cair issue no. 8 - august 2003

TradePort International Market Intelligence ReportMay 2003 InterVISTAS Consulting Inc. ©

INDUSTRYREVIEW

© InterVISTAS Consulting Inc.August 2003

ARE YOU READY FOR THE BOOM?10 August 2003

Re-capitalised Air Carriers. At the moment, all the news is about air carriers in bankruptcy orskirting the courts by re-organising on a ‘voluntary’ basis. Traffic and profit reports are even morenegative than they were after 9/11. But it is time to start looking ahead. You might be surprised withwhat you will see.

US Airways is the first of the air carriers toemerge from bankruptcy and serves as a goodlesson. It now has cash, lots of it. With re-financing, its cash position is so strong it placedan order for 170 aircraft. It has a new business plan, one that will aggressively pursue new regionaljet markets. Its cost structure is greatly reduced. To put it bluntly, while it was bankrupt in March,today it is a financially healthy carrier. This is not to say that it has solved its long run problems.Indeed, the challenge it faces from Southwest and JetBlue, among others, is formidable, and its costreductions still leave them as a relatively expensive operation. But for the time being, it is alive,kicking and seeking new markets. It has enough cash to allow it to survive for two or more years.

Other carriers are similarly being re-capitalised. United and Air Canada are following US Airwaysthrough the court protected bankruptcy re-organisation. They are likely to emerge with lower costsand a wad of cash, enough to order new planes (for delivery much later in the decade). American,Northwest, Continental and Delta are all undergoing cost reduction and financial renewal.

What does this mean for airports? The restructured network air carriers might best be viewed byairports as new air carriers. It will not be business as usual for them. They are all developing newbusiness plans. The actual plan they will follow is not necessarily what the press has reported. Somewill drop existing hubs (US Airways is threatening to close Pittsburgh) and re-orient their networks tobe more connected, and less hub-like.

Some believe that in domestic markets, carriers such as Air Canada and Delta will attempt to executeroute structures similar to their low cost carrier rivals. They are already adopting the LCC farepolicies, eliminating Saturday stayover and offering heavily discounted one way fares. Next, they maybegin to seek to connect smaller centres on new non-stop routes. WestJet, for example, years agolaunched non-stop service from Kelowna to Edmonton. As neither Air Canada or Canadian offerednon-stop service, this was a tremendous success. The lesson has not been lost. The low faresubsidiaries of carriers such as Air Canada (Zip), Delta (Song), United (something), etc, could acquiresignificant capacity from their parents and make major expansions.

Airport marketers should view services from the major network carriers as under threat. Our advice isto consider making professional presentations on what must be retained and where new opportunitieslie. Most important, it is necessary to develop professional intelligence on the actual new strategiesthe network carriers will be pursuing.

Michael TrethewayVice President

& Chief Economist


MARKET CAPITALISATION:THE TALE OF TWO BUSINESS MODELS15 August 2003

Industry DownturnThe airline industry has been hit hard since the September 11 th terrorist attacks in 2001. The U.S.economy had already been slowing and the attacks resulted in deep financial losses for airlines. Asthe industry began to rebuild, the onset of war in Iraq and the SARS outbreak threw the industry intocrisis again. This storm of events in the past two years has forced some full-service carriers (FSC) toseek bankruptcy protection in order to restructure their services to better compete with low costcarriers (LCC).

Impact on Market CapitalisationThe impact these events have had on the airline industry is quite striking. While many airlines wereable to recover slightly in the early half of 2002 from 9/11, it is evident that by mid-year, FSCs werenot going to be financially viable without significantly decreasing their operating costs. Conversely,LCCs have continued to be financially successful during these difficult times due to a lean operatingstructure. Investors have supported the LCCs and rewarded them with high share prices resulting inballooning market capitalisations. In the past year, United Airlines, US Airways, Air Canada, andHawaiian Airlines have all filed for bankruptcy protection and are attempting to restructure themselvesthrough cost and service reductions (US Airways has since emerged from Chapter 11 this pastMarch).

Diverging Financial Results: LCC vs. FSCSince 9/11, low cost carriers WestJet and Air Tran’s market capitalisations have grown 101% and288% respectively. Comparatively, United Airlines and American Airline’s market caps have dropped94% and 41% during the same time period. However, a few full-service carriers have made gains inthe past two years. British Airways and Alaska Airlines’ market caps having increased 23% and 26%respectively compared to September 21, 2001.

In general, LCCs have been able to increase their market cap through strict fiscal responsibility whileFSCs are lagging and falling into bankruptcy due to a high cost structure. The low-cost structure ofthe LCCs has allowed them to absorb much of the effects of the world crises and still retain the abilityto turn a profit. Their lower fares are more attractive to passengers who are willing to give up someservices (like complimentary meals and beverages) to get the best prices during a slow economy.

Geneva TrethewayProject Analyst


MARKET CAPITALISATION CON’T

Market Capitalisations from September 21, 2001 to 21 July 2003LCC Vs. FSC (in millions)

Low Cost Carriers 10-Sep-01 21-Sep-01 10-Oct-01 22-Jul-02* 21-Jul-03

Change from 10 Sep 01- 21

Jul 03

Change from 21 Sep 01-

21 Jul 03Air Tran 408$ 211$ 273$ 272$ 818$ 100% 288%WestJet 745$ 634$ 868$ 1,356$ 1,275$ 71% 101%Frontier Air 340$ 192$ 292$ 182$ 372$ 9% 94%Southwest 13,512$ 10,382$ 12,092$ 9,160$ 13,226$ -2% 27%JetBlue n/a n/a n/a 2,811$ 2,735$ n/aRyanair* n/a n/a n/a 3,999$ 5,086$ n/a

Full Service Carriers 10-Sep-01 21-Sep-01 10-Oct-01 22-Jul-02* 21-Jul-03

Change from 10 Sep 01- 21

Jul 03

Change from 21 Sep 01-

21 Jul 03Alaska 795$ 479$ 580$ 523$ 606$ -24% 26%British Airways 4,115$ 2,405$ 2,658$ 2,461$ 2,955$ -28% 23%Continental 2,188$ 802$ 982$ 686$ 937$ -57% 17%KLM 566$ 374$ 383$ 500$ 424$ -25% 13%Transat 258$ 182$ 175$ 233$ 148$ -43% -19%American 4,632$ 2,764$ 3,206$ 1,747$ 1,639$ -65% -41%Delta 4,553$ 2,765$ 3,341$ 1,780$ 1,541$ -66% -44%Air Canada 583$ 319$ 204$ 525$ 107$ -82% -67%Hawaiian Airlines 94$ 74$ 82$ 81$ 23$ -76% -69%United 1,674$ 925$ 1,006$ 551$ 57$ -97% -94%* 2002 price based on ISE Historical exchange prices, converted to USD with July 22, 2002 rate of 1.00968 USD/EuroNotes:1. 2002 market caps based on historical stock prices (July 22, 2002) and on July 21, 2003 outstanding shares2. 10 Sept 2001 market caps based on 21 Sept 2001 Outstanding Shares


