CAIR Issue No. 47 - December 2006 by Leah Dupuis

CANADIAN AVIATION INDUSTRY REVIEW

In this issue… Features Columns: • Changing Fleet Size of Air Canada and WestJet (p.1) • International Travel To/From Canada Jan to Sept 2006 (p.3) • Inbound Travel Market to Japan (p.5) • Canada’s ‘Blue Sky’ International Air Policy (p.13)

Regular Reports: • Canadian Airline Data (p.7) • U.S. Airline Data (p.8 ) • Canadian Airport Data (p.9) • Industry News (p.10) • The Ottawa Report (p.15) • The Washington Report (p.16) • InterVISTAS News (p.17)

CHANGING FLEET SIZE OF AIR CANADA AND WESTJET December 2006

Air Canada On 30 June 2004, Air Canada submitted its restructuring plan to the Ontario Superior Court of Canada. The plan includes a detailed fleet forecast for the period up to and including the year 2007. Table 1 compares Air Canada’s detailed fleet forecast (F) as stated in its restructuring plan with the carrier’s actual fleet size (A) for the 20042006 period.

Amy Yeung Senior Analyst

Table 1: Air Canada’s Fleet Size 2004-2006 - Forecast versus Actual Seat December December Configuration 2004 2005 AC Mainline F A F A A340-500 267 2 2 2 2 A340-300 286 9 9 9 10 A330 274 8 8 8 8 B767-300 203, 212, 213 30 30 30 33 B767-200 207 12 12 10 12 A321 166 13 13 13 10 A320 140 52 52 49 51 A319 120 48 48 48 48 CRJ-100/200 50 25 25 22 10 EMB-190 93 2 3 EMB-175 73 14 AC Mainline 199 199 193 187 Subtotal

December 2006 F A 2 2 9 10 8 8 29 33 9 12 13 10 47 50 46 45 20 15 15 183 185

Dec 2007 F 2 9 8 29 7 13 42 46 44 200

AC Jazz CRJ-100/200 CRJ-705 BAe-146 Dash 8-300 Dash 8-100 AC Jazz Subtotal AC Total

50 75 77 50 37

22 3 26 42 93

18 2 26 45 91

28 15 26 42 111

42 15 26 38 121

50 15 26 40 131

57 15 26 37 135

50 15 26 34 125

292

290

304

308

314

320

325

Note: F=Forecast; A=Actual Source: Air Canada

During 2005 and 2006, Air Canada’s total fleet size grew by 4 and 6 aircraft over the forecast. As illustrated in Table 2, although AC mainline’s actual fleet decreased by two aircraft between 2005 and 2006, the total number of aircraft seats (seat configuration multiply by number of aircraft) increased by 189 seats. AC Jazz’s 14 additional aircraft resulted in a 713 seat increase.

Page 1 December 2006

CHANGING FLEET SIZE OF AIR CANADA AND WESTJET – CON’T WestJet WestJet’s fleet size grew by 7 aircraft from 2005 to 2006 (Table 2). WestJet had retired all of its B737-200 aircraft by 2006. According to WestJet’s 2005 Annual Report, WestJet considered slowing down its B737-200 replacement scheduled while securing additional aircraft for future growth. By delaying the B737-200 aircraft replacement, WestJet would have even more seats and it would help to restore Jetsgo’s capacity following the demise of Jetsgo in March 2005. Air Canada announced that it will begin taking delivery of eighteen 777s in 2007. WestJet will take delivery of eleven B737-700 and two B737-800 between 2007 and 2008. Table 2: Carrier Fleet Size and Composition 2004-2006 Dec Dec Dec Seat Configuration 04 05 06 AC Mainline A340-500 A340-300 A330 B767-300 B767-200 A321 A320 A319 CRJ-100/200 EMB-190 EMB-175 AC Mainline Subtotal AC Jazz CRJ-200 CRJ-705 BAe-146 Dash 8-300 Dash 8-100 AC Jazz Subtotal

Page 2 December 2006

Fleet Seat Difference (2006-2005)

267 286 274 203, 212, 213 207 166 140 120 50 93 73

2 9 8 30 12 13 52 48 25 199

2 10 8 33 12 10 51 48 10 3 14 187

2 10 8 33 12 10 50 45 15 15 185

-1 -3 -10 +12 +1 -2

-140 -360 -500 +1,116 +73 +189

50 75 77 50 37

18 2 26 45 91

42 15 26 38 121

57 15 26 37 135

+15 -1 +14

+750 -37 +713

290

308

320

+12

+902

18 36 54

5 3 43 5 56

13 45 5 63

-5 +10 +2 +7

-625 +1,190 +272 +837

AC Total WestJet B737-200 B737-600 B737-700 B737-800 WestJet Total

Fleet Size Difference (2006-2005)

125 119 136 166

INTERNATIONAL TRAVEL TO/FROM CANADA JAN TO SEPT 2006 December 2006

Angelica Sparolin Senior Research Specialist Economics & Transportation

Overall, trips by Canadians abroad increased 6.3% year-to-date (January to September), with corresponding spending increasing by a similar amount (+5.7%). Visitor spending by Canadians abroad has generally been following an upward trend, with increases in 11 of the past 13 quarters.

