Details of the plan to start the new carrier are still being formulated, but the country's largest airline said Wednesday that arbitrated labour agreements, especially one with its 3,000 pilots, provide it with the necessary flexibility to pursue the endeavour.
"The launch of an Air Canada low-cost carrier represents pure growth in flying for our pilots and for the Air Canada family," president and CEO Calin Rovinescu said during a conference call that followed disappointing second-quarter earnings results.
Air Canada (TSX:AC.B) lost $96 million in the three-month period, more than double the $46 million it lost in the same period a year earlier and more than analysts had expected.
"We experienced several challenges in the quarter which adversely affected our net results, namely job actions which occurred this past March and April that impacted second-quarter bookings and revenues, and a slight capacity impact as a result of (the) Aveos (bankruptcy)," Rovinescu told analysts.
The airline estimates the two factors reduced earnings by 12 to 17 cents per diluted share in the quarter.
As it was, the overall loss was equal to 35 cents per share, up from 17 cents in the comparable year-earlier period.
On an adjusted basis, the Montreal-based airline had a loss of five cents per share, up from a loss of one cent per share a year ago.
The adjusted loss was four cents per share higher than a consensus estimate compiled by Thomson Reuters. Such estimates often exclude unusual items.
Air Canada said Wednesday that it would have made an adjusted profit of seven to 12 cents per share without the impact of the labour disruptions and the bankruptcy of Aveos Fleet Performance, which had done major overhauls of the airline's planes.
Revenue for the April- to-June quarter ahead of the main summer travel period was little changed year over year, rising $71 million to $2.99 billion. However, its revenue per seat mile was up only two per cent and yield or price increases lagged expectations amid tight competition in the Montreal-Toronto corridor and U.S. short-haul routes.
While the industry has grown in recent years, Air Canada has been stagnant without the addition of new aircraft.
The Montreal-based carrier plans to transfer to the new low-cost airline 20 Boeing 767 planes and 30 Airbus A319s currently used in its mainline fleet when they come off lease. The move comes as Air Canada is set to receive the first of 37 Boeing 787 Dreamliners beginning in 2014.
Rovinescu said the low-cost carrier model will allow Air Canada to grow its presence in markets where it can't now compete effectively with new entrants, return to markets previously abandoned and enter new markets that are impossible with its mainline brand.
"We view this as a gradual process. It's not going to be 50 aircraft starting to operate there by early 2013," he cautioned.
"With a strong liquidity position and our principal labour agreements now behind us and the potential for growth through the startup of a low-cost carrier airline, we believe we are well positioned to transform Air Canada into a more competitive, sustainable and solidly profitable airline for the benefit of our stakeholders."
The airline has been working for months on different options, said Ben Smith, chief commercial officer.
The new pilot agreement sets wages at similar levels to WestJet (TSX:WJA) and Air Transat (TSX:TRZ.B) and would allow the new low-cost carrier to better compete on routes to Las Vegas, Florida, Mexico, the Caribbean and Europe.
"All the destinations may not be new but there could be significant increases in capacity in areas we already operate in," Smith said.
The addition of more capacity worries industry observers.
"Our fear is that Air Canada will chase market share by operating these planes on low-yielding leisure routes where competition already exists, which ultimately would lead to lower yields for all players," wrote Cameron Doerksen of National Bank Financial.
Overall, Doerksen said he is cautious about Air Canada's prospects because of intensifying competition, particularly as WestJet targets business travellers by adding premium economy seating and starts a regional airline next year.
Walter Spracklin of RBC Capital Markets had a more upbeat view even as Air Canada shares closed down nine cents, or 7.8 per cent at $1.06 on Wednesday.
"Initial reactions to second-quarter results were likely driven off concerns over moderating traffic and yield growth," Spracklin said.
"However, when we look at the operational base of Air Canada coming out of the second quarter, the carrier is structurally very different with vastly improved operational sustainability, in our view," he wrote in a report.
Spracklin expects Air Canada's shares will rise now that labour negotiations have ended and liquidity pressures are slowly lifting from a lower pension liability.
The arbitrated labour agreements will cut the airline's pension solvency deficit by about $1.1 billion. It also plans to seek regulatory and government approval for a 10-year extension for resolving its remaining $3.1-billion pension deficit.
"While the longer-term structural components are improving, should solid industry fundamentals continue, we believe the AC shares present a compelling near-term trading opportunity," Spracklin said.
Meanwhile, Rovinescu said Air Canada is studying the addition of a premium economy class, but wouldn't say when it might take flight.
"We continue to see our premium passengers as a key ingredient of our business and so we're not going to let the time pass before responding, if we feel we need to respond, on all of our fleet types."
Air Canada is also considering the removal of Embraer 175 aircraft from its mainline fleet and changes to its regional fleet in light of the new pilot agreement which Rovinescu described as "extremely reasonable."
It also expects to receive "significant" savings from new aircraft maintenance agreements.
Air Canada is the country's largest domestic and international full-service airline providing scheduled and charter air transportation for passengers and cargo to more than 175 destinations on five continents.
It is the world's 15th largest commercial airline, providing service to more than 32 million passengers a year.
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