New Aero: Quick Take II

In the second edition of New Aero: Quick Take we look at British eVTOL developer Vertical Aerospace following on from our lead story in Volume VI of Airborne: Reborn.


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THE STORY: British eVTOL developer Vertical Aerospace give a glimpse of their new fixed-wing aircraft - but can they overcome the dual challenges of Brexit and COVID-19?


WHY IT'S IMPORTANT: The United Kingdom has a rich aviation history, so it's something of a sore point for the nation that just a single, small aircraft is wholly assembled in the territory today - the rugged little Britten Norman Islander (an electrified version of which is in development). The UK's current best hope for capturing a slice of New Aerospace opportunity might just lie in Bristol's Vertical Aerospace - a company of around 100 people founded in 2016 by Stephen Fitzpatrick (best known as the man behind Ovo Energy).


UNFORTUNATE TIMING

Vertical Aerospace (see our earlier profile on the company here) were on track to be a serious eVTOL contender as 2020 commenced. They'd acquired Formula 1 engineering specialists MGI Engineering in Q4 '19, were hoovering up talent from the likes of Rolls-Royce, GE and Airbus and at the end of January displayed their impressive Seraph aircraft in London's Canary Wharf to kick-off a Series A fundraising campaign. Rumoured to be looking for up to $100m the company were on course to publicly unveil the next-gen fixed-wing aircraft they'd seek to certify at July's Farnborough Airshow.


We went to see the Seraph demonstrator aircraft in London - and were as impressed as the curious crowds of City bankers

As February dawned Joby Aviation had closed a monster $590m Series C, Lilium were rumoured to be making good progress on their hunt for a Series C injection of up to $500m, Pitchbook were predicting 2020 would be a year of $100m+ Venture Capital eVTOL 'mega-deals' and an obscure 'coronavirus' in China seemed of little concern to the rest of the world.


Six months down the line no industry's been more acutely impacted by COVID-19 than aviation / aerospace. In this second Volume of New Aero: Quick Take we assess where the current climate leaves Vertical Aerospace.


FINANCIAL RUNWAY AND THE BIG PICTURE

To have just begun fundraising in Q1 2020 could be considered unfortunate timing for any company, for an aerospace manufacturer focused solely on an unproven market with little prospect of any revenue before 2023-25 - it might be catastrophic. Seed-funded privately by the founders' holding company Imagination Industries Ltd it's not known how much money the company's spent to date nor what the burn rate is - but we can make some educated guesses.


By the end of 2018 the company appeared to have already spent c. £5m and had a salary bill of around £2m / yr (according to Companies House filings). We can reasonably expect both these figures to have increased significantly - the company has added headcount and designed and built their most complex aircraft to date. If they were working from a finite pool of seed capital, these would be worrying times indeed.


However the company is bankrolled by an entrepreneur with an enviable track record whose holdings include a significant stake in Ovo Energy - a company he founded in just 2009 - that's rapidly become the UK's second biggest energy supplier, breaking the long-standing market dominance of 'The Big Six' energy companies who've long dominated the £55bn a year liberalised market. Last year alone Ovo completed a £500m take-over, supplied energy to c. 5m homes and secured a £200m investment from Mitsubishi Corporation which valued the company at over £1bn GBP (we'd estimate significantly more as the group's turnover in 2019 was over £1bn GBP).


Fitzpatrick's vision for the business is far bigger though, as the acquisition and investment strategy of his holding company indicates. Based on open source intelligence gathered by Osinto the group's interests beyond the core business of selling gas and electricity (in the UK, France, Spain, Australia and Germany) span:

You could make a persuasive case that Belfast-born Fitzpatrick is Britain's Elon Musk in the making, such is the scope and ambition of his clean energy business empire. Vertical Aerospace is best viewed as one amongst a raft of acquired and originated assets that are part of an ambitious and well-funded entrepreneur's bold 'Plan Zero'.:



Our assessment is that 'The Fitzpatrick Empire' almost certainly has pockets deep enough to sustain their eVTOL venture for an extra year or more if necessary. Whether it has the appetite or access to enough capital to certify an aircraft without external capital however, is another question. As such we expect that efforts to raise a significant round of funding for the business are still very much underway.


As private equity and venture capital markets start to rebound from coronavirus-induced lows there are however still some fundamental challenges for Vertical and their eVTOL peers that hadn't raised significant capital pre-Covid:

  • Venture Capital has never had a great fondness for aerospace - returns often taking longer to be realised than the 10 year lifespan of a typical VC fund

  • Commercial eVTOL services with fare-paying passengers are still too far away from generating revenue to excite most in the Private Equity world

  • Nobody seems to have worked out who'll pay for the infrastructure to support operational eVTOL networks yet

  • There's still a great deal of perceived technological and regulatory risk in such investments

Exceptions to this might be smart corporate money that brings with it a relevant competence and unfair advantage for the vehicle developer, and/or a direct use case for the aircraft - eg. the production expertise and mobility focus that Toyota brings to Joby, or the organ delivery model United Therapeutics bring to Beta Technologies.


