cair issue no. 5 - may 2003

© InterVISTAS Consulting Inc.May 2003

INDUSTRYREVIEW


NumberAir Canada

Airbus A340-300 9Airbus A330-300 8Boeing 747-400 6Boeing 767-300 35Boeing 767-200 15Airbus A321 13Airbus A320 50Airbus A319 46Boeing 737-200 25CRJ 25

JazzCRJ 10BAe-146 10Dash 8-300 26Dash 8-100 58

Operating Fleet

AIR CANADA FLEET CHANGES12 May 2003

Fleet: A Key Component to Restructuring Air Canada

Now that Air Canada has received court protection from its creditors, the “to-do list” at the carrier is along one. One of the keys to making Air Canada a competitive and viable airline is a rejuvenation andsimplification of its fleet. In general, Air Canada can reduce fuel and maintenance expenditures byoperating newer and more efficient aircraft, and can reduce training, labour and inventory costs byoperating fewer aircraft types. Recognising this, AC management has identified immediate fleetchanges that will occur.

Immediate Fleet ChangesAs of December 31, 2002, Air Canada operated 232aircraft in its mainline fleet, with an additional 104 jets andturboprops operated by Jazz, for a total of 336 aircraft. Inits CCAA application, Air Canada confirmed that it willimplement what is essentially a three-part plan for its fleet:

1. AC will remove older, less efficient aircraft. AC hasindicated that it will cease operating its entire Boeing737 (25), 747 (6) and BAe-146 (10) fleets. Theseremovals are in addition to the F28 and DC-9 aircrafttypes that AC removed in 2002.

2. As AC will continue to reduce capacity in the comingmonths, many of the parked aircraft will not bereplaced. However, some new aircraft (primarilyregional jets) will be added in the short term. AC hasannounced that it will add 50-seat CRJs to its fleet (probably for both mainline and Jazz), and isexamining 90-seat RJs as well. In addition, it has A319, A320 and A321 aircraft on order andscheduled for delivery in 2003.

3. Renegotiate leases on remaining aircraft. As US Airways and United Airlines have met withsuccess in renegotiating aircraft leases in Chapter 11, AC hopes to negotiate its lease rates downto levels that reflect the current environment.

Potential Future Fleet ChangesBeyond the changes identified above, Air Canada will need to make additional fleet decisions in thecoming years. Before discussing what these changes might include, it is useful to consider what thefuture structure of the airline’s passenger service will be. AC has indicated that its newly-formedholding company, Air Canada Enterprises, will include three passenger airline subsidiaries: AirCanada, ZIP, and AC Jazz.

Air CanadaAir Canada could conceivably become a primarily international carrier, exiting all but a few trunkroutes in the domestic market, to focus on transborder and overseas flights.

John WeatherillSenior Airline Analyst


AIR CANADA FLEET CHANGES - CON’TFollowing the removal of the 737s and 747s, Air Canada will be left with an all-Airbus operating fleet,with the exception of its 767-200/300s and regional jets. It is expected that the carrier will movetowards consolidating its fleet around the A320, A330 and A340 families.

With an average age of 17 years, the 767-200s should be the first to go. Air Canada has alreadyparked 8 such aircraft, and of the 15 remaining, 9 are owned by the carrier, and can be removed fromservice relatively easily. The remaining 6 could be phased out as the operating leases expire or arerenegotiated. A reasonable replacement for the 767-200s, which are used primarily on domesticroutes, is the 166-seat A321.

The 35 767-300s in the AC fleet are used on both domestic and international (Europe & Asia)services. With an average age of 9.5 years, they could remain in the fleet longer than the –200s, butmay eventually be replaced by Airbus family aircraft.

ZIP

Lower-cost ZIP will operate increased services domestically, and has begun the application processfor transborder flights. ZIP plans to increase its fleet from 9 to 20 aircraft by the end of 2003. In theshort term, the additional aircraft will likely be the 737-200s removed from the mainline fleet.However, these planes have an average age of nearly 22 years, and will need to be replaced as ZIPexpands. The 737s could be replaced by A319s, which have seating capacity comparable to the 737,and commonality with the A320/A321. Note, however, that if ZIP becomes more independent of ACand no longer shares pilots, ZIP could adopt its own fleet type, such as next generation 737s.

AC Jazz

AC Jazz will likely continue to operate domestic and transborder regional flights, but to fewer marketsthan today. The remaining four-engine BAe-146s are to be replaced with CRJs. In the medium term,there is reason to believe that Jazz will reduce or even eliminate its turboprop fleet. Several industrygroups have forecast a declining share for turboprops in the regional market, and Bombardier expectsthat just 21% of its deliveries to 2020 will be props.Looking five years down the road, the Dash-8s willbe, on average, nearly 20 years old.

The 50-seat Dash 8-300s may be replaced byCRJ200s, which have similar seat capacity. Thesmaller Dash 8-100s, with just 35 seats, could beeliminated altogether.

SummaryAir Canada’s low-cost competitors achieve cost efficiencies by operating just one aircraft type, and byconstraining themselves to routes which can be served by that aircraft type. On the other hand, thenetwork airline model is built on the connection of passengers from regional markets to internationalmarkets. As a result, it is not practical for Air Canada to reduce its fleet to just one aircraft type, oreven one family of aircraft. However, by simplifying its fleet to the extent possible, Air Canada canachieve part of the cost savings necessary to ensure its long-term survival.


