CAIR Issue No. 20 - August 2004 by Leah Dupuis

IVC MARKET INTELLIGENCE REPORT

WESTJET FLEET UPDATE August 2004

737-200 Replacement Aircraft Announced On August 3, WestJet announced an agreement to purchase six 737-600 aircraft from Boeing. Financial details were not released, although hints by WestJet suggest a purchase price of slightly under US$30 million per aircraft (Boeing’s list price for the –600 is US$41-$49 million). Financing for the planes was provided by the Export-Import bank of the United States, consistent with past deliveries. 737-200 Replacement

John Weatherill Manager, Airline Planning Vancouver, BC

The 118-seat 737-600, the smallest member of the Next Generation 737 family, will be used to replace some of WestJet’s ageing and costly 737-200s. With the 125-seat 737-200s approaching the end of their useful lives, a question had arisen as to potential replacement aircraft for use on thinner routes. Until the announcement, WestJet’s future fleet orders consisted of only 136-seat 737-700s and 166-seat 737-800s. From an operating cost standpoint, the new aircraft will provide considerable savings compared to the 737-200s. In addition to being far more fuel efficient than the older aircraft, the –600s will be more reliable and require less maintenance than the –200s. 737 Family Commonality The choice to add the 737-600 has several significant advantages for WS. As a 737NG family member, the –600 shares a common cockpit with WestJet’s –700s and – 800s, and will result in crew training and scheduling efficiencies. The family also uses many of the same maintenance parts and practices, allowing savings on spare parts inventories and maintenance training. The new aircraft will also improve scheduling flexibility, as the –600s have similar range capabilities as the –700/800s. Passengers will also notice a difference: with the 737-600, WestJet will be able to standardise their product, including offering leather seats of standard pitch and width, as well as LiveTV in-flight entertainment, throughout the fleet. Fleet Growth At the end of 2004, WestJet’s fleet will total 54 aircraft. With the 737-600 announcement, WestJet’s fleet will grow by 12 aircraft in 2005, as 15 new jets are delivered (3-600s, 7-700s, 5-800s) and three –200s are retired. The three remaining –600s will be delivered in 2006, along with the final –700 on firm order. Beginning in 2006, WestJet’s fleet will decrease in size, unless additional options are exercised. The 737-200s will continue to be phased out until November 2008, when the last of WestJet’s original fleet type is scheduled to be retired.

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WESTJET FLEET UPDATE - CON’ T Future Fleet Plans

Number of Aircraft

WestJet maintains considerable flexibility in adjusting its fleet size going forward. In addition to its ability to exercise additional 737NG options, WestJet can accelerate or delay the retirement of its 737 Classics. Furthermore, the potential exists for WestJet to place a new aircraft order if conditions warrant.

WestJet Fleet Size (2004-2008) 100

80 70

Options 737-800 737-700 737-600 737-200

60 50 40 30 20 10 0 2004

2005

2006

2007

2008

WestJet had previously examined the 100-seat Embraer-190, leading to speculation that a regional jet order was in store. WS President & CEO Clive Beddoe stated on August 3 that while “there will probably still be a need for us to consider a smaller jet to service some of the smaller markets” in the future, an order will not occur within the next two years. In early August, WestJet also announced that purchase rights for 12 additional Next Generation aircraft had been converted to options, which can be exercised for delivery in 2006. As WestJet’s aircraft needs will continue to grow due to –200 retirements, increased transcon flying and entry into the transborder market, it is a safe bet that at least some of those options will be exercised as firm orders.

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GROWTH OF LOW COST CARRIERS GLOBALLY 12 August 2004

Global Growth. Low Cost Carriers (LCCs) around the world are steadily increasing their presence. This is in despite of the fact that total domestic seat availability (LCCs and legacy carriers combined) in Canada and the U.S. is lower now than pre-September 11, 2001. In Europe, available domestic seats in 2003 were only slightly higher than in 2000. The two graphs below show the growth of LCCs in Canada, the U.S., and Europe from 1998 to 2003. One measures market share by seat capacity, and the other is based on Revenue Passenger Miles (RPMs). Despite variances in share, both graphs indicate a growth of LCCs in all three markets.

Marion Velez Project Analyst Vancouver, BC

LCC Domestic Seat Capacity % Share By Region 1998-2003

LCC Domestic Traffic (RPMs) % Share By Region 1998-2003 40%

30%

35%

25%

30%

20%

25%

15%

20% 15%

10%

5% 0%

0% Canada

U.S.

Europe

Canada

U.S.

Europe

Canada. WestJet is Canada’s largest LCC. In fact, the majority of Canada’s growth in the LCC

industry is attributed to WestJet. The airline represents 77% of Canada’s LCC seat capacity and 22% of Canada’s total industry capacity. LCCs represent 28% of seat capacity in the Canadian market and 34% of traffic in 2003.

U.S. LCCs began in the U.S. over 30 years ago when Southwest Airlines started operations in 1971.

In the U.S., 25% of seats are offered by LCCs. Southwest Airlines reported positive profits of US$ 113 million for 2nd quarter 2004. In contrast, network carrier US Airways is reportedly on the verge of filing for Chapter 11 bankruptcy protection for the second time in recent years.

