INDUSTRY REVIEW
SARS RECOVERY: BACK TO TREND 9 February 2004
Global Travel Industry Recovers from SARS.
Doris Mak Senior Market Analyst
It has been a little less than a year since SARS first surfaced in Hong Kong and severely impacted the global air travel industry. At the time, the World Health Organisation issued travel warnings that urged people not to travel to Asia unless it was absolutely imperative. Hong Kong, China Source: Aviation Analyst, Asia Pacific and Taiwan were among the hardest hit by the disease. Canada (mainly Toronto), was the only country outside of Asia that had deaths due to SARS. The virus hit its peak in July 2003. Since then, air traffic has fully recovered. Asia-based airlines now show passenger volumes back to levels before the outbreak.
Bird Flu: Another Global Travel Crisis? Just as the global air travel industry recovered from the impact of SARS, the threat of avian flu or bird flu surfaced in South East Asia. Avian flu is a contagious disease of animals, normally infecting birds, and to a lessor extent, pigs. Prior to this year, the only other incidence of bird flu in humans was a small outbreak in 1997 in Hong Kong that infected 18 people and killed 6. In this year’s outbreak, the only human cases of bird flu have been reported in Vietnam and Thailand, although poultry infections have been reported in 9 Asian countries (as illustrated at right). In an attempt to stem the spread of the disease amongst the bird population, mass culling of poultry has taken place. All human cases (23 people infected, 18 deaths) of the bird flu have resulted from direct contact with an infected bird. The underlying fear is that this disease may mutate to a form that could be easily transferred between humans and could become a pandemic, as there is no known cure. However, research results to date provide no indication that the disease is easily transmitted from poultry to humans.
Better Equipped to Fight. Due to the SARS epidemic last year, many lessons were learned. SARS demonstrated how easily a disease could get out of control on a global basis using air travel as its vehicle. Should bird flu become an issue, we are better prepared to cope today. Governments and hospitals in addition to airports and airlines, have developed processes, such as quarantining and temperature screening, to better manage such occurrences. Page 1 February 2004
ŠInterVISTAS Consulting Inc
TRENDS IN TRAVEL BEHAVIOUR 9 February 2004
Passengers (billions)
InterVISTAS Consulting Inc. conducts passenger surveys at airports around the world. We used this data to ask the question as to whether airline World Passenger Traffic passenger growth is due to more passengers 2 travelling, or the same passengers travelling +41% 1.75 more often. We were also interested in the 1.5 source of the recent post 9/11 decline in traffic. 1.25 Was it due to fewer individuals travelling by air, 1 or was it the same passengers as before, but 0.75 travelling less frequently? 0.5
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Traffic growth in the last decade. Worldwide passenger traffic increased by 41% from 1992 to 2002, an average compounded growth rate of 3.1% per annum. Traffic grew by 45% up to the peak in 2000, then declined by 2.4% in the subsequent two years. Source: International Civil Aviation Organization.
Senior Market Analyst
InterVISTAS research shows that while passenger traffic has increased steadily over the mid and late 1990s, average trip frequencies have remained largely unchanged. This means that the growth in passenger traffic can be attributed almost exclusively to more individuals travelling, rather than to the same individuals travelling more often. In North America and Europe, much of the growth in traffic can be attributed to the impact of low cost carriers (LCCs). In the U.S., for example, while traffic (RPMs) of the major carriers, excluding Southwest, grew at an average annual rate of 3.5% from 1990-2001, Southwest’s traffic grew by 14.6%. The low cost carrier strategy focuses on attracting people who have not travelled before – expanding the size of the market. On the other hand, full service carriers tend to compete for market share of existing travellers. Our research indicates that until 9/11, existing travellers had taken the same number of trips per year, on average. For airports, this means that traffic growth may be largely due to the low cost carriers. Passenger Traffic & Trip Frequency This is borne out by the much Growth Rates higher traffic growth rates at The difference between airports with a substantial growth in pax traffic presence of low cost carriers and growth in trip frequency is change in # individuals traveling (+0.7%) versus those without LCC service. -1.5% -3.0% 6% 4% 2%
+5.2%
0%
+8.7%
Since 9/11, there has been a Passenger Traffic decline in trips per traveller. Trip Frequency From 2000 to 2003, InterVISTAS research shows that annual trips per passenger fell by roughly 15%. The drop 1998 1999 2000 2001 2002 2003 in trip frequency started to appear in 2000 (although this largely offset the increase in 1998). It was in 2003 that trips per traveller showed a large decline. Interestingly, in 2001 and 2002, there were only minor drops in trip frequency per traveller. This indicates that the drop in traffic in those years was largely due to fewer individuals travelling. Perhaps what happened is that those travellers skittish about air travel stayed home, while those who appreciated the high safety and security record of air travel continued to travel as before. Percentage Change
Jane Ha
-2%
+0.7%
+1.1%
-4% -6% -8%
-10% -12% -14% -16%
Page 2 February 2004
©InterVISTAS Consulting Inc
TRENDS IN TRAVEL BEHAVIOUR - CONTINUED
2003 tells a different story. Here, there was a noticeable drop in trips per traveller. However, the drop in traffic was much less. Paradoxically, what seems to have happened in 2003 is that enough new individuals are using air travel to offset traffic declines from previous travellers taking fewer trips. Once again, this is consistent with the strategy of low cost carriers – attract new individuals to flying. The future – potential strong recovery in air travel? Going forward, as confidence is restored and individuals who previously travelled more often return to previous levels of trip frequency, and as the number of new individuals travelling due to the impact of low cost services increases, we may find dramatic growth in air travel. If the LCCs (and full service airline responses) continue to attract new individuals to flying, and if economic recovery and greater confidence in aviation security results in a return to previous numbers of trips per traveller, then we could see extremely high traffic growth rates for one or two years. This would bring air travel back up to its long-term trend line. However, since many airports deferred capital expenditure, a sudden growth spurt could put major pressures on infrastructure and passenger processing services. It is important that airports and airlines alike are prepared for the growth in passenger traffic.
Page 3 February 2004
©InterVISTAS Consulting Inc
SHORT TERM SPIKE IN FUEL PRICES 10 February 2004
The price of crude oil rises to $36/barrel in late January…
Until recently, oil prices had been expected to decline and settle into the $27/barrel range. Instead, they have jumped. Crude oil prices were as high as $36/barrel on January 20, before settling to a lower price level of $34/barrel on February 10. Oil prices have been impacted recently by two global factors:
Explosion in Algeria’s Largest Refinery
Recent Deep Freeze in Canada and the U.S.
Meteorologists forecast continuing cold weather in the U.S. east of the Rockies for the next several weeks. Similarly, Canada (outside of British Columbia) has also been hit by the deep freeze. Unexpected increases in levels of heating fuel consumption during this time period have put pressure on supplies that have resulted in higher prices.
