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New lines on the horizon

There’s nothing like increased competition to fuel consumer interest and hopefully grow a market and that’s exactly what’s happening with the launch of WestJet’s Encore and Air Canada’s Rouge, although both are aimed at different market segments. While Encore is aimed at boosting WestJet’s regional business in Western Canada before moving east, Rouge is attempting to bolster Air Canada’s international leisure travel market share to both sun destinations in winter and Europe in summer.

Air Canada was scheduled to launch Rouge in July with two Boeing 767 widebodies and two Airbus A319 narrowbodies, but could have 32 planes by the end of 2014. Photo: Air Canada

“It’s an exciting year in the air carrier industry, because you have two launches in the same year from two major
players,” said Calgary-based consultant Rick Erickson of R.P. Erickson & Associates. “Both are quite different and not likely to bump up against each other.” 

But Air Canada had little choice as it was losing market share to sun destinations, because all most sun seekers want is the cheapest ticket, which the carrier couldn’t offer under its old cost structure. And with Rouge, Air Canada can return to markets it pulled out of and even fly to new markets like Venice, said Erickson.

He pointed out that a lot of Canadians have bought property down south lately and need to get to it four or five times a year to justify their investment. Now Air Canada can be an attractive option.

“By and large, Rouge is a good thing. Air Canada is highly motivated and they have an improved cost structure.”

Air Canada was scheduled to launch Rouge in July with two Boeing 767 widebodies and two Airbus A319 narrowbodies, but could have 32 planes by the end of 2014 and eventually up to 50 aircraft in its low-cost fleet. The widebodies will operate on new service from Toronto to Edinburgh and Venice. Rouge will also take over Air Canada’s mainline service from Toronto and Montreal to Athens and assume Air Canada’s service to 10 Caribbean destinations, namely Punta Cana, Liberia, San Jose, Puerto Plata, Varadero, Kingston, Santa Clara, Cayo Coco, Holguin and Samana. The Rouge fleet will be replaced at the flagship by the 37 Boeing 787 Dreamliner aircraft expected to begin arriving in 2014.

“So Air Canada Rouge has the potential to become quite a substantial player in the leisure market where the economics cannot support our mainline network service,” said CEO Calin Rovinescu during a conference call.

Air Canada appears on its way towards sustained profitability, soaring back into the black in 2012 when it earned $131 million, versus a loss of $249 million in 2011, which included a $55-million charge related to its Aveos maintenance operations.

Rovinescu said the results clearly demonstrate that the carrier’s plan launched three years ago to stabilize and grow on a sustained basis is working. “While we have more work to do, Air Canada today is a stronger and more stable airline and we can now fully turn our attention to the future,” he said.

Unlike previous failed attempts by Air Canada to compete in the low-cost market, Rouge could work, according to analyst David Tyreman at Canaccord Genuity, Toronto.

“They have a lower cost structure, their pilot agreement has been amended and their density of seating is much higher,” he explained. “It’s a big difference. The objective is to have a similar cost structure to its competitors such as Sunwing, Thomas Cook, WestJet and Air Transat on sun destinations.”

Rouge could be a thorn in the side of Air Transat, which has been trying to improve its profitability by cutting costs for years, Tyreman added.

“They’re restructuring their product with new software and moving towards an all Airbus A330 fleet, but these moves all predate the launch of Rouge.”

And Transat does have some advantages over its competitors. It’s still the largest player in the leisure market, which gives it better buying power and allows it to spread its fixed costs better, Tyreman pointed out. “But Air Transat’s biggest problem is that there’s too much competition in the space they’re in and everyone is adding capacity except them.” 

