Innovation, funding woes mark rise and fall of Adam

 - July 7, 2008, 6:35 AM

In 1998, entrepreneur George Frederick “Rick” Adam and attorney John Knudsen began a journey that few dare to try and even fewer succeed at, launching a new aircraft manufacturing company from scratch and without having previously worked in the aviation manufacturing industry. The company that they started–Adam Aircraft Industries–made it through FAA certification of its first airplane, the piston-powered A500 centerline-thrust twin, but filed for Chapter 11 bankruptcy before the next airplane in the lineup, the A700 very light jet, could achieve certification.

Between the company’s 1998 founding and the bankruptcy on Feb. 15, 2008, Adam Aircraft endured the typical ups and downs associated with any aviation concern, especially the process of raising enough money to see its airplanes through certification and volume production.

The Adam Aircraft story isn’t over, however, as a group of Russian investors stepped in and bought Adam Aircraft’s assets on April 9, with plans to complete certification of the A700 and possibly finish what the company started with the A500. The following is based on historical records and interviews with former employees and members of the team working with the Russian investors on resurrecting Adam Aircraft.

In 1998, while still running New Era of Networks, the company he founded and took public, Rick Adam and John Knudsen started Adam Aircraft and by 2000 built a headquarters and manufacturing facility at Centennial Airport in Englewood, Colo. At the time the general aviation industry was rebounding. The General Aviation Revitalization Act had passed in 1996, limiting manufacturer liability for older aircraft, and while Cessna restarted its piston-airplane production line and Piper and Raytheon Aircraft kept building airplanes, they were “just building the same stuff,” Knudsen said.

NASA was prodding the industry to build more modern products, and a new company called Cirrus Design certified its first airplane, the SR20, in 1998. Even the FAA put on its promotional hat, with a goal of encouraging innovation that would lead to safer aircraft.

“Rick and I had been talking about this, and I think what was really driving [our plans] was there’s nothing new in the industry,” said Knudsen. Adam hired Knudsen to do some background exploration, and soon Knudsen was discussing ideas with his friend Burt Rutan at Scaled Composites, which offered to build a prototype. He and Adam considered what they were about to get into, launching an entirely new aircraft manufacturing company from scratch without any manufacturing experience between the two of them, and, he said, “We looked at it and said, ‘This shouldn’t be that hard.’”

A Market for a New Configuration

Adam Aircraft contracted with Scaled Composites to design and build the prototype for what would become the A500 piston twin. Adam and Knudsen already favored a push-pull configuration, with engines mounted on the front and back of the fuselage instead of on the wings, and all-composite construction. In a January 2003 interview, Adam explained why he liked the push-pull design: “A guy flying a 30-year-old asymmetrical twin with old engines in it, in my view, is playing Russian roulette every time he takes off. If you lose an engine in our airplane you don’t even put your feet on the rudders; they just sit on the floor.”

The M309 proof-of-concept prototype featured a center fuselage with engines on the nose and on the aft fuselage, and the fuselage attached only to the wing. Two booms mounted farther outboard on the wing led aft to the vertical fins, capped by a horizontal stabilizer. The main landing gear retracts into the booms. The design captured both Rutan’s predilection for unconventional layouts and Adam’s desire to provide something different from piston twins already offered, even though only two companies–Piper and Raytheon Aircraft–were manufacturing piston twins at the time. Cessna had successfully tried the fore-and-aft engine configuration before with the Skymaster and built nearly 3,000, but production ended in 1982.

The M309, which closely resembles the A500, first flew on March 21, 2000. The M309 and A500, however, were just preludes to the A700 twin-engine very light jet. The A700 was one of a crowd of VLJs, but with two engines mounted to the lengthened and still roomy aft fuselage, it remained a standout compared to the rest of the more conventional-looking VLJs, most of which look like scaled-down versions of ordinary business jets. The A700 was supposed to be an easy step-up for the A500 owner, with similar handling characteristics and the simpler operation of jet engines in place of complicated piston engines.

In 2001, Adam Aircraft applied to the FAA for the A500 type certificate, and S/N 1 first flew on July 11, 2002. While Adam had projected A500 FAA certification in mid-2003, the A500 did not achieve certification until May 11, 2005. This was still a significant accomplishment, but also it was no ordinary certification.

