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January 30, 2024
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In 2017, Amazon offered a glimpse of a futuristic world of uber-convenience. During the Super Bowl that year, the company ran a commercial for its smart speaker device, showing a woman ordering a bag of tortilla chips through the speaker. Instantly, an Amazon-branded drone carrying the salty snack lands behind her.1
The ad was aspirational, as it famously included a disclaimer confirming that the retailer’s air delivery service “is not available in some states (or any really). Yet.”2 Still, the 10-second spot successfully introduced tens of millions of American consumers to the Advanced Air Mobility (“AAM”) sector — of which drones are one of its many subcategories — for the first time.
Since then, AAM technology has taken off. In 2022, global AAM market valuation reached $8.2 billion and was expected to nearly double to more than $14 billion by January 1, 2024, according to the trade publication Aviation International News.3 And it’s blue skies ahead through the next decade: Sector valuations are expected to see 35% CAGR.4
Not surprisingly, the AAM sector’s soaring prospects are drawing the attention of many investors. Understanding the current AAM landscape can help stakeholders limit risks and identify the right targets in this highly regulated, fragmented space.
M&A uptick?
Transportation technology in the United States has a long history of rapid development and business shakeout. In the early 1900s, for instance, nearly 1,500 independent railroad companies were in operation.5 Today, seven remain.6 More than 50 major passenger airline mergers and acquisitions have occurred in the United States since the first, involving Western Air Express and Standard Airlines, in 1930.7 Airline reorganizations and liquidations, too, have been common – since the Carter administration deregulated the industry in 1978,8 more than 100 carriers have filed for bankruptcy.9 The current New York City subway system started as a series of privately owned underground train lines before the city itself acquired and consolidated them into one publicly owned entity in 1940.10
Like the examples above, the AAM sector is fragmented and is poised for an increase in mergers and acquisitions as winners and losers will inevitably emerge in a race to increase customer acceptance and develop the best technology, business use cases and regulatory approval.
The Federal Aviation Administration (“FAA”) organizes AAM technology into five categories: urban air mobility, regional air mobility, public services, large cargo delivery, and private or recreational vehicles.11 Currently, there are five generally accepted use cases for the technology in the United States, only two of which are meaningfully operationalized. One is by the U.S. Military, which regularly deploys drones in war zones; the other is by utility companies, which send AAM craft into far-flung areas to monitor electrical lines, pipelines and other vital infrastructure.12
The remaining three potential use cases for AAM craft (package delivery, medical transportation and consumer travel) still face considerable technological and regulatory hurdles before they can be widely commercialized.13 For example, extended battery life in large AAM craft is a current technological impediment to long-haul consumer travel.14
Smaller, unmanned drones, however, are more technologically mature.15 However, inconsistent global regulations and a lack of air traffic infrastructure means these flights are currently not in service in many areas of the country.16
One major reason is that the American public remains skeptical of drones. In a November 2023 survey by Northwestern University’s Mobility and Behavior Lab, respondents consistently ranked drones behind traditional delivery options and other alternative forms of automated parcel delivery, like driverless cars, when presented with various cost and delivery-time scenarios.17
“As companies ramp up drone deliveries due in part to labor shortages and in part because existing systems cannot satisfy the sheer volume of e-commerce deliveries, the researchers caution that these innovations may fail because of a lack of public acceptance,” a university news report concluded.18
Identifying the Right Opportunity
Given the current regulatory and technological uncertainties, identifying potentially good AAM deals is a big challenge for investors and operators alike. Still, many companies continue to receive capital infusions from partners that want to supply or build the various vehicles.19 Even the most futuristic and conceptual AAM ideas continue to attract considerable attention from angel and strategic investors.20
Taking a structured, methodical approach to any transaction typically produces the best results, especially in fragmented market conditions. To understand and mitigate risks in this space, all transactions in the AAM sector — whether as a buyer, a seller or an investor — should typically include the following:
- Commercial diligence: Market research that assesses, identifies and defines new business opportunities in the AAM market; provides market evaluations and growth opportunities; considers value propositions and brand perception; and offers strategic partnerships with lightweight-parts suppliers, battery developers and other AAM-focused vendors
- Financial diligence: Transaction risk assessment of earnings, working capital requirements, net asset analysis, sales/margin analysis, short-term forecast analysis, synergy analysis and carve-out considerations
- Operational diligence: Qualitative and quantitative assessment of an AAM firm’s potential to deliver on its business plan, including regulatory requirements with FAA, state and local officials and identify risks, opportunities and red flags
- ESG review: Comprehensive review of a company’s overarching carbon strategy, including market considerations; current and anticipated financial, environmental and social impacts across a variety of scenarios; and data collection and disclosure of regulatory climate and environmental requirements that are unique to aviation and AAM craft
- Debt and equity private capital raising: Assessment of AAM-focused strategic partnerships for fundraising, refinancing and asset-based loans necessary for long regulatory approvals inherent in the AAM sector
- Financial advising: Comprehensive evaluation of overall M&A strategy and business portfolio, including battery and parts suppliers
- Transaction opinions: Independent assessment of complex fairness and solvency issues, if necessary
- Transaction execution support: Representation and support for companies, buyers, sellers, lenders and investors to market, negotiate, document and close financial and strategic transactions
The fast-growing AAM sector offers no shortage of opportunities for investors, operators, entrepreneurs and inventors to take flight. That said, understanding how to navigate the complex technological and regulatory factors involved requires specific expertise in M&A, finance, law, ESG and other corporate governance disciplines.
About The Journal
The FTI Journal publication offers deep and engaging insights to contextualize the issues that matter, and explores topics that will impact the risks your business faces and its reputation.
Published
January 30, 2024
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