CJI ANALYSIS • WHEELS UP
Kenny Dichter founded Wheels Up in 2010 and took it to a billion-dollar company. He stepped down in as CEO and chairman in May 2023. After helping secure new investors he left the board on September 20th, 2023.
Wheels on fire
No business aviation company has attracted as much attention as Wheels Up in the last 12 months. After speaking with the people who have been in the room during the changes, we explain how and why the restructuring happened. And what it is doing next. Words: Alasdair Whyte
“UP Blue's reassuring presence inspires feelings of calm and confidence, sending a message of blue skies and tailwinds. A timeless and enduring blue hue with an accessible demeanour, UP Blue's relatable style brings people together.”
Wheels Up’s announcement in March 2023 that it was trademarking the company’s Pantone colour was followed by a collaboration with Hotel Lobby Candle to create a candle called Blue Skies. The press release said the candle was “designed to evoke the serene joy of flying private.”
These announcements followed partnerships with athletic brand REDVANLY and a golf capsule collection with Malbon Golf. The golf collection sold out in 24 hours.
It was not enough. In the second quarter of 2023 Wheels Up reported a net loss of $160.5m. It was burning through $2.3m of cash every day.
This disconnect was Wheels Up’s biggest issue. The company, which only launched in 2010, had grown to $1.58bn of sales in 2022 from 12,000 members (not including charter broker Air Partner’s customers). It was the largest charter operator in the world and the most searched for business aviation company. Customers liked the product. Some 80% of all members renewed. For large customers who purchased blocks, this was more than 90%. Demand was not the problem.
“Wheels Up was great at the offensive, but its defence was weak,” says one member of the founding team. “It was becoming the Amazon of business aviation, but the warehouses and delivery team could not keep up.”
As the Wheels Up marketing and communication team were busy getting more coverage, the management team were not feeling calm and confident. They knew that it needed more cash.
July 2021: Wheels Up on Wall Street
“This is a very special day in Wheels Up’s journey. We are now playing at Yankee Stadium or Wembley Stadium but we are just getting started,” said Kenny Dichter, Wheels Up’s founder, CEO and chair, in a call with Corporate Jet Investor. Dichter, who is rarely downbeat, was about to ring the New York Stock Exchange’s closing bell.
Investors shared his enthusiasm that day. The stock opened at $9.95 and traded up to $11.8. This valued the company at more than $2.5bn. It did not last. By the end of 2021 it was trading at $4.64. In June 2023 it was forced to do a reverse stock-split to keep its shares above the $1 it needed to stay on the exchange. It swapped 10 shares for 1. At the start of October 2023 its shares were trading around $2, from an equivalent issue price of $100.
George Mattson the new CEO
Todd Smith CFO who was also interim CEO
Wheels Up went public just as the hype for blank cheque or Special Purpose Acquisition Companies (SPACs) was cooling. Virgin Galactic, founded to take passengers into space, is widely seen as the poster child for the boom when it merged with a SPAC in 2019. In 2019 there were 59 SPACs that listed, in 2020 there were 248. Wheels Up was one of 613 companies to list via a SPAC in 2021. By 2022 this number had fallen to 86. By September 2023 there were just 22 – including Jet AI Aviation.
Early investors in SPACs were happy to invest in companies that had never made a profit. In some cases they did not even look for sales. Wheels Up was an attractive target. It was growing fast and was also a glamorous company with lots of celebrity ambassadors. The company’s advisers – Jefferies, Goldman Sachs and Morgan Stanley – asked SPACs to pitch on why they should be the buyer.
The winner was Aspirational Consumer Lifestyle, a SPAC launched by Ravi Thakran, a veteran of luxury company LMVH. Wheels Up’s SPAC presentation said that the company would become a business aviation marketplace (it positioned itself against companies like Uber, Airbnb and Netflix), going international and expanding into other sectors like yachting.
Like the technology companies it compared itself to, Wheels Up continued to focus on growth rather than profit. It took Uber 14 years to have a profitable quarter. This may have worked if the sentiment against SPACs was short-lived. The DE-SPAC Index, which tracks the 25 largest companies taken public through a SPAC, was down by 45% in 2021. And 75% in 2022. It has fallen further in 2023.
Wheels Up tried to capture as much of the record industry demand that came after lockdowns as possible. But the demand was more than its fleet could cope with. It was also hit when supply chain shortages kept aircraft on the ground. Wheels Up was often losing money on flights where it was having to charter aircraft from other operators. But it kept growing.
Dichter and Wheels Up’s team loved finding new ways to spread the brand. Experiments included golf clothes and equipment and even a candle. But it was not always able to deliver its services profitably.
