Reality checker
By Cat Hofacker|October 2021
Sergio Cecutta
It seems like every day there’s a new company vying for a spot in the emerging advanced air mobility market in which electric aircraft would ferry people and cargo over short routes not typically covered by air transportation today. Figuring out which concepts and the companies behind them are “real,” as in viable, can be difficult. That’s where analyst Sergio Cecutta comes in. The firm he co-founded, SMG Consulting, in late 2020 debuted its AAM Reality Index to vet the companies targeting the passenger segment of AAM, sometimes referred to as urban air mobility, or UAM. Released monthly, the index ranks manufacturers based on five factors most likely to bring their passenger aircraft to service, based on five factors: funding, leadership, technology readiness, certification and production. The higher a company’s ranking, the better SMG believes it is positioned for success. I connected with Cecutta on Zoom to learn more about how the index works and SMG’s plans for it.
Q: What is it about AAM that has created this overwhelming amount of interest, perhaps more so than other parts of aerospace?
A: For one thing, engineers are always people with a lot of imagination; they always look at pushing the boundary and the envelope. In aerospace, we’ve been conservative for many, many years, and I think this is the first time that there is a variety of configurations, there is new stuff. No two AAM vehicles look alike, more or less. Whereas to someone who flies once a year, they likely can’t tell the difference between a Boeing and an Airbus; they just know it’s got a wing and two engines. So AAM created a lot of excitement, and it also, from a financing industry point of view, created a lot of opportunity that did not exist because aerospace has gone through decades of consolidation, so it was always the same big players. It’s also interesting because AAM looks at the part of aviation that’s never been looked at: flights within your city or within the proximity of your city as opposed to going 300 miles away or 600 or 1,000 miles away. Because of the battery and distributed propulsion technology we have now, it makes sense financially to do it.
Q: You’ve credited Uber’s 2017 white paper with sparking the idea for this index. What was it about that document that made the AAM market feel “real” to you?
A: What grabbed my attention is that Uber Elevate co-founders Mark Moore, Nikhil Goel and the team there, they did a good job. Uber Elevate wasn’t just the vision of the future, it was something that went into a level of detail where it made sense. It wasn’t a piece of science fiction; there was that depth of technical detail, it had business potential, so it started to make a lot of sense that this industry was coming. It felt a little bit like the technologies that had created these cars with Level 3 and Level 4 autonomy were now coming to the aerospace industry. And then as we at SMG started to get to know the industry and the people, we were more and more convinced that this was the birth of something as opposed to a fluke. Moving into 2019 and 2020, the Vertical Flight Society with Mike Hirschberg was doing a great job cataloging all the companies out there, but we started to ask ourselves “Which ones are the companies that we want to work with? Which are problematic?” That is when the index was born. So there’s two things that we have purposefully done. Number one is we have no interest in classifying all the companies. There’s way too many, and I don’t think it matters anyway; any industry has a long tail that then withers away, and it’s just normal for any new industry. With these 20 companies that we’ve chosen for the index — and we’re going to add a few more — the idea is we’re measuring not the instantaneous progress of these companies. SMG doesn’t want to say who’s the most advanced today. We want to say, “Who’s the most likely to make it to the end? Who’s the most likely to certify the plane and keep up with their promises of making as many as their business plan says?”
Q: And none of the companies are paying to be on this list.
A: Correct. We wanted to make sure the index is data-driven. I like data because you can question my assumption, but you can’t question my data. So when we have someone that says, “Well, I think that score is wrong,” my response is, “As long as we agree with the order of the ranking, the actual number is less important.” We are very lucky that all the [original equipment manufacturers] open their doors to us with the distinction that some OEMs just tell us the public information. Some other OEMs tell us more than the public information, and the beauty is that the way the index is built, we can incorporate nonpublic information without disclosing it. For example, if a company has opened a plant but they haven’t announced it, we can incorporate that into their ranking without going into detail. We can just say, “production readiness increased.”
Q: To me, it seems like certification and production are the biggest indicators of success and therefore should be weighted more heavily.
