AIR Issue No. 5 - May 2011 by Leah Dupuis

CANADIAN AVIATION INTELLIGENCE REPORT May 2011

IN THIS ISSUE: CEO Update – p 1 Recent Developments in the United Kingdom Market – p 2 Airline Data – p 3 Airport Data – p 6 News – p 7 Asia Report – p 13 European Report – p 14 Washington Report – p 15 InterVISTAS News – p 18

CEO UPDATE May 2011

Welcome to the May 2011 edition of InterVISTAS Consulting Inc.’s Canadian Aviation Intelligence Report (CAIR). Below are some new projects that we are currently working on and some news on InterVISTAS contribution to the Qatar National Master Plan Project.

Gerry Bruno CEO

InterVISTAS Selected as Orange County John Wayne Airport’s On-Call Air Service Consultant Orange County John Wayne Airport has selected InterVISTAS as their on-call air service consultant after a competitive bid process. John Wayne Airport, which is currently the third largest airport in Southern California in terms of passengers, will be opening an International Arrivals Building later this year.

InterVISTAS to Undertake Economic Impact Study of Tourism in Kelowna, British Columbia Tourism Kelowna has commissioned an update to the Economic Impact of Tourism Study that InterVISTAS originally prepared in 2006. In 2006, the study found that there were 6,900 direct jobs associated with tourism in Kelowna. InterVISTAS will be updating this study beginning in July.

Colledge Transportation Consulting, Seaport Canada and InterVISTAS to Update BC Ports Strategy and Pacific Gateway Action Plan The consulting team of Colledge Transportation Consulting, Seaport Canada and InterVISTAS Consulting has been awarded the contract to provide an update to the 2005 BC Ports Strategy and the 2006 Pacific Gateway Action Plan for British Columbia’s Ministry of Transportation and Infrastructure.

The May 2011 CAIR Line-Up In this month’s publication, we have one feature article on recent developments in the UK market with respect to air service development. Our regular monthly columns are as follows: 

Asia Report



European Report



Washington Report

We hope you enjoy this issue.

Page 1 May 2011

RECENT DEVELOPMENTS IN THE UNITED KINGDOM MARKET

Picture

May 2011

Alex Welch Manager, Route Development

Direct service to the United Kingdom is often the first step for medium-sized airports looking to expand their air service offerings to markets outside of North America. Given our historical ties to the United Kingdom and London’s status as a global business centre and major tourism destination, it is only natural for London to consistently rank as the number one non-North American destination, in terms of market size, for many Canadian airports. Although demand for travel to/from the United Kingdom continues to grow, a number of recent developments have actually resulted in less seat capacity in the market and most importantly a reduction of competition in the leisure segment of the market. Annual seat capacity between Canada and the United Kingdom experienced significant growth over the period of 2003 to 2007, growing at an annualized rate of 8.3%. However the collapse of Zoom and Astraeus in 2008 and then Flyglobespan in 2009, removed over 600,000 seats (or 14% of the 2007 total) from the market. As a result, over the period of 2007 to 2010, Canada-UK seat capacity decreased at an Source: Scheduled air services as reported in the OAG annualized rate of 5.7%. The schedules. impact of this reduction was that some secondary airports in Canada lost their only service to the United Kingdom. In addition, many of the major airports in Canada lost their only services to secondary airports in the United Kingdom. In regards to competition in the leisure market, in 2007 leisure focused carriers accounted for 29% of the seat capacity. By 2010 this figure had dropped down to 17%. More importantly, by 2010 Canadian Affair (owned by Transat and using Transat and Thomas Cook aircraft for lift) was the only leisure focused tour operator in the market. As a point of comparison, it is important to note that this decrease in leisure focused service is not an industry-wide trend as other major Canada-Europe markets, such as Germany, continue to have service from a number of different leisure airlines and tour operators. However, as competition decreases, the opportunity for new entrants only becomes more attractive. In fact, Sunwing Airlines (based out of Toronto) recently made a significant expansion to its Europe services. Specifically, the airline stated that based on the success of last year’s Toronto-Amsterdam operation their Europe service will be expanded to include six more European destinations: London, Paris, Dublin, Porto, Lisbon and Rome (all service is from Toronto and Montréal). Given this development it is likely that other carriers will consider entering the market and this may present opportunities for secondary airports in Canada. Therefore, in these changing times it is imperative that airports remain up-to-date and when the news of a new entrant or expanding carrier surfaces, they should be ready to make a compelling case for new transatlantic service. Page 2 May 2011

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

April 2011 Air Carrier

Passenger Traffic Revenue Passenger Kilometres % Change % Change over 2010 from 2009

Capacity Available Seat Kilometres

Load Factor

% Change over 2010

% Change from 2009

Change over 2010

Change from 2009

Air Canada1

+11.6%

+12.7%

+12.2%

+11.5%

-0.5pts (to 81.9%)

+0.8pts (from 81.1%)

Domestic

-1.8%

0.0%

-2.0%

-3.1%

+0.2pts

+2.6pts

+17.7%

+18.4%

+18.6%

+18.1%

-0.7pts

+0.2pts

+11.8%

+25.3%

+12.3%

+21.7%

-0.4pts (to 83.6%)

+2.4pts (from 81.2%)

International & Charter

WestJet

Analysis: Air Canada’s system-wide traffic increased by 11.6% and available capacity increased by 12.2% in April 2011 compared to April 2010. Air Canada’s domestic available capacity (-2.0%) decreased slightly more than its domestic traffic (-1.8%) year-over-year. This led to a slight increase in domestic load factor (+0.2 percentage points to 83.5%). Passenger traffic (+17.7%) and available capacity (+18.6%) on Air Canada’s international sector increased in April 2011 compared to April 2010. WestJet reported a slight drop in the carrier’s load factor to 83.6% year-overyear. This was due to a greater increase available capacity (+12.3%) over in traffic (+11.8%) during the period.

