Archer Aviation Inc. (ACHR) Earnings Call Transcript & Summary

So good afternoon, everybody. My name is Edison Yu. I'm the space and aerial mobility analyst at Deutsche Bank. Welcome to the second eVTOL panel for the day, making UAM a reality. For those of you who are not familiar, UAM stands for urban air mobility and essentially the future of what many of us in this room think are cities could look like. We're very pleased to be joined by two companies and one consulting firm. Eve, Archer and SMG Consulting. Before we kick off the Q&A, we'll have a brief intro from each of our participants.

Sure. Thanks. Edison, Jerry DeMuro, Eve Air Mobility. For those of you, very few have been in this audience, but for those of you that don't know, we are effectively a spin-out of Embraer, the third largest OEM for commercial jets and bizjets in the world. I come to this particular enterprise after 40-plus years in aerospace and defense. It's been an exciting journey. We were one of the last few to get through the SPAC window last year. It was not the greatest of times to be out raising capital. But I think the value proposition that we offered spoke for itself. And so here we are. We went public May 10, and we're on the journey a little bit in between some of the other players. We have Joby represented in the back, Adam here with Archer. So we're all in this journey in some ways together, creating a whole new market and regulatory environment. So very exciting. Pleased to be here.

Adam Goldstein from Archer Aviation. We are building a piloted plus 4 passenger vehicle to be used in urban air mobility. We're targeting missions from the 20 to 30-mile type of range, and our vehicle Midnight is expected to be certified with the FEA here in the U.S. by the end of 2024 with a targeted profile of around 1,000 pounds of payload and around 100-mile range. We are really targeting kind of a dual approach to going to market, and that's around selling vehicles as well as operating vehicles ourselves. I do think you will see the industry really start to take hold with some helicopter replacements and sort of these vehicles that can outperform the typical urban air mobility substitutes. And ultimately develop long term into the grand vision of urban air mobility that we really expected and excited really to see. We're located in Northern California and around 500 people or so and I'm excited to be here.

Sergio Cecutta, partner at SMG Consulting, a 10-year-old business consulting firm operate aerospace and defense, one of our fields that we dedicated a lot of time is adventure mobility, which urban air mobility is a part. And we basically provide tools and advice to the industry.

Thanks for that.To kick things off, I wanted to give people's perspective on just this idea of UAM. I think a lot of excitement around it, a lot of big numbers going around. But maybe if you could kind of give your vision of what the future of Los Angeles or Miami or New York City could look like and how you're sort of playing your part in that, that would be great. So let's start with Adam.

Yes. So I think the industry will really start out where there already is demand. And you can see that from airport to City Center. And so we call those trunk routes where there is willingness to pay and known demand. And you can see that through the ride share market. Those are trips that will typically take people 60, 90, 120 minutes on the ground that you can replace with trips in the air that will take 5, 10, 15 minutes. And so there will likely be point-to-point routes established in the very beginning. And these will be routes that I think will be really highly trafficked. So you'll have a lot of people that are taking these types of routes in the ground that can now be easily replaced with trips in the air that are much more convenient. I also think the go-to-market pricing will be somewhat comparable to where ridesharing is. So it's going to be a very compelling value proposition to take these missions -- to take these trips. I also think you'll start to see these vehicles replace helicopters in the beginning of the market because they're much lower cost, they're much lower noise and they just come at a much higher degree of safety. And so you'll start to see these vehicles come to market across the sort of, I'll call it, smaller urban air mobility networks, but then also really into the broader mainstream and start replacing a lot of the other use cases for urban air mobility missions.

So without repeating much of what Adam said, we see the market very similarly near term, some trunk routes. We've already run simulations using helicopters in Brazil that simulated those routes and to get a sense for the price point and demand and those sorts of things, and it validates much of what Adam has said. We're going to be doing a similar thing in Chicago this month with a number of different partners. And so we also see initial trunk routes building out as users become more comfortable and with not only flying in these vehicles, but the routes in which they're taking. So as you build it out, we've done models with MIT that show areas like Southeastern Florida around Miami and Miami-Dade County, building out eventually in the longer term to something like 37 of these routes almost think about a bus or a rail network around town. Initially, we also believe that it will peel off some of the helicopter markets for exactly those reasons. These are quiet or safer, less expensive to operate. And therefore, we'll be more accepted by communities in their local areas. But also, we expect to peel off a significant amount of ground transportation because of the congestion factor. And those demand factors are only going to increase over time, urbanization, congestion and the daunting costs of upgrading ground transportation will continue to feed the demand here and build out to the kind of network that we're talking about in the example that I gave, Southeastern Florida. And so that will also affect maybe how cities develop in the longer term. I think that remains to be seen, but it makes some of the suburban lifestyles and the ability to commute wherever you want a little bit more realistic.

