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Teal Group Evaluation a Unique Program



       Richard Aboulafia is vice president of analysis at Teal Group Corp., a Fairfax, Va.-based research and consulting company specializing in the aerospace and defense industries. He writes and edits Teal Group's World Military and Civil Aircraft Briefing, which covers more than 135 aircraft programs and markets. The latest briefing, published last month, includes Aboulafia's first formal evaluation of Albuquerque-based Eclipse Aviation.
    Read more about Richard Aboulafia in a bio on his Web site.
    Eclipse declined the Journal's invitation to respond to the Teal Group's report.

   
   
    GUEST COMMENTARY BY RICHARD ABOULAFIA: The Eclipse program was designed from the outset to be revolutionary and unique. In Teal Group's estimation, the people behind Eclipse have attained this objective. This program is the single worst aviation program Teal Group has ever covered.
    It isn't the aircraft itself. Rather, it was a business plan that makes no sense, except to attract investors who don't know much about the aviation business. The plan called for 1,000 deliveries per year. As a reference point, in 2007 the world's manufacturers delivered a total of about 4,000 turbine-powered aircraft of all types and models. This one company, an unknown start-up, proposed to grow that global figure by 25 percent, admitting that it couldn't survive if it merely built 450 planes per year (100 aircraft more than any other turbine-powered aircraft model).
    The formula was remarkably simple. A completely unrealistic production rate was predicated on an unrealistically low price (less than $800,000, at first). That impossibly low price was predicated on the unrealistically high production numbers.
    This formula (promoted as a revolutionary paradigm) worked, as long as people gave Eclipse money. As soon as they stopped (which has been happening for the past 12 months), reality caught up to Eclipse, and it began hemorrhaging cash.
    It was more than just numbers. Eclipse tried to become too big to fail in cultural and social ways too. Enormous sums were lavished on publicity and advertising. The company cultivated numerous celebrity relationships, attracting prominent fans and advocates. The air taxi concept was promoted as a revolutionary phenomenon that both justified the production numbers and attracted attention from investors and the general public. "New" production methods (purportedly inspired by Raburn's computer background, but actually originating years ago at Embraer and other aircraft manufacturers) were also used to justify the hyper-ambitious build rate objectives.
    Despite the ludicrous business plan and the company's aggressive arrogance, people gave Eclipse hundreds of millions of dollars. For Eclipse and for Raburn, this was a truly extraordinary achievement. One might almost say it was disruptive.
   
Counting The Cost
    Combine the business costs of pursuing the jet air taxi myth with government spending on air taxi infrastructure (and subsidies to make it happen), add the cost of the Eclipse fiasco, and you get many billions of dollars in destroyed value. Jet air taxis and VLJs together constitute the worst misinvestment in recent aviation history.
    In addition to the economic cost, this program and related air taxi schemes have had a toxic impact on a broad range of political and governmental entities. Somehow, the FAA got co-opted. If the IG's report is correct, the FAA's actions were reprehensible, a threat to the principals of good governance that keep society safe. It would be akin to the FDA deciding to approve possibly tainted milk because it came from a well-connected dairy. During recent congressional hearings, New Mexico Gov. Bill Richardson implied that jobs were more important than honesty, safety and good government. For possibly the first time, a U.S. government entity provided equity cash for a private business.
    Numerous luminaries were recruited for the Eclipse board lending their good names to this dubious venture. Several have distanced themselves from it. Government officials, journalists, pundits, and random people believed not only in Eclipse but in the dream of air taxis. Eclipse won a Collier Trophy, a highly suspect award decision that managed to demean all the other worthy recipients and the Collier itself.
   
What Happens Next
    Keeping up with this program has become a surreal experience. Irrational investors make forecasting difficult, but socialist governments make it even tougher. The latest post-Soviet five-year plan calls for the Russian government to fund an Eclipse line in Russia. This is not a business decision made by the private sector, and therefore we can't predict whether it will be provided. We also don't know when the money will be provided. With numerous lawsuits from suppliers and customers, Eclipse faces the prospect of involuntary or voluntary bankruptcy.
    It should be noted that there might be a good aircraft hiding under Eclipse's deceptive business plan. Despite some serious and expensive teething problems with many of the EA500s built so far, some pilots are quite enthusiastic about its flying characteristics and economical operating costs (although many other pilots consider it a dysfunctional mass of parts flying in loose formation). Unlike most of the other failed VLJ wannabes, the EA500 is actually an innovative small jet. When fully matured, it might be regarded as an impressive engineering achievement. This raises the prospect of someone acquiring Eclipse and changing all of the price and sales assumptions. Selling 100-200 jets per year would be quite reasonable. But the price needed to achieve profitability — probably about $2.5 million — would make the EA500 much less competitive against Cessna's Mustang or Embraer's Phenom 100. For another $300,000-$400,000, buyers would get a more capable and robust aircraft with a much stronger guarantee of product support. Cessna and Embraer would also outgun any new Eclipse owner (other than Bombardier) in terms of sales, support and finance capability.
    Eclipse's hypothetical new owners would also need to kick in large sums just to get the aircraft fully capable, to make good obligations to current customers, and to get the production system straightened out. This would be a costly road map, especially since the light at the end of the tunnel would be a production program worth $250-$500 million in annual revenue with highly uncertain profitability.
    There is also a respectable chance that a large company buys Eclipse and completely revamps the business plan and production system. This, of course, would happen after Eclipse went bankrupt, removing any obligations to previous investors.
    Without that kind of deus ex machina, we doubt that Eclipse can survive as an ongoing business. There is a chance that additional cash injections would keep it alive for another year or two. But for now, our forecast calls for production to end in 2009. And of course everything about the end of this program will be messy.