MONTREAL -- Air Canada took a major step forward Wednesday as it reported its pension plans posted a small surplus, compared with a $3.7-billion deficit last year.

The improvement, to be confirmed later this year, helped boost shares in the airline to a nearly six-year high Wednesday.

Air Canada shares closed up 72 cents at $9.67 on the Toronto Stock Exchange.

The pension deficit have been a major drag on Canada's largest airline for many years, resulting in friction with Air Canada's unions as well as a significant expense. Air Canada's pension deficit peaked at $4.2 billion in 2012.

"We have, over the past four years, made significant progress," Air Canada president and chief executive Calin Rovinescu said.

The unions welcomed the turnaround, which they say will assuage fears of employees and retirees.

"Obviously we're pleased that the projected deficit has been eliminated because that has been a monkey on our back since 2003," said Leslie Dias, national representative of Unifor, which represents airport and call centre workers.

The head of the pilots' union said the surplus means that employee pensions are more secure and that about $1 billion worth of pension benefit cuts it agreed to, produced results.

"Many of our members and employees at Air Canada were cynical and skeptical about their pension benefits and I think today we've been shown that with sound management and sensible regulations that these pension plans can survive," Craig Blandford, president of the Air Canada Pilots Association, said in an interview.

The small surplus came as Air Canada (TSX:AC.B) saw a big drop in its pension plan liabilities as the interest rate used to calculate them increased sharply, reflecting an increase in long-term bond rates.

The rate for determining the plan's liabilities increased to 3.9 per cent compared with three per cent last year, reducing the deficit by an estimated $1.35 billion. Every tenth of a percentage point increase in the discount rate lowers the solvency deficit by $150 million.

The pension plan also reported a 13.8 per cent return on investments in 2013, benefit amendments that decreased the deficit by $970 million, and a $225-million contribution by the company.

Under a deal with Ottawa last year, Air Canada agreed to put $1.4 billion over seven years -- at least $150 million annually or $200 million on average -- into its pension plan to deal with its deficit. Without the agreement , the airline would have been forced to devote hundreds of millions more annually to its pension plans.

The airline said Wednesday that it may now consider opting out of its agreement with Ottawa, although not likely this year.

Such a move would free up as much as $200 million per year.

The unions, whose support was crucial in obtaining the deal with Ottawa, said employees would be irked if the airline rewarded shareholders instead of workers during the next round of bargaining in 2015.

"We think the company should err on the side of prudence and continue to make payments of at least $150 million annually to make sure that our members receive the decent retirement they are entitled to," stated Katherine Kontosthenos, vice-president of CUPE which represents flight attendants.

Air Canada is not alone in seeing an improvement in the status of its pension plans.

Consulting firm Mercer said earlier this year that rising interest rates and strong stock markets have helped defined pension plans across the country post some of their best results in years.

The Mercer pension health index, which tracks the funded status of a hypothetical defined benefit pension plan, stood at 106 per cent at Dec. 31 -- its highest level since June 2001.

Analyst Walter Spracklin of RBC Capital Markets, who raised his target price for Air Canada's shares to $13 from $10, said the elimination of the pension deficit was "a significant positive" for the airline.

In addition to the benefit of the pension improvement, David Tyerman of Canaccord Genuity said the airline's shares have substantial upside due to the introduction of more high-density seating on Boeing 777s, the launch of its Rouge low-cost carrier and pending arrival this spring of Boeing 787 Dreamliners.

"Given Air Canada's strong long-term potential, we continue to recommend investors buy Air Canada shares," he wrote in a report.