Rebirth of the VLJ?

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Some light jet builders survived their battering from recent headwinds better than others and are ramping up development again, Ian Putzger reports

The turbulent history of the very light jet concept took another twist last October, when Piper Aircraft announced that it was suspending development of its Altaire business jet indefinitely after re-evaluating the project and the latest forecasts for the sector.

According to Piper interim president and CEO Simon Caldecott, the programme was on schedule, on budget and hitting performance targets, but development costs had risen above the point where they were “recoverable under foreseeable light jet market projections”.

Caldecott added: “Clearly, the market for light jets is not recovering sufficiently and quickly enough to allow us to continue developing the programme under the economic circumstances we face.”

There may have been more to this than the uncertain market outlook. The Altaire was in a relatively early stage of development that made it easy for Piper’s management to shelve the project. The original concept of a Piper jet went back some time, but the redesign that marked the start of the Altaire project was more recent, points out Peter Maurer, CEO of Diamond Aircraft, which is working on another contender in the VLJ segment, the D-Jet.

It has been suggested that Piper was never entirely comfortable with the VLJ concept, having come rather late to the table. Its aircraft was turning out more complex – and thus more costly – than originally envisaged, which would have made it a tough sell against the Cessna Mustang and other rivals.

Whatever the case, Piper’s shelving of the project marked the latest in a string of casualties on the road to delivering the supposed “new BMW of the country club set”, as one aviation consultant describes the VLJ segment.

Others view the Altaire’s end as another nail in the coffin of the air taxi concept that underpinned the most high-profile VLJ project, the Eclipse. Commentators recall how the original Eclipse venture filed for Chapter 11 bankruptcy protection in November 2009, followed by Chapter 7 liquidation three months later, and point to the fate of DayJet, the most prominent exponent of the air taxi philosophy. Instead of fielding 1,000 VLJs within five years of its launch in 2007 as projected, the Florida-based carrier ceased operations in September 2008.

“In the beginning there were a lot of people with big ideas. It did not turn out the way they hoped,” says Magnus Henriksson, business manager of charter analyst Avinode.

Mason Holland, who leads the second-generation Eclipse enterprise, which trades as Eclipse Aerospace, reckons that the time was not ripe for the air taxi concept when DayJet and the original Eclipse tried to blaze a trail for VLJs. The souring economic situation and the resulting downturn in the general aviation business certainly took a heavy toll on efforts to bring VLJs to market.

Although the downturn has hurt the entire aviation sector, the General Aviation Manufacturers Association says the business jet segment suffered the worst pain in the industry in the first nine months of 2011, recording a 12.3% decline in aircraft deliveries compared with the like-for-like period the previous year. And in 2010 business jets had already slumped by 20.3% from January-September 2009, with light jets faring the worst.

Piston aircraft deliveries were down 8.8% in the first nine months of 2011, bruising aspiring light jet producers such as Cirrus Aircraft and Canada’s Diamond Aircraft. “The market hurt a lot last year. We had to learn how to shrink a company,” says Dale Klapmeier, Cirrus CEO and co-founder.

In 2006 and 2007, Cirrus built about 700 aircraft a year, but over the last three years output has been in the mid-200s, he adds. “That greatly changes your appetite for development.”

The erosion in residual values has further undermined the case for light jets, according to Ian McDougall, CEO of FSS Alliance, a full service provider to the corporate aviation sector. Those prepared to stretch to the price of a Phenom 100 can get hold of a high-quality larger aircraft right now, although the operating economics are proportionately higher, he says.

FSS Financial Services, the firm’s financing arm, has seen some activity on the VLJ side, says company president Mike Casey. Mostly this has involved straight loans and leases, as buyers have taken advantage of cheap capital. Banks have become more willing to lend money for jet acquisitions, Holland agrees, although not yet at the level he would like to see.

Although banks have relaxed their lending restrictions somewhat, many personal owners, who have replaced air taxi operators as the major target group for light jets, have been forced to reconsider their finances in the economic slump. Small business owners, a large part of this clientele, found in the downturn that funds for projects that had looked secure earlier on suddenly were no longer available, forcing them to find other sources and to rethink their priorities, notes Rollie Vincent, president of aviation consultancy Rolland Vincent Associates and a former executive at Bombardier and Cessna.

Most manufacturers working on light jets have faced similar pressures, and several of them ran out of funds. “Many have been under-capitalised. Their ROI horizon has been quite short,” Vincent comments.