LOWER FUEL PRICES ARE COMING

In recent weeks, the price of crude oil has fallen substantially…

Back in January, crude oil prices were at historically high price levels. The price of a barrel of crudeoil was rising steadily in previous months mainly due to the threat of war in Iraq and the general strikein Venezuela. Today, both factors no longer contribute to high crude oil prices.

The End of War in IraqThe U.S. led war in Iraq began on March 19 with the end of the war declared on May 1, just 40 dayslater. In the weeks prior to the start of the war, crude oil prices reached a high ($39.99 per barrel) inlate February. After the war began, the market uncertainty was lifted resulting in oil prices dropping33% to $26.85 a barrel.

Oil Flows in VenezuelaOnce again, oil flows from Venezuela, the world’s 6th largest oil producer. The general strike thatbegan in December 2002 crippled the country’s oil industry for weeks while depleting world oil stocksin the process. However, with the end of the strike and improving government stability, oil productionis slowly proceeding

…And lower prices in the future

Recent OPEC ActionWith the war in Iraq at an end, it is anticipated that Iraq will soon enter the market with oil exports. Asa result, on April 23, OPEC announced quota cutbacks on oil production from its member countries.

Declining “Futures” PricesThe futures market shows the price of crude oil falling to below $25 per barrel by the middle of nextyear. On May 9, 2003, the futures price of a barrel of crude oil for delivery in June 2004 is $24.99,approximately 10% lower than the current spot price of $27.64 per barrel. The market is indicatinga period of stability, good news for the aviation sector.

Doris Mak

Senior Market Analyst

Crude Oil Futures PricesAs of May 9, 2003

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WestJetWestJet

AIRLINE DATA – CANADATraffic and Load Factors on Canada’s Major Air Carriers – April 2003

Passenger TrafficRevenue Passenger

Kilometres

CapacityAvailable Seat

KilometresLoad Factor

Air Carrier% Changeover 2002

% Changefrom 2001

% Changeover 2002

% Changefrom 2001

% Changeover 2002

% Changefrom 2001

Air Canada1 -22.3% -20.7% -16.7% -15.3% -5.0 pts(to 69.6%)

-4.7 pts

Domestic(Mainline) -22.2% -19.6% -13.4% -7.1% -7.7 pts

(to 68.5%) -10.6 pts

Jazz -9.8% n/a -15.4% n/a +3.6 pts(to 57.7%) n/a

International& Charter -22.3% -21.2% -18.1% -18.6% -3.8 pts

(to 70.1%) -2.3 pts

WestJet +40% +98% +54% +126% -6.5 pts(to 65.6%)

-9.2 pts

Note: n/a – As Jazz was not reported in 2001, a percentage change from 2001 could not be calculated forDomestic Jazz and Domestic Consolidated.

In its first month under bankruptcy protection, Air Canada continued to suffer a decline in load factor.On a year over year basis, its domestic traffic declined by roughly 21%, while domestic capacity wascut only 14%.

WestJet continues to be unable to win increasesin traffic that keep up with its aggressivecapacity expansion. In April, the gap betweenits traffic and capacity growth widened to 14%,resulting in a disturbing drop in load factor to justover 65%.

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

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

10%15%20%25%

May-02


Feb Mar Apr

Int'l RPKInt'l ASK

Air Canada InternationalAir Canada International

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

10%15%20%25%

May-0 2


Feb Mar Apr

Dom RPK

Dom ASK

Jazz data is not includedin this graph

Air Canada Domestic Mainline Air Canada Domestic Mainline

NEW CARRIERS:LOAD FACTORS

Jetsgo: 72.6%Zip: not reported

CanJet: not reported


AIRLINE DATA – U.S.U.S. Airlines Release 1st Quarter 2003 Financial and April 2003 Traffic Figures –

AirlineQ1-03 Net

Income(US$ - Millions)

Q1-02 NetIncome

(US$ - Millions)

LoadFactor

Traffic(RPMs –millions)

Capacity(ASMs –millions)

1$1,043

LOSS

$1,563

LOSS

70.5%

á1.2 pts

9,330

â4.8%

13,229

â6.5%

$11

LOSS

$2

PROFIT

74.8% 3

â0.4 pts

1,227

á19.1%

1,855

á30.4%

2$221

LOSS$166

LOSS

72.4%

â1.1 pts

4,466

â8.4%

6,167

â7.0%

$466LOSS

$354LOSS

70.5%

â0.6 pts

7,423

â11.2%

10,532

â10.4%

$17

PROFIT

$13

PROFIT

84.1%

â0.2 pts

898

á80.8%

1,068

á80.4%

$396LOSS

$171LOSS

71.9%

â4.4 pts

5,042

â13.1%

7,013

á7.8%

$24PROFIT

$21PROFIT

66.6%

á0.3 pts

3,935

á5.5%

5,907

á5.0%

$1,343

LOSS

$510

LOSS

71.4%

â0.6 pts

7,477

â13.4%

10,479

â12.6%

3$1,613

PROFIT

$298

LOSS

74.1%

â0.3 pts

3,078

â13.5%

4,158

â13.2%

Notes: 1. Includes American Airlines and American Eagle2. Does not include Express Jet3. Load factor includes scheduled service only

Source: Carrier financial and traffic reports.

