Q2 2022 Wheels Up Experience Inc Earnings Call

and our longtime members also continue to spend with us at a healthy click. We believe all of these factors provide a strong foundation for future revenue growth. While our top line was strong, we are cognizant of the uncertain macroeconomic environment.

We do not expect to be completely immune, but the good news is we believe we have several levers to drive continued growth. As industry demand normalizes, we have the opportunity to serve a broader set of customers at a wider variety of price points and begin to realize a greater benefit from our marketplace.

Specifically, we have strategically opened up available capacity to on-demand flyers through our mobile app, increased volume with our wholesale partners, and delivered targeted marketing to both prospective and existing customers. Ultimately, our goal is to make it easy for consumers to fly with us. We are committed to delivering for all of our customers, whether they are members, on-demand flyers, or wholesale partners.

All of these initiatives, coupled with demand from our existing customers,

give us confidence that we can deliver continued revenue growth this year despite geopolitical and macroeconomic uncertainty.

That said, we also appreciate that strong growing revenue ultimately must translate to profitability and we understand the need to make significant progress in that area.

Our technology efforts and member experience initiatives, while short-term headwinds to margins, will provide a strong foundation for long-term sustainable profitability. At the same time, we are also focused on prioritizing our investments.

and streamlining our costs. Our goal is profitable growth.

The key to that goal is technology. Maniac will provide an update on what our teams are doing to build our technology-enabled marketplace.

that will further aggregate the supply side of private aviation to drive scale, utility, and efficiency.

As mentioned earlier, our Air Partner acquisition is off to a strong start. We are exceeding our expectations on both revenue and profit. I want to commend the Air Partner team for doing a great job of bringing new demand onto our platform as their customers fly in North America. Air Partner also has several important supply relationships that have augmented our overall fleet capacity. At the same time, we are increasingly seeing our customers flying into Europe .

We are thrilled to have AirPartner on our team. With the benefit of a full quarter of the index fuel surcharge in Q3, the operational progress that you will hear about from Vaniac and a healthy contribution from AirPartner, we expect to show higher margins over the course of the year en route to positive adjusted EBITDA in 2024. Next, I'd like to take a moment to provide an update on our environmental initiative.

We launched our carbon offset program this June . Our approach to a sustainable future is multifaceted. Our partnership with Hertz is a perfect example. Our customers will get the best in class service they demand while also tapping into the most advanced electric vehicle network on the market.

We remain focused on how we can reduce the overall environmental impact of our operations on our aircraft and in our facilities. I look forward to sharing more details on these important initiatives in future earnings calls. Before I turn it over to Vinayak, I want to introduce our new CFO Todd Smith.

Todd has been with us for a little over a month, joining us from GE, where he held several senior financial roles, most recently as global head of financial planning and analysis.

taught us a strong background of driving operational rigor and financial discipline.

The fact that we can attract someone of his caliber is a reflection of the tremendous opportunity it wields us.

Todd will provide some color on how we expect to achieve sustained adjusted EBITDA profitability in 2024.

As always, I am thankful to our loyal members and customers for continuing to put their trust in us. I would also like to recognize and thank our entire hardworking team for their tremendous effort and commitment.

Now let me turn it over to Vinayak, who will provide more detail on our technology and operating initiatives.

Thank you Kenny. It's great to be with all of you today. Our large revenue base puts us in a strong position as we focus on our goal, delivering profitability.

We'll continue to emphasize on operational execution, data-driven decision-making, and delivering a premium member experience to help ensure the investments we're making have an impact at scale.

Let me start with an update on our technology accomplishments in the past quarter.

which are further strengthening the capabilities and the foundation of our platform.

Most noteworthy, as of early June , our entire fleet, first party, second party, and third party under GRP, all the aircraft where we have scheduling control are now all managed on up SMS. It took slightly longer than we anticipated, but I am pleased to announce it is complete. For the first time in wheels of history, we have a holistic view of our supplies that provides full visibility into our aircraft availability and maintenance.

and the schedules report pilots, including the vacation and training schedules.

This allows us to see upfront where there is a mismatch in demand and supply and adjust accordingly.

For example,

We can now optimize preventive maintenance schedules around peak travel days, allowing us to have more one peak capacity on days with the highest demand.

That same process applies to scheduling pilot training.

All these operational improvements.

result in a more efficient operation and help us improve utility as well as margins and profitability.

Now that our supply and operational schedules are up at the mess.

We are working to layer on optimization in machine learning technology to help manage our daily operations in real time.

This would be critical as we respond to last-minute customer travel changes, adverse weather, and anticipated maintenance events in various unforeseen circumstances that happen regularly.

While we can't always predict the adverse events that can affect our daily operations, our software and technology will enable us to instantaneously address those situations as efficiently and effectively as possible. Most importantly, this will enable better and safer operations and improve our overall customer experience.

Through improvements in our data architecture, we now have the ability to more accurately forecast demand than ever before. Through this forecast, we can reduce stress on our operations by using smart pricing to shape demand and influence customer behavior. As a result, we can maximize utility on our assets as well as deliver a more profitable flight schedule. This is extremely important during the days when our product is being reviewed.

