CAIR Issue No. 11 - November 2003 by Leah Dupuis

INDUSTRY REVIEW

9/11 Two Years Later –

HAS U.S. PASSENGER TRAFFIC RECOVERED FROM 9/11? 15 November 2003

Traffic Recovery - It has been a little over two years since the tragedy of September 11. This event resulted in immediate drops in passenger traffic. Since then traffic has been struggling to recover to pre 9/11 levels.

Project Analyst

RPMs (millions)

Jennifer Tso

U.S. Domestic Traffic – After U.S. Domestic RPMs September 11, 2001, U.S. 2000 2001 2002 2003 50 domestic traffic fell 32% from 45 2000 levels. In October 2001, 40 traffic recovered but was still 35 28% below 2000 levels. In 30 September 2002, traffic was 25 12% down from 2000 levels. 20 Traffic in September 2003 15 recovered slightly, with traffic 10 10% below 2000. Traffic seems 5 Source: Air Transport Association to have surpassed 2002 and the 0 upward trend looks promising. Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec International Traffic - As International RPMs illustrated, September 2001 traffic levels dropped 30% from 2000 2001 2002 2003 20 2000. Traffic continued to drop 18 37% in October from the 16 previous year. Traffic in 14 12 September 2002 recovered 10 tremendously and was 9% 8 below 2000 levels, somewhat 6 4 better than recovery in domestic 2 traffic. At the start of 2003, Source: Air Transport Association 0 traffic levels looked promising, Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec with traffic up 3% over 2000 levels. However, with the looming Iraq War and SARS, international traffic dropped to their worst level since 2000. International traffic is still below both 2000 and 2002 levels. In both domestic and international, the traffic recovery appears to have stalled. Throughout 2003, domestic traffic has essentially tracked that of 2002, while international traffic worsened. Both sectors are roughly 10% below 2000 levels.

Page1 November 2003

SARS – ON THE ROAD TO RECOVERY 15 November 2003

Doris Mak

Senior Market Analyst

Out of the dark? Over the past month we have heard very little about SARS. No new outbreaks have surfaced and it seems that the air travel industry can breathe a little easier. However, Asian countries and air carriers are still on alert for any indication of the resurfacing of SARS. Traffic Continues to Increase: According to IATA, September traffic levels are 1% above those in the previous year. The AsiaPacific region has recovered but is still falling behind last year with traffic 1.6% lower. Passenger traffic at Asian airports continues to recover toward pre-SARS levels. For the month of September, total passenger traffic at Taipei Chiang Kai-shek International Airport was 1.5 million passengers, up 0.2% from the same month last year. Hong Kong International Airport’s passenger traffic volumes exceeded 95% of pre-SARS levels during September. International Travel Continues Upward: Visitor arrivals to Hong Kong for the month of September continue to recover. Total arrivals for the month totaled 1.5 million, up 7.9% from the same month last year. Mainland China visitor arrivals totaled 762,000, up 28%. Other countries reporting positive visitor growth include: Thailand (+13%); the Philippines (+10%); Singapore (+2.2%); and South Korea (+1.9%). Air carriers continue to recover from SARS: • All Nippon Airways Co. Ltd. posted a group net profit of US$191 million for the six months to September, compared to a net loss of US$74 million the year before. • China Eastern Airlines’ profits improved for the third quarter ended September 30, as earnings reached US$28 million, up from US$12 million from the previous year. For the nine months ended September 30, the carrier reported a net loss of US$144 million compared to income of US$18 million in 2002. • Philippines Airlines will resume direct flights to Kuala Lumpur after a five year absence. The service was originally slated to begin in May but was cancelled due to SARS.

Page2 November 2003

AIRLINE DATA – CANADA

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

% Change from 2001

% Change over 2002

% Change from 2001

% Change over 2002

% Change from 2001

-10.9%

+4.7%

-9.4%

-2.0%

-1.2 pts (to 73.2%)

+4.7 pts

Domestic (Mainline)

-4.4%

+7.1%

-2.6%

+11.1%

Jazz

+2.2%

N/A

+3.4%

N/A

International & Charter

-13.9%

+3.4%

-12.7%

-7.9%

+45.4%

+131.8%

+43.3%

+120.5%

Air Canada 1

NEW CARRIERS: LOAD FACTORS Jetsgo: Zip: CanJet:

61% not reported not reported

Load Factor

WestJet

-1.4 pts (72.3%) -0.7 pts (57.5%) -1.1 pts (73.7%)

-2.7 pts N/A +8.1 pts

+1.0 pts (to 72.8%)

+3.5 pts

Note: N/A – As Jazz was not reported in 2001, a percentage change from 2001 could not be calculated. Air Canada Domestic Mainline Analysis: • As with previous months, Air Canada’s 20% 15% domestic traffic has declined greater than its 10% available seat capacity compared to the same 5% month last year, worsening its load factor. With 0% -5% the impacts of SARS and the war in Iraq fading, -10% -15% the airline appears to still be struggling with -20% matching seat capacity with demand. -25%

Dom RPK Dom ASK

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

•

Air Canada’s international traffic levels remain at the same lowered levels established in June 2003, with traffic down approximately 15%. Asia and U.S. traffic have suffered the greatest declines. However, in the coming months, the airline expects to fully restore its service offerings to Asia as the threat of SARS has diminished.

Air Canada International 30% 20% 10% 0%

Int'l RPK Int'l ASK

-10% -20% -30% -40% 70%

For the first time in 11 months, percentage 60% 50% growth in WestJet traffic has increased more than its growth in available seat capacity. The 40% 30% airline has been very aggressive in expanding 20% its operations resulting in a lowered load factor, 10% year-to-date, as until this month, the airline has 0% added more seats at a faster rate than the volume of traffic carried.

