cair issue no.23 - november 2004

INTERVISTASMARKET INTELLIGENCEREPORT

InterVISTAS Consulting Inc. Market Intelligence ReportNovember 2004 ©InterVISTAS Consulting Inc.Page 1

Eugene ChuProject Analyst

AIR CANADA’S INTERNATIONALSEAT CAPACITY12 November 2004

On 30 September 2004, Air Canada completed its restructuring and emerged from bankruptcyprotection. As part of its new business plan, the carrier stated that it would place a stronger emphasison international services. However, international overseas seat capacity as a share of Air Canada’stotal seat capacity remains largely unchanged. Current OAG data shows that the volume of seatcapacity offered by Air Canada has declined in all sectors including the domestic, transborder, andinternational markets.

Air Canada’s Total Seat Capacity. Air Canada’s total seat capacity isdeclining by approximately 7.5% to 7.6 million seats in the three monthsending 31 January 2005 compared to the same period last year. As shownin Table 1, seat capacity has declined in nearly all markets, with the exception of Asia (which wasaffected by SARS in 2003) and Latin America.

International Seat Capacity Share. Air Canada’s seat capacity shares, by market, are shown inTable 1. The data show that the carrier’s international overseas capacity as a percentage of the totalin the three months ending 31 January 2005 is nearly identical to the same period last year.International overseas seat capacity continues to constitute about 10% of the total seats offered by AirCanada.

Table 1: Air Canada’s Seat Capacity (Non-Stop Departures from Canada)

Total Volume of Seat Capacity Share of Total Seat Capacity

DestinationThree Months

EndingJanuary 2005

Three MonthsEnding

January 2004Change

Three MonthsEnding

January 2005

Three MonthsEnding

January 2004

Canada 5,470,712 5,917,510 -446,798 72% 72%

U.S. Transborder 1,351,427 1,521,065 -169,638 18% 19%

Asia 200,071 185,264 14,807 2.6% 2.3%

Europe 320,712 352,644 -31,932 4.2% 4.3%

Latin America 251,340 236,648 14,692 3.3% 2.9%

Middle East 12,508 13,992 -1,484 0.2% 0.2%

International Overseas 784,631 788,548 -3,917 10% 9.7%

Grand Total 7,606,770 8,227,123 -620,353 100% 100%

Source: OAG Max November 2003 and 2004 disk.Notes: Includes Air Canada mainline and Jazz, Zip, Tango. Numbers may not add up due to rounding.


Jennifer TsoProject Analyst

THE RISE OF U.S. REGIONALCARRIERS November 2004

Fastest Growing Market Segment: The regional air carriers have been one of the fastestgrowing segments in the U.S. airline market since deregulation in 1978. These carriers have not onlygrown, but the nature of the markets they serve has changed dramatically. With the introduction ofregional jets into the regional carrier fleets in large numbers during the 1990s, these carriers areoffering a level of service that can compete with trunk carriers, and can offer service in longer haulmarkets.

What is a Regional Carrier? According to the Federal Aviation Administration (FAA), a regionalcarrier is a carrier that:• Flies a majority of their available seat miles (ASMs) using aircraft having 70 seats or less.• Has regularly scheduled passenger service.• Has an objective to provide connecting service for its codeshare partners.

Industry Consolidation: Thenumber of regional carriers hasdeclined since 1981. In the 1960s, theU.S. regional carrier industry wasfragmented and made up of smallindependently owned operations.Today, the industry is consolidatingand is characterised with large airlinesowning many regional carriers. Asshown, there were 250 regionalcarriers in 1981, and only 75 carriers in2003. The top 10 regionals nowrepresent 84% of regional carrierenplanements in 2003.

Growth and Share of the Industry: The Bureau of Transportation Statistics reports thatpassenger volumes on regional carriers grew 129% from 2002 to 2003, while the number ofpassengers travelling on major carriers fell by 3%. In absolute numbers, the majors lost 14 millionpassengers, while the regionals gained 17 million on a base that was only 14 million a year earlier.

Passengers(millions)

Carrier Type 2002 2003 % ChangeRegional Carriers (including Large, Medium, Commuter, Small Certified) 14 31 +129%National Carriers (including low cost carriers, AirTran, Frontier, JetBlueand Spirit)

80 111 +38%

Major Carriers (including Southwest Airlines) 460 446 -3%Total Carriers 554 588 +6%Source: Bureau of Transportation Statistics (T-100 Domestic Market Data).

75

250

0

50

100

150

200

250

300

1981 2003

Year

Nu

mb

er o

f U

.S. R

egio

nal

Car

rier

s

Source: FAA Aerospace Forecasts FY 2004-2015 (March 2004).

Number of U.S. Regional Carriers (1981 & 2003)


THE RISE OF U.S. REGIONALCARRIERS – CON’TMarkets Served: Regional carriers fly predominantly point-to point routes, allowing passengers toby-pass crowded hubs. As of 1 January 2004, regional airlines served 654 U.S. commercial airlineairports, 479 airports of which are served exclusively by regional airlines.1 Regional carriers alsotarget business customers - according to the Regional Carrier Association, business travellersrepresent 65% of regional carrier passengers.2

Financially Sound: Despiterecent difficulties in the airlineindustry, regional carriers havebeen able to perform betterfinancially than their largercounterparts. Regional carriershave a higher revenue perpassenger mile than networkand low-cost carriers and theirrevenues exceed operatingcosts. This is partly due to theway regional carriers arecompensated by the majorcarriers, typically with paymentsfor merely operating flights, withthe major carrier assuming riskfor sale of seats to passengers. As well, in 2003 regional carriers exhibited higher operating marginsthan either the low-cost and network carriers.

