TORONTO - Air Canada is jumping into the low-cost leisure travel market with the launch of its new Rouge airline, which will begin flying on Canada Day to destinations in Europe and the Caribbean.

The airline will start with flights from Toronto to Venice, Italy and Edinburgh, Scotland — two destinations that currently aren't served by Air Canada, and will serve Athens, Greece from Toronto and Montreal.

Air Canada's existing flights to Cuba, the Dominican Republican, Jamaica and Costa Rica will be flown by the discount carrier from Toronto.

The destinations are areas where demand for leisure travel has been growing, said Ben Smith, Air Canada's chief commercial officer. But many are routes that didn't generate adequate profits under Air Canada's existing cost structure.

"The creation of this carrier is to assist us in serving many destinations that our existing model does not work on a competitive basis," Smith said.

"This is not viewed as entering markets that we haven't been in the past, they are markets that we've always liked to serve, some we've already served in the past, we just had to have the right vehicle to exploit them properly."

For now, most of the flights will depart from Toronto, but the airline plans to add more Canadian gateways, along with more getaway destinations throughout 2013. It is also examining the potential of flights to Asia.

Smith said the carrier will be a vehicle to reclaim market share that it has lost to domestic and international competitors.

It plans to hire 200 flight attendants and pilots for the new low-cost carrier.

Air Canada pilots complained during labour negotiations earlier this year that the low-cost carrier could threaten their job security and working conditions, and that pilots at the carrier would earn less. In the end, a federal arbitrator chose Air Canada's final offer that included provisions allowing the airline to create a budget carrier.

Smith said Rouge pilots will be part of the Air Canada union but will operate on a "different work and pay scale," compared to those at the main line, adding that the choice to move to Rouge is up to the pilots and there has been a lot of interest in doing so.

The airline says flights to Venice, Edinburgh and Athens start at "special introductory fares" of $949 round-trip, including all taxes, fees, charges and surcharges.

Flights to the Dominican Republic and Jamaica will start at $269, one-way, while Cuba is offered starting at $538 round-trip.

All the introductory fares, which are available until Dec. 25, are based on Toronto departures.

Details about fares going forward were not immediately available, but the company said it will provide more details about pricing and its premium economy seats in January.

Air Canada previously launched a series of discount carriers including Zip, Tango and Jazz to compete against WestJet and Jetsgo.

Tango disbanded as an airline in 2003 but remains the name for Air Canada's cheapest economy fares. Zip shut in 2004 after providing service to Western Canada and was folded into Air Canada.

The new low-cost airline will begin operations with two Boeing 767-300ER and two Airbus A319 aircraft that will be released from Air Canada's mainline fleet. Additional planes will be added as Air Canada (TSX:AC.B) starts to take delivery of new Boeing 787 Dreamliner aircraft in 2014, ramping up to 50 planes.

Air Canada has 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.

Airline analyst Jacques Kavafian at Toll Cross Securities said that could turn some customers off, adding he doesn't believe Rouge will be the financial success the company hopes it will be.

"The A319s seat pitch is similar to competitors in Canada but the 767s seat pitch is almost unique in the world and will likely reflect poorly on its image," he said.

Smith refuted those claims, saying many of its competitors have a similar number of seats per aircraft.

"I can clearly state that the product offering for all seats will either be competitive or superior to what's being offered in all the markets that we serve," he said.

Competitor WestJet (TSX:WJA) is launching a discount regional carrier in the second half of next year and also introduced a premium economy section that will include 24 seats per plane once the fleet has been reconfigured. Density will increase on the 737-800 series jets only, which will go from 166 seats to 174, the company said.

Transportation analyst Chris Murray at PI Financial noted Air Canada expects the operation to be immediately profitable, but he believes, given its initial small scale, it won't contribute to earnings in its first two years.

"While the strategic rationale for launching the (low-cost carrier) unit as a defensive move against further penetration by other low-cost leisure carriers such as Sunwing Vacations, Transat and WestJet make sense, we remain skeptical of the magnitude of earnings impact until additional scale is obtained later this decade with additions to the mainline fleet."

However, traders seemed to react favourably to the launch, sending shares up almost eight per cent, or 13 cents, to close at $1.83 on the Toronto Stock Exchange.

