Q2 2021 Sun Country Airlines Holdings Inc Earnings Call
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Welcome to the Sun.
Airlines second quarter, 2 and it's only 1 earnings call. My name is Brian and I'll be your operator for today's call.
At this time all participant lines 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 will need to press star 1 on your telephone.
And please be advised and today's call's being recorded.
And you would require any further assistance. Please press star zero and I will now turn the call over to Chris Allen Director of Investor Relations. Mr. Allen you may begin.
Thank you I am joined today by Jude Bricker, our Chief Executive Officer, Sir David Davis, President and Chief.
Country and thoughts there and it sounds like group of others and help answer the question.
Before we begin I would like to remind everyone that during this call and that's something you may make certain statements that constitute forward looking statements. Our remarks. Today may include forward looking statements, which are based upon management's current beliefs expectations and assumptions and are subject to risks and uncertainties. Actual results may differ materially. We encourage you to review the risk factors and cautionary statements.
Final line and our earnings release, and most recent SEC filings, we assume no obligation to update any forward looking statement you can find our second quarter earnings press release as well as our 10-Q on the Investor Relations portion of our website at IR Dot Sun country Dot com with that I would like to now turn the call over to Julia Thanks, Chris Good morning, everybody.
Welcome to Sun country second.
<unk> quarter earnings call.
Our multi segment business model is unique and the airline industry due to the predictability of our cargo and charter businesses, we were able to deliver the most flexible scheduled service capacity and the industry. The combination of our schedule flexibility and low fixed cost model allow us to respond to both predictability.
The leisure demand fluctuations.
<unk> and its industry shocks, we believe due to our structural advantages, we will be able to reliably deliver strong profitability throughout all cycles.
And as demonstrated in the second quarter and we're clearly pleased with our results we are experiencing.
Copy recovery and demand of our scheduled service and June 2021, our scheduled service <unk> exceeded our comp for June and 2019 and advanced bookings throughout our selling schedule continue to pace ahead of their pre pandemic comps on surprisingly demand is particularly strong and domestic leisure, which.
And the rest most of our network.
Additionally, we are seeing fall charter demand and near pre pandemic levels with a return of fall NCAA football and of course, our cargo business continues to perform well.
Currently we're focused on 2 corporate priorities first is delivering quality operational results while building the airline back pre pandemic.
Pandemic utilization levels is a big lift for US is July 2021 departures were already exceed our July 2019 departures by nearly 16%.
Currently we're hiring across all major labor groups to meet our operational growth needs and thus far we've been successful delivering over 99.
Representing percent controllable completion factor and meeting our goals for on time and baggage metrics.
And I'm, so proud of the talent and hard work demonstrated every day by our frontline employees and our operational leadership.
Second is making some strategic investments afforded to us by our balance sheet strength and historically cheap.
9 prices across commercial aviation, mostly that means fleet growth and at appropriate prices, we are willing to spend on future fleet needs. Even if that means running a small short term surplus thus far we committed to 3 growth aircraft and we previously reported by <unk> and late stage negotiations on several larger aircraft deals.
Aside from fleet opportunities, we've found compelling investment.
And engines with a commitment on 5 engines and infrastructure as we recently closed on the purchase of our own flight simulator.
And with that I'll turn it over to Dave who will discuss our financial results and outlook in greater detail.
Asset Thanks, Jude on a review of our second quarter financial results in more detail and provide an update on our balance sheet and liquidity position before moving into Q&A.
For the 3 months ended June 32021, total operating revenue was $149.2 million a decrease of 12% versus the second quarter of 2000.
And 19, and a dramatic improvement versus the trough of the pandemic and the second quarter of last year.
This 12% decline and compares to a 35% decline in Q1 'twenty 1 revenue versus Q1.19 revenue demonstrating the strong steady sequential improvement that we're seeing.
Q2 revenue was also.
Significantly higher than our total revenue expectations that we described in early May and this increase was predominantly and unit revenue as our capacity was largely in line with our expectations.
For the quarter, our total revenue per ASM, or <unk>, which excludes cargo revenue, while including our charter revenue was.
<unk>, 9% versus Q2 of <unk> 19.
While our total ASM declined 19% versus the same period.
Our ancillary revenue per passenger continues to be strong at $41.66.
Our 26% higher than Q2 of <unk> 19, and our average fare was $95.
<unk>.
Or 11, 2% lower than Q2 of <unk> 19.
While this is still down versus 2019, it demonstrates strong continued improvement isn't even and our seasonally weaker second quarter.
For example, scheduled revenue per passenger declined 22% sequentially.
80, when the second quarter and the first quarter of 2019, while it only declined 3%. This year in spite of 3.5% sequential growth and scheduled ASM.
Typically we would fly fewer ASM and Q2 than in Q1 and <unk>.
