CAIR Issue No. 77 - April 2010 by Leah Dupuis

CANADIAN AVIATION INTELLIGENCE REPORT APRIL 2010

IN THIS ISSUE: CEO Update – p 1 Tourism Outlook – p 2 Caribbean Report – p 11 Asia Report – p 12 European Report – p 13 Washington Report – p 14 Opinion Column – p 15

CEO UPDATE April 2010

Welcome to the April 2010 edition of InterVISTAS Consulting Inc.’s Canadian Aviation Intelligence Report (CAIR).

The April 2010 CAIR Line-Up Gerry Bruno CEO

This month, we lead off with an article on the tourism outlook for 2010. While 2009 was a dismal year, there are signs that a recovery is underway. Eugene Chu provides an analysis on page 2. We also have an opinion column by Mike Tretheway, our Chief Economist. Mike was Director of Research for the Ministerial Task Force on International Air Policy. This month he comments on some economic impact work we at InterVISTAS did on the benefits of liberalisation of air service access. He also comments on the recent protectionism debate that has been at the forefront of policy discussions recently. Our regular columns include:

Caribbean Report

Asia Report

Europe Report

Washington Report

We hope you enjoy this issue.

Page 1 April 2010

CHALLENGING 2009 FOLLOWED BY OPTIMISM FOR INTERNATIONAL TOURISM IN 2010 April 2010

2009 was a challenging year for the international tourism industry. Beset by the global economic recession, a global health pandemic (H1N1 influenza), along with natural disasters and political unrest in many parts of the world, the demand for international travel plummeted. This column examines the demand for international tourism in 2009 based on preliminary statistics published by the World Tourism Organisation (UNWTO), and also provides an outlook for the year ahead. Growth of International Tourism International Tourist Arrivals – Global (millions)

A Challenging Year for Tourism in 2009. After consistent growth for

950 900

Signs of a Recovery? A closer examination of the 2009 results show that international tourist arrivals increased by 2% in the fourth quarter of 2009, following declines of 10%, 7% and 2% in the first three quarters of 2009 respectively. Asia Pacific (+2.9%), the Middle East (+5.3%) and Africa (+5.7%) led the recovery with positive growth during the second half of 2009.

920 880

850

800

805

750

763

700 682 682

650

702

692

633

600 570

550

610

593

536

08 20

07 20

03 20

02 20

99 19

97 19

500

international tourism between 2003 and 2008, international tourist arrivals dropped by 4% in 2009 to approximately 880 million. The decline was evident in most major world regions, including the Americas (-5%), Europe (-6%), Asia Pacific (-2%), and the Middle East (-6%). Only Africa managed to record positive annual growth (+5%) in international tourist arrivals in 2010.

908

850

Eugene Chu Senior Project Manager

Source: World Tourism Organisation (UNWTO).

UNWTO Panel of Tourism Experts Confidence Index (World)

175 Better

125 Equal

150 144

150

144 140

140 136

143 137

132

100

71 72

75 Worse

131

119

50 25 2003

2004

2005

2006

Prospects (before)

2007

2008

2009

2010

Evaluation (after)

Source: World Tourism Organisation (UNWTO).

Page 2 April 2010

Confidence in 2010. UNWTO’s Panel of Tourism Experts1 from around the world evaluated 2009 with a low score of 72, which was in line with expectations for the year (lower points reflect less confidence, and vice versa). However, the Panel rated prospects for 2010 at 131, above the neutral base of 100, and just below the pre-recession prospects for 2008. The UNWTO now expects that international tourist arrivals will grow by 3-4% in 2010. This is notably higher than the initial forecast of 1-3% that was made in the latter part of 2009, and reflects the International Monetary Fund’s improved forecasts for the global economy in 2010, along with improved confidence in the international tourism industry. By region, Asia Pacific is expected to be one of the leaders in tourism industry growth (5-7%), while Europe and the Americas is expected to post more moderate increases of 1-3% and 2-4% respectively in 2010.

Opportunities and Challenges. Preliminary signs indicate that the global economy may be recovering faster than expected after the worst recession since the Second World War. In general, business and consumer confidence has improved, while interest rates and inflation are expected to remain relatively low. There are also several major international events in 2010, including the Olympic and Paralympic Winter Games in Vancouver (February and March 2010), FIFA World Cup in South Africa (June 2010), and Shanghai World Expo (May-October 2010) that are expected to attract global visitors and boost international tourism. However, there are also several downside risks to the optimistic outlook for 2010. This includes unemployment and job uncertainty, especially in the more advanced economies in the Americas and Europe. The fragile economic recovery in these major tourism source markets pose a threat to international tourism industry growth. The gradual withdrawal of government stimulus measures in some markets may put pressure on business and consumers, while several advanced economies are facing significant debt and deficit challenges. Global security and health pandemics are continuing threats as well. Although the UNWTO forecast expects international tourist arrivals to increase in 2010, revenue and yields are expected to be relatively low, and recover at a slower pace than international visitor traffic.

