You're gonna go through a few to start?
Yeah.
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?
Yeah.
Okay. I'm gonna turn it over to Todd. He's gonna go through a few slides here just to kinda kick things off, then I got a lot of questions.
All right. Great.
Yeah.
Thanks, Noah. We 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 nine months ago. You know, we're very fortunate to be in a position where we've built a strong brand. We've grown the scale. We're over, you know, $1.6 billion in revenues last year.
We're very much now in a position where we're focused on saying, "Hey, how do we deliver profitability from this franchise?" That's what we're really focused on. If you, if you look at a little bit about our journey and our goals to get there, we've really framed it with three major pillars. The first is cost reductions and more cost discipline. The second is pricing and program changes. Then the third is around operational efficiencies and really unlocking the scale of a business that is of our size. 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.
Then we have access to over 1,200 aircraft that are third-party owned and operated, but safety verified and vetted to our standards. As we think about where we are on this journey, I'd say we made a couple of significant announcements over the course of this year. On March 1st, 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. You know, 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 two quarters.
We're making real progress there, with more to do, and more that we're committed to doing through the course of this year. Yesterday was probably our most significant announcement to date 'cause we announced a major change to our program and product offering. Historically, our businesses has largely generated revenue from offering a nationwide guaranteed availability program that provided cap rate protection for the members who join, you know, 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.
I think, you know, what we announced yesterday is that we're 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. For our guaranteed programmatic offering, we will concentrate that to the East Coast and the West Coast. Then for the middle parts of the country and the Pacific Northwest, we will service that on an on-demand charter basis. I'll show you that in a little bit more detail on the coming slides. 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. All that translates into this third bucket.
I think, you know, it's all about for us, how do we leverage the network density? How do we use dynamic pricing to shape demand? How do we improve the utility and the efficiency of our fleet? We've worked on a number of things over the last six to nine 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. 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, it just gives you a little bit of a graphic on the map. The dark blue regions are the areas that we're gonna continue to service programmatically. This 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.
I think if you think about the private aviation model, you know, about a third 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. I think if we're honest about, you know, the last couple of years, we ended up in a situation where often we were adversely selected. 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.
Our view now is we're gonna 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 gonna walk away on a programmatic basis from some of that revenue in the gray, which is about 20% of our total flight revenue. We expect to recapture some of that, but recapture it in an on-demand charter way. If you think about one of the components of our business, you know, that we acquired a little over a year ago, with 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, one of our most successful division within the company. We'll leverage their capability and increase that capability, invest in it to service the areas here that will not be covered programmatically. You know, 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 since 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. In each of those cases, we saw significant improvement in terms of booking rates as well as the efficiency and utility of our fleet.
We feel very good about the fact that we validated a lot of our assumptions and hypothesis here. 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. You know, we feel really good about the progress we're making on cost. You know, yesterday was a huge step forward on the program changes.
You know, we also announced a new program yesterday with Delta. Delta's 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. The program we announced yesterday was really designed to target corporate customers. Delta has a huge program with their corporate customers that they offered, you know, 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, you know, pay a membership fee for, et cetera, at preferential pricing. 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. You know, 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. Appreciate that.
Sure.
A lot going on.
For sure.
Were the or are the blue shaded areas there, the East Coast, West Coast areas, in the last two years or, you know, in 2021, 2022, I guess?
Yeah.
Were those profitable? Were those EBITDA profitable?
They're more profitable than the gray, for sure. 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. We certainly have a lot of volume, and again, it's 80% of our flight revenue are in those, in those areas, and that's more profitable flying for us certainly than the gray. 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 in an on-demand basis, then that's, you know, incremental and additive to that profitability journey that we have.
Yeah. I guess it was... You said Air Partner is very profitable.
That's right.
Air Partner has positive EBITDA.
That's right.
The gray area definitely had negative EBITDA.
That's right.
Did the blue area have positive EBITDA?
Yeah. I mean, in certain regions and certain routes, absolutely. In other regions, not so. 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.
Okay.
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 gonna offer there is that asset-light model where we go out and say, "Okay, if we can get a plane and it costs, you know, $7,500 an hour, then we're charging that plus a margin to the customer." By its definition, it would all be profitable on a go-forward basis.
Okay. The blue was more profitable, but it still needed work on all of the...
For sure.
efficiency items that you were describing.
Yeah.
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. You know, if you think about the base of cost, if you think about the, you know, the crewing, the maintenance, the scheduling, all of those things, this is a decidedly simpler model as we get to get this fully transitioned.
Yeah.
What it also does is, even in the places that we may have been positive, it will improve those margins by virtue of us, you know, 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.
