Airlines Industry - 06-11-29 - Regionals

U.S. Research Comments CALYON SECURITIES (USA) INC. November 29, 2006

Ray Neidl 212 261 4057 [email protected] Christine Min 212 408 5645 [email protected] Sanaz Kafayi 212 408 5648 [email protected]

Airlines Regional Airline Sector Update - Outlook for Sector Developments Industry Update

The regional airline sector is dominated by seven players, five of which are public companies that we follow (as shown in Exhibit 1). As the table demonstrates, the top seven players in the sector control approximately 80% of total capacity (ASMs) while the remaining 12 have the balance. Although we believe some niche regional airlines will remain, serving specific needs, in our opinion the sector will become increasingly dominated by four or five of the biggest regionals. • SkyWest (Buy), which remains one of our top picks dominates around 22% of the industry's ASMs. In our opinion, SKYW stands the best chance to continue to gain market share by obtaining new business. The main risk is if Delta were to be acquired, which would put the Salt Lake City operation at risk. • Republic (Buy) is our second pick in this sector due to its aggressive management with broad industry contacts, its low cost structure, its diversified customer base and its orientation toward the larger RJs, which we believe is the growth segment of the market. • Mesa (Neutral) also has experienced management and a broad customer base but, so far, the company has not lived up to expectations for obtaining new business. However, we believe the company still has many opportunities available. • ExpressJet (Neutral) has almost 14% of the industry ASMs but we believe it remains at risk as it tries to maintain its only contract with Continental Airlines while trying to find usage for the 69 aircraft it recently obtained from Continental. • Pinnacle (Neutral) has one customer, Northwest, and is currently in negotiations regarding the future of the contract. We believe that the two carriers will reach an agreement and that any claims that PNCL has against its partner will be folded into a new contract. • AMR's regional airline, American Eagle, controls approximately 13% of total ASMs, most of which are operated on behalf of American Airlines. We do not expect American Eagle to be spun off in the near future. • We believe that the future of Delta's owned regional, Comair, is uncertain. Further, if Comair survives, we believe that it will be sold and the most likely candidate to obtain this business would be SkyWest. • By historical standards, the regional airlines are trading at low P/E multiples due to perceived greater risk, as contracts are being modified by legacy carriers through the bankruptcy process. Once the Northwest and Delta bankruptcies are resolved, we believe this risk will be lowered. However, if the market believes that legacy consolidation will happen sooner rather than later, we expect pressure will remain on the multiples of even the best regional carriers.

