CAIR Issue No. 18 - June 2004 by Leah Dupuis

IVC MARKET INTELLIGENCE REPORT

ARE HIGH FUEL PRICES HERE TO STAY? 15 June 2004

The price of crude oil exceeded $41/barrel in early June… The price of crude oil hit a high of $41.45 per barrel in early June; prices have since dropped to $37.59 per barrel (on 14 June 2004). Increased global demand is the main factor in the current rise of oil prices. Increasing Demand Requirements from China The demand for crude oil in China is soaring due to its fast growing economy. After the U.S., China is currently the 2 nd largest consumer of oil currently using 5.5 million barrels a day. China’s demand for crude oil is expected to double from current levels over the next 10 years. As the U.S. economy gains momentum, its demand for oil is also increasing. In the short term, demand will rise as the busy summer travel months are just around the corner, both on the road and in the air. The transportation sector is the largest consumer of oil products.

…Rising Futures Prices The price of crude oil in the futures market has been increasing steadily over the past year. In mid2003, the futures price of a barrel of crude oil for delivery in September 2005 was at the $25 range. By December 2003, the futures price for that same barrel of crude oil rose 8% to $27. As of June 2004, the futures prices have continued to escalate to even higher levels – a barrel of crude for delivery in September 2005 will cost $34. Over a one-year period, the futures price has risen 36%!

Crude Oil Spot & Futures Prices $45.00

Dec 2003 Futures

Spot Prices

$40.00

Apr 2004 Futures

Jun 2004 Futures

$35.00 $30.00 $25.00 $20.00

May 2003 Futures

Aug 2003 Futures

$15.00 $10.00 $5.00

Oct-08

Jul-08

Jan-08

Apr-08

Oct-07

Jul-07

Apr-07

Oct-06

Jan-07

Jul-06

Apr-06

Oct-05

Jan-06

Jul-05

Apr-05

Jan-05

Oct-04

Jul-04

Jan-04

Apr-04

Oct-03

Jul-03

Jan-03

$0.00 Apr-03

Senior Market Analyst

Stronger U.S. Economy

US$/Barrel

Doris Mak

Month of Delivery

In the past, rising fuel prices were attributed to factors that largely impacted the supply of oil – such as the Iraq war or the general strike in Venezuela. However, the main reason for the recent high prices is excessive demand. It is likely that higher prices are here to stay - unless output from oil producing countries significantly increases to match demand. Page 1 June 2004

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AER LINGUS: A T RANSFORMED FULL SERVICE CARRIER A Financial Snapshot: Pre versus Post 9/11… Aer Lingus reported an operating profit of €74million and had €236 million in cash at the end of 2000. However, at the time, was forecasting a weaker financial position in 2001, in part due to intense competition from low cost carrier, Ryanair. The events of 9/11 made a weakening situation worse. Aer Lingus reported an operating loss of €90 million at the end of 2001 and forecast an operating loss of €152 million in 2002. The airline was struggling financially and announced that it did not have enough cash to survive past January 2002. Aer Lingus was on the verge of bankruptcy.

The Survival Plan that would transform Aer Lingus… Doris Mak Senior Market Analyst

Aer Lingus was in a dire situation; management realised that if it were to save the airline it would have to act swiftly and aggressively. The airline had been facing fierce competition in its own backyard from Ryanair, the world’s most successful low cost carrier and at the same time, Aer Lingus’s transatlantic network was suffering post 9/11. The first step taken was a detailed review of the airline’s current revenue base and cost structure. Regarding revenues, Aer Lingus found that 40% of its revenue base was derived from the transatlantic market – with the slowing U.S. economy and 9/11, the transatlantic market was weak. On the cost side, the airline recognised that its current cost structure and work processes were not sustainable or efficient enough in the post 9/11 environment with intense low cost carrier competition. The airline sought external assistance; however, due to EU restrictions, no government aid was available, and because of its inflexible cost structure, the airline did not have any debt financing available. About a month after 9/11, on 19 October 2001, Aer Lingus launched a Survival Plan focusing on cost reduction and increased efficiencies.

Cost Reductions. At the onset, Aer Lingus targeted to reduce costs by €190 million, but as a

result of the actions taken described below, the airline exceeded the target and reduced its costs by €225 million. §

Reduced Schedule. Almost immediately, the airline reduced flight frequencies and the number of aircraft in its fleet. The airline also terminated routes.

Staffing Changes. The airline laid off 2,000 employees, equivalent to approximately 1/3 of airline’s total employment base. All temporary staff were released and wage freezes were enacted for remaining employees. The airline also cancelled its cadet pilots and apprenticeship programs.

Expansion Plans. All capital projects were terminated and all non-vital expenditures were eliminated.

Distribution Costs. At the time, Aer Lingus’s distribution costs were thirty times higher than Ryanair. In an effort to close the gap, Aer Lingus dropped its travel agent commissions from 9% to 5%. The airline also encouraged the public to book their flights online through aerlingus.com – the airline’s more cost-effective distribution channel.

Page 2 June 2004

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AER LINGUS: A T RANSFORMED FULL SERVICE CARRIER (C ON’ T) Increased Efficiencies. Through the process of reducing its operating costs, Aer Lingus was also able to increase efficiencies in its fleet utilisation. §

Fleet Utilisation. In 2003, as the market began to recover, Aer Lingus was able to add 9 new routes without requiring additional resources by tweaking its scheduling of operations.

Pricing Strategy and Revenue. In response to competition from the low-cost carriers, Aer

Lingus’s pricing strategy was to significantly reduce its fares to match the competition. Ryanair was offering exceptionally low fares in the market place. As a result of its aggressive cost cutting measures, Aer Lingus gave itself the opportunity to go head-to-head with Ryanair. The market responded to Aer Lingus’s lower fares and resulted in increased passenger volumes, a higher load factor and increased revenues.

Positive Results. After undertaking aggressive cost cutting measures to save the airline and changing it pricing policies, Aer Lingus began to see positive results from their actions. §

In 2002, the airline had an operating profit of €64 million, net cash of €155 million and free cash of €367 million.

In 2003, the airline was carrying 11% more passengers with 33% less staff.

In the aftermath of 9/11, the transatlantic market has since improved. In 2003, Aer Lingus added 18% additional capacity on transatlantic routes.

