Eclipse's Difficult Future: Why Success May Be Elusive

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There's not much news coming out of Eclipse Aviation, given that the company has taken to deflecting press questions while it furiously reinvents itself. In a telephone conference with customers late last month, the company said Eclipse 2.0 would be a new company and things will be different. To that, all I can say is they had better be, else Eclipse is headed for the wrecking yard, in my view, to join the bleached bones of a hundred other startup aircraft companies.

One thing appears not to have changed, however, and that's the company's voracious appetite for capital. During the phone conference, attendees were told the next round of financing in October envisions the company needing between $200 and $300 million, this on top of the billion dollars plus it has already burned through. One can fairly ask: What are they doing with all this money? The first billion appears to have purchased massive infrastructure in Albuquerque and, to its credit, Eclipse aggressively trimmed its overhead last month by releasing more than a third of its workforce. If you're an investor, this is the sort of thing you want to see—a willful commitment to efficient management and smart use of resources. That's a plus.

By way of comparison, I had an oh-by-the-way conversation recently with the CEO of another company developing its own jet. I'll leave you to guess who, but I was curious about relative developmental costs. This not being my first day in journalism, I knew he wouldn't tell me what the actual dollar amount was, but I got him to agree to nod if I got close to guessing the right amount. So I started at $200 million.

"Are you ^&%$#&* me," he replied. What? Too low? No, way too high. Really? Eventually our cat-and-mouse guessing game lead me to the conclusion that this company is expecting its jet to require between $50 and $75 million to certify to the point of an approved aircraft and a production certificate. I asked if the company had a volume forecast in mind and, of course, it does, but he wouldn't say what it was. My guess is it's between 30 and 50 a year.

Drag the cursor back over Eclipse and think about that $200 to $300 million in context. When any company is launched, certain assumptions are made and woven into the fundamental fabric of the business plan. Every business decision thereafter proceeds from these assumptions. In Eclipse's case, we know the fundamental assumptions were low price based on high volume. Given the company's price increases, we know the low price assumption tanked. Now comes the volume part. Could it be that Eclipse is still so married to this assumption that it can't extricate itself from a model in which it has to build 300 to 500 airplanes a year? If so, $200 to $300 million would make sense, but the whole thing teeters on the notion that the VLJ market—or at least Eclipse's share of it—really is that big.

If it is not or Eclipse can't make that production volume work regardless of demand, it's hard to see how the company can make a go of it. That high-volume assumption, in my view, may ultimately be the very thing that drags Eclipse under. Either way, the investors—or investor—about to write that big check will have to be made of stern stuff to venture capital in this market.

If the next round of financing doesn't turn Eclipse, its only options may be to seek a buyout from another aerospace company that can fit the Eclipse comfortably into its product line. Some have speculated that Hawker Beechcraft would be the perfect suitor and they're probably right, since that company doesn't have an entry jet as light and small as the Eclipse is. The less appetizing prospect is bankruptcy, reorganization and a clean-sheet business plan based on realistic volumes, production output and costs. Could that be as few as 100 airplanes a year for the foreseeable future? Could be. By Eclipse standards, that might be a chump market, but it's also possible that it's as good as it gets.

There are three reasons I can think of for this. One is that the jet market may be reaching the end of a growth cycle and is thus poised for flattening or even retreat. Second, Eclipse is about to get intense competition from emerging twin and single-engine jets and, last, the Eclipse is in an odd place technologically. The vaunted Avio system never gelled and as consequence, Eclipse 500s have been delivered with less navigational capability than a new Skyhawk. The addition of the Garmin 400 navigator will address this, but the Avio will probably never deliver on its original promise as the ultimate in aircraft/avionics integration. Does that mean Eclipse will have to start over with another system that will do the integration? A good question.

Overhanging all of this is a unique problem Eclipse created for itself by selling so many production positions at what turned out to be below cost. There's an active secondary market for these Eclipse slots and those airplanes are selling for as much as $600,000 less than Eclipse's new $2.15 million price tag. That market may eventually flush, but until it does, Eclipse will have a problem selling new airplanes. Then there's the FAA's special review of Eclipse's certification, a complaint that came to light a few months after the company received its certification and announced it with great fanfare at Oshkosh. We've heard no murmurs about what this review will yield—maybe nothing or maybe something else. An order for selective recert would hardly help Eclipse's cause.

Whatever the outcome of all this, the next 12 months will be fascinating to watch as the fate of one of the largest investments in general aviation rolls into the next chapter.

Comments (18)

Gee, it is starting to sound like a broken record. Didn't Jim Bede have a fabulous design in the BD5, only to have the great production promises crash and burn?

Posted by: Juan Valdez | September 9, 2008 4:54 PM    Report this comment

Nice synopsis Berto, I am continually amazed at your development from an aviation vagrant into an acclaimed journalist.

Eclipse based their business model on an unrealistic assumption of cost. When they could not deliver the product at game changing prices, the strategy fell apart for the reasons you stated. Dayjet was a bizarre attempt to generate enough volume to generate enough production to cover overhead.

Eclipse had an arrogance about their airplane, which was unique only in it's cost of acquisition. It's just another airplane now, a very low capacity low performance bizjet with traditional costs per seat.

Posted by: Harry Alger | September 11, 2008 11:24 AM    Report this comment

But Eclipse started something that will be really big. Air taxi utilizing very light jets will emerge as the new paradigm in regional air travel precisely at the moment in time that is sorely needed. Many thanks to Vern and all of the investors for providing the (r)evolutionary vehicle without which it could not happen.

