Sunday, August 13, 2006

Eclipse of the Eclipse?

Do you remember the BD5J, the mini-jet that every red-blooded aviator wanted in his personal hangar? Well the modern version may turn out to be the Eclipse. I cannot remember an aircraft that has received as much ink in the lay press as the Eclipse. The reality of the skies filled with micro jets, however, is premature. No Very Light Jet, “VLJ”, has yet been fully certified by the FAA. Since 1998 when Vern Rayburn first announced his vision for the Eclipse, the first of this new breed, there have been many setbacks. The most significant setback was the dissolution of the Eclipse/Williams joint venture. Every new aircraft is first designed around an engine. Eclipse picked an unproven and uncertified variant of the Williams engine that fell short of expected performance. Then other major vendors for the Eclipse could not meet delivery dates or performance criteria.

Eclipse has an order backlog reported to be over 2,300. A significant number of these orders and options are from by two startup air taxi companies, DayJet and Linear. Linear’s founder, Al Herp, claims to have proven his model. Operationally maybe, but this company that operates Cessna Caravans between the Boston and New York markets, has reportedly stacked up huge losses. The Caravan is built like a truck and is the staple of the small package feeders for FedEx, UPS, etc. It has a proven operational history and a wide service network. The Eclipse has neither. DayJet has proven only that they can raise capital. So far they have raised $18 million from private investors. Raymond James is trying to raise another $135 million to fund the purchase of their first delivery of Eclipses and startup of operations.

Vaughn Cordle, a member of The Aviation Group team, CEO of Airline Forecasts, and a pilot for a major airline, believes most of the VLJ air taxi start-up companies will fail. He says these business models are not realistic. Residual values on the aircraft are overly optimistic as are the number of hours each plane can fly per year. Larger business jets fly 350 to 400 hours a year, not 2,000 or more as projected by Linear and DayJet. Vaughn also believes their business models are not realistic in forecasting demand and the percentage of seats they will fill. Vaughn has a pretty good crystal forecasting ball. Check out his 2002 condemnation of Avolar the failed United Airlines attempt to start a fractional company to compete with NetJets. For an in depth look at the VLJ market, read Vaughn’s paper, “Dot Coms with Wings: A Fun and Exciting Way to Lose Money”.

There is talk in the clubhouse of an Eclipse IPO. My father once told me that when his caddy gave him a stock tip he knew it was time to get out of the market. Unfortunately there are very few golf caddies today unless you play with Tiger’s crowd and this group owns real business jets. No room for a set of clubs in an Eclipse.

We will have more to say in future articles about who we believe will be the winners in the evolving light jet industry (yes, we believe there will some) and how this part of the business jet industry is evolving and creating new markets. Stay tuned.