Europe. LCCs in Europe represent 13% of available seat capacity with carriers such as Ryanair and EasyJet performing solidly. Ryanair is Europe’s first LCC to carry more than 25 million passengers in a year. Ryanair announced record profits for the quarter ending June 30, 2003 of 53.1 million pounds. EasyJet reported a 28% increase in passengers for July 2004, when compared to the same month last year. LCCs have shown that they have the ability to succeed even during industry downturns. LCCs have continued to grow and prosper in different world regions.

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

Air Carrier

LOAD FACTORS Zip:

not reported

CanJet:

not reported

Capacity

Load Factor

Available Seat Kilometres

% Change over 2003

% Change from 2002

% Change over 2003

% Change from 2002

% Change over 2003

% Change from 2002

+12.8%

-2.2%

+9.5%

-7.4%

+2.3 pts (to 80.4%)

+4.2 pts

Domestic (Mainline)

0.0%

-2.5%

-4.5%

-10.9%

+3.5 pts

+6.8 pts

Jazz

+7.5%

+15.3%

+0.4%

-6.7%

+4.4 pts

+12.8 pts

International & Charter

+19.7%

-2.2%

+17.6%

-5.7%

+1.4 pts

+2.9 pts

WestJet

+29.1%

+82.7%

+27.6%

+86.7%

Jetsgo

+90.6%

+494.4%

+69.8%

+442.6%

Air Canada1

OTHER CARRIERS:

Revenue Passenger Kilometres

+0.9 pts (to 78.6%) +8.7 pts (to 79.4%)

-1.7 pts +6.9 pts

Analysis: §

After six consecutive months of year-to-year increases, Air Canada’ domestic traffic was flat in July. The carrier reduced capacity on domestic routes during the month, resulting in an improved load factor despite flat traffic. Air Canada’s international traffic and capacity continues to post year-to-year increases as the industry recovery from SARS continues, and new Latin American services are added. Traffic and capacity over the Pacific increased by 112% and 109%, respectively. However, international traffic and capacity are still below 2002 levels. Overall load factor reached a record high for the fourth consecutive month in July. WestJet’s July load factor showed a year-toyear improvement even though capacity increased 29% during the month.

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

Jazz data is not included in this graph

Jul03

Aug Sep

Oct Nov

Dom RPK

Dec Jan- Feb 04

Mar

April May

Jun

July

Jun

July

Dom ASK

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

Jul03

Aug

Sep

Oct

Nov

Dec Jan- Feb 04

Int'l RPK

Int'l ASK

Mar

April May

WestJet 60% 50% 40% 30% 20% 10% 0%

Jul03

Aug

Sep

Oct

Nov Dec Jan- Feb 04

RPK

Mar April May Jun

July

ASK

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

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

Load Factor

Traffic ( RPMs – millions)

(ASMs – millions)

80.0 %

12,599

15,536

á 0.1 pts

á 5.3%

á 5.1%

73.2%

609

832

á 2.8pts

á 33.8%

á 28.6%

85.2 %

1,312

1,540

á 0.7 pts

á 7.6%

á 6.8%

86.1%

6,586

7,651

á 1.6 pts

á 9.4%

á 7.3%

83.5%

10,772

12,904

á 0.8 pts

á 14.0%

á 12.8%

87.9%

1,503

1,710

â 2.7 pts

á 30.6%

á 34.6%

85.8%

7,090

8,263

á 2.1 pts

á 5.7%

á 3.0%

79.4%

5,197

6,546

á 1.9 pts

á 9.4%

á 6.9%

84.8%

10,962

12,928

á 1.9 pts

á 10.6%

á 8.2%

82.7%

3,914

4,731

á 0.6 pts

á 3.3%

á 2.6%

Notes:

Mainline

Load factor includes scheduled service only

Capacity

Sources: Carrier traffic reports.

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

2003 2004

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

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

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

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

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

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

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

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

Kelowna

Saskatoon

Regina

St. John’s

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

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

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

+17.8% +7.1% +21.1% +22.5% +12.3% +19.0% +9.4% +9.4% +13.9% +10.8% +9.4% +12.8% +19.8% +21.3% +18.0%

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

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

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

April May

+30.1% +30.6%

+20.5% +20.8%

+31.7% +26.2%

+12.2% +5.4%*

+8.6% +7.5%

+20.8% +7.6%

+11.3% +8.8%

+16.9% +19.4%

+12.7% +8.0%

-0.3% -1.3%

+10.9% -0.3%

+2.6% -5.5%

+20.1% +15.2%

June

+18.3%

+16.1%

+18.3%

+7.9%*

+2.8%

+12.1%

+8.8%

+7.8%

+8.6%

+3.0%

+1.7%

-4.3%

+16.0%

2nd Quarter

+25.9%

+18.8%

+24.9%

N/A

+6.2%

+13.2%

+9.7%

+14.5%

+9.7%

+0.5%

+3.8%

-2.5%

+16.9%

Sources: Airport passenger statistics *Estimated 2004 totals

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CANADIAN A IRPORTS

Toronto

NEWS ARTICLES AIR CANADA UPDATE AIR CANADA REPORTS CDN$22 MILLION Q2 PROFIT BEFORE RESTRUCTURING ITEMS FUEL PRICES August 11, 2004 SPOT OIL PRICES CONTINUE TO INCREASE FUTURES PRICES INCREASE Crude Oil Prices: Spot – US$44.80 (up 13.6% from July) Futures •

6 month - $43.31 (December 2004 delivery)

•

12 month - $40.11 (July 2005 delivery)

•

2 year - $37.47 (July 2006 delivery)

•

5 year - $35.13 (December 2009 delivery) Monthly Spot Monthly Spot Prices Prices $50.00

$40.00 $35.00 $30.00

AIR CANADA & LOT POLISH AIRLINES PARTNER TO EXTEND NETWORK Air Canada announced an expansion of services to Poland through codeshare with its Star Alliance partner, LOT Polish Airlines. This includes services operated by LOT between Toronto and Warsaw, and also services to Gdansk, Krakow, Katowice, Poznan, Wroclaw, Rzeszow, and Szczecin. Air Canada will also offer codeshare services between Canada and Poland through its European gateway cities of London, Frankfurt, and Munich.

