IVC Sample 21 October 2003 - InterVISTAS · Payments are expected to resume once Memoranda of...

INDUSTRYREVIEW

October 2003 © InterVISTAS Consulting Inc.

SARS – CAUTIOUS RECOVERY II15 October 2003

Proceeding with caution. Due to the one SARS infection in Singaporeand other suspicious cases in Hong Kong, the threat of SARS hasresurfaced. Governments, airlines and airports are once again on alertand taking preventive measures to control SARS. It is thought that ifSARS returns this winter, it would harshly impact air travel - more sothan a terrorist attack.

Traffic Continues to Recover. Passenger traffic at Asian airports continue to reach towards pre-SARS levels. For the month of August, the total passenger traffic at Taipei Chiang Kai-ShekInternational Airport was 1.7 million passengers, down only 5% from the same month last year. HongKong International Airport’s passenger traffic volumes were 3.0 million, approximately 90% of HKG’spre-SARS traffic volumes. IATA has also indicated a recovery to 2002 levels for global airline traffic.In August, IATA members reported a drop of only 0.3% in traffic compared to August 2002. Inparticular, four regions showed year-over-year improvements: Europe increased 4.4%; SouthAmerica 8.2%; Africa 1.6% and the Middle East 18.7%. However, traffic is lower in North America(down 6.5%) and Asia/Pacific (down 4.6%).

Air carriers are continuing to recover from SARS:

• Cathay Pacific will increase services in its winter schedule. Service between Hong Kong andAuckland as well as Hong Kong and Melbourne will increase by two more flights for a total of 13and 12 a week, respectively.

• Philippines Airlines, which was hit hard in the first fiscal quarter (April-July) reporting losses of900 million pesos (US$16 million), announced the restoration of services that were cut during theSARS outbreak. Beginning October 25, the carrier will restore flights to Kuala Lumpur with fourweekly services.

• Thai Airways indicated that although SARS had significantly affected the company’s sales, thebottom line for the financial year ending September 30 looks to be impressive.

• Vietnam Air’s third quarter revenues increased 67.5% from the second quarter to US$196million as travel has increased after the containment of SARS. The carrier’s load factorincreased to 62.3% in June, compared with 54.8% in April and 52.9% in May.

Travel Continues Upward. According to the Hong Kong Tourism Board, passenger arrivals fromU.S. to Hong Kong were 13% below August 2002 levels after having been down more than 80% inApril and May. Abacus Asia Ltd. also indicated that Singapore’s airline bookings in Septemberincreased 12% from the previous year. Wing On Travel, the tour operating unit of Ananda Wing OnTravel (Holdings), saw its sales increase by 20% in the third quarter as local sentiment improved afterthe SARS outbreak.

Doris MakSenior Market Analyst


AIR CANADA RESTRUCTURINGUPDATE15 October 2003

On April 1, Air Canada filed in the Superior Court of Ontario for bankruptcyprotection under the Companies’ Creditor Arrangements Act (CCAA).Over the past six months, Air Canada has made changes that will see it

operating as a lower cost airline when it exits CCAA protection in the middle of December. Thiscolumn provides an update on the airline’s restructuring activities to date.

Financing. Air Canada started its solicitation process for an equity plan sponsor on July 16th. Thesponsor will provide approximately CDN$700 million in funding for the company’s emergence fromCCAA protection. On September 26, Air Canada announced that it had narrowed down potentialequity partners to two candidates: Victor T.K. Li, a Canadian citizen and son of Hong Kong tycoon LiKa-Shing, and Cerberus Capital Management, L.P. of New York, a U.S. asset management firm withCanadian interests. Negotiations are underway to complete the selection process by the end ofOctober 2003.

Labour. On June 30th, each of Air Canada’s labour unions ratified the newly negotiated labouragreements. The Air Canada Pilot’s Association was the last union to ratify their agreement. Theairline has since reduced its labour force by approximately 5,500 employees, including 300management positions, achieving a labour cost reduction of CDN$1.1 billion.With respect to pensions, Air Canada is proposing to unionised and non-unionised representativesthat Air Canada fund pension plans based on a going concern basis for three years, after which thesolvency deficit will be payable over 10 years.

Court Timing. Air Canada has been granted two extensions on the initial June 30th stay period,which is now scheduled to end December 20, 2003. The latest extension was granted so the airlinecan complete renegotiations on aircraft leases and operating contracts, and to complete the processto raise CDN$700 million in equity financing. The airline intends to exit bankruptcy protection by theend of the year.

Fleet. Air Canada released a Fleet Plan in June which included the elimination of its entire fleet ofBoeing 737 (25), 747 (6) and BAe-146 (10) aircraft. The airline has plans to add 50-seat regional jetsin the short term and the intent is to acquire regional jets with 70-100 seats in the long term. Thus far,the airline has reduced its fleet by about 40 aircraft, and has renegotiated lease terms on itsremaining fleet to reflect current market rates. Payments are expected to resume once Memorandaof Understanding (“MOUs”) on the new lease terms have been renegotiated with the aircraft lessors.Aircraft lease renegotiations are expected to be complete by the end of October.

Service Reductions. Overall seat capacity for the months of June, July and August 2003 werereduced by 17% from 2002 levels, while September capacity decreased by 11% compared to thesame time last year. Overseas Asian and transborder routes were most affected with capacityreductions of 60% and 25% respectively, although AC has since announced that several Asiaservices will be reinstated this fall. It is noted that part of the reason for the airline’s servicereductions was also due to the SARS outbreak.

Geneva Tretheway

Project Analyst


Crude Oil Spot & Futures PricesAs of October 9, 2003

$-

$5.00

$10.00

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

Jan-

03

Apr

-03

Jul-0

3

Oct

-03

Jan-

04

Apr

-04

Jul-0

4

Oct

-04

Jan-

05

Apr

-05

Jul-0

5

Oct

-05

Jan-

06

Apr

-06

Jul-0

6

Oct

-06

Jan-

07

Apr

-07

Jul-0

7

Oct

-07

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9

Oct

-09

Month of Delivery

US

$/B

arre

l

Crude oil prices expected to fall to $25 by late 2005.

Spot Prices Futures Prices

SHORT TERM STABILITY IN FUEL

PRICESThe price of crude oil stabilizes at $30…

Crude oil prices have stabilized in the $30 per barrel range in recent weeks mainly due to threefactors in the global market.

