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| Passion Investments: Aviation |
High-Flying Gamble
Michelle Seaton
10/01/2004
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The Eclipse 500 ultralight exists only as a prototype; it will not be
commercially available for at least two years, if ever. But the jet’s uncertain
future has not stopped Ken Ross from buying and selling five of them—at a
handsome profit—already.
 | | LOFTY AMOUNTS of money can be made—and lost—when gambling on aircraft
prototypes. Cessna, maker of the Citation CJ2, wants nothing to do with the
practice. |
Ross, president of North American Jet, an aircraft
management company in Chicago, does not typically trade in phantom aircraft, but
Eclipse offered a compelling opportunity. Four years ago, the company’s
ultralight personal jet was in the design stage. To raise the capital it needed
to go from blueprint to blue yonder, the company, based in Albuquerque, began
selling “delivery positions” for $155,000 each. These offered buyers the right
to purchase one of the first models to roll off of its assembly line—if and when
that occurred. Eclipse accepted 160 down payments from individuals such as Ross
for what it called Platinum Positions, which guaranteed a price of just under $1
million for the aircraft, and assured holders of a delivery date during the
first year of production. By the time Ross was ready to sell his positions
several years later, the going rate for them had risen between $300,000 and
$400,000 each.
Buying an option secured only by the seller’s intent is a
highly speculative move. The money Ross invested was nonrefundable, and did not
go into an escrow account. Moreover, there is no firm guarantee that the Eclipse
500 will ever move beyond the design stage. “This type of investment is not for
the faint of heart,” Ross admits. “You have to be able to lose everything, and
you have to be able to let it sit for five or six years.”
Selling delivery
positions allows manufacturers to raise the capital they need to develop new
lines, and it enables early buyers to lock in attractive prices on airplanes
that are years away from production. Some buyers, such as fractional companies
or private aircraft enthusiasts, may acquire early positions fully intending to
take possession of the planes. Other investors hope to sell, or flip, early
positions when their price rises. Manufacturers may sell hundreds of early
delivery positions. Eclipse has sold more than 2,000 on various
aircraft.
VALUE JUDGMENT
Purchasing delivery positions on aircraft in the design or prototype stages
secures us an attractive price and an early delivery date. We may also be able
to sell our positions on hotly anticipated models at a premium. However, the
risks of investing in delivery positions—manufacturer bankruptcy, FAA censure
and design problems among them—are substantial. |
With some popular aircraft models, there is a significant
gap—sometimes years—between order and delivery dates. When this occurs, the
early delivery position becomes a very valuable commodity. “The buyer says,
‘I’ll get this plane cheaper now than what it will sell for, and I’ll get it
sooner,’” explains Walt Lamon, president of Wyvern Consulting, a New
Jersey-based aviation consulting firm. For example, if we tried to order an
Eclipse today, we would take possession of it no earlier than 2010, and would
pay nearly $200,000 more than the price paid by the Platinum Position
holders.
If we time our purchase correctly, the reward can be impressive. In
2000, entrepreneur Lee Morse was planning to create a regional airline in
Maryland. He bought one of the first 100 positions on a Cessna Citation CJ2,
then a highly anticipated $5 million light jet prototype. When Morse changed his
mind about the purchase, a broker friend found a buyer willing to pay a hefty
premium. Morse cleared $300,000 on the deal. “The base price of the plane had
gone up $600,000,” Morse recalls. “The buyer got the plane he wanted right away,
at a great price.”
Crash and Burn
Not all position traders succeed. Morse
sold his CJ2 position during the general aviation boom, when manufacturers saw
order backlogs of two and three years. Within a month of Morse’s deal, however,
the aviation market hit a slump. Buyers evaporated, forcing early position
holders who needed to sell to do so at face value, or even at a loss.
There
is also a significant risk of total loss. It is possible that some of the
manufacturers competing to roll out popular ultralights in the cutthroat,
capital-intensive personal aircraft industry will go out of business. “It’s very
tough to get your deposit back unless they scrap the project,” explains Steve
Lockshin, CEO of Lydian Wealth Management in Washington, D.C. “In most cases,
you are bankrolling the company.”
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