CAIR Issue No. 42 - June 2006 by Leah Dupuis

INTERVISTAS ’ CANADIAN AVIATION INTELLIGENCE REPORT

In this issue… Features Columns: • South Korea Outbound Travel Market (p.1) • Airline Market Caps (p.3) • Is There a Future for Global Distribution Systems? (p.12) • Detention of Aircraft: The Supreme Court Speaks (p.14)

Regular Reports: • Airline Data-Canada (p.4) • Airline Data-U.S. (p.5) • Airport Data (p.6) • Industry News (p.7) • Ottawa Report (p.16) • Washington Report (p.18) • InterVISTAS News (p.19)

SOUTH KOREA OUTBOUND TRAVEL MARKET June 2006

10 Million Outbound Korean Visitors in 2005 Outbound travel from Korea has increased dramatically over the past few decades. Until the late 1980’s, outbound travel remained at less than one million visitors per year, but since then has experienced strong annual growth. The only exceptions have been a few years in the late 1990’s during the Asian economic crisis and in 2003 during the SARS outbreak. Outbound travel currently stands at approximately 10 million visitors, with $10 billion in tourism related expenditures. The average annual growth rate over the past five years has been exceptionally strong at over 11% per year. Figure 1: Total Outbound Travel From South Korea 12,000,000

Senior Researcher

$10,000 Outbound Visitors

$9,000

Expenditure (US$million)

Outbound Visitors

10,000,000

$8,000 $7,000

8,000,000

$6,000 6,000,000

$5,000 $4,000

4,000,000

$3,000 $2,000

2,000,000

Expenditures (US$millions)

Angelica Sparolin

$1,000 $0

19 80 19 82 19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04

Source: Korea Tourism Organization.

Other Asian Countries Capture 80% of Total Outbound Korean Travel The top destinations for outbound Korean travellers were other Asian countries, accounting for 80% of total outbound trips in 2005. China, Japan and Thailand were the top countries visited, together accounting for 59% of trips. The United States was the largest non-Asian destination at 7%. Travel to Europe represented 6% of total outbound trips with Germany, UK and France representing the top destinations.

Figure 2: Top Outbound Destinations

Europe 6%

Other 7% China 33%

United States 7%

Other Asia 21%

Thailand 7%

Japan 19%

Source: Korea Tourism Organization.

Page 1 June 2006

SOUTH KOREA – CON’T Travel to Canada at 2% of Total Outbound Korean Market Statistics Canada reported a total of 191,000 customs entries by Koreans in 2005. This represents approximately 2% of the total outbound Korean market. Over the past five years, Korean visits to Canada have generally been increasing, up 28% from 149,000 visitors in 2000. The only year Canada experienced a decline in visitors from Korea was 2003, when outbound travel volumes decreased 10% during the SARS outbreak. Recovery in 2004 was strong, increasing by 28% to reach 191,000 entries, but then remained flat in 2005. Figure 3: Outbound Trip Purpose

Close to Two-Thirds of Outbound Travel is for Leisure Purposes, including Visiting Friends and Relatives Outbound Korean visitors were most likely to be travelling for leisure purposes (54%), with an additional 9% visiting friends and relatives. Business travel represented an additional 22% of travel while other purposes represented the remaining 15%.

Outbound Visits Peak During Summer Months

Others 15%

Business 22%

Pleasure 54%

VFR 9%

Source: Korea Tourism Organization.

Outbound travel from Korea peaks in summer months, representing close to 30% of outbound travel during each of the past four years. Travel in the first, second and fourth quarters were generally similar over the past four years, with the exception of 2003, when large declines were experienced in the second quarter during the peak of the SARS outbreak. Figure 4: Seasonality of Outbound Travel From South Korea

Millions of Outbound Visitors

3.5 3.0 2.5 2.0 1.5 1.0 0.5

Q 1-

2 Q 002 22 Q 002 32 Q 002 420 Q 02 12 Q 003 22 Q 003 32 Q 003 420 Q 03 12 Q 004 22 Q 004 32 Q 004 420 Q 04 12 Q 005 22 Q 005 32 Q 005 420 05

0.0

Source: Korea Tourism Organization.

Korea to North American Travel Forecasts The latest medium term international travel forecasts from the Canadian Tourism Commission (2003) and the U.S. Department of Commerce Office of Travel & Tourism Industries (2005) anticipate continued strong growth for Korean tourist arrivals. The Canadian forecasts anticipate overall growth of 9% for the Korea to Canada market in both 2006 and 2007. The U.S. forecasts anticipate 8% growth in 2006 and 7% growth in 2007. Page 2 June 2006

AIRLINE MARKET CAPS June 2006

Industry Recovery Continues Global airline market capitalisation is up 31% for May 2006 over the same month last year at US$77 billion. Market capitalisation levels have surpassed the 2000 level of US$73 billion.* However, during the first 6 months of 2006, global airline market cap has increased only 8% compared to 12% for the latter half of 2005. Asia is the only world region showing more growth during the last 6 months, at 14% for December 2005 to May 2006 compared to 5% growth for June 2005 to November 2005. Growth in market capitalisation appears to have slowed during March 2006 in most regions.

Canadian Airlines are Stable

Geneva Tretheway Project Analyst

While the year-over-year growth for Canada has remained flat, in our previous report (January 2006), it was observed that Canadian airline market cap had grown 575% since 2000. Nearly all of this growth occurred as Air Canada emerged from bankruptcy. Market caps for WestJet and Air Canada are currently at C$1.4 billion and C$2.6 billion, respectively at the end of May 2006.

