Air Canada adding more planes to Rouge for use on domestic routes

MONTREAL -- Air Canada is looking to cut operating costs and defend against competition from upstart low-cost competitors by adding more planes to its Rouge fleet and flying them on regional routes within Canada.

Narrow-body Rouge planes that operate at lower cost could replace smaller regional aircraft operated by airline partners like Jazz on some routes.

For example, one of several flights per day on a popular route could be converted to an Airbus plane, industry analysts were told Friday.

Rouge aircraft are also available to compete if necessary with ultra low-cost carriers like WestJet's new Swoop subsidiary, Flair Airlines or Canada Jetlines.

"We needed to have the capability of introducing a lower-cost competitive vehicle, both on offence and on defence," Air Canada CEO Calin Rovinescu said during a conference call about its 2017 results.

The increased use of Rouge planes domestically is permitted under changes to the collective agreement with pilots negotiated last year.

Several more Rouge planes are being added this summer and once all Boeing 787s are delivered next year there will be no limit on the number or type of single-aisle planes that can be flown by Rouge.

Ben Smith, president of passenger airlines at Air Canada, said Rouge Airbus A320s and 321s can be converted to high density single class cabins or possibly another airplane type such as the Boeing 737 Max.

Rovinescu also told analysts that a joint venture with Air China expected to be concluded in the coming months would enable it to be more aggressive in the competitive Pacific market.

The joint venture would expand the relationship beyond the use of lounges and codesharing as it faces pressures on flights to China and Hong Kong.

"It certainly it should certainly be an assistance to us in competing more aggressively," Rovinescu said.

Meanwhile, Air Canada announced Friday a new $250-million cost-cutting plan to be implemented by the end of 2019. That follows the completion of a $500-million plan launched in 2009 that eventually netted about $575 million in savings.

The new drive to cut costs comes as the Montreal-based airline looks to maintain margins despite the expected slowing down of its capacity growth with the arrival of its final new large planes.

"We showed we can take costs out in bad times but we now need to show we can continue to have that cost discipline in good times," Rovinescu told analysts.

The cost savings are expected to come from procurement, maintenance, aircraft leases, internal engineering, overhead and simplified business processes, added chief financial officer Michael Rousseau.

Chris Murray of AltaCorp Capital Inc. said the new drive for efficiency is important as Air Canada's growth slows to about seven per cent in 2018 from nearly 12 per cent in 2017, with more reductions likely in subsequent years.

He expects the savings to come from "behind the scenes stuff" that won't be felt by passengers.

Air Canada capped a strong 2017 by earning adjusted net income of $61 million, or 22 cents per share for the quarter -- ahead of analyst estimates of 14 cents per share, according to Thomson Reuters data.

The airline's operating revenue was $3.82 billion in the fourth quarter, up from $3.43 billion a year earlier and above the estimate of $3.75 billion.

Net income was $8 million or two cents per share for the three months ended Dec. 31, which was an improvement over a 2016 fourth-quarter loss of $179 million but lower than expected.

"Overall, we liked what we saw in the Q4 results," wrote analyst Walter Spracklin of RBC Dominion Securities in a note to clients.

For the full year, it earned $2.04 billion or $7.34 per share, up from $876 million or $3.10 per share in 2016. Adjusted profits also rose five cents per share to $4.11.

Revenue grew 10.7 per cent to $16.2 billion as the airline carried a record 48.1 million passengers, up 7.3 per cent from the prior year.

This included record revenues from cargo and Air Canada Vacations along with more than $1 billion in ancillary revenues from payments for checked baggage, seats, food and changed bookings.

Strong demand and growing connecting traffic through its three hubs in Canada are expected to result in another good year in 2018, said Rovinescu, who added the performance is under appreciated by investors.

Air Canada's shares grew nearly 90 per cent last year and were up 2.3 per cent at $24.88 in midday trading on the Toronto Stock Exchange.