Air Canada needs cost cuts for new carrier

Air Canada will only introduce a low cost carrier over the next year if it can sustainably reduce labour and other costs, the airline's chief executive said Thursday.
Air Canada is targeting leisure markets and European destinations for its new carrier. (CBC)

Air Canada will only introduce a low cost carrier over the next year if it can sustainably reduce labour and other costs, the airline's chief executive said Thursday. 

"We will not do it unless it is and has the ability to remain truly low cost over the long term. It needs to be able to avoid the type of cost creep that has plagued legacy carriers over the years," Calin Rovinescu said during a conference call.

Canada's largest airline failed in its attempt to introduce low cost carriers a decade ago. This time, the model will ramp up to 50 aircraft using narrowbody and widebody planes to service sun and European destinations.

Air Canada said the carrier expects to create jobs for 462 pilots, three times as many flight attendants and some airport and maintenance positions.

"I'm increasingly convinced the low cost carrier can be a key driver in our tool kit and we need to seize this opportunity to assist in achieving our ultimate goal of long-term sustained profitability."

Rovinescu said the new carrier can work by creating a fundamentally different cost structure to profitably operate in leisure markets and European destinations where the mainline carrier doesn't attract much business and corporate customers.

Among the potential high volume, low yield destinations that could be served are Amsterdam, Dublin, Nice, Manchester, Lisbon, Casablanca and southern sun cities.

Approval from Air Canada's unions is a key step in proceeding. The airline has begun negotiations with all of its labour groups and is hopeful that new collective agreements can be reached without labour disputes.

Rovinescu declined to comment on the ratification vote by pilots that gets underway on Monday saying the process is an internal union matter.

Among the contentious issues are changes to accommodate the low-cost carrier and proposed changes forcing new hires onto defined contribution pension plans. The union representing call centre and airport workers has also sought the help of a federal conciliator.

Narrows loss

Air Canada tightened losses in the first-quarter as it booked a major foreign exchange gain, but the carrier also warned that high fuel prices are adding pressure to its results. 

The Montreal-based carrier said losses were $19 million for the three months ended March 31, and included foreign exchange gains of $104 million.

That compares to a deeper $112 million loss a year ago when it logged $123 million in foreign exchange gains.

Losses per share came in at seven cents compared to a loss of 41 cents per share a year ago.

Excluding foreign exchange gains, its adjusted loss was 45 cents per share, in line with analyst forecasts, compared to a loss of 85 cents a year earlier.

Fuel rises $120M

The airline was hit with more than $120 million in extra fuel costs in the quarter compared to the same time last year.

"Based on expected jet fuel prices and system capacity, we estimate that these higher fuel prices will add approximately $800 million to our operating costs in 2011," he told analysts.

Rovinescu said Air Canada is looking at a number of options to help offset high fuel prices, including adjusting its capacity, as well as higher fare and fuel surcharges on some flights.