CAIR Issue No. 4 - April 2003 by Leah Dupuis

INDUSTRY REVIEW

Page 1 April 2003

RESTRUCTURING AIR CANADA 6 April 2003

On April 1, Air Canada filed in the Superior Court of Ontario for bankruptcy protection under the Companies’ Creditor Arrangements Act. There is a lot of speculation in the media and on the street as to what Air Canada will look like when and if it emerges from CCAA. This month, we look at some of the facts about the bankruptcy filing. The filing

• As expected, Air Canada chose to use the CCAA rather than the Bankruptcy and Insolvency Act. The BIA has provisions for bankruptcy protection, but it is much less favourable for the company. • Air Canada filed for protection for itself and some but not all of its subsidiaries. Jazz Air Inc., Zip Air Inc. and Air Canada Capital are under bankruptcy protection.1 Tango and Jetz are merely brands of Air Canada, and not separate companies – these brands are now being operated under bankruptcy protection. Not included in the filing (and operating with business as usual) are AeroPlan, Air Canada Vacations and Destina. • Zip CEO Steve Smith indicated that Zip still plans to proceed with its growth strategy, and to operate 20 aircraft by the end of the year. • The filing indicated Air Canada had assets with book values of $7.8 billion and liabilities of $9.7 billion. Long term debt is listed as $4.2 billion. • The largest creditors are listed as Bank of Nova Scotia Trust Company of New York ($442 million), and the Bank of Nova Scotia with CIBC representing nine other Canadian financial institutions ($300 million). • Roughly 60% of the listed long term debt is owned by non-Canadians. • 222 of 232 aircraft are leased. Only ten are owned by the Company.

Protection The CCAA allows Air Canada to suspend making payments. Secured creditors can be prevented from repossessing any financial or physical assets during the period of protection. Financing

• At the time of the filing, Air Canada had $375 million unrestricted cash on hand. • General Electric Capital Canada has provided CA$1.05 billion in debtor in possession (DIP) financing. This is believed to be the largest DIP financing in Canadian history. • Just over half of this is a term loan, available immediately. The balance is a revolving credit facility. The loan has an 18 month term. • GE Capital holds leases on roughly 100 Air Canada aircraft. • The Globe&Mail estimated that GE is one of Air Canada’s largest creditors and holds more than $1 billion in AC’s debt or leases. • The Globe&Mail reported that the terms of the DIP loan pledge AC’s free assets as security for 22 of the roughly 100 aircraft leased by GE to AC.

There are four other subsidiaries in protection: Manoir Int’l Finance Inc., Simco Leasing Ltd., Wingco Leasing Inc., and 3838722 Canada Inc. Page 1 © InterVISTAS Consulting Inc. April 2003 1

RESTRUCTURING AIR CANADA CON’ T Who makes decisions?

• While Air Canada may make proposals to the court as to how funds should be spent and how the company should be restructured, actual decisions are now in the hands of Justice James Farley. The justice can dismember the company and sell assets over Air Canada’s objections. • Restructuring will require that each class of debtor approve the plan which Air Canada will put forth. Note that one class cannot out vote another. Within each class, a majority of investors representing at least 2/3 of the liabilities of that class must approve the restructuring plan. This double test is to prevent a few large creditors from forcing a solution on small investors, and vice versa. • Air Canada has hired New York based Seabury Group as investment advisors for its restructuring. This is the same group that handled the successful US Airways restructuring. • Air Canada has appointed Calin Rovinescu (Executive VP Corporate Development and Strategy) as Chief Restructuring officer.

Timing • The CCAA allows Air Canada 30 days to put forth a restructuring plan. However, the court may approve an unlimited number of extensions, and is likely to do so, provided progress toward restructuring is being made. Unlike the U.S., Canada, however, does not have a history of long periods of bankruptcy protection. Labour • There are no provisions under the CCAA for abrogating any labour contracts. This is quite unlike the U.S. Chapter 11 provisions, where the company can petition the court to cancel labour agreements. • CCAA does allow some scope for terminating executory contracts, but this is unlikely to be applied to labour contracts. It can be applied to arrangements such as leases, ground handling contracts, etc. Foreign Ownership Restrictions • Any restructuring must comply with the restriction that no more than 25% of new voting equity be held by non-Canadians, including conversion of all or part of debt, leases or obligations to new equity. • There is a similar restriction in the Air Canada Public Participation Act that prevents any one individual or entity from owning more than 25% of Air Canada’s voting equity. • Given the large amount of debt and aircraft leases held by non-Canadians, restructuring of Air Canada could be seriously impeded by the foreign ownership restrictions.

Page 2 April 2003

SARS – ANOTHER GLOBAL TRAVEL CRISIS The global airline industry has been hit with another crisis. SARS (Severe Acute Respiratory Syndrome) has severely impacted travel to and from Asia, especially Hong Kong and Mainland China. Although little is known about the disease, it appears that it spreads quickly through the population. This has prompted the World Health Organization to issue travel advisories to the general public to either limit or delay travel to global high-risk areas of Hong Kong, China, Singapore and Taiwan for the near term. Hong Kong and China have close to 2,300 cases of SARS, world wide there are close to 2,800 cases of the disease. Canada, especially Toronto, has also been widely affected by SARS. As of April 11, there were 98 cases of the disease and many more suspected cases nationwide; there have been 10 deaths in Canada since the outbreak that began at the beginning of March.

Doris Mak Senior Market Analyst Lifting of WHO Travel Advisory The World Trade Organization would only consider lifting the travel advisory after three incubation cycles of declining infection numbers. WHO defines the incubation period for SARS as 10 days from the time of exposure until a person shows symptoms. Under the most optimistic case scenario, the WHO travel advisory will remain in effect at least until mid-May.

Airline Impact The Air Transport Association (ATA) reports that for the four-week period ended April 6, U.S. system-wide traffic was down 17%. It is noted that part of this decline can also be attributed to the war in Iraq. However, during the past week, Asia-Pacific traffic has been down 26% from the same period last year. With depressed traffic, ATA member airlines have had to cut seat capacity in recent weeks.

