CAIR Issue No. 12 - December 2003

December 2003 © InterVISTAS Consulting Inc.

INDUSTRYREVIEW


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Macau and Shenzhen Airports Market Share Relative to HKG

Source: ACI World Airport Traffic Report

MARKET SHARE OF SECONDARY

AIRPORTS12 December 2003

Many secondary airports around the world have been experiencing a rapid increase in passengertraffic over the last several years. The main reason for the rise in secondary airports’ traffic volumesis the emergence of low cost carriers (LCCs). Many LCCs fly to secondary airports because of lowercosts and higher productivity. Here we look at the market share of selected secondary airports.

North America – In North America, the strength oflow cost carriers has fuelled the growth of secondaryairports. This is evident in the Greater Torontometropolitan area. Passenger volume at thesecondary Hamilton International Airport increasedsubstantially in year 2000, when WestJet selectedthe airport as the hub for its Eastern Canadianoperations. Hamilton’s share of air passenger trafficrelative to YYZ has increased from only 0.09% in1998 to 3% in 2002. In the U.S., the secondaryProvidence airport, served by Southwest Airlines, accounted for 17% of the share in passenger trafficrelative to Boston Logan International Airport.

Europe – The rise of low cost carriers have also hada positive impact on secondary airports in Europe.In the U.K., passenger traffic at the secondaryLondon Stansted Airport has been growing at asteady pace, reporting double-digit growth in the lastseveral years. In 2002, London Stansted Airportaccounted for 14% of total passengers using Londonairports, compared to 7% in 1998. At the secondaryPrestwick and Hahn airports, both Ryanair hubs,passenger traffic has increased significantly.Prestwick accounted for 16% of passenger traffic in 2002 relative to Glasgow International Airport,compared to 8% in 2002, while Hahn’s share of passenger traffic in Frankfurt has grown from 0.07%in 1998 to 3% in 2002.

Asia – In Asia, the launch of carriers such as AirMacau, Air Asia, Shenzhen Airlines, and ShanghaiAirlines have all contributed to the growth ofsecondary airports. In 2002, the airports in Macauand Shenzhen accounted for 9% and 20%respectively, of the passenger traffic at Hong Kongarea airports, compared to a combined 21% in 1998.

The growth of secondary airports is expected tocontinue as low cost and domestic carriers reducethe cost of air travel, and induce the demand for air services.

Note: Market size calculated as sum of passenger traffic at the primary and secondary airports.

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Hamilton International Airport Market Share Relative to YYZ


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London Stansted Airport Market Share Relative to LHR


Eugene ChuProject Analyst


RISING FUEL PRICES

15 December 2003

The price of crude oil has risen to close above $33…

Crude oil prices have remained above the $30/barrel level for the past two months. Lately, oil priceshave been affected mainly due to the following factors:

Oil Supplies Remain UnchangedThe Organisation of Petroleum Exporting States (OPEC), which controls half of the world’s crude oilexports, met in Vienna on December 4 to set its first quarter 2004 output policy. OPEC Memberswere concerned that rising supply from Iraq and Russia would offset growth in demand next year.OPEC members agreed to keep oil supplies steady at 24.5 million barrels per day, but indicated thatthe policy would be reviewed again on February 10, 2004.

But a Weakening U.S. Dollar is Driving Up Oil PricesThe continued weakening of the U.S. dollar is a cause of concern for OPEC since oil is traded in thiscurrency. The dollar has declined 16% against the Euro this year. OPEC has made it clear that itwill raise prices to offset the lost in purchasing power due to the decline in the U.S. dollar againstother major currencies. The group is also considering trading oil in Euros or in a basket of othercurrencies to compensate for the decline in the U.S. dollar.

…Somewhat lower prices expected in the future

The futures price of crude oil is approximately 19% lower than the current spot price of $33.04.However, futures prices have risen in the past month. As of December 12, 2003, the futures price ofa barrel of crude oil for delivery in November 2005 is at $26.89. This is 7% higher than the futuresprice of $25.14 reported for a November 2005 deliver quoted in the October Industry IntelligenceReport.

Doris Mak

Senior Market Analyst

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Crude Oil Spot & Futures PricesAs of December 12, 2003

SpotPrices

Futures PricesHave Risen


SARS – “NOT LIKELY TO EVER

RETURN”15 December 2003

As of December 15, there have been no new reportedcases of SARS anywhere in the world. According toDr. Donald Low, the chief microbiologist at Toronto’sMount Sinai Hospital, the SARS virus was a “one-off”event and is unlikely to return to Canada. Dr. Low’sviews have received support from scientists at theWorld Health Organization.

Airport Traffic Volumes Continue to Increase:According to IATA, October passenger traffic levelsincreased 2.5% compared to the same time last year. The Asia Pacific region continues to recoverwith traffic only 0.1% below last October’s results.

Passenger traffic at Asian airports continues to improve as well. For the month of October, totalpassenger traffic at Taipei Chiang Kai-shek International Airport totaled 1.6 million passengers, up1.3% from the same month last year. Traffic at Hong Kong International Airport reached 2.9 millionpassengers, down only 5.2% from the previous year.

Tourism Continues to Improve in some Markets: Visitor arrivals to Hong Kong for the month ofOctober continue to recover. Total arrivals for the month were 1.7 million, up 7% from October 2002.This growth can be attributed to an increase of 31% or almost 880,000 in arrivals from mainlandChina during the country’s weeklong National Day holiday in early October. Hong Kong’s recoveryhas been supported in a large part by the influx of tourism from the mainland.

But, comparatively, visitors to Singapore for YTD October 2003 are down 23.5%; however, thedecline has slowed following the end of the SARS outbreak. The decline showed an improvement onthe 25.2% drop seen between January to September.

Air carriers continue to recover from SARS:

• China Eastern Airlines’ October domestic passenger traffic has reached pre-SARS levels, withtraffic up 47% from the year before.

• Malaysian Airlines System has shown improvement in its second quarter reporting a net profitof US$27 million, compared with a net loss of US$43 million in the same quarter in 2002.International passenger load factors increased to 73% compared to 55% three months earlier.

