CAIR Issue No. 10 - October 2003

INDUSTRY REVIEW

SARS – CAUTIOUS RECOVERY II 15 October 2003

Proceeding with caution. Due to the one SARS infection in Singapore and other suspicious cases in Hong Kong, the threat of SARS has resurfaced. Governments, airlines and airports are once again on alert and taking preventive measures to control SARS. It is thought that if SARS returns this winter, it would harshly impact air travel - more so than a terrorist attack.

Doris Mak Senior Market Analyst

Traffic Continues to Recover. Passenger traffic at Asian airports continue to reach towards preSARS levels. For the month of August, the total passenger traffic at Taipei Chiang Kai-Shek International Airport was 1.7 million passengers, down only 5% from the same month last year. Hong Kong International Airport’s passenger traffic volumes were 3.0 million, approximately 90% of HKG’s pre-SARS traffic volumes. IATA has also indicated a recovery to 2002 levels for global airline traffic.

In August, IATA members reported a drop of only 0.3% in traffic compared to August 2002. In particular, four regions showed year-over-year improvements: Europe increased 4.4%; South America 8.2%; Africa 1.6% and the Middle East 18.7%. However, traffic is lower in North America (down 6.5%) and Asia/Pacific (down 4.6%).

Air carriers are continuing to recover from SARS: •

Cathay Pacific will increase services in its winter schedule. Service between Hong Kong and Auckland as well as Hong Kong and Melbourne will increase by two more flights for a total of 13 and 12 a week, respectively.

•

Philippines Airlines, which was hit hard in the first fiscal quarter (April-July) reporting losses of 900 million pesos (US$16 million), announced the restoration of services that were cut during the SARS outbreak. Beginning October 25, the carrier will restore flights to Kuala Lumpur with four weekly services.

•

Thai Airways indicated that although SARS had significantly affected the company’s sales, the bottom line for the financial year ending September 30 looks to be impressive.

•

Vietnam Air’s third quarter revenues increased 67.5% from the second quarter to US$196 million as travel has increased after the containment of SARS. The carrier’s load factor increased to 62.3% in June, compared with 54.8% in April and 52.9% in May.

Travel Continues Upward. According to the Hong Kong Tourism Board, passenger arrivals from U.S. to Hong Kong were 13% below August 2002 levels after having been down more than 80% in April and May. Abacus Asia Ltd. also indicated that Singapore’s airline bookings in September increased 12% from the previous year. Wing On Travel, the tour operating unit of Ananda Wing On Travel (Holdings), saw its sales increase by 20% in the third quarter as local sentiment improved after the SARS outbreak.

Page 1 October 2003

© InterVISTAS Consulting Inc.

AIR CANADA RESTRUCTURING UPDATE 15 October 2003

On April 1, Air Canada filed in the Superior Court of Ontario for bankruptcy protection under the Companies’ Creditor Arrangements Act (CCAA).

Over the past six months, Air Canada has made changes that will see it operating as a lower cost airline when it exits CCAA protection in the middle of December. This column provides an update on the airline’s restructuring activities to date.

Geneva Tretheway Project Analyst

Financing. Air Canada started its solicitation process for an equity plan sponsor on July 16th. The sponsor will provide approximately CDN$700 million in funding for the company’s emergence from CCAA protection. On September 26, Air Canada announced that it had narrowed down potential equity partners to two candidates: Victor T.K. Li, a Canadian citizen and son of Hong Kong tycoon Li Ka-Shing, and Cerberus Capital Management, L.P. of New York, a U.S. asset management firm with Canadian interests. Negotiations are underway to complete the selection process by the end of October 2003.

Labour. On June 30th, each of Air Canada’s labour unions ratified the newly negotiated labour agreements. The Air Canada Pilot’s Association was the last union to ratify their agreement. The airline has since reduced its labour force by approximately 5,500 employees, including 300 management positions, achieving a labour cost reduction of CDN$1.1 billion.

With respect to pensions, Air Canada is proposing to unionised and non-unionised representatives that Air Canada fund pension plans based on a going concern basis for three years, after which the solvency deficit will be payable over 10 years.

Court Timing. Air Canada has been granted two extensions on the initial June 30th stay period, which is now scheduled to end December 20, 2003. The latest extension was granted so the airline can complete renegotiations on aircraft leases and operating contracts, and to complete the process to raise CDN$700 million in equity financing. The airline intends to exit bankruptcy protection by the end of the year.

Fleet. Air Canada released a Fleet Plan in June which included the elimination of its entire fleet of Boeing 737 (25), 747 (6) and BAe-146 (10) aircraft. The airline has plans to add 50-seat regional jets in the short term and the intent is to acquire regional jets with 70-100 seats in the long term. Thus far, the airline has reduced its fleet by about 40 aircraft, and has renegotiated lease terms on its remaining fleet to reflect current market rates. Payments are expected to resume once Memoranda of Understanding (“MOUs”) on the new lease terms have been renegotiated with the aircraft lessors.

Aircraft lease renegotiations are expected to be complete by the end of October.

Service Reductions. Overall seat capacity for the months of June, July and August 2003 were reduced by 17% from 2002 levels, while September capacity decreased by 11% compared to the same time last year. Overseas Asian and transborder routes were most affected with capacity reductions of 60% and 25% respectively, although AC has since announced that several Asia services will be reinstated this fall. It is noted that part of the reason for the airline’s service reductions was also due to the SARS outbreak.

Page 2 October 2003

© InterVISTAS Consulting Inc.

SHORT TERM STABILITY IN FUEL PRICES The price of crude oil stabilizes at $30…

Crude oil prices have stabilized in the $30 per barrel range in recent weeks mainly due to three factors in the global market.

Cut in OPEC Production In a surprise move, OPEC cut production quotas in late September by 900,000 barrels per day.

Saudi Arabia took the lead by decreasing its production to make room for Iraq’s increasing output over the past few weeks. The announcement on September 24 caused crude oil prices to jump 12% in the following days.

Potential Oil Strike in Nigeria The powerful oil unions in Nigeria threatened a general strike to protest the government’s proposed deregulation of fuel marketing in the country. The oil workers and their unions have been concerned about the high price of oil. For now, a strike appears to have been averted as the oil unions were close to making a deal with fuel marketers.

