Surf Air Mobility Inc. (SRFM): Revolutionizing Regional Air Travel Through Electrification

Published on November 19, 2024 | Ticker: SRFM

Surf Air Mobility Inc. (SRFM) is a pioneering regional air mobility platform dedicated to transforming the future of air travel through the power of electrification. As the largest commuter airline operator in the United States, Surf Air Mobility is at the forefront of developing innovative powertrain technology and software solutions to drive substantial cost reductions and environmental benefits, making regional flying more accessible and affordable.

Company Background

Surf Air Mobility's roots trace back to 2016 when it was formed as Surf Air Global Limited, a British Virgin Islands holding company. The company's journey in the aviation industry began even earlier, with flight operations commencing in June 2013. Initially focused on serving regional business and leisure travelers, Surf Air offered daily scheduled flights and on-demand charter services.

In May 2018, Surf Air faced a significant challenge when it received notice of a tax lien filing from the IRS for unpaid federal excise taxes. Although the company agreed to an installment plan with the IRS, it defaulted on the plan in 2019. Additionally, Surf Air defaulted on its property tax obligations in various California counties, resulting in substantial liabilities accrued on its balance sheet.

Surf Air Mobility's journey took a significant turn in July 2023 with the acquisition of Southern Airways Corporation, a Delaware-based scheduled service commuter airline. This transformative move expanded Surf Air's regional airline network, allowing the combined entity to service U.S. cities across the Mid-Atlantic, Gulf South, Midwest, Rocky Mountains, West Coast, New England, and Hawaii. As of September 30, 2024, Surf Air Mobility supported 20 communities under the Essential Air Service (EAS) program, a government-funded initiative that provides subsidized air service to rural and isolated communities.

Financials

Surf Air Mobility's financial performance has been a mixed bag in recent quarters. For the third quarter of 2024, the company reported revenue of $28.4 million, which was relatively unchanged compared to the prior year period on a pro forma basis, but exceeded the high end of the company's guidance range of $25 million to $28 million. Scheduled service revenue increased by 2%, driven by the addition of subsidized route revenue from Williamsport, Purdue, and Lanai, partially offset by a lower completion factor. On-demand service revenue decreased by 13%, reflecting management's focus on profitability rather than near-term market penetration.

The company's adjusted EBITDA loss for the third quarter of 2024 was $8.9 million, unchanged from the same period of the prior year on a pro forma basis, outperforming the company's expectations of a loss of $10 million to $13 million. This outperformance was driven by improved operating margins from the on-demand business, realized M&A synergies, lower compensation costs, and lower professional expenses during the quarter.

For the fourth quarter of 2024, Surf Air Mobility expects revenue in the range of $25 million to $28 million and an adjusted EBITDA loss in the range of $5 million to $8 million. While the company's regional airline operations are not expected to reach profitability for the full year as previously anticipated, management's implementation of the transformation plan, including the rationalization of routes, resolution of deferred maintenance, and further improvement of flight completion rates, is expected to result in regional air operations reaching sustained profitability for fiscal year 2025 and beyond.

Looking at the most recent quarter (Q3 2024) in more detail, Surf Air Mobility reported:

Revenue: $28,386,000
Net income: -$12,225,000
Operating Cash Flow: -$12,310,000
Free Cash Flow: -$12,362,000

The company's year-over-year growth shows that revenue was relatively unchanged compared to the prior year period on a pro forma basis. Scheduled service revenue increased 43% year-over-year, driven by an 18% increase in scheduled passengers and a 33% increase in scheduled departures. This growth was primarily due to the timing of SRFM's acquisition of Southern Airways Corporation in 2023 and the inclusion of a full quarter of Southern's operations in 2024. On-demand flight revenue decreased slightly by 4% year-over-year, despite a 12% increase in the number of on-demand flights, due to a shift in customer preference towards more expensive aircraft for charter trips.

Liquidity

To address its near-term liquidity constraints and strengthen its balance sheet, Surf Air Mobility announced the closing of a $50 million term loan from Comvest Partners, a multi-billion-dollar investment management firm, on November 14, 2024. This financing, along with significant progress in reducing liabilities, has enabled the company to execute its transformation plan, including the optimization of its airline operations, recalibration of its on-demand business, and the development of its proprietary "SurfOS" software platform.

As of the most recent quarter, Surf Air Mobility reported:

Cash: $506,000
Available credit line: The company has a $400 million share subscription facility with GEM Global Yield LLC, of which $97.5 million is currently available for further advances.
Current ratio: 0.11
Quick ratio: 0.11

These figures highlight the company's tight liquidity position and the importance of the recent $50 million term loan in addressing near-term financial constraints.

In June 2024, the company submitted an offer-in-compromise to the IRS to resolve $7.7 million in outstanding federal excise tax liabilities. The company has also defaulted on property tax obligations in various California counties related to its aircraft and operations, totaling approximately $1.8 million. Surf Air Mobility is working to address up to $70 million in past liabilities, expecting to achieve a reduction of over 50% of these balances.

Strategic Initiatives

Surf Air Mobility's software initiatives are a key focus area for the company. In August 2024, the company announced the formation of a new venture, Surf Air Technologies LLC, and entered into an agreement with Palantir Technologies Inc. to power the operating system for the Advanced Air Mobility industry. This partnership aims to develop, market, and sell AI-powered software tools to create a category-defining operating system for the regional air mobility market, which is estimated to reach between $75 billion and $115 billion by 2035, according to McKinsey & Co. and NASA.

On the electrification front, Surf Air Mobility's aircraft electrification program remains on track to complete its Cessna Caravan Supplemental Type Certification (STC) in 2027. The company has an exclusive relationship with Textron Aviation to be their supplier of electrified powertrains for the Cessna Caravan and is actively pursuing strategic initiatives, including the creation of joint ventures or partnerships, to separately capitalize its electrification efforts and reduce costs.

The company is implementing a 4-phase transformation plan to optimize operations, recalibrate the on-demand business, drive efficiencies from its SurfOS software platform, and expand its route network and introduce electrification technologies. The first phase, focusing on improving the capital structure, strengthening the balance sheet, and realizing synergies from the Southern merger, is now complete. The second phase is an optimization phase, which includes improving productivity and efficiency of airline operations, recalibrating the on-demand business, and driving efficiencies through the Surf OS operating platform.

Conclusion

Despite the challenges faced by Surf Air Mobility, the company's dedicated management team with extensive expertise in aviation, electrification, and consumer technology, along with its exclusive partnerships and a clear transformation strategy, position it well to navigate the evolving regional air mobility landscape and deliver value to its shareholders in the years to come. The company's focus on scheduled and on-demand flight services, coupled with its technology and platform development initiatives, particularly in fleet electrification and enhancing user experience, provide a unique value proposition in the regional air mobility market. However, the company's financial performance remains challenging, with continued net losses and liquidity concerns that management is actively working to address through its transformation plan and strategic financing initiatives.