…Lower oil prices expected in the future
Despite the recent jump, the futures price of crude oil has remained relatively steady over the last few months. On 10 February 2004, the futures price of a barrel of crude oil for delivery in November 2005 is $27.76. This is 3% higher than the futures price of $26.89 for November 2005 delivery quoted in the December 2003 Industry Review. The current spot price of $33.87 is 22% higher than the futures spot price. Saudi Arabia’s Oil Minister indicated last month that he would like oil prices in the $25/barrel range. However, OPEC announced that it is cutting production quotas effective April 1. The move provides further evidence that OPEC will support oil prices well above its stated $22 to $27/barrel target range. Crude Oil Spot & Futures Prices As of February 10, 2004 40 35 30 25
Spot Prices
20
Futures Prices Decreasing
15 10
Dec-10
Dec-08
Dec-06
May-06
Jan-06
Mar-06
Nov-05
Jul-05
Sep-05
Mar-05
May-05
Jan-05
Sep-04
Nov-04
Jul-04
May-04
Mar-04
Jan-04
Nov-03
Jul-03
Sep-03
May-03
0
Mar-03
5
Jan-03
Senior Market Analyst
US$/Barrel
Doris Mak
On January 20, there was a huge blast at Algeria’s state-owned liquefied natural gas plant that killed at least 23 people. Algeria is the word’s second largest liquefied natural gas exporter. News of the explosion sent crude oil prices to close at $36/barrel.
Month of Delivery
Page 4 February 2004
©InterVISTAS Consulting Inc
AIRLINE DATA – CANADA Traffic and Load Factors on Canada’s Major Air Carriers - January 2004 Passenger Traffic
Air Carrier
NEW CARRIERS: LOAD FACTORS Jetsgo:
77% (Jan)
Zip:
not reported
CanJet:
not reported
Revenue Passenger Kilometres
Capacity
% Change over 2003
% Change from 2002
% Change % Change % Change % Change over 2003 from 2002 over 2003 from 2002
Air Canada 1
+1.1%
-1.0%
-1.2%
+0.4%
Domestic (Mainline)
+1.5%
-11.3%
-0.7%
-4.0%
Jazz
-2.5%
+7.2%
-2.6%
0.0%
International & Charter
+0.9%
+3.6%
-1.4%
+2.3%
WestJet
+53.1%
+132.5%
+37.3%
+121.5%
+7.1 pts
+3.3 pts
Jetsgo 2
+206.2%
N/A
+173.2%
N/A
+8.3 pts (77.3%)
N/A
Analysis: §
§
Load Factor
Available Seat Kilometres
Air Canada' domestic traffic rose by 1.5% in January 2004, the largest improvement in 14 months. The airline has been trending towards better results each month. The system-wide load factor of 72% was the best ever recorded for the month. The higher load factor is due to the airline's cutting of capacity since it began restructuring. For the second month in a row, international traffic also rose, for a modest overall traffic increase of 1.1% for the month due to strength in the Pacific and sun spot charter services. For four consecutive months, WestJet’s traffic growth continued to outpace capacity contributing to an improved load factor of 68.4%, the highest recorded for January since 2000. The carrier’s traffic rose by 53.1%, while capacity increased by 37.3%.
+1.6 pts (to 72.0%) +1.5 pts (68.8%) +0.1 pts (53.8%) +1.6 pts (73.3%)
-1.0 pts -5.7 pts +3.6 pts +0.9 pts
Air Canada Canada Domestic Domestic Mainline Mainline 5% 0% -5% -10% -15% -20% -25%
Jan- Feb 03
Mar
Apr May Jun
Dom RPK
Jul
Aug Sep
Oct
Nov
Dec
Jan04
Dom ASK
Air Canada International International 10% 5% 0% -5% -10% -15% -20% -25% -30% -35%
Jan03
Feb
Mar
Apr May
Jun
Int'l RPK
Jul
Aug
Sep
Oct
Nov
Dec
Jan04
Sep
Oct
Nov
Dec
Jan04
Int'l ASK
WestJet WestJet 70% 60% 50% 40% 30% 20% 10% 0% Jan- Feb Mar 03
Apr May
Jun
RPK
1
Jul
Aug
ASK
Air Canada Mainline consists of all Air Canada with the exception of Jazz.
N/A – As Jetsgo began operations in June 2002, a percentage change from the previous months is not applicable. 2
Page 5 February 2004
©InterVISTAS Consulting Inc
AIRLINE DATA – U.S. U.S. Airlines Release January 2004 Traffic Figures Traffic Data – January 2004 Airline
2
1
Load Factor
Traffic (RPMs – millions)
Capacity (ASMs – millions)
68.9 %
9,773
14,168
á 2.0 pts
á 3.8%
á 0.8%
58.4%
405
693
á 4.3pts
á 20.8%
á 11.8%
60.7 %
1,109
1,878
â 5.6 pts
á 3.4%
á 8.9%
71.4%
4,762
6,669
á 3.5pts
á 8.5%
á 3.2%
67.3%
7,732
11,495
á 1.4 pts
á 0.3%
â 1.7%
78.1%
1,079
1,381
â 4.1 pts
á 39.7%
á 47.0%
73.1%
5,242
7,173
á 1.4 pts
â 4.2%
â 6.0%
56.2%
3,456
6,148
â 1.5 pts
â 0.5%
á 2.6%
72.1%
8,453
11,720
á 1.2 pts
â 0.9%
â 2.6%
64.4%
2,799
4,346
á 2.2 pts
á 8.2%
á 4.5%
2
2
Notes:
Sources:
1.
Mainline
2.
Load factor includes scheduled service only Carrier traffic reports.
