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Toronto — Air Canada has until midnight Saturday to strike a deal with its pilots that could keep the embattled airline aloft, and even its chief executive officer says "our existence as a corporation sits in the balance."

The judge overseeing Air Canada's restructuring said that if no deal is reached by this "absolute" deadline, he will hold a rare Sunday-morning court session to debate the liquidation of the national carrier.

"There is no time to reach a leisurely resolution on this," Mr. Justice James Farley said yesterday in court.

Delays, he said, will lead to an "academic debate over the bones once the buzzards have picked it over."

Judge Farley said lawyers should go to court tomorrow prepared to make arguments about whether he has the legal right to impose a settlement on Air Canada's pilots and whether the airline should be put into bankruptcy.

If the airline is placed into bankruptcy, Air Canada's managers would turn the company over to a trustee who would either try to salvage it as a going concern or liquidate its assets.

It is also possible that the court could shut down Air Canada, but allow its regional airline Jazz to continue operating with its lower-paid work force.

Air Canada has said it needs more than $800-million in savings from its annual $3-billion labour bill to emerge from bankruptcy protection.

The airline has won $609-million in concessions from eight of its labour unions, but has been unable to come to an agreement with the pilots, who represent about 22 per cent of the company's payroll.

The two sides seemed far apart last night as they resumed negotiations with Mr. Justice Warren Winkler, a court-appointed facilitator. Although the pilots say they have offered Air Canada $251.2-million in annual savings, a lawyer for Air Canada said they have come up with only one quarter of that amount.

Trading of Air Canada stock was halted yesterday afternoon pending the court appearance, and travellers across the country wondered if they can book flights on the airline with confidence.

Sean Dunphy, a lawyer for Air Canada, said the airline is working on a plan to make sure all its passengers are protected.

"We are flying today. We will keep flying until the court orders otherwise," he said.

Air Canada put out a statement late yesterday telling customers that it's "business as usual," with all flights operating on schedule.

In a recorded message to Air Canada employees, president and CEO Robert Milton urged workers to stay focused on safety and good service — despite the trying circumstances.

"Today is unquestionably the most unsettling day any of us will have ever spent at Air Canada. The fact that our existence as a corporation sits in the balance is a sobering thought," Mr. Milton said.

He also urged other workers not to take their frustrations out on the airline's pilots.

"Over my 11 years at Air Canada, I have met hundreds of our pilots, and they are true professionals who share in our view of a successful future for this company. So when you see them, remember inside they are feeling every bit of uncertainty and emotion that we all are," Mr. Milton said.

There is debate over whether Air Canada's pilots would ratify an agreement, even if the union's bargaining committee agrees to a deal.

Two of the key sticking points in the negotiations involve the pilots' supplementary pension plan and the question of how many aircraft can be flown by the lower-paid pilots at Jazz.

Air Canada wants to transfer a large portion of its flying to Jazz pilots, who are represented by a separate union.

The pilots say this could mean that Jazz would be nearly twice the size of Air Canada in six years.

Air Canada filed for bankruptcy protection on April 1, which gave it breathing space from its creditors to try to come up with cost savings.

The airline has obtained $1.3-billion in "debtor in possession" loans from GE Capital Canada Ltd. and Canadian Imperial Bank of Commerce designed to help pay the bills while it restructures its operations.

Air Canada said it doesn't want to draw down the GE Capital loan unless it gets a deal with its pilots. The airline says it would be irresponsible to use the loan to fund operating losses if the restructuring doesn't have a reasonable chance of success, since this would leave fewer assets for other creditors.

Richard Jones, a lawyer for the Air Canada Pilots Association, said Mr. Dunphy's predictions that airline operations will be "disrupted" if a deal can't be reached soon are a "threat."

He suggested those comments might have been designed to try to bring the federal government into the settlement process.

"I think he's trying to signal to Ottawa, saying 'If you want to keep the planes flying, you'd better step into this.' "

Another lawyer involved in the proceedings said that even if this started as a bluff, Air Canada has gone too far to turn back.

"By Sunday, either there will be a deal with ACPA, or this will be headed for the ditch," he said.

At airports across the country, passengers had mixed feelings about the future of the national flag carrier, founded in 1937 as Trans-Canada Air Lines.

"I'm quite concerned," said Robert Benard, a trouble-shooter with Canada Bread. "I fly every two weeks with Air Canada."

Robert Benard said he now books travel on Air Canada no more than 30 days ahead.

Mr. Benard is also worried about his Air Canada frequent-flier points. "I've got 150,000 air miles," he said. "I'm not sure what would happen to them."

Jack Oudman, who markets three-wheel motorcycles from his home in Edmonton, travels 10 times a year with Air Canada. He said he'd be sorry to see Air Canada shut down, but he has a good alternative. "It would be unfortunate, but I'd fly with WestJet," he said.
With reports from Oliver Bertin and Richard Blackwell