Wheels Up, along with other providers of private aviation flights, is flying through a perfect storm.
Her name is not Greta, although she may come in the future. Carbon emissions are just one of a half dozen reasons cited by analysts apprehensive about the now publicly traded seller of private aviation services.
Wheels Up’s main business is flying consumers who buy memberships with guaranteed access on as little as 24 hours’ notice. They get capped hourly rates as well, which makes it easy to budget. It’s why they pay $10,000 or more to join and make six-figure deposits.
Founder & CEO Kenny Dichter, of charter flight company Wheels Up Experience Inc., gavels trading … [+]
In addition to owning aircraft, it manages jets for owners, it is a broker helping individuals and companies buy and sell airplanes, it has repair stations, and it provides technology for other operators.
It’s suffering from the same labor and supply chain issues as the entire industry and much of America. It couldn’t fly a full schedule in the past quarter due to the attrition of pilots. It’s now spending more to keep pilots, including giving them equity, bonuses, improving meals and the hotels they stay in while working.
It’s spending more upgrading customers who get guaranteed access to larger jets since it can’t always fulfill their flights in the reserved aircraft cabin types. When something goes wrong with the first airplane, it takes longer to find a replacement, something it guarantees.
It’s the same story across private aviation. Record demand, which should be a happy story, is being spoilt by service letdowns, much of it beyond the control of the providers.
The only difference is other providers are privately held or subsidiaries of publicly traded companies, any woes buried. Without true industry comps, investors must guess how well Wheels Up is handling the bumpy skies.
Since going public via a SPAC merger with LVMH-backed Aspirational Consumer Lifestyle Corp. back in July, its stock price has retreated from an $11.50 close on its first day to under $6.
The most recent decline started prior to reporting its Q3 earnings after a Morgan Stanley analyst opened coverage with a sell rating and questioned how many low single-digit millionaires could afford to fly privately.
Brian Nowak argued, “We see ~25% downside ($5.90 PT) as our deep dive into high-income households and travel spend per household speaks to a relatively small TAM/runway (only top 1%+ of U.S. households making at least $2.7 million +/year). This limits upside to our below Street estimates; we see negative revisions driving underperformance.”
After the call, Michael J. Bellisario of R.W. Baird wrote, “The 3Q21 update from Wheels Up was disappointing and highlighted nearly all the logistical challenges and cost pressures within the business. Expenses are forecasted to remain elevated for several quarters, and management appears to have hit the reset button, in our opinion. With shares down 20% today, investors are likely questioning the scalability of the model, the longer-term margin/earnings profile, and the company’s path to profitability. Our estimates and price target are declining, and we remain on the sidelines given the significant reduction in earnings visibility.”
He concluded, “The UP narrative likely becomes a ‘show me’ story and prospective buyer interest could be limited until greater fundamental viability emerges.”
Still, there are four analysts who have UP as a buy and two with a hold. Target prices range from $5.90 to $20, with the average target price of $10.65
Kenny Dichter, who founded Wheels Up in 2013 and serves as chairman and CEO, concluded the call by saying, “I’ve been now in this business for 21 years (He started Marquis Jet Partners in 2001 before selling it to NetJets in 2010), and I’m as bullish about our space as I’ve been since the day I started.”
Frankly, so I am I, including the digital strategy.
I say that as somebody who thought Uber, Airbnb, eBay or Amazon were crazy concepts that would never succeed.
Who in the world would buy something from somebody they didn’t know thousands of miles away, not a company, a person! Who would let somebody from the internet they never met stay in their house? Why would anyone want to get into a car driven by somebody they don’t know, not a licensed taxi or from a reputable car service?
While not quite a Luddite, I believe technology has limits when applied to UHNW purchasing. I’ve written extensively on this website about how high-end travel advisors are beating back online travel agencies in catering to well-heeled clients’ needs.
I believe it will be the same case in the world of on-demand private jet charter brokers, where expertise and personal service will trump the plethora of sites that are merely trying to capture your contact information for follow-up marketing.
However, Wheels Up’s technology focus is correctly applied, in my opinion. Its customers who charter the entire aircraft enjoy capped pricing and have already deposited hundreds of thousands of dollars they are drawing down.
