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| Passion Investments: Aviation |
High-Flying Gamble
Michelle Seaton
10/01/2004
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Designing and manufacturing a new aircraft
is a speculative venture. Industry experts estimate that bringing a new jet
design to market can cost from $250 million to $300 million, and can take years.
Sino-Swearingen, a U.S.-Taiwanese joint venture based in Texas, has been trying
to bring a $5 million light jet to market since 1995. It had to discard its
first design, and FAA certification for its second design, the SJ30-2, is years
away.
Even if a manufacturer stays afloat and its design does not become
entangled in FAA red tape, the company may still face financing snafus or
supplier delays. Eclipse has delayed production several times, once to shop
around for a new engine. Early position holders will have little recourse but to
wait for their airplanes.
 | | THE ECLIPSE 500 is only a prototype, but investors selling their delivery
positions are flying high. |
Design details may evolve over time, so Ken
Hoffman of Greenberg Traurig, an aviation law firm based in Miami, advises us to
seek guarantees from the manufacturer that the delivered aircraft will meet the
speed, size and payload specs set forth in the position contract. All too often,
as an airplane moves closer to production, its frame grows heavier, its top
speed drops and its cabin and cargo areas shrink. “You can end up with an
aircraft that’s not what you ordered,” says Hoffman. Some manufacturers mock up
an entire family of new aircraft to sell, then, after accepting deposits, decide
which one of them to fast-track through the approval process.
Owners of
early delivery positions also face practical concerns, such as whether the
company will be able to service the aircraft. This affects the value of our
delivery positions, particularly when the airplane is finally in production. We
should also take note of where we stand in the delivery queue. Ross reveals that
his buyers wanted to know exactly what position numbers he owned. Were they
among the first 50 aircraft? In the first 100? Being first in line is not
necessarily the most advantageous spot. David Lee, president of Air Shares
Elite, a regional fractional aircraft company based in Atlanta, is hoping to buy
10 to 15 ultralight jets. He wants first-year delivery positions, but he does
not want to buy any of the first 50 aircraft produced by any company. “The first
50 serial numbers in any manufacturing line are likely to have significant
shakedown problems,” Lee says. Morse agrees, noting that the buyer of his CJ2
was happy that he held position number 62. “It was definitely an early position,
but not too early.”
Unwelcome Advances
Although the aviation market has a long history of
selling early delivery positions for profit, some established manufacturers
frown upon the practice—and even go so far as to forbid it. FalconJet, for
example, provides a frosty response to those asking how positions are trading on
the 7X, its latest offering in the large business jet range. FalconJet spokesman
Ralph Aceti explains that customers can put down a refundable deposit of $5,000
to $10,000 to secure an early position on this $37 million aircraft until the
specs have been set. At that point, customers must sign a purchase agreement and
secure it with a $3 million payment. “If you decide afterward that you don’t
want that airplane, you don’t get your money back,” Aceti cautions.
Some
manufacturers discourage flipping positions by stating that their warrantees are
not transferable prior to delivery, or that the delivery contract itself cannot
be sold. Aceti will not confirm that FalconJet has ever made such declarations,
but he does confess that the idea of a customer becoming a dealer is justifiably
off-putting to manufacturers. “What if you sell your position to someone in
Africa? In that case, we’ve lost our ability to service the end user, and that
is not a good thing.”
Cessna wants nothing to do with the practice. “We don’t
sell delivery positions. We sell aircraft,” spokesman Mike Pierce asserts. When
asked if customers are trading positions on the new Mustang, Cessna’s entry into
the ultralight jet market, or if they have been trading on the wildly popular
CitationJet 2 or the new CitationJet 3, he claims, “It doesn’t
happen.”
Actually, it does happen. Morse declared his position on a Cessna
CJ2 the sole asset in a limited liability company, then sold the company and the
aircraft it owns prior to taking delivery. The new owner then put his name on
the title at delivery. Morse was careful to secure Cessna’s blessing (however
reluctantly it was bestowed) before making the sale. “They knew that I had
intended to take delivery of the aircraft. I’d even gone out and paid to learn
how to fly it myself,” Morse says. Knowing that Morse had good intentions, and
believing that he would one day be a Cessna owner, the company went along with
the deal. However, according to an aircraft broker who asked to remain
anonymous, this type of transaction is rare. Industry insiders generally
understand that if we flip a position against the wishes of the manufacturer, we
will do it only once. Some manufacturers have blackballed pure speculators on
occasion, the broker says.
Eclipse’s view of the practice is in stark
contrast to the conservative position of older manufacturers such as Cessna.
Eclipse President Vern Raburn can barely contain his glee when discussing the
$200,000 premium that early position holders on the Eclipse 500 now demand. “We
regularly get calls from people looking for a seller,” says Raburn, who adds
that the company has even brought buyers and sellers together. Eclipse also held
back about 20 early positions that it plans to auction off once production
begins. In essence, the company will be flipping its own positions during the
first year of production. Far from being squeamish about the notion of customers
making a profit on his product well before he does, Raburn seems thrilled that
early investors are receiving what he sees as just rewards. “Those first 160
buyers were real risk-takers, and there is no way you could characterize that
risk as rational,” Raburn says. “They took a chance on us, and we love ’em to
death.”
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