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

Moving on to our next chat is with George Mattson. He's the CEO of Wheels Up. George has been with Wheels Up for about 18 months or so now.

6 quarters.

6 quarters there you go. You're not counting. And George has been -- was on the Delta Board of Directors for about 11 years, so has certainly a deep background in overall commercial aviation. Maybe open it up to George, maybe kind of give an overview of just what Wheels Up is and kind of your vision for the company as you've been there since you've gotten to the firm.

Great. Thank you, Andrew, and thank you for joining us, everybody, today. So starting with the basics, Wheels Up is the fourth largest private aviation company in the industry. It was started about 12 years ago and very quickly grew to be one of the leaders in private aviation. We're the largest on-demand provider of private aviation. When you think about the private aviation industry, the vast majority of private aviation aircraft are still wholly owned, about 3/4, 70% of all aircraft are still wholly owned. And then within the segment that are operated, the largest model is the fractional model, which is NetJets and Flexjet. And then there are 2 on-demand operators, us and VistaJet who provide a programmatic membership and/or charter offering, and that's what we do. As Andrew mentioned, I was on the Board of Delta for 11 years. Prior to that, I spent 20 years at Goldman Sachs, where among my responsibilities, I was responsible for the transportation sector and spent more time in aviation through those years. But the fundamental idea of what we're doing on the back of Delta's investment into the company in September of 2023 and September of '23, Delta who had sold their private jet business to Wheels Up earlier in early 2020, right before the pandemic, made a second investment into Wheels Up, and I stepped off the Board to run the company. And this investment was quite different in its intentions. The idea behind what we're doing and what we launched into late in 2023 was to really, for the first time, integrate and merge the capabilities of a premium commercial carrier with the private aviation carrier and to offer a seamless commercial offering to customers across those 2 ecosystems that had always existed entirely separately. And really to approach private aviation, I think, differently than it's been approached in the past. It's been an industry, which I think has been fairly short on innovation. As I said, the fractional model has really been the dominant model, which is kind of a timeshare approach to private aviation. And we're really trying to build a solutions platform that spans not only across private and commercial aviation, which is how most people travel across both those who can access private aviation. But within private, solutions that span on fleet, off fleet, domestic, global and hybrid travel with Delta as well. So that's what we're building, and it's quite distinctive, I think, from the other models in the industry.

Can you maybe talk a little bit about the value proposition of your kind of on-demand model versus the fractional model and the benefits that it gives to consumers?

Yes. So the whole idea of what we're trying to do is provide the most customer-centric accessible solutions. So knock down the barriers to entry that have prevented people from accessing private aviation who otherwise could afford to. A study was done a few years ago that suggested that 90% of people who can afford to fly private have never flown private. And whether the number is 90% or some other large number, I think we can all agree that it's an industry that could be bigger based on folks who could afford to be part of it. So you ask yourself, well, why is that? And I think the why is -- we asked yourself 2 questions, where are they? And I think a lot of them are at the front of the cabin at Delta and elsewhere. But then you ask yourself another question, which is why is that? And I think it's because the industry has not done a great job of providing accessible, flexible solutions to allow people to access private aviation. And so our approach is to lower those barriers to give the tools to the customer to choose their mode of travel, each flight, not for every flight, not always on the same aircraft, not with long-term capital commitments. And so basically, Andrew, our offering consists of 2 options: basically join up or join Wheels Up through a membership programmatic offering in the U.S. that's supported by our fleet of approximately 150 aircraft, gives you guaranteed availability, assurances around pricing and you're a member; or you can be a global charter customer. One of the businesses that Wheels Up acquired 3 years ago, which really changed our footprint was one of the largest global providers of private charter brokerage. And so we have a global footprint in charter brokerage, which is as large, in fact, as our membership business. Most people don't know that. And so whether a customer wants to come to us as a member, where we really tried to lower the barriers to entry, a modest membership fee, put some money on deposit, the money doesn't expire, fly more, fly less, fly the aircraft you thought you'd fly, whatever you want to fly for each trip or be a charter customer, use us ad hoc when you want to. And then, of course, the third pillar is Delta. So the way we think about it is we're offering global aviation solutions spanning across commercial and private through those 3 fulfillment pillars, one of which is Delta.

