Executive Summary / Key Takeaways

• Surf Air Mobility (NYSE: SRFM) is executing a multi-phase transformation plan aimed at pivoting from a traditional regional airline operator toward a profitable, technology-enabled air mobility platform, leveraging unique partnerships and an established network.
• The company is intensely focused on its "Optimization" phase in 2025, targeting profitability (positive adjusted EBITDA) in its core airline operations through route rationalization, fleet management, maintenance backlog resolution, and driving efficiencies via its SurfOS software platform.
• Significant strategic initiatives include the development and planned 2026 commercial rollout of the AI-enhanced SurfOS operating system with Palantir (PLTR), and the pursuit of electrification for the Cessna Caravan aircraft with Textron Aviation (TXT), targeting STC completion in 2027.
• Recent financial results show progress in cost reduction and EBITDA improvement, although revenue was impacted in Q1 2025 by strategic route exits and operational disruptions; liquidity challenges persist, but recent financing efforts aim to address near-term constraints.
• Key factors to watch include the successful execution of the Optimization plan to achieve the 2025 profitability target, progress on the SurfOS commercialization and electrification STC timelines, and the company's ability to manage liquidity and resolve NYSE listing compliance issues.

Setting the Scene: A Regional Air Mobility Platform in Transition

Surf Air Mobility is positioning itself at the intersection of traditional regional air travel and the emerging landscape of advanced air mobility. The company operates a regional air mobility platform structured around two core areas: its established Air Mobility business, encompassing scheduled flights and on-demand charters, and its developing Air Technology business, focused on innovative software and electrification solutions. Born from the combination of Surf Air and Southern Airways in July 2023, following its public listing, the company inherited a network that served over 370,000 passengers across approximately 72,000 scheduled departures in 2024. This scale positions Surf Air Mobility as one of the largest commuter airlines in the U.S. by scheduled departures.

The company's strategic direction is guided by a four-phase Transformation Plan: Transformation, Optimization, Expansion, and Acceleration. The initial "Transformation" phase, completed in 2024, focused on foundational elements like capital structure improvement, balance sheet strengthening, management team building, and realizing synergies from the Southern merger. The current focus is firmly on "Optimization," aiming to enhance the efficiency and profitability of the existing airline operations while simultaneously advancing the technology initiatives that represent the company's future growth vectors.

The regional air mobility market, particularly the Part 135 segment in which Surf Air Mobility operates, is ripe for technological disruption and efficiency gains. While the broader electric vertical takeoff and landing (eVTOL) market garners significant attention, Surf Air Mobility's approach centers on electrifying existing, proven aircraft platforms like the Cessna Caravan and developing a comprehensive software operating system to streamline operations across the industry. This strategy differentiates it from pure-play eVTOL developers like Joby Aviation (JOBY), Archer Aviation (ACHR), Lilium N.V. (LILM), and EHang Holdings (EH), who are primarily focused on bringing new aircraft designs to market.

Compared to these eVTOL peers, Surf Air Mobility benefits from an existing operational network and revenue base, providing a degree of cash flow stability that many development-stage competitors lack. However, it faces challenges inherent in traditional airline operations, such as managing fleet maintenance, optimizing routes, and navigating labor costs. While eVTOL companies boast potentially higher growth rates (e.g., Joby 50% YoY, Archer 40% YoY in 2024) and are pushing the boundaries of aircraft design, Surf Air Mobility's strategy is to leverage its operational expertise and partnerships to introduce technology that enhances the economics and capabilities of the existing regional fleet, potentially offering a more incremental, yet scalable, path to electrification and efficiency.

Technological Pillars: SurfOS and Electrification

Central to Surf Air Mobility's long-term vision and competitive strategy are its two key technology initiatives: the SurfOS software platform and the electrification program for the Cessna Caravan.

The SurfOS platform, developed in partnership with Palantir Technologies, is envisioned as an AI-enhanced operating system for the advanced air mobility industry. The company entered into a joint venture agreement with Palantir in August 2024 to establish Surf Air Technologies LLC, a subsidiary intended to develop, market, and support this platform. Surf Air Mobility expects to be the initial customer, utilizing the software internally before a planned broad commercial rollout in 2026.

