Wheels Up stock plunged 21 percent on Tuesday, closing at 39 cents, after the company announced a $101 million quarterly loss, plans to consolidate into two primary operating regions, and that founder and CEO Kenny Dichter had stepped down.
Wheels Up announced that interim CEO Todd Smith will lead the company through a regional rebalancing effort that could very well shrink the size of the largest on-demand business aircraft charter operation in the U.S. Smith, previously CFO of the company, assumed the leadership position this week from Dichter, who will remain on the company’s board. On Tuesday, Smith told stock analysts that the new strategy will concentrate King Air service east of the Mississippi River and light and medium jet service in the American Rockies and Southwest. It will be “focused in the areas we want to win,” he said, and comprise roughly 80 percent of the company’s current business.
“If that means that we’re a little smaller, in terms of transitioning to a higher degree of profitability, then we’re fine with that” because it’s “the right answer for our business and our shareholders,” Smith, who joined Wheels Up as CFO last year, said. He added that the company’s traditional business model of an “historical one-size-fits-all product offering creates significant operational challenges that impact our ability to deliver our profitability goals.”
Those challenges included the need for more efficient crew scheduling, fewer repositioning legs, and better maintenance economics that would all be facilitated by a “smaller operating region.” In exchange, Smith broadly suggested cost savings would be at least partially passed along to customers in the form of “lower prices,” competitive cap rates, and certainty in peak periods. The new regional structure will take effect in June.
In a follow-up interview with AIN, Smith stressed that the proposed program changes were “prospective” and that Wheels Up would continue to honor the terms of current customer contracts. “Any member with block funds still active under the current rule set would continue to run off that block under the old rule set. We’re going to honor all of the existing guarantees and programs that are in place until those funds are depleted or reach expiration under their current contract, but then we would look to migrate [those customers] to the new rule set,” he said. “We’re not taking away anyone’s benefit today if they have an existing block with us that is still active.”
Smith said customers located in the 20 percent of the country where current operations are not profitable could continue to be served by Wheels Up via its Air Partner booking service and that out-of-region flights “will be dynamically priced at competitive market rates.”
“To be clear, we will continue to service all regions in the U.S.,” he stressed. “What we are really talking about is the right model to service our members and customers in the most effective way.”
He said that parts of the new programs had already been tested with a limited-time, special-pricing offer for King Air customers on the East Coast, currently with jet customers on the West Coast, and that the company was encouraged by the results. However, Smith conceded that the transition could produce short-term membership “churn,” which he used as a partial rationale for Wheels Up to suspend providing annual financial guidance going forward.
Wheels Up lost $101 million during the first quarter on $352 million in revenues and Smith said the company expected to lose another $95 million to $100 million during this year’s second quarter. However, he said he expected losses to be less severe as the year progressed, based on historical revenue trends.
The company still has $363 million in cash and Smith said more liquidity is likely available via loading additional debt onto company aircraft that are currently undervalued and disposing of certain non-core business assets and certain aircraft. Smith said that “we don’t have any specific plans right now to go back into the market and raise more liquidity; however, we have a number of things available to us. First and foremost we're going to continue to focus on our profitability efforts,” which Smith said he hopes translates into better service and more block-hour sales.
“And we do have additional capacity under our current debt arrangement to put some additional debt on, [and] we could do so,” he said. Last October Wheels Up raised $259 million via a 12 percent interest rate “enhanced equipment trust certificate” loan structure on 134 aircraft, but covenants governing that agreement require the company to maintain a minimum liquidity of $125 million.
Wheels Up also is beginning the move into its new Atlanta operations center this week, which the company said will provide greater efficiencies while continuing efforts to consolidate its five Part 135 operating certificates with the FAA. Smith said that an efficiency and cost-cutting campaign instituted last year was beginning to show success with regard to more effective “pilot staffing, maintenance, availability, spare parts, inventory, and demand shaping,” as well as “reduced fuel burn and overtime through more efficient management of our operations.”
In total, Smith said the improved processes should improve aircraft availability by nearly 10 percent in 2023 and said the company was continuing to spend aggressively on new technology to enhance these efforts and customer satisfaction.
With both analysts and AIN, Smith stressed Wheels Up’s strong relationship with Atlanta-based Delta Air Lines, both in terms of marketing and operational benefits. Delta became a large stockholder of the company through Wheels Up’s 2020 acquisition of Delta Private Jets. This includes a program whereby “Delta's business customers will receive volume-based preferential rates on wheels up charters and memberships” and “Delta will continue to provide Wheels Up customers unique access and exclusive benefits such as earning Sky Miles, Sky bonus points and medallion status.”
Dave Holtz, formerly Delta senior v-p of the airline’s operations and customer center, joined Wheels Up last year as chairman of operations and will run the company’s Atlanta center.