• Vietnam Pacific Airlines resumed flights between Danang and Hong Kong on November 29,eight months after service was suspended. The service will run twice a week using an AirbusA320.

Doris MakSenior Market Analyst


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Jetsgo Monthly Load Factor - 2002/2003

AIRLINE DATA – CANADATRAFFIC AND LOAD FACTORS ON CANADA’S MAJOR AIR CARRIERSNOVEMBER 2003

Passenger TrafficRevenue Passenger Kilometres

CapacityAvailable Seat Kilometres

Load FactorAir Carrier % Change

over 2002% Changefrom 2001

% Changeover 2002

% Changefrom 2001

% Changeover 2002

% Changefrom 2001

Air Canada1 -2.4% -1.9% -5.3% -3.9% +2.1 pts(to 69.2%)

+1.4 pts

Domestic(Mainline) +0.6% -7.6% -5.1% -1.7% +3.9 pts

(68.4%) -4.4 pts

Jazz +3.3% N/A -3.6% N/A +3.8 pts(57.1%) N/A

International& Charter -3.8% +1.1% -5.5% -4.8% +1.2 pts

(69.6%) +4.1 pts

WestJet +47.4% +109.2% +43.8% +116.5%+1.6 pts

(to 64.1%) -2.3 pts

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

Analysis:

For the first time in over a year, Air Canada’s domestic traffic increased over the same month lastyear. Load factor for the month was the highest ever achieved for November. Air Canada’sinternational traffic levels have also shown improvement for November.

For the second straight month, percentagegrowth in WestJet traffic has increasedmore than its growth in available seatcapacity. Load factor in Novemberincreased from the same time last year.

Jetsgo’s monthly load factor has remained relativelyconstant month to month since the airline beganoperations in 2002. This is because Jetsgo hasbeen adding capacity at a rate similar to passengergrowth, resulting in consistent load factors.

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

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Jazz data is not includedin this graph

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AIRLINE DATA – U.S.U.S. Airlines Release November 2003 Traffic Figures

Airline Load FactorTraffic

(RPMs – millions)Capacity

(ASMs – millions)

70.6%

á 3.1 pts

9,383

á 3.0%

13,283

â 1.6%

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á 5.7pts

423

á 21.4%

645

á 10.9%

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â 1.2 pts

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á 18.5%

1,755

á 21.2%

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á 5.5 pts

4,745

á 8.7%

5,302

á 0.7%

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á 2.7 pts

8,023

á 2.1%

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â 1.8%

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á 2.3 pts

985

á 57.6%

1,207

á 53.2%

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á 5.2 pts

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â 1.1%

6,827

â 7.9%

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á 3.2 pts

3,761

á 9.4%

5,903

á 3.9%

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á6.5 pts

8,474

á2.7%

11,198

â 6.1%

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á 6.7 pts

3,025

á 8.3%

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â1.6%

Notes: 1. Mainline2. Load factor includes scheduled service only

Sources: Carrier traffic reports.

December 2003 InterVISTAS Consulting Inc. ©

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

Toronto Vancouver Montreal-Dorval

Calgary Edmonton Ottawa Winnipeg Halifax Victoria Kelowna Saskatoon Regina St. John’s

2nd Quarter N/A -9.0% -10.9% -3.8% -6.7% -12.3% -6.9% -6.0% -6.3% -6.1% -8.7% -11.1% -11.9%September N/A +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 N/A -2.6% -0.2% +2.9% -4.4% +0.5% +1.2% +11.2% -4.8% +0.2% -5.4% -5.8% -0.8%October N/A +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 N/A +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 Quarter4th

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 -9.0% -9.9% 0.0% +1.9% -0.4% +2.5% +5.0% +4.1% +0.6% -0.5% +1.4% +7.0% +17.8%2nd Quarter -13.7% -12.2% -5.6% +0.7% -1.6% -2.1% +3.0% +2.9% +0.0% -0.7% -2.6% +1.3% +7.1%July -6.0% -4.5% +2.9% +4.7% +2.5% +3.0% +3.7% +5.7% +11.9% +5.0% +1.2% +4.7% +21.1%August -7.6% -1.2% -1.0% +1.4% +0.3% -7.0% +0.4% +4.1% +9.8% +0.5% -4.8% -2.2% +22.5%September -5.9% -3.0% +1.7% -1.8% +8.6% +1.6% +1.5% -0.6% +10.8% -0.7% -2.4% -0.2% +12.3%3rd Quarter -6.6% -2.8% +1.1% +1.6% +3.4% -0.9% +1.8% +3.3% +10.8% +1.7% -2.0% +0.7% +19.0%

2003

October N/A -3.1% +4.0% -0.7% +10.4% +1.4% +7.4% +2.5% +15.4% +1.1% N/A N/A +9.4%

CA

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FUEL PRICES

December 3, 2003

SPOT OIL PRICES INCREASINGFUTURES PRICES LOWER

Crude Oil Prices:

Spot – US$30.78(up 3.2% from November)

Future• 6 month - $30.22

(April 2004 delivery)• 12 month – $27.67

(November 2004 delivery)• 2 year - $26.10

(November 2005 delivery)• 5 year - $26.44

(November 2008 delivery)

NEWS ARTICLES

AIR CANADA UPDATE

AIR CANADA REPORTS CDN$263M LOSS INTHIRD QUARTER

Air Canada posted a lossof CDN$263 million in thethird quarter. This

includes a CDN$273 million charge related tothe carrier’s restructuring process. Revenuewas CDN$2.2 billion, with a CDN$17 millionoperating profit. Operating costs were reducedby 14%, but yield also fell 8%.

AIR CANADA RECEIVES COURT APPROVALFOR TRINITY OFFER AND RIGHTSOFFERING-MIZUHO APPEALSThe Ontario Superior Court has approved TrinityTime Investment’s (wholly owned by Victor Li)CDN$650 million bid for 31% of the equity in AirCanada. The decision leaves to the Air Canadaboard, the evaluation of a revised bid that hasbeen received from Cerberus CapitalManagement. However, Mizuho International, amajor Air Canada creditor, has filed for anappeal of the decision and stated that it will suethe Air Canada Board of Directors if it concludesthat the Cerberus offer is superior and stillrejected. If the new Cerberus offer is accepted,Li will receive a CDN$19.5 million break fee.

