10/28/2011 03:33 EDT | Updated 12/28/2011 05:12 EST

Air Canada and flight attendants union present arbitration proposals

MONTREAL - Air Canada and the union representing flight attendants met behind closed doors with an arbitrator on Friday to present proposals that will form the basis of a new collective agreement.

Both parties have agreed not to divulge the contents of their presentations.

But the carrier's desire to start a low-cost carrier, wages, working conditions and pensions are among the areas expected to be decided by a Canada Industrial Relations Board arbitrator.

In the pension arbitration ruling for customer service representatives, the arbitrator could only choose one proposal or the other. Kevin Burkett selected the union's proposal for a hybrid pension plan over the airline's desire for defined contributions for new hires.

The flight attendant arbitrator can craft a deal that takes components presented by both sides.

That makes the ruling by Nov. 7 difficult to predict.

Despite the different arbitration rules, industry observers have said arbitrators still typically prefer gradualism over making any groundbreaking moves.

The meeting comes a couple of days after the airline angered its pilots by seeking Ottawa's help in reaching an agreement through the appointment of conciliators — whose role is to help the two sides work through their differences.

The problem for the pilots union, however, is that the conciliation process begins a countdown that gives it limited time to find a plan that members can support.

The federal government's determination to prevent strikes has limited any material dropoff in Air Canada's (TSX:AC.B) forward bookings, says Walter Spracklin of RBC Capital Markets.

However, the airline's shares took a beating in the quarter, falling 36 per cent despite posting a 3.8 per cent traffic growth as it grappled with labour negotiations and a string of negative economic headlines.

Air Canada's regional partner Chorus Aviation (TSX:CHR) suffered a 25 per cent share dip, while shares of WestJet Airlines (TSX:WJA) fell only 15 per cent as traffic grew 7.7 per cent.

Spracklin is expecting the industry will face "a hard landing despite resilient traffic data" when it reports quarterly results next week.

Montreal-based Air Canada's profit is expected to slip to 48 cents per share from 91 cents a year ago despite an eight per cent growth of revenues to $3.3 billion. On an adjusted basis, it earned 64 cents per share last year.

Analysts polled by Thomson Reuters also expect WestJet's EPS to slip three cents to 34 cents per share on $785 million of revenues, which would be up 15 per cent on the year.

Chorus EPS should drop one cent to 14 cent per share as revenues increase six per cent to $402 million.

The International Air Transport Association upgraded industry profit forecasts in September to US$6.9 billion from US$4 billion. But it expects profits in 2012 will fall to US$4.9 billion on margins of 0.8 per cent.

Traffic on the world's airlines from business and first-class fares has slowed amid of weaker economic growth and declining business confidence. IATA said it increased by only 2.3 per cent in August, compared to 7.5 per cent in July.

"Air Canada is most exposed to premium travel so weakness in the segment would clearly adversely impact its profitability," wrote Cameron Doerksen of National Bank Financial.

He expects Canadian carriers, including Porter Airlines, will be "rational" by adding limited amounts of capacity in 2012.

Discounted fares prompted by intense competition is expected to trim yields in the third quarter. But Doerksen said overall ticket prices have recently improved and a higher than a year ago.

Despite a 10 per cent drop in WTI fuel prices in the quarter, a more than doubling of jet fuel crack spreads on futures markets should offset any benefits to airlines, added Spracklin.

A $100 per flight reduction in landing fees at Toronto's Pearson International Airport has also not expected to have much impact, reducing Air Canada and Chorus' annual frees by $12 million a year.

The airline would save $700 million annually if Canada adopted the same fee structure as in the United States.

On the Toronto Stock Exchange, Air Canada's shares gained two cents to $1.39 in Friday trading. WestJet was off two cents to $13.38 while Chorus fell five cents to $3.94.