AIRLINE DATA – CANADATraffic and Load Factors on Canada’s Major Air Carriers – July 2003

Passenger TrafficRevenue Passenger Kilometres

CapacityAvailable Seat Kilometres

Load FactorAir Carrier

% Changeover 2002

% Changefrom 2001

% Changeover 2002

% Changefrom 2001

% Changeover 2002

% Changefrom 2001

Air Canada1 -13.4% -14.0% -15.4% -15.5% +1.9 pts(to 78.1%)

+1.3 pts

Domestic(Mainline) -2.5% -6.6% -6.7% -4.9% +3.3 pts

(to 74.7%) --1.3 pts

Jazz +7.3% n/a -7.1% n/a +8.4%(to 62.3%) n/a

International& Charter -18.2% -17.5% -19.7% -20.5% +1.5 pts

(to 80.1%) +2.9 pts

WestJet +42% +108% +46% +122% -2.6 pts(to 78%)

-4.9 pts

Note: n/a – As Jazz was not reported in 2001, a percentage change from 2001 could not be calculated.

Analysis:• Air Canada traffic changes continue to linger in negative territory although the declines are

becoming less negative. This may be an indication that the short term impacts of SARS and theIraq war are diminishing.

• Air Canada's load factors have improved while the air carrier's traffic and capacity have declined.The airline appears to be better matching its seat capacity with passenger traffic levels throughits restructuring efforts.

• WestJet continues to grow with strongincreases in passenger traffic (+42%) andavailable capacity (+46%). However, theairline's load factor has been on the declinesince the beginning of the year, but this hasnot prevented the airline from sustainingprofitability. WestJet reported its 26thconsecutive quarter of profits, beatinganalyst estimates and as a result wererewarded by shareholders who supportedthe company’s share price to a new 52-week high.

§

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

0%

10%

20%

30%

40%

50%

60%

70%

80%

Aug-02

Sep Oct Nov Dec Jan-03

Feb Mar Apr May Jun Jul

RPKASK

WestJetWestJet

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Aug-02



Int'l RPKInt'l ASK

Air Canada InternationalAir Canada International

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

10%15%20%25%

Aug-02



Dom RPKDom ASK

Jazz data is not includedin this graph

Air Canada Domestic Mainline Air Canada Domestic Mainline

NEW CARRIERS:LOAD FACTORS

Jetsgo: 71%Zip: not reportedCanJet: not reported


AIRLINE DATA – U.S.

U.S. Airlines Release 2nd Quarter 2003 Financial and July 2003 Traffic Figures –

Financial Data – Second Quarter 2003 Traffic Data – July 2003

Airline2003 Q2 Net

Income (US$ - Millions)2002 Q2 Net Income

(US$ - Millions)Load

FactorTraffic

(RPMs – millions)Capacity(ASMs – millions)

1$75

LOSS$495LOSS

81.0%

+ 5.3 pts

11,968

- 0.4%

14,775

- 6.9%

$43

PROFIT

$55

LOSS

84.3% 2

+ 0.3 pts

1,421

+18.7%

1,771

+ 19.7%

3$79

PROFIT

$139

LOSS

84.5%

+ 5.0 pts

6,022

+ 5.6%

7,129

- 0.7%

$184

PROFIT

$186

LOSS

82.7%

- 4.9 pts

9,452

- 2.7%

11,435

- 8.5%

$38

PROFIT

$15

PROFIT

90.6%

+ 2.8 pts

1,150

+ 79.2%

1,270

+ 73.7%

$227PROFIT

$93LOSS

83.7%

+ 3.2 pts

6,708

- 3.9%

8,019

- 7.5%

$246PROFIT

$102PROFIT

77.5%

+ 4.3 pts

4,750

+ 9.8%

6,126

+ 3.6%

$623LOSS

$341LOSS

82.9%

+5.6 pts

9,913

-5.7%

11,951

-12.2%

2$13

PROFIT$248

LOSS

82.2%

+ 5.1 pts

3,789

- 3.5%

4,611

- 9.5%

Notes: 1. Includes American Airlines and American Eagle. Net loss includes Special Items2. Load factor includes scheduled service only3. Does not include Express Jet

Source: Carrier financial and traffic reports

© InterVISTAS Consulting IncAugust 2003

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

Toronto VancouverMontreal-Dorval Calgary Edmonton Ottawa Winnipeg Halifax Victoria Kelowna Saskatoon Regina St.

John’s

June -7.7% -9.8% -4.0% -7.0% -12.3% -6.0% -1.2% -7.4% -8.8% -9.7% -13.2% -16.8%

2nd Quarter -9.0% -10.9% -3.8% -6.7% -12.3% -6.9% -6.0% -6.3% -6.1% -8.7% -11.1% -11.9%

July -7.6% -8.3% -3.6% -9.4% -6.6% -5.1% +4.4% -13.1% -6.3% -9.5% -13.0% -7.0%

August -7.7% -7.9% -2.3% -7.5% -8.8% -2.8% +7.5% -8.8% -1.7% -13.6% -10.5% -8.0%

September +12.6% +22.5% +20.1% +7.6% +23.7% +16.4% +26.1% +13.2% +11.8% +12.6% +10.5% +20.0%

3rd Quarter -2.6% -0.2% +2.9% -4.4% +0.50% +1.2% +11.2% -4.8% +0.2% -5.4% -5.8% -0.8%

October +12.5% +15.3% +14.3% -0.1% +6.4% +5.9% +7.9% +0.1% +5.7% +1.7% +4.4% -0.7%

November +4.7% +5.3% +0.6% +9.4% +3.0% +5.7% +5.7% +0.1% -1.4% +0.2% +1.2% -2.3%

December +8.2% +4.3% +7.8% +7.1% +11.7% +6.3% +15.2% +8.1% +1.4% +4.3% +1.5% +3.2% +2.2%

4th Quarter n/a +7.2% +9.7% +7.6% +6.9% -5.1% +8.9% +7.3% +0.5% +3.0% +1.1% +3.0% -0.3%

2002

Full Year -7.5% -3.9% -4.3% +1.2% -4.1% -5.1% -3.8% +0.1% -4.8% -1.3% -5.1% -5.5% -5.7%

January +5.7% +2.8% +7.2% +6.3% +3.5% +6.2% +13.0% +4.5% +2.9% +4.0% +6.8% -0.3% -5.8%

February +4.6% -0.6% +3.7% +5.6% +3.0% +3.9% +12.7% +13.8 +7.5% +2.0% +6.0% +8.8% -2.0%

March +0.4% -1.4% -1.8% +3.7% -0.4% +2.2% +5.1% n/a +0.2% +5.0% -3.7% -4.2% -3.1%

1st Quarter +3.4% +0.2% +2.9% +5.2% +2.0% +4.0% +10.1% +10.0% +3.3% +3.7% +3.1% +1.3% -3.7%April -15.1% -13.6% -10.2% +1.6% +1.1% -7.6% +4.4% +6.1% -0.9% -0.6% -3.9% -1.6% -1.7%May -17.3 -13.5% -7.4 -1.4% -5.3% -1.5% -0.5% -1.2% +0.4% -1.0% -5.3% -1.6% +4.5%June n/a -9.9% n/a +1.9% -0.4% +2.5% +5.0% +4.1% +0.6% -0.5% +1.4% +7.0% +17.8%

2003

2nd Quarter n/a -12.2% n/a +0.7% -1.6% -2.1% +3.0% +2.9% +0.0% -0.7% -2.6% +1.3% +7.1%Note: Toronto traffic levels derived from Statistics Canada data.

