industry review ivc - intervistas...b737 a320/319/321 b767 a340/330 747-400 source: globe and mail...

InterVISTAS Consulting Inc.July 2003

INDUSTRYREVIEW

IVC


THE EMERGING AIR CANADA BUSINESS PLAN:SUSTAINABLE OR IS A RETURN TO FAILURE IN THE STAR(S)?

9 July 2003

The key: The fleet plan. Recently, the Globe and Mail released what they claim is Air Canada’spost-restructuring fleet plan. The fleet plan is generally a key to a carrier’s future businessperformance. For example, if it contains a faster expansion of capacity than market demand, itimplies a decline in yield. This is fine, so long as the new fleet plan uses aircraft with lower unitcosts. Lower costs per seat sold might be able to support lower yields. Conversely, if the fleetreduces capacity, or grows less than demand, then yields will increase, and a business plan withsmaller but higher unit cost aircraft might be supportable. The fleet plan also indicates whichmarkets the carrier intends to expand in thefuture.

So what about Air Canada’s fleet plan? Thegraph shows the fleet plan released by theGlobe and Mail. As you can see, the plancalls for a somewhat smaller fleet at the endof 2003, versus what AC had prior toentering bankruptcy protection. Beginningin 2004, the fleet begins to expand again.

Stagnant Long Haul Fleet. The detail inAC’s fleet plan reveals some disturbingnews. First, as seen in the dark bars at thebottom, the long haul fleet (A340/300 and767) declines and then remains stagnant. Why is this disturbing? As the full service networkcarriers are subject to increasing competition from low cost carriers, such as WestJet, they mustfocus on those services which provide the consumer with added value and for which they will pay apremium. Long haul intercontinental service is where the network carrier provides the best value.Short haul markets may have high volumes of origin-destination traffic, but as route distanceincreases, point to point traffic falls and connections beyond the gateway increase.

Yet Air Canada appears to have no plans to expand its value added long haul service. None of theother aircraft in its fleet plan are capable of intercontinental flights. This fleet plan should beespecially disturbing for those airports other than Toronto. If Air Canada intends to expandintercontinental destinations or frequencies at its fortress hub at YYZ, it seems that eventually thiswill have to be at the expense of intercontinental services at other airports.

Continuing market share battle. The centre set of bars embrace AC’s narrow body fleet plan:the A319/320/321, the remaining 737s and the proposed 70 and 100 seat regional jets. Thenumber of aircraft in this fleet never contracts and begins to expand in size within two years.(Whether total seat capacity grows depends on the specific mix of aircraft AC decides upon.) Whyis this disturbing? Air Canada has been battling to maintain its market share in the domesticmarket against the expansion of WestJet. By deploying excess capacity in the market, yields fellbelow costs and break-even load factors increased. This is something that must be reversed.

Air Canada’s future requires that it get its yields above unit costs. It has won some wage andproductivity concessions from its work force, a positive step. But by deciding to deploy 70 and 100seat aircraft, its unit seat costs may be higher, offsetting most or all of its wage and other gains.

12

Restructuring Fleet PlanRestructuring Fleet Plan

0

50

100

150

200

250

300

350

400

2003-Mar

2003eoy

2004 2005 2006 2007 2008 2009

Beech 1900Dash-8CRJNew 70/100B737A320/319/321B767A340/330747-400

Source: Globe and Mail

Michael TrethewayVice President

& Chief Economist


The smaller aircraft have lower total costs per flight, but higher seat costs. WestJet, on the otherhand, is moving into a higher capacity 737, providing it further unit cost savings.

All this could be workable for AC, if it can get its yields up. If its narrow body fleet plan called for anotable reduction in capacity, given the expansion of WestJet and other low cost carriers, a yieldincrease might be possible. But AC seems to be unwilling to yield an appreciable market share tothe low cost carriers. It is hard to see this fleet plan as providing the recipe for a long term return tohigher yields and profitability.

Short haul. The short haul fleet at the top of the chart indicates that the Dash-8 turbo prop fleetwill be shrunk. It seems that some of these services will be migrated to 19 seat B-1900 aircraft.Others will be migrated to 50 seat CRJ-200s. While some in the press have speculated that ACintends to operate the extra B1900s itself (it already has 20), it may be that these aircraft will beassigned to regional affiliates, as they presently are. What is confusing is why Air Canada intendsto finance the fleet of its independent affiliate carriers.

This fleet plan leaves a lot of questions as to whether AC can achieve a permanent andsustainable return to profitability.

Restructuring Fleet Plan

April2003

Year end2003 2004 2005 2006 2007 2008 2009

Beech 1900 16 16 16 17 19 23 28 32

Dash-8 73 68 68 68 66 60 53 47

CRJ 35 35 45 46 47 50 52 55

New 70/110-seat - - - 25 40 55 70 85

B737/Bae 1446 33 20 20 - - - - -

A320 family 108 105 105 105 98 92 85 78

B767 40 35 38 38 38 38 38 38

A340/330 17 16 16 16 16 16 16 16

B747-400 6 - - - - - - -

Total 328 295 308 315 324 334 342 351Source: Globe & Mail June 2, 2003


TorontoAC - 64%

OttawaAC - 67%

MontrealAC - 55%

HalifaxAC - 68%

EdmontonAC - 36%

CalgaryAC - 45%

WinnipegAC - 45%

VancouverAC - 47%

VictoriaAC - 49%

Air Canada Share of Seat Capacity at Major Canadian Airports*

Source: InterVISTAS calculations based on OAG Max, June 2003Note: Includes Air Canada and affiliates.* Airports in excess of one million passengers.