See important disclosures on pages 7 - 8 of this report. Page 1

U.S. Research Comments CALYON SECURITIES (USA) INC. November 29, 2006

Overview Regional sector stock prices, despite consistent profitability even through the rough post 9/11 environment, have been negatively affected by the industry's troubles. Following the various airline bankruptcies, long-term contracts between the independently owned regional airlines and their partners have been modified to the regionals' disadvantage. The changes in contracts reduced profitability, while the continuing threat of additional changes has caused the market to put a lower P/E multiple on the sector because of perceived greater risk in the future. Further, the growth of the regional sector has slowed over the past year as a result of the legacy carriers trimming regional capacity, with most reductions coming out of Comair, Mesaba and Pinnacle as their legacy partners restructure in bankruptcy. In addition, Republic's contract with Delta is still being negotiated. Regional airlines have operated under a combination of being owned by their partners or being independent and operating under a long-term contract. In some cases, the independent carriers own the aircraft operated under the contract and are responsible for financing the acquisition of the aircraft, using the contract and equipment as collateral. In other cases, the larger partner would purchase the aircraft and lease it to the regional carrier, relieving the regionals of the burden of financing but making them less independent. In recent years, the trend has been to sell off or IPO the regional airlines as independent operations because, with defined margin contracts that tie the regional to the partner, it makes little sense to expend management time and resources in ownership. The economics of the regional airlines are different, and regionals can probably be run better independently, allowing the market to decide on the value of the regional as a stand-alone entity. Most regional contracts operate under a defined cost pass-through basis, which guarantees margins as long as the regional meets performance criteria. The regionals' larger partners, usually legacy carriers, buy all of the seats and decide when and where the regionals should fly. In most cases, these flights are used to service smaller communities that feed the larger carrier's hub and fly under the legacy partner's name. Performance criteria vary marginally by contract but generally the principle is the same. This arrangement has been a great help to the legacy carriers in enabling them to extend their customer reach and hub operations to areas that would not be feasible using mainline operations. At the same time, the regionals have been a major perceived threat to the powerful pilots union, with the latter believing that these operations take away from their jobs, rather than acknowledging (as we believe) that the regionals actually increase the overall strength and feed of the legacy carrier, enabling an increase in overall flying. "Scope Clause" restrictions in pilot contracts with the airlines vary by carrier but, to one degree or another, restrict the airline in the number and size of regional jets that it can employ, regardless of business sense or economic need. We believe that this sector will consolidate and probably be dominated by four or five carriers. American Eagle, owned by AMR Corporation, which also owns American Airlines, will most likely be a survivor. We do not see the regional being spun off any time soon since AMR management seems to believe that there is a benefit in ownership of this type of feed. The other three survivors that we see are airlines with experienced and aggressive management, market mass, and independence through aircraft ownership. These include SkyWest, Republic and Mesa. All of these carriers have diversified risk through contracts with multiple partners and reduced risk through aircraft ownership, which gives them an extra measure of leverage with their partners. The two other regionals that we follow, Pinnacle and ExpressJet, face a more uncertain future. At this time, they each only have one partner, they face potential risk to their respective contracts, and they do not have ownership of their respective fleets. Of our major picks (SkyWest, Mesa and Republic), we believe that they are value, growth and earnings plays. We expect to see their multiples go up once the market gains more confidence that contracts will not be further modified, making them a good value risk. We expect to see this happen once Northwest and Delta reorganize and approach their exodus from bankruptcy. We also believe that all three are growth stocks since more opportunities will develop as legacy carriers continue their exit strategy from regional ownership (Delta and Comair) and as scope clause restrictions continue to ease, which admittedly will be a long and slow process. Even though margins are expected to go down moderately, we believe that the additional growth will add to the potential earnings of these three carriers. The risk is the possibility of consolidation among the legacy carriers, which would most likely lead to a reduction in the number of hub operations. The most likely hubs that would disappear in any industry consolidation are the smaller ones that have a disproportionate share of regional operations. Some of this may be made up by increased operations at the larger hubs, but most of it will disappear, becoming independent point-to-point flying, which could be more profitable but would be much more risky, in our opinion. Though there are persistent signs that the industry is about to begin a major consolidation, we are not sure if government regulators and politicians (especially with the recent takeover of Congress by the Democrats) are ready to let the process begin.

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U.S. Research Comments CALYON SECURITIES (USA) INC. November 29, 2006

