Meet Flight Options' new boss

 - August 4, 2008, 10:40 AM

It became apparent late last year that the management team led by chairman and CEO Kenn Ricci would be unable to raise the investment capital needed to continue fractional provider Flight Options in its then form. John Nahill, Raytheon Co. vice president of corporate strategy and development and a member of the Flight Options board of directors since the company’s merger with Raytheon Travel Air in March last year, spent virtually the entire month of January this year at Flight Options’ headquarters in Cleveland, where he went over the books and held conversations with customers, vendors, employees and management.

On February 10 the company announced that Nahill, 38, had been appointed chairman and CEO. “The employees and management of Flight Options are to be commended,” he said at the time. “In four short years, they took this business from a $30 million company to more than $700 million in sales.” In June, the company announced that it had completed a financial recapitalization agreement with Raytheon Co., giving Raytheon approximately 65-percent interest in Flight Options LLC, where before it had held 49.9 percent.

A graduate of Connecticut College (1986) and the MIT Sloan School of Management (1993), Nahill, a Boston native, had joined Raytheon in March 1999 as vice president of financial planning and analysis. Before that he was a senior consultant with McKinsey & Co., where he specialized in operational, marketing and merger practices in the defense and commercial electronics, software and automotive industries.

Nahill met AIN editor-in-chief R. Randall Padfield and chief news editor Gordon Gilbert in late June for an interview at AIN’s offices in New Jersey.

What changes have you made at Flight Options since taking over as chairman and CEO in February?

The new management team brings a different viewpoint to the company, with a focus on operational efficiencies. Our goal is to improve the experience of our customers by exceeding their expectations. By doing this, I believe sales will increase, which will improve financial performance, which in turn funds increased investment in the business, which improves customer satisfaction even more, and so on. I call this the “virtuous cycle,” and I successfully used this approach at Volvo’s North American marketing operations while I was working as a consultant for McKinsey.

What have you done specifically?

Our big emphasis is on supply-chain management. We have downsized to fewer suppliers. Instead of constantly shopping around every day for the lowest price, we’ve been able to negotiate low-cost, long-term agreements with a few key suppliers. When vendors know they can count on a large volume from your business, they respond to that commitment by offering a lower price. We announced in June that Raytheon Aircraft Services is our preferred supplier for aircraft maintenance [a five-year agreement worth more than $400 million], we have another agreement with Pratt & Whiney Canada to service our Pratt engines and we’ve reduced the number of FBOs we do business with to far fewer than the 100 we used before. Our savings on fuel alone are substantial.

Because of these better relationships with our suppliers, we have faster turnarounds and better dispatch reliability. Because we’re getting more out of our fleet, we have reduced our need to charter additional lift. Chartering is the epitome of inefficiency in the fractional business. It is costly and bad for customer satisfaction because, as our customers have told us, they do not want to be chartered.

One of our goals is to eliminate chartering completely. In the second quarter, our charter costs were down 80 percent compared with the second quarter of last year. Last month we had only 30 charter legs, less than 3 percent of our total flights.

I’d like to add that we’ve beaten our business plan month over month and so far Raytheon corporate management is very pleased with our progress.

Who else on the Flight Options management team is new?

We have a new head of maintenance, Brian Hoffman, formerly of Raytheon Aircraft Services. Jeff Dunbar is head of sales; he was head of Hawker sales at Raytheon Aircraft. John McLaughlin is in charge of financial planning and analysis. New regional sales directors are Ray Bennett (Southeast), formerly of NetJets; Clay Wilcox (Northeast), from Citation Shares; and George Kocher (New York City), formerly of Raytheon Travel Air. Tracey Chaplin is the new chief purchasing officer; she was formerly parts director for Flight Options. Most recently, Darnell Martens, one of the founders of Flight Options [and co-founder of Aviation Research Group/U.S.], was appointed chief strategy officer.

What is the relationship among Raytheon Travel Air, Flight Options and Raytheon? Will you keep the Flight Options name?

