2023-05-09 04:52:37 ET
Summary
- Vertical Aerospace has made it clear it needs a capital raise.
- The regulatory framework for eVTOLs is highly complex and a big risk to shareholders.
- Disruptive technology such as eVTOLs in an urban air mobility setting offer huge chances.
- Reality is that most manufacturers are not properly equipped to reach the highs of the eVTOL potential.
Looking at the coverage of players on the eVTOL market, we see all kinds of ratings on the various players on the eVTOL market. I, myself, have a buy rating on Eve with the notion that this is highly speculative, but while the company is a few steps behind compared to some peers, I do believe that they have a big advantage from the partnership with Embraer (ERJ). In this report, I will discuss why things are extremely difficult for Vertical Aerospace ( EVTL ).
The Rosy Outlook For The eVTOL Market
The rosy outlook for the eVTOL market is quite simple. The market potential is huge. Morgan Stanley estimates that the eVTOL market could be a $1.5 trillion market by 2040. We see a huge focus on how many orders eVTOL makers are collecting. The reality is that many order carry little meaning at this point other than nice PR for the eVTOL makers as I will explain later on.
Projects including engineering products have to fit in the SMART framework. That is one of the first lessons I was taught during the days when I was still in college myself following the Aerospace Design & System Engineering elements course. SMART stands for specific, measurable, attainable, realistic and timely.
Putting it simple, you have to design the product that the market wants achieving the objectives that the market wants at the timeframe that the market wants. If you design something that the market doesn’t want, you won’t sell the product, and if the product is either too early or too late to the market, the product will not sell either. The Airbus A380 might be an unfortunate example of that. I have no doubt that significant demand will exist for eVTOLs, which is not just limited to urban air mobility. Where things get more complicated is the attainability, realistic and timeliness element for eVTOL makers.
eVTOL Makers Violate SMART Framework
Part of the SMART framework is that you are realistic on the all elements of the project and what I believe is the major flaw at many eVTOL manufacturers is the time element. Many eVTOL makers have approached the market as if they have that one product that is going to be the success in the market. Very few, however, have attached realistic timelines and I cannot blame them from that completely. The technology is disruptive and regulators for a long time have been busy setting up a framework for certification of these new type of machines. The result, however, is that many eVTOL makers have been extremely bullish on their time-to-market and that is where things become difficult because if you don’t have a product and your product is still in development, you don’t have any cash generation meaning that you rely on funding, and if you rely on funding, you better have a good product that hits the market before you really run out of cash. That is one out of many challenges for eVTOL makers right now.
Vertical Aerospace Got Caught
The subject of eVTOL in the many challenges companies in the air mobility space face is complex, so I will not make an attempt to go through all of the challenges, but I do want to highlight how the time-to-market element is hurting Vertical Aerospace.
I don’t want to say a lot about SPACS, because it is a touchy subject and I wouldn’t consider myself a SPAC expert. What I do know and that is also the general view in the aerospace industry is that the SPAC mergers as a way to raise funding for eVTOL development says a thing or two for appetite in funding these projects. With a $1.5 trillion market opportunity, big aerospace companies have not backed eVTOL makers with loads of cash, and I think that says something about the associated risk profile and the realization in the industry that while there are many players in the eVTOL race, only few of them will actually make it.
To keep the dream alive, many eVTOL makers went public via a SPAC, during the SPAC boom it was a great time to raise cash. When Vertical Aerospace went public, the SPAC boom was already nearing its end, and with $300 million raised, I wouldn’t say that it was a failure but the funding wasn’t adequate to get through certification.
Time Is Money, Also For Vertical Aerospace
The challenge when developing a product even when demand is high is whether you get the product on the market before you run out of cash, and I believe that many eVTOL manufacturers have underestimated both the timeline and the cash required to bring an eVTOL to the market. Especially when keeping in mind that the regulator had to develop rules and that led to a change of mindset last year under what set of rules eVTOLs would be certified. I wouldn’t blame it all on eVTOL makers that they initially were optimistic on 2024 certifications, but I think with the disruptive nature of the eVTOL product, they could have known.
So, we are looking at longer timelines for certification and perhaps the roughly one-year certification process that eVTOL makers had templated from traditional commercial airplane manufacturers has been too optimistic, especially given that eVTOLs go through a 5 step process of which the first steps have already shown to be long. A slip in the timeline also means more cash burn and another year of delaying revenues. It took Airbus ( EADSF ) 14 months to go through the flight testing and paperwork for certification for the Airbus A320neo and that was with a very clear product and set of rules for which certification only needed to be carried out without having to invent the set of rules for it.
So, certification could easily take double the time of a normal one-year or so program as seen with commercial aircraft. That means an additional year of burning cash. Some of the eVTOL makers are burning between $100 million and $500 million per year. eVTOL burned $125 million as prototyping is expensive. While the cash burn profile in the years of flight testing is not known, I think generally the market, including the eVTOL manufacturers and suppliers, have underestimated the cost of development. Years ago, the expected figure was still around half a billion to one billion dollars, but if we do know one thing from the commercial airplane developments, it is that often the actual development comes are a factor 2 to 3 higher. So, the actual development costs could be in the range of $1 billion to $3 billion and I think Vertical Aerospace with a $300 million raise has not been equipped for that.
Vertical Aerospace is being regulated by the UK aviation regulator but I would not expect major differences in timelines there. The company has £104 million or $131 million in cash and cash equivalents, which realistically carries the business for a year and they announced in the first quarter that the certification target has slipped to late 2025 to 2026 giving the company a one-year delay in the best case, and with their current cash pile, they can’t even fund a year ahead to 2024 it seems. That is also why the company intends to raise cash and that it is certain that this will be at the expense of shareholders.
So, we see that Vertical Aerospace has been caught by the complex regulatory framework but that might not even be the biggest issue. While the orders are being seen as a big source of cash generation, most orders have no deposits or refundable deposits with a small portion being non-refundable. It is unknown when those deposits will happen making the huge “backlog” close to meaningless.
Beyond that and I might share some applicable number for eVTOLs on that in the future. The challenge of scaling does not seem to be incorporated in the cash requirements either. The VX4 of Vertical Aerospace should cost around $4 million keeping an edge over small-size helicopters, but with scaling production and higher development costs, one can wonder how strong the business case really is. I graduated on the design of an airplane the size of the Airbus A321neo that should be significantly more efficient and preferably enter the market around 2030. During the project, I was in charge of development budget estimation and production scaling. A lot of that can be applied to eVTOLs and the reality is that the initial productions are significantly loss making. It can take up to five years for production to mature and a significant number and a big part of those airplanes within that five-year production frame carry a production loss. So, there are many elements beyond flight testing that I believe are not adequately identified at this point.
Conclusion: Vertical Aerospace Is Extremely High Risk
eVTOLs are all high risk and potentially high reward, but I feel like with many eVTOL manufacturers there is a huge risk of proper budgeting for the aerospace realties being absent, and if I look at Vertical Aerospace in particular, they have already admitted the need to dilute shareholders and it makes one question how far away certification, profitability and shareholder results really are. Disruptive technology comes at a price and can be difficult to commercialize and it seems Vertical Aerospace shareholders have been paying that price.
For further details see:
Vertical Aerospace: An eVTOL Hype