I agree with most of the earlier posts about service, operational performance, and other improvments that can be made at AC. My personal view is something like this (although many points have already been mentioned).
1) New managment - I don't know if it's just Robert Milton or the entire AC managment team, but AC is just heading in the wrong direction. Tango right now pretty much eats away mainline leisure traffic; Zip is not going to work unless its point is to beat out discount carriers. New managment needs to come in and take a look at things all across the board, including:
2) Employee moral - I don't know what it is about AC employees, but their moral does seem rather low, not to mention that most of them are anti-WestJet. Maybe this is what AC has been telling the employees. But anyways, morale needs to rise - make people happy to be working for Air Canada. You should have some kind of core review, review everyone from up top down to the bottom, perhaps increase employee benefits (like more free non-rev'ing). Anything to keep AC's employees happy, if that does not work, get rid of some of them, and if need be, hire some new, more skilled ones.
3) Operational performance - I usually try to fly half AC and half WestJet when travelling within Canada, and one thing I have noticed is that AC's operational performance is consistently poor. Whether its delays of 3 hours+ or lost bags on a simple leg such as YVR-YYC, I have seen it all happen (to me as well as to others). Get the planes pushed back at the departure time, get the bags where and when they are supposed to be. I have no insider knowledge but I know this can be done if you have enough skilled, happy employees.
4) Customer service - once you have #2 and #3 nailed down, complaints will go down. You won't have to stand in line behind a guy bitching at an AC agent at 2am in YVR. And when people do complain, if it is valid (say their flight was delayed 4 hours and somehow they missed their connection or something), apologize and offer something back - don't be reluctant to offer hotel vouchers or vouchers for future flights. As long as these things don't happen often, it won't hurt your pocket too much.
5) Public Image/Relations - with the above all nailed down, eventually the complaints about Air Canada will go down (at least about customer service). Once that's down, more people will choose the incentives that AC offers over competitors most of the time if fares are more or less the same (Aeroplan miles/status being the primary reason). And also, people need to see AC as a world class carrier, not a public enemy, advertising about the exotic destinations around the world AC flies to, advertise about business and first class service. Because WestJet is not everything to everyone; the old lady or businessperson sitting next to me on a WestJet flight probably does not appreciate jokes about getting passengers to pick up on one of the flight attendants.
6) Route structure/aircraft
The 732s really should go, at least the majority of them. They do look somewhat crudy (just like WJs 732s), you have A319s and A320s - stick to them. They are much more fuel efficient and give passengers a more modern looking cabin, which goes with the image of a world class carrier.
As for route structure, it used to be (I don't know if it is anymore), AC's and Canadian's big money makers were the international routes and the domestic routes were the ones where AC and CP duked it out. Go back to that idea, expand/enhance international/transborder destinations and profit for them. When it comes to domestic traffic, just have the mainline routes and AC regional routes to connect passengers to those international routes. You don't have to have a fare war with WestJet, just match or come near matching WJ's fares where you need to, but by no means do you need to undercut them. Let the international routes subsidize the domestic ones - you'll still be out ahead. And right now, if you want to charge something high for something like YYZ-YUL, go right ahead, as long as its not an outrageous fare (e.g. $500+), take advantage of the fact that there is no competition.
So yeah, those are my thoughts. Thanks for reading to the end.