Dichter and Wheels Up’s team loved finding new ways to spread the brand. Experiments included golf clothes and equipment and even a candle. But it was not always able to deliver its services profitably.
June 2022: Mr Smith goes to Wheels Up
Todd Smith joined Wheels Up in June 2022 from GE as CFO to sort out these problems. Just six weeks after starting, he pledged that the company was changing its focus from growth to profitability. “None of us are satisfied with the current level of profitability of this business. So we are going to work very, very hard to accelerate that and make that happen as quickly as we can,” said Smith talking to analysts.
He pledged that Wheels Up would be profitable by the fourth quarter of 2024. But to get there it needed cash.
Smith also needed to sort out Wheels Up’s systems. Eric Jacobs, the previous CFO, had joined Wheels Up from Cox Automotive (the owner of Kelly Blue Book and Autotrader). Cox had acquired Dealertrack, a software company for car dealers. Jacobs had worked on 30 acquisitions and was heavily involved in Wheels Up’s deals.
The company had been growing so fast, that many back-office functions could not keep up. One early Wheels Up customer sent an email in 2021 asking to book a few flights. The Wheels Up contact came back saying that unfortunately the customer’s membership had expired. The customer sent back his credit card and asked them to bill him. He flew the flights. In 2022 he contacted them for a similar request and again was told they had lapsed. He sent his card again and then flew the 2022 flights. When he checked, he saw that he had never been billed for membership or his flights.
In October 2022 Smith closed a seven-year $270m bond deal – or enhanced equipment trust certificate (EETC) – backed by much of Wheels Up’s owned fleet. After fees it banked $259m. Bain Capital was the biggest buyer of the notes which pay 12% interest. This money was welcome but also came with covenants – or restrictions – that Wheels Up had to meet. This included a liquidity covenant, meaning that it had to keep cash. This became a real issue in the summer of 2023.
“None of us are satisfied with the current level of profitability of this business.”
Todd Smith, Wheels Up
At the start of 2023 it was clear that the company needed to change faster. During 2022 the company had said that it would cut costs by simplifying its operations. Key to this was getting the different aircraft management companies it had bought down to one single Air Carrier or Operators Certificate (AOC). Partly because of delays at the FAA this never happened. By March 2023 it still had five.
To increase efficiencies, Wheels Up opened a new operations centre in Atlanta headed by Dave Holtz, Wheels Up’s chairman of operations. Holz joined after 43 years at Delta Air Lines – including spending 11 years as senior vice president of its Atlanta operations and customer centre.
So far in 2023, Wheels Up flight completion has been 98.5% up from 95% in 2022. On-time performance (which is based on flying within an hour of the scheduled time and can be hit by members turning up late) has been 89% in 2023, up 11% from 2022.
In March 2023 Wheels Up announced job cuts to save $30m in costs. This was a shock to a company that had only ever known growth. “I am intensely aware that these reductions have a very human and emotional impact, and we always strive to treat everyone with the integrity and respect inherent in our Wheels Up values. At the same time, these are necessary business decisions that require us to be mindful of costs as we enhance our operations and continue to invest in the customer experience,” said Dichter in an email to all staff.
Wheels Up also lost a lot of senior managers. In its SPAC presentation, Wheels Up had a slide headed “Visionary team with proven operational excellence.” It named 14 people. In early 2023 – less than two years later – only Dichter and Laura Heltebran, chief legal officer, were still full time.
People who knew Dichter – the definition of a growth CEO - wondered how long he would stay.
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May 23: Buffett attacks, Dichter leaves
tor-in-chief of Private Jet Card Comparisons, sat down and started livestreaming the annual Berkshire Hathaway investor day. His site helps people decide on fractional or jet cards. Gollan wanted to see if Warren Buffett, chair and CEO, or Charlie Munger, its vice president, had any comments on NetJets, the fractional operator it owns. He would spend all day listening.
Early on, Buffett praised the performance of NetJets. “It’s in a class by itself. It’s done what Ferrari has done in a different sort of way in cars.” Munger said that NetJets was now worth the same amount as a major airline.
Gollan was rewarded for his patience. About six hours later Buffett started talking about Wheels Up. “It has 12,600 people who have given them over a billion dollars on prepaid cards and I think there’s a good chance some people are going to be disappointed later on,” said Buffett. Staff at Wheels Up were furious that he was attacking them.
Buffett’s comments focused interest on Wheels Up’s first quarter results which came out two days later. At the same time Wheels Up announced a major restructuring, but this – and the financial results – were completely overshadowed by the news that Dichter was stepping down as CEO and founder. Smith was made interim CEO. Thackran, whose SPAC had bought Wheels Up, was made chair.