U.S. Airlines Showing Improvement, But Still Below 2000 Levels In the U.S., domestic passenger yields reached the highest point in over 5 years, but market capitalisation of US$26 billion is still 33% below 2000 levels. The U.S. still has two major airlines in bankruptcy protection, Delta Air Lines and Northwest Airlines.

Free Float Market Capitalisation by Geography ($US Billions)* $90 $80 $70 $60 $50 $40 $30 $20 $10 $May-05

Jun-05

Jul-05

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

Feb-06

Mar-06

Apr-06

May-06

May-05

Jun-05

Jul-05

Aug-05

Sep-05

Oct-05

Nov-05

Dec-05

Jan-06

Feb-06

Mar-06

Apr-06

May-06

World

$59

$61

$58

$60

$61

$66

$71

$73

$81

$80

$77

World (ex USA)

$40

$41

$42

$41

$42

$41

$44

$48

$49

$52

$53

$51

Canada

United States

$19

$18

$19

$18

$20

$21

$24

$28

$26

$26.0

Western Europe

$17

$16

$17

$18

$19

$22

$23

$22

Asia-Pacific

$18

$19

$18

$19

$18

$19

$21

$22

$21

Source: Dow Jones Airline Broad Market Cap. Free float market capitalisation differs from full market capitalisation. (Shares are adjusted for free-float if cross ownership, government ownership, private ownership or restricted shares account for ownership of 5% or more). InterVISTASâ&#x20AC;&#x2122; Canadian Aviation Intelligence Report Page 3 June 2006 Copyright ÂŠ2005 InterVISTAS Consulting Inc., all rights reserved. *

AIRLINE DATA – CANADA Traffic and Load Factors on Canada’s Major Air Carriers May 2006 Passenger Traffic

OTHER CARRIERS: LOAD FACTORS

Air Carrier

Revenue Passenger Kilometres

% Change over 2005

% Change from 2004

Capacity

Load Factor

Available Seat Kilometres

% Change over 2005

% Change from 2004

Change over 2005 +3.3 pts (to 83.2%)

Change from 2004 +4.7 pts (from 78.5%)

Air Canada

+2.7%

+9.5%

-1.4%

+3.3%

Domestic (Mainline)

-3.2%

+0.8%

-1.2%

+0.4%

-1.6 pts

+0.3 pts

Jazz

+66.5%

+120.0%

+66.9%

+87.6%

-0.2 pts

+10.7 pts

International & Charter

+5.3%

+13.5%

-1.5%

+4.6%

+5.4 pts

+6.6 pts

+31.9%

+74.3%

+21.1%

+47.4%

+6.3 pts (to 76.9%)

+11.8 pts (from 65.1%)

CanJet: not reported

WestJet

Analysis: •

•

Air Canada domestic traffic and domestic capacity decreased by 3.2% and 1.2% respectively in May compare to the 2005 level. This resulted in a load factor decrease of 1.6 points. Domestic capacity continues to be transferred to AC Jazz. Air Canada RPK growth was led by transatlantic and transborder traffic increase. The two regions’ traffic figures increased 9.9% and 6.5% respectively. A modest 1.5% decrease in international capacity pushed international load factor upward 5.4 points over May 2005. WestJet recorded an eighth consecutive year-over-year increase in load factor during May 2006, rising 6 points to 76.9%. Traffic increased by 32% and capacity increased by 21% over May 2005, both led in part by expanded transborder service to the U.S.

Page 4 June 2006

Air Canada Domestic Mainline 10%

Jazz data is not included in this graph

5% 0% -5% -10% May- Jun 05

Jul

Aug

Sep

Oct

Dom RPK

Nov

Dec Jan- Feb 06

Mar

Apr

May

Dom ASK

Air Canada International 15% 10% 5% 0% -5% May- Jun 05

Jul

Aug

Sep

Oct

Int'l RPK

Nov

Dec

Jan- Feb 06

Mar

Apr

May

Int'l ASK

WestJet 35% 30% 25% 20% 15% 10% 5% 0% May- Jun 05

Jul

Aug

Sep

Oct

RPK

Nov

ASK

Dec Jan- Feb 06

Mar

Apr

May

AIRLINE DATA – U.S. U.S. Airlines Release May 2006 Traffic Figures Traffic Data - May 2006 Airline

Traffic (RPMs – millions)

(ASMs – millions)

1,897

2,399

79.1%

Ç11.3%

Ç21.9%

È7.5 pts

809

1,049

77.2%

Ç15.4%

Ç6.7%

Ç5.8 pts

5,959

7,761

76.87%

Ç13.7%

Ç7.1%

Ç4.4 pts

7,648

9,437

81.0%

Ç14.6%

Ç11.9%

Ç1.9 pts

10,160

12,125

83.8%

Ç4.5 pts

Ç2.1%

Ç2.0 pts

12,245

15,156

80.7%

Ç3.7%

Ç.03%

Ç2.6 pts

9,516

12,412

76.7%

È9.7%

È10.0%

Ç0.4 pts

6,207

7,177

86.5%

È5.6%

È8.7%

Ç2.9 pts

5,556

6,948

79.9%

È7.7%

È10.4%

Ç2.7 pts

319

421

75.9%

È37.2%

È45.5%

Ç10.1 pts

Notes:

1. 2.

Sources:

Carrier traffic reports.

Page 5 June 2006

Capacity

Load Factor

Mainline operations only. Load factor includes scheduled service only.

