The Future Is in the Sky, and We Won’t Need Runways Or Fuel To Get There

Electric Vertical Take Off and Landing (eVTOL)

Every year, Hong Kong, Beijing, London, Paris, New York, and Los Angeles, the world’s most beloved cities, attract an ever-growing number of people, seeking opportunity and prosperity. According to a UN report, by 2050 an additional 2.5B people will live in cities, making 80% of the world population urbanized. The same report also estimates that by 2030, the number of megacities (with more than 10 million inhabitants) will grow from 31 to 43.

Many of these cities, however, are reaching their limits. Partly due to lack of space, or funding, or both, urban infrastructure wasn’t designed to cope with an ever-increasing traffic flow. Adding new roads and highways is expensive and complicated, leading to congestion and saturation of available means of transportation.

Sitting in traffic has become a global problem, impacting productivity, fuel consumption and emissions. According to the American Transportation Research Institute, in the US, the economic loss attributed to traffic congestion amounted to $74.1B in 2019, not including the indirect costs from emissions and accidents. In the EU, the cost of traffic congestion is approximately $100B per year and is expected to increase to $300B in 2030. In terms of productivity loss, the average driver is estimated to spend 128 hours a year in traffic in Los Angeles. These figures climb to 133 hours in New York, 149 in London, 165 in Paris, and up to 14 days in traffic per year in Jakarta, Indonesia.

To address the limits urban planners face in highly populated urban areas, the solution may not come from more highways and roads, in fact, it may not come from the ground at all, but rather from the sky.

Vertical Take Off and Landing (VTOL) are aircrafts that are able to take off, hover, and land vertically, eliminating the need for runways. Their potential creates economic and social benefits, decreasing transportation bottlenecks and the need for ever expanding road networks. The potential applications of VTOLs are vast: air taxiing, which allows people to commute on-demand in urban centers and across cities; emergency response situations, including search and rescue operations and natural disaster events management; and cargo transport, increasing efficiency and speed of delivery of both large cargo and smaller parcels.

VTOL is not a new concept. Leonardo da Vinci was studying its potential, and in 1907, the Cornu, an early helicopter, made the first crewed vertical ascent. Helicopters are our current answer to Urban Air Mobility (UAM) in populated areas, efficiently transporting people and freight over short to medium distances, and air taxiing services have been using helicopters since the 1950s. New York Airways was a profitable operator in New York, offering rides from airports to downtown for less than the cost of a yellow cab, until a crash in 1977 led the company to default.

The biggest concern with scaling VTOL is noise and visual intrusion. The solution lies in electric VTOL (eVTOL), which represents one of the most recent breakthroughs in the aircraft industry. A study from Porsche, a company that invests heavily in eVTOL technology, found eVTOLs to be up to 4 times quieter, 2 times safer, and up to 10 times less expensive than traditional VTOLs such as helicopters.

eVTOLs’ are consequently prioritizing noise impact reductions as a key feature in design. Promoting quieter skies is a major advantage of eVTOLs over traditional VTOLs. Industry research is currently focused on reducing visual pollution and noise by leveraging propulsion systems with smaller rotors, creating less noise than a single rotor system such as the helicopter and by electrification of the power supply, which reduces the turbine noise emissions.

Recent developments in technology are accelerating public acceptance and large-scale commercialization of eVTOLs. One of the main breakthroughs making eVTOL a reality is an improved battery energy density, driven by hundreds of billions of investment and funded by behemoths like Tesla and General Motors. This is critical to offering a greater range at a lower cost and with less noise. Other major developments in eVTOL are sensors and Artificial Intelligence/Machine Learning (AI/ML), already industrialized in the automotive space and readily transferable to the eVTOL industry, thus improving autonomy and, eventually, removing the need for a pilot. The evolution in the field of 5G/Low Earth Orbit (5G/LEO) satellite communications will also play a key role in enabling safe and resilient communication with the additional proliferation of airborne vehicles.

Some macro developments have also created a fertile ground for the development of eVTOLs. The global climate and ESG revolution is propelling the industry. Traditional cars, trucks and delivery vans are undergoing major changes in their transition from fossil fuels and the aviation industry is the next frontier for sustainable propulsion.

