CAIR Issue No. 29 - May 2005 by Leah Dupuis

InterVISTAS ’ CANADIAN AVIATION INTELLIGENCE REPORT

In this issue… Features Columns: § Canada-China Air Bilateral (p.1) § Passenger Survey Research (p.2) § Ticket Distribution Update (p.3) § The Boeing 787 Dreamliner (p.11) § Airport Rent Relief (p.14)

Regular Reports: § Airport & Airline Data (p.4) § Industry News (p.8) § Airport Best Practices (p.11) § Ottawa Report (p.19) § Washington Report (p.20) § InterVISTAS’ News (p.21)

THE NEW CANADA-CHINA AIR SERVICE AGREEMENT 12 May 2005

In April 2005, Transport Minister Jean-C. Lapierre and International Trade Minister Jim Peterson announced that Canada had concluded a new bilateral air service agreement with the People’s Republic of China (PRC). The agreement includes an increase in the level of permitted passenger and cargo services between the two countries, and also contains aviation safety and security elements. However, this is not an open-skies agreement.

Eugene Chu Project Analyst

The New Air Services Agreement. The table below compares the level of Canada-China services permitted under the new agreement and the previous bilateral, which was completed in June 1973. Note that many details of both agreements remain confidential. Comparison of the Canada-China Air Service Agreements June 1973 Agreement Passenger Frequency/Week Cargo Frequency/Week Chinese Cities IncludedPassenger services Chinese Cities IncludedCargo services

1) Beijing 2) Shanghai 3) One other to be named by Canada 1) Shenzhen 2) Nanjing 3) Beijing/Shanghai

April 2005 Agreement Three-fold increase Three-fold increase Up to 9 cities total to be named by Canada Up to 9 cities total to be named by Canada

Source: Transport Canada press release and interview.

China Services Offered by Canadian Carriers. Under the previous agreement, Air

Canada (currently the only Canadian carrier with passenger services to China) operated 18 passenger flights per week to China including Vancouver-Beijing (daily), Vancouver-Shanghai (daily) and Toronto-Beijing (four/week). The carrier has announced plans to increase passenger services to China under the new agreement including: §

Increase in Toronto-Beijing service to daily flights by 2006

Start daily Toronto-Shanghai service by summer 2006

Start daily Vancouver-Guangzhou service by summer 2007

Other Canadian carriers including Harmony Airways, Air Transat, CargoJet and All Canada Express have also expressed interest in serving China. Harmony in particular has been promoting its intention to become a major carrier from Canada to China. This new bilateral air services agreement, combined with the recent designation of Canada as an approved destination by China, will facilitate Canada’s access to the fast growing Chinese market, a market forecast to grow to 100 million annual outbound tourists by 2020. Page 1 May 2005

PASSENGER SURVEY RESEARCH: FULL SERVICE CARRIERS VS LOW COST CARRIERS 12 May 2005

Passenger survey research can provide valuable insights into an airport’s passenger base. One topic of interest is the difference in behaviour among passengers travelling on full service airlines (FSAs, e.g., Air Canada) versus those flying on low cost carriers (LCCs, e.g., WestJet). Results from the 2004 Customer Satisfaction & Benchmarking Program among 12 Canadian Airports Council Small Airports reveal a number of interesting differences between the two passenger groups.

Method of Ticket Purchase. Passengers travelling on LCCs are less likely to purchase their tickets through a travel agent (17% vs. 30%) and more likely to book their flight through an airline website (42% vs. 30%). Jane Ha Manager, Customer Research Services

Full Service Carriers

Low Cost Carriers

Airline website

30%

42%

Directly with airline (telephone, personal visit)

13%

19%

Travel agent office

31%

17%

Travel agent website

Internet travel site

13%

10%

Other

Incidence of Purchase. Results also show that passengers flying on LCCs are slightly more likely to make a purchase at the airport relative to those travelling on FSAs. This holds true for both food/beverage and retail purchases, although the differences are not statistically significant. Full Service Carriers

Low Cost Carriers

Made a Purchase

27%

31%

Food/Beverage

22%

24%

11%

Retail

Incidence of Greeters/Well-wishers. Passengers travelling on LCCs are more likely to attract greeters/well-wishers to the airport than those flying on FSAs, especially for arriving passengers. % of Passengers with Meeters/Greeters Total Passengers

Full Service Carriers

Low Cost Carriers

46%

55%

Arriving Passengers

55%

64%

Departing Passengers

38%

45%

Page 2 May 2005

TICKET DISTRIBUTION UPDATE:

SHIFTS IN ONLINE SALES May 2005

Shift to Carrier Websites. Online air ticket sales are continuing to grow. This is good news

Angelica Sparolin Research Manager

for air carriers as online distribution costs are significantly lower than traditional channels. Even better news for carriers is that consumers are shifting towards purchasing tickets directly from the carriers’ websites rather than from online agencies such as Expedia and Travelocity. A recent study conducted by PhoCusWright showed that while the majority of online travel consumers in the US still believe that online agencies have the lowest prices (45%), this is down from 59% in 2002. 1 In contrast, the percentage of online travel consumers who believe that carrier sites have the cheapest prices has risen from 14% to 38%. This may in part be related to booking fees now charged by many online agencies (e.g., Expedia charges $5 and Travelocity charges $10 per flight booking). Additionally, a number of air carriers have recently announced lowest fare guarantees. For example, Continental Airlines is offering a refund on the difference plus a travel voucher in the amount of $100 if consumers are later able to find the same Continental ticket offered by an online agency for at least $5 cheaper than on the Continental website. Both United Airlines and American Airlines offer a similar deal with a $50 voucher. The PhoCusWright study also estimated that 61% of US online airline ticket sales are now made directly on carriers’ websites. Data for Canada was not available, but the recent Canadian survey results from Ipsos-Reid (2003) show that online agencies remain popular in Canada. Three of the top four most popular online travel websites are still online agencies: Expedia (18%), Travelocity (13%), Air Canada (12%) and CAA or local automobile association (11%). However, these results include not only air travel purchases, but hotel, car rental, cruise and other travel services. Use of online agencies will likely remain strong for consumers looking for package deals and a wider range of travel services.

