cair issue no.24 - december 2004

INTERVISTASMARKET INTELLIGENCEREPORT

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

THE SPEED OF RECOVERY FROMSARSDecember 2004

A Global Air Travel Crisis: The SARS Outbreak

Just as the air transport industry was recovering from the 9/11 terrorist attacks and the globaleconomic downturn in 2000 and 2001, the industry was hit by another crisis in early 2003. In March,the SARS (Severe Acute Respiratory Syndrome) outbreak quickly crippled the air travel industry. Inthe end, SARS killed over 700 people in Asia and 43 in Canada. It is likely the disease originated inChina’s Guangdong Province in November 2002 and was spread to other parts of the world by airtravellers. The hardest hit Asian countries were China (especially Hong Kong), Singapore andTaiwan. Canada (mainly Toronto) was the only country outside of Asia that had SARS deaths. Thedisease appeared to have peaked in July 2003 at which time the World Health Organisation (WHO)deemed the outbreak was under control.

A Speedy Air Traffic Recovery

International traffic statistics from IATAshow that Asia Pacific carriers had fullyrecovered to pre-SARS levels byOctober 2003. In contrast, the industryhas yet to fully recover from 9/11 astraffic levels are still below 2000. Duringthe SARS outbreak, Asia Pacific carrierssaw traffic declines of 50% during theinitial months of the crisis.

North America was the only world regionoutside of Asia that had SARS deaths; however its carriers didnot experience the same level of traffic declines (-20% range) compared to their Asian counterparts.IATA’s international traffic statistics showed that North American carriers had recovered to pre-SARSlevels by November 2003, showing a small traffic increase of 3% for the month.

Pent Up Travel Demand

Abacus International, Asia’s leading travel reservations company,had reported that year-over-year travel bookings beginning inJune 2003 exceeded the same month in the previous year, thatis, travel booking patterns had returned to levels experiencedprior to SARS. The recovery from SARS in essence began onlya few short months after the outbreak began.

By October 2003, air travelvolumes had recovered topre-SARS levels, only sixmonths after the outbreakbegan.

Doris Mak

Senior Project Manager

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

Y-O

-Y %

Ch

ang

e in

RP

Ks

Mar

-03

Apr

-03

May

-03

Jun-

03

Jul-0

3

Aug

-03

Sep

-03

Oct

-03

Nov

-03

Dec

-03

Jan-

04

Feb

-04

Mar

-04

Apr

-04

May

-04

Jun-

04

Jul-0

4

Aug

-04

Sep

-04

Oct

-04

International Traffic by Asia Pacific Carriers

Source: IATA International Traffic Statistics

Beginning ofSARS Crisis

International Traffic by Asia Pacific Carriers


RECENT CHANGES IN TRAVEL AGENTCOMMISSIONS FOR DOMESTIC TRAVELDecember 2004

Although there has been a shift towards greater consumer-direct sales via the Internet and callcentres, traditional travel agency channels still represent a significant share of total ticket sales. Inorder to encourage travel agencies to book with them, all of the major Canadian carriers currentlyoffer commissions on at least some classes of domestic travel. In recent months, there have beensome significant changes to domestic commissions, including the reintroduction of selectcommissions by Air Canada on global distribution system (GDS) bookings, as well as an increase inall commissions by WestJet on GDS bookings.

Air Canada had previously discontinued all domestic commissions in April 2002, similar to carriers inthe U.S. Historically, base commissions had been in the rage of 8% to 11%. In 2003, commissions of9% were reinstated on select fare categories for bookings made via the carrier’s agency website. Inmid-2004, Air Canada reintroduced a 5% commission on tickets booked through one select GDS(Sabre) and only in the Latitude fare category.

In November 2004, WestJet increased commissions on tickets booked through select GDSs (Sabre,Galileo and Worldspan) from 5% to 9%, matching rates paid on bookings made through the carrier’sagency website.

Jetsgo, CanJet and Harmony currently offer the highest domestic base commissions at 10% onInternet bookings. These carriers also offer 5% commissions on domestic GDS bookings.

There has been little information provided by the airlines for these recent increases in commissions.Some possible reasons for the changes may include pressure from GDSs as they struggle to maintainmarket share, as well as pressure from travel agency associations. The greatest influence, however,is likely competitive factors. As the number of carriers in Canada has expanded and their routeofferings increased in recent years, there is greater competition for agency bookings. The air carriersappear to be offering commissions on the full range of booking channels (GDS, Internet and callcentres) in order to increase the convenience and financial reward of booking with a particular airline.

Domestic Commission StructureCarrier

GDS InternetAir Canada Executive/Freedom

LatitudeFunTango

0%5%0%0%

Executive/FreedomLatitudeFunTango

0%5%9%9%

WestJet* All Classes 9% All Classes 9%Jetsgo All Classes 5% All Classes 10%CanJet All Classes 5% All Classes 10%Harmony Airways** All Classes 5% All Classes 10%

Sources: Air carrier websites/press releases, industry publications and travel agency input.*WestJet also offers 5% commissions on agency bookings through their call centre and on group bookings.**Harmony also offers 5% commissions on agency bookings through their call centre.

Angelica Sparolin

Research Manager


THE VIRGIN GROUP OF CARRIERSDecember 2004

The Virgin group of air carriers, founded by music industry entrepreneur, RichardBranson, has grown globally in recent years with successful operations in Europe andAustralia. In 2005, Virgin America will begin operations in the U.S. in addition; VirginNigeria will operate African services. Virgin Airlines has expanded globally from its UK

base and in the process has impacted the markets in which it serves. The Virgin brand hasdistinguished itself from other airlines by offering innovative products and services, providing anexceptional level of service and offering low fares giving its customers excellent value for money.

The Beginning: Virgin AtlanticIn June 1984, Virgin Atlantic was born. Branson publicly announced that his new air carrier wouldprovide long haul services between London and New York. This was a surprise to everyone, asBranson did not have any previous dealings in the aviation industry.

However, today, Virgin Atlantic is the UK’s second largest long-haul carrier of passengers and freight.The airline currently operates to 25 destinations around the world with a fleet of 24 aircraft. VirginAtlantic is 51% owned by the Virgin Group. In April 2000, Singapore Airlines purchased a 49% stakein the airline.

Continued GlobalExpansion of the VirginGroup

With the success of Virgin Atlantic, theVirgin Group of air carriers hasexpanded its low cost operations toother world regions.

