CAIR Issue No. 20 - August 2004

IVC MARKETINTELLIGENCE

REPORT

InterVISTAS Consulting Inc. Market Intelligence ReportAugust 2004 ©InterVISTAS Consulting Inc. Page 1

WESTJET FLEET UPDATEAugust 2004

737-200 Replacement Aircraft Announced

On August 3, WestJet announced an agreement to purchase six 737-600 aircraft from Boeing.Financial details were not released, although hints by WestJet suggest a purchase price of slightlyunder US$30 million per aircraft (Boeing’s list price for the –600 is US$41-$49 million). Financing forthe planes was provided by the Export-Import bank of the United States, consistent with pastdeliveries.

737-200 Replacement

The 118-seat 737-600, the smallest member of the Next Generation 737 family, will be used toreplace some of WestJet’s ageing and costly 737-200s. With the 125-seat 737-200s approaching theend of their useful lives, a question had arisen as to potential replacement aircraft for use on thinnerroutes. Until the announcement, WestJet’s future fleet orders consisted of only 136-seat 737-700sand 166-seat 737-800s.

From an operating cost standpoint, the new aircraft will provide considerable savings compared to the737-200s. In addition to being far more fuel efficient than theolder aircraft, the –600s will be more reliable and require lessmaintenance than the –200s.

737 Family Commonality

The choice to add the 737-600 has several significantadvantages for WS. As a 737NG family member, the–600 shares a common cockpit with WestJet’s –700s and –800s, and will result in crew training and schedulingefficiencies. The family also uses many of the samemaintenance parts and practices, allowing savings on spareparts inventories and maintenance training. The new aircraftwill also improve scheduling flexibility, as the –600s have similar range capabilities as the –700/800s.

Passengers will also notice a difference: with the 737-600, WestJet will be able to standardise theirproduct, including offering leather seats of standard pitch and width, as well as LiveTV in-flightentertainment, throughout the fleet.

Fleet Growth

At the end of 2004, WestJet’s fleet will total 54 aircraft. With the 737-600 announcement, WestJet’sfleet will grow by 12 aircraft in 2005, as 15 new jets are delivered (3-600s, 7-700s,5-800s) and three –200s are retired.

The three remaining –600s will be delivered in 2006, along with the final –700 on firm order.Beginning in 2006, WestJet’s fleet will decrease in size, unless additional options are exercised. The737-200s will continue to be phased out until November 2008, when the last of WestJet’s original fleettype is scheduled to be retired.

John WeatherillManager, Airline Planning

Vancouver, BC


WestJet Fleet Size (2004-2008)

0

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40

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60

70

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2004 2005 2006 2007 2008

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Options737-800737-700737-600737-200

WESTJET FLEET UPDATE - CON’TFuture Fleet Plans

WestJet maintainsconsiderable flexibility inadjusting its fleet size goingforward. In addition to itsability to exercise additional737NG options, WestJet canaccelerate or delay theretirement of its 737 Classics.Furthermore, the potentialexists for WestJet to place anew aircraft order if conditionswarrant.

WestJet had previously examined the 100-seat Embraer-190, leading to speculation that a regional jetorder was in store. WS President & CEO Clive Beddoe stated on August 3 that while “there willprobably still be a need for us to consider a smaller jet to service some of the smaller markets” in thefuture, an order will not occur within the next two years.

In early August, WestJet also announced that purchase rights for 12 additional Next Generationaircraft had been converted to options, which can be exercised for delivery in 2006. As WestJet’saircraft needs will continue to grow due to –200 retirements, increased transcon flying and entry intothe transborder market, it is a safe bet that at least some of those options will be exercised as firmorders.


GROWTH OF LOW COSTCARRIERS GLOBALLY12 August 2004

Global Growth. Low Cost Carriers (LCCs) around the world are steadily increasing their presence.This is in despite of the fact that total domestic seat availability (LCCs and legacy carriers combined)in Canada and the U.S. is lower now than pre-September 11, 2001. In Europe, available domesticseats in 2003 were only slightly higher than in 2000. The two graphs below show the growth of LCCsin Canada, the U.S., and Europe from 1998 to 2003. One measures market share by seat capacity,and the other is based on Revenue Passenger Miles (RPMs). Despite variances in share, bothgraphs indicate a growth of LCCs in all three markets.

Canada. WestJet is Canada’s largest LCC. In fact, the majority of Canada’s growth in the LCCindustry is attributed to WestJet. The airline represents 77% of Canada’s LCC seat capacity and 22%of Canada’s total industry capacity. LCCs represent 28% of seat capacity in the Canadian marketand 34% of traffic in 2003.

U.S. LCCs began in the U.S. over 30 years ago when Southwest Airlines started operations in 1971.In the U.S., 25% of seats are offered by LCCs. Southwest Airlines reported positive profits of US$ 113million for 2nd quarter 2004. In contrast, network carrier US Airways is reportedly on the verge offiling for Chapter 11 bankruptcy protection for the second time in recent years.

Europe. LCCs in Europe represent 13% of available seat capacity with carriers such as Ryanair andEasyJet performing solidly. Ryanair is Europe’s first LCC to carry more than 25 million passengers ina year. Ryanair announced record profits for the quarter ending June 30, 2003 of 53.1 millionpounds. EasyJet reported a 28% increase in passengers for July 2004, when compared to the samemonth last year.

LCCs have shown that they have the ability to succeed even during industry downturns. LCCs havecontinued to grow and prosper in different world regions.