Got it. What I found interesting about your business model that I wasn't aware of the international component, right? Like unlike a commercial airline where you have to switch carriers when, say, you get to Europe, you have optionality for your consumers if they fly into a bigger market to get into some of those smaller markets. Maybe touch upon that a little bit?

Yes. So first of all, as I mentioned, we have the capability to address any customer need on fleet or off fleet anywhere in the world. I mean examples of recent trips that come to mind, Dubai to Gaborone, Botswana, a trip the other day that we fulfilled, a trip from Teterboro to Geneva to Tokyo and back to Teterboro. That wasn't on our aircraft, but that's a trip that we put together for our customers. But to your question about international travel, this is where I think the connection with Delta becomes really interesting. And the whole idea of last mile, first mile connectivity with Delta. So the end state of where we want to go is that when you type in an itinerary, a city that might not even be in Delta's network you'll get a set of options. If you're one of those customers whose profile suggests you can fly across both of our systems, where you'll get a purely commercial option, you'll get a purely private option perhaps and you'll get a hybrid option. So take an example, Pittsburgh to, I don't know, to Dubrovnik, right? You might get purely commercial with 2 or 3 connections, an airline partner of Delta is in Europe to get you to Dubrovnik. You might get a private option from Pittsburgh to JFK, down a set of stairs into a car to Delta One. At the other end point, maybe you get Athens to Dubrovnik, commercial. These are the things we're working on. And in fact, this summer with Delta in cooperation with Delta, we put in place a pilot of this basically where we focused on 5 of the largest leisure destinations in Europe, Athens, Rome, Barcelona, Nice and Naples. And if you buy a Delta One ticket on delta.com, you will get a banner or a push notification that says, if Athens isn't your final destination and you want to fly privately on Wheels Up to your final destination click here. We're getting thousands and thousands and thousands of searches and inquiries about that. And for us, this year, it's less about how many flights we book because if you really think about what we're doing, we're reeducating how customers are thinking about their travel options. I think that customers have been taught to think about these modalities in separate silos. And we're trying to meld those silos together and get people to start thinking about how to optimize their travel solution relative to their economic parameters in the most optimal way for them, and they define that, not as the company defines that, but as they define that. And the economics of this are interesting, too. If you're flying to Athens in the middle of the summer, high season on Delta One with your family of 5 or 6, that can be, I don't know, $40,000, $50,000, $60,000 cost. The incremental cost of an hour on a private jet to not deal with all the rigor role of the transit and all that, it's going to be not multiples of your commercial aviation cost. It's going to be a fraction of your commercial aviation cost. And that's an upside down way of thinking about these economics. But if you start trying to optimize these things for customers and really give the customers the tools to select what works for them. And that's the education process we're doing with these folks that we're dealing with in these 5 cities. And the end state, of course, is there won't be 5 cities, it will be every city. And for Delta, I think when you start thinking about the premium journey and unlocking people's imagination around travel, now Delta's vast network, global network becomes an infinite global network, right? Anywhere there's an airport is the answer to where you can go. It was interesting when we started working on the marketing for this with Delta, the original sort of concepts we were looking at the big travel lanes from the big gateways, right? So pick Athens. It was conversations about Mykonos and Santorini and the places folks would go from Athens. But we actually turned that around and said, no, no, Athens is a dot, and there's a radio circle around Athens. And your destination is only limited by your imagination, right? Go to the next undiscovered place, go to the place that's the next-next place. You can't really get there commercially. You certainly can't get there easily. And so those are some of the narratives around how we're positioning this. On the leisure side that we've been talking about, there's also obviously a very important corporate element to our strategy as well.

Got it. I know it's incredibly early and you're just rolling out some of these initiatives. But are you seeing any early success this summer, right? We hear about -- you continue to hear about strong transatlantic travel. Anything you can talk about there?

