Surf Air Mobility Q3 2023 Earnings Call Transcript

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November 14, 2023

There are 7 speakers on the call.

Operator

Afternoon, and welcome to Surfer Air Mobility's Third Quarter 2023 Earnings Call. All participants are in a listen only mode. After the speakers' presentation, we will conduct a question and answer session. As a reminder, this conference call is being recorded. I would now like to turn the call over to Phil Margaritas, Head of Investor Relations and Communications.

Speaker 1

Thank you. Please go ahead.

Speaker 2

Thank you, operator. Welcome to Surfer Mobility's Q3 2023 earnings call. I'm joined today by Stan Little, Surfair's CEO Deanna White, our CFO David Anderman, our Chief Legal Officer And Sudan Shahani, our Co Founder. We released our Q3 2023 results this afternoon, which are available in filings with the SEC And on the Surfaire's investor page at investors. Surfaire.com.

Speaker 2

I'd like to remind everyone that during this call, we may discuss our outlook And future performance. These forward looking statements may be preceded by words such as we expect, we believe, we anticipate or similar such statements. These statements are subject to risks and uncertainties, and our actual results could differ materially from the views expressed today. Some of these risks have been set forth in our earnings release and our periodic reports filed with the SEC. During today's call, we will also discuss both GAAP and non GAAP financial measures.

Speaker 2

Additional disclosures regarding non GAAP financial measures, including a reconciliation of GAAP to non GAAP financial measures Are included in the earnings release we issued today, which has been posted on the Investor Relations page of Surf Air Mobility's website and in our filings with the SEC. With that, I'll turn it over to Stan.

Speaker 3

Thank you for joining us today for our first earnings call as a public company. We are pleased with our performance this quarter and we're on track to meet both our top line revenue and pro form a adjusted EBITDA guidance For 2023, despite a challenging backdrop for both our industry and the macro economy. Before we take a deeper look into our quarter, I'd like to share the 3 core drivers of our business model. First, we plan on expanding our air mobility network To maintain Surfair's leadership position in our scheduled airline business and our on demand charter business. 2nd, we will enable independent owner operators to join our platform and grow our off fleet product.

Speaker 3

Core to that effort is continued investment in our software platform. I want to draw particular attention to our partnership with Palantir, which will allow us to develop state of the art AI software for operators. 3rd, we continue to work on the long term goal of implementing electrified aircraft Across our network, we're developing proprietary powertrain technology, which will drive this evolution, lowering operating costs And driving growth for the whole regional air mobility market. In the Q3, we made meaningful progress toward these goals. Number 1, we completed our public listing on the New York Stock Exchange, which allowed us to close our acquisition of Southern Airways And to solidify our contractual agreements with strategic partners Textron Aviation, Jetstream Aviation Capital and GEM Global Yield.

Speaker 3

2, we confirmed our order and paid the deposit with Textron on our contracts for the purchase of 100 Cessna Grand Caravan EX aircraft. We're excited about the scheduled delivery of the first of these planes starting in April. As you probably know, unprecedented supply Chain and vendor delay issues are impacting the industry right now, us included. We've taken several substantial steps this quarter toward mitigating these issues, including the purchase of multiple spare engines and the sourcing of critical parts from new suppliers. Ultimately, the delivery of the new Textron planes Is the final fix, but until then, we do expect these actions to restore the majority of our out of service aircraft Revenue generation prior to the year end.

Speaker 3

In our core air mobility service, our off fleet products, including our on demand products, Represented the fastest growing part of our business in the Q3 with a year over year increase of 63%. Number 4, we made significant progress on the build out of our electrification business. From a certification perspective, We finalized our data license agreement with Textron Aviation, which will significantly de risk our timeline. Along with our lead partner, AeroTech, we're advancing our engineering and design specs and preparing to move into the next stage of development. From a commercial perspective, we finalized our exclusive sales and marketing agreement with Textron.

Speaker 3

We believe this agreement will create a viable channel to Established significant market share with our electrified powertrains across the global caravan fleet, both for new and used caravans. As part of our diversification plan to create a broader portfolio of new aircraft in our network, we forged a partnership with Regent, A company pioneering all electric Seaglider Airships. Not only have we been named their launch customer in Hawaii, But we've also partnered to establish a base of operations for passenger service in South Florida, the Bahamas and the Caribbean. And number 5, we also restructured our funding facility with JEM with new terms that provide us more flexibility in How and when we take draws. This arrangement gives us ongoing access to up to $400,000,000 of capital to help fund our growth plan.

