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Just a few months ago, Air Canada CEO Robert Milton was being applauded for his success in reviving the moribund national carrier. His Sybil-like strategy of splintering the airline into multiple personalities was hailed as a master stroke, and there was back-patting all around for producing two profitable quarters in a row. If that was a party, then the hangover just arrived — in the form of a dismal fourth quarter.

Air Canada announced on Monday that its passenger traffic and its overall market share had declined during the fourth quarter, and that as a result the nation's largest airline would have a loss for the period and for the full year as well. In an attempt to soften the blow, the carrier said the loss for the quarter would be smaller than the loss it had in the same period in 2001 or in 2000 — although that may not be much consolation, since it lost $380-million or so in the fourth quarter of 2001.

Some analysts — including Glenn Engel of Goldman Sachs in New York — expect the airline to report a loss for the fourth quarter that isn't all that much smaller than $380-million, given the kind of profitability hit the airline took in the quarter just ended. Mr. Engel is looking for a loss of $2.02 a share or $242-million, while others are expecting a loss of between 65 cents and 85 cents. There is also considerable debate about whether Air Canada will turn a profit this year, and if so by how much.

The airline said Monday that competitive pressure from WestJet and newer carriers such as Jetsgo and CanJet helped to push its overall ridership or "load factor" (total number of seats filled) down to just above 70 per cent in December, from the 72 per cent level in the same month of 2001. That's not a particularly impressive result by any means — and even less so when you recall that in December, 2001 the North American airline industry was still reeling from the effects of Sept. 11.

In the domestic market, the numbers were even worse: Air Canada's load factor fell to just 67.4 per cent from 74.5 per cent in December, 2001. And that wasn't all. "Revenue passenger miles" — the total number of miles flown by paying passengers, a crucial indicator of airline profitability — dropped by 0.6 per cent, while the number of total seats available rose by 2.5 per cent. Not a great combination. RPMs in the domestic market fell by almost 9 per cent in December compared with last year.

The Globe and Mail's Keith McArthur reported on Tuesday that a survey of traffic on the major carriers shows that Air Canada lost more than 12 per cent market share to WestJet and others in December, a crucial quarter for the airline business. In fact, Air Canada's share probably fell more than that, if figures from several other carriers (who don't report monthly statistics) are included. Traffic at the national airline's regional carrier Jazz alone has fallen by over 30 per cent.

Despite the good news from the third quarter, the fact remains that Air Canada has serious problems, including too much debt — about $12-billion or so. Its costs are also still too high compared with competitors such as WestJet, and that makes surviving on lower yields even harder, despite the alleged benefits of the multi-brand strategy. In fact, it's likely that the airline is eating into its own market share with its sub-brands, which are positioned as separate discount and charter carriers.

Mr. Milton has said his strategy is modeled on the Host Marriott chain, which has several sub-brands. The main difference between the two, however, is that hotels stay put — they don't suffer from high gas prices, and they don't have to be ready for take off in 15 minutes. Air Canada also has more debt. And guess what? Marriott's operating profits have been pretty anemic lately too, and the chain has said that it is looking for flat room revenues and even lower profit margins through 2003.

Avi Dalfen of Research Capital, who rates Air Canada a "sell," says there is simply too much capacity in the market and that no end is in sight to the current competitive pressure. "The number of seats out there exceeds the number of bums to fill those seats," he told Reuters, and that means the pressure on margins will only intensify in the short term. Air Canada's costs, however, are still too high to compensate, and its ability to reduce them is severely limited, if not non-existent.

Is the third quarter a sign of what the "real" Air Canada is capable of, or is the fourth quarter a truer picture? Even if the truth is somewhere in between, Canada's major carrier has its work cut out for it if Mr. Milton wants to get any further rounds of applause.

Look for exclusive Mathew Ingram commentary at GlobeInvestorGold