INDUSTRY REVIEW
Page 6
February 2003
THE SHIFT IN AIR CANADA’S DOMESTIC SEAT CAPACITY With the introduction of Tango and Zip operating under the Air Canada umbrella, there has been a noticeable shift in domestic seat capacity away from Air Canada trunk operations to its newly branded travel products in Tango and Zip. Tango began operations on a limited number of domestic routes in November 2001 offering travelers a “no-frills” option to Air Canada’s full-service travel offering. Zip, which began operations in September 2002, has its route network focussed primarily on Western Canada – although the low cost carrier has plans to expand services to Eastern Canada in February 2003. AC Domestic Seat Capacity Shares
Doris Mak Senior Market Analyst
Over the past two years, there has been a definite shift in domestic seat capacity from Air Canada trunk operations and Jazz to its other b randed products of Tango and Zip. In future months, with Zip’s plans to move into Eastern Canada, capacity will continue to be reallocated from Air Canada trunk.
100% 80% 60% 40% 20% 0% Jan 2001
Air Canada Trunk
Jan 2002
Regional/Jazz
Jan 2003
Tango
Zip
Air Canada Domestic Seat Capacity Breakdown Carrier January 2001 January 2002 January 2003 Air Canada Trunk 58.4% 59.5% 51.9% Regional/Jazz 41.6% 36.8% 32.8% Tango 3.7% 10.5% Zip 4.8% Total Domestic Seat 2,506,049 2,222,703 2,247,368 Capacity % Change in Total Domestic Seat Capacity -11.3% -10.3% from 2001 Source: OAG Max January 2001, January 2002, January 2003; Tango Timetable 2001 and January 2003, Air Canada Zip website. Observations: •
• • •
Both Air Canada Trunk and Jazz have seen a drop in their share of AC total domestic seat capacity. Tango and Zip now account for 15.3% of total capacity. Note that the seat capacity of Tango and Zip is now equal to 44.5% of the seat capacity of WestJet. The largest drop has been at Jazz, which lost 8.8% share of total capacity. In absolute terms, Jazz has seen a decline in seat capacity of –29.3%.
Page 1
February 2003
AIRLINE DATA - CANADA
Traffic and Load Factors on Canada’s Major Air Carriers – January 2003 Air Carrier
Jetsgo: Zip:
69% not reported
CanJet:
not reported
Capacity Available Seat Kilometres
Load Factor
% Change over 2002
% Change over 2001
% Change over 2002
% Change over 2001
% Change over 2002
% Change over 2001
-2.1%
-3.0%
+1.6%
-7.6%
-2.6 pts (to70.4%)
+3.3 pts
Domestic
-12.7%
-8.8%
-3.4%
-8.5%
-7.2 pts (to 67.3%
-0.3 pts
International & Charter
+2.6%
-0.6%
+3.7%
-7.2%
-0.7 pts (to 71.7%)
+4.8 pts
+149.1%
-5.8 pts (to 61.3%)
-4.3 pts
Air Canada 1
NEW CARRIERS: LOAD FACTORS
Passenger Traffic Revenue Passenger Kilometres
+51.8%
WestJet
+132.6%
+61.4%
The following graphs highlight the year-over-year change in Air Canada’s mainline domestic and international passenger traffic and capacity. Air Canada’s domestic traffic has continued its downward trend which began in November 2002 into the first quarter, traditionally the weakest months for the air travel industry. Domestic traffic has shown year-over-year declines for three consecutive months with traffic down 12.7% in January. Although Air Canada launched its winter seat sale event in January, domestic load factors were at 67.3% (down 7.2 pts) on 3.4% less capacity compared to a year ago. Air Canada’s transborder operations were up marginally (+0.8%) in January with a load factor of 64.2%. Capacity increased by 2.2% compared to one year ago. Air Canada Domestic Domestic
25%
Air Canada Canada International International 25%
20%
20%
15%
15%
10% 5% 0%
Dom RPK
10%
Int'l RPK
Dom ASK
5%
Int'l ASK
0%
-5% -10%
January 2003 RPKs are 8.8% below January 2001 levels
-15% Feb- Mar 02
Apr
May J u n
Jul
Aug S e p
Oct
N o v Dec Jan03
Although WestJet continues to show strong growth with traffic up 51.8% in January compared to the same month last year, the airline’s share price has been punished in the recent weeks. Investors view that the recent fare war between Air Canada Zip and WestJet will result in lower yields for the airline in the near future. WestJet capacity increased 61.4% for the month. With excess capacity in the system, load factor was down 5.8% from a year ago.
