CAIR Issue No. 31 - July 2005 by Leah Dupuis

INTERVISTAS ’ CANADIAN AVIATION INTELLIGENCE REPORT

In this issue… Features Columns: • Fuel Prices (p.1) • Economic Impact of Open Skies (p.3) • Airline Incentive Programs (p.13) • Cargo Co-Terminalisation (p.17) • NAFTA’s Security Partnership (p.19)

Regular Reports: • Economic Outlook (p.2) • Airline and Airport Data (p.5) • Industry News (p.9) • Airport Best Practices (p.16) • The Ottawa Report (p.20) • Washington Report (p.21) • InterVISTAS News (p.22)

FUEL PRICES: NEW VOCABULARY – BACKWARDATION & CONTANGO 18 July 2005

Crude oil prices hit an all-time high of $60 in July 2005… Crude oil prices have continued its upward trend over the past few weeks, surpassing the US$60 per barrel mark for the first time. Futures contracts for December 2011 are priced at $56.44 today, last month, this same contract only cost $54.70, a 3% increase.

Shift from Backwardation to Contango

However, in recent months, the futures price for near term deliveries have been lower than futures prices for delivery in more distant months. This is referred to as contango, the opposite of backwardation. In July, the price of a barrel of crude oil for delivery in August is $60.01; however, the price of a barrel of crude for delivery in February 2006 is $62.32. It is not until a contract for delivery in June 2007 where the price falls below $60, to $59.94. This shift in price behaviour can be attributed to the rapidly changing market expectations for crude oil. Small shocks or events in the global economy have impacted commodity prices significantly.

…. The level of futures prices continue upward Futures prices have continued to climb through the first half of 2005, as displayed in the graph below. The price of a barrel of crude oil contracted in the current month for delivery in January 2006 is US$62, up 7% from last month’s price of $58. Crude Oil Futures Prices July 2005

$65.00

June 2005

$60.00

$55.00

$45.00

April 2005

Futures Prices -----

Crude Oil Prices for Near Term Delivery

$50.00

February 2005

$40.00

January 2005 $35.00

$30.00

$25.00

May 2003

August 2003

December 2003

April 2004

June 2004

September 2004 Jul-08

Oct-08

Apr-08

Jan-08

Jul-07

Oct-07

Apr-07

Jan-07

Jul-06

Oct-06

Apr-06

Jan-06

Jul-05

Oct-05

Apr-05

Jan-05

Jul-04

Oct-04

Apr-04

Jan-04

Jul-03

Oct-03

Apr-03

$20.00 Jan-03

Senior Project Manager

US$ Per Barrel

Doris Mak

There has been a shift in the behaviour of the price of crude oil. Through much of 2003, the futures prices of a barrel of crude oil was expected to decline to the $25 per barrel range even though crude oil prices for near term deliveries were in the $30 per barrel range. Similarly, in 2004, prices for near term deliveries escalated upward to the $40 per barrel range, with futures prices for deliveries in distant months lower in the $30-$35 per barrel range. This is known as backwardation, where the price for distant future delivery is lower than that of a near term delivery.

Month of Delivery

Page 1 July 2005

ECONOMIC OUTLOOK: CANADA 13 July 2005

Q1 2006

Q1 2005

Q1 2004

Q1 2003

Q1 2002

Q1 2001

Source: Statistics Canada

Page 2 July 2005

Q1 2005

Q1 2004

Q1 2003

Strength in the Domestic Economy. While net exports have fallen, the domestic economy has strengthened and this should help increase growth starting in the second half of the year. Consumer spending is leading the way with 6.3% annualised growth in the first quarter, with especially high increases in purchases of durable goods. Fiscal and monetary policy should continue to help the domestic economy. Federal Consumer Spending (Annualised Quarterly % Change) government spending is up significantly in this year’s budget, 7% which will provide a fiscal stimulus. 6% Meanwhile, the Bank of Canada 5% continues to hold the bank rate steady at 2.5% as there is currently 4% insufficient inflationary pressure to 3% necessitate a rate increase. However, the Bank has indicated that 2% tighter monetary policy may be 1% required in the near term to keep inflation in check, indicating 0% expectations of increased growth in the future. Q1 2002

Transportation Analyst

Q1 2001

Josh Drury

The Canadian economy: Slow growth, but recovering. The Canadian economy slowed in its pace of growth in late 2004, and this has carried over into the first half Real Canadian GDP (Annualised Quarterly % Change) of 2005. Growth on an 5% Historical Forecast annualised basis for the first data data quarter was 2.3%, a slight 4% increase from the 2.1% growth in the last quarter of 2004. Growth 3% for the second quarter is expected to be about the same. 2% This decline in growth is largely attributed to a decline in net 1% exports, reflecting the high value of the Canadian dollar relative to 0% the U.S. dollar. The dollar’s value has remained relatively stable -1% after appreciating rapidly in 2004, and while exports have reversed -2% their decline, imports are growing Source: Statistics Canada for historical data; TD Economics for more rapidly and are expected to forecast data. outpace export growth in the future. This will continue to shrink the trade surplus and its contribution to GDP.

Next Month: The U.S.

ECONOMIC IMPACT OF OPEN SKIES 16 July 2005

In June 2005, Aéroports de Montreal, the Greater Toronto Airports Authority and the Vancouver International Airport Authority commissioned InterVISTAS Consulting Inc. to undertake a study of the economic impact of Canada-U.S. Open Skies. This is a summary of that report.

The Impact of the 1995 Open Transborder Air Services Agreement

Travis Archibald Senior Economic Analyst

The open transborder agreement that was signed in 1995 by Canada and the U.S. increased transborder passenger traffic by roughly 3.3 million passengers per annum relative to what had been forecast by Transport Canada prior to 1995.1 The growth in transborder air service has had significant positive economic impacts for Canada. During the period prior to 9/11, the increase in transborder air traffic, relative to the 1994 pre-agreement forecast, generated roughly 4,500 additional person years of Canadian employment per annum, $160 million in wages and almost $300 million in gross domestic product (GDP). Including indirect and induced impacts, the annual job creation total may have been 9,400 person years, $325 million in wages and just under $600 million in GDP.

