CAIR Issue No. 43 - July 2006 by Leah Dupuis

INTERVISTAS ’ CANADIAN AVIATION INDUSTRY REVIEW

In this issue… Features Columns: • Economic Outlook (p.1) • Oil Surges Past $70/Barrel (p.3) • Selected Publicly Available Cargo Trends (p.7)

Regular Reports: • Airline Data-Canada (p.4) • Airport Data (p.5) • Airline Data-U.S. (p.6) • Industry News (p.8) • Cargo Capers (p.13) • The Ottawa Report (p.15) • The Washington Report (p. 17) • InterVISTAS News (p.18)

ECONOMIC OUTLOOK July 2006

The U.S. – Heading for a Recession? In recent months, there has been increasing speculation that the U.S. economy is heading for a slowdown, and possibly a recession, in the short to medium term. While growth in the first quarter of 2006 was a strong 5.6% on an annualised basis, most predictions see the economy slowing and growth declining below recent Real U.S. GDP (Annualised Quarterly %) averages by late 2006 or early 2007. These expectations are predicated 8% on a number of interrelated factors:

Josh Drury Senior Analyst

The Federal Reserve (‘The Fed’) has steadily been raising interest rates and it may do so a few more times in the near future, due to concerns with inflation. These rate increases increase the cost of borrowing and cool demand.

Historical Data

Forecast Data

6% 5% 4% 3% 2% 1%

Q1 2007

Q1 2006

Q1 2005

Q1 2004

Q1 2003

The housing market is 0% beginning to decline. Home -1% prices increased rapidly in most -2% markets over the past few years, but appear to be levelling off. Source: Bureau of Economic Analysis for Historical Data / TD Rising interest rates and higher Economics for Forecast Data home prices have made housing less affordable and the number of unsold houses on the market has increased. Housing starts are expected to decline over the next few years. Q1 2002

U.S. New Home Average Sales Price $320,000 $300,000 $280,000 $260,000 $240,000 $220,000 $200,000

Source:

Page 1 July 2006

06 nJa

04 Ja

03 Ja

02 nJa

$180,000

US Census Bureau

ECONOMIC OUTLOOK – CON’T

Consumer spending is expected to soften. Recent consumer spending has benefited from both historically low interest rates and the wealth effects of rising home prices, as homeowners have cashed out much of their increased equity for home improvements and discretionary purchases. If interest rates increase and housing prices stagnate, consumer spending will fall back.

Soft or Hard Landing? While the consensus is that the U.S. economy will slow, there is some disagreement in whether this manifests itself in a period of below average but positive growth, or in a mild recession. The course of the economy will depend on a number of risk factors. First, there is the question of whether the increase in housing prices constitutes a ‘bubble’ that will burst and result in an abrupt downward market correction. The second risk is that oil and commodity prices will continue to rise, putting inflationary pressure on the economy as a whole and possibly leading to further tightening of monetary policy. Most projections are cautiously optimistic that these risks will be avoided. Commodity prices are expected to ease, and housing prices are expected to flatten rather than decline sharply, though this may be experienced locally in markets with the most pronounced increases.

Implications for Canada Whether the outcome in the U.S. is a slowdown or a recession, the decline in growth in the U.S. will have a dampening effect on the Canadian economy. Canada is expected to fare better than the U.S. in the next few years as the above factors do not exist or are less pronounced in the Canadian economy. Nevertheless, as the U.S.’s largest trading partner, Canada will suffer somewhat from a decline in U.S. demand. Current projections for the Canadian economy show a slowdown, but not as slow as the U.S., with growth declining to just over 3% for 2006 as a whole and 2.7% for 2007.

Page 2 July 2006

OIL SURGES PAST $70/BARREL July 2006

In the past month, oil prices have climbed to and surpassed the $70 per barrel mark. Strong global demand, potential supply concerns, and refining capacity issues continue to be the principal forces behind these elevated prices. On 5 July, oil reached an all-time closing high of $75.19. However, it should be noted that in inflation adjusted terms, the price is still well below levels seen during the 1979 oil crisis. Figure 1 illustrates the inflation-adjusted price of oil during the past 60 years. Figure 1: Crude Oil Prices (1946-2006) in 2005 Dollars $100 $90

2005 US$/Barrel

Doris Mak Manager, Special Projects

Iran/Iraq war

$80 $70

Asian Economic Crisis

Iranian Revolution

Series of OPEC Cuts (5 Million Barrels)

$60 $50 $40

Yom Kippur War Arab Oil Embargo

$30 $20 Gulf War

$10

9/11

$0 46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06

1946 - 2006

World Demand on the Rise Global demand has ramped up for the summer months as the northern hemisphere enters the busy summer driving season and the inventory build-up for winter month heating oil begins. Continued development in China and India has also been a factor in long-term energy demand. First quarter world oil demand averaged 85 barrels per day in 2006, up 1% from the same period in 2005.