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

2005 2006

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

+3.9% +5.5% +4.0% +4.5% +3.4% +2.7% +2.6% +2.9% +4.3% +5.2% +0.5% +3.2%

MontréalTrudeau +5.7% +3.6% +7.5% +5.6% +4.0% +1.5% +7.4% +4.1% +3.7% +4.1% +4.3% +4.0%

+3.5% +12.2% +10.1% +8.6% +11.2% +12.7% +7.9% +10.7% +7.1% +12.1% +10.3% +9.8%

+5.5% +12.0% +13.9% +10.4% +11.7% +8.8% +13.5% +11.2% +16.7% +10.7% +4.9% +10.4%

+0.1% +5.5% +3.4% +3.1% +4.8% +4.4% +7.1% +5.4% -0.7% -2.5% -3.5% -2.2%

+4.3% +8.0% +2.9% +5.0% +4.5% +4.6% +6.6% +5.1% +6.4% +6.2% +5.4% +6.0%

-0.2% -4.5% -0.5% -1.8% -9.7% -6.4% +0.3% -5.6% -0.7% +3.0% +5.6% +2.4%

+2.6% +5.8% +6.8% +5.1% +1.2% +5.2% +2.9% +3.1% +3.1% +8.5% +3.8% +4.9%

+18.8% +26.3% +22.7% +22.6% +15.9% +26.4% +16.1% +19.6% +16.1% +24.0% +19.1% +19.6%

+6.0% +13.5% +10.9% +10.2% +5.2% +10.3% +12.9% +9.3% +11.8% +18.0% +12.2% +13.9%

+3.8% +5.7% +12.4% +7.3% +10.9% +2.4% +13.9% +8.8% +12.8% +15.6% +9.5% +12.5%

St. John’s +9.8% +8.5% +12.4% +10.3% +14.0% +8.9% +8.9% +8.0% -0.9% +5.0% +7.9% +3.6%

+4.6%

+4.4%

+5.4%

+10.6%

+10.5%

+3.6%

+6.5%

-0.4%

+5.5%

+19.3%

+12.3%

+10.6%

+8.2%

January

+1.1%

-1.7%

+1.4%

+9.1%

+10.7%

+1.0%

+2.8%

+5.4%

+6.2%

+20.3%

+10.1%

+4.4%

+9.7%

February

-0.5%

+1.5%

+2.1%

+8.7%

+10.5%

+0.2%

-0.6%

+1.2%

+1.4%

+11.0%

+3.0%

-2.8%

+7.0%

+3.1% +1.3% +1.2%

+3.5% +1.3% +4.3%

+6.6% +3.6% +6.2%

+9.0% +8.7% +19.5%

+13.6% +11.8% +20.4%

+3.9% +1.8% +3.8%

+2.0% +1.4% +0.7%

+4.8% +3.8% +6.1%

-3.5% +0.9% +4.2%

+15.4% +15.5% +17.9%

+0.1% +4.4% +9.5%

-3.8% -0.8% +13.9%

-7.8% +2.0% +13.1%

Toronto

Vancouver

April May June 2nd Quarter July August September 3rd Quarter October November December 4th Quarter

+4.0% +6.7% +6.3% +5.7% +3.6% -1.1% +4.5% +2.2% -0.1% +0.6% -0.6% +0.0%

Full Year

March Quarter April

1st

Sources: Transport Canada and individual airports’ traffic reports. 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 June 2006

NEWS ARTICLES AIR CANADA UPDATE AIR CANADA PILOT WAGE NEGOTIATION TO BEGIN

On 5 June, Air Canada pilots and management began negotiating wages and pension terms for the first time since Air Canada emerged from bankruptcy and began making a profit. The Air Canada Pilots Association seeks to restore wages to the level experienced prior to the concessions package negotiated during the bankruptcy process in 2003 and 2004.

WESTJET LAUNCHES WESTJET VACATIONS INC.

On 1 June, WestJet launched its new subsidiary WestJet Vacations Inc. WestJet Vacations Inc. specialises in custom-made air and hotel packages that will leverage the carrier’s existing scheduled network to 33 cities across North America.

WESTJET ANNOUNCES FALL SCHEDULE ENHANCEMENTS

Air Canada has launched a test project of different processes and procedures to turn aircraft faster on the ground to improve efficiency and combat delays. Processes and procedures being tested include using both forward and rear doors for enplaning and deplaning passengers, boarding aircraft cleaners before all passengers deplane, splitting priority boarding by class, and assisting passengers with accessibility needs as the cleaning is finished.

WestJet will increase frequencies between selected cities across Canada and the United States effective 7 September through 29 October. Service between Calgary and Fort McMurray increases from one non-stop flight 6 days per week to two non-stop flights daily. Service between Calgary and Las Vegas increases from two non-stop flights per week to one non-stop flight daily. Direct service will become available between Vancouver and Las Vegas twice per week. Service between Vancouver and Maui increases from one nonstop flight 3 times per week to one non-stop flight daily. Service between Vancouver and Honolulu increases from one non-stop flight 4 times per week to one non-stop flight daily.

AIR CANADA JAZZ LAUNCHES DAILY YEAR-ROUND TORONTO-SALT LAKE CITY SERVICE

WESTJET ANNOUNCES MORE CONVENIENT GATES IN TORONTO PEARSON

AIR CANADA HAS NEW WAYS TO TURN AIRCRAFT

On 8 June, Air Canada Jazz launched daily, non-stop, year-round service between Toronto and Salt Lake City using Bombardier CRJ-705 jet aircraft.

WESTJET UPDATE WESTJET SETTLES SPY DISPUTE

WestJet agreed to pay $15.5 million ($5.5 million covering Air Canada’s legal costs and $10 million to charity) to settle the WestJet – Air Canada dispute over alleged corporate spying and unauthorised data collection by WestJet executives. Chairman and CEO Clive Beddoe apologised to Air Canada and its Chairman, President and CEO, Robert Milton, for the “misconduct.” Page 7 June 2006

WestJet will consolidate its domestic and international charter Toronto operations in Concourse C at Terminal 3 in Toronto Pearson International Airport effective 16 June. WestJet travellers making connections on WestJet’s domestic flights will enjoy the shortest walking distance between their check-in counter and departure gate compared to travellers of other airlines serving Toronto.

