Raitt was speaking a day after the pilots, concerned about the impact Air Canada's (ACb.TO) plan to start a low-cost carrier would have on their jobs and wages, voted 97 percent in favor of giving their union a strike mandate.

"I have received agreement from both parties ... that they will submit to the extended mediation process," Raitt told Parliament. "I'm very grateful for the work that they're going to put in, and we expect them to get a deal."

Raitt's spokeswoman, Ashley Kelahear, added in an email: "This government is pleased to advise the Canadian public that they can rest assured that it is business as usual at Air Canada and there will not be any disruptions in service."

On Tuesday, Raitt offered six months of mediation to the two sides, which she said were "really far apart".

Kelahear said the agreement to submit to mediation did not mean each side was surrendering its right to give notice of a strike or lockout during the six months. But that prospect was highly unlikely in the short term as the mediation process gets underway.

"Both sides have committed to reaching a resolution and both have indicated they have no intention of taking industrial action," Air Canada spokesman Peter Fitzpatrick said. "So in the meantime it is business as usual."

Kelahear added: "The minister would like to thank both parties for their commitment to the collective bargaining process and for ensuring that a work stoppage is avoided."

The key issues for pilots, who have been without a contract since March 31, 2011, are pay, pensions and Air Canada's low-cost carrier plan, which it says is critical to sustained profitability.

The Montreal-based airline said last week it was evaluating various models for operating a discount vacation carrier.

A report in the Globe and Mail newspaper on Wednesday said Air Canada has dedicated about 60 staff and nearly 30 consultants and lawyers to devise a plan for a low-cost airline and was seeking a foreign airline as a minority partner in the venture.

"We cannot comment on rumor and speculation," Fitzpatrick told Reuters.

(Editing by Frank McGurty and Peter Galloway)

• A Permanent Economic Emergency