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

WestJet

RPK ASK

Oct- Nov 02

Dec

Jan- Feb 03

Mar

Apr

May Jun

Jul

Aug Sep

Oct

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

Page3 November 2003

AIRLINE DATA – U.S. U.S. Airlines Release October 2003 Traffic Figures

Load Factor

Traffic (RPMs – millions)

(ASMs – millions)

70.2% á 1.7 pts

9,818 â 1.7%

13,982 â 4.1%

64.3% á 3.0pts

426 á 18.4%

662 á 13.0%

66.5 % á 0.6 pts

1,140 á 17.2%

1,738 á 14.7%

74.0% á 4.6 pts

4,853 á 3.1%

5,556 â 3.3%

72.9% á 2.0 pts

8,565 â 0.6%

11,743 â 3.4%

85.5% á 4.5 pts

1,045 á 62.7%

1,222 á 54.2%

78.5% á 3.4 pts

5,668 â 3.4%

7,221 â 7.6%

63.6% á 1.1 pts

3,968 á 5.7%

6,237 á 3.9%

76.6% á 5.9 pts

8,932 â 1.9%

11,676 â 9.4%

72.7% á 5.8 pts

3,226 á 8.8%

4,438 á 0.1%

Airline

Notes:

Capacity

Mainline Load factor includes scheduled service only Sources: Carrier traffic reports. 1. 2.

Page4 November 2003

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

2003

Page 5 November 2003

Vancouver

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

N/A N/A N/A N/A N/A N/A +8.2% N/A -7.5% +5.7% +4.6% +0.4% +3.4% -15.1% -17.3% -9.0% -13.7% -6.0% -7.6% -5.9%

MontrealDorval

-9.0% -7.7% +12.6% -2.6% +12.5% +4.7% +4.3% +7.2% -3.9% +2.8% -0.6% -1.4% +0.2% -13.6% -13.5% -9.9% -12.2% -4.5% -1.2% -3.0%

-10.9% -7.9% +22.5% -0.2% +15.3% +5.3% +7.8% +9.7% -4.3% +7.2% +3.7% -1.8% +2.9% -10.2% -7.4 0.0% -5.6% +2.9% -1.0% +1.7%

-3.8% -2.3% +20.1% +2.9% +14.3% +0.6% +7.1% +7.6% +1.2% +6.3% +5.6% +3.7% +5.2% +1.6% -1.4% +1.9% +0.7% 4.7% +1.4 -1.8%

-6.7% -7.5% +7.6% -4.4% -0.1% +9.4% +11.7% +6.9% -4.1% +3.5% +3.0% -0.4% +2.0% +1.1% -5.3% -0.4% -1.6% +2.5% +0.3% +8.6%

-12.3% -8.8% +23.7% +0.50% +6.4% +3.0% +6.3% -5.1% -5.1% +6.2% +3.9% +2.2% +4.0% -7.6% -1.5% +2.5% -2.1% +3.0% -7.0% +1.6%

-6.9% -2.8% +16.4% +1.2% +5.9% +5.7% +15.2% +8.9% -3.8% +13.0% +12.7% +5.1% +10.1% +4.4% -0.5% +5.0% +3.0% +3.7% +0.4% +1.5%

-6.0% +7.5% +26.1% +11.2% +7.9% +5.7% +8.1% +7.3% +0.1% +4.5% +13.8 N/A +10.0% +6.1% -1.2% +4.1% +2.9% +5.7% +4.1% -0.6%

Victoria

Kelowna

-6.3% -6.1% -8.8% -1.7% +13.2% +11.8% -4.8% +0.2% +0.1% +5.7% +0.1% -1.4% +1.4% +4.3% +0.5% +3.0% -4.8% -1.3% +2.9% +4.0% +7.5% +2.0% +0.2% +5.0% +3.3% +3.7% -0.9% -0.6% +0.4% -1.0% +0.6% -0.5% +0.0% -0.7% +11.9% +5.0% 9.8% 0.5% +10.8% -0.7%

Saskatoon

Regina

St. John’s

-8.7% -13.6% +12.6% -5.4% +1.7% +0.2% +1.5% +1.1% -5.1% +6.8% +6.0% -3.7% +3.1% -3.9% -5.3% +1.4% -2.6% +1.2% -4.8% N/A

-11.1% -10.5% +10.5% -5.8% +4.4% +1.2% +3.2% +3.0% -5.5% -0.3% +8.8% -4.2% +1.3% -1.6% -1.6% +7.0% +1.3% +4.7% -2.2% N/A

-11.9% -8.0% +20.0% -0.8% -0.7% -2.3% +2.2% -0.3% -5.7% -5.8% -2.0% -3.1% -3.7% -1.7% +4.5% +17.8% +7.1% +21.1% +22.5% +12.3%

CANADIAN A IRPORTS

2002

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

Toronto

Source: Dates provided by WestJet Airlines, effective November 12, 2003. Retirement dates are estimates only. Page 6 November 2003

ÂŠ InterVISTAS Consulting Inc

WESTJET AIRLINES FLEET PLAN: 2002-2005

*Indicates addition/removal of 737-800s on temporary lease.

(UPDATED TO REFLECT ORDERS PLACED NOV. 2003)

Note: Unless otherwise specified, all deliveries are 737-700 jets; all retirements are 737-200 jets.

NEWS ARTICLES AIR CANADA UPDATE

FUEL PRICES November 14, 2003 SPOT OIL PRICES INCREASING FUTURES PRICES LOWER Crude Oil Prices: Spot – US$29.84 (up 6.9% from October) Future •

6 month - $30.51 (March 2004 delivery)

•

12 month – $27.77 (October 2004 delivery)

•

2 year - $26.19 (October 2005 delivery)

