Q1 2021 Sun Country Airlines Holdings Inc Earnings Call
Okay.
Welcome to the Sun Country Airlines first quarter 2021 earnings call. My name is Vanessa and I will be your operator for today's call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session. During the question and answer session. If you have a question. Please press star.
And then one on your Touchtone phone. Please note that this conference is being recorded I will now turn the call over to Mr. Chris Allen Director of Investor Relations. Mr. Allen you may begin.
Thank you and good morning, everyone. We issued our first quarter earnings press release last night on the Investor Relations portion of our website at IR Dot Sun country Dot Com. Our first quarter 10-Q is also expected to be filed Tonight. After the close on the call with me I'm joined today by Jude Bricker, Our Chief Executive Officer, Dave Davis, President and Chief Financial Officer, and a host of others help answer questions before.
We began I would like to remind everyone that during this call. The company may make certain statements that constitute forward looking statements on our remarks. Today may include forward looking statements, which are based upon management's current beliefs expectations and assumptions that are subject to risks and uncertainties. Actual results may differ materially. We encourage you to review the risk factors on the cautionary statements outlined in our earnings release and our most recent.
SEC filings, we assume no obligation to update any forward looking statements with that said I would now like to turn the call over to Jared.
Environment I'm encouraged by recent improvements that we're seeing in forward bookings demand really picked up around mid February and that momentum continues today.
So first for our schedule a service business here a few data points to give me confidence in a continued recovery.
As of today, our summer schedule is sold to a higher load factor as compared to the same time in 2019.
Also we all know fares have been depressed throughout the print pandemic. However, beginning in mid March are sold fares for summer travel have been in line with the same period in 2019, while ancillary unit revenues continue to trend well ahead.
Our summer network is much more focused on VFR traffic thing is our winter schedule, which tends to focus on vacationers for the first time in the pandemic, we're starting to see VFR traffic. Returning I think this is the progression of the recovery, which begin with vacationers primarily to domestic sunbelt destinations.
Willingness to visit friends and relatives demonstrates increased.
Comfort with the COVID-19 situation.
Or no share rates have returned to pre COVID-19 levels again, demonstrating a traveler confidence.
In March and April our credit card sign ups and credit card spend exceeded pre COVID-19 comps. This indicates consumer desire for future air travel with us.
Finally, we're seeing substantial booking demand for far future itineraries during the pandemic, we experienced extremely compressed booking curves understandably.
Recently, however, we've been taking substantial bookings throughout our selling schedule, including into the first quarter of 2022.
Based on these inputs. We're planning a continued recovery is scheduled service through the end of the year.
Really our charter business continues to improve we focus on three broad charter areas, starting with our track programs, which consists of three dedicated aircraft two of our aircraft in track programs are up and running with the third scheduled to restart in the third quarter Nexstar sports programs, which have recently produced free.
COVID-19 volume is March Madness has returned in our major League soccer program picked up in April.
And finally, our military flying which is yet to recover however, military tends to peak during summer months.
Lastly are cargo business continues to perform well first quarter of 2021 March the first quarter, where we flew a full cargo schedule with all 12 committed aircraft. The program only begin in May of last year, and it's a testament to our operations professionals that we're able to stand up that program. So rapidly in the middle of a pandemic.
We.
We expect stable volumes from our cargo business going forward.
$2 $6 million, a decrease of $52 7 million or 29% compared to Q1 of 2020 and 35% compared to Q1 of <unk> 19.
The decrease was driven largely by a 52% dropped to $54 6 million in scheduled service revenue versus Q1, 'twenty, resulting from the ongoing impact from the COVID-19 pandemic, particularly in January and February the.
The company saw improving demand during the quarter as the number of vaccinations in the country increased and normal seasonal leisure demand patterns began to return.
Average fare on the first quarter of 2021 declined 30% to 98, 7% to $98 77.
Versus $140 34 in the same period last year.
Despite the decline in base fare ancillary revenue per passenger was essentially flat.
Going from $43 <unk> in the first quarter of 2020 to $42 98 in the first quarter of 2021.
Increased 20% versus last year due to a WTC financing we undertook in 2020 and the purchase of five aircraft in Q1 that were previously on lease.
