ivx sample april 2003 - intervistas · protection.1 tango and jetz are merely brands of air canada,...

© InterVISTAS Consulting Inc.April 2003

INDUSTRYREVIEW


RESTRUCTURING AIR CANADA6 April 2003

On April 1, Air Canada filed in the Superior Court of Ontario for bankruptcy protection underthe Companies’ Creditor Arrangements Act. There is a lot of speculation in the media and onthe street as to what Air Canada will look like when and if it emerges from CCAA. This month,we look at some of the facts about the bankruptcy filing.

The filing• As expected, Air Canada chose to use the CCAA

rather than the Bankruptcy and Insolvency Act. TheBIA has provisions for bankruptcy protection, but itis much less favourable for the company.

• Air Canada filed for protection for itself and somebut not all of its subsidiaries. Jazz Air Inc., Zip AirInc. and Air Canada Capital are under bankruptcyprotection.1 Tango and Jetz are merely brands of Air Canada, and not separate companies –these brands are now being operated under bankruptcy protection. Not included in the filing(and operating with business as usual) are AeroPlan, Air Canada Vacations and Destina.

• Zip CEO Steve Smith indicated that Zip still plans to proceed with its growth strategy, and tooperate 20 aircraft by the end of the year.

• The filing indicated Air Canada had assets with book values of $7.8 billion and liabilities of $9.7billion. Long term debt is listed as $4.2 billion.

• The largest creditors are listed as Bank of Nova Scotia Trust Company of New York ($442million), and the Bank of Nova Scotia with CIBC representing nine other Canadian financialinstitutions ($300 million).

• Roughly 60% of the listed long term debt is owned by non-Canadians.• 222 of 232 aircraft are leased. Only ten are owned by the Company.

ProtectionThe CCAA allows Air Canada to suspend making payments. Secured creditors can beprevented from repossessing any financial or physical assets during the period of protection.

Financing• At the time of the filing, Air Canada had $375 million unrestricted cash on hand.• General Electric Capital Canada has provided CA$1.05 billion in debtor in possession (DIP)

financing. This is believed to be the largest DIP financing in Canadian history.• Just over half of this is a term loan, available immediately. The balance is a revolving credit

facility. The loan has an 18 month term.• GE Capital holds leases on roughly 100 Air Canada aircraft.• The Globe&Mail estimated that GE is one of Air Canada’s largest creditors and holds more than

$1 billion in AC’s debt or leases.• The Globe&Mail reported that the terms of the DIP loan pledge AC’s free assets as security for

22 of the roughly 100 aircraft leased by GE to AC.

1 There are four other subsidiaries in protection: Manoir Int’l Finance Inc., Simco Leasing Ltd., Wingco LeasingInc., and 3838722 Canada Inc.


RESTRUCTURING AIR CANADA CON’TWho makes decisions?• While Air Canada may make proposals to the court as

to how funds should be spent and how the companyshould be restructured, actual decisions are now inthe hands of Justice James Farley. The justice candismember the company and sell assets over AirCanada’s objections.

• Restructuring will require that each class of debtorapprove the plan which Air Canada will put forth.Note that one class cannot out vote another. Withineach class, a majority of investors representing atleast 2/3 of the liabilities of that class must approvethe restructuring plan. This double test is to prevent afew large creditors from forcing a solution on smallinvestors, and vice versa.

• Air Canada has hired New York based Seabury Groupas investment advisors for its restructuring. This isthe same group that handled the successful USAirways restructuring.

• Air Canada has appointed Calin Rovinescu (Executive VP Corporate Development and Strategy)as Chief Restructuring officer.

Timing• The CCAA allows Air Canada 30 days to put forth a restructuring plan. However, the court may

approve an unlimited number of extensions, and is likely to do so, provided progress towardrestructuring is being made. Unlike the U.S., Canada, however, does not have a history of longperiods of bankruptcy protection.

Labour• There are no provisions under the CCAA for abrogating any labour contracts. This is quite unlike

the U.S. Chapter 11 provisions, where the company can petition the court to cancel labouragreements.

• CCAA does allow some scope for terminating executory contracts, but this is unlikely to beapplied to labour contracts. It can be applied to arrangements such as leases, ground handlingcontracts, etc.

Foreign Ownership Restrictions• Any restructuring must comply with the restriction that no more than 25% of new voting equity be

held by non-Canadians, including conversion of all or part of debt, leases or obligations to newequity.

• There is a similar restriction in the Air Canada Public Participation Act that prevents any oneindividual or entity from owning more than 25% of Air Canada’s voting equity.

• Given the large amount of debt and aircraft leases held by non-Canadians, restructuring of AirCanada could be seriously impeded by the foreign ownership restrictions.


Source: Air Transport Association

SARS – ANOTHER GLOBAL TRAVEL CRISIS

The global airline industry has been hit with another crisis. SARS (Severe Acute RespiratorySyndrome) has severely impacted travel to and from Asia, especially Hong Kong and Mainland China.Although little is known about the disease, it appears that it spreads quickly through the population.This has prompted the World Health Organization to issue travel advisories to the general public toeither limit or delay travel to global high-risk areas of Hong Kong, China, Singapore and Taiwan forthe near term. Hong Kong and China have close to 2,300 cases of SARS, world wide there are closeto 2,800 cases of the disease.

Canada, especially Toronto, has also been widely affected by SARS. As of April 11, there were 98cases of the disease and many more suspected cases nationwide; there have been 10 deaths inCanada since the outbreak that began at the beginning of March.

Airline ImpactThe Air TransportAssociation (ATA) reportsthat for the four-weekperiod ended April 6, U.S.system-wide traffic wasdown 17%. It is noted thatpart of this decline can alsobe attributed to the war inIraq. However, during thepast week, Asia-Pacifictraffic has been down 26%from the same period lastyear. With depressedtraffic, ATA member airlineshave had to cut seatcapacity in recent weeks.

