Labour Minister Lisa Raitt has applauded a resolution to the battle between Air Canada and its flight attendants that avoids a strike and settles the dispute through arbitration.

The two sides have agreed that an arbitrator will issue a binding agreement in about two weeks under federal labour laws that prevent a strike during the period.

"This resolution will bring labour stability to the airline while addressing the workplace issues raised by the CUPE negotiating team," she said in a news release Friday, hours after the deal was announced.

Despite the difficult circumstances, both parties were able to resolve their differences without any disruption to the public, the minister added.

"This negotiated settlement is unquestionably in the best interest of employees, the travelling public and the Canadian economy."

Wages, working conditions and pension changes are issues, along with Air Canada's plans to launch a discount carrier.

The 6,800 Air Canada flight attendants rejected two tentative agreements that the union negotiated this year. They had threatened to strike last month and complained loudly that the airline has forced them to swallow too many concessions over the years.

The flight attendants were forced to withdraw the strike threat when the federal government referred the bitter dispute to the national labour board.

Unlike the case with customer service agents, the arbitrator will have the latitude to craft a decision without being restricted to a choice of either proposal presented by each side.

The CAW arbitrator sided with the union's proposal for a hybrid pension plan. New employees will have defined contribution plans, while existing workers will remain in defined benefit plans.

Union sources say its proposal will reflect the concerns of members that led them to twice reject tentative deals the union had proposed they ratify.

The latest agreement to send the conflict to arbitration was reached after the parties met Thursday with the Canada Industrial Relations Board, which was considering two referrals from the minister.

Both referrals, including the one involving whether Air Canada should be considered an essential service are expected to be declared moot by the chairwoman of the CIRB.

Hearings are to begin Oct. 28 and a binding arbitration award is to be made by Nov. 7. The labour board will appoint an arbitrator if the two sides can't agree on one.

Both parties also agreed to withdraw unfair labour practice complaints filed by Air Canada on Oct. 12 and by CUPE on Sept 19.

Agreeing to the arbitration process prevents any further intervention from the government on this specific dispute.

The Conservatives have cited the country's fragile economy for threatening back-to-work legislation to forestall possible strikes in several labour disputes.

Some observers have even suggested the government may move to change the Canada Labour Code to prevent strikes in transportation and telecommunications sectors.

While not specifically addressing any changes, Ms. Raitt said the government remains supportive of "the concept of free collective bargaining."

"And as I have always stated, it is best when both parties work together to achieve an agreement."

Paul Moist, CUPE's national president, said the federal government's threat of back to work legislation and asking the labour board to take away the workers' right to strike have made it too difficult to reach an agreement through negotiation.

"In this context arbitration is the best option," Mr. Moist said in a statement Thursday evening.

Duncan Dee, Air Canada's Chief Operating Officer, expressed hope the two sides could finally move forward.

"Air Canada is pleased to have a process in place whereby we can avoid any disruption of service and eliminate uncertainty for our customers," Mr. Dee said in a statement.

The agreement comes ahead of a planned union rally on Parliament Hill to support free collective bargaining.

It follows a string of protests that have taken place across the country, including in front of the Prime Minister's Calgary office and Ms. Raitt's constituency office west of Toronto.

Observers say Parliament Hill provides an important visual backdrop as the union tries to mobilize opposition MPs and court public opinion against further government intervention.

The resolution to Air Canada's dispute with flight attendants comes as at least one analyst downgraded the airline Friday over the impact of a prolonged period of slow economic growth.

Tasneem Azim-Khan of UBS cut her share price target in half to C$1.50 because of pressure on costs from more moderate capacity growth and liquidity pressures.

On the Toronto Stock Exchange, Air Canada shares lost one cent at C$1.36 in morning trading.