Source: Air Transport Association

Air Canada’s overall traffic for the month of March was down 10.1%. The airline’s Asia-Pacific traffic was down 18%. Asian air carriers have had to reduce seat capacity system-wide due to weakening demand for air services. Cathay Pacific has scaled back its system-wide seat capacity by 14%, or a 23% reduction in the number of flights in the past 2 weeks. Local Asian governments have also impacted the air travel industry. The Government of Malaysia has decided to impose strict visa requirements on Hong Kong citizens wishing to travel to Malaysia. As a result, on April 10, Cathay Pacific announced that it would suspend all of its flights between Hong Kong and Malaysia until further notice.

Page 3 April 2003

AIRLINE DATA – CANADA Traffic and Load Factors on Canada’s Major Air Carriers – March 2003 Passenger Traffic Capacity Revenue Passenger Kilometres

Air Carrier

% Change over 2002

% Change from 2001

% Change over 2002

% Change from 2001

% Change over 2002

% Change from 2001

Air Canada 2

-9.7%

-5.5%

-5.6%

-1.2%

-3.3 pts (to73.6%)

-3.3 pts

Domestic (Mainline)

-12.3%

-11.9%

-7.3%

-5.5%

-4.1 pts (to 71.9%)

-5.2pts

Domestic (Jazz)

+0.8%

n/a

-7.9%

n/a

+5.2 pts (to 60.2%)

n/a

Domestic (Consolidated)

-10.8%

n/a

-7.4%

n/a

-2.7 pts (to 70.1%)

n/a

-9.2%

-8.2%

-4.8%

-6.3%

-3.7 pts (to 75.3%)

-1.6 pts

NEW CARRIERS: LOAD FACTORS Jetsgo: Zip:

73.6% not reported

CanJet:

not reported

Load Factor

Available Seat Kilometres

International & Charter

-4.0 pts -5.1 pts (to 66.8%) Note: n/a – As Jazz was not reported in 2001, a percentage change from 2001 could not be calculated for Domestic Jazz and Domestic Consolidated. +49%

WestJet

+124%

+58%

Analysis: • WJ traffic and capacity continues to grow. • Its load factor is now almost 7 points below Air Canada’s. • AC domestic traffic is continuing its downward trend. This is the 3 rd consecutive month with double digit declines. • AC international traffic is also now declining. • Traffic for Jazz is improving.

+141%

WestJet

80% 70% 60% 50%

RPK ASK

40% 30% 20% 10% 0%

Apr- May Jun 02

Air Canada Domestic Mainline Mainline 25% 20% 15% 10% 5% 0% -5% -10% -15%

Dom RPK Dom ASK

Jul

A u g Sep

Oct N o v Dec

J a n - Feb Mar 03

Sep

Oct

Nov Dec Jan- Feb Mar 03

Air Canada International

Jazz data is not included in this graph

Apr- M a y J u n 02

Jul Aug

25% 20% 15% 10% 5% 0% -5% -10% -15%

Int'l RPK Int'l ASK

Apr- May 02

Jun

Jul

A u g Sep Oct

Nov

Dec

Jan- Feb 03

Mar

Air Canada traffic numbers are a consolidation of mainline and Jazz. Page 4 April 2003

AIRLINE DATA – U.S. U.S. Airlines Release March 2003 Traffic Figures – Airline

Load Factor

Traffic ( RPMs – millions)

(ASMs – millions)

71.6%

9,990

13,949

â 2.7 pts

â 4.8%

â 1.1%

76.5% 3

1,281

1,880

â 4.2 pts

á 3.9%

á 17.4%

71.6%

4,915

6,865

â 7.9 pts

â 8.3%

á 1.9%

72.3%

8,273

11,449

â 3.8 pts

â 8.1%

â 3.2%

82.3%

894

1,087

â 3.5 pts

á 76.4%

á 84.1%

75.5%

5,991

7,940

â 6.4 pts

â 6.4%

á 1.6%

67.3%

4,058

6,026

â 2.9 pts

á 1.1%

á 5.4%

73.7%

8,719

11,831

â 3.8 pts

â 5.7%

â 0.8%

73.4%

3,203

4,376

â 4.6 pts

â 15.9%

â 10.4%

Notes:

Capacity

Includes American Airlines and American Eagle Does not include Express Jet 3. Load factor includes scheduled service only 1. 2.

Source: Carrier traffic reports.

Page 5 April 2003

.Summary of Total Year-Over-Year Passenger Traffic Performance at Selected Airports – 2002 to February 2003 Vancouver

