Wheels Up Experience Inc. (NYSE:UP) Q3 2024 Earnings Call Transcript

Wheels Up Experience Inc. (NYSE:UP) Q3 2024 Earnings Call Transcript November 9, 2024

Operator: Welcome to Wheels Up’s Third Quarter 2024 Earnings Conference Webcast. It is my pleasure to introduce Keith Ferguson. Mr. Ferguson, you may begin the conference.

Keith Ferguson: Thank you. This morning, we announced our third quarter results. The earnings release with its 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 and key operating metrics can be found in the financial tables of our earnings release and appendix of today’s presentation.

And with that, I’d like to turn it 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. When Delta invested in Wheels Up just over a year ago, I stepped off the Delta Board and into my role as CEO of Wheels Up with a clear vision: To combine the separate ecosystems of private and premium commercial aviation into one seamless, flexible and accessible offering and to do it profitably through a one-of-a-kind strategic partnership with Delta Airlines. At the start of my tenure, we outlined a bold ambition to guide our efforts, becoming the best-run private aviation company in the world. That starts with being the best operator in the industry. Over the last year, we’ve built a best-in-class team that has fortified our business through continuous operational improvement while providing unmatched transparency and building trust with our customers.

Second, it means offering the most compelling product in the industry. Our suite of on-demand, private aviation solutions, spanning both programmatic memberships and global charter offerings is, we believe, the most flexible, accessible and customer-centric on the market while also delivering the greatest value. And thanks to our strategic partnership with Delta Airlines, we are the only company that can deliver those private aviation solutions in a single integrated relationship with a premium global commercial airline, enabling the customer to choose their mode of travel trip by trip, private, commercial or a hybrid of the 2. Putting the customer in control of their travel decisions and delivering the widest array of tools with which to do that sits at the heart of what we do every day.

Q&A Session

These significant, intentional improvements have fortified our business over the past year. And with our third quarter results, I’m pleased to report that we continue to see sequential improvement in our financials. After 7 quarters of sequential revenue decline leading into the current year and following last year’s restructuring of our operations and the revamping of our commercial offering to shed unprofitable flying, our revenue stabilized in 2024. Our live leg demand in the quarter was flat sequentially versus an industry decline of over 15%. That outperformance has continued in the month of October. We remain focused on continuing to drive operational performance, efficiency and margin improvement as we look to resume growth in the new year.

Our adjusted contribution margin for the third quarter was almost 15%, nearly double what we reported in the second quarter, the highest we’ve achieved since going public in 2021 and an expansion of 14 percentage points since the fourth quarter of last year. This is a result of improved operational performance, higher utilization of our fleet and strong growth in our charter business. We also reduced our adjusted EBITDA loss by nearly 50% sequentially to $20 million. Back in the summer of 2022, facing adjusted EBITDA losses of over $160 million over the preceding 12 months, we established what at the time was an ambitious goal of achieving positive adjusted EBITDA in 2024. This quarter, we have once again made meaningful progress toward achieving that goal.

We anticipate that our fourth quarter adjusted EBITDA will once again show strong, sequential improvement over the third quarter, though we do expect to absorb some costs from our recently announced fleet modernization strategy and the associated transactions that will provide a headwind to achieving that goal in the fourth quarter. That said, even if we do not beat breakeven in the fourth quarter, we expect to generate positive adjusted EBITDA for the full year in 2025. Part of that success will depend on the continuation of the increased commercial momentum we saw this quarter with block sales up over 85% year-over-year to $147 million. We are seeing strong traction in terms of our Delta corporate sales initiative, with joint Delta accounts representing the highest mix of overall block sales in the month of September.

That’s the best monthly performance in over 4 years since we started tracking that data. We expect our recent fleet announcements to drive strong customer interest and continued commercial momentum in the fourth quarter and into 2025. With our operations and financials stabilized and showing clear sequential improvement, we have spent the last several months building our fleet modernization strategy, which we announced 2 weeks ago, alongside several major aircraft, commercial and financing transactions that have already set the strategy in motion at the National Business Aviation Association’s annual conference in Las Vegas. We expect these actions will enable the replacement of our fleets of existing jets across 4 current models with 2 of the most popular, preferred and successful aircraft types in the industry: Embraer’s Phenom 300 series and Bombardier’s Challenger 300 series aircraft.

We plan to transition our existing Hawker 400XP and Citation CJ3, Excel and XLS fleets to Embraer Phenom 300s and 300Es, bridging our existing light and midsized cabin options, allowing us to consolidate 3 fleets into 1, reducing operating complexity and expenses and increasing scheduling flexibility. We also plan to transition our existing Citation X fleet to Bombardier Challenger 300 and 350 aircraft while continuing to operate a fleet of King Airs. In selecting these aircraft types, we considered numerous factors, including operational reliability, performance and efficiency. We also listened to the market in selecting the best-selling aircraft over the last decade in their respective categories among both corporate customers and discerning leisure customers.