The restructuring was significant. Fundamentally, Wheels Up was changing its fleet from being a national operator to serving two regions – the west and the east of the US. Anyone living in the centre of the US can use Air Partner, the broker that Wheels Up bought in 2022, to arrange a charter.
Rather than operate its King Air 350i fleet across the country, these will now stay in the east region. Customers there can get guaranteed availability and capped hourly rates on Wheels Up’s anything from King Air to super-mid aircraft. They can also arrange large jet flights, but these are not guaranteed. Western customers get the same but from light jets to super-mid.
Wheels Up stresses that 80% of all its customers are in these two regions. “It's designed to concentrate the fleet where we have network density, both of planes and customers along routes, that you are predictable from a demand standpoint,” said a spokesman on a call with Corporate Jet Investor as the changes were announced. “By concentrating on two areas we can really focus in and get the unit economics that we need on a flight basis so that every flight's profitable.”
The spokesman denied that this restructuring was needed because Wheels Up had grown too fast. “Five years ago, we didn't know what we know now. We have a lot more data in terms of who our customers are, how they use the service, how they use the product. This was not a quick decision – we have been analysing the economics for a long time.”
Delta Air Line’s announcement that it would increase its focus on cross-selling Wheels Up to its largest customers was also largely missed. This was the most significant news that day.
Ravi Thakran’s SPAC won the contest to take Wheels Up public on the New York Stock Exchange.
January 2020: Wheels Up Delta
Of all the deals it closed, the merger with Delta Private Jets was by far the most important. Delta Air Lines ended up in business aviation when it acquired regional airline Comair in 1998. Delta Private Jets was profitable but not growing particularly fast – it had a fleet of 69 aircraft. It had some success cross-selling business jet flights to its largest customers, but growing Delta Private Jets was not seen as a priority.
This changed when Dichter met Ed Bastian, the CEO of Delta, to ask about buying the company. Together they came up with a much more ambitious plan.
Bastian is widely regarded as one of the world’s top airline leaders. He started his career at Price Waterhouse. Bastian joined the airline in 1998 as VP finance, becoming CFO in 2005. In May 2016 he became CEO.
Bastian is prepared to take risks. He was involved in Delta’s decision to buy an oil refinery and share stock with employees. Bastian is also a believer in technology. Delta has thousands of large corporate customers who charter private jets. He saw Wheels Up as a way of keeping them in a Delta network. The Delta CEO may have been attracted to the glamour of Wheels Up. Tom Brady, a Wheels Up ambassador, was recently named a strategic adviser to Delta, but this was not the main driver.
Ed Bastian, Delta CEO, wants to breakdown the barriers for Delta customers that want to fly on private jets.
In return for a 20% stake in Wheels Up, Delta moved over its managed fleet of 69 aircraft. The merger closed on Jan. 29, 2020. On that day China said it had recorded 7,711 cases of a new coronavirus. Within days, Delta’s focus had gone from finding overlap with Wheels Up to survival.
Before it merged, Delta Private Jets had a corporate scheme where the airline’s sales team would sell business jet flights to key customers. The plan was that this would be accelerated by Wheels Up. But Covid delayed it. In March 2023, it became a key focus.
“Chapter 11 was never going to happen. It was never part of the plan.”
In an interview with CNBC, Bastian stressed how the relationship simplified business aviation for Delta customers. “It’s a partnership that grows together,” said Bastian. “If you put a deposit down on Wheels Up, let’s say a $100,000 deposit, you can use that for travel on Wheels Up or you can use it for travel on Delta, which is a really unique arrangement because I think one of the biggest obstacles to people using the program has been the size of the deposit that’s required and the question is, ‘How often are we going to use this?’ We’ve eliminated that friction.”
Bastian with some of Delta’s 90,000 team.
Wheels Up’s own corporate enterprise solutions team – who focus on customers that spend more than $500,000 a year – were also seeing strong demand. Their sales had more than doubled compared with 2022.
Large users typically sign a two-year agreement depositing one year’s funds with Wheels Up. “Once they realise the advantages, the majority end up under-contributing and fly in excess of the initial deposit,” said Robert Bourrier, EVP global corporate sales, Wheels Up, who had moved over from Delta Air Lines to Delta Private Jets and then to Wheels Up. “Demand from corporates is stronger than ever.”
It is not unusual for enterprise accounts to have their own aircraft. “We don’t want to compete with corporate flight departments. What we’re looking to do is be as complementary as possible,” said Bourrier.
