Air taxis: Changing the way we fly

Two aging computer geeks are setting out to reinvent business travel. As Business 2.0 reports, it couldn't be happening a moment too soon.

By Erick Schonfeld, Business 2.0 Magazine

(Business 2.0 Magazine) -- Vern Raburn is gunning his 500-horsepower Ford Shelby GT on a high desert road behind the airport in Albuquerque, N.M. He hits a pothole but just presses harder on the gas. After all, he has struggled for nine years to get his small-jet startup off the ground--battling skeptics, losing an engine, and burning through nearly $750 million--and he's not about to slow down now.

This fall morning the 56-year-old CEO of Eclipse Aviation is leading his biggest customer, Ed Iacobucci, CEO of DayJet, to the hangar where finishing touches are being put on the first of 309 planes Iacobucci has ordered from Eclipse. Inside, 10 Eclipse 500 jets with white nose cones and green aluminum bodies stand like giant mechanical crickets waiting to be set free. They are all unpainted except for one plane with a white body, blue and yellow stripes, and a DayJet logo on its tail.

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JET-PROPELLED: Vern Raburn already has more than 2,500 orders (worth $4 billion) for his featherweight planes.
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PUTTING IT ALL TOGETHER: In Albuquerque most of Eclipse's 1,000 employees are busy assembling its first 54 jets.
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Aircraft fans gather to watch the arrival of the new jumbo Airbus jet. WJLA's Jay Kroff reports.
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Iacobucci walks up to the plane, which is considerably smaller than the Learjet he flew in on. In fact, the Eclipse weighs less than some SUVs, and in the configuration ordered by DayJet, it seats only five people--two pilots and three passengers--and has no toilet. But its compactness is what makes it special.

"This aircraft was from the beginning designed to be like a car," Raburn says, gesturing toward the leather bucket seats and interior designed by BMW. Iacobucci nods approvingly and points to the "experimental" designation on the plane's outside. "That can finally come off," he says with relief. The month before, after many delays, the FAA certified the plane.

Births are never easy. But Raburn and Iacobucci, two computer industry veterans, are about to deliver to the world a new model for the airline industry: the air taxi, which is to a commercial airplane what a shared car ride is to a Greyhound bus. Raburn is building the planes, and Iacobucci is going to use them to create point-to-point air service between small cities ignored by major airlines.

How big is that market? "The only thing you can say about predicting the size of new markets," Raburn says with a shrug, "is that you will be wrong." The forecast for PC sales in 1982 was 50,000 units, notes Iacobucci, a large Santa of a man with a short gray beard and a baseball cap. "Do you know what they actually shipped?" he asks. "Three million."

Planes are not PCs, but Eclipse already has more than 2,500 orders for its little jets, worth a total of nearly $4 billion. Sixty percent of the orders are earmarked for commercial customers, most of them air-taxi startups like DayJet. DayJet is the biggest, but Raburn says at least 18 others are in the works. Linear Air out of Boston has ordered 20, and Pogo (founded by former American Airlines (Charts) CEO Robert Crandall) is on the verge of ordering 50 for its air-taxi fleet. Most of the other startups are still flying under the radar.

"The advent of these small Eclipse jets will enable air taxis that will be very disruptive to the regional airlines," predicts Clayton Christensen, a Harvard Business School professor. If the air-taxi industry takes off, personal jet travel will no longer be just for CEOs and the very wealthy. It will be something many regular travelers can afford as well.

Of all the air-taxi startups, DayJet has the most radical business model. While the others are chartering entire planes, DayJet will be selling individual seats. "In the traditional airline model," Iacobucci explains, "you build a schedule and market the seats." With DayJet's air-taxi service, by contrast, "you build no schedule as long as you can, until the very last minute when you file your flight plans."

In other words, DayJet will move its flights around to meet the needs of its customers. "It's a real tyranny when you have a schedule," Raburn agrees.

Airlines have to fly no matter what. If a bad storm starts canceling flights, they have to make them up and still keep up the regular schedule. This can cause mayhem. (Ask JetBlue (Charts), which struggled to recover from one such storm this winter.) The airlines also need each plane to be 80 percent full just to break even.

With air taxis, Raburn says, "if you don't have any customers, you don't fly."

Many in the aviation industry doubt that this new model can work. "I'm not really clear what has changed that would make this viable," says Richard Aboulafia, chief analyst at aviation research firm the Teal Group. As DayJet accepts new reservations, it will need to constantly reconfigure its network of flights to fill them at the lowest possible cost and avoid flying empty legs.

