The Maker is Archer’s full-scale electric vertical take-off and landing demonstrator aircraft. ARCHER
Electric vertical take-off and landing (eVTOL) aircraft, aka urban or advanced air mobility (UAM/AAM) aircraft, are having a moment. Advocates, analysts, and financiers are touting a market valued in the hundreds of billions of dollars, or even at the $1tn level. Somewhere between $10bn and $20bn in funding has already been committed. Hundreds of start-up eVTOL hopefuls have emerged. Around 4,000 semifirm orders and letter-of-intent orders have been placed.
It is way too soon to know how real any of this is. However, an examination of why this industry has materialised and the obstacles in the way of eVTOL market success provides a few guidelines.
A key enabler is that interest rates are low, there is plenty of cash available and there is a lack of solid investment opportunities. Mature markets, for aerospace or anything else, are all highly valued already so new ideas are relatively attractive. To many investors who are not particularly familiar with aerospace, it might seem like eVTOLs are the only really new idea in aviation anyway.
SSBJ developer Aerion shut down last year. Aerion
However, that surplus cash does not explain all the billions of dollars in eVTOL funding. After all, it is unusual, if not unheard of, for an aviation market to not exist in any demonstrated way, yet still attract over $10bn. Non-existent aviation markets, such as supersonics or civil hypersonics or even flying cars, typically attract token amounts of speculative capital.
Most notably, Aerion, the 15+-year-old supersonic business jet pioneer, shut down last year after failing to attract enough cash to just keep its idea alive. While the market it was pursuing did not exist, its proximity to the proven and growing high-end business jet market should have provided confidence. So why are eVTOLs, at least over the past year or two, so well-funded?
Part of their funding success comes from a funding mechanism that is not new but has also been enjoying a moment: special purpose acquisition companies. Special purpose acquisition companies, (SPAC)s, also known as blank check companies, are publicly listed entities that exist primarily to attract investor cash to go and buy private, nonlisted companies. This process happens with a relative minimum of regulatory oversight or due diligence, so they are perfect for funding speculative new technologies and investing in speculative new markets. In December, Embraer’s Eve spin-off was acquired by Zanite Acquisition Corp, the sixth eVTOL SPAC deal.
SPACs are aided and abetted by what might be termed a uniquely Silicon Valley funding philosophy. Many technology investors and funds typically place relatively small bets on a wide variety of companies: a few million here, a few million there. Many of these individual bets will fizzle out but, the thinking goes, one in a few hundred will be an Amazon-like ‘unicorn’ which more than compensates these investors for their losses on the scores of other failed bets. Theranos, the disgraced blood-testing company, raised around $1bn but much of this came in the form of small investments from Silicon Valley funds. Very few, and possibly no, institutions have bet a high percentage of their investable assets on eVTOLS.
Finally, there is the growing role of sustainability investing. Many funds market themselves with an ESG (environmental, social, and governance) objective and eVTOLs, being electric, promise to advance decarbonisation, presumably creating technologies that can be leveraged for other segments of the aviation industry. Thus, we have the strange result of ESG investment money enabling rotorcraft aimed at providing convenient air taxi services for the wealthiest sector of society.
All of these funding sources and reasons face four distinct threats. First, the cost of capital is rising, as the US Federal Reserve, and other central banks, are raising interest rates in response to the threat of inflation. We do not yet know the impact of this, but it could be that investment cash will get tighter, particularly for the more speculative ideas out there.
Eve, an Embraer company, listed on the New York Stock Exchange (NYSE) through business combination with Zanite Acquisition Corp.
Second, the SPAC wave may be crashing. According to theThe Air Current (https://theaircurrent.com/industry-strategy/embraerspac-deal-evtol-developers/) and other sources, the market for SPACs, and the related market for private investments in public equity, or PIPEs, has significantly declined in recent months. The most recent SPAC deals – for the UK’s Vertical Aerospace and Eve, raised considerably less cash than the first wave.
EVE
This SPAC diminishment implies that the big believers in this technology have already placed their bets on what they think is the future, and are less willing to fund additional players. It could also mean that increased regulatory scrutiny is making the SPAC process less appealing as a funding mechanism.