Keys to the future… Aer Lingus continues to face stiff competition from Ryanair. In order to stay competitive, Aer Lingus must continue with its low fare strategy – as the market has responded positively. Also, working in tandem with the its low-fare pricing strategy, Aer Lingus must continue its costing cutting measures.

Page 3 June 2004

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THE DECLINE OF U.S. DOMESTIC YIELDS 14 June 2004

Over the last several years, the airline industry has been negatively affected by several external factors, including the outbreak of SARS, terrorism and the subsequent war in Iraq, and the economic downturn in the U.S. Although passenger traffic has shown a recent recovery from these events, yields remain depressed.

Passenger Traffic. Over

RPM (millions)

Project Analyst

U.S. Airlines Domestic Passenger Traffic (RPMs) 600,000 500,000 400,000 300,000 200,000 100,000 0 1993

1995

1997

1999

2001

2003

Source: Air Transport Association, Annual Traffic and Capacity-U.S. Airlines Scheduled Services.

Yields. In contrast, U.S.

domestic yields have shown a decline over the last decade, from nearly US$0.14/RPM in 1993, to US$0.12/RPM in 2003. Domestic yields in the U.S. remained relatively steady from 1993 to 2000, before a sharp decline in 2001. The yield in 2003 was well below the figures recorded in earlier years.

U.S. Airlines Domestic Yields

Yield (US$/RPM)

Eugene Chu

the last 10 years, domestic U.S. passenger traffic has risen 41%, from 354 billion in 1993 to 499 billion in 2003. Although there was a drop in passenger traffic in 2001 and 2002, a recovery was evident in 2003, with RPMs reaching close to the level seen in year 2000.

$0.16 $0.14 $0.12 $0.10 $0.08 $0.06 $0.04 $0.02 $0.00 1993

1995

1997

1999

2001

2003

Although some attribute the Source: Air Transport Association, Annual Passenger Prices (Yield)-U.S. Airlines Scheduled Services. decline in U.S. passenger traffic during 2001 to external events (9/11), the data suggests that the drop in yields was largely caused by other factors, especially increased competition from low cost carriers (LCCs). The 2001 drop in yields began in January and was complete by July. Yields were actually stable (in both Canada and the U.S.) after October 2001.

Notes: U.S. Airlines refer to all major, national, and regional airlines as defined by the U.S. DOT under Chapter 411 of Title 49 of the U.S. Code.

Page 4 June 2004

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

2004

Vancouver

-15.1% -17.3% -9.0% -13.7% -6.0% -7.6% -5.9% -6.6% -2.3% +0.1% +1.9% -0.1% -4.6% +1.6% +7.9% +8.7% +6.1% +30.1%

-13.6% -13.2% -9.8% -12.1% -4.5% -1.2% -3.0% -2.8% -3.1% +2.2% +2.8% +0.5% -3.7% +1.5% +7.9% +5.2% +4.8% +20.5%

April May June 2nd Quarter July August September 3rd Quarter October November December 4th Quarter Full Year January February March 1st Quarter April

Page 5 June 2004

MontréalTrudeau -9.0% -7.4% -0.7% -5.5% +3.0% +2.0% +2.3% +2.4% +2.7% +9.0% +8.5% +6.4% +1.3% +10.1% +19.6% +21.4% 17.1% +31.7%

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

+1.6% -1.4% +1.9% +0.7% +4.7% +1.4% -1.8% +1.6% -0.7% +8.0% +5.4% +3.9% +2.7% +4.2% +5.8% +2.5% +4.2% +12.2%

+1.1% -5.3% -0.4% -1.6% +2.5% +0.3% +8.6% +3.4% +10.4% +7.2% +4.9% +7.4% +2.9% +7.7% +10.7% +8.0% +8.6% +8.6%

-7.6% -1.5% +2.5% -2.1% +3.0% -7.0% +1.6% -0.9% +1.4% +6.5% +6.0% +4.5% +1.3% +3.5% +13.9% +11.4% +9.7% +20.8%

+4.4% -0.5% +5.0% +3.0% +3.7% +0.4% +1.5% +1.8% +7.4% +5.8% +6.0% +6.4% +5.1% +6.4% +11.7% +11.4% +9.9% +11.3%

+6.1% -1.2% +4.1% +2.9% +5.7% +4.1% -0.6% +3.3% +2.5% -0.05% +2.9% +1.9% +4.2% +3.2% +5.6% +9.0% +6.1% +16.9%

-0.9% +0.4% +0.6% +0.0% +11.9% +9.8% +10.8% +10.8% +15.4% +13.7% +16.1% +15.6% +7.3% +12.4% +11.4% +8.2% +10.5% +12.7%

-0.6% -1.0% -0.5% -0.7% +5.0% +0.5% -0.7% +1.7% +1.1% +9.6% +9.1% +6.6% +2.9% +5.9% +11.6% +2.6% + 6.5% -0.3%

-3.9% -5.3% +1.4% -2.6% +1.2% -4.8% -2.4% -2.0% -1.7% -0.3% +0.8% -0.4% -0.5% -2.2% +7.8% -2.4% +1.1% +10.9%

-1.6% -1.6% +7.0% +1.3% +4.7% -2.2% -0.2% +0.7% -1.3% +19.8% +2.0% +6.33% +2.4% +8.3% +2.8% +3.9% +5.0% +2.6%

St. John’s -1.7% +4.5% +17.8% +7.1% +21.1% +22.5% +12.3% +19.0% +9.4% +9.4% +13.9% +10.8% +9.4% +12.8% +19.8% +21.3% +18.0% +20.1%

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CANADIAN A IRPORTS

2003

Toronto

AIRLINE DATA – CANADA Traffic and Load Factors on Canada’s Major Air Carriers - May 2004 Passenger Traffic

Air Carrier

OTHER CARRIERS: LOAD FACTORS Jetsgo:

72% (May)

Zip:

not reported

CanJet:

not reported

Revenue Passenger Kilometres

Capacity

% Change over 2003

% Change from 2002

% Change over 2003

% Change from 2002

% Change over 2003

% Change from 2002

Air Canada1

+25.4%

-7.7%

+14.4%

-10.2%

+6.9 pts to (78.5%)

+2.1 pts

Domestic (Mainline)

