Wheels Up Experience Inc. (UP) Earnings Call Transcript
May 10, 2023
Earnings Call Speaker Segments
All right. It's our last presentation of the day. What are we doing after this, Keith? Very happy to have with us Wheels Up. And with us from the company, Todd Smith, who's the CFO and interim CEO. Is that correct?
Correct.
Okay. And I'm going to turn it over to Todd. He's going to go through a few slides here just to kind of kick things off, and then I got a lot of questions.
All right. Great. Thanks, Noah. I appreciate the chance to spend some time here and share a bit of our story. I thought I'd just frame the business a little bit with a few slides. I mean, I think the most important and relevant thing for us right now is the journey we're on to get to adjusted EBITDA profitability. That was a big focus of all of our communication over the last few weeks, months and quarters. And certainly, it's been a huge focus of mine since I arrived here about 9 months ago. We're very fortunate to be in a position where we've built a strong brand. We've grown the scale. We're over $1.6 billion in revenues last year. But we're very much now in a position where we're focused on saying, "Hey, how do we deliver profitability from this franchise? And that's what we're really focused on. So if you look a little bit about our journey and our goals to get there, we've really framed it with 3 major pillars: the first is cost reductions and more cost discipline; the second is pricing and program changes; and then the third is around operational efficiencies and really unlocking the scale of a business that is of our size. And we operate around 200 aircraft that we own or have on fixed lease. We have another 120 aircraft that we manage on behalf of other owners. And then we have access to over 1,200 aircraft that are third-party owned and operated, but safety verified embedded to our standards. But as we think about where we are in this journey, I'd say we've made a couple of significant announcements over the course of this year. So on March 1, we announced a $30 million SG&A reduction, which was a major cornerstone in terms of some of the cost reductions that you see in that first pillar. Our SG&A as a percentage of revenue has continued to come down. In absolute dollar terms, it was down $7 million sequentially in the first quarter, $12 million over the last 2 quarters. So we're making real progress there with more to do and more that we're committed to doing through the course of this year. But yesterday was probably our most significant announcement today because we announced a major change to our program and product offering. So historically, our businesses has largely generated revenue from offering a nationwide guaranteed availability program that provided capped rate protection for the members who join into our membership model. What we've seen over the last few years and what we've come to realize is that trying to deliver a nationwide program is incredibly difficult from an operational standpoint. And I think what we announced yesterday is that we are moving to an alternate model where although we are continuing to service and cover the entire United States, we will do so through multiple delivery models. And for our guaranteed programmatic offering, we will concentrate that to the East Coast and the West Coast. And then for the middle parts of the country and the Pacific Northwest, we will service that on an on-demand charter basis. And I'll show you that in a little bit more detail on the coming slides. But this was a significant step forward for us of putting ourselves in a position where we can gain significantly more efficiencies and simplify our delivery model, and all of that translates into this third bucket. So I think it's all about for us, how do we leverage the network density, how do we use dynamic pricing to shape demand, and how do we improve the utility and efficiency of our fleet. And we've worked on a number of things over the last 6 to 9 months in terms of adding more pilots and getting our pilot ratios right, improving our maintenance capability, improving our technology capability in terms of scheduling and how we plan the fleet. And the changes we announced yesterday as they go into effect over the second half of this year, will really allow us to take a step change in that journey, all of which is designed to support us getting to the right side of this chart, which is adjusted EBITDA positive in 2024 with a mid-teens adjusted contribution margin and a non-GAAP kind of GAAP or OpEx as a percentage of revenue in the low double-digit levels. The member program we announced yesterday, you can see on this chart, just gives you a little bit of a graphic on the map. The dark blue regions are the areas that we're going to continue to service programmatically. So these will be areas where we will continue to offer a program that has guaranteed availability and capped hourly rates, but they are much more targeted and into areas where we have much more significant flight density. And I think if you think about the private aviation model, about 1/3 of our flight legs on average are empty repositioning legs, where we're simply moving a plane into position for a customer. Our ability to reduce that percentage significantly improves our ability to operate more efficiently and at higher