IVC MARKET INTELLIGENCE REPORT
AIR CANADA UPDATE July 2004
On 1 April 2003, Air Canada filed for bankruptcy protection under the Companies’ Creditor Arrangements Act with the Ontario Superior Court. In the October 2003 Market Intelligence Report, an update of the events in the first six months of the airline’s restructuring was provided. This month, we provide a summary of what has happened since then.
Equity Partner
Geneva Tretheway Project Analyst
Air Canada’s court-ordered stay period has been extended four times since 31 December 2003. The airline is currently working towards exiting CCAA protection by its 30 September 2004 deadline. Since the last update, Air Canada had approved and secured $650 million in equity financing from Victor Li’s Trinity Time Investments in December 2003. Cerebus Capital Management, the other investment candidate, had submitted an unsolicited revised offer following the selection, which was reconsidered along with a revised bid from Li’s company. Trinity was reconfirmed as the airline’s equity partner just before Christmas.
Labour In February, however, the Office of the Superintendent of Financial Institutions (OSFI), representing airline employee and retiree pension interests, rejected Trinity’s attempt to renegotiate the company’s pension plans. Trinity decided to pull out of its investment deal after the 30 April 2004 deadline for labour concessions passed with no resolution. Air Canada had promised to leave its defined benefit plans alone in exchange for labour and wage concessions in 2003, but Trinity’s plan required that the pensions be switched to defined contribution plans. After Trinity’s departure, a pension agreement was reached with the OSFI that would have the company pay off its pension deficit over 10 years as opposed to the five year maximum set by the 1985 Pension Benefits Standards Act. The plan also allows current employees to choose between defined benefit and defined contribution plans. New employees will automatically be enrolled in the defined contribution plan. To meet the required $1.1 billion in concessions agreed to last year, mainline unions completed their share of the $200 million in remaining labour concessions in May and June 2004 required by the exit financing agreements set out by Deutsche Bank Group and GE Capital Aviation Services (GECAS). Air Canada Jazz just recently completed its ratifications, achieving its share of the required concessions. After having missed the 9 July deadline, the subsidiary had been threatened with being left out of the restructuring process if it did not meet its concession targets by 16 July 2004 and would have likely resulted in liquidation.
Fleet Meanwhile, Air Canada renegotiated its fleet financing with GECAS and its other creditors. The airline also negotiated a regional jet order with Bombardier and Embraer and reconfigured its fleet plan through 2007. Air Canada mainline will streamline its fleet composition and reduce its size from 213 to 183 aircraft by 2006, followed by an increase to just over 200 in 2007. Both the 747 and 737 types will be phased out, along with some older regional jets. (See “Air Canada Fleet Changes” in this issue.)
Financing and Restructuring The airline pursued other equity financing avenues through May and June, securing $850 million in exit financing from Deutsche Bank (up from the original $450 million) and an extension of the $535 million deal with GECAS to 30 September, with an additional $950 million in regional jet financing. With the increase in Deutsche Bank funding, the airline no longer needed a large equity partner, but still looked for a smaller investment. Air Canada secured a $250 million equity deal (convertible to Page 2 July 2004
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AIR CANADA UPDATE – CON’ T 9.2% of the airline’s common equity) from Cerebus on 23 June and this was approved by the court on 2 July, bringing its total equity capital to $1.1 billion. The Ontario Supreme Court, overseeing the restructuring process, has set a Creditors’ Meeting for 17 August for creditors to vote on Air Canada’s new restructuring plan. The plan includes postponing wage negotiations until 2006 at the earliest and turning its Technical Services, Cargo, and Groundhandling operations into separate businesses or limited partnerships. Under the revised agreement, the carrier’s creditors will receive between 6.17¢ and 9.25¢ for each dollar of proven claim. If the restructuring plan is approved, creditors will be eligible to buy rights shares at $20 each, part of the $850 million rights offering backed by the Deutsche Bank Group. Air Canada estimates that the total amount of proven claims by unsecured creditors is between $10 billion to $15 billion. The airline plans to reach its goal of exiting from CCAA protection by 30 September 2004.
Page 3 July 2004
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U.S. GAO RELEASES REPORT ON COMMERCIAL AVIATION 14 July 2004
In June 2004, the U.S. General Accounting Office (GAO) issued a briefing that examined the financial state of the commercial aviation industry over the last several years. This column outlines some of the key findings of the report.1
Eugene Chu Project Analyst
The U.S. airline industry, and in particular the full service legacy carriers have been faced with a series of challenges over the last several years. 2 Domestically, the rise of low-cost carriers, 3 along with the growth of the Internet as a tool to sell and distribute tickets, has reshaped the industry and put downward pressure on fares, decreasing yields. In addition, a series of external events, including the outbreak of SARS, the terrorist attacks of September 11th, the war in Iraq, and economic downturn all had significant impacts on the demand for air travel.
Two Different Approaches. The U.S. GAO reports that during this time, the two carrier groups
adopted very different strategies. The full service legacy carriers began to cut costs and reduce capacity, while the low cost carriers continued to expand and add services. Between 1 October 2001 (immediately after September 11th) and the end of 2003, legacy carriers collectively reduced operating costs by approximately 15%, or US$13 billion. The largest reductions came from labour, with a decrease of US$5.5 billion in costs. Legacy carriers also shifted traffic to regional carriers and grounded aircraft, reducing seat capacity by almost 13%. In contrast, the low cost carriers as a group increased seat capacity by 26%, and operating expenses by almost 10% (over US$1 billion) as they expanded operations and added services. However, in light of the expansion, the low cost carriers still maintained a significant unit cost advantage over legacy carriers.
Financial Troubles. Between 2000 and 2003, GAO reports that the legacy carriers as a group
have lost US$24 billion, while the low cost carriers made US$1.3 billion in profits over the same time period. However, the increase in competition has limited revenue growth for both groups of carriers. Over the last three years, yield has decreased by 19% for both carrier groups. The legacy carriers are also faced with large debt and pension obligations over the next several years. In 2002, two major legacy carriers, United Airlines and U.S. Airways entered Chapter 11 bankruptcy protection. U.S. Airways has since emerged from bankruptcy protection, but another major U.S. carrier, Delta Airlines, has warned that it may have to file for Chapter 11 bankruptcy protection.
