Lessons from Zetta Jet’s collapse

Jan 19, 2018 - 4:30 PM

It will take time to sort through the wreckage of Zetta Jet, the two-year-old charter operator that went bankrupt late in 2017. Its failure occurred amid charges of malfeasance and corruption that raised questions about auditing services, aircraft brokerages, the sanctity of large sums left on deposit, and the FAA.

In case you just tuned in, Zetta Jet, which was headquartered in Singapore, enjoyed spectacular growth, providing global charter on a rapidly expanding all-Bombardier owned-and-operated large-cabin fleet. Last September, the company, which maintained a California office, filed a lawsuit in a U.S. district court accusing ousted managing director Geoffery Cassidy of misappropriation of funds and fraud; Zetta Jet also filed for Chapter 11 bankruptcy protection. The bankruptcy court turned down the company’s reorganization financing petition in November, forcing it into liquidation, with millions of dollars in customer deposits and unpaid vendor goods and services likely lost.

Did mismanagement, misappropriation, or a failed business model bring down Zetta Jet? While courts, regulators, and forensic accountants look for answers, business aviation users can draw immediate lessons from the flameout. Among them:

FAA surveillance might not be adequate. Your charter aircraft and flight are supposed to be operated under FAA Part 135 rules, which are more stringent regarding maintenance, crew training, procedures, and other requirements than standards that govern Part 91, or private, non-revenue flights. In his 2015 National Transportation Safety Board accident report on a fatal Hawker 700 crash attributed in part to the operator’s “casual attitude toward compliance with ­standards,” NTSB member (and now chairman) Robert Sumwalt wrote that customers likely expected “the FAA [would] provide adequate surveillance” of the operator. However, the agency’s “insufficient oversight” meant such expectations “were based on a house of cards that created an illusion of safety.”

In the Zetta Jet collapse, charges and countercharges include claims that the company operated charter flights under Part 91 rules (albeit in Europe); that it was a majority foreign-owned company in contravention of FAA rules; that the agency was aware of the foreign ownership; and that the company had undue “control” over personnel in the FAA’s Flight Standards District Office (FSDO) that had responsibility for its oversight.

Asked for comment, an FAA spokesperson said that the agency “increased its surveillance of Zetta Jet after the company announced bankruptcy…[and has] asked Zetta Jet to surrender its operating certificate.” The FAA is investigating a number of allegations about the company, its ownership, and its operations.

The lesson here is that you can’t be certain about the extent to which the FAA is checking up on your charter operator. As such, you’d be wise to have a frank discussion about safety with the operator or broker you work with. Find out the safety standards that the company observes. Also, check the FAA database for actions or accidents involving an operator. You can also call the local FSDO and ask about any operator you’re working with or considering—those offices are supposed to have answers.

“It’s not just enough to do due diligence in the beginning; you need to do it on an ongoing basis.”    

Safety audit firms have internal controls to prevent data manipulation. Responding to Zetta Jet’s charges against him, Cassidy claimed the company’s “director of sales was bumping and adding not only blindly but falsely [flight] hours to pilots, in order to pass Wyvern and Argus trip checks.”

Both auditing services say internal controls prevent such manipulation, however. Joe Moeggenberg, Argus International’s founder, president, and CEO, says the company has “very good processes in place to make sure we don’t get into a situation where the operator is providing us with bad data.”

Ed Wandall, Argus’s director of charter evaluation and qualification, says the manager identified by Cassidy “has no access to the system. Our system is gated with user name and password.” Argus also checks “significant” operator-supplied type ratings information against the FAA database. “What we found with Zetta Jet specifically, [there were] a lot of updates of pilots and flying [time],” Wandall says. Where questions arose, Zetta Jet was “responsive” and “pretty much complied” with requests for logbooks or other documentation. “We have questioned them on multiple updates just like we would with everybody,” Wandall adds.

Art Dawley, CEO of Wyvern, says, “The overwhelming majority of companies registered in our system—including Zetta Jet before they went out of business—provide automated data feeds of all pilot and aircraft times through their fleet and pilot-management systems. Algorithms built into our data platform are designed to detect unnatural changes in pilot hourly experiences and, with few exceptions, we have not determined this to be an ongoing problem.” 

Insist on an escrow account—and keep an eye on costs. Block-charter programs and jet cards require you to put large sums on account. The Zetta Jet experience serves as a reminder that this money typically funds operations, rather than being held in protected accounts. Besides performing due diligence on the financials of any card or block-charter provider you consider working with, find out whether it has provisions for establishing escrow accounts.

Setting up an escrow, or segregated, account is at least as important for aircraft owners working with management companies, says Stephen Hofer, founder and president of Aerlex, an aviation law firm. Most management agreements require clients to have two months of operating expenses on account, a sum that can easily reach into six figures for large-cabin jets. “The paperwork associated with a true deposit account can require a lot of time and effort and additional expense,” Hofer admits. “A management company will do it, but not for free.”

But the effort is necessary, Hofer says, and moreover, “you need to insist that the manager provide you with real evidence that the costs being incurred by your aircraft are being paid. A management statement that says, ‘We took in this [revenue] in charter, and here’s your expenses’ doesn’t prove anything unless they back that up with documentation.”

The concern, says Hofer, is that if the management company gets behind and doesn’t pay for goods and services for which you advanced money, you could face a double whammy: “Liens could be accruing that you’ll have to pay to clear title to your aircraft,” Hofer explains. “It’s not just enough to do due diligence in the beginning; you need to do it on an ongoing basis.”