<unk> for June was down only 4.9% versus.
And as June of 2019.
Charter service revenue was $29 million for the quarter, which was approximately 31% lower than the second quarter of 2019.
Charter block hours and in the quarter were down 24% versus 2019 and.
And charter revenue per block hour has only declined 8.
6% and that same period.
Charter revenues from AD hoc charter flying have recovered much faster and are only down 8% versus 2019, and we're expecting to add additional track charter flying later this year is that part of the business has taken a bit longer to recover.
<unk> revenue was $22.1 million and the second quarter consistent with our expectations.
We started this flying and Q2 of 2000 and it was fully ramped up in Q1 of 'twenty 1.
Total operating expenses for the quarter decreased by 38% compared to the same period on 2019.
If you.
Cargo special items and fuel from our results total operating expenses were about flat and Q2 of 'twenty, 1 versus Q2 of <unk> 19.
We're very pleased with this result, as total block hours and the quarter were 11% higher than Q2, 'twenty, 1 and then in Q2 of 2019.
Of note.
Salaries and wages and benefits were up 17% and maintenance expense was up 84% versus 2019.
The increase in salaries was driven by the 11% block hour increase and the in sourcing of our ground operations at Minneapolis.
Higher maintenance costs and Q2 'twenty 1 our.
<unk> to the larger passenger fleet and the addition of the cargo business, which didn't exist in 2019, and the timing of certain heavy maintenance events.
Aircraft rent expense dropped 36% last year, while depreciation expense increased 11% as we continue to prioritize owning our aircrafts versus utilizing.
Due to the operating leases.
Operating expense includes a net special items credit of $38.5 million, consisting primarily of $39.8 million from the cares Act payroll support program offset by certain 1 time items related to the purchase of an aircraft that was previously under.
Our operating lease at Sun country.
Excluding these special items, we still had a positive adjusted operating income of $11.5 million and adjusted EBITDA of $28.8 million and the quarter.
This will be the second consecutive quarter, where we have positive adjusted operating margins and we expect this trend to continue.
And you into the next quarter.
The second quarter is also the third consecutive quarter, where adjusted EBITDA margins have been north of 15% as we produced over 19% this quarter.
The company ended the second quarter with liquidity of $336 million, which consisted.
<unk> $310.7 million and existing cash and equivalents and a $25 million undrawn revolver.
During the quarter, we purchased our 6 aircraft off lease using the same delayed draw term loan facility as we did for the last 5 aircrafts.
For all 6 aircrafts the total amount financed using the.
This facility is $85 million.
We only have 6 aircrafts still under operating leases, while at the second quarter, while at the end of the second quarter of 2019 that number was 18.
Our net debt has declined for the third consecutive quarter as we grew cash balances from operations.
Total debt rose from $505 million to $519 million due to the addition of 2 finance leases to the balance sheet.
We are actively and the market for 737, and <unk> that fit our cost parameters and we have seen a lot of aircraft coming available on the market in recent months at attractive terms as a.
While we are Sun country has no committed aircraft book and we're able to fund our growth with low cost aircraft purchased opportunistically in the used market.
Let me turn now to the outlook, we still see strong improvement in demand through the summer.
Third quarter total revenue is expected to be between 170 and 170.
5 million, which compares favorably to the $171 million that we produced and the third quarter of 2019.
In addition to this we're expecting to achieve and operating income margin between 5.5% and 9.5%, which would represent our third consecutive quarter of positive operating income.
A reminder point of this range is also higher than the 6% operating margin that we produced and the third quarter of 2019.
It's also worth noting that we are expecting to produce this level of higher operating income while assuming an average all in fuel price of $2.30.
Versus the $2.7 that we saw last quarter.
The mid total Q3, ASM are expected to be 16% to 19% lower than they were in 2019 as we're still on the process of normalizing capacity for the current demand environment.
With that I will open it up to questions.
Thank you, ladies and gentlemen as.
Sorry to ask a question you may do so by pressing star 1 on against the forward.
And so a jewelry question price without <unk>.
And by the composites and airlines.
First question we.
We have Catherine O'brien from Goldman Sachs.
Hey, everyone and thanks, so much for your time.
Hey, Catherine.
So revenue came in quite a bit better and you're forecasting at the beginning of the quarter. We've heard from other carriers that demand picked up through the quarter, but can you give us some color on what turned it better for Sun.
Sir your line is that fair loads with us and standout regions. Thanks.
Sure so great.
Great way to witness here, so I'll turn it over to him and just second bolt on and give you my comments beginning in about mid February.
<unk> was where we saw really a dramatic move and demand to the better.
And that continued all the way through June.
As I mentioned and my prepared comments.
Exceeded June 2019 travelers.
Which is higher fares and a slightly lower load factor.
And the.
On the demand environment improves throughout the quarter.
On a per loan basis.
