Q3 2021 Sun Country Airlines Holdings Inc Earnings Call
Okay.
Okay.
Welcome to the Sun country Airlines third quarter. So what are your 'twenty one earnings call my.
My name is Mitra, I said and I will be your operator for today's call.
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I will now turn the call over to Chris Allen Director of Investor Relations. Mr. Allen you may begin.
Thank you I'm joined today by Jude Bricker, our Chief Executive Officer, Dave Davis, President and Chief Financial Officer, and a talented group of others to help answer questions before we begin I'd like to remind everyone that during this call. The company may make certain statements that constitute forward looking statements. Our remarks. Today may include forward looking statements, which are based on upon management's current beliefs expectations and assumptions are subject to risk.
And uncertainties actual results may differ materially we encourage you to review the risk factors and cautionary statements outlined in our earnings release and our most SEC filings.
We assume no obligation to update any forward looking statement you can find our third quarter earnings press release on the Investor Relations portion of our website at IR <unk> com with that said I would like to turn the call over an outage.
Thanks, Chris Good morning, everyone to review, our multi segment business model is unique in the airline industry due to the predictability of our charter and cargo businesses, we're able to deliver the most flexible scheduled service capacity in the industry.
The combination of our schedule flexibility and low fixed cost model allow us to respond to both predictable leisure demand fluctuations and exaggerates industry shocks. We believe we will do our structural advantages, we will be able to reliably deliver the industry's best profitability throughout all cycles.
Traditionally the third quarter is a relatively weak quarter for us However, I'm happy to report industry, leading EBIT down and operating margins of 21, 3% and 13, 2% respectively.
While the Delta very negatively impact our scheduled service revenue, our cargo and charter segments outperformed to the upside. In addition, our variable capacity model helped to minimize our exposure to the demand weakness in late August early September as we flew 41% of the court.
Orders scheduled service departures in July and just 22 in September.
This focus on flying more during peak demand helped to produce a 4% trasimene versus the third quarter 2019 in fact RASM improved in every month within the quarter in spite of the Delta Varian, we attribute this trend to careful allocation of our capacity and continued improving performance of our ancillary products fourth quarter.
Bookings are trending positively as well similar to the third quarter, we've loaded as scheduled focused primarily on peak periods. For example, currently in the fourth quarter, 85% of our ASM Saar on peak days up from 80% in the fourth quarter of 2019.
I Wonder just two common themes across our industry first operation performance.
<unk> operations are straining everywhere across the economy as we recover from the Covid crisis, So I'm, especially proud of our team's performance. We've maintained a scheduled controllable completion factor of 99, 9% throughout the quarter and in the trailing 12 months further our trailing 12 months of on time performance is above 84% with a mishandle bag.
Rate of less than two per 1000.
This is why we're growing system black hours, 15% versus the third quarter 2019, and we've added our fleet substantially increasing it by about 50% since Covid began in light of our growth rates, our operational performance is particularly impressive.
Second cost pressures, while we're certainly not immune to labor cost inflation, we still expect our fourth quarter 'twenty, one X fuel unit cost to be roughly in line with the 2019 comp. This is in spite of significantly lower utilization as we bring back utilization on our passenger fleet to 2019 levels and work through some of our legs.
These contracts will be able to continue our ex fuel CASM trend heading to below 6%.
Finally, I want to give a few thoughts on our charter business I haven't devoted much commentary to this segment of the past.
Our charter business is extremely valuable because it has pass through economics. It is counter seasonal to our leisure demand, it's a space, where we have significant advantages and namely we can be more responsive than any other carrier.
For example in the third quarter, we participated in the Afghan evacuation, while also delivering our VIP product on our Kona shuttle and we flew our usual seasonal NCAA football schedule facilitated by positioning aircrafts throughout the country owns get service.
Sure, we're better charters and anybody recently, we announced a new five year agreement to support major League soccer and their charter needs.
Generally we're now seeing charter volumes back to 2019 levels as we continue to find new charter opportunities I am confident that our charter segment will continue to grow proportional to our scaled business with that I'll turn it over to Dave.
Thanks, Jude I will now review, our third quarter financial results in more detail and provide an update on our fleet acquisitions before moving into Q&A.
