Surf Air Mobility Inc.

Good afternoon and welcome to Surf Air Mobility's third quarter 2023 earnings call. All participants are in a listen-only mode. After the speaker's presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Bill Margaritas, Head of Investor Relations and Communications. Thank you. Please go ahead.

Thank you, Operator. Welcome to Surfer Mobility's third quarter 2023 earnings call. I'm joined today by Stan Little, Surfer's CEO, Deanna White, our CFO, David Anderman, our Chief Legal Officer, and Sudhir Shahani, our co-founder. We released our Q3 2023 results this afternoon, which are available in filings with the SEC and on Surfer's investor page at investors.surfer.com. I'd like to remind everyone that during this call, we may discuss our outlook and future performance. These forward-looking statements may be preceded by words such as we expect, we believe, we anticipate, or similar such statements. These statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Some of these risks have been set forth in our earnings release and our periodic reports filed with the SEC. During today's call, we will also discuss both GAAP and non-GAAP financial measures. Additional disclosures regarding non-GAAP financial measures, including a reconciliation of GAAP to non-GAAP financial measures, are included in the earnings release we issued today, which has been posted on the Investor Relations page of Surfer Mobility's website and in our filings with the SEC. With that, I'll turn it over to Stan.

Thank you for joining us today for our first earnings call as a public company. We are pleased with our performance this quarter and we're on track to meet both our top line revenue and pro forma adjusted EBITDA guidance for 2023, despite a challenging backdrop for both our industry and the macro economy. Before we take a deeper look into our quarter, I'd like to share the three core drivers of our business model. First, We plan on expanding our air mobility network to maintain SurFair's leadership position in our scheduled airline business and our on-demand charter business. Second, we will enable independent owner-operators to join our platform and grow our off-fleet products. Core to that effort is continued investment in our software platform. I want to draw particular attention to our partnership with Palantir which will allow us to develop state-of-the-art AI software for operators. Third, we continue to work on the long-term goal of implementing electrified aircraft across our network. We're developing proprietary powertrain technology, which will drive this evolution, lowering operating costs and driving growth for the whole regional air mobility market. In the third quarter, we made meaningful progress toward these goals. Number one, we completed our public listing on the New York Stock Exchange, which allowed us to close our acquisition of Southern Airways and to solidify our contractual agreements with strategic partners Textron Aviation, Jetstream Aviation Capital, and Gem Global Yield. Two, we confirmed our order and paid the deposit with Textron on our contract for the purchase of 100 Cessna Grand Caravan EX aircraft. We're excited about the scheduled delivery of the first of these planes starting in April. As you probably know, unprecedented supply chain and vendor delay issues are impacting the industry right now, us included. We've taken several substantial steps this quarter toward mitigating these issues, including the purchase of multiple spare engines and the sourcing of critical parts from new suppliers. Ultimately, the delivery of the new Textron planes is the final fix, But until then, we do expect these actions to restore the majority of our out-of-service aircraft to revenue generation prior to the year end. In our core air mobility service, our off-fleet products, including our on-demand products, represented the fastest growing part of our business in the third quarter, with a year-over-year increase of 63%. Number four, we made significant progress on the build-out of our electrification business. From a certification perspective, we finalized our data license agreement with Textron Aviation, which will significantly de-risk our timeline. Along with our lead partner Aerotech, we're advancing our engineering and design specs and preparing to move into the next stage of development. From a commercial perspective, we finalized our exclusive sales and marketing agreement with Textron. We believe this agreement will create a viable channel to establish significant market share with our electrified powertrains across the global caravan fleet, both for new and used caravans. As part of our diversification plan to create a broader portfolio of new aircraft in our network, we forged a partnership with Regent, a company pioneering all-electric seaglider airships. Not only have we been named their launch customer in Hawaii, But we've also partnered to establish a base of operations for passenger service in South Florida, the Bahamas, and the Caribbean. And number five, we also restructured our funding facility with GEM with new terms that provide us more flexibility in how and when we take draws. This arrangement gives us ongoing access to up to $400 million of capital to help fund our growth plan. Taken together, we believe these accomplishments are a solid foundation for advancing our strategic roadmap, both near and long term. Given that this is our first earnings call, I would like to take the opportunity now to give a high-level overview of the Surf Air Mobility story for those of you who may not know us well. Our mission is crystal clear. Surf Air Mobility will transform