SurfOS aims to provide a comprehensive suite of tools covering flight distribution, airline and charter operations, revenue and demand management, business intelligence, financial reporting, and customer service. Specific modules and applications are already being developed and deployed internally and with beta users. Examples include a Pilot check-in mobile app with Palantir integration, a large language model ("Ask Sam") for operational documentation, and tools for digitizing flight logs. The platform also includes features like a mobile Crew App for pilot workflow/time management, a Weight and Balance tool, and Business Intelligence dashboards providing real-time operational data. Quantifiable internal benefits are already emerging, such as a reported 20% reduction in call center traffic volume due to a self-service chat feature for flight changes and cancellations, and a 50% reduction in the on-demand sales team enabled by the SurfOS broker module and integrations with charter supply partners like Fly Easy and Avinode. Management sees potential for SurfOS applications, such as Tower OS, Resource Planning, and Safety Hub, to even contribute to improving air traffic control infrastructure, a concept recently discussed with the DOT and FAA. The strategic "so what" for investors is that SurfOS is designed not only to drive internal efficiencies and profitability but also to become a significant revenue stream by offering a category-defining solution to other Part 135 operators, brokers, and aircraft owners in a market estimated to reach $75 billion to $115 billion by 2035.

Simultaneously, Surf Air Mobility is pursuing the electrification of regional aircraft, focusing initially on the ubiquitous Cessna Caravan, in an exclusive partnership with Textron Aviation. This multi-year project aims to develop and certify (via Supplemental Type Certificate - STC) both hybrid-electric and fully-electric powertrains for the Caravan, targeting STC completion in 2027. The company has completed the conceptual design phase, finalized key suppliers, and progressed on preliminary design and system integration. Management estimates that electric powertrains could potentially reduce the direct cost of flying by 50%, while hybrid-electric variants could offer a 25% reduction. These cost savings, if realized, represent a significant potential competitive advantage, particularly against traditional turbine-powered aircraft and potentially even some eVTOL designs depending on route length and operational profile. The company has established a Cessna Electrification Customer Advisory Board and signed MOUs with seven customers interested in upgrading approximately 100 Caravans post-STC approval, indicating potential market demand. A bilateral agreement with Electra Aero also explores eSTOL technology integration and leasing partnerships. For investors, the electrification initiative represents a tangible path to lower operating costs, expand market reach by enabling more economical regional routes, and potentially generate revenue through powertrain sales or retrofits, positioning Surf Air Mobility as a leader in sustainable regional aviation.

Financial Performance and Operational Realities

Surf Air Mobility's recent financial performance reflects a company in transition, balancing strategic investments and operational improvements against historical challenges and market headwinds. For the full year 2024, the company reported pro forma revenue of $119.4 million, a 6% increase year-over-year. The adjusted EBITDA loss improved by 13% to $44.1 million on a pro forma basis, indicating some progress in cost management.

The first quarter of 2025, however, saw a decrease in total revenue to $23.5 million, down 23% from $30.6 million in Q1 2024. This decline was primarily attributed to strategic decisions within the Optimization phase, specifically the exiting of unprofitable scheduled routes and a brief service interruption in January related to maintenance issues. Scheduled service revenue decreased by 23% ($17.8 million vs $23.0 million), while On-Demand revenue decreased by 25% ($5.7 million vs $7.6 million) as the company exited certain products to focus on profitability.

Despite the revenue decrease, operating expenses saw significant reductions in Q1 2025 compared to Q1 2024. Cost of revenue (exclusive of depreciation/amortization) decreased by 13% to $24.7 million. Technology and development expenses fell sharply by 62% to $2.7 million, largely due to decreased accruals for the Textron data license and reduced headcount. Sales and marketing expenses dropped 45% to $1.7 million, driven by lower compensation and headcount. General and administrative expenses decreased by a substantial 56% to $10.9 million, primarily due to a $10.8 million reduction in stock-based compensation, including a $10.0 million reduction related to the Management Incentive Plan. These expense reductions contributed to a significant improvement in the operating loss ($18.6 million in Q1 2025 vs $34.5 million in Q1 2024) and a narrower adjusted EBITDA loss of $14.4 million in Q1 2025, within the company's expected range.