These purchases allowed us to further reduce our aircraft ownership costs and were financed using and delayed drive term loan facility. We also purchased the sixth aircraft off Leafs in the second quarter using the same financing facility.
For all six aircraft the total amount financed using this new facility was $85 million.
Is Jude mentioned, we successfully completed our IPO during Q1, which resulted in net proceeds of 224 $7 million and the issuance of more than $10 for a million shares of common stock.
With some of these proceeds we were paid the $45 million cares Act loan from the U S. Treasury that we originally took out in October of 20.
The company ended the first quarter with liquidity of $295 million, which consisted of 269 $6 million, an existing cash and cash equivalents and a 25 million dollar undrawn revolver.
On April 29th we received the first installment of $17.3 million from the third PSP Grant program.
Our total liquidity at the end of April was $325 million, consisting of $300 million in cash and 25 million in on Undrawn revolver.
We expect to receive the remainder of the third PSP grant on which we think will be around $17 million in may.
Are strong balance sheet will allow us to fund our fleet growth plans were actively in the market for 737, ngf's that fit our cost parameters, we've seen a lot of aircraft coming available in recent months at attractive terms.
As a reminder, sun country has no committed aircraft order book and we're able to fund our growth with low cost aircrafts purchased opportunistically in the used market.
Turning now to our outlook, we saw a strong improvement in demand as we move through the first quarter and our base case assumption is that demand will return to pre COVID-19 levels steadily throughout 2021.
Due to the seasonal nature of our business. The first quarter is typically the strongest of the year under normal conditions are average fairs and asm's are typically lower in the second quarter than the first quarter and chasm is typically higher in the second quarter than the first quarter.
Plans for that to happen in the near future.
We continue to produce I think great results for them and hopefully that results in some growth.
Opportunities for us in the future, but we don't have anything.
Debt, we can commit to I think one of the challenges in interpreting the results, which we have yet to demonstrate is the synergies between that business and our <unk> business.
So on country has always had a seasonal business and when we entered the contract before COVID-19. It happened the real value of that contract was to D season lies.
Our business so that we can be even more responsive to peak season.
Demand in times like March and some on the holidays and <unk>.
Excited to be able to demonstrate those results as we move forward. So.
As you look at it on a segment basis, I think that understates the value.
On the cargo business as we look to grow out of the pandemic.
Got you. Thank you and then to that point Jude on the on the seasonality. This has always been a very <unk> heavy.
EBIT margin business for some country you mentioned in the prepared remarks, too but is there going to be our goal over the next few years to get a little more balance on a quarter to quarter basis or.
Are you.
Pretty much I mean next quarter always yeah go ahead yeah.
Yes, I mean, there's not really a stated goal I think as we brought down our unit costs more of summer should be good for us I mean, what we will do a really nice business between Memorial day Labor day.
And Thats, just because the cost structure of the business relative to 18 17 and earlier.
<unk> substantially different today, so we will be able to stimulate a lot of demand during that period and then we've also found a lot of success in non Minneapolis network opportunities.
They tend to concentrate around the summer period, So our Hawaii network is doing quite well, our Mexican Caribbean source markets.
Destination markets out of source markets in the south in the summertime are doing really well.
So yes, I think I think the business will D seasonal lines, but theres nothing we can do to get people to travel in September or just be flying boxes.
Yeah.
That's actually a good lead on my last question is.
How are you going to sell it.
Where you don't have a strong point of sale presence you mentioned San Antonio for example is there a way to compete there and any other way other than price and just getting for spill traffic.
No its price.
I think over time, we'll build a brand in the market like what we've done here.
But people get on the airplane for price first and Thats and Thats why were participants in the GDS distribution platforms.
Meta will be really important to us for people to find our airfares.
And in many of these cases.
<unk>.
We shouldn't understate the value of having a peak schedule. So price is important but averages are deceiving because we can have on a higher average fare.
Then most of the competitors in the market that would be low cost carriers.
Competing with them on price, but only during the peak times.
Mhm mhm.
Okay, great. Okay. Thanks again.
On time.
And we have our next question from Catherine O'brien with Goldman Sachs. Please go ahead.
Hey, good morning, everyone. Congrats on a.
On my first call as a public company.
Thanks Anders.
Hey.
You spoke to how attractive the used aircraft market is right now we heard some pretty interesting numbers from one of your competitors just a couple of days ago.
