Wheels Up Experience Inc. (UP) Earnings Call Transcript & Summary

All right. So I think we're going to go ahead and get started. So Stephen Ju with the Credit Suisse Internet Equity Research team. Joining me on stage is Todd Smith, who is the CFO of Wheels Up. So I think, Todd, you're going to go through some slides to introduce us to Wheels Up.

I will, yes.

Awesome.

Great. Thank you.

Sure.

I appreciate the opportunity to have the chance to share a little bit about Wheels Up with you today. Again, my name is Todd Smith. I'm the CFO of Wheels up. I've been with the company for about 5 months now. Prior to that, I had spent about 25 years at GE in a number of divisional CFO jobs, and then most recently, as the Global Head of FP&A and Head of Corporate Finance. But I'm really excited about the journey we're on at Wheels Up and really proud to be a part of this team. Our company was founded in 2013 by Kenny Dichter, who remains our Chairman and CEO today. We went public in July of 2021. And we're really proud of how we're positioned. So we have a really strong track record of being able to demonstrate strong revenue growth that you can see on the chart here behind me. We expect to deliver over $1.5 billion of revenue in the full year of 2022. We're currently the #1 on-demand provider of charter aviation. We fly over 70,000 live flight legs a year. And we have a very desirable membership base of over 12,500 active members that continue to fly with us and use our aircraft. As we think about what we're trying to do, quite simply, we're trying to connect flyers to private aircraft and to each other. And we do that through a membership type model that I'll describe in a minute on the next page. But we see this as a space that is continuing to grow. Particularly coming out of COVID, more and more individuals have made the choice to fly privately. There's more and more focus on the experiential economy and improving the quality of the experiences versus simply accumulating goods and possessions, maybe that was more common in the past. And I think there's an enormous amount of latent supply out there that's being very inefficiently used, and we think there's a huge opportunity within a marketplace to connect those flyers with that supply in a more effective and efficient way. If you think about how we come to market, we operate under a membership model, as I said. That's a little different than some of our competitors who operate under a fractional program. So under a fractional program, you have to purchase a share of an aircraft to get in and get access to flight hours. Often that requires an outlay of $250,000, $350,000 in many cases. We offer a much more modest entry into the private aviation space. So we have a core membership that's $17,500 with an annual renewal around $8,500. And then we offer a lower tier membership that's less than $3,000. And I think that gives individuals the opportunity to fly across our different 5 -- 5 different types of cabin types within our fleet and choose the aircraft that makes sense for them for that individual trip. So if it's a short hop between New York and Nantucket, we have a King Air turboprop that may be very efficient and at the right price point. If you're flying transcontinental or a longer haul, then we have larger cabin aircraft that suits the need of that trip. We also try very hard to make sure that we give our members a great experience, and that's beyond simply the travel on the airplane. It's also a membership experience that gives them access to a number of great partners, whether that's AmEx, Inspirato, certain deals with Hertz, Barton & Gray. We offer curated events, whether it be parties that we host at Augusta during the Masters, Super Bowl parties, individual events with members like Thomas Keller, who is the chef at the French Laundry that does events for individual members and small groups. All of those things drive a lot of loyalty and repeat business through our member. Our average member in our core and business segment spends over $80,000 a year with us. We have over 80% retention among the broader member set for core and business. And for those individuals that are frequent highest flyers, the ones that put down prepaid monies or blocks, that membership retention is over 90-plus percent. So very strong, and we're very proud and happy that we're able to have that kind of loyalty within our membership. The way we go to market, again, as I said, in that membership model, that allows us to give people access to private aviation that maybe would not have previously considered it. We also have a unique model in terms of how we deliver on that demand. So we have a fleet that is a combination of 3 tiers. We over 200 aircraft that are owned or on long-term lease that gives us a guaranteed supply and controlled supply. We also manage over 150 aircraft for other individuals that own them that we have the right, but not the obligation to charter additional hours on. And then we have access to over 1,200 third-party owned and operated aircraft that are all safety vetted and verified to our standards, but again, gives us flexibility when we have peak demand. We're increasingly leveraging technology to drive more efficiency. I'll talk in a couple of slides about some of the challenges inherent in our industry. But we think there's a huge opportunity in front of us to transform this industry and move it out of the analog state that it's in today to one that's much more digital and where technology allows us to operate much more efficiently. If you look at the market itself and why we have such conviction around the opportunity here that's in front of us, I'll give you a couple of stats. It's a highly fragmented market. So you can see in some of the first couple of bullets here. The top 10 operators control less than 10% of the industry capacity, almost about 8%. 1,800-plus operators control fewer than 10 aircraft. So if you think about this, it's still very much a model that is not digitized or automated. It's very much, in many cases, a broker-led model, where a potential flyer will call in a broker. They will call 3 or 4 operators. They'll try to piece together options in a trip, call that individual back, confirm the booking. And it's not very efficient in a number of ways. And I think if you look at some of the other industries that are on this chart and some of the disruptors that have significantly transformed them, a lot of those same characteristics existed there. And I think that's why we have -- we believe we have such an opportunity in front of us to really transform the industry. That being said, it is highly complex. And I think we don't ever underestimate the challenges around doing what we're trying to do. It had been simple a number of other people would have done it already. And I think you can see on the chart here a number of the factors that drive some of that complexity. But if you really boil it down and contrast our industry with that of commercial aviation, in commercial aviation someone sets the routes, they set the fleets. They schedule that over