• Virgin Express (est. in 1992) is alow fare airline that operates to 13European destinations from its Brussels hub.

• Virgin Blue (est. in 1999) is a low fare airline that operates domestic Australia flights. Trans-Tasman flights and other international flights are operated by sister airline, Pacific Blue (est. in2004) which is based in New Zealand.

• Virgin America (est. in 2003) is anticipated to begin low cost operations in the U.S. in 2005. Theairline’s operational base will be in San Francisco with corporate headquarters in New York.

• Virgin Nigeria (est. in 2004) will replace Nigeria Airways. The airline will be majority owned bylocal investors. The Virgin Group will be a strategic investor and technical partner. The airlinewill be based in Lagos and will operate domestic flights and international flights to Europe, theU.S. and the Middle East.

• Recent news indicates that Branson is also interested in making an investment in India.

The Future: Virgin GalacticAs the Virgin group of carriers continues to expand its operations globally,Branson has also announced that Virgin Galactic will provide space travelby 2007.

Doris Mak

Senior Project Manager


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

10%15%20%

Nov-03

Dec Jan-04

Feb Mar April May Jun July Aug Sep Oct Nov

Dom RPK Dom ASK

Air Canada Domestic Mainline Air Canada Domestic Mainline

Jazz data is not includedin this graph

-10%

0%

10%

20%

30%

40%

Nov-03

Dec Jan-04


Int'l RPK Int'l ASK

Air Canada InternationalAir Canada International

0%

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20%

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40%

50%

60%

Nov-03

Dec Jan-04


RPK ASK

WestJetWestJet

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

Passenger TrafficRevenue Passenger Kilometres

CapacityAvailable Seat Kilometres

Load FactorAir Carrier

% Changeover 2003

% Changefrom 2002

% Changeover 2003

% Changefrom 2002

Changeover 2003

Changefrom 2002

AirCanada1 +3.9% +1.4% -3.6% -8.8% +5.4 pts

(to 74.6%) +7.5 pts

Domestic(Mainline) +2.6% +3.2% -8.5% -13.1% +8.3 pts +12.2 pts

Jazz +0.8% +4.2% -13.8% -16.9% +9.7 pts +13.5 pts

International& Charter +4.5% +0.5% -1.3% -6.7% +4.1 pts +5.3 pts

WestJet +19.4% +76.1% +30.9% +88.3% -5.6 pts(to 58.5%)

-4.0 pts

Jetsgo +36.5% +458% +45.5% +493% -4.3 pts(to 65.2%)

-4.1 pts

Analysis:

• Air Canada recorded its eighth consecutivemonth of record domestic and system loadfactor in November 2004. Domestic trafficsurpassed November 2002 levels as capacitycontinues to be reduced.

• For the first time in nine months, Air Canada’sinternational capacity decreased althoughtraffic was up (+4.5%). The largest declinewas in the transborder sector (-16%) andEuropean services (-9.0%). Total internationalcapacity is still below 2002 levels.

• In November 2004, WestJet’s capacityoutgrew traffic, resulting in a lowered loadfactor of about 59%. WestJet’s President andCEO, Clive Beddoe, attributed the decline inload factor to computer failures involving thecarrier’s revenue and inventory managementsystem, which affected WestJet’s ability toadjust fares and report seat inventoryaccurately, limiting the carrier’s ability tostimulate the market with low fares. In 2003,WestJet’s break even load factor is estimatedto have been roughly 61%.

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

OTHER CARRIERS:

LOAD FACTORS

CanJet: not reported

InterVISTAS Consulting Inc.Market Intelligence ReportDecember 2004 ©InterVISTAS Consulting Inc.Page 5

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

Traffic Data – November 2004

Airline Load Factor Traffic(RPMs – millions)

Capacity(ASMs – millions)

73.4%

á2.8 pts

10,157

á8.2%

13,835

á4.1%

67.1%

á1.5pts

555

á31.3%

827

á28.4%

70.5%

á7.0 pts

850

â6.0%

1,207

â15.3%

177.6%

á2.3 pts

5,227

á10.1%

6,736

á6.9%

73.4%

á2.4 pts

8,800

á9.7%

11,984

á6.1%

83.8%

á2.2 pts

1,382

á40.5%

1,649

á36.7%

77.7%

á1.4 pts

5,768

á10.7%

7,421

á8.7%

65.5%

á1.8 pts

4,292

á14.1%

6,558

á11.1%

276.1%

á0.4 pts

8,746

á3.6%

11,487

á2.9%

273.1%

á0.5 pts

3,084

á2.0%

4,220

á1.3%

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

Sources: Carrier traffic reports.

InterVISTAS Consulting Inc.Market Intelligence ReportDecember 2004 ©InterVISTAS Consulting Inc. Page 6

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

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%

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%

2004

October +14.8% +7.0% +10.6% +10.7% -4.0% +11.9% +1.1% +3.7% -1.4% +9.1% +7.9% +1.9% +18.2%

Source: Transport Canada

InterVISTAS Consulting Inc..Market Intelligence ReportDecember 2004 ©InterVISTAS Consulting Inc.Page 7

NEWS ARTICLES AIR CANADA UPDATEAIR CANADA ADDS CALGARY-FORTMCMURRAY SERVICE, INCREASESCALGARY-EDMONTON FLIGHTS

Air Canada will beadding capacity in

Western Canada during winter 2005 as a resultof increased activity in the petroleum industry.Beginning 10 January 2005, daily non-stopservices will be introduced between Calgary andFort McMurray. In addition, two additional dailyflights will be added between Calgary andEdmonton for a total of 16 daily flights, and allservices between Calgary and Grand Prairie willbe operated with Dash 8 aircraft to increasecapacity (previously, some flights had used theBeech 1900 aircraft).

AIR CANADA ADDS ONE ADDITIONALVANCOUVER-KELOWNA FLIGHTDURING WINTER PEAKBetween 26 December 2004 and 3 January2005, Air Canada will operate one additionalflight between Vancouver and Kelowna onMonday and Sunday of each week toaccommodate the winter peak season.

OTHER CANADIAN AIRLINESWESTJET CONVERTS B737-600PURCHASE OPTION

WestJet Airlines hasdecided to purchase one

additional B737-600 by converting the second of12 purchase options into a firm delivery. Theaircraft is scheduled to be delivered in 2006.

