cair issue no. 37 - january 2006

INTERVISTAS ’CANADIAN AVIATIONINTELLIGENCE REPORT

In this issue…

Features Columns: Regular Reports:• Crude Oil Prices Jump to $64 (p.1)• Market Capitalisation: Renewed Global

Performance (p.2)• Changes in Domestic Travel Agent

Commissions (p.3)

• Airline Data-Canada (p.4)• Airline Data-U.S. (p.5)• Airport Data (p.6)• Industry News (p.9)• Economic Outlook (p.12)• Washington Report (p.14)• InterVISTAS News (p.15)

InterVISTAS’ Canadian Aviation Intelligence ReportJanuary 2006 Copyright ©2005 InterVISTAS Consulting Inc., all rights reserved.Page 1

CRUDE OIL PRICES RETURN TO $6412 January 2005

Crude oil prices hit three month high of $64 a barrel in early January…Crude oil spot prices returned to an upward trend during December and early January, increasingfrom $58.47 a barrel at one point in December to a three month high of $64.40 on 12 January 2006.Spot prices are still lower than the August average of $68, but the contango position of the marketsuggests prices may increase beyond today’s $64.

Iran Resumes Plans for Nuclear DevelopmentAccording to some observers, Iran’s recent declaration to resume development at its nuclear researchfacilities has contributed to the recent rise in oil prices. The decision has gone against warnings byWestern countries and has caused notable concerns in the oil market since Iran is OPEC’s secondlargest supplier. It is feared that continued nuclear development in the country may lead to sanctionsthat will – in turn, impact the country’s oil production.

Seasonal Demands for OilThe winter demand for oil will be coming to an end in March. As much of North America hasexperienced a very mild winter, resource demands have been lighter than anticipated. However,demand will ramp up again during the month of May, when the U.S. summer driving season kicks-off.

... Crude oil futures prices up 10% from DecemberContinued concerns over the long-term supply of oil have caused an increase in futures prices relativeto the December 2005 futures prices. A futures contract in January 2006 for delivery of crude oil inDecember 2011 is priced at $60; this is a 10% increase for the same contract if purchased a monthearlier. The futures markets are currently betting that a) prices will remain in the $65 rangethroughout 2006, but b) the market is not expecting a major run up in prices. However, the markethas called future prices poorly over the past three years as the diagram shows.

Crude Oil Futures Prices

$20

$25

$30

$35

$40

$45

$50

$55

$60

$65

$70

Jan-

03

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-03

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-05

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-11

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12

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-12

Month of Delivery

US$

Per

Bar

rel

Crude OilFutures Prices

- - - - -

May 2003

Sep 2004

Apr 2005

Jan 2006

Dec 2005

Sep 2005Crude Oil

Spot Prices

Doris MakSenior Project Manager


Kahlil PhilanderProject Analyst

AIRLINE MARKET CAPITALISATION:RENEWED GLOBAL PERFORMANCE12 January 2006

In the past five years, the global airline industry has experienced acts of terrorism, war, SARS andsoaring fuel prices. The industry will pay about $97 billion for its fuel in 2006, almost a quarter of itsrevenue, compared to $44 billion in 2003. (See “Crude Oil Prices Jump To $64”, p.1). These eventshave eroded investor values in the industry. The market capitalisation (the market value of the equityshares) of the world’s airlines dropped from US$ 75 billion to $51 billion between December 2000 andDecember 2001.

Industry RecoveryWorld airline market capitalisation is now returning to the levels of 2000, at $73 billion. Operatingstatistics show that traffic volumes are strong. Revenue passenger kilometres are up 7.7% this yearand global passenger traffic is expected to grow 5.6% per annum until 2009. A surge in world aircraftsales during 2005 supports these growth figures. Boeing had a strong year in 2005, reporting 1,002orders for 2005, while Airbus nearly doubled their 2004 orders with 687 orders in the year toNovember 2005. (Final Airbus figures are not yet available, but may approach Boeing’s.)