Air Canada’s overall traffic for the month of March was down 10.1%. The airline’s Asia-Pacific trafficwas down 18%.

Asian air carriers have had to reduce seat capacity system-wide due to weakening demand for airservices. Cathay Pacific has scaled back its system-wide seat capacity by 14%, or a 23% reductionin the number of flights in the past 2 weeks.

Local Asian governments have also impacted the air travel industry. The Government of Malaysiahas decided to impose strict visa requirements on Hong Kong citizens wishing to travel to Malaysia.As a result, on April 10, Cathay Pacific announced that it would suspend all of its flights betweenHong Kong and Malaysia until further notice.

Doris Mak

Senior Market Analyst

Lifting of WHO Travel Advisory

The World Trade Organizationwould only consider lifting the traveladvisory after three incubationcycles of declining infectionnumbers. WHO defines theincubation period for SARS as 10days from the time of exposureuntil a person shows symptoms.

Under the most optimistic casescenario, the WHO travel advisorywill remain in effect at least untilmid-May.


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

Passenger TrafficRevenue Passenger Kilometres

CapacityAvailable Seat Kilometres

Load FactorAir Carrier

% Changeover 2002

% Changefrom 2001

% Changeover 2002

% Changefrom 2001

% Changeover 2002

% Changefrom 2001

Air Canada2 -9.7% -5.5% -5.6% -1.2% -3.3 pts(to73.6%)

-3.3 pts

Domestic(Mainline) -12.3% -11.9% -7.3% -5.5% -4.1 pts

(to 71.9%) -5.2pts

Domestic(Jazz) +0.8% n/a -7.9% n/a +5.2 pts

(to 60.2%) n/a

Domestic(Consolidated) -10.8% n/a -7.4% n/a -2.7 pts

(to 70.1%) n/a

International& Charter -9.2% -8.2% -4.8% -6.3% -3.7 pts

(to 75.3%) -1.6 pts

WestJet +49% +124% +58% +141% -4.0 pts(to 66.8%)

-5.1 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.

Analysis:• WJ traffic and capacity continues to grow.• Its load factor is now almost 7 points below

Air Canada’s.• AC domestic traffic is continuing its

downward trend. This is the 3 rd consecutivemonth with double digit declines.

• AC international traffic is also now declining.• Traffic for Jazz is improving.

2 Air Canada traffic numbers are a consolidation of mainline and Jazz.

0%

10%

20%

30%

40%

50%

60%

70%

80%

Apr-02

May Jun Jul Aug Sep Oct Nov Dec Jan-03

Feb Mar

RPKASK

WestJetWestJet

-15%-10%-5%0%5%

10%15%20%25%

Apr-02

May Jun Jul Aug Sep Oct N o v Dec Jan-03

Feb Mar

Dom RPKDom ASK

Jazz data is not includedin this graph

Air Canada Domestic Mainline Air Canada Domestic Mainline

-15%-10%

-5%0%5%

10%15%20%25%

Apr-02

May Jun Jul A u g Sep Oct Nov Dec Jan-0 3

Feb Mar

Int'l RPKInt'l ASK

Air Canada InternationalAir Canada International

NEW CARRIERS:LOAD FACTORS

Jetsgo: 73.6%Zip: not reported

CanJet: not reported


AIRLINE DATA – U.S.U.S. Airlines Release March 2003 Traffic Figures –

Airline Load FactorTraffic

(RPMs – millions)Capacity

(ASMs – millions)

171.6%

â2.7 pts

9,990

â4.8%

13,949

â1.1%

76.5% 3

â4.2 pts

1,281

á3.9%

1,880

á17.4%

271.6%

â7.9 pts

4,915

â8.3%

6,865

á1.9%

72.3%

â3.8 pts

8,273

â8.1%

11,449

â3.2%

82.3%

â3.5 pts

894

á76.4%

1,087

á84.1%

75.5%

â6.4 pts

5,991

â6.4%

7,940

á1.6%

67.3%

â2.9 pts

4,058

á1.1%

6,026

á5.4%

73.7%

â3.8 pts

8,719

â5.7%

11,831

â0.8%

3 73.4%

â4.6 pts

3,203

â15.9%

4,376

â10.4%

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

Source: Carrier traffic reports.

InterVISTAS Consulting Inc. ©April 2003

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

Toronto VancouverMontreal-

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

March -7.0% -13.1% -2.0% -11.4% -12.9% -12.4% -17.2% -6.5% -3.0% -7.6% -7.8% -11.8%

1st 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% n/a +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% n/a +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% n/a +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% n/a +6.3% +3.5% +6.2% +13.0% +4.5% +2.9% +4.0% +6.8% -0.3% -5.8%

2003

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

Note: Toronto traffic levels derived from Statistics Canada data.


AIRLINE STATUSAirline Status April 2003 –

Airline StatusAs of 15 April 2003

Carrier Bankruptcy CapacityCut

Job Cuts Comments

Air Canada 1 April 2003 -15% 3,600 May invoke force majeureclause to implement layoffs

Air NewZealand

Cutting service to Los Angeles,Hong Kong, Osaka, Nagoya

American Press claims ithas narrowlyaverted due tounionconcessions.

Carrier stillcontemplatingChapter 11 filing

Int’l –13%Dom – 2%

1,000 pilot jobs 2002 loss was largest inaviation history. Carrier isusing grace period in debt andlease contracts to avoidpayments. Reached majorsettlement with union.Delaying launch of LosAngeles-Narita by 1 year.

