Updated: Oct 19, 2021
Flying in a private jet has generally been reserved for the highest net worth individuals. The industry has evolved from having to buy a private jet (a G700 will cost about 70 mm and involves over 1mm in yearly maintenance expenses) to a fractional ownership model (Net Jets) and finally to the latest iteration, a membership-type service which brings us to Wheels Up (NYSE: UP). UP’s business model is focused on the democratization of private jets which we believe is an important theme with strong tailwinds. Being able to offer services and goods previously reserved for the first-class to the middle class is generally a strong business model. What UP is attempting for private jets is reminiscent of what Henry Ford did for the automobile industry. By making the automobile cheaper he made it affordable to 95% of the population whereas previously the car was a fashion statement for the affluent.
The CEO and founder of UP is Kenny Dichter. Dichter is an industry veteran who previously founded Marquis Jets, a private jet card program for NetJets (and later acquired by NetJets). After a brief hiatus from the aviation industry, he founded Wheels Up in 2013 with the same principle underlying Uber and Lyft. This is the utilization of assets that were idling for most of their serviceable lifespan. There are around 39k private jets in the world, 65% are in the USA, and are unused 97% of the time! What also makes the private jet marketplace interesting is the supply side being heavily fragmented. The top ten percent of operators only own 8% of the capacity and the other 1800 operators own fewer than 10 aircraft each. The flywheel works like this- the cheaper UP can make private jet flights, the greater the demand which in turn enables higher utilization of UPs jets, thus the cheaper UP can provide flights which further increases demand.
Private flying is an order of magnitude better than flying commercial-not having to get to an airport three hours before departure or board/deboard with hundreds of other people is significantly more convenient. Kenny Dichter views everybody as wanting to fly private-
“Humans are hard-wired to fly privately-when I look at the world I see 7.5 Billion private flyers who haven’t flown privately yet.”
Convenience is the main driver of this and once someone flies private, going back to commercial is extremely hard. Here is a pithy description from Warren Buffett in his shareholder letter about flying in a private jet -
“going back to commercial is like going back to holding hands”
Having the ability to fly out of 5000 airports instead of 500 (commercial airports), being chauffeured to and from in a private car is a luxury that also has significant utility. In a society that values experiences, it does not get better than flying in a private jet.
So how big is the TAM for private aviation? The target demographic UP is going after are people with a net worth above 1mm. As seen below this is roughly a potential customer base of 21mm people in the USA. In a study by McKinsey, about 90% of the people that can afford to fly private do not. UP’s business model is focused on driving costs and frictions down to unlock that 90%. The TAM of private aviation is currently 50 billion USD and is projected to be around 80B by 2025.
The private aviation industry has grown by about a three percent CAGR since 2012 per total industry hours spent flying. This is a small rate however it mostly represents the wealthiest .01% of the population who have fractional or total ownership. If UP can democratize private aviation, the private aviation market will grow much more rapidly, the only question is how much cheaper/convenient can UP make it. We dive into their business model below.
UP first began by purchasing 200 plus King Air private jets to seed their marketplace. This was a heavy investment and needed to be done to get the flywheel turning. UP then began to add other third-party operators onto their platform and use their aircraft without having to acquire them (shown below). Because of this, UP has been able to scale up significantly faster than NetJets. It took Net Jets 21 years to have 700 planes in its fleet while it took UP only 8 years to get to 1500 planes. The scalability of UPs business model is significantly faster. The King Airs started out making up 85% of UP’s aircraft in 2017 and they now make up about 50%. The other 50% of UPs jets are either “managed” or belong to a third party. Managed here means that UP contracts with private jet operators to take care of pilot scheduling, maintenance, etc in order to utilize their private jet. The operators pay UP for the maintenance of their craft and have a revenue share agreement with UP ( typically around 80 20 respectively).
The third leg of the stool is UPs third-party jets and ultimately what UP wants to be predominantly composed of. These are jets that are already qualified for commercial use (190) and can simply plug into UP’s marketplace to be used almost immediately. In total, UP manages and owns over 1000 private jets, or about 5% of the number of total private jets in the USA. UP’s managed and third-party fleets are asset-light and have target margins of 20% and 15% respectively.
Private jets have historically been very inefficient. Generally, for every flight, the jet had to return to home base for inspection and maintenance. This gave them an efficiency of 50% and an illustration of this is depicted below. UP’s business model rests on making private jet flights cheaper, the surest way of doing this is increasing their efficiency, thus the idea of “floating fleets” was born. The idea is to have maintenance centers (analogous to amazon fulfillment centers) nationwide so that the private jets only have a short distance to travel to undergo maintenance/scheduling/pilot crew scheduling instead of having to return to home base. The gain in efficiency UP is striving to achieve is about 30%, going from 50% efficiency to 66% efficiency.
