Wheels Up Experience Inc. (NYSE:UP) Q2 2024 Earnings Call Transcript

Wheels Up Experience Inc. (NYSE:UP) Q2 2024 Earnings Call Transcript August 9, 2024

Operator: Hello, everyone, and welcome to today’s Wheels Up Second Quarter 2024 Earnings Webcast. I will now hand the line over to Keith Ferguson to begin.

Keith Ferguson: Thank you. This morning, we announced our second quarter results. The earnings release with the supporting tables as well as a copy of today’s presentation can be found on our Investor Relations website at wheelsup.com/investors. Please refer to the slide with our disclaimer. Today’s presentation contains forward-looking statements based on our current forecasts and expectations of future events. These statements should be considered estimates only, and actual results may differ materially. During today’s webcast, we will refer to non-GAAP financial measures as outlined by SEC guidelines. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Reconciliations of GAAP to non-GAAP financial measures and definitions of non-GAAP financial measures are found within the financial tables of our earnings release and appendix of today’s presentation.

And with that, I’d like to turn over to Wheels Up’s Chief Executive Officer, George Mattson.

George Mattson: Thank you, Keith, and thanks to all of you for joining us today. For several months now, you’ve heard about Wheels Up’s commitment to leading the industry and operational excellence while driving efficiency, profitability and durability across our business model. I’m pleased to report that in Q2, we have once again exceeded our internal goals for both completion rate and on-time performance, coming in at 99% and 87%, respectively. Last quarter, we also introduced an additional benchmark we call brand days or days in which we have zero cancellations of any type across our entire controlled fleet. In Q2, we had 31 days, a new record, a nearly 15% increase from Q1, which had been our highest since we started tracking against this metric.

We are proud not only of our strong and greatly improved operational performance but also that we are leading the industry in operational transparency, the first and only major private aviation operator to be publicly sharing our operational performance. And we continue to encourage the industry to follow our lead. Our operating results are a clear reflection of the continuous improvement mindset that starts with our world-class leadership and team of aviation experts and expands to define our operational culture as a whole. This mindset has been a crucial foundation for our journey to being the best-run private aviation company. Notably, and as Todd will discuss, we have also seen financial improvements over the last quarter, an indication that our initiatives are working and an encouraging sign of our ability to achieve profitability and financial stability.

Q&A Session

In the quarter, we’ve also spent a significant amount of time closely analyzing our product portfolio and our market positioning. In June, we announced a streamlined and enhanced product portfolio, providing global access through options for membership and charter for first-time and experienced private flyers alike. We believe that private aviation as a whole has not yet capitalized on a large portion of the addressable market. To put it simply, many people who can afford to fly private do not. Our refreshed product portfolio offers industry-leading solutions that emphasize simplicity, accessibility and flexibility through 2 basic offerings. Travelers can choose to fly up with Wheels Up Charter, booking ad hoc trips anywhere in the world with no upfront cost, or they can join us with Wheels Up Membership, where a small annual fee and upfront-funded flight hours provide dynamic rates with price protection, expanded global access, increased flexibility and, most notably, guaranteed availability and recovery within the U.S., U.K. and Europe.

This is a testament to our confidence in our greatly improved operational reliability, our willingness to stand behind our product offering and our commitment to delivering for our members. Last month, we also announced upgrades to our mobile app and website and further advancements to our pricing platform that made it easier than ever for travelers to effectively explore our dynamic pricing rates across states as well as departure and arrival destinations. As a result, members can also enjoy increased savings across more than 200 of our most popular city fares, with additional routes to be featured throughout the year while tracking savings and loyalty progress. This level of flexibility and visibility into the booking process is more typical for commercial air travel and one that we will continue to build on as we further invest in our digital platform.

These simple solutions, unique incentives and even greater level of flexibility not only allow us to offer our customers more competitive pricing options but also enable us to more efficiently schedule our operation, driving higher demand, greater efficiency and improved financial performance. We’ve seen strong commercial momentum among our members. Block sales for the quarter were up over 25% sequentially and over 50% over last year. We’re seeing members return to Wheels Up who had left over the last couple of years, and we are bringing on new corporate customers from our growing pipeline of prospects through our corporate sales initiative with Delta. We have also begun working with the Delta SkyMiles loyalty team to identify and engage with their high-net-worth individual customers who represent attractive private aviation prospects, who are either already flying private or could fly private, accessed through their deep existing relationship with Delta.

We believe this represents a large and attractive growth opportunity we will jointly market to and target alongside our ongoing Delta corporate sales initiatives. Our strategic partnership with Delta Airlines is truly a one-of-a-kind in private aviation. Wheels Up Membership and Wheels Up Charter make industry-first use of our deep relationship with Delta commercially and through the SkyMiles loyalty program. While some of our customers fly exclusively private, many more utilize both commercial and private modes of air travel. And we believe building out our capability to seamlessly allow customers to choose between commercial and private modes of travel flight by flight as well as to deliver hybrid aviation solutions that combine both commercial and private travel in the same journey will open up a whole new array of untapped opportunities, delivering customer-centric aviation solutions that align with how customers actually select their mode of travel.