Carrier warned unions on 7April that if concessions notapproved soon, it will file forChapter 11 protection

AmericaWest

“will cut jobs”

Asiana Will cut some domestic flightsand reduce service to Guam(U.S. territory)

Avianca(Columbia)

Chapter1121 Mar 2003

Filed in U.S. court

BritishAirways

-4% overall

–6% NAtlantic

Accelerate planto cut 3,000

CathayPacific

-37% May halt all flights in May dueto decline in number ofpassengers and SARS.

Continental -2% 1,200 Suspended some Trans-Atlantic and Trans-Pacificflights. Dropping Hong Kongservice

Delta -12% Song to start 6 routes in June

Dragonair -25% SARS related reductions

Finnair 1,200

Iberia -4%


Airline StatusAs of 15 April 2003

Carrier Bankruptcy CapacityCut

Job Cuts Comments

Hawaiian Chapter 1121 Mar 2003

KLM -7% Thousands ofjobs

Seeking 10% reduction in unitcosts

Korean Will reduce flights to some U.S.cities

Midwest Claims it has taken steps toavoid bankruptcy

NW -12% 4,900

Qantas -20% 1,000

SAS 4,000 Seeking US$1.5 billion in costreduction in 3 rd majorrestructuring since 911. Wagefreeze in place and majorproductivity concessionsallowed by unions.

Singapore -19.7% SARS and Iraq war reductions.Cutting Hong Kong flights by50%. Cancelling Kaoshiung,Hiroshima. Cutting LosAngeles, New York,Amsterdam, Frankfurt,Manchester, Hanoi,Guangzhou

TurkishAirlines

Bookings have dropped 50%

UAL Chapter 11 -8% 1,100mechanics,2,300 flight

attendants tobe on unpaid

leave.

Says it will not meet Q2 cashflow requirements for DIPfinancing but dismissesgrowing media speculationover Chapter 7 liquidation

US Airways Chapter 11

Emerged 1 April2003

-4% Dropping allPIT Europe

service

Emerged from Chapter 11, apre-condition for needed U.S.Government loan guaranteeand Alabama Pension fundfinancing

Virgin Atlantic -3%

Prepared by InterVISTAS Consulting Inc. (www.InterVISTAS.com).Sources include airline press releases and Reuters.


NEWS ARTICLES

AIR CANADA UPDATEAIR CANADA FILESFOR BANKRUPTCYPROTECTIONOn April 1, 2003, Air Canada filed forbankruptcy protection under the Companies’Creditors Arrangement Act allowing thecompany to continue operating while it tries tofile a restructuring plan. Transport MinisterDavid Collenette indicat ed that Ottawa will notoffer a cash bailout for the carrier but insteadwill provide other forms of assistance.Meanwhile, General Electric Capital Canadawill provide the carrier with a $1.1 billion indebtor-in-possession financing. To access thefinancing, AC has agreed to pay GE a “closingfee” of U.S.$35 million. At the same time, AirCanada and the Canadian Auto Workers Unionagreed to slash more than 1,000 jobs – itsshare of the 3,600 job cuts announced onMarch 20.

AIR CANADA CODE SHARES TOLAMEZIAAir Canada will begin code sharing services viaRome to Lamezia Terme, Catania, Palermo andVenice with Italian carrier Air One, a Lufthansaaffiliated air carrier.

ZIP EXPANDS NETWORKEffective May 18, Zip Air will add a daily non-stop service from Vancouver and Winnipeg toSaskatoon.

OTHER CANADIAN AIRLINESCANJET INCREASES SUMMERFLIGHTS BY 40%CanJet Airlines will increase its summer flightsby over 40% during the peak summer period.Flight increases will begin as early as June 2.Those flights include:• Moncton-Montreal-Toronto four times

weekly service starting June 2• Halifax-Deer Lake service increases to four

flights per week starting June 2• Toronto-St. John’s non-stop service starting

June 21

• Fredericton-Montreal daily service startingJune 21.

Also, beginning June 22, CanJet Airlines willexpand its network to include a Fredericton-Toronto service.

JETSGO INCREASES SUMMERSCHEDULEBeginning in June, Jetsgo will add six newdestinations to its schedule. These include:Victoria, Thunder Bay, Saint John, St. John’s,Gander and Happy Valley. In total, the carrierwill serve 18 Canadian and two U.S. cities.

HMY AIRWAYS SCHEDULES SUMMERSERVICEOn May 5, HMY Airways will commence up to13 weekly round trip flights between Vancouverand Toronto.

U.S. & INTERNATIONALAIRLINESU.S. AIRLINE INDUSTRY TRAFFICDECLINES 17.4%The Air Transport Association reported adecline of 17.4% for U.S. airline’s systemwidetraffic for the week ended April 6. Pacific trafficdropped 25.8% for the first week of April.

AMERICAN AIRLINES AVOIDS CHAPTER11American Airlines hasavoided bankruptcy filingwhen it reached tentativeagreements with its three major unions. Theagreements will see reduced pay and benefitsthat will save the carrier US$1.8 billion annually.


NEWS ARTICLESCONTINENTAL TO SLASH 1,200 JOBSAs part of a US$500million cost-cutting plan,Continental Airlinesplans to eliminate 1,200 jobs by the end of theyear. These job cuts will be in addition to the4,300 employees already on furlough or leavesof absence. Senior management positions willbe reduced by 25% and pilots reduced by 125.Further cuts will affect reservation agents,airport agents and other employees.

CONTINENTAL OFFERS SERVICE TOSTANSTEDContinental Airlines announced it willcommence daily service to London StanstedAirport. Stansted has become a huge hub ofseveral low cost carriers.

NWA TO OFFER DETROIT-HALIFAXSERVICEStarting July 1 until September, NorthwestAirlines will offer new nonstop service betweenDetroit and Halifax. The service will beoperated with an Avro RJ85 regional jet.

