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Air Canada CEO Calin Rovinescu poses at their annual general meeting for shareholders in Toronto, May 12, 2015. The airline has restored the health of its pension funds, freeing up money for a share buyback.MARK BLINCH/Reuters

Air Canada, passing another milestone on its road to financial health, says the funding of its pension plan has improved enough that it can opt out of a pension agreement with the federal government – a move that allows it pay dividends and buy back shares.

The airline will begin what it calls a "modest" buyback of shares starting Friday, financed in part by $110-million freed up by opting out of the pension deal.

The deal with Ottawa, which prevented the payment of dividends and repurchase of shares, and restricted executive salary increases, would have required a $200-million contribution from Air Canada this year. Instead, the improved financial position of the plan means the airline need only make solvency payments of $90-million this year.

By next year, solvency payments will be zero, the airline said in a statement late Monday, which frees up $200-million in payments that would have been required if the pension agreement were still in place.

The seven-year deal with the federal government, which regulates the carrier's pension plans, took effect last year and required Air Canada to make $200-million payments annually to restore the funds to health.

But the funds have been restored to health by a new investment strategy that generated higher returns, concessions agreed to by employees and cash contributions by Air Canada of $900-million over the past six years.

"Our ability to return to normal funding rules for our pension plans represents a highly significant and positive milestone in the execution of our strategy to transform Air Canada into a sustainably profitable company for the long term," chief executive officer Calin Rovinescu said in the statement.

The funds had a solvency deficiency of $4.2-billion three years ago.

As of last week, that deficiency had been eliminated and a surplus of $1.2-billion generated.

Among the changes to the way the plans are financed is a strategy to invest in more fixed-income assets. About 75 per cent of the funds' liabilities are now matched with such assets, reducing the interest rate risk associated with pension plans.

As part of the risk assessment, Air Canada said it simulated the effect three economic crises would have on the current assets in the plan: the 2008-09 financial crisis, the burst of the technology bubble in 2001-02 and the 1970s oil crisis.

"None of those three economic crises would result in payments exceeding an aggregate amount of $1.2-billion over the next six years," the statement said.

The share buyback will occur over the next year. Based on Tuesday's closing price of $12.58 a share on the Toronto Stock Exchange, the buyback would cost the airline $125.8-million.

Air Canada plans to spend $9-billion during the next several years, mainly on new aircraft and equipment, but said the majority of its free cash flow will be devoted to reducing net debt and making annual debt payments that will average $600-million a year over the next several years.

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