1
January 2003 RPKs are 0.6% below January 2001 levels
-5% -10% Feb- Mar 02
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan03
WestJet
80% 70% 60% 50%
RPK
40%
ASK
30% 20% 10% 0% F e b - Mar 02
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Jan03
Air Canada Mainline consists of all Air Canada with the exception of Jazz.
Page 2
February 2003
AIRLINE DATA – US US AIRLINES 2002 FINANCIAL AND TRAFFIC FIGURES Airline
1
2002 Net Income (US$ - Millions)
2001 Net Income (US$ Millions)
$3,511 incl. special items
$1,762 incl. special items
$2,018 excl. special items
$1,407 excl. special items
LOSS 2
3
5
Load Factor
Traffic (RPMs – millions)
Capacity (ASMs – millions)
70.4%
125,900
178,800
á 1.8 pts
á 1.2%
â 1.3%
72.8%
12,400
17,600
â 3.2 pts
á 6.1%
á 8.7%
73.3%
59,300
80,100
á 1.5pts
â 2.9%
â 5.2%
LOSS
$169
$76
LOSS
LOSS
$451 LOSS
$95 LOSS
$1,272 LOSS
$1,216 LOSS
72.0%
102,000
141,700
á 3.2 pts
á 0.3%
â 4.1%
$55
$39
83.0%
6,800
8,200
PROFIT
PROFIT
á 5.0 pts
á 108.3%
á 95.8%
$798 LOSS
$423 LOSS
77.1%
72,000
93,400
á 2.8 pts
â 1.5%
â 5.0%
$241 PROFIT
$511 PROFIT
65.9%
45,392
68,887
â 2.2 pts
á 2.0%
á 5.5%
$3,212 LOSS
$2,131 LOSS
73.5%
109,500
148,800
á 2.7 pts
â 6.2%
â 9.7%
$1,646 LOSS
$2,117 LOSS
71.0%
40,000
56,400
á 2.2 pts
â 12.9%
â 15.5%
Notes: 1 Passengers carried data only includes up to June 2002. 2 Includes American Airlines and American Eagle 3 Scheduled Service –Total only 4 Includes Continental Express. 5 Load factor includes scheduled service only. Source: Carrier financial/traffic reports.
The largest US airlines lost more than US$11 billion in 2002, a US$7.5 billion improvement from the year before. From the above chart, American Airlines experienced the largest loss while only Southwest Airlines and JetBlue Airways were profitable for the year.
Page 3
February 2003
WESTJET OUTLOOK FOR 2003 Continued Growth in a Difficult Year For several years, many Canadian airports have looked to WestJet as their best opportunity for improving air services by bringing competition, flights, destinations, or jet aircraft to their markets. While WestJet is likely still the best hope for a strong and competitive industry in Canada, there are several indicators that the year ahead may be the most turbulent in its history. For starters, WestJet has introduced a fuel surcharge on its flights for the first time. Fuel prices are not significantly higher than they were when Air Canada, Canada 3000 and Air Transat added surcharges in May 2001, but the aggressive fuel hedging program which helped WestJet avoid following suit during the last fuel spike will account for less than 30% of its fuel needs in 2003. In addition, WestJet continues to feel the pinch on its ultra short haul routes, largely due to the destimulative effect of the Air Travellers Security Charge in these markets. Although the ATSC is expected to be reduced somewhat in the next federal budget, the structure of the fee is unlikely to change, meaning that short haul (lower fare) routes will continue to be disproportionately affected. To its credit WJ is leading by example, collecting its NavCanada and fuel surcharges on a tiered basis, mitigating the effect on short haul routes. Note that WestJet is also critical of Airport Improvement Fees, most of which also have a greater impact on short haul travel.