Relative to pre pandemic comps.
Across the network, we're seeing strength.
Some of that can be explained through.
Restarts of OA capacity in certain markets.
But generally the leisure markets continued to do well.
Other foreseeing big city connectivity to Minneapolis performed really well.
The only exceptions to broadly strong picture.
We believe can be explained through a delay and the infrastructure build out and some of the destination markets that we serve that are relatively small and that.
That means the travelers and unable to get a hotel room or a rental car or go out to dinner.
And so generally things are really good and that is continuing and the trends that we're seeing for bookings going forward.
Through October which is the time period that we have a meaningful booking profile.
Profile.
Grant.
That was a great answer Catherine the only thing I'd add to that is I think as.
As we saw through the quarter weighted the southeast, particularly Florida was really strong.
April and then as Jude mentioned and sort of the coast and the Mexican resort destinations really turned on and.
And just be better.
And the value of our business model and then we can move the capacity that quickly. So we were able to take advantage of it and as things slowed down and we got out of them and move into <unk>.
Thanks.
That's great and thanks for that color and then I guess.
Following up on some comments you made last.
June or it sounds like you've been busy.
Attracting attractive aircraft and the secondary market can you just help us think through what the upper bound of your acquisition targets might be just in terms of what you do.
And smoothly and over the next 12 months from an operational and and hiring standpoint, and I guess I think you might have mentioned something about this and are prepared.
Prepared remarks, but would you consider buying aircraft today, just given the current market backdrop, and then waiting too.
And could support them. Thanks, so much.
Yeah. So this is Dave.
I mean first of all there's a lot of aircraft on the market and we have gone through a lot of different.
Through bidding processes on a lot of aircraft to yield the aircraft that we have brought on which has 3 more so far this year and we have a strong bead on on many others, including some interesting multi aircraft deals.
We've said many times I think that our passenger fleet.
Fleet plan target is 50 aircrafts.
Sometime late in 2023.
On.
I think operationally, probably the Max pedal to the metal for us would be and aircraft a month I don't know if we get sustained net for 2 years, but it's on aircraft a month kind of thing at Max So I think operation.
<unk>, we can bring and the aircraft that we need to bring in to meet our fleet plan.
The answer to your second question is potentially yes in other words, if there were some really attractive deals out there, particularly multi aircraft opportunities are really economic aircraft opportunities, we probably wouldn't bring.
And those in even if we didn't have an immediate need for them 1 of the things we can always do though given the strength of our model.
We can bring and aircraft that we might not necessarily have a scheduled service need for and the particular month or quarter, even that we bring it in but we can throw it into our AD hoc charter pool and it is.
As long as we get the pilots to resource it.
We can use the aircraft's pick up some incremental charter revenue.
We've talked about keeping our ownership costs low, which we do.
So that helps us be able to sort of utilize these aircraft less than we otherwise would have periods, where we don't have scheduled service.
Opportunities for them 1.
1 other quick point on asset values is that most of the value of the planes that we're transacting on.
Are encompassed in the engines and Thats, an appreciating asset.
Along with OEM escalation.
Theres not a lot of cost with stockpiling.
That's.
Thank you so much.
Okay. Next question, we have Hunter Keay with.
On leases.
Good morning.
And on.
Hey.
So on Amazon if they were to theoretically come to USA, Please take Tim where airplanes.
And what would you feel the need to go out and find 10 more passenger aircrafts just to ensure that you stay balanced and maybe that immediately.
But would your ability to sort of accelerate passenger aircraft acquisition and to stay balanced or would you just kind of let yourself get a little over indexed to Amazon.
We would probably.
<unk>, let ourselves get.
Over index temporarily.
And the optimal ratio and between the 20%, 30% range and Thats based on minimum guarantees to our crews and so that we can.
Build on optimal scheduled service seasonal.
Airline.
So if theres an opportunity to expand with Amazon, we would probably take it on and wait and see what happens. Our current plan is that there isn't anything and the horizon and we're going to focus on building out.
Our scheduled service to pre pandemic levels.
Utilization levels on the fleet that we have.
And so.
I think.
It's good flying and if its an opportunity presents itself, we'll evaluate it but.
You know optimal is $75.25 for us roughly.
Okay. Thanks.
And then.
On the.
Your loyalty program what is your penetration of the.
Twin cities area relative to your local origin market share.
Yes, So let me define loyalty versus just.
Active customers that we interact with.
Through digital marketing, there's about $1 million for this 4 and 5 million people 90 minutes from the twin cities Airport.
We have 1 million households that we deal with which is pretty high penetration.
I'm not going to give you a numbers on our credit card program, which we would consider like.
The active loyalty members.
Other than that and it's growing really rapidly.
Keep in mind.
We inherited when we got here loyalty program that that we trash and rewrote.
So the loyalty program and Sun country.
