Wheels Up Experience Inc (UP) 2022 Q2 法說會逐字稿

Welcome. My name is Prita, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Wheels Up Experience second quarter earnings call. (Operator Instructions) Thank you.

Keith Ferguson, you may begin your conference.

Thank you. This afternoon we announced our second quarter financial results. The earnings 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 our 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.

During 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 to today's presentation.

And with that, I'd like to turn the call over to Wheels Up's Chairman and Chief Executive Officer, Kenny Dichter.

Thank you, Keith, and thanks to all of you for joining us today. For today's call, we are going to prioritize 3 topics that we think are important for investors today. One, an update on our business performance; two, an update on the progress of our technology and operating initiatives; three, the key components of our path to positive adjusted EBITDA. With that as a background, I am pleased to report another quarterly revenue record as we continued to see strong demand and strong product-market fit across our platform, including a great start to our recent acquisition of Air Partner.

We are working diligently to execute on our strategy to build a technology-enabled marketplace for private aviation that aggregates highly fragmented supply and connects it with strong and growing consumer demand. Today we are a clear leader in on-demand private aviation with a growing base of more than 12,500 Active Members, and we are poised to deliver over USD 1.5 billion of revenue this year, up from around USD 300 million just 4 short years ago.

We have built an iconic brand in private aviation and 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 a strong base of demand is often challenging for some growing marketplaces, it's an area where we have been very successful. Our second quarter is further testament to our success to date. We reported revenue of over USD 425 million, a record for the second quarter and up nearly 50% year over year. Active members are up over 20% compared to a year ago, and our live flight legs were up nearly 20% year over year, reflecting a continued appetite for travel as well as the contribution from Air Partners' private jet business.

Prepaid block sales, a great indicator of future flying, were exceptionally strong, over USD 330 million for the quarter and up over 180% year over year. Today, as that tally makes clear, overall demand remains solid even as average pricing is increasing and fuel surcharges took effect. Our Core member retention continues to be robust, and our Core members continue to spend more than USD 80,000 per year with us on average. Our newest cohorts continue to spend and fly more than our prior cohorts, and our longtime members also continue to spend with us at a healthy clip. 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 perspectives 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. Vinayak 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 profits. 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 intra-Europe. We are thrilled to have Air Partner on our team.

With the benefit of a full quarter of the indexed fuel surcharge in Q3, the operational progress that you will hear about from Vinayak and a healthy contribution from Air Partner, we expect to show higher margins over the course of the year [enroute] to positive adjusted EBITDA in 2024.

Next, I'd like to take a moment to provide an update on our environmental initiatives. 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. Todd has 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 at Wheels Up. 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 hard-working team for their tremendous effort and commitment.

Now let me turn it over to Vinayak who will provide more details 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. With continued emphasis on operational execution, data-driven decision making, and delivering a premium member experience will help ensure the investments we are 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 GRPs, all the aircraft where we have scheduling control are now all managed on UP FMS. It took slightly longer than we anticipated, but I'm pleased to announce it is complete. For the first time in Wheels Up history, we have a holistic view of our supplies that provides full visibility into our aircraft availability and maintenance and the schedules of our pilots, including their 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 1P 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 on UP FMS, we are working to layer on optimization and 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, unanticipated maintenance events, and 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. Increased visibility from our data will also highlight windows of opportunity in our schedule where we can open up to wholesale market for supplemental utility and revenue at a profitable margin.

With all our supply now on UP FMS, 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 throughout our operations. But we have a solid foundation in place, and I look forward to providing an update on our progress throughout the year.

Turning to our mobile app, our service-oriented architecture has enabled us to develop and deploy new features to improve the customer experience at a much faster pace, including improving performance, search, and member self-service, specifically our recent release enables app users to directly manage itinerary changes and passenger list, greatly reducing customer service interactions and high-touch 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 routine tasks. The app will enable customers to create alerts that highlight available capacity for members and non-members alike, driving demand through low-use periods and routes which balances our fleet and improves 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're 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 3 elements: hiring, training, and retention. And we are taking steps to address all 3. We continue to build a very compelling pilot value proposition to help us attract and retain the best talent in the industry. We've 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 for 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 success hiring pilots, training continues to be a bottleneck to improve dispatch availability, with significant delays in the time it takes for a pilot to enter service once they have been hired. That's why we've 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 Aircrew 360 program, which highlights career development, total compensation, and work-life benefits. We're focused on consistently improving the career opportunities and the quality of life for our pilots. We stive 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'm 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 scheduled maintenance at a lower labor cost. We're 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 operations leadership team with the hiring of Rob Cords as the EVP of Fleet Operations and Infrastructure. Rob was formerly the President of MRO Holdings and prior to that the President of Fleets and Airlines at StandardAero. Rob's leadership and experience at 2 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's imperative we proactively address these pressures to 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 limits 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 for diverse floating fleet.

