Wheels Up Experience Inc.

Welcome to Wales App's fourth quarter 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, please press star followed by the number 2. It is now my pleasure to introduce Keith Ferguson. Mr Keith Ferguson, you may now begin the conference call.

So thank you and welcome again to Wheels Up's fourth 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 slide with our disclaimer. Today's presentation contains forward-looking statements based on our current forecast and expectations of future events. These statements should be considered estimates only, and actual results may differ 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 Victor. Thank you, Keith, and thanks to all of you for joining us today.

Quick disclaimer, I have a little cold and my voice is a little raspy. That said, I'm pleased to report another quarter of record revenue as we continue to see unprecedented demand across our platform. The private aviation industry is ripe for disruption. Despite flying highly sophisticated aircraft, the industry has historically taken an analog and antiquated approach to optimizing supply and demand. The surge in demand over the past year has exposed the limitations of the industry's fragmented supply and consumers have felt the pain. What it has also done is to highlight the tremendous efficiencies that can be gained with the technology-enabled marketplace that seamlessly connects supply and demand. we are building that marketplace. We are still in the early stages, but our playbook, similar to the one used by Uber and Airbnb, is a proven winner. In short, our vision has never been clearer, our strategy has never been more relevant, and we continue to make meaningful progress in building the future marketplace for private travel. Bringing demand onto your platform is typically the most difficult part of building a two-sided marketplace. That is not the case for Wheels Up. Today, we are a clear leader with a growing base of more than 12,000 members. We have built an iconic brand in private aviation and forged a strong and unique commercial relationship with Delta Airlines, as well as brand partnerships with global powerhouses like American Express and Porsche. And after a two-year hiatus, We have returned to hosting certain signature live events around the Super Bowl, around the Masters, and around Art Basel. And we continue to work with a host of A-list ambassadors to help Wheels Up tell its story on the largest stages while generating important earned media for our brand. All of that creates a competitive advantage that sets us on a strong path for continued growth. Today we have our sights set on the supply side of the industry where we believe our focus on innovation will drive efficiency and unlock more capacity to meet the strong demand. Our strategy is to develop leading-edge technology to bridge this gap. We are building a platform that will leverage machine learning and AI tools to streamline our operations, automate scheduling, improve customer experience, create real-time incentives to fill available aircraft, and generally make it easier to fly private. we also believe this platform will open up a world of possibilities beyond aviation. This type of disruption requires a disruptive leadership team capable of moving quickly to capitalize on our competitive advantages and the clear opportunities we see around us. That's why we added and continue to add key technology-focused executives from outside our industry to bring new perspectives to an old way of doing things. Their expertise and energy has been vital as we forge a new path. And I am energized by the potential for us to improve operations, profitably grow the business, and generate attractive returns for our stockholders. With that as the backdrop, let me share some of the highlights from this morning's earnings release. we reported over 345 million in fourth quarter revenue, setting another record, which was up 64% year over year. Revenue for the year was almost 1.2 billion, which is up over 70% year over year and well above our latest guidance. We now have over 12,000 active members growing by over 30% year over year and more than doubling our membership from 2019. and our live legs were up 65% year-over-year to over 73,000 for 2021. I am extremely proud of these results and the efforts of our entire Wheels Up team who work tirelessly to serve and care for our customers. That said, I want to be very clear. We are fully cognizant of the short-term costs we are absorbing to prioritize customer service in a very challenging environment. We made the conscious decision to invest in our membership, including securing third-party capacity and often providing complimentary cabin upgrades to compensate for broader supply chain issues, including parts, maintenance, and workforce availability due to the Omicron wave of COVID-19. To protect service levels for our existing customers, we implemented a 90-day fly moratorium from date of joining on most new memberships and marketplace flyers. That substantially curtailed the ability of new customers to fly during a seasonally busy fourth quarter and the beginning of 2022. However, thanks to our concerted efforts to address supply, we were able to ease those restrictions earlier than expected, even as most of our competitors have continued with limitations on their programs. I am very confident that our focus on customer satisfaction, despite some short-term margin pressures and self-imposed limitations on our growth, was the right decision for our members, customers, and for our company for the long term. The reasoning is simple. Our cohort trends continue to highlight an extremely high lifetime customer value. Our core and business memberships on average spend over $80,000 per year with us. Their spend is durable year in and year out with very strong retention. Even better, our newest customers are spending more on our platform than earlier cohorts. This runs counter to the old marketing axiom that your oldest customers are your best customers, and it's another exceptional proof point of the strength of our demand dynamics and the power of our products and services. As further proof, our customers continue to make increasingly long-term commitments to wheels up, Our prepaid block sales were well north of $500 million for the fourth quarter, up 80% year-over-year, handily beating our previous block sales record. And this leading indicator continues to be strong in the first quarter. With robust block sales, our deferred revenue balance is well north of $900 million as of year-end. This, along with our strong retention rate, provides us with great revenue visibility and allows us to plan and secure future supply with more favorable economics across our 1P, 2P, and 3P fleets. I don't know of many companies that have the luxury of this type of visibility into the vast majority of their expected 2022 revenue. All of this demonstrates the true quality of our brand and customer base. That is why we made the decision to absorb margin pressures in favor of investing in the long-term value of our customers. In addition, we are making progress with certain recent supply initiatives. For example, we are growing our capacity with the acquisition of a latte air charter, which adds 12 incremental tails to our fleet. It's a great addition to our safety vetted and verified life jet program, arguably the most in demand category in the industry. I am very excited to report that we have hired more than 150 new wheels up pilots since our November call and added another 40 with Elante as we bolster our supply and continue to deliver exceptional service to our customers. It's a great thrill to welcome so many talented aviators who make what we do possible. next i'd like to take a minute to highlight our planned global expansion over the last year i've often spoken about natural adjacencies including new geographies our pending acquisition of air partner which is listed on the london stock exchange is a great fit with our growth strategy it will provide us an agile asset light way to extend our platform globally air partners should be accretive to our contribution margin and adjusted ebada in year one It is a strong management team, led by CEO Mark Pripa, that will guide our international expansion. Moreover, it gives us a global footprint to leverage for our members and prospective customers, whom we expect will increasingly look to travel around the world. We expect to close the acquisition within the next several weeks. Their partner has received shareholder approval, and we are awaiting final regulatory and court approvals. This will be an exciting new chapter for Wheels Up. I also want to provide a quick update on our announcement last year regarding our long-term strategic view of urban mobility. We recently began utilizing partner VTOLs for certain short-range trips during peak periods, a true last-mile solution. We have received positive member feedback and this is an important future feature to support our customers. We see tremendous opportunities where we can invest in our customers, expand our supply, develop our technology-enabled marketplace, and serve as a much larger overall TAM. Our strong balance sheet with significant cash on hand, essentially no debt and strong borrowing capacity, is a powerful advantage. Expect us to be opportunistic as we look to deepen our competitive modes. In my 20-plus years in private aviation, I've never been more bullish about the opportunity to revolutionize how the industry operates. We have growing predictable demand in concert with tangible technology initiatives to boost supply, streamline our operations, and deliver long-term attractive returns. As always, I'm thankful to our loyal members and customers for continuing to put their trust in us. I would also like to recognize and thank the hardworking people across Wheels Up, whom I'm proud to call my partners. Vinayat?

