on Apr 18 2014
Terrafugia has raised ~$10 million from sophisticated accredited investors. The majority of that capital has been spent on the development of the Transition. The rest is still being deployed today to get the Transition through the rest of the testing program.
The funds raised on Wefunder will go directly towards getting the Transition to market. We expect this infusion will enable Terrafugia to complete the design of our third prototype.
We expect to need another $15 million to get Terrafugia to profitability from Transition sales. We anticipate raising another $30 million to ensure adequate working capital in case there are delays with Transition (as are common in aviation), and to prove the TF-X concept design with a flying experimental aircraft.
We want investors who believe in the long term vision and will be comfortable tying up this investment for 5-10 years.
It depends on our fixed operating costs which depend on the particular production facility among other things, but we plan to start in our current 19,000 sq. ft. facility where we need to sell 40 Transition’s per year in order to break even.
Terrafugia has maintained alternative revenue through engineering and production contracts during the development of the Transition. In particular, we have been heavily involved with the DARPA TX program which has helped inspire the TF-X program. In addition, we are preparing our manufacturing team for a rigorous production environment by supplying composite boat parts for Stillwater Design.
We will not be profitable in the first year of production, but once we have delivered ~50 Transitions, we expect to have a gross margin of 40-45%. In the long run, if the price were held constant we might achieve 60% gross margin, but we expect to reduce the price to grow the market.
In 2013 dollars, the unit price may come down to between $150K and $200K. The hardware will still be expensive compared to a car, but there will be other business models like air-taxi services or “Zip-planes” which will allow more of the population to use flying cars even if they cannot afford to purchase one outright.
According to third party market research, the market for the Transition in the United States alone will be 200-400 units per year by production year four. This estimate is based exclusively on the general aviation market and does not account for growth of that market among non-pilots which may be inspired by the Transition. Non-current-pilots currently represent half of our production backlog, so those numbers could double. We do not have estimates we trust for international markets, but since the US represents approximately 50% of the global GA market, we believe that these numbers could reasonably be doubled again if all international regulations were to allow the operation of Transitions (which they do not today).
Our target customer is evolving as the company matures. Initially, we are targeting personal aircraft owners. These people already value their personal freedom, and the Transition gives them a new level of convenience and flexibility. They typically enjoy flying personal aircraft, and they already know how. This segment of the market has the lowest barriers to entry, but it is small (~150,000 personal aircraft owners in the US). We are starting to reach beyond this community to those non-pilots who have the means and may be inspired to enjoy the freedom, flexibility, and fun of the first practical flying car. Eventually, we will want everyone who doesn’t want to deal with the hassles of rush hour traffic or the TSA. We will start with that market once we have made more progress on the TF-X program.
Terrafugia reaches customers today through a combination of our website which is the top ranked site when searching for “flying cars” and also by going to key trade shows in the high end vehicle industries (aviation, automotive, and boating/sailing). We will begin to advertise in select publications once we are ready to deliver, and we may engage with regional distributors at that time.
The Transition gives our customers more FREEDOM, FLEXIBILITY, and FUN than any other aircraft on the market today. We are also setting the highest bar in the industry for SAFETY and SIMPLICITY which are the keys to expanding the personal aircraft market beyond general aviation today.
As airplanes go, this one is very simple: Most non-pilots will be able to learn how to safely operate the Transition in less than 20 hours. Current pilots need less than 5 hours to get the hang of it.
Safety is the top priority at Terrafugia. The Transition was designed from the ground up to meet more safety standards than any other general aviation aircraft. In addition to the rigorous Federal Aviation Regulations imposed by the FAA, the Transition must meet Federal Motor Vehicle Safety Standards imposed by the National Highway Traffic Safety Administration (NHTSA). We even incorporate safety advancements that are not required -- like a full airframe parachute system -- because we believe it is just the right thing to do and it will save lives. We are proud to build not only the most technically advanced flying car ever, but also the safest personal aircraft in the world.
There is little that makes us similar to previous attempts, except the fact that we are also developing a vehicle that flies and drives and that we intend to inspire a significant change in personal transportation. Unlike previous attempts:
The FAA is currently investing $63 billion in the NextGen Air Traffic Control system that includes key provisions that will benefit personal aviation. The key technology components all exist today. In the United States alone, the average commuter spends 52 minutes per day driving at an average speed of 17 mph -- and it is getting worse. The successful deployment of a TF-X like flying car would effectively inject $800 billion per year of lost time value back into the economy. It is wasteful of society to delay implementation of a practical flying car. The benefits to global GDP far outweigh the capital requirements even if conservative discounted cash flow models are used. Beyond the financial needs, the aspirational benefit to humanity that comes from the enhanced level of personal freedom and the satisfaction of finally accomplishing this vision is priceless.
The international ASTM standards that have been adopted by the FAA through the FARs for light aircraft certification were integral to the development of the design requirements for the Transition. The FAA has also given Terrafugia a special exemption to allow the Transition to carry more weight (allowing our extra safety features).