The court also approved a CDN$450 millionrights offering by Air Canada, to be backstoppedby Deutsche Bank. The offering will allowcreditors to acquire shares of the restructuredcarrier under the same terms as Li.

AIR CANADA SEEKS TO CONTRIBUTECDN$120M TO PENSION PLANAir Canada will seek court approval to make aCDN$120 million contribution to its CDN$1.5billion pension deficit. The contribution has beenapproved by the Board of Directors, the airline’snew equity partner Victor Li, and the carrier’scourt appointed monitor, Ernst & Young. AirCanada has not made any contribution to itspension plan since filing for bankruptcyprotection in April. Earlier this month, the carrieragreed to make a CDN$15 million payment to itsJazz pension.

AIR CANADA MAY FACE LAWSUIT FORUS$100M LOANSnecma SA, an aircraft manufacturer based inFrance, plans to sue Air Canada for its lossesstemming from a US$100 million loanguarantee it provided the carrier in 1993.Snecma is claiming fraud and misrepresentationagainst Air Canada for failing to reveal that thecarrier defaulted on loan agreements. AirCanada sold four aircraft to GE Capital AviationServices that were collateral for the loanprovided by Maple Leaf Funding Ltd.

AIR CANADA RECEIVES CDN$6MINDEMNITY FROM FEDERAL GOVERNMENTAir Canada has received a CDN$6M indemnityfrom the federal government after it was forcedto cancel its service from Montréal to Beirut,Lebanon. Ottawa withdrew Air Canada’slicense to operate to Lebanon on June 1 forsecurity reasons. Air Canada states that itremains interested in serving Lebanon.

AIR CANADA SCHEDULED TO PAYUS$101M TO LUFTHANSAAir Canada will have to pay US$101 million toLufthansa over a six-year period for missing aUS$195 million loan payment guaranteed by theGerman carrier. Lufthansa was ready toterminate its partnership with Air Canada, whichincludes 18 code share flights between the twocarriers, sharing of information technology, andjoint aircraft purchases to reduce costs. AirCanada will ask the court for approval of thepact.

AIR CANADA AND CARA REACH MODIFIEDAGREEMENTAir Canada has reached a new cateringservices agreement with Cara Operations Inc.Effective immediately, the new deal replacesthe previous contract and provides significantcost savings for Air Canada. Earlier inNovember, Air Canada had repudiated itscontract with Cara as part of its restructuringprocess to negotiate a deal with better terms.The new agreement expires November 2009.

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NEWS ARTICLESAIR CANADA EXPANDS WINTERSCHEDULE - LAUNCHES NEW SERVICESTO LATIN AND SOUTH AMERICAAir Canada is expanding its winter schedule toinclude new services to Latin and SouthAmerica. Services include three times weeklynon-stop flights from Toronto to San Jose, CostaRica, and Havana, Cuba with Airbus A319s, andthree times a week non-stop services fromToronto to Santiago, Chile, with same planeservice to Bueno Aires, Argentina, using Boeing767-300 aircraft. Air Canada now offers non-stop services to Cuba on 15 routes, departingfrom Calgary, Toronto, London (ON), Ottawa,Montréal, Moncton and Halifax to Varadero,Holguin, Cayo Largo, Cayo Coco, and Havana.Air Canada is also introducing new services toIxtapa and Cozumel, Mexico, Kona, Hawaii, andAruba, Puerto Plata, Punta Cana and LaRomana in the Dominican Republic.

OTHER CANADIAN AIRLINES

WESTJET TEAMS UP WITH VIA RAILWestJet and VIA RailCanada have completed

an agreement that will allow them to providecustomers with multi-modal fares to destinationsserved by WestJet and VIA Rail. Tour operator,Brewster, will be the exclusive agentmarketing these travel packages. Destinationswill include Calgary, Edmonton, Vancouver,Toronto, Hamilton, Montréal, and Moncton, andpackages will go on sale in January for 2004winter tours.

JETSGO NOVEMBER TRAFFICQUADRUPLES

Jetsgo carried four timesas many passengers inNovember compared to the

same time last year. Revenue passengerkilometres grew from 55.8 million to 228.4million. Capacity increased by 307% to 328.3million available seat kilometres. Load factorwas 69.5% for the month, almost unchangedfrom last year.

CANJET EXPANDS FLEETCanJet Airlines has begun negotiations toacquire 20 new long range aircraft to expand itsexisting fleet of six Boeing 737s. The aircraftwould be delivered between 2004-2006.

CANJET LAUNCHES NEW BRUNSWICK TOFLORIDA SERVICECanJet Airlines announced that it will belaunching flights from Moncton, New Brunswickto Sarasota Brandenton, Florida via Torontoonce per week. The new service will be offeredfrom February 10, 2004 to April 13, 2004.CanJet indicated that non-stop services may belaunched in the future if market response ispostive.

U.S. & INTERNATIONALAIRLINES

NORTHWEST AIRLINES SUBSIDISESPASSENGERS FOR AIRPORT FACILITYCHARGES

Northwest Airlineswill begin to subsidisecustomers for some

passenger facility charges (PFCs). This willreduce the cost of travel by US$9 roundtrip formany customers connecting in Minneapolis andDetroit.

UNITED UNVEILS LOW FARE CARRIER TEDUnited Airlines has officiallyannounced the launch of Ted, itslow fare carrier based in Denver.Ted will operate a fleet of A320s

and begin services in February 2004. By April,Ted will operate 106 daily flights.

ATLANTIC COAST AIRLINES TO LAUNCHINDEPENDENCE AIRAtlantic Coast Airlines (ACA) announced thatit will launch Independence Air, a low costcarrier based at Washington Dulles, in the firsthalf of 2004. The new carrier will operateACA’s existing 87 Bombardier CRJ200s, and 25Airbus A319s/320s currently on order.