Supply Concerns Continue to Elevate Prices Continued supply related concerns have also helped keep oil prices elevated. Potential or existing supply problems in Nigeria, Iran, Iraq and Venezuela have all contributed to recent market conditions. The threat of hurricane related damage along the Gulf Coast has also influenced supply concerns.

Refining Capacity Drops from 2005 During the first five months of 2006, U.S. refinery inputs of crude oil have averaged 470,000 barrels per day below the levels during the same period in 2005 (3% of total daily production). Several refineries continue to operate at reduced levels or remain shut down due to hurricane damage. Other refineries have delayed production to install equipment to meet Tier 2 gasoline and ultra-low-sulphurdiesel regulations or to undergo deferred maintenance schedules. Short-term futures contracts are presently being traded at values above the spot price, while longterm contracts are being traded below the spot price. These values suggest that short-run spot prices may rise, but a long-run downward correction is expected by the market. Page 3 July 2006

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

Air Carrier

Revenue Passenger Kilometres

% Change over 2005

% Change from 2004

+9.1%

-0.9%

+3.8%

-5.6%

-0.7%

-3.3%

Jazz

+56.5%

+114.7%

International & Charter

+5.0% +25.9%

Air Canada

+1.7%

CanJet: not reported

Domestic (Mainline)

WestJet

Change over 2005 +2.2 pts (to 83.5%)

Change from 2004 +4.1 pts (from 79.4%)

-2.1%

-1.9 pts

+1.2 pts

+59.3%

+97.4%

-1.3 pts

+6.0 pts

+13.7%

+0.1%

+6.5%

+3.9 pts

+5.3 pts

+54.1%

+20.0%

+43.7%

+3.6 pts (to 77.1%)

+5.2 pts (from 71.9%)

Analysis:

Load Factor

% Change over 2005

OTHER CARRIERS: LOAD FACTORS

% Change from 2004

Capacity

Available Seat Kilometres

Air Canada Domestic Mainline

Air Canada domestic mainline traffic continued its downward trend in June, dropping 5.6% from June 2005. This was offset by a 49.1% increase in domestic Jazz traffic. Combined, domestic mainline and domestic Jazz traffic is up 4.5% in June while capacity increased 2.4% (combined figures not shown). Led by transatlantic and transborder service, Air Canada international traffic climbed 5.0% during the month of June. A flat capacity increase of 0.1% allowed load factor to increase 3.9 points over June 2005.

10%

Jazz data is not included in this graph

5% 0% -5% -10% Jun05

Jul

Aug

Sep

Oct

Nov

Dom RPK

During the month of June, WestJet managed to increase load factor by 3.6 points despite capacity expansion of 20% over June 2005. Year to date capacity has increased 14% over 2005, while year to date traffic is up 24%.

