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MONTREAL - As Air Canada (TSX:AC.B) struggles to adjust to higher fuel prices, its parent company ACE Aviation (TSX:ACE.A) says a recent drop in the world oil price may help efforts to dispose of its majority stake in the country's biggest airline.

"Just the movement downward in oil over the last couple of weeks I view as helpful in the whole equation," ACE chairman and CEO Robert Milton said Friday during a conference call to discuss second-quarter results.

The holding company said it has no plans to distribute to shareholders about $800 million of cash ACE has on hand, after handing over more than $4.2 billion over the last couple of years.

Chief financial officer Brian Dunne wouldn't say whether the money could be used as part of a transaction for Air Canada. But he told analysts that ACE expects to narrow down its options regarding the airline over the next two to three months.

Among the options are a secondary offering, sale of its Air Canada holdings to investors including private equity, or some form of amalgamation with the airline to buy out the minority shareholders.

As ACE examines its options for winding down its holding company structure, Air Canada said it is considering fare hikes and asset sales to provide it with additional financial flexibility to adjust to high fuel prices.

Even as its second-quarter performance outpaced its large North American rivals, the airline said it may boost its cash position by up to $800 million through the sale and leaseback of aircraft and some inventory.

"We are planning to spend a great deal of time looking at that over the next couple of months," chief financial officer Michael Rousseau told analysts during a separate conference call.

The airline had almost $1.5 billion in cash and investments at the end of the quarter.

Earlier Friday, Air Canada reported its second-quarter profits dropped 21 per cent to $122 million, as the airline spent $212 million more on fuel from April to June than it did in the same time last year. That reduced the Montreal airline's operating income to $7 million, down from $88 million in the second quarter of 2007.

Net income fell to $1.22 per share, down from $1.55 million in the second quarter of 2007.

"We are operating in a very difficult environment and our results generated one of the smallest reductions in second-quarter margins among North American carriers," Air Canada CEO Montie Brewer told analysts.

Despite aggressive efforts to increase revenues through hikes in fares, fuel surcharges and other fees, and cut non-fuel expenses, the airline said it couldn't fully offset the higher fuel costs.

The fuel impact would have been $397 million had it not been for the airline's hedging strategy and the benefit it received from the higher Canadian dollar.

Passenger revenue increased five per cent in second quarter over last year and overall revenues including both passengers and cargo rose to $2.78 billion, an increase of $143 million.

The resilient domestic Canada market and stronger Pacific international market drove revenue growth and overcame the downturn in the transborder market.

The airline has introduced five fare increases to the domestic market over the last seven months and three fare hikes to the U.S. since January. Fuel surcharges have been added to all routes, with international one-way surcharges rising 20 to 200 per cent.

Additional fare hikes are expected as the airline continues to navigate through the challenges ahead, Brewer said.

"The second quarter result demonstrated the difficulty of increasing revenues at the same rapid pace as the increase in the price of jet fuel. However, our customers will eventually have to absorb the higher cost."

Overall capacity in the quarter increased 2.4 per cent, compared to 5.4 per cent a year ago.

Aside from fuel, which rose alongside a big spike in oil prices, the company is managing to contain its costs, Brewer said, unit costs dropping 1.7 per cent and cost -reduction initiatives on track to save the airline $100 million this year.

Faced with rising fuel prices, the air carrier announced plans in June to cut seven per cent of its capacity and lay off up to 2,000 of its 24,000 workers.

Brewer said that rising fees and charges will likely crimp some travellers' plans and lead to a softening in demand.

National Bank Financial analyst David Newman said Air Canada's results exceeded his expectations, but were below market consensus.

"We have long cautioned that domestic supply growth could outpace demand growth in 2008, and hence Air Canada's decision to trim capacity growth is clearly a positive for the industry as a whole," he wrote in a report.

Meanwhile, ACE reported Friday a second-quarter profit of $830 million, boosted by $908 million in pre-tax gains from the sale of its remaining stakes in loyalty program Aeroplan (TSX:AER.UN) and affiliate airline Jazz (TSX:JAZ.UN) in the quarter.

ACE's revenues, predominantly from Air Canada, increased to $2.78 billion from $2.66 billion.

On the Toronto Stock Exchange, Air Canada's shares lost three cents to $5.87 in Friday trading. ACE shares gained 17 cents to $11.15.