…But even lower prices expected in the future Declining “Futures” Prices The futures market shows Crude Oil Spot & Futures Prices the price of crude oil falling As of October 9, 2003 to the $25 per barrel range by late 2005. On October Crude oil prices expected to fall to 9, 2003, the futures price $25 by late 2005. of a barrel of crude oil for delivery in November 2005 Spot Futures Prices is $25.14, this is Prices marginally higher than futures price for the same month of delivery quoted in the August Industry Intelligence report of Month of Delivery $24.98. The price of crude oil is approximately 19% lower than the current spot price of $31.01 per barrel. It is interesting to see that the futures price of oil for delivery in the middle of 2006 and onward begin to increase. This is an indication of how the market feels today about oil supply and demand in the longer term. $40.00 $35.00 $30.00 $25.00 $20.00 $15.00 $10.00 $5.00

Page 3 October 2003

Jul-09

Oct-09

Jan-09

Apr-09

Jul-08

Oct-08

Jan-08

Apr-08

Jul-07

Oct-07

Jan-07

Apr-07

Jul-06

Oct-06

Jan-06

Apr-06

Jul-05

Oct-05

Jan-05

Apr-05

Jul-04

Oct-04

Jan-04

Apr-04

Jul-03

Oct-03

Jan-03

$-

Apr-03

Senior Market Analyst

US$/Barrel

Doris Mak

Commercial U.S. Oil Supplies Recent reports indicate that the U.S. surplus increased by 5.4 million barrels. Previous analyst estimates had U.S. oil reserves increasing by only 1 million barrels. With U.S. crude oil stocks in better shape than anticipated, crude oil prices declined somewhat in early October with prices remaining steady in the $30 per barrel range.

© InterVISTAS Consulting Inc.

AIRLINE DATA – CANADA T RAFFIC AND LOAD F ACTORS ON CANADA’S M AJOR AIR CARRIERS – SEPTEMBER 2003 Passenger Traffic Capacity Revenue Passenger Kilometres Available Seat Kilometres Air Carrier % Change over 2002

Air Canada 1

NEW CARRIERS: LOAD FACTORS Jetsgo: Zip: CanJet:

61% not reported not reported

-12.4%

% Change from 2001 +4.3%

% Change over 2002

% Change from 2001

% Change over 2002

% Change from 2001

-11.1%

-1.9%

-1.1 pts (to 73.4%)

+4.4 pts

Domestic (Mainline)

-3.9%

+15.1%

-2.2%

+11.1%

Jazz

-0.8%

N/A

+2.7%

N/A

-0.4%

-15.2%

-7.7%

International & Charter

-16.1%

Load Factor

-1.4 pts (to 70.7%) -1.9 pts (to 54.7%) -0.8 pts (to 74.8%)

+2.4 pts N/A +5.5 pts

-5.9 pts -4.7 pts (to 68.3) Note: N/A – As Jazz was not reported in 2001, a percentage change from 2001 could not be calculated.

WestJet

+33.8%

+123.3%

+45.4%

Analysis: • Air Canada's domestic traffic continues to be down relative to previous years although the declines are becoming less negative than previous months. It has been two years since the terrorist acts of September 11th, passenger traffic is up 15% from 2001 and down 4% from 2002. The airline's traffic levels continue to be down more than its reduction in seat capacity. Air Canada's load factor continues to fall indicating that the airline is not removing capacity at the same rate at which it is losing traffic.

•

+138.8%

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

Jazz data is not included in this graph Dom RPK Dom ASK

Oct- Nov Dec Jan- Feb Mar Apr May Jun 02 03

Jul

Aug Sep

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

Even though the air travel industry has recovered from SARS and the Iraq war, Air Canada's international traffic was 16% below 2002 levels. International traffic appears to have plateaued at lower levels (-15% range) the past few months. Air Canada's international traffic levels are declining faster than seat capacity resulting in a decreased load factor.

Int'l RPK Int'l ASK

-10% -20% -30% -40%

Oct- Nov Dec Jan- Feb Mar 02 03

Apr May Jun

Jul

Aug Sep

WestJet

70% 60% 50% 40%

RPK ASK

30% 20% 10%

•

1Air

0%

Although WestJet continues to show impressive percentage growth in traffic and seat capacity, the airline is adding seat capacity disproportionately to its traffic growth. As a result, the airline's load factor has fallen. In September, there exists a 12% spread between WestJet's traffic growth and increase in seats. Although the airline is still performing well financially, its declining load factor is eating into its profit margin.

Oct02

Nov

Dec

Jan03

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

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

Page 4 October 2003

© InterVISTAS Consulting Inc.

AIRLINE DATA – U.S. U.S. Airlines September 2003 Traffic Figures – Traffic

Capacity

(RPMs – millions)

(ASMs – millions)

66.7% á 2.8 pts

9,002 â 1.7%

13,479 â 5.9%

63.4% á 5.4 pts

526 á 37.6%

829 á 26.0%

60.1% á 2.4pts

374 á 19.1%

622 á 14.3%

62.0 % 3 á 0.8 pts

991 á 17.1.%

1,649 á 14.3%

72.3% á 4.4 pts

4,556 á 2.1%

6,303 â 4.0%

67.8% á 0.3 pts

7,718 â 2.6%

11,381 â 3.1%

80.2% á 4.4 pts

930 á 66.9%

1,159 á 57.7%

77.4% á 2.7 pts

5,557 â 2.9%

7,182 â 6.2%

60.4% á 3.6 pts

3,602 á 10.6%

5,960 á 3.8%

2

74.9% á 5.4 pts

8,388 â 3.6%

11,199 â 10.5%

2

66.7% á 6.4 pts

2,803 â 1.8%

4,204 â 11.2%

Airline

1

Notes:

1.

2.

Load Factor

Mainline Load factor includes scheduled service only

Sources: Carrier traffic reports

Page 5 October 2003

© InterVISTAS Consulting Inc.

