CAIR Issue No. 37 - January 2006 by Leah Dupuis

INTERVISTAS ’ CANADIAN AVIATION INTELLIGENCE REPORT

In this issue… Features Columns: • Crude Oil Prices Jump to $64 (p.1) • Market Capitalisation: Renewed Global Performance (p.2) • Changes in Domestic Travel Agent Commissions (p.3)

Regular Reports: • Airline Data-Canada (p.4) • Airline Data-U.S. (p.5) • Airport Data (p.6) • Industry News (p.9) • Economic Outlook (p.12) • Washington Report (p.14) • InterVISTAS News (p.15)

CRUDE OIL PRICES RETURN TO $64 12 January 2005

Crude oil prices hit three month high of $64 a barrel in early January… Crude oil spot prices returned to an upward trend during December and early January, increasing from $58.47 a barrel at one point in December to a three month high of $64.40 on 12 January 2006. Spot prices are still lower than the August average of $68, but the contango position of the market suggests prices may increase beyond today’s $64.

Seasonal Demands for Oil The winter demand for oil will be coming to an end in March. As much of North America has experienced a very mild winter, resource demands have been lighter than anticipated. However, demand will ramp up again during the month of May, when the U.S. summer driving season kicks-off.

... Crude oil futures prices up 10% from December Continued concerns over the long-term supply of oil have caused an increase in futures prices relative to the December 2005 futures prices. A futures contract in January 2006 for delivery of crude oil in December 2011 is priced at $60; this is a 10% increase for the same contract if purchased a month earlier. The futures markets are currently betting that a) prices will remain in the $65 range throughout 2006, but b) the market is not expecting a major run up in prices. However, the market has called future prices poorly over the past three years as the diagram shows. Crude Oil Futures Prices $70

Crude Oil Futures Prices -----

$65

Crude Oil Spot Prices

$60

Sep 2005 Jan 2006

$55

Dec 2005

$50 Apr 2005 $45 $40 $35 Sep 2004 $30 $25 May 2003 Jul-12

Oct-12

Apr-12

Jan-12

Jul-11

Oct-11

Apr-11

Jan-11

Jul-10

Oct-10

Apr-10

Jan-10

Jul-09

Oct-09

Apr-09

Jan-09

Jul-08

Oct-08

Apr-08

Jan-08

Jul-07

Oct-07

Apr-07

Jan-07

Jul-06

Oct-06

Apr-06

Jan-06

Jul-05

Oct-05

Apr-05

Jan-05

Jul-04

Oct-04

Apr-04

Jan-04

Jul-03

Oct-03

Apr-03

$20 Jan-03

Senior Project Manager

US$ Per Barrel

Doris Mak

Iran Resumes Plans for Nuclear Development According to some observers, Iran’s recent declaration to resume development at its nuclear research facilities has contributed to the recent rise in oil prices. The decision has gone against warnings by Western countries and has caused notable concerns in the oil market since Iran is OPEC’s second largest supplier. It is feared that continued nuclear development in the country may lead to sanctions that will – in turn, impact the country’s oil production.

Month of Delivery

Page 1 January 2006

AIRLINE MARKET CAPITALISATION: RENEWED GLOBAL PERFORMANCE 12 January 2006

In the past five years, the global airline industry has experienced acts of terrorism, war, SARS and soaring fuel prices. The industry will pay about $97 billion for its fuel in 2006, almost a quarter of its revenue, compared to $44 billion in 2003. (See “Crude Oil Prices Jump To $64”, p.1). These events have eroded investor values in the industry. The market capitalisation (the market value of the equity shares) of the world’s airlines dropped from US$ 75 billion to $51 billion between December 2000 and December 2001.

