Air Canada and WestJet Airlines sketched a relatively optimistic outlook for the third quarter on Thursday, despite high fuel prices and uncertainty over the global economy.

Canada's two biggest airlines earlier in the day reported stronger than expected second-quarter results after keeping a lid on costs and raising fares to offset higher fuel prices.

Both airlines' shares initially edged higher on the Toronto Stock Exchange but then slipped into negative territory as the broader market sold off on increased concerns about the U.S. and European economies.

While the current fuel price environment is challenging, by remaining focused on the execution of our strategy I am confident that we can continue to maintain momentum on all fronts, Air Canada Chief Executive Calin Rovinescu said.

Shortly thereafter his counterpart at WestJet, Canada's No. 2 carrier, said bookings for August and September looked healthy although he admitted it was early days yet.

At this point it is looking pretty strong across the board. All of the segments are performing pretty well and we don't see any variance in domestic versus international, WestJet CEO Gregg Saretsky said on a conference call.

Saretsky said WestJet, which was one of the few North American airlines to remain profitable throughout the 2008-09 recession, would follow the same playbook as in that period if the economy fell off the rails.

Air Canada Upbeat on Labor Talks, New Routes

Rovinescu said Air Canada was confident it could reach negotiated settlements with all its labor unions without further strikes. The airline was hit with a three-day strike by ticketing and sales agents in June. It is still in talks with three other unions, including its pilots and maintenance workers.

Canada's biggest airline remains interested in setting up a low-cost carrier if it can win buy-in from all the main stakeholders, including pilots, Rovinescu said.

The discount leisure airline plan cleared a major hurdle this week when Air Canada flight attendants, who reached a contract deal with the carrier on Monday, gave it their backing.

Air Canada was not unhappy with the passenger numbers it is seeing on its new route from the Billy Bishop Toronto City Airport to Montreal, Rovinescu said. Air Canada launched flights from the downtown airport in May, breaking the monopoly of tiny rival Porter Airlines.

Air Canada will also challenge the Canadian Competition Bureau's decision to block its planned cross-border flight joint venture with United Continental Holdings on antitrust grounds, Rovinescu said.

Air Canada and United Continental suspended the joint venture in June.

Operating Earnings Beat Forcasts

Earlier, Air Canada said its second-quarter operating income rose 55 percent to C$73 million (US$74.4 million) in the three months to end-June.

The airline, which teetered on the edge of bankruptcy two years ago, narrowed its net loss to C$46 million, or 17 Canadian cents a share, from a net loss of C$318 million, or C$1.14 a share, a year earlier.

On an adjusted basis, it reported a loss of 20 Canadian cents a share.

The costs were a little lower than expected. It sounds, based on the guidance provided, that they expect some of those costs to continue to be lower in the second half of the year, said National Bank Financial analyst Cameron Doerksen.

The carrier said high and volatile fuel costs were the main difficulty facing the airline industry, and it expects fuel to add about C$800 million to its operating costs this year.

Air Canada has slashed C$475 million off its cost base and is on track to meet its target of C$530 million in cost savings by year-end, the airline said.

Meanwhile, WestJet blew past analysts' forecasts with a nearly four-fold rise in earnings to C$25.6 million, or 18 Canadian cents a share, thanks to higher than expected revenue and lower than anticipated costs.

Analysts had forecast earnings of 9 Canadian cents a share for the airline, which was launched in 1996.

For the third quarter, WestJet said it expects increases in RASM, or revenue per available seat mile -- an industry measure to compare revenue performance between carriers -- but at a more moderate pace than in the first half of 2011 because of a strong comparable period in 2010.

WestJet's RASM rose 10.8 percent in the second quarter while its costs per available seat mile, or CASM, rose 7.8 percent in the quarter.

While we will be watching for signals of any pricing weakness arising from potential further slippage in the Canadian economy, provided fuel prices remain the same or decrease we continue to see smooth sailing ahead for WestJet, independent airline consultant Robert Kokonis said.

By Wednesday afternoon, WestJet's stock was 24 Canadian cents weaker at C$13.99 on the Toronto Stock Exchange. Air Canada's shares were 7 Canadian cents lower at C$2.04.