IVC MARKET INTELLIGENCE REPORT - InterVISTAS the second time in the past two years, US Airways has ... airlines such as Alaska Airlines and JetBlue have also undertaken price-hedging

IVC MARKET

INTELLIGENCE

REPORT

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

AIR CANADA’S NEW BUSINESS PLAN14 September 2004

On 1 April 2003, Air Canada filed for bankruptcy protection under theCompanies’ Creditors Arrangement Act (CCAA). As part of therestructuring process, the carrier has released its Plan ofArrangement, which outlines the business strategy Air Canada will implement once it emerges frombankruptcy protection. The carrier’s new business plan aims to stabilise its domestic market positionand provide for growth in international markets. The four components of Air Canada’s business planare outlined below.

Competitive Cost Structure. Air Canada has achieved cost reductions through the repudiationand re-negotiation of contractual obligations including aircraft leases and collective labouragreements. The carrier also plans to reduce costs by increasing the use of regional jet aircraft,eliminating older and less efficient aircraft, increasing the use of the Internet as a sales distributionchannel, and redesigning its on-board product offering. Air Canada has agreements in principle withBombardier and Embraer to purchase 90 regional jets for approximately US$2.0 billion. The carrierexpects to eliminate all B747-400 combi, B737-200, and BAE 146 aircraft from its fleet by 2005. Theoldest of the Dash-8 aircraft in the Jazz fleet will also be removed.

Redesign of the Air Canada Network. In the domestic market, the carrier plans to maintainfrequency on key domestic and transborder markets, but reduce capacity through the use of smallerregional aircraft on the routes. Air Canada plans to increase services to international destinations,and has increased total international capacity by 12% in the first quarter of 2004 (although this isaffected by the SARs related capacity reductions in 2003). New routes have been added to WesternEurope, Latin America and Asia.

New Revenue Model. The model is based on simplified fares that customers can book on AirCanada’s website. In May 2003, the carrier introduced its simplified fare categories in the domesticmarket, and expanded this fare structure to the U.S. market in February 2004. Air Canada reportsthat over 65% of the carrier’s domestic bookings are now completed on-line.

New Corporate Structure. The Air Canada group plans to operate under a new corporatestructure where its various business units are established as separate entities. Technical services,cargo and ground handling will all be operated as independent businesses or limited partnerships.Jazz, Destina.ca and Aeroplan are already separate entities. ACE Aviation Holdings Inc. will be theparent company of the group.

Air Canada’s Plan of Arrangement was approved unanimously by its creditors and by the OntarioSuperior Court overseeing the carrier’s restructuring process. Meanwhile, although initially AirCanada’s shares will be heavily owned by non-Canadians due to its use of shares with variable votingrights the Canadian Transportation Agency has ruled that Air Canada’s new corporate structuremeets the Canadian ownership and control requirements of the Canada Transportation Act. AirCanada plans to emerge from CCAA protection on or about 30 September 2004.

Eugene ChuProject Analyst


MORE TROUBLE AT US AIRWAYS15 September 2004

For the second time in the past two years, US Airways hasfiled for Chapter 11 bankruptcy protection in a bid totransform itself into a low cost carrier. Shortly after the 9/11terrorist attacks, US Airways was the first major U.S carrier to seek Chapter 11 bankruptcy protection.The airline emerged from its initial restructuring on 31 March 2003.

Why did the first restructuring fail?When US Airways exited Chapter 11 protection in Spring 2003, it had $1.2 billion in liquidity, 1 and ithad cut $2 billion in annual operating costs through the restructuring process. Although its costs werestill higher than its low cost competitors, the airline had plans to add aircraft and expand its routenetwork.

By March 2004 – facing immense competition from low cost carriers such as Southwest and JetBlue,coupled with high fuel costs, US Airways management determined that further operating cost cutswould be required or the airline would not survive. As a first step, US Airways restructured the termsof its $900 million loan guarantee with the Air Transportation Stabilization Board (ATSB) that itreceived after 9/11. US Airway’s management later announced its proposed Transformation Plan thatproposed further cuts of $1.5 billion in operating costs (including $800 million in labour costs). Theairline stressed the need for these cuts in order to compete in the current low cost environment.However, the major stumbling block was that the airline could not negotiate a new labour agreementwith its pilots. The airline was also dealing with a change in leadership. In April 2004, US AirwaysPresident, David Siegel resigned. The labour unions voiced their dissatisfaction with the airline'smanagement team and were calling for Siegel's resignation shortly after the announcement that theairline was seeking additional cost cuts (including labour concessions). So, on 12 September 2004,the airline filed for Chapter 11 bankruptcy protection for a second time in as many years. The filingwas also prompted by the airline’s obligation to make a pension plan payment of $110 million. It wasalso at risk of violating the terms of its aircraft-financing agreements.

