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INTERVISTAS ’CANADIAN AVIATIONINDUSTRY REVIEW

In this issue…

Features Columns: Regular Reports:• Economic Outlook (p.1)• Oil Surges Past $70/Barrel (p.3)• Selected Publicly Available Cargo

Trends (p.7)

• Airline Data-Canada (p.4)• Airport Data (p.5)• Airline Data-U.S. (p.6)• Industry News (p.8)• Cargo Capers (p.13)• The Ottawa Report (p.15)• The Washington Report (p. 17)• InterVISTAS News (p.18)

InterVISTAS’ Canadian Aviation Intelligence ReportJuly 2006 Copyright ©2005 InterVISTAS Consulting Inc., all rights reserved.Page 1

Josh Drury

Senior Analyst

U.S. New Home Average Sales Price

$180,000

$200,000

$220,000

$240,000

$260,000

$280,000

$300,000

$320,000

Jan-01

Jan-02

Jan-03

Jan-04

Jan-05

Jan-06

ECONOMIC OUTLOOKJuly 2006

The U.S. – Heading for a Recession?In recent months, there has been increasing speculation that the U.S. economy is heading for aslowdown, and possibly a recession, in the short to medium term. While growth in the first quarter of2006 was a strong 5.6% on an annualised basis, most predictions see the economy slowing andgrowth declining below recentaverages by late 2006 or early 2007.These expectations are predicatedon a number of interrelated factors:

The Federal Reserve (‘TheFed’) has steadily been raisinginterest rates and it may do so afew more times in the nearfuture, due to concerns withinflation. These rate increasesincrease the cost of borrowingand cool demand.

The housing market isbeginning to decline. Homeprices increased rapidly in mostmarkets over the past few years,but appear to be levelling off.Rising interest rates and higherhome prices have made housingless affordable and the numberof unsold houses on the market has increased. Housing starts are expected to decline over thenext few years.

Source: US Census Bureau

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Q1

2002

Q1

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Q1

2004

Q1

2005

Q1

2006

Q1

2007

Source: Bureau of Economic Analysis for Historical Data / TDEconomics for Forecast Data

Real U.S. GDP (Annualised Quarterly %)

HistoricalData

ForecastData


ECONOMIC OUTLOOK – CON’T Consumer spending is expected to soften. Recent consumer spending has benefited from both

historically low interest rates and the wealth effects of rising home prices, as homeowners havecashed out much of their increased equity for home improvements and discretionary purchases.If interest rates increase and housing prices stagnate, consumer spending will fall back.

Soft or Hard Landing?While the consensus is that the U.S. economy will slow, there is some disagreement in whether thismanifests itself in a period of below average but positive growth, or in a mild recession. The courseof the economy will depend on a number of risk factors. First, there is the question of whether theincrease in housing prices constitutes a ‘bubble’ that will burst and result in an abrupt downwardmarket correction. The second risk is that oil and commodity prices will continue to rise, puttinginflationary pressure on the economy as a whole and possibly leading to further tightening ofmonetary policy. Most projections are cautiously optimistic that these risks will be avoided.Commodity prices are expected to ease, and housing prices are expected to flatten rather thandecline sharply, though this may be experienced locally in markets with the most pronouncedincreases.

Implications for CanadaWhether the outcome in the U.S. is a slowdown or a recession, the decline in growth in the U.S. willhave a dampening effect on the Canadian economy. Canada is expected to fare better than the U.S.in the next few years as the above factors do not exist or are less pronounced in the Canadianeconomy. Nevertheless, as the U.S.’s largest trading partner, Canada will suffer somewhat from adecline in U.S. demand. Current projections for the Canadian economy show a slowdown, but not asslow as the U.S., with growth declining to just over 3% for 2006 as a whole and 2.7% for 2007.


Doris Mak

Manager, Special Projects

OIL SURGES PAST $70/BARRELJuly 2006

In the past month, oil prices have climbed to and surpassed the $70 per barrel mark. Strong globaldemand, potential supply concerns, and refining capacity issues continue to be the principal forcesbehind these elevated prices. On 5 July, oil reached an all-time closing high of $75.19. However, itshould be noted that in inflation adjusted terms, the price is still well below levels seen during the1979 oil crisis. Figure 1 illustrates the inflation-adjusted price of oil during the past 60 years.

Figure 1: Crude Oil Prices (1946-2006) in 2005 Dollars

World Demand on the RiseGlobal demand has ramped up for the summer months as the northern hemisphere enters the busysummer driving season and the inventory build-up for winter month heating oil begins. Continueddevelopment in China and India has also been a factor in long-term energy demand. First quarterworld oil demand averaged 85 barrels per day in 2006, up 1% from the same period in 2005.