InterVISTAS Consulting Inc. ©May 2003

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

Toronto Vancouver Montreal-Dorval Calgary Edmonton Ottawa Winnipeg Halifax Victoria Kelowna Saskatoon Regina St.

John’s1st Quarter -8.8% -13.6% -1.8% -11.7% -11.5% -16.5% -13.6% -8.4% -2.1% -6.7% -7.5% -10.3%

April -9.2% -13.5% -5.2% -8.1% -13.1% -9.3% -12.3% -6.4% -5.7% -13.4% -12.6% -11.0%

May -9.3% -9.5% -2.3% -4.9% -11.4% -5.7% -4.7% -5.1% -3.8% -3.0% -7.2% -7.3%

June -7.4% -9.8% -4.0% -7.0% -12.3% -6.0% -1.2% -7.4% -8.8% -9.7% -13.2% -16.8%

2nd Quarter -8.6% -10.9% -3.8% -6.7% -12.3% -6.9% -6.0% -6.3% -6.1% -8.7% -11.1% -11.9%

July -7.2% -8.3% -3.6% -9.4% -6.6% -5.1% +4.4% -13.1% -6.3% -9.5% -13.0% -7.0%

August -7.7% -7.9% -2.3% -7.5% -8.8% -2.8% +7.5% -8.8% -1.7% -13.6% -10.5% -8.0%

September +12.6% +22.4% +20.1% +7.6% +23.7% +16.4% +26.1% +13.2% +11.8% +12.6% +10.5% +20.0%

3rd Quarter -2.5% -0.2% +2.9% -4.4% +0.50% +1.2% +11.2% -4.8% +0.2% -5.4% -5.8% -0.8%

October +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 +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% +6.9% +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% +7.5% +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 n/a +3.8% +7.2% +6.3% +3.5% +6.2% +13.0% +4.5% +2.9% +4.0% +6.8% -0.3% -5.8%

February n/a -0.6% +3.7% +5.6% +3.0% +3.9% +12.7% +13.8% +7.5% +2.0% +6.0% +8.8% n/a

March n/a n/a n/a +3.7% n/a +2.2% +5.1% +11.6% +0.2% +5.0% -3.7% -4.2% n/a

2003

1st Quarter n/a n/a n/a +5.2% n/a +4.0% +10.1% n/a +3.3% +3.7% +3.1% +1.3% n/aNote: Toronto traffic levels derived from Statistics Canada data.

CA

NA

DIA

N A

IRP

OR

TS

InterVISTAS Consulting Inc. ©May 2003

MinneapolisNW - 81%

San FranciscoUA - 49%

SeattleAS - 42%

Salt LakeDL - 62%

DenverUA - 65%

ChicagoUA - 43%AA - 30%

DetroitNW - 77%

CincinnatiDL - 92%Memphis

NW - 69%

St. LouisAA - 72%

ClevelandCO - 62%

PittsburghUS - 73%

NewarkCO - 60%

AtlantaDL - 72%

MiamiAA - 50%

PhiladelphiaUS - 61%

WashingtonUA - 44%

CharlotteUS - 82%

San JuanAA - 74%

HoustonCO - 84%

DallasAA - 62%

L.A.UA - 22%

Source: US DOT, 2001, based on share of enplaned passengers

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NEWS ARTICLES

AIR CANADA UPDATEJUDGE LIMITS AIR CANADA’SDISCRETION, SPARESLAYOFFSJustice James Farley of Ontario’s SuperiorCourt of Justice, who is overseeing therestructuring of Air Canada, has limited AC’sability to bypass its collective agreements.Justice Farley has also ordered AC to suspendthe layoff of 200 Vancouver and Edmonton-based flight attendants. As well, Farleyapproved a $1.05 billion debtor-in-possessionfinancing from GE Capital Inc and he has alsoextended AC’s protection against its creditors toJune 30.

JUDGE APPOINTS MEDIATORJustice James Farley has appointed a judge toact as a mediator between Air Canada and itsunions. Air Canada and its unions will have 10days to resolve their differences.

JUDGE OPENS DOOR TO OTHERAEROPLAN OFFERSJustice James Farley has decided to put a holdon a deal between Air Canada and CIBC andopen the process to other bidders until May 10,after a last-minute bid for the unit was put forthby MBNA Corp. The ruling was based on arecommendation by Air Canada’s monitor, Ernst& Young, to open up CIBC’s exclusive Aeroplanagreement for 10 days of bids. Following thedecision, a total of 5 bids were received.

AIR CANADA TO CUT $770 MILLION INLABOUR COSTSAir Canada plans to cut an extra C$120 millionin labour costs per year if it intends to succeedin its restructuring efforts. The carrier hadoriginally planned to save C$650 million butnow is increasing the figure to C$770 million.The carrier has requested for a 60-day pay cutof 10% from its unions, a cut that would apply toall employee groups including executivemanagement, with the exception of employeesearning less than $25,000 a year.

