Air Canada mulls cutting fares to counter ultra-low cost carriers
Expanding Rouge to more markets part of strategy to ‘defend against’ rivals
As its competitors prepare to launch ultra-low cost carriers in the country, Air Canada said it is prepared to deploy its Rouge fleet in competing markets and may consider introducing an ultra-low cost fare for budget travellers.
Air Canada’s president of passenger airlines Benjamin Smith said Tuesday the company has the strategic option of introducing an ultra-low cost fare in specific markets that will provide a competitive option for travellers primarily focused on cost.
“How we’re going to deploy that, and where we’re going to deploy that, is going to be definitely geared strategically,” Smith told Air Canada’s annual investor conference in Toronto. “I don’t think we’re at all looking at putting that across the board. The plan is where we need to do it for market reasons or for competitive reasons, that’s where we’ll deploy it.”
The ultra-low fare is the latest strategy Air Canada is eyeing as airlines in Canada look to launch an ultra-low cost carrier (ULCC) next summer. Aspiring ULCC Canada Jetlines recently announced it will fly out of Hamilton and Waterloo, Ont., when it expects to launch next summer, offering base fares under $100. Air Canada rival WestJet is also planning to launch a subsidiary ULCC next summer.
Smith said Air Canada is wellpositioned to respond to such competitors, particularly through its low-cost leisure carrier Rouge. Air Canada recently announced it had amended a 10-year labour deal with its 3,500 pilots that will allow Rouge to not only grow to serve more markets, but offer flexibility when it comes to shifting capacity in order to compete with new airlines offering ultra-low fares.
“The flexibility we have to expand Rouge gives us the ability to deploy it on secondary domestic markets, if necessitated by increased ultra-low cost competition,” he said. “We are now better able to defend against our competition.”
That sentiment was reiterated by National Bank Financial analyst Cameron Doerkson in a note to clients. “The greater flexibility Air Canada now has to deploy Rouge will help the airline compete against potential future ultra-low cost airlines that may enter the Canadian market,” Doerkson wrote.
Since it began service in 2013, Rouge has grown to serving 49 destinations, providing competitive service in the markets it operates in at a low cost, Smith said.
Air Canada is also on the hunt for a financial institution to partner with as it launches plans to launch a new co-branded credit card.
The airline announced it is initiating a request for proposal for a co-branded credit card and is inviting major financial institutions to participate.
“International travel is the most popular reward a credit card loyalty program can offer, based on experiences in many countries around the world,” CEO Calin Rovinescu said.
“This makes us therefore a highly desirable partner as Canada’s largest carrier, with the most expansive global network and three powerful hubs. We also believe there are many ways we can enrich the value proposition for credit card user and our customers.”
Air Canada announced in May it would not be renewing its agreement with Aimia Inc., the operator of the Aeroplan loyalty program, which expires in June 2020 and will instead launch its own rewards program. The new loyalty program will allow customers to earn and redeem miles with greater flexibility, while allowing the airline to “own the entire customer experience instead of relying on a third party to do so,” Smith said.
Rovinescu said the net present value of the program repatriation over a 15-year period is expected to be between $2 billion and $2.5 billion.
Air Canada also is eyeing an annual earnings before interest, taxes, depreciation, amortization, impairment and aircraft rent margin ranging from 17 per cent and 20 per cent between 2018 and 2020, and an annual return on invested capital ranging from 13 per cent to 16 per cent. The airline’s free cash flow targets from 2018 and 2020 have been set at between $2 billion and $3 billion.