Wheels Up Experience Inc. Q2 FY2021 Earnings Call

Hello, everyone. Welcome to the Wheels Up Second Quarter 2021 Earnings Call. My name is Bethany, and I’ll be coordinating your call today. I will now hand the call over to your host Keith Ferguson from Investor Relations to begin. Keith, over to you.

Thank you. And welcome again to Wheels Up’s second quarter 2021 earnings conference call. Earlier today, we issued a press release announcing our financial results for the period. The release with the 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 estimates 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 the SEC guidelines. 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 our Chairman and Chief Executive Officer, Kenny Dichter. Kenny?

Thank you, Keith. And thanks to all of you for joining us today. We are excited to share the Wheels Up story with you. Please check out our Analyst Day materials from April 16, 2021, which you can find on our Wheels Up Investor page. We will touch on parts of that original presentation today. Building on my 20-plus years in the private aviation industry, Wheels Up is bringing the next phase of disruption with our marketplace platform. Our marketplace will efficiently connect growing demand with global aircraft supply, which over time will increase access, drive down costs, open the aperture through a much larger total addressable market and improve yields for third-party operators. Our strategy and improving yields on underutilized assets is similar to how Uber has extracted value in cars and Airbnb has done in homes. Let me share some of the highlights from this morning’s earnings release. We reported over $285 million in revenue in the second quarter, setting a quarterly record and up over 110% year-over-year. First half revenue was just under $550 million, which is up almost 90% year-over-year. Our Active Members grew almost 50% year-over-year and now exceeds 10,500 in total. Our Live Flight Legs were up almost 150% year-over-year to over 18,000 in the quarter. Private aviation has rebounded more quickly than anyone in the industry expected. We are seeing unprecedented demand for leisure travel and the beginnings of a return for business and international travel. Our strategy to increase and diversify our fleet, cultivate our brand, provide exclusive partner benefits and further develop innovative technology are key drivers to our performance. We view the combination of current market conditions and our strong customer cohort purchasing behavior as a great opportunity to increase our market share. We believe this is a defining moment in private aviation, where being bold matters, and we’re building relationships with consumers new to the market is critically important. As a result, we have made the strategic decision to invest in the growth of our business, while some industry participants are pulling back. This gives us even more conviction and confidence to push forward. I’d like to take a moment to recognize our hardworking team for their tireless work and support of our customers. I’d also like to thank our loyal members and customers for their trust in us. As I mentioned, we are seeing very strong demand. Now, allow me to explain how we are managing supply this year and our plans to enhance it. We deployed advanced machine learning algorithms that have improved our demand forecasting. This improved forecasting allows us to make short and long-term commitments to secure supply from other aircraft operators through the use of Guaranteed Rate Programs, what we call GRPs. These asset-light GRPs now represent over one-third of our third-party capacity, up from nearly zero at the beginning of the year. We have expanded the number of charter hours available from our managed aircraft base. These aircraft owners allow us to use their airplanes for Wheels Up members and customers at times when these owners are not flying. We will continue to unlock the latent supply in the industry. We will use machine learning to further enhance our ability to find the right plane in the right place at the right time to drive utility and reduce repositioning hours. We are creating products and services for our aircraft management platform to drive additional asset-light lift to support our flight demand. Our managed aircraft business provides a key component of supply. We are accelerating investments in areas of the business that we had expected to develop over a longer time horizon. That includes investing in human capital, technology, infrastructure, and key areas that will drive efficiency, reduce costs and most importantly, deliver world-class experiences in the air and on the ground. We believe Wheels Up has a significant first-mover advantage and that this strategy will generate strong margins and create substantial shareholder value over the long-term. Now, I’d like to recap some of our recent initiatives. We forged an exclusive partnership with American Express, a great opportunity to work with one of the most iconic brands in the world, offering unique programs and benefits to Platinum Card Members. This represents an important opportunity for lead generation. We launched UP for Business, which formalizes our offering for businesses and their private aviation needs. With our diverse fleet and commercial relationship with Delta Air Lines, we have already seen increased interest from businesses. As I like to say, CEOs like us, CFOs love us. I see a lot of opportunities with business customers. We recently integrated the Mountain Aviation fleet onto our Avianis Flight Management System. You will hear more about that in a few minutes. As part of our Meals Up initiative with Feeding America, we co-sponsored The Match with Tom Brady and Phil Mickelson, teeing off against Aaron Rodgers and Bryson DeChambeau. I’m proud to announce that to date we have inspired funding for over 60 million meals. We continue to focus on diversity, equity, and inclusion, both inside and outside our organization. Partnerships with organizations like C200, a powerful community of the most successful women in business, representing companies with more than $1.4 trillion in combined revenue and the NFL Players Association and its Community MVP program are two such examples. Next up, I want to introduce to you Vinayak Hegde, our Chief Marketplace Officer. Vinayak is the newest member of our C-suite, having joined us this May. He is responsible for all of our marketplace initiatives, including the product and technology that will power it. Vinayak was previously a senior executive at Airbnb, Groupon, and Amazon. Vinayak was introduced to us by the Chairman of our Marketplace and Board Advisor, Greg Greeley, when we partnered with Amazon and Airbnb. Vinayak is a force of nature and is already doing great things for us. With that, I’m now going to turn over the call to Vinayak.