Raytheon Travel Air was, and still is, a wholly owned subsidiary [100 percent] of Raytheon Aircraft Holdings, which is wholly owned by Raytheon Co.; Flight Options LLC [the new entity] is owned by Travel Air [65 percent] and Flight Options International [the “old” entity] owns the other 35 percent. Raytheon Co. has four of the seven members on Flight Options LLC’s board. It is important to note that Raytheon Aircraft Holdings has no governance–no control–over Flight Options. Flight Options employees are Flight Options employees, not Travel Air employees.

We are looking at the name, although many of our owners tell us there’s no need to change it. Our vision of the new Flight Options is not the same as the old Flight Options, or the old Travel Air. We are now much more customer focused and less market-share focused. We are not looking to be the biggest fractional operator. Growth isn’t required or necessary to meet efficiencies, customer expectations or operational requirements because with more than 200 airplanes, we are at critical scale. We will grow, but I’m interested in rational, well planned growth of the fleets and market areas that we can best support.

How many share owners does the company have now?

We prefer to express that in the number of contracts sold–about 2,200 to date. Some owners have more than one contract with us. Some have their own shares and others have shares in partnership with other owners, so it can be somewhat misleading to give the total number of share owners. That said, we have about 2,000 owners. We’ve also seen a substantial uptick in sales toward the end of the second quarter, and a net increase in contracts since the beginning of the year. I think we’ll be adding eight to 10 new planes by year-end.

We have heard about owners who became disgruntled over what they perceived as below-market valuations of their airplanes when they wanted to sell back their shares to Flight Options. How do you address this?

First, we do not set the values. Second, we invite owners to bring in their own appraisers to recommend the fair market value of their airplanes. The process is not the issue, but rather that the market for used airplanes is now, and has been, artificially low. It is untrue that Flight Options is paying below fair market value. It’s the general aviation market that is low.

How do you respond to the assertion that Flight Options set the initial values of its airplanes, and therefore the resultant fractional share prices, above fair market value, thus making the difference between the original selling price of the shares and today’s fair market value of the shares that much greater?

This assertion does not take into account the fact that Flight Options invested a great deal in avionics, interiors, paint, cabin entertainment systems and the like in each airplane–$600,000 to $700,000 on the smaller aircraft and up to $2 million on the larger ones. The reality is that the owners bought their shares post-refurbishment.

I don’t believe that the present fair market value of our aircraft is lower than that of other comparable pre-owned aircraft. Because of our process [inviting owners to use outside appraisers], it can’t be.

However, we plan to implement various programs to better protect the value of our owners’ airplanes. For example, we have increased the refurbishment schedule of our aircraft [to maintain their value] and have curtailed selling airplanes into the market at this time [to avoid depressing market values even more]. One thing we did to increase the utility and value of the Beechjet 400As in our fleet is implement a recent Raytheon flight manual change that adds 200 pounds to the mtow.

How is Flight Options’ relationship with its share owners?

Over the last four months, we’ve seen a dramatic improvement in customer satisfaction, based on owner feedback cards. The average rating in each of the categories on the cards has been well over 4.5 out of a possible 5.0, with most above 4.8. The statement, “My overall impression of the trip met my expectations,” is now averaging about 4.9. The card idea was actually suggested by Raytheon CEO Bill Swanson, who is one of our most frequent fliers. We receive comments from him after nearly every one of his trips. By the way, former President Bill Clinton is also one of our customers.

I credit this improvement to several things: our new maintenance plan, which has provided us with a more reliable fleet and fewer unscheduled repair issues; the infusion of a number of brand-new or late-model airplanes; and a renewed focus on a culture of customer service, setting goals and objectives and aggressive feedback systems at all levels. For example, we recently implemented a 360-degree evaluation system of our upper- and middle-management personnel.

What is the present composition of your fleet?

We currently operate 87 Beechjet 400As, 52 Hawker 800/800XPs, 17 King Air B200s, 13 CitationJets, 12 Citation IIIs, 11 Challenger 601s, seven Falcon 50s, six Citation IIs, six Citation Vs, five Citation Xs, two Gulfstream IVs and one Premier I.

Why are there no longer Gulfstream IVs and Falcon 50s shown in the list of aircraft on Flight Options’ Web site?