But Iacobucci thinks he has that covered. "Every reservation is a disruption," he says. And he's spent the past five years developing software that will allow DayJet to operate in such a constant state of turbulence.

The math whiz's new puzzle

Iacobucci has a long track record of tackling tough problems, especially those involving the allocation of scarce resources. The son of a scientist, he studied applied math and operations research at Georgia Tech in the early 1970s. His first job after college was to computerize the manufacturing planning system for a division of Rockwell International that produced nuclear valves.

In 1979, IBM (Charts) recruited Iacobucci; he became the architect of its network management software and then headed the joint IBM-Microsoft design team that developed the OS/2 PC operating system. (Both jobs involved managing computer resources: the first on a network, the second inside a computer.)

Right after he left IBM, the partnership with Microsoft blew up and Redmond decided to develop Windows instead. But Bill Gates had so much respect for Iacobucci that Microsoft (Charts) (along with legendary venture capitalists John Doerr and Ben Rosen) wound up investing in his new startup, Citrix Systems.

Citrix's stock was a highflier, and Iacobucci bought his own $9 million Learjet to fly around the world. By mid-2000 the market had crashed and so had Citrix's valuation. Iacobucci had a falling-out with his board and left the company.

He still owned the Learjet, however. It was expensive to maintain, but once you get used to a corporate jet, there's no going back. So with his wife, Nancy, Iacobucci decided to start a jet charter service. Thinking he needed to scale up to make it a viable business, he bought a $24 million Challenger and eventually two more Learjets. "It didn't take very long to realize that it was a crummy business," he says. The assets were extremely expensive and were not being used efficiently.

The next year Iacobucci ran into Raburn at a conference where Raburn was talking about his new aircraft startup. They had crossed paths many times throughout their careers in the PC industry. Raburn had been one of Microsoft's first employees and during the mid-1990s managed all of the technology investments for his old friend Paul Allen. When he started Eclipse Aviation in 1998, one of his biggest investors was another old friend, Bill Gates.

Onstage at that conference, Raburn talked about how he wanted to help bring on the era of air taxis by creating the Model T of small jets. "I knew exactly what he meant," Iacobucci recalls. "He wanted to be able to make interchangeable parts in airplanes and be able to produce them faster."

By combining the world's smallest jet engine, all-digital avionics, and new manufacturing methods with outsourced parts fabrication, Raburn thought, he could deliver not just the cheapest jet on the market but also the cheapest one to operate. Afterward the two veterans of the PC wars struck up a conversation about how this plane could open up new markets for jet travel. They talked so long that Iacobucci offered Raburn a ride back home to Albuquerque on his Challenger. They landed at the airstrip across the parking lot from Eclipse headquarters, and Raburn gave Iacobucci a tour of the empty office and 70,000 square feet of hangar space.

On the flight home, Iacobucci got to thinking. The main reason jet chartering is such a tough business is that the planes fly half-empty most of the time. If he could charter individual seats, he could lower the cost enough to undercut any other charter and even begin to compete with business-class airfares. Doing that without a fixed schedule, though, on the whim of customers' various travel needs, presented a massive coordination challenge.

"So it changed in character from an aviation problem to a math and science problem," Iacobucci says. In other words, it was right up his alley.

The following year Iacobucci and his wife founded DayJet (then code-named Jetson Systems) and became Eclipse's largest customer. Iacobucci put down nearly $10 million in deposits to secure some of Eclipse's first planes, which Raburn assured him would be approved by the FAA and start coming off the assembly line in 2004.

Then their plans hit a snag.

A patch of turbulence

The engine in a plane is like the microprocessor in a computer: Everything else is built around it. It determines the plane's fuel consumption and thus its size, weight, range, and operating costs. The smaller you can make the engine and still maintain adequate thrust, the more efficient the plane will be.

The original Eclipse engine was an experimental design from Williams International, which started out building turbine engines for cruise missiles. But this time Williams had bitten off more than it could chew. It was trying to build a phenomenally complex engine at a smaller scale than ever before.

A test plane equipped with Williams engines flew once in August 2002--its last successful flight. "We never again had two engines working at the same time," Raburn says. During the next three months, there were 26 engine failures, ranging from fires to broken fan blades to melted combustors. (Williams acknowledges that it was behind schedule, but disputes the rest of this account.)