Thank you, Kenny. It's great to be with all of you today. As Kenny highlighted, we're confident in our decision to absorb near-term margin pressure as it is in the best interest of the company and the customer over the long term. the proof is apparent in the strength of our customer codes and the very early results of our strategic initiatives i want to provide you some context on my priorities since i assumed the role of the company president in october we focused on three essential areas that we believe will drive both short-term improvements and results while unlocking significant potential in our business as we redefine success in our industry in order to achieve this unlock we will first drive operational rigor across our entire organization, especially during this period of rapid growth. Second, align both sides of the supply-demand flywheel to fully capitalize on the current customer and industry trends. And third, continue to invest in critical technology initiatives and extend our relationships with customers and suppliers and cement our first-mover advantage as a digital disruptor. I will provide some color on each. First is our focus on operational rigor. As Wheelsoft has grown both organically and through acquisition, the need for data-driven decision-making is greater than ever. To help us make the right decisions quickly, we're developing a single operating system across the company. Simply put, this is our way to rapidly share information, align priorities, and instill organizational discipline as we continue to scale. It provides a more structured approach to decision-making without sacrificing speed and gives us a single source of growth and a common vocabulary across all our metrics. This, in turn, makes us more attuned and responsive to the drivers of the business and more nimble in our execution. Another key element to operational success is optimizing and consolidating our multiple operating certificates. These legacy structures, primarily a product of previous acquisitions, contribute significant inefficiencies to an already complex operating framework. Rationalizing our operating certificates can improve our margins and the customer experience. We are attacking this in three phases. To begin, we are optimizing our global schedule across our six operating certificates. Until recently, we would take all our bookings and manually divide the demand across each certificate. It was time consuming, human capital intensive, and simply does not scale, especially when factoring in delays or last minute issues. To address this, We recently launched the first version of our global scheduling system to manage schedules across all of our certificates in a unified manner. We can then use our optimization software to allocate this demand in the most efficient way and see our cost savings in real time. Next, we are on track to migrate all of our certificates to run entirely on UpFMS, our own proprietary fleet management system by the end of April. As you may recall, we began this process last year and spent the last several months on important enhancements to the platform before rolling it out to the rest of our fleet. It is now much faster and more responsive and allows us to better optimize fleet schedules and maintenance events. This will offer significant operational advantages to better manage our fleet and maximize revenue. Finally, we have a team focused on consolidating our entire first-party fleet onto one FAA operating certificate. It is a critical step that will allow all of our pilots to be scheduled more flexibly rather than being tied to a specific certificate. This move along will significantly reduce the complexity and cost of our operations, improve margins, and give us better flexibility to meet customer needs. Our second focus area is to align the supply and demand fly well that will drive our marketplace. Ensuring we have the right supply strategy, including optimal first-party supply, is critical to improving our contribution margins. Having the right plane in the right place at the right time requires a precise series of input factors to be executed correctly. This includes having aircraft ready to fly, assigning the right pilots, using the right set of routes on a plane to maximize yields, and deploying a system to orchestrate all of this quickly and efficiently. Eric will provide more context on our overall fleet approach, so let me focus on how we are maximizing the availability of our first-party fleet, namely pilots and maintenance. As I mentioned last quarter, pilot and maintenance technician shortages created a cascading effect on our margins as we made the deliberate decision to secure capacity from third-party operators at a premium and provide free cabin upgrades to ensure we best serve our customers. I'm pleased to say that we are in a much better position today. As Kenny mentioned, we have hired more than 150 pilots since November and are on pace to hire over 200 pilots by the end of the first quarter, well ahead of time. It is important to note about half of these hires still need to go through extensive training before they fly a revenue-generating flight for us. That said, pilot hiring is a leading indicator of our ability to efficiently manage higher demand. A deep roster of pilots to reduce instances where we have aircraft availability to fly without necessary crew, which has been a challenge for us in the recent quarters. We have also focused on pilot hiring and retention through the introduction of our Air Crew 360 initiative. Through this initiative, we revamped pilot compensation, including equity grants and industry firsts, as well as improved benefits, career progression plans, and lifestyle enhancements to our pilots. Additionally, our partnership with Delta Airlines creates an exciting opportunity for career advancement for pilots who aspire to transition from flying private to commercial aviation and vice versa. Our pilots are some of the most highly trained and dynamic women and men in the industry. And it's how we represent our frontline with members and customers. It is an easy decision to invest in them. Turning to maintenance, one of our key challenges is our reliance on third-party providers that are exceptionally backlogged with the unprecedented demand in the industry and labor shortages as a result of the pandemic. Shortages have affected our own hiring of maintenance techs as well. As with pilots, we are building out an MX360 program with the goal of hiring more than 100 technicians over the course of the year. It is important because at our own maintenance