9 AIR TRANSPORTATION

INDUSTRY STRUCTURE

NATIONAL SCHEDULED AIR SERVICES

At the beginning of 2006, there were three networks of national scheduled air services. The largest was provided by Air Canada and its sister company, Jazz.¹ With its fleet of 201 large jet aircraft, Air Canada served 12 domestic points, 33 points in the United States and 59 other international destinations. Jazz, with its fleet of 135 smaller aircraft, served 69 destinations that Air Canada, with its much larger aircraft, could not serve in a viable or sustainable way. In effect, Jazz operations complemented and extended the connectivity of Air Canada’s network. Air Canada currently has a capacity purchase agreement with Jazz through which it has agreed to charter all of the latter’s capacity until the end of 2015.

WestJet operated the second largest network of air services and with its fleet of 63 Boeing 737-series aircraft, served 23 Canadian points, 11 U.S. points and Nassau, Bahamas.

The third network was an interlining arrangement between Canjet, based at Halifax, and Harmony Airways, based at Vancouver, whose points of service intersected at Toronto, with the former operating to points east and the latter to points west. This arrangement ended in September when Canjet ceased operating all its scheduled air services. At the time, Canjet had a fleet of 10 Boeing 737-series aircraft, while Harmony operated four 171-seat Boeing 757-200 aircraft.

SEASONAL AIR SERVICES

Many air carriers operating large jet aircraft provided charter air services for inclusive package tour operators between Canada and Europe, the United States, the Caribbean and other sun and leisure destinations. Air Transat and Skyservice Airlines specialized in providing air services to leisure and seasonal destinations such as Florida, Hawaii, Mexico and the Caribbean in the winter, while mainly serving European destinations through their summer charter programs. WestJet supplied Air Transat with an expanded market, feeding capacity from midsized Canadian airports to southern destinations under an exclusive agreement due to expire in October 2010. Air Transat carries approximately 2.4 million passengers annually with a fleet of 15 Airbus aircraft. Skyservice Airlines served similar destinations with a fleet of 26 Airbus and Boeing aircraft. Three other airlines also served the international charter market: Harmony Airways and Zoom Airlines, each with four Boeing aircraft, and Sunwing Airlines with three 189-seat Boeing 737-800 aircraft.

Although Canjet ceased operating scheduled air services, it realigned its operations and began operating charter air services to sun destinations in Cuba, Mexico, the Dominican Republic, the Bahamas and Jamaica from various Canadian cities for the 2006 – 2007 fall/winter season.

Air Canada and WestJet also provided charter air services for their own inclusive package tour affiliates, Touram LP doing business as Air Canada Vacations, and WestJet Vacations, respectively.

As well, many small air carriers operating fixed or rotary wing aircraft (i.e. helicopters) provided seasonal air services to lodge operations and hunting or fishing camps, or in support of mining, forestry and other resource industries.

FOREIGN AIR CARRIERS

Twenty Canadian cities benefitted from air services offered by 25 U.S. airlines, while 43 foreign airlines provided services between Canada and 57 international destinations in 39 countries. For a list of foreign airlines serving Canada on a scheduled basis, see Addendum Table A9-5.

NORTHERN AIR CARRIERS

A number of carriers provided jet services in Canada’s north, including Air North, Air NorTerra (doing business as Canadian North) and First Air. Others such as Aklak Air, Kenn Borek Air, Buffalo Airways, Arctic Sunwest, Air Tindi and North-Wright Airways also provided air services to remote communities in the Arctic. Most air carriers operating in Canada’s north provide medical evacuation, or “Medevac,” services and other transport under contract to the federal and territorial governments.

In all, some 45 airlines provided service to remote communities in niche markets. These air carriers and their major areas of operation are listed in Addendum Table A9-6.

REGIONAL AND LOCAL SERVICE AIR CARRIERS

Many air carriers served regional niche markets throughout Canada (e.g. Pacific Coastal, Bearskin, Air Creebec).