We speculated in January that Airbus, Jaguar Land Rover or Rolls-Royce's corporate venturing arms might be candidates for investing in Vertical - though their boards are all probably a little too focused on core business preservation right now to sign off on such speculative investments. Perhaps an analogue for Deutsche Bahn Digital Ventures (invested in Skyports, Volocopter) - another transport / logistics conglomerate - might be a better fit? The company could also consider tapping stock markets and really test the public's appetite for sustainable air transport with an IPO - as China's eHang did last year with a $100m USD share offering on the NASDAQ - note though that their price as of yesterday was more than 25% down at c. $9.00 vs an initial price of $12.50.

Note that the eHang price drop doesn't exhibit the characteristic 'covid-cliff' shape we see in other aviation / aerospace stocks

REGULATORY AND POLITICAL RISKS

In March we argued that a European eVTOL developer might've been wise not to lock-in a vehicle architecture before mid-2020. Our reasoning was that the certifying body, EASA, hadn't yet laid out the Accepted Means of Compliance (AMC) for their VTOL Special Condition - the piece of legislation that sets out very specific rules for vehicle performance, specification, safety standards etc. We stand by that assessment, and will be looking for evidence of which side Vertical's competition have fallen of this so-called 'regulatory wall' as we analyse EASA's AMCs in detail - get in touch if you'd like to work with us on this analysis.


As has sadly often been the case throughout the history of Britain's aerospace industry, the country's politicans seem determined to undermine the ingenuity of their best engineers, and their ideologically driven Brexit policy decisions might just send the promising follow-up to Vertical's Seraph eVTOL the same way as TSR-2, the Harrier and Blue Streak.


Despite pleas from industry that "continued participation in EASA is the best option" the country's Transport Secretary Grant Shapps shocked many in March with his insistence that the UK would leave EASA at the end of 2020 to "bring expertise home". How quickly the already over-stretched domestic regulator (the CAA) could build up similar competence to EASA is subject to much debate - the FT reported on an industry estimate that it might take a decade and cost £30-40m GBP a year, the CAA themselves note simply in their Brexit advice that:


"...the CAA has created the capability required for the UK to fulfil State of Design responsibilities independently of EASA should that be needed."

Shapps made his statement whilst in the US acknolwedging that he'd just met with Joby Aviation. Joby have over $700m of funding in the bank and the support of the US Air Force to accelerate certification of their S4 aircraft. The Agility Prime initiative under which this cooperation takes place has an explicit and unashamed goal of building a strategic eVTOL supply chain capability in the United States.


EASA and the FAA have taken quite different approaches to eVTOL certification - we can see why Joby might want to push the UK towards leaving EASA (potentially slowing down progress of Vertical Aerospace it should be noted - a direct competitor) and building new standards that more closely align with the FAA's - we're not so clear on how that's an advantage for the UK in any way.


We hope rather that Shapps might have taken home inspiration from the AFWERX Agility Prime initiative. With the uncertainty of Brexit on the horizon, a helping hand with certification from the Royal Air Force might certainly help reduce the regulatory risk for Vertical Aerospace and prospective investors. Rather than being influenced into adopting US regulations we'd hope the British Government might learn some of the following lessons from what the US are doing in the Advanced Aerial Mobility (AAM) arena:

  • Making military assets such as test ranges, experienced engineers and air traffic controllers available to commercial eVTOL operators as they progress through test flight programmes

  • Having bodies like NASA, the FAA and industry working together can accelerate the development of eg Unmanned Traffic Management (UTM) systems - in the UK this could be done by funding similar programmes with participation from the CAA & NATS

  • There's potentially great mutual benefit in connecting a military Air Force to agile private sector innovators in the manner of AFWERX

  • Radically simplified military procurement procedures like those seen in Agility Prime are required to facilitate such collaboration


TECHNICAL RISKS

It's hard to assess the company's technology before the aircraft they're seeking to certify is fully unveiled - however the transition to a fixed-wing architecture is encouraging and puts the company alongside frontrunners Beta Technologies, Joby Aviation, Lilium and Wisk in favouring an aircraft of this type. Cruising with the benefit of lift generated by a wing gives these aircraft a huge speed, efficiency and hence range advantage over the wingless multicopters that eg. Volocopter and eHang currently rely on - these (more or less) only generate lift from the propeller blades spinning - which is far less efficient (the FAA's Aerodynamics of Flight explains this all well).