Industry Recovery Kahlil Philander Project Analyst

World airline market capitalisation is now returning to the levels of 2000, at $73 billion. Operating statistics show that traffic volumes are strong. Revenue passenger kilometres are up 7.7% this year and global passenger traffic is expected to grow 5.6% per annum until 2009. A surge in world aircraft sales during 2005 supports these growth figures. Boeing had a strong year in 2005, reporting 1,002 orders for 2005, while Airbus nearly doubled their 2004 orders with 687 orders in the year to November 2005. (Final Airbus figures are not yet available, but may approach Boeing’s.) The Asia-Pacific market has recovered from the SARS crisis of two and a half years ago. While the market cap of Asian airlines fell over 40% from the end of 2000 to the end of 2001, it had fully recovered by the end of December 2004, to $19 billion. Although Canadian market capitalisation dropped over 50% from December 2000 to December 2001, it has since climbed 575% with new equity investments in both WestJet and post-bankruptcy Air Canada (ACE Aviation). WestJet and Air Canada, currently have market caps of $1.7 billion (CAD) and $4.0 billion (CAD) respectively. In Western Europe, the airline industry’s market cap levels have returned from past downturns. As of 31 December 2005, market cap was up 91% from 2001 and 44% from 2000. The United Kingdom’s airline market cap is up almost 300% from December 2001. Europe’s four largest airlines, in terms of market capitalisation, are Ryanair, Lufthansa, British Airways, and the recently merged Air France – KLM. Combined, these four companies now have a market cap near $29 billion.

Free Float Market Capitalisation by Region ($US Billion) $80.0

$70.0

$60.0

$50.0

$40.0

US Market Cap Still Down 38% $30.0

$20.0

$10.0

$2000

2001

2002

2003

2004

2005

31-Dec-00

31-Dec-01

31-Dec-02

31-Dec-03

31-Dec-04

31-Dec-05

World

$74.8

$51.3

$40.6

$55.3

$59.2

$71.3

World (ex USA)

$33.4

$22.1

$23.3

$31.4

$35.8

$40.0

USA

$39.1

$28.0

$15.9

$22.0

$21.2

$23.8

Canada

$1.7

$0.8

$1.1

$4.6

Western Europe

$15.1

$11.4

$12.6

$17.5

$17.0

$21.8

Asia-Pacific

$18.3

$10.7

$10.8

$13.9

$18.8

$18.2

Page 2 January 2006

Market capitalisation for airlines not including the U.S. have increased from $33 billion in 2000 to $40 billion in 2005, a growth of 21%. This compares to U.S. airline market values that have gone from $39 billion in 2000 to $24 billion in 2005, a 38% decline. Delta and Northwest Airlines joined United and US Airways in chapter 11-bankruptcy protection. United States airline market cap is still down 15% from December 2001. Southwest Airlines, the industry’s largest airline in terms of market cap ($13 billion), has managed to stay profitable during this US airline industry downturn, but its stock price has still declined 11% since 31 December 2001. InterVISTAS’ Canadian Aviation Intelligence Report Copyright ©2005 InterVISTAS Consulting Inc., all rights reserved.

CHANGES IN DOMESTIC TRAVEL AGENT COMMISSIONS Over the past year, there have been a number of changes in travel agent commissions for domestic air tickets. While Air Canada announced reductions in commissions throughout the year, other carriers not only maintained their base commissions, but the also offered agents bonus commissions and other promotional rewards.

Air Canada. Early in 2005, Air Canada eliminated all commissions on Tango

Angelica Sparolin Senior Researcher

fares, previously set at 9%. Tango-Plus fares were reduced from 9% to 5%. Starting 1 January 2006, commissions on flight passes, which were previously set at 5%, were eliminated. On 9 January 2006 Air Canada eliminated its 5% commissions on Latitude and Tango-Plus fares and for group bookings for all “non-preferred suppliers.” This move in particular has drawn criticism from travel agents and industry associations because Air Canada did not immediately specify the criteria it would be using to qualify agencies as preferred suppliers. Air Canada cited its business strategy aimed at lowering costs as the driving force behinds these recent commission cuts.

WestJet. WestJet continued to offer its base commissions, ranging from 5% to 9% on all tickets, based on booking channel. WestJet also offered bonus commissions during two periods in 2005: a 2% bonus commission during May, which WestJet has designated “Travel Agent Month”, designed to educate its employees on the role that agents play in the airline’s success; and a 3% bonus commission on all bookings made in September and October. WestJet also offered other contests and promotions throughout the year, including rewarding agents with AirMiles for online bookings made in November (in addition to the client receiving AirMiles). A general indication of the volume of WestJet ticket sales made through travel agencies is that in 2004 more than $400 million in WestJet travel agent bookings were made. CanJet. CanJet also maintained its base commissions of 5% to 9% in 2005. In celebration of its third anniversary of operation, CanJet offered a bonus 2% commission on all bookings made by agents during May and June. Domestic Commission Structure As of January 2006

