Monday, May 29, 2006

Eclipse - Customer Deposits

There is no industry standard for customer deposits on new airplanes under development.

To establish credibility in the marketplace, start-up companies typically will be quite emphatic, CUSTOMER DEPOSITS WILL GO INTO ESCROW ACCOUNTS. This sends the signal, we are a well financed, legitimate company and don't need customer deposits to fund the program. Further, if we don't do what we say, you will not be taking a risk, you will get your money back.

In the late 70's, Canadair bought the design rights to Bill Lear's LearJet 600 which would later be renamed the Challenger. Business jets represented a new market where Canadair had no credibility. They elected to put the $100,000 customer deposits into interest bearing escrow accounts that paid 10% per annum to the customer. The deposits also guaranteed the price of the airplane to be under $4 million.

(First Challenger deliveries did not begin until the early 80's. By then, the airplane had grown in size and price, somewhere around $8 million. There were speculators who took advantage of the "no lose" deposit program and purchased early delivery positions. Later they sold their positions, making millions on each $100k investment. Not an urban legend, I personally know two of them.)

Contrast the Canadair policy with Eclipse. An Eclipse News Release dated June 2002, stated that new deposits no longer had to go into an escrowed account. This would allow Vern to use the deposits for development and puts the prospects at risk of losing their deposit if the program goes belly-up.

Or (hypothetically), if a significant portion of the 2,400+ customers decide to cancel their orders and demand return of their deposits when they learn the aircraft falls short of the performance guarantees, the cash flow manager at Eclipse will be scrambling and the phone will be ringing in Bill Gates office -- send money!

Vern has been very vocal about many aspects of his program. He has yet to say "the airplane is meeting and exceding our performance goals."

They have nearly 2,000 hours on five prototypes, certification is scheduled just after the next full moon.

They know what the performance will be...should have a pretty good idea on empty weights...the NAA will not take back the Collier trophy. Vern, it is time to show your cards!

Sunday, May 21, 2006

Eclipse - Empty Weights

As reported in the May 2-8 issue of Flight International, Mike Gerzanics flew a beta test airplane for evaluation.

According to Mike's report, the aircraft did not have all of the systems and only three cabin seats, one short. He did not mention whether the icing equipment was installed. At the date of his flight, the cabin seats were not likely to have been FAA certified.

With three people on board (he did not mention their weights), no baggage, 1,495 lbs of fuel (46 lbs short of full fuel), the aircraft was within 45 lbs of max takeoff weight.

The Eclipse is already starting to come up short. It is advertised as an airplane that can carry four 170 lb individuals, 30 lbs of baggage, six seats and full fuel.

Mike's airplane would not be able to make the famous Phoenix - Chicago leg from a weight standpoint plus, the highest the altitude achieved was 32,000 feet. For reference, his speed at FL 320 was 395 ph, the fuel specifics .93 miles per pound or about 6.23 miles per gallon.

At best preliminary numbers, everyone will have to wait until the airplane is fully FAA certified, a complete airplane is put on the scales and flown to higher altitudes.
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!

Thursday, May 18, 2006

The Problem With Small Turbines

"...small aircraft are penalized by the pitiless exponential mathmatics of scaling down..."

Air & Space, p. 22, Oct/Nov 2005.

The problem with small turbines is, they are small.

To get any kind of efficiency, tolerences must be tighter, rotor RPM's higher, hot section temperatures higher, accessory gear boxes don't scale down. Small turbines lack the capacity to produce adequate bleed air for pressurization, nacelle and wing anti-ice.

Again, compare the Cessna Mustang to the Eclipse. Both have nearly the same cabin volume, both are intended to fly at the same altitudes with the same pressure differential. The Mustang engine will have 1,350 lbs of thrust, the Eclipse 900 lbs.

When you start extracting bleed air for pressurization, the Eclipse will pay a proportional greater penalty. This will show up if the engine lacks the power to get to altitude with a pressurized cabin.

Monday, May 15, 2006

Message to Eclipse - Corrections Welcomed

Every attempt has been made to keep this blog 100% accurate.

Most of the data related to the airplane comes from the Eclipse web site and articles by reporters who have flown the Eclipse. Things can be misinterpreted.

If there are errors or omissions that need to be corrected, leave your name and phone number in the comment section of the post in question. I will contact you to discuss what needs to be changed. Legitimate corrections will be made.

Sunday, May 14, 2006

Eclipse Performance - What Happened to the 5% Guarantee?

While analyzing the range numbers for a future post, I noticed an interesting change.

The Eclipse web site used to show range information with the caveat that it was guaranteed to plus-minus 5%. Which met on the 1,248 mile Phoenix-Chicago leg at high speed cruise, the airplane could actually come up 62 miles short and still meet the Eclipse performance goals.

Today, the disclaimer reads, "subject to revision following flight testing."

Changing the disclaimer on the web page is a keystroke effort. If the disclaimer is embedded in the 2,400+ purchase orders, changing the 5% guarantee will take some fancy foot work.