regional flying through electrification. We firmly believe that electric airplanes will unlock a new mass transit solution. According to recent NASA and McKinsey research reports, technological advancements, coupled with increased consumer demand for low-cost and ecologically friendly short-haul travel, presents a $10 billion addressable market in the U.S. and a $100 billion market globally. The vast majority of airports today do not offer commercial service. And 70% of air travel goes through only 30 airports across the U.S. Over the next decade, the expansion of air service to the approximately 5,000 underutilized public airports in America, combined with changing consumer preferences for new alternatives to congested highways, will help drive this paradigm shift in mass transit. You might ask, why aren't the big airlines pursuing this opportunity? The answer is simple. They've migrated their fleets to larger planes and moved most of their routes to large urban airports with longer flying ranges. This creates a significant opportunity for Surfer Mobility to serve the 100 to 400 mile trip flyers with a more affordable, convenient, and ecologically friendly solution. We plan on being the first company to bring electrified aircraft to market at scale. because we've identified the most expeditious path for obtaining FAA certification of electric aircraft. This starts with our decision to modify the Cessna Grand Caravan with a new powertrain. This pathway can shave years off the FAA review and approval process as compared to a newly designed airframe, which is what our competitors are pursuing. The Caravan is a tried-and-true plane with a large install base around the world. trusted by millions, including airlines, charter companies, other commercial users, and militaries. Our business model provides a unique competitive advantage to capitalize on this opportunity. We are the largest commuter airline in the U.S., and we have a quick path to market for electrification. We have the most practical electrification solution with our partner, Textron Aviation, the largest airplane manufacturer in general aviation. This relationship also provides us with an exclusive sales and marketing agreement for Textron to distribute our electric powertrains everywhere they sell caravans today. Unlike our competitors in the electrification space, our strategy will enable us to quickly deploy new electrified aircraft into our already established network to grow market share and sustain our market leadership position in commuter air. Today, Surf Air Mobility is a combination of our consumer-facing travel brand, Surf Air, Southern Airways, and Mogilele Airlines. The company has 750 combined employees. We fly 500,000 passengers on 75,000 flights and generate over $100 million in annual revenue. Our revenue is derived from three sources. Our regional air mobility network, providing scheduled passenger service, our government contracted services, otherwise known as EAS routes, and our on-demand service, which has access to over 200 independent operators to fly our customers. It's worth noting that the biggest constraints on revenue growth at this point are the challenges in the supply chain to maintain our fleets and procure new aircraft. That's why our exclusive agreement with Textron which includes preferred order status for new caravans, is such a valuable asset to us. As I mentioned earlier, we expect the first 11 caravans from Textron to be delivered over the course of 2024. Some of these will replace older planes in our fleet to improve service reliability and lower operating costs, while others will be deployed to new routes. Beyond 2024, our agreement includes the delivery of at least 20 new caravans each year. Another major driver of our growth is the expansion of our off-fleet products. We currently have working relationships with 200 operators across the country, giving us an inside track for future product placement of our software, hardware, and leasing products. Our plan is to create long-term recurring revenue contracts with these operators, helping them to finance their aircraft and providing them with modern software tools to run their businesses. Our partner, Palantir, a leading provider of AI systems, is collaborating closely with us to develop our aircraft as a service software suite. These software tools will give the operator improved productivity and efficiencies with predictive modeling capabilities personalized customer features, and route optimization. As I mentioned previously, in the long run, we expect electrification to become a significant tailwind to overall industry growth over time. I already touched on the importance of our relationship with Textron and how it lends to these efforts, but I also wanted to highlight another key relationship that is critical to our certification process. Aerotech is a leader in the aerospace engineering certification space. Their team of 250 engineers and certification specialists have enormous experience in electric and other leading-edge propulsion technologies, especially in getting new aircraft technology through the FAA certification process. And they have already performed the world's first and only electric caravan test flight. In closing, I want to express a special thanks to our most important partners, all our team members across Southern, Mochilele, and Surfer. Without their grit, determination, and tireless dedication, none of this would be possible. I am truly grateful for their commitment and dedication to providing exceptional customer experiences. Let me now turn it over to you, Deanna, for a look into the financials and operations.

Thanks, Dan. And thanks to all of you for joining us on the call today. As Stan mentioned, we are on track to meet our full year 2023 guidance for both revenue and pro forma adjusted EBITDA amidst a challenging environment for our industry. Our acquisition of Southern Airways closed on July 27, 2023, and we have now reflected the results of its operations in our 10Q financials as of that date. On a GAAP basis, the company reported third quarter revenue of $21.9 million and nine-month year-to-date revenue of $33.7 million. On an unaudited pro forma basis, which assumes the southern acquisition closed as of the beginning of the fiscal year, the company reported $28.9 million of revenue in the third quarter up 6.2% year-over-year, and $85.4 million of revenue for the nine-month year-to-date, up 17.3% year-over-year. This information can be found in the 10-Q under the Supplemental Unaudited Proforma Information section. We were particularly pleased with the growth in flights of our on-demand business. which on a pro forma basis was up 63% year over year in the third quarter, benefiting from geographical expansion and increased wallet share across our highest frequency customers. As I mentioned a moment ago, the airline industry is facing significant challenges from a cost perspective. We saw especially large impacts from inflationary pressures impacting aircraft fuel costs wages and benefits and other goods and services critical to our operations in addition there are higher costs and scarcity of parts in the supply chain creating challenges in onboarding fleet maintenance and aircraft reliability we are taking steps to reduce the impact of these costs but expect that industry-wide cost headwinds will continue to impact our business in future periods Away from industry headwinds, we also saw higher costs related to our public listing, the closing of the Southern Airways acquisition, and non-cash changes in the fair value of financial instruments. The vast majority of these costs are one-time items that will not recur in future periods. Surfer Mobility also reported pro forma adjusted EBITDA assuming the southern acquisition closed as of January 1st, the beginning of our fiscal year and for all periods presented, of negative $14.7 million for the third quarter and negative $32.5 million for the nine-month year to date. Negative adjusted EBITDA is largely driven by the previously mentioned operational costs and investments in our proprietary electrification technology. We plan to continue making investments in our business with a focus on responsibly deploying capital around high value priorities, including our technology platform and the certification and deployment of our electrification technologies. We will also be increasing sales and marketing spend to drive brand awareness and strengthen our commercial programs. We have a lot of work ahead of us, and we are highly focused on identifying opportunities to improve productivity, lower expenses, leverage technologies, streamline back office functions, and migrate best practices across our networks. As it relates to our source of funding, I want to briefly touch upon the contracts we have with both GEM and Jetstream. As previously disclosed, We have a $400 million share purchase agreement with GEMS. As of September 30th, 2023, Surfer Mobility had $5.9 million cash on hand with the ability to draw $92.5 million in cash advances and up to a maximum aggregate purchase price of $400 million under the GEMS share subscription facility. As Stan mentioned, we amended the facility in the third quarter to give us more flexibility in the amounts and timing of equity sales to match our capital needs. This will help us more effectively manage solutions as we execute our business plan. Our cash on hand reflects the balancing of working capital needs with solutions from GEM cash advances. The facility requires us to have registered chairs available to effect advances and draws. To that end, last week we filed a new registration statement to register, upon its effectiveness, an additional 300 million shares for future use related to this facility. As we look ahead to the delivery of our first 11 aircraft from our Textron Aviation Order, we intend to use our $450 million leasing facility with Jetstream, the largest aircraft leasing company in the U.S. for regional turboprop aircraft to finance our fleet. In terms of our other uses of capital, we are prioritizing capital spending in the following key areas. Technology to advance the certification of our electrified powertrain. Investment in our core direct to consumer passenger booking platform. Development of software for operators in conjunction with Palantir. and working capital to support our existing airline operations. All things considered, we made considerable progress in the third quarter and have laid the foundation to access necessary capital. While the macroeconomic situation remains demanding, we are pleased to reiterate our full year 2023 guidance. We are developing sound actions to address our challenges and enhance our ability to access capital as we grow. With that, I'll turn the call over to the operator for Q&A.

Thank you. Thank you. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again. Our first question comes from Austin Muller from Canaccord. Please go ahead. Your line is open.

Hi. Good evening. Just my first question here, do you expect any of the supply chain issues that you discussed to potentially impact Textron on the OEM side and slow down the delivery of new caravans to your fleet?

Hi, Austin. This is Stan. I can address that. That is certainly something that we have had concern about, but we have been in regular communication with Textron. They have actually provided us the specific serial numbers of the first several aircraft and have reaffirmed their commitment to the initial delivery in April so unless something unexpected changes on their end all indications are that that those deliveries should occur as scheduled okay great and then can you just go into a little bit more detail about the rollout process for the tier one routes as it currently stands sure The Tier 1 routes, which are in the selection phase right now, will come at some point. Obviously, what we're looking at right now, though, with the supply chain issues is the initial refleeting. We've talked often about how a certain number of the aircraft will go toward replacing older aircraft in our fleet, and a certain number will go toward increasing the number of routes and adding new routes. We do believe that likely the first deliveries will go toward refleeting just because route profitability is so important to what we do. And as we look at the increased costs these days, much of those costs are driven by the cost of maintaining an older aircraft fleet. So I think in this environment, we are again committed to ensuring route profitability first and route growth second.

Okay, great. Thank you for the details. Sure.

As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from Robbie Shanker from Morgan Stanley. Please go ahead. Your line is open.

Thanks. Good evening, everyone. So congratulations. You guys had a really busy and pretty successful 3Q. Can you remind us again what are some of the milestones we can look forward to in the fourth quarter?

Sure. Hi, Robbie. Good to speak with you again. I'll start on that one. In the fourth quarter, we're going to be working hard to bring the fleet back up to the optimal level, despite the issues that have plagued the entire industry with supply chain. So we would like to finish off the year with the fleet at or near customary levels of operational abilities. We'll also want to finish the year with many of our right-sizing on fares to ensure that all of our routes remain profitable on a route-by-route basis. On the electrification side, our department there is working very diligently to ensure that they stay on, and we believe they will stay on, the timeline that we discussed previously. which is the selection of key suppliers and getting out of the current phase we're in and ready to move into the next phase. So, you know, much of what we do, and then, of course, we don't want to forget the continued off-fleet growth, growing more customers who are suppliers to our on-demand travel platform. That's one of the big things that's really happened in this quarter is and I wanna make sure that that continues into the next quarter because that's such a big driver right now of revenue. As far as anything else on the operational side, much of that is waiting for that April 1st, first delivery of the Textron aircraft. As we continue to see here on a daily basis, the constraints of our growth are not demand driven, they are supply driven. There is a great deal of demand in the marketplace right now for the flights that we offer. And our biggest constraint is the ability to have aircraft to put on those routes. So that'll be coming in April. The other things I talked about, we're working on between now and then.

Got it. That's super helpful. Maybe a follow-up. Obviously, you and every single one of your airline peers are going through a pretty inflationary period right now. Can you remind us again how potentially price agnostic your customers might be, given that you guys fly a pretty niche, almost captive-type offering? And are you able to raise RASM to offset some of the inflationary pressures? Thank you.

Certainly. We will. We are certainly working to keep up with inflation on our fares. We saw a modest fare increase yesterday. implemented just a couple of weeks ago that we're already starting to see very positive signs from, meaning that the increase in revenue is commensurate with the increase in fare, and we're not seeing a lot of any significant drop-off in demand in that area. You know, frankly, we're very fortunate on our airline side in that with what we do in the places where we offer a very high-end product, we're one of the only very high-end products And in the places that we offer a product that is more mainstream, we are almost always the only offerer in that space as well. So our routes are generally either very exclusive or very high end. And each of those is very resilient against drop-offs in demand. If you've got to travel, you've got to travel.

Thank you. Sure.

Our next question comes from David Vernon from Bernstein. Please go ahead. Your line is open.

Hi, everyone. This is Justine Laufer speaking on behalf of David Vernon. Thanks for having us. So we'd like to start off by just asking if you're able to give some color on the timing or the frequency for the GEM drawdown.

You know, we have reset GEM. One of the things that has been one of the wins for us this quarter has been being able to reset the GEM draw schedule so that we are not capped with how low or how high we can go on the GEM. We don't have to draw $25 million, for example, if we don't presently need it. $25 million. Deanna can probably give some better specifics as to what the plans look going forward, but I would bring out that we have near complete flexibility now in the size of those draws and in the frequency of those draws. Deanna, would you like to give some further detail there?

Yeah, sure. So we're managing our cash like any company would to look at what our working capital needs are at any point in time and our investments in our technology products. And so the flexibility that the GEM amendment gives us is the ability to draw at a smaller amount or at more frequent amounts so that we can properly balance what we need in the business versus the dilutive impact of the GEM draw.

So if you look at the cash on hand that the company keeps, It's not necessarily what might be typically thought of because we do want to be strategic in when we make those GEM draws and not just have cash for the sake of having cash at that time, knowing that it's available at any point through the facility.

Okay, great. Thank you so much for that, Collar. I guess I could ask another question. It would be great if you could talk a little bit about the timing of the 11 aircraft delivery plan for 2024 and also on the note of 2024. Maybe if you're able to give a little bit of guidance for revenue.

As far as the delivery of the aircraft, I believe and I don't have those that delivery schedule in front of me. I know the first one is in April and then we take that leaves 10. I believe it's a roughly three per quarter. Four quarters, two, three, and four. Four would be in the first quarter, and then three, three, three, three, four, four. Sorry about that. I've been corrected. Three in the second quarter, and then four in the third quarter, and four in the fourth quarter. Then we move to a regular schedule of 20 per year after that, which would be five per quarter on a regular basis, 2025 going forward. I'll hand it over to Deanna to talk about the rest of the guidance.

So in our second quarter earnings call, we gave guidance for 2025. We did not give guidance yet for 2024. We intend to be able to provide full year guidance during our annual call in February. We have for our full 2023 results compared to the guidance that we did give. And then we'll also be giving the analysts and everyone what our 2024 guidance will be. for not only revenue but for additional items such as adjusted EBITDA.

Great. Okay. Thank you so much.

Thank you.

We have no further questions in queue. I'd like to turn the call back over to the company's CEO, Stan Little, for closing remarks.

Thanks very much. Just in summation, Surf Air Mobility had a very good third quarter. We progressed where we wanted to with our metrics. We're excited about the deliveries of Textron beginning next year, which will really be the revenue driver going forward. We thank all of you for joining us today, and we wish you a happy Thanksgiving.

This concludes today's conference call. Thank you for your participation. You may now disconnect.