CAIR Issue No. 33 - September 2005 by Leah Dupuis

INTERVISTAS ’ CANADIAN AVIATION INTELLIGENCE REPORT

In this issue… Features Columns: • Impact of Hurricane Katrina (p.1) • Record High Fuel Prices (p.2) • New Passenger ID Requirements (p. 12) • Fuel Prices-Long Term Threat? (p. 15)

Regular Reports: • Economic Outlook (p.3) • Airline Data (p.5) • Airport Data (p. 7) • Industry News (p.9) • Washington Report (p.13) • Ottawa Report (p.14) • InterVISTAS’ News (p. 16)

THE IMPACT OF HURRICANE KATRINA ON AIR SERVICES 20 September 2005

Impact on New Orleans International Airport

Josh Drury Transportation Analyst

Among the impacts of Hurricane Katrina has been the damage and disruption of service at airports in the affected region. Most notably, New Orleans International Airport (MSY) experienced significant infrastructure damage, and was closed to scheduled traffic beginning 29 August. In recent days, Northwest Airlines and Continental Airlines have resumed limited services, while Southwest Airlines resumed its Houston-New Orleans service on 20 September. American Airlines began its Dallas-New Orleans service on 21 September.

New Orleans International Airport is the largest airport in the region, handling 9.7 million enplaned and deplaned passengers in 2004. The airport ranks 40th in the U.S. in terms of enplaned passenger volumes. The airport is not a hub for any major U.S. carrier, so there are limited effects on connecting passengers-mitigating the impact of the closure. The airport has only modest cargo volumes.

Impact on airline revenues

The closure of MSY to scheduled traffic could result in millions of dollars in lost revenue to the airlines operating at the airport. Aviation Daily reports that the largest operator at the airport, Southwest Airlines, accounts for nearly a quarter of passenger revenue at MSY and could lose in excess of US$700,000 for each day the airport is closed. Other carriers most affected are Delta Airlines, American Airlines, Continental Airlines, and United Airlines, each with over 10% of the total passenger revenue at the airport. In total, revenue losses are approximately US$2.9 million per day according to Aviation Daily. The only Canadian carrier affected is Air Canada, which had operated a daily flight from Toronto using a CRJ. Air Canada’s revenue exposure is minimal compared to the major U.S. operators.

Impact on other regional airports While MSY is experiencing the largest magnitude of impacts from Katrina, it is by no means the only airport affected. Gulfport-Biloxi International Airport, while much smaller (860,000 enplaned/deplaned passengers in 2004) was also closed for an extended period of time, though commercial flights have recently resumed on a limited basis. More broadly, the hurricane temporarily affected many more airports in Florida, Louisiana, Mississippi and Alabama, which experienced cancellations and delays as the hurricane passed through the area. In total, the impact of Katrina on the U.S. aviation industry has been estimated at US$500 million over the next year, due to airport closures and the loss of traffic to airports in the affected areas.

Page 1 September 2005

RECORD HIGH FUEL PRICES 26 September 2005

Crude oil prices surpass $70 per barrel in August 2005…

In late August, crude oil prices surpassed the $70 mark in intraday trading before settling to close just below the new price level. Similar to previous months, futures contracts for December 2011 remain high at a price of $60.48, up 7% from July 2005. Impact of Hurricane Katrina and Hurricane Rita Hurricane Katrina impaired almost all crude oil production in the Gulf of Mexico, which accounts for approximately 25% of all U.S. crude oil output. The hurricane also affected about 10% of U.S. refining capacity, located in Louisiana and Mississippi.

Impact on Aviation Due to increasing world oil prices, International Air Transport Association (IATA) was forced to make its fourth revision to its estimated loss for the world aviation industry in 2005. IATA now predicts that the global industry will lose US$7.4 billion for the year, based on an average crude oil price of $57 per barrel. The biggest losers are expected to be the North American air carriers, with European carriers breaking even and Asian carriers expected to make a small profit for the year.

…. Futures prices continue skyward Due in part to short term global shocks, futures prices have continued to increase to higher and higher levels in 2005. The price of a barrel of crude oil contracted in the current month for delivery in March 2006 is US$67, up over 8% from July’s price of $62. Crude Oil Futures Prices $70.00

September 2005 $65.00

July 2005 June 2005

$60.00

Crude Oil Prices for Near Term Delivery

$55.00 $50.00

April 2005 Futures Prices -----

February 2005

$45.00 $40.00

January 2005 $35.00 $30.00 $25.00

May 2003

August 2003

December 2003

April 2004

June 2004

September 2004 Oct-08

Jul-08

Apr-08

Jan-08

Oct-07

Jul-07

Apr-07

Jan-07

Oct-06

Jul-06

Apr-06

Jan-06

Jul-05

Oct-05

Apr-05

Jan-05

Jul-04

Oct-04

Apr-04

Jan-04

Jul-03

Oct-03

Apr-03

$20.00 Jan-03

Senior Project Manager

US$ Per Barrel

Doris Mak

Initial forecasts had Hurricane Rita packing an even bigger punch than Katrina, but luckily for the state of Texas, Rita weakened substantially and did not inflict as much damage to the region than was originally feared.

