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Will Air Canada (TSX:AC) Get Sued Into Oblivion?

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In 2020, Air Canada (TSX:AC) is facing a number of problems. The most pressing of these are cancelled flights, cash flow issues and negative earnings. A less discussed problem is the risk of lawsuits. Currently, a lawyer in Vancouver is pursuing a class action lawsuit against Air Canada for giving passengers vouchers instead of refunds.

The suit stems for an abrupt policy change Air Canada made to stem the cash bleed brought on by COVID-19. Prior to March, AC had been giving refunds to passengers who had their flights cancelled because of the pandemic. The company abruptly switched course and started offering vouchers instead.

The Canadian Transportation Agency (CTA) said that the vouchers were adequate compensation. Simon Lin of EvoLink Law Group–the lawyer pursuing the class action–disagreed. Claiming that passengers are entitled to cash refunds, he’s taking the matter to court. Depending on how this lawsuit plays out, it could result in even more losses for Air Canada. Here’s why.

Details of the lawsuit

The lawsuit against Air Canada is based on the idea that the company owes passengers refunds for services not delivered. The passengers who were given vouchers had intended to travel on specific dates, and so vouchers to be used at a later date are not equivalent to what the passengers had purchased.

If a person booked a flight to go to, say, a concert, then a voucher for future travel is not worth anything to them. All too often, people’s travel plans are based on specific one-time events that will not recur in the future. If you book a flight to go to such an event and the flight gets cancelled, you may not have any reason to travel again at a later date.

According to Simon Lin, Air Canada owes its passengers full cash refunds–plus damages. In a Vice interview, he said that the airlines’ lack of money is not a valid defence and that “force majeure” does not absolve airlines of their responsibilities. If he’s right, then Air Canada is going to have to pay up, which could impose a substantial cost.

Potential cost to Air Canada

While it’s not entirely clear how much a refund lawsuit could cost Air Canada, it’s clear that the cost would be substantial. In its most recent quarter, Air Canada lost $1.05 billion due to cancelled flights and other factors. If they’d had to pay customers refunds, the loss would have been even greater than that.

In its article about the lawsuit, Vice claimed that Air Canada passengers were told paying refunds would bankrupt the airline. Now, with AC’s Q1 earnings out in the open, that looks quite possible. The airline was previously a mega profitable behemoth with 27 straight quarters of revenue growth.

Now it’s losing billions and running net cash outflows from operations. Add damages on top of that and you’ve got a recipe for pain.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned.

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