Air Canada's chief aware of pitfalls in launching a new LCC

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Air Canada's management is using lessons learned from previous industry attempts in launching a low cost carrier within its legacy structure.

The carrier's proposed low cost business plans emerged last month and since that time Air Canada has been fielding questions about the new business segment.

During a 4 May earnings call Air Canada CEO Calin Rovinescu admitted there are few success stories of legacy carriers efficiently running their own low cost operations. One of Air Canada's efforts, Zip, did not have enough scale with only 15 aircraft, says Rovinescu, while Tango eventually morphed into a fare category for use by Air Canada mainline.

 

 
   

Rovinescu says he appreciates the comments Air Canada has heard over the complexity of launching a low cost carrier and admits it is of "great benefit if you do it right", and a distraction "if you get it wrong".

Air Canada's management is examining the low cost business plan with their eyes wide open as Rovinescu stressed the cost equation of the new carrier must be favourable and "avoid the cost creep that plagues legacy carriers".

To avoid that cost creep Air Canada envisions work rules and pay scales that adhere to low cost operations and a distribution methodology different from legacy carrier models.

Air Canada could face obstacles in gaining labour's buy-in for the project. A letter outlining the proposed LCC was reportedly attached to a tentative collective agreement management reached with pilots earlier this year. The Air Canada Pilots Association (ACPA) originally cancelled a ratification vote, citing some elements of the agreement were deemed controversial among pilot group members. Subsequently ACPA set a 9 May vote date, arguing Air Canada refused to consider any changes to the tentative deal.

Even as pilot ratification of the tentative agreement remains tenuous Air Canada management has some solid elements in mind for the new low cost carrier, which include a mix of 50 narrow and widebody aircraft, and the types of markets ideal for the new operator.

Rovinescu states Air Canada doesn't take advantage of its franchise in "sun" leisure markets, and new destinations selected for the low cost operation would be largely markets that do not generate adequate corporate traffic. Stressing that he is not unveiling markets, Rovinescu does explain holiday destinations like Dublin, Nice, Lisbon and Casablanca fit into that high-volume, low yield pattern.

Air Canada's CEO also describes the possible establishment of the low cost carrier as an "ancillary benefit from the [Boeing] 787 delay". With first deliveries for seven aircraft now scheduled for late 2013 and early 2014, Air Canada could have some years of virtually no growth. Noting that the carrier has no intent to bring aircraft into its fleet on an undisciplined basis, the low cost carrier is way to bridge the growth gap. However, Rovinescu stresses the 787 delay is in no way driving the low cost carrier development.

He also envisions a gradual ramp-up to the 50-aircraft strong fleet, and states the carrier could create 462 new pilot jobs by 2015.