Wheels Up Experience Inc (UP) 2022 Q1 法說會逐字稿

Hello, and welcome to the Wheels Up Experiences' First Quarter 2022 Earnings Conference Call. My name is Harry and I'll be your operator today. (Operator Instructions) It is now my pleasure to hand you over to from -- apologies. It's now my pleasure to hand you over to Keith Ferguson from Wheels Up to begin. Keith, please go ahead.

Thank you, and welcome to Wheels Ups' First Quarter 2022 Earnings Conference Call. This afternoon, we issued a press release announcing our financial results for the period. The release with its supporting tables as well as a copy of today's presentation can be found on our Investor Relations website at wheelsup.com/investors. Please refer to the slide with the disclaimer. Today's presentation contains forward-looking statements based on our current forecast and expectations of future events. These statements should be considered estimates only, and actual results may differ materially.

In today's call, we will refer to non-GAAP financial measures as outlined by SEC guidelines. Unless otherwise noted, all income statement-related financial measures will be non-GAAP other than revenue. Reconciliations of GAAP to non-GAAP financial measures and definitions of non-GAAP financial measures are found within the financial tables of our earnings release and appendix of today's presentation.

With that, I'd like to turn the call over to our Chairman and CEO, Kenny Dichter.

Thank you, Keith, and thanks to all of you for joining us today. I am pleased to report record revenue for the first quarter as we continue to see unprecedented demand across our platform and more broadly across our industry. It has long been our goal to build a technology-enabled marketplace for private aviation that connects strong and growing demand with highly fragmented supply. This marketplace playbook is a proven destructor in many other verticals, and we are relentlessly focused on providing an unparalleled member experience in the air and on the ground, backed by an unwavering commitment to safety.

Our strategy is already showing results. Today, we are a clear leader with a growing base of more than 12,000 active members and well north of $1 billion of annual revenue. We have built an iconic brand and private aviation, and we have forged a strong and unique commercial relationship with Delta Airlines, as well as significant brand partnerships that deliver even greater value to our members. While generating demand is typically the more difficult part of building a marketplace, it is where we have been very successful.

In fact, our first quarter is a testament to that success. We reported revenue exceeding $320 million. Again, a record for the first quarter and up almost 25% year-over-year. Active members are 26% higher than a year ago, and our Live Legs were up 15% year-over-year as we marked the anniversary of the rebound in travel during the pandemic. Prepaid blocks sales, a great indicator of future demand were exceptionally strong. Over $170 million for the quarter and up over 150% year-over-year.

Overall demand remains strong at the start of the second quarter, and our average pricing is increasing. Our core member retention continues to be robust, and our core members continue to spend more than $80,000 per year with us on average. Our newest cohorts spend more than our prior cohorts will also continue to spend with us at a healthy clip. We believe all of these factors provide a strong foundation for future revenue growth.

Our key strategic priority is to aggregate the supply side of private aviation that drive the scale utility and efficiency that enables the network effect of our marketplace. This is the key to unlocking additional profitable consumer demand. Ultimately, the difference maker for us will be the industry-disrupting technology and innovation we deploy. We see an enormous opportunity to improve the customer experience and effectively create a broader and more accessible marketplace for private air travel as much as Uber has done for taxis and black car and Airbnb for vacation home rentals. Vinayak will talk in more detail about our operating and technology initiatives. I'm encouraged by the steady progress in both areas, and we are in a much stronger position today than we were at the beginning of this year.

As a direct result of those initiatives, our operations improved each month throughout the quarter, and we continue to improve in April. In fact, absent the impact of higher fuel prices during the quarter, our adjusted contribution margin would have improved sequentially in the first quarter. With the benefit of our fuel surcharge, our recent pricing actions and program adjustments and the contribution from Air Partner, coupled with our improving operating performance, we believe we are poised to show margin improvements throughout the remainder of the year.

Let me now highlight our most recent acquisition and a strategic minority investment. We closed on the Air Partner acquisition on April 1. Air Partner is a great fit with our growth strategy giving us an asset-light platform to extend our offerings globally and includes attractive adjacent businesses that we can grow over time. The company has a seasoned and well-respected management team that will lead our international expansion and enable us to provide a true end-to-end solution for our members who are increasingly looking to travel around the world. Beyond the strategic rationale, the Air Partner acquisition makes great financial sense as well.