Yeah.
It's an accelerator in those regions and it moves us from negative margins to profitable margins in the gray areas.
Yeah, okay, that makes sense. You alluded to test running these changes.
Yes.
Can you just elaborate on that? How do you do that?
Yeah. The test run was really around can we see a real response from our members and customers, for, you know, for some more dynamically priced and discounted per hour rates in these more efficient regions.
Okay.
At the last six weeks of the first quarter, we had a special pricing program for King Air east of the Mississippi. We said, "If you fly in the east of the Mississippi, within these days and times, then we're gonna offer a lower rate than we normally would under our programmatic offering." What we saw was a significant double-digit increase in bookings. At the same time, with those additional bookings in those highly efficient corridors, we saw efficiency improvements across our fleet.
Mm.
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-
Mm.
... that if we drop it, you know, $100 an hour, $200 an hour versus our normal rates, that they will bite? Secondly, hey, what are the effects that we see on our operational delivery?
Mm.
We saw multipoint improvement in efficiency and put more hours, which translates to utility and better spreads our fixed cost.
Right.
We did the same thing now with light jets, and we saw exact same reaction. I think, you know, 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. When you start to see that efficiency unlock come through, then you've got a real boost-
Yeah
... you know, both in terms of more utility, so covering your fixed cost, but also more profitable flying in general.
Okay. the pricing change there was to the tune of a few hundred dollars in the hourly rate?
That's right. We're still working on the exact final pricing that we're gonna roll out for these new programs, but that'll be released shortly ... in a matter of days. you know, we expect to go live with these new changes at the end of June.
Okay.
We have about a 30 day notice period, in that period, we plan to pre-sell blocks into that new program, 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. You know, I think, look, you know, you're aware of this. I think, you know, in the past, we had a little bit of a bad habit where, you know, we'd announce program changes, pricing changes, rule changes, and in that 30 day notice period, we would drive block sales under the old regime.
Under the old... Yeah. Yeah.
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. This time we said, "Hey, we're not gonna do that. We're not gonna take one more, one more hit on the old, the old
Really how I meant it in terms.
Yeah
... the sort of pro forma-
Yeah
... for the new model.
We think this is the most significant change in our business history, right? I think it's, you know, look, if you think about the first ten years at Wheels Up, we were in growth mode. We were gaining market share, we were building the brand, we were building a, you know, 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. I think, you know, we're, you know, we're benefiting from all of the experience and the learnings and some of the, you know, the challenges that we faced here, and we're gonna make smarter decisions now.
We've already made some tough decisions over the course of the last six months. We're gonna 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?
Yeah.
Really, most importantly, how do we unlock the value of our scale? You know, the thing that we haven't talked about is if you move through that chart, the other two big things that are happening that we're working on, next week, and a bit ahead of schedule, we're gonna open our new Member Operations Center in Atlanta.
Mm-hmm
... 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. The other piece that, you know, we previously talked about, is that we currently still operate five different FAA certificates.
Mm-hmm
... which basically are, you know, 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.
Yeah.
I think as we get, you know, cost into the right position, the program change is 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 gonna operate much more efficiently and serve our members in a much better way.
Yeah. Okay. That makes sense.
Yeah.
What are the biggest pieces of the cost bucket that are still to be done?
I think You know, look, we've attacked the SG&A, we made good progress there. I think now most of it's on the cost of operations.
Okay.
I think, a lot of that is intertwined with those things I just described.
Right.
Right? Getting, you know, consolidating member services, getting the certificates down to one. If you think about today, each FAA certificate has a Chief Pilot Officer, a Chief Training Officer, you know, all of those kind of infrastructure things that are duplicative that we can, again, put together. 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 gonna be leaner and smaller and more efficient than what we have today.
Yeah. Why can't that, FAA certificate issue happen faster? Why does that take so long?
Well, there's two components of it. I'd say the consolidation process and the conformity of our planes and pilots has 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. Ultimately, they own that decision, and they own the timeline, so we're not in a position to dictate their timing. Again, we're making good progress there. Along the way, there are a lot of things that we can go ahead and harmonize-
Mm-hmm
... 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-
For sure.
... to some way some degree of 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, you know, customers that have frustration with this if I'm in the Midwest and I've been living under the programmatic model or anything of that nature?
Yeah, I mean, Look, I think we have to acknowledge that there's some risk. I mean, if 80% plus of your flights are within that area and you relied on the programmatic offering in the past, then we're no longer going to offer that.
Yeah
That being said, as we started, that's generally loss-making business for us.
Right.
losing that, although we never wanna lose a member or a customer-
Mm-hmm
that's not revenue that I.
