InterVISTAS Aviation Intelligence Report October 2013 by Leah Dupuis

OCTOBER 2013

IN THIS ISSUE: CEO’s Message – p. 2 Feature Articles – p. 4 Regional Updates – p. 9 Deregulation & Consolidation P. 4

United States  Europe  Latin America Canada  Asia Pacific

Aviation News – p. 15 Traffic Updates – p.19 Taiwan Cross-Strait Market P. 6

InterVISTAS News – p. 23

CEO’S MESSAGE Hello and welcome to the October edition of the Aviation Intelligence Report This month, Buddy Anslinger reviews the trends in deregulation and consolidation in North America’s airline sector, and Rick Russell and Koen Brinkman take a look at the changes in the Taiwan-China Cross-strait aviation market. Our Regional Reports include: Deborah Meehan President and CEO

Analysis of U.S. airport average wait times, by Steve Martin, The debut of Volaris’ shares, by Kenneth Currie, ICAO’s new climate change deal, by Ian Kincaid, Top aviation issues in Canada, including expanded air service agreements with several countries, by Debra Ward, and A look at India’s changing aviation landscape, by Doris Mak.

We hope you enjoy this month’s edition.

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DEREGULATION AND CONSOLIDATION: NORTH AMERICAN AIRLINE TRENDS MOVE ACROSS BOTH PONDS Buddy Anslinger Vice President Airline Network Strategy

U.S. Deregulation in 1978 set off an amazing chain of events around the world that continues around the world today. When President Jimmy Carter signed into law the Airline Deregulation Act of 1978, neither he nor the chairman of the Civil Aeronautics Board, Alfred Kahn, could have foreseen the farsweeping changes that the bill would create not only for U.S. airlines, but also for airlines around the world. Deregulation was meant to remove the government from the commercial aspects of civil aviation while remaining its safety watchdog. Hence, airlines in the U.S. were now free to set prices, set routes, and to enter and exit markets as they saw fit. Initially, deregulation saw an amazing number of start-up airlines emerge across the nation and an unprecedented initiation of new routes by the newcomers as well as many long-frustrated stalwarts of the U.S. aviation industry. Market forces drove most of the start-ups out of business, but America West, which is essentially US Airways, is the only start-up still flying today. However, a number of the start-ups had built sizeable networks, and their companies were acquired and merged into other carriers to form even bigger airlines. The consolidation of the U.S. airline industry was an unexpected outcome of deregulation and a 180degree turn from the first heady days of deregulation’s brave new world.

As the 80s turned into the 90s and then into the new millennium, more airlines succumbed to financial troubles/bankruptcy or conversely, network envy, with the desire to bulk up their networks at all costs. There was a prevailing mindset that the bigger an airline was the less likely it was to fail; hence, these “greedy” airlines were quick to fall upon the financially troubled ones or at least upon their most prized routes or regions (e.g., United’s purchase of Pan Am’s Pacific routes in 1986). Once dismissed as insignificant, low cost airlines co-existed with the established carriers for years; however, their size did not amount to a significant share of U.S. airline traffic at the time. Like a contemporary hare and tortoise, the LCCs grew slowly but steadily, and 9/11 catapulted them into the mainstream. Their growth had been built upon a solid financial foundation so in many cases they were in better shape than their more established cousins. Copying their brethren, the LCCs began to merge and buy up other airlines and/or assets as well, and their market share began growing to a relatively large percentage of the U.S. market. Europe and Asia sat on the sidelines and watched the show going on in the U.S. for years. Interestingly, their airlines and markets were even more regulated than the U.S. They believed that what was happening in the U.S. was unique to the U.S. and could never happen in their markets. As with so many global trends, the first opening went across the Atlantic to Europe. Ryanair, an early advocate of Southwest’s operating practices, began flying around Ireland and the UK in 1985. Much like LCCs in the U.S., it took Ryanair and other johnny-come-lately LCCs like easyJet a while to gather steam. However, much like the U.S., the European airline cartels with their comfortable (read profitable) niches did not react swiftly enough to suppress the rising tide. Before British Airways, Air France, and Lufthansa knew what hit them, they were losing fortunes all over the place. While these big three earned enough from long-haul flying to insure their survival, dozens of national airlines could Page 4 October 2013

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not compete with the new order, and many familiar names that were decades old, including Swissair, Sabena, and Malev were no more. Even today, long-time aviation royalty like SAS and Alitalia are not sure if they will still be around in 5 years. As with the U.S., the financial turmoil wrought by the LCCs has set off a consolidation among European airlines. Heretofore, it was thought that national borders and pride would protect Europe’s airlines, but financial reality has required airlines and countries to wake up to the realization that not every country needs its own airline with its own widebody planes flying around the world. Much like the U.S., Europe is looking at having three behemoths, British Airways, Air France, and Lufthansa, along with several large LCCs like Ryanair and easyJet, and a handful of more modest-sized airlines.

Asia and Latin America are now beginning to see and feel the global trends that have swept through North America and Europe. Low fare carriers like AirAsia, Jetstar, and Lionair, are turning the traditional Asian carrier model upside down. Asia’s traditional airlines are trying to compete, but much like their European and American rivals, they are having a difficult time. Similarly in Latin America, Gol, Azul, Volaris, and VivaColombia are gaining market share and cachet, and Latin America’s legacy airlines are having to face a new reality. The future of the old established airlines in both Asia and Latin America is not certain. Who will survive and who will not? Which airlines will be consolidated into which? Will there be a Big 3 in Asia? Latin America? These are questions still being determined by the market today. The lesson to be learned by today’s airlines around the world is that no airline should believe that it is unique and insulated from market trends happening in other parts of the world. What was seen as a purely domestic issue in the U.S. nearly 40 years ago is still sweeping around the world, fomenting change from Bolivia to Bangladesh. No airline can stick its head in the sand and hope that these changes will pass on by without affecting it.

