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Surf Air Mobility Inc. (SRFM): Navigating the Skies Towards Profitability
Published on September 24, 2024 | Ticker: SRFM

Surf Air Mobility Inc. (SRFM) is building a regional air mobility ecosystem that aims to sustainably connect communities across the United States. The company is developing fully-electric and hybrid-electric powertrain technologies in partnership with commercial partners to electrify existing fleets and new aircraft. Additionally, Surf Air is investing in its proprietary digital platform to enable the regional air-mobility market to operate at scale and enhance the user's ability to make informed decisions based on multiple data sources and connected aircraft.

Financials

In the first quarter of 2024, Surf Air reported revenue of $30.6 million, a 9.5% increase compared to the prior year period. This growth was driven by an 18% increase in Essential Air Service (EAS) revenue, as well as a 4% year-over-year increase in revenue from the company's on-demand charter business. The company's on-demand charter operations saw a 29% increase in quarterly departures, though the revenue growth was tempered by a shift towards more cost-effective turboprop aircraft.

Despite the top-line growth, Surf Air reported an adjusted EBITDA loss of $16.5 million in the first quarter, driven by ongoing inflationary cost pressures and supply chain issues impacting aircraft maintenance and completion. The company also continues to invest heavily in its technology initiatives, including electrification and software development. For the full year 2023, Surf Air reported annual revenue of $60.5 million and a net loss of $250.7 million, with annual operating cash flow of -$64.4 million and free cash flow of -$72.1 million.

Outlook

Looking ahead, Surf Air is focused on improving the profitability of its regional airline operations. The company plans to conduct a strategic review of its route network, with a focus on maximizing profitability on its EAS routes. This effort is expected to be bolstered by the recent FAA Reauthorization Act, which increased the subsidy cap from $200 per passenger to at least $650 per passenger. Surf Air believes this change, coupled with the ability to rebid expiring routes at higher levels to account for inflationary pressures, could lead to improved unit economics over time.

In addition to the strategic review, Surf Air is also working to optimize its fleet and operations. The company has an order with Textron Aviation for up to 128 new Cessna Caravan aircraft, which will be used to replace older aircraft and support the company's growth network. Surf Air plans to provide more details on its holistic growth strategy at its upcoming Investor Day in the third quarter of 2024.

Recent Developments

Beyond its regional airline operations, Surf Air continues to make progress on its technology initiatives. The company's partnership with Palantir is evolving, with the two companies co-developing software tools to address key challenges faced by regional operators, including flight distribution, crew scheduling, revenue management, and business intelligence. Surf Air also remains focused on advancing its electrification efforts, with the electric Cessna Caravan program moving through the conceptual design phase and preparations underway for the submission of the Supplemental Type Certificate (STC) application to the FAA.

Liquidity

Surf Air's liquidity position remains a key focus area for the company. As of March 31, 2024, the company had $1.3 million in cash on hand, with the ability to draw up to $90 million in committed funds and an additional $296 million in follow-on draws from the GEM share subscription facility. Upon the closing of the mandatory convertible security transaction with GEM, Surf Air's draw capacity will be restored to $100 million in committed funds and $300 million in follow-on draws. However, the company recognizes the need to secure additional less dilutive capital, such as a credit facility, to finance its growth and investment plans.

Risks and Challenges

The regional air mobility market represents a significant opportunity for Surf Air, but the company faces a number of risks and challenges. These include the ability to raise additional capital, maintain efficient aircraft utilization, attract and retain customers, and successfully integrate and grow recent acquisitions and new business initiatives. The company's prospects are also subject to broader industry and macroeconomic factors, such as the impact of the COVID-19 pandemic, inflationary pressures, and perceived recessionary risks.

Conclusion

Despite these headwinds, Surf Air remains focused on executing its strategic priorities, which include improving the profitability of its regional airline operations, advancing its technology and electrification initiatives, and securing additional financing to support the company's long-term growth. As Surf Air navigates this transition, investors will be closely watching the company's ability to balance growth and profitability, as well as its progress in developing the technologies and infrastructure necessary to drive the adoption of sustainable regional air mobility solutions.

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