They‘re Here, Now What?

With about 450 VLJs currently in service (260 Eclipses, 170 Mustangs and 20 Phenom 100s) and at least another 300 to be built over the next 12 months, we're no longer on the drawing board: VLJ reality has hit.

One seldom-discussed point stands out: As stand-alone products, the current VLJs don't make financial sense for their respective manufacturers. Eclipse has never made a profit on its 500 model, and both Cessna and Embraer are (by my estimate) probably just barely breaking even on the gross revenues of their respective VLJs. The difference is that both Cessna and Embraer can afford to just barely break even, while the other manufacturers likely cannot. So why build a product if you're not going to make money? Two words: brand loyalty.

Aircraft manufacturers count on customers to step up to more profitable products as they outgrow their current holdings. Take, for example, the customer who has previously transitioned from the Cessna Citation CJ1+ to the CJ2+ to the CJ3, and is now waiting for his CJ4---he is Cessna's bread and butter. It's the second, third or fourth jet down the product line that yields the profits for the manufacturer, not the entry-level product. The first is usually the loss leader to get the customer in the door. This is exactly why Cessna restarted the single-engine production line in the late '90s---to get more people in the door to buy Citations later on. Cessna knows how to take care of its customers. As a result, in many cases, Citation customers have foregone the offerings of Cessna's competitors to keep their ownership experience intact.

Embraer is building on this same philosophy. The company strategically announced the development of the Phenom 300 at the same time as the Phenom 100, but scheduled its certification one year after the 100's certification. The Phenom 300 has 50% better range and 15% better speed than its little brother, but its price tag is almost 100% more (about $7 million for the 300 and $3.5 million for the 100). At the same time, there's enough in common between the two to make the flying transition a relatively easy one with what's currently planned to be a common type rating.

Embraer is taking a lesson right out of the Cessna playbook. Assuming Embraer, the world's third largest aircraft manufacturer, can keep its customers satisfied through a robust customer support program, the company will more than likely convert its current Phenom 100 owners to Phenom 300 owners, netting large profits in the conversion.

Despite a few operational hiccups (to be expected for any new aircraft design), the Phenom 100 is getting great reports from its first handful of owners. Picking up a new Phenom from Brazil has proven to be a significant task within its own right, requiring about two weeks from start to finish. These proud new Phenom owners, however, aren't complaining too much about spending a little time down in South America.

By the end of the year, Embraer expects to put out more than 100 of its Phenom 100s, significantly adding to the total VLJ operational fleet.

So what about Eclipse? Say what you will, but it's hard to argue that the Mustang or Phenom 100 would be around today without the Eclipse.

Unfortunately, at this writing, Eclipse is undergoing a painful Chapter 7 liquidation process that's going to leave between 1,000 and 5,000 (per bankruptcy filings) investors, vendors, customers, depositors and employees in a disastrous financial position. Eclipse's business model required production levels on the order of 1,000 airplanes yearly for the company to turn a profit. The highest production level Eclipse ever experienced was about 20 airplanes in one month, 25% of the production level its business plan needed for the company to make a profit on the bargain-priced jets.

As the company gets a financial and operational makeover through the bankruptcy process, one thing's for sure: You'll likely never see another new Eclipse 500 sold from the factory. If anyone does restart production, let's assume for argument's sake that the price for a factory-new Eclipse 500 will be $2.5 million (up from the original $837,500 price). The $2.5 million price tag isn't a world of difference from the roughly $2.9 million it costs to buy a 2009 Mustang, a significantly bigger aircraft with more capable systems and a publicly traded company behind it. The market for a $2.5 million Eclipse 500 is going to be limited with the current alternatives.

Herein lies one of the greatest future challenges for Eclipse Aviation's new owners. For Eclipse to survive, even after restructuring, it will have to make a profit on every plane it sells. Eclipse will also have to design, test and certify a follow-on product quickly, or it will lose its repeat customers to Cessna or Embraer as they outgrow their Eclipse 500s. The company also must make every effort to make good by the current owners and depositors who were financially and emotionally damaged by Eclipse's bankruptcy. If Eclipse doesn't launch a massive goodwill effort on its customer base, it will have a difficult time selling any new aircraft in the future.

Where does that leave Eclipse? It's possible that the company may become the next Mitsubishi. In 1983, Mitsubishi halted production of its twin-engine MU-2, the sporty, relatively inexpensive turboprop with a poor safety record. Though the Eclipse 500 has had a very good safety record, the aircraft's reputation has been tarnished by the company's missteps. Today, several hundred MU-2s still fly, well supported by the company that stood up to support MU-2 owners, but there will probably never be a new MU-2 built ever again.
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Cyrus Sigari is the president of jetAVIVA, a light-jet sales, factory acceptance and training firm based in Los Angeles. An ATP-rated pilot with multiple type ratings, Cyrus holds a degree in aerospace engineering from Purdue University. Visit www.jetaviva.com.