Will US Airways be able to exit Chapter 11 bankruptcy protection a second time?As the airline attempts to restructure under Chapter 11bankruptcy protection, there is a concern as to whether theairline will be able to successfully exit the restructuring processor be forced to liquidate via Chapter 7 of the U.S. bankruptcycode. The main problem for the airline is that it has next to noborrowing capacity. In its first restructuring, the airline pledgedmost of its assets to the ATSB for the $900 million loanguarantee and to General Electric. With few unencumberedassets, US Airways will now be hard pressed to find the

necessary funds to exit bankruptcy protection this time around.

Although at the time of filing US Airways had $1.45 billion in liquid assets, the airline will essentially beoperating on a cash basis while restructuring – this is a risky proposition as the airline could be forcedto liquidate should funds run out.

1 The liquidity package included $900 million in loan guarantee by the ATSB, $75 million cash provided byRetirement Systems of Alabama Holdings (RSA), $25 million cash provided by Bank of America and $240equity investment by RSA.

Doris MakSenior Project Manager


THE IMPACT OF HIGH FUEL PRICES15 September 2004

The price of crude oil rises close to $50 in August…The price of crude oil continued to rise in August, hitting a high of $48.70 per barrel. Prices havesince tempered somewhat, to a lower level of $43.87 per barrel on 13 September 2004. The spotprice has risen 30% from the beginning of the year. To put these recent highs into perspective,current prices are still low, compared to inflation adjusted prices which prevailed during the oil crisesof the 1970s and early 1980s. At the time, the price of a barrel cost between $60 to $80 in today’sdollars (after adjusting for inflation).

Increasing Demand Requirements from Asia. Since the start of the global economic recovery in2003, China and India have shown exceptional rates of economic growth that has resulted insignificant demand for oil. China’s demand is expected to reach 10 million barrels per day over thenext 10 years. In Japan, oil demand has also increased due to problems with nuclear powergeneration. As a result, Japan has increased its reliance on oil-fired electricity.

Short term Supply Factors. Supply concerns continue to abound in the short term. A majorconcern is the continued unrest in Iraq. Terrorists have continually threatened to destroy oilinstallations, which would result in major disruption to the flow of oil. As Russia is the largest non-OPEC producer of oil in the world, the Yukos affair has also fuelled uncertainty about availablesupplies. Yukos, Russia’s largest oil producing firm, has encountered liquidity problems (frozen bankaccounts) due to charges of tax evasion and (by the company’s CEO), which has brought uncertaintysurrounding the firm’s ongoing operations.

…. Rising futures pricesThe price of crude oil in the futures market has been increasing steadily over the past year. In August2003, the futures price of a barrel of crude oil for delivery in September 2005 was at $25 per barrel.In September 2004, the futures price for that same barrel of crude oil is $40, up 60% from a year ago.

Airline Fuel Price Hedging. Some airlines have been able to lessen the impact of high fuel pricesby hedging the price of fuel while airlines with poor credit ratings and low cash reserves are unable toengage in such activities and must purchase all of their fuel needs on the open market. Southwest

Airlines has implemented a fuel price-hedging program over the past few years.In 2004, the airline has hedged 80% of itsprojected fuel needs. Through its hedgingactivities, Southwest was able to lock in aprice of $24 per barrel for the year. Otherairlines such as Alaska Airlines and JetBluehave also undertaken price-hedgingactivities for approximately 30% of theirprojected fuel needs for the year. However,some of the major U.S. network carrierssuch as Delta, Northwest and US Airwayshave not hedged any portion of their fuelneeds. Poor financial position has inhibitedtheir ability to hedge future fuel prices,forcing them to purchase fuel for on theopen market.