In spite of a less-than-optimal operating WestJet Monthly Load Factor Growth/Decline: environment, WestJet will continue its 2002 vs. 2001 industry-leading growth, taking delivery of 11 3.0 new aircraft in 2003. It is important to note 2.0 that unlike its first several years of operation, 1.0 WestJet’s traffic growth is no longer keeping pace with its capacity growth. In 10 of the (1.0) past 12 months, WestJet has posted monthly (2.0) declines in year-over-year load factors, with (3.0) only September and October showing (4.0) improvements over the severely depressed levels of 2001. Although the falling load factor is due in part to the addition of new markets, one hopes that WestJet can avoid the flaw of growing too quickly, which has been fatal for many carriers in the past. Although the year ahead will be one of the most challenging so far for WestJet, it remains in the best shape among the large domestic carriers. WestJet is profitable, maintaining a solid balance sheet and strict cost controls. Investors may continue to see a depressed share value, and employees might be less excited than usual on profit-sharing day, but WestJet will continue to lead the growth of the Canadian airline industry in 2003. Page 4
February 2003
Dec-02
Oct-02
Nov-02
Sep-02
Jul-02
Aug-02
Jun-02
May-02
Apr-02
Mar-02
Jan-02
Feb-02
Senior Airline Analyst
While fuel prices, security charges and the pending conflict in Iraq will continue to have a negative impact, the emergence of low cost competition in all regions of the country is probably of greater concern to WestJet right now. With load factors stuck in the mid-50% range, Zip initiated a fare war in Western Canada. Seat sale prices between Vancouver/Victoria and Calgary are as low as $37.49 one way. WestJet had little choice but to match ZIP’s fares. In the east, the repeat of the Milton-Leblanc-Rowe battle has deteriorated, as it did in 2001, into money losing seat sales. The result is downward pressure on WestJet yields in both Eastern and Western Canada.
Change in L.F. over Previous Year (Pts.)
John Weatherill
Summary of Total Year-Over-Year Passenger Traffic Performance at Selected Airports - 2002 Vancouver
Montreal -Dorval
Calgary
Edmonton
Ottawa
Winnipeg
Halifax
Victoria
Kelowna
Saskatoon
Regina
St. John’s
January February
-10.3% -9.2%
-15.2% -12.4%
-4.3% +1.1%
-11.8% -12.0%
-11.4% -10.1%
-20.1% -17.2%
-5.6% -16.4%
-12.1% -6.8%
-3.0% -0.1%
-4.0% -8.5%
-8.4% -6.2%
-9.3% -9.8%
March 1st Quarter April
-7.0% -8.8% -9.2%
-13.1% -13.6% -13.5%
-2.0% -1.8% -5.2%
-11.4% -11.7% -8.1%
-12.9% -11.5% -13.1%
-12.4% -16.5% -9.3%
-17.2% -13.6% -12.3%
-6.5% -8.4% -6.4%
-3.0% -2.1% -5.7%
-7.6% -6.7% -13.4%
-7.8% -7.5% -12.6%
-11.8% -10.3% -11.0%
May June 2nd Quarter
-9.3% -7.4% -8.6%
-9.5% -9.8% -10.9%
-2.3% -4.0% -3.8%
-4.9% -7.0% -6.7%
-11.4% -12.3% -12.3%
-5.7% -6.0% -6.9%
-4.7% -1.2% -6.0%
-5.1% -7.4% -6.3%
-3.8% -8.8% -6.1%
-3.0% -9.7% -8.7%
-7.2% -13.2% -11.1%
-7.3% -16.8% -11.9%
July August September
-7.2% -7.7% +12.6%
-8.3% -7.9% +22.4%
-3.6% -2.3% +20.1%
-9.4% -7.5% +7.6%
-6.6% -8.8% +23.7%
-5.1% -2.8% +16.4%
+4.4% +7.5% +26.1%
-13.1% -8.8% +13.2%
-6.3% -1.7% +11.8%
-9.5% -13.6% +12.6%
-13.0% -10.5% +10.5%
-7.0% -8.0% +20.0%
3rd Quarter October November
-2.5% +12.5% +4.7%
-0.2% +15.3% +5.3%
+2.9% +14.3% +0.6%
-4.4% -0.1% +9.4%
+0.50% +6.4% +3.0%
+1.2% +5.9% +5.7%
+11.2% +7.9% +5.7%
-4.8% +0.1% +0.1%
+0.2% +5.7% -1.4%
-5.4% +1.7% +0.2%
-5.8% +4.4% +1.2%
-0.8% -0.7% -2.3%
December 4th Quarter
n/a n/a
n/a n/a
+6.9% +7.5%
+11.7% +6.9%
+6.3% -5.1%
+15.2% +8.9%
+8.1% +7.3%
+1.4% +0.5%
+4.3% +3.0%
+1.5% +1.1%
+3.2% +3.0%
+2.2% -0.3%
2002
Notes: Toronto does not report monthly or quarterly traffic level. St. John’s International Airport Authority figures in the January issue were reported as month-over-month % change. These figures have been revised to reflect year-over-year % change. Page 5
February 2003
NEWS ARTICLES AIR CANADA UPDATE AIR CANADA 2002 FINANCIALS IMPROVE Air Canada reported an unaudited operating loss of C$288 million for the quarter ended December 31, 2002, a C$20 million improvement from the same period last year. For the year, the company’s operating loss amounted to C$218 million, an improvement of C$513 million from 2001. Net loss for the quarter amounted to C$364 million while net loss for the year totaled C$428 million. Air Canada attributes several factors to the improved performance, including:
• • • •
Increased participation and more effective competition in the low fare market On-going cost reductions Improved customer service Advanced strategy to enhance value of core assets and subsidiary operations
Air Canada Financial Results – 2000-2002
2002 2001 2000
Operating Loss (C$ Millions) Q4 Full Year ($288) ($218) ($308) ($731) ($395) $83
Net Loss (C$ Millions) Q4 Full Year ($364) ($428) ($277) ($1,315) ($274) ($82)
Although Air Canada showed improvement in 2001, the carrier’s figures have not improved over 2000 levels.