•

5 year - $26.52 (October 2008 delivery) Monthly Spot Spot Prices Prices $40.00

US$ per Barrel

$35.00 $30.00 $25.00 $20.00 $15.00 Jan- Feb Mar Apr May 03

Jun

Jul Aug Sep

Oct

Nov

VICTOR LI SELECTED AS AIR CANADA EQUITY INVESTOR Air Canada has chosen Victor Li, son of Hong Kong tycoon Li Kashing as its major equity partner. Li, who has Canadian citizenship, will invest CDN$650 million into Air Canada for a 31% share of the carrier through Trinity Time Investments (a company wholly owned by Li). As part of the deal, Li will appoint five of the new 11-member board of directors. The remaining seats will be chosen by Deutsche Bank (2 seats), Air Canada management (2 seats), and the airline’s creditors (2 seats). Air Canada CEO Robert Milton, and Calin Rovinescu, the top executives overseeing the restructuring process, will each receive 1% of the equity in the airline to be vested over four years and paid out of Li’s stake leaving Trinity with a 29% stake. The deal is subject to several conditions including: resolution of the CDN$1.5 billion pension deficit; approval from creditors and federal regulators; the acquisition of a fleet of regional aircraft; and the absence of unforeseen events (e.g. a terrorist attack) that could depreciate the airline’s value. DEUTSCHE BANK BACKS AIR CANADA EQUITY FINANCING Air Canada has reached a deal with German based Deutsche Bank to backstop a rights offering by the bankrupt carrier. Air Canada is offering creditors an opportunity to purchase shares in the restructured carrier on the same terms as its equity investor, Victor Li. Under the agreement, Deutsche Bank will acquire any shares not purchased by creditors at a premium not exceeding 15%. The offering is expected to raise CDN$350-$450 million for the airline.

Page 7 November 2003

AMERICAN EXPRESS TO LOAN AIR CANADA CDN$80M Air Canada has completed a deal with American Express for a loan of CDN$80 million subject to approval from the Ontario Superior Court. In June, Air Canada reached an agreement with American Express that allowed the financial services provider to distribute Air Canada’s frequent flyer miles to its cardholders. The deal will last for five years, during which American Express must provide an unspecified amount of revenue to Air Canada through the purchase of Aeroplan miles. The amount that American Express will pay for the miles was not disclosed, and details of the agreement remain confidential. REGULATOR REJECTS AIR CANADA PENSION OFFER The Office of the Superintendent of Financial Institutions (OSFI) has rejected the latest proposal from Air Canada on its plan to resolve the CDN$1.5 billion pension deficit. Air Canada proposed to fund the CDN$1.5 billion shortfall over 10 years, but the federal law limits the funding to 5 years. The OSFI wants Air Canada to contribute 40% of the pension (CDN$600 million) in the first five years, and wants assurances that pension beneficiaries will receive information on the offer, and have the opportunity to vote on the proposal. AIR CANADA FACES CDN$1.7 BILLION CLAIM FROM TRAVEL AGENTS The Canadian Standard Travel Agent Registry (CSTAR), a group representing over 900 travel agencies across Canada, has filed a CDN$1.7 billion claim against Air Canada in the Ontario Superior Court. The claim is part of a suit against Air Canada, five U.S. based airlines, and the International Air Transport Association (IATA). CSTAR alleges that the airlines and transport association colluded to reduce and eliminate the commissions paid to Canadian travel agencies. Airlines have been reducing commissions since 1995, and some airlines have cancelled them altogether since April 2002.

NEWS ARTICLES AEROPLAN AND FUTURE SHOP LAUNCH JOINT MARKETING PROGRAM Air Canada has teamed up with retailer Future Shop to expand its Aeroplan program. The joint initiative will allow members to use frequent flyer points to redeem electronic goods such as TVs, DVDs and computers on the Aeroplan website only. Previously, Aeroplan members were limited to only redeeming points for travel related products and services. This pilot program will run until December 24, with plans for expansion if the promotion is successful. AIR CANADA TO FOCUS ON TRANSBORDER AND INTERNATIONAL MARKET Air Canada’s CEO Robert Milton has stated that Air Canada plans to cut capacity in the competitive domestic market, and focus on international and transborder routes. Air Canada and its subsidiaries currently operate 65% of the domestic passenger traffic, as measured by revenue passenger kilometres, and aims to retain about 50% of the market via its low cost carrier Zip.

OTHER CANADIAN AIRLINES

CANADIAN WESTERN AIRLINES OPERATING LICENSE REVOKED Transport Canada has revoked the operating license of Richmond, B.C., based Canadian Western Airlines (CWA) due to safety and operational problems. All flights have been cancelled and the company plans to file for bankruptcy. Jetcor Ltd , a Calgary based aircraft leasing company who had announced its intent to purchase Canadian Western Airlines, is no longer considering a purchase but may operate some or all of CWA’s routes. CWA operated regional services to coastal and interior B.C. including Nanaimo, Kamloops, Masset/Sandspit, Tofino/Uclucet, and Williams Lake with 19-seat Jetstream 31 aircraft. .

Page 8 November 2003

CANJET EXPANDS SERVICES TO FLORIDA CanJet has increased its services to Florida to include two new destinations and three new Canadian departure points. The Eastern Canada low fare carrier started weekly Saturday services between Halifax and St. Petersburg last winter, and will introduce non-stop services from Toronto and Ottawa to Sarasota Bradenton, and Montreal to West Palm Beach. CanJet’s one-way fares for these new services start at CDN$99. JETSGO ADDS ORLANDO-SANFORD SERVICE Jetsgo has launched non-stop weekly services between Montreal and Orlando Sanford International Airport in addition to its services from Toronto. Both flights will operate year round with Boeing MD83 aircraft on Saturdays, with additional flights operating during the peak winter season. AIR TRANSAT, SKYSERVICE AIRLINES, AND ZOOM DESIGNATED FOR DOMINICAN REPUBLIC SERVICES Canadian Transport Minister David Collonette announced that Air Transat, Skyservice Airlines, and Zoom Airlines have been designated to operate scheduled services from Canada to the Dominican Republic. Air Transat plans to offer services between the Dominican Republic and eight Canadian cities including Halifax, Quebec, Montreal, Toronto, Saskatoon, Edmonton, Calgary and Vancouver. Skyservice will offer services from Halifax, Moncton, Montreal, Ottawa, Toronto, Windsor, Thunder Bay, Winnipeg, Regina, Saskatoon, Edmonton, Calgary and Vancouver to the Dominican Republic. And Zoom plans to operate from Halifax and Ottawa to the Dominican Republic.