WESTJET INCORPORATES FUELSURCHARGE INTO TRANSBORDERAIRFARESWestJet has incorporated its CDN$20/US$15fuel surcharge on transborder flights into itsadvertised airfares. The fuel surcharge on faresfor flights within Canada was incorporated intoits advertised fares in January 2004.

WESTJET INCREASES COMMISSIONFOR GDS BOOKINGS, SIMPLIFIESFARESWestJet has increased the commission it paysto travel agents for bookings made via GDSfrom five percent to nine percent. The carrierhas also reduced advertised fares through itscall centre, on GDS, and on its website by $3,so that the same fare information is displayed onboth GDS and its website.

WESTJET TO LAUNCH TORONTO-KELOWNA AND CALGARY-HALIFAXSERVICES, INCREASES FLIGHTS FROMCALGARY TO REGINA, PHOENIX ANDSAN FRANCISCOStarting 10 January 2005, WestJet will launchnon-stop services between Toronto andKelowna as part of its winter schedule. From 9February 2005, non-stop services betweenCalgary and Halifax will also be introduced.Other schedule enhancements include one-stopservices between Toronto and Victoria,additional non-stop flights between Calgary andRegina, and increased transborder servicesfrom Calgary to Phoenix and San Francisco.

JETSGO ADDS REGIONAL ROUTES INWEST AND EXTENDS SEASONALSERVICES TO YEAR-ROUND FLIGHTS

Starting 10 January 2005,Jetsgo will begin non-stopservice between Calgary

and Kelowna six days per week, and non-stopservice from Saskatoon to Winnipeg andEdmonton daily along with 2 daily weekday and1 weekend non-stop Winnipeg to Vancouverservices. Prince George will receive daily non-stop services to Vancouver beginning 16January 2005, while Calgary-Fort McMurrayservice will be operated five days per weekbeginning 23 January 2005. From 10 January2005, services from Edmonton to Abbotsfordand Victoria will be extended to year-roundoperations, operating five days per week.

FUEL PRICES

December 1, 2004

SPOT OIL PRICES DROPFUTURES PRICESDECREASE

Crude Oil Prices:

Spot – US $45.49(down 8% from November)

Futures

• 6 month - $45.59(April 2005 delivery)

• 12 month - $43.83(October 2005 delivery)

• 2 year - $41.40(October 2006 delivery)

• 5 year - $37.99(December 2009 delivery)

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

Decem

ber-03

Januar

y-04

Februa

ryMarch April May

June July

August

Septem

berOcto

ber

Novem

ber

Decem

ber

US$

per B

arre

l

Monthly Spot PricesMonthly Spot Prices


NEWS ARTICLESOTHER CANADIAN AIRLINES –CON’TJETSGO TO LAUNCH TORONTO-OTTAWA SHUTTLE

Beginning 10 January 2005,Jetsgo will launch weekdayshuttle services between

Toronto and Ottawa. The service will beoperated every two hours between 7 am and 7pm for a total of 14 flights on the route eachweekday. Jetsgo launched shuttle servicesbetween Toronto and Montreal earlier in April2004.

U.S. AND INTERNATIONALAIRLINESUNITED AIRLINES’ EXCLUSIVITYPERIOD EXTENDED TO END OFJANUARY 2005

United Airlines has received approvalfrom the bankruptcy court to extendthe exclusivity period to submit its

reorganisation plan through to 31 January 2005.The exclusivity prevents creditors fromsubmitting an alternative reorganisation plan tothe court. United Airlines first filed for Chapter11 bankruptcy protection in December 2002.

EMIRATES TO LAUNCH TORONTOFLIGHTS?

Emirates Airlines has recentlybegun to place full page ads inToronto newspapers. The airline

currently only serves New York in North America(launched in June 2004) and its 2005 route planonly shows new routes to the Seychelles, Seoul,Hamburg, and Geneva.

ALASKA AIRLINES EXPANDS SERVICESFROM VANCOUVER

Beginning 13 February2005, Alaska Airlines willboost services to

Vancouver with the launch of daily non-stopflights to San Diego, and seasonal services toPalm Springs five days per week. In addition,two weekly flights will be added betweenVancouver and Las Vegas for a total of ninenon-stop flights per week.

NORTHWEST TO START TORONTO-MILWAUKEE SERVICE

Starting 22 February 2005,Northwest Airlines will offertwo flights per day between

Toronto and Milwaukee. The service will beoperated by Northwest Airlink partner PinnacleAirlines with CRJ aircraft. Air Canada alreadyoperates on this route.

RYANAIR NEGOTIATES LOW-COSTDEAL AT SHANNON AIRPORT

Ryanair has secured a dealwith Shannon Airport thatincludes deeply-discounted

landing and passenger fees. As a part of a five-year route expansion deal, the low-cost carriernegotiated a landing fee based on a charge perpassenger, rather than an aircraft weight basedfee. The charge will be €0.50 per passenger onnew routes opened from the airport and a fee of€1 per passenger that will increase to no morethan €2 based on volume growth on existingroutes. Note that the average landing charge atShannon works out to €7.50 per passenger.Ryanair has announced the addition of two extraroutes from Shannon: to London Stansted andto Liverpool. The airline also flies to FrankfurtHahn, Glasgow Prestwick, Charleroi andBeauvais from Shannon.


NEWS ARTICLESAIRPORTSGTAA UNVEILS PLANS FOR NEWAIRPORT IN PICKERING

The Greater Toronto AirportsAuthority (GTAA) has released adraft plan for the construction of a$2.0 billion airport in Pickering,

Ontario, about 30 km east of Toronto. Underthe plan, the airport would have two runways,and be open to recreational and private aircraftby 2012, eventually expanding to includecommercial carrier traffic-serving as a trafficreliever airport for Toronto PearsonInternational. The plan will serve as the basisfor the Project Description, which includesfurther studies, analysis and public consultation.

VANCOUVER INTERNATIONAL TOLAUNCH NEXUS AIR PILOT PROGRAM

Starting 30 November 2004,a 17-month pilot launch of theNexus Air program will begin

at Vancouver International Airport. Theprogram uses iris scanning technology to checka traveller’s identity, and allows passengersregistered in the program faster access throughborder crossings between Canada and the U.S.