DATA

Summary of Total Year-Over-Year Passenger Traffic Performance at Selected Airports – 2002-2003 Toronto

Vancouver

2nd Quarter

N/A

-9.0%

MontrealDorval -10.9%

2002

-3.8%

-6.7%

-12.3%

-6.9%

-6.0%

-6.3%

-6.1%

-8.7%

-11.1%

St. John’s -11.9%

July

N/A

-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

N/A

-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

N/A

+12.6%

+22.5%

+20.1%

+7.6%

+23.7%

+16.4%

+26.1%

+13.2%

+11.8%

+12.6%

+10.5%

+20.0%

3rd Quarter

N/A

-2.6%

-0.2%

+2.9%

-4.4%

+0.50%

+1.2%

+11.2%

-4.8%

+0.2%

-5.4%

-5.8%

-0.8%

October

N/A

+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

N/A

+4.7%

+5.3%

+0.6%

+9.4%

+3.0%

+5.7%

+5.7%

+0.1%

-1.4%

+0.2%

+1.2%

-2.3%

December

+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

+3.4%

+0.2%

+2.9%

+5.2%

+2.0%

+4.0%

+10.1%

+10.0%

+3.3%

+3.7%

+3.1%

+1.3%

-3.7%

April

-15.1%

-13.6%

-10.2%

+1.6%

+1.1%

-7.6%

+4.4%

+6.1%

-0.9%

-0.6%

-3.9%

-1.6%

-1.7%

May

-17.3%

-13.5%

-7.4

-1.4%

-5.3%

-1.5%

-0.5%

-1.2%

+0.4%

-1.0%

-5.3%

-1.6%

+4.5%

June

-9.0%

-9.9%

0.0%

+1.9%

-0.4%

+2.5%

+5.0%

+4.1%

+0.6%

-0.5%

+1.4%

+7.0%

+17.8%

2nd Quarter

-13.7%

-12.2%

-5.6%

+0.7%

-1.6%

-2.1%

+3.0%

+2.9%

+0.0%

-0.7%

-2.6%

+1.3%

+7.1%

July

-6.0%

-4.5%

+2.9%

4.7%

+2.5%

+3.0%

+3.7%

+5.7%

+11.9%

+5.0%

+1.2%

+4.7%

+21.1%

August

-7.6%

-1.2%

-1.0%

+1.4

+0.3%

-7.0%

+0.4%

+4.1%

+9.8%

+0.5%

-4.8%

-2.2%

N/A

4th Quarter

2003

Page 6 October 2003

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

© InterVISTAS Consulting Inc.

NEWS ARTICLES AIR CANADA UPDATE

FUEL PRICES October 3, 2003 SPOT OIL PRICES INCREASING FUTURES PRICES LOWER Crude Oil Prices: Spot – US$29.84 (up 3.3% from September) Future •

6 month - $28.86 (March 2004 delivery)

•

12 month – $26.51 (October 2004 delivery)

•

2 year - $25.12 (October 2005 delivery) Monthly Monthly Spot Prices $40.00

US$ per Barrel

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

Mar

Apr

May Jun

Jul Aug Sep

Oct

AIR CANADA BANKRUPTCY PROTECTION EXTENDED The original stay period granted to Air Canada on April 1, 2003 by the Ontario Superior Court of Justice has been extended to December 20, 2003. The extension will allow Air Canada more time to continue with its restructuring under the CCAA including: negotiation of remaining aircraft leases; completion of negotiations regarding the proposed CDN$700 million equity financing; completion of the claims process; and funding of the pension deficit. Once these issues have been resolved, Air Canada will file a Plan of Arrangement with the court. Air Canada has stated that it plans to exit from bankruptcy protection by the end of this year.

COURTS SET NOVEMBER 17 DEADLINE FOR AIR CANADA CREDITOR CLAIMS The Ontario Superior Court of Justice has set November 17, 2003, as the deadline for Air Canada’s creditors to submit their claims. The airline faces up to $9 billion in unsecured claims. Air Canada has stated that it has no cash to pay its creditors, and will instead offer them stock in the restructured airline.

THE END OF TANGO Air Canada’s discount brand subsidiary, Tango has been incorporated as a fare class in the mainline carrier’s flights as of October 1, 2003. Tango began operations in November 2001 and was Air Canada’s first trial in running a low-cost carrier. Tango allowed the airline to test a number of initiatives including: a simplified one way fare structure; allowing customers to make booking changes over the Internet; and fees for on-board meals. Air Canada has stated that Zip, the airline’s other low-cost subsidiary, will continue to operate independently.

Page 7 October 2003

WINNIPEG IS KEY TO ZIP’S SUCCESS Air Canada has high expectations for Zip, its low cost subsidiary based in Calgary. Zip is focusing on the Winnipeg market. The carrier plans to expand its fleet from 12 aircraft to 20 by the end of 2004. Last year, over half of the airline’s one million plus passengers originated from or destined to Winnipeg. Currently, Zip operates 15 flights per day from Winnipeg.

AIR CANADA REACHES LEASE AGREEMENT FOR 38 AIRCRAFT Air Canada has reached a tentative restructuring agreement for its lease of 38 Airbus aircraft including 22 A319s, eight A330s, and eight A340s. Under the terms of the new lease agreement, rental payments for the aircraft will be restructured consistent with Air Canada’s restructuring plan. The agreement is subject to the fulfillment of various conditions. Detailed terms of the lease agreement remain confidential.

GECAS CONFIRMS DEAL TO PURCHASE STOCK IN AIR CANADA GE Capital Aviation Services (GECAS) has obtained the right to purchase more than 4% of the stock in Air Canada when the airline exits from bankruptcy protection. For Air Canada, this is part of a deal to restructure leases on 94 aircraft, including termination of 20 leases on parked aircraft. The deal also includes a US$600 million loan from General Electric Capital Corporation, and up to US$950 million in additional financing to be used to purchase 43 regional jets in the future. GECAS will have the right to purchase common shares of Air Canada at the same price as the airline’s potential equity investor, and also have the option of converting US$106 million in debt into common stock at 125% of the price paid by the equity investor.

© InterVISTAS Consulting Inc.

NEWS ARTICLES OTHER CANADIAN AIRLINES WESTJET RAISING CDN$150 MILLION FOR NEW PLANES WestJet Airlines is issuing up to CDN$150 million in stock to fund the purchase of two new Boeing 737-700 aircraft. The airline will issue 5.2 million shares (approximately CDN$125 million) at CDN$24.25 each. WestJet currently has 44 aircraft in its fleet.

WESTJET EXPANDS SERVICE NETWORK WestJet has expanded its services to include non-stop flights between Halifax and Montréal, Edmonton and Ottawa, and Toronto and Thunder Bay. Service between its eastern hub in Hamilton and Gander, and Hamilton and St. John’s is also available. In addition, WestJet is offering twice daily service from Toronto to Winnipeg. The new services were launched in mid September. WestJet currently serves 24 Canadian cities.

JETSGO LAUNCHES “LOONIE SUNDAYS” On September 28, Jetsgo launched its “Loonie Sundays” program. The promotion offers customers discounted fares across its network and hundreds of seats for CDN$1 each Sunday for 24 hours. Reservations must be made at www.jetsgo.net. This is part of Jetsgo’s strategy to become the online marketplace for discount fares. The promotion also offers one-way flights between Toronto and Calgary for CDN$25.80, and between Montreal and Edmonton for CDN$45.53.