Better Times Ahead? Although recent data indicates that passenger traffic is recovering, low cost
carriers continue to maintain a unit cost advantage over the legacy carriers. In the first quarter of 2004, low cost carriers reported an average unit cost of US$7.7 cents/ASM, compared to an average unit cost of US$11.6 cents/ASM 4 for legacy carriers, a difference of nearly 51%. It is clear that legacy carriers will have to improve their business operations to return to profitability, meanwhile low cost carriers will continue to grow. Commercial Aviation: Despite Industry Turmoil, Low-Cost Airlines are Growing and Profitable (3 June 2004). Full service legacy carriers refer to Alaska, American, Continental, Delta, Northwest, United, and U.S. Airways. 3 Low cost carriers include AirTran, America West, ATA, Frontier, JetBlue, Southwest, and Spirit. 4 From Aviation Daily-1 July 2004, note that Alaska and ATA data are not included in this data. Page 4 InterVISTAS Consulting Inc. Market Intelligence Report July 2004 ŠInterVISTAS Consulting Inc. 1 2
AIR CANADA FLEET CHANGES 13 July 2004
Smaller Aircraft are the Focus for the Future On 30 June 2004, Air Canada submitted to the Ontario Superior Court its plan of reorganisation, compromise, and arrangement for the consideration and approval of its unsecured creditors. Among the elements of its restructuring plan, the document includes a detailed fleet forecast for the period up to and including 2007. Air Canada states in the document that its product strategy going forward will be to reduce capacity while maintaining frequency on domestic and transborder routes. As a result, AC’s fleet plan focuses on reducing its fleet of larger aircraft in favour of smaller regional jets. Fleet Plan Summary
John Weatherill Manager, Airline Planning
Between now and 2007, Air Canada/Jazz will increase their overall operating fleet from 304 to 325 aircraft. This includes a decrease in mainline jets from 213 to 200, and an increase in Jazz aircraft from 91 to 125. After an initial reduction of a dozen aircraft, the combined fleet will grow by 10-12 planes annually for the remainder of the period. Operating Fleet Air Canada Airbus A340 Airbus A330 Boeing 747-400 Boeing 767-300 Boeing 767-200 Airbus A321 Airbus A320 Airbus A319 Boeing 737-200 CRJ-200 EMB-190 Mainline Subtotal Jazz CRJ-200 CRJ-705 BAe-146 Dash 8-300 Dash 8-100 Jazz Subtotal Total
Mar-04
Dec-04
Dec-05
Dec-06
Dec-07
9 8 3 30 13 13 52 48 12 25 0 213
11 8 0 30 12 13 52 48 0 25 0 199
11 8 0 30 10 13 49 48 0 22 2 193
11 8 0 29 9 13 47 46 0 0 20 183
11 8 0 29 7 13 42 46 0 0 44 200
10 0 10 26 45 91 304
22 0 3 26 42 93 292
28 15 0 26 42 111 304
50 15 0 26 40 131 314
50 15 0 26 34 125 325
Air Canada’s widebody fleet will decrease by eight aircraft as the 747-400 Combis are retired and approximately half of the 767-200s are removed. These are among the oldest long-haul aircraft in AC’s fleet. AC will reduce its narrowbody fleet by 24 aircraft in the coming years. This includes the 12 737-200s that will be retired as ZIP operations are folded back into the mainline carrier, as well as 12 A319/A320 family aircraft. Fleet reductions are also planned for the turboprop aircraft in operation by Jazz. While the 26 Dash 8-300s will remain in service, 11 of Jazz’s 45 Dash 8-100s will be removed by 2007. Page 5 July 2004
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AIR CANADA FLEET CHANGES CON’ T
Unlike the other fleet types, Air Canada’s regional jet fleet will increase by 64 aircraft over the next four years, even after accounting for the removal of the 10 remaining BAe-146s. Following the delivery of two A340-500 aircraft this summer, all of Air Canada’s planned fleet growth will come from regional jets. Regional Jets In December 2003, Air Canada announced an order for 90 regional jet aircraft, including 45 Embraer 190s (93 seats), 30 CRJ-705s (74 seats), and 15 CRJ-200s (50 seats). At the time of the announcement, AC indicated that the exact allocation of aircraft would be subject to change. As the table above displays, only 15 CRJ-705s are accounted for in the new fleet plan. While negotiating cost concessions with ACPA and ALPA, Air Canada promised regional jet flying to both Jazz and mainline pilots. The matter was sent to arbitration and in March 2004, an arbitrator ruled that up to 65 regional jets could be allocated to the Jazz fleet, with the remaining RJs to be flown by mainline pilots. By 2006, Jazz will be operating the maximum 65 regional jets.1 Note that some media have incorrectly reported that Air Canada will be using the Embraer 190s to replace CRJ-200s; in fact, AC’s current CRJs will be transferred to Jazz beginning in 2005. The Air Canada fleet plan also indicates that an additional 15 regional aircraft will be added to the mainline fleet, on a basis to be determined in the future. Observations Clearly, Air Canada’s fleet strategy reflects the erosion of AC’s market share in the domestic sector. The plan to maintain frequency using smaller aircraft signals an expectation that competitors will continue to win passengers from AC. The plan itself is similar to the one produced by Air Canada in 2003, as the focus remains on short haul aircraft. Air Canada officials have consistently stated a restructuring strategy which concentrates increasingly on international services, with little or no growth domestically. With almost 15% of AC’s long haul aircraft to be removed from the fleet, this international strategy will seemingly be centred on transborder markets.
