““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 ”
Picking up the pieces
Shareowners weigh their options as Avantair folds.
The demise of Avantair has undoubtedly caught your attention if you own or lease a fractional share, have a jet card or have put money on account for block charter.
On August 16, the Clearwater, Florida-based provider of Piaggio P.180 Avanti twin turboprop fractional ownership, Jet Edge Card and Axis Lease programs was placed in liquidation through a Chapter 7 involuntary bankruptcy proceeding in Florida Middle District U.S. Bankruptcy Court in Tampa. The once publicly traded company (NASDAQ symbol AAIR) had ceased operations on June 26, sending more than 600 fractional share owners scrambling to locate and determine the condition of their aircraft and identify co-owners.
“I don’t know who the other [owners] are and I don’t know if the plane is intact,” Alan Meltzer of Bethesda, Maryland, owner of a one-eighth share, told BJT before the bankruptcy hearing. “We still owe money to the bank, so every month I make a payment for an asset that’s not here.”
Even if owners had their aircraft, they couldn’t fly them. The Federal Aviation Administration has suspended the airworthiness certificates of all 56 Avantis in the former fleet, noting that many have been “cannibalized” for parts and that almost all aircraft inspected had numerous discrepancies and lacked key components, often including engines.
“We’re trying to locate our other engine as we speak,” Daniel Catalfumo, an owner from Palm Beach Gardens, Florida, told BJT.
Customer dissatisfaction broke into public view when the Avantair Owners Forum went online this past January. “My last two experiences with Avantair have been very disappointing,” website administrator Joel Trammell wrote in the forum’s first posting, where he detailed his recent service misadventures before concluding, “I am now worried that [Avantair] will not be able to continue operations, leaving owners in a tough situation.” Trammell, who launched the site, was one of the four Texas-based Avantair owners who on July 25 filed the Chapter 7 involuntary bankruptcy petition.
The beginning of the end for Avantair came June 6 when it grounded its fleet amid concerns about improper tracking of flight hours on time-limited parts—those stripped from “donor” aircraft to keep others operational. The fleet was also grounded for almost three weeks last fall after an Avantair Piaggio shed an elevator and made two subsequent flights before the part’s absence was noted. Avantair called both groundings voluntary, but they were undertaken at the FAA’s insistence, according to former employees and others. (Employees were furloughed on June 26, and a class-action lawsuit on their behalf claims Avantair didn’t pay them for their last two and a half weeks of work; several lawsuits on behalf of owners have also been filed against Avantair.)
After the company ceased operations, the Owners Forum became a point of contact for people trying to locate their aircraft and identify fellow owners. (“Anyone seen 105SL? Apparently hasn’t flown or filed since a quick turnaround at KSGO May 3,” read one posting.)
Following Judge Catherine McEwen’s granting of the bankruptcy motion, Trammell told BJT he’s “hopeful this moves us forward” in gaining possession of aircraft for the shareowners, who contend Avantair has no claim to them. According to an attorney who was at the hearing, the judge ordered Avantair to provide information to help owners locate one another and granted them limited relief from an injunction filed in early August by Avantair’s court-appointed trustee that had quarantined the fleet. Owners may now inspect, perform preservative work on engines, airframes and components and reposition aircraft for storage at the airport where they’re located. An expert to be appointed by the trustee and paid by owners will inventory the fleet and assess the condition of the aircraft. Restoring the airplanes to airworthy condition will likely be a long and expensive process.
Piaggio America (PA), North American representative for Italy’s Piaggio Aero Industries, the Avanti’s manufacturer, will create an “OEM-trained team with the support of additional specialists furnished from Italy” to offer restoration services to fractional owners, said PA president and CEO John Bingham. PA recently sent an email to all known Avantair fractional owners “offering them our support,” and has received “numerous responses,” Bingham said. Asked about the sufficiency of spare-parts inventories, he commented that before addressing that issue, “We have to understand the condition and the needs of each of the owners’ aircraft.”
The shared-ownership model presents additional complications to aircraft recovery; little can be done without unanimous consent of the co-owners or a court order. Getting agreement from as many as 16 owners presents difficulties, especially since it’s likely that some owners have simply walked away from their shares, said attorney Amanda Applegate of Los Angeles-based law firm Aerlex, which represents some 120 owners with shares in approximately 20 former Avantair aircraft. Additionally, owners of stripped aircraft may attempt to track and recover missing parts, attorneys say.