Should we be expecting to see you guys beat pretty active acquiring aircraft this year.
We're still in the throes of COVID-19, but the things looking a little better do you guys have the dry powder on your balance sheet are or if not would you consider raising capitals.
Yes. So this is Dave.
I think the trends that you are hearing about in the used market for 737 eight hundreds are very similar to what we're seeing.
And we have already signed up three incremental growth aircraft in the first quarter and we are actively in the market for additional aircraft. I mean, we have a we have a growth plan built out into the future and it's likely that we may accelerate some of those aircraft back.
Acquisitions into this year, just given sort of what we're seeing in the market.
That's one of the advantages.
<unk>.
That we gained through the IPO was you can look at our balance sheet, we've got a really healthy liquidity position. So we got the powder to grow.
That's not to say that we're just going to simply use cash off the balance sheet to do that I think financing is available to us at pretty attractive terms as well. So we'll look at the most economic way to finance the aircraft, but we're very active in in the used market.
Great and then maybe just like a quick shorter term question.
Some of your ultra low cost peers like for it from so far are planning on adding back.
For capacity in the second quarter I think one just north from the other ones just south of flat versus 2019.
Are you seeing something on the demand environment is driving you are relatively more conservative capacity plans or is that some sort of structural constraint would love just to hear some color. Thanks.
We're getting higher fares on them for that reason.
Yeah.
Look I mean, the point is just that if you get a bunch of pilot sitting on their hands than you probably want to add some flying because it's you're chasing cash.
All of our pilots are fully employed right now because of our cargo business. So our block hour production is well above what it was on pre COVID-19 levels.
We have the metal to grow into a recovery when it's worthwhile.
But in order to add substantially back the same scheduled service volumes as what we had we're going to need to hire more crews and so it's just different dynamics here for the add backs to happen.
Got it so maybe it would be fair to say.
Just since Youre pilots already busy that allows you and generating revenue on those.
And as on flight allows you to perhaps be a little more focused on yield management versus versus load into the summer.
Absolutely, yes, that's accurate.
Alright, great. Thank you so much for your time everyone.
And we have our next question from Mike Lindenberg with Deutsche Bank. Please go ahead Sir.
Yeah, Hey, good morning.
Hey, Mike and Mike.
To echo everybody else congrats.
Hey on on the ancillary.
That's held up well in fact, you indicated that it was sort of trending better than previously how much of that is debt you just have a more robust ancillary product.
Or is some of that just additional uptake in.
Sort of what it was previously.
Are there better uptake more robust program and when we think about you know the innings on on ancillary I know that you guys did have sort of a later start than a lot of other ulc's vlccs.
What inning are we in on on ancillary and sort of rolling out the various elements.
Okay.
They were kind of in the seventh inning stretch right now, we really kicked off our ancillary growth with that migration over to the NAV at their platform, which happened in the summer 2019.
And most of the momentum that we picked up immediately thereafter was in seat assignment and bag revenue and that continues to grow though at a much slower pace.
On those product offerings will expand through machine learning and <unk>.
Best practices with merchandising on the website.
However.
Our recent growth is more focused on launching new products.
Like our insurance product and getting our third party sales, which are car rentals and hotels back too.
What we have had in 2017 for example.
And so.
And those are really value add initiatives because.
They have very little impact on the airfare, if I raise bag fees, there is going to be a negative impact on.
On a fair so.
I'm, just really bullish on ancillary and there is we have some headroom left to go.
I don't know for $5 that we're going to get over the next I don't know.
Year or two.
But it's going to be largely focused on non bag and see.
Sure.
Unit revenue expansions.
Great Great and then just question for Dave.
We've seen some of the more profit carriers that have had good profitability in the past under the cares act to be able to utilize the benefit of the Nols and go back for five years now I know that there was a tax sharing agreement here with your.
Primary shareholder do you get should we anticipate that you do get some cash tax refunds in subsequent quarters from here.
Is that is that out there as we think about liquidity.
Can you just shed some light on that if theres anything thanks.
Yes, I think it's pretty typical with private equity ownership like us we have.
Tax receivable agreement with our owner.
I think you pointed it out given.
Given restrictions in the cares Act, we really don't pay out anything under the TRA.
While the cares act restrictions are in place those go through March 23, right now.
Okay.
