Overly ambitious LCC Flair Airlines of Canada has many problems from finances to CTA investigations of ownership and control by US based 777 Partners

December 5, 2021

https://canadianaviationnews.wordpress.com/2021/12/05/flair-airlines-is-expanding-rapidly-but-internal-discord-and-regulatory-scrutiny-raise-questions-about-its-ambitious-growth/

It’s early 2021, and almost a year into the pandemic the skies around Canada’s airports are mostly quiet. Porter and Sunwing are grounded, Air Canada, WestJet Airlines and Air Transat are operating a small number of daily flights, cancelling orders for new planes and losing millions of dollars every day as air travel in much of the world is halted.

It’s a different picture at Flair Airlines, the tiny discount carrier based in Edmonton. On Jan. 27, Flair announced plans to lease and fly 13 Boeing 737 Max passenger jets. The bigger fleet would fly new routes to eight Canadian cities – 18 by the summer. “With this order, Flair is well on the way to achieving its ‘F50′ ambition of growing to 50 planes within five years,” said Flair, which at the time had just three 737s, two of which were essentially grounded by the pandemic.

The new planes would be leased from 777 Partners, the Miami-based private equity company that owns 25 per cent of Flair and is a major creditor to the airline, which bills itself as a low-cost alternative to its large rivals.

It was a bold move, coming as the global airline industry was in crisis and largely grounded. Canadian airlines were seeking billions in aid from Ottawa to cover rent and other costs as thousands of aviation workers were at home or working on wages topped up by government subsidies. Flair unveiled another step in its expansion last month, with the planned addition of Mexico and other vacation destinations, and added Hollywood Burbank to its growing list of U.S. destinations.

But as Flair plotted its rapid expansion, one finance official warned the airline’s top executive that the plan was too risky.

Jocelyn Harris, Flair’s vice-president of finance until the end of 2020, said she advised chief executive officer Stephen Jones that the airline could not afford the expansion, given that it was almost completely shut down and could not pay its bills.

“I couldn’t comprehend it,” Ms. Harris said of the plan to lease planes from 777 Partners. “In the fall we were completely insolvent, and they were going to go and sign on these contracts for these planes.”

Ms. Harris, who has filed a wrongful dismissal and harassment lawsuit against Flair, alleged in a court filing and interview that 777 Partners was calling the shots at Flair. She said she warned executives that the control exerted by the U.S.-based company was a possible violation of Canadian laws. A foreign investor cannot hold more than 25 per cent of a Canadian airline’s shares, nor is it allowed to take charge of company decision-making, known by the regulator as “control in fact.”

Ms. Harris’s allegations come amid a tumultuous time for the airline industry, which is facing new travel restrictions due to the Omicron variant. Flair is also facing a lawsuit from its largest Canadian investor, Prescott Strategic Investments, which is partly owned by Jim Scott, Flair’s former CEO.

The Globe and Mail has learned that the Canadian Transportation Agency, the airline industry regulator, is investigating Flair’s financial arrangement with 777 Partners, which was founded in 2015 by Steven Pasko and Joshua Craig Wander

“Flair is required to comply with the Canada Transportation Act’s Canadian ownership and control requirement to hold its licences,” the CTA said in a statement to The Globe. “In assessing the control in fact requirement, the CTA considers a number of factors, including any implications that may arise from the leasing of assets from non-Canadians. There is, however, no specific restriction precluding the leasing of assets from non-Canadians.

“CTA staff are aware of the arrangement between Flair and its U.S. investor, and is currently looking into the situation,” said the regulator, a quasi-judicial body that has the power to levy fines, sanctions or suspend operating licences.

The CTA said the Flair investigation has not yet been referred to a panel.

Mr. Jones, Flair’s CEO, said in a statement that his airline is “58-per-cent owned and controlled by Canadians, well above the minimum standard established under federal regulation.”

Flair lawyer Mike Wagner declined to comment on the lawsuit filed by Prescott, citing a publication ban and sealing order on the file sought by Flair.

Justice Ward Branch of the B.C. Supreme Court on July 12 issued a publication ban on the lawsuit and sealed the file. In an e-mail, Mr. Wagner said the publication ban prevented him from saying why he sought the publication ban. Mr. Scott and Prescott lawyer Steve Warnett declined to comment. Prescott also named 777 Partners in the suit. The investor declined to comment.

Ms. Harris, who left the airline on Dec. 31, 2020, alleges she was fired in retaliation for her complaint about harassment by Juan Arciniegas, a 777 Partners executive who was working at the Edmonton office. She also alleges she was let go for “raising concerns with respect to the increasing control of 777 Partners, contrary to the Canada Transportation Act,” according to her statement of claim, which has not been proven in court.

“Flair is vigorously opposing these unsubstantiated allegations through all proper legal channels,” Mr. Jones said.

Michael Robinson, a spokesman for 777 Partners, said Ms. Harris’s claims of “verbal harassment and bullying” are “without merit and will be vigorously defended should an attempt be made to involve the company.”

Mr. Robinson said the CTA inquiry is a routine part of the regulator’s “routine ownership stake review,” adding that “777 Partners has, and will continue to, assist Flair in any dialogue the CTA wishes to have with the airline.”

