UP - NYSE

Welcome. My name is Britta, and I will be your conference operator today. At this time, I would like to welcome everyone to the Wheels Up Experience Second Quarter Earnings Call. All lines have been placed on mute to prevent any background noise, and after the speakers’ remarks, there will be a question-and-answer session. [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 of 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 three 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 continue 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 market place for private aviation that aggregates highly fragmented supply, and connected 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 $1.5 billion of revenue this year, up from around $300 million just four 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, it’s 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 $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 Partner’s private jet business. Prepaid block sales, a great indicator of future flying were exceptionally strong, over $330 million for the quarter and up over 180% year-over-year. Today, as that tally made 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 $80,000 per year with us on average. Our newest cohorts continue to spend and fly more than our prior cohorts and our long time 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 topline 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 for on-demand flyers through our mobile app, increased volume with our wholesale partners and delivered targeted marketing to both prospective 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 the 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 margin will provide a strong foundation for long-term sustainable profitability. At the same time, we are also focused on prioritizing our investment and streamlining our call, 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 profit. I want to command 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 had several important supply relationships that have augmented our overall fleet capacity. At the same time we are increasingly seeing our customers flying into Europe. We are thrilled to have Air Partner on our team. With the benefit of a full quarter, of the index 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 and move 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, a 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 this 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 hardworking 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, so 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 steadily in control are now all managed on UP FMS. It took slightly longer than we anticipated, but I am pleased to announce it is complete. For the first time in Wheels Up history, we have a holistic view of our supply that provides full visibility into our aircraft availability and maintenance, and the schedules support pilots including the 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 team. 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 operations schedules are on Up FMS, we are working to layer on optimization in machine learning technology to help manage our daily operations in real-time. This will be critical as we respond to last minute customer travel changes, adverse weather and anticipated maintenance events in 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 demands 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 the wholesale market for supplemental utility and revenue at a profitable margin. With all our supply now on Up FMS, this is just a 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 members self-service, specifically recent release enables app users to directly manage itinerary changes and passenger list, greatly reducing customer service interactions and high touch logistics by 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 well as customers take advantage of self-service capabilities for routine tasks. The app will enable customers to create alerts that highlights available capacity for members and non-members alike, driving demand to 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 are 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 three elements, hiring, training and retention, and we are taking steps to address all three. We continue to build a very compelling pilot value proposition to help us attract and retain the best talent in the industry. e have exceeded our pilot hiring goals over the last eight months. With over 350 pilots hired so far this year. In addition to our organic hiring efforts we are also launching career pathway partnership programs to serve a consistent source of future pilots. Over the last month, we announced partnerships with Delta Airlines and 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 include this dispatch availability, with significant delays and the time it takes for a pilot to enter service once they have been hired. That’s why we made a concerted effort to secure additional flight simulator availability in order to get our pilots into service faster. This will expedite our on-boarding process, give us a wider pool of active pilots to best serve 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 are focused on consistently improving the career opportunities and the quality of life for our pilots. We strive 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 am 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 are 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 Model Holdings and prior to that the President of Fleets and Airlines at StandardAero. Rob’s leadership and experience at two 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 a significant operational efficiency when we complete the consolidation, which we expect in 2023. Multiple certificates increase complexity and limit 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 group 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 plus, minimum time flown, peak days surcharges, call-off periods and guaranteed availability. In addition, it is important to note that the fuel surcharges were implemented applied to all bookings post June 1st irrespective of the block programs for 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 the demand across the fleet. Let me conclude by saying, I am 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 will continue to deliver our initiatives and the timelines we set. I am 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 six 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 Wheels Up team is now focused on putting that vision into action, including streamlining our cost, 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 to 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 cap 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 $56.7 million and included about $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 great globally. In the quarter, we also took advantage of the strong demand environment with aircraft sales of $27 million, which was well above typical levels. We will continue to be opportunistic on future purchases and sales with the total balance of aircraft 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 in 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 the 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 $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 $17.5 million in the quarter, including capitalized software of $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 has 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 condition. 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 two platforms. With all of these actions, we expect to reach adjusted EBITDA profitability in 2024, with expected future growth and operating leverage driving profit thereafter. With regards to cash, we ended the quarter with $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 $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 $1.48 billion to $1.53 billion for the year. We expect third quarter revenue will grow approximately 25% plus 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 then Kenny outlined, on-demand flying, wholesale and targeted marketing will provide upside to our base case scenario and inflation 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 $42 million to negative $47 million. We also expect to report a GAAP net loss of between $95 million and $105 million for the third quarter. Reflected in this GAAP range are several non-cash estimates, $25 million charge related to stock-based compensation including earn-out shares and $17 million of depreciation and amortization expense. In addition, we expect approximately $15 million of cash expenses related to integration and other one-time items. The range does not reflect in a 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 $125 million. That includes what we consider more normal capital spending of approximately $67 million for purchased aircraft, capitalized software, et cetera. With the remainder of our CapEx being the $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 capability, 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.

