Part Two Of An Aero-News Interview With Eclipse CEO Vern Raburn

By Kevin R.C. "Hognose" O'Brien

• Read Part One

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?

FMI: www.eclipseaviation.com