LCC Domestic Traffic (RPMs) % Share By Region 1998-2003

0%

5%

10%

15%20%

25%

30%

35%

40%

Canada U.S. Europe

LCC Domestic Seat Capacity % Share By Region 1998-2003

0%

5%

10%

15%

20%

25%

30%

Canada U.S. Europe

Marion VelezProject AnalystVancouver, BC


-10%

-5%0%5%

10%15%

20%

Jul-03

Aug Sep Oct Nov Dec Jan-04

Feb Mar April May Jun July

Dom RPK Dom ASK

Air Canada Domestic Mainline Air Canada Domestic Mainline

Jazz data is not includedin this graph

-30%-20%-10%

0%10%20%30%40%

Jul-03



Int'l RPK Int'l ASK

Air Canada InternationalAir Canada International

0%

10%

20%

30%

40%

50%

60%

Jul-03



RPK ASK

WestJetWestJet

AIRLINE DATA – CANADATraffic and Load Factors on Canada’s Major Air Carriers - July 2004

Passenger TrafficRevenue Passenger Kilometres

CapacityAvailable Seat Kilometres

Load FactorAir Carrier

% Changeover 2003

% Changefrom 2002

% Changeover 2003

% Changefrom 2002

% Changeover 2003

% Changefrom 2002

Air Canada1 +12.8% -2.2% +9.5% -7.4% +2.3 pts(to 80.4%)

+4.2 pts

Domestic(Mainline)

0.0% -2.5% -4.5% -10.9% +3.5 pts +6.8 pts

Jazz +7.5% +15.3% +0.4% -6.7% +4.4 pts +12.8 pts

International& Charter

+19.7% -2.2% +17.6% -5.7% +1.4 pts +2.9 pts

WestJet +29.1% +82.7% +27.6% +86.7%+0.9 pts

(to 78.6%)-1.7 pts

Jetsgo +90.6% +494.4% +69.8% +442.6%+8.7 pts

(to 79.4%)+6.9 pts

Analysis:

§ After six consecutive months of year-to-yearincreases, Air Canada’ domestic traffic was flatin July. The carrier reduced capacity ondomestic routes during the month, resulting inan improved load factor despite flat traffic.

§ Air Canada’s international traffic and capacitycontinues to post year-to-year increases as theindustry recovery from SARS continues, andnew Latin American services are added.Traffic and capacity over the Pacific increasedby 112% and 109%, respectively. However,international traffic and capacity are still below2002 levels. Overall load factor reached arecord high for the fourth consecutive month inJuly.

§ WestJet’s July load factor showed a year-to-year improvement even though capacityincreased 29% during the month.

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

OTHER CARRIERS:

LOAD FACTORS

Zip: not reported

CanJet: not reported


AIRLINE DATA – U.S.U.S. Airlines Release July 2004 Traffic Figures

Traffic Data – July 2004

Airline Load FactorTraffic

(RPMs – millions)Capacity

(ASMs – millions)

80.0 %

á 0.1 pts

12,599

á 5.3%

15,536

á 5.1%

73.2%

á 2.8pts

609

á 33.8%

832

á 28.6%

185.2 %

á 0.7 pts

1,312

á 7.6%

1,540

á 6.8%

186.1%

á 1.6 pts

6,586

á 9.4%

7,651

á 7.3%

83.5%

á 0.8 pts

10,772

á 14.0%

12,904

á 12.8%

87.9%

â 2.7 pts

1,503

á 30.6%

1,710

á 34.6%

85.8%

á 2.1 pts

7,090

á 5.7%

8,263

á 3.0%

79.4%

á 1.9 pts

5,197

á 9.4%

6,546

á 6.9%

284.8%

á 1.9 pts

10,962

á 10.6%

12,928

á 8.2%

282.7%

á 0.6 pts

3,914

á 3.3%

4,731

á 2.6%

Notes: 1. Mainline

2. Load factor includes scheduled service only

Sources: Carrier traffic reports.


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

Toronto Vancouver Montréal-Trudeau

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

June -9.0% -9.8% -0.7% +1.9% -0.4% +2.5% +5.0% +4.1% +0.6% -0.5% +1.4% +7.0% +17.8%2nd Quarter -13.7% -12.1% -5.5% +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% +3.0% +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% +2.0% +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% +2.3% -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% +2.4% +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% +2.7% -0.7% +10.4% +1.4% +7.4% +2.5% +15.4% +1.1% -1.7% -1.3% +9.4%November +0.1% +2.2% +9.0% +8.0% +7.2% +6.5% +5.8% -0.05% +13.7% +9.6% -0.3% +19.8% +9.4%December +1.9% +2.8% +8.5% +5.4% +4.9% +6.0% +6.0% +2.9% +16.1% +9.1% +0.8% +2.0% +13.9%4th Quarter -0.1% +0.5% +6.4% +3.9% +7.4% +4.5% +6.4% +1.9% +15.6% +6.6% -0.4% +6.33% +10.8%

2003

Full Year -4.6% -3.7% +1.3% +2.7% +2.9% +1.3% +5.1% +4.2% +7.3% +2.9% -0.5% +2.4% +9.4%January +1.6% +1.5% +10.1% +4.2% +7.7% +3.5% +6.4% +3.2% +12.4% +5.9% -2.2% +8.3% +12.8%

February +7.9% +7.9% +19.6% +5.8% +10.7% +13.9% +11.7% +5.6% +11.4% +11.6% +7.8% +2.8% +19.8%March +8.7% +5.2% +21.4% +2.5% +8.0% +11.4% +11.4% +9.0% +8.2% +2.6% -2.4% +3.9% +21.3%

1st Quarter +6.1% +4.8% 17.1% +4.2% +8.6% +9.7% +9.9% +6.1% +10.5% + 6.5% +1.1% +5.0% +18.0%

