Editor’s note: This is the first of a two-part series on eVTOL financing submitted by Lobo Leasing, a global helicopter leasing company headquartered in Ireland.
In 1950s America it was proposed that mass-produced personal helicopters could provide the solution to an urban mobility crisis. Traffic accident rates were high. Congestion was a major issue. Roads were poor quality and too narrow. The personal helicopter seemed to offer a natural alternative to failing ground transportation.
But personal helicopters never got a chance. The solution to the crisis was more mundane. Federal funding was tapped to build a new highway system for America.
The urban mobility problems of the present day share some similarities to the 1950s, with climate change now added to the equation. We are witnessing another wave of enthusiasm for an airborne solution.
Over 200 types of eVTOL aircraft are currently in development, all promising low maintenance costs, quiet operation, and zero emissions. eVTOL aircraft eliminate many of the drawbacks of the helicopter while still providing the convenience of point-to-point transportation.
Nobody is expecting a sky filled with personal eVTOL aircraft anytime soon. But many are predicting eVTOL aircraft to revolutionize passenger and freight transportation on regional routes — i.e. routes longer than an average urban taxi ride but shorter than an average domestic airline routes. Examples are Vancouver to Vancouver Island or Manhattan to Philadelphia.
Investment into this advanced air mobility (AAM) market increased 10 times in 2020 to over US$1 billion. In 2021, the investment base is expected to grow again to US$4 billion. This funding is currently focused on the developers of eVTOL aircraft, notably leading players like Joby (based in the U.S.) and Lilium (based in Germany).
However, there is still a great deal of uncertainty about the eVTOL market. Will ground-based solutions prove safer and cheaper? How long will regulatory authorities take to certify eVTOL aircraft for commercial use? Which of the many eVTOL designs will be most effective? Will battery technology develop to meet the requirements of the industry?
Another uncertainty, which this article series will address, is how eVTOL aircraft will be financed. We will consider three possible types of financing: corporate financing, asset financing (or secured lending), and operating lease financing.
Examining eVTOL business models
We must start with examining the business models of eVTOL developers, as this has a significant impact on the types of financing that may be available for their eVTOL aircraft. Mark Moore, previously a director at Uber Elevate and now CEO of Whisper Aero, gave a keynote speech at a 2020 Vertical Flight Society workshop in which he anticipated that some eVTOL developers would hold eVTOL aircraft on their “significant balance sheets” in order to receive “the equivalent of [a] power-by-the-hour . . . revenue stream that’s constantly coming in,” which would offset revenues from cyclical aerospace markets.
Joby has adopted this strategy and is by far the highest capitalized of all eVTOL developers (with about $1.5 billion on its balance sheet upon its successful combination with Reinvent Technology Partners). Joby intends to combine the production of eVTOL aircraft, the long-term ownership of these aircraft, and the operation of the customer service all within one single business model. Lilium and Volocopter also seem to have elements of this approach in their initial business plan (but to a lesser degree than Joby) and are also among the best capitalized eVTOL developers.
This approach is rather unusual. We would not expect Airbus to run scheduled flights or for Tesla to offer taxi journeys. But perhaps the better analogy is Amazon or Apple, where distinct components to a service are brought together under a single brand.
There is no mistaking the intent. The requirement to develop operational capability was a driving force behind Joby’s recent acquisition of Uber Elevate and Lilium’s partnerships with Luxaviation Group (an experienced helicopter operator) and Lufthansa Aviation Training (a leading provider of aviation training services).
But the business model of many other eVTOL developers is more similar to that of a traditional aircraft original equipment manufacturer (OEM). The eVTOL developer will concentrate on sales and parts support and leave others to focus on long-term ownership and running day-to-day operations.
Operators that have already expressed an interest in operating eVTOL aircraft — including the airlines United, American, and Virgin Atlantic, and the helicopter operators Halo and HeliJet — will, like many others to come, probably require financing solutions to support their acquisitions of eVTOL aircraft.
It is also possible that the manufacturer-owner-operator business model might adapt to changing requirements of the eVTOL investment base and become closer to that of a traditional aircraft OEM. Investors may prefer the risks of production, of long-term asset ownership, and of operations to be separated, rather than merged into a single company. If there is a significant fall in investor appetite for the eVTOL market generally, then the outright sale of aircraft might become a requirement for the financial stability of eVTOL developers.
We can reasonably conclude that the acquisition of many eVTOL aircraft will require a financing solution which is distinct from the general corporate financing of the eVTOL developer. The nature of this financing solution will depend on two factors, including the useful life of eVTOL aircraft and the liquidity of eVTOL aircraft for sale or lease.
Long-lasting and liquid, or not?
In his March 2020 speech to the Vertical Flight Society, Mark Moore highlighted the “very significant question” of the residual value of eVTOL aircraft. Moore queried what would happen when the first generation of aircraft were replaced after five to seven years and what secondary markets would exist for these aircraft.
There is an emerging industry consensus that a first-generation eVTOL aircraft will have a useful life of about five to eight years. But why has this assumption gained traction when helicopters have useful lives of up to 25 years?
The short life assumption is based on the speed of development of eVTOL technology. Within a relatively short period, it is probable that early designs will be replaced with aircraft with greater efficiency and enhanced safety features. The game-changer for eVTOL from a cost perspective is the transition to pilotless aircraft, and this may require new aircraft designs. But there are counterarguments to the short life assumption.