VANCOUVER AIRPORT SERVICES TOMANAGE FOUR AIRPORTS INHONDURASVancouver Airport Services, a subsidiary of theVancouver International Airport Authority,has finalised a contract to manage and operatefour airports in Honduras including Tegucigalpa,San Pedro Sula, La Ceiba, and Roatan. Thesubsidiary also manages airports in Cranbrook,Fort St. John, Kamloops, Hamilton andMoncton, as well as international airports in NewZealand, Egypt, Turks and Caicos, Jamaica,Chile and the Dominican Republic.

CALGARY AIRPORT COMPLETESTERMINAL EXPANSION

Calgary InternationalAirport has completed theConcourse D Widening

Project – a three level expansion of its mainterminal. Approximately 20,000 square metersof space has been added to the terminal for atotal of 141,000 square meters. The $84 millionproject brings the total capital investment in theairport by the Calgary Airport Authority to $722million since taking responsibility of the airportfrom the Government of Canada in 1992.

AIRCRAFT MANUFACTURERSBOEING’S 737-900X TO BE LAUNCHEDINTO SERVICE BY 2007

Boeing will introduce the B737-900X, an enhanced model of theB737-900 into commercial

service by 2007. The manufacturer expects themodel to be certified in 2006, and is alreadyauthorised to market the aircraft to carriers.Boeing states that the B737-900X can fly about2,800 nautical miles with 180 passengers. Theaircraft has a maximum seat capacity of 215.

BOMBARDIER ANNOUNCES LOWERTHIRD QUARTER PROFITS, CUTS CRJ-200 PRODUCTION

Bombardier announcedconsolidated net incomeof US$10 million on

revenues of US$3.6 billion for the third quarterended 31 October 2004. This is a decreasefrom a net income of US$133 million in thesame period last year. The manufacturerindicated that production of the CRJ-200 will befurther reduced from one every four days to oneevery five days, for a total of 54 deliveries in thenext fiscal year.


NEWS ARTICLESAIRCRAFT MANUFACTURERS– CON’TAIRBUS RECEIVES APPROVAL TOINCREASE TIME BETWEENMAINTENANCE CHECKS

Airbus has receivedapproval from the Federal

Aviation Administration (FAA), EuropeanAviation Safety Agency and Transport Canadato increase the specified time betweenscheduled maintenance checks, lowering thecost for air carriers. The time between aircraftchecks is usually specified by the manufacturerand based on a combination of calendar time,number of flights and/or flight hours.

AIRBUS RECEIVES APPROVAL FROMBOARD TO OFFER A350Airbus has received approval from itsshareholders, EADS and BAE Systems to startmaking commercial offers to launch customersfor the A350 model. The A350 will have acommon type rating with the A330, and beoffered in two models. The A350-800 will havea seating capacity of 245 passengers in a threeclass configuration, and a range of about 15,900km. The A350-900 will seat 285 passengers ina three class configuration, and have a range ofapproximately 13,900 km. If the A350 programis eventually launched, the aircraft may enterservice in the first half of 2010.

CARGOUPS CANADA TEAMSTERS UNION 24-HOUR STRIKE RESOLVED3,800 members of Teamsters Canada went onstrike for 24 hours on 22 Nov, having refusedoffers by UPS in the negotiation of a newcollective agreement. UPS’ new offers wereaccepted by the Union’s negotiating team butare still subject to a vote by the employees.During the strike, the Independent PilotsAssociation (UPS’s pilots union) honouredTeamsters Canada’s primary picket lines.

PROLOGIS ENTERS CANADA WITHDISTRIBUTION FACILITIES

ProLogis has acquired134 acres of land in Mississauga, Ontario todevelop seven distribution facilities. Thecompany says that the facilities will allowProLogis to respond to growing consumerdemand in the area. Construction of the firstthree facilities is slated to begin in March 2005.ProLogis has obtained an interim credit facilityprovided by the Bank of America through itsCanadian branch.

AIR BRIDGE CARGO TO OPERATE DUALHUB NETWORKAir Bridge Cargo plans to develop two cargohubs in its network that will link destinations inEast Asia, the Commonwealth of IndependentStates (CIS), Europe and the U.S. The focuscities will be Moscow and Krasnoyarsk (500 kmnorth of the Russia-Mongolia border). FromMoscow, the carrier will serve points in India,Turkmenistan, and other CIS countries. TheU.S. and China will be served from Krasnoyarsk.The cargo carrier has also taken delivery of twoBoeing 747-200s previously owned by Alitalia,and plans to lease a third in 2005.

DHL REQUIRES ABX TO CUT 2005FLEETDHL has told ABX Air to cut its fleet by 26aircraft for 2005. ABX Air, under contract asprovider of air lift for DHL and Airborne, said thatthe fleet reduction will reduce their grossrevenues by $86 million-$96 million. ABX Airwill be required to remove 16 DC-9s and 10 DC-8s, affecting 22 routes. ABX will also add fourB767 aircraft under its contract with DHL.

.


NEWS ARTICLESCARGO – CON’TTOP CARGO INDUSTRY MEMBERS TOPUBLISH STATISTICS

Members of Cargo 2000will publish their flown-as-booked performance

statistics on selected routes starting in March2005. The 30-member group of select IATAmembers is making their operational statisticspublicly available in an effort to become moretransparent. The group, which includes topinternational cargo airlines, launched the projectin 1997 and has only recently reached a pointwhere it can provide a standard measurement ofits members’ operations. Other statistics will bereleased in three phases. Phase One includespost-shipment audits of airport-to-airportmovements, Phase Two will monitor door-to-door movement, and Phase Three provides forreal-time management at the individual piecelevel.

BAX GLOBAL TO BUILD NEW MEGA-HUB IN SINGAPORE

BAX Global will boostits warehouse capacityin Singapore to 1.2

million square feet (111,500 m2), by the end ofnext year. Construction will start soon on thenew US$48 million mega-hub at the AirportLogistics Park of Singapore (ALPS). The newfour-storey complex will offer 400,000 squarefeet to BAX Global’s existing capacity at ChangiBusiness Park, comprising 800,000 square feetof warehouse space.

MARTINAIR CARGO ADDS AIRCRAFTAND DESTINATIONS

MartinairCargo has

added an MD-11 to its fleet, and will bedeployed on routes serving Africa and theAmericas. The new aircraft brings its fleet to 12aircraft; eight MD-11s and four Boeing 747s.The carrier has also added three newdestinations to its route network: Toronto,Dallas-Fort Worth and Tianjin, China.

