Harris Williams professionals regularly attend industry conferences and events. On the flight home, they share three key takeaways to help shape your investment priorities.
Event: Revolution.Aero Conference, San Francisco
Report by: Chris Rogers, managing director; Chris Smith, director; and Mike Rohman, vice president, of the Harris Williams Aerospace, Defense & Government Services (ADG) Group
Event Overview: The Revolution.Aero conference discusses how new technologies are shaping the urban air mobility environment and the future of the business aviation and general aviation market.
Why is this an important event for professionals active in this industry?
Rogers: “Revolution.Aero is a unique event. It’s an interactive forum that brings together industry thought leaders, innovators, investors, regulators, and others who are reshaping and rethinking the future of business and personal aviation. This event is really exciting as we think about the opportunities and challenges associated with the future state of the private aviation market.”
Which trends, companies, or business models were top-of-mind at the event?
Smith: “One overriding theme of the conference is the potential for continued digital disruption in the business aviation marketplace. Private aviation is still a predominantly relationship-based industry, which contributes to a significant supply-demand inefficiency in the market. The rise of Uber gives you a sense of what could happen if innovation better matched owners of often underutilized aviation assets with the broader marketplace. Better utilization of assets could lead to lower operating costs, a more efficient travel network, and a heightened level of access to private aviation. There are a number of innovative companies in both the U.S. and Europe working hard to address this supply-demand imbalance.”
Rohman: “Another overarching theme of Revolution.Aero is urban air mobility (“UAM”), where the current focus is on the ecosystem and infrastructure necessary to make UAM a reality. The UAM ecosystem is a really significant market opportunity with some very real challenges to near-term growth. Think about what is needed for a passenger to take off from an airport helipad in an unmanned rotorcraft, navigate an airspace filled with other private unmanned vehicles and cargo delivery drones, and then land in downtown New York—safely, in 15 minutes. This all has to happen at a price point that makes it truly accessible. This future-state ecosystem will also have to work in conjunction with the broader traditional aerospace system. While there is growing competition among a number of large and small businesses to develop the hardware and software necessary to operate in this environment, there is also a need for cooperation to make this vision of UAM a reality.”
Rogers: “And then there’s the investment requirements and opportunities. An immense amount of capital is necessary for this UAM infrastructure and ecosystem to evolve. When considering the UAM market, the technologies needed to make these aircraft commercially viable are still rapidly evolving. Today, much of the funding for these technologies is coming from individual entrepreneurs, the government, and venture capital, and is focused on singular technologies. On the other hand, large strategic buyers like Airbus, Boeing, and Toyota are taking a more portfolio-oriented approach to push development forward. One of the unifying themes coming out of this year’s conference was the need for additional capital to flow into the UAM market to support long-term growth.”
Smith: “An omnipresent issue is regulation, which we think has real potential to be the near-term governor on the market’s growth. And that’s understandable—regulators have zero margin for error and are totally focused on safety. While the technology and infrastructure to support the UAM market isn’t quite there yet, in our opinion that support will be ready before the regulators are. So it’s up to regulators to figure out how to balance the need for speed-to-market and safety. There will need to be commitment from regulatory authorities to keep sufficient pace with quickly evolving technologies and commercial market demands.”
What opportunities are these dynamics creating for potential investors in this space?
Rohman: “Right now, it would be challenging for middle market private equity firms to play in the UAM market in a scaled way. They’re generally not looking to buy a company that’s trying to make the next personal urban air vehicle or cutting-edge electric propulsion system. But they do need to stay plugged in and closely watch as the space develops. You can’t start paying attention to the UAM market in five or 10 years, or whenever the tipping point occurs. When the tipping point happens—when the technology and regulations are clear—things will move quickly. You want to be at the front of that shift, not late to the game and on the outside looking in.”
Smith: “We think it would be wise for private equity investors to build relationships with the venture capital world that is or will be investing in this space at scale in the near-term. There are also some potentially interesting infrastructure investment opportunities needed for the UAM market to become fully operational on a national and global scale. These situations should be viewed as higher risk than typical infrastructure investments, but another potentially interesting angle for private equity players.”
Rogers: “We really like the idea of investment in companies with advanced technology for a more mature part of the supply chain that also has applications in urban air mobility. Potential examples include specialty materials for airframes and engines, advanced connectivity solutions, or next-gen battery technologies. In that case, the core business is more established, and there is huge upside if one of these venture-like bets takes off. Another opportunity is software technology or web-based services focused on conventional aircraft maintenance or operations. Such solutions can be pivoted into UAM applications as the ecosystem matures.”
Published October 2019