Air Canada to generate income from on-board entertainment when it goes public Luann Lasalle Canadian Press Tuesday, October 31, 2006 MONTREAL (CP) - Air Canada wants to offer seat-bound travellers the diversion of cutting edge in-flight entertainment and services, such as video games and the Internet, as part of a strategy to broaden its revenue base as it becomes a separate publicly traded company again. The onboard entertainment would complement Air Canada's current strategy of allowing passengers to select and pay for the services they want, which allows Canada's biggest air carrier to compete with both no-frills and full-service carriers. "Management believes it can generate additional revenue by offering buy-on-board, in-flight entertainment content, Maple Leaf Lounge access as well as a host of other products and services at the initial point of purchase," Air Canada said in an initial prospectus filed with regulators on its recently announced public offering of shares to investors. "While the concept is new to the airline industry, it has been successful in other industries such as the computer and automotive industries," the prospectus said. As is usual corporate practice for pending financings, Air Canada didn't comment publicly Monday on the contents of the prospectus, which outlines the broad measures of the company's planned IPO. Final details on the price and number of Air Canada shares to be issued to the public is expected before the end of the year. Owned by parent company ACE Aviation Holdings Inc. (TSX:ACE.A), Air Canada emerged from bankruptcy-court protection in 2004 and it hasn't been publicly traded since. The plan to wind up ACE and spin Air Canada out into its own company was announced in August, following similar spinoffs of minority stakes in the Aeroplan (TSX:AER.UN) and Jazz (TSX:JAZ.UN) subsidiaries. The offering of Air Canada shares would initially raise $200 million, with a second offering to follow. But the prospectus did not disclose what percentage the minority stake will represent or estimate an initial value for Air Canada shares. CEO Robert Milton has said he wants to increase the value of Air Canada, which he says is currently underpriced by the market. Analyst Ray Neidl of U.S.-based Calyon Securities said that while Air Canada has had a good reputation for its in-flight service with full-fare travellers, there's tough competition these days for business and first-class travellers, who want "some kind of service add-on," Neidl said. "They can make their own reservation but in-flight service is important." He said the hotel business, to some degree, offers clients extra services they can purchase and Air Canada "are trying to do that with the travelling public in Canada. Right now, it's in the experimental stage. I'm not sure if you can determine yet whether or not it's successful, but it's something I think that other airlines are keeping an eye on, including West Jet (TSX:WJA)." He noted some travellers want to sleep or read but "other people have got to have action and they'd be willing to pay to have access to better movies, video games and things of that nature." Some airlines are starting to offer Internet services, he added. As part of its effort to compete against low-cost and full-service airlines, Air Canada recently announced that customers can purchase or decline different services when they book online with Tango, Tango Plus, Latitude and Executive fare categories. Air Canada has also announced an unlimited pass for frequent travellers within Canada and the continental United States who can make fixed monthly payments to avoid full up-front costs. The prospectus says the airline wants to reduce the number of single-purchase transactions, which account for a substantial share of its revenue, and move to a pass or subscription revenue system. "This would allow Air Canada to reduce expenses associated with credit cards, global distribution systems, advertising and overhead fees, among others. Air Canada continues to develop the technology to support new products that would enable customers access to unlimited flying during a given period of time for a fixed fee," the airline said in the document. In addition, it said Air Canada is developing a web-based computer reservation system that will be introduced in phases starting late in 2007. "The new technology is expected to be innovative, flexible and cost effective and will allow Air Canada to facilitate and streamline the reservation and travel processes for both its customers and employees." ACE Aviation B shares closed at $39.00, up 64 cents, on the Toronto Stock Exchange.