AAM Investment Considerations

While the Advanced Air Mobility (AAM) industry has made significant strides in 2024, the recent shutdown of Universal Hydrogen underscores the inherent uncertainties associated with investments in future technologies. Despite substantial financial commitments to the sector, significant additional capital is still needed to fund the industry, along with a concerted effort to develop the ecosystem and secure support from governments and regulators for continued progress.

Investment Rationale in the AAM Industry is no Different

Investors use various tools to assess their investment plans, with Net Present Value (NPV) being a key method. NPV represents the total value of all investments and their anticipated future returns, taking into account both the risk premium and the timing of those returns.

A positive NPV signifies that the investor would make a return on that investment while a negative NPV indicates the investment is money-losing after taking risk premium into account.

Exhibit 1. NPV Calculation

Source: Alton

At present, there is broad consensus that the AAM industry remains in its development phase, which has and will continue to demand substantial investment. These investments will likely be needed through initial commercialization and will only start to see positive returns as the industry matures.

The NPV equation is influenced by the OEMs as well as ecosystem players such as operators and air and ground infrastructure providers. Regulators and governments also have a less direct yet significant role in influencing the NPV equation.

>$14 Billion Has Been Spent in the AAM Industry So Far – More is Required

Over the past five years, approximately $14 billion is known to have been invested in the AAM industry. More than 85% of this amount has gone to Original Equipment Manufacturers (OEMs), with the remainder invested in Air Traffic Management (ATM), avionics, powertrains, and infrastructure. Considering the undisclosed investments from major players like Airbus and Textron, these substantial financial commitments highlight a strong confidence and eagerness for innovation in the future of aviation.

Exhibit 2: Historical Funding in the AAM Industry

Note: Amount raised by EVE is included in both Air Traffic Control and OEM
Source: Alton; Pitchbook; Company Releases

However, as industry players, especially OEMs, approach their planned Entry into Service (EIS) dates, they will need additional investments to reach their goals. Recent balance sheet and cash flow analyses suggest that ongoing fundraising will be necessary to fund companies through EIS. Given the challenging capital markets conditions, it is increasingly crucial for OEMs to secure further resources.

Exhibit 3: Major AAM OEM’s Cash Runway (US$M)

Note: As of December 2023, TTM = Trailing Twelve Months, includes R&D, SG&A / stock compensation expenses
Source: Alton; Pitchbook

OEMS: Not all OEMs Will Survive; Distinct Value Propositions are Critical

The emerging AAM OEM sector is crowded with new entrants. According to the Vertical Flight Society (VFS), there are over 1,000 AAM vehicle designs as of April 2024. With each successful program estimated to require at least $1 billion in development costs, there is clearly not enough capital—$1 trillion or more—to fund all these concepts. Even among the 31 OEMs that have already secured over $10 million in funding, it is unlikely that all will reach their EIS goals. The scale of established players in traditional aviation offers a useful benchmark for how the AAM sector might look once it matures – fewer than 10 helicopter OEMs with >100 commercial helicopters in operation exist today.

Aspiring OEMs need to take the following internal and external factors into close consideration:

• In a challenging fundraising environment, demonstrating progress towards technical or commercial milestones is more important than ever to attract new investments
• Confronted with a lack of concrete datapoints due to the nascency of the industry, investors must nonetheless crystalize their investment thesis; an OEM’s ability to articulate its differentiators vs. other designs in the market will be a critical driver of its ability to attract orders
• A clear roadmap to mitigate risks around their vehicle and broader company is key
• Timing matters, and if the vehicle is not expected to enter service for the “first wave” in over the 2025-2026 period, then a compelling strategy is needed for the later EIS aircraft

Exhibit 4: Number of OEMs

Note: AAM OEMs include those that have disclosed >$10M funding / funded by parent companies; Commercial, helicopter, and business jets OEMs include those with at least 100 aircraft in service and still in production, excluding military usages
Source: Alton; Pitchbook; JetNet

Ecosystem: Developing an AAM Ecosystem is Key to Successful Commercialization

Investment in other areas of the AAM industry is significantly lower compared to OEMs, as ecosystem stakeholders are progressively leveraging existing investments to cater to AAM use cases.

• Infrastructure: existing Fixed Based Operators (FBOs) are partnering with OEMs to launch eVTOL services in the existing networks
• Operators: existing airlines are partnering with operators – AAM OEMs and other Part 135 operators – in establishing the operating model and concept of operations for future services. Some operating models contemplated include capacity purchase arrangements typical between US mainline carriers and regional carriers
• MRO: alliances are forming to develop aftermarket and training strategies to maintain the aircraft in a hyperlocal context

Exhibit 5: AAM Ecosystem Development

Note: [1] PDP = Pre-Delivery Payment
Source: Alton

Although the AAM industry is often viewed as revolutionary, it is, in many respects, “evolutionary” for many aviation services companies. These companies are repurposing existing infrastructure, operating models, and skill sets to adapt flexibly between traditional and future aviation technologies.

Regulators: Indirectly Help the AAM Industry Manage Risks, Determine EIS Timelines, and Support Social Acceptance

Regulators are crucial in shaping the commercialization timelines for the AAM industry through three primary functions: permitting, piloting, and promoting.

• Permitting: Regulators are deeply involved in the certification process. As rules are not clearly defined, major bodies like the FAA and EASA are working closely with OEMs to advance testing and validation processes to ensure that the vehicles are safe to operate and operate safely.
• Piloting: Beyond certification, proving the Concept of Operations (ConOps) is essential to ensure AAM operations can integrate seamlessly with existing aviation activities, particularly in urban areas. Regulators are key in developing and integrating ConOps, facilitating pilot programs that bring together stakeholders to validate use cases and address potential issues through improved planning and coordination.
• Promoting: Regulators also play a vital role in educating the public about the maturity of AAM technology, helping to drive consumer acceptance and understanding of these innovations.

Policymakers: Government Policy is a Key Enabler to Jumpstart the Industry in the Community

Governments contribute to advancing AAM development from strategic policy design to infrastructure investments to enhance both economic and societal benefits.

• Whole of Government (WOG) Approach: This involves coordinated efforts among various ministries, public administrations, and agencies to support AAM policy development. Given its multi-disciplinary nature, initial policies may include frameworks like the Transition Plan Taskforce (TPT), supplemented by relevant economic, social, and urban policies. Additionally, technology and sustainability policies are crucial in promoting AAM advancements.
• Benefits to Society: Underpinning the benefits assessment are detailed quantitative economic assessments of AAM use cases. This enables the design of targeted policies and funding mechanisms to facilitate the commercialization of AAM technologies.
• Economy and Development: Economic Impact Assessments (EIA) are essential to evaluate the broader economic effects of AAM deployment. This includes impacts on job creation, trade, talent development, innovation, and overall economic benefits. Such assessments help governments understand the full impact of AAM and guide funding and policy decisions.
• Infrastructure Development: Governments may directly or indirectly facilitate infrastructure development critical for AAM, including physical vertiports and air traffic management systems. It is critical for governments to drive initiatives toward next-generation sustainable infrastructure to support AAM operations.

Conclusion

As the AAM industry progresses, substantial investments are required for successful commercialization. The quantum of investment varies by ecosystem player, with the OEMs requiring significant capital investments to develop the new generation of vehicles while other ecosystem players have a greater ability to leverage existing investments for the AAM use case. Both regulators and governments play pivotal roles in “investing” in the industry’s future by managing certification processes, developing infrastructure, and implementing policies that ensure AAM’s successful integration into the aviation ecosystem and the urban environment.