NEWS ARTICLES ZOOM OFFERS VANCOUVER TO U.K. SERVICE Zoom Airlines has announced that it will be offering scheduled flights from six Canadian cities to both Glasgow and London Gatwick airports starting in May 2004. The airline will operate Boeing 767-300s from Vancouver, Edmonton, Calgary, Toronto, Ottawa, and Halifax to the U.K. Zoom will sell tickets directly to consumers, and at fares lower than the charter flights currently available. For example, fares from Vancouver to London start as low as CDN$299 each way. Zoom is based out of Ottawa and currently operates two Boeing 767s. TRANSAT SELLS FRENCH SUBSIDIARY ANYWAY.COM Transat A.T. Inc. has completed the sale of its online travel agency Anyway (www.anyway.com) to IAC/InterActiveCorp for CDN$81.6 million. Anyway will join IAC Travel, a division of IAC/InterActiveCorp, which includes online companies such as Interval International, TV Travel Shop, Hotels.com, and Hotwire.com. WESTJET EARNINGS RISE TO CDN$32.3M IN THIRD QUARTER WestJet announced that net earnings increased by 40% to CDN$32 million in the third quarter of 2003, as compared to the same period last year. Operating revenue increased to CDN$254 million. WestJet’s capacity increased by 45% to 3.1 billion ASKs, while traffic increased by 38% to 2.3 billion RPKs compared to last year. Load factor was 76.4% during the quarter, a decline from 80.2% during the third quarter of 2002. Yield decreased by 9.8% as compared to the same period last year.

Page 9 November 2003

WESTJET LOOKING AT EMBRAER JETS WestJet is in discussions with Embraer SA about the possibility of purchasing the Brazilian manufacturer’s 70-seat regional Embraer 170 jet. This aircraft would allow WestJet to operate services to smaller cities more efficiently and at a lower cost. WESTJET TO ADD SEVEN BOEING 737S WestJet announced that it will purchase seven Next-Generation Boeing 737-series aircraft to be delivered in 2005. The deal is subject to approval from the Export-Import Bank of the United States. WestJet plans to retire three of its Boeing 737-200s by the end of 2005, bringing the total number of aircraft in its fleet to 63, which include 48 Next-Generation 737s, and 15 737-200s. (See table of WestJet deliveries earlier in this report).

U.S. & INTERNATIONAL AIRLINES

CONTINENTAL AND UNITED REPORT IMPROVED THIRD QUARTER FINANCIALS Continental Airlines posted a US$133 million profit in the third quarter, which includes a US$100 after-tax gain from the sale of ExpressJet stock. Passenger revenue was US$2.2 billion, and the carrier achieved a load factor of 80%. United Airlines reported a loss of US$367 million in the quarter. This includes a US$330 million in special charges and reorganisation expenses. This is a significant improvement over the US$889 million loss last year. Revenues were US$3.8 billion and load factor increased to 80.2%.

NEWS ARTICLES LOW COST CARRIERS PROFITABLE IN THE THIRD QUARTER Low cost carriers in the U.S. posted strong third quarter results. Southwest Airlines reported a profit of US$106 million from revenues of US$1.6 billion. Excluding a special gain during the same period last year, profit more than doubled from US$50 million in 2002. JetBlue also doubled its profit from last year to US$29 million in the third quarter. Revenue increased by 65.5% to US$273.6 million and load factor was 87.7%. AirTran posted a US$20 million profit for the third quarter, with revenues of US$237 million. Load factor increased by 6.9% to 73.4% despite a 21% addition to capacity. SOUTHWEST CLOSES THREE CALL RESERVATION CENTRES Southwest Airlines announced that it will close three of its nine reservation centres in February. The carrier has seen a steady decline in call volume and an increase in web bookings over the last few years as a result of marketing programs to drive customers to the carrier web site. Southwest estimates that closing the three centres will save the carrier US$20-$30 million in the first quarter of 2004. Web site bookings currently account for over 50% of the carrier’s bookings and continue to grow every year. U.S. AIRWAYS TO MAINTAIN SERVICE IN PITTSBURGH U.S. Airways has announced that it will maintain services at Pittsburgh International Airport through to next summer. Earlier in May, the carrier had set Jan. 4 as the deadline for reaching an agreement with the airport over cost reductions. U.S. Airways will continue negotiations on a new lease with the airport.

Page 10 November 2003

SINGAPORE AIRLINES LAUNCHES LONGEST NON-STOP ROUTE IN THE WORLD Singapore Airlines has added the ultra long-range Airbus A340-500 to its fleet, which will offer non-stop services from Singapore to Los Angeles in February 2004. The carrier will offer daily services on the route, which will be the longest non-stop commercial service in the world. The flight from Singapore to Los Angeles will take approximately 16 hours, and the return flight about 18 hours 30 minutes. Singapore Airlines will also launch daily services to New York with the A340-500 beginning in August 2004. The carrier placed a firm order for five A340-500s in 1998, and took options on another five. CATHAY PACIFIC LAUNCHES SERVICE TO BEIJING Cathay Pacific Airways has announced that it will be starting services to Beijing on December 2. The carrier will operate three flights a week between Hong Kong and Beijing. Hong Kong’s Air Transport Licensing Authority has authorised Cathay Pacific to operate 21 weekly flights to Beijing and Shanghai, and three weekly flights to Xiamen. VIRGIN BLUE IPO Virgin Blue, Australia's low cost carrier, filed a prospectus to sell A$558 million in voting common shares on 10 Nov 2003. A$400 million of the shares are new shares, with the balance consisting of the sale of shares held by the UK based Virgin Group. Virgin Group is required by the terms of an agreement with current major owner Patrick Group to sell down its shares until at least 25% of total shares are owned by other than Virgin and Patrick Group. Patrick Group will purchase shares so that it owns 45% of total shares. Virgin will maintain two board positions but Sir Richard Branson will step down from the Board. He has been given the honorary title of “Life President”. Existing employees will each receive $1000 in stock. © InterVISTAS Consulting Inc.