An eVTOL airframe (like a helicopter) will not suffer from the compression and expansion of high-altitude flight. There is no toilet or galley to generate corrosion issues. The main eVTOL technological development is likely to be in battery technology. But it may be possible to install new-technology batteries in first-generation eVTOLs. And even the first generation of eVTOL aircraft are being designed with avionics that can accommodate pilotless operations.
Within five to 10 years of the first-generation aircraft entering service, a second generation of more efficient eVTOL aircraft should come into play as the market expands. But the value of the first-generation aircraft will not fall to zero overnight.
The high-profile eVTOL passenger routes might gradually transition into the newest equipment, but the first-generation aircraft will probably find new deployment on other routes. The low acquisition cost of first-generation eVTOL aircraft may enable routes to be opened in developing nations, in lower-density urban areas, or perhaps focused on freight rather than passengers (or even transitioning into roles such as firefighting and humanitarian support). It seems likely that at least some financiers will consider the useful life of a first-generation eVTOL aircraft to be at least 15 years.
Meanwhile, liquidity is the ability to sell or lease an asset within a reasonable time period. In the eVTOL aircraft context, a liquid aircraft would be one which has achieved widespread acceptance with a variety of different operators, in different regions and ideally across different roles (e.g. passenger transportation, freight, and emergency medical services).
Aircraft produced by a pure “manufacturer-owner-operator” would be illiquid. The manufacturer is the same as the operator. There is no diversified operator base. There is nobody else to whom you can sell or lease the aircraft. By contrast, eVTOL aircraft produced by “traditional OEMs” have the potential to become liquid, because we can expect to see the aircraft operated by a number of different operators.
It is impossible to say at this stage which types will achieve this potential. But it is reasonable to assume that the most liquid eVTOL aircraft will be those produced by the largest eVTOL developers and those which adhere most closely to the traditional OEM business model.
In the second part of this series, we will explore how business models, useful life, and liquidity will combine to influence the financing solutions available for eVTOLs.
It is my absolute hope that no individual person ever own or freely operate (regardless of airspace) any type of eVTOL forged from this aviation revolution.
https://m.youtube.com/watch?v=TF88VKZGzyE
Mr. Mallette, So what does “idiots in cars 96” have to do the evtols? Why are you creating distractions? Pilots spend their entire lives in training. Every two years a pilot must take a biennial flight review with an instructor. Instrument rated pilots must log 3 instrument approaches/departures every 6 months or have an instrument proficiency check once a year. To be a pilot means you are one of the best trained people on Earth. Comparing apples and oranges (pilots to idiot drivers) is very foolish and an exercise in futility; and just plain stupid. Start by doing some research and knowing what you are talking about. You certainly appear to not know what you are taking about. And your comment is not only not helpful, it is libelous to pilots. And one of the numerous pilot organizations may take you to task for this libel.
Mr. Welander:
As a helicopter pilot, I agree with your assessment of David Mallette. I think you will find that he does these posts just to get people to watch his compilation videos and could care less about the exciting new science and flight characteristics of eVTOL.
Terry, I’m a fixed and rotary wing pilot so I do fully understand your point. However, I don’t think that your view includes all the potential options. The new generation of aircraft planned is going to be extremely digitally assisted. Many of the things that pilots need to train to do will be part of the fly by wire software. Routes and flight corridors will be software limited. The 3D position of the aircraft will be highly monitored. So, almost anyone will be able to fly these things. … This is not my view but rather the intention of the NASA concept roll out in 2016. I was at the meeting. Flying in the future is not going to be anything like when we learned. It is going to be a new world where anyone with a drivers license will be able to take up a plane. Even emergency procedures will be digital. The concept of having to land a plane at night dead stick are not going to exist. I’m not sure how I feel about that but it is how it is going to be. It is the only way they will be able to get insurance low enough to allow these things to exist. Keep corridors really tight and use digital twin to monitor all states of the aircraft and passengers. Use Lidar, and near IR to scan for stuff like cables. Advanced GPS is a 25mm sphere in 3D space. So locating known bodies of water will not be a problem. I have done VR night flights. In the country it is a bit unsettling because you cant see anything. I think AR flight assist technology will be able to set you down safe if the mechanicals don’t fail from a goose strike or something similar.
Over 90% of emerging eVTOL -s are propeller driven. Batteries are a critical issue, it is right. But the issue is well-known and many developers work intensively to make batteries even better and, it is quite sure, they will succeed shortly.
However for eVTOL / UAM it is even more important to have really efficient and silent rotors/propellers implemented. It has been hardly talked about so far. Though the task (i.e. radically improve propeller characteristics) is theoretically feasible, as one can see e.g., on the Internet.
The use case for UAV’s is based on flights into cities. All the current designs are too big as they are so inefficient they depend on a large wingspan to generate lift to deliver poor range due to battery and propulsion inefficiencies. They are all dependant on improvements in battery technology for still inadequate range. The benefits are not clear for these size of aircraft as they require fast transition from the hover and even so sacrifice range over a more conventional design. The IPO documents also assume unrealistic utilisation levels since they will initially be required to fly under VFR and there will not be enough pilots. Frequent Battery replacement will make operating costs higher than people expect and if the lifespan is 8 years then they will not be cost effective for operators if they have to amortise a purchase price of $1-2m.