MontrealDorval

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

St. John’s

March

-7.0%

-13.1%

-2.0%

-11.4%

-12.9%

-12.4%

-17.2%

-6.5%

-3.0%

-7.6%

-7.8%

-11.8%

1 Quarter

-8.8%

-13.6%

-1.8%

-11.7%

-11.5%

-16.5%

-13.6%

-8.4%

-2.1%

-6.7%

-7.5%

-10.3%

April

-9.2%

-13.5%

-5.2%

-8.1%

-13.1%

-9.3%

-12.3%

-6.4%

-5.7%

-13.4%

-12.6%

-11.0%

May

-9.3%

-9.5%

-2.3%

-4.9%

-11.4%

-5.7%

-4.7%

-5.1%

-3.8%

-3.0%

-7.2%

-7.3%

June

-7.4%

-9.8%

-4.0%

-7.0%

-12.3%

-6.0%

-1.2%

-7.4%

-8.8%

-9.7%

-13.2%

-16.8%

2 Quarter

-8.6%

-10.9%

-3.8%

-6.7%

-12.3%

-6.9%

-6.0%

-6.3%

-6.1%

-8.7%

-11.1%

-11.9%

July

-7.2%

-8.3%

-3.6%

-9.4%

-6.6%

-5.1%

+4.4%

-13.1%

-6.3%

-9.5%

-13.0%

-7.0%

August

-7.7%

-7.9%

-2.3%

-7.5%

-8.8%

-2.8%

+7.5%

-8.8%

-1.7%

-13.6%

-10.5%

-8.0%

September

+12.6%

+22.4%

+20.1%

+7.6%

+23.7%

+16.4%

+26.1%

+13.2%

+11.8%

+12.6%

+10.5%

+20.0%

3 Quarter

-2.5%

-0.2%

+2.9%

-4.4%

+0.50%

+1.2%

+11.2%

-4.8%

+0.2%

-5.4%

-5.8%

-0.8%

October

+12.5%

+15.3%

+14.3%

-0.1%

+6.4%

+5.9%

+7.9%

+0.1%

+5.7%

+1.7%

+4.4%

-0.7%

November

+4.7%

+5.3%

+0.6%

+9.4%

+3.0%

+5.7%

+0.1%

-1.4%

+0.2%

+1.2%

-2.3%

+8.2%

+4.3%

n/a

+6.9%

+11.7%

+6.3%

+15.2%

+8.1%

+1.4%

+4.3%

+1.5%

+3.2%

+2.2%

n/a

+7.2%

n/a

+7.5%

+6.9%

-5.1%

+8.9%

+7.3%

+0.5%

+3.0%

+1.1%

+3.0%

-0.3%

-7.5%

-3.9%

n/a

+1.2%

-4.1%

-5.1%

-3.8%

+0.1%

-4.8%

-1.3%

-5.1%

-5.5%

-5.7%

January

n/a

+3.8%

n/a

+6.3%

+3.5%

+6.2%

+13.0%

+4.5%

+2.9%

+4.0%

+6.8%

-0.3%

-5.8%

February

n/a

+5.6%

+3.0%

+3.9%

+12.7%

+13.8%

+7.5%

+2.0%

+6.0%

+8.8%

n/a

Toronto

2002

December 4th Quarter Full Year 2003

Note: Toronto traffic levels derived from Statistics Canada data. Page 6 April 2003

InterVISTAS Consulting Inc. ©

AIRLINE STATUS Airline Status April 2003 – Airline Status As of 15 April 2003 Carrier Air Canada

Bankruptcy 1 April 2003

Capacity Cut -15%

Job Cuts

3,600 May invoke force majeure clause to implement layoffs

Air New Zealand American

Comments

Cutting service to Los Angeles, Hong Kong, Osaka, Nagoya Press claims it has narrowly averted due to union concessions.

Int’l –13% Dom – 2%

1,000 pilot jobs

Carrier still contemplating Chapter 11 filing

2002 loss was largest in aviation history. Carrier is using grace period in debt and lease contracts to avoid payments. Reached major settlement with union. Delaying launch of Los Angeles-Narita by 1 year. Carrier warned unions on 7 April that if concessions not approved soon, it will file for Chapter 11 protection

America West

“will cut jobs”

Asiana

Avianca (Columbia) British Airways Cathay Pacific

Will cut some domestic flights and reduce service to Guam (U.S. territory) Chapter11 21 Mar 2003

Filed in U.S. court -4% overall –6% N Atlantic

Accelerate plan to cut 3,000

-37%

May halt all flights in May due to decline in number of passengers and SARS.

-2%

1,200 Suspended some TransAtlantic and Trans-Pacific flights. Dropping Hong Kong service

Delta

-12%

Song to start 6 routes in June

Dragonair

-25%

SARS related reductions

Continental

Finnair Iberia Page 7 April 2003

1,200 -4% © InterVISTAS Consulting Inc.

Airline Status As of 15 April 2003 Carrier Hawaiian

Bankruptcy

Capacity Cut

Job Cuts

Comments

Chapter 11 21 Mar 2003

KLM

-7%

Thousands of Seeking 10% reduction in unit jobs costs

Korean

Will reduce flights to some U.S. cities

Midwest

Claims it has taken steps to avoid bankruptcy

-12%

4,900

Qantas

-20%

1,000

SAS

4,000 Seeking US$1.5 billion in cost reduction in 3 rd major restructuring since 911. Wage freeze in place and major productivity concessions allowed by unions.

Singapore

-19.7%

SARS and Iraq war reductions. Cutting Hong Kong flights by 50%. Cancelling Kaoshiung, Hiroshima. Cutting Los Angeles, New York, Amsterdam, Frankfurt, Manchester, Hanoi, Guangzhou

Turkish Airlines

Bookings have dropped 50%

UAL

Chapter 11

-8%

US Airways

Chapter 11

-4%

Emerged 1 April 2003 Virgin Atlantic

1,100 mechanics, 2,300 flight attendants to be on unpaid leave.

Says it will not meet Q2 cash flow requirements for DIP financing but dismisses growing media speculation over Chapter 7 liquidation

Dropping all Emerged from Chapter 11, a PIT Europe pre-condition for needed U.S. service Government loan guarantee and Alabama Pension fund financing

-3%

Prepared by InterVISTAS Consulting Inc. (www.InterVISTAS.com). Sources include airline press releases and Reuters.

Page 8 April 2003

ÂŠ InterVISTAS Consulting Inc.

NEWS ARTICLES AIR CANADA UPDATE AIR CANADA FILES FOR BANKRUPTCY PROTECTION

On April 1, 2003, Air Canada filed for bankruptcy protection under the Companies’ Creditors Arrangement Act allowing the company to continue operating while it tries to file a restructuring plan. Transport Minister David Collenette indicat ed that Ottawa will not offer a cash bailout for the carrier but instead will provide other forms of assistance. Meanwhile, General Electric Capital Canada will provide the carrier with a $1.1 billion in debtor-in-possession financing. To access the financing, AC has agreed to pay GE a “closing fee” of U.S.$35 million. At the same time, Air Canada and the Canadian Auto Workers Union agreed to slash more than 1,000 jobs – its share of the 3,600 job cuts announced on March 20.

AIR CANADA CODE SHARES TO LAMEZIA

Air Canada will begin code sharing services via Rome to Lamezia Terme, Catania, Palermo and Venice with Italian carrier Air One, a Lufthansa affiliated air carrier.

