cair issue no. 14 - february 2004

INDUSTRYREVIEW

February 2004 ©InterVISTAS Consulting Inc Page 1

Source: Aviation Analyst, Asia Pacific

SARS RECOVERY:BACK TO TREND9 February 2004

Global Travel Industry Recovers from SARS.

It has been a little less than ayear since SARS first surfaced inHong Kong and severelyimpacted the global air travelindustry. At the time, the WorldHealth Organisation issuedtravel warnings that urgedpeople not to travel to Asiaunless it was absolutelyimperative. Hong Kong, Chinaand Taiwan were among thehardest hit by the disease.Canada (mainly Toronto), was the only country outside of Asia that had deaths due to SARS. Thevirus hit its peak in July 2003. Since then, air traffic has fully recovered. Asia-based airlines nowshow passenger volumes back to levels before the outbreak.

Bird Flu: Another Global Travel Crisis?

Just as the global air travel industry recoveredfrom the impact of SARS, the threat of avian fluor bird flu surfaced in South East Asia. Avian fluis a contagious disease of animals, normallyinfecting birds, and to a lessor extent, pigs. Priorto this year, the only other incidence of bird flu inhumans was a small outbreak in 1997 in HongKong that infected 18 people and killed 6. In thisyear’s outbreak, the only human cases of bird fluhave been reported in Vietnam and Thailand,although poultry infections have been reported in 9 Asian countries (as illustrated at right). In anattempt to stem the spread of the disease amongst the bird population, mass culling of poultry hastaken place. All human cases (23 people infected, 18 deaths) of the bird flu have resulted from directcontact with an infected bird. The underlying fear is that this disease may mutate to a form that couldbe easily transferred between humans and could become a pandemic, as there is no known cure.However, research results to date provide no indication that the disease is easily transmitted frompoultry to humans.

Better Equipped to Fight.

Due to the SARS epidemic last year, many lessons were learned. SARS demonstrated how easily adisease could get out of control on a global basis using air travel as its vehicle. Should bird flubecome an issue, we are better prepared to cope today. Governments and hospitals in addition toairports and airlines, have developed processes, such as quarantining and temperature screening, tobetter manage such occurrences.

Doris Mak

Senior Market Analyst


TRENDS IN TRAVEL BEHAVIOUR9 February 2004

InterVISTAS Consulting Inc. conducts passenger surveys at airports around the world. We used thisdata to ask the question as to whether airlinepassenger growth is due to more passengerstravelling, or the same passengers travellingmore often. We were also interested in thesource of the recent post 9/11 decline in traffic.Was it due to fewer individuals travelling by air,or was it the same passengers as before, buttravelling less frequently?

Traffic growth in the last decade. Worldwidepassenger traffic increased by 41% from 1992to 2002, an average compounded growth rate of 3.1% per annum. Traffic grew by 45% up to thepeak in 2000, then declined by 2.4% in the subsequent two years.

InterVISTAS research shows that while passenger traffic has increased steadily over the mid and late1990s, average trip frequencies have remained largely unchanged. This means that the growth inpassenger traffic can be attributed almost exclusively to more individuals travelling, rather than to thesame individuals travelling more often.

In North America and Europe, much of the growth in traffic can be attributed to the impact of low costcarriers (LCCs). In the U.S., for example, while traffic (RPMs) of the major carriers, excludingSouthwest, grew at an average annual rate of 3.5% from 1990-2001, Southwest’s traffic grew by14.6%. The low cost carrier strategy focuses on attracting people who have not travelled before –expanding the size of the market. On the other hand, full service carriers tend to compete for marketshare of existing travellers. Our research indicates that until 9/11, existing travellers had taken thesame number of trips per year, on average. For airports, this means that traffic growth may be largelydue to the low cost carriers.This is borne out by the muchhigher traffic growth rates atairports with a substantialpresence of low cost carriersversus those without LCCservice.

Since 9/11, there has been adecline in trips per traveller.From 2000 to 2003,InterVISTAS research showsthat annual trips per passengerfell by roughly 15%. The dropin trip frequency started toappear in 2000 (although thislargely offset the increase in 1998). It was in 2003 that trips per traveller showed a large decline.Interestingly, in 2001 and 2002, there were only minor drops in trip frequency per traveller. Thisindicates that the drop in traffic in those years was largely due to fewer individuals travelling. Perhapswhat happened is that those travellers skittish about air travel stayed home, while those whoappreciated the high safety and security record of air travel continued to travel as before.

World Passenger Traffic

0.5

0.75

1

1.25

1.5

1.75

2

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002

Pas

seng

ers

(bill

ions

)

Source: International Civil Aviation Organization.

+41%

Jane Ha


Passenger Traffic & Trip Frequency Growth Rates

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

1998 1999 2000 2001 2002 2003

Per

cent

age

Cha

nge

Passenger Traffic

Tr ip Frequency

+0.7%

The difference betweengrowth in pax trafficand growth in trip frequency ischange in # individuals traveling (+0.7%)

+1.1%

+5.2% -1.5% -3.0% +8.7%


TRENDS IN TRAVEL BEHAVIOUR- CONTINUED

2003 tells a different story. Here, there was a noticeable drop in trips per traveller. However, the dropin traffic was much less. Paradoxically, what seems to have happened in 2003 is that enough newindividuals are using air travel to offset traffic declines from previous travellers taking fewer trips.Once again, this is consistent with the strategy of low cost carriers – attract new individuals to flying.

The future – potential strong recovery in air travel? Going forward, as confidence is restored andindividuals who previously travelled more often return to previous levels of trip frequency, and as thenumber of new individuals travelling due to the impact of low cost services increases, we may finddramatic growth in air travel. If the LCCs (and full service airline responses) continue to attract newindividuals to flying, and if economic recovery and greater confidence in aviation security results in areturn to previous numbers of trips per traveller, then we could see extremely high traffic growth ratesfor one or two years. This would bring air travel back up to its long-term trend line. However, sincemany airports deferred capital expenditure, a sudden growth spurt could put major pressures oninfrastructure and passenger processing services. It is important that airports and airlines alike areprepared for the growth in passenger traffic.