So why has this not been done before? It turns out it is quite hard, especially with the unique aspects of private aviation. Here is what retired Lt. General and COO of UP Thomas Bergeson says about the complexity-
“No two days are the same. Compared to an airline, which can set schedules months in advance, our schedules are constantly being updated, even up to the last minute and throughout the day. And while airlines fly from approximately 500 major airports in the United States, our customers are able to utilize almost 5,000 airports in the US. These executive airports often have unique restrictions and operating hours which can change regularly”
To handle the complexity, UP has built (organically and inorganically) and continues to optimize the software to handle the demands of changing flights, dynamic pricing, maintenance,and scheduling. All of these are innovative offerings, especially dynamic pricing. Before, private jet chartering was based on set pricing regardless of supply and demand via the use of jet cards and fractional ownership. Dynamic pricing allows for a more stable demand environment and in turn efficiency gains. All this horsepower is accessible through UPs mobile app in which about 50% of flights are booked. Here is what Bennkjsn said, a former VP of Amazon and current Director at UP said about building out software for the private aviation industry-
“And it reminds me of my early days at Amazon…we built software for what is called the plumbing and the undifferentiated stuff that nobody actually pays attention to. Aircraft scheduling, trip planning, maintenance takes a lot of investment, but the end result is actually it will allow us to have efficiencies in the long run that very few people can actually match up with. So, that’s why I’m very excited about the investment here that allows us”
Efficiency is the name of the game for all three legs of UP’s stool. For their owned/leased King Airs, UP sees significantly higher margins past the 50% utilization rate (due to fixed costs).The fixed costs on a King Air 350i are about five hundred thousand dollars per year or about ten percent of the purchase price. Utilizing these planes more efficiently requires more maintenance centers which can increase the uptime of private jets. UP currently has maintenance facilities and mobile service teams in Cincinnati, Ft Lauderdale, Elkhart Indiana, and Broomfield Colorado. UP plans to aggressively increase their locations to leverage their King Air 350s - currently, they are operating at about 60% of nameplate capacity. More passengers will drive operating leverage and efficiencies that can be passed on to the customer through cheaper flights. At full capacity, these jets will have a gross margin north of 20%. As for UP’s managed and third party fleet, these gross margins will hover around the 15% mark as the contracts are primarily a variable expense and based off revenue share agreements. Down the road, as UP consolidates the demand side, they will have pricing power over the fragmented operators and likely take a larger portion of the revenue.
UP has three membership tiers: Connect, Core, and Business. Connect membership is their lowest tier and was introduced in 2019. Although these members do not get capped rates or other amenities, Connect members do have access to features such as shared flights and hot flights. Hot flights are when a private jet is being repositioned for another flight/maintenance and are significantly cheaper. UP expects renewal rates for Connect members to be lower than Core members for the foreseeable future as Connect members fly less and do not have as many member benefits.
So how do customers like UP so far? UP has an NPS of 87 and has seen memberships grow at around a 20% CAGR for the last five years. The customers that use it love it. UP has a retention rate of 80% for their core and business customers and a retention rate of greater than 90% for customers that spend 50k or more on flights.
UP is selling an experience and has partnered with the largest sports icons of our generation to help with branding such as Serena Williams, Tom Brady, and Russell Wilson. Heading UP’s marketing division is Lee Applebaum who spearheaded Patron’s branding and ultimate sale to Bacardi. Another avenue UP is pursuing is via partnerships with companies that already have the clientele UP is looking for. One of these is a 7 year marketing agreement with Delta ( as a result of UP acquiring Delta Private Jets, Delta also owns more than 20% of UP) in which UP benefits from a funnel from Delta’s elite flying members. These potential customers hit a lot of checkmarks, they are affluent and they fly often. Currently, UP’s CAC is averaging 15k per customer and has a current payback period of 18 months. We expect this number to drop as partnerships with Delta and American Express Platinum gain momentum and as UP's share of mind increase with its branding.
Catalysts & Tailwinds
Experiences account for over 65% of discretionary spending in which traveling ranks at the top. Traveling to exotic places privately with family and friends will see strong tailwinds given future affordability.
As UP builds out its marketplace for private jets, it will have the optionality to add other high-end offerings such as helicopters, yachts, and villas.
Risks & Headwinds
As societal pressure for clean energy and zero carbon emissions increases, private jets will likely get dinged. Private jets account for 4% of total aviation emissions however each private jet passenger generates 500x the emissions of the average person. There will likely be stringent regulations imposed on private jets in the future.
COVID has accelerated the retirement of the aging pilot population and as a result the entire aviation industry is expected to face a pilot shortage of roughly 13% by 2023. This pilot shortage could stymie the growth prospects of UP and at the very least UP would see an increase in operating expenses as there inevitably would be a bidding war for pilots. UP has already begun offering equity incentives for pilots to join the company.
Valuing UP is a bit of an artistic exercise as the majority of its cash flows are far in the future (>5 years) and as result subject to more risk. Cash flows by the year 2026 will come primarily from two business segments: membership and flight revenue. UP’s membership revenue will primarily drop straight to the bottom line. We believe that UP membership can grow at a rate of 17% or have about 30k members by 2026 with the majority of them being Connect. Previously the growth of memberships has been around 20% with primarily Core customers so we believe this is a conservative assumption. This will contribute roughly 100mm in cash flows by 2026.
Flight revenue is a bit murkier to analyze as there are three revenue streams with different margin profiles: UP’s owned/leased planes, managed airplanes, and their third-party airplanes. For simplicity’s sake, we will assume UP can attain 90% plus efficiency on all their planes (this is a big IF however helps with ballpark estimates) and generate about 1.5 Billion dollars in revenue. This would give their owned planes a gross margin of 25%, and their managed and third-party aircrafts a gross margin of around 16%. Dollar weighting them based on their revenue gives a combined margin of around 20%. We get Wheels UP generating approximately 50mm in cash by year 2026 (from losing 100mm today). Discounting this back to the present rate and adding cash flows from their membership, cash, and assets (owned jets) gives a combined EV of 1.2B. Although UP is currently trading at too expensive of a multiple for us, we will be keeping an eye on this company given its moat and management.
How large could UP be?
Assuming that UP can get a 5% penetration rate into the US population with a net worth above 3mm (pricing the majority of them as Connect) would mean at least 500 million dollars alone in subscription revenue. This would also mean about 5B of flight revenue. Given UP’s first-mover advantage and their price competitive advantage, these revenue streams would command a high multiple and it would likely trade at about 5x its current price.