Q4 2021 Sun Country Airlines Holdings Inc Earnings Call
Yeah.
Okay.
Welcome to the Sun country Airlines fourth quarter and full year 2021 earnings Conference call. My name is normal and I'll be your operator for today's call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised.
Today's conference is being recorded.
Require any further assistance. Please press star Zero I would now like to turn the conference over to Mr. Chris Allen Director of Investor Relations. Mr. Allen you may begin.
Thank you and I'm joined today by Jude Bricker, our Chief Executive Officer, Dave Davis, President and Chief Financial Officer, and talented group of others that will answer your 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 forward looking statements, which are based on 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 outlined in our earnings release, our most recent SEC filings, we assume no obligation to update any forward looking statement you can find our third quarter, our fourth quarter press release on our Investor Relations portion of our website at IR dots on country Dot com with that I would now like to turn the <unk>.
Paul.
Thanks, Chris Good morning, everyone. Today, we are excited to announce full year record results from 2021.
Further our margins adjusted for cares Act benefit again lead the industry.
Our multi segment business model is unique among airlines is 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 this schedule flexibility and low fixed cost model allow us to respond to both predictable leisure demand fluctuations and <unk>.
This industry shocks, we believe due to our structural advantages will be able to reliably deliver one of the industry's best profitability throughout all cycles as we've been demonstrating through the Covid crisis.
First I wanted to talk about operations I continue to be amazed and impressed with the aviation professionals, we put on the front lines each day to make this operation work.
Not sure I've ever seen as challenging set of circumstances for an operation as what we've been dealing with since the holiday peak that our folks have delivered as they always do thank you to all my team members.
To start I want to address some of the most commonly raised concerns in our industry first staffing issues, we certainly seen the effects of a tight labor market on our staffing needs. Currently we're hiring across all major labor groups shortages. However, most acutely felt in pilots technicians and ramp staff.
And each of those groups, we've negotiated or announced increased pay and benefit offerings. Just recently, we most notably reached a new agreement with our pilot group, bringing our pilot pay above those airlines in our competitive set.
It should also give investors confidence in our ability to staff to our growth targets across the industry I believe staffing challenges where results downward pressure on capacity.
Giving capacity and therefore be positive fair's second unrelated as cost pressures, including fuel price, we remain well in control of our cost position, including the new pilot rates, we still expect 2022 X fuel adjusted CASM to come in less than 2019 further we still expect adjusted cash.
Adam to be under six by 2023, we expect to continue to be able to offset inflationary pressures in labor by cycling out of our legacy fleet deals introducing technology efficiencies and diluting our overhead with growth.
I want to remind everyone about a third of our flying has passed through fuel economics, and our variable schedule service operation allows us to build a schedule that will positively contribute in any fuel environment.
I believe our outperformance of the industry will widen in a high fuel environment all else equal.
Finally, the unit revenue recovery, we certainly have felt the effects of omicron bearing on our bookings and like other carriers have reported we are now seeing a strong recovery in demand, particularly for our domestic leisure markets and for our March peak period. We're currently selling in March schedule with maximum volume limited by staff, indicating our confidence.
And in recovery.
We also announced new fleet transactions for five additional growth aircrafts, Dave will talk more about the fleet plan, but I wanted to point out that we're continuing to see favorable price and availability of our feedstock 737 engine aircraft. We expect this to continue as Max production ramps along with it.
Covering and demand for aircrafts.
And with that I'll turn over to Dave.
Thanks, Jude we're very pleased with our results in 2021, as we accomplished a lot on a challenging year for the airline industry.
In March we launched our initial public offering which greatly strengthened our balance sheet and gave us the resources necessary to drive our growth.
We grew block hours during the year by 58% versus 2020 and.
13% versus 2019, we added five passenger aircraft signed long term charter agreements with MLS and Caesars Entertainment and we rapidly negotiated and ratified a new pilot agreement.
All of this was done while maintaining five consecutive quarters of greater than 15% EBITDAR margins.
Our new four year pilot agreement signed in December was negotiated in less than four months time, which speaks to the professionalism and dedication of our pilot group and company negotiating team.
The new deal is a key enabler of our growth plans specific benefits of the agreement include one pay rates benefits and work rules that are highly competitive with our low cost peers and should allow us to recruit the pilots we need to support our growth.