Thank you, Kenny, and great to speak with all of you. Let me start by providing a little color on my background, specifically at Airbnb, Groupon, and Amazon. I led the development of their marketplaces, which included systems and processes to match demand and supply. My responsibilities also included growth. Growth of both demand and supply, which in turn drove greater liquidity in each marketplace. My prior responsibilities were also focused on all the technology and processes that bring the marketplace platform to life; furthermore, bringing disparate systems, knocking out the best architecture, recruiting the brightest software minds, and creating a simple user interface that makes it intuitive and easy for customers to transact. The systems we built used data to power machine learning algorithms needed to optimize in real-time, things like dynamic pricing, personalization, impression mix management, and activating. These systems enabled us to react quickly to changing conditions in the business to optimize revenue and maintain the highest standards of customer experience. I wasn’t looking for a new challenge when Greg reached out to me. I was intrigued by the opportunity to develop an innovative marketplace platform for our high-value customers, where there really isn’t anything competitive today. Private aviation happens to be an ideal area for disruption with analog processes largely in place, limited automation, and fragmented supply. We are on a quest to create a much larger marketplace with optionality to provide more services for our high-value customers, examples of great events, partner benefits, and opportunities to expand into logical adjacencies. All of this creates more demand, reinforcing the strength of our platform. We believe that becoming the demand generator is the first step to building an attractive marketplace platform. Our data shows that existing customers continue to spend at attractive levels, and our newest cohorts are spending at an even faster pace. That’s extremely encouraging. It reflects our strategy of diversifying our fleet that has provided us a platform to service a lot more of our customers’ needs. The data for customer behavior allows us to predict demand in a more deterministic way, which in turn allows us to acquire the right type of aircraft supplies more efficiently in the long run. We are particularly encouraged by the fact that the vast majority of our flight demand comes directly to us, without any paid media, and reflects the strength of our brand. This customer behavior is very similar to how Amazon Prime members shop at Amazon. Our industry is very complicated. Flight schedules come together with little notice. There is no technology that provides real-time visibility of aircraft operators, or crew availability, maintenance schedules, or insight on where those aircraft need to be and when. There is safety vetting, trip services like catering and ground transportation, and international trip support. There are dynamic pricing algorithms to optimize schedules. And then, there is the user interface to make it seamless and easy for customers. Today, much of the background of the entire industry is executed on analog, labor-intensive processes that are not optimized. We have to utilize technology to drive automation. And there are a lot of things we are going to do. Let me tell you about how I see the product and technology roadmap for Wheels Up. During my short tenure, I can tell you I’m increasingly excited by our assets and our technology roadmap. Wheels Up is building a service-oriented architecture for its marketplace. Wheels Up is no different from where Amazon was in its early stages. When I think about the Wheels Up platform, I think of four components: the app and the customer-facing user interface and the features that enhance our go-to-market; integrated tool sets that are force multipliers to enable our service teams to better manage flights and overall customer experience; Avianis or flight management system, which is the ERP of our flight operations; and machine learning and optimization systems that make all the above more efficient. We’ll be rolling out significant new enhancements on our app over the next year that will allow customers to better search for specific destinations, compare prices based on time of week and day, have better visibility to shared flights, and set up alerts for their travel preferences. About 50% of our flights today are booked through the app. There is still room for improvement. The features that I just highlighted are a step in the right direction with much more to come. Once you have a booking, the goal is to automate the actual flight back-office functions, including personalizing the experience to align with customer preferences, procuring the right supply, and otherwise ensuring the flight proceeds as effortlessly and seamlessly as possible. Our improved demand forecasting tools have given us advanced notice to anticipate demand and schedule supply before others. We expect to further improve efficiency through the full deployment of the global aircraft search engine that we detailed on our Analyst Day. It will give us a high-fidelity view of all the applicable aircraft, their locations, and their availability. This Uber-like system will evolve from Avianis, which is a critical enabler of our strategy. Our flight management system, which is the core component of Avianis, is the brains behind the flight operations or the so-called ERP system. It provides flight tracking, crew scheduling, transaction settlement, analytics, and a host of other features that are essential to operating a fleet efficiently. In June, we converted our Mountain Aviation fleet onto the Avianis platform, which is an important milestone. Floating fleets are exponentially more complex than home-based fleets, but also the greatest opportunities to drive efficiency and utility across our asset-right fleet. We learned a lot from our Mountain Aviation conversion and are working quickly to drive enhancements to further blaze the path to a much wider deployment, both within our own Company and commercially for our third-party operators. We will be building a platform to incorporate machine learning into aspects of optimization across our operations. We can improve fleet availability by optimally timing maintenance at an individually aircraft level and intelligently scheduling flights and crews to reduce empty leg flights. Driving dynamically will help us maximize yield for both our owned and managed fleets and our partner fleets. This will improve unit economics and provide immense benefit to our customers. Let me conclude by saying, with the strong demand generation we have today, Wheels Up has an incredible foundation to harness a lot more value for shareholders. I see a lot of similarities with other marketplaces that I have been involved with at the earlier stages of their life cycles. With that, let me turn it back to Kenny.