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THE LUCRATIVE TAIWAN CROSSSTRAIT MARKET HAS BLOSSOMED OVER THE LAST FIVE YEARS Rick Russell Vice President Aviation Services

Up until 2003, direct flights between Taiwan and mainland China were not allowed and passengers were required to transfer at a connecting airport such as Hong Kong or Macau. Since 2003, the restrictions have been gradually eased. First, charter flights were permitted only for certain residents and during certain holiday periods such as the Chinese New Year, but starting in 2009 regular nonstop scheduled flights were also permitted. Passenger yield is high since capacity remains tightly restrained through frequency caps and destination restrictions. The following chart illustrates the gradual easing of the restrictions on Taiwan-Mainland China flights: 2003 - 2005 • Charters were allowed for the Chinese New Year period, but restricted to some residents 2006 • Charters were opened to all residents of Taiwan 2008 • July: weekend cross-Strait charter flights began July 4, 2008 eliminating HKG stopovers • November: Flights became daily, capped at 108 flights per week 2009 • Regular, scheduled cross-Strait flights are allowed • Cap raised to 270 flights per week 2010 • Cap raised by an additional 100 weekly flights and additional destinations were added to the list

Koen Brinkman

2013 • Cap raised from 558 to 616 weekly flights

Vice President Aviation Services

• China agreed to open eight additional mainland cities including Yinchuan, Hohhot, Zhangjiajie, Urumqi, Xining, Hailar, Lijiang and Weihai, bringing the number of mainland cities open to services from Taiwan from 41 to 54, far exceeding the 40 mainland cities opened to service from Hong Kong • The target of 616 weekly flights this year is more than five times the number recorded in the first year after Taiwan lifted a ban on direct cross-Strait flights in December 2008, which is a reflection of the sharp growth of travel across the Taiwan Straits • Entry of Chinese budget carriers, Juneyao and Spring between Shanghai Pudong and the Taiwanese port town of Kaohsiung, which is also Taiwan's second-largest city, is expected later in 2013

Source: InterVISTAS Research Shanghai Pudong-Taipei is the largest cross-Strait route by far, with the service from ShanghaiHongqiao and Taipei-Songshan, currently providing the most cross-Strait flights. However, Taipei Taoyuan International Airport will likely receive the majority of new services as cross-Strait flight frequencies are added.

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Development of seat capacity and flights from Taiwan to Mainland China

Source: Diio Schedules Analysis With a reliable high-speed train network, Taiwan’s domestic air travel market is relatively small. Besides Taiwan’s principal and main gateway, Taipei Taoyuan International Airport (TPE), Taiwan has two regional airports: the downtown Taipei Songshan International (TSA) and Kaohsiung Siaogang International Airport (KHH) located in the far south of the country. There are also five small airports including Taichung and two others located along the remote eastern shore, and to the west on two islands located in the Taiwan Straits. As shown below, the Taiwan - mainland China O&D market has increased from 11 percent in 2005 to 27 percent in 2012 – stimulated by the opening up of cross-Strait flights. China, including the Hong Kong market, now accounts for almost half of Taiwan traffic. Besides regional business traffic, the majority of these passengers are tour groups. Individual visits from mainland China to Taiwan were recently approved, but the majority of bookings still come from tour groups. Mainland China has grown to become Taiwan’s largest single market

Source: Diio O&D Passenger Traffic Analysis Page 7 October 2013

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A regional alliance amongst China Airlines and its Greater-China SkyTeam partners – China Eastern, China Southern and Xiamen Airlines – is indicative of the growing trend for East Asian airlines to combine their strengths against imposing competitors, namely Air China and Cathay Pacific. The SkyTeam regional alliance would account for about half of the capacity between Mainland China and Taiwan – its share on certain key business routes, like Shanghai, would be even higher. Because of this, access to the lucrative cross-Straits can be challenging for new entrants.

Taoyuan Airport, Terminal 1 In time, it is expected that a home-grown Taiwanese LCC will appear when the China market opens up further. The Chinese budget airlines, Spring Airlines and Juneyao, reflects their long-running heavy lobbying to the governments of mainland China and Taiwan, with limited weekly frequencies between Shanghai Pudong and Kaohsiung in Taiwan’s south on the horizon. But for now, the cross-Strait market is firmly in the hands of full-service carriers and so designated by their respective governments.

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UNITED STATES REPORT CBP Average Wait Times: Not As Bad As Anticipated Data from the U.S. Customs and Border Protection (CBP) show that the much-feared explosion of wait times at international airports that was expected to result from budgetary sequestration did not occur. CBP had earlier said that it expected wait times of 3-4 hours to occur.

Weighted Average Wait Times (mins)

Steve Martin Senior Vice President

Airport & Terminal

May

June

July

August

Atlanta lnt'l (F) Chicago O'Hare DFW Main Terminal EWR Terminal B Houston (IAH) JFK Terminal 4 Las Vegas LAX Bradley Terminal Miami North Concourse Miami South Concourse Orlando Airside 1 Orlando Airside 4 Seattle SFO Terminal A SFO Terminal G Washington Dulles

38.8 23.3 25.4 21.3 21.9 35.9 23.8 21.7 30.2 32.9 25.5 35.6 34.4 33.5 24.8 15.1

10.8 19.8 29.7 20.6 20.9 26.6 19.2 19.0 24.4 24.2 17.4 26.2 17.8 25.6 22.4 15.4

14.0 16.2 28.4 17.5 24.4 26.0 16.2 18.4 24.3 22.0 21.1 24.3 20.0 23.6 21.4 14.8

15.0 22.3 22.7 17.5 25.0 24.5 16.1 22.3 26.8 24.3 22.2 27.5 23.7 24.0 22.4 15.5

For the most part, average wait times have actually decreased over the summer at the major international gateways. None are experiencing average waits of more than 30 minutes.

