CAIR Issue No.23 - November 2004 by Leah Dupuis

INTERVISTAS MARKET INTELLIGENCE REPORT

AIR CANADA’S INTERNATIONAL SEAT CAPACITY 12 November 2004

On 30 September 2004, Air Canada completed its restructuring and emerged from bankruptcy protection. As part of its new business plan, the carrier stated that it would place a stronger emphasis on international services. However, international overseas seat capacity as a share of Air Canada’s total seat capacity remains largely unchanged. Current OAG data shows that the volume of seat capacity offered by Air Canada has declined in all sectors including the domestic, transborder, and international markets.

Air Canada’s Total Seat Capacity. Air Canada’s total seat capacity is Eugene Chu Project Analyst

declining by approximately 7.5% to 7.6 million seats in the three months ending 31 January 2005 compared to the same period last year. As shown in Table 1, seat capacity has declined in nearly all markets, with the exception of Asia (which was affected by SARS in 2003) and Latin America.

International Seat Capacity Share. Air Canada’s seat capacity shares, by market, are shown in

Table 1. The data show that the carrier’s international overseas capacity as a percentage of the total in the three months ending 31 January 2005 is nearly identical to the same period last year. International overseas seat capacity continues to constitute about 10% of the total seats offered by Air Canada. Table 1: Air Canada’s Seat Capacity (Non-Stop Departures from Canada) Total Volume of Seat Capacity Destination

Share of Total Seat Capacity

Three Months Three Months Three Months Three Months Change Ending Ending Ending Ending January 2005 January 2004 January 2005 January 2004

Canada

5,470,712

5,917,510

-446,798

72%

U.S. Transborder

1,351,427

1,521,065

-169,638

18%

19%

Asia

200,071

185,264

14,807

2.6%

2.3%

Europe

320,712

352,644

-31,932

4.2%

4.3%

Latin America

251,340

236,648

14,692

3.3%

2.9%

Middle East

12,508

13,992

-1,484

0.2%

784,631

788,548

-3,917

10%

9.7%

7,606,770

8,227,123

-620,353

100%

International Overseas Grand Total

Source: OAG Max November 2003 and 2004 disk. Notes: Includes Air Canada mainline and Jazz, Zip, Tango. Numbers may not add up due to rounding.

Page 1 November 2004

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THE RISE OF U.S. REGIONAL CARRIERS November 2004

Fastest Growing Market Segment: The regional air carriers have been one of the fastest

growing segments in the U.S. airline market since deregulation in 1978. These carriers have not only grown, but the nature of the markets they serve has changed dramatically. With the introduction of regional jets into the regional carrier fleets in large numbers during the 1990s, these carriers are offering a level of service that can compete with trunk carriers, and can offer service in longer haul markets.

What is a Regional Carrier? According to the Federal Aviation Administration (FAA), a regional

Project Analyst

Industry Consolidation: The

number of regional carriers has declined since 1981. In the 1960s, the U.S. regional carrier industry was fragmented and made up of small independently owned operations. Today, the industry is consolidating and is characterised with large airlines owning many regional carriers. As shown, there were 250 regional carriers in 1981, and only 75 carriers in 2003. The top 10 regionals now represent 84% of regional carrier enplanements in 2003.

Number of U.S. Regional Carriers (1981 & 2003) Number of U.S. Regional Carriers

Jennifer Tso

carrier is a carrier that: • Flies a majority of their available seat miles (ASMs) using aircraft having 70 seats or less. • Has regularly scheduled passenger service. • Has an objective to provide connecting service for its codeshare partners.

300 250 250 200 150 75 100 50 0 1981

2003 Year

Source: FAA Aerospace Forecasts FY 2004-2015 (March 2004).

Growth and Share of the Industry: The Bureau of Transportation Statistics reports that

passenger volumes on regional carriers grew 129% from 2002 to 2003, while the number of passengers travelling on major carriers fell by 3%. In absolute numbers, the majors lost 14 million passengers, while the regionals gained 17 million on a base that was only 14 million a year earlier.

Carrier Type Regional Carriers (including Large, Medium, Commuter, Small Certified) National Carriers (including low cost carriers, AirTran, Frontier, JetBlue

Passengers (millions) 2002 2003 14 31 80 111

% Change +129% +38%

and Spirit)

Major Carriers (including Southwest Airlines) Total Carriers

460 554

446 588

-3% +6%

Source: Bureau of Transportation Statistics (T-100 Domestic Market Data).

Page 2 November 2004

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THE RISE OF U.S. REGIONAL CARRIERS – CON’T Markets Served: Regional carriers fly predominantly point-to point routes, allowing passengers to by-pass crowded hubs. As of 1 January 2004, regional airlines served 654 U.S. commercial airline airports, 479 airports of which are served exclusively by regional airlines.1 Regional carriers also target business customers - according to the Regional Carrier Association, business travellers represent 65% of regional carrier passengers.2

Financially Sound: Despite

Domestic Operating Revenues and Expenses by Carrier Group

recent difficulties in the airline industry, regional carriers have 16 been able to perform better 14 Domestic financially than their larger Operating 12 Revenue and 10 counterparts. Regional carriers Expenses Per 8 Available have a higher revenue per 6 Seat Mile passenger mile than network (Cents Per 4 Mile) and low-cost carriers and their 2 0 revenues exceed operating Regionals Network Low-Cost costs. This is partly due to the Group way regional carriers are Operating Revenue Operating Expense compensated by the major carriers, typically with payments Source: Bureau of Transportation Statistics Second Quarter 2004 Press Release. DOT Form 41; Schedule P1.2. T100; T2 Data. for merely operating flights, with the major carrier assuming risk for sale of seats to passengers. As well, in 2003 regional carriers exhibited higher operating margins than either the low-cost and network carriers. Rank 1 2 3

Group Regionals Low-Cost Network

Domestic Operating Profit/Loss Margin 9.0% 7.2% -2.8%

Source: Bureau of Transportation Statistics Second Quarter 2004 Press Release. DOT Form 41; Schedule P1.2.