facilities, where we control the schedule and the priority of the work performed, we are able to complete the service in less time and at a lower labor cost. Many of these maintenance techs will be deployed to increase our mobile service unit capacity by 50% this year. which provides us more options and faster response time to address unscheduled maintenance at remote airports. Meanwhile, we are working diligently to increase our parts inventory so that we can improve our return-to-service times. I'm confident that we will quickly execute on these important hires, just as we did with our pilots, which will further improve aircraft availability. We are also working to improve supply in our asset-light second- and third-party fleets. Our aircraft management customers have increasingly recognized that our strong demand generation engine allows them to monetize their aircraft through charter when they could otherwise sit idle. Aircraft owners can take advantage of our new charter guarantee program, which provides predictable revenue to the owner in exchange for specific time increments of aircraft availability. This win-win proposition will drive significant capacity on Similarly, our third-party fleet is a vital component of our total offering, which is why with longer-term GRPs. We are working to allow our third-party partners to tap into our optimization technology for their fleets. This will improve their operations and help us better integrate their supply into our systems. We are also constantly improving our forecasting system to anticipate demand at a more granular level, which will help us predict when we will need ad-hoc third-party supply and plan budgets and schedules accordingly. While we are laser-focused on supply and not neglecting the demand part of the flywheel, It is clear that we have a great product market fit as evidenced by our growth in new members and continued spending by existing members. In fact, our newer cohort of members are spending earlier and spending more than our older member cohorts, which remain incredibly healthy. We recently deployed a customer data platform which provides a unified view of all customer experiences, including flights flown, issues experienced, predicted lifetime value, propensity to churn, and a priority score, among other things. We can now leverage this system across our member services and our sales and account management team to improve customer experience and drive better retention. This is the beginning of a sophisticated CRM system that reflects and scales with the business over time. As with any marketplace, pricing is a critical component of driving demand. We are developing a pricing system that will enable us to drive demand while also increasing the utility of our fleet. For example, If we notice that there are 10 flights into Florida in the evening and there are 20 flights out of Florida the next morning, we can use this mismatch as an opportunity to drive demand by offering slightly discounted flights to customers instead of just repositioning 10 empty non-revenue generating aircraft. Pricing is a critical area of focus for us in 2022. Based on my experience in other marketplaces, Pricing is a meaningful lever to shape demand and improve efficiency and margins, in addition to improving customer retention. Our last focus area is continued investment in our technology initiatives. As Kenny mentioned, private aviation has failed with outdated manual approaches that simply cannot scale to meet the evolving customer demands. We believe our technology solutions, when complete, will be a massive competitive advantage, particularly when coupled with our radical devotion to the customer. In the coming weeks, we will launch the newest version of our mobile app. We invested in this area so that we can constantly improve the user experience of our members and customers in a flexible and highly scalable way. The new app is extremely user-friendly with a streamlined user interface that allows for customization with less complexity. We're launching dozens of new and enhanced features, including many that will automate customer interactions at lower cost, while simultaneously providing a better customer experience and improving demand conversion. All of the initiatives that are mentioned today are the building blocks of our technology-enabled marketplace. The company cannot have an automated marketplace without robust and reliable data. One cannot have robust data with disparate systems that are not connected. Connecting all these systems through hardened APIs over a service-oriented architecture and a modern cloud data infrastructure will enable us to rapidly build features and continue to improve the customer experience and convert more demand in our marketplace. Let me provide some context to illustrate our vision in action. Last quarter, I gave a simple example of how the industry is inefficient by highlighting two customers departing from the same airport that today would be served by two different aircraft. This inefficiency happens far too often. In the future, the platform we are developing will recognize the overlap and provide incentives for either customer to adjust their departure times, enabling us to serve both customers with one aircraft. It sounds easy enough. The sheer complexity and amount of instantaneous computations required to do this at scale can only be achieved by a software-enabled platform, the one that we are building. That is why we are focused on these three key areas, operational rigor, supply and demand, and continued technology investments. We believe they will not only drive contribution margins, but more importantly, they will improve our customer experience. And we conclude by saying we have an incredible foundation as a leading demand generator in private aviation today. We are extending that advantage to the supply side of our business with our operational and technology initiatives. We have striking similarities with the other marketplaces I've been involved with at the earliest stages of their life cycles. All of them had very little automation to start with, and there was no shortage of transitory margin challenges. However, through a continuous focus on technology and operational discipline, they built platforms that gave them a competitive advantage and allowed them to turn the corner and show strength in their business model. Wheelshop is in a very similar position today and I have the utmost confidence in our future. I look forward to sharing our progress with you over the course of the year. With that, let me turn it over to Eric.