$25.00 $20.00

Jul y Au gu st

Ma r Ap r Ma y Ju ne

Fe b

De c Jan -04

Oc t No v

Se p

$15.00 Au g-0 3

US$ per Barrel

$45.00

Air Canada reported operating income of CDN$22 million before reorganisation and restructuring items in the second quarter, a year-to-year improvement of CDN$292 million. Operating revenue increased by 15% to CDN$247 million, while expenses declined by 1.0% to CDN$23 million. Air Canada attributed the year-to-year improvement to the recovery from SARS in Asia. However, the carrier reported a large net loss of CDN$510 million. Air Canada plans to exit bankruptcy protection by 30 September, and has sent its Circular and Plan of Arrangement to creditors in preparation for a 17 August vote.

CANADIAN AIRLINES WESTJET REPORTS CDN$7.5 MILLION Q2 PROFIT WestJet recorded net earnings of CDN$7.5 million in the second quarter, compared to CDN$14.7 million during the same period last year. Operating revenue increased by 25% to CDN$257 million, while operating expenses increased by 38% to CDN$244 million. The Page 7 August 2004

carrier attributed the decline in earnings to an increase in fuel cost, and higher landing and terminal fees at Toronto Pearson International Airport.

JETSGO EXPANDS FLORIDA AND LAS VEGAS SERVICES Beginning 2 October, Jetsgo will launch weekly services from Toronto to Sarasota and West Palm Beach, Florida. Service to the carrier’s existing Florida destinations, including: Fort Lauderdale, St. Petersburg, Fort Myers, and Orlando will increase starting 7 October. Beginning 7 October, Jetsgo’s service between Toronto and Las Vegas will increase from three weekly flights to full weekday service plus an additional Sunday flight.

U.S. AND INTERNATIONAL AIRLINES IATA REPORTS STRONG TRAFFIC RECOVERY The International Air Transport Association (IATA) reported that international passenger and cargo traffic increased by 20% and 13% year-to-year respectively, in the first half of 2004. IATA attributed the growth to a recovery from the effects of SARS and the economic downturn last year. Compared to 2000, passenger traffic increased by 8.4%, while cargo traffic increased by 16%.

NEW YORK PORT AUTHORITY APPROVES US$875 MILLION TERMINAL FOR JETBLUE The Port Authority of New York and New Jersey has approved plans for a US$875 million 26-gate terminal at New York J.F. Kennedy International Airport. The new terminal will be built by the port authority and JetBlue, who will operate the terminal under a lease of up to 35 years. Construction is expected to begin in 2005. InterVISTAS Consulting Inc. Market Intelligence Report ©InterVISTAS Consulting Inc.

NEWS ARTICLES U.S. AND INTERNATIONAL AIRLINES – CON’T RYANAIR POSTS US$64 MILLION PROFIT IN FIRST QUARTER Ryanair recorded after-tax profit of EUR53 million (US$64 million) in the first quarter, an increase of 21% year-to-year. Sales increased by 23% to EUR302 million (US$364 million), while unit costs were reduced by 4%. The number of passengers carried increased by 28% to 6.6 million, for a load factor of 83% during the first quarter. However, yields declined by 6%.

VIRGIN ATLANTIC ORDERS 13 AIRBUS AIRCRAFT Virgin Atlantic has placed a firm order for 13 A340600s, with options for 13 more, for delivery between 2006 and 2008. The carrier plans to add two to three new routes annually over the next several years, and also increase capacity on current routes. Virgin Atlantic will take delivery of two A340-600s in 2005 as part of an earlier order.

VIRGIN GROUP LOOKS AT POSSIBILITY OF AIRLINE INVESTMENT IN INDIA AND CHINA The Virgin Group, owned by Richard Branson, is investigating the possibility of investing in low cost carriers in India and China. A company spokeswoman indicated that the investment is still in the very early stages of exploration. Foreign individuals and institutions, not including foreign carriers, can currently own up to a 40% stake in Indian air carriers.

EMIRATES ORDERS FOUR BOEING 777 AIRCRAFT Dubai-based Emirates announced an order for four B777-300ER (extended range) aircraft for delivery in 2006, with options for nine more. The carrier currently operates 21 B777-300/200s and plans to expand its fleet of B777s to 51 by 2007. Page 8 August 2004

QANTAS AND TEMASEK ORDERS EIGHT A320S FOR JETSTAR ASIA VENTURE Australian carrier Qantas Airways and Temasek Holdings, the investment arm of the Singapore government, has ordered eight A320 aircraft for their Jestar Asia joint venture. Majority owned by Qantas, Jetstar Asia will begin service from Singapore at the end of the year.