CA

NA

DIA

N A

IRP

OR

TS


RUN-UP IN FUEL PRICESThe price of crude oil has hit a 4-month high…

In recent weeks, the price of crude oil has risen to levels not seen since the start of the Iraq War.Concerns over global (especially U.S.) oil supplies and fuel inventories have impacted crude oil pricesin the market. Other factors such as the slow return of Iraqi crude to the world markets anduncertainty in Venezuela have also contributed to the rise in crude oil prices.

Tight Commercial U.S. Oil SuppliesIn November 2001, President Bush decided to fill the country’s Strategic Petroleum Reserve (SPR) tomaximum capacity. As crude oil enters the U.S., a greater volume of oil is diverted to the SPR than tocommercial inventories. The SPR is the U.S.’s first line of defense against any disruptions in oilsupplies. With U.S commercial crude oil supplies at record low levels coupled with other globalconcerns, this has pushed oil prices higher.

Iraqi Oil ProductionWith the end of the Iraq War declared in May, oil shortly began to flow from Iraqi pumps. Prior to theU.S.-led invasion of Iraq, approximately 2.8 million barrels of oil were extracted each day. However,today, Iraq has only been able to achieve half that rate. Iraq’s lower production volumes haveaffected prices.

Political Uncertainty in VenezuelaThe general strike in Venezuela at the end of 2002/early 2003 was due to public protest againstPresident Hugo Chavez. The strike crippled the country’s oil industry for several weeks. Later thisyear, the ruling government faces the prospect of a recall vote resulting in further political uncertaintythat may disrupt the country’s crude oil production.

…But lower prices in the future

Steadily Declining “Futures” PricesThe futures market shows the price of crude oil falling to below $25 per barrel by late 2005. OnAugust 8, 2003, the futures price of a barrel of crude oil for delivery in November 2005 is $24.98,approximately 29% lower than the current spot price of $32.22 per barrel. The futures market ispointing to higher fuel prices in the next 24 months, leading to increased fuel costs for the aviationsector.

Doris Mak

Senior Market Analyst

Crude Oil Futures PricesAs of August 8, 2003

$15.00

$20.00

$25.00

$30.00

$35.00

Sep

tem

ber

2003

Nov

embe

r 200

3

Janu

ary

2004

Mar

ch 2

004

May

200

4

July

200

4

Sep

tem

ber

2004

Nov

embe

r 200

4

Janu

ary

2005

Mar

ch 2

005

May

200

5

July

200

5

Sep

tem

ber

2005

Nov

embe

r 200

5

June

200

6

Dec

embe

r 200

7

Dec

embe

r 200

9

Month of Delivery

US

$/B

arre

l

Crude oil prices expected to fall below $25 by late 2005.


SARS – THE RECOVERY BEGINS15 August 2003

The Recovery! The SARS outbreak that began in March took the airline industry by surprise. Withthe disease effectively contained in all parts of Asia and Canada by the end of June, the airline andtourism industries moved into recovery mode. By mid-July, passenger traffic at Hong KongInternational Airport was at 80% of pre-SARS levels. Airport officials did not expect passenger trafficto recover to these levels until the end of the year.

The International Air Transport Association (IATA) also recently reported statistics that signal thepost-SARS air travel recovery is under way. Preliminary June passenger traffic figures revealed onlya 12% drop in international passengers from the prior year, compared to a 21% drop in May.Asia/Pacific air carriers reported a 36% drop in June, compared to a staggering 55% decline in May.

Pent-up Air Travel Demands. Airline bookings arereturning to pre-SARS levels according to AbacusInternational, Asia’s largest air ticketing reservationcompany. Specifically, bookings on Asia to U.S. andintra-Asia routes show the greatest increases. For theweek of June 9th, air travel bookings from Asia to theU.S. reached nearly 25,000, approximately 20% abovethe level experienced in March. Additionally, Intra-Asiaweekly bookings have shown several weeks of steadygrowth, increasing from a low of 115,000 bookings toslightly over 475,000 bookings.

Airline Seat Capacity Rebounds! Recovery inavailable seat capacity is under way. Many airlines areoperating at or close to pre-SARS service levels.Some airlines have also introduced new services.

• Cathay Pacific: Currently operating at 90% of its pre-SARS passenger schedule, the airlineanticipates improved performance in the second half of 2003.

• Malaysia Airlines: Recently announced that it will resume all SARS affected flights to Beijing,Xiamen, Guangdong, Shanghai and Hong Kong.

• China Airlines and Eva Air: Effective mid-September, China Airlines plans to introduce twice-weekly Brisbane-Taipei flights. Additionally, Eva Air plans on increasing frequency on the sameroute by introducing a third weekly flight in late October.

• Air Canada: Service to Hong Kong now back to daily and may increase to 10 flights per week inSeptember. Service to Beijing was re-instated to daily on July 30th. Shanghai service back todaily. Seoul service back to daily and on July 1st the service was up-gauged to an A340,equivalent to a capacity increase of 12%.

It appears that the worst of SARS is behind us and the Asian market is starting to rebuild. However,there are continuing concerns that SARS is seasonal and may reappear in the fall. The road ahead isby no measure a smooth one, as the wounds left by SARS will take time to heal.

Source: Abacus International

Doris Mak

Senior Market Analyst


NEWS ARTICLESAIR CANADA UPDATEAIR CANADA REACHES AGREEMENTWITH ILFCOn July 21, Air Canada reached an agreementwith International Lease Finance Corporation(ILFC), the carrier’s second largest operatinglessor, on restructured lease terms for 12aircraft. The re-negotiated terms apply for thelifetime of leases for nine Airbus narrow-bodyaircraft as well as one A340 and two Boeing767-300s.

AIR CANADA MANAGEMENT CUTSAir Canada plans to eliminate 300management jobs, among them five senior vice-presidents, bringing the total of non-unionizedworkers down to 1,100.

AIR CANADA SEEKS NEW INVESTORSAir Canada is looking for new investors willingto inject C$700 million into the airline. Thisamount combined with the C$595 million debtfinancing provided by General Electric CapitalAviation Services will provide the necessary exitfinancing for Air Canada during the restructuringphase.