Yes. Look, I think we're seeing very good early success in interest level and how we're positioning this. And as I mentioned, thousands and thousands of queries and inquiries. You think about the scale, too, right? I mean Wheels Up today has about 10,000 customers, about 5,000 active members and about 5,000 active charter customers. And you think about Delta Airlines, right, 20 million active SkyMiles members, 0.5% of those folks, let's just say, could access private aviation. That's 100,000 people. You think about these 5 cities, there are 6-digit numbers of people in Delta One going to these cities. And so there's a huge addressable market, and we're seeing early signs of interest. I would say it's too early to talk about results. But when you think about the broader Delta partnership across their ecosystem and in corporate, we've been at the corporate thing a bit longer over these last 18 months. New Corporate in partnership with Delta is our fastest-growing segment now. It comprises about 40% of our business. And if you think about where Wheels Up started, those who know the history of the company, it was much more of a leisure-centric business models and we are going much more balanced between leisure and corporate, and the Delta corporate opportunity for us, they have 45,000-plus corporate customers, is a big opportunity.

Yes. Got it. Just curious, the booking curve for your products how does it relate relative to a Delta booking curve?

Yes. So look, one of the things that folks pay for when they access private aviation is the flexibility to make last-minute plans. So our booking curve tends to be closer in. People do book some weeks and months in advance in some cases. But basically, what we offer our customers is guaranteed availability 48 hours out. And so the bulk of our bookings come in a few -- a week to 3 weeks, 4 weeks before the flight. It builds kind of up to that 48-hour moment when we build our schedule for that day. It's a smaller business than a lot of the commercial folks that you cover, Andrew, but a pretty complex business, right?

Absolutely, yes.

I mean I sometimes joke with some of my friends in the commercial space that it must be nice to know that tail XYZ is going to be going from Kansas City to, let's say, Atlanta at 10:00, 300 days from now. I don't know where things are going tomorrow and it's dynamic. My customers create our network and our schedule for the day. And so we have to be nimble. We have to be very adept operationally to deal with that complexity. And those are some of the, I think, things we've brought to this company over these last 18 months as we've really focused on operational excellence on the back of Delta's capabilities there, candidly, and bringing some new ways of doing things to private aviation operationally.

Got it. How do you measure that operational success? I'm sure completion factor. Just curious how that has evolved over that kind of time you've been there?

Yes. So I think one of the most -- look, Wheels Up 1.0 did a tremendous job of becoming very relevant in private aviation very quickly, grew very quickly, became a very well-recognized brand, grew even faster through COVID and developed a lot of operational complexity that they weren't really prepared to manage. One of the most important things that we started to focus on, not when I got there and when Delta made its investment 1.5 years ago, but about a year before that, Delta started to help in this regard was shoring up the operation. So what we did is we decided we were going to build a central operations center in Chamblee, just north of Buckhead in Atlanta down the road from Delta. It's actually a replica just about of the OCC at Delta. It happens to be run by David Holtz, my COO, who ran the OCC at Delta for 10 years, knows a little something about operations. And day 1, when I came in here, I set out the goal that we were going to be the best run private aviation company in the industry and that we're going to follow the Delta playbook to do it. And we began disclosing operational stats day 1, even though we're not obligated to like the commercial folks are in private aviation because I thought it was important customers understand where we were and that we were transparent on that journey. So we started disclosing completion rate and D60, which is our on-time measure. We don't measure it when the door closes. We measure it when no pun intended, we're Wheels Up. And so we sit at about 98%, 99% completion rate on any given day, and we sit at about 90%, high 80s to 90% on time. We obviously build in a little block time. So we're better than that on arrival. But I invited everyone else in the industry when we started doing this on my first quarterly call, and I've kept doing it to join us and sharing their stats. I don't know. It hasn't happened yet. Maybe it will happen soon. But we're holding ourselves to account on that stuff. And look, you can't be good at this if you're not really good operationally. And people are paying a lot of money to buy back their time. And if you fail on that, you failed. And that's really the mantra. I moved the headquarters day 1 from New York, the New York sales office, if you want to call it that, to the op center. I sit in the op center. We all sit in the op center, and that's where we run the company from. It's where it should be run from. And so that's kind of the mindset shift that we've gone through. The other interesting thing we started measuring another borrow from Delta is brand days. So I remember back on the Board of Delta in the early 2010s, if you had said in a Delta meeting, hey, could we ever have a day with like no cancellations, people would have given you the 20 reasons why that's impossible statistically. And then we had 1 and then we had 5 and then to a couple of hundred, right? And so we started measuring brand days, and we went from like none to -- I think we had almost 90, 88 or 87 brand days last year. So it's the same journey. It's continuous improvement. It's the little things that matter in this business, and that's a lot of what our team is focused on. Look, we brought over some great people. I mentioned Dave Holtz, about 80% of our operations leadership is new. A lot of those folks came from Delta, not all, in operations, in the commercial space, revenue management, scheduling, et cetera. And then I brought in some great people from elsewhere, a really strong team.

