Sunday, May 21, 2006

Eclipse - Return on Investment

In Part 3, of the April 11 post, the amortization of development costs over the production run was considered. According to published reports, development costs will approach a half-billion dollars. If 2,500 aircraft are produced, then $200,000 will have to be added to the cost of each unit (not including interest on the half-billion investment) for recovery.

But even that scenario may not be correct. When the Williams engine was dropped in favor of the more expensive Pratt & Whitney engine, the airplane took a significant jump in price. In a magnanimous move, Vern told the media he was going to honor the existing contract prices in spite of the much higher priced Pratt engine.

At the time, Vern was claiming over 2,000 orders and few customers were canceling contracts due to the engine change. What ever slim margin may have been attached to these aircraft suddenly got a whole lot slimmer to absorb the cost of the much more expensive engines.

Are we talking about a few dozen (the first years production run) or a few hundred units (perhaps 2-3 years of production) that will have slim or no profit margin? When the prospectus comes out for the Eclipse IPO, get out your magnifying glass to read the fine print. It may be a long time before Eclipse Aviation ever turns a profit or even finds itself in a positive cash flow situation.

It is just amazing the kind of business plan one can execute when there is unlimited capital behind the organization!

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