Good explanation on the origins of the term there by easygoer, this is how I understand the term, as well.
However, I've noticed that the term is quite freely by tobacco companies. Some blends are flakes, some are navy cut, even thought the cut is exactly the same. Hell, even many cigarettes (Player's, Capstan...) are/were "navy cut". I wonder what's the idea behind that? Were the ciggies made of the same tobaccos than Navy Cut pipe tobaccos, or were they actually cut from flakes (sounds expensive)?
What about "Navy Flake" then? Quite a bit of variation between them, as well -- some have rum topping, some not. One has latakia, some have perique, some have burley. Another term from the marketing department, methinks.