9 AIR TRANSPORTATION

MAJOR EVENTS IN 2005

CANADA–U.S. OPEN SKIES

On November 10, 2005, the Governments of Canada and the United States (U.S.) further liberalized the 1995 Canada–U.S. Air Transport Agreement. The new provisions bring the 1995 agreement, which already provides for unrestricted air services between the two countries, into conformity with the U.S. Open Skies model.

The liberalized agreement was negotiated after extensive consultations with Canadian stakeholders and follows through on the pledge made by the Minister of Transport and the U.S. Secretary of Transportation in February 2005 that their departmental officials would discuss opportunities for further air liberalization. It also supports the Security and Prosperity Partnership of North America announced in March 2005.

The most significant amendments in the Open Skies agreement involve liberalizing Canadian air carrier access to the United States' third country markets and vice versa. Potential benefits include: greater access for Canadian passenger and cargo carriers to the large U.S. market as a platform from which to serve third countries; increased pricing flexibility for Canadian and U.S. carriers; more options for Canadian airports to attract U.S. carriers; and lower prices for consumers. These changes are scheduled to come into effect on September 1, 2006.

AIRPORT RENT POLICY REVIEW

On May 9, 2005, Transport Canada announced that the Government of Canada would adopt a new rent policy for federally owned airports. Implementation began January 1, 2006. The new policy is expected to provide close to $8 billion in rent relief for Canada's airport authorities over the course of their existing leases and will also address inequities in the system. The new rent formula is based on modern commercial leasing principles and is in line with other rent formulas within the Government of Canada and the private sector. The formula uses a progressive scale based on airport gross revenues and provides an equitable rent for both the 21 rent-paying airports across Canada and the taxpayer.

Every National Airport System airport, small, medium or large, stands to benefit financially in every year they are to pay rent. It is anticipated that significant portions of the savings from present and future rent reductions will translate into lower airfares for passengers. In addition to the rent reduction, the government is also forgiving the remaining repayments owed from airport authorities for chattels, such as runway sweepers and snowblowers, worth a total of $21.9 million.

SMALL AIRPORTS VIABILITY

The Council of Transport Ministers adopted a resolution at their September 2004 meeting stating that the viability of small airports is a shared responsibility. They asked Transport Canada to take the lead to define the mission of small airports and to identify options for future actions. A federal, provincial and territorial task group was created and met several times in 2005. The scope of the study done by the task force included all certified airports in Canada plus airports in the National Airports Policy that changed their status from a certified to a registered airport since the policy was introduced in 1994 (a total of 362 airports). The information gathered on the airports was analyzed from an airport-system perspective. Both commercial and non-commercial missions of airports were considered. At the Council of Transport Ministers meeting in September 2005, ministers acknowledged progress achieved by the task force and recognized the complexity of the question of small airports viability. Ministers asked the task force to pursue its work with the objective of submitting a report at the Council of Transport Ministers meeting in the fall of 2006.

ELECTRONIC COLLECTION OF AIR TRANSPORTATION STATISTICS

The Electronic Collection of Air Transportation Statistics (ECATS) initiative, which began in April 2003, is now collecting operational air transportation statistics electronically from approximately 220 air carriers serving Canada. Originally expected to collect from 170 identified airlines, the first phase was extended to accommodate the data collection from these new carriers. By collecting the data this way, the initiative is bettering the timeliness of air transportation statistics to industry and government and reducing the reporting burden and associated costs to stakeholders. The initiative remains on schedule and within budget with a completion date of March 31, 2006. The second phase of ECATS began in April 2005 and is currently collecting air cargo information and Passenger Origin and Destination information. Planning for the collection of general aviation and other air carrier information in the second phase of ECATS is well underway. The completion target date for the second phase of ECATS is March 31, 2008.

THIRD-PARTY WAR AND TERRORISM LIABILITIES INDEMNITY

When international insurers withdrew previous levels of coverage following the events of September 11, 2001, the federal government began providing short-term indemnification for third-party war and terrorism liabilities for providers of essential aviation services in Canada. This indemnity remained in effect in 2005 for renewable periods of 90 days. Coverage remained unavailable at reasonable prices even though the insurance markets recovered slightly. Other countries provide similar support to their carriers.

CAPE TOWN CONVENTION AND PROTOCOL

On February 24, 2005, Bill C-4, also known as the International Interests in Mobile Equipment (aircraft equipment) Act, received Royal Assent.

This Canadian legislation seeks to implement the Convention on International Interests in Mobile Equipment and the Protocol to the Convention on International Interests in Mobile Equipment on Matters Specific to Aircraft Equipment, which was signed by Canada in 2004. The Convention and Protocol will facilitate and encourage international asset-based financing (i.e., financing using the value of equipment as security for payment).

On September 28, 2005, sections 11 to 18 of the Act were brought into force. These sections, which contain amendments to the Bankruptcy and Insolvency Act, the Companies' Creditors Arrangement Act and the Winding-up and Restructuring Act, are designed to provide aircraft operators with access to new sources of low-cost financing, thereby reducing financing costs.

The remainder of the Act will be brought into force upon Canada's ratification of the Convention and Protocol.

JETSGO

On March 11, 2005, Jetsgo ceased operating all scheduled and non-scheduled air services and filed for bankruptcy protection with the Quebec Superior Court under the Companies' Creditors Arrangement Act.

Shortly after the company filed for bankruptcy, other Canadian carriers operating on the same city-pair routes that Jetsgo served stepped forward to provide assistance to stranded passengers and crews.

On May 13, 2005, after failing to restructure operations, Jetsgo filed for bankruptcy. Following Jetsgo's decision, Transport Canada cancelled the airline's air operator certificate effective May 14, 2005.

PRECLEARANCE

Before flights bound for the United States leave Canada, U.S. border preclearance allows U.S. preclearance officers to examine travellers and their goods for the purposes of customs, immigration, public health, food inspection and plant and animal health before flights depart from Canada for U.S. destinations. Through this system, travellers are treated as domestic passengers upon arrival in the U.S., where they enjoy shorter and easier connections to other U.S. cities, as well as direct access to U.S. airports that have no customs and immigration inspection facilities. U.S. preclearance is currently in place at seven Canadian airports (Calgary, Edmonton, Montreal, Ottawa, Toronto, Vancouver and Winnipeg). Canada and the U.S. have also agreed to introduce preclearance at the Halifax airport, which is scheduled for October 2006.

In late 2005, officials representing the Canadian and U.S. governments gathered in Ottawa for the first meeting of the Preclearance Consultative Group (PCG), a bi-national working group mandated under the 2001 Preclearance Agreement to review preclearance issues. One of the PCG's primary objectives is to ensure the smooth introduction of preclearance at the Halifax airport.

MULTIPLE DESIGNATION POLICY

In 2005, the Minister awarded two new designations under the 2002 multiple designation policy Air Transat was designated to serve Greece, and Skyservice was designated to serve Russia.

BILATERAL AGREEMENTS

Canada has air transport agreements or arrangements with more than 70 bilateral partners. In 2005, the Government of Canada held negotiations with seven countries. New agreements were negotiated with Guyana and the People's Republic of China, and Canada's agreements with Greece, India, and the United States were significantly liberalized. Negotiations with France and Panama were inconclusive.

Temporary air services arrangements with Israel and Singapore were extended, allowing existing air services to continue.

Major Events in 2005

Infrastructure

Industry Structure

Price, Productivity, Financial Performance

Freight Transportation

Passenger Transportation