Air Canada looks to be edging closer to being the first major airline to succeed at operating discount units.

Chief executive Robert Milton thinks so, and points to Air Canada's second quarter C$30 million ($19 million) profit as proof. In a quarter where US carriers lost $1.5 billion, Air Canada reported its first quarterly profit in 18 months.

He says the turnaround is due to Air Canada's creation of popular discount units like Tango, which flew 12% of Air Canada's second-quarter domestic capacity.

Milton adds Air Canada will also show a third-quarter profit, and some say it could be in the black by year-end.

But the extent of Air Canada's recovery is unclear. By changing the way it accounts for foreign exchange gains and losses, it is hard to compare results with previous periods. Under the new method, the airline restated last year's second- quarter loss of C$108 million as a C$44 million profit. But comparing both quarters under the old accounting method, Air Canada actually fared worse in the second quarter of this year than the last.

Zip, Air Canada's proposed western Canada unit, illustrates some of the hurdles a major carrier faces in creating a discount unit. Unions are fighting Zip's effort to cut labour costs. Flight attendants, for example, are balking at requests that they double as ticket agents. If talks do not resolve these issues, Zip's imminent launch could be jeopardised.

The Canada Industrial Relations Board, hoping negotiations will avoid a need for a decision, has deferred requests from four unions to have Air Canada and Zip declared common employer.

Knowing that it cannot match rival WestJet's costs, the airline has put off plans to fly head-to-head with WestJet on the Calgary-Vancouver route, western Canada's busiest.

Source: Airline Business