CAIR Issue No. 9 - September 2003 by Leah Dupuis

INDUSTRY REVIEW

Page 1 May 2003

TradePort International Market Intelligence Report InterVISTAS Consulting Inc. ÂŠ

LOW COST CARRIER TRAFFIC SHARES

15 September 2003

Southwest is #1. In May of this year, the U.S. DoT reported that Southwest Airlines became the largest domestic air carrier â&#x20AC;&#x201C; it carries more domestic passengers than any other carrier in the U.S. (and the world). Southwest grew at an average annual rate of 14.6% per annum from 1990 to 2001, compared to only 3.5% pa for the other major U.S. carriers. Even starting from a small base, this sustained extraordinary growth rate would inevitably result in it becoming the largest carrier of passengers. A Global Phenomena. Southwest is not alone however. Throughout the world, the low cost carriers are now achieving noticeable market shares. LCCs are well-established in Europe, the U.S., Canada and Australia. In the U.S., LCCs carried 26% of total passengers carried in 2002. Shares are somewhat smaller in Canada and Europe but already higher in Australia, as shown in the figure at the right. 1

Share of Passengers 100% 18%

15%

26%

28%

80% 60% 40%

82%

85%

74%

72%

20% 0% Canada

U.S.

Europe

Network Carriers

Project Analyst

Another way to look at the impact of the LCCs is in terms of seat capacity. The second graph shows the LCC share of seats offered for sale, based on OAG data for August 2003. Interestingly, the seat share is often higher for the LCCs than their passenger share. Many of the LCCs are now Share of Seat Capacity operating at lower load factors than the full 100% 20% 19% service network carriers. 25% 32% 80%

60% With lower costs, the LCC breakeven load factors are lower, allowing them to operate profitably with 80% 81% 40% 75% 68% lower loads. In contrast, the network carriers, 20% with their high costs, and with the low yields that 0% Canada U.S. Europe Australia are forced on them by competition from the LCCs, Network Carriers LCC have extremely high break even load factors. The third chart shows the breakeven load factors of selected LCCs and network carriers. It is not surprising that many of the latter are in bankruptcy while the former are achieving ever higher share prices.

Break-even Load Factors

percent

Geneva Tretheway

Australia

LCC

110% 100% 90% 80% 70% 60% 50% 40% WestJet

Air Canada

Ryanair

British Airways

Southwest

Northwest

United

Sources: Canada passengers: Airline websites. *No total available for CanJet airlines. US passengers: Air Transport Association 2002 Annual Report. European passengers: Association of European Airlines 2003 yearbook; LCC airline websites. Australian passengers: Centre for Asia Pacific Aviation, June 2003, "Industry Report: Virgin Blue". Capacity (all): OAG MaX August 2003 disc. 1

Page 2 September 2003

ÂŠ InterVISTAS Consulting Inc.

SARS – CAUTIOUS RECOVERY 15 September 2003

Airport Traffic Reaches Pre-SARS Levels. Passenger traffic at Asian airports has reached preSARS levels in the past few months. Total passenger traffic at Taipei Chiang Kai-shek International Airport was 1.8 million passengers, up 17% from the same month last year. For the month of July, Hong Kong International Airport’s passenger traffic volumes were 2.5 million, approximately 80% of HKG’s pre-SARS traffic volumes. In addition, Malaysia Airlines saw its passenger load factors return to its pre-SARS level of 74% for the first week in September. Yields Up. According to Abacus Asia Ltd. intra-Asia travel bookings have increased. During the month of July, bookings were 15% above 2002. In markets that were affected by SARS, bookings were higher than they were for the same period in 2002. China reported 14% growth, Hong Kong 16%, Singapore 5% and Vietnam 10% growth in travel bookings over the same period last year.

Doris Mak Senior Market Analyst

As the industry has recovered the past couple of months, passengers are also facing the return of fullprice airfares. China’s two major airlines are now selling one-way tickets between Beijing-Shanghai for US$120. The same ticket during the SARS epidemic was sold at a 40-50% discount. A Setback? After three months of relative stability, Singapore announced that a definitive case of SARS has surfaced in the city-state. There are indications that this case is isolated and does not mean that the virus is again active in the public domain. Nonetheless, the world has taken notice that SARS is still lurking in the background and may resurface without a moment’s notice. As a result, Singapore Airlines is considering reviving its SARS prevention measures program which include disinfecting its aircraft, providing cabin crew with protective masks and extensive passenger screening prior to boarding. The World Health Organization (WHO) stated that it would not issue any travel advisory warnings at this time. However, on September 8, South Korea increased its monitoring of SARS and began inspecting travelers arriving from Singapore.

As the industry continues to recover, airports and airlines will tread carefully the next few months as winter approaches and the possibility that SARS may reappear.