Increased visibility from our data will also highlight windows of opportunity in our schedule where we can open up to wholesale markets for supplemental utility and revenue at a profitable margin. With all of our supply now on upper from us, this is just the beginning of using data and technology to optimize the relationship between supply and demand and managing the cost of fulfillment in a more fine-grained fashion to maximize profitability. There is still considerable work to do in scaling our platform and connecting it through

enables app users to directly manage

I can already change this in passenger lists, greatly reducing customer service interactions and high-pitched logistics while simultaneously providing a better customer experience that puts our members in control.

The added benefit is that our operations and member service teams can focus more on providing the best customer experience.

as our customers take advantage of self-service capabilities for working tasks.

The app will enable customers to create alerts that highlight available capacity for members and non-members alike, driving demand to low-use periods and routes which balances our fleet and increase margins.

Ultimately, with these benefits, we expect a higher percentage of our customers will book directly through the app and convert at a higher rate.

Our mobile strategy is to empower our members and customers through digitization and increased personalization and offer them an incredible and convenient service in the palm of their hands.

We are in the early innings of building a world-class app, but we have the building blocks in place to support our marketplace at scale. We are focused on executing what we can control, even when we are facing stiffer headwinds from external factors such as the well-publicized industry-wide pilot shortages that continue to persist. Pilot availability has three elements, hiring, training, and retention.

and we are taking steps to address all three. We continue to build a very compelling pilot value proposition to help us attract and retain the best talent in the industry.

They have exceeded our pilot hiring goals over the last 8 months.

with over 350 pilots hired so far this year.

In addition to our organic hiring efforts, we're also launching career pathway partnership programs to serve as a consistent source of future pilots.

Over the last month, we announced partnerships with Delta Airlines and the ATP Flight School, which we expect to help us ensure a robust pipeline of top talent.

While we have such a hiring pilot, training continues to be a bottleneck to improve dispatch availability.

with significant delay in the time it takes for a pilot to enter service once they have been hired.

That's why we made a concerted effort to secure additional flight simulator availability in order to get our pilots into service faster.

This will expedite our onboarding process.

give us a wider pool of active pilots to best serve our customers and drive more utility on our aircraft.

To address retention, we have launched the newest iteration of our Air Crew 360 program.

which highlights career development, total compensation, and work-life benefits.

We are focused on consistently improving the career opportunities and the quality of life for our pilots.

He strives to be the employer of choice in private aviation and a place where pilots can enjoy long rewarding careers.

While we continue to make progress on pilots, I am pleased to report our maintenance capabilities have improved significantly due to strong technician hiring and improved parts inventory management.

We continue to invest in our internal maintenance capabilities, allowing us to better control our return to service times and schedule maintenance at a lower labor cost.

We are on track to boost our mobile service unit capacity by over 50% this year, providing faster response time to address unscheduled maintenance at remote airports.

Given the large number of airports we serve, this is a critical capability.

In June , we augmented our Operation leadership team with the hiring of Rob Katz as the EVP of heat operations and infrastructure.

Bob was formerly the president of Amaro Holdings and tried to get the president of Fleet Send Airlines at Standard Aero.

Ross leadership and experience at two of the largest MRO companies in the world will be a significant asset to our operations capabilities.

To be clear, we do not expect the overall macro pressures on pilots, parts, and maintenance to subside anytime soon.

That is why it is imperative we proactively address these pressures and continue to execute at a high level. Next, I want to provide an update on the consolidation of our FAA Operating Certificates.

We will see significant operational efficiency when we complete the consolidation, which we expect in 2023.

Multiple certificates increase complexity and limit our overall operating efficiency.

When we operate under one certificate, we have much more scheduling flexibility because more of our pilots can be better matched with our fleet. This reduces unneeded crew travel, provides more predictable schedules, and enables us to take full advantage of diverse floating fleets.

Finally, I want to highlight the recent changes to our product and pricing strategy which became effective on June 1st.

There are a number of pricing levers to both drive future consumer behavior and maximize our return on how our members use our products today.

They include hourly rates by cabin class, minimums and time flown, peak phase surcharges, follow-up periods and guaranteed availability.

In addition, it is important to note that the fuel surcharges we have implemented apply to all bookings post June 1st.

irrespective of the block programs for members previously purchased.

The most important takeaway is that we imagine pricing in a more sophisticated way. We believe these changes will drive a higher contribution margin by reflecting the true cost of the services we provide and a better customer experience by smoothing demand across the fleet. Let me conclude by saying I am very proud of our team for delivering the initiatives we outlined last quarter.

our entire fleet on App Service, continued announcements to our new app, and the increased pilot and maintenance hiring.

We'll continue to deliver our initiatives and the timelines will set.

I'm extremely confident of our future, even the milestones our team has reached so far this year.

We'll continue to have a relentless focus on improving the customer experience and driving our business to profitability.

I look forward to sharing our continued progress with you all. Let me turn it over to Todd.

Thank you, Vinayak. Hello, everyone.

