Sun Country Airlines Holdings, Inc.

Hello and welcome to Sun Country Airlines' first quarter 2025 earnings call. My name is Carmen 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 participate, you will need to press star 1-1 on your telephone. You will then hear a message advising your hand is raised. To withdraw your question, simply press star 1-1 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, Bill Trousdale, Chief Financial Officer, and a group of others to help answer questions. Before we begin, I would like to remind everyone that during this call, the company may make certain statements that constitute forward-looking statements. Our remarks today may include forelooking statements which are based on management's current beliefs, expectations, and assumptions and are subject to risks and certainties. Actual results may differ materially. We encourage you to review the risk factors and cautionary statements outlined in our earnings release on our most recent SEC filing. We assume no obligation to update any forelooking statements. You can find our first quarter 2025 earnings press release on the investor relations portion of our website at ir.suncountry.com. With that said, I would like to turn the call over to Jude.

Thanks, Chris. Good morning, everyone. 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 scheduled 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 will be able to reliably deliver industry-leading profitability throughout all cycles. During the first quarter, our flight attendants and our dispatchers ratified new contracts. I want to start by congratulating them on their raises. I'm proud of this team and the service we deliver. March is a particularly important month for us. It's a time when we stress operations, trying to meet the demand of our home market. In March, we delivered controllable completion factor of 99.4% in our scheduled business and over 98% on time in our cargo business, both key metrics for us. Additionally, we had a mishandled bag rate of 1.3, a record for us. Our folks continue to deliver for our customers. Our first quarter is typically our strongest quarter of the year. This quarter, we're reporting quarterly records for revenue and earnings. Additionally, we outperform the next best mainline carrier by a wider margin than we've seen since COVID. While we're certainly subject to industry conditions, I expect us to outperform by a greater margin during times of stress. This is due to the strength of our diversified model and the reliability of demand in our home market. Execution on the previously announced cargo expansion continues at pace with three of the eight additional committed aircraft having been inducted into the program. We plan to have all eight aircraft in service by the end of the summer, bringing our total cargo fleet to 20. Additionally, the unit revenues of that business have been expanding, with 1Q revenue per block hour growing by about 20% versus the same time last year. With growth in unit revenue and volumes, we project our cargo revenue should be roughly double compared to prior year comp by September. In that month, two-thirds of our flights will be under committed contracts, both charter and cargo. For 2025, our system block hours will continue to grow by about 8% year-on-year. However, with cargo growth outpacing system growth, we expect to draw down scheduled service temporarily as we absorb the opportunity in cargo. This should provide a tailwind for scheduled service unit revenues on a year-on-year basis through at least the end of 1Q26. In 1Q25, we produced about 7% scheduled service ASM growth on a 4.5% TRASM decline. For 2Q, we'll be shrinking scheduled service ASMs by about 7% and expect to see about a 3% TRASM improvement. That's below where we would expect to be based on capacity in the Easter shift. However, close-in fares accelerated into April. That's a positive indicator for summer, which for us is generally characterized by close-in bookings. 1Q25 also set a record for charter revenue. We built buffers into the timing of our cargo growth, so we'll have surplus passenger aircraft and crew time that we expect to be able to allocate into the charter market. For this reason, I expect our charter segment to perform well for the rest of the year. On the fleet side, we've redelivered our first 900 for passenger service and expect the second to arrive this quarter. We've decided to postpone the induction of this aircraft until later this year as we have a temporary surplus in our passenger fleet. Even with this deferral, we'll experience some unit cost pressures associated with lower utilization of our passenger fleet until we're able to catch up our staffing to our fleet, which should occur around the second quarter of 26. Further, temporary cost pressure will come from cargo growth in the form of staffing surpluses built into the induction buffers. We've made the decision to retire one of our older 800s, which will help us alleviate some of the tightness we're experiencing in the NG components market. The company continues to deliver high levels of free cash yield. Currently, we plan to continue to delever with net debt levels expected to fall below zero at some point in 2028. However, we have the liquidity and balance sheet headroom to take advantage of any opportunities, including share repurchases using the $25 million of repurchase authority recently granted by our board. A few other notes about the quarter. We're excited to be awarded Air Transport World's Airline Leader of the Year for 2025, and 1Q also marked the end of Apollo's ownership here at Sun Country with the sell-down of their remaining shares. Now I want to introduce Bill Trousdale to the earnings call. Bill's been an officer of the company serving in finance since 2018. I'm excited to have him here and congratulate him on his new role. And with that, I'll turn it over to you, Bill.