1 2

Regional Airline Association (www.raa.org) Regional Airline Association (www.raa.org)

Page 3 November 2004

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

Air Carrier

OTHER CARRIERS: LOAD FACTORS CanJet: not reported

Revenue Passenger Kilometres

Capacity

% Change over 2003

% Change from 2002

% Change over 2003

% Change from 2002

Change over 2003

Change from 2002

Air Canada3

+7.7%

-4.0%

+1.5%

-8.1%

+4.5 pts (to 77.7%)

+3.3 pts

Domestic (Mainline)

+1.7%

-2.8%

-8.3%

-10.6%

+7.8 pts

+6.4 pts

Jazz

+4.3%

+6.7%

-17.1%

-14.2%

+14.9 pts

+14.2 pts

International & Charter

+10.8%

-4.6%

+6.7%

-6.8%

+2.9 pts

+1.8 pts

WestJet

+24.0%

+80.4%

+31.5%

+88.5%

Jetsgo

+39.7%

+440%

+38.5%

+455%

Analysis: •

•

Load Factor

Available Seat Kilometres

Air Canada posted domestic and system load factors of 80% and 78% respectively in October 2004, both record highs for the month. Domestic capacity continues to decline, reflecting the elimination of its B737 fleet and the redeployment of some aircraft to the Latin America market. Domestic traffic and capacity are still below 2002 levels. Following a previous pattern, Air Canada’s international traffic and capacity continues to increase as new services are added to Latin America. International traffic and capacity are still below 2002 levels. WestJet’s addition of capacity was greater than its rate of traffic growth in October, resulting in a depressed load factor. The carrier commenced services to Fort Lauderdale, Phoenix, Orlando, San Franciso, and Tampa in October 2004, increasing both traffic and capacity.

-4.1 pts (to 68.7%) +0.6 pts (to 66.2%)

-3.1 pts -1.9 pts

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

Jazz data is not included in this graph

Oct- Nov Dec Jan- Feb 03 04

Mar

April May

Dom RPK

Jun July

Aug Sep

Oct

Aug Sep

Oct

Jun July Aug Sep

Oct

Dom ASK

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

Oct- Nov 03

Dec

Jan- Feb Mar April May 04

Int'l RPK

Jun

July

Int'l ASK

WestJet WestJet 60% 50% 40% 30% 20% 10% 0% Oct- Nov Dec Jan- Feb 03 04

Mar

RPK

April May

ASK

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

Page 4 November 2004

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

Notes:

Load Factor

Traffic ( RPMs – millions)

(ASMs – millions)

74.9%

10,716

14,305

á 4.7 pts

á 9.1%

á 2.3%

69.6%

595

855

á 5.3pts

á 39.7%

á 29.0%

N/A

78.9%

5,517

6,996

á 4.8 pts

á 13.7%

á 6.7%

74.1%

9,274

12,511

á 1.2 pts

á 8.3%

á 6.5%

83.1%

1,397

1,682

â 2.4 pts

á 33.7%

á 37.6%

80.3%

6,146

7,654

á 1.8 pts

á 8.4%

á 6.0%

66.6%

4,504

6,760

á 3.0 pts

á 13.5%

á 8.4%

77.8%

9,554

12,286

á 1.2 pts

á 7.2%

á 5.5%

75.6%

3,389

4,484

á 2.9 pts

á 5.1%

á 1.1%

Mainline

Load factor includes scheduled service only

Capacity

Sources: Carrier traffic reports.

