Air North News

Thank you for giving me the opportunity to speak to you today. I am pleased to see that northern and regional air carriers are included in these conference proceedings because I feel they are an integral and perhaps under-recognized component of our national air transportation network. As I expect that many of you here today may not be terribly familiar with Canada's north and Canada's northern air carriers, I will first take this opportunity to tell you a bit about us.

Here are some geographical and economic statistics that put Canada's three territories into perspective with respect to our ten provinces.

The Yukon Territory, Northwest Territory, and Nunavut together comprise almost 4 million square kilometers, or about 40% of Canada's land mass. Their combined population is just over 100,000, which is about one third of one percent of Canada's population. There are approximately 65 communities in the territories that receive scheduled air service, but of these, only eight are served by jet aircraft. There are only ten paved runways in all of the territories. Total real gross domestic product of all three territories combined is just over $6 billion, or about .5% of Canada's gdp. Government spending accounts for a substantial proportion of Territorial gdp.

In terms of access, many northern communities have no road access; some rely on air and seasonal sea lifts; some use air and winter roads; and some are dependent upon air only.

In terms of air traffic, territorial markets are very small in comparison with other Canadian markets, as can be seen from the following data:

The foregoing data shows that in 2009, total enplanements plus deplanements in the three territorial capitals combined was just over 650,000, representing less than 1% of the entire Canadian market and about as much traffic as Fort MacMurray generated on its own. I have added data for Dawson City and Old Crow, in the Yukon just to illustrate how small some of the regional communities are in terms of traffic.

Northerners do travel by air more often though, as indicated by the following statistics which relate air travel to population.

The foregoing data shows that the ratio of air traffic to population in the north is more than twice the ratio of air traffic to population in the rest of Canada.

Here is an interesting piece of aviation trivia. In Canada today, there are just six airlines providing scheduled domestic passenger service with jet equipment and here they are, ranked inversely by size, as measured by number of aircraft operated.

Canadian Air Carriers Providing Year Round
Domestic Scheduled Air Service with Jet Equipment

Carrier
Air North, Yukon's Airline
Canadian North
First Air
WestJet
Jazz
Air Canada

Everybody is very familiar with the last three carriers on the list as they are the largest carriers in Canada, and together, they account for most of Canada's domestic passenger traffic. For the purpose of this discussion, I will refer to these airlines as "the mainline carriers". The first three carriers on the list may not be familiar to all of you so I will take a minute to tell you a bit about them. All three operate primarily in the north and they share some important common characteristics. For the purpose of this discussion, lets refer to these three airlines as "the northern carriers".

The three northern air carriers, share some common characteristics as shown below.

Northern Air Carriers

• Primary routes are north-south rather than east-west
• Integrated jet and turboprop routes from Territorial capitals to southern gateways and northern communities
• Integrated passenger and freight services using combi aircraft
• Gravel/northern operations capable aircraft
• Northern based/northern employment
• Northern infrastructure
• Northern ownership, including First Nations.

In general, the primary routes for the northern carriers, in terms of both traffic and revenue, are the north-south extra-territorial jet routes between the territorial capitals and the southern gateway cities. These routes are integrated with turboprop routes serving communities within the territories. Freight is an important component of both route networks, particularly the turboprop routes. Most turboprop operations and some of the jet operations use combi-configured aircraft. All of the turboprops operate onto gravel runways and some jet operations are conducted onto gravel runways as well. All three northern airlines need to be well equipped to meet the unique seasonal weather and economic challenges that are found in the north. Additionally, all three northern carriers provide significant employment in the north and have made significant investments in northern infrastructure. Finally, all three northern air carriers are owned by northerners, and their shareholders include more than four different First Nations.

While the three northern air carriers have much in common, there are also significant differences between the carriers and the markets that they serve. I am, of course, most familiar with our Yukon market, and so I will focus the rest of my discussion on aviation in the Yukon, and the operations of Air North, Yukon's Airline.

Our airline has been around since 1977. The company was founded on February 1, 1977 by myself, at that time, a freshly licenced commercial pilot and business school graduate, and Tom Wood, an aircraft maintenance engineer. We initially operated a charter service primarily in support of the mining industry, starting our operation with a Cessna 206. During the next 15 years or so we operated on wheels, floats, and skis with many aircraft types including the full range of Cessna products; the Dehavilland Beaver, Otter, and Caribou; the Britten Norman Islander; the Beech 18 and 80, and the Douglas DC-3 and DC-4.