Maximum Wait Times (mins) Airport & Terminal Atlanta lnt'l (F) Chicago O'Hare DFW Main Terminal EWR Terminal B Houston (IAH) JFK Terminal 4 Las Vegas LAX Bradley Terminal Miami North Concourse Miami South Concourse Orlando Airside 1 Orlando Airside 4 Seattle SFO Terminal A SFO Terminal G Washington Dulles

May

June

July

August

50 116 109 107 70 177 79 96 153 126 100 103 63 132 87 83

76 87 100 63 79 119 87 61 92 99 69 86 69 88 80 84

66 66 162 65 97 95 41 57 96 83 92 94 114 84 76 98

67 85 83 66 81 120 64 73 87 81 85 90 89 88 89 71

Maximum wait times can still approach or exceed 2 hours, however. For the most part, maximum wait times fell significantly between May and August. CBP data indicate that only at JFK Terminal 4 does the maximum wait time exceed 100 minutes – a notable improvement since May, when the maximum exceeded 100 minutes at 9 out of the top 16 international gateways.

Source: InterVISTAS analysis of average wait time data from CBP: http://apps.cbp.gov/awt/index.asp

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LATIN AMERICA REPORT Successful Debut of Volaris Shares Shares of Mexican airline Volaris rose more than 15 percent on their debut in Mexico and New York on September 18, 2013, as investors bet the lowcost carrier would profit from Mexico's expanding middle class. Volaris' U.S.listed shares, which were priced at $12 on Tuesday, were up 15.8 percent at $13.90 in early afternoon trading. The Mexican-listed shares were up 15.4 percent at 17.90 pesos.

Kenneth Currie Executive Vice President, Finance and Privatization

The successful launch of Volaris shares, which were three times over-subscribed, comes amid a record year for Mexico's equity capital market. Buyers of the initial public offering mainly included institutional investors attracted to the idea of exposure to an expanding market, said Chief Executive Enrique Beltranena. Volaris' low-cost policy helps protect the company from economic weakness in Mexico, since even if it loses low-end customers, it can attract business travelers on a budget, Beltranena said. The company has big expansion plans, "We think we can add 90 cities in Mexico and about 140 internationally" over the next five years, said Beltranena. The international expansion would focus on the United States, but the company could also add destinations in Canada, the Caribbean and Central America, he said. In 2011, Volaris signed a deal with Airbus for 44 A320 planes to support growth plans. Volaris, which launched in 2006 backed by private equity, listed 28 percent of its capital in the IPO. Not including an overallotment option, Volaris raised $345 million through a sale of American Depositary Shares listed on the New York Stock Exchange and local stock certificates listed in Mexico. Mexican companies have been raising equity capital at a record rate this year. Through July, companies and real estate investment trusts have raised more than $9.1 billion in equity, greater than any full year on record, according to Thomson Reuters data.

AeroMexico Relaunches Guadalajara – L.A./Ontario with Contigo Product On October 1, AeroMexico Contigo began offering daily service between Guadalajara and L.A./Ontario International Airport (“ONT”) on a year-round basis. AeroMexico has invested $6 billion in 100 new airplanes to add to its fleet by 2018, officials said, and Ontario is part of the carrier’s plan to increase capacity. AeroMexico previously operated to ONT with daily flights on a seasonal basis with a two class aircraft. The aircraft in is configured in a single-class configuration that will accommodate more economy seats, though with greater legroom, at a lower fare than the previous one operated at ONT. “We’ve always loved this airport but we always felt we did not have the right product for this market,” said Giancarlo Mulinelli, regional sales director west for AeroMexico. “The important thing is our costs will go down, 14 percent, which will translate to better sales,” he said. “So it will help us be extremely competitive.” Local travel agent Fiorella Reyes noted, “If the price difference between flights at LAX and ONT are $30 to $45, then travelers will pay the difference and fly from ONT. If the price difference is higher, then they’ll choose LAX.” A study conducted by the airline found that resuming daily service at the Ontario airport is important to serving the Hispanic market in the Inland Empire. According to the 2012 Census data, 50 percent or 1.05 million of San Bernardino County’s population is Hispanic. “Ontario has always been an important route for us,” Mulinelli said. “The Hispanic community is huge here. We understand there is a lot of opportunity for growth.” Page 10 October 2013

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EUROPE REPORT The International Civil Aviation Organization (ICAO) reaches a deal on climate change ICAO envoys from over 190 nations gathered in Montreal for the 38th session of its triennial assembly, which ran from 24 September to 4 October 2013. Reaching a global agreement on an emission trading scheme was at the forefront of these talks.

Ian Kincaid Vice President, Economic Analysis

The UN's civil aviation body has reached outline agreement on a global market-based mechanism (MBM) to control the increase in carbon-dioxide emissions from air transport. As a compromise, the European Union has offered that its existing Emission Trading Scheme (ETS), will apply only to aviation activity fully within EU airspace (intercontinental flights in and out of the EU would be exempt). The EU was originally seeking a much stronger framework in line with its own ETS but backed down in the face of strong opposition from the U.S. and many developing countries. However, the compromise is expected to result in legal challenges to the scheme on competition grounds, as airlines operating largely intra-EU services, such as low cost carriers, will be subject to different charges to those operating intercontinental services. The European Parliament will have to act quickly if it is to endorse the agreement, as current legislation will resume aviation’s inclusion in the ETS starting April 2014.

The UK Civil Aviation Authority announces its proposed price caps for Heathrow and Gatwick On the 3rd October, the UK Civil Aviation Authority (CAA) published for consultation its final proposals for the economic regulation of the UK’s two largest airports, Heathrow and Gatwick, after April 2014. Heathrow had called for a 4.6% annual increase over the rate of inflation (RPI + 4.6%), whereas the airlines using Heathrow had asked for a 9.8% per year cut. The CAA has proposed a price cap that would not rise by more than inflation (i.e., RPI + 0%). Heathrow Airport Limited has criticized the proposed cap, arguing that it would diminish returns and create a lower incentive to invest. The group went on to note that: “The CAA’s proposals risk not only Heathrow’s competitive position but the attractiveness of the UK as a centre for international investment.” At the same time, British Airways, Heathrow’s largest airline, has characterized the proposed cap as excessive and makes an alternative hub look more attractive and more realistic. The CAA accepted Gatwick’s price commitment to its users of an average price growth of RPI + 0.5% per year for seven years. The CAA stated that its own analysis suggests that this is a fair price for users. Gatwick gave a “cautious welcome” to the CAA’s proposal, indicating that that if the CAA eventually finds that the airport does not have Substantial Market Power, it will deliver on these price (and related service) commitments. The CAA also stated that it will continue to consult on its assessment of Stansted’s market power (Stansted is the third largest airport serving London), before making a final decision on whether the airport should be regulated and if so, on the appropriate regulatory approach for the airport.

