Editor’s note: This is the second of a two-part series on eVTOL financing submitted by Lobo Leasing, a global helicopter leasing company headquartered in Ireland. Read the first part here.
In the first part of this series, we examined various eVTOL business models, including a “manufacturer-owner-operator” model like Joby’s, in which the eVTOL developer will also operate its aircraft; and a “traditional OEM” model in which an eVTOL developer sells its aircraft to independent operators, much as airframers do today. We can now consider various possible financing solutions for each model.
Corporate vs asset financing
Corporate financings are based on the historic and projected financial performance of a company and its general corporate balance sheet. Corporate financiers will likely take mortgages over eVTOL aircraft as part of a corporate financing (together with other assets such as factory equipment and intellectual property). But they are not looking to the value of these assets to fundamentally underwrite the financing.
Within the manufacturer-owner-operator business model, corporate financing seems to be the only way to finance the production and long-term ownership of eVTOL aircraft. The aircraft are illiquid, so a financier cannot rely on their resale value. Banks may provide “portfolio asset financings” to eVTOL companies operating this business model, but these transactions are really corporate financings.
Corporate financing is so far removed from the value of the eVTOL aircraft itself that the issues of aircraft liquidity and useful life are hardly relevant. This is not really a financing of an eVTOL aircraft, but rather a financing of a particular eVTOL design or business model.
The eVTOL industry can expect corporate financing to be made available on attractive terms. Governments are keen to support projects that resolve regional transportation issues in a climate-friendly manner. State support may be available either through export-credit agencies (to the extent the product is exported) or through industry-incentive schemes. Furthermore, investors (institutional and private) are generally willing to accept lower risk-adjusted returns for climate-friendly projects (so-called “environmental, social, and governance” or “ESG” investing).
However, things can change. It is possible the current high levels of enthusiasm for eVTOL solutions may not be sustained in the long term. The size of the market and its growth timetable are both uncertain. Corporate financing terms would be particularly hard hit by any change in market attitude to eVTOL aircraft as they are tied to particular eVTOL companies and business plans.
An asset financing, by contrast, is a loan specific to an asset (or a pool of assets) which is secured against the asset(s). If the loan defaults, the financier has the option to recover the asset, sell it, and use the sale proceeds to repay the loan.
Asset financings are heavily focused on the credit risk of the debtor. However, the intrinsic value of the underlying asset allows an asset financing to be provided at a higher value and/or on more attractive interest and repayment terms than would apply for a corporate financing. If the eVTOL industry can expect corporate financing on attractive terms, asset financing for the eVTOL industry should be provided on even better terms.
Asset financings require an asset to have some liquidity. An asset financier must have at least some opportunities to sell the asset for a reasonable value if the loan defaults. In the eVTOL context, liquidity for all aircraft types is currently unproven but is likely to develop first for aircraft produced by large-scale traditional OEM developers.
An asset financing is generally provided for a period of six to eight years, irrespective of an asset’s useful life. However, the useful life will have a dramatic effect on the repayment terms. If the asset itself has a useful life of only six to eight years, then the asset financing must fully amortize during the term because the asset effectively ceases to exist at the end of the financing.
If the asset has a longer useful life, then the asset financing could have a substantial balloon payment reflecting the residual value at the end of the financing. This will result in a more affordable asset finance lease due to the shallower rate of principal repayment during the term. A question for eVTOL asset financing is whether financiers will wait for liquidity and useful life to be demonstrated, or will proceed to fund deals based on unproven assumptions.
Operating leasing
An operating lease financier owns the asset and stakes their ability to make a good return on the liquidity and useful life of the asset. In an asset financing, liquidity is only required in a default scenario. In an operating lease, it is expected that the aircraft will have to move to another operator at some stage. An eVTOL operating lease financier must therefore have confidence both in the long-term useful life of eVTOL aircraft and in the future liquidity of the aircraft.
Again, the question comes as to whether financiers will wait for these conditions to be demonstrated, or forge ahead now and hope for the best. We can see some evidence for the latter. Avolon, one of the largest operating leasing companies for commercial jets, recently placed a conditional order for up to 500 VA-X4 eVTOL aircraft from Vertical Aerospace. It is unclear whether Avolon intends to offer these aircraft as part of an asset financing or operating lease product, but as Avolon’s core business is operating leasing, it’s reasonable to assume the latter.
