Air Canada Discount Airline: Low-Cost Carrier To Be Announced Within Weeks

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AIR CANADA DISCOUNT CARRIER
Air Canada says it is a couple of weeks away from announcing plans to launch a separately managed low cost carrier that will service transatlantic and leisure routes in the Caribbean and the United States. | CP

MONTREAL - Canada's two largest airlines have their sights set on new growth plans, with Air Canada set to announce details of its separate low-cost carrier and WestJet establishing its new regional service.

Air Canada chief financial officer Michael Rousseau told a CIBC investment conference Wednesday that the airline is just a couple of weeks away from announcing details of a new discount carrier that will serve transatlantic and leisure routes in the Caribbean and the United States.

It will be wholly owned by Air Canada (TSX:AC.B), but carry a different name.

"It is a very exciting initiative, not just for Air Canada, but our employees as well because it does provide growth opportunities for us," he said.

Meanwhile, WestJet plans to launch its new regional service in one half the country next summer and expand the service in other side of the country about nine months later.

However, the Calgary-based airline, which is starting the regional service with seven aircraft and ramping up to 20 by 2016, has been coy about just which half of the country it was planning to start with.

WestJet marketing vice-president Bob Cummings said the airline hosted a meeting in June of representatives from 32 communities that could be added to the regional service.

"These communities very much want WestJet to come into their community and stimulate traffic and become a part of their community," he said.

The schedule for the regional service will be announced early next year.

Meanwhile, Air Canada said about half of incremental profits from its low-cost carrier will be derived from cramming more seats into a fleet of 20 Boeing 767s and 30 Airbus A319s. The rest comes from lower employee wages and more flexible work rules.

The wide-body planes, for example, will be fitted with 20 per cent more seats, raising the number of passengers to 275 per aircraft.

The airline will serve new routes in Europe that currently aren't cost competitive for Air Canada and allow it to be more competitive on Caribbean and some U.S. destinations.

"The majority of the transatlantic routes will be, in fact, growth routes for us that we think we can make adequate, if not very strong returns," Rousseau said.

Its approach to the leisure market is more defensive, he added, with some routes switching to the low-cost carrier to improve margins.

Rousseau said Air Canada studied several different models around the world — including Qantas's Jetstar in Asia — and opted to create a wholly-owned airline with a separate management to ensure it maintains the low-cost carrier "mentality."

However, Rousseau warned the new airline, which will be launched in 2013, won't have a material impact on Air Canada's results until it ramps up to the full fleet of 50 planes.

Meanwhile, he says Air Canada is working on several other initiatives to build its profits after completing gruelling labour negotiations that lasted longer than it had anticipated.

Air Canada is also working to develop a "competitive response" to WestJet Airlines (TSX:WJA) plans to launch a regional service next year.

Bombardier Q400s planes will allow WestJet to add non-stop service to seven or eight communities and use the smaller planes on some existing routes to increase profits.

WestJet hopes the regional service will eventually add up to four million more customers to the 25.5 million who fly the mainline carrier for regular or vacation travel.

"We're not as concerned about (market) share as we are about growing profitably and successfully going forward," Cummings said.

"So we set ourselves up nicely to grow a lot of share if everything's going well or to scale back a bit and have more measured capacity growth and make sure that it is profitable."

Air Canada said it also is discussing with Ottawa about extending its moratorium on past service pension contributions for another 10 years once the current deal expires in 2013.

And Air Canada is preparing for the arrival in 2014 of its first Boeing 787 aircraft that will allow it to economically service markets such as India.

The planes, which will be purchased rather than leased, could be outfitted with three cabin classes — economy, premium economy and business.

While the International Air Transportation Association has warned about slowing premium travel, Rousseau said Air Canada hasn't experienced a softening and pricing remains strong.

On the Toronto Stock Exchange, Air Canada's shares closed up more than six per cent, gaining seven cents to $1.23 in Wednesday trading. WestJet shares lost 12 cents to $17.28.

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