+12.2%

-9.0%

-1.9%

-14.9%

+10.1 pts

+5.2 pts

Jazz

+4.5%

-5.4%

+2.3%

-16.3%

+1.3 pts

+7.1 pts

International & Charter

+32.6%

-7.1%

+23.8%

-7.9%

+5.2 pts

+0.7 pts

WestJet

+18.3%

+69.7%

+31.2%

+95.6%

-7.1 pts (to 65.1%)

-10.0 pts

Jetsgo

+103.2%

N/A

+114.2%

N/A

-2.5 pts (to 72.4%)

N/A

Analysis: §

Load Factor

Available Seat Kilometres

Air Canada’s domestic traffic continued to increase in May 2004, but year-to-year capacity was reduced. This is reflected in the carrier’s domestic load factor, which is 10 points above the same time last year. In May 2004, Air Canada’s international traffic recorded the largest year-to-year increase in over 12 months. This follows a trend of continuing recovery from the effects of SARS, the Iraq war and the economic downturn last year. However, both traffic and capacity remain below 2002 levels. Although WestJet’s traffic continues to post yearto-year increases, growth in May was slow relative to previous months. WestJet’s CEO, Clive Beddoe, attributed this to a reduction in the number of seat sales offered during the month. He claims this is part of WestJet’s strategy to improve yields without increasing the base fares in a high fuel cost environment. The increase in capacity outpaced the growth in traffic for the second consecutive month, depressing the load factor. WestJet’s share price fell to it lowest level in nearly a year, due in part to weak May traffic.

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

Jazz data is not included in this graph

May- Jun 03

Jul

Aug Sep

Dom RPK

Oct

Nov Dec Jan- Feb 04

Mar April May

Dom ASK

Air Canada Canada International International 40% 30% 20% 10% 0% -10% -20% -30% -40%

May- Jun 03

Jul

Aug

Sep

Oct

Int'l RPK

Nov

Dec

Jan- Feb 04

Mar

April May

Int'l ASK

WestJet 60% 50% 40% 30% 20% 10% 0% May- Jun 03

Jul

Aug Sep

Oct

Nov

RPK

Dec

Jan- Feb 04

Mar April May

ASK

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

Page 6 June 2004

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AIRLINE DATA – U.S. U.S. Airlines Release May 2004 Traffic Figures Traffic Data – May 2004 Airline

Load Factor

Notes:

Traffic ( RPMs – millions)

Capacity (ASMs – millions)

73.1 %

10,733

14,671

â 0.5 pts

á 9.0%

á 9.7%

68.4%

529

774

á 3.2pts

á 30.5%

á 24.3%

69.9 %

1,144

1,706

â 3.1 pts

â 6.5%

â 4.7%

74.7%

5,401

7,232

â 1.2 pts

á 11.9%

á 13.8%

79.3%

9,291

12,577

â 0.4 pts

á 18.5%

á 19.1%

81.8%

1,283

1,567

â 3.1 pts

á 38.3%

á 43.5%

80.7%

6,186

7,667

á 5.3 pts

á 15.9%

á 8.4%

73.9%

4,681

6,338

á 4.6 pts

á 11.7%

á 4.8%

80.1%

9,636

12,036

á 2.9 pts

á 20.2%

á 16.0%

75.4%

3,458

4,585

á 1.9 pts

á 7.3%

á 4.5%

Mainline

Load factor includes scheduled service only

Sources: Carrier traffic reports.

Page 7 June 2004

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NEWS ARTICLES AIR CANADA UPDATE AIR CANADA GRANTED EXTENTION TO STAY PERIOD FUEL PRICES June 11, 2004 SPOT OIL PRICES CONTINUE TO INCREASE FUTURES PRICES INCREASE Crude Oil Prices:

AIR CANADA REACHES TENTATIVE AGREEMENT WITH CAW

Spot – US$38.45 (down 4.0% from May) Futures • 6 month - $38.28 (October 2004 delivery) • 12 month - $35.83 (May 2005 delivery) • 2 year - $33.52 (May 2006 delivery) • 5 year - $29.77 (December 2009 delivery)

Monthly Spot Prices $45.00

$35.00 $30.00 $25.00 $20.00

Ma r Ap r Ma y Ju ne

Feb

Oc t No v De c Jan -04

$15.00 Ju l Au g Sep

US$ per Barrel

$40.00

Ju n-0 3

The Ontario Superior Court of Justice has approved an extension of the stay period granted to Air Canada until 30 September 2004. The carrier has been in bankruptcy protection since 1 April 2003.

Air Canada has reached a tentative agreement with the CAW. Air Canada had already reached tentative agreements with its other 6 unions and this last agreement has enabled Air Canada to meet the $200 million labour cost reductions required by its financiers Deutsche Bank and GECAS.

AIR CANADA PILOTS LAUNCHES ADVERTISING CAMPAIGN TO REASSURE CUSTOMERS ABOUT THE FUTURE OF AIR CANADA

The Air Canada Pilots Association (ACPA), which represent 3,100 of Air Canada’s mainline pilots, has launched an advertising campaign to encourage customers to keep flying on Air Canada, and negate doubts about the future of the carrier. The campaign began on 8 June and will run for three weeks, with a focus on the pilot’s commitment to safety, and the ACPA’s commitment to working with Air Canada to ensure a successful restructuring.

Page 8 June 2004

CIBC ORDERD TO PAY AIR CANADA $35 MILLION FOR CREDIT CARD REWARDMILE PROGRAM Judge James Farley of the Ontario Superior Court of Justice has ordered the Canadian Imperial Bank of Commerce (CIBC) to pay Air Canada $35 million for the month of May. As part an agreement last year, CIBC was to pay Air Canada $35 million per month for the reward-mile points collected through the Aeroplan program, but the bank had been offsetting the fee against a $350 million loan to Air Canada for the last 11-months. The loan has been repaid as of 30 April, but CIBC now wants to withhold future payments until the $1.4 billion claim it has against the carrier has been resolved. The court has yet to make a decision on this matter.

ZIP TO BE INTEGRATED INTO AIR CANADA

Zip, Air Canada’s discount fare subsidiary, will be merged into mainline operations later this year, if Air Canada’s seven unions ratify the cost cutting agreements that were recently reached with the carrier. Zip was launched in September 2002, and flies shorthaul routes, mostly within Western Canada. With the labour cost reductions, Air Canada no longer needs to operate Zip as a separate entity.

