Podcast: Europe’s Air Taxi Startups On The Brink

Investors have plowed billions of dollars into eVTOL ventures but now many are running out of cash. Listen in to hear Aviation Week's Jens Flottau share what he found on recent visits to Lilium and Volocopter. SMG Consulting's Sergio Cecutta also joins to break down the AAM funding environment and the advantage Chinese startups have. 

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Transcript

Joe Anselmo:

Welcome to Aviation Week's Check 6 podcast. I'm Joe Anselmo, editorial director and editor-in-chief of Aviation Week & Space Technology magazine.

Investors have plugged billions of dollars into vertical takeoff and landing startups, with industry front-runners pushing to launch service as early as next year. But now a lot of these ventures are running out of money, and the drama is mounting as they turn to their governments for help.

Joining us from Germany is Jens Flottau, who today visited Lilium Aerospace, a company that is on course to run out of money in July. He's also been to Volocopter, another German startup that has a little more cash on hand, but nonetheless was rebuffed by the Bavarian state government last week. Joining Jens is Ben Goldstein, the editor of Aviation Week's weekly AAM Report. And rounding out our discussion is Sergio Cecutta, co-founder of SMG Consulting and the leader of the firm's advanced air mobility practice.

Jens, let's start with you. You're going to tell it to me the same time you tell it to our listeners. What did you find at Lilium today?

Jens Flottau:

I found a lot of desperate and angry people who are still trying to persuade the Bavarian government and the Federal Government of Germany to help them out with what seems to be a relatively small amount of money. And it's actually not cash, it's just a loan guarantee that they want, totaling 100 million euros, which will, they think, help them encourage private investors to give the company more money. They're basically running out of money in July, as you said.

The backdrop of this is that the financing environment has turned a lot in this industry. A year or two ago, it was pretty easy for AAM companies to find money, but that has completely changed. Interest rates are still up. People are very cautious. And that happens in parallel to those companies spending more and needing more money. Volocopter, in particular, wants to fly at the Paris Olympics. Lilium wants to fly its first test aircraft by the end of the year. And spending just goes up while funding seems to be going down.

Joe Anselmo:

If you look at the top 10 AAM ventures, these two are in there and these are Germany's pride and joy. So, is the government really going to just let them go away because they ran out of money?

Jens Flottau:

Yeah, it is a mess. It's highly, highly political. You have to know that both in Baden-Württemberg, which is the state in which Volocopter is based, and in Bavaria, we have coalition governments and both governments don't agree on a path forward. In Baden-Württemberg, The Greens have stopped the deal to support Volocopter, because basically it's aviation and aviation is bad in their point of view, even if it's electrical aviation. And in Bavaria, there's a coalition between the Conservative Party and another conservative group, and they are not in agreement. So, it's very political on the state level. And on the federal level, there's another coalition government between the Social Democrats, the Greens and the Liberals. The Social Democrats are in favor of supporting the companies, Liberals are too, but The Greens are at best, neutral.

But you have to see if Germany's just risking its future in this business, they were ahead of many. I mean, Lilium is technologically, a very, very ambitious project. Volocopter's marks are conservative, but it would be the first Western company to be certified in the coming weeks or months. So, Germany does have a head start, and now the AAM sector could be just stopped, really, by politics. That, to me, doesn't make any sense given that the risk the government has taken is very, very low. It's a total of 100 million in loan guarantees. Yes. How much money is that? If I can add to this, the real danger, it's not really about this 100 million. It's about the signal that it sends to investors. If the government isn't willing to inject a small amount like that, then the signal to the investor base is just, why would you invest?

Joe Anselmo:

Ben Goldstein, you recently wrote an excellent takeaway for Aviation Week magazine based in part on some of Sergio's research. And tell me if I'm wrong here, but from my reading of that, there's basically three of these ventures, Joby, Archer, and Beta. Those are the only three that maybe have a liquidity to see themselves all the way through to service, and then of course, there's EHang, which is backed by the Chinese government. Did I get that right?

Ben Goldstein:

Yeah. At least among the Western OEMs, that does seem to be the case. In the United States, we have a handful of players that are better capitalized than in Europe. Joby is the most well-capitalized company in this space. They have all the money they need to make it into 2026, which is when they should have commercial services up and running.

Archer does not have as much money raised as Joby. Archer will still need to raise additional money, but the company will probably be able to make it into type certification and should not have too much difficulty coming up with that money. And Beta is a private company, but Beta also should have enough money at least to certify its conventional takeoff and landing aircraft.

I think the situation is a lot more dire in Europe, like Jens mentioned, where you have these companies that are just very poorly capitalized. And besides the two German startups you mentioned, you also have Vertical Aerospace in the UK, which is in a very similar position as Lilium, and may even run out of money by the third quarter. So, in the coming months.