Mar

Apr

May

Jun

Mar

Apr

May

Jun

Dom ASK

Air Canada International 15% 10% 5% 0% -5% Jun05

Jul

Aug

Sep

Oct

Nov

Int'l RPK

Dec Jan- Feb 06

Int'l ASK

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

Page 4 July 2006

Jul Aug Sep Oct Nov Dec Jan- Feb Mar Apr May Jun 06

RPK

ASK

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

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

+5.5%

MontréalTrudeau +3.6%

+12.2%

+12.0%

+5.5%

+8.0%

-4.5%

+5.8%

+26.3%

+13.5%

+5.7%

St. John’s +8.5%

Toronto

Vancouver

May

+6.7%

June

+6.3%

+4.0%

+7.5%

+10.1%

+13.9%

+3.4%

+2.9%

-0.5%

+6.8%

+22.7%

+10.9%

+12.4%

12.4%

2nd Quarter

+5.7%

+4.5%

+5.6%

+8.6%

+10.4%

+3.1%

+5.0%

-1.8%

+5.1%

+22.6%

+10.2%

+7.3%

+10.3%

2005

July

+3.6%

+3.4%

+4.0%

+11.2%

+11.7%

+4.8%

+4.5%

-9.7%

+1.2%

+15.9%

+5.2%

+10.9%

+14.0%

August

-1.1%

+2.7%

+1.5%

+12.7%

+8.8%

+4.4%

+4.6%

-6.4%

+5.2%

+26.4%

+10.3%

+2.4%

+8.9%

September

+4.5%

+2.6%

+7.4%

+7.9%

+13.5%

+7.1%

+6.6%

+0.3%

+2.9%

+16.1%

+12.9%

+13.9%

+8.9%

3rd Quarter

+2.2%

+2.9%

+4.1%

+10.7%

+11.2%

+5.4%

+5.1%

-5.6%

+3.1%

+19.6%

+9.3%

+8.8%

+8.0%

October

-0.1%

+4.3%

+3.7%

+7.1%

+16.7%

-0.7%

+6.4%

-0.7%

+3.1%

+16.1%

+11.8%

+12.8%

-0.9%

November

+0.6%

+5.2%

+4.1%

+12.1%

+10.7%

-2.5%

+6.2%

+3.0%

+8.5%

+24.0%

+18.0%

+15.6%

+5.0%

December

-0.6%

+0.5%

+4.3%

+10.3%

+4.9%

-3.5%

+5.4%

+5.6%

+3.8%

+19.1%

+12.2%

+9.5%

+7.9%

4th

2006

+0.0%

+3.2%

+4.0%

+9.8%

+10.4%

-2.2%

+6.0%

+2.4%

+4.9%

+19.6%

+13.9%

+12.5%

+3.6%

Full Year

Quarter

+4.6%

+4.4%

+5.4%

+10.6%

+10.5%

+3.6%

+6.5%

-0.4%

+5.5%

+19.3%

+12.3%

+10.6%

+8.2%

January

+1.1%

-1.7%

+1.4%

+9.1%

+10.7%

+1.0%

+2.8%

+5.4%

+6.2%

+20.3%

+10.1%

+4.4%

+9.7%

February

-0.5%

+1.5%

+2.1%

+8.7%

+10.5%

+0.2%

-0.6%

+1.2%

+1.4%

+11.0%

+3.0%

-2.8%

+7.0%

March

+3.1%

+3.5%

+6.6%

+9.0%

+13.6%

+3.9%

+2.0%

+4.8%

-3.5%

+15.4%

+0.1%

-3.8%

-7.8%

1st Quarter

+1.3%

+3.6%

+8.7%

+11.8%

+1.8%

+1.4%

+3.8%

+0.9%

+15.5%

+4.4%

-0.8%

+2.0%

April

+1.2%

+4.3%

+6.2%

+19.5%

+20.4%

+3.8%

+0.7%

+6.1%

+4.2%

+17.9%

+9.5%

+13.9%

+13.1%

May

+4.8%

+3.2%

+7.6%

+16.3%

+20.3%

+0.3%

+6.4%

+8.4%

+10.3%

+13.2%

+7.7%

+23.3%

+15.2%

Source: Transport Canada and individual airports’ traffic reports. If your airport is interested in providing InterVISTAS Consulting Inc. with its monthly passenger statistics, please email Doris Mak at doris_mak@intervistas.com.

Page 5 July 2006

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

Traffic (RPMs – millions)

(ASMs – millions)

1,997

2,433

82.1%

Ç11.4%

Ç20.8%

È6.9 pts

826

1,026

80.5%

Ç12.7%

Ç5.5%

Ç5.2 pts

6,150

7,652

80.4%

Ç13.2%

Ç7.3%

Ç4.2 pts

8,223

9,733

84.5%

Ç13.7%

Ç10.6%

Ç2.3 pts

10,755

12,181

88.3%

Ç2.3 pts

Ç2.2%

Ç0.2 pts

12,659

14,819

85.4%

È0.1%

È3.1%

Ç2.6 pts

11,112

13,157

84.5%

È0.1%

È3.0%

Ç2.5 pts

6,517

7,265

89.7%

È8.3%

È10.4%

Ç2.0 pts

5,869

7,006

83.8%

È5.8%

È8.6%

Ç2.5 pts

387

431

89.7%

È37.8%

È46.7%

Ç12.9 pts

Notes:

Capacity

Load Factor

1. Mainline operations only. 2. Load factor includes scheduled service only.

Sources: Carrier traffic reports.

