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.
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