Kit Company Default

A reader has contacted me several times worrying about the possibility that an airplane kit company may default on an order he places. He thinks I should warn people that it could happen, and should do something about the possibility.

Well, consider yourself warned. There have been a number of airplane kit makers that took deposits, or even full payment, and then folded financially before delivering complete kits.

The most notorious default was probably the BD-5 fiasco in the 1970s. The company accepted fully paid orders for hundreds, maybe even thousands, of kits to build the tiny single-seat pusher. To my knowledge nobody received a complete kit for the BD-5. The most fundamental missing component was an engine and drive system.

Other kit makers also failed financially and left builders stranded with incomplete kits, or perhaps no hardware at all. Some of those companies even reorganized and continue in a restructured form, though a bankruptcy almost always leaves order holders from the original company in the lurch.

I hope none of this is news to somebody considering ordering an airplane kit. Even the largest kit maker is still a small company, and small companies have smaller capital cushions than large ones so risk of default is always at least a little greater.

But what really bothers this fellow is the policy of requiring a significant deposit, or even complete payment, with a kit order. He believes those policies should be somehow stopped, and that EAA should take the lead in abolishing the prepayment practices.

First of all, airplane kit manufacturers are small. They don’t have the resources to buy the materials, pay staff to fabricate a kit, and then put that kit in inventory and carry the cost until an order arrives. Unsold finished goods have brought down very large companies–particularly aviation companies–and would be the death knell for a kit maker.

Secondly, an airplane kit is actually a custom made product. Even the most popular kits offer options and having choices are a huge reason somebody builds their own airplane. As with any custom made product, you pay upfront. Go order a new sofa and the maker is going to want all or most of the money before he starts to build and upholster the couch to your personal and exact specifications. Paying upon order is the only way creators of truly custom products can survive financially.

But there are steps any prospective kit builder can take to minimize the chances that his kit investment will be lost.

As they say in the financial business, past performance is no guarantee of future returns, but it is the best guidance available most of the time. If a kit company is established and has delivered a large number of kits that’s a good indication you will get your order filled as promised. Given the instant response time of the web any default or failure to deliver as promised by a kit company will be news on the day it happens. There is no place to hide for a company that is stiffing its customers.

Another layer of protection is to pay by credit card if the kit maker offers that option. Major credits cards will usually protect the cardholder if a merchant fails to deliver as promised.

Of course you may be able to take the good old FOB delivery. Go to the kit maker’s loading dock, hand over cash or an equivalent, and drive away with your kit. The larger, more established kit makers are most likely to offer the FOB option.

If you are a pioneer and want to be one of the first in line for a new design from a newly formed company your risks are highest in every respect. The company’s financial status is unproven and there is no track record of satisfied customers to confirm its performance. You could try to construct an escrow payment but that can be legally complex, will involve lawyers in order to have confidence, and will generate costs that somebody has to cover.

Default by an airplane kit maker is not a trivial issue. But it is not one that has a concrete solution. The largest kit makers will always be small businesses, and a startup company, no matter what the business, will always have considerable risk.

As with any investment the best you can do is research the kit company as thoroughly as possible and decide for yourself the level of risk. After all, when and if you finish a kit airplane a placard will say in large letters for all to see that this airplane is an experiment. The experiment is not only the flying of the finished airplane. The kit maker is a big part of the experiment, along with your building techniques and maintenance after the airplane is flying. Experimental aircraft cannot offer a guarantee of any sort and still exist, so there are no guarantees available for that very first step of making an order.

This entry was posted in Mac Clellan's Left Seat Blog. Bookmark the permalink.

26 Responses to Kit Company Default

  1. Glade Montgomery says:

    Mac, while your comments are generally good, I take exception to your characterization of small companies as being inherently less capitalized than large ones. Financial cushion is a relative thing. My own small business maintains a level of capitalization (relative to its business volume and commitments) that would be the envy of most major corporations. And it’s not exceptional. Many small businesses are extremely well capitalized. Of course many are not, but that’s true of larger corporations, too.

    Perhaps I am sensitive, but as a small business entrepreneur, I resent a broad characterization of my kind as financial weaklings, relative to the business we are conducting. Many of us are robustly strong — indeed, much stronger (in relative terms) than most major corporations.

