Sun Country Airlines Holdings, Inc.

Welcome to the Sun Country Airlines third quarter 2024 earnings call. My name is Daniel 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 the session, you'll need to press star one one on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. 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, our 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 forelooking statements. Our remarks today may include forelooking statements which are based upon management's beliefs, expectations, assumptions, and subjects to risk and uncertainty. Actual results may differ materially. We encourage you to review the risk factors and cautionary statements outlined in our earnings release and on our most recent SEC filing. We assume no obligation to update any forelooking statement. You can find our third quarter, 2024 earnings press release and investor relations portion of our website at .suncubier.com. With that said, I'd like to turn it over to Jude.

Thanks, Chris. Good morning, everyone. Happy Halloween. Our diversified business model is unique in the airline industry. Due to the predictability of our charter and cargo businesses, we are able to deliver the most flexible schedule service capacity in the industry. The combination of our schedule flexibility and low fixed cost model allows us to respond to both predictable leisure demand fluctuations and exogenous industry shocks. We believe, due to our structural advantages, we'll be able to reliably deliver industry-leading profitability throughout all cycles. Domestic industry capacity growth peaked in June at almost 7 percent, and the growth rate has been slowing ever since. But across our network, industry capacity reached a peak growth rate of 12 percent. By January, domestic industry capacity will be flat year on year and will be down across our network. Many airlines' earnings calls have focused on a rationalization of capacity. Clearly, much of the capacity that other airlines added across our network was lossmaking and has been removed. All the while, SunCountry continues to expand and produce profits and healthy cash flows. Selling unit revenues are now positive year on year for all future selling months. Flown unit revenues will lag, but we now expect fourth quarter trasm year on year to be around flat based on industry schedules that remain bullish on unit revenue trends into next year. Translating scheduled unit revenue trends into margins, we have positive trends in charter yields and cargo yields, both of which are contractual. We have mostly passed the post-COVID inflationary pressures and are expecting only modest ex-fuel unit cost increases going forward, and fuel is down. As shown in our 4Q guide, we believe we'll likely show a margin expansion. And based on current inputs, I remain bullish into 2025 as well. Another common topic on airline 3Q calls has been challenges with aircraft availability and OEM deliveries and AOGs caused by OEMs. Again, to draw distinction with our business, all the aircraft supporting our fleet growth for 2025 and 2026 are currently in operation with other carriers. They are either on our balance sheet as leased out until they are to be delivered or committed through our cargo program. Further, borrowing costs are a common topic. Just to remind everyone, we continue to produce free cash flow and are able to self-fund our modest capex requirements. As such, our debt levels continue to decline even as we grow. As we ride these positive trends, this management team will primarily be focused on operational improvements and service delivery. This past summer was very challenging operationally, as we discussed in the past, and only to cap the season off with hurricanes and a major IT disruption. But since October, August 1st, we have achieved a 99.5 controllable completion factor. We have an incredible team that navigates these challenges, and I'm proud to be part of it. With that, I'll turn it over to Dave.

