Ottawa gives Air Canada more time to eliminate deficit in its pension plan

OTTAWA – The federal government announced Tuesday that it would give Air Canada (TSX:AC.B) more time to eliminate a deficit in its pension plan.

The deal requires the airline to make contributions to the plan of at least $150 million a year totalling at least $1.4 billion over seven years.

The special contributions would be on top of the current service payments required by the pension plan.

The agreement also freezes increases in executive pay at the rate of inflation, prohibits special bonuses will be prohibited and puts limits on executives’ incentive plans.

The airline will also be prevented from paying dividends and buying back stock as well as making any pension plan benefit improvements without regulatory approval.

Air Canada’s pension deficit has been a chronic problem for the airline due to low interest rates which have driven up liabilities.

The Air Transport Association of Canada had argued against Ottawa granting Air Canada pension relief, saying it would create an unlevel playing field.

The group, which represents small regional carriers and training centres, argued that Ottawa should provide broad pension assistance to all Canadian companies, instead of giving a competitive advantage to the former Crown corporation.

Air Canada has said that cost savings from its recent labour agreements, startup of low-cost carrier Rouge and pension relief will help to lead the airline to sustainable profits.

Shares in Air Canada closed down six cents to $2.57 Tuesday on the Toronto Stock Exchange.