NEWS ARTICLES CARGO

KNIGHTHAWK FILES FOR BANKRUPTCY KnightHawk Inc. has announced bankruptcy filings by its two operating companies, KnightHawk Air Express and Kelowna Pacific Railway. The companies will continue operations with Pricewaterhouse Coopers as trustee. KnightHawk Inc. lost CDN$711,000 in the first three months ended July 31, although revenue increased 13% to $3.4 million. KnighHawk Air Express is a five-plane overnight cargo delivery carrier that operates out of Ottawa, Calgary, and St. John’s. They also serve Winnipeg. U.S. CARGO TRAFFIC DOWN 0.4% U.S. Air Transport Association figures for September show a drop in total cargo revenue ton miles of 0.4% from September 2002. Domestic traffic is up 3.4%, International is down 4% and Latin America had the largest decrease of 15.2%. RISE IN SEPTEMBER WORLD FREIGHT The International Air Transport Association (IATA) reported that September freight traffic is up 2.9% overall from the previous year. Asia Pacific traffic is up 5.5% and the Middle East saw the largest increase in cargo traffic, at 15.9%. FEDEX FIRST U.S. CARRIER TO KAZAKHSTAN FedEx Express will become the first U.S. airline to fly to Kazakhstan when it adds Almaty, the country’s largest city and business hub, as a fuelling stop on its Hong Kong – Paris route. This stop will enable FedEx Express to increase capacity on this route by 55,000lbs each flight. The departure time for this flight will be pushed back from 2200 to 0630 the next day, giving Hong Kong customers eight and a half extra hours to truck freight in. The flight will be operated on an existing MD-11 aircraft.

Page 11 November 2003

UPS Q3 PROFITS UP UPS announced in October that its third quarter profits increased over the previous year. Net profit was US$739 million, up from US$578 million for the same quarter last year. UPS financials suffered in 2002 due to shippers diverting packages to the company’s rivals while the company was in contract negotiations with some of its labour unions. UPS TO ADD FLIGHTS AS CHINA-U.S. MARKET GROWS Following a 45% growth in its China business in the second quarter, UPS plans to operate more China-U.S. flights to build its Shanghai operations. An increase in flight frequency will allow UPS to take advantage of its growing business in China and make Shanghai an important component in its global network. The growth at Shanghai was the highest in the entire Asia-Pacific region (15%) and more than twice the company’s global growth of 6% during its second quarter. UNIVERSAL EXPRESS PROPOSES SHIPPING OF PASSENGER BAGGAGE Universal Express, a Floridabased transportation logistics company has proposed to the U.S. Government that passengers be required to choose between checking their baggage on their flight or shipping it in advance. Richard Altomore, CEO of Universal Express, says the government could save US$1.4 billion in screening costs and US$6 billion in labour costs annually if companies handled baggage in advance of flights as opposed to flying it with the passengers.

NEWS ARTICLES NEW ICELANDAIR HALIFAX SERVICE Icelandair started a weekly B757F flight from Belgium’s Liege airport to Boston Logan airport via Keflavik in Reykjavik and will return via Halifax International Airport. The return flight will enable Icelandair to double its uplift of live lobster, which will be transferred at Keflavik to Scandinavia and Central Europe. NEW POLAR AIR HALIFAX SERVICE Polar Air Cargo has begun operating a weekly flight from Halifax International Airport. The B747 freighter flights operate each Sunday on a New York-Halifax-Liege route, transporting seafood and other regional products to Europe.

AIRPORTS

GTAA TO RAISE AIRLINE FEES AT TORONTO LESTER B. PEARSON INTERNATIONAL AIRPORT The Greater Toronto Airports Authority (GTAA) has announced significant airline fee increases for 2004. Preliminary figures show that landing fees will rise 29% and terminal fees will increase by approximately 20%. The GTAA stated that the fee increase is necessary to finance its CDN$4.4 billion terminal upgrade. Airline related fees account for 53% of the airport’s revenues. The airport authority has received heavy criticism from the International Air Transport Association (IATA) for the fee increases. EDMONTON AIRPORT MOVES TO NEXT PHASE OF TERMINAL REDEVELOPMENT Edmonton International Airport will begin the next phase of its air terminal redevelopment (ATR) project, which involves a CDN$18 million investment into the expansion of the North Terminal. The terminal will be upgraded to match the South Terminal (completed in 2002) and will include the addition of new retail services. The Central Hall, which links the North and South terminals, opened November 15.

Page 12 November 2003

TELUS LAUNCHES WI-FI HOTSPOT SERVICES AT YVR The Vancouver International Airport Authority has announced that Telus Mobility has completed the implementation of Wi-Fi Hotspot services at the Vancouver International Airport (YVR). The initiative allows customers at the YVR fast and secure wireless Internet access throughout the airport terminals, and will be the most comprehensive Wi-Fi Hotspot network at a Canadian airport. The service will include free access to online passenger services via the YVR’s web site.

AIRCRAFT MANUFACTURERS

AIRBUS REPORTS DECREASE IN REVENUES Airbus Industries reported revenues of EUR12 billion (CDN$18.1 billion) for the first 9 months of 2003, a 12% decline from last year. Earnings before interest and tax were EUR701 million (CDN$1.1 billion). Total aircraft delivered to date is 230. Airbus’ delivery forecast for 2003 is 300 aircraft. BOEING THIRD QUARTER EARNINGS DECLINE Boeing reported a net income of US$256 million for the third quarter, a 31% decrease from the same time last year, as the company took US$184 million in charges for ending the production of 757 aircraft. Total revenue was US$12.2 billion, with revenue from commercial aircraft decreasing by 17% to US$5.1 billion. Boeing has delivered a total of 230 commercial aircraft to date, with a forecast for 280 aircraft deliveries in 2003.