AIR CANADA VICTORIOUS, GLOBALPAYMENTS INC. APPEAL DISMISSEDOn July 25, the Ontario Court of Appealdismissed an appeal made by GlobalPayments Inc., a credit card processingcompany that had sought to terminate itsservices to Air Canada. Global Paymentsargued that it was being forced to extend creditto Air Canada, without it having to post security.

AIR CANADA RECORDS 100%INCREASE IN ONLINE BOOKINGAir Canada’s bookings on aircanada.com hasdoubled in just two months since the airlineintroduced simple, low, permanent online faresin mid-May. The airline has also enhanced itswebsite by offering customers the ability tomake their own itinerary changes online andalso introducing a new hotel booking tool thatoffers accommodation at very competitive rates.

AIR CANADA INTRODUCES DAILY NON-STOP SERVICE FROM HONG KONG TOTORONTOEffective December 1, 2003, Air Canada willintroduce daily non-stop service from HongKong eastbound to Toronto and a same planewestbound service via Vancouver. With theaddition of this new service, Air Canada willoffer customers two daily flights linking bothwestern and eastern Canada with Hong Kong.Service on the new route will operate on a 282-seat Airbus A340 aircraft.

AIR CANADA LAUNCHES WORLDWIDETRAVEL SEAT SALEAir Canada recently announced a “Windows ofOpportunity” seat sale offering reductions of upto 40 percent throughout its internationalnetwork. The sale runs until August 18, 2003for travel beginning September 8th with a lastdeparture date of December 4 th.

AIR CANADA AWARDED TECHNICALCONTRACT FROM JETBLUEAir Canada Technical Services has beenawarded a contract from JetBlue formaintenance, repair and overhaul of JetBlue’sfleet of Airbus A320 aircraft. The contractextends for up to six years and representsapproximately C$139 million of revenue for AirCanada Technical Services. The work will bedone at Air Canada Winnipeg maintenancecentre.

AIR CANADA ENDS FREE MEALS ONDOMESTIC FLIGHTSAs of August 1st, Air Canada will no longer offerfree meals on many of its domestic flights.Passengers on medium-haul flights of less than3 ½ hours may purchase snacks and mealspriced between $7-$12 prepared by Cararestaurant chains such as Swiss Chalet,Montana’s Cook House and Kelsey’s.


NEWS ARTICLESAIR CANADA UNIONS WIN RIGHT TOTALK TO INVESTORSAir Canada has reached an agreement with itsunions that will allow all its unions tocommunicate with potential equity investors.Potential investors are not required to negotiatewith the unions if they do not wish to. Theairline has set September 15th as the deadlinefor submission of letters of intent from investors.

THREE AIR CANADA BONDHOLDERSTO BE ADDED TO UCCOn August 8, Justice James Farley indicatedthat Air Canada’s unsecured creditorscommittee (USC) should add three moremembers from the bondholder syndicate, whichrepresent more than C$900 million in notes.The three bondholders should have control overC$75 million and will be given access toconfidential financial information.

AIR CANADA REPORTS Q2 LOSSESCompared to airlines such as Delta, Northwestand US Airways, which reported profits in Q22003 from losses the previous year, Air Canadaseems to be heading in the opposite direction.The carrier has reported an operating loss ofC$270 million before reorganization itemscompared to income of C$62 million last year.Operating revenues dropped to C$600 million, adrop of 24% from the same period the yearbefore.

AIR CANADA FOUND ANTI-COMPETITIVEThe Competition Tribunal has ruled that AirCanada performed anti-competitive actsbetween April 1, 2000 and March 5, 2001. AirCanada was found to have operated below itsavoidable costs, which is an anti-competitive acton both the Toronto-Moncton and Halifax-Montreal routes. Phase 2 of the proceedingswill determine whether Air Canada’s anti-competitive acts constitute an abuse of itsdominant position. (See article in this issue)

TANGO OFFERS NETWORK WIDE LOWFARESBeginning August 15, Tango will offer its lowone way fares to 87 daily domestic fights at

flytango.com for travel effective October 1. It willoffer new non-stop service between Vancouver-Montréal, Vancouver-Ottawa, Calgary-Montréal, Calgary-Ottawa, Edmonton- Montréal,and Edmonton-Ottawa. On October 1, Tangofares will be expanded to most Air Canadadestinations and will become a permanent farecategory on aircanda.com.

OTHER CANADIAN AIRLINESWESTJET POSTS Q2 PROFIT, UP 20%WestJet reported net earnings for the 2nd

quarter of C$14.7 million, a 19.5% increasefrom the same period in 2002. This is thecarrier’s 26th consecutive quarter of profitability.Its capacity for the quarter increased 49% whilerevenue passenger miles increased 44%.Revenue for the quarter was up 25% to C$205million. Shareholders applauded the airline’sperformance as share price hit a fifty-two weekhigh, gaining almost 20% on 1 day’s trading.

CANJET AIRLINES INTRODUCES NEWFLORIDA FLIGHTS AND ENHANCESDOMESTIC SERVICECanJet Airlines will add flights to Florida thisfall and winter. CanJet plans on introducingnew weekly non-stop service toSarasota/Bradenton from both Toronto andOttawa as well as new weekly non-stop servicebetween West Palm Beach and Montréalbeginning on November 1st, 2003. EffectiveSeptember 8th, CanJet will operate two dailynon-stop flights between Halifax and Montréaland Halifax and Ottawa. Additionally, the airlineplans on adding a second daily non-stop servicebetween Moncton and Toronto.

CANADIAN WESTERN BEGINSKAMLOOPS SERVICEOn August 1, Canadian Western Airlinesbegan its new scheduled twice daily servicebetween Kamloops and Vancouver.


NEWS ARTICLESEXCURSION AIR SERVES RURALNEWFOUNDLANDExcursion Air, a new airline based inBonavista, will offer rural air service to thepeople and businesses of Newfoundland.Service will be provided between St. John’s andcommunities such as Clarenville, Marystown,Bonavista and Bay d’Espoir.

US & INTERNATIONALAIRLINESAMERICA WEST TO LAUNCHEDMONTON SERVICEStarting October 20, America West will begin adaily nonstop service between Phoenix andEdmonton. The route will be served with 64-seat Canadair Regional Jets. The carrier alsocurrently serves Calgary, Vancouver, andToronto.

DELTA ENDS DIVIDEND PAYMENTSDelta Air Lines has stopped paying quarterlycommon stock cash dividends to investors.Delta had previously paid a quarterly dividend ofUS$0.025 per common share. The move willsave the carrier US$12 million annually.

CONTINENTIAL REDUCES STAKE INEXPRESSJETContinential plans on selling approximatelyUS$200 million of shares of its ExpressJetcommon stock. This transaction will dropContinential’s ownership stake in ExpressJetfrom 53.1% to 37.5%.