Page 6 February 2004
©InterVISTAS Consulting Inc
Summary of Total Year-Over-Year Passenger Traffic Performance at Selected Airports Vancouver
MontréalTrudeau
Calgary
Edmonton
Ottawa
Winnipeg
Halifax
Victoria
Kelowna
Saskatoon
Regina
St. John’s
2002
October November December 4th Quarter Full Year
N/A N/A +8.2% N/A -7.5%
+12.5% +4.7% +4.3% +7.2% -3.9%
+15.3% +5.3% +7.8% +9.7% -4.3%
+14.3% +0.6% +7.1% +7.6% +1.2%
-0.1% +9.4% +11.7% +6.9% -4.1%
+6.4% +3.0% +6.3% -5.1% -5.1%
+5.9% +5.7% +15.2% +8.9% -3.8%
+7.9% +5.7% +8.1% +7.3% +0.1%
+0.1% +0.1% +1.4% +0.5% -4.8%
+5.7% -1.4% +4.3% +3.0% -1.3%
+1.7% +0.2% +1.5% +1.1% -5.1%
+4.4% +1.2% +3.2% +3.0% -5.5%
-0.7% -2.3% +2.2% -0.3% -5.7%
2003
January February March 1st Quarter April May June 2nd Quarter July August September 3rd Quarter October November December 4th Quarter Full Year
+5.7% +4.6% +0.4% +3.4% -15.1% -17.3% -9.0% -13.7% -6.0% -7.6% -5.9% -6.6% -2.3% +0.1% +1.9% -0.1% -4.6%
+2.8% -0.6% -1.4% +0.2% -13.6% -13.5% -9.9% -12.2% -4.5% -1.2% -3.0% -2.8% -3.1% -2.2% +2.7% -0.9% -4%
+7.2% +3.7% -1.8% +2.9% -10.2% -7.4% 0.0% -5.6% +2.9% -1.0% +1.7% +1.1% +4.0% +11.4% N/A N/A N/A
+6.3% +5.6% +3.7% +5.2% +1.6% -1.4% +1.9% +0.7% +4.7% +1.4% -1.8% +1.6% -0.7% +8.0% +5.4% +3.9% +2.7%
+3.5% +3.0% -0.4% +2.0% +1.1% -5.3% -0.4% -1.6% +2.5% +0.3% +8.6% +3.4% +10.4% +7.2% +4.9% +7.4% +2.9%
+6.2% +3.9% +2.2% +4.0% -7.6% -1.5% +2.5% -2.1% +3.0% -7.0% +1.6% -0.9% +1.4% +6.5% +6.0% +4.5% +1.3%
+13.0% +12.7% +5.1% +10.1% +4.4% -0.5% +5.0% +3.0% +3.7% +0.4% +1.5% +1.8% +7.4% +5.8% +6.0% +6.4% +5.1%
+4.5% +13.8 N/A +10.0% +6.1% -1.2% +4.1% +2.9% +5.7% +4.1% -0.6% +3.3% +2.5% -0.05% +2.9% +1.9% +4.2%
+2.9% +7.5% +0.2% +3.3% -0.9% +0.4% +0.6% +0.0% +11.9% +9.8% +10.8% +10.8% +15.4% +13.7% +16.1% +15.6% +7.3%
+4.0% +2.0% +5.0% +3.7% -0.6% -1.0% -0.5% -0.7% +5.0% +0.5% -0.7% +1.7% +1.1% +9.6% +9.1% +6.6% +2.9%
+6.8% +6.0% -3.7% +3.1% -3.9% -5.3% +1.4% -2.6% +1.2% -4.8% -2.4% -2.0% -1.7% -0.3% +0.8% -0.4% -0.5%
-0.3% +8.8% -4.2% +1.3% -1.6% -1.6% +7.0% +1.3% +4.7% -2.2% -0.2% +0.7% -1.3% +19.8% +2.0% +6.33% +2.4%
-5.8% -2.0% -3.1% -3.7% -1.7% +4.5% +17.8% +7.1% +21.1% +22.5% +12.3% +19.0% +9.4% +9.4% +13.9% +10.8% +9.4%
Page 7 February 2004
©InterVISTAS Consulting Inc
CANADIAN A IRPORTS
Toronto
NEWS ARTICLES AIR CANADA UPDATE FEBRUARY 23 DEADLINE FOR AIR CANADA CREDITOR CLAIMS Air Canada’s court appointed monitor, Ernst & Young, announced that Air Canada creditors must file any outstanding claims by 23 February 2004. The value of claims received so far is CDN$103.4 billion, but the monitor indicated that CDN$83.4 billion, dealing with undisclosed legal matters, will be dismissed. Ernst and Young reviews the claims and decides which should be allowed, disallowed or revised. Creditors with legitimate claims will be paid with shares in the restructured Air Canada.
TRINITY’S PENSION PLAN PROPOSAL REJECTED BY UNIONS Trinity Time Investments’ (Air Canada’s equity investor) proposal to convert to a defined contribution pension plan has been rejected by the carrier’s unions. Currently, Air Canada has a defined benefit plan, where employees are guaranteed a specific pension level. Under a defined contribution plan, the pension amount is based on accumulated contributions and investment returns. The Trinity proposal would not affect current Air Canada retirees, nor employees with a combined age and service of 60 years or more; all other employees would move to a defined contribution program while keeping their rights accrued under the current plan. If the CDN$1.5 billion pension deficit is not resolved by March 1, Trinity may withdraw its proposed investment in Air Canada.
Page 8 February 2004
AIR CANADA TRANSFERS 20 A319S TO ZIP Air Canada announced that the Airbus A319 aircraft will replace the Boeing 737-200 fleet currently operated by Zip. Beginning in July, Zip will operate A319 aircraft transferred from Air Canada’s fleet, in addition to Zip’s current fleet of 12 B737-200s. By the end of 2004, Zip will operate 20 A319s, and the fleet of B737200s will be retired.
AIR CANADA EXTENDS SIMPLIFIED FARE STRUCTURE TO U.S. FLIGHTS Air Canada has introduced its simplified, Internet-based fare structure to all 80 U.S. destinations in its network, including those operated by Air Canada mainline, Jazz, and United Airlines code share flights. Similar to the web-based fare structure introduced for the domestic market last May, the new U.S. fare structure consists of six classes - five economy and one executive. The carrier’s online ticket sales have more than tripled since the new fare structure was introduced last year.
AIR CANADA DISPUTES GTAA GATE ALLOCATION Air Canada filed documents with the Ontario Superior Court stating that the Greater Toronto Airports Authority (GTAA) has rescinded a previous contract by offering the carrier only six “fixed preferential” gates at the new Terminal 1, instead of 14. Air Canada will have to share the other eight gates with WestJet Airlines. The carrier wants the court to overrule the GTAA allocation, stating that access to the Toronto gates are critical to its restructuring plan. The new terminal is scheduled to open 6 April 2004.
©InterVISTAS Consulting Inc
NEWS ARTICLES AIR CANADA CUTS CALL CENTRE STAFF
WESTJET POSTS CDN$60.5 MILLION PROFIT
Air Canada plans to lay off 307 workers from its call centre operations in Toronto, Winnipeg, and Saint John, effective in February and April. Further staff cuts are anticipated before the end of 2004 as automation projects are implemented. Air Canada currently employs approximately 1,600 workers at its call centres nation-wide.
In 2003, WestJet posted net earnings of CDN$60.5 million, an increase of 16.8% from the previous year. Revenue increased by 26.4% to CDN$859.6 million, while costs decreased by 15.6%.
AIR CANADA RJ ARBITRATION UNDERWAY Arbitration for the allocation of Air Canada’s regional jet aircraft (RJs) commenced on 17 January 2004. The arbitration process was established at the labour negotiations in May 2003 to determine overlapping scope issues with respect to the Air Canada Pilots Association (ACPA) and the Air Line Pilots Association (ALPA). Arguments are expected to be heard at the end of February 2004. Satisfactory conclusion of the arbitration process is required as a part of the amended investment agreement with Trinity Time Investments Ltd.