    I don’t have any direct information on it, but, based on the evident character of its founder and the way business there is conducted, I’d wager that Van’s Aircraft is likewise very well capitalized for its level of business. I suspect the chance of Van’s going “belly up” any time within the next few years is, well, close to zero (i.e., Vans is a much better bet than was General Motors’ a few years back, or any of many other Goliaths that have failed).

    • Mac says:

      Hi Glade,
      I don’t intend to pick on small businesses, particularly yours, whatever it is. But statistics don’t lie. Nine of 10 restaurants will go bust, and they are small businesses. VCs are happy if one or two out of 10 companies they invest in succeed. GM did go bankrupt, after 100 years. How long did it take DeLorean to do it? It’s simply an odds thing. As you note, there are many well capitalized small businesses, but there is a much larger number that aren’t.
      Mac Mc

      • Glade Montgomery says:

        Mac, you’re totally correct in the conclusion that small businesses have a higher failure rate, as compared to larger ones. It’s a valid point.

        Even my own business (it’s software) may have a lower likelihood of being around one-hundred years from now, as compared to, say, Ford Motor Company.

        That’s not really where my objection was targeted.

        I take some pride in the fact my own business is very, very well capitalized. We have on-hand cash reserves sufficient to handle all our outgo for, well, a year at least. This is without credit of any kind. There are a few major corporations that maybe could claim similarly, but it’s exceptional.

        You seemed to indicate, as a generality, that small businesses may have less capital setup (as a generality, and proportional to what they are doing) as compared to major corporations. You might be right in regard to averages even on this (I don’t know), but I wanted to make the point that some small businesses are very, very strong financially — indeed, very much stronger than most major corps (as a measure proportional to the business they are conducting; if you want to talk about total gross dollars, then, obviously, the major corps will trump).

      • Jim Butler says:

        Mac, you should reflect on the fact that EVERY business will either fail or be purchased by another business. There has never been, nor will there ever be, a business that stays in business in perpetuity.

  2. Boyd says:

    Mac,

    The “concrete solution” is…..caveat emptor!

  3. Jim Butler says:

    Mac I generally agree with all you have written. I have built two experimental kit aircraft and have been able to successfully navigate through those very hazardous waters.

    However, I take exception with your paragraph “Of course you may be able to take the good old FOB delivery. Go to the kit maker’s loading dock, hand over cash or an equivalent, and drive away with your kit. The larger, more established kit makers are most likely to offer the FOB option.” The term FOB is merely a specification of who pays for the freight costs. Assuming the kit manufacturer has the financial wherewithal to build the custom kit and assemble it in a box for the purchaser to pick up and pay for on his dock goes against the logic of the rest of your blog.

    • Bill Tomlinson says:

      My thoughts exactly.

    • Mac says:

      Hi Jim,
      The point I am trying to make is that some customers hesitate to hand over a cashier’s check, or money transfer for the full amount before the kit will be shipped. If they go to the loading dock they can have one hand on the check and the other on the kit itself so the “in between” period that worries them is covered. Maybe FOB is not the right term, but what I mean is that the money changes hands at the same instant the complete order is handed over.
      Mac Mc

  4. Grant Smith says:

    Good subject. Good content. I know it is not politically correnct to name names, but that is what is required here. Too many kit byers are first time customers and learn too late the risk involved. Your unnamed Bede example is a clasic for this. How many of his customers were first time kit buyers? I was at Oshkosh when Jim made his big BD5 push and although I had considerable aviation experiance and more that average EAA experiance I did not know the “Bede Story”. Fortunately, I was with a friend that informed me of the history.
    If we can not name the bad guys at least we can recommend the good guys. I will second the RV soundness although I have no first hand reliable knowledge. I would like to add Glastar who is perhaps second in size behind Vans and is my new part time employer. Although I have known about and loosly followed the Glasair history since the mid 70′s, I have been impressed with their present product and performance. Having said that I need to point out that, in the past Glasair has had its difficulties and reorginizations. Just another example of past performance not being an indicator of future performance. It is difficult and time consuming for a customer to determine the financial strength of a company.
    Therefore, I also second the message, “You all be carefull out there”.