Thanks, Jude, for those kind words. I'm grateful for the support of yourself and the board as I transition to the CFO seat here at Sun Country. And with that, we are very pleased to report that the first quarter was our 11th consecutive quarter of profitability. Total revenue of $326.6 million was the highest of any quarter on record for Sun Country. Operating margin for the quarter was 17.2%, and adjusted operating margin was 18.3%, which we expect to be among the highest in the industry. Diluted adjusted EPS for the quarter was 72 cents. These results speak directly to the resilience of our diversified business model at Sun Country. First quarter total revenue of $326.6 million was 4.9% higher than Q1 of 2024. Revenue for a passenger segment, which includes scheduled service and charter businesses, grew 4.1% year-over-year. Average scheduled service fare grew 1% year-over-year to $198.44, offset by a 3.9% percentage point decline in load factor. Scheduled service TRASM declined 4.7% as scheduled service ASMs increased 6.7%. As we turn our focus to the second quarter of 2025, we are expecting scheduled service ASMs to decrease approximately 7% as we allocate pilot resources to allow for the planned growth of our cargo segment. Charter revenue in the first quarter grew 15.6% to $55 million on 10.7% growth in charter block hours. Excluding the revenue reconciliation of fuel expenses, charter flying revenue increased 21%. Ad hoc charter revenue growth, which included March Madness flying, was also significant in the quarter, as we saw it increase by 55% versus last year, and now represents about 34% of total charter revenue for the quarter, as compared to 25% in Q1 of 2024. Our ability to reallocate resources to take advantage of ad hoc opportunities such as these helps us mitigate the impact of changes in demand in other parts of the business. For our cargo segment, revenue grew by 17.6% in Q1 to $28.2 million. This growth came despite a 1.1% decrease in cargo block hours. Q1 cargo revenue per block hour was up 18.9%, driven by the impact of the rate changes in our amended Amazon agreement, as well as standard annual rate adjustments. We continue to expect cargo flying to inflect sharply upward in 2025, as we take on eight additional freighter aircraft throughout the year. Three of those eight were delivered in the first quarter, with the first of those entering service in late March, and we continue to expect the remaining five to be delivered and entering service by the end of Q3. Turning now to costs. Q1 total operating expense grew 5.5% on 5.8% growth in total block hours. Adjusted CASM increased by 3.5% versus Q1 last year. The increases in salaries and wages put the most pressure on Q1 costs as pilot headcount grew about 7% to support the dramatic growth of our cargo fleet in 2025, as well as a 6% contractual pay rate increase for our pilots at the end of 2024. Operational challenges during the quarter, as well as rate increases and outsourced ground handling and airport costs, drove the bulk of the increase we saw in the ground handling and landing fees expense line items. While an increase in non-routine maintenance events helped drive the 12.2% increase in maintenance expenses. As a reminder, the growth in our cargo segment during the remainder of 2025 will cause us to reallocate pilot resources from our scheduled service flying this year. Thus, we expect full-year scheduled service ASMs to decline between 3 and 5%, with those reductions occurring from Q2 through Q4. The lower ASM production will put pressure on adjusted CASM, which we anticipate increasing mid to high single digits for the full year of 2025. Regarding cash flows in our balance sheet, our total liquidity at the end of Q1 was $227.1 million. At the end of March, we entered into a four-year $75 million revolving credit facility, which was an increase of $50 million over our previous revolver. Given our focus on Amazon growth in 2025 and into 2026, coupled with the six aircraft currently on lease to third-party airlines, we do not anticipate a need to purchase any incremental aircraft until we begin looking for 2027 capacity. We expect 2025 CapEx to be between $70 million and $80 million, which much of this spent on spare engines and inductions of our new cargo aircraft, as well as the aircraft returning to us off lease in 2025. In addition, during the quarter, we paid a total of $19.7 million in debt and finance lease obligations, enabling us to continue to maintain low levels of debt with a net debt to adjusted EBITDA ratio of 2.0x at the end of the first quarter. which was an improvement from 2.4x at the end of Q1 of 2024. For the full year of 2025, we expect to pay a total of $108 million towards these debt obligations. Furthermore, during the quarter, we repurchased $10 million of shares in conjunction with the secondary public offering in which Apollo Global Management exited their position in Sun Country. And we just received, as Jude mentioned, an additional $25 million of share repurchase authorization from our Board of Directors. Turning to guidance, we expect the second quarter total revenue to be between $250 and $260 million on a reduction of block hours between 1% and 3%. We are anticipating our fuel cost per gallon to be $2.44 and for us to achieve an operating margin between 4% and 7%. Our business is built for resiliency and will continue to allocate capacity between segments to maximize profitability and minimize our earnings volatility. And with that, operator, we can now open the call up for questions.