AIR CANADA EXTENDS LATITUDE PASS TO WESTERN CANADA

Air Canada has introduced its Latitude Pass discount program on flights between VancouverCalgary and Vancouver-Edmonton. Targeted at business travellers, the online program offers 10 or 20-one way trip credits to customers at a discount.

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NEWS ARTICLES AIR CANADA UPDATE – CON’T

OTHER CANADIAN AIRLINES

AIR CANADA REACHES RECORD LOAD FACTOR FOR MAY

WESTJET RECORDS DECLINE IN LOAD FACTOR FOR 2ND CONSECUTIVE MONTH

Air Canada reported a load factor of 78.5% in May, the highest recorded for the month, and 6.9 points higher than the same month last year. Passenger traffic increased by 25% to 5,517 million RPKs, while capacity increased by 14%. Please refer to the Airline Data-Canada section of this publication for details.

AIR CANADA SIGNS DEAL WITH SABRE TRAVEL NETWORK

Air Canada has signed an agreement with Sabre Travel Network, a company that connects travel buyers and sellers to the world’s largest global distribution system (GDS). The 4-year agreement includes reduced booking fee rates allowing Air Canada to further reduce distribution costs. Currently, 60% of Air Canada’s domestic GDS bookings are processed through Sabre.

AIR CANADA RAISES FARES AS FUEL COSTS AND NAV CANADA CHARGES INCREASE

Air Canada has raised fares on mainline operations, Jazz, Zip, and all code-share flights in response to higher fuel prices. Base fares within Canada have been increased by $7-$10 depending on the length of the trip, while fares for flights to and from the U.S. have been raised by $14-$28. Fares to and from international destinations have been increased by $6. Effective immediately, Air Canada will also increase the Nav Canada surcharge for travel within Canada on or after 1 August 2004. The charge for customers travelling under 300 miles will be $9, $15 for trips between 301-1000 miles, and $20 for flights over 1000 miles. The Nav Canada surcharge for travel between Canada and the U.S. will remain at $7.50 each way.

Page 9 June 2004

WestJet posted a load factor of 65% for the month of May, a 7.1 point decrease compared to the same month last year. This is the second consecutive month that the carrier has reported a decline in year-toyear load factor. WestJet had posted a 0.1 point decrease in load factor, to approximately 66% for the month of April. Please refer to the Airline Data-Canada section of this publication for details.

WESTJET APPLIES FOR NEW YORK LAGUARDIA SLOTS

WestJet has filed an application to the U.S. Department of Transportation for 12 slots at New York LaGuardia to begin six daily flights from Toronto. The carrier indicated that it wants to launch service on or before 31 October, using Stage 3 compliant B737 aircraft.

WESTJET ADDS FEES AS NAV CANADA SURCHARGE INCREASE

WestJet has increased the fees on its fares in response to an increase in Nav Canada navigational charges. Effective immediately, the new charges are applicable for travel on or after 1 August 2004. The Nav Canada fee will be $9 for customers travelling under 300 miles, 15 for flights between 301-1000 miles, and $20 for all other flights.

CANJET EXPANDS FLORIDA SERVICES Beginning 31 October, CanJet will launch non-stop weekly Sunday service between Halifax and Orlando. The carrier will introduce year-round Hamilton-Orlando flights starting 19 June.

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NEWS ARTICLES OTHER CANADIAN AIRLINES – CON’T

HMY RENAMED TO HARMONY

Based in Vancouver, HMY Airways has changed its name to Harmony Airways. Owned by David T.K. Ho, the carrier started operations in the winter of 2002 with two B757-200 aircraft. HMY offers scheduled services between Vancouver and Toronto, Los Angeles and Las Vegas. Summer flights to Honolulu and Maui will be launched on 25 June.

U.S. & INTERNATIONAL AIRLINES AMERICA WEST LAUNCHES SERVICE FROM LAX TO VANCOUVER AND EDMONTON

America West Airlines has initiated daily nonstop flights from Los Angeles (LAX) to Vancouver and Edmonton. Daily non-stop service from LAX to Puerto Vallarta and Mazatlan, Mexico has also been added. The carrier now operates 32 daily flights from LAX to nine destinations including Boston, Edmonton, Las Vegas, Mazatlan, New York, Phoenix, Puerto Vallarta, Vancouver, and Washington, D.C.

AMERICA WEST MAY CHANGE AIRBUS ORDER

America West has negotiated an amendment to its 1999 Airbus order that will include an additional 22 A319 and A320 aircraft as well as increased flexibility with its A318 order. The airline indicated that it may change its 15 firm orders for 107-seat A318s into orders for larger A319s and A320s, or it may even cancel the order all together.

Page 10 June 2004

UAL REQUESTS EXTENSION OF BANKRUPTCY PROTECTION

UAL, the parent company of United Airlines, has filed a motion to the U.S. Bankruptcy Court in Chicago to extend its exclusive right to file a re-organisation plan by three months to 30 September. The carrier is requesting a US$1.6 billion government guarantee from the Air Transportation Stabilisation Board (ATSB), and a $2.0 billion loan from J.P. Morgan Chase Bank and Citicorp U.S.A. The loan is required for UAL to exit from bankruptcy protection. The carrier filed for protection from creditors in December 2002.

JETBLUE CONVERTS 30 AIRBUS A320 OPTIONS

JetBlue, plans to convert 30 Airbus A320 options. This will make JetBlue Airbus’s fourth largest customer with 123 orders on backlog. Currently JetBlue flies 60 A320s.

VIRGIN U.S.A. TO BE BASED IN NEW YORK AND SAN FRANCISCO

Virgin U.S.A., Richard Branson’s U.S. low cost carrier, will base its headquarters in New York, and operations in San Francisco. The Manhattan headquarters will handle the marketing, human resources and finance functions, while San Francisco will house the flight attendants, pilots, maintenance staff, engineers, and dispatching. Virgin U.S.A. will be U.S. owned and operated, with plans to start operations early next year.

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NEWS ARTICLES U.S. & INTERNATIONAL AIRLINES – CON’T RYANAIR POSTS QUARTERLY LOSS, EASYJET ISSUES PROFIT WARNING

Ryanair posted a loss of EUR3.3 million (CDN5.4 million) in the first quarter of 2004, its first quarterly loss since 1997. Net profit for the year ended 31 March was EUR207 million (CDN339 million), the first decline in 13 years. Revenues increased by 28%, and Ryanair carried 47% more passengers during the year, but yields were weak. Meanwhile, EasyJet has issued a profit warning, stating that increased competition and high fuel prices could decrease earnings this year.