Next, we made a strategic minority investment in Tropic Ocean Airways, a leading provider of Cessna Caravan seaplanes which is ideal for last mile service in Florida, the Bahamas and the Caribbean and a great addition to our marketplace. We see opportunities to expand their service to other geographies and introduce their offerings to a much wider customer base. We look forward to keeping you updated on our progress.

We will also continue to broaden our supply capabilities through the strategic acquisitions of charter management companies and opportunistic aircraft purchases. As we have said many times, we are not demand constrained. That's why we are focused today on building our supply network while deploying our technology to be best positioned in a supply-constrained environment.

I'd like to provide an update on our environmental initiatives. Sustainability is something that is incredibly important to me and where Wheels Up can be a leader over the long term. Sustainability is the journey that we have embarked on, and I'm pleased to announce beginning in June that we will fully offset the carbon emissions of our member and customer flights. Carbon offsets are important but we are also focused on how to reduce the overall impact of our operations on the environment. Even seemingly small things like using sustainable, responsibly sourced materials and reducing single-use plastics can make a difference in the aggregate. We will be sharing more details on these important initiatives as they develop. One quarter into the year, we are moving quickly to invest in our members and in our customers, expand our supply network, further develop our technology-enabled marketplace and capture a much larger overall TAM.

Before I turn it over to Vinayak, I wanted to share that our CFO, Eric Jacobs, will be stepping down later this month to pursue a new endeavor. I'd like to thank Eric for his many contributions to Wheel Up where he's been a key member of our executive leadership team and played an integral role in taking Wheels Up public. He has helped build a tremendous finance team that he leaves in the very capable hands of Eric Cabezas, who has served as our SVP Finance for over 3 years and will serve as our interim CFO. We have retained Russell Reynolds, to conduct an external search for a permanent replacement. Eric Jacobs has graciously agreed to stay on as an adviser, and we are very happy we will be able to tap his insight and perspective going forward.

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 the entire hard-working team at Wheels Up for the tremendous effort they put forth every day.

Now let me turn it over to Vinayak, who will provide an update on our technology and operating progress.

Thank you, Kenny. It's great to be with all of you today. Kenny highlighted some of our recent top line successes, and I'm pleased to report that our pace of execution is also improving. The business operating system we have implemented is helping drive the rigor and transparency we need as we continue to scale and deliver improved core margins over the course of the year. Our operations improved steadily over the course of the first quarter, and that trend has continued so far in the second quarter. These improvements directly translate to a better customer experience, an area where we are relentlessly focused.

So with that, let me provide an update on the operating initiatives that I laid out last quarter, where we will continue to direct our energy and resources throughout the year. First, we're focused on improving utility in the near term to pilot and maintenance hiring. We've already hired more than 250 pilots since November, well ahead of the plan we laid out in the third quarter, and we'll continue to focus in this area. These pilots will steadily enter into service as they complete our company-specific training, giving us a strong ongoing pipeline, which will help to drive our fleet utility going forward. Our pilots are some of the most highly trained and dynamic in the industry and they proudly represent our frontline with members and customers.

Turning to maintenance. Our aircraft return to service time is a challenge, which adversely affects aircraft dispatch availability. One of the main challenges in this area is our reliance on third-party providers that are experiencing their own issues relating to labor, parts and work backlogs. To address this, we are continuing to invest in internal maintenance capabilities, which allow us to be in control of the schedule and work order priority at a lower labor cost. Our in-house maintenance teams are nearly 20% faster and recurring issues are 20% lower than external providers.

Similar to pilots, we have made a concerted effort to hire more maintenance technicians which accelerated in the first quarter and which we expect will continue to improve throughout the year. This increase in technicians will boost our mobile service unit capacity by over 50% this year, providing faster response time to address unscheduled maintenance at remote airports because we fly to thousands of destinations, this is a critical capability. Although parts availability still remains a challenge for aircraft manufacturers and the broader industry, we're getting smarter about increasing our inventory of the right parts in key areas where limited supply impacts that will return to service times.

