Flying taxis, passenger drones, electric regional aircraft and other forms of advanced air mobility (AAM) are a hot topic in aviation. Funds are pouring into space and more than 250 companies are working on solutions. And as the industry moves towards the first business operations, expected around the middle of the decade, executives are carefully reviewing and adjusting business plans to understand where they can make a profit and see a return on their investments.
Unit measures of costs and revenues are an important part of business plans. Unit metrics can provide easy benchmarks across business models and time, help AAM executives assess their competitiveness with other modes (such as personal car, transit or ridesharing), and scaling and growth of the model. But while unit metrics such as “price per kilometer” seem intuitive and easy to use, they also carry a significant risk of misinterpretation. Used incorrectly, they can easily lead to false conclusions, such as giving the impression that the market is bigger than it is or making an option look better than the alternatives when in reality it is worse. , and this in turn can lead to investing in bad companies, bad models of airplanes and mobility and, ultimately, the destruction of value.
With unit metrics, the devil is in the details. While it may seem obvious to some, a surprising number of people compare apples and oranges when talking about this industry. To fully understand economics, we need to be clear about unit metrics and make sure we are comparing apples to apples. The following discussion is intended to clarify how to properly adjust unit metrics. This doesn’t mean approving absolute prices – it requires a longer and more in-depth discussion.
Define unit cost and income
The unit cost of transport is generally thought of as the cost per unit of distance (e.g., dollars per passenger-mile), but in the context of the AAM, two things need to be clearly defined: the scope for which the cost is assessed and how the distance is measured (expose).
On the scope side, we can look at cost from several different angles: cost per vehicle, cost per seat, and cost per passenger. There are also three ways of thinking about distance: the direct distance (great circle), which is the most direct path between two points; road distance, which reflects the indirect nature of road trips; and the air distance, which is the flight path of the aircraft. Air distance tends to be shorter than road distance but longer than direct distance because the aircraft must maneuver for takeoff and landing and around other traffics and geographies.
To demonstrate the importance of these distinctions, the exhibit shows a comparison of unit revenues, or prices, between a hypothetical AAM provider and a ridesharing service. As noted, there are nine different ways to define the unit price. If the typical carpooling service costs $ 3 per vehicle road kilometer and the AAM cost is $ 2.50 per passenger flight kilometer, at face value, the AAM player appears to have a lower cost. But this conclusion assumes that there is only one passenger and that both vehicles follow the same route. Since the car will likely take a less direct (and therefore longer) route, the comparison is not fair. A more insightful comparison is to adapt to a common definition of distance.
In this example, we are adjusting to a common definition by assuming that the car’s route will be about 33% longer than the direct distance, because the car has to travel on roads. Likewise, we assume that the aircraft adds 10 percent distance to accommodate take-off and landing paths and constraints along the route. With this adjustment, the cost becomes $ 4.00 per direct vehicle mile for the car and $ 2.75 per direct mile per passenger for the plane, making AAM costs even better. But it’s still not an apple-to-apple comparison, as it compares the price per vehicle with the price per passenger. When the car carries two passengers, for example, the price per direct passenger-mile drops to $ 2.00, well below that of the AAM at $ 2.75 (each).
Travel time matters
We also have to take into account the length of the trip. Each mode of transport has both fixed costs per departure (such as landing infrastructure or booking fees) and variable costs (such as energy). The fixed costs are spread over the entire trip, so if everything else is equal, shorter trips tend to have higher unit costs and income. When comparing business plans and financial reports, it is important to recognize this effect and adjust unit metrics accordingly.
In traditional air travel, the square root distance adjustment formula provides a good approximation of the impact of stage length on unit metrics. To adjust, we multiply the unit metric by the square root of the actual scene length of the metric divided by the scene length we want to adjust to. Fixed cost to variable cost ratios published by a number of AAM companies suggest that the square root distance adjustment formula will also be a good approximation for this new industry, at least to some extent. As the distances recede, the different design points of each aircraft will begin to play an important role and break the validity of the fit formula.
For example, a hypothetical AAM has a cost of $ 1.75 per flight seat mile at a reference leg length of 25 miles, while another hypothetical AAM has a cost of $ 1.50 at a length 35 mile stage. At first glance, the second AAM appears to have lower costs. But when its path is adjusted to the length of the first stage of the AAM – $ 1.50 * sqrt (35/25) = $ 1.77 – the two costs turn out to be almost equivalent and therefore quite competitive.
These adjustments, both for the correct definition of unit metrics and for travel time, are necessary to get a correct view of AAM activity. Players who do not use unit metrics correctly could easily make bad decisions resulting in value destruction.
Andrea Cornell is a consultant in the McKinsey office in Denver, Axel Esqueis a partner in the Paris office and Robin riedelis a partner of the San Francisco office.