Carrier

Fare Category

Air Canada

Latitude Tango Plus All Other Fares

WestJet

All Classes

(11% to 12% during bonus periods)

CanJet

All Classes

(11% during bonus periods)

(7% during bonus periods)

Harmony

All Classes

5% Western Canada 10% Eastern Canada

10%

GDS

Internet

Call Centres

5% 5% 0% 9%

0% 0% 0% 5%

(7% to 9% during bonus periods)

Sources: Air carrier websites/press releases, industry publications and travel agency input. Air Canada commissions are for “preferred suppliers” only. WestJet also offers 5% commissions on group bookings. For GDS bookings, Harmony offers different commissions based on where in Canada the agency is located.

Page 3 January 2006

AIRLINE DATA – CANADA Traffic and Load Factors on Canada’s Major Air Carriers December 2005 Passenger Traffic

Air Carrier

Revenue Passenger Kilometres

% Change over 2004

% Change from 2003

+8.5%

+4.5%

+1.0%

-2.3%

-1.8%

-2.5%

Jazz

+86.1%

+97.7%

International & Charter

+11.4%

+15.0%

Air Canada1

+7.4%

CanJet: not reported

Domestic (Mainline)

WestJet

Change over 2004 +2.1 pts (to 77.3%)

Change from 2003 +5.3 pts (from 72.0%)

-12.3%

+0.2 pts

+8.2 pts

82.1%

68.7%

+2.5 pts

+12.2 pts

+12.8%

+7.3%

+6.9%

+2.9 pts

+4.1pts

+54.6%

+9.8%

+45.4%

+3.5 pts (to 78.2%)

+4.6 pts (from 73.6%)

Analysis: •

•

Load Factor

% Change over 2004

OTHER CARRIERS: LOAD FACTORS

% Change from 2003

Capacity

Available Seat Kilometres

Air Canada Domestic Mainline

21st

Air Canada reported its consecutive month of record load factors during December 2004. Domestic traffic and capacity continued to slide during the month, down 2.3% and 2.5% respectively from December 2004. Domestic load factor of 77.2% was Air Canada’s highest ever for December. Air Canada’s international services continued steady growth. December 2005 passenger traffic increased 11.4% and capacity grew 7.3%, over December 2004.

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

Jazz data is not included in this graph

-15%

Dec- Jan- Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 04 05 Dom RPK Dom ASK

Air Canada International 15% 10% 5% 0% -5%

•

Jazz traffic and capacity continued near triple-digit growth in December 2005, increasing 86% and 82% respectively from December 2004. WestJet continued strong passenger growth in December 2005 with a 15.0% increase in RPK over December 2004. As traffic volumes grew faster than capacity, load factor was up 3.5 pts to 78.2% for the month.

-10% Dec- Jan- Feb 04 05

Mar

Apr

May

Int'l RPK

Jun

Jul

Aug

Sep

Oct

Nov

Dec

Int'l ASK

W estJet 60% 50% 40% 30% 20% 10% 0% Dec- Jan- Feb 04 05

M ar

Apr

M ay

R PK

Jun

Jul

Aug

Sep

O ct

Nov

A SK

Air Canada consists of all Air Canada operations with the exception of Jazz. InterVISTAS’ Canadian Aviation Intelligence Report Page 4 January 2006 Copyright ©2005 InterVISTAS Consulting Inc., all rights reserved. 1

Dec

AIRLINE DATA – U.S. U.S. Airlines Release December 2005 Traffic Figures Traffic Data – December 2005 Airline

Load Factor

Traffic (RPMs – millions)

(ASMs – millions)

78.9%

11,490

14,545

!4.3 pts

!4.6%

"1.1%

71.6%

708

989

!5.9 pts

!23.8%

!13.7%

75.8%

432

570

!5.9 pts

"52.6%

"56.2%

77.7%

6,997

9,006

!1.2 pts

!13.1%

!11.4%

75.3%

9,117

12,101

!1.8 pts

"2.7%

"5.1%

82.0%

1,849

2,232

"0.9 pts

!27.9%

!26.6%

80.7%

5,817

7,210

!2.5 pts

"5.7%

"8.6%

67.6%

4,994

7,382

!4.7 pts

!15.1%

!7.0%

80.0%

9,452

11,813

!2.3 pts

!0.5 pts

"2.3%

72.2%

4,856

6,725

!0.3 pts

"7.0%

"7.4%

Notes:

1. 2.