NWA TO SHED 4,900 JOBSNorthwest Airlines plans to cut 4,900 jobs,ground 20 aircraft and cut capacity by 12% inan effort to deal with the sharp declines indemand.

UNITED REACHES DEAL WITH IAMUnited Airlines and theInternational Association ofMachinists and AerospaceWorkers have reached tentative agreementsthat, if ratified, could result in US$2.6 billion insavings for the airline over six years. Thesavings will be achieved through a 13%decrease in wages, a 20% employee co-payment towards the cost of health insurance,and work rule changes for part-time employees.

UNITED EXPRESS BEGINS CHICAGO-WINNIPEG SERVICEStarting June 12, United Express partner AirWisconsin, will offer two daily flights betweenChicago and Winnipeg. The service will beoperated with 50-seat regional jets.

US AIRWAYS TO PLACE RJ ORDERUS Airways CEO, Dave Siegel, is close toplacing a large order of 50- and 70-seat regionaljets from Embraer. He believes that theEmbraer product line will be important to USAirway’s near-term recovery and further praisesthe Embraer 170 as a “revolutionary” aircraftthat would give US Airways a significantcompetitive advantage.

SKYWEST 4TH QUARTER PROFITS RISE29%SkyWest reported aUS$17.8 million netprofit for the fourthquarter, a 29% increase from the previous year.Revenues for the quarter increased 2 6% toUS$208 million. Revenues do not includeUS$9.7 million that United Airlines owed toSkyWest before it filed for bankruptcy.Expenses totaled US$179 million, up 22% fromthe previous year.

SAS SNOWFLAKE BEGINSOPERATIONSSAS’s new low-cost carrier, Snowflake, beganoperations on March 30 using four Boeing 737-800s. The airline plans to operate with regularSAS staff, and bookings will be made throughregular distribution channels. A Website isslated to launch in June.


US Air Cargo Growth Rates

-15%

-10%

-5%

0 %

5 %

10%

15%

20%

25%

30%

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

Dom Total

DHL1.8%

Emery0.2% Bax Global

0.2% Other0.5%

Airborne9.4%

US Postal Service

22.1%

UPS29.7%

FedEx36.1%

Source: Air Cargo World

Shares of US Courier Market Shipments Under 70 poundsShares of US Courier Market Shipments Under 70 pounds2002 (1st 9 Months) 2002 (1st 9 Months)

NEWS ARTICLESCARGOU.S. CARGO INCREASESU.S. Air Transport Association figures forFebruary show a 0.6% increase in revenue tonmiles for domestic cargo and a 8.5% increase ininternational cargo. Total freight volume for themonth increased 4.4% from the previous year.

CARGOJET OFFERS SERVICE TOMEXICOCargoJet plans to launch thrice-weekly cargoservice to Mexico City and Guadalajara fromHamilton on June 30.

FEDEX, UPS, U.S. POSTAL SERVICEDOMINATE U.S. COURIER MARKET IN2002In 2002, FedEx, UPS and the U.S. PostalService made up 87.9% of the under 70 lbsmarket shipments in the U.S.

EMERY TO BECOME MENLOBy next January Emery Forwarding willchange its name to Menlo WorldwideForwarding. The company has conductedbusiness under the Menlo Worldwide SM brand,which is also a division of CNF Inc.

DHL INCREASES OWNERSHIP IN AHKDHL WORLDWIDE Express has increased its30% stake in Air Hong Kong by another 10%.The remaining 60% is owned by Cathay Pacific.

FEDEX 3RD QUARTER NET INCOME UP23%For the third quarter fiscal 2003, FedExCorporation reported US$5.6 billion inrevenue, an increase of 10% from the previousyear. Operating income increased 14% toUS$269 million and net income rose 23% toUS$147 million.

DEUTSCHE POST ACQUIRESAIRBORNE UNITDeutsche Post has agreed to purchase theground operations of Airborne Inc. DeutschePost subsidiary, DHL, will pay US$1.05 billionfor the acquisition. Airborne’s air operations willbecome an independent public company calledABX Air, Inc in order to conform with U.S.foreign ownership restrictions.

SIA CARGO AND LUFTHANSA IMPOSEWAR-RISK SURCHARGESSingapore Airlines Cargo and LufthansaCargo have introduced worldwide war-risksurcharges to cover additional costs during thewar in Iraq. SIA will charge US$0.25/kg whileLufthansa will charge US$0.11/kg.

TAIWAN CARRIERS INCREASE CARGORATESOn March 24, Eva Airways and China Airlinesincreased their shipment rates by 20-30%.China Airlines raised its rates to Europe by20%, while EVA raised rates by 45-50%.


NEWS ARTICLESLUFTHANSA AND KLM CUT CARGOSURCHARGESDue to falling fuel prices Lufthansa Cargo andKLM Royal Dutch Airlines NV will reduce theircargo surcharges. KLM will drop its $0.10/kgsurcharge and Lufthansa will cut its currentsurcharge of $0.21/kg to $0.16/kg.

AIRPORTSMONTRÉAL AIRPORT REVENUES UP8.2%Aéroports de Montréal reported consolidatedrevenues of C$197.3 million, up 8.2%, for theyear ended December 31, 2002. Operatingexpenses improved 11.3% from the previousyear to C$105 million.

AÉROPORTS DE MONTRÉAL OUTLOOKDOWNGRADED TO STABLEMoody’s Investor Services has confirmed the“A2” rating on the C$350 million airport revenuebonds of Aéroports de Montréal and haschanged the outlook from positive to stable.The change to stable is more consistent withthe current economic and air transport industryenvironment.

LUFTHANSA RETURNS TO MONTREALOn May 19, Lufthansa will operate a daily flightbetween Montréal and Munich. The service willbe operated by an Airbus A340.