profitability levels. And I think if we're honest about the last couple of years, we ended up in a situation where often we were adversely selected. So members took advantage of that guaranteed one size, one price nationwide to fly in some of the gray areas here that were highly inefficient, had a much more expensive recovery times and recovery legs and things of that nature. So our view now is we're going to come out with an extremely competitive offer that is designed to allow us to win, but win in the places where we can fly most efficiently and most profitably. We're going to walk away on a programmatic basis from some of that revenue in the gray, which is about 20% of our total flight revenue. And then we expect to recapture some of that but recapture it in an on-demand charter way. And if you think about one of the components of our business that we acquired a little over a year ago was a business called Air Partner, based out of the U.K., but with operations in the U.S. that is entirely an on-demand asset-light broker model. Extremely profitable, our most successful division within the company. And we'll leverage their capability and increase that capability, invest in it to service the areas here that will not be covered programmatically. This wasn't a decision we entered into lightly or one that we've made just in the last few weeks. We've been working on this for months. We did some test runs on this into the end of the first quarter where we offered some special pricing programs on the East Coast only for our King Air fleet. We've got one underway right now for light jets. And in each of those cases, we saw a significant improvement in terms of booking rates as well as the efficiency and utility of our fleet. So we feel very good about the fact that we validated a lot of our assumptions and hypothesis here. And we used BCG for the last few weeks to really come in and pressure test our assumptions again and make sure that we're thinking about it the right way that we really can achieve these benefits that we expect, many of which you see on the bottom right of the chart there in terms of increased asset utilization, higher efficiency and better margin flying. Just relative to this journey, I won't spend a lot of detail on this, but it just gives you some idea of some of the actions that we've already taken. We feel really good about the progress we're making on cost. Yesterday was a huge step forward on the program changes. We also announced a new program yesterday with Delta. Delta is our largest shareholder. They own about 20% of Wheels Up. We have a great relationship with them. They provide resources to us, our Head of Operations that we recently announced is a 30-year plus Delta veteran, who ran operations for them. But the program we announced yesterday was really designed to target corporate customers. So Delta has a huge program with their corporate customers that they offered programs for flying. We now can offer them what we believe is a unique industry-leading opportunity to also pair private flights with that for select members of those corporate customers and give them access to Wheels Up that otherwise they would have to pay a membership fee for, et cetera, at preferential pricing. So we're really excited about that program and what that means in terms of that partnership as well. So a lot going on in the company. The leadership changes yesterday, obviously, were a significant announcement. But more important for us is some of the steps that we're taking to kind of reposition the business and get it to a much stronger place.
Great. Thanks for that, Todd. I appreciate that. A lot going on. Were the -- are the blue shaded areas there, the East Coast, West Coast areas, in the last 2 years, in 2021, 2022, I guess, were those profitable? Were those EBITDA profitable?
They're more profitable than the gray, for sure. But I think what happened in many cases is our pricing because it was a one-size-fits-all across the country, we were probably overpriced in some of those regions and underpriced in the gray regions. So we certainly have a lot of volume. And again, it's 80% of our flight revenue in those areas, and that's more profitable flying for us certainly than the gray. So I think we'll get an immediate benefit as we simply reduce that revenue from the gray area. And then if we can recapture some of that on an on-demand basis, then that's incremental and additive to that profitability journey that we have.
Yes. I guess you said Air Partner is very profitable.
That's right.
So Air Partner has positive EBITDA. And so if you -- and the gray area definitely had negative EBITDA.
That's right.
Did the blue area have positive EBITDA?
Yes. I mean in certain regions and certain routes, absolutely. In other regions, not so. But I think, again, part of this is us as we reposition the fleet and simplify the delivery model, then that gets us to that profitability across all of the blue. And then I think as we change the programmatic offering, then we will get to profitability in the gray as well because the only thing we're going to offer there is that asset-light model where we go out and say, okay, if we can get a plane that costs 7,500 an hour, then we're charging that plus a margin to the customer. So by its definition, it would all be profitable on a go-forward basis.