Flight by flight and based on a myriad of factors is at the center of what we’re looking to do as we build the Wheels Up on the future. As in past quarters, we have continued to focus on driving growth in our profitable charter business and increasing its weighting in our revenue mix. Total charter flight transaction value, or FTV, increased over 30% sequentially and over 15% year-over-year. And we expect it to continue to outpace the rest of our business as we focus on leveraging our charter capabilities globally. Total charter FTV as a percent of total FTV now represents over 60%. The increasing contribution from our global charter business, coupled with our transition to focus on more profitable programmatic flying via the implementation of our revised primary service areas, led to adjusted contribution margin approaching 8% in the quarter, a nearly 7-point margin increase over the first quarter and also a significant increase over last year.

And finally, our Q2 revenue has stabilized sequentially, following a period of restructuring, revamping our commercial offering and focusing on more profitable flying. We are pleased with our operational performance and our accelerating commercial momentum, which together lay the groundwork for the next phase of our customer experience journey: fleet modernization. Our intention is to invest in and modernize our fleet across the portfolio, including the introduction of larger, newer and more capable aircraft, enabling us to meet our customers’ demands for an elevated experience on every flight. Much work has been done, and we look forward to sharing more details with you later in the year. Through the combination of our operational improvements, our structural cost improvements and our commercial momentum, we are earning the right to grow profitably.

With that, let me turn it over to Todd to share more on where we are in that journey and how we intend to get there.

Todd Smith: Thanks, George. It is great to be with you all today. For my remarks, I will focus on 3 topics: first, a review of our second quarter and the momentum we are seeing; second, the structural changes that we have made that have led to significant improvements in our underlying businesses; and third, how we will continue our journey to build the best-run private aviation company in the world. Starting with a review of the second quarter. Revenue was $196 million in Q2, flat to the first quarter, demonstrating the increased stability in our business. The year-over-year comp was impacted by the previous simplification of our operations, including the exit of our aircraft management and our aircraft sales businesses and last year’s program changes that allowed us to exit unprofitable flight revenue.

In addition, we continue to focus on driving growth in our profitable charter business and increasing its weighting within our revenue mix. Since charter revenue is reported on a net rather than gross basis, as that mix increases, GAAP reported revenue growth will not fully reflect the underlying demand trends of our business. That is why we believe flight transaction value, or FTV, is the best proxy for the performance of our business as it captures the full value of what our customers spend on flights with us. In the first quarter, total private jet flight transaction value, which captures the value of all of our private jet flying, was up 13% sequentially, reflecting stabilized demand with a normal seasonal pickup, and down 19% year-over-year, reflecting our transition to focus on more profitable flying that started just over a year ago.

Total charter FTV was up 33% sequentially and 16% year-over-year, outpacing our overall business and now accounting for 61% of our total flight transaction value in the quarter. That mix has continued to grow as a percentage of our total business and reflects strong customer interest in our leading global charter capabilities. Total private jet flight transaction value per live flight leg was 16,868, up 3% sequentially and up 15% year-over-year and reflects the underlying stability of our business. We expect to see continued momentum on flight transaction value as our management team turns its sight to driving growth in our business. In particular, we expect total charter FTV will outpace the rest of the business as we focus on leveraging our charter capabilities globally where we have a scale advantage.

Our adjusted contribution margin was 7.8% in the quarter, sequentially up from 1% in Q1 and from 5.4% in Q2 of 2023 as we are starting to see the impact of all of our initiatives we have taken in the past year. Specifically as our controlled fleet flying is now primarily within our primary service areas, we have removed significant structural costs, such as underutilized maintenance and repair facilities that we talked about last quarter. By concentrating our remaining maintenance capabilities where we have network density, we have greatly improved our maintenance cycle times and aircraft availability. We continue to serve customers across the entire United States using our leading charter capabilities, which has allowed us to replace certain loss-generating flights with ones that are now profitable and with an improved service for our customers.

After a year of hard work, our operations are now in a much better position and scalable. Looking forward, we expect adjusted contribution margin will improve significantly in the third quarter, driven by higher asset utilization, reduced fixed cost and continued charter growth with further improvement also in the fourth quarter. Adjusted EBITDA loss was $37.4 million for the quarter, improved from a $49.2 million loss in the first quarter. That reflects the higher adjusted contribution margin that highlights the structural changes we have made to our business. GAAP net loss was $97 million for the quarter, flat sequentially. Prepaid blocks were $145 million for the quarter, up 27% sequentially and up 50% year-over-year. The strength in prepaid block sales reflects an increasing appreciation by customers of our improved service metrics and our global capabilities as well as the continued strength of our Delta relationship.

Related to corporate strength, we saw continued strong block production from that customer base, consistent with the higher levels we saw in the first quarter. We continue to work closely with Delta on an expanding pipeline of leads from Delta’s corporate customers who see the value of our market-leading combined product offering. We ended the quarter with total liquidity plus reserve deposits of $261 million, which includes cash and cash equivalents, the undrawn revolver from Delta and the $20 million WTC reserve deposit. We have continued to make great progress in reducing our cash burn, with operating cash outflow down 63% from the first quarter and down 87% year-over-year. That result is a combination of the strength in block sales, benefits from the structural changes we have taken as well as improved cash management and continued stability in our deferred revenue balance.