NEWS ARTICLES GOVERNMENT AND REGULATORY

CANADA-RUSSIA AIRSPACE DISPUTE Canada and Russia are in an airspace dispute over the classification of India. Canada states that India is an Asia-Pacific country, which means that Canadian operated flights to India should be able to cross Russian airspace as per the two countries’ bilateral agreement. In September, Russia refused Air Canada access to its airspace, forcing the carrier to add an extra 1 1/2 hours to its new Toronto-New Delhi non-stop service. Canada retaliated by banning Aeroflot from crossing its airspace, adding extra hours to the carrier’s trans-polar flights. Recently, Canada also ordered the Russian carrier to drop half its Moscow-Toronto flights to 2 per week. E.U.-U.S. AIR REGULATION TALKS CONTINUE Talks between the European Union and the United States concerning the regulation of international air travel between the U.S. and E.U. resumed on October 1 st. The negotiations include the E.U.’s desire for the U.S. to remove airline foreign ownership limits, which are currently at 25 percent of voting stock. The U.S. is pushing for the E.U. to allow its carriers better access to London Heathrow airport. The Bush administration presented a proposal to boost foreign ownership limits to 49%, but the proposal has been delayed by the Senate.

Page 13 November 2003

PEOPLE IN THE NEWS

POSITION CHANGES AT THE WINNIPEG AIRPORT AUTHORITY Fred Legace, Director, Operational Services has left the Winnipeg Airports Authority (WAA) for the Managing Director position at YVR Airport Services (YVRAS) in Kamloops. Diane Jones, formerly Director, Operational Planning & Projects, has been promoted to Vice President of Operations at the Winnipeg Airport Authority. Bob Edgar is now the VP of Airport Redevelopment at WAA. UPS TOP MANAGEMENT CHANGES Two top management positions at UPS will become three at the end of the year. Thomas Weidermeyer, CEO and President of UPS Airlines, and Joseph Moderow, General Counsel, Corporate Secretary and Head of Global Public Affairs and Public Relations, have announced their retirements, effective Dec. 31, 2003. John Beystehner, currently Senior Vice President of Worldwide Sales and Marketing, will fill Weidermeyer’s position. Moderow will be replaced by both Allen Hill, who will become General Counsel and Corporate Secretary, and Kurt Kuehn who will become Senior Vice President of Worldwide Sales and Marketing. Both were elected Senior Vice Presidents by the UPS Board and will become members of the UPS Management Committee. NEW APPOINTMENTS AT THE CAC Reg Milley of Halifax International Airport has been appointed Chairman for the Canadian Airports Council. Jim Cherry from MontrealDorval airport will be the Vice-Chair. Both have been appointed for a two-year term.

ECONOMIC O UTLOOK November 13, 2003

U.S. GDP (Annualised Quarterly % Change)

100 95 90 85

Page 14 November 2003

Q3 2003

Q2 2003

Q1 2003

Q4 2002

Q3 2002

Q2 2002

Q1 2002

Q4 2001

Q3 2001

Q2 2001

Oct-03

Jul-03

Apr-03

U.S. Employment, Monthly Figures 200

6.5

Unemployment Rate (seasonally adjusted)

100

5.5

-100

-200

4.5

Employment Growth (month on month change)

-300

Oct-03

Jul-03

Apr-03

Jan-03

Oct-02

Jul-02

Apr-02

Jan-02

Oct-01

Jul-01

3.5 Apr-01

-400 Jan-01

Perhaps most encouraging are indications that this is no longer a jobless recovery. Employment grew for the third consecutive month in October, with 126,000 new jobs coming on the heels of a 125,000job increase in September. The unemployment rate nudged down slightly to 6.0%. This remains high compared with the past several years, but should drop if economic and employment growth continue as expected.

Jan-03

Oct-02

Jul-02

Apr-02

Jan-02

Jul-01

Apr-01

Oct-01

80 Jan-01

Transportation Specialist

Q1 2001

While no one expects growth to maintain this high pace in the long term, there is reason to believe that long-term growth will continue to exceed the low levels seen in the past several years. Consumer confidence, as measured by the University of Michigan Consumer Sentiment Index, rose in October, and is maintaining levels well above those seen at the beginning of the year.

Consumer Sentiment

Josh Drury

Q4 2000

Q3 2000

Q2 2000

8 7 6 5 4 3 2 1 0 -1 -2 -3 Q1 2000

The U.S. economy surged ahead in the third quarter, growing by 7.2% on an annualised basis. This represents the highest quarterly growth rate in 19 years. The largest factor in GDP growth was consumer spending, which increased 6.6%, fueled largely by personal income tax cuts. Business investment rose 11% and residential investment grew by 20%. Exports rose significantly while imports were essentially unchanged, showing the impact of the falling U.S. dollar.

ÂŠ InterVISTAS Consulting Inc.

QUEUING UP FOR U.S.-VISIT 2004 Additional line-ups at Airports and Seaports anticipated for new entry/exit procedures 12 November 2003 For many years, U.S. border agencies combated a significant problem of individuals with visa overstays and false identities. The Department of Homeland Security is responding to a congressional mandate for entry-exit tracking with U.S.-VISIT (United States Visitor and Immigrant Status Indicator Technology). In November, a pilot project will be tested at Atlanta Hartsfield airport for entry and exit procedures for citizens from countries other than the U.S. or Canada. By early 2004, 115 airports and 14 seaports will implement these procedures. In 2005/06, all other points of entry (land, rail) will be phased into U.S.VISIT. How will this impact the entry process? Foreigners entering the U.S., including Canadians with landed immigrant status, will be subject to biometric authentication upon presentation to a port of entry. The biometric will be used to authenticate the individual based upon a previous finger-scan provided during the visa application process. Solomon Wong Director, Security & Planning

What will exiting the U.S. involve? Foreigners and Canadian landed immigrants will be required to visit a Department of Homeland Security kiosk for automated document check and biometric scanning at the international airport/seaport.