ZIP EXPANDS NETWORK

Effective May 18, Zip Air will add a daily nonstop service from Vancouver and Winnipeg to Saskatoon.

OTHER CANADIAN AIRLINES CANJET INCREASES SUMMER FLIGHTS BY 40%

•

Fredericton-Montreal daily service starting June 21. Also, beginning June 22, CanJet Airlines will expand its network to include a FrederictonToronto service.

JETSGO INCREASES SUMMER SCHEDULE

Beginning in June, Jetsgo will add six new destinations to its schedule. These include: Victoria, Thunder Bay, Saint John, St. John’s, Gander and Happy Valley. In total, the carrier will serve 18 Canadian and two U.S. cities.

HMY AIRWAYS SCHEDULES SUMMER SERVICE

On May 5, HMY Airways will commence up to 13 weekly round trip flights between Vancouver and Toronto.

U.S. & INTERNATIONAL AIRLINES U.S. AIRLINE INDUSTRY TRAFFIC DECLINES 17.4%

The Air Transport Association reported a decline of 17.4% for U.S. airline’s systemwide traffic for the week ended April 6. Pacific traffic dropped 25.8% for the first week of April.

AMERICAN AIRLINES AVOIDS CHAPTER 11

American Airlines has avoided bankruptcy filing when it reached tentative agreements with its three major unions. The agreements will see reduced pay and benefits that will save the carrier US$1.8 billion annually.

CanJet Airlines will increase its summer flights by over 40% during the peak summer period. Flight increases will begin as early as June 2. Those flights include: • Moncton-Montreal-Toronto four times weekly service starting June 2 • Halifax-Deer Lake service increases to four flights per week starting June 2 • Toronto-St. John’s non-stop service starting June 21 Page 9 April 2003

NEWS ARTICLES CONTINENTAL TO SLASH 1,200 JOBS

As part of a US$500 million cost-cutting plan, Continental Airlines plans to eliminate 1,200 jobs by the end of the year. These job cuts will be in addition to the 4,300 employees already on furlough or leaves of absence. Senior management positions will be reduced by 25% and pilots reduced by 125. Further cuts will affect reservation agents, airport agents and other employees.

CONTINENTAL OFFERS SERVICE TO STANSTED

Continental Airlines announced it will commence daily service to London Stansted Airport. Stansted has become a huge hub of several low cost carriers.

NWA TO OFFER DETROIT-HALIFAX SERVICE

Starting July 1 until September, Northwest Airlines will offer new nonstop service between Detroit and Halifax. The service will be operated with an Avro RJ85 regional jet.

NWA TO SHED 4,900 JOBS

Northwest Airlines plans to cut 4,900 jobs, ground 20 aircraft and cut capacity by 12% in an effort to deal with the sharp declines in demand.

US AIRWAYS TO PLACE RJ ORDER

US Airways CEO, Dave Siegel, is close to placing a large order of 50- and 70-seat regional jets from Embraer. He believes that the Embraer product line will be important to US Airway’s near-term recovery and further praises the Embraer 170 as a “revolutionary” aircraft that would give US Airways a significant competitive advantage.

SKYWEST 4TH QUARTER PROFITS RISE 29%

SkyWest reported a US$17.8 million net profit for the fourth quarter, a 29% increase from the previous year. Revenues for the quarter increased 2 6% to US$208 million. Revenues do not include US$9.7 million that United Airlines owed to SkyWest before it filed for bankruptcy. Expenses totaled US$179 million, up 22% from the previous year.

SAS SNOWFLAKE BEGINS OPERATIONS

SAS’s new low-cost carrier, Snowflake, began operations on March 30 using four Boeing 737800s. The airline plans to operate with regular SAS staff, and bookings will be made through regular distribution channels. A Website is slated to launch in June.

UNITED REACHES DEAL WITH IAM

United Airlines and the International Association of Machinists and Aerospace Workers have reached tentative agreements that, if ratified, could result in US$2.6 billion in savings for the airline over six years. The savings will be achieved through a 13% decrease in wages, a 20% employee copayment towards the cost of health insurance, and work rule changes for part-time employees.

UNITED EXPRESS BEGINS CHICAGOWINNIPEG SERVICE

Starting June 12, United Express partner Air Wisconsin, will offer two daily flights between Chicago and Winnipeg. The service will be operated with 50-seat regional jets. Page 10 April 2003

NEWS ARTICLES CARGO U.S. CARGO INCREASES

U.S. Air Transport Association figures for February show a 0.6% increase in revenue ton miles for domestic cargo and a 8.5% increase in international cargo. Total freight volume for the month increased 4.4% from the previous year. US Air Cargo Growth Rates 30% 25% 20% 15%

DHL INCREASES OWNERSHIP IN AHK

DHL WORLDWIDE Express has increased its 30% stake in Air Hong Kong by another 10%. The remaining 60% is owned by Cathay Pacific.

FEDEX 3RD QUARTER NET INCOME UP 23%

For the third quarter fiscal 2003, FedEx Corporation reported US$5.6 billion in revenue, an increase of 10% from the previous year. Operating income increased 14% to US$269 million and net income rose 23% to US$147 million.

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

Dom

1999

1997

1995

1993

1991

1989

1987

1985

1983

1981

1979

1977

1975

1973

1971

-15%

Total

CARGOJET OFFERS SERVICE TO MEXICO

CargoJet plans to launch thrice-weekly cargo service to Mexico City and Guadalajara from Hamilton on June 30.

FEDEX, UPS, U.S. POSTAL SERVICE DOMINATE U.S. COURIER MARKET IN 2002

In 2002, FedEx, UPS and the U.S. Postal Service made up 87.9% of the under 70 lbs market shipments in the U.S. Shares Shares of of US Courier Market Shipments Under 70 70 pounds pounds 2002 (1st 9 Months)

DHL 1.8% Airborne 9.4%

Emery 0.2%

Bax Global 0.2%

Other 0.5% FedEx 36.1%

US Postal Service 22.1%

DEUTSCHE POST ACQUIRES AIRBORNE UNIT

Deutsche Post has agreed to purchase the ground operations of Airborne Inc. Deutsche Post subsidiary, DHL, will pay US$1.05 billion for the acquisition. Airborne’s air operations will become an independent public company called ABX Air, Inc in order to conform with U.S. foreign ownership restrictions.