So, this is a very tough situation. The financial environment has become very difficult to raise money in this space. And I think what we're seeing is the investment dollars that are out there are going to the fewer players that have a more realistic shot at entering into service. And a lot of players are being left behind. And there's questions as to what's going to happen, will there be consolidation? And to what extent can some of these companies be bought by existing players? Or, if they will have to file for insolvency. So, I think we're really at the point as type certification from the market leaders is in the near future, where we're seeing sort of a reckoning. And it's really the time when the winners and the losers are truly separating.

Joe Anselmo:

Sergio, we were hearing that European regulatory authorities were much more proactive than perhaps the FAA and moving much faster. So, what's going on here? It almost seems like the landscape just flipped on us.

Sergio Cecutta:

So, I think you guys all make great points. Thank you for having me, by the way. And I think Jens made an excellent point, right? So, anytime you have such capital intensive industries like aerospace, government support is a differentiator. In the US, we've seen Agility Prime, we've seen NASA, we've seen the FAA, we've seen Congress putting their weight behind advanced air mobility. In China, it's part of their five-year plan. It doesn't get higher than that. And now Europe, with these internal clashes in politics is actually putting, as we mentioned, their position into jeopardy. So, we think it's very important for government to support their industry.

And I think what you see in Europe is a conservatism where it's risky to invest in a startup, and you always can see the glass half full or half-empty. I think in the US, we see it half-full, meaning worst that can happen is they're not going to be there. The best that can happen, I get a lot of jobs. In Europe, they consider the glass half-empty with the risk of investing in a startup.

Now, when it comes to the regulatory environment, that's just one of the pieces. Yes, the regulatory environment in Europe is extremely clear, but at the same time, there is a lot of different pieces that come in. So, we always say that the funding environment has changed, and what does it mean? Any company needs to have a hurdle rate that is better than their cost of cash. And the cost of cash has gone up significantly because in the world, the whole interest rate went up five to six points. And so, it has made some of these companies’ cost of capital in the low to mid-10%, and that is a very big hurdle for a company to clear.

Now, the other part that we also need to be careful when we talk about, are these companies going to run out of cash? Et cetera, et cetera. It is also how much money they need and how does that compare to the certification and entry to service date? And what I mean, is that it is very much dependent on the country, their cost of labor. It is very much dependent on the configuration.

As Ben was mentioning, Joby, it's very well capitalized. However, caveat, Joby is not going to make money selling multimillion dollar pieces of equipment, but by selling multi-hundred of dollars tickets. Archer is almost there. And Beta, their strategy has been, let's make this eSTOL, so that we can fund ourselves more of the eVTOL cost. And I think after the transition, I think a lot of the naysayers have been put to bed when it comes to the fact of, are they working on an eVTOL?

The problem children, Lilium, Vertical, they're public. We know it very well. I think the story with the Volocopter is a more interesting picture. I think, Paris, it's not in jeopardy. I think their certification toward the end of the year shouldn't be in jeopardy. However, when it comes to funding these companies, you can't have this year-by-year funding. In order to build a roadmap, you need to have cash to be able to satisfy the entire roadmap.

Joe Anselmo:

So, Volocopter is going to fly demonstration flights at Paris, you say, and be certified by the end of the year. How could they go out of business after that? It would seem that they're at the forefront.

Jens Flottau:

Well, I mean, I was talking to Dirk Hoke, the CEO of Volocopter, and Klaus Roewe, the CEO of Lilium, in the past few days. And actually Klaus, today. I'll come back to your question, but Klaus clearly listed the scenarios. Plan A is you get the funding from the government and the private investors and you continue to work here. Plan B is you don't get the funding, you sell the company to someone, and that someone is, you can guess, we can all guess, it's probably not in Germany, it's probably not in Europe. It's going to be maybe in China or in Saudi Arabia or somewhere else, or US, US investors. So, they're losing that space here in Germany. And Plan C is bankruptcy.

Now, as to Volocopter, Dirk Hoke has publicly said that if he doesn't get funding soon, and soon, meaning in the coming weeks, he will have to consider filing for bankruptcy. I don't think that Volocopter will disappear. I think they will also be bought by someone. But if that someone is, again, in China, or in Saudi Arabia, or in the US, or somewhere, then of course, it's going to be a lot of the work will move out of the country. And as far as Paris is concerned, that decision will be up to that investor. If the investor decides that it's a good idea to fly in Paris and to spend that money, then yes, they will fly in Paris. If not, they won't.