Thank you so much. And as a reminder, to ask a question, simply press star 11 on your telephone and wait for your name to be announced. One moment for our first question. And it's coming from Duane Penningsworth with Evercore ISI. Please proceed.

Hey, good morning. Thank you. Can you talk a little bit about the ramp of aircraft and utilization and, frankly, profitability or margins on the cargo side, you know, how has maybe the change of that slope or how has the slope of that kind of changed versus your expectations at maybe the outside of the year?

Hey, Duane. Good morning. The way to think about it is we're going to grow pilot credit hours by 10% a year. The flying that we do in cargo uses more credit hours to produce a block hours. So even though we're growing credit hours by 10%, total system block hour growth will be below that as we expand in the cargo. And then once we've absorbed the cargo growth, we'll be adding back really efficient flying into SCED service. And so growth will exceed that 10% level. So this will be about a three year process to go into all the aircraft that we've already committed to, both from the lease-out fleet and the cargo expansion. More near-term, we're taking on these eight airplanes, and there's a lot of variability in the induction timing because we have part dependencies, sometimes record inconsistencies during the transition from prior operator, all the things you face with the induction of a used airplane. And so we staff up an expectation of that. What's expensive today that we're experiencing is that we staff up for an airplane that may come in late, but we can't really backfill that with other opportunities on the passenger side because we need, you know, 120 days at least to schedule a flight and we need, you know, a little bit of warning to get the, and, you know, demand dependent to get it into the ad hoc charter market. We'll have a little bit of headwinds on cost, but this is a 10% growth airline and probably will be for the next three years. The airplanes that are going to support that are already either on the balance sheet or committed through contract and don't require any capex. So we're just here executing.

Great. And then just for my follow-up, this might be a little bit of an unfair question, but your model contemplates peaks and off peaks in scheduled service. And obviously, the scheduled service capacity is pretty tight for the foreseeable future given this ramp into cargo. But I guess hypothetically, as we hear about all this peak versus off peak and softer troughs, I guess looking at the rest of the world, you know, what do you think these other carriers are going to need to do? Because we're always going to have weeks that have Tuesdays and Wednesdays So what do you think the natural evolution will be to all this, you know, continued conversation about softer Tuesdays, Wednesdays, et cetera?

I don't think that's an unfair question. I think that the leisure space needs to get smaller in the U.S. in order for us to get back pricing power. And that will either be done through reorgs or M&A activities.

Makes sense. Thank you. Thank you. One moment for our next question, please. It comes from the line of Michael Lindenberg with Deutsche Bank. Please proceed.

Yeah, hey. Good morning, everyone. Jude, I want to go back to just sort of what you saw with respect to demand through the quarter and as you head into April. You only called out February as being off-peak, and it sounded like it was a bit challenging on the demand side. You know, a fellow low-cost carrier yesterday talked about a real tough March and a really, you know, not a great Easter either, not a great April. It sounds like that you didn't see that. You talked about acceleration of close-in and maybe on the pricing side. Can you just elaborate on the March? And I realize you're obviously benefiting from the fact that you're really starting to scale back your capacity.

Yeah. Hey, Mike. Hey. Well, here's what we're seeing. We had, just to start off with, we report 18% margins, so things are pretty good. I didn't want to call that out. So, you know, but relative to where we thought we would be, we're below. And what had happened was January was really strong. All the airlines probably saw the same thing. So we held fares high in the booking path going into February and March. and we missed on load factor because as things slightly weakened, we weren't able to catch up. April will be up by about 5%, you know, probably. I'm talking unit revenues. I'd say 3% to 4% in May and probably, you know, 2% to 3% in June. But what's happened more recently is that these close-in fairs, have really accelerated rapidly. Keep in mind, our winter network and summer network are totally different. So we're talking about leisure market demand when we speak winter. So Florida, Mexican Caribbean, Southern California, Southwest desert destinations like Vegas and Phoenix. And then when we move into the summer, it's Minneapolis connecting to big cities, plus Texas origination of Mexican Caribbean markets. So when we talk about Minneapolis big city markets, which is a big thing for us in the summer, those fairs have accelerated really dramatically in the last couple of weeks. And the capacity looks really promising both because we're drawing down in the, in the OA backdrop is, is rationalizing really rapidly. So, you know, what, We're guiding conservatively. I'm certainly seeing more positivity in bookings than what we're baking into our forecast. Great.