Yeah, Yeah. So.
Essentially during that period, we're going to get the benefit of our Nols post that period.
You should think of us for the most part is kind of a full cash taxpayer as the benefit of the NOL will accrue too.
Due to the owners.
Okay fair enough. Thanks, Dave Thanks, everyone.
Thanks, Mike.
We have our next question from Brandon <unk> with Barclays.
Hey, good morning, and congrats guys on your first quarter as a public company.
Jude I Wonder I'm wondering if you could just give us some clarification here you did say.
For some reschedule salt to a higher load factor, but I'm, assuming you're relating that to the same period in time and the booking curve in 2019 and I think you also said fares are also came in higher but is that also in relation to the same time on the booking curve.
Yes, so for <unk>.
As we if we were to compare today versus the same period in 2019 and looking at summer bookings, which for US are between Memorial day on Labor day, our load factors for that period now are about in little bit higher than what they were in 2019.
But there is less capacity.
Fares for the last.
Roughly 45 days have been selling at the same level as they were selling in the same period of 2019, but we've been selling the summer schedule for much longer than that in the fares that we sold in advance of that period were lower.
So we've seen a recovery in fairs, we have seen a willingness of consumers to pay with <unk>, where we're paying a pre COVID-19 environment, but it just started about 45 days ago for the summer travel period.
And yes.
Color. There also is that sorry is that we're selling at a much higher ancillary level to date as well which is good.
Okay.
This question is coming from a novice, but I would assume that in this type of environment, where youre getting up on the booking curve youre actually able now to revenue manage and maybe that wasn't even possible 45 days ago.
Yeah.
Yes, I mean.
It's just such a dynamic environment.
We don't expect the kind of.
Close in fair premiums that we had achieved.
By going into March period.
So we expect a much flatter booking curve.
If I had to guess, but it really depends on kind of OA capacity does across the industry for the summer months.
Thus far carriers have been pretty controlled and restrained.
Summer looks really good but.
It's just been a really dynamic environment for the last few years. So I can't make any predictions about what closed on February is going to look like.
Okay I appreciate that.
And Dave This is kind of a specific question.
Question, but are you guys going to be providing any walk our disclosure on the cargo business.
Yes, so the Q will come out this afternoon, and there will be more of a breakdown about block hours by segment in that document.
Okay, great. So I guess more importantly, then do you view the.
Amazon contract is fully up and running now so at the profitability levels, you want to see or I guess, what could potentially drive profitability of that business.
Yes, I think you should probably think about it is fully up and running in the first quarter, we really got fully up and running at the end of last year.
Sure.
There is an opportunity for some profit growth going growth going forward, obviously, if we grow the fleet at some point there is an opportunity there, but there's also some some escalators built in in later years, but I think for the time being you should think about first quarter is kind of our number.
Okay. Appreciate it thanks guys.
I just wanted to clarify one other thing from the last comment Mike. So the cares Act grants the restrictions on exact comp go through March 23, the restrictions on dividends only go through September of 'twenty two.
And thank you I see that we have a follow up question from Hunter Keay with Wolfe Research. Please go ahead Sir.
Thanks, Ken.
So just I guess, a couple more sort of just like philosophical questions for you guys here.
When you when you contemplate buying a used plane.
Using cash versus debt.
Our finance lease wherever it might be.
One of the things that you factor in other than just obviously just the pure economics is there anything philosophically attached because they're a bias towards on using cash and you have to be convinced.
<unk>.
No.
Some other.
Nickel to use that like overusing cash, what's the default way to think about buying planes.
I guess up until the IPO on the default way, we're thinking about how can we enhance the aircraft. So we're in a bit of a new world.
I mean for us it's on legitimately just straight up the economics the economics are.
We're obviously going to be a little bit more bias towards towards cash and we have been in the past. So it's really attractive financing is available for <unk>.
<unk>, we were looking at really high LTV.
Financings that had an impact on the rate debt, we paid no we don't need to do that anymore and we can look at lower ltvs with better pricing. So that world is a little bit more open to us now, but I think youll see us move forward with some combination of.
Of our cash and financing.
It's just we're seeing.
Attractive financing out there and as long as Thats available, we're probably going to tap it right.
Right now we're seeing honestly.
The structure being dictated more by the seller managing their book values.
