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Monday, March 21, 2005

Cash Flow Halts Work On Dornier 328Jet

The German unit of AvCraft Aviation is insolvent and its enterprising project to resume production of the Dornier 328Jet has come to a standstill.

AvCraft Aerospace GmbH filed for insolvency on March 10, but there are no plans to put the U.S. parent into bankruptcy.

According to a source close to the firm's U.S. headquarters in Leesburg, Va., who asked not to be identified, the German operation was forced to make the filing because of strict German rules on cash flow. The company apparently failed to pay its 345 employees in Oberpfaffenhofen, Germany, in January.

AvCraft CEO Ben Bartel did not return repeated phone calls seeking comment. Bartel's investment partner, the Philadelphia venture capital firm of Dimeling, Schreiber & Park, also could not be reached for comment.

First designed and built by Fairchild, the Dornier 328Jet carries 32 passenger and is powered by two Pratt & Whitney engines.

AvCraft in 2003 purchased the rights and assets to the 328 and 428 programs from the bankruptcy estate of Fairchild. At the time, AvCraft obtained 18 unsold planes and five in various stages of completion at the Oberpfaffenhofen assembly plant. It was Bartel's plan to restart the assembly line by first completing the five planes and then ramping up production to build 54 new ones each year.

A year ago, Bartel told Regional Aviation News that the company had deposits on 25 planes and by early last summer had hoped to have deposits on 45 planes (CRAN, April 16, 2004). Apparently, the plant never started building the new planes. It did complete work on the five partially finished planes.

The source told Regional Aviation News that AvCraft is currently seeking new investors to resume the German production line. He noted that it has a number of orders, but it just needs the capital infusion to keep the plant operating until the planes are delivered.

AvCraft has had cash flow problems because China's Hainan Airlines has not paid for three planes that are ready for delivery. The first plane was ready for delivery last July. It is not known why Hainan has delayed accepting the planes. Hainan's late acceptance of earlier orders played a role in the Fairchild bankruptcy.

According to data compiled by BACK Aviation Solutions, Hainan had ordered 18 328Jets (RAN, Feb. 28).

AvCraft needed to sell between 10 and 20 planes each year to break even.

Compounding AvCraft's lack of 328Jet sales is the glut of planes on the U.S. market. Last summer, Flyi [FLYI] parked its fleet of 328Jets as it began to phase out of its code-share contract with Delta Air Lines [DAL]. Delta is ultimately responsible for the lease payments on the 30 328Jets. Over the summer, Delta negotiated with Midwest Connect, the only other U.S. carrier flying the 328Jets, to begin a code-share relationship. However, those talks broke down as Delta devoted all of its attention to its restructuring plan last fall as it worked to avoid bankruptcy.

With cash already tight, AvCraft in January agreed to pay a $50,000 settlement stemming from a 2004 dispute with the bankruptcy estate of Fairchild Dornier.

Outside of the German production facility, AvCraft's other major asset is a new maintenance facility in Myrtle Beach, S.C., designed to service both the jet and turboprop version of the 328. To conserve cash, the Leesburg offices are being shut down and the headquarters will be moved to the Myrtle Beach facility. That facility now employs 65. When AvCraft accepted a $750,000 grant to consolidate its facilities in Myrtle Beach, it promised to have 80 working at the site within one year.

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