April +30.1% +20.5% +31.7% +12.2% +8.6% +20.8% +11.3% +16.9% +12.7% -0.3% +10.9% +2.6% +20.1%May +30.6% +20.8% +26.2% +5.4%* +7.5% +7.6% +8.8% +19.4% +8.0% -1.3% -0.3% -5.5% +15.2%

June +18.3% +16.1% +18.3% +7.9%* +2.8% +12.1% +8.8% +7.8% +8.6% +3.0% +1.7% -4.3% +16.0%

2004

2nd Quarter +25.9% +18.8% +24.9% N/A +6.2% +13.2% +9.7% +14.5% +9.7% +0.5% +3.8% -2.5% +16.9%

Sources: Airport passenger statistics*Estimated 2004 totals

CA

NA

DIA

N A

IRP

OR

TS


NEWS ARTICLESAIR CANADA UPDATEAIR CANADA REPORTS CDN$22MILLION Q2 PROFIT BEFORERESTRUCTURING ITEMS

Air Canada reportedoperating income of

CDN$22 million before reorganisation andrestructuring items in the second quarter, ayear-to-year improvement of CDN$292 million.Operating revenue increased by 15% toCDN$247 million, while expenses declined by1.0% to CDN$23 million. Air Canada attributedthe year-to-year improvement to the recoveryfrom SARS in Asia. However, the carrierreported a large net loss of CDN$510 million.Air Canada plans to exit bankruptcy protectionby 30 September, and has sent its Circular andPlan of Arrangement to creditors in preparationfor a 17 August vote.

AIR CANADA & LOT POLISH AIRLINESPARTNER TO EXTEND NETWORK

Air Canada announced anexpansion of services to Poland

through codeshare with its Star Alliance partner,LOT Polish Airlines. This includes servicesoperated by LOT between Toronto and Warsaw,and also services to Gdansk, Krakow, Katowice,Poznan, Wroclaw, Rzeszow, and Szczecin. AirCanada will also offer codeshare servicesbetween Canada and Poland through itsEuropean gateway cities of London, Frankfurt,and Munich.

CANADIAN AIRLINESWESTJET REPORTS CDN$7.5 MILLIONQ2 PROFIT

WestJet recorded netearnings of CDN$7.5 million

in the second quarter, compared to CDN$14.7million during the same period last year.Operating revenue increased by 25% toCDN$257 million, while operating expensesincreased by 38% to CDN$244 million. The

carrier attributed the decline in earnings to anincrease in fuel cost, and higher landing andterminal fees at Toronto Pearson InternationalAirport.

JETSGO EXPANDS FLORIDA AND LASVEGAS SERVICES

Beginning 2 October,Jetsgo will launch weeklyservices from Toronto to

Sarasota and West Palm Beach, Florida.Service to the carrier’s existing Floridadestinations, including: Fort Lauderdale, St.Petersburg, Fort Myers, and Orlando willincrease starting 7 October.

Beginning 7 October, Jetsgo’s service betweenToronto and Las Vegas will increase from threeweekly flights to full weekday service plus anadditional Sunday flight.

U.S. AND INTERNATIONALAIRLINESIATA REPORTS STRONG TRAFFICRECOVERY

The International Air TransportAssociation (IATA) reported thatinternational passenger and cargo

traffic increased by 20% and 13% year-to-yearrespectively, in the first half of 2004. IATAattributed the growth to a recovery from theeffects of SARS and the economic downturn lastyear. Compared to 2000, passenger trafficincreased by 8.4%, while cargo traffic increasedby 16%.

NEW YORK PORT AUTHORITYAPPROVES US$875 MILLION TERMINALFOR JETBLUEThe Port Authority of New York and NewJersey has approved plans for a US$875 million26-gate terminal at New York J.F. KennedyInternational Airport. The new terminal will bebuilt by the port authority and JetBlue, who willoperate the terminal under a lease of up to 35years. Construction is expected to begin in2005.

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

$45.00

$50.00

Aug-03 Sep Oct Nov Dec

Jan-04 Feb Mar Apr May

June July

August

US$

per B

arre

l

Monthly Spot PricesMonthly Spot Prices

FUEL PRICES

August 11, 2004

SPOT OIL PRICES CONTINUE TOINCREASEFUTURES PRICES INCREASE

Crude Oil Prices:

Spot – US$44.80(up 13.6% from July)

Futures

• 6 month - $43.31(December 2004 delivery)

• 12 month - $40.11(July 2005 delivery)

• 2 year - $37.47(July 2006 delivery)

• 5 year - $35.13(December 2009 delivery)


NEWS ARTICLESU.S. AND INTERNATIONALAIRLINES – CON’T

RYANAIR POSTS US$64 MILLIONPROFIT IN FIRST QUARTER

Ryanair recorded after-taxprofit of EUR53 million

(US$64 million) in the first quarter, an increaseof 21% year-to-year. Sales increased by 23% toEUR302 million (US$364 million), while unitcosts were reduced by 4%. The number ofpassengers carried increased by 28% to 6.6million, for a load factor of 83% during the firstquarter. However, yields declined by 6%.

VIRGIN ATLANTIC ORDERS 13 AIRBUSAIRCRAFT

Virgin Atlantic has placeda firm order for 13 A340-600s, with options for 13

more, for delivery between 2006 and 2008. Thecarrier plans to add two to three new routesannually over the next several years, and alsoincrease capacity on current routes. VirginAtlantic will take delivery of two A340-600s in2005 as part of an earlier order.

VIRGIN GROUP LOOKS AT POSSIBILITYOF AIRLINE INVESTMENT IN INDIA ANDCHINAThe Virgin Group, owned by Richard Branson,is investigating the possibility of investing in lowcost carriers in India and China. A companyspokeswoman indicated that the investment isstill in the very early stages of exploration.Foreign individuals and institutions, not includingforeign carriers, can currently own up to a 40%stake in Indian air carriers.