The Asia-Pacific market has recovered from the SARS crisis of two and a half years ago. While themarket cap of Asian airlines fell over 40% from the end of 2000 to the end of 2001, it had fullyrecovered by the end of December 2004, to $19 billion.

Although Canadian market capitalisation dropped over 50% from December 2000 to December 2001,it has since climbed 575% with new equity investments in both WestJet and post-bankruptcy AirCanada (ACE Aviation). WestJet and Air Canada, currently have market caps of $1.7 billion (CAD)and $4.0 billion (CAD) respectively.

In Western Europe, the airline industry’s market cap levelshave returned from past downturns. As of 31 December 2005,market cap was up 91% from 2001 and 44% from 2000. TheUnited Kingdom’s airline market cap is up almost 300% fromDecember 2001. Europe’s four largest airlines, in terms ofmarket capitalisation, are Ryanair, Lufthansa, British Airways,and the recently merged Air France – KLM. Combined, thesefour companies now have a market cap near $29 billion.

US Market Cap Still Down 38%Market capitalisation for airlines not including the U.S. haveincreased from $33 billion in 2000 to $40 billion in 2005, agrowth of 21%. This compares to U.S. airline market valuesthat have gone from $39 billion in 2000 to $24 billion in 2005, a38% decline. Delta and Northwest Airlines joined United andUS Airways in chapter 11-bankruptcy protection. United Statesairline market cap is still down 15% from December 2001.Southwest Airlines, the industry’s largest airline in terms ofmarket cap ($13 billion), has managed to stay profitable duringthis US airline industry downturn, but its stock price has stilldeclined 11% since 31 December 2001.

Free Float Market Capitalisation by Region ($US Billion)

$-

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

2000 2001 2002 2003 2004 2005

World $74.8 $51.3 $40.6 $55.3 $59.2 $71.3 World (ex USA) $33.4 $22.1 $23.3 $31.4 $35.8 $40.0 USA $39.1 $28.0 $15.9 $22.0 $21.2 $23.8 Canada $1.7 $0.8 $1.1 $1.1 $1.1 $4.6 Western Europe $15.1 $11.4 $12.6 $17.5 $17.0 $21.8 Asia-Pacific $18.3 $10.7 $10.8 $13.9 $18.8 $18.2

31-Dec-00 31-Dec-01 31-Dec-02 31-Dec-03 31-Dec-04 31-Dec-05


CHANGES IN DOMESTIC TRAVELAGENT COMMISSIONSOver the past year, there have been a number of changes in travel agent commissions for domesticair tickets. While Air Canada announced reductions in commissions throughout the year, othercarriers not only maintained their base commissions, but the also offered agents bonus commissionsand other promotional rewards.

Air Canada. Early in 2005, Air Canada eliminated all commissions on Tangofares, previously set at 9%. Tango-Plus fares were reduced from 9% to 5%.Starting 1 January 2006, commissions on flight passes, which were previously setat 5%, were eliminated. On 9 January 2006 Air Canada eliminated its 5%commissions on Latitude and Tango-Plus fares and for group bookings for all“non-preferred suppliers.” This move in particular has drawn criticism from travel agents and industryassociations because Air Canada did not immediately specify the criteria it would be using to qualifyagencies as preferred suppliers. Air Canada cited its business strategy aimed at lowering costs asthe driving force behinds these recent commission cuts.

WestJet. WestJet continued to offer its base commissions,ranging from 5% to 9% on all tickets, based on booking channel.WestJet also offered bonus commissions during two periods in 2005: a 2% bonus commission duringMay, which WestJet has designated “Travel Agent Month”, designed to educate its employees on therole that agents play in the airline’s success; and a 3% bonus commission on all bookings made inSeptember and October. WestJet also offered other contests and promotions throughout the year,including rewarding agents with AirMiles for online bookings made in November (in addition to theclient receiving AirMiles). A general indication of the volume of WestJet ticket sales made throughtravel agencies is that in 2004 more than $400 million in WestJet travel agent bookings were made.

