Eclipse assets up for grabs

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March 25, 2009, 4:48 AM

As the liquidation process for the assets of bankrupt Eclipse Aviation drags on, four groups have announced proposals to buy those assets and restart product support and in some cases production for the orphaned Eclipse 500 very light jet. There may be Chinese interest in bidding on the Eclipse assets, too.

No date has been set for the asset auction by the Delaware bankruptcy court. Eclipse Aviation was placed into Chapter 7 (liquidation) bankruptcy on February 24, and since then a variety of competing elements have come forth, offering various ideas to help owners of the 259 Eclipse 500s produced keep their jets flying and buyers who have placed deposits–some totaling hundreds of thousands of dollars–recoup some part of their investment. Under the Chapter 7 liquidation proceeding, it’s unlikely that deposit holders will retrieve any money from the sale of Eclipse Aviation’s assets.

Eclipse Aviation, of course, isn’t the first example of an aircraft manufacturer going out of business or dropping support of an out-of-production aircraft. What happens with orphaned aircraft ranges from leaving owners to fend for themselves to the consistent aftermarket support provided by Mitsubishi for the MU-2 turboprops, which ended production in 1986. MU-2 parts, training and upgrades remain readily available, and Mitsubishi has promised to continue supporting the marque until the last one stops flying. In other cases, new companies have formed to support fleets like the Twin Commander turboprops or Aerostar piston twins. Gulfstream still provides support for all of the aircraft it manufactured, including technical support for the few remaining G-I turboprops, although maintenance and parts are handled by separate companies. Sabreliner still makes parts and provides complete maintenance for all North American Aviation/Rockwell International/Sabreliner 40- through 80-series jets.

In other cases, manufacturers have chosen to eliminate the liability and expense of supporting older models by removing them from the market and destroying the remaining fleet. Cessna did this with the CH-1 Skyhook helicopter, for example, and the 411 piston twin. Raytheon Aircraft followed suit by buying back the handful of Starship composite turboprops that were in customers’ hands and dismantling most of them. Some were given to museums.

The Eclipse situation is somewhat unusual. First, of the 259 Eclipse 500 twinjets delivered, not one that is in customer control is fully functional. Eclipse took the unusual step of certifying and beginning deliveries of the jets before they were completely finished; some early jets still need aerodynamic and engine upgrades that help the jet meet performance guarantees, including larger wing tip tanks. Many need the upgrade from the original Avidyne avionics to the latest Innovative Solutions & Support (IS&S) integrated glass panel avionics. And none have received the final avionics upgrade, dual Garmin 400W navigators that finally provide GPS capability, nor have any of these jets been upgraded with the flight-into-known-icing package.

There are other more pressing maintenance matters requiring immediate attention, too, including airworthiness directives on the angle-of-attack/pitot probes, throttle lever and one limiting maximum altitude to 37,000 feet until an engine problem causing excessive carbon build-up is fixed.

One element of this whole Eclipse situation is that it is not normal for a new aircraft, especially a jet, to be “orphaned” so soon after production begins.

The FAA has commented on the Eclipse situation, with a special airworthiness information bulletin (SAIB CE-09-14) outlining what Eclipse 500 owners need to consider as they try to continue flying while Eclipse Aviation’s assets are liquidated.

The SAIB is not mandatory, and in it the FAA advises Eclipse 500 owners that all Eclipse operations, including certification, production, service centers and training are closed. But Eclipse 500s can still be flown, as long as they are airworthy. “Contrary to media reports, the FAA has no plan to ground the EA500 airplanes,” the SAIB states, while also asking owners and operators to report any “unsafe conditions” to FAA program manager Alma Ramirez.

The SAIB’s questions/answers section explains, “Parts, including software upgrades, and proprietary information are not available from Eclipse.” Another problem is that while many vendors are sitting on piles of Eclipse components, they most likely are not able to ship those directly to an Eclipse owner or operator until obtaining FAA-PMA (parts manufacturer approval) on each component. Some components that have TSO approval can be sold and shipped to end users, but otherwise all material has to flow through Eclipse, which is the holder of the model 500’s type certificate. According to the SAIB, “several Eclipse suppliers are currently approaching the FAA about obtaining a Parts Manufacturer Approval on their components.”

Those Eclipse 500s that have been modified with the IS&S instrument panel are stuck without available navigation databases, which were distributed by Eclipse. The SAIB notes, “Since this update is not available from Eclipse, the types of approaches that the pilots can make with these airplanes may be limited. The airplanes with the Avidyne displays may be updated through other sources.”

Although entities are vying to purchase the Eclipse type certificate and other assets, the SAIB pointed out, “If Eclipse surrenders the TC, the FAA becomes the custodian. This allows for the continued support of in-service aircraft.” That doesn’t mean that the FAA would provide such support, only that it would facilitate the standard supplemental type certificate approval process for any modifications. Parts support would still be dependent on suppliers getting their materials PMA’d or TSO’d. 

If Eclipse were sold to a non-U.S. company, the SAIB said, the “FAA will work with appropriate government and international authorities to assure that airworthiness issues for U.S.-registered airplanes are addressed.”