Canadians Travelling Abroad

Visitors to Canada

50 Number of Trips (millions)

Statistics Canada recently released a number of statistical publications on international travel to/from Canada, including travel volumes, travel activities/motivations and spending.

+6.3%

-7.5%

30 20 10 0

Jan-Sept Jan-Sept 2005 2006

United States

Overseas

In contrast, visits to Canada by US and overseas residents decreased 7.5% year-to-date, with corresponding spending decreasing by a smaller magnitude (-2.5%). Spending by US and overseas visitors in Canada has generally been following a downward trend, with decreases in 6 of the past 7 quarters.

Trips Abroad by Canadian Residents Trips by Canadian residents to both US and overseas destinations increased year-to-date (January to September), with US travel up 6.2% and overseas travel up 6.9%. Year-to-date, spending by Canadians travelling to the US also increased, up 5.2% year-to-date to $6.5 billion. Spending by Canadians on overseas treats has increased 6.3% to $7.8 billion. Table 1: Trips Abroad by Canadian Residents January to September TRIPS:

2005

2006

% Change

Total US + Overseas

34,020,200

36,167,400

+6.3%

United States

29,000,500

30,802,100

+6.2%

Overseas

5,019,700

5,365,300

+6.9%

Source: Statistics Canada, International Travel Advance Information, November 2006.

Survey results from Statistics Canada’s 2006 Travel Activities and Motivation Study revealed that 36% of Canadian adults took at least one overnight trip to the United States in the past two years, up from 29% in 1999, when the study was last conducted. The proportion of Canadians reporting at least one overseas trip in the past two years also increased significantly, up from 20% in 1999 to 28% in 2006.

Page 3 December 2006

INTERNATIONAL TRAVEL TO/FROM CANADA JAN TO SEPT 2006 – CON’T Trips to Canada by Non-Residents The stronger Canadian dollar has taken a toll on visits to Canada. Inbound travel by US residents decreased 8.7% year-to-date (January to September). The Canadian Tourism Commission (CTC) is anticipating that due to the overall outlook for the US economy, weak trends in US visitors to Canada will continue into 2007.1 . Visits from overseas residents has remained flat at 3.7 million trips year-to-date. However, decreases were observed in many of the top markets, including the UK, Japan, Germany, Australia and Hong Kong. The CTC attributes some of the declines in key markets to the increasing cost of trips to Canada, based both on the stronger Canadian dollar and on higher prices of airfares, accommodations and other trip costs.2 In contrast, strong growth in visits was observed for China, up 27% over last year to 114,000 visits, for Mexico, up 8.5% to 175,000 visits and for China, up 9.3% to 73,000 visits. Spending by US visitors decreased 4.7% to $9.7 billion year-to-date, while spending by overseas visitors has remained flat at approximately $5.6 billion. Table 2: Trips to Canada by Non-Residents January to September TRIPS:

2005

2006

% Change

Total US + Overseas

29,226,000

27,023,100

-7.5%

United States

25,555,600

23,343,100

-8.7%

Overseas

3,670,400

3,680,000

+0.3%

United Kingdom

759,000

726,200

-4.3%

Japan

339,700

316,200

-6.9%

France

297,100

303,200

+2.1%

Germany

287,500

265,900

-7.5%

Mexico

160,800

174,600

+8.5%

Australia

173,000

169,400

-2.1%

South Korea

156,400

161,500

+3.2%

China

89,800

113,900

+26.8%

Netherlands

104,400

104,000

-0.4%

Hong Kong

93,500

91,200

-2.5%

India

66,800

73,000

+9.3%

1,142,400

1,180,900

+3.4%

Other Overseas

Source: Statistics Canada, International Travel Advance Information, November 2006.

1 “Tourism Faces Escalating Security and Economic Challenges,”CTC Tourism Intelligence Bulletin, Issue 35, September 2006. 2

“Winter Ushers in Cooling Trend,” CTC Tourism Intelligence Bulletin, Issue 36, November 2006.

Page 4 December 2006

INBOUND TRAVEL MARKET TO JAPAN 11 December 2006

In the February 2006 issue of the InterVISTAS Canadian Aviation Intelligence Report (Japan’s Outbound Travel Market, p. 7), Japan’s outbound travel market was assessed. This column will examine the inbound travel market to Japan and its underlying characteristics.

Growth in Inbound Travel to Japan

Connie Chang Project Analyst

As shown in Figure 1, there has Figure 1: Inbound Travel Market to Japan been steady growth in the number Millions 8 of travellers arriving in Japan, 7 increasing from 3.8 million 6 international travellers in 1996 to 5 the 2005 peak of 6.7 million. 4 According to the 2006 edition of 3 Tourism Highlights released by the 2 World Tourism Organization, 1 Japan ranks 7th in Asia for handling 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 the most inbound visitors, accounting for nearly 5% of Asia’s Source: Japan Tourism Marketing Co. total inbound travel market for the year 2005. Inbound travel also has a significant impact on Japan’s economy, generating total international tourism receipts of US$12.4 billion in 2005.