Thank you, Vinayak. Our team has accomplished a lot in our short history. We have built a strong brand and foundation, and have an experienced and diverse management team, which I believe has the vision to take us to the next level, as we create a marketplace platform for our high-value customers. Let me now turn it over to Eric Jacobs, our CFO, to run through our financials.

Thank you, Kenny. It’s great to represent Wheels Up to this group during our first public company quarterly earnings call. As Kenny noted, we’re very pleased with our strong start and the tailwinds in the first half of the year. We generated record revenue of $286 million in the quarter, up 113% year-over-year. As I comment about the second quarter, I’d like to do so in the context of providing an overview of our revenue model, which is broken down across four main categories: membership; flight; aircraft management; and other. Let me start with membership revenue, which grew 23% year-over-year. This revenue is highly visible and largely recurring, given our strong 80%-plus retention rate for core members. These core members make up most of our membership revenue. In the second quarter, we added more than 600 net new members with Active Members growing 47% year-over-year. We were pleased to have crossed the 10,000 member mark, finishing the quarter with 10,515 Active Members. While I expect that we will add more lower-priced connect members versus core members over time, we’ve added more core members than connect this year by a ratio of roughly 2 to 1. Our core offering that is guaranteed availability and cap pricing across all asset classes is clearly resonating with the market, particularly as industry pricing has increased and supply has tightened. That said, I want to stress that we don’t manage our business for any one type of customer, whether member or non-member. Our goal is to serve all customers and address their specific needs. Like Amazon or Costco, the member relationship is a key driver of our total revenue. We’re actively working to open up the aperture to attract other customers who are not yet members. Now, I’ll move to the next revenue category, flight revenue. Flight revenue is the largest contributor to our top-line. It was up 12% sequentially this quarter, and up 154% year-over-year. As I said during our Analyst Day, we think the best way to model flight revenue is to multiply Live Flight Legs by revenue per Live Flight. Live Flight Legs were up 19% sequentially from the first quarter and 146% year-over-year. As Kenny mentioned, we continue to see strong leisure demand and the beginnings of the pickup in business and international travel. Flight revenue for Live Flight Legs is driven primarily by stage length and cabin class mix of aircraft size, and it averaged $11,663 for the quarter. This was up 3% year-over-year. We have said in the past that flight stage lengths were up during COVID as customers generally traveled further within the U.S., but less frequently. Given that the economy is reopening, we’re starting to see a return to more normal trends. As a result, the average stage length was down over 10% year-over-year in the second quarter. It is now more consistent with traditional pre-COVID travel patterns after rising over 20% year-over-year in the first quarter. On a separate note, we’re seeing a higher mix of larger cabin flying, which is driven by continued customer interest in our recently launched and highly popular transcontinental service offering, driven primarily by our acquisition of Mountain Aviation. You’ve heard us say how excited we are about our recent strategic initiatives and how they are resonating with our customers. Let me give you some data points to highlight this. In the first half of 2019, prior to expanding our fleet offering and pre-COVID, our average core and business members spent slightly over $70,000 annualized with us, inclusive of membership revenue, which we believe is less than 50% of their total spend on private aviation, based on our membership survey data. Today, those customers in the first half of 2021 are spending an average of more than $80,000 annualized. Even better, new core and business members who have joined during the past year are spending more than their historical cohorts, which should bode well for future customer lifetime value. And we believe there’s a lot more wallet share available to us as we continue to execute and address our customers’ wants and needs. In terms of visibility, the percentage of core members who have purchased prepaid blocks this year has increased significantly to over 50%, and core members who buy blocks typically renew at a rate close to 90% historically. These blocks are prepaid deposits for future flights. We receive the cash upfront and gain visibility into our customers’ future flying intentions. Revenues are recognized when they fly typically over the following 12 months period. For the quarter, prepaid blocks were $116 million, up 71% year-over-year, which is a strong showing considering the number of blocks we sold in the fourth quarter of 2020, ahead of the resumption of the federal excise tax on flights. The next category is aircraft management. Aircraft management revenue is generated from recurring monthly management fees as well as recovery and recharge revenue, which is largely a pass-through of actual costs incurred with a small margin. Aircraft management plays a key strategic role for us as we scale our business in an asset-light manner. When our aircraft management owners allow us to use their assets, we can leverage our leading demand capabilities to schedule that aircraft to service our customers. We strategically entered into aircraft management through our acquisitions of Gama and Delta Private Jets. As part of a typical integration process, we’re calling through some legacy contracts that are not commercially advantageous to us. We’re also willing to make calculated trade-offs from time to time to obtain access to certain aircraft that are well-suited for our marketplace. They may offer lower monthly management fees or alternative hourly fee arrangements to create incentives for more charter hours and flexibility of aircraft usage. As a result, you should expect revenue from aircraft management to be roughly flattish sequentially over the remainder of the year. Our other revenue is a small percentage of our total revenue and represents revenue earned from software, fixed base operations or FBO, maintenance, aircraft sales, and special missions including defense. Switching to supply, let me quickly summarize the three categories of our asset-light fleet. We have a first-party owned and leased fleet of about 180 aircraft. We also have access to our managed second-party fleet with roughly 165 aircraft, and a third-party fleet of over 1200 aircraft. The managed and third-party fleets are considered asset-light fleets. The goal is to optimize utility and efficiency across all fleets to use the right plane in the right place at the right time to reduce or eliminate repositioning legs and ultimately improve costs and pricing. To manage our third-party asset-light sales closer to our