And then that's super helpful. And then just my second question to Bill, can you talk about the reason behind tripling your revolver? I don't know if it's as much opportunistic. I know Jude mentioned about that the leisure space has to get smaller and there may be reorgs. And so maybe it's the opportunity to build some dry powder. When I look out at your CapEx needs, they're de minimis over the next couple of years. So can you talk about the thinking behind expanding that and how you think about managing that? Thank you.

Yeah, thanks, Mike. So I would say that was more of a function of the fact that our prior revolver was put in place at the time of our IPO. At the time of our IPO, our annual revenue was $600 million-ish, and we've nearly doubled that. So we went to market, knowing that that revolver was coming due at the end of – basically in Q1 of 2026 – So we went to market at the end of last year, looking to upsize that in general. And as we went through the process, it was a bit opportunistic to get it to 75 million. It wasn't specifically designed to generate specific dry powder or anything like that. It's just a growth relative to the size of the airline type of thing.

You think about strategic uses of capital in three ways. First would be asset buys. So this would be opportunistic purchases of aircraft. We haven't done that in a while because planes have been expensive, but we hope to see some opportunities here with some disruption that we're seeing. Second is share buybacks, which we've authorized $25 million, and we'll do that opportunistically. And then the third is M&A. And I think we're going to see some opportunities out there.

Great.

Thanks, everyone. Thank you. Thank you. Our next question comes from Tom Fitzgerald with TD Collin. Please proceed.

Everyone, thanks so much for the time. Could you talk about the new credit card deal with Synchrony? It seems like it could be pretty exciting for your model, but I'd just love to hear how investors should think about how incremental it could be to growth and remuneration.

Yeah, we're excited about it. So the background was we inherited a Credit card agreement, these typically are about seven-year deals. So this is kind of our first opportunity since I've been at Sun Country to really leverage our relationship with our co-brand partner. Synchrony is going to become our co-brand. You know, we're going to implement the program in the third quarter. There's going to be some headwinds in the meantime because the credit card transaction transition limits our ability to build the credit card issuer base during this period. But the most substantial benefit is just an increase in rates for us. We're going to load a lot more technology to make it a better program for our consumers, but our revenue share is going to improve fairly dramatically. So yeah, this is going to be a really positive development for us. But it's not going to really hit the P&L until 26 and beyond.

Okay, thanks. That's really helpful color, Jude. And I just had a kind of a multi-part question on labor, but I was wondering if, you know, I know moving pilots from the right seat to the left seat had been a challenge for a little bit. So I'm curious about that, but It also seems like you have a lot of fixed costs that you should be able to leverage with the Amazon deal. And then just curious how we should be thinking about the flight attendant contract in terms of modeling the P&L the rest of the year. Thanks again for the time.

Thanks. So I'll give you some thoughts and then turn it over to Bill. So the flight attendant contract is done, and those costs will be in the second quarter and basically steady state. I think that generally we'll see hiring – Keep the, you know, juniorization accrues should be about, you know, second quarter should be run rate basis. Our pilots got a raise this year and that, and then we'll be open by the end of the year on amendment. I think it's going to take a little while. Your question is really material, is about how upgrades are looking. And I'll start off with the backdrop. You know, we spent a lot of time talking about pilot shortage. That's over. We haven't lost, we haven't, a pilot hasn't left Sun Country in like 90 days. And, you know, so this is, that's just not an issue anymore. We still are constrained by upgrades, which mainly has to do with quality of life transition. You know, the quality of schedule that you can hold as a junior pilot, as a junior captain versus senior FO. So we're doing a lot of things to improve that. We have PBS rolling out in the third quarter. trying to open a base this year, which I expect to have to get done. So I think there's a lot of improvement heading there. And with the backdrop of no attrition, I think, you know, we're very comfortable with the 10% credit hour growth that we're putting in. And I would think that there's upside to that because you're right, we do have the airplanes to operate more, particularly during peak periods, to the extent that crew growth exceeds our expectations. Anything to add, Bill?

