Air Canada to expand international operations while mulling LCC subsidiary

Air Canada this week announced their latest plans on improving the performance in an ever competitive North American airline industry. The carrier now appears to look more into long haul traffic, while shifting its short haul services to a lower cost subsidiary.

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According to a recent press release released by the airline, it now plans to pursue international growth opportunities while releasing some of its existing narrowbody aircraft to a lower cost operation – which AC dubs as a ‘low-cost leisure carrier’.

This shift of AC’s business model proves not only the changing shape of the North American airline industry, but also the level of success achieved by its US counterparts. Almost all of the US based majors have come out of bankruptcy protetction leaner and more efficiently, something with which AC’s cost base is now having difficulty matching.

 At a time when AC’s Calgary based neighbouring rival WestJet is moving from a low cost operation to launching a premium regional carrier, possibly following on from the success achieved by Porter Airlines – another Canadian carrier – it is more interesting to notice AC’s decision to establish a lower cost subsidiary.

The biggest impact of a high cost base is often experienced on the short haul routes, as the higher level of fixed costs in comparison to a longer flight causes an uneven distribution of the unit cost. The perfect remedy for this, as AC has identified, is to gradually shift its lower yielding short haul routes to a lower cost base – by establishing a LCC subsidiary.

And AC is not the first to do so, while airlines such as Qantas have found success with a similar formula long ago, fellow Star Alliance carrier Lufthansa too announced that it was moving in the same direction.

Yet, if the Canadian market dynamics are considered – AC’s low cost leisure carrier may in fact not be purely a no-frills operator. The Canadian market has quite a few dedicated charter airlines such as Air Transat and Sunwings, and there is a very good possibility that AC will try to develop a lower cost subsidiary with some frills – as signalled by the ‘leisure’ moniker.

While things wait to begin materialzing, AC has already begun its cost-base transformation activities by moving its Embraer 175 fleet to Sky Regional Airlines, under a capacity purchase agreement. Sky Regional is a non-unionized airline, and allows AC to break free from some of the work rules in place at a unionized airline.

The specifics of where Air Canada is heading may not be crystal clear yet, but one thing is for usre – that times at AC are going to be exciting in the next few months.

2 Responses to Air Canada to expand international operations while mulling LCC subsidiary

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