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CANADA REPORT Industry continues to call for new aviation policy The Conference Board of Canada’s has released a new report on Canada’s air sector, Growing Canada’s Economy: A New National Air Transportation Policy for Canada,.

Debra Ward Executive Consultant

The report was jointly written by The Conference Board of Canada and SLI Airports and Aviation Group, with financial support from the Canadian Airports Council and the National Airlines Council of Canada. Recommendations include improvements to visa processing, including enhanced transit programs such as the Transit Without Visa Program (TWOV), a permanent federal airport infrastructure renewal program, a revised airport ground rent formula, and a better linkage between CATSA and its user-pay funding. This is the latest of a number of papers that have identified and provided recommendations towards a new aviation policy. In May 2013, the industry-led Western Canadian Aviation Forum looked at similar issues and developed a proactive policy framework to promote the competitiveness and viability of the aviation industry,

Canada announces new and expanded air service agreements Canada has announced an expanded air service agreement with Japan to allow daytime access to Tokyo's Haneda Airport for Canadian air carriers starting April 2014 as well as expanded agreements with Algeria, Ethiopia, South Africa and Turkey. Canada also signed first-time bilateral agreements on code-sharing and pricing with Burkina Faso, Ecuador and Macedonia..

Canada and the Netherlands negotiating Trusted Traveller Program Documents provided to the media under the Access to Information Act revealed that Canada and the Netherlands have been negotiating a bilateral agreement that would allow their citizens to apply to each other’s Trusted Traveller programs. According to the Canadian Press report, the program would be modeled on the U.S.-Canada Nexus program, and could be the first step in an initiative to increase the number of bilateral and multilateral trusted traveller programs between Canada and other countries.

Michele McKenzie, President & CEO Canadian Tourism Commission to step down After 10 years, Michele McKenzie is stepping down as head of the Canadian Tourism Commission at the end of the year. CTC Chair, Steve Allan said that under Michele’s leadership the CTC has evolved into a strategy-focused crown corporation that has garnered national and international recognition as a top notch national tourism marketer.” The process to determine CTC's next permanent President and CEO will be carried out by the Government of Canada in collaboration with the CTC Board of Directors. The appointment is made by Governor in Council.

Canada tweaks its Foreign Trade Zones program Backed by a $5 million marketing program, the Canadian government intends to make Canadian FTZs more attractive and competitive for exporters, by reducing red tape, cutting costs and improving access to existing programs. While the initiative introduces a number of cost and time saving measures, such as removing the annual registration fee for the Customs Bonded Warehouse Program, the five programs grouped under the FTZ have not been changed. Each still requires a separate application and has different Page 12 October 2013

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reporting requirements. As part of the improvements to the program, the government plans to set up “Foreign Trade Zone Points” -- a single point of contact and coordinated service that provide facilitated access to FTZ programming for companies that set up on their site

Parliament to reboot this fall with a new session, Throne Speech The government hit the “restart” button this summer, proroguing (ending) the current session of Parliament and promising a fresh start in October when they outline their new agenda in a Speech from the Throne. The government is expected to keep its Economic Action Plan front and centre in the new session. However, it still has to deal with unfinished business, including finalizing major free trade agreements with the EU, the multilateral Trans Pacific Partnership and others.

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ASIA-PACIFIC REPORT India’s changing aviation landscape

Doris Mak Director, Special Projects

The gradual liberalization of India’s skies continues to change what has been a highly centralized market over the past few decades. A key change came last year when the Indian government indicated it would allow up to 49 per cent foreign ownership in the country’s carriers. A recent development, spurred by this policy change, includes the announcement of a joint venture between the Tata group (ownership group of Air India) and Singapore airlines on September 13th. This comes in addition to the partnership between Tata and AirAsia that was announced in February of this year. Ultimately, these events signal a changing aviation landscape in India. The most substantial change is expected to occur in the international sector which, unlike the domestic market, has grown continually throughout the past decade. The Singapore partnership in particular could play to its strength and capitalize on inter-continental long-haul flights. Given the fact that nearly 70 per cent of global traffic originating in India heads West, Delhi has the opportunity position itself as a major international hub. There is unfortunately one caveat placed upon new market entrants; a newly operating carrier must fly domestic Indian routes for a period of five years before being allowed to fly internationally out of the country. If Indian policymakers remove this unilateral rule, change will take place sooner than anticipated.

Lion Air looks to Bombardier as it boosts its narrow-body fleet Chief executive of Lion Air, Rusdi Kirana, revealed Lion Air’s intentions of purchasing “double-digit” figures of Bombardier C300 passenger aircraft. The airline cited that the planes size allows for a particularly low operating cost on routes that currently aren’t filling larger planes. For example, on routes that don’t fill a 737’s capacity of 189, and overfill a 72-seat ATR, a CS300 provides an opportunity to bridge the gap with capacity for 160 passengers. An order is expected to be finalized in the next few months, as Lion Air ponders over other items such as after-sales support. The potential purchase would add to an existing stockpile of aircraft on order for Lion Air, which includes over 500 Boeing and Airbus jets. In addition to the carrier’s plans for the aircraft purchase, Lion Air is also looking to broaden its international presence by creating affiliate airlines. An existing 49 per cent ownership in Malaysia’s Malindo Air will be boosted to 70 per cent with the addition of two aircraft for a Thai joint venture.

