Podcast: AAM Skeptic Vs. AAM Booster
Will the AAM market grow to $50 billion a year? Listen in as Richard Aboulafia and Mike Dyment debate the merits, and Aviation Week’s Graham Warwick weighs in with his thoughts.
Welcome to the Check 6 podcast. I'm Joe Anselmo, Aviation Week's editorial director. And today we bring back Graham Warwick and Richard Aboulafia to talk about the potential of the advanced air mobility market. Graham is Aviation Week's executive editor for technology and executive editor of Aviation Week's AAM Report, a weekly publication we launched in 2021 to follow the industry. Richard is a managing director at AeroDynamic Advisory and has long held the view that the AAM market’s potential has been over-hyped.
Last year, we brought the two of them together on Check 6 hoping for a debate, but they ended up largely agreeing with each other on many points. So today we're turning up the temperature a notch with a third guest, Michael Dyment. Mike is managing director at Nexa Capital, an advisory and investment firm based in Washington, DC that has been active in the AAM space for several years. Nexa's client base includes AeroMobil, Helijet, Blade, Joby Aviation, Piasaki and others. Nexa also has funded research into the global markets for AAM through its subsidiary, UAM Geomatics.
Richard, we’ve got to lead off with you because you were recently critical about Boeing's decision to invest $450 million in the Wisk venture. But billions of dollars have been committed to AAM projects in just the year. Are Boeing and all these other investors that misguided?
I don't know. I mean, people always hedge the investment announcements. For example, a couple of Boeing people said, "Well it's not $450 million in a lump sum, it's a small deposit of that with a commitment to more in the future". So they're placing, I guess you could say, a forward bet in the technology. What is more interesting to me is the whole concept of Silicon Valley and this back funding mechanism. You look at the Silicon Valley investing philosophy, you put $10 million here, $20 million there, literally hundreds of different bets. If one or two is a unicorn, you do great. And the rest, well sorry about that. SPAC funding I think just sort of boxed up a whole bunch of those bets and created a couple of the most well-funded new starts this industry has ever seen, right? So it's an extraordinary set of events with a great deal of money placed, but I don't think anybody is really betting like large chunks of their net worth on it. Rather, you've just got a very fragmented number of these much smaller bets being boxed together.
Mike, what does your research say the market potential is?
So we've been looking at the forward opportunities for advanced air mobility and aerial ride hailing for the last four or five years. Much of the market research that we have performed is heavily subscribed by aerospace companies throughout. We've got about a hundred corporations, investment groups and others that rely on the forecast that we produce to provide some grounding and opportunity framing. Our forecast though, are very conservative in comparison to numbers that you might see coming out of Goldman Sachs or Morgan Stanley, our numbers point to the fact that this is a trillion-dollar market opportunity. But I want to be very clear here that the trillion dollar figure that I've just put out is not per year. This is a cumulative figure that will build to a trillion dollars over a 20-25 year period.
And why are you so bullish on the market?
Let me just frame the opportunity a little more for you. If you look at the global airline industry today, according to IATA, revenues in 2019 for the airline sector came in at about $838 billion. That's for 2019, so it's pre-pandemic. It's expected, by the way, that that figure will be caught up again in a few years time, once the pandemic settles. In addition to that figure, airports have produced a couple of hundred billion dollars per year in revenue. And you have to think about transportation and mobility in the context, not just of what the airlines do, but also the sector itself. So it includes also research and development. And traditionally the aerospace defense sector has spent tens of billions of dollars per year on research and development.
So our view on advanced air mobility is that it will grow. It will certainly expand rapidly when automation takes effect maybe 10 or 15 years from now, but it will never be larger than about 5% of the size of the airline industry itself. I think there's a lot of confusion about what does it mean to be a trillion dollar market opportunity? What does it mean to support unicorns? You don't need a trillion dollar per year sector to attract $10-15 billion dollars worth of research and development largely going into Silicon Valley models. Context is important here.
Okay but sure your number "$1 trillion over 20 years" that still equates to about $50 billion a year, right?
