Eclipse's Difficult Future: Why Success May Be Elusive
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.