CanJet. CanJet also maintained its base commissions of 5% to 9% in2005. In celebration of its third anniversary of operation, CanJet offered abonus 2% commission on all bookings made by agents during May and June.

Domestic Commission Structure As of January 2006Carrier Fare Category GDS Internet Call Centres

Air CanadaLatitudeTango PlusAll Other Fares

5%5%0%

5%5%0%

0%0%0%

WestJet All Classes9%

(11% to 12% duringbonus periods)

9%(11% to 12% during

bonus periods)

5%(7% to 9% during bonus

periods)

CanJet All Classes 9%9%

(11% during bonusperiods)

5%(7% during bonus

periods)

Harmony All Classes 5% Western Canada10% Eastern Canada

10% 5%Sources: Air carrier websites/press releases, industry publications and travel agency input. Air Canada commissions are for “preferredsuppliers” only. WestJet also offers 5% commissions on group bookings. For GDS bookings, Harmony offers different commissions basedon where in Canada the agency is located.

Angelica SparolinSenior Researcher


AIRLINE DATA – CANADATraffic and Load Factors on Canada’s Major Air CarriersDecember 2005

Passenger TrafficRevenue Passenger Kilometres

CapacityAvailable Seat Kilometres Load Factor

Air Carrier % Changeover 2004

% Changefrom 2003

% Changeover 2004

% Changefrom 2003

Changeover 2004

Change from2003

Air Canada1 +7.4% +8.5% +4.5% +1.0% +2.1 pts(to 77.3%)

+5.3 pts(from 72.0%)

Domestic(Mainline) -2.3% -1.8% -2.5% -12.3% +0.2 pts +8.2 pts

Jazz +86.1% +97.7% 82.1% 68.7% +2.5 pts +12.2 pts

International& Charter +11.4% +12.8% +7.3% +6.9% +2.9 pts +4.1pts

WestJet +15.0% +54.6% +9.8% +45.4% +3.5 pts(to 78.2%)

+4.6 pts(from 73.6%)

Analysis:• Air Canada reported its 21st

consecutive month of record loadfactors during December 2004.Domestic traffic and capacitycontinued to slide during the month,down 2.3% and 2.5% respectivelyfrom December 2004. Domestic loadfactor of 77.2% was Air Canada’shighest ever for December.

• Air Canada’s international servicescontinued steady growth. December2005 passenger traffic increased11.4% and capacity grew 7.3%, overDecember 2004.

• Jazz traffic and capacity continuednear triple-digit growth in December2005, increasing 86% and 82%respectively from December 2004.

• WestJet continued strong passengergrowth in December 2005 with a15.0% increase in RPK overDecember 2004. As traffic volumesgrew faster than capacity, load factorwas up 3.5 pts to 78.2% for themonth.

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

OTHER CARRIERS:LOAD FACTORS

CanJet: not reported

-10%-5%0%5%

10%15%

Dec-04

Jan-05

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Int'l RPK Int'l ASK

Air Canada InternationalAir Canada International

0%

10%

20%

30%

40%

50%

60%

Dec-04

Jan-05

Feb M ar Apr M ay Jun Jul Aug Sep Oct Nov Dec

RPK ASK

W estJetW estJet

Air Canada Domestic MainlineAir Canada Domestic Mainline

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

10%

Dec-04

Jan-05

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Dom RPK Dom ASK

Jazz data is not includedin this graph


AIRLINE DATA – U.S.U.S. Airlines Release December 2005 Traffic Figures

Traffic Data – December 2005

Airline Load Factor Traffic(RPMs – millions)

Capacity(ASMs – millions)

78.9%

!4.3 pts11,490

!4.6%14,545

"1.1%

71.6%

!5.9 pts708

!23.8%989

!13.7%

75.8%

!5.9 pts432

"52.6%570

"56.2%

177.7%

!1.2 pts6,997

!13.1%9,006

!11.4%

75.3%

!1.8 pts9,117

"2.7%12,101

"5.1%

82.0%

"0.9 pts1,849

!27.9%2,232

!26.6%

80.7%

!2.5 pts5,817

"5.7%7,210

"8.6%

67.6%

!4.7 pts4,994

!15.1%7,382

!7.0%

280.0%

!2.3 pts9,452

!0.5 pts11,813

"2.3%

272.2%

!0.3 pts4,856

"7.0%6,725

"7.4%

Notes: 1. Mainline operations only.2. Load factor includes scheduled service only.

