Montreal-based Air Canada, the country's biggest airline, is launching Rouge at a time when Canadians have a growing number of options for vacation travel. It will compete with Transat (TRZb.TO), WestJet Vacations (WJA.TO) and Sunwing Travel Group.

Rouge will eventually offer cheap flights to tourists visiting the United States, the Caribbean and Europe, starting in June 2013.

Tickets have gone on sale for flights to Venice, Italy; Edinburgh, Scotland; Athens, Greece; Cuba; the Dominican Republic; Jamaica and Costa Rica, Air Canada said in a statement handed out to reporters at a Toronto event to announce the operation's name.

The fight for share of the vacation market has become more important for Air Canada as main rival WestJet prepares to launch Encore, its Canadian regional airline.

Encore promises to undercut Air Canada fares on domestic short-haul flights.

Rouge, which will fold Air Canada's existing vacation package business into the new low-cost operation, will initially fly four planes from Air Canada's mainline fleet.

As Air Canada takes delivery of Boeing (BA.N) 787 Dreamliner aircraft, starting in 2014, it will funnel more planes into the Rouge operation. It said it planned to reach 50 aircraft in three to five years.

Air Canada has reported a string of quarterly net losses in recent years, weighed down by non-operating items such as losses on foreign exchange and interest expenses.

But the airline was profitable in the third quarter, boosted by a foreign exchange gain and higher operating income, as tight cost controls started to pay off.

Rouge, operating as a wholly owned unit of Air Canada, will have its own management team, headed by Michael Friisdahl, former chief executive of Thomas Cook North America.

Air Canada plans to hire 150 flight attendants and 50 pilots for Rouge and expects to generate profits by fitting its planes with more seats and paying lower wages.

Earlier this year, Air Canada secured new union deals that included lower wages and less-generous pension plans for new hires after more than a year of turbulent negotiations.

Customer service agents went on strike in the summer of 2011. The federal government passed legislation to prevent the two unions that represent pilots and mechanics and baggage handlers from striking, and there were short wildcat strikes involving members of both unions.

Air Canada Chief Financial Officer Michael Rousseau has said the new carrier will not have a material impact on Air Canada's 2013 results.

Shares of Air Canada rose 7 Canadian cents to C$1.77 on the Toronto Stock Exchange. (Reporting by Susan Taylor; Editing by Jeffrey Benkoe)

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