06/10/2013 07:05 EDT | Updated 08/10/2013 05:12 EDT

Air Canada expects new planes, labour contracts to aid in cost-cutting efforts

TORONTO - Air Canada (TSX:AC.B) is pushing ahead with plans to cut costs by 15 per cent even as it increases capacity and its low-cost carrier Rouge takes off this summer, airline executives said Monday.

"We've been very clear that we will be unrelenting on costs and creatively respond to competition in any way we can," Air Canada president and chief executive told an investors meeting.

"Cost transformation is continuous."

The company said Monday that it had been doing better than expected on cost-containment during the second quarter, which ends June 30.

Air Canada's adjusted cost per available seat mile will decrease by between 0.5 per cent and 1.5 per cent compared with the second quarter of 2012, a full percentage point better than the previous estimate.

It said the anticipated increase to domestic capacity this year will be possible due to schedule changes, but looking forward to 2014, the company said the airline's new 787 Dreamliners and reconfigured seating will boost traffic.

"The introduction of the five Boeing 777s aircraft in a higher density configuration as well as the deployment of the 787 into service will provide significant cost advantages," Rovinescu said.

Air Canada also sees room to grow in international markets.

Rouge is set to begin flying to European and Caribbean destinations from Montreal and Toronto starting July 1.

The Montreal-based airline expects to have Rouge operating in more than 40 routes by 2014 and said Monday it plans to increase the company's overall full-year 2014 system capacity by nine to 11 per cent when compared to the full year 2013.

Air Canada also expects to get to reach the limit of 50 aircraft for Rouge — as mandated by its collective agreement — by 2015.

Air Canada said Rouge will do better than previous experiments because its cost structure will be lower and will pack more seats on its planes.

"These markets are not new to us, there are many more like those in Europe that we have not been able to participate in because of our cost structure and the product offering and Rouge is going to open the doors to many of those new markets," said Ben Smith, chief commercial officer.

"Many routes that were not viable for Air Canada in the past will now become possibilities."

The company also said that the stability it now enjoys after labour contracts and pension issues were settled earlier this year will allow it to focus on growth plans.

"There's no doubt that there are still challenges ahead," Rovinescu said. "But with the key labour and pension risks behind us, the execution of our strategic priorities is now our No. 1 focus."

"We will continue to attack costs, continue to develop new sources of revenue, improve the customer experience and adapt to the competitive environment."

Two of Air Canada's domestic rivals, WestJet and Porter, are also growing their alliances with foreign international carriers and planning to expand their own domestic fleets.

WestJet Airlines (TSX:WJA) is set to launch its new Encore regional service later this month using Bombardier Q400 turboprops in Alberta and British Columbia. Meanwhile Porter, which offers regional service from its base in Toronto, has announced plans to add Bombardier CS100 jets to its fleet of Q400s in 2016.

Air Canada now expects 2013 domestic capacity will grow by 1.5 per cent to 2.5 per cent over 2012 levels — a full percentage point above the levels announced last month, when Air Canada issued its first quarter results.

It also projected that seating capacity in the second quarter will be between two and three per cent above the comparable period last year.

The Canadian Transportation Agency ruled last month that Air Canada must pay higher compensation to passengers who are bumped from overbooked domestic flight and gave the airline until late June to submit new guidelines.

The federal agency said that Air Canada's the existing practice of paying $100 cash or $200 travel voucher is unreasonable but the airline has the right to appeal the CTA ruling.

Air Canada Class B shares were up close to one per cent at $2.29 at midday on the Toronto Stock Exchange, after reaching a daytime high of $2.38 per share earlier in the day.

WestJet stock was down 2.5 per cent to $21.14.