TRANSAT REPORTS CDN$10.3 MILLION LOSS IN THIRD QUARTER Transat A.T. Inc. reported a loss of CDN$10.3 million in the fiscal quarter ending July 31.

Total revenue was CDN$444.1 million, a 10.3% decline from the same period last year.

Passenger traffic dropped by 19%. However, the company expects improvements in 2004 as it replaces its six Lockheed L-1011s with four Airbus A310s to reduce operating costs.

Page 8 October 2003

U.S. & INTERNATIONAL AIRLINES SOUTHWEST TO EXPAND SERVICES IN 2004 Southwest Airlines has announced that starting Jan. 18, 2004, it will be adding new daily non-stop service between Spokane and Las Vegas with a fare of US$99 each way. The carrier is also adding non-stop services between Los Angeles and Tampa Bay, Chicago and Salt Lake City, and Orlando and Las Vegas with a fare of US$99 each way. Service between Ontario, CA and Reno is available for US$59 each way. The fares are available only on non-stop flights and require a roundtrip purchase with an overnight stay.

MESA PROPOSES MERGER WITH ACA Mesa has proposed a merge with Atlantic Coast Airlines (ACA) through an unsolicited stock offer worth over US$500 million. The deal would increase earnings of the combined carrier by 25%, and create the largest independent regional airline in the U.S with approximately 300 aircraft.

PACIFIC BLUE TO START SERVICE IN 2004 Virgin Blue has created a subsidiary, Pacific Blue, to fly between Australia and New Zealand, and within New Zealand. Pacific Blue will be based in Christchurch, South Island, and will start services on February 1, 2004. The carrier will follow a similar strategy to Virgin Blue, offering heavily reduced fares and high quality customer service. Pacific Blue’s first route will operate from Brisbane (Virgin Blue’s Australian base) to Christchurch. Under terms of the 49% purchase of Virgin Atlantic by Singapore Airlines, Virgin Blue is not allowed to use the Virgin brand name outside of Australia.

© InterVISTAS Consulting Inc.

NEWS ARTICLES SWISS INTERNATIONAL AIRLINES JOINS ONEWORLD ALLIANCE Swiss International Airlines will join the Oneworld Alliance and give British Airways some of its U.K. landing rights. The airlines have completed a memorandum of understanding, and a formal Alliance Agreement will be signed on October 24.

Joining Oneworld is expected to increase Swiss Airlines’ operating revenue by 100 million Swiss francs (US$76.1 million) a year over the next 3 years. The alliance may allow Swiss to secure additional financial support from its banks and private shareholders.

AIR FRANCE AND KLM TO MERGE On September 30, Air France announced that it would merge with Dutch based KLM. The US$912.9 million deal is financed through a share exchange that will give KLM shareholders 19% in the new holding company, Air France-KLM. Air France investors will own 37% and the French state 44% ownership of the airline. The merger, to be finalised in the next two weeks, will see KLM join SkyTeam Alliance and create Europe’s largest airline.

CARGO U.S. CARGO TRAFFIC DECREASES U.S. Air Transport Association figures for August show a drop in total revenue ton-miles of 2.6% from August 2002. Domestic traffic is down 1.8%, international traffic is down 3.4% and Latin America had the largest decrease of 14.5%.

WORLD AIR FREIGHT TRAFFIC UP The International Air Transport Association reported that worldwide August freight traffic is up 3.6% from the previous year with a year-todate increase of 6%. North America traffic increased 3.8% from the previous year and Asia Pacific has a year-to-date increase of 6.3%.

Page 9 October 2003

COLOGRAPHY FORECAST PREDICTS AIR CARGO GROWTH IN 2004 The most recent forecast of the Colography Group suggests that the economic recovery should finally put air cargo on a more solid growth path. Air freight movements are expected to grow in 2004 at about the same rate of growth as the economy. Shipments will increase from an expected 6.5 billion in 2003 to 6.6 billion in 2004. Ground parcel express, however, will show the strongest growth, with LTL and TL services also expanding at a rate faster than that of the economy.

DHL DANZAS AIR & OCEAN CANADIAN OPERATIONS JOINS PIP PROGRAM DHL Danzas Air & Ocean’s Canadian operations have become official partners of Canada Customs and Revenue Agency’s “Partners in Protection” (PIP) program. The voluntary program is designed to strengthen security and enhance incoming trade operations into Canada. Partner companies must conduct self-examination following strict guidelines set by Canada Customs. Benefits include expedited handling and processing of goods and documentation into Canada, and eligibility for the Free and Secure Trade (FAST) Program, which allows pre-approved companies faster processing time for CanadaU.S. shipments.

LUFTHANSA CARGO FLEET RESTRUCTURING Lufthansa Cargo plans to sell its entire 747-200 fleet of 8 cargo planes and replace them with 5 MD-11 passenger carriers that will be converted into freighters. The freighters will be outfitted to handle cool containers, a part of Lufthansa’s strategy to improve and expand their services for temperature sensitive air cargo. The fleet restructuring will result in an allMD-11 fleet of 19 aircraft by 2005. Three of the 747-200s will be sold to Air Atlanta Icelandic and re-chartered by Lufthansa as the need arises.

© InterVISTAS Consulting Inc.

NEWS ARTICLES LUFTHANSA CARGO RATE ADJUSTMENT BASED ON DEMAND Lufthansa Cargo will adjust its shipment rates based on the level of demand of the route.

Rates on peak-demand routes will be raised higher than on routes with weak traffic demand.

The rate hike will take effect on October 1, 2003, with an average increase of four percent.

Lufthansa will continue to offer customers its tailored capacity purchase agreements.

US$6 MILLION CARGO TERMINAL PROJECT PLANNED BY TNT FOR INCHEON TNT Express intends to open a 6,600 m 2 cargo terminal in Incheon, Korea. The US$6 million project was presented to the Korean authorities in September. The South Korean airport will be TNT’s Northeast Asia logistics hub.

Construction is set to begin in early 2004 and be completed by 2005. DHL has also chosen to build a freight terminal at Incheon Airport’s Cargo Terminal C by the end of 2005.

EVA AIR SETS UP EUROPEAN CARGO HUB EVA Air plans to set up a dedicated cargo facility, the EVA Air Cargo Centre, in Brussels. The hub will be responsible for all of the carrier’s cargo operations in Europe. EVA Air currently operates 14 cargo flights per week to Europe from Taipei.