EMIRATES ORDERS FOUR BOEING 777AIRCRAFT

Dubai-based Emirates announcedan order for four B777-300ER(extended range) aircraft for delivery

in 2006, with options for nine more. The carriercurrently operates 21 B777-300/200s and plansto expand its fleet of B777s to 51 by 2007.

QANTAS AND TEMASEK ORDERS EIGHTA320S FOR JETSTAR ASIA VENTURE

Australian carrier QantasAirways and TemasekHoldings, the investment

arm of the Singapore government, has orderedeight A320 aircraft for their Jestar Asia jointventure. Majority owned by Qantas, Jetstar Asiawill begin service from Singapore at the end ofthe year.

AIRPORTSSINGAPORE CHANGI TO BUILD LCCTERMINALThe Civil Aviation Authority of Singapore hasannounced plans to build a US$26 millionterminal dedicated to low cost carriers (LCCs) atChangi International Airport. The terminal willhave the capacity to handle 2.7 millionpassengers annually, and is scheduled to becomplete by 2006. Tiger Airways, a low costcarrier backed by Singapore Airlines, hascommitted to using the terminal.

AIRCRAFT MANUFACTURERSBOMBARDIER ADDS EUROPEANORDERS

Bombardier announcedthat Air Nostrum of

Valencia, Spain, has placed an order for 20CRJ200s. The agreement gives Air Nostrumthe option of converting some or all of theaircraft to CRJ900, CRJ700, or Q400 turbopropaircraft. The Spanish carrier currently operates50 Bombardier aircraft.

Styrian Spirit, a carrierbased in Graz, Austria, has

signed an agreement to purchase one CRJ200,worth approximately US$24 million. The carriercurrently operates three CRJ200s.


NEWS ARTICLESAIRCRAFT MANUFACTURERS– CON’T

AIRBUS OUTPACES BOEING IN FIRSTHALF 2004 DELIVERIESAirbus delivered 161 aircraft in the first half ofthe year, including three A318s, 44 A319s, 54A320s, 16 A321s, 39 A330/340s, and fiveA300/310s. Boeing delivered151 commercialaircraft in the first half of 2004, including 105B737s, 19 B777s, 12 B767/757s, nine B747sand six 717s. Boeing also delivered eight C-17military transports during the first half of theyear.

CARGOIATA REPORTS GLOBAL CARGOGROWTHIATA’s latest cargo statistics show growth for allregions in the first 6 months of the year. TheMiddle East reported a 37.4% growth in freighttonne kilometres (FTKs). The Asia Pacificregion saw growth of 13.3%, European cargotraffic grew 10.4%, and North America trailedwith 7.9% growth.

BOEING SAYS FREIGHTERS WILLDOUBLE IN 20 YEARS

According to Boeing’s CurrentMarket Outlook, the number offreighters in operation will

double by 2023. Over 2,950 freighters will beadded to carrier fleets. Boeing estimates 3,456aircraft dedicated for cargo will be in operation inthe next 20 years. The outlook projects that thenumber of widebody aircraft will triple. Theprogression towards widebody freighters willincrease the average freighter payload.

ADVANCE ELECTRONIC MANIFESTSREQUIREDBeginning 13 August 2004, U.S. Customs andBorder Protection (CBP) will introduce the firstof three phases of its Air Automated ManifestSystem (AMS). This will cover East Coast portsof entry, including airports. The deadline will be

13th October for Central U.S. airports and 13th

December for airports in Western U.S. Underthe program, electronic information must bereceived four hours before an aircraft arrives inthe U.S., or by takeoff time if the trip is less thanfour hours long.

Carriers have three options to transmit data.They can develop their own software interfacebased on the Customs Automated ManifestInterface Requirements-Air document; providethe data using an Air AMS service center, orpurchase commercial software.

AIR CANADA AND VOLGA DNEPRAIRLINES SIGN AGREEMENT

Air Canada and VolgaDnepr Airlines signed ageneral sales agency(GSA) agreement whereAir Canada will be Volga Dnepr’s exclusive GSAto Canadian governmental agencies for theprovision of AN-124-100 and IL-76 charterservices.

VOLGA-DNEPR HAS LARGEST CIVIL AN-124 FLEETVolga-Dnepr has taken delivery of its 10th AN-124 aircraft. The carrier now has the world’slargest civil AN-124 fleet. Volga-Dnepr also saidthat is has been investing in the next-generationdevelopment of the IL-76 and the AN-124aircraft. The latest AN-124-300 model isbelieved to offer a 20% payload increase overthe older model, the AN-124-100. The oldermodel has cargo capacity of 120 tonnes. Thenew aircraft also requires fewer crew andcomplies with the ICAO’s Chapter 4 Noisestandards.

Volga-Dnepr also operates two IL-76s, and isexpecting delivery of the new generation of IL-76s later this year. The new generation aircraftis also modelled to comply with ICAO’s Chapter4 standards.


NEWS ARTICLESCARGO – CON’T

WORLD AIRWAYS POSTS Q2 PROFITWorld Airways, a cargo andcharter specialist, posted a

US$ 2.6 million profit in the second quarter.This is 60% lower than its profit in the samequarter last year.

WORLD AIRWAYS TO LEASEWIDEBODY FREIGHTERSWorld Airways will lease two MD-11 widebodyfreighters by Spring 2005. The two additions willbring the carrier’s fleet up to five all-cargoaircraft.