Early indications are promising as pilot applications to Sun country are up by 160% compared to the month prior to the new agreement being announced.
New work rules that will allow pilots to start trips from their home locations and provide for the implementation of a preferential bidding system.
These changes will make sun country, a more attractive option for commuting pilots and reduce our costs by allowing us to more efficiently scheduled flight crews and three the ability to assign reserve pilots to bases outside of MSP. This flexibility was a key requirement to unlock potential future Amazon Amazon growth.
Our pilot pay rates were significantly behind the industry and the changes in the new contract are expected to increase our pilot cost per block hour by approximately 34% between 2021 and 2022.
We expect to be able to absorb most of this cost increase elsewhere, however, and our total 2022 non non fuel operating costs per block hour is expected to increase only 2% versus 2021 and is expected to be 9% lower than it was in 2019.
Pilot cost per block hour expected to decrease in 2023 is the full benefit of the new work rules are realized.
Let me turn now to specific Q4 dollars 21 results.
In the fourth quarter of 'twenty, one we delivered adjusted pretax income of $8 million and adjusted EPS of <unk> 10.
On revenue of $172 6 million.
For full year 2021, our adjusted pretax income was $25 4 million and adjusted EPS was <unk> 33 on revenue of $623 million.
We are very pleased with our profitable results in 2021, given the impact of the pandemic had on industry bookings.
Moreover, the pandemic effects were particularly acute in Q1, which has traditionally sun country strongest quarter.
Operating margins for Q4, and the full year were eight 6% and eight 1% respectively.
We believe our 2021 full year operating margin to be industry, leading.
Regarding costs, our Q4, 'twenty, one GAAP non fuel operating expenses increased $9 million or only 8% versus Q4 2019 on a 25% growth in total block hours.
We've demonstrated an ability to consistently take cost out of the business and we expect to be able to do so going forward.
Per aircraft ownership expense has declined by 22% since 2019.
Despite wage pressure in 2021, our ground handling cost per departure were 3% lower than they were in 2019, while we maintain the completion factor near the top of the industry.
Full year 2021, adjusted CASM was six <unk>.
Only 2% higher than our adjusted CASM in 2019 on an 18% reduction in ASM.
As Jude mentioned, we expect 2022, adjusted CASM, which includes the impact of our new pilot agreement to finish the year lower than the $6 300, <unk>, we achieved in 2019.
Turning now to revenue revenue in the quarter finished quite strong despite flying 11% fewer scheduled block hours in Q4 2021 versus 2019 scheduled service revenue finished the quarter down only 7% as average base fare was $111 in Q4 'twenty one.
This was $99 in Q4 19.
Q4, 2021, ancillary revenue was $1 6 million higher than the same period in 2019.
On a per passenger basis ancillary revenue per Pax was $44, which was the highest in the company's history.
Q4, 'twenty one charter service revenue was down 21% versus Q4 19, while charter block hours were down 22% in the same period.
Both MLS and Caesars charter flying will begin to contribute meaningfully towards the end of Q1 'twenty two.
Let me turn now to guidance.
Q1, 2022 total revenue is expected to be between $215 million to $225 million.
As a reminder, the first quarter is historically, our strongest quarter of the year adjusted.
Adjusted operating margin is expected to be between eight and 12%.
We are anticipating a fuel price of $2 79 per gallon for the quarter.
Finally, we expect total system at <unk> for the full year of 2022 to be approximately seven 8 billion.
Due to the seasonal nature of our business. We expect Q1 to have the highest level of Asm's followed by Q3.
With that we're now ready to open it up for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the Tonkin. Please standby, while we compile the Q&A roster.
Our first question comes from Hunter Keay with Wolfe Research. Your line is now open.
Hey, Thanks, just a quick one on that last day as some kind of data that's scheduled plus charter together for the $7 8 billion yes.
Yes, yes, thats right alright, Thanks, and then.
Judy Dave what kind of what your thoughts on this.
The Max planes that Youre old Pals Elysian, just bought June I was wondering not necessarily if you want to comment on that for them, but if there's any thought to maybe an evolving view.
That maybe that could work for you.
We always study it but we haven't been able to make the economics work thus far.
And it's not close.
We're seeing used aircraft values.
For late model aircrafts so.
Six to 10 years old.