All new CRJ-200 and CRJ-705 aircraft will be operated by Jazz; all new EMB-190 jets will be operated by AC mainline. Page 6 InterVISTAS Consulting Inc. Market Intelligence Report July 2004 ©InterVISTAS Consulting Inc. 1
AIRLINE DATA – CANADA Traffic and Load Factors on Canada’s Major Air Carriers - June 2004 Passenger Traffic
Air Carrier
OTHER CARRIERS:
Zip:
Capacity
Load Factor
Available Seat Kilometres
% Change over 2003
% Change from 2002
% Change over 2003
% Change from 2002
Change over 2003
Change from 2002
+13.6%
-6.3%
+9.7%
-9.2%
+2.7 pts (to 79.4%)
+2.5 pts
Domestic (Mainline)
+7.6%
-4.3%
-0.3%
-11.0%
+5.7 pts
+5.4 pts
Jazz
+4.7%
+8.3%
-0.4%
-9.4%
+3.3 pts
+11.1 pts
International & Charter
+16.6%
-7.2%
+15.3%
-8.3%
+0.9 pts
+1.0 pts
WestJet
+25.0%
+68.9%
+24.3%
+78.5%
Jetsgo
+73.4%
N/A
+72.4%
N/A
Air Canada 1
LOAD FACTORS Jetsgo:
Revenue Passenger Kilometres
67% (June) not reported
Analysis: §
§
§
Air Canada’s domestic traffic continued to post year-to-year increases in June. Combined with a decrease in capacity, this resulted in a domestic load factor improvement of nearly six points. In June 2004, Air Canada recorded double-digit year-to-year increases in both international traffic and capacity. This reflects the ongoing recovery in international traffic, and the carrier’s expansion of its Latin America services. Reversing an earlier trend, WestJet’s traffic growth was greater than the carrier’s addition of capacity in June. As a result, the monthly load factor posted a year-to-year increase. Although WestJet’s increase in traffic and capacity continue to outpace Air Canada’s growth, the increase is well below the growth rates the carrier recorded in 2002.
+0.4 pts (to 71.9%) +0.4 pts (to 67.4%)
-4.0 pts N/A
Air Canada Domestic Mainline 20% 15% 10% 5% 0% -5% -10% -15%
Jazz data is not included in this graph
Jun03
Jul
Aug Sep
Oct
Dom RPK
Nov
Dec Jan- Feb 04
Mar April May Jun
Dom ASK
Air Canada International International 40% 30% 20% 10% 0% -10% -20% -30%
Jun03
Jul Aug
Sep
Oct
Nov
Int'l RPK
Dec Jan- Feb 04
Mar April May
Jun
Mar April May
Jun
Int'l ASK
WestJet 60% 50% 40% 30% 20% 10% 0% Jun03
Jul
Aug Sep
Oct Nov Dec
RPK
1Air
Jan- Feb 04
ASK
Canada Mainline consists of all Air Canada with the exception of Jazz.
Page 7 July 2004
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AIRLINE DATA – U.S. U.S. Airlines Release June 2004 Traffic Figures Traffic Data – June 2004 Airline
1
1
2
2
Notes:
1. 2.
Load Factor
Traffic ( RPMs – millions)
(ASMs – millions)
Capacity
79.0 %
11,748
14,866
á 0.2 pts
á 8.2%
á 7.9%
72.4%
569
786
á 4.2pts
á 33.6%
á 25.9%
80.9 %
1,207
1,492
â 0.7 pts
á 4.6%
á 5.5%
82.4%
6,039
7,326
á 1.4 pts
á 12.2%
á 10.2%
81.9%
10,267
12,540
á 1.4 pts
á 16.6%
á 14.6%
85.5%
1,368
1,601
â 1.5 pts
á 41.1%
á 43.6%
86.4%
6,735
7,799
á 4.6 pts
á 12.7%
á 6.7%
78.8%
4,956
6,286
á 4.2 pts
á 11.9%
á 5.9%
86.0%
10,615
12,338
á 4.0 pts
á 16.9%
á 11.4%
81.6%
3,731
4,574
á 3.0 pts
á 5.4%
á 1.5%
Mainline Load factor includes scheduled service only
Sources: Carrier traffic reports.
Page 8 July 2004
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Summary of Total Year-Over-Year Passenger Traffic Performance at Selected Canadian Airports
2004
Edmonton
Ottawa
Winnipeg
Halifax
Victoria
Kelowna
Saskatoon
Regina
-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%
-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%
-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%
-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%
-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%
+0.4% +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%
-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%
-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% +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 +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%
+20.4%
+26.2%
N/A
+7.5%
+7.6%
+8.8%
+19.4%
+8.0%
-1.3%
-0.3%
-5.5%
+15.2%
Vancouver
May June 2nd Quarter July August September 3rd Quarter October November December 4th Quarter Full Year January February March 1st Quarter April
-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%
May
+30.6%
CANADIAN A IRPORTS
2003
Calgary
-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%
MontréalTrudeau -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%
Toronto
Sources: Airport passenger statistics
Page 9 July 2004
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NEWS ARTICLES AIR CANADA UPDATE AIR CANADA SECURES INVESTMENT, LABOUR RATIFICATIONS; RELEASES RESTRUCTURING PLAN FUEL PRICES 13 July 2004 SPOT OIL PRICES CONTINUE TO INCREASE FUTURES PRICES INCREASE Crude Oil Prices: Spot – US $39.44 (up 2.5% from June) Futures •
6 month - $38.71 (November 2004 delivery)
•
12 month - $36.13 (June 2005 delivery)
•
2 year - $33.67 (June 2006 delivery)
•
5 year - $29.86 (December 2009 delivery)
Air Canada has secured a $250 million investment deal with Cerebus Capital Management, approved by the Court on 2 July. Mainline and Jazz labour agreement ratifications have been completed, satisfying the labour cost realignment requirement of the Deutsche Bank Standby Agreement and the GECAS Global Restructuring Agreement. The airline also released its restructuring plan on 30 June, which will be voted on by its creditors on 17 August. For more details, see “Air Canada Restructuring Update” and “Air Canada Fleet Changes” in this month’s issue.