Industry Consolidation US Airways' bid for Delta increases uncertainty for the regional airline group overall. A potential merger could put the growth outlook for new 76-seat flying with the regionals at risk. The proposal for 50 incremental 76-seat aircraft for which Delta has sent out an RFP may not be pursued by US Airways management. The regional carriers would be at risk in any potential industry consolidation since in any major industry consolidation we would expect that some smaller hub operations would be closed or sharply downsized. Most of these hubs have heavy regional operations, and the need for this service could be severely curtailed. In our opinion, the hubs at most risk would be Cincinnati (Delta-Comair), Charlotte (US Airways-Mesa and others), Philadelphia (US Airways-Mesa and others), Salt Lake City (Delta-SkyWest), Cleveland (Continental), and Memphis (Northwest-Pinnacle). Growth opportunities would become more limited for the regional airlines if there were fewer hubs from which to operate. Regional airlines are already trading at low P/E multiples in our opinion and by historical measurements, which somewhat limits downside risks. The three most aggressive airlines in looking for new contracts, SkyWest, Republic, and Mesa, have drawn concern regarding this and as a result have had weakened stock prices recently. However, we believe that these carriers are strong enough, that their stock prices are cheap enough, and we believe that they could obtain other potential business, probably at the expense of other regional carriers. We see continuing value in investing in them, particularly SkyWest and Republic, and we are maintaining our ratings of BUY for SkyWest and Republic and NEUTRAL for Mesa. Finally, we are handicapping the chances of the US Airways bid of Delta succeeding at 35% to 40% with the biggest potential obstacle being the politicians and regulators. There are significant overlaps between the two systems and any approval by regulators would require significant divestitures that could destroy the potential economics of the merger. If it is approved by Washington, though, it will most likely set off an industry consolidation trend. If it is not approved, the immediate threat to the marginal hubs and regional growth will disappear, and regional stocks should rebound. ExpressJet (NEUTRAL) ExpressJet Holdings is the parent company of ExpressJet Airlines, which operates as Continental's regional service provider under the name Continental Express. The company serves 152 destinations in the United States, Canada, Mexico, Central America, and the Caribbean. ExpressJet reported 3Q EPS of $0.38 and the operating margin came in at 8.1% versus 9.6% a year ago. XJT actually performed better than its agreed-upon rates under its Continental agreement, but the miss came from additional expenses unrelated to the Continental agreement. Recently, XJT announced the creation of a new corporate jet unit that is designed to provide charter operations to businesses and other private entities. The new unit will begin operations in December 2006 with ERJ 145XR aircraft and the company expects to grow its fleet to 15 aircraft. The carrier is currently evaluating other opportunities for the remaining aircraft that will be withdrawn from its agreement with CAL. This strategy has major risks in our opinion and it remains uncertain as to the degree of success that will be achieved. However, if the current Continental contract stays in place, which we assume it will, ExpressJet will have adequate cash flow and has good cash reserves to fund its operations while it tries to devise new ways of expanding. Management has expressed that they will be able to speak about their future plans more specifically by January. In case of consolidation among legacy carriers, we believe it would be a "dark horse" in obtaining new contracts since it currently has no track record in obtaining new business. We are maintaining our Neutral on the company because of the uncertainty still surrounding its strategic business direction and how that would impact margins and estimates. Mesa Air Group (NEUTRAL) Mesa Air Group is an airline holding company and operates Mesa Airlines, United Express, U.S. Airways Express, Delta Connection, and go! Each of these airlines operates regional service either independently or for a partner legacy carrier. Mesa currently maintains over 1,100 daily systemwide departures to 173 cities, 46 states, the District of Columbia, Canada, and Mexico. Mesa Air Group reported disappointing fiscal 4Q06 diluted EPS of $0.15, excluding special items, missing our estimate of $0.20. For the full year, Mesa reported diluted EPS of $1.05, excluding extraordinary items, which compared unfavorably to our estimate of $1.09. The carrier's underperformance versus our estimate was attributable to higher

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U.S. Research Comments CALYON SECURITIES (USA) INC. November 29, 2006