It's been only six weeks since I joined, but I am incredibly excited about the significant opportunities I see here and the future for Wheels Up. As Kenny and Zaniya have mentioned, we are building an innovative and disruptive company that ultimately delivers for our members, our employees, and our shareholders.

The entire wheels of team is now focused on putting that vision into action.

including streamlining our costs.

prioritizing our investments.

and driving the operating rigor needed to execute on the initiatives that the NIAC outlines.

We have significant cash on hand and balance sheet flexibility, which gives us the security needed to weather the macroeconomic conditions and the time to execute on our key initiatives, which we expect will ultimately deliver profitability.

It also gives us flexibility to take advantage of strategic opportunities.

However, we will be disciplined with our capital and focused on spending it widely.

With that as background, let me turn to the numbers.

As Kenny mentioned, we are very pleased with our strong revenue growth, with revenue up 49% year over year.

Starting with membership.

Membership revenue grew 48% year-over-year for the quarter. We continue to add new members, ending the second quarter with 12,667 active members, up 20% year-over-year, with a higher mix of core and business members.

Our membership revenue is highly visible and largely recurring, with retention rates remaining strong at approximately 80% for core and business members overall, and approximately 90% for core and business members who purchase prepaid blocks.

As our supply constraints have eased, we have opened our platform for more Connect and non-members to fly.

As a result, we expect active users will start to outgrow active members.

These customers who pay market rather than capped rates represent an increasing opportunity to drive traffic in off peak time at an attractive margin profile.

Turning to flight revenue.

which was up 34% year over year, with live flight legs up 19% year over year.

AirPartner's private jet business contributed over 5% of live leg growth in the quarter.

We see continued leisure demand and a steady pickup in business and corporate travel. We are also pleased with this level of growth considering we are comparing to a very strong second quarter of 2021.

Flight revenue per live flight leg was $13,088 for the quarter, up 12% year-over-year on a reporting basis.

but up 16% for core wheels up.

excluding AirPartner, which records revenue on a net rather than gross basis.

That growth largely reflects higher pricing and our fuel surcharge and is a factor of stage length, cabin class, and off-peak versus peak flying.

Looking forward, third quarter flight revenue per live flight leg.

has historically been down sequentially due to a higher mix of shorter stage flying due to summer season travel patterns.

Switching to aircraft management, our aircraft management revenue grew 22% year-over-year for the quarter, driven by higher owner usage.

Total aircraft under management was flat sequentially.

Our final category, Other Revenue, grew significantly to $56.7 million and included about $21 million from AirPartners, Group Charter, Freight and Safety and Security Businesses.

That was slightly higher than we expected as AirPartner benefited from supply chain constraints that impacted freight globally.

In the quarter, we also took advantage of a strong demand environment with aircraft sales of 27 million, which was well above typical levels.

We will continue to be opportunistic on future purchases and sales with the total balance of aircraft held for sale expected to fluctuate from quarter to quarter.

Now let me address cost of revenue and margins.

Our adjusted contribution margin was 4.7% for the second quarter.

The 550 basis point sequential improvement was driven primarily by better than expected margins from AirPartner.

higher asset sales, as well as improved utility and new member growth.

offset by lower 3P margins

continued levels of investment, and higher fuel prices.

Switching to Office.

Sales and marketing expenses were up year over year on a percentage of revenue basis as we returned to in-person member events and sales activities.

as well as the addition of AirPartner.

We continue to increase our investment in technology and development as a percentage of revenue.

General and administrative expenses were up as a percentage of revenue year over year. With cost-saving measures, we have undertaken to date more than offset by the addition of AirPartner.

We are focused on driving increased cost controls in the coming quarters to improve our operating leverage.

As a result, adjusted EBITDA was negative 46.9 million for the quarter, which was within our recent guidance range.

AirPartner is off to a great start and exceeded our expectations for the quarter.

Capital expenditures were $17.5 million in the quarter, including capitalized software of $7.4 million.

Capitalized software is almost half of our normal capital spending and an important technology differentiator for us. Ultimately we are focused on getting this business to positive adjusted EBITDA.

The NIAC highlighted our operating and technology initiatives.

that are important building blocks.

I will highlight the financial impacts to set us on a path for sustainable profitability.

The majority of our profit improvement will come from our operations.

The key is to drive aircraft efficiency and utility through more efficient scheduling and shaping of demand.

On the revenue side, program changes that have already been enacted included dual surcharges, higher pricing, higher minimums, and lower guarantees will help to drive our effective, utilized price higher.

We will continue to monitor our programs to respond to changing market conditions.

On the cost side, we see opportunities to streamline our operation and expect to drive a lower cost profile as a result of certificate consolidation.

and the investments we are making in technology.

Lastly, AirPartner has performed well and we continue to believe there are significant revenue synergies between the two platforms.

With all of these actions, we expect to reach adjusted EPDOT profitability in 2024, with expected future growth and operating leverage driving profits thereafter.

With regards to cash, we ended the quarter with $427 million of cash in cash equivalent and no long-term debt.

With the strong industry demand, we believe the current fair market value of aircraft on our balance sheet.

is significantly above the carrying value on our books.