Japan Inbound Market Characteristics Based on the 2005 data from Japan’s Tourism Marketing Co., approximately 65% of visitors to Japan were tourists, 22% of the visitors were travelling for business needs, while the remaining 13% of trips were short excursions or travel for other purposes. Top markets of origin for 2005 include South Korea, Taiwan, China, Hong Kong and the United Kingdom. Figure 2 shows the inbound markets to Japan from 2002 to 2005. Korea, Japan’s top inbound market, accounts for more than a quarter of all international travel to Japan. Inbound travel to Japan in 2003 from Taiwan, China and Hong Kong experienced declines due to the SARS virus outbreak.

Page 5 December 2006

Figure 2: Top Arrivals to Japan, by Selected Countries 2002

Thousands

2003

2004

2005

2,000 1,800 1,600 1,400 1,200 1,000 800 600 400 200 0 Korea

Taiw an

United States

China

Hong Kong

United Kingdom

Canada

Philippines

Thailand

Germany

Source: Japan Tourism Marketing Co.

INBOUND TRAVEL MARKET TO JAPAN – CON’T Canadian Travellers to Japan Relative to the top inbound markets to Japan (Figure 2), the Canadian inbound market to Japan in 2005 was larger than the Philippines, Thailand, Germany, Singapore and Malaysia. In 2005, Canadian travellers accounted for 2% of all international visitors to Japan, totalling more than 150,000 travellers. Of this total, 72% of Canadian travellers arrived in Japan for tourism and leisure purposes, 16% travel to Japan was for business and the remaining 12% travel was for other purposes. Figure 3 shows the steady growth in Canadian travellers to Japan over the past ten years. There was a slight decline in the inbound travel market to Japan in 2003 that was likely caused by the SARS outbreak. Canada was one of the only non-Asian countries experiencing deaths due to the SARS virus. Figure 3: Canadian Travel Market to Japan Tourists

Thousands

Business

Other

160 140 120 100 80 60 40 20 0 1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

Source: Japan Tourism Marketing Co.

Future Market Growth According to the UNWTO’s Tourism 2020 Vision, the inbound travel market for Asia and the Pacific is forecasted to rise from 155 million visitors in 2005, more than a quarter of the world’s inbound travel market, and reach 397 million visitors by 2020. The region is also anticipated to be the second fastest growing market in the world, with an average annual growth rate of 6.5% between 1995 to 2020.

Page 6 December 2006

AIRLINE DATA – CANADA Traffic and Load Factors on Canada’s Major Air Carriers November 2006 Passenger Traffic

Air Carrier

Revenue Passenger Kilometres

% Change from 2004

% Change over 2005

% Change from 2004

Change over 2005

Change from 2004

Air Canada3

+4.1%

+9.8%

+3.0%

+6.1%

+0.8pts (to 77.2%)

+2.6pts (from 74.6%)

Domestic (Mainline)

+6.7%

+0.2%

+3.5%

-4.0%

+2.4pts

+3.3pts

Jazz

+23.4%

+144.8%

+19.0%

+127.8%

+2.5pts

+5.0pts

International & Charter

+3.0%

+14.3%

+2.8%

+10.7%

+0.2pts

+2.4pts

+29.2%

+67.0%

+26.6%

+33.2%

+1.5pts (to 73.4%)

+14.9pts (from 58.5%)

Air Canada Domestic Mainline

Analysis:

•

Load Factor

% Change over 2005

WestJet

•

Capacity

Available Seat Kilometres

Air Canada Mainline’s domestic traffic and capacity experienced growth for the first time since September 2005 - by 6.7% and 3.5% respectively over November 2005. However, Air Canada continues to transfer seat capacity to Jazz, resulting in an increase of 19% in seat capacity for Jazz. Air Canada’s total domestic capacity expansion was 3% over 2005. For November, the load factors for the international and charter services provided by Air Canada increased by 0.2 points, despite the expansion in capacity levels by 2.8%. This is a result of an upward trend of international traffic by 3.0%, mainly caused by increases in Latin American traffic. WestJet passenger traffic growth increased 29.2% over 2005. Traffic continues to outpace capacity, resulting in load factor growth of 1.5 points.

10%

Jazz data is not included in this graph

5% 0% -5% -10%

Sep- Oct Nov Dec Jan- Feb Mar Apr May Jun July Aug Sept Oct Nov 05 06

Dom RPK

Dom ASK

Air Canada International 15% 10% 5% 0% -5% Sep- Oct Nov Dec Jan- Feb Mar Apr May Jun July Aug Sept Oct Nov 05 06

Int'l RPK

Int'l ASK

WestJet 35% 30% 25% 20% 15% 10% 5% 0% Sep- Oct Nov Dec Jan- Feb Mar Apr May Jun July Aug Sept Oct Nov 05 06

RPK

ASK

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

Page 7 December 2006

AIRLINE DATA – U.S. U.S. Airlines Release November 2006 Traffic Figures

Notes:

(RPMs – millions)

(ASMs – millions)