Third, the sustainability angle could also go away. Aviation decarbonisation sounds like a noble goal but eVTOLs compete with ground transport, which is also decarbonising. The power requirements for electric vertical flight are considerably greater than the power requirements for electric cars. Eventually, investors and the investing public might get wise to this, particularly with the inevitable rise in new battery production needed for eVTOLs and all of the environmentally damaging rare Earth element mining associated with their production. Battery replacement rates will be higher with eVTOLs than with ground vehicles.
Fourth, and perhaps most of all, there is probably a day of reckoning coming. The eVTOL companies are expecting their designs to enter service, for the most part, in 2023 or 2024, which is a tall order considering their lack of experience in designing and certifying new air vehicles, to say nothing of the massive infrastructure, training, and other investments needed for these vehicles to achieve widespread success. The AW609 civil tiltrotor, backed by a very large and experienced aerospace prime, has yet to enter service, even though it first flew over 20 years ago. New technologies always take longer than expected to mature.
Thus, the wave of revenue anticipated by investors will either not materialise, or be years late, resulting in an investor rush to the exits. Already, as of early 2022, eVTOL companies that have gone through the listing process, particularly Joby, Lilium, and Archer, are watching their share prices trend steadily downward.
Some of the big eVTOL companies, particularly Joby, have announced plans for their own air taxi service, a strategy of vertical integration using their own eVTOLs. Vertical integration between products and services has not been done for many years in the aerospace industry. It greatly increases costs and risk for a manufacturer. This is particularly true for a new start company, as it greatly increases the challenge of raising capital. Theranos was taken down by fraudulent technology claims. By comparison, the eVTOL industry is on much sounder technological footing. The problem with eVTOLs concerns costs, and therefore economics.
The biggest problem working against mass adoption of eVTOLs is capital cost. Relative to helicopters, eVTOLs may or may not offer a significant reduction in operating costs. This theoretical operating costs difference is shadowed by a far bigger problem: flying machines cost a lot to build, particularly when they need to fly vertically. They are basically helicopters.
This problem is easily illustrated with a set of assumptions. Let us assume the eVTOL air vehicles cost $4m (the Archer US Securities and Exchange Commission filing says they will have a $5m unit price but some have claimed lower prices). Let us also assume that finance costs stay low, adding, say, a mere 50% to that.
Joby’s electric aircraft, powered by six electric motors. In 2020 Joby went public on the New York Stock Exchange, becoming one of the first publicly traded eVTOL companies.
Next, assume these vehicles are able to fly around three revenue hours a day (with more time flown for vehicle repositioning, in search of passengers), every day, or around 1,000 hours per year. By rotorcraft standards, that would be a very impressive achievement; half of that is more typical. Let us also assume these vehicles have a 25-year life, which is probably reasonable, or perhaps generous, given the strong likelihood that technological advances will make the first generations of eVTOLs obsolescent fairly quickly.
Joby
Thus, the simple maths that goes with these reasonable assumptions means that each revenue hour is burdened with $240 in amortised capital costs. That is, $6m in total capital/finance costs, divided by 25,000 revenue hours for the life of the vehicle.
This, of course, is on top of all the other costs: pilots, electricity, infrastructure amortisation, development cost amortisation, insurance, taxes, ground crew, maintenance, spare and replacement batteries, and whatever else. However, all of these high operating and fixed costs are on top of $240 per hour in sticker price amortisation.
These high costs are also the reason the market needs to be so large. If it is not, those costs are borne by a smaller pool of users and a smaller number of hours flown, creating the kind of high unit costs seen in the civil rotorcraft market. This is why the civil rotorcraft market is so small, outside of oil and gas models.
To look at it from the other direction, the business plans depend on a self-justifying prophecy. Improbably low unit costs are only possible with improbably high production and utilisation levels. Improbably high production and utilisation levels are only possible with improbably low unit costs. If either of these do not materialise, then it is just a question of how long investors keep throwing cash at unsustainable businesses.
The massive costs involved might be overlooked by tech sector investors. As Jill Lepore put it in the New York Times, describing a way of thinking commonly found in Silicon Valley, (https://www.nytimes.com/2021/11/04/opinion/elon-musk-capitalism.html?referringSource=articleShare), “…stock prices are driven less by earnings than by fantasies from science fiction.”