Cut in OPEC ProductionIn a surprise move, OPEC cut production quotas in late September by 900,000 barrels per day.Saudi Arabia took the lead by decreasing its production to make room for Iraq’s increasing outputover the past few weeks. The announcement on September 24 caused crude oil prices to jump 12%in the following days.

Commercial U.S. Oil SuppliesRecent reports indicate that the U.S. surplus increased by 5.4 million barrels. Previous analystestimates had U.S. oil reserves increasing by only 1 million barrels. With U.S. crude oil stocks inbetter shape than anticipated, crude oil prices declined somewhat in early October with pricesremaining steady in the $30 per barrel range.

Potential Oil Strike in NigeriaThe powerful oil unions in Nigeria threatened a general strike to protest the government’s proposedderegulation of fuel marketing in the country. The oil workers and their unions have been concernedabout the high price of oil. For now, a strike appears to have been averted as the oil unions wereclose to making a deal with fuel marketers.

…But even lower prices expected in the future

Declining “Futures” PricesThe futures market showsthe price of crude oil fallingto the $25 per barrel rangeby late 2005. On October9, 2003, the futures priceof a barrel of crude oil fordelivery in November 2005is $25.14, this ismarginally higher thanfutures price for the samemonth of delivery quotedin the August IndustryIntelligence report of$24.98. The price of crudeoil is approximately 19%lower than the current spot price of $31.01 per barrel. It is interesting to see that the futures price ofoil for delivery in the middle of 2006 and onward begin to increase. This is an indication of how themarket feels today about oil supply and demand in the longer term.

Doris Mak

Senior Market Analyst


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

10%15%20%

Oct-02

Nov Dec Jan-03

Feb Mar Apr May Jun Jul Aug Sep

Dom RPKDom ASK

Air Canada Domestic Mainline Air Canada Domestic Mainline

-40%

-30%

-20%

-10%

0%

10%

20%

30%

Oct-0 2

Nov Dec Jan-03


Int'l RPKInt'l ASK

Air Canada InternationalAir Canada International

0%

10%

20%

30%

40%

50%

60%

70%

Oct-02

Nov Dec Jan-03


RPKASK

WestJetWestJet

AIRLINE DATA – CANADATRAFFIC AND LOAD FACTORS ON CANADA’S MAJOR AIR CARRIERS – SEPTEMBER 2003

Passenger TrafficRevenue Passenger Kilometres

CapacityAvailable Seat Kilometres

Load FactorAir Carrier

% Changeover 2002

% Changefrom 2001

% Changeover 2002

% Changefrom 2001

% Changeover 2002

% Changefrom 2001

Air Canada1 -12.4% +4.3% -11.1% -1.9% -1.1 pts(to 73.4%)

+4.4 pts

Domestic(Mainline) -3.9% +15.1% -2.2% +11.1% -1.4 pts

(to 70.7%) +2.4 pts

Jazz -0.8% N/A +2.7% N/A -1.9 pts(to 54.7%) N/A

International& Charter -16.1% -0.4% -15.2% -7.7% -0.8 pts

(to 74.8%) +5.5 pts

WestJet +33.8% +123.3% +45.4% +138.8%-5.9 pts(to 68.3) -4.7 pts

Note: N/A – As Jazz was not reported in 2001, a percentage change from 2001 could not be calculated.

Analysis:• Air Canada's domestic traffic continues to be

down relative to previous years although thedeclines are becoming less negative thanprevious months. It has been two yearssince the terrorist acts of September 11th,passenger traffic is up 15% from 2001 anddown 4% from 2002. The airline's trafficlevels continue to be down more than itsreduction in seat capacity. Air Canada's loadfactor continues to fall indicating that theairline is not removing capacity at the samerate at which it is losing traffic.

• Even though the air travel industry hasrecovered from SARS and the Iraq war, AirCanada's international traffic was 16% below2002 levels. International traffic appears tohave plateaued at lower levels (-15% range)the past few months. Air Canada'sinternational traffic levels are declining fasterthan seat capacity resulting in a decreasedload factor.

• Although WestJet continues to showimpressive percentage growth in traffic andseat capacity, the airline is adding seat capacity disproportionately to its traffic growth. As aresult, the airline's load factor has fallen. In September, there exists a 12% spread betweenWestJet's traffic growth and increase in seats. Although the airline is still performing wellfinancially, its declining load factor is eating into its profit margin.

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

NEW CARRIERS:LOAD FACTORS

Jetsgo: 61%Zip: not reportedCanJet: not reported

Jazz data is not includedin this graph


AIRLINE DATA – U.S.U.S. Airlines September 2003 Traffic Figures –

Airline Load Factor Traffic(RPMs – millions)

Capacity(ASMs – millions)

66.7%á 2.8 pts

9,002â 1.7%

13,479â 5.9%

63.4%á 5.4 pts

526á 37.6%

829á 26.0%

60.1%á 2.4pts

374á 19.1%

622á14.3%

62.0 % 3

á 0.8 pts991

á 17.1.%1,649á 14.3%

1 72.3%á 4.4 pts

4,556á 2.1%

6,303â 4.0%

67.8%á0.3 pts

7,718â2.6%

11,381â3.1%

80.2%á 4.4 pts

930á 66.9%

1,159á 57.7%

77.4%á 2.7 pts

5,557â 2.9%

7,182â 6.2%

60.4%á 3.6 pts

3,602á10.6%

5,960á3.8%

2 74.9%á5.4 pts

8,388â3.6%

11,199â10.5%

2 66.7%á 6.4 pts

2,803â 1.8%

4,204â11.2%

Notes: 1. Mainline2. Load factor includes scheduled service only

Sources: Carrier traffic reports

DATA

© InterVISTAS Consulting Inc.October 2003Page 6

Summary of Total Year-Over-Year Passenger Traffic Performance at Selected Airports – 2002-2003

Toronto VancouverMontreal-

Dorval Calgary Edmonton Ottawa Winnipeg Halifax Victoria Kelowna Saskatoon ReginaSt.