Rank Group Domestic Operating Profit/Loss Margin1 Regionals 9.0%2 Low-Cost 7.2%3 Network -2.8%

Source: Bureau of Transportation Statistics Second Quarter 2004 Press Release. DOT Form 41; ScheduleP1.2.

1 Regional Airline Association (www.raa.org)2 Regional Airline Association (www.raa.org)

0

2

4

6

8

10

12

14

16

Regionals Network Low-Cost

Group

Domestic Operating

Revenue and Expenses Per

Available Seat Mile (Cents Per

Mile)

Operating Revenue Operating Expense

Source: Bureau of Transportation Statistics Second Quarter 2004Press Release. DOT Form 41; Schedule P1.2. T100; T2 Data.

Domestic Operating Revenues and Expenses byCarrier Group


AIRLINE DATA – CANADATraffic and Load Factors on Canada’s Major Air Carriers - October 2004

Passenger TrafficRevenue Passenger Kilometres

CapacityAvailable Seat Kilometres

Load FactorAir Carrier

% Changeover 2003

% Changefrom 2002

% Changeover 2003

% Changefrom 2002

Changeover 2003

Changefrom 2002

Air Canada3 +7.7% -4.0% +1.5% -8.1% +4.5 pts(to 77.7%) +3.3 pts

Domestic(Mainline)

+1.7% -2.8% -8.3% -10.6% +7.8 pts +6.4 pts

Jazz +4.3% +6.7% -17.1% -14.2% +14.9 pts +14.2 pts

International& Charter

+10.8% -4.6% +6.7% -6.8% +2.9 pts +1.8 pts

WestJet +24.0% +80.4% +31.5% +88.5% -4.1 pts(to 68.7%) -3.1 pts

Jetsgo +39.7% +440% +38.5% +455% +0.6 pts(to 66.2%) -1.9 pts

Analysis:

• Air Canada posted domestic and systemload factors of 80% and 78%respectively in October 2004, bothrecord highs for the month. Domesticcapacity continues to decline, reflectingthe elimination of its B737 fleet and theredeployment of some aircraft to theLatin America market. Domestic trafficand capacity are still below 2002 levels.

• Following a previous pattern, AirCanada’s international traffic andcapacity continues to increase as newservices are added to Latin America.International traffic and capacity are stillbelow 2002 levels.

• WestJet’s addition of capacity wasgreater than its rate of traffic growth inOctober, resulting in a depressed loadfactor. The carrier commenced servicesto Fort Lauderdale, Phoenix, Orlando,San Franciso, and Tampa in October2004, increasing both traffic and capacity.

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

OTHER CARRIERS:

LOAD FACTORS

CanJet: not reported

-15%-10%

-5%0%5%

10%15%20%

Oct-03

Nov Dec Jan-04

Feb Mar April May Jun July Aug Sep Oct

Dom RPK Dom ASK

Air Canada Domestic Mainline Air Canada Domestic Mainline

Jazz data is not includedin this graph

-20%-10%

0%10%20%30%40%

Oct-03

Nov Dec Jan-04


Int'l RPK Int'l ASK

Air Canada InternationalAir Canada International

0%

10%

20%

30%

40%

50%

60%

Oct-03

Nov Dec Jan-04


RPK ASK

WestJetWestJet


AIRLINE DATA – U.S.U.S. Airlines Release October 2004 Traffic Figures

Traffic Data – October 2004

Airline Load FactorTraffic

(RPMs – millions)Capacity

(ASMs – millions)

74.9%

á4.7 pts

10,716

á9.1%

14,305

á2.3%

69.6%

á5.3pts

595

á39.7%

855

á29.0%

N/A N/A N/A

178.9%

á4.8 pts

5,517

á13.7%

6,996

á6.7%

74.1%

á1.2 pts

9,274

á8.3%

12,511

á6.5%

83.1%

â2.4 pts

1,397

á33.7%

1,682

á37.6%

80.3%

á1.8 pts

6,146

á8.4%

7,654

á6.0%

66.6%

á3.0 pts

4,504

á13.5%

6,760

á8.4%

277.8%

á1.2 pts

9,554

á7.2%

12,286

á5.5%

275.6%

á2.9 pts

3,389

á5.1%

4,484

á1.1%

Notes: 1. Mainline

2. Load factor includes scheduled service only

Sources: Carrier traffic reports.


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

Toronto Vancouver Montréal-Trudeau

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

September -5.9% -3.0% +2.3% -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% +2.4% +1.6% +3.4% -0.9% +1.8% +3.3% +10.8% +1.7% -2.0% +0.7% +19.0%

October -2.3% -3.1% +2.7% -0.7% +10.4% +1.4% +7.4% +2.5% +15.4% +1.1% -1.7% -1.3% +9.4%

November +0.1% +2.2% +9.0% +8.0% +7.2% +6.5% +5.8% -0.05% +13.7% +9.6% -0.3% +19.8% +9.4%

December +1.9% +2.8% +8.5% +5.4% +4.9% +6.0% +6.0% +2.9% +16.1% +9.1% +0.8% +2.0% +13.9%

4th Quarter -0.1% +0.5% +6.4% +3.9% +7.4% +4.5% +6.4% +1.9% +15.6% +6.6% -0.4% +6.33% +10.8%