That arent much above teardown values still today.
And I don't know I was just going to take the Max can compete with that.
I Gotcha alright.
Another question for you.
The spirit or frontier deal again.
How are you thinking about that in terms of the overall impact to the overall competitive landscape and how does that change the algorithm for you in terms of how youre thinking about growth.
Will it.
Not at all we don't have a lot of overlap with either of those carriers.
They've both been out there trying to find things that the other doesn't do for me.
Multiple years as they both been growing so rapidly and Minnesota Hasnt been.
Very successful for them.
And I don't think that changes with them as a single company. So my view is we don't have a lot of overlap with them now we won't have a lot of overlap with them in the future that makes it not necessarily a great thing, it's not a real positive, but it also isn't really a negative and therefore it doesn't really change what we're doing.
I think generally hunter, we view sort of consolidation in the industry is a good thing so from a high level.
We are positively inclined toward it.
Alright, I'm going to get back in the queue. Thanks, a lot. Thanks.
Thanks, Adam.
Thank you and next.
Question comes from Duane <unk> with Evercore ISI Your line is open.
Hey, guys nice to be speaking with you. This morning hope everybody so staying warm.
It's actually it's actually 40 degrees today.
It was a record.
The gateway safety record again break out the sunscreen.
Okay.
Pilot, basing, which you now have this new flexibility and you talk about how that's going to help you on the cargo side, but.
But could you expand a little bit on how that impacts the passenger side of the business.
And how it might impact your thinking with respect to new markets.
Yes, I think one of the biggest things that we got here was the implementation of the PBS system, which is going to allow us to more efficiently schedule pilots to help us take cost out and improve trip quality for our pilot. So most other airlines had this in place on country hazards.
So we now we now got it this ability to stay.
Station Reserve pilots.
Out of Minneapolis for cargo trips was a big thing for our for Amazon.
We needed to get it to be eligible for more growth and we've now gotten it so that was a big win for us.
Generally on the on the passenger side.
I think what this does is it improves sort of quality of life for our pilots and makes.
Sun country more.
Interesting for commuting pilots in other words pilots, who don't live here in Minneapolis, because they'll ultimately have the ability to start trips from from home locations rather than come up here to Minneapolis to startup.
I don't think it necessarily changes our growth strategy of the cities, we're going to fly to but hopefully it's going to help.
Help us get our fair share of pilots rolling forward, Yeah, Duane it sounded like Youre kind of England towards are we going to create another minneapolis and that isn't in the plan. So our.
Our summer growth is going to be.
On the blueprint of our Dallas network, which is seasonal focus on origination traffic from summer peak market like Dallas, and we'll replicate that across major southern southern cities.
For some of our traffic, we see a lot of summer opportunities to deploy Minnesota based capacity into non Minnesota Owen needs.
And then keep in mind, we have.
Significant charter business that doesn't really touch, Minnesota with originations at La <unk> in Gulfport and law firm in Reno in AC and so.
Just.
The contract just adds to the flexibility that we can deploy assets around the country.
That makes it makes a lot of sense and then maybe just for my follow up.
You mentioned that this flexibility was helpful vis vis Amazon.
Can you talk about just broad strokes incremental growth opportunities in cargo.
And maybe along those lines, how do you weigh opportunities with perhaps a larger aircraft type, which you can now support.
Versus the potentially the increased complexity of supporting any fleet type thanks for taking the questions.
Thanks, Brian Yes.
And Amazon of growth I mean, we're in continuous negotiate discussions I should say with them.
Growth and obviously there.
Mayer businesses.
It publicly now.
As we all read about is growing rapidly.
But our focus remains on leveraging into that recovery for scheduled service.
Our preference would be.
To kind of be able to build out the utilization of our existing passenger fleet. It before we started adding more cargo aircrafts that being said I mean.
If there is an opportunity we'll take it we'll remain flexible and.
And I really don't have any comments on any aircraft type other than the 737.
That we're operating today.
I appreciate the thoughts.
Yeah.
Thank you our.
Our next question comes from Brandon Glinski with Barclays. Your line is open.
Good morning, everyone and thanks for taking my questions sure.
Judy I think you mentioned that Youre flying a march schedule as much as you can based on limitations with staffing did I hear you correctly.
Yes, that's right. So we started hiring pilots.