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AVIATION NEWS UNITED STATES UPDATE

US AIRWAYS AND AMERICAN AIRLINES EXTEND MERGER DEADLINE

HAWAII TO RECEIVE $23 MILLION USD IN AIRPORT FUNDING Federal transportation funding, coming from the pockets of the Federal Aviation Administration and the Federal Transit Administration, will flow to airports and bus transit systems throughout the Hawaiian State. Public transit buses will be replaced on Hawaii, Maui and Kauai. Approximately $18 million USD will be put aside for runway and airport improvements across the entire state.

Both Airlines, originally set to complete a merger by December 17th, 2013, have pushed forth the final date to January 18th to either complete the merger or abandon it altogether. On November 25th, both airlines will go to trial and defend the merger against an antitrust lawsuit put forth by the U.S. Department of Justice.

THE FAA AWARDS FUNDS FOR ALTERNATIVE JET FUEL RESEARCH On September 13th, the FAA announced $40 million USD in funding for alternative jet fuel research. Receiving the funding is a new Air Transportation Center of Excellence (ATCE), a collaboration of over 16 universities headed by both Washington State University and the Massachusetts Institute of Technology. Further to fuel research, the ATCE will investigate ways to achieve environmental goals on climate change, air quality and noise. BOEINGâ&#x20AC;&#x2122;S MONTANA FACILITY TO EXPAND Boeing will expand its manufacturing site in Helena, Montana, by just under 50 percent to address both an increase in aircraft demand and space needed to develop the 787-10 Dreamliner. The Helena plant designs and manufactures body cores, which join the bodies of planes to the wings. The expansion will provide an additional 55,000 sq. ft. and cost approximately $35 million USD. The construction will begin immediately and is due to be complete by the fourth quarter of next year. The aircraft manufacturer expects the finished building to increase worker capacity by 20-25 people, resulting in a 144-person workforce.

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MIDDLE EAST / AFRICA UPDATE CONGO TO START A NEW AIRLINE IN PARTNERSHIP WITH AIR FRANCE-KLM The Democratic Republic of Congo is creating a new national carrier with assistance from European carrier Air France-KLM. The two sides will combine to create a partnership that looks to launch the new carrier by January of 2014. The start-up will replace a previous Congolese carrier Lignes Aeriennes Congolaises, which is now defunct. NIGERIA TO RECEIVE A NEW CARRIER Nigeria can expect to receive a new low cost airline in the next 10 months. Headed by Mr. Alex Van Elk, managing director of Arik Air, the move looks to capitalize on both a surging African aviation market, and a high travel demand from Nigerians. The airline has already been in contact with Airbus, and is looking to lease new A319s to launch their route network.

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DUBAI’S NEWEST AIRPORT PREPARES TO RECEIVE PASSENGERS IN OCTOBER 2013 Dubai’s new al-Maktoum International Airport is set to receive passengers beginning on October 27th. In the longterm, the ‘aerotropolis’ is planned to have five runways and establish the capacity for 160 million passengers and 12 million tons of cargo per year. John Strickland of JLS consulting in the UK notes that the conception and development of the airport is aligned with Dubai’s goal of continuing to have a large passenger capacity in the future. Other industry analysts and observers expect the airport will be successful as it continues to expand. AIRLINE SAFETY SET TO IMPROVE IN AFRICA AS ALL AIRLINES SET TO BE IOSA CERTIFIED BY 2015 Africa has set the date of December 31st, 2015 to get all the continents airlines on the IATA Operational Safety Audit (IOSA) registry. While Africa only accounts for three per cent of global aviation traffic, the continent is responsible for half of all air fatalities. Statistics reveal that with Western-built airplanes, African airlines had one accident for every 270,000 flights while the global average remains at one accident for every five million flights. The International Civil Aviation Organisation (ICAO) Universal Safety Oversight Audit Programme (USOAP), an internationally recognized safety audit, is currently implemented in only 11 of 54 African countries. These 11 countries have only completed 60 per cent of ICAO’s Safety Related Standards and Recommended Practises (SARPS).

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LATIN AMERICA UPDATE AIRCRAFT FINANCING PICKS UP IN LATIN AMERICA Speakers at the 5th Business Aviation in Latin America summit, held at LABAC (Latin American Business Aviation Conference & Exhibition) in August, remarked on the stabilization of aircraft financing in the region. The summit covered a variety of financial issues and other key topics such as pilot shortages and the management of flight clearance risk in developing nations. TOP LIAT EXECUTIVE RESIGNS LIAT’S CEO Ian Brunton provided his resignation to the Caribbean airline, although no indication was given as to when it will be effective. LIAT’s corporate office was expected to provide a press release on Wednesday, September 18th. Communications with the carrier requesting further information on the change were not returned.

EUROPE UPDATE EUROPE PROVIDES THE U.S. WITH REVISED GLOBAL RULES ON AIRLINE EMISSIONS The European Union provided the United States with a new arrangement for regulations dealing with airline emissions. This agreement now imposes charges for emissions only created in European airspace. The original deal would have imposed emission costs over the carrier’s entire route, assuming it began or ended in Europe. The European concessions aim to maneuver the region, along with the United States, in a position to request the rest of the world to appropriate similar measures and controls.

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SAS EXPECTS TO EARN PROFIT FOR THE 2012/13 FISCAL YEAR The Scandinavian airline SAS reported that it expects to earn a profit for the 2012/13 fiscal year. This comes after a strong third quarter where the Scandinavian carrier posted a pre-tax profit of $169.25 million USD. An airline spokesperson noted, “Provided that no significant unforeseen event occurs in our business environment, the SAS Group will achieve an EBIT margin in excess of three percent and positive income before tax, for the full year 2012/2012”. LUFTHANSA PLACES NEW ORDER FOR BOEING AND AIRBUS AIRCRAFT Lufthansa ordered 25 Airbus A350-900 models and 34 Boeing 777-9X jets. Airbus deliveries are expected to begin arriving in 2016, while Boeing planes are not expected until the end of the decade. The upgrade serves to replace an aging long-haul fleet and significantly improve fuel efficiency. The airline notes that the new aircraft will achieve an average of 2.9 liters of jet fuel per 100 kilometers, improving upon the 3.58 liters of jet fuel per 100 kilometers consumed by current aircraft. AIR FRANCE-KLM TAKES A PAUSE ON POTENTIAL ALITALIA TAKEOVER

On September 23rd, Alitalia invited Air FranceKLM to double its stake from 25 to 50 per cent in the Italian national carrier. Speculation of an imminent takeover was put on hold when Air France-KLM delayed their response until the passing of Alitalia’s next executive board meeting, due to take place on September 26th.

