Ready for Takeoff

Steven Santo's darkest day as a CEO was the day he grounded his aircraft company's fleet of 54 private planes and furloughed nearly all of his 500 employees.

It was late October, and Clearwater-based Avantair Inc., which flies executives and other passengers across the country, was facing fallout from an incident that had sparked an investigation by the National Transportation Safety Board. Weeks earlier, a part had fallen from one of its planes in flight. One of the firm's signature Piaggio twin turboprops took off from Camarillo., Calif., to pick up two passengers in San Diego, and fly them to Henderson, Nev.

The plane landed safely in Nevada, but the crew was startled to find that the tail's left elevator was missing — a part that helps a plane climb or descend. Workers at the Camarillo airport spotted the elevator near a runway, the NTSB revealed in its preliminary report, and although no passengers or crew were harmed, the plane was substantially damaged.

Avantair quickly halted its flights and inspected each aircraft, says Santo, a commercially rated pilot who does not fly professionally. “We didn't find anything wrong,” he says, and the flights resumed. But then the NTSB delivered costly news. “They told us that the reuse of a bolt that holds the elevator on could cause it to lose its locking capability and roll off.”

What had been an incident affecting a single plane suddenly burgeoned into a company-wide problem, with implications for pilot and passenger safety and for the company's finances. Clearly, all the reused bolts needed to be replaced, says Santo. But should the company do it gradually, a plane or two at a time, or all at once? And, beyond the bolts, could Avantair have further issues, potentially involving safety or compliance with federal regulations? Santo needed to find out.

Still, grounding the whole fleet would cost millions and disrupt the 6,000 monthly flight hours of planes dispatched from Avantair's control center in a private terminal at St. Petersburg-Clearwater International Airport.

And 1,000 passengers, many of them CEOs and middle managers, were counting on their scheduled flights for business or leisure trips. Most of the passengers had a financial stake in the planes, since Avantair sells fractional ownership of the Piaggio Avanti, in an approach similar to selling timeshares at a resort. The company also leases planes and provides service for less frequent fliers.

“It was a very painful decision,” says Santo. “It wasn't a decision that was made in 10 minutes. We made that decision over maybe a 24-hour period.” He talked with managers and with the board of directors, but ultimately, the choice fell to the CEO.

Santo, who founded Avantair predecessor company Skyline Aviation Services in 1998, and Executive Vice President Kevin McKamey are the largest shareholders at Avantair.

Santo ordered the entire fleet to stand-down, for as long as it took to examine and fix each aircraft. He used the downtime to scrutinize the company operation for systemic problems, and to find ways to restore confidence in the fleet's safety. “We should build in some more safety systems while we're down,” he determined. “We did that, in concert with the [Federal Aviation Administration].”

Management broke the news of the stand-down to pilots in groups. “Our pilots are all over the country, so you really can't get them all together in a room,” the CEO explained, as he overlooked the flashing screens of the operations center. “There's well over 200 of them, so we did a phone conference, and told them we'd work our tail off to get everybody back as soon as we could.”

When the planes stood down, the operations center, normally buzzing with rows of dispatchers, chief pilots and weather specialists studying the flight screens — went dark. Out in the marketplace, Avantair stock (symbol: AAIR) fell, and remains weak, closing at about 12 cents Dec. 4, down from $1.33 in January.

In the larger picture of Avantair's finances, the company posted a net loss of $1.34 million attributable to common stockholders (5 cents per share) on revenues of $42.87 million in its first quarter of fiscal 2013, ended Sept. 30.

That compares with a net loss of $2.55 million for stockholders (10 cents a share) in the same quarter of fiscal 2012, on revenues of $42.97 million, according to the company's filings with the Securities and Exchange Commission. The number of revenue-generating flight hours during the first quarter of 2012 also dropped, by 0.2%.

Bold steps
Although the California-to-Nevada flight did not result in an accident, the airline was fortunate, says Bruce Landsberg, president of the Aircraft Owners and Pilots Association, a general aviation group based in Frederick, Md. “It's highly unusual to have a piece fall off an airplane and not have it go out of control and crash.”

Santo needed to take strong forward-looking safety measures to reassure his investors. He retained Nick Sabatini, former associate administrator for aviation safety at the FAA, to conduct an internal review of Avantair's aircraft and maintenance operations. And he hired David Cann, a 22-year FAA official, as the company's new senior vice president of safety, quality and compliance.

At the FAA, Cann's unit developed new oversight technology. “They wrote specialized systems that could really internally track exactly what was going on at an airline, and foresee any problems that could arise in the future, and correct them before they can come back,” Santo says.

Santo may find common ground in turning to former government officials for help. An attorney with a J.D. from St. Johns School of Law, he served as an assistant district attorney in New York in the 1990s, working in the major crimes unit.

Now, however, his efforts center on helping Avantair bounce back. His planes are flying again, and the dispatchers are back at the 24-hour control center in Clearwater. The three-week stand-down cost at least $2 million, and final costs aren't yet tallied. But the company still faces the task of convincing investors that it is on solid footing, and that it has resolved any potential maintenance or safety issues.

Sabatini, reached at his office in Washington, D.C., says Avantair's steps showed a strong commitment to safety by voluntarily grounding its planes and surrendering its flight certificate. The FAA later returned the company's certificate, Sabatini points out. “That is the strongest vote of confidence anyone could get—when the FAA returns your certificate.”

Earlier storms
This is not the first time Santo has been compelled to restore confidence in a time of crisis. During the recession that began in 2008 and forced many companies out of business, corporate travel budgets were slashed across the country.

With its sleek, $7 million Piaggio Avanti planes that offer club cabins, leather seats, and a private restroom, the aircraft might seem a tough sell to CEOs facing a struggling economy. But Avantair actually gained investors and passengers during the recession as it focused on retaining its fractional owners.

Santo set about ensuring that the corporate leaders who were his clients would find value in flying Avantair's craft. He concentrated on service and pitched time savings to convince the CEOs that investing in the Piaggio would provide them with a competitive advantage not available on commercial airlines.

“If you own multiple stores in multiple locations, you're not going to be able to cover them on the commercial airlines—at least in a short period of time. You may be lucky to hit one a day,” says Santo. “We have owners that go out and hit five locations in a day, and they're back home for dinner with their family.”

The convenience of avoiding lengthy commercial airport lines to check baggage or submit to scanners comes at a price. With a fractional, one-sixteenth ownership in a Piaggio, the management fee costs about $11,000 a month to fly 50 hours, says Santo, or $2,600 an hour. The plane holds eight people, but with just six, the cost is about $400 an hour per person, or $800 for an average, two-hour flight, comparable to the cost of some first-class commercial flights.

The company bought a new plane about two months ago, and in the past year-and-a-half has purchased six planes, representing an investment of $42 million.

As he faces the future, Santo recalls what worked during the recession: “We said, if we can just keep our folks that we have now, we'll be fine. What kept them was killing them with service. What kept them was becoming something that they didn't want to give up.”