Beyond costs and economics, eVTOLs face numerous technical challenges. These can be grouped under three headings:
First, there are regulatory and technical concerns. This includes airspace management, battery development and safety issues, air vehicle certification issues, public resistance issues and more. These issues will also impact the development of the air vehicles themselves. Will they have IFR and de-icing capabilities? If regulators mandate 30-minute reserves for a very short-range air vehicle, won’t that mandate a considerably bigger design, with more and/or larger batteries?
China’s Autoflight is now expanding into Europe with an R&D centre in Germany. It expects to achieve EASA certification for its four-seat ‘Prosperity 1’ eVTOL by 2025.
Second, there are infrastructure issues. These are intra-urban transports but, if there are not enough helipads, and associated chargers, crew stations, control centres, etc, then passengers will need to take a car from their starting point to the nearest helipad, fly to the helipad nearest to their destination, and then take a car to their destination.
Autoflight
Without a proliferation of these helipads, many would-be passengers might be tempted to take a car for a single-phase trip, despite the traffic, particularly if the car is electric and does not need a driver.
Third, industrial challenges are a major complication. In addition to developing and testing the vehicles, they need an aerospace-grade supply chain put in place, and one certainly does not exist today. They also need the product support capabilities associated with any new product, particularly ones developed by a new-start company.
These challenges should, in theory, give incumbent aerospace companies – Airbus, Embraer, Bell, and others – an advantage when competing in the eVTOL space. They have the necessary experience in dealing with all of these challenges. However, that raises another question. Given the need to prove the business case, why can’t the operational urban air mobility concept be validated using today’s piston or light turbine rotorcraft?
Of course, plain old helicopters, while far less technically risky, would also be much less likely to attract the kind of enormous investments garnered by the eVTOL hopefuls…to say nothing of the enormous investments they want and need to attract in the future.
Lilium claims a revolution in sustainable, high-speed regional air mobility with its seven-seat Lilium Jet.
Forecasting through this haze of challenges is impossible right now. But broadly, three scenarios are conceivable:
Lilium
1. Success Urban mobility is transformed. All the obstacles are hurdled and the world’s cities are covered with fleets of vertical commuter machines. Of course, as with any successful new market, there will be space for, at most, five or ten new players. That still means hundreds of eVTOL failures and a great deal of money lost.
2. A new niche business Most start-ups will fail but a lucky few eVTOL makers/service providers find enough wealthy people to allow their businesses to succeed. Effectively, they become like light, short-range helicopters but with less noise and lower emissions.
One big issue, however, is that the entire light turbine and piston helicopter market is only worth around $300m per year. If that were quadrupled (due to the much-touted technology stimulant effect), it would be just over $1bn per year, which is really not enough for more than a couple of manufacturers. Even these might need to go through bankruptcy restructuring, in order to take care of the hefty expenses associated with developing their new aircraft and technologies.
3. Complete failure Basically, eVTOLs echo the disastrous very light jet/air taxi craze of the 2000s, where numerous manufacturing start-ups (particularly Eclipse, but also Adam Aircraft, Safire, and others) fail completely, along with numerous operator start-ups, such as DayJet, SATSair, Pogo, and others). Basically, the costs prove too high and utilisation assumptions prove far too optimistic. Again, billions of dollars are lost. Notably, the very light jets never required the new technology leaps promised for (and required by) eVTOLs. But there is a big caveat here. It is appealing to believe that, even in this third scenario, this eVTOL funding craze might, at the very least, produce new technologies and systems that could replace the existing piston and turbine helicopters. However, the reality is that most eVTOLs in development today simply can not do the core helicopter mission. None would make a good air ambulance, for example, or a decent executive transport. They do not have the range, cabin, or speed associated with the helicopters that do these jobs.
For a curious illustration of this limitation, consider the US Air Force’s Agility Prime programme. Agility Prime promises that one day there will be a vehicle with ‘3-8 passengers, travelling at least 100 miles at speeds greater than 100mph.’ This vehicle, by the Air Force’s own estimation, would be drastically inferior to any rotorcraft in US military service. It is far from clear what the Air Force would do with such a light, underperforming machine.
When the US military has been swept up in this mania, it is pretty clear that new things will be funded. But the outcome might just be unpleasant for all concerned.