Deferred revenue additions and usage were a slightly positive contributor to operating cash flow in the quarter. We believe that bodes well for the rest of the year when block sales are seasonally strongest. Our EETC debt balance declined another $16 million due to scheduled principal payments and proceeds from aircraft sales. The remaining principal balance is now $176 million, down 35% from the initial amount less than 2 years ago. This quarter’s financial results provide validation that the investments we have made in our business and the difficult decisions we made over the past year to improve the efficiency of our business are working. Wheels Up is a much stronger company today than it was a year ago, and we look forward to delivering strong incremental results as we position the company for a strong and sustainable future.

George highlighted our continued strong customer service metrics. It is great to see our customers benefiting from our improved service, and it is important to understand how the overhaul of our operations over the past year enabled that. We consolidated all of our flight operations under one roof in our state-of-the-art Atlanta Member Operations Center that helped our coordination and improved our efficiency. We bolstered our management ranks with seasoned operational execs from Delta who have improved our operating capability. And we are stronger because we focused our controlled aircraft line where we have network density and a significant cost advantage. All of that groundwork was laid over the past year and is rooted in a disciplined adherence to improving the unit cost economics of this business.

The second quarter is evident that these initiatives are starting to show up in our financial metrics. As we continue to drive these initiatives and look to profitable revenue growth, we expect to see an increasing percentage of our sales dropping to the bottom line, with further margin improvement throughout the course of the year. I’m also pleased to report that we have now completed the consolidation of our FAA operating certificates for our entire King Air 350i and Citation Excel and XLS fleets. That consolidation allowed us to harmonize our flight operation and maintenance processes. Now all of our pilots and technicians are trained on the same flight manuals, and all of those aircraft now operate under the same flight ops and maintenance rule sets.

That has improved our economies of scale, increased in-service times and lowered our costs. The pilots for those aircraft are now fully interchangeable, which has allowed us to optimize our crew and aircraft scheduling, saving unnecessary travel and providing improved service for our customers with a lower delivery cost. We recently secured FAA approval to consolidate our Citation X aircraft on the same certificate and have already moved six of our aircraft over and are working to move the remainder of those aircraft over as soon as possible. Our improved operations create greater capacity to service all of our customer needs, utilizing a smaller and more optimized controlled fleet. That is why we have been able to significantly reduce our fixed cost base and position the company to benefit from significant operating leverage going forward.

Today, our revenue mix is much more balanced than it was a year ago, and it is much better aligned with the strength of the company following the overhaul of our program offering just over a year ago. With our operations in good shape, we are now turning our focus to our commercial efforts as we look to resume growth. As George mentioned, the program changes we just rolled out in June were designed to better target how we serve different customer bases and accelerate growth of our charter business. We expect growth will pick up as these initiatives take hold. Recent block sale trends, including a strong start in July, underscore a very positive customer response that gives us confidence in a return to growth from current levels. Lastly, we are starting to plan for the future.

As George touched on, we are working on a strategy to migrate our fleet to newer-generation aircraft. We expect to have more to share on that later this year. Progress on these initiatives continues to support our goal of achieving positive adjusted EBITDA later this year. In summary, we have made a lot of progress to strengthen our business in the past year. We have improved our core operations, and that places us among the industry leaders in terms of customer service metrics. We have taken out significant structural costs and inefficiencies. We have significantly reduced our cash burn. Now we are turning our sights to resuming revenue growth in order to scale our much improved platform. With that, let me now turn it back to George for his concluding remarks.

George Mattson: Thanks, Todd. Over the course of the quarter, we’ve made great strides in our progress toward becoming the best-run and most reliable private aviation company in the world. We’ve fortified our business through continuous operational excellence, which, in turn, has created the foundation for substantive updates to our product offerings that have allowed us to more fully capture the addressable market. And in Q2, we began to see the early signs of the positive effect of all of that progress on our financial performance. With operational excellence as our base, we remain committed to continuing to capture demand through our enhanced commercial engine as we look towards modernizing our fleet to align with our mix of customers and further drive an elevated customer experience.

Before I close, I want to once again thank our best-in-class team here at Wheels Up for their continued commitment, passion and dedication to providing safe, reliable experiences worth repeating every day. I want to personally thank David Adelman, who is retiring from our Board, for his years of invaluable service and his unwavering commitment to achieving the Wheels Up mission. David was central to building the company and getting us through the challenging times of last year. Thank you, David. I’m also very pleased to welcome Greg Summe to our Board. Greg brings decades of relevant experience, including in the aviation industry, as a successful CEO, as an investor and as a member of many blue-chip public company boards. I look forward to his contributions to our Board.

Greg, welcome. And finally, most importantly, I want to thank our members and customers for their continued loyalty. We are thrilled to bring our new product portfolio to fruition and see such a positive response and remain committed to placing accessibility, flexibility and transparency at the forefront of your experience while continuously delivering an exceptional experience on every flight. Thank you for your interest.

Operator: This concludes today’s conference call. Thank you all very much for joining.