SHORT TERM SPIKE IN FUELPRICES10 February 2004

The price of crude oil rises to $36/barrel in late January…Until recently, oil prices had been expected to decline and settle into the $27/barrel range. Instead,they have jumped. Crude oil prices were as high as $36/barrel on January 20, before settling to alower price level of $34/barrel on February 10. Oil prices have been impacted recently by two globalfactors:

Explosion in Algeria’s Largest RefineryOn January 20, there was a huge blast at Algeria’s state-owned liquefied natural gas plant that killedat least 23 people. Algeria is the word’s second largest liquefied natural gas exporter. News of theexplosion sent crude oil prices to close at $36/barrel.

Recent Deep Freeze in Canada and the U.S.Meteorologists forecast continuing cold weather in the U.S. east of the Rockies for the next severalweeks. Similarly, Canada (outside of British Columbia) has also been hit by the deep freeze.Unexpected increases in levels of heating fuel consumption during this time period have put pressureon supplies that have resulted in higher prices.

…Lower oil prices expected in the futureDespite the recent jump, the futures price of crude oil has remained relatively steady over the last fewmonths. On 10 February 2004, the futures price of a barrel of crude oil for delivery in November 2005is $27.76. This is 3% higher than the futures price of $26.89 for November 2005 delivery quoted inthe December 2003 Industry Review. The current spot price of $33.87 is 22% higher than the futuresspot price.

Saudi Arabia’s Oil Minister indicated last month that he would like oil prices in the $25/barrel range.However, OPEC announced that it is cutting production quotas effective April 1. The move providesfurther evidence that OPEC will support oil prices well above its stated $22 to $27/barrel target range.

0

5

10

15

20

25

30

35

40

Jan-

03

Mar

-03

May

-03

Jul-0

3

Sep-

03

Nov

-03

Jan

-04

Mar

-04

May

-04

Jul

-04

Sep

-04

Nov

-04

Jan

-05

Mar

-05

May

-05

Jul

-05

Sep

-05

Nov

-05

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-06

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-06

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-06

Dec

-06

Dec

-08

Dec

-10

Month of Delivery

US$/

Barr

el

Crude Oil Spot & Futures PricesAs of February 10, 2004

SpotPrices

Futures PricesDecreasing

Doris Mak



AIRLINE DATA – CANADATraffic and Load Factors on Canada’s Major Air Carriers - January 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 +1.1% -1.0% -1.2% +0.4% +1.6 pts(to 72.0%)

-1.0 pts

Domestic(Mainline) +1.5% -11.3% -0.7% -4.0%

+1.5 pts(68.8%) -5.7 pts

Jazz -2.5% +7.2% -2.6% 0.0%+0.1 pts(53.8%) +3.6 pts

International& Charter

+0.9% +3.6% -1.4% +2.3%+1.6 pts(73.3%)

+0.9 pts

WestJet +53.1% +132.5% +37.3% +121.5% +7.1 pts +3.3 pts

Jetsgo2 +206.2% N/A +173.2% N/A+8.3 pts(77.3%)

N/A

Analysis:§ Air Canada' domestic traffic rose by 1.5% in

January 2004, the largest improvement in 14months. The airline has been trending towardsbetter results each month. The system-wideload factor of 72% was the best ever recordedfor the month. The higher load factor is due tothe airline's cutting of capacity since it beganrestructuring. For the second month in a row,international traffic also rose, for a modest overalltraffic increase of 1.1% for the month due tostrength in the Pacific and sun spot charterservices.

§ For four consecutive months, WestJet’s trafficgrowth continued to outpace capacity contributingto an improved load factor of 68.4%, the highestrecorded for January since 2000. The carrier’straffic rose by 53.1%, while capacity increased by37.3%.

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

2 N/A – As Jetsgo began operations in June 2002, a percentage change from the previous months is notapplicable.

NEW CARRIERS:

LOAD FACTORS

Jetsgo: 77% (Jan)

Zip: not reported

CanJet: not reported

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

-5%0%5%

10%

Jan-03

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

Int'l RPK Int'l ASK

Air Canada InternationalAir Canada International

-25%

-20%

-15%

-10%

-5%

0%

5%

Jan-03


Dom RPK Dom ASK

Air Canada Domestic Mainline Air Canada Domestic Mainline

0%

10%

20%

30%

40%

50%

60%

70%

Jan-03


RPK ASK

WestJetWestJet


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

Traffic Data – January 2004

Airline Load Factor Traffic(RPMs – millions)

Capacity(ASMs – millions)

68.9 %

á 2.0 pts

9,773

á 3.8%

14,168

á 0.8%

58.4%

á 4.3pts

405

á 20.8%

693

á 11.8%

260.7 %

â 5.6 pts

1,109

á 3.4%

1,878

á 8.9%

171.4%

á 3.5pts

4,762

á 8.5%

6,669

á 3.2%

67.3%

á 1.4 pts

7,732

á 0.3%

11,495

â 1.7%

78.1%

â 4.1 pts

1,079

á 39.7%

1,381

á 47.0%

73.1%

á 1.4 pts

5,242

â 4.2%

7,173

â 6.0%

56.2%

â 1.5 pts

3,456

â 0.5%

6,148

á 2.6%

272.1%

á 1.2 pts

8,453

â 0.9%

11,720

â 2.6%

264.4%

á 2.2 pts

2,799

á 8.2%

4,346

á 4.5%

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 Airports

Toronto Vancouver Montréal-Trudeau

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

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% -1.7% -1.3% +9.4%November +0.1% -2.2% +11.4% +8.0% +7.2% +6.5% +5.8% -0.05% +13.7% +9.6% -0.3% +19.8% +9.4%December +1.9% +2.7% N/A +5.4% +4.9% +6.0% +6.0% +2.9% +16.1% +9.1% +0.8% +2.0% +13.9%4th Quarter -0.1% -0.9% N/A +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% -4% N/A +2.7% +2.9% +1.3% +5.1% +4.2% +7.3% +2.9% -0.5% +2.4% +9.4%

CA

NA

DIA

N A

IRP

OR

TS


NEWS ARTICLESAIR CANADA UPDATE

FEBRUARY 23 DEADLINE FOR AIRCANADA CREDITOR CLAIMSAir Canada’s courtappointed monitor, Ernst& Young, announced that Air Canada creditorsmust file any outstanding claims by 23 February2004. The value of claims received so far isCDN$103.4 billion, but the monitor indicatedthat CDN$83.4 billion, dealing with undisclosedlegal matters, will be dismissed. Ernst andYoung reviews the claims and decides whichshould be allowed, disallowed or revised.Creditors with legitimate claims will be paid withshares in the restructured Air Canada.