Finally, I want to highlight the recent changes to our product and pricing strategy which became effective on June 1st. We have 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-day surcharges, [call-out] periods, and guaranteed availability. In addition, it is important to note that the fuel surcharges we've implemented apply to all bookings post June 1st, irrespective of the block programs our members previously purchased.

The most important takeaway is that we are managing 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'm very proud of our team for delivering the initiatives we outlined last quarter: our entire fleet on UP FMS, continued enhancements to our new app, and the increased pilot and maintenance hiring. We'll continue to deliver our initiatives in the timelines we set. I'm extremely confident of our future given the milestones our team has reached so far this year. We will 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.

With that, let me turn it over to Todd.

Thank you, Vinayak. Hello, everyone. It's been only 6 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 Vinayak have mentioned, we are building an innovative and disruptive company that ultimately delivers for our members, our employees, and our shareholders. The entire fields 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 Vinayak outlined.

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 wisely.

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 times 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. Air Partner'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 reported basis, but up 16% for core Wheels Up excluding Air Partner, 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 USD 56.7 million and included about USD 21 million from Air Partner's Group Charter, freight and safety and security businesses. That was slightly higher than we expected as Air Partner benefited from supply chain constraints that impacted freights globally. In the quarter, we also took advantage of a strong demand environment with aircraft sales of USD 27 million, which was well above typical levels. We will continue to be opportunistic on future purchases and sales, with the total balance of aircrafts 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 Air Partner, 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 OpEx. Sales and marketing expenses were up year over year on a percentage of revenue basis, as we return to in person member events and sales activities as well as the addition of Air Partner. 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 Air Partner. We are focused on driving increased cost controls in the coming quarters to improve our operating leverage.

As a result, adjusted EBITDA was negative USD 46.9 million for the quarter, which was within our recent guidance range. Air Partner is off to a great start and exceeded our expectations for the quarter. Capital expenditures were USD 17.5 million in the quarter, including capitalized software of USD 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.

Vinayak highlighted our operating and technology initiatives that are important building blocks. I will highlight the financial impact 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 fuel surcharges, higher pricing, higher minimums, and lower guarantees, will help to drive our effective realized 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, Air Partner has performed well, and we continue to believe there are significant revenue synergies between the 2 platforms. With all of these actions, we expect to reach adjusted EBITDA profitability in 2024, with expected future growth and operating leverage driving profits thereafter.

With regards to cash, we ended the quarter with USD 427 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 significantly above the carrying value on our books. Our lower cash balance relative to the first quarter is primarily due to the USD 108 million acquisition of Air Partner.

So with that, let me now turn to our guidance. For full year 2022, we now expect revenue to be in the range of USD 1.48 billion to USD 1.53 billion for 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 third quarter adjusted contribution margin will be in the 4.5% to 5% range. We expect third quarter adjusted EBITDA in the range of negative USD 42 million to negative USD 47 million. We also expect to report a GAAP net loss of between USD 95 million and USD 105 million for the third quarter.

Reflected in this GAAP range are several noncash estimates: a USD 25 million charge related to stock-based compensation, including earnout shares; and USD 17 million of depreciation and amortization expense. In addition, we expect approximately USD 15 million of cash expenses related to integration and other one-time items. This 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 USD 125 million. That includes what we consider more normal capital spending of approximately USD 67 million for purchased aircraft, capitalized software, et cetera, with the remainder of our CapEx being the USD 58 million we spent to acquire the Textron 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, Vinayak, 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.

(Operator Instructions) Our first question on the phone lines from Sheila Kahyaoglu of Jefferies.

Welcome, Todd. Kenny, great quarter in terms of the top line. How do we think about -- in your prepared remarks, you had some comments about watching the demand environment. What signals are you watching, whether it's your active members or your users?

I would say, great leading indicator of our business is the block sales. I know we've projected and we reported 187% up there. The blocks are funds that are deposited in advance of flying; again, probably our best revenue visibility tool that we have. I'd say, secondly, we always watch retention. I want to say that retention has been very firm. I know we've reported out that we've had 90-percent-plus retention on our block buyers. If you look at the membership growth and everything else we have going on, that indicator -- that's a great leading indicator as well because if someone renews, it doesn't mean that they buy the block on that month. That means they're going to fly in the next 12.

So when I look out and I think about what's out there publicly, I look at the travel managers and 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 the service and now the platform -- the global platform that Air Partner affords us, we feel good about the demand.

