The first ULCC Canadian player Flair Airlines is under high scrutiny from the Canadian Transportation Agency and is at risk of losing its license. How did they land in that situation?
The sky is not the limit
Historically all countries have barriers to the implication of foreign investors in local airlines. In the United States airlines must prove that they don’t have foreign investors having a global controlling stake of more than 25%.
Years ago, it was already a major blocking point for Virgin America. The Americans had trouble navigating through tentacular Virgin Group to ensure that US investors had more than 75% of control of the airlines. Virgin America had planes, employees, and operations ready to start but could not start till they proved they were controlled by Americans shareholders. Today, the remaining assets are held by Alaska Airlines.
Within the EU, airlines face the same kind of regulation. The difference is that the limit is 49% of the control of the company. Here as well, airlines were in trouble to prove their European status.
This was the case for Air Berlin when it was in a troubled time. The German airline found Etihad Airways as a white horse. The Emirati airlines funded the German airlines with new shares and new loans. The issue was not really the shares as Etihad nether had a majority of the shareholding. The loans were the issue as these could impact the actual control if the lender lends only under his condition on the way to conduct the business.
The test was passed, and the company continued to operate with its Emirati shareholder but eventually bankrupted in 2017.
Canada needed investors
For years, the limit on foreign ownership and control of a Canadian airline was 25%. It’s only recently that the limit was raised to allow more foreign investments in the sector.
This change coincided with the setup of several ULCC airlines projects in Canada. Flair, Canada Jetline and Lynxs Air were in the starting blocks to conquer the market with lower fares. Flair was already operating with Canadian investors, but the two others were not. Finding investors is hard in the aviation transport business. Therefore, they lobbied for the change of the controlling stake limit bringing it to 49%. This was passed into law which take effect in March 2018 and wannabee airlines started to look for foreign investors with deep enough pockets.
Flair Airlines found 777 Partners
In 2018, Flair opened its share capital to the US investment fund 777 Partners. Based in Miami, this investment started in 2015 and has a wide range of activities in its portfolio by then was starting to invest in aviation-related businesses.
The deal with Flair airlines was not limited to shares. 777 had board members and granted financing to the Canadian airline. During the pandemic, 777 purchased 737MAX not taken up by airlines and leased them or sold them to Flair airlines.
All these items alerted the competitors and the authorities. Who has really the power to decide in this configuration? Flair airlines or 777 who own the aircraft has board members and substantial debt granted to the airline?
The Agency is responsible for ensuring all air carriers licensed to provide domestic air services meet the Canadian ownership requirements set out in the Act.
These requirements state that air service licensees must be owned and controlled “in fact” by Canadians. The Agency uses business and other information to determine whether a license holder or applicant is “in fact” Canadian.Canadian Transport Agency
Flair has been working the last few weeks to change its governance and financing. This means isolating the impact of the debt that Flair owes to 777 Partners, so the debt is not a lever of influence and names more Canadian on its board.
The main consequence for Flair is now on the company’s image. As the agency postponed its decision (now due in June) some passengers may have avoided the company despite the low prices and preferred other options.
Flair tried to counter that with a campaign “Flair is here to stay” but can it really be effective in front of part of the media?
In June we will know for good if Flair is sufficiently Canadian and there to stay or not and to close.