The airline said Tuesday that Rouge — launched more than a year ago as a low-cost leisure carrier — will take over the Toronto-Kelowna, B.C., and the Toronto-Sydney, N.S., routes and will be used for a new seasonal route between Calgary and Halifax.
"The expansion of Air Canada Rouge in North America, including on key domestic markets with high leisure demand and to Mexican and Caribbean destinations, remains a fundamental element of our strategy for sustainable, profitable growth," said Benjamin Smith, president of passenger airlines.
Lower wages and more seats on its planes help to reduce Rouge's operating costs compared with flights operated by parent Air Canada.
Air Canada CEO Calin Rovinescu telegraphed the use of Rouge for domestic routes when he told analysts in August that the airline would look at opportunities on a market-by-market basis.
The Rouge flights will offer economy- and premium-class seating beginning in May or June, depending on the route.
Air Canada (TSX:AC) also said it will resume service to Mexico City from Montreal with new Rouge flights starting in May. Rouge will also take over flights to Varadero, Cuba, from Calgary and Montreal, as well as the Montreal-to-Martinique route.
David Tyerman of Canaccord Genuity said the use of Rouge on smaller domestic routes can make them profitable even if lower fares are required to fill seats.
"So everybody may end up winning to some degree, although if you are a really tall person you won't be so keen," he said, referring to the less space legroom between the increased number of seats.
The analyst said other Canadian leisure destinations could be added to Rouge in the summer as it expands the fleet and seeks ways to use its narrowbody planes when travel to sun destinations wanes.
But he said Air Canada runs the risk of alienating customers, especially business people, who aren't prepared for the tighter flying conditions. That's what happened when flights from Vancouver to Los Angeles were converted to Rouge, prompting some consumer complaints, including negative tweets about legroom from actor Rob Lowe.
Air Canada admitted it needed to do a better job of "managing the customer expectations."
Tyerman said Air Canada is unlikely to convert large domestic Air Canada routes to Rouge if its main competitor, WestJet Airlines (TSX:WJA), flies with a configuration that provides greater legroom.
"It's quite possible that the higher density Air Canada offering won't be acceptable and you would lose (market) share because of it."
Launched in July 2013, Air Canada Rouge has been offering service to destinations in the United States, Caribbean, Mexico and Europe using Airbus A319 and Boeing 767 aircraft. It recently began flying to Hawaii from Toronto and will add flights to Osaka, Japan from Vancouver next year.
Rouge currently operates eight widebody Boeing 767s and 20 narrowbody Airbus A319s. By the end of 2016, the fleet is expected to reach 16 Boeing 767s and 25 A319s, or 41 of the 50 aircraft permitted by its collective agreement with pilots.
Meanwhile, Air Canada also announced new daily non-stop service using Jazz-operated turboprops for Calgary-Terrace, B.C., Calgary-Nanaimo, B.C, and Vancouver-Comox, B.C. routes. Daily Air Canada flights will be added between Toronto and Austin, Tex.
The route changes are being announced as Air Canada plans to boost its overall capacity by nine to 10 per cent next year.
Much of the added capacity will be in the international business, with domestic capacity projected to increase by four or five per cent. More than half of the international growth will come from Rouge's expansion, while much of the rest will flow from using new Boeing 787 Dreamliners, which have lower operating costs.
The airline recently announced the launch of non-stop service to Delhi and to Dubai from Toronto beginning in November 2015, both using the larger Boeing 787 Dreamliner.
On the Toronto Stock Exchange, Air Canada's shares closed down 57 cents or 4.89 per cent at $11.09 on Tuesday.
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Note to readers: This is a corrected story. An earlier version incorrectly stated Rouge flew Boeing 737 aircraft.Suggest a correction