Cash-strapped Air Canada has cleared the last hurdle in its attempt to avoid a second bankruptcy filing, following the carrier’s last holdout union approval of a new labor contract that contains no raises or pension payments for 21 months.

Canada’s main airline, a unit of ACE Aviation Holdings Inc., now has wage and pension agreements with all five of its Canadian unions that will save Air Canada precious cash and more importantly meet the conditions necessary for getting new financing.

“These are extremely challenging times for both the airline industry and credit markets,” said Air Canada chief executive Calin Rovinescu.

Rovinescu added that the next step to returning Air Canada to profitability will include a “significant cost-reduction program requiring participation by certain suppliers and stakeholders.”

Air Canada posted a loss of C$1.03 billion last year and produced a deficit of C$400 million in the first quarter of 2009. Facing a liquidity squeeze and hefty pension payments, the company ousted its CEO in May and installed Rovinescu, an investment banker and lawyer who was Air Canada’s chief restructuring officer in its 2003 reorganisation.