The deal, the Competition Bureau said Wednesday, will allow the airlines to co-operate on other routes where they don't hold a near monopoly.
Under the agreement, Air Canada (TSX:AC.B) and its Star Alliance partner are prohibited from co-ordinating their prices and schedules on 14 busy routes that connect several large Canadian cities with several large U.S. cities.
The federal agency will appoint an independent monitor operating at the airlines's expense to ensure Air Canada and its partner United Continental comply with terms of the agreement.
The deal "will ensure that passengers do not face higher prices and less choice on high-demand routes between Canada and the U.S. resulting from the airlines' proposed joint venture and co-ordination agreements," interim Competition commissioner John Pecman stated Wednesday.
The bureau says studies by U.S. anti-trust authorities of similar route monopolies found that prices increased by 15 per cent when there has been little competitive choice.
The airlines announced the joint venture in October 2010 but suspended its plans in June 2011 after the Competition Bureau intervened and raised concerns about the proposal and filed an application with the Competition Tribunal to block the joint venture.
The bureau originally identified 19 transborder routes, including 10 monopoly routes, where competition would be substantially reduced owing to the joint venture and the co-ordination agreements. But after reviewing additional information determined that competition won't likely be substantially harmed on five of those routes.
They are Montreal-New York, Toronto-Chicago, Toronto-New York, Vancouver-New York and Vancouver-Los Angeles.
Canadian airlines are unable to formally merge with non-Canadian airlines because of foreign ownership restrictions. But former commissioner Melanie Aitken had said the original joint venture proposal would have achieved that very same result for Air Canada and United Continental.
It originally also sought to undo three current co-ordination agreements between the two airlines.
Under the agreement, Air Canada and United Continental Holdings Inc. — formed by the merger of the United and Continental airlines — will be prevented from co-ordinating the number of seats available at each price on the affected routes. They will also be prevented from sharing commercially sensitive information or pooling revenue or costs on the routes.
Air Canada said it's pleased the settlement preserves its long-time relationship with United Airlines — two of North America's largest carriers.
"Air Canada has co-operated extensively with the commissioner throughout this process, and will continue to comply with all applicable regulatory requirements of the jurisdictions in which we operate," said Air Canada executive vice-president Ben Smith.
The airline said many of the transborder routes have already been subject to certain restrictions by the U.S. Department of Transportation and therefore it is used to working within such parameters.
"In addition, this agreement provides the flexibility to implement a Canada-U.S. transborder joint venture, an increasingly common practice in the global aviation industry, and one that is an important competitive consideration as the industry continues to evolve."
When the joint venture was announced, Air Canada and United said their closer ties would benefit passengers through lower fares, better co-ordinated flight schedules and connection times, more route choices, and improved frequent flyer benefits.
Chris Murray of PI Financial called the agreement a minor positive for Air Canada.
"It's not going to give them the major cost efficiencies I think they were hoping for but at the same time we pretty much expected that they were going to get killed outright," he said in an interview.
"For consumers, if you look at the city pairs it's really going to be for the most part the status quo."
While the agreement isn't perfect, Robert Kokonis, managing director of consultancy firm AirTrav, said it removes uncertainty from Air Canada's most significant commercial airline partnership and allows it to move forward with many other routes.
"This agreement will provide a material uptick to Air Canada's top line that will be reflected in revenue per available seat mile and bottom line earnings once the joint venture is fully implemented," he said in an email.
Air Canada is Canada's largest domestic and international airline serving more than 175 destinations on five continents. It is the 15th largest commercial airline in the world and flew more than 33 million passengers last year.
The airline and its regional partners operate more than 400 non-stop flights per day on over 100 routes to and from 55 U.S. and six Canadian airports.
On the Toronto Stock Exchange, Air Canada's shares closed unchanged at $1.88 in Wednesday trading.