Okay. So the blue is more profitable, but it still needed work on all of the efficiency items that you were describing. And the gray was kind of more deeply unprofitable because of the pricing relative to the inefficiency of flying.
That's right. The repositioning costs, the recovery legs, et cetera. And I think what we have -- if you think about the base of cost, if you think about the crewing, the maintenance, the scheduling, all of those things, this is a decidedly simpler model as we get to -- get this fully transitioned. So what it also does is, even in the places that we may have been positive, it will improve those margins by virtue of us, reducing our maintenance footprint, having more efficiency in terms of the flight legs and the scheduling, leaving fleets positioned in certain geographic areas versus flying them back and forth across the middle of the country, et cetera. So it's an accelerator in those regions, and it moves us from negative margins to profitable margins in the gray areas.
Yes. Okay. That makes sense. You alluded to test running these changes. Can you just elaborate on that? How do you do that?
Yes. And the test run was really around can we see a real response from our members and customers for some more dynamically priced and discounted per hour rates in these more efficient regions. So at – the last 6 weeks of the first quarter, we had a special pricing program for King Air east of the Mississippi. So we said, if you fly in the east of the Mississippi within these days and times, then we're going to offer a lower rate than we normally would under our programmatic offering. And what we saw was a significant double-digit increase in bookings. And then at the same time, with those additional bookings in those highly efficient corridors, we saw efficiency improvements across our fleet. So that was kind of our test case to say, a, will the customers and members respond to that more competitive rate? Are they price sensitive enough that if we drop it $100 an hour, $200 an hour versus our normal rates that they will bite? And secondly, hey, what are the effects that we see on our operational delivery? And we saw multi-point improvement in efficiency and put more hours, which translates to utility and better spreads our fixed cost. And then we did the same thing now with light jets and we saw the exact same reaction. So I think to the extent that we go out with a competitive offer that will be well received in the market, we think we will drive a lot more volume and activity into those areas. And then when you start to see that efficiency unlock come through, then you've got a real boost, both in terms of more utility, so covering your fixed cost, but also more profitable flying in general.
Okay. And the pricing change there was to the tune of a few hundred dollars in the hourly rate.
That's right. And we're still working on the exact final pricing that we're going to roll out for these new programs, but that will be released shortly in a matter of days, and we expect to go live with these new changes at the end of June. So we have about a 30-day notice period. And in that period, we plan to presell blocks into that new program, and we'll probably offer some additional incentive for that 30-day period just to try to accelerate our members and customers into that new program. And I think, look, you're aware of this. I think in the past, we had a little bit of a bad habit, where we'd announced program changes, pricing changes, rule changes. And in that 30-day notice period, we would drive block sales under the old regime, which really what that effectively did is that given that people have about, on average, 12 months to burn off the old rule set, it delayed the benefit of any of those changes that we made. So this time, we said, "Hey, we're not going to do that. We're not going to take one more hit on the old rule set. We're going to instead say, the old rule set's closed as we're announcing this...
As of now.
Yes. Well, it will go into effect in the next 24 hours, effectively. But what will happen then is that we will say we're going to presell those new program changes, which will then incentivize people to buy them, which will drive more of our members at an accelerated basis over to the new program, which is exactly what we want to do. Now we're not going to walk away from a member who has an existing block. So if you have an existing block that -- and you're flying in the Midwest, then until you burn through that block or you reach the expiry period of your current contract, we will honor it. But again, I think we'll do everything we can to try to move that transition along as fast as possible.
Yes. So the company has had the target of EBITDA profitability before the end of 2024 before these changes.
Yes.
Do these changes accelerate that? Or was that time line just starting to look like it had risk to it?
