UPDATE 2-Air Canada tops estimates as margins jump

(Adds earnings details, estimates, background)

Feb 16 (Reuters) - Air Canada reported a better-than-expected fourth quarter profit on Friday as the company's efforts to improve operating margins bore fruit in a 3-percentage point jump compared to a year ago.

Canada's biggest airline by market capitalisation is facing up to more direct competition from budget rival WestJet Airlines and the impact of higher fuel prices on its bottom line.

But Air Canada has grown traffic by launching 30 new routes over the past year and attracting international passengers to connect through its hubs in cities like Montreal and Toronto.

The company pointed to that expansion and strong control of costs as the drivers of a rise in operating margins to 3.5 percent in the fourth quarter from 0.5 percent a year earlier.

"Our transformation has made Air Canada profitable while reducing risk in many areas," Chief Executive Calin Rovinescu said in a statement.

"Along with new aircraft, we will keep investing in products and services, including our new loyalty program, technology to enrich the travel experience, and enhanced airport services and amenities."

The Montreal-based company is also expanding its low-cost carrier, Rouge, as customers continue to seek cheaper ways to fly and WestJet gets ready to launch its own ultra-low-cost carrier later this year.

Air Canada said it flew 9.9 percent more passengers in the quarter ended Dec. 31, and spent 1.3 percent less to fly each passenger, even as fuel costs rose about 13.6 percent to 67.5 Canadian cents per litre.

On an adjusted basis, however, it said it expects to spend about 2 percent to 3 percent more per passenger in the first quarter of 2018, compared with the first quarter last year.

Net income came in at C$8 million ($6.4 million), or 2 Canadian cents per share, in the fourth quarter, compared with a loss of C$179 million, or 66 Canadian cents per share, a year earlier.

Excluding items, the company earned 22 Canadian cents per share, beating analysts' average estimate of 14 Canadian cents, according to Thomson Reuters I/B/E/S.

Air Canada's operating revenue rose 11.5 percent to C$3.82 billion. ($1 = C$1.25) (Reporting by Anirban Paul in Bengaluru; Editing by Maju Samuel and Patrick Graham)