Our lower cash balance relative to the first quarter is primarily due to the $108 million acquisition of AirPartner.

So with that, let me now turn to our guidance.

For full year 2022, we now expect revenue to be in the range of $1.48 to $1.53 billion over the year.

We expect third quarter revenue will grow approximately 25 plus percent year over year.

driven in part by lower expected asset sales in the third quarter versus the second quarter. We are cognizant of the macro uncertainties that may impact future flying for our existing customers.

The other demand levers that Kenny outlined...

on-demand flying, wholesale, and targeted marketing.

will provide upside to our base case scenario and insulation to economic uncertainties.

Moving to adjusted contribution margin.

While it takes time for the results of some of our internal initiatives to manifest themselves in our reporting, we expect these improvements will largely offset the sequential decline in revenue from lower asset sales.

As a result, we expect 3rd Quarter Adjusted Contribution Margin will be in the 4.5-5% range.

We expect third quarter adjusted EBITDA in the range of negative 42 to negative 47 million.

We also expect to report a gap net loss of between 95 and 105 million.

for the third quarter.

Reflected in this gap range are several non-cash estimates.

a $25 million charge related to stock-based compensation, including earn-out shares,

and $17 million of depreciation and amortization expense.

In addition, we expect approximately $15 million of cash expenses related to integration and other one-time items.

The range does not reflect any non-cash gain or loss related to the fair value of our warrants and any other unusual items.

We continue to expect capital spending for 2022 to be approximately $125 million.

That includes what we consider more normal capital spending of approximately $67 million for purchased aircraft

capitalized software etc

With the remainder of our CAPEX being the $58 million we spent to acquire the TEXTRAN aircraft that we previously leased.

As we mentioned in previous calls, we view that purchase as a financing transaction rather than CapEx.

In closing, I want to thank Kenny, the NIAC, and the whole Wheels Up team for giving me the opportunity to join. I am excited about the future and our opportunity to deliver for our members, shareholders, and employees.

Thank you, Todd. It's great to have you on our team.

Before I turn the call back to the operator, I want to provide some closing remarks.

With the backdrop of very healthy global travel demand and our expanding capabilities, the disruptive potential for our technology-enabled marketplace is more apparent than ever. Our ability to seamlessly connect supply and demand

creates a unique advantage that we believe will improve asset utilization across our industry.

and generate sustained profitable growth for Wheels Up in the years ahead. I look forward to sharing our progress.

With that, let's take some questions.

Thank you.

If you would like to ask a question please press star followed by the number 1 on your telephone keypad.

If you change your mind please press star 2.

Please stand by whilst we order today's Q&A register.

We have our first question on the phone lines from.

Sheila Caligula of Jefferies. Please go ahead when you're ready, Sheila.

Hi guys, thank you so much and welcome Todd. Kenny, great quarter in terms of the top line. How do we think about, in your prepared remarks, if you have some comments about watching the demand environment? What signals are you watching, whether it's your active members or your users?

First off, thanks for the question. I would say, you know, the great indicator of our business is the block sales. I know we projected and we reported 187% up there. You know, the blocks are funds that are deposited and advanced flying. Again, probably our best.

you know, revenue visibility tools that we have. I'd say secondly, you know, we only watch retention. I want to say that retention has been very firm. I know we've reported out that we've had 90% plus retention on our block buyers. You know, if you look at the membership growth and everything else we have going on, that indicator, that's a great beauty indicator as well, because if someone renews, doesn't mean that they buy the block on that month. That means they're going to buy it in the next

So, you know, when I look out and I think about what's out there publicly, I look at the travel managers and, you know, what people are saying about back to business come the fall. I think we see a lot of enthusiasm about people doing business travel, which hasn't really shown up in the last couple of years. So I think that coupled with, you know, with the service and now the platform, the mobile platform that their partner affords us, you know, we feel good about the demand.

And maybe one more on the cost side. You know, margins improved nicely sequentially. How much of that was from the fuel surcharge and how do we think about the profitability into the second half in 2023? Let's take a look at join the market.

Yeah, so I'm just starting. I think, you know, we put the fuel index charge in place only in June . We had another fuel surcharge flat rate going into the second fuel charge. But relative to the index fuel charge, we need to give us the most cover. That really affected not only a very small quantity of our revenue in the second quarter. So relative to some of the fuel pressures that we saw in the first quarter.

those continued and grew a bit in the second quarter. Now, we've got that fuel index in place. Now, we did much better about the third quarter and fourth quarter that we got that mitigated. So we do expect some level of lift in our margin as a result of that going forward in the Q. I think we talked about the guidance and the margin rates that we shared with the third quarter. What we'll expect to see is some of that higher than typical performance in terms of asset sales.

as well as the output limits that we felt from Air Partner in the second quarter, will likely come back in a bit and be offset by some of that fuel improvement as a result of the index being replaced.

Great. Thank you both so much.

Thank you.

We now have the next question from Michael Lisserai of Baird. Please go ahead when you're ready.

Thanks. Good afternoon, everyone.