OTHER CANADIAN AIRLINES WESTJET TO LAUNCH TRANSBORDER FLIGHTS WITH SUMMER SCHEDULE WestJet’s new summer schedule includes the addition of 120 weekly non-stop flights between cities throughout its network, and the introduction of scheduled transborder services. Flights between Canada and Los Angeles, Fort Lauderdale and Orlando will be offered beginning October 2004. In the fourth quarter, seasonal services to Phoenix and Palm Springs will be added.
Page 9 February 2004
WESTJET SIGNS DEAL WITH SABRE WestJet has signed a five-year deal with Sabre Airline Solutions to purchase the Sabre Resource Management suite. The technology will help the airline manage staffing in its airport locations across Canada. WestJet’s deal marks the entry of the software suite into the low-fare carrier market.
JETSGO ACQUIRES 18 FOKKER 100 JETS Jetsgo announced that it will purchase 18 Fokker 100s from American Airlines. The first seven jets will be delivered immediately, and the carrier plans to have three in service by 24 June 2004. The Fokker 100s have a capacity of 105 seats, and joins Jetsgo’s current fleet of 14 160-seat MD-83s. These aircraft acquisitions would bring Jetsgo’s fleet to 32 aircraft.
AIR TRANSAT AGREES TO MOVE TO MONTREAL-TRUDEAU Air Transat has reached an agreement with Aéroports de Montréal (ADM) that will see the carrier shift its operations to MontréalPierre Elliott Trudeau International Airport (Dorval) in November 2004. ADM will construct a building to house Air Transat’s new head office and hangar, which will be leased to the carrier. Air Transat’s existing facilities at Montréal-Mirabel airport will be purchased by ADM.
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NEWS ARTICLES GEORGIAN EXPRESS LTD.’S AIR OPERATOR CERTIFICATE REINSTATED
SOUTHWEST POSTS US$298 MILLION PROFIT
Transport Canada has reinstated Georgian Express Ltd.’s Air Operator Certificate. The carrier’s certificate was suspended 22 January 2004, following a fatal accident involving a Cessna 208B Caravan at Pelee Island. The special purpose audit conducted by Transport Canada confirmed that the carrier met the required operating rules and regulations.
Southwest Airlines reported a profit of US$298 million in 2003, a 50% increase from US$198 million in the previous year. Fourth quarter profit was US$66 million from revenue of US$1.5 billion. The carrier saved US$41 million from its fuel hedging program in the quarter, and stopped paying travel agency commissions as of December 15, which is expected to save US$40 million annually.
HAWKAIR LAUNCHES VANCOUVER AND PRINCE GEORGE SERVICES FROM VICTORIA
UNITED REPORTS DECLINE IN FOURTH QUARTER LOSSES United Airline’s parent company, UAL, reported a fourth quarter operating loss of US$135 million in 2003, a US$859 million improvement over the previous year. Excluding special and reorganization items of US$1.1 billion, UAL’s loss for the year was US$1.7 billion, a US$1.5 billion improvement over the previous year. Operating revenue rose 4.2% to US$3.6 billion, while expenses declined 16% to US$3.8 billion.
Based in Terrace, B.C., Hawkair has introduced new services from Victoria to Vancouver and Prince George six times weekly. The carrier currently serves eight destinations in B.C. and Alberta, including: Dawson Creek, Grande Prairie, Kitimat, Prince George, Prince Rupert, Terrace, Vancouver and Victoria.
US & INTERNATIONAL AIRLINES AMERICA WEST REPORTS US$57.4 MILLION PROFIT America West Airlines reported a profit of US$57.4 million profit in 2003 after a record fourth quarter, compared to a US$387.9 million annual loss in the previous year. The carrier reported a profit of US$10.6 million in the fourth quarter, excluding special one-time items. Revenue in the quarter grew 7.7% to US$554.3 million, and load factor was a record 75.5%.
Page 10 February 2004
UNITED ASKS COURT TO EXTEND BANKRUPTCY PROTECTION United Airline’s parent UAL Corp. has filed a request to the Bankruptcy Court to extend the deadline for the carrier to file a reorganisation plan to 30 June, and wants the exclusivity period for receiving acceptance of the plan extended to 30 August. The current deadline for United to submit a reorganisation plan is 8 March. Several restructuring items need to be resolved, including United’s request for a US$1.6 billion federal loan guarantee, lease renegotiations for 175 aircraft, reduction of pension obligations and retiree benefit costs, and litigation over municipal airport bonds.
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NEWS ARTICLES UNITED AND AMERICAN REDUCE CHICAGO O’HARE FLIGHTS As part a Federal Aviation Authority (FAA) initiative to reduce flight delays at Chicago O’Hare International Airport, United Airlines and American Airlines will cut their operations at the airport by 5%, effective 4 March 2004. The agreement runs for six months, and allows United and American to operate 655 and 505 flights respectively, during the peak hours between 1 p.m. and 8 p.m. The carriers can reschedule flights cut from the peak hours.
COMPETITION HEATS UP IN NEW YORK JetBlue has been granted 11 slots to fly from New York LaGuardia Airport (LGA), and plans to launch service this spring. Currently, JetBlue offers services from its hub at New York J.F. Kennedy Airport (JFK). Meanwhile, Delta will be introducing nonstop Denver-New York (JFK) flights twice daily beginning April 4 th, and is investing over US$300 million to upgrade its terminals at JFK. The carrier plans to add eight new destinations from JFK by the summer, and add capacity to four existing destinations.
TED UNVEILS ROUTES Ted, United’s low cost carrier, is set to launch on 12 February 2004. By April, Ted will have 106 daily flights offering services from Denver to Reno, Las Vegas, Phoenix, New Orleans, Tampa, Orlando, Ontario (California), and Fort Lauderdale. Ted will also offer services between Las Vegas and Los Angeles, Las Vegas and San Francisco, and between San Francisco and Phoenix. Starting April 7, Ted will also launch services from Washington Dulles to Fort Lauderdale, Orlando, Tampa, and Las Vegas. The carrier expects to operate 15 roundtrips per day from the airport by mid-May, representing 22% of United’s domestic mainline flights from Washington Dulles.
AIRCRAFT MANUFACTURERS EMBRAER DELIVERS OVER 100 JETS IN 2003 Embraer delivered 101 jets in 2003, just one less than its target of 102. The company forecasts 160 deliveries for 2004, including commercial, corporate and defence aircraft, and 170 deliveries for 2005.
AIRPORTS GTAA PROPOSING NEW AIRPORT IN PICKERING The Greater Toronto Airports Authority (GTAA) is finalising a proposal to construct an airport to accommodate regional aircraft at Pickering. The airport will replace airports in Buttonville and Oshawa. The proposal will be released by June, and GTAA expects the new airport will be constructed by 2010.