AIRPORTS SINGAPORE CHANGI TO BUILD LCC TERMINAL The Civil Aviation Authority of Singapore has announced plans to build a US$26 million terminal dedicated to low cost carriers (LCCs) at Changi International Airport. The terminal will have the capacity to handle 2.7 million passengers annually, and is scheduled to be complete by 2006. Tiger Airways, a low cost carrier backed by Singapore Airlines, has committed to using the terminal.

AIRCRAFT MANUFACTURERS BOMBARDIER ADDS EUROPEAN ORDERS Bombardier announced that Air Nostrum of Valencia, Spain, has placed an order for 20 CRJ200s. The agreement gives Air Nostrum the option of converting some or all of the aircraft to CRJ900, CRJ700, or Q400 turboprop aircraft. The Spanish carrier currently operates 50 Bombardier aircraft. Styrian Spirit, a carrier based in Graz, Austria, has signed an agreement to purchase one CRJ200, worth approximately US$24 million. The carrier currently operates three CRJ200s.

NEWS ARTICLES AIRCRAFT MANUFACTURERS – CON’T

AIRBUS OUTPACES BOEING IN FIRST HALF 2004 DELIVERIES Airbus delivered 161 aircraft in the first half of the year, including three A318s, 44 A319s, 54 A320s, 16 A321s, 39 A330/340s, and five A300/310s. Boeing delivered151 commercial aircraft in the first half of 2004, including 105 B737s, 19 B777s, 12 B767/757s, nine B747s and six 717s. Boeing also delivered eight C-17 military transports during the first half of the year.

CARGO IATA REPORTS GLOBAL CARGO GROWTH IATA’s latest cargo statistics show growth for all regions in the first 6 months of the year. The Middle East reported a 37.4% growth in freight tonne kilometres (FTKs). The Asia Pacific region saw growth of 13.3%, European cargo traffic grew 10.4%, and North America trailed with 7.9% growth.

BOEING SAYS FREIGHTERS WILL DOUBLE IN 20 YEARS According to Boeing’s Current Market Outlook, the number of freighters in operation will double by 2023. Over 2,950 freighters will be added to carrier fleets. Boeing estimates 3,456 aircraft dedicated for cargo will be in operation in the next 20 years. The outlook projects that the number of widebody aircraft will triple. The progression towards widebody freighters will increase the average freighter payload.

ADVANCE ELECTRONIC MANIFESTS REQUIRED Beginning 13 August 2004, U.S. Customs and Border Protection (CBP) will introduce the first of three phases of its Air Automated Manifest System (AMS). This will cover East Coast ports of entry, including airports. The deadline will be Page 9 August 2004

13th October for Central U.S. airports and 13th December for airports in Western U.S. Under the program, electronic information must be received four hours before an aircraft arrives in the U.S., or by takeoff time if the trip is less than four hours long. Carriers have three options to transmit data. They can develop their own software interface based on the Customs Automated Manifest Interface Requirements-Air document; provide the data using an Air AMS service center, or purchase commercial software.

AIR CANADA AND VOLGA DNEPR AIRLINES SIGN AGREEMENT Air Canada and Volga Dnepr Airlines signed a general sales agency (GSA) agreement where Air Canada will be Volga Dnepr’s exclusive GSA to Canadian governmental agencies for the provision of AN-124-100 and IL-76 charter services.

VOLGA-DNEPR HAS LARGEST CIVIL AN124 FLEET Volga-Dnepr has taken delivery of its 10th AN124 aircraft. The carrier now has the world’s largest civil AN-124 fleet. Volga-Dnepr also said that is has been investing in the next-generation development of the IL-76 and the AN-124 aircraft. The latest AN-124-300 model is believed to offer a 20% payload increase over the older model, the AN-124-100. The older model has cargo capacity of 120 tonnes. The new aircraft also requires fewer crew and complies with the ICAO’s Chapter 4 Noise standards. Volga-Dnepr also operates two IL-76s, and is expecting delivery of the new generation of IL76s later this year. The new generation aircraft is also modelled to comply with ICAO’s Chapter 4 standards.

NEWS ARTICLES CARGO – CON’T WORLD AIRWAYS POSTS Q2 PROFIT

AIR CHINA CARGO ORDERS TWO 747400FS

World Airways, a cargo and charter specialist, posted a US$ 2.6 million profit in the second quarter. This is 60% lower than its profit in the same quarter last year.

Air China Cargo has ordered two Boeing 747400Fs valued at US$400 million. The aircraft will be powered using PW4056 engines. The first aircraft is scheduled for delivery in November 2005. The next delivery is for March 2006.

WORLD AIRWAYS TO LEASE WIDEBODY FREIGHTERS

KOREAN AIR CARGO LAUNCHES CALGARY CARGO SERVICES

World Airways will lease two MD-11 widebody freighters by Spring 2005. The two additions will bring the carrier’s fleet up to five all-cargo aircraft.

Korean Air Cargo will commence a once weekly scheduled, non-stop freighter service from Calgary to Seoul. This is the first scheduled freighter service from Alberta to Asia. Service will depart Calgary each Friday at 8am and arrive in Seoul the next day at 10:20am using a Boeing 747-400.

