Australia's Qantas Airways grounded its entire fleet on Saturday over a bitter labor dispute in an unprecedented move, with the government asking a tribunal to stop the conflict which it worries is putting both the airline and the economy at risk.

Tens of thousands of passengers, including 17 world leaders, were affected by the abrupt decision, which clearly took the government by surprise.

It came as an embarrassment for Prime Minister Julia Gillard who was hosting a Commonwealth leaders summit in the remote city of Perth, 17 of them booked to fly out on Sunday with Qantas.

Unions, from pilots to caterers, have taken strike action since September over pay and opposing Qantas plans to cut its soaring costs, as it looks at setting up two new airlines in Asia and cutting back financially draining long-haul flights.

It plans to cut 1,000 jobs and order $9 billion of new Airbus aircraft as part of a make over to salvage the loss making international business.

They are trashing our strategy and our brand. They are deliberately destabilizing the company. Customers are now fleeing from us, Qantas Chief Executive Alan Joyce said.

(The unions) are sticking by impossible claims that are not just to do with pay, but also to do with unions trying to dictate how we run our business, said Joyce, who estimated the latest move would cost the airline A$20 million ($21.4 million) a day.

The move came a day after shareholders backed hefty pay rises to senior Qantas executives.

It (the grounding) is partially designed to get the government involved, Australian aviation analyst Tom Ballantyne said on ABC Television. The airline will be irretrievably damaged if it goes on for more than a month.

Gillard said the escalating dispute could hit the economy. I believe Australians want to see this sorted out.

Qantas said it would lock out all employees from Monday night in the dispute which has affected 70,000 passengers and 600 flights on one of the country's biggest travel weekends. The grounding does not affect Qantas' budget airline Jetstar.

To resolve this at the expense of paying customers on one of the biggest flying days in Australia is quite frankly...bizarre, unwarranted and unfair to the loyal customers that Australia has, a businessman, who only gave his name as Barry, told Sky TV at Melbourne airport after he was stranded.

Qantas' Facebook page was inundated with angry passengers. Stranded in Sydney Airport...because QANTAS are useless idiots, wrote Lyn Haddon.

Zoe Johnson, an Australian living in Switzerland, said: I'm proudly Australian but it just leaves a really bad taste in your mouth. So many people say, 'I'm never going to fly Qantas again,' and from my point of view its just feels like a kind of bullying tactic really.

Adding to travelers' problems, Air France has canceled about one in five flights and warned of wider disruption as a five-day strike by flight attendants over employment terms began on Saturday.

WORST DISPUTE SINCE 2008

The dispute is the worst Qantas has faced since 2008, when industrial action by engineers cost it A$130 million ($133 million), according to local media.

I'm extremely disappointed. What's more, I indicated very clearly to Mr Joyce that I was disturbed by the fact that we've had a number of discussions and at no stage has Mr Joyce indicated to me that this was an action under consideration, said Transport Minister Anthony Albanese.

The government had asked for a special labor tribunal hearing to end the industrial action by both unions and Qantas.

The tribunal adjourned its hearing briefly and was due to resume later on Saturday evening. If it orders an end to the industrial action Qantas is expected to be flying again on Sunday.

The Qantas dispute escalated today and I am concerned about that for the national economy ... it could have implications for our national economy, Gillard told reporters.

PASSENGERS STRANDED

Qantas' decision to halt flights comes during one of Australia's busiest travel weekends, with tens of thousands traveling to the hugely popular Melbourne Cup horse race on Tuesday, dubbed the race that stops the nation.

Many passengers were stranded on aircraft waiting to take off on Saturday when the grounding announcement was made.

Alan Joyce is holding a knife to the nation's throat, said Captain Richard Woodward, vice-president of the Australian and International Pilots Association.

An extended grounding would benefit domestic rival Virgin Australia and others such as Singapore Airlines, British Airways and Chinese carriers on international routes.

Virgin Australia said it would accommodate Qantas passengers where possible and was looking at adding more services in response to Qantas grounding its fleet over labor dispute. sting Qantas approximately A$15 million per week in lost revenue.

($1 = 0.933 Australian Dollars)

(Additional reporting by Rebekah Kebede in Perth, Ed Davies in Sydney, James Grubel in Canberra, Kevin Lim in Singapore, Writing by Jonathan Thatcher, Editing by Michael Perry)

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