Wednesday, July 11, 2012

Tiny Jet Plans a Big Comeback

Even Bill Gates Couldn't Guarantee Eclipse's Success. Now New Owners Are Reviving It 
The Wall Street Journal

Eclipse Aviation Inc. once promised to revolutionize air travel with six-passenger jets powered by tiny engines for well under $1 million—about a quarter of the price of the cheapest jet then on the market.

The dream died in 2008 when Eclipse, partially bankrolled by Microsoft Corp. MSFT -1.48% co-founder Bill Gates, filed for bankruptcy, crushed by massive cost overruns and the financial crisis.

Now, a successor company run by a Charleston, S.C., investor who lost his own deposit on one of the small jets is cranking up Eclipse's Albuquerque, N.M., factory again. It plans to deliver the first updated Eclipse 550 planes in about a year.

This time around, the company is aiming for a more realistic price tag of $2.69 million per plane and has teamed up with what it considers a more stable group of suppliers, hoping to win back the loyalty of the jets' pilots and owners.

"They hated the company, but they loved the aircraft," said Mason Holland, CEO of successor company Eclipse Aerospace Inc., who paid $40 million in 2009 for a company that spent $1.4 billion over 10 years to design, build and deliver 260 aircraft before going under.

The original Eclipse 500 project faced myriad setbacks, notably replacing an early engine that shared lineage with those used on cruise missiles because it was too weak to sufficiently power the jet.

But the tiny jet's vision was bold. Compared with small propeller, or turbo-prop, planes, it would compete with, the Eclipse promised quieter, faster flying and the ability to soar over troublesome weather. The jet also offered cutting-edge instrumentation and an innovative fire-suppression system. But the early price tag of $837,500 per plane was the real game-changer, fueling dreams of small-plane enthusiasts becoming jet pilots and new air-taxi businesses serving cities within 300 to 400 miles more cheaply than airlines ever could.

At the time of Eclipse's rise in the early 2000s, the next-cheapest jet on the market was the eight-seat Cessna CJ1, which sold for $3.55 million in 2000.

Led by Vern Raburn, an early Microsoft employee who envisioned building small jets like computer hardware with low-cost suppliers, Eclipse started a race in 1998 to fill the skies with small jets. Cessna Aircraft Co., a unit of Textron Inc., TXT -3.06% Embraer SA, ERJ -7.50% Piper Aircraft Inc., Cirrus Design Corp., Diamond Aircraft Industries Inc. and Honda Motor Co. 7267.TO -1.47% all clamored to get into the low-cost small-jet business and follow Eclipse.

Today, only Cessna, Embraer and Eclipse have delivered these small jets; others struggled to find financing and customers amid a flagging economy.

The original Eclipse business model was rooted in high-volume, low-cost production and a supply chain spread across the world. Both proved problematic, and the price for the Eclipse 500 quickly climbed above $2 million.

The chain of supplier companies spanned from California to Japan and Chile, said Mr. Holland, who said the heavily outsourced program suffered from many of the same challenges as Boeing Co.'s BA -2.32% long-delayed 787 Dreamliner. Both programs faced numerous design changes, and because of part shortages across the range of suppliers, both were hit with production delays.
A display was put up Sunday for the Eclipse 550 ahead of this week's Farnborough air show in England.

How Eclipse structured the program sowed the seeds of its downfall, said Mr. Holland, who described the relationship between the company and its suppliers as "too bifurcated."

Eclipse hoped that accelerated production would quickly decrease the cost to build each jet so it could make a profit. But because suppliers' costs spiraled out of control, Eclipse had to pay higher prices for parts. The jet maker was then faced with losing significant cash for each low-price jet it delivered and pass increased costs on to customers. By the time it declared bankruptcy in November 2008, Eclipse held 2,000 orders for the jet, down from a high of 2,600, as the price rose.

Instead of relying on the old company's far-flung production pipeline, Eclipse Aerospace, the new company founded in 2009 by Mr. Holland, turned to Sikorsky Aircraft Corp., a unit of United Technologies Corp., UTX -2.21% which invested about $25 million in the company.

Sikorsky is both investor and supplier to Eclipse, and starting next year, PZL Mielec, a Sikorsky unit in Poland, will begin making the bodies, tails and wings of the jets, which will then be assembled in Albuquerque. Rather than having five companies building the body of each jet, its new Polish supplier will supply those parts from nose to tail and wingtip to wingtip—an operating model that greatly simplifies the building of the aircraft.

Unlike most of the original 500s, which were rushed through production to meet heavy demand, the 550s will leave the factory with the ability to fly into icing conditions, with automatic speed control, GPS navigation and other new features.

Buying an Eclipse the first time around "was the worst business decision I ever made," said Eclipse owner and pilot Tim Musgrave, CEO of tire-inflation-system company Pressure Systems International. He worried after his 2008 jet purchase that his winged investment would spend little time in the air if Eclipse went belly up and persistent problems with the craft weren't solved.

He and other owners were forced to spend an extra $300,000 on their jets to bring them up to nearly full operating standards. Even then, his plane could fly only under limited conditions—not into icing conditions or by GPS. Mr. Musgrave was one of the lucky few who purchased their jets for around $1 million.

Now, with Sikorsky onboard, he says Eclipse is a whole different company. "I really don't feel like I'm going back for a second [time]," he says. He plans to sell his first Eclipse for significantly more than he paid to help pay for the upgraded 550 model.

"The approach they're taking now is the approach they should have taken 10 years ago," says Richard Aboulafia, vice president of analysis of the Teal Group consultancy and a critic of Eclipse's original business model, which he says was based on "impossible numbers with an impossible price tag."

Today, Mr. Holland is less concerned with opening new markets, like air taxis, than offering a more economical way to get around for existing types of flying. He says the Eclipse 550 burns 59 gallons of jet fuel per hour while flying 430 miles per hour, compared with 83 gallons per hour for its nearest competition—Cessna's Mustang—at its top speed of 390 mph, and is the only jet that sells for under $3 million.

While pursuing charter operators and individual owners, Eclipse hopes to sell its six-seat 550s to the Pentagon and other governments for use in special missions or as replacements for training aircraft, Mr. Holland said.

The company plans to deliver 47 jets in 2014 and 50 to 100 in 2016. Mr. Holland estimates revenue of more than $125 million in 2014 and expects to deliver units at an undisclosed profit once it reaches the 50-a-year production mark.

Mr. Aboulafia said Eclipse still faces an uphill battle to deliver the jet at a profitable volume in an unpredictable market. "This is still a very difficult market segment with a lot of competitors," he said. 

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