Wednesday, March 7, 2007

Very Light Jets: A Reality Check for Eclipse

Vaughn Cordle, CFA / AirlineForecasts

The perception of easy (i.e., dumb) money and current anti-airline sentiments are fueling the entrepreneurial spirit to create a better mouse trap out of air transportation. New and improved engines, avionics, and manufacturing processes have resulted in new low-cost aircraft designs, thereby encouraging those who think they have a unique business plan to get in on the game.

Lots of people will try lots of things, most of which will fail, and those who do succeed will become very rich, which gets to the very heart of capitalism and the reason why mousetraps are being improved in the first place.

One of the most interesting experiments now in process is the Eclipse airplane being put together by Vern Raburn. Spurred by an understandable desire to bring jet travel to the masses, Raburn has built a very cheap, very small airplane. He has raised a prodigious amount of money and has overcome many obstacles. Now, even with certification in hand, red flags are popping up all over the place as he seeks a production certificate: reports of high altitude instability when fully loaded; design flaws in the windshield; and avionics problems, to name a few. Also, it doesn't help when reputable companies like United Airlines (pilot training) and Avidyne (avionics) have been replaced – or quit - as key suppliers.

Raburn has a long way to go if Eclipse is to become a credible manufacturer. However, if he can get through his troubles, his price point is going to make the Eclipse tough to beat for very short haul, regional flying of the kind that many air taxi companies are proposing and hoping to finance. Better airplanes will undoubtedly be available for other types of air taxi missions, but it will be very difficult for another manufacturer to approach Eclipse price and cost points. Success, however, is dependent, on getting the plane fully built and subsequently, proving that it can support the high utilization rates on which air taxi economics are dependent.

It is premature to predict the demise of Eclipse since there is no other aircraft that has the potential to lower the price point for private aviation as dramatically as it can. Moreover, as of yet, no VLJ manufacturer other than Eclipse has shown an understanding of the parts and support requirements of air taxi companies.

Embraer has an aircraft that may prove to be the default choice for air taxi use, even though it is heavier, more expensive and costs more to operate. The good news for Eclipse is that the Phenom 100 will not be ready until late 2008. The bad news for Eclipse is that the Phenom 100 is designed for comfort and robust utilization, with a cabin and baggage volume twice that of the Eclipse. More importantly perhaps, the Phenom 100 is designed for 35,000 cycles, which is 3.5 times that of the Eclipse, meaning that resale and residual values will be significantly lower for the Eclipse after a few years of heavy use unless it proves more durable than is now anticipated.

AirlineForecasts has examined the business plans of many of the new upstarts that will use the new, low-cost VLJs. Most are based on unrealistic assumptions of consumer demand and have significantly understated the true cost of providing on-demand air taxi service. Most should not be financed.

Several of the air taxi aspirants may actually get launched, but their success will depend on choosing aircraft that appropriately match demand in the markets they wish to serve, on good management skills, and on the ability to raise sufficient capital.

JetBird and Pogo are two examples of new VLJ air-taxi operators that have the right management capabilities. Moreover, both potentially have the kind of financial capability that will be required for survival of the “surge and shakeout” that AirlineForecasts expect to occur over the next several years.

Mao Tse Tung once described our attempts to innovate by saying “A hundred flowers will bloom,” pointing out that our potential is great but only if conditions are just right. Low cost and abundant capital, combined with a demand for low cost and hassle-free air transportation, results in a market ripe for innovation and entrepreneurship. However, only a lucky few will blossom fully, while others quickly wilt under the searing heat of competition and market realities. It is too soon to tell which type of flower Eclipse will be, but it is certain that Raburn’s ingenuity and doggedness will be sorely tested in the months to come.

Eclipse – Barely Breathing

In the last few days we have seen a flurry of articles in the aviation press about the trouble Eclipse is having getting FAA production certification approval. Only one aircraft has actually been delivered since December when David Crowe took delivery of the first aircraft. Recent troubles became apparent when a week ago CEO Vern Raburn announced the end of Avidyne’s involvement in the program. Avidyne was a key supplier of almost the entire avionics suite. Avidyne is not the first respected subcontractor to be terminated. Williams International, whose engine the Eclipse was designed around, dropped out early in the program requiring a major redesign and delay of production. Last week Raburn said that serious problems have “plagued virtually every aspect of development, design and production.” Within hours United Airlines dropped the Eclipse training program. A type certificate is required to fly the airplane and to my knowledge the only pilots authorized to fly the Eclipse are production test pilots. With no training program, Eclipse typed pilots will be hard to find. I am sure this does not make the pioneering Mr. Crowe very happy, or any of the hundreds of others waiting for delivery. I wrote The Eclipse of the Eclipse? last August, but I did not foresee these problems, nor did I expect to see this company on life support so soon.

I asked Vaughn Cordle, one of my partners in The Aviation Group, CEO and Chief Analyst of AirlineForecasts, and a B777 pilot for a major airline, for a reality check. I will be posting his reply here.