Air Canada moves to lower costs by expanding Rouge service to Vancouver, Calgary

MONTREAL - Air Canada is trying to further cut costs by expanding its low-cost subsidiary Rouge in Western Canada and using it to replace its regular service on some U.S. routes from Vancouver and Calgary.

Air Canada (TSX:AC.B) said Tuesday that Rouge will begin daily flights at the end of April to Las Vegas from Calgary and Vancouver.

It will be followed with service to Los Angeles, San Francisco and Anchorage, Alaska, a key port for cruise ships. Seasonal service from Vancouver and Calgary to Phoenix will begin next December.

Air Canada chief commercial officer Ben Smith said the expansion of Rouge and the addition of new aircraft are a "key element of our strategy for sustainable, profitable growth at both airlines."

"Air Canada Rouge is best suited to compete more cost effectively in these markets where there is both a high leisure travel demand and low-cost competition," he stated in a news release.

The airline is using Rouge to lower costs by filling planes with more passengers and paying workers less than on the main network.

Smith said it may add other destinations to Rouge as Air Canada receives delivery of new airplanes allowing its existing Airbus A319s and Boeing 767s to be transferred to the low-cost subsidiary.

Air Canada also said Rouge will also take over service between Toronto and San Diego and Phoenix.

The Montreal-based airline is expecting to cut $100 million in costs — a 15 per cent reduction in costs per available seat mile — over five years by adding new Boeing 777s, 787 Dreamliners and expanding Rouge.

With 18 per cent more seats, lower wages, more flexible work rules and lower overhead, Rouge's narrowbody fleet is expected to operate 21 per cent cheaper than the same airplanes on the main network. The advantage gained with the widebody 767s is even larger with a 25 per cent increase in seating to 264 passengers that lowers costs per available seat mile by 29 per cent.

Analyst David Tyerman of Canaccord Genuity said the expansion of Rouge in Western Canada is consistent with Air Canada's previously announced plans and efforts in Eastern Canada.

By increasing capacity through the addition of more seats, the analyst said the switch of routes to Rouge makes the airline more competitive.

"They're not targeting other airlines or other vendors, they're after the leisure market which WestJet happens to play in, as does Transat and everyone else," he said in an interview.

Tyerman said Rouge could eventually provide service to leisure destinations in Europe or Asia if demand warrants.

"There will be more to come because the expansion of Rouge in terms of the number of planes in it will continue next year, into 2016," he added.

Launched last July, Rouge plans to operate 54 routes, including service to Europe from Montreal and Toronto.

Air Canada Rouge has hired hundreds of flight attendants ahead of its Western expansion. Its workforce is expected to reach 650 by the end of the year when its fleet nearly doubles to 33 planes.

Follow @RossMarowits on Twitter