They already made their brand purchase – Wheels Up. When they are booking their trip, they are just formalizing their order, which can mainly be done online. This is supported by data from other fixed or capped rate programs such as NetJets and Sentient Jet. Clients don’t necessarily need to talk to somebody, although if they do, that’s not an issue.
Unlike the gentleman from Morgan Stanley, I think there is plenty of room for democratization, depending on how you define flying privately.
For several years I paid $6,500 per year to fly on empty legs posted by Delta Private Jets. Once I paid for the annual membership, the repositioning flights were free.
I racked up well over $300,000 in no-cost private jet flights. Some were to places we never visited before – and wouldn’t have otherwise – I’m talking about you, Baton Rouge and Augusta.
Others were to places we had always wanted to go as tourists but never scripted out; Charleston, New Orleans and Chicago were great.
We visited friends we hadn’t seen in years up in Jacksonville. When my father, my kids and my girlfriend’s mom were visiting here in Miami, we were able to take them on their first private jet flights, short hops between South Florida airports.
I was able to schedule a business trip to Boston and, on one occasion, give my daughter and some friends a lift to New Orleans by private jet instead of driving a rental car. The Crescent City was a popular destination for empty legs.
The Wheels Up program is a bit different – they charge a joining fee and then $350 per flight and the main reason I haven’t signed up is the pandemic.
However, my experience is just a small slice of democratization.
There is a large opportunity, in my opinion, for by-the-seat flights. Wheels Up over the summer used its King Air 350i turboprops to run some shuttles between New York and Nantucket that were priced under $1,000 per seat.
Earlier this year, Vista Global’s XO said shared flight revenues increased 225% year-over-year in March, with a 120% uptick for the quarter.
The nice thing about flying privately is you don’t have to go through the main air terminal. So even if you are just buying a seat and not chartering the entire airplane, you still get the benefit of showing up about 20 minutes before departure and being off the airport grounds five minutes after pulling up to the FBO, the industry name for private jet terminal.
Saturdays have typically been a down day for private jet usage.
I imagine from cities like Atlanta to places like Tuscaloosa and Baton Rouge, there are at least eight people (the number of seats in a Wheels Up King Air) on any Saturday in the Fall that would love to see their team play, arrive in time for tailgating and return home in time to toast some marshmallows over the fire before putting the kids to bed.
It’s conceivable by leveraging its sponsorship of ESPN’s College Football GameDay and digital access to the millions of consumers who have Delta SkyMiles accounts – Delta Air Lines is the largest shareholder in Wheels Up – Saturday could become one of Wheels Up’s busiest days.
There are more than a half dozen players offering some form of sharing or by-the-seat options. One of them, Aero, is backed by Uber co-founder Garret Camp. The pandemic has seemingly given them momentum.
Of course, getting more rich but not super-rich folks to fly privately is just one part of the Wheels Up story.
Nobody I know argues when Dichter says private jets have very low utilization, less than an hour per day on average, less than a tenth of commercial airliners. Nobody argues that decreasing empty repositioning flights would dramatically increase capacity and profitability.
Vinayak Hegde, who joined Wheels Up in May from Airbnb, Groupon and Amazon as chief marketplace officer and was promoted to president last month, talked about how technology will change the game.
He told analysts, “To give you an example, we may have a customer who has booked to arrive at Truckee Airport in Tahoe at 2:00 p.m. on Friday and another customer doing the search right now to leave Truckee at 1 p.m. on the same day. Our feature system will be able to, in real-time, recognize the opportunity, offer a benefit to nudge the searching customer towards a slightly later departure from Truckee so we can utilize a single aircraft for both flights, which will allow us to drive utility and efficiency in what is a win-win for everyone.”
I believe cash discounts are just scratching the surface.
Wheels Up has built up an impressive list of lifestyle partnerships. These arrangements are popular in luxury marketing. The goal is to reduce custom acquisition costs through cross-marketing – gain trial through some type of initial discount, freebie, or perk.
In other words, incentives to move your flight a couple of hours or even travel on a different day don’t have to be simply cutting the price of flights.
Wheels Up already gives members over $35,000 in discounts and benefits with partners that range from Porsche to Abercrombie & Kent, Waldorf Astoria, Inspirato, Hertz, and Landry’s, which includes a host of top-end restaurants.
The Wheels Up app already highlights high-demand dates, and its capped rate pricing structure promises lower flight costs if you fly at times and on routes that are beneficial to the company.