So you're making a lot of changes at Wheels Up. I think maybe changing gears a little bit and if maybe we could take a step back and maybe speak a little bit about the history of Wheels Up, particularly from a fleet perspective because fleet is another aspect that you're changing pretty dramatically here. So if you can talk about how they operated and the fleet they operated with maybe pre-pandemic into the growth that they had during the pandemic and kind of your initiatives now?

Yes, yes. Absolutely. So the original fleet platform of the company was the King Air. And it was short distance. It was leisure flying. It was a membership product. Over time, before we got here, they added jets to their fleet and sort of snap the picture when we started this 1.5 years ago, we were about 2/3 jets, 1/3 King Airs. It was a jet fleet that we quickly realized we were going to need to replace. And we built in the first couple of quarters, I was there, a 3-year plan that was supported by a fleet plan that had us modernizing our jet fleet and replacing all of our jets by the end of 2027, while reducing the size of our King Air fleet. And so what we decided to do is replace our legacy fleet of Hawker 400 and Citation CJ3 light jets, Citation Excel, XLS midsized jets and Citation X super midsized jets with 2 platforms, the Phenom 300, which is a premium light jet that really spans across the capabilities of the midsized category as well and then the Challenger 300, 350 in the super mid category. So we announced that at NBAA in October of last year, a year into this. We announced the acquisition of the largest operator of Phenoms in the on-demand in the industry, a company called GrandView Aviation, which jump-started us with 17 aircraft right away. And we've been replacing aircraft steadily ever since. We're about 25% of the way through that fleet modernization, Andrew. And what that fleet modernization does is a couple of things. One is it really changes the unit economics of our business. We concluded pretty quickly that with the legacy fleet we had, the utility we could put on that fleet, the reliability, the unit economics, we were going to be capped at where we could go. So we needed to do that. Second thing it does is it really repositions us in the market, I would say, from more of a value positioning to a premium positioning. These are best-in-class aircraft. We didn't choose these aircraft casually. The Embraer Phenom 300 is the leading private premium light jet in the industry. It has been for a dozen years. It's close to 1,000 copies out there. It's the go-to aircraft for corporate flight departments. And equally, the Challenger 300, 350 from Bombardier is also the leading aircraft in that category. These are also the aircraft that are being flown by some of my biggest competitors. And I kind of wanted to take the conversation about plan A versus plan B off the table and let's just focus on the model. Let's focus on whether you'd rather have an accessible customer-centric model or whether you'd rather have a rigid cumbersome model that you're trying to access travel through. And we think we're going to succeed in articulating the merits of that. But that fleet process is already underway. We did a couple of customer events this week on Monday in Palm Beach and on Tuesday in Atlanta, showcasing our new aircraft and very strong, very strong...

Very good response.

Very good response. It's a very different product than what Wheels Up has been associated with up until this point. And it's now out in the marketplace. We're branding those aircraft. We're standardizing the interiors. We're putting satellite WiFi on those aircraft. And we're buying these aircraft, I would say, kind of mid -- early to mid-cycle. We're not buying new aircraft. There's big enough secondary markets for these aircraft that were able to buy 7-, 10-year-old aircraft. And then this is also a little bit the Delta playbook, right? Invest into those aircraft where needed with -- and standardize the branding to where from a customer perspective, it's a really elevated product.

I guess I'm not as familiar with this, but what is the average life of a private aircraft?

30-plus years.

30-plus years. Okay.

Yes. I mean as with most aircraft, the depreciation curve is pretty steep at the front end and then flattens out. And so we're looking at this economically also. I mean we're building a fleet quickly. Even if we did want to put in new orders, we'd be waiting 2 or 3 years to get them. But what we like about our model is we're building an early life very reliable, best-in-class fleet. The reliability performance stats on these airplanes are best-in-class. And you contrast that to other models, and you sort of -- you buy a share of a new aircraft, but then you actually end up flying on a fleet of...