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

Page 3 May 2011

AIRLINE DATA – U.S. U.S. Airlines Release April 2011 Traffic Figures Airline

1,2

Notes:

Traffic

Capacity

(RPMs – millions)

(ASMs – millions)

2,499 6.1%

3,134 7.1%

79.7% 0.8 pts

785 12.2%

1,085 12.4%

72.4% 0.1 pts

17,007 1.1%

21,179 3.2%

80.3% 1.7 pts

10,431 2.7%

12,858 3.9%

81.1% 0.9 pts

15,473 2.6%

19,149 5.3%

80.8% 2.2 pts

4,946 4.3%

5,986 4.4%

82.6% 0.1 pts

1,763 7.8%

2,182 9.3%

80.8% 1.1 pts

Load Factor

1. Load factor includes scheduled service only. 2. Consolidated results for United Continental Holdings.

Sources: Carrier traffic reports.

Page 4 May 2011

AIRLINE DATA – INTERNATIONAL International Airlines Release April 2011 Traffic Figures Traffic

Capacity

(RPKs – millions)

(ASKs – millions)

17,569 23.1%

21,637 21.2%

81.2% 1.2 pts

16,707 24.3%

16,707 24.4%

76.3% 0.0 pts

9,690 33.2%

12,335 30.0%

80.7% 1.9 pts

8,722 3.3%

11,403 7.3%

76.5% 3.0 pts

6,908 7.0 pts

9,255 11.2 pts

74.6% 3.0 pts

4,011 39.2%

6,646 25.1%

60.4% 14.6 pts

8,063 6.8%

10,039 11.6%

80.3% 3.6 pts

Airline

3, 4

Load Factor

1. Includes Martinair. 2. Includes Lufthansa Passenger Airlines, SWISS from July 2009 onwards, British Midland from Sep 2009 onwards and Austrian Airlines. 3. Includes Qantas Domestic, QantasLink, Jetstar Domestic, Qantas International, Jetstar International, and Jetstar Asia. 4. Traffic results are for March 2011; April 2011 results are not yet posted. 5. Includes Cathay Pacific and Dragonair.

Page 5 May 2011

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

2010

Vancouver

Montréal

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

March 1st Quarter April May June 2nd Quarter July August September 3rd Quarter October November December 4th Quarter January

+4.1% +1.2% +2.7% +8.2% +7.9% +6.3% +7.3% +4.7% +6.8% +6.2% +8.6% +6.2% +5.8% +6.9% +6.8%

+3.0% +1.5% +2.3% +7.3% +8.2% +6.0% +4.7% -0.3% +3.0% +2.4% +7.3% +5.8% +3.0% +5.3% +3.0%

+3.3% +1.7% +3.6% +9.1% +11.4% +8.1% +7.1% +5.3% +10.3% +7.4% +8.1% +8.2% +6.0% +7.4% +8.5%

+5.0% +2.8% +0.1% +7.5% +7.6% +5.0% +5.9% +1.1% +3.4% +3.4% +3.3% +8.1% +0.4% +3.8% +1.9%

+1.2% -1.0% -3.8% +3.7% +3.8% +1.1% 0.0% -1.1% +2.1% +0.2% -1.8% +1.2% -2.2% -1.0% +0.7%

+8.1% +6.2% +5.0% +3.9% +8.2% +5.7% +6.9% +6.7% +3.9% +5.8% +2.1% +7.1% +5.6% +4.9% +3.2%

+1.2% -1.5% -4.4% +1.4% +2.4% -0.2% +2.4% -2.5% +1.9% +0.5% -1.0% +2.2% -0.6% +0.1% -2.7%

+5.8% +2.9% +0.5% +5.0% +1.6% +2.8% +6.9% -1.6% -0.2% +1.6% +0.2% +3.9% +7.2% +3.5% +4.0%

+4.6% -0.5% -1.6% +1.5% +0.7% +0.2% +0.8% -2.6% -2.8% -1.6% -2.0% -3.6% -3.0% -2.8% +1.6%

+4.4% +4.4% +3.4% +0.3% -11.7% -3.0% +3.4% +4.1% -0.5% +2.5% +3.0% -6.1% +2.4% -0.2% -1.9%

+5.6% +6.2% +4.9% +9.5% +6.4% +6.9% +2.8% +3.0% +5.1% +3.6% +2.2% +5.0% +3.3% +3.5% -2.6%

