TORONTO - Air Canada pilots are concerned that the airline's launch of a low-cost carrier could threaten their job security and working conditions, the union said Tuesday as the plans came closer to fruition after an arbitrator sided with the airline in a labour dispute.

A federal arbitrator chose Air Canada's final offer Monday, imposing a five-year collective agreement that includes, among other things, provisions allowing the airline to create a budget carrier.

The airline (TSX:AC.B) says the agreement, effective until April 2016, will give it the flexibility it needs to compete with budget carrier WestJet (TSX:WJA), which operates mostly domestic flights and doesn't have Air Canada's issues with union and pension woes.

"Another piece has fallen into place with this arbitration decision," said Air Canada spokesman Peter Fitzpatrick.

"The industry has changed and a lot of low-cost competition has arisen around the world and in Canada. It's no secret WestJet has a fairly significant cost advantage over Air Canada, so we need to create a vehicle that will be competitive."

Air Canada's top executives have said the launch of a discount carrier is a top priority, but details about the airline's plans are sparse.

"We're looking at our options," said Fitzpatrick. "Our president has said repeatedly that we intend to participate in this market, and how we'll do that is really what we're working on now."

Although Air Canada's offer indicates the low-cost carrier will employ workers from the Air Canada Pilots Association, the union's president says it will be "under drastically different terms of employment."

"While (the discount carrier) may employ ACPA pilots, it'll be under an entirely different set of work rules," said Paul Strachan.

"And, in the absence of a business plan or any sort of commercial projections (from Air Canada), I have to assume that's the whole point of the exercise."

Strachan said those new work rules would include longer hours.

Air Canada's offer also has provisions that allow the airline to remove the entire Embraer fleet of planes from the main line if a low-cost carrier is created, which may result in job losses for pilots, he added.

Air Canada's offer includes pay increases for the pilots: two per cent in 2011, 2014 and 2015, five per cent for 2012 and three per cent for 2013.

Air Canada has tried the discount route before with its launch of the now-defunct Zip Airlines.

At the airline's annual general meeting in June, chief executive officer Calin Rovinescu said Zip failed because it had a limited number of planes to battle WestJet.

The pilots are one of two major labour groups at Air Canada that have recently been forced to accept the airline's final offer in labour negotiations. The other union is the International Association of Machinists and Aerospace Workers, which represents repair and ramp crews.

Both disputes were sent to binding arbitration ordered by the federal government, which brought in back-to-work legislation after Air Canada locked out the pilots and the Machinists announced they would go on strike earlier this year.

Air Canada has been beset by labour problems for most of the last year with all of its major unions, which has hurt both its reputation and its share price.

The airline's shares rose more than eight per cent on the Toronto Stock Exchange in early trading Tuesday, but rose to $1.13 by the afternoon, an increase of five cents.

Related on HuffPost:

Loading Slideshow...
  • Air Canada's Labour Problems

  • June 2011: Ground Workers Strike

    About 3,800 customer sales and service representatives represented by the Canadian Auto Workers union held a three-day strike in June. They reached a deal with company just hours after the federal government introduced a bill seeking to legislate them back to work. At issue was employee pensions. The airline proposed new hires would receive defined contribution pension plans instead of the defined benefit plans current employees have. Ground workers ratified a new contract that leaves pensions alone, but negotiations continue over their future shape. -- <em>The Canadian Press</em>

  • Sept./Oct. 2011: Flight Attendants

    Air Canada's 6,800 flight attendants voted 98 per cent in favour of a strike action in September, rejecting a contract the Canadian Union of Public Employees had negotiated with the airline. At issue, once again, was pensions -- Air Canada had proposed that new hires would receive defined contribution pensions plans instead of the defined benefits plans flight attendants currently receive. CUPE and the airline negotiated a second deal in October, and flight attendants rejected it again -- this time by a more narrow 65 per cent. The federal government intervened again, sending the dispute to an arbitrator, who imposed the second agreement hammered out between the union and the airline. -- <em>Canadian Press files</em>

  • March 2012: Pilots, Mechanics Lockout Averted

    Air Canada's pilots and ground technicians were set to walk off the job just in time for March break when Air Canada threatened to do it for them and lock them out. For the third time in less than a year, the federal government intervened, passing back-to-work legislation and sending the matter to the industrial relations board. Prime Minister Stephen Harper defended the government's repeated use of back-to-work laws to prevent Air Canada strikes and lockouts, saying the airline is crucial to Canada's economy and cannot be allowed to stop operating, especially during a high travel season. -- <em>Canadian Press files</em>

  • March 2012: Protests Against Aveos Layoffs

    Days after a pilots' and machinists' strike was averted, Aveos, an Air Canada maintenance contractor, announced it was shutting plants in Montreal, Vancouver and Winnipeg laying off 2,400 employees. Some 200 employees in Montreal blocked access to the Air Canada building at Montreal's Pierre Elliott Trudeau building on Monday March 19, 2011. -- <em>Canadian Press files</em>

  • March 2012: Pilots Mysteriously Sick After Dispute

    Days after Labour Minister Lisa Raitt used legislation to prevent a walkoff or lockout of Air Canada pilots, the airline was hit with a flurry of delays and cancellations as an unusually high number of pilots called in sick to Montreal's Trudeau airport. The airline clearly suspects the move may have been some kind of covert labour action, as it has filed a complaint about the incident with the labour relations board. -- <em>Canadian Press files</em>

  • March 2012: Wildcat Strike

    A ground crew wildcat strike disrupted Air Canada's operations at Pearson Airport on Friday, March 23, 2012, after the airline reportedly fired three workers who had followed Labour Minister Lisa Raitt through the airport, heckling her. When ground workers walked off the job in protest, the airline reportedly fired 37 of them, causing further job walkoffs. The labour relations board eventually put a stop to the protests and reinstated the 37 fired workers, but not before the strikes had spread, briefly, to airports in Montreal and Vancouver.

  • April 2012: 'Sick-Out' Strikes Pearson

    A month after pilots in Toronto and Montreal called in sick en masse, prompting flight cancellations, the same thing appeared to happen again, as a "sick-out" by pilots hit Toronto's Pearson Airport. At least 60 flights were cancelled the morning the apparent job action hit. The Air Canada Pilots Association distanced itself from the action, saying it wasn't sanctioned by them. Air Canada described the sick-out as "illegal." Photo: Chris Bouchard, whose flight to Calgary was cancelled upon his arrival, checks flight times at Toronto Pearson Airport on Friday, April 13, 2012. (THE CANADIAN PRESS/Michelle Siu)

  • July 2012: Arbitrator Sides With Airline

    Air Canada pilots lost their monumental labour battle with the airline when an arbitrator, appointed by the government after back-to-work legislation, sided with the airline. The decision sent Air Canada stock higher on the expectation the decision would pave the way for a discount Air Canada airline brand, but left the company's pilots angry and disillusioned.