Brian Foley, the well-respected business aviation consultant, this week published a piece saying that Wheels Up needs to speed up getting to a profit to help Delta Air Lines, its largest investor. Delta’s profit fell 29% in the last quarter (it was not the only airline having a disappointing six months) and Foley says that Wheels Up needs to change quickly.

But, on paper at least, Delta’s investment in Wheels Up has not been a disaster. It is one of the few early investors who can say this. 

The airline was given 21% of Wheels Up in return for merging its business jet subsidiary Delta Private Jets with the membership company in 2020. In December 2022, according to its quarterly reports, Delta valued its stake at $257m. At the end of June 2023, when Wheels Up looked like it could file for bankruptcy protection, Delta cut this to $6m.

You know what happened next. In return for 95% of the company Delta, Certares, Knighthead and Cox lent the company $350m in September 2023. Delta also arranged an extra $100m loan. Before they invested, Wheels Up’s market capitalisation (number of shares multiplied by stock price) was just $69m.

This was a long way from when it went public in June 2021 at $2.83bn. On August 11, 2023 – when a Chapter 7 bankruptcy was possible – it hit $28.2m. Wheels Up’s market capitalisation today is $1.6bn.

On June 30 2024 Delta valued its 38% stake at $498m.

There are a few disclaimers here. Only 5% of the stock is still trading and if you were an early investor you are still very much in the red. But, so far at least, it has turned out to be a decent investment for Delta – especially compared to so many airline deals. It has been a fantastic one for Certares, Knighthead and Cox.

Like any financial investors, Certares, Knighthead and Cox are likely to want to exit one day. Delta is the obvious future buyer of their stakes. If Wheels Up does get to profit soon – and we will find out more next week – Ed Bastian, Delta’s CEO, may actually regret not buying more of the company in 2023.

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Certares and Knighthead are providing $400m with Delta using its previously announced $100m revolving credit facility. The private equity investors took Hertz Global Holdings out of bankruptcy in 2021.

Under the non-binding agreement, Delta will provide Wheels Up with $150m in new money term loans and a $100m revolving credit facility noted above. An additional $150m term loan will be provided by CK Opportunities under that facility. As will a further $50m in term loans from other investors. The additional $50m will be allocated as and when approved by Delta, Certares and Knighthead.

Wheels Up was advised by Jefferies and Kirkland & Ellis.

The company released financial results earlier today.

Wheels Up had an enterprise valuation of $2.1bn when it announced its merger with the Aspirational Consumer Lifestyle II SPAC in February 2021. It listed with a $10 share price in July 2021. Its shares closed at $1.33 yesterday.

Today Wheels Up announced that its second quarter revenue fell by $90m to $335m. The company’s net loss increased by $161m but $70m of this was a non-cash impairment. Wheels Up made a loss of $40m in the quarter.

“We are continuing to engage with strategic and financial partners around the path forward and look forward to sharing more information in the days ahead,” said Todd Smith, chief financial officer and interim CEO. “Meanwhile, we are continuing to provide exceptional service and experiences to our customers, who are reaping the benefits of our continued focus on operations.”

It had $151m of cash at cash equivalents on June 30th.

“The actions we have taken to improve our operations are translating to a better experience for our customers and an improved financial performance for the company,” said Smith. “Our on-time performance and reliability are showing marked improvement while our Adjusted Contribution margin and Adjusted EBITDA are at the best levels in almost two years, reflecting our focus on our network strengths as well as significant cost reductions and process improvements. We still have more work to do, but I am extremely encouraged by this quarter’s performance.”

Ed Bastian, Delta CEO said: “The partnership will create new opportunities for Wheels Up to drive strategic, operational and financial improvements for its customers in the months and years ahead. Delta’s unmatched expertise in premium travel, customer loyalty, corporate sales, operational reliability and aircraft maintenance, combined with Certares’ and Knighthead’s experience and global reach, are expected to speed Wheels Up on its path to profitability.

“I would like to extend my sincere gratitude to Kenny Dichter,” Bastian added. “For building the Wheels Up brand into a powerhouse in private aviation. We have great appreciation for his steadfast devotion to the members, customers and employees and his role in elevating the private aviation experience which will undoubtedly guide the industry’s path forward. We’re grateful he will continue as Wheels Up’s strategic advisor.”

Greg O’Hara, founder and senior MD, Certares, said the partnership with Wheels Up is a “natural extension” of its focus and experience in travel and tourism. “This transaction extends upon our longtime partnership with Delta across many of our portfolio companies.  We’re looking forward to joining Delta, Knighthead and others in driving the company’s ongoing transformation as it elevates private aviation as an industry leader,” said O’Hara. 

Wheels Up also revealed today that Delta chief financial officer Dan Janki will join the board as chairman. 

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Over the past decade the company steadily increased its revenues to an impressive $1.58bn in 2022 but has not yet turned the corner on losses, which totalled a staggering $555m. While year-over-year revenues increased during the first quarter of 2023, so did net losses as the number of members waned.

The company has said it can stem these losses next year but Wall Street has already cast its vote, with the New York Stock Exchange-registered stock falling from its initial offering price of around $10 in July, 2021 to just 28 cents at last check. A plan was recently proposed for a reverse stock split to avoid being delisted by the Exchange.

After mortgaging the planes it owned, Wheels Up built a cash war chest of $585m by the end of 2022, which shrunk to $363m by the end of this March. Continuing at this burn rate cash might only last until the end of this summer, a situation the company is proactively trying to improve by optimising its operations while considering the sale of non-core assets.

