Negotiations to determine whether pilots of Air Canada [OTC: ACNAQ] or its Jazz subsidiary will fly recently ordered regional jets (RJs) will be drawn out for at least another month after an arbitrator in the case reserved initial judgment and closed the proceedings to the public.

Arbitrator Martin Teplitsky will hear arguments from both carriers' pilots unions throughout February in order to determine whether to arbitrate the case based on "rights" or "interests." Air Canada pilots put forth a motion to determine the case on "rights," which would require Teplitsky to interpret the collective agreements to decide which group has the right to fly the new jets. Jazz pilots favor an "interest-based" solution to determine which pilot group will fly the new RJs based on optimal solutions of future interests.

Air Canada announced in December the purchase of 90 regional jets, to be split evenly by Montreal-based Bombardier [Toronto: BBDb] and Brazil-based Embraer [NYSE: ERJ] (CRAN, Jan. 5). The orders are worth almost US$2.7 billion for jets ranging from 50 to 110 seats. By exercising options to double each order, the final deal could be worth up to US$5.4 billion.

The mainline and regional pilots have battled since last summer over who would get to fly the new RJs, which are integral to Air Canada's efforts to emerge from bankruptcy (CRAN, June 30, 2003).

Teplitsky reserved judgment last week by stipulating that a decision now would be premature, and subsequently closed the entire process to the public. A final outcome could be expected as soon as early March.

Air Canada spokesman John Reber confirmed that the pilots are in the arbitration process but would not comment further.

The arbitrator noted that Air Canada's ongoing restructuring makes it critically important to reach a satisfactory and timely resolution of the new aircraft allocation.

The pilots' settlement of the issue has been made a condition of Victor Li's US$650 million proposal to gain voting control of Air Canada, that country's largest air carrier.

An Ontario Superior Court judge Jan. 16 approved not only Li's offer, but also two other financial deals in an effort to bring Air Canada out of its 10-month bankruptcy. GE Capital Aviation Services (GECAS), a unit of U.S. conglomerate General Electric [NYSE: GE], will provide a US$585 million loan when Air Canada emerges from creditor protection, plus US$950 million to help purchase the RJs and restructure leases on 108 aircraft.

The judge also approved a third motion indemnifying Wall Street investment house Merrill Lynch [NYSE: MER] for its role as an adviser to Air Canada's board.