WestJet (WJA.TO) shares rose more than 4 percent on Wednesday after the company said it expected to serve smaller Canadian destinations dominated by Air Canada (ACa.TO) - the nation's largest carrier - and other airlines before the end of 2013.

"In terms of where they're headed it's something that's certainly not surprising," said Air Canada Chief Operating Officer Duncan Dee, noting that WestJet had run out of destinations it could serve with its Boeing B-737 fleet.

"We're simply going to have to step up our game in markets where we haven't faced their competition before," Dee said in an interview in Beijing, where he was taking part in a federal trade mission.

Dee said it was too early to speculate what effect the WestJet move would have on the bottom line at Air Canada, which is beset with labor problems.

Shortly after Dee spoke to Reuters, Air Canada reported a fourth-quarter net loss as higher maintenance and fuel costs overshadowed the gains from increased passenger traffic.

Air Canada is currently involved in sometimes bad-tempered negotiations with unions representing pilots, cabin crew, ramp and maintenance employees as well as flight schedulers.

"We're continuing to talk to our unions ... There are several balls in the air in terms of the negotiations. As a positive note, all of those talks continue, none of them have broken off," said Dee.

Air Canada last year proposed setting up a low-cost carrier but that will not take off without concessions on wages or benefits from unions.

"The key there is the fact that carriers like WestJet continue to evolve their business plans, the fact that Air Canada continues to face strengthening competition from airlines that are able to compete at a much lower cost base," Dee said.

"Those are things that any business ... has to keep mindful of so that they're able to assure the future of their company.

Speaking about the low-cost carrier proposal, he added: "Suffice it to say that we continue to evaluate the various options we have and if and when something transpires we'll be able to make those options known and discuss them with our unions."

(Reporting by David Ljunggren)

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