* Q1 loss C$0.31/shr vs yr-ago loss C$4.00/shr
* Revenue up 5.4 pct to C$2.52 bln
* Says industry still fragile, pace of recovery uncertain
* Stock falls 7.3 pct on TSX (New throughout, changes dateline from Toronto. Adds details from conference call, analyst's comment, byline)
By Susan Taylor
OTTAWA, May 6 (Reuters) - Air Canada ACa.TOACb.TO reported a narrower quarterly loss on Thursday, but its shares tumbled along with other airline stocks on concern that fallout from Europe's debt crisis could derail the industry's recovery.
Shares of Canada's largest airline were already down sharply late Thursday afternoon when U.S. airline stocks swooned on fears of a double-dip recession should the debt crisis spread beyond Greece. By the time markets closed, Air Canada shares had shed 7.3 percent of their value.
The company said earlier it expects to take a C$20 million ($19 million) hit in the second quarter because of flight cancellations in April after an Icelandic volcano spewed ash clouds over Europe.
Even so, Air Canada said it is well positioned to weather an uncertain economic rebound as it cuts costs from operations and sees encouraging travel trends, such as a 15 percent increase in premium travel.
"The key take-away is continued focus on non-fuel costs and wisely managing their capacity," said Robert Kokonis, managing director of airline consulting company AirTrav Inc.
Just 10 months ago, the airline was teetering on the edge of bankruptcy protection, sideswiped by the recession and a heavy debt load before reaching last-minute financing and labor deals with its unions.
Some analysts on Thursday were quick to point out that the company was still vulnerable, even without referencing the chances of a fresh economic downturn triggered by the European turmoil.
"While positive trends, particularly in premium travel demand, are encouraging, we continue to have several concerns about Air Canada, including still relatively low levels of profitability and the risk of a rise in fuel prices, among others," Versant Partners analyst Cameron Doerksen said in a note.
Air Canada also faces a "stretched" balance sheet, labor contracts that require renewal in about a year, and a weak stock price, Doerksen said.
In the first quarter, Air Canada lost C$85 million, or 31 Canadian cents a share, compared with a loss of C$400 million, or C$4.00 a share, a year earlier.
The company recorded a C$100 million foreign exchange gain in the quarter and a C$101 million foreign exchange loss in the same period last year.
On an adjusted basis, the airline reported a loss of 62 Canadian cents a share.
Revenue rose 5.4 percent to C$2.52 billion as passenger revenue grew 4 percent
Analysts on average had expected the airline to report a loss of 94 Canadian cents a share, before items, on revenue of C$2.48 billion, according to Thomson Reuters I/B/E/S.
Unit costs, measured by operating expense per available seat mile, fell 3.7 percent compared with last year. Excluding fuel costs, it fell 4.2 percent.
"We do not expect a quick economic recovery -- more a marathon than a sprint," Chief Executive Calin Rovinescu said on a conference call with analysts.
While encouraged by signs of economic recovery through the quarter, he said the airline industry is still fragile.
The airline said it remains on track to reach target savings of C$270 million annually by the end of 2010 and C$500 million by the end of 2011.
It plans to increase its full-year 2010 capacity, as measured by available seat miles, by 4 percent to 6 percent over the full-year 2009 level. The full-year cost per available seat mile, excluding fuel, is seen falling by 2 percent to 4 percent.
For the second quarter, Air Canada plans to increase capacity by 4.5 to 5.5 percent over year-earlier levels and it sees second-quarter costs falling by 1.5 to 2.5 percent.
At quarter's end, the company had C$1.6 billion in cash. Current long-term debt rose to C$677 million at the end of March from C$468 million at the end of 2009, Doerksen wrote.
Air Canada also reported April traffic earlier on Thursday. Its load factor rose to 82.4 percent from 81.1 percent and traffic grew 1 percent as capacity fell 0.7 percent.
Air Canada's class B shares lost 16 Canadian cents to close at C$2.04 on the Toronto Stock Exchange on Thursday.
$1=$1.06 Canadian Additional reporting by Euan Rocha in Toronto and Bhaswati Mukhopadhyay in Bangalore; editing by Frank McGurty