Doris MakSenior Project Manager

$20.00

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3

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7

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-07

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08

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Jul-0

8

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-08

May 2003 Futures

June 2004 Futures

December 2003 Futures

August 2003 Futures

September 2004 Futures

April 2004 Futures

Spot Prices

Crude Oil Spot & Futures Prices Prices


-10%-5%0%5%

10%15%20%

Aug-03

Sep Oct Nov Dec Jan-04

Feb Mar April May Jun July Aug

Dom RPK Dom ASK

Air Canada Domestic Mainline Air Canada Domestic Mainline

Jazz data is not includedin this graph

-20%-10%

0%10%20%30%40%

Aug-03



Int'l RPK Int'l ASK

Air Canada InternationalAir Canada International

AIRLINE DATA – CANADA

Traffic and Load Factors on Canada’s Major Air Carriers - August 2004

Passenger TrafficRevenue Passenger Kilometres

CapacityAvailable Seat Kilometres

Load FactorAir Carrier % Change

over 2003% Changefrom 2002

% Changeover 2003

% Changefrom 2002

Changeover 2003

Changefrom 2002

Air Canada1 +9.8% -5.4% +6.5% -6.8%+2.6 pts(to 83.2%) +1.3 pts

Domestic(Mainline)

+0.2% -6.8% -5.9% -10.9% +5.0 pts +3.6 pts

Jazz +5.9% +14.2% +0.4% -1.2% +4.4 pts +12.8 pts

International& Charter

+14.7% -4.7% +13.3% -4.8% +1.0 pts +0.1 pts

WestJet +21.8% +70.6% +26.6% +83.6% -3.1 pts(to 79.8%) -6.1 pts

Jetsgo +59.7% +483.8% +56.2% +467.4% +1.9 pts(to 86.0%) +2.4 pts

Analysis:

• Air Canada continued to reducedomestic capacity in August. Trafficwas flat, resulting in an improved loadfactor. CEO Robert Milton has statedthat the carrier can be expected to be ina position where revenue from domesticoperations make up less than 20% ofthe total, as the focus turns to growinginternational services.

• Air Canada continued to record year-to-year increases in international traffic andcapacity during the month of August,reflecting the world-wide recovery indemand for air travel. However, trafficis still below 2002 levels. Air Canadareported a doubling of traffic through itsVancouver hub as the number ofpassengers destined to Asia increased,showing a recovery from the effects ofSARS in 2003.

• WestJet’s addition of capacity outpacedthe growth of traffic in August, especiallyon eastern Canadian routes, resulting ina lower year-to-year load factor.

1Air Canada Jazz is not included.

NEW CARRIERS:

LOAD FACTORS

Zip: not reported

CanJet: not reported

0%

10%

20%

30%

40%

50%

60%

Aug-03



RPK ASK

WestJetWestJet


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

Traffic Data – August 2004

Airline Load FactorTraffic

(RPMs – millions)Capacity

(ASMs – millions)

78.4 %

â 1.1 pts

12,194

á 4.4%

15,536

á 5.8%

68.5%

á 0.0pts

580

á 29.7%

846

á 29.6%

179.2 %

â0.6 pts

1,226

á 5.4%

1,548

á 6.2%

182.6%

á 0.4 pts

6,277

á 7.2%

7,600

á 6.8%

78.9%

â1.2 pts

10,205

á 9.0%

12,942

á 10.7%

89.3%

â 2.3 pts

1,530

á 31.0%

1,713

á 34.3%

83.3%

á 0.7 pts

6,902

á 3.3%

8,289

á 2.5%

75.1%

á 1.9 pts

4,986

á 11.3%

6,642

á 8.6%

283.8%

á 1.3 pts

10,915

á 9.9%

13,031

á 8.3%

279.1%

â 1.6 pts

3,760

á 0.8%

4,751

á 2.9%

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

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% +3.9% +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% +5.3% +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% +2.0% +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% +3.7% +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% +11.5% +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% +5.5% +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% +8.4% +2.8% +12.1% +8.8% +7.8% +8.6% +3.0% +1.7% -4.3% +16.0%

2nd Quarter +25.9% +18.8% +24.9% +8.4% +6.2% +13.2% +9.7% +14.5% +9.7% +0.5% +3.8% -2.5% +16.9%

2004

July +17.2%* +10.4% +18.7% +5.0% +0.8% +5.7% +8.8% +10.5% +4.7% -0.5% +5.5% +1.4% +10.6%

Sources: Airport passengers statistics

CA

NA

DIA

N A

IRP

OR

TS


NEWS ARTICLES

AIR CANADA UPDATEAIR CANADA’S RESTRUCTURING PLANAPPROVED

Air Canada’s creditorshave unanimously accepted

the carrier’s Plan of Arrangement as part of itsrestructuring under bankruptcy protection. Theplan has also been approved by the OntarioSuperior Court overseeing the company’srestructuring. Air Canada plans to emerge frombankruptcy protection by 30 September 2004.

CTA SAYS AIR CANADA IS CANADIANThe Canadian Transportation Agency has ruledthat Air Canada’s new corporate structuremeets the ownership and control requirementsoutlined in the Canada Transportation Act.Under the Act, foreign investments in anyCanadian carrier must not exceed 25% of votingshares. ACE Aviation Holdings Inc. will becomethe holding company for Air Canada when thecarrier exits bankruptcy protection.