Page 3 September 2003

AIRLINE DATA – CANADA

Traffic and Load Factors on Canada’s Major Air Carriers – August 2003 Passenger Traffic Capacity Air Carrier

NEW CARRIERS: LOAD FACTORS Jetsgo: Zip: CanJet:

84% not reported not reported

Revenue Passenger Kilometres

% Change over 2002

% Change from 2001

Load Factor

Available Seat Kilometres

% Change over 2002

% Change from 2001

% Change over 2002

% Change from 2001

-1.3 pts (to 80.6%)

+0.2 pts

Air Canada2

-13.8%

-13.4%

-12.5%

-13.7%

Domestic (Mainline)

-7.0%

-8.4%

-5.3%

-5.4%

-1.4 pts (to 76.9%)

--2.5 pts

Jazz

+7.8%

n/a

-1.6%

n/a

+5.5% (to 63.3%)

n/a

International & Charter

-17.0%

-15.8%

-16.0%

-17.6%

-0.9 pts (to 82.7%)

+1.8 pts

-3.0 pts -3.9 pts (to 83%) Note: n/a – As Jazz was not reported in 2001, a percentage change from 2001 could not be calculated. WestJet

+40%

+111%

Analysis: • As with previous months, Air Canada's traffic continues in negative territory with declines less negative than previous months. As the airline's traffic has been recovering from the impacts of SARS and the Iraq war, a set-back was experienced due to the black-out in eastern Canada and U.S. which forced many flight cancellations and affected the airline's system-wide network. Air Canada's operations for the month were also affected due to a computer virus that made its way through the airline's passenger check-in systems. Air Canada's load factor for August was also down (1.3%) on reduced seat capacity. •

WestJet continues to grow with strong increases in passenger traffic (+40%) and available capacity (+45%) at similar levels seen the past three months. Similar to previous months, the airline's load factor has been on the decline, mainly due the airline's expansion in the last year.

+45%

+121%

Air Canada Domestic Mainline 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% -25%

Jazz data is not included in this graph

Dom RPK Dom ASK

Sep- Oct Nov Dec Jan- Feb Mar 02 03

Apr May Jun

Jul Aug

Air Canada International 30% 20% 10% 0%

Int'l RPK Int'l ASK

-10% -20% -30% -40% Sep- Oct 02

Nov Dec Jan- Feb Mar Apr May Jun 03

Jul Aug

WestJet

80% 70% 60% 50%

RPK ASK

40% 30% 20% 10% 0% Sep- Oct Nov Dec 02

Jan- Feb Mar 03

Apr May

Jun

Jul

Aug

Air Canada Mainline consists of all Air Canada with the exception of Jazz. Page 4 September 2003

AIRLINE DATA – U.S. U.S. Airlines Release August 2003 Traffic Figures – Traffic Data – August 2003 Airline

Load Factor

Traffic (RPMs – millions)

(ASMs – millions )

79.5%

11,689

14,689

á 3.9 pts

â 1.7%

â 6.5%

79.5 % 3

1,344

1,773

á 0.2 pts

á 12.5.%

á 12.0%

82.2%

5,854

7,118

á 3.1 pts

á 1.7%

â 2.3%

80.1%

9,365

11,693

á2.9 pts

â3.7%

â 7.2%

91.6%

1,168

1,276

á 1.1 pts

á 69.6%

á 67.6%

82.6%

6,681

8,086

á1.9 pts

â 5.2%

â7.4%

73.2%

4,480

6,118

á 0.5 pts

á3.4%

á2.6%

82.5%

9,929

12,038

á3.7 pts

â8.1%

â12.2%

80.8%

3,729

4,617

á 3.7 pts

â 5.7%

â10.0%

Notes:

Capacity

Includes American Airlines and American Eagle. Mainline 3. Load factor includes scheduled service only 1.

Sources: Carrier traffic reports.