Yeah, I mean, I would just add, I mean, if you're looking from a modeling perspective, and you spoke to some of the fixed costs and kind of vis-a-vis our Amazon growth, when we look at, you know, we typically speak in terms of calves, and obviously that poses some challenges there. But if you look at total costs, you know, sort of excluding fuel per block hour, the growth and cost of that is going to be, for the year, it's going to be, you know, low single digits. for the year. So I think when we look at our costs, we feel like they're in good shape. We're always going to keep a focus on them, but we're pretty pleased in aggregate.

Thank you.

One moment for our next question. It comes from Catherine O'Brien with Goldman Sachs. Please proceed.

Good morning, everyone. Thanks for the time. Hey, maybe one more just on the cargo revenue ramp this year and next. You know, you've taken delivery of three of the eight incremental aircraft here to date by, I think, one QN, but only two of those were flying and one really late in the quarter. Jude, you said you expect to see a doubling of revenue by September. So should that inflection really be more back half-weighted? And then if I take you literally, that 4Q could be double year over year. That's about $60 million. and then you get that December rate step up. So next year, should we be thinking about something in like the mid $200 million range? Just anything on how we should think about that ramp would be super helpful.

Yeah, I mean, so the rate increase of 20% per revenue block hour and then the block hour production of eight incremental airplanes, the math works out to about 100% increase by September. Those airplanes are coming in just as rapidly as we can put them in there, but there's a process of putting it on the certificate, getting the transition mods completed, and then getting them scheduled, and we're running behind for reasons beyond our control. So it's going to be a little lumpy as we move through the transition, but I expect September to be operating 20 airplanes, and revenues September year-on-year should be about double, and that should roughly hold through, you know, until we lap ourselves on that metric. I don't think, though, it's 250. I think double would be more like 200. Yeah, 220, something like that.

Okay, shooting for the stars over here. Got you. And maybe just one more to follow up on your commentary on the short-term trends you're seeing that sound, you know, rosier than some of your peers. realize you're shrinking, so show that's helpful on a relative basis. But then as you were talking about your summer network, it's a lot of Minneapolis and Texas surging traffic, and one of your peers recently noted they were seeing a more noticeable pressure in northeast and to some extent west coast demand. I know you're small in both those regions, and they're more destination markets versus origin markets, but anything you could add, maybe just regionally that might be explaining why – This sounds like a very different call than some of the ones we've listened to recently.

I get it. I think it's all capacity-based. The East Coast had a lot of capacity going in, particularly in the Northeast and New England areas. We serve Boston and Providence and a few others in the region, and they're doing quite well because those markets into Minneapolis don't have a lot of capacity, and those are some of our strongest markets. So I think if you're on the East Coast moving people north-south or trans-con, it's going to be a challenging summer. In the Midwest where we serve, it looks really good. Our Dallas market, you know, leisure markets are doing really well. There's not a lot. I mean, California is a little down from Minneapolis as I look across the network, underperforming our expectation, but I'd struggle to find, you know, really outlier weakness. This is Grant.

I would just add that we don't have anything speculative. Like everything we do, we have a pretty good sense of, and especially as we're shrinking, and the rigor that goes into this, we're on a trip-by-trip basis. We have a very good sense for where it's coming in. So I echoed. Jude's commentary that we feel really good about where things are going. And even as we look back to the first quarter, the February weakness can be highly attributed to sort of Caribbean growth out of Minneapolis specifically. And it's a highly profitable segment for us. We grew it. Others grew it. So there's a little bit of pressure there. The absolute returns were still consistent with the rest of our network. That'll get adjusted as we go forward. And then in March, there was a little bit of pricing pressure, but it was completely connected to what Jude said, just where the expectations of March in the booking curve were really strong. And as things changed, fares came down a little bit, but we still delivered really good results. And I don't want to say that international was all bad for us. We did grow in Milwaukee. So if you go and look what we did in Milwaukee, we had a pretty substantial international growth in Milwaukee this year. And that paid dividends. It certainly met expectations and gives us a nice little baseline off of which to grow in Wisconsin because we operate out of Madison, Green Bay, and Milwaukee, and we're really pleased with those results. So our call is a little different, and it's for good reason.

Well, another tailwind that's a little bit more nuanced in unit revenues is that we got some infrastructure boost here in Minneapolis with more gates. So you think about trying to pack flying in a peak period. If you're gate constrained, you have to smooth it out. And we have plenty of planes and plenty of gates. And so we're able to really pack peak periods with a lot of seats, even though we're block hour constrained because of cargo growth.