Sources:

Carrier traffic reports.

Page 5 January 2006

Capacity

Mainline operations only. Load factor includes scheduled service only.

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

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

+9.6

+4.7%

+11.4%

+4.4%

+8.3%

+0.3

+5.1%

+8.0%

-11.1%

St. John’s +9.9%

+14.2%

+6.8%

+20.9%

+8.9%

+8.4%

+11.0%

+5.1%

+8.0%

+2.1%

+3.9%

+8.1%

+3.6%

+6.8%

4th Quarter

+14.0%

+6.7%

+16.1%

+9.7%

+3.1%

+11.4%

+3.5%

+6.4%

+0.3%

+5.9%

+8.0%

-2.1%

+11.9%

Full Year

+15.7%

+9.6%

+18.6%

+7.0%

+5.1%

+10.2%

+7.7%

+9.1%

+5.7%

+3.6%

+5.6%

+0.3%

+14.0%

January

+15.0%

+9.8%

+14.4%

+13.2%

+9.6%

+12.9%

+13.6%

+7.0%

+4.7%

+12.4%

+17.8%

+9.7%

+11.9%

February

+8.7%

+4.5%

+3.8%

+10.2%

+7.8%

+5.5%

+7.0%

+4.8%

+7.1%

+15.8%

+10.5%

+8.5%

+1.5%

March

+10.2%

+8.2%

+5.5%

+17.5%

+12.5%

+7.3%

+9.7%

+7.1%

+15.4%

+19.5%

+19.2%

+22.2%

+19.6%

1st Quarter

+11.2%

+7.5%

+7.7%

+13.7%

+10.0%

+8.4%

+10.0%

+6.3%

+9.3%

+16.0%

+15.7%

+13.3%

+11.5%

April

+4.0%

+3.9%

+5.7%

+3.5%

+5.5%

+0.1%

+4.3%

-0.2%

+2.6%

+18.8%

+6.0%

+3.8%

+9.8%

May

+6.7%

+5.5%

+3.6%

+12.2%

+12.0%

+5.5%

+8.0%

-4.5%

+5.8%

+26.3%

+13.5%

+5.7%

+8.5%

June

+6.3%

+4.0%

+7.5%

+10.1%

+13.9%

+3.4%

+2.9%

-0.5%

+6.8%

+22.7%

+10.9%

+12.4%

2nd Quarter

+5.7%

+4.5%

+5.6%

+8.6%

+10.4%

+3.1%

+5.0%

-1.8%

+5.1%

+22.6%

+10.2%

+7.3%

+10.3%

July

+3.6%

+3.4%

+4.0%

+11.2%

+11.7%

+4.8%

+4.5%

-9.7%

+1.2%

+15.9%

+5.2%

+10.9%

+14.0%

August

-1.1%

+2.7%

+1.5%

+12.7%

+8.8%

+4.4%

+4.6%

-6.4%

+5.2%

+26.4%

+10.3%

+2.4%

+8.9%

September

+4.5%

+2.6%

+7.4%

+7.9%

+13.5%

+7.1%

+6.6%

+0.3%

+2.9%

+16.1%

+12.9%

+13.9%

+8.9%

3rd Quarter

+2.2%

+2.9%

+4.1%

+10.7%

+11.2%

+5.4%

+5.1%

-5.6%

+3.1%

+19.6%

+9.3%

+8.8%

+8.0%

October

-0.1%

+4.3%

+3.7%

+7.1%

+16.7%

-0.7%

+6.4%

-0.7%

+3.1%

+16.1%

+11.8%

+12.8%

-0.9%

November +0.6% +5.2% +4.1% 12.1% Source: Transport Canada and individual airports’ traffic reports.