NEWS ARTICLESAMERICA WEST LAUNCHES NEWSERVICES

America WestAirlines will be

launching daily non-stop services from LasVegas to Vancouver and Edmonton. The newservices will begin March 1, 2004.

QANTAS ORDERS 23 A320S FOR NEWLOW COST AIRLINE

Qantas Airwaysannounced that its newlow cost domestic airline,

Jetstar, will begin services in May. The carrierhas ordered 23 A320s, with the first to bedelivered in June. The new low cost carrier willbegin selling seats in February, and initially usethe 14 Boeing 717s operated by ImpulseAirlines (QantasLink Brand). Jetstar willphase in the A320s in place of the Boeing717s, and expects to be operating all 23 bymid-2005.

EUROPEAN LOW COST CARRIERS TOFORM ASSOCIATIONThe low cost carriers in Europe are planning toform the European Low-Fare AirlineAssociation (ELFAA) to represent theirinterests to governments and the EuropeanCommission. ELFAA will initially be comprisedof Ryanair, Hapag-Lloyd Express, VolareWeb, Sky Europe and Sterling Airways.

CARGO

U.S. OCTOBER CARGO TRAFFIC DOWNThe U.S. Air Transport Association (ATA)reported that domestic and international aircargo traffic for the month of October weredown 2.9% and 10% respectively, from thesame period last year.

INTERNATIONAL FREIGHT TRAFFIC UPThe International Air Transport Association(IATA) reported that international freight trafficwas up 1.5% in October. The Middle East andAfrica showed the highest increases with23.1% each.

ATLAS AIR WORLDWIDE DEFERSBANKRUPTCY FILINGAtlas Air Worldwide Holdings, parentcompany of Atlas Air and Polar Air Cargo, hasdeferred the anticipated date of its Chapter 11bankruptcy filing from December 15, 2003 toFebruary 1, 2004. Atlas is in negotiations withits lessors and creditors to obtain pre-negotiatedagreements on its debt and aircraft leases, andminimise the impact of a bankruptcy filing on itsoperations.

VOLGA-DNEPR REPORTS 2003 REVENUEINCREASE

Volga-Dnepr Grouphas reported a 49%increase in revenues to

US$172 million for the first nine months of 2003.The airline transported over 46,000 tonnes ofcargo with its Antonov 124-100 freighter fleet forthe period ended September 30, 2003, andreported a 51% share of the global market foroutsize and super-heavy cargo transportation.This growth is attributed to the high level ofdemand from worldwide humanitarian andpeace-making missions.

NEW DHL FACILITIES IN INDIA AND NORTHCHINADHL has opened a 2,400 m2 express terminalat Indira Ghandi International Airport inDelhi. The terminal includes a custom bondedwarehouse staffed with customs agents,allowing 24/7 customs clearance services.DHL is also building a 180,000 m2 distributioncentre in Jinzhou, Liaoning Province, in NorthChina, due to open in May 2004.

DHL COMPLETES NEW FLEET WITH 34TH

B757DHL has taken delivery of its 34th Boeing 757Special Freighter, the last of its four-year €1billion (CAD$1.6 billion) fleet renewal project.The new aircraft will allow DHL to meetinternational aircraft noise and emissionstandards. The new B757SFs replace DHL’sB727F fleet.


NEWS ARTICLESDHL TEMPORARILY SUSPENDS MID-EASTFLIGHTSDHL temporarily suspended flights toAfghanistan and Iraq from Nov. 23-27following an emergency landing of one of itsplanes at Baghdad Airport. The Airbus A300,carrying mail to U.S. soldiers and aid packagesto relief organisations, was headed to BahrainAirport when its engine caught fire after take-off. Baghdad Airport and U.S. army officialssuggested the plane may have been hit by asurface-to-air missile. The cause of the fire isunder investigation; none of the three people onboard were hurt.

TNT ADDS BANGKOK TO ASIAN HUBSTNT Express has upgraded its Bangkok stationat Don Muang Airport to hub status, the fourthstation in TNT’s Asian network to be given hubstatus. A 24-hour operation was opened atBangkok in February 2003, which includedadvanced X-ray equipment for expressservices. TNT’s other Asian hubs are in HongKong, Singapore and the Philippines.

LUFTHANSA CARGO TO INCREASE ASIA-PACIFIC CAPACITY

Lufthansa Cargo hasannounced plans toexpand its Asia-

Pacific capacity in order to take advantage ofthe expanding export market in the region. Thecompany expects double-digit growth in theAsia-Pacific, which currently accounts for 40%of its global sales.

BRITISH AIRWAYS DEPLOYS BOEING 757FBritish Airways hasdeployed the Boeing

757F on routes within Europe. The 25 toncapacity freighters are chartered from DHL.Operations are from Heathrow, Luton, andEast Midlands airports. The freighters arebeing deployed to replace Boeing 767 bellycapacity on passenger flights as British Airwayswithdraws the 767s from passenger service inEurope.

AIRPORTS

EDMONTON AIRPORTS CONSOLIDATIONINCREASES NORTHERN SERVICEEdmonton Airports reported that northern airservices have increased significantly since theconsilidation of 97% of scheduled passengerservice at Edmonton International Airport in1996. The number of flights from Edmonton toNorthern Canada have increased 49%, whilethe number of arriving/departing passengersfrom northern destinations (including northernAlberta, northern B.C., N.W.T., Yukon) haveincreased by 139%. There are now 11 carriersserving the north with 40 non-stop destinations,and average low fares to the north have beenreduced by 15%-30%. Edmonton City CentreAirport will continue to serve the CapitalRegion, and the remaining 3% of scheduledpassenger service will be moved to EdmontonInternational Airport by January 1, 2005.

THERMAL SARS SCANNERS REMOVEDFROM AIRPORTSThe federal government announced that it willremove the thermal SARS scanners at theVancouver and Toronto international airports.Federal Health Minister, Anne McLellan, statedthat the threat from SARS has diminished andthat the thermal scanners were ineffective indetecting SARS. Federal quarantine officerswill remain at Toronto, Vancouver, Montréal,Calgary, Ottawa, Edmonton and Halifaxinternational airports.