John’s2nd Quarter N/A -9.0% -10.9% -3.8% -6.7% -12.3% -6.9% -6.0% -6.3% -6.1% -8.7% -11.1% -11.9%

July N/A -7.6% -8.3% -3.6% -9.4% -6.6% -5.1% +4.4% -13.1% -6.3% -9.5% -13.0% -7.0%

August N/A -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 N/A +12.6% +22.5% +20.1% +7.6% +23.7% +16.4% +26.1% +13.2% +11.8% +12.6% +10.5% +20.0%

3rd Quarter N/A -2.6% -0.2% +2.9% -4.4% +0.50% +1.2% +11.2% -4.8% +0.2% -5.4% -5.8% -0.8%

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%

2003

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% N/A


FUEL PRICES

October 3, 2003

SPOT OIL PRICES INCREASINGFUTURES PRICES LOWER

Crude Oil Prices:

Spot – US$29.84(up 3.3% from September)

Future

• 6 month - $28.86

(March 2004 delivery)

• 12 month – $26.51

(October 2004 delivery)

• 2 year - $25.12

(October 2005 delivery)

NEWS ARTICLES

AIR CANADA UPDATE

AIR CANADA BANKRUPTCY PROTECTIONEXTENDED

The original stay periodgranted to Air Canadaon April 1, 2003 by the

Ontario Superior Court of Justice has beenextended to December 20, 2003. Theextension will allow Air Canada more time tocontinue with its restructuring under the CCAAincluding: negotiation of remaining aircraftleases; completion of negotiations regardingthe proposed CDN$700 million equity financing;completion of the claims process; and fundingof the pension deficit. Once these issues havebeen resolved, Air Canada will file a Plan ofArrangement with the court. Air Canada hasstated that it plans to exit from bankruptcyprotection by the end of this year.

COURTS SET NOVEMBER 17 DEADLINEFOR AIR CANADA CREDITOR CLAIMSThe Ontario Superior Court of Justice hasset November 17, 2003, as the deadline for AirCanada’s creditors to submit their claims. Theairline faces up to $9 billion in unsecuredclaims. Air Canada has stated that it has nocash to pay its creditors, and will instead offerthem stock in the restructured airline.

THE END OF TANGOAir Canada’s discount brand subsidiary,Tango has been incorporated as a fare class inthe mainline carrier’s flights as of October 1,2003. Tango began operations in November2001 and was Air Canada’s first trial in runninga low-cost carrier. Tango allowed the airline totest a number of initiatives including: asimplified one way fare structure; allowingcustomers to make booking changes over theInternet; and fees for on-board meals. AirCanada has stated that Zip, the airline’s otherlow-cost subsidiary, will continue to operateindependently.

WINNIPEG IS KEY TO ZIP’S SUCCESSAir Canada has highexpectations for Zip, its lowcost subsidiary based in

Calgary. Zip is focusing on the Winnipegmarket. The carrier plans to expand its fleetfrom 12 aircraft to 20 by the end of 2004. Lastyear, over half of the airline’s one million pluspassengers originated from or destined toWinnipeg. Currently, Zip operates 15 flightsper day from Winnipeg.

AIR CANADA REACHES LEASEAGREEMENT FOR 38 AIRCRAFTAir Canada has reached a tentativerestructuring agreement for its lease of 38Airbus aircraft including 22 A319s, eightA330s, and eight A340s. Under the terms ofthe new lease agreement, rental payments forthe aircraft will be restructured consistent withAir Canada’s restructuring plan. Theagreement is subject to the fulfillment of variousconditions. Detailed terms of the leaseagreement remain confidential.

GECAS CONFIRMS DEAL TO PURCHASESTOCK IN AIR CANADA

GE Capital AviationServices (GECAS)has obtained the

right to purchase more than 4% of the stock inAir Canada when the airline exits frombankruptcy protection. For Air Canada, this ispart of a deal to restructure leases on 94aircraft, including termination of 20 leases onparked aircraft. The deal also includes aUS$600 million loan from General ElectricCapital Corporation, and up to US$950 millionin additional financing to be used to purchase43 regional jets in the future. GECAS will havethe right to purchase common shares of AirCanada at the same price as the airline’spotential equity investor, and also have theoption of converting US$106 million in debt intocommon stock at 125% of the price paid by theequity investor.

$15.00

$20.00

$25.00

$30.00

$35.00

$40.00

Jan-0 3

Feb Mar Apr May Jun Jul Aug Sep Oct

US$

per B

arre

l

Monthly Spot PricesMonthly Spot Prices


NEWS ARTICLES

OTHER CANADIAN AIRLINES

WESTJET RAISING CDN$150 MILLION FORNEW PLANES

WestJet Airlines isissuing up to CDN$150

million in stock to fund the purchase of two newBoeing 737-700 aircraft. The airline will issue5.2 million shares (approximately CDN$125million) at CDN$24.25 each. WestJet currentlyhas 44 aircraft in its fleet.

WESTJET EXPANDS SERVICE NETWORKWestJet has expanded its services to includenon-stop flights between Halifax and Montréal,Edmonton and Ottawa, and Toronto andThunder Bay. Service between its eastern hubin Hamilton and Gander, and Hamilton and St.John’s is also available. In addition, WestJet isoffering twice daily service from Toronto toWinnipeg. The new services were launched inmid September. WestJet currently serves 24Canadian cities.

JETSGO LAUNCHES “LOONIE SUNDAYS”On September 28, Jetsgo launched its“Loonie Sundays” program. The promotionoffers customers discounted fares across itsnetwork and hundreds of seats for CDN$1 eachSunday for 24 hours. Reservations must bemade at www.jetsgo.net. This is part ofJetsgo’s strategy to become the onlinemarketplace for discount fares. The promotionalso offers one-way flights between Torontoand Calgary for CDN$25.80, and betweenMontreal and Edmonton for CDN$45.53.

TRANSAT REPORTS CDN$10.3 MILLIONLOSS IN THIRD QUARTERTransat A.T. Inc. reported a loss of CDN$10.3million in the fiscal quarter ending July 31.Total revenue was CDN$444.1 million, a 10.3%decline from the same period last year.Passenger traffic dropped by 19%. However,the company expects improvements in 2004 asit replaces its six Lockheed L-1011s with fourAirbus A310s to reduce operating costs.

U.S. & INTERNATIONALAIRLINES

SOUTHWEST TO EXPAND SERVICES IN2004

Southwest Airlines hasannounced that starting Jan.18, 2004, it will be adding new

daily non-stop service between Spokane andLas Vegas with a fare of US$99 each way. Thecarrier is also adding non-stop servicesbetween Los Angeles and Tampa Bay, Chicagoand Salt Lake City, and Orlando and Las Vegaswith a fare of US$99 each way. Servicebetween Ontario, CA and Reno is available forUS$59 each way. The fares are available onlyon non-stop flights and require a roundtrippurchase with an overnight stay.

