Air Canada's struggle to stay airborne took a dramatic new turn Tuesday as it filed for and was granted court protection from its creditors a move commonly known as filing for bankruptcy protection.

"Air Canada is determined to do all in its power to restructure itself through this process and emerge as a world-class competitive and profitable airline," an airline affidavit filed with Ontario Superior Court of Justice said.

The move clears the way for a major restructuring the airline hopes will allow it to dig itself out from under a mountain of debt.

Air Canada said it will keep flying while the restructuring is in progress, saying it has lined up $700 million US in special "debtor-in-possession" financing to keep operating while it restructures.

Filing for protection under the Companies' Creditors Arrangement Act (CCAA) gives companies time to reorganize their operations and hold talks with their major stakeholders creditors, bond-holders, unions and suppliers. While CCAA protection is in place, creditors are prevented from taking any action against the airline.

Air Canada's protection is in place until May 1, but can be extended.

At this point, it's not completely clear what Air Canada will look like after the CCAA process, airline analyst Rick Erickson said. "I have to think we're probably going to see some fairly significant cuts, in terms of capacity and frequency, and that, of course, is going to mean job cuts," Erickson said during an interview on CBC Newsworld.

No federal help needed: Collenette

Transport Minister David Collenette said Ottawa was prepared to offer loan guarantees to the airline subject to "strict conditions."

But he said the airline told him late Monday night that loan guarantees would not be necessary because it had lined up that $700 million US in bridge financing from GE Capital. Ottawa has previously ruled out a cash bailout for the airline.

"We have to be fair to the industry. But we have to be fair to the taxpayers," Collenette said.

The bankruptcy filing comes as the airline faces major debt repayment deadlines and dwindling cash reserves which analysts said might run out in as little as three months.

Air Canada has been struggling with almost $13 billion in debt, part of which it acquired in its successful 1999 takeover of Canadian Airlines.

Troubles deepened after the economic downturn in 2000 and 2001 ate into its lucrative business travel. Then came the attacks of Sept. 11, 2001, which devastated airline business around the world.

Air Canada has also been busy trying to fend off competition from discount upstarts like WestJet, Jetsgo and CanJet. A series of fare wars delighted passengers but hurt its bottom line as it fought for market share with rivals that had much lower labour costs.

The airline's competitors accused Air Canada of trying to drive them out of business by unfairly undercutting them on routes on which they competed.

High fuel prices didn't help either, and the war in Iraq further cut back on passenger traffic.

On March 20, Air Canada cited the war as one of the reasons why it was cutting 3,600 of its 35,000 jobs. Those cuts were on top of $650 million it wants to slash from its annual labour bill.

But talks with several of its unions met with mixed results and the labour cuts could not be obtained.

The Canadian Auto Workers agreed late Monday to job cuts 1,060 interim layoffs among the 9,500 passenger agents it represents. The CAW also agreed to defer a 2.5 per cent wage increase. But most of the other unions said they could not agree to the cuts Air Canada was demanding.

Sale of Aeroplan stake to Onex off...for now

Air Canada also announced its deal to sell 35 per cent of its popular Aeroplan loyalty program to Onex Corp for $245 million is now off, but both parties say they hope to conclude a new agreement.

Air Canada is the latest North American carrier to file for bankruptcy protection.

US Airways, United Airlines' parent UAL, and Hawaiian Airlines have all filed for Chapter 11 in the United States the American equivalent of a CCAA filing. There are also rumours that AMR, parent of American Airlines, is days away from filing for Chapter 11.

Trading in Air Canada stock halted

Trading in Air Canada's shares was halted on the Toronto Stock Exchange before the market opened on Tuesday. They last traded at $2.10 a 17-month low.

Shareholders in Air Canada will likely lose their investment, according to Barry Prentice, director of the Transport Institute at the University of Manitoba. Prentice also told CBC Business News that Air Canada bond-holders would likely turn into equity holders.

But Prentice said the majority of Air Canada bondholders are American, so swapping debt for equity would be "complicated" because of the government's restrictions on foreign ownership of Air Canada shares.

Survival of company at stake in restructuring talks: Air Canada

There seems little doubt that when Air Canada emerges from bankruptcy protection, it will likely be a smaller airline, with fewer employees who earn less money and fly fewer routes.

Air Canada's chief financial officer put the stakes in the upcoming restructuring talks at no less than the survival of the company.

"Failure to adapt all aspects of the business capital and labour to the new realities will result in an avoidable but tragic disaster in which all stakeholders will emerge as losers," Robert Peterson said in an affidavit filed with the courts Tuesday.