Business Traveller Shift. Further shifts in online sales appear to be taking place amongst business travellers. A survey of 550 US business travellers conducted by Accenture found that in 2004, 71% booked their business travel primarily online. 2 Only 22% preferred to book via the telephone with a travel agent, down from 36% in 2003. Air Canada seems to be trying to take advantage of this shift with a new service aimed at online business travel sales. On May 3 the carrier announced that it was introducing self-service online business management accounts to book, track and monitor travel trends and expenditures for small to medium size businesses.

Travelocity: Live Agents. An interesting shift in strategy for online agency Travelocity is

the introduction of over 1,000 live agents which can be reached by phone to deal with any problems that arise with a booking. This service was introduced as part of a new customer bill of rights which aims to correct any problems that may go wrong with a trip.

1 “Online

travel giants still rule the roost” MSNBC, April 12, 2005. “About 75% of US business travellers use the Internet as their primary means for arranging their business travel” Eye for Travel, March 31, 2005. 2

Page 3 May 2005

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

Air Carrier

OTHER CARRIERS: LOAD FACTORS CanJet: not reported

Capacity

Revenue Passenger Kilometres

Load Factor

Available Seat Kilometres

% Change over 2004

% Change from 2003

% Change over 2004

% Change from 2003

Air Canada1

+4.7%

+28.1%

+1.1%

+10.6%

Domestic (Mainline)

+4.7%

+22.9%

-1.7%

Jazz

+17.0%

+31.7%

International & Charter

+4.7%

+35.0%

WestJet

Change over 2004 +2.8 pts (to 80.5%)

Change from 2003

+2.5%

+5.0 pts

+13.5 pts

-1.4%

+7.7%

+9.4 pts

+12.8 pts

+30.4%

+2.3%

+14.4%

+1.9 pts

+9.8 pts

+77.1%

+28.5%

+68.7%

+3.3 pts (to 68.8%)

+3.2 pts

Analysis: §

+10.9 pts

Air Canada Domestic Mainline

Air Canada and WestJet traffic continue to be strong due to Jetsgo’s demise in March 2005. Air Canada marked the thirteenth consecutive month of record system and domestic load factors in April 2005 as domestic capacity continues to be reduced while traffic increased. In April 2005, Air Canada’s international traffic and capacity increased compared to the same month in 2004 and 2003 as the demand for international travel continues to show strength over the past 12 months. Atlantic and Pacific traffic increased by 3.4% and 8.4% respectively.

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

Jazz data is not included in this graph

Apr- May Jun July 04

Aug

Sep

Dom RPK

Oct

Nov

Dec Jan- Feb 05

Mar

Apr

Dom ASK

Air Canada International 40% 30% 20% 10% 0% -10% Apr- May Jun 04

July Aug

Sep

Int'l RPK

Oct

Nov

Dec Jan- Feb 05

Mar

Apr

Dec Jan- Feb 05

Mar

Apr

Int'l ASK

WestJet 60% 50%

For five straight months, WestJet’s growth in traffic outpaced the addition of capacity in April 2005, resulting in an improved load factor.

40% 30% 20% 10% 0% Apr- May 04

Jun

July

Aug

Sep

RPK

1 Air

Oct

Nov

ASK

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

Page 4 May 2005

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

Notes:

1. 2.

Load Factor

Traffic (RPMs – millions)

(ASMs – millions )

Capacity

77.4%

11,306

14,600

á2.5 pts

á4.5%

á1.1%

69.8%

647

927

á1.7 pts

á26.1%

á22.9%

63.2%

501

793

â13.1 pts

â55.6%

â46.5%

80.0%

3,249

4,060

á2.0 pts

á1.0%

â1.5%

76.4%

10,013

13,110

á2.1 pts

á7.3%

á4.3%

87.3%

1,625

1,863

á1.0 pts

á26.6%

á25.1%

81.2%

6,336

7,805

á1.0 pts

á8.2%

á6.9%

69.1%

4,807

6,961

á0.1 pts

á2.5%

á13.2%

80.1%

9,049

11,299

á0.2 pts

â3.8%

â4.0%

75.9%

3,472

4,576

â3.9 pts

â0.2%

á5.0%

Mainline Load factor includes scheduled service only

Sources: Carrier traffic reports.