+13.5% +11.9% +9.7% +11.0% +8.3% +9.6% +11.6% +6.3% +3.6% +7.1% +4.9% +9.5% +14.9% +9.8% +3.9%

St. John’s +10.9% +6.8% +9.3% +8.4% +11.2% +9.7% +12.0% +6.0% +1.4% +6.7% +4.4% +6.3% +8.8% +6.3% +1.9%

February

+4.6%

-3.1%

+5.1%

-1.2%

+0.3%

+3.2%

-2.2%

+12.3%

+1.5%

+4.9%

-0.3%

+2.4%

+4.8%

March

N/A

+0.5%

+5.9%

-2.2%

+1.6%

+0.1%

-2.6%

+1.4%

-5.6%

-3.0%

+4.7%

+5.2%

N/A

1st Quarter

N/A

+0.1%

+6.5%

-0.5%

+0.9%

+2.1%

-2.5%

+5.4%

-1.2%

-0.2%

+0.4%

+3.8%

N/A

2011

Toronto

Source: Transport Canada and individual airports’ traffic reports. Note: Subject to revision. Passenger traffic for some airports was not yet available at the time of publication. Page 6 May 2011

NEWS AIR CANADA UPDATE AIR CANADA REPORTS NET LOSS OF C$19 MILLION IN FIRST QUARTER OF 2011 On 5 May 2011, Air Canada reported that it incurred a net loss of C$19 million in the first quarter ended 31 March 2011. This is C$93 million less than the loss reported by the carrier during the same period of the previous year (C$112 million). According to Air Canada, operating expenses increased by 6% (equivalent to C$164 million) year-over-year due to growth in system-wide capacity (7.7%) and an increase in fuel expenses (20%) year-over-year. AIR CANADA WINS PROGRAM OF THE YEAR AWARD AT ANNUAL FREQUENT TRAVELER AWARDS Air Canada, together with Aeroplan, won the 2011 program of the year award for airlines in the Americas at the annual Frequent Traveler Awards held in New York on 28 April 2011. This is the second year in a row for the award to be granted to Air Canada and Aeroplan. The Canadian carrier and loyalty coalition program also jointly received awards for "Best Airline Promotion for Earning," "Best Airline Redemption Ability" and "Best Customer Service" in the Americas region. The Frequent Traveler Awards include seven categories for frequent flyer and frequent guest programs, including Program of the Year, Best Redemption Promotion, Best Earning Promotion, Best Redemption Ability, Best Elite-Level Program, Best Customer Service and Best Loyalty Credit Card, and is based on votes casted online by the public.

Page 7 May 2011

AIR CANADA LAUNCHES EXPRESS SERVICE TO BILLY BISHOP TORONTO CITY AIRPORT On 1 May 2011, Air Canada launched Air Canada Express services and resumed services between the Toronto Island Airport and Montréal. Air Canada Express is the carrier’s new regional brand name. The non-stop services between the City airport and Montréal will be offered 15 times daily. It will be operated by Sky Regional Airlines Inc. with Bombardier Q-400 aircraft.

WESTJET UPDATE WESTJET SETS NEW SINGLE-DAY RECORD FOR TRAFFIC WITH 51,000 PASSENGERS On 4 May 11, WestJet announced its April load factor of 83.6 per cent, with RPMs growing 11.8 per cent and ASMs growing 12.3 percent year over year. CEO Greg Saretsky said that it was their second busiest April in history, with a new single-day record for traffic being set 21 April 2011 with 51,000 passengers. WESTJET REPORTS NET EARNINGS OF C$48.2 MILLION IN FIRST QUARTER OF 2011 On 3 May 2011, WestJet reported that in the first quarter ended 31 March 2011, it had net earnings of C$48.2 million. During the same period of the previous year, the carrier reported net earnings of C$2.4 million (C$45.8 million less than this year). In the first quarter, WestJet recorded an operating margin of 10.3%, and experienced a 12.1% increase year-over-year in revenue per available seat mile (RASM).

NEWS WESTJET UPDATE – CON’T WESTJET LAUNCHES NEW NON-STOP SERVICE BETWEEN VANCOUVER AND SANTA ANA, CALIFORNIA On 29 April 2011, WestJet announced a new non-stop service from Vancouver International Airport (YVR). Starting 2 May 2011, daily flight service commenced between Vancouver and Orange County-Anaheim, California, providing further access to Disneyland.

U.S. AIRLINES UPDATE HAWAIIAN AIRLINES’ PASSENGER TRAFFIC INCREASES 2.4% On 9 May 2011, Hawaiian Airlines reported that the carrier’s passenger traffic increased 2.4% to 678,556 passengers in April 2011 compared to April 2010, when the carrier transported 662,356 passengers. Both passenger traffic (17.2%) and available seat capacity (21.4%) increased yearover-year. However, Hawaiian Airlines reported a decrease in its load factor by 3 percentage points (to 82.4%) over a year ago. ALLEGIANT AIR EXPECTS SERVICES TO MEXICO AND CANADA BY 2013 Andrew Levy, president of Allegiant Air’s parent company - Allegiant Travel Co., said that the carrier expects to offer services to Mexico and Canada by 2013. This was announced at the Low-Cost Airlines World Americas conference held in Miami on 3 May 2011. According to Levy, the Las Vegas-based carrier is also looking into adding six Boeing 757 aircraft to its fleet by 2012. Allegiant Air currently has a fleet consisting of MD80 series aircraft.

