Air Canada optimistic on recovery despite high fuel prices, U.S. fallout ALISON AULD Canadian Press Tuesday, May 14, 2002 HALIFAX (CP) - Surging fuel prices, a free fall in the American airline industry and the emergence of more discount operators are putting added stress on Air Canada, making it difficult to predict when the dominant carrier might return to profitability, the company's president said Tuesday. Robert Milton could only offer cautious optimism to a small group of shareholders at the airline's annual general meeting, saying economic uncertainty is hampering a quick recovery in the industry. Climbing fuel costs and the faltering American airline sector have hit the Canadian airline particularly hard, he said. "We're now being affected by ever-escalating fuel prices in an extremely weak U.S. market, which has been a cornerstone of our existence," Milton told about 75 people at a Halifax hotel boardroom dominated by empty seats. "It has a very significant impact on us. This was a market where we were generating our most significant profits and we've seen that all change." Despite that, the CEO of the airline hinted he is considering starting another carrier that would offer long-haul, low-fare flights, possibly overseas. Milton said his marketing department was closely watching Australia's Quantas Airlines experiment with Australian Airlines, a recently launched low-cost subsidiary. "I see that having applicability in the Canadian market because the Canadian market features tremendously high summer volumes of tourists visiting from the world over," Milton said. "We're willing to adopt some of the best things that other airlines are doing." Milton, whose company witnessed a record loss of $1.25 billion last year during one of the worst slumps in the history of the industry, said it was working to reposition itself to recover from the dramatic fallout of the Sept. 11 attacks. The airline will continue to develop its low-cost carriers with the introduction this summer of Zip Air, a low-fare subsidiary based in Calgary that will offer short-haul flights. Milton said the decision to develop more no-frills services has proven successful with Tango, its first low-fare carrier that expects to operate in 23 Canadian cities this summer. Competition from an increasing number of discount carriers has forced the airline to reorganize its services to capture more of a market looking for reasonably priced airfares. Atlantic Canada is seeing more players move into the area, once dependent only on Air Canada for service. Halifax-based CanJet recently announced plans to re-launch its low-cost carrier this summer, joining Conquest in offering flights to Toronto. And WestJet has moved into Moncton, N.B., with plans to expand. "The real factor that's changed the world as we know it is the advent of the low-fare, short-haul player, a la WestJet or Jet Blue," he said, referring to two discount lines. "We have to play that game." The company is hoping the success of its new cheaper carriers will help stave off further losses from the impact of terrorism on the U.S. airline industry, which has been in a tailspin. Heavyweights, such as US Airways, are rumoured to be discussing bankruptcy. In Canada, Ottawa provided $160 million in direct aid to airlines to compensate for lost business immediately after the terrorist attacks. Milton, who was paid more than $1 million last year, said the company was hoping to see a profit in its critical third and fourth quarter when air traffic is traditionally at its highest. Jacques Kavafian, an analyst with Octagon Capital in Toronto, said it's likely Air Canada will see a profit in those quarters. "There's going be a profit in every quarter," he said. "They'll end the year with a small loss of about $20 million, but they'll earn $120 million profit next year." Milton said the company is also considering introducing an upgraded, luxury service on some of its planes, but wouldn't reveal details. He dismissed claims that Canadian travellers are fed up with Air Canada's service in the wake of its merger with Canadian Airlines, which caused a public outcry over long waits and forced the airline to launch an ad campaign apologizing for inconveniences. "I look at the global landscape of this industry and I feel pretty damned good about where we are," Milton said. "Despite what people think I get letters all day long complimenting our people on the job they do." The airline also got 680 complaints from June 30, 2001 to Dec. 31, 2001, according to the federal commissioner who handles some of the disputes between customers and Air Canada. 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