Month of Delivery

Page 2 September 2005

ECONOMIC OUTLOOK – U.S. 20 September 2005

Q1 2006

Q1 2005

Q1 2004

Q1 2003

Q1 2002

Transportation Analyst

Q1 2001

Josh Drury

The U.S. Economy – continued solid Real U.S. GDP (Annualised Quarterly % Change) growth in advance of 8% Katrina. The U.S. 7% economy continued to grow steadily in the 6% second quarter of 2005, Historical Forecast 5% data data with preliminary estimates of GDP 4% growth of 3.3% on an 3% annualised basis. This is down slightly from the 2% 3.8% growth in the first 1% quarter of 2005, and somewhat less than 0% annual growth in 2003 and 2004. Growth was -1% expected to pick up in -2% the last half of the year, Source: Bureau of Economic Analysis for historical data; TD with most projections for Economics for forecast data. Note forecast data does not account GDP growth in 2005 as for effects of Katrina. a whole of 3.5% or more. However, these projections did not anticipate the effects of a disaster such as Hurricane Katrina.

Negative impacts. The devastating effects of Hurricane Katrina on the U.S. Gulf Coast have led to substantial and ongoing economic impacts on the region and on the U.S. economy as a whole. The hurricane and resultant flooding have affected the economy in several ways: •

Loss of life and property. The total extent of casualties and damages will not be known for some time, but are substantial. Estimates of losses to the private insurance industry alone are estimated at US$30 billion.

•

Disruption of employment, production, and spending. The displacement of hundreds of thousands of evacuees, and damage and destruction of businesses means that employment, production and spending will be greatly reduced in the affected areas for months. Employment losses are estimated at 400,000 through to the end of the year.

•

Spiking of oil and gas prices. This region is responsible for approximately 30% of domestic oil production, 20% of gas production, and 50% of refining capacity; a large portion of this capacity was lost or damaged due to Katrina. Oil imports via Gulf Coast ports have also been disrupted. It is expected that this impact will be temporary as facilities are repaired and come back on line in the next few weeks.

Page 3 September 2005

ECONOMIC OUTLOOK – CON’T •

Disruption of transport. Damage from the hurricane has disrupted the flow of goods and passengers in and around the affected area. Major roads, bridges and highways (including Interstate 10) were rendered impassable, and airports including those at New Orleans and Gulfport-Biloxi were closed to scheduled service. The port facilities in New Orleans – including the Port of South Louisiana, the largest port by volume in the U.S. – are damaged and are closed to shipping, though this should resume as facilities are repaired. In the meantime, activity is diverted to nearby ports such as Baton Rouge.

While these impacts are substantial, the strong position of the economy before Katrina means the impacts will not be enough to trigger a recession. The U.S. Congressional Budget Office (CBO) anticipates that economic impacts will be concentrated in the second half of 2005, with the potential for overall GDP growth to be reduced by between one-half and one percentage point on an annualised basis. Based on previous forecasts, this would still leave GDP growth in excess of 2.5% for the last two quarters of 2005, and over 3% for the year. Growth is expected to increase again in 2006 as rebuilding continues.

Page 4 September 2005

AIRLINE DATA – CANADA Traffic and Load Factors on Canada’s Major Air Carriers August 2005 Passenger Traffic

Air Carrier

OTHER CARRIERS: LOAD FACTORS

Air Canada1 Domestic (Mainline) Jazz

CanJet: not reported

International & Charter

WestJet

Capacity

Revenue Passenger Kilometres

Load Factor

Available Seat Kilometres

% Change over 2004

% Change from 2003

% Change over 2004

% Change from 2003

Change over 2004 +2.1 pts (to 85.3%)

Change from 2003 +4.7 pts (from 80.6%)

+5.5%

+15.8%

+2.9%

+9.5%

+4.1%

+4.3%

-0.5%

-6.4%

+3.8 pts

+8.8 pts

+55.3%

+64.5%

+44.0%

+44.6%

+5.2 pts

+8.7pts

+6.1%

+21.7%

+4.4%

+18.3%

+1.4 pts

+2.4 pts

+22.3%

+49.0%

+16.9%

+47.9%

+3.7 pts (to 83.5%)