TRINITY’S PENSION PLAN PROPOSALREJECTED BY UNIONSTrinity Time Investments’ (Air Canada’s equityinvestor) proposal to convert to a definedcontribution pension plan has been rejected bythe carrier’s unions. Currently, Air Canada hasa defined benefit plan, where employees areguaranteed a specific pension level. Under adefined contribution plan, the pension amount isbased on accumulated contributions andinvestment returns. The Trinity proposal wouldnot affect current Air Canada retirees, noremployees with a combined age and service of60 years or more; all other employees wouldmove to a defined contribution program whilekeeping their rights accrued under the currentplan. If the CDN$1.5 billion pension deficit isnot resolved by March 1, Trinity may withdrawits proposed investment in Air Canada.

AIR CANADA TRANSFERS 20 A319S TOZIPAir Canada announcedthat the Airbus A319aircraft will replace the Boeing 737-200 fleetcurrently operated by Zip. Beginning in July,Zip will operate A319 aircraft transferred fromAir Canada’s fleet, in addition to Zip’s currentfleet of 12 B737-200s. By the end of 2004, Zipwill operate 20 A319s, and the fleet of B737-200s will be retired.

AIR CANADA EXTENDS SIMPLIFIEDFARE STRUCTURE TO U.S. FLIGHTSAir Canada has introduced its simplified,Internet-based fare structure to all 80 U.S.destinations in its network, including thoseoperated by Air Canada mainline, Jazz, andUnited Airlines code share flights. Similar to theweb-based fare structure introduced for thedomestic market last May, the new U.S. farestructure consists of six classes - five economyand one executive. The carrier’s online ticketsales have more than tripled since the new farestructure was introduced last year.

AIR CANADA DISPUTES GTAA GATEALLOCATIONAir Canada filed documents with the OntarioSuperior Court stating that the Greater TorontoAirports Authority (GTAA) has rescinded aprevious contract by offering the carrier only six“fixed preferential” gates at the new Terminal 1,instead of 14. Air Canada will have to share theother eight gates with WestJet Airlines. Thecarrier wants the court to overrule the GTAAallocation, stating that access to the Torontogates are critical to its restructuring plan. Thenew terminal is scheduled to open 6 April 2004.


NEWS ARTICLESAIR CANADA CUTS CALL CENTRESTAFFAir Canada plans to lay off 307 workers fromits call centre operations in Toronto, Winnipeg,and Saint John, effective in February and April.Further staff cuts are anticipated before the endof 2004 as automation projects areimplemented. Air Canada currently employsapproximately 1,600 workers at its call centresnation-wide.

AIR CANADA RJ ARBITRATIONUNDERWAYArbitration for the allocation of Air Canada’sregional jet aircraft (RJs) commenced on 17January 2004. The arbitration process wasestablished at the labour negotiations in May2003 to determine overlapping scope issueswith respect to the Air Canada PilotsAssociation (ACPA) and the Air Line PilotsAssociation (ALPA). Arguments are expectedto be heard at the end of February 2004.Satisfactory conclusion of the arbitrationprocess is required as a part of the amendedinvestment agreement with Trinity TimeInvestments Ltd.

OTHER CANADIAN AIRLINES

WESTJET TO LAUNCH TRANSBORDERFLIGHTS WITH SUMMER SCHEDULEWestJet’snewsummerschedule includes the addition of 120 weeklynon-stop flights between cities throughout itsnetwork, and the introduction of scheduledtransborder services. Flights between Canadaand Los Angeles, Fort Lauderdale and Orlandowill be offered beginning October 2004. In thefourth quarter, seasonal services to Phoenixand Palm Springs will be added.

WESTJET POSTS CDN$60.5 MILLIONPROFITIn 2003, WestJet posted net earnings ofCDN$60.5 million, an increase of 16.8% fromthe previous year. Revenue increased by26.4% to CDN$859.6 million, while costsdecreased by 15.6%.

WESTJET SIGNS DEAL WITH SABREWestJet has signed a five-year deal with SabreAirline Solutions to purchase the SabreResource Management suite. The technologywill help the airline manage staffing in its airportlocations across Canada. WestJet’s dealmarks the entry of the software suite into thelow-fare carrier market.

JETSGO ACQUIRES 18 FOKKER 100JETSJetsgo announced thatit will purchase 18Fokker 100s from American Airlines. The firstseven jets will be delivered immediately, andthe carrier plans to have three in service by 24June 2004. The Fokker 100s have a capacityof 105 seats, and joins Jetsgo’s current fleet of14 160-seat MD-83s. These aircraftacquisitions would bring Jetsgo’s fleet to 32aircraft.

AIR TRANSAT AGREES TO MOVE TOMONTREAL-TRUDEAUAir Transat hasreached an agreementwith Aéroports de Montréal (ADM) that will seethe carrier shift its operations to Montréal-Pierre Elliott Trudeau International Airport(Dorval) in November 2004. ADM willconstruct a building to house Air Transat’s newhead office and hangar, which will be leased tothe carrier. Air Transat’s existing facilities atMontréal-Mirabel airport will be purchased byADM.


NEWS ARTICLESGEORGIAN EXPRESS LTD.’S AIROPERATOR CERTIFICATE REINSTATEDTransportCanada hasreinstatedGeorgian Express Ltd.’s Air OperatorCertificate. The carrier’s certificate wassuspended 22 January 2004, following a fatalaccident involving a Cessna 208B Caravan atPelee Island. The special purpose auditconducted by Transport Canada confirmed thatthe carrier met the required operating rules andregulations.

HAWKAIR LAUNCHES VANCOUVERAND PRINCE GEORGE SERVICES FROMVICTORIABased in Terrace,B.C., Hawkair hasintroduced new services from Victoria toVancouver and Prince George six times weekly.The carrier currently serves eight destinations inB.C. and Alberta, including: Dawson Creek,Grande Prairie, Kitimat, Prince George, PrinceRupert, Terrace, Vancouver and Victoria.

US & INTERNATIONALAIRLINES

AMERICA WEST REPORTS US$57.4MILLION PROFITAmerica WestAirlines reporteda profit of US$57.4 million profit in 2003 after arecord fourth quarter, compared to a US$387.9million annual loss in the previous year. Thecarrier reported a profit of US$10.6 million in thefourth quarter, excluding special one-time items.Revenue in the quarter grew 7.7% to US$554.3million, and load factor was a record 75.5%.