Page 6 July 2006

Page 7 July 2006

Jan-06

Oct-05

Jul-05

Apr-05

Jan-05

Oct-04

Jul-04

Apr-04

Jan-04

Oct-03

Total

-10 0

-20

-30 May-05

Jan-05

Sep-04

May-04

Jan-04

Sep-03

May-03

Jan-03

Sep-02

May-02

Jan-02

Sep-01

May-01

Jan-01

% change from previous year

Apr-06

'Jan-06

Oct-05

May-06

Jan-06

40 Sep-05

Vancouver Air Cargo 2001-2006

Jul-05

Excludes Mail

Apr-05

Jan-05

Oct-04

Jul-04

Apr-04

Jan-04

Oct-03

Jul-03

Apr-03

Jan-03

Oct-02

Jul-02

Apr-02

Jan-02

Oct-01

Jul-01

Apr-01

Jan-01

% change from previous year

Total cargo

Jul-03

Apr-03

Jan-03

Oct-02

Jul-02

Apr-02

Jan-02

Oct-01

Jul-01

Apr-01

Jan-01

% change from previous year

SELECTED PUBLICLY AVAILABLE CARGO TRENDS

July 2006

US Domestic Air Cargo Traffic 2001-2006 30

10 0

-10

-20

-30

Integrator

Winnipeg Air Cargo 2001-2006

60%

50%

40%

30%

20%

10%

-10%

-20%

NEWS ARTICLES AIR CANADA UPDATE AIR CANADA LAUNCHES DAILY NONSTOP MONTREAL–DENVER SERVICE

AIR CANADA JAZZ LAUNCHES NONSTOP FLIGHTS BETWEEN ABBOTSFORD AND TORONTO

On 16 June, Air Canada launched daily, non-stop service between Montreal and Denver. Air Canada is the only airline to offer this direct service, which cuts existing air travel time by about two hours. The flight will be operated using 120-seat Airbus A319 aircraft.

On 16 June, Air Canada Jazz launched non-stop service between Abbotsford, BC and Toronto. The five-times weekly service will be operated using an Embraer E190 jet configured with 9 Executive Class and 84 Economy Class seats.

AIR CANADA LAUNCHES DAILY NONSTOP MONTREAL–MEXICO CITY SERVICE

AIR CANADA JAZZ LAUNCHES NONSTOP WINNIPEG–LAS VEGAS AND CALGARY–PALM SPRINGS FLIGHTS

On 17 June, Air Canada launched daily nonstop service between Montreal and Mexico City. The service will be operated using 120-seat Airbus A319 aircraft.

AIR CANADA LAUNCHES 3 TIMES WEEKLY NON-STOP TORONTO– SHANGHAI FLIGHTS

On 17 June, Air Canada launched non-stop service between Toronto and Shanghai. The new three-times weekly service is the only nonstop flight from eastern North America to Shanghai and offers the fastest flying time from Toronto. The flight will be operated using a 285seat A340-300 aircraft.

AIR CANADA WILL LAUNCH TWICE WEEKLY NON-STOP EDMONTON–LAS VEGAS FLIGHTS

Air Canada announced that starting 7 September, Air Canada will launch twice weekly, non-stop service between Edmonton and Las Vegas using 120-seat Airbus 319 aircraft.

Page 8 July 2006

On 21 June, Air Canada announced that Air Canada Jazz will operate twice weekly, nonstop service between Winnipeg and Las Vegas starting 7 September and daily non-stop flights between Calgary and Palm Springs starting 15 December. All flights will be operated using 75seat Bombardier CRJ-705 jet.

AIR CANADA JAZZ LAUNCHES DAILY NON-STOP EDMONTON–YELLOWKNIFE AND CALGARY–YELLOWKNIFE FLIGHTS Air Canada Jazz launches daily non-stop flights between Edmonton and Yellowknife starting 3 July. The company also launches the only daily non-stop flights between Calgary and Yellowknife starting 4 July. All flights are operated with 50-seat CRJ aircraft.

AIR CANADA JAZZ RESUMES TORONTO CITY CENTRE OPERATIONS IN AUGUST On 6 July, Air Canada Jazz announced that it will resume operations from Toronto City Centre Airport on 28 August, along with enhanced schedules and more destinations. Air Canada Jazz will provide daily service between Toronto City Centre Airport and Ottawa, and will also reinstate service to Montreal. On weekdays, it will offer ten round trips to Ottawa and seven round trips to Montreal.

NEWS ARTICLES AIR CANADA UPDATE – CON’T ACE RECEIVES $205 MILLION FROM SALE OF US AIRWAYS STOCK

ACE Aviation Holdings Inc., the parent company of Air Canada, bought five million shares of U.S. Airways’ stock for US$75 million back in September 2005. In April 2006, ACE sold 1.75 million shares for nearly US$68 million. In June and this month, ACE sold another 2.75 million shares for nearly US$140 million. Altogether, ACE received over US$205 million for the 4.5 million U.S. Airways shares sold in the open market. ACE still holds 500,000 shares of the stock and it makes up less than one percent of U.S. Airways.

WESTJET UPDATE WESTJET TO OPEN AIRPORT LOUNGES ACROSS CANADA TO ATTRACT BUSINESS TRAVELERS FLYING ANY AIRLINE WestJet is partnering with Manchester, U.K.- based Penauille Servisair to open airport lounges across Canada. Lounges are currently available in Ottawa and Winnipeg, while Calgary and Vancouver are scheduled to open in September. Travellers from any airline or travel class can buy one-day passes from C$14 to C$20 depending on the lounge’s location. WestJet is offering introductory rates when lounge access is pre-booked online. Amenities include leather seating, free nonalcoholic beverages and snacks and television and flight information screens, along with access to business facilities such as fax and wireless Internet. Lounges are licensed to serve alcohol at an additional cost.