customers, we’ll generally try to utilize that better positioned aircraft. In other words, we will take a holistic approach to scheduling trips. Year-to-date, our hourly mix of using our owned and leased fleet versus asset-light aircraft was approximately 65% to 35%, a decrease from 2020 levels of 55% to 45% was due primarily to the acquisition of Mountain Aviation, which was a wholesale provider to us last year, and that showed up as a third-party provider. Let me turn now to the cost side of our business. We, an aviation industry at large, are not immune to the cost pressures and supply constraints impacting many industries. Commodity prices, like fuel, travel costs related to commercial airfare and hotels, parts, and related shipping have all gone up and are tightened for many industries. Also, third-party flight maintenance costs as well as pilot and other labor costs are increasing as it relates specifically to our industry. We are leveraging the scale of our network and software tools to find and expand supply with significant enhancements to come. While definitely not easy, we’ve been able to manage through these constraints. And our hardworking team across the entire Company deserves a lot of credit for that. Also, given the rapid acceleration of demand, our strong commitment to deliver for our customers, we have absorbed some near-term pressure on our contribution margin, which we expect will be flat to slightly down in the second half of the year versus the first half. In addition, we continue to invest in sales and marketing. We are hiring more sales reps and account managers to address the strong demand we are experiencing. We hope that we can safely restart and host our signature Wheels Up events soon and also expand a number of regional events so that we can engage with our growing membership base. Events were all virtual last year. Year-to-date, sales and marketing expense was 6% of revenue versus 9% in the same period last year. Our technology and development investments are key to driving operational efficiencies, as both Kenny and Vinayak highlighted. We previously discussed enhancements we are making to our mobile app. And we’re looking forward to the commercialization of Avianis’ real-time supply dashboard, which will help us streamline scheduling and optimization for the marketplace. Going forward, we expect to increase our spending on technology, including capitalized software to generate increased efficiencies across the organization, particularly in our flight operations, customer service, and sales and marketing areas. With regard to EBITDA, our adjusted EBITDA improved by $7.6 million in the quarter compared to last year. While we’re almost a year ahead of schedule in our revenue growth, in this short term, we have strategically traded lower contribution and adjusted EBITDA margins to achieve that growth. Core member retention and lifetime value are very important to our long-term success. So, we’re striving to go the extra mile to ensure our customers are getting the best possible experience in this environment. While this requires additional investments in the business, we still believe in our long-term margin potential. Turning to capital expenditures, CapEx was $10.5 million in the first half of 2021, more than half of which was capitalized software. With CapEx at approximately 2% of revenue, we’re demonstrating lower capital intensiveness of our business. We’re able to better utilize our own capacity, leveraging asset-light lists to achieve the strong growth we reported, including the 146% year-over-year increase in Live Flight Legs with only minimal additions to our owned and leased fleet. Now, I’ll briefly review our capitalization and liquidity. At quarter end, Wheels Up had ample liquidity, the cash and cash equivalents of $161 million. After the quarter, we received gross cash proceeds of $656 million from our merger with Aspirational. We used a portion of those proceeds shortly after closing to pay off all of our $182 million of outstanding debt. This debt payoff included all of our aircraft-related financing and all of our other notes related to our prior acquisitions. Today, we believe we are in a much stronger position if we wanted to tap into the debt market. With the ability to securitize our owned aircraft, if we need to help fund our business and any opportunistic acquisitions. I will now turn to our financial outlook and guidance for the full year of 2021. When we started conversations last year with Aspirational, our initial projections were for $912 million in revenue for 2021. As we have discussed on the call, we’ve seen very strong flight demand in the first half of the year. The earlier strength in the first quarter continued into the second quarter with over $0.5 billion of revenue year-to-date through June. Given the strength in the first half, we now expect 2021 revenue to be in the range of $1.05 billion to $1.1 billion. For those who have reviewed our S-4 filing, we’re almost a year ahead of the initial Aspirational long-term revenue projections. And we will be crossing the $1 billion revenue threshold in only eight years of our existence. With regard to GAAP net loss, we expect to report a GAAP net loss of between $145 million to $160 million for 2021. While we are not immune from the near-term inflationary pressures, we have chosen not to raise cap rates to date. We’re also increasing investments in operations, technology, product development, and customer service. When you put it all together, we expect adjusted EBITDA to be in a range of negative $40 million to negative $50 million for the year. We expect CapEx spending will be $25 million to $35 million this year to support the growth and demand. Specifically, in the remainder of the year, we may add a small number of aircraft, given the strong demand. And we expect our technology-related investments will lead to an increase in capitalized software year. Year-to-date, roughly half of our CapEx is related to capitalized software for technology development. And CapEx also includes spending for our New York headquarters, which will be substantially completed by the end of the year. From an income tax perspective, we anticipate that we will generate net operating losses for income tax purposes in the near term that may be carried forward indefinitely. Now I would like to briefly touch on share count. You can see in the appendix of our slide deck, a table that outlines our capitalization as of July 13th, which is the date the merger with Aspirational closed. The table is inclusive of warrants at $11.50 and earnout shares that we’ve got at $12.50, $15, and $17.50. And it also reflects the acceleration of certain equity awards, as part of the closing of the merger. Lastly, please be aware that the appendices and our SEC filings, such as the Super 8-K A, provide important reconciliations, as well as certain quarterly operating metrics and other financial data. Before I turn the call back to the operator, I want to thank each of you for listening to our first quarterly earnings conference call. With that, let me turn the call back to the operator, so we can take your questions.