Includes over 340 experts and industry representatives from the public and private sectors, destinations, transportation providers, accommodation & catering, tour operators and travel agencies, consultancies, and general industry bodies. 1

Page 3 April 2010

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

March 2010 Air Carrier

Passenger Traffic Revenue Passenger Kilometres % Change % Change over 2009 from 2008

Capacity Available Seat Kilometres

Load Factor

% Change over 2009

% Change from 2008

Change over 2009

Change from 2008

Air Canada1

+9.6%

-5.2%

+7.7%

-4.2%

+1.4pts (to 82.1%)

-0.8pts (from 82.9%)

Domestic

+3.5%

-6.0%

+2.2%

-5.5%

+0.9pts

-0.5pts

International & Charter

+12.4%

-4.8%

+10.1%

-3.7%

-1.7pts

-0.9pts

+10.0%

+10.6%

+7.4%

+14.2%

+1.9pts (to 83.8%)

-2.8pts (from 86.6%)

WestJet

Analysis: • Air Canada’s domestic traffic sector increased 3.5% in March 2010 over March 2009. Domestic capacity decreased 6.0% resulting in an increase in the carrier’s domestic load factor from 80.6% in March 2009 to 81.5% in March 2010. • Air Canada Mainline’s international sector experienced growth in traffic (+12.4%) and a decrease in capacity (+4.8%) in March 2010 compared to March 2009. Traffic was up in all regions, including the Pacific (+30.3%).

Air Canada Domestic Mainline

6% 4% 2% 0% -2% -4% -6% -8% -10% -12%

Feb- Mar 09

Apr

May

Jun

Jul

Aug

Dom RPK

Sep

Oct

Nov

Dec

Dom ASK

Jan10

Feb

Mar

Air Canada International 15% 10% 5% 0% -5% -10%

• WestJet reported a system-wide -15% -20% load factor of 83.8%, up 1.9 percentage points from March 2009. This was due to traffic (+10.0%) outpacing growth in capacity (+7.4%).

Feb09

Mar

Apr

May

Jun

Jul

Aug

Int'l RPK

Sep

Oct

Nov

Dec

Int'l ASK

Jan10

Feb

Mar

Jan10

Feb

Mar

WestJet

12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% Feb09

Mar

Apr

May

Jun

Jul

RPK

Aug

Sep

Oct

ASK

Nov

Dec

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

Page 4 April 2010

AIRLINE DATA – U.S. U.S. Airlines Release March 2010 Traffic Figures

Notes:

(RPMs – millions)

(ASMs – millions)

Capacity

Load Factor

2,452 ↑9.1%

3,016 ↑6.4%

81.3% ↑2.0 pts

621 ↑3.7%

845 ↑3.7%

73.5% 0.0 pts

6,676 ↑0.4%

8,245 ↓4.2%

81.0% ↑3.7 pts

7,874 ↑5.2%

9,472 ↑0.5%

83.1% ↑3.7 pts

9,893 ↑3.2%

11,846 ↓2.7%

83.5% ↑4.8 pts

10,581 ↑2.5%

12,950 ↓0.7%

81.7% ↑2.6 pts

16,066 ↑3.0%

19,081 ↓1.6%

84.2% ↑3.7 pts

4,908 ↓0.1%

5,897 ↓1.7%

83.2% ↑1.3 pts

1,738 ↑9.6%

2,075 ↑5.5%

83.8% ↑3.1 pts

Traffic

Airline

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

Sources: Carrier traffic reports.

Page 5 April 2010

AIRLINE DATA – INTERNATIONAL International Airlines March 2010 Traffic Figures (RPKs – millions)

(ASKs – millions)

Capacity

Load Factor

16,776 ↑4.7%

20,831 ↓1.9%

80.5% ↑5.0 pts

10,533 ↑9.6%

13,326 ↑4.9%

79.0% ↑3.3 pts

8,099 ↓11.4%

10,850 ↓13.7%

74.7% ↑2.0 pts

N/A

6,436 ↑9.9%

8,050 ↓4.2%

79.9% ↑10.2 pts

5,676 ↓8.1%

8,134 ↓14.1%

69.7% ↑4.5 pts

7,353 ↑10.5%

8,742 ↑0.7%

84.1% ↑7.5 pts

Traffic

Airline

4,5

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 February 2010 – March 2010 results are not yet posted. 5. Includes Cathay Pacific and Dragonair.