Adam Aircraft did at one point ask the FAA if it would grant the A500 a provisional type certificate, according to Knudsen. Provisional type certificates are an FAA acknowledgement that the aircraft is eventually going to meet the full certification requirements. Some manufacturers have used provisional certification to show investors that they have met certification milestones, which helps keep the money flowing, but the FAA’s intent in creating the provisional type certificate was to allow airlines to complete testing on new aircraft before placing them into service. Gulfstream obtained provisional certification for the GV, and Cessna and Raytheon Aircraft have also used this process. Eclipse Aviation proudly proclaimed that its model 500 VLJ was “FAA certified” at EAA AirVenture in July 2006, but that was also a provisional type certificate, and the FAA didn’t issue the actual type certificate until Sept. 30, 2006.

Ultimately Adam Aircraft decided against trying to get a provisional type certificate for the A500. Interestingly, the FAA said, according to Knudsen, “We don’t want to do provisionals any more.” This was more than a year before then-FAA Administrator Marion Blakey handed Eclipse Aviation president and CEO Vern Raburn the provisional type certificate for the Eclipse 500 at EAA AirVenture 2006, saying, “On behalf of the Federal Aviation Administration, I have what may be the most significant piece of paper in America today, because it’s opening the door wide to the next generation of aviation.”

Adam obtained a limited type certificate, paving the way, it turned out, for what Eclipse Aviation did more than a year later when the EA-500 VLJ was certified without full avionics and flight envelope functionality. The A500 in its initially certified state was limited to unpressurized flight to a maximum of 12,500 feet and day VFR. The air-conditioning and pressurization systems had yet to be certified, the A500 still needed flight into known icing approval and the airplane had too much unusable fuel. There were many IOUs that would need to be fixed to make the A500 useful for buyers.

The problem for Adam, according to Knudsen, was the age-old battle to raise money while at the same time showing evidence of progress to persuade the financers that their money was well spent. “From an investor’s standpoint a type certificate is such a huge milestone,” he said. “The reason you do it is primarily driven by the need to raise money and demonstrate that you can actually get a type certificate. In hindsight it’s probably more efficient to do all the certification as one package.” At the time, everyone thought it would be easy to add the remaining features to the A500, but it turned out to be much more difficult because a lot of work had to get redone and test pilots had to fly more expensive tests.

Adam Aircraft did deliver A500s in varying states of completion. “It helped us because we were able to run a startup production line,” Knudsen said, “so we got some great experience in building airplanes and delivering them. We had plenty of customers who were willing to take an airplane without pressurization as long as it would be installed down the road. What you don’t [fully appreciate] is that by doing that, you then have to bring those airplanes back and retrofit them. We kind of underestimated how much work goes into the follow-on amendments to the type certificate.”

In September 2006, Adam Aircraft reached another major milestone, FAA production certification for the A500. This meant that Adam Aircraft employees could oversee the final approval process instead of FAA inspectors, greatly improving production efficiency. Unfortunately, assembly of each A500 was taking way too long, as many as 60,000 man-hours. For a new manufacturer, getting costs down so that each airplane costs less to make than it sells for–$1.2 million in the A500’s case–is vital. “We were going through the learning curve,” said Jan D’Angelo, former director of international and fleet sales. “To get into a reasonable production rate of maybe 24 to 36 airplanes per year, we needed to figure out how to get the build hours out of this airplane.”

The A700 Program

As the A500 was progressing, Adam Aircraft launched the A700 very light jet, an airplane that would prove much more popular in the marketplace than the A500.

The A700 was formally launched on Oct. 21, 2002, as “an affordable business jet [that] fills a huge void in the aviation market,” according to an Adam Aircraft press release. For a price tag of $1.995 million, the airplane was projected to have a top speed of 340 knots and a maximum altitude of 41,000 feet. One feature that set the A700 apart from competing VLJs was the roomy cabin, with space for six to eight passengers and space enough for a “full aft lavatory.” Adam Aircraft said it expected first flight of the A700 in the second half of 2003 and first deliveries late the following year. The airplane flew on schedule–on July 27, 2003–but the certification plans turned out to be ambitious.