LUFTHANSA CARGO, SHENZHENAIRLINES TO START JOINT-VENTUREAIRLINEThe first carrier to have foreign ownership inChina will begin operations after the 2005Chinese New Year Festival under the nameJade Cargo International. The carrier is ajoint-venture owned by Shenzhen Airlines (51%ownership), Lufthansa Cargo (25%) andDeutsche Investitions-undEntwicklungsgesellschaft (DEG Invest) (24%).Jade Cargo International will start serving thedomestic China and intra-Asia markets with twoA300-600 freighters. It plans to expand its routenetwork to include destinations outside of Asia.Rudolf Tewes has been appointed GeneralManager of the airline.

NEW CHINESE PRIVATE AIRLINEPREPARES FOR 2004 LAUNCHOkay Airways, one of three new private airlinesapproved by the Civil Aviation Administration ofChina (CAAC), is due to begin services thisyear. Based in Tianjin, near Beijing, OkayAirways will concentrate on domestic cargo andcharter operations with a fleet of six Boeingaircraft. The other two approved airlines areUnited Eagle Airlines and Air Spring.

GOVERNMENT ANDREGULATORYU.S. DOT WARNS AIRLINES, TRAVELAGENTS TO ADVERTISE SURCHARGES

U.S. Airlines and travel agents havebeen warned by the U.S.Department of Transportation(DOT) to include new booking fees in

advertised fares to avoid violating the full fareadvertising rule. Many large and overseasairlines have imposed a $5-10 surcharge forbooking tickets over the phone or in person.The Agency said it would pursue enforcementactions if changes were not made.

InterVISTAS Consulting Inc. Market Intelligence ReportDecember 2004 ©InterVISTAS Consulting Inc.

NEWS ARTICLESGOVERNMENT ANDREGULATORY – CON’TTSA TO CREATE STANDARD AIRCARGO SECURITY REQUIREMENTS

The Transportation SecurityAgency (TSA) has posted a noticeof proposed rule making (NPRM) onnew air cargo security requirements.

Included in the proposed rule is a standardsecurity program for cargo carriers operatingaircraft with a take-off weight of 45,000 kg ormore. This includes new guidelines on how toconduct focused background checks on workerswho handle cargo, but are not operating insecure areas. The new requirements will becombined with the TSA’s Known Shipperprogram and the agency’s explosive detectionsystem pilot program to work towards the goal of100% at-risk cargo screening.

OTHERINDIAN GOVERNMENT PLANS FORAIRPORTS PRIVATISATION

India plans to set up two joint-venture companies to hold theoperating leases of its two largest

airports. The Indian government’s plans toprivatise Mumbai and Delhi airports includes anoffer to private firms for 74% stakes in theairports to raise more than US$1 billion neededfor upgrades. Ten groups, includinginternational firms, are in the bidding process,which is expected to close by the end of March2005.

PEOPLE IN THE NEWSCharles R. Chambers has been elected as the2005 Board of Governors Chair of the Airports

Consultants Council(ACC). Mr. Chambers is aSenior Vice President inthe Washington D.C. officeof InterVISTAS ConsultingInc. and is widelyrecognised for his

expertise in developing analytically driven policypositions and strategies to help airport andtransportation clients. The ACC is theinternational trade association that representsconsulting firms involved in the development ofassociations and organisations engaged inaviation industry-related activities.

DHL Americas appointed John Mullen CEO,succeeding John Fellows, who will take up anew role with Deutsche Post World Net.

Sam Gilland, President andCEO of Sabre, has been giventhe additional job of companychairman.

Roy Griffins will become theDirector General of AirportsCouncil International (ACI) –Europe starting in December2004. He was previously the U.K.director general of civil aviation.

Griffins succeeds Philippe Hamon, who isretiring after having served since 1991.

Nigel Turner, CFO of U.K. carrier bmi, hasbeen appointed CEO,succeeding Austin Reid.


NEWS ARTICLESPEOPLE IN THE NEWS– CON’T

Air Canada hasannounced the

following senior executive appointments,effective 24 Nov 2004:

§ Sydney Isaacs is named Senior VicePresident, Corporate Development andChief Legal Officer, ACE Aviation Holdings,Inc.

§ David J. Shapiro is promoted to VicePresident and General Counsel, AirCanada.

§ Johanne Drapeau is promoted toCorporate Secretary, ACE AviationHoldings Inc. and Air Canada.

§ Jack McLean is appointed Controller, ACEAviation Holdings Inc. and Air Canada

On 15 Dec 2004, Air Canada announced thefollowing senior executive appointments:

§ Montie Brewer is appointed President andCEO of ACE’s mainline carrier, operating asAir Canada.

§ Jon Turner has been appointed VicePresident, Maintenance, Air Canada.

§ Duncan Dee is appointed Senior VicePresident, Corporate Affairs and ChiefAdministrative Officer, ACE. Dee waspreviously Senior Vice President, CorporateAffairs.

§ Bradley Moore is appointed President andCEO, Air Canada Ground HandlingServices.

§ Claude Morin is appointed President andCEO, Air Canada Cargo.

Carlton Donaway has been appointed amember of ACE Aviation Holdings Board ofDirectors. Donaway was executive chairman ofDHL Holdings USA, chairman, president andCEO of Airborne Inc. and president and CEO ofABX Air Inc.

Donald Carty, former AMR Corp.CEO, has been elected to the boardof CHC Helicopter Corp. along withChairman and CEO of Booth Creek

Management Corp. George Gillett and CHCCEO Sylvan Allard.

BOMBARDIER CEO LEAVES POSTPaul Tellier, CEO of Bombardierand former head of CanadianNational Railway left Bombardier'stop post effective 13 December. Atthe same time, 2 other board

members resigned their positions. Thesechanges suggest that there was disagreementon a strategic issue facing the firm. CurrentChairman, Laurent Beaudoin, will assume therole of CEO.

NEW CEO OF HARMONY AIRWAYSGary Collins, B.C.'s ProvincialFinance Minister resigned from publiclife to pursue a career in the publicsector as CEO of Vancouver-based

Harmony Airways.


0.60

0.65

0.70

0.75

0.80

0.85

Jan-

02

Apr

-02

Jul-0

2

Oct

-02

Jan-

03

Apr

-03

Jul-0

3

Oct

-03

Jan-

04

Apr

-04

Jul-0

4

Oct

-04

Daily Exchange Rate: U.S. Dollar per Canadian Dollar

Source: Prof. Werner Antweiler, University of British Columbia

Increase since Jan-03: 33.0%Increase since Jan-04: 9.4%

-1%

0%

1%

2%

3%

4%

5%

6%

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Source: Statistics Canada for historical data; OECD for forecast data.

