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Air Canada drew the battle lines with its more profitable rival WestJet Airlines Ltd. Friday - announcing the launch of a new low-cost carrier to be called Zip Air Inc., based in Western Canada.

The new carrier - expected to launch this summer - will operate as a wholly owned subsidiary of Air Canada, with headquarters in WestJet's home turf of Calgary.

Zip's initial flights will travel between Calgary and Vancouver, replacing Air Canada's existing network flights between those two cities. Service will be expanded to other Canadian destinations and into the United States within a year.

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Full schedules, fares and the start date for tickets sales have yet to be announced. The new airline will be run by former WestJet executive Stephen Smith.

"Zip responds directly to fundamental changes in the airline industry, especially on short haul routes where fewer consumers are looking for executive class and meals, but all are looking for low fares and friendly, professional service.," Mr. Smith said.

Initially, Zip will employ 250 people at its headquarters in Calgary and in Vancouver. The staff is eventually expected to to grow to 1,000.

The new carrier will operate mainly on short-haul routes using a startup fleet of six Boeing 737-200 jets.

That fleet, Air Canada said, will eventually grow to about 20 aircraft, all transferred from the existing Air Canada fleet.

"Canadians tell us that they want Air Canada to continue serving their communities, but our mainline operations in certain short haul markets may no longer be financially sustainable as yields have been driven down by low fare competition," Air Canada president and chief executive officer Robert Milton said.

"We understand that consumers want low fares on a year-round basis. The new carrier will provide an attractive and affordable option with convenient connections to Air Canada's worldwide network."

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Airlines around the world had been struggling through much of last year as a result of the global economic slowdown and its impact on travel, particularly in the business segment. The sector, however, was thrown into crisis in the wake of the devastating aerial terrorist attacks in the United States on Sept. 11.

In the wake of those attacks, Canada 3000 was forced to shut its doors. However, low-cost carriers like Calgary-based WestJet Airlines Ltd. have been able to post relatively strong results, while full-service airlines like Montreal-based Air Canada are having trouble turning a profit.

On Thursday, the federal government told Air Canada that it will only receive $60-million in compensation for the effects of the Sept. 11 terrorist attacks, significantly less than initial estimates of $100-million.

Air Canada said late yesterday that it will take a $37-million charge to its first-quarter results, due on May 2, because of the discrepancy

Last year, Air Canada lost $1.25-billion last year.

Zip, Air Canada said, will cut costs by offering only light snack and beverage services, maximizing electronic services like on-line booking and check-in and using only one kind of aircraft, allowing it to maximize efficiencies.

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"As we have said previously, our focus and strategy for 2002 is to transform the airline and reduce costs in a material fashion by, among other things, utilizing existing aircraft more effectively to participate in the various niche markets that are evolving in the airline industry," Mr. Milton said in Friday's announcement.

"We will continue to deliver both choice and value to our customers, which in turn will ensure Air Canada's viability."

With the new carrier, Air Canada and its subsidiaries will offer five air passenger services including: the main line, regional service on Air Canada Jazz, low-fare no-frills service on Tango, charter service on Air Canada Jetz and the service announced Friday.

In the past, WestJet has complained to the federal Competition Bureau about Air Canada's competitive practices. In 2000, WestJet complained to the bureau after Air Canada slashed prices and expanded capacity between Moncton and Toronto following WestJet's announcement of a service betweeen Moncton and Hamilton.

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