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Air Canada operating profit drops on fuel costs

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Surging fuel prices contributed to a sharp drop in operating profits at Air Canada (AC.B-T) and the airline posted a net loss for the third quarter Friday.

The slide in operating profit came even though Canada's largest airline completed its cost-reduction program in the quarter, reaching $530 million in annual savings.

"We experienced a strong revenue performance in the quarter, however the revenue growth did not keep pace with the increase in operating costs, given a higher price of fuel," said Chief Executive Calin Rovinescu on a conference call.

Operating profit dropped to $270 million from $306 million a year earlier. Operating revenue rose 7 percent to $3.24 billion, but operating expenses rose 9 percent, thanks to a 47 percent increase in fuel prices.

"All and all I'd call it an in-line quarter, with reasonable expectations to move forward," said PI Financial analyst Chris Murray in an interview. Murray highlighted the cost-cutting program, calling the savings "substantial."

For 2011, the Montreal-based airline said it expected system capacity to increase by 4.0 to 4.5 percent, but citing the economic environment, also said it will aim to raise capacity no more than 1.5 percent in 2012.

Air Canada's net loss came in at $124 million, or 45 cents a share, compared with a net profit of $317 million, or $1.10. Adjusted for foreign exchange losses, it earned 55 cents a share.

Passenger revenue per available seat mile, an industry performance benchmark, rose 5.1 percent from the same quarter last year, due to yield growth and higher load factors.

Higher yields came thanks to higher fares, fuel surcharges and more premium traffic, the company said. Rovinescu said the quarter's load factor of 85.8 percent set a new record.

LABOUR TALKS CONTINUE

Despite months of labour strife, Rovinescu said he was determined to bring the airline's pension deficit under control, calling pension reform critically important to the company's prospects.

The airline's check-in and call-center staff went on strike in June over pensions for new hires. Their union threatened further job action in October, after the airline appealed an arbitrator's ruling on the issue, and the company subsequently withdrew its appeal.

Rovinescu also spoke about the airline's decision to ask the government to appoint a conciliator for its negotiations with the Air Canada Pilots Association. That move started the clock towards a legal strike or lock-out position.

"We cannot have an open-ended timeframe, with labor uncertainty overhang indefinitely," said Rovinescu. "We have to act responsibly for our customers and other stakeholders."

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