A new deal Air Canada has signed with its pilots permits its Rouge airline to expand its narrow-bodied fleet as the carrier's mainline fleet grows, strengthening the company's hand as the competition with low-cost carriers heats up.
Under changes to its contract with pilots, Air Canada will be able to expand the fleet at low-cost Rouge by one narrow-bodied plane for every one it adds to its mainline service, and by two narrow-bodied jets for every wide-bodied plane added to the mainline fleet.
Amendments to the deal with the Air Canada Pilots Association, which eliminate a 50-plane limit on the Rouge fleet, were agreed to in September. The details of how the contract permits the low-cost unit to expand were not revealed at the time, but are contained in a copy of the agreement obtained by The Globe and Mail.
The expansion of Rouge is a key part of Air Canada's strategy to compete against ultralow-cost carriers (ULCCs) such asCanada Jetlines Ltd. and the Swoop unit of WestJet Airlines Ltd., both of which are planning to begin operations next summer.
"The [Rouge] model is now capable of being used to compete against anybody who comes in the market," Calin Rovinescu, Air Canada's chief executive officer, said in an interview. "From our perspective, we think we have a product that is quite competitive."
In the 2014 contract signed with its pilots, Rouge is limited to 25 narrow-bodied planes of the 50-aircraft overall limit.
Removing that limit is crucial, Mr. Rovinescu said, "because, otherwise, what you would have had to do is shift airplanes from other really good markets. So you'd have a tough choice to decide: Are you going to remove it from some markets to put it onto others?"
Air Canada will take delivery of two narrow-bodied Boeing 737 jets this year – the first jets from a 61-plane order – and will add six wide-bodied Boeing 787s to its mainline fleet during the rest of this year and in 2018.
The formulas permit Rouge to expand immediately, which can be done by redeploying A320-family aircraft destined to exit the mainline fleet.
"You could start adding it right now and certainly in time for next summer," Mr. Rovinescu said in Toronto after speaking at an economic conference. "Some of it is market-driven, some of it is how much in advance do you start new routes."
What impact the changes will have on routes is still under study, he said. Air Canada executives said during an investor day presentation that expanding Rouge to regional domestic routes is one option being examined.
Flying an Airbus A319 that has already been paid for into Hamilton from Abbotsford, B.C., for example, could allow Rouge to compete against WestJet, which is already flying that route. Those two cities will also be the eastern Canada and western Canada bases respectively for Canada Jetlines.
The combination of new narrow-bodies, which includes Bombardier Inc.'s C Series planes that will be delivered beginning in 2019, means Air Canada "can look at other opportunities that weren't available to us in the past," said Ben Smith, the airline's president of passenger airlines. "Whether that's in the ULCC or LCC [markets], further leisure areas we're not competing in today or whatever competitive threat comes at us."
The pilot contract also permits Rouge to replace existing Boeing 767s with Boeing 787s, but only as replacements, not as additions to the Rouge fleet.
But using the larger Boeing 787-9 on Rouge in some international long-haul flights could make sense, said industry analyst Robert Kokonis, who heads AirTrav Inc.
Air Canada's mainline service between Toronto and New Delhi on a 787-9 offers 298 seats.
"But think about 340-350 seats on a Rouge-configured 787-9," Mr. Kokonis said. "Now you're talking."
Air Canada has options to acquire 13 more 787s. Delivery of the 37 planes from its firm order is scheduled to be complete in 2019.
The amendments to the pilot contract also outline a change in Rouge's purpose.
"The mandate of ACrouge is to support the strength, sustainability and growth of mainline," a clause in a letter of understanding on work rules and conditions says. Under the previous agreement with pilots, the scope of Rouge was described as being "limited to the market seeking low-cost air travel."
Rouge was not intended to replace mainline routes that were financially viable, the clause stated.
But the low-cost unit is already supplementing some mainline offerings. Air Canada mainline provides service over the Atlantic Ocean to London Heathrow, while Rouge flies into London Gatwick.
But, "we don't expect to have too many routes where you'd have both the Rouge and the mainline service," Mr. Rovinescu said.