NEWS ARTICLES OTHER CANADIAN AIRLINE NEWS

ALASKA AIRLINES APPLIES FOR MORE MEXICAN FLIGHTS

CanJet Airlines signed an agreement with the Government of Canada to provide volume savings for government personnel travelling on business. The agreement could provide CanJet with a boost in traffic and the government with more travel options and cost savings.

On 26 May, Alaska Airlines applied to the U.S. Department of Transportation to fly non-stop four days a week on the Seattle-Cancun and Portland-Los Cabos routes and three days a week between Portland and Puerto Vallarta. If approved, the new seasonal flights will operate from the end of October to the end of April. The following cities in Mexico are currently served by the carrier from Los Angeles: Loreto, Los Cabos, Puerto Vallarta, Mazatlan, Manzanillo, Ixtapa/Zihuatanejo, Guadalajara, Mexico City and Cancun.

TRANSAT A.T. RECORDS SECOND BEST QUARTER

DELTA AIRLINES SEEKS TO TERMINATE PILOTS’ PENSION PLAN

CANJET - GOVERNMENT AIR TRAVEL AGREEMENT

Transat A.T. Inc. recorded an 8.6% revenue increase, compared with second quarter 2005, to $792 million. Profit increased 3.4% to $68.5 million compared with the second quarter 2005. Growth in revenues mainly resulted from increased business activity, fuel surcharges and 2005 acquisitions, such as the acquisition of Travel Superstore Inc. based in Hamilton, Ontario.

U.S. AIRLINE NEWS

U.S. AIRLINES WANT RATE INCREASE

ALASKA AIRLINES REACHES TENTATIVE AGREEMENTS WITH INTERNATIONAL ASSOCIATION OF MACHINISTS On 26 May, Alaska Airlines reached tentative agreements with the International Association of Machinists on two new deals. One agreement covers clerical, office and passenger service employees, including customer service and reservations sales agents, while the second agreement covers the airline's ramp service and stores agents, including aircraft ground-handling workers. More than 3,700 employees will be affected by the agreements. A ratification vote is expected to begin in two weeks to settle the terms of the accord. Page 8 June 2006

Delta Airlines plans to seek termination of its pilots’ defined benefit pension plan. The concessions package approved in May 2006, which included an initial 14 percent pay cut and assurances the pilots union will not fight any company effort to terminate the pilots' pension, was the second such agreement that the pilots agreed to in two years. Delta promised the union a $650 million bank note if the pilot pension plan is terminated. U.S. airlines are being hurt by a government delay to raise rates for mail shipments to cover rising fuel costs. However, the U.S. Postal Service, the Defence Department and United Parcel Service (UPS) say the government already overpays for international mail under the existing rate-setting program. The U.S. Postal Service, UPS and FedEx Corp. support marketbased rates, which allows the market to determine what airlines can charge for air mail.

NEWS ARTICLES U.S. AIRLINE NEWS – CON’T JETBLUE TO FLY DIRECT FROM SYRACUSE TO ORLANDO THIS JULY

JetBlue plans to fly directly between Syracuse and Orlando starting 20 July after Syracuse offered a $635,000 incentive package to JetBlue. All airlines serving Syracuse have been offered varying levels of incentives. American Eagle took advantage of the airport’s monetary incentives to launch flights between Syracuse and Dallas/Fort Worth last year.

CARGO CARGOJET REPORTS GROWTH IN TRAFFIC AND REVENUES FOR FIRST QUARTER OF 2006

The Cargojet Income Fund released its first quarter results on 26 April, showing double-digit growth in revenues compared to the same period last year. Revenues increased 14.6% to $31.4 million, while expenses grew 21% to $25.4 million, largely as a result of increased fuel expenses. Freight carried rose 6.8% to 530,000 pounds per operating day.

FEDEX PLANS TO INCREASE INDIANAPOLIS CAPACITY BY 30% FedEx announced expansion plans to its Indianapolis hub to increase package processing capacity by more than 30% to 99,000 packages per hour. As many as 800 additional employees may be hired. Indianapolis is the second largest domestic FedEx hub behind Memphis. The anticipated operational date for the expanded system is December 2008.

Page 9 June 2006

JADE CARGO INTERNATIONAL TO START OPERATIONS

Jade Cargo International is a joint venture all-cargo operator formed by Shenzhen Airlines (51% ownership) and Lufthansa Cargo (25% ownership). Deutsche Investitions und Entwicklungsgesellschaft, a large German development finance institution, owns the remaining 24%. Jade will take possession of its first aircraft, a 747-400ERF, at the beginning of August and will initially serve Amsterdam and Seoul each three times a week from its Shenzhen hub. Jade will be taking possession of another five 747-400ERFs by the end of 2007.

WORLD AIR FREIGHT TRAFFIC ROSE 1.8% IN APRIL According to the latest ACI FreightFlash data, worldwide freight volume increased by 1.8% over April 2005. For the past 12 months, worldwide freight volume grew by 2.5%. International traffic increased by 3.7% while domestic freight volume fell slightly by 0.7%.

PEOPLE MEYER NAMED COMMERCIAL VP FOR YVR AIRPORT SERVICES

Jim Meyer has been named Vice President, Commercial for YVR Airport Services. Meyer is currently working on the Cyprus Airports Project at Larnaka, Cyprus.