ATLAS AIR EXITS FROM BANKRUPTCYPROTECTION

Atlas Air WorldwideHoldings Inc, parent

company of Atlas Air and Polar Air Cargo, hasemerged from Chapter 11 bankruptcyprotection. The company had filed forbankruptcy in January 2004.

The company’s restructuring program hasresulted in the clearing of over US$600 million inpre-petition debt. Capacity and operating costshave also been reduced. Atlas has paid off andretired its debtor-in-possession financing loanfrom CIT Group and Ableco Finance LLC.Wachovia Bank, National Association, and itssubsidiary Congress Financial Corporation havecommitted $60 million in liquidity to the carrier.

IBERIA CLOSES MIAMI HUBSpanish flag-carrier, Iberia, will close its Miamihub. The company will restructure its networkso that markets in Latin America will be serveddirect from Madrid. Iberia currently flies toseven destinations in Latin America from itsMiami hub. The reason for the hub closure isincreased U.S. security requirements.

AIR CHINA CARGO ORDERS TWO 747-400FSAir China Cargo has ordered two Boeing 747-400Fs valued at US$400 million. The aircraftwill be powered using PW4056 engines. Thefirst aircraft is scheduled for delivery inNovember 2005. The next delivery is for March2006.

KOREAN AIR CARGO LAUNCHESCALGARY CARGO SERVICES

Korean Air Cargo willcommence a once

weekly scheduled, non-stop freighter servicefrom Calgary to Seoul. This is the firstscheduled freighter service from Alberta to Asia.Service will depart Calgary each Friday at 8amand arrive in Seoul the next day at 10:20amusing a Boeing 747-400.

FEDEX EXTENDS LAND LEASE INPHILIPPINES

FedEx has extended its landlease in Subic Bay, Philippines to

2010. The carrier also signed an agreementgiving them access to land at the DiosdadoMacapagal International Airport if the companyneeds to expand their Asia Pacific hub.

FEDEX APPLIES FOR MORE SERVICETO CHINAFedEx has applied to the US Department ofTransportation to fly 12 more weekly servicesbetween China and the U.S. The applicationconsists of 6 additional flights to Shanghai and 6to Qingdao. Qingdao is a new destination forFedEx. The carrier already flies to Beijing andShenzhen. An air service pact between Chinaand the U.S. was signed on 24 July 2004outlining 111 new flights a week for cargo onlycarriers over the next 6 years. Twenty-oneflights became available August 1st, and 18flights will be available in 25 March 2005.


NEWS ARTICLESCARGO – CON’T

UPS REPORT INCREASE IN Q2EARNINGS

UPS reported an 18.2% increase in netincome for the second quarter.Revenue increased by 7.8% and the

company expects 2004 earnings to grow 20%.

DHL PLANS HANDLING CENTER INGUANGZHOU

DHL is planning to build ahandling centre at

Guangzhou International Airport in southernChina. This is in addition to its new US$100million hub in Hong Kong (HKG). TheGuangzhou center will be smaller than DHL’sHKG hub. DHL currently has 40% of the marketin China. The company operates a 50-50 jointventure with freight forwarder Sinotrans (HK)Shipping Ltd.

TNT EXPRESS WINS LEGAL DISPUTEOVER NIGHT FLIGHTS

TNT Express has won a disputeover protestors objecting to nightflights at its Belgium hub, Liège.Protestors wanted the Court of

Appeal in Liège to close the airport or ban allnight flights operated by TNT Express. Thecourt dismissed the case, stating that TNT’soperations comply with all governmentregulations. The court also said that night flightsare “unavoidable and a legitimate necessity to amodern economy.”

FIATA & IATA LAUNCH NEW PROGRAMThe International Federation of FreightForwarders (FIATA) and the International AirTransport Association (IATA) have formed anew official relationship called the European AirCargo Programme (EACP). This will replacethe old IATA Cargo Agency AgreementResolution 801.

The new agreement will replace old restrictiverules with more flexible ones. The new programis designed to recognise the partnership andcustomer relationship between airlines andforwarders. The EACP will be governed byrepresentatives from airlines and forwarders.

REGULATORY/GOVERNMENTHOUSE OF REPRESENTATIVESAPPROVE MANPADS DEFENSE ACT OF2004

The House of Representativesapproved the Commercial AviationMANPADS Defense Act of 2004

(CAMDA). The legislation will expedite theinstallation of equipment on commercial aircraftthat could protect planes from shoulder-firedground-to-air-missiles. However, the bill doesnot define who should be responsible for thecost of the equipment.

EU LAUNCHES LEGAL ACTION TOREMOVE INDIVIDUAL OPEN SKIESDEALSIn an effort towards a single European Sky, theEuropean Commission has launched legalaction to force EU countries to remove individualbilateral agreements. The EU’s top court ruledthat these agreements break the union’s singlemarket rules. The EU has a mandate tonegotiate a new deal on behalf of the 25members of the union.


NEWS ARTICLESPEOPLEAIR CANADA ANNOUNCES BOARD OFDIRECTORS OF ACE AVIATIONHOLDINGS INC.Air Canada announced the names of the Boardof Directors for ACE Aviation Holdings Inc. on12 August 2004. ACE Holdings is the parentholding company that owns Air Canada and itssubsidiaries. The Board of Directors, followingemergence from CCAA protection, will be:

§ Bernard Attali, Senior Advisor, OrrickHerrigton and Sutcliffe (Paris, France),

§ Robert E. Brown , President & C.E.O., CAEInc. (Montréal, Québec),

§ Michael Green, President, CerebrusOperations (New York, New York),

§ George Hamilton, C.E.O., Global HomeProducts, LLC (New Albany, Ohio),

§ W. Brett Ingersoll, Managing Director,Cerebrus Capital Management L.P. (NewYork, New York),

§ Pierre Marc Johnson, Counsel, HeenanBlaikie (Montréal, Québec),

§ Frank J. McKenna, Counsel, McInnesCooper (Moncton, New Brunswick),

§ Robert A. Milton, President & C.E.O., AirCanada (Montréal, Québec),

§ John T. McLennan, Corporate Director(Mahone Bay, Nova Scotia),

§ David I. Richardson, Financial Consultant(Toronto, Ontario), and

§ Marvin Yontef, Senior Partner, StikemanElliot (Toronto, Ontario).