MESA PROPOSES MERGER WITH ACAMesa has proposed a merge withAtlantic Coast Airlines (ACA)through an unsolicited stock offerworth over US$500 million. The

deal would increase earnings of the combinedcarrier by 25%, and create the largestindependent regional airline in the U.S withapproximately 300 aircraft.

PACIFIC BLUE TO START SERVICE IN 2004Virgin Blue has created asubsidiary, Pacific Blue, tofly between Australia andNew Zealand, and within

New Zealand. Pacific Blue will be based inChristchurch, South Island, and will startservices on February 1, 2004. The carrier willfollow a similar strategy to Virgin Blue, offeringheavily reduced fares and high quality customerservice. Pacific Blue’s first route will operatefrom Brisbane (Virgin Blue’s Australian base)to Christchurch. Under terms of the 49%purchase of Virgin Atlantic by SingaporeAirlines, Virgin Blue is not allowed to use theVirgin brand name outside of Australia.


NEWS ARTICLESSWISS INTERNATIONAL AIRLINES JOINSONEWORLD ALLIANCESwiss International Airlines will join theOneworld Alliance and give British Airwayssome of its U.K. landing rights. The airlineshave completed a memorandum ofunderstanding, and a formal AllianceAgreement will be signed on October 24.Joining Oneworld is expected to increaseSwiss Airlines’ operating revenue by 100million Swiss francs (US$76.1 million) a yearover the next 3 years. The alliance may allowSwiss to secure additional financial supportfrom its banks and private shareholders.

AIR FRANCE AND KLM TO MERGEOn September 30, Air France announced thatit would merge with Dutch based KLM. TheUS$912.9 million deal is financed through ashare exchange that will give KLMshareholders 19% in the new holding company,Air France-KLM. Air France investors willown 37% and the French state 44% ownershipof the airline. The merger, to be finalised in thenext two weeks, will see KLM join SkyTeamAlliance and create Europe’s largest airline.

CARGO

U.S. CARGO TRAFFIC DECREASESU.S. Air Transport Association figures forAugust show a drop in total revenue ton-milesof 2.6% from August 2002. Domestic traffic isdown 1.8%, international traffic is down 3.4%and Latin America had the largest decrease of14.5%.

WORLD AIR FREIGHT TRAFFIC UPThe International Air Transport Associationreported that worldwide August freight traffic isup 3.6% from the previous year with a year-to-date increase of 6%. North America trafficincreased 3.8% from the previous year andAsia Pacific has a year-to-date increase of6.3%.

COLOGRAPHY FORECAST PREDICTS AIRCARGO GROWTH IN 2004

The most recent forecast of the ColographyGroup suggests that the economic recoveryshould finally put air cargo on a more solidgrowth path. Air freight movements areexpected to grow in 2004 at about the samerate of growth as the economy. Shipments willincrease from an expected 6.5 billion in 2003 to6.6 billion in 2004. Ground parcel express,however, will show the strongest growth, withLTL and TL services also expanding at a ratefaster than that of the economy.

DHL DANZAS AIR & OCEAN CANADIANOPERATIONS JOINS PIP PROGRAMDHL Danzas Air & Ocean’s Canadianoperations have become official partners ofCanada Customs and Revenue Agency’s“Partners in Protection” (PIP) program. Thevoluntary program is designed to strengthensecurity and enhance incoming tradeoperations into Canada. Partner companiesmust conduct self-examination following strictguidelines set by Canada Customs. Benefitsinclude expedited handling and processing ofgoods and documentation into Canada, andeligibility for the Free and Secure Trade (FAST)Program, which allows pre-approvedcompanies faster processing time for Canada-U.S. shipments.

LUFTHANSA CARGO FLEETRESTRUCTURING

Lufthansa Cargoplans to sell its entire

747-200 fleet of 8 cargo planes and replacethem with 5 MD-11 passenger carriers that willbe converted into freighters. The freighters willbe outfitted to handle cool containers, a part ofLufthansa’s strategy to improve and expandtheir services for temperature sensitive aircargo. The fleet restructuring will result in an all-MD-11 fleet of 19 aircraft by 2005. Three of the747-200s will be sold to Air Atlanta Icelandicand re-chartered by Lufthansa as the needarises.


NEWS ARTICLESLUFTHANSA CARGO RATE ADJUSTMENTBASED ON DEMANDLufthansa Cargo will adjust its shipment ratesbased on the level of demand of the route.Rates on peak-demand routes will be raisedhigher than on routes with weak traffic demand.The rate hike will take effect on October 1,2003, with an average increase of four percent.Lufthansa will continue to offer customers itstailored capacity purchase agreements.

US$6 MILLION CARGO TERMINALPROJECT PLANNED BY TNT FOR INCHEON

TNT Express intends to opena 6,600 m2 cargo terminal in

Incheon, Korea. The US$6 million project waspresented to the Korean authorities inSeptember. The South Korean airport will beTNT’s Northeast Asia logistics hub.Construction is set to begin in early 2004 andbe completed by 2005. DHL has also chosento build a freight terminal at Incheon Airport’sCargo Terminal C by the end of 2005.

EVA AIR SETS UP EUROPEAN CARGO HUBEVA Air plans to set up adedicated cargo facility, the

EVA Air Cargo Centre, in Brussels. The hubwill be responsible for all of the carrier’s cargooperations in Europe. EVA Air currentlyoperates 14 cargo flights per week to Europefrom Taipei.

KOREAN AIR CARGO AND CARGOJETALLIANCE ANNOUNCEDOn September 22, 2003, the two airlinesannounced a strategic marketing andoperational alliance. Korean Air Cargoflights to and from Canada will connectonto Cargojet’s network of premiumdomestic overnight service flights.Cargojet will provide Korean Air withsales, marketing and operational support inexchange for cargo sales, marketing andinterline support.

FEDEX REPORTS FIRST QUARTERREVENUE GROWTH

FedEx reportedearnings for the

quarter ending August 31, 2003 of $0.42per diluted share. A realignment of theFedEx Express business through earlyretirement and severance programsresulted in $0.27 of the reported earnings,and a one-time benefit of $0.08 per dilutedshare was realised from a court ruling infavour of the company over the treatmentof jet engine maintenance costs. FedEx’soperating income improved 21% beforebusiness realignment costs.