NEWS ARTICLES PEOPLE – CON’T GUIOMARD NAMED NEW COMMISSIONER FOR IRELAND’S AVIATION REGULATION On 13 April, Cathal Guiomard has been appointed as the new Commissioner for Aviation Regulation by Mr. Marin Cullen T.D. Minister for Transport. The principal functions of the Commission are to regulate airport charges at Dublin Airport and aviation terminal service charges levied by the Irish Aviation Authority.

SABRE REPORTS 80% E-TICKETS ISSUED WORLDWIDE

Sabre reported that 80% of all tickets issued worldwide through its global distribution system are now electronic. Sabre thinks the industry is not likely to implement e-ticketing 100% by the IATA 2007 deadline. However, carriers that sell most of the world’s tickets will be e-ticket compliant by the deadline. Sabre Airline Solutions hosts the reservations systems of over 100 airlines around the world. Over 50 airlines are using the SabreSonic Ticket Interline Electronic Ticketing Hub to issue e-tickets.

CHINA PLANS 48 NEW AIRPORTS

OTHER PATA TO ADDRESS ECONOMIC BENEFITS OF OPEN SKIES AT UNWTO ROUNDTABLE PATA will address the economic benefits of air services liberalisation at the UNWTO’s Ministerial Roundtable on Asia-Pacific Tourism Policies on 13-15 June in Macau, China. According to a study conducted by InterVISTAS Consulting, liberalising a further 320 air routes currently not operating in an “Open Skies” environment would generate traffic growth of almost 63%, which is equivalent to $490 billion in GDP (equivalent to an economy the size of Brazil). This study is available at www.intervistas.com.

China plans to open 48 new airports over the next five years in anticipation of the 14% annual passenger growth estimated by the Civil Aviation Administration of China (CAAC). The plan will increase the total number of airports in China to 190 by the year 2010.

WORLD PASSENGER TRAFFIC ROSE IN APRIL According to the latest ACI PaxFlash data, worldwide passenger traffic rose 6.5% in April relative to the same period in 2005. Heavy Easter travel coupled with major Chinese holidays in April contributed to the growth despite fuel surcharges driving up ticket prices. For the past 12 months, worldwide passenger traffic experienced a 4.8% average increase while international and domestic traffic rose by 6.1% and 3.8% respectively.

FIRST A380 SERVICE SYDNEYSINGAPORE Singapore Airlines, which is taking delivery of the world's first A380 in November, will operate its first commercial flight in December on the Sydney to Singapore route. It will operate the aircraft with 480 seats in a 3class configuration, roughly 100 more than its 747s.

Page 10 June 2006

NEWS ARTICLES OTHER – CON’T EUROPEAN UNION AND SINGAPORE SIGN “HORIZONTAL AGREEMENT”

The European Commission has signed an air services agreement with Singapore whereby the latter will accept designation of any European airline from any EU country. The so-called 'horizontal' agreement would allow, for example, Italy to designate Air France for service from Milan to Singapore. The agreement does not replace the bilateral agreements between Singapore and individual EU states. It only clarifies a broader range of carriers that can be designated. To date, 400 bilaterals of EU states have been changed to horizontal agreements.

VIRGIN BLUE ORDERS EIGHT 737S

Virgin Blue of Australia ordered eight 737-800s for replacement of leased aircraft in its fleet and that of New Zealand based Pacific Blue.

Page 11 June 2006

EUROPEAN UNION EXPANDS THE EUROPEAN COMMON AVIATION AREA

On 9 June, the EU, the Transport Ministers of Iceland and Norway (which are not part of the EU, but are part of the EU's Common Aviation Market) and the Transport Ministers of Albania, Bosnia and Herzegovina, Bulgaria, Croatia, the Former Yugoslav Republic of Macedonia, Romania, Serbia, Montenegro and the United Nations Mission in Kosovo, signed an agreement to expand the Common Aviation Area to include south-eastern Europe. The EU's hope is to incorporate the whole neighborhood of the EU into the common market by 2010. In addition to removing flight restrictions, airline ownership and control provisions will be relaxed and common safety and security, competition, and consumer protection rules will be applied.

IS THERE A FUTURE FOR GLOBAL DISTRIBUTION SYSTEMS? 15 June 2006

As airlines increasingly look for ways to reduce cost and the Internet provides an ever more effective vehicle for the carriers to distribute their product, one has to ask what the future holds for the global distribution systems (GDS). The GDS share of passenger reservations is shrinking in every corner of the world as consumers and increasingly travel agencies take advantage of airline websites. Internet reservations cost the carriers only a few cents per booking versus the several dollars associated with the GDS transaction. To make matters worse, with declining yields, the GDS portion of the travellers’ ticket has been increasing. But are the GDS really destined to be the next dinosaurs of the travel industry or will there remain a role for these mega-systems?

GDS: Still Efficient Nigel Brownlow Vice President, Airline Business Development

The GDSs are still the only efficient way for the travel agencies to deal with complex bookings that involve multiple carriers and interline pricing. These systems provide, in a matter of seconds, a comprehensive listing of all itinerary options and available interline prices that meet a customer’s travel requirements. Consider the challenge of checking availability for travel from Canada to India. If you wanted to research the travel options on the internet, you would have to check the web pages of all carriers serving the major connecting points in both Europe and Asia and then the websites of the carriers operating from those intermediate cities onwards to India. A thorough evaluation might include twenty or thirty individual searches – just to get you there, never mind the return. You would then have the problem of purchasing back-to-back fares which are probably more expensive than the through interline fares and they do not offer en route protection in the case of irregular operations. This is often not a viable option. The consumer either accepts the limited itineraries available on one or two carriers’ websites or calls their travel agents who have the benefit of a GDS system.

