A little more than three years and a global pandemic after becoming the largest shareholder in Wheels Up, Delta Air Lines and its highly regarded CEO Ed Bastian will now be tasked with turning around the fortunes of the nation’s third-largest private jet flight provider.
A non-binding agreement announced this morning by Delta includes funds contributed by the airline and CK Opportunities Fund, I LP, which is co-managed by affiliates of Certares (owner of Internova, a major group of luxury and corporate travel agencies) and Knighthead. The facility would be comprised of a $400 million term loan and a $100 million liquidity facility from Delta, totaling $500 million to Wheels Up. In exchange. The lenders will receive newly issued Wheels Up Class A common stock resulting in owning approximately 95% of the pro forma equity of the company on a fully diluted basis.
“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,” said Delta CEO Ed Bastian, adding, “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.”
In prepared remarks, Bastian continued, “I would like to extend my sincere gratitude to Kenny Dichter, the visionary founder behind Wheels Up, 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.”
(Dichter stepped down in May as Chairman and CEO but remains on the Board.)
Greg O’Hara, founder and Senior Managing Director at Certares, commented, “This strategic partnership with Wheels Up is a natural extension of our focus and experience in travel, tourism and hospitality. It is also a natural extension of 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.”
The new funding prevents a possible bankruptcy and shutdown. It comes at a time Wheels Up was close to running out of money, according to multiple sources. Last week, Delta loaned the private aviation company $15 million. The private jet company’s delayed Q2 financials, filed last night, showed cash had dropped from $586 million at the end of 2022 to $363 million in March and $152 million at the end of June.
At the end of Q2, Wheels Up had 11,639 members, who combined paid the company $828 million for future flights. They would have been unsecured creditors in bankruptcy. There are over 2,000 employees who could have ended up without a paycheck.
According to the release, “The company’s audit committee determined that the delay that would be caused in obtaining stockholder approval would jeopardize the company’s financial viability. Shares representing approximately 80% of the company’s outstanding equity are expected to be issued without prior shareholder approval based on the Financial Distress Exception provided for in the Shareholder Approval Policy of the New York Stock Exchange.”
Additionally, Delta’s CFO Dan Janki replaces Ravi Thakran as Wheels Up chairman, and Todd Smith continues as CFO and Interim CEO.
Both Smith, who joined Wheels Up in 2022, and Janki, who came to Delta in 2021, are longtime veterans of GE.
Delta and Wheels Up
Delta became Wheels Up’s largest shareholder after it sold its Delta Private Jets unit to the 2013 private aviation start-up in a transaction that closed in early 2020. That ended more than two decades of direct involvement in the private jet segment for Delta.
However, it has remained closely tied to Wheels Up via a commercial agreement that enables the private jet flight provider’s members to gain status in Delta’s SkyMiles loyalty program, earn bonus miles for funding accounts, and use those funds to buy tickets on Delta. The airline recently started pitching flights on Wheels Up to its corporate accounts, an area that is expected to gain more emphasis now.
Before this latest round of financing, the Atlanta-based carrier, which bills itself as America’s most-awarded airline, held 20% of the outstanding equity.
Giving Wheels Up a second chance may have been influenced by the Covid-19-induced surge in demand for private jet flights. An analysis from McKinsey revealed large growth opportunities, showing before the pandemic, only about 10% of the wealthy who could afford to fly privately were doing so. It pegged the potential market as being up to 1.6 million U.S. households.
In an exclusive interview, Smith said, “We continue to feel there are a number of macro tailwinds behind this business and this industry and if you have the product mix, the right delivery model, and the right strategic relationships, which we think we have now, then we should be in a really strong position to capitalize on that, adding, “What Wheels Up and Delta offer is unique in the market. There’s nothing else like it.”
UHNWs, who had previously eschewed expensive private flights, flocked to private jets in record numbers. During the shutdowns, it was due to a lack of airline service between the places they have second homes, such as Aspen, Palm Beach, and Nantucket. Before the wide availability of vaccines, it was concerns about being in crowded spaces. Now, it’s issues with airline delays, cancelations, and passenger meltdowns inflight, plus the realization that flying privately is kid and pet friendly and can shave hours of wasted time connecting through big hubs and driving to distant airports.