Most observers agree that the original Eclipse venture was a victim of this scenario, as was Adam Aircraft Industries, which plunged into bankruptcy in 2008. Others blame their demise on a lack of grounding in the aviation sector. “Companies like Adam and Eclipse were ‘greenfield’ operations. They had no history in making aircraft,” comments Maurer.

“There were several who never got beyond the prototype stage. None were serious contenders in any commercial market,” agrees McDougall.

Diamond and Cirrus have had their fair share of experience with scrambling for funds in tight financial situations. The D-Jet and the Cirrus SF50 looked in jeopardy last year, with both manufacturers forced to scale back their businesses when funds became tight. Diamond suspended its test flight progamme last March.

Both companies eventually managed to find new business partners to secure fresh funding. Cirrus merged with China Aviation Industry General Aircraft (CAIGA) last summer, while Diamond announced in November that Medrar Financial Group, a Dubai-based investment company, had acquired a majority stake for an undisclosed sum.

“In the past we were severely limited by our cash position. The SF50 was severely hurt by the economic downturn, so we were not able to progress that initial programme,” admits Klapmeier. “With the purchase of Cirrus by CAIGA, not only can we dream about the SF50 again, but we can also develop a growth path.”

With fresh support under their wings, Vincent sees a good chance of the D-Jet and SF50 both making it through. “Both come from proven manufacturers who have a step-up base of customers,” he says.

Undeterred by the woes that have beset the VLJ segment, Holland, Maurer and Klapmeier all see a promising niche between piston aircraft and jets larger than the Phenom 100. Holland points to travel patterns in North America, where 70% of all private jet trips are 750nm or less, usually with three passengers or fewer on board.

Avinode’s statistics for the European market suggest a similar opening there. Almost 60% of there are shorter than three hours, and 40% below two hours. Seventy-three percent of flights have four or fewer passengers, and 40% either one or two passengers. This has worked well for the Phenom 100 and the Cessna Mustang, says Henriksson. Both aircraft are increasing their share of the European market and look likely to continue their upward trajectory with more entering service.


Crosshead: Negative connotations

As they move closer to certification of their jets, manufacturers tend to move away from the VLJ label. They rather brand their coming aircraft as personal jets or entry-level jets, lest they be associated with the failed air taxi vision of the original Eclipse venture.

“The term VLJ has negative connotations. Most prefer to call them personal jets. And they really are, whether it’s the CEO and his wife using them on the weekend or on a business trip. They are a business tool or a lifestyle tool, like personal apps,” says Vincent.

Maurer comments: “We never got excited over the air taxi business. We wanted to create an entry-level jet. We aim first at the owner-pilot. The initial market is owner-flown. Longer term, we see applications commercially. It makes sense for corporations to have a small jet for short distances.”

Cessna has largely avoided the air taxi concept in its marketing of the Mustang. “We’ve sold it as an entry level personal jet,” says Brian Rohloff, business leader for the Citation Mustang and Citation M2.

For his part, Klapmeier describes the SF50 as a personal plane “designed around the owner in the front left seat”, a non-professional pilot. “That design philosophy drives the development of the plane. It has to be intuitive, easy to operate, easy to fly,” he says.

McDougall characterises the existing contenders in the market, the Mustang and the Eclipse 500, as “mostly left-turn planes, designed for the people who turn left as the enter the aircraft. They are delightful for the pilot, not so much for the passenger. The cabins are small.”

Maurer comments that the comfort level on a personal jet should be similar to that on a conventional business jet, but he believes it is impossible to marry high-altitude performance, comfort and low cost in light jet design. Manufacturers must go for two of these criteria and pursue the third as well as possible.

“We wanted to offer low cost, but a high level of comfort. We sacrificed high-altitude performance,” he says. “On shorter distances you usually don’t go up to 41,000 feet.”

So far three prototypes of the D-Jet have flown and Diamond is currently working on the shell for a fourth, which will be used for certification testing. Maurer estimates this will take about two years.

At this point Klapmeier is not ready to reveal timelines for bringing the SF50 to market. Cirrus will pursue certification more or less simultaneously around the globe. He expects certification to go relatively smoothly in countries where the company’s SR20 and SR22 piston models are already certified.

Having obtained certification for its Total Eclipse jet in the US in October, Eclipse Aerospace announced the following month certification in the UAE, along with orders for five aircraft that will be registered there.

Meanwhile, work on the Eclipse 550 is “on track and on schedule”, according to Holland. The new model, which uses the same airframe as the 500, is slated for delivery in 2013 at a price tag of $2.695 million.

