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CALGARY, Alberta (Reuters) - Air Canada ACa.TO will cut 2,000 jobs and shrink its capacity by 7 percent as runaway fuel prices sap the profitability of many of its routes, the country's biggest airline said on Tuesday.
Air Canada's drastic action, which translates into a 7 percent cut in its 28,000-employee workforce, follows moves by the company to park older, gas-guzzling jets and to add fuel surcharges to fares in a bid to offset surging oil prices.
But in the five weeks since it imposed extra fees to deal with then-record prices, oil has surged another 16 percent to near $140 a barrel, surprising energy analysts.
"I don't know what the tipping point was, but there's no question that, in the last month or so, the fuel crisis has gotten worse for airlines and Air Canada's really kind of following the lead of most of the major U.S. airlines in cutting back capacity for the fall," Versant Partners airline analyst Cameron Doerksen said.
Also on Tuesday, Virgin America, the low-cost carrier partly owned by Britain's Virgin Group VA.UL, said it will cut its capacity by 10 percent in the fourth quarter.
High fuel costs and a sputtering U.S. economy have combined to force some U.S. airlines into bankruptcy protection, while spurring others, such as Delta Air Lines (DAL.N) and Northwest Airlines NWA.N, into merger talks.
Air Canada's capacity cuts, to take effect in autumn and winter schedules, will be deepest on its Canada-U.S. transborder network, which will shrink by 13 percent. International capacity will drop by 7 percent.
Domestic routes will be trimmed by 2 percent, reflecting the relative strength of the Canadian economy and travel demand despite high oil prices, spokeswoman Angela Mah said.
Air Canada now spends an average C$230 per passenger on fuel for a round trip, up 57 percent from 2007, it said.
The airline warned that cuts could be deeper than those detailed on Tuesday if fuel prices remain at current levels.
The Canadian Auto Workers union, representing sales and service agents, said about 400 of its members across the country will be laid off in the cuts, which it called "devastating."
Union officials said they will start talks with the airline in coming weeks to discuss ways to ease the blow.
The association representing Air Canada's 3,300 pilots said it did not know how they will fare as the airline has yet to detail which routes and aircraft will be cut back.
Doerksen said Air Canada's move -- its first layoffs since it emerged from bankruptcy protection in 2004 -- was necessary to maintain its financial health and shouldn't affect plans by its parent company, ACE Aviation Holdings ACEa.TO, to part with its remaining 75 percent stake.
ACE Chief Executive Robert Milton has been weighing options for winding up the holding company since last year, a process complicated by the overall industry's woes and Air Canada's weak stock price.
Air Canada's A-series shares jumped 29 Canadian cents, or 3 percent, to C$9.13 on the Toronto Stock Exchange on Tuesday.
The airline expects 2008 capacity to be in a range of up 1 percent to down 1 percent from 2007. That compares with a May forecast for an increase of between 1 percent and 2.5 percent.
WestJet Airlines Ltd (WJA.TO), the No. 2 Canadian carrier, has no plans to follow suit with cuts. Its fleet of newer, fuel efficient jets and a strategy of shifting capacity seasonally between domestic and international routes allows it to stick with expansion plans, Vice-President Richard Bartrem said.
WestJet expects its capacity to rise 16 percent in 2008. It aims to add two more Boeing 737s this year and seven in 2009.
Additional reporting by Janet Guttsman; editing by Rob Wilson