What started as a bad week for Wall Street has ended as an even worse week for DayJet and possibly for VLJ manufacturers counting upon a robust per-seat, on-demand air taxi business. DayJet’s website says that it “has discontinued its jet services and cancelled all future flights as a result of the company’s inability to arrange critical financing in the midst of the current global financial crisis.” While hardly a death knell...
for VLJ based per-seat, on-demand air taxi services or for light jet manufacturers, it is evidence that the bubble of irrational exuberance around VLJs and the air taxi industry has burst and that both are coming back down to earth.
Bubbles in aviation are not new. The post World War II boom and bust of aviation companies is a great example. In 1946, GA manufacturers sold 35,000 aircraft. But in 1949, sales leveled out at 3,405 units, a 90% drop in shipments in just 3 years, and many companies went out of business.
The launch of the very light jet market was vaguely reminiscent of the disk drive market in 1983. At that time, about 40, mostly new, disk drive companies had business plans to acquire a 25% market share. Obviously that wasn’t possible, and the vast majority of these companies folded.
Fast forward to late 2004. Buried at the end of a report I wrote for a hedge fund company was a note on the VJL market. I listed ten manufacturers with announced plans to build VLJs and another four with specialty and kit jets. Aircraft on the list included: Adam Aircraft A700, Aerostar FJ-100, Avocet ProJet, Cessna Mustang, Chichester-Miles Leopard Six, Diamond D-Jet, Eclipse 500, HondaJet, Safire Jet and TAM-AIR Twinjet. The four specialty jets were the ATJ Javelin, Viper, Excel Jet Limited Sport Jet kit and Maverick Jet. I won’t take the time to update you on each of them, but a number of these companies have already fallen by the wayside.
At the time, there were widely divergent estimates of the market size for VLJs. The biggest swing factor was the projected purchases by on-demand air taxi operators, since they didn’t yet exist. However, some forecasts called for fully half of the VLJ demand to come from these operators. In fact, the press has often reported that DayJet’s orders for 1300 aircraft represented fully 50% of the backlog for Eclipse.
DayJet was certainly the largest VLJ based per-seat, on-demand air taxi company. Until recently, they were operating a fleet of 28 Eclipse 500 jets serving 60 airports across the southeast. In 2007, they announced an influx of $50 million with their third round of private financing. However a year later, in May, 2008, they announced difficulty in raising an additional $40 million and laid off 100 of their 260 employees.
The company claims that its model was working well, with more than 2400 customers using the service. Like any network however, an on-demand air taxi system becomes more attractive as more nodes or airports are added, attracting even more customers. Unfortunately, DayJet ran out of money before they could add enough aircraft and destinations to break even.
Which is not to say that on-demand air taxi services cannot work. SATSAir Air Taxi operates in the same region as DayJet, but utilizes a fleet of Cirrus SR22s instead. In business since 2004, they placed firm orders for 50 SR22s with options for 50 more. Currently the FAA database shows that they own 22 SR22s, but they may have more in service. At a total acquisition cost of about $45 million, they’ve been able to create a fleet for less than half the per unit cost of the DayJet fleet. Moreover, with just one engine to feed, their operating cost-per-mile is significantly lower.
At AirVenture 2008, they announced that they will use the Cirrus Design Vision SJ50 light jet in the future. This single engine jet will let customers fly farther while still costing less per seat mile than the twin engine Eclipse 500s used by DayJet. The on-demand air taxi industry is still in its infancy, but one key lesson is clear: operators need to create a large network (by growing organically or through partnerships) as quickly and inexpensively as possible.
As for VLJ companies, Eclipse clearly stands to lose the most from the loss of DayJet. Their original low, $895,000 price point was predicated upon the economies of scale that would come from building 4-500 jets per year, many of them destined for the on-demand air taxi industry. With lower volumes, their prices were destined to rise. In May, 2008, they announced a price increase to $2.15 million.
By contrast, some suggested at the time that Cessna’s introductory price for the Mustang jet, announced at $2.295 million in 2002, seemed high. With the passage of time, it’s clear that they had a more realistic expectation of the sales volumes and costs for a new light jet.
Of all the light jets, Cessna and Eclipse have a great head start and will likely be around for the long haul. What’s unclear though is whether Eclipse will be the company selling the 500. Late last year, Cessna acquired Columbia for far less than the cost of designing and certifying a new aircraft. If Eclipse were to have financial difficulty, their designs would most likely survive, though with a different logo on the planes. There’s bound to be more wreckage along the VLJ highway and there’s no way of knowing which companies will end up along the side of the road. What is clear is that a few strong players will emerge, but their sales volumes will be less than the heady expectations of only a few months ago. Irrational exuberance strikes again.
Comments