CAIR Issue No. 13 - January 2004

Page 1December 2003 © InterVISTAS Consulting Inc.

INDUSTRYREVIEW


THE CONTINUING SHIFT IN AIR

CANADA’S DOMESTIC SEAT CAPACITY16 January 2004

Mainline steady. Over the pastthree years, Air Canada has beenshifting its domestic capacitybetween mainline, Jazz, Zip andTango. While its overall capacityhas decreased, the share ofdomestic seat capacity flown bymainline services has only declinedslightly, from 58.4% to 56.7%. Ayear ago, mainline share was downto roughly 52%, but at this time theTango brand was carrying just over10% of capacity. Tango was not a separate carrier. It was a service brand which used AC mainlinepilots, flight attendants and customer service agents.

Jazz down. The biggest shift since January 2001 has been the reduction in traffic handled by Jazz.This regional carrier has lost a quarter of the capacity share it used to have, from 41% to 31%.

Zip up but low fare brands down. Zip has more than doubled since a year ago, and now handlesalmost 12% of domestic seat capacity. However, this is only slightly greater than what Tango handled ayear ago. In fact, the total share of domestic capacity handled in Air Canada low fare aircraftconfigurations (Tango and Zip) has declined from 15.3% to 11.9%.

Air Canada Domestic Seat Capacity BreakdownCarrier January 2001 January 2002 January 2003 January 2004Air Canada Mainline 58.4% 59.5% 51.9% 56.7%Regional/Jazz 41.6% 36.8% 32.8% 31.4%Tango1 3.7% 10.5% -Zip - - 4.8% 11.9%Total DomesticSeat Capacity 2,506,049 2,222,703 2,247,368 2,180,150

% Change in Total DomesticSeat Capacity from 2001 - -11.3% -10.3% -13.0%

Source: OAG Max January 2001, January 2002, January 2003, December 2003, Tango Timetable 2001 and January 2003, Zip website.

1 Tango has been incorporated as a fare class in Air Canada mainline as of October 1, 2003.

Jennifer TsoProject Analyst

Air Canada Domestic Seat Capacity

0%

20%

40%

60%

80%

100%

120%

'Jan 2001 Jan-02 Jan-03 Jan-04

ZipTangoJazzMainline


DECLINING CARRIER COMMISSION

EXPENSES16 January 2004

Declining Commission Expenses: Historically, commissions have been paid by airlines to travelagents, industry wholesalers/consolidators, tour operators and other companies participating in the traveldistribution network. Over recent years we have seen a decline in commissions paid by airlines. Inparticular, many U.S. and Canadian carriers have eliminated travel agency commissions on domestictickets.

In Q2 2003, commission expenses of U.S.network carriers dropped 18% to $346 million,compared to the same period in 2002. Asshown, Continental Airlines exhibited thelargest percentage drop in commissionexpenses, down 34% from the same quarter in2002. Compared with network carriers,commission expenses of U.S. low-cost carriershave shown more aggressive declines.Commission expenses for these carriersdeclined 33% to $30 million in Q2 2003,compared to the same period in 2002.JetBlue shows the largest percentagedecline in commission expenses among low-cost carriers, essentially down to zero.

What external factors caused airlines tocut commissions? One reason fordeclining commissions is the emergence oflow-cost carriers. Low-cost carriers arealways striving to decrease their break-evenpoints so that they remain profitable. Asdiscussed above, the commission expenses of network carriers have declined but not at the same rateas those of the low-cost carriers. Network carriers are beginning to change their business models bydecreasing costs and becoming as profitable as their counterparts.

Perhaps the key driving force for the decline in commission expenses is the introduction of the Internet.According to the General Accounting Office Airline Ticketing Report, the percentage of tickets bookedonline increased from 7% to 30% between 1999 – 2002. Historically, consumers typically purchasedtickets through a travel agent. Airlines paid anywhere from 8-11% commission to the agency, whichtranslated into high commission expenses for the airline. For example, in 1998 U.S. Airways’commission expenses represented about 7% of total operating costs. As the Internet emerged, airlinesdeveloped less expensive online booking websites that bypassed travel agent ticket sales.

As well, Internet-based agencies such as Expedia and Travelocity, which use global distribution systemsto book tickets, cost the airlines less than booking through traditional travel agencies. Low-cost carriershave led the move towards this more cost-efficient distribution channel and have benefited from lowerdistribution costs. Network carriers are now adapting to online booking systems and are experiencingdeclines in commission expenses.

Jennifer TsoProject Analyst


AIRLINE STOCK PRICES SHOW

IMPROVEMENT16 January 2004

In spite of the fact that several U.S. (and Canadian) airlines are in or skirting bankruptcy, in 2003 thestock prices of several airlines showed dramatic improvements.

Network Carriers: Network carriers, the ones under severe profitability pressures, have neverthelessshown improvement in their 2003 stock performance in many cases. American Airlines, who was closeto Chapter 11 bankruptcy in the fall, has seen its stock price increase 96% in the 12 months ending 31December 2003. Continental Airlines showed the largest increase among U.S. network airlines, with animpressive 124% increase in stock price. However Delta Airlines was down 2.4% by comparison.United is still operating under Chapter 11 and US Airways just exited from bankruptcy protection. AirCanada has been under CCAA protection since April 1, 2003. While the company has indicated that itsshares will be worthless after emerging from bankruptcy its shares are still trading in positive territory.