Capacity

Load Factor

1,907

2,359

80.8%

↑11.7%

↑13.2%

↓1.1 pts

730

994

73.5%

↑4.6%

↑3.6%

↑0.8 pts

5,594

7,788

71.8%

↑11.9%

↑10.5%

↑0.9 pts

7,028

8,712

80.7%

↑9.8 %

↑7.1%

↑2.0 pts

9,131

11,463

79.7%

↑2.4%

↑2.7%

↓0.2 pts

10,706

13,430

79.7%

↓1.1%

↓3.7%

↑2.1 pts

8,914

11,505

77.5%

↓1.8%

↓6.5%

↑3.7 pts

6,132

7,509

81.7%

↑3.2%

↑1.7%

↑1.3 pts

4,971

6,391

77.8%

↑1.0%

↓2.3%

↑2.6 pts

316

409

77.2%

↓26.2%

↓29.1%

↑3.0 pts

Traffic

Airline

1. Mainline operations only. 2. Load factor includes scheduled service only.

Sources: Carrier traffic reports.

Page 8 December 2006

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

MontréalTrudeau

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

St. John’s

October November December 4th Quarter

-0.1% +0.6% -0.6% +0.0%

+4.3% +5.2% +0.5% +3.2%

+3.7% +4.1% +4.3% +4.0%

+7.1% +12.1% +10.3% +9.8%

+16.7% +10.7% +4.9% +10.4%

-0.7% -2.5% -3.5% -2.2%

+6.4% +6.2% +5.4% +6.0%

-0.7% +3.0% +5.6% +2.4%

+3.1% +8.5% +3.8% +4.9%

+16.1% +24.0% +19.1% +19.6%

+11.8% +18.0% +12.2% +13.9%

+12.8% +15.6% +9.5% +12.5%

-0.9% +5.0% +7.9% +3.6%

Full Year

+4.6%

+4.4%

+5.4%

+10.6%

+10.5%

+3.6%

+6.5%

-0.4%

+5.5%

+19.3%

+12.3%

+10.6%

+8.2%

January February March

+1.0% -0.2% +3.2%

-1.1% +1.5% +3.5%

+0.9% +1.9% +7.2%

+9.2% +7.9% +9.2%

+10.7% +10.9% +13.0%

+1.0% +0.2% +3.9%

+2.8% -0.6% +2.0%

+5.4% +1.2% +4.8%

+6.2% +1.4% -3.5%

+20.3% +11.0% +15.4%

+10.1% +3.0% +0.1%

+4.4% -2.8% -3.8%

+9.7% +7.0% -7.8%

1st Quarter

+1.4%

+1.3%

+3.4%

+8.8%

+11.6%

+1.8%

+1.4%

+3.8%

+0.9%

+15.5%

+4.4%

-0.8%

+2.0%

April May June

+6.2% +4.8% +2.9%

+4.3% +3.2% +2.7%

+6.5% +8.3% +4.5%

+18.8% +16.0% +9.6%

+20.7% +20.6% +13.2%

+3.8% +0.3% +1.8%

+0.6% +6.4% +4.1%

+6.8% +8.4% +0.7%

+4.2% +10.3% +8.6%

+17.9% +13.2% +13.4%

+9.5% +7.7% +5.3%

+13.9% +23.3% +12.5%

+13.1% +15.2% +3.7%

2nd Quarter

+4.6%

+3.3%

+6.4%

+14.6%

+18.1%

+1.9%

+3.8%

+5.2%

+7.8%

+14.7%

+7.4%

+16.3%

+10.3%

July August

+2.2% +6.8%

+4.8% +3.9%

+1.9% +3.4%

+7.6% +10.0%

+13.8% +18.2%

-2.1% +2.2%

+4.9% +8.5%

+8.5% +7.1%

+7.4% +11.3%

+14.4% +12.2%

+5.9% +5.8%

+7.1% +15.9%

+13.2% +11.5%

September

+2.2%

+2.1%

+2.2%

+9.9%

+13.1%

0.0%

+8.8%

+4.9%

+6.9%

+16.6%

+6.9%

+10.4%

-0.5%

Quarter +3.8% +3.7% +2.5% +9.2% October +2.6% +2.3% +4.0% +9.9% Source: Transport Canada and individual airports’ traffic reports.

+15.1% +18.4%

+0.1% +2.3%

+7.3% +7.7%

+6.9% +6.2%

+8.6% +12.6%

+14.3% +13.7%

+7.1% +7.1%

+11.1% +6.2%

+8.6% +0.9%

2005

Toronto

2006 3rd

Page 9 December 2006

NEWS ARTICLES increase in U.S. transborder revenues.

AIR CANADA UPDATE AIR CANADA INTRODUCES ‘WELCOME ABOARD’ TRAVEL PASS On 14 December, Air Canada launched ‘Welcome Aboard’ travel pass for the winter season. The passes, priced starting at $229 per month, payable over a two-month period, are valid exclusively for Tuesday and Saturday trips anywhere within Canada and for selected areas in continental U.S., where services are offered by Air Canada, Jazz and their regional partners. A three day option that extends travel days to include Sundays is also available. The passes can be purchased via Air Canada’s web site or through travel agents from 14 December 2006 to 3 January 2007. The passes are valid between 9 January and 6 March 2007.