    • Bill Tomlinson says:

      I have always thought – right since it happened – that Jim Bede was/is unfairly castigated. There was nothing wrong with the BD-5 airframe, which was Bede’s doing, the problem was with the engine, which was not Bede’s doing.

      The worst criticism that can be made against Bede was that he believed the engine manufacturer that they could reliably get 100 bhp out of an engine that weighed 75 lbs. Anybody who knows anything about piston engines – and Bede surely should have done – would realise that this is unrealistic.

      On the other hand, he WAS promised that level of performance by an engine manufacturer which was large and highly reputable .

      One last thought: the jet version of the BD-5 works just fine.

    • Sarah A says:

      The problem with getting the publications we read to provide this critical info is that it is bad for their business. They all need advertising dollars to exist (and EAA needs to rent space at Oshkosh) so if they start saying negative things about the prospects for buyers ever seeing the kit they paid for than the advertising dollars will go else where. This applies to Kitplanes as well as Sport Aviation so I am not just talking about EAA here. When you do see any coverage it is usually when things have progressed to the point where it is common knowledge, certinly among the internet groups that spring up around these designs. Maybe there is a liability concern on their part since a bad word or two can doom a company. The buyers too need to be smarter about what they pay out and keep in mind if it sounds too good to be true than it probably is. I have followed the EAB field for over 40 years now and have seen more “Flash in the Pan” companies come and go then I have fingers and toes to count. First rule is if they do not have a flying example with some significant time on it than it is too early to buy a kit. And never expect the aviation press to do your Due Diligence, it is not in their financial interest to find flaws in their advertisers products.

      • Dave Hurd says:

        Grant and Sarah make some valid points regarding company financial strength coupled with the inherent conflict of interest when an aviation writer pens a gushy story about the latest innovation that has sprung from even an established company, let alone a startup. I believe that is what Grant referenced when he mentioned Glasair’s “difficulties”. As a victim of those “difficulties”, and a chapter president, in the late 90′s I suggested to the Homebuilders Council President that EAA would be the perfect organization to set up a rating system for new designs.

        Similar in principle, to the financial rating services Moodys and Standard & Poors, it would not recommend a kit, or a manufacturer, simply use a risk matrix to evaluate the plusses and minuses of any new or modified design, along with the capability of the company to provide continued support. Then the potential builder could decide for himself/herself. A company using an escrow method would appear stronger than one financing the first builder’s kit with the deposit from the next builder, for example. One with a solid product history would get higher marks than a start up. A modified kit, that hadn’t been adequately proven would not show off as well as one with successful builder (not factory) experiences.

        Some builders like to be on the “bleeding edge” and would be comfortable with the risk of a new design or modification, just as some investors will dabble in what is euphemistically called “high yield” investments, AKA junk bonds. But at least a potential builder could get a better handle on what they’re getting into and whether the people they’re buying from are the real deal, or just some fly-by-night. Who more qualified to create such a matrix than EAA?

        It seemed to me that the well established kit manufacturers like Van’s would be thrilled with such a program, as I suspect they would rate very highly with their new offerings. And, in turn that would drive a more consistent quality approach to design, testing, and financial conduct within the industry. For example, you wouldn’t have to ask about escrow, it would become the standard for a company who wanted to be considered a player with a good rating. A company that diverted funds from builder support for development of a new project might see their financial standing slip.

        My suggestion fell on deaf ears at EAA HQ, probably because nobody wanted to take a chance on offending and advertiser or booth occupant at Airventure, which speaks to Sarah’s comment about the aviation press exercising due diligence.

        Too bad, because I believe such a system would improve potential builder confidence in the homebuilt market, and when people get into a project with their eyes open, they’re more likely to finish successfully. That’s good for the industry, aviation in general, and especially for EAA.