The first question comes from Sheila Kahyaoglu from Jefferies. Sheila, your line is open.

Hi. Good morning, guys. And thank you so much for the time. And congratulations on your first quarter, out of the gate very strong. Maybe I could ask about membership grew 47% year-over-year. Can you give us any color about the growth between connect and business core? And you also talked about members going from $70k to $80k annualized spend. Kind of how you think about a normalized level of spend?

Sheila, thanks for being here and thanks for that question. I would just say that we have a lot of work to do in a very good way on business, and it’s a great opportunity coming forward and the segmentation on the connect membership. Overall, we feel really good about where things are. Of course, we like the increased spending. And I’m going to hand that to Eric to provide more detail.

Thank you, Sheila. I appreciate it. As I mentioned earlier, we are indifferent to the type of member we have, whether they are core, connect, or even non-members; our focus is on encouraging people to fly. Membership offers benefits, particularly for core members, who are responding positively to features like dynamically priced cap rates and scheduling certainty. This is contributing to increased spending per member. The new cohort is performing significantly better than in the past, which is exciting in terms of lifetime value. Additionally, this growth is occurring alongside the resurgence of business and traditional leisure travel. Currently, we are engaging with high-net-worth individuals, but we are also noticing discussions about business and traditional travel among our membership.

That’s great. And then, maybe one more on the guidance if that’s okay. Your 2021 guidance seems to imply the second half growth of 27% versus 90% growth in the first half. So, are you just being conservative there? What drives that deceleration?

So, if you look at the back half guidance, it’s essentially saying, look, we’re right now, we want to be conservative, hopefully in terms of the back half being relatively consistent with what we saw in the first half. So, if business and international continues to come back, that could bode well for us. But right now, given that the comps were much tighter in the back half of the year, we just want to be conservative.

The next question comes from Michael Bellisario from Baird. Michael, your line is open.