SOUTHWEST POSTS US$298 MILLIONPROFITSouthwest Airlinesreported a profit ofUS$298 million in 2003,a 50% increase from US$198 million in theprevious year. Fourth quarter profit was US$66million from revenue of US$1.5 billion. Thecarrier saved US$41 million from its fuelhedging program in the quarter, and stoppedpaying travel agency commissions as ofDecember 15, which is expected to save US$40million annually.

UNITED REPORTS DECLINE IN FOURTHQUARTER LOSSESUnited Airline’s parent company, UAL,reported a fourth quarter operating loss ofUS$135 million in 2003, a US$859 millionimprovement over the previous year. Excludingspecial and reorganization items of US$1.1billion, UAL’s loss for the year was US$1.7billion, a US$1.5 billion improvement over theprevious year. Operating revenue rose 4.2% toUS$3.6 billion, while expenses declined 16% toUS$3.8 billion.

UNITED ASKS COURT TO EXTENDBANKRUPTCY PROTECTIONUnited Airline’s parent UAL Corp. has filed arequest to the Bankruptcy Court to extend thedeadline for the carrier to file a reorganisationplan to 30 June, and wants the exclusivityperiod for receiving acceptance of the planextended to 30 August. The current deadlinefor United to submit a reorganisation plan is 8March. Several restructuring items need to beresolved, including United’s request for aUS$1.6 billion federal loan guarantee, leaserenegotiations for 175 aircraft, reduction ofpension obligations and retiree benefit costs,and litigation over municipal airport bonds.


NEWS ARTICLESUNITED AND AMERICAN REDUCECHICAGO O’HARE FLIGHTSAs part a Federal AviationAuthority (FAA) initiative toreduce flight delays atChicago O’HareInternational Airport, United Airlines andAmerican Airlines will cut their operations atthe airport by 5%, effective 4 March 2004. Theagreement runs for six months, and allowsUnited and American to operate 655 and 505flights respectively, during the peak hoursbetween 1 p.m. and 8 p.m. The carriers canreschedule flights cut from the peak hours.

TED UNVEILS ROUTESTed, United’s low costcarrier, is set to launchon 12 February 2004.By April, Ted will have 106 daily flights offeringservices from Denver to Reno, Las Vegas,Phoenix, New Orleans, Tampa, Orlando,Ontario (California), and Fort Lauderdale. Tedwill also offer services between Las Vegas andLos Angeles, Las Vegas and San Francisco,and between San Francisco and Phoenix.Starting April 7, Ted will also launch servicesfrom Washington Dulles to Fort Lauderdale,Orlando, Tampa, and Las Vegas. The carrierexpects to operate 15 roundtrips per day fromthe airport by mid-May, representing 22% ofUnited’s domestic mainline flights fromWashington Dulles.

COMPETITION HEATS UP IN NEW YORKJetBlue has been granted11 slots to fly from NewYork LaGuardia Airport (LGA), and plans tolaunch service this spring. Currently, JetBlueoffers services from its hub at New York J.F.Kennedy Airport (JFK).Meanwhile, Delta willbe introducing non-stop Denver-New York (JFK) flights twice dailybeginning April 4 th, and is investing overUS$300 million to upgrade its terminals at JFK.The carrier plans to add eight new destinationsfrom JFK by the summer, and add capacity tofour existing destinations.

AIRCRAFTMANUFACTURERS

EMBRAER DELIVERS OVER 100 JETSIN 2003Embraerdelivered 101jets in 2003, just one less than its target of 102.The company forecasts 160 deliveries for 2004,including commercial, corporate and defenceaircraft, and 170 deliveries for 2005.

AIRPORTS

GTAA PROPOSING NEW AIRPORT INPICKERINGThe Greater Toronto AirportsAuthority (GTAA) is finalising aproposal to construct an airport toaccommodate regional aircraft atPickering. The airport will replace airports inButtonville and Oshawa. The proposal will bereleased by June, and GTAA expects the newairport will be constructed by 2010.


NEWS ARTICLES

CARGO

ATA REPORTS 2003 TRAFFICUNCHANGED FROM 2002Total cargo for the month ofDecember was up 4.7% over2002, with 2,019,364 revenueton-miles transported. Total 2003 traffic was23,215,524 RTKs, down only 0.2% from 2002.

IATA REPORTS INCREASE IN 2003WORLD FREIGHT TRAFFICWorld FTKs were up 7.7% forthe month of December with allregions showing positive growth overDecember 2002. Full year FTKs were up 4.9%for 2003. The Middle East showed the mostgrowth, up 15.1% from 2002.

CARGOJET STARTS SPECIALIZEDPASSENGER SERVICE FOR TORONTOBASEBALL TEAMCargojetrecently signed acontract with theToronto BlueJays to provide the Major League Baseballteam with exclusive air transport services. Dueto the demanding nature of the servicerequirements (i.e., no tolerance for missedflights), two B727s are required in order to havea back-up available at all times. The aircraftare being configured with 60 first-class seats.In previous years, Skyservice and Air Canadaprovided this service.

PROFITS RISE FOR OWNER OF EMERYWORLDWIDECNF, owner of Emery Worldwide, reportedthat its fourth-quarter net earnings roseUS$26.8 million ($0.49 per share) including acharge, from US$ 22 million ($0.41 per share) ayear ago. Revenue was US$1.35 billion, up5.5% from 2002.

PUROLATOR UNION VOTES ON NEWDEALPurolator has settlednon-monetary issueswith its labour union, Teamsters Canada, andhas exchanged economic proposals includingpensions, medical benefits, and wages with theunion. Voting on the new pact took place fromJanuary 19-31st, but the results have not beenreleased yet. Teamsters Canada representsapproximately 8,500 members at Purolatorfrom 14 local unions. The four-year contractwith Purolator expired on 31st December 2003.

ATLAS AIR FILES FOR CHAPTER 11Atlas Air Worldwide Holdings, parentcompany of Atlas Air and Polar Air Cargo,filed for Chapter 11 bankruptcy protection on 30January 2004. The company originallyintended to file late last year, but waspostponed in order to secure negotiatedagreements with creditors in hopes of reducingthe time spent in reorganization. The companysecured US$50 million in DIP and exitfinancing. Normal operations will bemaintained during the reorganization phase.

ARROW AIR FILES FOR CHAPTER 11AGAINMiami-based Arrow Air filed for Chapter 11protection on 28 January 2004, citing financialproblems due to a sluggish economy, high fuelprices, and excess capacity. The carrier hademerged from Chapter 11 protection in May2002. Arrow Air has not dismissed any of its750 employees and plans to continue operatingwhile looking for new investors.