Page 8 May 2011

U.S. DOT TENTATIVELY GRANTS ANTITRUST IMMUNITY TO DELTA AIR LINES AND VIRGIN AUSTRALIA AIRLINES ALLIANCE On 10 May 2011, the U.S. Department of Transportation (DOT) tentatively granted anti-trust immunity to the alliance between Delta Air Lines and Virgin Australia Airlines. The alliance will allow the two carriers to coordinate services between the U.S. and Australia through codesharing, and will enable customers to avail of extended frequent flyer program benefits. The DOT had tentatively rejected the alliance application previously; however after changes were made to the application, the department reversed its initial ruling. The Australia Competition and Consumer Commission approved the alliance between the two carriers in December 2009. US AIRWAYS CONSIDERS POSSIBLE MERGER SCENARIOS Executives at US Airways are considering possible merger scenarios says Doug Parker, CEO of US Airways. According to Mr. Parker, if United, Delta, or American were interested in a deal, US Airways is one of the only remaining airlines that would result in a transaction of significant size. Mr. Porter said that a transaction with a smaller carrier could be possible, but would have limited implications for the market. US Airways has missed out on several merger attempts most noticeably in 2008 with Delta and Northwest, and recently, with Southwest Airlines’ plans to purchase Air Trans.

NEWS

AIR CHINA AND CATHAY PACIFIC LAUNCH AIR CHINA CARGO

CARGO UPDATE FEDEX EXPRESS BUILDS REGIONAL HUB IN SINGAPORE FedEx Express is currently building a regional hub in Singapore. The hub will be located at the Airport Logistics Park Free Trade Zone adjacent to Singapore Changi Airport. Operations are expected to commence at the site in the latter half of 2012. At 282,700 square-feet, the Singapore regional hub will become the carrier’s second-largest facility in Asia, following its main sorting operation in Guangzhou, China. LUFTHANSA CARGO FINALISES ORDER FOR FIVE BOEING 777 FREIGHTERS On 19 May 2011, Lufthansa Cargo finalised an order for five Boeing 777 freighters, which it initiated with Boeing in March 2011. Based on Boeing list prices, the order is valued at US$1.35 billion. AeroLogic, Lufthansa Cargo’s joint venture with DHL Express, already operates eight Boeing 777 freighters. To-date, Boeing has received a total of 88 orders for this aircraft type, and 39 freighters have already been delivered. PANALPINA ADDS SECOND AIR CARGO FLIGHT BETWEEN HONG KONG AND HUNTSVILLE, ALABAMA TO AIR FREIGHT NETWORK

On 6 May 2011, Air China and Cathay Pacific launched Air China Cargo (ACC), the new cargo carrier joint venture between the two carriers. ACC will be based in Shanghai and will have a fleet consisting of 12 Boeing 747-400 freighters. Of the seven Board of Directors of the cargo joint venture, four will be appointed by Air China, which has a 51% equity interest in ACC. The three other directors will be appointed by Cathay Pacific, which has a 25% equity interest together with a 24% economic interest. CHINA SOUTHERN AIRLINES TO ASSIST CHINA POST IN TRASPORTATION OF AIR CARGO Facing growing volumes, China Post has contracted China Southern Airlines to assist in the transportation of mail and air cargo. To assist in streamlining the process of scanning and delivering mail, China Southern Airlines has teamed up with Sodexi, a Skyteam network member and branch of Air France Cargo. Sodexi, located at Paris Charles de Gaulle (CDG) airport, will fly mail daily from China to Paris where it will be scanned and distributed using the Skyteam network.

On 13 May 2011, Panalpina, a leading global supplier of forwarding and logistics services, announced that it will be adding an air cargo flight between Hong Kong and Huntsville, Alabama to its air freight network. The new air cargo service is the first direct service flight between the two cities. It will be operated weekly by Atlas Air using Boeing 747-400F aircraft. Page 9 May 2011

NEWS PEOPLE IN THE NEWS DENIS LEBEL APPOINTED AS MINISTER OF TRANSPORT, INFRASTRUCTURE AND COMMUNITIES AND OLIVIA CHOW APPOINTED AS TRANSPORT CRITIC On 18 May 2011, Prime Minister Stephen Harper announced that Denis Lebel, MP for Roberval-Lac-St-Jean, has been appointed as Canada’s new Minister of Transport, Infrastructure and Communities. Mr. Lebel entered federal politics in 2007 and has been serving as Minister of State for the Economic Development Agency of Canada for the Regions of Quebec since 2008. The following week, Jack Layton, leader of the New Democrat Party (NDP) of Canada, announced that Olivia Chow, MP for Trinity-Spadina, will serve as the NDP transportation and infrastructure critic. Ms. Chow was first elected as a Member of Parliament in 2006 and has previously served as Vice Chair of the Toronto Transit Commission (TTC). GREATER LONDON INTERNATIONAL AIRPORT AUTHORITY PRESIDENT AND CEO ANNOUNCES RETIREMENT On 5 May 2011, Greater London International Airport Authority President and CEO, Steve Baker, announced that he intends to retire on 30 April 2012. Mr. Baker has been serving at London International Airport for the past 20 years, and has also served at Toronto Pearson International Airport and Calgary International Airport. The recruitment process for his successor has been initiated by the Greater London International Airport Authority Board of Directors.

