The Vertical Space

#63 Uma Subramanian, Surya Ventures: Commercial air travel innovation under attack

• Luka T • Episode 63

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In today's episode, we sit down with Uma Subramanian, a seasoned aviation expert with a wealth of experience in the industry.

Having known Uma for many years, we've been really eager to bring her insights to our audience. From her time as an engineer working on F-18s, to doing corporate development and strategy at Rolls Royce, to leading the urban air mobility network Voom, an Airbus company, to being the founding CEO of Aero, an airline catering to premium passengers, from March 2019 to September 2023, Uma truly brings a unique perspective to the table.

Our conversation with Uma covers a wide range of topics, from the genesis of Aero and the economics of running an airline to the challenges and opportunities in the ever-evolving aviation industry. One particularly contentious topic we explore is the ongoing debate surrounding Part 135 and Part 380 regulations, sparked by the success and recent public discourse around JSX.

Throughout our discussion, we delve into the intricacies of airline operations, exploring questions such as the right strategies for profitable growth, the role of labor in shaping airline policies, and the regulatory structures that either hinder or foster innovation in air travel. We also touch upon exciting developments in electric aviation and the potential for regional air services in the U.S., shedding light on the future of aviation and the path forward for industry innovation.

So join us as we unpack the complexities of starting and running an airline, navigate the economics of air travel, and explore the fascinating intersections of innovation and regulation in aviation.

Uma:

I think Part 135 and the Part 135/ Part 380 structure is under attack, and I would argue very unfairly. Part 135/ Part 380 was deliberately designed by the FAA and DOT together to allow for a semi-scheduled service under 30 people. That was deliberately done that way. If you look at all the safety inputs there, they are as safe as, if not better than, Part 121 air carriers. And the whole system is under attack now, because lo and behold, the Part 121 regulation was designed to favor the incumbent, and to really keep out innovation in this space. And so I think the next 18 months are going to determine whether this is it for commercial air travel in the U.S. or whether we're going to still have space for novel ideas.

Luka:

Welcome back to The Vertical Space. In today's episode was sit down with Uma Subramanian, a seasoned aviation expert with a wealth of experience in industry. Having known Uma for many years, we've been really eager to bring her insights to our audience. From her time as an engineer, working on F-18s to doing corporate development and strategy at Rolls Royce, to leading the urban air mobility network Voom, an Airbus company to being the founding CEO of Aero, an airline catering to premium passengers from March 2019 to September 2023, Uma truly brings a unique perspective to the table. Our conversation covers a wide range of topics from the genesis of Aero and the economics of running an airline to the challenges and opportunities in the ever evolving aviation industry. One particularly contentious topic that we explore is the ongoing debates surrounding Part 135 and Part 380 regulations sparked by the success and recent public discourse around JSX. Throughout our discussion, we delve into the intricacies of airline operations, exploring questions, such as the right strategies for profitable growth, the role of labor in shaping airline policies and the regulatory structures that either hinder or foster innovation in air travel. We also touch upon the exciting developments in electric aviation, and the potential for regional air services in the U.S. shedding light on the future of aviation and the path forward for industry innovation. Uma is the managing director of Surya Ventures, a mobility advisory firm. From 2019 through 2023, Uma was the CEO of Aero Technologies, a next generation air carrier for the experience economy. Prior to launching Aero, Uma was the founding CEO of Voom.Flights an Airbus company, which ran on demand air taxi services in Sao Paulo and Mexico City. Uma holds an undergraduate degree in aerospace engineering from the University of Michigan and an MBA from Harvard Business School. Uma is passionate about flight and has spent the majority of her career working in aerospace and aviation. Uma believes that this is an extraordinary time in the industry and looks forward to building the future of flight. So join us as we unpack the complexities of starting and running an airline, navigate the economics of air travel and explore the fascinating intersection of innovation and regulation in aviation, right after a brief sponsor message. Uma, welcome to The Vertical Space. It's a pleasure to have you on the show.

Uma:

Thanks very much for having me, gentlemen.

Luka:

Is there anything that very few in the industry agree with you on?

Uma:

So, my answer to this is that we all know that air travel has become a commoditized kind of universally terrible experience. And I believe that it is possible to do something radically different. And I believe it's possible to do something radically different while building a profitable business. But you have to be really deliberate in what you do, in order to radically change the paradigm.

Jim:

Uma, how did you end up starting an airline? what drove you into that direction?

Uma:

Thank you, Jim, for the question. So, my history and passion for aviation go way back. I went to space camp when I was nine and became obsessed with all things aviation and aerospace. I have an undergrad degree in aerospace engineering, and right outta college, worked on the F 18 program doing stress engineering in the aft fuselage, which if you know me is not a good career choice. I am, not the engineer's engineer, so quite quickly I pivoted, and managed to finagle my way onto what was then Project Constellation, which was, the US' Moon Mars program. And I spent three sort of very happy years building or articulating a future for space travel, that, that was very exciting. It was about how does, how do we tend to send people to the moon? How do we send people to Mars? What is the right crew mix look like? And so had a really deep and intrinsic look at the space industry. And what I concluded there was that, space is really amazing, but things take a really long time. So I went to business school, and had some exposure into how do you make, how do people make decisions about what businesses to start and why. and found myself realizing that if ever I wanted to do something that moved at pace in the aerospace sector, it would have to be in aviation. And aviation is at the cutting edge, and very real to customers today. So I worked for Rolls Royce, in the military engine business and then, After a few kind of loops went and worked at Airbus where I started Airbus's first urban air mobility business, which was a network business that moved people in helicopters as a precursor to the urban air mobility revolution and learned in that process about how do you make money in the aviation space. And so when you were talking about the aviation space and, it becomes quite clear that you must be the operator to make money in aviation. there is very little margin for a network player. And so in March of 2019, I met Garrett Camp, who is the founder of Uber. And Garrett said to me, I want to do something in aviation. I believe fundamentally that the commercial air travel experience sucks and private's unaffordable. and I wanna start something. now Garrett had the experience of Uber, and was very interested in doing something asset light. And having had the experience at Airbus of running an asset light helicopter network, I made the point to him that you must be the operator in order for any of these models to work because the value accrues to the operator. And so with that as a thesis, we started, we built a super premium semi private brand, called Aero, that was about delivering a radically better passenger experience with economics that made sense. So we took Embraer Regional Jets, which had fallen out of favor with the commercial carriers, stripped them down to 16 seats, and started operating on, on routes, both in the US and in Europe. Now in, in aviation timing is everything. so we launched an airline six months before COVID and Brexit and financial crisis. so I genuinely believe that we managed to build something, despite the sort of really strong headwinds. and there is a very interesting model here because what we discovered is that there is a segment of people that really do care about the air travel experience, and there is an opportunity to build something that is radically better but you have to be really deliberate in how you do that, and what routes you choose, and how you go to market.

