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OTTAWA (Reuters) - Cash-strapped Air Canada has approached the government for a loan, Finance Minister Jim Flaherty said on Tuesday as the airline works against the clock to stave off possible bankruptcy.
Flaherty said Canada's biggest airline was in discussions with Export Development Canada for a commercial loan. A source close to the talks said the carrier was asking the federal financing agency for about C$200 million ($177 million), a third of the C$600 million the carrier says it needs in the short term.
"Air Canada has had some discussions with Export Development Canada about possibly borrowing on commercial terms, but those are discussions that are ongoing," Flaherty told reporters.
His comments come hours after Air Canada announced it had reached tentative agreements with the rest of its unionized workforce on a temporary freeze on funding a deep pension shortfall.
An agreement with the unions on pensions and securing financing are crucial to keeping the debt-laden airline, which has been buffeted by a global slowdown in air travel and stiff competition at home, from filing for bankruptcy for the second time in six years.
Shares in Air Canada surged as much as 20 percent on the Toronto Stock Exchange on Tuesday morning. The class A shares hit C$1.77, a gain of 32 Canadian cents, while its B shares reached C$1.78, an increase of 29 Canadian cents.
The source said any loans to Air Canada would come from the EDC's Canada Account, which is for transactions that are outside the EDC's responsibility but deemed to be in the national interest.
The loan would be negotiated on a commercial basis and would not be considered by the government as a bailout. The EDC would administer the loan but the federal government would take on the risk.
Air Canada President and Chief Executive Calin Rovinescu said in a statement the airline was in talks with "several potential lenders".
Air Canada announced late on Monday that it had reached tentative agreements with the Air Canada Pilots Association (ACPA) and the Canadian Union of Public Employees (CUPE) on a 21-month moratorium on funding its C$2.9 billion pension deficit.
As with its other three unions last week, Air Canada also reached a collective agreement with ACPA that freezes wages and pension benefits for 21 months.
But the airline has yet to reach a similar agreement with CUPE, which represents about 6,700 flight attendants.
A deal with CUPE is a prerequisite for all the pension agreements to take effect. Talks were continuing but a union official said the two sides were still a way apart.
"We did not come here to bargain a concessionary agreement. It was enough to bargain a cost-neutral agreement," CUPE spokeswoman Katherine Thompson told Reuters.
In exchange for their agreement on a pension moratorium, Air Canada's unions will get a 15 percent equity stake in the airline.
They will also have the right to appoint one representative to Air Canada's board of directors.
In addition to the moratorium on past service pension contributions until the end of 2010, payments into the fund will be fixed for three years thereafter at C$150 million, C$175 million, and C$225 million in 2011, 2012 and 2013, respectively.
For the pension agreements to take effect they need union member approval as well as federal regulatory approval.
Additional reporting by Euan Rocha in Toronto and Chakradhar Adusumilli in Bangalore, editing by Rob Wilson