Air Canada's new low-cost service, Rouge, to begin flying in July

Air Canada unveils the new leisure airline Air Canada Rouge with a photo opportunity in Dundas Square in Toronto on Tuesday December 18, 2012. (Aaron Vincent Elkaim / THE CANADIAN PRESS)

TORONTO -- Air Canada is jumping into the low-cost leisure travel market with the launch of its new Rouge airline, which will begin flying on Canada Day to destinations in Europe and the Caribbean.

The airline will start with flights from Toronto to Venice, Italy and Edinburgh, Scotland -- two destinations that currently aren't served by Air Canada, and will serve Athens, Greece from Toronto and Montreal.

Air Canada's existing flights to Cuba, the Dominican Republican, Jamaica and Costa Rica will be flown by the discount carrier from Toronto.

The destinations are areas where demand for leisure travel has been growing, said Ben Smith, Air Canada's chief commercial officer. But many are routes that didn't generate adequate profits under Air Canada's existing cost structure.

"The creation of this carrier is to assist us in serving many destinations that our existing model does not work on a competitive basis," Smith said.

"This is not viewed as entering markets that we haven't been in the past, they are markets that we've always liked to serve, some we've already served in the past, we just had to have the right vehicle to exploit them properly."

For now, most of the flights will depart from Toronto, but the airline plans to add more Canadian gateways, along with more getaway destinations throughout 2013. It is also examining the potential of flights to Asia.

Smith said the carrier will be a vehicle to reclaim market share that it has lost to domestic and international competitors.

It plans to hire 200 flight attendants and pilots for the new low-cost carrier.

Air Canada pilots complained during labour negotiations earlier this year that the low-cost carrier could threaten their job security and working conditions, and that pilots at the carrier would earn less. In the end, a federal arbitrator chose Air Canada's final offer that included provisions allowing the airline to create a budget carrier.

Smith said Rouge pilots will be part of the Air Canada union but will operate on a "different work and pay scale," compared to those at the main line, adding that the choice to move to Rouge is up to the pilots and there has been a lot of interest in doing so.

The airline says flights to Venice, Edinburgh and Athens start at "special introductory fares" of $949 round-trip, including all taxes, fees, charges and surcharges.

Flights to the Dominican Republic and Jamaica will start at $269, one-way, while Cuba is offered starting at $538 round-trip.

All the introductory fares, which are available until Dec. 25, are based on Toronto departures.

Details about fares going forward were not immediately available, but the company said it will provide more details about pricing and its premium economy seats in January.

Air Canada previously launched a series of discount carriers including Zip, Tango and Jazz to compete against WestJet and Jetsgo.

Tango disbanded as an airline in 2003 but remains the name for Air Canada's cheapest economy fares. Zip shut in 2004 after providing service to Western Canada and was folded into Air Canada.

The new low-cost airline will begin operations with two Boeing 767-300ER and two Airbus A319 aircraft that will be released from Air Canada's mainline fleet. Additional planes will be added as Air Canada (TSX:AC.B) starts to take delivery of new Boeing 787 Dreamliner aircraft in 2014, ramping up to 50 planes.

Air Canada has said about half of incremental profits from its low-cost carrier will be derived from cramming more seats into a fleet of 20 Boeing 767s and 30 Airbus A319s. The rest comes from lower employee wages and more flexible work rules.

The wide-body planes, for example, will be fitted with 20 per cent more seats, raising the number of passengers to 275 per aircraft.

Airline analyst Jacques Kavafian at Toll Cross Securities said that could turn some customers off, adding he doesn't believe Rouge will be the financial success the company hopes it will be.

"The A319s seat pitch is similar to competitors in Canada but the 767s seat pitch is almost unique in the world and will likely reflect poorly on its image," he said.

Smith refuted those claims, saying many of its competitors have a similar number of seats per aircraft.

"I can clearly state that the product offering for all seats will either be competitive or superior to what's being offered in all the markets that we serve," he said.

Competitor WestJet (TSX:WJA) is launching a discount regional carrier in the second half of next year and also introduced a premium economy section that will include 24 seats per plane once the fleet has been reconfigured. Density will increase on the 737-800 series jets only, which will go from 166 seats to 174, the company said.

Transportation analyst Chris Murray at PI Financial noted Air Canada expects the operation to be immediately profitable, but he believes, given its initial small scale, it won't contribute to earnings in its first two years.

"While the strategic rationale for launching the (low-cost carrier) unit as a defensive move against further penetration by other low-cost leisure carriers such as Sunwing Vacations, Transat and WestJet make sense, we remain skeptical of the magnitude of earnings impact until additional scale is obtained later this decade with additions to the mainline fleet."

However, traders seemed to react favourably to the launch, sending shares up almost eight per cent, or 13 cents, to close at $1.83 on the Toronto Stock Exchange.