AIR CANADA RECEIVES $200 MILLION FROM IPO

On 24 November, ACE Aviation Holdings Inc. and Air Canada announced that they have completed an initial public offering and secondary offering that generated $200 million and $325 million in gross proceeds respectively. With the completion of the offering Air Canada has cash and cash equivalents in excess of $2 billion.

ACE REPORTS 62% DROP IN 3RDQUARTER PROFIT

ACE Aviation Holdings, parent company of Air Canada, announced a 62% or C$103 million decrease in net profit for the third quarter. The company explained that the decrease was partly due to a C$102 million charge related to the redemption of Aeroplan points. Aeroplan’s new mileage expiry policy has driven Aeroplan members to redeem their Aeroplan Miles prior to the 1 July 2007 deadline to avoid losing all of their accumulated Aeroplan Miles. The company also lost C$3 million in foreign exchange. However, the company did gain C$52 million from the sale of 1.25 million of US Airways shares and Air Canada’s operating margin increased by 10.3%, driven by a 14% Page 10 December 2006

AIR CANADA NEW FLEET TO DECREASE OPERATING COSTS

Air Canada announced that it will begin taking delivery of eighteen 777s. The 777s will replace the existing A340-500s and the 777 next year is 26% cheaper in terms of CASM. Air Canada also ordered 45 E-190s that are 18% cheaper per trip cost compared to the A319s they will be replacing. Air Canada will begin taking delivery in 2010 of fourteen 787s on firm order which are 30% less costly to operate than the 767-300s they will replace.

ACTS BUYS GRUPO TACA’S MAINTENANCE DIVISION Air Canada Technical Services (ACTS) will acquire 80% of Grupo TACA Holdings Ltd.’s aircraft maintenance division, Aeromantenimiento, in El Salvador for nearly US $45 million and shares. The president of Grupo TACA, Robert Kriete, will join ACTS’s board as part of the deal. ACTS is a full-service maintenance, repair and overhaul organisation that provides airframe, engine and component maintenance work to Air Canada and other airlines as well as Canada’s National Defence Department.

WESTJET UPDATE WESTJET INTRODUCES TRAVEL PASS On 23 November, WestJet introduced its new “Travel Pass” for travellers to fly 10 one-way flights for $1,700 including all taxes, fees and surcharges. The Travel Pass is transferable and is available for a limited time only. All Travel Passes must be purchased before 31 January 2007 and travel must be completed by 31 May 2007.

NEWS ARTICLES OTHER CANADIAN AIRLINE NEWS CANJET OPERATES CHARTER FLIGHTS FOR TRANSAT CanJet Airlines announced that it will be operating charters from Halifax, Moncton and Quebec City to Orlando, St. Petersburg and Fort Lauderdale on behalf of Transat Holidays beginning February 2007. The Halifax-St. Petersburg, Halifax-Orlando, HalifaxFort Lauderdale, Moncton-Orlando, Moncton-St. Petersburg and Quebec City-Orlando are offered once weekly.

CARGO NEWS CENTURION AND FWIA WIN U.S.MEXICO CARGO DESIGNATION

Centurion Air Cargo and

Florida West International Airways won the remaining U.S. cargo designations to serve Mexico City. The competition for the Mexico City all-cargo designations was originally among Centurion, FWIA and Kitty Hawk. The U.S. Transportation Department only has two designations available and Kitty Hawk withdrew from the proceedings. Amerijet, UPS and Astar Air Cargo hold the other all-cargo exemptions to Mexico City.

KITTY HAWK’S CONTRACTS WITH USPS TOTAL $5 MILLION

Hawk, Inc., for the operation and management of the C-NET network over the holiday season.

PEOPLE IN THE NEWS MINISTER CANNONS APPOINTS KADUCK TO THE CTA On 8 December, the Minister of Transport, Infrastructure and Communities announced the appointment of Mr. Raymon J. Kaduck to the Canadian Transportation Agency. Mr. Kaduck is currently the president of Aeronavigatsia Consulting Inc. He was assistant director, aviation programs with the Northwest Territories and Department of Transportation from 1997 to 1999 and was a flight specialist with the former Air Traffic Services branch of Transport Canada from 1982 to 1989. He has been appointed to the CTA for three years.

WESTJET APPOINTS VP FOR WESTJET VACATIONS On 29 November, WestJet announced the appointment of John Hamilton as VicePresident of WestJet Vacations. Mr. Hamilton became the Vice-President for Travel Corp. in 1995 and prior to joining WestJet Vacations, he ran BCAA Travel and was instrumental in the launch of CANescapes and the purchase of Pacific Sunspots.