AIR CANADA SELLS 35% OF AEROPLAN, CONSIDERS SALE OF OPERATING UNITS Air Canada will sell 35% of Aeroplan to private investor, Onex Corporation for C$245 million. Air Canada will hold a C$200 million note payable by Aeroplan and Onex will hold a C$52.5 million note from Aeroplan. In addition, the company intends to sell up to 49% interest in Air Canada Technical Services and a significant stake in Air Canada Ground Handling Services, once it is set up as a stand alone entity. As well, the company is considering the sale of Air Canada Jazz. With the sale of these divisions, the carrier hopes to develop several of its operating units as stand alone businesses with the objective of driving new revenue opportunities and attracting investment from financial and strategic partners.
AIR CANADA REDUCES WINTER SCHEDULE, FOCUS ON PROFIT Air Canada has cut its February and March domestic flight schedules by more than 6%. Overall, it has cut capacity across its worldwide network by 3-4% through a combination of shifting to smaller aircraft and reducing flight frequencies.
LONDON, ON JOINS ZIP’S NETWORK Beginning March 2, Zip Air Inc. will offer daily service from London, Ontario to Vancouver, Calgary, and Abbotsford using a fleet of 737200s.
AIR CANADA WINS REGULATORY CASE On January 16, the Quebec Court of Appeal ruled to strike down a provision of the Competition Act which would have given the Competition Commissioner unlimited power to order Air Canada to raise fares when suspected of predatory behaviour. The Commissioner is considering an appeal. Page 6
February 2003
NEWS ARTICLES. OTHER CANADIAN AIRLINES WESTJET, ZIP LOWER FARES IN WEST WestJet and Zip Air have reduced fares for travel between January 18 - February 28, on Western Canada routes where they compete head-to-head. Fares start as low as: Calgary-Victoria (one-way) WinnipegAbbotsford (one-way)
Zip
WestJet
$39.99
$37.50
$79.99
$77.50
WESTJET ADDS EASTERN ROUTES Effective April 1, WestJet will offer non-stop service every business day between Winnipeg-Windsor as well as weekend service between Windsor-Calgary. On April 24, the carrier will launch service from Calgary to Montreal with further enhancements to the schedule in late July. Apart from Montreal and Windsor, the carrier will offer four weekly nonstop flights between Moncton-St. John’s beginning on June 15. On June 16, three weekly non-stops between Moncton-Gander will also be offered.
JETSGO BEGINS OTTAWA SERVICE, IMPROVES SERVICE Starting March 2, Jetsgo will offer a weekday Ottawa-Toronto service with twice-daily return flights, plus one return flight on Sundays. The carrier has added a seventh Boeing MD-83 to its fleet for the extended service. On March 3, the carrier will add three weekly VancouverToronto flights.
CANJET OFFERS 50% OFF DOMESTIC FARES
On January 22, CanJet launched a “Winter Sizzler Sale” offering 50% off regular domestic fares. The sale was in effect until January 31 for travel up to April 30.
Page 7
BEARSKIN OFFERS LOW FARES Bearskin Airlines has introduced low fares and enhanced schedules to and from Winnipeg. Roundtrip fares between WinnipegKenora are C$99 if booked at least 60 days in advance.
US & INTERNATIONAL AIRLINES US MAJORS WIN CODESHARING APPROVAL On January 17, Delta, Northwest and Continental were given approval by the US DOT and the Justice Department to sell seats on each other’s flights through a code-share arrangement.
