As Wheels Up completes a year to forget, lower demand may provide the tailwind it needs to achieve its 2024 profitability goal
Increasing expenses continued to plague Wheels Up in 2022 as it recorded record revenues and higher prepaid block sales, countered by growing losses. It also made another executive change and announced discounted pricing on its King Air 350 fleet, a potential sign of things to come.
Wheels Up 2022 Financial Results and 2023 Guidance
First, some numbers.
Revenues in Q4 increased 18% to $408 million. Full-year revenues jumped 32% to $1.58 billion.
However, the company is guiding $1.55-$1.6 billion in revenues in 2023, essentially flat.
Net loss in Q4 increased from $77 million to $239 million. The results were driven by a non-cash impairment charge of $132 million related to its acquisitions over the past several years.
However, the full-year net loss increased from $197 million to $508 million. Without the impairment, full-year net loss for 2022 was $376 million.
Adjusted EBITDA loss in Q4 narrowed from $46 million to $44 million.
For 2022, the Adjusted EBITDA loss increased to $185 million from $87 million.
For Full Year 2023, Wheels Up is projecting a narrower $110-$130 million EBITDA loss.
It still forecasts Adjusted EBITDA profitability sometime in 2024.
Wheels Up cash position
A key highlight for members who advance the company large deposits, up to $400,000, with the promise of future flights, is that Wheels Up still has plenty of cash.
Cash and cash equivalents were $586 million at the end of 2022, up from $545 million at the end of Q3 2022.
That was down from $785 million at the end of 2021.
On the outflow side in 2022 were its $107 million purchase of U.K.-based Air Partner, $15.5 million to buy operator Alante Aviation, and the $58 million purchase of leased aircraft from Textron, net of maintenance credits.
Adding cash was its $259 million sale and issuance of equipment notes.
Another key is that Wheels Up is maintaining its industry-leading membership levels, although they have been running flat for the year.
Active Members increased 5% to 12,661 year-over-year, although they were equal to Q3 and Q2 of 2022 (see table below).
During its Q4 earnings call, Chairman and CEO Kenny Dichter admitted headwinds as demand for private flying demand ebbs.
“We did see a little bit of slowing as we came through the end of the fourth quarter,” Dichter told analysts.
Wheels Up Membership (as of Dec. 31, 2022)
According to The Jet Card Report by Private Jet Card Comparisons, Wheels Up continues to be the most considered private aviation provider, with 41.2% of respondents saying they either bought from or contemplated the company’s membership options.
It also had the largest share of first-time customers, according to the research, benefitting when competitors such as NetJets, Sentient Jets, Flexjet, Jet Linx, Airshare, and others stopped taking new members for parts of 2021 and 2022.
Prepaid Block Sales – deposits by Core members – increased 12% to just over $1 billion in 2022.
That was up from $897 million in 2021.
Q4 in 2021 and 2022, as well as Q2 in 2022, were boosted by announcing program changes in advance.
It gave members and new joiners a window to sign-up under old terms before implementing higher capped rates and stricter policies.
Wheels Up Block Sales by Quarter (2021-22 by Quarter)
|Period||Block Sales (in millions)|
|Q4 2022||$ 346|
|Q3 2022||$ 151|
|Q2 2022||$ 333|
|Q1 2022||$ 175|
|Q4 2021||$ 540|
|Q3 2021||$ 172|
|Q2 2021||$ 116|
|Q1 2021||$ 69|
Still, a look at deposit sales for H2 of 2021 ($712 million) versus H2 of 2022 ($497 million) speaks to the downturn in demand from record levels.
At the same time, there is an influx of new entrants.
More operators and brokers want to play in the jet card and membership arena now that the supply issues have receded.
Honoring contract terms
As demand hit record levels, Wheels Up didn’t follow others by changing contracts mid-term.
Others unlocked hourly rate guarantees, imposed blackout dates when capped/fixed rates wouldn’t be honored, expanded peak days, increased daily minimums, and extended callouts.
Instead, Wheels Up even gave customers the opportunity to lock in existing terms with additional deposits.
It served Wheels Up well. The cash kept flowing in.
However, by extending its more generous guarantees up to 30 months, that meant Wheels Up has been at the tail end of gaining benefits of increased pricing, higher daily minimums, and longer callouts.
CFO Todd Smith says the company is now seeing the benefit of its three price hikes from December 2021, June, and December 2022.
As time moves forward, those benefits will increase.
On-Fleet vs. Off-Fleet
Wheels Up is a hybrid program.
It uses a fleet of aircraft it owns and leases (referred to as 1P), a fleet it manages for owners (2P), and third-party charter operators (3P).
According to its February 2021 Investor Day presentation (see below), 1P has the highest profit margins, 2P follows, and using third-party operators is the lowest margin.
With charter demand slowing, it means Wheels Up will be less reliant on third-party operators.
When it needs that resource, it will be buying under better terms.
Smith noted, “Today, in a more balanced market, we are adjusting and renewing (third-party) contracts at reduced rates with shorter commitment, which improves margins.”
Reliability = Profits
Smith told analysts, “We are continuing to overhaul our internal and external maintenance operations to improve aircraft availability. We have further strengthened our preventative maintenance program so that our aircraft will have greater operational readiness, especially during peak times. And we are adding additional internal labor capacity while consolidating and restructuring agreements with third-party providers to reduce cost and aircraft out-of-service times.”
He added, “We anticipate these and other improvements will increase our fleet availability by nearly 10% in 2023. A well-functioning maintenance operation supports the fuller utility of our aircraft and significantly reduces the need for expensive recovery flights, which can negatively impact member experiences and our financials.”
Several guaranteed availablity, fixed-rate providers tell me they were losing as much as 200% of flight cost on recovery flights during the peak of the demand surge.