Williams's management and founder Sam Williams kept reassuring Raburn that all these problems would soon be fixed. But in November 2002, Raburn called together his senior executives and told them he no longer believed that Williams was capable of finishing the engine to the required specifications.

"We're in an airplane, and the engine is on fire," he told them. "We're going to die. It's that simple. The only alternative is to pull a Schwarzenegger, jump out of the airplane, and hope we find a parachute on the way down."

Everyone in the room voted to jump out of the airplane.

Now came the hard part. Raburn had to tell his board, which was stacked with Williams loyalists. It was a painful meeting. Raburn argued that starting from scratch with a new engine was Eclipse's only option. "Things would be OK if you just weren't so mean to Williams," one board member fired back.

But another director, biomedical billionaire Al Mann, came to Raburn's defense. The capital markets would close up as soon as news got out. Mann ended up putting in $50 million of his own and helped raise another $37 million.

"The company would have gone under," he says. Gates threw in more money as well, becoming the second-largest shareholder after Mann, who now owns about 30 percent of the company. (Raburn's stake was whittled down to about 2 percent.)

Next, Raburn had to call his customers and offer to return their deposits. "I think Vern was afraid to call me," Iacobucci says. The news was shocking, but Raburn softened the blow by inviting Iacobucci to help evaluate alternative engines. Of the 2,200 original customers who put down deposits before the Williams fiasco, only 60 asked for their money back.

Raburn ended up choosing a Pratt & Whitney (Charts) engine that changed the specs of the new jet. Instead of an $837,000 plane with a range of 1,300 nautical miles, the Eclipse 500 with the new engine today costs $1.5 million and has a shorter range of 1,150 nautical miles but is slightly faster.

The FAA certified the aircraft last September, and Eclipse hopes (barring any more delays) to get the agency's final approval on its manufacturing processes in the coming weeks. Eclipse already employs more than 1,000 people, most of them busy assembling the first 54 planes. "In some ways, getting the certification is like qualifying to get on the starting grid at Indianapolis," Raburn says. "It's not the end of the race. It's really the beginning."

Despite the 2,500-order backlog, there are still plenty of skeptics. "We are asked to believe there is something magic about the new light jets," says Aboulafia, a 20-year aircraft industry analyst. "I don't buy it."

Neither do the real captains of the aircraft industry. In the past year, Raburn has given factory tours to the heads of major aviation companies. Many were impressed, but ex-Cessna chairman Russ Meyer's comment was typical: "You are never going to sell as many as you think," he told Raburn. Cessna expects to sell no more than 150 of its competing FAA-approved Mustangs per year.

Aboulafia doubts that the entire market for this class of "very light jets" will be more than 300 planes a year. Raburn, however, is depending on higher volumes to reach profitability. He needs to sell at least 500 planes annually to break even, and he's confident he will get close to that this year. He thinks he can sell 750 planes next year, which would give Eclipse more than $1 billion in revenue and make it profitable. Raburn's ace in the hole is the air-taxi industry, and for that he's counting on Iacobucci.

Puddle-jumping for profit

In his Delray Beach, Fla., office with a hallway the length of a bowling alley, Iacobucci is itching to go. He's raised $68 million so far. His startup already employs about 100 people, and he plans to ramp up to 400 by year's end. Most of the new hires will be pilots, desk agents, and customer service representatives.

Behind him is a map of Florida marked with the first five DayPort cities: Boca Raton, Gainesville, Lakeland, Pensacola, and Tallahassee. Florida is an ideal testing ground for this type of service because of its good flying weather, the density and high income of its population, and the miserable commercial air routes within the state.

By the end of June, Iacobucci expects to have on-demand service to all five cities. He'll also offer slightly more expensive charter service to 80 DayStops across the state. To go to a DayStop, you'll have to charter the whole plane, while a trip to a DayPort will be charged on a per-seat basis. DayJet is starting with eight to 10 planes in five cities, but the plan is to grow quickly as service expands first through the Southeast--to Georgia, Alabama, Tennessee, South Carolina, North Carolina--and eventually nationwide.

Iacobucci knows he can't compete with the major airlines in their hub cities. Instead, his DayPorts will be in hard-to-get-to cities that either don't have commercial airline service or are so far out on the spokes of the system that it's easier to drive there than fly. For DayJet to succeed, Iacobucci believes, it needs to replace car trips.