FEDEX EMPLOYEES SUPPORTVOLUNTARY PROGRAMPositive employee response to FedExExpress’ voluntary early retirement andseverance programs has led the companyto adjust its cost and savings forecasts forthese programs. FedEx Express expectsto save between US$130 million andUS$140 million, primarily in the second halfof the fiscal year.

UPS EXPANDS SOUTHEAST-ASIANSERVICES

UPS is now operating a dailyBoeing 737 flight between itsPhilippine base and KualaLumpur, with plans to increase

capacity to a B757 next year. BangkokB757 services are also planned to begin inOctober.


NEWS ARTICLESEZYCARGO WEB PORTAL OPEN FORBUSINESS

Cathay Pacific Cargo,Qantas Freight, JapanAirlines Cargo, and

Singapore Airlines Cargo have formed apartnership with Cargo Community NetworkSingapore and Global Logistics Systems(HK) to develop Ezycargo.com, a web-basedfreight portal which will provide a single point ofentry to all four airlines’ cargo services. Thewebsite was launched on September 25 in HongKong and will provide cargo customers with theability to book space, track shipments and checkflight schedules on the four Asia-Pacific airlines.

SENAI, MALAYSIA SITE OF NEW FEDEXDISTRIBUTION CENTREFedEx has opened a distribution centre inSenai, Malaysia, from where shipments will betrucked into Singapore Changi Airport, ratherthan flown in from Kuala Lumpur. This moveenables overnight shipping to 19 Asian centresand next-day service to North America. Cargopreviously took two to three days via KUL.

ATLAS AIR STOCK DELISTED ON NYSEThe New York StockExchange suspendedtrading of Atlas Air’s stock

in early September and wants the company de-listed. The decision was based on severalfactors, including Atlas Air’s financialdifficulties and the company’s delay incompleting SEC filings.

ALITALIA JOINS U.S. CARGO SALES JOINTVENTUREThe Italian carrier joins Air France, Korean Airand Delta Air Lines’ Atlanta-based jointventure. The joint venture is designed to offercustomers a central reservation system andcommon product line, as well as acomprehensive route network.

AIRPORTS

U.S. CLOSES TWO PACIFIC OCEAN TECHSTOP AIRPORTSThe U.S. has announced that it will close theairports at Midway Island and Johnston Atolldue to federal budget cuts. Both airports hadbeen used as emergency landing sites forETOPS (extended range twin-engineoperations) aircraft such as the B767.

TRAFFIC IMPROVES AT HONG KONGINTERNATIONAL AIRPORTAt the Hong Kong International Airport,overall passenger traffic has returned to morethan 90% of pre-SARS levels. Total passengertraffic in August was 3.02 million, a 22.3%increase from July. Cargo volume was also5.5% up from the same time last year.

AIRCRAFT MANUFACTURERS

BOEING PARTNERS WITH AIR FRANCEINDUSTRIESBoeing and Air FranceIndustries have formed a777 Component Services

program. The program allows airlines toreduce costs and inventory of critical linereplaceable units (LRUs) such as avionicsboxes and precision mechanical assemblies.Boeing and Air France Industries will send apart to airlines within one day of receiving theorder. The faulty part will then berestored/upgraded, and returned to theexchange inventory pool. Airlines agree to a10-year term, and pay a per-flight-hour rate thatcovers exchange of approximately 300 LRUs.


NEWS ARTICLESBOMBARDIER WINS CDN$1.2 BILLIONSKYWEST CONTRACTBombardier Inc. announced that it hasreceived a CDN$1.2 billion order for 30 CRJ700 regional jets from Utah based SkyWestAirlines Inc. The transaction includes optionsfor the purchase of an additional 80 jets, whichcould boost the value of the order to CDN$4.6billion. SkyWest had previously ordered 100regional jets from Bombardier and has takendelivery of 84 to date.

GOVERNMENT ANDREGULATORY

U.S. AND EUROPEAN UNION STARTSOPEN SKIES NEGOTIATIONSThe E.U. and U.S. have completed the firstround of discussions for an open aviation areabetween the two airline markets. The partieshave established that an agreement shouldinclude scheduled and charter services forpassengers and cargo, freedom to determineprices, capacity and frequency, user charges,ground-handling, intermodal operations, safetyand security. A second round of negotiations isplanned for December 8 in Brussels.

U.S. AND VIETNAM SIGNS AVIATION PACTThe U.S. and Vietnam have agreed to an airservices pact that will allow the first direct flightsbetween the two countries since the end of theVietnam War, effective immediately. However,the agreement does not allow for the pick up ofpassengers on stopovers, and limits the numberof all-freight flights. The 5-year pact will allowtwo U.S. carriers to each fly seven roundtripflights per week direct to Vietnam, and giveVietnam Airlines reciprocal rights for flights tothe U.S.

FAA APPROVES TAXIWAYS FOR A380 USEThe Federal Aviation Administration (FAA)

has defined requirements thatwould allow new A380 aircraft touse existing 75-foot taxiways in theU.S. Airports must designate

planned taxi routes, and aircraft must notexceed 15 mph, and be equipped with a taxiingcamera system (TCS) to assist pilots. Newtaxiways must be built to larger standardsrequired for A380 aircraft.

TSA RECEIVES 40 AIR CARGO SECURITYRECOMMENDATIONSThe Aviation Security Advisory Committeehas given 40 recommendations on 22 topicareas to the Transportation SecurityAdministration. Improvements to the KnownShipper Program and suggestions for a morelayered security program were among thesuggestions. There were contrasting opinionsas to whether the recommendations went toofar or not far enough.

FAA TESTS SECURITY CAMERAS ONAIRLINERSThe FAA is testing the use of cameras inaircraft as a measure to improve airsecurity against terrorist hijackings. Pilotshave opposed the idea, stating that havingcameras in cockpits would dilute theirauthority and could lead to groundpersonnel giving orders based onmisinterpretations or incompleteinformation. Supporters of the in-flightcameras say they could improve air safetyand crash investigations. FAA officialsstress that the cameras, if approved, arefor passenger safety and not for monitoringpilots.


NEWS ARTICLESNAV CANADA FEE HIKE APPEALED BY AIRCANADA

Nav Canada’s 6.9% feehike imposed last August isbeing appealed by Air

Canada. The airline, currently in bankruptcyprotection, claims that Nav Canada is out oftouch with current economic conditions and istrying to compensate for a revenue shortfall thatis the result of a decrease in business. NavCanada, a not-for-profit organisation, isrequired under legislation to break even.

