Air Canada (AC.TO) is cutting its capacity by 25 per cent and reducing its workforce by 1,700 employees, saying the government’s new COVID-19 testing requirements has led to diminished demand.

Canada’s largest airline announced on Wednesday that it will reduce its overall capacity by 25 per cent in the first quarter of 2021, representing an overall capacity reduction of 80 per cent compared to the same time last year. Air Canada said it is cutting domestic, trans-border and Caribbean routes.

The decision will result in a workforce reduction of 1,700 employees. Another 200 employees working at its Express carriers will also be affected.

“Since the implementation by the Federal and Provincial Governments of these increased travel restrictions and other measures, in addition to the existing quarantine requirements, we have seen an immediate impact to our close-in bookings,” Air Canada’s chief commercial officer Lucie Guillemette said in a statement, calling the decision “difficult but necessary.”

“While this is not the news we were hoping to announce this early into the year, we are nonetheless encouraged that Health Canada has already approved two vaccines and that the Government of Canada expects the vast majority of eligible Canadians to be vaccinated by September. We look forward to seeing our business start to return to normal and to bringing back some of our more than 20,000 employees currently on furlough and layoff.”

Air Canada notified airports in Atlantic Canada this week that it would cut additional routes in the region, suspending all flights in Gander, N.L., Goose Bay, N.L., and Fredericton, N.B., until further notice as of Jan. 23.

RBC Capital Markets analyst Walter Spracklin wrote in a note to clients Wednesday that the cuts will have a “neutral” impact on Air Canada’s stock, as “expectations for a longer period of lower demand was likely already expected. The company’s stock was down 1.34 per cent in midday trading.

“All told, we view the decision by the company to act quickly in response to the increased travel restrictions as prudent, and see the measures taken as serving to partially offset anticipated cash burn during the quarter while leaving the long-term outlook intact,” Spracklin wrote.

Which routes has Air Canada cut?

The following routes have now been suspended by Air Canada.

Domestic:

• Fredericton–Montreal

• Gander–Halifax

• Goose Bay–Halifax

• Kamloops-Vancouver

• Ottawa-Calgary

• Ottawa-Vancouver

• Prince Rupert-Vancouver

• Quebec City-Toronto

• St. John’s-Toronto

• Victoria-Calgary

• Winnipeg-Calgary

• Yellowknife-Edmonton

Trans-border:

• Calgary to Maui

• Montreal to Denver, Houston, Orlando

• Toronto to Houston, Orlando, Tampa, Washington (Dulles)

• Vancouver to Honolulu (until April), Maui (until mid-February)

International:

• Montreal to Barbados, Casablanca, Cozumel, Samana, San Jose (Costa Rica), Santa Clara, Turks & Caicos, Nassau, Sao Paulo, Puerto Vallarta

• Toronto to: Cozumel, Curacao, Ixtapa, Los Cabos, Paris, Saint Lucia, Santa Clara, St. Vincent, Zurich

• Vancouver to: Los Cabos, Mexico City, Puerto Vallarta, Mexico.

The COVID-19 pandemic, as well as related government-imposed rules and restrictions, have devastated demand for air travel around the world.

Last week, WestJet Airlines announced it would slash capacity and reduce its staff by 1,000, blaming Ottawa’s “incoherent and inconsistent” COVID-19 testing policies for the decision.

The federal government issued an interim order on Jan. 6 requiring all travellers coming to Canada to provide proof of a negative COVID-19 test taken within 72-hours of departure, a move that was initially announced last month. Air Canada, Air Transat, Sunwing, the National Airlines Council of Canada and the International Air Transportation Association had unsuccessfully lobbied Ottawa to grant an 11-day extension to implement the rules.

Canada’s airline industry has been calling on the federal government to provide a financial relief package for the battered sector since the pandemic struck in March. Ottawa has said it will provide an aid package but only if airlines provide refunds to passengers whose flights were cancelled as a result of COVID-19.

With files from the Canadian Press.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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