Thanks. Good morning, everyone. First question relates to demand. Can you help us understand how quickly do you guys see bookings and/or new members sign-ups increase, as you have a sponsored event or you do some sort of marketing promotion, just thinking about the golf tournament that you mentioned?

Yes. I would say that, of course, when we get the brand out there, whether it’s an event like The Match that drew over a couple of million people on the Turner networks, or you do something with an ambassador, you definitely see an influx of lead activity and demand activity. I would say, even bigger, looking at a partnership with an iconic partner like American Express, and we announced something with their Platinum group, you immediately saw a spike in interest in people coming in. And I think we’re just getting started as it relates to the opportunities that we have with global scale partners in this area. I’m going to kick it over to Vinayak, who’s out in Seattle. Again, Vinayak came in and joined us about three months ago, spending some great time at Amazon and Airbnb, and as Chief Global Sales.

Thank you, Kenny. I mean, the key thing that we look at is, from the time people become a member to how quickly they book. And we are very encouraged by the results. That’s the strength of how our platform is actually helping. And we actually look at burn rates. We have a significant amount of people who use blocks. So, in addition to events, it’s also based on seasonality. And then, what we see here is people who become our members are actually trying our product much faster than before, which is very encouraging for us.

And I’m going to kick it over to Eric. I think he’s got a bullet here.

Yes. I think that last point that Vinayak made is an interesting one. If you looked historically, people generally become a member when they had a need to fly. And what we’ve seen recently is that the timeframe between when someone joins and flies has decreased, which is nice to see.

And then, just in terms of the balance sheet and potential uses of your cash. Can you help us understand what you’re thinking about today? I know you mentioned M&A and acquisitions, but where is that on the priority list today?

Yes. I would say, look, we’re in a very unique position. You talk about first-mover advantage and being the first public company in the private jet space in the history of the private jet space. So, having the public ammunition, I mean the $656 million available and being in that very unique position, we have a lot of different moves on the table, but we evaluate, and we kick the tires everywhere. We’re going to be focusing on aggregating supply in an asset-right way, with big partnerships. And I’m going to kick it over to Eric for maybe a follow-up bullet on that.

Yes. So, look, we have a strong balance sheet, we paid off our debt, and we like where we sit. We think that for our business, it’s very important to demonstrate to our customers that we have a very strong balance sheet. That’s where we stand.

Got it. And just one follow-up there. Any update on the Textron partnership that you guys announced recently?

We have a strong and longstanding relationship with Textron and their team led by Scott Donnelly. Our latest announcement involved the potential transition from VTOL to eVTOL technology in collaboration with Scott. We believe Textron will be an excellent partner, and with the engineering expertise from Mitch at Bell Helicopter, we are confident in our choice. By the end of the fourth quarter this year, we expect to showcase some VTOL developments with them. This partnership allows us to integrate our technology effectively. We are proud to have made this announcement with Textron, as they are a significant part of our fleet and there is much work ahead.

The next question comes from Gary Prestopino from Barrington Research. Gary, your line is open.

Hey. Good morning all. A series of questions. First of all, Eric, could you comment on maybe how much your member retention improved sequentially and year-over-year?

Yes. Historically, or last year, we reported that our core member retention was about 80%. It’s now over 80%. As Kenny mentioned at our Analyst Day, those who spend and fly with us are renewing at over 90%. We’ve experienced very strong retention over the past six months.

Okay. And then, a couple of other questions here. Kind of back of the envelope, after your transaction, post Q, the end of the quarter, your net cash on the balance sheet is about $630 million. Is that right?

I think it's slightly lower than that. In July, we experienced some expenditure, particularly in the summer months. I'll provide you with the exact number shortly. But overall, it is somewhat less than that.

Yes. I would just say on that question, it’s very healthy for us to have a good burn, provided that the retention numbers that Eric stated stand. And we’re excited, again, our biggest customers, our biggest members from a spend perspective or our members that we’re retaining is over 90%. What we’re excited about is if you look at the overall business, people putting down blocks are very important to us. So, what we’re seeing is people burning their hours off. And again, that’s good for us, very healthy, and then replacing and replenishing it. We have more block buyers than we’ve ever had.

So, Gary, if you look at page 15 in our deck that we posted on our website to accompany the presentation, you’ll see roughly a $575 million pro forma summary balance sheet as of June 30th.

To emphasize what Eric mentioned, it is quite unique in our industry to be debt-free and have the capability to support member assets if an opportunity arises.

No, I just think that’s great. I just wanted to make sure I got that clarified. So, when you’re talking about these prepaid blocks, that leads to my next question here. It looks like the deferred revenue was down from the end of the year. And as I recall, that deferred revenue reflects prepaid blocks and the amount of flight time people have paid for that has not been used. So, could you comment on that, considering that you said that the prepaid block purchases were pretty strong in the quarter? Does that normally happen?

