Thoughtful Analysis from Two Readers.
First from flightcenter:
1) Honeywell has an excellent track record for predicting the size of new aircraft markets. They have very sophisticated models and access to lots of "insider" information, but most importantly, they have been consistently right in their predictions time and again, year after year. Ask around the industry if you want to validate this fact.
2) Both Cirrus and Diamond have proven their ability to manufacture large numbers of inexpensive aircraft at a profit. Look at the GAMA numbers. They will be able to take advantage of their high capacity production infrastructure to amortize some of their jet production costs. Their track record provides confidence that they are likely to meet their price targets.
3) Both Cirrus and Diamond have proven their ability to certify innovative aircraft and stay close to their schedules while doing it.
4) Both Cirrus and Diamond are building substantially simpler and easier to produce aircraft (and hence less costly aircraft) than Eclipse is building. Just a couple examples, they don't need to worry about pressurizing the airplane to 41,000 feet. They don't need to certify to RVSM standards. They don't need quick donning oxygen masks... The list goes on and on...
5) Both Cirrus and Diamond have built an extremely large and loyal customer base that is ready to step up and will tend to stick Cirrus and Diamond aircraft if given the choice. (By the way, so has Cessna).
6) Cirrus and Diamond customers are predominantly single engine piston customers and a single engine jet will be an easier transition for their customers hoping to step up. There are significant barriers to entry for customers wanting to step up from single engine piston aircraft. Getting and paying for insurance is going to be a major problem for the folks stepping up from smaller, lower performance aircraft. This will not be as big a problem for piston pilots stepping up to a lower performance, single engine personal jet.
7) We do know that Eclipse has been selling the E500 since May of 2000 when they started taking Platinum, Gold and Silver deposits. If we are to believe Ken, then they have taken deposits for 800 aircraft to individual owners. That is 7 years to secure 800 orders. Do the math and extrapolate how many individual orders you would expect once the aircraft is being delivered. If initial customer feedback was incredibly positive, you might expect the order rate to double once the airplane has been shipping for a while and leadtimes are reasonable...
8) We do know that the vast majority of Eclipse's orders come from the air taxi market. 2 years ago, Vern told me that his estimate of the percent of orders that were coming from the air taxi market was about 80%. At the time, there were about 500 orders from individuals. So that meant that about 2,000 of his orders were attributed to the air taxi market.
9) We do know that the air taxi market will only succeed if someone is willing to finance all those planes. The facts are that it has been extremely difficult for DayJet, Pogo and other air taxi companies to secure the financing for the aircraft they need. We do know that DayJet has recently secured financing on the order of $50M. Clearly not enough to buy thousands of airplanes.
10) We do know that the air taxi market will succeed only if customers love the service. Customers are not going to love a service where DayJet lands to pick up another customer while I’m on the plane waiting to get to my destination. I wouldn’t share a cab on the way home from the airport if the service was free. Why do you think no one car pools to work? You want to leave when you want to leave. The whole DayJet model of not committing to the customer when he’s going to be flying until the last possible moment, in order to aggregate other customers on to that flight, is not going to be a winner. Trust me.
11) We do know that the whole air taxi market concept was based on Vern’s promise of a direct operating cost of $0.52 per mile. (not $0.52 per passenger mile, but $0.52 per aircraft mile). The idea was, if air taxi companies could make 50% gross margin, and charge $1 per mile, there would be unlimited demand for air taxi service and huge profits. And you know what? They would have been right!
However, those projected costs are history. It is looking a lot more likely that air taxi services are going to need to charge closer to $6 per aircraft mile to make the profit needed for a sustainable business. This translates to much lower demand.
12) We do know that the Eclipse air taxi order book does not include a firm commitment to buy more than a few hundreds of aircraft. The rest are options, with very little deposit money backing them. The fact is, if the customers aren’t delighted, and the financiers aren’t willing to put up $4B (2,000 orders times $2M per airplane) to finance the air taxi companies, those options are going to be worthless paper to Eclipse.
So what does that mean?
Anyone who is building a business plan that requires the establishment of a large, high growth air taxi market for success, is building a house of cards.
Individual owners of piston class aircraft are going to flock to the Cirrus and Diamond personal jet products.
Many individual owners of turboprop and high performance twins will be natural Eclipse customers. They will have the experience and financial capability to move to an Eclipse. That gets back to the 365 new turboprop sales per year and the 2,400 used aircraft transactions per year that occur per year in the $500K to $4M price range. It is hard to imagine that more than 20 – 25% of those used aircraft transactions will be converted into new VLJ sales.
Bottom line, there is going to be a market for about 500 twin engine VLJs per year. The competitors in this market segment are: Adam, Cessna, Eclipse, Embraer, and Honda.
So what are the facts? We know that Cessna, Embraer are building their business plans based on assumptions that will allow them to be successful producing 100 – 150 aircraft per year. We know that Adam and Honda believe that they can have a profitable business with around 50 or 60 aircraft per year.
We know that the Eclipse breakeven point is about 750 aircraft per year.
Ok, so back to Stan’s original question - Who is ready to invest a few million in Eclipse?
Lets get back to the topic of Stan's post:
Can Eclipse pull off an ipo? I live in Europe but spent many years on Wall Street and am currently a director of several European and US technology businesses. I try to keep close to conditions is the ipo market. Late last fall one of my company's, involved in RFID (no, not Alien), took a very hard look at this. What did the street tell us:
1) need substantial revenue base (in typical "hi-tech" that might be annual revenues of $30 to 50 million, indicates the product has true customer traction)
2) need demonstrated real revenue growth over several years,
3) need decent and sustainable gross margins (indicates you have your manufacturing under control and that your product is not a low margin commodity, in hi tech that means minimum of 40 to 50%, I have no idea what that should look like for aero manuf)
4) need to have crossed the profitability line, ie have a quarter or two of true bottom line profit, or in an extreme case have a positive Ebitda,and
5) the revenue growth and cost control indicates that the level of profitability/ebitda is going to continue accelerating
6) need to have invested the time and money to be Sarbanes Oxley compliant, whch means the CEO, CFO and directors have absolute faith in the financial systems and are willing to sign off on the financial statements.
Eclipse looks to be very far away from almost any of these metrics. Remember deposits are not revenues they are deferred expenses.
Stan raises an interesting point in suggesting the pink sheet market, but I imagine that the directors of this company would have their sights much higher than that.
Anyway, for what its worth those are my insights, would love to hear from those of your who are closer to the aero industry than hi tech.