AIRCRAFTMANUFACTURERSBOMBARDIER KEEPS TORONTO PLANTOPENA new labour deal reached by Bombardier Inc.and CAW will see Bombardier’s de Havillandaircraft assembly plant lose 650 employees inorder to keep the facility operating for at leastanother three years. Under the new deal, theplant’s 1,900 unionized employees will seewages increase by 7% with improvements topension and severance clauses.

BOMBARDIER SELLS UNITS, FOCUSESON AEROSPACEIn an attempt to reduce its debt burden,Bombardier Inc. plans to sell its recreationalproducts division and focus solely on itsTransportation and Aerospace units, includingits successful line of regional jets and corporateaircraft. The company anticipates producingmore than C$2 billion in new liquidity from acombination of a stock offering worth C$800million and the sale of the snowmobile and jetski product lines worth C$1.5 billion. Thecompany has also announced that it is innegotiations to sell its Defense Servicesbusiness and Belfast City Airport.

FAIRCHILD DORNIER 328JET PROGRAMACQUIREDAvCraft Aviation, an aircraft services providerbased in Virginia, will acquire FairchildDornier’s entire 3278JET program. AvCraft willalso acquire production, customer and materialsupport facilities in Oberpfaffenhofen, Germany.

EMBRAER FOURTH QUARTERRESULTS STRONGEmbraer reported a fourth quarter net profit ofUS$192 million. The company delivered 41planes, seven more than in the same quarter in2001. Net sales for the full year totaled US$2.5billion, while net income was US$223 million.

GOVERNMENT ANDREGULATORYCANADA AIRPORTS ACT INTRODUCEDOn March 20, David Collenette introduced theCanada Airports Act, a new legislation intendedto regulate Canada’s airports. The legislationwill set out the roles and obligations of theCanadian Government and the airportoperators. A total of 30 airports, including 26National Airports System airports will beaffected by this Act.

FUEL PRICES

April 4, 2003

SPOT OIL PRICES DROPPINGFUTURES PRICES STILL LOW

Crude Oil Price:Spot – US$28.42(down 23% from March)

Future• 6 month - $25.54

(October 2003 delivery)• 12 month – $24.68

(April 2004 delivery)• 2 year - $23.97

(April 2005 delivery)• 5 year - $23.97

(April 2008 delivery)


NEWS ARTICLESNAV CANADA EXPECTED TO RAISEFEESNav Canada plans to increase the fees itcharges to carriers to cover its revenue shortfall.The company faces revenue problems such as• a C$44 million bill for February and March

owed by Air Canada; and• a decline in traffic volumes leading to lower

airline revenues.Nav Canada will undertake a consultationprocess before a new fee can be implemented.

EU CLOSER TO OPEN SKIESOn March 21, the European Council urged theCouncil of Transport Ministers to give amandate to the European Commission tonegotiate an open-skies agreement with theU.S.

PEOPLE IN THE NEWSNAV CANADA APPOINTS SENIORLEADERSHIP TO EXECUTIVEMANAGEMENT COMMITTEERichard Dixon has joined NAV Canada’sExecutive Management Committee as the VicePresident and Human Resources Officer. KathyFox has been appointed Vice President,Operations.

AIR CANADA APPOINTS ROBERT E.BROWNRobert E. Brown has been appointed Vice-Chairof Air Canada’s Board of Directors. Brownformerly served as the President and CEO ofBombardier Inc. from 1999 to December 2002and has held several senior positions with thefederal government.

BESSELER RESIGNS FROMGOVERNMENT OF CANADADuane Besseler, the Government of Canada'sChief Air Negotiator, has resigned his position.No replace has been named as yet.

OTHERFATALITY RATES DOWN FOR U.S.CARRIERS, UP FOR WORLDThe National Transportation Safety Boardreported a decline of 11% in the U.S. accidentrate in 2002. It must be noted that departuresfor U.S. scheduled airlines decreased in 2002.According to ICAO, worldwide fatalities onscheduled service have increased to 791 fromlast year.

CONCORDE ENDS SERVICEAir France and British Airways announcedthat the retirement of their Concorde fleets. AirFrance will end its Concorde flights beginningMay 31 and British Airways will end flights at theend of October.

AMERICANS INTEND DOMESTIC TRIPSAccording to a Travelocity poll most Americansintend to travel within the U.S. rather thanoverseas over the next year. The studyindicates that almost 90% plan to traveldomestically more than 200 miles from homeand 61% plan to travel within 200 miles.


NEWS ARTICLES

US AIRWAYS EMERGES FROM BANKRUPTCY

US Airways emerged from bankruptcy on March 31, 2003. This was 7.5 months after itsoriginal filing for Chapter 11 protection on August 11, 2002. Key elements of its financialrestructuring include the following:

Corporate restructuring• a new board of directors• continuation of David Siegal as CEO• a new regional airline division within US Airways to operate regional jets: MidAtlantic Airways to

be started by the end of the year• US Airways will apply for membership in the STAR alliance• cancellation of prior common stock• General unsecured creditors are expected to receive under 2% of their claims

New funds• new financing of US$1.25 billion• US$250 million in new equity• a new US$1 billion loan, 90% of which is secured by the U.S. Air Transportation Stabilization

Board, and is to be paid out in the last three years of the 6.5 year term• new common stock is owned 37% by the new equity investor, 30% by employees, 11% by

unsecured creditors, 10% by the U.S. ATSB, 8% by management, 5% by General Electric

Use of funds• US375 million of the $1.25 billion repaid debtor in possession financing• part of the funds will be used to purchase/lease new regional jets for MidAtlantic and its other

regional carriers• the turboprop fleet will be eliminated by 2008

Cost Savings• annual operating cost savings of US$1.9 billion per year: $1billion from labour cost savings, $500

million from reduced lease and debt payments, and $400 million from vender savings and othersources