Page 5 November 2004

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

September

-5.9%

-3.0%

MontréalTrudeau +2.3%

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

-1.8%

+8.6%

+1.6%

+1.5%

-0.6%

+10.8%

-0.7%

-2.4%

-0.2%

St. John’s +12.3%

3rd Quarter

-6.6%

-2.8%

+2.4%

+1.6%

+3.4%

-0.9%

+1.8%

+3.3%

+10.8%

+1.7%

-2.0%

+0.7%

+19.0%

October

-2.3%

-3.1%

+2.7%

-0.7%

+10.4%

+1.4%

+7.4%

+2.5%

+15.4%

+1.1%

-1.7%

-1.3%

+9.4%

November

+0.1%

+2.2%

+9.0%

+8.0%

+7.2%

+6.5%

+5.8%

-0.05%

+13.7%

+9.6%

-0.3%

+19.8%

+9.4%

December

+1.9%

+2.8%

+8.5%

+5.4%

+4.9%

+6.0%

+2.9%

+16.1%

+9.1%

+0.8%

+2.0%

+13.9%

4th Quarter

-0.1%

+0.5%

+6.4%

+3.9%

+7.4%

+4.5%

+6.4%

+1.9%

+15.6%

+6.6%

-0.4%

+6.33%

+10.8%

Full Year

-4.6%

-3.7%

+1.3%

+2.7%

+2.9%

+1.3%

+5.1%

+4.2%

+7.3%

+2.9%

-0.5%

+2.4%

+9.4%

January

+2.3%

+1.5%

+8.6%

+3.9%

+7.7%

+3.5%

+6.4%

+3.2%

+12.4%

+5.9%

-2.2%

+8.3%

+12.8%

February

+8.6%

+7.9%

+18.0%

+5.3%

+10.7%

+13.9%

+11.7%

+5.6%

+11.4%

+11.6%

+7.8%

+2.8%

+19.8%

March

+9.3%

+5.2%

+16.4%

+2.0%

+8.0%

+11.4%

+9.0%

+8.2%

+2.6%

-2.4%

+3.9%

+21.3%

+6.8%

+4.8%

14.4%

+3.7%

+8.6%

+9.7%

+9.9%

+6.1%

+10.5%

+ 6.5%

+1.1%

+5.0%

+18.0%

April

+30.6%

+20.5%

+29.5%

+11.5%

+8.6%

+20.8%

+11.3%

+16.9%

+12.7%

-0.3%

+10.9%

+2.6%

+20.1%

May

+30.8%

+20.8%

+23.5%

+5.5%

+7.5%

+7.6%

+9.1%

+19.4%

+8.0%

-1.3%

-0.3%

-5.5%

+15.2%

1st

Quarter

2004

June

+18.5%

+16.1%

+16.6%

+8.4%

+2.8%

+12.1%

+9.8%

+7.8%

+8.6%

+3.0%

+1.7%

-4.3%

+16.0%

2nd Quarter

+26.2%

+18.8%

+22.8%

+8.4%

+6.2%

+13.2%

+9.7%

+14.5%

+9.7%

+0.5%

+3.8%

-2.5%

+16.9%

July

+17.2%

+10.4%

+17.2%

+5.0%

+0.8%

+5.7%

+9.0%

+10.5%

+4.7%

-0.5%

+5.5%

+1.4%

+10.6%

August

+16.0%

+4.9%

+16.4%

+1.9%

+2.2%

+6.2%

+7.9%

+6.9%*

-2.0%

-5.9%

+5.4%

+1.5%

+10.1%

September

+16.1%

+11.5%

+13.3%

+13.0%

+6.3%

+7.9%

+9.4%

+8.6%

+8.3%

+12.1%

+5.3%

-0.6%

+13.4%

3rd

+16.5%

+8.7%

+16.7%

+6.2%

+2.9%

+6.6%

+8.4%

+8.6%

+3.3%

+1.1%

+5.4%

+0.8%

+11.2%

Quarter

Source: Transport Canada Page 6 November 2004

CANADIAN A IRPORTS

2003

Toronto

NEWS ARTICLES AIR CANADA UPDATE FUEL PRICES 5 November 2004 SPOT OIL PRICES DROP BUT FUTURES PRICES INCREASE Crude Oil Prices: Spot – US $49.61 (up 7% from October) Futures • 6 month - $48.67 (April 2005 delivery) • 12 month - $46.09 (October 2005 delivery) • 2 year - $42.86 (October 2006 delivery) • 5 year - $38.94 (December 2009 delivery)

Ju l Au y Se gust pte mb er Oc tob No er vem ber

Jun e

Ap ril May

No vem be r -0 De 3 cem Jan ber ua ry-0 Fe 4 br ua ry Ma rch

US$ per Barrel

Monthly Spot Prices $60.00 $55.00 $50.00 $45.00 $40.00 $35.00 $30.00 $25.00 $20.00 $15.00

ACE AVIATION HOLDINGS INC. REPORTS $243 MILLION OPERATING INCOME BEFORE REORGANISATION AND RESTRUCTURING ITEMS

Argentine capital to six flights per week (including three flights per week via Santiago, Chile). Air Canada’s service between Toronto and Sao Paulo, Brazil will be increased from six flights per week to daily service beginning 1 December 2004.

ACE Aviation Holdings Inc., parent company of Air Canada, reported operating income of $243 million before reorganisation and restructuring items in the third quarter of 2004. When these items are included, net loss was $81 million. Operating revenues increased by 12%, and the carrier reported traffic recovery in all markets (2003 was affected by SARS), with the exception of the U.S. transborder market. Operating expenses increased by $42 million due to higher oil prices. ACE had a consolidated cash balance of $1.9 billion as of 9 November 2004.

AIR CANADA TO ADD SERVICE BETWEEN SYDNEY AND VANCOUVER

AIR CANADA SIMPLIFIES FARE STRUCTURE

OTHER CANADIAN AIRLINES

Air Canada has simplified its fare structure with the elimination of its Econo fare category, and the removal of minimum stay and round trip requirements on all fares for flights within North America. The carrier now has five fare categories that offer different levels of flexibility and benefits including Tango, Fun, Latitude, Freedom, and Executive.

AIR CANADA INTRODUCES SUN PASS

Air Canada has introduced the Sun Pass, a package of multi-trip passes consisting of six one-way flight credits for flights from Toronto or Montreal to sun destinations in the U.S. Destinations include Fort Lauderdale, Las Vegas, Miami, Orlando, Phoenix, Tampa, and also Fort Myers and West Palm Beach, which are seasonal routes.

