After delivering the warning in court, the airline later said it would extend $15 million in emergency financing to maintenance company Aveos Fleet Performance.
Air Canada said in a release the financing should allow Aveos to reopen some facilities, recall some employees and that this in turn should allow Air Canada to introduce some additional maintenance work "with greater confidence" over the coming days and weeks.
Despite having said earlier in the day it won't be affected by the Aveos troubles, the airline's lawyers argued in vain Monday for a Quebec Superior Court judge to order Aveos to not lay off more workers and to meet its obligations to complete the aircraft repairs.
Three wide-body planes and several narrow-body aircraft are sitting in Aveos facilities across the country, some missing landing gear.
Air Canada lawyer Louis Belanger said the next 24 to 48 hours will be crucial in determining if the aircraft repairs can be completed on schedule. He said nearly 3,000 passengers daily could be "stranded" if the planes aren't returned to service.
"We can't wait 15 days for the aircraft to be released," he said.
Unless the work is completed, "it may result in the necessity to cancel flights if aircraft aren't available."
Despite what it argued in court, Air Canada (TSX:AC.B) said in a news release that its fleet's maintenance and repair activities are done in-house and won't be affected by the plant closures.
"The airline's line maintenance has always been performed directly by Air Canada, at the airline's own facilities by Air Canada's 2,300 maintenance employees," the airline said in a statement.
"The airline typically performs its line maintenance activities overnight or between flights, as necessary."
Montreal-based Aveos said it has permanently shut its airframe repair business. The move will affect about 1,800 of the company's 2,600 employees.
The remaining employees repairing engines and components such as landing gear have not been let go but it wasn't immediately clear when they will be called back to work.
Aveos said it will be able to restart operations if it can secure liquidity and develop a restructuring plan.
"This was an extremely difficult decision, one we made only after lengthy and careful consideration of all other options. We deeply regret the job losses and the impact this decision has on our employees in Canada," stated Aveos CEO Joe Kolshak.
Aveos blamed Air Canada for its financial troubles, saying in its court filing that the airline reduced, deferred, and cancelled maintenance work, which resulted in approximately $16 million in lost revenue in less than two months. But Air Canada disputed that claim, saying it has met all of the financial and legal obligations of its contractual arrangements with Aveos.
Justice Mark Schrager denied an Air Canada request that would have forced Aveos to maintain operations and employment to complete the contracted repairs.
"Accommodation, if there is any between Aveos and Air Canada, is going to be made in a boardroom, not a courtroom," he said before granting creditor protection Monday.
The airline was forced to cancel several flights over the weekend. It said several pilots called in sick, there was heavy fog and a fire closed a runway at Toronto's Pearson Airport.
The head of the pilots association denied it led a co-ordinated protest to have pilots book off sick. But Capt. Paul Strachan said the stress of the labour dispute has had a clear effect on some workers.
The Canadian Industrial Relations Board will determine the merits of Air Canada's complaint that the pilots called in sick as a protest and that the action constituted an illegal strike after hearing from the two sides next week.
Aveos shut down three main plants in Vancouver, Winnipeg and Montreal, as well as other facilities in Edmonton, Calgary, Trenton and Mississauga, Ont. The International Association of Machinists and Aerospace Workers maintains Air Canada caused the problems at Aveos by sending its heavy aircraft maintenance business to other providers.
It said the layoff of Aveos workers is a violation of the Air Canada Public Participation Act and it wants the federal government to intervene and save their jobs.
"We want the federal government to intervene, otherwise a viable industry and its highly skilled workers will vanish forever," said Dave Ritchie, Canadian General Vice President of the IAMAW.
The union contends the government and Canada Industrial Relations Board should have done more to ensure Aveos was financially viable before approving the transfer of workers from Air Canada.
Aveos argues Air Canada is responsible for $10 million in severance payments owed to laid off airframe workers.
Some of those employees protested outside an Air Canada office in Montreal on Monday morning, blocking access to the building near Pierre Elliott Trudeau International Airport.
A few kilometres away, another group of laid-off workers protested outside an Aveos building. Similar protests took place in Vancouver and Winnipeg.
Union spokesman Marcel St-Jean said if Air Canada was still sending its planes to Aveos for maintenance, the company might not be in the position it is in right now.
Aveos said it was owed $60 million, mostly from Air Canada. As of January, its liabilities exceeded the book value of its assets by $165 million.
The company said it lost nearly $49 million before taxes in the fourth quarter and $9.5 million in the first nine months of last year.
Aveos was once Air Canada's technical services division but in 2007 was spun off as a separate company.
Chris Murray of PI Financial said he doesn't foresee any major impact to Air Canada's finances in the near team because of the Aveos shutdown.
Air Canada says it has a contingency plan involving other companies if Aveos is unable to ensure the work can be done. Air Canada is Aveos' largest customer, providing about 90 per cent of its maintenance overhaul work. Its exclusive airframe contract expires in June 2013, while engine work is guaranteed until 2018.
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