Kitty Hawk Aircargo, Inc. has entered into contracts with the United States Postal Service to operate seven of its own aircraft in the daytime air and ground cargo network (“C-NET”) for the holiday season from 28 November to 24 December. Based on successful performance of the contract, the total revenue to Kitty Hawk Aircargo, Inc. is estimated to be approximately $4.6 million. This contract is in addition to the $29 million contract between the USPS and Kitty Hawk Cargo, Inc, also a subsidiary of Kitty Page 11 December 2006

NEWS ARTICLES AMERICAN WINS UNION CONSENT TO FLY BEIJING

OTHER IATA FORECASTS INDUSTRY 2007 PROFIT OF $2.5 BILLION On 13 December, IATA announced that the world’s airline industry should become profitable for the first time since 2000. IATA lowered its estimate on industry wide loss for 2006 from $1.7 billion, as announced in September, to $500 million. IATA forecasts industry wide profit to be approximately $2.5 billion for 2007. Of this total, European and Asian airlines are expected to earn $1.5 billion and $1.2 billion respectively. The U.S. airline industry is expected to generate only $200 million in profit. Both Middle Eastern and Latin American carriers are expected to profit $100 million. In contrast, African airlines are expected to lose $500 million.

EDMONTON INTERNATIONAL AIRPORT FINALISES $200 MILLION EXPANSION DEAL The Edmonton International Airport has finalised a $200 million financing deal with the Alberta Capital Finance Authority so the airport can meet anticipated passenger growth. The $200 million, five-year expansion plan includes the addition of a new terminal concourse, a larger U.S. transborder area, aircraft parking space, system upgrades and 1,000 parkade stalls. The airport has no plan to increase its $15 Airport Improvement Fee.

The union of American Airlines, the Allied Pilots Association, has authorised American Airlines to fly the DallasBeijing route that is pending the U.S. Transportation Department’s decision on route authority for new China service. American’s management needs to secure an agreement with APA for the DFW-Beijing service in accordance to the APA-American Airlines collective bargaining agreement that contains language governing extended long-haul flying. The DOT is expected to announce before year end which of four carriers that applied for new China service – American, Continental, Northwest or United – will be granted the route authority.

US AIRWAYS PROPOSES $8 BILLION MERGER WITH DELTA AIRLINES U.S. Airways announced a proposal to merge with Delta Airlines after Delta emerges from Chapter 11 restructuring. The transaction is valued at approximately $8 billion in cash and stock to Delta’s unsecured creditors. The combined airline would operate under the Delta name. The “New” Delta would be the number one airline across the Atlantic to Europe and the second largest airline to the Caribbean with services to over 350 destinations.

AIRTRAN AND FRONTIER’S MARKETING PARTNERSHIP On 14 November, AirTran Airways and Frontier Airlines Holdings created a low cost carrier referral and marketing relationship that doubles the number of destinations available to customers. This relationship allows AirTran customers to travel with Frontier while earning credits in AirTran’s rewards account or vice versa. Customers can redeem their credits for travel on either airline.

Page 12 December 2006

CANADA’S ‘BLUE SKY’ INTERNATIONAL AIR POLICY December 2006

On 27 November 2006, a new international air transportation policy called Blue Sky was introduced by Lawrence Cannon, Minister of Transportation, Infrastructure and Communities. The new policy represents a shift in Canada’s approach to international air agreements, from a policy of gradual reduction in restrictions to one of active pursuit of “Open Skies”-type agreements, such as the one negotiated with the U.S. in November 2005. Transport Canada’s original draft of the policy was released for consultation with stakeholders in October 2006. The final policy reflects some minor changes as a result of these consultations.

Josh Drury Senior Analyst

The new air transport policy is guided by a set of policy objectives and principles that point toward the establishment of a more liberalised air transport policy that embraces market principles, encourages competition, provides opportunities for growth and new services, supports Canada’s trade objectives, and recognises air transport’s contribution to the economy, particularly trade and tourism. Balancing these goals, the policy is to ensure Canadian carriers have the opportunity to grow and compete on a reasonably level playing field, and is to be guided by safety and security implications. The general policy approach for air transportation negotiations under the new policy is one of proactively pursuing more liberalised agreements fro both passenger and cargo services. The policy states: “As a primary objective, Canada will seek to negotiate reciprocal “Open Skies”-type agreements, similar to the one negotiated with the U.S. in November 2005, where it is deemed to be in Canada’s overall interest.” Such agreements would include: •

unlimited 3rd and 4th freedom rights;

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no limits on frequencies or on the number of airlines permitted to operate;

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market-based tariff/pricing regime for bilateral and 3rd country services;

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open and flexible code-sharing regime;

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unrestricted 5th and 6th freedom rights;

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seventh freedom rights for all-cargo services; and

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agreements would not include cabotage rights.