+0.6 pts (from 82.9%)

Analysis: •

•

Air Canada reported a load factor of 85.3% in August 2005, the highest ever for the air carrier in any month. Although mainline domestic traffic increased, capacity was reduced. In comparison, Jazz’s traffic and capacity increased by double digits, albeit load factor was relatively lower at 72%. Air Canada’s international traffic and capacity continued to increase in August 2005. The growth of traffic outpaced the addition of capacity, resulting in an improved load factor. Capacity was added in all international sectors with the exception of services to the U.S. WestJet continued to report traffic and capacity increases in August 2005. The increase in traffic outpaced the addition of capacity, resulting in a higher load factor. Although both Air Canada and WestJet increased fares in mid-August as a result of higher fuel prices, this did not result in a decrease in traffic.

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

Jazz data is not included in this graph

Aug- Sep 04

Oct

Nov

Dec Jan- Feb 05

Dom RPK

Mar

Apr May

Jun

Jul

Aug

Dom ASK

Air Canada International 20% 15% 10% 5% 0% -5% -10% Aug- Sep Oct 04

Nov

Dec Jan- Feb 05

Int'l RPK

Mar

Apr May

Jun

Jul

Aug

Int'l ASK

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

Oct

Nov

Dec

Jan- Feb 05

RPK

Mar

Apr

May Jun

Jul

Aug

ASK

1Air

Canada consists of all Air Canada operations with the exception of Jazz. Page 5 September 2005

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

Load Factor

Traffic (RPMs – millions)

(ASMs – millions )

81.5%

12,653

15,509

á3.1 pts

á3.8%

â0.1%

70.6%

724

1,027

á2.1 pts

á25.0%

á21.3%

81.1%

674

831

á1.9 pts

â45.0%

â46.3%

84.3%

3,716

4,410

á1.8 pts

á25.8

á3.5%

80.0%

11,286

14,112

á1.3 pts

á6.8%

á5.1%

90.1%

1,986

2,205

á0.8 pts

á29.8%

á28.7%

84.8%

6,957

8,203

á1.5pts

á0.7%

â1.0%

76.1%

5,671

7,453

á1.0pts

á13.7%

á12.2%

84.8%

10,438

12,305

á1.0 pts

â4.4%

â5.6%

77.3%

3,534

4,571

â1.8pts

â6.0%

â3.8%

Notes:

1. 2.

Sources:

Carrier traffic reports.

Page 6 September 2005

Capacity

Mainline operations only. Load factor includes scheduled service only.