The result is most are sticking around. Research conducted last month by Private Jet Card Comparisons shows over 93% of new since-Covid flyers continue to fly privately, with those saying they will fly privately regularly increasing by 25% year-over-year. While the charter market has fallen from its peak, WingX data shows as of this month, overall business jet departures are 15.5% higher than in 2019, while scheduled airline flights are still 5.4% below their pre-Covid levels.
In May, Bastian telegraphed his interest in keeping Wheels Up aloft.
During a talk at the Wings Club, after Dichter had stepped down and Wheels Up announced more losses in its Q1 earnings, CNBC’s Phil Le Beau asked the Delta CEO if he regretted the deal. He responded, “The relationship is strong. I think Kenny [Dichter] has done a masterful job over the last decade building a high-quality brand, great experience, (with) a lot of new members, and for us to be able to add that to our stack is the premium opportunity within the Delta experience, well no one has ever been able to do that before, and we have been attempting to pull that off.” He concluded by saying, “I support what they’re doing.”
Revenue and Losses
Until the latest quarter, when Wheels Up suspended guidance, it had beat revenue expectations since its IPO in July 2021. However, it struggled with skyrocketing expenses, ballooning losses and service lapses. Last year, it recorded a net loss of $555 million even as revenues rose 32% to $1.58 billion. In Q1, it reported revenues increased $26 million year-over-year to $352 million, a first-quarter record. However, net loss jumped $12 million year-over-year to $101 million and Adjusted EBITDA was flat with a loss of $49 million. Revenue in the latest quarter dropped 21% from $425.5 million to $335.1 million and net loss grew to $160.6 million from $92.8 million, including a $70 million non-cash goodwill impairment charge recognized during the quarter. For Q2, the Adjusted EBITA loss decreased by $6.6 million to $40.3 million.
Smith, this morning, reiterated his promise to be profitable on an EBITDA basis next year.
Wheels Up’s problems are both bad timing and self-inflicted.
It continued its acquisition binge through the pandemic, ending up with five different charter operators (Alante Air Charter, Delta Private Jets, Gama Aviation Signature, Mountain Aviation, and TMC Jets), each running under separate government certificates, meaning limited synergies. For example, FAA regulations prevent a pilot qualified to fly a specific aircraft type for one operator to fly for a sister operator in the same type unless they are retrained to the other operator’s specifications, often casual differences. Even today, there is a waitlist for training slots at a cost of tens of thousands of dollars per pilot. During the height of Covid, when a positive test meant pilots needed to stay at home and quarantine, the complexity in crewing for Wheels Up was exponentially difficult.
There were other hurdles. In addition to membership contracts allowing customers to schedule (and cancel) flights at capped pricing from Bozeman to Tulsa or Yakima to Boca Raton with as little as 24 hours’ notice, if there was a mechanical, it would take multiple internal calls to the different dispatch centers of each operator to find a replacement. Only last summer did Wheels Up finally consolidate its dispatch and scheduling teams in one place.
READ: Private Jet Industry Stuck In A Holding Pattern
Like many jet card memberships, Wheels Up guarantees replacement aircraft without an additional charge when there is a mechanical. When that happened during the demand surge that spanned 2021 and 2022, flight providers often paid third-party operators significantly more than they were charging their customers. Regulatory filings show that in 2021, Wheels Up paid FlyExclusive $37.5 million before flight costs just to secure additional aircraft for an overflow of demand from members.
Covid Challenges Remain
For all private jet flight providers, the Covid challenges were – and continue to be immense. While airlines focus resources on a few hubs and cities with high levels of flight activity, private jet operators fly where customers want, serving over 5,000 U.S. airports compared to less than 500 for the airlines.
Operators are faced with delays as short-staffed FBOs – private jet terminals – sometimes lack ramp space and struggle to get airplanes fueled and turned around in a timely manner during busy periods. Shortages of maintenance technicians mean getting local MROs to fix a plane that breaks away from base is harder. Parts shortages mean that aircraft types remain grounded, not earning revenue for days, weeks, or months with a cracked windshield or engine blade, something that before Covid would be fixed overnight. As a result, the number of jet card and fractional private jet users who said they experienced delays, cancelations, and service lapses in the previous 12 months jumped from 21% in mid-2021 to 44% last year and 48% as of last month.
