Air Canada warned Friday it will keep a lid on increasing its capacity next year, as it reported a sharp drop in operating profits in its third quarter.

High fuel costs pushed operating earnings down by nearly 12 per cent to $270 million, or 55 cents per share, seven cents above analyst expectations on average, according to a poll by Thomson Reuters.

That compared with $306 million, or 70 cents per share, in the same quarter a year ago.

The airline said it plans to cap capacity growth in 2012 to 1.5 per cent in 2012.

"In the event of a prolonged economic slowdown affecting travel demand, our fleet would provide us with the flexibility to adjust capacity as necessary to mitigate the negative impact," CEO Calin Rovinescu said in a release.

Air Canada shares closed down four cents at $1.36 on the Toronto Stock Exchange.


Air Canada 3-month chart

Operating revenue was $3.24 billion, up from $3.03 billion, coming in above average analyst expectations.

Expenses increased nine per cent in the period to $252 million, driven by a 47 per cent increase in basic fuel prices. The stronger Canadian dollar helped lessen the impact of some expenses in foreign currencies.

The Montreal-based carrier's shares took a beating in the quarter, falling 36 per cent despite posting a 3.8 per cent traffic growth as it grappled with labour negotiations and a string of negative economic headlines.

Air Canada is awaiting an arbitration ruling to establish a new collective agreement with flight attendants.

It reached agreement with customer service agents following a three-day strike in June and recently abandoned a judicial review of an arbitrator's pension ruling that will set up a hybrid pension model for new hires.

The national carrier angered pilots by seeking Ottawa's help to appoint conciliators to help negotiate a collective agreement.

With files from The Canadian Press