Wheels Up Earnings Take Off (NYSE:UP)

In the wake of last week’s earnings release, we continue to believe that Wheels Up Experience Inc. (NYSE:UP) is a strong medium term idea for risk-tolerant investors. The company is one of the largest private aviation companies, providing a comprehensive portfolio of services to non-owner fliers as well as jet owners. With more than 200 aircraft in their owned and leased fleet, UP offers access to over 1,200 third-party aircraft, including multiple aircraft types and categories.

In the company’s most recent earnings report, gross margin improved from -6.6% in Q1 to 0.1% in Q2. Compared to 2021, gross margin in the first quarter of 2022 was 11.7 percentage points less while gross margin in the second quarter was only 5.8 percentage points down from last year’s figure.

Sources for all earnings data were here and here.

An acquired business that unexpectedly outperformed in Q2 proved to be a significant driver. However, this may not be the case next quarter. Company executives noted on the conference call that the timing of fuel charge adjustments in Q2 meant that the impact was limited. There should be more of an effect in Q3 and Q4.

Adjusted EBITDA loss was smaller than in the last quarter, and the majority of the guidance range for the next quarter was better than the Q2 figure.

Prepaid block sales were up 180% YoY compared to being up 153% YoY in the previous quarter, while live flight legs were up 19% YoY versus an increase of 15% YoY in the last quarter.

Price increases and fuel surcharges do not seem to have hurt demand. We believe that Q3 and Q4 will tell us more about whether this assessment is accurate.

At the top of the earnings press release was a notable change. Last quarter, the release highlighted that “Technology and operating initiatives progressing to drive long-term profitability” By contrast, this quarter the line is “Technology investments & operational focus expected to drive Adjusted EBITDA profitability in 2024”. Company representatives clarified on the call that management expects sustained adjusted EBITDA profitability in 2024.

Incorporating profitability that is accelerated by one year into a model for UP will incrementally improve the price target from my previous article’s $4.75 estimate. Ultimately, this quarter’s performance and guidance make the price target, or higher, seem more attainable.

Also, if earlier profitability makes for a steeper ramp upward in results between now and then, it should lead to an earlier adjustment from other investors in decreasing their probabilities of failure for Wheels Up.. This won’t happen overnight. However, this is looking relatively more like a medium-term story and somewhat less like a long-term play after this quarter.

Disclosure: Risks of Investing in Microcap Stocks

With a share price of less than $3 and a market capitalization of just $500 million, Wheels Up is considered a microcap stock. There are many risks in investing in microcap stocks, including increased volatility and potential lack of liquidity. While we recommend Wheels Up as a medium-term investment, we urge investors to approach Wheels Up cautiously and as part of a larger, balanced investment strategy. We would not recommend this stock to risk-averse or conservative investors.

About Wheels Up Experience

Wheels Up Experience provides on-demand private jet service in the United States. Currently, UP is the largest aircraft charter service in terms of flight hours in 2021 according to ARGUS. The company has a strategic partnership with Delta, including a program that enables pilots to log hours with Wheels Up while participating in the Delta pilot development program. Clients have access to membership benefits, commercial travel benefits, and charter services through the UP app. Wheels Up also offers freight, safety, and security solutions. Their services are offered to individuals, companies, and government organizations.

The company connects its expanding base of over 12,000 members with a network of over 1,500 private charter aircraft. UP maintains its headquarters in New York City and has offices in 25 cities worldwide.

Celebrity Jets and The Private Charter Jet Market

Recently, many celebrities have been the focus of criticism for their ownership of private jets. Most notably, Taylor Swift, Blake Shelton, JayZ, and Travis Scott have been called out in the media for their promotion of green initiatives while globe-hopping on private jets with huge carbon footprints.

While this has sparked outrage among climate change activists, the media attention has boosted the private charter jet segment, and Wheels Up is poised to benefit from the attention. COVID-19 safety precautions and massive flight cancellations at airports around the globe have also increased the customer base for private charter flights. Booking a charter flight offers convenience that commercial flights cannot offer. Clients can arrive at the airport within minutes of take off. Once at their destination, they disembark and are on their way far more quickly than commercial flight travelers.

Recent Corporate Initiatives

Wheels Up announced several initiatives that should produce positive results. The UP FMS platform manages the entire controlled fleet under a single consolidated dashboard. This should improve efficiency in managing daily operations and crew scheduling. This is in line with corporate efforts to streamline operations.

In addition, Wheels Up reported that it had exceeded its pilot hiring targets. The company continues to invest in hiring maintenance crew and improving overall fleet availability.

For the second quarter:

• Active members grew to 12,667 for a YoY increase of 20%. This was driven by existing member retention and new member acquisition.
• Active users grew to 13, 119 for a YoY increase of 16% driven by the increase in active members.
• Live flight legs grew to 21,705 for a YoY increase of 19%. Demand was strong across all categories of aircraft.
• Flight revenue per live flight leg grew 12% to $13,088. This number included revenue from Air Partner. The increase was 16% when excluding Air Partner. The increase came from higher pricing, fuel surcharges, and an increased mix of larger cabin flying.
• Revenue grew 49% over the same period last year to $425.5 million.

Conclusion:

A strong earnings release and recent company initiatives make UP a good medium-term addition for a risk tolerant portfolio. We also believe that the negativity around celebrity jets and buzz about private aviation will not dampen demand for new private aviation customers.