Jim:

So you looked at space and you looked at aerospace overall, and you saw that aviation is where the excitement is and where you wanted to spend your time. And then you started looking at aviation and then you saw that being the operator is the way to be able to make the money. Can you talk a little bit about the economics of that? Why the operator and how did you reach that conclusion?

Luka:

And even before that, Uma, if you don't mind clarifying what exactly you mean by running a network as opposed to being an operator.

Jim:

you, Luka.

Uma:

Yes, so, there is a popular thesis that percolates around Silicon Valley every five or ten years, where if you go and look at any small regional airport, there's a lot of jets sitting on the ground. And what is a thesis that just keeps popping up is, Hey, I see a lot of excess capacity and I can make that capacity available in a way that allows, so I will build a network, right? So this was the Jetspotter model and operate other people's airplanes and allow them to operate profitably. This is the Blade model where they work with operators to run their network.

Jim:

Right.

Uma:

and The challenge with that is that the economics in that don't really make sense, right? So the cost per hour to operate an aircraft comes down the more hours you fly. And so as the operator, you are, and this is why airlines sweat their assets, right? so an average airline will operate its asset between 3600 and 4000, hours a year per asset. But Charter operators only fly 400 to 800 hours, which is why charter flights are so expensive on a per hour basis, because they're covering their costs. And the thesis around, like, putting those charter operators in service more through a network play, basically implies that you can build a cost structure that's more efficient. But time and time again, what people have found is is that's actually really difficult to do because there is a, there's a ceiling on willingness to pay on a per hour basis that makes the economics not quite sort out. Does that answer the question?

Jim:

So that answered the question a little bit of the operator versus the network, I guess, but I'm also assuming you're saying vis a vis the OEM as well, you're saying that this is where the money is versus being an OEM is my guess, is what you're saying. Is that right?

Uma:

No, those are radically different businesses. and so being an OEM, so I'm talking purely about the air operations space. So how do you make money with assets once you already have them?

Jim:

Okay, great. So, and can you just talk a little more detail about the economics of being the operator that brought you to your conclusion?

Uma:

Yeah, so, an operator, has classic fixed and variable costs, right? And the fixed costs are the depreciation of the aircraft, labor is often a fixed cost, insurance is a fixed cost on a per aircraft basis. and so you, you go through the stack bar build up on the fixed costs, and then the variable costs are really important. So there's also variable labor. there is fuel, which is a big one, and on a per flight hour basis, and then there's a maintenance reserve, which you carry on a per flight hour basis. So when you have many more hours over which to spread your fixed cost, your cost on a per hour basis can weigh out. And so if you don't operate your asset that much, you have to cover those fixed costs on, over 400 hours, right? And that tends to be the biggest driver.

Peter:

And so when you were running VOOM, as that, first experience with an operator, was VOOM exclusively operating its own aircraft or were you running a network and had some other operators on that network or was it a hybrid approach?

Uma:

VOOM was exclusively just the network. So that's a great example. So, the VOOM cost stack shook out as, on a 100 ticket. So say a passenger pays, we operated in Sao Paulo, Mexico City. So say a passenger were to pay 100 to fly from Guadalupe Airport to Itaim. So, Seventy five of those dollars went to the operator. Fifteen dollars went to the helipads at either side. About another five dollars went to air traffic control in Sao Paulo. And then the last five dollars is the margin that the network has. And a lot of times that margin is even less. So if you look at the cases of like JetSmarter, or, or some of the bigger network plays that didn't work out, BlackJet, DayJet. When I started Aero I had a long list of like dead players in this space. Often times there wasn't margin for the network, which is why that model doesn't work.

Peter:

So, what were the key learnings you took from the VOOM experience that proved the most helpful and relevant as you, were building Aero?

Uma:

Steve Jobs had that phrase, you can't connect the dots looking forward, you can only connect them looking back. When I look back, I couldn't have done Aero without having done Voom, because I didn't know how to build an operation, right? And going through the VOOM experience and working with operators and really, like, learning about the pieces that needed to come together, taught me how to go build an air operation, right? Like, I knew that I needed to go out and get a Part 135 ticket. I know I needed to go out and file for Part 380 in order to have commercial authority to fly in the U. S. What post holders you need and how to actually go do that. How do you procure an aircraft and like, do go through all those things. And that's what I learned getting to this, getting to the point where we started Aero.

Peter:

When you started out with Aero, did you have one vision for, how it would grow profitably and what would be the right strategy? and did the experience, slightly change that or change that in some big ways as you got deeper into it and began operations with Aero? What came out of that?