Just on your 2024 adjustity but profitability target, maybe give us some context just around your decision to kind of draw the line in the sand, why today, anything specific you saw over the last 90 days, plus or minus that gave you more confidence in your business.

Yeah, I'll take that. I mean, look, I think we started with a lot of things here that we feel really, really good about in this business, and certainly as I joined in the last six weeks and spent time here. And we've got a really strong top line. We've got a great membership base. We've got loyal members there and a product market that fits very well. I think that being said, none of the leadership team or none of the employees that was up feels good about the fact that we generated a lot of the magnitude that we did.

in the second quarter. And I think it's very clear for us, and I think as we go forward, that revenue growth task will come with improved operational performance that translates to profitability. We sat down and thought about what are the key levers, and you've heard us describe some of that, both in my expression and mine, relative to kind of what we're laying out. You know, we've taken a number of actions already, fuel surcharge being one of those, pricing structural changes that went into effect in June , definitely.

increasingly feel coming through the book. Obviously an incremental contribution from AirPartner that's positive and helpful. But now we're really translating our focus onto the operational improvements. And then I can share a little bit more about that and what we're interested in doing, but we felt that the 24 timeline gives us the path to execute those operational improvements, knowing that a lot of those things are in our control, there's some things that are not in our control, and also for us to get the cost structure right at this business.

But ultimately, we're going to work really hard to try to drive that even quicker, but we feel comfortable committing to that gate, and that's what we're aligned and working to. And I don't know if you want to give a little detail on the individual operational things that we're working on. Definitely. Thanks, Todd. This is Vinayak here. On the operational improvements, as we have got better visibility into the operations, one of the key things we have to do is launch after-match. Our entire operation…

seen as one operation. So that in the past, we have known that we have four and five different certificates.

Even though we have different operating certificates, from an operational perspective, we can see all of them at the same way. That gives us much better ability to match demand with supply.

so that we can at a fine-grained manner understand like what are days when we have more

Demand, how do we actually match the supply with the demand?

I'm already in the first party demand because of that comes at a higher margin. So we can do that at a much fine grained fashion. So that is the first thing we'll be doing. The second thing is we have better visibility into pilots in terms of when their training schedule happens, when they take to vacation. We can manage supply of pilots maintenance schedules in a much better fashion as well. And the last thing I wanted to say is with better demand forecasting, we can really understand when exactly is the demand coming on a per day per cabin cost basis.

because the time we require to actually secure third party demand has an effect on the margin. So the much earlier we have a better visibility into when we want third party supply, the better it is in terms of getting marked in.

These are the three main things that will help us to give us more confidence as we go to our markets. The last thing I will say is we are going to consolidate all the certificates into one certificate. We don't need a trailer, we are doing this all day.

That really gives us much.

better visibility and operational efficiencies and cost productions as a result of consolidating all of them into one certificate we plan to do in 2023.

Got it. And just one follow-up there on the cost reductions. Do you expect R&D and sales and marketing dollars to come down in the out years, or is it really more just about leveraging the top line at a lower percentage of revenues? I actually think it's a combination of both. So I think if we think about where we want to invest, certainly we want to continue to put investment behind technology, because I think technology and the optimization that it gives us.

is a key part of this overall efficiency and operational improvement. And also should allow us to take some of the manual effort and the analog out of our processes today that will contribute to the efficiency. I think we need to fund a lot of that growth by taking a sharper look at our GMA spend as well as some of the spend that we do even in the sales and marketing area to make sure that it's focused and then make sure that it delivers a return. So I think you'll see a couple of things. I think you'll see some absolute reduction in certain areas that will be used.

Thank you. The next question comes from the line of Aaron Kessler of Raymond James. You may proceed with your question Aaron.

Great, thanks. A couple of questions. May, on the price elasticity, can you talk about me the reaction to?

So the higher prices, I assume not much of a change in retention, et cetera. Also, you kind of mentioned pilot retention a few times. Can you just quantify what the trend rates are or how should we think about any way you can quantify kind of the retention rates that you're seeing and how that's changing? Thank you.

This is Kenny. I'll take the first swipe here just in terms of the price increases. We've put price increases in. We did November and we did again in May. So, yeah, that's price increases. And like I said, the reaction to the price increases, the people have accepted them. I think Todd mentioned in June we had the full effect of our fuel surcharges. So at the end of the day, there's elasticity in the sense that our customers really in tune with the price increases.

people are doing us and telling us about what they're going to do in the future. You know, that to me again is an indicator if there were two or three dashboard items, those are the ones I'd be looking at. Yeah, just to add on to that, from a pricing perspective, when we made changes in November and we made changes in June , we not only looked at the price of oil, but we also looked at what competitors are doing and what similar services are doing. Our pricing phase is not just an hourly pricing phase, right? We change minimums in some places, we increase the...

account managers get very detailed information on who is more likely to renew and who is not likely to renew. So we are watching it and making sure the retention stays strong by providing visibility and the data to our account managers so that they can actually have the conversation with the customer on retention. We have not seen trade elasticity actually affect retention in any shape or form right now. We do not have handle lines in

Great. I'm going to just move on to pilot retention. And also, can you come – I may have missed some of the other revenues. Can you remind me of the breakout of other revenues for Q2 and maybe how we should think about other revenues for Q3?