Page 6 April 2010

2009 2010

Toronto

Vancouver

January

-4.0%

-9.6%

MontréalTrudeau -2.7%

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

-4.2%

-1.7%

-0.9%

-1.0%

-7.5%

+1.1%

-8.8%

+10.5%

+7.1%

St. John’s -0.1%

February March st 1 Quarter

-5.9% -8.8% -6.3%

-11.3% -11.3% -10.7%

-7.0% -5.7% -5.3%

-3.5% -7.7% -5.2%

-3.2% -3.7% -2.9%

-8.0% -4.1% -4.4%

-3.5% -5.2% -3.3%

-11.3% -14.3% -11.5%

-2.8% -1.2% -1.0%

-8.5% -5.5% -7.6%

+6.5% -0.1% +5.7%

+0.8% -5.1% +0.9%

-5.9% -4.1% -3.4%

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

-6.7% -11.9% +12.3% -10.4% -4.9% -5.2% -5.1% -5.1% -1.9% -3.2% -0.6% -1.9%

-8.1% -14.6% -16.0% -13.1% -11.7% -9.6% -4.5% -8.9% -6.6% -5.2% -0.7% -4.1%

-6.4% -10.4% -7.8% -8.2% -1.5% -2.5% -5.4% -3.1% -3.1% -4.4% -0.1% -2.5%

-5.1% -8.3% -6.9% -6.8% -2.5% -1.9% +3.1% -0.7% +0.4% -4.0% -3.7% -2.4%

1.5% -8.5% -9.9% -5.7% -7.5% -7.8% -7.3% -7.5% -6.4% -5.2% -2.6% -4.7%

-7.1% -4.5% -6.9% -6.2% -5.5% -4.9% -1.8% -4.1% 1.3% +3.2% +5.4% +3.2%

-3.2% -8.1% -8.3% -6.6% -7.6% -5.9% -4.3% -6.0% -4.5% -8.9% -2.9% -5.4%

-1.9% -8.4% -7.5% -5.9% -3.0% -3.7% +1.2% -2.1% -1.3% +2.2% +4.3% +1.4%

0.1% -3.4% -4.1% -2.5% -1.9% -3.2% +2.3% -1.1% -2.4% +1.5% +13.1% +3.6%

-0.7% -2.9% 11.0% +2.4% +2.0% -1.2% +0.3% +0.3% -4.9% +9.6% +2.1% +2.0%

11.8% -2.0% -1.9% +2.3% +8.0% +3.3% -7.2% +1.3% -5.2% -3.8% +4.8% -1.4%

6.4% -2.8% 1.0% +1.4% +1.2% +5.9% +3.3% +3.5% +0.0% +2.5% +1.4% +1.3%

3.3% 2.0% -4.4% +0.1% +1.5% +2.0% +2.8% +2.1% -2.1% -0.1% +3.8% +0.3%

January

-0.4%

-1.9%

0.0%

+1.7%

-1.4%

+6.7%

-2.1%

+1.0%

+0.1%

+10.0%

+7.0%

+10.5%

+4.6%

Source: Transport Canada and individual airports’ traffic reports. Note: Subject to revision. Page 7 April 2010

NEWS AIR CANADA UPDATE JAMAICA SERVICE EXPANDED

In May 2010, Air Canada will expand its service to Jamaica by doubling the number of weekly flights between Toronto and Kingston to four. Air Canada will also deploy larger aircraft on the route during certain days of the week.

NEW U.S. SERVICES

On 27 January 2010, Air Canada announced new daily services from Toronto to seven U.S. cities, set to begin as early as April 2010. The cities include: • Orange County, California (daily, year-round); • San Diego, California (daily, year-round); • Portland, Oregon, (daily, year-round); • Memphis, Tennessee, (twice daily, yearround); • Cincinnati, Ohio, (twice daily); • Portland, Maine, (twice daily); and

WESTJET UPDATE WESTJET CEO RESIGNS WestJet CEO and President Sean Durfy announced his resignation, effect 1 April 2010. Mr. Durfy joined WestJet in 2004, becoming President in 2006 and CEO in 2007. Current Executive Vice President Gregg Saretsky has been announced as his successor.

NEW SEASONAL SERVICE TO THE DOMINICAN REPUBLIC WestJet will begin offering seasonal service from Toronto to Semana, Dominican Republic on 5 June 2010. The service will be offered weekly on Saturdays. WestJet will also begin offering weekly seasonal service from Montréal to Punta Cana.

CARGO SALES AND SERVICES AGREEMENT WITH EXP-AIR

• Syracuse, New York, (twice daily).

NEW INTERNATIONAL SERVICES

Air Canada is offering four new international services out of Toronto this summer, including Athens, Barcelona, Copenhagen, and Brussels.

NON-STOP REGINA-OTTAWA ADDED On 17 May 2010, Air Canada will launch the only non-stop daily flights linking Regina and Ottawa, with same plane service to/from Montréal. The service will be operated by Jazz using 75-seat Bombardier 705 jet aircraft.

AIR CANADA EXPANDS CALIFORNIA SERVICE Air Canada is increasing its capacity of service to California by over 50% by operating 77 weekly flights this summer. The increase includes a new service between Toronto and Orange County, a new route to San Diego, Page 8 April 2010

increased service to San Francisco, and the new use of a wide-body Boeing 767-300ER on select flights to Los Angeles. The service to Orange County began on 8 April, while the other new services will begin in June.

WestJet announced that it signed an agreement with EXP-AIR Cargo that offers an expanded range of services for customers throughout Canada, the U.S., Mexico, and the Caribbean. EXP-AIR Cargo offers cargo sales, charters, aircraft leasing, management, administration, and IT solutions to the cargo industry.

NEW SERVICE TO CUBA

On 1 April 2010, WestJet began offering scheduled service between Toronto and Varadero, Cayo Coco, and Holguin, Cuba. The services to Cayo Coco and Varadero will be offered in both the summer and winter, while the service to Holguin will be a summer service only. WestJet previously offered service to these destinations on a chartered service.

U.S. AIRLINES

is the home airport of FedEx.

VIRGIN AIRLINES EXPANDS TO TORONTO PEARSON AND ORLANDO.