Page 11 February 2004
©InterVISTAS Consulting Inc
NEWS ARTICLES CARGO
PUROLATOR UNION VOTES ON NEW DEAL
ATA REPORTS 2003 TRAFFIC UNCHANGED FROM 2002
Purolator has settled non-monetary issues with its labour union, Teamsters Canada, and has exchanged economic proposals including pensions, medical benefits, and wages with the union. Voting on the new pact took place from January 19-31st, but the results have not been released yet. Teamsters Canada represents approximately 8,500 members at Purolator from 14 local unions. The four-year contract with Purolator expired on 31st December 2003.
Total cargo for the month of December was up 4.7% over 2002, with 2,019,364 revenue ton-miles transported. Total 2003 traffic was 23,215,524 RTKs, down only 0.2% from 2002.
IATA REPORTS INCREASE IN 2003 WORLD FREIGHT TRAFFIC World FTKs were up 7.7% for the month of December with all regions showing positive growth over December 2002. Full year FTKs were up 4.9% for 2003. The Middle East showed the most growth, up 15.1% from 2002.
CARGOJET STARTS SPECIALIZED PASSENGER SERVICE FOR TORONTO BASEBALL TEAM Cargojet recently signed a contract with the Toronto Blue Jays to provide the Major League Baseball team with exclusive air transport services. Due to the demanding nature of the service requirements (i.e., no tolerance for missed flights), two B727s are required in order to have a back-up available at all times. The aircraft are being configured with 60 first-class seats. In previous years, Skyservice and Air Canada provided this service.
ATLAS AIR FILES FOR CHAPTER 11 Atlas Air Worldwide Holdings, parent company of Atlas Air and Polar Air Cargo, filed for Chapter 11 bankruptcy protection on 30 January 2004. The company originally intended to file late last year, but was postponed in order to secure negotiated agreements with creditors in hopes of reducing the time spent in reorganization. The company secured US$50 million in DIP and exit financing. Normal operations will be maintained during the reorganization phase.
ARROW AIR FILES FOR CHAPTER 11 AGAIN Miami-based Arrow Air filed for Chapter 11 protection on 28 January 2004, citing financial problems due to a sluggish economy, high fuel prices, and excess capacity. The carrier had emerged from Chapter 11 protection in May 2002. Arrow Air has not dismissed any of its 750 employees and plans to continue operating while looking for new investors.
PROFITS RISE FOR OWNER OF EMERY WORLDWIDE CNF, owner of Emery Worldwide, reported that its fourth-quarter net earnings rose US$26.8 million ($0.49 per share) including a charge, from US$ 22 million ($0.41 per share) a year ago. Revenue was US$1.35 billion, up 5.5% from 2002. Page 12 February 2004
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NEWS ARTICLES FEDEX, UPS ASK DOT TO REVIEW ASTAR RULING FedEx and UPS have, as expected, asked the DOT to review the decision made by administrative law judge Brian Kolko on Astar Air Cargo Inc.’s citizenship. The two cargo carriers contend that Astar’s relationship with DHL, owned by Germany’s Deutsche Post World Net, disqualifies it as a U.S. citizen according to foreign ownership limits.
UPS REPORTS Q4 PROFITS United Parcel Service (UPS) reported a rise in its fourth-quarter profits to 70 cents per share compared to 59 cents per share in Q4 2002. Quarterly net income was US$856 million, down from US$1.5 billion in late 2002, when UPS had a US$1.02 billion tax settlement. Revenue was up 8.2% to US$8.93 billion.
DHL THREATENS TO ABANDON BRUSSELS HUB DHL said that if Belgium did not allow it to expand its operations at Zavantem Airport, it would abandon Brussels as its European hub. The Belgian government is reluctant to allow DHL to expand due to concerns over night-time noise pollution. DHL wants to increase its number of night flights from 16,000 per year to 34,000 by 2012, higher than the airport’s current limit of 25,000. The courier is planning to open a €100 million (C$168.7 million) hub in Leipzig, Germany to relieve the burden on its Brussels hub.
Page 13 February 2004
REGULATORY/GOVERNMENT U.S. SEEKS LIBERALISED AIR TRAFFIC AGREEMENT WITH CANADA Canada is being urged to pursue an open skies agreement with the U.S., which could eventually allow Canadian and U.S. carriers to fly domestic routes in each other’s countries. U.S. Ambassador Paul Cellucci called for liberalisation talks a year ago and has renewed his request following the recent change in Canada’s government. Tony Valeri, the new Transport Minister, expressed interest in examining the potential for open skies.
AIRPORT GROUPS PUSHING FAA TO ALLOW MORE AIRLINE SUBSIDIES Airport groups including Airports Council International (ACI), and the American Association of Airport Executives (AAAE) are asking the Federal Aviation Administration (FAA) to allow all airports to offer airlines direct subsidies to attract new services. Currently, airports operated by municipal organisations can offer airline’s incentives, but airports managed by independent authorities are only allowed to waive fees. The lobby was initiated from a petition by Sarasota Airport, which claimed that current regulations place the airport at a competitive disadvantage.
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NEWS ARTICLES EUROPEAN COMMISSION FINDS RYANAIR AID ILLEGAL
NAV CANADA QUARTERLY REVENUES RISE
The European Commission has ruled that financial support paid to Ryanair by Brussels Charleroi Airport was illegal. The E.C. has ordered that Ryanair pay back €4 million (C$6.75 million) it received between 2001 and 2003. The E.C. plans to limit the amount of support that airlines can receive from public airports to 50% of the costs and limit the timeframe to 5 years. (Please see the column by Ian Kincaid named “Ryanair vs. the E.U.” in this IR).
Revenues for Q1 ended 30 November 2003 were $245 million, compared to $222 million for the same period the previous year. Air traffic was only up 0.5%. Benefiting from the sale of $15 million in debt owed to it by Air Canada, Nav Canada’s expenses dropped to $172 million from $182 million. Nav Canada was able to reduce its rate stabilisation account deficit by 40%.
EUROPEAN COMMISSION EXTENDS AIR FRANCE-KLM INQUIRY The European Commission has extended Phase 1 of its investigation of the Air FranceKLM merger by two weeks from the original deadline of 29 January 2004. The E.C. usually agrees to extend Phase 1 of merger investigations only when it believes any problems related to competition will be easily resolved, thus avoiding an in-depth Phase 2. Both airlines are submitting remedies to solve competition concerns.
OTHER AVIATION ALBERTA FORMED After two years of discussion between six organisations, Aviation Alberta has been launched as the unified group representing aviation and aerospace interests in Alberta. Mr. Don Matthews has been appointed President and CEO of Aviation Alberta, while Mr. Garth Atkinson, President of the Calgary Airport Authority, will serve as Chairman. Aviation Alberta will have offices in Calgary and Edmonton.
Page 14 February 2004
PEOPLE IN THE NEWS CONTINENTAL’S CEO RETIRES Continental Airlines has announced that their Chairman and CEO Gordon Bethune will retire earlier than planned. Bethune was scheduled to retire in August 2006, but will do so at the end of 2004 instead. He will be replaced by President Larry Kellner.
