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Air North News

President's Message - June 2010

I recently had an opportunity to speak at the Yukon First Nations Resource Opportunities Conference in Whitehorse, and I thought that our readers might find parts of the presentation to be interesting. The theme for the conference was economic development from the resource industry and the involvement of Yukon First Nations in resource development.

Firstly, most of us would likely agree that economic development is important to the Yukon, and also that the resource sector has always been and will likely continue to be a key component of economic development in our Territory. Secondly, it might similarly be agreed that Yukon First Nations are an emerging and growing component of the Yukon economy, and that First Nations want to become more involved in future growth.

I think the experience we have had at Air North, Yukon's Airline during the last ten years provides a pretty good illustration of how local businesses can help to grow our economy and how Yukon First Nations can participate.

Let's start with a couple of general observations about economic development. This might help to identify some common ground for governments, individuals, and businesses.

Most private sector businesses have a marketing department, or at least an individual whose role is to generate sales. The drive to increase sales is motivated by a desire to generate profits, thus providing economic benefit to shareholders. The budget for marketing is justified by the incremental net sales generated through marketing efforts.

To some extent, public sector organizations also operate as profit centers. Here in the Yukon, both the departments of Economic Development and Tourism have substantial budgets and they work very hard to bring new business to the Territory. New business in the Yukon puts more "money on Main Street" and this generates revenue for the Territorial Government through the direct payment of taxes and fees, through the generation of direct employment taxes, through income and employment taxes paid by local companies who provide goods and services to the new business activity, and through taxes and fees generated through secondary economic activities (referred to as the multiplier effect). An enhanced Territorial Government revenue stream can fund expenditures, which may be used to support and enhance the quality of life for all of us who live here.

In the Yukon, with our remote location and small population, we are unlikely to entice an automobile plant or a major corporate head office to locate here, but historically we have always done well with mining and tourism. With particular respect to the resource sector, economic activities have thus far been confined to exploration, extraction, and transportation. Our location and population have, to date, made secondary activities such as smelting or refining impractical.

The growing interest by First Nations in participating in economic development activities and the emergence of First Nations as an economic force in the Territory may be illustrated by considering how the Vuntut Gwitchin First Nation became involved in Air North. In early 2000, the First Nation, through their development corporation, acquired a 49 percent interest in the airline. The Vuntut Gwitchin investment was motivated by a desire to provide economic benefits to the community of Old Crow by ensuring that some of the dollars spent in support of the community were retained in or returned to the community. The investment was based upon sound business and public sector economic development principles. I would like to think that the investment in Air North by the Vuntut Gwitchin First Nation stands as an excellent example of Yukon First Nations economic development.

The same combination of business and economic development principles applied to, at least, our first Class C share offerings, and certainly to our decision to launch our jet service in 2002. With respect to our first local equity offering, this came before we acquired our first jet and at a time when our competitor had a history of eliminating new players through aggressive pricing and capacity management. Despite what I felt would be perceived as unacceptable risk, we sold close to 400 Class C shares and raised close to $2 million in the local market in less than 30 days. In talking to our local investors, I learned that most were not primarily motivated by the potential economic returns provided by flight and cash dividends, but rather by a desire to invest in a venture that would provide benefits to the Yukon and its Residents.

Today, Air North, Yukon's Airline has almost 1,400 Yukon resident Class C and Class D shareholders, and more than 600 Yukon resident Vuntut Gwitchin First Nation beneficial shareholders. We also have almost 180 Yukon employees. More than one in fifteen Yukon residents has either an equity or an employment stake in this airline. Local investors have thus far provided more than $8 million in equity capital, thus facilitating the acquisition of our three B737-200's and our B737-400 aircraft.

Local economic development was a fundamental consideration in our decision to launch our jet service in 2002, not because we were nice guys and wanted to do something nice for the Yukon, but because we knew that our success would depend upon local market purchasing support, and we felt that the local economic benefits that we would provide would help us to get the purchasing support that we needed.

Until 2002, Whitehorse, like many northern communities, was served by a southern air carrier operating from a southern hub. In this type of traditional "hub and spoke" system, infrastructure and jobs were consolidated in the southern hub and minimized in the north. As a result, for the most part, cash flowed out of the Yukon, from the spoke and into the hub and most of the economic benefits provided by the air service accrued to the hub in the south.