AIR CANADA JAZZ APPOINTS NEWSENIOR EXECUTIVES

Bill Bredt has beenappointed Senior VicePresident and Chief

Operating Officer of Air Canada Jazz. LastApril he was named President of Zip Air Inc.Previous to that, Bredt was Vice President,Network and Revenue Management at AirCanada.

Allan Rowe is Senior Vice President and ChiefFinancial Officer. Rowe was previously CFOwith Fishery Products International Limited.

Scott Tapson is Vice President, CustomerExperience. His last position was VicePresident, Operations and Customer Servicewith Air Canada Jazz.

Jolene Mahody is Vice President, CorporateStrategy. She recently held the position ofDirector, Commercial and Resource Planningwith Jazz.

Colin Copp is Vice President, EmployeeRelations. He held several positions at AirCanada Jazz including Vice President LabourRelations and Corporate Safety.


NEWS ARTICLESPEOPLE – CON’T

AIR CANADA MAKES NEW CUSTOMERSERVICE APPOINTMENTS

Air Canada has appointed BradMoore Vice President, CustomerExperience – Airports. Mooreheld the previousposition of VicePresident,

Customer Service. SueWelscheid will be appointed toVice President, Customer

Experience – In-Flight. She heldthe previous position of VicePresident, People. Bothindividuals will report to SteveSmith , Senior Vice President,Customer Experience.

TAP AIR PORTUGAL CHAIRMAN STEPSDOWN

As part of Tap-Air Portugal’srestructuring plan, which

began several years ago, Antonio CardosaCunha will resign as Chairman of the state-owned airline. The former chairman joined theairline in 2002 after serving as the country’sMinister of Agriculture, European commissioner,and commissioner of the Expo 98 InternationalExhibition. A replacement has not yet beenannounced.

CARGOLUX APPOINTS NEW DIRECTORCargolux has appointedThomas Kaltenegger

Director of Import/Export Services, based inLuxembourg. Kaltenegger previously held theposition of Cargolux’s country manager inGermany. Klaus D. Gries will take over thisposition and be based in Frankfurt.

Continental Airlines' Board ofDirectors has electedExecutive Vice PresidentJeffery Smisek as the airline'snew President. Smisek will betaking over the position fromLarry Kellner, who will be the new Chairman andChief Operating Officer. In January, Continentalannounced that its CEO Gorden Bethune wasretiring at the end of 2004. Larry Kellner waselected as his successor.

Jacques Barrot (France) has been named asthe new European Union Commissioner forTransport. Barrot formerly was Commissionerfor regional policy. Barrot replaces Loyola dePalacio. The new commissioner is responsibleonly for Transport, with the energy portfoliogoing to a newly created Commissioner position.Barrot was also named as one of 5 fivepresidents of the European Commission.

OTHERCANADIAN TRAVEL GROUP ACQUIREDBY NBTAThe Canadian Alliance of Business Travel(CABT) will become a subsidiary of the U.S.National Business Travel Association (NBTA).CABT members are travel managers, who willreceive NBTA benefits including industryupdates, educational opportunities, andbusiness resources under the acquisition.


GAO REPORT ON LEGACY AIRCARRIERS13 August 2004

On 11 August, the newly renamed U.S. Government Accountability Office released a major reporttitled Legacy Airlines Must Further Reduce Costs to Restore Profitability. This report is available freeof charge on the GAO web site (www.gao.gov).

The report, which compares the big network carriers to the lowcost carriers, is full of a number of insights about the health ofthe U.S. legacy carriers. Among these are:

• In spite of cost cutting, U.S. legacy carriers experienced anincrease in unit costs from 2000 to 2003, while the LCCswere able to further reduce unit costs. The gap increased!

• The legacy carriers had $6.8 billion in cash at the end of2003, but face $20 billion in long term debt and leaseobligations over the next four years. While not stated in thereport, the implication is that if the legacy carriers merelyachieve break-even on an operating profit basis, they willuse up all available cash in roughly two years.

• In contrast, the LCCs had $3.5 billion in cash and four yearobligations of only $2.1 billion. Again, while not stated in the report, the implication is that even ifthese carriers stopped earning record profits, they have sufficient cash to handle all obligationsfor four years.

• Legacy carriers face $21 billion in underfunded pension liabilities. While congress gave thecarriers some relief in being able to postpone these payments for a few years, the full amount isstill due.

• LCCs now have a presence in 2,304 of the top 5,000 domestic markets, and these represent85% of total domestic passengers carried.

• The legacy carriers have not only lost market share to LCCs, they carried fewer passengers inabsolute numbers as well.

The major observation of the study was that while the legacy carriers sought to reduce costs by $20billion, they were only able to achieve $13 billion in savings. The report states that it appears that thelegacy carriers will have limited access to capital markets, and thus it will be necessary to generatecash from operations to survive. Their survivability depends on a) further reducing unit costs, and b)gaining a revenue premium associated with network connectivity services. This must be done soon!