It is expected that initially ACE will be 70%foreign owned, but foreign shareholders willhave "variable" voting rights. A vote cast byforeign shareholders will be counted as afraction, if necessary, so that they account for nomore than 25% in aggregate.

ZIP OPERATIONS SHIFTED TO AIRCANADA MAINLINE

Air Canada has shut downZip, its Calgary based low-cost subsidiary, and shifted

the carrier’s routes back to the mainlineoperation. Almost all of Zip’s 400 employeeshave been transferred to positions at AirCanada, while the subsidiary’s fleet of 12 aircraftwill be returned to lessors. Air Canadaannounced earlier in the year that it would ceaseoperation of Zip after reaching cost-cutting dealswith its unions that brought mainline salaries toZip levels.

CIBC TO ACQUIRE MINORITY STAKE INRESTRUCTURED AIR CANADA

The Canadian Imperial Bank ofCommerce (CIBC) has exercisedits right to acquire more than 3.7million voting shares of ACE

Aviation Holdings Inc., the holding company ofAir Canada, for CDN$74 million.

AIR CANADA CARGO TO OPERATE ASINDEPENDENT ENTITYAir Canada Cargo plans to establish itself as anindependent entity as part of the carrier’s court-approved re-organisation plan. Initially, AirCanada Cargo will use Air Canada aircraft, anddepend on the carrier to market its cargoservices. Air Canada Cargo will also depend onAll Canada Express to operate some services.However, the cargo company will hold its owneconomic license from the CanadianTransportation Agency. The carrier has alsoapplied to the U.S. Department ofTransportation for separate operating authorityon Canada-U.S. services.

AIR CANADA RE-INTRODUCESTORONTO-ROME SERVICEBeginning 4 April 2005, Air Canada will re-launch daily non-stop services between Torontoand Rome. The service will be operated with198-seat B767-200 ER aircraft.

AIR CANADA EXPANDS WEB CHECK-INTO ALL DOMESTIC FLIGHTSAir Canada has expanded the online check-inservice on its website to all domestic flightsoperated by the carrier. The online check-inservice allows domestic travellers, with andwithout baggage, to check-in and print boardingpasses from their home or office via the AirCanada website.

FUEL PRICES

3 September 2004

SPOT OIL PRICES TRENDUPWARDSFUTURES PRICES AT LOWERLEVELS

Crude Oil Prices:

Spot – US $43.99(down 1.8% from August)

Futures• 6 month - $42.83

(February 2005 delivery)• 12 month - $40.48

(August 2005 delivery)• 2 year - $37.26

(August 2006 delivery)• 5 year - $34.13

(December 2009 delivery)

$15.00$20.00

$25.00$30.00$35.00

$40.00$45.00

$50.00

Septem

ber-03

October

Novem

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Decem

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Januar

y-04Feb

ruary

March

April May June July

August

Septem

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US$

per B

arre

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Monthly Spot PricesMonthly Spot Prices


NEWS ARTICLES

CANADIAN AIRLINESWESTJET AND CATHAY PACIFICDISCUSS POSSIBLE ALLIANCE

WestJet Airlines andCathay Pacific Airways are in discussionsabout a possible strategic alliance to allowpassengers travelling to Hong Kong fromsmaller Canadian cities to board WestJet, andthen connect to Cathay Pacific on the samebooking. WestJet has not commented onCathay’s disclosure.

CANJET TO LAUNCH WINNIPEG-ORLANDO SERVICES IN THE WINTER

Starting 9 February 2005,CanJet will launch Winnipeg-Orlando services for 16 weeks

as part of its winter schedule.

CANJET INCREASES HALIFAX-OTTAWAAND HALIFAX-HAMILTON FREQUENCY,BOOSTS SERVICE TO FLORIDACanJet has increased services between Halifax-Ottawa and Halifax-Hamilton to three flightsdaily in both directions from two flights per day.Service between Hamilton and Orlando will bedoubled with the addition of a second weeklyflight, starting on 8 February 2005, while newweekly service between Hamilton and St.Petersburg-Clearwater will be added on 5November 2004.

CANJET TO LEASE FOUR B737-500sCanJet has completed an agreement to leasefour B737-500 aircraft, with one aircraftscheduled to arrive this fall, and the remainingthree before next summer. The B737-500 has alonger range than the B737-200s currently inCanJet’s fleet. These aircraft will enable thecarrier to operate routes with increased stagelength and additional non-stop services. CanJetwill have five B737-500s and seven B737-200sin its fleet after the acquisition.