Some 10-12 writers have flown the Eclipse yet none have reported on any altitudes above 32,000 feet. A peculiar situation since certification is predicted to be just weeks away, the test fleet has amassed over 1,700 flight hours and the aircraft will be certified to 41,000 feet.

It would be nice to know what the speed and fuel flows will be at altitude.

Is this a warning flag flying over the Sandia peaks?

Sunday, May 07, 2006

Vern Raburn has enough hot air to float all the balloons in the Albuquerque Balloon Fest

Don't let the following frivolous comments detract from major issues discussed in the first three posts, especially the April 11 post, but last month Vern went to the European Business Aviation Convention in Geneva, and proclaimed the Eclipse to be an environmentally friendly airplane.

According to Vern, people living near the airports will love the Eclipse, it hardly makes any noise. When your engines only have 900 lbs of thrust you can have a pretty quiet airplane. My wife's vacuum may put out more than 900 lbs of thrust.

And cabin noise lower than the Challenger 604 and Hawker 800. Vern, these are real jets flying at real jet speeds. Noise is energy, it goes up with the square of the velocity. If your airplane was as fast as theirs, it would be noisy. Or slow the 604/800 down to Eclipse speeds and you will find these airplanes to be even quieter.

The Eclipse is going so slow, it hardly qualifies for jet speeds. In fact, your airplane is so slow, it will be a real pain-in-the-ass for Air Traffic Control because the Eclipse can not keep up with the air traffic (mostly regional jets) that use the same airspace above 29,000 feet.

And I have not read where the Eclipse will be doing any bird strike tests. It may not be necessary because this airplane may be most vulnerable by getting struck from behind!
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?

Saturday, May 06, 2006

Eclipse Charter Rates

Want to charter an Eclipse, be prepared to pay about $3.00 per mile for the privilege. Vern Raburn has promoted the idea of jet charter and I quote..."to bring "personal" into aviation, making it possible for commercial air passengers to move directly between cities on a quick, affordable and convenient basis...unquote.

The implication here is that Eclipse operating costs are so low they approach commercial airfares. Let's look at the costs a charter operator would face and the fares needed to sustain a profit and continue in business.

Fixed Costs:

Lease/Finance $ 147,244 per year
Insurance $ 38,000 per year
Administrative $ 40,000 per year
Total $225,244 per year

With 600 hours per year utilization - $375 per hour
With 800 hours per year utilization - $282 per hour
With 1,000 hours per year utilization - $225 per hour

Variable Costs:

Fuel $296 per hour
Maintenance $125 per hour
Engine Reserve $113 per hour
Pilot Expense $140 per hour
Total $674 per hour

Then let's give the charter company a modest 10% mark-up on costs for profit and another 10% allowance to cover non-revenue flights i.e. training, pilot check-outs, maintenance, dead-heading for positioning, communications etc.

Speed and fuel flows based on 380 mph block speed and high speed cruise.

600 hours of utilization $1,049/hour plus 20% = $1,259/hour or $3.31/mile
800 hours of utilization $ 956/hour plus 20% = $1,147/hour or $3.02/mile
1,000 hours of utilization $899/hour plus 20% = $1,078/hour or $2.84/mile

NOTE: The basis for these costs are provided at the end of this post.

Now let's look at a typical charter between a couple of random cities:

Columbus, Ohio to Tampa, Florida. 829 miles one-way, 2.2 hours by Eclipse charter. 4.4 hours round trip. Charter costs $5,007 round trip (800 hours per year utilization).

Comparable commercial air fares:

- Full fare coach around $500 round trip
- Full fare business class $1,300 round trip

There are added benefits to charter flights:

- More convenient than commercial flights, go when you want to go.
- Overnight expenses can often be avoided.
- Less time is wasted in airports.
- A charter can go where the airlines don't.
- Two or three can travel for the same cost as one.

For some, the added benefits may offset the extra cost, but will Eclipse provide any great breakthrough in the way America travels? You be the judge.

Basis for charter cost of operation estimates:

Cost of the Eclipse at time of delivery $1,500,000 (check the numbers, the Eclipse is no longer a million dollar jet).

Lease, 8 year term at 7% simple interest and a 40% buyout at end of lease.

Insurance numbers from Eclipse web site.

Administrative allowance assumes multi-plane operation and would include contributions to advertising, sales, scheduling, hangar, management and other overhead items.

Fuel based on 66 gallons per hour at high speed cruise with fuel at $4.50 per gallon, an average price at the date of this post.

Maintenance - Eclipse numbers based on a pay-as-you-fly program, and the numbers start at delivery (so much for a warranty program).

Engine Reserve - Eclipse/Pratt numbers posted on Eclipse web site.

Pilot and expenses - Somewhat based on the Eclipse model of a single pilot operation and using retired airline pilots who might like to supplement their pensions and do contract flying. The pilots would logically expect at least 3 hours of revenue flying per day. Some charter operators like DayJet will opt for a two pilot operation and pilot expenses may even be higher.