operating expenses than we were estimating. Specifically, operating expenses increased as a result of the start-up costs related to training and the initiation of Delta turboprop operations at JFK. In addition, the effective fourth-quarter tax rate of 47.1% was greater than we were forecasting. The higher tax rate was driven by not being allowed to deduct certain stock option expenses. Fiscal fourth-quarter results were adversely impacted by increased maintenance and training expenses. The company attributed the quarter's results to higher-than-expected pilot training expenses ($2.5 million higher than planned) related to Mesa's Delta Freedom operation as well as increased expenses due to higher-than-forecasted engine overhauls. The overhauls were related to two early aircraft lease returns and two unscheduled engine removals. Specifically, the company stated that maintenance expense was $7.8 million higher than it had previously estimated. The company has several potential projects in the pipeline; however, the future of these projects remain uncertain at this point. In case of consolidation among legacy carriers, we believe the company's aggressive management team with their broad industry contacts will be able to gain market share. Pinnacle Airlines (NEUTRAL) Pinnacle Airlines operates exclusively as Northwest Airlink, Northwest's regional carrier, with over 700 daily departures to 113 cities in 37 states and six Canadian provinces. The company provides service to destinations in the United States and Canada from Northwest's hubs in Detroit, Memphis, and Minneapolis/St. Paul as well as from a focus city at Indianapolis. Pinnacle Airlines reported third-quarter results of $0.62, excluding special items, ahead of our estimate and the consensus of $0.57. The company was able to keep costs down by slightly improving operating margins, to 10.6%, despite a 6% decline in revenue that was due to the decrease in fleet size after Northwest took down 15 planes last November. PNCL is holding discussions with Northwest regarding the assumption of the Airline Services Agreement (ASA) between the two companies and the carrier expects to reach an agreement on a modified ASA in the near future. The company stated that it expects the new ASA to substantially reduce its revenue, certain expenses and earnings. In addition, Northwest has indicated that PNCL must reach a tentative agreement with its pilots union before it can continue as a regional partner for Northwest. We find the aforementioned items as potential risks for the continuing of operations. Recently, PNCL's stock has appreciated due to potential unsecured claims against bankrupt partner, Northwest Airlines, for the termination of the operation of 15 aircraft. These aircraft represent about 10% of Pinnacle's fleet and 6% of its revenue. With Northwest's unsecured bonds trading in the mid 80s range recently, the unsecured claims could have a value up to $12 a share, according to some estimates. However, we do not agree with this argument and we believe any claim will be folded in as part of any settlement with Northwest under a new contract. Contrary to what some believe, we believe adding to the claim pool is important to Northwest as the unsecured creditors will become the owners of the new company and their concerns must be addressed by management. As a result of reduced operations and a reduced estimated operating margin of 8%, our 2007 EPS estimate is $1.75. In reality, though, in a new agreement with Northwest, the 15 aircraft could come back to Pinnacle. In addition, the margins may not be reduced by as much as we are estimating through other cost cutting measures such as reduced aircraft charges. Northwest was paying above-market rates for these aircraft pre-bankruptcy. We believe that it is in the best interest of all parties to resolve and renew the contract. If the contract is terminated, Pinnacle could become a significant unsecured creditor but the final amount of the claim would still have to be determined by the bankruptcy court. Once the contract is resolved, we believe that the market will give the company a higher P/E multiple of 5x to 7x, resulting in a price range of $9 to $12. However, we do not believe that Northwest, which owns all the aircraft, will sign a contract until Pinnacle obtains a new cost-efficient contract with its pilots. Ironically, any termination of the contract forcing Pinnacle to become an unsecured creditor could produce more value for current Pinnacle stockholders. In case of consolidation among legacy carriers, we believe the company remains at a disadvantage.

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U.S. Research Comments CALYON SECURITIES (USA) INC. November 29, 2006

