““CEOs go to their vacation homes just after companies report favorable news, and CEOs return to headquarters right before subsequent news is released. More good news is released when CEOs are back at work, and CEOs appear not to leave headquarters at all if a firm has adverse news to disclose. When CEOs are away from the office, stock prices behave quietly with sharply lower volatility. Volatility increases immediately when CEOs return to work.” —David Yermack, a New York University finance professor, whose recently released study shows a correlation between when CEOs take their private jets on vacation and movements in their companies’ stock price ”
What If Your Management Company Goes Under?
For Mike, a part-owner of a mid-size jet, the moment of truth came when the company that insured the aircraft started sending requests for payment. The problem was, he and his partners had already prepaid for their insurance through JetDirect Aviation, the firm that managed the aircraft and made it available for charters.
Mike, who asked that we not use his last name, told BJT what happened in an interview conducted during JetDirect's implosion and bankruptcy in 2009. A year earlier, he said, the management company's officials had recommended that aircraft owners prepay their insurance bills, so that they could get a better deal on insurance. But the monies were not actually being paid to the insurer, explained Mike. When the insurance provider started asking him for payment and sending overdue notices, he confronted JetDirect's managers. They claimed that they had just found out about the overdue bills "yesterday."
Mike, who eventually lost $400,000, realized retrospectively that plenty of signs had pointed to financial problems at JetDirect. He and other owners ended up paying many overdue bills themselves, including insurance, fuel and maintenance-program fees for the engines on their aircraft. "We even had to pay for expenses on charter trips [flown in our aircraft], which should have been paid by JetDirect. Supposedly they're charging the customer, but they never paid. [And creditors] will put a lien on your aircraft [if the bill isn't paid]."
Ever since the JetDirect failure, many management companies have appeared to be more careful about segregating management fees paid by aircraft owners and also about sharing financial information. Clearly, when handing over a multimillion-dollar aircraft to a company that is charged with keeping it safe and productive, owners need to keep their eyes wide open about the management business' finances.
JetDirect represented an attempt to consolidate more than a dozen charter/management companies across the U.S. into a huge firm that would dominate the industry. At its peak, it had about 300 aircraft in its fleet, but the complexity of merging the companies and managing that many aircraft and the timing of the country's recession made it impossible for JetDirect to survive. "They tried to get so big so fast," said Mike. "That's the reason this happened."
Warning signs usually precede a failure like JetDirect's, said David Rimmer, executive vice president at New York-based charter/management firm ExcelAire. "Companies don't typically fail overnight," he said. "It's the end of a long process. When you ask the right questions and for the right information, you can see the first links in the chain that lead to failure."
The process of vetting management firms should begin before you formalize a relationship. "If I were choosing a management firm, I would do some due diligence," said Joe Moeggenberg, president and CEO of charter auditing and data firm Argus International. "I would not leave this up to a pilot friend or situation where the owner has pilot crew. I would bring in a third party to run the traps."
Moeggenberg recommended hiring a consultant to review the management firm's policies and procedures, interview clients, run credit checks and look over bank references. It's important, he said, "to make sure the company is not only safe but financially viable." (Argus does not offer this service.)
Once you sign on with a management company, Moeggenberg added, you should watch for high turnover in its staff. "That would be a very bad sign, if there were lots of people jumping ship," he said.
A management firm should allow regular financial audits by a company chosen by the aircraft owner. If the management outfit balks at this idea, that would be a concern as well, Moeggenberg noted. "A legit, well-funded firm would not have an issue with that." The same is true for safety audits, which should also be done regularly, with results shared with the owner.
Dan Drohan was intimately involved with the JetDirect debacle, having sold his charter firm, Sunset Aviation, Inc., to it in 2007. JetDirect forced Sunset into bankruptcy prior to its own failure. Drohan was able to resurrect his team and form another company, San Francisco-based Solairus Aviation.
There are ways to tell that problems are developing, he said. But, "depending on the structure of the arrangement between the client and the management company, it can be impossible to know things are amiss before they reach crisis mode."
Owners need to watch for key problem areas, Drohan explained, including delays in paying employee expenses and "the unusual emphasis on owners paying more frequently, or even early." When a management company is in trouble, he added, "it will always prioritize its payments to vendors that keep the lights on over seemingly lower priority expenses, such as employee [salaries]."
Another indicator of trouble is when the management company asks charter clients to pay upfront with block-charter agreements. If the management company is using this cash to pay bills rather than pay charter fees to aircraft owners or charter vendors, a serious problem is brewing (and that's exactly what happened at JetDirect). "This can often be when the cash crisis hits full tilt," Drohan said.
In case worse comes to worst, he added, "Contracts should have a termination clause, and embedded within them should be a clause that if anything untoward or nefarious is going on, the client has the right to terminate immediately with no notice. The bottom line is that you have to keep an eye on your money, regardless of who is managing it. Things change; good companies turn into not-so-good ones quickly, and in every industry."
Rimmer commented similarly. "We encourage owners to be always asking questions and if they sense that something is amiss, follow your nose and find out. Don't allow your exposure to grow if you feel your asset is at risk."
And jumping into the situation early is always better, he added. "With JetDirect, the owners were hoping that it could be turned around. Instead of digging out, the hole just got deeper." There were, he said, "many stops along the way where they could have cut the bleeding. With what it costs to fuel these airplanes and pay crew expenses and handling fees, the money adds up fast."
In other words, you need to monitor your management company on a regular basis. "The relationship isn't one you can set, forget and walk away from," Rimmer said. "It's important that owners keep an eye on the books. It's fair to ask for proof that we're current with fuel suppliers, handlers and landlords and talk to crews and employees and make sure things as basic as paychecks are clear."
Keep in mind that just because a management company is large–JetDirect was, after all, the biggest–doesn't mean its finances are sound. "If you sense something wrong, immediately start to ask questions of the people who run the business," Rimmer said. "Ask about bill payments and ask to see backups to the claims they're making."
And trust your gut, concluded Drohan. "If you sense that something isn't right, it probably isn't. Also, aircraft owners should rely on their flight crew and administrative staff to read the situation. These folks are dealing with the management company day in and day out; they hear the rumors and they talk to the staff. When things are going well, they usually can sense it. And when things aren't going so well, they hear about it."
7 Ways to Protect Yourself
1. Ask questions before signing a contract.
2. Hire a consultant to investigate the company.
3. Make sure your contract has an early-termination clause.
4. Beware of high turnover or problems with paying employees.
5. Insist on financial and safety audits and ask for proof that the company is current on its bills.
6. Be suspicious of requests for early payment from owners or requests for large upfront payments from charter customers.
7. Monitor the company regularly and get feedback from your staff.