Yes. So when we look at urban air mobility, I think we kind of looked at it in 3 different phases. First phase, the entry into service, where we will look a little bit like a city airline, imagine an airline scheduled service lies only in the city, and it operates these main routes. The second piece is going to be an expansion where you can go to more places. And then the last piece, that probably we'll talk in maybe 2030. It's when you become a mobility as a service kind of service, where you will be aggregating traffic as opposed to have something that's scheduled and that would be the ultimate goal and then autonomy, but that's a question mark.

Great. So I was just about to dive into kind of the next topic, which I think this idea is certainly very compelling. And I think most of us agree, it's the future. But time lines have a lot of tendency to fluctuate. And so in this sort of vision of UAM, where do you see kind of this time frame being, I think, some of us say it's '25. There's some people talking about 2030. Where do you think this really starts to gain momentum? Open to all 3.

So we have Adam's projection of entry into service. I think you said certification in 2024, entering into service shortly after that. We're planning for entry into service in 2026. I think Joby is planning entry into service before either of those. But you'll have early adoption, and it will be fairly dispersed where that will occur. And so I think by the 2030 time frame, the KPMG studies that are out there. I think Morgan Stanley all project about something like a $30 billion market by 2030. That may or may not happen exactly at that time. But I think it will take 4 to 5 years to see maturity, as Adam mentioned. And as we have partners, we have rideshare partners, helicopter operators, et cetera. So I think it demonstrates what Adam is talking about, all of those participants in the space today see this as the next generation, some could say, transformational approach to urban transportation. So there are a lot of demand factors pushing it. and many of the current participants in transportation, planning on leveraging these new technologies and bringing them to market. So I think it will take 4 or 5 years. to get through the initial certification process, early adoption, you'll likely see in more remote places, even we have customers that are planning to essentially replace helicopter service for tourists, where it's not as congested in an urban environment. So you'll see it, I think, different adoption rates in different market segments around the world.

So for Archer, really the -- I guess it's for everybody, but the big gating factor is just getting through the certification process. And I think the good news is that much of the groundwork has been laid already in terms of laying out that process. These are not the most sophisticated vehicles that have ever been certified before. So it's -- we're not building an F-35. We're not building a V-22. These are relatively easy to understand vehicles with some nuance that there's electric engine probably the biggest difference. And there's also lithium-ion batteries used as the primary source of energy. And so we're pretty confident that we can get through the certification process here by the end of 2024 and enter into service here by 2025. And that's actually not that far away from where we are today. So we have shown, I think, as an industry, what the vehicles can do from a technology perspective. I still do think there is a big gap in what the public understands from where the industry is from a technology perspective versus where it actually is. But you're starting to see a lot more demonstrations of these vehicles. And I think next year in 2023, as you really start to see the certification process get very, very deep and to become very, very clear sort of time lines, I think there will be a lot more comfort and conviction around the timing of these vehicles. I mean you literally just had a 60 minutes episode where they were the actual administrator of the FEA saying, the companies are ready, we will certify these vehicles in 2024. So you kind of have all the signs pointing there. But understandably, there's a lot of proof points that still need to happen in order to gain confidence on that time line.

So I guess to turn to Sergio. What's your time? What are you telling the companies that you're advising? What kind of time line is realistic?

So we think the 2024 to 2027, it's realistic. When it comes to certification, unfortunately, companies ask and the FEA decides. So hopefully, the -- it will keep to the time line that we're looking at. But I think 2024, 2027 is when you will see the establishment of the services. And I think the other part that we need to look at is, again, people don't know these services. And I think there is going to be a lot of potential for induced demand. In 2007, you didn't know you needed smartphone. And today, everyone has a smartphone. If you don't have a smartphone, it's like "what, a flip on". So it's going to be the same thing here. But again, it's going to be gradual. And I think some cities will be more promising than others for 2 reasons. Fair weather meaning good temperature, sunny, no thunder storms. Those are going to be the cities where you will see the start of the services as well as a big enormous amount of people that are there. And it's not a chance that the city of Los Angeles is always talked about by everyone because it is the largest urban area in the United States with 25 million people.

All right. So I guess, let's sort of talk about the business opportunity here because a lot of investors is obviously what they care about. We have these vehicles. They're very catered to these UAM environments. What are the actual kind of types of use cases can we expect to see? And how are you going to get consumers to be comfortable with that?