Thank you. [Operator Instructions] We have our first question on the phone lines from Sheila Kahyaoglu of Jefferies. Please go ahead when you ready Sheila.

Hi, guys. Thank you so much and welcome Todd. Kenny great quarter in terms of the topline, 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 new users?

First off, thanks for the question. I would say, greatly indicator of our business is the block sales. I know we projected and we reported 187% up there. The blocks are funds that are deposited in advance for flying, again probably our best revenue visibility tool that we have. I’d say, secondly, we always like retention. I want to say that retention has been very firm. I know we reported out that we have had 90% 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 for that month, that means they are going to buy in the next 12. So, when I look out and I think about what’s out there, obviously, the travel managers and what people are saying about back business from 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 -- global platform that Air Partner affords us, we feel good about the demand.

Perfect. Maybe one more on the cost side, margins improved nicely sequentially, how much of that with some of the fuel surcharge and how do we think about the profitability into the second half and in 2023?

Yeah. This is Todd. I think, the fuel index charge in place only in June. We had another fuel charge -- surcharge flat rate that went into effect during the quarter. But relative to the index fuel charge will gives us the most cover, that really effect only a very small quantity of our revenue in the second quarter. So, relative to some of fuel practice that we saw in first quarter, those continue where you can grow a bit in the second quarter. Now we have got that fuel index in place now, we feel much better about the third quarter and fourth quarter that we have got that mitigated. So we do expect some level of lift in our margin going forward in 3Q. I think, we talked about the guidance and the margin rate that we shared for third quarter, what we expect to see is, some of that hired and skillful performance in terms of asset sales, as well as the outperformance that we got from Air Partner’s second quarter will likely come back in a bit and will be offset by some of the fuel improvement as a result of the index be in place.

Thank you, Todd, so much.

Thank you. We now have the next question from Michael Bellisario of Baird. Please go ahead when you are ready.

Thanks. Good afternoon, everyone. Just on your 2024 adjusted EBITDA profitability target, maybe give us some context just around your decision to kind of draw a 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?

Yeah. I think I will take that. I mean, look, I think, we started with a lot of things here that we feel really, really good about in this business, and certainly, as I joined in the last six weeks and spent time here. We have got a really strong topline, we have got a great membership base, we got loyal members there in a product market that fits very well. I think with that being said, though, done a lot from the leadership team, the employees of Wheels Up feel good about the fact that we generated a loss of the magnitude that we did in the second quarter and I will leave it very clear for us and I think as we go forward that revenue will pass it from there, improved operational performance that translates to profitability. We sat down and thought about what are the key levers and we first described some of that, both Vinayak that came in mind relative to kind of laying out. We have taken the number of actions already, fuel surcharge being one of those, price and structural changes that went into effect in June that we increasingly feel coming from the book, obviously, an incremental contribution from Air Partner that’s positive and helpful. But now we are really translating our focus on to the operational improvements. And Vinayak can share little bit more about that what ranges we are doing, but we felt that at 2024 timeline gives us a path to execute these operational improvements knowing that a lot of these are in our control, but some things are not in our control and also cost structure right in this business. But ultimately, we are going to work really hard to try to drive that even quicker, but our focus is leading to that date and that’s what we are aligned and working to. Vinayak, if you want to give little details on the individual operational things that we are...

Yeah. Definitely. On the op --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 have to do was launching Up FMS. Our entire operation is seen as one operation, so that in the past you had known that we had that four and five different certificates, even though we have 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-grain manner understand like what are days when we have more demand, how do we actually match the supply with the demand, primarily first-party demand because that comes at a higher margin. So you can do that at a much fine-grain fashion, so that is the first thing we would be doing. The second thing is they have better visibility into pilots in terms of when the training schedule happens, when they take the vacation. 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 the demand coming on a per day per cabin plus basis, because the time we require to actually secure third-party demand has an effect on the margins. So the 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 three main things that will help us to give us more confidence has been to our markets. The last thing I would say, 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 and we plan to do in 2023.

Got it. And just one follow-up there on the cost reductions, would you expect R&D and sales and marketing dollars to come down in the out years or is it really more just about leveraging the topline and a lower percentage of revenues?