Thank you, Vinayak. Hello, everyone. As Kenny noted, we are very pleased with our strong revenue growth, with fourth quarter revenue growing 64% year-over-year to $345 million, and full-year revenue jumping 72% to $1.194 billion. That strong performance was due to the incredible efforts of our team to secure supply and service our customers during a challenging period for the industry. Providing more detail on revenue, our membership revenue grew 38% year-over-year in the quarter and 27% for the full year. As we've discussed previously, we believe our membership revenue is highly visible and largely recurring, especially since our retention rates continue to remain strong at approximately 80% for core and business members overall and approximately 90% for core and business members who purchase prepaid blocks. In the fourth quarter, we added 665 net new members, with active members growing 31% year over year. Our core business offerings, with their guaranteed availability and CAF rates across all asset classes, continue to resonate with customers, even as we raise certain CAF pricing tiers in November. Those membership tiers were a key driver of growth in the quarter, along with the continued success of our American Express partnerships. As Kenny mentioned, we implemented a temporary moratorium on flying for certain new members and pay-as-you-go flying during the fourth quarter so that we could prioritize our supply to service our existing members. I'm pleased to say that while there was a temporary headwind in adding prospective members, overall membership trends and prepaid blocks remained strong throughout the moratorium. Also, new membership sales had picked up following the lifting of the moratorium in February. Turning to flight revenue, flight revenue was up 66% year-over-year for the quarter and up 76% for the full year. Live flight lags were up 63% year-over-year in the quarter and 65% for the full year. We continue to see strong leisure demand in the beginnings of a pickup in business and international travel. We are pleased with this performance, even though supply chain constraints limited our ability to address potential significant demand from Connect and non-members through our marketplace. A live flight-led growth of 63% significantly outpaced North American private aviation flight-led growth of about 45% for the year, highlighting our ability to gain share. Just as a reminder to you, Industry metrics allocate all of our 3P flying to those third-party operators we utilize, even though those flights are actually for our customers. Flight revenue per live flight lag was $12,428 for the quarter. This was up slightly year over year. Please keep in mind this metric is a function of various factors, including pricing, stage length, cabin mix, and peak versus off-peak flying. While the mix of those components varies from quarter to quarter, we expect to show an increasing benefit over time from the price increases that we announced last November, particularly as the prepaid blocks that locked in prior rates are utilized over the course of the year. Prepaid block sales were incredibly strong at $540 million in the quarter, up 80% year over year. This provides us with great visibility for the year ahead. Also, block sales have continued to be strong so far this quarter, even with the recent cap rate increases. Currently, over 60% of our core members have a prepaid block. Switching to aircraft management, our aircraft management revenue grew 69% year-over-year for the fourth quarter and 70% for the full year, driven by higher flight volumes by owners and member charter usage. We managed approximately 150 aircraft as of the end of the fourth quarter, which is down slightly from the prior quarter. As we mentioned on previous calls, we are continuing to restructure certain legacy management contracts that are not commercially advantageous to us. There were about 15 of those contracts remaining at the end of the year, down from about 20 at the end of the third quarter. Our last revenue category is other revenue. Other revenue is a small percentage of our total revenue. It 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 margin. Our strategy is to optimize utility and efficiency across our entire 1P, 2P, and 3P fleets. Our goal is to use technology to automate scheduling so that we use the right plane and the right place at the right time to minimize your positioning legs and improve profitability. The process improvements, technology, and automation initiatives that Vinayak described are expected to be a significant driver of margin improvement in the future. That's our goal, but it's clearly taking more time in this market environment. As we mentioned on our last quarterly call, we did expect unprecedented demand coupled with similarly unprecedented industry labor, supply, and cost pressures to impact our 1P utility and efficiency and therefore increase our operating costs in the fourth quarter. In addition, to service our members, we depended on more expensive third-party supply and absorbed a higher level of complementary cabin class upgrades. Due to all those factors, our adjusted contribution margin fell to 1.3% in the quarter, which is generally in line with the expectations we articulated on the third quarter call. So now let me take a moment to update you on our progress on the tactical initiatives we also laid out last quarter. First, as the Knight mentioned, we are in a much better position with our pilot numbers, and we are now applying lessons learned from our pilot initiatives to improve our maintenance capabilities. As the pilots complete training, which takes more time in this environment given high demand for training slots, and our in-house maintenance capabilities increase, we should be in a position to significantly improve the utilization of our existing aircraft. We are also looking to add more 1P capacity through acquisition and individual aircraft purchases. I'll provide more details on that in a minute. Second, We will start seeing a more meaningful impact in the upcoming quarters from pricing, particularly from the 13% increase on cap rates for King Airs and the 8% increase for light jets that we implemented in early December. While existing pay-to-go members generally saw price increases in December, price increases for members who purchased prepaid blocks before December will phase in over time as their blocks are utilized. Also, we just announced a $295 to $895 per hour fuel surcharge, depending on cabin class, on substantially all flights for the first time in our history due to the spike in fuel costs. This fuel surcharge will commence on April 9th and apply to prepaid block flights as well. Third, we are having success driving more managed charter hours, hours that our members fly on our managed tails out of our 2P fleet. We expect significant growth in our 2P flights in 2022 due to an expected increase in charter hours per managed aircraft, aided by the launch of our charter guarantee program and a healthy pipeline of charter-friendly fleet additions. Fourth, we continue to expand the utilization of long-term GRPs, or guaranteed rate programs, to augment our fleet capacity to help us best serve our customers. Our visibility of flight demand allows us to plan ahead and more confidently lock up supply earlier. Recently, we have started to reduce free cabin class upgrades and the need for last-minute 3P supply, which should allow us to improve our margin on 3P aircraft. Fifth, we are almost halfway to our goal of hiring 50 software engineers, most of whom will be based in our new technology center in Seattle. With pricing, process improvements, additional supply, and technology initiatives, we have many levers that will help us improve adjusted contribution margin in the second half of the year. switching to OpEx. We continue to see a lot of opportunities to