Sure, Gary. Yes. Once again, I’ll refer you back to our Analyst Day where we discussed the seasonality of blocks. Typically, our deferred revenue decreases during the summer months as flying increases, and we usually see a significant rise at the end of the year. Last year, with the return of flights and the federal excise tax, we had over $230 million in blocks for that quarter. While I don't want to predict that it will be $230 million this quarter or by the end of this year, given the absence of the federal excise tax, we do expect blocks to rise. Historically, deferred revenue has indeed increased at the end of the year.

Okay. That’s just the explanation I wanted. I’ve got a couple of more if I may. It looks like your guidance on adjusted EBITDA relative to when you did the transaction, there was a negative delta of $11 million to $21 million. Can that all be explained by the fact that you’re increasing your investments in technology, people, etc.?

I would say this is Kenny, and I'll let Eric provide a few points here. Vinayak Hegde's presence on this call highlights our decision to prioritize our members. We are experiencing a significant increase in demand. Our commitment to our members today stems from our belief that lifetime value is crucial. Additionally, with Vinayak on board and assembling a technology-focused team in Seattle, we see positive developments on the top line. Our strategy involves a long-term perspective, and Eric can elaborate on how we reached the numbers he presented.

Sure. Thanks, Kenny. So, as I discussed earlier, we’ve absorbed the cost pressures and supply constraints that are affecting probably aviation as well as other industries. We have not raised cap rate to date, and we do typically raise pricing annually. In terms of some of the investments, we’re investing in an additional $20 million to $25 million in OpEx this year, on an annualized basis in our operations and service delivery capabilities. And that will enhance customer experiences and drive aircraft availability, scheduling optimization, and third-party supply. It also includes investing in our pilots through a series of initiatives to enhance recruitment and retention of new and existing pilots. We’re also investing an incremental $15 million this year on an annualized basis in technology and the marketplace. And that’s to generate increased long-term efficiencies.

I want to give Vinayak the microphone here. I know Vinayak, this is one that’s close to your heart and put your Amazon and Airbnb add-on. I think this play has been run and we’re committed to running it.

Yes. Thanks, Kenny. There is a significant amount of technology to develop here. The efficiencies we achieve will benefit us in the long term and set us apart from other companies. It reminds me of my early experience at Amazon, where we created software for foundational tasks that often go unnoticed. Functions like aircraft scheduling, trip planning, and maintenance require substantial investment, but ultimately, these will provide us with efficiencies that few can match. This is why I am very enthusiastic about this investment. Furthermore, in the private aviation sector, there isn't any proprietary software available for purchase and integration; everything must be custom-built for each company. This investment enables us to distinguish ourselves over time.

Okay. And while I have you on here, I’m just going to ask this question, because I think it’s important longer term. I mean, with the industry platform, technology you are developing the global aircraft search engine, how long is it going to take to get developed to where you would actually be able to employ the integrated platform in the market? And if you could give us a couple of bullets as to how this improves your operations, once this thing is in the market, that would be very helpful.

Thank you. We are approaching this in stages rather than all at once. Our goal is to dismantle the existing structure and build a service-oriented architecture, allowing us to implement changes swiftly. We have already migrated Avianis for our Mountain Aviation fleet, and you will see features rolled out gradually, leading to ongoing improvements over time. For instance, once Mountain Aviation is integrated into Avianis, we will be able to provide automatic fleet optimization features. As we continue to add more functionalities, we will see incremental optimizations. The same approach applies to our website; as we automate more on the front end, we can enhance search capabilities, which will boost conversion rates. This is a strategy I have successfully applied in other contexts, focusing on optimization across the board and continuous improvement. A sudden overhaul is quite risky. So, the first step will involve establishing the service-oriented architecture, followed by a careful, step-by-step migration of other components. There isn’t a fixed timeline; changes are being made continuously, and updates will be rolled out progressively.

Okay. Thank you. That’s very helpful. That’s all I have. Congratulations again for getting the Company public and your first quarter out of the box.

Thank you.

The final question comes from Oliver Chen of Cowen. Oliver, your line is open.

Hi. Thank you very much. Machine learning is a core competency at Wheels Up. What customer interaction data is really important, and what are the nature of the training sets that you’re pursuing to drive that customer experience? And as you think about ML across the organization, what’s the lower-hanging fruit, and where might it have the most impact in other departments? Kenny, I would also love your take on experiential and membership, and how you see that evolving as a lifestyle brand over the customer lifetime value as well. Thank you.

I’m going to have Vinayak take the first piece. And then, Vinayak, I’ll pick up the brand and the aspirational elements of what we’re doing on the lifestyle side.