Potential Impact of Full Open Skies A new bilateral air services agreement between Canada and the U.S. could be agreed upon in the near future. This expanded agreement might take the name “Full Open Skies”, and would expand upon the previous agreement by offering Canadian and U.S. carriers fifth freedom rights for passenger services, and fifth and seventh freedom rights for cargo services. This potential agreement would create significant additional economic impacts through increased passenger and cargo services, as well as increased tourism spending. The following table summarises the direct economic impacts associated with some individual types of new air services which could materialise with a full open skies agreement. Potential Incremental Annual Direct Economic Impacts of a Full Open Skies Agreement Type of new air service

Person Years

Wages

GDP

Economic Output

5th freedom passenger service – Canadian carrier

175 PY

$6.2 million

$11.9 million

$22.9 million

5th freedom passenger service – U.S. carrier

105 PY

$3.8 million

$7.2 million

$13.8 million

5th freedom cargo service – U.S. heavy-lift cargo carrier

77 PY

$2.7 million

$5.2 million

$10.1 million

5th freedom cargo service – U.S. integrator

98 PY

$3.5 million

$6.7 million

$12.8 million

An adjustment was made to account for the fact the forecast did not anticipate the events of 9/11. Page 3 InterVISTAS’ Canadian Aviation Intelligence Report July 2005 Copyright ©2005 InterVISTAS Consulting Inc., all rights reserved. 1

ECONOMIC IMPACT OF OPEN SKIES – CON’T The total impact of a full open skies agreement would of course depend on the number of new air services that are generated. As an illustration of the total potential impact of full open skies, the following table documents the impacts of a package of five new Canadian routes enabled by full open skies (e.g., a Canadian carrier flying via the U.S. to Latin American destinations) and four new U.S. routes. Potential Annual Incremental Direct Economic Impacts of a Full Open Skies Agreement For scenario of 5 new Canadian and 4 new U.S. routes Person Years

Wages

GDP

Economic Output

Direct

1,294 PY

$46 million

$88 million

$170 million

Indirect

682 PY

$23.6 million

$44 million

$87 million

Induced

737 PY

$24.7 million

$46 million

$104 million

2,713 PY

$94.4 million

$178 million

$361 million

Type of new air service

Total

Tourism Impacts The above economic impacts are those associated largely with the aviation sector of Canada’s economy. New air services, however, also stimulate other economic sectors, such as tourism and export industries. For example, while a 5th freedom passenger service by a U.S. carrier could generate as many as 105 direct person years of Canadian employment in aviation, the estimated impact on jobs in the tourism sector is roughly 1,300 direct person years of employment. For the scenario of five new Canadian and four new U.S. carrier fifth freedom routes, total tourism employment generation could be roughly 8,700 direct person years, and if indirect and induced job creation takes place, the total job impact may be as high as 14,850 person years in the tourism sector. As can be seen, not only is there a large potential impact of full open skies on the aviation sector, the positive impact on the tourism sector of a full open skies agreement is several times larger.

The full report is available at www.OpenSkies.ca or www.InterVISTAS.com. Page 4 July 2005

AIRLINE DATA – CANADA TRAFFIC AND LOAD FACTORS ON CANADA’S MAJOR AIR CARRIERS JUNE 2005 Capacity Passenger Traffic

Air Carrier

OTHER CARRIERS: LOAD FACTORS CanJet: not reported

Revenue Passenger Kilometres

% Change over 2004

% Change from 2003

% Change over 2004

% Change from 2003

Change from 2003

+7.3%

+21.9%

+4.7%

+14.9%

Domestic (Mainline)

+5.2%

+13.3%

+1.3%

+0.9%

+3.1 pts

+8.8 pts

Jazz

+37.2%

+43.6%

+23.9%

+23.4%

+7.3 pts

+10.6 pts

International & Charter

+8.2%

+26.2%

+6.4%

+22.6%

+1.4 pts

+2.3 pts

+22.4%

+53.0%

+19.8%

+48.9%

+1.6 pts (to 73.5%)

+2.0 pts

Analysis:

Change over 2004 +1.9 pts (to 81.3%)

Air Canada1

WestJet

Load Factor

Available Seat Kilometres

+4.6 pts

Air Canada Domestic Mainline

Air Canada reported its fifteenth consecutive month of record domestic load factors in June 2005. Domestic traffic has increased since March 2005-when Jetsgo ceased operations. International traffic continued to be strong for Air Canada in June 2005 compared to the same time period in 2004 and 2003. Latin America traffic posted the strongest gain at 19%. For the seventh consecutive month, WestJet’s growth in traffic outpaced the addition of capacity. This has resulted in an improved load factor for June 2005.

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

Jazz data is not included in this graph

Jun- July Aug 04

Sep

Oct

Nov

Dom RPK

Dec Jan- Feb 05

Mar

Apr

May

Jun

Apr

May

Jun

Dom ASK

Air Canada International 25% 20% 15% 10% 5% 0% -5% -10% Jun- July Aug 04

Sep

Oct

Nov

Int'l RPK

Dec Jan- Feb 05

Mar

Int'l ASK

WestJet 60% 50% 40% 30% 20% 10% 0% Jun- July Aug 04

Sep

Oct

Nov

RPK

Dec Jan- Feb 05

Mar

Apr

May

Jun

ASK

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

Page 5 July 2005

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

Load Factor

Traffic (RPMs – millions)

(ASMs – millions)

82.8%

12,666

15,291

"3.8 pts

"7.8%

"2.8%

75.3%

732

973

"2.9 pts

"28.7%

"23.7%

N/A

84.7%

2,565

4,208

"2.1 pts

"3.7%

"1.1%

80.9%

8,402

10,391

"0.6 pts

"3.3%

"2.6%

89.0%

1,793

2,014

"3.5 pts

"31.1%

"25.9%

87.7%

7,109

8,107

"1.3 pts

"5.6%

"3.9%

76.2%

5,432

7,133

#2.6 pts

"9.6%

"13.5%

88.1%

10,509

11,922

"2.1pts

#1.0 %

#3.4%

81.2%

3,727

4,590

#0.4pts

"0.1%

"0.4%

Notes:

1. 2. 3.

