updated 8/3/2010 8:03:12 PM ET 2010-08-04T00:03:12

Debt-ridden Mexicana de Aviacion, Mexico's largest airline, announced Tuesday it filed for bankruptcy protection in Mexico and the U.S. after pilots and flight attendants rejected a deal to cut pay and staffing.

Mexicana said it filed Monday in a Mexico City court "to restructure its cost and insure the viability of the company." Mexico's insolvency law will allow Mexicana to keep operating while it tries to solve its financial problems, the company said.

The airline also filed for Chapter 15 bankruptcy in a New York court saying it needs protection from creditors who may want to seize its U.S. assets.

"Action against Mexicana's aircraft or airport terminal operations and equipment would seriously disrupt Mexican's efforts to restructure its affairs," Maru E. Johansen, Mexicana's U.S. vice president for legal affairs and corporate affairs, said in court papers.

Creditors in the U.S. and Canada worried about Mexicana's financial situation had three of the airline's aircraft grounded last week.

Johansen said the company was badly hit by the swine flu outbreak last year. Mexicana "suffered losses as a result of a flu epidemic that had a severe, immediate and unexpected impact upon Mexican tourism and business-related trips and travel," he wrote.

The airline owes Mexican banks at least 2.5 billion pesos (US$199 million), Chief Executive Officer Manuel Borja said at a news conference Monday. Borja didn't say what the company's total debt is.

The airline has proposed pay cuts of 41 percent for pilots and 39 percent for flight attendants, along with a 40 percent reduction in employees, saying both are needed to keep the company afloat.

"The labor costs of (Mexicana) are well above the global average," the company said.

Pilots and attendants say they accepted wage reductions and gave up some benefits starting in 2006, saving Mexicana around $48 million a year. They blame the company's financial woes on poor management.

Leonardo Sanchez, a spokesman for the pilots union, said it has asked Mexico's president and lawmakers to order an investigation into the financial dealings of Mexicana since 2005, when it was bought from the government by Grupo Posadas.

He said federal authorities should look at "whether executive deliberately drained the company of capital to the detriment of pilots and whether the company's assets were transferred to the group's two other airlines" — Click and Link.

Sanchez said the pilots union was not considering going on strike for now.

The flight attendants union said in an ad published Tuesday in local media that it rejected "the fraudulent intention of making Mexicana de Aviacion file for creditor protection since this means sharing the loses while privatizing the gains by leaving Click and Link out of the proceedings."

Mexicana suspended three flights — one domestic, one between Sacramento, California, and Guadalajara and another between Sacramento and San Jose del Cabo. The frequency or routes have been changed for 28 other flights, the company added in a news release posted on its website.

Mexicana flies to more than 65 national and international destinations, including the United States, Canada, Central America, South America and Europe. Mexicana carried 11.1 million passengers in 2009, the company says on its website.

Copyright 2010 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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