Sources: Carrier traffic reports.


Toronto Vancouver Montréal-Trudeau Calgary Edmonton Ottawa Winnipeg Halifax Victoria Kelowna Saskatoon Regina St.

John’sNovember +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%

2004

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% +17.8% +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% +10.5% +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% +19.2% +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% +15.7% +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% +6.0% +3.8% +9.8%May +6.7% +5.5% +3.6% +12.2% +12.0% +5.5% +8.0% -4.5% +5.8% +26.3% +13.5% +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% +10.9% +12.4% +12.4%

2nd Quarter +5.7% +4.5% +5.6% +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% +4.0% +11.2% +11.7% +4.8% +4.5% -9.7% +1.2% +15.9% +5.2% +10.9% +14.0%

August -1.1% +2.7% +1.5% +12.7% +8.8% +4.4% +4.6% -6.4% +5.2% +26.4% +10.3% +2.4% +8.9%September +4.5% +2.6% +7.4% +7.9% +13.5% +7.1% +6.6% +0.3% +2.9% +16.1% +12.9% +13.9% +8.9%3rd Quarter +2.2% +2.9% +4.1% +10.7% +11.2% +5.4% +5.1% -5.6% +3.1% +19.6% +9.3% +8.8% +8.0%

October -0.1% +4.3% +3.7% +7.1% +16.7% -0.7% +6.4% -0.7% +3.1% +16.1% +11.8% +12.8% -0.9%

2005

November +0.6% +5.2% +4.1% 12.1% +10.7% +2.5% +6.2% +3.0% +8.5% +24.0% +18.0% +15.6% +5.0%Source: Transport Canada and individual airports’ traffic reports.

If your airport is interested in providing InterVISTAS Consulting Inc. with its monthly passenger statistics, please email Doris Mak at [email protected].

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

InterVISTAS’ Canadian Aviation Intelligence ReportJanuary 2006 Copyright ©2005 InterVISTAS Consulting Inc., all rights reserved.

WestJet Airlines Fleet Plan: 2005 - 2008

xxxxx

xxx

xxx

xxx

xx xx

55(+1)

63(+8)

67(+4)

70(+3)

JAN FEB M AR APR M AY JUN JUL AUG SEP OCT NOV DEC W S FleetTotal

2008

2005

2006

2007

Source: WestJet Airlines, effective December 29, 2005.

Notes: 10 of 12 deliveries in 2006 are 737-600 series aircraft (119 seats). Remaining 2 are 737-700 series (136 seats).Deliveries scheduled for 2007/08 are tentatively booked as 737-700s.WestJet holds an additional 24 purchase rights/options, which may be exercised or converted before Dec. 31/2008.

Prepared by

Passenger Market Data for Airports

InterVISTAS Consulting,

in conjunction with the

International Air Transport

Association and other

suppliers, is offering a unique

data set that provides

passenger market sizes, travel

routings and fare profile data

for domestic, transborder and

international markets.

InterVISTAS Consulting Inc.550-1200 West 73rd Avenue,

Vancouver, BC, V6P 6G5Canada

Telephone: 1-604-717-1800Facsimile: 1-604-717-1818

E-mail: [email protected]

Accurate and Timely Marketing Data:A Key to Air Service Development

Origin & Destination Market Data forall Top MarketsInbound & outbound travel agencydata is now available for Canadiandomestic and top international airmarkets.