And maybe one more on the cost side. 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 and in 2023?

It's Todd. I'd say, we put the fuel indexed charge in place only in June, and we had another fuel surcharge flat rate that went into effect beginning of this quarter. But relative to the indexed fuel charge, we think it gives us the most cover. That really affected 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 even grew a bit in the second quarter. Now that we've got that fuel index in place now, we feel much better about the third quarter and fourth quarter that we've got that mitigated. So we do expect some level of lift in our margin as a result of that going forward in 3Q.

I think we talked about the guidance and the margin rates that we shared for the third quarter. What we would expect to see is some of that is higher-than-typical performance in terms of asset sales as well as the outperformance that we saw 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 in place.

We now have the next question from Michael Bellisario of Baird.

Just on your 2024 adjusted EBITDA profitability target, maybe give us some context just around run your decision to 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?

Yes, I'll take that. Look, I think we've started with a lot of things here that we feel really, really good about in this business, and certainly, as I've joined in the last 6 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, though, [all] of us in the leadership team and all the [employees at Wheels Up] feel good about the fact that we generated the loss of the magnitude that we did in the second quarter. And I think it's very clear to us, and I think as we go forward that revenue growth has to 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 Vinayak's section and mine, relative to what we're laying out. We've taken a number of actions already, fuel surcharge being one of those, price and structural changes that went into effect in June that we'll increasingly feel coming through the book, obviously an incremental contribution from Air Partner that's positive and helpful. But now we're really [translating] our focus onto the operational improvements.

And Vinayak, [to share a little more about that in what we’re] doing, but we felt that the '24 timeline gives us a 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 in 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 date and that's what we're aligned and working to. And I don't know, Vinayak, 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 operation, so one of the key things we had to do was launch UP FMS, so our entire operation is seen as one operation. So that in the past, as you know, that we had 4 and 5 different certificates. Even though they are 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 what are days when we have more demand, how do we actually match the supply with the demand. Primarily it's our first-party demand because that comes at a higher margin. So we can do that at a much fine-grained fashion. So that is the first thing we will be doing.

The second thing is we have better visibility into pilots in terms of when their training schedule happens, when they take the vacation, so 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 margins. So the much earlier we have a better visibility into when we want third-party supply, the better it is in terms of getting margin.

These are the 3 main things that will help us to give us more confidence as we improve our margins. The last thing I will say is we are going to consolidate all the certificates into one certificate. That really gives us much better visibility and operational efficiencies and cost reductions as a result of consolidating all of them into one certificate, which 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 outyears, or is it really more just about leveraging the top line and a lower percentage of revenues?

I'd actually say it's a combination of both. So I think as we think about where we want to invest, certainly, we want to continue to put investments 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 G&A 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 things. I think you'll see some absolute reductions in certain areas that will be used to fund some of the technology and targeted sales and marketing spend. And then, obviously, we have to translate our growth to more operating leverage in general. We haven't successfully done that in the past, but that's a key focus for us as we get the right priorities and the right alignment going forward.

The next question comes from the line of Aaron Kessler of Raymond James.

Couple questions. Maybe on the price elasticity, can you just talk about maybe the reaction to some of the higher prices? I assume not much of a change in retention, et cetera. Also, you mentioned pilot retention a few times. Can you just maybe quantify what the churn rates are and how should we think about -- any way you can quantify the retention rates that you're seeing and how that's changing?

This is Kenny. I'll take the first swipe here. Just in terms of the pricing increases. We've put price increases in. We did November, and we did again in May. So you have had 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 customer is really in tune with the price of oil out there, so that's not an opaque number and the customer accepts that that's part of the programming. There's a scarcity as it relates to assets out in our space, and I think the programmatic. There's a scarcity as it relates to assets out in our space, and I think the programmatic offering, the membership has really resonated because of that scarcity. And we feel strongly that the -- again, the retention, meeting those price increases and what people are doing and telling us about what they're going to do in the future, that to me again is an indicator, if there were 2 or 3 dashboard items, those are the ones I'd be looking at.

Yes. Just to add on to that. From a pricing perspective, when we made changes in November and when we made changes in June, we not only looked at the price of oil, but we also looked at what competitors are doing, what similar services are doing. Our price increase is not just an hourly price increase. We changed minimums in some places, we increased peak rate surcharges. So we're trying to match what competitors are doing while still remaining competitive and being [great deal] for our customers. So that's the first thing.