Page 5 September 2003

Halifax

Victoria

Kelowna

2nd Quarter

-9.0%

-10.9%

-3.8%

-6.7%

-12.3%

-6.9%

-6.0%

-6.3%

-6.1%

-8.7%

St. John’s -11.1% -11.9%

July

-7.6%

-8.3%

-3.6%

-9.4%

-6.6%

-5.1%

+4.4%

-13.1%

-6.3%

-9.5%

-13.0%

-7.0%

August

-7.7%

-7.9%

-2.3%

-7.5%

-8.8%

-2.8%

+7.5%

-8.8%

-1.7%

-13.6%

-10.5%

-8.0%

September

+12.6%

+22.5%

+20.1%

+7.6%

+23.7%

+16.4%

+26.1%

+13.2%

+11.8%

+12.6%

3rd Quarter

-2.6%

-0.2%

+2.9%

-4.4%

+0.50%

+1.2%

+11.2%

-4.8%

+0.2%

-5.4%

+10.5% +20.0 % -5.8% -0.8%

October

+12.5%

+15.3%

+14.3%

-0.1%

+6.4%

+5.9%

+7.9%

+0.1%

+5.7%

+1.7%

+4.4%

-0.7%

November

+4.7%

+5.3%

+0.6%

+9.4%

+3.0%

+5.7%

+0.1%

-1.4%

+0.2%

+1.2%

-2.3%

+8.2%

+4.3%

+7.8%

+7.1%

+11.7%

+6.3%

+15.2%

+8.1%

+1.4%

+4.3%

+1.5%

+3.2%

+2.2%

n/a

+7.2%

+9.7%

+7.6%

+6.9%

-5.1%

+8.9%

+7.3%

+0.5%

+3.0%

+1.1%

+3.0%

-0.3%

Full Year

-7.5%

-3.9%

-4.3%

+1.2%

-4.1%

-5.1%

-3.8%

+0.1%

-4.8%

-1.3%

-5.1%

-5.5%

-5.7%

January

+5.7%

+2.8%

+7.2%

+6.3%

+3.5%

+6.2%

+13.0%

+4.5%

+2.9%

+4.0%

+6.8%

-0.3%

-5.8%

February

+4.6%

-0.6%

+3.7%

+5.6%

+3.0%

+3.9%

+12.7%

+13.8

+7.5%

+2.0%

+6.0%

+8.8%

-2.0%

March

+0.4%

-1.4%

-1.8%

+3.7%

-0.4%

+2.2%

+5.1%

n/a

+0.2%

+5.0%

-3.7%

-4.2%

-3.1%

1st Quarter April May June 2nd Quarter July

+3.4% -15.1% -17.3% -9.0% -13.7% -6.0%

+0.2% -13.6% -13.5% -9.9% -12.2% n/a

+2.9% -10.2% -7.4 0.0% -5.6% +2.9%

+5.2% +1.6% -1.4% +1.9% +0.7% 4.7%

+2.0% +1.1% -5.3% -0.4% -1.6% +2.5%

+4.0% -7.6% -1.5% +2.5% -2.1% +3.0%

+10.1% +4.4% -0.5% +5.0% +3.0% +3.7%

+10.0% +6.1% -1.2% +4.1% +2.9% +5.7%

+3.3% -0.9% +0.4% +0.6% +0.0% +11.9%

+3.7% -0.6% -1.0% -0.5% -0.7% +5.0%

+3.1% -3.9% -5.3% +1.4% -2.6% +1.2%

+1.3% -1.6% -1.6% +7.0% +1.3% +4.7%

-3.7% -1.7% +4.5% +17.8 +7.1% +21.1

December 4th Quarter

2003

Page 6 September 2003

Saskatoon Regina

CANADIAN AIRPORTS

2002

. Summary of Total Year-Over-Year Passenger Traffic Performance at Selected Airports MontrealToronto Vancouver Calgary Edmonton Ottawa Winnipeg Dorval

NEWS ARTICLES AIR CANADA UPDATE AIR CANADA RESTRUCTURES AIRCRAFT LEASES Air Canada has restructured leases on an additional 14 aircraft with three different lessors, bringing the total restructured leases to 135. The carrier is also completing memoranda of understanding on another 59 aircraft with 12 different lessors.

AIR CANADA APPEALS NAV CANADA FEE INCREASE Air Canada is appealing the 6.9% charges instituted on August 1, 2003 by Nav Canada. Nav Canada is expected to oppose the appeal. The Canadian Transportation Agency will have 60 days to decide on the matter after hearing both sides.

AIR CANADA INCREASES CUBA SERVICE This winter Air Canada will improve its air services to Cuba by adding more flights, new routes, and introducing scheduled air services on most of the 15 routes it operates to Cuba from cities across Canada. In addition, effective December 2, Air Canada will introduce yearround three days per week service between Toronto and Havana. The service will operate with Airbus A319s. The carrier will introduce non-stop service between Montreal-Cayo Largo, Moncton-Holguin, and Halifax-Varadero.

AIR CANADA “WINDOWS OF OPPORTUNITY”, FARES AT 40% OFF

JETSGO TO LAUNCH ITS IN-FLIGHT MAGAZINE After two years of service, Jetsgo has decided to provide its passengers with free in-flight magazines. The in-flight magazine will launch as a quarterly publication and then move to bimonthly in mid-2004. The first issue is scheduled for release in mid-November.

JETSGO LAUNCHES JETSMILES PROGRAM Jetsgo introduced its Jetsmiles frequent flyer program on September 12th. The program allows passengers to earn up to 2,000 miles on a return long haul flight and redeem for free flights starting at only 7,000 miles for a one-way short haul flight. The program features no blackout periods, advance booking requirements, booking fees or surcharges, when using reward travel. Only security taxes and airport fees and taxes will be payable.