Supply Concerns Continue to Elevate PricesContinued supply related concerns have also helped keep oil prices elevated. Potential or existingsupply problems in Nigeria, Iran, Iraq and Venezuela have all contributed to recent market conditions.The threat of hurricane related damage along the Gulf Coast has also influenced supply concerns.

Refining Capacity Drops from 2005During the first five months of 2006, U.S. refinery inputs of crude oil have averaged 470,000 barrelsper day below the levels during the same period in 2005 (3% of total daily production). Severalrefineries continue to operate at reduced levels or remain shut down due to hurricane damage. Otherrefineries have delayed production to install equipment to meet Tier 2 gasoline and ultra-low-sulphur-diesel regulations or to undergo deferred maintenance schedules.

Short-term futures contracts are presently being traded at values above the spot price, while long-term contracts are being traded below the spot price. These values suggest that short-run spot pricesmay rise, but a long-run downward correction is expected by the market.

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46 49 52 55 58 61 64 67 70 73 76 79 82 85 88 91 94 97 00 03 06

1946 - 2006

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Yom Kippur WarArab Oil Embargo

Asian Economic Crisis

Series of OPECCuts

(5 Million Barrels)

GulfWar

IranianRevolution

Iran/Iraqwar

9/11


AIRLINE DATA – CANADATraffic and Load Factors on Canada’s Major Air CarriersJune 2006

Passenger TrafficRevenue Passenger Kilometres

CapacityAvailable Seat Kilometres Load Factor

Air Carrier % Changeover 2005

% Changefrom 2004

% Changeover 2005

% Changefrom 2004

Changeover 2005

Change from2004

Air Canada +1.7% +9.1% -0.9% +3.8% +2.2 pts(to 83.5%)

+4.1 pts(from 79.4%)

Domestic(Mainline) -5.6% -0.7% -3.3% -2.1% -1.9 pts +1.2 pts

Jazz +56.5% +114.7% +59.3% +97.4% -1.3 pts +6.0 pts

International& Charter +5.0% +13.7% +0.1% +6.5% +3.9 pts +5.3 pts

WestJet +25.9% +54.1% +20.0% +43.7% +3.6 pts(to 77.1%)

+5.2 pts(from 71.9%)

Analysis:

Air Canada domestic mainline trafficcontinued its downward trend inJune, dropping 5.6% from June2005. This was offset by a 49.1%increase in domestic Jazz traffic.Combined, domestic mainline anddomestic Jazz traffic is up 4.5% inJune while capacity increased 2.4%(combined figures not shown).

Led by transatlantic and transborderservice, Air Canada internationaltraffic climbed 5.0% during the monthof June. A flat capacity increase of0.1% allowed load factor to increase3.9 points over June 2005.

During the month of June, WestJetmanaged to increase load factor by3.6 points despite capacityexpansion of 20% over June 2005.Year to date capacity has increased14% over 2005, while year to datetraffic is up 24%.

OTHER CARRIERS:LOAD FACTORS

CanJet: not reported

Air Canada Domestic Mainline Air Canada Domestic Mainline

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Dom RPK Dom ASK

Jazz data is not includedin this graph

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Int'l RPK Int'l ASK

Air Canada InternationalAir Canada International

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May-05

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Feb Mar Apr May Jun

RPK ASK

WestJetWestJet


Summary of Total Year-Over-Year Passenger Traffic Performance at Selected Canadian AirportsToronto Vancouver Montréal-

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

May +6.7% +5.5% +3.6% +12.2% +12.0% +5.5% +8.0% -4.5% +5.8% +26.3% +13.5% +5.7% +8.5%June +6.3% +4.0% +7.5% +10.1% +13.9% +3.4% +2.9% -0.5% +6.8% +22.7% +10.9% +12.4% 12.4%

2nd Quarter +5.7% +4.5% +5.6% +8.6% +10.4% +3.1% +5.0% -1.8% +5.1% +22.6% +10.2% +7.3% +10.3%July +3.6% +3.4% +4.0% +11.2% +11.7% +4.8% +4.5% -9.7% +1.2% +15.9% +5.2% +10.9% +14.0%

August -1.1% +2.7% +1.5% +12.7% +8.8% +4.4% +4.6% -6.4% +5.2% +26.4% +10.3% +2.4% +8.9%September +4.5% +2.6% +7.4% +7.9% +13.5% +7.1% +6.6% +0.3% +2.9% +16.1% +12.9% +13.9% +8.9%3rd Quarter +2.2% +2.9% +4.1% +10.7% +11.2% +5.4% +5.1% -5.6% +3.1% +19.6% +9.3% +8.8% +8.0%

