Taking a Powder
Last week Jet Aspen, the start-up airline that was to ferry powder-hungry passengers from Los Angeles and other cities to Aspen, Telluride and Montrose, filed for protection from its creditors under Chapter 11 federal bankruptcy laws. Despite publicity and millions of dollars it raised, the Virginia-based company never got off the ground.
Much of the blame for the financial crash lands at the feet of its erstwhile founder, Hap Pareti, who has also started three other airlines only to watch them fall into bankruptcy court. A driving force behind Jet Aspen as it struggled for stability last year, Pareti and his flight record became a liability when the U.S. Department of Transportation insisted he sever his ties with the company before it would grant the airline a license to fly.
Early this year Pareti told the federal agency he'd left the company; however, the DOT apparently wasn't convinced, and it delayed approval. Without a license, the airline could not pay its bills. In recent weeks Jet Aspen and some of its employees who were owed tens of thousands of dollars in back wages have played a game of legal brinksmanship. The standoff ended May 20, when the unpaid employees threatened to force the company into bankruptcy that afternoon; Jet Aspen responded by doing the deed itself in the morning.
Now, as investigators begin to sift through the financial rubble of Jet Aspen to determine what went wrong, it appears as though, at best, Pareti was not completely frank with his investors. At worst, he may have misled the Department of Transportation about the financial health of Jet Aspen.
The anatomy of a plane crash:
Taxi: In the past decade Pareti has launched three separate budget airlines: People Express Airlines Inc. out of Newark; Presidential Airways of Chicago; and Leisure Air, based in Winston-Salem, North Carolina. Each ended up in bankruptcy court. Despite his unsuccessful past, however, Pareti (who could not be reached for comment for this story) has said that he was recruited by investors to start Jet Aspen.
Throughout the spring and summer of 1995, Pareti represented the airline to the public and raised money in private. The idea of new air service to Colorado's booming ski areas was not a hard sell. In fact, Sandy Zuehlke, a Telluride businessman, couldn't wait: He contacted Pareti in June 1995 and asked if some local investors could get a piece of Jet Aspen.
"I thought it made sense, so I approached Pareti," recalls Zuehlke, who runs Good Sense Co., a solid-waste management enterprise. Zuehlke's friends and associates poured $750,000 into the young company. They weren't the only ones writing checks: By the end of the fall, Pareti told the DOT that Jet Aspen had raised $8 million.
Takeoff: Jet Aspen was incorporated on June 30, 1995. It applied to the transportation department for its license on September 26, 1995. According to documents filed in Washington, the airline had a fine pedigree and little reason to think DOT approval would be a problem. Alan Hughes, co-founder and president of the company, had nearly three decades of aviation experience. Its vice-president for flight operations, William Neuens, had a similar amount of experience with United Air Lines.
Abort: In December the DOT began to raise questions about Pareti and his past financial dealings with the other airlines. As a result, Pareti signed an agreement with the federal agency that he would step down from Jet Aspen and have no contact with the company or its operations. But Zuehlke says Pareti didn't follow through with the deal and continued to have a hand in Jet Aspen's business.
Pareti's persistent involvement with the airline did not go unnoticed. In January two companies positioning themselves as future competitors of Jet Aspen--Peak International and Tri-Star Airlines--alerted the DOT that Pareti was still in the cockpit. At the same time, ORIX Aviation Systems, a Dublin, Ireland, company that had lent planes, parts and money to Leisure Air, informed federal investigators that Pareti still owed it just over $215,000 in loans it had extended to Jet Aspen in 1992 and 1993.
Takeoff No. 2: By the beginning of the year, Pareti had finally let go, agreeing to give up his stock and leave the company. "I haven't seen him around here since February," says a spokeswoman for Jet Aspen in Virginia. (However, directory assistance still lists the phone number for the consulting firm Hap Pareti & Associates as the same as Jet Aspen's.)
Meanwhile, a group of equity investors, including Zuehlke, began meeting weekly to decide how to rebuild the struggling company. But with no income and its federal license application in limbo, the airline continued to bleed cash. "If Pareti had not violated that agreement," Zuehlke says, "the DOT would have given its approval" and Jet Aspen would have been airborne by early this year.
As it was, however, by March Jet Aspen had skipped several paychecks for pilots and other employees, several of whom had moved to Colorado for their new jobs.
Turbulence: Zuehlke says his investor committee dug into the airline's finances--and came up dirty. "Investors were led to believe by Hap Pareti that the company was capitalized to a much higher amount than we actually were," he says.
Specifically, Zuehlke says the story Jet Aspen's shareholders were being told by Pareti as late as mid-December--that the airline had enough money in the bank to satisfy the DOT and get off the ground--was fiction. "What we found," he says, "was that addendums to the company's application to the DOT were false." Zuehlke declines to elaborate, saying only that the papers had to do with Jet Aspen's financial health.
Bill Mosley, a DOT spokesman, says his agency is not aware of any financial irregularities in Jet Aspen's license application. "But," he adds, "we'd be interested in hearing about them."
Last month additional trouble appeared on the horizon when several pilots, who by then had not received paychecks since February, retained a Denver lawyer to help them recover their wages. In all, attorney Jim Fattor says, Jet Aspen owed his clients around $25,000.
Tailspin: With Zuehlke and his increasingly aggressive investors starting to question Alan Hughes and the Virginia management, the airline began a nosedive. It bottomed out on Monday, May 20.
Fattor says he had been negotiating hard with Hughes to get the pilots paid but that Hughes wasn't being helpful. So Fattor gave an ultimatum: If some agreement or reasonable progress hadn't been reached by Monday afternoon, he was going to file an involuntary bankruptcy petition that would force Jet Aspen into a Chapter 7 liquidation of its assets and dismantling of the company.
In the meantime, Zuehlke, acting on behalf of the investors' committee--and unbeknownst to Jet Aspen's executives--placed a phone call to Fattor at around 11 a.m. Monday. He suggested that he, Fattor and the pilots meet later that day and try to hammer out a deal. Recalls Fattor: "Zuehlke said he represented the equity investors and that he and his group had put a bunch of money into the company and he'd like to talk to me about paying his clients." They agreed to meet at 2:30.
But the meeting never happened. At about 1:30 Fattor saw a fax scrolling off his machine: It was Jet Aspen's filing for voluntary bankruptcy and legal protection from its creditors. "I was pretty surprised," says Zuehlke, who says he had every intention of attending the meeting with the pilots before he heard the news. According to the filing, Jet Aspen had $900,000 in debts and only $100,000 in assets.
Stephen Leach, a Virginia lawyer hired by Jet Aspen to handle the bankruptcy, says it was Fattor and the pilots who were being unreasonable. "The company tried to negotiate with them, but it was apparent that [Fattor] was not interested," he says. He adds that the airline chose to file bankruptcy itself in Virginia rather than face liquidation forced by the pilots, because it would be more convenient to have the case settled there.
For now, Jet Aspen's future is up in the air. The company could walk away from the project, but Leach says that is not Hughes's intention. (Hughes hasn't returned Westword's calls.) It could also reorganize and emerge from bankruptcy ready for flight; the DOT's Mosley says bankruptcy would not necessarily cancel the company's application to fly. More likely, Zuehlke and the investors' committee will try to pick up enough pieces to build a spinoff airline. To do that, the group would have to raise enough money to pay off Jet Aspen's creditors and then convince the Virginia bankruptcy court of their sound intentions. At press time, Zuehlke said he was close to raising the money and that the creditors' committee was considering a new "Colorado-based operation dealing with flights within Colorado.