SIA CARGO AND LUFTHANSA IMPOSE WAR-RISK SURCHARGES

Singapore Airlines Cargo and Lufthansa Cargo have introduced worldwide war-risk surcharges to cover additional costs during the war in Iraq. SIA will charge US$0.25/kg while Lufthansa will charge US$0.11/kg.

TAIWAN CARRIERS INCREASE CARGO RATES

On March 24, Eva Airways and China Airlines increased their shipment rates by 20-30%. China Airlines raised its rates to Europe by 20%, while EVA raised rates by 45-50%.

UPS 29.7%

Source: Air Cargo World

EMERY TO BECOME MENLO

By next January Emery Forwarding will change its name to Menlo Worldwide Forwarding. The company has conducted business under the Menlo Worldwide SM brand, which is also a division of CNF Inc.

Page 11 April 2003

NEWS ARTICLES LUFTHANSA AND KLM CUT CARGO SURCHARGES

Due to falling fuel prices Lufthansa Cargo and KLM Royal Dutch Airlines NV will reduce their cargo surcharges. KLM will drop its $0.10/kg surcharge and Lufthansa will cut its current surcharge of $0.21/kg to $0.16/kg.

AIRPORTS FUEL PRICES April 4, 2003 SPOT OIL PRICES DROPPING FUTURES PRICES STILL LOW Crude Oil Price: Spot – US$28.42 (down 23% from March) Future • 6 month - $25.54 (October 2003 delivery) • 12 month – $24.68 (April 2004 delivery) • 2 year - $23.97 (April 2005 delivery) • 5 year - $23.97 (April 2008 delivery)

MONTRÉAL AIRPORT REVENUES UP 8.2%

Aéroports de Montréal reported consolidated revenues of C$197.3 million, up 8.2%, for the year ended December 31, 2002. Operating expenses improved 11.3% from the previous year to C$105 million.

AÉROPORTS DE MONTRÉAL OUTLOOK DOWNGRADED TO STABLE

Moody’s Investor Services has confirmed the “A2” rating on the C$350 million airport revenue bonds of Aéroports de Montréal and has changed the outlook from positive to stable. The change to stable is more consistent with the current economic and air transport industry environment.

LUFTHANSA RETURNS TO MONTREAL

On May 19, Lufthansa will operate a daily flight between Montréal and Munich. The service will be operated by an Airbus A340.

AIRCRAFT MANUFACTURERS BOMBARDIER KEEPS TORONTO PLANT OPEN

A new labour deal reached by Bombardier Inc. and CAW will see Bombardier’s de Havilland aircraft assembly plant lose 650 employees in order to keep the facility operating for at least another three years. Under the new deal, the plant’s 1,900 unionized employees will see wages increase by 7% with improvements to pension and severance clauses.

Page 12 April 2003

BOMBARDIER SELLS UNITS, FOCUSES ON AEROSPACE

In an attempt to reduce its debt burden, Bombardier Inc. plans to sell its recreational products division and focus solely on its Transportation and Aerospace units, including its successful line of regional jets and corporate aircraft. The company anticipates producing more than C$2 billion in new liquidity from a combination of a stock offering worth C$800 million and the sale of the snowmobile and jet ski product lines worth C$1.5 billion. The company has also announced that it is in negotiations to sell its Defense Services business and Belfast City Airport.

FAIRCHILD DORNIER 328JET PROGRAM ACQUIRED

AvCraft Aviation, an aircraft services provider based in Virginia, will acquire Fairchild Dornier’s entire 3278JET program. AvCraft will also acquire production, customer and material support facilities in Oberpfaffenhofen, Germany.

EMBRAER FOURTH QUARTER RESULTS STRONG

Embraer reported a fourth quarter net profit of US$192 million. The company delivered 41 planes, seven more than in the same quarter in 2001. Net sales for the full year totaled US$2.5 billion, while net income was US$223 million.

GOVERNMENT AND REGULATORY CANADA AIRPORTS ACT INTRODUCED

On March 20, David Collenette introduced the Canada Airports Act, a new legislation intended to regulate Canada’s airports. The legislation will set out the roles and obligations of the Canadian Government and the airport operators. A total of 30 airports, including 26 National Airports System airports will be affected by this Act.

NEWS ARTICLES NAV CANADA EXPECTED TO RAISE FEES

OTHER

Nav Canada plans to increase the fees it charges to carriers to cover its revenue shortfall. The company faces revenue problems such as • a C$44 million bill for February and March owed by Air Canada; and • a decline in traffic volumes leading to lower airline revenues. Nav Canada will undertake a consultation process before a new fee can be implemented.

FATALITY RATES DOWN FOR U.S. CARRIERS, UP FOR WORLD

EU CLOSER TO OPEN SKIES

CONCORDE ENDS SERVICE

On March 21, the European Council urged the Council of Transport Ministers to give a mandate to the European Commission to negotiate an open-skies agreement with the U.S.

PEOPLE IN THE NEWS NAV CANADA APPOINTS SENIOR LEADERSHIP TO EXECUTIVE MANAGEMENT COMMITTEE

Richard Dixon has joined NAV Canada’s Executive Management Committee as the Vice President and Human Resources Officer. Kathy Fox has been appointed Vice President, Operations.

The National Transportation Safety Board reported a decline of 11% in the U.S. accident rate in 2002. It must be noted that departures for U.S. scheduled airlines decreased in 2002. According to ICAO, worldwide fatalities on scheduled service have increased to 791 from last year. Air France and British Airways announced that the retirement of their Concorde fleets. Air France will end its Concorde flights beginning May 31 and British Airways will end flights at the end of October.