Thank you, Kenny. I mean, when I look at private aviation and when I took the job, I mean, there were very few places where you can apply machine learning to so many aspects of the business. Let me start with the simpler ones at the back end. One is, fleet optimization and scheduling. How do you play the right plane at the right time? That’s where we can use machine learning. Second, we can now do prediction, we already do this right now where we can actually predict demand by cabin class that allows us to secure inventory much better than before. I mean, if you think about GRP, one of the reasons we can do these Guaranteed Rate Programs is we have conviction about the production of demand that we are going to get. So, that helps us a lot. Search result, how we actually optimize search results, we can use machine learning. Prediction for understanding propensity to continue to work with a sort of propensity to attract from our platform, so our sales team can actually work with the customer. Machine learning can be used for actually predicting maintenance. I will give you a very simple example. Let’s say, one of our planes is coming for maintenance. Our prediction could say this part could fail pretty soon. We could actually take the same unscheduled maintenance and add the predictive maintenance and get it done in one place, so our planes are in the sky more and are utilized more. So, pretty much every aspect of what the front end and the back end, we can start using machine learning, which is what is working very exciting about this platform.

Thank you, Vinayak. Regarding our goal of building a world-class lifestyle brand, we are fortunate to have Vinayak and Greg Greeley, who were instrumental in developing Amazon Prime. On the marketing front, we have Lee Applbaum, who has achieved remarkable results for Patrón, which was the largest independent sale of a liquor brand to Bacardi. We are focused on establishing that global lifestyle brand, and we selected Ravi and Aspirational largely due to their background with LVMH. With Scott Dahnke and his team at L Catterton, and Ravi now on our Board, we have all the necessary elements in place. I admire Ed Bastian and the impressive innovations Delta has made for its first-class and business-class customers, along with their frequent flyer programs. We have everything needed to build a strong brand. We are partnered with notable figures like Serena Williams, Tom Brady, Russell, Ciara, and others who truly represent our vision. We believe that private flying resonates with the over 8.1 billion people in the world, and we see everyone as being capable of flying privately. Our aim is to create a desirable image where wearing a Wheels Up sweatshirt signifies that you are just one step away from experiencing private flying. This is the kind of status we want our brand to convey, with the intention of making everyone feel included. Stephanie Chung, who leads our growth initiatives, has done an incredible job ensuring that everyone knows this brand is for them. Thus, inclusion is a vital aspect of our approach.

Thank you. And Eric, the presentation mentioned tightness in supply. How would you characterize the supply versus demand dynamic? And how might tightness continue and duration? I would love your thoughts on the biggest opportunities in supply as you scale as well. And which aspects of supply and which categories you scale. And as you balance return on capital, what’s asset-right, as well as customer convenience and availability? Thank you.

Thank you, Oliver. A significant aspect of our business model is that we operate in first-party, second-party, and third-party supply. This gives us a unique advantage in adapting to the industry's changing dynamics. Currently, supply is limited in some areas due to broader economic conditions. Adjusting our operations to meet these challenges isn't straightforward. This includes labor issues across various sectors, such as FBOs, which affects how quickly we can process fuel and thus get flights moving. This results in overall supply tightening. However, we believe this situation is not systemic and that we are better positioned to manage it than many others in the industry. Looking ahead, we aim to maintain a balanced approach, potentially leaning more towards asset-light strategies. Nevertheless, we may still acquire a few aircraft in the latter half of the year to ensure we strike the right balance among first-party, second-party, and third-party operations. Our aircraft management business will be crucial for our long-term strategy, as having access to owners' aircraft when they are not in use is a vital differentiator for us.

Thank you. And last question on this dynamic environment with the Delta variant and what we’re facing with lots of change and uncertainty. What are you seeing in your data and what can you control versus uncontrollable and the environment across the world? Thank you.

We are closely monitoring the Delta variant situation. In some cases, private aviation has become essential for people, and we see that reflected in the demand. Once individuals experience our services, the retention rates illustrate our position well. We are focused on our safe passage initiatives, with Dr. Scott Gottlieb collaborating with us to establish protocols. Scott has been extremely effective during this crisis, and we are proud to partner with him. We look forward to a future where medicine, vaccines, and other mitigation efforts address this challenge. I believe we are in a unique position; we have been operating daily since the crisis began in March 2020, and we are witnessing significant demand. We are navigating various protocols to ensure safety for everyone. One notable outcome of COVID for Wheels Up has been our partnership with Feeding America. We believe our company should contribute positively while achieving our goals, and we have inspired over 60 million meals, with more to come.

Thank you. Best regards.

Thank you.

This concludes today’s conference call. Thank you for joining. You may now disconnect your lines.