“When you already have your own fleet, we can be an extension of our fleet when you have challenges around maintenance or demand issues.”
At The Wings Club Luncheon in New York, in May 2023, Bastian was asked by Phil LeBeau, CNBC’s auto and airline industry reporter, if he regretted investing in Wheels Up. Bastian answered: “The relationship is strong. Kenny [Dichter] has done a masterful job over the last decade building a high-quality brand, great experience, a lot of new members.” Bastian added: “For us to be able to add that to our stack as the premium opportunity within the Delta experience, well no one has ever been able to do that before, and we have been attempting to pull that off.”
June 23: Rumours of Chapter 11 were greatly exaggerated
After Dichter’s departure, there was a lot of talk about Wheels Up filing for Chapter 11. The Wall Street Journal broke a story in June 2023 saying that Wheels Up was looking for bankruptcy advisers and had appointed law firm Kirkland & Ellis to help with restructuring. Its share price fell.
Wheels Up did meet with bankruptcy advisers but had never appointed them. While the story scared investors, it also reminded the EETC investors that a Chapter 11 could happen. As an airline, it could have returned select aircraft due to a special section in the US bankruptcy code.
“Any large company that is in a restructuring process would typically look at a formal bankruptcy process alongside other options,” said David Fowkes, who has led several airline and helicopter operator bankruptcies, both as an adviser and as an operator. “Chapter 11 allows you to restructure much faster and cut costs much harder. It is also a great threat to hold over people you are negotiating with.”
Instead of hiring a new bank or restructuring boutique, Wheels Up stayed with Jefferies, the investment bank that had taken the company from an idea to Wall Street. “Chapter 11 was never going to happen,” says one person close to the deal. “It was never part of the plan.”
Bastian, who had been chief restructuring officer during Delta’s Chapter 11, did not see the advantage in bankruptcy protection. He also knew how expensive the process is. Jefferies had two things to do: find new investors to come in alongside Delta and sell the loss-making aircraft management business.
July 2023: Knighthead and Certares
Dichter stepped down as CEO and chairman on May 9th, 2023. But the founder remained an active board member. Sources close to the transaction say that he was closely involved in the fundraising, working closely with Ed Bastian and others.
Jefferies approached a range of investors with experience of aviation and travel. In the end the most favourable response came from two investors, Certares Management and credit fund Knighthead Capital Management.
“Wheels Up is an integral part of Delta's portfolio of premium partners.”
Dan Janki, Delta Air Lines
Certares, a private equity firm, has invested in a number of travel companies including American Express Global Business Travel, car rental firm Hertz, Latam Airlines and Liberty Tripadviser. Knighthead had worked with Certares including bringing Hertz out of Chapter 11. Both knew Delta well. They were also reliable investors. In 2021 Certares and Knighthead launched a $1.5bn CK Opportunities Fund to invest in travel, tourism and hospitality companies facing “acute liquidity and financing needs”.
Cox Enterprises, the family-owned media and communications company also joined as an investor. It may be a coincidence that Wheels Up’s former chief financial officer and its first chief technology officer were both former Cox employees.
Delta, CK Wheels (a new Certares and Knighthead fund) and Cox agreed a $350m term loan. The airline also agreed to a $100m revolving credit facility.
It is unclear how the convertible debt is structured. Two market sources believe that collateral includes broker Air Partner, the 131 aircraft not included in the EETC, all the company’s intellectual property including the brand, and all other assets. In return for closing the loans, the lenders received 95% of Wheels Up’s stock. Jefferies and PJT Partners, a boutique bank, are also in talks to add another $50m lender.
“The partnership will create new opportunities for Wheels Up to drive strategic, operational and financial improvements for its customers in the months and years ahead,” said Delta’s Bastian. “Delta’s unmatched expertise in premium travel, customer loyalty, corporate sales, operational reliability and aircraft maintenance, combined with Certares’ and Knighthead’s experience and global reach, are expected to speed Wheels Up on its path to profitability.”
The new lenders will also dominate Wheels Up’s new board. Delta will have four directors, Certares and Knighthead two each, and Cox one. There will be a seat for one company executive and two places for independent directors from the old board. One of the new board members is Lee Moak former president of pilot’s union ALPA who was a Northwest pilot and was involved in the Delta Air Lines merger serving as chairman of the Delta master executive council.
Dan Janki, Delta’s CFO, became chairman of the Wheels Up board when the financing was announced. He also agreed with Bastian’s vision: “Wheels Up is an integral part of Delta's portfolio of premium partners, and this deep relationship offers a significant opportunity to deliver compelling benefits to our customers that are unique in the travel space,” said Janki.