TRANSAT A.T. AND WESTJET EXPAND CHARTER BUSINESS WestJet signed a two-year partnership with Transat for WestJet to fly charter flights to sunspot destinations on behalf of Transat’s tour companies such as World of Vacations and Air Transat Holidays. Transat is to pay $29 million to WestJet in the first year; and in return, WestJet aircraft and crews will provide service on behalf of Transat to/from the Dominican Republic, and Mexican destinations such as Mazatlan, Puerto Vallarta, Cancun and Varadero.

On September 4, Air Canada launched the “Windows of Opportunity” seat sale offering 40% off fares for all its international and transborder destinations. The sale runs from September 18 to December 15.

OTHER CANADIAN AIRLINES JETSGO’S FALL SEAT SALE Jetsgo launched its fall seat sale on August 23rd. The sale highlighted Jetsgo’s new fall routes such as Toronto-Las Vegas for $149 one-way and also new Florida destinations of Orlando, St. Petersburg and Fort Myers. Page 7 August 2003

NEWS ARTICLES U.S. & INTERNATIONAL AIRLINES AIRLINES TO REDUCE FLIGHTS ON SECOND ANNIVERSARY OF 9/11

unsecured creditors as part of the company’s court-approved plan of reorganization. This is the first distribution made to unsecured creditors since its emergence from Chapter 11 on March 31.

Air Canada and other international airlines are cutting flight schedules on the second anniversary of the terrorist attacks in the U.S. Air Canada cancelled 14 flights to destinations in New York, Washington and Boston due to weak travel demand. This year Air Canada’s cancellations are a significant improvement from last year when 60 flights were cancelled. United Airlines also stated that it would be cutting flights on several of its high-frequency routes. Aviation Daily reports that US carriers reduced the number of domestic flights by 7% on September 11, 2003 compared to the same day a week earlier. In 2002, the reduction in flight capacity for the anniversary of 9/11 was 12%.

CATHAY PACIFIC REPORTS LOSS FOR FIRST HALF OF 2003

MESA ADDS MORE JETS TO US AIRWAYS EXPRESS NETWORK

United Airlines plans to cut costs by US$5 billion per year, including $900 million in aircraft lease and debt payments. Since its filing for Chapter 11 bankruptcy protection in December, United has already obtained US$2.56 billion in savings through wage and benefit cuts. The carrier still has plans to launch a low-fare carrier in the first quarter of next year.

Mesa will add four 50-seat regional jets to its US Airways Express network bringing the total number of aircraft to 56.

ATA DEFERS 737-800 DELIVERIES As part of its ongoing financial restructuring, ATA Holdings Corp. has entered a tentative agreement with Boeing to defer the delivery of seven 737-800 aircraft until 2005. The airline has also entered into agreements with three of its lessors to delay or reduce lease payments.

Cathay Pacific Airways reported losses of US$160 million (HK$1.24billion) in the first six months of 2003 compared with a profit of US$181 million (HK $1.41 billion) during the same period in 2002. The SARS was a primary factor, however Cathay stated that 90% of the airline’s full schedule has been restored with 100% of normal operation due to commence by the end of September 2003. Additionally, Cathay plans on adding new flights to London, Auckland and Melbourne.

UNITED TO CUT COSTS BY US$5 BILLION

DELTA RECALLS PILOTS, CUTS FLIGHT ATTE NDANTS Delta Air Lines plans to recall 250 pilots that were furloughed during the war in Iraq. The first group of 45 pilots will be recalled on October 1 and the remainder will return to work by the end of the year. The carrier also announced cuts to 700 flight attendant jobs.

US AIRWAYS ISSUES SHARES TO UNSECURED CREDITORS On September 9, US Airways Group Inc. issued 1.3 million shares of common stock to its Page 8 August 2003

NEWS ARTICLES CARGO U.S. DOMESTIC CARGO INCREASES U.S. Air Transport Association figures for July show a 4.7% increase in revenue ton miles for domestic cargo and a 2.6% decrease in international cargo. Latin America trade experienced a significant drop of 10.1% in volume. Total freight traffic for the month increased 1.0% from the previous year.

WORLD AIR FREIGHT TRAFFIC UP Worldwide air cargo traffic increased 7.3% in the first six months of 2003, but dropped 0.2% in June, according to the International Air Transport Association. Freight traffic in AsiaPacific for the first six months increased 8.7%. Carriers in North America reported a 5.3% drop in freight traffic for the month of June.

WINNIPEG INTERNATIONAL AIRPORT CARGO APRON EXPANSION Winnipeg Airports Authority broke ground on a new common-use cargo apron in late August. The project consists of 25,000 m2 of concrete and 5,100 m2 of asphalt. When completed in late autumn, it will be able to handle five independent 727 power in power out operations.

DHL ACQUIRES AIRBORNE, CUTTING JOBS On August 14, Airbone Inc. shareholders approved the US$1.05 billion sale of its ground operations to DHL. DHL is cutting 2,870 jobs at pickup and delivery centres across the U.S. as part of its consolidation with Airborne.