Of older...

Used aircraft, which seems a little backwards. We'd rather buy 7- or 10-year-old aircraft, put our customers on those aircraft have maybe much lower acquisition costs, $0.50 on the dollar kind of thing and be able to pass some of those economics on to our customers and better pricing.

What are the CapEx needs of your refleeting initiative?

So we have a plan that has us basically funded to accomplish the entire need between a mix of owned and leased aircraft over the next 3 years. We recapitalized or refinanced our balance sheet in October when we announced the GrandView acquisition with the help of Bank of America, thank you. With a facility that refinanced our existing fleet. It acquired the new 17 aircraft from GrandView, and it provided reborrowing capacity to continue to buy aircraft as we sell aircraft because we're selling aircraft as we're buying aircraft. And so when you look at the net CapEx need, we have that covered with our current funding.

Got it. Got it. Operationally, what do you view as your biggest challenges?

Yes. So look, our biggest challenges looking in the rearview mirror have been operating this legacy fleet that wasn't fundamentally reliable enough to meet our goals. And I think the team did a great job doing that a lot better. I mean I really am proud of some of the short-term wins we had when we came in here. I mean, starting from October of '23, we really focused on performance and saw significant improvements in maintenance availability, all the operating stats and drove significant improvement with that legacy fleet. If you look at last year on relatively flat revenues, we started to grow again in the fourth quarter, and we grew again in the first quarter. But on relatively flat revenues, we expanded our contribution margin by 19 percentage points from basically 1% to 19%. And we did that on that legacy fleet. We drove utilization up 32%. We just operated better. So the challenges of that legacy fleet will eventually be behind us. Right now, we're in the midst of a fleet transition. So as my ops team likes to remind me, we're going from 4 jet types to 2, but on the way to 2, we're going to 6. So we're kind of juggling a little bit. And there's a lot of execution involved in that. But we've got the right people on board to manage that. Look, going forward, we just want to continue to elevate what customers expect, right? We've put in place some resources really focused on all aspects of the customer experience, right? It's nice to talk about the planes and this plane versus that plane and all how they feel and look inside, and that's an important part of the customer experience, but there's hundreds of touch points, as you know, with customers in this industry, whether it's commercial or private aviation. And we're looking at that total experience now foundationally supported by a great product. But there's a myriad of places we can continue to improve. But we're on a journey where we're now actually measuring and looking and thinking how are we interfacing with customers on the front end and when their prospects? What happens when you become a member? What does your billing look like? What is your renewal process? What's the pre-flight? What's the in-flight? How are the pilots presenting? What does the safety brief sound like? We're looking at all the tiny things that matter and aggregate to a total experience.

Got it. I do see some pilots in the room. So I wanted to ask you how -- like how you source pilots for the operation?

So our pilot core, which is a tremendous asset of our company, they are the front face. I mean, unlike in commercial aviation, these folks are the people interfacing in every way with the customer around flight. From greeting to bags to problem solving to obviously operating the aircraft safely every time. But we source pilots from basically, I'd say, 3 places, Andrew. One, there's a cadre of folks who just fly privately -- private jet aircraft and always want to. They're not coming from anywhere. They're not going anywhere. They like flying private aviation aircraft. They like some of the lifestyle aspects of that, allowing them to predict schedules better, not live where they want, et cetera. And the customer interface piece is a big part of that. I'd say about 1/3 of our folks are coming up through general aviation on their way to commercial aviation, and we're a stop on that journey. And we have pathways for those folks to end up at Endeavor and Delta and other places. And then we have folks who retire out of the mainlines and have a few more years they can fly. And we have a lot of those folks from Delta and other places as well, United and all the mainline carriers, and they love it. So you could be sitting there in one of our planes with a captain who a few months ago was flying a 777 or some other big airplane for the commercial folks.

Interesting. You definitely have a good kind of long-term vision for Wheels Up. If you were to look 5, 10 years down the road, what would you view as kind of the ideal relationship between Wheels Up and Delta?