We are continuing both programs, but I made the decision that we would not sell new shares in these airplanes for the time being. The issue is that we are oversold in both aircraft and I don’t want to prompt additional sales. On the GIV and certain other models, we are limiting the number of owners. As a rule I would rather have a current owner buy more hours than a new owner buy into the program. Acquiring a GIV, even a pre-owned one, is expensive. Refurbishment costs about $2 million and is a nine-month project. So we’re not planning to add any GIVs in the near future. However, we are adding another Falcon 50 (probably by the end of the summer) because it does certain missions that other aircraft can’t–specifically super high and hot. We need extra capacity for these missions. We are also looking at a number of airplanes with larger cabins to fulfill future needs.

What is the average age of the fleet? How many flight hours do aircraft log annually?

The average age is less than 10 years. [In May, UBS Warburg reported this as 9.7 years.] Each aircraft logs about 800 hours per year.

What’s the status of RVSM and TAWS certification?

We will be ready with both by their respective deadlines.

How will the implementation of Part 91 Subpart K, the new rule governing fractional operations, affect your operations?

Very little, as all our aircraft and maintenance programs comply with Part 135. We expect all crews to be Part 135 certified within the next nine months. We expect full 135 compliance by the first quarter of next year.

Why have you decided to do this?

Because it gives us more flexibility in the ways that we can operate our airplanes. For example, we could add a program similar to the block-hour program Marquis Jet is doing with NetJets, which must be operated under Part 135.

How many pilots does Flight Options employ?

About 950 right now, out of a total of more than 1,600 employees.

Previously in its marketing literature, Flight Options promoted its use of dedicated crewing. Is this still in effect?

It is, but we are looking at it. An advantage of being a new CEO is that I can take a fresh look at everything. Dedicated crewing does entail additional costs, but some of these are made up with operating proficiencies. And the pilots prefer it. If the objective is to have the best owner experience–and for us it is–then dedicated crewing is an important factor. The operational benefits relate to better care and feeding of the airplanes by the pilots; they also know the maintenance history of their airplane better. It’s true that the procedure was implemented because of the difference in avionics configurations within the Flight Options fleet, but even as the cockpits are becoming more standard, we’re still sticking with dedicated crewing because of its benefits.

We have two, in some cases two-and-a-half, PICs assigned to each airplane. Copilots are not dedicated to specific airplanes, although there are some crews that are working together. In this manner, PICs come to know the unique characteristics of their airplane while copilots gain experience with several captains and airplanes. The PICs’ schedules overlap on the first and last day of their rotation so the outgoing PIC can brief the incoming one on any issues. They also get to know each other, and that develops an attitude that you’re not going to leave a bad or dirty airplane for the next guy.

We’ve also used the eight-day crew rotation schedule as the basis of a new maintenance program, started in May, for our Beechjet 400s. Every eight days the airplane goes in for preventive maintenance, giving 45 maintenance events per year. On the rotation day, the airplane is put in for 36 hours of maintenance, starting at about six or seven at night, with the technicians and parts kits already there and waiting. Our goal is to eliminate unscheduled maintenance. We’d rather remove and replace time-limited parts early than have a failed part disrupt a trip. This is far less expensive than having to reposition another airplane for an AOG.

As our maintenance service provider, Raytheon Aircraft Services has helped us implement this new program. We added our Hawker 800s to this program in July and we’re developing a program for the King Air, although we may do a 16-day system with the King Airs because they are so reliable–actually they are our most reliable airplanes.

The International Brotherhood of Teamsters has told us a union-organizing effort among the pilots is planned now that the financial recapitalization of Flight Options by Raytheon has been completed. What have you heard about this?

Very little. Most of the feedback I have received from our pilots has been positive. Part of this may be due to the new seniority system [integrating the former Raytheon Travel Air pilots with the Flight Options pilots] that I directed be implemented. We examined the old system and found that under it 95 percent of the Flight Options pilots had obtained a seniority advantage while 95 percent of the former RTA pilots were “disadvantaged.” The new system evens this out.

What is your opinion of the lawsuit filed by several former Raytheon Travel Air pilots alleging that Flight Options unlawfully discharged them because of their union-organizing activities at Travel Air before the merger last year?

I can’t comment on pending litigation. However, I will say that we believe we have one of the best relationships with our pilots in the industry, that we have the best pilots–actually the best overall workforce–in the industry and that we are committed to keeping them.