It will eventually peak at around $50 billion a year. So if you think about the airline industry at $838 billion in 2019, we're looking at 5, 6, 7% of the potential size of the airline industry. So we're not expecting to see the advanced air mobility sector approach the magnitude of the existing airline sector at all. Having said that, there's a lot of money to be made here, and there's a lot of very smart capital flowing into advanced air mobility. And I will add that the airlines themselves have done their own diligence on this opportunity. We're going to see a disintermediation of door-to-door travel, which the airlines themselves are very interested in taking advantage of.
So we're seeing several thousand vehicles having been soft committed to from the AAM eVTOL sector, we're probably going to see more. I think it's very exciting. And this is really a developmental cauldron. You don't put $10 billion into the hands of traditional aerospace companies to try to cash in on AAM. This money has to go to entrepreneurial thinkers. I hate to say it, but younger people who can perhaps be more creative and not worry so much about failure in order to see this niche market blossom.
Richard, I'm pulling this straight from my memory, so correct me if I'm wrong, but I remember you at one point throwing out a market figure estimate more like $300 million?
That is on the basis of the existing market for small turbine and piston rotorcraft. I'm the first to admit there's going to be some stimulus there, absolutely. Now, does it ever get more than 5X that, 6X that, 4X that? I tend to be pretty doubtful. Now the problem here is that, I'm a little confused about the numbers. The jetliner business, the manufacturing of jetliners last year was about $100 billion. The airliner business that I think Mike is talking about includes operations, that's the industry of moving people, if we're talking about the market for things that fly in aggregate, the total aviation market is sadly under $200 billion.
So you start talking about a peak of $50 billion a year in urban air mobility. You're talking about 25% of the current civil and military aircraft business being consumed by these small urban air mobility things, that doesn't conform to anything that I can grasp. What I can grasp however, as you say, is starting with a base assumption of the current market for products in this class, and then allowing a healthy level of stimulus, which gets you safely probably under $2 billion.
Okay. So Mike, we have you in one corner at $50 billion and Richard in the other at under $2 billion. Graham Warwick, a good time to bring you in now. Where do you fall in? You’ve got a big space in there to position.
Somewhere in the middle, I think. So I mean, we have to acknowledge there is a huge amount of hype around this sector. There are a lot of reasons for that. I mean, one of the reasons is that when we started out, it was pointed out that electric propulsion would lower the traditional barriers to entering aerospace because it is a lot less specialist and expensive to develop an electric propulsion system than it is to become a turbine engine manufacturer, right? And that has been proved totally. If you look, as soon as electric propulsion became a possibility, we've had hundreds of companies declare their intent to do so. So that lowering of the barrier has happened.
The second thing is we have an investment market that does not want to miss out on the next Tesla or miss out on the next SpaceX. So there are people making forward bets that they would've never made before, but are making because they saw what happened with Tesla and SpaceX. And then you have the SPAC process, which because of its very nature, it was not an IPO. They were allowed to make forward projections of their performance. So they played up their potential, and they attracted a lot of money, and they fueled the hype in doing that. Now I think the hype, whatever that cycle is, the hype cycle, we are on the other side of the peak now, because we are in the hard work part of this process. And as we heard, Joby lost one of their prototypes. It's one of the very first publicly acknowledged losses of one of these vehicles. This is the hard part that's beginning.
So I am somewhere in the middle. I'm convinced now that this is technologically feasible. That we can design viable vehicles. We can get them certified. We can get them into the airspace system. We can begin flying kind of what helicopters do today, right? I have absolutely no doubt. That is possible. Now when? I think all the companies are being optimistic, it's not going to happen by 2024. Maybe it'll happen in ‘25 but there's going to be delays. What I'm uncertain of and remain uncertain of, because there is no evidence for it, is that we can get large numbers of people into these vehicles. You know, however quiet they're going to be, however safe they're going to be compared with a helicopter, we still don't have any hard evidence that people will choose to use these vehicles as a mode of transportation. This is not an aviation market. This is a ground transportation market that the aviation industry is taking aim at.