Thanks, Jude. We're pleased to report that Q3 was our ninth consecutive quarter of profitability. In year to date, Sun Country has among the highest margins in the industry. Both our cargo segment and our charter line of business continue to produce solid growth, which has partially offset the capacity-driven pricing pressure we've experienced in the scheduled service business this year. As industry capacity continues to rationalize, we're seeing a stronger pricing environment in Q4 and into Q1 of 25. Sun Country has rapidly matched our capacity with market demand as Q3 scheduled service ASM growth fell to 5.8 percent year over year versus more than 18 percent in the second quarter. We're planning this growth to slow further in Q4, with scheduled service ASM growth expected to be slightly higher than 3 percent year over year. Let me now turn to the specifics of Q3. First, to revenue and capacity. Third quarter total revenue was $249.5 million, which was roughly flat with the third quarter, $23. Revenue for our passenger segment, which includes our scheduled service and charter businesses, fell 3 percent year over year. Scheduled service revenue declined 5.9 percent, driven by an 11.1 percent decline in scheduled service trasm. The quarter was impacted by industry over capacity, the crowd strike outage and hurricanes in Florida. We rapidly reduced our scheduled service capacity as the quarter proceeded, with July growing 12 percent versus prior year, but September shrinking by 10 percent. Given the length of our booking window, it generally takes a couple of quarters to fully realize the impact of capacity changes on flown fare levels. We feel confident that our current capacity allocation for Q4 and Q1 25 matches customer demand. Q4 scheduled service trasm is expected to be flat with Q4 23 levels and total trasm, which includes our charter business, is expected to be up versus last year by low single digits. Charter revenue in the third quarter grew 7 percent to $51 million, which was a new quarterly high for Sun Country, partially offsetting scheduled service weakness. Driving this result was a 1.7 percent increase in charter block hours and a 5 percent improvement in revenue per block hour. Charter unit revenue improvement resulted from recently renegotiated contractual rate increases and a better mix of flying. Charter unit revenue growth would have been significantly higher had lower fuel prices not reduced the fuel cost reimbursement we received from our charter customers. Over 80 percent of our charter revenue during the quarter came from flying done under long term agreements. For our cargo segment, revenue grew by 11.9 percent in Q3 to $29.2 million, which was also an all time quarterly high. This growth came despite a 3.6 percent decrease in cargo block hours, resulting from aircraft and heavy check and hurricane driven flight cancellations in the southeast. Cargo revenue per block hour was up 16 percent, driven by the impact of a portion of the rate changes implicit in our extended Amazon agreement, as well as annual rate escalations. We continue to expect cargo flying to inflect sharply upward in 2025 as we take on an anticipated eight additional freighter aircraft throughout the year. In the segment reporting table included in our -10-Q, you'll see that cargo margins improved significantly versus last year. As a reminder, the segment reporting and our quarterly filings includes allocated corporate overhead. The revised Amazon contract rates will continue to escalate as we receive additional aircraft and will not be in full effect until the second half of 2025. Turning now to costs, we continue to remain well disciplined as Q3-CASM declined 1.9 percent for the third quarter of 2023, while adjusted CASM increased 3.7 percent. This adjusted CASM increase was largely driven by our slowing growth during the quarter. Ground handling expenses grew 23.3 percent year over year, driven by more flying volume, higher outsourced ground handler costs and one time credits incurred in Q3-23, which didn't repeat this year. Regarding landing fees and airport rents, we continue to see pressure on costs due to the roll off of COVID-era relief payments that airports have been using to minimize rate increases. It's contributed to a 14.5 percent increase in landing fees and airport rent expense during the quarter. As we move into Q4, the slowing growth in our scheduled service business is likely to continue to put some pressure on adjusted CASM. Regarding our balance sheet, our total liquidity at the end of the third quarter was $165 million. As of October 30th, total liquidity stood at approximately $184 million. Year to date, we've spent $42.6 million on CapEx and we anticipate full year 2024 CapEx to be approximately $75 million. At this point, we do not expect to purchase any incremental aircraft until we begin looking at 2027 capacity. We continue to generate strong free cash flow and our leverage remains low. We expect to finish the year with a net debt to adjust the EBITDA ratio of 2.3 times. Let me turn now to guidance. We expect fourth quarter total revenue to be between $250 and $260 million on block hour growth of 2 to 5 percent. We're anticipating our fuel cost per gallon to be $2.47 and for us to achieve an operating margin between 7 and 9 percent. Our business is built for resiliency and we'll continue to allocate capacity between segments to maximize profitability and minimize earnings volatility. With that, I will open it up for questions.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. In the interest of time, we ask that you please lend yourself to one question and one follow-up.

Please

stand by while we compile

the Q&A roster. Our first question comes from Wayne Penigworth

with Evercore ISI. Your line is open.

Hey, good morning. Thanks. So on cargo, just with respect to the existing book of business that you're doing, have you hit full run rate on improvements on the existing business that you're doing or some of that still building? And do you have any update on the timing of incremental cargo aircraft, growth aircraft in 2025?

Yeah, so the answer is not all of the rate changes that are implicit in our new agreement are included in that number. So a portion of them occurred this year, but there will be two more increases next year as the new aircraft deliver. We're really still looking to be on track for sort of the new cargo aircraft coming in, which would be late first, early second quarter for the first one, and then by late third, early fourth quarter for the eighth one. So it's a rapid ramp during the summer months of 2025. And by the end of the year of next year, 25, all the aircraft should be operating and the rate changes should be fully in place.

OK, great. That's very clear. And then just on the seasonal flying that you do in in scheduled service away from Minneapolis, any any new thinking in your approach there, any kind of new markets you're particularly excited about and are the industry capacity adjustments that you're seeing any any different in those seasonal markets away from Minneapolis?

No Minneapolis capacity. Hey, Dwayne, no Minneapolis capacity is primarily at Sun Country as summer issue. And we're going to be likely shrinking scheduled service capacity summer of 25, first 24 because of the cargo inductions that Dave was talking about. So total block hours for the year will be up somewhere around 10 percent. So we're still hiring and growing sort of at a controlled but sustainable pace. But the mix will be different. So for summer of next year, you know, our non Minneapolis flying will be under some small pressures, so consider it made mostly flat. I wouldn't expect any new markets for summer next year. Very clear. A substantial we had a lot of market launches in the summer of 24 out of Minneapolis, predominantly some non Minneapolis markets. And some of those will need to be also will also need to be suspended in order to support the cargo growth.