AIR CANADA REPORTS Q1 OPERATINGLOSSAir Canada reported a preliminary unauditedoperating loss for the first quarter of $354million compared to a loss of $160 million forthe same period in 2002. The carrier alsoannounced measures to reduce operatingcosts. These measures include:• reduction in capacity by 17% year over

year for June, July, and potentially August.Asian and transborder routes are mostaffected;

• temporary suspension until Labour Day ofservice between Toronto-Kansas City,Toronto-New Orleans, and Toronto-St.Louis;

• suspension of service until the summerschedule of 2004 on Calgary-Chicago,Montréal-Atlanta, Montréal-San Francisco,Toronto-San Diego, Toronto-Tokyo/Narita,Vancouver-Washington/Dulles, andVancouver-Nagoya;

• suspension of Dayton and Grand Rapidsservice; and the grounding of 40 aircraft.

TANGO TO BE DOWNSIZEDAir Canada will cut capacity on its Tango flightsby more than 40% in July and August. Startingin May, Tango’s capacity will decrease by31.5%. After that, Tango’s capacity drops21.8% in June, 41.6% in July and 41.1% inAugust. Air Canada stated that its discountcapacity is being shifted to Zip Air Inc, which isplanning to grow to 20 aircraft by the end of theyear.

NAV CANADA FORCES AIR CANADA TOPAY UPOn April 22, Nav Canada filed a judicial order toforce Air Canada to pay for services. AirCanada had not paid for navigation servicessince it received temporary bankruptcyprotection on April 1. On May 5, Air Canadareached a settlement with Nav Canada,although neither party released any detailsconcerning the agreement.


NEWS ARTICLESAIR CANADA LAUNCHES SEAT SALE,UP TO 40% DISCOUNTAir Canada and Air Canada Jazz announcedfare reductions of up to 40% for spring/summertravel to over 150 destinations worldwide. Thesale begins on May 7 through May 16.

OTHER CANADIAN AIRLINESWESTJET Q1PROFITS FALL 89%First quarter 2003 netearnings for WestJet Airlines dropped 89%, toC$778,000. Operating revenues increased26% to C$172 million. Several factorscontributed to the decline in profits:• fuel price increases;• price-cutting among Canadian carriers

forcing WJ to sell 45% of its seats atdeeply discounted prices; and

• the war in Iraq.

WESTJET OFFERS SERVICE TOMONTRÉALOn April 24, WestJet commenced its new dailynon-stop Montréal-Calgary service. On July 21,the carrier will enhance its Montréal schedule toinclude new non-stop Montréal-Hamilton serviceas well as a non-stop Montréal-Vancouverservice.

WESTJET DROPS SAULT STE. MARIE &SUDBURY SERVICEEffective September 9th and 10th WestJet willdrop service from Sault Ste. Marie and Sudbury.The decision to withdraw was a result of theinability to sustain year-round ridership.

CANJET INTRODUCES FREQUENTFLYER PROGRAMOn May 1, CanJet Airlines unveiled its“SmartRewards” customer loyalty program.This marks the first Canadian discount carrier tocreate such a program. Customers will earn1,000 reward points for each one-way trip, andwhen they reach 6,000 points customers canredeem them for a free one-way flight. Thecarrier plans to bring in partners such as hotels,restaurants and car rental firms.

CANJET POSTPONES FREDERICTONSERVICEDue to current marketconditions, on May 7,CanJet Airlines decided to postpone itsscheduled Fredericton-Toronto service that wasslated to begin on June 2.

TRANSAT CUTS CAPACITY BY 15%Transat AT Inc. will lay off 500 employees, or18% of its workforce. The company’s charterairline, Air Transat, will lose 400 employeeswhile Air Transat Holidays and Nolitour/World ofVacations will lose 100 employees. In addition,the airline plans to cut capacity by 15% thissummer.

PACIFIC COASTAL FLYING TOCRANBROOKBeginning early July, Pacific Coastal Airlines willoffer daily Vancouver-Cranbrook service.

U.S. & INTERNATIONALAIRLINESU.S. WEEKLY TRAFFIC STEADYINGFor the week ending May 4, 2003, U.S. carriertraffic began to show an upswing. Domestictraffic has recovered and seems solid. Thedecline in transpacific traffic seems to havehalted but is not yet entering a recovery mode.

NORTHWEST WORKERS TO EXPECTPAY CUTSIn efforts to save US$950million a year in labourcosts, Northwest Airlines plans to cut wagesand benefits for U.S.-based employees by 5-15%. These reductions will be implemented onJuly 1 and will remain in effect for 6.5 years.

HORIZON AIR OFFERS KAMLOOPS-SEATTLE SERVICEBeginning December 15, Horizon Air will offertwice daily service from Kamloops to Seattle.


NEWS ARTICLESCARTY STEPS DOWNAfter more than 20 years at American AirlinesCorp., chairman and CEO Don Carty hasresigned. Gerard Aprey will succeed Carty asCEO and Edward Brennan will be namedexecutive chairman.

AMERICAN ANNOUNCES PAY AND JOBCUTSAmerican Airlines willeliminate jobs and cutsalaries as it plans to save US$4 billion a yearin operating cost. Beginning May 1, alldomestic employees will take pay cuts andclose to 7,000 employees could lose their jobs.The cost savings have allowed AA to avoid filingfor bankruptcy.

UNITED RATIFIES NEW AGREEMENTSWITH IAMOn April 29, the International Association ofMachinist and Aerospace Workers, whichrepresent United’s maintenance, ramp andsecurity employees, ratified a new six-yearcontract. The agreement will include 13% paycuts and will save the company US$794 milliona year in labour costs.

