Dear Fellow Bubble Watchers (Part 2, the Sequel),
It’s déjà vu all over again. I have distant memories of Very Light Jet/Air Taxi arguments from the 2000s, and now, as Advanced (or Urban) Air Mobility emerges, with similar business cases, aspirational goals, and utopian greed, all that air taxi nonsense is flooding back (albeit with much shorter aircraft ranges). Thanks to vast pools of cash sloshing around in the economy, AAM concepts are now proliferating. I feel like that Greek guy who got a job killing monsters. Chop one head off, and three, or 20, will grow in its place. A series of SPACs will then offer these monster heads $5 billion (on paper), enabling, and encouraging, even more monsters to sprout.
Thus, with a sense of futility, I offer the following six AAM thoughts, harkening back to the VLJ insanity I witnessed back in the 2000s:
1. Focus on capital costs. AAM backers focus on operating costs because they look great. But everything with a piston engine or a light turbine looks great too. As with VLJs (and light helicopters), seat mile costs aren’t much more than with a nice car. Capital costs are the real problem. Look at the Archer SPAC SEC filing (here). It indicates that the unit price for the United pseudo-deal is $5 million. Question: How often are you or your friends given exclusive, personal use of a $5 million machine of any sort? That phrase, “Like Uber, for…” (air mobility, say) neglects the fact that most cars serving as Ubers have an economic value of, maybe, $10,000. And Uber drivers can own their cars; AAM pilots won’t.
I live in Washington, DC. If I looked at the same intra-city transport challenges that AAM is intended to address, and said, “This is a wealthy area. Who doesn’t want to ride in a Rolls-Royce, even just once? I think I’ll start an on-demand Rolls-Royce car service.” You’d think I’d lost my mind. But those cars cost 10% of what these AAMs sell for. Drivers would cost much less than AAM pilots, too, and there’d be no need for special infrastructure or insurance.
But with AAM, everyone pretends that none of this is an issue, and that capital costs aren’t a problem at all. The result is a market valued in the trillions. Because everyone wants to fly in an electric helicopter, right? “From our standpoint the only way it works is if it scales and is affordable and accessible and it’s a democratized form of transport,” as a Joby representative recently commented. That’s accurate. But it’s hard to scale up using $5 million machines. And $5 million machines will never be a “democratized form of transport.”
2. Don’t forget ULS syndrome. As described in my May 2018 letter, Unsustainable Life Spirals happen when you try to scale the unscalable. The gap between manufacturing costs and sales prices obliterates manufacturers. Eclipse sold its jets for around $1 million (or less), but it cost around twice that to build them. That’s what did them in. Meanwhile, the need to amortize those big capital costs over fewer-than-expected flight hours obliterated the operators, like DayJet.
The same will happen to most AAM manufacturers and providers. Investors, or regulators, will notice the losses resulting from the gap between revenue and costs. AAM touts will simply promise much higher production or utilization rates to make it all right. This never happens, of course, and everyone involved loses millions or billions, depending on how long they throw piles of cash into the ULS bonfire.
3. Don’t fall for future hype. With VLJs and AAMs, the pre-existing market (small private aircraft or rotorcraft) was nothing to write home about. But a “revolutionary” air service was (and is) supposed to change that. To promote this “disruption”, promoters need to obliterate memories of all the technology that came before the new stuff, and all the interim steps that could be taken to ease the path, because if these steps failed that would disprove the concept. For AAM, they need us to forget the idea of using R44s or other light helicopters in this role with modern Uber-like scheduling technology. Because if that fails, the bigger, far more expensive dreams die too. Remember my Roll-Royce car scheme? To enhance my business’s disruptive tech cred, I’d swap out the Rolls motors for batteries and electric drive. That would change everything, somehow, and magically this terrible idea would look eco-friendly and high-tech.
Obliterating the past isn’t easy. Consider the US Air Force’s impossibly goofy Agility Prime initiative, promising that one day there will be a vehicle with “3-8 passengers, traveling at least 100 miles at speeds greater than 100 mph.” Well, imagine that. Putting aside the fact this is not an Air Force mission, the idea that USAF personnel are trying to reinvent a mediocre helicopter is simply bizarre.
4. Engineering matters. Many VLJs were concept-heavy and execution-lite. Similarly, scratch into these AAM concepts and you may or may not find much serious engineering. And there doesn’t appear to be any connection between this problem and accessing capital. For a very useful guide to the hundreds of AAM contenders, and the work behind them, see here. As the same site accurately notes, “When you see a program that combines electric propulsion with eye-popping production numbers, it is almost certain that the universe is getting ready to create some very disappointed investors.”
5. This time may be different. AAMs seek cash in a world flooded with the stuff. SPACs weren’t a thing in the VLJ days; today, annual SPAC volumes are in the $200 billion range. Some of this SPAC cash is an illusion, but many AAM companies will last longer than those VLJ failures. As the New York Times noted, “The SPAC deals allow the companies to advertise ambitious business projections, something the Securities and Exchange Commission otherwise prohibits in initial public offerings.”
6. This time may be worse. What strikes me about those VLJ/air taxi days is that while I was always cynical, in real terms, I was a starry-eyed optimist. I would have thought that Eclipse would be a viable business after the second or third bankruptcy. It’s dead, along with the other VLJs, even the Cessna Mustang, which came from a real OEM. I would have thought that a few of the lower-cost air taxi operations would have been viable, like SATSAir. None were. AAMs may be able to access much more cash than the VLJ/Air Taxi people. But pumping cash into a flawed idea still ends badly. And the bigger the bubble, the bigger the collapse.
Yours, ‘Til Agility Prime Re-Invents The Jet Ranger,
Richard Aboulafia