Sources:

Carrier traffic reports.

Page 6 July 2005

Capacity

Mainline Load factor includes scheduled service only ATA’s traffic report not available at the time of publication

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

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

+20.4%

MontréalTrudeau +26.3%

+5.5%

+7.5%

+7.6%

+9.0%

+19.4%

+8.0%

-1.3%

-0.3%

-5.5%

St. John’s +15.2%

+18.5%

+16.1%

+18.1%

+8.0%

+2.8%

+12.1%

+9.2%

+7.8%

+8.6%

+3.0%

+1.7%

-4.3%

+15.9%

2nd Quarter

+26.2%

+18.8%

+24.9%

+8.3%

+6.2%

+13.2%

+9.7%

+14.5%

+9.7%

+0.5%

+3.8%

-2.5%

+16.9%

July

+17.1%

+10.4%

+18.7%

+5.0%

+0.8%

+5.7%

+8.6%

+10.5%

+4.7%

-0.5%

+5.5%

+1.4%

+10.6%

Toronto

Vancouver

May

+30.8%

June

2004 2005

August

+16.0%

+4.9%

+18.1%

+1.9%

+2.2%

+6.2%

+7.4%

+6.9%

-2.0%

-5.9%

+5.4%

+1.5%

+10.1%

September

+16.1%

+11.5%

+13.2%

+13.0%

+6.3%

+7.9%

+8.8%

+8.6%

+8.3%

+12.1%

+5.3%

-0.6%

+13.4%

3rd Quarter

+16.4%

+8.7%

+16.7%

+6.2%

+2.9%

+6.6%

+8.2%

+8.6%

+3.3%

+1.1%

+5.4%

+0.8%

+11.2%

October

+14.3%

+7.0%

+10.7%

-4.0%

+11.9%

+1.1%

+3.7%

-1.4%

+9.1%

+7.9%

+1.9%

+18.2%

November

+13.3%

+6.2%

+17.6%

+9.6

+4.7%

+11.4%

+4.4%

+8.3%

+0.3

+5.1%

+8.0%

-11.1%

+9.9%

December

+14.2%

+6.8%

+20.9%

+8.9%

+8.4%

+11.0%

+5.1%

+8.0%

+2.1%

+3.9%

+8.1%

+3.6%

+6.8%

4th

+14.0%

+6.7%

+16.1%

+9.7%

+3.1%

+11.4%

+3.5%

+6.4%

+0.3%

+5.9%

+8.0%

-2.1%

+11.9%

Full Year

+15.7%

+9.6%

+18.6%

+7.0%

+5.1%

+10.2%

+7.7%

+9.1%

+5.7%

+3.6%

+5.6%

+0.3%

+14.0%

January

+15.0%

+9.8%

+14.4%

+13.2%

+9.6%

+12.9%

+13.6%

+6.6%

+4.7%

+12.4%

+17.7%

+9.7%

+11.9%

February

+8.7%

+4.5%

+4.0%

+10.2%

+7.8%

+5.5%

+7.0%

+4.5%

+7.1%

+15.8%

+10.4%

+8.5%

+1.5%

March

+10.9%

+8.2%

+5.1%

+17.5%

+12.5%

+7.3%

+9.7%

+6.6%

+15.4%

+19.5%

+19.1%

+22.2%

+19.6%

1st Quarter

+11.5%

+7.5%

+7.6%

+13.7%

+10.0%

+8.4%

+10.0%

+5.9%

+9.3%

+16.0%

+15.6%

+13.3%

+11.5%

April

+4.4%

+3.9%

+5.8%

+3.5%

+5.5%

+0.1%

+4.3%

-0.2%

+2.6%

+18.8%

+5.9%

+3.8%

+9.8%

June +6.7% +5.5% +3.7% +12.0% +12.0% Source: Transport Canada and individual airports’ traffic reports.

+5.5%

+8.0%

-8.9%

+5.8%

+26.3%

+12.6%

+5.7%

+8.5%

Quarter

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 7 July 2005

U.S. Passenger Market Data for Airports Accurate and Timely Marketing Data: A Key to Air Service Development InterVISTAS Consulting specialises in developing origin/destination passenger market sizes, travel routings and fare profile data for domestic, transborder and international city-pair markets.

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

Origin & Destination Market Data for all Transborder Markets

Identify True Origin & Destination Flows

InterVISTAS recognises the need for a solid base of market knowledge to support air service development. Our market research team specialises in quantifying origin/destination passenger markets, travel patterns, and drive diversion for airports.

•

InterVISTAS’ transborder market data relies on a number of sources including travel agency ticket sales, which represent one of the most comprehensive and detailed sources of air travel data between Canada and the United States. By combining air ticket sales data with other aviation data sources and years of industry knowledge, InterVISTAS offers custom reporting on transborder air markets.

Understand Competition within Airport Catchment Areas

Page 8 July 2005

Quantify city-pair market sizes for air service development initiatives

Analyse Hub Activity & Routings •

•

Identify key routing patterns to support air service proposals

Quantify traffic leakage to determine true market sizes

For more information, contact: Nancy Keen Market Research & Analysis InterVISTAS Consulting Inc. Telephone: 1-604-717-1822 Email: nancy_keen@InterVISTAS.com

NEWS ARTICLES AIR CANADA UPDATE AEROPLAN INCOME FUND COMPLETES CDN$288 MILLION IPO ACE Aviation Holdings, parent company of Air Canada, announced that Aeroplan Income Fund has completed its CDN$250 million IPO. Including the underwriters’ exercise of their over-allotment option, gross proceeds from the IPO are CDN$288 million. Aeroplan Income Fund is an unincorporated, open-ended trust established to acquire an interest in the partnership units of Aeroplan LP. ACE holds an 86% interest in Aeroplan LP, while Aeroplan Income Fund holds 14%.

AIR CANADA LAUNCHES TORONTOSEOUL SERVICE Air Canada has launched non-stop services between Toronto and Seoul, South Korea. The flights are operated three times per week using A340-300 aircraft configured to 286 seats.

