Bankruptcy at helo training school rattles rotor industry

 - February 26, 2008, 5:33 AM

The largest civilian helicopter school in the U.S. abruptly ceased operations on February 3 amidst allegations by students and former employees of skewed ethics, mismanagement, misrepresentation and possible criminal activities. Executives throughout the industry fear that the building scandal surrounding Silver State Helicopters and its founder, Jerry Airola, could taint the entire helicopter training industry, exacerbate a looming shortage of commercial helicopter pilots, and make it more difficult for students to obtain loans for helicopter pilot training.

“This is one big cesspool and there is definitely the potential for backlash,” said Randy Rowles, chairman of the HAI’s flight training committee. “This is going to create huge issues within the next 30 days.” Rowles joined Silver State in June last year to “clean up” its training program but had tendered his resignation before the bankruptcy. Rowles said he did so after the company resumed high-pressure marketing tactics that created “overcapacity problems” of too many students and not enough helicopters at the school’s 33 locations. Rowles estimated the overcapacity at 20 to 40 percent on average, depending on location. Two locations in Florida had 46-percent overcapacity, according to Rowles. Silver State operated 250 helicopters, most of them Robinson R22s.

“The ripple effect is big and will go all the way back to [Robinson Helicopter founder] Frank Robinson,” said Doug Vause, president of High Desert Helicopters school in Ogden, Utah. Silver State had two Utah locations, in Provo and Ogden. Vause thinks the events at Silver State will cast a shadow over the entire helicopter training industry. In the days following its closure, he spent hours on the phone with local reporters emphasizing that Silver State’s shutdown was a “company problem, not an industry one.” Still, he worries about how lenders will view the industry in the aftermath of Silver State’s collapse. “That is my biggest concern and it threatens the viability of all of us.”

Kurt Robinson, Robinson Helicopter vice president, said that, as of early last month, approximately nine helicopters on its production line were destined for Silver State. According to Robinson, they have already been custom painted in Silver State’s colors. Because of the paint, “I don’t know how popular those helicopters are going to be” to other buyers. Silver State also has a substantial number of kits and parts awaiting shipment.

 “It puts a damper on the whole industry,” said Matt Hewlett, director of operations at Universal Helicopters, a school located in Provo.

Silver State filed a Chapter 7 (liquidation) bankruptcy petition on February 4. The day before, founder Airola dispatched an e-mail to the company’s 750 employees informing them of the shutdown. He wrote, “The Board of Directors has not made a final decision as to Silver State Helicopters. Because the monthly operating expenses, even at the recently streamlined levels, continue to exceed cash flow the board has elected to suspend all operations effective at 5 p.m. today.” In fact, Silver State’s attorneys had already drafted the company’s bankruptcy petition and filed it the following day.

In its bankruptcy filing, Silver State claimed assets of less than $50,000 and debts of $10 million to $50 million. Some 2,500 students–most of them younger than 25–were enrolled at Silver State. They had paid between $50,000 and $70,000 up front in mostly borrowed, high-interest loans, often arranged by Silver State. The training package included 200 hours of flight time, ratings up to certified flight instructor, and often promises (false ones, students allege) of future employment with the company.

Silver State recruited predominantly non-college-track students via marketing campaigns that featured radio ad blitzes followed by large, high-pressure seminars in hotel ballrooms or airport hangars. At the seminars, Airola often would deliver the sales pitch, mesmerizing an audience of largely teenagers and early 20-somethings with tales of the seemingly insatiable industry demand for helicopter pilots and tempting training prices.

Garret Oberg is a former student at the Provo location. On Sunday, February 3, he received a phone call from Silver State informing him that the school was shutting down for a week to resolve funding issues. He called his instructor, Mike Pope, the following morning. “He told me, ‘They fired everybody Sunday night and locked the doors,’” Oberg said.

Oberg took out $70,000 in student loans at 12 percent interest from Student Loan Xpress and quit his job as a residential heating and cooling system technician to attend Silver State full-time. His wife works as a part-time tutor. After logging 100 hours over six months, Oberg has a private pilot’s license and he says Silver State has all his money. In fact, Silver State drew down Oberg’s and other students’ accounts to zero on the Friday before it filed for bankruptcy, according to Dan Reed, an attorney representing a large group of students. It took the remaining $23,300 out of Oberg’s account.

Oberg estimates that it will take another $40,000 to get his CFI, training that Silver State was supposed to provide.

“I was at the school all day every day, always studying my books so I could get done,” says Oberg. “I want to find a way to finish, but right now I have to find a job and put flight training on hold. My only other option is to join the Army and I don’t want to do that. My monthly payment on the student loan is $900 for 10 years. After a year of instructing I figured I could get hired in the Gulf of Mexico and make around $60,000 a year, but now I don’t have anything.”