I actually think it’s a combination of both. So, I think as we speak about where we want to invest. Certainly we want to continue to put investment behind technology, because I think technology and the optimization it gives us, it is a key part of the overall efficiency and operational improvements and also should allow 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 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 will a couple of things, I think, you will see some absolute reduction 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 because we have done that in the past and that’s the key focus for us as we kind of did the right priorities and the right alignment going forward.

Thanks for that.

Thank you. The next question comes from the line of Aaron Kessler of Raymond James. You may proceed with your question, Aaron.

Great. Thanks. A couple of questions from me, on the price elasticity, can 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 kind of mentioned kind of pilot retention a few times, can you just quantify, I mean, what the return rates are, how should we think about any way to quantify the retention rates that you are seeing and how that’s changing? Thank you.

This is Kenny. I will take the first swipe here. Just in terms of the price increases, we have got price increases that we did in November and we did again in May. So, that price increases and like I said the reaction to the price increase, the people have accepted it. I think Todd mentioned in June, we have the full effect of our fuel surcharges. So at the end of the day there is elasticity in the sense that our customers really in tune with the price of oil out there, so that’s not an opaque number and the customer accepts that’s part of the programming. Seriously as it relates to assets out in our space and I think the programmatic offering the membership is really resonated because of that scarcity and we feel strong that the -- again the retention, needing of price increases and what people are giving us and telling us about what they will do in the future, that path to me again as an indicator that there were two [inaudible] items, most of the ones that we are looking at.

Yeah. 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 look at the price of oil, but we also looked at what competitors are doing with what similar services they are doing. Our price increase is not just an hourly price increase, right? We changed many months in some cases, we increased, decreased our charges. So we trying to match what competitors are doing, while still remaining competitive and being friendly 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 are watching it and making sure of the retention stay strong by providing visibility and the data to our account managers, so they can actually have the conversation with the customer on retention. We have not seen price elasticity actually affect retention and membership perform right now.

Great. And then just maybe on the pilot retention and also can you comment -- I may have missed it, but the other revenues, can you let me the breakout of other revenues for Q2 or maybe how we should think about other revenues for Q3?

I will take the pilot retention part. Yeah. So from a pilot retention perspective, it is something we watch very closely. As you know, the current environment, I mean, pilots are in great demand. We are very cognizant of it. That is why we launch what is called as Aircrew 360 2.0. If you look at our 360, we have everything with respect to pilot, the technology, tools that we can give them, the lifetime benefits, 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, look at our current workforce and make sure we are managing retention on a very close basis.

Okay. This is Kenny. One great thing about our pilot program is all of our pilots are shareholders in the company.

Yeah.

And I think one of the advantages to being a public company is that our pilot is always going to get share. Thank you for what you do every day, you are our partners and our shareholders. So, as Vinayak and team are developing Aircrew 360 and Aircrew 360 2.0. If you think about our pilot, our partners and like I said, we thank them many time, okay.

Yeah. So I think we [inaudible] the composition of the other revenue line and maybe some of the growth that we saw in the second quarter there. There is really two primary drivers that make up that $56.7 million of other revenue in the quarter. That’s both the asset sales that we had, we had about $37 million [ph] of asset sales that when that revenue line and then a meaningful portion of the AP revenue. So, we talked about AP revenue being around $35 million or so roughly, about $42 million [ph] of their revenue actually goes in the other revenue lines based on the category of what it is. So, I think if you think about that going forward, we signaled two things in the prepared remarks we shared earlier, one is that we had a higher in terms of the level of asset sales in the second quarter, so we don’t expect that to continue at the same levels and also we saw Air Partner outperform and they make -- because of some of the seasonal volatility in their profile it may not continue at the same level, although, we are quite optimistic how strong Air Partner is contributing so far with the short time with us.

Great. Thank you.

Thank you, Aaron. We now have Gary Prestopino of Barrington Research. You may proceed with your question, Gary.

Hi, Gary.

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

Frankly, yes, so what happens when we consolidate certificates is or, yeah, the pilots who are fly aircraft to a particular type of aircraft it can easily fly the aircraft. To give you an example, let’s say, we have two certificates and we need pilot certificate for Citation Excel and they are in that city, but if they are belonging to a different certificate we can’t put them on the planes. 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 smoother fashion. Right now because they are in two different certificates, I cannot globally maximize all of them. Having them in one certificate also means like there is less communication gaps, there has been clear ownership of the certificates. The other thing that it does is, you imagine on any given day, there could be a mechanical failure for a plane and then what we are doing at right now is we will have to go through every certificate to say who has the capacity. Having all of them in one certificate really allows us to optimize the best customer experience, while making sure the faster delivering that experience in the case of mechanical is accomplished in the best possible way for us.