CHINA AIRLINES’ AIRCRAFTPROMOTIONAL SLOGAN REJECTED BYCTA

In August, China Airlinessubmitted an applicationto the Canadian

Transportation Agency (CTA) for permissionto operate to and from Vancouver a repaintedBoeing 747-400 that stated “Taiwan, Touchyour heart” in place of “China Airlines” on thebody of the aircraft. This was part of a strategyto promote tourism in Taiwan. However, theapplication was rejected, as the AirTransportation Regulations (section 18c)require that the name of the licensee, ChinaAirlines, be shown clearly on the aircraft.

FRANCE INTRODUCES “NOISE TAX”

The French government hasannounced that it will increase

airport charges to finance soundproof work inresidential areas close to airports. The plan willincrease the funding to areas exposed to noiselevels above 70 decibels to US$64 million peryear, starting in 2004. The French airport“noise tax” could set a precedent for othercountries.

PEOPLE IN THE NEWS

WESTJET APPOINTS NEW MEMBER TOBOARDWestJet has appointed Alan Jackson to theboard of directors. He is currently President andCEO of both Arci Ltd., a real estate investmentcompany, and of Jackson Enterprises Inc, aholding and consulting company. He replacesBrian Gibson, who will remain active as aconsultant for the airline.

KWOK RESIGNS FROM AIR CANADABOARDEva Lee Kwok, a member of Air Canada’sboard of directors since 1998, has resigned toavoid the appearance of any conflict of interestin the airline’s equity solicitation process. Ms.Kwok serves as a director on the boards ofHusky Energy Inc., and CK Life SciencesInternational (Holdings) Inc., both of whichare controlled by the family of Victor Li, one oftwo candidates selected for becoming theairline’s equity partner. Ms. Kwok has notattended any meetings regarding the selectionof potential equity partners for Air Canada forthe same reason.

STAPLES PROMOTED TO MARKETINGDIRECTOR AT HALIFAX AIRPORTJerry Staples has been promoted to Director ofMarketing at Halifax International Airport.

OTHER

NEW PASSPORT REQUIREMENTSDELAYEDGovernment agencies and airports have beengiven more time to adapt to the machine-readable passport (MRP) rule. The deadlinefor overseas travellers to the U.S. eligible forvisa waivers to have MRPs has been extendedby one year, to October 1, 2004.


ECONOMIC OUTLOOK10 October 2003

Signs of improvement inthe U.S. economyFor the first time in eight months, therewas positive growth in employment inthe U.S. (seasonally adjusted non-farmpayroll employment, to be precise).Around 57,000 jobs were created inSeptember, surprising mosteconomists, who expected negative orzero growth. This appears to be afurther sign that the U.S. economy isgaining strength.

Another sign is the Gross Domestic Productfigures, which showed robust growth of 3.3%in the second quarter of 2003 following twoquarters of weak growth. The third quarter isexpected to be even stronger with forecastgrowth of over 5% (according toeconomy.com). The Economist’s poll offorecasts puts the annual GDP growth for2003 at 2.4% and growth in 2004 at 3.6%.

Other indicators such as theInstitute for SupplyManagement’s U.S. ProductionIndex, the PMI (www.ism.ws) andthe University of MichiganConsumer Sentiment Index(www.sca.isr.umich.edu) are fairlypositive as well. The PMI(Purchasing Managers Index) hasincreased from its low in Aprilindicating that the manufacturingeconomy in the U.S. has beengrowing, albeit at a modest rate.And the Consumer Sentiment Indexhas remained fairly steady (declining slightly) since its spurt following the official end of the Iraq war.Overall, the outlook for the U.S. economy is considerably improved from early this year. A few moremonths of positive job growth would certainly firm up this positive outlook.

Ian Kincaid

Manager,

Economic Analysis

-400

-300

-200

-100

0

100

200

Jan

Mar

May Ju

l

Sep Nov Jan

Mar

May Ju

l

Sep Nov Jan

Mar

May Ju

l

Sep

3.5%

4.0%

4.5%

5.0%

5.5%

6.0%

6.5%

Source: U.S. Bureau of Labor Statistics

U.S. Employment, Monthly Figures

2001 20032002

Unemployment Rate(seasonally adjusted)

Employment Growth(month on month change)

Sources: University of Michigan and The Institute of Supply Management

75

80

85

90

95

100

Sep

-01

Nov

Jan-

02 Mar

May Ju

l

Sep Nov

Jan-

03 Mar

May Ju

l

Sep

35

40

45

50

55

60

Consumer Sentiment

PMI

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

Q1

2000

Q2

2000

Q3

2000

Q4

2000

Q1

2001

Q2

2001

Q3

2001

Q4

2001

Q1

2002

Q2

2002

Q3

2002

Q4

2002

Q1

2003

Q2

2003

Source: U.S. Bureau of Economic Analysis

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


BIOMETRICS AND PRIVACY15 October 2003

Biometric technologies are increasingly being used for rapid authentication of a person’s identity.Returning from a trip to the U.S. last month, for example, I was successfully identified as "SolomonWong" through a CANPASS biometric iris scan and cleared Customs in less than 30 seconds.

The benefits of using biometric technologies in airport settings are well documented. However,according to a recent Ekos Research poll, fewer than 5% of Canadians surveyed could identify themeaning of the word "biometrics.” Worse yet, the issue of the privacy of biometric information is lessunderstood. This column dispels some of the "myths" associated with the increasingly complicatedworld of biometric technologies.

Can my biometric information be stolen?The short answer: Yes, like any piece of electronic information. In spite of firewalls and encryptiontechnologies, the potential still remains for data to fall into the wrong hands. It is important to remember,however, that biometric templates cannot be reverse-engineered to the individual.

As shown in the simplified example above, the biometric template on file for "John Smith" is a collectionof numbers (14.32, 8.53, 10.36, etc.). For authentication, biometric readings would involve matching thisfile template to a fresh reading (e.g. 14.31, 8.56, 10.34, etc.). If the numbers match within a reasonablelevel of confidence, then John Smith's identity is confirmed.Should a biometric template fall into the wrong hands, the damage to John Smith's privacy is minimal, asthis is simply a set of numbers. A greater concern is the potential for reverse engineering the algorithmfor the system from the set of numbers.

