Air Canada expands its Rouge fleet in response to ultra-low-cost carrier competition

Air Canada will begin deploying its low-cost Rouge airplanes on routes to British Columbia this summer, part of a strategic response as it braces for competition from new ultra-low-cost carriers (ULCC).

The airline said on Monday that it will expand its Rouge narrow-body Airbus fleet in the second quarter, introducing new routes from Montreal to Victoria, B.C. and Toronto to Nanaimo and Kamloops, B.C. beginning in June — the same month that WestJet Airlines Ltd. plans on launching its new ultra-low-cost carrier Swoop. 

“We are equipping ourselves with additional tools, such as our new suite of economy fares and increased access to Rouge, to face our competitors head-on and compete more effectively, including (against) the new low-cost entrants,” chief executive Calin Rovinescu said on a conference call with analysts following the release of the company’s first quarter results. 

“With these and other initiatives, I expect we will build on the strengths of our first quarter results.”

While WestJet prepares to launch Swoop on June 20 in response to other ULCC competitors such as Flair Airlines Ltd., Air Canada has maintained its focus on targeting the premium passenger, driving higher yields for the company. When it comes to the new and emerging ULCCS, Air Canada has opted to monitor the market, deploying Rouge and offering a basic, no-frills fare to domestic customers when necessary. 

Earlier this month, the airline introduced re-branded economy fares that it said would offer customers greater flexibility when it came to travelling amenities. One of those five fares is basic economy, a restrictive, no-frills category that Air Canada said could also be used in response to ULCCs. 

“It’s all there ready in case we need to use that fare specifically or surgically in certain domestic markets,” Air Canada’s vice president of commercial operations Benjamin Smith said Monday. 

“We’re definitely not putting that fare into the market across the board. We will use it when and where necessary. The percentage of seats (that are basic fare) will be determined by what we need competitively.”

Air Canada also said it is prepared to increase capacity in the event that WestJet pilots go on strike. 

“We certainly don’t take any pleasure from seeing WestJet’s current challenges and woes but certainly it’s our objective that if there was a business opportunity there we’ll seize upon it as they sought to do,” Rovinescu said. 

Air Canada reported a net loss of $170 million in the three month period ending March 31, typically its weakest quarter, compared to a loss of $13 million during the same time last year. Still, passenger revenues climbed in the first quarter from $3.1 billion last year to $3.5 billion this year, driven by traffic growth of 11.4 per cent and yield improvement of 0.4 per cent. Earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent (EBITDAR) were $397 million, well ahead of analysts consensus.  

“Notable was that the demand environment remains strong, with traffic ahead of expectations on lower than expected capacity,” said RBC Capital Markets analyst Walter Spracklin in a note to clients Monday. 

“These results are all the more impressive given the context that this is a seasonally weak quarter for them, and there were several periods of difficult weather during this quarter.” 

In addition to difficult weather conditions, Air Canada faced a 16 per cent increase in fuel costs per litre, which jumped from 63.2 cents last year to 73.3 cents this year. 

Cowen analyst Helane Becker said in a note to clients that while fuel prices will put pressure on the company’s margins in the near-term, “given the strength in international markets, we expect revenue increases to eventually overcome the recent increase in input costs.” 

Air Canada’s stock jumped 4.3 per cent shortly after the markets opened on Monday, before giving back most of those gains and closing at $25.42 on the Toronto Stock Exchange, an increase of 23 cents. 

With files from the Canadian Press.