In 2019, 777 Partners bought a 25-per-cent stake in Flair for an undisclosed amount. Flair, in a statement announcing the investment, said 777 Partners’ “financial strength” would help it grow and compete with Canada’s two dominant airlines.

The private equity investor does not disclose financial data. It made headlines in the sporting world in September with the purchase of Italy’s oldest professional soccer team, Genoa Cricket and Football Club, for a reported US$175-million. Its other investments include Synchrono Group Inc., a North Carolina-based insurance underwriter. Its aviation stakes include Air Black Box, a technology platform that allows a handful of Asian airlines to cross-sell seats; World Ticket seat-sales software; and Bonza Aviation, an Australian low-cost airline slated to launch in 2022 with two or three Boeing 737s. The investor has also bought the rights to use the name World Airways Inc., the U.S. carrier that stopped flying in 2014.

“Our senior management team is composed of industry veterans with backgrounds in private equity, venture capital, investment banking, financial technology, insurance, actuarial science, asset management, structured-credit, risk analytics, complex commercial litigation and computer science,” the company’s website says. “We partner directly with our management teams and portfolio companies to build long term value for all stakeholders.”

In 2004, 777 Partners co-founder Mr. Wander was convicted of cocaine trafficking in a Florida court, pleading no contest to the charges. He received 16 years’ probation, according to Florida court records. According to a news report on his trafficking case, the then-22-year-old admitted that a package containing 31 grams of cocaine was for him and a friend. He reportedly avoided a jail term of as long as 26 years with his plea.

Flair and 777 Partners representatives did not address questions about Mr. Wander’s criminal record nor grant an interview with him.

“The company will not comment on any legacy issues regarding Mr. Wander’s distant past,” Mr. Robinson said.

Jamina Kotak, Flair’s chief of staff, said in an e-mail that the airline is “pleased to be associated with Mr. Wander and 777 Partners. We could not imagine a more supportive director, shareholder and lender.”

The 737s that 777 Partners will lease to Flair are among the 24 aircraft the private equity company is buying from Boeing. The deal includes an option to buy another 60 of the aircraft. Flair this month is flying nine 737 Max aircraft, five of which are leased from 777 Partners and four from an unrelated company, Ms. Kotak said.

Ms. Harris said Flair owed about $129-million to 777 Partners at the end of 2020. The loan came with 18-per-cent interest. The airline’s executives and Mr. Wander held talks with government lenders Export Development Canada and the Business Development Bank of Canada for emergency financing but were turned down, Ms. Harris said.

Flair declined to answer questions about its financial picture. “As a private company, Flair generally does not publicly disclose or discuss its confidential financial information, which includes among other things debt, financing, lending and aircraft leasing details,” Ms. Kotak said. “Flair has benefited from a tremendous amount of support from its vendors throughout the COVID pandemic. Several vendors agreed to defer payments.”

To be granted an air operating licence to fly from point to point in Canada, an airline must be majority-owned by Canadians. Foreign ownership is capped at 49 per cent, or 25 per cent for a single individual or entity. In addition, the airline must be controlled in fact by Canadians.

According to the CTA’s website, “control in law is generally shown by owning enough shares to carry the right to a majority of votes. Control in fact goes beyond control in law as it includes the ability to exert control by any direct or indirect influence.

“Although the term is not defined in the [Transportation] Act, the agency considers control in fact to be: the power, whether exercised or not, to control the strategic decision-making activities of an enterprise and to manage and run its day-to-day operations,” the CTA says. “Those who may have the power to influence a company’s decisions can include minority owners, designated representatives, financial institutions, employees and others.”

Ms. Harris said 777 Partners stayed out of the aircraft operations and maintenance component of the airline. “But on the commercial [side] – the schedule, what planes we were going to fly, how are we going to advertise and market, and the vendors we engaged with – it felt everything had to be almost run through them,” she said.

David Gillen, a transportation professor at the University of British Columbia, said the leases do not appear to violate Canada’s foreign ownership laws. “The lessor might wield a lot of weight in decision-making but they are not an owner, any more than the bank holding one’s mortgage is an owner – unless of course, you cannot make a payment, at which time they might become an unintentional owner,” Prof. Gillen said.

The rules are intended to ensure Canadians make the decisions that affect domestic airlines, said John Gradek, who teaches aviation leadership at McGill University.

“If Flair is trying to disrupt the Canadian marketplace without really having to follow the same rules and the same practices as other Canadian carriers, it gives them an unfair competitive advantage,” he said. Other domestic carriers would welcome the chance to have greater access to foreign funding, he added.

Flair drew the attention of the regulator due to the nature of its financial arrangements with 777 Partners, Mr. Gradek said, leasing planes from the same part-owner and lender. “I think it was the fact that 777 Partners … was the entity that really wanted to deploy airplanes into Canada,” he said.

The Flair investigation appears to be at the initial stage of fact gathering to support a recommendation of action or dismissal. “And then it’s handed up to the [CTA] panel for them to do the adjudication and the formal issuance of CTA order, if one is required,” Mr. Gradek said.

“If it’s a serious enough breach of regulations and practices they can look at … monetary penalties or they can make a recommendation to Transport Canada for a regulatory remedy, including suspension of the airline operating licence.”