Is my biometric information protected?In Canada, the Privacy Act provides for the protection of documentation and biometric data. A "personalinformation bank" (PIB) is the repository for this information. Access to this information requires thatindividuals be notified of the purpose, legal authority, to whom the information may be distributed, and itsstorage location.

What about mandatory biometrics?A number of governments around the world are contemplating mandatory biometric registration forvisitors. Some, including Canada, are evaluating issuance of national ID cards with biometrics. Whilethe merits of such proposals are debatable, the privacy principles remain the same: by law, Canadianshave a right to know, and have access to, the information that a government collects about them. Moreimportantly, a greater understanding of the significance of biometrics needs to be communicated in orderto have a more informed debate on a critical public policy decision.

Solomon WongDirector,

Security & Planning


OTTAWA REPORT13 October 2003

Parliament returns. Parliament returned on September 15, 2003 after havingrecessed in mid-June. On the transportation legislation front, the word on thestreet is that Bill C-27, the proposed Canada Airports Act, is all but dead on theorder paper. Standing committee hearings on the bill will likely not take placeduring this session of parliament. Still on life support is the amended CanadaTransportation Act, or Bill C-26. With only a third of the 250 witnesses heard onC-26 in the spring, there seems to be only a remote chance that this bill, as itstands, will make it through the fall hearing schedule. The only possibility is if thebill is broken up into manageable pieces by mode of transportation. Given thatthe Thanksgiving break has already passed and that Parliament may prorogue inNovember, time is now Bill C-26’s biggest enemy. Witness after witness before

the Transport Committee in the spring of 2003 criticised C-26 citing it as not reflective of industry input.

United States-European Union Aviation Talks October 2, 2003 - While Canada’s airlines and airportswere calling on the Canadian federal government to take part in these historic talks between the UnitedStates and the European Union, the government was steadfast in refusing to get involved, even as anobserver. Many observers are of the view that unlike the Chicago Conference of 1944, where Canadahad a major role in shaping the bilateral aviation framework, this time Canada stands to not have anyinfluence by not being at the table. The talks could lay the groundwork for discussions about foreignownership, market access and cabotage.

Air Canada files appeal of NAVCAN fee hike with Canadian Transportation Agency. Air Canadawants federal regulators to repeal a 6.9% increase in fees imposed last August by Nav Canada. Theairline feels it inflicts further damage to an already fragile industry and fails to take into consideration theinterests of its customers. The claims are made as part of a 100-page-plus appeal the airline has filedwith the Canadian Transportation Agency (CTA) in its efforts to have the increase cancelled or reduced.In the documents, Air Canada's lawyers portray Nav Canada -- the country's monopoly provider of airtraffic control -- as an agency that is out of touch with the current reality in the airline industry. The CTAwill review arguments from both sides and render a decision.

Air Canada equity process could raise foreign ownership issues. On September 26, 2003 AirCanada announced that it has selected two qualified investors to move to the final phase of the equitysponsorship solicitation process to assist in funding its emergence from CCAA protection. The airlinewill enter into detailed negotiations with Cerberus Capital Management, L.P., a New York based assetmanagement firm with Canadian interests, and a company controlled by Mr. Victor T.K. Li, a Canadiancitizen with substantial global business interests.

Both proposals address Air Canada's minimum CDN$700 million target of new equity and each alsocontemplates co-investment by creditors through a rights offering which would increase total proceeds toCDN$1 billion. Whichever proposal wins will likely be reviewed by the Canadian Transportation Agencyto ensure that Air Canada is substantially controlled in fact by Canadian nationals and within the 25%foreign ownership cap which Ottawa has repeatedly rejected calls to relax.

Sam BaroneRegional Vice President,

Ottawa


WASHINGTON REPORT

15 October 2003

DOT: Passenger levels still below Pre-9/11 levelsThe DOT Bureau of Transportation Statistics reported in early October that U.S. airlines carried 6.4%fewer domestic passengers during the first half of 2003 than in the first half of 2001. Delta Airlinescarried the most passengers in June 2003 with 6.8 million enplaning domestic passengers. SouthwestAirlines was a close second with 45,000 fewer enplanements than Delta. American Airlines and UnitedAirlines had 6.5 million and 5.0 million enplanements respectively.

DHS Rolls Out US-VISIT ProgramIn October, the Department of Homeland Security (DHS)announced the implementation of the U.S.-VISIT entryprogram at 115 commercial U.S. airports. The program willcapture both entry and exit information on foreign nationalvisa holders visiting the U.S. Specifically, all foreign nationalvisa holders will be photographed and fingerprinted uponarrival and fingerprinted prior to departure from all air andsea ports-of-entry. The deadline for implementation of thisprogram at airports is December 31, 2003.

Carriers can be Sued for 9/11 AttacksA U.S. Federal Court judge ruled in early September that families of 9/11 victims can file negligenceclaims against American Airlines, United Airlines, the Boeing Company and the owners of the WorldTrade Center. Families must choose whether to join litigation or receive money from the U.S.Government compensation fund established by Congress. Victim’s families have until 22 December2003 to decide to join the suit.

U.S. Ratifies Montreal Convention

The U.S. filed its ratification of the 1999 Montreal Convention with the ICAO on 5 September 2003. TheU.S. was the last country needed to bring the convention into force. Where applicable, the conventionwill:

• Eliminate the Warsaw Convention limits on an airline’s liability for death or injury to internationalpassengers. (The Warsaw Convention of 1929 established rules regarding limits on airlineliability to passengers and limits on the access of many claimants to courts in their owncountries.)

• Allow lawsuits in cases of passenger deaths or injuries to be brought in the country of thepassenger’s principal and permanent residence.

Charles Chambers

Senior Vice President

GA2

And

Regional Vice President

InterVISTAS Consulting Inc.


CARGO CAPERS8 October 2003

One big step forward … On occasion, I have beenrather critical of the degree of government intervention inthe international air transport industry. This month,however, I have to tip my hat to the U.S. and EuropeanUnion, who last week met to kick off negotiations thatshould lead to a new more liberal air transport serviceagreement. It is unclear how far this agreement will go, orhow long it will take to get there, as the E.U. has a muchmore ambitious agenda than the U.S. Regardless, theoutcome will be a more open environment than currentlyexists. If the U.S. view prevails, the end result will be a U.S. model “open skies” agreement between theU.S. and the E.U. Although this will put Canada further behind the eight ball in the short-run, it willincrease pressure for Canada to dramatically liberalise its agreements and could benefit us in the longerterm. If the more aggressive European view prevails, we will eventually see a common aviation areacovering the North Atlantic. This would go beyond open skies to eventually include Right ofEstablishment, cabotage, removal of foreign ownership restrictions, and common safety and securityprovisions. Although Canada is not currently an active part of this negotiation, the pressures of such anopen environment between two of our major trading partners would force us to be part of the outcome,opening up opportunities for Canadian airports to act as gateways between the two blocs. Canadianstakeholders should already be lobbying Transport Canada to adopt this broader viewpoint and becomean active participant in this development.