Cash flow remains a critical area. Net cash used in operating activities increased to $15.8 million in Q1 2025 from $12.8 million in Q1 2024, despite the lower net loss, primarily due to lower non-cash expenses like stock-based compensation and changes in fair value of financial instruments. Investing activities provided $0.8 million in Q1 2025, an improvement from using $0.7 million in Q1 2024, driven by proceeds from asset sales offsetting capital expenditures. Financing activities provided only $0.5 million in Q1 2025, a significant decrease from $13.1 million in Q1 2024, reflecting reduced borrowings from related parties and lower proceeds from the GEM Share Purchase Agreement.

The company's balance sheet as of March 31, 2025, shows total assets of $105.3 million and total liabilities of $240.9 million, resulting in a significant shareholders' deficit of $135.6 million and a working capital deficit ($19.9 million current assets vs $92.1 million current liabilities). The company is in default on certain tax obligations ($8.1 million federal excise tax, $1.7 million property tax) and a SAFE-T note ($0.5 million), which are classified as current liabilities. These factors, coupled with historical losses and negative cash flow, raise substantial doubt about the company's ability to continue as a going concern.

Addressing Liquidity and Charting the Path to Profitability

Recognizing these challenges, management has prioritized strengthening the balance sheet and securing funding for its transformation plan. In November 2024, the company secured a $50 million term loan with Comvest Partners, comprised of a $44.5 million funded tranche and a $5.5 million delayed draw, maturing in 48 months at SOFR + 5%. This financing, along with successfully extending the maturities of other secured debt to the end of 2028 and efforts to reduce up to $70 million in past liabilities by over 50%, are intended to address near-term liquidity constraints and reduce reliance on the GEM Share Purchase Agreement, thereby minimizing potential equity dilution.

While the GEM facility still provides access to significant potential funding (up to $97.5 million in advances and $298.6 million in draws as of March 31, 2025), daily volume limitations ($104 thousand shares per draw as of March 31, 2025) and a NYSE market capitalization listing requirement violation (needs to be cured by November 2025) currently restrict its practical availability. Subsequent to the quarter end, the company completed a $5.0 million registered direct offering in April 2025, providing additional equity capital.

The core of the near-term strategy is the Optimization phase, specifically targeting profitability in airline operations for the full year 2025. This goal is underpinned by several operational initiatives:

• Route Rationalization: Exiting unprofitable routes identified through data-driven analysis.
• Fleet Management: Simplifying the fleet to focus on the efficient Cessna Grand Caravan, returning older aircraft (five in Q1 2025), and integrating new aircraft deliveries from the Textron order (four accepted in Q4 2024) to improve availability and lower costs.
• Maintenance Improvement: Addressing maintenance backlogs that impacted aircraft availability and completion factors (a brief service interruption occurred in January 2025). Management reports improved completion factors (above 92% in early Q2 2025) and targets 96% before expansion.
• Operational Efficiency: Centralizing operations (relocation to Dallas/Fort Worth), attracting experienced aviation talent, and leveraging SurfOS tools to streamline processes (e.g., maintenance, crew scheduling, customer service).
• On-Demand Recalibration: Shifting focus to profitability over volume, expanding into higher-margin jet categories, securing volume purchase agreements, and leveraging the SurfOS platform.

Management's guidance for Q2 2025 reflects this ongoing transition, with expected revenue between $23.5 million and $26.5 million and an adjusted EBITDA loss between $10 million and $13 million. The full-year 2025 guidance reiterates expectations of at least $100 million in revenue and, crucially, achieving profitability in airline operations.

Competitive Landscape and Strategic Positioning

Surf Air Mobility operates in a competitive environment that spans traditional regional airlines, charter operators, and emerging advanced air mobility players. Its position as one of the largest commuter airlines provides scale and an established customer base, particularly in markets served by its EAS contracts (approximately 40% of revenue), where it often faces less direct competition than major hub routes and benefits from being a low-cost provider, a factor increasingly weighted in EAS bids due to the FAA Reauthorization Act. The recent interline agreement with Japan Airlines (JALSY), adding to existing agreements with major carriers like American (AAL), Alaska (ALK), Hawaiian (HA), and United (UAL), expands its reach to a vast pool of potential customers (over 435 million combined).