AIR CANADA ADDS ZURICH STOP TO TORONTO-NEW DELHI SERVICE

On 29 October 2005, Air Canada will end its non-stop service between Toronto and New Delhi. The service will be replaced with a Toronto-Zurich-New Delhi flight. The new flight will be operated with a B767-300ER aircraft configured to 212 seats.

OTHER CANADIAN AIRLINE NEWS WESTJET ADDS FUEL SURCHARGE

WestJet has added a temporary fuel surcharge to the price of its domestic fares. Base fares on domestic flights under 300 miles (483 km) will increase $8 each way, while base fares on domestic flights between 301 miles (484 km) and 1,000 miles (1,609 km) will increase $10 each way, and base fares on domestic fares over 1,000 (1,609) miles will increase $15 each way. Base fares for flights between Canada and the U.S. remains unchanged. Page 9 July 2005

WESTJET LAUNCHES SEASONAL TORONTO-CHARLOTTETOWN SERVICES

WestJet has launched seasonal daily non-stop services between Toronto and Charlottetown. The service will be operated until 15 September 2005.

WESTJET COMPLETES SALE OF B737200 FLEET

WestJet has completed the sales of its fleet of 10 B737-200 aircraft to Apollo Aviation Group. The aircraft will be replaced by a fleet of Boeing Next-Generation 737 aircraft by March 2006.

HARMONY AIRWAYS TO START ABBOTSFORD-HAWAII SERVICES

Vancouver based Harmony Airways plans to launch Abbotsford-Hawaii services in mid-December of this year. The service will be operated once per week.

CANJET AIRLINES INTRODUCE VANCOUVER-TORONTO SERVICES, DOUBLES CALGARY-TORONTO FLIGHTS CanJet Airlines has launched daily non-stop services between Vancouver and Toronto. In addition, the carrier has increased its Calgary-Toronto services to two per day.

TRANSAT A.T. ACQUIRES BENNET VOYAGES Transat A.T., parent company of Air Transat, has acquired Bennet Voyages through its French based subsidiary, Vacances Transat. Based in France, Bennet Voyages is a French outbound tour operator that offers tour packages to Scandinavia, the U.K., and Ireland.

NEWS ARTICLES OTHER CANADIAN AIRLINE NEWS – CON’T SKYSERVICE INITIATES SEASONAL EASTERN EUROPE SERVICES Canadian charter operator, Skyservice Airlines, has started direct weekly flights between Toronto and Belgrade, Serbia for 13 weeks and to Zagreb, Croatia for 11 weeks with Boeing 757 aircraft. The airline has also started serving Split, Croatia and Ohrid, Macedonia using B757s.

NEW ROUTE FOR REGIONAL 1

Starting 1 July 2005, Regional 1 is offering five non-stop flights per week between Kamloops and Victoria using 37-seat Dash 8 aircraft. The airline is affiliated with Calgary-based maintenance firm Avmax Group Inc.

SUNWING VACATIONS CREATES OWN AIRLINE Sunwing Airline, the latest venture of Canada 3000 founder Colin Hunter, will take off on 17 November 2005, offering the air portion of Sunwing Vacation’s package holidays. The Toronto-based airline will fly to sun destinations such as Cuba, the Dominican Republic, Mexico and Costa Rica with Boeing 737-600 aircraft. The airline plans to have a fleet of ten aircraft by 2010.

CANADIAN AIRPORTS

BUSINESS/CHARTER CENTRE OPENS AT EDMONTON INTERNATIONAL The Executive Flight Centre (EFC) opened at Edmonton International Airport on 29 June 2005. The $5 million facility will cater to charter, tier three operators, business and corporate jets, and small commercially owned and private aircraft. Charter operator North Cariboo Air is the anchor tenant at the new facility.

HUDSON GROUP TO OPERATE CONCESSION AT CALGARY INTERNATIONAL The Hudson Group has been awarded a contract to operate a combination Hudson News and Euro Café store at Calgary International Airport. Eiffel Tower Bakery, locally established, will supply baked goods for Hudson in the café.

OTTAWA INTERNATIONAL AIRPORT WINS 2005 ACI-NA ENVIRONMENTAL ACHIEVEMENT AWARD The Ottawa MacDonaldCartier International Airport has been selected as winner of the Airports Council International-North America (ACI-NA) 2005 Environmental Achievement Award. The airport was selected for its Glycol Biotreatment System, which prevents glycol from being released into the Rideau River.

VANCOUVER INTERNATIONAL LAUNCHES CAPITAL IMPROVEMENT PROGRAM The Vancouver International Airport has launched its $1.4 billion capital program, which will include terminal and gate expansions, RAV Line construction, enhancements to the parkade, road system, baggage systems, and to the airport’s runways and taxiways, and upgrades to security.

Page 10 July 2005

NEWS ARTICLES CARGO NEWS FUEL AFFECTS CARGO TRAFFIC IN MAY The International Air Transport Association (IATA) reported that international cargo traffic declined by 1.6% in May over the same month in 2004. IATA cites the rising cost of fuel as a factor in the drop and says it demonstrates the effect of the cost of fuel on the global economy. Asia, North America, Latin America and Europe all showed negative growth in May. Only the Middle East and Africa showed positive growth, 11% and 7% respectively for May 2005.

KOREAN AIR CARGO MOVES TO TOP SPOT IN CARGO TRAFFIC Data released by the International Air Transport Association (IATA) shows that Korean Air Cargo had the highest cargo traffic volume in 2004 at 8.2 billion FTKs. Lufthansa Cargo, the top ranked carrier by volume for the past 19 years, was second at 8.0 billion FTKs. Singapore Airlines and Cathay Pacific placed third and fourth in cargo volume respectively.

PLATINUM AIR CARGO UK TAKES STAKE IN CANADIAN BRANCH Platinum Air Cargo (UK) Ltd. has bought a majority stake in its sister company, Platinum Air Cargo Canada. The Canadian branch represents My Travel Airways, a charter airline that offers service to North America, the Caribbean and Europe, to freight forwarding agents in Canada. The company is keen to expand its services into the Caribbean.

MANAGEMENT CHANGE FOR KNIGHTHAWK INC.