That's great. I really appreciate all that, caller gents. Thanks.

Thank you. Our next question is from Brandon Oglenski with Barclays. Please proceed.

Hey, good morning, Jude, and congrats, Bill. I guess, Jude, you talked about pilot productivity or, like, having some downtime built into the schedule, I think, as you ramp up the cargo side. We did see good charter growth this quarter. Was that more of a contracted basis or more, you know, ad hoc business that you came across?

I guess, how do you look to manage that? Well, we're seeing an expansion in the production of our charter business. So unit revenues are increasing in charters, and that's because of the contract mix. Yeah, I mean, we have more availability close in to be able to take opportunities as they come up. In years past, we kind of scheduled the airline for the tightness, and then we didn't have, you know, close-in availability, and we had to forego a lot of those opportunities. I'd say generally the cargo market is – is actually under a little bit of pressure because there's a lot of folks coming into it. And we got some tailwind from bankruptcies through COVID like IARO I'd call out. So, you know, as we sit here today, I'm confident that we're going to outperform just because we have contracted charter revenue that is going to happen. And then we have close in demand so we can be really flexible. This is something we're really good at. Grant runs our Charter business, any other commentary?

Yeah, the team's done a really good job. So I think in the quarter, it was sort of ad hoc in nature where the year-over-year strength came from. But it's really important to understand that there's been a concerted effort to sort of engage with our customers. So those relationships that we formed, the reliability that we offer to customers, when the NCAA needs to fulfill things and we have that availability, they look to us because they really trust the team. the capability I definitely give a shout out to our ops team because we expect we knew we were going to fly March really hard and and our crew staffing the folks who schedule our pilots plan our pilots I shout give them credit because they did an excellent job of facilitating March but the the team is in a really good place the relationships with our customers are in a really good place So, I completely agree. As we look forward, we will adjust to the business as the competitive environment says we should, but the relationships with our customers are strong, and the team's really innovative. Jude mentioned it, but our ability to integrate scheduled service with Charter service to come up with creative solutions. It is unparalleled in the business and it is muscle. We've been working on for years and we're really good at it. And so it almost harkens back to a previous question about his carriers talk about, hey, sculpting. Off-peak is not as good as peak, and we'll do that. It's one thing to talk about that. It's another to deliver upon it and to build that muscle and the capability to execute upon moving schedules, levels of ops that move around. It's easier said than done, and I think it's just a testament to the team here at Sun Country that we're able to do it. First quarter charter shows it. but we're not done there's a lot of innovation that we're going to continue to bring on and from a charter perspective there's some business development that's in the works too so we're excited about taking the brand out people like us they know us they respect us so it's it's we're starting to have discussions with folks and i'd say the team's in a really good place and poised for success i appreciate the thorough response and judah just clarification i think

Did you mention doubling cargo revenue by the third quarter, or should we be thinking about that into next year?

September.

So it will lap that metric in the fourth quarter. Okay, got it. And then real quick, I know you mentioned the buyback, but I don't know if we elaborated on it here in Q&A. I mean, $25 million, I guess not that sizable, but maybe more signaling from the board, or can you maybe expand on that?

We're just going to take it opportunistically and see what's out there. And, you know, our stock got hit pretty hard recently, and we don't want to be just sitting on the sideline if that were to happen again.

Okay. Appreciate it. Thank you.

Thanks.

Thank you. Our next question comes from James Kirby with JP Morgan. Please proceed.

Hey, good morning, guys. You know, there's been low-cost carriers in the market that are making significant changes to their product offerings, as well as, you know, the off-peak, peak flying. Have you seen any share shift, or are you seeing any start of a share shift or change in buyer behavior from this?

I think that's a really interesting question. We spend a lot of time thinking about it. We did the cabins that we, and the product revision in 2018. Cabins last about seven years, eight years. We're not planning anything now, but I think we have a great product. We do a nice job, in my view, of kind of saying these are things that are affordable to give away for free and have high value to the consumer. Other things we can't get a return on, we don't give away. There's been a lot of talk about the premium for premium. We have a premium economy product that is as a percentage of our cabin, higher than any other airline and leisure in the U.S. So I think we're well positioned in that regard. We have a really strong brand presence in the Twin Cities, which is really valuable. But the premium versus, you know, of our premium economy versus basic economy essentially hasn't expanded enough to justify, you know, adding more of those seats. I mean, we're still running high 80s load factor during peak periods. So I think we have the right product now. We spend a lot of time talking about onboard connectivity. I think probably at some point in the future we're going to need to do that. But we've got a nice solution right now with the captive Wi-Fi offering. So I think we've got the right product for the leisure customer here in the Twin Cities, really high-quality seats so you can sit in them for their relatively long stage lengths. So we don't have anything impending changes, but we're studying it quite a lot actually.

