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Executive vice-president Ben Smith unveils Air Canada’s new leisure airline Rouge in Toronto on Tuesday, Dec. 18, 2012.

Aaron Vincent Elkaim/THE CANADIAN PRESS

Air Canada is jumping into the low-cost leisure travel market with the launch of its new airline, dubbed Rouge, which will begin flying on Canada Day to destinations in Europe and the Caribbean.

The new airline will fly from Toronto to Venice in Italy and Edinburgh in Scotland, two destinations that currently aren't served by Air Canada, and will serve Athens from Toronto and Montreal.

Air Canada's existing flights to Cuba, the Dominican Republican, Jamaica and Costa Rica will be flown by the discount carrier from Toronto.

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The destinations are areas where demand for leisure travel has been growing, said Ben Smith, Air Canada's chief commercial officer. But many are routes that didn't generate adequate profits under Air Canada's existing cost structure.

"The creation of this carrier is to assist us in serving many destinations that our existing model does not work on a competitive basis," Mr. Smith said.

"This is not viewed as entering markets that we haven't been in in the past, they are markets that we've always liked to serve, some we've already served in the past, we just had to have the right vehicle to exploit them properly."

He said the carrier will be a vehicle to reclaim market share that it has lost to domestic and international competitors.

It plans to hire 200 flight attendants and pilots for the new low-cost carrier.

The pilots will be existing Air Canada pilots who will transfer to the new fleet that will cater to the leisure market.

Air Canada pilots complained during labour negotiations this year that the airline's launch of a low-cost carrier could threaten their job security and working conditions. In the end, a federal arbitrator chose Air Canada's final offer that included provisions allowing the airline to create a budget carrier.

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The airline says flights to Venice, Edinburgh and Athens start at "special introductory fares" of $949 round-trip, including all taxes, fees, charges and surcharges.

Flights to the Dominican Republic and Jamaica will start at $269, one-way, while Cuba is offered starting at $538 round-trip.

All the introductory fares, which are available until Dec. 25, are based on Toronto departures.

Details about fares further along were not immediately available, but the company said it will provide more details about pricing and its premium economy seats in January.

The new low-cost airline will begin operations with two Boeing 767-300ER and two Airbus A319 aircraft that will be released from Air Canada's mainline fleet.

Additional planes will be added as Air Canada starts to take delivery of new Boeing 787 Dreamliner aircraft in 2014, ramping up to 50 planes.

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Air Canada has said about half of incremental profits from its low-cost carrier will be derived from cramming more seats into a fleet of 20 Boeing 767s and 30 Airbus A319s. The rest comes from lower employee wages and more flexible work rules.

The wide-body planes, for example, will be fitted with 20 per cent more seats, raising the number of passengers to 275 per aircraft.

Airline analyst Jacques Kavafian at Toll Cross Securities said that could turn some customers off, adding he doesn't believe Rouge will be the financial success the company hopes it will be.

"The A319s seat pitch is similar to competitors in Canada but the 767s seat pitch is almost unique in the world and will likely reflect poorly on its image," he said.

"Customer can put up in tight seating for a Caribbean flight for four to five hours, but European flights such as Toronto-Venice at 8hr40 (longer at 9hr30 on the return portion) and Toronto-Athens at over 9hr40 (longer at 10hr45 on the return flight) would likely not be as tolerated."

Air Canada is Canada's largest domestic and international airline and the 15th largest airline in the world, serving more than 33 million passengers last year.

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Competitor WestJet Airlines Ltd. is launching a discount regional carrier in the second half of next year.

WestJet Encore will cater to smaller markets with Bombardier Q400 propeller aircraft.

The company says it will announce the schedule for WestJet Encore early next year.

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