Financing Considerations for OEMs

Although progress in the Advanced Air Mobility (AAM) space has attracted a wave of investment, the amount of funding raised has waned since its peak in 2021. Apart from EHang and AutoFlight’s recent certification under the Civil Aviation Authority of China (CAAC), all other players across the world are continuing to work towards certification in their respective jurisdictions, with many targeting entry into service by 2026.

Prior to this date, operators and investors alike must consider the ability of an Original Equipment Manufacturer (OEM) to obtain the requisite funding to sustain operations while working to meet their certification and commercialization milestones.

OEM Financing Trends

Between 2018 and 2023, AAM OEMs, including Electric Vertical Take Off and Landing (eVTOL), Electric Conventional Take Off and Landing (eCTOL), and Electric Short Take Off and Landing (eSTOL) OEMs, raised over US$11B in capital. Annual investment peaked at US$5.3B in 2021 amidst announcements of test flights and first steps towards certification; however, the pace and magnitude of funding has since slowed, as evidenced by US$3.5B raised in 2022 and US$1.6B in 2023.

To date, the amount of funding has primarily driven by private venture capital rounds / corporates, public IPOs, and the related PIPEs (Private Investment in Public Equity).

However, increased government participation in these projects is evident as OEMs seek further liquidity amidst a challenging capital markets landscape and as public sector authorities seek to take a more active role in developing and supporting the industry.

Exhibit 1. AAM OEM Fundraising Activity, 2018-2023 (US$B)

Note: Figures reflect publicly available data for AAM companies and may not be exhaustive, includes eVTOL, eCTOL, and eSTOL companies
Source: Alton; Pitchbook; annual reports; OEM press releases

Continued Importance of Financing for OEMs

With a long and challenging path toward certification and commercialization, OEMs remain keenly focused on access to financing. Liquidity issues jeopardize an OEM’s ability to reach key certification timelines, and some OEMs may not have cash to sustain operations through certification.

It is therefore essential for operators, investors, and lessors to understand an OEM’s ability to raise funds in order to assess the overall risks of investing in or acquiring a particular OEM’s eVTOL.

Exhibit 2. Cash on Hand vs. Trailing Twelve Months (TTM) Cash Burn (US$M) – Dec 23

Note: N/M denotes not meaningful, as EHang has already acquired Type Certificate, Airworthiness Certificate, and Production Certificate from CAAC
Source: Alton; Pitchbook; annual reports; OEM press releases

Impact of an OEM’s Existing Funding Source

Private Market – Equity (PIPE / VC / Corporate / Private)

The private market is the traditional funding source for pre-commercial stage novel technologies, and is a key funding source for AAM OEMs. This form of funding can come from financial investors (e.g., venture capital firms) and strategic investors, including both externally funded and internally funded sources, in exchange for equity stake in the company.

Fueled by the favorable low-interest environment, new private funding raised ca. $4.8B in 2021-2022, before subsequently and sharply dropping to ca. $1.1B in 2023 as interest rates increased.

Financial investors in the AAM sector seek outsized returns in exchange for placing higher-risk bets. The general availability of such funding is highly dependent on the market environment including the cost of borrowing. While technological breakthroughs could further incentivize further private funding, major milestones such as type certification are still 1-2 years away for the majority of the western OEMs.

Strategic investors place bets on programs in return for potential synergies with their existing / future businesses. For strategic investors already in the aircraft manufacturing space, early investments in AAM OEMs have helped them secure manufacturing contracts and lucrative aftermarket sales support arrangements.

OEMs backed by parent companies (e.g., Honda, XPeng HT, Wisk) have the unique advantage of being financed internally, which provides a more predictable and stable source of cash while shielding OEMs from volatility in the capital markets and the macroeconomy more broadly.

However, there could be potential downsides, as a shift in a parent company’s priorities or poor business performance may result in fewer resources being devoted to a subsidiary AAM program.

In Q1 2024, private investments in the industry have been on a smaller scale. Recent notable private investments include Lilium’s $74M PIPE, Heart Aerospace’s $107M Series B raise, Vertical Aerospace founder’s own $50M investment, and Elroy Air’s ca. $50M venture capital funding round after achieving the world’s first turbogenerator-hybrid test flight in late November 2023.

In order for additional private capital to flow into the sector, investors will want to see OEMs achieve key milestone events, with potential tailwinds coming from the macro financing environment. Parent companies, likewise, are anticipated to require firming strategies and clear milestone achievements to continue funding their AAM business to commercialization.

Private Market – Debt

Private debt at present is constrained, notably smaller in scope (excluding government-affiliated debt arrangements), owing to uncertainties regarding OEMs’ repayment capacity. Private creditors would insist on robust collateral and assurances to safeguard their investments in such transactions.

Public Market (IPO / SPAC / Public)

Following the post-COVID fiscal stimulus packages from governments around the world, six OEMs raised >$2.6B from Initial Public Offerings (IPOs), excluding PIPE investments, providing those OEMs with an influx of cash and support for continued operations.

However, the longer certification timelines and current higher interest rate environment hamper companies’ ability to raise funds from the public market – and only a limited set of AAM OEMs have been able to do so in the past 24 months (e.g. Lilium’s public offering of 38M shares in May 2024 and ca. $75M equity issuance in July 2023). In the broader aviation space, public offerings have also been limited with some exceptions such as XTI Aerospace’s IPO in March 2024.

With the less favorable environment in the public market and declining share prices, raising money through this channel may not be promising for many OEMs, such that alternative avenues need to be secured.

Government Supported Funding

Certain governmental bodies are also promoting AAM development to achieve sustainability goals, boost local economies, and stay at the forefront of technology innovation.

In the United States, the Air Force’s Agility Prime program has partnered with the eVTOL industry to accelerate dual-use transformative vertical lift markets. Examples of announced partnerships include:

1. Contract with Joby for nine aircraft including training and testing collaboration, valued at $131M;
2. Contract with Archer for six aircraft orders including training, testing, and MRO collaboration, valued at $142M;
3. Collaboration with Beta on testing, resulting in the first airworthiness approval from the military for crewed flights for an electric aircraft manufacturer in 2021.

Other countries have similar ambitions too. In Brazil, the Brazilian Development Bank (BNDES) granted a 12-year $92.5M credit line to EVE in December 2023 to support projects that help mitigate climate change as well as generate social benefits.

In China, EHang also received ca. $150M credit line from the state-owned Agriculture Bank of China in 2022 to support its working capital requirements. The lender also indicated its intention to support future ESG-linked bond issuance by EHang or short-term revolving credit facilities.

These loans / credit lines are of smaller scale compared to other forms of AAM funding, but could play an increasingly important role as the aircraft and business models approach maturity.

Customer Supported Funding

A final financing source to highlight is the Pre-Delivery Payment (PDP), commonly used in the traditional commercial aircraft sector but a more nascent form of financing in the advanced air mobility space. Few OEMs to date have been able to secure PDPs of scale, (though United Airlines paid Archer $10M in PDPs in conjunction with its order for 100x eVTOLs). With the industry trending towards commercialization, such payments may become more frequent, meaningful, and important to eVTOL OEMs.

Conclusion

A variety of financing sources – primarily private and public financing options – have been used by OEMs to raise financing to bring their vehicle concepts into reality. However, with changes in the financing environment, availability of those funding sources have ebbed and flowed, leading OEMs to seek alternative sources of funds such as government supported or customer supported funding options.

Regardless, in a tight financing environment, cash is key to support OEM development and commercialization goals. Continued fundraising is a necessary priority to ensure the long-term sustainability of an OEM’s business model.