Yes. So look, I think that -- what we're so excited about is this idea that we are in a long-term indefinite strategic partnership to transform private aviation and aviation in the process. And look, I think Delta speaks to this themselves when they talk about it, but they view this as an integrated part of their premium commercial offering. This is not a financial investment. This wasn't sort of a rescue of a company that needed some help. This is now viewed this sort of second investment into Wheels Up is viewed as an integrated part of Delta's premium commercial offering. We're going to market together. We're going to market together as we face Delta's 45,000-plus corporate customers as we face the subset of their individual customers for whom this is relevant. And I think Delta views this the same way they view their other integrated JV partnerships with the international carriers that they have. And I think Delta has taken a different approach to that than some of their competitors in the industry. And so what do I see 20 years from now? I see a seamlessly integrated offering between us and Delta that customers can access digitally and in every other way to choose their optimal mode of travel between us, Delta and hybrids of the 2 here in the U.S. and around the world. That's where we want to go.

Great. Any questions in -- do we have a question in the audience?

[indiscernible].

Yes. So what we've been using is what most people have been using before satellite WiFi became available in private aviation, which is really only happening now. It's rolling out kind of real time. And the 2 major providers are Gogo and Starlink. But we've been using the traditional air-to-ground systems that Gogo in private aviation offers and there's various levels, L1, L3, L5, and we have different versions on different aircraft of ours. But we're going to standardize that on the Gogo Galileo HDX system, which is supported by OneWeb as the satellite communications provider. We ran a robust process. We talked to, obviously, all the folks who could offer something. We looked at the capabilities of those systems. We looked at the cost of those systems. We looked at the availability of those systems on our particular aircraft types, getting STCs and so forth and entered into, I think, a really good agreement with Gogo to support our transition, which is starting this summer of putting satellite WiFi on our aircraft. Not being well connected on a private aviation aircraft is no longer acceptable, right? These things are supposed to be productivity tools. They're supposed to be traveling boardrooms, you're meeting with -- you're on there with your management team and so forth, and you need to be connected. And so we're going to -- you're going to see a really significant improvement as these systems roll out, not only for us, but other folks who are also employing these systems and other ones in the marketplace and the capability on these aircraft to do live video, Zoom calls, telephone calls, I mean it's all going to be very different than what people are familiar with today with the legacy systems. Sure.

Any other questions from the audience? I guess one last one for me, just a couple of minutes left. So you've been at Wheels Up for 18 months. You're -- you've gotten the operation, improved the operation...

Continuous journey.

Getting through the refleeting initiatives, starting to meet with investors now. So I guess 2 questions. One, what are the 2 to 3 things you want to instill in the investor community? And I guess second question, from the meetings that you've had so far, what do you think is the biggest misperception of Wheels Up out there?

Yes. So look, on the first question, Andrew, I would say that we're in the early innings, first, second inning of a multiyear transformation journey, right? This isn't a turnaround to something that existed before. We're doing some things that are new and different to Wheels Up, but new and different in aviation. And this whole idea of a solutions platform and really giving the customer the tools to access it is new. And I think it's going to bring people -- new people into private aviation. I think it's going to also shift concentration or share between legacy models and this new approach. I think the opportunities we have with Delta are powerful and will be very meaningful for Wheels Up as we continue through this journey. And look, on the financial side, in year 1, we made a lot of improvement, right? We sort of shored up who our core customer was. We started to grow again, as I mentioned. We expanded our contribution margins by 19 points. We reduced our EBITDA loss by 80% and then another 50% in the first quarter of this year. And so we're on a journey. I would say those first 18, 19 points of contribution margin improvement we're operating better with what we had. The next leg of that journey is the fleet transition. And the unit economics of the fleet drive another very significant increment of profitability through our business that is going to be the next major driver of financial improvement as that fleet transition happens and gets us to a place where we believe we're going to be sustainably profitable and earning an attractive return. I think the biggest misperception is just this is a well-known company and what people know or think they know or remember is not exactly where we are today or where we're going. So some of our discussions have to start with helping people understand what's changed before you can even talk about what's going to happen. And so we're getting that message out and people are responding well to it.

Great. With that, I'll leave it there. Thanks. Thanks for joining us.

Appreciate the time. Thank you all.