IATA ANNOUNCES LARGEST DROP IN CARGO IN OVER 50 YEARS

Virgin America announced on 18 March 2010 that it will begin offering direct daily service to San Francisco and Los Angeles from Toronto starting in June. Beginning in August 2010, the airline will also offer daily nonstop service to Orlando from Los Angeles and San Francisco.

AIRLINE SHARES SURGE

On 9 February 2010, shares of U.S. airlines grew 7%, the largest one-day increase since May 2009. The increase was driven by United Airlines reporting January unit revenue well above estimates. American Airlines also saw good results on the news that Japan Airlines would stay in the Oneworld alliance.

INTERNATIONAL AIRLINES LAN PERU OFFERS SERVICE FROM SAN FRANCISCO LAN Peru has announced that it will offer four non-stop flights per week from San Francisco to Lima. The route will be served using Boeing 767-300s with a capacity of 221 passengers. The new service is the only non-stop service from San Francisco to South America.

EUROPEAN COMMISSION SENDS “STATEMENT OF OBJECTIONS” TO FREIGHT FORWARDERS

The European Commission has sent objections notices to a number of freight forwarders regarding alleged price-fixing cartels. Objections have been sent to Panalpina, UPS, DHL, and Kuehne and Nagel. A Statement of Objections is a formal step in initiating anti-trust investigations.

B787-8F TAKES FIRST FLIGHT On 8 February 2009, the Boeing 787-8 Freighter took its first flight in Washington State, beginning an extensive testing program. The aircraft is supposed to offer the best operating costs of any freighter, providing over 15% more revenue cargo volume. Boeing has received 76 orders for the new freighter.

OTHER NEWS

JETSTAR INTERLINE DEAL Jetstar has signed an interline deal with Air Canada allowing customers to connect with the Canadian carrier through Hawaii using a joint fare. It is the 12th interline deal for the low-cost carrier.

CARGO MEMPHIS IS WORLD’S BUSIEST CARGO AIRPORT AGAIN

Memphis International Airport retained its place as the busiest cargo airport in the world during 2009, for the 18th straight year. The airport saw freight increase 0.04% over 2008 widening the gap over second busiest Hong Kong International Airport which saw freight decrease 7.7% due to the effect the economic crisis had on Asian exports. Memphis International Airport Page 9 April 2010

2009 experienced a 10.1% decrease in cargo traffic, the largest drop since the end of the Second World War. European carriers were some of the worst hit, finishing the year at 20% below 2008 peak traffic.

WTO TOURISM EXPECTATIONS INCREASE The UN World Tourism Organisation released its January 2010 Tourism Barometer. While global tourism arrivals declined 4% in 2009, to 880 million, prospects for 2010 are brightening, with the WTO forecasting growth of 3-4% in 2010. The WTO’s World Tourism Barometer, a measure of expectations for the industry in the coming 6-12 months, showed a remarkable jump from 71 in 2009 to 131 for 2010. The index is scaled so that values below 100 indicate no expected growth in tourism while

values above indicate positive growth. This is the largest jump in expectations for tourism in over a decade. Positive factors listed for Canada inbound tourism included hosting the 2010 Winter Olympics and receiving approved destination status from China.

EDMONTON TAXI FARE MAY CHANGE

The Vehicle for Hire Commission has submitted a new proposed rate structure for fares from the city to Edmonton International Airport. The new rates would allow drivers to charge the meter rate or flat rate that is equal to the one offered from the airport to the city, whichever is lower. This will eliminate instances where fares from the city to the airport can be significantly higher than going the same distance from the airport to the city. Drivers will vote on the proposed measure 10 February 2010.

GLOBAL AIRLINE CAPACITY AND FREQUENCY GROWS

OAG reports that the total number of seats available in April of 2010 is increasing 6% over the previous year. Frequency is also increasing, with world airlines operating 4% more flights in April 2010 over the previous year. Significant growth is occurring in the Middle East and Central and South America. North America is the only region not showing growth, with capacity decreasing 2% and frequency decreasing 4%.

CANADIAN AIRPORTS COUNCIL WILL PARTICIPATE IN SECURITY REVIEW

The Canadian Airports Council (CAC) will work closely with the Minister of Transport on a review of the Canadian Air Transport Security Authority (CATSA). The review will focus on how the Authority’s spending and structure fulfills its mandate, in order to determine if alternative practices could be more efficient.

SHANNON AIRPORT CONSIDERS DIRECT PASSENGER CHARGE The Dublin Airport Authority (which also has responsibility for Shannon Airport) is considering removing the airport passenger charge from the airline ticket price and charging a fee directly to boarding passengers. The AIFs charged in Page 10 April 2010

Canada were cited as a model.

LUFTHANSA INVESTMENT IN FRANKFURT ON HOLD Lufthansa is intending investment of “hundreds of millions of euros” in a new freight centre at Frankfurt Airport, provided it retains the right to operated night flights. A proposed ban on night flights is causing uncertainty, and the investment will not go ahead until the government ensures night flights can continue.

SKYSERVICE AIRLINES ANNOUNCES SHUTDOWN OF OPERATIONS

On 31 March 2010, Skyservice Airlines announced the shutdown of its operations after the Ontario Superior Court of Justice appointed a receiver. The company was unable to maintain profitable operations due to its high debt level.