Travel Agent Community: Still Loyal Users of GDS Despite the best efforts of the airlines, the travel agencies remain loyal to their GDS providers. As agencies do not pay the segment booking fee, GDS costs are not as much of a concern for them. Using the GDS means a set of familiar transactions that are quicker and more convenient than the multitude of unique interfaces offered by the various carrier websites. While an agency may well use the booking engines of a few preferred carriers, once the customer’s travel falls beyond those carriers’ networks, they will revert back to the GDS. A GDS booking and ticket is automatically processed through the relevant ticket settlement plan and may well be integrated with the agency’s revenue accounting system – which is often part of the GDS package. Even their office computer equipment and internet service are most likely supplied at no cost by the GDS provider. And yes, for those who might have a more cynical view, some GDS companies have been known to block the carriers’ website IP addresses on their equipment and internet service. It is unlikely the travel agencies will be the force driving the GDS to extinction.

Next Generation GDS After decades of passing their costs on the airlines, the GDS providers are now having to respond to the industry cost pressures and have begun to at least hold the line on their fees. Unfortunately, their ability to drastically reduce costs to the level needed to be competitive with Internet distribution is severely hampered by their systems operating environment and architecture. The major GDSs are based on technology that, while truly revolutionary in its day, is badly outdated by modern standards. Their ability to operate and maintain these systems more economically is increasingly limited.

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GLOBAL DISTRIBUTION SYSTEMS? – CON’T

To compensate, some providers offer “light” products that incur a lower booking fee but then sacrifice on the depth of the availability search. But, while taking the global distribution capabilities out of the GDS may let them reduce cost, it removes their most important product feature.

New companies have stepped forward in an effort to meet the requirement. Typically formed as partnerships of travel industry experts and leading technology companies, the next generation GDS providers have leveraged the advantages of the latest development tools to build more economical systems that are optimized for Internet communication. These companies are able to offer a global travel distribution service at a fraction of the cost of the legacy systems. Their challenge, however, is building the critical mass they need to become a realistic alternative. Travel agencies won’t start using these systems until they provide access to a wide range of carriers. To the travel agencies there is limited economic advantage to switching to the newer systems. You might think that the carriers would be lining up to sign on with the next generation systems but they seem to be waiting for the travel trade before incurring the cost of an additional distribution channel. The next generation systems might be cheaper, but if the travel agencies are not using them there is no benefit to the carriers.

The Future of GDS What will break this apparent impasse? There is a need for affordable global travel distribution services and there is an increasing number of products to service that need. But with the disconnect between the users (the travel agents) and the purchasers (the airlines), it may take years before the technology becomes widely distributed. Good news, perhaps, for the current GDS providers who would be wise to use the time to revamp their products. Ironically, the very invention that shifted the market away from the GDS might be the one that brings them back. The low cost carrier model owes much of its success to the reduction in distribution cost achieved through direct internet sales. This business model is beginning to saturate in many markets and we see the slow re-introduction of some of those practices that were originally an anathema to the LCC. Increasingly, LCCs are looking to interline and, code-share, and are even struggling to distribute through the GDS. Most LCCs distribute their product through their hosted reservation systems. These systems have not been developed to interface with each other or to the GDS. While advancements are being made in this regard, there is really no single source reservation system that will allow travel agencies or consumers to view and book itineraries across multiple low cost carriers. As the global share of travel reservations made on low cost carriers continues to rise, the travel market will increasingly demand the degree of convenience that it has enjoyed with the legacy airlines and traditional systems. The next generation GDS may become the vehicle by which the low cost carriers are able to provide an integrated global service. The new systems offer an affordable mechanism to distribute integrated itineraries connecting cities served by different low cost carriers throughout the world. Demand from the consumer might well be the force that drives the travel agencies to adopt the new systems. If and when they do, we can expect that legacy carriers will happily follow suit. The role the GDS and travel agencies play in airline reservations will continue to fall as low cost carriers expand and as the Internet becomes more universally available. Whether the GDS systems become a niche market service or whether the introduction of new more affordable systems enables a higher degree of participation may well depend on the value the low cost carriers place in the expanded market reach a GDS service provides.

Page 13 June 2006

DETENTION OF AIRCRAFT: THE SUPREME COURT SPEAKS 12 June 2006

This month we have invited Gerard A. Chouest to comment on the recent Supreme Court decision regarding seizure of aircraft. Mr. Chouest is a partner of Bersenas Jacobsen Chouest Thomson Blackburn LLP, based in Toronto. His practice includes regulatory, commercial and general litigation. He represents aviation clients in civil litigation as well as in litigious matters proceeding before the Canadian Transportation Agency and Human Rights Commissions. He advises clients in enforcement actions undertaken by Transport Canada and in relation to carrier licensing, regulatory compliance and insurance matters. He can be reached at 416-982-3804.

Gerard A. Chouest Partner Bersenas Jacobson Chouest Thompson BlackburnLLP

The failure of Inter-Canadian in 1999 and that of the Canada 3000 group (which then included Royal Aviation) in 2001 resulted in conflicting claims upon the aircraft which had been operated by those companies. The fleets were generally leased and various acts of default had occurred. The companies were also in arrears with respect to charges levied in respect of airport and navigational charges. Hotly contested litigation, pitting the authorities who provided the services against a group of lessors, proceeded in Ontario and Quebec. On June 9, 2006, the Supreme Court of Canada found in favour of Nav Canada and the various airport authorities. The Inter-Canadian case reached the Supreme Court through the Quebec Court of Appeal while the Canada 3000 case came through Ontario. Before the provincial appellate courts the lessors prevailed on all issues, but only by 2 to 1 split decisions. While there are certainly nuances, the majority decisions are in agreement on the major issues. The two dissenting judges were also largely in agreement. The decision of the Supreme Court was unanimous and upheld the views of the dissenting judges. A review of the principal issues follows.

