MONTREAL - Air Canada (TSX:AC.B) is seeing small signs of improvement in air travel but says a full recovery in its key business class could be least a year away, the airline's chief executive said Friday.

"The worst of the worst seems to be behind us. Sprouts of green are coming up from the earth," Calin Rovinescu said during a conference call about the airline's third-quarter results.

However, an airline such as Air Canada that is more reliant on business travel will take longer to recover, he warned analysts, noting a full recovery to 2007 revenue levels could be 12 to 18 months away.

The Montreal-based airline is Canada's largest passenger carrier. Its largest domestic rivals are Calgary-based WestJet Airlines Ltd. (TSX:WJA), which also operates a scheduled service, and Air Transat (TSX:TRZ.B), a Montreal-based charter airline.

While this recession is marked by its long duration, Rovinescu said he's not witnessing any permanent change in travel patterns.

In spite of lower passenger and cargo revenue, Air Canada reported a profit in the third quarter - thanks to lower fuel prices and foreign exchange gains.

The airline reported net income of $277 million or $2.44 per share for the quarter ended Sept. 30. That was an improvement from a year-ago net loss of $132 million or $1.32 per share.

The quarter's profit included $295 million in foreign exchange gains, in contrast to an $87-million foreign exchange loss in the third quarter of 2008, Air Canada said.

On an adjusted basis, the airline beat expectations by reporting a loss of 19 cents a share. The earnings were adjusted to remove gains of foreign exchange and a gain on assets of $1 million during the quarter.

Air Canada's operating revenues totalled $2.7 billion for the quarter, down from $3.1 billion last year.

"We continue to perform well in comparison to other North American carriers, with one of, if not the smallest, reductions in third-quarter unit revenues," Rovinescu said.

Analysts had pegged Air Canada's earnings per share at 38 cents and revenue at $2.6 billion, according to estimates compiled by Thomson Reuters.

Cameron Doerksen of Versant Partners upgraded his rating to neutral from sell based on the airline's cash position, early signs of recovery in air travel and the substantial share-price decrease in the last month.

"We suspect that, as more evidence of a market recovery becomes apparent, that the shares will potentially strengthen," he wrote in a report.

The airline has made a series of changes it said were pivotal to managing through the weak economic conditions.

A nearly $250 million equity offering brought its cash balances to close to $1.5 billion, providing it more "financial flexibility to meet future challenges."

The airline continues to target $500 million in cost savings and revenue enhancements by 2011, including $50 million this year. It is on track to achieve $145 million of the planned $250 million in savings by 2010.

But National Bank Financial analyst David Newman said "much more is required, likely up to $1 billion to $1.5 billion."

While not willing to cede its domestic market share, Air Canada said it plans to focus on building its international network and partnerships. It is adding new routes to Brussels, Athens and Barcelona, Spain, and will reinstate service from Toronto to Tokyo.

It also expects to gain unspecified incremental revenue from a new joint venture that splits proceeds for travel on North Atlantic routes with Lufthansa, United Airways and Continental Airways as of January.

The airline said it is also pushing for a culture change within its operations which will incorporate simplified processes and a "just-do-it" mentality.

Air Canada posted operating income of $68 million for the quarter, a drop from $112 million recorded a year ago. The airline said its operating results continued to be affected by weak economic conditions.

The airline said passenger revenue fell by 13 per cent in the July-September quarter from the previous year to $366 million.

Air Canada saw a 2.1 per cent drop in passenger traffic and cut capacity by 3.3 per cent. It expects capacity will increase one to two per cent in the fourth quarter but be down 4.25 to 4.75 per cent for the year.

Air Canada shares closed at $1.16, up two cents Friday on the Toronto Stock Exchange.