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(Reuters) - Air Canada ACb.TO said on Wednesday it expected weakness in the Canadian dollar and adverse weather conditions to weigh on results in the current quarter, news that sent its shares sinking as much as 20 percent in morning trading.
The country's largest carrier, which widely missed analysts' expectations for the fourth quarter, said the Canadian dollar had weakened more than it forecast when crafting its budget.
First-quarter earnings before interest, taxes, depreciation, amortization and impairment, and aircraft rent (EBITDAR) could fall by between C$15 million ($13.6 million) and C$30 million from a year earlier, when it earned C$145 million.
The Montreal-based company told analysts on a conference call on Wednesday that it would consider trimming costs and raising prices when the timing was appropriate.
A fall in the Canadian dollar hurts Air Canada as the airline makes its major purchases, such as planes and fuel, in U.S. dollars.
Fears about low inflation in Canada and the possibility of an interest rate cut dragged the Canadian dollar to a four-and-a-half year low against the greenback on January 31.
The Canadian dollar was worth about 90.77 U.S. cents on Tuesday; it was near parity a year earlier.
Air Canada said it has U.S. dollar currency derivatives of about $1.55 billion and U.S. dollar cash reserves of $743 million, which will be available to help offset about 50 percent of its net U.S. dollar exposure in 2014.
WestJet Airlines Ltd (WJA.TO), Air Canada's main domestic rival, recently raised ticket prices to make up for rising currency-related costs. WestJet said it would raise prices again if the Canadian dollar slid further.
Air Canada forecast adjusted cost per available seat mile (CASM) to fall between 1 and 2 percent in the first quarter and 2.5 and 3.5 percent for the full year. CASM is a key metric that measures the cost incurred to fly a single seat for a mile.
For the full year, the weaker Canadian dollar is expected to hit Air Canada's CASM outlook by 1.4 percentage points.
The carrier said seat capacity will increase to between 3.5 and 4.5 percent in the current quarter compared to last year.
While Air Canada said it reported its best full-year financial performance, fourth-quarter results were hit by planes that were slightly less full than the fourth quarter of 2012 and lower yields. Passenger revenue per available seat mile (RASM) fell 1.7 percent.
Air Canada's CASM fell 2.3 percent in the fourth quarter ended December 31.
Adjusted CASM excludes fuel expenses, the cost of ground packages at Air Canada Vacations and special items.
The company's net loss narrowed to C$6 million, or 2 Canadian cents per share, from C$60 million, or 22 Canadian cents, a year earlier. Operating revenue rose to C$2.89 billion from C$2.84 billion.
Excluding financing expenses on employee benefits and other items, adjusted earnings were C$3 million, or 1 Canadian cent a share, compared with a loss of C$5 million, or 2 Canadian cents a share.
Analysts, on average, had been expecting earnings of 12 cents a share, according to Thomson Reuters I/B/E/S.
EBITDAR excluding the impact of benefit plan amendments for the fourth quarter was C$277 million, compared with C$283 million a year ago. Air Canada estimated that EBITDAR in December took a C$15 million hit from harsh winter weather.
Shares slumped 12.9 percent to C$6.81 in morning trading, after earlier sinking as low as C$6.20.
In January, shares briefly reached highs not seen since early 2008 before tumbling some 20 percent on concerns over the impact of the Canadian dollar.
($1 = $1.10 Canadian)
Additional reporting by Sneha Banerjee in Bangalore and Allison Martell in Toronto; Editing by Kirti Pandey and Bernadette Baum