ACI-NA ELECTS 2004 BOARD The Airports Council International – North America (ACI-NA) has elected its 2004 board of directors, naming Patrick Graham Chairman. Graham is the Executive Director of the Savannah/Hilton Head International Airport.
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RYANAIR VS THE E.U. 10 February 2004 As we described in December’s edition of the Industry Review, Ryanair is one of the most aggressive low cost carriers (LCCs) in keeping costs as low as possible. One way the Irish-based airline does this is by flying to underutilised secondary airports whenever they are available (e.g., Skvasta rather than Stockholm, Malmo rather than Copenhagen, Charleroi rather than Brussels Zaventem). By doing this, Ryanair can reduce turnaround times by avoiding congested airports and, in some cases, negotiate favourable deals on landing fees and other costs.
Ian Kincaid Manager, Economic Analysis
Illegal subsidies. One such deal with Charleroi Airport in Belgium has caught the attention of the European Commission, the primary policy making and administrative body of the E.U. The airport, which is owned by local government, provided Ryanair with discounted landing fees (€1 per passenger compared with the standard rate of €8), discounted ground handling charges, free offices, assistance with pilot training and staff accommodation, and incentives to set up additional routes from the airport. The local government saw the deal as an effective way to provide economic stimulus to a region suffering from 30% unemployment. However, following a complaint by Brussels Zaventem Airport, the European Commission ruled on February 3, 2004 that the discounts and subsidies provided by Charleroi Airport constitute illegal state subsidies. As a result, Ryanair must pay back about €3 million of the €12 million it has received from the airport since it struck its deal with Charleroi in 2001. Virgin Express has indicated it may now sue Ryanair for damages, based on the Commission ruling. Ryanair strikes back. To say that Ryanair is disappointed by the ruling would be an understatement. Labelling the E.U. the “evil empire”, Ryanair CEO, Michael O’Leary, stated that the ruling was a disaster for the low cost carrier industry in Europe. Mr. O’Leary pointed out that this ruling could affect similar deals Ryanair has with 19 state-owned French airports, as well as deals struck by easyJet, Lufthansa and FlyBe with a few European airports. Ryanair claims that, as a result of the ruling, it may be forced to sharply increase fares or reduce service on many of its routes. The impact on the LCC industry in Europe. The ruling is unlikely to be the disaster that Ryanair makes out. The European Commission has pointed out that the ruling was against specific details of the Charleroi deal, which are not typical of arrangements elsewhere. Some forms of aid are acceptable, such as help for marketing support and introductory discounts for up to five years, but not for the 15 years agreed at Charleroi. In other words, airlines may receive subsidies towards start-up costs but the service must eventually be profitable without state aid. The ruling is only applicable to state-owned airports, and would not apply to privately owned airports. That said, only the UK has proceeded with full-blown privatisation, and even there some of the airports are still partially owned by local authorities (such as Manchester). Some airports in Denmark, Germany, Netherlands, and Austria have also been privatised. Protesting too much? The general feeling among analysts and airlines in the LCC industry is that Ryanair is making too much of the ruling. Most believe that Ryanair can continue to operate service to Charleroi with only a modest increase in fares or reduction in profitability. The airline had to pay back only a fraction of the subsidy it received (in any case, Ryanair currently has cash reserves of over €1 billion). However, Ryanair look set to appeal the decision at the European Court of Justice.
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MARITIME SECURITY UPDATE February 9, 2004
Solomon Wong Director, Security & Planning
Analogous to the creation of the International Civil Aviation Organization (ICAO), an international conference in Geneva adopted a convention formally establishing the International Maritime Organization (IMO) in 1948. The purpose of the IMO is to encourage cooperation between governments on policies relating to maritime safety/security, efficiency of navigation and prevention/control of marine pollution. In December 2002, the IMO held a week-long Diplomatic Conference to amend the International Shop and Port Facility Security Code (ISPS). This code includes a series of measures targeted for implementation in July 2004 to strengthen maritime security, prevent, and suppress acts of terrorism against shipping. Implementation of ISPS in Canada is led by Transport Canada and is based on four areas: vessels (over 100 tons), marine facilities (ports and operators), offshore facilities (e.g. oil-drilling platforms), and security clearance (Restricted Area Access).
New Restricted Area Clearances. One of the key implementation items is the creation of
restricted areas and pass systems. Similar to the “Restricted Area Pass” system in use at Canadian Airports for decades, between 130,000 and 200,000 Canadian maritime workers will undergo the new pass issuance process being introduced at port facilities. These passes will both address terrorism threats as well as focus on organised crime.
Regulations Harmonised with the U.S. Transport Canada developed ISPS regulations with the
key objective of U.S. harmonisation. This has been achieved with the U.S. Coast Guard advising in Dec. 2003 that draft Canadian regulations meet U.S. requirements. Accordingly, Canadian and U.S. governments are expected to pursue a bilateral agreement avoiding the need for Canadian registered ships to also submit security plans to the U.S.
Differences with existing Canada Border Services Agency programs. Maritime operators
have identified conflicts with the ISPS restricted area clearance program and Canada Border Services Agency sufferance warehouse regulations. It is unknown if and when harmonisation of these differing provisions will be implemented. This may also generate challenges for trans-shipments through Canada destined for the U.S. These will need to meet security requirements of both nations to obtain expedited service.
Implications for Canadian Airports. The evolution of maritime security does not directly impact
airports, but will have long-term implications for the development of multi-modal security policies. Key issues to track include: §
Transport Canada resources: Programs such as a new restricted clearance system will add significant volumes of clearances: this may impact the speed of existing airport RAP issuance.
§
Multi-modal integration and interoperability: Policies have developed to date on a mode-bymode basis. As Transport Canada evolves its proposed “security management system” program, there will inevitably be programs and applications that span across all modes, including airports.
§
Policy compatibility: At the onset, it appears that there is a closer match with U.S. regulations on maritime security, as compared to aviation security. The harmonisation of maritime policies at the development phase may serve as a future template for aviation security policy development.
