Investors Pass On Risky Aviation Bets
Until this year, aerospace fledglings had their best chance in well over a decade to secure outside investment. Suddenly, the new economic financial climate has made fundraising an ever more difficult challenge for those needing outside capital and poses an outsized challenge to simply keep the lights on.
In 2008 the bankruptcy of Eclipse Aviation, with promises of thousands of its tiny, personal jets darkening the skies, soured investors to the general aviation segment after it vapourised more than a billion dollars in investment. For over a decade, wary, early-stage investors largely shunned the general aviation sector altogether.
The passage of time and changing of the guard erased much of the financial community’s tribal knowledge and long memories of this event. Some newcomers were naïve to the aviation sector’s high level of compliance and capital-intensive nature. They hopefully relearned that returns can take upwards of a decade to appear and must be viewed on a long-term investment horizon rather than the typical 2–5-year flip.
Following a very accommodative money policy, investors were awash in cash looking to be put to work. In an environment of essentially zero interest rates, investors were forced to look elsewhere in search of returns.
Early aviation ventures became particularly attractive given their nature of requiring outsized amounts of capital, which made it relatively easy to deploy huge amounts of “dry powder” in one fell swoop. The sector became a new shiny thing for the investment community, with bedazzling Jetson-like flying cars, Uber-like private aircraft charter, Concorde-like supersonic jets and Star Trek-like green propulsion systems (minus the dilithium crystals). Special Purpose Acquisition Companies (SPACs) even allowed some of these aerospace darlings to skip traditional intermediate fundraising steps, which in theory sufficiently capitalised a project to take it all the way from concept to market entry.
Today, the jig is up. Rising interest rates have made other investments outside of aviation more attractive. When coupled with an economy in flux, it creates a more defensive investor posture as it relates to risky early aviation ventures. The billions already poured into the sector are now at an acute risk.
Already the casualties are mounting. The 2021 shutdown of the Aerion supersonic passenger jet programme should have served as the canary in the coal mine for others. A more recent high-profile example is Kittyhawk, a flying car startup started by Google co-founder Larry Page, which just threw in the towel.
It is estimated that there are well over 300 other Electric Vertical Takeoff and Landing (eVTOL) aircraft proposed, each at risk if there’s a dependence on outside funding. Most will quietly fade away without a public announcement, the only tangible memory being the flicker of a flashy Web site with a tab for “Investor Inquires.”
General aviation-themed SPACs listed on the stock exchange have overwhelmingly seen their values fall to a fraction of their original issuing values. From their average $10 stock issuance price, eVTOL hopefuls Archer, Lilium and Joby are now priced in the 2-to-4-dollar range. Wheels Up, with the mantra to democratise private air travel with its existing service using traditional airplanes, is now worth just over a buck.
The dominos have begun to fall for early-stage aviation companies and will further accelerate for the foreseeable future. There will be far more losers than winners.
The winners will be those with a long-term investment outlook and a viable, sufficiently capitalised product or service that will benefit from a culling of the herd. Security issuers, early stock sellers and overly bullish advisors also benefitted.
The clear losers will be those who lost money on these ventures. However, for the large venture capital and private equity firms it will merely be a decimal point loss in their overall portfolios. They play the game of putting chips on many different tables, including aviation, hoping to hit just one future unicorn.
The less obvious and most unfortunate loser will be the general aviation industry itself. Hopeful game-changing ideas could now be stifled for years to come as investors once again tap the brakes and become more wary of the sector.