Page 10 May 2011

ANDREW WATTERSON APPOINTED AS VICE PRESIDENT OF PLANNING AND REVENUE MANAGEMENT OF HAWAIIAN AIRLINES On 11 May 2011, Hawaiian Airlines announced that Andrew Watterson was appointed as Vice President of Planning and Revenue. Mr. Watterson has experience as a partner in the aviation, aerospace, and defense practice of Oliver Wyman a Dallas-based consulting firm. He will be replacing Avi Mannis, who was recently appointed as the carrier’s new Vice President of Marketing. UPS APPOINTS MATT CAPOZZOLI AS VICE PRESIDENT OF FLIGHT OPERATIONS On 27 April 2011, UPS announced that Matt Capozzoli was appointed as Vice President of Flight Operations for UPS Airlines. Mr. Capozzoli has 34 years of experience serving with UPS. He began his career with the global logistics company in 1977 working in ground operations, and has held several managerial positions since. His predecessor, Capt. Rick Barr, will be retiring after 23 years of service at UPS. PRESIDENT AND CEO OF ESTONIAN AIR TO RESIGN Estonian Air announced that the carrier’s current President and CEO, Andrus Aljas, will be resigning from his position effective 1 June 2011. Mr. Aljas began his career with Estonian Air on 7 June 2006 as Vice President Finance, and has been serving as the carrier’s President and CEO since 29 April 2008. His successor has been chosen and will be announced when he steps down on 1 June 2011.

NEWS AIRPORTS UPDATE WORLD PASSENGER TRAFFIC AT AIRPORTS RETURNS TO PRE-ECONOMIC CRISIS LEVELS According to Angela Gittens, Director General of the Airports Council International (ACI), world passenger traffic at airports has returned to preeconomic crisis levels. Referring to predictions that could see air traffic doubling within 20 years, Ms. Gittens called for airports to make infrastructure investments to deal with increased passengers and promoted airport entrepreneurship as a means of diversifying airport revenues. BEIJING CAPTIAL INTERNATIONAL AIRPORT CONSIDERS A-SHARE LISTING IN CHINA On 11 May 2011, Chairman Dong Dong Zhiyi said that Beijing Capital International Airport (PEK) was considering an A-share listing in China. The potential listing of yuan-based A-shares would signal a significant shift in practice from the current Hong-Kong listing. FLIGHTS SUSPENDED AT BEN-GURION AIRPORT DUE TO FUEL CONTAMINATION PROBLEM On 6 May 2011, flights at Israel’s Ben-Gurion Airport (TLV) were suspended after a fuel contamination problem. The fuel contamination halted air traffic leaving thousands of passengers stranded as they waited for flights to resume. As the airport awaited test results from Germany, alternative fuel was being transported in from Cyprus and surrounding areas with the possibility of the military stepping in to assist with refueling.

Page 11 May 2011

BRAZILIAN AIRPORTS REPORT INCREASE IN PASSENGER TRAFFIC IN FIRST QUARTER OF 2011 For the first quarter of 2011, the Brazilian airports together reported an increase in total passenger traffic, with domestic passengers reaching over 38 million and international passengers over 4.5 million. Domestic traffic at Brazil’s airports increased by 16.4% year-over-year for the first quarter ended 31 March 2011, while international passenger traffic grew by 15.4% year-over-year. Strong growth in the Brazil market is forecasted and new international services to Brazil is expected in the upcoming months, with the country hosting the World Cup in 2014 and the Olympics in 2016.

OTHER NEWS PORTER AIRLINES BEGINS SERVICES FROM WINDSOR TO BILLY BISHOP TORONTO CITY AIRPORT On 27 April 2011, Porter Airlines began three-a-day round trip service, operating 70 seat Bombardier Q400 aircraft, from Windsor to Billy Bishop Toronto City Airport as a part of their expanding route network. With fares starting at $99 for a one-way trip, Sandra Pupatello the local MPP and Minister of Economic Development and Trade said that “Porter’s expanded service provides a boost to Ontario’s economy.” Expanded flight service to Sault Ste. Marie will also commence Spring 2011.

NEWS

GOOGLE ADDS FLIGHT SCHEDULE SEARCH CAPABILITIES

OTHER NEWS – CON’T DEMAND FOR AIRCRAFT IN MIDDLE EAST TO INCREASE BY 150% BY 2029 According to Boeing, growth in demand for aircraft in the Middle East will increase by 150% by 2029, with approximately 2,340 new aircraft being required. With a forecasted value of $390 billion, over half of the new planes are expected to be twin-aisle to deal with expected growth in the long haul markets. Since 2001, Boeing said that available seat miles have grown from 2.8 billion to 8.6 billion in the Middle East market.