2003

Full Year -4.6% -3.7% +1.3% +2.7% +2.9% +1.3% +5.1% +4.2% +7.3% +2.9% -0.5% +2.4% +9.4%

January +2.3% +1.5% +8.6% +3.9% +7.7% +3.5% +6.4% +3.2% +12.4% +5.9% -2.2% +8.3% +12.8%

February +8.6% +7.9% +18.0% +5.3% +10.7% +13.9% +11.7% +5.6% +11.4% +11.6% +7.8% +2.8% +19.8%

March +9.3% +5.2% +16.4% +2.0% +8.0% +11.4% +11.4% +9.0% +8.2% +2.6% -2.4% +3.9% +21.3%

1st Quarter +6.8% +4.8% 14.4% +3.7% +8.6% +9.7% +9.9% +6.1% +10.5% + 6.5% +1.1% +5.0% +18.0%

April +30.6% +20.5% +29.5% +11.5% +8.6% +20.8% +11.3% +16.9% +12.7% -0.3% +10.9% +2.6% +20.1%

May +30.8% +20.8% +23.5% +5.5% +7.5% +7.6% +9.1% +19.4% +8.0% -1.3% -0.3% -5.5% +15.2%

June +18.5% +16.1% +16.6% +8.4% +2.8% +12.1% +9.8% +7.8% +8.6% +3.0% +1.7% -4.3% +16.0%

2nd Quarter +26.2% +18.8% +22.8% +8.4% +6.2% +13.2% +9.7% +14.5% +9.7% +0.5% +3.8% -2.5% +16.9%

July +17.2% +10.4% +17.2% +5.0% +0.8% +5.7% +9.0% +10.5% +4.7% -0.5% +5.5% +1.4% +10.6%

August +16.0% +4.9% +16.4% +1.9% +2.2% +6.2% +7.9% +6.9%* -2.0% -5.9% +5.4% +1.5% +10.1%

September +16.1% +11.5% +13.3% +13.0% +6.3% +7.9% +9.4% +8.6% +8.3% +12.1% +5.3% -0.6% +13.4%

2004

3rd Quarter +16.5% +8.7% +16.7% +6.2% +2.9% +6.6% +8.4% +8.6% +3.3% +1.1% +5.4% +0.8% +11.2%

Source: Transport Canada

CA

NA

DIA

N A

IRP

OR

TS


NEWS ARTICLESAIR CANADA UPDATEACE AVIATION HOLDINGS INC.REPORTS $243 MILLION OPERATINGINCOME BEFORE REORGANISATIONAND RESTRUCTURING ITEMSACE Aviation Holdings Inc., parent companyof Air Canada, reported operating income of$243 million before reorganisation andrestructuring items in the third quarter of 2004.When these items are included, net loss was$81 million. Operating revenues increased by12%, and the carrier reported traffic recovery inall markets (2003 was affected by SARS), withthe exception of the U.S. transborder market.Operating expenses increased by $42 milliondue to higher oil prices. ACE had aconsolidated cash balance of $1.9 billion as of 9November 2004.

AIR CANADA SIMPLIFIES FARESTRUCTURE

Air Canada hassimplified its fare

structure with the elimination of its Econo farecategory, and the removal of minimum stay andround trip requirements on all fares for flightswithin North America. The carrier now has fivefare categories that offer different levels offlexibility and benefits including Tango, Fun,Latitude, Freedom, and Executive.

AIR CANADA INTRODUCES SUN PASSAir Canada has introduced the Sun Pass, apackage of multi-trip passes consisting of sixone-way flight credits for flights from Toronto orMontreal to sun destinations in the U.S.Destinations include Fort Lauderdale, LasVegas, Miami, Orlando, Phoenix, Tampa, andalso Fort Myers and West Palm Beach, whichare seasonal routes.

AIR CANADA EXPANDS SERVICE TOSOUTH AMERICAAir Canada has launched services to Peru withthe introduction of three times weekly non-stopservice between Toronto and Lima. Non-stopservices between Toronto and Buenos Aires hasalso been launched, increasing service to the

Argentine capital to six flights per week(including three flights per week via Santiago,Chile). Air Canada’s service between Torontoand Sao Paulo, Brazil will be increased from sixflights per week to daily service beginning 1December 2004.

AIR CANADA TO ADD SERVICEBETWEEN SYDNEY AND VANCOUVERBeginning 16 December 2004, Air Canada willadd one daily flight between Sydney andVancouver with A340-300 aircraft. Thenorthbound flight from Australia will be non-stop,while the southbound flight will make a stop inHonolulu for refuelling. Customers can stayonboard the southbound flight, eliminating theneed for U.S. customs clearance. Air Canadawill maintain its existing daily B767-300ER flightbetween Vancouver and Sydney via Honolulu.

OTHER CANADIAN AIRLINESWESTJET REPORTS 31ST CONSECUTIVEQUARTER OF PROFITABILITY

WestJet reported netearnings of $21 million

in the third quarter of this year on revenue of$310 million. Revenue increased compared tothe third quarter of 2003, but profit declined by35% year-to-year. Yield decreased by 4.0% toabout 17 cents. WestJet attributed the decreasein profitability to high fuel prices and loweryields.

WESTJET’S WINTER SCHEDULEINCLUDES 24 ADDITIONAL WEEKLYFLIGHTSWestJet’s winter schedule, effective 19December 2004, includes 24 additional non-stopflights per week. This includes an increase inthe number of frequencies from Winnipeg toToronto, Vancouver and Ottawa. With theseadditions, WestJet will be operating 1,800weekly departures on 62 city pairs.