AIR CANADA FLIES TO BOGOTÁ AND CARACAS A three times weekly non-stop flight from Toronto to Bogotá, Colombia began on 30 June 2004, followed by a three times weekly non-stop Toronto – Caracas, Venezuela service on 1 July. Air Canada will also add a similar service to Lima, Peru starting 1 November 2004.
FIRST A340-500 IS DELIVERED TO AIR CANADA On 27 June 2004, Air Canada became the first North American operator of the Airbus 340-500 when it received its first of two A340-500s to be delivered this summer. The aircraft has 267 seats (42J, 225Y) and a range of 8,976 mi (14,446 km), capable of flying Toronto – Hong Kong non-stop. The second plane will arrive in July.
Page 10 July 2004
E-TRAVEL OF AMADEUS HIRED BY AIR CANADA Air Canada has hired Massachusetts-based eTravel, a unit of Amadeus North America LLC to revamp its consumer, travel agents and vacations websites. Until now, Air Canada has been managing its websites internally, using IBM technology. The new websites are scheduled to be online this fall.
OTHER CANADIAN AIRLINES JETSGO EXPANDS ATLANTIC CANADA SERVICES Starting 15 July 2004, Jetsgo will fly from Toronto to Moncton, NB. This non-stop service operated Monday – Friday is the carrier’s first year-round service to New Brunswick. Jetsgo’s summer services to Fredericton and Saint John began the last week of June.
JETSGO EXPANDS WESTERN CANADA SERVICES Starting 7 September, Jetsgo will launch services between Vancouver and Edmonton three times per day. The carrier’s services between Vancouver and Toronto will be increased to five flights per day, including two via Edmonton. In addition, Jetsgo will be expanding services to New York with the introduction of two daily flights between Toronto and LaGuardia beginning 20 September. One additional daily flight between Toronto and Newark will also be added, for a total of three daily flights on the route. With the new services, Jetsgo will be offering five daily flights to New York. Jetsgo’s Toronto-Los Angeles service, which starts 30 July as a three times weekly service, will have a Sunday flight added 12 September.
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NEWS ARTICLES OTHER CANADIAN AIRLINES – CON’T
WESTJET ANNOUNCES U.S. FLIGHT SCHEDULE
connections” via St. John’s have been built into the schedules for Atlantic Canada customers. Newfoundland CanJet passengers must connect twice, once at Halifax and also at a second Canadian point.
WestJet will begin its first scheduled flights to the U.S. on 20 September 2004 (WestJet had previously offered charter flights to the U.S.) WestJet will start with twelve weekly non-stop flights from Toronto – New York, daily Calgary – Los Angeles and Toronto – Los Angeles flights on 20 Sept. Additional flights will be added between October and January to San Francisco, Phoenix, Orlando, Fort Lauderdale, Tampa, and Palm Springs. To promote its new U.S. services and sell seats, WestJet is lowering its introductory fares. Oneway “Oh-My-Gosh” fares will range from $49 for New York flights to $59 on Tampa and Palm Springs flights, before taxes and surcharges. Regular one-way fares for these cities are $69, $117, and $89 respectively.
U.S. AND INTERNATIONAL AIRLINES
CANADA 3000 TO BE REINCARNATED AS CHARTER AIRLINE
JETBLUE ANNOUNCES PROSPECTIVE CANADIAN CITIES
On 1 July, an Ontario entrepreneur announced his plan to launch a charter airline bearing the name Canada 3000 by December 2004. The original Canada 3000 went bankrupt in November 2001, stranding thousands of travellers when its planes stopped flying.
U.S. low-cost carrier JetBlue is looking at 38 cities to potentially add to its growing route network. The airline announced that it is looking at new services to coincide with its Airbus and Embraer aircraft deliveries scheduled for 2005. Of the 38 cities JetBlue is interested in, five are Canadian: Vancouver, Toronto, Calgary, Montréal, and Halifax. JetBlue is scheduled to take delivery of 100 EMB-190 aircraft by 2011, the first five of which will be delivered by 2005. JetBlue also added 30 A320s to its Airbus order. The carrier currently has 53 A320s in its fleet.
CANJET STARTS FALL AND WINTER FLORIDA SCHEDULES EARLY Due to popular demand, CanJet will launch its Fall and Winter services to Florida three weeks earlier than in 2003. Effective 9 October 2004 through 29 May 2005, flights to Orlando, St. Petersburg-Clearwater, West Palm Beach, and Sarasota Bradenton will depart from CanJet’s major eastern Canada airports. “Two-way
Page 11 July 2004
UNITED AIRLINES AID REQUEST DENIED UAL Corp.’s request for US$1.1 billion in federal loan guarantees was rejected by an Air Transportation Stabilisation Board (ATSB) panel. The airline, currently under Chapter 11 protection, had amended its previously rejected 1.6 billion application. The ATSB stated that it will not accept any further applications from United. The carrier will now have to find more ways to cut costs from its expenses and through its employees in order for it to exit bankruptcy protection.
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NEWS ARTICLES U.S. AND INTERNATIONAL AIRLINES – CONT’D INDEPENDENCE AIR LAUNCHES SYRACUSE, NASHVILLE, AND JACKSONVILLE SERVICES Independence Air launched flights on 1 July 2004 from Washington Dulles International Airport to Syracuse (8/day), Nashville (6/day), and Jacksonville (6/day) international airports. Each route, also served by United Airlines, will see its capacity more than double with Independence Air’s new services.
ATA PLANS TO BEGIN EUROPE FLIGHTS Low-cost carrier ATA (formerly American Trans Air) plans to start offering flights to European destinations as early as next year. The airline wants to fly to two or three European cities and is negotiating with CologneBonn Airport in Germany. ATA said CologneBonn was high on its list of potential destinations because of its success in low-cost travel.
VIRGIN AMERICA PLACES AIRBUS ORDER Virgin America, the latest branch of Sir Richard Branson’s air product offering, has placed an order for 18 Airbus aircraft, comprising 11 A319s and 7 A320s to be delivered in 2005. Additionally, the airline will lease 15 A320 family aircraft from GE Capital Aviation Services (GECAS) and up to 72 options with EADS’ Airbus affiliate.