SINGAPORE INVESTS US$26M INTOAIRPORT TO PREPARE FOR A380The Civil Aviation Authority of Singapore(CAAS) is investing US$26 million to upgradethe facilities at Changi Airport to accommodatethe A380. Singapore Airlines, which has 10A380s on order and options for an additional 15,will begin commercial operation of the aircraft inMarch 2006.


NEWS ARTICLES

AIRCRAFTMANUFACTURERS

BOMBARDIER DELIVERS 1000TH CRJBombardier has delivered its 1000th CRJregional jet to Delta Connection carrier Comair.Comair operates the world’s largest CRJ fleetand has 259 CRJ200 and CRJ700 aircraft.

EMBRAER 170 RECEIVES PROVISIONALFAA APPROVAL

The Federal AviationAdministration (U.S.) has

given provisional type certification to theEmbraer 170. This means that U.S. carrierscan begin crew training and route provingflights with the aircraft. Final certification isexpected in early 2004.

GOVERNMENT ANDREGULATORY

CANADA AND RUSSIA REMOVE FLIGHTRESTRICTIONS AS TALKS CONTINUECanada and Russia, who are in a dispute overair space, have temporarily removed therestrictions on Aeroflot and Air Canada,respectively. Canada has lifted the restrictionon Aeroflot flights that limited Moscow-Torontoflights to two per week, and Russia hasrestored the right of Canadian carriers to useRussian airspace on flights to India. Furthernegotiations between the two countries arescheduled for December.

NEW TSA CARGO SECURITY PLANThe Transportation Security Administration(TSA) has announced a plan to increase cargosecurity. The TSA issued security directivesrequiring foreign all-cargo carriers to complywith the same security procedures required ofdomestic air carriers. The plan includesrequirements for cargo carriers (both all-cargoand cargo-carrying passenger aircraft) toperform random inspections on all U.S. flights.The TSA will make sure that inspections arecompleted properly.

NEW EU CARGO SECURITY REGULATIONSThe European Parliament and the Council ofthe E.U. have passed a regulation imposingnew cargo security measures. The main focusof the new regulations is to prevent cargoshipments being used as a cover for terroristattacks by establishing common basicstandards in air transport. All industriesinvolved in the cargo business will be affectedby the regulations, which require companies toimprove their own security systems, providequalified staff, and perform random checkseither by x-ray or by physically opening boxes.

U.K. AND HONG KONG REACH NEWBILATERAL AGREEMENTThe U.K. and Hong Kong governments haveagreed on a new bilateral agreement that givesfifth-freedom rights to Virgin Atlantic on theLondon Heathrow-Hong Kong-Sydney route,and to Cathay Pacific Airways on the HongKong-London-New York route. The agreementalso allows for unlimited capacity between HongKong and London, and enables Hong Kongcarriers to codeshare beyond London, and U.K.carriers to codeshare beyond Hong Kong. Theagreement is conditional on approval from theEuropean Commission.


NEWS ARTICLES

PEOPLE IN THE NEWS

HAMILTON INTERNATIONAL AIRPORTAPPOINTS NEW MANAGEMENT POSITIONSHamilton International Airport (YHM), a fullyowned subsidiary of TradePort InternationalCorporation, has announced the followingmanagement changes: Tony Battaglia hasresigned as CEO of YHM and will becomeChairman of the Board of Directors, replacingJoe Mancinelli who will continue to serve as aDirector. Richard Koroscil has beenappointed CEO to replace Battaglia. Koroscilpreviously served as Vice President ofOperations with YVR Vancouver AirportServices Ltd.

WESTJET VICE PRESIDENT OF MARKETINGAND SALES RESIGNSWestJet announced that Bill Lamberton, VicePresident of Marketing and Sales, has steppeddown. He will continue to provide the companywith ongoing consulting services. Lambertonhas been with WestJet since its inception 8years ago.

WINNIPEG AIRPORTS AUTHORITYANNOUNCES NEW CHAIRMANWinnipeg Airports Authority Inc. ChairmanJ.A. (Sandy) Hopkins’ term expired onNovember 30, 2003. He is replaced by ArthurMauro, former President and CEO of InvestorsGroup, and Chancellor of the University ofManitoba. Otto Lang, former Minister ofTransportation for Canada, has been re-electedas Vice Chair.

GTAA APPOINTS NEW OPERATIONSOFFICERThe Greater Toronto Airports Authority(GTAA) announced that John Kaldeway willassume the role of Chief Operating Officer(COO), effective January 1, 2004. Kaldeway iscurrently Vice President of Transition Programs.Gordon Grant will take this position in Januarywhen Kaldeway becomes COO.

O’BRIEN RESIGNS FROM AIR CANADABOARD OF DIRECTORSDavid P. O’Brien has resigned from AirCanada’s Board of Directors, stating additionalresponsibilities as the reason for his decision.O’Brien has been with the Air Canada boardsince 1998, and was also on the carrier’sRestructuring Committee.

DELTA CEO RETIRESDelta Airlines announced that Chairman andCEO Leo Mullin, will retire on January 1, 2004,and step down as Chairman on May 1, 2004.Jack Smith will become Chairman, and GeraldGrinstein the new CEO.

BOEING CEO RESIGNSBoeing announced the resignation of Chairmanand CEO Phil Condit. Boeing’s Board ofDirectors has decided to implement a newleadership structure following Condit’sresignation. Lewis Platt has been appointednon-executive Chairman, and HarryStonecipher as President and CEO. Allposition changes effective immediately.

OTHER

PARSONS AWARDED WINNIPEG AIRPORTCONTRACTThe Winnipeg Airports Authority hasawarded Parsons a six-year, CDN$6 millioncontract to provide program managementservices for Winnipeg Airport’s InfrastructureRedevelopment Plan (AIRPlan).

