Do You Buy a Position or Assume It?

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I've never figured out whether would-be airplane buyers just have short memories or if they something in their psyche predisposes them to accept the most outlandish claims at face value while simultaneously dismissing the grim truth. I am referring here to the quaint industry practice of "buying positions" for new aircraft. This subject comes up this week because I just got a letter from a would-be purchaser of an Eclipse 400.

"I recently placed a $100,000 deposit toward an Eclipse 400 in response to an e-mail solicitation from Eclipse Aviation," the reader wrote. "The agreement allows a full refund until November 2009. Five weeks ago, I requested a refund. I have been informed that there is a delay and was promised a refund in a few days. None came and repeated phone calls have been unanswered. Please warn your readers."

Well, hello? Although we've been on the Eclipse Aviation deathwatch since last year sometime, I suppose it's possible that the general buying public wouldn't have noticed what we noticed. (Delayed orders, certification issues, unhappy customers awaiting upgrades, not to mention dismissal of founding CEO Vern Raburn last July, all culminating in a bankruptcy filing earlier this month.)

My observation is that so enthralled are some buyers with being the first—or among the first—to own a new airplane, that they'll do almost anything to make it a reality. That includes handing over large checks to start-up companies in an industry where failures outnumber successes and where the fine print on refund policies is just so much useless boilerplate once the company becomes insolvent, which there is a very good chance it will be. When I see the buying frenzy that some of these position offers touch off, I am seized by an overwhelming urge to grab the nearest set of lapels and shake vigorously.

The larger issue is the idea of selling positions in the first place. (The cynics among the Eclipse crowd now refer to this as "assuming the position.") Why is it that the aircraft industry has this unique need to drag its customers into the risk pool of creating a new product? I wrote about this in the November 2008 issue of Aviation Consumer which you can read here.

The ostensible reason is that the only way a company can raise capital for a major certification project is to convince investors that there's actually a market for it. Pre-production position buys do this, according to the accepted wisdom.

Whether they do or they don't, I think the potential for abusing position buyers is overwhelming. Eclipse, in my view, had an absolutely Byzantine set of restrictions and conditions on its refund policy. At one point, it claimed 2,500 orders, but we could never determine if all of those orders included pre-production deposits. This does nothing but distort the perceived value of the positions to the point that trading them for profit (or not) becomes a business unto itself. Some Eclipse holders made tidy six-figure killings, but an undetermined number have been left holding an empty bag that used to contain $100,000.

At an aviation event in Florida last month, Vern Raburn sniffed about how "aviation eats its young" and how he was beset by naysayers who said the Eclipse concept would never fly. Well, it did fly, it's just that it crashed and burned after takeoff. Despite Raburn's protests, if there had been more skeptics and fewer starry-eyed, unquestioning believers, Eclipse would have still got its airplane built. But fewer depositers would be out their cash as a result.

Aviation journalists walk a fine line in such deliberations. On the one hand, readers want us to cheer every airplane and aviation-related product we see for the "good of the industry." For many readers, flying is a quiet refuge from the harshness of a cruel world. There's enough bad news out there without us crapping on the grand glory of the next great winged thing.

But when we pull our punches—and we most assuredly do that all too often—the casual reader may not be alert enough to read between the lines and may assign credibility and worthiness where little or none exists. In the end, the way to look at pre-production deposits is thus: If you can afford to stand in front of your fireplace and burn an amount of money equivalent to the deposit without missing it, by all means go for it.

If not, caveat emptor.

Comments (8)

It always amazes my how people swept up by a combination of marketing and their own enthusiasm can fail to do some objective research and blithely ignore all disconfirming evidence that their plan is sound.

My understanding is that unless your deposit is held by a third-party escrow, which was not the case here, then in the event of bankruptcy, deposit holders become unsecured creditors.

Posted by: Adam Hunt | December 8, 2008 7:26 AM    Report this comment

I am curious whether it could be argued that a position holder not an unsecured creditor, but a secured creditor. If a deposit was exchanged for a vague promise (you can buy one of the first airplanes built, etc.), you would be an unsecured creditor. But you were promised a very specific position which translates to a specific airplane. Plus those positions are bought and sold, and the AC manufacturer honored the sale of the position, implying it was specific promise. Thus you could infer you have some ownership in that airplane and you have a claim on that airplane whenever it is built, and perhaps even through bankruptcy. Hopefully, some sharp attorney can chime in on this argument.

Posted by: GEORGE BONEY | December 8, 2008 11:08 AM    Report this comment

I do not see the sense in being the "first" anyways. i know that from the car business i definately do not want to be the first to buy a new run car. i usually wait for 1-2 years before purchasing a new model. the first 2 years leaves automakers time to work out the bugs and improve on their product. i am not in the market to buy a plane but i would use the same tactics if i were to buy a plane. i am sorry but the empty pocketed buyers get what they deserve. DO YOUR RESEARCH!

Posted by: MICHAEL SULLIVAN | December 8, 2008 11:55 AM    Report this comment

Anyone care to wager on the odds of Piper certifying and selling the new Piperjet? I still remember having to "repo" Garrett TPE331-14 engines, back when the Cheyenne program tanked in the early eighties...

Posted by: Steve Zeller | December 8, 2008 4:55 PM    Report this comment

Usually when a new aircraft is announced, the specs are groundbreaking and the price is reasonable. Somehow the laws of physics get suspended and this new plane will go faster, farther, carrying more on less fuel, for a smaller acquisition cost. People are enticed to put down the money because they want these new capabilities sooner rather than later, and the design and certification lag already ensures it is going to be later. This multiplies as more people fall for the pitch, increasing the wait, and with it the more incentive to pay cash now for a delivery position later...

Of course, the specs creep back to reality, the price goes up, the cost of design/engineering/certifying proves crippling. Original investors get tapped out, new backers are scarce even at a discount, and before you know it, the whole thing collapses like the ponzi scheme it was all along.

The only question is: who actually wins? I think Raburn may have actually believed his hype! Since even suppliers got caught holding bags, I don't think anyone made money on Eclipse, or for that matter Adam.

Posted by: paul stafford | December 9, 2008 11:45 AM    Report this comment

This is yet another practice that Vern brought over from the PC industry. It was very common in the early days for manufacturers to take deposits on products not yet built, or even not yet designed and then use the deposit money to do the actual design and development. Most of the time the depositors got nothing and lost all their deposit. I have been in the PC industry since the early 80s so I got the joy of watching it happen back then and getting to watch it all over again in the VLJ industry (Eclipse, Adam, etc.). I guess there is something to be said about sticking with the stodgy old companies who don't know how to build an airplane right, at least according to Vern, like Cessna :-)

Posted by: gene pope | December 17, 2008 7:13 PM    Report this comment

It's my opinion that a non-escrow position holder is neither a secured or unsecured creditor; he is an investor.

Posted by: Mike Perkins | January 15, 2009 1:26 PM    Report this comment

Well but the look of the asset sale decided by the Delaware judge, it would seem they are unsecured creditors and it looks like they have fallen below the "SOL" line.

Posted by: Adam Hunt | January 15, 2009 2:36 PM    Report this comment

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