<unk> hundred $73 7 million of revenue in the third quarter. This is the highest level since Q1 of 'twenty and is higher than the third quarter of 2019 for the scheduled service passenger business PRASM was $6 one nine <unk>.
Which is only 1% below Q3 and 19 levels.
Sequentially PRASM increased 11% versus the second quarter of 'twenty, one and an 8% increase in scheduled service ASM.
Ancillary revenue continues to stay strong at $42 91 per passenger which.
Which is 33% higher than the third quarter of 19.
We're still trailing our 2019 load factor, but are encouraged by the strengthening that we are seeing in pricing.
Total revenue per ASM or <unk>, which includes revenue from our charter business, but excludes our cargo segment was $9 six three.
Up from nine to six <unk> in Q3 of <unk> 19.
Charter revenue was $33 8 million for the quarter, although still not fully back to Q3 and 19 levels charter revenue is rebounding nicely and we are seeing strong growth in our sports business, particularly our flying for major League soccer.
As gene noted, we recently signed a five year deal to be the charter service provider to the MLS.
Our track charter programs, which consists largely of casino flying are still recovering from the pandemic and there remains excess capacity from other airlines in the military charter market, which we think will subside once more lucrative international and business traffic begins to return.
Cargo revenue in the third quarter was $24 4 million and benefited from a 4% increase in block hours versus the second quarter of 'twenty one.
Okay.
Turning now to operating costs, we continue to maintain solid cost discipline with a total operating expense was 6% lower than they were in the third quarter of 19.
Conversion from a leased to owned aircraft fleets continues to pay dividends as the combination of aircraft rent expense rent expense and aircraft depreciation was 13% lower than in the third quarter of <unk> 19.
Our efforts to lower distribution costs have resulted in a reduction in sales and marketing cost per passenger of 15% compared to the third quarter of <unk> 19.
Salaries were 26%.
Versus the same period in 2019, due mainly to the in sourcing of our MSP ground handling operations in April of 'twenty as well as growth in our flying level.
On a per block hour basis. However, the combination of both grants and salary expense was essentially flat versus the third quarter of 19 and operations at our MSP base have markedly improved.
Turning now to our fleet.
As we've mentioned in previous calls our intent has been to acquire five incremental aircraft in 2021 and 8% in 2022 on our way to at least 50 passenger aircrafts by the second half of 2023.
With the acquisition of two aircrafts since the end of the second quarter.
We've now reached our fleet goal for 2021.
We remain engaged in discussions on a number of additional planes and we're confident that we'll be able to find what we need to grow.
At prices that will allow us to continue to average down our ownership costs.
During Q3, we purchased an engine and aircraft and three engines for cash, resulting in a reduction and a reduction in our liquidity balance from $336 million at the end of the second quarter to $300 million at the end of Q3.
We may finance unencumbered assets in the future and our liquidity is sufficient to provide flexibility on the timing of future financing decisions.
Total debt, including both finance and operating lease amounts on the balance sheet has only increased $5 million since the beginning of the year and liquidity as of November 1st was $325 million. So we're in a very strong position to fund our growth.
Finally, we summarized our expectations for Q4 in the earnings release.
Q4 is a typically seasonally weaker quarter for sun country than Q3.
In addition fuel prices are expected to be 31 cents per gallon higher in Q4 than in Q3.
For the quarter, we expect total revenue of between 164 and $169 million.
Fuel price of $2 55 per gallon.
And operating margins of $1 five to five 5%.
With that I'd now like to open it up to questions.
As a reminder to ask a question you will need to press star one again, it's all about.
So what's the audio question first the palanquin. Please standby, while we compile the Q&A roster.
Okay.
Your first question comes from the line of Hunter Keay with Wolfe Research.
Good morning, its actually know what chase all upfront okay.
I noticed you used the word sensibly when describing your capacity growth what.
What do you mean by that in the context of your expansion plans.
The main thing we would mean is making sure that we're able to deliver a quality operation results.
So we have the fleet to grow substantially faster than we're growing but recall, we didn't have the kind of draw down most of the airline industry had so we kept everybody working through the Covid pandemic.
Now, we're running about 15% to 20% higher depending on the period, but as we look into the next year.
Then in 2019 levels.
Which is substantial considering that we stopped hiring like most airlines to the pandemic.