The use case? So once we're over the hurdle of certification and safety, we're all building the Five9 standard typical of aviation. So once we're over that hurdle, I think the use cases will be precisely what Adam talked about and maybe even some expansion. Some of the providers in the space are targeting a longer-range semi-regional. We are targeting much like Archer that nominal 20-mile, 25-mile trip that may take up to 2 hours in an urban environment, which we can reduce to 12 to 15 minutes rideshare opportunity, the replacement of the helicopter. So I think they will be the initial use cases and then the network gets built out for broader transportation opportunities around the city as a rideshare kind of an approach. So it builds over time.

I also think there is some -- I guess there's a lot of energy in sort of motion towards nonkinetic military DoD applications. So rescue vehicles, supply chain logistics vehicles, golden hour type vehicles. where there's a compelling value proposition. So these vehicles, because they operate just at a much lower cost and because they come with such a high degree of safety, that it's really compelling to I think, to the DoD and probably to the global DoD market that these vehicles could be used in those types of applications. Now I think the industry is sensitive to it, given it's an industry that's focused on sustainability and ESG. So I think there's been interesting ways to work to where we can create products that are available. And there's been a lot of, I think, interest to date and support from the DoD for these types of vehicles as well.

So when you look at the type of routes, you hear everyone talk about these routes to the airport, right? And it's no coincidence that a lot of airlines have expressed interest or outright placed orders and both of the guys here, [indiscernible] both are from airlines. And the idea is that for an airline capturing the consumer as close as possible to their house, if not at their house, is more important. So you can imagine, for example, having a United flight and instead of starting at LAX starts in your neck of the woods, takes you to LAX and then a transfer you to another airplane of United. It kind of like a code share or the same slide number on and on like we have today. And I think that is going to be where a lot of the companies can get in, starting making money and survive the first year as the service builds bigger and bigger.

So diving a little bit deeper. Are there specific markets depending, I guess, which region you focus on that you like. I know Los Angeles was mentioned earlier, but are there certain markets that you're looking at to launch in? And when would we likely see operations there?

So Archer is targeting cities that are focused on congestion, cities that have kind of pro tech type of setup. Cities with good weather that are easy to operate in. And then I do think airline partners are good ones to go to market with because they come with people that already customers. They come with access to airports. So they come with a lot of advantages. And so we've kind of publicly talked about L.A. and Miami cities. But I think if you can go through kind of some of the top big cities that you can look at. And I do think weather is going to be a big consideration. And so you can go into some of the colder cities. From Archer's perspective, we are building into all conditions outside of one, which is [indiscernible]. And so that will reduce the number of days if we went into a place like Chicago, but Place Chicago is still very interesting. Obviously, United has a big hub there. So for Archer, that's an interesting city, but it obviously comes with its drawbacks. So I would say it's probably the cities you're expecting. But then I also think there's going to be some focus on cities you're probably not expecting. And that's because in the big cities, it's hard to deploy aircraft. It's difficult to place like New York or some of these places that have very complex air traffic management systems. It's tough. And so if you went to a smaller city, it actually might be pretty interesting, and there might be much easier to operate. And so I think you will be surprised at some of the smaller cities that some of the companies start to launch in as well.

So I would add to what Adam said, just building on that last point. Cities like maybe Tier 2, like Indianapolis, I'm not saying weather. But of that scale, it is an easier problem to solve from an air traffic perspective. But I would add the international component where there's a significant amount of helicopter operation already in some of these major cities. I would offer places like Sao Paulo, which has the largest fleet of commuter helicopters or helicopter activity on a daily basis. But also if you think about some places in the Far East. So it's a combination of the regulatory environment and where our customers want to operate. In our case, where our partners have great strength, whether they be a regional airline, an international airline. Helicopter operator is what we're focused on. So we're going to determine that based on all those factors and partner preference.

When we look at the cities, we basically divide cities in 2 pieces, 2 different parts. Cities that want the service and cities in which the companies that are built a vehicle want to put the service. I'll give you an example. Singapore, not that big, but it's very forward. They want the service or in cities like Paris where Europe has made it as a centerpiece of the rollout of these services. Here in the U.S., the larger the city, the more difficult it is to work with, I mean, I can ask any of the guys here how easy is to work with LA. We are gigantic. But at the same time, the opportunity is so large. So where you will see, you will see some cities in which you're like "Da, makes total sense." But other cities in which you will see service that you were not expecting, if you look at some cities like the [ Costa Azure ] really nice place, but you don't expect to start there. And yes, you might see these services start there because the local authorities are more open to house them.