FUEL PRICES

5 November 2004

SPOT OIL PRICES DROP BUTFUTURES PRICES INCREASE

Crude Oil Prices:

Spot – US $49.61(up 7% from October)

Futures• 6 month - $48.67

(April 2005 delivery)• 12 month - $46.09

(October 2005 delivery)• 2 year - $42.86

(October 2006 delivery)• 5 year - $38.94

(December 2009 delivery)

$15.00$20.00$25.00$30.00$35.00$40.00$45.00$50.00$55.00$60.00

November

-03

Decem

ber

Januar

y-04Fe

bruary

March April

May June Jul

y

August

Septem

berOcto

ber

Novem

ber

US$

per

Bar

rel

Monthly Spot PricesMonthly Spot Prices


NEWS ARTICLESOTHER CANADIAN AIRLINES –CON’TWESTJET STARTS NEW TRANSBORDERSERVICES

WestJet has launchedfour times weekly non-

stop services from Toronto to each of Tampaand Fort Lauderdale. Starting 19 December2004, service between Vancouver and LosAngeles will begin, along with Calgary-PalmSprings service starting 7 January 2005.

CANJET TO LAUNCH MONCTON-NEWYORK SERVICE

CanJet Airlines will introducedaily weekday services between

Moncton, New Brunswick and New YorkLaGuardia via Toronto beginning 29 November2004.

CANJET TO OFFER SEASONALOTTAWA-ORLANDO SERVICECanJet Airlines will launch services betweenOttawa and Orlando from 8 February 2005 to 25May 2005. The service will be operated onceper week via Hamilton.

CANJET TO REPLACE FOUR AIRCRAFTWITH B737-500SCanJet Airlines will replace four of its B737-200aircraft with four B737-500s, with delivery of allaircraft scheduled to be complete before thesummer of 2005.

JETSGO TO LAUNCH QUEBEC CITY-FORT LAUDERDALE SERVICE

Beginning 19 December 2004,Jetsgo will offer once per week

service between Quebec City and FortLauderdale with MD-83 aircraft. The seasonalservice will be operated until the end of April2005.

U.S. AND INTERNATIONALAIRLINESU.S. AIRWAYS WARNS OF POSSIBLELIQUIDATION, MESA EVALUATINGDIFFERENT OPTIONS

U.S. Airways stated in a recentbankruptcy court filing that thecarrier may have to liquidate

unless the court approves its motion to imposepay cuts on three of its unions, cut retireebenefits, and end pension plans. The carrierwarned of low cash levels and a projected fullyear loss of over $700 million in 2004.

Meanwhile, Mesa Airlines, which operates 73jets as United Express, is evaluating differentoptions in the event that U.S. Airways isliquidated. This includes parking all UnitedExpress jets, leasing the aircraft to otherregional carriers, or redeploying the jets inexisting partnerships, flying the aircraft for newpartners, or using the jets in an independentoperation.

ATA AIRLINES FILES FORBANKRUPTCY PROTECTIONOn 26 October 2004, ATA Airlines announcedthat it had filed for Chapter 11 bankruptcyprotection. AirTran plans to assume ATA’s gateleases at Chicago Midway, and also take overthe carrier’s slots at New York LaGuardia, andWashington National. The gates and slots tobe transferred are worth approximately US$87.5million, but are still subject to approval by theCity of Chicago and the bankruptcy court.ATA’s marketing agreement with AirTranincludes code-sharing and co-operation onfrequent flyer programs. America West hasindicated it may bid for the entire airline, whichcould pre-empt the sale of the slots to AirTran.


NEWS ARTICLESU.S. AND INTERNATIONALAIRLINES – CON’TOLYMPIC AIRWAYS PLACED UNDERBANKRUPTCY PROTECTIONThe Greek government has passed a bill toprotect Olympic Airways from creditors until 28February 2005. The government is trying toprivatise the national carrier, which is losingmore than EUR100 million (CDN$155 million)annually.

AIR BERLIN PLACES ORDER FOR 70A320S

Air Berlin has placed a firmorder with Airbus for 70

A320s with options for 40 more aircraft. Ten ofthe aircraft will be allocated to Niki, an Austrianlow cost carrier in which Air Berlin holds a 25%stake. Delivery is scheduled to begin at the endof 2005 and run through to 2011.

IATA REPORTS TRAFFIC GROWTH BUTPREDICTS HIGH INDUSTRY LOSSES

Based on statistics published by theInternational Air TransportAssociation (IATA), international

scheduled passenger traffic (RPK) and cargotraffic (FTK) increased by approximately 18%and 14% year-to-year respectively in the firstnine months of 2004. However, IATA predictsthat industry losses may exceed the US$4.0billion previously forecast if current fuel pricespersist. In 2003, air traffic was affected by aseries of market shocks, including SARS,terrorism and the war in Iraq.

AIRPORTSTRANSPORT CANADA AND CATSAISSUES BIOMETRIC ID CARDS AT FOURAIRPORTSTransport Canada and the Canadian AirTransport Security Authority (CATSA) willuse biometric ID cards to improve the airportrestricted area pass system at four airportsincluding Vancouver International, KelownaInternational, Montreal Trudeau, andCharlottetown Airport. The cards willeventually be used at 29 major Canadianairports.