InterVISTAS’ market data issupported by a number of sourcesincluding IATA travel agency ticketsales. Travel agency sales representapproximately 80% scheduledinternational air tickets issuedworldwide. The database includesmore than 7 million air tickets issuedannually in Canada and severalmillion tickets destined to Canadaannually.

Identify True Origin & DestinationFlows• Quantify city-pair market sizes for

air service development initiatives

Analyse Hub Activity & Routings• Identify key routing patterns to

support air service proposals

Understand Competition withinAirport Catchment Areas• Quantify traffic leakage to

determine true market sizes

For more information, contact:Nancy KeenInterVISTAS ConsultingTelephone: 604-717-1822Email: [email protected]


NEWS ARTICLESAIR CANADA UPDATEAIR CANADA CUTS 40% OF INTERLINEPARTNERSHIPS

Air Canada hasannounced that it

has cut about 150 of the near 350 total interlinepartnerships it had in place with other airlines.Notable airlines whose partnerships will endinclude El Al, Etihad, and China Airlines.

AIR CANADA TECHNICAL SERVICESNOT TO LAUNCH IPO UNTIL END OF2006ACE Holdings, Air Canada’s parent companyhas said that they would not launch the initialpublic offering of Air Canada Technical Servicesuntil the end of 2006, citing a need for time tocollect and release independent financialstatements. Fellow ACE subsidiary Aeroplanhas already gone public and Jazz is ready for anoffering early next year.

AIR CANADA TO INTRODUCE TORONTO- SHANGHAI NON-STOP FLIGHTSAir Canada announced on 9 January, that it willintroduce non-stop flights from Toronto toShanghai, effective 16 June 2006. The newservice will operate three times weekly. AirCanada currently offers Toronto-Beijing non-stop service and daily non-stop service to bothShanghai and Beijing from Vancouver.

AIR CANADA JAZZ LAUNCHES YVR -SAN DIEGO SERVICE

On 17 December, AirCanada Jazz inaugurated adaily non-stop service fromVancouver to San Diego. Air

Canada now offers up to 20 daily flights toCalifornia from cities across Canada.

AIR CANADA LAUNCHES SERVICE TOSANTO DOMINGOAir Canada launched a service from Toronto toSanto Domingo on 17 December. The non-stopflights will run three times weekly during thewinter and spring holiday peaks and two flightsweekly for the balance of the year.

AIR CANADA COMMENCES NEWROUTES FROM CALGARYOn 17 December, Air Canada launched twonew non-stop routes from Calgary to Orlandoand from Calgary to Abbotsford. Air Canada’sseasonal service to Orlando will depart twiceweekly, while Air Canada Jazz will operate thethree daily Abbotsford flights.

AIR CANADA TO LAUNCH MONTREALTO DENVER SERVICEAir Canada announced on 21 December theintroduction of a daily non-stop service fromMontreal to Denver, Colorado. The year roundflights will begin 16 June 2006. Air Canada isthe only airline to offer this direct service thatcuts existing air travel time by approximately twohours.

AIR CANADA WELCOMES EMBRAER190 AIRCRAFTOn 22 December, Air Canada’s first newEmbraer 190 aircraft had its inaugural flight. AirCanada becomes the first North Americanairline to operate two different Embraer E-Jetmodels, the E175 and the E190.

AIR CANADA LAUNCHESTRANSATLANTIC SIMPLIFIED FARESAir Canada announced on 4 January that it hasexpanded its simplified fare structure to flights toand from the United Kingdom. The redesignedfare structure simplifies travel bookings to fourfare categories.

OTHER CANADIAN AIRLINENEWSSKYSERVICE LAUNCHES SERVICEFROM KITCHENER/WATERLOOOn 22 December, Skyservice Airlines, inconjunction with Sunquest Vacations,launched direct charter service fromKitchener/Waterloo to Varadero, Cuba. The pairwill inaugurate direct charter service to Cancunon 29 December 2005. In conjunction withSignature Vacations, Skyservice will also offerweekly charter service to Punta Canta andCancun beginning 26 December and 3February, respectively.


