EADSY - Boeing Airbus And The Autonomous Aircraft Opportunity

2023-11-05 23:48:25 ET

Summary

• Boeing and Airbus are engaged in projects and ventures that aim to bring autonomous flying to the aviation industry.
• Autonomous flight has the potential to reduce human error, increase safety, and lower operating costs in the air transportation industry.
• Airbus has the pieces in place to develop a fully autonomous fleet of aircraft, while Boeing is focused on providing autonomy to others in the growing eVTOL industry.

Introduction

Considering the exponential progress being made by autonomous driving software in recent years, as shown by Google’s Waymo ( GOOG ) ( GOOGL ), GM’s Cruise ( GM ), Mobileye ( MBLY ), and Tesla ( TSLA ), I thought I would look into how much progress is being made in fully autonomous flight, complementary to autonomous driving. I found that two of the most prominent aircraft manufacturers in the aviation industry, Boeing ( BA ) and Airbus ( OTCPK:EADSF ) ( OTCPK:EADSY ), are engaged in projects and ventures that stand to usher in a new wave of autonomous flying, making cheaper and safer flight a reality in our skies in the future.

What is Autonomous Flight, and Why Does it Matter?

To understand why I write about autonomous flight as an investment opportunity at all, we must first consider what it is, and why investors should care about it.

Autonomous flight, in short, is an aircraft’s ability to taxi, take off, fly/cruise, turn, and land without human guidance or intervention, almost certainly with the help of artificial intelligence training. Some may be wondering, “Don’t we already have these capabilities, since aircraft nowadays have autopilot installed in them?” Not quite. Autopilot in aircraft is more like a car’s advanced driver-assistance system, or ADAS. Most ADAS are mostly only capable of allowing a car to cruise somewhat autonomously on highways, but a driver still needs to be present in case of unexpected highway scenarios or for driving off the highway. The same is basically true of autopilot in aircraft – it works fine for cruising in the air, but can do little else without a pilot’s guiding hand.

As Tesla, Cruise, Mobileye and Waymo have proven, making systems beyond ADAS-level capabilities is a fairly attractive business opportunity. I say this because the companies involved wouldn’t sink billions of dollars into developing self-driving software if they didn’t think it would lead to a desirable return on investment. Additionally, the ability to reduce human error in vehicle accidents, and thereby reduce vehicle accidents overall, makes the development of autonomous driving software not just a good business opportunity, but a serious safety upgrade as well, assuming this software can perform better on roads than humans. Safety is certainly one aspect that will be noticed by regulators of autonomous software, regarding both safety milestones, and safety failures . Finally, autonomous driving stands to make transportation much cheaper for the average traveler. As it is for cars and trucks, so it is for planes and other aerial vehicles: autonomous flying software would be a money-maker for the companies involved, safer all around, and cheaper for customers.

Per this Forbes piece , UBS estimated in the late 2010s that autonomous software could save the air transportation industry about $35 billion. Considering that the industry is estimated to grow to about ~$330 billion by 2028, autonomous software could contribute back over a tenth of the industry’s value by late this decade, based on UBS’s analysis.

Boeing and Airbus – What’s Their Role?

Now to talk about Boeing and Airbus. Most investors may know Boeing for its military aircraft and rocket technology, and most may know Airbus for its commercial aircraft and helicopter production businesses. Both of these businesses are doing swimmingly, and will likely do just fine over time. But if you were to ask me why I would consider buying shares of either of them, it wouldn’t be for the companies’ hardware, but for their software. I care little about Boeing and Airbus’s aircraft businesses; my focus for the long term is on these companies’ promising forays into autonomous flight, and the prospects of further incorporating it into their current and future product lines.

Airbus, Dragonfly, and the Pieces of a General-Purpose Autonomous Flight Program

Airbus has recently launched an autonomous flight program known as Project Dragonfly. As reported, it is a program that allows software installed in the vehicle to guide it to safety should the pilot(s) be incapacitated. The article discussing it frames Dragonfly as a supplemental assistance software, but I see it as much, much more. With this program in place, and with a few upgrades and rounds of training, Airbus will be capable of developing a fully autonomous, general-purpose flight software program that can operate aerial vehicles on its own, incapacitated pilot(s) or not.