As an example, one provider said a flight booked for $25,000 cost him around $50,000 to recover.
At the last minute, the only replacement aircraft was a large cabin jet.
Wheels Up has previously said they were upgrading members due to not having the size aircraft they had reserved.
In those cases, Wheels Up was absorbing the high operating or buying expenses.
During the peak, operators and aircraft owners whose airplanes were available for charter in managed fleets knew they had the jet card and fractional providers up against the wall. Some extracted maximum pricing.
King Air pricing
Smith told analysts fleet utilization will increase by offering attractive pricing on low-demand dates where it has fleet and member density.
Since the middle of February, it has been testing a King Air promotion.
It is offering flights on its turboprop fleet at $4,195 per hour, about 20% less than the standard capped hourly rates.
The pricing is limited to flights arriving and departing from Maine, New Hampshire, Vermont, New York, Connecticut, Rhode Island, Massachusetts, New Jersey, Delaware, New Jersey, Pennsylvania, Maryland, Illinois, Indiana, Ohio, West Virginia, Virginia, Kentucky, Tennessee, North Carolina, South Carolina, Georgia, Alabama, Mississippi, and Florida.
By targeting flyers East of the Mississippi, Smith says Wheels Up cuts down on costly empty leg repositioning flights.
The company has also implemented fleet management profit and loss by aircraft type.
Smith says, “We are establishing specific fleet performance teams who have a dedicated P&L. They are empowered to make decisions on a more granular level that optimizes the performance of each aircraft type,”
Expect more deals if you can fly on lower-demand dates and between airports that don’t require long repositioning flights.
With supply less of an issue, Wheels Up is again focusing on its entry-level Connect program.
The program doesn’t have the same capped rate and availability guarantees as its Core memberships.
It instead competes with XO’s dynamic pricing memberships and on-demand charter brokers.
Smith says an increase in Connect member flying will “help” profitability.
The Connect joining fee is under $3,000, compared to the around $17,500 for Core memberships.
In other words, it attracts less frequent flyers. Since there are no rate or availability guarantees, Wheels Up is also assured of making money on every flight.
Wheels Up again used its earnings call to let out executive changes.
Mark Briffa is now Chief Commercial Officer for the company overseeing global commercial and sales efforts and reporting to Dichter.
He was CEO of Air Partner before Wheels Up acquired the U.K.-based company and will continue to oversee that group, based in London.
Ken Napolitano, Chief Sales Officer since 2018, has left the company.
A spokesperson declined to comment further.
Reasons to be Optimistic
If you want to view the glass as half full, there are some good reasons to think Wheels Up is flying out of the storm.
Firstly, its owned/leased fleets of King Airs and Citation Xs enable it to offer discounted pricing on short hops and coast-to-coast flights that make it a price leader for those missions.
It is also continuing the process of merging operations and certificates from the half-dozen operators it acquired.
Its Atlanta operations center, due to open later this year, will help make operations more efficient and dependable.
Bringing more maintenance in-house should mean better availability of its own fleet.
It also means fewer loss-making recovery flights when there is a mechanical.
With the surge of demand no longer an issue, Smith says it is getting better pricing when it goes go off-fleet.
The melding of its various operators will mean more scheduling efficiency and fewer repositioning legs.
That has also meant narrowing the primary service area where its capped rates apply.
Last Fall, it removed Los Cabos and cut to select Canadian cities where the capped rates apply.
Smith says Wheels Up is focusing its marketing on customers where it has fleet density, making its operations more efficient.
Clearly, Wheels Up has a lot more work to do.
Smith says bookings started slowly in January, but March has picked up.
The bottom line is Wheels Up is projecting flat revenues in 2023, which means it will need to drive profits via efficiency and a sharper focus on costs.
As well as trimming the capped rate service area for its Core members, it also removed the Caribbean and Mexico one-way fixed pricing from Air Partner’s jet card program.
In other words, Wheels Up is following others, eschewing unprofitable aspects of the business. At the same time, it risks losing share-of-wallet from customers who are impacted.
Smith says the company is scaling back the scale of its signature events.
It’s unclear whether slicing $30 million in salaries from non-operational headcount will be enough, although executives say there aren’t plans for more layoffs.
Wheels Up has previously said it retains around 90% of Core members who make a deposit, typically starting at $100,000.
Wheels Up doesn’t break out Core versus Connect members.
However, one could extrapolate that Wheels Up loses about 1,000 of those high-spending members per year. There isn’t a long list of providers who have that many members in total.
In a market where demand isn’t growing, but there has been a net increase of 17 jet card and membership providers since the outset of the Covid pandemic, competition will remain fierce.
Briffa is certainly jumping into the hot seat.
While Dichter tells Private Jet Card Comparisons there is “no change to our marketplace strategy,” he adds, “We are focusing our near-term technology efforts on fewer things that have a more direct impact on the customer experience.”
That’s a good thing.
It’s still far from certain that the long tail of operators can be digitized like Airbnb.
Wheels Up members, who spend six figures a year to fly, want reliability.
It’s been a challenge for the industry, including Wheels Up.
Last year, the percentage of Private Jet Card Comparisons subscribers who say they have had cancelations, delays, and service letdowns in the previous 12 months more than doubled from 21%-to-44%.
At the same time, hourly rates jumped 21% in 2022.
Higher prices and poorer service for a clientele of UHNWs do not make a tasty recipe.
Wheels Up’s program offerings, pricing, and policies are just fine. The way they honored the terms of their agreements should be respected.
Blocking and tackling are now the order of the day.
Smith noted one improvement. “We increased the level of automation in our billing function that enhances accuracy and timeliness of customer invoices and increases the productivity of our back-office teams,” he says.
Less billing mistakes is the type of thing many private flyers will appreciate.
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