Real Canadian GDP (Annualised Quarterly % Change)

Historical data Forecast data

ECONOMIC OUTLOOK FOR 20057 December 2004

Canada: improved growth in 2004,likely to continue in 2005. Hit bynumerous shocks in 2003, such asSARS, mad cow disease and the risingCanadian dollar, the Canadian economygrew by a modest 2% in real terms (i.e.,after adjusting for inflation).

So far, it looks like 2004 will be aconsiderable improvement over 2003.The first three quarters of 2004 sawannualised GDP growth close to orabove 3%. Most analysts are predictingthat Canada’s GDP growth in 2004 will be around 3% for the year as a whole.1 This growth has beendriven by strong consumer spending and even stronger business investment. Consumer spendinggrew by 3-4% in each of the first three quarters of the year (on an annualised basis), while businessinvestment on fixed capital increased by 6-7% on an annualised basis. The increased businessinvestment may be due, in part, to the strength of the Canadian dollar, which made importedmachinery and equipment cheaper to purchase for Canadian businesses.

The outlook for the Canadian economy in 2005 appears fairly positive. The OECD is forecasting thatreal GDP will increase by 3.3% in 2005, an improvement over 2004.2 While exports are expected toweaken as a result of the high Canadian dollar, domestic consumer spending and businessinvestment is expected to remain strong. However, further increases in the Canadian dollar couldweaken this economic outlook.

The Canadian dollar: where will itgo? As mentioned above, the highCanadian dollar is expected to weakenexports in 2005. There is evidence of thisoccurring already. Statistics Canadareported that exports declined by 0.5% inQ3 2004, the first decline in a year. Itshould be noted that what is occurring isnot so much the Canadian dollarstrengthening, as the U.S. dollarweakening. The U.S. dollar has fallenagainst many other currencies, mostnotably the Euro. However, since the U.S.

consumes approximately 85% of Canada’s exports, the U.S. dollar exchange rate is a major factor forthe Canadian economy. As well, with the Chinese Renminbi pegged to the U.S. dollar, Canadianresource exports to China may decline.

1 The Organisation for Economic Co-operation and Development (OECD) and The Economist magazine bothpredict 3.0% real annual GDP growth for 2004.2 Source: OECD Economic Outlook No. 76, Preliminary Edition, 30 November 2004. The Economist is alsoforecasting growth of 3.3%.

Ian Kincaid

Manager, Economic Analysis


-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

Q1

2001

Q1

2002

Q1

2003

Q1

2004

Q1

2005

Source: U.S. Bureau of Economic Analysis for historical data; OECD for forecast data.

Real U.S. GDP (Annualised Quarterly % Change)

Historical data Forecast data

ECONOMIC OUTLOOK FOR 2005– CON’TIt is expected that the Canadian dollar will remain strong against the U.S. dollar for some time tocome. Some analysis are even predicting further increases - Donald Coxe, a global portfoliostrategist with BMO Financial Group, predicts that the Canadian dollar could hit $1 U.S. in the next 18months - a level that has not been seen since the mid-1970s. It appears that the high Canadian dollarmay be here to stay for the time being, and may increase even further.

Impact on Canadian airports. The strong Canadian dollar makes Canada a more expensiveplace for Americans to visit, which could negatively impact on tourism. However, the exchange rate isonly one factor affecting tourism. The most important factor may be the health of the U.S. economywhich, as discussed below, has improved substantially.

The flip side of the strengthening Canadian dollar is that travel to the U.S. has become significantlycheaper, which could mean more outbound travel from Canadian airports. As most Canadian airportshandle more outbound travel than inbound, the net result for airport traffic could well be positive.

The U.S. economy: a great 2004, butslowing in 2005. The first threequarters of 2004 saw the U.S. economygrow at 3-4% on an annualised basis.The OECD expects real GDP to havegrown by 4.4% by the end of 2004, a levelof performance not seen since 1999.Business spending has been very strongin 2004 (business spending on equipmentand I.T. grew by 8% in Q1 2004 and14%in Q2 2004), while consumer spendinghas increased by 3-4% each quarter.

The OECD is forecasting that U.S. GDP will grow by 3.3% in real terms in 2005, the same as Canada.The somewhat lower rate of growth forecast for 2005, relative to 2004, is due to expected interest rateincreases by the Federal Reserve, a slowing housing market and the lagged effect of high oil prices.While oil prices are expected to moderate in 2005, the effects on demand and on energy costs areexpected to slow growth for part of 2005.3 In addition, fiscal policy is also poised to provide lessstimulus than in 2004, with lower government spending increases and little in the way of new tax cutsexpected.

Overall, the signs are positive for 2005, but risks remain. Canada is forecast to continue itsfairly healthy economic growth into 2005, fuelled by both consumers and businesses. The major riskfor Canada is further appreciation in the Canadian dollar (relative to the U.S. dollar) which couldreduce exports and inbound tourism. Growth in the U.S. economy is forecast to moderate in 2005 butremain healthy, matching that of Canada. While oil prices are expected to decline in 2005, any futureprice shocks, due to war, terrorism or demand/supply issues, could slow growth in the U.S. economy.

3 The BMO Financial Group forecasts that oil prices will be at US$33 per barrel by the end of 2005, close tolong-term averages and well below the peak in 2004 of US$52 per barrel.

The exchange rate is onlyone factor affectingtourism … the mostimportant factor may bethe health of the U.S.economy.


OTTAWA REPORT7 December 2004

Lapierre Outlines Remainder of Transport Canada’s2004/05 Budget Estimates

Transport Minister Jean C. Lapierre has announced the department’s budget estimates for 2004/05.The last Parliament approved interim funds for the department’s requirements for the first nine monthsof the fiscal year. On 9 December the House will debate the main and supplementary estimatedrequirements for the remainder of the fiscal year. Top priorities for the department include:

§ Promoting a safe and secure transportation system;

§ Enhancing trade corridors and improving infrastructure; and

§ Encouraging sustainable transportation.

Approximately half of the funding flows through the department to Crown corporations and othergovernment agencies. The department itself has about $1.2 billion to support strategic initiatives.One of the largest flow through payments includes $466 million to fund the operations of theCanadian Air Transport Security Authority (CATSA). CATSA services include pre-board screening ofpassengers and baggage, the deployment of Explosive Detection Systems at airports, the restrictedarea pass system, and the screening of non-passengers who enter restricted areas at majorCanadian airports.