In the event this proves not to be enough, other options could potentially include additional investment from partner and largest shareholder Delta Airlines, returning to the private sector and fundraising, or combining with a strategic. Reorganising through bankruptcy is another possibility, and if private equity or other acquirer ever became involved, would presumably be a prerequisite.

Wheels Up has a substantial fleet of private business aircraft. Should some or all of them ever be divested and hit the used plane market there would be industry ramifications.

Many were manufactured by Textron’s Aircraft Division, which makes the Cessna and Beechcraft line of aircraft that Wheels Up primarily uses. Any suddenly large selection of King Air and Citation models on the preowned market would negatively impact the demand for more expensive new ones.

Other impacts would be lower resale and residual values for these models of aircraft as supply exceeds demand on the preowned market, affecting both owners and lenders/lessors with skin in the game.

The departure of the CEO just days before the next scheduled board meeting would seem a bad omen. However Wheels Up is not alone amongst young aviation companies who are more susceptible to the new environment of high interest rates and cooling investment capital flow, all of which stress tests their business model sustainability.

As Warren Buffett so eloquently quoted: “Only when the tide goes out do you learn who has been swimming naked.”

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The company now has six months to regain compliance and get its share price above $1. At market close on Friday April 14th, it sat at $0.51.

If delisted, a company can no longer trade on the NYSE and instead has to trade on the Over-the-Counter (OTC) market. Investors don’t automatically lose money, but being delisted usually carries a negative association.

A delisted stock can be relisted, although this is difficult to do, as the company has to resolve the issue that has forced the delisting and become compliant again.

Wheels Up is recommending its shareholders vote to carry out a reverse stock split to increase its per-share price.

The action, if voted for in its shareholders meeting on May 31st, would mean outstanding shares of common stock are split at a ratio between 1-5 and 1-10.

A 1-5 reverse stock split would mean a shareholder who previously owned 100 shares would now own 20, but each share would be worth five times more than before. A 1-10 ratio would mean a shareholder who held 100 shares previously would now own 10, with each share worth 10 times as much as previously.

At market opening today, the Wheels Up share price was $0.57.

Corporate Jet Investor (CJI) understands that while this could be a move to prevent a delisting of the company, Wheels Up has not received any notice of potential delisting from the New York Stock Exchange.

Earlier in the week, Wheels Up adjusted its unaudited full-year results for 2022, stating that its audited net loss during the year totaled $555m, rather than the $507m previously stated.

The adjusted net loss was more than double the loss of $197m reported in 2021.

In a separate SEC filing on April 3rd, the company said it amended its accounts to reflect a non-cash goodwill impairment charge.

Wheels Up previously reported a charge of $132m for the last quarter and full year 2022. Now, Wheels Up has said the charge was actually for $180m. The company said it should have recognised a $62m charge in its third quarter (Q3) results for 2022 and a $118m charge in its Q4 2022 results.

CJI understands the losses do not reflect the acquisition of Air Partner but were related to acquisitions that took place before the company went public. The company said the changes do not affect its commitment to be EBITDA profitable in 2024.

A Wheels Up spokesperson told CJI: “These impairments were one-time, non-cash charges, meaning that they do not impact our cash position or adjusted EBITDA, our preferred measure of our profitability, and we do not expect to see similar adjustments going forward. None of these matters represent a significant financial issue for Wheels Up, and they did not impact our operations.”

The spokesperson added: “We are confident in our business and excited for its future. We opened the year with a strong cash position of $586 million on hand, which gives us the runway to invest in operations and improve our member experience while we continue to improve our profitability profile.

“We have the benefits of significant scale, a great brand and high-impact partnerships with companies like Delta Air Lines. We look forward to continuing to deliver exceptional member experiences while we pursue profitability in 2024.”

In March, Wheels Up announced it is cutting staff to save $30m annually to meet this goal of profitability next year.

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The company had $586m in cash at the end of 2022 – compared with $785m in cash at the end of 2021 and $286m at the end of September 2022. The rise was boosted by strong fourth quarter block sales and the $270m aircraft-backed bond it issued in October. The fourth quarter is typically its strongest one for block sales.

Wheels Up had already announced a $30m cost cutting programme last week involving job losses. “The cost action was difficult but it is the right step in our plan to get the company profitable in 2024,” Kenny Dichter, chair and CEO, Wheels Up told Corporate Jet Investor just after the results were announced. “People are rallying on the path to profitability.”

This goodwill impairment charge related to acquisitions. It was purely an accounting adjustment partly because of the fall in Wheel Up’s share price and higher interest rates since it bought companies.

Wheels Up had 13,846 members and customers at the end of 2022 up 10% from 12,543 at the end of 2021. This was boosted by buying charter broker Air Partner. Mark Briffa, the former CEO of Air Partner, has been made chief commercial officer for Wheels Up.

It flew 19,308 live flight legs, down from 20,296 in the last three months of 2021.

“We have seen some moderation in demand but sales are still strong and we are forecasting a flatter year in 2023 for demand but one where we can improve margins,” Todd Smith, CFO, Wheels Up told Corporate Jet Investor.

“We spent nine plus years building the brand, memberships, customer service and partnerships,” said Dichter, “and we are now on the flight path to profitability. Where growth meets profitability. We are very satisfied with where we are now and the future is in our hands. We are on the glidepath to profitability.”

CJI Take: The Wheels Up sales and marketing machine is clearly still working with revenues up 18% in the fourth quarter and active members up 5% for the year. But the company’s focus is very much on becoming profitable next year.

Unless you are an accountant, the $132m goodwill impairment is irrelevant. Much more important is the $586m in cash that Wheels Up had at the end of the year. This should give it the runway it needs to reach profitability. It also means any more large acquisitions are unlikely this year.

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