ATLAS AIR EXITS FROM BANKRUPTCY PROTECTION Atlas Air Worldwide Holdings Inc, parent company of Atlas Air and Polar Air Cargo, has emerged from Chapter 11 bankruptcy protection. The company had filed for bankruptcy in January 2004. The company’s restructuring program has resulted in the clearing of over US$600 million in pre-petition debt. Capacity and operating costs have also been reduced. Atlas has paid off and retired its debtor-in-possession financing loan from CIT Group and Ableco Finance LLC. Wachovia Bank, National Association, and its subsidiary Congress Financial Corporation have committed $60 million in liquidity to the carrier.

IBERIA CLOSES MIAMI HUB Spanish flag-carrier, Iberia, will close its Miami hub. The company will restructure its network so that markets in Latin America will be served direct from Madrid. Iberia currently flies to seven destinations in Latin America from its Miami hub. The reason for the hub closure is increased U.S. security requirements.

Page 10 August 2004

FEDEX EXTENDS LAND LEASE IN PHILIPPINES FedEx has extended its land lease in Subic Bay, Philippines to 2010. The carrier also signed an agreement giving them access to land at the Diosdado Macapagal International Airport if the company needs to expand their Asia Pacific hub.

FEDEX APPLIES FOR MORE SERVICE TO CHINA FedEx has applied to the US Department of Transportation to fly 12 more weekly services between China and the U.S. The application consists of 6 additional flights to Shanghai and 6 to Qingdao. Qingdao is a new destination for FedEx. The carrier already flies to Beijing and Shenzhen. An air service pact between China and the U.S. was signed on 24 July 2004 outlining 111 new flights a week for cargo only carriers over the next 6 years. Twenty-one flights became available August 1 st, and 18 flights will be available in 25 March 2005.

NEWS ARTICLES CARGO – CON’T UPS REPORT INCREASE IN Q2 EARNINGS UPS reported an 18.2% increase in net income for the second quarter. Revenue increased by 7.8% and the company expects 2004 earnings to grow 20%.

DHL PLANS HANDLING CENTER IN GUANGZHOU DHL is planning to build a handling centre at Guangzhou International Airport in southern China. This is in addition to its new US$100 million hub in Hong Kong (HKG). The Guangzhou center will be smaller than DHL’s HKG hub. DHL currently has 40% of the market in China. The company operates a 50-50 joint venture with freight forwarder Sinotrans (HK) Shipping Ltd.

TNT EXPRESS WINS LEGAL DISPUTE OVER NIGHT FLIGHTS TNT Express has won a dispute over protestors objecting to night flights at its Belgium hub, Liège. Protestors wanted the Court of Appeal in Liège to close the airport or ban all night flights operated by TNT Express. The court dismissed the case, stating that TNT’s operations comply with all government regulations. The court also said that night flights are “unavoidable and a legitimate necessity to a modern economy.”

The new agreement will replace old restrictive rules with more flexible ones. The new program is designed to recognise the partnership and customer relationship between airlines and forwarders. The EACP will be governed by representatives from airlines and forwarders.

REGULATORY/GOVERNMENT HOUSE OF REPRESENTATIVES APPROVE MANPADS DEFENSE ACT OF 2004 The House of Representatives approved the Commercial Aviation MANPADS Defense Act of 2004 (CAMDA). The legislation will expedite the installation of equipment on commercial aircraft that could protect planes from shoulder-fired ground-to-air-missiles. However, the bill does not define who should be responsible for the cost of the equipment.

EU LAUNCHES LEGAL ACTION TO REMOVE INDIVIDUAL OPEN SKIES DEALS In an effort towards a single European Sky, the European Commission has launched legal action to force EU countries to remove individual bilateral agreements. The EU’s top court ruled that these agreements break the union’s single market rules. The EU has a mandate to negotiate a new deal on behalf of the 25 members of the union.

FIATA & IATA LAUNCH NEW PROGRAM The International Federation of Freight Forwarders (FIATA) and the International Air Transport Association (IATA) have formed a new official relationship called the European Air Cargo Programme (EACP). This will replace the old IATA Cargo Agency Agreement Resolution 801.

Page 11 August 2004

NEWS ARTICLES PEOPLE AIR CANADA ANNOUNCES BOARD OF DIRECTORS OF ACE AVIATION HOLDINGS INC. Air Canada announced the names of the Board of Directors for ACE Aviation Holdings Inc. on 12 August 2004. ACE Holdings is the parent holding company that owns Air Canada and its subsidiaries. The Board of Directors, following emergence from CCAA protection, will be: §

Bernard Attali, Senior Advisor, Orrick Herrigton and Sutcliffe (Paris, France),

Robert E. Brown , President & C.E.O., CAE Inc. (Montréal, Québec),

Michael Green, President, Cerebrus Operations (New York, New York),

George Hamilton, C.E.O., Global Home Products, LLC (New Albany, Ohio),

W. Brett Ingersoll, Managing Director, Cerebrus Capital Management L.P. (New York, New York),

Pierre Marc Johnson, Counsel, Heenan Blaikie (Montréal, Québec),

Frank J. McKenna, Counsel, McInnes Cooper (Moncton, New Brunswick),

Robert A. Milton, President & C.E.O., Air Canada (Montréal, Québec),

John T. McLennan, Corporate Director (Mahone Bay, Nova Scotia),

David I. Richardson, Financial Consultant (Toronto, Ontario), and

Marvin Yontef, Senior Partner, Stikeman Elliot (Toronto, Ontario).