Following are summaries of the current proposals for disposition of the Eclipse Aviation assets. Apart from these efforts, two companies have launched and are offering to assist Eclipse 500 owners and operators. Albuquerque, N.M.-based Eclipse 500 Services says it is staffed by people who built and maintained Eclipse 500s. And it plans to offer maintenance and upgrades, including the Garmin 400W navigator upgrade and possibly known-icing “depending on customer interest.”

Another company providing maintenance and upgrade services to Eclipse owners is Albuquerque-based Eclipse Aero Solutions. This company includes former Eclipse Aviation employees who worked in the service center as well as Eclipse engineers. Eclipse Aero Solutions plans to expand and obtain an FAA repair station certificate, according to COO Jim Twohig. The company is currently maintaining Eclipse 500s and offering upgrades like a DME installation that enables owners with the expired nav database on IS&S-equipped avionics systems to keep flying.

Eclipse Jet
Last July, Eclipse investor and chairman of the board Roel Pieper took over leadership at the company after founder and chief evangelist Vern Raburn was forced to depart. After trying to raise money to buy Eclipse Aviation for $28 million in cash plus $160 million in promissory notes and 15 percent equity for senior secured noteholders following Eclipse’s Chapter 11 bankruptcy, Pieper’s company Etirc Aviation was unable to follow through and lost the $150 million it had invested in Eclipse.

Now Pieper is back, having recently joined the team of Eclipse Jet, one of the companies that plans to bid on Eclipse’s assets. These assets may go for much less this time, given that Eclipse’s senior noteholders asked the court to place the company into Chapter 7 bankruptcy, which means that its assets will be sold to the highest bidder.

Eclipse Jet was founded by Mike Press, a long-time Eclipse 500 aficionado and owner of S/N 4, and Mason Holland, a so-called “60-percent deposit holder” who paid the required 60 percent of the purchase price for promised delivery that never occurred. Holland’s Eclipse was supposed to be S/N 473. Press and Holland are also members of the Ad Hoc Customer Committee and Steering Committee, which has been trying to protect Eclipse customer interests during the bankruptcy proceedings. “Roel is a minority partner and has made a financial investment [in Eclipse Jet],” said Holland. “We all have a collective interest in doing the right thing for the company.”

Other members of the Eclipse Jet team include Raul Segredo and John Cracken. Segredo is president and CEO of Avionica, which makes data recorders used in flight operational quality assurance (FOQA) systems as well as satellite communications equipment. Cracken is managing director of Dallas-based private equity firm Cracken Harkey.

Eclipse Jet has met with the owners’ group, according to Holland. “We’re hoping we can work on something collaboratively. The end-game is to embrace the owners.”

Eclipse Jet’s goals are to rebuild the Eclipse 500 service, support and training programs and eventually restart production of the jet. Pieper would like to license assembly of the Eclipse 500 overseas, according to Holland, but core production would remain in the U.S.

Eclipse Aviation’s big mistake, Holland said, was to focus first on growth instead of profits that could support the company for the long-term. “We have put together a solid business plan to reintroduce Eclipse as a thriving profitable company that focuses on customers first,” he said. “They’re the lifeblood of the business.”

The first priority is to provide parts and training and help existing Eclipse 500 owners modify their jets to the latest configuration with the Garmin 400W navigators and the known-icing upgrade. Some of the early Eclipse 500s still need the aerodynamic mods, too. Once that is achieved, Holland said, “We’ll start reintroducing production of aircraft.” And deposit-holders like Holland, who are likely to get nothing as a result of the bankruptcy, will be offered a discount on new-production jets “so they can recoup some of their investment.” He can’t quote a price for a new Eclipse 500, but added that it  “will be very competitive.”

Eclipse Jet plans to help suppliers that are still owed money with some financial support. In addition,  keeping the fleet serviced creates an outlet for Eclipse inventory that otherwise might not be worth much.

Eclipse Jet has the necessary funding to make a solid bid on Eclipse’s assets, according to Holland, although in mid-March the company was still seeking working capital that would be needed to finance the effort to revive Eclipse. Former Eclipse employees are already showing interest in joining Eclipse Jet, but, he added, “100 percent of senior management will be from existing customers and deposit holders.”

Although Eclipse Aviation burned through well over $1 billion developing the Eclipse 500, obtaining FAA type and production certificates and delivering 259 jets, Holland appreciates the effort that went into building a new jet company from scratch. “That is a monumental thing to pull off,” he said. “The vision was there and was achieved, and this is a fantastic machine. We can’t let this go to waste. They created a viable aircraft, now we just need to put a viable company behind it. The risk is mitigated to a large degree. We know the product works.”

Press, who has sold many Eclipse 500s and logged hundreds of hours in his own 500 via his company Single-Pilot Jet Management, Chesterfield, Mo., sees Eclipse Jet as an opportunity to help his customers. “Many of the owners are my personal friends, whom I’ve introduced to Eclipse and sold them their aircraft,” he said. “I am responsible for them, and Mason and I have organized an exceptional team to lead a bid to fulfill my responsibility to current Eclipse owners and depositors.”