WestJet will increase its regional service in the west first. Service to eastern Canada is expected to follow within a year. Photo: WestJet

It appears Air Transat is pulling back slightly in some markets where it faces direct competition with Rouge. Online route tracker Airline Route has reported that during July and August, Air Transat will reduce its Toronto-Athens frequencies from twice weekly to once weekly compared with the same period last year. Weekly frequencies between Toronto and Glasgow are falling from six to five year-over-year. Air Transat also serves Venice from Montreal and during the July to August period, it is increasing frequencies on the route from once weekly to twice weekly year-over-year but operating the service with a 249-seat Airbus A310 aircraft instead of the 342/343-seat Airbus A330-200/300 aircraft used on the route a year ago. And the four times a week Toronto-Frankfurt service has been cancelled, among other service reductions to Europe.

WestJet said it plans to use its new fleet of Bombardier Q400 NextGen aircraft at Encore to enhance its schedule in Alberta and Saskatchewan. It will also add Fort St. John, B.C., to its network and use the first two 78-seat Bombardier Q400s on routes between Vancouver and Victoria, and from Calgary to Nanaimo. Calgary, Edmonton, Grande Prairie and Saskatoon will see an increase in the number of flights to their cities this summer on a year-over-year basis.

The airline has firm orders for 20 Q400s and options for 25 more planes over the next six years that Erickson believes WestJet will convert to orders. After increasing its regional service in the west, WestJet plans to introduce Encore to Eastern Canada in about nine to 12 months.

The Calgary-based carrier is facing increased competition from Air Canada, which recently announced increased frequencies in Western Canada with its own fleet of Bombardier Q400s, operated by Jazz. It plans to increase its capacity, for example, between Vancouver and Fort St. John by 19 per cent. Additional routes will be added as it takes delivery of five more planes by the end of the year.

“The launch of Encore could prove to be a good move, as WestJet really only had two choices to grow,” said Tyreman. “It could down gage or go international and down gaging is a much smaller, less risky and less costly step as they know the Canadian market. It’s also a good opportunity to service much smaller city pairs and feed more passengers onto their 737s.”

Erickson is “convinced” that WestJet will go international within the next 24 to 30 months and is using Encore to feed traffic to its mainline carrier. “I think that’s why [president and CEO Gregg] Saretsky was attracted to WestJet. He did the same at Alaska Airlines. WestJet wants to be recognized as a true national player. It flies to the 30 largest Canadian cities, compared to 70 for Air Canada and is still not recognized as a national carrier.”

WestJet will extend service between Calgary and Grande Prairie to year-round from seasonal, adding one new daily flight in August, operated by WestJet Encore. WestJet will also increase the number of daily flights between Calgary and Edmonton to nine from seven by September. Both new flights, as well as two existing flights on WestJet’s Boeing 737 Next-Generation aircraft, will be operated by WestJet Encore.

Rouge At A Glance

Between Edmonton and Grande Prairie, WestJet will increase the number of daily flights to three from two by September, and all flights between the two cities will be operated by WestJet Encore.

WestJet Encore’s president, Ferio Pugliese, called the upcoming launch a “historic moment.”

“We are just getting started,” said Pugliese, who is also WestJet executive vice-president.

The airline said Fort St. John, the so-called Energetic City, creates a strong foundation for the new service as a centre for northeastern B.C.’s diverse economic base of oil, natural gas, forestry and agriculture.

A WestJet spokesman said starting in Western Canada is less about protecting its turf than making sure the Calgary-based Encore is comfortable with starting a new service and adding a new fleet type from its home base.

About 300 employees will be hired by year-end to operate the first seven Bombardier aircraft. Up to 1,800 will be employed when the service is totally ramped up.

Employees will earn about 10 per cent less than what colleagues make at the main line carrier, but earnings will be in line with a low-cost regional service, spokesman Richard Bartrem added.

WestJet also announced that it will deploy its fleet of Boeing 737 jets to two more U.S. destinations and beef up its main line service to several destinations in Canada, the Caribbean and Mexico. Among the Canadian service enhancements is non-stop service between Toronto and Fort McMurray.

The launch of Rouge and Encore should offer plenty of new choices for Canadian travellers and hopefully at reduced fares.

“For Joe Public, especially in the [underserved] regions, this is great news,” said Erickson.