ALASKA AIRLINES NOW CHARGINGFOR BAGS OVER 50 POUNDSAlaska Airlines and Horizon Air plan onchanging their excess baggage policy by cuttingthe weight for the free baggage allowance.Effective October 1st, 2003, any bags weighing51 to 70 pounds will be charged a US$25 fee.Bags weighing 71 pounds to 100 pounds will becharged US$50 and all baggage weighing morethan 100 pounds will be shipped as cargo.

CTA DENIES LOT REQUESTThe Canadian Transportation Agency hasdenied the request of LOT Polish Airlines to

operate extra round-trip flights between Warsawand Toronto on June 26, July 17, and August14, 21 and 28. The bilateral limits flights to 5per week and makes provisions to add flights ona temporary basis. Currently, Air Canada andAir Transat are the designated airlines to servePoland; while AC did not object to the request,Air Transat did citing demand weakness due toSARS.

CARGOCALGARY SELECTED TO HOST AIRCARGO CONFERENCEThe International Air Cargo Association(TIACA) has selected Calgary as the host sitefor the 2006 International Air Cargo Forum andExposition. Calgary won over Pittsburgh,Memphis and Monterrey.

U.S. DOMESTIC CARGO DROPSU.S. Air Transport Association figures forJune show a 3.3% decrease in revenue tonmiles for domestic cargo and a 6.0% decreasein international cargo. Latin America tradeexperienced a significant drop of 14.3% involume. Total freight traffic for the monthdecreased 4.6% from the previous year.

U.S. CARGO CARRIERS GIVEN MOREACCESS TO HONG KONGThe U.S. Transportation Dept. (DOT) hasallocated the rights to 40 cargo routes fromHong Kong to Asian and European destinationsto UPS and FedEx. The first 24 routes beginimmediately and the remaining 16 are effectiveOctober 28th.

FEDEX ESTABLISHES SPACE INTRADEPORT HONG KONGFedEx will become the first expresstransportation company to establish facilities atthe new 40,000m 2 facility at TradePort HongKong.

UPS POSTS STRONG Q2 RESULTSUPS reported net income of US$692 million forthe 2nd quarter ended June 30, a 13.3%increase from the same period last year.Revenue for the quarter totaled US$8.2 billion,a 7.1% increase from last year.


NEWS ARTICLESAIRBORNE Q2 EARNINGS UPAirborne Inc. earned US$3.8 million in the 2nd

quarter, up from $457,000 from the same periodlast year. The growth in earnings is a result ofthe increase in domestic shipments andimproved operating efficiency. Revenues forthe company increased 2% to US$827 million.

DHL INCREASES PRICESBeginning September 1, DHL will increase theprice of all packages by a fee of EUR 0.08which will be included as a separate item onbills. The increase in prices is a result of agovernment truck levy.

DHL OPENS THAILAND AIR EXPRESSFACILITYOn July 21, DHL unveiled a 1,500 m2 DHL Hubat Bangkok International Airport, Don Muang.The 24/7 facility will consolidate inbound andoutbound express shipments, andtranshipments to the DHL network in SouthernAsia and Indochina. The hub willaccommodate 380 weekly flights and process1.5 million documents and packages forexpress delivery.

DEUTSCHE POST WORLD NET PROFITSRISEConsolidated group profits for Deutsche PostWorld Net for the first half of 2003 increased toEUR 650 million (US$747 million), from EUR155 million (US$178 million) in 2002.

LUFTHANSA CARGO TERMINAL OPENSAT JFKOn July 18th, Lufthansa Cargo opened its new$161 million cargo terminal at John F. KennedyInternational Airport. Lufthansa will occupy53,600 m2 of the terminal, including 10,400 m2

for its own offices and another 2,700 m2 foroffices for sub-tenants. The carrier has a five-year term on its portion of the terminal.

POLAR AIR CARGO LAUNCHES ASIA-EUROPE SERVICEEffective August 20th, Polar Air Cargo willbegin a thrice-weekly service between Liégeand Seoul and continue on to Taipei withBoeing 747-400 freighters. Both flights willoriginate and end in the U.S.

AIRPORTSYVR UNVEILS IRIS SCANNERVancouver International Airport has becomethe first North American airport to implement theiris-recognition technology for CANPASS-Airmembers. The system costs C$35 million.

GANDER AIRPORT EMPLOYEESRETURN TO WORKGander airport employees returned to work onThursday, July 31st ending the longest airportstrike in Canadian history. All issues wereresolved except for wages, which was sent tobinding arbitration.

GTAA RATINGS LOWEREDThe Dominian Bond Rating Service (DBRS) andStandard and Poor’s Ratings Services (S&P)have both lowered their ratings on the GreaterToronto Airports Authority. The DBRSlowered the rating on GTAA’s revenue bondsand medium term notes to “A” from “A (high)”while S&P have lowered it to “A-” from “A”.

BAA FIRST FISCAL QUARTER PROFITSDOWNAirport operator, BAA, experienced a drop of6% in profits to US$240 million in the threemonths to June 30th. Traffic at the UK airportsincreased 2.2% to 32.7 million passengers whilecargo dropped 1.5% to 416,000 metric tons.

A+ CREDIT RATING AFFIRMED FOROTTAWA AIRPORTStandard & Poor’s Rating Services has affirmedthe A+ long term issuer credit and seniorunsecured debt ratings to Ottawa Airport.


FUEL PRICES

August 7, 2003

SPOT OIL PRICES INCREASINGFUTURES PRICES LOWER

Crude Oil Prices:

Spot – US$32.39(up 6% from July)

Future – High for a year• 6 month - $29.95

(February 2004 delivery)• 12 month – $27.41

(August 2004 delivery)• 2 year - $25.14

(August 2005 delivery)• 5 year - $24.58

(August 2008 delivery)

NEWS ARTICLESAIRCRAFT MANUFACTURERSBOEING CUTS 5,000 JOBS, REPORTSQ2 LOSSESBoeing plans to cut 5,000 more jobs by the endof this year from its Commercial AirplaneDivision. These cuts are in addition to the 5,000job losses announced by the company for 2003.Boeing also reported a net loss of US$192million for the 2nd quarter, compared with netearnings of US$779 million in 2002. Deliveriesfor the quarter totalling 74 aircraft were down34% from a year ago.

AIRBUS HALF-YEAR PROFITS DOWNAirbus parent EADS reported a net loss of EUR66 million (US$76) million for the first half of2003 ended June 30, compared to a net incomeof EUR 91 million (US$104 million) in 2002.Revenues declined 7% to EUR 13.1 billion(US$15 billion).

BOMBARIDER TO SELL 24 JETS TOMESA AIRBombardier is negotiating to sell 24 regionaljets worth US$600 million to Mesa Air GroupInc.

PEOPLE IN THE NEWSSTAPLES NEW DIRECTOR AT HIAAJerry Staples at Halifax International AirportAuthority has been promoted from Manager toDirector of Marketing and BusinessDevelopment.