The estimate also includes funding for the Airports Capital Assistance Program, which assistsregional airports with the financing of capital projects and expansion. A total of 38 projects wereselected this year including projects in Dawson Creek, B.C.; Lynn Lake, Manitoba; Moosonee,Ontario; and Sydney, Nova Scotia. Estimates for research and development include testing of newde-icing fluids and the publication of guidelines for removing snow and ice from aircraft wings.

The supplementary estimates include approximately $41 million for Transport Canada’s financial relieffor airport authorities which was announced in July 2003, as result of a series of market shocks thathit the industry including SARS and the terrorist attacks of September 11th. A $37 million increase inpayments is provided to CATSA for capital expenditures related to the deployment of ExplosivesDetection System (EDS) equipment. This is money that was allocated for 2003-04 but could not bespent due to delays in the deployment of equipment. CATSA expects to have the EDS equipmentdeployed by 1 January 2006 in partnership with airport authorities.

Proposed Amendments to Canadian Aviation Regulations Announcedto Improve Runway Approaches

The Transport Minister also announced proposed amendments to the Canadian Aviation Regulationsto improve the safety of runway approaches in poor weather and visibility. The principle is that in poorvisibility conditions, the crew must be able to see the runway environment, and have sufficient time toposition for a safe landing before an approach is attempted. Currently, pilots must be able to see atleast 350 m before attempting a landing when visibility is reported by an automated visibility sensor.The new requirements will extend this from 550 m to 1,200 m depending on the type of instrumentapproach and runway environment. The amendments will ensure that Canadian regulations are onpar with international standards, and incorporate recommendations from the Transportation SafetyBoard.

Sam Barone

Regional Vice PresidentOttawa, ON


THE WASHINGTON REPORT24 November 2004

Secretary Mineta to Remain in Bush CabinetOn 8 December 2004, Secretary of Transportation, Norman Mineta was asked to stay on anotherterm in the Bush cabinet. Mineta had considered stepping down in the event Bush was re-elected,but decided along with his family to stay on if the President asked.

Congress Could Vote On Extending FAA’s Reach to Space

The Commercial Space Launch Amendments of 2004 was passed by Congress on 19 November,giving the Federal Aviation Administration (FAA) the authority to regulate manned sub-orbital spaceflight to some extent. The amendment updates the Commercial Space Launch Act of 1984 to createa framework for space flight similar to how airlines are currently regulated. The bill would allow anAssociate Administrator for Commercial Space Transportation (AST) to issue experimental permits,facilitating the launch of reusable sub-orbital rockets and regulating safety and liability of reusablesub-orbital rockets. The FAA would have eight years to regulate this new sector, but opponents arguethat the bill does not adequately protect passengers. Congress also wants to establish regulations forspacecraft manufacture in preparation for an emerging sub-orbital rocket flight market.

Bush Administration May Re-Attempt Increase Of Foreign OwnershipLevels

In its second term, the Bush Administration will try again to get Congress to raise airline foreignownership levels from 25% to 49%. It is not yet clear if the Bush Administration and the DOT willmake the same proposal as last term. Karan Bhatia, U.S. Department of Transportation deputyassistant secretary for aviation and international affairs indicated that it is too early to determine what,if anything, the White house will propose.

FedEx to Challenge DOT Repayment

Federal Express says it will challenge a ruling by the U.S. Department of Transportation (DOT) that itmust repay US$29 million of the $101 million it received under the Air Transportation Safety andStabilisation Act in 2002. The U.S. DOT released a final determination that FedEx is only eligible for$72 million under the act, and must repay the difference.

U.S. And Mexico to Liberalise New Air Services Agreement

The U.S. and Mexico will hold formal negotiations to liberalise their air services agreement Dec. 8-9 inWashington. The current aviation bilateral, last updated in 1999, is restrictive and limits the number ofcarriers and city-pair markets that carriers from either nation can operate on. Passenger service isrestricted to only two combination carriers from each country per city pair and four carriers per countryto provide codeshare services between city pairs. On the cargo side, the limit is five carriers percountry on each city pair.

Final Order Issued from TSA Requiring PNR Data from AirlinesThe Transportation Security Administration (TSA) has issued a final order requiring U.S. airlines tosubmit Passenger Name Records (PNR) data as a part of its Secure Flight program development.Data must arrive by 23 November for all travel taking place between 1 June and 30 June 2004. TheTSA may choose to exclude travel between Europe and the U.S. in order to not violate EuropeanUnion privacy laws. Under Secure Flight, the TSA will be responsible for comparing PNR data to itsdatabase of known or suspected terrorists.

Charles Chambers

Senior Vice PresidentInterVISTAS-ga2

Washington, D.C.


CARGO CAPERS26 November 2004

A look ahead. As we near the halfway point of the decade, it is timely to think ahead to what cargodevelopments we might see in the second half. There is potential for changes in air policy, industrystructure, international service, freighters, and the role of Canadian airports in the global supply chain.

Co-Terminalisation. Expect restrictions on cargo co-terminalisation in theCanada-U.S. air bilateral to be lifted. They exist to force U.S. integrators suchas FedEx and UPS to use Canadian operators for flying between Canadianairports, even for packages originating in or destined to the U.S. While somesay this provision is needed to counter scope clauses in the U.S. integratorlabour agreements, such protectionism is increasingly out of step. MinisterLapierre has already indicated it is time to reconsider our dated approach.

Open Skies. Though Canada will not have all the open skies bilaterals it should in this timeframe, itwill have taken major steps in that direction. These agreements will include cargo fifths, which will bean important step for Canada’s airports to develop fully as key gateways to the NAFTA marketplace.

A North American Single Market. After talks between the EU and the U.S.on the Transatlantic Common Aviation Area bog down, Canada and the U.S.(and potentially Mexico) will sit down to discuss a North American SingleAviation Market. Talks will include cabotage rights. Although we probably won’tsee this in place before 2010, it is coming.

Industry Rationalisation. With Air Canada getting back into freighters, co-terminalisation, ever-increasing competition from surface transport and intense competition between Canada’s all-cargocarriers, domestic air cargo industry rationalisation is likely. Financial results for privately held carrierssuch as Cargojet, Kelowna Flightcraft and Morningstar are not available, however, publicly tradedKnighthawk lost money in each of the last three years. It is unlikely that the air cargo side will beexempt from the forces that have already forced restructuring of passenger operators.