Direct Liability to Pay The Civil Air Navigation Services Commercialization Act (CANSCA), which created Nav Canada as a provider of navigation services for aircraft flying in Canadian air space, stipulates that “the owner and operator of an aircraft are jointly and severally liable for the payment of any charge for air navigation services imposed by the Corporation in respect of the aircraft.” (emphasis added) Nav Canada relied on a simple reading of these words to argue that the aircraft lessors were directly liable to pay the outstanding charges. The lessors held legal title to the aircraft in question. As such they would normally and properly be referred to as “owners” and the Act would appear to have the effect contended for by Nav Canada. However, all thirteen judges (three each in Ontario and Quebec and seven in the Supreme Court) rejected this argument. In doing so, they laid emphasis upon the fact that CANSCA is part of a fabric of harmonious aeronautical legislation which has as its leading instrument the Aeronautics Act. In accordance with that scheme of legislation, the word “owner” has a particular meaning. It designates the “registered owner” and that in turn is a title reserved for the air operator certificated to provide an air service. In this case, the failed carriers were the registered owners and only they are contemplated by the “direct liability” provision. Accordingly, the lessors are not obliged to pay the navigation charges. However, as will be seen in the following, they are likely to have a powerful motivation to pay, as only by paying (or posting security) will they secure the release of their aircraft from detention.

Page 14 June 2006

DETENTION OF AIRCRAFT: - CON’T The Right to Detain Aircraft The Airports Act and CANSCA contain provisions which allow the authorities and Nav Canada to detain aircraft “owned or operated” by a person liable to pay a proper charge. The right to detain is not automatic, and may be exercised only if authorized by court order. The question which arose is whether this right of detention can be set up against a lessor which holds legal title to the aircraft. Two main objections to the detention remedy were raised in the courts below. The first objection is based on a presumption relating to the displacement of property rights. This is the argument which carried most weight with the original motions judge in Ontario (who also found in favour of the lessors) and it was also accepted by the Quebec Court of Appeal. The second objection found favour in each of the provincial appellate courts. The Justices noted that the relevant statutes do not contain any mechanism for dealing with difficult cases in which rights come into conflict. There are no provisions to define priorities among different persons with interests, no explicit power of sale and nothing to indicate how the proceeds of any sale should be distributed among the different parties. The Ontario Court of Appeal also found support for the position of the lessors in the history and context of the legislation. In over-ruling the courts below, the Supreme Court began by insisting on the importance of context, and in particular “the commercial reality of the marketplace where a statute is intended to function”. The detention powers were granted to the private sector providers of the services in question to make the ventures attractive. These entities are required to provide the services according to a cost-based tariff. On the other hand, the lessors are sophisticated parties who have chosen to invest in the industry, they are in a better position to protect themselves against the types of losses in question and there are legal precedents for the detention remedy. Although the Supreme Court does not quote him in this respect, it appears the Justices agreed with the comments of Justice Juriansz, dissenting in the Ontario Court of Appeal, which emphasize the commercial reality of modern lease arrangements. The rights of the lessors, he stated, “should not be regarded as those of uninvolved third party strangers to the outstanding charges . . . . They leased their aircraft . . . to be flown using the air navigation services provided by Nav Canada, and to use the airport facilities and services provided by the Airport Authorities. The outstanding charges are not general debts of the Canada 3000 Companies, but those debts incurred by the use of the Lessors’ aircraft just as the Lessors contemplated and expressly authorized”. There are several ancillary points which may be summarized as follows: There is simply a power of detention, and no implied power of sale. The right to detain is not automatic, but must be authorized by court order. The order is discretionary and the judge making the order may impose restrictions to address fairness concerns, provided however that she may not do anything which would deprive the authorities of their right to be paid in full. The order affects the aircraft and not persons, therefore each and every aircraft may potentially be detained and held until all charges owed by the relevant operator have been paid. Once an order is made, it will apply to the air frame and all essential aircraft equipment. Lessors of parts, engines for example, will not be entitled to remove the parts over which they have an interest. This decision is likely to have repercussions for the negotiation of aircraft leases. The importance of security deposits, whereby lessors seek to insulate themselves from the consequences of lessee default, may increase and lessors are likely to seek other ways to secure themselves from the consequences of these statutory encroachments on their title and interest. Page 15 June 2006

OTTAWA REPORT June 2006

Transport Minister Introduced a New Draft of the Canada Airports Act

Sam Barone Regional Vice President Ottawa, ON

The On 15 June 2006, The Minister of Transport, Infrastructure and Communities introduced Bill 39:C-20, a new draft of the Canada Airports Act. The new act comprises 253 sections, significantly longer than the pervious draft (37:C-27, 210 sections). It is now approaching the length of the Canada Transportation Act, which requires only 278 sections to govern all modes of transport, and is almost double the size of the Competition Act (128 sections) which covers all sectors of the Canadian economy. The bill contains highly detailed regulations of corporate governance of an airport, for example specifying in law the percent of directors required to call a special meeting of the board (section 117), specifying in law whether a board member may participate in a board meeting by telephone (section 121), specifying in law the minimum size of board committee, specifying in law, whether the chair of an audit committee may call a meeting, etc.

New Aircraft Emergency Response Requirements Announced On 18 May, the Minister of Transport, Infrastructure and Communities announced new aircraft emergency response requirements for Canadian airports. The amendments to the Canadian Aviation Regulations (CARs) will require on-site aircraft rescue and firefighting at airports serving more than 180,000 passengers per year. All airports, regardless of size, are still required to prepare and submit for approval an emergency response plan. The Airports Capital Assistance Program has been modified to provide funding to assist all qualifying airports with the implementation.