Uma:

Yeah. So, so Aero is still running. It is, serving passengers between Los Angeles and Cabo and Aspen, profitably. And when we started out, we had a huge vision to bring Semi private premium air travel to both Europe and the U. S. and they always say like if you had a do over, what would you do? And I think I would do less. I think what I learned building Aero is that it's really important to focus and like really nail it in one geography, and go from there. But you know, we got a lot of things right. We built a wonderful product. We had, we had five airplanes with 16 seats in them. That was a beautiful experience. and we found some routes that had a lot of traction. in hindsight, there's some routes that make a lot of sense, like New York, South Florida is a route that is a really compelling premium travel route. There's a lot of opportunities, sort of Canada, South Florida, up and down the eastern seaboard is really compelling. The West Coast has different travel patterns, and oftentimes you need longer range, so I probably would have started on the East Coast, with the airplanes that I had. But there's very clearly a market for the premium traveler that needs to be addressed in a different way.

Jim:

So your conclusions from your earlier work led you to believe that there's an opportunity in aviation, there's an opportunity to be the operator, and, your next professional Step forward was you're trying to prove out this opportunity. Let me ask you, who today is taking advantage of what you see as the greater opportunities in the market? What kind of operators?

Uma:

So I think that, so JSX is doing a really nice job on, the, the, Medium premium market, right? So not the wealthy end of the market, but the sort of large bell curve around like the middle class, with discretionary income traveler, right? and it's doing a really nice job of delivering to that person a radically better experience. At the premium end, Aero's product offering is beautiful. We have very kind of reliable customers, that fly us really regularly. And then, at a global scale, Vista has a semi private offering that's also quite a good offering. but I don't think anyone has really nailed it. Like I think there's really an opportunity here, to do something different, but you'd have to do it, you'd have to pick the right launch markets.

Jim:

Talk about that.

Uma:

Yeah, so I think, one of the, one of the things is, So we set out with a thesis that we were serving leisure travelers primarily, instead of going after really high density markets. but high density markets are where travelers feel the most pain around the travel experience, right? So the New York, Florida commuters are the ones that have to suffer through the airport and often will choose to fly private instead. So you can pick off that as an opportunity. the other market that I feel is a really compelling place to start something like this is in Europe, where I don't know if any of you have been through Heathrow lately, but last time I was flying to Frankfurt, it was two and a half hour queues, in the mornings. And so the beauty of the European market is because most of the airports are within three hours of, well I'll use the London example, three hours of London a product like the one that we built, with the reconfigured ERJs would be optimal for that market.

Jim:

And Uma, when you say, you're not going to have LHR, you're flying out of Gatwick or you're flying and is it the airport and is it potentially the FBO that's changing the dynamics of the experience?

Uma:

Yeah, so when we were in Europe, we flew out of Farnborough, which was the, private airport. So we ran, scheduled charter, out of Farnborough. And that was a dramatically different experience because you show up to fly internationally 20 to 45 minutes before the flight, and it's a dramatically better experience. and there's no kind of complications of Interestingly enough, in Europe, they have airport security because you're going on an international flight. So you still have to clear security, but it's a very sort of seamless, painless kind of process. It's the magic of flying private for the price of first class.

Jim:

And are you using the, I don't know Farnborough, very well, are you using the traditional airline terminal or are you using an FBO for that security process, that onboarding process for the passenger?

Uma:

You use the FBO, which has security in it.

Peter:

Thinking about the U. S. market again, there are two ways to characterize the gap in the market, between existing commercial air service and flying private. one of them is, as you've pointed out, there is a less painful, somewhat more premium. service offering that sits between the quality level of the commercial airline experience and flying private. the other one that I'd love to get your thoughts on is the regional airline, air service opportunity, which, 50 years ago in this country, that was a viable business model and, it fell away. It was no longer economic, but commercial air transport today, serves a relatively small fraction of the airports in the country. And when you look at that opportunity, that may not be a, a premium type of service, but is there a window, the way the industry is structured and the way the requirements are structured, for offering that type of service again, in your opinion?

Uma:

It's probably worth delving into why that model went away. so if we think back kind of 20 years ago, right, we had. Continental and U. S. Air, and Northwest Airlines and, before that, Eastern and, Piedmont and all sorts of other kind of air carriers, that were operating in a tightly regulated market, right? And then the airlines went towards deregulation and the sort of hub and spoke model evolved. But what is really complex, and this is controversial, is that the airlines are really beholden to labor. and labor costs keep going up, right? And big structural changes like, ALPA forcing first officers to have a minimum of 1, 500 hours drives labor costs for the airlines way, way up. And if you look at kind of recent transactions in the aviation space, right? Like typically airlines trade a two to three X revenue. But there's an example of a transaction going through now, the Alaska Airlines buying out Hawaiian, where Hawaiian's revenue last year was 3. 2 billion, and they're selling for less than one times revenue, inclusive of debt, right? And that's bananas. That basically says that airlines are inherently, like, value destroying, right? Because you don't even trade at 1x revenue, it's just crazy. And if you look at what their cost drivers are, their fixed costs are extremely high. They, they've got, Part 121 drives you to carry a lot of, surplus, like, very redundant, Kind of very high employee levels, really high fixed costs, and then your variable costs are extremely high, because, on a per hour basis, you're having to spread your pilot costs, and it's just, it's prohibitively expensive to run an airline at scale, right? And so, what we saw in the U. S. happen was, lots and lots of consolidation. And so you've ended up with six transcontinental carriers that operate on razor thin margins. And it's a fundamental kind of structural question, right? and this is, I would argue that the root cause of all of this is, entirely labor. We are beholden to the demands, of labor. And if you look at, at the big carriers are having to pay 600 grand a year for a long haul captain. That kind of cost structure just makes it prohibitively expensive across the airline to operate really efficiently. So you asked the question about can regional travel come back. It depends, right? So right now for the FAA, it has not been a priority to serve these lower cost markets, right? In principle, Part 380 and Part 135 were very deliberately designed to continue to allow access to these markets. So Part 135 carriers are allowed to have, first officers with 500 flight hours, right? That brings the whole cost of the system down. And so you can actually have Regional Carriers, and there's a lot of misinformation circulating about the safety of these things where they're, they've lumped in all Part 135 carriers, not just those carriers operating under Part 380. And if you look at the safety records of the Part 135 carriers operating under Part 380, what you'll find is that they are oftentimes better than the Part 121 carriers. Like, there's been a series in the last few weeks of very high profile incidents with big Part 121 carriers that you don't see with Part 135 carriers. It's, it's noteworthy, in that ALPA and, the big airlines that are going after Part 380 are using safety as a use case when it's a bit, it's a pot calling the kettle black.