Page 5 May 2005

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

2004

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

+5.2%

MontréalTrudeau +21.4%

+2.0%

+8.0%

+11.4%

+9.0%

+8.2%

+2.6%

+10.8%

+3.9%

St. John’s +21.3%

+6.8%

+4.8%

+17.1%

+3.7%

+8.8%

+9.7%

+9.9%

+6.1%

+10.5%

+ 6.5%

+5.3%

+5.0%

+18.0%

April

+30.6%

+20.5%

+31.7%

+11.5%

+8.6%

+20.8%

+11.2%

+16.9%

+12.7%

-0.3%

+10.9%

+2.6%

+20.1%

May

+30.8%

+20.4%

+26.3%

+5.5%

+7.5%

+7.6%

+9.0%

+19.4%

+8.0%

-1.3%

-0.3%

-5.5%

+15.2%

June

+18.5%

+16.1%

+18.1%

+8.0%

+2.8%

+12.1%

+9.2%

+7.8%

+8.6%

+3.0%

+1.7%

-4.3%

+15.9%

2nd Quarter

+26.2%

+18.8%

+24.9%

+8.3%

+6.2%

+13.2%

+9.7%

+14.5%

+9.7%

+0.5%

+3.8%

-2.5%

+16.9%

July

+17.1%

+10.4%

+18.7%

+5.0%

+0.8%

+5.7%

+8.6%

+10.5%

+4.7%

-0.5%

+5.5%

+1.4%

+10.6%

August

+16.0%

+4.9%

+18.1%

+1.9%

+2.2%

+6.2%

+7.4%

+6.9%

-2.0%

-5.9%

+5.4%

+1.5%

+10.1%

September

+16.1%

+11.5%

+13.2%

+13.0%

+6.3%

+7.9%

+8.8%

+8.6%

+8.3%

+12.1%

+5.3%

-0.6%

+13.4%

3rd Quarter

+16.4%

+8.7%

+16.7%

+6.2%

+2.9%

+6.6%

+8.2%

+8.6%

+3.3%

+1.1%

+5.4%

+0.8%

+11.2%

October

+14.3%

+7.0%

+10.7%

-4.0%

+11.9%

+1.1%

+3.7%

-1.4%

+9.1%

+7.9%

+1.9%

+18.2%

November

+13.3%

+6.2%

+17.6%

+9.6

+4.7%

+11.4%

+4.4%

+8.3%

+0.3

+5.1%

+8.0%

-11.1%

+9.9%

December

+14.2%

+6.8%

+20.9%

+8.9%

+8.4%

+11.0%

+5.1%

+8.0%

+2.1%

+3.9%

+8.1%

+3.6%

+6.8%

4th

+14.0%

+6.7%

+16.1%

+9.7%

+3.1%

+11.4%

+3.5%

+6.4%

+0.3%

+5.9%

+8.0%

-2.1%

+11.9%

Full Year

+15.7%

+9.6%

+18.6%

+7.0%

+5.1%

+10.2%

+7.7%

+9.1%

+5.7%

+3.6%

+5.6%

+0.3%

+14.0%

January

+15.0%

+9.8%

+14.4%

+13.2%

+9.6%

+12.9%

+13.6%

+6.6%

+4.7%

+12.4%

+17.7%

+9.7%

+11.9%

Toronto

Vancouver

March

+9.3%

1st Quarter

Quarter

2005

February

+8.7%

+4.5%

+4.0%

+10.2%

+7.8%

+5.5%

+7.0%

+4.5%

+7.1%

+15.8%

+10.4%

+8.5%

+1.5%

March

+10.9%

+8.2%

+5.1%

+17.5%

+12.5%

+7.3%

+9.7%

+6.6%

+15.4%

+19.5%

+19.1%

+22.2%

+19.6%

1st Quarter +11.5% +7.5% +7.6% +13.7% +10.0% Source: Transport Canada and individual airports’ traffic reports.

+8.4%

+10.0%

+5.9%

+9.3%

+16.0%

+15.6%

+13.3%

+11.5%

If your airport is interested in providing InterVISTAS Consulting Inc. with its monthly passenger statistics, please email Doris Mak at doris_mak@InterVISTAS.com Page 6 May 2005

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

New!

for domestic, transborder and international markets.

New!

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

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

Identify True Origin & Destination Flows •

Quantify city-pair market sizes for air service development initiatives

Analyse Hub Activity & Routings •

Identify key routing patterns to support air service proposals

Understand Competition within Airport Catchment Areas •

Quantify traffic leakage to determine true market sizes

For more information, contact: Nancy Keen Tel: 1-604-717-1822 Email: nancy_keen@InterVISTAS.com

NEWS ARTICLES AIR CANADA NEWS AIR CANADA MODERNIZES FLEET WITH B777S AND B787 DREAMLINERS On 25 April 2005, Air Canada announced its wide-body fleet renewal plan, which includes up to 36 Boeing 777s and up to 60 Boeing 787 Dreamliners. The plan includes firm orders for 18 Boeing 777s and purchase rights for 18 more planes. Deliveries for the 777s are scheduled to begin in 2006, with the arrival of three 777300ERS. The new 777-300ERS will be used on the airline’s Vancouver-Tokyo service. Firm orders for 14 B787 Dreamliners with options to purchase rights for an additional 46 planes, are also reported. The first 787 is slated for delivery in 2010.

ACE AVIATION HOLDINGS REPORTS CDN$10 MILLION OPERATING LOSS IN FIRST QUARTER ACE Aviation Holdings Inc., parent company of Air Canada, reported an operating loss of CDN$10 million in the first quarter of 2005, compared to an operating loss before reorganisation and restructuring items of CDN$145 million in the same quarter last year. Net loss for the quarter was CDN$77 million, compared to CDN$304 million in 2004. ACE had a consolidated cash balance of approximately CDN$2.1 billion as of 11 May 2005.

AIR CANADA OFFERS SIMPLE ONLINE BOOKING FOR SMALL BUSINESSES Air Canada has established new online selfservice booking tools aimed at simplifying the booking process for small and medium businesses. The tools will allow businesses to book, track, and monitor travel trends and expenditures for their business.

Page 8 May 2005

OTHER CANADIAN AIRLINE NEWS JETSGO DECLARES BANKRUPTCY Jetsgo has declared formal bankruptcy and the carrier’s remaining assets including 10 Fokker100 aircraft will be sold as the company is liquidated. The carrier’s restructuring plan did not satisfy creditors who are owed about CDN$108 million. Following the carrier’s declaration of bankruptcy, Transport Canada has cancelled Jetgo’s air operator certificate.

TRANSAT A.T. INC. ACQUIRES INTEREST IN TRIPCENTRAL.CA Transat A.T. Inc., through Consultour Inc., a wholly owned subsidiary of Transat, has acquired controlling interest in Hamilton, ON based Travel Superstore Inc. Travel Superstore Inc. operates 10 travel agencies and a travel website known as tripcentral.ca. The website has developed a new approach to marketing vacation travel services by integrating the services of the Internet, a call centre with several sales outlets, and its skilled travel consultants.