We started our scheduled services within the Yukon and between the Yukon and Alaska in the mid 1980's and in 1996 we replaced our piston-powered fleet with Hawker Siddeley 748s. Our turboprop service now links Whitehorse to Dawson City and Old Crow in the Yukon, Inuvik in the Northwest Territories, and Fairbanks Alaska.

In 2002 we acquired two Boeing 737-200 aircraft and on June 7, 2002 we started scheduled service between Whitehorse and Vancouver, Edmonton, and Calgary. Our jet fleet now includes Boeing 737-200, 400, and 500 aircraft. Airport improvements have been and are being made in both Dawson City and Old Crow and by next summer we hope to bring jet service to these communities using our gravel equipped B737-200 combi aircraft.

I think that one of the things that makes our company somewhat unique is the partnerships that we have been able to forge with our local community and I will take just a few minutes to tell you about these.

Our first community partnership was made with the Vuntut Gwitchin First Nation. In November 2000, the First Nation, through their development corporation, acquired a 30% interest in Air North by purchasing shares from co-founder Tom Wood. In late 2001 the Development Corporation completed their purchase of Tom Wood's stock and today they hold just over 48% of the voting stock in the company.

Most Vuntut Gwitchin First Nation citizens reside in Old Crow, which is the northern most community in the Yukon. Old Crow has no road access and relies on air service for passenger transportation as well as the delivery of groceries, mail, building materials, consumer goods, and even gasoline, heating, and diesel generating fuel. For this reason, the investment in Air North was regarded as strategic for the community and its residents. It was also regarded as an economic development opportunity. 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. It should be noted that while the investment timeline for individual shareholders may be measured in years, the Vuntut Gwitchin investment in Air North must address the needs of future generations.

Our next community partnership was accomplished in early 2002 by means of a local equity offering under the Yukon Small Business Investment Tax Credit Program. This program is sponsored by the Yukon Government and is designed to encourage Yukon residents to invest in the local economy. A one-time tax credit applicable to Yukon taxes and equal to 25% of the value of the investment was provided to eligible Yukon investors. We sold a total of 640 Class C shares to 544 Yukon investors and in doing so raised $3.2 million, which was used to retire vendor financing on the Boeing 737 aircraft and to provide working capital. The Class C shares represented .57% of the voting stock in the company and they carried a five year conversion/redemption option. A $5,000 investment for a Class C share provided the investor with a one time Yukon tax credit of $1,250. Additionally, the company provided 4% cumulative annual cash dividends as well as 4 dividend flight segments each year. All of the original Class C shares have now reached their conversion/redemption dates and all have now been converted to Class D shares which provide 4 annual flight segment dividends to the shareholder. The Class D shares do not pay cash dividends and they are redeemable at the discretion of the company.

In 2008, we increased our community partnership after receiving authorization from the Yukon Government Department of Economic Development to issue additional Class C shares under the Yukon Small Business Investment Tax Credit Program as well as Class D shares under a regulatory exemption. These shares were priced at $7,500 and all offerings were fully subscribed. As a result of these offerings, our Class C and Class D shares now total 1452 representing 1.3% of the voting stock in the company.

With 1452 Class C and Class D shares, held by 1248 Yukon resident shareholders, more than 800 Yukon resident Vuntut Gwitchin First Nation beneficial shareholders, and almost 200 Yukon employees, almost 7% of Yukon residents and more than 15% of Yukon households have either an equity or an employment stake in the airline. Local investors have thusfar provided more than $8 million in equity capital thus facilitating the acquisition of our three B737-200's and our B737-400 and B737-500 aircraft. I think that this was a remarkable demonstration of interest from a community of just under 34,000 people and one which caught the company, and myself especially, completely by surprise. I felt that our initial equity offering would be regarded as far too speculative and as the level of local investment grew, so did the pressure not to make any mistakes.

In talking to our local investors, it soon became apparent that many 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 to Yukon residents. Intuitively, they were acknowledging the local economic development aspects associated with providing the vital north-south air transportation link from within the Yukon rather than from outside of the territory.

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.

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 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% to 25% 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 and that is pretty much what we have done.