Joe Anselmo:

Sergio, we've been talking about this for years, but I'll ask you the same question again. How much room is there in the world, how many of these ventures are going to survive?

Sergio Cecutta:

This is one of the most interesting questions, right? In general, we say in the long term, and long term meaning 15, 20 years, we think that five to seven companies worldwide, it's plenty. However, in the short term, there will be more companies.

Now, the caveat is, the market, if you look at the market forecasts, I mean, we forecast about 34 eVTOLs produced in 2025. That probably might be conservative, but we don't get to the thousands or the tens of thousands till the 2045, 2050. And that is a long time to be slogging along with low numbers to make it there. So, really, we have a lot of companies right now.

And we also need to deal with the fact that number one, we have this first wave of companies that we're talking about. And if it is difficult to find money for this first wave of companies, we have to ask the question, what about the second wave of companies that have raised their $100 million, $200 million? If the billion is really the certification hurdle, and we posit that it is actually more than that, how much money do they have to raise?

And then last but not least, this is a worldwide marketplace and we've been doing a lot of research to understand China. And in China, the certification cost run from $150 -250 million US. That is a lot less money. And while you won't see a Chinese eVTOL flying over New York or Los Angeles anytime soon, there are going to be places like UAE, like for example, last week in Dubai, where you will have within 30 feet of each other, EHang, Joby, and Archer. So, we need to consider that as well. But we definitely have too many companies. And if you have seen in the last few months, you've seen more and more companies coming out of regions that are not the usual three, aka China, US and Europe, coming to the forefront and wanting to produce eVTOLs. So, we still have a long road to go.

Ben Goldstein:

I would just echo what he says. I think there's room for plenty of companies in this market. The question is, is to what extent can the companies that are currently trying to certify their vehicles, will they find the investor dollars? And it's just not appearing likely, I think, that more than a handful in this first wave, a small handful are going to be able to make it there and cross the finish line.

And then, I think it's really an open question as to that second wave. We know who the players are, but unless they have corporate backing or they're backed by a legacy OEM, like some of them are, I think there's going to be a difficult road. And we can already see some of those second-wave companies also look like they're beginning to fall apart. So, it'll be interesting to see how it plays out. But I think, like I said earlier, this is really a reckoning time right now.

Joe Anselmo:

Sergio, our listeners can't see, but you're nodding. You were nodding as Ben was talking. We are going to see ventures go away this year, correct?

Sergio Cecutta:

I fear. When the year started, I was a little more optimistic and we are only four months in, and I'm a little more pessimistic now. I think that companies are burning at a pace that is very high. And again, let's not forget that once production starts, the cash burn is going to go up even more significantly. Just look at any of the EV companies to give you an idea of what it means when you start producing and burning cash.

My only concern is what does it mean for companies? When we look at consolidation, we always think about a company buying another company. However, in this market, most companies are producing perfect substitutes. And so, it's more going to be a company goes away, and then the talent gets subdivided in the industry and the patents get acquired.

But again, the last point that I would like to make is thinking back about the Betamax versus VHS, if you are a Gen X-er, or any of the other fights in formats, not always the best product wins. Sometimes, it's the product that gets all of these different pieces together. And once again, and as Jens was saying, government support is a very important piece. And again, companies at the end, if they cannot find the money at all, they have to go where the money is.

Jens Flottau:

And the sad reality is that the government should know from history what works, what doesn't work. Germany was part of the Airbus countries that set up Airbus some 50 years ago, a little over 50 years ago, and they knew they had to put in money initially. And has it paid off? I would say so, absolutely. It has paid off big time for them. Huge success.

Now, at the very airport that Lilium is based now, Oberpfaffenhofen in Germany, you see the bad example as well. 20 years ago, Fairchild Dornier went bust. And actually, they're using some of the same hangars today for Lilium and for some of the other ventures that are out there. And Dornier went bust back then. I covered that in very great detail. Among others, because the government was not prepared to protect them and to support them with a loan guarantee. So, we're talking loan guarantee again, Oberpfaffenhofen again. So, the government, the Bavarian government, the federal government all should know that if you support industry, it can be a huge success. If you don't support it, they should also know what happens then. Just look at Fairchild Dornier 20 years ago.

Joe Anselmo:

Well, the good news is we're getting closer and closer to seeing at least some of these companies fly and get closer to reality.

Jens, Ben, Sergio, we are out of time, but thank you all so much for sharing your time and your insights. That is a wrap for this week's Check 6. A special thank you to our podcast editor in London, Guy Ferneyhough. And to our listeners, if you've enjoyed our episodes so far this year, please consider supporting us by writing a review on Apple Podcasts. Thank you for your time, and join us again next week for another Check 6.