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Air Canada to expand routes, fare structure in bid to fly alongside low-cost carriers

Air Canada planes are pictured at Toronto Pearson International Airport.

Matthew Sherwood/The Globe and Mail

Air Canada is gearing up to compete in the full-fledged battle for bargain-conscious travellers that will begin next year when two ultralow-cost carriers (ULCC) take to the skies.

Canada's largest airline will offer what it calls an ultralow-cost fare on selective flights and expand its low-cost Rouge network to regional routes in Canada, Air Canada executives said in presentations Tuesday to investors and analysts.

"The low-fare option that is now going to be at our disposal definitely is in our back pocket for strategic use," said Ben Smith, the carrier's president of passenger airlines. "That is definitely going to be deployed strategically."

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It won't be available on all flights, he said, but "where we need to do it for market reasons and competitive reasons, that's where we'll deploy it."

It's one potential response to the arrival of Canada Jetlines Ltd. and the as-yet unnamed ULCC being planned by WestJet Airlines Ltd., both of which are scheduled to start service next summer, joining Flair Airlines Ltd., which has already begun flying.

The competition will be good for Canadians, because it should bring air fares down, industry consultant Robert Kokonis, who heads AirTrav Inc., said on Tuesday.

Among the key questions for Air Canada, Mr. Kokonis said, are: what domestic routes will Rouge target; and does the low-cost unit have costs that are low enough to compete effectively against ultralow-cost competitors?

"I think they're structured more as a lower-cost leisure carrier," he said of Rouge. "They don't have the same kind of really razor-sharp focus on generating ancillary revenue that a pure play ULCC would have."

Canada Jetlines, for example, said last week that it will offer base fares of less than $100 in Canada, but charge for baggage, including bags that are stowed in the overhead bins of its airplanes.

Mr. Smith said amendments to the labour agreement between Air Canada and its pilots that were announced last week permit an expansion of the Rouge narrow-bodied airplane fleet beyond its initial limit of 50 planes. Rouge has 49 planes now.

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"It is going to significantly strengthen our airline against the competitors we face both domestically and internationally," he said.

The costs of operating a Rouge aircraft are about 30 per cent lower than the costs of running a similar plane in Air Canada's mainline operation, he noted.

He would not say what regional domestic routes Rouge would tackle, but said Air Canada is anticipating some low-cost competition across the Pacific Ocean so it has begun offering Rouge flights between Vancouver and Osaka and Nagoya in Japan. He would not disclose which regional routes in Canada will be targeted.

One response to the ULCC could be to offer single-class Rouge Airbus A319s with 144 seats or 150 seats with a narrower space between the rows, Mr. Smith said.

Rouge's bigger planes could replace the smaller planes of its regional partners on Toronto-Quebec City ‎flights, National Bank airline analyst Cameron Doerksen said in a research report on the Air Canada meeting.

WestJet, which is in the midst of expanding its international operations and has ordered Boeing 787 planes to do so, has said it plans to fly to Chinese markets.

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Air Canada said U.S. and international markets generate 67 per cent of its revenue.

The airline said in an update to its financial targets that it plans to generate free cash flow of $2-billion to $3-billion between 2018 and 2020, and that the creation of its own loyalty program when it withdraws from the Aeroplan partnership in 2020 will generate $2-billion to $2.5-billion in net present value over a 15-year period.

The startup costs for the loyalty program will amount to $85-million, chief financial officer Michael Rousseau said.

Editor’s Note: A Wednesday Report on Business article on Air Canada incorrectly said Air Canada will terminate the Aeroplan system. In fact, Air Canada cannot terminate the partnership, but has announced that it plans to withdraw from it. The airline will, however, continue making Air Canada flights available to Aeroplan members after its own loyalty program begins.
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