Google has added flight schedule search capabilities. A summary of flight information, such as the schedule for all flights between two airports, is now provided when one searches for flights on the search engine’s website (www.google.com). This new feature also allows passengers to view non-stop flights between two airports or a list of all destinations from a specific airport. Google expects to introduce more travel-related searches in the future through their acquisition of the travel search engine, ITA last month.

DEMAND FOR AIRCRAFT IN BRAZIL FORECASTED TO INCREASE OVER NEXT 20 YEARS According to Boeing growth in demand for aircraft in Brazil could result in 2,180 new airplanes over the next 20 years. With a forecasted value of $210 billion, Latin America passenger air travel and air cargo are expected to grow approximately 6.9% and 6.4%, respectively, by 2029. Much of this expected growth is due to take place in Brazil as a result of the rise of the middle class and the introduction of regional low-cost carriers. IATA REVEALS AIR CARGO GROWTH AS PASSENGER GROWTH SLOWS According to the International Air Transport Association (IATA), air freight demand has spiked 4.5% with year-over-year growth of 3.7% from March 2010. This comes as passenger volume growth slowed to 0.3% in February. Air freight in Europe and North America grew 6.1% and 7.1%, respectively, with the largest growth in the Middle East and Latin America at 10.1% and 10.4%, respectively.

Page 12 May 2011

THE ASIA REPORT May 2011

Japan Airlines decreases seat capacity on select international and domestic routes

Doris Mak Director, Special Projects

On 17 May 2011, Japan Airlines (JAL) announced that it will be decreasing the seat capacity on select international and domestic routes throughout the month of June 2011 in response to a decrease in demand. Flights between Narita and Nagoya, which were previously operated with Boeing 777-300ER aircraft, will now be operated with a smaller Boeing 767-300ER aircraft. The carrier will also be reducing the frequency of its international services during the same period. Flights from Narita to Beijing and Seoul (Incheon) will decrease to seven weekly flights from 14. Furthermore, JAL will be suspending its flights between Narita and Hong Kong for the month of June 2011. The carrier will continue to monitor demand and make adjustments accordingly.

Air New Zealand and Virgin Australia announce new joint transTasman network On 16 May 2011, Air New Zealand and Virgin Australia announced their new joint trans-Tasman network that was developed as part of the carriers’ new alliance. The codeshare agreement between the two carriers has led to the largest Australasian route network offered to trans-Tasman travellers. Beginning in November 2011 until March 2012, Air New Zealand’s passengers will be able to connect to Virgin Australia’s services to 31 Australian destinations, while Virgin Australia’s passengers will be able to connect to Air New Zealand’s services to 26 New Zealand destinations. Flight times and capacity on some routes have been adjusted to increase convenience for passengers and to meet demand. Services between Queenstown and Sydney will be offered five times weekly during peak months, while capacity on Melbourne-Wellington services will increase by 10.5%. Air New Zealand and Virgin Australia’s Pacific Blue airline will operate 70% and 30% of the capacity, respectively. The alliance between the two carriers was approved in December 2010.

Shenzhen local government purchases 24% stake in Shenzhen Airlines Shenzhen International Total Logistics Co. purchased a 24% stake in Shenzhen Airlines from Huirun Investment Co. The purchase amounted to CNY789 million (US$121.4 million). The logistics company is a subsidiary of Shenzhen International Holdings, which is controlled by the government, and had already held a 25% stake in the carrier prior to the purchase. Huirun Investment Co., which faces bankruptcy, put up the bid for the remainder of its stake in the airline at the beginning of the year in order to pay off its debts. The investment company used to hold a 65% stake in Shenzhen Airlines prior to the bankruptcy, and sold 26% and 15% to Air China and Quancheng Logistics Co., respectively, in March 2011. Air China currently is the controlling stakeholder of the airline with a 51% stake.

Air cargo price-fixing case begins in New Zealand On 11 May 2011, the New Zealand High Court began the first stage of the proceedings on air cargo price-fixing activities that are said to have taken place between 2000 and 2006. According to the New Zealand Commerce Commission, several international airlines were involved in imposing fuel surcharges on air freight shipped in and out of New Zealand. The airlines include Cathay Pacific, Air New Zealand, Korean Air Lines, Singapore Airlines Cargo, Japan Airlines, Malaysian Airlines, PT Garuda Indonesia, Thai Airways, Emirates and Singapore Airlines. In the first stage, the New Zealand High Court will determine whether the commission has authority over air freight shipped into New Zealand. In the second part of the proceedings, the High Court will assess whether price-fixing activities have taken place. This second stage is scheduled to begin in July 2012.

Page 13 May 2011

THE EUROPEAN REPORT May 2011

Keflavik International Airport closes due to eruption of Grimsvotn volcano

Ian Kincaid Vice President, Economic Analysis

On 22 May 2011, Keflavik International Airport in Iceland was closed due to the eruption of Grimsvotn volcano the day before. Iceland’s aviation authorities declared a no-fly zone over a 120-nautical mile radius around the eruption, cancelling all inbound and outbound flights to and from the airport. The volcanic ash caused by the eruption of Iceland’s most active volcano has reached a height of 12 kilometres around the country. According to Eurocontrol, the European Organisation for the Safety of Air Navigation, European and trans-Atlantic flights have not been affected by the volcanic ash (24hours since the eruption).

