The Jig is Up in Aviation Industries-Many Early-Stage

Over a decade ago, aerospace startups had a reasonable chance to secure outside investment. As a result of the changing economic and financial climate, fundraising has become an even more difficult challenge for those who need outside capital. In addition, just keeping the lights on has become even more difficult.

When Eclipse Aviation declared bankruptcy in 2008, with promises of thousands of tiny personal jets, it soured investors in general aviation. It was after losing more than a billion dollars in investment. The public aviation sector was shunned mainly by early-stage investors for over a decade.

As time passed and the guards changed, they lost much of the financial community’s tribal knowledge and long memories of this event. Newcomers were unaware of the aviation industry’s high level of compliance and capital-intensive nature. Returns may take upwards of a decade to appear and should view on a long-term investment horizon rather than the typical 2–5-year cycle.

Due to a very accommodating money policy, investors had plenty of cash to invest. Investors are compelled to explore elsewhere for rewards in a climate of zero interest rates.

Early aircraft projects were particularly appealing since they required massive sums of finance, making it relatively straightforward to deploy vast amounts of “dry powder” in one fell swoop. With dazzling Jetson-like flying vehicles, UberUBER +5.4%-like private aircraft charter, Concorde-like supersonic jets, and Star Trek-like green propulsion technologies, and the sector became a new bright object for the investing community (minus the dilithium crystals). Special Purpose Acquisition Companies (SPACs) even permitted some of these aerospace darlings to bypass normal intermediary financing processes, which in principle, would have adequately funded a project to take it from idea to market introduction.

The jig is up today. Rising interest rates have made non-aviation assets more appealing. Combined with an unstable economy, it generates a more protective investor posture regarding riskier early aviation businesses. The billions previously invested in the sector are now in jeopardy.

Casualties are already piling up. The Aerion supersonic passenger jet program’s cancellation in 2021 should have acted as a canary in the coal mine for others. Kittyhawk, a flying automobile firm founded by GoogleGOOG +0.3% co-founder Larry Page, is a more recent high-profile example.

An estimated 300 additional Electric Vertical Takeoff and Landing (eVTOL) aircraft are proposed, all of which are jeopardized if they rely on outside financing. Most will silently go away without public notice, leaving only a flash of a glitzy Web site with a page for “Investor Inquiries.”

SPACs with general aviation themes listed on the stock exchange have had their prices plummet to a fraction of their initial issue values. Archer, Lilium, and Joby are valued in the 2-to-4-dollar range, down from their average $10 stock issue price. Wheels Up, whose slogan is “democratize private aviation travel using classic airplanes,” is now worth over $1.

The dominoes have started to fall for early-stage aviation startups and will continue to do so for the foreseeable future. There will be many more losers than winners.

Those with a long-term investment strategy and a viable, well-funded product or service that will benefit from a herd reduction will be the victors. Security issuers, early stock sellers, and overly optimistic advisers also helped.

Those who lost money on these initiatives will be the clear losers. On the other hand, the major venture capital and private equity companies will only suffer a decimal point loss in their entire portfolios. They play the game by putting chips on several tables, including aviation, hoping to hit a future unicorn.

The general aviation industry will be the less visible and most regrettable loser. Optimistic game-changing ideas may be stymied for years as investors reapply the brakes and become skeptical of the industry.