International Services. Air Canada will acquire its own freighters to operate internationally.Carriers watching Cargolux in Calgary learn there are untapped international air cargo markets inCanada beyond the traditional gateways of Toronto and Vancouver, and freighter services tosecondary Canadian airports will increase significantly in this period.

Freighter Developments. The transition from 727Fs to 757Fs willbe well underway. UPS is already using 757s on transborder services;Cargojet and Kelowna Flightcraft are likely to have made at least apartial transition in this timeframe. With the resumption of production,the AN-124 is likely to be a more common sight at Canadian airports.The IL-76 may also make a return with new Stage 3 compliant engines and new avionics. Don’t lookfor A380 freighters, however; they are unlikely to be serving Canada anytime soon.

The Role of Canadian Airports as NAFTA Gateways. With open skies agreements,international freighter operations by Air Canada, and increased foreign carrier interest in Canada’s aircargo market, Canada’s airports will start playing the role for which they are so well positioned –gateways to the NAFTA marketplace. If a North American Single Aviation Market can beimplemented, expect cargo activity at Canadian airports to truly take off, eh.

Robert Andriulaitis

Director Transportation& Logistics Studies


BLOODBATH IN THE AIR9 December 2004

OverviewThe growth of low cost carriers (LCCs) in the United States domestic air travel market has resulted inextensive airfare competition between these type of carriers and network airlines. The competitionhas been quite fierce. In Canada, low cost carriers are also growing in size with the addition of moreaircraft and more non-stop routes throughout the country. As a consequence, Canada is nowexperiencing the price war phenomenon that has been experienced throughout the United States overthe last several years.

U.S. SituationCurrently, there are some half dozen aggressive low cost carriers inthe United States including Southwest, JetBlue, AirTran, Spirit andFrontier. The combined seat capacity of these airlines, at this time,amounts to over 500,000 seats per day or 20% of the U.S. domestictotal. Furthermore, these airlines are adding a great deal moreaircraft than the network carriers with current orders and options

amounting to over 900 compared to the 600 aircraft they operate today.

As a consequence of this highly evolved level of competition, airfares throughout the United Statesare lower than ever before. For instance, a recently announced seat sale by AirTran offered a one-way price between Philadelphia and San Francisco at $109.00 USD or on a seat mile basis 4.3 centsper mile. The network carriers have responded by creating their own low cost carrier alternativessuch as Delta’s Song and United’s Ted which match the fares, but not necessarily the costs of theLCCs.

Because of this airfare bloodbath within the U.S. domestic market, many network carriers have beencasting their eyes in other directions to improve their overall financial results. Aircraft used on U.S.domestic routes are now being redeployed to international markets. Some examples are:

§ The expansion of Continental into Mexico with 28 cities now served, more cities than even thoseserved by Mexican national carriers;

§ America West’s major expansion between Western Canada and the United States;

§ Delta’s increase of services into Atlantic Canada; and

§ Continental’s expansion of their Newark – Europe flight operations.

Recent Canadian DevelopmentsIn Canada, three low cost carriers, WestJet, Jetsgo and CanJet,are providing stiff competition to the revitalised, re-organised AirCanada. As well, there are new start-up carriers such asHarmony, Zoom and Regional One. The three main low costcarriers have a current fleet of 88 aircraft devoted mostly todomestic services up against a total Air Canada fleet of some 292aircraft including Jazz. For domestic operations, the three low cost carriers currently offer 43,000seats per day or 42% of the domestic total. Furthermore, these carriers have about 70 aircraft onorder or on option, which would increase their current fleet size by 77%.

Martin Copeland

Vice-President,Airline Marketing & Planning


BLOODBATH IN THE AIR – CON’TAs a result of this intensive competition, domestic airfares withinCanada have fallen dramatically. Last year, we were astounded to seethe price of one-way travel between Vancouver and Toronto as low as$119.00. Currently, the standard lowest walk-up fare is some $99.00,but Jetsgo has gone beyond this extremely low fare with a one-way$49.00 fare between Toronto and Vancouver (if you buy a ticket for the

return at the lowest available price, which could be $99.00). The $99.00 fare amounts to 4.7 centsper seat mile, which is far below what it costs the airlines to provide the service.

This intensive competition is not slowing down. For example, Jetsgo recently announced anaggressive foray into WestJet’s Western Canada territory, with new year-round flights to 6 markets.These new services also come with tantalisingly low price levels in the $49.00 range. In addition,Jetsgo has announced a bi-hourly shuttle service between Toronto and Ottawa, taking Air Canadaand WestJet head on.

Even crossing the border, prices are starting to fall. Last year’s $99.00 fare between Vancouver andLos Angeles has now been eclipsed by Alaska Airlines $79.00 one-way fare. Furthermore, pricesbetween Vancouver and Palm Springs/Las Vegas/San Diego have also been reduced now down to$74.00. The reaction of Harmony on Palm Springs was rather swift with a new one-way airfare of$59.00.

ImplicationsThis airfare war is not financially sustainable. Depending upon how much of a flight load is beingcarried at these low prices, the return on an average flight could be a substantial operating loss. Evenwith the apparent 11.1 cents per mile seat cost of WestJet, it doesn’t take too many $99.00passengers contributing 4.7 cents per seat mile to ensure that the flight is going to be operated at aloss.

In the present environment, airlines do not have the power to maintain price increases. Unless therevenue situation improves in the future, some airlines are simply not going to stay in business. It’s apretty rough re-entry for the re-organised Air Canada, but the reality of today’s competition and lowfares would appear to make it very difficult for them to achieve their new financial objectives.

Some of the implications for Canadian airports are that those with services of two or more of the fourlargest scheduled airlines in Canada may see their passenger traffic increase over last year and theirairport aeronautical fees rise. However, some of these increased revenues should be set aside nextyear in a marketing budget to help attract new business if an industry collapse results in one lessdomestic mainline carrier. If you are a traveller, it’s probably not a bad idea to book your flights nowsince the competitive environment in the future will no doubt change, restoring prices to a highernorm.

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.

Prepared by InterVISTAS Consulting Inc.

cair issue no.24 - december 2004

Documents

air travel industry

sars deaths

travel agentcommissions

sars outbreakjust

travel agencies

duringthe sars outbreak

topresars levels

global air travel crisis