AIR CANADA EXPANDS SERVICE TO SOUTH AMERICA

Beginning 16 December 2004, Air Canada will add one daily flight between Sydney and Vancouver with A340-300 aircraft. The northbound flight from Australia will be non-stop, while the southbound flight will make a stop in Honolulu for refuelling. Customers can stay onboard the southbound flight, eliminating the need for U.S. customs clearance. Air Canada will maintain its existing daily B767-300ER flight between Vancouver and Sydney via Honolulu.

WESTJET REPORTS 31ST CONSECUTIVE QUARTER OF PROFITABILITY

WestJet reported net earnings of $21 million in the third quarter of this year on revenue of $310 million. Revenue increased compared to the third quarter of 2003, but profit declined by 35% year-to-year. Yield decreased by 4.0% to about 17 cents. WestJet attributed the decrease in profitability to high fuel prices and lower yields.

WESTJET’S WINTER SCHEDULE INCLUDES 24 ADDITIONAL WEEKLY FLIGHTS

WestJet’s winter schedule, effective 19 December 2004, includes 24 additional non-stop flights per week. This includes an increase in the number of frequencies from Winnipeg to Toronto, Vancouver and Ottawa. With these additions, WestJet will be operating 1,800 weekly departures on 62 city pairs.

Air Canada has launched services to Peru with the introduction of three times weekly non-stop service between Toronto and Lima. Non-stop services between Toronto and Buenos Aires has also been launched, increasing service to the Page 7 November 2004

NEWS ARTICLES OTHER CANADIAN AIRLINES –

U.S. AND INTERNATIONAL AIRLINES

WESTJET STARTS NEW TRANSBORDER SERVICES

U.S. AIRWAYS WARNS OF POSSIBLE LIQUIDATION, MESA EVALUATING DIFFERENT OPTIONS

CON’T

WestJet has launched four times weekly nonstop services from Toronto to each of Tampa and Fort Lauderdale. Starting 19 December 2004, service between Vancouver and Los Angeles will begin, along with Calgary-Palm Springs service starting 7 January 2005.

CANJET TO LAUNCH MONCTON-NEW YORK SERVICE

CanJet Airlines will introduce daily weekday services between Moncton, New Brunswick and New York LaGuardia via Toronto beginning 29 November 2004.

CANJET TO OFFER SEASONAL OTTAWA-ORLANDO SERVICE

CanJet Airlines will launch services between Ottawa and Orlando from 8 February 2005 to 25 May 2005. The service will be operated once per week via Hamilton.

CANJET TO REPLACE FOUR AIRCRAFT WITH B737-500S

CanJet Airlines will replace four of its B737-200 aircraft with four B737-500s, with delivery of all aircraft scheduled to be complete before the summer of 2005.

JETSGO TO LAUNCH QUEBEC CITYFORT LAUDERDALE SERVICE

Beginning 19 December 2004, Jetsgo will offer once per week service between Quebec City and Fort Lauderdale with MD-83 aircraft. The seasonal service will be operated until the end of April 2005.

Page 8 November 2004

U.S. Airways stated in a recent bankruptcy court filing that the carrier may have to liquidate unless the court approves its motion to impose pay cuts on three of its unions, cut retiree benefits, and end pension plans. The carrier warned of low cash levels and a projected full year loss of over $700 million in 2004. Meanwhile, Mesa Airlines, which operates 73 jets as United Express, is evaluating different options in the event that U.S. Airways is liquidated. This includes parking all United Express jets, leasing the aircraft to other regional carriers, or redeploying the jets in existing partnerships, flying the aircraft for new partners, or using the jets in an independent operation.

ATA AIRLINES FILES FOR BANKRUPTCY PROTECTION

On 26 October 2004, ATA Airlines announced that it had filed for Chapter 11 bankruptcy protection. AirTran plans to assume ATA’s gate leases at Chicago Midway, and also take over the carrier’s slots at New York LaGuardia, and Washington National. The gates and slots to be transferred are worth approximately US$87.5 million, but are still subject to approval by the City of Chicago and the bankruptcy court. ATA’s marketing agreement with AirTran includes code-sharing and co-operation on frequent flyer programs. America West has indicated it may bid for the entire airline, which could pre-empt the sale of the slots to AirTran.

NEWS ARTICLES U.S. AND INTERNATIONAL AIRLINES – CON’T OLYMPIC AIRWAYS PLACED UNDER BANKRUPTCY PROTECTION

The Greek government has passed a bill to protect Olympic Airways from creditors until 28 February 2005. The government is trying to privatise the national carrier, which is losing more than EUR100 million (CDN$155 million) annually.

AIR BERLIN PLACES ORDER FOR 70 A320S

Air Berlin has placed a firm order with Airbus for 70 A320s with options for 40 more aircraft. Ten of the aircraft will be allocated to Niki, an Austrian low cost carrier in which Air Berlin holds a 25% stake. Delivery is scheduled to begin at the end of 2005 and run through to 2011.

IATA REPORTS TRAFFIC GROWTH BUT PREDICTS HIGH INDUSTRY LOSSES Based on statistics published by the International Air Transport Association (IATA), international scheduled passenger traffic (RPK) and cargo traffic (FTK) increased by approximately 18% and 14% year-to-year respectively in the first nine months of 2004. However, IATA predicts that industry losses may exceed the US$4.0 billion previously forecast if current fuel prices persist. In 2003, air traffic was affected by a series of market shocks, including SARS, terrorism and the war in Iraq.