So we're in full ramp up mode right now we are hiring across all major labor categories.
And that's about as fast as we can go.
Got it thank you.
Our next question comes from the line of Catherine O'brien with Goldman Sachs.
Hey, good morning, everyone. Thanks for your time.
Hey, Catherine.
So I think you guys are the only U S airline to beat your initial guidance this quarter given the impact of the Delta variant may quarter, I guess, what was better to offset that delta really weakness I know you'd mentioned in the press release, you did see some across your system.
Yes, I think that this is Dave I think that we're probably a few things.
When we went into our initial guidance I think the demand environment has continued to be pretty unclear. So we were maybe a tad conservative just not knowing what to expect with the ups and downs due to COVID-19.
We benefited from a little bit more cargo flying during the quarter then.
Than we had originally anticipated and then I think everybody at the company is just doing a great job at cost control and keeping our operating costs in line.
I think all those things sort of manifested themselves during the period.
To produce the operating margins that we saw so I don't think there was anything really extraordinary just sort of continued tight management of the business.
Okay got it and then maybe just one on the floor with book.
You know your implied CASM X fuel based on your guidance.
Would be down sequentially from third quarter, despite actually being lower in the fourth quarter, where there is some timing events in the third quarter that that drove a little bit of inflation or the operation just really gaining efficiency going forward, what's driving that thanks.
I don't know that our CASM is going to be lower in the fourth quarter that are niche in the third quarter, just because we are smaller.
So I.
I don't think I don't necessarily think thats. The case, there there wasn't any sort of particular im thinking there wasn't any particularly costly onetime item in the third quarter at all in the fourth quarter actually we're seeing a bit of a step up in some maintenance events.
Just the impact of that is pretty small so it was really any drivers of CASM changed from three to four is mainly just due to the capacity. Yes. My comments Katherine were mainly around the fourth quarter as compared to <unk> 19.
Which we expect to be roughly flat and there's some variability in there so give.
Give or take a little bit.
Got it I'll sharpen the pencil on the mid points of the model.
Could just maybe sneak in one last quick one I've been hearing that the secondary aircraft market is starting to heat up a little bit in that in that used aircraft values are starting to improve.
I guess first are you seeing the same thing in <unk>.
Probably would be helpful. If you could help us frame, where you see aircraft are versus pre COVID-19.
When you were probably initially making the growth plans over the next couple of years. Thanks, So much.
Yeah.
We have.
Sort of tallied up the other day, we've looked at 150 aircrafts so far this year.
I told you we've acquired five so.
We're pretty picky.
But there is plenty of aircraft out there from from our standpoint to acquire I don't think we've seen any real tightening in pricing. If we have it's maybe been pretty minor, but we continue to find aircrafts.
Probably at similar pricing to what we saw in.
Earlier in the year, so I haven't noticed any big change other than maybe a little bit on the margins.
But.
Nothing significant.
Two airplanes, we did were done very recently and they are in line with the same economics as the other airplanes, we acquired this year.
And what I'd say is.
<unk>.
The used market is.
Driven by weakness throughout the world, So where we saw now North America, and Europe tightening a little bit Southeast Asia is really weak right now and so we see a lot of capacity still coming to market from those.
Curious fictions.
I'm not too concerned about finding that lift we need.
Relative to pre pandemic.
I think June 30, 25, 30% and pricing Yeah, alright, yes.
We're buying mostly a part out values even newer equipment.
Okay. Thanks. Thank you I appreciate the extra time everyone.
Thanks Catherine.
Your next question comes from the line of Michael Lindenberg with Deutsche Bank.
Yeah, Hey.
Hey, good morning, everyone.
Look as a federal contractor.
Having too.
Deal with this vaccine mandate, where are you guys on that.
How does how does your personnel situation look.
I'll take that one.
And yes. This is Greg.
So as you said the vaccine mandate.
It applies to us.
We've rolled that out our team's done a great job of getting the technology up so that people can upload their.
<unk> will continue to encourage all of our employees.
We're pretty optimistic with regard to that to where we are right now I think for the entire industry is sort of trying to figure out how to how to manage through this and we've got a good plan. The deadline date of December by Federal mandate, I think probably we use that month to try to chase down folks that have been submitted their vaccination cards.