Gander


THE COST OF AIRLINE LOYALTYWESTJET VS. AIR CANADAOn 25 June 2003, WestJet announced that it would begin to offer Air Miles rewards to passengersbooking via its website. This seemed to reverse its long-standing policy that its low fares weresufficient reward for passengers. This article looks at airline reward programs, and shows that theWestJet program costs the carrier a fraction of Air Canada’s costs for its Aeroplan reward system.

Frequent Flyer Programs. Frequent flyer programs (FFPs) have been an industry phenomenonsince American Airlines introduced its AAdvantage program in 1981. The concept of rewardingtravellers with "free" flights has been enormously popular with consumers. InterVISTAS researchindicates that airline passengers in Canada have been willing to pay up to a 25% airfare premium inorder to collect Aeroplan points.

However, FFPs come with a cost for airlines. Carriers have argued that the cost of the reward flightare trivial, since reward passengers are channelled into seats which would otherwise remain empty.However, this is not always the case. Air Canada’s Super Elite members can book onto flights whichotherwise are expected to be sold out. In addition, FFPs have substantial costs of investing in andoperating computer systems to track reward travel, training for staff, call centres for bookings, staff forsorting out disputes with customers, etc. There are administration costs both when the passengerearns points and when the passenger uses points.

Aeroplan. Aeroplan has more than 6 million members in Canada.Previously an internal division of Air Canada, it is now a wholly-ownedsubsidiary, and is not included in AC's CCAA filing. The Aeroplanprogram is extremely popular, but it is costly for Air Canada. There are significant administrationcosts involved, including labour, technology and facilities for the company. Unredeemed Aeroplanpoints represent a significant liability to Air Canada. At December 31, 2002, AC recorded its loyaltyprogram liability at $384 million.

CanJet/Jetsgo. Other Canadian airlines have started to invest inloyalty programs. CanJet recently launched its SmartRewardsprogram, while Jetsgo is offering free flights to frequent travellerswith its temporary SimpliFREE campaign.

WestJet. The WestJet decision to offer Air Miles was not unexpected, as WJ has been a redemptionpartner since May 2000. Clive Beddoe had hinted earlier in the year that WJ was feeling pressure tostart a loyalty plan (although he acknowledged in the same breath that Southwest founder HerbKelleher wishes SW had never started its Rapid Rewards program).

Although it does represent a new cost item for WestJet, the use of the Air Miles systemoffers significant cost savings over an in-house loyalty program. WestJet will purchaseAir Miles from The Loyalty Group, the Canadian company that started Air Miles in1992.

After paying the fee for Air Miles points, WestJet incurs no further costs, including administrationcosts, nor any liability for future travel. The Loyalty Group handles the administration of the program.When the collector wants to redeem their points, The Loyalty Group purchases the reward travel.Some of the travel might be on WestJet, and if it is WestJet is paid for the reward air ticket. Travel

John WeatherillSenior Airline Analyst


redemption will be a source of revenue for WJ. By comparison, Air Canada gives its passengersAeroplan points now, and then owes them a reward in the future.

Leveraging into an existing reward base. Reward points are more attractive if you have alreadycollected some. If WJ started an in-house program, their passengers would have to start collectingfrom zero. A key benefit of Air Miles is that WestJet can immediately benefit from the loyalty of the7.6 million Canadian households that are already collecting Air Miles points.

Using Air Miles to reduce Distribution Costs. WestJet only offers Air Miles for tickets purchasedthrough their website, thereby encouraging passengers to use the least expensive distributionchannel. Furthermore, WestJet customers earn Air Miles on the basis of money spent (one mile per$20), rather than on the basis of flight segments or miles flown (as with Aeroplan and SmartRewards).This subtle difference ensures that WestJet is giving the most rewards to passengers who give themthe most revenue.

The Program Costs. WestJet’s Air Miles participation costs it only a fraction of what Aeroplan costsAir Canada.

Consider a passenger travelling exclusively between Vancouver and Toronto, paying an averagereturn fare of $1,000 on Air Canada. Depending on the booking class, Air Canada offers about 4,000Aeroplan points for each flight between these cities. An Aeroplan member can redeem 25,000 pointsfor a free Vancouver - Toronto flight; therefore, the passenger must make 6.25 Vancouver-Torontoreturn trips to earn a free flight. The payout ratio for Air Canada is 0.16 (4,000 miles / 25,000 miles).

By comparison, a WestJet passenger on the same routing will earn one Air Mile for every $20 spent,or 50 Air Miles per $1,000 flight. Depending on the season, between 2,800 and 4,400 Air Miles canbe redeemed for a free Vancouver - Toronto flight. Excluding bonus offers or other discounts (whichare common in the program), the Air Miles collector must spend between $56,000 and $88,000 toearn their free flight. The payout ratio for WestJet is 0.017 ($1000 free trip / $56,000 in spending).This is roughly one-tenth the payout ratio of Air Canada.

Comparison of WestJet and Air Canada Reward Programs

WestJet Air Canada

Program Air Miles Aeroplan

Miles needed for YVR-YYZ 2,800-4,400 25,000

Point rewards 1 point per $20 of ticket cost 4,000 points for one YVR-YYZ

Spending needed for YVR-YYZ $56,000 $6,250

Administrative costs None Considerable costs to track pointearning and reward usage

Cost of providing reward WestJet is paid by Air Miles ifreward use is on WestJet

Air Canada must provide thereward flight at Air Canada’s cost –

no revenue

Payout ratio: reward trips per paid trip trips needed for reward

0.01756

0.1606.25

After paying the feefor Air Miles points,WestJet incurs nofurther costs,includingadministration costs,nor does it incur anyliability for futuretravel.

WestJet is paid by AirMiles for any rewardtravel that uses WJ.