Peter:

Why is it over these years that labor has gained such leverage over the airlines? I mean, clearly you point out that they have and, I, I think we can see that, beyond just that immediate leverage over the airline itself, they're able to use that to, exert influence over the structure of the industry and over the constraints by which, other models like Part 135 with Part 380 are able to operate. But why did that happen in the first place?

Uma:

That's a great question. I think some of this is driven by, like, the FAA, as has come out lately, right, is quite significantly understaffed. and so they are not able to, really ask the more nuanced questions about, like, what happens if I strip these things back. But how did labor, how did

Jim:

strip what things back, Uma?

Uma:

Like, strip, like, look more closely at whether Part 135 operating under Part 380 versus Part 121 if there's truly a difference in the, or, assess the safety cases as made by the controversial carriers. So, how did labor get, get stronger is a great question. Actually, Pete, I don't know that I can answer that. I don't think I have a good answer for that. I think that's just, like, really effective lobbying.

Luka:

I

Uma:

Yeah, It's interesting

Luka:

to then extrapolate from that statement to how autonomy gets adopted on commercial aircraft.

Uma:

Yeah, I think the MCAS incidents at Boeing have really set autonomy back, because that was really a push about, that was about a control system that's supposed to do something to override the capabilities of the airplane. But the autonomy, is a great solve for this problem, right? Pilots are getting older. There is a dearth of pilots in the pipeline, which is how they're able to extract, materially higher labor costs. There's far fewer pilots coming out of the military, which used to be a source of, of pilots for the US air carriers. And, I think autonomy will definitely move us forward in that space. So I think you're starting to see, a clear definition of the path, right? So it will never go to full autonomy right off the gate. You'll probably go for, potentially single pilot with a remote kind of override, and then eventually over time might move in that direction. But, But autonomy is definitely kind of part of the long term equation here. But in the short term, I think, we're really stuck, right? We're stuck with sort of six, behemoths, in the U. S. anyway, right? Six behemoths, that are offering transcon service., And then lots of people have started small airlines. So, so the best one, is Andrew Levy's Avelo right now. And he posted recently that they turned a profit. That's a brand new, low cost carrier that's going after these secondary markets. and, the, the thesis there, so he was at Allegiant before that. and the thesis there is like, run, run your airplanes full, offering low cost service to tier two and tier three cities, which is also what Breeze is doing. and then the premium customer, like both of these offerings, no one is solving for the premium customer, right? This is what we were trying to solve for, which is offer a better product at a more premium price to serve, the premium customer in a better way.

Jim:

Yeah, Avelo was right down the road from us in New Haven. Boy, those things are packed. I mean, it's a nice service they're providing that's relatively affordable to great cities. So, I can understand why they're being successful. Hey, can I ask a quick question? So, let's line up your airline operation next to the 121 and talk about the main cost differences. Why are you able to be a more profitable operation from the cost side and from a revenue side? Your pilot costs are different because you don't have the same requirements. Also talk about the airside and the landside costs. Because I would assume being out of an FBO, you're providing, well, you're definitely providing a better experience. What's the cost difference?

Uma:

So the theory here, Jim, is that, operating, under part 135 allows you to go into smaller airports, right. You can go into airports that are not part 139 airports that are often less expensive to serve. and so you're going in as a charter operator, right, into these airports. and those airports are materially cheaper to operate to and from. so that's one big cost driver. you have, pilots that are on Certified flight instructors, who are working their way, up the ladder, accruing hours and so there's a delta on pilot costs. You're nominally operating out of FBOs, which are expensive, so that's probably a wash relative to operating out of airports. But the two main drivers are, you've got efficiencies on the airports that you go in and out of, so like the airport landing fees are lower, and you're really driving, in the JSX example, for instance, you're really, working with high caliber, pilots that are not yet, part 121 certified.

Jim:

And you're able to charge a premium for what reasons? One is the

Uma:

Because the experience is radically better. So you're flying out, so you're essentially offering your passengers a semi private experience.

Jim:

You're flying outta the FBO versus the airline terminal. you're on your aircraft experience, I would assume is considerably better.

Uma:

The aircraft experience is remarkably better. we have sort of premium seats, at least in the Aero example, we had 16 seat aircraft, with, a premium configuration, beautiful interiors, the in flight food options are materially better. But more importantly, it was really about service. So, I don't know if any of you have tried to get an airline on the phone lately. it's like nearly impossible to actually talk to a live human. Whereas at Aero, we answered every phone call. And that, in and of itself, right, that's not to do with the flight experience. But that Just having real time customer service gives it a look and feel of a premium carrier.