grow and we'll continue to invest in sales and marketing, though we expect those expenses will come down as a percentage of revenue over time. In terms of research and development, technology is a key investment area for us. As part of the significant hiring of software engineers I mentioned, we're having great success adding talented technologists from leading companies. We expect to continue these efforts. Capitalized software is an important component of our CapEx. General and administrative expenses were unusually high in the fourth quarter due to the timing of expenses and employee costs. In 2022, we expect to get more leverage in our G&A spend as a percentage of revenue. This is due in part to a structuring program we began recently to streamline our corporate overhead and other costs. The annual savings from the cuts made late in the first quarter are expected to be in excess of $10 million on an annual run rate basis. When you put things all together, adjusted EBITDA came in at a negative $46.3 million for the quarter and a negative $87.4 million for the year, which was within our most recent guidance range. Cash flow from operations were very strong, coming in at $279 million for the quarter and $126 million for the year. That strength was due primarily to the strong prepaid block sales we have discussed, which importantly allows us to operate with negative working capital. Kindly keep in mind, while block sales have been very strong, there is seasonality to those sales. Capital expenditures, including capitalized software, was $28 million for the year, coming in at the lower end of our recent guidance range due to timing. Almost half of our capex was capitalized software. Now we'd like to discuss our fleet strategy and certain other plans for 2022. Our one-piece fleet is a mix of owned and leased aircraft, both of which are included in our balance sheet. When we evaluate adding an aircraft, we have various options to consider. We can either buy it, lease it, finance it, or even sell it into our managed fleet over time for our charter usage. For example, we recently paid $65 million to Textron, the 32 mid and super mid-citation aircraft that were previously on our balance sheet as operating leases with a $10 million annual lease cost. We have been operating these aircraft, but many of them branded with blue and white painted tail. We could have entered into a third-party sale-leaseback transaction, with a third party on similar terms. But given our past position, we elected to purchase these aircraft outright, and we'll consider potential alternative financing options over time as needed. We're also looking to further bolster our 1P fleet. Having scheduled control of aircraft in a strong demand environment is valuable. That's why we purchased Elante, which leases 12 highly sought-after light jets. And we will continue to evaluate other acquisition candidates, We also see opportunities to strategically use our aircraft brokerage purchase and sale capabilities. Some aircraft may be purchased outright for our fleet. For other aircraft, we believe we are in a great position to sell them to future owners who can recognize the tax benefits from the accelerated depreciation. Ideally, they can either lease them back to us, or we may manage these aircraft with the owners committing to allow us to use their aircraft for our charter customers, which we view as a win-win proposition. Due to our increased brokerage capabilities, we're adding aircraft to our balance sheet as assets held for sale with an expected short-term holding period. We started doing this during the fourth quarter with $18 million in aircraft held for sale as of the end of the year. In total, capital spending for 2022 is expected to be approximately $125 million. That includes what we consider normal capital spending of $60 million for purchased aircraft, capitalized software, et cetera, as well as the $65 million spent for the Textron aircraft purchase in the first quarter, which we view primarily as a financing decision of previously leased and operated aircraft. Free cash flow, defined as cash flow from operations less total capital expenditures, including capitalized software, was also very strong, coming in at $267 million for the fourth quarter and $98 million for the full year. Due to that strong free cash flow, a year end yields up at a very healthy balance sheet with cash and cash equivalents of $784 million and essentially no indebtedness. Let me turn now to our guidance, which does not include any pending or potential acquisitions, including your partner. Looking at 2022, given the strong demand we are seeing and the visibility provided from the strong prepaid block sales and resulting $935 million of deferred revenue as of December 31st, 2021, we expect revenue to be in the range of $1.35 billion to $1.42 billion for the year. From a seasonality perspective, Typical industry trends pre-COVID have been that Q1 and Q2 are similar from a demand perspective, as are Q3 and Q4 compared to each other, with demand slightly stronger in the back half of the year compared to the first half. This pattern has changed, however, due to COVID. For this year, we expect our first quarter will be the lowest revenue quarter in dollars for the year, but up approximately 15% year over year. We were not immune to widespread Omicron-related staffing shortages and adverse winter weather that did impact our operating performance in January and February of this year. In addition, the moratorium that recently ended resulted in reduced flying availability for certain members and non-members and impacted our lower-end Connect membership sales that do not have the same guaranteed flight rule set as core members. The good news is demand has picked up as the moratorium was eased. as a result we expect our total revenue to grow each quarter over the course of the year moving to margins cost of service our customers have increased as we work through operational process improvements and develop our technology while fuel costs for one are sharply higher due to geopolitical events we will start mitigating this effective april 9th as we implement the fuel surcharge i discussed earlier When you consider things all together, we expect our adjusted contribution margin in the first quarter will be down slightly versus the fourth quarter and improve as the year progresses. We expect first quarter adjusted EBITDA to be in a range of negative 52 million to negative 57 million. We also expect to report a gap net loss of between $105 to $115 million for the first quarter. Reflected in this gap range are several non-cash estimates. a $10 million charge related to earn-out shares, a $15 million expense related to stock-based compensation, $20 million of depreciation and amortization expense, and $10 million of restructuring costs and other non-cash items. The range does not reflect any non-cash gain or loss related to the fair value of our warrants or any other unusual items. As our operational and technology initiatives progress, along with better pricing, we still expect to exit the year with higher margins that will set us up well for 2023 and beyond. However, with the current geopolitical landscape coupled with macroeconomic uncertainties, we think it is prudent for now to provide adjusted EBITDA and GAF earnings guidance one quarter at a time. In closing, I want to reiterate our core and business member retention and lifetime value are very important to the long-term value of the companies. That is why we are incurring incremental costs to ensure our customers get the best possible experience in this environment. We are investing in our technology-enabled marketplace platform and still believe we will significantly increase margins in the future. With that, thank you all for joining. Let me turn the call back to the operator so we can take your questions.

