Surf Air Mobility Inc. (NYSE:SRFM) Q1 2024 Earnings Call Transcript

Surf Air Mobility Inc. (NYSE:SRFM) Q1 2024 Earnings Call Transcript May 18, 2024

Operator: Thank you for standing by. At this time, I would like to welcome everyone to the Surf Air First Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Taylor Giles to kick things off. Taylor, please go ahead.

Taylor Giles: Thank you, operator. Welcome to Surf Air Mobility’s first quarter 2024 Earnings Call. I’m joined today by Stan Little, Surf Air’s outgoing CEO; and Oliver Reeves, Surf Air’s CFO. Please note that we released our results this afternoon, which are available in filings with the SEC and on Surf Air’s Investor page at investors.surfair.com. Before we begin, I would like to remind everyone that we may, during this call, discuss our outlook and future performance. These forward-looking statements may be preceded by words such as we expect, we believe, we anticipate or other similar such statements. These statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today.

Some of these risks have been set forth in our earnings release and our periodic reports filed with the SEC. During today’s call, we will also present both GAAP and non-GAAP financial measures. Additional disclosures regarding non-GAAP measures, including a reconciliation of GAAP to non-GAAP measures, are included in the earnings release we issued earlier today, which has been posted on the Investor Relations page of Surf Air Mobility’s website and in our filings with the SEC. With that, I’ll turn the call over to Stan.

Stan Little: I’d like to begin by addressing the announcement today that I will be stepping aside as Surf Air Mobility’s CEO this week. It has been the highlight of my career so far to build Southern Airways into America’s largest commuter airline and then to be invited to join Surf Air Mobility as CEO following our merger. While I will miss my day-to-day interaction with so many of our team members, I’m honored to assume the role of Founder of Southern Airways, a vantage point from which I will continue to actively advise the company and bring my expertise to bear, especially in industry and government relations. I’m also pleased to announce that Surf Air Mobility’s Board of Directors has appointed Deanna White as Chief Operating Officer and Interim CEO.

Deanna is a seasoned industry leader. She melds intimate knowledge of the company and its people, an unparalleled depth of experience in the aviation industry and a track record of success in the C-Suite of multiple innovative companies across the Air Mobility sector. Deanna has been with the company since 2021 and has already made a valuable and long lasting contribution as both CFO and Senior Advisor. Moreover, Deanna’s previous experience in C-Level positions at a large private jet company, Bombardier Flexjet, and an eVTOL company, Kitty Hawk, now Wisk Aero, will continue to guide and inspire her as she brings about Surf Air Mobility’s next chapter that will herald a renewed focus on balancing growth and opportunity with profitability. I look forward to supporting Deanna as she takes on the mantle to reshape the industry and deliver on Surf Air Mobility’s massive potential.

To the entire Surf Air team, many of whom I’ve known for over a decade, I’d like to personally thank you for your continuous hard work, for being the heartbeat of this company and for allowing me to go on this exciting journey with you. With that I’ll turn the call over to Oliver to provide more detail on our first quarter.

Oliver Reeves: Thanks, Dan, and thanks to everyone that has joined our call. Please note that the company will be providing a comprehensive strategic update at our upcoming Investor Day, which will now take place in the third quarter of 2024 in order to give Deanna time to take charge, drive the company’s most important priorities, and prepare an in-depth Investor Day Briefing for your information and input. With that said, I do want to give you a preview today of our investor relations objectives over the course of this transition for engagement. First, we plan to provide the investment community with a comprehensive overview of our business, which includes our leading regional Air Mobility platform and our expanding technology platform, which encompasses our aircraft-as-a-service, other software products and electrification initiatives.

Secondly, we intend to provide visibility into the various ways in which we plan to rapidly achieve profitability for the regional Air Mobility business, which today includes our Southern, Mokulele and Surf Air brands, as well as our [Technical Difficulty] operations. Third, we intend to illustrate for our investors the underlying unit economics today and contrast them against achievable future unit economics for these platforms at scale and at a steady state. Finally, we aim to provide context that more clearly frames and explains our projections regarding the size of these opportunities and compare them to the chronological evolution of regional and mobility industries can. Surf Air Mobility’s regional Air Mobility platform, which encompasses our commuter airline operations as well as our charter operations services our current growth engine.

The platform’s first quarter revenue growth was driven by an 80% year-over-year increase in EAS scheduled service revenue and a 4% year-over-year increase in on-demand charter revenue. With regard to scheduled service, we anticipate that the refreezing of Southern, coupled with the implementation of cost cutting measures and other strategic initiatives will result in a return to profitability for airline operations. To this end, we intend to complete a strategic review of the vast majority of our scheduled services routes in the coming quarter to maximize week profitability in what remains a challenging operating environment. We do not anticipate that our focus on profitability will come at the expense of revenue. In fact, over the medium term, the imminent passing of the FAA Reauthorization Act has the potential to positively impact our revenues and profitability as it raises in its current form the subsidy cap from a maximum of $200 per passenger to a maximum of at least $650 per passenger.

