MONTREAL - More travellers flying the expensive seats in the front of the plane helped Air Canada to sharply narrow its losses as the economy continued to slowly recover in the first months of the year.

Canada's largest airline (TSX:AC.B) reported Thursday that premium cabin revenues grew by $58 million or 15 per cent from last year, driven by a 10.6 per cent increase in traffic.

The gains accounted for almost 70 per cent of the $84 million increase in system passenger revenues, which rose to nearly $2.1 billion.

The first quarter marked an improvement from last year and sequential growth over the last six months. But it still remained well below pre-recession levels.

"Nonetheless, this is a positive indicator that business travel demand is slowly starting to return," Air Canada CEO Calin Rovinescu said during a conference call with analysts.

He said the improvement demonstrated that the airline's initiatives such as paid upgrade programs are starting to stick and that customers are recognizing the value of its business offering.

The business class gains were enjoyed in the Rapidair corridor connecting Toronto, Ottawa and Montreal as a result of improving economic conditions.

"Not only is business travel coming back in Canada, we're positioning Toronto as a great place to connect internationally from North America and we're having success in attracting business traffic to and from the U.S. Northeast," Ben Smith, chief commercial officer, told analysts.

Air Canada lost $85 million or 31 cents per share in the seasonally weak first quarter ended March 31. That compared with a loss of $400 million or $4 per share a year ago.

Operating revenues rose to $2.5 billion from just under $2.4 billion.

Air Canada said it expects to lose about $20 million in operating profits from flight cancellations after the closure of European airspace for five days in April because of volcanic ash from the volcanic eruption in Iceland.

As for its efforts to return to Billy Bishop Airport in downtown Toronto, Rovinescu said Air Canada was looking at "all means" of getting into the island airport as soon as possible.

It will appear in Federal Court in July in a bid to obtain slots. Rovinescu also suggested it may seek damages for having been evicted in 2006 by the airport's owners, who then started up Porter Airlines.

The airline said its capacity will increase by four to six per cent this year, but most of that will be allocated to international and U.S. routes.

Domestic capacity is expected to be flat to up 1.5 per cent, which should allow fares to increase, said Cameron Doerksen of Versant Partners.

Despite the encouraging improvements in premium travel, Doerksen was concerned by Air Canada's relatively low levels of profitability, still stretched balance sheet and the risk of higher fuel prices.

Air Canada had $1.6 billion of cash and short-term assets as of the end of March.

Air Canada shares fell 8.64 per cent, or 19 cents to $2.01 on the Toronto Stock Exchange.

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