Peter:

I think there's something really valuable that the customers recognize is that it's a more civilized experience. It's quieter in the terminal, it's quieter when you're flying, you aren't just overwhelmed with all of the boilerplate announcements that they're making. You don't have the same sort of treatment in terms of, getting through security. those little things I think add up to a really different experience on the part of the passenger and a different sort of emotional approach to, even undertaking air travel in that case.

Uma:

Yeah, it's no longer a chore. So what we found is like people love flying with us. So we flew a lot of really high profile folks that, for whatever reason can't fly, commercial. And their choice that they were making was to trade down from private and fly aero, because they were getting functionally the same experience.

Peter:

When we, look at the opportunity in the market for offering this premium service, and we see that there's a gap in today's air transportation options, looking at the inputs to this, whether there's new technology that's going to be brought to bear or not. From a structural standpoint, do you see that, looking at the way the regulations are structured under, with Part 121 versus Part 135 operating, in Part 380, do you see a big window for businesses to come into this segment of the market? Or is it really a constrained sort of tiny little knothole that they have to get through in order to make this work. What's your sense from the experience you've had?

Uma:

Yeah, that's a great question, Pete. I think, Part 135 and the Part 135, Part 380 structure is under attack, and I would argue very unfairly. Part 135, Part 380 was deliberately designed by the FAA and DOT together to allow for, a a semi-scheduled service under 30 people. That was deliberately done that way. if you look at, all the safety inputs there, they are as safe as, if not better than, Part 121 air carriers. And the whole system is under attack now, because lo and behold, the Part 121 regulation was designed to favor the incumbent And to really keep out innovation in this space. And so the next 18 months are going to be super critical for the future of U. S. Aviation. We're in trouble on the OEM side because the structure of the industry allowed for basically only one OEM at scale, right? Because, if you look back 50 years, right, on the aircraft manufacturing side, we had Lockheed and Grumman and McDonnell and Douglas and Boeing, everyone was building passenger aircraft. But as the safety requirements ramped up and as the certification got more and more onerous, as the cost went through the roof to actually bring a product to market, very few companies could sustain that cost. And so, so they were allowed to kind of all merge together and you ended up in the problems that you've got now with Boeing. It is becoming like that in the commercial aviation space. Like, there are these six carriers, and then you've got Avalo and Breeze that have just started, that are competing. And there is not a will, both politically and in the industry, to allow innovation in this space. And so I think the next 18 months are going to determine whether this is it for commercial air travel in the U.S or whether we're going to still have space, for novel ideas and for people to come and serve this premium traffic in a different way.

Jim:

Let's say that you have the opportunity that even though there's an onslaught right now, let's say that it's a positive outcome. What's the size of the market? Is it a sliver of what the commercial aviation market is today? What percentage is this market the commercial market today?

Uma:

That's a good question. So when we went through the exercise of sizing the market, we said that commercial air travel was in 2019, a 900 billion market, right? So that included all the airlines globally, plus the charter operators that were, that were, that published results. And that did not include like people that own their own aircraft. So if you assume it's 900 billion, right? And you assume that a third of that is leisure travel, right? So we were specifically targeting premium leisure travelers. one third of that is leisure travelers. And of that. One another third are premium leisure travelers. You ended up with a market size of about a hundred billion dollars globally. So it's not a tiny market. it's a large enough market. So it is fair to say that 30 percent of all air travelers are premium air travelers. So if you look at the kind of total market globally, you're talking about 900. If you remove the sort of leisure filter, you're talking about a 300 billion market. It's a big market. These are people that pay for business class fares.

Luka:

Uma If the premium travel segment is where the opportunity exists today, do you think that the maturation of technologies enabling electric aircraft is a lever strong enough to create the opportunity for all of the other non-premium travel segments as well?

Uma:

Okay, so I think, we should look at the evolution of electric aviation. So, so best in class batteries today are about 240 watt hours a kilogram, right? So with batteries that are not super power dense, all of the aircraft configurations that we're looking at today are for small, kind of four, four pax max airplanes. And we need, so at Airbus, we looked at a lot of different scenarios and universally concluded that to have aviation, regional scale aviation, which is the point at which this starts to make sense, you need 800 to 1000 watt hours a kilogram on power density, right? So you have to have radically better batteries. That's the point at which electric aviation becomes material, where you can have regional scale electric aviation. And, so I don't know, like, there's a lot of people working on very small, very lightweight, electric airplanes. And that's fine for sort of the city commute or the suburban commute. But to have regional aviation at scale, we're a long way off. So then you ask the question, what happens, if you have, airplanes that have regional scale range, you still end up in this problem around the operator, right, because, the operating rules determine where you'll be able to operate those aircraft, right? So if the resolution around Part 135 is favorable and it says, hey, you can continue to operate up to 30 seats. Then all of a sudden, it's a really interesting game, right? So, so there is a, a technology maturation. So in 10 years, right, when batteries get materially better and you can have an aircraft that gives you regional scale range, if Part 135, Part 380 are still alive, then you have a framework for potentially new electric aviation air carriers.

Luka:

Right. And Uma, we're circling around this part 135, 121, 380 discussion. Do you mind taking us a layer deeper into, what's currently the hot topic discussion and maybe a little bit more, on the privileges for each of those.

