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(Reuters) - WestJet Airlines Ltd is mulling the launch of a regional airline, using a fleet of turboprop aircraft to serve smaller markets in Canada, marking a departure from its successful low-cost strategy and presenting a new challenge to bigger rival Air Canada.
WestJet, Canada's No.2 carrier, said on Monday it may launch the short-haul service as early as next year, using a fleet of about 40 turboprops - a move that would add a second type of aircraft to its fleet for the first time in its 15-year history.
The Calgary, Alberta-based carrier is in talks with employees about the plan, which could cost the airline more than $1 billion. Employees will be asked to vote on the proposal, which includes housing the new airline in a sister company, in a process expected to be completed in early February.
Operating a single fleet of Boeing 737 aircraft has been central to WestJet's strategy of being a low-cost airline, as maintenance and training costs don't have to be duplicated.
But the fast-growing airline, which flies within Canada and to mostly sun destinations in the United States, Mexico and the Caribbean, has considered adding a second fleet for some time as it searches for new revenue sources.
"I think there are quite a few opportunities for WestJet in these smaller markets. Some of the fares are quite high," said National Bank Financial analyst Cameron Doerksen.
Air Canada, the country's biggest airline, is the sole carrier on several routes to small communities in Canada through its partner Chorus Aviation, which operates under the Air Canada Express brand.
WestJet's annual operating costs are about one third lower than those of Air Canada, which could help it undercut the larger carrier on fares.
An additional fleet at WestJet "definitely will increase costs and complexity," Doerksen said.
"But it is really more about a relative low-cost game and WestJet will still have lower costs than its competitors on those routes," he said.
Montreal-based Air Canada declined to comment on WestJet's plans.
"This cannot be viewed as warm and fuzzy by Air Canada. You have a very aggressive player that wants what was pretty much exclusively yours," independent airline analyst Rick Erickson said.
WestJet did not say which turboprop aircraft it planned to buy for the new airline but analysts said the Q400, made by fellow Canadian company Bombardier Inc, was the most likely candidate.
A Bombardier spokesman said the company is in discussions with WestJet and that it would be feasible to deliver Q400s for a 2013 launch date.
The new airline's likely competitors, Chorus and Skyservice Business Aviation, also fly Q400s, as does Porter Airlines, a small regional airline focused on Eastern Canada.
There has also been some market speculation that WestJet could buy Porter, giving it access to Porter's established fleet - and an important regional hub at Toronto's downtown Billy Bishop Airport.
Turboprop aircraft, which use a turbine engine to drive a propeller, are efficient on short routes because they fly at lower speeds and can land and take off easily at smaller airports.
The ATR 72, a turboprop built by French-Italian aircraft maker ATR, is another possible contender, analysts said.
With a price tag on a Q400 of around $25 million, WestJet's proposal is a "$1 billion gambit", Erickson said. WestJet has a market value of about C$1.5 billion ($1.47 billion).
Raymond James analyst Ben Cherniavsky said he did not expect WestJet to face the same kind of resistance to the new airline as Air Canada has faced from its employees over plans to set up a low-cost airline.
For one, the new airline is not likely to demand a lower pay-scale as Air Canada's low-cost proposal does. Unlike Air Canada, WestJet employees are not unionized and the company regularly scores highly in surveys ranking the best places to work in Canada.
Shares of WestJet closed down 14 Canadian cents at C$11.66 on the Toronto Stock Exchange on Monday. Air Canada's stock was down 2 Canadian cents at C$1.04 and Chorus Aviation shares were off 12 Canadian cents, or 3.5 percent, at C$3.24.
Additional reporting by Jeffrey Jones in Calgary; Editing by Rob Wilson