Federal Government Commits to New Transportation Actions The Minister of Transport, Infrastructure and Communities announced that in the coming months, he will be advancing practical, specific measures in the areas of sustainable infrastructure, transportation gateways and trade corridors, and transportation security including public transit. The goal is to build on the vitality of Canadian cities and communities, and use the transportation system to make Canada more competitive in the global economy. In addition to the $16.5 billion of federal investment in infrastructure over the next four years, the government will use legislative frameworks such as a Bill to amend the Canada Transportation Act, to ensure an efficient and effective transportation network is available to Canadians.

NAV Canada Reached Tentative Agreement with CAW Local NAV Canada has reached a tentative agreement with Canadian Auto Workers (CAW), Local 1016. The agreement affects NAV Canada employees who provide flight planning services, simulation support for air traffic control training, aeronautical information services and design, and flight data analysis for billing and publications support.

Supreme Court Allows NAV Canada to Seize Aircraft for Unpaid Services The Supreme Court of Canada has ruled that NAV Canada has the right to seize aircraft for unpaid services. The right extends to those who own, lease or finance aircraft operated by air carriers. NAV Canada can now recover the $8 million of unpaid customer service charges relating to the bankruptcies of Inter-Canadian in 1999 and Canada 3000 in 2002 (see Chouest’s article on p. 14).

Page 16 June 2006

WASHINGTON REPORT June 2006

House Committee Approves $15 Billion for FAA The House Transportation Appropriations Committee approved a $15.3 billion budget for the Federal Aviation Administration (FAA) for the 2007 fiscal year. The approved budget is $1.6 billion more than the Administration’s requests. The three main components of the FAA funding – airport, facilities and equipment, and operations will all receive more funding than the previous year’s level. The Essential Air Service program will receive $117 million. The FAA funding would come from the aviation trust fund and the general fund. No restriction is placed on the FAA Telecommunications Infrastructure program.

Jon Ash President InterVISTAS-ga2 Consulting Inc. Washington, D.C.

Congress Does Not Block Foreign Ownership NPRM Both the House and Senate chose not to proceed with an appropriations bill amendment which would have forced a four month delay in the DoT adopting its Supplemental Notice of Proposed Rule Making, to liberalise interpretation of the foreign ownership limits on airlines. The SNPRM would allow foreign investors more management freedom of certain airline decisions such as marketing, while reserving critical decisions around safety and security to US citizens. Finalising the SNPRM is viewed as a requirement for EU approval of a proposed US-EU phase 1 open skies treaty.

Ecuador Elevated to Category 1 Status After a reassessment of Ecuador’s civil aviation authority, the Federal Aviation Administration (FAA) has elevated Ecuador’s safety rating to Category 1 from Category 2 status. The FAA in 1995 gave Ecuador a Category 2 safety rating, which restricted Ecuadorian flights to the U.S. This means Ecuador can now oversee air carriers in accordance with International Civil Aviation Organization (ICAO) safety standards. Venezuela has also been elevated to Category 1 status in May 2006.

New Regulations to Strengthen Air Cargo Security The Transportation Security Administration (TSA) issued rules to strengthen air cargo security. The new measures, to be phased in over the next six months, require background checks and enhanced security training for freight forwarder employees and extend security areas of airports to include ramps and cargo facilities.

Complaints on U.S. Airlines on the Rise According to the U.S. Department of Transport Air Travel Consumer Report for March, the number of consumer complaints had increased between 2003 and 2005. Consumer complaints include airline service, disability-related issues and discrimination (other than disability). From 2003 to 2005, ontime arrival rate dropped from 82% to 77% and cancellation rate increased from 1.8% to 1.9%. The number of mishandled baggage per 1,000 passengers also increased by 44%.

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INTERVISTAS NEWS June 2006

New Publications Available at www.intervistas.com InterVISTAS recently released a study entitled “The Economic Impact of Air Service Liberalisation.” The study predicts that liberalising a further 320 air routes currently not operating in an “Open Skies” environment would generate traffic growth of almost 63%. This study was jointly sponsored by Boeing, the Pacific Asia Travel Association, and other global travel organisations. The presentation titled, “Overcoming Turbulence: Recovery of the Airline Industry”, presented by Dr. Tretheway, Executive Vice President, at the Airline Finance Conference in Toronto on 6 June 2006, is now available.

InterVISTAS Upcoming Speaking Engagements •

Mr. John Weatherill, Director, Airline Planning World Low Cost Airline Congress (Americas): Miami, FL – 26 June 2006 Mr. Weatherill will lead a workshop for airline planners and airport marketing personnel. The workshop will educate participants on how to evaluate and structure incentive programs to ensure the objectives of both airports and airlines are met.

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Mr. Martin Copeland, Senior Vice President, Airline Marketing & Planning World Low Cost Airline Congress (Americas): Miami, FL – 27 June 2006 Mr. Copeland will participate in a panel discussion with low cost airline route planning personnel.

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Dr. Mike Tretheway, Executive Vice President Financing Aviation Infrastructure: Toronto, ON – 17 October 2006 Dr. Tretheway will be the keynote speaker delivering the luncheon presentation titled, “The Role of Government Policy in Airport Finance.”

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Mr. Solomon Wong, Vice President, Security & Planning AVSEC: Sydney, Australia – 17-19 October 2006 Mr. Wong will be delivering a presentation titled, “Border and Aviation Security: The Complexity of the Challenge.”

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

Page 18 June 2006