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President's Message - October 2009

On June 25, Air North, Yukon's Airline held its Annual General Meeting, in Whitehorse, at our Boeing maintenance facility. The meeting, as usual, was very well attended, with more than 150 shareholders present. During the meeting there was much discussion about the economy, the competitive environment, and our future plans, and I thought I might share some of that discussion with our readers.

Air travel has continued to decline in most markets and the Yukon market is no exception. Traffic at the Whitehorse airport showed a 5.2 percent decline during the first half of 2009 compared with the same period in 2008. We are doing better than most markets though, as many other North American and international markets have shown traffic declines of closer to 10 percent and even higher in some cases. We are used to a cyclical economy in the Yukon. Because of the distance between us and our gateways, air travel is more of a necessity than a luxury, and because of this I expect that 2009 traffic volumes will be comparable to those experienced in 2006, and I don't feel that the economy on its own will cause undue hardship for our airline.

The competitive situation, on the other hand, is presenting some real challenges. Normally, a declining traffic environment would be best met with disciplined capacity and yield management, and rigorous cost controls, but the current competitive environment is making it difficult for us to follow the ideal course. Despite declining traffic volumes, our competitor has increased their capacity in this market by more than 40 percent this past summer, and at the same time they are consistently selling their product below cost in an apparent effort to generate cash flows and to cause us to lose market share. These reckless and irrational tactics come at a time when Air Canada has lost $1 billion in 2008 and are well on their way to another large loss in 2009.

Most analysts agree that Air Canada's focus on market share at the expense of yield is a tactic that simply will not work given their cost structure, and many feel this approach may well lead them into bankruptcy for the second time in six years. Air Canada may feel that the risks associated with their recklessness are mitigated by the expectation that the government will bail them out before they allow them to fail. There is likely some merit to this thinking, given that the federal government has already agreed to provide some debt financing. Air Canada's current actions are having an impact on our airline, as well as on other airlines, and I feel it would be a mistake for the Government of Canada to loan them money without first ensuring that the funds are not used to support predatory competitive tactics.

We know that we have to survive on our own, and to do that we need to maintain a strong market presence. Air Canada had nearly a 2:1 flight-frequency advantage over us last year, and we need to balance out the flight choices. In order to do this, we are adding afternoon departures to and from Vancouver on selected days. Our morning departures to Vancouver will continue to operate Monday through Saturday departing Whitehorse at 8:00 a.m. and departing Vancouver daily at 11:30 a.m. During the winter, afternoon departures to Vancouver will be at 6:00 p.m. on Monday, Wednesday, and Friday, and at 2:55 p.m. on Sundays. Afternoon northbound departures from Vancouver will be at 6:00 p.m. on Tuesdays, Thursdays, and Sundays. Our summer schedule between Whitehorse and Vancouver will offer daily southbound morning departures at 8:00 a.m. and afternoon southbound departures at 6:00 p.m. every day except Saturday. Northbound departures from Vancouver will be at 11:30 a.m. daily and at 6:00 p.m. every day except Saturday.

Our Alberta service will continue to operate year round on Monday, Wednesday, and Friday, but will move to a 10:00 a.m. departure southbound from Whitehorse and a 2:10 p.m. departure from Calgary and a 3:35 p.m. departure northbound from Edmonton. This schedule will improve connectivity options on our Alberta service.

North service departures will be at 8:30 a.m. year round, operating Monday through Friday with some seasonal flight reductions on Tuesdays and/or Thursdays. This will allow same day southbound connections to Vancouver from Dawson City, Old Crow, and Inuvik on Mondays, Wednesdays, and Fridays, plus seasonal same-day connections on Tuesdays and Thursdays from Dawson City, Old Crow, and Fairbanks.

Our new schedule increases our market presence, eliminates the frequency advantage enjoyed by our competitor, optimizes arrival and departure times, and reduces our overall unit costs. Additionally, our new afternoon frequencies will greatly enhance our cargo service, which is such an important element of our product and so valuable to the Yukon market.

