* Analyst upgrades to a "buy," 2nd upgrade in two weeks
* Stock rises 12 pct but closes up 2 pct
* Lingering worries on debt levels, cost structure
By Nicole Mordant
VANCOUVER, British Columbia, Nov 2 (Reuters) - Air Canada ACa.TO ACAb.TO, hounded by bankruptcy fears earlier this year, is creeping out of the dog-house after a recent fund-raising, a sign that an industry downturn is ending and confidence in the carrier's management is growing.
The stock rose as much as 12 percent on Monday after David Tyerman, an airline analyst at Genuity Capital Markets, raised his recommendation to a "buy" from a "hold," saying Air Canada's fuller coffers are a good buffer against any unforeseen shocks.
"We recommend that investors buy Air Canada shares for large upside potential from recovering industry demand, Air Canada-specific profit-improvement efforts and substantial balance-sheet improvement over the coming cycle," Tyerman said in a research note.
Tyerman is the second analyst in two weeks to give Canada's biggest airline a better report card following its C$250 million ($232 million) share issue last month.
UBS Securities analyst Fadi Chamoun upgraded the stock to "neutral" from a "sell" on Oct. 15, a turnaround from six months ago when the shares suffered a series of analyst downgrades as it looked poised to file for bankruptcy for the second time in six years.
Air Canada now has about C$1.4 billion in cash, Tyerman said, "plenty to see the company through the current recession" after it raised $1 billion in July from lenders including the government and won a temporary pension deficit payment reprieve from its labor unions.
He also thinks Air Canada has a good chance of reaching Chief Executive Calin Rovinescu's goal of boosting profits by C$500 million -- C$400 million from cost cuts and C$100 million from new sales.
"Calin Rovinescu is the right guy in the right place at the right time. ... He has certainly breathed life into the airline," said Rick Erickson, an independent airline industry analyst.
Rovinescu, a lawyer who was Air Canada's vice-president of corporate development and strategy from 2000 to 2004, took the reins in March. He is a co-founder of Canadian investment bank Genuity Capital Markets.
STILL A LOT TO BE DONE
Air Canada's heavy debt load, big pension deficit and high cost structure, the same factors that drove it to the brink of bankruptcy protection, still remain, UBS's Chamoun said.
He forecasts a recovery for Air Canada only from the second half of next year, while Tyerman points to recent Canadian data showing improving passenger demand and tentative signs of stronger pricing trends in global air travel.
Air Canada needs to stop relying on making its money from its business class passengers and figure out a way to get more profit from its economy travelers where the carrier faces stiff competition from domestic rival WestJet Airlines Ltd (WJA.TO), Erickson said.
Air Canada's B shares closed up 2 Canadian cents, or 2 percent higher, at C$1.05 on the Toronto Stock Exchange on Monday. The stock has a long way to go to get back to the C$2.50 level of January, nevermind the peaks of around C$20 reached in 2007.
Versant Partners analyst Cameron Doerksen, who still has a "sell" recommendation on Air Canada, declined to comment ahead of the company's third-quarter results due on Friday.
"I'll be reviewing all my numbers at that time with the possibility of there being a change," he said.
Air Canada is expected to report net income of C$117 million on revenue of C$2.6 billion for the three months to the end of September, according to Thomson Reuters I/B/E/S.
($1 = $1.08 Canadian)
(Reporting by Nicole Mordant; Editing by Frank McGurty)