Page 17 October 2013

CANADA UPDATE CANADIAN GOVERNMENT ANNOUNCES NEW AND EXPANDED AIR TRANSPORT AGREEMENTS WITH SEVEN COUNTRIES Following the conclusion of the 38th session of the International Civil Aviation Organization’s (ICAO) Assembly, the Canadian Government announced new and expanded air transport agreements. Specifically, Algeria, Ethiopia, South Africa and Turkey received amended agreements, allowing an increased number of routings and flight options from these countries. New bilateral agreements were established with Burkina Faso, Ecuador and Macedonia. Minister of Transport, Lisa Raitt, notes, “The expansion of air transport relationships goes hand in hand with opening new markets around the world, which we know creates jobs, growth and long-term prosperity here at home.” KELLY AVIATION TO OPEN A MAINTENANCE PLANT IN MONTREAL Kelly Aviation, a subsidiary of Lockheed, opened a new maintenance plant in Montreal on September 12th. Starting with 90 workers, the firm will be performing maintenance on CFM34 and CFM56 engines used to power CRJ’s, Embraers and the A320 family of aircraft. COMOX AIRPORT WELCOMES RECORD NUMBER OF PASSENGERS IN 2012 Comox airport CEO Fred Bigelow announced on September 19th at the Annual Public Meeting that the airport welcomed a record 327,000 passengers in 2012. Furthermore, Comox posted strong financial results for the 2012/2013 fiscal year, with a reported surplus of over $560,000 CAD. The CEO notes that while the passenger growth far outperforms that of the 1.3 per cent North American average, much of the increase can be attributed to a new direct charter route to Cancun operated by Air Transat.

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AIR TRANSPORTATION SPENDING BY CANADIAN HOUSEHOLDS DECLINE

First quarter of 2013 results reveal that Canadian household spending on air transportation declined for the first time since the recession. The Conference Board of Canada, a think-tank responsible for the spending study, expects little to change for the remainder of the year. Reasons for the decline include high indebtedness, sluggish job creation and weak consumer confidence. The study further suggests that Canadians’ budget constraints will lower airlines’ pricing power, resulting in an industry price increase of just over one percent next year. The Conference Board of Canada expects airlines to remain profitable this year, with margins slightly smaller than those received in 2012.

OTHER NEWS CHINA LOOKS TO DEREGULATE THE COUNTRY’S AVIATION MARKET The process to deregulate China’s international and domestic aviation markets is underway as regulators are welcoming new carriers to the country’s interior. Wei Hou, Vice President of Hainan Airlines, notes that the relaxing of restrictions on international flying is driven by interior cities looking to capitalize on their economic growth. The Chinese government is also looking to encourage start-up carriers, which puts an end to a decade of airline consolidation.

GARUDA INDONESIA EARNS ‘BEST IN REGION: ASIA AND AUSTRALASIA’ AWARD The Airline Passenger Experience Association (APEX) named Garuda Indonesia “Best in Region: Asia and Australasia” in Anaheim, California on September 9th. The award is timely for Garuda as their “Quantum Leap 2011-2015” program is in full swing, which mandates continuous service improvement. Garuda came out ahead of five other finalists in the category, including Qantas Airways, Singapore Airlines, Cathay Pacific Airways, Air New Zealand and Pakistan International Airlines. BOEING FORECASTS STRONG DEMAND FOR PILOTS IN THE ASIA PACIFIC REGION According to the Boeing Pilot & Technician Outlook, the Asia Pacific region can expect an urgent demand for aviation personnel over the next two decades. Estimates indicate that 192,300 new commercial airline pilots and 215,300 new technicians will be needed through to 2032. The strongest demand in the region is displayed by China, which needs 77,400 pilots and 93,900 technicians over the next 20 years.

EMBRAER RELEASES 2014-2023 CHINA EXECUTIVE AVIATION MARKET OUTLOOK On September 10th, Embraer Executive Jets released its 2014-2023 China Executive Aviation Market Outlook during a press conference at the Chinese International Business Aviation Show (CIBAS). According to the outlook, demand for executive jets in the country is forecast to total 805 over the next 10 years. According to Guan Dongyuan, Senior Vice President of Embraer, 120 commercial Embraer jets are currently in service in the country. Page 18 October 2013

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AIRLINE DATA – ASIA PACIFIC Asia-Pacific Airlines Release Traffic Figures for September 2013

Airline

Traffic (RPKs – millions)

Capacity (ASKs – millions)

Load Factor

9,248 2.3%

11,777 0.2%

78.5% 2.0 pts

8,058 1.8%

10,079 2.6%

79.9% 0.7 pts

5,232 4.3%

6,950 3.0%

75.2% 1.0 pts

8,445 3.6%

10,375 0.4 %

81.4% 3.2 pts

Notes:

1. Includes Cathay Pacific and Dragonair.

Source:

Carrier traffic reports

AIRLINE DATA – EUROPE European Airlines Release Traffic Figures for September 2013 Traffic (RPKs – millions)

Capacity (ASKs – millions)

Load Factor

21,954 4.9%

24,969 2.3%

87.9% 2.2 pts

21,134 4.3%

24,747 2.3%

85.4% 1.6 pts

18,372 10.6%

21,543 9.4%

85.3% 0.9 pts

Airline

Page 19 October 2013

Notes:

1. Includes Martinair. 2. Includes Lufthansa Passenger Airlines, SWISS, Austrian Airlines. 3. Includes British Airways (including bmi Mainline, excluding bmi Regional and bmibaby) and Iberia (including Iberia Express).