Air France-KLM, Alitalia and Delta Air Lines joint venture reduce transAtlantic capacity in Fall 2011 On 19 May 2011, Air France-KLM, Alitalia and Delta Air Lines announced that they will be reducing trans-Atlantic passenger capacity on their combined network by 7%-9% year-over-year in Fall 2011. The members of the joint venture cited rising jet fuel prices and fluctuating seasonal demand as reasons behind the decrease in frequency of selected routes between Europe and the United States and Canada. Together, the airlines form the leading trans-Atlantic joint venture, comprising 26% of total trans-Atlantic capacity and generating annual revenues equivalent to $11 billion. Their combined network includes over 260 daily trans-Atlantic flights to over 300 destinations operated with a fleet of 144 aircraft.

Air Berlin reports loss of €120.6 million for the first quarter of 2011 Air Berlin experienced a loss of €120.6 million (US$169.6 million) for the first quarter of 2011, as reported by the airline on 18 May 2011. Over the same period last year, the carrier reported a loss of €131.6 million. According to Air Berlin, this year’s loss is attributed to flight cancellations caused by the political conflict in Northern Africa, the introduction of the air transportation tax, the significant increase in the price of kerosene, and the decrease in Easter-related tourism business. However, Germany's second-largest airline company remains optimistic and forecasts a 4%-5% passenger increase in the upcoming months.

Danish airline, Cimber Sterling, experiences higher than expected losses On 17 May 2011, Danish airline Cimber Sterling was in dialogue with investors after higher than expected loses. With increasing fuel prices and special item costs, the 2010 operating loss is expected to be around DKK190 million-DKK200 million (US$36.2-US$38.1 million), approximately 40% higher than earlier forecasts. According to news reports, the airline has had several interested parties potentially willing to invest to strengthen the capital base.

British Airways reaches an agreement with its cabin crew On 12 May 2011, British Airways reached an agreement with its cabin crew, represented by the Unite union. The carrier and the union agreed on cost-saving structural changes in cabin crew operations. Exact terms of the agreement have not been disclosed. Since the dispute began 18 months ago, 22 strikes had taken place, costing British Airways approximately £150 million (US$246 million). Since the two parties were able to reach an agreement, the threat of industrial action by the carrier’s cabin crew was lifted. Over the next month, the agreement will be voted upon by 9,000 Unite cabin crew members for final ratification.

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THE WASHINGTON REPORT May 2011

Major Changes in Store for U.S. – Australia/New Zealand Market In a sure sign that the world is not ending as had been predicted and widely publicized by a California preacher and radio evangelist, major changes are unfolding in the Trans-Pacific market that supposedly will benefit not only the carriers, but consumers as well.

Steve Martin Senior Vice President

DOT Tentatively Clears Delta, Virgin Blue Agreement The U.S. Department of Transportation (DOT) reversed a previous finding and tentatively approved an antitrust application from Delta to operate joint services between the U.S. and Australia with affiliates of the Virgin Blue Group (V Australia, Virgin Blue and Pacific Blue Airlines affiliates in both Australia and New Zealand). Despite having been approved by the Australian government in 2009, the DOT had rejected the application for antitrust immunity for the carriers in 2009, citing the applicants’ failure to demonstrate any consumer benefit from the proposed arrangement. DOT now found that "Delta and its partners had made substantial changes from their previous application, addressing concerns that immunity would provide only limited benefit to consumers." In the new application, DOT found that Delta and the Virgin Blue Group had effectively submitted a new application. This proposal: 

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clarified that the Virgin Blue Group will operate with one management structure and a unified reservations system that is compatible with Delta’s system and capable of supporting the highly technical joint venture cooperation necessary to deliver the consumer benefits associated with a highly integrated, immunized alliance expanded the scope of their joint venture to include more points beyond the gateway cities. … [T]he expansion and optimization of their joint network will make the alliance more competitive and allow it to deliver substantial benefits at inception. submitted market data that reflect more favourable conditions for immunized cooperation than those that existed last year. … The applicants have committed on the record to maintain their existing capacity in the market for two years, to provide consumers with the assurance of some of the benefits from the cooperation in the immediate future.

DOT’s competitive analysis found that the proposed transaction was unlikely to have any significant deleterious effect on competition in the U.S.-Australia market. “Three carrier groups, each with its own alliance, in a long-haul market, are likely to continue to operate in a competitive environment that benefits the traveling and shipping public. Where it does occur, the loss of competition from four to three carriers will not cause a substantial reduction in competition.” Further, DOT found that granting antitrust immunity to the applicants “…would likely improve the quality of competition, providing further benefits to passengers in the market. Approving the application would create a stronger competitive force that would put additional competitive pressure on incumbents to deliver new and improved consumer benefits.”

