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Air Canada takes pass on Bombardier CSeries purchase as it keeps existing Embraers

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MONTREAL - Air Canada has dealt a blow to Bombardier's hopes of landing the country's largest carrier as one of its first CSeries customers as the airline said it has decided not to immediately replace its remaining fleet of Embraer E190s.

After selecting Boeing's 737 MAX last year to replace 20 Embraers, the airline was looking at options for 25 more of the planes that remain in its fleet. However, it said Thursday that the 90-seat Embraer aircraft are still relatively young and it prefers to avoid more capital expenditures and debt as it focuses on nearly $9 billion of spending on other new planes.

Over the coming year it will add 37 Boeing 787 Dreamliners, up to 109 737 MAX and spend $300 million to retrofit 18 Boeing 777s with more seats and features of the Dreamliners.

"It's a question of the relative benefit analysis of what you get out of having a new aircraft as opposed to working through the remaining life of the existing ones," CEO Calin Rovinescu said following the airline's annual meeting.

"When those aircraft are near end-of-life, we're still going to have those 25 to replace at some stage and we're going to have our entire (Aribus) 319 at Rouge fleet to replace with some narrow-body product but that's not a tomorrow sort of decision."

While it won't be in the market to buy more planes for a few years, he said the decision had nothing to do with the quality of the CSeries.

"We really do like the airplane. It's a question of cost and benefit. It's as simple as that, but it's a great airplane and I sincerely wish they are very successful with it."

Bombardier said it was disappointed by Air Canada's decision, but is confident the aircraft is best suited for Air Canada's needs once it eventually proceeds with buying new narrow-body aircraft.

"It's not the preferred outcome at this time but we're still optimistic and we still have a positive feeling about what's to come," said spokeswoman Marianella Delabarrera. "We're putting this on the shelf as a future opportunity."

Delivery of the 110- to 160-seat CSeries aircraft has been delayed until at least the second half of 2015. To date, Bombardier has received commitments for 447 CSeries aircraft from 18 customers in 15 countries, including 203 firm orders.

Porter Airlines is the lone Canadian CSeries customer to date, having placed a conditional order for 12 CS100 aircraft, with 18 options, worth about US$2.08 billion. However, the order is contingent on getting approval for a runway extension and permission to fly jets from Toronto City Centre Airport.

Walter Spracklin of RBC Capital Markets said Air Canada's decision is negative for Bombardier, whose CSeries he felt was a "shoo-in" as a replacement aircraft.

"What we had not anticipated was that the company would elect not to replace them at all. 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," he wrote in a report.

On the Toronto Stock Exchange, Bombardier stock closed down 30 cents or 7.14 per cent at $3.90 on massive volume of 42.6 million shares. The issue's daily average is some 7.3 million shares.

Meanwhile, Air Canada (TSX:AC.B) reported a first quarter net loss of $341 million that was impacted by a lower Canadian dollar and a harsh winter.

The loss amounted to $1.20 per diluted share, compared with a net loss of $260 million, or 95 cents, in the same quarter last year.

The airline said the loss in the first quarter included foreign exchange losses of $161 million, versus foreign exchange losses of $40 million in the first quarter of 2013.

On an adjusted basis, the airline lost $132 million, or 46 cents per diluted share, one cent above analyst forecasts and compared with a loss of $143 million, or 52 cents per share, year-over-year.

Total revenues were up at $3.065 billion versus $2.952 billion.

Air Canada said its earnings before interest, taxes, depreciation, amortization and impairment, and aircraft rent (EBITDAR) was $147 million compared with $145 million in the same quarter last year.

Rovinescu said the results were good given the weather and currency headwinds.

"(They) confirm that we're ready to move from a period of survival and transformation to a period of investment, profitable growth and opportunity. Having achieved the needed stability we are now in a position to make substantial capital investments to increase our competitiveness, significantly lower our costs, grow the airline, and improve margins," he said during a conference call with analysts.

Rovinescu said he's pleased with the rollout of its low-cost Rouge carrier despite some consumer complaints, including negative tweets about legroom from actor Rob Lowe.

Having been ranked the best airline in North America for each of the last four years, customer expectations are high, he said.

"We need to do a better job of managing the customer expectation in transitioning from the expectations of Air Canada's product to the product of a leisure carrier and a leisure carrier has a tighter pitch...and so we expect this to be a question that will improve with the passage of time."

The chief executive later said he's not worried about WestJet's (TSX:WJA) consideration of expanding its international reach by adding a fleet of wide-body aircraft.

"We are making ourselves as lean and as competitive as possible regardless what the competition does," he told reporters. "We're bringing our cost structure down, they're bringing it up and we'll compete with the best product."

On the Toronto Stock Exchange, Air Canada's (TSX:AC.B) closed down 31 cents or 3.77 per cent at $7.91 on 6.8 million shares, more than 2.5 times the average daily volume.

Follow @RossMarowits on Twitter.

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