Republic Airways (BUY) Republic Airways Holdings is a holding company that owns Chautauqua Airlines, Republic Airlines, and Shuttle America. Chautauqua operates regional service for American Connection, Delta Connection, United Express, and U.S. Airways Express. Republic Airlines operates as U.S. Airways Express and Shuttle America operates as Delta Connection and United Express. System-wide, Republic offers approximately 1,000 daily departures to 89 cities in 35 states, Canada, Mexico, and the Bahamas. RJET reported 3Q EPS of $0.50, better than our and the consensus estimate of $0.45. This is the third quarter this year that the company has topped consensus estimates. Total operating revenues for 3Q06 increased 33% to $306.1 million primarily due to a 46.5% increase in ASMs and a 23.9% increase in block hours. CASM, including interest expense but excluding fuel, decreased to 7.37 cents, a 9.5% decrease compared to the prior year's 8.14 cents. A little more color on RJET's service for Continental: On July 21, RJET announced that it had reached an agreement to operate 44 50-seat RJs for CAL. The company stated that it will transfer 20 existing 50-seat ERJ-145s operated for US Airways to Continental service during the first half of 2007. Since then, the company has found the other planes. RJET has been able to enter into agreements to lease 12 used CRJs and has a letter of intent to lease an additional 12 CRJs in order to fulfill its agreement with Continental. In our opinion, obtaining a new operating lease certificate for the CRJs is a positive as it diversifies the fleet type RJET operates, which will be helpful in its efforts to bid for other business. In case of consolidation among legacy carriers, we believe that the aggressive management at the company with their broad industry contacts will be able to gain market share among regional carriers. SkyWest (BUY) SkyWest is the regional operator for Delta Connection and United Express. System-wide, the company serves approximately 239 cities in the United States, Canada, Mexico, and the Caribbean with about 2,500 daily departures. SkyWest reported EPS of $0.63 versus $0.51 a year ago. As a result of the acquisition of ASA made last September, SKYW experienced significant increases in its fleet, ASMs and revenue. Load factor was up almost 3 points year over year. Operating revenues were $791.8 million for the quarter, a 59% increase compared to the same period last year. Revenues increased primarily as a result of a 63.3% increase in available seat miles (ASMs) and due to increased fuel cost reimbursements by SKYW's major partners, which are recorded as operating revenues. Total ASMs for 3Q06 increased 63.3% from 3Q05, primarily as a result of SKYW increasing its fleet size to 407 aircraft as of September 30, 2006. SKYW announced that it has been selected for the first allocation of regional jet flying related to an existing Request for Proposal (RFP) by Delta Air Lines, Inc. (Delta). The first allocation of aircraft consists of 12 Bombardier CRJ700s, previously operated by Comair, Delta's wholly owned subsidiary. The aircraft will serve markets from Delta's hub in Cincinnati and will begin to transition to SkyWest, Inc. in February 2007. The aircraft will operate under a contract flying arrangement with Delta. SkyWest has yet to determine which of its airline operating companies will operate the aircraft at Cincinnati. As a result of this additional regional jet flying, SkyWest, on a combined basis, will operate 228 regional jet aircraft and 24 turboprop aircraft for Delta. We believe Delta is reallocating this business primarily to put pressure on the Comair pilots for cost cuts. In our opinion, Delta intends to sell Comair if cost reductions are achieved. However, we believe if Comair costs do not come down, Delta will continue to transfer its business, with SkyWest the most likely winner of this business. In case of consolidation among legacy carriers, we believe that with the company's strong reputation, solid management team, operational record and financial strength, it will be well positioned to not only survive but to grow through capturing more market share. The main risk, in our opinion, is the company's operations for Delta at SLC, a hub that we believe will be endangered. SKYW remains one of our top picks and we maintain our BUY rating on the stock.

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U.S. Research Comments CALYON SECURITIES (USA) INC. November 29, 2006