As a result, these aircraft types have large installed bases and correspondingly large secondary markets, which we believe will enable the completion of our fleet transition to these aircraft types within approximately 3 years, subject to business and market conditions. At NBAA, we announced our binding agreement to acquire the entire fleet of 17 Embraer Phenom 300 and 300E aircraft of GrandView Aviation, a subsidiary of Global Medical Response. Our intention is to incrementally grow our Phenom fleet as we retire our Hawker, CJ3, Excel and XLS fleets, a process that we expect will be completed within approximately 3 years. Upon closing the transaction, which we are working to complete by the end of November, we expect to immediately introduce the Phenom 300 series aircraft into our programmatic membership offering and to our charter customers.

The vast majority of Phenom aircraft in the market are either wholly owned by individual owners or corporate flight departments or are fractionally owned through the fractional programs of other operators. With the GrandView aircraft, we expect to become the largest provider of Phenom aircraft on an on-demand basis in the world. Our fleet modernization plan also revamps our offerings in the super mid fleet category, where we intend to opportunistically acquire a fleet of pre-owned Challenger 300 series aircraft via the secondary market through a combination of outright purchases and long-term leasing. As we look to execute our plan, we have entered into a sale agreement for all 13 of our currently owned Citation X aircraft. As part of this deal, we plan to lease a portion of them back and amend the leases on our existing leased Citation Xs with the same buyer.

This provides important flexibility to end leases as well as replace and backfill those current leased Citation Xs with Challenger aircraft in the future, providing for a seamless transition to our new fleet. We expect to begin operating Challengers in our fleet by early next year, with availability on both an as-requested charter basis and on specified routes for our members. Full introduction into our programmatic offering across our guaranteed service areas is expected by the end of 2025. Like the Phenom transition time line, we expect to complete the transition to our Challengers within approximately 3 years. Lastly, I want to turn to the final piece of the puzzle, the financing to enable these transactions as well as future actions to complete our comprehensive fleet transition.

We have entered into a commitment letter with Bank of America for a new up to $332 million senior secured revolving credit facility. The company anticipates that the revolving facility will close concurrently with the closing of the GrandView acquisition by the end of November. We expect to utilize the revolving facility to fund several actions, including the GrandView acquisition, the redemption of all outstanding equipment notes on the company’s owned aircraft and general corporate purposes. The financing, along with the sale of aircraft currently under contract is also expected to deliver up to $115 million of additional cash to our balance sheet before transaction expenses and provides future revolving borrowing availability as we pay down debt and reposition our fleet, with which we expect to opportunistically acquire additional Phenom and Challenger aircraft in the future as we complete our fleet modernization plan.

Highlighting their commitment to us, Delta Airlines has agreed to provide credit support for the new financing, enhancing our access to capital and on more attractive terms than would otherwise be available. This backing is a further testament to the strength of our partnership as well as Delta’s confidence in the progress we have made to date and our planned fleet modernization as we execute on our transformation plan. The operational, commercial and financial implications of the fleet strategy are extensive and underpin our long-term strategy. Looking ahead, we expect that the significant reduction of the average age of our aircraft and the selection of replacement aircraft types well-known in the industry for their reliability will be instrumental in driving a step-change improvement in operational performance and operational efficiency.

Eric will go into this in greater detail, but our transformed fleet is expected to enable improved maintenance availability, higher utilization and lower operating costs, all of which are anticipated to dramatically change our profitability margins per aircraft, transform the unit cost economics of our business and drive profit improvement over the next several years as we continue to enable and invest in an exceptional experience for our customers. We have already made an incredible amount of progress in the last year in raising the bar for our customers. In a recent third-party survey by private jet card comparisons of their subscribers, we saw a nearly 50% increase in Wheels Up customers who were highly satisfied, the largest year-over-year improvement of any provider, with almost three quarters of all respondents who use Wheels Up rating their experience with us as excellent or very good.

We’re incredibly proud of this progress and in such a short period of time and are committed to continuing to enhance our customer experience as we introduce our new Phenom and Challenger aircraft into our fleet. Central to that experience is exceptional onboard WiFi. Concurrent with the announcement of our fleet modernization strategy, we announced that we entered into a letter of intent with Gogo Business Aviation to equip the Phenom and Challenger aircraft we expect to acquire with the enhanced capabilities and superior performance of Gogo Galileo HDX satellite-based WiFi. Gogo’s Low Earth Orbit satellite system is expected to deliver high bandwidth, low latency global coverage and be capable of live streaming and voice telephony. As these new aircraft enter our fleet, we look forward to delivering best-in-class connectivity as one of the first and only domestic fleets in private aviation with standardized satellite WiFi capability.