Page 12 August 2004

AIR CANADA JAZZ APPOINTS NEW SENIOR EXECUTIVES Bill Bredt has been appointed Senior Vice President and Chief Operating Officer of Air Canada Jazz. Last April he was named President of Zip Air Inc. Previous to that, Bredt was Vice President, Network and Revenue Management at Air Canada. Allan Rowe is Senior Vice President and Chief Financial Officer. Rowe was previously CFO with Fishery Products International Limited. Scott Tapson is Vice President, Customer Experience. His last position was Vice President, Operations and Customer Service with Air Canada Jazz. Jolene Mahody is Vice President, Corporate Strategy. She recently held the position of Director, Commercial and Resource Planning with Jazz. Colin Copp is Vice President, Employee Relations. He held several positions at Air Canada Jazz including Vice President Labour Relations and Corporate Safety.

NEWS ARTICLES PEOPLE – CON’T AIR CANADA MAKES NEW CUSTOMER SERVICE APPOINTMENTS Air Canada has appointed Brad Moore Vice President, Customer Experience – Airports. Moore held the previous position of Vice President, Customer Service. Sue Welscheid will be appointed to Vice President, Customer Experience – In-Flight. She held the previous position of Vice President, People. Both individuals will report to Steve Smith , Senior Vice President, Customer Experience.

TAP AIR PORTUGAL CHAIRMAN STEPS DOWN As part of Tap-Air Portugal’s restructuring plan, which began several years ago, Antonio Cardosa Cunha will resign as Chairman of the stateowned airline. The former chairman joined the airline in 2002 after serving as the country’s Minister of Agriculture, European commissioner, and commissioner of the Expo 98 International Exhibition. A replacement has not yet been announced.

Continental Airlines' Board of Directors has elected Executive Vice President Jeffery Smisek as the airline's new President. Smisek will be taking over the position from Larry Kellner, who will be the new Chairman and Chief Operating Officer. In January, Continental announced that its CEO Gorden Bethune was retiring at the end of 2004. Larry Kellner was elected as his successor. Jacques Barrot (France) has been named as the new European Union Commissioner for Transport. Barrot formerly was Commissioner for regional policy. Barrot replaces Loyola de Palacio. The new commissioner is responsible only for Transport, with the energy portfolio going to a newly created Commissioner position. Barrot was also named as one of 5 five presidents of the European Commission.

OTHER CANADIAN TRAVEL GROUP ACQUIRED BY NBTA The Canadian Alliance of Business Travel (CABT) will become a subsidiary of the U.S. National Business Travel Association (NBTA). CABT members are travel managers, who will receive NBTA benefits including industry updates, educational opportunities, and business resources under the acquisition.

CARGOLUX APPOINTS NEW DIRECTOR Cargolux has appointed Thomas Kaltenegger Director of Import/Export Services, based in Luxembourg. Kaltenegger previously held the position of Cargolux’s country manager in Germany. Klaus D. Gries will take over this position and be based in Frankfurt.

Page 13 August 2004

GAO REPORT ON LEGACY AIR CARRIERS 13 August 2004

On 11 August, the newly renamed U.S. Government Accountability Office released a major report titled Legacy Airlines Must Further Reduce Costs to Restore Profitability. This report is available free of charge on the GAO web site (www.gao.gov). The report, which compares the big network carriers to the low cost carriers, is full of a number of insights about the health of the U.S. legacy carriers. Among these are:

Mike Tretheway Vice President Marketing & Chief Economist Vancouver, BC

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In spite of cost cutting, U.S. legacy carriers experienced an increase in unit costs from 2000 to 2003, while the LCCs were able to further reduce unit costs. The gap increased! The legacy carriers had $6.8 billion in cash at the end of 2003, but face $20 billion in long term debt and lease obligations over the next four years. While not stated in the report, the implication is that if the legacy carriers merely achieve break-even on an operating profit basis, they will use up all available cash in roughly two years. In contrast, the LCCs had $3.5 billion in cash and four year obligations of only $2.1 billion. Again, while not stated in the report, the implication is that even if these carriers stopped earning record profits, they have sufficient cash to handle all obligations for four years. Legacy carriers face $21 billion in underfunded pension liabilities. While congress gave the carriers some relief in being able to postpone these payments for a few years, the full amount is still due. LCCs now have a presence in 2,304 of the top 5,000 domestic markets, and these represent 85% of total domestic passengers carried. The legacy carriers have not only lost market share to LCCs, they carried fewer passengers in absolute numbers as well.

The major observation of the study was that while the legacy carriers sought to reduce costs by $20 billion, they were only able to achieve $13 billion in savings. The report states that it appears that the legacy carriers will have limited access to capital markets, and thus it will be necessary to generate cash from operations to survive. Their survivability depends on a) further reducing unit costs, and b) gaining a revenue premium associated with network connectivity services. This must be done soon!

Page 14 August 2004

9/11 COMMISSION & AIRPORT SECURITY 12 August 2004

After a year and a half of hearings and investigations, the 9/11 Commission Report was released on 22 July 2004. Created in 2002, the National Commission on Terrorist Attacks Upon the United States (a.k.a. 9/11 Commission) was tasked by congressional legislation to “prepare a full and complete account of the circumstances surrounding the September 11, 2001 terrorist attacks, preparedness for and the immediate response to the attacks.”

