June 21, 2022
Despite longstanding decline in the regional aviation sector, investment in new, sustainably powered regional aircraft has skyrocketed in the last two years to more than USD 3 billion. One key reason: short flights are well suited to trialing important technologies like electric, hydrogen and hybrid propulsion. However, there is still much to be done to exploit the full potential of this new generation of mobility.
Rapid innovation and a growing need for greener travel are beginning to reshape regional flight. The advanced air mobility market now ranges from small unmanned aerial vehicles to regional aircraft for 19 passengers or more. Use cases include chartered trips, cargo transport, feeder flights to major hubs or trial periods for new routes.
Growing interest in regional aviation
Increasingly, regional flight is also being seen as a testing ground for sustainable technologies. Research and development of alternative aircraft propulsion has been ongoing for the last two decades. However, the increasingly urgent need to reduce aviation emissions is now rapidly accelerating progress. 2020 saw more investment in alternative propulsion projects than the previous ten years combined, while 2021 recorded a further rise. There are now almost 400 development projects underway worldwide for alternative propulsion regional aircraft.
Most focus on either electric or hybrid systems. Fully electric propulsion is best suited to the short-distance UAM and RAM markets; hydrogen propulsion offers greater range but is only being explored by a small number of projects due to current technological limitations of fuel cells and batteries.
A closer look at the number of projects in each sector shows that RAM long-distance dominates, with 35% of all projects focusing on aircraft for ranges of more than 300km and fewer than 19 passengers. This is extremely surprising as the vast majority of funding, particularly in 2021, went to projects looking at either the UAM or short-distance RAM sectors.
While entry into service for these aircraft is still several years away, considerable technological progress has already been made. This likely explains why many developers are now focusing on both the short- and long-distance RAM segments, which offer greater market potential. Investors, on the other hand, are either yet to realize this or are betting on more established short-distance UAM projects with the intention of widening their scope once technology is ready and the market more mature.
A small market in decline…
At first glance, the level of investment and innovation in the market may seem surprising. RAM has a minor role in the global aviation market: in 2018, which we selected as a representative pre-Covid-19 year, short-distance air travel of less than 400km accounted for just 2% of the global offered transport capacity.
What’s more, the regional air mobility sector has been in decline since 1998. By adding new, more efficient narrowbody aircraft to their fleets, low-cost airlines have been able to outperform regional operators. There is no additional growth anticipated for RAM under the current conditions and forecasts.
… but with significant potential
So, what lies behind the recent growth in projects and investment in the RAM market?
While its market share may be small, this still equates to significant passenger and revenue volumes. In 2016, more than 900 million passengers travelled on scheduled flights of less than 800km. In the same year, revenue for flights of less than 400km totaled USD 29 billion, with flights of less than 800km making up USD 116 billion.
Crucially, short-distance flights are also well suited to testing new technologies like electric, hydrogen and hybrid propulsion. The latter is particularly significant for the wider aviation market. Hydrogen propulsion for regional applications could deliver ranges of 2,000km-plus, which would cover 70% of all transport capacity from, to and within Europe.
Infrastructure, costs and other challenges
We believe that this continued innovation and the drive for sustainability can halt the decline of the RAM market. If it is to truly take off, however, there are a number of key challenges still to overcome. Public acceptance and certification for new technologies will take time. Infrastructure is also vital, including electric charging stations and seamless integration with ground transportation networks and booking platforms – all of which will require further investment.
Potential growth is also dependent on three main external factors: overall growth of the aviation market; availability and cost of renewable energy; and the overall price for RAM compared to other modes of transportation.
We have identified three potential trajectories for the RAM market, which vary according to the development of the macroeconomic environment. This will depend heavily on whether the industry can drive down costs. Succeed and RAM (short- and long-distance) can become a mass-market form of mobility; fail and it will remain a niche option at a premium price for those seeking greater convenience, comfort or even sustainability.
Base case: USD 25 bn by 2050
- The aviation market returns to its long-term growth path of around 4% CAGR
- Renewable energy will be available in sufficient quantity, however prices for energy will be higher than today
Best case: USD 50 bn by 2050
- Renewable energy will be available in sufficient quantity and energy prices remain relatively stable
- The aviation market continues to grow, especially the regional segment RAM achieves a ticket price that makes it competitive with other modes of transport like trains and cars
Downside case: USD 10 bn by 2050
- Limited availability of sustainable energy
- Energy prices increase substantially due to geopolitical crises and to combat global warming
- The aviation market experiences a decline in growth to curb global warming
Manfred Hader, Senior Partner and Head of Roland Berger's Global Aerospace Defence Practice
Stephan Baur, Principal Industrials