DELTA’S NEW SONG On January 29, Song, Delta’s new low-fare airline service was unveiled. Effectively, this is a re-launch of Delta Express, a Tango-like carrier which Delta had operated for some years prior to September 2001. Song will initially service US Northeast to Florida routes and will begin service on April 15 from New York to West Palm Beach. The carrier plans to provide 144 daily flights with a fleet of 36 Boeing 757 aircraft by October 2003.
NW TO FURLOUGH PILOTS Northwest plans to furlough an additional 60 pilots. The carrier has also asked the pilots union to postpone payments to its pension plan.
FRONTIER AIRLINES IMPLEMENTS TEMPORARY FUEL SURCHARGE On January 15, Frontier Airlines implemented a temporary $10 fuel surcharge for all domestic U.S. flights.
February 2003
CARGO US CARGO INCREASES US Air Transport Association figures for December show a 7.1% increase in revenue ton-miles for domestic cargo. International cargo increased by 9.7%. Although overall cargo increased 8.4% it was still down 9.7% from December 2000. Total freight volume for the year increased 3.7% but was still down 7.4% from 2000.
FUEL PRICES February 7, 2003 CRUDE OIL PRICES RISING Crude Oil Price: Spot – US$35.12 up 10% from January. Future • • • •
6 month - US$30.22 12 month - US$27.26 2 year - US$24.11 5 year - US$23.47
UPS 4TH QUARTER EARNINGS IMPROVE For the 4th quarter ended December 31, 2002, UPS revenue was up 3.3% from the same period last year. Net income rose 133% to US$1.5 billion. For the full year, revenue totalled US$31.3 billion, an increase of 3.1% from the prior year.
AIRBORNE NET INCOME IMPROVES Airborne, Inc. reported fourth quarter net income of US$12.2 million up from US$2.2 million in the fourth quarter of 2001. For the year Airborne reported US$14.8 million in net earnings, compared to a net loss of US$19.5 million the previous year.
AIRPORTS WAA STRONG 4TH QUARTER RESULTS Winnipeg Airports Authority reported fourth quarter revenues of $11.0 million, an increase of 11% from the previous year. Revenues exceeded expenses by $3.2 million. Passenger traffic for the quarter reached 666,000, an increase of 9.9% from 2001. For 2002, revenues totalled $42.4 million and expenses worth $56.6 million. Annual passenger traffic reached 2.7 million, dropping 3.6% from 2001.
PRINCE GEORGE AIRPORT FINALLY TRANSFERS TO LOCAL CONTROL Prince George Airport Authority has signed an agreement to transfer control of Prince George Airport from the Government of Page 8
Canada to the airport authority. Prince George is the last of the 26 National Airports System airports to be transferred and with local control. Transfer will take place on March 31, 2003.
AIRCRAFT MANUFACTURERS BOEING REPORTS DECLINE IN NET EARNINGS Boeing reported net earnings of US$590 million for the fourth quarter 2002 with revenues of US$13.7 billion. Net earnings for the full year totalled US$2.3 billion.
BOEING TO LAYOFF 650 EMPLOYEES On March 21, Boeing will layoff 650 employees from its Commercial Airplanes Group as part of the division’s overall plans to eliminate 5,000 positions this year through layoffs and attrition. In total, Boeing plans to lay off 6,000-7,000 employees from the Commercial Airplanes Group and the Shared Services group this year.
GOVERNMENT AND REGULATORY ONLY HALF OF U.S. SECURITY FEES TO BE FUNDED BY USERS The Bush Administration is requesting US$4.8 billion to fund the Transportation Security Agency for FY2004. Of this, only half ($2.4 billion) will be derived from security fees levied on passenger tickets and airline fees.
PEOPLE IN THE NEWS GRAD JOINS YVRAS JAMAICA Curtis Grad, Airport Manager at Abbotsford Airport, will be joining YVR Airport Services as their new Vice President of Operations in Montego Bay, Jamaica.
ANDRUSIAK JOINS CATSA
Owen Andrusiak has left his position as Manager of North Bay and has joined CATSA’s Regulations & Knowledge department. February 2003
THE OTTAWA SCENE 10 February 2003 Federal Budget. Finance Minister John Manley tables the 2003 federal budget in the House of Commons on February 18 at 4pm. Information about the Budget contents will be available from the Finance Department’s web site www.fin.gc.ca once the Minister begins his address. ATSC. Changes to the $24 Air Transportation Security Charge will likely be announced at that time. Also worth watching out for is the Government’s response to VIA Rail’s request for $3 Billion to help fund high-speed rail in the Quebec City-Windsor corridor. The Budget may also accelerate the Government’s multi-sector regulatory reform initiative as part of its Innovation agenda. Canada’s Airline Industry. Following the release of Air Canada’s 4 th Quarter 2002 results last week, Transport Minister David Collenette acknowledged that the Government is concerned about the financial fragility of Canada’s airline industry and that consideration is being given to whether the Government has a role in providing relief, possibly through reduced airport rents, a reduction in NAV Canada charges and/or security fees. Mr. Collenette noted that no decision has been made.