Page 9 November 2004

AIRPORTS TRANSPORT CANADA AND CATSA ISSUES BIOMETRIC ID CARDS AT FOUR AIRPORTS Transport Canada and the Canadian Air Transport Security Authority (CATSA) will use biometric ID cards to improve the airport restricted area pass system at four airports including Vancouver International, Kelowna International, Montreal Trudeau, and Charlottetown Airport. The cards will eventually be used at 29 major Canadian airports.

AIRCRAFT MANUFACTURERS OTTAWA PROVIDES LOAN GUARANTEE FOR AIR CANADA’S PURCHASE OF BOMBARDIER AIRCRAFT

The Government of Canada has approved a loan guarantee of up to $1.5 billion for Air Canada’s purchase of Bombardier regional jets through Industry Canada. If Air Canada defaults on the purchase, the government will have a secured claim against the aircraft. Air Canada has an order for 30 regional jets from Bombardier, with options for 15 aircraft.

NEWS ARTICLES CARGO BOEING OFFERING FREIGHTER VERSION OF B777

Boeing is in discussions with several customers about a freighter based on the passenger version of the B777-200LR. The freighter will have a payload capacity of about 100 tonnes and a range of 5,200 nm (9,600 km). Entry into service is projected to be in 2009.

AIR CANADA BEGINS TORONTOFRANKFURT FREIGHTER SERVICE; EXPANDS CARGO CAPACITY IN WESTERN CANADA

Air Canada Cargo has introduced a freighter service between Frankfurt and Toronto. The new MD-11 service will fly five times weekly through a leasing agreement with Gemini Air Cargo. Air Canada has also entered an agreement with Cargojet Airways to use its B727 cargo aircraft from Toronto to Vancouver via Calgary four times weekly.

PRIMARIS AIRLINES TO PURCHASE NEW BOEING AIRCRAFT

Primaris Airlines placed a firm order for 20 B737800s for delivery between 2007 and 2010 and 20 B7E7-8s for delivery between 2010 and 2013. The carrier plans to use the B737s on both domestic and transatlantic routes, citing the ability of the 800s to fly New York – Frankfurt using belly tanks. The B7E7-8 was ordered in a 150-passenger configuration and has a range of 9,200 nautical miles.

LUFTHANSA CARGO AND SHENZHEN AIRLINES TO OPERATE JOINT CARGO CARRIER IN CHINA

Lufthansa Cargo and Shenzhen Airlines will be partnering with DEG, a German development bank, to create Jade Cargo International. The new carrier will be 51% owned by Shenzhen Airlines. Lufthansa Cargo will own 25% and DEG will 24%. Jade Cargo will begin operations in February 2005 and will be based in Shenzhen, China.

ASIANA CARGO TO BEGIN SERVICE TO CALGARY

On 3 November 2004, Asiana Cargo began its first scheduled freighter service from Calgary to Seoul. The thrice-weekly B747-400 service will fly non-stop from Calgary International Airport to Incheon International Airport. The return flight will operate via Chicago.

KOREAN AIR CARGO LAUNCHES SERVICE TO OSLO AND OSAKA

Korean Air Cargo launched its second Oslo-Seoul freighter service and its fourth Seoul-Osaka freighter service. The new service uses a B747-400 freighter and will depart Seoul every Friday, stop over at Anchorage and Chicago, then cross the Atlantic and arrive at Oslo on the same day. The same freighter will return to Seoul on Saturday and depart for Osaka on Sunday and arrive on the same day.

MARTINAIR CARGO, TAMPA CARGO JOIN GF-X EXCHANGE

Martinair Cargo and Tampa Cargo have joined GF-X Exchange, an airfreight reservations system. Implementation has already begun and both carriers expect to receive bookings from GF-X Exchange early next year.

Page 10 November 2004

NEWS ARTICLES CARGO – CON’T FEDEX INCREASES TRANSATLANTIC CAPACITY

Beginning March 2005, FedEx will be adding five non-stop flights per week from Cologne to Memphis, using MD11s. This brings total FedEx flights between Europe and the U.S. to 28 per week.

FEDEX TO BUY JETS FROM DELTA AIR LINES

FedEx has agreed to purchase eight MD-11 passenger aircraft from Delta Air Lines. FedEx is expected to convert the aircraft to freighters and have them in service by 2007.

DHL CANCELS PLANS FOR INTERCONTINENTAL HUB AT BRUSSELS AIRPORT, SELECTS LEIPZIG INSTEAD DHL has cancelled its plans to set up an intercontinental hub at Brussels National Airport. DHL and the Belgian government were unable to resolve disputes regarding noise levels and the use of MD-11 aircraft. Brussels will remain a regional hub. DHL has selected Leipzig Airport as its new hub with operations expected to begin in 2008.

DHL OPENS MINNEAPOLIS HUB

DHL has opened a US$3.0 million regional sort centre in Minneapolis. This is the seventh regional sort centre to be added to the DHL network, and is part of its US$1.2 billion expansion program announced in June 2004. Other U.S. regional sort centres have been opened this year include Baton Rouge, Denver, Erie, Memphis, Phoenix, and Salt Lake City.

PEOPLE NEW EXECUTIVE VP, MARKETING & SALES AT WESTJET WestJet has hired Sean Durfy as its new Executive Vice President, Marketing & Sales. Page 11 November 2004

Durfy was previously Vice President of ENMAX Corporation, and President and COO of ENMAX Energy Corporation.

