CANADA'S AIRLINE PROFITS SEEN HIGHER Canada's airline industry, shaken up by a recent merger that creates a powerful new competitor for government-owned Air Canada, has begun its first serious drive for profitability in 50 years, industry analysts said. "Now we've got a company that can compete with Air Canada," said Thomas Bradley of Richardson Greenshields of Canada Ltd. "Clearly, it can go head-to-head in any market." The new airline, which arose from the 300-mln-Canadian-dlr takeover of Canadian Pacific Air Lines Ltd by the small but cash-rich Pacific Western Airlines Corp, was launched last week as Canadian Airlines International Ltd. Canadian Airlines will have 35-40 pct of the 6-billion-Canadian-dlr domestic market, against Air Canada's 50-55 pct. Wardair International Ltd is third with about nine pct. Analysts believe Pacific Western's aggressive and cost-conscious chairman Rhys Eyton will develop the true potential of the former CP Air, which floundered for four decades inside the bureaucracy of conglomerate Canadian Pacific Ltd. They said CP Air's management style had been not much different from that of Air Canada, formed 50 years ago, because neither airline was held accountable to its owners. "Not that long ago, maybe even just six months ago, these two airlines were totally fiscally irresponsible. Neither seemed that concerned about the bottom line," said Bradley. "But with CP Air being run by Eyton, it will be very conscious of profitability and shareholder return. And Air Canada is on the verge of going that way," he said. CP Air, always fighting for market share rather than profits, was "a perennial money-loser," analyst Wilfred Hahn of Bache Securities Inc said in a recent report. Prior to its takeover in December, it had accumulated long-term debt of 600 mln Canadian dlrs. From 1981 to 1985, its losses totaled 87 mln Canadian dlrs. Air Canada, widely expected to be privatized later this year in a public share offering, lost 14.8 mln Canadian dlrs on revenues of 2.72 billion dlrs in 1985. It has a debt of more than 2 billion dlrs. Although only a minority interest is likely to be sold to the public, the prospect of privatization at a time of increased competition is forcing Air Canada to pay more attention to finances, analysts said. It recently disclosed that it expects to report a profit "in excess of 35 mln to 40 mln dlrs" for 1986. However, this profit recovery was due less to management skill than the fact that all Canadian airlines had a good year in 1986, analysts said. Tourists came to Canada in record numbers last year, attracted by the relatively weak Canadian dollar and Expo 86 in Vancouver, which alone had more than 22 mln visitors. For the next few years, most analysts see three-six pct air traffic growth, and they expect profits will come from cost-cutting and careful spending. Peter Friend of Walywn Stodgell Cochran Murray Ltd said institutional buyers will be eager to add Air Canada to their portfolios as a blue-chip investment, but warned that new competition makes profit growth less certain. "The airline with something to lose will be Air Canada. At one time, it had a fixed system which was theirs and nobody else's," Friend said. Many analysts recommend that investors buy and hold airline shares for at least a year. Analysts said Air Canada's immediate concern ahead of a public stock offering will be unloading unprofitable air routes without setting off a political storm. It also will be faced with an expensive but necessary updating of its aging fleet of 111 aircraft. Wardair, preferring strong medicine now instead of later, already has embarked on a one-billion-Canadian-dlr purchase of a dozen aircraft from Europe's Airbus Industrie. Canadian Airlines, which has 81 aircraft, last week ordered six commuter planes from British Aerospace and said it would soon buy as many as six wide-bodied aircraft from Airbus or the Boeing Co. Analysts said Canadian Airlines, with its newer fleet, needs to make fewer replacements and can afford these without hurting profits. Steven Garmaise of Wood Gundy Inc expects Canadian Airlines' profit in 1988 will more than double last year's 29.8 mln Canadian dlrs by Pacific Western.