Uma:

Yeah, so it's probably worth backing up a second. So, so Part 121 is the FAA denomination for the operating license, right? So Part 121 carriers are airlines that have to operate out of Part 139 airports that, have to go through TSA and are what we think of as an airline. Part 135 are air charter operators, that operate with DOT Part 380 economic authority that allows them to run on a semi schedule, right? So you can basically run flights, and the goal here is to serve city payers multiple times a day. So you get a Part 135 air carrier, that's your authority to operate. And then you get DOT Part 380, which is your economic authority. And then you get what's called commuter authority on top of that from the DOT, which allows you to operate multiple, like more than four and a half times a week between any city pair. So that's what we're talking about. So this structure was designed very deliberately about 25 years ago during this period of consolidation that Peter talked about earlier. And the goal there was to create a mechanism that would allow service continuity to smaller regional airports, right? And with the goal being that these places don't lose service as you, as the airline industry consolidates. So, so recognizing that those airports have different economics than the kind of major cities. So, so that's the macro structure. And so what's currently under threat is that the Part 380 structure and Part 135 carriers operating on a semi schedule, has proven really popular with consumers. People are choosing to fly, JSX is the biggest one, but services like JSX and Contour and Aero, and are flying under Part 380, on a sort of semi schedule, and people love the service, because they get to fly out of private terminals, and it's a much more sort of seamless experience. And right now, that structure is, is under threat because these services have proved wildly successful. And, and my personal view is that this is, again, the airlines monopolizing to ward off competition. and using the guise of safety to do that. So they're basically claiming that these services are less safe because, first officers only have 500 hours, which as we know is just nonsense. and if you actually look at the data being presented, the data is being skewed in a way that is not accurate. So they are lumping all operators together. And there is a very different, it is a, there's a very, there's a dramatic difference between operators whose livelihoods depend on really delivering a safe and reliable operation with some volume and other operators that, operate one aircraft on a, on an inconsistent basis. And so if you look at, if you look at, at what's happening now, so there's really an interest in trying to get, both the FAA and the DOT to reverse their position vis a vis Part 380 and Part 135 right now. And there's a lot of pressure on the industry to do so. but So, it's not fully clear how this is going to shake out because on one side you have JSX and other operators like, like Contour, and supporting them, you've got United and JetBlue, and then on the other side, opposing them and when viewed with an anti competitive lens, you've got Alpa and American Airlines and Southwest. So this is really going to be a philosophical issue that the FAA is going to need to resolve about whether it wants to allow for, for competition in this space and for new novel experiences that radically benefit the customer.

Peter:

So you addressed their safety argument, as they attack this, I've also read that they're using security as another, vector for attacking the model. What is your response to that? What do you, where do you think the ground truth is really with that question?

Uma:

Yeah, security is an interesting one. So, there was an article that I read at some point about the Homeland Security basically, like, white hacked itself through TSA and found that only 45 percent of the things that they were, that they brought through were actually stopped and picked up. So you could argue about the efficacy of TSA more broadly, right? So the carriers in general, do explosive swabbing on luggage, but the beauty of the Part 135 structure, right, is that the cockpit door is locked and because these, at least those services that are currently in existence, don't have overhead bins, you don't, you're not able to carry a lot of, of hand luggage on board. And so when viewed from the security lens, look, I think, I think everyone recognizes that we'll probably see metal detectors at these, at these, FBOs kind of pretty soon. I think that's an, that's a fairly easy solve. But then, the data would lead you to the conclusion that they are effectively the same.

Jim:

So, Uma, if you're successful and you get the outcome that you want and this is a 100 to 300 billion opportunity, I'm assuming these are some of the most profitable passengers on the 121 side that would go to this new model you've created.

Uma:

that's the hope, and the expectation. So, serving Premium passengers out of smaller airports is a materially better experience for the passenger. And if we are able to take that offering and scale it into a lot of different markets, you can imagine that becomes a big business.

Jim:

And then from an air traffic perspective, I'm assuming these are, secondary airports, so arguably you're spread loading the traffic to smaller airports, the regional and the smaller airports.

Uma:

Exactly. And so,

Jim:

accessing 3, 800 that are underutilized today and you're providing service to cities that a lot of them have been cut in the last five to ten years.

Uma:

You're really able to serve many more passengers on a much more local basis. Of course, you still have to make money flying airplanes, right? So there are going to be routes that are materially better, right? So, not every market has the premium traveler. It's usually the kind of bigger cities where there's concentrations of wealth, where it makes sense to run the premium offering, but you are offering the premium traveler with many more choices.

Jim:

Are there any other unintended consequences that could come from this? If you're tapping 100 to 300 billion dollar market, you're talking about a lot of volume, especially given that there's smaller aircraft. Is there anything else that you've thought about that may pop up as noise, community noise issues, anything? Or are they just so darn thankful for getting aircraft that you're not as concerned about it? Not sure how the communities would feel about that.

Uma:

The aircraft supply is a real issue, which is where we come back to Luka's question about electric aircraft. Essentially, nobody builds airplanes that are fewer than 60 seats anymore. And this is because we've had massive consolidation in the number of airlines, and airlines want bigger aircraft that they run fewer times between the same O and D pairs, right? So they're solving for bigger airplanes. So, Embraer stopped making the ERJ in like 2012, and then Bombardier has basically stopped making the CRJ. And so there are no aircraft that are under really 50 seats anymore that are coming to market except for these electric airplanes. So Heart Aerospace has an aircraft that they're purporting will be, 30 seats, and people are looking at smaller electric airplanes. But one big kind of question for us is, like, where will we get capacity for smaller aircraft, right? So, this is where taking kind of old private jets and converting them. so you basically, you take out the existing seat configuration. Maybe you take out the D VAN and put in more seats, is the most likely path.

Luka:

Uma, how does an airline differentiate other than routes, the customer experience? How can an airline that is perhaps starting truly defensively differentiate itself?