AIRCRAFT MANUFACTURERSOTTAWA PROVIDES LOAN GUARANTEEFOR AIR CANADA’S PURCHASE OFBOMBARDIER AIRCRAFTThe Government of Canada has approved aloan guarantee of up to $1.5 billion for AirCanada’s purchase of Bombardier regional jetsthrough Industry Canada. If Air Canada defaultson the purchase, the government will have asecured claim against the aircraft. Air Canadahas an order for 30 regional jets fromBombardier, with options for 15 aircraft.


NEWS ARTICLESCARGOBOEING OFFERING FREIGHTERVERSION OF B777

Boeing is in discussions withseveral customers about afreighter based on the passenger

version of the B777-200LR. The freighter willhave a payload capacity of about 100 tonnesand a range of 5,200 nm (9,600 km). Entry intoservice is projected to be in 2009.

AIR CANADA BEGINS TORONTO-FRANKFURT FREIGHTER SERVICE;EXPANDS CARGO CAPACITY INWESTERN CANADA

Air Canada Cargo hasintroduced a freighter

service between Frankfurt and Toronto. Thenew MD-11 service will fly five times weeklythrough a leasing agreement with Gemini AirCargo. Air Canada has also entered anagreement with Cargojet Airways to use itsB727 cargo aircraft from Toronto to Vancouvervia Calgary four times weekly.

PRIMARIS AIRLINES TO PURCHASENEW BOEING AIRCRAFT

Primaris Airlines placeda firm order for 20 B737-800s for delivery

between 2007 and 2010 and 20 B7E7-8s fordelivery between 2010 and 2013. The carrierplans to use the B737s on both domestic andtransatlantic routes, citing the ability of the 800sto fly New York – Frankfurt using belly tanks.The B7E7-8 was ordered in a 150-passengerconfiguration and has a range of 9,200 nauticalmiles.

LUFTHANSA CARGO AND SHENZHENAIRLINES TO OPERATE JOINT CARGOCARRIER IN CHINA

Lufthansa Cargo andShenzhen Airlines will bepartnering with DEG, a

German developmentbank, to create JadeCargo International.The new carrier will be 51% owned byShenzhen Airlines. Lufthansa Cargo will own25% and DEG will 24%. Jade Cargo will beginoperations in February 2005 and will be basedin Shenzhen, China.

ASIANA CARGO TO BEGIN SERVICE TOCALGARY

On 3 November 2004,Asiana Cargo began its

first scheduled freighter service from Calgary toSeoul. The thrice-weekly B747-400 service willfly non-stop from Calgary International Airportto Incheon International Airport. The returnflight will operate via Chicago.

KOREAN AIR CARGO LAUNCHESSERVICE TO OSLO AND OSAKA

Korean Air Cargolaunched its second

Oslo-Seoul freighter service and its fourthSeoul-Osaka freighter service. The new serviceuses a B747-400 freighter and will depart Seoulevery Friday, stop over at Anchorage andChicago, then cross the Atlantic and arrive atOslo on the same day. The same freighter willreturn to Seoul on Saturday and depart forOsaka on Sunday and arrive on the same day.

MARTINAIR CARGO, TAMPA CARGOJOIN GF-X EXCHANGEMartinair Cargo and Tampa Cargo have joinedGF-X Exchange, an airfreight reservationssystem. Implementation has already begun andboth carriers expect to receive bookings fromGF-X Exchange early next year.


NEWS ARTICLESCARGO – CON’TFEDEX INCREASES TRANSATLANTICCAPACITY

Beginning March 2005, FedExwill be adding five non-stop flights

per week from Cologne to Memphis, using MD-11s. This brings total FedEx flights betweenEurope and the U.S. to 28 per week.

FEDEX TO BUY JETS FROM DELTA AIRLINESFedEx has agreed to purchase eight MD-11passenger aircraft from Delta Air Lines. FedExis expected to convert the aircraft to freightersand have them in service by 2007.

DHL CANCELS PLANS FORINTERCONTINENTAL HUB ATBRUSSELS AIRPORT, SELECTS LEIPZIGINSTEAD

DHL has cancelled itsplans to set up an

intercontinental hub at Brussels NationalAirport. DHL and the Belgian government wereunable to resolve disputes regarding noiselevels and the use of MD-11 aircraft. Brusselswill remain a regional hub. DHL has selectedLeipzig Airport as its new hub with operationsexpected to begin in 2008.

DHL OPENS MINNEAPOLIS HUBDHL has opened a US$3.0 million regional sortcentre in Minneapolis. This is the seventhregional sort centre to be added to the DHLnetwork, and is part of its US$1.2 billionexpansion program announced in June 2004.Other U.S. regional sort centres have beenopened this year include Baton Rouge, Denver,Erie, Memphis, Phoenix, and Salt Lake City.

PEOPLENEW EXECUTIVE VP, MARKETING & SALESAT WESTJET

WestJet has hiredSean Durfy as its new

Executive Vice President, Marketing & Sales.

Durfy was previously Vice President of ENMAXCorporation, and President and COO of ENMAXEnergy Corporation.

NORTHWEST AIRLINES NAMES NEWEXECUTIVE VP

Northwest Airlines named PhilHaan Executive Vice President of

International Alliances and IT. Haan will also beChairman of Northwest Airlines Cargo.

TRANSAT A.T. INC APPOINTS GENERALMANAGER OF LOOK VOYAGESOlivier Kervella has been appointed GeneralManager of Transat A.T. Inc.’s Frenchsubsidiary Look Voyages.

