March 20, 2012 / 8:27 PM / 5 years ago

CORRECTED-WRAPUP 2-Air Canada faces challenges from Aveos, pilots

* Bankruptcy protection granted until April 5

* Letter on corporate site terminates all workers

* Aveos workers throw stones, eggs at Air Canada staff

* Air Canada must have service centers across Canada

By Leila Lemghalef and Allison Martell

MONTREAL/TORONTO, March 20 (Reuters) - The company that services planes for Canada's biggest airline laid off all its staff on Tuesday in a new headache for an airline already heading to binding arbitration on two labor disputes.

Aveos Fleet Performance Inc, which does heavy maintenance for Air Canada, posted a termination letter on its website on Tuesday afternoon, addressed to "all employees."

"We regret to advise you that effective immediately your employment with Aveos Fleet Performance Inc. is terminated. You are no longer required to report to the workplace," it said.

Aveos was once the in-house maintenance division at Air Canada, and many of its 2,600 employees in Canada previously worked for the airline, some of them very recently.

It obtained bankruptcy protection on Monday, laid off workers in its airframe division and blamed Air Canada, its principal customer, for a liquidity crisis.

Even before the additional layoffs, Aveos workers held a noisy protest outside Air Canada's headquarters in Montreal, pelting passing cars with stones, eggs and debris. One person was arrested.

Air Canada, the only airline serving many smaller Canadian centers, has already been in disputes with both its pilots, represented by the Air Canada Pilots Association, and with its machinists, who are represented by the same union who represent the Aveos workers.

The pilots, angry after the federal government passed a law to prevent a strike or lockout at the airline, said they were challenging the legislation in court, complaining that it violated their right to collective bargaining.

Neither Aveos nor Air Canada could be reached for comment, although Air Canada said on Monday that a disruption at Aveos would not affect its day-to-day operations.

JETBLUE, CANADIAN GOVERNMENT ARE OTHER CLIENTS

Aveos services planes for Air Canada, for the Canadian government and for a number of other airlines, including U.S. carrier JetBlue < J BLU.O>, it said in its filing for creditor protection.

Its initial bankruptcy protection order, issued by a Montreal court under Canada's Companies' Creditors Arrangement Act, the equivalent of a U.S. Chapter 11 filing, will expire on April 5.

The workers' protest, the second in two days, took place near the Air Canada and Aveos headquarters in an industrial part of Montreal. Some demonstrators threw eggs, rocks, wooden planks and Christmas lights at cars headed toward the airline's facility.

Rehan Sheikh was one of the laid-off workers at the protest. He was an Air Canada employee until three weeks ago, but said he was told last year that he had to choose between the airline - where he would likely have been laid off soon - and Aveos.

"Us young guys were forced to choose Aveos or we would have been laid off," he said. "They promised us a lot."

Late on Monday, Air Canada said it had offered Aveos a debtor-in-possession financing package, which the airline said could help Aveos resume some operations. But the package was similar to one Aveos and its lenders rejected over the weekend.

Aveos became an independent company in 2007, although Air Canada still owns the maintenance facilities and leases them back to Aveos.

The Canadian government noted on Monday night that Air Canada is obliged by law to keep overhaul stations in Montreal; Mississauga, Ontario; and Winnipeg, o n e of several regulations that Air Canada's competitors do not face. [ ID :nL1E8EJCY4]

Other airlines, unlike Air Canada, do not have to comply with language laws that say customers have the right to service in English or in French, Canada's two official languages, for example.

Air Canada, which competes domestically with Calgary-based WestJet Airlines Ltd and privately owned Porter Airlines, is trying to cut costs and change the way it operates, and it came close to shutting down earlier this month amid threats of a simultaneous strike and lockout.

The government, which says the Canadian economy is too fragile to withstand a work stoppage, prevented both with legislation that sent the two separate contract disputes to binding arbitration.

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