The 50-minute first flight was textbook smooth, with a climb to 15,000 feet, stability and slow flight and systems tests and a gentle landing back at Centennial Airport. This A700–powered by the Williams International FJ33 turbofan– was a preproduction prototype; later versions would be built to conform to the final aerodynamic design and systems architecture, but this first airplane was never a certifiable aircraft, nor was it meant to be.

There is a misconception that Adam Aircraft naively sought to certify the A700 as a derivative of the A500. If the FAA allowed this, the A700 would not need to get an entirely new type certificate. Obtaining a derivative type certificate is far less costly and time-consuming than certifying a new airplane. All Gulfstream large-cabin jets through the G550, for example, are derivatives of earlier Gulfstreams, certified as amendments to the GII type certificate. The G650 will be Gulfstream’s first new large-cabin type certificate in 40 years.

It turns out that there is some truth to that belief, but it’s not as though Adam Aircraft bet the company on the A700 type certificate being an amendment to
the A500’s. “We made the inquiry [to the FAA],” said Knudsen. “I’d asked them, ‘Is it possible to do this?’ But there were just too many differences going from a propeller airplane to a jet. It was probably going to be harder to do that than to start a type certificate program for the A700.”

A700 S/N 2 was nearer to conforming to the final production and design configuration and flew in February 2006. By the time that airplane joined the flight-test program, Adam Aircraft had reset the certification projection and expected FAA approval by the end of 2006. The company had sold more than 250 A700s by late 2006, including fleet sales to air taxi companies such as MagnumJet (101 jets) and Pogo (75 jets for $150 million, but this order was later cancelled) and Nexusjets in Europe (96). In May 2007, Hainan Zhong Hang Tai General Aviation Airlines ordered 50 A700s. The price later climbed to $2.45 million (January 2008 $).

D’Angelo was a key player in the fleet sales of the A700, and he always felt that he could have sold a lot more A700s if there hadn’t been a management shake-up at Adam Aircraft. At the peak of A700 activity, D’Angelo figured the order book had signatures for 350 jets. The A500 order book topped out at 70 airplanes, but that number was likely much lower by the time the bankruptcy took place because some buyers were able to cancel orders and get their deposits back.

Joe Walker took over as president of Adam Aircraft on March 23, 2004, replacing cofounder Knudsen, who remained general counsel. Walker had joined the Adam Aircraft board of directors in 2003; his previous job was senior v-p of worldwide sales for Gulfstream Aerospace.

Walker’s strengths, according to D’Angelo, were well suited to marketing and sales and not so much to the complex challenge of creating an efficiently reproducible aircraft. Knudsen noted that “by the time [Walker] got really involved, most of the certification work [on the A500] was done, and we were trying to get manufacturing up and running. You think type certification is a huge accomplishment, but it’s more like your first baby step. The production piece is the toughest part of the whole process.” Walker eventually either resigned or was replaced, depending on who you ask. (Walker didn’t respond to AIN’s requests for an interview for this story.) “Joe was very talented in the marketing/sales arena,” D’Angelo said, “but not so much in production, which is why he got replaced.”

When the FAA awarded Adam a production certificate for the A500 on Sept. 19, 2006, Rick Adam said at the time, “An FAA production certificate represents a major step toward the Adam Aircraft goal of delivering six A500s every month.” To accomplish this, some serious changes would need to occur.

Walker left Adam Aircraft abruptly in February 2007, coincident with the announcement on February 12 that the company hired Duncan Koerbel as president and appointed John Wolf to the board of directors. The Adam Aircraft press release said that Walker would “continue on as a consultant.”

Unlike the original management team, Wolf and Koerbel had plenty of experience in aerospace manufacturing. Wolf is credited with turning around the MD-80 program when it was suffering serious production problems at McDonnell Douglas’s Long Beach, Calif., factory and Koerbel is widely regarded as a brilliant aerospace engineer. However, one project that the two men worked on, the attempt to turn Fairchild Dornier into a powerhouse regional jetliner manufacturer, ended in bankruptcy on April 3, 2002.

