Nineteen months after they predicted UAM would be a niche market, Aviation Week’s Graham Warwick and Teal Group’s Richard Aboulafia are back to address why investors are now pouring billions of dollars into the emerging sector. 

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Transcript:

Joe Anselmo

Welcome to the Check Six podcast. I'm Joe Anselmo, Editorial Director for the Aviation Week Network. Private investors are pouring large sums of money into urban air mobility startups, creating what is increasingly starting to look like a frenzy. High on the list is Joby Aviation, which already has conducted hundreds of flight tests of its air taxi prototype. Joby is receiving a $1.5 billion infusion as part of a plan to go public and launch air taxi services in three years. Joby's market valuation is already $6.6 billion. Joby's announcement came on the heels of a $1.1 billion commitment to fund commercialization of Archer's all-electric air taxi. Archer plans to launch service in Los Angeles and Southern Florida in 2024. It also has won a $1 billion order to supply 200 air taxis to United Airlines.

And money is pouring into dozens of other ambitious ventures. China's Ehang, Germany's Lilium and Volocopter, and projects backed to various degrees by Hyundai, Boeing, Airbus, and Bell, to name just a few. It's little wonder then that Aviation Week is calling vertical lift ‘aerospace's hottest market.’ But all this excitement got me to thinking back to a podcast we recorded and the summer of 2019 with Graham Warwick, Aviation Week's lead Technology Editor, and the Teal Group’s, Richard Aboulafia. They turned out to be largely in agreement that UAM would only be little more than a niche market. Richard's estimate, I believe, was about $2 billion annually at best. Given that so many investors have chosen to ignore their reasoned arguments, we asked Graham and Richard back to see if their thoughts on UAM have changed in the last 19 months. Richard, let's start out with you. I went back and listened to the 2019 podcast, and here were some of your thoughts.

Richard Aboulafia (on recording from 2019):

You’ve got to start with something when you're looking at a market. There is a market for a service or a product and the closest analog we now have is vertical lift pistons and wide singled turbines, and the market for that is currently $350 or so million per year. Really not much to start with. There's all kinds of potential for market stimulation on the basis of technology that's very exciting, but if it's a remarkable precedent setting, pathbreaking 5X stimulant, you're still left with a sub $2 billion market that doesn't justify the massive investment that's being considered for it.

Joe Anselmo:

Richard, given all the money that's poured into a UAM in just the past few weeks, do you still agree with yourself?

Richard Aboulafia:

Well, obviously I wasn't expecting accountability here, Joe, but now that you've imposed it upon me, I may as well take and run with it. Of course, I agree with myself. I mean, you've got this bizarre situation where it's now in the ... I mean, back then we could have a handle on the money that was going into this. I believe your magazine ran a chart that all seemed comfortably in the hundreds of millions here, but now you're getting into billions and billions. This is extraordinary because here we are a year or two or three later, and there's still what you call technically no market. There might be one day. There might well be. I would still go with my expectation of some kind of stimulated version of the current light vertical lift market. But right now, this is not a product that people are using. There is no functioning market and yet billions of dollars are pouring into it. This is setting us up for the mother of all bubbles, really.

Joe Anselmo:

Graham it's your turn on the hot seat. Let's hear what you had to say 19 months ago.

Graham Warwick (on recording from 2019):

To be frank, there's 150 something players that are developing vehicles. You can kill, you can forget 90% of those. They're just, they'll never happen. That brings you down to 15, and we've probably seen at least 10 of those 15 applying something already. Maybe they all have by now, but of those 15, I'd be surprised if five certify their vehicles.

Joe Anselmo:

Richard's standing firm with his forecast from 19 months ago. Are you standing for him as well or changed your mind a little bit?

Graham Warwick:

Well, I mean, clearly it's hard to stick to five. I think I'm going to take a lesson out of the book of the baker's dozen and the baker's dozen was habit of adding an extra loaf, a 13th loaf to a delivery of a dozen things. I'm actually going to come up with the Warwick half dozen, which is seven. Anyway, I do think that there's going to be consolidation, regionalization, and stratification. Actually, some of these seven are not going to be direct competitors. But you can't say that Volocopter with its little multi-copter is a direct competitor for Lilium with its regional thingy. Then, you might have a vehicle that is successful in China but not outside of China. I think there's going to be a little bit of that, but I mean, at the moment I would say there's about seven in the race. But I do expect some of those horses to get together or to go off and run in a different races at some point.