CATSA APPOINTMENTSMike Weeks joins Canadian Air TransportSecurity Authority (CATSA) as a contractmanager, after a number of years at AirCanada. Additionally, on August 5th, ClémentJoly (FCA) was appointed to the board ofdirectors.

NEW MANAGEMENT AT TERRACEAIRPORTLaurie Brown joins Terrace airports, as the newairports manager.

NEW MANAGEMENT AT ABBOTSFORDAIRPORTRick Reid joins Abbotsford airports, as the newairports manager.

BRENDA CALCE LEAVES SSM AIRPORTSault Ste Marie’s airport manager, BrendaCalce, has left the Airport DevelopmentCorporation on early retirement.

AIR CANADA ANNOUNCESMANAGEMENT REORGANIZATIONRoss MacCormack, Senior Vice President forInternational & Alliances Group is retiring after32 years with Air Canada. The International &Alliances group will as of September 30th reportto Montie Brewer, Executive Vice President,Commercial. Additionally, Steve Markey, VicePresident for Government Relations &Regulatory Affairs plans on leaving the carrier topursue other interests. Duncan Dee, VicePresident for Corporate Affairs will assumeresponsibilities for the department.

POIRIER NEW CHAIRMAN OF ACIWORLD AIR CARGO SUB-COMMITTEEStephan Poirier of Calgary Airport Authoritywill replace Mike Gamo of Tokyo Narita Airportas the new chairman of the ACI Word Air CargoSub-committee.

GOVERNMENT ANDREGULATORYNAV CANADA FEES UP 7%Effective August 1, Nav Canada will increase itsfees by 6.9% after announcing a C$14 milliondeficit in the three months ended May 31st. Thedeficit includes a C$22 million provision forcharges not paid by Air Canada.

CANADA, VIETNAM CONCLUDE AIRPACT AGREEMENTOn July 30th, Canada and Vietnam reachedtheir first air transport agreement. Theagreement allows for the operation of codesharing services to and from any Canadian cityand Vietnam.

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

Dec-02

Jan-03

Feb Mar Apr May Jun Jul Aug

US$

per B

arre

l

Monthly Spot PricesMonthly Spot Prices


NEWS ARTICLESOTHEROTTAWA PROVIDES MINOR AIRLINERELIEFOttawa announced short-term financial relief ofmore than C$80 million for Canada’s troubledairline industry. Effective July 1st, 2003, for atwo-year period, larger Canadian airports will beable to defer a minimum of 10% of their rents,but airports are required to pay the deferredamounts over a period of 10 years, starting onJanuary 1st 2006.

U.S.-EU OPENSKIES TALKS TO BEGINTHIS YEARBeginning October 1st, the U.S. and theEuropean Union will enter discussionsregarding a transatlantic open-skies agreement.A second round of discussions will follow inDecember.


EMIRATES: AN EMERGING POWERHOUSE9 August 2003

An unknown carrier. Emirates is a well known carrier in Europe, Asia, Africa and now Australia/NewZealand, but it is almost unknown in the Americas. Well, its time to pay attention. Emirates isemerging as a global powerhouse that is a threat to carriers all over the world. And it is doing so onits own, without the help of any alliance.

In 2003, when its sister network carriers all over the world were reeling and tasting bankruptcy, itplaced the largest aircraft order in history. It now has 43 A-380s onorder, and will emerge as the largest operator of this Goliath of aircraft.Its growth has been dramatic – it didn’t even exist prior to 1985.

Expansion Example: Australia/New Zealand. Emirates has started operating non-stop toAustralia, with four daily flights, rivalling British Airways and Qantas. This month it begins to cross theTasman Sea, connecting Australia to New Zealand with daily flights from each of Sydney, Melbourneand Brisbane to Auckland. With this and a few other service improvements, AKL will see its capacityincrease by roughly 30%! Emirates can connect the four Australian cities (including Perth) to threedestinations in the UK, and another 11 cities in Continental Europe on a one-stop basis. (See maps.)It has roughly three times the service to Europe that Singapore Airlines offers. It is the largest non-European carrier operating to Europe.

One stop from anywhere in the world. Emirates is beginning to take delivery of the A340-500, thelong range aircraft which Air Canada ordered then cancelled. With the A340-500, Emirates can reachalmost any city in the world non-stop. The only place it cannot reach with this aircraft is the far westcoast of South America. As Emirates builds its network, it will be able to truly connect the worldthrough its hub in Dubai. No other major airport in the world offers the one-stop connectivity thatDubai offers via Emirates.

In many ways, Emirates is following the Singapore Airlines model. It hires labour from all over theworld, for example, with flight attendants from roughly 60 countries. It operates modern aircraft withvery high in-flight service, yet attractive air fares. Its steady expansion is profitable. Its home base israted as one of the best airports in the world, and Dubai is emerging as a major tourism destinationwith its 60 story hotel and theme park.

Next: North America? Looking at its extensive current network, and the aircraft on order, it wouldbe logical for this carrier to deploy its new A340-500 fleet to North America. While it has notannounced such plans, it seems a logical next step in its development. Major Canadian airports maywant to pay attention and consider making a pitch to the carrier. This is an opportunity not to beoverlooked.

Michael TrethewayVice President

& Chief Economist


EMIRATES CON’T


CARGO CAPERS11 August 2003

A big win for air cargo in Canada! No – it isn’t that the federal government has finally provided uswith the liberal international cargo policy we’ve been advocating – we’re still waiting for that. But inmany ways, this win will provide some needed momentum to help set the stage for the open air cargopolicy we will eventually enjoy. What is it? The July 31 announcement by the International Air CargoAssociation (TIACA) that Calgary has been namedthe site for the 2006 International Air Cargo Forumand Exposition (ACF).

Canada joins the big leagues of international aircargo. The ACF is simply the best and most prestigious air cargo conference that there is. Held onlyevery two years, it attracts the movers and the shakers of air cargo carriers, airports, government, andsuppliers of every kind. This is the kind of conference where decisions are made and real progress toimprove international air cargo is possible. By winning the bid over cargo giant Memphis as well asPittsburgh and Monterrey, Calgary joins the ranks of such prestigious airport communities such asHong Kong, Washington, and Dubai, hosts of the 2002,2000, and 1996 ACFs respectively. Winning the bidinstantly raises the profile of Calgary, of Alberta, and ofCanada, and provides us with a legitimacy and presencein international air cargo that has in general eluded Canada to date. Calgary in particular, andCanadian airports in general, will be able to capitalize on this profile to more readily open doors.