Mike Tretheway Vice President Marketing &

Chief EconomistVancouver, BC


9/11 COMMISSION & AIRPORTSECURITY12 August 2004

After a year and a half of hearings and investigations, the 9/11 Commission Report was released on22 July 2004. Created in 2002, the National Commission on Terrorist Attacks Upon the United States(a.k.a. 9/11 Commission) was tasked by congressional legislation to “prepare a full and completeaccount of the circumstances surrounding the September 11, 2001 terrorist attacks, preparedness forand the immediate response to the attacks.”

The first 46 pages of the 567-page report contain a riveting account of the hour-by-hour chronology of9/11 from the viewpoint of terrorists, passengers, government agencies and officials. Additionally, thereport contains key recommendations to prevent future terrorists attacks within the United States.

While the bulk of the recommendations covered failings in intelligence governance andcommunications, the 9/11 Commission report does highlight some key recommendations on airportsecurity.

The Need for an Integrated Security Strategy

The Report argues for greater Congressional oversight of the Transportation Security Administration(TSA). In particular, the Commission criticises the TSA for the lack of an “integrated strategic plan forthe transportation sector as well as for various modes of transportation such as air, sea and ground.”

The Commission urges the TSA to advance a multi-layered security system -- one which would arraythe identified threats versus layers of solutions.

Continue "no-fly" and "automatic selectee" List Programs

Although there are ongoing privacy concerns about the future Computer Assisted PassengerPrescreening System (CAPPS) program, the Commission argues that Congress should compelairlines to submit information about passengers for automatic selectee purposes for further scrutiny.

For Canadian airports, this may be a moot point: Canadian Deputy Prime Minister McLellan andHomeland Security Secretary Tom Ridge already agreed in January to an exchange of passengerdata. At the time, this included CAPPS II data -- which would primarily impact outbound transborderflights from Canada. As a future CAPPS II (or son of CAPPS II) program evolves, this agreement willundoubtedly continue with the increased exchange of information between Canada and the U.S.

Improve Airport Screening Checkpoints

The Commission noted that while trace detection equipment was used on individual carry-on bags, nomeasures were undertaken to screen individual persons for trace amounts of explosives. TheCommission urged that, at a minimum, those individuals referred to secondary screening have theirclothing traced for explosives.

Solomon WongDirector, Security & Planning

Vancouver, BC


9/11 COMMISSION & AIRPORT

SECURITY – CON’TThe state of technology at present is limited in full-body scanningexplosive trace detection (EDT). While units like the IonscanSentinel (see picture to the right) have been in use at majorattractions (e.g. CN Tower) and piloted at Pearson Airport, it addsan additional step in the screening process. The TSA will not beable to fulfil this new task unless a single walk-through metaldetector device combined with the Ionscan Sentinel is commerciallydeployed.

The use of conventional trace explosive detection on clothing is also impractical due to the time itwould take to accurately wand an individual and cover enough surface area.

Canada and the U.S. enjoy a relationship on security screening that recognises that while equipmentand procedures are different, they have no impact on acceptance of origin-destination traffic. Whilethe TSA has agreed not to re-screen individuals who are onward connecting from pre-clearance sites,it is possible that any introduction of full body ETD could trigger revisiting this policy. CATSA itselfmay face pressures to introduce full-body ETD as Transport Canada/CATSA have already beentesting this machinery at select airports.

Increased Air Cargo Security

The Commission also urged for the TSA to step up its efforts to improve the tracking and identificationof threats to cargo in the aviation and maritime sectors. Specifically, the Commission called for theTSA to mandate that each passenger aircraft have one hardened container that is blast-proof.

The FAA certified Hardened Unit Load Devices (HULD’s) in 1998 following the Gore Commissionfindings. However, the airline industry has resisted this due to weight and cost considerations. TheCommission’s recommendations would mean a capital cost of about $40 million for about 4,000HULD’s to be deployed on jet aircraft in the U.S. Furthermore, these jet aircraft would each lose 100-200 pounds of carrying capacity. The end result would undoubtedly be an increase in belly air cargorates.

Transport Canada has not evaluated or indicated signs of mandating HULD deployment. It iscurrently evaluating a set of policies on air cargo screening and security, anticipated to be unveiled inthe third quarter of 2004.

Next Steps

The 9/11 Commission and its recommendations have no legal power, but the document hasconsiderable political clout, particularly as the United States enters a November presidential electionseason.

The Bush Administration has already looked at ways to implement the recommended changes, inorder to counter the Kerry/Edwards platform. These developments will likely yield in some policyshifts and changes in the coming months - primarily on the organisation of the intelligence operationswithin the U.S. Government.


THE OTTAWA REPORT11 August 2004

Shadow Cabinets of the NDP and the Conservatives:What do they mean for the 38th Parliament?

On 20 July 2004, Prime Minister Paul Martin unveiled a new cabinet to Canadians.In early August the NDP and Conservatives appointed their shadow cabinets withineach respective federal portfolio.

In majority governments, government relations activities focus on the executivebranch of government – Ministers, staff and senior officials in the bureaucracy. However, in a minoritygovernment, as strategic control shifts in part from the executive to the legislative branch ofgovernment, politicians of all stripes have a greater say in the direction and shape of legislation andgovernment programs and policies.

In this context, shadow cabinet appointments are more relevant and important targets for advocacyefforts, and offer some indication of what the 38th Parliament might look like.

This article provides a broad overview of the choices the NDP and the Conservatives have made intheir respective shadow cabinets and what they might suggest in terms of how things might unfoldfrom a transport and related policy perspective in the upcoming Parliament. The Bloc Québécois hasnot named their shadow cabinet yet and is not expected to do so in the very near term. We alsodelve deeper into the individual personalities in areas of key interest such as transport andinfrastructure.

