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Air Canada Rouge bookings strong as airline feels yield pressures

MONTREAL - Air Canada says its new low-cost carrier Rouge is contributing to healthier overall bookings for the coming summer even though competition is pressuring prices.

"Rouge bookings are strong and launch readiness is well on track," chief executive Calin Rovinescu said Friday during a conference call about first-quarter results.

In addition to recruiting and training pilots and flight crews, Air Canada is moving aircraft to the new carrier and working to obtain a Transport Canada operating certificate.

"We have every reason to expect a successful launch," he told analysts.

Rouge will initially start operating with two Boeing 767 with flights to Europe and two Airbus A319 for leisure sun destinations. It plans to add six narrowbody planes by the end of the year, growing to 50 planes within a few years.

The discount carrier will serve some existing Air Canada routes and new destinations such as Venice and Edinburgh.

Rouge is expected to profit by cramming more seats on its planes than Air Canada's main fleet and lower employee costs.

Air Canada said overall booking demand this summer is running ahead of last year but it is facing price pressure.

"The demand is there, people are buying airline tickets...our challenge will be to get the pricing up to a level we need to get it to," Rovinescu said.

Air Canada (TSX:AC.B) said Friday it lost $260 million or 95 cents per diluted share in its most recent quarter, down from a loss of $274 million or 99 cents per share in the same 2012 quarter.

Operating revenues were $2.95 billion, down from $2.96 billion.

Pricing decreased 1.1 per cent as it felt pressure from competition, especially in Eastern Canada, to New York and South America.

On an adjusted basis, the airline said its loss was $143 million or 52 cents per share, down from $162 million or 58 cents in the prior-year quarter.

While it narrowed the first-quarter loss, the results fell short of Air Canada's expectation in part due to a decline in premium travel demand, Rovinescu said.

Premium revenues fell 6.7 per cent in the quarter.

"While it's clear that there's still lots of work ahead of us, we continue to make steady progress towards the sustainable transformation of our airline."

Analyst Cameron Doerksen of National Bank Financial said while domestic prices remains relatively strong, Air Canada continues to see pressure on yields in some markets that will only increase as competition increases.

"We see Air Canada's yields coming under further pressure later in 2013 and into 2014 as WestJet (TSX:WJA) starts up its new (Encore) regional service," he wrote in a report.

Doerksen also remains skeptical that Rouge will be able to achieve acceptable returns on lower yielding routes where healthy competition already exists.

Rovinescu said he doesn't foresee prices being a long-term challenge, saying yields should improve, especially in the U.S., as the economy strengthens.

"I don't necessarily categorize this as a long-term issue, but one that we are definitely focused on right now."

Air Canada also reported Friday that its planes flew with a greater proportion of empty seats in April compared with a year ago as the airline increased capacity and traffic slipped lower.

The airline reported a load factor of 82.1 per cent for the month, down from 83 per cent a year ago, while capacity as measured by available seat miles increased one per cent.

Traffic at Air Canada measured by revenue passenger miles was down 0.2 per cent compared with a year ago.

Meanwhile, Rovinescu said the airline remains focused on reducing its costs by adding five Boeing 777 aircraft, launching Rouge, transferring Embraer 175 regional aircraft to Sky Regional and developing its international network.

It has also initiated a request for proposals with the world's four large aircraft manufacturers, including Bombardier (TSX:BBD.B) to eventually replace its fleet of narrowbody aircraft. The airline is also talking to engine manufacturers.

During the quarter, Air Canada launched its rebranded loyalty program Altitude which operates alongside Aeroplan and gives frequent fliers perks, including access to lounges and upgrades.

Rovinescu said it's a key part of the airline's strategy to compete against rivals, including WestJet, which is trying to attract business travellers.

"We will count on the loyalty program to help us respond to the challenge."

He said business travellers are buying upgrades even if they're not buying premium class seating.

On the Toronto Stock Exchange, Air Canada's class B shares closed down 18 cents, or 6.25 per cent, at $2.70 on Friday.

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