With the inclusion of 2 of the most popular and reliable aircraft in private aviation in our updated fleet unlocking such potential, we are confident that Wheels Up remains on the right track with our goal of achieving positive adjusted EBITDA for the full year in 2025. As we have strengthened the resiliency of our business model and invested in the future, we have also continued to strengthen what I believe is already the best team in the industry with 3 key hires: Matthew Knopf, our Chief Legal Officer; Meaghan Wells as EVP of Enterprise Planning and Strategy; and Michael Henny as SVP, Customer Experience. Until he joined Wheels Up, Matthew served as Senior Vice President and Deputy General Counsel at Delta Airlines from 2015, where he played a pivotal leadership role in the completion of Delta’s many significant transactions and key joint venture restructurings.

His deep knowledge of the industry and our company has already been invaluable. Meaghan joins us following her tenure as Chief Investment Officer at Vista Global and her dynamic background, deep private aviation experience and focus on driving strategic growth will be integral in the development of our long-term growth strategy. Michael joined us just this week in the role of SVP, Customer Experience, following his tenure at Delta. He will be leading our efforts to drive a consistently excellent experience at all of the customer touch points across our enterprise. Before I turn things over to Eric, I also wanted to provide a brief update on our search for our permanent CFO. The industry has taken notice of the progress we’re making as a company, the team we are building and the path we’re on for the future.

As a result, we have seen strong interest in the role from several great candidates and are working our way through the selection process, which we expect to conclude by the end of the year. In the meantime, I want to extend my deepest appreciation to Eric for his partnership and the great job he’s been doing while we continue our search. And with that, let me turn it over to Eric to run through the details.

Eric Cabezas : Thanks, George. It is great to be with you all today. In my remarks, I will focus on 4 topics: one, a review of our third quarter results, including the continued momentum in our business; two, the positive impact we believe our fleet modernization will have on our business; three, the Bank of America transaction and how that is expected to refinance our existing aircraft debt, finance the GrandView transaction and add liquidity to our balance sheet; and four, our confidence in our journey to build the best-run private aviation company. Starting with a review of the third quarter results. Revenue was $194 million in Q3, roughly flat sequentially, highlighting the stability of our business starting in the first quarter of this year.

As we have mentioned previously, the year-over-year comparison was impacted by the 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. Going forward, we believe our current commercial offering and fleet modernization plans set us up to resume growth in 2025. The decline in membership revenue and members is due to our streamlined product portfolio that gives our customers the option to join up as a member with special benefits, or Fly Up using our more accessible charter offering. Private jet gross bookings, which captures the full value of our private jet flying was down 20% year-over-year, but only 6% sequentially, reflecting relative stability of our business.

We had previously referred to these metrics as flight transaction value versus gross bookings, but revised the title to align with similar metrics reported by other companies, such as Uber and Lyft. Private jet gross bookings per live flight leg was $15,990, up 4% year-over-year and reflects the underlying stability of our business and what customers are spending to fly with us on each flight. Total gross bookings, which represent gross bookings for private jet, group charter and cargo, were down 16% year-over-year, but only 4% sequentially in the third quarter, outperforming private jet gross bookings due to strong group charter revenue from the travel ahead of the presidential elections. We expect both private jet and total gross bookings will be up sequentially in the fourth quarter.

In addition, in June, we streamlined our product portfolio to make it easier for customers to fly with us using our leading charter capabilities. We expect to introduce additional customer metrics in the future that we believe will provide additional transparency on important drivers of our business today. Our adjusted contribution margin was 14.8% in the quarter, up significantly sequentially from 7.8% in Q2 and 1% in Q1, and as George mentioned, the highest level since we have been a public company. That improvement was driven in part by a 26% year-over-year increase in asset utilization and is a reflection of the tough choices we made over the past year that we believe have made us a stronger company today. Adjusted EBITDA loss was $20 million for the quarter, improving by $17 million sequentially.

That reflects the higher adjusted contribution margin that highlights the structural changes we have made to our business as operating costs were flat sequentially. GAAP net loss was $58 million for the quarter, improving by 40% sequentially. Prepaid blocks were $147 million for the quarter, up 86%, nearly double the level a year ago. We are pleased with our increased traction with corporate customers with corporate block sales up over 50% year-over-year. The strength in prepaid block sales mirrors improved service metrics, the continued strength of our Delta relationship and highlight how our customers are increasingly committing to us. We believe the fleet modernization plan that George articulated will position us for continued success. We have continued to make great progress in reducing our cash burn with operating cash flow improving 44% sequentially and 94% year-over-year from a cash outflow of $250 million a year ago to $15 million in the current quarter.