NEWARK OPENS NEW CARGO BUILDING Newark Liberty International Airport opened its new US$33.4 million cargo facility. The 99,400m2 facility contains 12 warehouse bays, over 2,000m 2 of space for offices, 33 truck docks and three to four aircraft parking positions.

Page 9 August 2003

NORTHWEST GROUND WORKERS LOSE JOBS Due to a 40-50% drop in mail volume handled by Northwest Airlines last year, the carrier has decided to cease its domestic mail operations and cut 850 ground workers. Northwest has been carrying domestic mail since 1926. It still expects to handle close to 29 million pounds of international mail this year.

ATLAS FINANCIAL WOES CONTINUE. On August 29th, the majority of the holders of Atlas Enhanced Equipment Trust Certificates agreed to extend their forbearance agreement from August 31st to September 12th to allow Atlas to continue to negotiate a restructuring. On September 8th, the NYSE suspended trading of Atlas common stock because of continuing delays in completing SEC filing requirements. The SEC is considering whether to delist the stock.

VOLGA-DNEPR SCHEDULED SERVICES Volga-Dnepr Airlines appointed Stan Wraight to head its efforts to move beyond its outsized cargo specialization into scheduled freighter service. Wraight had previously worked for KLM and Atlas. Scheduled services are intended as 6th freedom operations via Russia between Europe and the Far East. Volga-Dnepr is unable to operate scheduled services on routes other than those which move through Russia.

CHINA AIRLINES ADDS 747-400 FOR TRANSPACIFIC China Airlines of Taiwan took delivery of a 747-400 freighter, its 15th widebody freighter. The freighter is intended for increased transpacific service.

ÂŠ InterVISTAS Consulting Inc

NEWS ARTICLES NEW PORT TERMINAL IN TRIESTE

Schenker opened a new terminal at the port of Trieste in northern Italy. The main focus will be on attracting traffic moving between southeastern Europe and Asia. The current focus is on improving road and rail connections to the port to offer a more cost-effective and shorter alternative to the use of northen European ports. The port includes 1.8 million square metres designated as an FTZ

AIRPORTS MONTRÉAL DORVAL AIRPORT TO BE RENAMED On August 21, Transport Minister David Collenette announced the decision to rename Montréal’s Dorval Airport to Pierre Trudeau Airport in honor of the former Prime Minister. The airport will be officially renamed on January 1, 2004.

MONTRÉAL Q2 RESULTS REPORT SMALL LOSS For the 2nd quarter, Aéroports de Montréal reported consolidated revenues of C$48.8 million, up C$0.6 million from last year. Controllable operating costs totaled C$27.6 million, up C$4.8 million from the same period last year. For the period, the airport reported a small loss of $0.2 million, compared to an excess of revenues over expenses of C$10.2 million over the same period last year. Passenger traffic for the quarter fell 4.8% due to the effects of the Iraq war and SARS.

OTTAWA AIRPORT TO OPEN NEW TERMINAL October 12, 2003 marks the opening day of Ottawa’s Macdonald-Cartier International Airport Authority’s brand new C$310 million terminal building.

protection. The Dominion Bond Rating Service confirmed YVR’s rating of AA (low) and has removed it from an “Under Review With Negative Implications” advisory, which was placed on most Canadian airports at the height of the SARS epidemic. The Airport Authority expects to earn a $20.1 million surplus this year.

YVR UNVEILS RETAIL EXPANSION On September 3, Vancouver International Airport unveiled the first phase of its new C$5 million expansion of its transborder retail stores. When completed, the expansion will include the addition of 12,000 square feet of retail space, provide 70 new permanent jobs and generate C$8 million in annual revenue.

GTAA REACHES AGREEMENT WITH PSAC WORKERS The Greater Toronto Airport Authority (GTAA) reached an agreement on a three year contract with the Public Service Alliance of Canada (PSAC), which represents over 600 workers at the GTAA.

MONCTON AIRPORT PASSENGER TRAFFIC SOARS IN JULY Traffic levels at Greater Moncton International Airport increased 34% to 51,732 for the month of July , a record for the airport in a single month since privatization in 1997. Year-to-date passenger traffic increased 23% to 262,485. The airport projects between 450,000-475,000 passengers this year.

DELTA CONNECTION INTRODUCES FREDERICTON-BOSTON SERVICE Delta Connection will offer two daily roundtrip nonstop flights between Fredericton and Boston. The service will operate with Fairchild 328JET regional jets.

YVR DEBT RATING RETAINED The Vancouver International Airport will make safe financial results this year after experiencing a series of external shocks from SARS and Air Canada declaring bankruptcy Page 10 August 2003

NEWS ARTICLES BOARDING PASSES REQUIRED AT SPOKANE

Starting September 8, the Transportation Security Administration (TSA) passengers at Spokane International Airport will be required to show their boarding passes and a government-issued ID at all checkpoints. Spokane is one of 265 airports currently participating in the TSA’s “Selectee Checkpoint” program.

