Over the holidays, buried in the news about Travis Kalanick’s resignation from Uber’s board, Uber announced a partnership with Joby Aviation, a secretive startup working on electric vertical takeoff and landing aircraft (eVTOLs), commonly referred to as “flying cars” or “urban air mobility.”
Urban air mobility has been a goal of Uber’s since they published their first whitepaper in October 2016. Since then, Uber has announced partnerships with many legacy aircraft manufacturers, including Bell Helicopter, Boeing, and Embraer.
Other startups, most notably Lilium and Kitty Hawk, have released videos of their own aircraft demonstrators (Disclosure: I work for Kitty Hawk). But none of them have announced partnerships with Uber. Among eVTOL startups, Joby is an outlier.
Specifically, Lilium seems to be positioning itself as a direct competitor to Uber Elevate, with plans to offer an app-based service to book rides on its eVTOL. It will be vertically integrated, with passengers using the Lilium app to pay Lilium for rides on Lilium aircraft. No middleman required!
Building airplanes is a profitable business. In 2018 (before the 737 MAX debacle), Boeing’s revenue was $101.1 billion at a 19.4% gross margin. In that same year, Airbus booked €64 billion in revenue at similar margins. Although they do not have any direct relationships with end consumers (in this case, the flying public), they enable airlines to conduct their businesses, similar to how Stripe/AWS enable most web startups.
Running an airline, however, is not profitable at all. In Zero to One, Peter Thiel uses them as the canonical example of a commodity business that can capture none of the value that it creates. United Airlines’ gross margin rarely exceeds the single digits, and it frequently runs at a loss. Given these economics, it’s hard to blame the legacy aircraft manufacturers for partnering with Uber. They’re expecting this market to play out similarly to commercial airlines, with a similar share of profits.
I strongly disagree with their assessment.
In my view, manufacturing eVTOLs, if successful, will look less like building jets and more like building cars, a competitive industry with many companies offering minimally-differentiated products. Automakers’ margins reflect this. The Big 3 American automakers, like airlines, all post profit margins in the single digits on billions of dollars in revenue. Not to mention their infamous government bailouts 10 years ago.
Uber is doing all it can to create these conditions in the eventual eVTOL market. Its white paper explicitly spells out vehicle requirements, namely speed, range, and seating. If its seven vehicle partners all create similar vehicles matching this spec, Uber, like Microsoft and Google before it, will have successfully commoditized their complement. They will make money, and manufacturers will squeeze each others’ profits to zero.
This is likely to happen because the barrier to entry for small aircraft is far lower than that of commercial jets: the unit cost for a 138-seat Boeing 737 is around $100 million. For comparison, the base price of a new Diamond DA40, a modern 4-seater aircraft, is $430,000. While total program costs do not perfectly scale to per-unit costs, the current state of the commercial jet market, a duopoly of Airbus and Boeing, is telling.
The most credible threat to the Boeing-Airbus duopoly is the Comac C919, a 737/A320 competitor built by a Chinese state owned enterprise. The C919 is only possible because of significant government support, from financing the estimated $20 billion program cost to hacking foreign aircraft suppliers for critical IP. Its success is a pillar of the Chinese government’s critical Made in China 2025 policy, a major factor behind the current trade war.
All that just to clone a 30-year-old Airbus A320 model. Now that’s a moat!
In my view, the list of outcomes for the nascent eVTOL industry is pretty short:
1) Like the commercial jet industry, manufacturers will make significant profits, and carriers will make none.
2) Like the auto industry, manufacturers will make no profits, but third parties like Uber will (maybe, eventually, hopefully) make profits on plane-share.
3) This tech is all vaporware, no-one gets it to work reliably for useful distances, and it becomes the topic of thinkpieces on tech industry hubris.
My money is on #2.