But as Harvard professor Christensen says of the nature of disruptive technologies, a new technology opens up markets that could not be profitably pursued before. As the technology improves over time, Christensen says, it begins to compete more directly with the established industry players it is disrupting.

DayJet will not be for everyone. It's targeted initially at business travelers who take trips by car because they have no alternative. These are people who make more than $100,000 a year and would happily pay a little more if it meant getting home a day earlier. "It's about time," Iacobucci says, repeating DayJet's tagline. There's no onboard bathroom because the longest DayJet flight will be 600 miles (two hours).

How much a DayJet flight costs will depend on how flexible a traveler's schedule is. The price of each flight will range from $1 to $3 per mile. A 329-mile, one-hour flight between Boca Raton and Tallahassee, for example, will cost nearly $1,000 each way if the traveler can't give DayJet more than a 75-minute window to work with.

But if the customer agrees to fly anytime between, say, 7 a.m. and 1 p.m.--a six-hour window--the flight might cost only $329 each way. The wider the window, the more options DayJet has to meet the reservation.

Behind this reservation system is really complicated mathematics. It's basically a resource-allocation problem. Given a certain number of planes, routes, and existing reservations, what is the optimal way to reconfigure DayJet's network of air taxis to accommodate each new reservation request?

"We'll have to evaluate billions of options and come back to you with a yes or no answer in five seconds," Iacobucci says. Even a supercomputer would have trouble doing that.

Instead of a supercomputer, Iacobucci has two Russian mathematicians, Eugene Taits and Alex Khmelnitsky, stashed in a windowless room down the hall working on an algorithm they believe will solve the problem. At DayJet, everyone calls them the rocket scientists. Their algorithm quickly creates a best guess as to whether DayJet can meet a request and at what cost. As long as it comes up with an acceptable answer, it can offer a quote.

From the time a quote is given until just before the flight plans need to be filed, DayJet's system can keep trying to come up with an even better answer that lowers the total cost of the air-taxi network. On rare occasions, that might mean three different planes taking three passengers to the same place, if that's more efficient for the overall network.

To test this algorithm, Iacobucci is working with some operations research scientists at Georgia Tech who do have access to a supercomputer. It takes them 24 hours to come up with the same answers DayJet's optimization algorithm comes up with in a few seconds.

In another office farther down the hall (these have windows), Iacobucci keeps his ant farmers. They are complexity scientists, originally from the Santa Fe Institute, who have created a massive simulation of the entire U.S. transportation system. They've mapped travel patterns into 10-square-mile blocks, complete with income levels, demographics, historical driving patterns, airport drive times, and airline schedules and fares.

"It's like Sim City on steroids," Iacobucci says. After calibrating the simulation to match current travel behavior, the ant farmers introduce DayJet service in different cities and see how the simulated people react. That's how the DayPorts are selected.

Iacobucci expects the air-taxi industry to end up a lot bigger than just DayJet and Eclipse. As he grows his network, he knows that he'll eventually have to start adding larger planes to his fleet. He should have plenty to choose from: Adam Aircraft, Embraer's Phenom, and Honda (Charts) all plan to make six- to eight-passenger air taxis.

And despite his friendship with Raburn, Iacobucci is not wedded to Eclipse. "I've told Vern that the small airplane is his," he says, "unless someone comes up with a better one."

That someone may be Raburn himself. When asked whether Eclipse has begun designing a second plane, he lets slip, "Yup, only four people in the company know about it." (Well, not anymore.)

Pressed for details, he hems and haws, finally saying, "The ultimate personification of an airline is one person, one aircraft. So maybe the best air taxi is a two-person plane." After all, you do need a pilot. With the current Eclipse 500, Iacobucci calculates that he will lose money with one passenger and make money with two or three. But a two-person air taxi should make money on every flight.

Before that can happen, though, Iacobucci and Raburn have to prove that the first generation of air taxis can fly at a profit. It will come down to volume. Back at Eclipse HQ, Iacobucci figures it like this: "If the customers really come from cars, then I know there is a rosy road ahead, because there are a lot of them. If we end up just cherry-picking the same old guys in the zero-sum game of the charter operators, then we are in trouble."

Either they will create a new market or they won't. As Raburn looks around the hangar at his first batch of half-assembled flying machines, he seems to have no doubt that they will prove their critics wrong. "The debate," he says, "will cease to be a debate."

Erick Schonfeld (eschonfeld@business2.com) is an editor-at-large at Business 2.0 and writes the blog The Next Net. Top of page

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.