SKYSERVICE ADDS TWO B767-300 AIRCRAFT TO FLEET Skyservice has added two B767-300 aircraft to its fleet of 25 aircraft. The aircraft will be used for flights from Toronto to the United Kingdom, Portugal, Italy and Croatia in the summer and from Vancouver to the Caribbean and Mexico in the winter.

WESTJET REPORTS LOSS IN FIRST QUARTER 2005 WestJet reported a $9.6 million loss in net earnings for the first quarter of 2005 compared to $512,000 profit in the same quarter last year. Operating revenues increased 36% to $295 million. Capacity for the quarter increased 31% and RPMs increased by 42%. WestJet reasons that intense competition, high fuel costs and a low-yield environment contributed to declines in earnings.

NEWS ARTICLES OTHER CANADIAN AIRLINE NEWS – CON’T WESTJET REPORTS LOSS IN FIRST QUARTER 2005 WestJet reported a $9.6 million loss in net earnings for the first quarter of 2005 compared to $512,000 profit in the same quarter last year. Operating revenues increased 36% to $295 million. Capacity for the quarter increased 31% and RPMs increased by 42%. WestJet reasons that intense competition, high fuel costs and a low-yield environment contributed to declines in earnings.

WESTJET ADDS TO SUMMER SCHEDULE WestJet has announced increases in its summer schedule, which includes 66 additional non-stop flights per week between cities and throughout its network. Vancouver, Calgary, Toronto, Halifax, Moncton, Windsor, London and Comox will experience increases in capacity.

WESTJET TO LAUNCH SEASONAL CHARLOTTETOWN SERVICE Between June 18 and 15 September 2005, WestJet will be adding seasonal all-jet service to Charlottetown. The carrier will offer daily Charlottetown-Toronto service and daily connecting service between CharlottetownCalgary, and Charlottetown-Abbotsford. In addition, one-stop service is available six days a week between Charlottetown-Vancouver, with connecting service between CharlottetownEdmonton, and Charlottetown-Montreal.

WESTJET TERMINATES NEW YORK SERVICE After less than a year of service, WestJet will terminate flights to New York La Guardia on 4 July 2005. The carrier’s decision to end service was the inability to secure gates at La Guardia. The aircraft will be used for a daily TorontoVictoria flight this summer.

Page 9 May 2005

CANADIAN AIRPORTS WINNIPEG AIRPORTS AUTHORITY REPORTS INCREASE IN Q1 RESULTS The WAA reported operating revenues of $9.6 million for Q12005, up 8.4% from the same period last year. Airport Improvement Fee revenues for the quarter totalled $5.0 million, while the airport’s restricted capital fund is approximately $26.9 million.

CARGO NEWS AIR CANADA LAUNCHES TORONTOSHANGHAI CARGO SERVICES Air Canada has started three times weekly cargo services between Toronto and Shanghai. The flights are operated with MD-11 aircraft which has a cargo capacity of 84 tonnes. Air Canada is currently the only carrier operating direct freighter services between Canada and China.

WORLD AIRWAYS SIGNS DEAL WITH AIR CANADA A $44 million wet-lease contract between World Airways and Air Canada has been signed for international cargo services between Toronto and several cities in Asia, and between Toronto and Europe. The two-year agreement allows World Airways to operate a MD-11F aircraft for Air Canada starting in May. In addition, Air Canada has extended its lease agreement with Gemini Air Cargo to operate over the North Atlantic for an additional two years beginning March 1. Air Canada will offer a TorontoFrankfurt five time weekly all-cargo service.

CARGOLUX REPORTS STRONG PROFITS FOR 2004 Cargolux reported revenues of US$1.2 billion at year end 2004, up 26% from last year. Operating profit increased 24% to US$81 million, while net profit increased 18% to US$84 million. The company carried approximately 595,000 tonnes of freight in 2004, 17% increase from 2003.

NEWS ARTICLES CARGO NEWS – CON’T NEW CARGO INFRASTRUCTURE IN HAHN Frankfurt-Hahn airport will be investing in new cargo infrastructure. The airport recently resurfaced its 3,400 metre runway, has installed ILS Category IIIa approach aids and has added high-speed taxiways. The airport’s board of directors has also approved a US$52 million runway extension to 3,800 metres. Completion of the runway extension is slated for mid 2006.

DHL INTRODUCES NEW U.S.-CHINA SERVICE DHL will offer two new direct overnight express services between Shanghai and the U.S. and between Beijing and Hong Kong. The Shanghai-U.S. flights will be operated by Northwest Airlines with a B747-200 freighter. The four times weekly Beijing-Hong Kong service will be operated by Cathay Pacific using an A330-200 passenger aircraft.

OTHER NAV CANADA CONTRACT AWARDED TO NICE SYSTEMS Nav Canada has awarded a $2.8 million contract to Israel’s Nice Systems. Under the terms of the contract, Nice Systems will offer advanced interaction management tools to 70 Canadian air traffic control sites. This project will be completed by the end of this year.

GOVERNMENT OF CANADA FUNDS BOMBARDIER JET SALE

GOVERNMENT OF MANITOBA PROVIDES MUNICIPAL AIRPORT FUNDING Thirty-three Manitoba municipal airports will receive $76,200 in grants. The funding will ensure the maintenance of safe operations and enhancement of facilities. The annual Manitoba Airports Assistance Program will provide operating grants of $2,400 for airports with paved runways and $1,200 for facilities with unpaved runways.

PEOPLE IN THE NEWS TRANSPORT MINISTER ANNOUNCES VIA RAIL APPOINTMENTS Mr. Michel Crête and Mr. Steven M. Cummings have been appointed to the board of directors of VIA Rail Canada Inc. Mr. Crête currently provides consulting services to the Government of Canada while Mr. Cummings is currently president and CEO of Maxwell Cummins & Sons Holding Limited.