JAPAN AIR INCREASES BOMBARDIER ORDER Japan Air Commuter has ordered four more Q400 high-speed turboprop aircraft, bringing its firm orders to nine of the 74-seat Bombardier planes.
Page 12 July 2004
The deal is speculated to be worth around US$110 million with an option for one more.
EMIRATES LAUNCHES ‘DOUBLE INAUGURAL’ SERVICE Emirates Airlines launched its Dubai-Melbourne-Christchurch flights at the beginning of July. The “double inaugural” flight marks the start of its non-stop Melbourne service and its first flight to Christchurch. Emirates is flying A340-500s on the route three times per week, doubling to six per week on 16 August.
SINGAPORE AIRLINES BREAKS FLIGHT TIME RECORDS - AGAIN With the inauguration of its non-stop roundtrip Singapore-New York service, Singapore Airlines broke the record for the longest commercial air service – for the second time in the past year. The 18-hour 18-minute flight over 16,600 km of land and water on an A340-500 beat Singapore Airlines’ previous record of 14 hours and 42 minutes on its 14,093 km Singapore-Los Angeles service on 3 February 2004.
CHINA EASTERN EXPANDS NORTH AMERICAN NETWORK WITH VANCOUVER SERVICES Shanghai-based China Eastern Airlines launched flights to Vancouver, its second North American destination. The flights operate three times per week on A340-300 aircraft. The airline says it is planning to launch more North American destinations and will expand its services into Europe with winter flights into Moscow this year. The carrier is currently in talks with Virgin Atlantic on codesharing flights from China to the United Kingdom.
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NEWS ARTICLES U.S. AND INTERNATIONAL AIRLINES – CONT’D HONG KONG AND FRANCE SIGN INTERMODAL SERVICE DEAL Hong Kong has signed an inter-modal code-sharing deal with France that allows Cathay Pacific to put its airline codes on France’s SNCF highspeed train service to ten major cities. The agreement also allows airlines in both countries to codeshare on flights to Papeete, Tahiti; and Noumea, New Caledonia.
AIRCRAFT MANUFACTURERS BOEING DELIVERS 75 PLANES IN Q2 Boeing delivered 75 commercial airplanes during the second quarter, including 50 737s. Yearto-date, Boeing has delivered 151 planes, 105 of which were 737s. The airline expects to deliver 285 planes by year-end.
BOEING ANNOUNCES DEALS FOR 10 MORE 7E7S Boeing announced that two European carriers, including Britain’s First Choice Airways and Italian charter carrier Blue Panorama, have placed orders for 10 7E7s. First Choice signed a letter of intent for six jets, with options for three more. Blue Panorama’s order includes four jets. Previously All Nippon Airways and Air New Zealand had announced orders for 50, and two 7E7s respectively. The new deals puts the current order at 62 jets. The 7E7 is scheduled to start commercial service in 2008.
FAIRCHILD DORNIER FILES FOR BANKRUPTCY Fairchild Dornier Aero Industries has filed for Chapter 11-like insolvency with the district court of Weilheim, Germany after two years of trying to keep its 728 regional jet program afloat. The company is a unit of D’Long International Strategic Investments, a financially troubled Chinese industrial conglomerate. The original Fairchild Dornier filed for bankruptcy in April Page 13 July 2004
2002 after investors Clayton, Dubilier & Rice decided against a second round of financing. Fairchild Dornier Aero Industries had 110 firm orders from Lufthansa and GE Capital Aviation Services (GECAS). The test program for the 728-jet prototype was due to begin this fall after a two-year delay.
CARGO CARGO CAPACITY INCREASE BIGGER THAN TRAFFIC INCREASE IN MAY International freight traffic was up 19% in May, according to the International Air Transport Association (IATA). The Middle East and AsiaPacific regions continued to show the most growth with 33% and 20% increases in freight tonne kilometres respectively. However, overall available tonne kilometres were up 24% in May.
ATA MEMBERS TRAFFIC UP IN MAY Air Transport Association (ATA) members transported 2.1 million revenue ton miles (RTMs) in May, up 7.5% over 2003. Freight and express RTMs increased while mail RTMs continued to drop, currently comprising only 5% of total cargo RTMs transported.
FEDEX REPORTS 47% Q4 INCREASE FedEx Corp reported a net income of US$412 million for the fourth quarter of its fiscal year. Revenues were up 21% over Q4 2003 at $7.0 billion from $5.8 billion. The FedEx Express segment reported an operating income of $407 million, up 38% from 2003’s $295 million.
FEDEX OPENS NEW MIAMI HUB FedEx opened its new $50 million Miami Gateway Hub at Miami International Airport on 9 July 2004. The 145,000 sq. ft facility will process 40,000 packages a day and will enhance Fed Ex’s Latin America and Caribbean services.
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NEWS ARTICLES CARGO – CON’T DHL RELOCATES TO NEW CANADIAN DISTRIBUTION CENTRE DHL Danzas Air & Ocean, the logistics division of DHL, has relocated its Canadian warehousing operations, regional management, sales and customs brokerage and other employees to its new 89,721 sq. ft. facility in Mississauga, Ontario. The new facility features 12 truck-level cargo bays and 30 feet of maximum vertical capacity for stacking.
DHL ANNOUNCES PLAN FOR US$1.2 BILLION EXPANSION DHL said it plans to invest US$1.2 billion to expand and upgrade its package-delivery operations in the U.S. by building seven new package sorting centres by the end of the year, and another in 2005. The company also said it would consolidate some air delivery operations by moving some jobs from Cincinnati/Northern Kentucky International Airport to its Wilmington, OH Air Park. Many of the Cincinnati employees will be transferred to the workforce of ABX Air Inc., which operates the airport.