AUSTRALIA BANS USE OF B727S The Australian government has banned the use of noisy Boeing 727s and Antonov aircraft from operation at Sydney, Melbourne, Brisbane, and Perth airports. Only two B727s are on the national register. The ban will be in effect from 1 September and applications to use the aircraft will be rejected following 1 July. The decision was originally flagged in the government’s December aviation white paper. Sydney will be most affected by the decision, having recorded 396 movements by the aircraft in 2008-2009.

PEOPLE IN THE NEWS NEW PRESIDENT ANNOUNCED FOR TOURISM INDUSTRY ASSOCIATION OF CANADA

David Goldstein will take over the role of President and CEO of the Tourism Association of Canada on 5 April 2010. Mr. Goldstein has over 18 years experience in the media industry including senior advocacy roles.

THE CARIBBEAN REPORT April 2010

Caribbean Airlines closer to a deal for Air Jamaica takeover

Jacqueline Clarke Director, Strategic & Tourism Development

The Government of Jamaica signed a non-binding letter of intent with Caribbean Airlines for the takeover of Air Jamaica by the Trinidad-based carrier. The terms of the letter formed the basis for a legally-binding agreement that was to be signed by March 31. According to the letter of intent, Caribbean Airlines will commence its Jamaican operations on or before July 1 by adding a network of routes to its international network. Caribbean Airlines will also operate a daily Kingston, Port-ofSpain, Georgetown (Guyana) service, but this route will not form part of the Jamaican operations. Inter-island flights between Kingston and Montego Bay may fall victim to the new agreement as the airline indicated that these service will “be considered”. Caribbean Airlines proposes to use "five to seven aircraft with an estimated number of cockpit and crew, respectively, of 70 to 90 and 140 to 160" for the Jamaican operation. The airline shall have "absolute discretion” in hiring any Air Jamaica employees to staff the operation. Caribbean Airlines is to be designated the exclusive national carrier of Jamaica under the air services agreements between itself and other states “for as long as the Jamaican operations maintain a minimum level of service and meet certain other criteria". On Air Jamaica’s side, the carrier will "implement revenue management and communication measures as determined by Caribbean Airlines and reasonably acceptable to the Government of Jamaica in order to actively manage market share, enhance passenger loyalty to the national carrier, and help preserve the competitiveness of the launch of the Jamaican operations (of Caribbean Airlines)" prior to ceasing service on July 1. The Air Jamaica Frequent Flyer Programme will be integrated and rationalised into the Caribbean Airlines programme. Tickets for Air Jamaica services will be honoured by Caribbean Airlines on routes that are part of the Jamaican operation and will be settled by the Government of Jamaica to the value of 93 per cent of the Air Jamaica ticket fares. The final agreement will give the Government of Jamaica a 10 per cent equity interest in Caribbean Airlines and allow the Government to appoint one director to the airline’s board.

Air service options improve between Caribbean and Canada Negotiations between the governments of Canada and Cuba and between Canada and Trinidad and Tobago have resulted in expanded air service agreements. The new agreements allow airlines to offer more flight options between Canada and both countries. WestJet and Sunwing were immediate beneficiaries as both carriers have been designated to operate scheduled international air services between Canada and Cuba. WestJet has also been designated to operate scheduled international air services between Canada and Trinidad and Tobago. The carrier plans to introduce seasonal daily service from Toronto to Port of Spain in May 2010. On a related note, Air Transat has been given government approval to operate scheduled air services between Canada and Jamaica. Jamaica is Canada’s 13th-largest bilateral air travel market, and this new designation will facilitate new air services from cities across Canada.

LIAT delays launch of cargo service The December start date for LIAT’s new cargo service was pushed back to March 1 due to an aircraft delivery delay. In a bid to improve its profitability, the airline is converting one of its three Dash 8 (100) aircraft to a freighter. A delay in completing the aircraft’s C-Check at the manufacturer’s facility originally pushed the return date back to mid-February. The service was set to be launched on March 1 once final approval from Transport Canada and the Eastern Caribbean Civil Aviation Authority was received. The airline reported that there is already a high level of interest in the service from regional manufacturers, agricultural exporters and other traders in the region.

Page 11 April 2010

THE ASIA REPORT April 2010

Air China New Service to Manila

Doris Mak Director, Special Projects

On 29 March 2010, Air China opened a new non-stop service from Beijing to Manila. Flights will operate once a day, three days a week, using a Boeing 737-800. The new service will attempt to capitalize on the increasing number of Filipino tourists travelling to China, particularly Beijing, Shanghai, and Guangzhou.

China Airlines Non-Stop Service to London China Airlines became the only carrier providing non-stop service between Taipei and London when it launched its new service on 28 March 2010. The service will be offered three times a week, using an Airbus A340-300 with 246 economy seats and 30 business class seats.

Beijing Cargo Company Buys Stake in Okay Beijing cargo company Da Tian W Group has purchased a 63% share in Okay Airways from Juneyao Group. Okay Airways was China’s first privately run airline, but has yet to run a profit since it began operations in May 2004. Okay operates three 737-300Fs, two Yun-8s, one MA60 and three 737-800s on more than 20 domestic routes.

