It’s been a turbulent ride for shareholders of Hawthorne-based commuter air operator and electric plane developer Surf Air Mobility Corp. in the weeks following the company’s launch as a publicly traded entity through a rarely used direct-listing process.

The stock opened on its first day of trading on July 27 at $5 a share and immediately plunged to $3.15 by the end of the trading session. The stock’s trajectory has continued south since then, reaching a low of $1.18 on Aug. 17 before rebounding a bit to close at $1.51 on Aug. 30.

The stock price plunge was so alarming to Surf Air Mobility executives that on Aug. 16, they took the highly ususual step of announcing a plan to temporarily lock up the nearly 7 million shares still held by early investors who had acquired them prior to the direct listing. Those shares cannot be sold on the New York Stock Exchange until after Jan. 1.

The lockup is designed to give Surf Air Mobility executives time to put together a road show for institutional investors and analysts designed to build interest in and support for the stock.

Sudden transformation

The share-price fiasco has diverted attention away from what would otherwise have been a remarkable transformation for Surf Air Mobility. A decade ago, Surf Air was a small commuter air service using general aviation planes for so-called “short haul” trips of under 500 miles, mostly within California and some other Western states. Now, it’s one of the largest short-haul commuter airlines that use general aviation planes in the nation.

That’s because on July 27 – the same day that stock trading commenced – Surf Air Mobility closed its acquisition of Palm Beach, Florida-based Southern Airways Corp., a much larger short-haul commuter airline. 

The combined operation – based at Surf Air Mobility’s already existing headquarters next to Hawthorne Municipal Airport – last year carried 450,000 passengers across 48 cities with over 75,000 departures. 

That puts Surf Air Mobility at the top of the list of short-haul air carriers using general aviation aircraft within the United States as ranked by the number of scheduled departures, according to Stan Little, the newly-installed chief executive of the combined Surf Air Mobility. 

Little added that the combined Surf Air Mobility is the only such airline to operate on both coasts. It also runs flights in Hawaii, through the prior acquisition of Mokulele Airlines. 

The vast majority of Surf Air Mobility flights use 9-seat Cessna aircraft and are under 500 miles in distance.

“Our primary competitor is the choice to drive rather than fly,” Little said.

Business flight collapse

This is a long way from Surf Air’s original incarnation early last decade, when its primary market was shuttling executives and investor types between smaller air fields near Silicon Valley and Los Angeles County’s Silicon Beach, allowing its customers to avoid the hassles of major airports such as Los Angeles International. At that time, Surf Air was primarily an “all-you-can-fly” subscription service, where for a monthly fee, a customer is guaranteed seats on an unlimited number of flights.

With only so many people willing to subscribe to the “all-you-can-fly” model, Surf Air gradually began opening up its flights to one-time customers willing to pay to reserve a seat on one of its planes. And with an eye toward the future decarbonization of local and regional air travel, Surf Air began developing hybrid-electric and fully-electric powertrains that could eventually be installed in its Cessna fleet. 

But then the Covid-19 pandemic hit and scrambled travel patterns, knocking the bottom out of its business shuttle market. Executives and the investors they sought to connect with were forced to conduct their business via online conferencing and continued to do so even after pandemic restrictions started to lift.

That’s when Surf Air sought to focus on the broader short-haul travel market by acquiring Southern Airways.

Direct-listing stumble

But according to Little, the former chief executive of Southern Airways, Surf Air Mobility had to convert to a publicly traded company in order for the acquisition to go through. Little said the increased financial transparency that comes with public company status was a nonnegotiable requirement for the deal.

Two other deals that Surf Air was negotiating also depended on the company going public. One was a July 2021 agreement with Wichita, Kansas-based Textron Aviation Inc., which makes the Cessna aircraft, to purchase up to 150 nine-seat Cessna Grand Caravan planes, into which Surf Air would eventually install its hybrid-electric powertrains. 

The second deal, announced in October 2021, was for $450 million in lease financing from Miami-based Jetstream Aviation Capital, some of which would be used to fund the purchase of those planes.

According to Little, all three deals would have gone away if Surf Air failed to go public.

With the initial public offering market nearly shutting down in the market downturn of late 2021 and early last year, Surf Air Mobility turned to a special purpose acquisition company or SPAC transaction in spring of last year that would have valued the company at $1.42 billion. But that deal fell apart months later as the SPAC market collapsed amidst tougher federal regulation and poor market performance of the companies that had gone public through the process.

That left a direct listing as the only option for Surf Air Mobility to go public. Under this rarely used method, companies don’t sell shares underwritten by investment banks into the market to raise capital. Instead, existing investors’ private shares are converted into common stock that those investors can sell on the market.

On the plus side for companies going public through direct listings, they can save on substantial investment bank underwriting fees.

But the drawback is that there’s no coordinated campaign to introduce the company to the investment community, so when existing investors sell their shares on the market, there’s no excitement built up to sway other investors to buy them, which means those shares can land with a thud.

That’s exactly what happened with Surf Air Mobility as two-thirds of the approximately 20 million shares held by pre-listing investors hit the market in the weeks following the direct listing. The share price tumbled instantly and kept heading down for two weeks toward penny stock territory. The company’s market cap fell below $50 million – quite a contrast to the lofty $1.42 billion valuation that came with the failed SPAC deal one year earlier.

Share lockup

As the stock neared the $1 threshold, Surf Air Mobility executives were forced to act. While they could do little about the 14 million shares that had already hit the market, they could freeze the shares held by pre-listing investors by shortening the so-called “registration window” under which those investors are authorized to sell their shares.

In announcing the move on August 16, Surf Air referred to this as “effectively locking up affiliate shares.”

The goal, according to the annoucement, was to allow “management to present at institutional investor conferences and host nondeal roadshows, in addition to other institutional investor engagements.”

The lockup period is set to end on January 1, giving the company four months to hit the investor road show circuit.

The hope is that with a more complete picture of what Surf Air Mobility’s vision and goals are, investors would be more willing to climb aboard.

But to one outside expert, this share lockup is essentially an admission that Surf Air Mobility went through the whole direct listing process backward.

“It sounds like they went only half-way in their direct listing and now they want a bit of a do-over, this time with a road show that should have been done prior to their direct listing,” said Michael Simkovic, professor of law and accounting at the USC Gould School of Law.

Sinkovic noted that the act of locking up the shares held by pre-listing investors also caps the number shares on the market, which should in theory prevent further slippage in the stock.

Indeed the share price has recovered a bit since the Aug. 16 lock-up announcement, going above $1.50 on Aug. 30 for the first time since Aug. 2.

Surf Air Mobility executives now hope they can return their attention to the company’s longer-term mission: to help lead the short-haul commuter aviation sector into the post-carbon age with electrified powertrains.

“This is a long-term play for flying electric airplanes,” Little said. “It’s where the industry has to go.  Just look at where crude oil prices are now compared to 30 years ago when short-haul routes were actually making money. That trend is only going to continue, so the path to (long-term) financial viability depends on going electric.”