Student Loan Xpress did not return calls seeking comment about the extent of its relationship with Silver State. Student Loan Xpress is owned by CIT Group and is the subject of ongoing bribery and kickback investigations in several states.

Aliree Ragan was 16 when she attended Silver State’s recruiting seminar and first heard Airola in an Ogden hangar. She filled out an application on the spot and then finished high school early to attend.

Silver State accepted her shortly after her 18th birthday and helped her obtain
a student loan that was cosigned by her father, a truck driver in Harriman, Utah. Ragan, now 19, had accumulated 91 hours and was due to take her private pilot check ride the week after Silver State collapsed. The company drew the last $17,700 from her account on February 1. She now has $76,000 in student loan debt. She recently took a job as a secretary for an electrical contractor and has no idea how she is going to repay the loan.

Initially, Ragan was flying 10 hours per week, but as Silver State cut her flight hours in half her training lagged.

Despite repeated attempts, she told AIN she has not been able to retrieve her student paperwork from the empty, locked and guarded Silver State office in Ogden.

High Desert Helicopters’ Vause estimates that Oberg and Ragan’s situation is typical of at least half of all Silver State students. “About 50 to 60 percent of them, all their money is gone and if they are lucky they might have their private [pilot certificate] done and be starting on their commercial,” he said. Even though Silver State students took 12 to 18 months to complete the 200-hour program, the company typically drew down their accounts within their first five to six months of enrollment.
Vause estimates that “less than 50 percent” of these students will ever work as professional helicopter pilots.

Following the Money Trail
In the week following Silver State’s bankruptcy, Sandy, Utah attorney Dan Reed fielded more than 750 calls from former Silver State students and employees throughout the U.S. Reed has received numerous reports of student accounts being drawn down the Friday before the bankruptcy. “That money was obviously not included in the bankruptcy filing. Where is the money? [It] went somewhere. It is not in these kids’ accounts anymore.”

Reed has characterized the Friday draw-downs “damning.”

While Reed has just begun to research his clients’ options, he says his first priority is to get Silver State students negotiated relief from their lending institutions. “We need to stop the payments from coming due so these students can survive.”
Moreover, he hopes that the Silver State students he represents will not be forced into personal bankruptcy. “I don’t want them to have to file bankruptcy. They were not out there racking up credit-card debt. They took loans in furtherance of their education and to pursue a career.”

Longer term, Reed is exploring the possibility of “pursuing a class action suit that would pierce [Silver State’s] corporate veil and go after the owners and officers individually.”

However, he cautions that such a course will not be quick or easy. “There’s no way to accurately predict how long it will take. [Silver State] has done everything to [cover its] tracks and make it as difficult as possible. It could easily take a few years.”
Reed also said that several state attorneys general are in the process of starting investigations into the company.

Although Silver State is bankrupt, its new owner has deep pockets and may have at least some liability. In August 2007, Airola sold 60 percent of Silver State to Eos Partners, a $3 billion New York private equity firm, for an estimated $30 million. “At the very least it looks like they didn’t do their due diligence,” said Reed. “They should have been watching.”

Eos declined to comment for this story, and Airola could not be reached. Company insiders said Airola continued to have invoice approval authority even after the Eos infusion.

Also in August 2007, Silver State received a $40 million line of credit from Orix Financials, secured by its aircraft. Bankruptcy court documents reveal that Silver State drew $33 million off the line by last month. Orix spokeswoman Elizabeth Daane would say only that the company was a “major secured creditor.”

Las Vegas television station KVBC reported that Orix representatives were initially thwarted in their attempt to access Silver State’s headquarters, to check on the status of the aircraft following the bankruptcy filing, by a company employee brandishing a handgun. They later gained access in the company of U.S. Marshalls.

Following the Eos purchase, Airola remained on Silver State’s board, although the company did hire a new president, Joe Fox. Company executives were told that Airola was purchasing the non-training assets of the company to spin off into a separate entity, Airola Helicopters International, to be based in New Braunfels, Texas. These included approximately 22 turbine helicopters, mostly Bell 206s and 407s, used for patrol, cropdusting and other activities.

Rowles thinks this “carve-out” was a smokescreen to deflect attention from the company’s bankruptcy preparations. He said the “carve-out committee” finished its work on January 31, four days before the bankruptcy filing.

The behavior of the company executives also reinforced the appearance that Silver State was properly capitalized. In the weeks before the bankruptcy filing, Rowles and Fox met with Kurt Robinson to discuss increasing parts and component inventories and ordering more new helicopters.

Critics claim that smoke and mirrors were at the heart of Silver State’s problems and that the company was little more than a pyramid scheme that used helicopters as a prop while Airola funneled the company’s assets to friends, family members and himself.

Thanks in part to Airola’s alleged profligate spending habits, Silver State burned through the average student’s entire tuition in five to six months, almost a full year before they were due to complete training, and was dependent on recruiting ever larger pools of new students to finance the training back end of earlier ones.

