Part Two Of An Aero-News Interview With Eclipse CEO Vern
Raburn
By Kevin R.C. "Hognose" O'Brien
In the first part of
our groundbreaking interview with Eclipse Aviation founder and CEO
Vern Raburn, we dug up his flying roots, and talked about what he's
flying these days (a nice Aero Commander turboprop) and what he'd
rather be flying (his AT-6, due to make a reappearance in the
coming third part of the interview). In this segment, we get some
reminiscences about early Silicon Valley days -- which leads into
how he sees early errors by Apple Computer repeated in the aircraft
industry -- which gives some clues as to how Eclipse can sell a jet
for less that their competitors' costs. As we pick up the
interview, Vern has just finished talking about his flying
history.
Vern
Raburn: So, I've just been around airplanes my whole life.
I majored in aeronautical engineering, but the year I was going to
graduate was the year the billboard went up in Seattle, that said,
"Last one out, turn out the lights."
(laughter)
So I said, this is probably what you'd call a career-limiting
move, to go into aerospace. And I got sucked into computers. Which
is also fun and fantastic and wonderful... but for me, Eclipse is
both pursuit of a passion (I mean let's face it, who doesn't want
to combine their occupation with their avocation?) and it's a
chance to change things. And I'm another one of those really really
really really -- put another thirty "reallys" in there -- lucky
guys who's actually been able to be part of some things that really
changed how people live their lives, and being at Microsoft in the
extremely early days, and buying the most Apple 1s from the
Steves... I bought two, no, I should say I bought one third of the
Apple Ones produced. I still have one in my garage. And so I've
known the Steves forever -- and just getting to be part of that,
because, let's face it, it has changed the world.
Aero-News: It seems like it was a magical time
in a magical place.
Vern Raburn: It was a totally magical time. And
we learned -- first off, most of us were really young because,
people who were older were too smart to get involved. And so we
were just all the dumb young kids.
Aero-News: It was a tinkering thing?
Vern Raburn: It was a tinkering thing for a
long time, but it was also a group of people that didn't know what
they didn't know. And therefore, they weren't scared by what they
didn't know.
And we changed the world, quite literally. And once you've gone
through that process it's more addictive than marijuana and
whatever else put together.
Aero-News: So having changed the world once,
you want to do it again.
Vern Raburn: I'd like to try!
Aero-News: Well, I guess the quest is the
worthwhile thing, isn't it.
Vern Raburn: The experience is the journey.
Aero-News: Actually one of the Steves made that
into a billboard at one time.
Vern Raburn: Exactly, exactly.
Aero-News: And I drank his Koolaid and I've got
his laptop in the bag over there.
Vern Raburn: I've been a big -- you know, I've
had Macs and I've had PCs, and I've had Macs and PCs.
Unfortunately, the hubris that set into Apple -- Steve started it
and Scully really continued it -- and made it terrible. And then
what's his name, there...
Aero-News: The guy from IBM -- Spindler?
Vern Raburn: No, not Spindler, the guy after
that. This was the guy just before Steve came back. Everybody used
to call him Buzz Lightyear. And I can see his face, but I can't
remember his name. [Aero-News: We've since figured out that Vern
probably meant mid-90s Apple CEO Dr. Gil Amelio].
Those guys really drove that company into the ground. And
Jean-Louis Gassee really started it -- the sort of arrogant, "we're
Apple, and you're not." They had a great opportunity to really take
over the world but -- [Raburn shrugs] -- nyeah, that's the way
things happen sometimes.
Are Macs inherently better? In some ways. In other ways, naaah.
Having been around that... (tails off).
Aero-News: Every guy prefers the hammer he
bought himself.
Vern Raburn: That's exactly right. That's a
very good way of putting it. I completely and totally agree with
you.
And having been around that -- and frankly, watching this
industry [aviation] sort of self-destruct on arrogance also.
Self-destruct on getting addicted to the continual increase in
prices. Getting addicted to the continual decrease in volume. And
demonstrating repeatedly that there's no price elasticity in this
business, and therefore convincing themselves [of that]. Coming out
of a world where the definition of value change was to make the
airplane better and raise the price. To me, that's not a value
change!