-25%-20%-15%-10%

-5%0%5%

10%15%20%25%

Jul-02

Aug Sep Oct Nov Dec Jan-03

Feb Mar Apr May Jun

Dom RPKDom ASK

Jazz data is not includedin this graph

Air Canada Domestic Mainline Air Canada Domestic Mainline

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Jul-02


Feb Mar Apr May Jun

Int'l RPKInt'l ASK

Air Canada InternationalAir Canada International

AIRLINE DATA – CANADATraffic and Load Factors on Canada’s Major Air Carriers – June 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 -17.5% -16.2% -17.3% -18.0% -0.2 pts(to 76.7%)

+1.7 pts

Domestic(Mainline) -11.1% -12.9% -10.7% -8.7% -0.3 pts

(to 72.4%) --3.4 pts

Jazz +3.5% n/a -9.1% n/a +7.8%(to 64.5%) n/a

International& Charter -18.6% -15.9% -20.5% -22.3% +0.1 pts

(to 79.6%) +4.5 pts

WestJet +35% +116% +44% +137%-4.4 pts(to 72%)

-7.2 pts

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

Analysis:• Air Canada continues to be in negative traffic

growth territory due to the impacts of SARS, theIraq War and its bankruptcy.

• However, there appears to be some recovery, asboth capacity and traffic improves relative to theprevious two months. More internationalcapacity has been cut than traffic has dropped,improving its load factor on international services.

• WestJet continues to grow, but at a lower rate ofgrowth. While a year ago, it was posting year over year growth rates in the 45 to 55+% range, thismonth, traffic grew only 35%. To some extent this is expected – as its traffic base gets larger eachyear, the percentage increase of new steady additions to capacity becomes smaller. As can be seen,its growth rate has been declining almost steadily since January.

• WestJet’s capacity growth continues to outpace its traffic growth. Load factor in June 2003 was 7percentage points lower than a year ago. As actual load factor moves down toward the break evenload factor, its profits decline.

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

0%

10%

20%30%

40%

50%

60%70%

80%

Jul-02


Feb Mar Apr May Jun

RPKASK

WestJetWestJet

NEW CARRIERS:LOAD FACTORSJetsgo: 67%Zip: not reportedCanJet not reported


AIRLINE DATA – U.S.

U.S. Airlines Release June 2003 Traffic Figures

Airline Load FactorTraffic

(RPMs – millions)Capacity

(ASMs – millions)

178.8%

á3.6 pts

10,862

â3.2%

13,779

â7.7%

81.4% 3

â0.6 pts

1,334

á14.8%

1,725

á16.3%

2 81.0%

á2.3 pts

5,382

â1.5%

6,644

â4.3%

80.5%

á3.2 pts

8,809

â5.3%

10,940

â9.1%

87.0%

á1.3 pts

969

á62.7%

1,115

á60.4%

81.8%

á0.3 pts

5,976

â10.2%

7,308

â10.5%

74.6%

á1.1 pts

4,428

á5.2%

5,938

á3.7%

82.0%

á4.0 pts

9,082

â9.8%

11,074

â14.2%

3 78.6%

á1.3 pts

3,539

â5.8%

4,505

â7.3%

Notes:1. Includes American Airlines and American Eagle2. Load factor includes scheduled service only3. Does not include Express Jet

Source:Carrier financial and traffi c reports


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

Montreal-Dorval

Calgary Edmonton Ottawa Winnipeg Halifax Victoria Kelowna Saskatoon ReginaSt.

John’s

May -9.3% -9.5% -2.3% -4.9% -11.4% -5.7% -4.7% -5.1% -3.8% -3.0% -7.2% -7.3%

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

2nd Quarter -8.6% -10.9% -3.8% -6.7% -12.3% -6.9% -6.0% -6.3% -6.1% -8.7% -11.1% -11.9%

July -7.2% -8.3% -3.6% -9.4% -6.6% -5.1% +4.4% -13.1% -6.3% -9.5% -13.0% -7.0%

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

September +12.6% +22.4% +20.1% +7.6% +23.7% +16.4% +26.1% +13.2% +11.8% +12.6% +10.5% +20.0%

3rd Quarter -2.5% -0.2% +2.9% -4.4% +0.50% +1.2% +11.2% -4.8% +0.2% -5.4% -5.8% -0.8%

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

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

December +8.2% +4.3% +7.8% +6.9% +11.7% +6.3% +15.2% +8.1% +1.4% +4.3% +1.5% +3.2% +2.2%

4th Quarter n/a +7.2% +9.7% +7.5% +6.9% -5.1% +8.9% +7.3% +0.5% +3.0% +1.1% +3.0% -0.3%

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% +3.8% +7.2% +6.3% +3.5% +6.2% +13.0% +4.5% +2.9% +4.0% +6.8% -0.3% -5.8%

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

March +0.4% -1.3% -1.8% +3.7% -0.3% +2.2% +5.1% +11.6% +0.2% +5.0% -3.7% -4.2% n/a1st Quarter +3.4% +0.6% +2.9% +5.2% +2.0% +4.0% +10.1% +10.0% +3.3% +3.7% +3.1% +1.3% n/aApril -15.1% -13.5% -10.2% +1.7% +1.1% -7.6% +4.4% +6.1% -0.9% -0.6% -3.9% -1.6% n/a

2003

May -17.3% -13.5% n/a -1.4% +5.3% -3.9% -0.5% -1.2% +0.4 -1.0% n/a -1.6% n/aNote: Toronto traffic data provided by Toronto Pearson International Airport. Data not available for St. John’s due to labour strike.