While our increased presence in the Yukon market will provide more travel options for Yukoners and visitors, we also recognize that some travellers might find it inconvenient to travel to a gateway with us and beyond with another carrier. In general, through-travel with the same carrier does not offer cost advantages (sometimes it actually costs more), but it can offer a convenience advantage, and we are continuing with our efforts to interline luggage with WestJet and Air Canada. For those that are able to travel with carry-on luggage only, this is not an issue.

In order for our expanded schedule to be successful, we will need to add almost 40,000 passenger segments to our annual total. As the market is currently shrinking rather than growing, we will have to work hard to attract new customers to our service. We have identified the following three distinct sources of increased traffic:

i) Increased Yukon Government direct purchases 5,500 segments
ii) Increased purchases from Yukon residents 16,250 segments
iii) Increased purchases from visitors 16,250 segments
TOTAL 38,000 segments

Based upon our current average fare, the increased local purchasing from Yukon Government and Yukon residents will cause more than $4 million to remain in the local economy instead of "leaking out" of our economy each year. The increased local purchasing by visitors will add over $3 million to the value of our visitor industry each year by causing these dollars to flow into our economy rather than bypassing it. During the past several years the Yukon Government have provided outstanding purchasing support to Air North, Yukon's Airline, and we are most appreciative of this support, but we are in a unique environment at this time, and we are asking all Yukoners, including our government, to help keep the Yukon economy strong by purchasing air transportation locally.

Purchasing locally is not charity, it's just good business, and the merits of a buy-local philosophy are not just confined to aviation in the Yukon. Many jurisdictions are currently using public spending as a means to mitigate the impact of the current dramatic and unforeseen economic downturn, and despite free trade and other such agreements, most jurisdictions are taking steps to maximize the impact of capital intervention and to minimize "leakage". By taking steps to look after ourselves first, the Yukon can insulate itself from the worst of the economic downturn. This airline spends almost $20 million each year in the Yukon, and these dollars are spread out over more than 200 Yukon businesses and almost 200 Yukon employees. This local spending has a huge positive impact on our economy. Our payroll provides a good illustration. We currently have 75 percent of our employees and spend 84 percent of our payroll in the Yukon. Were we based in Vancouver, for example, only 24 percent of our employees and 15 percent of our payroll would be in the Yukon.

Many of our readers will remember the way that air service was provided to the Yukon prior to 2002. Like most northern communities, Whitehorse was served as part of a traditional airline "hub and spoke" route network, with the hub located in Vancouver, and, previous to this, in Edmonton. In this situation, economic benefits accruing to the Yukon were very limited, as all of the transportation infrastructure and most of the employees were based outside of the Yukon. Northern air carriers like ourselves have been instrumental in establishing northern hubs, by bringing employment and infrastructure to the North. The net effect of this has been to cause cash to stay in the north and flow into the North rather than flowing out of the North or bypassing the North. These efforts by northern air carriers provide significant economic benefits to the territories.

Air North truly is Yukon's Airline, and we owe our success to our Yukon stakeholders who continue to show support for their airline. With almost 1,300 Class C and D shareholders, almost 800 Vuntut Gwitchin beneficial shareholders, and more than 220 full- and part-time employees, approximately one in fifteen individual Yukoners and more than one in ten Yukon households has either an equity stake or an employment stake in this company.

Air transportation is an essential component of our northern economy, and northern-based and northern owned carriers operate with a clear focus on northern service. In doing so, they provide much local economic benefit. We are extremely proud of what Air North, Yukon's Airline, has accomplished during the past thirty-two years and in particular since 2002. There is no other regional jurisdiction in Canada that can boast the degree of local ownership, influence, and benefit we have been able to achieve with respect to such an important part of our everyday lives. We are extremely thankful for the tremendous support provided by our northern stakeholders. In these tough economic times, and in this irrational marketplace, local market support is more important to us than ever.

Thank you,

Joseph Sparling, President
Air North, Yukon's Airline

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