FUEL PRICES September 8, 2003 SPOT OIL PRICES DECREASING FUTURES PRICES LOWER Crude Oil Prices: Spot – US$28.87 (down 11% from August)

AIRCRAFT MANUFACTURERS BOEING CONFIRMS JAL ORDER Boeing has confirmed an order for seven 767-300ER aircraft worth US$ 850 million from JAL. The new aircraft will increase JAL’s 767 fleet to 40 over the next three years. JAL will take delivery of the first 767 next year and receive the remainder by the end of 2006.

BOEING TO CUT 1,440 JOBS Boeing Co. plans to issue layoff notices to 1,440 employees. About 1,250 of those are in the Seattle area. The notices will go into effect on October 24.

GOVERNMENT AND REGULATORY US SECURITY FEE RE-IMPOSED On October 1, the U.S. Transportation Security Agency will resume imposing its two security fees. The September 11th Security Fee is US$2.50 per passenger per enplanement for up to two enplanements. The Aviation Security Infrastructure Fee is based on each air carrier's security costs in 2000. Both fees were suspended by Congress from 1 June to 20 September 2003 via the Emergency Wartime Supplemental Appropriations Act. The first payments by air carriers will be due to the TSA at the end of the November.

Future – Steady decline • 6 month - $27.94 (February 2004 delivery) • 12 month – $26.24 (September 2004 delivery) • 2 year - $24.78 (September 2005 delivery) • 5 year - $24.57 (September 2008 delivery)

Monthly Spot Prices $40.00

US$ per Barrel

$35.00 $30.00 $25.00 $20.00 $15.00 Dec- Jan- Feb 02 03

Mar Apr

May Jun

Jul Aug Sep

Page 11 August 2003

ECONOMIC OUTLOOK 15 September 2003

Employment in Canada (Millions, Seasonally adjusted)

The Canadian economy revisited

15.8

15.6

15.4

15.2

5 4 3 2

Q2 2003

Q1 2003

Q4 2002

Q3 2002

Q2 2002

Q1 2002

Q4 2001

Q3 2001

Q2 2001

Q1 2001

Q4 2000

-1 Q3 2000

Jul

Mar

May

Jan

Nov

Jul

Sep

Mar

May

Jan

Nov

Jul

The evidence does appear to show the economy slowing. Much of this has been put down one-offs such as SARS, mad cow disease and the Iraq war. Some economists have also suggested that the Bank of Canada was a bit too hasty in ramping up

Q2 2000

Sep

2003 declined by 0.3%, at an annualised rate. This is first quarterly decline since Q3 2001. We had previously reported a decline in monthly GDP for April; this decline continued through the rest of the quarter.

Q1 2000

2003

Source: Labour Force Survey, Statistics Canada

Canadian GDP (Annualised Quarterly % Change)

Source: Statistics Canada

interest rates. Bank of Canada Overnight Rate (%)

However, the Canadian economy is well positioned to bounce back. On September 3rd, the Bank of Canada announced its second quarter point interest rate cut of the year. The Bank indicated that it was not planning any further cuts, stating “there are clear indications that conditions are in place for a strengthening of economic growth”.

6 5 4 3 2 1

The indications from Canada’s largest 0 export market, the United States, are generally positive. In the second quarter of Source: Bank of Canada 2003, US GDP increased by an annualised rate of 3.1%. And a recent economic survey of Canada by the Organisation for Economic Cooperation and Development (OECD) stated that despite the current slowdown, economic activity is expected to pick up again towards the end of the year and remain healthy in 2004 (Economic Survey – Canada 2003, OECD, September 2nd, 2003). Jul

Sep

May

Mar

Jan

Nov

Jul

Sep

2003

May

Mar

Jan

Nov

Jul

Sep

2002

May

Mar

2001

Jan

Ian Kincaid Manager, Economic Analysis

2002

Mar

Statistics Canada also reported that Gross Domestic Product for the second quarter of

2001

Jan

15.0

May

In July, we reported that there were signs (in the form of employment and GDP statistics) that the Canadian economy was slowing. With two months’ worth of additional data, are the signs any clearer? Certainly, as can be seen in the chart opposite, employment growth has stagnated. There has been no growth in employment since February 2003.

