The Montreal-based airline said it will transfer 15 Embraer 175 jets in its mainline fleet to non-unionized Sky Regional, which will fly them under the Air Canada Express banner on short flights, mainly from Toronto and Montreal to cities in the northeastern U.S.
The change flows out of an arbitrated pilots contract that allows the airline to outsource more of its large regional jet business to regional carriers such as Chorus Aviation (TSX:CHR) and Sky Regional.
Sky Regional already operates flights using five Q400 turboprops between Montreal and Billy Bishop Toronto City Airport under the Air Canada Express name.
The transfer of the 15 regional jets is expected to be made between February and June 2013.
Air Canada (TSX:AC.B) announced the deal with Sky Regional as it also announced plans to add two new Boeing 777-300ER aircraft to its fleet next year as part a move to grow its international business.
The two new aircraft will bring Air Canada's Boeing 777 fleet to 20 aircraft, including both the 300ER and 200LR models.
"The arrival of these new Boeing 777s, along with the 787 Dreamliners in 2014, will allow us to introduce new routes at the mainline carrier and release aircraft from our existing fleet to our new low-cost leisure carrier," Air Canada chief executive Calin Rovinescu said in a statement.
"Air Canada's mainline carrier will continue to grow internationally as we launch new routes, while the leisure carrier will pursue opportunities in markets where we are not adequately cost competitive under the mainline brand."
Air Canada said the two changes have been factored into its plans, announced last month, to hire more some 1,100 employees over the next 12 months, including 200 new jobs for flight attendants and pilots at the low-cost carrier it plans to launch next year.
Spokeswoman Isabelle Arthur said there won't be any job losses because pilots that fly the ERJ 175 can also fly the larger ERJ190. She also noted the addition of the two Boeing 777 and attrition at the airline.
The union representing Air Canada pilots said none of its members would be forced to work for Sky Regional.
After the arbitration ruling was announced in July, the Air Canada Pilots Association said the imposed work rules will cost many pilots their jobs and demoralize the rest.
"Customers will be surprised and disappointed to learn that in future, buying a ticket from Air Canada will not guarantee them a seat on an Air Canada flight operated by an Air Canada pilot," union president Capt. Paul Strachan and chairman Capt. Jean-Marc Belanger said in a statement at the time.
Cameron Doerksen of National Bank Financial said Monday that Air Canada's regional service move is a big boost to a Chorus competitor and positions Sky Regional to compete for future flying with Air Canada.
"We believe that Sky Regional has a lower cost structure than Chorus and will be well positioned to bid on any future opportunities with Air Canada," he wrote in a report.
Doerksen said some observers believed the new pilot agreement would provide additional growth avenues for Chorus from the Embraer planes. But he thinks Air Canada will primarily replace Chorus' 50-seat CRJ planes with Q400s and maybe CRJ705s.
He said the key risk for Halifax-based Chorus is the pending arbitration ruling on cost benchmarking. Air Canada wants the markup it pays to Chorus reduced to operate regional flights, while Chorus wants the current markup to remain in place until at least 2015.
Chorus said Air Canada didn't conduct a competitive bidding process for contract given to Sky Regional.
The addition of 75-seat Bombardier 705 jets would improve its operating costs.
"However, the addition of the Embraer 175s would make Jazz less efficient and raise our costs as a result of multiple fleet types," said spokeswoman Manon Stuart.
On the Toronto Stock Exchange, Air Canada's shares closed up four cents, or 3.15 per cent, to $1.31 in Monday trading. Chorus Aviation shares were unchanged at $3.80.