D’Angelo wasn’t happy with the new management’s effect on his sales efforts. “You really couldn’t do anything unless they were involved,” he said. “And when they got involved, typically they started to take over the process, and then things didn’t happen as quickly.”

But something, at least, was finally happening on the production side. Koerbel launched a strenuous effort to reduce the amount of time needed to build an Adam A500 or A700, dubbing the program “make production fly.” This eventually cut A500 production man-hours by about half.

On June 19, 2007, Adam Aircraft announced that it had secured additional funding, in the form of a senior secured credit facility arranged by Morgan Stanley Senior Funding. This basically meant that a group of investors joined with Morgan Stanley to loan money to Adam Aircraft, money that was needed, according to the airframer, “to accelerate the production rate of the FAA-certified A500 piston twin and complete the certification of the A700 VLJ and bring that aircraft to full-rate production.”

Wolf and Koerbel accelerated spending, hiring hundreds of new workers, buying new manufacturing equipment and preparing the company to achieve an ambitious goal of producing 18 airplanes per month. One example of the new tooling was a long pneumatic clamping fixture that cut wing assembly time to five from 30 days, eliminating the time-consuming hand-gluing of composite ribs to skins and the spar.

The changes that Koerbel implemented were “absolutely appropriate,” D’Angelo said. “The build time on the A500 was extraordinary. There’s no way we could make any money on that airplane unless the price went up dramatically. Under the Rick and Joe regime, for whatever reason, I think there was reluctance to slow things down and go back upstream and take the time necessary to remedy the situation. The parts were coming out of the factory floor for assembly and they weren’t fitting, and we had an extraordinary amount of labor out on the floor just sitting around sanding pieces to get them to fit in accordance with the drawings.

“Once we got parts built and figured out that we’re going to have to make changes, we weren’t going back upstream quickly or at all. The guys are saying, ‘It’s frustrating, my guys are supposed to be putting parts together and building an airplane, instead they’re having to modify stuff on the go, because we’re not getting things that fit well together.’

“The ‘make production fly’ initiative was to clean up all of that, and we were actually making some pretty good progress. We were seeing a serious burn down on labor hours for the airplanes. We were just starting to get results of these changes when the company shut down. But the trend was good.”

However, the rate at which Adam Aircraft was spending money was outpacing the limited amount of incoming revenue and available funding. High-rate production was planned to begin around January 2008, and Koerbel’s team hired the people needed to make that happen, according to Knudsen. But, he added, “The production processes were lagging by probably three to six months behind where we wanted to be. In hindsight, we hired more people before we needed them, but it’s tough to do. You look at where you think you’re going to be on a plan, and hiring people is a pretty long lead time, to get that pipeline going.”

Ultimately, said Knudsen, the make production fly “plan was good, and the idea was what we needed. The execution obviously didn’t work as planned. We didn’t have the funds secured to get through it.”

On the flight test and development front, progress continued. S/N 003, the first fully conforming A700, flew on April 9, 2007, followed by S/N 004 on August 24. “This is another significant milestone in the effort of certifying the A700,” said Tom Bisges, senior vice president of engineering.

“Duncan [Koerbel] absolutely put the focus on production,” Bisges said. “We were on a path changing from hand-building airplanes to a standard production line. From an employee standpoint, putting a flag for us to rally around, it was a good approach. We had a lot of challenges to overcome.”

In retrospect, Bisges sees that Adam Aircraft might have tried to achieve too much with limited resources. Adding so many new people, for example, to ramp up the “make production fly” program caused a dilution of effort because there weren’t enough processes in place and people to manage those processes. Trying to get the A500 production line humming efficiently, fixing the A500 IOUs, certifying the A700, he said, “We had some real competing priorities.”

Less than a month before S/N 004 flew, there had been a major change at Adam Aircraft, with the sudden resignation of founder Rick Adam. Although Adam’s departure wasn’t official until early August, it was clear at that year’s EAA AirVenture show that all was not well at the company. At a media lunch during the show, Rick Adam delivered a presentation that was almost word-for-word the same as his presentation at shows earlier that year, except for added emphasis on the “make production fly” effort.