Following the announcement that its remaining air routes were canceled by its customer effective on 28 May 2005, Knighthawk Inc. has announced that it has exercised its right to terminate its management services agreement with Intravest Corp. and Tom Rothfels. The company’s affairs will now be managed by 420394 B.C. Ltd., a company owned by Kenneth Fitzgerald, who will act as interim CEO until a permanent CEO is found. Knighthawk carried cargo for Purolator and Airborne Express.

AIR CANADA PUTS CALGARY CARGO SERVICE ON HOLD AFTER CARGOJET COMPLAINT

Air Canada Cargo has put on hold a Calgary stop on its TorontoShanghai MD-11F service after a complaint by CargoJet. Canadian based CargoJet has filed a complaint to the Canadian Transportation Agency (CTA) stating that Air Canada Cargo has an ACMI (aircraft, crew, maintenance and insurance) agreement with U.S. based World Airways for the service, from which it leased the MD-11 to fly a domestic Toronto-Calgary segment. Canada’s current air bilateral agreement with the U.S. does not allow U.S. carriers to fly between two Canadian cities (e.g. cabotage).

Page 11 July 2005

NEWS ARTICLES PEOPLE IN THE NEWS The Regina Airport Authority has appointed Rob Slinger as its new President and Chief Executive Officer. Slinger brings over twenty years of experience from the Air Force, Bombardier Aerospace and the University of Saskatchewan to his new post. Airports Council International (ACI) has named Anne McGinley as Director of ACI’s Montreal office, which represents member interests to ICAO. McGinley was the Irish representative to ICAO in 2001 and also served as Chairman of the ICAO Air Transport Committee. She replaces Roderick Heitmeyer who is retiring after representing ACI at ICAO for over ten years. EADS has selected Thomas Enders and Noel Forgeard as its new co-CEOs, effective immediately, for a five-year term. EADS, in agreement with 20% shareholder BAE Systems, also appointed Gustav Humbert as President and CEO of Airbus. He replaces Noel Foregard, who previously held the post.

OTHER VIRGIN ATLANTIC PLANS TO RESUME TORONTO SERVICE

Virgin Atlantic Chairman Richard Branson indicated that the carrier wants to re-start services to Toronto after stopping services because of the terrorist attacks of September 11. The carrier would offer summer seasonal Toronto services, and then use the same aircraft to serve Cape Town in the winter.

Page 12 July 2005

U.S. AIRLINES EXPECTED TO LOSE $5.6 BILLION THIS YEAR Merrill Lynch estimates that U.S. airlines will lose US$5.6 billion (CDN$6.9 billion) this year, higher than the previous estimate of US$5.0 billion (CDN$6.1 billion) due to higher fuel prices. The firm forecasts U.S. airlines to lose US$1.5 billion (CDN$1.8 billion) in 2006.

AUSTRALIA/NEW ZEALAND AGREE TO E.U. OWNERSHIP CLAUSE IN BILATERALS

The European Union (E.U.) has reached agreement with Australia and New Zealand to replace the nationality restrictions in the ownership and control clauses of the bilateral agreements with one which allows any E.U. country to designate any E.U. airline to fly on routes to Australia/New Zealand. E.g., it would allow a French airline to fly from Rome to Sydney. The E.U. has already negotiated 13 other such changes to their air bilateral agreements.

EUROPEAN PARLIAMENT REJECTS E.U.-CANADA PASSENGER AGREEMENT The European Parliament has rejected an agreement between the E.U. and Canada on the transfer of Advance Passenger Information and Passenger Name Record (API/PNR) to Canada Border Services Agency by E.U. carriers operating to Canada. The European Parliament was consulted on the agreement but has no power to make a decision on the issue. Members of the Parliament suggested that finalisation of the agreement should be postponed until the E.U. Court of Justice has made a decision on a similar E.U.-U.S. agreement.

AIRLINE INCENTIVE PROGRAMS 13 July 2005

Over the past several years, airports, governments, tourism groups and other stakeholders have become increasingly aggressive in pursuing new air services, and have frequently turned to financial incentives to induce airlines to serve their community. At the same time, the state of the aviation industry has made airlines far more risk averse when examining new route opportunities. Airlines no longer have the financial capability to endure heavy losses while a new route matures to profitability a process that can take several years. Before approving fleet expansion plans, airline boards are requiring executives to demonstrate that new routes will meet higher thresholds of financial return than in the past. As a result, many carriers now require significant incentive packages before committing to a new service. While numerous variations exist, the most common incentives in use today include airport fee discounts, joint marketing support, community ticket trusts (also called travel banks), and revenue guarantees.

John Weatherill Manager, Airline Planning

While incentives such as these can be beneficial, care must be taken to ensure that they are used strategically and judiciously, and that limited community resources are used in the most effective way possible. Airline incentives are not appropriate in every circumstance. They should be designed to reduce the risk to an airline during the start-up phase of a new service, and to build awareness and demand for a new air service as it becomes established. Incentives should not be used to “buy” air services that would not be self-sustaining in the long term (such services are often discontinued the moment the support is suspended). In addition, different airlines have different incentive requirements, the specifics of which are dictated by network development strategy, fleet constraints, market growth potential, airline philosophy and other factors. As a result, an airport’s incentive program should be flexible to ensure that both the needs of the particular airline and the interests of the community are met.

Incentive Package Development and Implementation As incentive requirements vary by route and airline, a community should develop an allencompassing, flexible incentive policy. Airport and community officials should be open to considering incentives in certain (strategic) circumstances, and should be prepared to act quickly if required, but should resist investing in new air services that do not hold sufficient expectation of future viability. Most airports are open to offering landing fee discounts for a limited period to airlines initiating service on a new route, recognising that such a gesture does not require an out-of-pocket expense. In addition, many communities provide co-operative support, often in the form of landing fee reimbursements that are committed to a marketing program which promotes the new service. But often communities are reluctant to agree to more significant incentives such as revenue guarantees and ticket trusts.

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AIRLINE INCENTIVE PROGRAMS – CON’T When an airline requests such an incentive as a requirement for a new air service, communities should proceed carefully and make an informed decision by taking the following steps: !