NORTHWEST AIRLINES NAMES NEW EXECUTIVE VP

Northwest Airlines named Phil Haan Executive Vice President of International Alliances and IT. Haan will also be Chairman of Northwest Airlines Cargo.

TRANSAT A.T. INC APPOINTS GENERAL MANAGER OF LOOK VOYAGES Olivier Kervella has been appointed General Manager of Transat A.T. Inc.’s French subsidiary Look Voyages.

APPOINTMENTS TO THE HALIFAX AND THUNDER BAY PORT AUTHORITIES

Judy A. Steele has been appointed to the Board of Directors of the Halifax Port Authority. Robert J. Patterson has been appointed to the Board of Directors of the Thunder Bay Port Authority.

AEROPORTS DE MONTREAL ANNOUNCES NEW MEMBER OF THE BOARD OF DIRECTORS

Benoit Labonté has been appointed to Aéroports de Montréal’s Board of Directors. Labonté has been President and CEO of the Board of Trade of Metropolitan Montréal since April 2002. He is replacing Gilles Labbé who has completed his term.

AER LINGUS CEO WALSH RESIGNS ALONG WITH COO AND CFO

Aer Lingus announced that Chief Executive Officer Willie Walsh has resigned, along with Chief Operations Officer Seamus Kearney and Chief Financial Officer Brian Dunne, effective May 2005. Replacements have not been named.

NEWS ARTICLES GOVERNMENT AND REGULATORY FAA ALLOWS SOME AIRLINES TO CARRY SMALLER FUEL RESERVES

Due to high fuel costs, the U.S. Federal Aviation Administration (FAA) will allow some air carriers to reduce fuel reserves on international flights by up to 10 percent to decrease weight and cut costs. So far, American Airlines and Continental Airlines are the only two carriers that have been granted the right to fly with less fuel.

U.S. DEPARTMENT OF TRANSPORTATION SPENDS $20 MILLION FOR AIRPORTS DAMAGED BY HURRICANES

The U.S. federal government will spend US$20.5 million to repair 71 airports along the east coast that were damaged by hurricanes. Airports in Alabama, Florida, Kentucky, Mississippi, North Carolina, Pennsylvania, West Virginia, and Puerto Rico will receive funding. An additional 14 airports will receive another US$4.1 million in funding within the next few weeks.

INDIA TO REVIEW FOREIGN OWNERSHIP INVESTMENTS

India may reconsider their policy of barring foreign airlines from investing in local carriers. However, Indian Aviation Minister, Praful Patel, said the ministry’s first priority is to strengthen India’s carriers. Currently only foreign individuals or businesses can invest in Indian airlines, but not foreign airlines.

CANADA RELEASES SEIZED AN-124

Canada has released an AN-124 freighter aircraft from the Ukraine. The freighter was seized on 2 July 2003 because of a US$38 million debt that the Ukraine State Property Fund owed TMR Energy Ltd., a Canadian based company officially registered in Cyprus. The

Page 12 November 2004

aircraft was released after the Ukraine appealed the case citing that the AN-124 was a military aircraft, and Canadian law protects the property of foreign states.

U.S. NO-FLY LIST CHALLENGED

The American Civil Liberties Union (ACLU) has filed a lawsuit challenging the U.S. government’s “no-fly” list that identifies people who pose a threat to air travel and prevents them from travelling to and within the U.S. The ACLU states the “no-fly” list violates a person’s constitutional rights to freedom from unreasonable search and seizure.

TRANSPORT MINISTER REQUESTS REVIEW OF AIR INDUSTRY ECONOMIC REGULATION

The Parliament's Standing Committee on Transport (SCOT) has been asked by Transport Minister Jean-C. Lapierre to conduct a review to determine whether Canada should further liberalise its approach to the economic regulation of the air industry. SCOT has been issued a guidance document to direct its review with questions on whether or not Canada should reduce or lift restrictions on foreign ownership of Canadian air carriers, whether Canada should seek Open Skies or bilateral agreements with the U.S. and other countries, and whether cargo and passenger services should be treated the same in bilateral negotiations.

CANADIAN AIR CARRIERS COMMIT TO GREENHOUSE GAS REDUCTIONS OUTLINED IN KYOTO ACCORD

The Air Transport Association of Canada announced that Canadian carriers will strive to reduce greenhouse gas (GHG) emissions by an average of 1.1% per year as outlined in the Kyoto Accord. By 2012, the carriers would have reduced GHG emissions by 24% from the baseline year (1990), burning 1.1 billion fewer litres of fuel.

THE WASHINGTON REPORT 12 November 2004

Machine-Readable Passport Requirements Now In Effect for Visa Waiver Program Visitors

Charles Chambers Senior Vice President InterVISTAS-ga 2 Consulting Inc. Washington, D.C.

Starting 26 October 2004, Customs and Border Protection (CBP) requires that any alien requesting admission to the United States under the Visa Waiver Program (VWP) is required to have a machine-readable passport (MRP). To ease the transition to the new requirements, from 26 October to 25 April 2005 the CBP will not impose a fine on carriers for bringing to the U.S. any alien who is a national of any one of the 22 designated countries applying for admission under the VWP without an MRP. The 22 designated VWP countries are: Australia, Austria, Denmark, Finland, France, Germany, Iceland, Ireland, Italy, Japan, Luxembourg, Monaco, the Netherlands, New Zealand, Norway, Portugal, San Marino, Singapore, Spain, Sweden, Switzerland, and the United Kingdom.