While competitors were quick to change the rules and pricing of their programs, adapting to the challenging market, something many contracts allowed via fine print or Force Majeure, Wheels Up honored the terms its members had signed up for. That included their capped hourly rate guarantees, the lead time to book flights, the number of peak days where surcharges and longer booking windows applied, and daily minimums, the amount of flight time charged, even if your flight takes less time.
It could be argued that Wheels Up took a benevolent approach mainly to drive revenue growth. While rivals stopped accepting new members so they could regroup, Wheels Up continued. Until as recently as last December, when announcing program changes, Wheels Up would give members 30 days to renew under their existing terms and rates for an additional 12-to-30 months based on depositing additional funds for future flights. Although it got the cash, it meant Wheels Up was delaying any benefits it hoped to gain from the changes.
Born to Lose
Wheels Up’s financial performance – and vision of digitalizing and democratizing private aviation like Airbnb – were largely born out of the same enthusiasm that funded years and billions of dollars of losses at Uber, Facebook, Tesla, Amazon and other start-ups, where investors valued rapid growth and a story over profits.
For its detractors, who have been ready to hammer the final nails into its coffin for a while now, today’s rescue highlights the difficult nature of commercial aviation operators. For the big airlines, every pre-deregulation major except Southwest Airlines has shuttered, merged or gone through Chapter 11 at some point. For their private aviation brethren, there are as many examples of downs as ups. Jet It, the 12th-largest operator based on fractional/charter flight hours, closed shop in May. In April 2020, JetSuite, the 17th-largest player, entered Chapter 11 bankruptcy laying off all but a handful of employees, grounding its fleet, and costing the 900 members of its Suite Key jet card program $50 million in lost monies. Vista Global, the fourth-largest player in the U.S., has been in the spotlight since a Financial Times article earlier this year revealed its increasing debt, net losses, and the ratio of jet card deposits to cash on hand.
Even the biggest provider has had troubles.
Following NetJets’ $711 million loss in 2009, Warren Buffett wrote, “In the eleven years that we have owned the company, it has recorded an aggregate pre-tax loss of $157 million. Moreover, the company’s debt has soared from $102 million at the time of purchase to $1.9 billion in April of last year. Without Berkshire’s guarantee of this debt, NetJets would have been out of business. It’s clear that I failed you in letting NetJets descend into this condition. But, luckily, I have been bailed out.”
Despite the failures and close calls, consumers keep advancing big amounts of money to fractional and jet membership flight providers. While that may seem odd, in large part, it is because they want what the companies are selling. Buyers prefer programs with fixed or capped rates and guaranteed availability over market-based pricing by a nearly 12-to-1 margin. They value the ability to change and cancel flights on short notice as if they owned their own airplane, something that’s more restrictive if you charter flight-by-flight. They also know for all intents and purposes, there is no Expedia of private jets that can provide real-time availability and pricing across the longtail of over 600 U.S. charter operators, essentially mini-airlines, the vast majority of which have less than 10 airplanes and still communicate via emails, text messages and phone calls. Guaranteed jet cards and fractional ownership enables clients to save time booking and canceling flights at preset rates with a call, email, online or even via text message.
READ: Risky Business? 10 Reasons Consumers Keep Buying Private Jet Cards
Be Like Buffett
Bastian can take comfort that for Buffett sticking with NetJets during its darkest hours, turned out to be a good move.
During Berkshire Hathaway’s annual meeting earlier this year, Buffett praised NetJets’ CEO and the current business, “Adam Johnson has performed; you can’t believe what he’s done with the business. It was a tough model for a long time, but (Johnson) has brought it where it is, and we should have a wonderful company forever.”
Vice Chairman Charlie Munger added, “NetJets has been remarkable. You can argue it’s worth as much as any airline now.” Delta is currently valued at $28.5 billion.
In fact, NetJets is doing so well that it doesn’t have availability of fractional shares in the U.S. until the second half of next year. Demand is still strong enough that its entry-level jet card and lease programs continue to carry significant Covid-demand-induced restrictions. Moreover, prices are as much as 60% higher than in 2020.
