UPDATE 4-Air Canada could be forced into bankruptcy - UBS

(Adds details, updates share prices)

CALGARY, Alberta, Feb 17 (Reuters) - Air Canada (ACa.TO), the country's biggest airline, could be forced to file for bankruptcy protection if it does not secure additional financing and succeed in renegotiating covenants in credit card agreements, UBS analyst Fadi Chamoun said.

"Notwithstanding lower fuel costs, we believe that cash from operations will be insufficient to meet rising pension funding obligations and over C$1 billion ($800 million) of debt repayment over the next two years," Chamoun said in a note dated Feb. 13.

Covenants in credit card agreements could tighten further in the second quarter and result in the airline being required to maintain higher cash deposits, said Chamoun, who downgraded Air Canada shares to "sell" from "neutral". He also cut his target price for its shares to C$1 from C$1.50.

"In the absence of additional financing (sale of assets) and renegotiation of covenants in credit card agreements, Air Canada could be forced to file for bankruptcy in our opinion," he wrote.

Air Canada spokeswoman Angela Mah declined to comment on the UBS report.

Air Canada only emerged from its last round of bankruptcy protection in 2004. But the economic crisis has hammered most international carriers as traffic has dropped, forcing them to cut routes, restrain capacity and lay off employees.

Air Canada last year cut 2,000 jobs and slashed capacity by 7 percent and has made more cuts since.

Chief Executive Montie Brewer said on Friday -- as Air Canada announced an unexpectedly large loss of C$727 million for the fourth quarter of last year -- that the airline would seek to reduce costs by another C$100 million and shave capacity by a further 3.5 percent.

Most analysts, however, expect the airline to weather the economic storm. Tom Varesh, an analyst at Canaccord Adams, lowered his rating on Air Canada on Tuesday to "speculative buy" from "buy" and cut the price target to C$4 from C$6 per share, but he said Air Canada will likely be able to make it through 2009.

Air Canada's class B shares were down nearly 10 percent at midafternoon on Tuesday, dropping 14 Canadian cents to C$1.31. The shares have fallen 87 percent over the past 12 months.

The company said on Friday it has shored up its balance sheet with C$641 million in new financing, but warned that the recession may put more pressure on its revenue in 2009. Air Canada said it has up to C$1 billion of assets it could use to increase its liquidity if needed.

($1=$1.26 Canadian) (Reporting by Scott Haggett and Mary Meyase; editing by Peter Galloway)