JACOBS CONSULTANCY ACQUIRES LEIGHFISHER ASSOCIATESJacobs Consultancy Inc., a subsidiary ofJacobs Engineering Group Inc., will acquireLeigh Fisher Associates, an airport consultingfirm near San Franciso, California. Leigh FisherAssociates provides physical planning, financial,and business advisory services to airports in theU.S. and around the world.


ECONOMIC OUTLOOK13 December 2003

Evidence that the Canadian Economy isSoftening. Recently released figures forGross Domestic Product do not show avery encouraging picture of growth. In thethird quarter, GDP increased by a meagre1.1% on an annualised basis, only slightlyup from the 0.7% decline in the secondquarter. This low growth has been largelyattributed to temporary factors includingSARS, BSE, and the war in Iraq. Morerecently, the August blackout loweredoutput for the third quarter, as did adrawdown in inventories which decreasedthe demand for new manufactured goodsand contributed to less than forecasted growth. Now that these setbacks have ended, do conditionsexist for the Canadian economy to resume strong growth? Yes.

But Signs of Underlying Strength. One areaalready displaying signs of a rebound is the labourmarket, where job creation has resumed the levelsseen throughout 2002. From September toNovember, an estimated 166,000 jobs have beencreated, more than three times as many as in thefirst eight months of the year. Unemployment fellto 7.5% in November, down from a peak of 8% inAugust and September. Most of the recent growthhas been in full-time employment.This increase in employment should bolsterconsumer spending in the future.

The Bank of Canada has been optimistic about the impending turnaround, and has held the overnightrate steady at 2.75% since early September. While low GDP growth, below-target inflation, and rapidappreciation of the dollar might otherwise induce a drop in rates, the Bank believes such a move isunnecessary as the economy is poised for growth – recently forecasting growth in the fourth quarterto exceed four percent on an annualised basis. This growth will be fuelled largely on an increase indomestic demand and economic growth abroad, particularly in the United States. The high dollar willhave somewhat of an offsetting effect on increased foreign demand, however the Bank has indicatedthat it may drop rates in the future if this effect is stronger than expected.

Josh Drury

TransportationSpecialist

Canadian GDP (Annualised Quarterly % Change)

-2

-1

0

1

2

3

4

5

6

Q1

2000

Q2

2000

Q3

2000

Q4

2000

Q1

2001

Q2

2001

Q3

2001

Q4

2001

Q1

2002

Q2

2002

Q3

2002

Q4

2002

Q1

2003

Q2

2003

Q3

2003

Source: Statistics Canada

-40

-20

0

20

40

60

80

100

Jan

-01

Ap

r-01

Jul-

01

Oct

-01

Jan

-02

Ap

r-02

Jul-

02

Oct

-02

Jan

-03

Ap

r-03

Jul-

03

Oct

-03

6.7

6.9

7.1

7.3

7.5

7.7

7.9

8.1Unemployment Rate(seasonally adjusted)

Employment Growth(month on month change)

Canadian Employment, Monthly Figures


THE OTTAWA SCENE15 December 2003

The biggest news in Ottawa this month, of course, is the long-awaited transfer ofpower on December 12 from Prime Minister Chretien to the new leader of thefederal Liberal party, Paul Martin. Prime Minister Martin appointed a 39-membercabinet after being sworn in.

New Minister of Transport. The new Minister of Transportis the Honourable Tony Valeri. Tony Valeri (Hamilton-StoneyCreek) was first elected in 1993 and was re-elected in 1997and 2000. He was appointed Chair of the National Caucus

Economic Development Committee in October 1999. In June 2001, he waselected Chair of the non-partisan Parliamentary Steel Caucus. Mr. Valeri wasParliamentary Secretary to the Minister of Finance from 1997-99. He hasserved on five standing committees: Finance, Liaison, Industry, Environmentand Sustainable Development, and as chair of Government Operations.

He also chaired the Liberal Caucus Task Force on Jobs and Small Business. Before entering federalpolitics, Mr. Valeri was President of Canadian Financial Group Ltd. He was also a member ofnumerous business organisations, including a term as Director of the Board of the IndependentBrokers Life Insurance of Canada Association.

Some of the files inherited by Mr. Valeri include the legislation covering Canadian Airports (CanadaAirports Act), Canada Transportation Act amendments including new funding for VIA Rail, as well asmanaging the on-going restructuring at Air Canada. Transportation Security will also figure large inMr. Valeri’s new challenges.

Canada Border Services Agency (CBSA). In regards to border issues, the Canada Customs andRevenue Agency (CCRA) will no longer exist, but has been split off into CRA (Canada RevenueAgency) which would report to the new Minister of National Revenue, and the new Canada BorderServices Agency (CBSA) which has just been established. This is part of the move to create a newintegrated border agency similar to the Customs and Border Protection Bureau under HomelandSecurity in the U.S. The new CBSA has been in the works for some time and its final structure is stillevolving.

New Minister of State of Infrastructure. Infrastructure is also a high priority for the newPrime Minister. He has appointed the Honourable Andy Scott (Fredericton NB) as the newMinister of State for Infrastructure. First elected to the House of Commons in 1993, AndyScott was re-elected in June 1997 and again in November 2000. He is currently Chair of theStanding Committee on Justice and Human Rights and a member of the Standing Committeeon Government Operations and Estimates. He is also a member of the following caucuses:Post-Secondary Education; Social Policy; CBC; Foreign Affairs and Defence; and Researchand Development, where he is undertaking an inquiry as to the adequacy of federal researchand development in Atlantic Canada. Following his re-election in 1997, Andy Scott wasnamed Solicitor General of Canada, a position he held until November 1998. In 1996, heheaded the federal Task Force on Disability Issues. Between 1981 and 1993, Mr. Scottserved as the Executive Director of the New Brunswick Liberal Party, Senior Policy Adviser toPremier Frank McKenna, and Assistant Deputy Minister for Intergovernmental Affairs in NewBrunswick.