Roland Dorsay Regional Vice President Ottawa
Security. On the security front, Immigration Minister Denis Codere has asked the House of Commons Immigration Committee to consider the introduction of a biometric national identity card. This is opposed by Canada’s Privacy Commissioner and others. Nonetheless, Minister Codere believes that a national identity card would help Canadians avoid the brunt of upcoming US entry /exit tracking requirements. The Canadian Government remains concerned that Canadian citizens may not be exempt from U.S. entry/exit tracking which is to be phased in by 2005 and is seeking assurances that Canadian citizens will not be affected. If as a result of mounting security pressures in the U.S., Canadians are not exempted, the impact on cross border travel and trade would be considerable, particularly for the land border. U.S. Trade Act. The U.S. Trade Act of 2002 requires U.S. Customs to develop regulations to provide for the mandatory collection of electronic information on cargo prior to importation in or exportation out of the U.S. Late last year, U.S. Customs issued “Straw Man” regulations for public comment. They proposed that the data be supplied 8 hours prior to lading for air courier shipments and 12 hours prior to lading for other air cargo shipments. For trucks, the requirement is to provide electronic information 4 hours before lading. More recently, U.S. Customs extended the comment period on its proposed regulations to February 18, 2003. Foreign Affairs anticipates that these advance notice time lines will be reduced somewhat when the regulations are finalized but is encouraging affected stakeholders to make their views known. VIA Rail Legislation. The government has announced its initiation to table legislation on VIA Rail the week of February 17. We expect that this legislation will create a statutory base for VIA Rail, which is neither a crown corporation nor a government agency. This legislation will likely define a role for VIA and clarify its financial relationship with the Federal Government.
Page 9
February 2003
The TSA & CATSA: Key Differences in Security Management
Solomon Wong Director Security & Planning
As the reorganization of Customs, INS and other agencies into the Department of Homeland Security (DHS) accelerates in the first half of 2003, some of the key differences between the U.S. and Canadian approaches to transportation and border security are becoming increasingly apparent. At the front line is the delivery of services to protect the commercial air transport system by the Canadian Air Transport Security Authority (CATSA) and the U.S. Transportation Security Administration (TSA). The key differences in each organization's structure are outlined in this article. Same Purpose, Different Scope Both CATSA and the TSA were created to address shortcomings in security processes. CATSA focuses on airports but the TSA was charged with a multi-modal scope. As its work in aviation security matures, the TSA is now advancing security measures for other modes such as cruiseships. CATSA, on the other hand, has a narrow mandate for screening of passengers, personnel and their goods passing into restricted areas at airports. The balance of other transportation security measures (marine, rail, and other facets of aviation) remain largely with carriers and facility operators.
anticipated to be incorporated as a sister organization to these two bureaus, and provide greater coordination in transportation initiatives. CATSA is currently in the preliminary stages of defining its enhanced biometric restricted area pass system. Its efforts are coordinated through a federal inter-departmental committee, including the Canada Customs and Revenue Agency and Citizenship and Immigration Canada. Separation of Regulatory Authority There are significant differences in each organization's ability to advance regulatory changes. The TSA issues and administers federal Transportation Security Regulations (TSR), formerly administered by the FAA. TSR cover all modes including rules for carriers, aerodrome and transportation information. It is anticipated that TSR will be coordinated closely between the reorganized TSA, and its sister organizations in the DHS Border and Transportation Security Directorate. By comparison, CATSA can only form recommendations to Transport Canada for changes to federal regulations such as the Security Screening Order or the Air Carrier Security Measures (ACSM).
