* Q4 operating profit C$85 mln vs C$83 mln loss
* Adj loss C$0.06/shr vs Street view loss C$0.05/shr
* Q4 RASM 3 pct vs WestJet's 6.8 pct
* Air Canada stock dips 2 pct on Toronto Stock Exchange (Recasts with analyst comment, conference call, stock price)
By Nicole Mordant
VANCOUVER, Feb 10 (Reuters) - Strong business class demand helped Air Canada ACa.TO ACb.TO return to a quarterly operating profit and lay out optimistic forecasts on Thursday, but the results failed to live up to expectations set by its main domestic rival.
The results from Canada's biggest airline came a day after No. 2 carrier WestJet Airlines Ltd (WJA.TO) reported its quarterly profit doubled, partly because of a rebound in travel demand and tight cost controls. [ID:nN04206947]
"All in all, it is, relative to past performance, a strong performance from Air Canada but I think there were expectations of a better performance on the (passenger) yield side," said PI Financial analyst Chris Murray.
Air Canada's passenger revenue per available seat mile, RASM, a key industry measure, improved 3 percent in the fourth quarter but that was well below the 6.8 percent increase in RASM posted by WestJet.
"The stock had a good rally yesterday. All expectations were that they would put up similar yield growth numbers (as WestJet)," Murray said.
Air Canada's stock was down 8 Canadian cents, or 2 percent, at C$3.34 on the Toronto Stock Exchange on Thursday morning, after the carrier reported fourth-quarter operating income of C$85 million, a sharp turnaround from a year-earlier loss of C$83 million.
Premium cabin revenue increased nearly 21 percent, or C$88 million, in the fourth quarter. Business and first-class travel made up nearly 44 percent of all passenger revenues, Air Canada Chief Executive Calin Rovinescu said on a conference call.
Despite the strong rebound to operating profit for an airline that was on the verge of bankruptcy 18 months ago, Rovinescu cautioned of the impact of fuel prices, which have resumed a sharp climb in recent weeks.
"While there are encouraging signs the economy and our industry are continuing to recover, this remains tentative and fragile," Rovinescu said in a statement.
The latest operating results exclude a provision of C$46 million for a cargo investigation.
Excluding gains on foreign exchange and the cargo provision, the company posted an adjusted loss of 6 Canadian cents a share. On that basis, analysts on average had expected a loss of 5 Canadian cents a share.
Looking ahead, the Montreal-based airline said it planned to increase its 2011 system capacity, or available seat miles (ASM), by between 5.5 percent and 6.5 percent.
Air Canada said its costs, as measured by operating expenses per available seat mile, or CASM, are expected to decrease by up to 2 percent for 2011. In the fourth quarter, its unit costs decreased 3.4 percent.
"The guidance on costs and capacity are better than expected," said Canaccord Genuity analyst David Tyerman. "The question will be whether they get enough price increases to offset fuel costs."
Air Canada, which is about to start contract renegotiations with all its unions, held out an olive branch to workers on Thursday, offering them a special C$14 million equity payment after the company's sharply improved performance in 2010.
The Canadian Auto Workers union, which represents 3,800 customer sales and service agents, will start labor talks on Friday. Their contract expires on Feb. 28.
The contracts of four other unions -- pilots, flight attendants, mechanics and baggage handlers -- expire at the end of March.
Expectations are that unions, emboldened by Air Canada's stronger financial position, will push aggressively for better wages and benefits after they accepted status quo contracts 21 months ago to keep the company out of bankruptcy protection.
$1=$1 Canadian Additional reporting by Bhaswati Mukhopadhyay in Bangalore; editing by Rob Wilson