Low Cost Carriers: While the performance of some network carrier stocks was strong in 2003, it is thelow-cost carriers who remain the stars. ATA’s and Frontier’s stocks are both up 111%, AirTran is up205%. America West, sometimes classified as low cost carrier, is up a whopping 589%! Southwest andRyanair stocks experienced solid annual increases of 16% and 29% respectively. On a split adjustedbasis, JetBlue’s stock price increased 47%. Just prior to 2003’s year-end, the airline’s stock split 3 for 2,increasing the outstanding volume of shares to over 100 million. North of the border, WestJet’s stocksexperienced exceptional growth with its stock price increasing 76% during 2003.

-100%

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Change in stock price Dec 31 2002 - Dec 31 2003

Low Cost Carriers Network Carriers

Geneva TrethewayResearch Analyst


0%

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Dec-02

Jan-03

Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

RPK ASK

WestJetWestJet

AIRLINE DATA – CANADATRAFFIC AND LOAD FACTORS ON CANADA’S MAJOR AIR CARRIERSDECEMBER 2003

Passenger TrafficRevenue Passenger Kilometres

CapacityAvailable Seat Kilometres

Load FactorAir Carrier

% Changeover 2002

% Changefrom 2001

% Changeover 2002

% Changefrom 2001

% Changeover 2002

% Changefrom 2001

Air Canada2 +0.2% -0.4% -2.6% -0.2% +2.0 pts(to 72.0%)

-0.1 pts

Domestic(Mainline) -1.3% -10.1% -3.5% -2.9% +1.6 pts

(69.0%) -5.5%

Jazz +2.4% N/A -4.0% N/A +3.6 pts(55.8%) N/A

International& Charter +0.8% +4.3% -2.2% +1.1% +2.1 pts

(73.2%) +2.2%

WestJet +40.6% +112.3% +37.9% +117.2%+1.5 pts

(to 73.6%) -1.7 pts

Jetsgo +231.4% N/A +233.9% N/A-0.6 pts(77.4%) N/A

Note: N/A – As Jazz was not reported in 2001, a percentage change from 2001 could not be calculated.

Analysis:

• Air Canada appears to be finallyreversing it long standing trafficdeclines. In December, for the first timein 2003, the carrier posted growth insystem-wide passenger traffic.Although modest (0.2% growth relativeto the same month a year ago), it is acontinuation of a trend which began inMay, when the bad traffic news becamea bit less negative each month.

• WestJet now marks its third month in arow with traffic growth greater thancapacity. With the exception of twomonths, since early 2002, WestJet'scapacity growth exceeded trafficgrowth. This caused as steady declinein load factor. Beginning in October2003, this process has reversed.

2Air Canada Mainline consists of all Air Canada with the exception of Jazz.

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Dec-02

Jan-03


Dom RPK Dom ASK

Air Canada Domestic Mainline Air Canada Domestic Mainline

Jazz data is not includedin this graph

-35%-30%-25%-20%-15%-10%-5%0%5%

10%

Dec-02

Jan-03


Int'l RPK Int'l ASK

Air Canada InternationalAir Canada International

NEW CARRIERS:LOAD FACTORSJetsgo: 77% (Dec)Zip: not reportedCanJet: not reported


AIRLINE DATA – U.S.U.S. Airlines Release December 2003 Traffic Figures

Traffic Data – December 2003

Airline Load FactorTraffic

(RPMs – millions)Capacity

(ASMs – millions)

73.7 %

á 0.5 pts

10,352

â 0.1%

14,030

â 0.8%

64.6%

á 1.5pts

446

á 18.0%

690

á 15.3%

268.7 %

â 2.8 pts

1,124

á 11.1%

1,824

á 15.0%

177.0%

á 3.1 pts

5,183

á 7.6%

6,735

á 3.3%

74.1%

â 0.2 pts

8,592

â 0.5%

11,596

â 0.3%

82.2%

â 2.7 pts

1,078

á 43.6%

1,311

á 48.2%

78.1%

á 1.2 pts

5,732

â 4.8%

7,335

â 6.3%

64.0%

á 2.0 pts

3,935

á 1.1%

6,152

á 4.3%

278.4%

á2.5 pts

9,204

â2.8%

11,743

â 5.8%

272.9%

á 0.5 pts

3,125

á 4.1%

4,289

á3.4%

Notes: 1. Mainline2. Load factor includes scheduled service only

Sources: Carrier traffic reports.

Page 9January 2004 InterVISTAS Consulting Inc. ©

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

Toronto Vancouver Montreal-Trudeau

Calgary Edmonton Ottawa Winnipeg Halifax Victoria Kelowna Saskatoon Regina St. John’s

2nd Quarter N/A -9.0% -10.9% -3.8% -6.7% -12.3% -6.9% -6.0% -6.3% -6.1% -8.7% -11.1% -11.9%September N/A +12.6% +22.5% +20.1% +7.6% +23.7% +16.4% +26.1% +13.2% +11.8% +12.6% +10.5% +20.0%

