Air Canada CEO says discount market vital as business market declines GILLIAN LIVINGSTON Canadian Press Thursday, August 01, 2002 TORONTO (CP) - As Air Canada posted its first profit in more than a year amid turbulence in the industry, its chief executive urged its unions Thursday to help the company's new no-frills airline Zip grab market share from rival WestJet. In a conference call with analysts, president and chief executive Robert Milton said its unions need to "get on with it" and follow the leadership of its pilots union - which has already reached a deal for the new Calgary-based low-fare carrier that will start flying short-haul routes in Western Canada starting Sept. 22. Air Canada's unions have been wary about the low-cost carrier and the fact Zip's workers will take over the work on some routes that are currently flown by Air Canada. "It is incumbent upon those unions leaders to get on with it. Otherwise, in my view, Air Canada will only shrink," Milton said, noting that the low-fare market "is obviously the most buoyant segment of this industry." "Our pilot group took a leadership position and it's my view that the other groups will follow recognizing the importance of this initiative," Milton told analysts during a conference call to discuss its profits of $30 million in the second quarter. The discount market is becoming more important, Milton said, as business travel continues to suffer following the Sept. 11 terrorist attacks on the U.S. and the bursting of the dot-com bubble during the past year. Air Canada's troubles began even earlier and the last time the carrier reported a profit was in the third quarter of 2000. The $30 million profit for the three months ended June 30, amounted to 23 cents per share and was on revenue of $2.55 billion, flat when compared with the year-earlier quarter. Last year, the company's second quarter loss was a steep $108-million or 90 cents a share but because of changes in accounting standards relating to foreign exchange, the earnings were restated Thursday to show a profit of $44 million, or 32 cents per share, in the second quarter of 2001. Air Canada lost $1.25 billion in 2001 and added a loss of $219 million in the first quarter of this year as it dealt with a severe industry slowdown by cutting jobs, shifting capacity away from business class towards lower fares, and altering routes away from U.S. destinations. Canada's dominant carrier said a decline in business travel was offset by an increase in passenger traffic after Air Canada introduced new discount brands Tango - whose service grew by 70 per cent - Jazz and Zip. Milton said the changes made are the right ones. "Clearly we're on the right track." Air Canada's latest low-fare initiative, Zip, will replace 15 daily flights of the main brand between Calgary and Winnipeg, Edmonton and Vancouver, and Edmonton and Winnipeg. But it hasn't got off the ground yet. The company's workers are taking the airline to the Canadian Industrial Relations Board to prevent it from hiring workers outside existing union contracts. One of its unions is also upset over Zip's plans to make its flight attendants double as passenger agents and reservation agents. Those are separate jobs at the main airline and are represented by different unions. Jacques Kavafian, director of research at Octagon Capital, said the unions "are effectively trying to block" Zip because it needs "advantageous" union agreements for it to work. Coinciding with a one per cent increase in passengers was a one per cent reduction in flying capacity. The airline's load factor - the proportion of seats filled - rose to 75 per cent. Kavafian said the company made major changes but was only able to post a small profit. "That's how tough the whole environment is," he said. Air Canada is right to move into the low-fare markets because it's losing market share in Canada to the growing WestJet, he said. Weakness in business travel, as well as in regional traffic and flights to and from the United States, "remains an ongoing challenge," Milton said. Still, he expects Air Canada (TSX:AC) to remain profitable in the current quarter. Chief financial officer Robert Peterson said that "premium business class traffic continues to experience double-digit declines," one of its major markets. "While I expect business traffic will return to some degree, it is not our expectation. That's why we have reconfigured this airline the way we have," Milton said. "It will not return to the extent we knew during the high-tech boom." Air Canada's shares on the Toronto stock market rose 13 cents to $6.83 in trading Thursday. 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