Where other countries are not interested in negotiating such an Open-skies-type agreement, Canada will seek to negotiate a scaled-down agreement as long as it does not compromise Canada’s ability to negotiate a more open agreement in the future. In such cases Canada will still seek as much flexibility in all cargo-services as possible. The policy also states that in some situations the government may determine that an Open Skies-type agreement is not in Canada’s best interest. This mainly includes situations where it is determined Canadian carriers would not have a level playing field due to other policy or market issues. This is a possible area of concern for some stakeholders in that such a determination, or the application of other stated principles and objectives of the policy, may be used in some cases to justify continued

Page 13 December 2006

CANADA’S ‘BLUE SKY’ INTERNATIONAL AIR POLICY – CON’T

restrictive air transport agreements in some cases. It remains to be seen whether this type of determination will be used to any significant extent in limiting liberalisation of air transport agreements, or whether Canada will seek full Open-Skies-type agreements in the large majority of cases, as the U.S. has done. Related Policies. Beyond the Blue Sky policy on air transport agreements, the government had also sought stakeholder input on changes to related programs covering international air transport policy. Air Cargo Transshipment. The international air cargo transshipment program allows cargo with international origin and destination to land at transshipment airports, to be stored for a time if needed, and transferred onto another flight of any carrier or any other mode for transport to its final destination. It is currently in effect at six airports (Mirabel, Hamilton, Windsor, Gander, Winnipeg and Edmonton). Transport Canada now indicates “the air cargo transshipment program will be expanded to allow any airport to participate in the program, subject to it meeting current application requirements and approvals.” There are no indications the scope of the policy will be changed (for example, to allow international to domestic transshipment), beyond extending the program to all airports. Foreign Carrier Access. The Foreign Carrier Access (FCA) provisions of Canada’s 1994 international air transportation policy allow a foreign government to apply for one of its carriers to operate up to two weekly services with a Canadian point other than Toronto, if the country has no air transport agreement with Canada and if no Canadian carriers have interest in serving the market in question. As the policy was little used, Transport Canada recommended it be terminated. However, following stakeholder inputs recommending the program remain, it will continue to apply pending further review. In addition to these immediate policy concerns, Transport Canada is still seeking stakeholder views on a number of longer term issues, specifically: •

the possibility of a comprehensive air transport agreement between Canada and the European Union;

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changes to ownership and control requirements for foreign carriers;

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creation of a single North American aviation market; and

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adoption of a multilateral approach to air transport negotiations.

Stakeholder input on these issues is being sought through the end of December 2006.

Page 14 December 2006

OTTAWA REPORT December 2006

Transport Canada Announces New Blue Sky Policy On 27 November, the Minister of Transport, Infrastructure and Communities announced a new international air transportation policy called Blue Sky. The new policy will encourage the development of new markets and services and increase competition. Unlike the previous air transportation policy that supports a more gradual process in reducing restrictions in air agreements, the Blue Sky policy supports negotiating more Open Skies-type agreements with Canada’s most important aviation and trading partners. Canada already has a liberalised air agreement with the U.S. and the U.K. Air traffic between Canada and the U.S. has nearly doubled since the first liberalisation of Canada’s air service agreements with the U.S. in 1995. (see ‘Blue Sky’ column on p.13 for more details.)

Tax Burden Creates Competitive Disadvantages for Canadian Airlines Martin Copeland Senior Vice President, Aviation

A research report issued by the Montreal Economic Institute indicates that industry specific taxes including airport rent, air travellers’ security charge and federal fuel excise tax have a negative impact on the competitiveness of Canadian air carriers. Canadian airlines are disadvantaged because none of Canada’s G8 partners impose airport rent or similar charges on their airports. Further, Canadian airports receive no services in return for the rents paid. Canada has one of the highest passenger security fees in the world and while the federal government collected $1.25 billion in fees, it only spent $820 million in the first three years on security. Finally, Canada’s federal fuel excise tax of 4 cents per litre is nearly doubles that of the U.S. of 4 cents per gallon.

Lower Mainland Port Authorities Approve Single Authority Concept The three port authorities in the Lower Mainland – Vancouver, North Fraser and Fraser River have approved a report which recommends a single authority. The report, prepared by InterVISTAS Consulting Inc., recommended that the integration of port activities in the Lower Mainland is the most effective solution for optimising port planning, development and marketing. This in turn helps to enhance Canada’s competitiveness in the global trade environment, particularly in capturing the increasing Trans-Pacific trade volumes. The report has been forwarded to the Minister of Transport, Infrastructure and Communities for his review and action.

New Trucking Policy for B.C.’s Lower Mainland Ports On 29 November, Lawrence Cannon, the Minister of Transport, Infrastructure and Communities, and the Minister of International Trade and Minister for the Pacific Gateway and the Vancouver-Whistler Olympics, the Honourable David Emerson, announced new trucking regulations for British Columbia’s Lower Mainland ports. The new trucking regulations require the Vancouver and Fraser Port Authorities to introduce a new licensing, audit and enforcement provisions that will apply to container trucks and container truck operations at ports. The purpose of the new trucking policy is to increase stability in the container trucking by ensuring that companies do not continue to undercut each other, something that could result in another labour dispute over fuel surcharges.

NAV Canada Reports 3.6% Traffic Increase for September NAV Canada reports that its September traffic increased by 3.6% compared to the same month in 2005. Traffic is measured in weighted charging units that reflects the number of flights, aircraft size and distance flown in Canadian airspace.

Page 15 December 2006

WASHINGTON REPORT December 2006

Oberstar and Mica to Lead the House Committee on Transportation and Infrastructure Congressmen James Oberstar (Democrat) and John Mica (Republican) will lead the House Committee on Transportation and Infrastructure. The Committee on Transportation and Infrastructure has jurisdiction over aviation, coast guard and maritime transportation, economic development, highways, transit and pipelines, railroads, water resources and environment.