OK, got it. Thank you.

Thank you. And our next question comes from Robbie Schenker with Oregon Stanley. Your line is open.

Hi, good morning. This is Catherine on for Robbie. Thank you for taking my question. Just a quick question on the update on the Oman aircraft that you've released. I'm curious if those are going to continue to be on lease or if you're planning to add those to your fleet.

Yeah, so here's where we stand with that. We will definitely be adding adding them to our fleet. Remember, we have five aircraft which were scheduled to sort of one of them re-deliver this year and go into service next year and then all of them in place here at Sun Country by the end of next year. I think what's going to happen given some of these OEM delays that are impacting other airlines, they want to extend leases and we're no exception to that. So they want to extend the leases that we have to them. So I would say it's very likely that we extend at least a portion of those aircraft out into 2026 before they are re-delivered, which works well for us given the cargo growth we have next year.

Got it. And just a quick follow up. I was curious what the RASM opportunity might be next year. Just given all this industry capacity has been coming out of the market. I'm curious how you think about that impacting Sun Country. Thanks.

Hey, Catherine, we just loaded summer schedule, so there's no meaningful volume of bookings past April. As I mentioned in my comments earlier, the first quarter bookings remain strong. We're seeing positive trends year on year. And so to the extent that we have data to look at in our own bookings beyond what other airlines have loaded in their schedules, things look really positive. But that's only through April.

Thank you. And our next question comes from

Brandon Oglinski with Barclays. Your line is open.

Hey, good morning, Jude and Dave. Thanks for taking the question. So should we still be thinking double digit declines in your scheduled service capacity or block hour flying next year? Is that still the bogey?

Yeah, so let me give a brief update on that. You know, we're still finalizing the 25 plan, but I think so we originally thought that we were going to need to shrink our scheduled service business next year, you know, on the order of, let's say, 10 percent ish. I think given the situation with our pilots, better availability than we thought that shrink in our scheduled service business is probably more like mid single digits type number. Again, we're finalizing right now, but I think we'll be able to fly a little bit more on the passenger side next year than we had initially thought.

You can look at loaded schedules and compare July year on year, June year on year, and you'll see down, you know, high single digits as we get more clarity on the delivery timing of the cargo fleet. There's a little bit of an input that is an unknown related to captain upgrades. You know, we're not going to shrink from there. It'll only go higher. So we'll continue to add scheduled service capacity as we become as the segment mix becomes clear and pilot staffing becomes more clear.

I appreciate that, Jude. And I guess there was a comment about, you know, your booking profile. It takes a few months for capacity reductions to start showing up in higher fares or higher realized fares, I guess. Is there anything you're changing given that capacity is likely to be down next year in the way you're holding inventory or pricing?

No, I think that comment, Brandon, was really more around just sort of leisure passengers and the tendency to book earlier, particularly given the leisure passenger mix that we have. So the only point was, you know, as I think Jude mentioned, we're seeing nice upward trends, you know, positive inflection year over year on a booked fare basis. But that won't sort of flow into flown revenue, you know, for a quarter of a year. So because people buy in advance and maybe a little bit more in advance when they're leisure passengers.

OK, understood. Thank you,

guys. Thank you. Our next question comes from Michael Linenberg with DB. Your line is open.

Hi, this is Shannon. Already on for Mike. Thanks for taking my question. Dave, maybe a couple for you. With other revenue of 48 percent year over year, what drove that large increase?

I mean, the biggest driver of that is our that's where the. Revenue from leased aircraft hits our P&L. So the aircraft that we have out on lease, we get revenue for. That's the line item where it's shown.

OK, got it. And how do you think about, you know, balancing deploying your free cash flow for share buybacks and other uses, you know, just knowing that some shareholders may be limited to some extent from buying your stock due to, you know, your current market cap and trading liquidity?

Yeah, so, you know, we had a sort of a share buyback program going for a while. A free cash flow profile looks good. I would say we are very rapidly amortizing debt right now, and that will continue into the future. I don't really foresee us in a share buyback mode for the next couple of months. But as we move into twenty five, our cash is building rapidly. We're going to we'll sort of revisit this. Now, there's always this trade off for us and. You know, relatively limited float, people have difficulty getting in and out of the stock as we buy back shares. It kind of exacerbates that. But, you know, we think our shares are a really good investment at this price. So as we move later this year into early next, we're going to revisit that.

Just one one thing on cash balances, the end of the third quarter is the annual trough in the seasonality of our cash balances. So when you look at the balance sheet on the queue, just keep that in mind.

Well, thank you.

Thank

you.

Our next question comes from Tom Fitzgerald with TD Callum. Your line is open.