We have got to get people out of cars, buses, trains, whatever they're using today. We've got to persuade them to do that trip in an air vehicle. And that's the bit to me that still remains to be proven. That's the bit that takes this from the market that Richard foresees, of replacing the light turbine helicopter, to the market that Michael's research indicates is there to be had if we can make this work, which is using this as a regular or a routine mode of transportation. Beginning with integrating the airline operations so that you have custody of your passenger from the minute they leave their house to the minute they arrive at their destination. That's the bit that we've still got to prove actually exists. So that's the bit where I'm skeptical. I'm not skeptical about the vehicles. I'm not skeptical that we can begin operations much as we do today. I am still uncertain about the scale of the market going forward.
Mike, how do you see the market unfolding that Graham was talking about? And when do you think we would have mass adoption of these vehicles by the general public?
Our research points to the end of the 2020s, basically to see scale begin to build. We will see cities and operators coming online probably by 2024 in a small scale type of rollout. But growing through the next roughly 7-10 years. And our biggest inflection point in our analysis is the bet that automation, in other words, getting rid of the pilot, will have a major potential impact. So we're seeing today with Tesla, they are experimenting with volunteer drivers who agree to drive their vehicles around without their hands on the wheel. They're building lots of data and information to see how an automated driving system can be safe and effective. I think with aviation, we're going to see the same thing. I think the Boeing bet on Wisk and the announcement that was made this week, it points to a very thoughtful approach that a major aerospace manufacturer is going to make on automation.
Of course, we're all concerned about pilots, are pilots going to be available. Some of the business models will require pilots for the foreseeable future. Good luck with that. It will be a real struggle and it's going to contain the overall size of this market opportunity for years to come. But if that can be overcome -- what happens when you get rid of the pilot, you are reducing cost dramatically, you're increasing safety. And you're able to compress the density of operations in the air because automated vehicles should be able to fly safely, more closely together. So that's the scale driver and we see cost per ticket dropping precipitously between say 2028 and 2038, due to that particular development. We see ticket prices dropping from hundreds of dollars on average, across all of our use cases, down to $10s basically. And of course there are a lot of averages in that, I can break that all out if you need to.
The other thing that I want to point to is that this is not just... When you think about all the money that's going into advanced air mobility, I would say that two thirds of that is not focused on vehicles. It's focused on how do we put those vehicles to use. How do we attract 135 operators to use our fleet, or buy into the fleet, to begin to implement operations. There is a lot of infrastructure that has to be built out. Our analysis shows that infrastructure on a cost return basis for advanced air mobility is quite affordable. It doesn't cost that much to build a Vertiport in many areas of the world.
So we see promise there as well, but you really have to think about this trillion dollar market as we refer to it as an aggregate of operators, vehicle purchases, infrastructure. There's a big challenge I think ahead with UTM, with the air traffic management side of this, it's almost nowhere in terms of development today. And it's going to be an impediment if it doesn't get figured out over the next few years. So again, I just want to point to the concept here that advanced air mobility, it's really a reasonably small market, but it will enable brand new things.
If you think about what the airlines are interested in, this is an opportunity for the airlines to capture the business traveler from door-to-door. And that's why they are making commitments. Some are soft, but some are not. And I think the airlines, we need to appreciate that they are the experts in terms of business travel, door-to-door service, opportunities to disintermediate travel today into some future model later on. And I think we have probably 30 airlines today that have already committed to some extent to electric vehicle integration into their operations. That is a crucible for development that should produce very interesting business models, probably competing business models, and that should help to accelerate electric transportation in the air quickly.
Richard, is he winning you over?
Well, not exactly. I mean, there's a number of issues. One is technological maturation, the idea of automated vertical machines flying through our cities in 10 or 15 or even 20 years just doesn't sound right. I mean, we've been working on self-driving cars for how long now, and boy, they don't appear to be anywhere in sight. But beyond that, these are fundamentally very expensive objects. They're expensive to fly. They are as expensive as rotorcraft. Ironically, we know this particularly because of the SPAC process that requires them to file these sorts of things. They are expensive. And the idea of lots of people getting access to vehicles on an exclusive basis that cost $3, $4, $5 million dollars, that's kind of out of whack with economic reality I think.
