Raytheon takes majority control of Flight Options

 - July 28, 2008, 11:48 AM
Four months after John Nahill, former v-p of corporate strategy and development at Raytheon Co., took charge of Flight Options from its founder and then chairman and CEO Kenn Ricci, Raytheon in mid-June completed a “financial recapitalization agreement” in which it now owns approximately 65 percent of the world’s second-largest fractional aircraft ownership company.

This move had been expected for several months. Flight Options LLC’s roots lie in the merger of Raytheon’s own fractional-ownership subsidiary, Raytheon Travel Air, with Flight Options in March 2002, creating an aircraft ownership operation second only to NetJets in fleet size and number of shareowners. Nahill was no stranger to Flight Options as he had served on the board of Flight Options since its merger with Raytheon Travel Air.

The newly combined fractional aircraft operation boasted more than 1,600 share customers, 900 pilots and a fleet of some 200 aircraft. Under that merger, Raytheon held a 49.9-percent interest in the merged operation, which retained the name Flight Options, the majority holder.

As part of the deal, Flight Options contracted with Raytheon Aircraft for a mix of 115 new Premier Is, Beechjets (now the Hawker 400XP) and Hawker 800XPs over a five-year period. At press time it wasn’t clear exactly what changes are in store for that plan. In March, Raytheon said it would reduce its reported aircraft backlog by another $850 million related to an order for Raytheon models received last year from the fractional aircraft provider, as accounting rules prevent Raytheon from reporting sales to a company it controls as backlog. Raytheon has confirmed that reduction in its takeover agreement.

It wasn’t long after the March 2002 merger with Travel Air that Flight Options started looking for needed additional financing, a search that proved extremely difficult in this slow economy. Last August the company came close to signing with a large financial sponsor, but the final details of the terms were reportedly unacceptable to Flight Options’ investors. It was just before the end of last year that terms were reached with Raytheon to take control of Flight Options if financing couldn’t be obtained elsewhere.

In a third-quarter filing with the Securities and Exchange Commission, Raytheon Co. revealed that as part of the joint venture that saw Travel Air absorbed into the reorganized Flight Options, Raytheon “loaned the new entity $20 million. The company’s investment in and other assets related to the joint venture totaled $83 million as of 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, there can be no assurance that Flight Options’ will ultimately be successful in attracting additional outside funding. 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.”

The extent of Flight Options’ losses was disclosed in April. “When and if Raytheon becomes a majority shareholder of Flight Options, we will need to change our accounting treatment,” said a Raytheon quarterly report. Although Raytheon had not yet consolidated Flight Options’ financial results at that time, “We are now starting, with the first quarter (2003), to record 100 percent of Flight Options’ losses since we have been meeting all its financial requirements as of the first of the year.”

Bleeding Red Ink

During the first quarter of this year, Raytheon recorded approximately $13 million in losses at Flight Options. “This quarterly loss was unusually high due to several factors we believe are nonrecurring,” the company reported without elaborating. Raytheon said Flight Options expects revenues of about $500 million and an operating loss of $10 million over the last three quarters of this year.”

In the months between the merger of Raytheon and Flight Options and the closing of the current deal, the two companies have gradually been increasing their partnership and cooperation. In the latest such action, an agreement was inked in late May under which Raytheon Aircraft Services will provide all of the maintenance for Flight Options’ entire fleet. The deal made Flight Options RAS’ largest customer.

RAS will provide the maintenance at more than 20 service centers and additional facilities dedicated to Flight Options maintenance, according to Nahill. Also under the agreement, Flight Options mechanics became RAS employees. Nahill said the deal initially is for five years and represents a $400 million commitment by RAS. Of the company’s more than 200 airplanes, about 75 percent are Raytheon Aircraft models.
Flight Options recently named two former Raytheon executives as regional sales directors.

Ricci established Flight Options in 1998 as an outgrowth of his Corporate Wings charter and management business, offering shares in previously owned corporate jets to keep customer acquisition costs below those for the new models of like aircraft typically offered by the other fractional providers. The strategy worked, enabling the company to enter the marketplace. While Flight Options is now introducing new aircraft (it has taken delivery of two Premier Is it intends to evaluate over the rest of the year), the average age of the Flight Options fleet is still nearly 10 years, the oldest average of the three largest fractional providers, according to a recent survey

(Since his departure from the top slot at Flight Options, Ricci has been concentrating on rebuilding Corporate Wings, which also operates a number of FBOs.)

Just Add Money

As part of the majority-ownership agreement, Raytheon has “committed to invest in certain additional capital on an as-needed basis over the next 18 months” and provide “additional capital and retail financing over the next three years.” Raytheon declined to discuss actual dollar amounts it has in mind, but did say that “further information is expected to be available” at the end of the second quarter.

“Raytheon is pleased to participate in the recapitalization of Flight Options,” said Ed Pliner, Raytheon’s CFO. “We believe this recapitalization will provide Flight Options with the resources to achieve its business objectives.”

“Raytheon’s investment will allow Flight Options to grow and continue to exceed our customers’ expectations for safety, service and value,” said Nahill. “With this transaction complete, we look forward to introducing new products and programs for our owners, which will continue our tradition of bringing innovative and value-oriented products to the marketplace.”

One upcoming innovation may be a 25-hour flight-block program. Flight Options also squelched rumors that the company was going to sell its Beech King Air fleet. Nahill recently reconfirmed the company’s commitment to the King Airs, saying they have the highest dispatch reliability of all the Flight Options aircraft.

Other Flight Options shareholders include Brantley Partners, Brantley Capital and Monitor Clipper Equity Partners.