If you would like to ask a question, please press star followed by one on your telephone keypad now. If you do change your mind, please press star followed by two. When preparing to ask your question, please ensure that your line is unmuted. Our first question comes from Michael Bellisario from Baird. Your line is now open. Please go ahead.

Thanks. Good morning, everyone. Just wanted the one piece fleet strategy information you gave was great. Can you maybe take a step back given all the changes that have occurred recently on the revenue and expense side. How do you think about the sweet spot of your business going forward in terms of balancing 1P, 2P, and 3P investments? Eric? Thanks, Michael. Thanks, Kenny. So in terms of what we expect to grow each of our 1P, 2P, and 3P capabilities over time, clearly in this market environment where, as I said, 3P costs have increased as demand has increased across the entire market, it's more advantageous for us to put more activity on our 1P fleet or leverage our 2P fleet. In terms of profitability, Over time, and we talked about this at our analyst day, that our 1P fleet has the most profit opportunity for us with 30% plus target margins. 2P and 3P generally are in that 15% to 25% target margins, and this is more over the long term. I would say today that's shifted a little bit in terms of we're seeing more profitability right now on our 2P fleet versus 1P and 3P. And we have more opportunity right now on the 1P because our utility has not improved. As we improve utility, that's really where you get the benefit in margin expansion because you've already, you know, once you've covered your fixed cost, you have the opportunity to really, you know, that incremental flight, those incremental flights really are at a variable cost. And so we're working through making sure that we have the And then we can turn on the spigots of more demand to essentially drive that utility. In the first, as I said, we really haven't been opening up the market place in the aperture to non-members. So we can add more supply, whether it's 1P, 2P, or 3P, and open it up to more members and non-members.