Some customers, who might not care about saving $5,000 on a flight, may value a $10,000 discount on safari. It’s the same reason that business travelers on their way home from a meeting will take compensation from an airline they can use personally from to move to a later flight.
As somebody who buys a lot of stuff online, I’m truly amazed about how wrong I was and how sophisticated the upsells and add-ons have become. Wheels Up has an interesting arsenal of merchandising opportunities that go beyond cutting prices.
If they can prove by driving trial to partners, their customers then stick around and buy more, the cost of promotional offers Wheels Up uses to incentivize clients will be heavily discounted.
During Corporate Jet Investor held earlier this month in Miami, Dichter told the audience, “Everyone we hire (from tech companies) says, ‘Where is the industry’s tech?’ There is no marketplace tech that empowers the mom-and-pop operator. This is such an incredible white space.”
I spent about a half-hour with Hegde during another recent conference. He believes technology will shake loose more access to the jets currently parked on the ground.
Much of the current charter fleet is aircraft managed for owners. Many of them require trip-by-trip owner approval for each charter request. It’s generally a series of phone calls and emails from consumer to broker to operator to aircraft owner’s assistant to owner and back the other way.
Owners of larger and newer aircraft tend to be more particular. While they gain charter revenue, more flights mean more expensive maintenance. Those beautiful wood veneers are easily scratched and costly to fix.
Hegde envisions providing owners with a pricing grid to make educated decisions fast that will show them which days they can make more money putting their jets on the charter market.
He sees ratings of charter passengers in the same way Uber drivers rate riders. From their smartphones, owners will see how many flights potential customers flew in the past and crew can rate how they left the cabin and behaved.
When one owner tells her friends who also own jets how she made an extra $50,000 by moving her flight to Palm Springs from Friday to Sunday, chances are her friends might ask how she did it.
I also spend hours talking with others in the industry who have serious doubts that an industry so complicated can be easily digitized. In some cases, the long tail of operators may just not need the technology Wheels Up is offering. They are managing two or three aircraft in Biloxi and are doing just fine.
There are other issues as well. Many owners will never put their airplanes on the charter market. There are lots of owners who won’t find the extra money worth shifting their plans. You can only run your pilots around so much before they go somewhere else, or you need to hire more pilots.
I think both sides can be right in their views. But then again, what percentage of people list their homes on Airbnb or drive for Uber or Lyft? You don’t need widespread participation to make an impact.
Dichter, during the analysts’ call, used the current crisis – demand outstripping supply of aircraft positioned in the right place at the right time to underscore his vision of creating a digital Airbnb-like marketplace for private flights.
He said, “The unprecedented demand that the private aviation industry is experiencing today and the related stresses it’s putting on the available supply further validates our strategy and the tremendous opportunity that exists in the market…The supply-demand imbalance that we are currently experiencing reflects the industry’s inability to scale with analog and inefficient processes. What is happening today makes it even more clear that we need to change the way things get done.”
According to Google Trends, Dichter has created a private aviation provider brand that is only equaled by NetJets, the largest and one of the most established players in the space.
He achieved this status while Wheels Up was a relatively minor actor – before it became big. Competitors say he overspends and overhypes on marketing – everything from sponsoring racehorses to gimmicks like selling through Costco, but the bottom line is it has worked.
In just eight years, Dichter has created Burger King, Pepsi, or Avis in a fragmented market.
According to research I do with paid subscribers of my website, Private Jet Card Comparisons, Wheels Up is the most considered brand for purchasing private aviation.
In three years, Dichter, via multiple acquisitions, has built Wheels Up from selling memberships on a fleet of turboprops he didn’t even operate to being in a virtual tie as the second-largest operator based on fractional and charter flight hours.
While the market is still fragmented – the top 10 players control only 46 percent of the market – opportunities to create new, major players are limited.
Through June, the operators ranked between 11 and 30 by flight hours combined for just 8.2 share points.
In other words, any big moves would mean deals between top players. There’s no apparent space for disruptors to come in, as seemingly happens in the Part 121 airline industry.
That means the line-up is pretty much set.
Dichter likes to say people are wired to fly privately. Industry executives frequently compare private flying to an addictive drug. Once you start, it’s hard to stop.
McKinsey estimated only about 10% of the wealthy who could afford to charter the entire aircraft were doing so before the pandemic.
