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On of Air Canada's Embraer 175 jets

As it makes room for its new low-cost carrier, Air Canada announced an incremental shift in its operations, with the transfer of its smallest class of planes to regional partners and the addition of new widebody jets to expand its international routes.

Air Canada said it is transferring its fleet of 15, 73-seat Embraer 175s to Sky Regional, one of the four smaller carriers running short-haul, regional flights under the Air Canada Express brand.

Sky Regional has been flying the Toronto to Montreal corridor for Air Canada since May last year, and the small Embraer jets will be used for Express flights to northeast U.S. cities, Air Canada said Monday.

Yet rather than just a simple transfer of jets, the move adds a competitive element to Air Canada's regional business, by creating potential competition among the carrier's regional partners, particularly between Sky and Jazz, which is a subsidiary of Chorus Aviation. The upshot is ultimately to help Air Canada keep costs down.

There are a few caveats though. The transfer of the planes to Sky falls under the capacity purchase agreement that Sky has with Air Canada, and each of Air Canada's three other regional partners have similar agreements. The agreements guarantee each partner a certain fleet size and flight hours. So Air Canada can't suddenly pull its business from one regional operator to another.

Air Canada also draws up the schedule for its regional Express flights, so it won't pit, say, a Sky flight against one run by Jazz. However, as National Bank analyst Cameron Doerksen noted, building the fleets with different regional partners nevertheless does raise the potential for future competition as their regional operations evolve. Sky, for instance, is known in the industry as a lower-cost operator, which could encourage Jazz to keep its costs down.

"The reason why Air Canada would want to do that is to create competition and lower costs in its regional aircraft fleet," he said.

"It may not result in an immediate shift. Chorus does have protection by the capacity purchase agreement. There's a minimum amount of flying, a minimum number of aircraft. So they are not about to lose a whole bunch of aircraft to another party," Mr. Doerksen added. "But any future growth that Air Canada may have in its regional fleet is clearly going to be put out to competitive bid."

On the other end of the scale, Air Canada also announced it will add two new Boeing 777-300ER widebody jets to its international fleet. Along with the acquisition of new 787s in 2014, this "will allow us to introduce new routes at the mainline carier and release aircraft from our existing fleet to our new low-cost leisure carrier," said Air Canada president and chief executive officer Calin Rovinescu.

Where does this put the low-cost carrier, expected to be unveiled in the coming weeks and scheduled to take to the skies next year? As Air Canada has said, the discount carrier will be more of a rebranding and repricing of the main carrier's flights to vacation destinations and Europe, run as a separate, discount unit, distinct from the main company.

"It will not be the same types of aircraft that the regionals would fly for Air Canada," Mr. Doerksen said.

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