POLAR MOVES EUROPEAN HUB TO SCHIPHOL Polar Air Cargo will transfer its European cargo hub from Liége, Belgium to Amsterdam Schiphol this fall. Schiphol services will increase from 3 to 16 weekly scheduled intercontinental flights. Construction of a semipermanent facility to house Polar’s transhipment activities is expected to begin later in the year.
WORLD AIRWAYS ADDS TWO CARGO JETS TO FLEET World Airways has signed a letter of intent to lease two MD-11F aircraft to boost capacity in its international cargo fleet. The aircraft are scheduled to arrive in the spring of 2005, bringing the carrier’s MD-11 fleet to five cargo and eight passenger aircraft. Page 14 July 2004
VOLGA-DNEPR SECURES LOAN FOR RUSSIA’S FIRST SCHEDULED CARGO AIRLINE Volga-Dnepr Group has secured a US$14 million loan from HSBC Bank to finance the fleet expansion of its new scheduled cargo carrier, AirBridge Cargo. HSBC has also provided an additional $15 million short-term credit to increase VolgaDnepr Group’s working capital. The new airline will fly both Russian and Western aircraft and is already operating its first B747-200.
NEW AAT CARGO TERMINAL TO TRIPLE HONG KONG INTERNATIONAL HANDLING CAPACITY Asia Airfreight Terminal (AAT), a Hong Kong based handler, has announced that it will invest HK$1.75 billion (US$224 million) on a new 117,500m 2 air cargo terminal at the Hong Kong International Airport. The new terminal is expected to be completed by December 2006, adding an annual capacity of 910,000 tonnes to AAT’s current 458,600 tonnes.
REGULATORY/GOVERNMENT EUROPEAN PARLIAMENT TO ASK FOR ANNULMENT OF U.S.-E.U. PNR AGREEMENT European Parliament President Pat Cox has asked the E.U. Court of Justice to annul the Passenger Name Record (PNR) agreement recently signed between the U.S. and E.U. A law requiring all foreign airlines entering, departing or crossing U.S. airspace to provide access to their PNR data was put in place following the 9/11 terrorist attacks. Due to European concerns that it violates E.U. privacy protection laws, the implementation of the law was delayed until an agreement could be reached between the U.S. government and European parliament.
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NEWS ARTICLES CARGO – CON’T CHINA AND U.S. SIGN BILATERAL AGREEMENT The agreement between China and the U.S., which extends through 2010, will open up new routes and allow 195 more weekly flights for each nation over six years. The agreement provides for 111 of the flights to go to cargo carriers and will allow U.S. cargo carriers to establish hubs in China, once specific criteria are met. The US DoT will be responsible for allocating the flights beginning in August.
FY 2005 DHS SPENDING BILL APPROVED BY U.S. HOUSE OF REPRESENTATIVES The U.S. House of Representatives approved its version of the US$32 billion Department of Homeland Security (DHS) spending bill for 2005. The bill includes $269 million for explosives detection system (EDS) installations and ensures that a portion of this money goes to EDS installation at medium and small airports. The bill continues the requirement that the TSA pay for space it uses at airports outside of the necessary security checkpoints. $118 million is included for air cargo security.
FAA HEADQUARTERS RENAMED TO HONOUR WRIGHT BROTHERS Two Federal Aviation Administration (FAA) office buildings in Washington D.C. have been renamed in honour of Orville and Wilbur Wright, the inventors of powered, sustained, controlled flight.
Page 15 July 2004
TSA LAUNCHES REGISTERED TRAVELLER PILOT PROGRAM The U.S. Transportation Security Administration (TSA) launched the Registered Traveller Pilot Program on 7 July 2004 at Minneapolis/St. Paul International Airport in cooperation with Northwest Airlines. Travellers will be able to apply to the program which, after meeting screening and security checks, will allow them to pass through an expedited security process at select airports. By the end of August, the program will be implemented at Los Angeles International with United Airlines, Houston Intercontinental with Continental Airlines, Boston Logan, and Reagan National in coordination with American Airlines.
CAPPS II SCRAPPED Due to privacy concerns, the U.S. government has decided to drop plans to develop its Computer Assisted Passenger Pre-screening System (CAPPS II). The program was launched after 9/11 but gained criticism from privacy advocates when it was revealed that some airlines provided passenger information which was used to test the system. The program could be replaced by the voluntary Registered Traveller Program recently launched at Minneapolis/St. Paul airport.
NAV CANADA TO INCREASE SERVICE CHARGE
Nav Canada will increase its air navigation service charges on 1 Sept 2004 by an average of 7.9 percent. The increase is required in order to avoid a projected revenue shortfall in the next fiscal year, but service charges will still be 20% below the old Air Transportation Tax they replaced.
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NEWS ARTICLES PEOPLE The Vancouver International Airport Authority has appointed two new directors: Ruston Goepel, Senior Vice President of Raymond James Ltd., and Mary B. Jordan, Executive Director of the B.C. Centre for Disease Control. Reappointed to the board is Bruna Giacomazzi , Director-At-Large. Bill Boesch has been named CEO of Deutsche Post Global Mail USA. Don Berry was named chief operating officer and Florian Schuhbauer was named CFO. Pierre Gramegna was named chairman of Cargolux. He is the current president of the Luxembourg Chamber of Commerce. Wake Smith has been promoted to Senior Vice President and Chief Operating Officer of Atlas Air Worldwide Holdings. He will oversee all aspects of AAWH’s operation, including executing the company’s restructuring plan, set to emerge from Chapter 11 in late July.
Mark Hill, WestJet’s Vice President of Strategic Planning, has resigned from his position at the company effective 14 July 2004. Hill, a former employee of Air Canada, decided to resign from WestJet in light of the current lawsuit between WestJet and Air Canada concerning his involvement in downloading route information from an Air Canada employee website. James F. Parker has retired as CEO of Southwest Airlines and as a member of the Board of Directors. The Board of Directors has appointed Gary Kelly to take Parker's place as Vice Chairman of the Board and CEO, and member of the Board of Directors. Kelly has been with Southwest since 1989 and previously held the position of Southwest's Executive Vice President and CFO. Laura Wright, who is currently Vice President Finance and Treasurer, will take over Kelly's previous position as CFO.