  5. Mike Massey says:

    Excellent common sense article.
    Any new company that is promising a much better value than anybody else is a very high risk. Any established company with good track record over time is a very low risk.
    Try to fix the problem with stupid regulations and you put any new company out of business before they get started. Even though we all benefit from our free enterprise, some people just do not understand the concept. Free and regulate do not work very well together. When free is gone, there will be nothing left worth regulating. If this guy can’t deal with the kit purchase, how will he ever deal with getting it built, and then making flight and weather decisions? What if there aren’t enough regulations to keep him safe?

  6. phil g says:

    I am wondering why Mac works for the EAA, this sure isn’t advocacy

    • Bill P. says:

      Providing prospective purchasers of new kit designs with suggestions for minimizing their risk of losing their investments is not advocacy? I don’t follow. Sounds like advocacy on behalf of pilots and prospective aircraft kit purchasers to me, and those are the people who comprise EAA.

      • Mike Massey says:

        The reason Mac works for the EAA is because he is one of the top (half dozen) aviation writers of our time. He is also afflicted with integrity. Very rare condition these days. Those of us who have been reading his work for the past 30 years know that he writes what he believes to be true regardless of advertiser considerations. He warned people about a certain very small and cheap new jet airplane that came out a decade ago promising to be cheaper and better than anything else on the market. He turned out to be exactly right. It cost his magazine a significant amount of advertising dollars because the the small jet makers managers got mad and did not advertise with his magazine. The small jet was too good to be true and they went out of business leaving many people strung out with deposits on unfinished airplanes. Yes it does seem strange in this age of dis-honesty for a writer to write an article like this. That my friends is what is wrong with journalism today and why I respect McClellan as a honest professional aviation journalist. God I wish we had people like him in the rest of the news media and in our government.

        • Bill P. says:

          Yes, I remember that episode well. Everywhere you turned in the aviation press you were assaulted by stories of how that new “very light jet” would soon fill the skies with aviation taxis, and how one particular company had placed an advance order for hundreds, or maybe even a thousand, of them. However, I never saw much about it in the magazine Mac was helming at the time, and wondered why. Only later did I learn it was apparently because he was not drinking the koolaid, and did not wish to have his mag readers be duped by the general hysteria, even at the cost of advertising dollars. I also respect that kind of integrity.

  7. brett hawkins says:

    As Mac and others pointed out, purchasing something from a company that is bootstrapping itself through cash flow from early kit sales is risky. There is usually an attractive price discount for such deals, but buyer beware. You may have the contractual right to sue for non-delivery, but little hope of collecting your judgment.

    Assuming your desired plane kit is already being sold, one alternative is to try to purchase the kit second hand from an existing builder who lost interest. Assuming it is a complete kit, and not “kit 1 of 4″, you get all the stuff at the time you hand over the bank check. I did that with a Glasair 1 kit back in 1994, completed it and am still flying it today.

    If the kit manufacturer has already moved on to bigger and better versions of your plane, you may have to play catch-up by purchasing updated hardware, parts and other components. Glasair was pretty good about helping Glasair I builders (take a look at a professionally finished IFR Glasair 1 RG!) integrate the updated stuff developed for later kits, but it wasn’t free.

  8. Thomas says:

    There is a better way to handle this, and larger airplane startups use it: the escrow account. Whether anyone actually offers – or uses – this approach in the kitbuilding world, I don’t know.

    Here’s how it works:

    The buyer pays up front, and the money goes in an escrow account (held by a third party, the escrow agent). Now, as long as the kitbuilder finishes the job, there is no worry that the customer won’t pay up when the kit is ready. This means the builder can borrow money (if necessary, with a home equity line or credit card loan) to build the kit, pay workers, etc., and can show the lender the order and the balance in the escrow account – it’s a secured order. Of course, borrowing costs have to be built into the kit price now, but on the other hand the buyer is getting insurance! If no-one will lend, the builder may have to take an equity investment from someone who believes in the builder and has money. In most cases, getting money is a lot easier when you have an order and the payment is already sitting in an escrow account!

    If the kit isn’t delivered, escrow doesn’t close, the buyer gets the money back. The kitbuilder is out of pocket for whatever got spent in the meantime, of course, but after all it was the kitbuilder who didn’t come through.

    If the kit is delivered, escrow closes, the kitbuilder gets paid and the buyer gets the kit.