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CARGO CAPERS 10 February 2004
The debate over Cargo Open Skies intensifies. With the recent positive signals sent by the U.S. and Canada about the potential for negotiating Open Skies for cargo, debate is starting to heat up. Industry analysts, user groups, and Air Canada are welcoming the news, while the Canadian all-cargo carriers are mobilizing opposition. So what are the real issues? There are four main issues for cargo open skies: beyond rights; modified 6 ths; co-terminalisation; and right of establishment. Some of these are red herrings, while others mask the real issue. First, the red herrings. In my view, the issues of beyond rights, modified 6 th freedoms, and Right of Establishment are moot. §
Beyond rights (5th and 7 th freedoms). Beyond rights can dramatically improve the economics of air cargo routes. By allowing stops on intermediate and beyond points, they spread the burden of filling freighter capacity over a number of points instead of requiring a single point to produce sufficient volumes in both directions to justify service. As a result, these rights dramatically increase the likelihood of international all-cargo services through Canadian airports. Clearly Canadian shippers and airports would benefit from such rights, as we can see from the example of Cargolux successfully growing the Calgary market through the use of 5 ths. Well, what about Canadian carriers then? This is a question that might be raised, given Canada’s history of developing air policy only to serve the needs of carriers rather than users of the service. But in this case, the answer is simple – because there are no Canadian all-cargo carriers offering international service, there is nothing for a protectionist policy to protect. In fact, the domestic allcargo carriers ignore this issue, tacitly signalling they have no opposition to open beyond rights. The only carrier with a potential concern is Air Canada – and to its credit, it has been supportive of the reciprocal exchange of open beyond rights. The only other possibility – maintaining a restrictive policy in the hopes that someday a Canadian carrier might emerge – is simply untenable. An open exchange of beyond rights would be a win for Canada.
§
Modified 6 th Freedoms, or so-called “home country cabotage” would allow U.S. cargo carriers to move Canadian domestic shipments, in bond, across their U.S. sort centre hubs. While this issue may be of interest to analysts, shippers and even the negotiators, under the existing legislative framework in both countries, this is simply not in the cards. It is not enough to negotiate this traffic right via the treaty process. Legislation must be changed in both countries. One could argue that it may be relatively easy to change the Canada Transportation Act to allow non-Canadians to provide domestic service. But changing the legislation in the U.S. is an entirely different matter. The anti-cabotage provisions in the infamous Jones Act, for example, would have to be repealed. The U.S. chief air negotiator indicated that this was a remote possibility. So despite the current talk, unless Canada was willing to change its law and grant cabotage without reciprocal rights from the U.S., the threat of U.S. integrator carriers moving Canadian domestic shipments across U.S. hubs is simply not an issue.
•
Right of Establishment is simply not a threat. It would allow U.S. carriers to invest in Canadian domestic air carriers. If the law in Canada were to be changed to allow this, it would not undermine the Canadian domestic air cargo industry. Even with U.S. owners, Canadian domestic cargo would move in Canada, with Canadian aircraft, exclusively using Canadian labour and paying landing fees to Canadian airports.
Robert Andriulaitis Director Transportation & Logistics Studies
Page 17 February 2004
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CARGO CAPERS - CONTINUED The crux of the matter: co-terminalisation (Co-T). Co-T would allow U.S. integrators to carry U.S. traffic between Canadian points. The simplest example would be two UPS flights going to Hamilton with one going on to Montréal, delivering the U.S. originating traffic from both Hamilton inbound flights, but not picking up domestic traffic in Hamilton for delivery in Montréal. This could improve operating efficiencies, provide a higher level of service to beyond the gateway points, and potentially lead to some Canadian airports being served by heavier (and/or quieter) aircraft than is currently the case. Canadian cargo carriers strongly oppose Co-T. They claim it will put them out of business as they currently carry US originating cargo on domestic beyond-the-gateway segments. However, Co-T will NOT allow U.S. carriers to fly domestic cargo within Canada, and thus there will continue to be traffic and revenue for the Canadian cargo carriers. What seems likely here is that the Canadian cargo carriers have other agendas, such as seeking to change scope clauses in collective agreements between U.S. pilots and UPS and FedEx. The question then becomes one of whether Canada should use international air policy as a means to redress elements we don’t like in collective bargaining agreements of private U.S. companies. Before considering this, think of what Canadian reaction would be if the situation was reversed and the U.S. used treaty provisions against private Canadian firms because it didn’t like our carriers’ contracting out provisions. The situation is a messy one. The bottom line is that cargo Co-T will not put the Canadian cargo carriers out of business (someone will have to carry domestic freight), but some may have a reduced level of activity. Airports are likely to find that they have greater cargo capacity and more landing fee revenues, in aggregate, when Co-T is implemented. Claims that Canadian airports will lose landing fee revenues are unfounded. If anything, the opposite is more likely, with U.S. cargo airports losing landing fees. Some Final Thoughts. During the negotiations preceding the 1995 agreement, the Canadian carriers opposed Open Skies, fearing that they could not compete against the giant U.S. carriers, with their ability to use their dominant hubs to feed Canadian traffic into their vast domestic systems by virtue of preclearance in Canada. So what happened? The opposite -- Air Canada became the dominant transborder carrier. Canada’s international air policy historically put a premium on protecting Canadian air carriers. So what happened? Despite the protection, airlines such as Canadian Airlines and Canada 3000 failed anyway. The restriction on co-terminalisation did not save All Canada Express from bankruptcy. History is full of examples that show that protecting Canadian carriers, at the expense of users of airline services, does little to ensure the viability of Canadian carriers. Are the fears of the Canadian all-cargo legitimate? Many are not, but some certainly are. Nevertheless, in a world moving towards more open trade, changes are inevitable. Perhaps the best approach would be for Canada to pull its head out of the sand, put the interests of users of air transport services first, implement the pending changes on a phased basis (as we did in 1995) to give the Canadian carriers time to adapt, and move on in our development as a trading nation.
Page 18 February 2004
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OTTAWA SCENE 10 February 2004
Minister Valeri to Rethink Aviation Policy In an interview with the Financial Post, Transport Minister, MP Tony Valeri (Hamilton Stoney Creek) indicated that he will review Canada's aviation policy. The review would include foreign ownership limits, airport rents, and the aviation security charge. This is a major change from the attitude of his predecessor, David Collenette. We expect that Minister Valeri will look at air policy in terms of what it can do for the Canadian economy. When he chaired the Caucus economic development committee, Valeri approached air policy from an overall economic perspective, not from a carrier protectionist viewpoint. He is likely to be sympathetic to the needs of shippers, the tourism industry, and other air transport users.
Sam Barone Regional Vice President Ottawa
It is unlikely that he will have time prior to the expected federal election (likely in April or May 2004) to make significant changes, but the review and consultation process between now and the election could set the stage and the tone for long overdue policy changes in Canada’s aviation industry.
Public Meeting on Proposed Amendments to the Canadian Computer Reservation Systems (CRS) Regulations (the "CRS Regulations") and other Travel Distribution Issues Over the past three years, Transport Canada has been carrying out a review of the CRS Regulations that were put in place in 1995. The review included meetings with members of the travel distribution industry, air carriers and other governments. On 25 October 2003, the federal government published proposed amendments to the CRS Regulations in the Canada Gazette Part I. The amendments were prompted by changes in the marketplace and what was learned in the review. During the 30-day consultation period, which ended on 24 November 2003, stakeholders and the general public had the opportunity to submit formal comments to the Department on the proposed amendments to the CRS Regulations. In order for Transport Canada to bring its consultations to a conclusion, members of the travel distribution industry were invited to a public meeting on February 9, 2004. This meeting allowed participants to present their views on the proposed CRS Regulations to the Parliamentary Secretary and some of his colleagues.