Owners also face mechanics liens filed in state courts for unpaid maintenance work on their aircraft. Teterboro Rams has received permission from Bergen County Court in New Jersey to auction the four Avantis in its possession. (These state actions are subject to a stay while the assets are under bankruptcy-court supervision.) Rams has liens on 37 additional Avantis, according to co-owner Dennis Espinosa, and in bankruptcy court filings claims it’s owed more than $475,000. Dallas Airmotive has filed an objection in bankruptcy court to granting owners possession, claiming some of its loaner engines are on Avantis and seeking their return.
In its last quarterly financial statement, Avantair said it faced $122.75 million in debts and other obligations, and owners are among those asking where the money went. At press time, Avantair CEO Steve Santo, CFO Bret Holmes, president David Haslett and three other company executives were scheduled to begin providing sworn testimony to the trustee “concerning the acts, conduct, business, transfers, real and personal property of the debtor [Avantair], the financial condition of the debtor and any other matter which may affect the condition of the debtor’s estate,” in the trustee’s words. The six have also been ordered to produce a wide array of business and personal records.
Meanwhile, owners’ recovery efforts continue. “Overall, we love the airplane,” said shareowner Bill McIntyre of Dallas, echoing comments offered by several other Avantair customers. “I’ve even harbored thoughts about actually buying one.”
Catalfumo’s group plans to sell its aircraft “as is,” calculating that the best-case scenario of the value of a preowned Avanti doesn’t justify the cost of restoration. He and co-owners also fear that unknown safety issues could lurk in the airframe as a result of poor maintenance. This concern may strike aviation professionals as overblown, but the reality is that this episode has shaken the confidence of many owners in many ways. They have lost their investment, but the fractional industry has lost their trust, and that could prove to be a much more valuable commodity.
“The financial loss is trivial compared with the fact that our families were exposed to some serious risk without us knowing,” New York City shareowner Clifford Press said after reading the FAA’s inspection findings. “We are mostly incredibly grateful that we’re not dealing with fatalities here.”
5 Lessons for Business Jet Travelers
Given the questions that Avantair’s involuntary bankruptcy raises, what should you do now if you’re a fractional owner or are thinking about buying into a shared-ownership program? First, take a deep breath and relax. Avantair’s collapse isn’t symptomatic of an industry-wide infection. To be sure, fractional activity has declined over the past year (8.5 percent, according Argus, an aviation research and services company), but fractional programs still meet the needs of thousands of demanding travelers. However, consider these suggestions for ensuring that the experience matches your expectations:
1. Get help. Despite their basic similarity, fractional programs vary in ways that can greatly affect your costs and satisfaction. Make sure you “receive advice from someone who knows the industry and can guide you away from the pitfalls,” advises New Jersey aviation attorney Daniel Herr. Experts say prospective fractional buyers are less likely to seek professional guidance than those leasing or buying a whole aircraft, though fractional contracts can be more complex.
2. Know your co-owners. Not knowing their identities has been a major stumbling block for Avantair owners trying to make recovery plans for their aircraft. Moreover, “if there are aspects of a program [owners] might want to change, they really don’t have the ability to communicate as a group with the provider” unless they know one another, says attorney James Butler, CEO of Maryland-based Shaircraft Solutions.
3. Examine your asset and provider annually. It’s likely you rarely if ever fly on the aircraft you partially own. But you should check on its condition at least once per year—and while you’re at it, inspect your provider, as well. “An owners’ group could do a quality or safety audit on the company once in a while,” says Kevin O’Leary, president of Massachusetts-based Jet Advisors. For spot checks on your airplane, don’t hesitate to ask flight crews about the tail number; they know the favorites and the dogs of the fleet.
4. Know the true costs of ownership. Rather than giving an insider’s discount, fractional programs typically charge a premium over retail for purchasing shares of new aircraft. This is critical to keep in mind as eagerly awaited new models join fractional fleets. “A lot of these aircraft are going to be terrific, but you don’t want to go into them priced significantly above the market price,” advises consultant Michael Riegel, owner of Nevada-based AviationIQ. “The moment you take delivery, you’re going to take a hit on value.” Moreover, projections of residual values that fractional companies give owners are typically overly optimistic, and the valuations provided by the companies under guaranteed repurchase agreements are often below what owners expect—and what would seem equitable—due to contractual fine print.
5. Recognize the limits of contractual rights and protections. Aviation attorneys and consultants can advise you on the critical aspects of fractional ownership contracts, as well as on provisions that may be negotiable, such as details of repurchase guarantees. But ultimately there are no guarantees, as the Avantair story demonstrates—the contract is only as good as the stability of the company behind it. Vet accordingly. “I don’t see that there’s anything you can really put in writing…that is going to protect you,” says Connecticut aviation attorney Paul Lange. There’s no insurance you can buy, short of owning the entire airplane so you have more control.”
James Wynbrandt welcomes comments and suggestions at firstname.lastname@example.org.