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Low-cost subsidiary seen as crucial to Air Canada survival

Air Canada planes on the tarmac at Toronto Pearson International Airport.


Air Canada faces another threat to its business as the airline girds for a strike Thursday by 6,800 flight attendants.

Rivals with lower labour costs are gaining fast on Air Canada, forcing the carrier to make plans for a low-cost division crucial to preventing the erosion of passengers on leisure routes.

Competitors such as Air Transat, WestJet Airlines Ltd., Sunwing Travel Group and Sunquest Vacations are already making gains in Mexico and the Caribbean at Air Canada's expense, and there are concerns that new competitors will emerge on routes to Europe and Asia.

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The standoff between Air Canada and its flight attendants comes as Ottawa takes steps to intervene with back-to-work legislation to ward off a strike by the Canadian Union of Public Employees, which represents flight attendants.

While federal Labour Minister Lisa Raitt is seeking to prevent a walkout by sending the dispute to the Canada Industrial Relations Board, a strike could begin at 12:01 a.m. on Thursday as workers grow ever more frustrated with own their union negotiators, notably over the contentious issue of the low-cost division.

"Either Air Canada starts up a low-cost carrier within the next 12 to 15 months, or its financial position will continue to deteriorate. Even if oil prices come down and the economy recovers, that will mask the fact that Air Canada will be increasingly uncompetitive, especially in transatlantic and transpacific markets," said Fred Lazar, a professor at York University's Schulich School of Business. "Air Canada realizes that certain leisure routes cannot be sustained by business traffic."

Prof. Lazar added that Air Canada is also losing traffic to U.S. border airports, which are luring Canadians to drive south to save money on airfares.

The country's largest airline is counting on the discount leisure division to combat rivals, but employees warn that management needs to protect the jobs of existing staff first.

More than 65 per cent of Air Canada CUPE members who cast ballots rejected a tentative agreement after 10 days of voting wrapped up on Sunday, marking the second time that flight attendants have spurned a proposed contract in the past three months.

The first pact contained some job security clauses and guarantees of no forced transfers to the discount carrier, which would introduce a lower wage scale. In the second deal, management improved the pay formula for shifts with long stopovers, but withdrew a letter of understanding governing wages and working conditions for the budget carrier, union officials say. In both instances, CUPE negotiators recommended acceptance of the tentative deals.

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Air Canada is striving to start the low-cost division in 2012 with four Boeing 767s and six Airbus A319s, with the potential to increase the fleet to 50 planes by 2015. About 1,400 jobs for flight attendants and another 460 positions for pilots could also be created at the new operation.

But on social media, flight attendants say they were dissatisfied with the first tentative agreement's assurances of job security and don't like the removal of the letter in the second proposed contract. Employees are also expressing concerns that Air Canada is trying to emulate Australia's Qantas, whose low-cost subsidiary Jetstar Airways is seen as a prime example of a budget carrier expanding within a traditional global airline.

"There's an unsustainable business model currently, therefore Air Canada has to look at ways of reducing costs. WestJet in particular is chipping away at the advantages that Air Canada had, such as collecting Aeroplan points," said Karl Moore, a professor at McGill University's Desautels Faculty of Management. Last year, WestJet introduced its own frequent-flier program and loyalty credit card.

On social media, flight attendants say the low-cost division will threaten existing jobs because many routes could easily be shifted away from the "mainline" to the low-cost carrier (LCC).

In the letter of understanding in the first tentative agreement, Air Canada promised to restrict the discount operation's flying to new or underserved markets. "The mandate of the LCC will be limited to the market segment seeking low-cost air travel. The LCC is not intended to replace mainline routes the company considers to be financially viable," said the letter. "Mainline cabin personnel shall not be forced to transfer to the LCC."

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About the Author

Brent Jang is a business reporter in The Globe and Mail’s Vancouver bureau. He joined the Globe in 1995. His former positions include transportation reporter in Toronto, energy correspondent in Calgary and Western columnist for Report on Business. He holds a Bachelor of Commerce degree from the University of Alberta, where he served as Editor-in-Chief of The Gateway student newspaper. Mr. More

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