NEWS ARTICLESCANADIAN AIRPORTSYVRAA CREDIT RATING UPGRADED

The VancouverInternationalAirport

Authority’s (YVRAA) credit and unsecureddebt ratings have been raised by Standard &Poor’s, from AA Low to AA. YVRAA is one ofonly four airports in the world with this highdesignation.

CALGARY PASSENGER VOLUMEREACHES 10 MILLION IN 2005Calgary International Airport (YYC) reachedan all-time high of 10.2 million passengersduring 2005. The figure represents an increaseof 11% over 2004. YYC is Canada’s fourthbusiest airport.

NAV CANADA TO REPLACE TOWER ATTORONTO BUTTONVILLENAV CANADA, announced on 17 January,plans to build a $2 million air traffic control towerat Toronto Buttonville Airport. The facility isto replace the existing tower and is expected tofinish completion June 2007.

CARGOUN-DHL AGREEMENT

The United NationsDevelopment Programme

and the UN Office for the Coordination ofHumanitarian Affairs signed a partnershipagreement with international leading expressand logistics provider DHL to set up three globaldisaster response teams. The first is located inSingapore, with the other two to cover Africa/Middle East and Latin America/Caribbean.

PEOPLE IN THE NEWSEU APPOINTS MATTHIAS RUETE DG-TRANSPORT

The European Commissionappointed Matthias Ruete asDirector General of the Energy andTransport Directorate. Among hisduties will be the development of

air transport policy. Previously he wasresponsible for competitiveness initiatives in theEnterprise and Industry Directorate.

MICHEL LEMAY NAMED TRANSAT VPCOMMUNICATIONS

Transat A.T. announced MichelLemay as the new Vice President,Communications and Corporate

Affairs. Lemay is currently VP, Corporate andFinancial Communication with Optimum PublicRelations.

BEN SMITH TO CEO, AIR CANADAVACATIONS

Air Canada Vacations’President and CEO,Allister Paterson, hasleft the company after

four years at the position. Ben Smith, AirCanada’s Vice President of Network Planning,has taken over in the interim.

ALASKA PROMOTES GLENN JOHNSONAlaska has promoted Glenn Johnson to seniorVP-customer service for airports. Johnson is aformer VP-customer service for Horizon Air, andhas led an operations improvement team atAlaska for the past six months.

OTHEREUROPEAN COMMON AVIATION AREACREATED

The EU reached agreementwith 10 non-EU nations toextend the EuropeanCommon Aviation Area

(ECAA): Iceland, Norway, Bulgaria, Croatia,Macedonia, Montenegro, Serbia,Bosnia/Herzegovina and the UN mission inKosovo. The ECAA is believed to includecabotage and right of establishment, as well asintegration of safety and regulatory matters.The agreements are expected to take effect inearly 2007.


NEWS ARTICLESOTHER – CON’TU.S. NETWORK CARRIERS LOSSESWIDEN IN Q3U.S. network carriers (America West,Continental, Delta, Northwest, United, and USAirways) reported a combined third quarter netloss of $2.7 billion, versus a loss of $1.5 billion ayear earlier. Only Continental reported positivenet income. US Airways had a net profit, butwhen combined with America West, the Groupreported a loss.

UNITED LOOKS TO ADD AIR CANADATO ANTITRUST IMMUNITY APPLICATION

United Airlineshas asked the US

Department of Transportation to add AirCanada to its current application for antitrustimmunity extension to its bilateral agreementswith LOT, TAP, and Swiss.

MOROCCO OPEN SKIES WITH EUMorocco and the 25 nationEuropean Union entered into anopen skies agreement, whichremoves all restrictions on EU

and Moroccan airlines. The agreement allowsunlimited 3rd/4th/5th freedom services, right ofestablishment and cabotage. Some 7thfreedom passenger services are also allowed.

FRANCE APPROVES NEW AIRLINE TAXFrance has approved a tax onairline tickets to financedevelopment aid for poorcountries. The tax will range

from EUR1 to EUR40 per ticket and is expectedto generate EUR210 million per year.