Guy, that's helpful. I appreciate the color. And then for my second question, you know, I know generally asking about M&A is a moot point, but maybe coming from a different angle, is there any guidelines that you wouldn't breach in terms of M&A, in terms of leverage, liquidity, or maybe that's not even M&A dependent, but maybe just remind us of kind of your ceilings on leverage or liquidity.

Well, more on the M&A side, we have to be able to protect what makes us special, which is the ability to peak up and down and combine these segments into a single operation. A lot of that could be impinged if the work rules in the future of a JCBA change that, you know, so that's something we're very conscious of. Yeah, I mean, on the liquidity side, I'll let Bill comment in a second. We're more than comfortable where we are. Keep in mind, you know, so much of our revenue is contracted that liquidity isn't as sensitive here at Sun Country as it is across the industry. The goal is always to think about, you know, the part of the scheduled service that we always have and have for 40 years, always shows up these very peak days, combined with contracted flying, both in cargo and in charter, if we can get that to contribute to cover our fixed cost, then that's the perfect airline model, in my view. We can fly when we want and don't have to fly when we can't, and it just You know, so I'm very comfortable where we are on the liquidity front. I think we have the headroom in assets. We have about half a billion dollars of appreciated asset value in excess of our debt levels. So we have lots of headroom on the balance sheet to raise capital if there's an opportunity. And so, you know, we're just going to be responsive to what we see.

I mean, I'll just add to that. I mean, right now our liquidity or liquidity as a percentage of annual revenues sits a little north of 20%. You know, we probably can operate, you know, lower, lower than that. And we have in the past pretty safely given the sort of the, the, the mix of business that we have and, and the fact that only 60% of our, of our revenues, you know, 60, 65% of our revenues is traditional passenger revenue. It's a lot more sort of under contract that sort of comes in very much, very methodically. So we're, like as Jude says, we're really comfortable in our current liquidity position and, you know, in good shape.

Got it. I appreciate the commentary. Thanks for the time.

Thanks. Thank you. And as a reminder, if you do have a question, simply press star 1-1 to get in the queue. Our next question comes from Ryan Capozzi with Wolf Research. Please proceed.

Hey, good morning, guys. Maybe just more of a high-level question here, but, you know, 1Q margins were roughly flat year over year, and your 2Q margin guidance is also flat year over year at the midpoint. Do you see a path to margin expansion in the back half of the year here as your mix starts to shift quite a bit?

Absolutely. Yeah, no doubt about it. So obviously it's dependent on where the demand environment goes, and I think there's a lot of questions around that. But yeah, this is just about us absorbing the opportunity in cargo and then being able to bring our utilization at least back to what it was the prior year. So utilization's down about 10% on the passenger fleet, and we'd like to grow that back to where it was and That's very accretive flying, and it doesn't require us to add new markets or off-peak stuff. So, yeah, I mean, I think we should have some tailwind on margins as we move into the back of the year, on a year-over-year basis.

Got it. That's helpful there. And then maybe just back to the scheduled service business, and I know you touched on this earlier, but how should we think about the load factor and yield dynamic in an environment of less scheduled service capacity going forward?

I think, you know, we schedule, we want to run high load factors, and we're able to do that predominantly because of the way we schedule. So if you think about our TRASM premium to, Sphere and Frontier, for example, it comes in for a couple different reasons. We have a better product. That's because we fly longer stage length and we invest a little bit more in it. We fly only when there's demand. So we lower utilization, positively affects unit revenues. And then we have brand presence. So they have a strategy of being thin everywhere, and we have a strategy of being strong where it matters. And, you know, our strategy is proving to be better. So, you know, I think our outperformance will widen and we'll continue to focus on high load factor, stimulative fares, but we're not going to have anything in the schedule that doesn't cover its variable cost at a minimum. So, you know, if you think about fare volatility going forward, if demand falls, We're going to try to maintain our margins by cutting our weakest flights. So absolute profitability may suffer, but, you know, we'll deliver the margins that you expect. Contrast is true as well. If we see a rally in fares, unlikely perhaps, but if it happens, then we have a lot of capacity that we can add into the shoulder periods.