Page 9 July 2006

OTHER CANADIAN AIRLINE NEWS HARMONY–HAWAIIAN INTER-ISLAND, AUSTRALIA CODE-SHARE DEAL AWAITS U.S. APPROVAL

Harmony Airways and Hawaiian Airlines agreed to a code-share deal in May calling for Hawaiian to carry Harmony’s code on interisland flights from Honolulu to Hilo, Maui, Kona and Lihue, as well as from Maui to Hilo, Kona and Lihue. Another part of the code-share agreement allows Hawaiian to carry Harmony’s code on its flights between Honolulu and Sydney. Harmony is in the process of obtaining authority for Canada-Australia operations from Australian and Canadian authorities but does not have U.S. authority for the HonoluluAustralia sector. Once approved, Harmony and Hawaiian would compete with existing services by American/Qantas, United and Air Canada.

TRANSPORT MINISTER CANNON DESIGNATED SKYSERVICE TO PORTUGAL On 6 July, the Federal Minister of Transport, Infrastructure and Communities announced the designation of Skyservice Airlines Inc. as a scheduled international carrier. The new designation allows the carrier to operate between Canada and Portugal. Skyservice intends to operate scheduled air services to Lisbon and Faro from unnamed Canadian points, but most likely Toronto. (See also Ottawa Report, page 15)

NEWS ARTICLE CARGO NEWS DHL-TRANSMILE ALLIANCE CUT DELIVERY TIME FOR MALAYSIAN CUSTOMERS BY HALF DAY On 26 June, DHL signed a long-term “strategic network alliance” with Malaysian cargo carrier Transmile. DHL will offer 10 weekly flights from Subang airport to its main Asia/Pacific hub in Hong Kong aboard Transmile aircraft. DHL already has block space for cargo on Transmile flights but this agreement will allow for more regular service and cut delivery time for Malaysian customers by a half-day for shipments to other countries in Asia, Europe and the U.S. West Coast.

VOLGA-DNEPR TO OPERATE NEW IL-76 Volga-Dnepr Group said it will start commercial flights with its new generation IL-76TD90VD freighter, reestablishing the freighter for worldwide operations including major cargo markets in Europe, North America, Australia and Japan, which placed a ban on the use of IL-76TD aircraft due to noise restrictions. The IL-76 is a successful and popular aircraft for air cargo movements. Volga-Dnepr Group has upgraded the IL-76 by further improving its operating capability and ensuring compliance to the current and future regulatory requirements of ICAO. The first new-build IL-76TD-90VD has been given clearance to operate globally after the aircraft type was awarded a Chapter 4 noise certificate by ICAO in January 2006.

Page 10 July 2006

UNITED STOPS FLYING U.S. DOMESTIC MAIL STARTING IN JULY

United Airlines will stop transporting U.S. domestic mail after 30 June. United did not qualify for a five-year domestic mail contract renewal from the U.S. Postal Service based on its ontime domestic mail delivery performance from October through March. The airline has declined a short-term contract extension to operate through 30 September. United will continue to move international mail, which makes up most of its mail service in volume and revenue. The airline can bid for U.S. domestic mail service in 2011.

UPS TO FLY U.S. POSTAL SERVICE MAIL

United Parcel Service Inc. and the U.S. Postal Service have agreed to a deal for UPS to carry mail for U.S. Postal Services. The deal is expected to generate more than $100 million in revenue per year for UPS and allows UPS to be in a strong position to compete for some or all of the postal business currently handled by FedEx Corp. FedEx’s $1.3 billion contract is up for renewal in 2007.

CATHY PACIFIC ORDERS SIX 747-400 FREIGHTERS FOR HONG KONG HUB

On 22 June, Cathy Pacific ordered six Boeing 747-400 Extended Range Freighters (ERF) to accommodate new cargo growth plans for its Hong Kong hub. The new planes are scheduled for delivery between May 2008 and April 2009. The 747-400ERF has a maximum payload of 248,600 pounds and carries 22,000 pounds more than other 747-400 freighters on longrange flights at maximum take-off weight.

NEWS ARTICLES PEOPLE IN THE NEWS PRESIDENT AND CEO OF GTAA TO RETIRE

Mr. John Kaldeway, President and CEO of the Greater Toronto Airports Authority, is to retire when his contract ends in December 2006. The Board will begin a formal search for the new President and CEO who will be in place in the first quarter of 2007. Mr. Kaldeway began his career in aviation more than 30 years ago with Transport Canada. He transferred to the GTAA in December 1996 and assumed his present position in October 2004.

NANAIMO AIRPORT APPOINTED NEW PRESIDENT AND CEO The Nanaimo Airport has appointed Michael Hooper as the President and CEO of the Nanaimo Airport Commission. This position was previously held by David Hunter. Hooper has 28 years experience in land management, working as a consultant to forestry companies on the West Coast of Vancouver Island, as well as the South Coast up to Alaska.