Congress Reviews Airlines’ Service Level

Jon Ash President Inc. Washington, D.C.

InterVISTAS-ga2 Consulting

The DOT Office of Inspector General issued a report to Congress which reviewed the customer service levels of 14 major U.S. airlines. The report suggested that airlines need to improve selfauditing of their customer service plans, provide more timely delay and cancellation information, provide better assistance to persons with disabilities, simplify frequent flyer award earnings and redemptions requirements, and compensate bumped passengers. The report commented that the DOT Office of Aviation Enforcement and Proceedings needs to better monitor airline compliance to federal air traveler consumer protection requirements.

ACI AAAE Ask Congress to Increase EDS Funding The Airports Council International-North America (ACI-NA) and the American Association of Airport Executives (AAAE) and have asked Congress to increase funding for in-line explosives detection systems (EDS) installation at additional airports. With the exception of the nine airports that have installed in-line EDS systems, all other U.S. airports use the “stand alone” EDS systems that conduct EDS screenings separately from the x-ray screening system in the passenger terminal areas. The inline EDS systems are integrated into automated x-ray screening systems in the baggage screening area and, therefore, make the screening process more efficient. The nine airports that have installed in-line EDS systems managed to recover their initial investment in approximately one year and these airports will save approximately $1.3 billion over seven years due to reduction in TSA baggage screeners and supervisors.

DOT Withdraws Foreign Ownership Plan Due to Congressional opposition, the U.S. Transport Department withdrew its proposal to relax the application of foreign ownership rules that would have granted foreign investors greater influence over U.S. airlines’ operations. The withdrawal of the proposal could affect the U.S.-E.U. Open Skies Agreement since European officials have communicated to its U.S. counterparts that a relaxed foreign ownership rule is a prerequisite to signing the U.S.-E.U. Open Skies Agreement. The proposal was opposed by unions, some airlines and lawmakers who feel that changes to foreign ownership rules should come from Congress, rather than the Bush Administration.

FAA Modernizes India’s Aviation System The FAA Administrator, Marion Blakey, and India’s Minister for Civil Aviation, Praful Patel, signed an agreement to work together on issues ranging from air traffic control training and procedures to aviation safety standards and regulations to modernize India’s civil aviation infrastructure. India is an important player to the U.S. in its effort to create a seamless global satellite navigation system.

Page 16 December 2006

INTERVISTAS NEWS December 2006

Steven Martin Joins InterVISTAS-ga2’s Washington Office InterVISTAS is pleased to announce that Steven C. Martin will join InterVISTAS- ga2’s Washington office as a Senior Vice-President, effective 1 January 2007. Prior to joining InterVISTAS, Steven was the Assistant Director-Commercial Aviation Issues with the U.S. Government Accountability Office (GAO), where he managed GAO’s evaluations of issues concerning the competitiveness and financial health of the U.S. commercial airline industry, and numerous related aviation matters. Steven holds a BA in Political Science form the Miami University (Ohio) and an MA in Public Policy Sciences from Duke University. Recently, Steven completed a major study of the telecom sector at GAO.

Anne Ellenberger Joins InterVISTAS’ Vancouver Office InterVISTAS is pleased to announce that Anne Ellenberger has joined InterVISTAS’ Vancouver office as Manager, Accounting Services. Anne is a Certified General Accountant and brings to the InterVISTAS group a diverse background in management and senior accounting positions that include the forestry and retail industries. Her accounting background also includes the health foods industry as well as property management.

InterVISTAS Upcoming Speaking Engagements Mr. John Weatherill, Director, Airline Planning Africa Airports 2007: Johannesburg, South Africa – 27-28 February 2007 Mr. Weatherill will be delivering a presentation titled, “Effectively Marketing Africa’s Airports.” World Regional Airports Congress: London, United Kingdom – 16-17 April 2007 Mr. Weatherill will be delivering a presentation titled, “Understanding and Applying E.U. Guidelines on Start-up Aid for Airlines at Regional Airports.” Dr. Mike Tretheway, Executive Vice President and Chief Economist 10th Hamburg Aviation Conference: Hamburg, Germany – 14-17 February 2007 Dr. Tretheway will participate in a panel on, “The Changing Supply Chain in Aviation.” Canadian Airports Council’s Airports Canada 2007 Conference and Exhibition: Ottawa-Gatineau, QC – 25-26 April 2007 Dr. Tretheway will participate in a panel on, “The Quest for New Services.” InterVISTAS’ Canadian Aviation Intelligence Report is a collection of information gathered from public sources, such as press releases, media articles, etc., information from confidential sources, and items heard on the street. Thus, some of the information is speculative and may not materialise. To inquire about advertising opportunities or to provide comments/feedback on the InterVISTAS’ Canadian Aviation Intelligence Report, please contact Rob Beynon at rob_beynon@InterVISTAS.com or 1-604-717-1864. To subscribe, please send an email to subscribe@InterVISTAS.com

Page 17 December 2006