Helpful. Thanks for the time here, guys. Thanks.

Thank you. Our next question comes from the line of Chris Tataropoulos with Susquehanna International. Please proceed.

Good morning. Could you remind us of the timing of the rate increases as they relate to the deliveries of the remaining aircraft for Amazon, and then also the economics with the contract. Apologies, I think I ask this question on every call, but given all the concerns here on tariffs and tangible goods and things like that, just want to better understand how utilization is reflected here in these contracts. So, I know that... I'll take it in the life of... Yeah, volume and... The life of... Right, yeah.

Okay. Yeah, so just to touch on the structure of the contract. There's a fixed component and a variable component. Generally speaking, the variable component covers our cost. The margin for the program is in the fixed component. So lower utilization drives higher margins for cargo for some country. So I'm not at all concerned about it. And look, I mean, this is a long-dated contract. This will be here contributing for us for a really, really long time. So no concerns there with utilization in the fleet. In fact, we'd prefer, particularly during peak periods, to have lower utilization because we could deliver more on time and deploy those pilots to more productive flying. On the rate increases, I'll turn it over to Bill if you have some timing on that.

Actually, I'd have to look that up, to be brutally honest. There is one more general rate increase, which is dependent on the timing of certain aircraft, which I don't have off the top of my head. And then we have our standard increases, which is between 3% and 5% a year occurs in December of every year.

We're mostly baked. When we signed the deal and started this progress, it's mostly there. There's one more rate increase that's going into effect based on growth that's going to happen probably in the third quarter, I guess. Yeah.

Okay, as a follow-up, I don't think you mentioned in your prepared remarks anything on the CMI leases. I think there's four or five aircraft. If you could just remind us of the timing of those.

Yeah, so those are standard operating leases. I think that's what you're talking about. We have, yeah, so we have five. We have had five 900s out on lease and two 800s. We took back one of those, and those are roll-off lease. mostly towards the end of this year and a few into next year. And then the induction timing is taking quite a long time these days with availability of parts and engineering support from the OEM. So, you know, we'll introduce at least one 900 we expect in the third quarter. And then the passenger fleet growth will kind of be dependent on, you know, how quickly we can staff up. But there's no constraint on going out and buying used airplanes in this relatively tight market. We have them already, as you point out, coming off lease with deals we've done the last couple of years. But I think it's important, as you've modeled the airline, this is important because they generate pretty good returns on lease, and we take them back. And relative to an airline that's buying in the open market and inducting it, that airplane doesn't go into WIP. I mean, so we're still experiencing DNA costs associated with airplanes that we put into storage awaiting induction. So there'll be some transition friction as we move the airplanes from their lessee onto our certificate.

Got it. Okay. Thank you.

Thanks.

Thank you. And our last question comes from Michael Lindenberg with Deutsche Bank. Please proceed.

Oh yeah, hey, hey, thanks for the follow up. You know, Jude, you you made a comment that intrigued me about, you know, getting additional gates in Minneapolis and the question is, are these newly built gates and how many? Or were these gates that were maybe vacated by a competitor or competitors? Thanks for taking my question.

Hey Mike, little bit of both. We got two new gates built and then we're absorbing more of the availability because of the drawback and competitors in the I want to remind everybody we have our own terminal, and it's just a great setup here and a strategic advantage. I love it as a traveler and as a CEO. And we added two gates to our facility that are new, and then we'll continue to absorb gates from competitors that we push out of our market.

How many gates totaled are you currently operating out of the Hubert Humphrey Terminal?

We have the ability to peak up to 10, and those are, you know, some of those are common use that we kind of push people around on in and out of. They've added two, and they have plans to add that we got, and then they have plans to add more than that. And then I don't have the number off the top of my head, but in the next couple of years, and we're trying to continue to absorb that because we need it.

Just one more. I apologize. Are the per-employment costs at your terminal lower than the main terminal, or if they're the same? I know that Minneapolis actually has some of the lowest employment costs of any terminal in the country.

Yeah, it's a better deal.

It's a better deal.

But these capital projects, you know, we're not immune from them. They are pushing north. Okay. Thank you. Thanks, Mike.

Thank you, and this concludes our Q&A session for today. I will turn it back to Mr. Bricker for final comments.

Hey, guys, thanks for joining us today. We're really excited about where we are, and thanks for your interest in the company. Have a great day.

Thank you, and with that, we thank you all for participating, and you may now disconnect.