The second thing is in terms of demand and retention, we actually watch retention very, very closely. As we said, our core retention is over 80%, and we continue to see retention continuing to stay stronger. What we are doing is managing retention at a much [close] basis. Our account managers get very detailed information on who is more likely to renew, who is not likely to renew. So we're watching it and making sure the retention stays strong by providing visibility and the data to our account manager such that they can actually have the conversation with the customer on retention. We have not seen price elasticity actually affect retention in any shape or form right now.

And then just maybe on the pilot retention. And also, can you come -- I may have missed it, but the other revenues, can you remind me 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. Yes, so from a pilot retention perspective, it is something we watch very closely. As you know the current environment, pilots are in great demand. We are very cognizant of it. That is why we launched what is called an Aircrew 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 we really understand retention at a per cabin class basis, we 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 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 Vinayak and team are developing Aircrew 360 and Aircrew 360 2.0, we think about our pilots as our partners, and like I said, we thank them anytime we can.

Yes. So the second part of your question, I think, was 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 2 primary drivers that make up that USD 56.7 million of other revenue in the quarter. That's both the asset sales that we had. We had about [USD 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 revenues being around USD 35 million or so roughly, about USD 22 million of their revenue actually goes into the other revenue line just based on the category of what it is.

So I think if you think about that going forward, we signaled 2 things I think in some of the prepared remarks that we shared earlier. One is that we had a higher than typical level of asset sales in the second quarter, so we don't expect that to continue at the same level. And also, we saw Air Partner outperform. And 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 Air Partner is contributing so far with their short time with us.

We now have Gary Prestopino of Barrington Research.

Couple of questions here. Vinayak, could you maybe explain to me again is when you consolidate these certificates, what benefits does it give you? I believe it doesn't standardize the size of flight crews and things like that.

Yes. So what happens when we consolidate certificates is all the pilots who [are hyperactive] to a particular type of aircraft, they can actually fly that aircraft. To give you an example, let's say we have 2 certificates, and we need pilots, let's say, for our Citation Excel, and they are in that city. But if they are belonging to different certificate, we can't put them on the plane. So that is first thing.

Second is 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 2 different certificates, I cannot globally maximize all of them. Having them in 1 certificate also means there is less communication gaps, there'll be 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 capacity. Having all of them in 1 certificate really allows us to optimize the best customer experience while making sure the cost for delivering that experience in the case of an 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 just a government check-the-box kind of regulation? Is it extremely hard to do this?

Yes. No, airlines do it all the time, so it is not really hard to do. But it also helps us. It does steps 2 steps: 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 the efficiencies. 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 platinum] certificates we have, the best practices from all of that, work with the FAA, and then consolidated. The good thing is we have Dave Holtz who is our Chairman of Operations who worked at Delta Airlines, was involved in similar certificate consolidations at Delta as well. And we have help from people across from Delta helping us out on how we actually manage this.

Okay. And then just a couple more questions. In terms of your target for positive adjusted EBITDA, is that exiting Q4 or is that -- 2024 or is that -- when do we start seeing that in your masterplan if you want to share that with us?

Yes. It's certainly our goal to get there as quickly as we can. So we said 2024 and that's our focus. We don't intend that [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 what am I focused in the last few weeks since 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. Vinayak 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 here 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.

Okay. And to achieve profitability, what would be your target adjusted contribution margin? Can you share that?

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

We now have Marvin Fong of BTIG.

First one, I believe last quarter you guided to a contribution margin of 3.5% and obviously you did better than that, and I think you cited some other factors such as the asset sales and the little stronger performance at Air Partner. So just wanted to confirm that on a core basis, did you also outperform the 3.5% contribution margin target?

Yes. I think the way we think about it, you're correct in what you said. We did highlight that a majority of that improvement over the sequential 1Q to 2Q was driven by Air 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 improvements quarter over quarter, higher new member growth as well as starting to see some of the pricing and 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 1P fleet but also in the 3P fleet. So we did have the improvement but it was not as strong as we had hoped to on an operating base 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, you obviously have plenty of cash on the balance sheet. But where do you expect your cash position to trough at before you do get to breakeven? If you could just give us an idea on your cash consumption over the next I guess 1.5 year, that'd be great.

Yes. We don't provide specific guidance on the cash flow by quarter. But here's what I'm saying, we had USD 427 million as we exited the second quarter. We feel really good about that position. in addition to that, we have no debt and highly financeable assets. As we mentioned in some of the prepared remarks, we feel that the fair market value of the assets are higher than what we carry them on the balance sheet. We've seen stronger ability to drive prepaid blocks. In the future we expect that to continue. And I think we feel really good about where we are in regards to net cash position and the flexibility our balance sheet affords us. That gives us the time and the security to then deliver on the improvement in profitability and 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 that we want to invest in. Obviously, there's a high [call] rate for that. We're going to be very judicious with any decisions there, but I think we feel good about the position that we're in.