Personnel Changes in Key Aviation Committees Some changes in the leadership of aviation-related committees have already occurred following the October 19th re-election of George W. Bush. Senator Ted Stevens (AK) replaces John McCain as Chairman of the Senate Commerce, Science and Transportation Committee following McCain’s completion of his 6-year limit at the post. The Commerce Committee’s top Democrat Ernest Hollings did not seek re-election and will be replaced by Senator Daniel Inouye (HI). It is not yet known who will replace Representative Bill Lipinski, who did not seek re-election, as the top Democrat on the House Aviation Subcommittee. Separately, Department of Transportation (DOT) Secretary Norman Mineta named three new members to the FAA Management Advisory Council (MAC) which advises on matters of policy, budget and regulations. The new members are Charles Bolden Jr., Tech Trans International; Russell Meyer Jr., Cessna Aircraft; and Philip Trenary, Pinnacle Airlines.

FAA Rejects Request to Expand Airport Revenue Use for Carrier Subsidies On 19 October, the Federal Aviation Administration issued notice that it was denying the request by Sarasota-Manatee Airport Authority to allow use of airport revenue to directly subsidise air carrier operations. While airports generally supported the petition, many expressed concern about unforeseen consequences which could prove to be detrimental, such as airports bidding for airline service or airlines demanding subsidies to continue operating in the market. Non-airport entities opposing the petition expressed concern that using airport revenues to subsidise air services would make fewer funds available to meet other airport needs, or that aeronautical charges would have to be raised to maintain a self-sustaining rate structure.

European Bilateral Matters The U.S. and the European Commission (E.C.) met on 20 October to discuss where they stand in continuing talks on an Open Skies agreement. Although the two sides did not set a date to resume negotiations, they did discuss several issues, including safety, security, competition, subsidies, environment, airline ownership and control, facilitation, and labour laws. The E.C. reiterated that it has sent letters to its Member States about agreements with the U.S., apparently as a warning to countries like Spain that have been meeting with the U.S. These agreements are infractions of European Union law; Member States are not free to negotiate with the U.S. on areas where the E.C. has competence. Page 13 November 2004

THE OTTAWA REPORT November 2004

Lapierre Discusses Liberalising Canadian Air Travel and other Aviation-related Initiatives

Sam Barone Regional Vice President Ottawa, ON

Transport Minister Jean Lapierre announced plans to examine the liberalisation of Canada’s air policies at the recent Canadian Airline Investment Conference in Toronto. Lapierre suggested re-examining foreign ownership restrictions for Canadian air carriers. He also said it is time to consider cabotage between Canada and the U.S. The current open-skies agreement between Canada and the U.S. (concluded in 1995) only allows carriers to fly transborder routes. The Minister added that airline liberalisation has to be re-examined on three fronts – domestic, transborder and international. While Ministers Collenette and Valeri did not commit Canada to discussions with the European Union, Minister Lapierre acknowledged that Canada has to face the reality of a rapidly changing airline industry at home and abroad. To this end, the Minister stated that “the Europeans are making us think about regional approaches to aviation”. This may open the door to Canada approaching the U.S. and even Mexico, to perhaps jointly negotiate a new multilateral air services agreement between the NAFTA partners and the EU. In addition, the Minister, who has been consulting widely with stakeholders across Canada, stated that the initiatives of the last government have been overtaken by events. For example, Canada no longer needs the intrusive measures affecting airlines in the proposed changes to the Canada Transportation Act since shifts in market share have made them inappropriate. As part of the speech the Minister may also consider making air travel security more of public good as many stakeholders and their customers are bearing the costs of new security measures. While other modes and economic sectors also share the security burden with government, the playing field is not even. Lapierre also discussed other air priorities such as the need to reach a decision on Canada’s current airport rent policy and finding ways to improve transportation linkages to Canadian airports. Of significance is that the Minister wants to ensure a “fine-tuning of governance mechanisms” when it comes to Canadian airports. This will likely result in the tabling of an amended Canada Airports Act that links governance to airport rents.

Nav Canada Completes its Level of Service Review Nav Canada has completed its Level of Service Review that examines its various services. Until now, Nav Canada had not performed a complete review of its operations since becoming the owner and operator of the Air Navigation System (ANS) in 1996. The Review includes proposed changes in airport control and advisory services, weather services, navigational aids, airways, instrument approach procedures and emergency navigation assistance services. The implementation of many of these changes is pending a safety review by Transport Canada.

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CBSA EXPANDS SECURITY ROLE 15 November 2004

Solomon Wong Director, Security & Planning

Key Milestones in CBSA History

The Canada Border Services Agency (CBSA) moved into a new phase of evolution in October, just 10 months after it was created. Joining 4,000 CBSA officers to manage Canadian borders will be 800 immigration officers formerly reporting to the Department of Citizenship and Immigration. Together, the combined workforce moves border management into one agency.

1841

Canada Customs created with the consolidation of Upper and Lower Canada.

Evolution of border services role

1921

Department of Customs and Excise created to join together inland revenue and customs functions.

1925

Income tax started in Canada and is placed under the Department of Customs and Excise.

1927

Department renamed as National Revenue.

1969

Customs officers assigned duty to question travellers on behalf of all Federal departments (35 years before the U.S.).

1999

Department transformed into an agency model (Canada Customs & Revenue Agency).