Some percentage of that reservoir has started to fly private since the outbreak of Covid. My research shows 100% plan to continue to fly privately when the pandemic ends. Most recently, over 50% said they would fly privately on a regular basis.
What’s more, the percentage of my subscribers – they pay $250 per year to compare programs – who are new to private aviation continues to range between 47% and 50% over three surveys conducted in January, July and September.
In other words, there seems to be no let-up of new consumers.
In fact, many subscribers tell me they are now dipping their toes in the water after friends who started to fly privately recommend doing so as a lifestyle investment. Others that started last year buying 15 or 25 hours are now buying 50, 100 or looking into fractional ownership, a five-year multi-million dollar commitment.
Try to make a same day business trip if you live in a spoke city. Take your three young kids on a commercial flight, check-in, TSA, waiting at the gate, and then compare it to the private aviation experience and you will see what I mean.
With over 1,000 Covid deaths per day in the U.S., many private flyers remain concerned when visiting older relatives, vaccinated or not. Some have children with underlying conditions.
What’s more, nearly one-third of subscribers who were flying privately prior to Covid say they will use private aviation more post-pandemic than they did before, compared to only 3% who say less.
As a side note, I am bullish on the entire market – not just Wheels Up.
There are different models out there. They are more nuanced than most people understand.
There aren’t really any one size fits all solutions, and a significant number of users have multiple solutions. It’s like cars in a driveway. You have a station car and one for the lake house.
It’s worth noting, Dichter’s acquisitions weren’t just willy nilly. They were to capture a larger share of wallet from existing customers.
His acquisition of Mountain Air and its large fleet of super midsize Citation Xs with coast-to-coast nonstop ranged enabled Wheels Up to become a major player in that market from not playing at all.
The landmark deal with Delta Airlines to acquire Delta Private Jets gives it access to the airline’s roster of corporate accounts. It also enables members to use funds they deposit with Wheels Up to buy tickets on Delta and gain Diamond level status in its loyalty program.
In addition to having one of the largest fleets, it has one of the biggest customer bases, with over 10,000 members.
In other words, Wheels Up has some visibility into where and when its customers are going to fly. While some book days before, others reserve their flights weeks and months in advance. That allows it to charter jets from other operators for days, weeks and months at a time as needed, expanding its fleet virtually without having to buy new airplanes.
While it is suffering from added expense during times of high demand like now, when the market swings down, which it will, it won’t be stuck with a bunch of airplanes it doesn’t need.
Those same operators who are now getting premiums will be on the short end of the stick when that day comes. But then, isn’t that how business works. It ebbs and flows.
This brokerage part of the Wheels Up business will benefit from any digitalization gains, but the critical bullet point is the guaranteed revenue programs.
Pioneered by rival Sentient Jet, but sweetly copied by Dichter, these GRPs have gone from low single digits to 40% of its off-fleet flying this year. It’s something smaller and midsize brokers don’t have the scale to do.
In other words, if you want to look at Wheels Up as a private aviation play with an Airbnb upside, you’re buying into a company that in the U.S., along with Kenn Ricci’s Directional Aviation, is a solid number two to Warren Buffet’s NetJets, the clear market leader.
As recently as 2019, Wheels Up’s annual revenues were under $400 million. This year they should be above $1.1 billion based on guidance.
Investors in Wheels Up will need to be patient.
For anyone who listened to its pre-IPO Investors’ Day presentation, there was a large section dedicated to the complexities of running an airline where customers set the schedules days before departure.
COO Thomas Bergeson, a 35-year veteran of the Air Force, who served as Deputy Commander of U.S. Central Command and was responsible for all U.S. and coalition military operations in the Middle East, Southwest, and Central Asia countries, pointed out, “The management and execution of flight operations are filled with complexity with multiple variables to consider, such as the temperature and weather, the runway length, the weight and balance of the aircraft, pilot qualifications and currencies, aircraft maintenance schedules, to name but a few. And private aviation has one significant difference from commercial airlines: our schedules change every single day. No two days are the same.”
That was before private flying surged to record levels. That was before supply chain and labor shortages bubbled to the surface.
Wheels Up may be challenged to retain existing members if it doesn’t perform to their expectations. However, other prominent players aren’t taking in new customers.