+10.7%

+2.5%

+6.2%

+3.0%

+8.5%

+24.0%

+18.0%

+15.6%

+5.0%

2004

Calgary

+6.2%

MontréalTrudeau +17.6%

Toronto

Vancouver

November

+13.3%

December

2005

If your airport is interested in providing InterVISTAS Consulting Inc. with its monthly passenger statistics, please email Doris Mak at doris_mak@intervistas.com. Page 6 January 2006

W estJet Airlines Fleet Plan: 2005 - 2008 FEB

M AR

2006

2005

JAN

x x x

JU N

JU L

AU G

SEP

OCT

x x x

x x

NOV

W S Fleet Total

D EC

55 (+1)

x x x

63 (+8)

2007

x x

M AY

67 (+4)

2008

AP R

70 (+3)

Source: W estJet Airlines, effective Decem ber 29, 2005. Notes:

10 of 12 deliveries in 2006 are 737-600 series aircraft (119 seats). Rem aining 2 are 737-700 series (136 seats). Deliveries scheduled for 2007/08 are tentatively booked as 737-700s. W estJet holds an additional 24 purchase rights/options, which m ay be exercised or converted before Dec. 31/2008.

Page 7 January 2006

Prepared by

Passenger Market Data for Airports Accurate and Timely Marketing Data: A Key to Air Service Development InterVISTAS Consulting, in conjunction with the International Air Transport Association and other suppliers, is offering a unique data set that provides passenger market sizes, travel routings and fare profile data for domestic, transborder and international markets.

InterVISTAS Consulting Inc. rd 550-1200 West 73 Avenue, Vancouver, BC, V6P 6G5 Canada Telephone: 1-604-717-1800 Facsimile: 1-604-717-1818 E-mail: info@intervistas.com

Origin & Destination Market Data for all Top Markets Inbound & outbound travel agency data is now available for Canadian domestic and top international air markets. InterVISTAS’ market data is supported by a number of sources including IATA travel agency ticket sales. Travel agency sales represent approximately 80% scheduled international air tickets issued worldwide. The database includes more than 7 million air tickets issued annually in Canada and several million tickets destined to Canada annually.

Identify True Origin & Destination Flows • Quantify city-pair market sizes for air service development initiatives Analyse Hub Activity & Routings • Identify key routing patterns to support air service proposals Understand Competition within Airport Catchment Areas • Quantify traffic leakage to determine true market sizes For more information, contact: Nancy Keen InterVISTAS Consulting Telephone: 604-717-1822 Email: nancy_keen@intervistas.com

NEWS ARTICLES AIR CANADA COMMENCES NEW ROUTES FROM CALGARY

AIR CANADA UPDATE AIR CANADA CUTS 40% OF INTERLINE PARTNERSHIPS Air Canada has announced that it has cut about 150 of the near 350 total interline partnerships it had in place with other airlines. Notable airlines whose partnerships will end include El Al, Etihad, and China Airlines.

AIR CANADA TECHNICAL SERVICES NOT TO LAUNCH IPO UNTIL END OF 2006

ACE Holdings, Air Canada’s parent company has said that they would not launch the initial public offering of Air Canada Technical Services until the end of 2006, citing a need for time to collect and release independent financial statements. Fellow ACE subsidiary Aeroplan has already gone public and Jazz is ready for an offering early next year.

AIR CANADA TO INTRODUCE TORONTO - SHANGHAI NON-STOP FLIGHTS Air Canada announced on 9 January, that it will introduce non-stop flights from Toronto to Shanghai, effective 16 June 2006. The new service will operate three times weekly. Air Canada currently offers Toronto-Beijing nonstop service and daily non-stop service to both Shanghai and Beijing from Vancouver.

AIR CANADA JAZZ LAUNCHES YVR SAN DIEGO SERVICE On 17 December, Air Canada Jazz inaugurated a daily non-stop service from Vancouver to San Diego. Air Canada now offers up to 20 daily flights to California from cities across Canada.

AIR CANADA LAUNCHES SERVICE TO SANTO DOMINGO

Air Canada launched a service from Toronto to Santo Domingo on 17 December. The non-stop flights will run three times weekly during the winter and spring holiday peaks and two flights weekly for the balance of the year. Page 9 January 2006

On 17 December, Air Canada launched two new non-stop routes from Calgary to Orlando and from Calgary to Abbotsford. Air Canada’s seasonal service to Orlando will depart twice weekly, while Air Canada Jazz will operate the three daily Abbotsford flights.

AIR CANADA TO LAUNCH MONTREAL TO DENVER SERVICE Air Canada announced on 21 December the introduction of a daily non-stop service from Montreal to Denver, Colorado. The year round flights will begin 16 June 2006. Air Canada is the only airline to offer this direct service that cuts existing air travel time by approximately two hours.