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

2004

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

+10.4%

MontréalTrudeau +18.7%

+5.0%

+0.8%

+5.7%

+8.6%

+10.5%

+4.7%

-0.5%

+5.5%

+1.4%

St. John’s +10.6%

+16.0%

+4.9%

+18.1%

+1.9%

+2.2%

+6.2%

+7.4%

+6.9%

-2.0%

-5.9%

+5.4%

+1.5%

+10.1%

September

+16.1%

+11.5%

+13.2%

+13.0%

+6.3%

+7.9%

+8.8%

+8.6%

+8.3%

+12.1%

+5.3%

-0.6%

+13.4%

3rd Quarter

+16.4%

+8.7%

+16.7%

+6.2%

+2.9%

+6.6%

+8.2%

+8.6%

+3.3%

+1.1%

+5.4%

+0.8%

+11.2%

October

+14.3%

+7.0%

+10.7%

-4.0%

+11.9%

+1.1%

+3.7%

-1.4%

+9.1%

+7.9%

+1.9%

+18.2%

November

+13.3%

+6.2%

+17.6%

+9.6

+4.7%

+11.4%

+4.4%

+8.3%

+0.3

+5.1%

+8.0%

-11.1%

+9.9%

December

+14.2%

+6.8%

+20.9%

+8.9%

+8.4%

+11.0%

+5.1%

+8.0%

+2.1%

+3.9%

+8.1%

+3.6%

+6.8%

4th

+14.0%

+6.7%

+16.1%

+9.7%

+3.1%

+11.4%

+3.5%

+6.4%

+0.3%

+5.9%

+8.0%

-2.1%

+11.9%

Full Year

+15.7%

+9.6%

+18.6%

+7.0%

+5.1%

+10.2%

+7.7%

+9.1%

+5.7%

+3.6%

+5.6%

+0.3%

+14.0%

Toronto

Vancouver

July

+17.1%

August

Quarter

2005

January

+15.0%

+9.8%

+14.4%

+13.2%

+9.6%

+12.9%

+13.6%

+7.0%

+4.7%

+12.4%

+17.7%

+9.7%

+11.9%

February

+8.7%

+4.5%

+3.8%

+10.2%

+7.8%

+5.5%

+7.0%

+4.8%

+7.1%

+15.8%

+10.4%

+8.5%

+1.5%

March

+10.2%

+8.2%

+5.5%

+17.5%

+12.5%

+7.3%

+9.7%

+7.1%

+15.4%

+19.5%

+19.1%

+22.2%

+19.6%

1st Quarter

+11.2%

+7.5%

+7.7%

+13.7%

+10.0%

+8.4%

+10.0%

+6.3%

+9.3%

+16.0%

+15.6%

+13.3%

+11.5%

April

+4.0%

+3.9%

+5.7%

+3.5%

+5.5%

+0.1%

+4.3%

-0.2%

+2.6%

+18.8%

+5.9%

+3.8%

+9.8%

May

+6.7%

+5.5%

+3.7%

+12.2%

+12.0%

+5.5%

+8.0%

-4.5%

+5.8%

+26.3%

+13.4%

+5.7%

+8.5%

June

+6.3%

+4.0%

+7.5%

+10.1%

+13.9%

+3.4%

+2.9%

-0.5%

+6.8%

+22.7%

+11.0%

+12.4%

12.4%

2nd Quarter

+5.7%

+4.5%

+5.7%

+8.6%

+10.4%

+3.1%

+5.0%

-1.8%

+5.1%

+22.6%

+10.2%

+7.3%

+10.3%

July +3.6% +3.4% +3.8% +11.2% +11.7% Source: Transport Canada and individual airports’ traffic reports.

+4.8%

+4.5%

-9.7%

+1.2%

+15.9%

+5.1%

+10.9%

+14.0%

If your airport is interested in providing InterVISTAS Consulting Inc. with its monthly passenger statistics, please email Doris Mak at doris_mak@intervistas.com Page 7 September 2005

Passenger Market Data for Airports Accurate and Timely Marketing Data: A Key to Air Service Development InterVISTAS Consulting, in conjunction with the International Air Transport Association and other suppliers, is offering a unique, and newly enhanced data product that provides passenger market sizes, travel routings and fare

New!

profile data for domestic, transborder and international markets.

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

New!

Expanded Origin & Destination Market Data for all Top Markets Inbound & outbound travel agency data is now available for Canadian domestic and top international air markets. InterVISTAS’ market data is supported by a number of sources including IATA travel agency ticket sales. Travel agency sales represent approximately 80% scheduled international air tickets issued worldwide. The database includes more than 7 million air tickets issued in Canada and several million tickets destined to Canada annually.

Page 8 September 2005

Identify True Origin & Destination Flows •

Quantify city-pair market sizes for air service development initiatives

Analyse Hub Activity & Routings •

Identify key routing patterns to support air service proposals

Understand Competition within Airport Catchment Areas •

Quantify traffic leakage to determine true market sizes

For more information, contact: Nancy Keen Tel: 1-604-717-1822 Email: nancy_keen@InterVISTAS.com

NEWS ARTICLES AIR CANADA UPDATE

WESTJET BOOSTS CHARLOTTETOWNTORONTO SERVICE

AIR CANADA STARTS HAMILTONMONTREAL AND HAMILTON-OTTAWA SERVICES

Starting 17 October 2005, WestJet will extend its Charlottetown-Toronto service to six flights per week.

Air Canada Jazz has launched four daily nonstop flights between Hamilton and Montreal, and three daily non-stop flights between Hamilton and Ottawa. The flights are operated with 50seat Canadair regional jets.

WESTJET COMMENCES TORONTO-LAS VEGAS FLIGHTS

AIR CANADA CREATES TASK FORCE TO REDUCE AIRCRAFT WEIGHT In an effort to save on increasingly expensive jet fuel, Air Canada has created a special task force of employees to investigate ways to make its aircraft lighter and reduce fuel consumption. The task force will investigate a wide range of possibilities for reducing weight, including aircraft interiors, fuel carriage, and onboard product.

AIR CANADA INTRODUCES “NORTH AMERICA UNLIMITED PASS” On 13 September, Air Canada launched its North America Unlimited Pass, which it claims is the airline industry’s first-ever unlimited flight subscription. Holders of the pass will be able to fly to over 100 destinations in Canada and the continental U.S. served by Air Canada and Air Canada Jazz, as often as they wish over a twomonth period. The pass will cost $6,998 plus GST (and QST for Quebec residents) and will be effective between October 1 to November 30.