CA

NA

DIA

N A

IRP

OR

TS


DECREASE IN AIR CANADA’S SEAT CAPACITY10 July 2003

State of AC Post Restructuring. Since Air Canada filed for bankruptcy protection under theCompanies’ Creditors Arrangement Act (CCAA) on April 1, the carrier has made significant cuts tocapacity and flight offerings. Air Canada is the dominant airline in the Canadian airline industry. Itcurrently accounts for 51% of all flights and 52% of all seats departing from Canada’s top 100airports. In the domestic market, AC operates 56% of flight frequencies and 58% of seats, comparedto 67% of flights and 72% of seats pre-restructuring. As shown below, AC’s overall seat capacity andflight frequency declined 18% and 20% respectively in June 2003, compared to June 2002. ExcludingZip and Tango, AC flights have been reduced by 19% and seat capacity is down 14% in 2003 from2002. AC Tango operations have shrunk significantly with seat capacity down 52% and frequencydown 58% compared to June 2002.AC Mainline’s seat capacity to Asia was heavily impacted, declining 70% between June 2003 andJune 2002, although some of this reduction may have been due to SARS. Other AC sectors severelyimpacted include Domestic transcontinental (-24%), Regional services (-23%) and transborder(-19%).

Air Canada Capacity Changes June 2003 vs. June 2002

% ChangeCarrier

Flights SeatsAir Canada Mainline1 -11.4% -19.0%Zip2 - -Tango -58.2% -51.5%Total Seat Capacity -19.6% -17.6%

Source: OAG Max June 2002 and June 2003.1Jazz included in AC Mainline.2 Zip did not have operations in 2002 and a percentage change could not be computed.3 One week sample of flights in June 2002 and June 2003

Airports Losing Capacity. The impact of AC’s restructuring has affected the top airports in Canada.Of the top ten airports, Halifax has the greatest reduction in seat capacity, followed by Edmonton andVancouver.Air Canada Capacity Reductions at Top Ten Airports

Capacity ChangeAirport

Flights Seats

Toronto -19% -15%Vancouver -16% -18%Montreal -14% -11%Calgary -9% -7%Edmonton -19% -20%Ottawa -11% -15%Halifax -22% -22%Winnipeg -9% -13%Victoria -4% -1%

Hamilton 0% 0%Total -16% -15%

Source: OAG Max June 2002 and June 2003.

As AC continues with its restructuring activities, further adjustments to its flights and seat capacitiesare expected as AC moves towards a smaller fleet.

Jennifer Tso

Project Analyst

Air Canada reported an 18%drop in seat capacity and 20%drop in flight frequencies post-restructuring.


NEWS ARTICLESAIR CANADA UPDATEAIR CANADA CUTS FARES TO MATCHRIVALSAir Canada Tango cut the price of some of itsairfares by 50% during the summer season.Some one-way fares were sold for as low as$12. The move to reduce fares was a result ofthe fare reduction by rival Jetsgo. The saleended on June 19 for travel completed by July16.AIR CANADA PILOTS UPSET OVERARBITRATOR’S RULINGOn June 26, the Chairman of the CanadaIndustrial Relations Board gave a mixeddecision regarding the merger of the senioritylist of the former Canadian Airlines and AirCanada pilots. An initial arbitration decision byarbitrator Morton Mitchnick, which stronglyfavored the original AC pilots, was appealed bythe former CAI pilots. Both pilot groups agreedto binding arbitration for the appeal. The recentappeal decision by Brian Keller gave back somebenefit to the CAI pilots, but did not award thestrict date-of-hire seniority list they wanted -- ACpilots still receive some preference. Although itwas a binding arbitration, the AC pilots wereupset with the appeal ruling and petitioned theCIRB, which agreed to a "limited" review of theseniority integration once again. However, theCIRB chair denied a request that the Kellerseniority list not be made operational. Thus theKeller seniority list is now in use while the CIRBconducts its limited review.AIR CANADA COMPLETES FIRSTNEGOTIATIONS WITH LESSORS,REACHES FINANCING AGREEMENTOn June 20, Air Canada completed the firstrenegotiation of lease terms with aircraft lessorGATX Capital over three Airbus A-321 aircraft.GATX has agreed to the rates and termsconsistent with Air Canada’s restructuring plan.The carrier has also reached a tentativeagreement worth C$1.8 billion with GeneralElectric Capital Aviation Services (GECAS)on all GECAS financed and managed aircraft aswell as new exit and aircraft financing when AirCanada emerges from creditor protection. As

part of the agreement, GECAS has also agreedto a C$575 million secured loan and to providea maximum of C$1.3 billion to finance up to 43regional aircraft.AIR CANADA LABOUR CONTRACTSCOMPLETEAir Canada has completed the ratification of alllabour contracts and will achieve permanentcost reductions of C$1.1 billion a year. Over thepast three weeks agreements were completedwith the International Association of Machinistsand Aerospace Workers, Canadian Union ofPublic Employees, Canadian Auto Workers andCanadian Airline Dispatchers Association. TheAir Canada Pilots Association was the last toreach an agreement. The pilots union voted infavour of a new six-year contract that will savethe carrier C$257 million a year through about300 layoffs, paycuts of 15% and more flexibleworking conditions. Agreements were alsoratified with all unions representing Air CanadaJazz employees. Jazz was able to achieve totalannualized labour and management costreductions of C$110 million.TRANSPORT CANADA DESIGNATESAIR CANADA TO SERVE CUBAOn July 11, David Collenette designated AirCanada to operate scheduled Canada-Cubaservice. Air Canada will operate flights fromCalgary, Halifax, London, Moncton, Montréal,Ottawa and Toronto to Havana, Varadero,Holguin and one other city to be chosen byCanada.AIR CANADA EXECS TO TAKE PAYCUTS LESS THAN EXPECTEDAir Canada executives will be receiving salarycuts of 10%, less than the 15% that wasexpected. Only CEO Milton is taking a 15% cut.The airline’s pilots are taking a 15% pay cut andhad expected all executives to equal that cut.BANKRUPTCY PROTECTION EXTENDEDFOR AIR CANADAJustice Farley has extended the stay period forAir Canada to September 30, 2003. Theextension will allow the carrier to completerenegotiations with lessors and to commencethe process of raising C$1.35 billion in exitfinancing.


