Air Canada's expansion plans will be poised for takeoff once the new planes arrive, a report contends.Air Canada
Air Canada is getting pumped about launching a low-cost carrier next winter to recapture passengers who have flocked to tour operators.
Air Canada chief executive officer Calin Rovinescu said Thursday that he's keen to mount a counter-attack on selected markets in Europe, Mexico and the Caribbean. He portrayed it as a classic business case where the best defence is a good offence.
"We believe that such an evolution is a necessary ingredient for sustainable, meaningful growth," Mr. Rovinescu said during a conference call as he outlined plans for the low-cost carrier to industry analysts.
The carrier must first win acceptance from its unions before it is able to start the discount leisure airline to compete against aggressive tour operators, including Transat A.T. Inc., Sunwing Travel Group, WestJet Vacations and Sunquest Vacations.
While acknowledging that gaining support from labour leaders will be a delicate task, Mr. Rovinescu said Air Canada needs lower wage scales for the discount division - and pension reforms in general - to be competitive.
"By creating a new business with a fundamentally different cost structure, Air Canada should be able to profitably operate in leisure markets for the next decade and beyond, where we currently cannot compete properly," he said. "This includes high-volume and lower-yield routes such as, for example, Amsterdam, Dublin, Nice, Manchester, Lisbon, Casablanca and numerous other destinations."
Mr. Rovinescu estimates that up to 462 pilots will be hired at the new leisure unit by 2015, as well as jobs for roughly 1,380 flight attendants and additional positions at airports and in aircraft maintenance.
Robert Kokonis, president of airline consulting firm AirTrav Inc., said Air Canada must persuade its unions, starting with pilots, to support the discount division. The Air Canada Pilots Association will start a ratification vote on Monday on a tentative labour agreement which includes new rules for the discount unit. ACPA advised its members this week to re-read "misunderstood aspects" of the tentative pact.
"Air Canada is not competitive from a cost standpoint. During labour negotiations, if the company does not achieve the wage scales, work rules and pension changes that it needs, the low-cost carrier will not proceed," Mr. Kokonis said in an interview from Montreal, where Air Canada held its annual meeting on Thursday.
At first, Air Canada will rely on four wide-body Boeing 767s for transatlantic routes and six narrow-body Airbus A319s for sun markets, aiming to increase the discount fleet to 50 planes by 2015. In an interview last month with The Globe and Mail, Mr. Rovinescu said even if Air Canada deployed only 25 planes over the next four years, it would be a huge boost for union members.
The company is counting on the creation of the discount division to help carry it through an era of high oil prices. Airfares are soaring just as many consumers book flights for the busy summer vacation season.
Air Canada estimates that it will face paying an extra $800-million in fuel bills this year, or a 30-per-cent increase over last year's $2.65-billion in total fuel expenses.
In the first quarter, fuel costs jumped 20 per cent to $742-million, weakening Air Canada's financial results. Still, the country's largest airline reported Thursday that it narrowed its first-quarter loss to $19-million from $112-million in 2010. Its operating loss was $66-million, compared with $136-million in last year's first quarter.
Mr. Rovinescu said Air Canada's new strategy will avoid "cannibalization" of existing revenue.
Air Canada has experimented with discount divisions in the past, notably the Zip Air Inc. fleet, which was launched in 2002, primarily as a low-cost rival to WestJet Airlines. But Air Canada closed it just two years after startup.
With distinctive purple planes, Air Canada also operated Tango as a low-cost carrier for less than two years, closing it in the fall of 2003.
Some analysts expressed skepticism Thursday about Air Canada's low-cost carrier plans, but airline executives pointed to Jetstar Airways, the low-cost subsidiary of Australia's Qantas, as a good example of a budget subsidiary operating nicely within a traditional global carrier.
Brent Jang