Sun Country Airlines Holdings, Inc.

Good day and welcome to the Sun Country Airlines fourth quarter and full year 2022 earnings call. My name is Chris and I will be your operator for today's call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during that session, you will need to press star 1 1 on your phone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded, and I will now turn the call over to Chris Allen, Director of Investor Relations. Mr. Allen, you may begin.

Thank you. I'm joined today by Jude Bricker, Chief Executive Officer, Dave Davis, President and Chief Financial Officer, and a group of others to help answer questions. Before we begin, I'd like to remind everyone that during this call, the company may make certain statements that constitute forward-looking statements. Our remarks today may include forward-looking statements which are based upon management's current beliefs, expectations, and assumptions and are subject to risks and uncertainties. Actual results may differ materially. We encourage you to review the risk factors and cautionary statements outlined in our earnings release and most recent SEC filings. We assume no obligation to update any forward-looking statement. You can find our fourth quarter and full-year earnings press release on the investor relations portion of our website at ir.suncountry.com. With that said, I'd like to now turn the call over to Jude. Thanks, Chris. Good morning, everybody. To review, our multi-segment business is unique in the airline industry. Due to the predictability of our charter and cargo businesses, we're able to deliver the most flexible scheduled service capacity in the industry. The combination of our schedule flexibility and low-cost model allow us to respond to both predictable leisure demand fluctuations and exogenous industry shocks. We believe, due to these structural advantages, we'll be able to reliably deliver industry-leading profitability throughout all cycles. In execution of our multi-segment business, it's critical that we're able to deliver industry-leading operational performance. I'm especially proud that in 2022, Sun Country delivered the industry's best completion factor. During the challenging December period, we delivered 99.6 completion factor, also best in the industry. So proud of our whole team that continue to come through for our customers every day. We continue to see strong demand for all segments of our business. In scheduled service, currently selling through August, we're seeing consistently strong yields, even compared to an already strong 2022. The first quarter, notably year-over-year TRASM improvement implicit in our guide, is mostly a result of a strong recovery in international demand as compared to Omicron-impacted first quarter 2022. This outperformance is overcoming West Florida demand, which is still recovering from Hurricane Ian. All indications are that unit revenues will continue to remain strong through the summer, including observable bookings, overall industry capacity across our network, loyalty spend, contracted distribution agreements, and local economy metrics. In scheduled service through the next year, we expect to continue to build out our MSP operation to its natural share. To that end, we've decided to postpone the restart of our summer Hawaiian operations until 2024. Keep in mind that in the first quarter, which is typically our strongest of the year, keep in mind that the first quarter is typically our strongest of the year under constant fuel and normalized demand. I expect charters to put up big growth numbers in 2023. Mostly we're focused on long-term contracted charter revenue. We've expanded our casino operation to five aircraft and added a second aircraft to our VIP operations. I expect to have eight aircraft committed to contracted charter flying by the end of 2023, counting our 12 cargo aircraft that brings our contracted fleet to 20 aircraft of the 55 we have in service. All these aircraft fly at consistent operational levels with pass-through economics. This operating base allows us maximum flexibility with our scheduled business. I expect our sports business to grow this year as well, focused on collegiate sports and Major League Soccer. Charter demand remains strong, and we believe it's generally underserved by the industry. Our cargo business will improve this year due to contracted escalation, but we expect volumes to be consistent year over year as we focus on building out our scheduled and chartered businesses. On the fleet, we'll continue to be opportunistic buyers. I expect most of our 2023 growth to come through utilization increases, which remain well below 2019 levels. This will allow us to deploy capital for debt repayments through amortization, consider share buybacks, and some prudent infrastructure investment like our new training centers that open in 4Q and technology to support our operations. I'm confident we'll continue to find the growth aircraft that we need as we need them. And with that, I'll turn it over to Dave.

