June 4, 2012 / 4:48 PM / in 5 years

Air Canada still for low-cost plan despite hostility

Passengers walk past Air Canada planes on the runway at Pearson International Airport in Toronto April 13, 2012. REUTERS/Mike Cassese

CALGARY/VANCOUVER (Reuters) - Air Canada remains committed to entering the low-cost segment of the airline industry, possibly by starting its own low-cost carrier or through a partnership, the company’s chief executive said, despite employee concerns about such a venture.

A low-cost carrier will help the 75-year-old airline, which is Canada’s biggest, cut costs and make it more competitive with increasing numbers of low-cost carriers around the world, CEO Calin Rovinescu said at the airline’s annual meeting on Monday.

“I have said repeatedly that we need to participate in this segment of the market in one manner or another. And to this end, we are evaluating various low-cost business models,” Rovinescu told shareholders at the meeting in Calgary.

He said there are ”three or four very successful models out there“ that Air Canada is studying, including the possibility of launching a low-cost airline to fly to leisure destinations. ”There are also “opportunities that exist on some portions of the long haul market”, he said without elaborating.

Airlines such as Air Canada that have been in existence for many years have cost structures that are 30 percent to 50 percent higher than those of low-cost airlines, Rovinescu said. That gives the latter an “unquestioned ability” to capture market share.

He said airlines around the world, including Japan Airlines, Thai Airways and Singapore Airlines, have all either opted to start their own low-cost carriers or formed partnerships with others to “defend against erosion at the mainline carrier or exploit new market opportunities, which would otherwise not be viable.”

Air Canada was not intending to turn the entire airline into a low-cost carrier, Rovinescu said. “We look at the successful hub operators... They kept their legacy model and we certainly intend to do that,” he said.

Rovinescu declined to specify a timeline for a low-cost venture but said the airline was taking into account ongoing labor talks with its employees, notably its pilots, who have come out strongly against the airline’s low-cost carrier plans.

Pilots argue that as they will still have to do the same work at a low-cost operation as they do at the main hub, they should not be paid less.

“We obviously have been sensitive to the views of our pilots and want to make sure that whatever timeframe we’re looking at is consistent with the discussions that are taking place in the arbitration process,” Rovinescu told reporters after the meeting.

Relations between Air Canada and the union representing its 3,000 pilots have been strained this year as the two sides tried and failed to negotiate a new labor agreement. The dispute is now in the hands of a government arbitrator who will impose a binding agreement on the two sides before the end of August.

The Air Canada Pilots Association (ACPA), which represents the airlines pilots, also accuses the loss-making company of “hypocrisy” and says it gives double-digit pay increases to top executives while extolling austerity to its employees.

ACPA’s president Paul Strachan told the annual meeting that Air Canada’s pilots, many of whom are shareholders, would vote against the company’s executive compensation guidelines. Shareholders overall, however, overwhelmingly approved the motion.

Shares in Air Canada were 1 percent weaker at 87 Canadian cents on the Toronto Stock Exchange. The shares are down nearly 60 percent in the past year.

Editing by Peter Galloway and Marguerita Choy

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