UNITED PLANS TO SHUT DOWNMAINTENANCE CENTERSUnited Airlines plans to close its Indianpolisand Oakland maintenance centers on May 9and May 31 respectively. The closures willaffect close to 1,400 employees.

LUFTHANSA PARKS ADDITIONALAIRCRAFTDue to a 20% drop in passenger revenue duringApril, Lufthansa announced that it will parkanother 15 aircraft, brining the total to 70 for thecarrier. The carrier will also reduce work hoursfor its ground staff and reduce its weeklyGermany-Hong Kong flights from 13 to 3.

CHINA SOUTHERN APRIL TRAFFICDOWN 37%China Southern Airlines reported a drop of37% in traffic for the month of April due to theSARS outbreak. Passenger load factor for themonth fell 12 percentage points.

CARGOU.S. DOMESTIC CARGO DECREASESU.S. Air Transport Association figures forMarch show a 0.4% decrease in revenue tonmiles for domestic cargo and a 5.5% increase ininternational cargo. Total freight volume for themonth increased 2.5% from the previous year.

CARGOJET ENTERS MARKETINGALLIANCESOn May 12, Cargojet entered a marketing andoperational alliance with Air France Cargo.Cargojet will provide sales, marketing andoperational support to Air France Cargo inWestern and Atlantic Canada. Air FranceCargo will offer cargo sales, marketing andinterline support. Effective May 15, Cargojetentered a similar marketing and operationalmarketing alliance with BA World Cargo.

DHL UPGRADES CALGARY SERVICEOn May 12, DHL Canada president, Eric deMatt, made an announcement regarding theselection of Calgary as its western Canadianhub airport. DHL will distribute internationalfreight to the Yukon, Northwest Territories,Alberta and Saskatchewan via Calgary. Servicewill be upgraded from a Farichild Metro to a727.

UPS 1ST Q PROFITS UP 8.5%For the quarter ending March31, UPS reported an increase of8.5% in net income to US$563million. Revenue totaled $8billion, up 5.8% from the same quarter in 2002.Consolidated operating profit fell 0.2% toUS$945 million.

CARGOLUX 2002 FINANCIAL RESULTSSTRONGCargolux reported a net profit of US$49.3million for 2002, a 220% increase from the prioryear. Operating profit increased by 150%.During the year, the carrier flew close to 4.2million tonne-kilometres, a 10.3% increase fromthe previous year.


NEWS ARTICLESLUFTHANSA CARGO FURTHER CUTSSURCHARGEEffective May 6, Lufthansa Cargo will reduceits fuel surcharge by a further 0.05 eurosbringing the surcharge down to 0.15 euros/kg.The cuts are in line with the continuing declinein crude oil and kerosene prices.

ACE FILES FOR BANKRUPTCYPROTECTIONAllCanada Express (ACE) has filed forbankruptcy protection. Recently, ACE lost itscontract for domestic lift for its major client,UPS, to Cargojet. With this loss, and the loss ofsome other smaller contracts, a reorganizationbecame necessary. ACE continues to operateservices as it restructures.

AIRPORTSYVR WINS SUPREME COURT APPEALOn May 8, the Supreme Court of Canadarejected an appeal from three Richmondfamilies over the airplane noise they had toendure since the opening of the VancouverInternational Airport’s north runway in 1996.

BC AIRPORTS TO SPLIT $6 MILLION INGRANTSDawson Creek, Fort Nelson, Fort St. John,Nanaimo, Quesnel, Smithers and Terraceairports will be splitting C$6 million in federalgrants under the Airports Capital AssistanceProgram. The largest amounts will go to FortNelson ($2.6 million) and Dawson Creek ($1.9million) for repavement of runways/taxiways andother improvements.

YVR EXPERIENCES CARGO GROWTH IN2002Vancouver International Airport (YVR),second behind Los Angeles International, wasone of the only two major west coast airports toexperience international cargo growth in 2002.YVR year-end overall cargo increased 2.6%over 2001. Growth from passenger bellyholdand international all-freighter segmentsincreased 4.5%, while integrator volumedecreased 3.5% from last year.

HAMILTON POISED FOR 2003John C. Munro Hamilton International airporthandled 92,000 tonnes of air freight in 2002.For 2003, it plans to attract internationalfreighter operations. The airport has recentlyinvested C$5.3 million in an extra 33,000m 2

apron, and the addition of a new multi-tenantcargo facility. It also offers customized servicefor air cargo carriers.

WAA RELEASES STRONG 1ST

QUARTER 2003 RESULTSFor the first quarter of 2003, Winnipeg AirportsAuthority Inc. reported revenues of $11.5million, an 18% increase from the previous year.The excess of revenues over expenses totaled$3.3 million, up 22% over the previous year.

GTAA COMPLETES ISSUE OF NOTESThe Greater Toronto Airports Authority(GTAA) has completed an issue of $375 millionprincipal amount of 5-year Medium Term Notes.The proceeds of the issue will go towards thefunding of the Airport Development Program.