Source:

Carrier traffic reports

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AIRLINE DATA – NORTH AMERICA North American Carriers Release Traffic Figures for September 2013 Traffic (RPMs – millions)

Airline

Capacity (ASMs – millions)

Load Factor

CANADA 5,995 4.7%

6,700 2.9%

89.5% 1.6 pts

1,884 11.5%

2,144 12.8%

87.9% 1.0 pts

UNITED STATES

Page 20 October 2013

3,484 6.2%

4,016 7.2%

86.8% 0.8 pts

19,514 0.5%

22,325 1.4%

87.4% 0.8 pts

12,752 3.2%

15,010 4.2%

85.0% 0.8 pts

19,437 2.7%

22,266 3.3%

87.3% 0.5 pts

6,263 6.3%

7,127 5.6%

87.9% 0.6 pts

9,169 2.0%

11,273 1.4%

81.3% 2.9 pts

550 1.3%

608 2.2 %

90.5% 3.2 pts

Notes:

1. Consolidated results for United Continental Holdings. 2. Results are for American Airlines Inc., and its wholly owned subsidiary AMR Eagle Holding Corporation. 3. Results are for US Airways Group consisting of mainline-operated flights including US Airways Express flights operated by wholly owned subsidiaries PSA Airlines and Piedmont Airlines. 4. Results are combined traffic results for Southwest Airlines and AirTran. 5. Total system includes scheduled service, fixed fee contract and non-revenue flying.

Source:

Carrier traffic reports.

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Page 21

October 2013

2013

2012

Summary of Total Year-Over-Year Passenger Traffic Performance at Selected Canadian Airports October November December 4th Quarter Full Year January February March st 1 Quarter April May June 2nd Quarter July August September 3rd Quarter

Toronto

Vancouver

Montréal

Calgary

Edmonton

Ottawa

Winnipeg

Halifax

Victoria

Kelowna

Saskatoon

Regina

+5.4% +6.0% +4.5% +5.3% +5.1% +0.6% -9.5% +3.7% -1.7% +2.0% +5.8% +4.1% +4.0% +2.2% +3.6% +3.6% +9.6%

+3.5% +3.8% -0.7% +2.1% +3.3% -1.6% -1.8% -0.9% -1.4% -1.5% +0.4% +4.3% +1.0% +3.7% +5.9% +3.1% +4.3%

-0.2% +1.7% +3.2% +1.5% +1.0% +0.4% -1.8% +2.3% +0.3% -0.5% +3.8% +1.7% +1.7% +3.5% +6.2% +1.2% +3.8%

+7.6% +7.5% +6.5% +7.2% +6.0% +3.7% +2.2% +6.0% +4.0% +3.4% +5.4% +1.9% +3.6% +3.9% +6.6% +4.9% +5.2%

+6.6% +7.1% +3.6% +5.7% +6.4% +3.6% +2.4% +3.8% 3.3% +2.9% +4.5% +5.5% +4.3% +5.1% +5.2% +5.4% +5.2%

-3.2% -4.3% -4.0% -3.8% +1.3% -5.2% -7.2% -2.6% -5.0% -2.2% -2.3% -4.0% -2.8% -0.2% -0.6% -1.1% -0.6%

+4.6% +2.8% -2.4% +1.6% +4.4% -2.1% -4.4% -1.2% -2.6% -4.4% -0.8% -1.1% -2.1% n/a n/a n/a n/a

+0.0% +0.8% -5.3% -1.5% +0.3% -0.5% -8.2% -0.6% -3.1% -4.3% -3.1% +1.0% -2.1% +1.0% -1.4% -1.0% -0.5%

+0.8% +0.7% -0.3% +0.4% +0.5% -0.1% -0.4% +2.6% 0.7% +0.9% +3.4% +10.1% +4.8% +1.3% +3.7% +3.3% +2.8%

+4.5% +6.3% -0.6% +3.1% +3.7% +0.6% -0.5% +0.2% 0.1% +0.4% +6.1% +6.2% +4.2% +5.3% +5.5% +5.2% +5.3%

+4.1% +5.4% +4.7% +4.8% +6.5% +3.9% +2.8% +5.3% 4.0% +4.5% +4.5% +1.1% +3.4% +5.2% +5.9% +1.8% +4.3%

+5.6% +3.7% +3.9% +4.4% +3.9% +5.3% +0.9% +5.3% 3.8% +4.8% +2.4% -0.6% +2.2% +5.5% +6.1% n/a n/a

Source: Individual airports’ traffic reports. Note: Subject to revision.

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Page 22

October 2013

Summary of Total Year-Over-Year Passenger Traffic Performance at Selected U.S. & International Airports

2013

2012

United States

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

Atlanta

Chicago

+2.7% +3.7% +3.2% +3.2% +3.2% +3.1% -0.9% -0.1% 0.7% -0.8% -5.6% -3.5% -3.3% -3.2% -2.2% n/a n/a

-2.4% -0.9% -3.7% -2.3% +0.1% +0.6% -5.7% -3.4% -2.8% +5.6% +0.7% -1.2% +1.7% +1.1% +1.2% +1.7% +1.3%

Los Angeles +1.3% +1.6% +5.0% +2.6% +3.0% +3.3% 0.4% 5.6% 3.2% +3.8% +5.6% +6.5% +5.3% +4.5% +3.9% +5.0% +4.4%

International

Dallas

Denver

-0.7% +2.5% +4.2% +1.9% +1.4% 6.8% 2.9% 2.5% 4.0% +5.6% +1.5% +3.7% +3.6% +4.3% +3.9% +3.8% +4.0%

+3.3% +2.2% +0.3% +1.9% +0.6% +3.1% -1.6% 0.0% 0.5% -2.6% -1.4% -2.1% -2.0% -2.6% -5.0% -0.7% -2.9%

New York JFK -1.0% +4.1% +7.3% +3.4% +6.5% +5.4% -5.2% -0.3% 0.1% -7.5% -0.1% -1.0% -2.9% -1.4% -0.8% n/a n/a