Actually, I'd say neither of those things. I mean, like as we contemplated this, we always said that that second circle in my chart was a core component of us getting there. So it's not that we did this in particularly in response to anything or us feeling like we're falling behind. This was always the core pillar of us getting there, cost actions, program changes, operational efficiency. I think this is the major step that underpins that and underpins our confidence and being able to deliver that in 2024 because -- and again, as I said, we didn't enter into this lightly. We were thoughtful and thorough around the analysis and taking our time over the last few months to really explore what it was going to take and what that would translate to in terms of the operational improvement. So I would say this is very much part of our journey. It's consistent and always been one of our circles since we announced that commitment. And it's just the next phase of us taking major steps along that journey to get to where we want to go.
Okay. I guess I struggle a little bit with why this change wouldn't move you to EBITDA profitable pretty much immediately. If Air Partner is profitable and there's going to be a higher -- there's going to be more Air Partner and then in the programmatic, you're eliminating the gray. And then in the blue, if you're able to reduce pricing unless -- if you're over pricing, unless everybody that's flying in that region is losing money, it would seem like the totality of that...
The component of that is that you got to take into account is the transition. So we have a number of blocks today that are still eligible to fly under a rule set in that gray area of the country. So until we burn those off -- I mean, again, as we'd say, depending on the size of the block, it's anywhere from 12 to 18 months generally that goes through. And obviously, every month, it comes down. But there's a little bit of like until you get through that transition and can start to fully redeploy your fleets and fully redeploy your maintenance operations, et cetera, you're not going to realize the full benefits of this. So if you ask me, "Hey, on the in-state of this fully implemented, and let's say that's 18 to 24 months from now, am I highly confident in significant profitability here?" Yes, I am. Because I think that the in-state, I have more conviction than ever based on the work we've done here. But I also know that we've got a period of time where we have to transition through that. And we're not going to walk away from the members that we have current commitments to and have current contracts. So that transitionary period is the reason that it takes us a little while to still get there.
That makes a lot of sense. And that's really how I meant it in terms of the sort of pro forma for the [ union ] model.
Yes. We think this is the most significant change in our business history, right? I think it's -- look, if you think about the first 10 years of Wheels Up, we were in growth mode. We were gaining market share. We were building the brand. We're building a membership base of over 12,500. There's a lot of decisions there that underpin that goal of growth. Now we're at a point where we can say, hey, we've got the scale, now we've got to be profitable, and that requires a different delivery model. And I think we're benefiting from all of the experience and the learnings and some of the challenges that we faced here and we're going to make smarter decisions now. We've already made some tough decisions over the course of the last 6 months. We're going to continue to do the right things, all with the lens of saying, hey, how do we get this business to a profitable state that's sustainable? And really, most importantly, how do we unlock the value of our scale. And the thing that we haven't talked about is if you move through that chart, the other 2 big things that are happening that we're working on, next week and a bit ahead of schedule, we're going to open our new member operations center in Atlanta, which will consolidate all of our member services and operational teams into one facility. We think that's a huge unlock for us in terms of just having everyone together under one roof, being able to talk and work together, tracking flights, serving our members, delivering the best service possible. That's a big step for us. And then the other piece that we previously talked about is that we currently still operate 5 different FAA certificates, which basically are policies and procedures and rules that we have to adhere to as we operate different components of the airline. We're in the midst of working with the FAA to consolidate those down to a single certificate that we hope to achieve toward the end of this year, maybe early next year at the latest, which also gives us the ability to just unlock a lot of the efficiency of that scale. So I think as we get cost into the right position, the program changes well positioned, do the right things in terms of our member services center and then get those certificates collapsed, then we're really in a position to have something that's going to operate much more efficiently and serve our members in a much better way.
Yes. Okay. That makes up. What are the biggest pieces of the cost bucket that are still to be done?
