Air Canada (ACb.TO), Canada's biggest airline, said on Monday the agreement preserved compensation and benefits for its pilots near the top of industry levels and helped to ensure the sustainability of the company's defined benefit pension fund.

"At the same time, it provides the company with the necessary flexibility to compete effectively in the current industry environment," Air Canada Chief Executive Calin Rovinescu said in a statement.

The Air Canada Pilots Association ACPA.L, which has been in on-off talks with Air Canada for more than a year, was swift to condemn the decision by arbitrator Douglas Stanley and suggested that it may affect the safety of the airline as pilots are disillusioned and distracted.

"Air Canada pilots are angry at the way they have been treated by the government and their employer," ACPA said in a statement.

"The safety and professionalism that passengers expect from Air Canada pilots have been put at risk by a corporate culture that refuses to recognize or value our contributions," it said.

A key issue in the talks was money-losing Air Canada's desire to launch a separate discount airline, which it says is crucial to future profitability. Pilots strongly oppose the plan, fearing it puts their job security and benefits at risk.

Pilots rejected a tentative labor agreement reached by its union with the carrier in May 2011, largely because it proposed the creation of a low-cost airline subsidiary.

ACPA president Paul Strachan said the new contract did make mention of a low-cost operation, but did not give further details. He said the agreement also included terms increasing the number of flight hours per month for pilots from a maximum of 90 hours to 118 hours.

"We're taking a step decades back in time in terms of allowable flight time here," he said in an interview.

Air Canada said it would not comment further on details of the new five-year agreement, which will run until April 1, 2016, while it was discussing it with its employees.

The previous agreement expired on March 31, 2011.

"With the final offer selection announced, I expect that more details will begin to emerge from Air Canada regarding its previously announced intention to start a low-cost carrier operation," said Robert Kokonis, managing director of AirTrav Inc, an airline consulting company.

BINDING ARBITRATION

Canadian Labour Minister Lisa Raitt appointed Stanley in May after the Canadian government halted in March a planned work stoppage at Air Canada sparked by the airline's decision to lock out its pilots after negotiations failed to reach a deal.

The government, arguing that a shut down of Air Canada would harm Canada's fragile economic recovery, passed legislation to prevent Air Canada's pilots, as well as its mechanics and baggage handlers, from striking and the airline from locking them out.

That legislation sent contract disputes for the two unions to binding arbitration.

"I respect the decision made by Mr. Stanley and am glad that the dispute between Air Canada and the ACPA has reached a conclusion that will ensure stability for the economy, and Canadians," Raitt said in a statement.

Despite the government intervention, Air Canada's operations were hurt by wildcat strikes involving members of both unions in March and April. The short-lived strikes caused a string of flight cancellations across the country.

Both unions have challenged the government law as unconstitutional.

The arbitrator's decision on the pilots' contract follows a separate ruling June 17, in which an arbitrator chose to enforce Air Canada's final offer, rather than a union-proposed offer, for 8,600 mechanics, baggage handlers and cargo agents.

ACPA said federally imposed arbitration could not bring about the "energized and motivated professional pilot group Air Canada needs to succeed."

"Instead, arbitration has imposed work rules that will cost many pilots their jobs, demoralize the rest and kick other important issues years down the road, where they will fester and undermine any effort to achieve positive culture change at our airline," ACPA president Paul Strachan and chairman Jean-Marc Belanger said in a statement. (Additional reporting by Susan Taylor in Toronto; Editing by David Gregorio, Andre Grenon and Richard Pullin)

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