AER LINGUS APPOINTS NEW CEO Dermot Mannion has been appointed the new CEO of Aer Lingus. Previously the President of Group Support Services for Emirates, Mannion will focus on continuing Aer Lingus’ low-fare strategy. If your organization has any personnel announcements, please email Rob Beynon at rob_beynon@InterVISTAS.com

The Government of Canada will provide loans worth US$230 million to Delta’s regional carriers Comair and Southeast Airlines for the purchase of Bombardier jets. The loan is the second transaction under a US$960 million cash facility set up in July 2003 by the Government as part of the “Canada Account” to help the aerospace sector sell planes.

Page 10 May 2005

THE BOEING 787 DREAMLINER May 2005

Creating New Market Opportunities

Momentum appears to be building for the 787 Dreamliner, Boeing’s first new aircraft since the launching the 777 in 1990. In the past few weeks, new orders have been announced by Korean Airlines, Air Canada and Northwest Airlines, bringing the order book to over 250 units from 20 airlines. The 787 seems to be emerging as a favourite over the Airbus A350 – an A330 derivative which has yet to be officially launched.

John Weatherill Manager, Airline Planning

The 787 will come in three series, the –300, –800 and –900, with the latter two intended for long haul operations. Threeclass seating configurations and design ranges put these planes in competition with the Boeing 767 and Airbus A330 families, as shown at right. As we move towards the first deliveries of the 787 in 2008, it is useful to examine what impacts this aircraft will have on airlines and on global air services.

Aircraft 787-300 787-800 787-900 767-200 767-300 767-400 A330-200 A330-300

Seating Capacity 296 223 259 181 218 245 253 295

Maximum Range (nm) 3,500 8,500 8,300 6,600 6,100 5,650 6,750 5,650

787 Dreamliner Benefits

Range. The 787 offers several critical benefits to the airlines that will operate it. First, the –800 and – 900 variants are medium-sized aircraft designed with a maximum range of over 8,000 nautical miles; this is comparable to the much larger 777, 747 and A340 aircraft families. As the table above displays, current mid-sized aircraft are limited to about 6,600nm. This opens up a huge number of potential non-stop routes which are too long for existing 767/A330 aircraft, but too small for the larger jets in the market to serve profitably. Cost. Combined with the increased range is a lower cost base. On a unit (available seat mile) basis, Boeing estimates fuel and maintenance costs to be 20% below peer aircraft, with overall cash operating costs 10% lower (although manufacturer estimates should always be taken with a grain of salt). Purchase pricing is said to be comparable to existing mid-sized aircraft. Revenue. The 787 will be composed of 50% composite materials, adding strength and durability to the frame, and allowing improvements in passenger comfort such as larger windows, higher cabin humidity and wider seats and aisles. By offering new non-stop services and increased passenger comfort, airlines should be able to recognise a yield premium with the 787.

Page 11 May 2005

THE BOEING 787 DREAMLINER – CON’T

Air Service Implications

The combination of longer range and lower costs is a powerful one. For the first time, an aircraft will be available to serve very long, thin markets, such as London-Perth or Montreal-Tokyo, which are currently only served with connecting flights. The figure below shows the range limits for the 787-800 and 767-400 from New York City, and illustrates the significant range improvement of the new aircraft. When Continental takes delivery of their first 787-800, non-stop flights from their Newark hub to Johannesburg, Dubai, Delhi, Auckland and many other cities would be possible with a mid-sized aircraft.

Even within the range limits of the 767, the 787 can offer significant benefits. With a lower unit cost than peer airliners, the 787 can make non-stop flights viable on thinner routes, including secondary markets that cannot currently be served profitably. Consider a North America – Eastern Europe service, which may not have the market size to support a 767-400 operation. With its lower trip costs and fewer seats, it is estimated that the breakeven load factor for a 787-800 would be five percentage points lower than the 767. This translates into 20 fewer passengers per flight required to make the service viable. This type of improvement could allow airlines to offer additional frequencies on current routes, and could result in new, sustainable air services on routes which are currently considered marginal. For the first time, scheduled long haul international air service could be achievable for hundreds of cities.

Planning for the 787 Although delivery of the first 787 is not scheduled until 2008, airports and communities should begin examining the implications of this aircraft on their long range air services. Given the extended planning cycle required for international services, communities should start laying the research groundwork necessary to quantify and communicate these new air service opportunities to the growing list of airlines that will operate the 787 Dreamliner.

Page 12 May 2005

AIRPORT BEST PRACTICES 5 May 2005

This month, InterVISTAS introduces a new feature to the Canadian Aviation Intelligence Report, a column which will focus on best practices in the aviation industry.

YVR’s Community Consultation for its Master Plan

Rob Beynon Director, Airport Marketing

Vancouver International Airport Authority is preparing its new Master Plan, which will guide the development of YVR from 2007 to 2027. Under the Direction of Michael O’Brien, the Airport Authority’s Vice President of Strategic Planning and Legal Services, YVR is looking at a 40-year horizon to provide the context, direction and long-term thinking required to make nearterm decisions that do not preclude future choices. The Airport Authority is using a sustainability framework, integrating governance, economic, environmental and social considerations into the planning process. What is perhaps the most interesting aspect of YVR’s planning process is the degree and type of community consultation it is undertaking. YVR has not produced a draft master plan, as yet. Instead, it has started a dialogue with stakeholders and the community regarding long-term trends and what these might mean for the airport over the next 40 years. It has sketched out a few options for airport development, but they are literally sketches, not a part of the Master Plan, as yet. The trends they are looking at include population/demographic trends, trends in environmental impacts of aviation and values in the community, the role of the airport in the region’s economic development, trends in technology, etc.

Forum 44. The consultation process began in the fall of 2004 with Forum ‘44, a two-day

conference involving community, business and government leaders. At Forum ‘44, one of the speakers, noted youth environmentalist Severin Cullis-Suzuki, observed that she may be the only one at the forum who would actually be using the airport in 2044. From this, YVR organised a Youth Forum in April 2005. The forum invited youth from around the Province of BC, representing different elements of society, to seek their views on long-term airport development.