Beijing Injects USD220 Million into China Southern The Chinese government has injected USD219.6 million (CNY1.5 billion) into China Southern Airlines in order to help the airline reduce its debt-to-equity ratio, which is approximately 4:1. In total, the Chinese government is injecting CNY15 billion among the three large Chinese carriers including CNY9 billion to China Eastern Airlines and CNY3 billion to CZ.

New Indian Cargo Airline Prepares to Launch Aryan Cargo Express (ACE), based in Delhi, is preparing to launch in the next few months. The company has four Airbus 310-300F and plans to add some Airbus 330-200F/MD11Fs. The company plans to connect the Indian market with China, Southeast Asia, the Middle East, Europe, and the CIS. It will initially use three hubs in Delhi, Sharjah, and Bangkok.

JAL/NCA Merger off Talks between Japan Airlines and Nippon Cargo Airlines on integrating cargo operations have been derailed by JAL’s bankruptcy filing in January. An overhaul of JAL’s cargo operations is being called for by the government. This could potentially lead to JAL suspending freighter operations

Page 12 April 2010

THE EUROPEAN REPORT April 2010

Labour Unrest Grounds European Flights Pilot and air traffic controller unions throughout Europe have been strongly opposing measures aimed at improving efficiency and operating costs.

Ian Kincaid Director, Economic Analysis

Lufthansa- Concerned over the transfer of domestic jobs to foreign subsidies as a cost control measure, Lufthansa’s pilots’ union walked off the job on Monday, February 22. The 4,000 member pilots’ union – one of the highest paid in the world – is seeking job security measures. Arguing that cheaper crews from smaller subsidy companies will soon replace them, the union is demanding that Lufthansa pilots hired abroad be covered by German labour standards. Estimating that a strike would cost them USD34 million per day, Deutsche Lufthansa AG brought an application before the Courts seeking an injunction immediately after the strike began. At the hearing, both sides agreed to resume negotiations. As such, union leaders temporarily agreed to suspend their job action until March 8. Despite the short strike, thousands of passengers were left stranded. The pilots plan another short strike in mid-April, citing stalls in the negotiation process. British Airways- The same day that Lufthansa pilots walked off the job, British Airways cabin crew members voted 81% in favour of striking due to unresolved wage and working conditions. Cabin crew walked on 19 March for three days and planned another one starting on 27 March. Air Traffic Controllers- Five unions representing French air traffic controllers also announced a fourday strike on Monday, February 22. The strike ended when employees returned to work the following Saturday. Employees were protesting reforms seeking to integrate European air traffic control, a move that workers fear will result in lost jobs and civil servant benefits. The unions ended the strike after the government agreed to set up a consultative committee, involving the unions, to discuss the implementation of the reforms. During the strike, 50% of all flights at Orly and 25% of flights at Charles de Gaulle airports were cancelled.

Air France Expands A-380 Routes On February 17, 2010, Air France launched the first A-380 service between Paris Charles de Gaulle and Johannesburg, South Africa. The airline will operate 3 of 10 weekly services on an A-380 until March 28. Air France became the first airline to utilize the A-380 when it operated the aircraft for its Paris-New York service in November 2009. Once it receives delivery of a third A380 later this year, Air France plans on operating it on a Paris-Tokyo route.

Iberia Airlines to Post Record Breaking Operating Loss Estimated to post an operating loss of $452 million USD in 2009, Iberia’s attempted merger with British Airways is receiving further justification from proponents. Seeking to compete more effectively against larger European rivals, the two airlines agreed to a USD7 billion merger in November 2009. Despite British Airways’ 3.7 billion pound deficit, the merger is expected to be completed by the end of 2010’s first quarter.

Page 13 April 2010

THE WASHINGTON REPORT April 2010

U.S. Department of Transportation Proposes to Approve Oneworld Antitrust Immunity

