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Airlines revving up for their new discount carriers

Air Canada passengers line up at the baggage check-in counter at Pearson International.


Strong third-quarter earnings from Air Canada and WestJet Airlines Ltd. this week are likely to show a certain formula working well for the two carriers, even as they gird for mounting competition.

The secret is capacity discipline, as analysts at Raymond James note. The economy is slowly reviving and demand is rising, but the capacity on domestic Canadian flights (calculated in the industry as the number of seats multiplied by miles flown) is estimated to have shrunk overall by 0.2 per cent last summer, Raymond James analyst Ben Cherniavsky says.

As a result, airfares have had no direction to go but up. "We have seen evidence of this in our monthly airfare index, which remains near record levels for both Air Canada and WestJet," Mr. Cherniavsky explained in a report on third-quarter expectations.

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It's a good position for the carriers to be in as both prepare to launch sister airlines. Mr. Cherniavsky expects Air Canada to post a quarterly profit Thursday of 67 cents a share, compared with a loss of 45 cents in the same period last year. For WestJet, he foresees per-share profit of 40 cents when it reports Wednesday, compared with 28 cents in the third quarter 2011.

Most industry watchers are viewing changes at the airlines as a growth opportunity and an uncertainty. Air Canada is preparing to soon unveil the name, branding and flying schedules for its new low-cost carrier, a discount subsidiary that will fly to sun destinations and Europe.

National Bank's Cameron Doerksen adds that this will come as Air Canada requires more cash to renew its wide-body and narrow-body planes. He nevertheless has raised his quarterly profit estimate for Air Canada to 72 cents a share, adding he sees the airline "benefiting from improved costs due to the new labour agreements, new maintenance deals, reduced regional airline costs and the lower cost carrier."

Meanwhile, WestJet is prepping the launch of its regional carrier Encore, to be headquartered like its parent in Calgary and due to take off in the second half of 2013. WestJet remains mum, however, on whether Encore will be first rolled out over Eastern or Western Canada.

Both airlines have been revving up with teasers before the full unveiling of the new carriers: Air Canada recently introduced more regional flights to oil-patch centres in the West, a move seen as a pre-emptive foray before WestJet enters the Western regional market. And WestJet has introduced some new winter sun-destinations, going after the same vacation dollars as Air Canada's coming discount carrier.

But some see nuances in these moves.

"WestJet's launch of new sun destinations is not in retaliation for Air Canada's proposed [low-cost carrier], but a natural growth that the company has been pursuing for 10 years," said Jacques Kavafian, a former long-time analyst who follows the industry. "The fact that it has more airplanes this year than last means it can fly to more destinations this year."

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Mr. Kavafian sees Air Canada's new regional flights in the West as a reaction to the coming competition from Encore, but said "I guarantee you, WestJet had anticipated that move. Just watch WestJet Encore launch in a market that no one anticipated, catching Air Canada and others by surprise."

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About the Author

Guy Dixon is a feature writer for The Globe and Mail. More


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