What’s next for Wheels Up?
Make no mistake; the challenges are steep. Today’s NetJets does business very differently than the 2009 version, with a much more disciplined approach to selling and risk. It will also take a deft touch. When Buffett changed the CEO position, the new boss sliced costs to where customers and employees were unhappy, and it took a while to rebuild its stellar reputation.
For Bastian, he gets something competitors can only wish for. Thanks to Dichter’s showmanship and penchant for spending big on sponsorships, high-profile events and marketing, Wheels Up has brand awareness on par with NetJets, ahead of everyone else. That’s helpful since finding the UHNW customers McKinsey references in its market study is expensive and a bit like searching for needles in a haystack.
On the corporate side, the Delta boss told the Wings Club audience that his team’s contacts – travel managers – aren’t necessarily the deciders for private aviation solutions. Still, it’s better than cold calling.
If it hasn’t been planned out already, it remains to be seen what Wheels Up 2.0 will look like.
Last week, it announced a non-binding letter of intent to sell its managed aircraft group to Airshare. Ironically, the management business was the core of the Delta Private Jets that Wheels Up bought in 2020.
Management will have to decide what it wants to do regarding unwinding other acquisitions, such as Denver-based Mountain Aviation and U.K.-based broker Air Partner, which was supposed to be the foundation for international growth. Corporate Jet Investor reports both are on the block.
After exiting aircraft management – if that’s still the plan, Wheels Up will be heavily focused on King Air turboprops, that now are kept in the Eastern U.S. to minimize repositioning costs, Hawker 400 light jets and Citation X jets it uses to offer transcontinental flights at discounted prices.
Geographic changes made to its guaranteed membership programs in June need to be evaluated, as will the make-up of its future fleet and service areas that include capped rates and guaranteed availability.
Dichter was a champion of democratization and digitalization. Wheels Up has offered a limited amount of private flights-by-the-seat between New York and Nantucket during the summer and same-day roundtrips for college football games, where getting there would typically be a seven-hour drive instead of a one-hour flight.
Are there opportunities to market such flights to Delta’s SkyMiles members on low-demand days when its King Air fleet sits idle? Vista is pursuing the market via its XO brand and JSX, a sister company to JetSuite, is expanding the model nationwide. While seemingly attractive, it could be more headaches for minimal returns.
Smith declined to provide specifics except to say the past few weeks have made it clear there are a number of additional opportunities between Wheels Up and Delta that can be leveraged.
The company may have tacitly abandoned its dreams of becoming an Airbnb or Expedia for the long tail of private jet operators when it sold Portside the licensing rights to fleet management software provider Avianis in July. Before its IPO, Dichter called the 2019 deal his “most important acquisition…think Double Click to Google.”
The new relationship with Certares opens a path to sell on-demand charter flights through the more than 100,000 travel advisors at its Internova Travel Group, ranked by Travel Weekly as the 11th largest U.S. travel agency with $5 billion in sales. According to the trade publication, Internova is “doubling down on the luxury category.” While it sounds enticing, that also means training advisors on the ins and outs of booking private flights, which is very different than airline tickets, more complicated than you may imagine, with lots of room to make costly mistakes.
Smith said today’s deal doesn’t portend any changes to Wheels Up’s previously announced plans or strategy.
Getting new customers will be an uphill battle. Deposit sales for future flights fell to $96 million this past quarter compared to $333 million in 2022 when Wheels Up encouraged members to add funds at their current terms before a price increase.
Private aviation providers get most new customers as referrals from current ones. That’s tricky, as on top of Wheels Up’s financial and operational problems, everyone is still dealing with labor and supply chain issues, air traffic congestion and ground services delays that hamper reliability.
At the same time, memberships like what Wheels Up sells are relatively easy to exit if you are unhappy. The result is sophisticated UHNWs and corporations using these programs often scan the market to see if the grass is greener somewhere else. About 50% of jet card users say they are currently considering changing providers.
Of immediate importance, keeping Wheels Up airborne will mean clamping down on expenses that don’t impact service and improving operations so that current customers recommend it to their friends and colleagues. That means at the top of the list is convincing members who make deposits to stick around and give it more money for future flights.
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