Evaluate the expected financial results of the proposed air service, including sensitivity to fluctuations in demand, traffic stimulation, airfares and airline costs (fuel, etc.);

Quantify the potential financial risks of the proposed incentive program;

Determine whether incentives are appropriate for the specific route/airline;

Determine which type of incentive is most likely to achieve the objectives of the airline and airport

Determine the appropriate amount of financial incentive.

Although such analysis is complex, it is required to ensure that a negotiated contract provides maximum benefit (at minimum risk) for the community. Seeking outside assistance at this stage can help an airport secure an important new air service, or avoid a potentially costly mistake.

Incentive Program Funding Some airline incentive programs can be costly. For instance, revenue guarantees for mainline service often exceed $1 million, while those for regional/commuter services can require a commitment of several hundred thousand. Arranging funding for programs such as these can be a challenge. Beyond contributing funds to an incentive program, airport authorities can organise community support for an initiative by conducting information sessions to educate community stakeholders as to the benefits of the new air service, and can generate local commitments for contributions to ticket trusts or revenue guarantees. Local sources of funding often include: !

Municipal or state/provincial governments;

Chamber of Commerce;

Tourism industry stakeholders (revenue guarantees are often financed by large hotels or attractions such as ski resort operators);

Large corporations;

Other community/regional partners.

The key to securing local funding is educating stakeholders on the benefits of the new services, and clearly demonstrating that their commitment is a sound investment that will show future returns.

Carrier Backlash A word of warning: incentive programs must be carefully constructed not only to meet the needs of the recipient airline, but also to ensure that incumbent airlines are not unfairly discriminated against. As incentive programs have grown in popularity, so has resistance grown among incumbent carriers who argue that incentives, particularly travel banks and revenue guarantees, distort the marketplace and create an unlevel playing field. Page 14 July 2005

AIRLINE INCENTIVE PROGRAMS – CON’T In Wichita, Kansas, the community provided a multimillion-dollar revenue guarantee to AirTran Airways. Delta Air Lines, which opposed the original funding to its competitor, reduced service at Wichita in response to the continuation the revenue guarantee for an extended period. In Fresno, California, United Airlines has launched a complaint with the U.S. Department of Transportation over the use of a federal grant to fund a revenue guarantee for Frontier Airlines on the FresnoDenver route – a market which United had already served. Often such situations arise when a community seeks to achieve lower airfares by encouraging competition on a route served by only one airline. To accomplish this goal without angering an important existing airline, airports and communities can use various tactics: !

Approach the incumbent carrier(s) first to see if they are willing or able to provide the desired air service (either by enhancing existing services or starting new routes);

Limit incentives to airlines initiating services on previously unserved routes (note that securing service to a competitive hub can achieve lower airfares for a number of connecting markets);

Structure incentive packages (such as marketing programs) to make all carriers eligible.

That said, airports and communities need not feel obligated to make incentives available to any carrier that requests (or demands) them. For example, communities wishing to improve air access to a certain region can limit their incentive offers to airlines with hub locations and route networks complementary to this goal. The key to developing a beneficial, affordable, and non-controversial airline incentive program is to evaluate each opportunity on a case-by-case basis, and to perform detailed analysis of the potential risk and reward to the community.

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AIRPORT BEST PRACTICES 18 July 2005

Calgary International Airport Attracts International Cargo In the past five years, Calgary International Airport has grown a sector of the business in which many express interest, but few succeed – international cargo. Its success has been a combination of vision, planning, investment and marketing. Results. Since 2000, the airport’s accomplishments are well known:

Rob Beynon Director, Airport Marketing

Attracting weekly Cargolux B747-400F service to Europe, and then increasing it to three times per week;

Attracting first Korean Air outbound service (B747F-400) and then thrice-weekly Asiana B747-400F service to Asia;

Winning the right to host the 2006 International Air Cargo Association (TIACA) forum and exhibition. The bi-yearly TIACA conference is the world’s premier cargo event.

In 2002 the airport was named Air Cargo News “Cargo Airport of the Year: North America.”

Calgary’s success is all the more intriguing because it is neither a major producer of aviation using export products nor a major North American import centre. Develop and Stick to a Cargo Development Plan. Speaking at the ACI Marketing Conference in June, Stephan Poirier, Sr. Director of Cargo and Logistics, said the airport authority board and management started with a vision, developed a plan for air cargo, and invested in infrastructure and marketing to achieve their goals. The authority then implemented the five-year plan, including infrastructure investment and marketing to attract air carriers . “The plan was a success,” Poirier noted. Having a focused cargo marketing and development plan was essential. Investment in infrastructure has included three aircraft parking aprons and a 12,000 square foot live animal centre including a portable live animal loading and penning systems. Both Marketing Vice President Julien DeSchutter and Poirier have actively marketed Calgary to the world. Attracting the two Korean carriers took approximately three years of innovative sales and marketing. According to Poirier, the next step is developing warehousing and logistics facilities at the airport. The authority is currently developing a 10-year plan to accomplish that goal. Based on past experience of goal setting and execution, the authority is well on its way.

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CARGO CO-TERMINALISATION -NOT A THREAT 8 July 2005

The big bogeyman for negotiating Canada-U.S. Open Skies will be cargo co-terminalisation. This is a standard element of the 70 U.S. open skies agreements, and one that the U.S. thought was going to be resolved more than 10 years ago, shortly after the 1995 Canada-U.S. Open Transborder agreement. Increasingly, Canada is becoming one of the only countries with has not exchanged cargo co-terminalisation rights with the U.S.1 It is likely a must-have element for the U.S., and without it, there will likely be no Canada-U.S. open skies.