I'll take the pilot retention part first. Yeah, so from a pilot retention perspective, it is something we watch very closely. As you know, the current environment, I mean, pilots are in great demand. We are very cognizant of it. That is why we launched what is called an APU 360 2.0. We look at a 360 view of everything with respect to pilots, the technology tools that we can give them, the lifetime benefits, the compensation, career path. We are watching that very closely.

and making sure we are managing pilots very well. The other thing is really understand retention at a per-heaven class basis. Look at our current workforce and make sure we are managing retention on a very close basis.

I'd say this is Kenny, one of the great things about our pilot program is all of our pilots are shareholders in the company. And I think, you know, one of the advantages of being a public company is having our pilots, I always got to give them a shout out, thank you for all you do every day. They're our partners and our shareholders. So as Benaiah and his team are developing Air Crew 360 and Air Crew 360 2.0, you know, we think about our pilots as our partners. And like I said, we thank them anytime we can.

So the second part of your question, and this is about the composition of the other revenue line and maybe some of the growth that we saw in the second quarter there, there's really two primary drivers that make up the $6.7 million of other revenue in the quarter. That's both the asset sales that we had, so we had about $27 million of asset sales that went into that line item, and then a meaningful portion of the AP revenue. So we talked about AP revenue being around $30 million.

because of some of the seasonal volatility in their profile, it may not continue at the same level, although we are quite optimistic at how strong their partner is contributing so far in a different time of year.

Great, thank you.

Thank you, Aaron.

We now have Gary Prestapino of Arrington Research. You may proceed with your question, Gary. Good afternoon, everyone. A couple of questions here. Vinaya, could you maybe explain to me again is when you consolidate these certificates, and then we can move on to the next question.

What benefits does it give to you? I believe it, does it standardize the size of flight crews and things like that.

Yes, so what happens when we consolidate certificates is the pilots who are typewriters of a particular type of aircraft, they can actually fly that aircraft. To give you an example, let's say we have two certificates and we need pilots, let's say, for our Citation XL and they are in that city, but if they are belonging to a different certificate, we can't put them on the planes. So that is first thing.

Second is, you know, managing training schedules, operating procedures, all of that can be done in one common method so that maintenance scheduling, everything can be managed in a much closer fashion. Right now, because they are in two different certificates, I cannot globally maximize all of them.

Having them in one certificate also means like there's less communication gaps, there's still clearer ownership among the certificates. The other thing that it does is imagine on any given day, there could be a mechanical failure for a plane. And then what we are doing right now is we will have to go to every certificate to say who has the capacity. Having all of them in one certificate really allows us to optimize the best customer experience while making sure the cost for delivering that experience in the case of an...

you know, mechanical is accomplished in the best possible way for us. Okay, and you said you'll have all these certificates consolidated in 2023?

That is correct. So we are working with the FAA to do that consolidation.

That's another question I wanted to get to. Is this more or less the...

a government checks a box kind of regulation?

Thank you.

extremely hard to do this.

No, I do it all the time so it is not really hard to do but it also helps us. It does do such one.

We can all get on one operating site across our certification. How do we manage vacation? How do we manage training? How do we manage return to service? So it is a good exercise for us anyway to improve efficiency. But by doing that and having the FAA agree on that would put us in a much better position. Essentially what people do is they agree on one procedure because these procedures are already approved by the FAA. So what we are trying to do is fix the fraction on the certificates we have, the best practices from all of that work with the FAA, and then consolidate.

The good thing is, you know, we have Dave Holtz, who is our chairman of operations, who worked with Delta Airline, was involved in similar participatory consolidations with Delta as well. And we have help from people across from Delta helping us out on how we actually handle it.

Okay, and then just a couple more questions. In terms of your targets for Positive Adjusted EBITDA, is that exiting Q4, or is that some 2024, or is that, you know, when do we start seeing that in your master plan if you want to share that with us?

Yeah, I mean, certainly our goal is to get there as quickly as we can. So we said 2024, and that's our focus. We don't intend that, hopefully, to be an exit rate. We're going to try very hard to accelerate that. I think the work that we're doing right now, and a lot of my focus in the last weeks as I've arrived here is, how do we get the right alignment to drive the operating rigor on a very focused set of priorities that are directly tied to that profitability goal?

And I think we're working to get all of that aligned and in place. And I and I are working closely to make sure our organizations are tied in and that we've got the operating rhythm going so that we have maybe a more focused and a narrower set of objectives, but ones that are absolutely tied to this. And as I mentioned to you earlier, none of us are satisfied with the current level of profitability of this business. So we're going to work very, very hard to accelerate that and make that happen as quickly as we can. Thank you.

Okay.

To achieve profitability, what would be your target adjusted contribution margin? Can you share that?