Steve Martin Senior Vice President

The U.S. Department of Transportation (DOT) tentatively decided to grant antitrust immunity to American Airlines and four international partners to form a global alliance. If the decision is made final, American and its oneworld alliance partners British Airways, Iberia Airlines, Finnair and Royal Jordanian Airlines would be able to more closely coordinate international operations in transatlantic markets. This decision is seen as “leveling the competitive playing field” between the three major alliances. In its “show-cause” order, the DOT found that granting antitrust immunity to the oneworld alliance would provide travelers and shippers with a variety of benefits, including lower fares on more routes, increased services, better schedules and reduced travel and connection times. The DOT also said the proposed alliance would enhance competition around the world by creating competition with the existing Star Alliance and the SkyTeam alliance, which already have been granted immunity. However, the DOT noted that the alliance could harm competition on select routes between the United States and London's Heathrow Airport, where the availability of landing and takeoff slots is limited. As a condition of approval, the DOT proposed that the applicants make four pairs of slots available for up to 10 years to enable competitors to launch new U.S.-LHR service. Parties have 45 days in which to file responses to the DOT’s tentative order. The applicants then have another 15 days to respond to those filings. Compared with the comments filed in December 2009 by the U.S. Department of Justice’s Antitrust Division, the DOT’s decision seems to differ significantly in the extent to which it perceives potential competitive harm. Two months earlier, the Justice Department (DOJ) had argued that the proposed alliance will risk “significant competitive” harm, particularly on six transatlantic routes: Boston-London, Chicago-London, Dallas/Ft. Worth-London, Miami-London, Miami-Madrid, and New York-London. DOJ suggested that fares on the six transatlantic routes could materially increase. It recommended that DOT impose some combination of slot divestitures and carve-outs to protect competition. DOT tentatively decided not to impose a carve-out remedy. It wrote that the shift in the character of alliances towards integrated joint ventures made it sceptical about the efficacy of carve-outs. DOT did not impose any carve-outs in overlap markets in the recent SkyTeam and Star cases. The early reaction from industry observers is that the preconditions set by DOT are relatively light, especially compared to the 16 slot pairs demanded by regulators after BA and American had applied for antitrust immunity in 2002. This decision was soundly condemned by Virgin Atlantic president Richard Branson, who characterized it as a “complete joke.” Virgin said that “Millions of transatlantic travelers will be adversely affected if this alliance receives approval.” It is now hoping for a more critical evaluation from the European Commission (EC), where a decision is still pending. The main questions will be how the EC’s decision may differ from the DOT’s and how differences will be settled. The timing of the EC decision is uncertain, although the commission has already indicated that it sees some potential for competitive harm from the oneworld joint-venture proposal. European regulators are also examining Star and SkyTeam joint ventures that have already been approved by U.S. authorities.

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THE AIRLINE PROTECTIONISM DEBATE April 2010

Parliament was clear that the objective of Canada’s transportation policy is to serve the needs of shippers and travellers. Why are we protecting some foreign airlines from other foreign airlines? Dr. Mike Tretheway Executive Vice President and Chief Economist In recent weeks, the debate on international air policy has heated up in Canada. Emirates Airlines is seeking authorisation to provide additional air service to Canada. Other foreign are also seeking additional route rights to serve Canada. For example, for years Singapore Airlines has been seeking rights to operate daily to Canada. Air Canada does not serve these markets nor any of the markets beyond, yet it is seeking protection from these carriers. The recent debate has been productive in that it has sharply focused on the critical issue. That issue is whether Air Canada should be protected from competition by the Canadian government, even in markets it does not serve with its own aircraft. Air Canada does not fly to Dubai. It also does not fly to points beyond Dubai, such as to the many cities in India where economic growth has been averaging 7% per year. Air Canada does not fly to Singapore. It used to. Nor does it fly any longer to points such as Taiwan, Thailand and the Philippines, all of which had been served in the past by Air Canada or Canadian Airlines. Air Canada operates a commercial business and it is its prerogative to choose where to fly and where not to fly. While Air Canada does not find it in its commercial interest to serve these destinations, that does not mean that there is no demand by Canadians or foreign visitors for service to/from these destinations. Such demand does exist. But due to the absence of direct air service, or government constraints on the capacity that can be operated from these points, there is unserved demand that could be tapped. Accommodating unserved travel demand to Canada is in Canada’ interest. Why should potential travellers to Canada be denied air access? Restricting air access only benefits U.S. and other foreign carriers and creates jobs at their hubs.

Is Canada protecting one set of foreign carriers from another? Protecting Air Canada on routes it does not serve is a curious issue. The airline does sell some tickets into these markets (we estimate they sell roughly 10% of the tickets), by putting passengers on flights of its code share partners, like Lufthansa. These are foreign carriers. So Canada’s approach to protectionism seems to be protecting one set of foreign airlines (Air Canada’s alliance partners) from other foreign airlines (such as Emirates, Etihad, Singapore, etc.) Air Canada presumably receives some benefit from selling tickets on foreign airline partners. But these tickets sold by Air Canada to India, the Middle East etc., generate the bulk of their jobs in places outside of Canada, like Frankfurt. By protecting one set of foreign airlines from competition from other foreign airlines, Canada suffers from a lower level of tourism visitation, less air cargo capacity and higher prices.

InterVISTAS’ approach to Economic Impact Only Measures Net Benefits to Canada InterVISTAS has documented economic impacts of aviation services for many airlines, airports and Page 15 April 2010

tourism operators. We were asked by Emirates Airlines to document the potential economic benefits that would be generated if Emirates were allowed to increase its services to Canada beyond the paltry three times weekly service it is currently allowed. [In today’s international airline industry, three times weekly service has poor economics. Daily service is the market expectation and the economics of daily service, e.g., the ability to attract time sensitive business travellers, are more sensible.] Our study found that expanded Emirates service would generate an additional 275,000 passengers per year to/from Canada, and create up to 2,800 jobs in Canada. These jobs would be partly in aviation and its suppliers, and partly in tourism. Tourism spending would increase by over $80 million per year. Our study has been criticised by some as not recognising negative impacts on Air Canada. This is not the case. The study incorporated such impacts into our analysis. If new service were to be allowed, Emirates would carry more than 275,000 new passengers. Emirates flights would have three types of passengers: those it carries on its current restricted services, those it would serve who previously flew on other airlines (i.e., other foreign carriers) and those which are incremental new travellers. Our study only counted the latter. We did not count passengers and the corresponding jobs of Emirates and its suppliers which are diverted from other carriers (such as Air Canada and its foreign airline partners), as these might be offset by Canadian job losses at those carriers. We only counted the net gain in economic impact to Canada. We did have one omission in our study. Many of the 275,000 new passengers to Canada on Emirates would purchase tickets on domestic carriers for flights within Canada. In Australia, for example, a very large share of passengers travelling on Emirates purchase domestic tickets from domestic Australian carriers. In our study we projected that between 10 and 15% of the new passengers on Emirates would buy domestic tickets on Air Canada, WestJet or a regional carrier. This would result in additional economic benefits for Canada which we had not counted in our study.