Michael Tretheway Executive Vice President

The problem is that some (but not all) of the Canadian domestic cargo carriers have loudly claimed that it would put them out of business. Without the U.S. cargo they carry onward on some of their domestic Canadian flights, their entire industry would cease to exist. They would be unable to compete with the powerful U.S. cargo carriers. InterVISTAS Consulting was asked by the Aéroports de Montréal, the Greater Toronto Airports Authority and the Vancouver International Airport Authority to examine the economics of cargo co-terminalisation. At most, only 6% of Canadian (The full report is available at www.OpenSkies.ca or at domestic cargo traffic could www.InterVISTAS.com). Our findings are that at most, be affected by cargo coonly 6% of Canadian domestic cargo traffic could be terminalisation with the U.S affected by cargo co-terminalisation with the U.S. First, what cargo co-terminalisation is not. Co-terminalisation is not cabotage. It would not allow U.S. cargo integrators such as FedEx and UPS to carry domestic Canadian cargo on board their aircraft. It would not allow them to carry Canadian domestic cargo via their U.S. hubs. We are informed that the U.S. cargo carriers have never asked for such rights and the U.S. negotiators have no intention of seeking such rights. Some scare mongering has either claimed co-terminalisation is cabotage or would inevitably lead to cabotage. Both are incorrect. Second, what is cargo co-terminalisation? Co-terminalisation traffic rights allow a carrier to serve two or more points in a foreign country with the same Edmonton aircraft. It does not allow the carriage of domestic Co-terminalization Sector traffic between cities in the foreign country – only traffic which originates in (or is destined to) the Winnipeg carrier’s home country can be carried on to the Canada second and following points in the foreign country. In U.S. some cases, co-terminalisation flights offer a carrier better economics than serving multiple points in the Example of Co-Terminalization Memphis foreign country with separate non-stop services.

Canada and the U.S. have exchanged co-terminalisation rights for passenger services, and even allow coterminalisation with aircraft under 30,000 pound gross take-off weight. Page 17 InterVISTAS’ Canadian Aviation Intelligence Report July 2005 Copyright ©2005 InterVISTAS Consulting Inc., all rights reserved. 1

CARGO CO-TERMINALISATION – CON’T Third, very little Canadian domestic traffic is at risk. To begin with, most major Canadian markets are already served non-stop by one or more U.S. integrator carriers from their hubs. (There are 8 Canadian gateway airports with non-stop U.S. cargo service.) The only markets which could be economically viable for co-terminalisation operation by U.S. carriers would have to have too little traffic for non-stop service, yet enough to justify onward service by a large cargo freighter. The communities fitting into this band are in fact quite limited. InterVISTAS examined all possible Canadian markets and determined that only a small amount of traffic is currently flown beyond the eight gateway cities in volumes sufficient to justify a large freighter, and this is all that is at risk from the granting of co-terminalisation traffic rights. We estimated that even if all these markets were to have transborder cargo flown by co-terminalisation, it would amount to no more than 6% of the cargo currently carried by domestic Canadian freighters. Further, it is clear that if co-terminalisation flights did begin, at least some of the traffic they would carry is currently carried by trucks, not by domestic air freighters. For example, as much as half of transborder cargo to Edmonton is currently flown to Calgary and trucked to Edmonton. Canada’s cargo carriers are cost competitive. It is widely acknowledged that the domestic Canadian cargo carriers are lower cost operators than the large U.S. integrators. If coterminalisation rights were to be negotiated by Canada and the U.S., this would weigh strongly in favour of U.S. integrators continuing to utilise Canadian domestic carriers beyond their current gateways. Assessment. This is not to say that cargo co-terminalisation would be risk free. The market would ultimately sort out the best way to serve Canada’s shippers. But only a small amount of traffic is at risk, and Canada’s cargo carriers would enter the competition with a cost advantage.

Page 18 July 2005

NAFTA'S SECURITY & PROSPERITY PARTNERSHIP 6 July 2005

In March 2005, the leaders of Canada, the U.S. and Mexico joined together to launch the Security & Prosperity Partnership (SPP) (www.spp.gov). SPP is the first major tri-lateral initiative since NAFTA that will further integrate the North American economies, quality of life and combined security. In late June, the Ministers/Secretaries responsible for foreign affairs, commerce and national security for each of the three nations tabled a "Report to Leaders" that maps out 105 joint bi/tri-lateral initiatives.

Increased Regionalisation of Security Worldwide Solomon Wong Director, Security & Planning

The SPP process signals some movement towards mutual recognition of security procedures and processes by June 2007. This is a major trend that is being evidenced in other parts of the world: Europe, Africa and APEC are all advancing some form of internal alignment of standards. In particular, SPP embraces the "Perimeter" concept for security and borders that the Canadian Airports community has supported. !

27 initiatives are outlined to bolster the security of the three countries. These will be tracked and advanced at the most senior levels of government, much like the 2001 Smart Border Action Plan.

Relationship between "Security" and "Prosperity" One of the major strengths of the SPP concept was the direct linkage drawn between security and prosperity. Far too often security measures are advanced without consequential thought on market or modal impacts. SPP provides a framework that, at the same time is building new border and security innovations, advances telecommunications, agriculture and health industries. !

78 initiatives are outlined to build prosperity and further integrate the NAFTA economies.

Progress Report Anticipated December 2005 Although SPP has an ambitious start in the first three months of the initiative, there remains some sizeable gaps in its delivery. These may form a future set of initiatives beyond the initial 105. Some key challenges under consideration in the future progress report include: !

Lack of integrated approach: Borders and transportation security are still treated separately. Under SPP, for example, NEXUS will become one program. However, there is no vision to align comparable "Registered Traveller" programs in transportation security.

Little tri-lateral security research: A lot of focus on economic initiatives revolve around trilateral research. However, little to no focus is provided to advance joint research on future border/transportation security practices – a key ingredient for future process harmonisation.

Inter-relationships with Air Liberalisation: Any future "Open Skies" or liberalisation of aviation agreements depends on common recognition of screening systems for passengers and cargo. The absence of this would lead to an environment of re-screening in each country and delays within the supply-chain/travel processes. Future SPP initiatives should clearly establish these dependencies.

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THE OTTAWA REPORT 12 July 2005

Air Transport Association Signs Agreement with Government of Canada to Reduce GHG Emissions On 29 June 2005, the Air Transport Association of Canada finalised an agreement with the Government of Canada to reduce greenhouse gas (GHG) emissions in the domestic aviation services sector. The draft agreement to reduce GHG was agreed to in November 2004. Under the voluntary agreement, the Air Transport Association will encourage its members to improve energy efficiency by an average of 1.1% per year, which will result in a total GHG emission reduction of about 24% by 2012, relative to 1990 levels. Transport Canada estimates that domestic aviation accounts for approximately four percent of Canada’s transportation related GHG emissions.