AIR CANADA WELCOMES EMBRAER 190 AIRCRAFT

On 22 December, Air Canada’s first new Embraer 190 aircraft had its inaugural flight. Air Canada becomes the first North American airline to operate two different Embraer E-Jet models, the E175 and the E190.

AIR CANADA LAUNCHES TRANSATLANTIC SIMPLIFIED FARES

Air Canada announced on 4 January that it has expanded its simplified fare structure to flights to and from the United Kingdom. The redesigned fare structure simplifies travel bookings to four fare categories.

OTHER CANADIAN AIRLINE NEWS SKYSERVICE LAUNCHES SERVICE FROM KITCHENER/WATERLOO

On 22 December, Skyservice Airlines, in conjunction with Sunquest Vacations, launched direct charter service from Kitchener/Waterloo to Varadero, Cuba. The pair will inaugurate direct charter service to Cancun on 29 December 2005. In conjunction with Signature Vacations, Skyservice will also offer weekly charter service to Punta Canta and Cancun beginning 26 December and 3 February, respectively.

NEWS ARTICLES CANADIAN AIRPORTS YVRAA CREDIT RATING UPGRADED

The Vancouver International Airport Authority’s (YVRAA) credit and unsecured debt ratings have been raised by Standard & Poor’s, from AA Low to AA. YVRAA is one of only four airports in the world with this high designation.

CALGARY PASSENGER VOLUME REACHES 10 MILLION IN 2005

Calgary International Airport (YYC) reached an all-time high of 10.2 million passengers during 2005. The figure represents an increase of 11% over 2004. YYC is Canada’s fourth busiest airport. NAV CANADA TO REPLACE TOWER AT TORONTO BUTTONVILLE NAV CANADA, announced on 17 January, plans to build a $2 million air traffic control tower at Toronto Buttonville Airport. The facility is to replace the existing tower and is expected to finish completion June 2007.

CARGO UN-DHL AGREEMENT

The United Nations Development Programme and the UN Office for the Coordination of Humanitarian Affairs signed a partnership agreement with international leading express and logistics provider DHL to set up three global disaster response teams. The first is located in Singapore, with the other two to cover Africa/ Middle East and Latin America/Caribbean.

PEOPLE IN THE NEWS EU APPOINTS MATTHIAS RUETE DGTRANSPORT

The European Commission appointed Matthias Ruete as Director General of the Energy and Transport Directorate. Among his duties will be the development of

Page 10 January 2006

air transport policy. Previously he was responsible for competitiveness initiatives in the Enterprise and Industry Directorate.

MICHEL LEMAY NAMED TRANSAT VP COMMUNICATIONS Transat A.T. announced Michel Lemay as the new Vice President, Communications and Corporate Affairs. Lemay is currently VP, Corporate and Financial Communication with Optimum Public Relations.

BEN SMITH TO CEO, AIR CANADA VACATIONS

Air Canada Vacations’ President and CEO, Allister Paterson, has left the company after four years at the position. Ben Smith, Air Canada’s Vice President of Network Planning, has taken over in the interim.

ALASKA PROMOTES GLENN JOHNSON

Alaska has promoted Glenn Johnson to senior VP-customer service for airports. Johnson is a former VP-customer service for Horizon Air, and has led an operations improvement team at Alaska for the past six months.

OTHER EUROPEAN COMMON AVIATION AREA CREATED The EU reached agreement with 10 non-EU nations to extend the European Common Aviation Area (ECAA): Iceland, Norway, Bulgaria, Croatia, Macedonia, Montenegro, Serbia, Bosnia/Herzegovina and the UN mission in Kosovo. The ECAA is believed to include cabotage and right of establishment, as well as integration of safety and regulatory matters. The agreements are expected to take effect in early 2007.

NEWS ARTICLES FRANCE APPROVES NEW AIRLINE TAX

OTHER – CON’T U.S. NETWORK CARRIERS LOSSES WIDEN IN Q3 U.S. network carriers (America West, Continental, Delta, Northwest, United, and US Airways) reported a combined third quarter net loss of $2.7 billion, versus a loss of $1.5 billion a year earlier. Only Continental reported positive net income. US Airways had a net profit, but when combined with America West, the Group reported a loss.