The other thing is this whole door-to-door thing, I don't quite understand. I mean, no one's landing on your lawn unless you live in Greenwich, Connecticut and have a convertible tennis court. It's probably not happening. You have to go somewhere, you have to drive somewhere or get driven somewhere. Then you have to get in the machine and then you fly and then you get to the other... near where you're going, but probably not exactly. And you have to get in another car and drive to where you're ultimately going. And in some cases, say I was going to Dulles airport with my family and bags and whatever, I'd have to take those bags, get in a car, drive to the Vertiport, go the 15 miles or whatever out to Dulles airport, and then get from that Vertiport to where I need to go at Dulles.
That's hundreds of dollars in the best expectation to do something that could frankly be very easily done in ground vehicles. And I should mention too, that ground vehicles are decarbonizing at a much faster pace than aviation, which means from this who, "Ah, they're electric, this is an ESG play", that doesn't make a great deal of sense to me either. So I'm afraid I must disagree on many of these points.
Graham, I wanted to ask you about Wisk. Obviously Mike thinks Wisk was a great idea, the investment by Boeing, and Richard has been on the record as saying it was not a good idea. Where do you fall on Boeing's decision to invest close to half a billion dollars in Wisk?
Yeah, as Richard pointed out, that's not in one chunk, that's in quarterly installments and it's still only about a third of what Wisk has itself said is going to take to develop the vehicle and begin the service. I think it sounds like a lot of money, but spread over time it's actually quite a low risk bet, and they get a lot back for it. I mean, if Wisk works and Wisk does actually get an automated self-flying passenger vehicle certified, then as Michael has pointed out, the world is then their lobster, right? They will have the lowest operating cost for an air taxi because they'll have no pilot in the vehicle. So if it works, Boeing then has a piece of probably one of the biggest players in the market, if it works.
And the other side is that Boeing has been frittering around with electric propulsion and automation for some time now. It's had its own programs. It had programs within Aurora [Flight Sciences] that it shut down when it shut down the Next operation, it's had automation programs. It's had caravans flying around automated, etc. But it's never really had a focus to really get to grips with automation, autonomy, basically, hyper automation. We may be 20 years away from having that level of automation in a passenger aircraft. We may not, it may be quicker than that, but we may be 20 years away. But even to get that level of automation, we are going to have to have millions of hours experience of automation before we'll ever get it certified in a large aircraft.
Well, Wisk is already flying automated in airspace in New Zealand. It is beginning to be integrated with other traffic in New Zealand. They are already gaining experience on a small scale, but the fundamentals are the same, automating the vehicle, automating the ground, automating the communication between the two are all the same. So they're getting that experience. And it's with a focus on actually enabling a product, which is different from a research program where you demonstrate some piece of the pie and then you put it in the fridge for a few years. Wisk is putting the pieces together and then moving to the next piece and then moving to the next piece. So you get a much more fully formed result from something like Wisk that you would from Boeing's own internal research, when that internal research doesn't have a product focus and won't have product focus for 10 years, or something like that. So they're getting a lot out of that.
I want to go back to what Richard says about a couple of the points he made. Maturity of automation, absolutely. The only way we're going to get around that is, same as the car industry's doing, is get millions of hours of shadow-mode experience, millions of hours of low-risk environment experience. And we'll get there, eventually. As Michael mentioned, the pilot... This industry is not existing in isolation, we are going to have a major pilot crisis. We're going to have a major controller crisis at some point in the future. So we have to start putting the pieces together. There are two pieces to that. One is automation. The second is that the regional airline industry has ceased to function as the feeder farm for the commercial aviation for pilots. They've got to find those pilots somewhere. The reason that Mesa is investing in advanced air mobility is in part because it wants to create a new pilot feeder farm for the airline industry. And you could get a pilot into an AAM vehicle below the 1500 hour limit for regionals. And if you can do that, you can start to feed the system again. So that's one piece.