OTHER CANADIAN AIRLINE NEWS WESTJET IMPLEMENTS FUEL RISK MANAGEMENT STRATEGY On 8 September, WestJet announced a fuel risk management strategy to guard against the impacts of future price volatility. The strategy involves buying forward a portion of jet fuel in the coming months at a fixed price, corresponding to its share of advance ticket sales. Page 9 September 2005

On 5 September, WestJet commenced service to Las Vegas with its initial daily service from Toronto. Additional non-stop services will be added in the coming months, with twice weekly service to be added from Kelowna and Winnipeg on 6 October, and from Calgary and Edmonton on 3 November. All flights will be operated using WestJet’s 737-700 aircraft.

WESTJET TO LAUNCH VANCOUVERHONOLULU AND VANCOUVER-MAUI SERVICES Beginning 9 December 2005, WestJet will launch non-stop services between Vancouver and Honolulu, five times per week. From 17 December 2005, the carrier will also operate two flights per week between Vancouver and Maui.

CANJET ADDS SERVICES TO FLORIDA CanJet Airlines announced new services to five Florida destinations for the 2005/06 fall and winter season. Services will operate non-stop from Halifax, Moncton, Toronto, Ottawa and Montreal to St. Petersburg, Orlando, Sarasota, Fort Lauderdale and West Palm Beach. The flights will be introduced on a staggered basis between November 2005 and February 2006, and will continue until the end of May 2006.

TRANSAT A.T. REPORTS HIGHER REVENUE, LOWER NET INCOME IN 3RD QUARTER Transat A.T., parent of Air Transat, announced its third quarter results on 8 September. Higher passenger volumes increased revenues for the third quarter to $553 million, representing an 11% increase over the third quarter of 2004. Expenses, largely driven by rising fuel costs, rose more rapidly, driving net income down to $1.0 million in the third quarter, compared to $13 million the previous year.

NEWS ARTICLES CANADIAN AIRPORTS

PEOPLE IN THE NEWS

CONTINENTAL AIRLINES TO LAUNCH MONCTON-NEWARK SERVICES

On 6 September, WestJet announced the appointment of Russ Hall to the position of Executive Vice President, Guest Services and Information Technology. Hall was previously the president Russ Hall of AGTI Consulting Services, a business and IT consulting firm. WestJet also announced the expansion of Don Bell’s role to Executive Vice President, Culture and Don Bell Airports.

Beginning 2 May 2006, Continental Airlines will launch daily non-stop services between Moncton, New Brunswick and Newark. The flight will be operated with an Embraer regional jet.

CARGO NEWS AN-124 FREIGHTER PRODUCTION REVIVED BY VOLGA-DNEPR AGREEMENT The Volga-Dnepr Group and Vnesheconombank, a Russian financial institution, have signed a co-operation agreement that will result in the revival of AN124 freighter production. Volga-Dnepr announced that it plans to acquire five AN-124 aircraft, with delivery scheduled for 2008.

AIRBRIDGE MOVES EUROPEAN HUB TO AMSTERDAM AirBridge Cargo has moved its European hub from Luxembourg to Amsterdam, and will be increasing service from Amsterdam to four flights per week by the end of September 2005. The move was made to increase interline capabilities, which AirBridge felt were lacking at Luxembourg.

UPS SELECTED AS LOGISTICS SPONSOR FOR 2008 OLYMPICS

On 7 September, WestJet announced the appointments of Arthur Scace and Hugh Bolton to its Board of Directors. Scace is currently non-executive Chairman of the Bank of Nova Scotia, and has served on the boards of companies including The Canada Life Assurance Company and Gerdau Ameristeel. Bolton is the current non-executive Chair of EPCOR Utilities and Matricon, and is on the boards of Canadian National Railway, Teck Cominco and TD Bank Financial Group.

Arthur Scace

Hugh Bolton

UPS has been selected as the official Logistics and Express Delivery Service for the 2008 Olympic Games in Beijing. The selection follows announcements that UPS will commence service to China in 2005 and will develop a major hub in Shanghai by 2007. UPS will provide express delivery to event venues at the Olympics, and will provide consultation in developing the logistics operating plan for the Games. Page 10 September 2005

NEWS ARTICLES PEOPLE IN THE NEWS – CON’T AIR CANADA TECHNICAL SERVICES DECENTRALISES EXECUTIVE FUNCTIONS Air Canada Technical Services (ACTS), the carrier’s maintenance and repair unit, decentralised its chief operating officer functions on a regional basis in August. Vice President and Chief Operations Officer Ron Eldvidge becomes VP-Western Operations. Mark Swearingin, formerly of Midwest Airlines, UPS and US Airways, becomes VP-Eastern operations. Ray Poulin retains his position as Director-Central Operations. ACTS performs maintenance and repair for Air Canada as well as outsourcing to other carriers including Delta, JetBlue, and Lufthansa.