AMERICANS INTEND DOMESTIC TRIPS

According to a Travelocity poll most Americans intend to travel within the U.S. rather than overseas over the next year. The study indicates that almost 90% plan to travel domestically more than 200 miles from home and 61% plan to travel within 200 miles.

AIR CANADA APPOINTS ROBERT E. BROWN

Robert E. Brown has been appointed Vice-Chair of Air Canada’s Board of Directors. Brown formerly served as the President and CEO of Bombardier Inc. from 1999 to December 2002 and has held several senior positions with the federal government.

BESSELER RESIGNS FROM GOVERNMENT OF CANADA

Duane Besseler, the Government of Canada's Chief Air Negotiator, has resigned his position. No replace has been named as yet.

Page 13 April 2003

NEWS ARTICLES US AIRWAYS EMERGES FROM BANKRUPTCY US Airways emerged from bankruptcy on March 31, 2003. This was 7.5 months after its original filing for Chapter 11 protection on August 11, 2002. Key elements of its financial restructuring include the following: Corporate restructuring • a new board of directors • continuation of David Siegal as CEO • a new regional airline division within US Airways to operate regional jets: MidAtlantic Airways to be started by the end of the year • US Airways will apply for membership in the STAR alliance • cancellation of prior common stock • General unsecured creditors are expected to receive under 2% of their claims New funds • new financing of US$1.25 billion • US$250 million in new equity • a new US$1 billion loan, 90% of which is secured by the U.S. Air Transportation Stabilization Board, and is to be paid out in the last three years of the 6.5 year term • new common stock is owned 37% by the new equity investor, 30% by employees, 11% by unsecured creditors, 10% by the U.S. ATSB, 8% by management, 5% by General Electric Use of funds • US375 million of the $1.25 billion repaid debtor in possession financing • part of the funds will be used to purchase/lease new regional jets for MidAtlantic and its other regional carriers • the turboprop fleet will be eliminated by 2008 Cost Savings • annual operating cost savings of US$1.9 billion per year: $1billion from labour cost savings, $500 million from reduced lease and debt payments, and $400 million from vender savings and other sources • aircraft debt and lease obligations reduced from US$8.4 billion to $5.6 billion • replacement of the defined benefit pension plan for pilots with a defined contribution pension plan • cost per available seat mile is expected to fall from US 12.2 cents to 9.9 cents • cancellation of its lease with Allegheny County, the operator of the Pittsburgh International Airport with a new lease being negotiated • a new credit card processing agreement, which replaces National Processing Corp. with Bank of America (Note that BoA was one of the funders of the DIP financing)

Page 14 April 2003

ECONOMIC OUTLOOK 15 April 2003

Ian Kincaid Senior Economist

War, disease … For several months the economic outlook for Reported Cases of SARS Worldwide March 16th - April 11th the world economy has been 3,000 clouded by the threat of war in Iraq. Total Cases Deaths Now a new cloud looms in the form 2,500 of Severe Acute Respiratory 2,000 Cases in Guangdong Syndrome (SARS). As of April Province, China added 11th, the World Health Organisation 1,500 (WHO) had received reports of 1,000 2,890 cases of SARS infection and 500 116 deaths, the vast majority of which have been in Asia, 0 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 1 2 3 4 5 6 7 8 9 10 11 particularly Hong Kong and China.3 March April The economic impact of SARS has Source: World Health Organisation been felt most heavily in the Asian travel and tourism industry. Cathy Pacific, Singapore Airlines and Quantas have all cited SARS as one reason for recent capacity cutbacks. Hotel and conference bookings in Asia have also been badly hit. There is even evidence that Canada (which has had 98 confirmed cases and 10 deaths, to date) is being affected by the public response to SARS. The American Association for Cancer Research convention in Toronto, which was due to host 16,000 attendees, was recently cancelled due to concerns about SARS. The final impact of SARS on the economy in general is highly uncertain. It is dependent on the spread of the disease and, arguably more importantly, the attention it receives from the media. If the disease follows the pattern of other recent outbreaks of new, “killer” diseases such as West Nile, Streptococcus and the Hong Kong chicken-flu, the impact is likely to be short-lived even if the disease is never fully eradicated. Generally speaking, once the “novelty” has worn off of events such as disease outbreaks or terrorist attacks, people revert back to their normal lifestyle and travel patterns. That said, the course of the disease is not known. It is clear, however, that there will be at least shortterm economic harm. U.S. brokerage firm Morgan Stanley was concerned enough to cut its global growth forecast for 2003 to 2.4%, putting it below the world’s recession growth threshold of 2.5%. A principle reason given was that the SARS outbreak was expected to slow growth in Asia, tipping an already weak global economy back into recession. Other economists have been less keen to provide predictions, recognising the unknowns involved.

To put this into content, over the same time period an estimated 2,400 people died from the common flu in the U.S. alone. 3

Page 15 April 2003

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Consumer Confidence

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The U.S. Economy, Stumbling? Several key indictors of economic health suggest that the U.S. economy is weakening and could be on the verge of double-dipping into recession. U.S. employment figures released for March 2003 showed that employment fell by 108,000 following an even larger drop of 357,000 in February. Despite this, the U.S. unemployment rate still stands at a fairly respectable 5.8%.