NEWS ARTICLESOTHER CANADIAN AIRLINESWESTJET OFFERS NEW GANDER ANDST. JOHN’S SERVICEOn June 16, WestJet began its new service toSt. John’s. The carrier offers four weekly flightsbetween St. John’s and Moncton. On June 17WestJet initiated service to Gander offeringthree weekly flights between Gander andOttawa. The carrier also announced thefollowing new and enhanced services that willbegin September 15:

New Services Enhanced ServicesWinnipeg - Toronto Winnipeg - SaskatoonWinnipeg - Vancouver Winnipeg - Thunder BayMontréal - Halifax Halifax - OttawaGander - OttawaSt. John’s - OttawaCalgary - OttawaToronto - Thunder BayOttawa - Edmonton

WESTJET OFFERS FREQUENT FLYERPROGRAMOn July 25, WestJet introduced its frequent-flyer program. The carrier will offer Air Miles®reward points on tickets booked on the Internet.Passengers can earn one reward mile on every$20 spent on an online booking, excludingtaxes and airport fees.

WESTJET ENTERS C$100 MILLIONPENSION PLAN EQUITY LINEWestJet has entered a deal with the OntarioTeachers’ Pension Plan that would require thepension plan to purchase up to C$100 million ofWestJet’s common shares. Under the terms ofthe agreement, the Plan is not required topurchase shares exceeding 30% of WestJet’soutstanding capital.

WESTJET FIRST CANADIAN AIRLINE TOFEATURE SATELLITE TVWestJet and LiveTV, a subsidiary of JetBlue,have signed a thirteen-year agreement for theinstallation of the satellite system on 40 aircraft,with the option to install the system on future

aircraft deliveries. WestJet plans to offer theservice free of charge until all of its 700-seriesaircraft are configured.

CANJET TO BEGIN HALIFAX-ST.PETERSBURG SERVICEOn November 1, CanJet Airlines will begin aweekly non-stop service between Halifax andSt. Petersburg.

ZOOM AIRLINES DESIGNATED TOOPERATE BETWEEN CANADA AND UKOn June 5, David Collenette announced thedesignation of Zoom Airlines Inc. to operatescheduled flights between Canada and the UK.The carrier will offer flights between Calgary-Glasgow, Vancouver/Edmonton-London(Gatwick), Vancouver/Calgary-Manchester,Toronto-Belfast, and Toronto-Birmingham.

HAWKAIR TO RAISE EQUITYHawkair is currently placing $4.5 million inpreferred shares to raise new equity. Theproceeds will be used to pay down debt andlease additional Dash 8 - 100 aircraft to allow itto expand into new markets. Hawkair currentlyserves four routes to Vancouver: Terrace,Prince Rupert, Dawson Creek and Smithers.The company has stated its long termobjectives as a) profitably expanding fleet andmarket coverage to include destinations in BC,Alberta, SE Alaska and Northern Washington,and b) to seek a 'liquidity event' for itsshareholders within 5 years. The privateplacement is being handled by DundeeSecurities. A copy of the offer memorandum isavailable to interested investors from theCompany or Dundee.


NEWS ARTICLESU.S. & INTERNATIONALAIRLINESUS AIRWAYS STOPS DELIVERY OF 25RJSDue to a contract dispute with its pilots, USAirways will not take delivery of 25 75-seatBombardier CRJ-705 planes. The carrier plansto contract with affiliate Mesa Airlines to fly 25and possibly up to 55 regional 70-seat jetsunder the US Airways Express banner.

LUFTHANSA OFFERS MUNICH-MONTRÉAL SERVICEOn June 14, Lufthansa introduced a three-times weekly service between Munich andMontréal. The service will be operated with anAirbus A340-300.

CO, DL, NW ALLOW MILESREDEMPTIONOn July 15, frequent flyer members ofContinental, Delta and Northwest were ableto redeem miles on one another’s flights to 374destinations. Delta Song and Delta Connectionflights operated by American Eagle areexcluded.

CONTINENTAL DELAYS 737 ORDEROn July 14, Continental Airlinesannounced that it will defer firm deliveries of36 Boeing 737 aircraft that were originallyscheduled for delivery in 2005, 2006 and2007.NORTHWEST LAUNCHES DETROIT-HALIFAX SERVICEOn July 4, Northwest Airlines and its affiliate,Mesaba Aviation Inc., initiated direct servicebetween Detroit and Halifax. The service willoperate with a 69-seat passenger Avro RJ85regional jet.

CARGOU.S. DOMESTIC CARGO DECREASESU.S. Air Transport Association figures forMay show a 2.3% decrease in revenue tonmiles for domestic cargo and a 3.3% decrease

in international cargo. Total freight traffic for themonth decreased 2.8% from the previous year.

YVR CARGO DOWN IN MAYVancouver International Airport reported a15.4% drop in cargo for the month of May and a7% drop for year-to-date.

CABINET RESCINDS CANADA-EUROPECARGO FLIGHTSThe Cabinet has rescinded CanadianTransportation Agency permits for a chartercargo service from Halifax to Europe which wasto be operated by MK Airlines Limited. Backin May, the carrier had applied to the CanadianTransportation Agency, and was granted theright to operate 5 th freedom charter cargo flightsbetween Canada and Europe. Cabinetrescinded the decision noting that the proposedflights were 7 th, not 5 th, freedom services.