years with a very high degree of consistency. So you know exactly that there's a plane leaving Phoenix going to Atlanta 2 times a day. And then the job is to simply fill the seats in that plane. In our industry and in our model, that schedule and those routes change every single day. And what we flew today and the type of aircraft we flew between 2 cities today won't be the same as what we fly tomorrow. It isn't the same -- it wasn't the same as what we flew yesterday. So we have to have the capability to increasingly be able to deal with that inherent inefficiency. And if you think about private aviation in general, about 1/3 of the flight legs that are actually executed are empty. They're repositioning legs, where you're flying a plane into a site to pick up a customer or after dropping off a customer, you're flying it out. The ability to reduce that level of empty flight legs that are non-revenue-generating makes a huge difference in terms of the profitability of an individual company that's in this space. I think if you think about some of the things that we're using and how we're going after the opportunity that we believe exist, a lot of them come down to technology. And I think if you think about the 3 pillars here that I have on the page, first of all, it's about optimizing our own delivery. So how do we increasingly use technology? And we have a proprietary system called UP FMS, our fleet management schedule -- scheduling system, fleet management system that we're -- as of June 1 of this year, we have all of our flight operations now on that one system. That gives us the ability now to build algorithms and add technical capability that allows us to optimize the schedule. Think about how we string together different flight patterns, how we take advantage of some of the opportunities to be more efficient. Next, we're working on the app. And in many ways, you could say, "Okay, great, you guys have an app. Welcome to 2005." But we're going well beyond the simple task of searching and booking on the app, even moving beyond having our customers be able to update their manifest, the passenger list, their baggage. And really trying to move to the next level of this, where we're increasingly communicating with our customers, pushing notifications to them about their flight, et cetera, and then more importantly, starting to shape demand at the point of booking. And to give you an example of that. At some level, you would say, hey, if someone's paying $30,000 or $40,000 to fly somewhere, then they should have the ability to set the exact time and the location in terms of wherever they want to fly. But at the same time, what we're finding is that in a number of cases, people do have some level of flexibility. And if someone says, "Hey, I want to fly out of Nantucket at 8:00 a.m. in the morning", we may realize that we have a flight that's coming into Nantucket at 9:30 that same morning. So instead of flying an empty plane in to get them and then flying an empty plane out 2 hours later, at the point of booking we can say as you make your selection, "Hey, if you're willing to fly out at 9:30 or 10 a.m., there's a discounted price. There's more options for you that might be attractive. If not, then certainly you can fly out at 8:00, but it's going to potentially cost you more." And I think if you think about the commercial model, that's done very effectively today. When you search for a flight, you get to see multiple options at multiple price points. We think that we can nudge that demand in a way that will have a significant impact on our efficiency. And then the third piece of this is really around: How do we use that technology? How do we use that marketplace to expand the market? How do we bring more flyers in that might not have considered flying private previously because now we can give them visibility to a lot of this latent supply that's underutilized. If you think about in the private aviation industry, on average, an aircraft flies for 1.2 hours a day. In the commercial world, a plane flies 8 or 9 hours a day. So there's an enormous amount of capacity that exists. If we can make that available, share with individuals in a frictionless way where they can search, they can set up alerts for certain city pairs and other things, they can take advantage maybe of discounted repositioning legs, that might bring someone in and give them the opportunity to fly privately where previously they wouldn't have considered it. Just a quick couple of slides to set the stage on our financials. We released our third quarter earnings earlier in November. Again, we had a really strong revenue performance. So third quarter revenues were up 39% year-over-year. That follows our second quarter, which is up 49%. So we're continuing to show a really strong track record in terms of growing the top line. We're also growing the number of members, up 12% in the third quarter. The number of live flight legs, so the number of flights that we actually fly. And then maybe most importantly to me as CFO, the flight revenue per live flight leg is also increasing 20%, which is indicative of the fact that we've raised prices. And as those prices work through the book, we're seeing a greater revenue percentage per flight leg on average, which again helps us combat some of the pressures that we're seeing in terms of inflation around pilots and maintenance and other costs that we're having to incur as many in the industry is. I would just say probably the most important slide here, though, for us is our commitment to get to adjusted EBITDA profitability in 2024. We made this commitment earlier in the summer. We said that although we've proven our ability to grow revenue, ultimately, for this business to be successful, we have to also prove our ability to have that revenue fall through at positive margins. We've made a number of investments, particularly in technology that we think will pay off for us. But at the same time, we have to be more judicial around our cost structure. We've done a number of acquisitions and we rolled up individual flight companies, that now we need to integrate in a more complete way, reduce some of the duplicative infrastructure that exists, and quite frankly, be more disciplined on some of our investments to make sure that they're really generating the return that we expect. We've also increased our pricing, put fuel surcharges in place, which help us offset some of that inflationary pressure. And then the third piece is really where we have to operate more efficiently and more effectively. And I think that's a combination of hiring the right number of pilots to make sure we've got the coverage for the fleet, investing in our maintenance capability, and most importantly, using the technology to increasingly fly and deliver in a safe and reliable way, but in a much more efficient way than maybe we have in the past. So again, we're very excited about the journey we're on. We think there's a huge opportunity in front of us. I appreciate the chance to share some of that with you today, and be happy to take a few questions now.

