VANCOUVER, British Columbia (Reuters) - Air Canada reached a tentative labor agreement on Monday with its last hold-out union, removing an important obstacle in the cash-strapped airline's bid to line up financing to stave off bankruptcy.
Shares in Air Canada, Canada's biggest carrier, turned positive after a deal to extend its current contract with its flight attendants was announced. But an analyst said labor peace is just one of several boxes the airline needs to check to avoid filing for bankruptcy for the second time in six years.
"As of now they are not out of the woods yet. The labor agreement is just the first step in a multi-step process," Research Capital analyst Jacques Kavafian said.
Key to Air Canada's future is its ability to raise fresh financing to pay off debt. The airline has repeatedly said lenders require labor peace before they will consider loans, so its move to extend all its union contracts was crucial.
Another important prong will be how well the airline performs financially over the important summer vacation period.
Kavafian said that June "will probably not be a good month" but that July and August could be "pretty good" based on advance bookings and prices.
Air Canada's B shares were up 2 Canadian cents at C$1.55 on the Toronto Stock Exchange early on Monday afternoon. Its variable voting A shares were 1 Canadian cent firmer at C$1.56, bucking an overall market that was down more than 3 percent.
With the help of two mediators, Air Canada and the union representing its flight attendants agreed to extend their collective labor agreement for 21 months -- the same deal Air Canada struck with its four other unions.
The Canadian Union of Public Employees, or CUPE, which represents 6,700 flight attendants at Air Canada, was the last of the unions to agree to the labor contract extension.
The carrier has also reached agreements with all its unions on a 21-month moratorium on funding a C$2.9 billion ($2.5 billion) shortfall in its pension plan.
"These tentative agreements will allow us to move forward to the next milestones: obtaining the necessary governmental measures and approvals for the pension funding arrangement and raising new financing," Air Canada Chief Executive Calin Rovinescu said in a statement.
"Discussions are ongoing with several potential lenders," he said.
Battered by a sharp downturn in demand and intense competition, Air Canada has asked federal financing agency Export Development Canada for a commercial loan of about C$200 million.
There has been media speculation that ACE Aviation Holdings Inc, Air Canada's parent, and Groupe Aeroplan, which operates Air Canada's frequent flyer program, could also step in to help the carrier.
Four of Air Canada's five unions still need to vote on the contract and pension-moratorium agreements. The airline's customer service and sales agents, represented by the Canadian Auto Workers union, ratified their agreement last week.
CUPE spokeswoman Katherine Thompson said the two mediators appointed last week by the Canadian government to help the union and Air Canada reach a deal were key to the parties "finding common ground".
"We do believe this is the best agreement in the current economic environment," Thompson said of the deal, which like those with the other unions, freezes wages and pension benefits for 21 months.
For the pension moratorium to take effect, the approval of federal regulators is also needed.
Reporting by Nicole Mordant; editing by Peter Galloway