Electrification And Palantir Software Will Lower Airline Costs

Key Takeaways

• Effective route rationalization and OS implementation are set to enhance revenue, expand margins, and drive earnings growth.
  
• Electrification initiatives promise to reduce operating costs and boost profit margins with successful integration by 2027.
  
• Sustained profitability and revenue growth are challenged by execution risks, market dependencies, capital constraints, and long-term electrification uncertainties.

Catalysts

An operates air mobility business.

• The successful raising of a $50 million term loan at attractive rates in November 2024 is expected to lower the company's cost of capital and enable strong execution of its transformation plan, potentially increasing profitability and positively affecting earnings.
  
• Completing the first phase (transformation) and progressing into the optimization phase of the company's four-phase strategic plan is aimed at making airline operations profitable in 2025, thereby improving net margins.
  
• A disciplined approach to route rationalization and exiting unprofitable routes will allow Surf Air Mobility to focus on revenue-generating routes and expand margins, leading to potential earnings growth.
  
• Implementation of their SurfOS operating system software, in partnership with Palantir, is projected to enhance efficiency and drive revenue growth through features like dynamic pricing and resource planning, ultimately improving both top and bottom lines.
  
• Electrification initiatives, including the certification of electrified powertrains for Cessna Caravan aircraft, target a completion date of 2027, which could significantly reduce operating costs and enhance profit margins upon successful integration.

Surf Air Mobility Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Surf Air Mobility's revenue will grow by 18.3% annually over the next 3 years.
• Analysts are not forecasting that Surf Air Mobility will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Surf Air Mobility's profit margin will increase from -62.7% to the average US Airlines industry of 6.2% in 3 years.
• If Surf Air Mobility's profit margin were to converge on the industry average, you could expect earnings to reach $12.2 million (and earnings per share of $0.53) by about May 2028, up from $-74.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.1x on those 2028 earnings, up from -0.6x today. This future PE is greater than the current PE for the US Airlines industry at 8.5x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.95%, as per the Simply Wall St company report.

Surf Air Mobility Future Earnings Per Share Growth

Risks

• The company faces challenges in achieving sustained profitability, as evidenced by its ongoing adjusted EBITDA losses, which could impact net margins and earnings.
  
• There are risks associated with the execution of the ongoing transformation plan, which may not deliver the anticipated efficiencies or cost reductions, potentially affecting operating costs and profitability.
  
• The reliance on external operators for on-demand services could expose the company to market and operational risks that may hinder revenue growth from this segment.
  
• The electrification initiative is a long-term project with significant uncertainties and capital requirements that could strain financial resources and delay expected financial benefits until 2027, affecting future cash flows and earnings.
  
• The company has a history of being capital-constrained, which could limit its ability to fund growth initiatives or capitalize on market opportunities, potentially impacting future revenue and net profit margins.

Valuation

• The analysts have a consensus price target of $7.625 for Surf Air Mobility based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $12.0, and the most bearish reporting a price target of just $3.25.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $197.8 million, earnings will come to $12.2 million, and it would be trading on a PE ratio of 19.1x, assuming you use a discount rate of 10.0%.
• Given the current share price of $2.5, the analyst price target of $7.62 is 67.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.