FEDEX PROFITS INCREASE IN FISCALYEARFor fiscal year ending May 31, FedEx Corp.reported net income of US$830 million, anincrease of 17% from last year. Operatingincome increased 11% to US$1.5 billion.

NORTHWEST CARGO SIGNS DEALWITH CANADIAN SALES AGENTSNorthwest Cargo has signed a deal with twoMississauga companies to market and sell itsservices throughout Canada. CAS Cargo &Travel Inc., will be the general sales agent inEastern Canada, and Ralph Porter EnterprisesInc. will be the agent in Western Canada.

ATLAS AIR CONSIDERS CHAPTER 11FILINGAtlas Air Worldwide Holdings may file forChapter 11 bankruptcy protection to completeits debt restructuring program that began inMarch. The company is negotiating with itsremaining secured creditors and lessors.

VOLGA DNEPR INCREASES USE OFGANDER INTERNATIONALVolga Dnepr Airlines has increased its use ofGander International Airport. After operatingfewer than 5 flights a quarter previously, thecarrier was up to over 20 flights in Q1 2003.


NEWS ARTICLES

AIRPORTTORONTO PORT AUTHORITY GETSISLAND BRIDGEOn June 17, Toronto City Council membersvoted in favour to pay C$48.6 million to theToronto Port Authority for the construction of abridge link to the island’s airport.

NEW RUNWAY CONSTRUCTION ENDSAT DENVERJune 23rd marked the end of construction onDenver’s new three-mile runway, which isexpected to increase capacity by 18%. The firstcommercial use will begin in mid-September.

AIRCRAFT MANUFACTURERSAIRBUS CONFIRMS MAJOR EMIRATESORDERAirbus has confirmed a major order fromEmirates for 41 planes. The deal is worth US$9billion and includes twenty-one 555-seat A380s.The carrier is also purchasing long range A340-500s and A340-600s. Delivery of the A340-500s will begin next year, followed by the A340-600s in 2007 and the A380s in 2009.

BOEING LANDS AIRTRAN ORDERAirTran Airways has placed an order for 100new CFM56-7B powered 737-700s and 800s,50 of which are firm orders and the rest options.The carrier also placed an order for up to 10additional 717s, keeping its production lineopen.

BOEING MAY END 757 PRODUCTIONThe Seattle Post Intelligencer reported thatBoeing’s order log for the 757 is down to 18aircraft, all but two of which are for Continental,and may decide to end the production line in2005 or earlier.

PEOPLE IN THE NEWSCATSA WELCOMES NEW REGIONALMANAGERSBob Gosse has been appointed CATSAregional manager for the Newfoundland andLabrador region. Gosse has 30 years ofexpertise in airport maintenance and aerospaceoperations and was the former president ofCHC Composites. John Murphy has beenappointed CATSA regional manager for theOntario Region. Before joining CATSA in April2003, Murphy was the Manager of the GrandBahama International Airport and has workedwith Transport Canada for over 25 years inairport design.

NEW MANAGING DIRECTOR FORONEWORLDJohn McCulloch has been appointed the newManaging Partner for oneWorld. oneWorld isheadquartered in Vancouver.


SARS – THE END OF A CRISIS10 July 2003The End of the Outbreak! The SARS outbreak, which began in March, and propelled the travelindustry into yet another crisis, may now be coming to an end. The World Health Organization (WHO)declared the containment of the SARS virus in all affected countries. At the end of June and earlyJuly, Beijing and Toronto were removed from the WHO SARS affected list as no new cases werereported for 20 days. On July 5, Taiwan, the only remaining affected area, was removed from the list.However, the WHO has two cautions: while there have been no new outbreaks for two incubationcycles, there are still individuals infected with SARS in quarantine in Canada, China, Taiwan, etc.Further, the WHO does not know whether SARS is a seasonal illness like the flu. Either of theseleave concerns that SARS could break out again.Airport Traffic Recovering! Many Asian airports have started to see recovery of passenger traffic.In June, an average of 200 flights per week were reinstated at Hong Kong International Airport andfurther increases in flights are expected for July. Tokyo’s Narita Airport is also seeing a recovery inthe number of flights operating after passenger numbers declined 43% and 36% in May and June.On July 5, Taipei Chiang Kai-shek International Airport reported a 535% increase in passenger levelsfrom a recorded daily low of 5,676 on May 19. According to Amadeus Asia Ltd., daily bookings from32 Asia Pacific countries and territories have reached pre-SARS levels.Airlines Adding Back Capacity! Every day, air carriers are announcing the restoration of flights,frequencies and capacity and recording traffic recovery.• Cathay Pacific’s CEO indicated that the carrier is pursuing a strategy of restoring flights to a full

schedule as fast as possible, rather than only incrementally add flights which are fully profitable.It will be more difficult for the market to recover without its former service convenience. Heexpects passenger levels in July and August to reach 27,000 to 30,000 passengers per day. Thecarrier will operate a full schedule by September. It has already restored four flights betweenNew York and Hong Kong. On July 1, the carrier added one more weekly San Francisco-HongKong flight. By the fall, Cathay plans to return to pre-SARS levels of 28 flights a week from threeU.S. cities.

• China Airlines (Taiwan) announced it plans to restore full capacity on services to Hong Kong byAugust 1.

• China Southern Airlines is predicting a net profit of C$83 million in the last eight months of2003. It has resumed twice-weekly service from Xiamen to Kuala Lumpur and from Guangzhouto Ho Chi Minh City. It has also relaunched three weekly flights from Shantou to Hong Kong andresumed twice-weekly service from Sanya to Hong Kong. The carrier plans to relaunch its pre-SARS schedule of three weekly flights between Los Angeles and Guangzhou and relaunch twiceweekly flights from Shantou to Bangkok and five weekly flights from Guangzhou to Seoul.

