Lawsuit of the week: Shareholder takes aim at airline's expansion plan

Flair shareholder claims company’s plans rammed through without approval, potentially putting operating licence at risk

Submitted

A shareholder in Flair Airlines Ltd. is taking the low-cost carrier to court, claiming it’s wrongfully withholding key information about a significant expansion of the company’s fleet of aircraft announced in the midst of the COVID-19 pandemic.

Prescott Strategic Investments LP by its general partner Prescott Strategic Investments Ltd. filed a petition in BC Supreme Court on June 18, naming Flair and Florida-based 777 Partners LLC, a “significant creditor” of the aviation firm, as respondents. Prescott, run by Canadian aviation industry veterans Jim Scott and Jerry Presley, claims in the court filing that the dispute was spurred by Flair’s management deciding to “aggressively expand its operations during a global pandemic” by signing leases on 13 new Boeing 737-8 airplanes with a subsidiary controlled by 777 Partners, also a Flair shareholder. 

According to the petition, Flair’s fleet of three Boeing 737s was mostly grounded from September 2020 to April 2021, with the airline using only one for its Vancouver-Edmonton-Toronto route and its Vancouver-Calgary-Toronto route during that time. Prescott owns just under 68% of the airline’s voting shares, and had taken over the company’s management in 2018.

“Shortly after taking over management of Flair, Prescott’s partners became aware that Flair required an immediate infusion of funds in order to pay down a line of credit,” the petition states, a situation which saw 777 Partners sign on as an investor after being approached by Flair. The airline currently owes 777 Partners $140 million, most of which is at an 18% interest rate.

Prescott claims that the COVID-19 outbreak saw Canadian air travel drop by around 90% of pre-pandemic passenger numbers, causing other airlines such as WestJet (TSX:WJA) and Air Canada (TSX:AC) to scale back or halt expansion plans including cancelling orders for their new Boeing (NYSE:BA) 737-8s.

But Flair went the opposite way, announcing in January 2021 that it was leasing more than a dozen new planes for new routes at five Canadian airports, an announcement that “caused serious concerns for Prescott.” Flair hadn’t sought shareholder approval as required for the leases and expansion plans, Prescott claims.

“Because Flair had already begun selling tickets connected to the expanded services, Flair’s position was entrenched and any after-the-fact vote by shareholders would be futile,” the petition states.

Moreover, the company didn’t get approval for the leases from the Canadian Transportation Agency, raising “significant concern” about whether the leases would put the company under control of 777 Partners, which could lead to a finding that it wasn’t “controlled in fact” by Canadians as required by the Canada Transportation Act. Such a finding could strip the aviation firm of its licence to operate in Canada, Prescott claims. Meanwhile, directors of 777 Partners have allegedly threatened to call in Flair’s debt and put it into receivership if it doesn’t proceed with the leases and expansion plans, which Prescott claims are not in Flair’s best interest.

The petition seeks declarations that Flair’s affairs are “being conducted in a manner that is oppressive” to Prescott, and an order for Flair and 777 Partners to buy Prescott’s shares for $0.85 per share.

The petition’s factual basis has not been tested in court, and Flair and 777 Partners had not filed responses by press time.