I'm pleased to report that with our pilot force increasing and maintenance turnaround times improving, our dispatch availability and utility, the number of hours for aircraft flights revenue each month improved over the course of the quarter and are now operating at the highest levels in over 6 months. I expect these key operations initiatives will continue to drive improvements in our service levels and contribution margins.

Now allow me to walk you through a few of our recent initiatives that demonstrate how we are strengthening our technology marketplace on both the supply and the demand side. As you may recall, we migrated our mountain fleet to Up FMS last year. All migrations are challenging, and we have learned a lot from that experience. In 6 short months, our team migrated nearly our entire first-party fleet on to Up FMS. And we are currently processing the final approvals for our entire fleet.

Based on what we have learned from running our own fleets and those of over 100 customers ride at more than 80 new features to Up FMS to make fleet management more efficient, especially for floating fleets and for rapidly changing schedules common today. This greatly reduces complexity by providing a common high-fidelity view of all our operations. We have a robust product roadmap and will continuously deploy enhancements that will enable all clients of Up FMS, including our own fleet to more effectively manage daily operations.

We are now focused on integrating Up FMS with our scheduling system to further optimize utility and maximize efficiency across all our fleets. And there are other opportunities to add automation to our marketplace by connecting our internal systems to our customer-facing platforms like the Wheels Up app, we can provide real-time customer incentives and price dynamically to drive demand for off-peak flying. This will help us proactively stimulate demand to fill empty repositioning legs and encourage customers with flexibility to change their travel plans, driving higher utility. This means significant savings for our customers and revenue for Wheels Up where we would have done in the past.

We also will be better positioned to capitalize on the demand supply mismatches that often occur. Our natively built customer data platform is a critical component of improving our customer experience because it gives our account managers and customer service teams, great visibility into our customers' experiences, preferences and intentions in real time. In April, we launched a complete rebuild of our mobile app, our first major app update in 2 years. Like Up FMS, the new app was redesigned on a modern service-oriented architecture that enables us to regularly add new features and functionality to improve the user experience. Since our initial launch, we've already released multiple updates with significant improvements to performance and search.

These foundational elements are just the beginning of our mobile roadmap. Future updates will allow passengers to manage flight changes and passenger lists, greatly reducing customer service interactions while simultaneously providing a better customer experience that puts our members in control, coupled with insights from our customer data platform, our app will ultimately help us shape demand by recommending alternative times, dates or even airports that better mesh with available supply. With this continued improvement in user experience, we expect a higher percentage of our customers to book directly through the app, thereby improving conversion. It also allows our member service team to focus on providing a great customer experience instead of manually handling logistics details.

I will now touch on our initiatives to increase the supply from more asset-light second- and third-party fleets. For our second-party aircraft management fleet, our charter guarantee program that provides predictable revenue to an owner in exchange for specific increments of aircraft availability has been well received. Our pipeline of new managed sales that are undergoing conformity an FAA required process to bring the aircraft into our operating certificates is already exceeding our internal targets. We expect that will drive continued growth in charter hours for our managed fleet in 2022. We continue to extend our third-party capacity over long-term (inaudible).

As we migrated our own fleet on to Up FMS, we are now in a strong position to allow our third-party partner operators to also take advantage of the capabilities of Up FMS. It is important to note that many of our partner operators already use Up FMS for their own fleet management within their networks. Cross fleet optimization can drive profits for all parties and is another compelling reason to choose our marketplace. Additionally, we are constantly improving our forecasting system to anticipate demand at a more granular level to minimize our use of expensive last-minute ad hoc third-party supply.

We previously mentioned consolidating the 6 FAA certificates that currently make up our first-party fleet. An initiative which will provide meaningful additional improvement in the efficiency of our operations. We're currently in the process of consolidation with a targeted completion in 2023 and will share more details in subsequent quarters. All of this helps us improve the scalability of our supply, which will complement the incredible foundation we have as a leading demand generator in private aviation today.

Finally, I wanted to highlight recent changes to our product and pricing strategy. Given that we continue to be in an unprecedented demand environment, we are being thoughtful to ensure our dynamically priced marketplace as the right product offerings for our customers while still being competitive. Pricing is an important lever to influence customer behavior, incentivizing customers to move to higher membership payers in order to capture greater member benefits.