APPOINTMENTS TO THE HALIFAX ANDTHUNDER BAY PORT AUTHORITIESJudy A. Steele has been appointed to the Boardof Directors of the Halifax Port Authority.Robert J. Patterson has been appointed to theBoard of Directors of the Thunder Bay PortAuthority.

AEROPORTS DE MONTREALANNOUNCES NEW MEMBER OF THEBOARD OF DIRECTORS

Benoit Labonté has beenappointed to Aéroports deMontréal’s Board of

Directors. Labonté has been President and CEOof the Board of Trade of Metropolitan Montréalsince April 2002. He is replacing Gilles Labbéwho has completed his term.

AER LINGUS CEO WALSH RESIGNSALONG WITH COO AND CFOAer Lingus announced that Chief ExecutiveOfficer Willie Walsh has resigned, along withChief Operations Officer Seamus Kearney andChief Financial Officer Brian Dunne, effectiveMay 2005. Replacements have not beennamed.


NEWS ARTICLESGOVERNMENT ANDREGULATORYFAA ALLOWS SOME AIRLINES TOCARRY SMALLER FUEL RESERVES

Due to high fuel costs, the U.S.Federal Aviation Administration(FAA) will allow some air carriers to

reduce fuel reserves on international flights byup to 10 percent to decrease weight and cutcosts. So far, American Airlines andContinental Airlines are the only two carriersthat have been granted the right to fly with lessfuel.

U.S. DEPARTMENT OFTRANSPORTATION SPENDS $20MILLION FOR AIRPORTS DAMAGED BYHURRICANES

The U.S. federal government willspend US$20.5 million to repair 71airports along the east coast that

were damaged by hurricanes. Airports inAlabama, Florida, Kentucky, Mississippi, NorthCarolina, Pennsylvania, West Virginia, andPuerto Rico will receive funding. An additional14 airports will receive another US$4.1 million infunding within the next few weeks.

INDIA TO REVIEW FOREIGNOWNERSHIP INVESTMENTS

India may reconsider their policy ofbarring foreign airlines from investingin local carriers. However, Indian

Aviation Minister, Praful Patel, said theministry’s first priority is to strengthen India’scarriers. Currently only foreign individuals orbusinesses can invest in Indian airlines, but notforeign airlines.

CANADA RELEASES SEIZED AN-124Canada has released an AN-124 freighteraircraft from the Ukraine. The freighter wasseized on 2 July 2003 because of a US$38million debt that the Ukraine State PropertyFund owed TMR Energy Ltd., a Canadian basedcompany officially registered in Cyprus. The

aircraft was released after the Ukraine appealedthe case citing that the AN-124 was a militaryaircraft, and Canadian law protects the propertyof foreign states.

U.S. NO-FLY LIST CHALLENGEDThe American Civil Liberties Union (ACLU) hasfiled a lawsuit challenging the U.S. government’s“no-fly” list that identifies people who pose athreat to air travel and prevents them fromtravelling to and within the U.S. The ACLUstates the “no-fly” list violates a person’sconstitutional rights to freedom fromunreasonable search and seizure.

TRANSPORT MINISTER REQUESTSREVIEW OF AIR INDUSTRY ECONOMICREGULATIONThe Parliament's Standing Committee onTransport (SCOT) has been asked by TransportMinister Jean-C. Lapierre to conduct a review todetermine whether Canada should furtherliberalise its approach to the economicregulation of the air industry. SCOT has beenissued a guidance document to direct its reviewwith questions on whether or not Canada shouldreduce or lift restrictions on foreign ownership ofCanadian air carriers, whether Canada shouldseek Open Skies or bilateral agreements withthe U.S. and other countries, and whether cargoand passenger services should be treated thesame in bilateral negotiations.

CANADIAN AIR CARRIERS COMMIT TOGREENHOUSE GAS REDUCTIONSOUTLINED IN KYOTO ACCORD

The Air Transport Association ofCanada announced that Canadiancarriers will strive to reduce

greenhouse gas (GHG) emissions by anaverage of 1.1% per year as outlined in theKyoto Accord. By 2012, the carriers would havereduced GHG emissions by 24% from thebaseline year (1990), burning 1.1 billion fewerlitres of fuel.


THE WASHINGTON REPORT12 November 2004

Machine-Readable Passport Requirements Now In Effect for Visa Waiver ProgramVisitorsStarting 26 October 2004, Customs and Border Protection(CBP) requires that any alien requesting admission to theUnited States under the Visa Waiver Program (VWP) is requiredto have a machine-readable passport (MRP). To ease thetransition to the new requirements, from 26 October to 25 April2005 the CBP will not impose a fine on carriers for bringing tothe U.S. any alien who is a national of any one of the 22designated countries applying for admission under the VWP without an MRP. The 22 designatedVWP countries are: Australia, Austria, Denmark, Finland, France, Germany, Iceland, Ireland, Italy,Japan, Luxembourg, Monaco, the Netherlands, New Zealand, Norway, Portugal, San Marino,Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

Personnel Changes in Key Aviation CommitteesSome changes in the leadership of aviation-related committees have already occurred following theOctober 19th re-election of George W. Bush. Senator Ted Stevens (AK) replaces John McCain asChairman of the Senate Commerce, Science and Transportation Committee following McCain’scompletion of his 6-year limit at the post. The Commerce Committee’s top Democrat Ernest Hollingsdid not seek re-election and will be replaced by Senator Daniel Inouye (HI). It is not yet known whowill replace Representative Bill Lipinski, who did not seek re-election, as the top Democrat on theHouse Aviation Subcommittee. Separately, Department of Transportation (DOT) Secretary NormanMineta named three new members to the FAA Management Advisory Council (MAC) which adviseson matters of policy, budget and regulations. The new members are Charles Bolden Jr., Tech TransInternational; Russell Meyer Jr., Cessna Aircraft; and Philip Trenary, Pinnacle Airlines.