Thanks so much for the time, everyone. Just going back to the health of the booking window, especially in Minneapolis, with carriers like JetBlue leaving, could you touch on how seven day rolling yields have trended over the last six or eight weeks or so?

Sure, I mean, they're up. So seven day trailing fairs versus the same period last year are up in every selling month as we look forward, where we have any significant volumes. And, you know, I mean, also, I just want to point out that the calendar shift for leisure carriers like ours that's happened this year is really powerful. So it's a late Thanksgiving and a midweek Christmas and New Year's. It's sort of the best set up that we could hope for combined also with the late Easter extends our winter travel season. So there's a really weak period between Thanksgiving and Christmas. That's a relatively short period this year. And then we have a long winter booking cycle because of because of a late Easter. So there's some other background that's kind of helping bookings like those things. But generally, you know, on our biggest, thickest markets for this winter, we're all seeing in each of those markets, we're seeing really positive trends. So that's Minneapolis, Vegas, L.A., Orlando, Cancun, Fort Myers, you know, December bookings in West Florida haven't been really affected by the hurricane challenges. So, you know, November, we'll see an impact, but we but that appears to be over by the time the December schedule starts. So, things look really good.

That's super helpful. Thanks so much. And then just as a follow up, once you get into 26, you know, you have the Amazon, the full comportment of the Amazon planes on board. How are you thinking about the seasonality of cargo block hours? Just kind of first half, second half. Any color there would be really helpful. Thanks again for the time.

You know, this if you go look at sort of the revenue profile of the cargo business, it varies. The main variance quarter to quarter, honestly, is just check volume, like what aircraft are going through check at any one time. So the business has a great advantage for us in that it's quite flat throughout the year. And we expect that to continue a little bit harder flying during Amazon prime periods, but not that much. So it's great, very stable business. And we expect that to

to continue as all the aircraft are in. Thank you. As a reminder, to ask a question, please press star one one on your telephone. Again, that is star one one to ask a question. And our next question comes from

Scott

group with Wolf.

Your line is open.

Hey, thanks. Good morning. I want to follow up on the cargo revenue per block hour. So I don't know if I see it's up seven percent over last quarter, 16 percent year over year, which is sort of in your mind is more representative of the of the the new rate with Amazon. And I'll tell you what I'm trying to figure out. It sounds like there's there's two more increases coming. Should we think about these other two increases similar in magnitude is what we just got. And I'm just trying to understand ultimately by the back half next year where this revenue per block. Yeah.

Yeah. So. The 16 percent year over years got in it, you know, the annual rate escalators and then the other number you mentioned is quarter over quarter. I would say that without being too precise, that quarter over quarter number is more representative of one element of the new contractual rates. We have two more increases coming next year, which very roughly in totality between the two should be roughly equivalent to the increase we saw in the number you mentioned. You know, I don't I'm not going to get into detail contractual rates here, but by the end of twenty six, everything sorry and the twenty five, everything will be fully in.

OK, no, that's

just want to

bring up also the rate structure has a fixed component and then a departure component and a block hour component. So utilization, mostly subject to heavy check schedules has some impact on the per block hour rate that you're looking at in the financials. So there's not only rate changes, there's also a little bit of noise associated with other things.

Yep, makes sense. You made a comment that fairs booked or positive. Rasmus flat and Q4 and people on leisure tend to book early. Do you feel like we should be able to does the fair positive translate into positive Rasmus in Q1, which is your big quarter or is it? Has there been enough early booking where we may not see the Rasmus inflection in Q1?

Yeah, we're not going to guide to one Q, but but my point was only that the inflection happened a few months ago. So we were selling into flown months, October, November, December at a negative fair first last year up until a few months ago. Now it's positive. It'll take a while for total trazem to catch up. But the further out in the schedule we look, the longer time we'll have of these positive booking trends and the more bullish we become. OK, makes sense.

And then just lastly, there's obviously a lot of mixed changes next year. Scheduled down mid single digit cargo growing. What's a good way to think about QASM next year?

Yeah, so, you know, the plan is still sort of coming together. QASM is going to be up because the passenger business is down and the passenger business is what drives QASM. Obviously not the cargo business. You know, I would say we're looking at numbers. Let's just call it mid single. Digit up next year in QASM, but that's subject to change here as we finalize our plan.

Makes sense. Thank you guys. Appreciate it.

Thanks, Scott. Thank you. I'm showing no further questions at this time. Oh, now I like to turn it back to Judith Ricker closing remarks.

Hey, guys, thanks for your interest. I hope everybody has a great weekend. We're really excited about what we're seeing on booking trends, which we've talked about quite a lot this morning and look forward to giving you another update in 90 days. Have a great day,

everybody. This concludes today's conference call. Thank you for participating. You may now disconnect.