A: What you say is not wrong, so without going through a lot of detail, yes, those are the two big issues in this industry. For the index, we put weight on which one of the five buckets is the most important. And then through a formula, our algorithm comes up with a value on a scale of 1-10. We wanted something simple that can be easily compared because in advanced air mobility, many times we have these “it depends” scenarios. There are a million nuances that go into each company, at the very least, you can compare certain things between companies. And we’ve thought about updating the formula, but for now we don’t want to for the simple reason that every time you update a formula, you break the comparison with the past. Never say never, but I wouldn’t foresee changing the way we calculate it.
Q: One metric missing from this list that will surely factor in is public acceptance. How do you account for that aspect?
A: In aerospace, we always say no one competes on safety. Whatever the FAA, whatever EASA dictates as the threshold for certification, we’re going to meet it. But I would agree with you that public acceptance is important. We are probably going to think about capturing it when we look at operations, as opposed to the vehicles, because a vehicle will be safe for the public or it’s not going to be certified. But when it comes to public acceptance, that is something we need to think about when it comes to operations. I always call it the beehive problem: You don’t hear one bee, but you hear a beehive. It’s the same thing here. You might not hear one vehicle, but when you’ve got hundreds, is it going to change? Many times we don’t know until we know, so that’s why NASA is doing these acoustics tests right now with the [Advanced Air Mobility] National Campaign. That is great because it’s the first time that we can simulate in real life how these flights are going to work.
Q: So you’re thinking of public acceptance in terms of noise levels. It seems like another big aspect will be the long-term plan to shift to autonomous flights.
A: Autonomy is a complex issue. I don’t think it’s anything short term. If you look at the AI Roadmap that EASA has issued, they’re talking about what we really think of as full autonomy by the first half of the 2030s. So it’s not anything that’s going to happen tomorrow, but in the nearer term, if people aren’t going to fly in these vehicles once companies start entering operations, then it’s a moot point to even talk about anything more complex. That’s why there is a not-for-profit organization called CAMI, the Community Air Mobility Initiative, that’s doing a lot of great work with the cities, with residents, to educate people about these vehicles. Because if you say “air taxi,” people think about “The Jetsons,” they think about “Star Wars,” and that’s not the way it’s going to be. My way to think about it is an urban network. We don’t want to use the “airline” word,but it’s going to be a network similar in principle to an airline model for a few years until this industry grows in size: regularly scheduled flights within a city or to close-by cities.
Q: That’s the grand vision a lot of these companies are articulating, but there’s so many of them that I wonder if there is a bubble that’s going to burst at some point.
A: “A bubble going to burst” seems like a negative connotation. There’s going to be consolidation because there’s just too many companies right now. I think the market is big enough, it’s just how far away is the market. What I see is that companies — especially the top companies — are taking a very pragmatic approach to this. Some of the numbers might look big because we’ve never seen them as far as production, but at the same time they’re taking a pragmatic approach: “We need to do this, and we need to do this, and we need to do this.” At the beginning, I think Uber introduced us to these visions of 2040 with these skyscraper-sized vertiports. It was a good way to get the juices flowing, to get interest in the market. But now we’re at the point where we say, “OK, great, one day we will have a thousand-foot-tall tower for landing AAM vehicles. What’s coming tomorrow?” This pragmatism will avoid a bubble bursting, so it’s going to be more like when you’re stirring two liquids; it’s just going to coagulate into something more homogeneous. I don’t see it as a jarring explosion of a bubble.
Q: Once the dust settles, most of the companies I’ve talked with aren’t envisioning a market that’s as large as the auto industry, for example. What is your sense?