This assumes that Airbus doesn’t already have autonomous flight software capable of performing all the tasks pilots would. While I think this is currently the case, I do not believe it will remain true for long – Airbus appears to have the pieces in place to eventually form a fully integrated general-purpose autonomous flight software package.

According to this article on what differentiates self-flying aircraft from autonomous aircraft, self-flying aircraft are essentially just aircraft with autopilot that allow them to cruise, while autonomous aircraft are able to independently do at least three critical things in addition to simply cruising: take-off and land; seek out obstacles; and alter course to manage unpredictable situations. Airbus displays on its website a suite of autonomous flight technology and projects that are either deployed or under development. Among these is Dragonfly, which likely alters course to manage unpredictable situations like pilot incapacitation. Two more notable offerings in the Airbus suite are Deckfinder, touted as “The all-purpose landing aid,” and ATTOL (Autonomous Taxi, Take-off and Landing), a project that has allowed the company to take-off and land commercial aircraft using vision and image recognition, presumably avoiding obstacles in the course of taking off and landing.

It seems to me, then, that Airbus has assembled the necessary pieces to create a fully autonomous fleet of various aircraft. Once it does so, it will be able to fully capitalize on the benefits of the autonomous opportunity that I laid out above, i.e. lower operating costs, higher safety, and more competitive prices for customers.

Boeing, Wisk, eVTOLs, and a Huge Data Moat

Not to be outdone, Boeing also has a suite of autonomous flight programs – one that is actually much more diversified since it includes applications for craft in the sea, the air, and in space . Still, I think the headlines for Boeing over the next decade or so regarding autonomous flight will focus more on how it provides autonomy for others, not how the company itself utilizes autonomy. In other words, while the popular Airbus tale of autonomy will be that of a company on the cusp of assembling its own generalized solution autonomous flight software for its own use in commercial craft, I think Boeing’s tale will be that of a company that bought leading autonomous flight software and a hoard of training data in anticipation of its use by a nascent segment of the aerospace industry.

To summarize the backstory regarding Boeing’s new autonomy front, we first need to wind back the clock a bit. A company called Zee Aero was founded in 2010 as a startup producing vertical take-off and landing, or VTOL, vehicles. What made it different from its competitors was that it aimed to have its vehicles eventually be autonomous, and collected years of flight data to train on for this purpose. A merger, a spinoff, a name change, and an acquisition later, Zee Aero became Wisk Aero, and Wisk became a Boeing subsidiary. Wisk kicked off a 2021 lawsuit against another upstart VTOL company, Archer Aviation ( ACHR ), for stealing Wisk’s trade secrets, but in mid-2023, both parties buried the hatchet, settled their differences out of court days before trial, and agreed for Archer to exclusively use Wisk’s autonomous software for its operations.

Due to Wisk’s decade-plus worth of flight data and experience with VTOLs, Wisk is the real autonomous software winner in the VTOL arena. As this article by Stephen Tobin explains, no other company has the data advantage to train its own VTOL fleet to quickly become autonomous. Acquiring data takes time, and Wisk is far ahead in that area, so it will likely emerge with its own autonomous flight software very soon, much sooner than anyone else in the VTOL space. Of course, as Wisk’s parent, Boeing benefits where Wisk benefits. Once Wisk completes its software, Boeing will be highly incentivized to license Wisk’s software package to members of the nascent electric VTOL (eVTOL) industry. Boeing and others will point to Archer’s successful use of Wisk’s autonomous flight software as a reason to license it from Boeing; meanwhile the large amounts of time and money needed to develop autonomous software will stand as a reason for competitors to not compete against Boeing, prompting them to line up to license the Wisk/Boeing software.

The eVTOL industry is projected to grow at about a 20% CAGR over the next decade, according to consensus estimates. As this growth occurs, the Wisk/Boeing autonomous software will find its way into more and more eVTOL vehicles as eVTOL companies aim for more autonomous flights, sending more free revenue Boeing’s way. Boeing’s software would likely then become the industry standard in the eVTOL industry for autonomous flying, setting the company up to collect a steady check every quarter from a young industry that may be worth $2.3 billion in 2033, and likely to grow as it matures. Not a big deal for Boeing itself considering the company’s already huge financial numbers, but the company would still be the main player actively encouraging the proliferation of the new eVTOL industry’s autonomous flying capabilities.

The Financials – Why Autonomy May Not Be the Biggest Deal for the Balance Sheet

Speaking of the financials, let’s go over the main financial metrics for Boeing and Airbus.