Lift Aircraft, an eVTOL developed based in Austin, Texas, is already offering the opportunity for private capital to invest in its Hexa eVTOL aircraft on an operating lease basis. Asset financing is described as “what might be available to you” and estimated resale value is left as “to be determined.” But it’s an interesting and imaginative approach.
One advantage to “forging ahead now” is that early entrants to the market can secure attractive acquisition costs. Avolon must have negotiated a good purchase price from Vertical Aerospace for such a large order. The issues of useful life and liquidity should therefore matter less to Avolon than for later market entrants (who will need to pay much more for the same aircraft).
How might an eVTOL operating lease be priced? Operating lease pricing is effectively an asset financing with a premium to compensate the lessor for assuming the residual value risk. The higher the residual value risk, the higher the premium. The rent is often discussed in terms of a lease rental factor (LRF) — the monthly rental divided by the asset value, expressed as a percentage. A narrowbody commercial jet would be at one end of the spectrum, with an LRF of around 0.7% to 0.9%.
We would expect eVTOL operating leasing to be at the other end of the spectrum, with LRFs in the range of 1.2% to 1.4%. An eVTOL aircraft costing US$4 million would therefore have a rental cost of between $48,000 and $56,000 per month. But an “early bird” like Avolon might be able to offer rentals at half this amount if they purchased at a 50% discount.
Leasing demand drivers
We can conclude by considering whether there will be a strong demand for operating leasing from eVTOL operators. This demand is taken as a given in the commercial passenger jet market, but not so much in the commercial helicopter market (where many operators prefer to own aircraft through asset or corporate financing).
There are three fundamental drivers behind operator demand for aircraft operating leasing. The first driver is when an outright acquisition (or asset financing) is not financially viable for the operator. The second is when the aircraft is only available on an operating lease. And the third is when the ability to return the aircraft after a certain period is highly valuable to the operator.
The first driver is a major factor behind the expansion of commercial jet leasing. However, as aircraft become less expensive, this driver weakens. Most eVTOL aircraft have a projected acquisition cost of approximately $2 million to $5 million, a fraction of the value of a commercial jet or even a medium or heavy helicopter. It raises the question of whether operators will prefer to purchase and own eVTOL aircraft rather than pay the premium of an operating lease.
The second driver also underpins commercial jet leasing. The long production times for commercial jets and the requirement to make substantial pre-delivery payments years in advance of delivery makes operating leasing the only option for many airlines. This is unlikely to be the case in the eVTOL market where production timescales should be much shorter (as with helicopters). However, perhaps the recent Avolon transaction with Vertical is a move in this direction.
The third driver is critical to many helicopter lease transactions. Helicopter operators often work on the basis of fixed-term contracts. Leasing a helicopter for the same period as the underlying contract is an effective way of managing the financial risks of that contract. However, in this respect eVTOL operators are more like passenger airlines than helicopter operators. The eVTOL routes will be operated for as long as they are profitable with no defined end date. This driver towards operating leasing will be weaker for eVTOL operators than for helicopter operators.
The third driver is still likely to be the main one encouraging eVTOL operators towards considering operating leasing, but for a different reason. Because of the fast development of eVTOL technology, the ability to upgrade to new technology after a defined period should be something of considerable value to an operator. The question is how much eVTOL operators would be willing to pay to achieve this flexibility and whether can this be matched to the return expectations of an eVTOL leasing company.
Summing up
For eVTOL aircraft produced within a manufacturer-owner-operator business model, the only financing solution is corporate financing. This financing should be available on good terms, unless investors lose enthusiasm for eVTOLs generally.
For aircraft produced within the traditional OEM business model, asset financing is a possibility but depends on what assumptions financiers make regarding useful life and liquidity. For these aircraft, operating lease financing is also possible and indeed appears to already be on the horizon. However, this type of financing depends not only on financier assumptions regarding useful life and liquidity but also on whether operators want this kind of product.
Fascinating and insightful article into this new and emerging market in aviation.