A: Aerospace is expensive. Not that automotive is not expensive, but the fact is that there are a lot more people that will always have cars than will be flying in airplanes. That’s an inevitability, at least for the next 20, 30 years. But the beauty of the AAM market is that it’s made up of many different pieces. There’s going to be a cargo market that we think is going to be healthy and grow really quickly. The goal of Amazon is to deliver your order in 30 minutes, by AAM vehicles, autonomous drones or even autonomous trucks. In some parts of the U.S. outside of the big cities, it takes two to three days, and so these vehicles will help with the demand for “Can I have it tomorrow?” Or us in the big cities, “Can I have it in an hour?” On the other side, the passenger air taxi market is also a big opportunity. We’ve always looked at a regional market or a country or international. You go to LA from San Francisco, you don’t go to LA from Orange County. When it comes to the numbers, we at SMG think that market is big. As to whether it’s big in the hundreds of billions of dollars or the trillions, that’s a problem for 20 years from now. Today, it’s enough to say we recognize that it’s a healthy market because it’s a new form of transportation that some cities desperately need. That’s an opportunity for the consumer. We used to say, “Are you doing a bus, the subway or the taxi?” Now it’s the subway, taxis, you can take an Uber, you can take a scooter. At a certain point, we’ll say, “Why don’t you take an air taxi?”
Q: Every new edition of your index brings a new ranking or piece of news. Do you anticipate things leveling out at some point?
A: Yes. Right now we’re in that time of the market where we are progressing through certification, flying subscale prototypes, full-scale prototypes, they’re establishing their production facilities. Soon, they will start flying formal aircraft for certification. Once their airplane is certified, their production is started, I would see this plateauing more with progress taking more time, for the simple reason that at a certain point, someone will get to the magic number 10 on our index: They have a viable business with network operators and thousands of airplanes. Right now, there is more churn because it’s more companies, and schedules are changing — “We’re going to do a flight. No, flight is delayed.” There is a lot of movement right now, where you see some jockeying for position. But at the same time, if you look at Joby Aviation and you go back a few indexes, they’re always there at the top.
Q: Is Joby’s consistent ranking at the top of the index a good predictor of their future success?
A: Joby has been around since 2009, and it takes time to develop this technology. When they started, there was no electric aviation industry, so they had to figure it out on their own, a little bit like Tesla. But Joby has a great team. They are very pragmatic with what they’re doing. They are very result-oriented; they will never make noise unless there is something to talk about. And if you look at the number of flights, they’re the company that has flown the most with a full-scale prototype. As far as certification, they are probably one of the most advanced out there. On the production side, they’re working with Toyota, one of the best companies in the world as far as production. If you look at some of the other top companies on the index, they share this pragmatism and they’re also putting all the right pieces in place. That is very important because no one is going to do it all, but choosing the right partner is a big step toward success.
Q: The metrics in your index seem like a good recipe for success, but what other common traits do you see in the most promising AAM companies?
A: The leading companies are all about execution, and no, it doesn’t sound sexy. A lot of these technologies will soon be mature enough that the FAA can feel comfortable certifying it, so now it’s a matter of execution. That’s not going to be easy because it brings in problems of scale and complexities that we’re not familiar with in aerospace. Beyond that, it gets hard to identify common traits because while the definition of AAM is that it’s enabled by electrification, distributed propulsion and autonomy, it encompasses a big number of markets and use cases.
Q: Looking to the future in 10 years or so, what is the role of the AAM Reality Index going to be if these company predictions come true and they are operating passenger flights?
A: That’s a good point. We don’t think the index is this cure for all the evils. At a certain point, I think it will serve its mission. We want to have multiple indexes in the future — for operators, we want to have indexes for infrastructure — because there’s company progress. Maybe someone gets almost at the top of a vehicle index, so now you start your work as an operator. So at a certain point I think the Reality Index will become historical. We also think about this industry being solid in another six, seven years, by the end of the decade, so it’s about looking ahead to what’s next for us. The whole idea is that when another AAM revolution comes around, we don’t want to miss it. You have to consider that this step into automation is going to be a big change, so that might reshuffle the orders on our index in some way. Maybe the company that was No. 1 in piloted operations won’t be No. 1 when they go autonomous. That’s going to be another step change that I think is still going to make the index important, but this is not meant to be something that’s still around by 2040. I hope that the industry has something cooler at that point.
