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OTTAWA (Reuters) - Air Canada ACb.TO won a seven-year extension on Tuesday of the cap on special payments to erase its sizeable pension fund deficit, over the objection of its smaller rivals, but will have to make higher payments than it originally requested and abide by certain conditions.
Finance Minister Jim Flaherty said the airline, which had sought to limit its special payments to C$150 million ($145.6 million) a year for 10 years, will have to pay a total of C$1.4 billion over seven years, or an average of C$200 million a year, with a minimum of C$150 million a year.
"It's important to note that Air Canada's unions and retirees have been supportive of the company's request for further solvency funding relief for its pension plans," Flaherty said. "This regulatory change ... is providing Air Canada time to pay off the sizeable pension deficit."
Air Canada is Canada's largest airline, and rival West Jet had cried foul over what it said was repeated requests for special assistance, especially when it was expanding its fleet.
Executive compensation at the troubled airline, Canada's largest, will only be allowed to grow at the rate of inflation, special bonuses will be prohibited and limits will be imposed on executive incentive plans, the Finance Department said.
Dividends and share repurchases will be banned during the period, the department said. And no pension benefit improvements will be allowed without regulatory approval. The airline currently does not pay a dividend.
In 2009, Air Canada won agreement from the government for a moratorium on making any special payments to reduce its pension deficit through 2010, and then a cap on special payments that would rise from C$150 million in 2011 to C$225 million in 2013.
That deal, which sought to address a major gap in its defined benefit plans as yields declined, expires at the end of January 2014, and the new arrangement goes through to the end of January 2021.
In asking Flaherty last April for the extension, Chief Executive Calin Rovinescu had said the pension deficit had doubled during 2011 to C$4.4 billion, the result of a reduction in the discount rate used to calculate pension liabilities, to 3.3 percent from 4.5 percent. The airline subsequently revised that deficit figure to C$4.2 billion.
Tuesday's Air Canada statement said the arrangements are subject to successfully concluding a consultation process with management and retiree beneficiaries, but it noted that the Canadian-based unions had previously backed the extension request.
The machinists union said it had informed the government earlier on Tuesday that Air Canada had not fulfilled its obligations with regard to a new pension agreement.
However, it is broadly supportive of the extension.
"At the machinists union, our position has always been that we would not oppose funding relief for Air Canada or a pension moratorium," said Fred Hospes, who heads the unit that represents the largest number of Air Canada employees.
Additional reporting by Euan Rocha in Toronto; Editing by Eric Walsh and Cynthia Osterman