On another hugely important front, last-mile logistics in e-commerce became an essential service during COVID, forcing governments to reassess their decades-long infrastructure projects and give more consideration to urban air mobility (UAM), providing strong support for the design of regulations in favor of non-human cargo carriers, which would eventually prepare the ground for large-scale human urban air mobility transport business models. Finally, the increased emphasis on national security, given the very nature of the eVTOL/UAM technology and its use in military applications, will likely help propel the industry even further.

The aviation industry is racing toward the development of eVTOLs, supported by billions of dollars in investment from investment firms and government agencies. According to data from PitchBook and PrivateEquityWire, in 2020, despite the impact of COVID, air mobility companies raised a total of $1.1B in private investment, an 80% increase from 2019. In Q1 2021 alone, investors poured $3.8B into eVTOL air taxi startups such as Joby Aviation, Archer, and Lilium, more than three times the amount invested in all of 2020. Pitchbook analysts estimate that the global air taxi passenger mobility market alone will grow from a debut start of $1.5B in revenue in 2025 to $150.9B in 2035, supported by operating cost efficiencies over helicopters and the development of affordable passenger air mobility business models.

In our opinion, three companies stand out in the eVTOL space, in terms of manufacturing, design, and readiness for large-scale commercialization. Archer Aviation (NYSE:ARCH) is one of them. The California-based company introduced its first 2-seater eVTOL, named Maker, in June 2021 in Los Angeles. Subject to FAA certification, Archer plans to start production and commercialization of its eVTOLs in 2024. The company projects revenue of $1B in 2025. In July 2021, it announced a definitive agreement with United Airlines, a first for an eVTOL company, for $1B of Archer’s aircrafts, with an option for an additional $500M. On September 17, Archer listed through a SPAC merger with Atlas Crest Investment Corp. (ACIC), receiving $1.1B in cash proceeds under the revised SPAC deal. The company has a current market capitalization of $1.89B. We see Archer Aviation having great upside potential, with forecast revenue exceeding $1B and strong established contracts.

Germany’s Lilium (NASDAQ:LILM) is another major contestant in the race for commercialization in the eVTOL industry. The company developed a 7-seater eVTOL, which it plans to commercialize and use for its air taxiing services by 2025. In August, the company announced a $1B commercial deal and strategic alliance with leading Brazilian airline Azul (NYSE:AZUL). The deal involves the sale of 220 aircraft to Azul. The Brazilian airline will use the aircrafts as part of its network, expected to start by 2025. With the partnership, Lilium plans to transform high-speed regional transportation in a country with almost 100M domestic air passengers a year. On September 15, Lilium listed via the SPAC Quell Acquisition (QELL) and received $584M in cash proceeds. Tencent was an early investor, followed by BlackRock, Baillie Gifford, and Palantir, among others. Lilium will use the funds to finalize design and assembly of the eVTOL, open a factory in Germany, complete the Type Certification process and start global deployment. The company’s market capitalization is $2.74B with a current price per share of $9.10. The analysts’ consensus is a price target of $17.33, a 90.5% upside. We like Lilium because it offers some of the best eVTOL capabilities in the industry. The company’s aircraft can accommodate 7 passengers over an impressive 155 miles range, making it a prime candidate for regional transportation services.

Our personal favorite is Joby Aviation (NYSE:JOBY), a California-based startup founded in 2009, which stands out as the most advanced and well-funded eVTOL company. Joby spent the last decade developing its own electric motors, increasing its chance of success. Joby focuses on eVTOL development and eVTOL transportation services. The company started trading on August 11 after combining with Reinvent Technology Partners, a SPAC run by LinkedIn co-founder Reid Hoffman and Zynga founder Marc Pincus. Joby raised $1.6B in cash proceeds. BlackRock, Uber and Fidelity were leading investors. Joby developed the S-4 eVTOL to operate as a commercial aircraft beginning in 2024. The aircraft has an autonomy of 150+ miles on a single charge, carries a pilot and four passengers and reaches a speed of up to 200 mph. Earlier this year, Avionics International reported Joby Aviation to be the closest eVTOL company to certification, citing an agreement to G1 certification conditions with the FAA. Joby is planning to begin commercial flights in 2024, targeting one of the busiest metro areas, Los Angeles, as its initial launch market. The company forecasts $2.05B in revenue by 2026, with sales in three cities for a total of 963 aircrafts. For an enterprise value of $4.5B, Joby is priced 2.2 times forecast revenue of $2.05B in 2026. The current market capitalization is at $5.53B, which is not cheap but appears justified in light of the company’s ambitious strategy backed by major partners and an impressive management team, suggesting a significant market opportunity and a positive long-term outlook. The analysts’ consensus price target is $16.00, representing a 75% upside.