3rd Quarter N/A -2.6% -0.2% +2.9% -4.4% +0.5% +1.2% +11.2% -4.8% +0.2% -5.4% -5.8% -0.8%October N/A +12.5% +15.3% +14.3% -0.1% +6.4% +5.9% +7.9% +0.1% +5.7% +1.7% +4.4% -0.7%November N/A +4.7% +5.3% +0.6% +9.4% +3.0% +5.7% +5.7% +0.1% -1.4% +0.2% +1.2% -2.3%December +8.2% +4.3% +7.8% +7.1% +11.7% +6.3% +15.2% +8.1% +1.4% +4.3% +1.5% +3.2% +2.2%4th Quarter N/A +7.2% +9.7% +7.6% +6.9% -5.1% +8.9% +7.3% +0.5% +3.0% +1.1% +3.0% -0.3%

2002

Full Year -7.5% -3.9% -4.3% +1.2% -4.1% -5.1% -3.8% +0.1% -4.8% -1.3% -5.1% -5.5% -5.7%January +5.7% +2.8% +7.2% +6.3% +3.5% +6.2% +13.0% +4.5% +2.9% +4.0% +6.8% -0.3% -5.8%February +4.6% -0.6% +3.7% +5.6% +3.0% +3.9% +12.7% +13.8 +7.5% +2.0% +6.0% +8.8% -2.0%March +0.4% -1.4% -1.8% +3.7% -0.4% +2.2% +5.1% N/A +0.2% +5.0% -3.7% -4.2% -3.1%1st Quarter +3.4% +0.2% +2.9% +5.2% +2.0% +4.0% +10.1% +10.0% +3.3% +3.7% +3.1% +1.3% -3.7%April -15.1% -13.6% -10.2% +1.6% +1.1% -7.6% +4.4% +6.1% -0.9% -0.6% -3.9% -1.6% -1.7%May -17.3% -13.5% -7.4% -1.4% -5.3% -1.5% -0.5% -1.2% +0.4% -1.0% -5.3% -1.6% +4.5%June -9.0% -9.9% 0.0% +1.9% -0.4% +2.5% +5.0% +4.1% +0.6% -0.5% +1.4% +7.0% +17.8%2nd Quarter -13.7% -12.2% -5.6% +0.7% -1.6% -2.1% +3.0% +2.9% +0.0% -0.7% -2.6% +1.3% +7.1%July -6.0% -4.5% +2.9% +4.7% +2.5% +3.0% +3.7% +5.7% +11.9% +5.0% +1.2% +4.7% +21.1%August -7.6% -1.2% -1.0% +1.4% +0.3% -7.0% +0.4% +4.1% +9.8% +0.5% -4.8% -2.2% +22.5%September -5.9% -3.0% +1.7% -1.8% +8.6% +1.6% +1.5% -0.6% +10.8% -0.7% -2.4% -0.2% +12.3%3rd Quarter -6.6% -2.8% +1.1% +1.6% +3.4% -0.9% +1.8% +3.3% +10.8% +1.7% -2.0% +0.7% +19.0%October -2.3% -3.1% +4.0% -0.7% +10.4% +1.4% +7.4% +2.5% +15.4% +1.1% N/A -1.3% +9.4%

2003

November 0.1% 2.2% +11.4% +8.0% +7.2% +6.5% +5.8% -0.05% +13.7% +9.6% N/A 19.8% N/A

CA

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Page 10January 2004 © InterVISTAS Consulting Inc.

NEWS ARTICLESAIR CANADA UPDATEAIR CANADA REACHES US$1.5BFINANCING DEAL WITH GECAS

Air Canada has reacheda financing agreementwith GE Capital Aviation

Services (GECAS) that includes a US$585million loan, US$950 million to finance thepurchase of regional jets, and restructuredleases on 108 aircraft. Under the terms of thedeal, Air Canada must maintain a cash balanceof C$750 million-which can fall to C$500 milliononly if certain performance targets are met. Thecarrier’s collateral, in the form of spare parts,cannot fall below US$517 million. Additionally,if Air Canada sells 100% of Aeroplan - itsfrequent flyer program, it must reserve 25% ofthe proceeds, or no less than US$125 million,towards paying the loan. The carrier mustobtain approval from GECAS before sellingAeroplan. The agreement is also conditional onthe carrier emerging from bankruptcy protectionby April 30th. GECAS will receive a one-timeUS$10.6 million payment to provide the loan,and US$500,000 annually to manage the loans.

AIR CANADA ORDERS 90 AIRCRAFT FROMBOMBARDIER AND EMBRAERAir Canada has completed a memorandum ofunderstanding to purchase 45 Bombardier and45 Embraer regional aircraft for US$2.65 billion.Negotiations continue for an additional 15aircraft. The order consists of 15 BombardierCRJ-200 and 30 CRJ-705 to be delivered in2004, and 45 Embraer 190 scheduled forNovember 2005 delivery. Both the Bombardierand Embraer orders include options for anadditional 45 aircraft. The purchase is subjectto satisfactory financing terms, approval fromequity investor Trinity Time Investments, andthe court overseeing the carrier’s restructuringunder the Companies’ Creditors ArrangementAct (CCAA).

AIR CANADA RECONFIRMS TRINITY ASEQUITY PARTNERAir Canada’s Board of Directors has againselected Victor Li’s Trinity Time Investmentsas the carrier’s equity partner after comparingrevised bids from both Cerberus CapitalManagement and Trinity. The revised proposalcalls for Trinity to invest CDN$650 million for31% of the shares in Air Canada, and offerscreditors up to 66% of the carrier’s equity. AUS$106 million note held by GE CapitalAviation Services (GECAS) will be paid out incash instead of stock. Trinity also reached adeal with Deutsche Bank, which is backstoppinga CDN$450 million rights offering that allowscreditors the opportunity to purchase moreshares at discounted rates.