During 2009, based upon our average yields, the average airfare in or out of the Yukon was more than 25% lower than it was in 2001. Yukon airfares, including those within the Yukon, now compare very well with those found on similar routes in the south. Furthermore, since 2002, domestic traffic has grown by more than 60%. Almost all of the growth in traffic was price stimulated as people can afford to travel more often, and more people can afford to travel. By bringing the cost of travel down, Yukoners have had more money in their pockets to spend on other goods and services, and visitors have arrived in the Yukon with more money to spend on goods and services while they are in the territory.

Our Yukon transportation hub has had a significant impact on Yukon employment, accounting for more than a 2 percent increase in private sector jobs. Our employees now represent almost 2.5 percent of the private sector Yukon workforce. We have 75% of our employees located in, and 85 percent of our payroll dollars earned in the Yukon. This includes our pilots, flight attendants, maintenance personnel, cargo, catering, ramp, and passenger services personnel, along with our call center, marketing, administrative and management personnel. Were we to locate our operations hub in a southern city, then we would only have about 60 Yukon employees, or 25% of the total number, and only about 15% of our payroll dollars would be earned by Yukon employees.

We have also had an impact on Gross Domestic Product (gdp). In 2009, the Yukon real gdp was about $1.5 billion and the government accounted for about 40% of this. I estimate that Air North now accounts for between about 1.5% and 3% of Yukon gdp depending upon how one quantifies secondary impacts.

The economic benefits that accrue from a transportation hub are significant and indisputable and they can accrue equally well in a small regional market or in a large national or international market. I read with interest, the recent study done by Dr Fred Lazar of the Schulich School of Business, on behalf of the National Airlines Council, an association of the mainline carriers. This study, entitled "The Economic Impacts of the Member Carriers of the National Airlines Council of Canada" outlines, among other things, the tremendous contribution that Canada's aviation industry makes to our economy.

The primary economic impact arguments make complete sense, whether expressed on a regional level in the north, or on a national level in the international marketplace, but the press, the blogs and the talk on the street all illustrate that there is another side to the argument. 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 but it does put things into perspective. The direct or primary economic development points don't count for anything if you can't deliver a competitive product.

The aforementioned consumer feedback represents an intuitive acknowledgement of the secondary economic benefits that can accrue to a region from the increased economic activity that can result from lower transportation costs and improved transportation access. It is conceivable that these secondary benefits could outweigh the direct benefits provided by employment and infrastructure in a local hub. This is really the crux of the current debate with respect to international air access and it is a factor that must be weighed in northern markets also as mainline carriers seek to expand their services to the north. With particular respect to the north, it is interesting to note that Transport Canada has just commissioned a study to "provide an assessment of the implications of competition in Canada's northern air transportation system". Northern air carriers are confident that this study will confirm the vital role that they play in providing safe and affordable air transportation throughout the north.

We, of course, had to satisfy ourselves that we could establish most of our infrastructure in the north and still deliver a competitive product. In many respects, it costs more to do business in the north, and our route opportunities are limited by the size of our market. In order to be competitive we need to be able to operate modern aircraft that provide unit operating cost efficiencies and we need to fly enough available seat miles (ASM's) such that we can efficiently amortize all of our fixed costs including aircraft ownership and other infrastructure related costs.

We can and do deliver a competitive product but our competitiveness relates directly to our market share. We need to maintain a large share of our northern market in order to justify our northern infrastructure and to ensure that our costs and our pricing are competitive. For this reason, we, along with the other northern carriers, are particularly sensitive to the efforts of mainline carriers to expand their services to the north. Stated quite simply, we need to defend our turf aggressively because it is a small turf and the only one that we have.

We rely upon our community partnerships to provide the purchasing support that we need to maintain and grow our market share and we also rely on community partnerships to help us keep our costs down. In particular, we work with our territorial government to ensure that northern aviation infrastructure is provided at a competitive cost and quality to that available elsewhere. Going forward, we would hope to achieve working relationships with mainline carriers such that we can provide broader access to northern consumers while keeping our focus on northern markets.

In order for a partnership to be successful at any level, there must be costs borne by and benefits accrued to all of the partners in equitable proportions. We feel that we have been able to achieve this balance with respect to our community partnerships. I believe that our success in this regard is confirmed by the level of community investment and purchasing support that we have been able to achieve.

Thank you.

Joseph Sparling, President
Air North, Yukon's Airline