If the stock price is the vote of Wall Street, the third-quarter financial results of Wheels Up with higher losses due to higher expenses despite higher revenues is bad news.
That said, I’m not sure there is much bad news for Main Street, that being Wheels Up’s customers. At least not yet. Still, there are significant challenges ahead.
Let’s start with the Q3 results.
Revenues for the quarter were up 55%, from $195 million to $302 million compared to 2020. However, the cost of sale increased 65.5%, and other costs, including technology sales and marketing, and administration, all grew faster than revenues.
The bottom line was operating income from operations went from a $26 million profit to a $69 million loss. The year-to-date loss increased from $33.4 million to $120 million.
By the same token, revenue grew for the first three quarters increased from $485 million to $849 million. Some of that can be attributed to its January acquisition of Mountain Aviation.
There is plenty of liquidity. Over $500 million in cash and very little debt.
Getting lost is how far Wheels Up has come in a short period. Speaking at Revolution.aero in San Francisco just 37 months ago, Wheels Up founder Kenny Dichter said he hoped to reach $400 million in revenues and 5,000 members by the end of 2018.
Its current guidance is for 2021 revenue is just a bit over $1.1 billion.
In 2018 Dichter added, his goal was to double members to 10,000 in the next “three to three-and-a-half years.” At the end of September, Wheels Up had 11,375 active members.
Earlier in 2018, the company added its first Citation X, its first aircraft that had nonstop coast-to-coast range. Previously its fleet consisted of King Air 350i turboprops and Citation Excel/XLS midsize jets. It now has over 50 of the super-midsize jets.
Back then, Wheels Up didn’t even operate aircraft. It sold memberships and outsourced operations of its fleet to Gama Aviation Signature.
Today, Wheels Up Experience is neck and neck with Directional Aviation’s Flexjet as the second-biggest operator charter and fractional aircraft in the world’s biggest market for private aviation.
The latest drop for Wheels Up’s stock price began before announcing its Q3 results.
Morgan Stanley initiated coverage with a sell rating. Analyst Brian Nowak wrote, “We see ~25% downside ($5.90 PT) as our deep dive into high-income households, and travel spend per household speaks to a relatively small TAM/runway (only top 1%+ of US households making at least $2.7mn+/year). This limits upside to our below Street estimates; we see negative revisions driving underperformance.”
That said, as of today, four analysts have Wheels Up a buy rating with two as a hold.
The average price target from the analysts is $10.65, ranging from $5.90 to $20, although several analysts dropped their target price. It closed yesterday at $5.78. Today’s intraday low reached a 52-week low of $5.58.
The negative outlook of Morgan Stanley appears to be that the addressable market of potential private flyers is lower than Wheels Up management forecasts.
While relevant to the stock price and something I disagree with for other reasons – I won’t get into the weeds – to readers of this website, I think the reaction is, why do I care?
Many existing Wheels Up customers don’t care about democratization. Its core customers spend around $80,000 per year flying. They may share flights occasionally, but for the most part, they are chartering the entire aircraft.
With Covid deaths still running over 1,000 per day in the U.S., airline connections from spoke cities still not robust, and the airline experience like being inside the ring at a UFC event, those who can afford it will continue to move to private aviation.
The percentage of subscribers to Private Jet Card Comparisons who tell us they are new to private aviation since the outbreak of Covid has remained between 47% and 50% during three surveys – in January, July, and September.
In other words, the reservoir of those who have the money to pay $5,000 to $20,000 per hour to fly privately continues unabated.
In the same surveys, 100% of new private aviation flyers say they will continue to fly privately post-Covid – whenever that is – with more than half saying they will do so regularly.
About a third of folks flying privately before the pandemic say they will fly more privately in the future compared to just 3% who say less.
The continued surge in demand was a core topic during Corporate Jet Investor in Miami earlier this month.
Wheels Up has plenty of room to grow with the folks who are wealthy enough to charter an entire aircraft on a regular basis.
According to The Jet Card Report 2021, Wheels Up is the most considered private aviation jet card or membership provider, but not it wasn’t the most purchased.
This is based on research with paid subscribers of Private Jet Card Comparisons conducted during the summer before other rivals stopped taking new members.
What’s more, jet card sellers whose customers account for about 40% of active users are not taking new customers. This same set was getting a similar 40% of new to private aviation customers.
While there are still around 40 companies selling fixed or capped rate jet cards with guaranteed availability, several of the biggest players are not in the market right now.
Fixed and capped rates are preferred by jet cardy buyers over dynamic pricing by a more than 20-to-1 margin. After all, you lock in a rate.
How would you like to rent office space where your landlord can change what you pay from month to month? That’s dynamic pricing.
