In recent months, I’ve been closing the loop on aviation fuel replacements over the coming decades, and where and how the replacement will start. My assessment of hydrogen, aluminum fuel cells, the arguments of those critical of rechargeable batteries, and biofuels pointed to rechargeable batteries and biofuels as the dominant replacements. I then projected the fuel replacement through 2100 in a scenario to trigger thinking, showing battery and biofuels rising through 2060 followed by batteries dominating, and the projecting emissions benefits.
My extended conversation with Anders Forslund, CEO and founder of Heart Aerospace, introduced me to the opportunity for regional air mobility with electric fixed-wing plane economics to revitalize the sector, something cemented by conversations with Josef Mouris, CEO and founder of Electron Aviation, and NASA’s regional air mobility white paper.
That led me to exploring the high-market cap pure play companies trying to introduce electric vertical take-off and landing (eVTOL) aircraft, including Joby, Archer, Ehang, Vertical, and Lilium, all of which I’d looked at in the past as a voyeur on interesting electrification opportunities without particularly thinking them relevant. It became clear that they were going to be much more expensive to operate than purported, that their total addressable market was tiny, that they were betting on complexity instead of simplicity, and they were betting against battery energy density.
I’d been surprised at the market capitalization of the leaders in this space. Excluding Blade Urban Mobility, which is a platform which provides affluent people with charter jets and runs a scheduled helicopter service in Manhattan, one of only two in North America, and excluding aerospace giants such as Embraer, Airbus, and Bell (Textron), all of which have eVTOL aircraft in prototype, and including Vertical’s announced $2.2 billion SPAC, still theoretically pending this year, the market capitalization recently was still over $12 billion.
It was clear to me that this space was vastly overvalued at that market capitalization, but I thought it would be interesting to see what the pure play market capitalization was at peak versus today.
At peak in 2021, the stocks, including Vertical’s SPAC, were worth $27.92 billion. As of close of North American markets on November 23rd, 2021, they are worth $11.82 billion, if you assume Vertical’s $2.2 billion stands up, which is a bad assumption. If that SPAC goes forward, I would expect it to be under $1 billion.
This doesn’t make Cathie Wood’s Ark Invest ARKX ETF, incepted on April Fool’s Day 2021 amusingly enough, with its position in two pure plays and Blade, as well as autonomous weapons platforms, UAVs, and military industrial stocks, look all that prescient. It’s done a lot better than the pure plays, only being off 5% since inception, in part because it only had $40 million of its $540 million in the urban air mobility space last time I checked, so other stocks have balanced out the eVTOL stocks.
It appears that $16.1 billion in market capitalization value has evaporated for urban air mobility stocks in the past few months.
By comparison, the S&P 500 is up 24.88% year-to-date, the Dow Jones Industrial Average is up 17.01% year-to-date, the NASDAQ composite is up 22.4%, and TSLA, with its electric vehicles and autonomous features, is up 57.16%.
I assume that most of the people and organizations that created the SPACs that took the pure play eVTOL companies got their money out early, so they did just fine, and the companies themselves still have far more capital than they have any need of, and certainly far more than their products and business models suggest is remotely warranted. But a lot of investors who didn’t do their due diligence, and who didn’t remember caveat emptor, undoubtedly lost a lot of money in this space in the past 10 months. If they’d just invested in a market index fund, they would have been vastly ahead.
So yes, the whiff of tulips I had been smelling over my analysis of this space has become overwhelming. It was a bubble, it’s deflated massively, it has no basis to reinflate, but the pure play companies are still left with a lot of money and the odd support of NASA to lobby for urban vertiports and a Blade Runner future. Never underestimate the power of billions of dollars to make a lot of people behave stupidly, so expect that one or two cities will buy into this idea and spend money that could have been much better spent to the benefit of their citizens.
Meanwhile, urbanists, policy makers, and investors, focus your attention on the portion of aviation electrification that makes tremendous sense, has strong use cases, and will actually deliver innovative value: regional air mobility. Activate the 400- to 750-meter airstrips that are languishing in and around your cities with a mesh network of cargo and passenger deliveries that are carbon neutral, quiet, and viable this decade. Pay attention to Heart Aerospace, Eviation, and Electron Aviation, with their 4- to 19-passenger, 0.5- to 2.5-ton cargo capacities. Pay attention to the orders put in by shipping firms and passenger airlines for fixed-wing airlines that will revitalize your existing airstrips. Support the Harbour Air’s as they convert their commuter float planes to electric.
The Innovator’s Dilemma tells us that the major aerospace firms will be slow to electrify, slow to bring useful electric cargo and passenger aircraft to the market, and slow to realize that they are losing market share at the bottom of the market. Let them figure it out. Christensen and Raynor provided them the insights they needed to survive the transition in 1997, so if they can’t figure it out, that’s on them.
Aviation will electrify over the next 80 years. It will go through a biofuels blip which will have vastly lower emissions than today’s fossil fuels. The electrification will begin with small fixed-wing planes flying 400-600 kilometers between urban areas, and they’ll have business models with on-demand booking and fly-when-you-arrive service, and a bunch of scheduled services.
Aviation will not electrify starting with and likely not ending with massive numbers of electric VTOLs humming through the skies of our cities. If you are an urban planner or policy maker engaged with urban air mobility, be aware that the bloom is distinctly off this rose, cut your losses, and pivot to regional air mobility. If you are an investor in one of the pure plays, the trajectory of the stocks is down. Cut your losses. If you work for one of the firms, congratulations, you have absurd amounts of money to play with on cool engineering projects. But if you actually want to make a difference for the climate or the economy, consider your exit strategy.
Feature image courtesy of Electron Aviation.