Sam BaroneRegional Vice President,

Ottawa


IMPLEMENTING CHAPTER 4 NOISE

STANDARDS IN THE U.S.ICAO Noise StandardsThe International Civil Aviation Organisation (ICAO) sets and administers international certificationstandards for aircraft, as contained in Annex 16. Each country is encouraged to adopt thesestandards in their aviation regulations. An aircraft certified as having met the ICAO standards may beused in any ICAO member country. In Canada, these standards are contained in the Aeronautics Actand administered by Transport Canada. In the U.S., they are defined under the Airport Noise andCapacity Act of 1990, and administered by the Federal Aviation Administration (FAA).

Noise standards for jet aircraft designed before 1977, such as theBoeing 727-200, and DC-9, were defined in Chapter 2 of Annex16. Subsequently, newer aircraft were required to meet thestricter standards contained in Chapter 3 of the Annex. Examplesof Chapter 3 compliant aircraft include the Boeing 737-300/400,Boeing 767 and Airbus A319/320. Chapter 2 aircraft werecompletely phased out of commercial operation in the U.S. byDecember 31, 1999, while in Canada, they were phased out byApril 1, 2002, with an exemption period extending to December 31of this year.

Chapter 4 Noise StandardsIn June 2001, on the basis of recommendations made by ICAO’sCommittee on Aviation Environmental Protection (CAEP), a newermore stringent Chapter 4 noise standard was adopted. The newnoise standards are intended to apply to any certificationapplication for new aircraft type designs submitted on or afterJanuary, 2006.

The new standards are based on Effective Perceived Noise level(EPNdb) measurements of flyover, lateral and approach noise.New aircraft design types will be Chapter 4 compliant when:

• None of the aircraft’s individual maximum noise levels(flyover, lateral and approach) exceed the maximumpermitted for Chapter 3 aircraft;1 and

• The sum of all three maximum noise levels is at least 10EPNdb below the maximum permitted noise levels specifiedin Chapter 3; and

• The sum of any two maximum noise levels is at least 2EPNdb below the maximum permitted noise levels specifiedin Chapter 3.

The U.S. FAA is moving towards the adoption of these standardsand has recently issued a notice of the proposed new ‘Stage 4’rules for public comment. Canadian regulations have yet to beintroduced, although Canadian Aviation Regulations were

1The Chapter 3 standard allows levels exceeding the maximum for one of the 3 components, provided this isoffset by a reduction in noise for another component.

727 Stage 1

727 Stage 2

727 Stage 3 Hushkit

727 Stage 3 Re-engine

757 Pure Stage 3

Aircraft Noise Footprints

Noise standards have contributedto significantly reducing aircraftnoise emissions

Marcel ChampagneSenior Planner


amended in 2001 to enable Chapter 4 aircraft design-types to comply to Chapter 3 standards.2

Reaching Chapter 4 ComplianceThe adoption of the new noise standard for new aircraft designs is not intended to start a processaimed at phasing out the production or operation of Chapter 3 aircraft types. There is no schedule forphase out of such aircraft. Chapter 4 will only apply to new aircraft types. The phase out of Chapter 2aircraft took 20 to 25 years to achieve in North America. While the Chapter 3 standards wereestablished in 1977, an actual phase out schedule was not proposed until the early 1990s.

FAA impact assessments of the new standards indicate that all but a few currently produced aircrafttypes meet the new Chapter 4 standards. Those that do not meet Chapter 4 standards have or willlikely have derivative series that will comply.

To a certain extent, the phase-out of Chapter 3 aircraft has already commenced. The recent industrydownturn has forced most large North American air carriers to withdraw large numbers of olderChapter 2 aircraft that were hushkited to nominally meet the Chapter 3 standard. Examples are theBoeing 727 and DC-9 that are less efficient to operate, and would not necessarily meet Chapter 4standards.

2 Without the amendment any future aircraft certificated to the new Chapter 4 standard would not have beenconsidered a Chapter 3 aircraft.


CARGO CAPERS15 December 2003

Developments in Cargo Cabotage. An amendment to theU.S. FAA Reauthorization Act authorises a limited form ofcabotage for air cargo moving between Alaska and the rest ofthe U.S. The amendment was originally proposed by theSenate and has now been passed by both the House and the Senate and has been presented to thePresident. Interestingly, the Conference that was established to reconcile the House and Senateversions of the Act was chaired by Rep. Don Young (R-Alaska), chairman of the Committee onTransportation and Infrastructure. Included in the Conference as a representative from the Senatewas the President Pro Tempore of the U.S. Senate, Ted Stevens (R- Alaska) – yes that Ted Stevens– the one that Anchorage International Airport is named after.

Cabotage provisions in the U.S. It is widely believed that cabotage – the carriage of passengers orgoods between points in a single country by a foreign aircraft – is not permissible in the U.S. In fact,while U.S. law generally does not allow cabotage, it does permit the Secretary of Transportation toissue temporary cabotage rights (passenger or cargo). Such rights were authorised, for example,during one of the fuel crises of the early 1970s.

What’s New? The Senate amendment would provide an additionalcabotage granting power to the Secretary for cargo moving fromAnchorage (or any other airport in Alaska) and other U.S. states. TheAct states that even if cargo is switched between two foreign aircraft inAlaska, the leg between Alaska and the lower 48 would be considereda continuation of the international movement, not a domestic one.

Currently, the transhipment provisions at Anchorage and Fairbanksallow foreign air carriers to exchange cargo in Anchorage, for onwardshipment to other countries, provided the cargo is not destined to theUnited States. For example, if Japan Airlines has Japaneseoriginating cargo destined to Finland, it can fly it on its cargo flight toChicago, and drop it off in Anchorage. Finnair can pick up the cargothe next time it comes through Anchorage heading home to Helsinki.

The Senate amendment would extend transhipment to U.S. destined cargo. For example, CathayPacific would be able to bring to Anchorage any cargo destined from Hong Kong to Chicago (on itsHong Kong – Anchorage – Los Angeles route). It would drop the Chicago bound cargo in Anchoragewhere it would await a Nippon Cargo Airlines flight headed to Chicago. NCA would pick it up andcarry it to Chicago. That last segment, the carriage of Hong Kong originating cargo on the domesticAnchorage-Chicago leg, is currently considered cabotage and NCA cannot carry it at present. Thenew provision would allow it to do so.