Though the indicators are still mixed, this is not necessarily a bad thing. There appears to be no evidence of a steady downward trend, as was feared a few months back. Page 12 August 2003

ECONOMIC OUTLOOK 15 September 2003

Employment in Canada (Millions, Seasonally adjusted)

The Canadian economy revisited

15.8

15.6

15.4

15.2

5 4 3 2

Q2 2003

Q1 2003

Q4 2002

Q3 2002

Q2 2002

Q1 2002

Q4 2001

Q3 2001

Q2 2001

Q1 2001

Q4 2000

-1 Q3 2000

Jul

Mar

May

Jan

Nov

Jul

Sep

Mar

May

Jan

Nov

Jul

Q2 2000

Sep

Q1 2000

2003

Source: Labour Force Survey, Statistics Canada

Canadian GDP (Annualised Quarterly % Change)

Source: Statistics Canada

interest rates. Bank of Canada Overnight Rate (%)

6 5 4 3 2 1

Sep

May

Mar

Jan

Nov

Jul

Sep

2003

May

Mar

Jan

Nov

Jul

Sep

2002

May

Mar

2001

Jan

Ian Kincaid Manager, Economic Analysis

2002

Mar

Statistics Canada also reported that Gross Domestic Product for the second quarter of

2001

Jan

15.0

May

Though the indicators are still mixed, this is not necessarily a bad thing. There appears to be no evidence of a steady downward trend, as was feared a few months back. Page 13 August 2003

TSAâ&#x20AC;&#x2122;S SELECTEE CHECKPOINT PROGRAM

15 September 2003

The U.S. Transportation Security Administration (TSA) is planning to complete the implementation of its "Selectee Checkpoint" program by the end of 2003. When completed, it will be mandatory for travellers in the U.S. to have a paper airline boarding pass and photo ID upon arriving at the pre-board screening point. This program eliminates e-tickets or itineraries as valid proof of travel at security screening points.

Solomon Wong Director Security & Planning

The genesis of this program was a response to the high costs of staffing TSA agents at each boarding gate to conduct a secondary search on randomly selected passengers. With Selectee Checkpoint, the random searches occur at central pre-board screening points, where the bulk of TSA staff is located. At present, 265 of the 429 airports within the TSA's mandate are covered within this program. The Canadian Air Transport Security Authority (CATSA) has no comparable program. Random at-gate screening continues for certain flights. As well, passengers are required to present their boarding pass at the scre.ening point, while airline staff verify passenger ID's at the gate. The development of the TSA Selectee Checkpoint program raises some fundamental questions about the effectiveness of preventing unauthorized access to restricted post-security areas.

Variable Standards in On-line Boarding Passes. With self-serve check-in usage levels at 65-80% in some markets, the new stage in the evolution of self-service is web check-in and boarding pass issuance. The TSA has anticipated this evolution and the Selectee Checkpoint program provides for acceptance of boarding passes printed from the web. However, participating carriers have each developed their own standards for outlining the information (name, flight number, date). Although machine-readable barcodes are available, TSA agents are not equipped with readers to decode information. Page 14 August 2003

Above: Varying standards for e-boarding passes (Hawaiian, U.S. Airways, NWA)

Furthermore, most carriers are providing boarding passes that allow for easy manipulation of images generated by carrier websites, compared to more fraud-proof PDF technologies.

Identity Fraud and Theft Further compounding the variability of boarding passes is the relative ease to generate and obtain fake ID's. A September 2003 report from the U.S. General Accounting Office revealed a significant degree of ease to apply for and receive a fake driver's license in the U.S. This poses a significant challenge for carriers and transportation security agencies: driver's licenses remain the most common piece of photo identification carried by individuals in North America.

Further Development of Selectee Checkpoint Needed Greater integration and access by transportation security to airline passenger manifests will be an aid in preventing unauthorized persons from accessing postsecurity areas. Furthermore, as our society continues to evolve into a paperless environment, agencies will need to anticipate the future proliferation of handheld or wireless web services, as well as electronic means of verifying identity and travel status of an individual.

ÂŠ InterVISTAS Consulting Inc

WASHINGTON REPORT

15 September 2003

Low-Cost Carrier Reports Top Traffic Results: The Department of Transportation (DOT) Bureau of Transportation Statistics (BTS) reported that a low-cost airline had topped the monthly domestic passenger traffic ranking for the first time ever in May. Low-cost carrier, Southwest Airlines, reported carrying 6.5 million domestic passengers. Delta Airlines and American Airlines ranked second and third with 6.3 million and 6.2 million domestic passengers carried, respectively. BTS stated that Southwest’s top ranking in domestic passenger traffic indicates a long-trend of growth by the low-cost carriers and lesser dominance by network carriers. On a similar note, DOT stated in a report issued on July 21, that low-cost carriers are now serving more longer distance markets today than in the past. According to the report, low-cost carriers such as AirTran Airways, ATA Airlines, Frontier Airlines, JetBlue Airways, Southwest Airlines and Spirit Airlines had either begun new or extended existing long-haul services over the past several years.

Charles Chambers Senior Vice President GA2

and Regional Vice President InterVISTAS Consulting Inc. Washington, D.C.