Holland is confident that the 550 can take over from the Mustang as the leading model in the entry jet space. Cessna’s aircraft, which was certified in 2006, has used its head start to build up a commanding lead. Between January and September 32 aircraft were delivered, and the fourth quarter was in line with that, Rohlof says. “Now we’re pushing towards 400 deliveries.”

At the large end of the personal jet segment, the Phenom 100 established a new home in the US last year as Embraer built a business jet customer centre in Florida, where it now assembles the aircraft. The manufacturer expects to deliver 31 Phenom 100s from the new plant this year. According to Embraer, the type was the most delivered executive jet in 2010, with 100 units handed over to customers during that year.

The Phenom 100 is set to face competition from Cessna’s M2, formally launched in September. Deliveries are scheduled to begin in the second half of 2013. The company is not going public with its demand projections, but says the plane will fill a gap between the Mustang and the Citation CJ family. “Mustang owners were looking for more speed and a bigger cabin,” Rohloff says. “The M2 creates a step-up for Mustang customers and keeps them in the family.”

For the Eclipse 550, Holland foresees demand for 50-100 units per year. The company’s business model is sustainable at a rate of 50 a year, and output can be pushed up to 100 with the existing set-up, he says.

Cirrus intends to adjust its output to what the market will bear. “We have pent-up demand, which will drive production. Long term we will figure out where the market is going,” says Klapmeier. He estimates the company will end up turning out 150 planes a year, but adds: “It should be 400 or 500. We have to communicate the value of these airplanes to the world.”

Holland estimates that about 40% of Eclipse 550 production will go to US customers. Elsewhere, he sees potential in Europe, Latin America, Asia and the Middle East. For Cessna, North America has been the strongest market, followed by Europe. The company has beefed up its sales force in preparation for a strong international drive. Asia and Latin America are major targets, but other markets are also under review, Rohloff says.

“China is obviously the bullseye for a lot of aviation companies,” he says. However, he believes the country currently lacks the infrastructure necessary for a vigorous traffic in light jets.


Crosshead: Owner-pilots and beyond

Owner-pilots are the market segment all the new entrants are targeting initially, but they have higher ambitions further down the road. Holland reckons on sales in equal measure to people flying the Eclipse 550 and passengers happy to sit in the back.

For the Mustang, the majority of the clientele are small business owners, but there is also “a good population of personal ownership”, Rohloff says. “A lot of times the Mustang becomes a stablemate for larger aircraft, to be utilised for shorter trips,” he observes.

Opinions are divided on fractional ownership schemes. “Fractional ownership is all around us. There is no reason why it couldn’t apply to smaller planes,” comments McDougall. Likewise, Maurer regards the concept as viable for personal jets, pointing to its current use in both the piston and small jet aircraft segments.

Cessna has seen little evidence of this, however. “We don’t see the fractional ownership model as a significant market for the Mustang,” Rohloff comments.

Vincent also has his reservations. “Shared ownership tends to be a regional phenomenon because of local tax regimes,” he remarks.

NetJets likewise appears to have no appetite for personal jets. “We don’t currently have VLJs and there aren’t any plans to integrate them in the fleet as it stands,” comments a spokesperson.

Charter is widely viewed as a promising opportunity, however. Holland argues that it would make sense for charter operators to have personal jets in their fleet for short runs to complement their larger jets. Diamond Aircraft has already had expressions of interest from several charter operators in the D-Jet. “It’s a good way to draw potential customers into the charter segment,” Maurer says.

A few of Cessna’s customers are using the Mustang for charter activities. “We’re starting to see that increase,” Rohloff reports.

Klapmeier sees personal jets unlocking huge potential in the charter segment. “Part 135 charter operators have turned charter into a multi-thousand-dollar operation. A lot of people don’t consider charter because they can’t afford several thousand dollars. We turn this to 1,000-dollar charters,” he says.

Vincent is not prepared to consign the air taxi idea to history just yet. DayJet had a lot of potential but stumbled over its choice of aircraft, lack of critical mass and having too many planes on the ground, he says. “You need a high dispatch rate. I think it can work, but it needs a very reliable, proven airframe.”

Klapmeier describes himself as a strong believer in the air taxi concept. “With better scheduling software out there, air taxi is going to make sense,” he declares.

Not surprisingly, there is a lot of scepticism, too. “With air taxi, the hurdle you have to get over is the acquisition price of the aircraft. That’s challenging. There is no easy way,” McDougall says. “You’ve got to put rear ends on seats at fairly low cost. It’s very tough if you have strong competition from the charter market.”