FAA Rejects Request to Expand Airport Revenue Use for Carrier SubsidiesOn 19 October, the Federal Aviation Administration issued notice that it was denying the request bySarasota-Manatee Airport Authority to allow use of airport revenue to directly subsidise air carrieroperations. While airports generally supported the petition, many expressed concern aboutunforeseen consequences which could prove to be detrimental, such as airports bidding for airlineservice or airlines demanding subsidies to continue operating in the market. Non-airport entitiesopposing the petition expressed concern that using airport revenues to subsidise air services wouldmake fewer funds available to meet other airport needs, or that aeronautical charges would have tobe raised to maintain a self-sustaining rate structure.

European Bilateral MattersThe U.S. and the European Commission (E.C.) met on 20 October to discuss where they stand incontinuing talks on an Open Skies agreement. Although the two sides did not set a date to resumenegotiations, they did discuss several issues, including safety, security, competition, subsidies,environment, airline ownership and control, facilitation, and labour laws. The E.C. reiterated that ithas sent letters to its Member States about agreements with the U.S., apparently as a warning tocountries like Spain that have been meeting with the U.S. These agreements are infractions ofEuropean Union law; Member States are not free to negotiate with the U.S. on areas where the E.C.has competence.

Charles Chambers

Senior Vice PresidentInterVISTAS-ga2 Consulting Inc.

Washington, D.C.


THE OTTAWA REPORTNovember 2004

Lapierre Discusses Liberalising Canadian Air Travel and other Aviation-relatedInitiativesTransport Minister Jean Lapierre announced plans to examine the liberalisationof Canada’s air policies at the recent Canadian Airline Investment Conferencein Toronto. Lapierre suggested re-examining foreign ownership restrictions forCanadian air carriers. He also said it is time to consider cabotage betweenCanada and the U.S. The current open-skies agreement between Canada andthe U.S. (concluded in 1995) only allows carriers to fly transborder routes. TheMinister added that airline liberalisation has to be re-examined on three fronts– domestic, transborder and international. While Ministers Collenette andValeri did not commit Canada to discussions with the European Union, Minister Lapierreacknowledged that Canada has to face the reality of a rapidly changing airline industry at home andabroad. To this end, the Minister stated that “the Europeans are making us think about regionalapproaches to aviation”. This may open the door to Canada approaching the U.S. and even Mexico,to perhaps jointly negotiate a new multilateral air services agreement between the NAFTA partnersand the EU.

In addition, the Minister, who has been consulting widely with stakeholders across Canada, statedthat the initiatives of the last government have been overtaken by events. For example, Canada nolonger needs the intrusive measures affecting airlines in the proposed changes to the CanadaTransportation Act since shifts in market share have made them inappropriate.

As part of the speech the Minister may also consider making air travel security more of public good asmany stakeholders and their customers are bearing the costs of new security measures. While othermodes and economic sectors also share the security burden with government, the playing field is noteven.

Lapierre also discussed other air priorities such as the need to reach a decision on Canada’s currentairport rent policy and finding ways to improve transportation linkages to Canadian airports. Ofsignificance is that the Minister wants to ensure a “fine-tuning of governance mechanisms” when itcomes to Canadian airports. This will likely result in the tabling of an amended Canada Airports Actthat links governance to airport rents.

Nav Canada Completes its Level of Service ReviewNav Canada has completed its Level of Service Review that examines its various services. Until now,Nav Canada had not performed a complete review of its operations since becoming the owner andoperator of the Air Navigation System (ANS) in 1996. The Review includes proposed changes inairport control and advisory services, weather services, navigational aids, airways, instrumentapproach procedures and emergency navigation assistance services. The implementation of many ofthese changes is pending a safety review by Transport Canada.

Sam BaroneRegional Vice President

Ottawa, ON


CBSA EXPANDS SECURITY ROLE15 November 2004

The Canada Border Services Agency (CBSA) moved into anew phase of evolution in October, just 10 months after itwas created. Joining 4,000 CBSA officers to manageCanadian borders will be 800 immigration officers formerlyreporting to the Department of Citizenship and Immigration.Together, the combined workforce moves bordermanagement into one agency.

Evolution of border services rolePrior to December 2003, borders were operated by CanadaCustoms and Revenue Agency (CCRA) and Citizenship andImmigration Canada (CIC). CIC and CCRA historically hada strong degree of co-operation and joint programdevelopment. However, a structural change was advancedin 2003 to respond to the strong focus on security anddivergent objectives between the “revenue” and “customs”functions within CCRA.

Consolidation is not analogous to U.S.Homeland SecurityWhile some have compared the formation of CBSA asidentical to the creation of a single U.S. Customs and BorderProtection agency for U.S. borders, this is far from accurate.

• Border management in Canada has enjoyed astreamlined processing since 1969 with customsofficers questioning passengers on behalf of otherdepartments. The U.S., through the creation ofCustoms and Border Protection, is only now movingtowards consolidated processing for immigration andcustoms functions.

