* Q1 loss C$4.00/shr vs loss C$2.88/shr
* Adjusted loss C$2.99/shr excludes forex losses
* Revenue falls 12 pct to C$2.39 bln
* Shares plunge more than 25 pct (Adds analyst comments, updates stock prices)
By Susan Taylor
OTTAWA, May 8 (Reuters) - Air Canada ACa.TO said on Friday its quarterly loss deepened by 39 percent as demand continued to weaken, and the country's largest carrier said difficult conditions will continue through 2009.
Shares in the company, which threw cold water on widespread speculation it would file for bankruptcy protection to restructure its operations, plunged more than 25 percent.
The decline reverses a two-day stock surge of more than 50 percent, amid speculation that an "open skies" treaty with the EU could result in foreign investment in Air Canada.
"The financials were in line, there's no real surprises," said CIBC World Markets analyst Chris Murray in an interview.
"It was what we expected, given that the company's going into labor negotiations -- you certainly wouldn't expect to see any inflammatory comments or red flags."
Air Canada's class B shares shed 47 Canadian cents to end at C$1.33 while the class A shares dropped 46 cents to C$1.35 on the Toronto Stock Exchange on Friday. The stock has lost more than 80 percent of its value in the past 12 months.
"The bottom line is that even if Air Canada can avoid (bankruptcy) it will be saddled with a large debt burden that will impede its ability to compete, potentially for years," Versant Partners analyst Cameron Doerksen said in a note.
"Until the company solves its immediate balance sheet issues and successfully negotiates its labor agreements, we see no compelling reason to own Air Canada shares."
The airline, which faces a raft of difficulties as a sour economy and tough competition hammer its business, has set out a five-point plan that it hopes will help it avoid bankruptcy.
Finding relief from a C$2.85 billion ($2.48 billion) pension deficit tops the list, said the carrier, which is in talks with its unions and government officials on the issue.
"Even under the best-case scenario, total pension funding obligations this year will be C$507 million, up C$114 million from last year," wrote Doerksen.
"Put simply, Air Canada not only needs the proposed new government regulations to be enacted, but it also needs concessions from its labor groups (including a moratorium on funding the deficit) if it is to solve the pension issue."
Labor agreements expire at the end of May and June.
Liquidity is another crucial issue for the company.
Air Canada, which needs to rebuild cash levels despite tight credit markets, said it has significant assets available for financing and has set a long-term goal of cash levels at 15 percent of revenue.
It has begun talks with suppliers, banks, leasing companies and government on financing alternatives. With C$1.01 billion in cash as of April 30, it needs C$1.3 billion by the end of June to avoid violating certain covenants with a credit card processor.
"New financing solutions will be called for," recently appointed CEO Calin Rovinescu told analysts on a conference call. "A climate of labor stability throughout this period will be essential to get lenders and other partners on board."
The airline said it has to find new ways to generate revenue, cut costs and grow profitably over the long term.
Management has identified more than C$250 million in savings, up from C$100 million previously targeted, largely from improved efficiency. It expects to realize the savings over the next 18 months and wants to deploy more cost-cutting measures over the next two months.
Montreal-based Air Canada said its first-quarter net loss ballooned to C$400 million, or C$4.00 a share, from a year-ago loss of C$288 million, or C$2.88 a share.
Excluding charges of C$101 million on foreign exchange losses, it lost C$2.99 a share.
Operating revenue dropped 12 percent to C$2.39 billion from C$2.73 billion.
Passenger revenue fell 13 percent to C$2.01 billion, and the airline said it reduced capacity by 10.3 percent.
Overall costs per available seat mile climbed 5 percent, or 9.4 percent excluding fuel costs. ($1=$1.15 Canadian) (Reporting by Susan Taylor; additional reporting by Ashutosh Joshi in Bangalore, editing by Rob Wilson)