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Case Comment: The demise of Skyservice Airlines

Published in the April 2010 issue of Transportation Notes - View Article

On March 31, 2010, Skyservice Airlines was placed in receivership after approximately 25 years of operations as a charter carrier serving sun-seekers bound for Caribbean destinations in the winter and vacationers to Europe in the summer months. At the time of its demise Skyservice had two principal clients—Signature Vacations and Sunquest Vacations. The first is a TUI Travel company and the second is owned by Thomas Cook PLC.

The beginning of the end for Skyservice came in the fall of 2009 when TUI Travel and the Sunwing Travel Group announced an intention to proceed with a transaction which would have significant implications for the alignment of market strength within the Canadian air charter sector.

The Sunwing Travel Group includes a tour wholesaler, Sunwing Vacations, with a vertically integrated charter airline, Sunwing. As part of the transaction, the operations of the TUI Travel wholesaler, Signature, would be integrated with those of Sunwing Vacations. The obvious implication of this transaction was that Skyservice would eventually lose the support of Signature.

The TUI-Sunwing transaction raised some interesting questions respecting the eventual ownership and control of Sunwing Airlines. Canadian law includes the nearly universal requirement that Canadian airlines be substantially owned and effectively controlled by Canadians. Whether this requirement would be met following implementation of the proposed transaction was the subject of proceedings before the Canadian Transportation Agency which rendered its decision on the issue on January 13, 2010.

That decision gave the Agency’s seal of approval to the transaction and effectively sealed the fate of Skyservice Airlines.

The Agency proceedings were commenced on October 5, 2009 when Sunwing Airlines applied for an advance ruling to the effect that it would continue to meet the ownership and control requirements following the proposed transaction, the essential elements of which were as follows:

TUI Travel PLC (a travel industry giant which is not Canadian) would form a subsidiary, TUI Canada Holdings Inc. (“TUI”), which is likewise not Canadian;
TUI would acquire 49% of the equity of Sunwing Travel (but limited to 25% of voting equity);
TUI’s wholesale operation in Canada would be amalgamated with that of the Sunwing Travel Group;
Sunwing Travel would continue to own 100% of Sunwing Airlines.

On the face of it, this transaction would not appear to violate the Canadian ownership requirement as the voting shares owned by TUI are limited to 25%, an acceptable number. The question which arose was whether Sunwing Airlines would continue to be substantially controlled by Canadians given the total economic interest in foreign hands and the levers of control which TUI would be able to manipulate given its size and considering the services it might be expected to provide to Sunwing.

The Agency determined that TUI would not be in a position to exercise the sort of decisive control over the affairs of Sunwing Airline necessary to result in the latter being substantially controlled by non-Canadians. The reasons for which it came to this decision are set out in the January decision, but it is not possible to probe behind those reasons as the Agency heard the Sunwing application behind closed doors. Neither the text of the application itself nor any of the documents submitted in connection with the application were made available for inspection by any interested party.

In November, 2009, Skyservice Airlines filed a request that it be allowed to participate as an intervener in the application and in this request set out the grounds on which it believed TUI would be in a position to assert substantial control over the affairs of Sunwing Airlines. These included the following:

Given the size of its investment in Sunwing, TUI would be strongly motivated to control the Sunwing Group to protect its investment;
TUI owns 100% of at least seven airlines and has shown an inclination to own the airlines which are members of its group of travel companies;
TUI would be in a position to exercise control through a number of likely commercial arrangements involving aircraft leasing, pilot supply, schedules, destinations, co-branding, and choice of resort or hotel providers.

Skyservice was hampered in its ability to analyze the avenues of control actually open to TUI as the Agency declined to give it access to the documents defining the commercial arrangements between Sunwing and TUI. These were all filed subject to a claim for confidentiality and a request for access was denied.

The Agency nominally granted Skyservice’s request for intervener status, but did so in a way which made the grant virtually meaningless. Skyservice’s participation as intervener was limited to filing the application for leave to intervene. The applicants were in a hurry to get the deal approved and the Agency was clearly persuaded that it should not allow any opportunity for public scrutiny which would interfere with a timely confirmation that the transaction could proceed without offending Canadian legislation.

The Agency states that it conducted an analysis of relevant factors and concluded that TUI UK would “through its large economic interest and significant investment in Sunwing Airlines” have “the motive to exercise its influence over . . . strategic direction and/or day-to-day operations”.

The Agency also acknowledged that TUI is by far larger than its Canadian partner and “has the required business expertise and the comparative financial strength” to influence the latter’s strategic direction and operations.

However, these factors were not sufficient to support, in the Agency’s view, a finding that TUI would in fact be able to exert “dominant or determining” influence. The Agency relied on its findings respecting corporate governance. It cited provisions of a Unanimous Shareholders Agreement which is said to provide (the document was filed with a claim for confidentiality which the Agency allowed) that resolutions at shareholders’ meetings “require the affirmative vote of the Canadian shareholder”.

There are provisions to ensure the majority of the Board are Canadians. The Agency found it significant that the annual Business Plan is to be approved by the Board and that the Board has the ability to control the appointment of senior management.

It is not apparent why these unsurprising facts should be cited in support of the conclusion that effective control rests with the Canadian shareholder.

On the interesting issue of what veto rights the non-Canadian shareholder might possess, we are simply told that veto rights exist, but these only “afford the minority shareholder the rights it needs to protect its investment” and not “the ability to exercise control”. As we are told nothing of what these veto rights are, it is impossible to assess the accuracy of the Agency’s conclusion.

Of course, the Agency’s decision may be one most would agree with if all the facts were known, but it certainly is anything but transparent. The important facts are known to very few.

Canadian Transportation Agency, Decision 10-A-2010, January 13, 2010