KOREAN AIR CARGO AND CARGOJET ALLIANCE ANNOUNCED On September 22, 2003, the two airlines announced a strategic marketing and operational alliance. Korean Air Cargo flights to and from Canada will connect onto Cargojet’s network of premium domestic overnight service flights.

Cargojet will provide Korean Air with sales, marketing and operational support in exchange for cargo sales, marketing and interline support.

Page 10 October 2003

FEDEX REPORTS FIRST QUARTER REVENUE GROWTH FedEx reported earnings for the quarter ending August 31, 2003 of $0.42 per diluted share. A realignment of the FedEx Express business through early retirement and severance programs resulted in $0.27 of the reported earnings, and a one-time benefit of $0.08 per diluted share was realised from a court ruling in favour of the company over the treatment of jet engine maintenance costs. FedEx’s operating income improved 21% before business realignment costs.

FEDEX EMPLOYEES SUPPORT VOLUNTARY PROGRAM Positive employee response to FedEx Express’ voluntary early retirement and severance programs has led the company to adjust its cost and savings forecasts for these programs. FedEx Express expects to save between US$130 million and US$140 million, primarily in the second half of the fiscal year.

UPS EXPANDS SOUTHEAST-ASIAN SERVICES UPS is now operating a daily Boeing 737 flight between its Philippine base and Kuala Lumpur, with plans to increase capacity to a B757 next year. Bangkok B757 services are also planned to begin in October.

© InterVISTAS Consulting Inc.

NEWS ARTICLES EZYCARGO WEB PORTAL OPEN FOR BUSINESS Cathay Pacific Cargo, Qantas Freight, Japan Airlines Cargo, and Singapore Airlines Cargo have formed a partnership with Cargo Community Network Singapore and Global Logistics Systems (HK) to develop Ezycargo.com, a web-based freight portal which will provide a single point of entry to all four airlines’ cargo services. The website was launched on September 25 in Hong Kong and will provide cargo customers with the ability to book space, track shipments and check flight schedules on the four Asia-Pacific airlines.

SENAI, MALAYSIA SITE OF NEW FEDEX DISTRIBUTION CENTRE FedEx has opened a distribution centre in Senai, Malaysia, from where shipments will be trucked into Singapore Changi Airport, rather than flown in from Kuala Lumpur. This move enables overnight shipping to 19 Asian centres and next-day service to North America. Cargo previously took two to three days via KUL. ATLAS AIR STOCK DELISTED ON NYSE The New York Stock Exchange suspended trading of Atlas Air’s stock in early September and wants the company delisted. The decision was based on several factors, including Atlas Air’s financial difficulties and the company’s delay in completing SEC filings.

ALITALIA JOINS U.S. CARGO SALES JOINT VENTURE The Italian carrier joins Air France, Korean Air and Delta Air Lines’ Atlanta-based joint venture. The joint venture is designed to offer customers a central reservation system and common product line, as well as a comprehensive route network.

Page 11 October 2003

AIRPORTS U.S. CLOSES TWO PACIFIC OCEAN TECH STOP AIRPORTS The U.S. has announced that it will close the airports at Midway Island and Johnston Atoll due to federal budget cuts. Both airports had been used as emergency landing sites for ETOPS (extended range twin-engine operations) aircraft such as the B767.

TRAFFIC IMPROVES AT HONG KONG INTERNATIONAL AIRPORT At the Hong Kong International Airport, overall passenger traffic has returned to more than 90% of pre-SARS levels. Total passenger traffic in August was 3.02 million, a 22.3% increase from July. Cargo volume was also 5.5% up from the same time last year.

AIRCRAFT MANUFACTURERS BOEING PARTNERS WITH AIR FRANCE INDUSTRIES Boeing and Air France Industries have formed a 777 Component Services program. The program allows airlines to reduce costs and inventory of critical line replaceable units (LRUs) such as avionics boxes and precision mechanical assemblies.

Boeing and Air France Industries will send a part to airlines within one day of receiving the order. The faulty part will then be restored/upgraded, and returned to the exchange inventory pool. Airlines agree to a 10-year term, and pay a per-flight-hour rate that covers exchange of approximately 300 LRUs.

© InterVISTAS Consulting Inc.

NEWS ARTICLES BOMBARDIER WINS CDN$1.2 BILLION SKYWEST CONTRACT Bombardier Inc. announced that it has received a CDN$1.2 billion order for 30 CRJ 700 regional jets from Utah based SkyWest Airlines Inc. The transaction includes options for the purchase of an additional 80 jets, which could boost the value of the order to CDN$4.6 billion. SkyWest had previously ordered 100 regional jets from Bombardier and has taken delivery of 84 to date.

FAA APPROVES TAXIWAYS FOR A380 USE The Federal Aviation Administration (FAA) has defined requirements that would allow new A380 aircraft to use existing 75-foot taxiways in the U.S. Airports must designate planned taxi routes, and aircraft must not exceed 15 mph, and be equipped with a taxiing camera system (TCS) to assist pilots. New taxiways must be built to larger standards required for A380 aircraft.

GOVERNMENT AND REGULATORY

TSA RECEIVES 40 AIR CARGO SECURITY RECOMMENDATIONS The Aviation Security Advisory Committee has given 40 recommendations on 22 topic areas to the Transportation Security Administration. Improvements to the Known Shipper Program and suggestions for a more layered security program were among the suggestions. There were contrasting opinions as to whether the recommendations went too far or not far enough.

U.S. AND EUROPEAN UNION STARTS OPEN SKIES NEGOTIATIONS The E.U. and U.S. have completed the first round of discussions for an open aviation area between the two airline markets. The parties have established that an agreement should include scheduled and charter services for passengers and cargo, freedom to determine prices, capacity and frequency, user charges, ground-handling, intermodal operations, safety and security. A second round of negotiations is planned for December 8 in Brussels.

U.S. AND VIETNAM SIGNS AVIATION PACT The U.S. and Vietnam have agreed to an air services pact that will allow the first direct flights between the two countries since the end of the Vietnam War, effective immediately. However, the agreement does not allow for the pick up of passengers on stopovers, and limits the number of all-freight flights. The 5-year pact will allow two U.S. carriers to each fly seven roundtrip flights per week direct to Vietnam, and give Vietnam Airlines reciprocal rights for flights to the U.S.