A key to the success of the “Calgary” bid was that it was not pitched as solely a Calgary bid, butrather was pitched as a Calgary/Alberta/Canada bid. Strong support from Canada’s other airports –unheard of in competitive environments such as this – was a key factor in the win. Support from AirCanada, as well as other cargo stakeholders – including the Government of Canada – showed theCanadian cargo community as a whole was behind the bid. The continued support of the Canadiancargo community will be important not only for the 2006 ACF – but for the upcoming 2004 ACF inBilbao Spain, where a Team Canada marketing approach under the auspices of the CanadianAirports Council will be taken with the assistance of some PEMD funding from DFAIT. The co-

operative effort leading to the Calgary win bodes well forthe joint marketing efforts leading up to the 2004 ACF.

So where do we go from here? Obviously Calgary andthe airport communities participating in the CAC TIACAinitiative have their work cut out for them for both the 2004

and 2006 conferences. It will be important to build on the momentum that will be created by thesignificant efforts of the Canadian airports and get other key stakeholders involved. In particular, the2004 and 2006 initiatives will give ample opportunity for working closely with Transport Canada, andthe possibility of using this as means to advocate for needed policy changes. Wouldn’t it be nice toconvince Transport Canada that the 2004 ACF would be a great forum to announce Canada’s new AirCargo Open Skies policy?

Robert Andriulaitis

Director,Transportation & Logistics

Studies


COMPETITION TRIBUNAL DECISION

ON PREDATION7 August 2003

On 22 July 2003, the Canadian Competition Tribunal released its decision in Phase 1 of the hearingsto determine whether Air Canada violated the Competition Act by its pricing and capacity actionsagainst WestJet and separately against CanJet Airlines. In brief, the Tribunal found on virtually allpoints for the Commissioner of Competition and against Air Canada. However, this decision that AirCanada has performed anti-competitive acts does not mean that Air Canada engaged in an ‘abuse ofdominant position’ as defined in the Competition Act. Sound confusing? Here I attempt to sort thisout in plain language.

Background. Air Canada acquired Canadian Airlines International in early 2000. The merger wasannounced and subsequently blessed by the Minster of Transport in December 1999, and thetransaction completed in July 2000. The two carriers were finally amalgamated under the singlename of Air Canada in January 2001. The resulting concentration of the airline industry resulted inwhat many would consider to be a dominant airline in the domestic market. (Whether Air Canada is‘dominant’ under the meaning of the law is a complicated matter.)

As a consequence of the merger, the government introduced some changes to the Competition Act.These were given Royal Assent on 29 June 2000. The Act empowered the Governor in Council (i.e.,the Cabinet) to create regulations defining anti-competitive acts in the airline industry. On 23 August2000, the government gazetted a small set of such regulations, including two which made it an anti-competitive act to operate or increase capacity on a route at fares which do not cover the avoidablecosts of service.

The Events. On 19 April 2000, WestJet announced it would enter the Hamilton-Moncton route.While Air Canada did not operate on this route, the Hamilton airport is in close proximity to Toronto’sPearson International Airport, where Air Canada was the only carrier operating to Moncton. AirCanada almost immediately responded to WestJet’s announced service by announcing prices whichmet or undercut WestJet’s prices, and it increased capacity on the route.

In September 2000, CanJet Airlines began service between Halifax and Montreal. Air Canada wasthe major carrier on the route, although there was some service by Royal Airlines. Air Canadamatched CanJet’s price but did not increase capacity. CanJet subsequently further reduced its priceand Air Canada did not match. A few months later, CanJet exited the industry by being acquired byCanada 3000, which itself exited the industry in late 2001 via bankruptcy.

The Application by the Commissioner. In Canada,only the Commissioner of Competition may apply to theTribunal for an order under the relevant section of theCompetition Act. He filed an Application with the Competition Tribunal on 5 March 2001 alleging AirCanada breached the ‘abuse of dominance’ provisions of Section 79 of the Act, by breaching therecent regulations which defined operating or increasing capacity at prices below avoidable costs asan anti-competitive act. Note that it is abuse of dominance which is the illegal action. This is subtle,but while operating or increasing capacity at prices below avoidable cost constitutes an anti-competitive act, by itself it is not necessarily an abuse of dominance.

Robert Andriulaitis

Director,Transportation & Logistics

Studies


COMPETITION TRIBUNAL CON’THearings began before the Competition Tribunal on 29 August 2001. These hearings weresuspended on September 11, 2001 due to the terrorism acts in the U.S. For a variety of reasons,hearings did not begin again until November 2002, with a reconstituted Tribunal panel. The hearingsconcluded in March 2003.

Two Phases. While the regulations specify avoidable costs as the appropriate measure to test forpredation in the airline industry, there were fundamental differences between the Commissioner andAir Canada on how the test should be applied. In light of this, both Air Canada and the Commissioneragreed that it would be best to deal with the Commissioner’s application in two phases.

Phase 1 would be confined to a factual determination of whether or not Air Canada offered orincreased capacity at prices below avoidable costs. If it is found in Phase 1 that Air Canada did so,

that is, that it had performed an anti-competitive act, then the parties wouldproceed to Phase 2.

Phase 2 would determine whether this constituted a breach of Section 78 ofthe Competition Act, an abuse of dominance. While the legal issues arecomplex, Phase 2 will likely address three questions: i) based on factorssuch as market share and barriers to entry, was Air Canada dominant on therelevant routes? ii) were the operations below avoidable cost sufficient to

constitute a practice of anti-competitive acts? and iii) did this conduct on the part of Air Canada resultin a substantial prevention or lessening of competition?

The Phase 1 decision. The July 2003 decision by the Tribunal concerned Phase 1. There were twobroad issues. First, what constitutes the correct revenues to use in establishing prices, and second,what costs are avoidable. While the issues may seem straightforward in theory, the devil is in thedetails. The details are important, as Air Canada put forth a set of measures for revenue and costswhich would have resulted in a finding that it did not operate or increase capacity at prices belowavoidable costs, while the Commissioner put forth revenue and cost measures which would haveresulted in a finding against Air Canada. The areas of contention were:

• Beyond revenues. The Commissioner proposed that revenues for connecting flights should notbe included in the measure of revenues on the two routes in question. Air Canada proposedincluding revenues for connecting flight segments when assessing its prices (revenues) on eitherof the two routes in the proceeding. That is, revenues on its Toronto-Moncton services wouldinclude revenues on Toronto-Edmonton and other segments with passenger connections.

• Redeployment and avoidability. Does redeployment of aircraft or labour make a cost avoidable?Air Canada claimed that redeploying an aircraft from one route to another does not make a costavoidable on either the new or the previous route. The Commissioner claimed that costs shouldbe attached to the route they are actually operated on.


COMPETITION TRIBUNAL CON’T• Routes vs. Flight. Air Canada claimed that the revenues (prices) and costs should only be

compared to each other at the route level. The Commissioner claimed that doing so couldconceal the use of a single flight to predate and thus each schedule flight should be assessed asto whether prices were below avoidable cost.

• Time Period. Air Canada claimed that it needed a full year to properly determine whether priceswere above or below avoidable costs. The Commissioner argued for a shorter period, roughlyone quarter.

