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Air North News

Summer Schedule Advisory 2009

February 6, 2009

To describe current economic conditions as a downturn is, at best, an understatement. Economic uncertainty has created many challenges, including finalizing our 2009 summer capacity. This task has recently become more complicated as our competitor has introduced some irrationality into the market by adding 33% to their summer capacity at a time when market traffic is dropping by 5% to 10%. At the same time they are choosing to sell their seats for less than what it costs to provide them. From a business standpoint, this is a dangerous and reckless combination of tactics.

This is a good time for airline consumers as there are lots of choices out there and prices are lower than ever. We always match market pricing, but consumers should remember that "if something seems too good to be true, then it is likely not true." It is simply not realistic to expect six daily flights to Whitehorse next summer at fares of less than $150. The combination of undisciplined capacity management and below cost pricing cannot sustain itself and if it persists on a system wide basis, then it can only lead to a return to bankruptcy protection for Air Canada (and a spot in the queue for a bailout). Our competitor lost $298 million during the first three quarters of 2008 and that loss will grow when they publish fourth quarter statistics. Air North was profitable during 2008.

Yukon consumers might be interested in learning a bit more about airline economics and how they apply to our market. The relationship between Air Canada and Jazz creates an interesting and unique market situation. Jazz provides service to Whitehorse under a Capacity Purchase Agreement whereby Air Canada buys seats from Jazz at a price that recovers all costs and provides a profit for Jazz. During the first three quarters of 2008, Jazz costs were $.26/Available Seat Mile (ASM). Their fleet is comprised of CRJ regional jets and DHC-8 turboprops. Although Jazz does not publish the relative operating costs of the two types, industry knowledge would give a ballpark allocation of around $.20/ASM for the RJ type and around $.30/ASM for the DHC-8 type. It is the RJ type that currently flies to Whitehorse so using a cost of $.20/ASM, a return on sales of 8%, and a 1000 mile approximate average distance between Whitehorse and its gateway cities, would lead one to conclude that Air Canada is paying Jazz more than $200 for every seat that flies to and from Whitehorse. With an 80% load factor that means that Air Canada needs to sell each seat at an average price of at least $250 just to break even. If they put too much capacity into the market and their load factor drops to 60%, then their break even average pricing increases to more than $330.

Now, what about six daily flights? That represents 600 seats/day for Jazz and 480 seats/day for Air North, for a total of 1080 seats/day. The busiest month on record at the Whitehorse Airport was July 2008 when southern market traffic produced an average of just under 750 passengers/day during the peak month only. If, by some miracle, the Whitehorse market is able to achieve record setting passenger volumes each month next summer, the increased market capacity will reduce market average load factors to just over 69%. (Air Canada's system wide average load factor in December was 82%). At a 69% load factor, break-even pricing for Air Canada will be about $290. That means that for each seat they sold at $109 yesterday, they will have to sell another seat at $471 just to achieve their break-even average for the two seats.

While I would like to be able to say that we do not care what our competitor does in the market, the simple reality is that what they do has an impact on us. When they flood the market with seats, both of our loads are diluted, and when they price below cost, we must match them and so our yields become diluted and our profitability is impacted as well. Fortunately, our costs are less than theirs and our assets are paid for so the impact of their actions on us is minimized.

With particular respect to pricing, our original business plan in 2001 was predicated upon average fares of $250 and an average load factor of 65%. At that time, the average fare in this market with our competitor was more than $300. Today, because improved load factors have offset cost increases, our target average yield is still around $250. I think that this represents a fair price and exceptionally good value for the product provided. Our pricing philosophy is to charge a fair price for our product each and every day. We do not like to price below our cost nor do we ever try to take advantage of our customers. As an example, when you look on our website on average, our lowest fare to Vancouver is $193 and our highest fare is $447. This represents a fairly narrow band around our target average. By way of comparison, with our competitors you can sometimes find fares as low as $109 (yesterday), and as high as $1106. Even though we find that we must follow the competition down when they price below cost, we do not follow the competition up, even when the opportunity is there. We live here and would have a tough time explaining that to our local customers and shareholders!

I think that the irrationality that we are currently seeing in this market is possibly as a result of a vicious competitive battle that is taking place across the country between Air Canada and WestJet. Air Canada has, in general, reduced capacity in many markets in response to a declining economy. WestJet has taken some competitive advantage of this by increasing capacity to gain market share. WestJet has in general added less seats than Air Canada has removed, so the net effect has been improved load factors for both carriers and improved market share for WestJet at the expense of Air Canada. I think that the new Air Canada routes, which were all out of Calgary, as well as the seat sales, may have been designed to get the attention of WestJet.

At Air North, Yukon's Airline, we are comfortable with our role in the Yukon aviation market. More than one in fifteen Yukoners is a shareholder and I believe that we have demonstrated our value to the Yukon market as well as to the Yukon economy time and time again over the past thirty- two years. We believe that Yukoners will continue to buy from their airline even when there are more alternative choices out there. We will maintain our existing Alberta service pattern (Mon, Wed, Fri) through next summer and beyond. We will not add any additional seasonal capacity into the Alberta market this summer. We will also maintain our existing Vancouver service pattern through next summer and beyond, but, like previous summers, we will provide additional peak season service with double daily frequencies on Tues, Wed, and Thurs.

On behalf of all of us at Air North, Yukon's Airline, I would like to once again thank our Yukon stakeholders for their continued loyal support.

Joseph Sparling, President
Air North, Yukon's Airline

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