AIR CANADA JAZZ TO INCREASEFREQUENCY TO PRINCE GEORGE ONSMALLER PLANESStarting February 1, Air Canada Jazz willincrease the number of daily flights from PrinceGeorge to Vancouver from four to six.However, the service capacity will remainalmost the same as a smaller 50-seat deHavilland Dash 8-300 will replace the 77-seatBAE-146 jet currently used.

AIR CANADA INCORPORATES FUELSURCHARGE INTO FARESBeginning January 21, Air Canada will includethe fuel surcharge on all domestic fares,including flights operated by Air Canada, AirCanada Jazz, and Zip. Fuel surcharges arealready included in international flights andrange from CDN$10-$20, depending ondistance. Other Canadian airlines, includingWestJet and Jetsgo, will also adopt this change.

CTA ORDERS AIR CANADA TO ELIMINATEINSURANCE SURCHARGEThe Canadian Transportation Agency (CTA)has ordered Air Canada to drop the CDN$6insurance surcharge on its fares by March 27.The surcharge was introduced in September2001 as a temporary levy to cover risinginsurance costs after the September 11 terroristattacks.

FUEL PRICES

January 8, 2004

• SPOT OIL PRICESCONTINUE TO INCREASE

• FUTURES PRICESINCREASE

Crude Oil Prices:• Spot – US$33.98

(up 10.4% from December)

Futures• 6 month - $32.73

(May 2004 delivery)• 12 month -$29.78

(December 2004 delivery)• 2 year - $27.70

(December 2005 delivery)• 5 year - $27.25

(December 2008 delivery)

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

Feb-03

Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan-04

US$

per B

arre

l

Monthly Spot PricesMonthly Spot Prices


NEWS ARTICLES

OTHER CANADIAN AIRLINESWESTJET TRIPLES TORONTO SERVICEWITH EASTERN EXPANSIONBeginning April 18, 2004, WestJet will increaseit’s departures from Toronto PearsonInternational Airport to 182, including 39 weeklyflights from Toronto to Montreal, and 32 flightsbetween Toronto and Ottawa. Departures fromToronto to Calgary will be increased to 40weekly, and from Toronto to Winnipeg 18weekly. The new schedule will have 1,580weekly departures across Canada, withincreases in all major routes including Montreal,Toronto, Ottawa, Vancouver, Calgary,Edmonton and Winnipeg.

JETSGO ADDS TWO NEW AIRCRAFTJetsgo has announced it willadd two new aircraft to itsfleet, bringing the total to 14.

Additional capacity will be added from Torontoand Montreal for spring break service toOrlando, Fort Lauderdale, St. Petersburg, andFort Myers. Services from Winnipeg, Halifaxand Vancouver will also increase.

US AND INTERNATIONALAIRLINESCANADIAN AFFAIR STARTS NEW U.K.SERVICES

Beginning in May, CanadianAffair Ltd., a London based touroperator, will introduce servicesfrom Toronto to Manchester and

Birmingham three times weekly using My TravelAirlines (U.K. tour operator). Five weekly flightsbetween Toronto and Gatwick will be added,and up to seven daily flights between Glasgowand Toronto will be offered during the peaksummer season. Approximately 90% of theflights will be provided by Thomas Cook Airlinesusing a Boeing 757. The tour operator plans togrow into a scheduled operator by 2005.

U.S. AIRWAYS RENEWS LEASE FOR 10GATES AT PITTSBURGH AIRPORT

U.S. Airways has completedan agreement to lease 10 gatesand associated terminal and

support facilities at Pittsburgh InternationalAirport through 2018, replacing a lease that wasrejected earlier as part of the carrier’sbankruptcy restructuring. The remaining 40gates will be leased on a month to month basis.U.S. Airways also signed a three-year lease foron-airport support facilities includingmaintenance hangars, cargo, mail sorting, andfood services. The carrier will maintain aschedule similar to its existing service atPittsburgh until September.

FRONTIER FIRST TO REPAY POST SEPT. 11FEDERAL GUARANTEED LOAN

Frontier Airlines is thefirst U.S. carrier to repay infull its US$70 million loan

guaranteed by the Air TransportationStabilisation Board (ATSB) after the tragicevents of September 11.

MESA ENDS ATLANTICCOAST BID

Mesa Air Group Inc. has ended its bid forAtlantic Coast Airlines (ACA). This comesafter United Airlines terminated a proposedservice agreement with Mesa that would havehad the carrier operate some of ACA’s routes.A federal court had temporarily blocked the bidfor potential anti-trust violations. Atlantic Coastwill continue with plans to launch its low costcarrier, Independence Air at WashingtonDulles International Airport.

AIR ASIA EXPANDS WITH 737-300Air Asia, a low cost carrierbased in Malaysia, plans toincrease its fleet to 21 by June

2004. The carrier is currently operating 11 737-300 aircraft.


NEWS ARTICLESJETBLUE AND AIRTRAN BOOST IN-FLIGHTENTERTAINMENT SYSTEMS

JetBlue announced that it hasreached deals with XM SatelliteRadio and Fox parent News

Corp. to add up to 100 channels of digitalsatellite radio and pay-per-view movies on itsflights. The new services will be introduced onits fleet of A320s this fall and on the Embraer190s as they are delivered next year. JetBluewas the first to offer satellite T.V. on its flights in2000. AirTran, which currently does notprovide in-flight entertainment services, will alsobe adding the XM Satellite Radio system on itsflights beginning this summer.