Integrated Service Delivery A criticism of the TSA thus is its investment in system enhancements (e.g. biometrics) independent from other U.S. and Canadian agencies. With the TSA destined to be part of the DHS Border and Transportation Security Directorate, agency coordination should greatly improve. As of March 1, 2003, the U.S. Customs Service and Immigration and Naturalization Service (INS) and other border agencies will become the new Bureau of Customs and Border Protection (BCBP) and Bureau of Immigration and Customs Enforcement (BICE). A reorganized TSA is Page 10
February 2003
The TSA & CATSA: Key Differences in Security Management -Continued Future Directions As Canada and the U.S. develop their structures for delivery of air transportation security, some important questions need to be addressed for long term solutions: ยง ยง ยง ยง
How will risk management and security for different modes be applied? Will security agencies be able to integrate initiatives with other passenger and goods processing functions? Will these entities have sufficient regulatory authority to evolve their processes? How will Canada and the U.S. increase greater cooperation and coordination in delivering optimal security for the continent?
AT A GLANCE Formation Airports Workforce Budget
Page 11
TSA Nov 2001 429 50,000+, federal US$4.8 billion in FY2003
CATSA Apr 2002 89 >100 federal, >3,000 contractor screeners CAD$2.2 billion over 5 years
February 2003
ECONOMIC OUTLOOK 10 February 2003 Increased risk of recession in the U.S. The chance that the US will slip back into recession was upgraded to 1-in-3 last week. Unemployment is high and rising fuel prices are a costly burden for households and businesses. At the start of 2003, US consumers were clearly worried. Behind the decline in the University of Michigan Consumer Sentiment Index (www.sca.isr.umich.edu) reading for January 2003 is a widely held view that jobs are scarce. This is supported by the current number of weekly claims for unemployment insurance which indicate that the number of jobs nation-wide is not increasing. 60 55 50 45 40 35
Jan -03
De c-0 2
Oc t
No v
Se p
Ju l
Au g
y
Jun
Ap l
Ma
Ma r
Feb
De c Jan -02
t
Oc
No v
Manager Economic Services
'Se pt02
Allison Padova
The manufacturing economy is 100 also showing signs of PMI 95 sluggishness compared to December. The Institute for 90 Supply Management’s US 85 Production Index (PMI) (www.ism.ws) fell to 53.9 80 percent, down 1.3 percentage Consumer Confidence points from December. 75 Nonetheless, the value of this index signifies that the manufacturing economy is still expanding. The Institute for Supply Management reports that the overall economy, like the manufacturing economy, was still growing in January 2003 – but at a reduced rate.
A quick and successful end to the standoff with Iraq would bring relief to the US economy through lower fuel prices and reduced uncertainty. As well, continued decline in the value of the US dollar will be some remedy to the current situation. This is because, as the dollar falls and imports become relatively more expensive, US industries will experience an increase in domestic demand. Greater domestic demand will encourage the business sector to start investing, making purchases from their suppliers and hiring back workers. In spite of its apparent weakness, the U.S. economy is expected to grow at a healthy 3-3.5 % during the first half of 2003. Canada – still bucking the trend, for now. Growth in employment in Canada during 2002 reached a 15-year high at 3.7%. Low interest rates (although expected to increase) and increased income will keep consumers spending in 2003. To keep inflation low, the Bank of Canada is expected to make its first interest rate increase of the year on April 15. Analysts predict that the overnight rate will be up 150 basis points to 4.25% by the end of the year. The value of the Canadian dollar is higher than it has been in the last 8 moths or so, but the outlook for the rest of the year is uncertain.
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February 2003
WHAT’S HAPPENING 14 February 2003 Massive Bankruptcies? Will the U.S. air carriers and Air Canada all file for bankruptcy protection should the U.S. invade Iraq or should there be a terrorism incident? This certainly is a realistic possibility. A month ago, not much credibility would have been given to this scenario, but today the word on the street is that it is now a likely outcome. The best way to emerge from bankruptcy protection is to enter it and with as much cash as possible. If there is armed conflict and/or a terrorism incident, air travel demand will drop. It is unlikely that any of the major network carriers could withstand another drop in traffic and revenues, such as was witnessed after 911. If bankruptcy is inevitable, then the sooner protection is sought, the better. Such a decision must be viewed as a rationale decision by airline’s boards of directors. (The decision to enter bankruptcy is a decision for the board, not management.)