Competitors also told AIN that Silver State underpriced its training packages by an average of $20,000.

A Reputation for Mismanaged Funds
“There were people in this company with absolutely no experience in helicopters or helicopter training making six-figure salaries,” said Rowles. Within the company these employees were known as “FOJs,” said Rowles, for “friends and family of Jerry’s.”

Several former employees assert that Airola used Silver State funds to provide select employees with Hummer SUVs and sports cars, build a personal collection of exotic cars including a $153,000 Ford GT.

Former employees also charge that Airola used Silver State funds for his own unsuccessful political campaign and to buy political influence with a variety of office holders including incumbent Nevada Governor Jim Gibbons, himself the current target of a federal bribery investigation. Airola is one of the top fundraisers for the governor’s legal defense fund; just last month Gibbons appointed him to the Nevada Economic Development Advisory Board.

Airola made deals further down the political food chain as well. He donated the use of a Silver State helicopter to the Merced County, Calif. Sheriff’s department in 2004 in exchange for making him a reserve deputy. Merced terminated Airola when an audit revealed that he was not a California resident, one of the requirements to be a reserve deputy. Airola had worked as a police officer in Los Banos, Calif., beginning in 1991, but was fired in 1993.

Airola’s law enforcement credentials, as well as his business practices at Silver State, attracted Las Vegas media scrutiny when Airola spent at least $1.7 million, in what at the time was assumed his own personal funds, unsuccessfully running for sheriff of Clark County and Las Vegas, Nevada in 2006. He said he was running because he wanted to “take something that is broken and fix it.”

Airola seemingly spared no expense in the campaign and even hired the same high-powered political consultants who worked on Calif. Governor Arnold Schwarzenegger’s campaign. He attacked the department for bureaucratic bloat and inefficiency and promised, if elected, to use the same business practices that allowed him to expand Silver State from one Robinson R22 in 1999 to the nation’s largest flight school with an estimated $78 million in annual revenue. In 2005 the company ranked 12th on the Inc. Magazine 500 list of the fastest growing small businesses in the U.S.

A History of Legal Troubles
The campaign of Airola’s chief rival, Doug Gillespie, who won the election, needed to go no farther than the legal database LexisNexis for opposition research. As early as 2002, students had filed a number of lawsuits against Silver State, claiming the school had overpromised and underdelivered. Perhaps the most egregious example occurred in Mesa, Ariz., in 2004, when Silver State lured 1,300 students to its seminar, enrolled 119, and provided one R22 for training. Several Mesa students sued and that action was in arbitration earlier this year.

Airola was also named a co-defendant in a sexual harassment suit brought by a former employee of a Silver State-owned entity.

Most of the students’ lawsuits had a common theme: Silver State did not have enough helicopters or instructors for students to finish their training within the 18 months the company prescribed. Students who went over the time limit were either expelled from the program or told that they needed to pay additional tuition and fees to complete it. Their contract with Silver State precluded refunds but students could use their account balances to purchase “helicopter services” from the company.

By 2004 the operation was coming unglued and Airola acknowledged the company’s problems in a letter to its students. “It is important to me that you know that I am both aware of the frustrations that sometimes plague your flight training experience and am grateful for the patience you have shown during this time of amazing growth of our company.”

Silver State reached a new high the following year when it grew to 850 employees scattered over 44 locations in 18 states. In his 2004 letter to students, Airola held out the promise of future employment for those who had endured training delays.
“We have committed the company to large commercial contracts over the next few years. The largest asset that we have is you, our student base, which guarantees a large pool of qualified pilots to fulfill the obligations of these contracts.”

Silver State settled some of the earlier student lawsuits but several are still pending, as is a wrongful-death suit involving the fatal crash a Silver State Robinson R44 near Jacksonville, Fla., at the Craig Municipal Airport on March 27, 2007, that killed both student and instructor. The helicopter had just come out of maintenance. The NTSB found that the probable cause of the crash was “the [Silver State] mechanic’s improper installation of the attachment hardware for the servo to swashplate push-pull tube joint, which resulted in a disconnection, subsequent loss of control and impact with terrain. Contributing factors were the company management’s inadequate surveillance and enforcement of maintenance procedures, the excessive maintenance workload due to inadequate staffing of maintenance personnel and the insufficient management of maintenance tasks.”

The company’s blemished reputation has compromised the marketability of Silver State graduates and instructors, according to several industry sources, who view Silver State training as deficient. Recruiters for large Gulf of Mexico operators told Hewlett that they would not even consider hiring a Silver State graduate. Joe Munoz, the chief pilot for air tour operator Maverick Helicopters in Las Vegas, said that most Silver State graduates did not have enough flight time to be considered
for employment.

“What happened to these young people is despicable,” said Rowles. “I hate the fact that I was even associated with it.”

Silver State’s creditor committee is scheduled to meet March 10.