Adam was scheduled after the lunch press meeting to give a one-on-one interview to this AIN reporter, but at the appointed time, Adam was suddenly and inexplicably unavailable. Less than two weeks later, Adam was no longer at the helm of Adam Aircraft, replaced by new chairman and CEO John Wolf. At the time  the company told AIN that Adam’s move had been planned for some time. “Rick chose to step down,” a company spokeswoman said. “This is just part of the transition that had begun back in February.” Adam still held seats on the board of directors, but it appears that he had no influence on the company after his departure and he eventually launched a new composites development company called AdamWorks. Adam also owns A500 S/N 004, which was leased to the company for testing purposes.

During the rest of 2007, according to Knudsen, “We were making great progress, things were humming at a pretty good clip.” All items had been cleared on the A500 except for known icing and the unusable fuel problem, “make production fly” was paying dividends and A700 certification was on track. Ice-shape and high-altitude testing had been finished, and all major barriers to A700 certification had been crossed. “A500 production was a little behind where we thought we’d be,” he added, “but not by much. The problem we were running into was raising the extra $100 to $150 million needed to get the company to the break-even point.”

Operations Suspended

On Jan. 16, 2008, Adam Aircraft announced that it was laying off 300 of its 800 employees and temporarily suspending operations at its Ogden, Utah, satellite manufacturing facility and moving composite boom manufacturing from the Pueblo, Colo., satellite to the Englewood headquarters. Koerbel said that Adam Aircraft needed to manage cash expenditures carefully while seeking additional funding.

Yet sometime before that announcement, Wolf sent a letter to shareholders warning that the company needed to raise $30.5 million by the end of January to allow Adam Aircraft to continue operating until it could raise another $100 million by May 31.

Unfortunately, said Knudsen, the search for money, which had been under way for many months, was taking place at the worst possible time. “It was a little bit of a perfect storm.…This is not a time to be looking for money. On top of that, you have your major lender caught up in the credit crisis.”

Unfortunately, the rank and file at Adam Aircraft were not aware of the financial issues that were mentioned in Wolf’s letter to shareholders, at least until the press revealed the existence and contents of the letter. “Employees started to get concerned about what was going to happen,” said D’Angelo. Koerbel held a series of company-wide meetings to keep everyone apprised about the fundraising efforts. January 31 came and went, and no new funding was announced.

“People were well aware that we were trying to get this interim funding and that it was dragging out,” D’Angelo said. “During that period everybody was sort of in a state of suspended animation. They didn’t know if they should be doing their job, they didn’t know if we were going to have a company.”

On February 8, D’Angelo said, “Duncan [Koerbel] held a town hall meeting and told everybody we were close in securing funds and that we would get some funds in the following week, but we weren’t sure what size of commitment we’d get. So everybody left on the Friday and went home with some hope that there would be an answer the following week.”

“We’d actually had assurances,” said Knudsen, “that we had a pretty good amount of money lined up, not the $150 million, but it looked like enough to keep things running. And we thought we had an agreement from Morgan Stanley to fund at least the sale of the company or the alternative to the sale of the company, kind of a Chapter 11 type of reorganization, as opposed to closing it down.”

On Sunday, Bisges got the news that there was an agreement for some funding, although it would be limited and would necessitate further lay- offs. He pulled together his colleagues for a meeting at the Adam facilities to discuss their strategy, who would be retained and what resources were critical given the reduced funding.

On Monday February 11, Koerbel informed the managers that Morgan Stanley was not going to provide funding, according to Bisges. The same day Koerbel assembled the troops for a final all-hands meeting. Said D’Angelo, “Everybody found out that we had no money, that the deal actually fell through and we were done, and there was a hangar full of 500-plus people who were absolutely stunned. …It was a pretty sad state of affairs. But the spirit wasn’t depressing,” he recalled. “It was just like, look, we did a great job, we had a great company; this is an unfortunate circumstance.”

While most departing employees took only their own personal belongings, AIN was told, some equipment was pilfered, perhaps because some people were upset about the loss of their jobs and health benefits. Two times, someone had to be stopped from walking off with expensive weight-and- balance equipment. And someone left with some borescopes, plasma televisions and computers. “There was some pilferage,” Bisges acknowledged, “but 99 percent were more disappointed and more professional than anything else.”