Solomon Wong Director, Security & Planning Vancouver, BC

The first 46 pages of the 567-page report contain a riveting account of the hour-by-hour chronology of 9/11 from the viewpoint of terrorists, passengers, government agencies and officials. Additionally, the report contains key recommendations to prevent future terrorists attacks within the United States. While the bulk of the recommendations covered failings in intelligence governance and communications, the 9/11 Commission report does highlight some key recommendations on airport security.

The Need for an Integrated Security Strategy The Report argues for greater Congressional oversight of the Transportation Security Administration (TSA). In particular, the Commission criticises the TSA for the lack of an “integrated strategic plan for the transportation sector as well as for various modes of transportation such as air, sea and ground.” The Commission urges the TSA to advance a multi-layered security system -- one which would array the identified threats versus layers of solutions.

Continue "no-fly" and "automatic selectee" List Programs Although there are ongoing privacy concerns about the future Computer Assisted Passenger Prescreening System (CAPPS) program, the Commission argues that Congress should compel airlines to submit information about passengers for automatic selectee purposes for further scrutiny. For Canadian airports, this may be a moot point: Canadian Deputy Prime Minister McLellan and Homeland Security Secretary Tom Ridge already agreed in January to an exchange of passenger data. At the time, this included CAPPS II data -- which would primarily impact outbound transborder flights from Canada. As a future CAPPS II (or son of CAPPS II) program evolves, this agreement will undoubtedly continue with the increased exchange of information between Canada and the U.S.

Improve Airport Screening Checkpoints The Commission noted that while trace detection equipment was used on individual carry-on bags, no measures were undertaken to screen individual persons for trace amounts of explosives. The Commission urged that, at a minimum, those individuals referred to secondary screening have their clothing traced for explosives.

Page 15 August 2004

9/11 COMMISSION & AIRPORT SECURITY – CON’ T The state of technology at present is limited in full-body scanning explosive trace detection (EDT). While units like the Ionscan Sentinel (see picture to the right) have been in use at major attractions (e.g. CN Tower) and piloted at Pearson Airport, it adds an additional step in the screening process. The TSA will not be able to fulfil this new task unless a single walk-through metal detector device combined with the Ionscan Sentinel is commercially deployed. The use of conventional trace explosive detection on clothing is also impractical due to the time it would take to accurately wand an individual and cover enough surface area. Canada and the U.S. enjoy a relationship on security screening that recognises that while equipment and procedures are different, they have no impact on acceptance of origin-destination traffic. While the TSA has agreed not to re-screen individuals who are onward connecting from pre-clearance sites, it is possible that any introduction of full body ETD could trigger revisiting this policy. CATSA itself may face pressures to introduce full-body ETD as Transport Canada/CATSA have already been testing this machinery at select airports.

Increased Air Cargo Security The Commission also urged for the TSA to step up its efforts to improve the tracking and identification of threats to cargo in the aviation and maritime sectors. Specifically, the Commission called for the TSA to mandate that each passenger aircraft have one hardened container that is blast-proof. The FAA certified Hardened Unit Load Devices (HULD’s) in 1998 following the Gore Commission findings. However, the airline industry has resisted this due to weight and cost considerations. The Commission’s recommendations would mean a capital cost of about $40 million for about 4,000 HULD’s to be deployed on jet aircraft in the U.S. Furthermore, these jet aircraft would each lose 100200 pounds of carrying capacity. The end result would undoubtedly be an increase in belly air cargo rates. Transport Canada has not evaluated or indicated signs of mandating HULD deployment. It is currently evaluating a set of policies on air cargo screening and security, anticipated to be unveiled in the third quarter of 2004.

Next Steps The 9/11 Commission and its recommendations have no legal power, but the document has considerable political clout, particularly as the United States enters a November presidential election season. The Bush Administration has already looked at ways to implement the recommended changes, in order to counter the Kerry/Edwards platform. These developments will likely yield in some policy shifts and changes in the coming months - primarily on the organisation of the intelligence operations within the U.S. Government. Page 16 August 2004

THE OTTAWA REPORT 11 August 2004

Shadow Cabinets of the NDP and the Conservatives: What do they mean for the 38th Parliament? On 20 July 2004, Prime Minister Paul Martin unveiled a new cabinet to Canadians. In early August the NDP and Conservatives appointed their shadow cabinets within each respective federal portfolio.

Sam Barone Regional Vice President Ottawa, ON

In majority governments, government relations activities focus on the executive branch of government – Ministers, staff and senior officials in the bureaucracy. However, in a minority government, as strategic control shifts in part from the executive to the legislative branch of government, politicians of all stripes have a greater say in the direction and shape of legislation and government programs and policies. In this context, shadow cabinet appointments are more relevant and important targets for advocacy efforts, and offer some indication of what the 38th Parliament might look like. This article provides a broad overview of the choices the NDP and the Conservatives have made in their respective shadow cabinets and what they might suggest in terms of how things might unfold from a transport and related policy perspective in the upcoming Parliament. The Bloc Québécois has not named their shadow cabinet yet and is not expected to do so in the very near term. We also delve deeper into the individual personalities in areas of key interest such as transport and infrastructure. The Opposition Parties in Parliament Each party will have a strategic place in the upcoming Parliament. The NDP holds a position of special influence with the Liberals and some might say it has been a significant influence in shaping the government’s priorities. Many of the issues that the NDP have identified as priorities – health care, the environment, and families – were key planks in the Liberal election platform. From this perspective, we could expect to see a more innovative and activist government at work over the next 18-24 months. The Bloc Québécois is also a strategic player in the next Parliament. With the Liberal-NDP union one vote shy of a majority, the government will have to rely on left-leaning MPs from the Bloc to support the government on key initiatives. As the official Opposition with 99 seats, and with many of them first-time members from Ontario, the Conservatives will also be an important government relations audience in a minority situation. The Conservatives are in a pivotal position to determine the momentum of key files - to either slow things down or expedite them, depending on the issue. It is also worth noting that the Bloc and the Conservatives together total 153, only two votes shy of a majority. In terms of government relations, particularly advocacy, it will be very important to educate all political parties and to determine individual party positions on issues. Gaining a better understanding of the critics in each party will be helpful.