Regional Consultation. Also in April 2005, the consultation process moved beyond the

immediate Vancouver area to embrace stakeholders throughout British Columbia. YVR serves as a gateway to BC, and regional communities are affected by the development (or lack of development) of YVR. For example, one issue that YVR put to the audience was whether development of regional services should be via the main terminal or via the more convenient South terminal. Based on the dialogue, YVR expects to produce a draft master plan, which will then go out to extensive consultation. More information is available from www.yvr.ca.

Page 13 May 2005

AIRPORT RENTS: THE DETAILS 10 May 2005

Two Components of Benefits. On 8 May 2005, Transport Minster Jean-C. Lapierre announced a program of rent relief for Canada’s airports. The rent relief has two components: §

Reduced rent for each of the 21 rent paying airports in the National Airport System (NAS).

Cancellation of any remaining payments for chattels from NAS airports.

The chattels forgiveness is an important benefit for 12 NAS airports who collectively still owed $22 million over a period ending in 2014. The largest beneficiary is Prince George ($4.2 million) followed by Gander ($3.4 million). The largest airport in this group is Halifax ($1.3 million), with benefits to a number of small airports, such as Charlottetown and Saint John. There are beneficiaries in 8 of the 10 provinces.

Michael Tretheway Executive Vice President

The rent reduction announcement follows several years of intense lobbying by the airports, their communities and stakeholders, the airlines, the tourism industry and, some pundits would say, the Transport Minister himself (with the Minister of Finance being the lobbying target).

Justification. The underlying justification for the rent reductions comes from Transport Canada’s review of rents, which began in June 2001. The review was the result of comments in 2000 by the Auditor General, as well as pressures from the airports and airlines. The rent reduction announcement essentially indicated that the rent review found that rents paid by the Canadian NAS airports were excessive when compared to public utilities and to foreign airports that had been privatised. That comparison suggested that the appropriate level of rents should have been $5 billion (in net present value, NPV), rather than $13 billion. The big picture. The announcement focused on the big picture, but the devil is in the details.

The big picture is that every one of the 21 airports will eventually enjoy reduced rent. The scale of the rent reduction is large: a 60% reduction in net present value of rents to be paid over a 58 year period from an estimated $12.9 billion in NPV to $5.1 billion, for a total reduction of $7.8 billion.

Limited benefit for next few years. Now the details. The reduced rent is phased in slowly until FY2011, as the diagram shows. The benefits, although small, do begin in the current fiscal year. Beginning in FY2012, there is a big increase in benefit, largely due to rent relief finally being extended to Toronto. Essentially, the rent relief program keeps the impact on the federal treasury low for next few years. Some might say the government is providing relief for future amounts it has not yet worked into its budget.

More Equitable. The new rent formula (see next page) is simple, transparent, and eliminates anomalies where airports of similar size paid very different rent. Page 14 May 2005

AIRPORT RENTS: THE DETAILS – CON’T Toronto. However, Toronto receives almost no rent reduction in the first six years. In fact, the

Greater Toronto Airport Authority was quite critical of the rent relief announcement. Not only does it receive little in the way rent reduction until 2012 (its rents will go up in 2006!), it criticised the new formula for essentially charging rent on revenues required to pay for property taxes (technically, payments in lieu of taxes), capital construction costs, and interest payments on debt required for new construction. According to GTAA, it is currently paying 43% of total airport rent payments in Canada but this will eventually grow to 66%. As well, the GTAA criticised the continuing competitive imbalance, as U.S. airports with which it must compete pay no rents and are often subsidised by their governments. GTAA has vowed to continue to press for rent relief for Toronto International Airport.

Toronto Rent Payments

Others. Many of the other airport authorities

welcomed the rent relief announcement. Airports with less than $5 million in annual revenues will pay no rents, and the graduated scale of rent payments will keep rents down for most small and mid sized airports. The graduated rent scale (see box) works much like progressive income tax schedules – as you earn more, the percent you pay increases with each income bracket.

New Airport Rent Formula Gross Revenue (millions pa)

Rent Paid

On the first $0 to $5

On the next $5 million

The table and selected graphs on the following pages provides detail for each affected airport on the rents it will and would have paid.

On the next $15 million (total $25)

Assessment. Overall, this is an important step for

On the next $75 million

8% most of Canada’s airports. The principle argued by the airport authorities and their stakeholders that rent On the next $150 10% payments were not equitable among the NAS airports million has been accepted, as was the argument that the level Any amount over of rent payments was excessive. The Ministers 12% $250 million (Transport and Finance) and the Transport Canada staff are to be credited with making this important first step. The deferral of rent relief at Toronto, on the other hand, is of great concern. It is the hub major for Air Canada and an important point in the networks of WestJet and CanJet.

Page 15 May 2005

AIRPORT RENTS: THE DETAILS – CON’T Canadian Airport Rents and Savings Under New Rent Formula