We now have Noah Poponak of Goldman Sachs.

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. And then I guess I'm a little surprised that's not a bigger highlight on the bridge to positive EBITDA in '24. Maybe you can just discuss how you're assuming that mix is, as it seems like it's a pretty big piece of the process to get to 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 it as supply. We see it as what percentage of our flights are being fulfilled by first-party versus third-party. About 70-plus percent is fulfilled by first-party; depending on the day, a little by second-party; and the remaining, about 30% is fulfilled by third-party. We have 2 kinds of third-party: one is ad hoc where we are going in the market and buying. We also have arrangements called GRPs, which means guaranteed rate plans. We have contracts with third-party suppliers where we maintain scheduling control of those planes while they maintain operational control. That allows us to understand. 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 will also be more third-party, including a higher mix of GRPs, which allows us to actually fulfill the customer demand.

Also, when you think about where we're going with the business and why Vinayak and company are so important, to technology enable the third-party in our space is 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. We're focused on unlocking this [fragment live] 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 to-dos, if you will, on how we're going to derive, where this business is getting its lift forward, but again, off balance sheet. Third-party supply is going to be a big part of the mix on the go-forward basis. And again, I think that connection, that's really our core mission is to connect buyers and aircraft at scale is something that technology's really going to unlock. And I think your thesis is about third-party playing a big role that's something we see and that's something we're shooting for.

So one additional thing I wanted to say was this UP FMS, the technology platform we use to manage our planes. Over 100 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-fleet 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 such that we can actually fulfill that customer demand in the most efficient way. Todd, you'll take the second part?

Yes, look, I think in some ways if you think about that path to possibility, that operational improvement box that we highlighted, that 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's going to translates to hopefully not only higher rates but expand the [TAM] for us as well.

Okay. That's all very helpful. Appreciate that. Maybe just to follow up on the technology initiatives. What's the timing of the mobile app bullet points you highlighted on Slide 7? Obviously, that'll be forever evolving, but just those core items you've highlighted today, when are those complete?

So in April we launched a new version of the mobile app. We had not made an app update for 2 years. But there's 2 things that happened. One, that app is now built on a 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, like 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 we see a low-demand day or a day where there is an empty flight available, customers can actually get alerts such 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 -- we're improving the speed of the app as well, such that customers can see the prices faster, they can go through the pipeline faster, so that they can check out faster. My past experience has all been able building mobile apps and speed of the app actually matters a lot.

The other thing with respect to technology on the app side I wanted to say was this one UP 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're 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 2 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 deposit activity since that's moving the needle at the moment?

Yes. I think, in general, we expect a fairly consistent profile as we've seen in prior years. Obviously, we drove really strong block sales coming out of the end of last year with some of the price changes. We saw that again in the second quarter. We don't expect the third quarter block sales to be quite as robust as what we saw in the second quarter. That's typical, but that's maybe a lower block sale quarter. And then typically, fourth quarter again we'll see a pretty strong position there. And we expect that to be reasonably consistent with what we've seen in the past.

We have a final question on the line from Tyler Seidman of Credit Suisse.

Just one for me. It sounds like you're opening up to non-members. Can you talk about what routes you have opened up so far? Are these mostly like your high-volume routes more broadly? And at this point, what are the key constraints before having a broader launch? Is it mostly the pilot issues or are more tech investments needed on the back end?

Yes, 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. More technology that we get into our operations, the more we understand where there's demand available, whether it's for -- by the way, Air Partner has done a great job of putting demand on our fleet. Wholesale when we have -- you take a Saturday, if you will. A Saturday is not Friday or Sunday related to 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 [in a year], and where we have more demand, the demand 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 the non-member community, they can become members and have access to our fleet. So with that, to Vinayak. Yes. So one of the advantages of having everything on UP FMS is we can see the demand that is there on the platform and we can see what is the supply that we have to fulfill that.

So wherever we see mismatch, we do 2 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 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 GRP planes on our platform, we see where we have capacity. So based on that, you are seeing when you go on the app and search, whether you are a Connect member or a non-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 flight flying into Florida on Friday and only 25 flights going 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 tech we are building. Right now, though, we understand capacity, and based on the capacity, we are fine-tuning by cabin class whether we open up the demand for members or not, which we were not doing before. But the key lever for that was actually building everything on 1 FMS.

We have no further questions on the line. I'd like to hand it back to...

I want to thank everybody for joining today. Appreciate and the wheels are up. Thanks.

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