Kevin, or Freak, is a reader and is enamored with the stories of King Arthur. Because his mother is so patient and so kind, he refers to her as The Fair Guinevere, a representation of the ultimate kind woman in his mind. Max, being dyslexic, doesn't catch the reference and thinks that Freak is saying "The Fair Gwen of Air," a simple mistake which is compounded by Freak's mother being named "Gwen."
"So how come you call your mom 'Fair Gwen of Air,' is that a nickname?"
"Guinevere," [Freak] finally says, catching his breath. "The Fair Guinevere, from the legend of King Arthur."
(Philbrick, Freak the Mighty, Google Books)
This nickname shows Freak's knowledge and his tendency to idealize people based on fictional characters. Freak wants the real world to be more like the adventures in books, and real people to be both better and idealized. For Max, the nickname is at first strange, making him think that the cruel stories about Freak are true; later, he understands the true meaning of idealization and adopts parts of Freak's speech patterns for himself.
In reality, Kevin calls his mother "The Fair Guinevere"—a reference to the beautiful and legendary wife of King Arthur. Kevin is obsessed with the tale of King Arthur because he relates to Arthur's struggles in earning the throne. Kevin sees King Arthur as the "wimpy little kid" who pulled the sword out of the stone when the "big tough dudes" failed to do so. Kevin refers to his mother as Guinevere because he sees her as incredibly beautiful—inside and out—and tremendously loving. While these qualities do exist in Gwen, this nickname is also a reflection of Kevin's tendency to romanticize the people in his life.
Max misinterprets this nickname due to his dyslexia, and he believes that Kevin is calling his mother "Fair Gwen of Air."
It's a play on words, and Kevin's way of telling his mother that he thinks highly of her. Kevin is a fan of the legend of King Arthur and the Knights of the Round Table and Camelot, where Guinevere is queen. Thus, for the imaginative Kevin, the fair Guinevere becomes Fair Gwen of Air.