Speaker 3

Taken together, we believe these accomplishments are a solid foundation for advancing our strategic roadmap, both near and long term. Given that this is our first earnings call, I would like to take the opportunity now to give a high level overview of the SURF Air Mobility story Flying through electrification. We firmly believe that electric airplanes will unlock a new mass transit solution. According to recent NASA and Mackenzie research reports, technological advancements coupled with increased consumer demand for low cost And ecologically friendly short haul travel presents a $10,000,000,000 addressable market in the U. S.

Speaker 3

And a $100,000,000,000 market globally. The vast majority of airports today do not offer commercial service and 70% of air travel goes through only 30 airports across the U. S. Over the next decade, the expansion of air service to the approximately 5,000 underutilized public airports in America, Combined with changing consumer preferences for new alternatives to congested highways will help drive this paradigm shift in mass transit. You might ask, why aren't the big airlines pursuing this opportunity?

Speaker 3

The answer is simple. They've migrated their fleets to larger planes And moved most of their routes to large urban airports with longer flying ranges. This creates a significant opportunity for Surf Air Mobility To serve the 100 to 400 mile trip flyers with a more affordable, convenient and ecologically friendly solution. We plan on being the 1st company to bring electrified aircraft to market at scale because we've identified the most expeditious path For obtaining FAA certification of electric aircraft. This starts with our decision to modify the Cessna Grand Caribbean with a new powertrain.

Speaker 3

This pathway can shave years off the FAA review and approval process as compared to a newly designed airframe, which is what our competitors are pursuing. The Qaravan is a tried and true plane with a large installed base around the world, trusted by 1,000,000, Including airlines, charter companies, other commercial users and militaries. Our business model provides a unique competitive advantage To capitalize on this opportunity, we are the largest commuter airline in the U. S. And we have a quick path to market for electrification.

Speaker 3

We have the most practical electrification solution with our partner Textron Aviation, the largest airplane manufacturer in general aviation. This relationship also provides us with an exclusive sales and marketing agreement for Textron to distribute our electric powertrains Everywhere they sell caravans today. Unlike our competitors in the electrification space, our strategy will enable us To quickly deploy new electrified aircraft into our already established network to grow market share and sustain our market leadership position in Commuter Air. Today, Surf Air Mobility is a combination of our consumer facing travel brand, Surf Air, Southern Airways and Mokulele Airlines. The company has 750 combined employees.

Speaker 3

We fly 500,000 passengers on 75,000 flights and generate over $100,000,000 in annual revenue. Our revenue is derived from 3 sources: our regional air mobility network providing scheduled passenger service Our government contracted services, otherwise known as EAS routes and our on demand service, which Has access to over 200 independent operators to fly our customers. It's worth noting that the biggest constraints on revenue growth at this Point are the challenges in the supply chain to maintain our fleets and procure new aircraft. That's why our exclusive agreement with Textron, Which includes preferred order status for new caravans is such a valuable asset to us. As I mentioned earlier, We expect the first 11 caravans from Textron to be delivered over the course of 2024.

Speaker 3

Some of these will replace older planes in our fleet To improve service reliability and lower operating costs, while others will be deployed to new routes. Beyond 2024, Our agreement includes the delivery of at least 20 new caravans each year. Another major driver of our growth is the expansion of our off fleet We currently have working relationships with 200 operators across the country, giving us an inside track For future product placement of our software, hardware and leasing products. Our plan is to create long term Recurring revenue contracts with these operators, helping them to finance their aircraft and providing them with modern software tools to run their businesses. Our partner Palantir, a leading provider of AI systems is collaborating closely with us to develop our aircraft as a service software suite.

Speaker 3

These software tools will give the operator improved productivity and efficiencies with predictive modeling capabilities, Personalized customer features and route optimization. As I mentioned previously, In the long run, we expect electrification to become a significant tailwind to overall industry growth over time. I already touched on the importance of our relationship with Textron and how it lends to these efforts. But I also wanted to highlight another Key relationship that is critical to our certification process. AeroTech is a leader in the aerospace engineering certification space.

Speaker 3

Their team of 250 engineers and certification specialists have enormous experience in electric and other leading edge propulsion technologies, Especially in getting new aircraft technology through the FAA certification process. And they have already performed the world's first and only electric caravan test flight. In closing, I want to express a special thanks to our most important partners, All our team members across Southern, Mokelelele and Surf Air, without their grit, determination and tireless dedication, None of this would be possible. I'm truly grateful for their commitment and dedication to providing exceptional customer experiences. Let me now turn it over to you, Deanna, for a look into the financials and operations.

