Air Canada files for bankruptcy as bookings dive

Air Canada, the world's 11th largest airline, last night filed for emergency bankruptcy protection, thus becoming the latest North American carrier to succumb to the collapse in air travel and massive losses afflicting the industry.

The airline, which is struggling to restructure some 13bn Canadian dollars (£6bn) of debt, filed its request in a Toronto court under Canada's Companies' Creditors Arrangement Act, similar to Chapter 11 bankruptcy in the US.

The court protection initially runs until the end of May. It will allow Air Canada to keep flying while it finalises a debt agreement with its creditors. The airline has already put together a short-term C$1.05bn finance line, to tide it over while it seeks cost-cutting agreements with employees' unions.

The airline, which had about C$558m of cash on hand at the start of 2003, is believed to be losing about C$2m a day. Still worse may be on the way, as nervous passengers cut back their travel because of the war in Iraq.

Air Canada's move came as American Airlines, the world's biggest airline, reached a deal with its unions, cutting costs by a total $1.8bn (£1.1bn) and enabling it to avoid following its rival United Airlines into Chapter 11 – for the time being at least.

The crucial piece of the package fell into place when American's pilots agreed to a 23 per cent pay cut next year and the loss of 2,000 jobs. That alone will save American $660m a year. Don Carty, American's chief executive, will take a 33 per cent pay cut and decline a bonus for a third year. Shares in American Airlines' parent company, AMR Corp, rose 43 per cent on the news.

In one positive development, US Airways emerged from Chapter 11 yesterday, albeit much slimmed down. But the outlook for the industry is unrelentingly gloomy, with domestic bookings down 20 per cent, and international reservations up to 40 per cent lower, since the start of the Iraq war. UAL Corp, United's parent, has even warned it could go into liquidation.

In Congress, House and Senate legislators are moving towards agreement on a $3bn-plus aid package for the airlines. This could be attached to President George Bush's $75bn supplementary budget request to pay for the Iraq war, which is likely to be passed before Congress breaks for its Easter recess later this month.