AIRCRAFT MANUFACTUERSBOMBARDIER, EMBRAER SPLIT USAIRWAYS ORDERUS Airways has ordered 170 regional jetsworth US$4.3 billion from both Bombardier andEmbraer. The agreement with Bombardier isfor 60 CRJ200s and 25 CRJ700s. The firstCRJ200s will be delivered in October to USAirways subsidiary PSA Airlines. Theremainder will be delivered by April 2005. Theother 85 firm orders are for the 70-seat Embraer170 with delivery slated for November.

GOVERNMENT ANDREGULARTORYCHINA OFFERS AID TO CARRIERSThe Ministry of Finance announced it will makediscounted loans available to Chinese airlinesand travel agencies to help them weather theimpact of the SARS outbreak. Loans will be for6 months or one-year terms at rates slightlyabove 5%.


FUEL PRICES

May 2, 2003

SPOT OIL PRICES DROPPINGFUTURES PRICES STILL LOW

Crude Oil Prices:

Spot – US$25.73(down 9% from April)

Future• 6 month - $25.75

(November 2003 delivery)• 12 month – $24.61

(May 2004 delivery)• 2 year - $24.07

(April 2005 delivery)• 5 year - $24.25

(April 2008 delivery)

NEWS ARTICLESPEOPLE IN THE NEWSSITA APPOINTS NEW PRESIDENTPeter Buecking will be moving from Vancouverto Geneva to take over as President of SITA.Currently, Peter has been managing Director ofthe oneWorld Alliance, following 17 years withCathay Pacific.

MIRABEL APPOINTS VP CARGO &INDUSTRIAL DEVELOPMENTMontréal-Mirabel International has hired JeanTesdale as vice president cargo and industrialdevelopment.

OTHER2001 CHARTER STATISTICS RELEASEDSeventeen months after the end of the year,Statistics Canada has finally released its 2001Charter statistics publication.

SAULT STE. MARIE MOVES FORWARDON AIR CARGO STUDYSault Ste. Marie has received approval to moveforward on an air cargo study, which compriseof two phases. The first focuses on determiningif the city can create a niche in the air cargomarket with either a call centre component or alogistic integrator component. The second willbuild on the successes of the first phase. Itincludes work on infrastructure design and costestimates, determination of warehouse needs,air cargo marketing, and the seeking of funds towork with air carriers.

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

Dec-02 Jan-03 Feb Mar Apr May-03

US$

per

Bar

rel

Monthly Spot PricesMonthly Spot Prices


Source: Air Transport Association

SARSTHE GLOBAL AIR TRAVEL CRISIS CONTINUES

During the past month, the situation has not improved much for the global airline and tourismindustries due to SARS (Severe Acute Respiratory Syndrome). In particular, the disease hascontinued to severely impact Asia’s tourism and travel industries. However, the situation in HongKong, one of cities hardest hit by the disease, has seen modest improvement during the past fourweeks. But, China’s capital, Beijing, now has the highest number of reported SARS cases in theworld, with the number of infections increasing daily. The situation in Taiwan has also worsenedsubstantially in recent days. In an attempt to limit the spread of the disease, Taiwan has issued a banon visitors from all countries to which the World Health Organization (WHO) has issued a traveladvisory.

In late April, the WHO included Toronto in its travel advisory, labeling the city as a SARS hotspot, theonly one outside of Asia. On May 14, the WHO officially removed Toronto from its travel advisory list.In the past 20 days, Toronto has not reported any further spread of SARS. To date, there are over7,000 SARS cases worldwide with the majority in China (67%) and Hong Kong (23%).

Airport ImpactAirports in the Asia-Pacific region have suffered greatly since the outbreak of the disease. In April,42% of Hong Kong’s scheduled flights were cancelled resulting in a 60% decline in passenger traffic.Similarly, passenger traffic at Beijing Airport has dropped 50%.

Airline ImpactWeekly traffic statistics published by theAir Transport Association (ATA) reportsthat traffic to Asia-Pacific carried by U.S.carriers hit a low, down 40% during theweek of April 20th compared to a yearago. System-wide capacity for ATAmember airlines are 12% below lastyear's levels. In the last two weeks,Asia-Pacific traffic has increased slightly,although traffic is still down in the -40%range. To put this in perspective, notethat domestic traffic has recovered and isnow in positive territory.

Air Canada’s overall traffic for the month of April was down 22.3%. The airline’s Asia-Pacific trafficwas down 49%.

Cathay Pacific has cut back its normal weekly scheduled flight frequencies by 45%. In an effort tostimulate air travel and the Hong Kong economy, Cathay Pacific and other firms in the tourismindustry have launched a “We Love Hong Kong” campaign.

Qantas Airlines reports a decline in load factor and yields due to SARS. The airline’s bookings toHong Kong and Japan are down 64% and 30%, respectively. Qantas also reports weak inboundbookings from continental Europe to Australia. The airline will continue its cost cutting initiatives byfreezing capital and discretionary spending.

Doris Mak

Senior Market Analyst

Lifting of WHO Travel Advisory

The WHO travel advisory remainsin effect for most countries (China,Hong Kong, Singapore andTaiwan), with the exception ofVietnam and Canada, whose traveladvisories have been lifted.


Ian KincaidSenior Economist

ECONOMIC OUTLOOK9 May 2003

The Rise of theLoonie: Sustainable?

