:: August 2008 Letter ::
The aviation business gets sleepy after Farnborough. Things are nice and quiet. Yet I woke up on July 29th to interesting news: Vern Raburn, CEO and founder of Eclipse Aviation, was ousted as a pre-condition for the company’s next round of financing. He stepped down to an advisory position, but he soon severed all ties with Eclipse (or they were severed for him). When someone gets fired from their job, it’s best to take the high road. A prudent man will either be silent or say nothing bad.
I am not that man. The lessons Eclipse teaches are too important. Raburn’s fall capped ten years of wretched behavior. As I’ve tried to chronicle in my December 2002, March 2006, and April 2007 monthly letters (I’ve felt vaguely Cassandra-like), Eclipse is a startup VLJ company with an impossible and absurd business plan. The jet’s artificially low price (originally $800,000) depended on impossibly high production numbers (1,000+ per year). Their impossibly high production targets depended on an artificially low price. They needed to deliver 600 jets per year just to avoid bankruptcy. In short, this was an effort to lure cash with the very dubious promise of a “revolution” in aircraft production.
Raburn insisted that this revolution, with its “disruptive technology,” would leave the legacy dinosaur aviation companies (and aviation analysts) behind, stuck in their old ways of thinking. Many people, for good and bad motives, eagerly gulped this Kool-Aid. In one of many hideous embarrassments, Eclipse even “earned” a Collier trophy, demeaning the past recipients (777, C-17, B-2, V-22, etc).
I learned two valuable lessons from Raburn’s atrocity. The first lesson is that aviation forecasting is impossible and irrelevant if people willingly throw cash on a bonfire. Forecasting is normally based on market demand and production constraints. The company’s plans depended on investors enabling Eclipse to lose money on each plane they delivered. This is why Teal Group hasn’t initiated report coverage of Eclipse. It’s impossible to forecast production of a plane that has no future unless people continue to throw money at it. The hapless investors provided well over $1 billion. They will continue to lose money on each plane built until the company’s likely collapse.
The second lesson is that value destruction isn’t just about money. There’s a human cost too. The A380 was a money-losing mistake, but everyone at Airbus (a few senior managers excepted) still have their jobs and get to live in nice places. Truly disastrous business cases like Eclipse do a lot more damage to people’s lives. Almost 1,000 workers were laid off when cousin VLJ horror child Adam Aircraft went bankrupt. Eclipse has already laid off hundreds of purportedly temporary workers, but about 1,700 unlucky souls still work there (see Karen Di Piazza’s excellent article at www.charterx.com/resources). The best email I’ve ever gotten came from a guy who said my comments convinced him to not take a job with a new VLJ startup. That company, like six or seven other VLJ wannabes, is now dead.
Are there are any other lessons from this grim episode? Did Raburn do anything noteworthy, something to shake the industry up? Not really. Give a trained chimp over a billion dollars to squander and I’m sure he’d produce something that shakes the industry up. Is “you shouldn’t give a billion dollars to anyone with a ludicrous plan to build thousands of jets per year” a valid lesson? If so, I concur. You should also be wary of anyone pumping up the value of his company with overhyped snake oil-derived technology.
This charade lasted longer than I expected, partly because it had deep political roots. It got strong support from the New Mexico government (including a fervently oblivious Bill Richardson, who approved an unprecedented state equity stake in Eclipse). The FAA provided an extraordinary and unusual level of support for the program and to the certification process. Some FAA employees have formally complained about improper certification of this jet over their objections. In June, Congress began an investigation of the complaint. In August, the FAA began a special safety review of Eclipse jets.
Whether safety is an issue or not, Eclipse’s lessons will take more time to sink in. For a dismal and clueless example, see Vern Raburn’s Legacy, Aviation Week’s August 4th editorial, which blithely concludes “We suspect we haven’t heard the last from Vern Raburn, and for the general and business aviation community, that’s a good thing.” The same week, a much smarter (or, to put it another way, not dumb) August 5th Flight International editorial called him “a corporate liability.” I'm not endorsing either magazine over the other; I'm just pointing out that the truth about Raburn will take time to sink in.
As for Eclipse, it’s now facing a predictably horrible situation. The only way to make the program cash positive is to charge more than the current price ($2.2 million; three times the original price, and 50% more than six months ago). Yet the higher that price goes, the more Cessna’s Mustang or Embraer’s Phenom 100 look like great values (at $2.6-2.8 million), and those planes come from companies with superb product support and marketing. The new owners might not have the capital to keep things going (in this business, the first tranche provided—reportedly $100 million—is as meaningful as Doctor Evil’s ONE MILLION DOLLARS in that Austin Powers flick). Yet $100-200 million is nothing compared with the $1+ billion in other people’s money already incinerated.
Actually, there is a third lesson, or perhaps it’s more of a concern. Eclipse’s likely collapse will resonate with people who are looking to invest in aviation. There are myriad new and established investment opportunities in that sector. It would be unfortunate if this disaster sent a chill through those investors.
In September, we’ll produce Teal Group’s first Eclipse report. If you want to keep updated on Eclipse’s eclipse, see the endlessly entertaining Eclipse Critic blog, http://eclipsecriticng.blogspot.com. In the meantime, the August Aircraft supplement includes the Rotorcraft and Regional Aircraft overviews, the F-22, AW139, Tu-204, Il-96, AS.350, and the SJ30. Have a great end of summer.
Yours, Until Pigs Fly,
© Richard Aboulafia 1997-2006, All rights reserved.