Okay. And you said you will have all these certificates consolidated in 2023.

That is correct. We are working with the FAA to do the consolidation.

That’s another question I wanted to get, is this more or less a government check the box kind of regulation and is it extremely hard to…

Yes. No. And we -- everyone do it all the time, so it is not really hard to do, but it also helps us -- it does give one. We can all get on operating type across all certificates, how do we manage location, how do we manage cleaning, how do we manage return to service. So it is a good exercise for us anyway to improve efficiency, and by doing that and having the FAA agree on that would put us in a much better position. Essentially what people do they agree on one procedure, because these procedures are already approved by the FAA. So what we are trying to do is fix the pricing on the certificates we have, the best practices from all of that, work with FAA and then consolidated. The good thing is, we have Dave Holtz, who is our Chairman of Operations, who worked at Delta Airline, who is involved in similar certificate consolidations to Delta as well. We have help from people across Delta helping us out on how we actually manage all these things.

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

Yeah. I mean, certainly our goal there is [inaudible] we can. So we said 2024, that’s our focus. We don’t intend it could be an exit rate. I mean, we are going to try very hard to accelerate that. I think the work that we are doing right now and one of my -- in the last week as arrived here is, how do we get the right alignment to drive kind of the operating rigor on a very focused set of priorities that are directly tied to that profitability goal. And I think we are working to get all that aligned in place, Vinayak and I working closely to meet priorities that are tied in and that we have got the operating rhythm going, so that we have -- maybe we are focused and narrow set of objectives, but ones that are absolutely tied to this. And as I mentioned to you earlier, none of us are satisfied with the current level of profitability of this business. So we are 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?

Yeah. I think, if we get back to some of the historical levels that we operate in, which is double-digit adjusted contribution margin. I mean that’s what we are targeting. As you know there is combination of number of things we have to focus on in terms of utility improvement, it is the function of maintenance ability and pilot availability, I think that is [inaudible] work that we need to do around our cost structure. So I think getting back something in that range would allow us to get to the profitability that we are targeting.

Okay. Thank you very much.

Thank you. We now have Marvin Fong of BTIG. Please go ahead when you are ready Marvin.

Great. Thank you for taking my question. 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 more stronger performance at our partners. So just wanted to confirm that on a core basis, did you also outperform the 3.5 point percent contribution margin target?

Yeah, I think when we think about, you are correct in what you said, you 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 is really a combination of couple of things. So I -- the things that were going in our favor were utility improvement quarter-over-quarter, higher member growth, as well as starting to see some of the pricing and rate improvements come through the book. Unfortunately, some of that offset by the continued pressure that we saw on fuel and that fuel impact is not only in our 1P fleet, but also in the 3P fleet. So, we did have the improvement, but it was not as long as we had hoped to on an operating basis, 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 met full year or exiting, so you answered that part, but just curious, I mean, you obviously have plenty of cash on the balance sheet, but where do you expect your cash position to kind of trough that before you do get to breakeven. If you could just give us an idea on your cash consumption over the next, I guess, year and a half that would be great?

Yeah. We don’t provide specific guidance on the cash flow by quarter. But just trying to say, we had $427 million at the exit of second quarter, we feel really good about that position. In addition to that we have no debt and high financeable assets as we mentioned in our prepared remarks, we feel that the fair market value of the assets are higher than what we carry on the balance sheet. We see strong ability to drive prepaid blocks in the future, we expect that to continue. And I think we feel really good about where we are with regard to net cash position and the flexibility our balance sheet affords us. That gives us the time and the security that is being deliver on, yeah, the improvement in profitability and the path that we set forward. And at the same time just a little bit of flexibility in case there’s something strategic that comes along that we want to invest in. There is a high score rate that we are going to be very judicious with any decisions there, but I think we feel good about the position that we are in.

Okay. That’s great. Great color. Thank you very much.

Thank you. We now have Noah Poponak of Goldman Sachs. Please go ahead when you are ready.

Hi. Good evening, everyone.

Hello.

I was hoping to better understand how much of your supply in the quarter with still third-party and particularly buy and 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, that’s -- I am a little surprised, it’s not a bigger highlight on the bridge to positive EBITDA in 2024. Maybe you can just discuss how you are assuming that mix is, it seems like it’s a pretty big piece of the process to get to positive EBITDA.

I will take the first part of the question on, in terms of first-party and third-party supply. In the third-party, we don’t see the supply. We see it as what puts you take that flights are being fulfilled by first-part versus third-party. But 70% plus 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 two kinds of third-party. One is ad-hoc where we are going in the market and buying. We also have arrangements part of GRPs between 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. So because we have demand, we have a much better understanding of the type of demand we have. We manage the mix as 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. It allows us to actually fulfill the customer demand.