Victoria

Halifax

Winnipeg

Edmonton

Ottawa

Calgary

Montreal

Vancouver

Toronto

All Airports

Airport

Page 16 May 2005

Rent Old Formula

2006 $337 million

2010 $390 million

2015 $818 million

2020 $1.2 billion

Total $12.9 billion

New Formula

$289 million

$214 million

$274 million

$0.3 billion

$5.1 billion

Savings

$48 million

$176 million

$544 million

$0.9 billion

$7.8 billion

Old Formula

$147 million

$161 million

$491 million

$785 million

$8 billion

New Formula

$144 million

$135 million

$173 million

$198 million

$3 billion

Savings

$3 million

$26 million

$318 million

$587 million

$5 billion

Old Formula

$81 million

$99 million

$125 million

$151 million

$2.0 billion

New Formula

$75 million

$30 million

$ 41 million

$ 51 million

$0.9 billion

Savings

$ 6 million

$69 million

$ 84 million

$100 million

$1.1 billion

Old Formula

$23 million

$33 million

$84 million

$96 million

$1.0 billion

New Formula

$19 million

$23 million

$25 million

$31 million

$0.5 billion

Savings

$4 million

$10 million

$59 million

$65 million

$0.5 billion

Old Formula

$47 million

$51 million

$54 million

$57 million

$809 million

New Formula

$24 million

$10 million

$15 million

$17 million

$305 million

Savings

$23 million

$41 million

$39 million

$40 million

$504 million

Old Formula

$13.2 million

$17 million

$21 million

$24 million

$332 million

New Formula

$12.5 million

$4 million

$5 million

$112 million

Savings

$0.7 million

$13 million

$17 million

$19 million

$220 million

Old Formula

$13 million

$14 million

$15 million

$192 million

New Formula

$4 million

$5 million

$7 million

$8 million

$103 million

Savings

$9 million

$8 million

$7 million

$89 million

Old Formula

$3.92 million

$6 million

$10 million

$17 million

$164 million

New Formula

$3.89 million

$4 million

$ 5 million

$ 6 million

$ 81 million

Savings

$0.03 million

$2 million

$ 5 million

$11 million

$ 83 million

Old Formula

$4.5 million

$5 million

$8 million

$11 million

$119 million

New Formula

$4.2 million

$3 million

$4 million

$63 million

Savings

$0.3 million

$2 million

$5 million

$7 million

$56 million

Old Formula

$1.2 million

$1.8 million

$1.9 million

$2.3 million

$23 million

New Formula

$1.1 million

$0.4 million

$0.5 million

$0.7 million

$11 million

Savings

$0.1 million

$1.4 million

$1.6 million

$12 million

AIRPORT RENTS: THE DETAILS – CON’T Canadian Airport Rents and Savings Under New Rent Formula

Fredericton

Gander

Prince George

London

Moncton

Thunder Bay

Saskatoon

Regina

St John’s

Québec

Airport

Page 17 May 2005

Rent Old Formula

2006

2010 $1.45 million

2015 $2.64 million

2020 $2.7 million

Total $18 million

New Formula

$0.04 million

$0.1 million

$2 million

Savings

$1.41 million

$2.60 million

$2.6 million

$16 million

Old Formula

$578,000

$628,000

$1.2 million

$2.2 million

$17.0 million

New Formula

$207,000

$338,000

$0.6 million

$0.8 million

$ 8.3 million

Savings

$371,000

$290,000

$0.6 million

$1.4 million

$ 8.7 million

Old Formula

$680,000

$742,000

$968,000

$1.2 million

$10.7 million

New Formula

$49,000

$135,000

$222,000

$0.4 million

$3.7 million

Savings

$631,000

$607,000

$746,000

$0.8 million

$ 7.0 million

Old Formula

$678,000

$737,000

$814,000

$899,000

$7.6 million

New Formula

$45,000

$99,000

$217,000

$340,000

$2.8 million

Savings

$633,000

$638,000

$597,000

$559,000

$4.8 million

Old Formula

$331,000

$459,000

$743,000

$1.06 million

$7.6 million

New Formula

$12,000

$21,000

$35,000

$0.05 million

$0.7 million

Savings

$319,000

$438,000

$708,000

$1.01 million

$6.9 million

Old Formula

$1.5 million

$7.5 million

New Formula

$0.3 million

$2.4 million

Savings

$1.2 million

$5.1 million

Old Formula

$32,000

$722,000

$817,000

$5.3 million

New Formula

$26,000

$33,000

$49,000

$1.1 million

Savings

$6,000

$689,000

$768,000

$4.2 million

Old Formula

$636,000

$705,000

$4.3 million

New Formula

$39,000

$60,000

$1.0 million

Savings

$597,000

$645,000

$3.3 million

Old Formula

$636,000

$3.4 million

New Formula

$47,000

$0.5 million

Savings

$589,000

$2.9 million

Old Formula

$345,000

$1.4 million

New Formula

$ 22,000

$0.3 million

Savings

$323,000

$1.1 million

AIRPORT RENTS: THE DETAILS – CON’T Canadian Airport Rents and Savings Under New Rent Formula

Charlottetown

Saint John

Airport

Rent Old Formula

2006 $0

2010 $0

2015

2020 $270,000

Total $1.1 million

New Formula

$12,000

$0.1 million

Savings

$258,000

$1.0 million

Old Formula

$304,000

$984,000

New Formula

$11,000

$187,000

Savings

$293,000

$797,000

Source: Transport Canada: Airport Rent Policy Fact Sheets http://www.tc.gc.ca/air/airport-rent/ fact.htm

Vancouver Rent Payments

Calgary Rent Payments

Winnipeg Rent Payments

Gander Rent Payments

Page 18 May 2005

THE OTTAWA REPORT May 2005

Canada-China Bilateral Air Agreement Announced

On 19 April 2005, a new and expanded bilateral air transport agreement between Canada and the People’s Republic of China was announced. The new pact allows a threefold increase in passenger and cargo flights. As well, the agreement contains strong aviation safety and security provisions. As a result of the agreement, Air Canada, Cargojet and Harmony Airways intend to introduce new passenger and cargo services. Air Transat and All Canada Express have also expressed an interest in serving China.

Audit of Canada’s Aviation Security System Sam Barone Regional Vice President Ottawa, ON

Beginning May 2005, Canada’s aviation security system will undergo an audit under the International Civil Aviation Organization’s (ICAO) Universal Security Audit Programme. The audit focuses on legislation, policy, regulation, organisational arrangements and security measures being carried out by airports. Results of the audit will help Canada identify key areas for continued improvement in aviation security.

Official Language Protection Legislation

On 2 May 2005, the Transport Minister announced the amendment of the Air Canada Public Participation Act, which outlined the conditions for the privatisation of Air Canada in 1988. Since Air Canada emerged from bankruptcy protection in September 2004, there were major changes to its corporate structure. The new legislation will ensure that official language obligations continue to apply to the restructured Air Canada and its former internal divisions and subsidiaries. As well, the requirement to keep the Air Canada head office in Montréal will be extended to ACE Aviation Holdings.