This presents a big near-term opportunity for Wheels Up to gain share.
NetJets, which may have been the biggest player in jet cards based on my revenue estimates, has not only stopped selling cards to new members but is also not guaranteeing renewals.
Other players renewing current members have made significant changes to their terms – giving themselves the right to move departure times by as much as a day in either direction, limiting the number of flights they will book on a given day, and imposing rate hikes using 30-day notice provisions.
There are good reasons for making these moves and something I’ll address in a minute.
Dichter has been beating the drum lately; his proposition is based on getting you from point A to point B safely and efficiently, whereas NetJets, Flexjet, FlyExclusive, Nicholas Air, and several others are selling on-fleet programs.
In other words, his thesis is their growth is constrained by the aircraft they operate. When you buy their programs, you expect to fly on their fleet.
Wheels Up, on the other hand, is ramping up the use of third-party operators.
During the Q3 call, it said 40% of its off-fleet flying is being done via guaranteed revenue programs. That means instead of chartering an aircraft from another operator for a single customer flight, it rents airplanes for days, weeks, or months at a time.
While the operator maintains control, Wheels Up sets the schedule. At the beginning of the year, that GRP number was low single digits. This capacity is in addition to its 300 + owned and managed aircraft.
So, the Wheels up proposition is that it can continue to take in new members because it is not constrained to how fast it can acquire aircraft, new or used. It can just buy more time from other operators.
Still, Wheels Up has the same supply issues as the industry.
It turns out Wheels Up doesn’t have access to pixie dust.
However, Dichter, during the analysts’ call, used the current crisis – demand outstripping supply of aircraft positioned in the right place at the right time to underscore his vision of creating a digital Airbnb-like marketplace for private flights.
“The unprecedented demand that the private aviation industry is experiencing today and the related stresses it’s putting on the available supply further validates our strategy and the tremendous opportunity that exists in the market…The supply-demand imbalance that we are currently experiencing reflects the industry’s inability to scale with analog and inefficient processes. What is happening today makes it even more clear that we need to change the way things get done. That’s how we are going to unlock supply and enhance margins in the future.”
Company president Vinayak Hegde told listeners that some features of its digital strategy will be visible next year. “To give you an example, we may have a customer who has booked to arrive at Truckee Airport in Tahoe at 2:00 p.m. on Friday and another customer doing the search right now to leave Truckee at 1 p.m. on the same day. Our feature system will be able to, in real-time, recognize the opportunity, offer a benefit to nudge the searching customer towards a slightly later departure from Truckee so we can utilize a single aircraft for both flights, which will allow us to drive utility and efficiency in what is a win-win for everyone.”
Still, the nifty technology is not helping yet.
Dichter noted in addition to supply chain issues; Wheels Up is being hamstrung by not having enough pilots.
During the Q3 call, he said, “The biggest gating factor for us today is our ability to hire enough pilots to serve the rapid increase in demand and offset turnover. Unlike some other sectors facing labor shortages that can quickly train and deploy more workers, Wheels Up pilots receive extensive training and must meet stringent qualification requirements. The end result was that we could not fully crew our first-party fleet during the third quarter. This reduced the utility in our fleet versus our prior quarter. Pilot shortages were also experienced by many of the partners we work with. This resulted in less third-party aircraft available to us and increased cost in obtaining that supplemental lift.”
In addition to giving pilots equity grants, Wheels Up is improving meals, hotels, and other benefits management hopes will make it a preferred employer.
The company has been adding expense by upgrading customers to larger aircraft. That’s mainly because it can’t efficiently source the categories they book.
Several subscribers tell me they have enjoyed these upgrades. However, that goodwill is quickly lost when a cancelation means recovery flights five hours later or even the next day.
Again, this isn’t limited to Wheels Up but underscores everyone is operating in the same fishbowl.
Dichter told analysts block sales, deposits for future flights “were $172 million, up 120% year-over-year, a record for the third quarter. And the fourth quarter is positioned to be even stronger as existing members lock in current rates before our recently announced cap rate pricing increase to take effect on December 1.”
For September, Wheels Up had less competition. How long will NetJets, Sentient Jet, Jet Linx Aviation, and others put a hold on accepting new customers? My belief is they want to get through the storm of holiday travel and assess. Or at least they want to get a firm hold on holiday bookings and capacity. Again, I have more to say about this if you read on.
However, for the moment, Wheels Up has gone from a good program with plusses and minuses to a top choice.
Remember what I mentioned from The Jet Card Report 2021. Prior to other programs putting a hold on new members, Wheels Up was the most considered program, But, it only ranked fourth in conversion percentage.
