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Air Canada is grounding 40 aircraft, scrapping a dozen routes and slashing capacity during the peak summer season, largely because of the "ruinous effect" of the SARS outbreak.

The insolvent airline, which lost more than $5-million a day in April after filing for bankruptcy protection, said traffic on Asian routes is down about 60 per cent, while traffic through Toronto is down more than 25 per cent due to concerns over severe acute respiratory syndrome.

"SARS will clearly have a sustained impact in every affected area of the world and has already had a ruinous effect on our summer, 2003," Robert Milton, Air Canada's president and chief executive, said in a news release.

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"I do not expect international travel demand to Canada to recover in the near term."

Air Canada did not mention job cuts in the release. But spokeswoman Laura Cooke said the impact on the company's workers will be discussed as part of continuing talks with its labour unions.

The Montreal-based airline said summer capacity will be 17 per cent below last year, and most capacity and route cuts affect flights to Asia and the United States.

Air Canada said it will cut Asian travel by 60 per cent, scrapping its Toronto-Tokyo/Narita flights and its Vancouver-Nagoya flights for a year.

Capacity to the United States will fall by 25 per cent, as Air Canada cuts routes including Toronto-New Orleans and Calgary-Chicago during the summer and suspends service to Dayton, Ohio, and Grand Rapids, Mich., indefinitely.

Airline capacity is measured by the number of seats available multiplied by the average length of a flight.

Mr. Milton said the cuts are necessary because of a "terrible revenue environment" resulting from the SARS outbreak on the heels of the war in Iraq. He said the second and third quarters will be among the worst in Air Canada history.

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But the reductions announced yesterday, Mr. Milton said, "will not be sufficient to stem the losses, and immediate cost reduction is required in all areas."

Air Canada has completed plans for a major overhaul of its operations that will be presented to the airline's creditors over the next couple of days.

Sources say the plan includes moving to smaller aircraft, charging more often for meals and snacks and introducing a simpler, more transparent fare structure.

Sam Barone, president of the Ottawa-based consulting firm Transportation Partners, said the airline will have to move faster to implement the plan in light of its worsening environment.

He said he expects Air Canada will emerge from bankruptcy, but said there's always a chance the airline could be forced to liquidate its assets and shut down.

Pam Sachs, who represents flight attendants at the Canadian Union of Public Employees, said she expects Air Canada will get rid of a "substantial number" of workers as it grounds 40 aircraft.

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Air Canada currently has 336 aircraft in its fleet.

Ms. Sachs said CUPE wants to help Air Canada to reduce its work force, but she said labour cuts should come through early-retirement incentives, not layoffs.

CUPE believes the SARS outbreak is not enough for Air Canada to invoke the clause in its contract that would allow it to lay off flight attendants.

Air Canada's operating loss for April was $152-million, or $5-million a day. The April losses are particularly dire given that Air Canada has not been paying its aircraft leases since it filed for bankruptcy protection on April 1 of this year.

For the first quarter ended March 31, Air Canada reported an operating loss of $354-million, or about $4-million a day, compared with a loss of $160-million in the first quarter of 2002.

Air Canada also restated its financial results for 2002 to include a $400-million write-down of a tax valuation allowance. That put the airline's 2002 loss at $828-million or $6.89 per share, compared with $1.3-billion or $10.95 per share in 2001.

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Air Canada is scheduled to return to court this morning, where a judge is expected to rule on whether to endorse a contract between Air Canada and Canadian Imperial Bank of Commerce for the exclusive right to buy Aeroplan frequent-flier miles.

Five credit-card companies -- Royal Bank of Canada, American Express Co., MBNA Corp., Citigroup Inc. and Bank One Corp. -- have submitted bids to Air Canada's court-appointed monitor, Ernst & Young Inc., in an attempt to wrest the lucrative contract from CIBC.

Sources say Air Canada has been in talks with CIBC to see if it would sweeten its bid.

Other items scheduled to go before Mr. Justice James Farley today include:

Airports are asking Air Canada to pay its outstanding bills more quickly;

A syndicate of Canadian banks has filed a motion asking the judge to limit protection for the company's executives and corporate directors. The banks argue that a $170-million "directors' charge" should not cover potential liabilities from before the company filed for bankruptcy protection;

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A321 Partners BV, an aircraft leasing company, has filed a motion asking Judge Farley to order Air Canada to pay its aircraft rent or return the three Airbus A321 aircraft to the company.

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