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Air Canada to forge ahead with low-cost division

Air Canada pilots picket across from the company's annual general meeting in Calgary on Monday, June 4, 2012. The pilots are trying to negotiate a new contract with the company.

Todd Korol/Reuters

Air Canada's chief executive officer is vowing to redouble his efforts to launch a low-cost carrier, saying he is prepared to make hard choices to ensure the airline's growth.

Calin Rovinescu said the creation of a discount division is crucial for Air Canada in the fragile airline industry, but such "transformational change" will be difficult for union leaders to embrace.

Air Canada first disclosed its plans for a low-cost carrier in April, 2011, targeting vacation destinations in Europe, Mexico and the Caribbean. Since then, the country's largest airline has been spent much time and energy attempting to resolve a series of conflicts with its unions, which are concerned that employees in the new division will be working harder for less pay than existing staff.

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"If we are to transform our company to make it truly sustainable on a long-term basis, profound changes have to occur to our business model," Mr. Rovinescu said during a webcast from the carrier's annual general meeting Monday in Calgary.

"Everywhere we are witnessing the rise of low-cost carriers with an unquestioned ability to capture market share from legacy airlines, whose cost structures are higher by anywhere from 30 to 50 per cent."

Fourteen months ago, Air Canada management secured a tentative labour pact with the Air Canada Pilots Association (ACPA), but members of the union rejected that proposed deal, which had provisions for the introduction of a new lower-wage classification of pilots.

Mr. Rovinescu said he is determined to participate in the low-cost segment of the airline market "in one manner or another, and to this end we are evaluating various low-cost carrier business models," including basing the new division in Canada and bringing in a foreign partner as a minority investor.

He pointed to Japan Airlines, Singapore Airlines, Thai Airways and Japan's All Nippon Airways (ANA) as examples of carriers making moves in the low-cost sector. ANA has teamed up with Malaysian budget carrier AirAsia while Japan Airlines has been co-operating with Australia's Qantas.

Many foreign airlines are starting their own discount operations or forming partnerships to do so, "to either defend against erosion at the mainline carrier or exploit new market opportunities, which would not otherwise be viable," Mr. Rovinescu said.

ACPA president Paul Strachan, who attended Monday's annual meeting, said the union has yet to be briefed on the latest details of management's plans for the low-cost carrier.

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Mr. Strachan said it's possible that Montreal-based Air Canada will try to bypass unions to start the discount airline.

National Bank Financial Inc. analyst Cameron Doerksen said Air Canada is facing pressure to cut costs and raise revenue amid increased competition.

WestJet Airlines Ltd. launched a new route on Monday between Toronto and New York's LaGuardia Airport, triggering seat sales on service to and from the Big Apple. WestJet's entry will harm Air Canada's yields, or the average price paid by one passenger to fly one mile, Mr. Doerksen said. He added that Porter Airlines Inc.'s rapid growth will also be slowed by expansions by WestJet and Air Canada in the Eastern Triangle of Toronto, Montreal and Ottawa.

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