Our most recent program changes will encourage customers to fly at times on aircraft that maximize our operational flexibility and realize the full benefit of our supply strategy. That is why they're increasing peak surcharges again, now up to 15%. We believe these changes better reflect the true cost of the services we provide and will translate to higher service levels and improved customer satisfaction.

The benefit of capped rate increases will fade in overtime as prepaid blocks are used with the fuel surcharges, which were effective on April lines are already having an impact. Our new fuel index strategy for those prices, which start on June 1, ensures we will continue to be productive from additional swings in global energy markets.

Let me conclude by saying I'm proud of our team for delivering on the initiatives we outlined last quarter, Up FMS, our new app, pilot and maintenance hiring. We'll continue to deliver on what we say and the timelines we set for ourselves. All the initiatives I highlighted today are the building blocks that strengthen the foundation of our technology-enabled marketplace which we believe will give us a competitive advantage and demonstrate the strength of our business model, connecting all our systems to hardened APIs over a service-oriented architecture on modern cloud infrastructure will enable us to rapidly build features and continue to improve the customer experience and convert more demand on our marketplace. We will continue to drive technology and operational discipline as we build our platform and most importantly, keep the customer at the center of our focus.

I'm extremely confident in our future given the progress our team has made in the past 6 months, and I look forward to sharing our continued progress. With that, let me turn it over to Eric.

Thank you, Vinayak. Hello, everyone. As Kenny highlighted, we are very pleased with our strong revenue growth, the revenue up 24% year-over-year. Specifically, membership revenue grew 38% year-over-year for the quarter, and we added 384 net new members ending the first quarter with 12,424 active members, up 26% year-over-year. We saw a pickup in new membership sales following the lifting of the flight moratorium in February. Also, the mix has continued to shift towards our higher-priced core membership tier that offers more guaranteed access to the member, which is valuable in today's supply-constrained market.

We believe our membership revenue is highly visible and largely recurring as our retention rates remain strong at approximately 80% for Core and Business members overall and approximately 90% for Core and Business members who purchased prepaid block.

Turning to flight revenue. Flight revenue was up 24% year-over-year for the quarter, with Live Flight Legs up 15% year-over-year. We continue to see strong leisure demand and a pickup in business and international travel. We are also pleased with this level of growth, considering that supply chain constraints continue to limit our ability to address significant potential demand from Connect and nonmembers through our marketplace. Flight revenue per Live Flight Leg was $13,410 for the quarter, up 8% year-over-year. This metric is a function of multiple factors, including pricing, stage length, cabin mix, and peak versus off-peak flying. During the first quarter, we began seeing an impact from the cap rate price increase that was affected last December as well as a continued shift in mix to larger cabin classes as our customers favored our jet offering.

Looking forward for the remainder of the year, we expect to show an increasing benefit to flight revenue per Live Flight Leg from the December and June price increases, as the prepaid block that locked in prior rates are utilized as well as from the fuel surcharges that commenced April 9 and which will be updated on June 1. We also expect strong future flight revenue as prepaid block sales totaled $175 million in the quarter, up 153% year-over-year. Currently, over 60% of our core members have an outstanding prepaid block.

Switching to aircraft management. Our aircraft management revenue grew 19% year-over-year for the quarter, driven by higher owner usage. We managed approximately 150 aircraft as of the end of the first quarter, which is flat from year-end. We now have less than 10 legacy management contracts that we're working to restructure, down from 15 at the end of the year and about 20 at the end of the third quarter. Our final revenue category is Other revenue. Other revenue is a small percentage of our total revenue, it represents revenue earned from software, fixed-based operations, or SEO, maintenance, aircraft sales where we act as a broker and special missions, including defense.

Now let me address cost of revenue and margin. Our goal is to optimize utility and efficiency across our entire 1P, 2P and 3P fleet by using technology and scale to automate scheduling and incentivized fine to reduce reposition legs and improve profitability. Vinayak provided an update on our operational and technology initiatives. So I wanted to provide some context for how those initiatives are expected to impact our financial results. First off, while we are making meaningful progress internally on numerous areas, the financial impact will increasingly flow through the income statement over the course of the year. For example, as Vinayak mentioned, it takes about 60 days for recompile hire to be revenue productive. There was a modest benefit late in the first quarter, and we expect a larger impact in future quarters given our recent hiring trends.