NEWS ARTICLESFEDEX, UPS ASK DOT TO REVIEWASTAR RULINGFedEx and UPS have, as expected, asked theDOT to review the decision made byadministrative law judge Brian Kolko on AstarAir Cargo Inc.’s citizenship. The two cargocarriers contend that Astar’s relationship withDHL, owned by Germany’s Deutsche PostWorld Net, disqualifies it as a U.S. citizenaccording to foreign ownership limits.

UPS REPORTS Q4 PROFITSUnited Parcel Service (UPS) reported a rise inits fourth-quarter profits to 70cents per share compared to 59cents per share in Q4 2002.Quarterly net income wasUS$856 million, down from US$1.5 billion in late2002, when UPS had a US$1.02 billion taxsettlement. Revenue was up 8.2% to US$8.93billion.

DHL THREATENS TO ABANDONBRUSSELS HUBDHL said that if Belgium did not allow it toexpand its operations at Zavantem Airport, itwould abandon Brussels as its European hub.The Belgian government is reluctant to allowDHL to expand due to concerns over night-timenoise pollution. DHL wants to increase itsnumber of night flights from 16,000 per year to34,000 by 2012, higher than the airport’s currentlimit of 25,000. The courier is planning to opena €100 million (C$168.7 million) hub in Leipzig,Germany to relieve the burden on its Brusselshub.

REGULATORY/GOVERNMENTU.S. SEEKS LIBERALISED AIR TRAFFICAGREEMENT WITH CANADACanada is being urged to pursue an open skiesagreement with the U.S., which could eventuallyallow Canadian and U.S. carriers to fly domesticroutes in each other’s countries. U.S.Ambassador PaulCellucci called forliberalisation talks a year ago and has renewedhis request following the recent change inCanada’s government. Tony Valeri, the newTransport Minister, expressed interest inexamining the potential for open skies.

AIRPORT GROUPS PUSHING FAA TOALLOW MORE AIRLINE SUBSIDIESAirport groups including Airports CouncilInternational (ACI), and the AmericanAssociation of Airport Executives (AAAE) areasking the Federal Aviation Administration(FAA) to allow all airports to offer airlines directsubsidies to attract new services. Currently,airports operated by municipal organisationscan offer airline’s incentives, but airportsmanaged by independent authorities are onlyallowed to waive fees. The lobby was initiatedfrom a petition by Sarasota Airport, whichclaimed that current regulations place theairport at a competitive disadvantage.


NEWS ARTICLESEUROPEAN COMMISSION FINDSRYANAIR AID ILLEGALThe European Commission has ruled thatfinancial support paid to Ryanair by BrusselsCharleroi Airport was illegal. The E.C. hasordered that Ryanair pay back €4 million(C$6.75 million) it received between 2001 and2003. The E.C. plans to limit the amount ofsupport that airlines can receive from publicairports to 50% of the costs and limit thetimeframe to 5 years. (Please see the columnby Ian Kincaid named “Ryanair vs. the E.U.” inthis IR).

EUROPEAN COMMISSION EXTENDS AIRFRANCE-KLM INQUIRYThe European Commission has extendedPhase 1 of its investigation of the Air France-KLM merger by two weeks from the originaldeadline of 29 January 2004. The E.C. usuallyagrees to extend Phase 1 of mergerinvestigations only when it believes anyproblems related to competition will be easilyresolved, thus avoiding an in-depth Phase 2.Both airlines are submitting remedies to solvecompetition concerns.

OTHER

AVIATION ALBERTAFORMEDAfter two years ofdiscussion between sixorganisations, Aviation Alberta has beenlaunched as the unified group representingaviation and aerospace interests in Alberta. Mr.Don Matthews has been appointed Presidentand CEO of Aviation Alberta, while Mr. GarthAtkinson, President of the Calgary AirportAuthority, will serve as Chairman. AviationAlberta will have offices in Calgary andEdmonton.

NAV CANADA QUARTERLY REVENUESRISERevenues for Q1 ended30 November 2003 were$245 million, compared to $222 million for thesame period the previous year. Air traffic wasonly up 0.5%. Benefiting from the sale of $15million in debt owed to it by Air Canada, NavCanada’s expenses dropped to $172 millionfrom $182 million. Nav Canada was able toreduce its rate stabilisation account deficit by40%.

PEOPLE IN THE NEWS

CONTINENTAL’S CEO RETIRESContinental Airlines has announced that their

Chairman and CEOGordon Bethune willretire earlier thanplanned. Bethune wasscheduled to retire inAugust 2006, but will doso at the end of 2004instead. He will be

replaced by President Larry Kellner.

ACI-NA ELECTS 2004 BOARDThe Airports Council International – North

America (ACI-NA) haselected its 2004 board ofdirectors, naming PatrickGraham Chairman.Graham is the ExecutiveDirector of theSavannah/Hilton HeadInternational Airport.


RYANAIR VS THE E.U.10 February 2004

As we described in December’s edition of the Industry Review,Ryanair is one of the most aggressive low cost carriers (LCCs)in keeping costs as low as possible. One way the Irish-based airline does this is by flying to under-utilised secondary airports whenever they are available (e.g., Skvasta rather than Stockholm, Malmorather than Copenhagen, Charleroi rather than Brussels Zaventem). By doing this, Ryanair canreduce turnaround times by avoiding congested airports and, in some cases, negotiate favourabledeals on landing fees and other costs.

Illegal subsidies. One such deal with Charleroi Airport in Belgium has caughtthe attention of the European Commission, the primary policy making andadministrative body of the E.U. The airport, which is owned by localgovernment, provided Ryanair with discounted landing fees (€1 per passengercompared with the standard rate of €8), discounted ground handling charges,

free offices, assistance with pilot training and staff accommodation, and incentives to set up additionalroutes from the airport. The local government saw the deal as an effective way to provide economicstimulus to a region suffering from 30% unemployment.

However, following a complaint by Brussels Zaventem Airport, the EuropeanCommission ruled on February 3, 2004 that the discounts and subsidies providedby Charleroi Airport constitute illegal state subsidies. As a result, Ryanair mustpay back about €3 million of the €12 million it has received from the airport sinceit struck its deal with Charleroi in 2001. Virgin Express has indicated it may nowsue Ryanair for damages, based on the Commission ruling.

