carriers will be allowed to operate scheduled services between Mexico and the U.S. (previously limited to five), and three allcargo carriers will be allowed to operate on each city pair (previously limited to one).

FAA Proposes New Security Devices FAA has proposed that commercial aircraft be equipped with equipment that will allow the flight crew to monitor the area outside the cockpit door. The FAA has also made other suggestions for cabin crew to notify pilots of suspicious activity or any security breaches in the cabin of the aircraft. The proposed changes address post 9/11 recommendations by the aviation industry, the U.S. government and ICAO.

GAO Report: Gap in Air Crew Security Training A recent GAO report cites continuous oversight of security training of flight and cabin crew aboard commercial aircraft. The GAO reports that TSA has not established performance goals for security training, lacks internal controls for properly assessing training of flight crew and lacks written procedures for reviewing training programs. In addition, TSA has not assessed the quality of classroom instruction and follow-up with airline employees and has not established performance measures on whether a self-defense training program developed in 2004 is effective. Federal law requires that TSA monitor and review airline training programs to ensure that crew members are prepared for potential threats to safety.

Page 18 October 2005

INTERVISTAS NEWS October 2005

Doug Wilson joins InterVISTAS-ga2 Consulting, Inc. as Director, Transportation Research, Forecasting & Planning InterVISTAS-ga2 Consulting, Inc. is pleased to announce that Doug Wilson has joined the firm as Director, Transportation Research, Forecasting & Planning. He will be located in the Washington, DC office. “Mr. Wilson greatly enhances our capabilities in air cargo, forecasting and airport planning,” said Jon Ash, President of InterVISTAS-ga2 Consulting. “He has 27 years of experience in the transportation sector, including both air and rail transport.” During his consulting career, Doug has done work in the areas of air traffic forecasting, air services program development, international aviation policy and bilateral agreements, econometrics, air cargo development, airport capacity planning, aviation databases/modeling and airline economics. Mr. Wilson had previously worked for Air Canada, CP Limited (holding company that owned CP Rail, CP Air, CP Trucks, various other firms), Sypher Mueller and Edwards Kelsey. He has experience in airline, airport and rail transportation. He has a Masters Degree in Economics from the University of Wisconsin.

InterVISTAS Upcoming Speaking Engagements •

19 October 2005: AIM BC Workshop at 67th Annual BCAC Conference, Whistler, BC Rob Beynon, Director, Airport Marketing ”Airports and Tourism”

•

21 October 2005: 3rd Annual Air Access Forum, Halifax, NS John Weatherill, Manager, Airline Planning ” Data Collection: The Challenges, Reliability and Business Case Needs”

•

23 February 2006: 9th Annual Hamburg Aviation Conference, Hamburg, Germany Dr. Mike Tretheway, Executive Vice-President Dr. Tretheway has been honoured by being selected to give the Martin Kunz Memorial Lecture 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. To inquire about advertising opportunities or to provide comments/feedback on the InterVISTAS’ Canadian Aviation Intelligence Report, please contact Rob Beynon at rob_beynon@InterVISTAS.com or 1-604-717-1864. To subscribe, please send an email to subscribe@InterVISTAS.com To unsubscribe, please send an email to unsubscribe@InterVISTAS.com. Prepared by InterVISTAS Consulting Inc.

Page 19 October 2005