2003

Canada Border Services Agency (CBSA) created to assume Customs, border control and excise functions. New Canada Revenue Agency (CRA) retained administration of taxation system.

Prior to December 2003, borders were operated by Canada Customs and Revenue Agency (CCRA) and Citizenship and Immigration Canada (CIC). CIC and CCRA historically had a strong degree of co-operation and joint program development. However, a structural change was advanced in 2003 to respond to the strong focus on security and divergent objectives between the “revenue” and “customs” functions within CCRA.

Consolidation is not analogous to U.S. Homeland Security While some have compared the formation of CBSA as identical to the creation of a single U.S. Customs and Border Protection agency for U.S. borders, this is far from accurate. •

Border management in Canada has enjoyed a streamlined processing since 1969 with customs officers questioning passengers on behalf of other departments. The U.S., through the creation of Customs and Border Protection, is only now moving towards consolidated processing for immigration and customs functions.

•

Unlike the U.S., the Canadian approach explicitly avoided including refugee and immigration issues within the context of national security. While CBSA has port of entry functions, Citizenship and Immigration Canada will continue in its function to welcome new Canadians.

Greater flexibility anticipated As CBSA celebrates into its first year of operations in December, new flexibility in structures and policies is anticipated to benefit Canadian airports. Now as the lead border agency to work on Shared Border Accord initiatives with the U.S., new program development will require fewer approvals. Furthermore, CBSA will be examining enhanced processing and improvements in international arrivals for passengers and goods, and associated border services. Page 15 November 2004

PREDATION & THE COMPETITION ACT 3 November 2004

Remember the predatory pricing complaint against Air Canada? In 2000, the

Commissioner of Competition issued a cease and desist order to Air Canada, based on predatory complaints by WestJet and CanJet. It subsequently brought Air Canada to the Competition Tribunal for violating the new airline predatory pricing provisions added to the Competition Act following AC’s acquisition of Canadian Airlines. In the case of WestJet’s complaint, Air Canada had not only matched WestJet’s price in the Moncton to Hamilton/Toronto market, but it undercut the price and added significant amounts of capacity.

Mike Tretheway Senior Vice President & Chief Economist

The Competition Tribunal proceedings were to be divided into two phases. In the Phase 1, the Tribunal was to address the issue as to whether Air Canada had offered capacity for sale at prices below ‘avoidable costs.’ In 2003, the Tribunal ruled that Air Canada had offered capacity at prices below avoidable costs, and thus had committed an anti-competitive act. Effectively, Phase 2 was to have determined whether or not there were legitimate business reasons for prices below avoidable costs, such as seasonality. If there were no justifications, and if Air Canada was found to be a dominant airline, then Air Canada would have been guilty under the Competition Act. (There is a subtly between committing an anti-competitive act and violating the provisions of the Competition Act.) However, Air Canada filed for bankruptcy in April 2003, and the Commissioner agreed to postpone Phase 2 until Air Canada emerged from court protection.

End of the Competition Tribunal Proceeding Against Air Canada. Now

that Air Canada has emerged from bankruptcy, the Commissioner and Air Canada have reached an agreement in the case. The Commissioner will not proceed to Phase 2 and Air Canada will not appeal the Phase 1 decision. For the Commissioner, the Tribunal ruling will stand as to what constitutes avoidable cost, and how to compare that to the complex set of prices an airline charges on a route. This gives clarity to the Commissioner and to air carriers and will act as a precedent in other sectors as well. Not going on to Phase 2 removes the worry from Air Canada of a ruling against it, and for both it saves a lot of time and expense.

Removal of the Special Airline provisions in the Competition Act. On 1 November, David Emerson, the Minister of Industry, tabled in

Parliament a bill to make a comprehensive set of revisions to the Competition Act. Changes to the Act have long been in the works. In addition to general amendments to the Act, the bill removes all of the special provisions for airlines that were put into the Act in June 2000, following the merger of Canadian into Air Canada. The special provisions had: • • • • • •

Minister David Emerson

removed Competition Bureau oversight of airline mergers (reserving this for the Governor in Council -- i.e., cabinet), authorised the AC-CP merger, put in special predatory pricing provisions for the airline industry, provided powers for the Commissioner to issue cease and desist pricing orders to a dominant air carrier engaging in potential predatory behaviour, created provisions to prevent a dominant airline from pre-empting slots, etc.

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PREDATION & THE COMPETITION ACT – CON’T Recall that the AC-CP merger was authorised by legislation as at the time, as the Competition Bureau could have opposed the merger under the general provisions of the Competition Act. There were concerns in 2000 that Air Canada’s dominance in the airline industry could have resulted in abuse against desperately needed new competition and that the general provisions of the Act might be too weak and slow to protect airline competition. The conditions of the airline industry have changed dramatically since 2000. Both Air Canada and Canadian have been taken through bankruptcy, WestJet has grown significantly, and CanJet and Jetsgo have returned to the market. As well, there was significant opposition in the legal community to the cease and desist powers put into the Act, although these were upheld when Air Canada appealed them. The Minister’s view now is that the general provisions of the Act will be sufficient to deal with predation and other abuse of dominance in the airline industry. The end of the predation proceedings against Air Canada and the proposed revisions to the Act closes an important chapter in the story of Canada’s airline industry, but there are more chapters to come.

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 materialise. Information contained herein is provided for the use of InterVISTAS Consulting Inc. only, and may not be distributed beyond the office. Prepared by InterVISTAS Consulting Inc.

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