Joe Anselmo:

Richard, I covered the whole dot com boom and bust early in my career and it sounds like you're seeing parallels with that.

Richard Aboulafia:

Yeah, absolutely. This is not our first rodeo, right? I mean, the air taxi VLJ (very-light jet) craze of early to mid-2000s was sort of an extraordinary dress rehearsal. But to the best of my recollection, only one company, and dare I say it, Eclipse, raised anything like the kind of capital that we're talking about here. But that's the funny thing. Eclipse certainly would have made it into the Warwick baker's dozen. Okay, where does that leave? Well, as coincidence would happen, there's a newsworthy item. The shard husk of Eclipse was just sold a couple of weeks ago for the princely sum of $5 million to a fuel concern out of Singapore, I believe. That is all that is left of what was once back in, I think 2008, the single biggest market leader in terms of deliveries. It all flamed out horribly. If that's not sort of the best template for what might be going on here, I don't know what is.

The other thing I'd point out is that in order to make a proper Silicon Valley techno bubble, as I'm sure you remember and must remember, and maybe had been scarred by as we all were, you have to obliterate all memory of previous technologies that effectively did the same job like, "Imagine a world in which you could ride around on a sidewalk in an electrical vehicle." A sort of this, the tremendous run-up of concepts behind Segway: "You could re-engineer a city." Here we have it again. Everybody's saying, "Imagine a world where you could rise up vertically and then move horizontally at about a hundred miles per hour, and then lower yourself vertically. Imagine this utopian road." Yeah, that's called a helicopter. We've had them for way over half a century. We're seeing exactly the same dynamic, the willingful obliteration of all past technologies that could serve as a proving ground for what's being attempted here.

Joe Anselmo:

Richard, for those readers who are younger than us, when you say Eclipse, you're referring to Eclipse Aviation. There was a guy named Vern Raburn who was one of the early founders of Microsoft. He started a company that mass-produced very light jets at a low cost. I remember that Aviation Week wrote an editorial praising him and you've countered back that Aviation Week was a bunch of idiots. I'll never forget that. But it turns out you were right. Graham, this market is moving so fast. I mean, in January, you just published a list of your top 10 UAM ventures and Archer wasn't even on that list. Now, Archer is suddenly a big player. This is moving so fast.

Graham Warwick:

Yeah, it is. Actually, I'm going to go back to Richard's point about Eclipse, because I think it is a very, very good illustration of what the risks of what we're seeing play out here. Because when I first started covering eVTOL, which is back in 2010 or thereabouts, my concern was the technical feasibility. Well, we've kind of retired that risk. We know that we can do a sort of a vehicle that can do a mission on batteries. Then, it was the regulatory risk and we've seen the regulators come up with ways, approaches, to certify these vehicles. Then, I was concerned that really there wasn't a market out there. As Richard said, there is no market there now. To get for there to be a market, people have to want to fly in these vehicles.

The last time we did this, my big point was that there was no proof the market was there. What's happened since then is we have seen a massive engagement of the cities and communities to try and create that market. I think that the industry is tackling that. My concern now shifts to really, I am certain these things are going to go in service 2023, 2024. We're going to see limited service, kind of like a helicopter service from the same helipads on the same routes, but just to prove whether or not these vehicles are quieter, are safer, are cheaper to operate so they can then try and start to build a market. My concern now is the next 20 years. Because if we don't scale up, as Richard says, this is just another aviation market. It's few hundred airplanes a year, and it's the existing light helicopter market.

The only way it becomes something else is if they can scale it up beyond that. And that's really, if you go back to Eclipse, where Eclipse fell apart was the airplane had its issues, but it was certified, it was put in production, but its main customer DayJet had an air taxi model which was very sophisticated, they had a lot of thought go into it, but fundamentally the market wasn't there. The economics weren't there and they were not able to take the aircraft that Eclipse had set itself up to build in high numbers. I think, if we look at the scaling up process that faces this industry, that's where the same thing could happen if we don't get this right.

Because all of these companies, the Jobys, the Archers, are setting up for volume production. There are all of that cost projections that are based on volume production of aircraft and volume operation of aircraft. Unless we can make that volume work, which means we've got to have the airspace, we've got to have the infrastructure, we've got to have the customer base on a huge scale, then I think you get the same situation where you have aircraft going into a market that just isn't developing the way that they originally thought. I think that now is where I see the risk.

