Air Canada rouge 767-300 on final at YYZ. Photo: Tom Podolec
Written for Aviation Week & Space Technology – June 14, 2014
Like United Airlines and Delta Air Lines, Air Canada has experimented with low-fare offspring. After the failure of its earlier endeavors, Tango and Zip, the airline is now about a year into the operation of “Air Canada Rouge,” its lower-cost medium- and long-haul leisure travel offering.
Rouge is part of the Air Canada Leisure Group, which includes inclusive-tour operator Air Canada Vacations. “We’re targeting Rouge at winter ‘sun,’ and summer Europe destinations,” Executive Vice President/Chief Commercial Officer Ben Smith says. “Over the years, our competitors were able to really grow, and either take a huge share or push us out of a market. Our share of Hawaii went from 80 to 20 percent. We needed a tool that could complement and fit into the mainline carrier. We’re not copying any other model; we designed Rouge to meet the Canadian market’s needs, and be profitable.”
Although low-cost carriers (LCC) Zip and Tango only lasted a few years in the early 2000s, Smith says Air Canada learned a lot from the attempts. “We found out how we could brand and provide a la carte fares, move away from Saturday night stays, set up ‘buy on board,’ handle online booking and differentiate pricing from mainline services.” United and Delta came to Montreal to study Tango before launching Ted and Song, respectively, he says. The Tango brand is now the lowest-cost option in Air Canada’s fare classes, although the LCC is defunct.
The Rouge model is based on lower operating costs and wages, increased aircraft capacity, and the transfer of unprofitable mainline routes to the leisure carrier. By year’s end, 47 international mainline routes will have been transferred to Rouge, and seven new destinations will be added. There are no immediate plans to expand Rouge into the domestic market.
Smith says that after extensive analysis of each route’s financial performance, unprofitable legs are identified and the options are to “withdraw, reduce or replace. Our preference is to keep mainline, but the reality, when you look at the yields, is that Rouge is the better offering.”
Arik De, vice president of airline strategy for Intervistas, sees Rouge as a positive step for the airline, but not without challenges. “Rouge is a great platform for lowering the cost structure for Air Canada, and a great tool to compete on leisure heavy routes,” he says. “It will be interesting to see how they deal with the segmentation of the consumer market. If they move the product downstream to Rouge for markets that have leisure and business traffic, as they have with Vancouver-Los Angeles International Airport, they might open themselves to competitors in the business space.”
The airline sees its main competition as Canadian carriers Air Transat and Sunwing Airlines, and to some extent, arch-rival Westjet. Foreign carriers such as Thomas Cook/Condor and Corsair Airlines also serve that market in Canada. And U.S. LCCsAllegiant Air and Spirit Airlines siphon price-conscious Canadian travelers to U.S.-border airports.
Ultimately, Rouge will have up to 20 Boeing 767s and 30 AirbusA319s, all from the mainline Air Canada fleet. As of March, 17 aircraft had been transferred, including four 767s and 13 A319s. The Rouge airplanes are reconfigured to a high-density interior, with up to 142 seats in the A319s and 280 in the 767s. A wireless “bring your own device” inflight entertainment system (IFE) is also part of the reconfiguration.
As routes have been transferred from mainline to Rouge, passenger complaints, primarily about the change to high-density seating, have been lodged. The Vancouver-to-Los Angeles-service shift to a Rouge-configured A319 resulted in critical reports in the mainstream press. Passengers have also turned to social media to air their dissatisfaction about Rouge and Air Canada’s high-density Boeing777s.
Smith acknowledges that passenger expectations have to be managed. He compared the current changes—and the reactions—to those made decades ago when regional destinations were transitioned from mainline jet service to regional turboprops.
After reporting its best financial performance ever in 2013, Air Canada posted a C$341 million ($313 million) loss in the first quarter of 2014. This was against revenues of C$3.06 billion, a 3.8% increase year-over-year. The loss was primarily attributed to both extreme winter operations, and a C$161 million foreign exchange loss due to the impact of a lower Canadian dollar. However, system yields increased from the first quarter of 2013, and the airline’s adjusted cost per seat mile dropped by 2.5%. The financial markets appear pleased with Air Canada’s cost control and revenue performance, as reflected by a sharp increase in the value of the airline’s stock since the end of March.
To lay the foundation for the next phase of its growth, Air Canada negotiated competitive agreements with its four labor groups. In January, a new agreement with the Greater Toronto Airport Authority, the operator of Toronto Pearson International Airport took effect. This agreement, at Air Canada’s largest and most important hub, is for an initial five-year term. Among other provisions, it sets a fixed fee structure for airport services. This was a key element in Air Canada’s plan to turn Toronto Pearson into a global hub. And earlier this year, the airline was able to eliminate a multibillion-dollar deficit in its defined-benefit employee pension plan.
Rouge is only part of the ongoing transformation of Air Canada; fleet renewal is also in progress. “With the financial house in order, and upgrades to our fleet and the right products on board, we will have all the necessary components in place,” says Smith.
Air Canada took delivery of its first Boeing 787-8 in May, with five more due to be delivered before the end of the year. The order for 37 is split between 15 251-seat 787-8s and 22 larger 787-9s along with options and purchase rights for an additional 23 aircraft. Although primarily intended to replace the aging 767-300ER fleet, the 787s will open new long, thin routes for the airline, such as Toronto to Tokyo-Haneda.
However, the delayed arrival of its first three 787s forced the airline to wet lease two 767s from EuroAtlantic Airways for six weeks this summer to serve three destinations.
The airline is planning to upgrade the interiors of its 18-aircraft 777-200LR and -300ER fleet to match the new, updated, three-class configuration of seats and IFE of the 787s. A change to what Smith describes as “the new industry standard for the 777,”—a 10-across economy cabin—will increase the available seats by 11-15%. The 787’s new International Business Class lie-flat seats and configuration, and new Premium Economy mini-cabin are also part of the 777’s upgrade. The project is set to begin in late 2015, and be completed in the second half of 2016. There are also five, 458-seat 777-300ERs in the fleet. These have unique seats and cabin configuration, and are deployed on specific high-yield routes.
Air Canada is also making a shift from Airbus to Boeing. As well as the 787s, the airline will be replacing its A320-series narrowbodies with up to 109 737MAX-series aircraft, a huge defeat for the European manufacturer. A key part of the deal was Boeing’s purchase of 20 of the airline’s 45 Embraer 190s. As the Embraers exit the fleet, they will be replaced with larger, leased narrowbodies. The airline plans to keep flying the remaining 25 Embraers, which is considered a blow to the CSeriesorderbook of Montreal-based Bombardier Aerospace.
The fate of the small fleet of eight A330s is still to be determined, although Smith says, “We’ll likely be flying it to the end of the decade.” And as far as the 767-300ER is concerned, he says, “We know everything about this airplane. We have builds in our fleet from 1988 to 2001, and it is the perfect airplane to repurpose for Rouge.”