Encompass Aviation (LC, Hawthorne) has taken Surf Air (URF, Santa Monica) to court just days after the US subscription-based pioneer replaced Encompass with Advanced Air (Council Bluffs) as its capacity provider.

Encompass Aviation said in a statement issued on Wednesday, June 19, that it had filed a suit in the Southern District of New York against "financially distressed" Surf Air citing a breach of contract.

Encompass said it had asked the court to enforce the charter service's obligations to it as specified in several operating agreements signed by the two companies last year, and also to enforce subsequent payment agreements stipulated to in the interim. The California-based capacity provider claimed Surf Air owed it more than USD3.1 million and that its move to engage Advanced Air was simply an attempt to keep flying while defaulting on their agreements with Encompass.

"We have been happy to serve as Surf's primary carrier in the state of California. But we've come to the breaking point. Surf has repeatedly allocated its revenue on things other than paying in full for flight operations and aircraft maintenance," Steve Harfst, President and CEO of Encompass Aviation, said. "Surf has failed to honor its obligations under its agreements with Encompass and we have been significantly damaged as a result, both by Surf's repeated failure to pay for services rendered and by its blatantly improper attempt to walk away from our service in favor of another operator."

Surf Air's ties to Encompass date back to 2017 when Surf Air, in the interests of expanding its growth prospects, chose to transition into a virtual carrier by selling off its airline assets to a US entity. Negotiations with Encompass led to an agreement in May wherein Encompass would acquire Surf's airline assets and operate for Surf in California.

However, Encompass claims that Surf Air failed to make its agreed-upon payments and that just four months into their contract, Surf's payment deficit had ballooned to more than USD3.7 million.

"Despite non-payment, Encompass continued in good faith to operate flights and maintain the operating integrity and safety of the aircraft used to transport Surf's customers," it said. "Throughout the term of the agreement, Surf continued to demand performance by Encompass in exchange for little to no payment. Despite collecting revenue from its members, Surf failed to pay the contracted costs for flight operations and related maintenance responsibilities undertaken by Encompass."

The final straw came on June 15 when, without any prior notice, Encompass claims Surf Air sent it a termination letter shortly after awarding Advanced Air a contract.

"This is in violation of the right of first refusal clause of the contract between Surf and Encompass," it argued.

Lawyers for Encompass have also sent a cease and desist letter to Surf Air's board of directors and management, seeking payment owed and to prevent them from taking further action against Encompass.

Surf Air has since countered that Encompass's claims are not accurate and that its lawsuit is therefore without merit.

"Surf Air intends to defend itself vigorously," it said in a statement. "Surf Air is also considering counterclaims. The company has retained Skip Miller, partner at Miller Barondess LLP as its litigation counsel."

On its decision to switch to Advanced Air, Surf Air said the move was motivated by its desire to work with business partners that can "continue to provide exemplary service to its members".

Aside from this USD3.1 million claim, the US Internal Revenue Service (IRS) has filed liens against Surf Air for USD2,330,323.10 in unpaid excise taxes. According to AIN Online, California state documents show the missed payments cover periods through the end of 2016 and all of 2017. Surf Air has simply noted that the matter is under review while choosing not to comment.