London Heathrow -0.1% +3.1% +2.0% +1.6% +0.9% +0.3% 1.0% 3.9% 1.8% -0.7% +4.7% +4.6% +2.9% +5.5% +7.7% +3.4% +5.5%

Paris CDG -2.1% +1.1% -1.4% -0.9% +1.1% -3.0% -1.6% n/a n/a -3.1% +2.5% 0.0% -0.6% -0.5% +3.8% n/a n/a

Frankfurt

Beijing

+1.4% -2.7% -6.3% -2.3% +1.9% -4.9% 0.2% -1.1% -2.0% -2.2% +0.4% +3.1% +0.4% +5.0% +3.6% +3.6% +4.1%

+1.2% +3.1% +7.2% +3.7% +4.3% -0.3% 7.3% 7.6% 4.8% +2.5% +3.4% +1.4% +2.4% -2.7% +0.6% +1.7% -0.2%

Tokyo Narita +8.9% +11.2% +10.9% +10.3% +16.8% +6.2% 8.4% 9.7% 8.2% +6.1% +5.4% +9.2% +6.9% +7.6% +7.7% +7.6% +7.6%

Mexico City +7.7% +7.7% +6.1% +7.1% +11.8% +7.7% 2.2% 2.7% 4.2% +4.4% +7.3% +8.6% +6.8% +8.3% +8.2% +8.6% +8.4%

Source: Individual airportsâ&#x20AC;&#x2122; traffic reports. Note: Subject to revision.

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INTERVISTAS NEWS The InterVISTAS Group continues to be active in delivering a diverse range of consulting projects around the world and some of the new projects we are working on are listed below:

Charlottesville-Albemarle Airport Authority Contract Renewal 

Five year contract renewal to provide advisement and representation.

Congratulations to Elmira Corning Regional Airport (ELM) 

ELM was named one of United Airlines' newest U.S. destinations (United service to Chicago O'Hare). This becomes the 2nd new route announced within the last month at ELM, including new twice weekly Allegiant service to St. Petersburg/Clearwater.

Congratulations to Lisbon International Airport (LIS)  

LIS has become a destination for a new trans-Atlantic route with Air Canada Rouge. The new 3/week service will start in the summer of 2014 and will be the first Air Canada route for LIS.

Winnipeg International Airport Forecast 

Page 23 October 2013

Develop an aviation forecast for passenger movement and cargo activity.

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SPEAKING ENGAGEMENTS AND EVENTS Ian Kincaid, Vice President, Economic Analysis German Aviation Research Society Workshop St. Gallen Switzerland – 13 November 2013 Mr. Kincaid will speak on airport forecasting methods which incorporate business risk assessment.

Mike Tretheway, Chief Economist & Chief Strategic Officer European Aviation Conference St. Gallen, Switzerland – 13-15 November 2013 Dr. Tretheway will lead a two-part discussion on Airport Competition: Myth or the End of Regulation. For more information please see: http://www.eac-conference.com/

Mike Tretheway, Emre Serpen and Kate Markhvida, Manager, Economic Analysis Airline Economics Course, Istanbul Technical University Istanbul, Turkey – 18-23 November 2013 The InterVISTAS team of Mike Tretheway, Emre Serpen, Kate Markhvida are presenting a full course on Airline Economics in the new Aviation Executive MBA program of Istanbul Technical University.

Dr. Emre Serpen, Executive Vice President China Aviation Summit Shanghai, China – 3 December 2013 Dr. Serpen will join the discussion panel on Financial Leasing for Win-Win Relationships with Airlines and Aerospace.

Steve Martin, Senior Vice President Transportation Research Board Annual Research Conference Washington, D.C – 16 January 2014 Mr. Martin will moderate a panel discussing "Effect of Airline Consolidation on Industry Stakeholders".

Page 24 October 2013

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Mike Tretheway, Chief Economist and Chief Strategic Officer Growing the North Conference Grande Prairie, Alberta â&#x20AC;&#x201C; 18-20 February 2014 Dr. Tretheway will present The Role of the Airport in Regional Economic Development.

Page 25 October 2013

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STAFF ANNOUNCEMENTS The InterVISTAS Group is pleased to announce the following achievements of InterVISTAS staff members:

Dr. Tretheway Selected for Who’s Who of Competition Lawyers and Economists InterVISTAS’ Dr. Michael Tretheway was selected again by his peers for inclusion in Who’s Who of Competition Lawyers and Economists. Mike is a specialist in transportation economics, including competition issues such as mergers, alliances, pricing agreements. He has appeared as an expert witness in court, regulatory hearings and arbitration panels in Australia, Canada, the European Union, Hong Kong, New Zealand, South Africa, and the U.S.

Page 26 October 2013

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OUR OFFICES UNITED STATES

CANADA

Washington, DC 1150 Connecticut Avenue, NW Suite 601 Washington, DC 20036 Tel: +1.202.688.2220 Fax: +1.202.688.2225

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Boston, Massachusetts One International Place 100 Oliver Street Boston, MA 02110 Tel: +1.617.535.3205

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UNITED KINGDOM

NETHERLANDS

Bath* Suite 10, Regency House 2 Wood Street, Queen Square Bath, UK BA1 2JQ Tel: +44.20.8144.1835 Fax: +44.1225.330.209

The Hague 10 Anna van Saksenlaan 2593 HT The Hague Tel: +31.70.344.6449 Fax: +31.70.324.5302

*Registered as a Branch Office under the laws of the Registrar of Companies for England & Wales, Company No. FC027160 Branch No. BR, of InterVISTAS-EU Consulting Inc., a Canadian company incorporated under the laws of the Province of British Columbia Business Corporations Act No. BC0771664. InterVISTAS’ 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 provide comments/feedback on the InterVISTAS’ Aviation Intelligence Report, please contact Paul Ouimet at paul.ouimet@intervistas.com or 1-604-717-1800. To subscribe, please send an email to subscribe@InterVISTAS.com To unsubscribe, please send an email to unsubscribe@InterVISTAS.com