All right. So I'll kick it off here. So I guess that you touched on this in the beginning of the presentation. But from a competitive standpoint, if you can update us on the overall private aviation landscape? Many of these guys are still private, right?

That's right.

So are peers acting rational on the pricing side in the near term? Or are there some competitive dynamics that we should be aware of? Yes?

Yes. I think generally the market is operating in a rational manner. I mean, obviously, everyone went through a period of time, particularly in the first half of this year, where there was a significant amount of growth in demand that probably exceeded the supply. And I think there was a real struggle to make sure that we found enough supply and connected that supply to the demand. I think we certainly felt that, a number of our competitors felt that. That was probably exacerbated a bit as well due to some of the challenges in the labor market relative to pilots and even maintenance technicians, parts availability with supply chain pressures, et cetera. So all of those things kind of combine to be a pretty competitive environment. At the same time, we are feeling the inflationary pressures as are others. And I'd say, in general, the industry is increasing price. And I think what -- when we made our decision to increase our prices, we did so with an understanding of what the market was doing and we tried to be thoughtful about that. We felt it was necessary to kind of position ourselves successfully and particularly as we're trying to achieve profitability. But at the same time, I would say it had very little impact on slowing the demand, which we continue to see and feel at a pretty strong level. And I think there's new entrants, new flyers, the market is growing. But I think, again, in part because of this inefficiency, being able to place that demand with the supply is still a challenge. And I think that's going to continue to be the case for some period of time.

Got it. I think in April, Wheels Up released a new mobile app that provides unique first-party intent data. I think the downloads were well north of 300,000 cumulative to date. And you have 12,500 active members now. So there's like a 25x gap between the number of downloads and who are actually using the app right now. So like what's -- are there any reasons why this gap shouldn't close, right? So what can you do to close that gap because people are interested in downloading the app?

Yes. No -- and I think we saw a really strong interest in people downloading it. I think a lot of people are curious. They're looking at the cost. They're searching city pairs. They're trying to understand what it might cost for them to fly privately. But I do think that, that illustrates in our mind the opportunity that's in front of us, right? And I think through the summer, there was just a general shortage of supply. So the members and the members that put down prepaid monies and paid more to get some of the guaranteed availability, they used up a lot of our capacity on our 1P fleet and increasingly started using as much of the third-party supply that we could pull in. So I think for people that were in that non-guaranteed space, a lot of times when they searched, they couldn't come up with a plane because there just wasn't availability. I think some of that has balanced itself a little bit. We're starting to see more and more people at our lower tier membership and it's just people who've downloaded the app start to be able to book successfully. And I think as we get more and more supply into the marketplace, again, that will only increase that. But I think we were encouraged to see how many people downloaded the app and were curious about it. And I think we're seeing a reasonable amount of our bookings now all being done on the app. And I think as more and more people continue to kind of fuel their curiosity, we're hopeful that we'll have more and more takers who decide to fly for the first time.