Yeah, I think if we get back to some of the historical levels that we've operated in, which is the double-digit contribution margin, I mean, that's kind of what we're targeting. As you know, it's a combination of the number of things that we have to focus on in terms of utility improvement, which is a function of maintenance availability and pilot availability and things of that nature. Plus, there's some real work that we need to do around our cost structure. I think getting back to something in that range would allow us to deliver the profitability.

I think you cited some other factors such as the asset sales and a little stronger performance at AirPartner. I just wanted to confirm that on a core basis, did you also outperform the 3.5% contribution margin target?

Yeah, I think the way we think, Con, you're correct in what you said. You did highlight that a majority of that improvement over the sequential 1Q to 2Q was driven by your partner and maybe higher than typical asset sales. If you think about the operational improvement that we drove, excluding those items, it was really a combination of a couple things. So the things that were going in our favor were utility improvement, quarter over quarter, new member growth.

as well as starting to see some of the pricing rate improvements come through the book. Unfortunately, some of that was offset by the continued pressure that we saw in fuel, and that fuel impacts us not only in our own one-piece fleet, but also in the three-piece fleet. So we did have the improvements, but it was not as strong as we had hoped to on an operating basis just because of that fuel pressure that we saw in the second quarter.

Okay, great understood. And my follow-up question, I had the same question about EBITDA positive and whether that meant full year or exiting. So you answered that part. But just curious, I mean, you obviously have plenty of cash on the balance sheet, but you know, where do you expect your cash position to kind of trough that, you know, before you do get to break even if you could just give us an idea on your cash consumption over the next

I guess a year and a half, that'd be great. Yeah, we don't provide specific guidance on the cash flow by quarter, but here's what I would say. We had $4.27 million to the exit of the second quarter. We feel really good about that position. In addition to that, we have no debt and highly financial assets. As we mentioned in some of the pair and marks, we feel that the pair market value of the assets are higher than what we carry them on the balance sheet.

We've seen stronger abilities drive prepaid blocks in the future. We expect that to continue. And I think we feel really good about where we are in regard to that cash position and the flexibility our balance sheet affords us. That gives us the time and the security to then deliver on the improvement and profitability in the path that we set forward. And at the same time, still gives us a little bit of flexibility in case there's something strategic that comes along we want to invest in. There's a high cool rate for that. It's going to be very...

judicious with any decisions there, but I think we feel good about the position that we're in.

judicious with any decisions there, but I think we feel good about the position that we're in. Okay, that's great. Great color. Thank you very much.

Thank you. We now have Nira Potnak of Goldman Sachs. Please go ahead when you're ready.

Thank you. Hi. Good evening,

Hello.

I was hoping to better understand.

How much of your supply in the quarter was still third party, and particularly buying supply on the open market? I don't know if it's possible to quantify that compared to the sequential period or the year ago period. How much of your supply in the quarter was still third party, and particularly buying supply on the open market?

And then, um.

I'm a little surprised that's not a bigger highlight on the bridge to...

Maybe you can just discuss how you're assuming that mixes, as it seems like it's a pretty big piece of the process to get the positive EBITDA.

I'll take the first part of the question in terms of first party and third party. Supply in the third party, we don't see the supply, we see it as what percentage of our flights are being fulfilled by first party versus third party. We see it as 70 plus percentage fulfilled by first party.

depending on the day, a little by second party, and the remaining 30% is by third party. We have two kinds of third parties. One is ad hoc, where we are going in the market and buying. We also have arrangements for the GRCs, which means guaranteed rate plans. We have contracts.

the third-party suppliers where we maintain scheduling control of those planes.

while they maintain operational control. That allows us to understand. So because we have demand, we have a much better understanding of the type of demand we have. We manage the mix of first party, second party and third party based on the days of demand. So as an example, if it is a peak day, there may be more first party, but there may also be more third party, including a higher mix of GRPs.

which allows us to actually continue the customer demand. Yeah, I mean, also, when you think about where we're going with the business and why Vinaia and company are so important, you know, to technology enable the third party in our space, it's highly fragmented, it's not real time, and I think about the competitive set, they're really focused on the legacy set, they're focused on ownership and managing other people's assets. You know, we're focused on locking.

this fragment via technology. I think again, Todd's here and here in his first month, I think we're taking a conservative approach in all of the seduces, if you will, on how we're gonna derive, you know, where this business is getting its lift forward. But again, off balance sheet, third party suppliers gonna be a big part of the mix on a go forward basis. And again, I think that that connection is really our core mission is to connect buyers.

and aircraft at scale is something that technology is really going to unlock. And I think your thesis about third parties playing a big role, that's something we see in that summer shooting for. The one additional thing I wanted to say was this up-custom-as-the-technology platform we use to manage our planes.

over a hundred different operators already use that platform. And many of our third party providers already use that platform. So what we are working on right now is to do what we call a cross-lead optimization, where we are taking the total cost needed to fulfill the demand and optimize it just across, not just our first party, but also the third party fleet, that we can actually fulfill that customer demand in the most efficient way. So how do you take this? Bye.