JETSGO LAUNCHES WEB CHECK-INJetsgo has introduced online check-in servicesvia its website. The service allows travellerswith no checked baggage to print their ownboarding pass, and proceed directly to airportsecurity for all flights on Jetsgo’s scheduleddomestic network.

TRANSAT A.T. RECORDS THIRDQUARTER INCOME OF CDN$13 MILLION

Transat A.T. Inc., parent companyof Air Transat, reported revenues ofCDN$499 million in the thirdquarter of 2004, a year-to-year

increase of 12%. The travel group posted aCDN$28 million margin and net income ofCDN$13 million during the period, compared toa net loss of CDN$10 million in the third quarterof 2003.

TRANSPORT CANADA GRANTSWESTJET OPERATIONAL APPROVALFOR RNP RNAVTransport Canada has granted WestJetapproval to operate RNP RNAV (advancednavigational procedures) throughout Canada.WestJet is the first carrier in the world to begranted approval for RNP 0.10 nm procedures,which provides for additional safety andimproved access to the airports it serves,especially in poor visibility. Over the next 10months, WestJet will work with Naverus tocomplete development of over 90 RNPprocedures into the airports served by thecarrier.


NEWS ARTICLES

U.S. AND INTERNATIONALAIRLINESUS AIRWAYS FILES 2ND TIME FORBANKRUPTCY PROTECTIONUS Airways has filed for Chapter 11 protection -18 months after emerging from bankruptcyprotection. The carrier’s bankruptcy petitionlisted US$8.8 billion in assets (including US$2.5billion in goodwill), and liabilities of US$8.7billion. The carrier has approximately US$1.5billion in cash, cash equivalents, and short-terminvestments.

UNITED EXPRESS TO LAUNCHOTTAWA-CHICAGOSERVICES

Beginning 31 October 2004, United Airlines willintroduce three daily non-stop flights betweenOttawa and Chicago via United Express carrierAir Wisconsin. It plans to operate the servicewith 50-seat regional jets. Altogether, Unitedand Air Canada will operate six dailyfrequencies on the route.

DELTA PLANS TO CUT COSTS BY US$5BILLION OVER TWO YEARS

Delta Air Line’s restructuringplan aims to reduce costs by

US$5 billion through to 2006, with a reduction ofUS$2.3 billion by the end of 2004. The carrierplans to drastically reduce services from itsDallas/Fort Worth hub, effectively ending its huboperation at the airport. It will expand Song - itslow cost unit. The carrier has warned that if itdoes not receive concessions from its pilots, itmay have to file for Chapter 11 bankruptcyprotection.

CONTINENTAL, KLM, AND NORTHWESTJOIN SKYTEAM, CHINA SOUTHERN TOFOLLOW

Continental Airlines, KLM RoyalDutch Airlines and NorthwestAirlines have joined the SkyTeamalliance. The membership will

allow passengers to collect frequent flyer mileson all nine SkyTeam carriers, and add to thenetwork of the alliance. SkyTeam now includesAeromexico, Air France, Alitalia, ContinentalAirlines, CSA Czech Airlines, Delta Air Lines,KLM, Korean Air, and Northwest Airlines.China Southern Airlines has completed anagreement for future membership in the alliance.

AIRPORTSEDMONTON INTERNATIONAL AIRPORTBEGINS COMMUTER ENHANCEMENTPROGRAMEdmonton International Airport has openedAirport Express in the Visitor Information Centreof the World Trade Centre in downtownEdmonton, the first phase of the airport’sCommuter Enhancement Program. AirportExpress offers travellers two self-serve AirCanada and WestJet check-in kiosks, baggagestorage, airport and flight information, andscheduled shuttle services to the airport. TheCommuter Enhancement Program was createdto facilitate passenger check-in and improvetransportation to and from the airport.


NEWS ARTICLES

AIRCRAFT MANUFACTURERSEMBRAER POSTS RECORD SALES INSECOND QUARTER

Embraer reported US$924million in sales during thesecond quarter, an increase of

63% year-to-year, and the highest in themanufacturer’s history. Second quarterdeliveries totalled 43, compared to 23 in the firstquarter. Embraer has set a delivery target of160 aircraft for 2004.

CARGOTNT EXPRESS TO EXPAND EUROPEANHUB

TNT Express will be investingUS$44 million in the first phase ofits expansion at its European hub

at Belgium’s Liège airport. The hub sortationspace will be doubling in size and additionaloffice space will be added. It is expected to becompleted by the end of 2005. The second andthird phase of expansion is expected to costUS$71 million and be completed in 6 years.

COYNE AIRWAYS MOVES EUROPEANHUB

To achieve faster deliveries acrossits Caspian network, Coyne Airwaysis moving its European hub from

Brno, Czech Republic back to Vatry, France. In2002, Coyne switched its hub from Vatry to Brnodue to operation restrictions placed on its IL-76Fflights. Coyne is now operating AN-12 flightsfrom its Brno hub.

KUEHNE & NAGEL ACQUIRES NETHERCARGO SERVICES

Leading global logistics provider Kuehne& Nagel (K&N) acquired Nether Cargo

Services. Nether is a specialist in the transportof perishables in Holland.

KOREAN AIR ORDERS TWO B747-400FREIGHTERS

Korean Air Cargo hasplaced a US$400 million

order for two B747-400 freighters for delivery inthe second half of 2005. Korean Air Cargocurrently has 21 aircraft including 17 B747-400freighters. A B747-400 ERF is scheduled fordelivery in August from a previous order.

KOREAN AIR ORDERS BOEINGCONVERSION KITSKorean Air Cargo has become Boeing’s thirdcustomer for the B747-400SF (SpecialFreighter). The carrier placed an order for up to20 Boeing conversion kits used to changepassenger aircraft to full-freighter aircraft. Thiswill allow Korean Air to increase its cargorevenue while improving the residual value ofexisting aircraft. Delivery of the first aircraft willbe in August 2006.

CHINA CARGO ORDERS TWO 747-400FREIGHTERS

China Cargo ordered twonew 747-400 freighters tobe delivered in November

2005 and March 2006. Currently China Cargohas a fleet of one 747-400, four 747-200s andeight 747-400 “combi” aircraft.

SINGAPORE AIRLINES CARGOLOOKING TO CONVERT PASSENGERAIRCRAFT TO FULL FREIGHTERS

Singapore Airlines Cargois in negotiations withBoeing to convert up to five

passenger B747-400s to a full freighterconfiguration. The carrier is planning to convertfour or five passenger B747-400s to freightersafter they receive their 17th and last productionfreighter delivery in March 2006.


NEWS ARTICLES

CARGO – CON’T

CATHAY TO BUY EIGHT B747-400sCathay Pacific Airways will buy eight usedB747-400 aircraft and convert four to freightersby the end of 2006. The additions bringCathay’s fleet size to over 100 passenger andcargo aircraft.

VOLGA-DNPER TAKES DELIVERY OFITS 10TH AN-124-100

Volga-Dnepr Airlinestook delivery of its 10th

AN-124-100 Ruslanheavy duty freighter. Volga-Dnepr and theInternational Finance Corporation (IFC) financedconstruction of the Ruslan aircraft. The newfreighter has an expanded 150-tonne payloadcapacity and a take-off weight of 402 tonnes. Itsrange also increases from 4,750 to 6,500kilometres when carrying up to 120 tonnes ofcargo.

NEW AN124-100 FOR POLET CARGOAIRLINES

Polet Cargo Airlines ofRussia has added a newAntonov AN124-100 to

its fleet. The new addition will bring its all-Antonov fleet up to eight aircraft.

CHANGES IN DHL’S NORTH AMERICANHUBS

DHL will be investingUS$350 million to make

Ohio Air Park its main U.S. hub. Staff from theCincinnati/Northern Kentucky InternationalAirport will be moved to Ohio Air Park.

DHL Danzas Air & Ocean is relocating andexpanding its distribution centre to a new90,000-ft2 facility in Mississauga.

REGULATORY/GOVERNMENTADDITIONAL CARGO SERVICESBETWEEN U.S. AND CHINA

On 3 September2004, FedEx and

UPS received tentative approvalfrom the U.S. Transportation Department for 12additional all-cargo weekly frequencies betweenChina and the U.S. until the end of 2005.Northwest Airlines has been approved for 6frequencies, and Polar Air Cargo was granted9 weekly frequencies in the same period. Finalapproval for the services is expected to takeplace soon after an 11-day comment periodexpires.

PEOPLECEO OF EDMONTON AIRPORTS

ANNNOUNCESRETIREMENTScott Clements, Presidentand CEO of EdmontonAirports Authorityannounced his plans to retireat the end of this year.

During his 10 years of service, Clementsoversaw important projects including a $265million Air Terminal Redevelopment Project atEdmonton International Airport. The Board hasnot yet chosen his successor.

CEO OF GTAA RETIRESGreater Toronto Airport Authority(GTAA) President and CEO Louis A.Turpen will be retiring as of 30

September 2004. The Board has a consultingarrangement with Turpen so that the GTAA cancontinue to benefit from his expertise. TheBoard has appointed current Chief OperatingOfficer, John Kaldeway to succeed Turpen.


NEWS ARTICLES

PEOPLE – CON’T

UPS CANADA NAMESPRESIDENTGlenn Rice has been promoted toPresident of UPS Canada and will be

responsible for the company’s Canadianoperations.

NEW EXECUTIVE VICE PRESIDENT FORTRANSAT TOURS CANADATransat A.T. Inc. has appointed NelsonGentiletti to the newly created position ofExecutive Vice President for Transat ToursCanada. Gentiletti will continue with hisresponsibilities as Transat A.T.’s Vice Presidentof Finance and Administration, and ChiefFinancial Officer until a successor is appointed.

CONTINENTAL AIRLINES ELECTSEXECUTIVE VICE PRESIDENT

Continental Airlines haselected Executive VicePresident Jeffery Smisek asPresident. Smisek will besucceeding Larry Kellner whowill be taking Chairman andChief Executive responsibilitiesat the end of the year.

NEW DIRECTOR GENERAL FOR ACIEUROPERoy Griffins CB has been appointedDirector General of ACI Europe as of1 December 2004. Griffins willsucceed Philippe Hamon, who was a

director since 1991 when he launched ACIEurope.

AAPA ANNOUNCES NEW DIRECTORGENERAL

Andrew Herdman will bethe new Director General of

the Association of Asia Pacific Airlines(AAPA). Herdman was the former head ofCathay Pacific Cargo and is currently a SwirePacific executive. He will be succeedingRichard Sterling.


ECONOMIC OUTLOOK15 September 2004

Robust growth in Canada. Canadian realGDP grew at a very strong rate of 4.3% inthe second quarter of 2004. Export growthwas key to the second quarter economicexpansion, growing at 22%, and accountingfor three-quarters of the increase inCanada’s real GDP.

Economic growth would have been higherhad domestic demand not slowed. In thesecond quarter, domestic demand grew only1.7% (annualised) after increasing 5.9% inthe first quarter. Despite the minimal growth in domestic demand in the second quarter, the Canadianeconomy still experienced its highest quarterly economic growth since the second quarter of 2002.The record economic growth, combined with concerns about increasing “core” inflation, led the Bankof Canada to increase interest rates. On 8 September 2004, as many economists expected, the Bankraised the overnight rate a quarter of a percentage point to 2.25%, and indicated that it is likely toincrease rates further.

Sluggish consumer spending limitsgrowth in the U.S. The U.S. economygrew at an annualised rate of 2.8% in thesecond quarter of 2004. This was aslowdown from the 4.5% first quarter realGDP growth, and only half the rate of growthin Canada.

Import growth, combined with lowerpersonal consumption spending and privateinventory investment growth, contributed tothe second quarter slowdown in real GDPgrowth. U.S. exports increased 6.1% in thesecond quarter, but were more than outpaced by imports (14.1%).

Similar to Canada, personal consumptionspending was weak, growing a mere 1.6% inthe second quarter, compared to 4.1% in thefirst quarter. Economists have linked theminimal growth in consumer spending to risingfuel costs, and increasing interest rates.

The U.S. index of consumer sentiment isgenerally trending upward, compared to 2003,but is still well below the levels of the 1990sand 2000.

-2

-1

0

1

2

3

4

5

6

Q1

'00

Q2

'00

Q3

'00

Q4

'00

Q1

'01

Q2

'01

Q3

'01

Q4

'01

Q1

'02

Q2

'02

Q3

'02

Q4

'02

Q1

'03

Q2

'03

Q3

'03

Q4

'03

Q1

'04

Q2

'04

Source: Statistics Canada

Canadian Real GDP (Annualised Quarterly % Change)

-2

-1

0

1

2

3

4

5

6

Q1

'00

Q2

'00

Q3

'00

Q4

'00

Q1

'01

Q2

'01

Q3

'01

Q4

'01

Q1

'02

Q2

'02

Q3

'02

Q4

'02

Q1

'03

Q2

'03

Q3

'03

Q4

'03

Q1

'04

Q2

'04

Source: U.S. Bureau of Economic Analysis

U.S. Real GDP (Annualised Quarterly % Change)

75

80

85

90

95

100

105

110

115

Jan-

00

May

-00

Sep-

00

Jan-

01

May

-01

Sep-

01

Jan-

02

May

-02

Sep-

02

Jan-

03

May

-03

Sep-

03

Jan-

04

May

-04

Source: University of Michigan

US Index of Consumer Sentiment (1966=100)

Ian KincaidManager,

Economic Analysis


THE OTTAWA REPORT14 September 2004

Canadian Transportation Agency Approves Air Canada’s Corporate Structure

The Canadian Transportation Agency approved Air Canada’s newcorporate structure as meeting the Canadian ownership and controlrequirements stipulated in the Canada Transportation Act. By law,foreign investment in any Canadian airline cannot exceed 25 percentof the voting interest. The agency’s decision allows Air Canada toproceed with its restructuring plan in an effort towards exiting creditorprotection. Air Canada is expecting to exit creditor protection by 30September 2004.

NAV CANADA Posts Third Quarter Financial Results

NAV Canada posted revenues of $248 million for the third quarter.This is up 15% from $216 million in the same period last year. Theincrease in revenues can be attributed to increases in fees as well asan 8.1% increase in air traffic. Third quarter operating expenses were $186 million in 2004, which issignificantly lower than 2003 operating expenses (2003 expenses were $208 million and included a$22 million bad debt expense from Air Canada).

Despite an increase in revenue and decrease in expense, NAV Canada still posted a loss for the thirdquarter. Total expenses were $257 million, $9 million over total revenue. However, 2004 thirdquarter results have improved relative to 2003, which posted a loss of $14 million.

Effective 1 September 2004, Nav Canada will be increasing customer service charges by 7.9%.

Transport Canada

The ownership of Saint Hubert Airport was transferred from Transport Canada to Développement del’aéroport Saint-Hubert de Longueuil on 13 September 2004. Saint Hubert Airport is a small airportlocated in Quebec. Transport Canada will also contribute $3.3 million to cover operating deficits andmaintenance costs until 2006-2007.

Currently, 125 of Canada’s 136 airports have been transferred from the federal government to localauthorities or municipalities. All 26 of Canada’s national airports have already been transferred. 61 ofthe country’s 71 regional airports have also been transferred. In the small airports category, all butone have been transferred. Transport Canada still owns the Bonnechere Airport in Ontario. Localgovernments also own and operate 8 of Transport Canada’s Arctic airports.

Sam BaroneRegional Vice President

Ottawa, ON


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 REPORT13 September 2004

FAA and Airlines Reach O’Hare Agreement

The Federal Aviation Administration (FAA) and airlines reachedan agreement that will limit the number of flights at ChicagoO’Hare airport. In order to cut flight delays by 20%, domesticairlines have agreed to a limit of 88 flights per hour between 7a.m. and 8 p.m. The agreement is effective from 1 November2004 to 30 April 2005. United and American, operating 86% of O’Hare flights, have agreed to thelargest reductions. Between noon and 8 p.m. the two airlines will cancel or move a total of 37incoming flights to ease congestion at the crowded airport.

TSA to Test Secure Flight Program

Responding to public objection, the Transportation Security Administration (TSA) will begin testingSecure Flight, a new passenger pre-screening program to replace CAPPS II (computer-assistedpassenger pre-screening program). TSA will assume responsibility for conducting passenger pre-screening on domestic flights from airlines. Passenger name records (PNR) will be checked againstan expanded terrorist watch list not available to airlines, but PNR data will not be used for other lawenforcement purposes as had been done under CAPPS II. Secure Flight will also include a redresssystem for passengers who believe they have been wrongly selected for additional screening.

ATA Urges Review of Fuel Prices on Airlines

The Air Transport Association (ATA) says that the cost of fuel for U.S. airlines will be $6 billion morethan the previous year and has urged Congress to review the impact of high fuel prices on airlines.The ATA wants the U.S. to stop acquiring oil for the Strategic Petroleum Reserve and release somereserves into supply.

Senate Panel Approves DOT Spending Bill

The Senate Transportation/Treasury Appropriations Subcommittee approved its version of fiscal year2005 spending bill, which includes funding for the FAA and the Airport Improvement Program (AIP).US$3.5 billion was allocated to AIP, $20 million of which is made available to the Small CommunityAir Service Development Program. The bill includes a provision that prohibits the FAA from requiringairports to provide space free of charge to the agency, and one that extends the war risk insuranceprogram by one year to 31 December 2005.

Charles ChambersRegional Vice President

InterVISTAS Consulting Inc.

AND

Senior Vice PresidentInterVISTAS-ga2 Consulting Inc.

Washington, D.C.

Documents

IVC MARKET INTELLIGENCE REPORT - InterVISTAS the second time in the past two years, US Airways has ... airlines such as Alaska Airlines and JetBlue have also undertaken price-hedging