• aircraft debt and lease obligations reduced from US$8.4 billion to $5.6 billion• replacement of the defined benefit pension plan for pilots with a defined contribution pension plan• cost per available seat mile is expected to fall from US 12.2 cents to 9.9 cents• cancellation of its lease with Allegheny County, the operator of the Pittsburgh International Airport

with a new lease being negotiated• a new credit card processing agreement, which replaces National Processing Corp. with Bank of

America (Note that BoA was one of the funders of the DIP financing)


Ian KincaidSenior Economist

ECONOMIC OUTLOOK15 April 2003

War, disease … For severalmonths the economic outlook forthe world economy has beenclouded by the threat of war in Iraq.Now a new cloud looms in the formof Severe Acute RespiratorySyndrome (SARS). As of April11th, the World Health Organisation(WHO) had received reports of2,890 cases of SARS infection and116 deaths, the vast majority ofwhich have been in Asia,particularly Hong Kong and China.3The economic impact of SARS hasbeen felt most heavily in the Asiantravel and tourism industry. Cathy Pacific, Singapore Airlines and Quantas have all cited SARS asone reason for recent capacity cutbacks. Hotel and conference bookings in Asia have also beenbadly hit. There is even evidence that Canada (which has had 98 confirmed cases and 10 deaths, todate) is being affected by the public response to SARS. The American Association for CancerResearch convention in Toronto, which was due to host 16,000 attendees, was recently cancelleddue to concerns about SARS.

The final impact of SARS on the economy in general is highly uncertain. It is dependent on thespread of the disease and, arguably more importantly, the attention it receives from the media. If thedisease follows the pattern of other recent outbreaks of new, “killer” diseases such as West Nile,Streptococcus and the Hong Kong chicken-flu, the impact is likely to be short-lived even if the diseaseis never fully eradicated. Generally speaking, once the “novelty” has worn off of events such asdisease outbreaks or terrorist attacks, people revert back to their normal lifestyle and travel patterns.

That said, the course of the disease is not known. It is clear, however, that there will be at least short-term economic harm. U.S. brokerage firm Morgan Stanley was concerned enough to cut its globalgrowth forecast for 2003 to 2.4%, putting it below the world’s recession growth threshold of 2.5%. Aprinciple reason given was that the SARS outbreak was expected to slow growth in Asia, tipping analready weak global economy back into recession. Other economists have been less keen to providepredictions, recognising the unknowns involved.

3 To put this into content, over the same time period an estimated 2,400 people died from the common flu in theU.S. alone.

0

500

1,000

1,500

2,000

2,500

3,000

1617 18192021 22232425 262728 293031 1 2 3 4 5 6 7 8 9 1011

Total Cases Deaths

March April

Cases in Guangdong Province, China added

Reported Cases of SARS WorldwideMarch 16th - April 11th

Source: World Health Organisation


The U.S. Economy, Stumbling?Several key indictors of economichealth suggest that the U.S.economy is weakening and could beon the verge of double-dipping intorecession. U.S. employment figuresreleased for March 2003 showedthat employment fell by 108,000following an even larger drop of357,000 in February. Despite this,the U.S. unemployment rate stillstands at a fairly respectable 5.8%.

The Institute for Supply Management’s U.S. Production Index, the PMI (www.ism.ws) droppedbelow the breakeven level of 50 to 46.2 in March, indicating that the manufacturing economy in theU.S. contracted after four months of modest growth. The institute cited the weak economy, warconcerns and energy prices as main causes for this contraction. The University of MichiganConsumer Sentiment Index (www.sca.isr.umich.edu) also declined in March to 77.6, due toconcerns about job security and lack of income growth, continuing a trend which started in January.

However, since the start of the war, consumer sentiment has risen sharply reaching 83.2 by April 11th

as consumers apparently feel a successful war effort will boost the economy. Another recent positivefor the U.S. economy has been the sharp drop in oil prices since the start of the war – oil spot priceshave declined by over 25% since March 19 th to around $25/barrel. This will bring much needed reliefto both consumers and businesses. And despite increased unemployment and consumer concernsabout incomes, average personal incomes in the U.S. did increase by 2.9% for the year endingFebruary 2003.

At present, there is a great deal of uncertainty surrounding the health and direction of the U.S.economy due largely to the “fog of war”. The broad consensus among economists is that some claritywill return once the war in Iraq has ended and that, with the war over, the outlook for the U.S. shouldbe more positive.

Canada – still looking good. Employment in Canada continues to grow, adding 14,200 new jobs inMarch. This is less than the 55,200 created in February but fairly impressive given that the Canadiandollar remained strong in March (versus the U.S. dollar) and that March saw the start of war and theoutbreak of SARS

In order to prevent the economy overheating, the Bank of Canada has again raised interest rates. OnApril 15th, the overnight rate was raised by a ¼ percentage point to 3.25%. Apparently concerns aboutinflation, which in February was at a core rate of 3.1%, outweighed concerns about the weak U.S.economy, the war and SARS. 4 This is the fifth ¼ point increase in interest rates since April last year.

4 The core rate of inflation excludes certain volatile items such as food and energy; with these items included,February’s inflation rate stood at 4.6% due to fuel price increases. The Bank of Canada’s target range for thecore rate of inflation is 1-3%.