UNITED LOOKS TO ADD AIR CANADA TO ANTITRUST IMMUNITY APPLICATION United Airlines has asked the US Department of Transportation to add Air Canada to its current application for antitrust immunity extension to its bilateral agreements with LOT, TAP, and Swiss.

MOROCCO OPEN SKIES WITH EU

Morocco and the 25 nation European Union entered into an open skies agreement, which removes all restrictions on EU and Moroccan airlines. The agreement allows unlimited 3rd/4th/5th freedom services, right of establishment and cabotage. Some 7th freedom passenger services are also allowed.

Page 11 January 2006

France has approved a tax on airline tickets to finance development aid for poor countries. The tax will range from EUR1 to EUR40 per ticket and is expected to generate EUR210 million per year.

UNITED’S PLANS TO EXIT BANKRUPTCY IN FEBRUARY ON TRACK The current period of protection for United Airlines has been extended to 3 March to provide the carrier with a suitable timeline to have its reorganisation plan approved and exit protection during February. United has been in bankruptcy protection since December 2002. November year to date operating earnings has improved by $450 million and United expects cost-cutting strategies will reduce average annual costs by $7 billion through 2010.

UNITED AIRLINES INCREASES DENVER SERVICES

On 21 December, United Airlines announced a new daily roundtrip service between its Denver hub and Toronto. The service begins 12 June 2006. United will also add an additional daily flight to its Denver – Vancouver service in June, bringing the total service between the cities to three times daily.

ECONOMIC OUTLOOK January 2006

The Canadian economy: Healthy growth through 2005. Following a relatively slow start in the first quarter of 2005, the economy picked up with solid GDP growth, exceeding 3% on an annualised basis in the second and third quarters. Data for the fourth quarter is not yet available but is expected to be somewhat below this pace, leading to an estimated 2.9% growth on the year. These growth numbers are not as impressive as in some recent years, but nevertheless reflect a healthy economy. Employment growth continued the steady pace from 2004, while unemployment has declined to historically low levels. The unemployment rate in November dropped to 6.4%, its lowest level since 1974, before edging up a tenth of a point in December.

Q1 2006

Q1 2005

Q1 2004

Contributing to Real Canadian GDP (annualised Quarterly %) increased growth in 6% 2006 are improvements Historical Forecast in the manufacturing Data Data 5% sector and in exports, which have suffered in 4% recent years due to the appreciation of the 3% Canadian dollar. Many economists are of the 2% view that the dollar will stabilise within a few 1% cents of 85 cents U.S., 0% as an expected drop or stabilisation in commodity prices (which -1% have been contributing to the high Canadian dollar) will be offset by tighter monetary policy Source: Statistics Canada for Historical Data; TD Economics for Forecast Data from the Bank of Canada in response to inflationary pressures. Q1 2003

Director, Economic Analysis

Q1 2002

Ian Kincaid

2006: Strong start, slowing slightly. For 2006, there is some range in current forecasts for overall economic performance. GDP growth forecasts range from a low of 2.7% (National Bank of Canada) to as high as 3.5% (Bank of Montreal), with a median of about 3%. There is general agreement that the expected drop in growth in the fourth quarter of 2005 was a temporary occurrence and growth should rebound to over 3% early in the year. This growth is somewhat expected to weaken over the course of the year.

The high dollar has positively impacted investment, particularly in machinery and equipment (10.3% growth in 2005), contributing to economic and productivity growth even as exports have remained weak. (Higher investment also bodes well for future economic productivity.)

Taxes? The 2005 level of investment is expected to cool slightly in 2006 but remain relatively high. Also contributing to growth in 2006 will be expected fiscal stimuli from the federal government. This includes income tax reductions announced in 2005, which will increase the basic deduction and a reduction of the lowest personal rate and/or a reduction in the GST. Further tax reductions and/or new government spending are part of the platforms of all federal parties, so further stimulus can be expected regardless of the outcome of the January 23 election. Page 12 January 2006

ECONOMIC OUTLOOK – CON’T Countering these positive factors are negative trends in some sectors in Canada and the U.S., which are expected to take effect later in the year. In Canada, residential construction has already begun falling off and will have negative growth through 2006, due to fulfilment of pent-up demand and rising interest rates. Household spending, particularly on durable goods, is also expected to slow. The U.S. is seeing similar trends, perhaps more pronounced, as higher interest rates and energy prices, declines in housing starts, and resulting decreases in consumer spending are expected to cool the U.S. economy in the near to medium term. As Canada’s largest trading partner, this will spill over to Canada through decreased demand for exports. There remains some disagreement on the timing, severity, and impact of such a slowdown, which leads to the ranges in growth expectations amongst economists.

