Analysis: Unions ground Air Canada's low-cost carrier plan

TORONTO (Reuters) - Months of labor conflict have stalled Air Canada's plans for a low-cost carrier, but Canada's biggest airline says it has not given up the idea.

Air Canada, which teetered on the edge of bankruptcy two years ago, has struggled to bring down costs and turn consistent profits, and Chief Executive Calin Rovinescu says the low-cost leisure market is too good an opportunity to ignore.

We remain of the view that participation in the low-cost market is critical to achieving sustainable profitability at Air Canada, he said on last Friday's earnings call.

The new business, proposed last spring and initially tipped for a mid 2012 start, would compete on low-yield, high-volume international destinations like Amsterdam, Dublin and Nice, as well as southern vacation spots.

But Rovinescu has said repeatedly that he will not go ahead unless he can ensure the new business will be genuinely low-cost. For that, he will need concessions on wages or benefits from Air Canada's unions.

Established airlines have often sought to launch separate brands to compete with low-cost entrants like Southwest Airlines or EasyJet. The newer arrivals operate with fewer workers, lower pay or a single type of plane, reducing maintenance costs.

But Air Canada, whose previous low-cost airlines were quickly folded into the mainline carrier, has struggled to persuade its four major unions to support its plan.

A new collective agreement for flight attendants includes no mention of the low-cost carrier. The attendants rejected an earlier contract that included provisions on the new carrier.

In interviews, union leaders are uniformly critical.

Pilots still have to do the same. Why then would one carry lower compensation? said Paul Strachan, president of the Air Canada Pilots Association, which in May also voted down a tentative deal that included the low-cost carrier.

Rovinescu was quoted last year as saying he hoped to launch the low-cost carrier within a year, but this August he said it was unlikely anything substantial would happen before 2013. But without real progress in discussions with the pilots' union, the carrier will not take off.

UNIONS HOSTILE TO PLAN

Strachan said other carriers keep costs low by only flying one type of aircraft, while Rovinescu has said the new carrier's 50-strong fleet would need to include both narrow- and wide-body planes.

Rovinescu said last week that the airline's contract with airport check-in and call-center staff would not prohibit a low-cost carrier. Lower wages for new hires have been in that agreement since before the latest round of bargaining, but there is no explicit mention of the new carrier.

Chuck Atkinson, president of the union that represents mechanics and baggage handlers, said his unit does not yet have a position on the new carrier, but he expressed misgivings.

What's happening at Qantas now gives us some concern, because it seems the low-cost carrier is expanding much more than the mainline carrier, he said.

Lower wages paid by Qantas Airways' low-cost carrier Jetstar have angered workers at the Australian airline, and that, combined with plans to expand low-cost operations, were big factors in a labor dispute that grounded the entire Qantas fleet last month.

Most analysts say it is too early to judge the Air Canada initiative.

It can't go ahead without the unions' support, so we're just going to have to wait and see, said Canaccord Genuity analyst David Tyerman.

Air Canada has tried to launch low-cost carriers before. Zip Air, created in 2002 to compete with WestJet Airlines, shut down in 2004. Tango, which flew in Canada and the United States, was folded into the main fleet in 2003 after about two years in operation.

Rovinescu has said the new airline would focus on international leisure markets and would not cannibalize existing business, something that was the case for Tango.

Independent airline consultant Robert Kokonis questioned Air Canada's priorities.

Air Canada needs to focus on operating and managing the core airline, he said. When you open up a separate division, it could potentially take management's eye off the ball.

Several major carriers have failed to succeed with low-cost brands. British Airways sold off its money-losing regional budget carrier BA Connect in 2006, a year after the demise of Delta Air Lines' Song. United Airlines shut its four-year-old budget brand Ted in 2008.

(Additional reporting by Nicole Mordant in Vancouver and Narayanan Somasundaram in Sydney; Editing by Janet Guttsman)