What happened

"Flying taxi" start-up Lilium (LILM 2.33%) has begun testing its prototype in a wind tunnel, a major milestone in the aircraft's development. Shares of the closely followed start-up spiked by more than 20% on the news before falling back some as the day went on.

So what

Lilium is one of a number of companies racing to bring small, van-sized electric vertical take-off and landing (eVTOL) aircraft to market. These aircraft would not replace traditional long-haul aircraft, but could be a way to glide over city traffic or to feed airlines traffic from outer suburbs.

The industry is in its early days, but shows a lot of promise. There is also a lot of competition, including start-ups like Lilium, Joby Aviation, Archer Aviation, and Vertical Aerospace, as well as from established aircraft manufacturers like Embraer.

The conventional wisdom here is that while the market opportunity is real, it is uncertain that all these companies are going to have success. Therefore, it's important to get airborne as soon as possible.

Lilium took a step in that direction by beginning wind tests with a 40% scale model of its jet, including working engines, at a facility in the Netherlands.

The announcement came on the same day that acting Federal Aviation Administration (FAA) administrator Billy Nolen, speaking at a Wall Street Journal event, said he expects to see air taxis "at scale" within a decade. Last month, the FAA released a new operational blueprint that envisions a future where airspace procedures will have to be adjusted to accommodate flying taxis and other, similar aircraft.

While it is still a long way from final approval, it is at least an indication that regulators are thinking about a world where aircraft made by Lilium and others are commonplace.

Now what

While the excitement is understandable, the stock's pullback as the day went on is justified. This is an important step for Lilium, but it is still an early step. And competitors including Joby and Archer are arguably still out in front of the eVTOL race.

For the foreseeable future, these eVTOL stocks should be treated by investors as highly speculative parts of a well-diversified portfolio. There will be no overnight success here, and stock moves that suggest something otherwise are likely to be short lived.