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Air Canada is the latest airline to announce cutbacks in the face of rising fuels costs. ((CBC))

Air Canada said Tuesday it plans to eliminate 2,000 jobs and reduce its capacity as the company joins the list of airlines cutting back in the face of higher fuel prices.

Air Canada also hinted that more capacity cuts may be necessary if fuel costs remain at their current levels.

The country's biggest carrier said it will reduce its overall capacity by seven per cent in the last three months of this year and the first quarter of 2009.

The airline said fuel prices have more than doubled over the past year, and that a $1-per-barrel increase in the price of oil adds $26 million to its annual fuel bill.

Most of the job cuts are expected to take effect Nov. 1 and will be spread across the country. The company has the equivalent of 23,900 full-time employees.

Air Canada said fuel is its single biggest expense — accounting for more than 30 per cent of its operating expenses. The company expects its total fuel charge will be $1 billion higher this year than last year.

"The loss of jobs is painful in view of our employees' hard work in bringing the airline back to profitability over the past four years," said Montie Brewer, Air Canada's president and CEO.

"I regret having to take these actions but they are necessary to remain competitive going forward. Air Canada, like most global airlines, needs to adapt its business and reduce flying that has become unprofitable in the current fuel environment," Brewer said in a release. "If fuel prices remain at current levels, we can anticipate further capacity reductions."

Air Canada said it expects the price of jet fuel will average 93 cents per litre for 2008.

The airline projected it will cost an average of $230 in fuel this year to carry one passenger on a round-trip journey, after factoring in the company's fuel hedging program. That is up from $146 last year and $110 in 2004.

13% cut to U.S. routes

Air Canada said it  plans to cut capacity on its domestic routes by two per cent, its routes into the U.S. by 13 per cent and its international capacity by seven per cent.

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The airline said it will suspend its Toronto-Rome non-stop service until the peak summer season, and halt Vancouver-Osaka non-stop services on Oct. 26.

The airline's revised fall-and-winter flying schedule and changes to its fleet of aircraft will be announced at a later date.

The Class A shares of Air Canada rose 29 cents to close at $9.13 on the TSX.

Air Canada's competitor, discount carrier WestJet, said it has no plans for flight cancellations or layoffs. Last month, Calgary-based WestJet followed Air Canada and implemented a fuel surcharge.

"We believe [the surcharge] was the fairest and most transparent way to deal with the issue at hand, which is fuel," said WestJet spokesman Richard Bartrem.

"But we'll not be introducing anything like charging for a first or second checked bag or anything in that regard … the fuel surcharge is helping us weather the storm, as it were, for these record fuel prices."

Airline analyst Joseph D'Cruz said the North American airline industry has been hit by a "perfect storm.

"The U.S. airlines are suffering badly, and one or two of them may go bankrupt because as fuel rises they're slapping [on] surcharges, and at the same time there's a recession the United States," said D'Cruz, a professor at the University of Toronto's Rotman School of Management.

"The two things together — higher surcharges and the recession — are dampening demand, and that is hurting cash flow in the United States to the point where some of those airlines may be pushed into bankruptcy."

Several U.S. airlines have already announced cuts to their fleets and staff in the face of higher fuel costs and soft demand.

United Airlines, which announced cutbacks earlier this month, said Tuesday its fuel bill is on track to hit $9.5 billion US this year, up more than $3.5 billion from last year.

The second-largest U.S. carrier submitted the fuel cost figure in a statement given to the U.S. government in support of legislation aimed at tackling volatility in oil trading.