EDC NEW YORK HIRES FORMER ACI-NA HEAD TO PROTECT INTERESTS IN AIRPORT MATTERS The city of New York’s Economic Development Corp. has hired the former ACI-NA and Port Authority head, David Plavin, as a consultant for a year. Mr. Plavin will advise the city on aviation matters with a focus in modernising the three New York area airports.

Page 11 July 2006

AIRBUS CONFIRMED NEW PRESIDENT AND CEO

Airbus has confirmed that Christian Streiff, deputy CEO of French building materials group Saint-Gobain, is the new president and CEO of Airbus after former CEO Gustav Humbert resigned from his position on 2 July. Humbert had left because of the A380’s problems and the selling of a large block of EADS stock shortly before the announcement of the latest delay.

OTHER SOUTHWEST RAISES FARES TO OFFSET RISING FUEL COSTS Southwest Airlines raised ticket prices by $3 on flights between 750 and 1,000 miles and by $10 on flights longer than 1,000 miles, citing soaring fuel costs. Southwest earned $548 million last year and its fuel bill is expected to be $800 million higher this year. Southwest remains one of the best-hedged airlines against fuel spikes in the industry and has locked in prices until 2009. Southwest’s increases were immediately matched by seven other airlines: American Airlines, United Airlines, Delta Air Lines, Northwest Airlines, Continental Airlines, AirTran Airways and Frontier Airlines.

EASYJET INCREASES PROFIT FORECAST DUE TO GROWTH IN NONTICKET ANCILLARY REVENUE

EasyJet executives increased their profit forecast to 40-50% growth for fiscal year 2006. Much of the earnings will stem from a 30% rise per seat this year in nonticket ancillary revenues, such as drinks, online insurance, excess baggage, hotels and car hire.

NEWS ARTICLE OTHER – CON’T MAIR REPORTS $83 MILLION FISCAL YEAR LOSS

MAIR Holdings, the parent company of Mesaba Airlines and Big Sky Airlines, reported a loss of $83 million in fiscal year ended 31 March. MAIR explained the loss was driven by Northwest Airlines’ decision to withhold approximately $30 million in regularly scheduled payments and its decision to reduce Mesaba’s fleet by more than 50%, which led to Mesaba’s bankruptcy. MAIR earned $7.4 million in the prior fiscal year.

BOEING/AIRBUS SALES UPDATE In the first half of 2006, Boeing sold 480 aircraft and Airbus sold 117. In the small capacity narrow body segment, Boeing sold sixty-nine 787s compared with Airbus sales of thirteen A350s. Airbus sold eight of the A330/340 series and ninety-six A320s, which continue to be a strong product.

NEW VARIG AUCTION SET FOR JULY 12 Varig’s future was up in the air as NV Participacoes, the employee-led investor group that was the only bidder at the 8 June auction of the bankrupt carrier, failed to make an initial $75 million down payment on 23 June. In the first week of July, Judge Luiz Roberto Ayoub revealed his decision to hold a new auction to sell Varig on 12 July. To be eligible for this auction, bidders must provide a bank bond for $100 million to guarantee the financial solvency of the bid.

Page 12 July 2006

CARGO CAPERS July 2006

The New Formula for High Stock Prices? Everyone is aware that cargo airlines (indeed, transportation firms generally) are facing historically high fuel costs. Prices have risen dramatically over the past few years as the following chart from the International Air Transport Association shows.

Robert Andriulaitis Vice President Transportation and Logistics Studies

Compounding this, the U.S. Department of Homeland Security recently released its Final Rule for Air Cargo Security Requirements. This rule will increase costs for air cargo carriers, as it will require background security checks for another 50,000 air cargo operator employees and add another 300 cargo inspectors to TSA’s payroll. There is also media attention (mostly in Europe) on reining in aviation due to the environmental damage from aircraft emissions. The European parliament is calling for airlines to pay tax on aviation fuel, and to be brought into the EU's carbon emissions trading scheme. The concern is over the volume of emissions, the anticipated high growth rate of air transport, and the fact that aviation emissions are at high altitude, where the impact is greater. So, one could expect investors to be nervous about the prospects for air cargo companies. The following New York Stock Exchange charts of share prices of Atlas Air, FedEx and UPS over the past year, however, suggest the market remains confident in the future of air cargo. Atlas Air

FedEx

UPS

Page 13 July 2006

CARGO CAPERS – CON’T Reasons for Optimism So why the continued optimism? A key factor is the continuing increase in global trade driven by strong economies in China and elsewhere, and the gradual elimination of restrictions on international air cargo service that is allowing air carriers to actually capitalise on this trade growth. The basic demand for international air cargo continues to rise, particularly as China, India and other nations continue their rapid growth and integration into the world economy, and this bodes well for air cargo carriers that operate on a global scale. Part of the reason may also stem from the nature of the cost increases. Some suggest that fuel and security costs are easier to pass on to customers than general rate increases because they are separable and clearly attributable to outside causes. As well, competing modes of transport are all facing nearly identical increases in energy costs. I used the term ‘nearly identical’, since the ‘crack spread’ between aviation fuel prices and the price of crude oil has increased at the same time that oil prices have gone up, giving air transport a double whammy on the energy cost front.