For Boeing, revenues from 2013-2019 hovered around $80-100 billion, but dipped to $50-60 billion beginning in 2020, and have been climbing back up to an estimated $75 billion in the trailing 12 months or TTM. Net income was roughly $5-10 billion from 2013-2018, but the company has sustained net losses in the years since, with losses of ~$600 million in 2019 and nearly $12 billion in 2020, before reducing losses to $4-5 billion in 2021 and 2022, and reducing to a ~$3 billion loss in the TTM. Lastly, operating cash flow fluctuated between $8 billion and $15 billion from 2013-2018, then fell negative with losses of ~$2 billion in 2019, $18 billion in 2020, and ~$3.5 billion in 2021, before turning positive again with cash flow of ~$3 billion in 2022 and over $6 billion in TTM.

For Airbus revenues from 2013-2019 were $70-80 billion, then dipped to ~$60 billion from 2020-2022, only recently reaching ~$67 billion in TTM. Net income for the company has fluctuated between $1 billion and $3.5 billion from 2013-2018, dipped to losses of over $1 billion in 2019 and 2020, and rebounded to over $4 billion every year afterward. Finally, operating cash flow hovered between $2-5 billion from 2013-2019, fell to a loss of over $6.6 billion in 2020, then rebounded to cash flow of over $5 billion, over $6 billion, and over $7 billion for the 2021, 2022, and TTM periods, respectively.

In sum, these companies’ financials are very large, and were negatively impacted by the Covid-19 pandemic to the tune of several billion dollars. While their contributions to autonomous software could be a huge leap forward for innovations in flight, autonomous flight will not contribute much to these companies’ balance sheets, certainly not in the near term and possibly not in the long term, either. However, given time, and greater advancements, autonomy could move the needle for these companies’ finances more than it may initially appear. Plus, there is a consideration beyond the balance sheet investors may want to consider.

Added Autonomy Upside – AI Advancements and Competitive Security

Advancements in AI could increase the possible activities that can be done autonomously, which could set the stage for increases in the added value of autonomous flight. Considering the AI advancements we have seen since the UBS analysis cited by Forbes, there could be perhaps an increase in the possible autonomy gains above the $35 billion estimated for the aerial transportation industry alone. If we assume that AI-enhanced autonomy contributes back a tenth of the value of the defense market, as the UBS statistic claimed for aerial transportation, then considering the projected $830 billion market value for global defense in 2031, autonomous flight stands to add over $80 billion to the defense industry by next decade.

The autonomous flight upside for Boeing and Airbus, big players in defense and commercial craft, respectively, could therefore add several billion to both firms’ bottom lines. This amount would meaningfully affect the financials for both companies, and would have been large enough to offset some of the losses they sustained during the pandemic.

Beyond the balance sheet, however, I believe that autonomous flight will become a prerequisite to operate in the defense and commercial aircraft industries by the next decade due to its capacity to substantially reduce error rates compared to humans. Consequently, the companies operating non-autonomous craft will have to either settle for a greatly reduced market share, try to compete with these two behemoths, or license Boeing and Airbus’s autonomous software from them. So, even if the bottom lines of Boeing and Airbus only see a moderate impact, I think their positions in their industries will be secure due to their full embrace of autonomy. Such security, in my view, is priceless.

Risks to Thesis

To briefly cover the thesis risks, first, Airbus could fail to integrate its autonomous software pieces into a fully generalized all-purpose flight program; this would reduce its value as a one-size-fits-all software package for the company to flexibly use in its vehicles, potentially increasing complexity and cost as long as it operates its autonomous offerings in pieces. Second, Boeing could fail to properly capitalize on the Wisk software opportunity, and could face a potent rival who develops their own eVTOL autonomous software and outcompetes it on this front. Lastly, autonomous flight, with or without greater AI advancements, might not contribute to either the defense or commercial markets as much as predicted, reducing the amount of upside available for Airbus and Boeing to capitalize on.

Takeaway

While it may not result in big benefits to their balance sheets, I believe that Boeing and Airbus are well positioned to capitalize on the promise of fully integrated autonomous flight software, and will gain significant benefits from it, along with other companies and industries.

Due to the likely tailwinds stemming from their strength in autonomy, I rate Boeing and Airbus shares a Buy.

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