February 7, 2008 / 12:00 PM / in 10 years

UPDATE 3-Air Canada flies into the black, stock soars

(Adds analyst comments, updates stock price)

By Jeffrey Jones

CALGARY, Alberta, Feb 7 (Reuters) - Air Canada ACa.TO flew into the black in the fourth quarter as it added passengers in a healthy domestic market and cut non-fuel costs, the country’s dominant airline said on Thursday.

Air Canada executives said they expect revenues in the coming months to remain positive at home and even in the United States, where the economy has been drifting into a downturn and airlines are moving toward mergers.

“We’re still seeing very strong Canadian demand,” Chief Executive Montie Brewer told analysts. “The market’s grown quite a bit over the last three years and the trend’s continuing.”

The outlook and unexpectedly profitable fourth quarter -- helped by the replacement of older jets with more fuel-efficient Boeing 777s -- sparked hefty stock gains.

Air Canada A-series shares gained C$1.47, or nearly 18 percent, to C$9.66 on the Toronto Stock Exchange.

They had dropped 57 percent in the past year as some analysts forecast a weaker environment and investors worried about more shares coming on the market when parent ACE Aviation Holdings ACEa.TO parts with its remaining 75 percent stake.

“The move today is due to people maybe realizing that the stock was kind of oversold,” Versant Partners analyst Cameron Doerksen said. “There’s still this question mark about what ACE is going to do, but I think the results show the fundamentals of the company aren’t going to pot.”

The airline has started the year with a record Canadian load factor in January and forward bookings point to more of the same, Air Canada said. Transatlantic routes are still weak, but U.S. business remains strong, it said.

In the quarter, Air Canada earned C$35 million ($35 million), or 35 Canadian cents a share, up from a year-earlier net loss of C$144 million, or C$1.55 a share. The most recent quarter included foreign currency gains of C$20 million.

It had been expected to lose 22 Canadian cents a share, according to a Reuters Estimates poll of analysts.

Operating income was C$72 million, compared with a loss of C$5 million. Revenue rose 4 percent to C$2.5 billion.

The airline said it expects its capacity to increase this year by 2.5 percent to 4 percent, for both the Canadian market and on a system-wide basis.

However, operating income may be hurt by an expected increase in depreciation of between C$120 million and C$140 million, compared with 2007, due to investments in new aircraft and the refurbishment of older ones.

Quarterly operating costs fell by 3.9 percent per available seat mile to 12.4 cents, excluding fuel, Air Canada said. With fuel included, costs slipped by 2 percent as the newer planes helped weather oil prices that jumped to near $100 a barrel.

The airline has taken delivery of half the 18 Boeing 777s it will have in its fleet by 2009.

Brewer said he expects a U.S. airline consolidation wave to benefit his carrier, especially as it orders new planes.

In the past two days, it has been reported that Delta Air Lines (DAL.N) and Northwest Airlines Corp NWA.N could announce a merger as early as next week and that United Airlines UAUA.O and Continental Airlines Corp (CAL.N) are in the early stages of talks.

“It gives us another year or two of competitive advantage with having a superior product in the marketplace,” Brewer said. “And also, having gone through a lot of consolidation ourselves, consolidation causes you to look inwardly for quite a while, not outwardly. So we look to take some advantage from the fact that they are distracted.”

$1=$1.01 Canadian Additional reporting by Scott Anderson; editing by Janet Guttsman

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