Posted by: Todd House | September 13, 2008 6:28 PM    Report this comment

And what about the downpayments they have to pay back because the original price is not respected anymore ?

Posted by: roland mullender | September 15, 2008 6:19 AM    Report this comment

Dayjet is a vehicle used by Eclipse to try to move some sales. It isn't a viable model long term. Watch.

Posted by: Harry Alger | September 15, 2008 10:57 AM    Report this comment

I think time is going to run out on Eclipse. They had wonderful (and wholly unrealistic ideas) about the technical challenges they faced and the time it would take to solve them and bring the product to market. They were priced to absolute perfection in the sense that to make their pricing goals they had to ramp up to mass production (at least mass production for an aircraft) without too many snags. Reality bites and lo and behold, that had plenty of snags. We are now entering a different economic cycle and Eclipse will be faced with difficult credit markets AND a far more difficult sales environment as well. Too bad.

Posted by: JT Daugherty | September 15, 2008 11:13 AM    Report this comment

I am surprised that so many "sophisticated" customers fell for smoke and mirrors and did not see the flawed business model of this company. It goes to show that a good marketing program will sell a marginal product design at an unrealistic price. The reality of cost has caught up with the illusion. When I say a marginal design, I am addressing the performance vs market reality of charter operations. The $1 billion has gone into trying to force market development for a product without a sustainable market.

Posted by: Leo LeBoeuf | September 15, 2008 2:14 PM    Report this comment

Can't say that I have seen where the $billion has been spent in Albuquerque.

Posted by: Christopher Kinnaman | September 15, 2008 6:20 PM    Report this comment

Let me get this straight: An extremely low performance aircraft, trying to be marketed at twice its original price to an economy that is radically slowing? I have to recommend Vern as the optimist of the decade. As for the Eclipse starting a "new paradigm in regional air travel?" I seriously doubt it. Time will tell.

Posted by: Steven Garman | September 16, 2008 1:22 AM    Report this comment

No, we're starting what will become the new paradigm in regional air travel. Vern Raburn and now others envisioned a new category of aircraft that is enabling it. And, yes, I agree, time will tell.

Posted by: Todd House | September 16, 2008 11:18 AM    Report this comment

Sorry Todd, the market isn't there for a model where the pilots comprise 50% of the real world load capacity, and the stage length is limited to distances that are too short to get the airplane to be efficient. It is a wonderful concept, but the market doesn't support it.

Posted by: Harry Alger | September 16, 2008 11:37 AM    Report this comment

Steve Hanvey at SATSAIR, Bill Herp at Linear Air and Paul Fischer at Imagine Air might all disagree. 20th Century airline metrics cannot be used as the ultimate arbiter of this argument. Innovation combined with disruptive technologies and vision will redefine our notion of an "airline." As, the 2-10 billion dollar national market (Research2Zero.com) grows increasingly bereft of essential air services, it will embrace, indeed, already has embraced, this emerging model that will cause people to actually look forward to flying again.

Posted by: Todd House | September 16, 2008 12:11 PM    Report this comment

I was the first full time engineer on what became Eclipse Program years latter. I helped to write the original business plan that started getting investors interested. The high production rate WAS one of the first tenants of the business model, but so was light weight and low fuel consumption. When it turned out one of the other engineers who put the target weight into the biz plan didn't have an engineering basis for the 2050# target empty weight, he quipped, "I gave us a challenge." What a challenge, the best estimates we could come up with were between 2850# and 3250# and of course they didn't end up anywhere near there. That was the first technical challenge we tripped over; there were many more to come.

Posted by: Terry Duncan | September 18, 2008 3:25 PM    Report this comment

Now that Dayjet is at the end of its day, I guess the old guard wasn't so wrong after all. Hate to see a new company fold but when one bases its hopes on a dream, one needs to have something to back it up. And the Eclipse ain't it.

Posted by: Steven Garman | September 22, 2008 6:52 AM    Report this comment

Choice of aircraft is as important as business and financial model. A twin engine jet that cruises in the 30's is not the jet for air taxi with an average trip length of 290nm. Today's economic realities demand a single engine jet. The market will come to accept this over time.

Posted by: Todd House | September 22, 2008 7:46 AM    Report this comment

Re: Mr House comment. I think that for the 290 nm trip a turboprop is more efficient. Aircraft like the PC 12 or TBM make much more economic sense. Run the numbers. Even the humble Caravan will offer good performance for the 200 to 250 nm range. Add in the ability to fly VFR in the turbprop, and you will find that the gate to gate time can be lower when operating in congested airspace.

I speak from experience flying in and out of the NY City area on such missions.

Posted by: Leo LeBoeuf | September 22, 2008 8:10 AM    Report this comment

Re: Mr. House's comment: The model for the twin engine VLJ didn't work so now you're going to an even lower performing model? The single engine jet? Not. I agree with Mr. LeBoeuf; there is no question that the planes he speaks of will offer cheaper, better and safer operations.

Posted by: Steven Garman | September 22, 2008 3:05 PM    Report this comment

Well Todd? The only thing "disruptive" about the Eclipse is the Dayjet collapse. Great article on aviationplanning.com about why the model failed.

Posted by: Harry Alger | September 25, 2008 2:15 PM    Report this comment

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