OTHER DELTA, NORTWEST FILE FOR BANKRUPTCY PROTECTION On 14 September, Delta Air Lines and Northwest Airlines each filed for Chapter 11 bankruptcy protection, suffering the effects of high fuel costs, labour expenses, and rising debts. The two airlines, the third and fourth largest in the U.S. respectively, join United Airlines and US Airways as major U.S. carriers currently under bankruptcy protection.

RUSSIA GROUNDS IL-96-300S On 22 August, Russian regulators ordered the immediate grounding of all Ilyushin 96-300 aircraft, following the discovery of problems with the widebody’s braking system. Aeroflot, which operates six of the aircraft, was forced to cancel many of its long-haul flights (including those to Toronto and Washington) after the aircraft were taken out of service.

Page 11 September 2005

SOUTHWEST ANNOUNCES NEW FLIGHTS AT PITTSBURGH AND PHILADELPHIA Southwest Airlines announced it will be adding new flights at Pittsburgh and Philadelphia beginning in October and November. Destinations include Tampa, Orlando, Chicago, Phoenix, and Las Vegas, as well as flights between the two Pennsylvania cities. The new flights will use the last new Boeing 737s the airline will take delivery of in 2005.

NORTHWEST’S OPERATIONS SUFFER DURING MECHANICS STRIKE Mechanics at Northwest Airlines went on strike 20 August, leading to a number of maintenancerelated cancellations and delays. On-time performance fell as low as 48% and completion factor as low as 92% at the beginning of the strike, but performance has since improved as the carrier has used replacement workers.

NAV CANADA CONTROLLERS RATIFY NEW CONTRACT In August, controllers at NAV CANADA represented by the Canadian Auto Workers and Canadian Air Traffic Control Association ratified a new four-year contract deal. The deal will provide a wage increase of 12% and will be in effect until the end of March 2009.

EXECUTIVE JET MANAGEMENT AUTHORISED FOR COMMUTER SERVICE In August, the U.S. Department of Transport (DOT) authorised Executive Jet Management (EJM) to operate as a scheduled commuter passenger carrier using business jets. EJM plans to operate using small aircraft (10 seats or less) on routes between New York, Chicago, and Los Angeles.

NEW PASSENGER IDENTIFICATION REQUIREMENTS 14 September 2005

Checking the identity of passengers is a challenging practice for air carriers, border and security agencies to accomplish. The splitsecond review of the government-issued photo ID card or passport is typically used today. In an age when ID theft, and fraudulent documents are dramatically increasing, airport practices are soon to be updated. Several initiatives are under way to further enhance the capability to verify the identity of an individual with impacts on Canadian airports.

Solomon Wong Director, Security & Planning

U.S. Western Hemisphere Travel Initiative (WHTI)

After the 9/11 Commission reported its findings in 2004, Congress acted upon recommendations through the Intelligence Reform and Terrorism Protection Act. Contained within this are changes to the Western Hemisphere Exemption â&#x20AC;&#x201C; which currently allows certain individuals (e.g., Canadian citizens, returning U.S. Citizens) to enter the U.S. with a birth certificate/driver's license. The new proposal mandates the use of passports or a "secure travel ID". While the latter has yet to be defined, a future Nexus card is a likely candidate to fulfil the "secure travel ID" requirement. The WHTI has caused significant concerns in the travel industry due to its impacts on the cost of travel (e.g. family of four will need an additional $300 in new expenditure for passports). Significant work is needed to ensure the WHTI is operationally sound at airports, and does not alter the travel market.

U.K. Identity Cards

The U.K. Home Office is in the planning stages for a biometric ID card. This card would be mandatory when an individual applies for "designated documents" including passports. With this card, however, the individual would be free to travel anywhere in Europe. This has a number of advantages over the WHTI approach: the UK is basically pre-determining the form of "secure travel ID" and ensuring its broad availability.

Canada's Biometric Passports

Canada has pursued a "biometric passport" to be launched in 2005. This document is to integrate the existing passport with a memory chip, which contains biometric information. No additional details on roll-out or additional costs for passports are advanced. With over 13 million individuals with Canadian passports, in five years time the passport will be the largest type of biometrics in use in the country.