Then by whatever we prefer which we're happy to do.
Yes, I'm, saying that there is sort of like a.
Is there an aversion to debt.
Corporate philosophy.
Well last year was pretty big for US I mean, we took on 15 airplanes.
Greg sitting here next to me sweat and a little bit of my answer.
Yeah, I think we can do about one a month pretty pretty sustainably.
Okay, but I think the important message there is that.
We're going to find airplanes add values, where we can generate that returns and we think we should get and if we don't get those airplanes, we're not going to buy on and not going to growth at.
At the same rate and if we do we'll go with more rapidly. So the market prices of aircraft for would be an input into our growth profile.
I think we have a pretty well structured growth plan all for the next three years here, which is driven by in network plan on knowledge of where we want to grow this business. So it's not we're not just.
Adding aircraft just for the sake of growth is Jude pointed out we need to kind of returns that we need in order to.
In order to add aircraft when I was talking about growing more quickly before it sort of pulling some of their forward just given the.
Pretty unprecedented market for Tuesday aircraft right now, yes, we wanted the problem. The industry has is like an airplane isn't always the same amount of production.
If we get the right value. We can do the same amount of flying with more aircraft generating higher unit revenues because of our peak strategy.
Okay.
Can I ask another question are there more people on queue.
Elaine into it I think.
Scenario for philosophy.
No that's that's cool.
I'm not trying to fill time I legitimately. This is a good use of time, but.
It helps us understand charter all of it it's kind of a it's an industry that.
I understand with charter is but I don't really know a lot about how it works in terms of.
Buying in the used market.
We've tried to build sort of a holistic business model.
Yes, okay, well thanks for all the time everybody appreciate it Sir.
Sure.
Thank you we now have a follow up from Brandon <unk> with Barclays.
Hey, guys I figured we could ask one too.
But I did want to.
Touch on growing outside of Minneapolis.
Does that create any difficulties going forward because I think MSP is your only base right.
That's right.
Yes.
Operationally, we look at it as a strength.
I think as we mature as an airline on say four to five years from now we may need to revisit this.
But the flexibility of being able to fly on Hawaiian network and only doing in between Memorial day, and labor day without having to move crews around on a permanent basis is really valuable or Dallas network to the Mexican Caribbean markets is substantial but it's really concentrated again memorial day to labor day.
And and.
And we.
Are effectively able to do it a year out of Minneapolis.
There's a little bit more cost because we position crews.
But then we don't have to burden the operation in those markets with the shutdown in September so I view it.
Again.
The next.
Three to four years, we may need to revisit this but right now it's working really well that we can be really efficient from seasonal markets.
We also have the advantage of having a winter peaks so that we're deploying capital.
We're deploying assets when it's.
In most demand in other markets.
So.
This is really powerful right now.
Those growth opportunities are just working really well.
But I would assume.
Minneapolis opportunity is probably up a little bit of our hurdle given your brand power and the market is that challenging outside of many.
Yes.
In the upper Midwest, our brand is pretty strong I mean, I think we've seen we've seen ads in Madison and other places that have been.
Yeah.
Here's honestly, how we're thinking about on the share buybacks aren't in my radar screen right now I mean, what we're focused on.
On on growing the airline and we're restricted anyway for another year and a half or so.
So we're going to manage the balance sheet prudently, but at this point, we think we've got opportunity in front of us the.
The business model is working so that's that's our focus.
Got it and then maybe one on costs from to mind, when we talked about pilot it's already been fully employed.
<unk>.
Across the industry, we're seeing a lot of other carriers who have.
On costs.
Costs stepping up in the first half for the fear around getting pilot.
Pilots that were furloughed or or on leave retrained the summer peak, putting aircraft back into the shop, that's been in storage.
How do we think on that for you for you guys. I know, obviously, you were able to fly a bit more than the industry throughout just given your cargo from the charter opportunities.
Should we see.
Any pressure on those line items or have you really been fully like that already happened a couple of quarters ago.
Yes, I mean, one of the things to think about for for Sun country is.
We were actually bigger in the fourth quarter of.
'twenty than we were at the beginning of 'twenty because of the Amazon business. So we didn't go through furloughs.
Thanks.
And thank you ladies and gentlemen. This concludes today's conference. Thank you for participating you may now disconnect.
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