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VANCOUVER (Reuters) - A new labor contract with its pilots gives Air Canada, the country's biggest airline, more leeway as it tries break clear of increased competition and return to profit, and its shares rose on Tuesday.
A Canadian government-appointed arbitrator said in an 82-page ruling released late on Monday that he had selected the airline's contract proposal over one submitted by its pilots union because it would better ensure the economic viability and competitiveness of Air Canada.
The Air Canada version of the contract allows it to outsource more flying to other companies -- a concept known as scope -- and also to establish a low-cost subsidiary, both of which should help it to cut costs.
"The most surprising aspect, and very positive, was the final conclusion around scope," PI Financial transportation analyst Chris Murray said.
"It should make for a more effective operation and financially they're performing as well," he said.
The contract also raises the contribution that pilots' make to their pensions, a move that will help Air Canada reduce its massive C$4.4 billion ($4.39 billion) pension deficit, the servicing of which nearly tipped it into bankruptcy in 2009.
The airline did sink into bankruptcy in 2003 and has been profitable for only one year out of the past 10 as it deals with stiffer competition and higher fuel costs.
Air Canada's stock is down 50 percent in the past year, hurt by worries about strikes and the possibility that it could again seek bankruptcy protection.
But on Tuesday its more heavily traded "B" shares jumped as much as 12 percent to C$1.21 on the Toronto Stock Exchange as investors cheered the end of more than a year of volatile labor negotiations. By early afternoon the stock was off its peak, but still up 4.6 percent at C$1.13.
The Air Canada proposal chosen by the arbitrator was essentially the same as a tentative agreement reached between the bargaining committee of the pilots union, the Air Canada Pilots Association (ACPA), and the airline in March 2011, when their last agreement expired.
The union membership rejected the agreement in May 2011 largely because it proposed the creation of a low-cost airline subsidiary, which they feared would put their job security, wages and benefits at risk.
Under the new contract, Air Canada will be allowed to establish a discount carrier with lower wages for its pilots. The carrier, which can have up to 50 aircraft drawn from the existing mainline fleet, will fly mainly to leisure destinations, competing with WestJet Airlines and Air Transat.
The "scope" clauses are one significant area in which the new contract differs from the previous tentative agreement.
Under the new pact, Air Canada can increase its regional fleet to 60 75-seat jets from 16 currently. It can also add an unlimited number of regional partners under contract purchase agreements (CPA). Currently it has four CPA partners.
The new agreement also includes annual wage increases of between 2 percent and 5 percent over a five-year contract, which runs until April 1, 2016.
Even so, pilots were angered by the arbitrator's decision to favor Air Canada, saying legislation enacted by the government to force the two sides into arbitration stacked the deck against the union.
There is "no doubt that the federal government's legislation tilted the process against us, by giving the arbitrator a 'guiding principle' that gave more weight to the corporation's argument," ACPA said in a question-and-answer document sent to its members, and obtained by Reuters.
However, the union cautioned against pilots embarking on wildcat strikes, an action that a few took earlier this year. Such actions would open individuals and ACPA to heavy fines, it said.
"Civil disobedience is one possible response to the arbitration award, but it should not be taken lightly, without full knowledge of the possible consequences," the ACPA document said.
As was the case in Air Canada's agreements with its other unions, pilots' pension fund contributions will increase as the company tries to reduce its pension deficit by C$1.1 billion. Pilots will only be eligible for full pensions at age 65 as opposed to 60 before, unless they have 30 years of service.
Arbitrator Douglas Stanley said, however, that the pension relief was still not enough to remove the "grave risk" that the deficit poses to Air Canada and its retired pilots.
He agreed with the call by the arbitrator involved in the airline's contract dispute with its mechanics that an extension of a moratorium on Air Canada's pension fund payments is needed. A moratorium on past service payments expires in January 2014.
The pension problem "is still there. It still needs to be addressed," PI's Murray said.
Editing by Peter Galloway