Converting our entire One Peak fleet onto Up FMS should significantly simplify our flight operations with one dashboard to see and schedule or aircraft crew, maintenance, et cetera. The impact to margins will be apparent in the second half of the year as we enhance the actual workflows that automate and optimize our global scheduling.

The certificate consolidation process is now in its early stages. This initiative will allow us to better leverage crew and other personnel availability across our entire fleet once completed in 2023.

While these initiatives are all very concrete and will improve our operations and margin, one thing that is not in our control, is fuel costs driven by the price of Jet A fuel. While we have the ability to pass along fuel costs within a reasonable period of time, the sharping quick increase in debt A fuel prices related to geopolitical events led to an approximately $9 million adverse impact to our adjusted contribution margin in the first quarter as the recent fuel surcharge didn't become effective until April 9.

Our adjusted contribution margin was negative 0.8% for the first quarter. It would have been roughly 250 basis points higher that fuel prices were the same as the fourth quarter. That improvement reflects the success of our operating initiatives that Vinayak highlighted. Vinayak also highlighted a new fuel surcharge mechanism that was announced earlier this month. But that program change commencing June 1, we expect fuel costs will largely be a direct pass-through with minimal impact to our margins thereafter. However, so far in the second quarter, fuel is still a headwind even with the initial fuel surcharge that took effect in April. That is because fuel prices have continued to rise and have exceeded the amount covered by the initial fuel surcharge.

Switching to OpEx. Sales and marketing expenses were up slightly year-over-year on a percentage of revenue basis as we returned to an in-person member event during this year's Super Bowl in Los Angeles. We have also been increasing our investment in technology and development as a percentage of revenue. Capitalized software is an important component of our CapEx spending, and we believe part of our differentiation in the market. General and administrative expenses were down slightly as a percentage of revenue year-over-year. We will continue to explore opportunities that can further streamline our corporate overhead and other costs. As a result, adjusted EBITDA was negative $49.4 million for the quarter, which is better than our recent guidance range. Capital expenditures were $71.9 million in the quarter which includes approximately $58 million net to acquire 32 aircraft from Textron.

Other capital expenditures, including capitalized software, were approximately $14 million in the quarter. Capitalized software is almost half of our core capital spending. We continue to expect capital spending for 2022 to be approximately $125 million. That includes what we consider more typical capital spending of approximately $67 million for purchased aircraft, capitalized software, et cetera, plus the $58 million spent to the Textron preowned aircraft purchased in the first quarter. As we highlighted on our last call, we view the Textron purchase as a financing transaction since those aircraft were already on our balance sheet as operating leases. We will remain opportunistic in upgrading and expanding our One Peak fleet similar to our acquisition of Alante Air.

We have also wrapped up the strategic use of our aircraft brokerage purchase and sales capabilities. Some aircraft may be purchased outright for our 1P fleet. Other aircraft may be purchased as aircraft held for sale to sell to future owners with some committing to allow us to manage and use their aircraft for our charter customers. Our brokerage capabilities have been the driver of approximately $56 million of the aircraft held for sale line on our balance sheet. This is consistent with what we communicated in our last quarterly call. We do not anticipate aircraft held for sale to increase significantly from this level, but the balance will fluctuate with the timing level of sales and any replacement aircraft purchases.

With regards to cash, we ended the quarter with $538 million of cash and cash equivalents and no long-term debt. With the strong industry demand, we believe the current fair market value of aircraft on our balance sheet is well above their fixed asset carrying value. This should allow us an opportunity to finance those assets to drive further growth.

Now let me provide some information regarding the financial impact of the Air Partner acquisition which will be reflected fully in the second quarter since the transaction closed on April 1. Air Partner had several service lines, private jets, group charter, freight and safety and security. The private jet business will be included in our flight revenue. Initially, that revenue will represent net revenue, which is the agent fees earned by Air Partner as our customers fly. Over time, we expect to transition the U.S. private jet business to be more similar to the Wheels Up private jet business. Revenue will then reflect the total transaction value of gross revenue the customer pays for flying, which is consistent with how Wheels Up reports its flight revenue today. Air Partner's international private jet business is expected to still be reported on a net revenue basis.