Yeah, Mike, I have a couple. And then Danny.

Just the key to utility here for us, consolidating certificates, global scheduling is going to open that up for us in a meaningful way as well. Got it. And then just one more from me. You've been using your balance sheet a little bit more, and it seems like you're more inclined to lean in a little bit as you look out. maybe 12 months, 12-plus months, how much of your current investment capacity do you think you could use or do you want to use to further bolster the one P3? I'll take that one, Kenny. So in terms of our CapEx guidance said that it implies that we're going to spend about, about $60 million of normal CapEx, which about a little less than half of that is going to be related to purchasing aircraft. on our balance sheet. That's the current plan for right now. That does not include those assets held for sale, which are assets, those aircraft that we're essentially buying with the ability to either sell off to an owner that will put them in our managed fleet or, you know, work with somebody to lease that back to us as a, you know, still part of 1P, but through an operating case, not as a, you know, And at the end of the year, we had $18 million of assets held for sale. That will probably increase to about $50 or $60 million pretty quickly here. We've had a lot of success in acquiring. That's a great deal for us where we have some great examples where we've been able to take an aircraft, find an owner that's looking for that aircraft. It's a type of aircraft that we actually utilize in our fleet today and they'll pay us a management fee to manage that aircraft and that will pay them an hourly rate when we utilize that aircraft for high charter availability.

Thank you.

Our next question comes from Gary Precipino from Barrington Research. Your line is now open. Please go ahead.

Hey, good morning, everyone. A couple of questions here on your pilot retention, first of all, particularly as it relates to the King Airs. I mean, has that stabilized or improved from where you were at the end of Q3?

Hey, Gary, thanks for the question. Yes, we're doing two things for pilot retention. We had a new program called Aircrew 360. It's more like kind of a comprehensive look of everything about them, like career progression, benefits, compensation. We were the first in the industry to provide stock-based compensation to our pilots. So we are stabilizing the retention on the pilots. We're also double down on hiring, like the speed in which we hire, the focus we have.

give higher referral bonuses for our pilots if they refer people so overall we're very pleased with the progress we've made both on the retention side as well as acquisition of new pilots for the king air as well okay so these 150 pilots that you've hired as well as you you say you're going to have 200 higher by the end of q1 when will they be uh totally certified to start flying the king airs

So about half of them are already getting certified. You know, unlike other industries, when a pilot gets hired, there are three or four steps that we have to take. One is, you know, there needs to be background investigation that happens on their qualification and performance. You know, where the previous company comes to give that data. Then there's like a class one medical examination with an FAA qualified medical examiner. Then they get interviews to our operations right now with respect to company-specific operating procedures, and then they get type-rated for the specific type of aircraft. And then they start doing what I call initial operating experience. So it takes a couple of months. So half of them are coming out of training as we speak, you know, because we've been hiring since November, right? And so this is an ongoing process as they keep on coming more and more onto the platform for us to produce revenue-generating flights.

so i guess i guess in in what you're saying by q4 of 2022 going into 2023 the bulk of these pilots will be able to fly these planes on regular schedules is that kind of a good bogey there well the the 150 to 200 we have hired they should be able to fly in q2 of 2022 not even q4

So it does not take a few months. So yeah, definitely in Q2.

Okay. And then in terms of the King Air, which you said you had a lot of capacity and upside. I mean, what what is going on there with the utilization? You know, I believe it was probably down in Q4. How does that look now in Q1? And where do you think you can take it by the end of the year?

