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Air Canada plans to create a discount leisure airline to compete on routes to Europe, Mexico, the Caribbean and other popular vacation spots, a move that will ratchet up the competitive pressure on tour operators such as Transat A.T. Inc.

The country's largest airline is actively drawing up a business plan to launch a low-cost carrier (LCC) with four Boeing 767s and six Airbus A319s, with the potential to increase that fleet to 50 planes, according to a letter of understanding attached to the tentative labour pact between the company and the Air Canada Pilots Association.

"The mandate of the LCC will be limited to the market segment seeking low-cost air travel," according to the letter. "The LCC is not intended to replace mainline routes the company considers financially viable. The LCC's success and viability depends on the parties' ability to fulfill this mandate on a competitive basis."

The project is the latest sign of the airline's aggressiveness as it claws its way back from the financial difficulty it got into during the recession. In addition to the new discount carrier, Air Canada recently said it would return to Billy Bishop Toronto City Airport, a decision aimed at recapturing market share among business travellers that it has lost to upstart Porter Airlines Inc.

Air Canada envisages having 30 Airbus planes and 20 Boeings in the new division. Those planes can carry between 120 and 213 passengers in their current configurations, but business class would be removed for the discount airline and replaced with "premium economy" seating.

The airline and the pilots' union have agreed to negotiate a pay structure for the discount unit.

"Air Canada and ACPA wish to establish a labour relations structure covering the pilot-employees of the low-cost carrier," said the letter. A new lower-wage classification of pilots would be started, though the letter cautions that "the full scope and details of the terms and conditions governing the LCC cannot be realistically contained in this LOU [letter of understanding]"

Transat is the country's largest tour operator, followed by fast-growing Sunwing Travel Group, which merged in 2009 with Signature Vacations.

Other tour operators vying for Canadian leisure travellers include WestJet Vacations and Thomas Cook Canada Ltd.'s Sunquest Vacations. Air Canada competes in the charter market through its wholly-owned division, Air Canada Vacations.

Air Canada Vacations already operates in markets such as Mexico, the Caribbean, U.S. sun destinations, Europe, Central and South America and Asia, but its tour packages generally target mid- to higher-end travellers in the charter sector.

ACPA spokesman Paul Howard declined to comment on the letter of understanding, which is dated March 17, noting that union negotiators only began to publicly unveil the tentative agreement Monday in Vancouver, the first stop in a cross-country tour this week to provide details to more than 3,000 Air Canada pilots. ACPA's master executive council has authorized an April 15-27 ratification vote for the tentative labour pact reached last month.

"We wouldn't comment on the substance of a collective agreement before we've even briefed our own members on it," Mr. Howard said, noting that additional meetings with pilots will be held this week in Winnipeg, Montreal and Toronto. "We're in the process of explaining what's in the agreement."

Air Canada declined comment.

ACPA is the first of the airline's unions to agree to tentative contract terms.

The Canadian Auto Workers union, which represents customer service agents and call centre staff, resumed bargaining last week aided by a federal conciliator. Management proposals on table include the creation of new classifications in call centres, says the CAW, whose collective agreement expired Feb. 28.

The Canadian Union of Public Employees began labour talks last week on behalf of flight attendants, while the International Association of Machinists and Aerospace Workers has scheduled introductory bargaining meetings this month with Air Canada.

Labour pacts at ACPA, CUPE and IAMAW expired March 31.

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