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THE WASHINGTON REPORT – CON’T In tentatively approving the arrangement, DOT required that the carriers meet several specified conditions. According to the Show Cause order, the carrier must: 



Implement their joint venture within 18 months or lose the antitrust immunity. The purpose of this condition is to ensure that the public benefits of the alliance are realized in a prompt fashion. Meet certain capacity commitments. Delta must operate at least 656 annual transpacific segments (U.S. mainland to points in Australia) and Virgin Blue must operate at least 1260 annual transpacific segments (Australia to points in the U.S. mainland). Report annually on developments in the alliance and the degree to which the public benefits envisioned in the application are being realized.

In addition, the Virgin Blue Group must report full-itinerary O&D Survey information for all passenger itineraries that include a United States point. (DOT will keep the information confidential.) Following DOT’s announcement, Delta and Virgin Australia issued a statement that noted, “The alliance will create a comprehensive, fully integrated network able to serve thousands of city-pairs in North America and the South Pacific. Delta alone serves a single point in Australia, Sydney, and Virgin Australia’s international airline, V Australia, flies only to Los Angeles. The antitrust immunized alliance will allow the airlines to fully cooperate on network planning and distribution to deliver a more attractive and competitive service for customers.” Said Glen Hauenstein, Delta's executive vice president of network, revenue management and marketing, “This alliance will bring more effective competition to the region and provide consumers greater choice of destinations, frequencies and schedules."

American – Qantas Apply to Deepen Commercial Ties The day after DOT issued its finding on Delta and Virgin Australia, Qantas and American Airlines announced that they are seeking regulatory approval for a joint business agreement (JBA) on their services between Australia/New Zealand and the United States, within the these regions and beyond to third countries. If approved, the JBA will create a new strategic partnership between Qantas and American involving close commercial cooperation and resulting in significant benefits for consumers. It will also enable the airlines to maximize the advantages of Qantas' new service to American's primary hub, Dallas/Fort Worth (DFW), which commences next week. Qantas has filed an application for authorization of the JBA with the Australian Competition and Consumer Commission (ACCC) and will file an application with the New Zealand Minister of Transport. The U.S. Department of Transportation will also review the agreement.

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THE WASHINGTON REPORT – CON’T The key elements of the JBA are:      

Joint strategic planning and management of trans-Pacific services and 'behind and beyond' services within Australia/New Zealand and North America. Improvement of flight schedules, frequencies and connection times to benefit Qantas and American customers. Joint pricing initiatives resulting in more competitive fares and new fare products, as well as joint marketing of services. Increased opportunities for customers of each airline to earn and redeem frequent flyer miles/points on services operated by the other. A streamlined offering for corporate customers and for travel agents. The ability to coordinate pricing for the sale of Australia and New Zealand package destinations by AA Vacations, American's outlet for discount vacation packages.

"By strengthening and broadening further our cooperative business partnership with Qantas, American will be better positioned to deliver enhanced benefits to our joint customers," said Virasb Vahidi, American's Chief Commercial Officer. "The expanded joint business agreement between American and Qantas will benefit our customers, financial partners, and employees. Qantas is one of our longest standing and most highly valued partners, and together we are creating a new joint platform from which to launch significant growth in air travel between North America and the South Pacific." Qantas currently offers 41 scheduled round-trip flights per week between Australia/New Zealand and the U.S. These include 33 weekly flights to Los Angeles, four weekly flights to Honolulu and four weekly flights to Dallas/Fort Worth (which launched 16 May 2011). Qantas also offers six weekly flights to New York via Los Angeles. American and its affiliate American Eagle operate a total of 1,010 weekly flights to 37 destinations in North America from Los Angeles. American has announced its intention to enhance its operations there. Being able to flow Qantas traffic over LAX would help American to expand its operations to other destinations.

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INTERVISTAS NEWS Rick Russell received Certificate of Appreciation for contribution to the implementation of the Qatar National Master Plan Project (QNMP) InterVISTAS is proud to announce that Rick Russell, Vice President, was awarded a Certificate of Appreciation by His Excellency Sheikh Abdul Rahman Bin Khalifa Bin Abdul Azziz Al-Thani, Minister of Municipality and Urban Planning (MMUP) and Chairman, Qatar National Master Plan Steering Committee. This prestigious and rare honour was awarded for Rick's outstanding contribution to the implementation of the Qatar National Master Plan project (QNMP), supporting the arrangement of QNMP Executive and Technical Leadership Seminars held in Doha from December 2010 to March 2011.

InterVISTAS Upcoming Speaking Engagements Dr. Mike Tretheway, President, InterVISTAS Consulting Inc., Executive Vice President and Chief Economist, InterVISTAS Group Marine Pilotage Association: Halifax, NS – 6 July 2011 Dr. Tretheway will be presenting on the status and future of economic and safety regulation, in general, and of marine transport in particular. Kevin Schorr, Vice President, Air Service Development 2011 ACI-NA Marketing and Communications Conference: Cleveland, OH – 2023 June 2011 Mr. Schorr will be an airline roundtable moderator together with representatives from several airlines.

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 Robert Andriulaitis at robert.andriulaitis@intervistas.com or 1-604-717-1807. To subscribe, please send an email to subscribe@InterVISTAS.com To unsubscribe, please send an email to unsubscribe@InterVISTAS.com Page 18 May 2011