Yeah. Also, when you think about where we are going with the business and why Vinayak and company are so important. Technology enable the third-party in our space, it is highly fragmented, it’s not real-time, and I think, about the competitive set, they are really focused on the legacy set, they are focused on ownership and managing other people’s assets. We are focused on unlocking this fragment live via technology. I think again last year and here in this first month. I think we have taken a conservative approach in all of the schedules if you will, on how we are going to derive, where this business is getting its lift forward, but again on the balance sheet, third-party suppliers are going to be a big part of the mix on a go-forward basis. Then again, I think that connection is really our core maintenance that connect buyers and aircraft at scale with something that technology is going to unlock. And I think your thesis about third0party is playing a big role. That’s something we see and that something we are looking for.

One additional thing I wanted to say was this Up FMS the technology platform we use to manage our claims, over 100 different operators already use that platform and many of our third-party providers already use that platform. So it’s -- what we are working on right now is what we call a cross optimization, where we are taking the total cost needed to fill the demand and optimize it just across your not just our first-party, but also the third-party fleet so that we can actually fulfill the customer demand in the most efficient way. Todd, you take the second part?

Yeah. I mean, look, I think in some ways if you think about that, that’s a probability that operational improvement box that we highlighted that specifically talks to utility improvement that we are seeking to drive in our own fleet and as you add greater utility there that gives us much more capacity. So then serve that number 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 then translates into what we -- not only higher rates, but expanding TAM for us as well.

Okay. That’s all very helpful. Appreciate that. Maybe just to follow up on the technology initiatives, what the timing of the mobile app bullet points you highlighted on slide seven, obviously that will be forever to evolve, but just those core items you have highlighted today, when are those complete?

So if we launch the new version of mobile app. We have not made an app at least for two years, but there’s two things that happened. One, that app is now in service oriented technology, which 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 month 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, when -- if we see a low demand day or a day where there is an empty flight available, customers can actually get alerts, so 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 are 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 about building mobile apps and the speed of the app actually matters a lot. The other thing with respect to technology on app that 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 are constantly trying to make the app for the pilots as efficient and as fast as possible, such that they can do their job better as well. So there is really two 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 we expect free cash flow to progress through the back half of the year, and specifically, with deposit activities since that’s moving the needle at the moment?

Yeah. I think we expect a fairly consistent profile that we have seen in prior years. I mean, obviously, we saw really strong block deals coming out at the end of last year with some of the price changes, we saw that again in the second quarter. We don’t accept the third quarter blocks to be quite as robust as what we saw in the second quarter, that’s typical, but that’s maybe a lower block in the quarter. But maybe typically in the fourth quarter again we will see a pretty strong position there and we expect that to be reasonably consistent with what we have seen in the past.

Okay. All right. Thanks so much.

Thank you. We have a final question on the line from Tyler Seidman of Credit Suisse. You may proceed with your question, Tyler.

Hey, guys. Thanks for squeezing me in. Just one from me, it sounds like you are 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 more tech investments needed on the back end? Thanks.

Yeah. This is Kenny. I will take the first half and then hand it to Vinayak. First and foremost, our mission here is to take care of our members. The more technology that we get into our operations, the more we understand where there is demand available by the risk for, by the way, Air Partner has done a great job putting demand on our fleet. Wholesale, when we have, you take a Saturday if you will. Saturday is not Friday or Sunday you like to travel, you may have a wholesale opportunity there. I think Vinayak explained it well, explains how technology really opens that up and when we look at 8,760 hours that are available per 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 said Vinayak.

Yeah. 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, so we don’t do things now, we -- our pricing has gotten a little more sophisticated. So based on demand and supply, based on the day, based on the cabin plus, we are trying to adjust the pricing into kind of demand ship 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 GRPs lanes on our platform, we see keep where we have capacity. So based on that, we are seeing, when you go on the app and search whether you are a connect member or non-member you will see openings. It is not yet specific to certain routes, we are building the technology. As an example, if you see that there are 50 planes flying to Florida on Friday and only 25 flights flying out of Florida, I need to get the fleet out of Florida. So I should be able to actually get demand there for planes out of Florida. That’s the app we are building. Right now though we understand capacity and based on the capacity, we are fine-tuning by cabin plus whether we will open up the demand for members or not which we were not doing before, but the key kind of level was actually building everything on one FMS.

Thank you. We have no further questions in the line.

I want to thank you everybody for…

I’d like to hand back to…

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