Adam Aircraft shut down on February 11 and filed for Chapter 7 (liquidation) bankruptcy on February 15. About a month later, employees learned that Koerbel had received a $300,000 severance payment.

Fortunately for many former Adam Aircraft employees, other aircraft manufacturers descended quickly on Denver in a massive recruiting drive. “You could go to any number of hotels around Centennial Airport,” D’Angelo said, “and there were job fairs everywhere. Dassault, Piper, Gulfstream, Hawker, Cessna, you name it, everybody in the business came out immediately to recruit this talent. A lot of the staff since then has had multiple offers. In a lot of cases, people moved back to Wichita. They’re moving back home because we recruited a lot of folks out of Wichita. I think that underscores the shortage of engineering talent in the aerospace business and the caliber of people we had on board at Adam Aircraft.”

The Final Chapter?

What happened to Adam Aircraft might have had something to do with the credit crisis that was just starting to roil the financial markets, D’Angelo said, but that wasn’t the sole reason the company went bankrupt. “It could be true that Morgan Stanley was starting to get nervous about the overall credit crisis and the fallout from the sub-prime crisis and its level of risk at Adam Aircraft. That could have been the trigger for them to do what they did.” But, he added, “The primary reason the company got into financial difficulty was financial mismanagement by the executives.” He declined to elaborate.

Morgan Stanley wouldn’t comment on the financial details. However, a source familiar with the funding situation told AIN that Adam Aircraft “was in default of its line of credit, and that’s why [the funding] was pulled.”

Chapter 7 bankruptcy means that most creditors–including deposit holders on A500s and A700s and suppliers and vendors–will likely get nothing back. Documents from the Adam Aircraft bankruptcy are littered with the names of large and small companies owed varying amounts of money, including $51 million to the Morgan Stanley Senior Fund parties. The total debt, as far as AIN was able to determine and including the Senior Fund amount, added up to more than $53 million. This doesn’t include deposits on aircraft. Estimates of the total amount raised during Adam Aircraft’s nine or so years of existence add up to about $300 million, which is not a high number given that the company certified one airplane, got it into production and was near certifying a new jet.

Birth of a New Company

Adam Aircraft is not dead. The company’s assets were offered for bid and while a number of entities viewed the bid package, only one group was willing to put up the minimum $10 million. This turned out to be a Russian company called Industrial Investors, in partnership with a group of former Adam Aircraft employees that includes D’Angelo and Bisges, but not Knudsen. The group, called AAI Acquisition, bought Adam Aircraft’s assets on April 9.

D’Angelo had met Industrial Investors managing director Eugene Andratchnikov while he was trying to sell the Russian company a fleet of A700s for charter/air-taxi use by one of its subsidiaries. The new company will have to reapply for A700 type certification and relaunch that program, but the FAA has promised that if the resurrected Adam Aircraft can employ some of the same people, certification should not be delayed too long. The company’s goal is to certify the A700 by the end of next year.

The new Adam Aircraft will have to work with suppliers and vendors to try to keep them on board the new certification and production program. And deposit holders may yet see a return on their investment. Finding a new buyer would be a lot more costly than figuring out a way to deliver an airplane to an existing deposit holder, D’Angelo explained. Regardless of whether the company decides to restart the A500 program, there remain outstanding modifications due on those that were delivered. The new company is trying to figure out how to address that situation.

Fleet buyer Nexusjets of Monte Carlo, Monaco, is in discussions with the new Adam Aircraft about its order for 96 A700s. “Nexusjets is confident that the new Adam will not let us down since we were the second largest client and have supported Adam since 2004,” explained Svante Kumlin, chairman and founder of the would-be air-taxi company. “We still think the A700 is a good aircraft for our operation. We need, however, to be able to negotiate a deal with [the new Adam] to be beneficial for both parties involved.”

Alex Wilcox, president of JetSuite (formerly MagnumJet), said that he had hoped to start flying with A700s this year. “Adam delayed us about a year in terms of being able to start,” he explained, “and that was the most painful part of the experience.” JetSuite also has orders for Embraer Phenom 100s, however, and will launch operations with those. “We had a pretty small exposure [with Adam],” he said, “and managed to get a fair amount [of the deposit] back before it went bankrupt.”