Terrafugia management is actively involved in the creation and maintenance of the ASTM standards that are used by the FAA for the regulation of light aircraft. In addition, Terrafugia COO Anna Mracek Dietrich participated in the Aviation Rulemaking Committee (ARC) which is advising the FAA on the latest revision of the Federal Aviation Regulations that pertain to aircraft less than 19,000 lbs. Our exposure to the FMVSS has been quite useful to these bodies.
If the FAA adopts the key changes that have been recommended by the Part 23 ARC, much of the remaining certification guidelines/process work can be accomplished in ASTM committee F44 (of which we are a founding member). In addition, in order to allow operators to utilize a TF-X vehicle with less training than a typical private pilot today, Terrafugia will need to show the FAA that the level of safety of a TF-X vehicle with an inexperienced operator exceeds that of an experienced pilot flying a general aviation aircraft today. We believe it is doable. The FAA would then need to create a new type of "operator’s license" for a flying car.
Perhaps the most important pieces are great relationships with fantastic suppliers and a superb production team with a good training program -- we’ve made great progress on these fronts. An outstanding ERP system that is tightly integrated to the shop floor, suppliers, and sales is another key piece -- we do not have this yet.
The production line will fall under the purview of our Quality Assurance program. We are currently at the early stages of setting up our QA program and systems, based in large part on the industry best practices currently being captured by ASTM F44 Committee for General Aviation Aircraft, and standards like AS9100 and ASTM F2930, which we helped author. One part of our QA system which is already up and running to support our testing program is a Material Review Board (MRB) which convenes a cross-disciplinary team to evaluate any anomalies or damage and decide what corrective actions are necessary.
Finally, there is the tooling and assembly jigs (and the associated documentation/procedures). We have some tooling and some documentation and procedures, but we do not have everything we need for efficient production yet -- some of what was built for the current prototype must be revised based on lessons learned in the field. This capital raise will go substantially toward building out the remaining jigs, tools and procedures needed for early production.
Delivery of the first Transition is expected in 2015. Our second prototype Transition is currently undergoing durability testing. During this process we are monitoring every part and joint in the vehicle for signs of wear and fatigue. Once this process is complete we will have a list of desirable modifications to the design. A third prototype will incorporate those design changes and be used for final compliance testing for certification. This process is currently expected to take approximately 18 months, but the actual duration will depend on the final number of changes desired prior to production.
There are many component technologies that did not exist outside the laboratory 30 years ago: proven carbon fiber composites, proven high power density aluminum block 4-stroke aircraft engines with Nikasil cylinders that are FAA certified to run on auto gas, inexpensive MEMS accelerometers and gyros, glass cockpit displays with synthetic vision, GPS moving maps, digital weather and traffic data, safety cage/crumple zone design, simulated crash testing, airbags, pre-tensioning seatbelts, off-the shelf full airframe parachute systems, and finally, configurations that allow a vehicle to fit inside a single car garage and rapidly convert between flying and driving modes.
The Transition is the first step of the TF-X program. Initially, almost all resources will be dedicated to the Transition. Over time, more and more of the development budget will shift to future products. Five years from now, very few resources will be dedicated to Transition compared to TF-X. All of the technology, field experience, and production capability developed for Transition will inform the TF-X program.
Making the TF-X work and achieve the level of safety and freedom we believe it can is a huge engineering system integration challenge, but it does not require any fundamentally new technology -- that is what makes it so exciting to us -- we can make it work now!
That said, there are some technologies that are around the corner that will make a TF-X vehicle even more amazing:
We have a lot of engineers at Terrafugia (including in our management) -- that is both a strength and a weakness. We tend not to pursue as many business development opportunities as we might if we were more MBA-centric. We have not raised as much capital or grown as fast as we perhaps could have if we had been more aggressive in pursuing those other opportunities. Instead, we have an unrelenting focus and passion for making the flying car real. We don’t want to be just another aerospace company that gets most of it’s revenue from government contracts. We want to be a true consumer product aerospace company that inspires the creation of an entirely new flying car industry.
We intend to hire a VP of Manufacturing, a Supply Chain Manager, and at least one Buyer in addition to multiple Vehicle Assembly Technicians. We will also hire a Director of Sales and Training. On the engineering side, we will continue to hire top talent to assist with Transition product improvements and the TF-X program.
We have already inspired quite a bit of competition, some of which is public, and some of which is not. This is fantastic. We need more. The more competition we inspire, the more useful work and idea flow will go towards this fledgeling industry, and the more regulations will change to allow the more widespread use of this type of vehicle. The biggest risk we have is that we DON’T inspire enough serious competition. If that happens, the industry could stay small for a longer time which would mean less growth and higher risk for Terrafugia.
In ten years, Terrafugia should have at least two product lines -- an evolved Transition that is even easier to operate, and at least one product that has evolved out of the TF-X program which will allow a much larger segment of the population to experience the freedom of a practical flying car. I expect we will be a publicly traded company selling thousands of vehicles per year. The open development environment of TF-X will have maintained the public’s trust and Terrafugia’s leadership position in a rapidly maturing flying car industry even with the entry of new much larger companies. We will be inspiring millions of people around the world to embrace a new dimension of personal freedom. Flash forward another 10 years and the industry Terrafugia inspired will have a measurable effect on the global GDP.
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