The Canadian Airports Council (CAC) has made the following appointments to its executive board: Howard P. Goldberg is appointed Vice President Economic Affairs and Policy Development, Fred L. Jones is appointed Vice President Operational, Technical, and Environmental Affairs and Sandi London is appointed Director, Small Airports. Roland Dorsay is no longer the President and CEO of the CAC. The board is currently searching for candidates to fill his position.
Page 16 July 2004
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CAN FULL SERVICE AIRLINES SURVIVE? July 2004
It’s been well over a year since the full service airlines (FSAs) in North America won major wage concessions from employees, lessors, and other suppliers. At the time, carriers touted these concessions as the ingredients for restoring profitability. What has been the record since then? Here I provide some data and commentary. My view is that the North American FSAs have not restored profitability and may be unable to do so without further consolidation. Whether winning cost concessions under bankruptcy protection like United, US Airways and Air Canada, or whether winning them by barely skirting bankruptcy like American, it simply has not been enough, and only domestic FSA contraction and consolidation will restore the industry to health.
carriers. I include both the FSAs as well as the low cost carriers and the larger regional carriers. The data is for the 12 months ending March 2004, and thus is the most current. In spite of the wage and supplier concessions, and in spite of recovery of traffic in recent months, the U.S. full service airlines are still operating below break even. The one exception is Continental, perhaps one of the best managed airlines in the U.S. Of course, it went through two episodes of bankruptcy protection to get there.
US Carriers
Am Eagle
Exec
Tr States
Measba
Atl SE
Comair
Air Wi
.
Horizon
SW
FR
Atran
JB
ATA
AW
.
Spirit
AM
CO
US
DL
90 85 80 75 70 65 60 55 50 45 40
NW
Load Factor vs. Break-even Load Factor
UN
Vice President & Chief Economist
FSAs are still operating below Break-even Load Factors, even after major cost concessions. First, the plot below shows actual and break-even load factors for the U.S. air
percent
Michael Tretheway
12 months ended 2004 Q1 Break-even LF
Load Factor
BELF- LCCs
LF - LCCs
The LCCs are all operating above break-even load factors. In contrast to the FSAs, all of
the 7 listed LCCs are above break-even. More importantly, with the exception of Spirit, all the LCCs have break-even load factors below those of the FSAs.
The regional carriers are operating above break-even load factors. What may be
surprising to many is that all of the listed U.S. regional carriers are operating above break-even, and have break even load factors even lower than the LCCs. In previous issues of the Market Intelligence Report, we have reported that many of the U.S. regional carriers have market capitalisations greater than the large US FSAs. Page 17 July 2004
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CAN FULL SERVICE AIRLINES SURVIVE? – CON’ T International services are not the problem. The problem is in domestic FSA services. Further investigation of break-even load factors indicates that the FSAs are generally at or above break-even on their international services. Their problems are confined to their domestic services. I think the message is clear here. The U.S. FSAs simply are unable to compete against the LCCs. Around the year 2000, the LCCs reached a critical mass in the U.S. market, roughly 25% of domestic capacity. At this point, yields in the domestic U.S. market fell precipitously. This in turn drove up the break-even load factors of the FSAs. U.S. Major Carriers Average Domestic Yield 16.0
15.0
Cents per RPM
14.0
13.0
12.0 11.0
May
Mar
Nov
Jan-04
Jul
Sep
May
Mar
Nov
Jan-03
Jul
Sep
May
Mar
Nov
Jan-02
Jul
Sep
May
Mar
Nov
Jan-01
Jul
Sep
Mar
Jan-00
9.0
May
10.0
Source: ATA Monthly Passenger Yield Report 2000 -May 2004
Contrary to what many think, the drop in domestic yields occurred before 9/11. The graph above shows this quite clearly using U.S. monthly domestic yield data. Yields dropped steadily from December 2000 to August 2001. The drop in yields was completed prior to 9/11. In fact, yields rose slightly after 9/11 and ever since have been bouncing around the 12 cent range. 9/11 is not to blame for the woes of the U.S. full service airlines. It is the impact of domestic competition from LCCs which has driven the FSAs to the edge of bankruptcy.
The LCCs are profitable with current yields, and are adding a lot of capacity, so it is unlikely that domestic yields will improve. Cost cutting will be difficult, especially since the FSAs are losing market share and traffic to the LCCs. The airline industry has
Unit cost (Cost per passenger)
Cost concessions offset by reduced traffic. The data show that the U.S. FSAs have been unable to reduce costs for domestic services sufficient to compete against the LCCs and independent regionals. To survive, they need to do one of three things: increase yields, further reduce Reconciling Reduced Factor Cost costs, or withdraw from domestic services. with Increased Unit Cost FSAs experienced offsetting unit cost increases as they lost traffic to LCCs and independent regional carriers
B A
FSAs reduced unit cost by wage and supplier concessions
Traffic level (number of passengers)
Page 18 July 2004
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CAN FULL SERVICE AIRLINES SURVIVE? – CON’ T substantial economies of traffic density. What this means is that as traffic falls, unit costs go up. What happened in the last few years is that the U.S. FSAs won important and large cost concessions, but these were largely offset by higher unit costs as they lost economies of traffic density. At the risk being somewhat academic, I show the figure on the previous page which shows the concept. Cost concessions were obtained, but these were offset by loss of economies of traffic density. This is in fact what happened last year. All six FSAs lost traffic last year, and three of them experienced higher unit costs in spite of wage and supplier concessions. The future? With the FSAs caught in a downward spiral, the way out of this may have to be consolidation. Either one (or more) of the FSAs will have to exit the industry, or some will have to merge. Mergers would allow the FSA industry to continue to contract as the LCCs expand, while allowing the surviving FSAs to maintain size sufficient to restore economies of traffic density. Note that the needed mergers could potentially cross national borders – if foreign ownership laws were updated. This suggests that the future structure of the airline industry might look as follows: §
LCCs building to 40-60% of domestic trunk markets.