Earlier than the rest of the industry.
October .
15 months ago and.
But theres just a lot of catching up to do and we've been continually yet.
We're just in a different situation than the rest of the industry. We went into Covid with 30 years. So a passenger airplane 31 added 12 cargo airplanes, and then have been adding passenger aircrafts for the fleet has grown substantially and it's just going to take us a while to staff up to that our training pipeline. We're in the process of expanding.
We kind of had the training staff that we went into Covid with which was 12 pilots.
Month of capability, and we want to make that two or three times that and just takes a little bit of time to ramp that up.
Okay I appreciate that.
It is not something commercial you're seeing like in the spring break period, I think you had pretty favorable commentary on demand.
Yeah, absolutely so.
I mean, it's tough to forecast in a COVID-19 environment as we've been talking about it seems like a long time now.
And the revenue in the first quarter for us and particularly heavily weighted towards the very last several weeks of the quarter.
And so what we're seeing in bookings just over the last two weeks is really really positive and just like other waves of the COVID-19 .
Crisis. It is highly correlated to what we see in.
The falloff in.
Hospitalizations for example across the country and our bookings are turning the corner in the same way.
And just like with other waves.
This recovery begins with domestic leisure markets that we serve and now we're starting to see it extend into some of our longer haul markets and international markets.
So that's why we have such a wide bracket of our revenue forecast in the first quarter is that there's still quite a lot of uncertainty, but if you extrapolate out what we're seeing.
Today.
A really positive finished for the quarter.
Okay, I appreciate that and if I could just ask one more maybe of Dave.
You guys mentioned in the prepared remarks or at least in the release about Amazon and some impacts from operational difficulties can you talk about.
The financial implications of that if you don't mind.
Yes, the financial implications were pretty minimal.
Had some operational disruptions right towards the end of the year.
Sort of a perfect storm of some staffing issues that were COVID-19 related really really cold weather here and then we had an outage that resulted in sort of an abnormally high level of cancellations for us.
I would I would think of the financial impact in the fourth quarter to us of all of these issues as.
Let's say $1 million ish, so not it's not a huge impact for us in the fourth quarter.
Thanks Ian.
Wanted to contextualize a little bit.
Just across the ecosystem, so staffing issues for us, but also all of our vendors that we rely on for maintenance and ground support.
Federal agencies, like TSA, and the FAA and air traffic control or Havent staffing issues associated with both hiring and also sick time were related to Covid and then the supply chain. So were delayed in getting aircraft into service and repairs done.
Service bulletins and engineering work from Boeing.
Just a weird environment right now and I continue to believe that that's going to put kind of a governor on industry capacity as we've seen good commentary as airlines have announced that will be positive for payers as we push into the summer period.
Thank you.
Thank you. Our next question comes from Catherine O'brien with Goldman Sachs. Your line is now open.
Hey, good morning, everyone. Thanks, so much for the time.
Sure Catherine.
Hey, so wanted to get on the revenue beat this quarter can you walk us through what drove that I think last quarter. There was some incremental charter ops with.
Danny.
Right.
Mission that drove part of your third quarter B.
Any any charter ops here higher Amazon or was it just stronger passenger demand bears okay.
Yes.
It was higher fares.
We went into the quarter.
A really uncertain environment right I think when we had the call we're probably coming down off of Delta and then the omicron thing happened so.
We were somewhat cautious on the revenue guide and I think the fare environment, just strengthened pretty rapidly and that produced the outperformance.
If you recall back to Delta.
Saw this inflection point around late September .
That was just really dramatic where.
Went from a weak environment for the next day it was.
Increasing and we kind of saw this.
Really strong.
Demand increase up until really Dominic run Varian and through the holiday period and were kind of in that same place now with AMA front as we move into the March period.
And so I'm, just really bullish on demand and in the next.
Four to six weeks as we move into our.
Peak spring break holiday season.
Got it okay. So that.
That you answered a little bit of my follow up which is just as you're thinking about the first quarter. You spoke about had very back half weighted like the last several weeks as we get into March.
Typical seasonality that makes sense, but can you give us some color on how you thought about forecasting the first quarter out.
There are a fair degree of conservatism in one Q2, just given the uncertainty.
Due to the amount of bookings that you already have.