Michael Tretheway Vice President & Chief Economist
An immediate filing for bankruptcy protection also sends a strong signal to government about the need to compensate the airlines for the commercial impacts of decisions involving armed conflict and terrorism. With current financial conditions of the industry, the alternative may be substantial disruption of airline services, and major impacts on the general economy. One might speculate that a drop in traffic the second time around may be less than after 911. Those travellers who are the most skittish left the market 17 months ago. The remaining travellers are either those who are a bit more inured or who understand the essential high safety nature of air transport relative to the alternatives. On the other hand, while a single major event, such as 911, might be dismissed as an anomaly, a second within two years allows a straight line trend to be drawn. Airport implications. Airports should take seriously the possibility that most, if not all, of the major network airlines will seek bankruptcy protection. Unpaid airport fees will either be lost or be tied up for a considerable period. You will have to be ready to promptly file claims with a number of bankruptcy courts. As well, you will want to be ready to work out pay-as-you-go or other arrangements for ongoing operations after the bankruptcy filing. Don’t Kill that Goose That Lays the Golden Egg. When Canada 3000’s board decided to file for bankruptcy protection, it was reported that its original intent was not to liquidate the company, but to continue flying. However, almost immediately after the decision, two airports were reported to have seized Canada 3000 aircraft. This prompted the board to decide to proceed to liquidation. This likely was not done out of spite for the airport’s powers, but rather because the board recognised that without aircraft they could not fly their way through the bankruptcy re-organisation. The challenge is that a policy to keep the carriers flying requires that all airports agree to not seize aircraft.
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February 2003
CARGO CAPERS 10 February 2003 Double, double toil and trouble; Fire burn and cauldron bubble. The chant of the three witches from Act IV of MacBeth seems eerily prophetic as the U.S. and its allies gear up for the second act in the effort to eliminate terrorism’s access to suspected nuclear, chemical and other weapons of mass destruction in the Middle East. But will this in fact turn out to be a tragedy for the air cargo industry, or might there be a silver lining in the threatening storm clouds? Certainly many of the passenger carriers (i.e., the full-cost full-service carriers such as United and American) are struggling to reposition themselves and another war will likely push many over the edge. But their problems go well beyond the war or 9/11. While these events certainly harmed them, they really exacerbated the fact that the carriers missed the boat on what consumers were looking for – low fares and reliable service. The carriers that provide such a service (Southwest in the U.S., WestJet in Canada, Ryanair in Europe) are doing quite well, thank you very much.
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most freight operators long ago recognized the changing dynamics of the global supply chain and have already re-invented themselves (e.g., FedEx long ago built up its surface network, UPS entered marine transport, Emery ditched its air fleet and contracted out lift to others; Airborne built up a large ground network to supplement its air operations); many international freight operators are far smaller than their behemoth passenger counterparts, and are able to quickly respond to changes, both good and bad; air cargo is less intimidated by threats than passengers: while US Domestic Air Cargo Traffic passenger enplanements in the U.S. have yet to approach 2000 30 levels, freight and express exceeded 2000 levels in three of the 20 10 last six months of last year Total cargo 0 according to ATA statistics; Excludes Mail -10 air cargo in the Pacific Rim began -20 its recovery soon after 9/11, with cargo up 10% in the first six months -30 of 2002, and even the more vulnerable North Atlantic corridor has shown some positive signs of late (e.g., KLM reported 6% growth in January 2003); air cargo is driven by economic growth and world trade, and despite the threat of war, most recent forecasts show continued growth (e.g., South Korea is expecting 7.5% growth this year; China 7.5-7.8%, Taiwan 3.6%, Canada 3-3.8%); the imminent retirement of key older freighter types, such as the 747-200 and DC-10, as well as restrictions on non-Stage 3 compliant Russian freighters, will mitigate concerns about an “oversupply” of cargo lift. Mar
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Director, Cargo and Logistics Studies
Jan-01
Robert Andriulaitis
Prognosis. So what is the prognosis for air cargo in this time of high fuel prices, increased security costs, and imminent war? Frankly, who can say with any certainty! But a few thoughts for consideration:
February 2003
CARGO CAPERS - CONTINUED This suggests that a relatively healthy air cargo industry should be a target for Canadian airports in the uncertain year to come. Also, although Canada and Europe are certainly not immune from backlash coming from the conflict, it can be expected that the U.S. would bear the brunt of any actions. This suggests that Canadian airports have an opportunity to capitalize on security concerns and act as relatively secure cargo gateways from Asia and Europe to the U.S., both for air service and/or surface transport from Canadian airports to U.S. destinations. Obtaining fifth freedom rights for cargo would enhance the attractiveness of service via Canadian points. Canadian airports have inherent advantages as effective gateways to NAFTA, and while it may be distasteful to some, the pending conflict might be the event that allows them to turn that theoretical advantage into reality.
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 materialize. Information contained herein is provided for the use of TradePort International Corporation only, and may not be distributed beyond the Corporation.
Prepared by InterVISTAS Consulting Inc.
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February 2003