The other piece is that Richard talked about door-to-door. Advanced air mobility is frequently equated with the hype around the very light jets. I disagree with that for two reasons. One is the very light jet had two markets, private aviation, which is a small market, and air taxi. AAM has multiple markets, like helicopters do today. You've got cargo, you've got medical transport, you've got military and you've got air taxis. So they're not reliant on one industry to get started. Any one of those industries could get them going, right? But door-to-door, the thing that's different about what VLJs did with air taxi was, it was still an airplane. You had to go on your computer, two or three days before you fly, book a flight, you got back from them a window of opportunity where you had to get to the airport, they would then pick you up, fly you to the next airport, deliver you within a window of time, maybe via third airport. And it was in an airplane that took two crew, carried a maximum of three passengers, used jet engines that burned kerosene. And it was just fundamentally an expensive operation. And it failed, right?
What this whole door-to-door thing is got nothing to do, or only partially to do, with the air vehicle. It's the app. The day that we can provide the user with an app in which air is just one option and they just push a button and they book a trip from their door that involves ground vehicles, air vehicles, public transport, whatever it happens to be is the day that this actually works.
It doesn't work if they have to drive miles to the Vertiport, and it works if the right Vertiport is close by. If the trip includes a vehicle, it gets them to the Vertiport and from the Vertiport. We've got to stop looking at advanced air mobility like traditional aviation. To work, it can't be traditional aviation. We're not there yet. That's the problem. We have got to get all these pieces in place for it to actually work, but it is not air taxi in the VLJ sense of air taxi.
Okay. We're starting to run down on time, but I want to make sure Richard and Mike got a chance to give some final comments. And Richard, I do want to say that we said you were critical of Boeing's investment in Wisk, I think you weren't critical of Wisk per se, more that Boeing should be focused on some other big, big problems they're dealing with. Correct?
Yeah. I mean, the investment at Wisk from an optic standpoint alone is problematic because they've had these draconian cuts in their core engineering workforce and the investment in their core product line, which fell 20% last year, 30% present the year before. If they were developing a new jet for the first time in 18 years and increasing, not decreasing, their engineering head count and spend, and on the side, they wanted to make this forward bet in Wisk, I'd be fine with that. But the simultaneous cuts to their core jetliner development business and this investment in Wisk, basically tells all of their customer base, "Yeah, go and get in line for an A321neo because you're not getting the equivalent jet from us anytime soon".
I have to disagree, frankly, Richard, with your thesis here. Boeing is not investing in Wisk because they want to manufacture millions of light electric aircraft. They're betting that what comes out of this program is going to benefit their airline customers and help to differentiate their future plans for perhaps smaller aircraft, hydrogen powered flight, etc. I mean, it's an important bet for them to show the airlines that they're thinking outside the box. I also want to say, Joe, that it's not just about moving passengers, advanced air mobility is going to create new business models in the medical field, for example.
If you look at what Walmart is doing in package delivery, that's one part of it. Another big part of the Walmart plan is to bring healthcare to rural areas using their retail stores. If you look at Arkansas, Walmart has about a hundred stores throughout Arkansas, but the health outcomes of Arkansonians is very poor. Being able to move dentists vertically to new dental labs located in their stores is a big part of the strategy for them. And they're betting on advanced air mobility to help move people around. So these are wonderful, socially beneficial, large, very large market opportunities that can be enabled through electric flight. And we have to think a little bit more broadly about the potential across multiple new markets.
Okay, well that unfortunately concludes our time, but gentlemen, thank you for an enlightening discussion and we'll definitely have to have you back for round four. Richard Aboulafia, Mike Dyment, appreciate your time. That is a wrap for this week's Check 6 podcast. You can subscribe to Check 6 in Apple podcasts, Google podcasts, Stitcher and Spotify. You can also read Graham's regular reporting on this sector in the weekly AAM report, go to aviationweek.com/aamreport. Special thanks to our podcast editor in London, Guy Ferneyhough. Join us again next week for another Check 6 and stay safe.