OTTAWA, Feb 7 (Reuters) - Transport Minister David Collenette urged Air Canada (AC) on Thursday to cut its huge market share and stop driving small competitors out of business or face a more active government presence. He said he thought the nation's dominant airline, which posted a C$1.25 billion ($788 million) net loss for the year on Thursday, was beginning to understand that Canada needed competition. He said it should concentrate on long-haul flights and on international routes. "Air Canada should decide what kind of airline it is," Collenette said of the formerly state-owned carrier. "I would have hoped that they would come to the conclusion that it is an international powerhouse, which it is, a transborder powerhouse, which it is, and a domestic airline which serves the full-service market on long-haul routes in Canada, and don't try and hammer every little guy on the block to death." He told reporters it was counterproductive, throwing good money after bad, to go after the small competitors. "But I don't run their business. But I think they're getting the message, and I think they're making some strides in cost-cutting, and I think they understand that unless things improve, then the government's going to have to be more proactive on the file," he said. "The government takes a great interest in this. We want to work with Air Canada to manage the situation, manage market share and enhance competition," Collenette said. "I would hope that they would continue to work with us to ensure an orderly reduction in market share." Some market-share reduction could occur if it discontinues some of the service to small markets that it was required to maintain as a condition for swallowing up the country's No. 2 carrier, Canadian Airlines. But despite Collenette's plea to stick to full-service business, the airline said earlier on Thursday its no-frills service, Tango, could grow very quickly and that its fleet size potential was limitless. Collenette did say he saw encouraging signs that other airlines would be offering more competition by the summer. Analysts said discount airline Canada 3000 failed last autumn in part because of heavy competition from Air Canada in an air market that was hit hard by the fallout of the Sept. 11 attacks.