Page 12 October 2003

FAA TESTS SECURITY CAMERAS ON AIRLINERS The FAA is testing the use of cameras in aircraft as a measure to improve air security against terrorist hijackings. Pilots have opposed the idea, stating that having cameras in cockpits would dilute their authority and could lead to ground personnel giving orders based on misinterpretations or incomplete information. Supporters of the in-flight cameras say they could improve air safety and crash investigations. FAA officials stress that the cameras, if approved, are for passenger safety and not for monitoring pilots.

Š InterVISTAS Consulting Inc.

NEWS ARTICLES NAV CANADA FEE HIKE APPEALED BY AIR CANADA Nav Canada’s 6.9% fee hike imposed last August is being appealed by Air Canada. The airline, currently in bankruptcy protection, claims that Nav Canada is out of touch with current economic conditions and is trying to compensate for a revenue shortfall that is the result of a decrease in business. Nav Canada, a not-for-profit organisation, is required under legislation to break even.

CHINA AIRLINES’ AIRCRAFT PROMOTIONAL SLOGAN REJECTED BY CTA In August, China Airlines submitted an application to the Canadian Transportation Agency (CTA) for permission to operate to and from Vancouver a repainted Boeing 747-400 that stated “Taiwan, Touch your heart” in place of “China Airlines” on the body of the aircraft. This was part of a strategy to promote tourism in Taiwan. However, the application was rejected, as the Air Transportation Regulations (section 18c) require that the name of the licensee, China Airlines, be shown clearly on the aircraft.

FRANCE INTRODUCES “NOISE TAX” The French government has announced that it will increase airport charges to finance soundproof work in residential areas close to airports. The plan will increase the funding to areas exposed to noise levels above 70 decibels to US$64 million per year, starting in 2004. The French airport “noise tax” could set a precedent for other countries.

Page 13 October 2003

PEOPLE IN THE NEWS WESTJET APPOINTS NEW MEMBER TO BOARD WestJet has appointed Alan Jackson to the board of directors. He is currently President and CEO of both Arci Ltd., a real estate investment company, and of Jackson Enterprises Inc, a holding and consulting company. He replaces Brian Gibson, who will remain active as a consultant for the airline.

KWOK RESIGNS FROM AIR CANADA BOARD Eva Lee Kwok, a member of Air Canada’s board of directors since 1998, has resigned to avoid the appearance of any conflict of interest in the airline’s equity solicitation process. Ms. Kwok serves as a director on the boards of Husky Energy Inc., and CK Life Sciences International (Holdings) Inc., both of which are controlled by the family of Victor Li, one of two candidates selected for becoming the airline’s equity partner. Ms. Kwok has not attended any meetings regarding the selection of potential equity partners for Air Canada for the same reason.

STAPLES PROMOTED TO MARKETING DIRECTOR AT HALIFAX AIRPORT Jerry Staples has been promoted to Director of Marketing at Halifax International Airport.

OTHER NEW PASSPORT REQUIREMENTS DELAYED Government agencies and airports have been given more time to adapt to the machinereadable passport (MRP) rule. The deadline for overseas travellers to the U.S. eligible for visa waivers to have MRPs has been extended by one year, to October 1, 2004.

© InterVISTAS Consulting Inc.

ECONOMIC OUTLOOK 10 October 2003

Signs of improvement in the U.S. economy

U.S. Employment, Monthly Figures 200

For the first time in eight months, there was positive growth in employment in the U.S. (seasonally adjusted non-farm payroll employment, to be precise).

Around 57,000 jobs were created in September, surprising most economists, who expected negative or zero growth. This appears to be a further sign that the U.S. economy is gaining strength.

6.5% Unemployment Rate (seasonally adjusted)

100

6.0%

0

5.5%

-100

5.0%

-200

4.5% Employment Growth (month on month change)

-300

4.0%

Jul

Sep

May

Jan

3.5%

Mar

Nov

Jul

Sep

2003

May

Jan

Mar

Nov

Jul

Sep

2002

May

Jan

Mar

2001

-400

Source: U.S. Bureau of Labor Statistics

U.S. Real GDP (Annualised Quarterly % Change)

4% 3% 2% 1% 0% -1% Q2 2003

Q1 2003

Q4 2002

Q3 2002

Q2 2002

Q1 2002

Q4 2001

Q3 2001

Q2 2001

Q1 2001

Q4 2000

-2% Q3 2000

Source: U.S. Bureau of Economic Analysis

Page 14 October 2003

Sep

Jul

May

Mar

Jan-03

Nov

Sep

Jul

May

Mar

Jan-02

Nov

Other indicators such as the 100 60 Institute for Supply PMI Management’s U.S. Production 95 55 Index, the PMI (www.ism.ws) and 90 50 the University of Michigan Consumer Sentiment Index 85 45 (www.sca.isr.umich.edu) are fairly positive as well. The PMI 80 40 (Purchasing Managers Index) has Consumer Sentiment increased from its low in April 75 35 indicating that the manufacturing economy in the U.S. has been Sources: University of Michigan and The Institute of Supply Management growing, albeit at a modest rate.

And the Consumer Sentiment Index has remained fairly steady (declining slightly) since its spurt following the official end of the Iraq war.

Overall, the outlook for the U.S. economy is considerably improved from early this year. A few more months of positive job growth would certainly firm up this positive outlook.

Sep-01

Economic Analysis

5%

Q2 2000

Manager,

Another sign is the Gross Domestic Product figures, which showed robust growth of 3.3% in the second quarter of 2003 following two quarters of weak growth. The third quarter is expected to be even stronger with forecast growth of over 5% (according to economy.com). The Economist’s poll of forecasts puts the annual GDP growth for 2003 at 2.4% and growth in 2004 at 3.6%.

6%

Q1 2000

Ian Kincaid

© InterVISTAS Consulting Inc.

BIOMETRICS AND PRIVACY 15 October 2003

Biometric technologies are increasingly being used for rapid authentication of a person’s identity.

Returning from a trip to the U.S. last month, for example, I was successfully identified as "Solomon Wong" through a CANPASS biometric iris scan and cleared Customs in less than 30 seconds.

The benefits of using biometric technologies in airport settings are well documented. However, according to a recent Ekos Research poll, fewer than 5% of Canadians surveyed could identify the meaning of the word "biometrics.� Worse yet, the issue of the privacy of biometric information is less understood. This column dispels some of the "myths" associated with the increasingly complicated world of biometric technologies.

Can my biometric information be stolen?

The short answer: Yes, like any piece of electronic information. In spite of firewalls and encryption technologies, the potential still remains for data to fall into the wrong hands. It is important to remember, however, that biometric templates cannot be reverse-engineered to the individual.