Wouldn't expect any operational impact from the vaccine mandate.
This this quarter.
The reaction from the employees was mixed as you would imagine.
Kind of dealing with with some frustration but.
We will be compliant.
Very good.
With respect to.
The pass through economics of charter and cargo Jude as you mentioned.
As you think about with fuel prices up a lot I think Dave said they were up like 31 cents or maybe it was 31% maybe it is 31 cents per gallon.
Over three Q, how how quickly can you sort of re pivot.
Your capacity towards charter and.
And cargo and I I guess, you did say that 85% of your capacity in the fourth quarter is going to be peak days versus 80% in 19. So it seems like in a scheduled business you are really focused on the busiest days, maybe because of higher fuel prices just thoughts on that.
But we can be pretty responsive when you think about <unk>.
<unk> opportunities in the charter market.
We can very close and reallocate, but it doesn't have that kind of volume to really move substantial units of capacity added skirt services schedule planned at least 90 days in advance.
And.
Amazon Flying has is mostly <unk>.
Flat.
Yes so.
The way, we think about it is we want to have.
Our cost structure and.
Other segments provide the kind of economics, where we can fly a little or a lot in skirt business and deliver the same unit costs.
And that's that's kind of where we're headed I wouldn't think of it though is a reallocation in response to fuel prices.
And one other bit of commentary Mike is like what we're seeing on the yield side is really positive right now I'm not sure even in this fuel price, we want to move that much capacity out of scared, particularly ahead of the holiday season.
I mean, if you're out there buying a ticket thats going to be pretty expensive. These days.
Rest of the economy, we're dealing with reflation here and then airlines just arent able to bring back seats as fast as demand is recovering.
I've definitely seen it firsthand just one quick one on the Amazon you did say it was fairly flat, but I suspect even though your fourth quarter seasonally is weaker than your third is that is that the quarter, where youre going to have the highest from an Amazon and I'm just thinking holiday shipping and the fact that I think everybody is running tight is that going to be.
Your bank.
Revenue wise from a cargo perspective.
For this year, yes, I can't speak to the future, but this fourth quarter will be our highest volume we've ever flown for them.
Great Alright.
Great job this quarter thanks, guys.
Thanks, Mike.
As a reminder to ask a question you will need to press star one so all of that so.
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Your next question comes from the line of Brandon <unk> with Barclays.
Hey, good morning, everyone and thanks for taking my question. So maybe can we follow up there on the comments about better yields because obviously margins are coming down a little bit in the fourth quarter, and probably a little bit due to fuel.
How does that change your behavior.
On the margin here on pricing in the outlook.
Yes, so we had the remnants of the delta varying effects on bookings it kind of again and laid out.
And basically.
Basically affected through the end of <unk>.
October but the beginning of November week anyway.
But what we're sitting here right now looking at is a winter travel season, which for US is from Thanksgiving to Easter.
Which looks as good as we've ever seen.
No.
We have kind of maturity in our ancillary products, which are now producing.
In excess of $40 per passenger segment, which is.
Up substantially from the 2019 comp winter 1920.
And.
As Dave mentioned in his comments load factors haven't quite got back to where they were but yields are fully recovered.
We would add a lot more capacity, if we had the ability to do so going into the winter season.
I think I think this is Dave Hey, Brendan I think one of the things to think about us.
Just the seasonality of this airline fourth quarter is typically weaker from a margin perspective than the third quarter anyway.
Jude points out yields remained strong.
We the guidance, we gave for fourth quarter operating margin the biggest effect on that number relative to where it would historically be is fuel.
If you add if you add sort of this big run up in fuel sort of back to the back to that number we'd be typically seeing the same third to fourth quarter patterns that we see for this company.
Yearly.
Got it.
Yes.
Those comments about you'd be probably more if you could what's the constraint right now because I think you hit your fleet expansion plans.
Dave you spoke about what you plan to add to the fleet next year I guess is it pilot limitations as an airport capacity.
Hiring.
Yes.
It's hiring pilot constraints.
As well as with everywhere across the.
Economy.
Labor is tight right now and we're seeing some of the same things.
I just want to make the point, we're hitting our head count.
Objective.
Objective, but there is there is some uncertainty in that and so the way we deal with uncertainty as pull down.