Look, we don't specify actual utilization numbers. There are three things that affect utilization. One is what we call green planes and green pilots. We can dramatically improve the maintenance by improving green planes. As we get to pilots, we can improve dramatically the number of pilots we have. So there's green planes and green pilots. And then we can optimize the optimizer. These utilization numbers that we have are something we have achieved in Q2 of last year. So we can easily beat that as we improve our pilot ratios and use software to optimize the schedules. We won't provide specific utilization numbers, but these are things that we have achieved in the past. And as we get pilot ratios to be better, we can get it going. One thing on Q4, You know, we were not immune to Omicron-related shortages, both on the maintenance side, both on first-party and third-party, and cruise itself as, you know, when they fell sick during Q4, as you might have heard through other, you know, even airlines where last few weeks of December there was pilot-related shortages. We do believe with higher pilot ratios that were software to manage the crew and scheduling and optimizing, we can dramatically increase the utilization of the King Air fleet. Okay, thank you.

And then, Eric, lastly, you cited a bunch of below-the-line components in Q1 to get to the adjusted EBITDA. Could you just go through those again? I couldn't write them down quick enough. Sure. Give me a second to get my notes here. But essentially, it was $20 million of depreciation was one of them. There was, I think, $10 million related to earn-out shares. These are all not cash items So $15 million related to stock-based top and $10 million related to restructuring costs and other non-cash items. So the total amount of add-backs are about $55 million.

Thank you. You're welcome.

As another reminder, if you would like to ask a question, please press star followed by one on your telephone keypad now. And the next question comes from Marvin Song from BTIG. Your line is now open. Please proceed with your question.

Great. Good morning. Thanks for taking my questions. The first question on fuel sounds like your fuel surcharge won't be hitting in the first quarter. So just do you have a sense of if the If the surcharges were in place for the first quarter, like what would your EBITDA, adjusted EBITDA number come in at? And then I have a follow-up question. So, Martin, this is Eric. I'll take a broader approach to this, and then I'll zero down a little bit more on your question. So, look, as I mentioned in my prepared remarks, we implemented a fuel surcharge for our members, including those with prepaid locks. And it's the first time in our history that we've taken such an action, even though our contract's permitted. And as you mentioned, the surcharge takes effect April 9th, you know, 30 days notice. So therefore, we'll all set our cost increases, our cost in the second quarter. And that surcharge ranges from $295 to $895 per hour. That's based on cabin class. So some history on our fuel costs. So fuel was about 50% of our gap cost of revenue for 2021. That's about $165 million. And so a 10% change or increase in fuel expense would increase our costs by about $16 million a year on a similar amount of flight volumes. The commodity price of fuel comprises about 50% of our total fuel costs. If you look at distribution taxes, Those are more fixed, and that's sort of the remaining other half. The Jet Fuel Commodity Index price was about $2.16 per gallon a year end, and that's up from $1.34 at the end of 2020. And so the other day, the index crossed the $4 mark, which would increase our cost by about double, which is about double the increase in the last two months. At the current index cost, our fuel costs would increase by about 50%, but that would be substantially offset by that recently announced surcharge. If the fuel costs continue to rise, we do have the ability to take further action by amending our terms of service. In terms of what the impact was, I can give you sort of what the rough impact is on March, and that would be about $3 to $4 million, which is based on sort of that increase. it's hard to kind of go back and say, you know, depending on what rates you use for the beginning of the year and such, you know, but to give you a sense of the incremental impact for us for March is about $3 million to $4 million. Okay. All right. That's super, super helpful. Thanks for that. And then my other question, since, you know, the air partner acquisition gets you into Europe, you know, could you discuss any businesses they were doing, you know, with the, you know, Russia, Ukraine area? And also, you know, just as you're thinking about expansion into Europe, change at all, are you seeing essentially more of an opportunity there, or any additional thoughts on geographic expansion would be great. Thanks. Yeah, Marvin, it's Kenny. Thanks for the question. And as we've talked about since our public offering, we see our brand as a global brand, their partner, a 60-year history, incredible, talented people, asset-light. Their exposure in Russia is minimal, non-material, which is great. They service Europe. If you think about being a Wheels Up member and the value of being a Wheels Up member, there's plenty of folks that are going to fly over on a Delta Airline airplane or an affiliate, and they're going to pick up the Air Partner Network and vice versa. Mark Griffith, their CEO, is excited to be our person in Europe, working directly with the NIAC on the business forward. But we always talked about planting a flag there. I think there are some great opportunistic opportunities there. We talked about our cash position leaving this year with over $750 million, and that doesn't account for our ability to back lever our assets that we pay down. So you have another couple hundred billion plus to utilize should we want to do that. But really, really exciting, super talented team. And, again, like I said, we see a global opportunity here. So excited about Air Partners. Sure. Thanks, Kenny and Eric. Appreciate it.

That was our final question, so I'll hand it back to Kenny Dichter for closing remarks.

Hey, Maxine, thank you so much for hosting, and thanks to everybody for joining us today. I'm going to leave everybody with one final thought. We're making substantial progress in building an innovative, technology-enabled marketplace. to optimize fragmented supply. We will connect that supply with a large, growing, and dynamic addressable market, all supported by our trusted and iconic Wheels Up brand. I want everybody to have a good day, and thanks again. Wheels are up.

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.