Since our last column on theCanadian dollar in March the looniehas continued its upward climbagainst the U.S dollar. At the timeof writing the Canadian dollarstands at close to 72 U.S. cents, alevel not seen since late 1997 andan increase of over 15% from itslow of 62 U.S. cents in January2002.2

Much of this rise can be attributed toa general weakness in the U.S.dollar. As can be seen in the graphto the left, a number of majorcurrencies have appreciated againstthe U.S. dollar since the start of theyear including the Australian Dollarand the Euro. However, othercurrencies such as the British Poundand the Yen have remained flat. TheCanadian dollar’s performance isamong the strongest of the majorcurrencies.

There has been considerablespeculation as to whether theCanadian dollar will continue itsrally. It has been argued that someof the factors at play are temporaryand that once the U.S. economyeventually gets back on its feet,interest rates will converge and theU.S. dollar will rebound.

Clues can be found in the futuresmarket for the Canadian dollar.This gives an indication of theexpectations for the value of theCanadian dollar in the future. Ascan be seen in the graph to the right, it appears that there is a good chance the Canadian dollar willnot appreciate much further, though it will hold onto most of its recent gains. 2 Source: Prof. Werner Antweiler, University of British Columbia

95

100

105

110

115

01-Jan-03 01-Feb-03 01-Mar-03 01-Apr-03 01-May-03

Australian Dollar (AUD)Canadian Dollar (CAD)Euro (EUR)Japanese Yen (YEN)UK Pound (UKP)

U.S. Dollar vs Foreign CurrenciesIndex: January 2002 =100

UKP

YEN

EUR

CAD

AUD

Strong growth

Stable

0.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

May

-03

Jun-

03

Jul-0

3

Aug

-03

Sep

-03

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-03

Nov

-03

Dec

-03

Jan-

04

Feb-

04

Mar

-04

Apr

-04

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-04

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

Spot Rate on 9th May:71.8 U.S. Cents

Futures rate, 12 months forward:70.2 U.S. Cents

Source: BMO Economic Research, www.bmo.com/economic

0.60

0.62

0.64

0.66

0.68

0.70

0.72

0.74

Jan-

01

Feb

-01

Mar

-01

Apr

-01

May

-01

Jun-

01

Jul-0

1

Aug

-01

Sep

-01

Oct

-01

Nov

-01

Dec

-01

Jan-

02

Feb

-02

Mar

-02

Apr

-02

May

-02

Jun-

02

Jul-0

2

Aug

-02

Sep

-02

Oct

-02

Nov

-02

Dec

-02

Jan-

03

Feb

-03

Mar

-03

Apr

-03

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-03

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


Roland DorsayRegional Vice President

Ottawa

OTTAWA SCENETHE CANADA AIRPORTS ACT12 May 2003.

The House of Commons continues to make slow headway through several pieces of aviation-relatedlegislation.

Canada Airports Act (Bill C-27): Second reading debate continues this week. There appears to begeneral support from MP’s for the broad principles regarding, governance, transparency, andimproved accountability. However, some MP’s have objected to the extensive new reporting andcompliance requirements as tantamount to a re-regulation of airports. Others are critical of the lack ofsufficient airline representation on airports’ boards and the lack of sufficient controls over AIF’s. Yetothers criticize Transport Canada for not addressing airport rents in the new Act.

The Bill will eventually receive second reading and be referred to the Transport Committee for clauseby clause consideration. However there is no longer enough time on the legislative calendar for thisBill to pass before the summer parliamentary recess. Passage in the fall session is uncertain at best.The House will recess in June and is not expected to return before October. That leaves only a fewweeks before the Liberal leadership convention in November.

The Canada Transportation Amendment Act (Bill C-26): is also slowly making its way throughParliament. The Bill is at Committee stage and receiving submissions from interested stakeholders.ATAC focused its criticism in two areas. ATAC asked the Committee to drop the Bill’s so-called“agreements” section which gives the Government new powers to impose commercial agreements onairlines with respect to such matters as interlining, prorates, and loyalty programs. ATAC also askedthe Committee to withdraw the “advertising” provisions as technically impractical and in any event notthe proper jurisdiction for Transport Canada.

Transport Committee members want to travel across Canada to give other stakeholders a goodopportunity to make their views known. It is likely that the Committee will want to recommendnumerous changes to this Bill but there is little indication as yet that Minister Collenette will want toaccommodate any recommended amendments.

Foreign Ownership and Control: Also of interest is the Industry Committee’s much anticipatedreport on foreign ownership of Canadian telecommunications interests. The Committee recommendeddismantling the foreign ownership limits on telephone and cable firms for the sake of expandingcompetition. Whether this translates into similar views on the part of the Transport Committee withrespect to the aviation industry remains to be seen but it is at least indicative of a growing recognitionthat few sectors of the Canadian economy benefit from protective controls over foreign ownership.

ATSC: On 18 February 2003, the Minister of Finance put forth a set of budget amendments, includinga revision of the ATSC. Bill C-28 implements certain provisions of the budget, including reducing theATSC (Part 6 of C-28). While the bill has not yet passed, its provisions regarding the ATSC areintended to be retroactive to 1 March 2003, and in practice airlines have been instructed to collect thenew fee ($6.55 plus GST or HST), even while awaiting passage. The ATSC changes reduce theATSC on domestic travel to $7 one way (including GST, higher with HST ), but provides no reductionon transborder or international travel.


