AIR CANADA 
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TORONTO (Reuters) - Air Canada (>> Air Canada) shares fell sharply for a second day on Tuesday on investor worries that Canada's weakening dollar would drive up costs at the country's largest airline.
Shares of the Montreal-based carrier closed 12 percent lower at C$7.63 on the Toronto Stock Exchange after dropping as low as C$7.44 after media reports flagged comments that the carrier's chief executive officer made about the impact of the currency's depreciation.
"We have massive exposure to the U.S. dollar," the Globe and Mail newspaper quoted CEO Calin Rovinescu as saying after a speech. "The kind of precipitous (Canadian dollar) drop that we have had in the last little while is significant."
Air Canada is set to report fourth-quarter results on February 12, while its smaller rival, WestJet Airlines Ltd (>> WestJet Airlines Ltd.), whose stock tumbled 4 percent on Tuesday, is set to issue year-end numbers February 4.
Fears about low inflation in Canada and the possibility of an interest-rate cut helped push the Canadian dollar to a 4-1/2 year low against the greenback on Tuesday at 89.57 U.S. cents.
A falling dollar hurts Air Canada because it makes major purchases in U.S. dollars, including planes and fuel. The airline estimated that in 2012 every 1 cent change in the value of Canada's dollar had a C$33 million ($29.7 million) impact on its annual operating income.
Jet fuel, which is Air Canada's largest single expense, represents about a third of total operating costs. The airline hedges some of its fuel purchases, but that typically covers only 35 percent of the total, Rovinescu told the Globe and Mail.
In December, the airline said it would buy 61 Boeing 737 MAX planes, which would have a list price of $6.5 billion, though aircraft are typically sold below list price.
Some analysts said that currency worries are not new and the decline in Air Canada stock is overdone.
"We've seen such a sharp selloff that I don't think it's fully justified," AltaCorp Capital Inc analyst Chris Murray said.
Canada's airline industry is healthy, he said, based on recent traffic data and executive comments on forward booking.
What's more, Air Canada can cut costs and increase revenue, through surcharges and higher ticket prices. The airline's vacations arm added a C$35 surcharge to trips starting on Monday.
RBC Capital Markets analyst Walter Spracklin said the steep currency drop represents a buying opportunity, in part because there is a natural hedge between a stronger U.S. dollar and lower jet fuel prices.
"The bottom line is that forex fluctuations, cold weather in Canada ... are not reasons to sell," Spracklin wrote in a note to clients.
(Reporting by Susan Taylor; Editing by Peter Galloway)
By Susan Taylor