The group charter, freight and safety and businesses will be included in our other revenue category. These businesses are primarily on a net basis, so we will recognize only the fees we receive for performing the services. Overall, we expect Air Partner will contribute approximately $30 million of revenue in the second quarter, but roughly 30% to 70% between flight and other revenue. Because of the high mix of net revenue, adjusted contribution margin percentage contributed from Air Partner is significantly higher than our corporate average.

So with that, let me now turn to our guidance which includes Air Partners. For full year 2022, we now expect revenue to be in the range of $1.47 billion to $1.52 billion for the year, reflecting an approximately $90 million revenue contribution from Air Partner. We continue to expect our revenue to grow each quarter over the course of the year, with the second quarter up at least 28% year-over-year, inclusive of approximately $30 million related to Air Partner. Please keep in mind, Air Partner revenue does fluctuate from quarter-to-quarter and it's a relatively small percentage of our total revenue.

Moving to adjusted contribution margin. We expect an improvement from our operational initiatives plus the benefit of the inclusion of Air Partner will be partially offset by the higher fuel expense I discussed earlier. As a result, we expect adjusted contribution margin for the second quarter will be approximately 3.5%. Operational improvements in the fuel surcharge should contribute roughly 200 basis points of the sequential gain with the remaining increase coming from Air Partner. With the recent changes to our program, our view is that the negative fuel impact will be behind us in June. Therefore, we expect adjusted contribution margin will benefit by an additional roughly 200 basis points sequentially in the third quarter. We expect second quarter adjusted EBITDA to be in the range of a negative $43 million to negative $48 million with Air Partner contributing a positive $2 million to $3 million to that total.

We also expect to report a GAAP net loss of between $90 million to $100 million in the second quarter. Reflected in this GAAP range are several noncash estimates, a $10 million charge related to earn-out share, a $15 million expense related to stock-based compensation and $15 million of depreciation and amortization expense. In addition, we expect approximately $10 million of cash expenses related to transactions and other onetime items. Range does not reflect any noncash standard loss related to the fair value of our warrants and any other unusual items. Overall, our operational technology initiatives, along with better pricing, including our fuel surcharges will allow us to exit the year with higher margins that will set us up well for 2023 and beyond.

In closing, I want to thank Kenny and the team at Wheels Up. The company has grown revenue almost 5x since I joined. And today, it has a very strong foundation, serving members in all cabin classes with a global offering. It's been an absolute pleasure working with the team. I was a member before I joined the Wheels Up team, and I'm looking forward to benefiting from all the enhancements to the marketplace as a member in the future.

With that, thank you all for joining. Let me turn the call back to the operator so we can take your questions.

(Operator Instructions) And our first question is from the line of Sheila Kahyaoglu from Jefferies.

Eric, best of luck on your next venture. Can I just ask starting from the top line, I guess, on the Air Partner, we have it contributing $50 million. So it implies organic did go up about 5%. How much of that organic is an increase in membership revenues versus the price increases that are contributing?

Thanks, Sheila. I'm going to have Eric, and I want to introduce Eric Cabezas, who has been on our side for 3 years, who is going to be helping answer some of the questions here. He's our interim CFO.

Sure.

I just want to make sure I understand your question properly. So you're asking about our -- the 28% guidance for next quarter, how much of that is organic versus Air Partner. Is that correct?

Just for the full year, you've raised guidance by 8%. So we have Air Partner at like $50 million of contribution -- sorry, $90 million of contribution. I apologize -- and then so it implies organic did go up by a few percentage points. I was just wondering how much of that is an increase in membership and other versus like pricing kicking in?

Yes. So the pricing was reflected in our additional guidance for the year. So we didn't change guidance (inaudible) other than to really add into Air Partner plus the benefit that we saw in Q1. So hopefully, that is conservative, but that's how we approach the guidance for the remainder of the year.

And then, Eric, you flipped way too fast for me to keep up with those numbers on the fuel surcharge. Can you just go over once more. It alleviates about 200 basis points in Q2, how much for the full year for '22? And then how do we think about that in '23?

Yes, Eric Cabezas, do you want to grab that?