One such air carrier, QuikAir, ceased operating in October. At its peak, QuikAir had operated more than 20 flights every weekday between Calgary and Edmonton City Centre Airport. In January, however, the Edmonton Airports Authority closed the Edmonton City Centre Airport to aircraft having more than 10 passenger seats. QuikAir, whose primary air service was to Calgary, relocated to Edmonton’s International Airport, but this move exposed it to competition from WestJet and Air Canada. Like QuikAir, Integra Air also relocated to Edmonton International Airport; unlike QuikAir, however, it was not as exposed to competition because it primarily served the Edmonton–Lethbridge market, for which there is a greater travel time by automobile and a lack of direct competition from other air carriers. Others, notably Peace Air, were permitted to continue operating from Edmonton City Centre Airport because it operated aircraft with 10 or fewer seats.

Like QuikAir, other air carriers offering regional air services have faced competitive difficulties. In the past two years, Quebecair Express (Quebec), Air Sask (Saskatchewan) and Northern Hawk Aviation (British Columbia) have all ceased operating. In 2006, Hawkair (British Columbia) undertook a financial restructuring and operated a much reduced network.

ALL-CARGO AIR CARRIERS

Several air carriers provided dedicated all-cargo air services on behalf of Canada Post, courier companies, freight forwarders, consolidators and shippers. These included Cargojet Canada (Mississauga), Kelowna Flightcraft (British Columbia) and Morningstar Air Express (Edmonton). In addition, cargo air services complemented the scheduled passenger air services of many Canadian air carriers.

BUSINESS AVIATION AND SPECIALTY AIR SERVICES

Fractional ownership, or “time-sharing,” of aircraft is regulated as a commercial air service. The increasing capital and operating costs of conventional aircraft ownership continue to make fractional ownership an appealing alternative, especially among corporate users.

Specialty air services can be as diverse as flight training, flights for parachute jumping, glider towing, aerial forest fire management and firefighting, aerial inspection and construction, aerial photography and surveying, advertising, weather sounding, crop spraying and helicopter logging, as well as hovercraft services.

Licencing for both business aviation and specialty air services is required. Addendum Table A9-7 shows that at the end of 2006, 2,311 licences had been issued by the Canadian Transportation Agency to air carriers to provide air services defined by those permissions. Addendum tables A9-8 and A9-9 show the number of personnel licences issued by Transport Canada and a provincial breakdown of those licences, respectively.

RECREATIONAL AVIATION

Recreational flying accounts for about two thirds of Canada’s pilots and three quarters of all aircraft registered in Canada. It is the largest segment of Canada’s civil aviation activity and includes motorized fixed and rotary winged aircraft as well as ultra-lights, gliders and balloons, among others. Addendum Table A9-10 provides information on the types of aircraft operated.

¹ ACE Aviation Holdings Inc. (ACE) is the parent holding company for a number of services companies and partnerships, notably: Air Canada; Aeroplan Limited Partnership (Aeroplan); Jazz Air LP (Jazz); and ACTS Limited Partnership (ACTS). Air Canada itself is made up of principal operating companies and partnerships, namely: Air Canada; Air Canada Ground Handling Services Limited Partnership (ACGHS); Touram Limited Partnership (Air Canada Vacations); and AC Cargo Limited Partnership (Air Canada Cargo). At the end of 2006, ACE held a 75 per cent ownership interest in Air Canada, following an initial public offering of that company on November 4, 2006; a 50.3 per cent direct ownership interest in Aeroplan; a 79.7 per cent direct ownership interest in Jazz; and a 100 per cent ownership interest in ACTS. Earlier in the year, on February 2, 2006, ACE completed an initial public offering of the Jazz Air Income Fund (Jazz Fund). Return

Major Events in 2006

Infrastructure

Industry Structure

Price, Productivity and Financial Performance

Freight Transportation

Passenger Transportation