Page 17 August 2004

THE OTTAWA REPORT – CON’T Ministries of Transport, Infrastructure, Urban Affairs Transport – Conservative Critic The Conservatives’ new Transport critic is MP Rob Nicholson (Niagara Falls, Ontario), who served in the House of Commons between 1984 and 1993, the year he was appointed the Minister of Science and Minister Responsible for Small Business. His background will be beneficial in this largely economic portfolio, although he may lack the knowledge of the file of his predecessor. Transport – NDP Critic Well versed in the transportation agenda by virtue of being a long-standing member of the Standing Committee on Transport, MP Bev Desjarlais (Churchill, Manitoba) is a strong advocate of the government playing a significant role in the transportation network to ensure service to all parts of Canada. Active in the labour movement, Desjarlais will be a strong critic particularly when it comes to any further government funding decisions for Air Canada and VIA Rail. Infrastructure – Conservative Critic Elected to the House in 1997 under the Alliance banner, MP Rahim Jaffer (Edmonton—Strathcona) has a relatively high profile earned as one of the youngest MPs on the Hill. Sitting on numerous Committees, Jaffer has served as Intergovernmental Affairs, Industry and the Environment critic for the Alliance party. He is now the Conservatives’ Infrastructure critic. The Conservative campaign platform called for an elimination of many of the federally managed infrastructure programs in favour of allocating a portion of the gas tax to municipalities to manage these initiatives on their own behalf. Cities and Community Infrastructure – NDP Critic A former MPP for Hamilton, new MP David Christopherson (Hamilton Centre) is the NDP’s Cities and Community Infrastructure critic. He has a long history in municipal and provincial affairs – a good fit with this critic position. Serving as the Solicitor-General in Bob Rae’s Ontario government, Christopherson subsequently held positions as Party Whip and Speaker. The NDP have an aggressive cities and community policy platform, and with Christopherson’s experience, there is no doubt he will vie for plenty of airtime over the coming months.

Page 18 August 2004

THE WASHINGTON REPORT 11 August 2004

FAA Needs to Improve Safety Enforcement The Government Accountability Office (GAO) issued a report stating that the FAA needs better management controls for commercial airlines and private pilots. The GAO found that although $334 million in fines were imposed on airlines and pilots from 1993 to 2003, the amount was later reduced to $162 million. The FAA closes more than half of cases involving safety violations without imposing fines. Often times, only a warning is given. Furthermore, about 3,200 cases were closed due to lack of evidence. The FAA has a database which tracks rule violations but it is incomplete, difficult to use, and inconsistent as data varies from office to office.

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

NTSB Renews Recommendations for Cockpit Cameras The National Transportation Safety Board (NTSB) renewed its call for the FAA to require large aircraft to be equipped with crash-resistant cameras. This first recommendation was made 4 years ago, but pilots objected due to concerns about privacy issues. Pilots say that cameras, unlike technical data, are subject to interpretation and can be used to make non-objective criticisms of a pilot’s actions. The NTSB believes that cameras can provide better information on the causes of plane crashes.

New Assistant Secretary Of Homeland Security Admiral David Stone has been nominated the Assistant Secretary of Homeland Security for the Transportation Security Administration (TSA). Stone is currently the Acting Administrator at TSA. He was also formerly Federal Security Director at Los Angeles International Airport.

U.S. Urges EU to Negotiate New Agreement for Airbus The U.S. wants the EU to negotiate a new civil aircraft agreement banning further government subsidies for Airbus. The original accord outlining the subsidies was made in 1992 when Boeing had 80% of the jetliner market. Currently, Boeing only represents approximately 50%.

Open Skies for U.S. and Indonesia The Indonesian Minister of Transportation and U.S. Department of Transportation secretary Mineta signed an Open Skies agreement. The new agreement replaces a 1960s pact between the countries and removes all restrictions on flight frequency, the type of aircraft, and the prices charged. The agreement covers passenger, cargo, and charter operations. The U.S. Trade and Development Agency also gave Indonesia three grants totalling US$ 1.1 million. The money will be used to fund security and safety assessments at four Indonesian airports, improve air traffic control systems and equipment, and develop the country’s passenger reservation system. This is a collection of information gathered from public sources, such as press releases, media articles, etc., information from confidential sources, and items heard on the street. Thus some of the information is speculative and may not materialize. Information contained herein is provided for the use of InterVISTAS Consulting Inc. only, and may not be distributed beyond the office. Prepared by InterVISTAS Consulting Inc. Page 19 August 2004