I think -- look, we've attacked the SG&A. We made good progress there. I think now most of it is on the cost of operations. And I think a lot of that is intertwined with those things I just described, right? Getting consolidated member services, getting the certificates down to 1. If you think about today, each FAA certificate has a Chief Pilot Officer, a Chief Training Officer, all of those kind of infrastructure things that are duplicative that we can, again, put together. And then I think the last piece is just saying, hey, once we truly understand this new programmatic model, what is our operational footprint that best supports that, which is going to be leaner and smaller and more efficient than what we have today.
Yes. Why can't that FAA certificate issue happen faster? Why does that take so long?
Well, there's 2 components of it. I'd say the consolidation process and the conformity of our planes and pilots have to be approved by the FAA. And there's a very specific and defined process that you have their approval. Obviously, we have a good relationship with the FAA. We're working closely with them. But ultimately, they own that decision, and they own the time line. So we're not in a position to dictate their timing. But again, we're making good progress there. But along the way, there are a lot of things that we can go ahead and harmonize even in advance of that final certificate decision, and we're making good progress on that.
Okay. What's your level of concern, if any, that this strategic pivot, if it's fair to call it that, I mean, it sounds like to some way, this was -- to some degree, this was always part of the plan. But I guess what's your level of concern that there's any level of brand damage or customers that have frustration with us. If I'm in the Midwest and I've been living under the programmatic or anything of that nature?
Yes. I mean, look, I think we have to acknowledge that there's some risk. I mean if you're -- if 80-plus percent of your flights are within that area, and you relied on the programmatic offering in the past, and we're no longer going to offer that. So now that being said, as we started, that's generally loss-making business for us. So losing that, although we never want to lose a member or a customer, that's not revenue that I want or that we can afford to have at the moment. And what we will say to them is that we have a terrific track record and capability with our Air Partner team for delivering white glove specialized service and we will look to do that and offer them a market competitive price with an exceptional service experience that hopefully will still be attractive to them. But it has to be at a rate that's profitable for us. And that's the lens at which we're viewing it from.
Okay. Can you talk us through the 1Q cash flow? And the cash from op burn was relatively high. I know there's seasonality. I know there's a lot of moving pieces. And so just given where the balance sheet is, what was in there that's abnormal? Is that in any way? Does that in any way resemble the run rate from here through the rest of the Year? What can we look forward for cash flow...
Yes. I mean, look, certainly, cash is the topic is on everyone's mind. We're not in any way ducking that or not being thoughtful about it. I would again say that we were very thoughtful and deliberate about these changes, and we certainly considered the implications of them as that may impact cash in different ways. So a couple of things. We ended the first quarter with about $363 million of cash. That's down certainly from the year-end. The first quarter is always our seasonally highest cash burn in our lowest block quarter. So if you think about what that means, we have less new block inflows coming through in the first quarter, typically as a result of the fourth quarter always being our biggest block inflow. So a lot of our members and their contracts renew at the end of the year in the fourth quarter. So generally, we see really strong block inflows there. And as a result, then there's usually a lighter renewal level in the first quarter. So we always see generally lower kind of cash flow or higher burn in Q1, that typically improves through the course of the year, blocks increased through the year as well. If we think about specifically this first quarter, a few things that happened that don't repeat through the year. So annual bonus payments are in the first quarter. The cash severance cost of the $30 million SG&A cost out that we announced on March 1 hit in the first quarter. And some of the build costs for the MOC, the member operations center that's opening next week, we also felt in the first quarter. Neither of those -- none of those are run rate items. So we wouldn't expect to see this continue through the course of the year. The other thing that we're excited about is that we think as we go out with this new offer, it's going to be highly competitive, and that gives us an opportunity to drive more block in flows and maybe to a greater degree than we would typically see in the second quarter and into the third quarter as a result of the new offering. But most importantly, it will be in the areas where we want to win and that we can do so profitably. And then we also announced yesterday that we are considering and evaluating the disposition of certain noncore, nonstrategic assets that would yield some additional proceeds. And the last piece is, as we think about this new programmatic offering. Because one of the things that's critical for us is as we position planes in these more targeted geographic areas, making sure we got the right pruning that fleet a bit and having some aircraft sales that will translate again to some level of liquidity. And if you think about where we are, our -- the fair value of our aircraft is substantially above kind of the book value and the principal value of our debt. So there is equity value there that can be realized. So what I would assure people is that we were thoughtful when we made this decision to say, hey, what are the things that we need to ensure that we have to kind of play through and manage during that transitionary period, and we continue to work hard on making sure that we're improving profitability every quarter and then reinvest in how we manage our cash. And to just to give a couple of stats I know there's some swirl yesterday, some CNBC articles and other things that were particularly helpful to us. But we brought in a substantial amount of blocks, well over $1 million of blocks yesterday. We sold almost $1 million by lunch time today.