As for the continuing dynamics, Archer wasn't on the list in January because at that point they had not flown anything and they had a single angel investor. Now, we're setting where they still haven't flown anything, but they have got large amount of investment. And we're going to see that. I don't know if there's any other Archers out there. We didn't know about Archer two years ago, but they all face this signature challenge. Yes, they'll get into service, but can they scale to where it becomes something other than a traditional light helicopter aviation market?

Joe Anselmo:

You talked about DayJet. One of the problems with DayJet was it was the air taxi service and they often ended up with one passenger and two pilots. Isn't the difference here that a lot of these vehicles are going to be eventually remotely piloted or autonomous someday. Does that, Graham, make the economic case a little easier?

Graham Warwick:

Fundamentally, that's not going to happen anytime soon. It is baked into the long-term sort of cost projections of how you get this service down to a price that's equivalent to a ride share. Yes, there are two of the leading companies that are pursuing an autonomous only approach to this, but that's not how their service is going to start. Even Wisk, which is the Boeing-Kitty Hawk joint venture, they're talking about it, but they're not talking about flying autonomously over U.S. cities for several years. Ehang may think it can, but I don't think many people think they can. But your Joby and Archer's and Hyundai are all talking about piloted for some period of time. You can't bake autonomy into your initial business model. It's something that's out there that you aspire to and that you drive to over time, but you do not launch service on that basis.

Joe Anselmo:

Richard, there's a lot of smart and successful people behind all of this. What are we missing? I mean, if you're saying that they're foolhardy in doing this, why are such smart people being foolhardy? That's where I sort of have a disconnect.

Richard Aboulafia:

Well, wasn’t there a Mark Twain expression, it's something like, “It's very difficult to make a person see your point of view when his salary depends upon him not seeing your point of view.”  I mean, at the end of the day, there is so much cash flowing into this business. Not only does it dwarf the anticipated or prospective market size, it dwarfs anything else. I mean, it's pretty extraordinary, especially in these rather difficult commercial pandemic market times.

Then, someone offers you a board seat or an executive job at something, and they're going to have the sort of financial, well, they're going to have the pockets to give you a really good salary, heck, let them ride, give it a chance. I can't say I'm above it. If someone said, "Well, we want you to take lead on this venture. All you have to do is just apply your program management skills, which I don't have, but some kind of something aerospace adjacent and here's your million dollar salary." I can't tell you I wouldn't take it. I mean, I would never put my name on something that was simply wrong; but on the other hand, if someone offers you a job at a startup venture that may or may not survive, you're going to look at it very seriously.

Graham Warwick:

You heard it here first, folks. Just send your job offers. I think we have to ... I mean, it is extraordinary. I've covered aviation for 40 years. I've covered the general aviation market for that period of time. I have seen time and time again, interesting ideas fail because they couldn't raise a few, a couple of hundred million dollars to get something off the ground. Now, we've got billions of dollars coming in for things which haven't flown in some cases.

I do think that we do have to kind of put this in context, is this money's flowing into a lot of sectors. A slice of it is going into eVTOL or urban air mobility. But I mean, we're seeing a lot go into space. We're seeing a lot going into other sectors, as well, spacs every day and all of that. There's just a lot of money out there. Therefore, there are people placing, probably the same people, placing bets across multiple industries because they think one of them might be the next Tesla or the next Space X or the next whatever. It is not a phenomenon we're used to seeing in aviation.

But I think that this money is a bet. It will either pay off or it won't pay off, and I don't think that people who are putting the money in here are really that worried about whether it does or it doesn't. I mean, that's kind of, "I haven't got that money, so I wouldn't know whether I would worry about it or not." But  they're making a bet on a market. If that bet pays off, then they are on the ground floor of the next transportation revolution. If it doesn't pay off, they've probably got another bet somewhere else

Richard Aboulafia:

For that point, the Silicon Valley model is you put X amount down under different ventures, one of them is going to be a unicorn, the other 99, you don't worry about because you've just bought in on, I don't know, Amazon or Microsoft or the ground floor. That sort of thinking coupled with a ridiculous flood of liquidity in this economy and a complete absence of other investment opportunities has helped produce the marvelous concept known as the spac, otherwise known as hot money on overdrive. I mean, basically you've got this cash that's been provided to an institution with a relatively limited time horizon in which to spend it in a relatively narrow set of opportunities. Oh my, dear God, I think as a society, not just as an industry, we're kind of coming to terms with what the arrival of spacs means for the M&A world and for the economy in general. In other words, I have a feeling this is not going to be a bubble that just affects aerospace. It's probably going to affect a whole bunch of other segments of the economy.