I think in some ways, if you think about that past profitability, that operational improvement box that we highlighted specifically talks to the utility improvement that we're seeking to drive in our own fleet. And I think as we get greater utility there, that gives us much more capacity to then serve that member set that we have today, which then in turn opens up more of that third party capacity for us to expand into a broader marketplace. And I think that has been increased like hopefully I.

not only higher rates, but expanding them for us as well.

higher rates but expanding again for us as well. Okay.

That's all very helpful. I appreciate that. Maybe just to follow up on the technology initiatives.

What's the timing of the mobile app bullet points you've highlighted on?

slide seven. Obviously, that will be forever evolving, but just those core items we've highlighted today, when are those complete? In April we launched a new version of mobile app. We have not made an app update for two years, but there's two things that happened. One, that app is now built on service-oriented technology that enables us to make deployments very frequently. So now we are deploying multiple times in the quarter.

as we add newer and newer features. That really gives us control and makes us improve the customer experience. As an example, just last week, we added new features to the mobile app. Customers are in control of their itinerary changes. In the past, if they had to make a change to their itinerary, they had to call member services. Now they can do that on their own. We have alerts. If you see a low demand day or a day where there is an empty flight available, customers can actually get alerts so that they can actually get.

information or notification that there is a hot flight available or there is a flight that is available.

So we are constantly improving the speed of the app as well, such that customers can see the prices faster, they can go through the pipeline faster, such that they can check out faster. I-Pass experience has all been about building mobile apps, and speed of the app actually matters a lot. The other thing with respect to technology on the app that I wanted to say was this one FMS that we have launched on the supply side, pilots need an app as well. Pilots have to use their app to manage their schedule. We have updated that app as well.

and we have made it much faster than what it was before. We are constantly trying to make the app for the pilots.

as efficient and as fast as possible so that they can do their job better as well. So there is really two apps, one is the consumer app, the other one is the pilot app.

Okay, last one, Todd, I know you don't have guidance for it, but any color or commentary on how to expect free cash flow to progress through the back half of the year, and specifically with, um,

you know, deposit activity since that's moving the needle at the moment. Yeah, I think in general we expect a fairly consistent profile as we've seen in prior years. I mean, obviously we drove really strong block sales coming out at the end of last year for some of the price changes. We saw that again in the second quarter. We don't expect the third quarter blocks to be quite as robust as what we saw in the second quarter. That's typical, but maybe a lower...

blocks in a quarter, but then typically in the fourth quarter, you will see a pretty strong position there. And it needs to be recently the system was seen in the past.

in the fourth quarter, you will see a pretty strong position there. And it needs to be recently the system was seen in the past. Anybody have any other questions about this motion?

All right, thanks so much.

Thank you. We have our final question number 9 from…

Tyler Sigmund of Credit Suisse. You may proceed with your question, Tyler.

Hey, guys. Thanks for squeezing me in. Just one from me. It sounds like you're opening up to nonmembers. We'll share a little bit more of talking about personal VladiusIsai there. Because that's a project I'm working on.

Can you talk about you know, what routes you have opened up so far?

you know, mostly like your high volume groups, you know, you know more broadly and

At this point, what are the key constraints before having a broader launch? Is it mostly the pilot issues or more tech investments needed on the back end? Thanks. Is it mostly just scope and space for the pilot?

Yeah, this is Kenny. I'll take the first half of this and hand it to Vinayak. First and foremost, our mission here is to take care of our members. The more technology that we get into our operations, the more we understand where there's demand available by the risk for it. By the way, Eric Horton has done a great job of putting demand on our fleet.

wholesale when we have, you know, you take a Saturday, if you will, Saturday is not Friday or Sunday, late travel, you may have a wholesale opportunity there. I think Vinayak is going to explain how technology really opens that up. And when we look at the 8,760 hours that are available a year and where we have our demand, the demand pump patterns are easily recognizable and we are developing algorithms here to be able to push out that demand to the non-member community.

Best thing about an unmembered community is to become members and have access to our people.

So with that said, yeah, so one of the things on having everything on our message is we can see the.

demand that is there on the platform, where we can see what is the supply that we have to fulfill that. So wherever we see.

Next match, so we do two things now. Our pricing has gotten a little more sophisticated. So based on demand and supply, based on the day, based on the cabin class, we are trying to adjust the pricing to kind of demand shape a little bit. Second, after that, because we can have much better visibility into the full supply that we have on the platform, including in many cases the third party GRC claims on our platform, we see where we have capacity. So based on that, you are seeing where you go on the app and search whether you are a connect member or a phone member.

you will see opening. It is not yet specific to certain routes we are building the technology. As an example, if you see there are 50 clients flying into Florida on Friday, and only 25 clients flying out of Florida, I need to get planes out of Florida. So I should be able to actually get demand there for planes out of Florida. That's the type we are building. Right now though, we understand capacity. And based on the capacity, we are fine-tuning by cabin class. What else?

whether we open up the demand for members or not, which we were not doing before. But the key kind of level for that was actually building everything on one FMS.

Thank you.

We have no further questions.

I want to thank you for joining.

I want to thank everybody for joining today. Appreciate and we'll direct.

Thanks.

Thank you all for joining. That does conclude today's call. Thank you again. You may now disconnect your line.