However, the company's operational model faces pressure from both traditional and new entrants. Traditional airlines compete on price and network density. Newer eVTOL competitors, while pre-revenue or early stage, are developing aircraft with potentially superior efficiency and performance metrics (e.g., Joby's estimated 20-30% greater energy efficiency, Archer's 25% faster processing speeds, Lilium's 15% greater range). While Surf Air Mobility's focus on electrifying existing aircraft offers a different pathway, it must demonstrate that its technology can deliver comparable or sufficient cost/performance advantages to remain competitive. Its reliance on third-party operators for a significant portion of its on-demand business, while providing flexibility, can also lead to higher costs and lower throughput compared to competitors with fully integrated operations.

Surf Air Mobility's strategic response is multifaceted:

1. Leverage Scale and Network: Optimize the existing airline business for profitability, using the established network as a foundation.
2. Technological Differentiation: Develop SurfOS as a platform to drive internal efficiencies and create a new revenue stream by selling the software to other operators, addressing a key pain point in the fragmented regional air mobility industry.
3. Electrify the Core Fleet: Pursue Caravan electrification to lower operating costs and offer a sustainable, potentially more economical alternative to traditional aircraft, positioning itself for future environmental regulations and market demand for green aviation.
4. Strategic Partnerships: Utilize exclusive relationships with Textron Aviation and Palantir to accelerate technology development and market penetration, differentiating itself from competitors.

The success of this strategy hinges on the company's ability to execute its Optimization plan to achieve profitability in its core business, providing a stable financial base, while simultaneously bringing its SurfOS and electrification technologies to market on schedule and demonstrating their tangible benefits.

Risks and Challenges

Despite the strategic vision and ongoing efforts, Surf Air Mobility faces significant risks. The substantial doubt about its ability to continue as a going concern highlights the precarious financial position stemming from historical losses, negative cash flow, and debt/tax defaults. While recent financing has provided a lifeline, sustained profitability and access to future capital are essential. The ability to raise additional funding on acceptable terms is not assured, and failure to do so could force the company to scale back strategic initiatives, including technology development and network expansion.

Operational risks are also material. Achieving and maintaining high aircraft utilization and completion factors requires effectively managing pilot availability, maintenance personnel shortages, and critical component supply chains. The January 2025 service interruption underscores the sensitivity of operations to maintenance issues. Furthermore, the success of the Optimization phase depends on the accurate identification and profitable replacement of exited routes, which may take time.

Regulatory risks, particularly concerning the EAS program (40% of revenue) and FAA certification for electrification (STC target 2027), could impact revenue streams and technology timelines. While management believes its low-cost structure provides an advantage in EAS, potential budget cuts remain a risk. Delays in STC certification could postpone the realization of benefits from the electrification program.

Competitive pressures from both traditional airlines and well-funded eVTOL developers could constrain pricing power and market share gains. Macroeconomic factors like inflation (impacting fuel, labor, parts costs) and perceived recessionary risks (reducing travel demand) could also adversely affect financial performance. Finally, the material weaknesses in internal control over financial reporting identified as of December 31, 2024, pose a risk to the reliability of financial reporting until fully remediated.

Conclusion

Surf Air Mobility is at a pivotal juncture, attempting to transform its business model amidst significant financial and operational challenges. The company's strategic pivot, centered on optimizing its core airline operations for profitability in 2025 and developing transformative technologies like SurfOS and Caravan electrification through key partnerships, presents a compelling narrative for long-term value creation. The successful execution of the Optimization phase is critical to establishing a stable financial foundation, while the advancement of its technology initiatives holds the potential to differentiate Surf Air Mobility in the evolving regional air mobility market.

While the company's history of losses, negative cash flow, and debt defaults underscore the inherent risks and raise going concern doubts, recent financing efforts and management's focused strategy offer a potential path forward. Investors should closely monitor the company's progress against its stated goals, particularly achieving airline profitability in 2025, the timelines for SurfOS commercialization in 2026 and Caravan electrification STC in 2027, and its ability to secure necessary funding and resolve operational and regulatory hurdles. The investment thesis hinges on Surf Air Mobility's ability to successfully execute its transformation plan, leveraging its existing scale and unique technological approach to capture a meaningful share of the future regional air mobility market.