Uma:

So I think one of the reasons we started Aero was because there is no differentiation, right? You buy, like, other than being loyal. So I was a very loyal one world, traveler when I worked for Airbus, because I accrued so many miles that it didn't make sense to fly anything other than one world. Mileage programs are the single biggest source of competitive advantage for any of the carriers. Once you're, once you have a customer and they're very loyal with you, that's the way. But our thesis with Aero, we didn't have a loyalty program. We sold a lot of tickets because we offered a radically better product. And our customers repeated a lot, right? So people, even without a loyalty program, our average passenger has flown Aero three or four times. And that's, and like, and we had served very few routes, right, between Aspen and Cabo, so depending on how often you need to go to Aspen and Cabo. But you can imagine as we build out those routes that passengers love the product, and they love the service, and they would rather fly a better product than, than fly with a carrier that they may have miles with. Did I answer your question?

Luka:

Yeah, I mean, at the end of the day, it comes down to, who can operate more efficiently assuming that everybody's trying to, provide that same level of

Uma:

Of service.

Luka:

service and experience. Absolutely.

Uma:

Yeah.

Luka:

Out of everything that we've touched so far, where would you point entrepreneurs to go and innovate?

Uma:

So I think the most interesting area in the kind of aviation value chain is actually, on the supply chain part for airlines, right? So, there is a huge opportunity on getting parts where they need to be when they need to be there. and There's an enormous opportunity around 3D printing that I think is interesting. So, there's PMA parts that are, parts that are form, fit, and function equivalent to OEM parts that are made by third party vendors. Equally, imagine a 3D printing Opportunity, around creating PMA parts, that I think is really interesting. I think if you are going to be an entrepreneur that starts an air carrier of any kind, you need to start with an inordinate amount of capital up front, right? We're talking about at least a couple hundred million dollars up front because starting an airline is very expensive. You have to build an airline before you start operating. And so you need a lot of capital and a lot of resilience because in aviation when anything breaks or anything goes awry, it's hundreds of thousands of dollars to fix, right? And so, raising capital for an airline, like a tech company, is a very hard thing to do. So, if you decide that you want to be an air carrier, plan to start with a lot of cash up front.

Luka:

What do you think about, ideas of creating on demand airlines with nine passengers or less that use, optimization algorithms to match supply and demand.

Uma:

This is, this kind of goes back to where we started this conversation, which is about being the operator. Truly on demand services, right? You have to look at the only company that did this well, was ExoJet. And under Brad Stewart's leadership, they built a very robust algorithm that would allow Brad to like predictively assess where demand was going to come from for the 50th airplane 60 days from now, right? But that was based on a really robust dataset. Fundamentally, you have to cover your operating costs, every leg, right? And this is why on demand is really hard. Like, on demand, so, so for the, so, why on demand has never really worked before, right? So, say Peter needs to go from San Francisco to Reno, but the jet is in Long Beach, and the jet lives in Long Beach. So the jet has to fly empty Long Beach to San Francisco. Peter flies San Francisco to Reno, and the jet goes back from Reno to Long Beach. Why on demand? That's two deadhead legs for every revenue leg, and you have to cover the cost of those things, right? So the deadhead leg is functionally the same cost as the revenue leg. Right, so you have to be able to charge three times the price of what it would actually like cost you if that airplane was like already on the ground. This is why the on demand problem is so hard to solve. It's because the costs just don't make sense unless you have sufficient capacity and then you're paying for all these airplanes that are just sitting on the ground.

Luka:

How is the on demand problem cracked though? Do you have any ideas? Is it a matter of, technology? Is it a matter of, I mean, obviously lower operating costs, but, put that aside. Is it about choosing the routes or the areas that you're serving wisely,

Uma:

I, frankly, I think on, I just don't believe in on demand. Like, I have not yet seen a model that allows you to crack that because you come back to the fundamental problem with aviation, right? So, The reason that asset-light doesn't work is because, let's back it all the way up, OEMs spend billions of dollars certifying a platform. So, whether it's, Bombardier, or whether it's, Cessna. Anyone that's building a new, PJ platform, they are spending billions of dollars certifying a new platform, right? And then they sell a few hundred airplanes. The OEM has to recover all that cost. So where do they make it up? They make some of it up on the sale of the OE, but most of it up on the aftermarket. So your aftermarket parts are very expensive. Like if you break the windscreen of a Dassault Falcon, it's 250 grand to replace, right? And so the air carrier is carrying a huge maintenance reserve for these things. And fundamentally, right, the problem with on demand is that even if you can get better at predicting where the demand comes from, you have to have a fleet that's big enough to actually satisfy that demand, right? This is like the example of Uber paying its drivers in the early days before it had built up the network to such a scale. And then you get to the problem where how many people can actually afford that super premium leg that has to cost three times the three. This is why, aviation tends to end up on a schedule in order to actually make money. Because having the supply in the right place at the right time is very difficult. So, so, Voom when we first started, for about 15 days, we were on demand. And then extremely quickly, we built a schedule where the helicopters left the helipads every half an hour. Because you can't, like, the economics just are not, you don't have the supply base that you have on the ground to actually enable you to do on demand at scale.

Peter:

It really points towards the, the only format where on demand would work is if you had mass produced, small, inexpensive aircraft and or that were extremely cheap to operate deadhead. But what really what you want is the former.

Luka:

which basically is the Uber model on the ground, right, Peter?

Peter:

Right? Right. Now, the Uber model benefits from the fact that you get dual use out of all the privately owned automobiles. so they have an advantage there, but what this points towards are the very small, electric or, they're not constrained to that propulsion model, but, of the aircraft that are under development, it's going to be at that end of the spectrum that can be mass produced, where you can drive the cost down, you can amortize the certification cost, that have a glimmer of a hope of realizing this model. but it's a big leap to get there.