Are Canadian Citizens exempt? Based upon an agreement reached at the end of October, U.S. Homeland Security Secretary Tom Ridge and Canadian Deputy Prime Minister John Manley announced Canadian citizens would be exempt from U.S. VISIT. Secretary Ridge however acknowledged that a congressional directive could reverse this exemption. Will the new processes impact throughput? Notwithstanding procedural changes as a result of the Atlanta pilot in November, it is anticipated that each step could add 60-90 seconds per transaction to the passenger journey. Based upon an estimated 23 million international visitors through US airports and seaports annually, this translates to over 1.1 million hours of additional processing time. The proposed processes for U.S.-VISIT therefore have significant potential to create long queues at already constrained exit and entry points at U.S. airports.

Page 15 November 2003

ÂŠ InterVISTAS Consulting Inc.

THE OTTAWA SCENE November 13, 2003

New Computer Reservation Regulations Announced. On October 28, Transport Minister David Collenette announced the publication of proposed amendments to the Canadian Computer Reservation Systems (CRS) Regulations for air travel in the Canada Gazette Part I. The proposed amendments are designed to reflect changes in the airline industry and the emergence of the Internet as a low-cost method of distribution. At the same time the proposed regulations would continue to protect the interests of air travelers and foster enhanced competition in the air industry. Canadian Transportation Agency Releases InterVISTAS Study November 6. In February 2003, the Canadian Transportation Agency awarded to InterVISTAS Consulting, a contract to study the airfare pricing situation in Atlantic Canada in order to supplement its own airline price monitoring activities. The study compared airfares on nine non-competitive routes in Atlantic Canada to airfares offered on similar routes within Canada on which there was competition.

Sam Barone Regional Vice President, Ottawa

On seven of the non-competitive routes, InterVISTAS' study indicates that airfares were generally more expensive and/or more restrictive than the corresponding airfares offered by the same carrier on similar competitive domestic routes. In addition, the study indicates that, on six of the non-competitive routes, the airfares offered at the low end of the range were not as deeply discounted as those offered on similar competitive domestic routes. In each case, the carrier whose airfares are in question is Air Canada. InterVISTAS' conclusions are not binding on the Canadian Transportation Agency. Pursuant to subsection 66(6) of the Canada Transportation Act, which was amended by Parliament in July 2000, the Agency may take remedial action if it finds, on its own motion, that passenger fares and cargo rates published or offered on routes within Canada where there is no, or very limited, competition are unreasonable, or that the range of fares or cargo rates offered is inadequate. As such, prior to taking any action, the Agency would undertake a more in-depth analysis of the airfares on the routes in question. Parliament Prorogued. On 12 Nov 2003, Parliament was prorogued. This means that all existing bills being considered by Parliament are terminated. Thus Bill C-26 (Amendments to the Canada Transportation Act) and C-27 (The Canada Airports Act) have “died on the order paper.” Note, however, that when the new session of parliament convenes on 12 January 2004, these bills could be reintroduced at exactly the same stage they were at in the legislative process. Both had passed first reading, with C-26 (but not C-27) under active consideration by the standing Committee on Transit. All committee memberships are cancelled by proroguing and must be constituted anew in the next session.

Page 16 November 2003

WASHINGTON REPORT 15 November 2003

Insurance Coverage Extended, Again. The DOT has authorised another 60-day extension of the aviation insurance. The extension period is from 12 October to 10 December 2003. Airport Access Test Program Begins. On October 16th, 2003, TSA announced that Unisys Corporation had been selected as the systems integrator for the Airport Access Control Pilot Program. The purpose of the program is to devise ways to tighten access to secure areas of airports by implementing new technologies such as retinal scans, facial recognition and next-generation surveillance cameras. It is estimated that at least 20 airports can participate in this program.

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

New Radar System in Use. FAA announced that the Airport Surveillance Radar-11 (ASR-11), the first all-digital airport radar system, is replacing older-generation analog radars. Benefits of the ASR-11 include improved digital aircraft and weather input that is required by new air traffic control systems. The first ASR-11 was implemented at Philadelphia International Airport. Department of Homeland Security (DHS) Tracking Flaws. On November 5 th, 2003, the House Subcommittee on Immigration, Border Security, and Claims reviewed the ability of DHS to effectively track overstay foreign visitors. According to DHS, the total population of resident overstay is 2.3 million. Due to unresolved weaknesses in the DHS system for tracking arrivals and departures, DHS has no accurate list for overstay visitors. However, DHS has two new tracking systems in place—the National Security Entry and Exist Registration System (NSEERS) and National Security Entry and Exit Registration System (US-VISIT). Shortfalls of the two systems include the fact that NSEERS does not include most visitors and the US-VISIT has not yet been implemented. ASIF – Feedback Needed: TSA is seeking feedback on changes to the way it sets the Aviation Security Infrastructure Fee (ASIF). The ASIF is imposed on airlines to pay for the services offered by TSA. The current ASIF is based on the airline’s 2000 security costs. TSA is considering basing the fee on the individual carrier’s market share or other similar factors. TSA has several reasons to adjust the ASIF, some of which include the following: • its lack of consideration for the economic hardship and difficulties faced by the aviation industry since September 11th; • its lack of consideration for any growth or decline in a carrier's business since 2000; • it provides an unfair advantage for new carriers when compared to existing carriers; • it discriminates against those smaller carriers who experienced higher costs for providing roughly the same services.