Sources: University of Michigan and The Institute of Supply Management

75

80

85

90

95

100

'Sept-0

2 OctNov Dec

Jan-02 Feb Mar Apl May Jun Jul Au

gSep Oct Nov

Dec-02

Jan-03 Feb Mar Ap

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35

40

45

50

55

60

Consumer Confidence

PMI


STRAIGHT AHEAD – WITH BLINDERS ON9 April 2003

A Vision for Transportation? On 25 February, the Minister of Transportation released his longawaited ‘blueprint’ for transportation. Titled Straight Ahead: A Vision for the Future of Transportationin Canada, this was the culmination of a multiyear effort which began with the legislatively requiredreview of the Canada Transportation Act. There were also seeds of the new vision in the Minister’sMillennium Conference on Transportation on June 12, 2000, in the merger of Canadian AirlinesInternational into Air Canada, and in the proposed merger of the Canadian National and BurlingtonNorthern railways.

The Van Horne Institute recently held a conference on the blueprint atthe end of April. Dr. Bill Waters of the University of British Columbia,who was also a member of the Canada Transportation Act ReviewPanel, gave the keynote address. His theme was that the title of thedocument was appropriate. In his view, Canada has been on a pathsince the 1950s McPherson Royal Commission toward increasingreliance on the market to deliver transportation services. This new pathbegan with the National Transportation Act of 1967, which for the firsttime promoted competition, in that case between modes of transport. Itcontinued with the 1987 Act, which authorized competition betweencarriers within the same mode of transport. This was the first time airlines were granted legislatedfreedom to compete. The 1996 Act took further steps toward liberalization. The Straight Ahead visionstill embraces competition as the means for delivery of transportation services, and in that sense thevision is a further continuance of a long term vision for transportation in Canada.

Putting on Blinders. However, in my opinion, at least for the air mode, amore appropriate title would have been Straight Ahead With Blinders On.During the past few years, the Minister and his staff heard two themesthat were shared by almost all modes and all stakeholders:

• The government should not take more out the transport• sector than it needs to.• Anything the government takes out should be re-• invested.

Virtually all stakeholders are in agreement on these two principles:carriers, infrastructure providers, the tourism industry, and shippers.

Silence! But the Straight Ahead document is silent on these issues! Not only did the Minister and hisstaff not embrace these principles, they did not even acknowledge in the document that they heardcountless testimony pleading that they be adopted! The Minister and his staff went straight aheadand put forth the vision they wanted to, after putting on blinders, which enabled them to ignore theoverwhelming amount of testimony and advocacy.

A locomotive barrelling down the track. Perhaps the appropriate analogyis that government policy is a horse pulling the cart of the transport sector.The horse has blinders on and can’t see that he has stopped with the airlinecart on railroad tracks – and there is a locomotive barrelling down the trackstoward the cart. In fact, the locomotive just hit the cart! After munching onsome grass, this blinkered horse is ready to move straight ahead, but nowsans cart.

MinisterialPolicy

Airlines

Michael TrethewayVice President & Chief Economist


AviationXDecimated

A cry fallen on deaf ears. For years, the aviation sector has raised the crythat government taxation and the airport rent policy was doing real damage tothe industry. It was imposing serious burdens on air carriers and infrastructureproviders. The latter, of course, pass on these burdens to the carriers.Ultimately the consumer pays, and increasingly they decided to forego airtravel. The impact of the Air Travellers Security Charge was especiallyonerous, and it has decimated short haul air travel, in the true Roman sense ofthe term.

Since 911, the Government has extracted roughly $500 million in airport rent and at least half thatamount via the ATSC (not to mention millions in domestic aviation fuel taxes). If the Ministers ofTransport and Finance believe that airport rents and the ATSC would have no material impact on theindustry, we ask the following questions:• What impact would an additional $750 million have had on the aviation industry in the months

since 911 and the onset of a North American recession?• What impact would an additional 10-15% in short haul travellers have had on the economics of

Canada’s air carriers?

The answers to these two questions are obvious. The present aviation crisis has many contributors,but the airport rent and ATSC policies were fatal wounds.

Their impact of these two wounds is even deeper. Without the cash cow approach ofthe government, the air carriers and the airports would never have developed theanimosity which is now so apparent. The government failed to invest in airports forover a decade. The newly formed airport authorities immediately began to remedy

the situation. Unfortunately, under-investment in the entire system meant that the entire system hadto undergo massive capital investment at the same time. Without the airport rent policy, the key hubairports would largely have been able to finance expansion without AIFs,5 and air travel would havebeen much more affordable. Misguided government policy has had real and fatal impacts on theaviation sector.

What we really need. The U.S. developed a vision for their transportsector. Unlike Canada, they figured out how much infrastructureinvestment was going to be needed in the medium and long term. TheU.S. Government then quantified what this was going to cost. This simpleexercise revealed that the sector would need all the help it could get tofinance replacing bridges, upgrading roads, investing in expanded airports,fixing the air traffic control system, etc. The government responded withtwo major infrastructure funding programs: the Intermodal SurfaceTransportation Efficiency Act(ISTEA) and theTransportation Equity Act forthe 21st Century (TEA-21). It

also has a number of airport specific programs. Unlikethe Canadian government, which seeks to extract excisetaxes and other rents from transport, the U.S. hasprovided infrastructure providers with access to billionsof dollars in grants (putting their fuel tax dollars to work)and tax-free bonds which enable private sectorinvestment.

5 ATAC has to pick up some of the blame here. The airports proposed lower AIFs on short haul travel, similar tothe YVR policy, but ATAC rejected this and insisted on a uniform AIF, despite warnings from airports that thiswould be detrimental to short haul travel.


Roland DorsayRegional Vice President

Ottawa

OTTAWA SCENETHE CANADA AIRPORTS ACTApril 10, 2003.

Bill C-27 was tabled in the House of Commons on March 20th to mixed reviews. The CAC welcomedthe Government’s commitment to transparency, accountability and good governance but expressedconcern that the Act is not as flexible in accommodating the considerable differences betweenairports across the country as are the 1994 National Airports Policy’s devolution principles. As well,the CAC voiced its concern that the Act will significantly increase compliance costs in response to theextensive new regulatory requirements, particularly for the smaller airports.