• Unlike the U.S., the Canadian approach explicitlyavoided including refugee and immigration issues withinthe context of national security. While CBSA has port ofentry functions, Citizenship and Immigration Canada willcontinue in its function to welcome new Canadians.

Greater flexibility anticipatedAs CBSA celebrates into its first year of operations inDecember, new flexibility in structures and policies isanticipated to benefit Canadian airports. Now as the leadborder agency to work on Shared Border Accord initiativeswith the U.S., new program development will require fewerapprovals. Furthermore, CBSA will be examining enhancedprocessing and improvements in international arrivals forpassengers and goods, and associated border services.

Key Milestones inCBSA History

1841 Canada Customs createdwith the consolidation ofUpper and Lower Canada.

1921 Department of Customsand Excise created to jointogether inland revenueand customs functions.

1925 Income tax started inCanada and is placedunder the Department ofCustoms and Excise.

1927 Department renamed asNational Revenue.

1969 Customs officers assignedduty to question travellerson behalf of all Federaldepartments (35 yearsbefore the U.S.).

1999 Department transformedinto an agency model(Canada Customs &Revenue Agency).

2003 Canada Border ServicesAgency (CBSA) created toassume Customs, bordercontrol and excisefunctions. New CanadaRevenue Agency (CRA)retained administration oftaxation system.

Solomon WongDirector, Security & Planning


Mike TrethewaySenior Vice President

& Chief Economist

Minister David Emerson

PREDATION & THE COMPETITION ACT3 November 2004

Remember the predatory pricing complaint against Air Canada? In 2000, theCommissioner of Competition issued a cease and desist order to Air Canada, based on predatorycomplaints by WestJet and CanJet. It subsequently brought Air Canada to the Competition Tribunalfor violating the new airline predatory pricing provisions added to the Competition Act following AC’sacquisition of Canadian Airlines. In the case of WestJet’s complaint, Air Canada had not onlymatched WestJet’s price in the Moncton to Hamilton/Toronto market, but it undercut the price andadded significant amounts of capacity.

The Competition Tribunal proceedings were to bedivided into two phases. In the Phase 1, the Tribunalwas to address the issue as to whether Air Canada had offered capacity for sale at prices below‘avoidable costs.’ In 2003, the Tribunal ruled that Air Canada had offered capacity at prices belowavoidable costs, and thus had committed an anti-competitive act. Effectively, Phase 2 was to havedetermined whether or not there were legitimate business reasons for prices below avoidable costs,such as seasonality. If there were no justifications, and if Air Canada was found to be a dominantairline, then Air Canada would have been guilty under the Competition Act. (There is a subtlybetween committing an anti-competitive act and violating the provisions of the Competition Act.)However, Air Canada filed for bankruptcy in April 2003, and the Commissioner agreed to postponePhase 2 until Air Canada emerged from court protection.

End of the Competition Tribunal Proceeding Against Air Canada. Nowthat Air Canada has emerged from bankruptcy, the Commissioner and Air Canadahave reached an agreement in the case. The Commissioner will not proceed toPhase 2 and Air Canada will not appeal the Phase 1 decision. For theCommissioner, the Tribunal ruling will stand as to what constitutes avoidable cost,

and how to compare that to the complex set of prices an airline charges on a route. This gives clarityto the Commissioner and to air carriers and will act as a precedent in other sectors as well. Not goingon to Phase 2 removes the worry from Air Canada of a ruling against it, and for both it saves a lot oftime and expense.

Removal of the Special Airline provisions in the CompetitionAct. On 1 November, David Emerson, the Minister of Industry, tabled inParliament a bill to make a comprehensive set of revisions to theCompetition Act. Changes to the Act have long been in the works. Inaddition to general amendments to the Act, the bill removes all of thespecial provisions for airlines that were put into the Act in June 2000,following the merger of Canadian into Air Canada. The special provisionshad:

• removed Competition Bureau oversight of airline mergers (reserving this for the Governor inCouncil -- i.e., cabinet),

• authorised the AC-CP merger,• put in special predatory pricing provisions for the airline industry,• provided powers for the Commissioner to issue cease and desist pricing orders to a dominant air

carrier engaging in potential predatory behaviour,• created provisions to prevent a dominant airline from pre-empting slots,• etc.


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 is speculative and may not materialise. Information containedherein is provided for the use of InterVISTAS Consulting Inc. only, and may not bedistributed beyond the office.

Prepared by InterVISTAS Consulting Inc.

PREDATION & THE COMPETITION ACT – CON’TRecall that the AC-CP merger was authorised by legislation as at the time, as the Competition Bureaucould have opposed the merger under the general provisions of the Competition Act. There wereconcerns in 2000 that Air Canada’s dominance in the airline industry could have resulted in abuseagainst desperately needed new competition and that the general provisions of the Act might be tooweak and slow to protect airline competition.

The conditions of the airline industry have changed dramatically since 2000. Both Air Canada andCanadian have been taken through bankruptcy, WestJet has grown significantly, and CanJet andJetsgo have returned to the market. As well, there was significant opposition in the legal communityto the cease and desist powers put into the Act, although these were upheld when Air Canadaappealed them. The Minister’s view now is that the general provisions of the Act will be sufficient todeal with predation and other abuse of dominance in the airline industry.

The end of the predation proceedings against Air Canada and the proposed revisions to the Actcloses an important chapter in the story of Canada’s airline industry, but there are more chapters tocome.

cair issue no.23 - november 2004

Documents

regional air carriers

total seats

available seat miles

airline market

grand total

trunk carriers

regional carrier fleets

growing market segment