The other thing I point out, per Graham's point about, compared to everything else we've seen in the past and salaries and everything, compared this with the agony associated with the Fairchild Dornier back 20 years ago. You had a bunch of folks, some people with very good names, getting a job at a startup company that was going to produce a regional jet or leveraging the old Dornier assets to produce a regional jet. The thing about it, it was shockingly legitimate. And it was. I have absolutely nothing. They even produced a really good jet for a really good, a decent enough market. They would have gotten there before Embraer, that larger regional jet market. It was really interesting. They peaked out and, I forget what it was, $700-800 million before Allianz and CDR cut the plug.

That's kind of frustrating here. In this environment, they would have said, "Hey, there's a real market. We've got a real jet, it's a good product. Can we please have another couple hundred million?" Somebody would have reached into their pocket and taken out a wad of walking around money and said, "Sure, keep spending." Here you've got the exact opposite of that. Just this sort of absolutely no horizon, or I mean, the expectations associated with capital going into this business are not like anything we've ever seen before, even with very light jets.

Graham Warwick:

I think it's important to also bear in mind that all this money going in, it fundamentally gets us to initial service with a handful of certified vehicles in a handful of cities to prove whether or not this idea works. To scale up, you're talking about a whole other level of money It's a lot to us in aerospace to see this amount of money coming in, but it only gets us that initial few vehicles in initial few cities to prove whether this idea works. If it doesn't, then we are left with a traditional aviation market. If it does, well, then we are talking about do we have a Tesla in our hands or do we have a SpaceX on our hands? But at the moment, all that's been put at risk is the money that's required to get the first few wheels on tarmac in the cities. Then, we will start to find out whether or not we have a market and we will start to find out whether or not we can scale that to a completely new transportation system. We just don't know whether that's going to happen or not.

Joe Anselmo:

Graham, we're running short on time, but a final question for you. We've talked all about the finances behind this. How about the pace of technological innovation? Is it about on pace where you saw two years ago or is it moving faster than you had expected?

Graham Warwick:

I think that it's kind of what you would expect once people focused on the technology. These are technologies that came from other sectors, so it's batteries, motor, and they were all automotive. These first prototypes that flew used automotive batteries, automotive motors. what you're seeing in terms of progress is the result of aerospace engineers focusing on an aerospace problem. And so what you're seeing is we're starting to see aerospace grade motors, aerospace grade batteries, and we're starting to see what look like quite practical, usable vehicles.

I think that there are already signs that the next step in battery technology is ... Now, the problem with battery technology is that there's always been hundreds of the next-best battery, but when they were focused on the automotive market, they never could quite sort of make that step in to get the automotive guys to ... because you have to do it on such a huge scale. Aerospace can look at some of these battery chemistries, like lithium metal or something like that, and they can say, "If I put aerospace engineering into this battery chemistry, I can produce an aerospace battery." I think what we will very shortly see is a big step in the performance of aerospace batteries and that might not now be tied exactly to what automotive. So I think the pace is really just the result of the industry getting serious about the technology.

Joe Anselmo:

Richard. I know I said I'd give Graham the last word, but you look like you really have got something to say, so let's give you the last word. How about that?

Richard Aboulafia:

Oh yeah, thanks, Joe. Is just seems kind of funny, 19 months ago and did this the first time the service promised to be no more than three years away. Here we are 19 months later, it's three years away. I will bet you a nice dinner in the neighborhood that when we meet again in 19 months, it'll be about three years away.

Joe Anselmo:

Okay, well, in that vein, I've actually looked at my calendar and seeing that 19 months from now is December of 2022. We'll have you guys back then for a Hanukkah/Christmas special, see where we are then. But you've both been great sports coming on. Thanks, Richard. Thanks, Graham.

That's a wrap for this Check Six podcast, which is now available for download on iTunes, Stitcher, Google Play, and Spotify. Special thanks to our producer in London, Guy Ferneyhough. Join us again on Friday when Aviation Week's Jen DiMascio and Irene Klotz will be delving into the rapidly evolving commercial space sector. Have a great week, stay safe, and wear your masks.