Yes. Thanks, Kenny. The fuel had a roughly $9 million impact on our contribution margin for Q1, which equates to roughly 250 basis points for the quarter. As we highlighted, the new fuel mechanism will take place -- will take effect June 1 and will largely insulate margins from future fuel price volatility. With that said, the price of fuel has continued to increase in April and May, so fuel continued to be a headwind in Q2, with the negative impact is behind us in June. We've guided to 3.5% margins for Q2, and we expect the full offset to contribute 200 basis points of improvement accrued in Q3. So it's roughly a 200 basis point sequential improvement from Q2 to Q3.

And our next question is from the line of Gary Prestopino of Barrington.

Sure. I'm sorry, I jumped on the call a little bit late, so I don't know if I missed some things. But could you tell me on your prepaid blocks -- are those -- can people use those without incurring a fuel surcharge? Or do they get surcharged if they use the block?

Gary, it's Kenny. The -- the program rules allow us to put the fuel surcharge on to the full membership with the 30 days notice, which is what we did effective March 9, which kicked in. We got some coverage starting April 9. June 1, we gave notice, changed the program and indexed the fuel, which gives us really full coverage on our fuel as it relates to the up and the down. So I think with that, I'm going to give Vinayak the bullet point just to further give you a little clarity there.

Yes. Gary, just to be clear, yes, unlike the block will affect the fuel surcharge, so irrespective of whether you are an existing number or an old number with a previous block, the fuel charge is applied to the cost of the flight for everybody.

Okay. And then, I guess, just I'm trying to follow all this. You're talking about an increase in your adjusted contribution margin of 200 basis points sequentially. Is that right? Or am I wrong in your guidance?

From a guidance perspective, we're guiding to 3.5% for Q2 and we've guided that the fuel benefit or offset in Q3 will equate to about 200 basis points of incremental improvement.

So we're looking at a 5.5% adjusted contribution margin in Q3? Is that all right?

That correct. That's right.

So I guess what I'm getting at is, I mean, I guess one of the ways to look at what you're doing is your efficiency should be reflected in that contribution margin. At least your operational efficiency with the aircraft. So if you're still looking at $45 million of adjusted EBITDA, you're really going to jump up your spending over the next at last quarter, and that would continue throughout the rest of the year. Some of it I realize is that you're going back to a lot of in-person things and promotions and stuff like that. But is that how we should look at this?

So Gary, it's Eric. So I think that the hiring of the pilots and such and higher maintenance tax actually helps us from a margin improvement perspective because especially, we have aircraft that they can fly and it allow us more trips on the board. And we have -- on the maintenance side, there's a very quick payback in terms of how they start impacting the margin.

So as Eric talked about, the 200 basis point improvement in Q3 relates to fuel, we didn't want to sort of look out a number related to operational improvements yet because we're still working through a lot of the supply chain things and things like certificate it's not like -- they are not going to take a longer period of time. That's really going to start hitting in 2023. So Vinayak, I think wants to add a point here?

No, all I was saying was this will take a period of time as we ramp up. So we did not include a lot of that within it. But over a period of time, we should start seeing the improvements.

Yes. And Gary,...

Sorry, Kenny, go ahead.

Yes. I just want to fine point on that. We feel very comfortable with our margin guidance and our goal is to meant our guidance -- we look forward to sharing our second quarter results.

And our next question is from the line of Marvin Fong of BTIG.

Kenny, just a question to start -- I appreciate the color you gave about current trends, and I think you said April was strong. Just maybe you could dive a little deeper into the demand trends you're seeing. And just maybe comparatively, how did April look or even early May compared to what actually saw in the first quarter? And I have a follow-up.

First off, Marvin, I think that the trends on the demand side in our industry continue to be robust. Wheels Up is seeing tremendous interest. And obviously, you have the back to the office and businesses looking at what they're going to do travel-wise, this year. I'm working closely with Vinayak, who I'm sure I can give you a little bit of his view on where we're going from a demand perspective. But really, the way that we're going to hit utility and efficiency and handle the demand moving forward is really where the unlock is for us. Vinayak?