CONDOR LAUNCHES LCC PRICING

Based in Germany, Condor has introduced low cost carrier fares on its intercontinental flights. The carrier offers services to North America, the Caribbean, and Southeast Asia. It currently operates nine B767-300ER aircraft. Fares start at EUR99 (CDN165) one way. Condor is a subsidiary of tour operator Thomas Cook AG.

SIA PLANS TO LAUNCH A380 SERVICE TO LONDON AND SYDNEY

London and Sydney will become the first airports in the world to see A380 service when Singapore Airlines begins operating the aircraft in early 2006. A380 service to Hong Kong and San Francisco will be launched later in 2006 and 2007. Singapore Airlines has 10 A380s on firm order, with options for 15 additional aircraft.

Page 11 June 2004

SWISS DECIDES NOT TO JOIN ONEWORLD

Swiss announced that it will not join the oneworld alliance, stating that the cost of joining the alliance outweighs the benefits. The carrier never reached an agreement with British Airways on the exchange of frequent flyer data. The British carrier’s EUR50 million (CDN83 million) loan guarantee for Swiss that was granted in exchange for eight slots at Heathrow is unaffected. Swiss will continue to codeshare with British Airways on the Geneva-London route for the next three years.

STAR ALLIANCE WELCOMES THREE NEW MEMBERS

Star Alliance, one of the three global alliances, has added South African Airways, TAP Portugal, and Blue 1, a Finnish airline, to its membership. The alliance now has 18 members and captures almost 20 percent of the global market share of flights. Star Alliance will have more than 15,000 daily flights to 833 destinations in 152 countries.

SKYTEAM ADDS NEW MEMBERS, LOOKS TO FURTHER EXPANSION

The SkyTeam alliance will officially add Continental, Northwest, and KLM on 13 September. The carriers already code-share with existing members and previously launched a frequent flyer-link. The alliance will allow the group to expand its network in Asia to nine destinations. SkyTeam is also considering Malaysian Airlines and Kenya Airways as future members.

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NEWS ARTICLES U.S. & INTERNATIONAL AIRLINES – CON’T AIRLINES FIND NEW WAYS TO CONSERVE FUEL

With rising fuel prices, Airlines are finding creative ways to cut fuel costs. To lighten weight, American Airlines carries less emergency fuel on Trans-Atlantic flights. JetBlue use one instead of two engines to taxi along runways. United Airway’s low cost carrier Ted now flies at a maximum flying speed of 516 mph, down from 530 mph. Southwest Airlines added extensions to the wingtips of their Boeing 737’s to reduce drag, lowering fuel consumption by up to four percent. Others in the industry have also recognised the need for fuel efficiency. Boeing’s 7E7 dreamliner will be 20% more fuel-efficient than its 767 models from the 1970s.

REGULATORY/GOVERNMENT E.U. REJECTS OPEN SKIES DEAL

European Union transport ministers rejected an open skies deal with the United States, wanting further negotiations on the market access issue. The E.U. court ruled that preexisting U.S bilateral agreements with individual E.U. states broke European rules that create a single internal market. The E.U. has asked that it be allowed cabotage rights in order to create a balance in the market. The U.S. has agreed to increase the foreign ownership levels from 25% to 49% voting stock, but is unwilling to allow European carriers access to its domestic market.

Page 12 June 2004

U.S. AND E.U. SIGN PASSENGER DATA AGREEMENT

The agreement allows airlines to provide the U.S. Customs and Border Protection (CBP) with Passenger Name Record (PNR) information relating to flights between the United States and the European Union. The Department of Homeland Security (DHS) requires that airlines provide PNR data for security reasons, but E.U. privacy laws did not permit airlines to disclose the data. Prior to the agreement, an interim agreement had been in effect allowing airlines to provide the CBP with required PNR data without penalty or fine from either side during U.S.-E.U discussions. The U.S. now has access to 34 categories of personal information, and must destroy its records after 3.5 years.

CARGO The Air Transport Association (ATA) reported that 2.0 million revenue ton miles were transported in the month of April, up 6.9% over April 2003. The International Air Transport Association (IATA) member airlines’ overall freight tonne kilometres increased 13.8% over April 2003. The Middle East remains the region showing the strongest growth, with an increase of 29.8%, followed by North America with a 17.2% increase for April 2004.

KITTY HAWK TO CONVERT B737-300S TO FREIGHTERS

Kitty Hawk will be the North American launch customer for the Boeing 737-300SF. The airline will lease seven of the converted B737-300s from GE Capital Aviation Services. The first delivery to Kitty Hawk is set for November 2004; the remaining six will be delivered throughout 2005.

NEWS ARTICLES CARGO – CON’T U.S. CARGO TO CONTINUE TO SHIFT TO FREIGHTERS, FAA SAYS

The Federal Aviation Administration’s (FAA) “Aerospace Forecasts 2004-2015” report finds that the overall share of U.S. domestic cargo moving by freighter will reach 79% by 2015, up from 75% in 2003. This growth is attributed in part to the heightened security requirements imposed by the FAA in October 2001, to an increase in integrator traffic and to the increased demand for faster service and greater capacity. The annual rate of growth of revenue ton miles (RTMs) is expected to be 4.5% from 2006-2015.

7E7 COULD BOOST POINT-TO-POINT U.S. CARGO SAYS FREIGHT FORWARDER

Chris Coppersmith, president and CEO of Target Logistic Services, believes the launch of Boeing’s new aircraft will win freight forwarders back to using air transport rather than ground services since 9/11. Pointing out that point-to-point services mean less handling and less chance of damage and theft, Coppersmith also notes that point-to-point services will stimulate air cargo growth in the U.S. as cities that are served as spokes gain direct services, decreasing delivery times. The Boeing 7E7 Dreamliner has a belly capacity of 22,680 kg or 50,000 lbs and is expected to enter service in 2008.

ARROW AIR EMERGES FROM CHAPTER 11 PROTECTION

Arrow Air has exited Chapter 11 bankruptcy protection after only five months. The cargo carrier and its creditors agreed to a reorganizational plan that allowed it to maintain its 520 employees, its management, and its assets intact. Arrow Air also hopes to expand its employee base in the next year and a half. The carrier’s three principals are James Pinto, Michael Tokarz, and Philip George, all from investment and liability firms.

