Failed Plane Deal Lands in a Court : Aviation: A Van Nuys firm claims General Electric reneged on a deal to provide new engines for corporate jets. GE says the firm failed to generate any orders for the planes.
The idea struck Geoffrey D. Miller and David A. Eisenstadt as a sure-fire financial hit.
The pair, who ran an airline consulting firm in Van Nuys called American Aviation Industries, hatched a plan in 1984 that they believed would uncover a rich new market for corporate jets.
They would buy used Lockheed-built JetStar corporate planes, put new jet engines on them that were quieter and had longer range, and resell the planes for a profit. Or they would make the changes for JetStar owners who wanted the overhauled version. The retrofitted jets, which were originally built between 1960 and 1979 with engines made by Garrett or Pratt & Whitney, would be called FanStars.
Miller and Eisenstadt believed customers would buy the FanStar because, with its $6.8-million price tag, the jet would be less expensive than comparable new aircraft made by Gulfstream, Falcon and other rivals. Their sales idea was something like offering an old car with a brand new engine. And with its new engines, the converted JetStar could now make transoceanic flights--an attraction for businesses with overseas offices.
But to get the project off the ground AAI needed engines and a source of cash. So it turned to General Electric, the Fairfield, Conn.-based conglomerate that is one of the nation’s major jet-engine builders and that also owns General Electric Capital Corp., a thriving financial-services company with a sterling investment record. Together, AAI and GE were supposed to profit handsomely with the FanStar.
Instead, their project crashed and burned before the plane even got approved by federal authorities. And now AAI is suing GE, alleging that GE effectively ran AAI out of business by failing to keep providing the firm with cash as promised. AAI is seeking $109 million in damages, which represents its estimate of future profits had AAI continued its project.
GE not only denies AAI’s claims, it also contends that it was the injured party, and GE has filed a cross-suit against AAI, seeking more than $10 million in damages. A jury trial for the combined suits began last week in Superior Court in Van Nuys, before Judge Stephen D. Petersen. The trial is expected to last three months.
The case is a classic David versus Goliath battle, pitting tiny AAI against the giant GE, which has annual sales of $40 billion. It’s also a complicated case which, judging by the opening statements of the companies’ lawyers, could rest on whether the jury determines if AAI and GE had ironclad, written agreements that were broken, or whether some of their “agreements” were merely verbal “handshakes” that were not binding.
A. Barry Cappello, the lawyer for AAI, and Bert M. Cooper, GE’s attorney, each took about two hours to make their opening statements. Judge Petersen even asked the lawyers to start each day of the trial with a joke, to help mitigate the jury’s tedious task of sorting through financial statements and contract law.
Miller, 46, and Eisenstadt, 47, are not aerospace engineers, but rather consider themselves apt in aviation marketing. They became partners in 1980 to initially broker commuter airplanes to investors who would lease the planes to airlines. Before that, Miller said, he arranged tax-shelter deals involving trucks and earth-moving equipment. Eisenstadt said he has a psychology degree from UCLA and previously sold aviation insurance.
Between them, Miller and Eisenstadt had $1.5 million invested in AAI, and each owned 21% of its stock by the time the FanStar project collapsed, Cappello said. They currently are not employed elsewhere and have devoted all of their time to the trial, he said.
They contend that their firm and GE had a “joint venture partnership” to create and market the FanStar, in which GE agreed to supply turbofan engines for the overhauled planes, and to fund and market the project along with AAI. GE Capital (then called GE Credit) also was to lend money to customers who wanted to buy the FanStar.
AAI also would supervise the overall engineering and flight testing of the new plane, and was to guide the jet through the many tests required to get Federal Aviation Administration approval so the planes could be sold.
But AAI alleges that within two years after it brought GE the idea, GE purposely began withholding cash from AAI--leaving AAI unable to pay its bills--and eventually cut off AAI altogether.
In addition, AAI alleged that when it tried to get the investment firm Advest Group to invest $10 million in AAI in late 1986, GE said it would finish financing the project, so Advest backed out. But in February, 1987, GE wrote AAI “telling us that there was no more money,” attorney Cappello said in his opening remarks.
GE counters that there never was a formal joint venture, that it was primarily AAI’s engine supplier and lender. Before the project was abandoned, GE says it loaned about $10 million to AAI, but that AAI proved to be less than a credit-worthy borrower.
AAI defaulted on some of its GE loans, and “had essentially no financial accounting records,” Cooper told the jury in his opening statement. In addition, Miller and Eisenstadt were paying themselves “extravagant” annual salaries of $225,000 even though AAI had no sales yet, Cooper said.
AAI also had vowed that it would start getting firm orders for the FanStar once a prototype of the jet had its inaugural test flight, but that after the flight on Sept. 5, 1986, no orders surfaced, Cooper said. Finally, GE concluded that the early optimism about the FanStar “turned out not to be justified” and that it “ought not to throw good money after bad,” he said.
But Miller and Eisenstadt contend that despite GE’s dim view of the FanStar’s potential sales, some studies have forecasted sales of between 40 and 90 planes. They also allege that GE is aware of those predictions, and “wanted the whole profit pie to itself,” said another of AAI’s lawyers, Peter J. Bezek. The studies were done by AAI, a firm called Forecast Associates in Connecticut and an aviation expert named Roger Sprake, Cappello said.
GE denies the allegations. By the time the project collapsed, “the problem was AAI had not been able to get a single firm order for the airplane,” Cooper said. “That is the most eloquent indication of whether or not the plane had a future.
“AAI failed not because of what GE did, but in spite of what GE did,” he added. “GE never gave AAI a blank check.”