That's just product development, improvement. So the real
opportunity we see is making the airplane better and DEcreasing the
price.
And certainly, with technology, and innovation -- and just with
changes in business models -- you can do that. I think we're
proving it.
Aero-News: And of course, the competition will
react in various ways to this...
Vern Raburn: At some point, you'd think!
At some point, you'd think they'd sort of finally acknowledge
that yeah, guess what? We are doing what we said we were going to
do.
(The national anthem starts playing outside, as the airshow gets
underway. From here on, the quality of our interview tape takes
some hits. And when a Merlin or big radial goes by, we both pause
and look up, as if we could see the plane through the tent).
Aero-News: I almost feel like a traitor,
continuing the interview while the Star-Spangled Banner is
playing... but since I spent 25 years in the Army, I figure the
country can owe me this one --
Vern Raburn: (laughs) We should go out for it,
but I agree.
Vern Raburn: -- knowing how little time
you've got. America can owe me, rather I can owe the country one
Star-Spangled Banner.
Now, you've run into all kinds of little, off-setting problems
and teething difficulties, going back to the initial disappointment
in the development schedule, from Williams...
Vern Raburn: Right.
Aero-News: They seem to be finally sorting that
motor out, now that it's too late.
Vern Raburn: Not the one that we were trying to
use. The one we were trying to use, the EJ 22, and the FJ 33 have
about as much in common as a piston engine and a turbine do.
They're radically different engines.
And the simple fact of the matter is that Williams just promised
far more than they even had the ability to think about, let alone
deliver. And that's why we ended up with such a disastrous
situation.
Aero-News: And the 610.
Vern Raburn: Well, the 33's a fine motor. It's
just a scaled version of the 44 and the 44's a 30-year-old motor
now. And if you go back and look in, like, the 1978 edition of
Jane's, you'll find the FJ44 in there.
That motor's been around a long, long, long, long time! It's
basically a very old turbine design. And the 33 is nothing more --
as Williams fully admits -- than a direct scale [down of the
44].
Which means, the specific fuel consumption... Although Williams
always makes great claims, the only airplane flying with it today
is the [Adam] 700, of course. [This interview took place on
April 15th --ed.]. The published numbers,
such as they are, to date, indicate that that engine has very,
very, very bad specific fuel consumption.
And we think when you see real airplanes with real motors on
'em, you're going to see a significant difference in operating
cost. Once again, this industry thinks that operating costs don't
matter. Operating costs are what you live and die by! So we've
worked very hard at trying to achieve that.
But, beyond the Williams debacle, the program has gone
remarkably well.
We're not just trying to build an airplane, though. That's the
primary thing that differentiates us, and I think once people come
out to Albuquerque and spend some time like Zoom has...
Aero-News: In your reality distortion field out
there?
Vern Raburn: I prefer to think of it as more
"reality" than "reality distortion."
The simple fact is, we've raised more money than all of the
other companies combined. And that hasn't gone just into developing
the aircraft, that's gone into developing a company, with all the
support structure, and all the manufacturing. Dale Klapmeier
[Cirrus Design co-founder and Executive Vice President] came
through about, oh gosh, three months ago. [About Feb 2005 -ed.]
And, you know, he just got quieter and quieter as he went through.
And finally, at the end, he said, "You know, I really expected to
see something that's kind of like what he had when we first got
certified. A big hangar, with a bunch of guys with some wooden
forms and things." He said, "You've already got the factory we're
still trying to build."
It takes a lot of money to do that, and it takes a lot of skill
to do that, and it takes a lot of dedication to do that. We've got
that kind of organization in place. We're doing more than just
building an airplane.
Aero-News: So. being that rare organization in
aviation that's NOT undercapitalized...
Vern Raburn: (laughs) Let's just say we're
ADEQUATELY capitalized. I wouldn't say OVERcapitalized.
Aero-News: I didn't say that, I said not
undercapitalized.
Vern Raburn: That's a fair statement.