Given our participation in the program under which we support 19 communities as of March 31st 2024, the possibility to rebid expiring routes at levels to take into account inflationary and other cost pressures creates the potential for improved unit economics over time. Finally, the Reauthorization Act would require the total cost of an air carrier’s proposal to be equally weighted with other factors such as local recommendations and interline agreements, which favors Surf Air Mobility’s low cost caravan fleet. In parallel, in our last earnings call, we specifically called out new routes between Williamsport, Pennsylvania and our Washington Dulles’ hub and between Purdue University and our Chicago O’Hare hub. These routes are subsidized by local and private entities without the need for the essential air service program.

I’m pleased to report that both of these routes now becoming operational with Purdue launching this week and Williamsport next week. As we look to longer term growth, Textron Aviation is providing us with up to a 128 new caravan aircraft over the next six years beginning next quarter. On the aircraft delivery side, we remain on track with the cadence of previously announced delivery slots with Textron for eight new caravans across Q3 and Q4. As you welcome these aircraft into our fleet, we will be decommissioning some of our older aircraft to reduce maintenance cost and improve reliability. Once Southern has been completed, we anticipate that the remaining aircraft will be deployed into our previously described growth network. We plan to give a more fulsome update on our holistic growth network strategy at our Investor Day in the third quarter.

Moving away from our flight operations, I would like to comment on our technology partnership with Palantir, which continues to evolve and grow deeper. We are really excited about the software that we are co-developing. First for ourselves and thereafter as applications that we will market and sell to the industry to establish a new and growing revenue stream. With Palantir, we’re developing the tools that address the largest and most important opportunities that regional operators face today. Flight distribution, crew scheduling, revenue management, passenger operations, and business intelligence. We continue to make exciting progress across all of these aspects. As with software, our electrification initiatives also continue to make good progress powered by our relationship with Textron.

The electric caravan program is moving through the conceptual design phase, which we expect to close later this year. In this current phase, we are iterating on the design and performance of our EP1 electric power train and its integration into the caravan’s airframe and systems. We are also working closely with the FAA in preparation for the submission of our SEC application, including our certification basis and methods of compliance draft. We expect this to follow the closeout of the conceptual design phase later this year. In addition to the Electric EP1 program, we continue to engage with the supply chain for the Hybrid EP1 powertrain for the caravan as well as other potential aircraft platforms. Now let me briefly cover the numbers for the quarter.

As detailed in our press release, the company reported first quarter revenue of 30.6 million compared to 27.9 million for the comparable prior period on an unaudited pro form basis, which assumes the Southern acquisition closed as of the beginning of fiscal year 2023, beating the first quarter guidance. First quarter revenue was up 9.5% year-over-year, driven by a number of factors. First, an 18% increase in EAS revenue, driven by the addition of our Burlington, Iowa route, as well as increased subsidies for certain routes within our network. And second, a 4% year-over-year increase in revenue from our on-demand charter business. Specifically our on-demand charter products saw quarterly departures increased 29% year-over-year, which equates to 906 departures in the first quarter of 2024 versus 701 departures in the first quarter of 2023.

This divergence between the departure and revenue growth is explained by our charter mix, which increasingly favors turboprops over larger aircraft. More granularly, 72% of our charters in the first quarter of 2024 were flown on turboprops versus 68% for the first quarter of 2023. Adjusted EBITDA was negative 16.5 million driven by operating losses in our Air Mobility segment, where we continue to experience inflationary cost pressures and supply chain issues that continue to impact aircraft maintenance and completion factors. We also continue to make investments in our technology business across both electrification and software initiatives. Nonetheless, our adjusted EBITDA is on track with management expectations and met our first quarter 2024 guidance.

Turning to liquidity, as of March 31st, 2024, Surf Air Mobility had $1.3 million cash on hand with the ability to draw $90 million in committed draws and $296 million in follow-on draws from the GEM share subscription facility. Upon closing the mandatory convertible security described in our 8-K filed on March 6th, 2024, Surf Air Mobility’s ability to draw from the GEM subscription facility will be restored to full capacity. A $100 million in committed draws and $300 million in follow-on draws subject to any drawdowns prior to the closing date. In addition, while management continues to believe the GEM facility should provide adequate capital to finance our investment in network growth, software development and electrification over the short to medium term, management feels it is necessary for the company to secure additional less diluted capital in the form of a credit facility.

The company has retained a leading investment bank to more fully represent it in these efforts. Management is also considering pursuing other strategic initiatives with partners and affiliates, including the creation of one or more joint ventures to separately capitalize the company’s electrification and software efforts and maximize shareholder value creation from these substantial investments. Finally, our second quarter 2024 guidance is revenue in the range of $28 million to $31 million which reflects the seasonality of our charter operations and pro form adjusted EBITDA in the range of negative $18 million to negative $16 million which excludes the expected impact of stock-based compensation and other non-recurring items. Surf Air Mobility will provide full year 2024 guidance at its Investor Day to be held in the third quarter of 2024.

