FLY FRONTERA FIRES BACK: BEDC'S DUE DILIGENCE A SCAM

(Fly Frontera has responded to an article that appeared in the Brownsville Herald today. Below are some of their responses to the story written by Steve Clark where he quotes BEDC administrators about their negative response to the Fly Frontera proposal.)

The Brownsville Economic Development Council due diligence report that effectively ended Public Charter Inc.’s bid to establish Brownsville-based passenger air service to Mexico is confidential under a non-disclosure agreement meant to protect the firm’s sensitive financial information — standard policy when BEDC performs due diligence on a company that wants incentives. (So did GBIC and BEDC violate this agreement and can they be sued? Most definitely.)
But in this case, The Herald has obtained a copy of BEDC’s review of PCI and Charter Air Transport, which were gunning for a contract with the city of Brownsville to fly passengers between Brownsville and the Mexican cities of Monterrey and Tampico under the name “Fly Frontera.” (Due diligence, confidentiality agreement, means that GBIC and BEDC violated the terms of this agreement, sending a message that no company’s financial records are protected)
The report details why BEDC gave Fly Frontera a thumbs-down regarding the level of incentives city leaders seemed poised to approve for PCI, which sells passenger tickets, and aircraft operator CAT. Those incentives consisted of $500,000 in start-up money and up to $2 million more in revenue guarantees over two years, depending on ticket sales. The Herald also has a copy of a written response to the BEDC report from Jim Gallagher, president of PCI, who complains that BEDC omitted key information, thus painting an incomplete and not wholly accurate picture of his firm. (It was a due diligence scam.)
For the due diligence report, BEDC requested extensive documentation from PCI and CAT, including financial's going back three years; proof of legal authority to provide the proposed passenger service; a list of the companies’ owners and officers; a business plan; details of the operational agreement between PCI and CAT; certificates of good-standing from the companies’ respective states; and financial's on another Gallagher venture, Aviation Technologies Inc.
BEDC did not receive all the information it requested, (you forgot to mention that the report states Jim Gallagher provided all the information that was requested of him) such as details on Aviation Technologies. Gallagher said he declined to provide financials on that company since it wasn't involved in the Fly Frontera deal.
Nevertheless, the missing data (because Jason Hilt refused to accept Jim gallagher email, his email were block they had to be submitted to its atttorney Mark Sossi) made a complete due diligence review impossible, said BEDC’s Gilberto Salinas.
Much of the requested documentation was not provided in CAT’s case. David Norton, an aviation attorney whose evaluation is part of the BEDC report, concluded that the air service PCI was proposing — Fly Frontera — appeared to be “theoretically possible,” though not all required authorizations were in place. (Theoretically possible, what does that mean? Did Mr. Norton ever call Mr. Gallagher to talk about these reports? NO)
Among the authorizations Norton specifically cited PCI as lacking was permission from the U.S. Department of Transportation to operate flights to Mexico, which he noted could be difficult and time-consuming to obtain. PCI did secure an Air Operators Certificate from Mexico. Norton advised caution in “committing to providing significant funds” to PCI, since it wasn’t clear the company would be able to secure all the necessary authorizations. (all the operating certificates were produced and sent various times GBIC and BEDC ignored them and kicked them back.)
An economic impact analysis contained in the BEDC report concludes that a load factor of 60 percent or above, meaning at least 60 percent of passenger seats full on each inbound flight, meant the city would have been able to recoup the $500,000 start-up payout to PCI, while anything over two years of operation would be an added economic benefit. However, the analysis warned that a successful operation could also invite competition from other airports in the Valley, which would “greatly affect the viability of this project.” (With a 60% load factor the City would have been able to recoup its investment.)
BEDC noted that the companies have experience in the aviation industry as well as access to aircraft, and also observed that “if there ever was a time to start air service between Brownsville and Monterrey and Brownsville and Tampico, now is presumably the time.”
The report said the economic analysis showed “potential for a positive economic impact.” (So does that mean this has great potential?)
On the down side, the report’s financial analysis pointed to PCI’s weak financial standing, including negative net worth, negative liabilities and negative net income in 2010. BEDC singled out PCI’s negative net worth as the biggest concern, noting that the company “could legally file for bankruptcy at any time” and would be ill-prepared financially to deal with even minor problems. It also raises questions about PCI management’s performance, BEDC said.
“Of concern is investing $500,000 in start-up funds with a company with assets of less than $120,000 and a negative net worth, then guaranteeing up to $2 million in rate subsidies,” states the BEDC report, (and the report states that Jim Gallagher had net worth of more than $4. 5 million dollars, with 1/8 of it in cash and was willing to pledge 1 million dollars in a performance bond guaranteed by assets) which notes that “not even American Eagle or Continental received this type of start up funding.” (No they received more totaling about 2 million dollars, respectively)
As part of the report’s final analysis, BEDC recommended that no start-up funds be paid to PCI, or if so, that it be a dollar-for-dollar match between PCI and the city. The way things stood, the city would bear all the risk and PCI none, BEDC concluded. (How about the costs of the plane, the $200,000 to be spent on promoting Brownsville, spare parts, training, certificates and other costs and use of a multi million reservations system?)
More bad new for Fly Frontera: The report states that “using the standard BEDC Evaluation Scorecard for Applicants to evaluate financial strength, PCI and CAT had the lowest scores ever reviewed since the evaluation process began.” The report’s financial review uses the word “abysmal” to describe PCI’s solvency. (How can it be abysmal when its owner has over 4 million in cash assets and is willing to pledge one million in a performance bond?)
Gil Salinas of BEDC said Thursday that due diligence is vital when the city is considering spending scarce resources on a commercial venture. (Gil, how do you respond to GBIC giving money to Imagine Brownsville and not having to produce a single document, to show financial integrity?)
“We’ve been burned before,” he said. “We’re not a Houston or a Dallas that can throw money around. We have to be very, very careful and very mindful of who’s coming into town. We have learned our lesson the hard way. When we talk about due diligence, this is exactly what we’re talking about. In the end we’re protecting the community.” (Then why throw money at Imagine Brownsville, millions of it and they have produced too date two jobs, the Executive Director and the Public Relations Director?)
I think GBIC and BEDC have some explaining to do.