OTTAWA - Air Canada shares are up four per cent in early trading after Ottawa gave the airline more time to eliminate the $4.2-billion deficit in its pension plan.
The deal, announced Tuesday, also imposes strict rules on the airline that limit executive pay and prevent it from paying dividends.
The airline (TSX:AC.B) must make contributions to the pension plan of at least $150 million a year totalling at least $1.4 billion over seven years, on top of the regular contributions required by the plan.
Air Canada shares were up 11 cents at $2.68 on the Toronto Stock Exchange shortly after the open.
Among other things, the pension agreement freezes increases in executive pay at the rate of inflation, prohibits special bonuses and puts limits on executives' incentive plans.
The airline will also be prevented from paying dividends and buying back stock as well as making any pension plan benefit improvements without regulatory approval.
In a statement, Finance Minister Jim Flaherty said the deal ensures that Air Canada remains viable, protecting thousands of jobs.
Flaherty also noted that Air Canada’s unions and retirees have been supportive of the company’s request for help with its pension deficit, adding that the "regulatory change is not costing Canadian taxpayers a single dollar."
Air Canada's pension deficit has been a chronic problem for the airline due to low interest rates which have driven up liabilities.
The airline had wanted Ottawa to put a $150-million cap on its annual solvency deficit payments for the next decade, starting in 2014.
In 2009, Air Canada signed a deal with the federal government that granted the airline a moratorium on special pension contributions to reduce its deficit for that year and 2010. Under that deal, which expires next year, Air Canada was required to make $150 million in special payments in 2011, $175 million in 2012 and $225 million in 2013.
The Air Transport Association of Canada had argued against Ottawa granting Air Canada pension relief, saying it would create an uneven playing field.
The group, which represents small regional carriers and training centres, argued that Ottawa should provide broad pension assistance to all Canadian companies, instead of giving a competitive advantage to the former Crown corporation.
"We don't really have anything to add, but that we respect the government's decision," John McKenna, president and CEO of ATAC, said late Tuesday.
McKenna said the group has decided to be more "cautious" after it was falsely accused of being overly critical of the airline.
Last week, it posted a public apology on the front page of its website for the open letter it had written to the federal government to voice its concerns.
Air Canada has said that cost savings from its recent labour agreements, the startup of low-cost carrier Rouge and pension relief will help to lead the airline to sustainable profits.