§
Fewer FSAs, which focus on profitable international and regional services.
§
FSAs contracting dramatically in the domestic trunk market, confining themselves to domestic services which connect major domestic points to hubs, especially those with international services.
§
Large regional carriers expanding their market shares.
Page 19 July 2004
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THE OTTAWA REPORT 20 July 2004
Prime Minister announces new ministry and Minister of Transport On 20 July 2004, Prime Minister Paul Martin unveiled a new cabinet to Canadians. Minister Tony Valeri, appointed Minister of Transport in December 2003, has been appointed Leader of the Government in the House of Commons. Taking over as Minister of Transport is the Honourable Jean C. Lapierre, MP for the Montreal-area riding of Outremont, Quebec.
Sam Barone Regional Vice President, Ottawa
Jean Lapierre was elected to the House of Commons from 1979 to 1990 and was re-elected in 2004. He served as Parliamentary Secretary to a number of ministers and was Minister of State for Youth and for Fitness and Amateur Sport. In Opposition, he was critic for foreign trade, economic development and constitutional affairs. Originally from the Magdalen Islands, Jean Lapierre studied Law at the University of Ottawa and was called to the Quebec Bar in 1979. While at university, Mr. Lapierre began his political career. Between 1974 and 1979, he was special assistant to the Minister of Consumer and Corporate Affairs and executive assistant to the Minister of State for Urban Affairs. In 1992, Mr. Lapierre became a radio host with CKAC, a position he held until recently. In 2001, he also became an anchor for the main news program of the TQS television network. With Lapierre as Minister of Transport, Quebec will loom large in the formation of transportation policy, especially with respect to VIA, Air Canada and Bombardier. It remains to be seen what the new Minister will mean for files such as airport rent and international air policy. While Lapierre will need to reach out to the transport industry, as his predecessor Tony Valeri had already done, it is unknown at this point how much Lapierre will adopt from Valeri who had talked about market-based, economic-driven transport policy. It seems likely that a repeal of Air Canada’s Public Participation Act will not be on the radar screen – including the issues of location of headquarters and bilingual requirements. The Honourable Jim Karygiannis, MP for the Toronto area riding of Scarborough Agincourt, remains as Parliamentary Secretary to the Minister of Transport. First elected in 1988, Jim Karygiannis has served as a member of the Joint Standing Committee on the Library of Parliament, and the Standing Committee on Public Accounts. In 2003, he was named Parliamentary Secretary to the Minister of Transport with special emphasis on Transportation and Environment.
New Position of Minister of State The Prime Minister also announced a new position of Minister of State (Infrastructure and Communities). This change will better position the government to advance its agenda for Canadian cities and communities in strong collaboration with partners across the country. The new Minister of State (Infrastructure and Communities) is the Honourable John Ferguson Godfrey, from the Toronto area riding of Don Valley West.
Page 20 July 2004
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THE WASHINGTON REPORT 14 July 2004
TSA Announces Additional Airport EDS Aid TSA announced in mid-June that it was providing funding to San Francisco International Airport and Seattle-Tacoma International Airport to offset costs for Explosives Detection Systems (EDS). For San Francisco, TSA is providing $15 million to offset costs for completing a permanent in-line EDS. For Seattle-Tacoma, TSA is providing $2.2 million to offset costs for planning and design work to deploy additional EDS machines in various terminals. According to the agency, it has so far authorised $955 million to airports for deploying permanent checked baggage security systems over the next three years.
Charles Chambers Regional Vice President InterVISTAS Consulting Inc. AND Senior Vice President GA2 Washington, D.C.
TSA Issues Guidance for Private Screening On 23 June, TSA released its "Guidance on the Screening Partnership Program" (SPP) that provides information for airports interested in having private companies provide screeners. Under the Aviation and Transportation Security Act, after 19 November 2004, airports can “opt-out" of having Federal screeners and choose private security service companies to conduct screening operations under TSA management. TSA tested private screening at five U.S. airports and has determined that security and customer service at these airports is comparable to that of airports staffed with Federal screeners. TSA plans to solicit proposals from private companies to become qualified vendors, who can then bid on contracts to provide screening services at airports authorised for the SPP. TSA expects contractors to provide their services that are cost competitive with equivalent Federal operations.
TSA Begins Registered Traveller Test TSA announced on 16 June that it had reached agreements with several airports and airlines to begin the Registered Traveller Pilot Program (RTPP). Participating air carriers solicit frequent flyers that travel at least once a week in selected markets for participation. Each volunteer must provide TSA with personal information along with a biometric imprint including finger and iris for a security assessment. Once approved, the volunteer will be enrolled in the RTPP. Once the program is operational at their home airports, volunteers will proceed to a Registered Traveller lane to provide their biometrics to confirm their valid registrations and allow them to proceed to primary screening while secondary screening will be largely eliminated. Airports and airlines participating in the RTPP and their implement dates include Minneapolis-St. Paul with Northwest Airlines in late June, Los Angeles with United Airlines in late July 2004, Houston Intercontinental with Continental Airlines in early August 2004, and Boston Logan and Washington National both with American Airlines by the end of August 2004.
China-U.S. Bilateral Agreement Expanded On 18 June, the U.S. and China expanded their air services agreement. The new agreement will allow five additional airlines from each country to serve the U.S.-China market, entering the market in each of the years 2004, 2005, 2006, 2008, and 2010. This more than doubles the number of U.S. airlines that may serve China. Each side will receive an additional 195 weekly flights over the next six Page 21 July 2004
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THE WASHINGTON REPORT – CONT’D
years, including 111 flights by all-cargo carriers and 84 flights by passenger airlines. The agreement permits unlimited codesharing between each country’s airlines and allows the carriers to serve any city in the other country. The agreement will also substantially increase so-called “doing business” freedoms of U.S. carriers in China, including the right for U.S. cargo airlines to establish hubs in China.
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 beyond the office. Prepared by InterVISTAS Consulting Inc. Page 22 July 2004
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