October -0.1% +4.3% +3.7% +7.1% +16.7% -0.7% +6.4% -0.7% +3.1% +16.1% +11.8% +12.8% -0.9%November +0.6% +5.2% +4.1% +12.1% +10.7% -2.5% +6.2% +3.0% +8.5% +24.0% +18.0% +15.6% +5.0%December -0.6% +0.5% +4.3% +10.3% +4.9% -3.5% +5.4% +5.6% +3.8% +19.1% +12.2% +9.5% +7.9%4th Quarter +0.0% +3.2% +4.0% +9.8% +10.4% -2.2% +6.0% +2.4% +4.9% +19.6% +13.9% +12.5% +3.6%

2005

Full Year +4.6% +4.4% +5.4% +10.6% +10.5% +3.6% +6.5% -0.4% +5.5% +19.3% +12.3% +10.6% +8.2%January +1.1% -1.7% +1.4% +9.1% +10.7% +1.0% +2.8% +5.4% +6.2% +20.3% +10.1% +4.4% +9.7%February -0.5% +1.5% +2.1% +8.7% +10.5% +0.2% -0.6% +1.2% +1.4% +11.0% +3.0% -2.8% +7.0%

March +3.1% +3.5% +6.6% +9.0% +13.6% +3.9% +2.0% +4.8% -3.5% +15.4% +0.1% -3.8% -7.8%1st Quarter +1.3% +1.3% +3.6% +8.7% +11.8% +1.8% +1.4% +3.8% +0.9% +15.5% +4.4% -0.8% +2.0%

April +1.2% +4.3% +6.2% +19.5% +20.4% +3.8% +0.7% +6.1% +4.2% +17.9% +9.5% +13.9% +13.1%

2006

May +4.8% +3.2% +7.6% +16.3% +20.3% +0.3% +6.4% +8.4% +10.3% +13.2% +7.7% +23.3% +15.2%Source: Transport Canada and individual airports’ traffic reports.

If your airport is interested in providing InterVISTAS Consulting Inc. with its monthly passenger statistics, please email Doris Mak at [email protected].


AIRLINE DATA – U.S.U.S. Airlines Release June 2006 Traffic Figures

Traffic Data - June 2006

Airline Traffic(RPMs – millions)

Capacity(ASMs – millions) Load Factor

1,997

11.4%2,433

20.8%82.1%

6.9 pts

826

12.7%1,026

5.5%80.5%

5.2 pts

6,150

13.2%7,652

7.3%80.4%

4.2 pts

18,223

13.7%9,733

10.6%84.5%

2.3 pts

210,755

2.3 pts12,181

2.2%88.3%

0.2 pts

12,659

0.1%14,819

3.1%85.4%

2.6 pts

11,112

0.1%13,157

3.0%84.5%

2.5 pts

6,517

8.3%7,265

10.4%89.7%

2.0 pts

25,869

5.8%7,006

8.6%83.8%

2.5 pts

387

37.8%431

46.7%89.7%

12.9 pts

Notes: 1. Mainline operations only.2. Load factor includes scheduled service only.

Sources: Carrier traffic reports.


US Domestic Air Cargo Traffic2001-2006

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Total Integrator

SELECTED PUBLICLY AVAILABLECARGO TRENDSJuly 2006


NEWS ARTICLESAIR CANADA UPDATEAIR CANADA LAUNCHES DAILY NON-STOP MONTREAL–DENVER SERVICE

On 16 June, AirCanada launched

daily, non-stop service between Montreal andDenver. Air Canada is the only airline to offerthis direct service, which cuts existing air traveltime by about two hours. The flight will beoperated using 120-seat Airbus A319 aircraft.

AIR CANADA LAUNCHES DAILY NON-STOP MONTREAL–MEXICO CITYSERVICEOn 17 June, Air Canada launched daily non-stop service between Montreal and Mexico City.The service will be operated using 120-seatAirbus A319 aircraft.

AIR CANADA LAUNCHES 3 TIMESWEEKLY NON-STOP TORONTO–SHANGHAI FLIGHTSOn 17 June, Air Canada launched non-stopservice between Toronto and Shanghai. Thenew three-times weekly service is the only non-stop flight from eastern North America toShanghai and offers the fastest flying time fromToronto. The flight will be operated using a 285-seat A340-300 aircraft.

AIR CANADA WILL LAUNCH TWICEWEEKLY NON-STOP EDMONTON–LASVEGAS FLIGHTSAir Canada announced that starting 7September, Air Canada will launch twice weekly,non-stop service between Edmonton and LasVegas using 120-seat Airbus 319 aircraft.