Sources: University of Michigan and The Institute of Supply Management

The Institute for Supply Management’s U.S. Production Index, the PMI (www.ism.ws) dropped below the breakeven level of 50 to 46.2 in March, indicating that the manufacturing economy in the U.S. contracted after four months of modest growth. The institute cited the weak economy, war concerns and energy prices as main causes for this contraction. The University of Michigan Consumer Sentiment Index (www.sca.isr.umich.edu) also declined in March to 77.6, due to concerns about job security and lack of income growth, continuing a trend which started in January. However, since the start of the war, consumer sentiment has risen sharply reaching 83.2 by April 11th as consumers apparently feel a successful war effort will boost the economy. Another recent positive for the U.S. economy has been the sharp drop in oil prices since the start of the war – oil spot prices have declined by over 25% since March 19 th to around $25/barrel. This will bring much needed relief to both consumers and businesses. And despite increased unemployment and consumer concerns about incomes, average personal incomes in the U.S. did increase by 2.9% for the year ending February 2003. At present, there is a great deal of uncertainty surrounding the health and direction of the U.S. economy due largely to the “fog of war”. The broad consensus among economists is that some clarity will return once the war in Iraq has ended and that, with the war over, the outlook for the U.S. should be more positive. Canada – still looking good. Employment in Canada continues to grow, adding 14,200 new jobs in March. This is less than the 55,200 created in February but fairly impressive given that the Canadian dollar remained strong in March (versus the U.S. dollar) and that March saw the start of war and the outbreak of SARS In order to prevent the economy overheating, the Bank of Canada has again raised interest rates. On April 15th, the overnight rate was raised by a ¼ percentage point to 3.25%. Apparently concerns about inflation, which in February was at a core rate of 3.1%, outweighed concerns about the weak U.S. economy, the war and SARS. 4 This is the fifth ¼ point increase in interest rates since April last year.

The core rate of inflation excludes certain volatile items such as food and energy; with these items included, February’s inflation rate stood at 4.6% due to fuel price increases. The Bank of Canada’s target range for the core rate of inflation is 1-3%. 4

Page 16 April 2003

STRAIGHT AHEAD – WITH BLINDERS ON 9 April 2003

A Vision for Transportation? On 25 February, the Minister of Transportation released his long awaited ‘blueprint’ for transportation. Titled Straight Ahead: A Vision for the Future of Transportation in Canada, this was the culmination of a multiyear effort which began with the legislatively required review of the Canada Transportation Act. There were also seeds of the new vision in the Minister’s Millennium Conference on Transportation on June 12, 2000, in the merger of Canadian Airlines International into Air Canada, and in the proposed merger of the Canadian National and Burlington Northern railways.

Michael Tretheway Vice President & Chief Economist

The Van Horne Institute recently held a conference on the blueprint at the end of April. Dr. Bill Waters of the University of British Columbia, who was also a member of the Canada Transportation Act Review Panel, gave the keynote address. His theme was that the title of the document was appropriate. In his view, Canada has been on a path since the 1950s McPherson Royal Commission toward increasing reliance on the market to deliver transportation services. This new path began with the National Transportation Act of 1967, which for the first time promoted competition, in that case between modes of transport. It continued with the 1987 Act, which authorized competition between carriers within the same mode of transport. This was the first time airlines were granted legislated freedom to compete. The 1996 Act took further steps toward liberalization. The Straight Ahead vision still embraces competition as the means for delivery of transportation services, and in that sense the vision is a further continuance of a long term vision for transportation in Canada. Putting on Blinders. However, in my opinion, at least for the air mode, a more appropriate title would have been Straight Ahead With Blinders On. During the past few years, the Minister and his staff heard two themes that were shared by almost all modes and all stakeholders: • • • •

The government should not take more out the transport sector than it needs to. Anything the government takes out should be reinvested.

Virtually all stakeholders are in agreement on these two principles: carriers, infrastructure providers, the tourism industry, and shippers. Silence! But the Straight Ahead document is silent on these issues! Not only did the Minister and his staff not embrace these principles, they did not even acknowledge in the document that they heard countless testimony pleading that they be adopted! The Minister and his staff went straight ahead and put forth the vision they wanted to, after putting on blinders, which enabled them to ignore the overwhelming amount of testimony and advocacy.

Airlines Ministerial Policy

Page 17 April 2003

A locomotive barrelling down the track. Perhaps the appropriate analogy is that government policy is a horse pulling the cart of the transport sector. The horse has blinders on and can’t see that he has stopped with the airline cart on railroad tracks – and there is a locomotive barrelling down the tracks toward the cart. In fact, the locomotive just hit the cart! After munching on some grass, this blinkered horse is ready to move straight ahead, but now sans cart.

A cry fallen on deaf ears. For years, the aviation sector has raised the cry that government taxation and the airport rent policy was doing real damage to the industry. It was imposing serious burdens on air carriers and infrastructure providers. The latter, of course, pass on these burdens to the carriers. Ultimately the consumer pays, and increasingly they decided to forego air travel. The impact of the Air Travellers Security Charge was especially onerous, and it has decimated short haul air travel, in the true Roman sense of the term.

Aviation Decimated

Since 911, the Government has extracted roughly $500 million in airport rent and at least half that amount via the ATSC (not to mention millions in domestic aviation fuel taxes). If the Ministers of Transport and Finance believe that airport rents and the ATSC would have no material impact on the industry, we ask the following questions: • What impact would an additional $750 million have had on the aviation industry in the months since 911 and the onset of a North American recession? • What impact would an additional 10-15% in short haul travellers have had on the economics of Canada’s air carriers? The answers to these two questions are obvious. The present aviation crisis has many contributors, but the airport rent and ATSC policies were fatal wounds. Their impact of these two wounds is even deeper. Without the cash cow approach of the government, the air carriers and the airports would never have developed the animosity which is now so apparent. The government failed to invest in airports for over a decade. The newly formed airport authorities immediately began to remedy the situation. Unfortunately, under-investment in the entire system meant that the entire system had to undergo massive capital investment at the same time. Without the airport rent policy, the key hub airports would largely have been able to finance expansion without AIFs, 5 and air travel would have been much more affordable. Misguided government policy has had real and fatal impacts on the aviation sector. What we really need. The U.S. developed a vision for their transport sector. Unlike Canada, they figured out how much infrastructure investment was going to be needed in the medium and long term. The U.S. Government then quantified what this was going to cost. This simple exercise revealed that the sector would need all the help it could get to finance replacing bridges, upgrading roads, investing in expanded airports, fixing the air traffic control system, etc. The government responded with two major infrastructure funding programs: the Intermodal Surface Transportation Efficiency Act (ISTEA) and the Transportation Equity Act for the 21st Century (TEA-21). It also has a number of airport specific programs. Unlike the Canadian government, which seeks to extract excise taxes and other rents from transport, the U.S. has provided infrastructure providers with access to billions of dollars in grants (putting their fuel tax dollars to work) and tax-free bonds which enable private sector investment. ATAC has to pick up some of the blame here. The airports proposed lower AIFs on short haul travel, similar to the YVR policy, but ATAC rejected this and insisted on a uniform AIF, despite warnings from airports that this would be detrimental to short haul travel. Page 18 © InterVISTAS Consulting Inc. April 2003 5

OTTAWA SCENE THE CANADA AIRPORTS ACT April 10, 2003.