Page 13 January 2006

WASHINGTON REPORT 10 January 2005

U.S. Signs New Aviation Agreement with Mexico Mexican and U.S. authorities have signed a new agreement concluded in September. The accord allows three airlines from each country to fly between any U.S. city and 14 Mexican destinations. The previous pact had only allowed for two airlines. The agreement also allows an unlimited number of all-cargo carriers to fly between the two countries, versus five previously, and expands code-sharing rights for U.S. and Mexican airlines.

DOT Denies SkyTeam Antitrust Immunity Jon Ash President InterVISTAS-ga2 Consulting Inc. Washington, D.C.

The U.S. Department of Transportation (DOT) has tentatively denied a request by the SkyTeam carriers – Air France, Alitalia, CSA, Delta, KLM, and Northwest – for antitrust immunity. The DOT cited that the alliance failed to convince the department that immunity would provide sufficient public benefit. The DOT did approve a request by SkyTeam for expanded code sharing.

House Pension Bill Gives No Relief to Airlines The House has passed a pension reform bill that obliges companies to close their pension fund shortages within seven years. A similar senate bill provided airlines with 20 years to remedy the shortfalls, but the house did not provide this special relief.

FAA to Expand Approach Procedures Designed to Boost Arrival Rates The FAA is to roll out a new airport approach procedure at some of the nation’s busiest airports next year. Airlines are interested in using it to achieve cost advantages that Alaska Airlines achieved during trials. The required navigation performance (RNP) procedures use aircraft flight management systems to fly approach paths with almost no deviation. Aircraft that meet RNP standards can use autopilot to follow complex approach paths, mapped out by the FAA, even during bad weather. This can prevent diversions while increasing arrival rates.

Nine-Month Domestic Traffic Up 5.3% from 2004 On 15 December, the U.S. Department of Transportation announced that U.S. airlines carried 5.3% more domestic passengers and flew 1.2% more domestic flights during the first nine months of 2005 than during the same period in 2004. Revenue also increased 5.5%, while available seat miles and load factor were up 1.8% and 2.6% respectively.

Airline On-Time Performance Improves from 2004 The on-time performance for America’s 20 largest carriers improved during November 2005; on time arrival rates increased to 80.0% from 79.1% in November 2004. Cancellations for the same group also showed improvement, down from 1.2% in November 2004 to 1.0% in 2005.

Page 14 January 2006

INTERVISTAS NEWS January 2006

Kara M. Levine Joins InterVISTAS-ga2 Consulting, Inc. as Director, Strategic Analysis and Forecasting. Ms. Levine brings to InterVISTAS a strong background in cargo operations and forecasting, airline financial modeling, operational performance analysis, industry trend analysis and air service marketing and development. Prior to joining the InterVISTAS team, she was an Associate with an equity research firm, covering companies in the aerospace, defense, transportation and logistics industries, and had been a Senior Market Analyst with American Trans Air. Ms. Levine holds a Masters Degree in Economics from the University of California.

InterVISTAS Upcoming Speaking Engagements #

23 February 2006: 9th Annual Hamburg Aviation Conference, Hamburg, Germany Dr. Mike Tretheway, Executive Vice-President Dr. Tretheway has been honoured by being selected to give the Martin Kunz Memorial Lecture. The title of his presentation is “Airline Economics 30 Years after Deregulation.”

22 February 2006: GARS Workshop, Hamburg, Germany Mr. Ian Kincaid, Director, Economic Analysis The title of his presentation is “Issues in Benchmarking Airports.”

InterVISTAS’ Canadian Aviation Intelligence Report 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. To inquire about advertising opportunities or to provide comments/feedback on the InterVISTAS’ Canadian Aviation Intelligence Report, please contact Rob Beynon at rob_beynon@InterVISTAS.com or 1-604-717-1864. To subscribe, please send an email to subscribe@InterVISTAS.com To unsubscribe, please send an email to unsubscribe@InterVISTAS.com.

Page 15 January 2006