FEDEX TO FLY US POSTAL SERVICE OVERSEAS MATERIAL

FedEx will take over the delivery of the US Postal Service's (USPS) overseas Global Express Guaranteed packages from DHL Worldwide Express. FedEx already transports much domestic mail and packages for USPS under existing agreements. The new arrangement will come into effect on 1 July 2004.

MILKTRUCKS BECOME MAILTRUCKS WITH TNT MAIL UK

TNT Mail, the U.K. subsidiary of TPG NV, has signed a two-year agreement with Express Dairies, a trading division of Aria Foods UK. The agreement will have Express Dairies delivering large non-time sensitive mail items to more than six million U.K. households for TNT Mail. The partnership will also offer businesses a service for large and heavier addressed packages.

PROFITS UP FOR UPS, CARGOLUX

Cargolux broke its records with a 2003 net profit of US$70.9 million. UPS reported $759 million net income, a 24% increase in its first quarter of 2004.

Page 13 June 2004

NEWS ARTICLES CARGO – CON’T

PEOPLE

VOLGA-DNEPR LAUNCHES AIRBRIDGE CARGO

Peter Wallis has been elected as the next Chairman of the Board of Directors for the Calgary Airport Authority, effective 9 August 2004. He succeeds Thomas J. Walsh. Wallis has served as a Board member since 1998. Wallis is Director of the University of Calgary’s Van Horne Research Institute, and a former Vice President at Canadian Airlines.

Volga-Dnepr’s subsidiary Airbridge Cargo has launched its inaugural flight from Beijing to Luxembourg via Novosibirsk. The subsidiary, set to become an independent carrier by 2005, operates a fleet of B747-200Fs. Volga-Dnepr also test flew its re-engined AN124 with the payload increased to 150 metric tonnes. More testing is required before the aircraft is ready for services.

AIRBUS TO BOOST A320 PRODUCTION

Royal Roads Military College in Victoria, B.C, has awarded Scott Clements, CEO of Edmonton Airports, an honourary PhD. Clements is the longest serving CEO of a Canadian Airport Authority, and was formerly Lt. General with the Canadian Forces. He has been involved in the education and training of leaders, including his prior command of the National Defence College in Kingston, Ontario.

OTHER

Jean-Cyril Spinetta, President and CEO of Air France, was elected chairman of the IATA board of governors for 20042005. He takes over from JAL Chairman Isao Kaneko.

AIRCRAFT MANUFACTURERS Airbus plans to increase the production rate of its A320 family of aircraft by 20% next year, with a possible further increase by year-end 2005. As of 31 May, Airbus reported booked orders for 61 A320 aircraft. The manufacturer expects to deliver 300-305 aircraft this year.

NUMBER OF PARKED PLANES DECREASES

According to Airclaims and Lehman Brothers, the number of parked planes decreased from 595 in November 2003 to 534 in March 2004, representing 11.7% of the pre-Sept. 11 U.S. domestic fleet, down from 12.6%. Thirty-six planes were parked and 96 were removed. Thirty-eight of the removed planes were returned to service, 28 were leased or sold, 30 were scrapped, and one was converted into a freighter.

Page 14 June 2004

Iberia President Fernando Conte was named chairman of the oneworld alliance governing board at the alliance’s recent summit meeting in Singapore. Jacques Grilli has been appointed as the new Director of Screening Operations at CATSA. All CATSA’s RMs will report to Grilli. Grilli was previously the CATSA Director of Law Enforcement and Security Liaison.

NEWS ARTICLES PEOPLE – CON’T Air Canada has named Bill Zoeller as president and CEO and Ron Elvidge as VP and COO of its Technical Services maintenance group. Both are based at the airline’s Montréal maintenance centre. Gerard Aprey has been named chairman of AMR Corp, parent company of American Airlines. Aprey also currently serves as president and CEO of AMR Corp. World Airways has promoted Randy Martinez to President and CEO and Jeff MacKinney to Chief Operating Officer. Rob Binns has been named Sr. Vice President, Marketing.

Randy Martinez

Page 15 June 2004

John Allan, chairman of Exel, has been named as president of the U.K.-based Freight Transport Association, for 2004-05. Aer Lingus Chairman Tom Mulchay resigned on 29May after being named in a tax evasion scandal at Allied Irish Banks plc. SAS Cargo Group has appointed VP Kenneth Marx as the new president and CEO. He succeeds Peter Grønlund who became president and CEO of Scandlines in May. Swissport Z ürich has appointed Marcel Hungerbühler to the position of CEO, effective 1 May. The former SWISS executive succeeds Urs Sieber, who has been appointed as the head of the European division at Swissport International.

Jeff MacKinney

ECONOMIC OUTLOOK 10 June 2004 Canadian GDP (Annualised Quarterly % Change)

Canada - Momentum Building

Q1 '04

Q4 '04

Q3 '03

Q2 '03

Q1 '03

Q4 '02

Q3 '02

Q2 '02

Q1 '02

Q4 '01

Q3 '01

Q2 '01

Q1 '01

Q4 '00

Q3 '00

Canadian employment dropped in February and March, but increased in April and May (0.3% and 0.4% respectively). The combination of first quarter GDP growth and consecutive months of employment increases indicate that the Canadian economy may be heating up. This may lead to a rise in interest rates later in the year.

Employment in Canada (Millions, Seasonally adjusted) 16.2 16.0 15.8 15.6 15.4 15.2 2002

2003

Mar

May

Jan

Nov

Jul

Sep

May

Mar

Jan

Nov

Sep

Jul

Mar

15.0 May

Source: Labour Force Survey, Statistics Canada

U.S. Real GDP (Annualised Quarterly % Change) 6% 5% 4% 3% 2% 1% 0% -1% Q1 2004

Q4 2003

Q3 2003

Q2 2003

Q1 2003

Q4 2002

Q3 2002

Q2 2002

Q1 2002

Q4 2001

Q3 2001

Q2 2001

Q1 2001

Q4 2000

-2% Q3 2000

The U.S. economy grew 4.4% in the first quarter of 2004, finally outpacing the Canadian economy by two percentage points after lagging for several years. Consumer spending in the U.S. is in good shape, as two major factors that drive it; personal disposable income and employment, have been improving. Nonfarm employment grew by 248,000 in the month of May, marking the ninth consecutive monthly increase. U.S. GDP and employment are higher in comparison to the same period last year (Q1 GDP is 5% higher, and May employment is 1% higher).

