Canadian ultra-low-cost carrier Flair Airlines has been the subject of a license review by the country’s transport agency. The Canadian aviation watchdog is concerned the airline may not be controlled by Canadians, which is a requirement by law. If the Canadian Transportation Agency’s concerns are found to be accurate, Flair Airlines could potentially lose its license to operate in Canada.

However, Canada’s third-largest airline isn’t giving up anytime soon. The carrier said it is answering the agency’s questions and will continue to do so. Flair’s CEO, Stephen Jones, updated Simple Flying about the investigation’s progress and also explained his airline’s stand. He said,

“Flair Airlines is here to stay.”

Let’s unpack everything we know so far.

The rules

The Canadian Transportation Agency, or CTA, is the country’s aviation regulator body. All airlines operating in Canada have to follow the rules and regulations set by the CTA. When it comes to carriers registered as ‘Canadian,’ there are some guidelines and requirements that must be strictly adhered to, failing which the CTA can suspend or cancel the operating licenses of airlines.

The rules state that for an airline to be considered as Canadian, it must be “incorporated or formed under the laws of Canada or a province.” The second requirement states that non-Canadians cannot own more than 49% of voting interests in the country, and no single non-Canadian can own or control more than 25% of voting interests. Additionally, restrictions also apply to non-Canadian carriers, as foreign airlines can only hold a maximum of 25% of the voting interest in a Canadian carrier.

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Flair Airlines has to convince the CTA of its Canadian identity. Photo: Flair Airlines

Lastly, and this is where it gets tricky, the CTA also says the airline must be controlled “in fact” by Canadians. Now, this can be seen as a subjective condition as the agency does not define any specific clauses that can dictate if a Canadian is controlling the airline. Flair’s CEO has said that one of the ways the CTA judges this condition is by looking at the airline’s relationships with foreigners.

Reasons for CTA’s license review

Flair has said the agency’s process is a continuous one where it asks questions of the airline to address its concerns on compliance. As per procedure, when the CTA cannot be certain about any airline’s compliance with the mentioned rules, the decision is made by a two-member panel. This is exactly what happened in Flair’s case, and the panel raised a preliminary determination on March 2nd.

Flair Airlines satisfies the first two clauses without any issues. The ULCC is registered in Canada, and Canadians own more than 51%. However, the third loosely-defined clause spelled trouble for Flair. As Simple Flying reported last week, 777 Partners’ involvement with Flair is the main reason the CTA has started looking into carrier's business practices. 777 Partners is a Miami-based investment firm/wet leasing company that owns a 25% stake in Flair Airlines. In addition, 777 Partners leases several aircraft to the airline and occupies three of the five seats on its board.

The first and foremost concern is “to ensure that Canadian control of decision-making is maintained.” Indeed, Jones has said the CTA had sought Flair’s replies on specific queries within 60 days of the preliminary determination.

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The carrier has until May 3rd to reply to the CTA's queries. Photo: Flair Airlines

Specific issues raised by the CTA

According to Stephen Jones, the queries raised by the CTA mainly fit into two broad categories: Corporate Governance and Corporate Finance. The former targets one of Flair Airlines’ main governing documents, something called as the “unanimous shareholders agreement.” More specifically, the CTA seems to think the document does not allow for Canadians to maintain control of the airline at all times.

The unanimous shareholders agreement heavily influences decision-making based on shareholder rights. Flair Airlines admits the document, originally drafted in 2018, needed revision as it did not enforce Canadian control explicitly enough. The carrier has made certain amendments to the agreement after consulting the agency. Shareholders have ratified the changes made to the document this week, paving the way for its immediate implementation.

The new agreement increases Flair Airlines’ board of directors from five to nine. But more importantly, only two members will be non-Canadian. Subsequently, 777 Partners’ right to appoint directors has also been changed from three to two. Another setback for the US-based company comes in the form of reduced veto rights.

On the side of Corporate Finance, the CTA has concerns about 777 Partners’ day-to-day cash funding of Flair Airlines, the debt owed, and aircraft leased. Stephen Jones said,

“This [day-to-day cash funding from 777 Partners] was required by Flair during COVID to ensure the survival of the airline and the protection of jobs and connectivity for all Canadians. As we stand here today, Flair is strongly cash self-generating and is predicting significant cash surpluses to build over the strong summer period. We are no longer dependent on 777 Partners for day-today cash needs.”

While addressing the issue of Flair’s debt to 777 Partners, Jones argued his airline did not receive any significant aid from the government during the treacherous pandemic period. To keep the carrier afloat, 777 Partners provided a “lifeline.” Flair has asked the Canadian government for an 18-month exemption from rules to fix all irregularities and refinance debts.

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Following an amendment, the number of people on the company's board of directors is increased to nine. Photo: Flair Airlines

National Airlines Council of Canada intervenes

Following Flair’s request for a temporary exemption from rules, the National Airlines Council of Canada (NACC) has issued a statement urging the authorities to reject the request. The NACC is an organization representing Canada’s biggest passengers airlines like Air Canada and WestJet.

The NACC said in a statement,

“The competitiveness and stability of Canada’s aviation industry relies on a number of factors – chief among them, the application of statutes and regulations that give Canadian travelers confidence they are receiving service from domestic carriers that have demonstrably proven their Canadian ownership and investment. It is with this basic principle in mind that Canada’s airlines are calling on the Government of Canada to reject Flair Airlines’ request for an exemption under the Act. If granted, this unprecedented request would allow Flair to continue operating outside the bounds of existing Canadian law, setting a troubling precedent while also threatening consumer confidence in the sector, at a time when the travel industry is working hard to provide a strong and sustainable future for air travel for Canadians.”

Flair Airlines has made significant changes to its management structure to convince the CTA of its truly Canadian identity. However, we won’t know if the agency is entirely satisfied by the carrier’s actions until much later. The next step is for Flair to respond to the CTA before May 3rd.