Sunday, May 07, 2006

Eclipse - House of Cards

The April 11 post asked the question, if Vern Raburn has over 2,000+ orders which will take 3 to 4 years to produce, why all the current promotion and self-promotion? The answer is obvious and has been reported by various writers. Eclipse intends to go public, perhaps sooner rather than later as Vern's reckless spending habits (with other peoples money) consumes more and more cash.

The prospectus for the IPO will be an interesting read! Here are some things to look for:

1. How firm are the 2,000+ orders?

2. How much of the capital raised by the IPO will go to the original investors?

3. Cash flow projections showing how the company intends to re-pay the initial investors and make a profit for the new stockholders.

The Eclipse business model is based on volume production. Rates of 1,000 units per year! Volume production begets low prices which begets high sales rates. This 3-cornered house is built on a very shaky foundation, Vern's House of Cards.

How firm are the 2,000+ orders (actually, 2,400+ now reported)? Are they backed by non-refundable deposits or just "walkie-talkie" orders, whereby prospects can walk away from the purchase agreement with no penalty?

While I have not seen a copy of the Eclipse Purchase Agreement, one must assume that if the airplane fails to meet published performance (within plus-minus 5%), all contracts could be terminated at the option of the buyer.

As noted in my March 11 post, this may be the most vulnerable aspect of the program. Miss the empty weight as this writer predicts...the aircraft will not meet performance specs...contracts will be cancelled...the demand will not support the Eclipse business plan...and the House of Cards collapses.

Four or five years ago when the Eclipse program first started, the airplane was priced under a million dollars, jet fuel was less than $1.50 per gallon and the Williams engine held a promise of very low operating costs (fuel and overhaul costs). One could envision reasonable charter rates consequently, air taxi operators became a major constituent in Vern's backlog.

These same favorable conditions do not exist today. As noted in my May 6 post, the airplane will cost nearly $1.5 million, jet fuel is $4.50 per gallon, and the published Pratt engine maintenance costs are $113 per hour. This leads to straight charter costs (not share-a-plane) at about $ 3.00 per mile. If the air taxi orders diminish to any significant degree, the House of Cards is very shaky.

Likewise, the individuals Vern profiles on his web site as future owners, placed their orders long before the dramatic rise in jet fuel cost. How many of these prospects will have second thoughts about paying $ 4 to 5 per gallon for jet fuel?

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