Right
... you know, or that we can, we can afford to have at the moment. What we will say to them is that, you know, 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. It has to be at a rate that's profitable for us, and that's the, that's the lens at which we're viewing it from.
Yeah. Okay. Can you talk us through the 1 Q cash flow?
Sure.
you know, the cash from op burn was relatively high. I know there's seasonality. I know there's a lot of moving pieces.
Yeah.
just, you know, yeah, 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?
Sure.
What can we look for for cash flow?
Yeah, I mean, look, certainly, cash is a topic that's on everyone's mind. You know, 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, is that that may impact cash in different ways. You know, so a couple things. You know, 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 and our lowest block quarter. If you think about what that means, you know, 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 inflows.
A lot of our members and their contracts renew at the end of the year in the fourth quarter. Generally we see really strong block inflows there, and as a result, then there's usually a lighter renewal level in the first quarter. We always see generally lower kind of cash flow or higher burn in Q1. That typically improves through the course of the year. Blocks increase through the year as well. If we think about specifically this first quarter, you know, a few things that happened that don't repeat through the year. You know, 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 1st hit in the first quarter.
Some of the build costs for the MOC, the Member Operations Center, that's opening next week, we also felt in the first quarter. None of those are run rate items, we wouldn't expect to see those 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 gonna be highly competitive, and that gives us an opportunity to drive more block inflows 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. Most importantly, it'll be in the areas where we want to win.
Yeah
... and that we can do so profitably. Then, you know, we also announced yesterday that we are considering and evaluating the disposition of certain non-core, non-strategic assets that will yield some additional proceeds. The last piece is, as we think about this new programmatic offering, we're in a position where we will re-evaluate our fleet size. 'Cause one of the things that's critical for us is as we position planes, you know, in these more targeted geographic areas, making sure we got the right fleet size to ensure the right level of utility on them. That'll likely result in us pruning that fleet a bit and having some aircraft sales that'll translate again to some level of liquidity.
you know, if you think about where we are, the fair value of our aircraft is substantially above kind of the book value and the principal value of our debt. There is equity value there that can be realized. you know, 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?" We continue to work hard on making sure that, you know, we're improving profitability every quarter and that we reinvest and how we manage our cash. To give a couple of stats that...
You know, I know there was some swirl yesterday, some CNBC articles and other things that weren't particularly helpful to us. You know, we brought in a substantial amount of blocks, well over $1 million of blocks yesterday.
Hmm.
we sold almost $1 million by lunchtime 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.
Yeah
... to the new program?" yesterday-
You basically have, like, a two day window where the old block is still available.
That's right. Yeah. Again, we're having some thoughtful conversations about where we're selling those.
Yeah. I mean,
Yeah. I mean, I understand, but, like, we're not out flogging the Midwest, you know, for new blocks. Like, we're guiding people in the right direction there. Most of these blocks are coming in in the right places and where we want them to be.
Yeah
... 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.
Hmm.
It was the largest bookings day of the year.
Why?
Again, I think, you know, we're seeing volume increase. We're seeing, you know, some of these pricing programs on the light jets that we've rolled out being really attractive.
Yeah.
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. Like, you know, I felt really good about that, like, this morning. You know, like, I mean, when we talked to the sales team and said, "Okay, hey, I know you got a lot of questions and stuff, but, like, what's the reaction?" People are saying, "Hey, still scheduling flights.
Yeah.
They're booking with us and we continue to very much appreciate the loyalty of our members, which has really held up.
Okay. 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.
At the end of June.
Yeah
... between May, you know, this week and let's call it, June 26th or so when we expect it to go live, that'll be a pre-sale period. We're still selling blocks in that period.
2Q, 3Q, you're anticipating 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.
Okay.
you know, if you remember back to last year, in the second quarter, we did a big price increase.
Right.
we probably drove more blocks there.
Right. Right. Yeah.
If you looked at a more normalized level.
Right
I think if you look at the trend that we've been seeing 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.
4Q is seasonally strong.
Seasonally higher because so many of the existing block members' contracts come up for renewal.
Is the thought process or is the right framework? 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.
That's right.
You're maybe gonna sell some airplanes. You're maybe gonna sell some other assets. You get to a profitable place in the next kinda 12 months, maybe a little bit longer, depending on exactly how we define exiting 2024.
Right.
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?
Yeah. 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. I mean, with 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. We'd certainly consider that if that came to the point that it was, it was needed.
At this point, we're trying to get these program changes out, continuing to take costs 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 zero.
Perfect.
We can stop there. Todd, thanks so much for being with us.
Yeah, appreciate it.
Appreciate it.
Thanks so much.
Great to see you.