UPDATE 2-Air Canada pushes on with plan to cut costs, boost capacity

Mon Jun 10, 2013 6:48pm BST

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TORONTO, June 10 (Reuters) - Air Canada said on Monday that it expected to cut costs by up to 15 percent in the medium term, even as it boosts capacity, because of lower maintenance expenses, a new-low cost carrier and the addition of tightly packed fuel-efficient planes.

As competition heats up, Canada's largest airline will increase capacity 9 percent to 11 percent in 2014, bulking up on international routes where it is keen to expand its business. For 2013, the company expects capacity to climb 1.5 percent to 2.5 percent.

In the first major expansion of its wide-body fleet in a decade, the Montreal-based airline will add five new high-density Boeing 777-300ER planes between June and February. In 2014, it will take delivery of the first seven of 37 Boeing 787 jets it has ordered.

The company also expects to increase capacity with the start of its Rouge airline in July. The new low-cost carrier is aimed at high-volume leisure travel in the Caribbean, United States and other international markets.

Air Canada has also tightened its grip on costs.

"We do have a plan to transform Air Canada into a sustainably profitable airline," Chief Executive Officer Calin Rovinescu said on a webcast investor presentation.

The transfer of 15 Embraer 175 aircraft to privately held airline Sky Regional in 2013 will also contribute to the 15 percent reduction in overall costs per available seat mile.

The company now expects those costs to fall 0.5 percent to 1.5 percent, excluding fuel and unusual items, in the second quarter and full year. It previously forecast between a 0.5 percent decrease and 0.5 percent increase for the quarter.

Chief Financial Officer Micheal Rousseau would not specify when the company would reach the 15 percent target, other than to say it would be in the medium term.

Plane maintenance costs will fall by C$40 million ($39.3 million) in 2013, an improvement from a May forecast that they said would be unchanged from 2013. The savings, from new service agreements, follow last year's bankruptcy of Air Canada's former aircraft maintenance company, Aveos Fleet Performance.

Executives said in Monday's presentation that they targeted balance sheet improvement and a return on invested capital that exceeds its weighted average cost of capital by 2015.

After forging new labor deals with its unions and winning a government extension of the cap on special payments to its pension fund, Air Canada said it could eliminate the fund's C$3.7 billion deficit by 2020.

Air Canada shares rose nearly 5 percent earlier on Monday, but in afternoon trading, they were up just 0.4 percent at C$2.28.