““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's Going On at Flight Options?
When industry observers speculate about the future of the four biggest fractional-jet-share providers, the company that often prompts the most discussion is Flight Options. That's because it has arguably undergone more change than its competitors while also lacking the protection afforded by being under a large corporate umbrella.
NetJets, the biggest and oldest of the four, suffered huge losses recently but has had the advantage of being part of Warren Buffett's Berkshire Hathaway since 1998. And Richard Santulli, who introduced the fractional-jet-share concept in 1986, ran the company for more than two decades. (He stepped down last year and was replaced as chairman by David Sokol, who had headed another Berkshire-owned corporation.) Canadian aircraft manufacturer Bombardier founded Dallas-based Flexjet in 1995 and still owns it, while Textron's Cessna Aircraft holds Greenwich, Conn.-based CitationAir (formerly CitationShares), whose CEO is founder Steven O'Neill.
Flight Options, while also currently run by its founder, is another story. Launched as an independent company in 1997, the Richmond Heights, Ohio-based firm merged with Raytheon Travel Air in 2001 and became a fully owned Raytheon subsidiary in 2005. That same year, the company's pilots unionized and began four years of frequently acrimonious negotiations with Flight Options. (The pilots finally ratified a new contract this March.) Then, in November 2007, Raytheon sold the company to H.I.G. Capital, a private equity outfit. Meanwhile, Michael Scheeringa-who joined Flight Options in 2004 and became CEO two years later-replaced its whole senior management team and instituted changes that prompted half the sales force to quit.
More changes have occurred since then. For one thing, Scheeringa-who predicted to me in an interview for this magazine (February/March 2008) that H.I.G.'s involvement in the company would mean "only good things" for his future there-lost his job just months after we talked. (Scheeringa, now president of Signature Flight Support, declined to comment for this story.) In his place are chairman Kenn Ricci, who started the company, left in 2003 and returned in June 2008; and CEO Michael Silvestro, who worked at Flight Options from 2000 to 2005 and also came back in 2008.
Moreover, H.I.G. now holds only a minority stake in the corporation. About 75 percent of it has been owned since March of last year by Directional Capital, a firm led by Ricci, and Resilience Capital Partners, a Cleveland-based private equity outfit. Ricci, Silvestro and other members of the Flight Options management team also directly hold ownership stakes.
Like many of its competitors, the company has suffered in the economic downturn and is considerably smaller than it was just a few years ago. After several rounds of furloughs and layoffs, it has 687 employees, about the same number as a year ago but down from a reported 1,500 as recently as 2007. Its headquarters staff, which had totaled 500, is now less than half that size; and its fleet is shrinking. At this writing, it has 101 airplanes, down 20 from mid-2008.
These cutbacks notwithstanding, some observers believe the company may have what it takes to survive and ultimately thrive. Flight Options "has never been an extension of one of the OEMs so it has never had the parental support that some of the others have had," said aviation industry analyst Peter Fuchs, but "one of the things the company has proven to be is resilient." Fuchs, a principal at the aviation consulting firm Acuitant and a former director of financial planning at Flight Options, added that Ricci and Silvestro are "passionately behind their business."
Aviation consultant Brian Foley agreed, saying that while the fractional provider "probably isn't as insulated in a corporate culture" as some of its competitors, "Kenn Ricci has proven himself a successful manager. I'm sure he has a target in mind and the wherewithal to move in that direction." Foley blamed the company's problems on "the business model and the industry," adding, "they're all feeling the heat."
At least two consultants whose clients include Flight Options shareowners, however, don't believe external forces caused all the company's difficulties. James Butler, a former BJT columnist who is CEO of the consulting firm Shaircraft Solutions, suggested that the fractional provider's reputation has been damaged by its policies regarding the repurchase of shares. "Flight Options hasn't treated our clients equitably and we've had to fight to get fair values for them," he said. Michael Riegel, who heads the consulting firm AviationIQ, spoke similarly, noting that Flight Options has been offering a "two-tiered approach" to people who seek to sell their shares.
"For customers who wanted to liquidate immediately," Riegel said, the company has provided "what amounted to a distressed value-a very, very hefty discount to blue book. Or you could put your aircraft in line and as aircraft were sold out of the fleet, you would recover whatever Flight Options was able to recover." Riegel added that he hadn't witnessed this kind of two-tiered approach at any other company and that Flight Options' "very substantial discounts to blue book were far higher than anything we've seen with any other provider."
According to Foley, however, "a lot of shareholders [with various providers] were disappointed with their residual values but that's just a fact of the market, not a Flight Options phenomenon. Valuations for the entire marketplace took a lot of people by surprise."
Silvestro emphasized that Flight Options treats its customers fairly. "We're doing our best to make sure we buy shares back at a fair value, he said. It's challenging today, given the illiquidity of the marketplace. But we've instituted a program where we're very transparent about telling folks, 'This is what we sold the airplane for and you're getting your pro-rata share.'" Added Ricci: "We are not in the business of making money by beating down the buy cost and raising the sales price. We have our 7-percent commission in the middle and that's how we work."