In closing, I would like to personally thank Stan for his warm welcome when I joined the company and his subsequent leadership over the last few months. I’m now excited to work closely with Deanna and look forward to helping her implement and achieve her strategic goals for the company. And with that, I’m happy to take questions.

Q&A Session

Operator: Thank you. [Operator Instructions] And it looks like our first question is from Austin Moeller at Canaccord. Austin, please go ahead.

Austin Moeller: Hi. Good afternoon. Is this strategic review expected to primarily focus routes on essential air services flights or on Tier 1 routes?

Stan Little: Well, to answer your question, the strategic review is going to be on all of the routes that we currently fly. But as you know, we mostly fly. Sorry, I thought I was on mute. We mostly fly central air service routes. So that so obviously, by that calculation, it would be on EAS routes mostly.

Austin Moeller: Okay. And in terms of the strategic review, do you see it as more likely that the electrified powertrain tech, is what you would sell, or are you looking at potentially selling some of the caravan fleet?

Stan Little: No. So just so we’re clear, the strategic review is something that we’re doing from a profitability standpoint. What we intend to do is to look at each of the routes to which we currently fly and assess whether they’re profitable, and if they’re not profitable, what we can do to make them profitable. Once we’ve done that, we’re going to look at other operational efficiencies that we believe are low hanging fruits and then assess on top of that revenue growth such as what you were talking about, which is our growth network, in which case we would take some of our Textron planes that are coming from our order that we disclosed, which is 128 planes. Some of that would go obviously to [indiscernible] Southern, but the rest of that would be deployed to our growth network.

Austin Moeller: Great. Thanks for all the details.

Operator: Thanks, Austin. And our next question comes from the line of Alex Potter with Piper Sandler. Alex, please go ahead.

Benjamin Johnson: Hi, there. This is Ben Johnson on for Alex Potter. I guess, can you kind of remind me of the mechanism by which the EAS program subsidies work and exactly how this FAA Reauthorization Act will impact Surf Air. And then, like, were you previously receiving, like, the maximum cap of $200 a passenger, and how much do you expect to be receiving going forward?

Stan Little: Hi, Austin. This is Stan. I’ll be glad to handle that as I have been intimately involved with the FAA Reauth for, I guess, over a year now. So the way the system works is that, when an RFP, a request for proposals goes out to all of the airlines, essentially asking for bids at the cities, each airline is then able to put in a proposal of the number of flights that they will fly, the proposed subsidy, the proposed airfare that goes in. And then, at the completion of each fiscal year, the DOT computes what the actual subsidy was per passenger. So they take the total amount of subsidy paid to an airline, they divide that subsidy amount by the number of passengers who actually flew, and in theory, that number has to be below $200 or the city risks being eliminated from the program.

There have been some waivers, lately, so it has not always happened that if you’re above 200 when it’s said and done, you are eliminated. But at least during the proposal period, you have to anticipate a subsidy below $200 per passenger. As you may or may not know, airlines have been working for 25 years or more to get the subsidy cap raised. I believe that cap has been in place since the early ’90s. So there’s been no inflationary raise on that whatsoever. We have been working hard in Washington for the last, as I said, over a year to get that raise to realistic levels, so that when we put in bids, we have the flexibility and the ability to put in a bid that accurately reflects our costs and, you know, some degree of profit margin. So moving from a $200 subsidy cap to a $650 subsidy cap is quite a big deal because now we won’t have to, we won’t have to cut all the way down to the bone as it were, in trying to do our forecasts and make our proposals.

The other important thing to note in the FAA Reauth this time around is that in addition to raising that cap by 300 plus percent. There’s also been a language change that says that the DOT must look at the cost of the subsidy when awarding the bid. So you can’t come in necessarily and bid a bigger, faster, newer aircraft and get the proposal even though it may be, you know, twice as much as Southern’s or Mokulele’s or Surf Air’s did maybe. So it makes the program competitively based from a dollars standpoint, but it also allows us to increase the dollars in our bid, which should be healthy for the company. We anticipate that this could add as much as $5 million to our bottom line in the near term without increasing costs since we’re already flying flights.

Benjamin Johnson: Awesome. Thank you. And I guess would it be fair to say that the increase of the cap substantially increases the amount of potential, EAS routes, EAS viable routes?

Stan Little: Well, you know, the EAS program is limited in the number of routes that are out there. There are only a certain number of cities, a 120 something cities, I think, that are in the program. So it won’t change that. What it will do is probably increase the number of cities in which we may be interested in bidding because with the increase in the cap, we now, you know, have the ability to look at all of them and say, with that kind of cap, can we still make money there? So it’s quite possible we may be able to increase the number of cities on which we bid.

Benjamin Johnson: Awesome. Thank you very much.

Stan Little: Certainly. Thanks.

Operator: And thanks, Ben. [Operator Instructions] And it looks like there are no further questions. So ladies and gentlemen, that will conclude today’s call. Thank you all for joining and you may now disconnect.