Page 17 November 2003

CARGO CAPERS 13 November 2003 Intermodal Cargo Transport – the Next Wave? Air-truck intermodal services are extremely well established, particularly in North America, where trucks benefit from a relatively well-advanced highway system. Many “air cargo services” are in fact now provided by truck rather than aircraft, making truck both a competitor and a collaborator with air transport. So is it reasonable to carry the concept one step further to incorporate air-rail intermodal services? Developments in Passenger Air-Rail Services. There are a number of initiatives underway around the world examining air-rail intermodality. Much of the focus is on passenger services, particularly in Europe, but also in the U.S. For example, IATA released the Air/Rail Intermodality Study earlier this year which found enthusiasm from passengers for the concept, but noted a number of problems, including the development of low-cost carrier services which compete both with existing air network carriers and high-speed rail. In the U.S., a joint Congressional hearing by the subcommittee on Aviation and the Subcommittee on Railroads strongly supported high-speed rail as a means to reduce airport congestion. Robert Andriulaiti s Director, Transportation &

Moving beyond talk and studies, there are already many examples of passenger rail services to airports, particularly in Europe. The International Air Rail Organization website lists “Airport Railways of the World” (at http://www.airportrailwaysoftheworld.com/arc_en.shtml) which shows what rail services are available at various airports in Europe, Asia, Australia, and the U.S.

Logistics Studies

Developments in Cargo Air Rail Services. The Pennsylvania DoT and U.S. DoT are sponsoring a study of an airport/rail station at Harrisburg that will have a cargo component as well as passenger. Next year’s 13th Annual International Air Rail Conference in Brussels will have cargo as a major theme. COACT is conducting research and development, and has plans for test trials, for the development of fast cargo trains. Beyond this, there are a number of air cargo airports that market rail access as one of their advantages. Fort Worth Alliance has one of the largest intermodal facilities in the U.S., serving air, truck and rail. Nashville, and Huntsville go one step further, marketing marine access as well as air, truck and rail. East Midlands Airport notes that “Royal Mail chose EMA as its major air/road/rail interchange hubs for its night mail operation.” CargoCity (Frankfurt) markets Rail AirCargo, a direct rail connection from CargoCity South to the Frankfurt-Mannheim extension. Closer to home, Hamilton International Airport markets air, highway, rail and marine access. This is all well and good, but… as a recent article in Air Cargo World noted “European airports say cargo rail feeder services are the answer to congestion in Europe, but what the trains lack are freight customers.” The article reviews initiatives at Frankfurt, Amsterdam, Paris, and Liége that came to naught. Plans still are on the shelf for future consideration, but there does not appear to be much happening at the moment. If air-rail cargo is making only limited headway in Europe, where road congestion is such an issue, is it reasonable for Canadian airports to plan for potential rail connections in the future?

Page 18 November 2003

Thoughts for consideration. There are a number of reasons that airport planners should consider the potential for having rail freight facilities on site: 1. Passenger considerations might play a role in some areas. Vancouver-Seattle, Calgary-Edmonton, and Windsor-Hamilton-Toronto-Montréal-Québec have been cited as possible high-speed rail services in the future. Now, such services would likely require dedicated track, but there still may be some synergies in the provision of right of way and access that might have some cargo spin-offs. 2. If air-sea can work, why can’t air-rail? Air-sea service from Asia to Europe via North America was developed as a niche market that enjoyed some considerable success. The Ministry of Construction and Transportation in South Korea recently announced a master plan for Incheon that contemplates the construction of harbour facilities within the airport. MASkargo has launched an airsea concept at Kuala Lumpur. If the idea of offering a service that combines speed with low costs works for air and sea, it could potentially work for air and rail. 3. Rail for rail’s sake. Even if air-rail transfers do not take place, FTZ/distribution activities that could be attracted to an airport site might also have need of rail access. Studies show transportation access as a key element in locational decision making. Logistics Today has developed a Logistics Quotient™ which evaluates how “logistics friendly” cities are. Of the 10 factors, four relate to road transportation, one to air, one to rail and one to marine. Thus the existence of a rail (or marine) facility could increase the attractiveness of the airport for distribution/value-added activity that could build up the critical mass needed for the development of a full-fledged aerotropolis. While likely to remain niche markets for the foreseeable future, airports might want to do what they can to keep the door open to air-rail and even air-sea services as an option for future growth.

Page 19 November 2003

ACCOUNTING FOR PFCS 13 November 2003 U.S. Accounting. The United States government allows airports to collect passenger facility charges (PFCs) as a means of funding certain types of capital projects. The way these fees are treated by accountants at the U.S. airports can differ from Canadian practice for Airport Improvement Fees (AIFs). Let’s suppose that a U.S. airport has a $300 million capital program spanning a three year construction period, and that the airport applied to the FAA for permission to charge a PFC and received approval. (Note that to be eligible to charge a PFC, the airport must apply to the FAA and receive its blessing for the capital program.) Now suppose that in Year 1, the PFC generated revenues of $75 million, and that the airport spent $100 million on the capital program. Here’s how a number of US airports do the accounting. The $75 million in Year 1 PFC revenue is offset against the $100 million Year 1 capital spending. Only the difference, $25 million, gets put onto the airport’s balance sheet as construction work in progress (a balance sheet asset). Michael Trethewa y Vice President & Chief Economist

Canada. In Canada, the airport would have put the full $100 million in construction work in progress on the balance sheet. It would have recorded $75 million in AIF revenue, but since it has no expenditures expensed are against it in Year 1, the $75 million in AIF revenue will result in a $75 million profit or contribution and this in turn would appear on the airport’s balance sheet in Year 1 as either a reserve fund or as retained earnings. Fees and Charges. Now move ahead to year 4 when the capital program is complete and the asset is put into use. In the U.S., the $25 million in construction work in progress from Year 1 is now converted into a regular long term asset. It will be depreciated and a portion of the $25 million will be expensed (as depreciation) in Year 4. If the asset has a 25 year life, then $1 million will be recognised as depreciation expense in Year 4, and landing (or other) fees will be raised to recover the $1 million in depreciation. Variations. There are differences in the U.S. At least one airport puts the full $100 million on the balance sheet. Then each year it looks at cumulative capital expenditures, subtracts off cumulative AIF, and only the balance is considered for fees and charges. The balance could be depreciated and the annual amount, along with interest expenses, used in setting fees for the year. An alternative is to use a cash basis where the annual interest expense plus any actual debt retirement is used in setting the fees. There are some timing differences in the different methods used in the U.S., but eventually they get to similar results where PFC revenues are netted off against capital expenditures prior to setting charges. 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 November 2003