In addition to being served as a "northern outpost" at the end of a southern based route network, airfares in and out of the Yukon were considerably higher than those found on comparable southern routes. We felt that we could operate profitably at fares that were 20 percent to 25 percent lower than existing fares and at the same time bring additional economic benefits to the Yukon by making Whitehorse the hub of our route network. That is pretty much exactly what we have done.

During 2009, based upon our average yields, the average airfare in or out of the Yukon was about 30 percent lower than it was in 2001, before we launched our jet service. Yukon airfares now compare very well with those found on similar routes in the south. Furthermore, since 2002, traffic has grown more than 50 percent. I believe that most of the growth in traffic is price-stimulated, as people can afford to travel more often, and more people can afford to travel. A good illustration of this is the number of Yukon students who traveled to B.C. and Alberta during this year's spring break. This was not possible ten years ago.

With respect to economic development, it is easy to see that transportation is an integral and essential component of a healthy economy, and that economic growth requires a safe, efficient, and affordable transportation network. In the North, air transportation is especially important because distances are large and alternative modes are generally not available. While it is easy to see how transportation facilitates economic development, we often overlook the fact that transportation can be part of economic development.

This can be illustrated by considering employment statistics. We currently have about 240 employees, of which about 180, or 75 percent of the total, are Yukon residents. Our payroll last year was just over $10 million, and almost 85 percent of those dollars were earned by Yukon employees. Were we to move our corporate headquarters, accounting, call center, flight crew and maintenance personnel to, say, Vancouver, then we would only have about 60 Yukon employees, or 25 percent of the total number, and only about 15 percent of our payroll dollars would be earned by Yukon employees.

The difference between the hub and the spoke is further illustrated in the Yukon market by observing that Air Canada/Jazz has about 25 Yukon employees as compared with 180 for Air North, yet they operated more flights to and from the Yukon than we did last year.

In addition to payroll, last year Air North spent close to $5 million on other local goods and services provided by almost 200 Yukon businesses. The direct economic impact of our Whitehorse transportation hub also provides many multiples of its value in indirect economic benefits to the Yukon, including property, payroll, and income taxes.

To illustrate further, consider that when a Yukon resident purchases his or her travel with Air Canada, those dollars pretty much all leave the Yukon. Similarly, when a visitor to the Yukon purchases travel with Air Canada, most of those travel dollars never enter the Yukon economy. On the other hand, when a resident purchases his or her travel with Air North, almost all of those travel dollars remain in the Yukon economy, and when a visitor purchases travel from Air North, those travel dollars flow into the Yukon economy.

Purchasing locally is not charity-it is 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 economic downturn and despite free trade and other such agreements, most jurisdictions are taking steps to maximize the impact of capital intervention and minimize "leakage".

While I might have you convinced that "buy local" is a bit of a "no-brainer", there is another side to the argument. I recently listened to Calin Rovinescu, Air Canada's President, speak at the Vancouver Board of Trade. Much of Mr. Rovinescu's presentation dealt with the aggressive efforts of Air Emirates to increase their capacity into Canada and the impact that this would have on Air Canada and on the Canadian economy. There were some good points made with regards to the Canadian economy and direct and indirect employment, including the multiplier effect. In a lot of respects, the economic impact arguments that apply to Air Canada and Air Emirates in the international marketplace are very similar to those that apply to Air North and Air Canada in the Yukon marketplace. In the international marketplace, Air Canada's position is somewhat protected by the Federal Government and the bilateral air services agreement between Canada and the UAE.

While Mr Rovinescu's pitch was generally well received by the Board of Trade audience, the write-ups in the Globe and Mail and from blog postings were not nearly so receptive. It seems that there are a lot of airline consumers who don't particularly care about whose economy their travel purchase is benefiting-they just care about how much the trip costs, if the times suit them, and if they receive good service. This should not be particularly surprising and although we enjoy a higher level of market loyalty in our Yukon market than any mainline carrier could ever expect to achieve, it does put things into perspective. The economic development points don't count for anything if you can't deliver a competitive product. We understand this completely.

At Air North, Yukon's Airline, we are completely committed to making sure that we can provide a product that is competitive with anything that anyone else in the industry can provide. While we do not expect anyone to pay more to travel with us than they would to travel with our competitor, we do like to point out the significant benefits that accrue to the Yukon economy and to all Yukoners when you make your travel purchases from the local carrier.

Thank you for your business.

Joseph Sparling, President
Air North, Yukon's Airline

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