Do As I Say, Not As I Do In its argument for protection, Air Canada indicates that Emirates should be confined only to serving passengers to Dubai. It should not be allowed to serve traffic beyond Dubai, such as to India, even though Air Canada does not serve these markets either. This argument in favour of protection is curious for two reasons. First, Canada has not objected to Lufthansa, British Airways, KLM, Air France, Cathay Pacific, Japan Airlines, United and other carriers flying to/from Canada to their hubs and then connecting the passengers beyond to the Middle East, South Asia, etc. Indeed, that is how passengers from these points currently get to Canada. Why is it acceptable for these carriers to operate connecting services across their hubs to other countries, but it is not acceptable for Emirates, or Singapore, etc. to do so? It might be argued that the difference is government ownership of Emirates and Singapore. But if this is the reason, why has Canada not objected, now or in the past, to connecting services by other foreign government owned carriers such as Air New Zealand, Air France, Alitalia, etc., some of which have been massively subsidized by their government or who have benefited from massive government equity injections? Second, Air Canada’s own strategy is to connect U.S. passengers to destinations in Europe and Asia across its Canadian hub. It has emphasised this strategy repeatedly to the financial community. But this is the very strategy – connecting passengers from foreign nations across its hub – that it is trying to prevent Emirates, Singapore and selected carriers from pursuing. Is this a case of “do as I say, not as I do”? Page 16 April 2010

Air policy should follow the objectives of the Canada Transportation Act Canada’s transportation policy was established by Parliament in the Canada Transportation Act. Nowhere in the Act is reference made to protecting Canadian air carriers, and certainly no reference is made to protecting the traffic of some foreign carriers from competition from other foreign carriers. The Act instead says that the purpose of national transportation policy is “to serve the transportation needs of shippers and travellers … and to maintain the economic well-being and growth of Canada and its regions…”.The Act specifically says that these objectives are most likely to be achieved when all carriers are able to compete. Canada is foregoing economic and social benefits when it engages in selective protectionism which benefits one set of foreign air carriers by denying opportunity to other foreign carriers. When Canada and the U.S. were negotiating an open skies treaty in the 1990s, it was argued by many of the same protectionism inclined parties we are hearing from today that Canada’s carriers could not compete against the U.S. carriers, and that protectionism was needed. We now know that the opposite took place. Today, the largest carrier in the Canada-U.S. airline market, by a considerable margin, is Air Canada. A recent commentator said that the current government of Canada has it right by protecting Air Canada. I would suggest to this professor that Parliament had it right when it set Canada’s transportation policy as focussing on the needs of shippers and travellers, and made no legislative provision for protectionism.

Dr. Michael Tretheway is chief global economist with the InterVISTAS Consulting Group and is an Adjunct Professor with the Sauder School of Business. He was the Director of Research for the Ministerial Task Force on International Air Policy. Emirates Airlines commissioned the InterVISTAS economic impact study.

Page 17 April 2010

INTERVISTAS NEWS InterVISTAS Recent and Upcoming Speaking Engagements Steve Martin, Senior Vice President • ACI-NA Airport Board Members and Commissioners Annual Conference: Savannah, Georgia – 11 April 2010 Mr. Martin gave a presentation on the evolving role of regional airlines. Robert Andriulaitis, Vice President, Transportation & Logistics • BC Tourism Summit: Vancouver BC – 20 April 2010 Mr. Andriulaitis will serve on a panel discussing how well tourism development is being supported Martin Copeland, Senior Vice President • European Regions Airline Association: Edinburgh, Scotland – 14 April 2010 Mr. Copeland delivered a presentation on “Airport and Airline Risk Sharing, During the Introductory, Start-up Stage of New Air Services”. • Low Cost Airlines of the Americas Conference: Miami, Florida – 04 June 2010 Mr. Copeland will participate in a panel discussion and deliver a presentation entitled "The Era of LCC/Legacy Carrier Conflict and Cooperation”.

New Executive Consultants at InterVISTAS Debra Ward Debra Ward has joined InterVISTAS as an Executive Consultant to provide support on strategic planning and tourism development projects. Debra is a former president of the Tourism Industry Association of Canada. She is experienced providing analysis and advice to the public, industry and government on integrated strategies for tourism, transportation and economic development. Mary-Jane Bennett Mary-Jane Bennett has joined InterVISTAS as an Executive Consultant to support the transportation policy practice. Ms. Bennett served as a Board Member of the Canada Transportation Agency from 1998 to 2007 and is a member of the Canadian Bar Association. She was previously a member of the Transportation Lawyers of Canada and the U.S. 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 April 2010