In last month’s overview of the fractional aircraft industry, several consultants characterized Cleveland-based Flight Options as the least financially sound of the four major fractional providers. While official Flight Options pronouncements paint a rosier picture, recent data suggests that the fractional consultants weren’t far off the mark.

In an August 12 press release, the company announced that Raytheon invested another $50 million in Flight Options, boosting Raytheon’s ownership share in the fractional provider from 69 percent to 95 percent. Flight Options CFO Mark Brady explained that the “additional funding will help us meet our business objectives,” namely the fractional provider’s fleet renewal efforts, “and achieve future success within the industry,” but Raytheon’s Securities and Exchange Commission (SEC) filings paint a different picture.

In its second-quarter 10-Q filing, Raytheon said, “The company’s other segment results were composed primarily of the operations of Flight Options (FO). The higher losses this year [$41 million in the first six months versus $22 million in the same period last year] are due to increased aircraft charter expense due to the operational impacts primarily from older aircraft in the fleet, and customer demand.

“The older aircraft in the fleet are being retired and replaced by newer aircraft over the next five years. FO is also taking action to reduce the number of different types of aircraft in its fleet from a dozen to four and in the interim to reduce current operating costs. Although FO management believes that these actions will result in improved financial results, there can be no assurance that these actions will have the expected effect.”

The SEC filing also reveals that Raytheon is recording all of Flight Options’ losses, since it is “meeting all of FO’s financing requirements.” In the second quarter, the report says, Raytheon loaned Flight Options an additional $50 million, bringing its total investment in the fractional provider, including goodwill, to about $189 million as of June 26.

Raytheon’s relationship with the Cleveland company began in April 2002 when its Travel Air fractional arm merged with Flight Options, with Raytheon taking a minority 49.9-percent equity share. At the time Raytheon was looking to get out of the fractional aircraft business and planned slowly to divest its interest in Flight Options, but things didn’t turn out as planned.

Throwing Money at the Problem

In June 2003 Raytheon participated in a financial recapitalization of Flight Options and exchanged certain debt for equity, giving it a 69-percent share. At the time of that deal, Raytheon “committed to invest in certain additional capital on an as-needed basis over the next 18 months” and to provide “additional capital and retail financing over the next three years.”

This was certainly the case when Raytheon’s Travel Air division recapitalized Flight Options with an additional $50 million on August 10. However, it wasn’t done without a fight from the minority equity owners, which include Brantley Partners, Brantley Capital and Monitor Clipper Equity Partners.

In June Raytheon and Flight Options agreed to the $50 million equity infusion in exchange for 5 billion “common units,” which would have increased Raytheon’s interest in the fractional provider to 99 percent. But the minority shareholders cried foul and filed a lawsuit in the Delaware Chancery Court on June 27 to block those plans.

According to Brantley Capital’s July 13 SEC filing, Flight Options “would use the proceeds of this [$50 million] investment to repay amounts it owes to Raytheon Aircraft Credit Corporation under a floor plan financing and security agreement. If this transaction is consummated in accordance with its terms,” it would substantially dilute the minority shareholders’ stake in Flight Options to approximately 1 percent.

Consequently, Brantley would lose virtually all of the value–estimated to be $21.9 million as of January 1–of its investment in Flight Options. (Previously, the value was pegged at $32.5 million but was downgraded after a review of the overall general aviation market conditions, Flight Options’ operating results from last year and the fractional provider’s ongoing capital needs.) According to earlier SEC filings, Brantley invested $5.6 million in Flight Options in 1998.

On July 11 the Delaware Chan- cery Court issued a preliminary injunction, effective until August 10, to allow the minority shareholders to seek relief through arbitration. The two sides came to an arbitrated agreement last month, and Brantley chairman and CEO Robert Pinkas told AIN that the lawsuit has since been sealed.

A Murky Future

But this story is far from over. According to Raytheon’s July SEC filing, Flight Options “requires further advances or other capital investment in order to meet minimum liquidity requirements. If losses at FO were to continue over the longer term or sufficient funds are not made available to FO, [Raytheon’s] investment in FO could become impaired.

“In addition, the minority equity owners have sought to effect a merger of affiliates of FO and the minority equity owners where FO would assume certain liabilities and contingencies. This merger is required only in circumstances where the liabilities and contingencies assumed have a fair value not greater than $25 million at the time of the merger. [Raytheon] has not agreed that the conditions for the merger have been satisfied, and the merger is the subject of ongoing discussions among FO, [Raytheon] and the minority equity owners.”

A Flight Options spokeswoman declined to comment for this report, other than saying that the company’s August 12 press release provides sufficient information about the recapitalization deal.