• China Eastern Airlines saw passenger loads returning to normal levels. It now carries 16,000passengers a day, a significant increase compared to a low of 5,400 a day in May. It is operating72% of its flights, up from 33% in May.

• Singapore Airlines reinstated daily service from Los Angeles to Singapore on July 1. Thecarrier will have 39 flights a week, down from a peak of 45 but up from a low of 21 during theSARS scare.

• United Airlines plans to add back 54 flights in July including some seasonal service changesand reinstate some Pacific flights that were cancelled due to SARS.

• Northwest Airlines plans to increase its internal Asia/Pacific network capacity by replacing allAirbus A320s with Boeing 757s.

• Continental Airlines will resume four of its five weekly flights between Newark and Hong Kongbeginning August 1.

Although SARS has left a scar on the airline industry, recovery is apparent and as China EasternAirlines stated “bookings have improved. The recovery in passenger traffic is faster than expected.”

Doris Mak

Senior Market Analyst

“Hong Kong International Airportis clearly emerging from thewoods. The latest figures showthat we are well on track tomaking a full recovery. Julylooked set to continue the trend:daily passenger traffic figures forthe first week were already up toabout 70% of pre-SARS levels",

Dr. David J Pang,Chief Executive Officer

Airport Authority Hong Kong


ECONOMIC OUTLOOK15th July 2003

Is the Canadian economy slowing?

Recent economic data for the Canadianeconomy shows that the “Northern Tiger”may be slowing. Statistics Canadareported that employment dropped in Apriland May after a year and a half of steadygains. June was better, with 49,000 newjobs created though almost all were part-time. Nearly 84,000 new jobs werecreated in the first half of the year, wellbelow the 304,000 created in the sameperiod of 2002.

Similarly GDP output for the month of Aprilfell by 0.2%, the first monthly decline sinceSeptember 2001. This softening in theeconomy has been put down to factorssuch as SARS, mad cow disease and thestrong Canadian dollar impacting exportsand tourism.

Trend or Blip? However, at this stage itis not clear whether this is the start of a

trend or just a blip. There are still plenty of positives for the Canadian economy. The U.S economy(Canada’s biggest export market) shows signs of improving, with increases in consumer confidenceand robust GDP growth (although the U.S. recovery is failing to generate any new jobs).

In Canada, consumer confidence, as measured by research companyDecima, rebounded strongly in May following the end of the Iraq war andthe subsidence of SARS in Canada. The Bank of Canada has decided toprovide fresh stimulus to the economy by cutting interest rates by a quarterpoint. Inflation, which was a concern of the central bank, has dropped to2.9%, within the bank’s target range of 1-3%; the core rate which excludesvolatile items such as food and energy dropped to 2.3%. This gave thecentral bank some room to cut interest rates.

The picture should become clearer with one or two months additional data. A key indicator to watchover the next two months is employment. If positive numbers year-over-year results are reported inJuly and August, then it is likely that we are merely experiencing a blip rather than a trend.

At this stage it isnot clear whether

the Canadianslowdown is start

of a trend

-1.0

-0.8

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

Jan

Feb Mar

Ap

r

May

Jun

Jul

Aug

Se

p

Oct

No

v

De

c

Jan

Feb Mar

Ap

r

Source: Statistics Canada

Canadian GDP (Monthly % Change, Seasonally adjusted)

2002 2003

Ian Kincaid

Manager, EconomicAnalysis

15.0

15.2

15.4

15.6

15.8

Jan

Mar

May Ju

l

Sep No

v

Jan

Mar

May Ju

l

Sep No

v

Jan

Mar

May

Source: Labour Force Survey, Statistics Canada

Employment in Canada (Millions, Seasonally adjusted)

2001 2002 2003


CARGO CAPERS02 July 2003

InterVISTAS and the Canadian Airports Council havebeen active advocates of an improved Canadian FTZregulatory environment. This effort paid dividends withthe implementation of the Export Distribution Centre(EDC) program. The program is beginning to take off,with 25 EDC certificates now in effect, and airportauthorities such as Gander, Hamilton and Vancouvermarketing their own EDC capabilities. This month welook at what is happening elsewhere to put thedeveloping Canadian EDCs in the global context.

Concerns about the future of FTZs. Some observershave wondered about the future role of FTZs in a worldwhere tariffs are being lowered and even eliminated.This is clearly a valid point – after all, FTZs wereoriginally established to get around some of theproblems that tariffs created. No tariffs – no problems,right? If only it were that simple!

FTZs are here to stay – at least for some time to come. For starters, tariffs have not disappeared,and will likely be with us for some years yet. Moreover, tariff rates tend to not come down uniformly –and the resultant distortion this implies (i.e., inverted tariffs) is in part what FTZs were created to dealwith in the first place!

Also, FTZs can help deal with other trade impediments – tariffs are not the only form of trade barrier!Even if tariffs were eliminated entirely, FTZs would still have a valuable (i.e., time and cost saving)role to play. Without them, a distribution centre in Canada would have to formally import goods toCanada (paperwork), pay the GST (increased cash flow burden and extra financing costs), export thegoods from Canada (more paperwork), and then import the goods into the U.S. or Mexico (again,paperwork). With a Canadian FTZ, the first two paperwork items are eliminated or greatly simplifiedand expedited, and the remaining money item is eliminated. FTZs are not only about duty relief –after all, we have had programs for that for years. The CAC FTZ initiative was primarily about GSTrelief and the elimination of costly paperwork.

Finally, as the volume and scope of world trade continues to increase dramatically, this suggests apotential for an even greater use of conventional FTZs for the foreseeable future.