ATAC also welcomed the Government initiative but expressed its disappointment that Bill C-27 doesnot go far enough in giving airlines control over fees and charges and fails to give air carriers the one-third representation on Airport Authority Boards that ATAC seeks.

Next Steps: After a 2nd reading and debate in the House of Commons, the Bill will be referred to theHouse Transport Committee for clause- by-clause review. The Committee stage provides anopportunity for airports, air carriers and other interested stakeholders to continue to lobby foramendments or seek to delay the bill. The House Transport Committee is considering holdinghearings across the country to assist it with its review of the Bill.

The Government hopes to have the legislation enacted before the summer Parliamentary recessexpected to begin by June 20th. Whether the Government can clear the Bill through all the legislativehoops before the summer recess remains to be seen. In light of the airline industry crisis; AirCanada’s entry in to receivership under the CCAA legislation; and the consequential negative impacton airport revenues and programs, the current environment is not overly conducive to a swift passageof complicated and controversial legislation which lacks a strong stakeholder consensus.

Canadian Government Fees, Charges and Rent ReliefAir Canada’s success in lining up private sector Debtor in Possession financing from GE Capital hasrelieved the Government from needing to make a difficult decision on whether to help Air Canada withloan guarantees or other forms of financial assistance.

However, in the face of the on-going industry difficulties, the Government is said to be looking to otherways to assist airlines and airports in general. Transport Minister Collenette hopes to complete theon-going Airport Rent Policy review in the next month or two. There have been calls for a moratoriumon airport rents; on the collection of the Air Transportation Security fee; and on the collection of thefuel excise tax. Although there has been much media speculation that Airports can look forward tosome significant relief on airport rents, it should be noted that the Government has not yet made itsdecision. The outcome is far from a sure thing.

U.S. Government Assistance to the Airline IndustryWith U.S. carriers forecasting to lose over US$11 billion in 2003, there have been widespread calls forgovernment assistance south of the border. On April 1st, the U.S. House and Senate AppropriationsCommittees voted on bills that would compensate airlines for additional security costs and wouldimpose limits on salaries and bonuses paid to airline executives. The House Plan would provide U.S.$3.2b in assistance, including reimbursing airlines for security fees paid since February. The Senateplan would provide U.S. $3.5b in assistance by extending subsidized war-risk insurance, relievingpassengers from paying security fees and providing additional unemployment benefits for airline staff.However, the Bush Administration is opposed to providing as much funding as proposed under eitherCongressional plan. Congressional leaders say they expect the legislation will eventually pass with aprice tag in the order of U.S. $ 2 B.


Solomon WongDirector

Security & Planning

EXPLOSIVE DETECTION SYSTEMS (PART 1):DIFFERING APPROACHES IN CANADA & THE U.S.10 April 2003

100% vs. multi-levelThe acquisition and deployment of explosivedetection systems (EDS) and explosive tracedetection (ETD) represents the largestexpenditure by CATSA at Canadian airports.Totalling over CAD$1 billion 2002-06, thisequipment will radically alter the processing ofchecked luggage.

Canada joins many airports in Europe inimplementing multi-level hold baggagescreening with EDS, following the 1988bombing of Pan Am Flight 103 over Lockerbie.The methodology developed in Europe uses amulti-level risk assessment:§ Level 1: Checked baggage is scanned

using high speed (600-1500 bags per hour)but less revealing scanners to detect darkdensities of explosive materials. Roughly40-50% of bags are sent for furtherinvestigation.

§ Level 2: An operator scans the rejectedbags further, with 5% of the original totalreferred for further screening.

§ Level 3: A much more detailed exam takesplace, with slower but more sophisticatedscanning equipment. However, as only 5%of bags generally need the more detailedscanning, total system processing time isacceptable.

§ Level 4: Problem bags are reconciled withpassengers to be hand inspected.

§ Level 5: Disposal of bags/alarmprocedures.

U.S. adopts 100% scanningFollowing September 11, 2001, the U.S.Transportation Security Administrationadopted a radically different approach for EDS.The U.S. process is the equivalent of starting at

Level 3 with "computed tomography (CT)"scanners. The CT scanners are sophisticatedunits, but are relatively slow and prone to falsealarms. As well, there are only two FAAcertified vendors for this technology (L-3Communications and InVision Technologies).

The U.S. approach of requiring 100% level 3scanning, with very slow equipment can only bemet with massive investment in large numbersof units.

Implications for Canadian AirportsWhile Canada has made acquisitions ofequipment from both companies, there arechallenges for transborder operations fromCanadian airports. A number of smaller airportswith transborder service may have only one CTscanner, at least initially. The slow throughput,effectively in the range of 150-200 bags perhour, will result in either the need forpassengers to arrive at the airport several hoursearly, or in delayed flights.

As well, connecting bags through some U.S.airports have already been subject to re-screening, if they had not been scanned by aCT machine in Canada. This may pose asignificant inconvenience to passengers andmay prevent them from making flightconnections.

Canadian airports without adequate CT scannercapacity could see carriers deciding to dropservice.

Next Issue: Beyond Computed Tomography:What's next for EDS machinery?

Above: Computed Tomography UnitsCertified by the US FAA (top to bottom:InVision CTX 9000, CTX 5000 and L3

3DX 6000)

This is a collection of information gathered from public sources, such as press releases, mediaarticles, etc., information from Confidential sources, and items heard on the street. Thus some of theinformation is speculative and may not materialize.

Prepared by InterVISTAS Consulting Inc.

ivx sample april 2003 - intervistas · protection.1 tango and jetz are merely brands of air canada,...

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