The Opposition Parties in Parliament

Each party will have a strategic place in the upcoming Parliament. The NDP holds a position ofspecial influence with the Liberals and some might say it has been a significant influence in shapingthe government’s priorities. Many of the issues that the NDP have identified as priorities – healthcare, the environment, and families – were key planks in the Liberal election platform. From thisperspective, we could expect to see a more innovative and activist government at work over the next18-24 months.

The Bloc Québécois is also a strategic player in the next Parliament. With the Liberal-NDP union onevote shy of a majority, the government will have to rely on left-leaning MPs from the Bloc to supportthe government on key initiatives.

As the official Opposition with 99 seats, and with many of them first-time members from Ontario, theConservatives will also be an important government relations audience in a minority situation. TheConservatives are in a pivotal position to determine the momentum of key files - to either slow thingsdown or expedite them, depending on the issue. It is also worth noting that the Bloc and theConservatives together total 153, only two votes shy of a majority.

In terms of government relations, particularly advocacy, it will be very important to educate all politicalparties and to determine individual party positions on issues. Gaining a better understanding of thecritics in each party will be helpful.

Sam BaroneRegional Vice President

Ottawa, ON


THE OTTAWA REPORT – CON’TMinistries of Transport, Infrastructure, Urban Affairs

Transport – Conservative Critic

The Conservatives’ new Transport critic is MP Rob Nicholson (Niagara Falls, Ontario), who served inthe House of Commons between 1984 and 1993, the year he was appointed the Minister of Scienceand Minister Responsible for Small Business. His background will be beneficial in this largelyeconomic portfolio, although he may lack the knowledge of the file of his predecessor.

Transport – NDP Critic

Well versed in the transportation agenda by virtue of being a long-standing member of the StandingCommittee on Transport, MP Bev Desjarlais (Churchill, Manitoba) is a strong advocate of thegovernment playing a significant role in the transportation network to ensure service to all parts ofCanada. Active in the labour movement, Desjarlais will be a strong critic particularly when it comes toany further government funding decisions for Air Canada and VIA Rail.

Infrastructure – Conservative Critic

Elected to the House in 1997 under the Alliance banner, MP Rahim Jaffer (Edmonton—Strathcona)has a relatively high profile earned as one of the youngest MPs on the Hill. Sitting on numerousCommittees, Jaffer has served as Intergovernmental Affairs, Industry and the Environment critic forthe Alliance party. He is now the Conservatives’ Infrastructure critic.

The Conservative campaign platform called for an elimination of many of the federally managedinfrastructure programs in favour of allocating a portion of the gas tax to municipalities to managethese initiatives on their own behalf.

Cities and Community Infrastructure – NDP Critic

A former MPP for Hamilton, new MP David Christopherson (Hamilton Centre) is the NDP’s Cities andCommunity Infrastructure critic. He has a long history in municipal and provincial affairs – a good fitwith this critic position. Serving as the Solicitor-General in Bob Rae’s Ontario government,Christopherson subsequently held positions as Party Whip and Speaker.

The NDP have an aggressive cities and community policy platform, and with Christopherson’sexperience, there is no doubt he will vie for plenty of airtime over the coming months.


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 is speculative and may not materialize. Information containedherein is provided for the use of InterVISTAS Consulting Inc. only, and may not bedistributed beyond the office.

Prepared by InterVISTAS Consulting Inc.

THE WASHINGTON REPORT11 August 2004

FAA Needs to Improve Safety Enforcement

The Government Accountability Office (GAO) issued a reportstating that the FAA needs better management controls forcommercial airlines and private pilots. The GAO found thatalthough $334 million in fines were imposed on airlines and pilotsfrom 1993 to 2003, the amount was later reduced to $162 million.The FAA closes more than half of cases involving safety violations without imposing fines. Oftentimes, only a warning is given. Furthermore, about 3,200 cases were closed due to lack of evidence.The FAA has a database which tracks rule violations but it is incomplete, difficult to use, andinconsistent as data varies from office to office.

NTSB Renews Recommendations for Cockpit CamerasThe National Transportation Safety Board (NTSB) renewed its call for the FAA to require large aircraftto be equipped with crash-resistant cameras. This first recommendation was made 4 years ago, butpilots objected due to concerns about privacy issues. Pilots say that cameras, unlike technical data,are subject to interpretation and can be used to make non-objective criticisms of a pilot’s actions. TheNTSB believes that cameras can provide better information on the causes of plane crashes.

New Assistant Secretary Of Homeland Security

Admiral David Stone has been nominated the Assistant Secretary of Homeland Security for theTransportation Security Administration (TSA). Stone is currently the Acting Administrator at TSA. Hewas also formerly Federal Security Director at Los Angeles International Airport.

U.S. Urges EU to Negotiate New Agreement for AirbusThe U.S. wants the EU to negotiate a new civil aircraft agreement banning further governmentsubsidies for Airbus. The original accord outlining the subsidies was made in 1992 when Boeing had80% of the jetliner market. Currently, Boeing only represents approximately 50%.

Open Skies for U.S. and IndonesiaThe Indonesian Minister of Transportation and U.S. Department of Transportation secretary Minetasigned an Open Skies agreement. The new agreement replaces a 1960s pact between the countriesand removes all restrictions on flight frequency, the type of aircraft, and the prices charged. Theagreement covers passenger, cargo, and charter operations. The U.S. Trade and DevelopmentAgency also gave Indonesia three grants totalling US$ 1.1 million. The money will be used to fundsecurity and safety assessments at four Indonesian airports, improve air traffic control systems andequipment, and develop the country’s passenger reservation system.

Charles ChambersRegional Vice President

InterVISTAS Consulting Inc.

AND

Senior Vice PresidentGA2

Washington, D.C.

Documents

CAIR Issue No. 20 - August 2004