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.

"The Air Canada Leisure Group will be well positioned in the highly competitive but growing leisure segment in Canada, with its strong value proposition and competitive cost structure," said Michael Friisdahl, who is heading up the new venture, at a launch event in Toronto.

Rouge will offer cheap flights to tourists visiting the Caribbean and Europe, starting July 1, 2013 - not June, as was previously announced.

Tickets went on sale on Tuesday for flights to Venice, Italy; Edinburgh, Scotland; Athens, Greece; Cuba; the Dominican Republic; Jamaica and Costa Rica.

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 will expand to other destinations for next winter, said Chief Commercial Officer Ben Smith. As Air Canada takes delivery of Boeing (BA.N) 787 Dreamliner aircraft starting in 2014, it will funnel more planes into Rouge.

The airline plans to reach 50 Rouge aircraft in three to five years, Smith said. He said the venture is expected to be profitable in the "short, medium and long term".

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.

The leisure unit, a wholly owned subsidiary formed by combining the new airline with Air Canada's existing vacation package business, will initially use four Rouge planes taken out of Air Canada's mainline fleet.

Rouge will take over some flights previously operated by Air Canada Vacations, as well as the mainline fleet's seasonal service to Athens.

The unit will have its own management team, headed by 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 9 Canadian cents to C$1.79 on the Toronto Stock Exchange. (Reporting by Susan Taylor and Allison Martell; Editing by Jeffrey Benkoe, Dan Grebler and Andrew Hay)

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