Aero-News: Undercapitalized... we can walk down
the line here, and we can look at a lot of dreamers with brilliant
ideas that will never happen because --
Vern Raburn: Yeah, there's a lot of fallacies
in this business. The composite material systems have created some
mass illusions. In the sense that, it's so easy to get a composite
aircraft into the air, compared to an aluminum aircraft.
particularly compared to an aluminum aircraft that you're really
trying to optimize the shape, optimize the design.
Aero-News: Well, you're also certifying an
entirely new manufacturing process.
Vern Raburn: Exactly.
Aero-News: That's something nobody's
done...
Vern Raburn: Which has thousands of man-hours
of impact on how fast we put together the airplane! Which means,
that when we're building aircraft at rate we'll be building an
airplane in about four days. As opposed to the forty or sixty days
that it takes Cessna to build an airplane.
Aero-News: And so, is that the key to being
able to deliver at a lower price point?
Vern Raburn: There's a dozen things that are
"the key." I mean, that's ONE of them. Clearly, driving man-hours
out is one of them. Outsourcing everything the way we do. We don't
fabricate anything ourselves. So what that means is, because I can
build an airplane in four days, and because I don't pay for any
parts until I start building it, because I can deliver it to a
customer ten days after I take delivery of the parts, means that I
don't have any working capital costs.
And one of the big fallacies in general aviation is, that
engines are the most expensive thing. And engines are not, it's
overhead. It's working capital that is the biggest single cost in
the airplane. It's overhead that you want to reduce.
So when you go through that whole process, and you go through
the way we've done electronics, and you go through the way we've
done systems in the aircraft, and you go through every single
aspect of it, that turns out to be the real issue, how we can get
the price where we are.
It's not just one thing. You can't do just one thing, you have
to do it all.
Aero-News: Some of the components that go in
the airplane, the prices are not very elastic --
Vern Raburn: Actually, they are! if you have
enough volume.
Aero-News: That was the next part of my
question. It doesn't seem like they've been responsive to
[volume]... but your view is, your suppliers have been responsive
to your volume?
Vern Raburn: We have worked very hard to find
those suppliers, around the WORLD. We have more international
suppliers than any other general aviation company. All the way from
the wing being built entirely in Japan, to the nose being built in
Santiago, Chile, to the entire empennage being built in England, to
landing gear being built in Italy. We have gone to the best -- and
the least expensive -- and the best quality suppliers we can find
throughout the world.
Yeah, we go and we talk to -- oh, I won't name names -- but you
say you're going to buy [rest of sentence lost to airshow noise].
Well, there was one component where we were going to TRIPLE their
production. In a year. In fact, we were going to almost quadruple
their production. And their response was, "OK, we'll give you an
additional three percent discount for that." It was primarily a
piece of electronics. And I know how electronics respond to
volume.
Aero-News: The iterative cost for making more
quantity is minimal... it's the setup and tooling.
Vern Raburn: It's not even the iterative cost,
the real cost savings is the overhead absorption. If you can run
more through your same factory, it's spread....
Aero-News: Your factory's not idle, your
tooling's not idle, you're making money with it.
Vern Raburn: Exactly right.
Aero-News: It's the same thing as if you own an
airplane [for commercial purposes]. If it's in the air, you're
making money. If it's sitting on the ramp, you're not.
Vern Raburn: Absolutely. Fixed costs versus
direct costs. In aircraft, we call it direct costs, but it's really
variable costs. And the more your variable costs are, the more your
fixed costs get amortized over a larger base. Therefore it comes
down per hour.
Aero-News: Your unit price, then, should
respond to that. It should respond more than a piddling three
percent.
Vern Raburn: Absolutely.
Aero-News: I daresay you found another
supplier, gave them an economic education and the facts of
life...
Vern Raburn: (grinning) Bingo.
Actually, most of 'em -- as we moved more and more outside
traditional aerospace industry suppliers, what we're finding is,
it's not all that difficult to find companies that understand. The
aerospace industry supplier base is really extraordinarily
antiquated. Antiquated in the sense that it doesn't understand
price elasticity, it doesn't understand demand...
Aero-News: It's been sheltered and it's
ossified.
Vern Raburn: And I would add one more thing:
it's gotten addicted to cost-plus contracting. And cost-plus
contracting is just evil. It's just... [momentarily tongue-tied
with indignation]
Aero-News: It's a ticket to throw money
away.