TSA Resumes Security Fees: Commencing October 1, 2003, the Transportation Security Administration (TSA) will resume the September 11th Security Fee and the Aviation Security Infrastructure Fee. These two fees had been suspended from June 1st, 2003 to September 30th, 2003 through the Emergency Wartime Supplemental Appropriations Act. Both fees apply to U.S. and foreign carriers and charges are as follows: •

September 11th Security Fee - $2.50 per enplanement for up to two enplanements per one-way trip or four enplanements per roundtrip.

•

Aviation Security Infrastructure Fee – depends on each carrier’s security costs in 2000.

Airport Security Screeners Forbidden to Have Unions: The Federal Labor Relations Authority (FLRA) ruled that airport security screeners do not have the right to a union. TSA head James Loy, signed an order in 2002 forbidding collective bargaining by screeners because he was concerned that union contracts could reduce flexibility to changes in shift assignments in response to a terrorist threat. The American Federation of Government Employees (AFGE), the union that is seeking to represent the airport security screeners, plans on appealing the decision. Also, on September 9, 2003, the AFGE praised Congressman Robert Andrews for introducing a resolution urging lawmakers in the House to sign on the issue of granting collective bargaining rights to TSA screeners. FAA Introduces Rules to Limit Public Access to Aircraft Information: The Federal Aviation Authority (FAA) recently introduced rules that limit public access to aircraft information. FAA employees are forbidden from releasing an aircraft’s location, flight plan, altitude and origin/destination information to the public unless the request is for an official government purpose or required for safety or efficiency reasons. War Risk Insurance Coverage Extended: Transportation Secretary Norman Mineta announced on August 11, 2003, a 60-day extension of the aviation insurance program provided to U.S. carriers by the FAA. Gordon England – Leaves DHS: Department of Homeland Security (DHS) Deputy Secretary Gordon England was second in command at DHS. President Bush has nominated England to be the Secretary of the Navy. A replacement for Gordon England is yet to be determined. Page 15 August 2003

FOREIGN OWNERSHIP LIMITS 15 September 2003

Current Limits. Canada limits foreign ownership of Canadian air carriers to 25%. Further, regardless of the foreign ownership percentage, foreigners may not control a Canadian air carrier. These ownership limits are contained in Section 55 of the Canada Transportation Act (CTAct). The Act allows the Governor in Council (i.e., the Cabinet) to change the foreign ownership percentage, but only an amendment to the Act can remove the no-foreign-control provision. For Air Canada (AC), the foreign ownership and control limits are also contained in the Air Canada Public Participation Act, a good example of redundant government legislation. There are also limits in most of Canada’s bilateral air services agreements with other nations. Most of these require that any carrier designated by Canada for international service must be ‘substantially owned and controlled’ by Canadians.

Michael Tretheway Vice President & Chief Economist

Trends Elsewhere. Australia, New Zealand, Chile and others removed foreign ownership limits on their domestic air carriers, although bilaterals constrain their international services to the usual ownership and control restrictions. The U.S. is considering increasing its foreign ownership limit to 49%. The European Union has removed national ownership and control restrictions and replaced them with EU ownership restrictions. Thus, Greek investors can establish a UK based airline, and British investors can establish a Belgium air carrier. Some bilaterals allow EU owned airlines to operate outside the EU, such as Finland and Switzerland. IATA is on a campaign calling for governments around the world to remove their archaic airline ownership restrictions. Not only do near bankrupt airlines need access to new equity capital, the industry needs to restructure (i.e., consolidate and merge), and foreign ownership laws are a major impediment. The problem in Canada. Air Canada is seeking new equity capital and the conversion of some debt and other unpaid bills to equity. Since most of AC’s debt is foreign owned, debt conversion could run afoul of the CTAct. As well, some of AC’s potential investors are non-Canadian. There has been some discussion in the media that AC could get around the ownership restrictions by using different classes of shares with limited voting powers. However, these commentators seem unaware that the Canadian Transportation Agency has reviewed such provisions many times in the past and rejected them. American Airlines was limited to 25% voting equity and 33% total investment in Canadian. The Agency also ruled against several other cases, including Air 2000, Skyservice, Greyhound and others. Without a change in the CTAct, it is hard to see how the Agency could rule differently for a restructured Air Canada. Equitable Treatment. Even if the Agency were to allow foreign investment in Air Canada with limited voting rights, wouldn’t this be treating other airlines in Canada unfairly? Why was Londonair (a proposed start up in 2001) not allowed a license with a 49% foreign ownership stake if AC can get around the rule? Why can’t WestJet shareholders sell their shares to U.S. or other non-Canadian investors and get a higher selling price? It is time for Canada to modernize its airline foreign ownership laws. Air Canada should be allowed to pursue the best opportunities for its financial restructuring. Other Canadian carriers should be treated the same, and their shareholders should be allowed to sell their stock to the highest bidder. 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. Prepared by InterVISTAS Consulting Inc.

Page 16 August 2003