Earlier on HuffPost:

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  • Air Canada's Labour Problems

  • June 2011: Ground Workers Strike

    About 3,800 customer sales and service representatives represented by the Canadian Auto Workers union held a three-day strike in June. They reached a deal with company just hours after the federal government introduced a bill seeking to legislate them back to work. At issue was employee pensions. The airline proposed new hires would receive defined contribution pension plans instead of the defined benefit plans current employees have. Ground workers ratified a new contract that leaves pensions alone, but negotiations continue over their future shape. -- <em>The Canadian Press</em>

  • Sept./Oct. 2011: Flight Attendants

    Air Canada's 6,800 flight attendants voted 98 per cent in favour of a strike action in September, rejecting a contract the Canadian Union of Public Employees had negotiated with the airline. At issue, once again, was pensions -- Air Canada had proposed that new hires would receive defined contribution pensions plans instead of the defined benefits plans flight attendants currently receive. CUPE and the airline negotiated a second deal in October, and flight attendants rejected it again -- this time by a more narrow 65 per cent. The federal government intervened again, sending the dispute to an arbitrator, who imposed the second agreement hammered out between the union and the airline. -- <em>Canadian Press files</em>

  • March 2012: Pilots, Mechanics Lockout Averted

    Air Canada's pilots and ground technicians were set to walk off the job just in time for March break when Air Canada threatened to do it for them and lock them out. For the third time in less than a year, the federal government intervened, passing back-to-work legislation and sending the matter to the industrial relations board. Prime Minister Stephen Harper defended the government's repeated use of back-to-work laws to prevent Air Canada strikes and lockouts, saying the airline is crucial to Canada's economy and cannot be allowed to stop operating, especially during a high travel season. -- <em>Canadian Press files</em>

  • March 2012: Protests Against Aveos Layoffs

    Days after a pilots' and machinists' strike was averted, Aveos, an Air Canada maintenance contractor, announced it was shutting plants in Montreal, Vancouver and Winnipeg laying off 2,400 employees. Some 200 employees in Montreal blocked access to the Air Canada building at Montreal's Pierre Elliott Trudeau building on Monday March 19, 2011. -- <em>Canadian Press files</em>

  • March 2012: Pilots Mysteriously Sick After Dispute

    Days after Labour Minister Lisa Raitt used legislation to prevent a walkoff or lockout of Air Canada pilots, the airline was hit with a flurry of delays and cancellations as an unusually high number of pilots called in sick to Montreal's Trudeau airport. The airline clearly suspects the move may have been some kind of covert labour action, as it has filed a complaint about the incident with the labour relations board. -- <em>Canadian Press files</em>

  • March 2012: Wildcat Strike

    A ground crew wildcat strike disrupted Air Canada's operations at Pearson Airport on Friday, March 23, 2012, after the airline reportedly fired three workers who had followed Labour Minister Lisa Raitt through the airport, heckling her. When ground workers walked off the job in protest, the airline reportedly fired 37 of them, causing further job walkoffs. The labour relations board eventually put a stop to the protests and reinstated the 37 fired workers, but not before the strikes had spread, briefly, to airports in Montreal and Vancouver.

  • April 2012: 'Sick-Out' Strikes Pearson

    A month after pilots in Toronto and Montreal called in sick en masse, prompting flight cancellations, the same thing appeared to happen again, as a "sick-out" by pilots hit Toronto's Pearson Airport. At least 60 flights were cancelled the morning the apparent job action hit. The Air Canada Pilots Association distanced itself from the action, saying it wasn't sanctioned by them. Air Canada described the sick-out as "illegal." Photo: Chris Bouchard, whose flight to Calgary was cancelled upon his arrival, checks flight times at Toronto Pearson Airport on Friday, April 13, 2012. (THE CANADIAN PRESS/Michelle Siu)

  • July 2012: Arbitrator Sides With Airline

    Air Canada pilots lost their monumental labour battle with the airline when an arbitrator, appointed by the government after back-to-work legislation, sided with the airline. The decision sent Air Canada stock higher on the expectation the decision would pave the way for a discount Air Canada airline brand, but left the company's pilots angry and disillusioned.