Got it. Now since the IPO, I think you've had about -- I'll speak on the supply side of things, right? So you've had about 100 operators that use the UP FMS, right? So what are some of the key friction points among the remaining, call it, like 1,800 or so that are not using the platform yet?

Yes. I mean a lot of it comes down to how easily we can integrate them into the system. I mean part of this and the success will ultimately be: how do you get visibility to that supply in an almost real-time basis? And I think today still a lot of that work is kind of a manual upload, a manual interface or dependent upon them updating their own fleet status in near real time. So I think what we're working with them now on is: how do we make that interchange, if you will, that connection as seamless as possible? And I think the more suppliers that we get on, the more bookings that they start to see coming through that channel, we think it will drive more and more volume there. There's a little bit of a prove-it-to-me type mentality now, I think. And we've got to make good on that and make sure our technology supports them. But I think at the point where they start to say, "Hey, I was able to utilize my fleet in a higher level than I would have otherwise," then it will become more and more attractive. But so much of this is still that journey from moving from people calling around with clipboards and jotting notes down to getting it all into a system and making that visibility as seamless as possible.

Got it. The question that's on everybody's mind outside --the unavoidable question is, of course, the macro question now. Given your user base, I would imagine that they're probably a little bit more resilient, right? But -- and I think earlier you were talking about how you raised prices and people are paying up, right?

Sure.

So contrast that with, I guess, you had -- active users were flat Q-on-Q on the third quarter. So can you update us on the demand environment? Is this sort of the first signs of potential deterioration? Or what are you seeing currently in terms of consumer activity and willingness to spend on travel?

Yes. I mean, so far, it seems to be holding up. I mean, obviously, we're just in the middle now of the fourth quarter. We would say that we are not immune from those macro pressures, but at the same time, we generally expect our member base to hold up better than the average consumer just given their demographic. It's a little interesting, too. I mean if you think about it, like some of the pressures that we really felt earlier in this year was just because of that significant expansion of demand and us trying to fulfill it as efficiently as possible. One of the things that helps us a little bit in this is our fleet model, right? So with the first party, second party and third party, if demand does start to slow, the first thing we'll do is we'll take demand off the third party. And then if it slows a bit more, we'll take demand off that second-party managed fleet, where we don't have any obligation to. And we'll push as much demand as possible onto our own fleet, where we have a fixed cost profile. So it actually gives us a little bit of insulation as we start to pull down that demand that we can do it among that multi-tiered model. And we think that helps us. And in some ways, may actually allow us to put even more demand on our fixed fleet. But we're continuing to monitor it and we will through the fourth quarter and see where we're positioned.

Got it. And one of the other constraints that we were talking about before was the situation with the pilots, right?

Right.

So I think Wheels Up has hired 450 pilots so far this year. And it seems like this, I guess -- I don't know, the bottleneck, pinch point, whatever you want to call it, is now shifting from hiring to training as there seems to be a bit of a crunch on simulators, right?

That's right.

So like what -- and also -- so first, I guess, what differentiates Wheels Up versus competitors and, I guess, the commercial space in terms of they probably can pay more? Like are there like puts and takes in terms of like the attractiveness of working with Wheels Up versus commercial or other competitors?

Yes. I mean I think there's a couple of things. I mean, we've worked hard to make sure that we give an extremely competitive offering to our pilots. We've done a number of things to retain them and improve their quality of life. Some of that's technology, working with them in terms of other benefits beyond simply pay, but making sure that they have as good an experience as possible as being part of our team. We have increased our wages and rates, benefits and other things to try to remain competitive. We've increased the aperture in terms of how we recruit and where we recruit from. And this is a good example of a place where having your largest shareholder be the Delta Airlines is beneficial, because we've created programs with Delta that pilots can come in fly with Wheels Up for a couple of years and then have an on-ramp into the commercial space to fly the larger jets and vice versa. In the commercial space, there's a mandatory retirement age for pilots at 65. In our space, we can fly longer if they're able and willing. So as some of the pilots may retire or leave Delta that they still want to fly on some schedule, then we can increasingly direct them into Wheels Up. So we've been working hard to try to make sure that we're successful there and we have the right crewing strategy that we need for our fleet. And as you said, we've hired over 450 pilots year-to-date. And right now, what we're working through is, as a new pilot comes in, they have to get trained and certified. Despite their history and experience, they still have to go through that process. We've worked hard to secure additional simulator time and make sure we've got that capacity. But there is a bit of a lag as they have to work through that process before the revenue generating.