The European view is the one that needs to prevail if aviation is to be able to fulfill the promise it holds toclosely link the world’s economies. There will, however, be challenges, including achieving U.S.legislative change and overcoming U.S. labour opposition. (The ALPA web site contains an articleshowing what they view to be the dangers of such an agreement: Manchester United, a hypotheticalChicago-based airline owned by a British sports/transportation conglomerate accepting applications frompilots holding E.U. aviation certificates; SunSki, a Polish-certificated airline operating exclusivelybetween Miami and Latin America; and a major U.S. air carrier announcing during a 30-day cooling offperiod that if its pilots strike it will operate its full international schedule using aircraft and crews leasedfrom Europe. Aside from the cute word play on Man U and the somewhat politically incorrect Polishjoke, these concerns highlight the difference in perspective that labour has from most otherstakeholders).

… and one big step backward . You would think that the international air cargo industry is challengingenough, with carriers needing to cope with unbalanced traffic flows, seasonal peaking, competition,obtaining access to congested airports, mitigating noise and environmental concerns, dealing with everincreasing security requirements and trying to circumvent archaic regulatory impediments. But no –unfortunately, the courts now have added yet another layer of complexity. The case in point is the June2003 seizure of a Ukranian Antonov AN-124 at Goose Bay by a Newfoundland and Labrador Sheriffacting on the basis of a Federal Writ of Seizure and Sale that reflects a May 2002 decision by a Swedishcourt. The reason for the seizure is a US$42 million outstanding debt to TMR Energy stemming from thebreaking of a 1993 contract. What makes this remarkable is that the debt was not owed by Antonov – itwas owed by the Ukraine State Property Fund! Since both Antonov and the State Property Fund arestate-owned enterprises, the assets of both were deemed to be the property of the state by the Swedishcourt, and thus the AN-124 was considered as eligible security for the State’s obligations.The seizure was appealed, and the Federal Court of Canada held a hearing at the end of August. Adecision was expected by now, but the illness of one of the judges has delayed the rendering of thedecision.

Robert AndriulaitisDirector, Transportation &

Logistics Studies


The implications are significant. If upheld, state-ownedaircraft could be vulnerable to seizures for debts owedby other state enterprises. Not surprisingly, theUkraine announced that all state-run airlines shouldsuspend flights to all countries that may be affected bythe Swedish ruling. On the negative side, potentialservices by a carrier interested in serving Canada havebeen thwarted by factors outside its control. On thepositive side, it certainly provides incentive for theprivatisation of state-owned airlines!


TIME TO REPLACE THE 727 FREIGHTERThe Boeing 727 has been one of the world’s most successful small jet freighters. An inventory by ArielAviation shows that with over 500 in service, the 727F represents 85% of small cargo jets and 30% of allfreighters. While there are some newer 727 models that are only just over 20 years old, many of thesevenerable aircraft are nearing the end of their useful life. The 727-100 models average about 36 years inage, with the average 727-200 only about 3 years younger. Engines are reaching the limit of their life.While this aircraft could continue in a freighter mission for some time, since 911 the price of replacementaircraft has dropped dramatically and the economics of re-engineering the aircraft are weakening.

The question is which aircraft will replace the 727F in Canada. The 727 is a critical cargo aircraft here --Kelowna Flightcraft has 18 aircraft (both 100s and 200s) and Cargojet has nine aircraft (all 200s).

The leading candidates appear to be the 737-300/400, the 757-200 and perhaps the A320/321, althoughall of these are likely to remain in front-line passenger service for quite some time yet. Some Europeancarriers, such as TNT, have even looked at the Russian TU-204, but these are not licensed yet foroperation by European Union carriers. DC-9s are too old and too small. The MD-80 cannot handle 125”x 108” pallets, which limits its ability to integrate with other aircraft.

757 Most Likely. I attended the Air Cargoeconomics conference in Amsterdam last monthand had an opportunity to chat with a number ofindustry leaders about 727 replacement. It isincreasingly my view that the 757 will emergeas the prime candidate for 727F replacement in Canada. There are a number of reasons for this. Thefirst 757-200 was delivered in 1982, which puts it at that life cycle stage for conversion to freighterconfiguration. Over 1,000 were produced, which gives an ample market to choose from. Barring arecent, small Chinese order, no new orders have been received for some time now, and only one carrier,Continental, has undelivered aircraft. Thus it seems increasingly likely that the production run will stopsoon. This should result in a drop in the price of the used aircraft. A couple of third party firms haveannounced their intention to offer conversion services. The aircraft is fuel-efficient, has low maintenancecosts, and offers labour savings over older the 727. The 737-300/400 is also a candidate, butdiscussions with a leading Canadian 727 operator made clear that our markets can support the extracapacity of the 757-200F.

As soon as retired 757s show up on the market at prices under US$10million, I would expect Canadianfreight operators to begin purchases. The transition will not be overnight. It is likely that an operator,such as Kelowna, will purchase one or two and begin a multi-year effort to develop a 757F conversionprogram. The process will involve obtaining certification for the conversions, training staff, then graduallyimplementing the program, putting them into service, one at a time.

There will be a lot of advantages for airports and their communities when the conversion is made. The757F is much quieter than the 727. Its cost per ASK may also be much less, provided the additionalcapacity can be sold. This will be of benefit to shippers and consumers. The aircraft is larger than the727, so airports will benefit from increased landing fees, however, airports will also need to ensure theirapron space is adequate to handle them.

Michael Tretheway

Vice 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 isspeculative and may not materialize.

Prepared by InterVISTAS Consulting Inc.

IVC Sample 21 October 2003 - InterVISTAS · Payments are expected to resume once Memoranda of...

Documents

Transcript of IVC Sample 21 October 2003 - InterVISTAS · Payments are expected to resume once Memoranda of...