Locked in do you feel like you have more certainty than where you were forecasting Mark you just trying to get some color on how you were going to turn it over to grant maybe you Renz R. R.
Revenue.
For some color, yes, thanks gathering and I would say I would echo what Jude said, we've gotten so good at being these waves and sort of how things play out, but as we look to forecast the first quarter. The fourth quarter was pretty instructive in terms of how that sort of return of demand after delta perform and we had.
Three distinct peak periods for us, which was a little bit different we have a holiday school break in October where we saw really good demand Thanksgiving.
In the second half of December and so using that we have a pretty good sense for the first quarter and one thing Thats really notable about us in the first quarter, we actually have an inflection point just an overall capacity for a while we trailed 2019. This is the first quarter, where we're bigger than 2019 on a pretty substantial.
Basis on the scheduled side of the house, we feel really good about the schedule we have.
In the market, it's really Minneapolis focus we've done a really good job building the brand in Minneapolis connecting with customers here.
So the one thing I think that we are doing is just working really closely with our operating team because the airline is fully fully deployed in March and so for us, It's just execution and making sure we deliver and I can say that the team here does that as well as any airline I've seen so we're very.
Focus on that so just anything that would bring.
Guardrails for the first quarter, just making sure we can deliver and I think there's a ton of confidence here that we will.
That's great and then maybe one for you Dave.
On the quick clarification, one and a follow up on the balance sheet. So on the five aircrafts.
Otherwise for for I guess first are those part of a planned deliveries this year or how are those incremental and then.
Given Jude comment on.
Your target aircrafts.
Being still for sale not much above teardown.
Do you have I know theres still some training guardrails you guys are working on but.
From a balance sheet perspective.
Yeah.
If those deals or perhaps not here to stay forever is there is there capacity on the balance sheet and appetite for management perspective, maybe lock in some aircraft for future periods.
Thanks.
The two parts there thanks.
Yes, let me just talk about the fleet situations. So our fleet plan for 2022 has us adding eight passenger aircraft. We signed deals for two of those last year in 'twenty. One so those are going to be delivering the five I mentioned are part of the eight so that brings us to <unk>.
Kevin It's only early February .
That'll be delivering through the year.
And we need to find only one more to hit our fleet plan, but I think it's fair to say that what you said is accurate.
We continue to see attractive deals in the market, we're very active and to the extent that we see.
Really good deals and maybe we frontload the fleet a little bit we will do that.
Balance sheet is not a concern we're very well capitalized we have access to whatever to the financing that we need at really attractive rates. So that's not that's not a limiter for us.
Really the only limiter at this point is our ability as really the staffing side, our ability to train pilots get them through.
And fly the aircraft, there's plenty of market opportunities for us plenty of aircraft that are available we have the balance sheet capacity to bring them on.
So yes, we're in a good spot from a fleet perspective.
Okay, great. Thanks, so much for all the time.
Sure. Thank you.
Our next question comes from Michael Lindenberg with Deutsche Bank. Your line is open.
Oh, Hi, Yes. This is Shawn Dougherty on for Mike. My first question is given the recent run up in fuel and putting cargo charter side can you provide us with some more detail on your historic ability to recapture higher fares.
So this is an important concept is there is a wide spectrum of revenue outcomes on a scheduled service network and our response to high fuel prices is to eliminate.
Flights that are predictably.
Under return targets.
That's how we rate space, we don't raise fares by going out across the fleet.
Adding $1 or whatever to the airfare, we just go in and eliminate flights to become marginal and as the new inputs for fuel price.
Become clear to us.
So.
Thats the model is that we don't have.
Much of our relationship for unit cost and utilization. So it just becomes okay whats the fuel price input.
Flights are profitable and hit our hurdle rate at that fuel price. The other ones are eliminated and thats, how we run the skin service business and that's how we're able to pass on.
That's how we were able to maintain our margins in a rising fuel prices.
Yeah, and I think I think if you look across the industry.
You definitely see that recapture effect that Jude is talking about is sort of you call lower profitable and less profitable flights are unprofitable flights capacity comes downstairs rise.
And part of this cost is recaptured over time, it's not instant theres a lag but.
<unk>.
That's the trend.
Got it thanks, and my second question can you give us any cost inputs that perhaps maybe for Brian Cowen throughout 2022 to drive the adjusted unit cost below 2018 levels.