Carbon Taxes One real uncertainty is on the environmental side, where there may be some potential in Europe for air transportation to be singled out for “special” treatment. Penalising a mode of transportation that has made tremendous strides in improving fuel efficiency and hence lowering relative emission levels does not make for sound environmental policy. Nor does this make for sound economic policy: it is imperative that all modes of transport be treated in an equitable manner so as to not artificially distort the market for cargo transportation and in turn limit trade and economic growth. Organisations such as IATA are already heavily involved in strategic advocacy in this area, and only time will tell how this evolves. Overall, while it will remain a challenge for air cargo companies to remain profitable in a competitive arena as the operating and policy environment continues to increase in complexity, the air cargo fundamentals remain strong.

Page 14 July 2006

THE OTTAWA REPORT July 2006

Canada and UK Sign Open Skies Agreement Canada and the United Kingdom signed an open skies agreement that allows airlines from each country to offer unlimited flights to and from third countries via the other country. Airlines will also face no restrictions on how they set their fares when carrying passengers through their own country to the third country. The agreement is effective September 2006.

Canada and Portugal Conclude New Air Transport Agreement

Sam Barone Regional Vice President Ottawa, ON

On 19 June, the Minister of Transport and the Minster of International Trade announced that the governments of Canada and Portugal have established a new air transport agreement that will allow for significant expansion of air services between both countries. Under the new agreement, Canadian airlines will have access to all destinations in Portugal and Portuguese airlines will have the same access to Canadian destinations. There will also be no limitations on the frequency of service carriers can offer. In addition to operating their own aircraft, carriers can provide code-sharing services. Although this is a liberalisation of the Canada-Portugal agreement, because the agreement does not allow 5th freedom service or 7th freedom cargo services, it is not an open skies agreement.

Canada and Algeria Sign First Air Transport Bilateral Deal On 5 July, Canada signed its first air transport agreement with Algeria. The agreement allows for airlines to operate their own planes between the countries or carriers can utilise code-share flights. Air Algerie has announced plans to operate up to two flights per week between Algiers and Montreal. Air Canada will offer code-sharing services to Algeria via Europe.

Phase 2 of Ottawa Airport Expansion Set to Begin Phase 2 of the Ottawa International Airport expansion project will start this summer. The $95 million project, to be paid for in part by the airport improvement fee, will be completed in 2008. The expansion will add 7,000 square metres of terminal space to accommodate 12 more gates to the airport.

Transport Canada to Fund 13 Transportation Planning and Modal Integration Projects across Canada On 26 June, the Minister of Transport, Infrastructure and Communities announced over $1 million in federal funding for 13 projects that advance Transportation planning and enhance integration and connections between transportation modes as part of the Transportation Planning and Modal Integration Initiatives. To date, approximately $5 million in funding has been granted to a total of 45 projects across Canada, including the 13 projects announced.

CAC Wants Air Liberalisation Policy Accelerated Canadian Airports Council called for the federal government to accelerate pursuit of open skies agreements with countries around the world. Jim Facette, CAC President and CEO, believes Canada’s current air service agreements are far too restrictive and favour the interests of Canadian carriers. Tourism is a $58 billion industry in Canada and yet there are restrictive agreements in place with many of the top 10 sources of overseas visitors to Canada, such as Japan and South Korea. World carriers that are interested in serving Canada, or increasing service to Canada, are unable to

Page 15 July 2006

THE OTTAWA REPORT – CON’T do so due to limitations in air bilateral agreements with Canada. An EU-wide air deal would have the greatest economic potential for Canada because Europe is Canada’s second largest source of tourists after the U.S. Japan, Singapore, South Africa, South Korea and the United Arab Emirates are also priority markets for open skies agreements.

NAV Canada to Install New Navigation Aids NAV Canada will replace 100 Distance Measuring Equipment (DME) units across Canada at a cost of $15 million over the next three years to reflect NAV Canada’s commitment to renew and modernise Canada’s air navigation infrastructure. A DME is a ground based navigation aid that allows aircraft to continuously measure their distances in relation to the unit which emits a transponder-type signal.