That result is a combination of the strength in block sales, benefits from the structural changes we have made as well as improved cash management and continued stability in our deferred revenue balance. Turning to our customer performance metrics. A year ago, we started on the path to provide transparency to our customers, committing to provide our customer metrics each quarter. For the third quarter, our completion rate was in line with our target of 98%. However, our on-time performance, which we define as a percent of flights departing within 60 minutes of scheduled time, was 82% and below our target for the quarter, partially driven by summer weather, air traffic control delays and certificate conformity activity. Brand Days, which measure days in the quarter with zero cancellations, were 19.

While that is down sequentially, it was our third best quarter since we started tracking this metric nearly 3 years ago. Our team is working hard every day to improve operational reliability, and we look forward to further benefits as we migrate to our newer fleet. As George indicated, we expect the addition of the Phenom and Challenger aircraft into our fleet will significantly lower our operating costs for several reasons. First is that maintenance availability is anticipated to be 25% to 50% higher than the aircraft they are replacing. That drives higher asset utilization and lower hourly costs. Second, we expect improved reliability will lead to greater schedule integrity, which lowers recovery costs and makes crew scheduling much more efficient.

Lastly, the consolidation of our fleet down to 3 fleet types, including our turboprops, will greatly simplify our operations versus managing the 5 aircraft models we have today, which all require specific crews, scheduling and maintenance processes. When you put it all together, our fleet modernization plan is expected to allow us to deliver an elevated level of financial performance and drive the next stage of our growth, starting now and over the next several years. Turning to liquidity. We ended the quarter with total liquidity plus reserve deposits of $236 million, which includes cash and cash equivalents, the undrawn revolver from Delta and the $20 million EETC reserve deposit. Looking ahead to Q4, we are working to close a new up to $332 million revolving credit facility with Bank of America.

With the Delta credit support, that facility is expected to be used to fund the $105 million acquisition of GrandView’s fleet and refinance our existing EETC aircraft debt. That anticipated financing, in combination with proceeds from current aircraft sales under contract, is expected to add up to $115 million of cash and liquidity to our balance sheet. In addition, we expect to save over 500 basis points of cash interest compared with today’s interest rates. The 5-year facility has a revolver feature for the first 3 years that gives us added flexibility to sell our existing aircraft and finance newer aircraft purchases as we pay down debt. We expect our fleet modernization plans will be funded with this facility in conjunction with third-party operating leases.

The Citation X sale and lease transaction touched on earlier is expected to contribute to our cash position while providing us important flexibility to execute on our strategy to exit Citation Xs and swap leases for newer Challenger aircraft. This deal enables an orderly transition from Citation X to Challengers over the next 3 years. With expected proceeds from the Bank of America facility, the pending sale of our Citation X fleet, seasonally higher prepaid block sales and the acquisition of the GrandView fleet, we expect our year-end cash and liquidity position to improve from the end of the third quarter. You may recall this slide, which we introduced last quarter to highlight the different phases of Wheels Up. After over a year of hard work and structural changes, I’m pleased to report that we are nearing the end of our transition stage.

Wheels Up today is a much stronger company with a clear path forward. As you heard today, we are at the dawn of a new era for Wheels Up and turning our sights to offense as we look to refresh our fleet with newer aircraft and look forward to a resumption of growth in our business. And by that, I mean sustainable and profitable growth. Our goal remains to be the best-run private aviation company globally, leveraging the strength of our network platform, capitalizing on our competitive advantages and delivering a great experience for our customers. With that, let me now turn it back to George for his concluding remarks.

George Mattson : Thanks, Eric. I’m incredibly proud of the progress we’ve made over the last year and in particular, over the last quarter here at Wheels Up. I look forward to the next phase of our customer experience journey, linked to our financial journey, as we complete our fleet transition and continue to standardize an elevated customer experience across our fleet. To that end, we are hard at work and in discussions with Bombardier, Embraer and other third-party providers on other elements of our product offering that create an elevated, consistent customer experience worth repeating, including standardized delivery and interiors. And we expect to have more to share with you in the coming months. As always, I want to take this opportunity to thank our best-in-class team here at Wheels Up for their dedication to our culture of continued excellence and the hard work that has enabled all of the existing progress we’ve shared with you today.

It has been an incredibly busy few months. None of this would be possible without the dedication and commitment of our amazing team. To our strategic partners, Delta Airlines, I want to extend my appreciation for their continued confidence in the progress we’ve made and the future we’re creating together as evident not only by their support of our prospective financing, but of the recent commitment from Delta, CK Wheels, Cox, Whitebox and Kore Capital to extend their lockup in support of our long-term plan. And most importantly, thank you once again to our members and customers for their continued loyalty. We take great pride and satisfaction in your feedback that our hard work has paid off, and we are delivering you a more consistently excellent experience.

We are thrilled to be introducing two of the most popular aircraft in private aviation into our offerings in service of executing our vision to deliver the most customer-centric and valuable aviation solutions in the industry. Thank you for your interest.

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

End of Q&A: