Wheels Up Experience Inc.

Hello and welcome to the Wills Up third quarter 2021 earnings call. My name is Alex and I'll be your operator for today. If you would like to ask a question at the end of the presentation, you can press star one on your telephone keypads. If you'd like to withdraw your question, you can press star two. I will now hand over to Keith Ferguson from Wills Up. Keith, over to you.

Thank you and welcome again to Wills Up's third quarter 2021 earnings conference call. Earlier today, we issued a press release announcing our financial results for the period. The 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 slash investors. Please refer to the slides in 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 material. 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 our Chairman and Chief Executive Officer, Kenny Dixon.

Thank you, Keith, and thanks to all of you for joining us today ahead of Veterans Day, the National Day of Remembrance. I wanted to say a special thank you to all of our veterans who so honorably served our country. We are incredibly fortunate to have many veterans in our ranks, including pilots, mechanics, corporate staff, executive leadership, our board, and, of course, our members. It has been the driving force since we founded Wheels Up. We continue to disrupt private aviation. We are building a technology-driven marketplace platform connecting our robust demand with fragmented supply. This is similar to how Uber disrupted the traditional taxi and limousine market and how Airbnb created value in vacation homes. The unprecedented demand that the private aviation industry is experiencing today and the related stressors it's putting on the available supply further validates our strategy and the tremendous opportunity that exists in the market. We have plenty of positives to recognize this quarter, including our record growth. With our trusted and iconic brand, we are a leading demand generator in our space. Our membership programs and other flight options, like shared flights, make private aviation more accessible than ever and are resonating with consumers. Our Wheels Up events and exclusive partner benefits continue to add important value to member experience and support retention. In addition, our public listing has given us a very strong balance sheet with over $500 million of cash and essentially zero debt. We are very well positioned to invest in our business and build on our significant first mover advantage. With that backdrop, let me share some highlights from this morning's earnings release. We reported over $300 million in revenue in the third quarter, setting another quarterly revenue record of 50% year over year. Revenue for the first nine months was nearly 850 million, which is up 75% year-over-year. We are now over 11,000 active members, growing 45% year-over-year. In the past 12 months, we have added over 3,500 active members. And our live flight legs were up over 50% year-over-year to 19,700 and a quarter. Now, with unprecedented demand comes supply challenges that are also unprecedented, particularly in the light of COVID-19, Supply constraints are an issue for almost all industries, including ours, and have been widely reported on. As consumers, we experience this every day, from commodities to durables and luxury goods. These supply challenges were significantly exacerbated during the third quarter, which impacted contribution margin and our profitability. We pride ourselves in providing exceptional service for all of our customers, including members and non-members, and they deserve no less, given this is the cornerstone of our business. That said, while we believe we have performed better than most this quarter, we haven't met the high expectations that we have set for ourselves and our brand. As much as external factors have driven most of the challenges, we will not rest on that as an excuse. The good news is we believe the challenges are largely in our control, fixable, and being addressed today. And with seemingly no end in sight to the continued demand for private aviation from both consumers and businesses, We are more encouraged than ever, but it will take some time and patience to address these supply constraints and increase costs. So let me take a few minutes to explain what we are doing today, starting with our pilots. The biggest gating factor for us today is our ability to hire enough pilots to serve the rapid increase in demand and offset turnover. Unlike some other sectors facing labor shortages that can quickly train and deploy more workers, Wheels Up pilots receive extensive training and must meet stringent qualification requirements. The end result was that we could not fully crew our first-party fleet during the third quarter. This reduced the utility in our fleet versus our prior quarter. Pilot shortages were also experienced by many of the partners we worked with. This resulted in less third-party aircraft available to us and increased costs in obtaining that supplemental lift. With regards to addressing the issue for our fleet, we are increasing compensation and benefits for all of our pilots. This includes providing our pilots with the first-ever broad-based equity grant in our industry, one of the incredible benefits we have as being a publicly traded company. Equity provides a unique competitive advantage for us going forward, allowing our pilots to share in the success of the company. Beyond compensation, we are investing in the quality of our travel management program, for pilots when they are on duty as we reserve hotels, ground transportation, and food. These may sound like simple things, but during and after a long day of flying, they're incredibly important for quality of life. Our pilots represent some of the best trained, most dynamic individuals in the industry and are frontline with our customers. We want Wheels Up to be their employer of choice. Now let me move to customer service. We always focus on providing the best service possible to our customers. Given heightened demand, we are spending more to secure and lock up third-party aircraft supply. And recently, that has increasingly included providing a significant number of cabin class upgrades to ensure that we can deliver for our customers. While we are looking to add more pilots, we are also investing in our maintenance technicians and facilities in order to return our aircraft back to service faster. We are doing all of this because we know that absorbing some short-term margin pressure make sense for the long-term value of the company and our brand. Our customers have a very high lifetime value and we are confident that the technology and operational improvements that we are working on will allow us to continue to unlock that value in the future. Our core and business members spend on average over $80,000 per year with us. When you look at our customer cohort spending, you can see how loyal customers spend more money with us year after year. Even better, Our newest customers are spending more with us than prior cohorts. These are very consistent trends. We believe the right strategy is to build loyalty for the long term. That's why we made the conscious decision not to raise our cap pricing over the summer. Our customers appreciate our integrity and recognize that one of the key benefits of our membership program is our cap rates. I am pleased to report that our customers are making increasingly long-term commitments to Wheels Up. This is reflected in the strength of our block sales, which were $172 million, up 120% year-over-year, a record for the third quarter. And the fourth quarter is positioned to be even stronger, as existing members lock in current rates before our recently announced cap rate pricing increase to take effect on December 1st. These block sales provide us great visibility to continued robust demand, and they give us confidence to lock up future supply. Now I want to touch on program changes we recently implemented that you may have seen reported in the press. The biggest change is we were requiring more advance notice ahead of travel. This will give us more time to schedule and secure capacity. In addition, we are also raising pricing and requiring larger block commitments from our members for the peak day guarantees. These program changes will allow us to prioritize our current resources and support our existing customers while continuing to sell programs that we can confidently deliver to our new customers. The most valuable brands in the world are built by doing the right thing for their customers over the long term and not taking shortcuts in the near term. Let me now turn to highlight several of our recent management additions. The supply, demand, and balance 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. That's how we are going to unlock supply and enhance margins in the future. In order to be truly disruptive, you need to start with a disruptive management team. To that end, we are augmenting our experienced private aviation industry leadership with world-class expertise in tech and digital marketplaces. Vinayak Hegde joined our company as Chief Marketplace Officer six months ago. During this time, I have been extremely impressed by his rigor and business insights that he has brought to the organization. This is the type of leadership we need as the pace of business continues to accelerate. That's why we recently announced he was promoted to president. He has important operational and technology expertise from his years disrupting and innovating industries at Amazon and Airbnb. He is going to bring us to the forefront of technology-driven innovation and automation that is going to significantly improve our access to supply. He will share some details of our technology roadmap in a few minutes. Our new Chief Product Officer, Jean McKenna, has also worked closely with Vinayak in the past. Jean is building products and tools to streamline our back-end processes, enhance our user experience, and automate our operations. Our new SVP of Pricing and Revenue Management, Julia Zhang, joined us from T-Mobile, one of the biggest disruptors in the wireless space, where she was in charge of pricing and supply chains. There's a lot of opportunity to innovate on pricing and incentivize off-peak flying to smooth demand compression and expand the market. Srikanth Satya, who joined us only a month ago as our Chief Technology Officer, headed a storage division at EMC Dell and also spent meaningful time as an executive at Microsoft and Amazon Web Services. He will lead our technology transformation. On the operations side, we have elevated Greg Farnbrook, who is the CEO of Mountain Aviation, to head our first party operations. Phil Dodick, who was president of TMC when we acquired them, is now head of our second party operations, which includes aircraft management ops. Their extensive experience, having led some of the largest third party operators in the country, will help us immensely moving forward. I'd like to close with a quick update on a couple of other recent initiatives. Our partnership with American Express, offering their members exclusive flight benefits commenced on July 1st and is off to a strong start. We are seeing new flight activity, membership purchases, block purchases, as well as an uptick in our mobile app downloads. The partnership is exceeding our expectations. Our Up for Business initiative is also gaining traction with a strong pipeline. We are seeing success cross-selling to Delta's large base of corporate customers. Our partnership with Delta gives businesses the flexibility to fly both commercial and private. We offer businesses access to a diverse range of aircraft to fit their varying needs. Before I turn the call over to Vinayak, I want to reiterate how thankful I am for our loyal customers for their patience, understanding, and continuing to put their trust in us. I would also like to take a moment to recognize our hardworking team, particularly our pilots, for their great work in support of our customers. Vinayak,

Thank you, and I'm delighted to speak with all of you today. Also, thank you, Kenny and the Wheels Up board for having the confidence and faith in me as the president of Wheels Up. It's truly an honor. I joined Wheels Up to execute on the next and arguably the most critical phase of our disruptive strategy, which is to build the industry's first technology-driven marketplace, much like Amazon, Airbnb, and Uber have done. For us, it entails a simple user interface that is easy for customers to search, discover, and book. It also means creating an easy way for operators to list their aircraft availability and increase utilization of their fleet. What's incredible is the industry, despite all its complexity, still largely depends on analog and manual processes to operate today. It should be little surprised that today's strong demand environment has unmasked the industry's inability to scale. Expensive assets are very underutilized to empty repositioning legs, ad hoc maintenance scheduling, and inefficient communications, resulting in a suboptimal experience both for customers and operators. It is important to understand the logistics of our industry are very complicated. More than half of our customers within a week of their travel. We fly to thousands of airports. Unlike commercial airlines, The schedules are set more than six months in advance. Our schedules have to be developed and optimized very close to the departure time of the flights. We have to manage the plethora of different aircraft types and sizes. Now, you heard Kenny touch on program changes we announced to preserve the integrity of the service we deliver to every customer, whether legacy or new to wheel shop. And I would like to take a moment to provide some color on what that really means. Supply is the industry's biggest challenge today, so what we are doing is focusing our capacity on our existing customers so that we can provide the best service possible. Most new members from November 1st on will have access to shared and hot flights. However, they will have specific full aircraft travel restrictions for 90 days after joining. I want to be clear. These changes were very thoughtful and deliberate based on data and analytics. They were designed to focus on consistently delivering at the highest level for our members in a very difficult near-term environment. We'll continue to monitor market conditions and our own supply capabilities and adjust our offerings accordingly, including the potential to allocate specific membership offerings. The reality is our growth has exceeded even our most optimistic expectations, and the broader industry is still largely functioning on archaic analog systems. Let me now turn to our technology initiatives that will unlock more supply in the near future. Specifically, how we will optimize this marketplace by building a trusted platform where supply and demand meet efficiently, providing liquidity to operators with great selection, price, and convenience to our customers. We'll do this using data and machine learning to optimize aircraft routing, maintenance and crew schedules, minimizing empty repositioning legs, and improve utilization. across a fragmented industry of these expensive, underutilized assets. Automating and bringing scale to this marketplace will allow us to drive down costs, improve efficiencies, and provide world-class customer experiences. We're going to do this similarly to what Amazon did during its early stages of growth. We're rolling out several new initiatives this quarter. I'm going to talk about two such initiatives today. First, we're deploying a new operational management system giving us end-to-end tracking for customer experiences from search to booking to the flight itself. This will enable us to monitor defects, communication delays, data inconsistencies, missing customer data, etc. By providing visibility and priority to our member services organization, we can better ensure each trip is successfully executed as we continuously improve our processes. We're already starting to leverage this tool to improve our customer experience. For example, We can now identify flights that have only one passenger listed and alert the member to supply the full passenger manifest ahead of time to avoid day-off delays. Second, we are deploying the first version of a customer data platform. This will provide a full view of our service we have provided to each customer, flight history, case and communications history, upgrades and benefits provided. It will give us meaningful insights into customer behavior, enabling us to unearth new opportunities and act on them quickly. For example, we'll score a customer's propensity to churn and their potential lifetime value. This allows our account management and operational teams to take the right action at the customer level. Going forward, our technology initiatives will run on up-cloud services. You may have heard me talk about the importance of a service-oriented architecture. This is a technology platform where all the functions are effectively apps or modules that all plug into one another. This will improve the digital workflows, allow us to scale better, and give us the ability to adapt and make changes very quickly. Being agile is an important hallmark of a successful marketplace. Now, when I refer to up-close services, you should understand that Avianis is a component of that. It represents our fleet management system, which we now call UpFMS. The FMS is responsible for crew scheduling, maintenance record keeping, fuel invoicing, et cetera. It's essentially the ERP of an aircraft fleet. Last quarter, I mentioned that we successfully migrated our mountain aviation fleet to up FMS. We're continuing to add enhancements and other features before we roll it out to our other certificates. In addition, third-party operators who use Avionics are also testing these new enhancements. I want to update you on our primary goal, which is to build what we call the Global Aircraft Search Engine. This will offer a high-fidelity view of aircraft locations, crew availability, maintenance scheduling, and where that plane needs to be and when. Avionis, which again is now up SMS, is one of the building blocks to create that system. By the middle of next year, we'll deploy the first generation of that system. By having all that information and intelligence, It will significantly improve our ability to schedule and unlock more capacity. We will do that by deploying advanced algorithms to optimize the schedule in seconds, rather than human rule sets that we use today. It should provide a faster and more efficient recovery option in the event of an unscheduled maintenance event. It will be an enormous differentiator and critical for our success, including improving profitability. Let me now switch on to our WheelSub app, the core user interface for our customers. What you see today is the first generation of the WheelSub app. I'm very happy with the great reviews the app has received so far, and over 50% of our bookings are done through the app today. But clearly, there is a lot we must do to deliver a world-class experience for members and customers, including continuing to improve the user interface. Foremost, we want to make it easier to use and more relevant with better personalization. Specifically, 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. I want to double-click on the amount of personalization and merchandising we are going to do within the app. The content displayed on the app will be personalized for each customer based on the specific preferences and needs. It will give us more flexibility in our scheduling to gain efficiency. To give you an example, we may have a customer who is booked to arrive at Truckee Airport in Tahoe at 2 p.m. on Friday, and another customer doing a search right now to leave Truckee at 1 p.m. on the same day. Our future system will be able to, in real time, recognize the opportunity offer a benefit to not just touching customer towards a slightly later departure from Turkey. So we can utilize a single aircraft for both flights. This will allow us to drive utility and efficiency in what is a win-win for everyone. The new app will be built on the service-oriented architecture that I mentioned before. It will enable future enhancement to be delivered much faster than we have in the past. Lastly, we're working closely with our partner at Delta Airlines, private aviation has different complexities than commercial aviation, but we can benefit from their operational resources and capabilities. For example, we are leveraging their expertise in customer care, maintenance and operations, crew scheduling, and adapting it to our marketplace. It is also worth noting that we are on a quest to create a much larger marketplace with optionality to provide more services for our high-value customers, leveraging opportunity to expand into logical adjacencies and force new partnerships. We have very trusted relationships with our members, and this gives us a unique ability to diversify our offerings well beyond private aviation, leveraging the strength, scale, and flexibility of our marketplace platform. That's why it's important to lay the groundwork to build a truly scalable platform. Let me conclude by saying we have an incredible foundation as a leading demand generator in private aviation today. I see a lot of similarities with other marketplaces I've been involved with at the earliest stages of their life cycle. All of them had less automation to start with, but through continuous focus on technology, they were able to turn the corner and show the strength in their business model. I'm excited by the opportunities in front of us to improve efficiency and utility and generate significant margins in the future. We just need to execute, and I can tell you the exceptional management team in place today is up for the challenge. and you'll see significant improvements in the near future. I wouldn't have come if I didn't see a very real opportunity to generate significant shareholder value. With that, let me turn it over to Eric. Eric?

Thank you, Vinayak. As Kenny noted, we are very pleased with our strong revenue growth this year, with third quarter revenue up 55% year over year to $302 million. This reflects the unprecedented demand we are experiencing, as well as the success of our membership programs and our broad-based delivery capabilities. Let me start by providing more details about our revenue, which is broken down across four main categories, membership, flight, aircraft management, and others. Membership revenue grew 35% year-over-year in a quarter. We believe membership revenue is highly visible and largely recurring. Given our 80% retention rate, for core and business members generally, and approximately 90% for those core and business members that purchased block. In the third quarter, we added 860 net new members with active members growing 45% year-over-year. We were very pleased to have crossed 11,000 member threshold, finishing the quarter with 11,325 active members. Our core and business offerings with their guaranteed availability and cap rates across all asset classes continue to resonate with the market, particularly as market pricing increased. That was a key driver of growth in the quarter, along with the initial success of our Amex partnership that Kenny commented on earlier. Kenny and Vinay touched on the recent changes to our programs. We will essentially be managing near-term membership growth based on our expected ability to deliver. We believe this will be temporary, however, as we execute on our plan to increase our delivery capabilities. Turning to flight revenue, flight revenue was up 3% sequentially this quarter and up 56% year over year. We think the best way to model flight revenue is to multiply live flight lags by revenue per live lag. Live flight lags were up 8% sequentially from the second quarter. and up 52% year over year. We continue to see strong leisure demand and the beginnings of a pickup in business and international travel. We also believe there was significant demand from Connect and non-members, which we simply could not address during the quarter, given the supply constraints. Flight revenue per live flight leg was almost $11,100 for the quarter, up 2% year over year and down 5% sequentially, reflecting a higher mix of shorter haul trips on smaller aircraft. This is normal seasonality for the third quarter. Prepaid blocks, which provide visibility into our future flight revenue, were $172 million in the quarter, up 120% year over year. We expect fourth quarter block sales to be very strong as well and outpace third quarter block sales. That said, Please note that the fourth quarter of 2020 was a particularly strong quarter for block sales due to the resumption of the federal excise tax on flights at the beginning of 2021. This pulled forward block demand into the fourth quarter of 2020. As I mentioned earlier, core and business members who buy prepaid blocks typically renew at around 90%. Now, approximately 60% of our core and business members have a block. up from roughly 50% a year ago. Members who are buying blocks today are generally able to lock in current cap rates for the duration of their prepaid blocks. In fact, on December 1st, we're implementing a cap rate increase of 8% to 13% on the cabin classes that are most constrained, turboprop and light jets. New and existing members are able to purchase at the old rates and program terms through the end of November. Historically, we've raised rates and changed program terms as of January 1st of each year, so this year's change is a month earlier than normal. Switching to aircraft management, our aircraft management revenue grew 51% year-over-year in the quarter due to our higher mix of pass-through revenue, reflecting higher owner usage of aircraft. We were managing approximately 160 aircraft as of the end of the third quarter, which is down slightly from the prior quarter. As we mentioned during our second quarter call, we are continuing to call legacy management contracts that are not commercially advantageous to us. There are about 20 of those contracts remaining to be worked through. On a positive note, managed charter hours, hours that our members fly on our managed tails, were up approximately 40% year-to-date, even on that slightly smaller fleet. We believe that aircraft owners are recognizing how our strong demand generation helps them to monetize their underutilized aircraft. We are encouraged by our healthy sales pipeline for new managed aircraft. We are also actively working on a new product initiative to further highlight a value proposition for aircraft owners. Once we work through the reduction of sales I mentioned, we expect that total aircraft under management will resume growth in 2022. Charter-friendly managed aircraft are an increasingly important source of supply for us as it allows us to flex up our capacity at pre-negotiated rates. Our other revenue is a small percentage of our total revenue and represents revenue earned from software, fixed-base operations, or FBO, maintenance, aircraft sales, and special missions, including defense. Now let me address cost of revenue and margins. Our strategy is to optimize utility and efficiency across all fleets. In essence, to use the right plane in the right place at the right time to minimize repositioning legs and improve profitability. To manage a third-party asset like tail as closest to our customer, we will try to utilize the better positioned aircraft. We are going to enable this through the process improvements, technology, and automation initiatives that Vinay described, as well as through improved operational and maintenance capabilities. That's how we expect to drive significant margins in the future. In the second quarter of this year, we were much better able to balance our service commitments with our costs, and our contribution margin increased steadily each month during the quarter. However, that trend reversed in the third quarter, as higher demand in industry labor, supply, and cost pressures compounded. That led to significant margin declines in August and September, which were well beyond expectations. As a result, adjusted contribution margin fell to 6.3% in the third quarter, down from 10.7% in the second quarter. We are now showing contribution and contribution margin on an adjusted basis to exclude equity-based compensation and exclude certain other items that are not indicative of our ongoing operating performance. Prior to us issuing a unique broad-based equity grant for our pilots, the amount of equity-based compensation included in cost of revenue was not significant. We believe that the adjusted contribution calculation conforms more closely to our adjusted EBITDA calculation. We and the aviation industry at large are not immune to the cost pressures and supply constraints impacting most companies across the global economy. Labor and part availability and costs, commodity prices, shipping, fuel, and travel costs have all gone up and or tightened across the board. The largest impact in the quarter was pilot availability driven by increased competition for experienced pilots. Additionally, maintenance parts and labor constraints resulted in longer return to service times. Combined, these factors led to a significant sequential reduction in our on-fleet utilities, as we couldn't fly all the aircraft we had available on certain days. As a result, we were forced to rely more on our 2P and 3P fleets. At the same time, some third-party operators with capacity in the spot market took advantage of the limited supply and raise their wholesale pricing upwards of 20% or more. Related to that, we experienced a significant increase in expensive cabin class upgrades as light jets were particularly supply constrained. Again, we absorbed those costs and upgrades as we focused on delivering for our customers. Now, let me quantify the impact of these pressures on our margins, and then I will speak to how Wheeled Up is addressing each going forward. The lower 1P on-fleet utility in the third quarter, despite higher demand versus the second quarter, impacted our adjusted contribution margin by over 200 basis points. Second, the increase in on-fleet cost per hour driven by higher input maintenance and labor costs created an additional roughly 150 basis points headwind. And third, higher costs for 3P supply and complementary cabin class upgrades drove the balance of the margin decline. So let me now walk you through what we're doing to improve adjusted contribution margins going forward. First, we will improve our 1P utility. We are ramping up our pilot recruiting and retention efforts. We believe our investment in compensation, including recent equity grants, health and wellness, and quality of life initiatives will create a compelling offering as we look to add and train over 150 pilots over the coming quarters. In addition, We are expanding our in-house maintenance capabilities as we plan to add over 100 aircraft technicians. We also expect to increase our mobile service unit capacity by 50% and institute other process changes to get our aircraft back into service sooner. Second, we are raising pricing. The capped pricing and program changes affected December 1st will allow us to better price in this market environment and more efficiently match demand with supply. The more immediate impact will be on existing pay-as-you-go members, and new members and blocks added after December 1st. Third, we are working to secure more 3P capacity by significantly increasing our usage of long-term guaranteed rate programs, or GRPs. We have a unique advantage from the predictability of our customer cohort spending trend and prepaid block sales to lock up supply earlier at better rates than the spot market. GRPs accounted for 40% of our third-party flying in the quarter, And we expect that will continue to increase. Fourth, we expect an increased contribution from our 2P fleet. We are launching several new initiatives, including GRPs for our managed fleet, to further incentivize and grow the number of owners that charter their aircraft in our marketplace. And fifth, we're focusing on developing our technology, where we'll be looking to hire over 50 software engineers. We believe these investments will generate increased efficiencies across the organization. particularly in our flight operations, customer service, and sales and marketing areas. The launch of the Global Aircraft Search Engine, as Vinay detailed, should be a big step to optimize scheduling and improve profitability. While we will provide our 2022 guidance when we report fourth quarter earnings, we do expect supply constraints to persist in the near term. So as we execute on the strategies I just outlined and others, our adjusted contribution margins will likely be in the low to mid-single digits for the next several quarters. With that said, we still continue to believe we can significantly increase margins in the long term as we execute on our plan. Switching to OpEx, we continue to gain some leverage on our sales and marketing expense as a percentage of revenue. At the same time, we are planning to increase our spending on technology, including capitalized software, to execute on our technology initiatives. General and administrative expenses are higher this quarter due to public company costs, which should continue to come down over time as a percentage of revenue. Our challenges with our adjusted contribution margin resulted in our adjusted EBITDA decreasing $15.9 million in the quarter compared to last year. Turning to capital expenditures, CapEx was $16.3 million year-to-date, with more than half of that being capitalized software. Free cash flow The find is cash flow from operations less total capital expenditures, including capitalized software, was a negative $39 million for the quarter. At quarter end, Wheels Up had a strong balance sheet with cash and cash equivalents of $535 million and essentially no debt. With regards to 2021 guidance, given the strength in our revenue in the first nine months of the year, we now expect 2021 revenue to be in a range of $1.115 to $1.14 billion. We now expect adjusted EBITDA to be in a range of negative $80 million to negative $90 million for the year. That is largely due to the lower than expected adjusted contribution margin we discussed and the cost of the investments that Vinayak outlined. We expect to report a gap net loss of between $200 to $210 million for 2021. Reflected in this range are several non-cash amounts, a $20 million charge related to the earn-out shares, and a $35 million expense related to stock-based compensation, which includes accelerated investing. The range also reflects a $12 million year-to-date non-cash gain on the fair value of our warrants. Most of these non-cash amounts relate to our transaction with Aspirational and the public listing of our shares. We expect CapEx spending will be at the higher end of our $25 to $35 million range. In order to support the stronger demand, we will likely acquire some aircraft this quarter. It's worth noting that we also serve as an aircraft broker. Our goal would be to sell at least some of the aircraft we acquire to new owners who allow us to manage or lease back those aircraft. Also, our increased technology-related investments will lead to an increase in capitalized software. From an income tax perspective, We anticipate that we will generate net operating losses for income tax purposes in the near term that may be carried forward indefinitely. In closing, I want to reiterate a core and business member retention and lifetime value are very important to the long-term value of the company. That is why we are incurring incremental costs to ensure our customers get the best possible experience in this environment. We are focused on execution to deliver on the promise of our technology-enabled marketplace platform. and believe we can significantly increase margins in the long term as a result. With that, thank you all for joining. Let me turn the call back to the operator so we can take your questions.

Thank you. We will now proceed with the Q&A. If you would like to ask a question, you can press star 1 on your telephone keypad. If you would like to withdraw your question, you can press star 2. Please ensure you're unmuted locally when asking a question. Please note we will be limiting questions to one question and one follow-up question. Thank you. Our first question for today comes from Sheila Kayavlu from Jefferies. Sheila, your line is now open.

Hey, good morning, guys. Thank you very much. Nice quarter on the revenue side. Maybe, Eric, you detailed the adjusted EBITDA guidance being lowered very nicely in terms of the different components lowering it. But maybe can you talk about the timing of the improvement, you know, given fleet labor? I think you mentioned there's 150 basis points. It might take a while as you focus on, you know, pilots and competition there and some of the supply chain shortages. So kind of how do you expect the improvement post Q4? Because I think Q4 is about a 15% EBITDA loss.

Sure. Thanks for the question. So in terms of... essentially where we're going from an adjusted EBITDA perspective. You know, we'll give 2022 guidance next quarter, but as I said in my prepared remarks, essentially EBITDA is going to be down and they load to – I'm sorry, contribution margin is going to be down to the low to mid single digits in the next couple of quarters. So as you think about how that flows through from an EBITDA perspective, you know, that of these things kick in. As I also said last quarter, we're investing $20 to $25 million in pilots, $15 million in technology. So that's also impacting Q4 into the beginning of next year as well.

Yeah, and Sheila, this is Kenny. Thanks for the question. We're taking a long view of the customer here. And ultimately, I believe that this market has plenty of pricing power and elasticity in it. But our membership program, membership has its privileges. And we want to take care of that customer through this transitory period where we're seeing spike in pricing. So, again, playing the long game on the member. And I think Eric laid it out nicely.

Yeah. No, I hear you on that, Kenny. And I think that's a fair point. You're announcing a price increase of 4% taking effect on December 1st. Kind of is that enough or do you see more and how do you think your competitors are changing their price?

Yeah, well, we've already seen our competitors move pricing, you know, more drastically than we are. You know, we're moving pricing 8% to 13% where we need to move it, which is in our entry level, the King Air, the light jets. We're leaving our cap rates on the mid and super mid because we have some room there. But the net-net is we want to always provide value. Listen, can somebody argue that Amazon Prime can double their rate on what they charge their customer for that great value and great service? The answer is yes. They probably lose a couple of percentage points, but nothing material. We could move our pricing even higher, but we've made a conscious decision to keep that value on our member, you know, really focus on the member. Eric?

So, Sheila, in my remarks, I talked about how the Pays You Go members and people that buy blocks after December 1st will see higher pricing pretty much immediately. But about over half our members have a block today. And I also said during my remarks that we expect very strong fourth quarter block sales as existing members take advantage of this one-month period where they can buy blocks at build rates. So it's going to take a longer period of time for that to kick in.

I'm going to have Vinayak drop a bullet point here. I'm talking about Amazon and Ash. Vinayak lived at Amazon and Airbnb through, you know, sort of peak surgy demand. Vinayak, you're on mute.

Thanks, Kenny. Sheila, I think when it comes to pricing, your question was also on competitors. We do monitor competitor pricing very closely. We do believe that the opportunity for us with respect to pricing is in the smaller cabin sizes, as we mentioned. Pricing is a big opportunity for us. That is why we are building a team around it. We hired Julia Zhang from T-Mobile, who are the expertise in both subscription and pricing. So that allows us to figure out how to price it, not just at the cap level, but an individual trip level that enables us to maximize profitability in the long run while making sure we are increasing customer lifetime value. But the trick for us is, is to move on from more static pricing to automated pricing, even though there is a cap, so that we can actually manage the pricing at a per-trip level.

Sure. Thank you, guys, for that caller.

Thank you, Sheila. Our next question for today comes from Hunter Keay from Wolf Research. Hunter, your line is now open.

Thank you. Good morning, everybody. Eric, what type of planes are you going to buy in the fourth quarter? How many are you buying and how are you going to finance the acquisition?

So we're going to buy several planes this quarter, mostly on the smaller side. We're not out there buying mobiles and Gulfstreams and such. So that's the target. It's not going to be a significant amount. I mean, our guy What we are doing is we are investing in GRPs, long-term GRPs, for both our third-party fleet and our second-party fleet. So that allows us to lock up longer-term aircraft from third parties, once again, in a very asset-like manner.

Okay. You know, how temporary is this initiative to manage the membership? Sorry, I saw the background. And is there a point where you would contemplate maybe closing off to new members until these supply bottlenecks catch up like NetJet did?

Yeah, this is Kenny. Thanks for the question. What we've done to protect our current membership is we put a moratorium. We're taking new members in, but there's a 90-day delay in when you can book unless you put $200,000 down for non-peak access or $400,000 down for full access. So it's critical that we manage through this transitory period. Again, 90 days is where we kind of conferred the front end and the back end of the business on operations and took a look at what forecasted demand looks like. And that's the answer for now. But incredibly bullish. And look, we're filling demand as we speak. There's tens of millions of dollars of demand that we can take in. And this is just one way that we're tempering it for our current members, but more important, keeping the business open for new business when we believe we can service it in the way we service our current. Okay.

Thank you, Kenny. Thank you, Hunter. Our next question for today comes from Gary Prestapino from Barrington Research. Gary, your line is now open.

Hey, good morning, everyone. This may be a little bit of a long question, but could you maybe just segment out what these price changes are for the various levels of membership, your ConnectCore business, just so we have that clear as to where we're going here with what you're doing to raise prices?

I would say on the membership pricing, we've left that in place as it is. So the price to join the program and the school rate, that hasn't moved. I'm going to hand it over to Eric to give you a little bit of color. Or actually, Eric Gorbaniak, one of you can take this in terms of the pricing on the King Air, where it's moving, and where the light jet is moving, and maybe just reiterate where we are on mid-super, mid-large.

I'll take it. So in terms of the turboprop, the King Air, essentially we're raising the cap rate 8% effective December 1st. For the light jet, that's going to be raised 13%. Once again, we're talking about the cap rate. We price each individual trip. That could be up to the cap rate or at the cap rate. And then for the mid-sized

one percent and then we're leaving the super mid and large cabin cap rates as is and i think one of the big values this is kenny is our one-way pricing it's why people are joining it's why our retention rates uh are what they are we have uh we're delivering tremendous value uh for our customers and again as i as i said before on the top of the call We could take more pricing. The market is giving us the ability, and our member is giving us more ability, you know, and we'll pay up, and we're sticking with that. Program changes, Eric, if you want to cover a couple of those, or Vinay, if you want to add some color here. But like I said, from a personal perspective, it's now 21 years for me in this business. You know, from a TAM perspective and a demand perspective, All of the public numbers that are out there for everybody to look at are at historic levels.

It's just that a program changes. Essentially what we're doing is having the call outs be a little longer, and what that allows us As Benayek said, we use a lot of data and analytics to evaluate that, and that will help us sort of, you know, prove profitability.

And one thing we're in front of is, you know, the technology hiring is not easy, and we're dealing with putting an A-plus team on the field. Benayek, maybe you could give some color on how technology plays in here because, again, the way that we're set up, first party, second party, and third party, you know, building a marketplace, With the demand that we're forecasting out in 2022 and 23, and just what the industry is telling us, technology is going to play a big role in the unlock, both on supply, demand, and efficiency. So, Vinay?

Yeah, thanks, Kenny. Just in terms of technology of pricing, since the question was on pricing, as we said, we are going to build systems very similar to how You know, Amazon or Airbnb did where we do competitive price monitoring so we can understand pricing by competitors on a more real-time basis so we can take that into account. In terms of other program changes, also there are three components, right? One is the call-out period. One is the price that Eric talked about. But also minimums, like what is the minimum block that we have on a per-cabin class basis. So that also actually helps us with the margin. In terms of technology on the buyer side, you know, as we build the new app, we are going to have features which will enable us to kind of understand more real-time what other trips are there that day, such that we can figure out how to nudge people to kind of take the trip, as I mentioned in my, you know, written reports, where we can actually use the same plane by nudging people to take a flight earlier by an hour or later by an hour, so that we can improve utilization in a very big way. And when it comes to technology and the buyer side, as you know, our FMS system, they're building global aircraft search engine that will enable us to find the right aircraft at the right place. So we, FMS is also used by many third party operators, our FMS. And if we know that someone needs a flight from, let's say, Las Vegas to Seattle, If there is already a plane going from Las Vegas to, let's say, Vancouver, British Columbia, we can identify that plane and put people on that flight because it would have come as an empty leg and where we can make margins. So this kind of global aircraft search capability is going to, one, make more return or yield maximization for the operator, but also give us more supply. So we're very excited about that.

Thank you. Thank you, Gary. Our next question comes from Aaron Kessler from Raymond James. Aaron, your line is now open. Great.

Thanks, guys. A couple of questions. Maybe from an M&A opportunity, I assume a lot of the competitors are facing a lot of the same supply constraints in the industry. Do you view this as maybe an opportunity to acquire some of the smaller players in the market and kind of roll up the space a little bit more? And this moves back on the pricing quickly. If we think about kind of the weighted average increase in pricing based on your kind of mix today, kind of what does that work out to? Thank you.

I'll take the first piece. I'll have Eric take the second piece. I might even take a swing at the little piece of the second. But on the first one, listen, our timing – on the public offering. You know, we rang the bell on July 14. What did that do? We put $656 million worth of press cash on the balance sheet, and we have a public currency. So when you think about the, you know, the opportunity to do M&A, We have all of the ammunition. I think Eric pointed out that we have essentially zero debt. We paid off our founding debt on the King Air. So we have tremendous deal capacity. This is a fragmented industry. Again, we're 3% of the $30 billion TAM that exists today. So plenty of fragmented folks here that are small, medium, and even large out there for us to look at and partner. And, again, when you're talking to an entrepreneur, and I get to talk to them all the time in our space, Having currency New York Stock Exchange stock plus capital on the balance sheet, we have all of the ingredients to do just what you ask, which is look at every M&A opportunity out there. We're focused on asset light, which is our folks that have access to airplanes, control the scheduling, and we can take that in and look at how that can enhance our fleet overnight. When we think about just the overall pricing, the mid and the super mid, we haven't yet, or on a daily basis, we hit the cap sometimes, but we've got plenty of room on the mid, the super mid, and the large to take pricing without changing our cap rates. And Eric, I don't know if that answers the question in full there, but there is more margin to be had with the mid, super mid, and large because, again, if we want to move up closer to our cap rates in those categories, you're taking margin without taking pricing.

So, Aaron, it's hard to give you an exact number because there is some time that it's going to take for some of this to kick in. But think about it this way. Forty percent of our members or core members, which is the most of our, you know, the vast majority of our members, will see an increase effective 12-1 for a little bit more than about 75 percent of their flights. You know, and that increase is up. until their blocks expire.

So think about that remaining 60% is going to come in more towards the back half of the year and to the end of next year.

Got it. Great. Thank you.

Thank you, Aaron. Our next question for today comes from Marvin Fong from BTIG. Marvin, your line is now open.

Great. Thank you for taking my questions this morning. Most have been asked and answered, actually, but perhaps you could give us your view on when you think your pilot shortage might come into balance and you'd be able to get all the pilots that you want to. Are we thinking by the end of the year, or will this persist into 23? And then just a question on membership. I mean, do you expect... the program changes that you've implemented to the press membership as maybe these people move on to mainline flying, or do you expect your membership trends to kind of hold and people to accept the changes you've made? Thanks.

Yeah, I'm going to take just the first piece and I'm going to hand it to Vinayak. But just on the pilots, we gave our first, to all of our control fleet pilots, and really we did a celebration rant for all of our pilots and folks on equity, RSUs. We're the first company, again, it's one of the advantages of being a public firm, to be able to issue equity and have our pilots riding along with us on the success of the company. I think in this time, you know, with this demand, we're going to have to get more competitive on the pilot front. We're prepared to be there. I think a lot of it is lifestyle, and we're in motion on putting some great lifestyle programs, together here, you know, some new benefits as it relates to how the pilots eat, where they stay, and all of the special things that pilots need, especially when they're working as hard as they are out there. We just think, again, like M&A questioned before, we're really uniquely positioned to beef up our pilot ranks. We have a couple of hundred requisitions that we're going to attack over the next 30, 60, 90 days And we expect N22 to be not only in balance, but in great position to have our first party aircraft crew to the way that we want to have it crewed. And again, at the end of the day, the second party, we're going to enhance our relationship with the 170 or in our program, maybe 50 or 60 airplanes that are really, really charter friendly. We're going to enhance our relationship with those folks that own those planes where we can gain more scheduling control And then, again, the third party, that's where we really want to focus, and that's really why, Vinayak, I want you to answer this. Technology is the big unlock here. You know, think Airbnb and think Uber and how important supply is there. And, again, Vinayak, this is your area. I'll have you pick up the back half of that question.

Thank you, Kenny. You know, on the back half of the question with respect to membership, you know, When we did these price changes, we did it very thoughtfully. We looked at competitor prizes. We looked at our membership cohorts. You know, the broader industry, it's well-recognized that what is happening in industry, as people said, other competitors are also figuring out their memberships. We announced our program changes thoughtfully while making sure we are delivering outstanding service. We really have two big types of membership, our co-membership and connect membership. What is really happening is more and more customers are seeing a better product market fit with our core memberships. So, you know, while there may be changes to membership patterns with respect to core and connect, you're going to see more and more people use our core memberships and our retention rates, especially when there are blocks that are very, very high. So the way we think about it is kind of the total value of our entire membership base not just the number of members. And we are trying to optimize the total value of our entire membership base. And we believe more and more people are liking our core membership program. So we may see some moments with respect to Connect versus Core. But overall, we are happy with the growth in membership and retention. Our retention numbers for our core business customers is incredibly high. And we believe that we'll continue to see that as we think through the market in the short and medium term.

All right, I'm going to have Eric give you a bullet or two. We have one more bullet on that from Eric. Yeah, I think there was two sort of sub-questions.

One was regarding pilots and timing. So, look, as we said in our remarks, we're trying to hire 100-plus pilots in the next couple quarters here. We've got to get them trained. Training slots are something that we have to consider. as well as the third party is going to take longer to solve. So that's why our contribution margin will be impacted for the next couple of quarters. The other question you had is about membership and whether it be depressed. Look, it's still, you know, for the next two months, we're out there. We're selling memberships. Obviously, there's some a little bit of, you know, you can't buy for 90 days, but we'll reassess that at the beginning of the year and see how we're doing in terms of some of the supply unlock and whether or not we can accelerate something there.

The good news is we're one of the only majors that is open for business and people are looking for programmatic lift into 2022. Yeah, the doors are open and we're welcoming them in. And like I said, with the caveat that over the next two, three months, we're going to govern when they can fly in the short term.

I just wanted to say one thing for the new members when they come in. They still have access to, especially the core members, will have access to shared flights and hot flights. It's the individual flights where there is a 90-day governor in place.

Terrific. Thanks, everyone. Appreciate it.

Thank you, Melvin. Our next question comes from Michael Bellisario from Baird. Michael, your line is now open.

Thanks. Good morning, everyone. Just on that same new member topic, can you tell how many new private flyers are signing up with you versus someone or some business switching from a competitor?

Yeah, I think that we're seeing, look, the TAM that we laid out when we marketed this deal in a public way is showing up. And, you know, our partnership with American Express, the early returns there are super strong, amazing amount of downloading our app and getting familiar with Wheels Up. And I want to double-click on our partnership with Delta. What we're doing with Delta, cross-selling business with their company, business sellers and our business unit up for business. You know, just I want to say a tremendous interest in our space. And again, we're seeing the, you know, that TAM really open up here. And again, the evidence for me would be how successful the early returns are at American Express and really over the last year with Delta, interest level and conversion from folks that weren't programmatic private flyers, you know, prior. So I think it's the beginning of a real open up.

Got it. That's helpful. And then just on the revenue side, you have an estimate of how much revenue you had to forego in the quarter and then how that maybe progressed throughout the quarter and so far in October and November, just really trying to understand how much demand isn't being met in terms of dollars.

When we look at it, it's not an exact science, but we know who's searching and we know who has governors on their memberships and, you know, what the bookings are. I believe that there's tens of millions of dollars that have spilled. And, again, that may be a conservative estimate on what we're looking at here. When I think about the industry as a whole, I think there's hundreds of millions of dollars industry-wide that's being spilled that will be serviced. By the way, we talk about Travis Kalanick and Garrett Camp when they figured out at Uber that the American car was parked 23 hours and 30 minutes a day. The business jet in North America, the rest of the world, is parked 23 hours and 40 minutes a day. So there's plenty unlocked. These planes are not flying like the Boeings and the Airbuses. Technology, more new pilot starts coming into our space. There's tremendous airframe capacity without having to pull from the OEMs at this point in time. Thank you.

Thank you, Michael. Our final question for today comes from Brian Nowak from Morgan Stanley. Brian, your line is now open.

Great. Thanks for taking my questions. Just wanted to sort of follow up around user growth and member growth. You have a lot of great data on elasticity over time on your users. Just talk to us about how you're thinking about new user growth the next nine months or so, just sort of navigating through this challenging time. And then when you made the comment about low single-digit contribution margins, what is the underlying user growth assumption to get to that low single-digit number? Thanks.

I'll start out, and thanks for the question. One is, again, just want to highlight for the call that we're 3% of the $30 billion space today, and there's plenty of room for us to grow in the traditional sense. I think when I think about opening up that TAM, I think about the sharing. I think about the buy the seat. You know, if you look at the pricing that we can give to our members on a New York Nantucket route, where you go to LaGuardia, it could be $600, $700 a seat for that round trip. If you look at it divided by eight, eight seats on a King Air, you may be paying $100 or $200 more each way, so you've got a two or three X. versus commercial, which is very appealing, you know, from a time and space go. And that really opens up the TAM to that 15 and 20 million people that could afford it, less than $1,000 per leg. And we think there's a tremendous amount of that out there. I'm going to hand it over to Vinayak, and then Eric will finalize things up with where the margins are. But I just want to say that, for the whole call, thank you to everybody that kicked in a question here. We have an unbelievable opportunity. With that 3%, we're still in demand. And if we can really focus, maniacal focus, Amazon-like focus on the member and take care of that member, that member is going to take care of us, and the growth is going to take care of itself. So, Vinayak, maybe you can fill in last question here, a couple of bullets, and Eric, we'll have you bring it home.

Thank you, Kenny. On the membership growth, I don't think we're going to disclose the growth numbers right now, but we have a clear target in place. and I plan to actually get there. The two things with respect to membership growth, what we are seeing is membership growth as you see through the numbers is continuing to grow. The second thing is the cohorts are actually spending more than they spent before, so we see very early membership growth. Third, they are actually booking flights earlier in terms of from the time they become a member to actually booking a flight. The last thing I wanted to say is, I mean, we are doing this with fairly flat, sales and marketing budget right now. We do believe that we can turn the speaker on for demand when needed. And the way we get demand is, you know, we do lead gen marketing as well, and we have not aggressively done that because of the demand we have. We feel confident about the membership growth that we can get. And additionally, you know, our partnership with companies like American Express are huge drivers to new membership growth. And Eric can comment about, like, you know, when we talk about 2022, we'll give more color with respect to that.

Thanks, Anay. So you're right. We're not going to give specific guidance for our user growth, but I will highlight some things I said in my prior remarks. Essentially, our core business memberships are resonating stronger than Connect. because of the guaranteed rates and the program rules. And so we're seeing upticks from Connect to Core when people are doing at a rate that's double that we've traditionally seen. You know, user growth with the fact that we're not allowing, you know, folks to apply over the next 90 days is going to decrease. It's really focused on the membership growth is what we're focused on. So I'll leave it at that.

And I'll just double click in on that. I think if you were in an environment that didn't have the demand surge that we are seeing today, you'd have a lot more a la carte available. But, you know, right now what we set up eight years ago, this membership program, the value of that membership today with certain guarantees on Lyft, It just puts us in a position again, but I can team. I'm counting on you to open up that that that supply demand latency that's out there. But in the meanwhile, as Eric said, the trade that has the most value today and has the most liquidity, if you will, is the is the membership. And that's really what we're seeing here and and we're excited about it. With that said, I think we're at the end of the call. Is that the last the last question?

That is the last question, yes. I will hand back over to Kenny Victor for any closing remarks.

All right. I'm going to go quick, and I know people have a lot to do today. Thanks for joining us today and taking the time to better understand our vision, our business, and our long-term strategy. I've been now in this business for 21 years, and I'm as bullish about our space as I've been since the day I started. We are building an innovative technology-enabled marketplace to optimize fragmented and underutilized supply and connect it with a large and growing addressable market. All of this is supported by a trusted and iconic brand. We firmly believe that the leaders we have hired and the investments we're making in operations, technology, product development, customer service, and most important, our pilots, will position wheels up as the undisputed leader in our industry. We also believe we'll create significant shareholder value in the years ahead, and I look forward to continuing the up journey with all of you. Thank you. Alex, thank you for running a great call.

Thank you very much. That's no problem. Thank you all for joining today's call.