Other companies are positioning themselves in the eVTOL race. Volocopter, a German startup, was the first eVTOL developer to receive a design organization approval from the European Union Aviation Safety Agency (EASA), a key step toward receiving the EASA SC-VTOL type certification for its two-seat VoloCity eVTOL, expected by the end of 2022. The air operator certificate is also in progress with Volocopter planning to begin air taxi operations in 2023 in Singapore and Paris.

Finally, there is EHang (NASDAQ:EH), another eVTOL company that listed in 2019. Its two-seat EH216 autonomous eVTOL has been in flight testing since early 2018 and its application for type certification by the Civil Aviation Administration of China was submitted in December 2020 and accepted in January 2021. The company expects the certification to be granted by 2022. The Chinese startup plans to operate the EH216 for air taxi services and is launching the “100 routes” initiative to develop trial services in China.

This brief overview of some of the major players shows a thriving industry, with leaders emerging and paving the way to transform transportation as we know it. Morgan Stanley, in an updated report from May 2021, details why it believes eVTOLs will be the next major disruption in the global transportation sector, and the vast implications these technologies will have for the future of transport, consumption, urban design, healthcare and ecology. The firm estimates in its base case that the global TAM for eVTOL/UAM will grow from $8B in 2020 to $55B in 2030 at a CAGR of 21%. In the same report, Morgan Stanley expands on its longer-term views, projecting the global market to grow to $1T by 2040 and to $9T by 2050 in their base case — representing 6% of the projected global GDP; and up to $18.9T in their bull case — accounting for 12% of the global GDP. As a comparison, the automotive industry accounted for only 3% of the US GDP in 2020.

To support these projections, industry experts agree that the TAM for eVTOLs could not only grow by taking a share of the existing Auto, Transportation, Airline, and A&D revenue opportunity but by creating its very own TAM. This entails eVTOLs answering to consumers’ needs that simply do not yet exist, or that are not achievable using existing modes of transportation and infrastructure.

Again, as with VTOLs earlier, this is not something new. In the early 20th century, the introduction of the passenger automobile created a new market with a new method of transportation, taking both market share from existing means of transport, such as horse drawn carriages and railroads, and also creating a new TAM by offering a new, reliable and safe means of travel to people that was not possible or practical using horses or rails.

Shortly after WW2, long-distance commercial travel created another new market, with airlines providing a similar revolution to what the passenger car offered over horses and rail. The total of passengers carried through air transport to the US increased from less than 800K in 1933 to 3M by 1946, and to 18M by 1970. The global per capita international travel increased tenfold between the 1940s and 1960s. Since then, according to the World Bank, global air traffic increased from 310M passengers in 1970 to 4.4B in 2019. Again, the commercial airline industry, as a new means of transportation, created a new TAM that did not rely solely on taking a share of the revenue opportunity of the automotive industry, which flourished during the same period.

While it seems impossible to predict whether eVTOLs will replicate the same growth as commercial airlines and personal automobiles, they appear to offer a similar disruptive and convenient new transportation method. Imagine, for instance, pressing a button to order an air-taxi to visit a relative living in another city for a day-trip; or flying from London to Paris, or from San Francisco to Los Angeles, for a night-out at a favorite restaurant and returning the same night to sleep at home. Imagine being able to get to your international flight in 20 minutes, rather than the two plus hours it would usually require. These are practical, real-life examples that simply do not exist with current modes of transport and infrastructure. They make eVTOLs appear similar to previous transport disruptions, providing it with a new TAM to exploit on top of the Auto, Transportation, Airline, and A&D TAM, and further supporting the bullish view of this burgeoning industry.

Industry leaders have even bigger visions, that, today, may appear like something out of a science fiction film, but may be closer to reality, even by 2030. Flying vehicles would change the layout and structures of urban centers. Cities would grow taller, expanding rooftop landing zones. Air highways would connect skyscrapers, freeing up space on the roads below, reducing congestion, and increasing green spaces and parks. Workers could order air taxis to be lifted to their cloud-tethered office. Eventually we could have less and less reasons to descend to the ground below, ultimately living our lives and conducting business in elevated cities in the sky.