UPDATE 3-Air Canada won't replace Embraer jets with Bombardier CSeries

Thu May 15, 2014 10:25am EDT

* Q1 net loss C$1.20/share vs $0.95 year earlier

* Loss includes C$161 mln forex losses on weaker Canadian dollar

* Bombardier CSeries was in running for aircraft replacement

* Bombardier shares fall 3 pct (Adds analyst comment, updates share movement)

By Shubhankar Chakravorty

May 15 (Reuters) - Air Canada said it would not replace 25 narrow-bodied Embraer planes, dealing a blow to Bombardier Inc's hopes of pushing its CSeries aircraft into the company's fleet.

The CSeries has been dogged by multiple delays and cost overruns, but was in the running to replace these aircraft, which are part of Air Canada's fleet of 45 E190 planes made by Brazil's Embraer.

Bombardier shares fell as much as 3.5 percent to C$4.05 in morning trading on the Toronto Stock Exchange. Air Canada shares were little changed at C$7.82.

"After careful consideration, Air Canada has decided to continue to operate the (Embraer) aircraft given their young age ... and to avoid additional capital expenditures and debt," the largest Canadian carrier said in a statement on Thursday.

Air Canada's decision comes after the company reported a higher first-quarter loss, mainly due to a weaker Canadian dollar.

"We had considered that if Air Canada was going to renew its E190 fleet, that the CSeries was a shoo-in as a replacement aircraft," RBC Capital Markets analyst Walter Spracklin said.

"We consider this decision a material negative for Bombardier as we had hoped the Air Canada order would help improve investment sentiment around CSeries new orders in 2014," Spracklin added.

In theory, however, the CSeries could still replace these planes at a later date.

Last month, Air Canada finalized a deal to sell the rest of its E190 planes to Boeing Co. As part of this deal, Air Canada finalized its order for 61 Boeing 737 Max single-aisle jets, completing the first phase of the carrier's narrow-body fleet renewal plan.

Airlines rarely switch between different aircraft suppliers due to the high costs associated with training and maintenance.

Montreal-based Air Canada, which mostly buys fuel and planes in U.S. dollars, has been seeking ways to boost revenue and cut costs to compensate for the weaker Canadian dollar.

It estimated that in 2012 every 1 cent change in the value of the Canadian dollar had a C$33 million ($29.7 million) impact on its annual operating income.

The company said on Thursday that its net loss widened to C$341 million ($312.7 million), or C$1.20 per share, in the quarter ended March 31, from C$260 million, or 95 Canadian cents per share, a year earlier. This included foreign exchange losses of C$161 million.

The company forecast its adjusted costs per available seat mile (CASM) to fall by 3.0-4.0 percent in fiscal 2014, compared with its previous forecast of a 2.5-3.5 percent decrease, due to lower aircraft maintenance and depreciation, amortization and impairment expenses.

CASM, widely recognized as key measure of an airline's efficiency, shows how much an airline spends to fly one passenger.

WestJet Airlines Ltd, Canada's No. 2 carrier, said last week that it would try to cut costs and raise fees and fares as it, too, grapples with a weaker Canadian dollar that is driving up expenses.

($1 = 1.10 Canadian dollars) (Additional reporting by Euan Rocha in Toronto; Editing by Simon Jennings and Sayantani Ghosh)

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