Canada's largest airline has asked for protection from its creditors - which it owes almost US$9bn - but vowed to keep flying.
Air Canada's 224 jets fly to 150 destinations
Air Canada is the only Canadian carrier with an extensive network of international flights, making it vital to the country's transport infrastructure.
It is the latest casualty in a long list of airlines struggling to cope with the travel slump caused by September 11, the recent health scare in Asia and the war on Iraq.
The company said the protection will give it time to restructure and emerge as a leaner, more financially viable airline.
Seeking protection from creditors is part of the legal framework of filing for bankruptcy in many other countries.
Air Canada has debts of C$13bn ($US8.8bn; £5.6bn) and laid off 3,600 staff earlier this month.
There is already speculation that the Canadian government may come to the rescue.
'Essential part of infrastructure'
Transport Minister David Collenette said on Monday that the government was considering ways to assist the airline but ruled out a cash handout.
Credit rating agency Moody's has predicted that some government assistance may be available to the airline as it is an important part of Canada's transportation infrastructure, but said the support would be directed towards maintaining necessary flights.
Air Canada is by far the country's largest airline with a fleet of 224 jets flying to 150 destinations.
It first flew as Trans-Canada Airlines in 1937 and was owned by the Canadian government until 1989.
Shares in Air Canada hit an all-time low on Monday before being suspended from the Toronto stock exchange on Tuesday.
Air Canada is the third of North America's 10 biggest carriers to file for bankruptcy.
In the US, a package of $3.5bn of aid for ailines is currently working its way into US legislation winning two key votes of approval on Tuesday.
Key committees in both the Senate and House of Representatives voted in favour of the aid package for airlines but there are still more votes to come.
American Airlines (AA), meanwhile, the biggest airline in the US, has been hovering on the brink of bankruptcy for some weeks and is in desperate last hour negotiations to avoid going down the same route as Air Canada.
The latest news from AA unions indicated that
2,500 pilots - 20% of the total - would be laid-off over the next year.