UNITED’S PLANS TO EXITBANKRUPTCY IN FEBRUARY ON TRACKThe current period of protection for UnitedAirlines has been extended to 3 March toprovide the carrier with a suitable timeline tohave its reorganisation plan approved and exitprotection during February. United has been inbankruptcy protection since December 2002.November year to date operating earnings hasimproved by $450 million and United expectscost-cutting strategies will reduce averageannual costs by $7 billion through 2010.

UNITED AIRLINES INCREASES DENVERSERVICESOn 21 December, United Airlines announced anew daily roundtrip service between its Denverhub and Toronto. The service begins 12 June2006. United will also add an additional dailyflight to its Denver – Vancouver service in June,bringing the total service between the cities tothree times daily.


-1%

0%

1%

2%

3%

4%

5%

6%Q

1 20

02

Q1

2003

Q1

2004

Q1

2005

Q1

2006

Source: Statistics Canada for Historical Data; TD Economics for Forecast Data

Real Canadian GDP (annualised Quarterly %)

HistoricalData

ForecastData

ECONOMIC OUTLOOKJanuary 2006

The Canadian economy: Healthy growth through 2005. Following a relativelyslow start in the first quarter of 2005, the economy picked up with solid GDP growth, exceeding 3% onan annualised basis in the second and third quarters. Data for the fourth quarter is not yet availablebut is expected to be somewhat below this pace, leading to an estimated 2.9% growth on the year.These growth numbers are not as impressive as in some recent years, but nevertheless reflect ahealthy economy. Employment growth continued the steady pace from 2004, while unemploymenthas declined to historically low levels. The unemployment rate in November dropped to 6.4%, itslowest level since 1974, before edging up a tenth of a point in December.

2006: Strong start, slowing slightly. For 2006, there is some range in currentforecasts for overall economic performance. GDP growth forecasts range from a low of 2.7%(National Bank of Canada) to as high as 3.5% (Bank of Montreal), with a median of about 3%. Thereis general agreement that the expected drop in growth in the fourth quarter of 2005 was a temporaryoccurrence and growth should rebound to over 3% early in the year. This growth is somewhatexpected to weaken over the course of the year.

Contributing toincreased growth in2006 are improvementsin the manufacturingsector and in exports,which have suffered inrecent years due to theappreciation of theCanadian dollar. Manyeconomists are of theview that the dollar willstabilise within a fewcents of 85 cents U.S.,as an expected drop orstabilisation incommodity prices (whichhave been contributingto the high Canadiandollar) will be offset bytighter monetary policyfrom the Bank ofCanada in response to inflationary pressures.

The high dollar has positively impacted investment, particularly in machinery and equipment (10.3%growth in 2005), contributing to economic and productivity growth even as exports have remainedweak. (Higher investment also bodes well for future economic productivity.)

Taxes? The 2005 level of investment is expected to cool slightly in 2006 but remain relatively high.Also contributing to growth in 2006 will be expected fiscal stimuli from the federal government. Thisincludes income tax reductions announced in 2005, which will increase the basic deduction and areduction of the lowest personal rate and/or a reduction in the GST. Further tax reductions and/ornew government spending are part of the platforms of all federal parties, so further stimulus can beexpected regardless of the outcome of the January 23 election.

Ian KincaidDirector, Economic Analysis


ECONOMIC OUTLOOK – CON’TCountering these positive factors are negative trends in some sectors in Canada and the U.S., whichare expected to take effect later in the year. In Canada, residential construction has already begunfalling off and will have negative growth through 2006, due to fulfilment of pent-up demand and risinginterest rates. Household spending, particularly on durable goods, is also expected to slow. The U.S.is seeing similar trends, perhaps more pronounced, as higher interest rates and energy prices,declines in housing starts, and resulting decreases in consumer spending are expected to cool theU.S. economy in the near to medium term. As Canada’s largest trading partner, this will spill over toCanada through decreased demand for exports. There remains some disagreement on the timing,severity, and impact of such a slowdown, which leads to the ranges in growth expectations amongsteconomists.