Dichter told the analysts, “The most valuable brands in the world are built by doing the right thing for their customers over the long term and not taking shortcuts in the near term.”
Its new program does an excellent job for existing members. They can lock in current terms and rates for up to 24 months.
Wheels Up on paper has created a top-of-the-class offering in a market where on-demand charter prices are spiking. Other programs are adding more peak days, blackouts, longer callouts, and raising prices.
At a $200,000 deposit, there are only 20 peak days. At $400,000, there are only 10 peak days. For flyers who don’t have the flexibility to move their schedule – school holidays or business meetings – these deposits pale compared to the cost and long-term commitment of fractional ownership, which quickly becomes a popular alternative to cards as they become more restrictive.
Even the new program is quite generous. Rates increased, as did some daily minimums, but the peak day schedule stayed the same. If you deposit at least $200,000 you can fly right away.
The holidays are a time we see family and friends we haven’t seen for a while. This year might be even more significant if you weren’t traveling last year.
When Air Partner, Sentient, Jet Linx, and others imposed restrictions on holidays flying last month, and earlier, there was ire among their customers. They decided to take a hit early and give customers fair warning they didn’t have enough capacity to fulfill commitments.
I’m asked nearly daily by Wheels Up customers how they will handle the demand. Will they have enough airplanes? I have no idea. So far, Wheels Up has not made any moves except to urge customers to avoid busy travel days. I doubt that’s enough.
How many of their over 10,000 members will want to fly during the holidays? How flexible are they?
The interesting dynamic about private aviation customers is they are largely successful business people. “My company is not for sale, but everything is for sale.”
Wheels Up customers are good at negotiating. They do it every day. In large part, it’s how they accumulated enough money to fly privately.
According to WingX, top markets for Thanksgiving private flights include between New York and South Florida, Dallas and Houston, Los Angeles and San Francisco, and Los Angeles and Las Vegas.
We can assume Wheels Up probably has multiple customers scheduled to fly on those routes, possibly dozens of flights and hundreds of people.
One proposition of Wheels Up has been the market for jet sharing. It would certainly make sense if Wheels Up added shuttle flights on routes with large numbers of customers traveling.
I’m not thinking of private jets. I’m thinking about the types of VIP airliners sports teams, and political campaigns use – 737s and 757s configured in all business class layouts.
Instead of paying $30,000 or $40,000 for a private jet to fly your party of three or four, on a light or midsize jet would you agree to fly on one of these VIP airliners for a couple of thousand bucks? Having done it, I can say it was a unique experience. It was a lot of fun.
Certainly, Wheels Up could include transfers on both ends. Lay on some fancy catering, and have gift bags on every seat. Perhaps the kids would get a kick out flying on the same airplanes that NBA and NHL teams use. Make it an experience!
Then there is the example Hegde gave about the future. What if Wheels Up called you up and offered you a discount to move your flight from the Sunday after Thanksgiving to Wednesday. We have all gotten pretty good at working remotely.
And then I think about their partnerships – Porsche, Abercrombie & Kent, Landry’s. Would you move your flight a couple of days in exchange for a free month’s rental of a 911?
Maybe you would be a bit more flexible if you got a certificate for $15,000 off a luxury safari from Abercrombie & Kent? You may think it was worth shifting your travel plans a bit.
Or how about a $7,500 gift certificate at Palm Restaurant steakhouses, part of the Landry’s empire.
Wheels Up is already taking a hit on the expense side via upgrades and increased compensation for pilots. It’s paying more to third-party operators as well.
As we go into the holidays, I’m not sure what Wheels Up will do. However, it’s a chance to gain long-term loyalty.
Frankly, my best advice is to stay home. I expect for all providers it is going to be a mess, particularly for recovery aircraft.
Still, it will be interesting to see how Wheels Up handles holiday demand. I suppose it’s still not too late to impose restrictions on bookings and blackout dates. By the same token, it may also provide an opportunity for them to deliver.
This is a place they shouldn’t go short. Every extra dollar spent to make customers happy by compensating for changing their schedules will be a dollar well spent.
Referrals from current customers are traditionally the most significant source of new customers. Sentient says every new customer yields 2.5 referrals.
During CJI Dichter told the audience, “Our investors are long-term investors…They want a much bigger business, and they are willing to let us grow…If we have the opportunity to become 10 or 20 times bigger, that’s the investor we want.”
If Wheels Up figures out a way to keep its current customers happy in what is truly a challenging environment for a high-touch industry catering to UHNWs, it will have plenty of growth opportunities. The fact is new customers are spending more, faster. This is a chance to keep that momentum.
What Wall Street currently thinks about Wheels Up doesn’t really matter. How its customers view the company after the holidays will be more critical.