AIR CANADA JAZZ LAUNCHES NON-STOP FLIGHTS BETWEENABBOTSFORD AND TORONTO

On 16 June, Air CanadaJazz launched non-stopservice betweenAbbotsford, BC and

Toronto. The five-times weekly service will beoperated using an Embraer E190 jet configuredwith 9 Executive Class and 84 Economy Classseats.

AIR CANADA JAZZ LAUNCHES NON-STOP WINNIPEG–LAS VEGAS ANDCALGARY–PALM SPRINGS FLIGHTSOn 21 June, Air Canada announced that AirCanada Jazz will operate twice weekly, non-stop service between Winnipeg and Las Vegasstarting 7 September and daily non-stop flightsbetween Calgary and Palm Springs starting 15December. All flights will be operated using 75-seat Bombardier CRJ-705 jet.

AIR CANADA JAZZ LAUNCHES DAILYNON-STOP EDMONTON–YELLOWKNIFEAND CALGARY–YELLOWKNIFEFLIGHTSAir Canada Jazz launches daily non-stop flightsbetween Edmonton and Yellowknife starting 3July. The company also launches the only dailynon-stop flights between Calgary andYellowknife starting 4 July. All flights areoperated with 50-seat CRJ aircraft.

AIR CANADA JAZZ RESUMES TORONTOCITY CENTRE OPERATIONS IN AUGUSTOn 6 July, Air Canada Jazz announced that itwill resume operations from Toronto City CentreAirport on 28 August, along with enhancedschedules and more destinations. Air CanadaJazz will provide daily service between TorontoCity Centre Airport and Ottawa, and will also re-instate service to Montreal. On weekdays, it willoffer ten round trips to Ottawa and seven roundtrips to Montreal.


NEWS ARTICLESAIR CANADA UPDATE – CON’TACE RECEIVES $205 MILLION FROMSALE OF US AIRWAYS STOCKACE Aviation Holdings Inc., the parentcompany of Air Canada, bought five millionshares of U.S. Airways’ stock for US$75 millionback in September 2005. In April 2006, ACEsold 1.75 million shares for nearly US$68million. In June and this month, ACE soldanother 2.75 million shares for nearly US$140million. Altogether, ACE received over US$205million for the 4.5 million U.S. Airways sharessold in the open market. ACE still holds500,000 shares of the stock and it makes upless than one percent of U.S. Airways.

WESTJET UPDATEWESTJET TO OPEN AIRPORT LOUNGESACROSS CANADA TO ATTRACTBUSINESS TRAVELERS FLYING ANYAIRLINE

WestJet ispartnering with

Manchester, U.K.- based Penauille Servisair toopen airport lounges across Canada. Loungesare currently available in Ottawa and Winnipeg,while Calgary and Vancouver are scheduled toopen in September. Travellers from any airlineor travel class can buy one-day passes fromC$14 to C$20 depending on the lounge’slocation. WestJet is offering introductory rateswhen lounge access is pre-booked online.Amenities include leather seating, free non-alcoholic beverages and snacks and televisionand flight information screens, along with accessto business facilities such as fax and wirelessInternet. Lounges are licensed to serve alcoholat an additional cost.

OTHER CANADIAN AIRLINENEWSHARMONY–HAWAIIAN INTER-ISLAND,AUSTRALIA CODE-SHARE DEALAWAITS U.S. APPROVAL

Harmony Airways and Hawaiian Airlinesagreed to a code-share deal in May calling forHawaiian to carry Harmony’s code on inter-island flights from Honolulu to Hilo, Maui, Konaand Lihue, as well as from Maui to Hilo, Konaand Lihue. Another part of the code-shareagreement allows Hawaiian to carry Harmony’scode on its flights between Honolulu andSydney. Harmony is in the process of obtainingauthority for Canada-Australia operations fromAustralian and Canadian authorities but doesnot have U.S. authority for the Honolulu-Australia sector. Once approved, Harmony andHawaiian would compete with existing servicesby American/Qantas, United and Air Canada.

TRANSPORT MINISTER CANNONDESIGNATED SKYSERVICE TOPORTUGAL

On 6 July, the FederalMinister of Transport,Infrastructure and

Communities announced the designation ofSkyservice Airlines Inc. as a scheduledinternational carrier. The new designationallows the carrier to operate between Canadaand Portugal. Skyservice intends to operatescheduled air services to Lisbon and Faro fromunnamed Canadian points, but most likelyToronto. (See also Ottawa Report, page 15)


NEWS ARTICLECARGO NEWSDHL-TRANSMILE ALLIANCE CUTDELIVERY TIME FOR MALAYSIANCUSTOMERS BY HALF DAY

On 26 June, DHLsigned a long-term

“strategic network alliance” with Malaysian cargocarrier Transmile. DHL will offer 10 weeklyflights from Subang airport to its mainAsia/Pacific hub in Hong Kong aboard Transmileaircraft. DHL already has block space for cargoon Transmile flights but this agreement will allowfor more regular service and cut delivery time forMalaysian customers by a half-day forshipments to other countries in Asia, Europeand the U.S. West Coast.

VOLGA-DNEPR TO OPERATE NEW IL-76Volga-Dnepr Group said it will start commercial

flights with its newgeneration IL-76TD-90VD freighter, re-

establishing the freighter for worldwideoperations including major cargo markets inEurope, North America, Australia and Japan,which placed a ban on the use of IL-76TDaircraft due to noise restrictions. The IL-76 is asuccessful and popular aircraft for air cargomovements. Volga-Dnepr Group has upgradedthe IL-76 by further improving its operatingcapability and ensuring compliance to thecurrent and future regulatory requirements ofICAO. The first new-build IL-76TD-90VD hasbeen given clearance to operate globally afterthe aircraft type was awarded a Chapter 4 noisecertificate by ICAO in January 2006.

UNITED STOPS FLYING U.S. DOMESTICMAIL STARTING IN JULY

United Airlines will stoptransporting U.S. domestic mailafter 30 June. United did not qualify

for a five-year domestic mail contract renewalfrom the U.S. Postal Service based on its on-time domestic mail delivery performance fromOctober through March. The airline hasdeclined a short-term contract extension tooperate through 30 September. United willcontinue to move international mail, whichmakes up most of its mail service in volume andrevenue. The airline can bid for U.S. domesticmail service in 2011.

UPS TO FLY U.S. POSTAL SERVICEMAIL

United Parcel ServiceInc. and the U.S. Postal

Service have agreed to a deal for UPSto carry mail for U.S. Postal Services.The deal is expected to generate morethan $100 million in revenue per year

for UPS and allows UPS to be in a strongposition to compete for some or all of the postalbusiness currently handled by FedEx Corp.FedEx’s $1.3 billion contract is up for renewal in2007.

CATHY PACIFIC ORDERS SIX 747-400FREIGHTERS FOR HONG KONG HUB

On 22 June, CathyPacific ordered sixBoeing 747-400

Extended Range Freighters (ERF) toaccommodate new cargo growth plans for itsHong Kong hub. The new planes are scheduledfor delivery between May 2008 and April 2009.The 747-400ERF has a maximum payload of248,600 pounds and carries 22,000 poundsmore than other 747-400 freighters on long-range flights at maximum take-off weight.


NEWS ARTICLESPEOPLE IN THE NEWSPRESIDENT AND CEO OF GTAA TORETIRE

Mr. John Kaldeway, Presidentand CEO of the Greater TorontoAirports Authority, is to retire whenhis contract ends in December2006. The Board will begin aformal search for the new

President and CEO who will be in place in thefirst quarter of 2007. Mr. Kaldeway began hiscareer in aviation more than 30 years ago withTransport Canada. He transferred to the GTAAin December 1996 and assumed his presentposition in October 2004.

NANAIMO AIRPORT APPOINTED NEWPRESIDENT AND CEO

The Nanaimo Airport hasappointed Michael Hooper asthe President and CEO of theNanaimo Airport Commission.This position was previously heldby David Hunter. Hooper has 28

years experience in land management, workingas a consultant to forestry companies on theWest Coast of Vancouver Island, as well as theSouth Coast up to Alaska.

EDC NEW YORK HIRES FORMER ACI-NAHEAD TO PROTECT INTERESTS INAIRPORT MATTERSThe city of New York’sEconomic Development Corp.has hired the former ACI-NAand Port Authority head, DavidPlavin, as a consultant for ayear. Mr. Plavin will advise thecity on aviation matters with a focus inmodernising the three New York area airports.

AIRBUS CONFIRMED NEW PRESIDENTAND CEO

Airbus has confirmed thatChristian Streiff, deputy CEOof French building materialsgroup Saint-Gobain, is the newpresident and CEO of Airbus

after former CEO Gustav Humbert resignedfrom his position on 2 July. Humbert had leftbecause of the A380’s problems and the sellingof a large block of EADS stock shortly before theannouncement of the latest delay.

OTHERSOUTHWEST RAISES FARES TOOFFSET RISING FUEL COSTSSouthwest Airlines raised ticket prices by $3on flights between 750 and 1,000 miles and by$10 on flights longer than 1,000 miles, citingsoaring fuel costs. Southwest earned $548million last year and its fuel bill is expected to be$800 million higher this year. Southwestremains one of the best-hedged airlines againstfuel spikes in the industry and has locked inprices until 2009. Southwest’s increases wereimmediately matched by seven other airlines:American Airlines, United Airlines, Delta AirLines, Northwest Airlines, Continental Airlines,AirTran Airways and Frontier Airlines.

EASYJET INCREASES PROFITFORECAST DUE TO GROWTH IN NON-TICKET ANCILLARY REVENUE

EasyJet executivesincreased their profitforecast to 40-50% growth

for fiscal year 2006. Much of the earnings willstem from a 30% rise per seat this year in non-ticket ancillary revenues, such as drinks, onlineinsurance, excess baggage, hotels and car hire.


NEWS ARTICLEOTHER – CON’TMAIR REPORTS $83 MILLION FISCALYEAR LOSSMAIR Holdings, the parent company ofMesaba Airlines and Big Sky Airlines,reported a loss of $83 million in fiscal yearended 31 March. MAIR explained the losswas driven by Northwest Airlines’ decision towithhold approximately $30 million in regularlyscheduled payments and its decision toreduce Mesaba’s fleet by more than 50%,which led to Mesaba’s bankruptcy. MAIRearned $7.4 million in the prior fiscal year.

NEW VARIG AUCTION SET FOR JULY12

Varig’s future wasup in the air as NVParticipacoes, the

employee-led investor group that was the onlybidder at the 8 June auction of the bankruptcarrier, failed to make an initial $75 milliondown payment on 23 June. In the first weekof July, Judge Luiz Roberto Ayoub revealedhis decision to hold a new auction to sell Varigon 12 July. To be eligible for this auction,bidders must provide a bank bond for $100million to guarantee the financial solvency ofthe bid.

BOEING/AIRBUS SALES UPDATEIn the first half of2006, Boeingsold 480 aircraftand Airbus sold117. In the smallcapacity narrow

body segment, Boeing sold sixty-nine 787scompared with Airbus sales of thirteenA350s. Airbus sold eight of the A330/340series and ninety-six A320s, which continue tobe a strong product.


Robert Andriulaitis

Vice PresidentTransportation and Logistics

Studies

CARGO CAPERSJuly 2006

The New Formula for High Stock Prices?Everyone is aware that cargo airlines (indeed, transportation firms generally) are facing historicallyhigh fuel costs. Prices have risen dramatically over the past few years as the following chart from theInternational Air Transport Association shows.

Compounding this, the U.S.Department of HomelandSecurity recently released itsFinal Rule for Air CargoSecurity Requirements. Thisrule will increase costs for aircargo carriers, as it willrequire background securitychecks for another 50,000 aircargo operator employeesand add another 300 cargoinspectors to TSA’s payroll.

There is also media attention(mostly in Europe) on reining in aviation due to the environmental damage from aircraft emissions.The European parliament is calling for airlines to pay tax on aviation fuel, and to be brought into theEU's carbon emissions trading scheme. The concern is over the volume of emissions, the anticipatedhigh growth rate of air transport, and the fact that aviation emissions are at high altitude, where theimpact is greater.

So, one could expect investors to be nervous about the prospects for air cargo companies. Thefollowing New York Stock Exchange charts of share prices of Atlas Air, FedEx and UPS over the pastyear, however, suggest the market remains confident in the future of air cargo.

Atlas Air FedEx

UPS


CARGO CAPERS – CON’TReasons for Optimism So why the continued optimism?A key factor is the continuing increase in global trade driven by strong economies in China andelsewhere, and the gradual elimination of restrictions on international air cargo service that is allowingair carriers to actually capitalise on this trade growth. The basic demand for international air cargocontinues to rise, particularly as China, India and other nations continue their rapid growth andintegration into the world economy, and this bodes well for air cargo carriers that operate on a globalscale.

Part of the reason may also stem from the nature of the cost increases. Some suggest that fuel andsecurity costs are easier to pass on to customers than general rate increases because they areseparable and clearly attributable to outside causes. As well, competing modes of transport are allfacing nearly identical increases in energy costs. I used the term ‘nearly identical’, since the ‘crackspread’ between aviation fuel prices and the price of crude oil has increased at the same time that oilprices have gone up, giving air transport a double whammy on the energy cost front.

Carbon TaxesOne real uncertainty is on the environmental side, where there may be some potential in Europe forair transportation to be singled out for “special” treatment. Penalising a mode of transportation thathas made tremendous strides in improving fuel efficiency and hence lowering relative emission levelsdoes not make for sound environmental policy. Nor does this make for sound economic policy: it isimperative that all modes of transport be treated in an equitable manner so as to not artificially distortthe market for cargo transportation and in turn limit trade and economic growth. Organisations suchas IATA are already heavily involved in strategic advocacy in this area, and only time will tell how thisevolves.

Overall, while it will remain a challenge for air cargo companies to remain profitable in a competitivearena as the operating and policy environment continues to increase in complexity, the air cargofundamentals remain strong.


Sam Barone

Regional Vice PresidentOttawa, ON

THE OTTAWA REPORTJuly 2006

Canada and UK Sign Open Skies AgreementCanada and the United Kingdom signed an open skies agreement thatallows airlines from each country to offer unlimited flights to and from thirdcountries via the other country. Airlines will also face no restrictions on howthey set their fares when carrying passengers through their own country tothe third country. The agreement is effective September 2006.

Canada and Portugal Conclude New Air Transport AgreementOn 19 June, the Minister of Transport and the Minster of International Trade announced that thegovernments of Canada and Portugal have established a new air transport agreement that will allowfor significant expansion of air services between both countries. Under the new agreement, Canadianairlines will have access to all destinations in Portugal and Portuguese airlines will have the sameaccess to Canadian destinations. There will also be no limitations on the frequency of service carrierscan offer. In addition to operating their own aircraft, carriers can provide code-sharing services.Although this is a liberalisation of the Canada-Portugal agreement, because the agreement does notallow 5th freedom service or 7th freedom cargo services, it is not an open skies agreement.

Canada and Algeria Sign First Air Transport Bilateral DealOn 5 July, Canada signed its first air transport agreement with Algeria. The agreement allows forairlines to operate their own planes between the countries or carriers can utilise code-share flights.Air Algerie has announced plans to operate up to two flights per week between Algiers and Montreal.Air Canada will offer code-sharing services to Algeria via Europe.

Phase 2 of Ottawa Airport Expansion Set to BeginPhase 2 of the Ottawa International Airport expansion project will start this summer. The $95 millionproject, to be paid for in part by the airport improvement fee, will be completed in 2008. Theexpansion will add 7,000 square metres of terminal space to accommodate 12 more gates to theairport.

Transport Canada to Fund 13 Transportation Planning and ModalIntegration Projects across CanadaOn 26 June, the Minister of Transport, Infrastructure and Communities announced over $1 million infederal funding for 13 projects that advance Transportation planning and enhance integration andconnections between transportation modes as part of the Transportation Planning and ModalIntegration Initiatives. To date, approximately $5 million in funding has been granted to a total of 45projects across Canada, including the 13 projects announced.

CAC Wants Air Liberalisation Policy AcceleratedCanadian Airports Council called for the federal government to accelerate pursuit of open skiesagreements with countries around the world. Jim Facette, CAC President and CEO, believesCanada’s current air service agreements are far too restrictive and favour the interests of Canadiancarriers. Tourism is a $58 billion industry in Canada and yet there are restrictive agreements in placewith many of the top 10 sources of overseas visitors to Canada, such as Japan and South Korea.World carriers that are interested in serving Canada, or increasing service to Canada, are unable to


THE OTTAWA REPORT – CON’Tdo so due to limitations in air bilateral agreements with Canada. An EU-wide air deal would have thegreatest economic potential for Canada because Europe is Canada’s second largest source oftourists after the U.S. Japan, Singapore, South Africa, South Korea and the United Arab Emirates arealso priority markets for open skies agreements.

NAV Canada to Install New Navigation AidsNAV Canada will replace 100 Distance Measuring Equipment (DME) units across Canada at a cost of$15 million over the next three years to reflect NAV Canada’s commitment to renew and moderniseCanada’s air navigation infrastructure. A DME is a ground based navigation aid that allows aircraft tocontinuously measure their distances in relation to the unit which emits a transponder-type signal.

Canadian GA User Fee Increase UpheldThe new daily charge for small aircraft issue had been upheld on appeal on 17 July 2006. Pilots ofsmall aircraft will be expected to pay a new daily charge at seven major international airports inCanada. Although the charge had been appealed by the Canadian Owners and Pilots Associationand the Helicopter Association of Canada, the Canadian Transportation Agency (CTA) informed NAVCANADA that the fee complies with the Civil Air Navigation Services Commercialisation Actannounced in April 2006. The new charge of $10 per day, with an annual maximum of $1200, willbecome effective 1 March, 2008, and apply to aircraft weighing three tonnes or less at Vancouver(including the water aerodrome), Calgary, Edmonton, Winnipeg, Toronto (Pearson), Ottawa(Macdonald-Cartier) and Montreal (Trudeau) international airports.


THE WASHINGTON REPORTJuly 2006

Transportation Secretary Mineta ResignsOn 23 June, Norman Mineta, the longest serving Secretary ofTransportation, announced the resignation of his position aftermore than five years of service. He was the only Democrat inPresident Bush’s Cabinet and the first Asian-American toserve in a White House Cabinet. Mineta developed theTransportation Security Administration after the events of9/11, and he was a key author of the Intermodal Surface Transportation Efficiency Act (ISTEA) thatled to major surges in mass transit ridership and greener transportation operations such as bikepaths. Mineta announced that he will be joining Hill & Knowlton, a prestigious government relationsfirm, as its vice chairman.

U.S. and Chad Signed Open Skies AgreementThe United States and Chad signed a full open skies agreement that will permit air services betweenthe two countries without restrictions. The air services accord will allow all cargo carriers to flybetween the other country and third countries without directly connecting to their homeland.

GAO Concludes Reregulating the Airline Industry Would ReverseConsumer BenefitsThe Department of Transportation (DOT) asked the Government Accountability Office (GAO) toanalyze the impact of reregulating the airline industry on reducing potential pension defaults byairlines following the DOT Appropriation Act in 2006. The GAO found that airfares have fallen in realterms over time while service, as measured by industry connectivity and competitiveness, hasimproved slightly. Overall, median fares have declined almost 40% since 1980 as measured in 2005dollars. However, fares in short-distance and less-traveled markets have not fallen as much as faresin long-distance and heavily trafficked markets. Since 1980, markets have generally become morecompetitive with the average number of competitors increasing from 2.2 per market in 1980 to 3.5 in2005. The GAO concluded that reregulation of the industry will likely reverse much of the consumerbenefits and would not save airline pensions.

GAO Says TSA Needs Money for Bag Screening NeedsA new report from the Government Accountability Office indicates that funding to install futurescreening equipment on a large scale remains uncertain. Currently, TSA uses stand-alone EDS andETD machines which requires a greater number of screeners and results in screening fewer bags forexplosives each hour. TSA estimated that the cost of replacing the existing machines with in-lineEDS machines is $22 billion over 20 years. Because of the lack of funds to install in-line EDSSystems; airports are using a variety of funding mechanisms, such as Airport Improvement Programmoney and passenger facility charges, to pay for screening systems. TSA has already identified 25airports that should first receive federal funds for installing in-line EDS machines.

Senate Committee Approves $32 Billion DHS Spending BillOn 29 June, the Senate Appropriations Committee approved a $32 billion spending bill for theDepartment of Homeland Security for fiscal year 2005. The bill includes $422 million for explosivesdetection installation and a provision requiring TSA to pay for space the agency uses at airportsoutside of “necessary security checkpoints.” The Senate committee-approved DHS spending bill butrejects the Administration’s proposed increase in the $2.50 passenger security fee. The bill hasmoved to the full Senate for its consideration.

Jon Ash

PresidentInterVISTAS-ga2 Consulting Inc.

Washington, D.C.


InterVISTAS’ Canadian Aviation Intelligence Report is a collection of information gathered from public sources, suchas press releases, media articles, etc., information from confidential sources, and items heard on the street. Thussome of the information is speculative and may not materialise.

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INTERVISTAS NEWSJuly 2006

Angelica Sparolin Appointed as Senior Research Specialist,Economics and TransportationInterVISTAS is pleased to announce that Angelica Sparolin has been appointed asSenior Research Specialist, Economics and Transportation. Ms. Sparolin has deepand broad knowledge in market analysis, air fares and other areas. She has workedextensively with ticket sales data and is a specialist in developing air passengermarket size models. She also has extensive experience conducting economic impactstudies and other economic analysis for various modes of transportation.

Doris Mak Appointed as Manager, Special ProjectsInterVISTAS is pleased to announce that Doris Mak has been appointed as Manager,Special Projects. Ms. Mak has extensive marketing and consulting experience atInterVISTAS, working in several different practice areas including market research, airservice development, economic analysis and intelligence. With this broad base ofexperience, Ms. Mak plays a key role in integrating the various practices in majorconsulting projects for clients in Canada and overseas.

InterVISTAS Upcoming Speaking Engagements Dr. Mike Tretheway, Executive Vice President

Financing Aviation Infrastructure: Toronto, ON – 17 October 2006Dr. Tretheway will be the keynote speaker delivering the luncheon presentationtitled, “The Role of Government Policy in Airport Finance.”

Mr. Solomon Wong, Vice President, Security & PlanningAVSEC: Sydney, Australia – 17-19 October 2006Mr. Wong will be delivering a presentation titled, “Border and Aviation Security:The Complexity of the Challenge.”

Mr. Solomon Wong, Vice President, Security & PlanningPassenger Terminal EXPO 2006 USA Conference, Fort Lauderdale, FL – 6-8December 2006Mr. Wong will be delivering a presentation titled, “Open and Secure Skies.”

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