Sam Barone Regional Vice President

Federal and Provincial Government to Fund Intelligent Transportation Systems Research and Development in B.C. David Emerson, Minister of Industry, and co-Senior Minister responsible for British Columbia, and B.C. Transport Minister, Kevin Falcon announced that the Federal and B.C. Provincial Government will each provide up to $500,000 to establish the Bureau of ITS and Freight Security at the University of British Columbia. The Bureau will establish a research and development program to conduct research on intelligent transportation systems and freight security. The goal of the research is to improve the efficiency and security of existing transportation systems/infrastructure in B.C. by looking at new ways to use technology.

Transport Canada Announces $2.5 Million Funding to Continue Passenger Rail Service in Northern Ontario Transport Canada has extended its funding agreement (to 31 March 2006) with the Ontario Northland Transportation Commission to provide $2.5 million to support the continuation of passenger rail service between Toronto and North Bay. The service provides a transportation link between the Greater Toronto Area and Parry Sound-Muskoka, with stops in Gravenhurst, Bracebridge, Huntsville and South River. The Ontario Northland Transportation Commission is a provincial Crown corporation.

NAV CANADA Reports $279 Million Revenue in Third Quarter 2005 NAV CANADA reported revenues of $279 million in the third quarter of ended 31 May 2005, compared to $248 million in the same period last year. The higher revenues arose from the increase in customer service charges that were implemented 1 September 2004 and an increase in air traffic. Operating expenses for the quarter were $216 million.

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THE WASHINGTON REPORT 13 July 2005

DOJ Clears US Airways-America West Merger After a 30-day review, the U.S. Department of Justice (DOJ) has cleared the proposed merger between US Airways and America West. While the merger is still subject to approval by America West’s shareholders, US Airways creditors, the bankruptcy court, the Securities and Exchange Commission (SEC), the U.S. Department of Transportation (DOT), and the Air Transport Stabilisation Board (ATSB), the two airlines hope to complete the deal and begin merging this fall.

House Awards $14.4 billion to FAA

Charles Chambers Senior Vice President InterVISTAS-ga2 Consulting Inc. Washington, D.C.

A US$67 billion bill passed by the House Appropriations Committee for the 2006 fiscal year will provide $14.4 billion to the Federal Aviation Administration (FAA). This is up $877 million from the previous year and $1.7 billion more than the FAA’s request. The budget includes $8.2 billion for operations, $3.6 billion for the Airport Improvement Program, $104 million for Essential Air Service and $25 million to hire and train new air traffic controllers. The bill also extends the war risk insurance for one year. Funding for the $20 million Small Community Air Service Development program and the $10 million Airport Co-operative Research Program was eliminated due to a procedural objection raised by House Aviation Subcommittee Chairman John Mica (R-Fla). His objection was not based on the merits of the individual programs, but because they were funded from AIP, which is not specifically authorised by current law.

Pension Protection Act Approved by House subcommittee The Pension Protection Act was approved by the House Employer-Employee Relations Subcommittee, requiring companies to fully fund pension plans within seven years and to pay higher insurance premiums to the Pension Benefit Guaranty Corp (PBGC). The bill does not include special airline aid. John Boehner (R-Ohio), who introduced the bill, stated that he did not want industryspecific language included as the measure moves through the House of Representatives. American Airlines supported the bill, but would like to see that airlines get 15 years to fund pensions. Delta favours bills introduced in the House and Senate that would allow 25 years for airlines to fund their pensions.

Mineta Calls for Reform of 1970s-Model Aviation Trust Fund DOT Secretary Norman Mineta has called for the Aviation Trust Fund (ATF) to be reformed. With revenues for the fund coming from a 7.5% ticket tax of each plane ticket sold, Mineta says that today’s low fares are not providing enough for the fund. The ATF was created to fund airspace system improvements. The fund raised $9 billion in 2004, short of the $13 billion required to make necessary system improvements. The trust fund is due for renewal in 2007.

GAO Presents Report on U.S. Legacy Carrier Issues to House Subcommittee The General Accountability Office (GAO) presented its report on U.S. legacy carrier issues to the House Aviation Subcommittee in June. The report stated that U.S. airlines under bankruptcy protection have not historically harmed their competitors, but are detrimental to pension plan participants and the PBGC. The GAO stated that legacy carriers have not been able to reduce their costs enough to properly compete with low-cost carriers and acclimate to changing consumer demand. Shifting pension plans to the Pension Benefit Guaranty Corporation (PBGC) will not solve their financial problems, but will shift risk to the PBGC.

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INTERVISTAS NEWS 12 July 2005

Financial and retail expert Karla Petri joins InterVISTAS Consulting Financial and retail expert Karla Petri has joined InterVISTAS Consulting Inc.’s Winnipeg office as Associate Consultant, Retail & Financial Planning. Ms Petri has more than 10 years experience in financial, retail and land development planning. She was formerly a member of the Vancouver International Airport’s corporate finance team, and before that a regulatory expert with BC Hydro. Ms Petri has conducted financial feasibility studies, risk analysis, and development and management of RFP processes to select concessionaires and land development tenants. In the utilities sector she has undertaken load analysis, revenue forecasting and market research for use in commercial decision making and regulatory submissions. Ms Petri has a Masters degree in economics form the University of British Columbia, and an undergraduate degree from the University of Winnipeg. She will be based in InterVISTAS Winnipeg office (204) 949-2900.

InterVISTAS Reports on Transborder Air Services Since 1994. InterVISTAS Consulting Inc. has completed a report on the changes in Canada-US air services since 1994, the year prior to the 1995 Open Transborder Air Services Agreement. The report compared actual transborder traffic to the 1994 forecast. As well, the report provides a summary for each Canadian airport which has or had transborder air service, including traffic levels, carriers and routes for 1994 and 2005. The report was sponsored by Aéroports de Montréal, the Greater Toronto Airports Authority and the Vancouver International Airport Authority. The report is available at www.InterVISTAS.com or at www.OpenSkies.ca.

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

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