Solomon Wong

Director, Security & Planning

As shown in the simplified example above, the biometric template on file for "John Smith" is a collection of numbers (14.32, 8.53, 10.36, etc.). For authentication, biometric readings would involve matching this file template to a fresh reading (e.g. 14.31, 8.56, 10.34, etc.). If the numbers match within a reasonable level of confidence, then John Smith's identity is confirmed.

Should a biometric template fall into the wrong hands, the damage to John Smith's privacy is minimal, as this is simply a set of numbers. A greater concern is the potential for reverse engineering the algorithm for the system from the set of numbers.

Is my biometric information protected?

In Canada, the Privacy Act provides for the protection of documentation and biometric data. A "personal information bank" (PIB) is the repository for this information. Access to this information requires that individuals be notified of the purpose, legal authority, to whom the information may be distributed, and its storage location.

What about mandatory biometrics?

A number of governments around the world are contemplating mandatory biometric registration for visitors. Some, including Canada, are evaluating issuance of national ID cards with biometrics. While the merits of such proposals are debatable, the privacy principles remain the same: by law, Canadians have a right to know, and have access to, the information that a government collects about them. More importantly, a greater understanding of the significance of biometrics needs to be communicated in order to have a more informed debate on a critical public policy decision.

Page 15 October 2003

Š InterVISTAS Consulting Inc.

OTTAWA REPORT 13 October 2003

Parliament returns. Parliament returned on September 15, 2003 after having recessed in mid-June. On the transportation legislation front, the word on the street is that Bill C-27, the proposed Canada Airports Act, is all but dead on the order paper. Standing committee hearings on the bill will likely not take place during this session of parliament. Still on life support is the amended Canada Transportation Act, or Bill C-26. With only a third of the 250 witnesses heard on C-26 in the spring, there seems to be only a remote chance that this bill, as it stands, will make it through the fall hearing schedule. The only possibility is if the bill is broken up into manageable pieces by mode of transportation. Given that the Thanksgiving break has already passed and that Parliament may prorogue in November, time is now Bill C-26’s biggest enemy. Witness after witness before the Transport Committee in the spring of 2003 criticised C-26 citing it as not reflective of industry input.

Sam Barone

Regional Vice President, Ottawa

United States-European Union Aviation Talks October 2, 2003 - While Canada’s airlines and airports were calling on the Canadian federal government to take part in these historic talks between the United States and the European Union, the government was steadfast in refusing to get involved, even as an observer. Many observers are of the view that unlike the Chicago Conference of 1944, where Canada had a major role in shaping the bilateral aviation framework, this time Canada stands to not have any influence by not being at the table. The talks could lay the groundwork for discussions about foreign ownership, market access and cabotage.

Air Canada files appeal of NAVCAN fee hike with Canadian Transportation Agency. Air Canada wants federal regulators to repeal a 6.9% increase in fees imposed last August by Nav Canada. The airline feels it inflicts further damage to an already fragile industry and fails to take into consideration the interests of its customers. The claims are made as part of a 100-page-plus appeal the airline has filed with the Canadian Transportation Agency (CTA) in its efforts to have the increase cancelled or reduced.

In the documents, Air Canada's lawyers portray Nav Canada -- the country's monopoly provider of air traffic control -- as an agency that is out of touch with the current reality in the airline industry. The CTA will review arguments from both sides and render a decision.

Air Canada equity process could raise foreign ownership issues. On September 26, 2003 Air Canada announced that it has selected two qualified investors to move to the final phase of the equity sponsorship solicitation process to assist in funding its emergence from CCAA protection. The airline will enter into detailed negotiations with Cerberus Capital Management, L.P., a New York based asset management firm with Canadian interests, and a company controlled by Mr. Victor T.K. Li, a Canadian citizen with substantial global business interests.

Both proposals address Air Canada's minimum CDN$700 million target of new equity and each also contemplates co-investment by creditors through a rights offering which would increase total proceeds to CDN$1 billion. Whichever proposal wins will likely be reviewed by the Canadian Transportation Agency to ensure that Air Canada is substantially controlled in fact by Canadian nationals and within the 25% foreign ownership cap which Ottawa has repeatedly rejected calls to relax.

Page 16 October 2003

Š InterVISTAS Consulting Inc.

WASHINGTON REPORT 15 October 2003

DOT: Passenger levels still below Pre-9/11 levels The DOT Bureau of Transportation Statistics reported in early October that U.S. airlines carried 6.4% fewer domestic passengers during the first half of 2003 than in the first half of 2001. Delta Airlines carried the most passengers in June 2003 with 6.8 million enplaning domestic passengers. Southwest Airlines was a close second with 45,000 fewer enplanements than Delta. American Airlines and United Airlines had 6.5 million and 5.0 million enplanements respectively.

Charles Chambers Senior Vice President GA 2

And Regional Vice President InterVISTAS Consulting Inc.

DHS Rolls Out US-VISIT Program In October, the Department of Homeland Security (DHS) announced the implementation of the U.S.-VISIT entry program at 115 commercial U.S. airports. The program will capture both entry and exit information on foreign national visa holders visiting the U.S. Specifically, all foreign national visa holders will be photographed and fingerprinted upon arrival and fingerprinted prior to departure from all air and sea ports-of-entry. The deadline for implementation of this program at airports is December 31, 2003.

Carriers can be Sued for 9/11 Attacks A U.S. Federal Court judge ruled in early September that families of 9/11 victims can file negligence claims against American Airlines, United Airlines, the Boeing Company and the owners of the World Trade Center. Families must choose whether to join litigation or receive money from the U.S. Government compensation fund established by Congress. Victim’s families have until 22 December 2003 to decide to join the suit.

U.S. Ratifies Montreal Convention The U.S. filed its ratification of the 1999 Montreal Convention with the ICAO on 5 September 2003. The U.S. was the last country needed to bring the convention into force. Where applicable, the convention will: • Eliminate the Warsaw Convention limits on an airline’s liability for death or injury to international passengers. (The Warsaw Convention of 1929 established rules regarding limits on airline liability to passengers and limits on the access of many claimants to courts in their own countries.)

• Allow lawsuits in cases of passenger deaths or injuries to be brought in the country of the passenger’s principal and permanent residence.

Page 17 October 2003

© InterVISTAS Consulting Inc.

