Canada has appointed a mediator to try to settle disagreements between Air Canada and its unions and retirees over the future of the airline's pension plan, Finance Minister Jim Flaherty said Thursday.

Air Canada, the country's largest carrier, drew protest last month when it asked unions to support a moratorium on funding its CAD$2.85 billion (USD$2.59 billion) pension deficit.

A solution to pension funding woes and concessions from unions are seen as crucial to keeping Air Canada from filing for bankruptcy protection for the second time in six years.

Former Ontario Superior Court judge James Farley, who oversaw Air Canada's 2003 bankruptcy, will seek a solution on the company's pension and other issues, the government said.

The company's recently-appointed CEO Calin Rovinescu has said labor stability is essential as it seeks new financing arrangements in the face of slumping demand.

The carrier's labor agreements with unions representing about 18,000 employees expire at the end of May and June.

News of a mediator came as a surprise to the Canadian Auto Workers union, which said it was awaiting a response to its latest offer to Air Canada when the announcement was made.

"We were actually making good progress and getting really quite close to resolving the outstanding issues," CAW Local 2002 president Leslie Dias said. She said a few key issues remain, notably on pension plan funding.

Air Canada told the union an official response to its latest offer will not come until Sunday, as the carrier determines the mediator's terms of reference, Dias said.

The union's current collective agreement, for about 4,500 employees, expired May 31. The CAW, which has been in talks with Air Canada for the last two weeks, has demanded the company continue funding its pension plan.

"Obviously we welcome the assistance," said CAW president Ken Lewenza. "We'll see how this works out."

Air Canada Pilots Association, which represents more than 3,000 pilots, said it looked forward to working with Farley.

Versant Partners analyst Cameron Doerksen has estimated total pension funding obligations this year at CAD$507 million, up CAD$114 million from last year.

Air Canada gained some breathing room from a key credit card processor late last month, allowing it to reduce the cash it needs on hand to CAD$800 million from CAD$1.3 billion.

The Montreal-based company lost CAD$400 million in its first quarter. Revenue dropped 12 percent to CAD$2.39 billion.