Yes. So just to be clear, in 2 days, we are not seeing any impact on the demand side in spite of the environment we have. What we are doing is trying to deliver the initiatives as fast as we can. And the way we look at about demand is, if you look at our customer cohorts that we have seen existing customer cohorts continue to spend. And because we have this long-term view of what we are seeing for them for the past 2, 3 years, they're continuing to spend -- the newer customer cohorts are spending at higher levels and they're starting to fly earlier after they become a member. So in terms of the demand there are 2 indicators, which is new memberships that we are getting in terms of its actual demand, both seem to be strong and are not seeing any differences based on the geopolitical conditions right now.

And then -- I appreciate what you're saying that the demand environment looks good. But just considering the fact that the macro, does that actually maybe perhaps help you find owners on either the 2P or the 3P side who might be looking to generate some income and are maybe more willing to participate in your programs there? Just some additional color there would be great.

Yes. That should totally help us to participate. And the other thing that happens is we have this guarantee program for our 2P owners where we can give guaranteed charter hours to them. We have multiple other levers for demand that we have not activated. So to give you an example, we had a moratorium in November and lifted it in February, but still the vast majority of the demand is to take care of our existing core members, right? There is people searching on our platform who have created accounts, but we're not showing availability to them because we are actually focused on servicing our existing members.

The advantage as we get more supply or the supply-demand if change gets more efficient is we can actually open up that aperture for nonmember customers to search and book on our platform and those go at market rates, so it's better margins for us. So we have levers to kind of change demand, not just in membership because we actually see traffic on the app where people are searching. So both on the demand side, on the supply side, I think the opportunities exist.

Marvin, one last bullet -- one last bullet there just to reinforce what Vinayak is saying, and I know Eric reported on it. The block sales continue to be strong. that gives us great revenue visibility as to what we're looking at forward. Our offering on model is not predicated on ownership. So like he said, the demand there just feels good, but the blocks really tell the story. People vote with their ability to put moneys down. I know you had one more.

I actually was going to ask about that. I just want to confirm, just as a housekeeping question. So the prepaid block number that was as of the end of the first quarter, right? So that wasn't affected in any way by this additional or new increase of the cap rates, right, that didn't have any impact on that?

Yes, not for the first quarter.

Yes. I would say, we have now -- Yes, not -- the first quarter was not affected, and we think that early indications are that people are reacting well to both the fuel surcharges and the cap rate, which really as a membership has its privileges feature, which is -- it protects you against surge spot market pricing.

(Operator Instructions) Our next question is from Michael Bellisario from Baird.

Just want to go back to the business versus leisure trends that you mentioned. Are you seeing a shift in which segment is buying blocks and then also the rate at which they're being used today?

So, this is Eric, Mike. So we don't really report out the details on types of members time blocks. That said, our corporate sales have been very strong, and our partnership with Delta has benefited, I think to us as we have access to some of their corporate clients.

Yes. Vinayak?

Yes. And I just want to add that, as Eric said, we don't report on it, but both the business and the individual customer block sales are up year-on-year. We won't report on the specifics. But we are very pleased with the growth in both the sectors.

Got it. That's helpful. And then just -- can you maybe dig into the active users kind of flattish sequentially? What happened in the first part of the year? Was there a step back presumably because of the flight moratorium? And then what have you seen maybe more recently after that was lifted?

Given the tightness in supply doubling down on servicing our membership base. So we really hadn't opened up the opportunity to nonmembers, and that's why you see sort of flattish on the active user phase. And you can see that active members did grow sequentially year-over-year.

Got it. And then just related to opening that up to nonmembers. Is there an updated thinking in terms of timing for that?

Yes. Vinayak?

Michael, we're getting smarter about how we do that, like -- so right now, our technology, it either allows you to allow access to -- based on your type of membership you have, what results you get. But we can start seeing fluctuation in demand in countercyclical routes and our plan is to add the technology where selectively, we can start actually opening up to nonmembers depending on cabin class, depending on what route and over a period of time, increase. That's the fact we are building. So there's not going to be like a switch on for nonmembers. What we will do is start selectively pushing that out based on availability, based on the routes that start making profits. And actually, as the supply-demand mix starts getting better, open up that aperture more than more. So that's what we're going to do.

And we have no further questions today. So it would be my pleasure to hand back to Kenny Ditch for any closing remarks.

(technical difficulty)