Page 19 February 2004
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THE WASHINGTON REPORT 15 February 2004
Airline Passenger Data Disclosure: In preparation of the launch of CAPPS II (Computer-Assisted Passenger Screening System), major U.S. carriers will be creating disclosure policies that will inform passengers of the possibility of sharing personal data with the federal government as well as protect themselves from liability. The CAPPS II program is designed to compare passenger reservation records (names, addresses, birth dates etc.) against commercial databases and government watch lists, to verify identities and to determine criminal records. Passengers will be given risk scores with a number and colour ranking their perceived threat on the aircraft. Several questions on how the passenger data will be handled have surfaced. These include: Will passengers be told information is being shared with the government? Will they have a way to correct information they believe is incorrect? Will rules be clear on the purpose for which data can be shared?
Charles Chambers Senior Vice President GA2 AND Regional Vice President InterVISTAS Consulting Inc. Washington, D.C.
U.S. Congress Passes Pension Funding Bill: The Senate has passed legislation that would grant major pension funding relief to airlines and other industries. The bill allows airlines to avoid making special payments that would be required to support their under funded pension plans. The relief will be for two years, where companies pay only 20% of the amount that would be due in the first year, and 40% in the second year. The bill will also substitute a higher corporate-bond interest for two years for the 30-year Treasury bond rate used in calculating pension liabilities. Congress Approves Spending Bill: The U.S. Congress has passed an $820 billion spending bill that puts aside $88.9 billion for Transportation/Treasury. The FAA will receive $14 billion, of which $3.4 billion will go towards the Airport Improvement Program and $102 million to Essential Air Service. DOT Addresses Future Gridlock: DOT Secretary, Norman Mineta, announced plans for a next generation air transportation system with expanded capacity to relieve congestion and gridlock. The FAA has already started several airspace modernization plans including seven new air traffic control towers, five new terminal air traffic control facilities, new advanced radar systems at 12 airports, and a STARS air traffic control system at 14 airports. New runway construction is slated for seven airports and four major hubs (Boston, Charlotte, Denver and Minneapolis) will get advanced satellite/radar systems. EU Against Armed Marshals on Transatlantic Flights: EU officials have rejected U.S. attempts to put armed sky marshals on high-risk flights stating instead the need to increase security at airports. European countries said they would rather cancel flights than to see guns onboard. Only France and the U.K. have agreed to the U.S. request.
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SHAME ON YOU, MINISTER YOUNG! 10 February 2004
At the 27 January 2004 Air Currents Conference, former Transport Minister Doug Young sat on a panel which was supposed to deal with the issue of a new open skies agreement with the U.S. On the panel was the U.S. chief air negotiator. Ex-minister Young was likely chosen as he was Minister when the 1995 Open Skies treaty (or nearly open skies treaty) was negotiated and signed. Minister Young indicated that this was his first speech on the topic since he was minister.
Michael Tretheway Vice President & Chief Economist
Were transfers of airports and Nav Canada a mistake? Instead of addressing the topic of open skies, he commented instead on the policy to transfer Canada’s airports to local airport authorities. According to the Minister (the minister who transferred most of the NAS airports and Nav Canada), this policy was a mistake. Further, he claimed he had been hoodwinked by community representatives into believing their locally based not-for-profit authorities would act responsibly. Young cited escalating costs, extortionate airport improvement and air navigation fees, and overbuilding of airports and the air navigation system as irresponsible decisions by the authorities. He was especially critical of the new Ottawa terminal, and had unkind words for Moncton’s terminal (he is from New Brunswick) and others. (An interesting exception was his comments regarding the Vancouver International Airport Authority which he believes got the formula right. Vancouver was transferred by the previous government.) Ex-Minister Young’s comments were reported in the press. Needless to say, many of us in the audience were stunned by his diatribe. This was the Minister who had negotiated open skies, given Canada a major step toward an intelligent international air policy, transferred Nav Canada and many of the airports and established the process which would transfer Canada’s ports. Lest we forget: he ignored the end of the ticket tax. His remarks provoked outrage from many conference participants. Three key points were made to counter Young’s remarks. The first concerned what he viewed as the irresponsible Nav Canada and airport improvement fees. He seems to have forgotten that the transfer of Nav Canada resulted in the elimination of the $50 Air Transportation Tax (ATT) in 1999.1 How easy it is to forget the burden of this former tax when complaints are made about airport and air nav fees and charges. The Nav Canada fees which replaced the tax are significantly lower on a per passenger basis than the tax. Further, while air passengers carried the whole financial burden in 1995, today cargo carriers, overflight carriers, and others are bearing a fair share of the costs of the system they use. This has been a major win for Canada’s balance of payments, as now U.S. and overseas carriers are contributing to the costs of the system they use. From fiscal drain to fiscal windfall. The second point made was that he ignored the impact of the airport/air nav transfers on the federal treasury. In the past, the federal government spent $175 million per annum on airports, while today it receives over $260 million in airport rent -- a combined $435 million annual improvement for the taxpayer. If the federal government had simply ceased to subsidise the major airports and went to zero rent, there would be no airport improvement fees at the major airports. Further, in the case of Nav Canada, the federal government received a half billion dollars as an up-front payment from Nav Can. The ATT was originally established at $5 in the late 1970s, and had increased 1000% over its life, versus an inflation rate of only 200%. 1
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SHAME ON YOU, MINISTER YOUNG! - CONTINUED Correcting overdue investments. At the same time as the federal government is obtaining what is now cumulating into billions in revenue, the airports and Nav Can have made and continue to make much needed investments, measured in billions, to renew, replace, upgrade and expand infrastructure which had been deferred by the Federal government. This is being done at no cost to the taxpayer or landlord. Moncton is a good example. The terminal was literally falling apart. It had five separate roofs, with rot in between. There were no restrooms post security and almost no seats in the holdroom and an HVAC system which was on the verge of permanent failure. One of the two runways had been built (by Transport Canada) with improper drainage and would bulge with water pressure during a heavy rain. Today, the community of Moncton has a terminal which is larger, yet cheaper to maintain. It provides essential services, such as washrooms and seats in the holdroom. You can land on the runway during a heavy rain. Engines for local economic development. A third point made was that prior to transfers, many communities had air service with important gaps, as the federal government undertook no marketing. The airport authorities invested in marketing to develop air services which the communities needed. Today’s airports are better economic engines for their communities. While there is more to be done, some tremendous successes have been achieved for both large and small airport communities. In my opinion, the ex-Minister’s remarks were irresponsible. They reflect an armchair quarterback approach to a difficult and important issue. This is not excusable from someone who had available all the facts, such as the end of the Air Transportation Tax and the enormous revenues the federal government is earning from the financial deals his staff negotiated. Shame on you Doug Young!
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. Prepared by InterVISTAS Consulting Inc.
Page 22 February 2004
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