While Wheels Up has put up some gates for new joiners, so long as you put up $200,000, you can fly right away except for peak days – there are only 20. If you deposit $400,000, you can fly from day one on all dates, and there are only 10 peak days.
Despite the jet shortage, there are still around 40 providers still selling fixed or capped rate jet cards with guaranteed availability. Yet, some of the biggest players such as Berkshire Hathaway’s NetJets and Executive Jet Management, Directional Aviation’s Sentient Jet and Flexjet, and Jet Linx Aviation are off the table for now.
Providers have also restructured their card programs – implementing blackouts, caps on how many bookings they will take for a day, and even giving themselves the leeway to move client flights by a day in either direction.
In some cases, their members are joining a second program, better to keep their options open if they can’t book when they need to.
Wheels Up has allowed legacy members to extend the terms and pricing of their deals for up to 24 months by making more deposits before the end of the month. Despite some changes to its program for new joiners, it hasn’t added peak days or made any draconian changes.
That said, it will have to fulfill those flights when members call to book or find ways to encourage them to move their flights as Hegde described.
If one assumes most of the current pool will stick with private aviation, customers upset with their current provider may switch.
In the near term, it may cost Wheels Up more to keep current customers happy, or they could pick up customers who become dissatisfied with competitors’ new policies. Either way, the key will be to avoid a major meltdown.
That may cost more money, but the private aviation user is savvy. While some won’t change their flight timings, I suspect many will have a price at which they will happily stay in Florida for a couple of extra days and pick up their meetings via Zoom.
With just over a billion dollars in sales this year, Wheels Up may be a big player in the world of private aviation providers. Yet, it’s a minnow in the large ecosystem of big companies playing in the luxury arena. For example, LVMH, owner of Louis Vuitton and Dior, had over $50 billion in revenues last year.
With over 10,000 well-heeled members, if the stock price remains depressed, a large luxury group like LVMH, which already owns high-end hotels, trains and a yacht builder, could see synergies snapping up Wheels Up.
While Dichter has talks of selling rental villas and charter yachts, and its Investors Day presentation even cited the possibility of a co-brand credit card, I think there are more brand opportunities in accessible luxury such as apparel and hospitality.
At conferences, Dichter used to poll the audience, asking them to raise their hand if they played polo. He then asked if they had ever bought anything from Polo Ralph Lauren. Private jets have that similar draw for those of us who know we will never own our own Gulfstream or Global.
Perhaps one day, there will be a Wheels Up apparel section at Macy’s or on Amazon? Why not aviation-themed rooftop bars and restaurants? Much of this could be achieved via licensing and promoted through its ambassadors who already have some ownership interest in the company.
For now, I think it’s too early to sell Wheels Up’s vision of digitalizing private aviation.
Management would do well to follow the cues of brands that have succeed by focusing on their customers and ignoring the wolves of Wall Street.
Luxury hotels that cut fresh flowers and overnight room service will lose some of those high-paying clients to those that give the service being paid for.
So long as Wheels Up’s high-spending members remain loyal and keep making six-figure deposits for future flights, management will have a significant amount of runway.
Demand for its product, based on revenues, is a full year ahead of management’s forecast.
Argus predicts the industry could end up 10% bigger than it was before the pandemic.
Growth in the next 12 to 24 months may be limited by how fast Wheels Up – or other players – can unlock supply and efficiency.
The industry was surprised by how quickly it rebounded. In April 2020, flights were down more than 80%. Supply chain and labor shortages are now causing service delivery and expense issues.
I’m not sure why Wheels Up is being penalized for a global pandemic that opened up a pool of HNW consumers previously on the sidelines.
Hegde said in the next year, “Customers will see improved search and booking capabilities, end-to-end self-service for managing reservations and travel, automated notifications of updates or changes to status on the flight, catering and ground transportation, promotional calendar, partner deals, notices of upcoming events, access to member benefits, community and flight-sharing.”
Notifying customers in a timely manner when there are delays and getting replacement aircraft faster is the key for all providers, in my opinion.
Still, I am bullish on the industry overall.
So, while I am a buyer of Wheels Up, I think it has good company with competitors who can be equally successful with different strategies.
I also believe in small and midsize players where owner-operators have direct relationships with customers.
(Note: I own 100 shares of Wheels Up Experience, Inc.)
Wheels Up, along with other providers of private aviation flights, is flying through a perfect storm.