Speaker 4

Thanks, Dan, and thanks to all of you for joining us on the call today. As Stan mentioned, we are on track to meet our full year 2023 guidance for both revenue and pro form a adjusted EBITDA amidst a challenging environment for our industry. Our acquisition of Southern Airways closed on July 27, 2023, and we have now reflected the results of its operations in our 10 Q financials as of that date. On a GAAP basis, The company reported 3rd quarter revenue of $21,900,000 and 9 months year to date revenue of $33,700,000 On an unaudited pro form a basis, which assumes the Southern acquisition closed as of the beginning of the fiscal year, The company reported $28,900,000 of revenue in the 3rd quarter, up 6.2% year over year and $85,400,000 of revenue for the 9 months year to date, up 17.3% year over year. This information can be found in the 10 Q under the supplemental unaudited pro form a information section.

Speaker 4

We were particularly pleased with the growth in flights of our on demand business, which on a pro form a basis As I mentioned a moment ago, The airline industry is facing significant challenges from a cost perspective. We saw especially large impacts from inflationary pressures Impacting aircraft fuel costs, wages and benefits and other goods and services critical to our operations. In addition, there are higher costs and scarcity of parts in the supply chain, creating challenges in onboarding, fleet maintenance And aircraft reliability. We are taking steps to reduce the impact of these costs, but expect that industry wide cost headwinds We'll continue to impact our business in future periods. Away from industry headwinds, We also saw higher costs related to our public listing, the closing of the Southern Airways acquisition and non cash changes in the fair value of financial instruments.

Speaker 4

The vast majority of these costs are one time items that will not recur in future periods. Third Fare Mobility also reported pro form a adjusted EBITDA, Assuming the Southern acquisition closed as of January 1, the beginning of our fiscal year and for all periods presented of negative $14,700,000 for the 3rd quarter and negative $32,500,000 for the 9 months year to date. Negative adjusted EBITDA is largely driven by the previously mentioned operational costs and investments in our proprietary electrification technology. We plan to continue making investments in our business with a focus on And the certification and deployment of our electrification technologies. We will also be increasing sales and marketing spend to drive brand awareness and strengthen our commercial programs.

Speaker 4

We have a lot of work ahead of us and we are highly focused on identifying and migrate best practices across our network. As it relates to our source Funding, I want to briefly touch upon the contracts we have with both JEM and Jetstream. As previously disclosed, We have a $400,000,000 share repurchase agreement with JEM. As of September 30, 2023, Surfer Mobility had $5,900,000 cash on hand with the ability to draw $92,500,000 in cash advances and up to a maximum aggregate purchase price of $400,000,000 under the JEM share subscription facility. As Stan mentioned, we amended the facility in the Q3 to give us more flexibility in the amounts and timing of equity sales to match our capital needs.

Speaker 4

This will help us more effectively manage solutions as we execute our business plan. Our cash on hand reflects the balancing of working capital needs with solution from JEM Cash Advances. The facility requires us to have registered chairs available to effect advances and draws. To that end, Last week, we filed a new registration statement to register upon its effectiveness an additional 300,000,000 shares for future use related to this facility. As we look ahead to the delivery of our first 11 aircraft from our Textron Aviation order, We intend to use our $450,000,000 leasing facility with Jetstream, the largest aircraft leasing In the U.

Speaker 4

S. For regional turboprop aircraft to finance our fleet. In terms of our other uses of capital, We are prioritizing capital spending in the following key areas: technology to advance the certification of our electrified powertrain Investment in our core direct to consumer passenger booking platform, development of software for operators in conjunction with Palantir And working capital to support our existing airline operations. All things considered, We made considerable progress in the Q3 and have laid the foundation to access necessary capital. While the macroeconomic situation remains demanding, we are pleased to reiterate our full year 2023 guidance.

Speaker 4

We are developing sound actions to address our challenges and enhance our ability to access capital as we grow. With that, I'll turn the call over to the operator for Q and A. Thank you.

Operator

Thank you. Our first question comes from Ravi or from Austin Mueller from Canaccord. Please go ahead. Your line is open.

Speaker 1

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

Speaker 3

Hi, Austin. This is Stan. I can address that. That is certainly something that we have had concern about, But we have been in regular communication with Textron. They have actually provided us the specific Serial numbers of the first several aircraft and have reaffirmed their commitment to the initial delivery in April.

Speaker 3

So unless something unexpected changes on their end, all indications are that those deliveries should occur as scheduled.

Speaker 1

Okay, great. And then can you just go into a little bit more detail about the rollout process for the Tier 1 routes as it currently stands?

Speaker 3

Sure. The Tier 1 routes, which are in the selection phase right now, will come at some point. Obviously, what we're looking at right now though with the supply chain issues is the initial re fleeting. We've talked often about how a certain number of the aircraft will go toward replacing older aircraft in our fleet And a certain number will go toward increasing the number of routes and adding new routes. We do believe that likely, the first Deliveries will go toward re fleeting just because route profitability is so important to what we do.