October 2006 - U.S. Regional Airlines' Operations % of ASMs

ASMs

% of Total Industry Departures

% of Total Industry ASMs

RJ

Turboprop

74,002 48,976 25,026

1,807.1 1,088.0 719.1

18.7% 12.4% 6.3%

22.2% 13.3% 8.8%

93.9% 92.2% 96.4%

6.1% 7.8% 3.6%

42,857

1,128.1

10.8%

13.8%

100.0%

0.0%

AA Eagle Executive

54,050 49,465 4,585

1,066.4 1,004.1 62.3

13.6% 12.5% 1.2%

13.1% 12.3% 0.8%

91.6% 97.3% 0.0%

8.4% 2.7% 100.0%

Mesa United Express Freedom Air Midwest go! Nantucket

43,345 24,435 4,673 6,396 4,886 2,002 953

1,003.2 656.1 198.5 119.2 15.6 13.6 0.2

10.9% 6.2% 1.2% 1.6% 1.2% 0.5% 0.2%

12.3% 8.0% 2.4% 1.5% 0.2% 0.2% 0.0%

94.4% 95.7% 100.0% 90.1% 0.0% 100.0% 0.0%

5.6% 4.3% 0.0% 9.9% 100.0% 0.0% 100.0%

Chautauqua Republic Shuttle America

25,222 17,903 4,769 2,550

648.8 330.1 181.4 137.3

6.4% 4.5% 1.2% 0.6%

8.0% 4.0% 2.2% 1.7%

100.0% 100.0% 100.0% 100.0%

0.0% 0.0% 0.0% 0.0%

Comair

24,250

603.8

6.1%

7.4%

100.0%

0.0%

Pinnacle

21,168

444.9

5.3%

5.5%

100.0%

0.0%

Horizon Air

15,812

319.5

4.0%

3.9%

48.4%

51.6%

US Airways Express PSA Piedmont

24,899 11,410 13,489

318.5 217.2 101.3

6.3% 2.9% 3.4%

3.9% 2.7% 1.2%

68.2% 100.0% 0.0%

31.8% 0.0% 100.0%

TransStates Go Jet

11,322 8,886 2,436

290.1 187.5 102.6

2.9% 2.2% 0.6%

3.6% 2.3% 1.3%

100.0% 100.0% 100.0%

0.0% 0.0% 0.0%

Air Wisconsin

14,838

270.8

3.7%

3.3%

100.0%

0.0%

Mesaba

11,892

106.3

3.0%

1.3%

33.6%

66.4%

Colgan Air

9,524

52.2

2.4%

0.6%

0.0%

100.0%

SkyWay

4,632

32.2

1.2%

0.4%

76.5%

23.5%

Gulfstream

5,801

24.3

1.5%

0.3%

0.0%

100.0%

PenAir

2,497

13.1

0.6%

0.2%

0.0%

100.0%

Commutair

3,119

10.4

0.8%

0.1%

0.0%

100.0%

Regions Air

2,114

5.8

0.5%

0.1%

0.0%

100.0%

Cape Air

5,074

5.2

1.3%

0.1%

0.0%

100.0%

396,418

8,151

Company

Operator

SkyWest SkyWest ASA ExpressJet American Eagle

Mesa

Republic Airways

TransStates

Total

Departures

Source: Airline Monitor, Company Reports, OAG data

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U.S. Research Comments CALYON SECURITIES (USA) INC. November 29, 2006

Other Companies Mentioned AirTran Holdings (AAI; $12.81; ADD) ACE Aviation Holdings (ACE-B.TO; $38.12; BUY) Alaska Air Group (ALK; $40.98; BUY) AMR Corporation (AMR; $31.95; ADD) Continental Airlines (CAL; $41.50; ADD) Copa Holdings SA (CPA; $42.62; BUY) Delta Air Lines (DALRQ; $1.19; SELL) Embraer-Empresa Brasileira de Aeronautica S.A. (ERJ; $41.60; ADD) Frontier Airlines (FRNT; $8.14; NEUTRAL) GOL Linhas Aereas Inteligentes S.A. (GOL; $27.99; ADD) JetBlue Airways Corp. (JBLU; $13.96; NEUTRAL) US Airways (LCC; $58.18; ADD) Lan Airlines S.A. (LFL; $49.45; BUY) Southwest Airlines (LUV; $15.78; ADD) Mesa Air Group (MESA; $8.54; NEUTRAL) Northwest Airlines (NWACQ; $3.68; SELL) Pinnacle Airlines Corp. (PNCL; $9.62; NEUTRAL) Republic Airways Holdings (RJET; $17.13; BUY) SkyWest, Inc. (SKYW; $25.10; BUY) TAM SA (TAM; $27.75; ADD) UAL Corporation (UAUA; $40.51; NEUTRAL) WestJet Airlines Ltd. (WJA.TO; $11.22; ADD) ExpressJet Holdings, Inc. (XJT; $7.76; NEUTRAL)

IMPORTANT DISCLOSURES Analyst Certification I, Ray Neidl, hereby certify that the views expressed in this research report accurately reflect my own personal views about the securities and/or the issuers and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. I, Christine Min, hereby certify that the views expressed in this research report accurately reflect my own personal views about the securities and/or the issuers and that no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. The member and/or analyst(s) involved in the preparation of this report have reason to know that an affiliate of Calyon Securities (USA) Inc. received compensation from Copa Holdings SA for non-investment banking products/services in the past 12 months. The member makes a market in the securities of Frontier Airlines. The member and/or analyst(s) involved in the preparation of this report have reason to know that an affiliate of Calyon Securities (USA) Inc. received compensation from GOL Linhas Aereas Inteligentes S.A. for non-investment banking products/services in the past 12 months. The member makes a market in the securities of JetBlue Airways Corp. Calyon Securities (USA) Inc. covered the predecessor companies of US Airways. Ray Neidl initiated coverage of US Airways (UAIRQ) on October 5, 2004 with a Sell rating and price target of $0.25 (price at initiation: $1.45), and the rating and target price remained until liquidation. Ray Neidl initiated coverage of America West Holdings (AWA) on October 8, 2004 with a Neutral rating and price target of $5 (price: $4.98); on April 20, 2005 the rating was lowered to Reduce and the price target was lowered to $4 ($4.81); on April 25, 2005 the rating was raised to Neutral and the price target remained $4 ($4.27). The rating and price target of AWA remained Reduce with a $4 price target until liquidation. The member makes a market in the securities of US Airways. Calyon or its affiliates participated in a public offering of Lan Airlines S.A.'s securities or received compensation for investment banking services from Lan Airlines S.A. in the past 12 months. Calyon or its affiliates managed or co-managed a public offering of Lan Airlines S.A.'s securities in the past 12 months. The member makes a market in the securities of Mesa Air Group. The member makes a market in the securities of Northwest Airlines. The member makes a market in the securities of Pinnacle Airlines Corp. The member makes a market in the securities of Republic Airways Holdings. The member makes a market in the securities of SkyWest, Inc. Ray Neidl initiated coverage of the TAM ord. (TAMM4; R$27) on October 25, 2005 with an ADD rating and R$31 price target. On