Q2 2000

U.S Economy Surging Ahead

Q1 2000

Manager, Economic Analysis

Jan

Ian Kincaid

Q2 '00

Q1 '00

Statistics Canada reports Canadian 5 GDP grew 2.4% (at an annualised rate) 4 in the first quarter of 2004. A more in3 depth look reveals that there are some 2 significant positives that can be taken from the first quarter GDP growth. Final 1 domestic demand (consumer spending, 0 government outlays, and business -1 investments) and exports both experienced tremendous growth over Source: Statistics Canada the quarter, at 4.8% and 6.3% respectively. The growth in exports signals that the expansion in U.S. GDP is more than offsetting the strong loonie.

Source: U.S. Bureau of Economic Analysis

The overwhelming expansion in most aspects of the U.S. economy lead many economists to believe that the U.S. Federal Reserve will soon begin raising interest rates to moderate the surging economy. Page 16 June 2004

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CANADA’S NEW NATIONAL SECURITY POLICY & AIRPORTS 11 June 2004

Solomon Wong Director, Security & Planning

The National Security Policy (NSP) was the last major policy platform announced by the Liberals before the Federal Election was called. In advance of the NSP, Canada was under considerable criticism for the lack of a formal policy, even though integral parts of national security were already implemented. Canadian Intelligence’s role in tracking Ahmed Ressam in 1999, for example, was cited in his trial for the Al Qaeda plan to blow up LAX on 1 January 2000.

Components of Canada’s National Security Policy

The NSP will redefine the role and interactions of Canadian airports as a first line of defence for threats, such as health contagions and terrorist activity. The NSP contains 6 key areas related to intelligence, borders, transportation security, health/emergencies, as well as international security. Of major importance to airports are: §

Biometric Passports to be introduced in 2005. In time for the future 2006 deadline for biometric passports mandated by the U.S., Canada will begin deploying biometric passports in 2005 using the facial biometric (a standard outlined by ICAO).

National Health Agency formed. The primary co-ordination function for crises such as SARS was announced in December 2003 to be a new Health Agency. The NSP outlines further roles and hints at future roles of this agency at airports. Depending on the progress of new contagions, this may promote either increased international arrivals scanning for health reasons, or for this area to evolve as a pre-clearance to Canada model.

Transportation Security changes. In addition to CATSA’s formation in 2002, the response on transportation security has been fragmented by modes. While the NSP does not explicitly deal with the modal disparities in transportation security, significant funding is provided for maritime security to upgrade this mode to many of the regulations airports have operated under post-Air India. A commitment is placed to work with the private sector, including airports, for future air cargo security and passenger security modifications.

In addition, the NSP outlines the evolution of the 2001 Canada-U.S. Smart Border process into the next phase, which could potentially include Mexico. Furthermore, implementing Smart Border concepts throughout the world is outlined -- developments which could help evolve the processes for international departures and arrivals in future. All in all, the NSP is a logical evolution of anti-terrorism legislation passed by Parliament since 9/11. In addition to this, however, the NSP provides a glimpse of the underlying structure for integrated crisis response. The federal “Government Operations Centre” and regional “Security Operations Centre” are new concepts which, when fully defined, will aim to provide a central co-ordination of all government agencies -- and the central funnel that airports will need to deal with in future management of national security issues.

Page 17 June 2004

OTTAWA SCENE 10 June 2004

Bill C-7 Public Safety Act Comes into Force For the Canadian aviation industry, the facilitation files continue to be busy in 2004. Bill C-7 or the Public Safety Act gives Canadian domestic security agencies the right to demand passenger information. For Canadian carriers this will likely be problematic because the passenger data airlines keep for domestic flights is far less complete than the information required for international travel. The Air Transport Association of Canada (ATAC) is apprehensive that security agencies will try to fix the problem by ordering carriers to gather more information and transmit it at the airline’s cost. The airlines are hoping to limit carrier responsibility to simply providing access to security agencies who would gather and sort data at their own expense. Below are the highlights of the newly enacted Public Safety Act.

Sam Barone Regional Vice President, Ottawa

Why do the RCMP and CSIS need air passenger information? §

In light of the terrorist events of September 11th, the adaptability of terrorists, and the continuing threat, there is a need to be vigilant in ensuring that our security and law enforcement agencies have the necessary tools to protect the safety and security of Canadians.

Due to terrorist threats and criminal acts against aviation security, the RCMP needs passenger information to make effective decisions about which flights to target with aircraft protective officers.

CSIS requires passenger information to investigate threats to the security of Canada.

Canadians expect their police to use all reasonable tools available to ensure their safety.

What does Section 4.82 in Bill C-7 do? §

It amends the Aeronautics Act to require airlines, upon request, to provide a small core group of specially designated RCMP and CSIS officials with access to air passenger information for very restricted purposes. These purposes are limited to transportation security, the Air Carrier Protective Program, and counter-terrorism.

Designated officials will be authorized to match passenger information against other information under their own control to identify known and potential terrorists and risks to transportation security.

The RCMP and CSIS would have seven days to analyze passenger information to identify terrorist and transportation security threats. This analysis includes checks on the ground to reliably identify passengers who pose an actual threat so that any unnecessary passenger information could be destroyed as quickly as possible.

Designated officials would only be authorized to disclose matched information to a third party for very restricted purposes.

A consequential amendment to the Personal Information and Protection and Electronic Documents Act (PIPEDA) is required to recognize that national security involves collaboration and cooperation between governments at all levels and the private sector community. The amendment provides assurance to businesses that they can assist national security without concern of breaching PIPEDA.

Page 18 June 2004

OTTAWA SCENE – CON’T New Director General Air Policy appointed at Transport Canada In late May 2004, Ms. Brigita Gravitas-Beck was appointed as the new Air Policy Director General, replacing Mrs. Val Dufour who has been in Air Policy since 1986. Ms. Brigita Gravitis-Beck was previously Executive Director, Treasury Board of Canada, Secretariat for Industry, Science, Regional Development and Regulatory Issues. It will be interesting to monitor which direction Airport and Airline policy will take given the new management. Such policy direction will largely be a function of who the next Minister of Transport will be on 29 June 2004, and from which political party. Mrs. Dufour has taken up new duties as Senior Advisor to the Assistant Deputy Minister of Policy at Transport Canada (Kristine Burr). Among Mrs. Dufour’s new duties is a mandate to reintroduce a new Canada Airports Act.