CARGOU.S. CARGO VOLUME DECREASESU.S. Air Transport Association figures forNovember show a 2.1% decrease in revenueton miles for domestic cargo and a 6.1%decrease for international cargo. Total freightvolume for the month decreased by 4.2% fromthe previous year.

INTERNATIONAL FREIGHT TRAFFICINCREASESThe International Air Transport Association(IATA) reported that total international FTKs areup 2.4% for November and year-to-date traffic isup 4.8% over 2002. The Middle East saw thelargest increase with an 18% rise in itsinternational freight traffic.

ASTAR AIR CARGO RULED TO BE U.S.CARRIERAn administrative law judge has determined thatASTAR Air Cargo does not violate U.S. foreignownership and limitations. UPS had objected toAStar's license based on nationality claims.The carrier was formed at the request ofGerman owned DHL, who is financing 80% of aloan for its purchase price, and is AStar’sdominant customer. ASTAR is headed byformer Northwest Airlines CEO John Dasburgand has an 11 year contract with DHL. TheDOT will conduct a final analysis to determinewhether or not ASTAR qualifies as a U.S.carrier.

NEW CARGO CARRIER LAUNCHED INCHINA

Air China Cargo has beenofficially launched. The new

carrier is owned by Air China (51%), CITICPacific (25%), Capital Airport (24%) and hascapital resources of CNY 3.5 billion (CAD$547million). Air China Cargo will deploy 5 Boeing747 freighters. The carrier will also use spaceon 8 Boeing 747-400 passenger-cargo planesand 115 passenger aircraft with cargo spacefrom the mainline. The freighter's servicenetwork covers most Chinese provincial capitalsand major cities, in addition to 36 cities in 27countries and regions.

VOLGA-DNEPR TO LAUNCH NEW AIRLINEVolga-Dnepr announcedplans to launch Air

Bridge Cargo on April 2, 2004. The newcarrier will operate under its own Air Operator’sCertificate, offering scheduled freighter servicebetween Europe and Asia through Russia, withplans to serve the U.S. from Moscow in thefuture. Volga has bought two B747-200s withplans to acquire at least eight 747s by 2010 forthe new airline.

FEDEX ACQUIRES KINKO’SFedEx will acquire Kinko’s ina US$2.4 billion deal with

Clayton, Dubilier & Rice. The transaction willclose in the first calendar quarter of 2004.

FEDEX TO MOVE ASIA HUB TO CHINAFedEx announced that it will move its hub atSubic Bay in the Philippines to Guangzhou,China. The current lease at Subic Bay expiresin 2007 and the runway and apron have limitedexpansion room.

FEDEX AND UPS TOP IN RTKsAirline Business has released its top 100cargo airline ranking for 2002. Based on cargotraffic RTKs, FedEx took the top spot with over14.6 million RTKs, followed by UPS at 7.3million RTKs and Lufthansa Cargo with 7.2million RTKs. Air Canada ranked 24th with 1.9million RTKs flown in 2002.


NEWS ARTICLESFEDEX Q2 PROFITS DOWNFedEx’s net income was US$91 million for itssecond fiscal quarter ended 30 November 2003,down 63% from US$245 million one year ago.Before realignment costs, revenue was US$266million, or 9% ahead of 2002.

CATHAY PACIFIC PLANS EXPANSION OFFREIGHTER FLEET

Cathay Pacific will add up to13 Boeing 747-400F

freighters to its fleet by 2007 as it expandsinternational services to Beijing, Munich andNorth America. The carrier has ordered oneB747-400F to be delivered in January 2005,and plans to convert six to 12 B747-400s intofreighters by 2007. Cathay Pacific currentlyoperates 11 freighters including five 747-400Fsand six 747-200Fs.

AIRPORTS

HAMILTON INTERNATIONAL AIRPORTCELEBRATES 1 MILLIONTH PASSENGEROF 2003The 1 millionth passenger of 2003 passedthrough Hamilton International Airport at 9:00AM Friday, December 12th. This is the first timethe airport has passed the 1 million-passengermark in a single year.

WESTJET REDUCES SERVICE ATHAMILTONAs part of its increased service to Toronto,WestJet is rationalising service at a number ofother airports in Canada. Hamilton will lose60% of its WestJet flights and its routes toMontreal and Ottawa. The latter route alsoresults in the loss of the one way services toGander and St. John's. WestJet will retain 63flights at Hamilton and its maintenance base.While the airport expects that another airline willtake the opportunity to fill the void left by thereduced WestJet service, it has put itsexpansion plans on hold.

DORVAL RENAMED TO MONTRÉAL-TRUDEAUAs of 1 January 2004, Montréal-Dorval Airportis now known as Montréal-Pierre ElliotTrudeau. Aéroports de Montréal isencouraging the use of Montréal-Trudeau foreveryday reference. The airport’s identifiercode, YUL, will remain unchanged.