Thanks, Jude. We're pleased to report strong Q4 results, which I'll detail in a minute, near the upper end of our guidance range for both revenue and operating margin. Adjusted pre-tax income for the quarter was $10.3 million, a 39% improvement over Q4 of 2021, despite an increase in fuel prices of nearly 44% in the impact of the new pilot agreement that we signed near the end of 2021. Although we are now comparing our results to prior year, it's important to note that our Q4 adjusted pre-tax income is nearly 26% higher than it was in Q4 of 19. Additionally, we grew Q4 2022 year-over-year capacity on both a system block hour and ASM basis by 10% and 14% respectively. Q4 system block hours were 37% higher than they were in Q4 of 19. Let me start with a discussion of revenue and capacity. As Jude noted, the revenue environment remains very strong. Q4 of 22 total operating revenue of $227.2 million was 31.6% higher than the year-ago quarter. The scheduled service business is particularly strong, as TRASM grew 27% versus last year on an almost 14% growth in scheduled service ASMs. Ticket plus ancillary revenue grew 45% year-over-year as we saw an increase in total fare to $177.36, combined with an increase in load factor from 76.6% last year to 84.4% in Q4 of 22. This strength in unit revenue shows no signs of abating as we move into the first quarter. The story is the same for the full year 2022 with scheduled service TRASM growing almost 37% and an increase in scheduled ASMs of 16%. Both total fare of $175.29 and load factor of 83.5% were the highest full year results since 2018 when we began our conversion to a single class configuration. We finished 2022 with full year revenue of $894.4 million, a 44% increase over 2021, and a record for Sun Country. Charter revenue grew in the fourth quarter by 11%, as we saw another quarter of strong growth and flying under long-term contracts, referred to as program charter, and steady improvement in our ad hoc business. Ad hoc charter revenue doubled versus Q3 of 2022, and is showing steady progress as we continue to add pilots to pursue these opportunities. We've made a concerted effort to grow the amount of our charter business under long-term contracts, and we've been very successful so far. For the full year, program charter revenue was $121.7 million, nearly 2.5 times higher than it was in 2021, and we feel there remains room to grow. We added the equivalent of a third aircraft serving our CSRS contract in the fourth quarter of 2022. Full year revenue for the ad hoc charter business is still about 60% below its peak in 2019, but as we continue to add pilot resources, we expect to see steady growth in this segment. Cargo revenue grew 5% in the fourth quarter on a small decline in capacity. For the full year, cargo revenue declined 1% on a 4% decrease in cargo block hours. During the first half of the year, we had numerous Amazon aircraft and heavy maintenance, which drove the block hour decrease. Our cargo flying remains a consistent source of revenue in all environments, and we do not expect this to change in the future. Let me turn now to costs. Our fourth quarter adjusted chasm increased 7% versus last year. For the full year, adjusted chasm increased 9% year over year. Similar to what we have been saying all year, the main drivers of this cost increase have been twofold. First, we have been smaller than we had initially planned to be due to labor and aircraft constraints. Second, 2022 results reflect the cost of the new pilot agreement we signed at the end of 2021. This is an important point as the results of many of our competitors have yet to fully incorporate the cost of recently completed or upcoming new pilot contracts. Two additional aircraft are expected to enter service in Q1 of 23. As we grow into our expanded fleet throughout 2023, we expect to see a deceleration in unit cost increases. Let me say a few words now about our strong balance sheet. We finished 2022 with $289.4 million in total liquidity, including $264.7 million in unrestricted cash and short-term investments. Our year-end net debt to adjusted EBITDA was 2.7. During January of 2023, we completed the $25 million ASR portion of our share buyback program, repurchasing approximately 1.4 million shares at an average price of $18.23. We still have $25 million in board-approved share repurchase authority and will execute any buybacks under the program opportunistically, considering the liquidity needs of the business. Let me switch now to Q1 2023 guidance. As I said previously, we're seeing very strong demand with approximately 80% of our planned Q1 passenger revenue already booked, and we expect the strength to continue throughout the quarter. Total Q1 2023 revenue is expected to be between 280 and $290 million, which would be 24 to 28% higher than Q1 of 2022. We expect total block hour growth of 3.5% to 6.5%. We're expecting an operating margin of between 15% and 20%, assuming a fuel price of $3.58 per gallon. Just a quick reminder, Q1 is historically our strongest quarter of the year, and we expect to see seasonal trends similar to previous years. The fundamentals of our unique diversified business remain strong, and our model is highly resilient to changes in macroeconomic conditions. Our focus remains on profitable growth. With that, I'll open it for questions.