Besides questioning the company's repurchase valuation policies, Riegel expressed concern about what he called "a borderline conflict of interest" related to Ricci's leadership roles at both Flight Options and Nextant Aerospace, a company set up to modernize aging Beechjets. Nextant, he said, "is certifying a production line that will require a lot of Beechjets. Can they guarantee that there is positively no linkage between these two companies and that at no time will they protect Nextant in a manner that is contrary to the interests of Beechjet shareowners with Flight Options? Can they guarantee that they are not going to use Flight Options aircraft as fodder for their other company?"
Questioned about Nextant, Ricci said, "We ask those companies [we're involved with] to compete competitively." But he added, "We obviously think there would be some synergy with the Nextant product where we're going to put the fuel-efficient engines on the Beechjet. That might be a product that ends up in the Flight Options fleet."
For Butler, meanwhile, the makeup of that fleet has been another concern. "I think they've not settled on a particular business model or approach to the market," he said. "They've tried to be an older-aircraft carrier at lower prices. They've tried to be a carrier with all kinds of aircraft. They've tried to [offer just] a few models-part new, part preowned. I just don't think they've ever quite settled on an approach."
Ricci acknowledged that Flight Options' fleet has not always been what it should be. But he said he believes his company's independence from manufacturers is a plus because that allows it to focus on supplying aircraft models customers want, not the ones a parent corporation wants to sell. When he started the business, he said, "the players in the market were trying to use fractional as a distribution channel for new aircraft. We saw Flight Options as something different-as providing transportation, not distribution of product. When Raytheon took over, they changed it into the same model everyone else had. They wanted to drive the customer to the products they were manufacturing."
Now, Ricci said, the focus is back to providing aircraft that fit customers' needs. He believes one such aircraft is the Phenom 300 light jet, though he conceded that Flight Options' big bet on this model was made not by him but by the previous management, which ordered 100 Phenom 300s from Brazilian manufacturer Embraer at a cost of $750 million. Flight Options is set to receive the first two of these jets shortly and seven more before the end of the year.
"Every once in a while, an airplane comes down the pike that is so unique that people really want it," Silvestro said. "We feel that way with the Phenom 300. Its range is so good, and it's going to operate for about $1,000 an hour less than a typical light jet like a [Cessna Citation] CJ3-or $2,000 an hour less than [a Citation] Excel. It's really a game changer." [Asked about these claims, David Wyndham of aircraft information supplier Conklin & de Decker said, "There are many variables and many ways to calculate the costs. However, our data show that with two pilots on each aircraft and no depreciation, total hourly costs would be about $2,010 for the Phenom 300, $2,145 for the Citation CJ3 and $2,905 for the Citation Excel." -Ed.]
"It's a fantastic airplane," said Fuchs of the Phenom 300. "The question is whether the market will adopt it. But it's certainly not a case where you scratch your head and think, 'Why did they choose that airplane?'"
In addition to the Phenom 300, Flight Options is counting on its JetPASS Select card to help improve its bottom line. The company advertises this program as a way to buy time in its fleet without owning a fractional share and claims on its Web site that JetPASS Select "renders competitive jet card programs obsolete by offering access to all cabin types, more flexibility and lower rates." Flight Options asserts that it can sell JetPASS Select hours for up to 31 percent less than competitors because it involves "no middleman or broker to drive up costs."
So what does all the change at the company mean for current and prospective customers? Fuchs and Foley sound hopeful that Flight Options is headed in the right direction, but Butler expresses skepticism. "They've competed on price," he said, "and I wouldn't rule them out if a client finds that the price points they offer are attractive. But we'd certainly make a client aware of our concerns. Some of the other fractional providers are supported by pretty deep pockets, and when we have a company that's struggled and has an investment banking group funding it, we're not as sanguine about their capital situation and liquidity to weather the difficulties in the market right now as we are some of the others. And it's a time to go with strength."
Riegel commented similarly. While NetJets, for example, has "a large, solid parent company that appears to be quite happy to ride out the [economic] storm," he said, "I don't know what kind of financial resources are being made available to Flight Options. So I'm suggesting to clients that we steer clear until we have a better picture."
Ricci and Silvestro, meanwhile, are decidedly upbeat about their company's future.
Asked whether Flight Options is now profitable, Ricci stated flatly, "We are. And I mean income after tax, after depreciation, interest, buying the company and anything else you want to put in." And he said, "Our dispatch availability has increased, our response time has been better, customer service has increased significantly. So at the end of the day, if the customers are being served well, the business is going to do well."
Ricci said he expects Flight Options to venture more into the international arena and added that whether fractional shares or jet cards predominate "depends on what happens with the financing market." But, he commented, "I don't think the [fractional] business model is broken."
What would Flight Options say to customers who are troubled about all the changes at the firm? "It can feel like a lot of change," answered Silvestro, "but if you just take out those five years [when Ricci was out of the company], it's been very consistent."
Added Ricci: "What I would say [to a concerned customer] is, 'I'm sorry about the five-year interlude but we were passionate about the business when we began in 1998 and we're passionate about it now. And we've got the company back to where we want it.'"