“New” developments in FTZs. The underlying assumption above is that FTZs continue in theirexisting format (i.e., as a mechanism to “get around” tariff and trade barriers). The trend over the pastfew years, however, has been to marry up FTZ capabilities with supply chain management activitiesto create full service international trade logistics centres.

Robert Andriulaitis

Director,

Transportation & Logistics

Studies


CARGO CAPERS - CONTINUEDDanzas AEI opened a full service logistics centre in the BogataColumbia FTZ. U.S.-based industrial real estate owner/operator

AMB Property Corporation developed a 234,000 ft2 multi-tenant logistics facility at theAirport Logistics Park of Singapore, located in the Changi airports FTZ. Menlo WorldwideLogistics became the first tenant. Emirates SkyCargo opened a SkyCargo Centre in theRas Al Khaimah Free Zone. Airborne Logistics, APL Logistics, Emery, Exel, and Nippon

Express Logistics also operate at various FTZs. Successful FTZs like Singapore, Incheon, andHamburg are increasingly marketingthemselves as logistics centres with FTZcapabilities, rather than simply as FTZs.

We have seen evidence of this closer to home as well. The media reportedthat when TradePort began to explore establishing an FTZ at HamiltonInternational Airport, PBB Global Logistics expressed an interest in a

logistics role in the facility.

3PLs are getting very good at combining logistics and FTZs toachieve superior results. Exel achieved significant cost and service improvements to Compaq’sreverse logistics processes by utilizing FTZs. Hillwood, the operator of the cargo centre/industrialpark at Fort Worth Alliance Airport, set up a subsidiary, Alliance Operating Services (AOS), to provideits tenants with third-party logistics services to enable them to get maximum benefit out of the FTZ. Inaddition to AOS, DSC Logistics, Ryder, Trans-Trade, UPS Logistics, and Value and Service Logisticsall operate at Alliance.

The relationship between FTZs and logistics appears to be getting even stronger. CommodityLogistics chose to establish its headquarters in the Columbus Ohio FTZ and Excel set up its regionalheadquarters in the Dubai Airport Free Zone.

FTZs are now positioning themselves not just as a means of avoiding duties and taxes, but as keycomponents of logistics centres that improve upon existing supply chains using the unique duty andtax saving attributes of FTZs. It appears that to be successful requires both the FTZ capabilities andstrong logistics services.

With Canada’s favourable geographic location as a gateway to the NAFTA marketplace from Europeand Asia, Canadian airports establishing full service logistics EDCs should be able to attract a shareof the growing transatlantic and transpacific trade and logistics activity. As such, despite a late start inthe FTZ industry, the future of Canada’s EDCs looks promising.


OTTAWA REPORT10 July 2003

Parliament is on Recess – not prorogued. Both Houses of Parliament recessed in mid-June, andmany sighs of relief were heard in the transportation sector. But Bills C-26 and C-27 are still active.The Prime Minister could have decided to prorogue Parliament, thereby terminating any bills whichhad not passed. However, by choosing to simply recess for the summer both the Canada Airports Act(C-27) and the changes to the Canada Transportation Act (C-26) are alive and of concern. Bothhouses are scheduled to resume sitting during the week of September 15th.

What was the status of the two bills at time of recess? C-26, which has few changes for the airtransport sector, had completed second reading in the House and was referred to the House StandingCommittee on Transportation. The Standing Committee had indicated it wanted to hold hearings onthe bill, especially in regard to the rail provisions. The committee never got to the bill itself, as it waspreoccupied with hearings on CATSA and other issues.

C-27, the Airports Act, still had not completed second reading debate and thus had not been referredto the Standing Committee. At least some members of the Committee would like to hold extensivehearings on the bill, if it should ever be referred to them.

It remains to be seen what happens in the fall. One view is that the Minister will continue to pushthese two bills through Parliament. Another is that all parliamentary business will be stalled as thelame duck Prime Minister loses control of the caucus as the leadership convention looms. The lameduck, however, could pull a few surprises out of his sleeve, ranging from calling an election toresigning during the summer. In the meantime, the two bills remain on the order paper.

The MK Air Case. As reported elsewhere in Industry Review, the Governor-in-Council reversed adecision of the Canada Transportation Agency allowing MK Airlines Limited to operate cargo servicesfrom Spain to Halifax. MK Air (based in Ghana) had requested permission to operate 5th freedomfreighter services between Europe and Canada on an entity charter basis. (However, the serviceswould not be originating in Ghana, and thus were 7th freedom services.) Their application includedtriangle services from Luxembourg to Connecticut to Halifax on behalf of Panalpina and Luxembourg-Alabama-Mirabel flights on behalf of Morganair. The Agency recently solicited comments fromCanadian carriers, but none were received, although Air Canada had objected to an earlier award ofauthorisation to MK Airlines. The authorisation was granted on 29 May 2003.

On June 2, cabinet rescinded the CTA decision. The order simply stated that theservice was a 7th freedom service, not a 5th freedom service originating in Ghana. Asubsequent application by MK Airlines was turned down by the CTA, citing the GICorder. Authorities in Halifax indicated that the consequence is a loss of business forthem and a gain in business for Boston where the fish are now being trucked. Theyindicated the business did not move to Air Canada bellyspace.

Ottawa Airport. WestJet has announced a significant increase in Ottawa Airport operation starting inmid September with new daily non-stops to Calgary and Edmonton (one less than daily) as well as anadditional daily Halifax frequency and new Gander/St. John non-stops.

Martin CopelandVice President

Airline Marketing & Planning

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.

industry review ivc - intervistas...b737 a320/319/321 b767 a340/330 747-400 source: globe and mail...

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