New Flight Options CEO brings Raytheon closer

In a move that appeared to bring Raytheon a step closer to concluding its intention to take control of the operations of fractional jet provider Flight Options, company chairman and CEO Kenn Ricci stepped down last month and was replaced by John Nahill, formerly v-p of corporate strategy and development at Raytheon Co. He was named chairman and CEO in a unanimous vote by the nine-member board.

Ricci had not planned on relinquishing command of the company he founded in 1998. In late November he told AIN that he planned to stay at the helm of the company even after Raytheon takes control. Ricci will continue as an “advisor to company management and support its future endeavors,” though he will not serve on the board.

Nahill is no stranger to Flight Options–he has sat on the Flight Options board since the company merged last year with Raytheon Travel Air. Since the merger, which gave Raytheon a 49.9-percent interest, Flight Options has been looking for needed equity financing. But the search for capital has been extremely difficult in this slow economy. In August last year the company thought it had come to terms with a large financial sponsor, but the final details of those terms were reportedly unacceptable to Flight Options’ investors. Just before the new year, terms were reached with Raytheon in which the Lexington, Mass. company would become the majority shareholder and take over operation after converting to equity some $20 million in debt Flight Options owes Raytheon.

As part of the merger, Flight Options contracted with Raytheon Aircraft for a mix of 115 new Premier Is, Beechjets and Hawker 800XPs. Deliveries on this order are scheduled to begin in 2007. Even without those airplanes, the merger transformed Flight Options into the second-largest fractional provider after NetJets, accounting for some 1,600 share owners and a combined fleet of more than 200 airplanes and 900 pilots then. There are currently about 2,200 shareowners, Nahill said.

In January, Ricci said Flight Options sold 30,000 hours’ worth of fractional shares last year, compared with 40,000 hours’ worth in 2001.

Raytheon alerted the industry last year that it was considering taking control of Flight Options. In its third-quarter 10-Q filing with the Securities and Exchange Commission, Raytheon stated: “In March 2002, the company formed a joint venture with Flight Options Inc. whereby the company contributed its Raytheon Travel Air fractional-ownership business and loaned the new entity $20 million. The company’s investment in and other assets related to the joint venture totaled $83 million on Sept. 29, 2002.

“The new entity, Flight Options LLC, has been pursuing additional equity financing, but has not yet secured the funds. In light of current capital market conditions, if Flight Options is not successful in this regard, the company may offer to exchange the Flight Options debt it currently holds for additional equity in the joint venture, whereby the company could be responsible for its operations, own a majority of Flight Options and consolidate Flight Options in its financial statements.”

Raytheon is expected to conclude its deal with Flight Options before the end of this month.

Nahill joined Raytheon four years ago as vice president of  financial analysis. Later, as v-p of corporate development he managed all merger, acquisition and divestiture activities of the company. Before joining Raytheon, Nahill was a senior engagement manager in the Boston office of consulting agency McKinsey & Company. During his six years at McKinsey, Nahill was in charge of operational, marketing and merger practices focusing on the defense and commercial electronics, software and automotive industries. He is a graduate of Connecticut College and received his master’s degree from the MIT Sloan School of Management.

In an interview with AIN just one week after being named CEO, Nahill responded to a number of questions on what’s in store for Flight Options under its new management team and soon to be Raytheon parent.

What brought about the change in command?
At the end of the day, it was differences in the direction of the company. The board just felt that it was time to change. Kenn [Ricci] is still a substantial shareholder. He will continue to be a valued adviser. I intend to tap Kenn when I need him.

What other top executive changes have been made or will also be made?
Mike Rossi, COO, will be leaving the company. The management team will be Rich Heckman, v-p of sales and marketing; Chris Herzberg, v-p of operations; and Paul Leachko, v-p of maintenance. These positions are largely unchanged; they just report directly to me now, and not to Mike and to Kenn as before. Mark Brody is my CFO.

Could you describe what you see as the significant strengths and weaknesses of the company?
We have a great workforce and it is completely committed to meeting and exceeding the owners’ expectations. That drives our second strength–a very strong customer-owner performance, consistently at the top of the market for customer satisfaction. A third strength is that we are finally achieving the utilization rates, dispatch availability, dispatch reliability, cost per hour and other operational components that we hoped to achieve when we put the two companies (RTA and Flight Options) together. We are now a very efficient and lean organization.

One of our weaknesses is that I think we have too broad a fleet in terms of models of airplanes. The company operates nine different models. That’s under review right now, but will not change overnight. The company has reduced its King Air fleet as customers moved up into jets, but 19 King Airs are still in operation and they are supporting more than 100 customers. The Beech twin turboprop has the highest dispatch reliability of all aircraft in the fleet.

We buy more than $100 million of fuel annually and spend $130 million a year in maintenance, and I don’t believe we have worked with our vendors as closely as we could. I have been in key discussions with lots of our suppliers and there are win-win opportunities here. I find that the better integrated you are with vendors, the more opportunities there are to reduce costs.

I also think there is a public perception of weakness of the company, a lot of that propagated by our competition. That is something that will go away quickly with the new capitalization of the company. This perception will be a short-lived problem.

Perhaps the weak public image is more a reaction to Raytheon’s statement last year that if Flight Options can’t find additional financing elsewhere, Raytheon will step in. What do you think?
At the time of the merger between RTA and Flight Options, roughly a 50-50 equity, RTA received what is called a seller’s note. That note (the $20 million loan to Flight Options) was due at the end of last year. The seller’s note was what equalized the respective balance sheets. If Flight Options was unable to pay off the seller’s note, Raytheon could convert that to equity. Given where the market values were and the overall public markets for capital–2002 was a very difficult year–the Raytheon and the Flight Options board met and said that, at these valuations, this is a silly time to be raising capital. Raytheon felt that rather than accept terms and conditions that a company the size of Flight Options or Raytheon should have to endure, we’re better off internally funding the company. In so doing, Raytheon is considering converting a fair amount of its debt to equity. When that happens, Raytheon will end up owning about 70 percent of Flight Options.

I think all this came across the wrong way. It’s actually a very prudent business proposition when you don’t want to be selling equity at the prices being offered on the market–and we are in a strong enough position that we didn’t have to.

When will Raytheon exercise its option?
In the first quarter. We are now working through the details for that, and the discussions are going very well. There are few or no points of contention. Flight Options will remain its own entity.

As part of the merger, Flight Options agreed to purchase 115 new Raytheon jets over the next five years. Is this still on track?
There are always going to be adjustments to quantity and schedules. And that’s anticipated in these agreements. I don’t anticipate substantial adjustments.

Before the RTA-Flight Options merger, the Travel Air pilots voted unionization down. Once Raytheon takes over majority ownership, do you anticipate a move to unionization again?
No, not at all. I’ve spoken to scores of pilots–and I don’t distinguish between former RTA pilots and the Flight Options pilots–and I have found they are happy with the way the management team has treated them. I have no intention of changing benefits, vacation, annual review process, pilot seniority and pay-for-pilot-training policies. I believe the union process that was under way fell apart because [the majority of employees] never ever felt that they had values different from those of management.

In the most recent employee survey in conjunction with Fortune magazine, employees ranked Flight Options above average in credibility, respect, fairness, pride and camaraderie.

Will there be any adjustments to owner costs as a result of the management and owner change?
We will continue to monitor our pricing to ensure we are competitive. There are no adjustments planned related directly to the management change or when Raytheon takes over.