Funding Awarded to Greenhouse Gas Emission Reduction Projects in the Freight Industry Approximately $1 million in funding provided by Transport Canada’s Freight Sustainability Demonstration Program will be awarded to seven projects designed to reduce greenhouse gas emissions in the freight industry. Projects range from evaluating the impact of alternative fuels on engine performance to assessing the first commercially available hybrid electric-diesel delivery trucks. Air Canada, Canadian Pacific Railway, FedEx, FIBA Canning, Hudson’s Bay Company, Innovation Maritime, and Saskatoon Diesel Services will receive funding under the program.

Canada Responds to U.S. Lighter Ban

Starting 26 April 2005, the Canadian Air Transport Security Authority (CATSA) will intercept lighters at U.S. pre-clearance screening points at airports in Montreal, Ottawa, Toronto, Winnipeg, Calgary, Edmonton, and Vancouver. As well, retail establishments will not be allowed to sell lighters in the protected pre-clearance areas. Passengers flying within Canada or to destinations other than the U.S. will be allowed to carry disposable lighters.

Page 19 May 2005

THE WASHINGTON REPORT May 2005

U.S. – Paraguay Open Skies Agreement Signed

On 2 May 2005, the U.S. and Paraguay signed a full OpenSkies air agreement allowing carriers in the U.S. and Paraguay to operate between the two countries without any restrictions. The two parties came to an agreement without holding formal negotiations. As a result of this, the U.S. now has full Open-Skies agreements with 14 countries in the Western Hemisphere and with 68 countries worldwide.

TSA Phase II of Airport Access Control Pilot Program to Begin Charles Chambers Senior Vice President InterVISTAS-ga2 Consulting Inc. Washington, D.C.

On 25 April 2005, the Transportation Security Administration (TSA) announced the start of Phase II of the Airport Access Control Pilot Program. The TSA will test advanced technologies such as video surveillance, Radio Frequency Identification (RFID) cards, iris scan readers, and hand geometry readers to enhance access control to secure areas of an airport. Boston’s Logan, New York’s John F. Kennedy, Denver, Orlando and Salt Lake City will be among the airports to pilot the technologies. The technology will be deployed in June 2005 and the pilot program will run through summer 2005.

Appropriates Subcommittee Approves FY06 DHS Spending Bill The House Homeland Security Appropriations Subcommittee approved the fiscal year 2006 funding bill for the Department of Homeland Security (DHS). The bill provides $30.8 billion for operations and activities of the DHS. Items of interest include: §

$19.4 billion for border protection, immigration enforcement, and related activities;

$3.6 billion for supporting state and local first responders;

$6.4 billion to enhance security for all modes of transportation, with a focus on research and development of advanced technologies to inspect baggage, passengers and cargo;

a cap of 45,000 TSA passenger screeners;

the development and implementation of improved air cargo security standards and protocol; and

the implementation of a security plan to allow general aviation aircraft to land and take off at Ronald Reagan Washington National Airport within 90 days of enactment.

DOT Issues Final 2006 Authority for China Markets

The U.S. DOT has granted clearance to airlines for service rights to China. American Airlines will offer Chicago-Shanghai service, while FedEx, Northwest, Polar and UPS will add three weekly roundtrip flights. Continental, set to begin service on June 15, 2005, will offer a daily non-stop New York-Beijing service. The carrier has also applied to DOT for approval to operate New York-Shanghai non-stop service starting March 2007, with online connecting service between Shanghai and points throughout the U.S., Europe and Latin America.

Page 20 May 2005

INTERVISTAS NEWS May 2005

Joe O’Gorman Joins InterVISTAS-ga2 as Associate Consultant

InterVISTAS is pleased to announce that Joe O'Gorman, former Director of U.S. Preclearance for Customs and Border Protection, DHS, in Washington, D.C. has joined InterVISTAS-ga2 as Associate Consultant, Border Management and Security. As an InterVISTAS Associate, Joe O'Gorman will serve clients in programs for border management, process reengineering and security.

He has recently completed a 35-year career with the U.S. Government, serving with the U.S. Customs Service, and then U.S. Customs and Border Protection, for over 33 years. During his tenure as the national Program Manager for Land Border Passenger Processing, he oversaw the development and installation of license plate readers to facilitate vehicle processing and the initial “trusted traveller” programs which became NEXUS LAND. Earlier in his career with U.S. Customs he managed various programs concerning the processing of passengers, cargo, and international mail, and helped develop procedures for clearing international express consignment shipments.

InterVISTAS Upcoming Speaking Engagements •

June 3: Canadian Airline Investment Conference, Toronto, Ontario. Mike Tretheway, Executive Vice President “The New Industry Model in Canada”

•

June 9: National Transportation Summit, Toronto, Ontario. Paul Ouimet, Executive Vice President “Increasing Infrastructure Investment – Getting Goods Moving Faster and Easier with PublicPrivate Partnerships”

•

June 13: ACI Marketing Conference, Calgary, Alberta. Mike Tretheway, Executive Vice President “What’s Next for Airline Market”

InterVISTAS’ Canadian Aviation Intelligence Report is a collection of information gathered from public sources, such as press releases, media articles, etc., information from confidential sources, and items heard on the street. Thus some of the information is speculative and may not materialise. To inquire about advertising opportunities or to provide comments/feedback on the InterVISTAS’ Canadian Aviation Intelligence Report, please contact Rob Beynon at rob_beynon@InterVISTAS.com or 1-604-717-1864. To subscribe, please send an email to subscribe@InterVISTAS.com To unsubscribe, please send an email to unsubscribe@InterVISTAS.com. Prepared by InterVISTAS Consulting Inc.

Page 21 May 2005