The Challenge: Compatibility

Programs like the Canadian biometric passport, UK identity cards and US Western Hemisphere Travel Initiative aim to augment the passenger identification capabilities. Technologies like biometrics will provide some functionality to reduce the risk of fraudulent ID. The real challenge remains in compatibility and questions on separate approaches used in isolation of common standards. Can these three programs work with each other? Will the biometric passport in Canada open up possibilities for use in other applications? Can CATSA or TSA use these documents to improve programs like Passenger Protect and Secure Flight? These and other similar questions demand an improved multi-lateral framework to deal with identity verification. Page 12 September 2005

WASHINGTON REPORT 20 September 2005

U.S. Airline Employment Down 3%

The U.S. DOT reported that employment at U.S. scheduled carriers was down 3.4% in June 2005 over the same month last year. Employment levels at network carriers were down almost 7% for the month, while low cost carrier employment decreased by less than 1% from previous year. On the upside, U.S. regional carriers increased employment by 10% for the month of June 2005.

GAO Suggest Federal Government Play Role in Intermodal Development Charles Chambers Senior Vice President InterVISTAS-ga2 Consulting Inc. Washington, D.C.

A report by the Government Accountability Office (GAO) lists strategies to develop intermodal capabilities at U.S. airports. The GAO cites benefits that include reductions in road congestion and short haul air services. Air passenger traffic in the U.S. is expected to grow to one billion by 2015 and most U.S. airports have direct connections to local bus or rail services rather than nationwide bus or rail systems. Major barriers to developing intermodal projects include securing funding, disincentives for airport support such as reductions in airport parking revenue, land constraints and limitations of the existing nationwide rail system. The GAO advocates for nationwide transportation planning and development and a fundamental shift in decision-making from local to federal government in order to develop a more integrated transportation system.

TSA Considers Lifting Ban on Some Restricted Items in Carry-On Luggage Edmund Hawley, the new head of TSA, is looking for ways to upgrade airport security and reduce the amount of time that passengers spend waiting in line for security processing. Some changes under consideration include lifting the ban on carry-on items such as scissors, razor blades and small knives. Also under the proposed changes, it is suggested that most passengers would not have to remove their shoes prior to entering the security inspection lines. The TSA is also suggesting minimising the number of security pat-downs and exempt certain passengers from the screening process such as pilots, members of Congress and Cabinet, Federal judges, high-ranking military officers and people with top secret security clearance.

Congress to Resolve TSA Budget

When Congress returns from its August recess, negotiations on the final FY2006 budget will be completed prior to sending the bill to the President. The House approved a US$5.7 billion budget (US$4.6 billion for aviation security. The Senate agreed to a US$5.1 billion budget (US$3 billion for aviation security).

Page 13 September 2005

OTTAWA REPORT September 2005

Canada Concludes Transportation Mission to China

Sam Barone Regional Vice President Ottawa, ON

Transport Minister Jean LaPierre completed his transportation mission to China, which lasted from September 1-7. The Minister was accompanied on the mission by a business delegation of more than 30 executives representing Canadian airports, ports, airlines, railways and transportationrelated associations. The mission included stops in Beijing, Shanghai and Hong Kong and covered aviation, rail and marine issues as well as trade and tourism. Key issues discussed include the recent Canada-China bilateral air services agreement, and the ongoing talks regarding China’s Approved Destination Status. When both agreements are signed it is expected flights between the two countries, and volume of Chinese visitors to Canada, will triple in the near future. Discussions on trade and marine issues, including an agreement to review the existing Bilateral Agreement on Maritime Transport, were aimed at increasing trade in goods and using Canada as a gateway to the North American market.

Canada, U.S. Sign Agreement to Improve Efficiency in Freight Transportation On 14 September, Natural Resources Canada (NRCan) and the U.S. Environmental Protection Agency (EPA) announced the signing of an agreement to co-operate and share information on research, development, and projects to improve fuel efficiency and reduce emissions of greenhouse gases in the freight and shipping industries. The agreement is expected to allow for the development of more fuel-efficient technologies and other measures, such as training and awareness programs, to reduce fuel consumption and emissions. The two organisations have already developed complementary programs with similar aims. NRCan’s FleetSmart program is an education and training-based program to encourage fuel-efficient driving, while EPA’s SmartWay Transport Partnership is focused on implementing innovative fuel-saving technologies in rail and heavy-duty fleets.

Funding Announced for Safety Improvements at Sydney Airport

On 31 August, Mark Eyking, Parliamentary Secretary to the Minister of International Trade, and Rodger Cuzner, Member of Parliament for Cape Breton-Canso, announced funding for safety improvements at Sydney Airport. The Government of Canada is providing $378,000 through the Airports Capital Assistance Program (ACAP) for the replacement of fire hydrants and the associated water distribution system. Sydney Airport is the main airport for Cape Breton Island, and receives daily scheduled service from Air Canada Jazz and cargo service from Prince Edward Air, as well as seasonal service from Air St. Pierre.

