Surf Air Mobility Files Plan For U.S. Direct Listing

A Quick Take On Surf Air Mobility Inc.

Surf Air Mobility Inc. (SRFM) has filed to conduct a direct listing of its common stock, according to an S-1 registration statement.

The firm provides regional air travel services in the United States.

Given Surf Air Mobility Inc.'s history of high operating losses, inherent risks in its business plan of transitioning to hybrid and electric aircraft, and likely significant overhang of stock supply after the listing, my opinion on the direct listing is Sell.

Surf Air Overview

Hawthorne, California-based Surf Air Mobility Inc. was founded to develop a network of commuter airline-type air transportation options with a "shared private" customer experience and high-frequency operations using small turboprop aircraft.

Management will be headed by founder, Chairman and CEO of Southern Airways R. Stanley Little. Mr. Little has been a practicing attorney since 2002.

The company seeks to merge with Southern Airways Corporation, which is the largest operator of Cessna Caravan small turboprop aircraft in the United States.

The combined operations of the two companies, if successfully merged, will serve U.S. cities in the "Mid-Atlantic, Gulf South, Midwest, Rocky Mountains, West Coast, New England and Hawaii" regions.

As of March 31, 2023, Surf Air has booked fair market value investment of $337.2 million in equity from investors including Liam Fayed, Sudhin Shahani and others.

Surf Air - Customer Acquisition

The firm obtains customers via a variety of marketing efforts and industry partnerships.

Additionally, the company plans to expand its network by "connecting many of the underutilized regional airports in the United States" based on "mobile device and various demographic data layers."

Sales and Marketing expenses as a percentage of total revenue have trended lower as revenues have increased, as the figures below indicate:

(Source - SEC.)

The Sales and Marketing efficiency multiple, defined as how many dollars of additional new revenue are generated by each dollar of Sales and Marketing expense, fell to 0.5x in the most recent reporting period, as shown in the table below:

(Source - SEC.)

Surf Air’s Market & Competition

According to a 2023 market research report by Georgia Tech, the regional air mobility market in the U.S. is seriously underserved.

Per the report, "out of 5,000 public airports with runways exceeding 3,000 feet, only 500 or just one in 10 are used by commercial air carriers..."

The Georgia Tech study, funded by NASA, concludes that "thanks to advances in aviation electric propulsion systems, a new market for regional air mobility could open up additional traveling options for U.S. travelers."

Also, autonomy operations will also simplify aircraft operations and lower costs by reducing the number of pilots in the cockpit and improving energy efficiency.

The firm faces competition from a variety of direct competitors as well as indirect competition as consumers use other forms of transit in their region, including cars, vans, buses and trains.

Surf Air Mobility’s Combined Financial Performance

The company’s recent financial results can be summarized as follows:

• Growing top-line revenue, but at a decelerating rate of growth

• Uneven gross loss and negative gross margin

• High and variable operating losses

• Increasing cash used in operations.

Below are relevant financial results derived from the firm’s registration statement:

(Source - SEC.)

As of March 31, 2023, Surf Air had $241,000 in cash and $124.2 million in total liabilities.

Free cash flow during the twelve months ending March 31, 2023, was negative ($31.6 million).

Surf Air Mobility Inc. Direct Listing Details

Surf Air is registering for sale a direct listing of its common stock, enabling existing shareholders to sell their shares on the open market.

Assuming a successful direct listing at the most recent private sale price (June 2023) of $11.82, the company’s enterprise value at the open of trading would approximate $532.3 million.

The firm is an ‘emerging growth company’ as defined by the 2012 JOBS Act and may elect to take advantage of reduced public company reporting requirements; prospective shareholders would receive less information for the listing and in the future as a publicly-held company within the requirements of the Act.

Since the combined company is pursuing a direct listing, it will receive no proceeds from the direct listing; individual shareholders may elect to sell their shares on the open market.

Management’s presentation of the company's condition will occur at an Investor Day to be announced by the company.

Regarding outstanding legal proceedings, the firm is currently in default of certain federal excise taxes in the amount of $6.3 million as of March 31, 2023. The company made a payment of $200,000 in May 2023 and seeks to negotiate with the IRS for a payment plan.

The company is also in default "on its property tax obligations in various California counties [in the amount of] approximately $2.0 million as of March 31, 2023."

The company also owes $6.0 million in "certain past due rental and maintenance payments under its aircraft leases."

The company also owes approximately $1.3 million related to a litigation judgment and is in post-judgement discovery. The amount has "been recognized as an accrued expense as of December 31, 2022 and 2021."

Valuation Metrics For Surf Air

Below is a table of relevant capitalization and valuation figures for the combined company:

(Source - SEC.)

Commentary About Surf Air’s Direct Listing

SRFM is seeking to go public through a direct listing and won’t receive any proceeds from the offering.

The firm’s financials have shown increasing top-line revenue, but at a decelerating rate of growth, variable gross loss and negative gross margin, high and fluctuating operating losses and growing cash used in operations.

Free cash flow for the twelve months ending March 31, 2023, was negative ($31.6 million).

Sales and Marketing expenses as a percentage of total revenue have trended lower as revenue has increased; however, its Sales and Marketing efficiency multiple fell to 0.5, indicating the firm was less efficient in its marketing and sales efforts.

The firm currently plans to pay no dividends and to retain future profits, if any, for reinvestment back into the firm's growth and working capital requirements.

SRFM’s recent capital spending history indicates it has spent lightly on capital expenditures in the past 12 months.

The market opportunity for providing regional mobility is substantial, with a number of underserved markets in the United States.

Risks to the company’s outlook as a public company include the firm’s legal issues, the need to raise capital for its expansion plans and its history of operating losses.

As for valuation expectations, at the reference price indicated above, the firm would be valued at an Enterprise Value/Revenue multiple of approximately 25.4x.

Given the firm's history of high operating losses, inherent risks in its business plan of transitioning to hybrid and electric aircraft, and likely significant overhang of stock supply after the listing, my opinion on the Surf Air Mobility Inc. direct listing is Sell.

Expected Direct Listing Date: To be announced.

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