Canadian GA User Fee Increase Upheld The new daily charge for small aircraft issue had been upheld on appeal on 17 July 2006. Pilots of small aircraft will be expected to pay a new daily charge at seven major international airports in Canada. Although the charge had been appealed by the Canadian Owners and Pilots Association and the Helicopter Association of Canada, the Canadian Transportation Agency (CTA) informed NAV CANADA that the fee complies with the Civil Air Navigation Services Commercialisation Act announced in April 2006. The new charge of $10 per day, with an annual maximum of $1200, will become effective 1 March, 2008, and apply to aircraft weighing three tonnes or less at Vancouver (including the water aerodrome), Calgary, Edmonton, Winnipeg, Toronto (Pearson), Ottawa (Macdonald-Cartier) and Montreal (Trudeau) international airports.

Page 16 July 2006

THE WASHINGTON REPORT July 2006

Transportation Secretary Mineta Resigns On 23 June, Norman Mineta, the longest serving Secretary of Transportation, announced the resignation of his position after more than five years of service. He was the only Democrat in President Bush’s Cabinet and the first Asian-American to serve in a White House Cabinet. Mineta developed the Transportation Security Administration after the events of 9/11, and he was a key author of the Intermodal Surface Transportation Efficiency Act (ISTEA) that led to major surges in mass transit ridership and greener transportation operations such as bike paths. Mineta announced that he will be joining Hill & Knowlton, a prestigious government relations firm, as its vice chairman.

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

U.S. and Chad Signed Open Skies Agreement The United States and Chad signed a full open skies agreement that will permit air services between the two countries without restrictions. The air services accord will allow all cargo carriers to fly between the other country and third countries without directly connecting to their homeland.

GAO Concludes Reregulating the Airline Industry Would Reverse Consumer Benefits The Department of Transportation (DOT) asked the Government Accountability Office (GAO) to analyze the impact of reregulating the airline industry on reducing potential pension defaults by airlines following the DOT Appropriation Act in 2006. The GAO found that airfares have fallen in real terms over time while service, as measured by industry connectivity and competitiveness, has improved slightly. Overall, median fares have declined almost 40% since 1980 as measured in 2005 dollars. However, fares in short-distance and less-traveled markets have not fallen as much as fares in long-distance and heavily trafficked markets. Since 1980, markets have generally become more competitive with the average number of competitors increasing from 2.2 per market in 1980 to 3.5 in 2005. The GAO concluded that reregulation of the industry will likely reverse much of the consumer benefits and would not save airline pensions.

GAO Says TSA Needs Money for Bag Screening Needs A new report from the Government Accountability Office indicates that funding to install future screening equipment on a large scale remains uncertain. Currently, TSA uses stand-alone EDS and ETD machines which requires a greater number of screeners and results in screening fewer bags for explosives each hour. TSA estimated that the cost of replacing the existing machines with in-line EDS machines is $22 billion over 20 years. Because of the lack of funds to install in-line EDS Systems; airports are using a variety of funding mechanisms, such as Airport Improvement Program money and passenger facility charges, to pay for screening systems. TSA has already identified 25 airports that should first receive federal funds for installing in-line EDS machines.

Senate Committee Approves $32 Billion DHS Spending Bill On 29 June, the Senate Appropriations Committee approved a $32 billion spending bill for the Department of Homeland Security for fiscal year 2005. The bill includes $422 million for explosives detection installation and a provision requiring TSA to pay for space the agency uses at airports outside of “necessary security checkpoints.” The Senate committee-approved DHS spending bill but rejects the Administration’s proposed increase in the $2.50 passenger security fee. The bill has moved to the full Senate for its consideration. Page 17 July 2006

INTERVISTAS NEWS July 2006

Angelica Sparolin Appointed as Senior Research Specialist, Economics and Transportation InterVISTAS is pleased to announce that Angelica Sparolin has been appointed as Senior Research Specialist, Economics and Transportation. Ms. Sparolin has deep and broad knowledge in market analysis, air fares and other areas. She has worked extensively with ticket sales data and is a specialist in developing air passenger market size models. She also has extensive experience conducting economic impact studies and other economic analysis for various modes of transportation.

Doris Mak Appointed as Manager, Special Projects InterVISTAS is pleased to announce that Doris Mak has been appointed as Manager, Special Projects. Ms. Mak has extensive marketing and consulting experience at InterVISTAS, working in several different practice areas including market research, air service development, economic analysis and intelligence. With this broad base of experience, Ms. Mak plays a key role in integrating the various practices in major consulting projects for clients in Canada and overseas.

InterVISTAS Upcoming Speaking Engagements

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

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

Mr. Solomon Wong, Vice President, Security & Planning Passenger Terminal EXPO 2006 USA Conference, Fort Lauderdale, FL – 6-8 December 2006 Mr. Wong will be delivering a presentation titled, “Open and Secure Skies.”

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

Page 18 July 2006