    In the real world, there is the question of “what if the kit is shoddy/not what the buyer expected?” The escrow agent will need a set of rules specifying conditions for releasing the money: frankly, usually this will be “the buyer accepted the kit”, so if the buyer gets cold feet it’s not so great. One way to mitigate this is to structure the deal so that a portion of the deposit is nonrefundable. But, the problems are at least smaller and more manageable at this point.

    • Bill Tomlinson says:

      Mac does mention escrow in his original piece “You could try to construct an escrow payment but that can be legally complex, will involve lawyers in order to have confidence, and will generate costs that somebody has to cover”.

      I agree that the rule for releasing the money will likely be “the buyer accepted the kit”. I should think the kit would need to be seriously defective to justify refusing to accept it. If nothing else that gets round Mac’s problem of legal complexity.

      My other point would be that you don’t need to use an escrow agent. All you need do is open a deposit account at a bank, which requires both your signatures for a withdrawal.

      You deposit the money in this account at the beginning of the transaction then, once you have taken delivery of the kit, you hand the kit-supplier a withdrawal slip with your signature on it. He adds his signature and can then get the money.

  9. Rob Panish says:

    Hi Mac-

    You brought back some memories with this…I was one of those 70′s BD-5 builders. Having bought the kit from someone else, I didn’t suffer financially as much as some others, but it was still painful to sit back and wait for the Hirth (then Xenoah) ordeal to unfold as it did. Jim Bede actually had a pretty good design history with the BD-1 (Yankee) and the BD-4 as standouts in my mind, and he was an excellent salesman. Should we all have been wary? Sure. However I never looked back on the project with disdain. It was an excellent kit and I learned a lot about metal airframe construction. I was along for the ride.

    If I had 30 grand tied up in the promise of receiving a bunch of sheet metal (composites or whatever) today, it would probably be with a reputable company…one with a good track record and a bunch of happy builders. Still not a guarantee but then this little niche of the aviation world is unique…people following and living their dreams. If you see something you like and want to jump in feet first and support someone relatively new to producing homebuilt kits, then do your homework and go for it. Go for the ride…having been forewarned. Chances are good you may be hugely rewarded. Just understand the risks. The only guarantee is that you will be working among a really great group of people within the EAA.

    Rob

  10. Edwin Kleman says:

    This is what is exactly going on with Elio moters. They are taking 100 to 1000 dollar deposits on a three wheeler that will get 84 miles per gallon. People are giving them the money but the engine has not been developed yet!

  11. Frank Giger says:

    Actually, I inventoried all the kit materials on site and cut the check right there in Holden, MO when I bought my Nieuport 11 (some assembly required) from Aerodrome Airplanes – so getting it right there is an option.

    Then again, AA kits are really just the materials and hardware from the required supplies list, aluminum tubing and pre-cut gussets, so Robert Baslee can keep stock on hand without issue.

    Checking reputations and with previous customers is key, and with the Internet simply too easy to do.

    • Bill Tomlinson says:

      I think Mac was talking mainly about start-ups which, by definition, have no previous customers to check with.

      There is bound to be more financial risk when buying a new design, just as tere is bound to be more aerodynamic risk and more structural risk.

  12. Max Jorgensen says:

    Anyone have thoughts about .Tango 2 company?

  13. Stuart C. Ashley says:

    Hi Mac;
    The discussion has gotten a little off track. The main point is not whether small or large businesses are more likely to go out of business, or are more weakly or strongly financed. Nor is the issue that x out of ten restaurants go out of business. The point is: Did the restaurant or business take your money and then go out of business, without delivering an acceptable product. Nobody gets stiffed by a restaurant, because the payment follows the delivery. On the other hand, kit manufacturers can disappoint in several ways. They can default in whole, or in part (missing engines), they can deliver shoddy or dangerous product, or they can fail to make available the spare parts and advice they claim to stand ready to do. On the other hand, many are very ethical. Several years ago I put a $2500 deposit on a British engine in development called the Gemini. The money was to be held in escrow. After waiting about two years, I requested my money back. It was promptly returned. I have no complaints. They did the best they could, but never succeeded in producing a commercial product.
    Cheers! Stu.

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>