Ryanair strikes back. To say that Ryanair is disappointed by the ruling would bean understatement. Labelling the E.U. the “evil empire”, Ryanair CEO, Michael O’Leary, stated thatthe ruling was a disaster for the low cost carrier industry in Europe. Mr. O’Leary pointed out that thisruling could affect similar deals Ryanair has with 19 state-owned French airports, as well as dealsstruck by easyJet, Lufthansa and FlyBe with a few European airports. Ryanair claims that, as a resultof the ruling, it may be forced to sharply increase fares or reduce service on many of its routes.

The impact on the LCC industry in Europe. The ruling is unlikely to be the disaster that Ryanairmakes out. The European Commission has pointed out that the ruling was against specific details ofthe Charleroi deal, which are not typical of arrangements elsewhere. Some forms of aid areacceptable, such as help for marketing support and introductory discounts for up to five years, but notfor the 15 years agreed at Charleroi. In other words, airlines may receive subsidies towards start-upcosts but the service must eventually be profitable without state aid.

The ruling is only applicable to state-owned airports, and would not apply to privately owned airports.That said, only the UK has proceeded with full-blown privatisation, and even there some of theairports are still partially owned by local authorities (such as Manchester). Some airports in Denmark,Germany, Netherlands, and Austria have also been privatised.

Protesting too much? The general feeling among analysts and airlines in the LCC industry is thatRyanair is making too much of the ruling. Most believe that Ryanair can continue to operate serviceto Charleroi with only a modest increase in fares or reduction in profitability. The airline had to payback only a fraction of the subsidy it received (in any case, Ryanair currently has cash reserves ofover €1 billion). However, Ryanair look set to appeal the decision at the European Court of Justice.

Ian KincaidManager,

Economic Analysis


MARITIME SECURITY UPDATEFebruary 9, 2004

Analogous to the creation of the International Civil AviationOrganization (ICAO), an international conference in Geneva adopted aconvention formally establishing the International Maritime Organization(IMO) in 1948. The purpose of the IMO is to encourage cooperationbetween governments on policies relating to maritime safety/security,efficiency of navigation and prevention/control of marine pollution.

In December 2002, the IMO held a week-long Diplomatic Conference to amend the International Shopand Port Facility Security Code (ISPS). This code includes a series of measures targeted forimplementation in July 2004 to strengthen maritime security, prevent, and suppress acts of terrorismagainst shipping.Implementation of ISPS in Canada is led by Transport Canada and is based on four areas: vessels(over 100 tons), marine facilities (ports and operators), offshore facilities (e.g. oil-drilling platforms),and security clearance (Restricted Area Access).

New Restricted Area Clearances. One of the key implementation items is the creation ofrestricted areas and pass systems. Similar to the “Restricted Area Pass” system in use at CanadianAirports for decades, between 130,000 and 200,000 Canadian maritime workers will undergo the newpass issuance process being introduced at port facilities. These passes will both address terrorismthreats as well as focus on organised crime.

Regulations Harmonised with the U.S. Transport Canada developed ISPS regulations with thekey objective of U.S. harmonisation. This has been achieved with the U.S. Coast Guard advising inDec. 2003 that draft Canadian regulations meet U.S. requirements. Accordingly, Canadian and U.S.governments are expected to pursue a bilateral agreement avoiding the need for Canadian registeredships to also submit security plans to the U.S.

Differences with existing Canada Border Services Agency programs. Maritime operatorshave identified conflicts with the ISPS restricted area clearance program and Canada Border ServicesAgency sufferance warehouse regulations. It is unknown if and when harmonisation of these differingprovisions will be implemented. This may also generate challenges for trans-shipments throughCanada destined for the U.S. These will need to meet security requirements of both nations to obtainexpedited service.

Implications for Canadian Airports. The evolution of maritime security does not directly impactairports, but will have long-term implications for the development of multi-modal security policies. Keyissues to track include:

§ Transport Canada resources: Programs such as a new restricted clearance system will addsignificant volumes of clearances: this may impact the speed of existing airport RAP issuance.

§ Multi-modal integration and interoperability: Policies have developed to date on a mode-by-mode basis. As Transport Canada evolves its proposed “security management system” program,there will inevitably be programs and applications that span across all modes, including airports.

§ Policy compatibility: At the onset, it appears that there is a closer match with U.S. regulationson maritime security, as compared to aviation security. The harmonisation of maritime policies atthe development phase may serve as a future template for aviation security policy development.

Solomon WongDirector,

Security & Planning


CARGO CAPERS10 February 2004

The debate over Cargo Open Skies intensifies. With the recent positive signals sent by the U.S.and Canada about the potential for negotiating Open Skies for cargo, debate is starting to heat up.Industry analysts, user groups, and Air Canada are welcoming the news, while the Canadian all-cargocarriers are mobilizing opposition.

So what are the real issues? There are four main issues for cargo open skies: beyond rights;modified 6 ths; co-terminalisation; and right of establishment. Some of these are red herrings, whileothers mask the real issue.

First, the red herrings. In my view, the issues of beyond rights, modified 6 th freedoms, and Right ofEstablishment are moot.

§ Beyond rights (5th and 7 th freedoms). Beyond rights can dramatically improve the economics ofair cargo routes. By allowing stops on intermediate and beyond points, they spread the burden offilling freighter capacity over a number of points instead of requiring a single point to producesufficient volumes in both directions to justify service. As a result, these rights dramaticallyincrease the likelihood of international all-cargo services through Canadian airports. ClearlyCanadian shippers and airports would benefit from such rights, as we can see from the exampleof Cargolux successfully growing the Calgary market through the use of 5 ths. Well, what aboutCanadian carriers then? This is a question that might be raised, given Canada’s history ofdeveloping air policy only to serve the needs of carriers rather than users of the service. But inthis case, the answer is simple – because there are no Canadian all-cargo carriers offeringinternational service, there is nothing for a protectionist policy to protect. In fact, the domestic all-cargo carriers ignore this issue, tacitly signalling they have no opposition to open beyond rights.The only carrier with a potential concern is Air Canada – and to its credit, it has been supportiveof the reciprocal exchange of open beyond rights. The only other possibility – maintaining arestrictive policy in the hopes that someday a Canadian carrier might emerge – is simplyuntenable. An open exchange of beyond rights would be a win for Canada.

