In my earlier posts I wrote about
Re-volt: battery sovereignty in the electric aircraft space - Implications for manufacturers and investors
Too many fish in the pond, too many electric birds not yet in the sky
In part 3 of this series let us examine how players in the AAM space can win the long-race to commercialization and profitability.
There are only a few exceedingly well funded manufacturers in the AAM space which either have a strong investor backing or are linked to an establish aircraft manufacturer. Most other manufacturers have and will continue to seek out funding sources.
Equity financing has been the mainstay for investments into the AAM space, with some exceptions for PIPE financing related to investments raised through SPACs. However, as AAM manufacturers mature, many find it more and more difficult to obtain equity investments because the shareholding structures have become very diluted and dispersed so that even early stage investors will now find it difficult to exercise any kind of positive or even negative control (ie. veto rights) over the direction of the business. The ability to control the investment is one of the key advantages of equity investments, and an important one because equity investors rank last in the event of an insolvent winding up of a company. Creditors who invested even in unsecured debt would be paid out before equity investors.
As a result, some players in the space have started to look at debt and leasing structures.
Raising asset based debt secured on the value of the aircraft has often been a challenge for the nascent AAM space, since electric aircraft are often times too risky for commercial banks, with the residual value (i.e. Value of the aircraft at the end of the loan or lease) of such electric aircraft being very much in question. The fact that residual value is unquantifiable (or potentially even zero) was a factor even for parties previously considering the financing of C919 aircraft (China's narrow body aircraft), and is a much bigger risk for the AAM market since there is no guarantee that the manufacturer will survive to be able to produce the parts that may be required for the aircraft to continue to be in commercial service (since it will need to comply with flight safety regulations on operation and maintenance).
Taking inspiration from the energy sector and from the beginnings of financing in the early days of commercial aviation, a more viable debt financing method could be for creditors (more likely in the private credit space given the current risk appetite of banks) to provide corporate loans to the manufacturer, and for the manufacturer to then provide a finance lease of the aircraft to its buyer.
This would resemble an earlier time in the aviation finance industry where manufacturers themselves would frequently provide loans to airlines to purchase their aircraft. The advantage of this structure is that corporate loans are evaluated on the basis of the viability and financial health of the business as a whole, as opposed to the as yet unquantifiable residual value of the aircraft assets.
Green loans and bonds, sustainable, transition and social linked financing
With EVs being seen as a dawn of a new era of green transportation, one might think that climate impact funds and sustainability linked financing might be another source of funding for the industry.
However, with a few potentially small exceptions, sustainable and transition taxonomies and classifications relevant to the debt market have not recognized electrification of air travel as being a green or even a transition investment. This position is not unjustified since the mere fact of running on electricity does not make air transportation greener if the electricity does not come from renewable energy. Yet, in order to access "green dollar" investments from climate impact funds and development banks, there has to be a clear link to powering transportation with renewable energy sources. The capital investment to link up with an independent renewable energy power producer to a charge port and then to the aircraft could work to satisfy the evaluation criteria for such funding sources, but given the amount of cross-sectorial collaborations needed, this would be a project not for the faint-hearted.
Another interesting pivot as yet unobserved in the industry is the potential for the market to tap into social linked loans, since many of the best use cases in the AAM industry is to support vulnerable communities with medical and disaster aid, to support impoverished communities with transportation where road rail and ship are not available so as to allow them to participate in the economy which has been one of the best ways of alleviating poverty. The challenge is that these projects require governmental support which is not always easy to obtain, and does not immediately inspire confidence that a strong steady stream of receivables will result which will make such financing pay off for the creditors. The challenge then is finding both a mix of such social linked use cases as well as clearly income producing use cases. Some of the most convincing use cases I have seen have included:
- replacing some of the routes currently plied by business jets from cities to exotic resorts and golf courses - luxury air travel without the flight shaming, which indeed has been adopted in several cities accepting the development of electric aircraft charging facilities in airports servicing the luxury air travel and business jet sector
- defense related surveillance and transportation within military and protected zones although there continue to be interesting debates on whether defense spending would eventually fall under any "national security" categories relevant to social linked financing
- commercial monitoring of reforestation projects, mining projects, ports, manufacturing facilities or plantations to increase operational efficiency of such projects and transportation of cargo within these projects
With everything mentioned above, we need to end off with a nod of recognition to every person now fully engaged in the AAM sector which has re-imagined a new era of aviation and mobility. Across cultures and throughout time, humanity has been in equal parts inspired and humbled by the willingness to take a different (harder) and more novel path:
"All things are difficult before they are easy" - Thomas Fuller
"万事起头难“ (roughly translated as - all beginnings are difficult) - Chinese proverb
“We are kept from our goal not by obstacles but by a clear path to a lesser goal.” - Hindu scripture
Walking the journey together with players is this space has been extremely rewarding. This weekend I was reminded again of the power of innovation despite the challenges, by this quote:
"Someone is sitting in the shade today because someone planted a tree a long time ago" - Warren Buffet
The topics covered so far are a reflection of what I have seen as being the key concerns of AAM sector leaders in the last 2 quarters. Do these reflect your concerns as well?
As an industry-expert, what future concerns would you rank as being your top challenges?
- sanctions & import - export control
- data privacy, data sovereignty
- Predictive AI, Generative AI & Intellectual Property issues