New Eclipse Acquisition
Phil Friedman, CEO of Wichita-based Harlow Aerostructures, was one of the early companies with an Eclipse asset-buying proposal, announcing the formation of New Eclipse Acquisition on February 27. Also on the New Eclipse team is Peter Reed, who was CFO at Eclipse Aviation for seven years. Friedman is proposing to restart Eclipse 500 production by 2011, but doing so will require a lot of manufacturing engineering work and tooling design to lower the cost of producing the jet. “It’s … a challenge,” Friedman said.

The first step would be to upgrade the entire fleet to the latest configuration. “There’s not a single one of the 259 airplanes that was delivered complete,” Friedman said, “so we have to upgrade everybody to same latest configuration.” He would also like to open multiple smaller service centers around the U.S., closer to where customers are located so they wouldn’t have to travel as far as they did to the former Eclipse service centers in Albuquerque; Gainesville, Fla.; and Albany, N.Y.

New Eclipse has contacted Eclipse vendors, and Friedman is hoping that they won’t have to go to the trouble of obtaining PMA approval for their parts but can wait for the new company to buy Eclipse’s assets and restart the flow of parts under the new banner. “We’re asking them to hold off until we get back to the normal chain of supply,” he said.

Friedman believes that the Eclipse 500 can be competitive, but it would have to sell for a base price of about $2.4 million. Eclipse not only didn’t charge enough for the jet but mistakenly believed that there was a large air-taxi market for the jet and “that high volume would drive down manufacturing costs like it does in other industries,” he said. “I just don’t believe–having been in the industry–that economies of scale and cost savings are as great as projected.” According to Friedman, Eclipse projected a build time of 600 person-hours for the 500, but it really took about 7,000. The Cessna Mustang takes about 4,000, he said. “That was a major error in cost analysis.” Add to that problems with the Eclipse’s original Williams International engines–which Raburn claims set the company back $250 million–“and you’ve got millions of dollars of losses,” Friedman said. If Eclipse is operated like a normal company, he added, it should be successful. And that includes fixing reliability problems, providing better and more consistent service, paying vendors on time and not focusing on a “grandiose vision of a huge air-taxi market.”

New Eclipse may offer a small discount to deposit-holders, but that hasn’t been decided yet. Friedman’s business plan assumes that orders have dropped to zero. Friedman and Reed have been talking to key Eclipse engineers, former employees, model 500 owners and suppliers. “All constituencies want this to work,” Friedman said. “I’m extremely excited. I’ve been in this industry 28 years, and this is an opportunity to build an entire jet. It’s the culmination of all the effort I’ve made in my career, and I think it’s the only plan that can work in this dire economic environment.”

China Plan?
AIN
has been in contact with a person who said he represents a Chinese company interested in bidding on the Eclipse assets, but he would not reveal any details by the time this article was published. He also would not confirm if he represents China Commercial Aircraft, which is interested in bidding on Eclipse’s assets, according to a March 17 article in the Albuquerque Journal.

Eclipse Services and Support
Bill Herp, CEO of charter operator Linear Air of Concord, Mass., which has four Eclipse 500s in its fleet, launched a co-operative organization made up of Eclipse owners hoping to buy assets from the liquidation sale to help keep Eclipse 500s in service. The co-op is named Eclipse Services and Support, and if it can purchase the right assets from Eclipse, such as the type certificate and other intellectual property, it could help owners obtain parts and upgrades at reasonable prices.

The co-op would be structured so that Eclipse-owner members would obtain support for their jets at the cost of operating the co-op, thus keeping prices down. “I think the fact that it is structured as a co-operative gives it the potential to most efficiently offer to the customer base the most cost-effective way to get their aircraft upgraded,” Herp said. “The notion of creating a co-operative funded by owners seems to resonate,” he said.

Eclipse Owners Group
David Green, owner of Eclipse 500 S/N 1, is part of a group proposing something similar to Linear Air’s co-op. The Eclipse Owners Group is first evaluating other bidders’ programs, and if those don’t offer the best deal for owners, the group is proposing a non-profit co-op to purchase Eclipse’s assets and serve owners’ needs, similar to the co-op proposed by Herp at Linear Air. Other members of the group include Randall Sanada, founder of very light jet charter/management firm Jet Alliance of Westlake Village, Calif., as well as model 500 owners Ron Lebel and Ken Meyer and Single-Pilot Jet Management’s Mike Press. The Eclipse Owners Group effort was announced before Press and Mason Holland launched Eclipse Jet.

“We as the owner group have a lot of motivation to band together and be united,” said Sanada, “not only to protect our interests and the interests of the depositors but also to address the predatory practices of those who might take advantage of the owner group by capturing control of the assets.”

If the owners group co-op becomes necessary, Sanada envisions it doing what all of the other efforts are proposing: supporting the existing fleet, performing upgrades, then possibly restarting production. In the co-op’s case, however, production may have to be licensed to an existing manufacturer.

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