Speaker 3

And as we look at the increased costs these days, Much of those costs are driven by the cost of maintaining an older aircraft fleet. So I think in this environment, we are again committed to ensuring route profitability first and route growth second.

Speaker 1

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

Operator

Our next question comes from Ravi Shanker from Morgan Stanley. Please go ahead. Your line is open.

Speaker 5

Thanks. Good evening, everyone. So congratulations. You guys had a really busy and pretty successful 3Q. Can you remind us again what are some of the milestones we can look forward to in the Q4?

Speaker 3

Sure. Hi, Robbie. Good to speak with you again. I'll start on that one. In the Q4, we're going to be working hard to bring the fleet back up To the optimal level despite the issues that have plagued the entire industry with supply chain.

Speaker 3

So we would like to finish off the year With the fleet at or near customary levels of operational abilities, we'll also want to finish the year With many of our right sizing on fares to ensure that all of our routes Remain profitable on a route by route basis. On the electrification side, Our department there is working very diligently to ensure that they stay on and we believe they will stay on The timeline that we discussed previously, which is the selection of key suppliers and getting out of the current phase we're in and ready to move into the next phase. So much of what we do And then of course, we don't want to forget the continued off fleet growth, growing more customers who are suppliers to our on demand travel platform. That's one of the big things that's really happened in this quarter and I want to make sure that that continues into the next quarter because that's such a big driver right now Of revenue, as far as anything else on the operational side, much of that is waiting for that April 1st delivery of the Textron aircraft. As we continue to see here on a daily basis, the constraints of our growth are not demand driven, They are supply driven.

Speaker 3

There is a great deal of demand in the marketplace right now for the flights that we offer And our biggest constraint is the ability to have aircraft to put on those routes. So that will be coming in April. The other things I talked about, we're working on Between now and then.

Speaker 5

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

Speaker 5

Thank you.

Speaker 3

Certainly. We will. We are certainly working to keep up with inflation on our fares. We saw modest fare increase Implemented just a couple of weeks ago that we're already starting to see very positive signs from, meaning that the increase in revenue is Commensurate with the increase in fare and we're not seeing a lot of any significant drop off in demand in that area. Frankly, we are we're very fortunate on our airline side in that with what we do in the places where we offer a very high end product, We are one of the only very high end products.

Speaker 3

And in the places that we offer a product that is more mainstream, We are almost always the only offeror in that space as well. So our routes are generally either very exclusive Or very high end and each of those is very resilient against drop offs in demand. If you've got to travel, you've got to travel. Thank you. Sure.

Operator

Our next question comes from David Vernon from Bernstein.

Speaker 1

Please go ahead. Your line is open.

Speaker 6

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

Speaker 3

We have reset GEM. One of the things that has been one of the wins for us this quarter has been being able to reset The gym draw schedule so that we are not capped with how low or how high we can go in the gym. We don't have to draw $25,000,000 for example, if we don't presently need $25,000,000 Deanna can probably give some better specifics as to What the plans look going forward, but I would bring out that we have near complete flexibility now in the size of those draws and in the frequency of those draws. Diana, would you like to give some further detail there?

Speaker 4

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

Speaker 3

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

Speaker 6

Okay, great. Thank you so much for that color. Yes, I could ask another question. It would be great if you could talk a little bit about, the timing of the 11 aircraft deliveries planned for 2024. And also on the note of 2024, maybe if you're able to give a little bit of guidance for revenue?

Speaker 3

As far as the delivery of the aircraft, I believe and I don't have those that delivery schedule in front of me. I know the first one is in April and then we take That leaves 10, I believe it's roughly 3 per quarter for quarters 2, 3 and 4. 4 would be in the first Quarter and then 333 3 44, sorry about that. I've been corrected. 3 in the second quarter and then 4 in the third quarter and 4 in the Q4, then we move to a regular schedule of 20 per year after that, which would be 5 per quarter On a regular basis 2025 going forward.

Speaker 3

I'll hand it over to Deanna to talk about the rest of the guidance.

Speaker 4

So in our Q2 earnings call, we gave guidance for 2025. We did not give guidance yet for 2024. We intend to be able to provide full year guidance during our annual call in February we have for our Full 2023 results compared to the guidance that we did give and then we'll also be giving the analysts and everyone What our 2024 guidance will be for not only revenue, but for additional items such as adjusted EBITDA.

Speaker 6

Great. Okay. Thank you so much.

Speaker 3

Thank you.

Operator

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

Speaker 3

Thanks very much. Just in summation, Surf Air Mobility had a very good 4th 3rd quarter. We progressed where we wanted to with our metrics. We're excited about the deliveries of Textron beginning next year, which will really be the revenue driver going forward. We thank all of you for joining us today, And we wish you a Happy Thanksgiving.

Operator

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

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