Air Canada low-cost arm to launch 2013, ramp up slowly

VANCOUVER/BANGALORE Thu Aug 9, 2012 5:53am EDT

Air Canada aircraft are seen at Toronto Pearson International Airport, in this September 20, 2011 file photo. REUTERS/Mark Blinch/Files

Air Canada aircraft are seen at Toronto Pearson International Airport, in this September 20, 2011 file photo.

Credit: Reuters/Mark Blinch/Files

VANCOUVER/BANGALORE (Reuters) - Air Canada, having overcome union resistance to the launch of a low-cost carrier, plans to start offering cheap flights to holiday destinations next year, slowly ramping up to a 50-aircraft operation that it hopes will return it to profit.

Air Canada (ACb.TO) revealed the timing of the launch on Wednesday after reporting weaker-than-expected quarterly results for the second quarter, news that sent the stock down nearly 10 percent during the day. It blamed a slump in bookings in the wake of wildcat strikes by some employees, and the collapse of its maintenance contractor.

Air Canada, the country's biggest airline, has touted a low-cost division as a way to cut its high costs and boost revenue and market share after years of stagnation.

The plan was a non-starter until nine days ago when a federal arbitrator imposed a new labor agreement on its pilots, who oppose the discount operation. Air Canada plans to pay less for pilots flying for the new carrier.

The company said on Wednesday the discount unit's rollout would in part depend on the timing of deliveries of new, bigger planes for its mainline carrier, allowing it to move smaller aircraft to the new routes.

"It's not going to be 50 aircraft starting to operate there by early 2013," Air Canada Chief Executive Calin Rovinescu said on a conference call. "This doesn't happen overnight."

PI Financial transport analyst Chris Murray expects the new airline to have only three to five aircraft by the end of 2013 and said it would surprise him to see 50 aircraft at the end of decade.

The new airline, which will use up to 20 Boeing 767s and 30 Airbus A319s, will fly to Sun Belt destinations in the United States, such as Florida and Nevada, as well as to the Caribbean and Europe. Rovinescu said there were no plans to fly within Canada.

While the low-cost carrier could help trim costs, it is "not a savior of any sort," said Morningstar analyst Neal Dihora.

DISAPPOINTING REVENUES

The company's net loss widened to C$96 million, or 35 Canadian cents a share, from C$46 million, or 17 Canadian cents, a year earlier.

Air Canada's passenger revenue per available seat mile RASM.L, or unit revenues, was particularly disappointing, analysts said. It rose only 2 percent compared with a 6 percent increase at competitor WestJet Airlines Ltd (WJA.TO).

On some of the routes that produced lower yields, including flights to Montreal and New York, the carrier is experiencing more competition from WestJet and Porter Airlines, a small regional carrier.

With WestJet's recent introduction of flights from Toronto to New York and the launch of its regional airline in 2013, "the competitive environment for Air Canada is only going to become more challenging," National Bank Financial analyst Cameron Doerksen said in a note to clients.

Air Canada estimated the labor disruptions and the closure of Aveos Fleet Performance Inc shaved off 12 Canadian cents to 17 Canadian cents a share from its earnings in the quarter.

Air Canada's contract with its pilots, imposed by a government-appointed arbitrator on July 30 after the two sides couldn't reach an agreement, marked the end of more than a year of fractious negotiations with its unions.

Aveos, once Air Canada's maintenance division, halted operations in March as it ran out of money. A court-appointed monitor is trying to find buyers for parts of the company.

By the end of the second quarter, booking trends had returned to normal and Air Canada was making progress in securing long-term maintenance partners, it said.

SEEKS PENSION MORATORIUM

Air Canada said its pension deficit shrank slightly to C$4.2 billion as of January 1 from a previous estimate of C$4.4 billion, helped by reasonable investment returns.

The deficit "is the most critical issue facing the viability of the company", a lawyer appearing for Air Canada said at a recent arbitration hearing. Payments to service the deficit nearly tipped the company into bankruptcy in 2009.

Rovinescu declined to give details on talks between the Canadian government and the airline, which wants a new moratorium on past pension payments to replace an existing one that expires in 2013.

Air Canada's stock ended down 7.8 percent at C$1.06 on the Toronto Stock Exchange. It has lost more than 40 percent of its value in the past year. (Reporting By Nicole Mordant in Vancouver and Bhaswati Mukhopadhyay in Bangalore; Editing by Frank McGurty)

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