Okay. So -- well, how long is that lag? I think it stood at 90 days or so?

Yes, around 90 days. I mean I think at certain points it had ballooned a little beyond that. But we're seeing it come back down now. And with some of the capacity adds, that's becoming less of an issue for us.

Got it. I think on the third quarter call, you mentioned that 20% of flight revenue was from the June pricing initiatives with more than 50% from blocks that were sold pre-December 2021, right?

That's right.

So what appears to be sort of meaningful white space ahead on the pricing side. And so can you update us on where these data points stand today?

Yes. I mean we -- so for those of you not familiar with our model, we allow customers to purchase prepaid blocks or put up prepaid funds that they can then utilize typically over a 12-month period of time. That locks in the pricing at the point that they funded that block and allows them to maintain that pricing and rule set for that 12-month period on average. So what that means is as we've introduced price increases or rule set changes, it takes a period of time for those to fully work through the book because we have to burn down those prior blocks and then reload at the new pricing. So in the third quarter, as you mentioned, only about 20% of the June price increase was still in the book. And that -- again, if you think about the time frame that says on average about 12 months, sometimes up to 18 months if it's a really large block, so $400k or so, that kind of sets your time frame for when we should expect to see that to run through ratably within the profile. And then we just announced some new price increases that will go into effect tomorrow. So again, that will also help us. So I think when I showed that number before around the revenue per live flight leg, that growing at that 20% level, 25% if you exclude Air Partner, that's really starting to come through and will be really helpful to us as we go through into '23.

Speaking of Air Partner, right? So what have you learned about the business after 7 months? What are the differences in terms of the users internationally versus the U.S.?

Yes. I mean Air Partner has been a terrific acquisition for us. We closed that on April 1. They operate entirely in an asset-light model. So it's -- they don't have an owned fleet. But they have a really strong network of both customers and suppliers. They also operate in the custom charter and cargo space. I think what we like best about that business is the optionality it gives our members and vice versa. So we're really focused now on how do we take advantage of those synergies between us, the cross-sell opportunities. So if you have a Wheels Up member that's flying in Europe, we now have an option for them. And particularly, let's say that they're even -- maybe they're flying Delta first class to Europe, but then their final destination is in the south of France or something, we have a solution that takes some them that last mile. And vice versa for some of the Air Partner customers that are now traveling in the U.S. Instead of them going out and chartering with a broker for another operator or provider in the U.S., we can take advantage of our fleet here and put that Air Partner customer on our fleet. So I'd still say we're in the early stages of realizing the real benefits there, but that's been an extremely positive acquisition for us. They're strong positive margin, and we think there's a big opportunity for both our members and Air Partner's customers on both sides of the pond.

Got it. I think we only have about 2 minutes left. So let's fast forward 12 months from now, and it's December 2023. You're back here at the Credit Suisse conference. So what do you think we'll be talking about in terms of what you've accomplished in the trailing 12 months?

Well, I think a couple of things. I'm hoping that, that bar that starts this chart is a lot smaller at that point and we've made real meaningful progress on our journey toward positive adjusted EBITDA. That's first and foremost. I think the other thing is us making real progress on the technology, right? I mean it's a tech conference, right? And I think for us, that's the real key. So I mean we've made a lot of investments there. I'd still say we're in the early stages of realizing the benefits on that. I hope what you'd start to see from us is a revenue profile that in addition to our member revenue, we start to have more and more revenue coming from the 'marketplace' or those pay-as-you-go flyers who are out -- who've downloaded our app or searching for flights. And that should be a real indicator for us that we're starting to get traction and progress on this vision that we have to disrupt this space.

Awesome. And we'll wrap it there. Thank you so much, Todd, for joining us.

Great. Thank you so much. Appreciate it.

All right.