§ Modified 6 th Freedoms, or so-called “home country cabotage” would allow U.S. cargo carriers tomove Canadian domestic shipments, in bond, across their U.S. sort centre hubs. While thisissue may be of interest to analysts, shippers and even the negotiators, under the existinglegislative framework in both countries, this is simply not in the cards. It is not enough tonegotiate this traffic right via the treaty process. Legislation must be changed in both countries.One could argue that it may be relatively easy to change the Canada Transportation Act to allownon-Canadians to provide domestic service. But changing the legislation in the U.S. is an entirelydifferent matter. The anti-cabotage provisions in the infamous Jones Act, for example, wouldhave to be repealed. The U.S. chief air negotiator indicated that this was a remote possibility.So despite the current talk, unless Canada was willing to change its law and grant cabotagewithout reciprocal rights from the U.S., the threat of U.S. integrator carriers moving Canadiandomestic shipments across U.S. hubs is simply not an issue.

• Right of Establishment is simply not a threat. It would allow U.S. carriers to invest in Canadiandomestic air carriers. If the law in Canada were to be changed to allow this, it would notundermine the Canadian domestic air cargo industry. Even with U.S. owners, Canadiandomestic cargo would move in Canada, with Canadian aircraft, exclusively using Canadianlabour and paying landing fees to Canadian airports.

Robert AndriulaitisDirector Transportation

& Logistics Studies


CARGO CAPERS - CONTINUED

The crux of the matter: co-terminalisation (Co-T). Co-T would allow U.S. integrators to carry U.S.traffic between Canadian points. The simplest example would be two UPS flights going to Hamiltonwith one going on to Montréal, delivering the U.S. originating traffic from both Hamilton inboundflights, but not picking up domestic traffic in Hamilton for delivery in Montréal. This could improveoperating efficiencies, provide a higher level of service to beyond the gateway points, and potentiallylead to some Canadian airports being served by heavier (and/or quieter) aircraft than is currently thecase.

Canadian cargo carriers strongly oppose Co-T. They claim it will put them out of business as theycurrently carry US originating cargo on domestic beyond-the-gateway segments.

However, Co-T will NOT allow U.S. carriers to fly domestic cargo within Canada, and thus there willcontinue to be traffic and revenue for the Canadian cargo carriers. What seems likely here is that theCanadian cargo carriers have other agendas, such as seeking to change scope clauses in collectiveagreements between U.S. pilots and UPS and FedEx. The question then becomes one of whetherCanada should use international air policy as a means to redress elements we don’t like in collectivebargaining agreements of private U.S. companies. Before considering this, think of what Canadianreaction would be if the situation was reversed and the U.S. used treaty provisions against privateCanadian firms because it didn’t like our carriers’ contracting out provisions. The situation is a messyone.

The bottom line is that cargo Co-T will not put the Canadian cargo carriers out of business (someonewill have to carry domestic freight), but some may have a reduced level of activity. Airports are likelyto find that they have greater cargo capacity and more landing fee revenues, in aggregate, when Co-Tis implemented. Claims that Canadian airports will lose landing fee revenues are unfounded. Ifanything, the opposite is more likely, with U.S. cargo airports losing landing fees.

Some Final Thoughts. During the negotiations preceding the 1995 agreement, the Canadiancarriers opposed Open Skies, fearing that they could not compete against the giant U.S. carriers, withtheir ability to use their dominant hubs to feed Canadian traffic into their vast domestic systems byvirtue of preclearance in Canada. So what happened? The opposite -- Air Canada became thedominant transborder carrier.

Canada’s international air policy historically put a premium on protecting Canadian air carriers. Sowhat happened? Despite the protection, airlines such as Canadian Airlines and Canada 3000 failedanyway. The restriction on co-terminalisation did not save All Canada Express from bankruptcy.History is full of examples that show that protecting Canadian carriers, at the expense of users ofairline services, does little to ensure the viability of Canadian carriers.

Are the fears of the Canadian all-cargo legitimate? Many are not, but some certainly are.Nevertheless, in a world moving towards more open trade, changes are inevitable. Perhaps the bestapproach would be for Canada to pull its head out of the sand, put the interests of users of airtransport services first, implement the pending changes on a phased basis (as we did in 1995) to givethe Canadian carriers time to adapt, and move on in our development as a trading nation.


OTTAWA SCENE10 February 2004

Minister Valeri to Rethink Aviation PolicyIn an interview with the Financial Post, Transport Minister, MP Tony Valeri(Hamilton Stoney Creek) indicated that he will review Canada's aviation policy. The review would include foreign ownership limits, airport rents, and the aviationsecurity charge. This is a major change from the attitude of his predecessor,David Collenette.

We expect that Minister Valeri will look at air policy in terms of what it can do forthe Canadian economy. When he chaired the Caucus economic developmentcommittee, Valeri approached air policy from an overall economic perspective, not from a carrierprotectionist viewpoint. He is likely to be sympathetic to the needs of shippers, the tourism industry,and other air transport users.

It is unlikely that he will have time prior to the expected federal election (likely in April or May 2004) tomake significant changes, but the review and consultation process between now and the electioncould set the stage and the tone for long overdue policy changes in Canada’s aviation industry.

Public Meeting on Proposed Amendments to the Canadian Computer ReservationSystems (CRS) Regulations (the "CRS Regulations") and other Travel DistributionIssuesOver the past three years, Transport Canada hasbeen carrying out a review of the CRSRegulations that were put in place in 1995. Thereview included meetings with members of thetravel distribution industry, air carriers and othergovernments. On 25 October 2003, the federalgovernment published proposed amendments tothe CRS Regulations in the Canada Gazette PartI.

The amendments were prompted by changes in the marketplace and what was learned in the review.During the 30-day consultation period, which ended on 24 November 2003, stakeholders and thegeneral public had the opportunity to submit formal comments to the Department on the proposedamendments to the CRS Regulations.

In order for Transport Canada to bring its consultations to a conclusion, members of the traveldistribution industry were invited to a public meeting on February 9, 2004. This meeting allowedparticipants to present their views on the proposed CRS Regulations to the Parliamentary Secretaryand some of his colleagues.

Sam BaroneRegional Vice President

Ottawa


THE WASHINGTON REPORT15 February 2004

Airline Passenger Data Disclosure: In preparation of the launchof CAPPS II (Computer-Assisted Passenger Screening System),major U.S. carriers will be creating disclosure policies that willinform passengers of the possibility of sharing personal data withthe federal government as well as protect themselves from liability.The CAPPS II program is designed to compare passengerreservation records (names, addresses, birth dates etc.) againstcommercial databases and government watch lists, to verify identities and to determine criminalrecords. Passengers will be given risk scores with a number and colour ranking their perceived threaton the aircraft. Several questions on how the passenger data will be handled have surfaced. Theseinclude: Will passengers be told information is being shared with the government? Will they have away to correct information they believe is incorrect? Will rules be clear on the purpose for which datacan be shared?

U.S. Congress Passes Pension Funding Bill: The Senate has passed legislation that would grantmajor pension funding relief to airlines and other industries. The bill allows airlines to avoid makingspecial payments that would be required to support their under funded pension plans. The relief willbe for two years, where companies pay only 20% of the amount that would be due in the first year,and 40% in the second year. The bill will also substitute a higher corporate-bond interest for twoyears for the 30-year Treasury bond rate used in calculating pension liabilities.

Congress Approves Spending Bill: The U.S. Congress has passed an $820 billion spending billthat puts aside $88.9 billion for Transportation/Treasury. The FAA will receive $14 billion, of which$3.4 billion will go towards the Airport Improvement Program and $102 million to Essential AirService.

DOT Addresses Future Gridlock: DOT Secretary, Norman Mineta, announced plans for a nextgeneration air transportation system with expanded capacity to relieve congestion and gridlock. TheFAA has already started several airspace modernization plans including seven new air traffic controltowers, five new terminal air traffic control facilities, new advanced radar systems at 12 airports, and aSTARS air traffic control system at 14 airports. New runway construction is slated for seven airportsand four major hubs (Boston, Charlotte, Denver and Minneapolis) will get advanced satellite/radarsystems.

EU Against Armed Marshals on Transatlantic Flights: EU officials have rejected U.S. attempts toput armed sky marshals on high-risk flights stating instead the need to increase security at airports.European countries said they would rather cancel flights than to see guns onboard. Only France andthe U.K. have agreed to the U.S. request.

Charles ChambersSenior Vice President GA2

AND

Regional Vice PresidentInterVISTAS Consulting Inc.

Washington, D.C.


SHAME ON YOU,MINISTER YOUNG!10 February 2004

At the 27 January 2004 Air Currents Conference, former Transport Minister Doug Young sat on apanel which was supposed to deal with the issue of a new open skies agreement with the U.S. Onthe panel was the U.S. chief air negotiator. Ex-minister Young was likely chosen as he was Ministerwhen the 1995 Open Skies treaty (or nearly open skies treaty) was negotiated and signed. MinisterYoung indicated that this was his first speech on the topic since he was minister.

Were transfers of airports and Nav Canada a mistake? Instead of addressing the topic of openskies, he commented instead on the policy to transfer Canada’s airports to local airport authorities.According to the Minister (the minister who transferred most of the NAS airports and Nav Canada),this policy was a mistake. Further, he claimed he had been hoodwinked by communityrepresentatives into believing their locally based not-for-profit authorities would act responsibly.Young cited escalating costs, extortionate airport improvement and air navigation fees, andoverbuilding of airports and the air navigation system as irresponsible decisions by the authorities.He was especially critical of the new Ottawa terminal, and had unkind words for Moncton’s terminal(he is from New Brunswick) and others. (An interesting exception was his comments regarding theVancouver International Airport Authority which he believes got the formula right. Vancouver wastransferred by the previous government.) Ex-Minister Young’s comments were reported in the press.

Needless to say, many of us in the audience were stunned by his diatribe. This was the Minister whohad negotiated open skies, given Canada a major step toward an intelligent international air policy,transferred Nav Canada and many of the airports and established the process which would transferCanada’s ports.

Lest we forget: he ignored the end of the ticket tax. Hisremarks provoked outrage from many conference participants.Three key points were made to counter Young’s remarks. Thefirst concerned what he viewed as the irresponsible Nav Canada and airport improvement fees. Heseems to have forgotten that the transfer of Nav Canada resulted in the elimination of the $50 AirTransportation Tax (ATT) in 1999.1 How easy it is to forget the burden of this former tax whencomplaints are made about airport and air nav fees and charges. The Nav Canada fees whichreplaced the tax are significantly lower on a per passenger basis than the tax. Further, while airpassengers carried the whole financial burden in 1995, today cargo carriers, overflight carriers, andothers are bearing a fair share of the costs of the system they use. This has been a major win forCanada’s balance of payments, as now U.S. and overseas carriers are contributing to the costs of thesystem they use.

From fiscal drain to fiscal windfall. The second point made was that he ignored the impact of theairport/air nav transfers on the federal treasury. In the past, the federal government spent $175million per annum on airports, while today it receives over $260 million in airport rent -- a combined$435 million annual improvement for the taxpayer. If the federal government had simply ceased tosubsidise the major airports and went to zero rent, there would be no airport improvement fees at themajor airports. Further, in the case of Nav Canada, the federal government received a half billiondollars as an up-front payment from Nav Can.

1 The ATT was originally established at $5 in the late 1970s, and had increased 1000% over its life, versus aninflation rate of only 200%.

Michael TrethewayVice President &Chief Economist


SHAME ON YOU,MINISTER YOUNG! - CONTINUED

Correcting overdue investments. At the same time as the federalgovernment is obtaining what is now cumulating into billions in revenue,the airports and Nav Can have made and continue to make much neededinvestments, measured in billions, to renew, replace, upgrade andexpand infrastructure which had been deferred by the Federalgovernment. This is being done at no cost to the taxpayer or landlord.Moncton is a good example. The terminal was literally falling apart. Ithad five separate roofs, with rot in between. There were no restroomspost security and almost no seats in the holdroom and an HVAC systemwhich was on the verge of permanent failure. One of the two runways had been built (by TransportCanada) with improper drainage and would bulge with water pressure during a heavy rain. Today,the community of Moncton has a terminal which is larger, yet cheaper to maintain. It providesessential services, such as washrooms and seats in the holdroom. You can land on the runwayduring a heavy rain.

Engines for local economic development. A third point made was that prior to transfers, manycommunities had air service with important gaps, as the federal government undertook no marketing.The airport authorities invested in marketing to develop air services which the communities needed.Today’s airports are better economic engines for their communities. While there is more to be done,some tremendous successes have been achieved for both large and small airport communities.

In my opinion, the ex-Minister’s remarks were irresponsible. They reflect an armchair quarterbackapproach to a difficult and important issue. This is not excusable from someone who had available allthe facts, such as the end of the Air Transportation Tax and the enormous revenues the federalgovernment is earning from the financial deals his staff negotiated. Shame on you Doug Young!

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. 14 - february 2004

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