Is it really more about just restoring the ASM growth and better utilization of the network. Thanks for the questions.
Yes, I think.
Continued averaging down and costs on the fleet side as part of the metric.
We in sourced R.
Our.
Brown handling here in Minneapolis in 2020 that continues.
Provide dividends for us.
A significant opportunity in <unk> and 'twenty. Two is just continued cost control and leveraging as ASF has come back.
As I pointed out we've been able to essentially absorbed the costs of the new pilot agreement. That's in the numbers. So it's cost control elsewhere and leveraging into to growth.
Thank you.
Next question comes from Chris <unk> with Susquehanna. Your line is open.
Good morning, everyone and thanks for taking my question so going.
Going back to the new work rules, you mentioned with respect to the new pilot deal curious if that was something that the union brought to you or.
It was kind of mutually bought to the table and whether there were sort of any atypical.
Or out of ordinary concessions made during the bargaining period, meaning.
This kind of.
Resignation environment, or however, you want to describe it should we expect that perhaps we could see other changes to any upcoming deals you got with other groups.
Yes, so theres sort of a lot in that.
Sure.
Basically some of the work rules that I talked about here or brought to the table by the company.
Others, like let's say PBS I would probably characterize it as both sides had an interest in and getting that in place.
<unk>.
There is nothing.
And going through sort of the deal there's nothing kind of out of the ordinary for the industry.
And work rule changes that we made.
Nothing particularly unique.
That's in this deal some of this starting trips at home stuff is fairly unique and we're hammering out the final details on that.
I think one of the things about this agreement.
Is our pilots were substantially behind.
The average of our who we believe our competitors in the low cost world. So there was a lot of ground to be made up.
Which is what drives that pilot cost per block hour number I gave.
We don't believe and the data would indicate that we're not in the same position with our other work groups in other words.
Pay rates benefits and so forth are quite consistent with what our peers pay at this point, so I wouldn't expect to see similar moves.
With other work groups for us.
Just a little more commentary on that negotiation.
We got done in a contract that was pretty old.
We've got an amendment negotiated in two months.
And it takes a tremendous amount of effort from.
Our team obviously, but also our pilot group and Alpha National and our NBC and I'm, just so impressed with those guys and I'm really excited.
For the pilots that have been here.
The challenges in some countries have we got pilot.
Payroll for 35 years, and now Theyre going to get.
For the first time, maybe in their whole career and industry, leading contract I'm just really excited for those guys.
It's really kind of amazing that we got this across the finish line in the timeline that we did and it took a lot of working together.
Yeah, that's great that it happened.
Okay and my second one so if we go back to I think it was Hunter's question on the.
Announced.
Merger proposal with frontier and Spirit yesterday. So you mentioned it doesn't really impact anything you do in that I think you said that you kind of look at consolidation as favorably, but if the recovery business.
And long haul international does take longer and we have this kind of jump ball approach to managing inventory from your peers in the U S is there perhaps there's also the upselling phenomenon that we keep hearing about so is there perhaps an opportunity within this.
Mercury goes through and everything else that's happening to perhaps look at markets, where you typically wouldn't have looked to sell inventory. Thank you.
I just want to be really clear.
We're focused on the peak years of days.
So the combination of spirit and frontier.
Drive these 12 and 13, our daily utilization of their new aircraft is still going to have that same dynamic. So I don't think this changes at all our opportunity set of really peaky leisure markets that have predictable peaks along.
Dave weaker primarily seasonal sensitivities.
So.
There is.
Set of.
<unk> 400, <unk> that have these really peak contributions from late leisure demand and they're not going to be effectively served.
Any other carrier than us.
Spirit or frontier, just can't can't modulate their capacity.
<unk>.
As to what's required to pick up that demand that exists on those peak periods.
I don't think it is.
Dave mentioned I think it's a net positive I don't think it changes the dynamic much here in Minneapolis, which is quickly becoming a two airline market.
And I think our growth outside of Minneapolis is still going to be focused on these predictable peak season leisure markets originating.
Originating from major DMA.
And I think that I feel strong more strongly about that with the merger.
New to us and we're still evaluating it and I think we'll kind of see how it plays out but.
I think it's a.
It's positive for our X Minneapolis growth and it's kind of neutral for Minneapolis.
And our plans here.
Okay. Thank you.