With the acquisition of MGI (now Vertical Advanced Engineering) last year came rapid prototyping and composite structures expertise, but aerospace manufacturing is a different beast to F1 and requires highly specific engineering approvals and regular audit oversight.


An encouraging signal of both Vertical's stability and their technical competence have been three major hires announced during the pandemic:



In addition the company is working closely with aerospace heavyweight Honeywell, deepening a partnership first announced in July '19 to work on fly-by-wire and flight control systems derived from tech found in Lockheed Martin's F-35. An announcement on August 11th revealed that Honeywell will also supply a range of flight deck technologies for the company's upcoming demonstrator vehicle - from avionics hardware and software to multitouch displays and the vehicle's operating system.


MARKET RISKS / OPPORTUNITIES

Vertical Aerospace haven't pushed too hard on 'Urban Air Mobility' unlike some competitors who are now refocusing communications towards 'Regional Air Mobility' (as cities continue to prove stubbornly empty and free of the congestion eVTOL aircraft were supposed to fly over). Pushing inter-city operations is proving popular at present, as are reconfigurations for carrying various cargo payloads to generate near-term revenue.


The regional mobility pitch means companies like Vertical can pitch themselves as direct (and theoretically far cheaper) alternatives to other public transport infrastructure projects. For example - a network of 20 x vertiports at £10m each = £200m vs £100bn+ for the UK's HS2 rail project - in tough economic times, this suddenly makes air mobility sound a lot more interesting to policy makers.


Vertical Aerospace have hinted at operating UK inter-city routes of c. 100 miles, but given away little more on their go-to-market strategy - perhaps wisely. Whilst the UK has some promising domestic routes to serve on paper - and enticing short hop international options from London to cities like Paris, Amsterdam and Brussels that could be highly profitable - it remains to be seen if first generation commercial eVTOLs will have the range to service them. When they can they'll compete with the plethora of budget airlines and well subsidised rail companies already serving such routes and we'll see just how cost-efficient eVTOL operations really are vs competing modes of transportation.


One thing's for sure - operating in low airspace (as all eVTOL aircraft will) - two of the biggest factors to consider are weather and airspace. The UK has some of the most complex and congested airspace in the world and famously unpredictable weather. High fidelity weather data will be essential to profitably and reliably operate any sort of 'air taxi' service in the market, and a next generation air traffic management system that's integrated with existing services will be essential. As such keep eyes open for met and airspace partnership announcements. Meteo Group, the UK's own Met Office or 'weather intelligence' company like ClimaCell will be essential for efficient eVTOL operations, especially in more northerly and remote markets. On the UTM side there are myriad contenders from Airbus and Altitude Angel to Uber and Google's Wing.



We don't think Vertical will operate their aircraft (as Lilium plan to), but rather partner with eg. Uber Elevate (as Joby have) to handle the passenger-facing side of the business. That would leave Vertical's engineering-heavy team to focus the next few years on building and certifying their aircraft.


What ambitions the company have beyond their upcoming flight demonstrator are unclear - no plans have been announced for serial production nor anything about external funding (it'd make sense for one to follow the other).


Which markets might Vertical be looking to besides the UK? Ovo's interests in France, Spain, Germany, Australia and Japan might provide a clue as to where they look first. Australia's of particular interest as it seems a little off everyone's air mobility radar with the exception of Uber (Melbourne being an Uber Air launch city).


OUR TAKE

Conventional wisdom suggests eVTOL developers that didn't raise significant capital pre-Covid are unlikely to survive to certification - we don't count Vertical Aerospace among them and think they are a strong contender.


What might at first glance appear a small British company 'late to the eVTOL party' and trailing US and European competitors in terms of funding, is on closer inspection the potential jewel in the crown of a highly successful, and growing multibillion pound renewable energy business empire.


We see little risk of the company disappearing in the short-term, and perhaps even some technical and regulatory advantages in timing their final design a little later than the competition. We anticipate an Uber Elevate partnership announcement this year (assuming that programme survives what are tough times for Uber itself) followed by a first flight of the new aircraft Q4 '20 / Q1 '21.


Closing a $100m Series A this year seems less likely than it did 6 months ago - and maybe less desirable. We'd guess the company might extend fundraising activity in to 2021 by which time private equity markets will likely have stabilised further, and Ovo backers Mitsubishi might be keen to not lose to much ground to rivals like Toyota and Hyundai who are active in the space already. The delay might even work in the Vertical's favour.


There's nothing to entice investors like seeing a new aircraft actually flying and meeting the team that's built it. We wouldn't even rule out Fitzpatrick snapping up some further complementary acquisitions this year whilst prices are suppressed.

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