NAV CANADA COMPLETES CDN$11MUPGRADE AT MONTREAL-TRUDEAUAIRPORTNAV Canada has completed a CDN$11 millionupgrade to the Montreal Area Control Centreand Air Traffic Tower located at the Montreal-Pierre Elliot Trudeau International Airport.The upgrade includes the Integrated InformationDisplay System/Extended Computer DisplaySystem (IIDS/EXCDS), which providescontrollers with faster and more reliable accessto air traffic information by integrating flight data.The Control Centre and Air Traffic Towerprovides en route information services to aircraftflying over Quebec and adjoining provinces.

LOW COST CARRIER TERMINAL TO BECONSTRUCTED AT CHANGI AIRPORTThe Ministry of Transport in Singaporeconfirmed that it is considering plans to build apassenger terminal for low cost carriers atSingapore Changi Airport. Low cost carriersValuAir, Air Asia and Tiger Airways are allplanning to launch services from Singapore inthe first half of 2004.

AIRCRAFT MANUFACTURERS

AIRBUS OUTPACES BOEING IN AIRCRAFTDELIVERY FOR 2003

Boeing delivered 281commercial aircraft in 2003, 26%less than last year. Over half ofthese deliveries were for the

Boeing 737 series. Meanwhile, Airbusdelivered its 300th aircraft at the end December2003, and is expected to have slightly over 300deliveries for the year.


NEWS ARTICLESBOEING RECEIVES CND$360M B737-700WESTJET ORDERBoeing announced that it has received aCDN$360M order from WestJet for seven newB737-700s scheduled to be delivered in 2005.Currently, WestJet’s fleet consists of 44 B737s,including 26 B737-700s.

REGULATORY

U.S ANNOUNCES CRS DEREGULATIONThe U.S. government says it will lift mostrestrictions on computer reservation systems(CRS) by January 31 because they are nolonger necessary due in part to the increase inon-line booking. The government regulatedCRS in the 1980s when they were all owned byUS airlines and nearly 90% of ticket sales werethrough travel agents using CRS. Theremaining two restrictions, which prohibit CRSfrom biasing flight listings in favour of someairlines and from requiring airlines to provide allfares, will be lifted in July to give the markettime to adjust.

U.S. ANNOUNCES AIR MARSHAL PLANWITH MIXED RESPONSE FROM AIRLINESThe U.S. government announced Dec 30th thatit will require armed air marshals to be placedon certain international flights into the UnitedStates. The British government said it wasopen to the plan but that certain conditionswould have to be met. Thomas Cook Airlinesand South African Airways disagree with theidea and say they would rather cancel flights.Air Canada and the Canadian governmenthave a limited program in place that they plan toexpand to accommodate the new requirement.

EUROPEAN COMMISSION INVESTIGATESFARE DISCRIMINATION CLAIMSThe European Commission (E.C.) hasreceived complaints that certain airlines chargedifferent prices for the same service dependingon the customer’s country of residence. TheE.C. has begun an investigation into 18 airlines’pricing practices. Nationality-baseddiscrimination in the single European market isprohibited by the European Union Treaty.

PEOPLE

RICHARD KOROSCIL APPOINTEDPRESIDENT & CEO OF TRADEPORTINTERNATIONAL

Richard Koroscil hasbeen appointed Presidentand C.E.O of TradePortInternationalCorporation, the operatorof the HamiltonInternational Airport.Previously, he served as

Vice President of Operations with YVRVancouver Airport Services Ltd., where he wasresponsible for the operations at all YVRASairports in Canada and internationally -15airports in total. He is a graduate of the AviationManagement program at Durham College ofApplied Arts and Sciences. His experience hasalso included several positions in the Canadianairport industry, including Airport Manager atTimmins and Windsor airports and VicePresident of Operations at Vancouver Airport.

INTERVISTAS CONSULTING INC.PROMOTES PAUL GRIMSEY

InterVISTAS ConsultingInc. is pleased toannounce the promotionof Paul Grimsey. Mr.Grimsey has beenappointed Vice President,Finance andAdministration & Chief

Financial Officer. He has over 10 yearsexperience as a Chartered Accountant,including positions in the cruise and destinationmanagement industry, and the food industry.Prior to becoming a Chartered Accountant, Mr.Grimsey worked as a commercial pilot and flewprofessionally for 10 years.


NEWS ARTICLESNEW ACI CHAIRMANNiels Boserup, CEO of Copenhagen AirportsLtd, was unanimously elected Chairman ofAirports Council International (ACI) for a two-year term starting January 1 at the ACI GeneralAssembly on December 6, 2003.

NTERVISTAS CONSULTING INC.PROMOTES JOHN WEATHERILL

InterVISTAS ConsultingInc. is pleased to announcethe promotion of JohnWeatherill. Mr. Weatherillhas been appointed asManager, Airline Planning.Prior to joining InterVISTAS

Consulting Inc., Mr. Weatherill worked withWestJet Airlines. He has considerableexperience in marketing new air services toairlines and has developed good workingrelationships with most network and low costcarriers in North America.

DAVID STONE NAMED TSAADMINISTRATORDavid M. Stone has been named to serve asacting TSA Administrator, replacing James M.Loy, who was recently named deputy secretaryof the Department of Homeland Security. Stonewas formerly the Deputy Chief of Staff at theTransportation Security Administration(TSA) and Security Director for Los AngelesInternational Airport.