Page 19 June 2004

CARGO CAPERS 9 June 2004

Back to the Future – Air Canada reintroduces freighter operations. On May 11th, Cargojet announced the start-up of a daytime Hamilton-Calgary-Vancouver service as of June 1 st to supplement its overnight cargo network. This was seen as an opportunity to meet customer demand anticipated due to the reduction in cargo capacity resulting from Air Canada’s downgauging of passenger aircraft used in domestic service. It would also increase utilization of aircraft that would otherwise be idle during the day.

Robert Andriulaitis Director Transportation & Logistics Studies

The day the Cargojet operation began, Air Canada launched a new freighter service in Canada. Not announced – launched. No fanfare, no announcements: just the sudden appearance of an Air Canada freighter (operated by All Canada Express) on the apron at Pearson, Calgary, and Vancouver. Although rumours had been circulating for some time that AC was in negotiations with ACE, the first time Cargojet knew the deal was done was when one of their pilots let them know they crossed paths with the AC freighter at YYC! There had been speculation for years that Air Canada would resume freighter operations. Statements by Claude Morin and Robert Milton gave clear indication they wanted to move the company in this direction. Air Canada Cargo was spun off as a “stand-alone business” back in early 2003, to help prepare it for potential freighter operations. When Air Canada announced it was eliminating its 747s from the fleet, Air Canada Cargo fought the decision and managed to retain the three combi versions AC operates in order to give it much needed main deck space. Everything seemed ready at AC for some time – it was “just” a matter of whether they could: (1) handle it financially; (2) get the Board on side during a difficult period for the airline; and (3) get the pilots to agree to contract this out in order to lower costs and enable it to compete more effectively with Cargojet. Ironically Air Canada’s precarious financial condition – which was driving the first two concerns – is likely what convinced the pilots to concede the third point. It is believed that in the last round of labour negotiations for concessions, with Air Canada at the brink, the pilots agreed to contracting out freighter operations. There is speculation that they in turn extracted their pound of flesh from Air Canada, but details of the agreement are not known with any certainty.

So what does this mean: Fare Wars? We are all very familiar with the fare competition being

waged among Canada’s passenger air carriers. While a standard feature on the passenger side, this has not been as large a factor on the cargo side, at least domestically. (It should be noted that international rates have been subject to downward pressure, particularly across the North Atlantic, resulting from the large amount of belly capacity that is available on a discounted basis.) Now however, rate wars are a distinct possibility as AC and Cargojet battle for customers, particularly since the routing and timing of the respective services are very similar, other than the difference in the southern Ontario base. It will be very interesting to see what lessons Air Canada has learned from its battles with the Low Cost Carriers on the passenger side, and what strategy it will adopt for cargo. So far it looks like a fight to the finish, but as we are still only a couple weeks into this brave new world, it is a bit premature to declare how this will end. Who knows, maybe they can take a page from the experience of LCCs and use pricing to stimulate and grow the market to a point where they can both co-exist! Page 20 June 2004

CARGO CAPERS –

CON’T

The future: dare we say international service? Air Canada’s strengths lie in the international

domain, and seems prepared to concede a big portion of the domestic market to WestJet, Jetsgo and the others. Many of the factors that led Air Canada to this realization on the passenger side also play a role on the cargo side. Perhaps Air Canada will look to international freight operations as its cargo niche, rather than battling it out with Cargojet for the domestic market. Only time will tell if Air Canada tries to fulfil this role, but as Canada has historically been underserved by international freighter operations, I can think of few Canadian airports (not to mention freight forwarders, 3PLs, and shippers) that would not encourage Air Canada (or anyone else for that matter) to provide Canadians with dedicated international freighter operations.

Page 21 June 2004

THE WASHINGTON REPORT 14 June 2004

No Additional Aid to U.S. Airlines House Aviation Subcommittee Chairman, John Mica indicated that no additional monetary aid will be given to the country’s troubled airlines. This was the clear consensus during a hearing at a recent House Aviation Subcommittee on 3 June. There does not appear to be any inclination by key congressional committees to provide any additional aid to the industry. Mica stated, “the airlines in trouble must be prepared to fend for themselves”.

Recommendations made by DOT Inspector General on Easing Air Traffic Congestion

Charles Chambers Regional Vice President InterVISTAS Consulting Inc. AND Senior Vice President GA2 Washington, D.C.

On 18 May, DOT Inspector General (IG) Ken Mead made recommendations to the Senate Aviation Subcommittee on easing air traffic congestion. Mead predicted that air traffic would probably worsen this summer. He mentioned that the key “drivers of congestion” include regional jet growth increasing demand on airports and air traffic control, and low cost carrier (LCC) expansion in large and mediumsized markets. Mead made two recommendations: §

The Federal Aviation Administration (FAA) should publish new capacity benchmarks as soon as possible. The current benchmarks were set in the summer of 2000.

The DOT should collaborate with the Department of Homeland Security (DHS) to collect and report airport-specific data on wait-times at airport passenger security screening checkpoints. This will help determine which areas in the aviation system need improvement.

U.S.-VISIT Comment Deadline Extended The period for providing comments on information collected under the United States Visitor and Immigrant Status Indicator Technology (U.S.-VISIT) program will be extended by 30 days to 21 June 2004. The DHS has been collecting information on non-immigrant visa holders seeking admission to the U.S. from 5 January 2004 through to 5 January 2005. DHS estimates that 24 million people (of which 19 million are air travellers and 5 million are sea travellers) would be required to provide biometrics during this one-year time period. DHS estimates that the collection of biometrics data will add an average of one minute per person to the passenger processing time.

This is a collection of information gathered from public sources, such as press releases, media articles, etc., information from Confidential sources, and items heard on the street. Thus some of the information is speculative and may not materialize. Information contained herein is provided for the use of InterVISTAS Consulting Inc. only, and may not be distributed. Prepared by InterVISTAS Consulting Inc.

Page 22 June 2004