WASHINGTON REPORT 10 January 2005

U.S. Signs New Aviation Agreement with MexicoMexican and U.S. authorities have signed a new agreementconcluded in September. The accord allows three airlinesfrom each country to fly between any U.S. city and 14 Mexicandestinations. The previous pact had only allowed for twoairlines. The agreement also allows an unlimited number ofall-cargo carriers to fly between the two countries, versus fivepreviously, and expands code-sharing rights for U.S. andMexican airlines.

DOT Denies SkyTeam Antitrust ImmunityThe U.S. Department of Transportation (DOT) has tentatively denied a request by the SkyTeamcarriers – Air France, Alitalia, CSA, Delta, KLM, and Northwest – for antitrust immunity. The DOTcited that the alliance failed to convince the department that immunity would provide sufficient publicbenefit. The DOT did approve a request by SkyTeam for expanded code sharing.

House Pension Bill Gives No Relief to AirlinesThe House has passed a pension reform bill that obliges companies to close their pension fundshortages within seven years. A similar senate bill provided airlines with 20 years to remedy theshortfalls, but the house did not provide this special relief.

FAA to Expand Approach Procedures Designed to Boost Arrival RatesThe FAA is to roll out a new airport approach procedure at some of the nation’s busiest airports nextyear. Airlines are interested in using it to achieve cost advantages that Alaska Airlines achievedduring trials. The required navigation performance (RNP) procedures use aircraft flight managementsystems to fly approach paths with almost no deviation. Aircraft that meet RNP standards can useautopilot to follow complex approach paths, mapped out by the FAA, even during bad weather. Thiscan prevent diversions while increasing arrival rates.

Nine-Month Domestic Traffic Up 5.3% from 2004On 15 December, the U.S. Department of Transportation announced that U.S. airlines carried 5.3%more domestic passengers and flew 1.2% more domestic flights during the first nine months of 2005than during the same period in 2004. Revenue also increased 5.5%, while available seat miles andload factor were up 1.8% and 2.6% respectively.

Airline On-Time Performance Improves from 2004The on-time performance for America’s 20 largest carriers improved during November 2005; on timearrival rates increased to 80.0% from 79.1% in November 2004. Cancellations for the same groupalso showed improvement, down from 1.2% in November 2004 to 1.0% in 2005.

Jon Ash

PresidentInterVISTAS-ga2 Consulting Inc.

Washington, D.C.


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 thestreet. Thus some of the information is speculative and may not materialise.

To inquire about advertising opportunities or to provide comments/feedback on the InterVISTAS’ CanadianAviation Intelligence Report, please contact Rob Beynon at [email protected] or 1-604-717-1864.

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INTERVISTAS NEWSJanuary 2006

Kara M. Levine Joins InterVISTAS-ga2 Consulting, Inc.as Director, Strategic Analysis and Forecasting.Ms. Levine brings to InterVISTAS a strong background in cargooperations and forecasting, airline financial modeling, operationalperformance analysis, industry trend analysis and air service marketingand development. Prior to joining the InterVISTAS team, she was anAssociate with an equity research firm, covering companies in theaerospace, defense, transportation and logistics industries, and had beena Senior Market Analyst with American Trans Air. Ms. Levine holds aMasters Degree in Economics from the University of California.

InterVISTAS Upcoming Speaking Engagements

# 23 February 2006: 9th Annual Hamburg Aviation Conference, Hamburg, GermanyDr. Mike Tretheway, Executive Vice-PresidentDr. Tretheway has been honoured by being selected to give the Martin Kunz Memorial Lecture.The title of his presentation is “Airline Economics 30 Years after Deregulation.”

# 22 February 2006: GARS Workshop, Hamburg, GermanyMr. Ian Kincaid, Director, Economic AnalysisThe title of his presentation is “Issues in Benchmarking Airports.”

cair issue no. 37 - january 2006

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