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U.S. Research Comments CALYON SECURITIES (USA) INC. November 29, 2006

November 11, 2005 we raised our price target to R$34 (price at the time: R$30.50). On November 17, 2005 we raised our price target to R$39 (R$35.50). On January 12, 2006 we raised our price target to R$53 (R$48.50). On March 13, 2006 we transferred our coverage to the newly-launched ADS with an ADD rating and US$23 price target. We initiated coverage of UAL Corp on October 5, 2004 with a Sell rating and Target Price of $0.25. We maintained that rating and target price until the company emerged from bankruptcy on February 2, 2006. The member makes a market in the securities of UAL Corporation. The member and/or analyst(s) involved in the preparation of this report have reason to know that an affiliate of Calyon Securities (USA) Inc. received compensation from WestJet Airlines Ltd. for non-investment banking products/services in the past 12 months.

RATING RECOMMENDATIONS (based on anticipated returns over a 12-month period): BUY, above 20%; ADD, 10%-20%; NEUTRAL, +/-10%; REDUCE, negative return, but by less than 20%; SELL, negative return of more than 20%. OVERALL RATING DISTRIBUTION for Calyon Securities (USA) Inc., Equity Universe: BUY - 51.3%, HOLD - 41.0%, SELL - 6.8%, Restricted - 0.9%. Data as of September 30, 2006. INVESTMENT BANKING CLIENTS as a % of rating category: BUY - 18.3%, HOLD - 16.7%, SELL 12.5%, Restricted - 100%. Data for 12-month period ending September 30, 2006. FOR A HISTORY of the recommendations and price targets for companies mentioned in this report, please write to: Calyon Securities (USA) Inc., Compliance Department, 1301 Avenue of the Americas, 15th Floor, New York, New York 10019-6022. CALYON SECURITIES (USA) INC. POLICY: Calyon Securities (USA) Inc.'s policy is to only publish research that is impartial, independent, clear, fair, and not misleading. Analysts may not receive compensation from the companies they cover. Neither analysts nor members of their households may have a financial interest in, or be an officer, director or advisory board member of companies covered by the analyst. ADDITIONAL INFORMATION on the securities mentioned herein is available upon request. DISCLAIMER: The information and statistical data herein have been obtained from sources we believe to be reliable but in no way are warranted by us as to accuracy or completeness. We do not undertake to advise you as to any change in our views. This is not a solicitation or any offer to buy or sell. We, our affiliates, and any officer director or stockholder, or any member of their families may have a position in, and may from time to time purchase or sell any of the above mentioned or related securities. This material has been prepared for and by Calyon Securities (USA) Inc. This publication is for institutional clients distribution only. This report or portions thereof cannot be copied or reproduced without the prior written consent of Calyon Securities (USA) Inc. In the UK, this document is directed only at Investment Professionals who are Market Counterparties or Intermediate Customers (as defined by the FSA). This document is not for distribution to, nor should be relied upon by, Private Customers (as defined by the FSA). © 2006 Calyon Securities (USA) Inc. All rights reserved.

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