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   article | 19-Jul-24

New Generation Mobility: Financing Considerations for Operators


Alton Team: Alan Lim,  Ben Tinkler Davies,  Daniel Zhou,  Evan Deahl,  Filip Nowick,  Jordi Ferrer,  Joshua Ng,  Tatsuhiko Suzuki,  Zhen Ying Cheah

Market: Technology & Mobility

Financing Considerations for Operators

With electric Vertical Take-off and Landing (eVTOL) aircraft poised to enter commercial service more fully over the coming years, access to financing may be crucial for operators in order to incorporate these novel aircraft into their fleets. To date, because of limited eVTOLs being delivered to operators, fundraising explicitly earmarked for eVTOL acquisitions by operators has been rare. However, as eVTOLs move towards delivery and commercialization, operators will increasingly need to plan and secure their financing.

Unique Risks and Characteristics of the eVTOL Sector

In traditional aviation sectors, operators with strong financial creditworthiness, longer operational track record and / or experience with asset-based financing will likely be better positioned to access financing. While that generally remains true for the eVTOL industry, there are risks unique to the sector that may affect decision making by financiers and operators alike:

  • Commercialization uncertainty, due to an evolving regulatory framework, uncertain safety / operational track records (which could impact public acceptance and adoption), and the lack of an established ecosystem (e.g., pilot training, certification, infrastructure);
  • Residual value and economic life uncertainty, as the novelty of eVTOL technology renders the economics of these aircraft more challenging to assess; and
  • Battery technology that may be currently insufficient to support use cases outside the urban air mobility use case.

Prospects of Financing for eVTOL Operators

For conventional aircraft, ca. 50% of new deliveries are financed via aircraft operating leases, while the balance are purchased directly by operators. Airlines and operating lessors alike utilize debt from banks, capital markets, and other sources to a more limited extent such as export credit agencies, insurance-supported financing, and manufacturers.
However, due to the abovementioned risks of a nascent aircraft type and smaller financing deal size, eVTOL operators’ ability to access and leverage traditional financing methods may be limited; financiers’ perceptions will differ based on their views of the eVTOL industry, business maturity and other factors.


Exhibit 1. Prospects of Financing for eVTOL Aircraft

Source: Alton


Near and Mid-Term – Credit is the Key

In the near term prior to and at the commencement of the commercialization phase of the industry, asset-based financing is anticipated to be more challenging to secure. eVTOL operators will have to rely on their balance sheets as a primary source of funding.

Financing at this stage will be credit-based and well-established operators are likely to have capital market’s access to finance their eVTOL aircraft, if they decide to do so. However, as the unit value of eVTOL aircraft is generally much lower than conventional aircraft, traditional financing channels such as bank and capital markets may only be required for more sizeable fleet deals.

Start-up operators may need to be more creative for their aircraft financing in the near to medium term due to the lack of established credit. Significant equity may be required for debt financing or alternatively export credit agency support may be critical, unless well capitalized OEMs are able to provide financing solutions or operating lessors are able to underwrite the credit and asset risk. Finding such solutions may be challenging.

OEM-operator-owners are in a unique situation as they may be able to access financing through the OEM business. However, the OEMs will also need to balance capital spending across their businesses given their integrated roles in the value chain. A successful operator requires investing in capabilities including pilot / technician training and MRO, in addition to the investments required to develop, certify, manufacture and scale production on the OEM side.

As the industry gradually proves its technology and economics, lessors are likely to capture opportunities in the market while banks and capital markets activity increases.

Long Term – Asset Quality Plays a Bigger Role

Assuming the industry matures in the long term, the feasibility and economics of operators’ business models proven, and asset economics become well understood, traditional financing sources through banks and capital markets will likely emerge.

Financiers at this stage will take both asset risks and operator credit risks into their financing decisions. Aircraft that have higher residual value retention are likely to be favored by lessors and financiers alike, allowing more attractive financing economics to be realized.

Start-up operators will see opportunities to have their orders backed by financiers, minimizing their own capital expenditure upfront. For operators that are also aircraft owners and OEMs, their business track record and aircraft maturity will be key to financiers’ considerations.

Conclusion

In a similar vein as the traditional airline industry, there will not be a one-size-fits-all approach to financing for eVTOL operators. Commercial financing for eVTOL operators will be heavily influenced by operator credit in the near and medium term, with asset-based financing gradually becoming available in the longer term.