It should be noted, however, that goods having both origin and destination within the U.S. are noteligible for transport by foreign carriers under this provision.

So is this really cabotage? Now some might argue that this is not really cabotage – after all, thegoods involved are not U.S. goods transported between two U.S. points – we are dealing with foreign-originating or destined goods moving between two U.S. points on a foreign aircraft.

There is some merit to such an argument. However, consider the so-called 6 th freedom operationsmany carriers engage in. A carrier brings passengers or cargo from a foreign point to its home

Robert AndriulaitisDirector, Transportation &

Logistics Studies


country. Those passengers or cargo are then transported to a third country. So what differentiatesthis from a 5 th freedom movement directly between two foreign nations? Obviously the connection inthe home base. But what does that really mean? The passengers and/or goods that arrive from aforeign point at the carrier’s home country are considered a 4 th freedom movement. In other words,the carrier has simply brought traffic from a nation to its home. As far as the originating country isconcerned, that traffic is now in the other country. That is what then enables the carrier to take up thistraffic, and move it to a third country. It is no longer traffic of the originating country – it is traffic of thecarrier’s home country. If not, that would be a 5 th freedom move – taking up traffic in one foreignnation and delivering it to another foreign nation.

Eighth Freedom: Cabotage Extension Of International Service

Same thing in the Alaska air cargo situation. Traffic that foreign carriers (or U.S. carriers for thatmatter) drop off in Alaska essentially becomes U.S. traffic. For a foreign carrier to then pick it up andtransport it to a U.S. point is in fact cabotage, regardless of where the goods originated. So while itmay not be conform to the typical view of cabotage (e.g. picking up U.S. produced supplies inChicago and transporting it to Anchorage for consumption there), it is technically cabotage.

Implications for Canada? Canada’s transhipment policy does not currently allow for domestictranshipment (unless the carrier has the underlying rights). The U.S. precedent sets the table for anapproach to Ottawa to take the next step in the evolution of Canada’s own transhipment policy andallow foreign carriers transhipping at Gander, Hamilton, Montréal or Windsor to exchange goodsbound for the entire NAFTA marketplace – not just the NAFTA marketplace that exists outside ofCanada. Welcome to the 21st century!

Hong Kong Anchorage Chicago

Cathay Pacific Nippon Cargo


TWO TYPES OF LOW COST CARRIER?15 December 2003

The Successful Business Model. Over the past five or so years, the low cost carrier airlinebusiness model has come to dominate the industry in terms of financial success. From Malaysia toBrazil, Australia to Europe, and throughout North America, low cost carriers such as Air Asia, GOL,WestJet, Ryanair and Southwest are recording consistent profits, even in difficult times.

But are the strategies pursued by these carriers similar? There are many similarities. They all focuson keeping costs down. They tend to operate a single aircraft type. Customers are offered a strippeddown service, with limited flexibility and frills.

Market Selection Differences. However, uponclose inspection there seem to be two groupings ofcarriers based on different market selectionstrategies. The differences are best exemplified byRyanair and EasyJet in Europe, althoughSouthwest and JetBlue are U.S. carriers withdifferences in their strategies.

Ryanair focuses on serving a wide array ofdestinations. Its strategy is to serve as many citiesas possible. Many destinations, such as Newquayin Cornwall are served only once per day. As the map shows, Ryanair has an extensive network of88 cities. It serves these with only 133 non-stop routes, an average of 1.5 per city served. What isespecially important about Ryanair is that it uses secondary airports whenever they are available:Skvasta rather than Stockholm, Nimes rather than Marseilles, Malmo rather the Copenhagen, RomeCampino rather than Rome’s main airport, …

In contrast, EasyJet serves less than half the number of cities of Ryanair, 39. But most areconnected to multiple destinations. Amsterdam, for example, is connected to 11 cities alone.Altogether, EasyJet serves 125 non-stop routes, or 3.2 per destination in contrast with Ryanair’s 1.5per destination. Most important, EasyJet almost always serves the major airport in the metropolitanregion.

In the U.S., Southwest is a mix of the two strategies. It uses secondary airports, when available, butin some cases will serve major airports as well. In Los Angeles, it provides service to LAX as well asOntario and other secondary airports.

JetBlue might be thought of as the EasyJet of the U.S. It tends to serve major airports. However, thisis not always the case. It uses Oakland rather than San Francisco, Ontario and Long Beach ratherthan LAX, Fort Lauderdale and West Palm Beach rather than Miami.

Dead as a Dinosaur? Both strategies produce profits. However, we heard recently a claim that theSouthwest strategy is “dead as a dinosaur.” This seems a premature statement. The most profitableairline in the world in terms of operating margin is Ryanair, with a 24% return, and was profitablealmost from the beginning of its history as a low cost carrier. EasyJet has had a much more difficultstruggle. In the U.S., JetBlue is currently earning more than Southwest, 19.7% versus 11.9%. Butthe latter is hardly a failure! Its market capitalisation is greater than all of the other U.S. carrierscombined, including JetBlue!

Ryanair Route Network from STD

Michael TrethewayVice President

& Chief Economist


What is more revealing is the break evenload factors of the carriers. JetBlue requiresan average 71% load factor in order to coverits costs. This is similar to the networkcarriers (prior to 911). Southwest has abetter edge, with a 5% lower break evenpoint. The world leader is, once again,Ryanair with a 54% break even load factor.These results do not seem to support aclaim that the Southwest business model isdead as a dinosaur. If anything, the JetBluemodel seems a bit more fragile althoughboth are superior business models to thatpursued by the network carriers.

Perhaps the speaker had forgotten that the dinosaurs are not dead. Instead, they evolved into a newspecies: birds! There are many species of birds and not a single set of plumage which is required forsoaring flight.

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.

31

Break-even Load FactorsBreak-even Load Factors

40%

45%

50%

55%

60%

65%

70%

75%

Ryanair WestJet Southwest JetBlue

perc

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CAIR Issue No. 12 - December 2003

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Transcript of CAIR Issue No. 12 - December 2003