Vern Raburn: It's morally corrupt! It has no
INTEGRITY. Because it's exactly a ticket to... it rewards schedule
slips, it rewards inefficiency. It rewards price increases because
what you do, is you make all your money on the plus of cost-plus.
You're completely incented to increase the cost, because the plus
is always a percentage of the cost. And therefore -- why in the
world should you not give cars to every executive?
Aero-News: What's your motivation to run a lean
company? None.
Vern Raburn: Absolutely. And, let's face it,
certainly in the last thirty years, the primary engine of
innovation in aviation has been the Department of Defense. For
military contracting, which is all cost-plus, and that flows, from
the Boeings, from the Lockheeds, from the Northrops, all the way
down to the smallest vendor who's got thirty employees. Cause
everybody does it the same way. They all do it on a cost-plus basis
because the whole organization runs on a cost-plus basis.
And everyone's incented to just be inefficient. They're rewarded
for it.
Aero-News: But that also drives the mechanism
whereby unit costs go up and up and up, and quantity purchases go
down and down and down...
Vern Raburn: Absolutely. It's called price
elasticity.
Aero-News: And it becomes a spiral. It feeds
itself. Because the unit price got so high that people can't
justify buying so many. And that reduction in unit deliveries
drives [unit] costs higher, as the fixed costs are imposed on a
smaller base....
Vern Raburn: You ultimately reach a point of
sort of minimal stability. Meaning, you can build thirty or forty
airplanes a year, year in and year out, and you can keep raising
the price. It doesn't matter how inefficient you become, there's
always thirty or forty idiots that'll go out and buy one.
Aero-News: Or people who need it so badly
that...
Vern Raburn: ...they don't care about price.
Although -- the vast majority of aircraft in production today with,
really, just a couple of exceptions -- and this is where I think
Dale and Alan [Klapmeier] have done such a good job at Cirrus --
the vast majority of the aircraft that are out there today, you
always have the choice of a used aircraft. And let's face it. For,
rarely more than 10% of the cost of a new aircraft you can make a
used aircraft virtually new. With the exception of these fatigue
and corrosion problems, which have their own set of issues. Which
is going to start changing the situation.
What we have today is an economic stasis. Meaning, there's no
incentive to buy anything new because everything new is just
"expensive, and the same." You know, the '64 Mustang versus the
2006 Mustang, are two radically different animals.
Aero-News: Absolutely. [You see the interviewer
catching Vern's favorite term of emphatic agreement].
In every aspect. Safety, economics, comfort, operating,
performance, every single aspect. So why in the world would you
want a '64 Mustang? Well, if you like to drive an antique car in a
July Fourth or Labor Day parade, then you could have a '64
Mustang.
Aero-News: For what the thing was originally
sold for, the newer one is the superior product.
Vern Raburn: RIght. And what's the difference
between an '82 182, and a 2006 182? Cessna will tell you it's a
whole lot of things, but let's face it...
Aero-News: It's got a bunch of manufacturing,
interior quality, and systems upgrades, that were forced on it by
competition from people like Alan and Dale, and Bing Lantis.
Because otherwise, if it had not been for the emergence of those
guys from the kit, sport, [industry] into the manufactured aircraft
industry, Cessna, Mooney, Piper, would all have you staring at
steam gages.
Vern Raburn: (chuckling): Right.
Aero-News: And they're all so proud of their
glass panel, like it was their own idea.
Vern Raburn: And that was driven more by guys
like me! I mean, Gary Burrell, and Min [Dr Min Kao, cofounder with
Burrell of Garmin], and those guys, Dan Schwinn [Avidyne -- watch
for his interview in this series], Gordon [Pratt] at Chelton, these
are all guys that -- we share the same sort of DNA.
We keep saying, "There's gotta be a better way. There's gotta be
something that's better here."
Aero-News: Right. We haven't had any
development since we came up with these two lines of an ILS, back
in 1940.
Vern Raburn: Absolutely, absolutely.
So, we just see lots and lots and lots of opportunity. I think
we're proving it now, you know?