A loss $1-billion last year will see Air Canada , the country's largest carrier, further shrinking its network, which has concerns to be raised about its ability to combat the recession, fund its pension plan and meet union demands.

While, in 2008 Air Canada cancelled and scaled back dozens of routes, this year it expects to reduce worldwide seat capacity by between 2.5 and 3.5%.

Friday, it also disclosed its pension fund solvency deficit has soared 167% to $3.2-billion beginning 2009 from 1st January 2008's $1.2-billion.

Montie Brewer, Air Canada chief executive officer in a conference call stated: 'While 2009 promises to be challenging, we believe we are well-positioned to manage through the economic downturn'. Last year saw the airline's red ink mark its largest annual loss since
2003, the year it filed for bankruptcy protection.

Weakening travel demand, pension deficit and a portion of fuel contracts locked in at higher prices has analysts and union leaders worried about the Montreal-based carrier, fretting over the enormous pressures they will place on the company. Over all, the airline will still benefit from lower fuel bills, however, its six-year labour contracts set to expire mid-year are still a cause for pessimism.

Even without a strike, fears of labour disruptions are bound to see consumers switch to rivals like WestJet Airlines Ltd. because of fears of labour disruptions, and with Air Canada 's cash reserves sliding to $1-billion (Canadian) from $2.1-billion in 2006, it doesn't have much to help weather tough times, or navigate through a difficult labour environment.

Following 2,000 job cuts last year, the carrier will temporarily lay off up to 345-flight attendants on 2nd March.

Peter Fitzpatrick, Air Canada 's spokesman in Toronto , declined to comment.