• Which costs are avoidable? Air Canada and the Commissioner had different lists of which costswere avoidable vs. non-avoidable.

The Tribunal’s Findings. While there are some subtleties in its decision, essentially the Tribunalfound in favour of the Commissioner on all five elements. Beyond revenues are not to be used in thecalculations, costs follow the use of aircraft and labour, evaluation is to be at the flight and not only atthe route level, and the final lists of avoidable costs look much closer to that proposed by theCommissioner than that proposed by Air Canada. In a surprise decision, the Tribunal determined thatthe time period for analysis is to be one month, even shorter than the Commissioner proposed.

The result? Using the Tribunal’s rulings on the key issues, it found Air Canada offered or increasedcapacity at prices below avoidable costs on the two routes in question. Thus, it committed anti-competitive acts. It remains for Phase 2 to determine whether these anti-competitive acts constitutean abuse of dominant position.

Next Steps. First, while the Tribunal released its decision, it also ordered a ‘stay of execution’ of itsfindings until Air Canada emerges from bankruptcy protection. Second, Air Canada could choose toappeal the Phase 1 findings. Third, the Commissioner and Air Canada would eventually be backbefore the Tribunal to put forth their arguments on the Phase 2 issues. It might be noted, that even ifthe Tribunal finds against Air Canada at Phase 2, the law prevailing at the time provides for no fines.All the Commissioner can obtain is an order against Air Canada to stop its practices. In 2002, the lawwas changed to provide for “administrative monetary penalties.”

Canada vs. the U.S. Only a few weeks prior to the Tribunal’s decision, the U.S. Court of Appealsreleased its findings in a suit brought by the U.S. Dept. of Justice against American Airlines. The DOJalleged that American engaged in predatory conduct against Vanguard Airlines (and others). TheAppeals court upheld an earlier decision by the District Court which dismissed the DoJ’s case. Again,the issues are complex, but essentially the finding was that the DoJ had not convinced the Court thatAmerican had operated capacity at prices below an appropriate measure of costs. Some might saythat the DoJ did not do a proper job of establishing what constituted avoidable costs.

Why was the Commissioner successful in Canada at Phase 1 while the DoJ was not successful in theU.S.? The reasons are complex, but a major reason is that in Canada, the Commissioner undertooka detailed account by account examination of costs to determine what was avoidable or notavoidable. As well, the Canadian legislation and accompanying regulation specifying avoidable coston a route as the appropriate test made the Commissioner’s job in Canada clearer.


OTTAWA REPORTAugust 15, 2003

The House of Commons is currently on summer break which means that any new legislation awaitsthe return to the house in the Fall. However, Ministers are progressing various files to the house andthis bureaucracy is still grinding along. Progress is particularly slow because of the impendingchange of Prime Minister and therefore cabinet.

The Canadian Transportation Agency has issued a numberof orders to Air Canada regarding their airfares, but thesehave all be stayed by Justice Farely due to the courtprotection given to Air Canada while the airline restructures its operations under CCAA protection.Additionally, the Competition Tribunal has announced its decision regarding the Air Canada predationcase involving WestJet and Canjet (For more details on the decision, please refer to the column onthe Competition Tribunal Decision in this publication).

On the bilateral front, Canada has negotiated a new agreement with Vietnam for scheduled airservices between the two countries. The signing of the agreement coincided with the 30th anniversaryof Canada-Vietnam diplomatic relations. The bilateral itself has very liberal conditions regarding flightfrequency, the setting of prices and code-sharing. As a result of this agreement, Air Canada andVietnam Airlines plan to initiate code-sharing services between the two countries in the near future.

The Minister of Transport announced short-term financial relief of more than $80 million for Canada’saviation industry. Under this program, larger airports in Canada will be able to defer a minimum of10% on their rents on a sliding scale depending on the amount of reduced traffic at their airportbetween April 2002 and April 2003. Deferred rents must be repaid to the government, interest free,over a period of 10 years beginning June 1, 2006. In addition, starting in 2003/2004, the NationalAirports System airports that do not yet pay rent will receive a two-year deferral of their outstandingpayments for other assets they received upon the transfer of the airport. This short-term financialrelief is separate from the long-term Rent Policy Review that is still ongoing.

Martin CopelandVice President

Airline Marketing & Planning


WASHINGTON REPORTThe following news stories are compiled by Global Aviation Associates (ga2) and are presented intheir monthly Washington Aviation Newsletter.

Update on Financial Status of U.S. Carriers. DOT BTS (Bureau ofTransportation Statistics) reported for first quarter 2003 that only five (JetBlue,American Eagle, AirTran Airways, Southwest Airlines, and Spirit Airlines) of thelarge, major U.S. airlines’ were profitable. American Airlines and United Airlinesreported the highest operating losses of $735 million and $608 million during the quarter, respectively.

DHS Funding Approved. On June 24th the House approved theDepartment of Homeland Security Appropriations Act, 2004 (H.R.2555) legislation and provided the Department of HomelandSecurity (DHS) funding worth $29.4 billion for fiscal year 2004. Thebill has been sent to the Senate for consideration. This legislationincludes:

• $5.2 billion for the Transportation Security Administration(TSA);

• $350 million for new identification technologies and;• funding for commercial airlines and air cargo security on passenger flights.

TSA Plans to Fund EDSs. On July 7 th, TSA entered into agreements with three of the largest U.S.airports to assist with the payment of installing permanent explosive detection systems (EDSs), whichare integrated with the airport’s baggage conveyor system. Dallas/Fort Worth, Boston Logan andSeattle-Tacoma are the first airports to enter into such arrangements with TSA. TSA expects similarfinancial arrangements will be made with other airports. TSA plans to pay 75% of the costs over aperiod of approximately 3-4 years. The airport is responsible for the remaining 25% of the total cost.

TSA Plans to Arm Pilots. TSA announced on June 26th that it has fullyimplemented the Federal Flight Deck Officer Program with the purpose totrain pilots to carry guns in the cockpit. Full-scale training of airline pilots whovolunteer to carry guns commenced July 20th. The cost to train pilots for thisfiscal year will total $8 million. TSA plans on requesting another $25 millionto train pilots for fiscal year 2004. The training curriculum includes firearm instructions, information onhow to transport service weapons and defensive tactics.

Russell Chew – FAA’s first COO. DOT Secretary Norman Mineta recently announced RussellChew as the first FAA Chief Operating Officer (COO). His main responsibilities include:

• overseeing FAA’s research and acquisitions program and;• supervision of the financial and operating performance of the air traffic control system.

This is a collection of information gathered from public sources, such as press releases, media articles, etc.,information from Confidential sources, and items heard on the street. Thus some of the information isspeculative and may not materialize.

Prepared by InterVISTAS Consulting Inc.

cair issue no. 8 - august 2003

Documents

new air carriers

recapitalised air carriers

air carriers toemerge

new markets

major network carriers

air canada zip

new planes

new opportunitieslie