ECONOMIC OUTLOOK9th January 2004

The Canadian Dollar. Can itgo any higher?In 2003, the Canadian dollarrose dramatically against theU.S. dollar. Starting the yearat 63.5 U.S. cents, theCanadian dollar reached 77.4U.S. cents by the end of theyear; an increase of 22%. In2004, the loonie has riseneven higher, to 78.8 U.S.cents (by January 9 th). Thelast time the Canadian dollarwas at this level was in May1993.

Many analysts believe that the Canadian dollar will remain strong for some time to come, and maystrengthen further. Much of the rise of the loonie can be attributed to a general weakness in the U.S.dollar. The U.S dollar has declined against most major currencies (such as the Euro, British Poundand the Japanese Yen) over the last year. Both the U.S. Federal reserve and the U.S. governmenthave indicated that they will continue to support a weak dollar policy until it becomes clear theeconomic recovery is well under way.

Impact on Canadian AirportsThe strong Canadian dollar makes Canada a more expensive place for Americans to visit, whichcould negatively impact on tourism. However, the exchange rate is only one factor affecting tourism.Probably the most important factor is the health of the U.S. economy, which appears to improvingrapidly. The U.S. economy grew by a staggering 8.2% in the third quarter of 2003, and is forecast togrow by a robust 3½ to 4% in 2004.

The flip side of the strengtheningCanadian dollar is that travel to the U.S.has become significantly cheaper, whichcould mean more outbound travel fromCanadian airports. As most Canadianairports handle more outbound travel thaninbound, the net result for airport trafficcould well be positive.

Another point to consider is that, while the Canadian dollar has risen significantly against the U.S.dollar, its performance against many other currencies has been less dramatic or even negative (seethe table above). For example, the Canadian has remained flat against the Euro and has evendeclined against the Australian dollar.

Ian KincaidManager, Economic

Analysis

0.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

0.76

0.78

0.80

Jan-

03

Feb

-03

Mar

-03

Apr

-03

May

-03

Jun-

03

Jul-0

3

Aug

-03

Sep

-03

Oct

-03

Nov

-03

Dec

-03

Jan-

04

Daily Exchange Rate: U.S. Dollar per Canadian Dollar

Source: Prof. Werner Antweiler, University of British Columbia

Canadian Dollar Versus Major CurrenciesPer Canadian Dollar

Jan 2, 2003 Jan 9, 2004 Change

U.S. Dollar 0.64 0.79 +24%

Euro 0.61 0.61 0%

British Pound 0.40 0.43 +8%

Japanese Yen 76.1 83.9 +10%

Australian Dollar 1.13 1.01 -11%

Source: Prof. Werner Antweiler, University of British Columbia


(transfer of publicsafety responsibilities)

CBSACanada Border

Services Agency

CCRACustoms and

Revenue Agency

Ministerof Citizenshi p

and Immigrati on

CFIACanadian Food

Inspection Agency

M inister ofAgriculture and Agri-Food

M inister ofNational Reve nue

Minister ofPublic Safety &

Emergency Preparedness

CICCitizenship and

Immigration Canada

F o r m e r S t r u c t u r e

D e c e m b e r 1 2 , 2 0 0 3

CANADA BORDER SERVICES AGENCY

CREATEDReorganisation of agencies one step in streamlining management of borders. On December12, 2003 Paul Martin unveiled a new focus for the management of borders. Previously, borderinspection functions reported to three different ministers. Now, a new Canada Border ServicesAgency has been established and it (CBSA) reports only to the Public Safety & EmergencyPreparedness Minister, Anne McLellan.The Minister also has the responsibility for working with hercounterpart in the United States (Department of Homeland Security Secretary, Tom Ridge) for theSmart Border process.

The former agencies (CFIA, CCRA)and department (CIC) still retain manyof their original duties. The onlyfunctions transferred over to CBSAare:

• Customs Program;• Immigration intelligence,

interdiction and enforcementfunctions; and

• Passenger and initial importinspection services at ports ofentry.

Unlike the structure for CBSAproposed for Kim Campbell’s shortlived 1993 government, immigrationpolicy and the passport office remainintact.

Partial Alignment with the U.S. Model. The changes bring a partial alignment of the approach usedby the U.S. in the creation of the Bureau of Customs and Border Protection under a Department ofHomeland Security. Key differences include:• Maintaining transportation security directly under the control of Transport Canada• Keeping the Coast Guard under the control of the Department of Fisheries and Oceans

Key Issues. The definition of CBSA operations is anticipated to take months. Most functions areexpected to be transparent to travellers and shippers. For example, the “primary inspection lines” atinternational airports have long had customs officers administer immigration duties. Furthermore,immigration and customs authorities had numerous joint programs such as CANPASS well underway.Despite existing coordination, major issues that will impact airports include:• How the new agency will ensure its systems communicate with each other and become fully

integrated.• Defining the civil service rules governing thousands of workers – in particular for essential

services.• Will the CBSA co-ordinate efforts in Canada to advance transportation security at airports and

ports?Additional changes leading to and after a spring 2004 election will provide greater clarity in thefunctionality of the CBSA.

