Air Canada says it is a couple of weeks away from announcing details for a separate low-cost airline that will serve transatlantic and leisure routes in the Caribbean and the United States.
Michael Rousseau, the airline's chief financial officer, told a CIBC investment conference on Wednesday that the carrier will be wholly owned by Air Canada, but carry a different name.
"It is a very exciting initiative, not just for Air Canada, but our employees as well because it does provide growth opportunities for us," he said.
About half of the incremental profits from the low cost carrier will be derived from cramming more seats into a fleet of 20 Boeing 767s and 30 Airbus A319s. The rest comes from lower employee wages and more flexible work rules.
The wide-body planes, for example, will be fitted with 20 per cent more seats, raising the number of passengers to 275 per aircraft.
The new business model will open the low cost carrier to new routes in Europe that currently aren't cost competitive for Air Canada and allow it to be more competitive on Caribbean and some U.S. destinations.
"The majority of the transatlantic routes will be in fact growth routes for us that we think we can make adequate if not very strong returns," Rousseau said.
Its approach to the leisure market is more defensive, he added, with some routes switching to the low cost carrier to improve margins.
Management to be separate
Rousseau said Air Canada studied various global models — including Qantas's Jetstar in Asia — and opted to create a wholly owned airline with a separate management to ensure it maintains the low cost carrier "mentality."
However, the new airline will take advantage of Air Canada's strength and leverage to negotiate certain contracts.
Rousseau warned that the new low cost carrier will be launched in 2013, but won't have a material impact on Air Canada's results until it ramps up to the full fleet of 50 planes.
Meanwhile, he says Air Canada is working on several other initiatives to build its profits after completing gruelling labour negotiations that lasted longer than it had anticipated.
"Now those are behind us and for the most part those contracts are fair and provide us lots of flexibility, especially the ACPA contract (with pilots). We are taking full advantage of that as a management group to drive value over the next couple of years."
Rousseau downplayed suggestions of lingering friction between the company and unionized employees following the labour disputes. He said there wasn't any increase in pilots booking off sick after the arbitrator ruled in favour of the airline.
'We don't have a difficult relationship with the vast majority of our employees.'—Michael Rousseau, Air Canada CFO
He blamed the media for portraying tensions between the company.
"We don't have a difficult relationship with the vast majority of our employees."
Among Air Canada's efforts is to develop a "competitive response" to WestJet Airlines plans to launch a regional service next year.
New scope clauses in the agreement with pilots allows up to 60 planes with up to 76 seats to be flown by its regional partner at lower cost.
"The ability to push some flying down to regional which has a lower cost structure than mainline is a way to some degree that we're going to be able to compete with WestJet's regional."
It also is discussing with Ottawa about extending its moratorium on past service pension contributions for another 10 years once the current deal expires in 2013.
And Air Canada is preparing for the arrival in 2014 of its first Boeing 787 aircraft that will allow it to economically service markets such as India. The planes, which will be purchased rather than leased, could be outfitted with three cabin classes — economy, premium economy and business.
While the International Air Transportation Association has warned about slowing premium travel, Rousseau said Air Canada hasn't experienced a softening and pricing remains strong.
On the Toronto Stock Exchange, Air Canada's shares gained nine cents to $1.25 at mid-afternoon.