On the old program.
On the old program, but after these announcements, like we're still getting people that have high confidence in us, and people are already asking, hey, when can I start putting new blocks in to the new program.
Usually have like a 2-day window where the old block is still available.
That's right. Yes. And -- but again, we're having some thoughtful conversations about where we're selling those. So -- I understand. But like we're not out flogging the Midwest for new blocks. Like we're guiding people in the right direction there. So most of these blocks are coming in, in the right places and where we want them to be. And I would say the other interesting stat for us yesterday, again, with all the noise and stuff that was going on, was our bookings, our flight bookings were up 25% year-over-year yesterday, and it was the largest bookings day of the year.
Why?
Again, I think we're seeing volume increase. We're seeing some of these pricing programs in the light jet that we've rolled out, being really attractive. And I think in general, I think it's a show of support in many ways, like our members are sticking with us, and we're still selling through everything that's going on. So like I felt really good about that like this morning. Like I mean, when we talk to the sales team, you said, okay, hey, I know you got a lot of questions and stuff, but like what's the reaction and people are saying, "Hey, still scheduling flights. And they're booking with us and we continue to very much appreciate the loyalty of our members which has really held up.
Okay. So 2Q, you would expect to potentially be a strong block quarter even though the month of May will kind of be off on the old program and then the new program launches June...
Into June. So like between May this week and, let's call it, June 26 or so when we expect it to go live, that will be a presell period. So we're still selling blocks in the period.
But so 2Q, 3Q, you're antiaging have the potential to be stronger block quarters than they've been in the past because you're launching this new program.
Well, what I would say is stronger than they would have been otherwise. If you remember back to last year, in the second quarter, we did a big price increase. So we probably drove the blocks there. But if you looked at a more normalized level and I think if you look at the trend that we've been seeing in the last few months, I think this has an opportunity to improve the attractiveness of our offering, and that will be helpful to our block profile.
And then 4Q is seasonally...
Seasonally higher because so many of the existing block members contracts come up for renewal.
So is the thought process -- is it the is the right framework -- you just ended -- you just reported the end of 1Q with the cash balance that you have. 2Q, 3Q here have some block activity. 4Q has heavy block activity. You're maybe going to sell some airplanes to maybe use some other assets, and you get to a profitable place in the next kind of 12 months, maybe a little bit longer depending on exactly how we define exiting 2024. And therefore, you can organically make it through this transition period, or is it more likely that you would also need to raise additional capital in that period?
Yes. I mean we don't have any specific plans to raise capital right now. I mean I think some of that will depend on how things go over the next few months, how this new offering is received by the market and some of the progress on other things that we've got in front of us that we've laid out. But I mean, look, that being said, we've got a relatively low level of leverage on our fleet today. We have some opportunity to put more on if we needed to. And we'd certainly consider that if that came to the point that it was needed. But at this point, we're trying to get these program changes out, continuing to take cost out, do some of the other things I described and see how we go.
Okay. All right. Well, with that, we just ticked down to 0. So we can stop there. So Todd, thanks so much for being with us.
Yes, appreciate it. Thanks.
It's great to see you. Thank you.
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