Solomon WongDirector

Security & Planning

EXPLOSIVE DETECTION SYSTEMS (PART 2):NEW TECHNOLOGICAL DIRECTIONS10 May 2003

Hold baggage screening at North Americanairports has to-date been limited to a select fewtechnological solutions. As outlined in thiscolumn last month, certified computedtomography (CT) x-ray technologies haveproven to be relatively slow and expensive, andhave produced high false alarm rates.Furthermore, the issues with CT scanners havebecome a major concern for Canadian airportsdue to re-screening requirements for post-cleared passengers connecting in the US.

One promising technology is that of quadrupoleresonance (QR) - originally developed forlandmine detection during the Vietnam War. Itsapplication in an airport environment dates tothe late 1990's through the work of anAustralian company, QR Sciences. Testing ofits automated screening units has beenconducted at airports around the world,including Ottawa.

Radio waves in quadrupole resonancecontribute to lower false alarm rates.Quadrupole resonance uses low-intensity radiowaves to determine the presence of specificchemicals, such as explosive substances. Asopposed to the results obtained through use ofx-rays on CT scanners, QR’s wave structuredramatically reduces false alarms rates.Current equipment tests indicate that QR has afalse alarm rate below 3%.

Lower implementation costs forquadrupole resonance.Currently deployed CT machines cost in excessof $1 million. In comparison, the cost of QRmachines are reported to be 50-60% lower dueto their different technology components andsmaller machine footprint. InVision and L-3, themanufacturers of the majority of the CTmachines certified in North America, haveresponded with planned upgrades to theirequipment to include QR. Costingapproximately CAD$200-300,000 per machine,this upgrade would allow already deployed

machinery to take advantage of QRtechnologies in combination with CT scanning.

Implications of quadrupole resonancefor airportsThe advantages of QR technology deploymentreside in greater baggage throughput in theprocessing systems. If integrated into theexisting models of hold baggage screening,fewer explosive trace detection machines wouldbe needed as a result. The latter machines arecurrently used to address the high rate of falsealarms for bags through CT scanners.

The rate of adoption by security agencies to usethis technology may however prove to be achallenge. Time lags relating to the certificationof the machinery and training may result indeployment not occurring until after 2005.However, with QR upgrade kits anticipated tobe rolled out in late 2003/early 2004, there maybe considerable pressures to have rapidadoption across all airports in North America..

Above: Computed Tomography Units Certified by theUS FAA (top to bottom: InVision CTX 9000, CTX5000 and L3 3DX 6000)


WESTJET:ARE LOWER COSTS IN YOUR FUTURE?10 May 2003

A large drop in profits:, WestJet reported an 89% drop in first quarter profits to just under $800million. Revenues increased by 26%, but this was insufficient to maintain its high profit margins on acapacity increase of just over 50%. We should keep this in perspective, of course. WestJet is at leastreporting some profits, while arch rival Air Canada entered its second month under court protectedreorganisation.

Nevertheless, WestJet is unlikely to tolerate what it considers to be an inadequate profit margin.There are a number of actions it could take, including reducing the rate of deployment of new aircraft,putting pressure on Ottawa to force Air Canada to charge compensatory prices, and pressuringOttawa to reduce the Air Traveller Security Charge (ATSC).

However, cost reductions are also a likely outcome. Recently, I compared WestJet to Ryanair,Europe’s low cost leader. It is interesting to see how each has progressed during the past few years.The first graph shows Ryanair’s break-even andactual load factors. Notice the constant downwardtrend in break-even load factor. Most of this is due toconstant attention to cost reduction, rather than toincreasing yields (the other way to lower break-evenload factor). Ryanair has opened up a 20% gapbetween actual and break-even load factors. Thisallows it to weather the combined effects ofrecession, fuel prices, terrorism, etc.

Now consider WestJet. Relative to Air Canada and the other network carriers, it has a very lowbreak-even load factor. However, WJ has not been able to achieve the constant downward trend inbreak-even load factor that Ryanair has. One reason for this is that WestJet has faced reduced yields

as a result of the dramatic impact of the ATSC andreduced fares in the market as Air Canada fought toretain market share. (WestJet alleges that AC’sactions are predatory and the source of its financialdemise.)

But while WestJet is a very cost consciousorganisation, it has not had the relentless devotionto cost cutting that Ryanair has. WestJet payscommissions to travel agents; Ryanair does not.WestJet offers free soft drinks; Ryanair charges

even for a glass of water. WestJet allows two carry-ons and two checked bags. Ryanair weightseverything and charges for any excess weight of carry-ons and for any bags in excess of one lightovernight bag. WestJet pays landing fees, while Ryanair has been successful in getting someairports to pay it to fly there. Airports should be forewarned: WestJet will be aggressively seekingreductions in airport costs.

RyanairRyanair

40

45

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1995 1996 1997 1998 1999 2000 2001

BE-LFLF

This wedge allows carrier to surviveload factor drop of 20 percentage points

WestJetWestJet

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1996 1997 1998 1999 2000 2001 2002

B-LF

LF

Does not have decline in BELF found at RyanairDoes not have decline in BELF found at Ryanair

Michael TrethewayVice President & Chief Economist

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 andmay not materialize.

Prepared by InterVISTAS Consulting Inc.

cair issue no. 5 - may 2003

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