(Reuters) - Air Canada ( ACDVF ) and its pilots are locked in a standoff over a new labor contract and face a deadline by Sunday to reach a deal that would avert strike action.

WHERE DO THE TALKS STAND?

If the two parties do not reach an agreement by the end of Saturday, Sept. 14, they will both have the option to issue either a strike or lockout notice, which would trigger Air Canada's ( ACDVF ) three-day plan to wind down operations.

The airline would progressively cancel flights over three days, with a complete shutdown as early as 00:01 EDT (0401 GMT)on Wednesday, Sept. 18.

On Thursday, Air Canada ( ACDVF ) CEO Michael Rousseau said the airline was still committed to reaching a deal but accused the pilots' union of making excessive wage demands.

The union has said a strike could be averted if Air Canada ( ACDVF ) negotiates a fair agreement.

WHAT IMPACT WOULD A STRIKE HAVE?

Air Canada ( ACDVF ) and its low-cost Air Canada Rouge subsidiary together operate nearly 670 flights per day, and a shutdown could affect 110,000 passengers daily as well as freight carriage.

It is Canada's largest airline, flying to more than 180 airports around the world. The strike will also likely result in fewer flights for American travelers as the airline flies passengers from U.S. cities to Europe and Asia through its Canadian hubs.

In a research note, Desjardins economists estimated a two-week pilot strike could result in a loss of around C$1.4 billion ($1.03 billion) to Canada's real GDP in September, meaning daily losses of roughly C$98 million.

A spokesperson for Air Canada ( ACDVF ) said once the airline starts implementing its wind-down plan, it would cause days and weeks of disruptions.

Air Canada ( ACDVF ) estimates it can take close to eight hours for its maintenance team to have each aircraft ready for a return to service. That means it will take four to five days to bring all aircraft back into service.

WHAT ARE THE ISSUES INVOLVED THE DISPUTE?

Air Canada's ( ACDVF ) 5,400 pilots are demanding wage rates that would narrow the pay gap with their counterparts at major U.S. carriers such as United Airlines.

Pilots at U.S. airlines have negotiated hefty pay raises in new contracts in the past two years, helped by a travel boom and staffing shortages. United's new pilot contract, for example, included pay increases of about 42%.

As a result, some United pilots now earn 92% more than their counterparts at Air Canada ( ACDVF ), according to data from the Air Line Pilots Association, which represents the carrier's pilots. In 2013, the pay gap was just 3%.

The association says Air Canada ( ACDVF ) pilots are working under pay rates and quality-of-life provisions negotiated in 2014.

Rousseau said Air Canada ( ACDVF ) had offered a wage increase of more than 30%, as well as improved pension and health benefits in the new contract.

WILL THE GOVERNMENT INTERVENE?

Prime Minister Justin Trudeau said on Friday the government would not intervene and intended instead to pressure both sides to avert a strike.

On Thursday, Air Canada ( ACDVF ) took the unusual step of saying the federal government should be ready to step in to head off a strike. While Ottawa has intervened several times in labor disputes over the last few decades, it only did so after stoppages have begun, not before.

Federal Labour Minister Steven MacKinnon has broad powers to tackle disputes and last month intervened within 24 hours to end a stoppage at the two largest rail companies, Canadian Pacific Kansas City ( CP ) and Canadian National Railway ( CNI ).

That move was denounced by unions and criticized by the federal New Democratic Party, which has helped keep Canada's minority Liberal government in power through a deal offering automatic support. Earlier this month NDP leader Jagmeet Singh withdrew that support.

WHAT HAPPENS IF MY FLIGHT IS CANCELED?

If Air Canada ( ACDVF ) cancels a flight because of a strike by its own employees, the airline must offer to rebook passengers free of charge on the next available flight offered by any carrier, or offer a refund and transportation to return passengers to their point of origin.

Air Canada ( ACDVF ) has offered flexible travel waivers for passengers scheduled to fly Sept. 15-23. The airline has said it is also working with other carriers to secure seats for customers to mitigate the impact of its flight cancellations.

However, it advised customers to accept refunds or future travel credit as seats on other airlines are expected to be limited.

Under Canada's airline passenger protection regulations, customers will not be entitled to cash compensation for expenses incurred as a result of delayed or canceled flights due to labor disruption if they are flying within Canada. Passengers traveling internationally may be entitled to compensation.

($1 = 1.3580 Canadian dollars)