Air Canada fleet changes to drive up to 15% CASM reduction

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Air Canada expects that a collection of strategic fleet initiatives could reduce its cost per available seat mile (CASM) by 15% if implemented today, say executives during Air Canada's investor day in Toronto today.

Air Canada's full-year 2012 CASM of 17.4 Canadian cents (17 cents) could drop to 15 Canadian cents assuming that cost drivers stay at last year's levels, says Michael Rousseau, the carrier's executive vice-president and chief financial officer in a presentation.

The carrier did not give a firm timeline for when it could realise the full 15% in savings, which are beginning to take place this year as new aircraft like the Boeing 777-300ER join the mainline fleet and others like the Embraer 175 are transferred to other fleets.

Some of the savings will be garnered from transitioning aircraft from Air Canada's mainline fleet into its new low-cost leisure carrier, Air Canada Rouge. Rouge will have a lower cost structure than the mainline operation, made possible by a new pilot contract finalised in July 2012 that allows Air Canada to add up to 50 aircraft in the Rouge operation and use additional regional airline providers. The Rouge fleet will be made up of Airbus A319s and Boeing 767-300s transitioned from the mainline operation to the low-cost carrier, which launches in July with four aircraft initially.

The A319 will operate medium-haul service to the Caribbean, Latin America and Mexico. Using the aircraft under the Rouge cost structure is expected to drive CASM on flights operated with the aircraft type by an estimated 21%, Rousseau's presentation shows. Moving the Boeing 767-300s to Rouge are expected to produce a 29% CASM reduction.

These savings will come from new work rules and lower wages at Rouge. The aircraft themselves will also provide savings, as they will be modified in a higher-density configuration than in the mainline operation.

New aircraft coming into the fleet are also expected to drive cost reductions. The more efficient fuel burn of the Boeing 787 compared to the 767-300 is projected to reduce fuel and maintenance CASM by 29%, says Rousseau.

The five new 777-300ERs that Air Canada will start taking delivery of this month will also provide cost savings from a higher-density configuration. The new aircraft will have 458 seats compared to the 349 seats in the in-service Boeing 777-300s.

Transitioning some regional aircraft will also provide savings, says Rousseau. Air Canada is in the process of moving 15 E-175 aircraft to Sky Regional for operations in the northeast USA, which is expected to produce an 11% CASM reduction for the aircraft type.

Air Canada announced today that it now expects its CASM in the second quarter to decrease 0.5 to 1.5% year-over-year, compared to previous estimates of it decreasing 0.5% or increasing as much as 0.5%.

Air Canada is also expecting savings from other types of changes in addition to the CASM befit from fleet moves, such as aircraft maintenance. The carrier used to rely on Aveos for a majority of its maintenance, but the firm closed abruptly in March 2012 after declaring bankruptcy. The carrier says it plans to see C$143 million ($140 million) in yearly benefits from new rates on maintenance agreements with other more cost-competitive MRO firms, as well as annual savings from depreciation of C$40 million.