Is it.
And secondly.
3 years old.
And so we're still kind of making some adjustments and tweaks and working to grow that program out and 1 of those years was a COVID-19 here exactly.
And so that.
I think the encouraging thing about our credit card program is that it's.
Banking and that.
Now that we're through Covid, we're seeing sign ups back to the pace that we had had in 2019 and.
And spend is back.
And we can talk more about it.
As we get a full year out of Covid and kind of see what the steady state of that product looks like.
Growth. Thanks, Kevin we've also.
And Im sorry, I would only add that during COVID-19, we've made sort of a strategic focus on making sure. We're building out the Minneapolis network. So our market share in Minneapolis, We're really happy with how thats developed over the last 12 months.
Great. Okay. Thank you.
Okay.
Thank you and next question, we have the line of Mike Lindenberg with Deutsche Bank.
Good morning, everyone.
2 questions here.
Hey, Dave as you think about your liquidity, which is actually quite high relative to your revenue base I realize we're still sort of in the midst of.
And the pandemic here.
But as you think longer term have you sort of thought about.
What is the appropriate level and the fact that unlike most other carriers you got about a third of your revenue that is under long term contract or longer term in nature, and so you may not need to carry as much cash.
As your competitors.
Where are you coming out on that.
That's a good question I mean, here's here's here's the dilemma with that given the way to model works and the fact that a big chunk of our business is.
And our long term contract.
Let's say heavily repeatable.
We can probably operate and we've demonstrated the ability to operate with a whole lot less capital than we have on the balance sheet right. Now. So there is no question about that.
We have surplus cash on the balance sheet today, what the optimal number is something probably lower than that now the 1 caveat that I would.
And sort of put in here is.
And we've talked about a pretty aggressive growth plan and that means hiring and means buying aircraft. It means going to airports. It means ground equipment and means everything sort of training infrastructure everything associated with that and we said at the time of the IPO that that's what we're going to use our capital for and that is what we're going to use.
Our capital for.
And.
I hesitate to throw out a precise number of.
And over the optimal optimal amount of capital if youre looking at a number of 20% to 30% of our total revenue.
That seems from my history, and the industry like a rough number and we got more than that now.
Okay. That's helpful.
And then just second question.
You look through your list here of 11 newer airports and I'm curious.
I'm going to focus and on <unk>.
Clinton Gordon Asheville.
And I'm curious about how much work you had done in advance before announcing those.
<unk>.
Or was that more of a reaction to a competitor flow.
<unk> for many to those markets and look.
Many of your home it is your bread and butter and I suspect that at the end of the day, you're going to do everything you can to defend that market. So.
Just curious on kind of market selection and kind.
And there were those markets that you had been planning for for some time or was that more of a reactionary move whatever you can any color on that would be great. Thanks.
The West Palm Beach, and reentry and then West, Florida, along the coast, we want to be there for.
Minnesota to go to every single.
The risk.
Destination across the West coast.
And your question Mike.
It's on our home market and we aim to be the choice carrier for everybody and the twin cities that haynes with their own money and distinct from delta's customers yet and.
We're gonna depend on this market aggressively okay.
Fair enough. Thanks.
Good day, ladies and gentlemen, again and.
And so you were asking a question. Please press star then the number 1 or your telephone keypad.
And that's our wants and ask the question.
Okay.
Single.
Okay next question, we have Chris <unk>.
And to Hana and Sir.
Hey, good morning, everyone and thanks for taking my question so.
And your prepared remarks, you mentioned about the resiliency of your margins through.
Given.
Your unique operating.
Model and business, so I realize that your businesses a lot different today than it was a few years ago.
Could you help us frame what margins might look like.
A few cycle with the current.
Business.
Through the site that you currently have.
I don't think we want to get into a lot of forward looking multi year margin guidance I think I think the point was is that sort of given the stability of our cargo business, giving given the high degree of repeated.
Liability of our charter business.
We can.
Work through cycles on the passenger scheduled service side and still maintain.
Above average levels of profitability for the industry I hesitate to give on exactly what those long term margins would be but I think we're very confident.
And at that they would be in excess of the margins that could be generated by carriers who rely on.
Almost exclusively on the scheduled passenger business.
Okay, Thank you and us.
Follow up just curious on your <unk>.
Your utilization levels with them and Amazon is more.
<unk> people return to office, and perhaps Theres less online orders per home curious if youre seeing any change in volumes and utilization there. Thank you.
No its very consistent and our expectation is that continues into the future.
What you saw on the second quarter should stay contained.
More.
Thanks, and good time.
Yes.
And there are no further questions to centers.
Alright, thanks, everyone.
Yes.
Thanks for your interest and southern country and have a good day everybody.
And with you.
And.
Ladies and gentlemen. This concludes today's conference call you may now disconnect.
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