Bill C-27 was tabled in the House of Commons on March 20th to mixed reviews. The CAC welcomed the Government’s commitment to transparency, accountability and good governance but expressed concern that the Act is not as flexible in accommodating the considerable differences between airports across the country as are the 1994 National Airports Policy’s devolution principles. As well, the CAC voiced its concern that the Act will significantly increase compliance costs in response to the extensive new regulatory requirements, particularly for the smaller airports. ATAC also welcomed the Government initiative but expressed its disappointment that Bill C-27 does not go far enough in giving airlines control over fees and charges and fails to give air carriers the onethird representation on Airport Authority Boards that ATAC seeks.

Roland Dorsay Regional Vice President Ottawa

Next Steps: After a 2 nd reading and debate in the House of Commons, the Bill will be referred to the House Transport Committee for clause- by-clause review. The Committee stage provides an opportunity for airports, air carriers and other interested stakeholders to continue to lobby for amendments or seek to delay the bill. The House Transport Committee is considering holding hearings across the country to assist it with its review of the Bill. The Government hopes to have the legislation enacted before the summer Parliamentary recess expected to begin by June 20th. Whether the Government can clear the Bill through all the legislative hoops before the summer recess remains to be seen. In light of the airline industry crisis; Air Canada’s entry in to receivership under the CCAA legislation; and the consequential negative impact on airport revenues and programs, the current environment is not overly conducive to a swift passage of complicated and controversial legislation which lacks a strong stakeholder consensus. Canadian Government Fees, Charges and Rent Relief Air Canada’s success in lining up private sector Debtor in Possession financing from GE Capital has relieved the Government from needing to make a difficult decision on whether to help Air Canada with loan guarantees or other forms of financial assistance. However, in the face of the on-going industry difficulties, the Government is said to be looking to other ways to assist airlines and airports in general. Transport Minister Collenette hopes to complete the on-going Airport Rent Policy review in the next month or two. There have been calls for a moratorium on airport rents; on the collection of the Air Transportation Security fee; and on the collection of the fuel excise tax. Although there has been much media speculation that Airports can look forward to some significant relief on airport rents, it should be noted that the Government has not yet made its decision. The outcome is far from a sure thing. U.S. Government Assistance to the Airline Industry With U.S. carriers forecasting to lose over US$11 billion in 2003, there have been widespread calls for government assistance south of the border. On April 1st, the U.S. House and Senate Appropriations Committees voted on bills that would compensate airlines for additional security costs and would impose limits on salaries and bonuses paid to airline executives. The House Plan would provide U.S. $3.2b in assistance, including reimbursing airlines for security fees paid since February. The Senate plan would provide U.S. $3.5b in assistance by extending subsidized war-risk insurance, relieving passengers from paying security fees and providing additional unemployment benefits for airline staff. However, the Bush Administration is opposed to providing as much funding as proposed under either Congressional plan. Congressional leaders say they expect the legislation will eventually pass with a price tag in the order of U.S. $ 2 B.

Page 19 April 2003

EXPLOSIVE DETECTION SYSTEMS (PART 1): DIFFERING APPROACHES IN CANADA & THE U.S. 10 April 2003

100% vs. multi-level The acquisition and deployment of explosive detection systems (EDS) and explosive trace detection (ETD) represents the largest expenditure by CATSA at Canadian airports. Totalling over CAD$1 billion 2002-06, this equipment will radically alter the processing of checked luggage.

Solomon Wong Director Security & Planning

Above: Computed Tomography Units Certified by the US FAA (top to bottom: InVision CTX 9000, CTX 5000 and L3 3DX 6000)

Canada joins many airports in Europe in implementing multi-level hold baggage screening with EDS, following the 1988 bombing of Pan Am Flight 103 over Lockerbie. The methodology developed in Europe uses a multi-level risk assessment: § Level 1: Checked baggage is scanned using high speed (600-1500 bags per hour) but less revealing scanners to detect dark densities of explosive materials. Roughly 40-50% of bags are sent for further investigation. § Level 2: An operator scans the rejected bags further, with 5% of the original total referred for further screening. § Level 3: A much more detailed exam takes place, with slower but more sophisticated scanning equipment. However, as only 5% of bags generally need the more detailed scanning, total system processing time is acceptable. § Level 4: Problem bags are reconciled with passengers to be hand inspected. § Level 5: Disposal of bags/alarm procedures. U.S. adopts 100% scanning Following September 11, 2001, the U.S. Transportation Security Administration adopted a radically different approach for EDS. The U.S. process is the equivalent of starting at

Level 3 with "computed tomography (CT)" scanners. The CT scanners are sophisticated units, but are relatively slow and prone to false alarms. As well, there are only two FAA certified vendors for this technology (L-3 Communications and InVision Technologies). The U.S. approach of requiring 100% level 3 scanning, with very slow equipment can only be met with massive investment in large numbers of units. Implications for Canadian Airports While Canada has made acquisitions of equipment from both companies, there are challenges for transborder operations from Canadian airports. A number of smaller airports with transborder service may have only one CT scanner, at least initially. The slow throughput, effectively in the range of 150-200 bags per hour, will result in either the need for passengers to arrive at the airport several hours early, or in delayed flights. As well, connecting bags through some U.S. airports have already been subject to rescreening, if they had not been scanned by a CT machine in Canada. This may pose a significant inconvenience to passengers and may prevent them from making flight connections. Canadian airports without adequate CT scanner capacity could see carriers deciding to drop service. Next Issue: Beyond Computed Tomography: What's next for EDS machinery?

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 20 April 2003