Uma:

Yeah. And I think from like, what we know, right, is anyone literally anyone can build a flying prototype, but to actually industrialize that prototype is a radically different exercise, right? So to build and get type certificate for an airplane and to certify the design processes, there is zero tolerance anymore for, things to be unsafe. And so the safety standards are only going to get harder to satisfy. And so the delta between a flying prototype and a production vehicle. is huge. So you, So, this is why I think the whole model is very difficult. So even the electric VTOL, right? the only sort of short haul regional airline that's ever made money was New York Airways, which was helicopters every 30 minutes from the top of the Pan Am building to any airport. That's the only one that ever made money and it ran for like 20 years and the reason it made money was because it ran on a schedule. Every 30 minutes from the top of the building you could go to any of these airports. And on-demand is such a difficult problem to solve because the underlying asset is very expensive, the operating cost of that asset is very high, and you have to be able to pool demand in a way that's really difficult.

Jim:

As you look at advanced air mobility, eVTOLs, drone delivery, military drones, where do you see the best opportunities for the entrepreneur?

Uma:

um, I've met an entrepreneur recently who is working on a 1, 000 watt hour per kilogram battery. If they solve that problem, if you solve the power density problem on the battery side, you're going to open up a whole new era of electric aviation, right? And probably become a trillionaire in the process. So I give a lecture on entrepreneurship at my alma mater, in the fall and I, was basically telling everyone to go get a degree in material science because I think if you solve the power, the battery problem for aviation, And then suddenly you've created a new industry, and that's the space that I'm most excited about. So, lightweight, power dense battery technology is the answer to all of these. Because if we had battery, right, so batteries had historically been getting better at whatever, 8 percent a year, right? But now that rate of improvement seems to have slowed, and we may be reaching the capacity So, you need something new and novel, that people haven't figured out what that is yet. So, that's the space that I'm most excited about right now.

Jim:

And what type of vehicles will be most affected? I mean, are you talking about batteries that will power, larger aircraft? I mean obviously the large planes that, that would be an enormous breakthrough, but people are saying 40 or 50 years from now, what do you think is realistic in the next 10 years on the battery side and what's the impact and what kind of vehicles?

Uma:

Look, I think until you get to that point, you are talking about small vehicles, right? And so, batteries will continue to improve incrementally, and that only makes the electric VTOL use case better. I don't believe that there's only one use case for AAM. We see a lot of different kind of configurations, winged, not winged, whatever. But basically in the zero to 500 mile range, there are a number of different use cases. There's the urban commute use case. There's a suburban use case. There's the airport to wherever use case, right? And all of those things are interesting and merit different technical solutions. But to really have electric aviation at scale, we need better power density.

Luka:

800 or 1000 Watt hours per kilogram battery might be, who knows? It'll be a step change at some point, 10, 15, 30 years I may be, very wrong, but I also may not be far from the truth. What do you think is the comparative advantage of having a battery of such energy density versus having a 50 percent more efficient, conventional aircraft with a combination of improved propulsion systems, and airframe improvements. And so in a world that is very used to operating, traditional aircraft versus embracing a world of flying batteries, that come with baggage that we don't even know yet, what do you think is more appealing?

Uma:

Good question. so the traditional path of making better turbofans and making more efficient airframes, has to be done, right? It's, it, like that, I don't think it's an either or. It's a question about emissions, right? If you really want to get to the COP26 emissions targets, right, where, the airlines are effectively carbon neutral by 2050, then you have to have electric. But if that's not, if that's not really a driving priority, then optimizing existing airframes, making better propulsion technologies is part of the game, right? it's where the game is going. But the biggest revolution in propulsion systems was in the geared turbofan, right? Pratt spent 10 billion dollars bringing the geared turbofan to market, and then once that product was in operation, they had a huge recall, right? So this is like, this is non trivially hard. This is why aviation is so expensive, because it costs so much money to certify stuff and then go back and still have to make improvements over time.

Peter:

I think, Luka, on that list of developments, I think that what would be equally, if not even more compelling, would be a small, reliable, affordable micro turbo generator that would be the, the conversion, take a, hydrocarbon fuel, it can be a sustainable one or not, but take all the benefits of that liquid hydrocarbon fuel and convert it to electricity for, small aircraft, small systems and gives you a viable alternative to, some future battery technology. And it would usher in the ability to bring forth long range, really capable small aircraft, whether they're owner operated or whether they are, on scheduled service. I think it would just give the industry a lot of flexibility. I

Luka:

I agree. I agree. You know, 800 watt hours per kilogram battery would certainly enable regional air travel, but getting cost out of traditional systems would enable radical changes to the business model of much larger aircraft as well, and create opportunities there, not just in the small regional segment of the market. Uma what do you think about, the industry's current thoughts on decarbonizing aviation? How much of that is grounded in solid rational arguments versus following I hate to say it, but to a certain extent, dogma.

Uma:

I haven't seen a clear plan that I believe in, right? So, Luka, you and I both know people that have started, hydrogen companies. I think that's interesting, but hydrogen is still, unstable at room temperature, etc. So, again, it has the same, hurdle, to certification as electric. So, I haven't seen any plans that I really believe are real yet.

Luka:

as a closing note, Uma, what's the one point that you would want our audience to take away from the discussion?

Uma:

Aviation is super exciting and super sexy, but super hard. I think that there is opportunity for innovation, but there has to be desire, for innovative solutions to thrive and to flourish. And I think that the system as currently structured works against innovation. So if there are any, FAA people listening to this, there is a need, the customer is underserved. The American consumer is underserved by today's aviation options and there need to be other, more innovative ways to serve that customer. but we need to not kill off innovative companies that are trying to do that.

Luka:

Well, thank you very much, Uma. We really enjoyed the conversation.

Uma:

Thanks very

Peter:

Yeah. Thank you,

Uma:

it.