CARGO CAPERS 8 October 2003

Robert Andriulaitis

Director, Transportation & Logistics Studies

One big step forward … On occasion, I have been rather critical of the degree of government intervention in the international air transport industry. This month, however, I have to tip my hat to the U.S. and European Union, who last week met to kick off negotiations that should lead to a new more liberal air transport service agreement. It is unclear how far this agreement will go, or how long it will take to get there, as the E.U. has a much more ambitious agenda than the U.S. Regardless, the outcome will be a more open environment than currently exists. If the U.S. view prevails, the end result will be a U.S. model “open skies” agreement between the U.S. and the E.U. Although this will put Canada further behind the eight ball in the short-run, it will increase pressure for Canada to dramatically liberalise its agreements and could benefit us in the longer term. If the more aggressive European view prevails, we will eventually see a common aviation area covering the North Atlantic. This would go beyond open skies to eventually include Right of Establishment, cabotage, removal of foreign ownership restrictions, and common safety and security provisions. Although Canada is not currently an active part of this negotiation, the pressures of such an open environment between two of our major trading partners would force us to be part of the outcome, opening up opportunities for Canadian airports to act as gateways between the two blocs. Canadian stakeholders should already be lobbying Transport Canada to adopt this broader viewpoint and become an active participant in this development.

The European view is the one that needs to prevail if aviation is to be able to fulfill the promise it holds to closely link the world’s economies. There will, however, be challenges, including achieving U.S. legislative change and overcoming U.S. labour opposition. (The ALPA web site contains an article showing what they view to be the dangers of such an agreement: Manchester United, a hypothetical Chicago-based airline owned by a British sports/transportation conglomerate accepting applications from pilots holding E.U. aviation certificates; SunSki, a Polish-certificated airline operating exclusively between Miami and Latin America; and a major U.S. air carrier announcing during a 30-day cooling off period that if its pilots strike it will operate its full international schedule using aircraft and crews leased from Europe. Aside from the cute word play on Man U and the somewhat politically incorrect Polish joke, these concerns highlight the difference in perspective that labour has from most other stakeholders). … and one big step backward. You would think that the international air cargo industry is challenging enough, with carriers needing to cope with unbalanced traffic flows, seasonal peaking, competition, obtaining access to congested airports, mitigating noise and environmental concerns, dealing with ever increasing security requirements and trying to circumvent archaic regulatory impediments. But no – unfortunately, the courts now have added yet another layer of complexity. The case in point is the June 2003 seizure of a Ukranian Antonov AN-124 at Goose Bay by a Newfoundland and Labrador Sheriff acting on the basis of a Federal Writ of Seizure and Sale that reflects a May 2002 decision by a Swedish court. The reason for the seizure is a US$42 million outstanding debt to TMR Energy stemming from the breaking of a 1993 contract. What makes this remarkable is that the debt was not owed by Antonov – it was owed by the Ukraine State Property Fund! Since both Antonov and the State Property Fund are state-owned enterprises, the assets of both were deemed to be the property of the state by the Swedish court, and thus the AN-124 was considered as eligible security for the State’s obligations.

The seizure was appealed, and the Federal Court of Canada held a hearing at the end of August. A decision was expected by now, but the illness of one of the judges has delayed the rendering of the decision.

Page 18 October 2003

© InterVISTAS Consulting Inc.

The implications are significant. If upheld, state-owned aircraft could be vulnerable to seizures for debts owed by other state enterprises. Not surprisingly, the Ukraine announced that all state-run airlines should suspend flights to all countries that may be affected by the Swedish ruling. On the negative side, potential services by a carrier interested in serving Canada have been thwarted by factors outside its control. On the positive side, it certainly provides incentive for the privatisation of state-owned airlines!

Page 19 October 2003

Š InterVISTAS Consulting Inc.

TIME TO REPLACE THE 727 FREIGHTER The Boeing 727 has been one of the world’s most successful small jet freighters. An inventory by Ariel Aviation shows that with over 500 in service, the 727F represents 85% of small cargo jets and 30% of all freighters. While there are some newer 727 models that are only just over 20 years old, many of these venerable aircraft are nearing the end of their useful life. The 727-100 models average about 36 years in age, with the average 727-200 only about 3 years younger. Engines are reaching the limit of their life.

While this aircraft could continue in a freighter mission for some time, since 911 the price of replacement aircraft has dropped dramatically and the economics of re-engineering the aircraft are weakening.

The question is which aircraft will replace the 727F in Canada. The 727 is a critical cargo aircraft here -Kelowna Flightcraft has 18 aircraft (both 100s and 200s) and Cargojet has nine aircraft (all 200s).

The leading candidates appear to be the 737-300/400, the 757-200 and perhaps the A320/321, although all of these are likely to remain in front-line passenger service for quite some time yet. Some European carriers, such as TNT, have even looked at the Russian TU-204, but these are not licensed yet for operation by European Union carriers. DC-9s are too old and too small. The MD-80 cannot handle 125” x 108” pallets, which limits its ability to integrate with other aircraft.

Michael Tretheway Vice President & Chief Economist

757 Most Likely. I attended the Air Cargo economics conference in Amsterdam last month and had an opportunity to chat with a number of industry leaders about 727 replacement. It is increasingly my view that the 757 will emerge as the prime candidate for 727F replacement in Canada. There are a number of reasons for this. The first 757-200 was delivered in 1982, which puts it at that life cycle stage for conversion to freighter configuration. Over 1,000 were produced, which gives an ample market to choose from. Barring a recent, small Chinese order, no new orders have been received for some time now, and only one carrier, Continental, has undelivered aircraft. Thus it seems increasingly likely that the production run will stop soon. This should result in a drop in the price of the used aircraft. A couple of third party firms have announced their intention to offer conversion services. The aircraft is fuel-efficient, has low maintenance costs, and offers labour savings over older the 727. The 737-300/400 is also a candidate, but discussions with a leading Canadian 727 operator made clear that our markets can support the extra capacity of the 757-200F. As soon as retired 757s show up on the market at prices under US$10million, I would expect Canadian freight operators to begin purchases. The transition will not be overnight. It is likely that an operator, such as Kelowna, will purchase one or two and begin a multi-year effort to develop a 757F conversion program. The process will involve obtaining certification for the conversions, training staff, then gradually implementing the program, putting them into service, one at a time.

There will be a lot of advantages for airports and their communities when the conversion is made. The 757F is much quieter than the 727. Its cost per ASK may also be much less, provided the additional capacity can be sold. This will be of benefit to shippers and consumers. The aircraft is larger than the 727, so airports will benefit from increased landing fees, however, airports will also need to ensure their apron space is adequate to handle them.

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 20 October 2003

© InterVISTAS Consulting Inc.