NAV CANADA Releases July Traffic Figures

NAV CANADA announced its traffic figures for July 2005, as measured in weighted charging units (reflects the number of flights, aircraft size and distance flown in Canadian airspace). Traffic increased by 3.9% compared to the same month last year. Fiscal year-to-date traffic was up 5.1% relative to 2003-2004. NAV CANADA’s fiscal year is from September 1 to August 31.

Page 14 September 2005

AIRLINE FUEL PRICES -NOT A LONG TERM THREAT? 15 September 2005

Much attention has been given in the short term to high airline fuel prices. In inflation adjusted terms, oil prices are approaching their former high (in inflation adjusted terms) of $85 per barrel reached in 1980. As described by Doris Mak in the August 2005 issue of InterVISTAS’ Canadian Aviation Intelligence Report, current market conditions are contango, meaning that the forward price of oil (a guaranteed price for delivery in the future) is higher than the spot price. There is no question that high prices are going to cause significant industry pain to the industry, possibly with a toll in terms of bankrupt carriers and decreased shareholder values of the survivors.

Michael Tretheway Executive Vice President

A key question is whether these high fuel prices will be permanent. There are two views. •

One camp is of the view that the world is running out of oil supply and demand is increasing, and thus fuel prices will permanently remain high. The recent book Twilight in the Desert is a good example of this view, and I recommend reading it.

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The other camp claims that today’s high oil prices will result in a) increased supply (e.g., increased investment in oil recovery from Canada’s vast oil sands deposits, or investment in old fields to increase production by water injection), b) greater conservation (e.g., high oil prices will result in consumers favouring more fuel efficient vehicles and airlines retiring older, less efficient aircraft), and c) energy substitution (e.g., electric utilities switching from oil to gas or coal) which will free up oil products for higher value uses such as aviation and autos. Steven Forbes recently predicted that oil will be at $35 per barrel within 18 months due to these factors.

It may be that a combination of these views will prevail. There is definitely a permanent increase in oil demand from China and India, which will support higher long term prices than prevailed in the 1990s. (In fact, in inflation adjust terms, oil prices in the 1990s were only slightly higher than those in the 1950s and 1960s.) As well, increased supply may only partially offset declining production in Saudi, Alaska, North Sea and other oil fields. However, the economic response mechanism is definitely at work. The Athabasca oil sands, for example, are currently producing 1 million barrels to day with investment underway to go to 2 million barrels. However, at an oil price of $24, production can be ramped up to 5 million barrels, and according to one expert I talked to can go to perhaps 15 million barrels in 15 years. Alberta has two other oil sands fields as do other western states and provinces. It should also be pointed out that air transport is already down to similar fuel consumption per passenger kilometre as the family automobile. The 787 will deliver a further 20% improvement in fuel economy. Higher fuel prices may result in somewhat reduced travel overall, but not necessarily result in a shift from air to auto. The fuel cost alone of a 1,500 kilometre trip (two ways) at $1.25 per litre is roughly $400, which compares very favourably with airline ticket costs, even without accounting for other auto costs and extra lodging and meal costs. It may be that the net impact of somewhat higher fuel prices will be to reduce the aviation rate of growth somewhat, but with long term growth continuing nonetheless.

Page 15 September 2005

INTERVISTAS NEWS September 2005

Cindy Lee joins InterVISTAS Consulting Inc. as Manager, Business Planning InterVISTAS Consulting Inc. is pleased to announce that Cindy Lee has joined the firm as Manager, Business Planning. She will be located in the Vancouver office. “Ms Lee greatly enhances our capabilities in financial and business planning,” said Gerry Bruno, President and CEO of the InterVISTAS Group. “She has extensive experience in the airline and telecommunications industries and has also worked in venture funding. Ms Lee has extensive experience in the airline, telecommunications and leisure industries. Her experience includes development of annual business plans, financial forecasting and analysis, performance and benchmarking analysis, and the development of investment and divestiture strategies. She has completed all three levels of the Chartered Financial Analyst program, holds an MBA degree specialising in finance, and an undergraduate degree focussed on transportation and logistics.

InterVISTAS Upcoming Speaking Engagements •

19 October 2005: AIM BC Workshop at 67th Annual BCAC Conference, Whistler, BC Rob Beynon, Director, Airport Marketing ”Airports and Tourism”

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23 February 2006: 9th Annual Hamburg Aviation Conference, Hamburg, Germany Dr. Mike Tretheway, Executive Vice-President Martin Kunz Memorial Lecture – Topic to be determined.

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

Page 16 September 2005