Solomon WongDirector,

Security and Planning


WASHINGTON REPORT15 January 2004

FAA Reauthorization Becomes Law: On December 12, 2003,President Bush signed into law the Federal Aviation Administration’sfour-year, $60 billion reauthorization bill, Vision 100 – The Century ofAviation Act. This bill provides$14 billion for airport constructionprojects, $140 million to assist small communities in attracting andretaining air service, $308 million to ensure air service to isolatedcommunities and $2 billion to create more efficient security screeningat airports.

New Security Rules for Foreign Airlines: On December 29, 2003, the U.S. Department ofHomeland Security (DHS) announced that any foreign passenger and cargo international flightsentering U.S. air space will be required to place armed, trained, government law enforcement officersaboard. Prior to this announcement, DHS had raised the threat level for the U.S. to Code Orange, thesecond-highest level.

TSA Awards First-Round Grants to Airports: On December 16th, 2003, the TransportationSecurity Administration (TSA) awarded $7.8 million in grants for Airport Terminal SecurityEnhancements. Eight airports were awarded grants and include: T.F.Green State Airports, R.I.;Newark International; Helena Regional, Mont.; Boston Logan International; Chicago Midway; DenverInternational; and Key West International, Fla. An additional $17 million is anticipated to be awardedin the next few weeks.

U.S., EU Reach Deal on Passenger Data: In an effort to fight terrorism, the European Union (EU)has agreed to allow the U.S. to continue to collect passenger data from transatlantic airlines. Underthe agreement, the U.S. can collect 34 types of data records including passenger name, address,telephone number, credit card numbers, travel companions and the amount of checked-in luggage.The U.S. will be allowed to store the information for 3½ years and the data will only be used by theHomeland Security Department in terrorism investigations and other international crimes.

U.S. Congress Postpones Decision on Pension Relief: When U.S. Congress adjourned for theyear in December, it had failed to approve pension relief sought by airlines. Senate leaders agreed toconsider a House-passed bill when they return in late January. The bill would allow businesses touse an index of long-term corporate bond rates to calculate pension liabilities over the next two years.

DOT Appoints Karan Bhatia: The Department of Transportation has appointed Karan Bhatia asAssistant Secretary for Aviation and International Affairs, with responsibility in international aviation,international transportation and trade issues, airline economics and related matters. Prior to joiningDOT, Bhatia had served as the Deputy Under Secretary for Industry and Security for the U.S.Department of Commerce.

Charles ChambersSenior Vice President

GA2

And

Regional Vice PresidentInterVISTAS Consulting Inc.

Washington, D.C.


THE OTTAWA SCENE16 January 2004

Prime Minister Announces Return of Parliament. Prime Minister Paul Martinannounced on January 7, 2004 that Parliament will return on Monday, February 2,2004. The Governor General, on the Prime Minister’s recommendation, signed aproclamation to recall Parliament at three o’clock on February 2 for the dispatch ofbusiness. The Speech from the Throne, which will open the 3 rd session of the 37th

Parliament, will be read by the Governor General in the Senate that afternoon.

The Speech from the Throne is expected to build on the government’scommitment to a facilitation focus as part of its agenda. The creation of the

Canada Border Services Agency is evidence of this new direction.1 The Canada-U.S. Smart Borderaction plan will be administered by this agency.The Speech will also likely outline how Canada plans to approach its overall relationship with theUnited States. The creation of a new Cabinet Committee on Canada-U.S. relations chaired by thePrime Minister, a Canada-U.S. Secretariat in the Privy Council Office, as well as the appointment of aParliamentary Secretary to the Prime Minister for Canada-U.S. relations signal how important thisgovernment views relations with the U.S. A key question is how this new emphasis on Canada-U.S.relations will impact the air transport relationship between the two countries.

While a number of other changes to the Federal Government have been announced, it is still too earlyto determine their true impacts on the airport and airline communities.

One thing is clear, however, and that is that the points of influence if not power have increased inOttawa. In the post-democratic reform era, Parliamentary Secretaries, Ministers of State, AssociateMembers, Ministers, MPs, Advisors, Legislative Committees, Cabinet Committees, and officials etc.are all, in their own right influential players in the policy process. It will be important to target allaudiences when advocating a position or advancing an issue.

It will mean spending more time educating everyone – not just Ministers – on the merits of a specificposition on key issues in order to achieve substantive policy changes.

Minister Valeri to Rethink Aviation Policy. In an interview with the Financial Post, Minister TonyValeri (Hamilton Stoney Creek) indicated that he will review Canada's aviation policy. The reviewwould include foreign ownership limits, airport rents and the aviation security charge. This is a majorchange from the attitude of his predecessor, David Collenette. We expect that Minister Valeri will lookat air policy in terms of what it can do for the Canadian economy. When he chaired the Caucuseconomic development committee, Valeri approached air policy from an overall economicperspective, not from a carrier protectionist viewpoint. He is likely to be sympathetic to the needs ofshippers, the tourism industry and other air transport users. It is unlikely that he will have time prior tothe expected federal election to make significant changes, but the review and consultation processbetween now and the election could set the stage and the tone for long overdue policy changes inaviation.

1See article in this issue titled “Canadian Border Services Agency Created” in this month’s publication.

Sam BaroneRegional Vice President,

Ottawa

This is a collection of information gathered from public sources, such as press releases, media articles, etc.,information from Confidential sources, and items heard on the street. Thus some of the information isspeculative and may not materialize.

Prepared by InterVISTAS Consulting Inc.

CAIR Issue No. 13 - January 2004

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