September 2023: Mattson as new CEO
At the same time as it was looking for financing, the search was on for a new CEO. Bastian interviewed final candidates himself. The winner – George Mattson – was someone he clearly trusts.
Mattson joined Delta's Board of Directors in 2012 when he retired from his role of co-head of the global industrials investment banking group at Goldman Sachs. Airlines and transportation were part of his responsibility and he already knew Bastian.
“George is an exceptional business leader whose background will be instrumental to the continued success of Wheels Up,” said Bastian in a statement.
Mattson was also the lead investor and chairman of Tropic Ocean Airways, a US seaplane operator. Wheels Up formed a partnership with Tropic Ocean in 2022 and invested in it.
As a board member Dichter was also involved on the search committee for the new CEO and met with final candidates. He met Mattson, a Delta board member, during the Delta Private Jets transaction. Mattson chaired the airline’s business committee at the time.
“George is an exceptional choice to lead the company through this important time. He will serve customers, employees and stakeholders consistent with the elevated experiences that have always defined Wheels Up," said Dichter in a statement when Mattson was formally appointed.
October 2023: Airshare does a deal
Jefferies had also found a home for the third-party aircraft management business in Kansas.
As well as Delta Private Jets, Wheels Up acquired five significant management companies – TMC Jets (2019), Gama Aviation Signature (2020), Mountain Aviation (2020) and Alante Air (2022) – before going public. It paid around $70m for Gama Aviation Signature alone.
But the plan to build what it called a second-party fleet of managed aircraft had been a disappointment. When Wheels Up listed on the New York Stock Exchange in July 2021 it had a managed fleet of about 160 aircraft. This had fallen to about 90 aircraft two years later.
“We are not going to grow too fast. We want to grow intelligently.”
John Owen, Airshare
Airshare, best known for its fractional programme, has been offering aircraft management and charter since 2008 and had been looking for a company to buy. As well as its fleet of 24 fractional aircraft, Airshare is already managing 34 jets. “The Wheels Up business is the perfect fit for us, it has a very similar structure to ours and we are keen to add great people to our team,” John Owen, CEO, told Corporate Jet Investor. “We will mesh together the two management teams and have already spoken to as many owners as possible about moving over.”
Owen also said that this would take time. “We are not going to grow too fast. We want to grow intelligently.”
Dichter likes launching companies and Wheels Up will not be his last.
2024: The path to profitability
Mattson has only spent a few days as CEO, but his decision to be based near Wheels Up’s new Atlanta facility, rather than the New York head office, sends a clear sign. The next few years are about making the business run efficiently rather than growth. The focus is very much on hitting adjusted EBITDA before the end of 2024.
Rather than trying to be the “everything store of aviation” that Dichter told Corporate Jet Investor was the aim in 2021, it now wants to focus on what it believes are the “right” customers according to internal documents.
The years of amazing growth are over for now. Mattson and Smith want to slow down. One Wheels Up investor presentation seen by Corporate Jet Investor suggests that the operator may cut its fleet from 206 aircraft to around 150-160 by the end of 2024. It is particularly keen to sell its mid-size fleet. The cash from these sales will also be important in cutting cash burn.
Wheels Up wants to fly its first-party aircraft harder, using Air Partner to find extra lift and sell charter when needed. It wants to shift more of the business to on-demand charter, rather than guaranteed availability.
In the run up to the SPAC merger, much was made of Wheels Up’s plans for international expansion. These have been toned down and now the focus is on expanding Air Partner or perhaps franchising the brand.
Mattson is hoping that with Delta’s help Wheels Up can get its operations and technology to catch up with its marketing.
2025: We need to talk about Kenny
When the financing closed on September 20th, 2023, Dichter formally stepped down from the Wheels Up board. He remains a meaningful shareholder.
“I would like to extend my sincere gratitude to Kenny Dichter for building the Wheels Up brand into a powerhouse in private aviation,” Bastian said when the financing closed. “We have great appreciation for his steadfast devotion to the members, customers and employees and his role in elevating the private aviation experience which will undoubtedly guide the industry’s path forward.”
People close to Dichter say he is very proud of the people and company he founded. "I am very enthusiastic about the future of Wheels Up," said Dichter. “The entire Wheels Up community has my unwavering support on the journey ahead.”
You can be certain that Wheels Up is not going to be the serial entrepreneur’s last start-up. In 2010 he vowed that Wheels Up would become the biggest brand in aviation. He achieved this.
As Hotel Lobby Candle said: “We hope Blue Skies reminds you that the journey should be as enjoyable as the destination. Ready for take-off? Adventure awaits.”