Thank you and I have a follow up with Hunter Keay with Wolfe Research. Your line is open.
Yes.
You did that last comment you made have you guys study what happened in Seattle when does that place became a two airline market with delta and what happened with some of the tertiary competitive capacity there that maybe you couldnt compete on schedule and loyalty and any similarities you may see developing here.
Are there yes.
Yeah of course look I mean, Seattle is a bigger market than what we have here and the geography is a little bit different with flow over the ocean, but.
But yes, I mean I completely agree with you.
<unk>.
I think it is an allegory to what we're seeing here with Delta.
We're focused on leisure market.
I think more carefully we want to be.
EBIT more segmented.
The way, we think about the twin cities and focus more directly on leisure, which I think will be less of a front end.
That Alaska is in Seattle to Delta.
But yes, I mean I think.
There is a good model for co existing.
Uh huh.
I would put us right up there with Alaska.
Alright.
As an example, yes.
Yes, Sir.
<unk> now but.
Right and then.
On the CASM comment that you made just to be.
Be clear Youre expecting your 'twenty three CASM ex adjusted to be under <unk> on a full year basis, or youre, saying youre going to get there at some point in 'twenty three.
Yes, I mean at this point, we're thinking that our full year number is going to be.
<unk> six.
Got it.
Alright, and then can you talk a little bit about pvs, some more and just elaborate on some of the benefits that it is going to bring to you that might be unique to some country and also just tell people on the call understand why PBS is a beneficial thing for an airline to run anyway.
So I am super passionate about PBS in appropriately.
Shouldn't be so much you don't hear that focus to me, but I just love the product because and I think it's going to be great for our pilot so what PBS.
Allow the pilot.
While honoring seniority to select their own schedule instead of US building a months long schedule and then pilot seniority order select from that set of schedules option.
And so imagine just a portfolio of trips out there round trips from Minneapolis two.
Two or three day trips for charters.
Our cargo line that takes you to multiple cities on four or five days and then depending on your situation personally you can select and build the schedule that's best for you.
Obviously, not everybody gets what they want but were just a lot more likely to satisfy pilots for their own personal scheduling.
Desires in the PBS system than an alliance system, which is just an outdated system.
Further in 2017.
Pilot work rules changed at par 117, and the primary change was that legalities are now on a rolling basis instead of on a calendar basis. He used to be able to start the month, a new and now I think it makes perfect sense, it's a rolling basis. So PBS.
When as it awards pilot.
Even flight attendants calendars it takes into account those restrictions and it's just a lot more.
It's just a lot more efficient for both pilots in the company.
Greg any other comments.
Good question.
Yes.
More desirable attributes construction means fewer drive trips, which means more efficiency.
The pilot workforce.
Okay. Okay can I ask a couple more Chris.
Finally.
Yes.
Go ahead, Mark Alright fine.
Why do you think your ops have been so strong while others have been still weak youre focused voluntary to pick up trips I mean is it a cultural thing I mean, how are you getting people.
To show up is because they're small I mean, you can have direct <unk>.
Good question.
I don't feel like it's been really hard.
I'll turn it over to.
Hey, Greg.
Yes.
I think it's a few things I think that the.
Sure.
As evidenced by our agreement that we've got with our pilots that shows that we've got a good relationship and we have seen some leaning forward granted mentioned just to close relationship that we have between the commercial team and the operations team to really pinpoint decisions that we need to make super close and we.
We actually have daily discussions, where we're looking not only day or next day next few days. So it's just been a lot of close work.
Think that the organization is very much aligned on what we need to accomplish I think that's largely what it is but there's a whole lot of tactics that come in on a daily basis to make this work.
Didn't touch on just structural advantages we have one is where single based operator single fleet type, where in Minneapolis, which isn't JFK Honolulu, but.
Kind of in the middle.
And.
So we didn't have to deal with a lot of the ADC.
<unk> and other airline and field congestion and things like that so we've also got we've also got a good position at <unk>.
In our terminal here, which helps us consistency among other additional some advantages such as that that we've got.
And the variable capacity that we can reset the schedule with.
Yes, that's the other thing is kind of firebreak natural fire breaks in our schedule that exist.
As we scheduled for demand but.
If youre spirit or frontier.
The only recovery option is to cancel down and reset.
We have today Tuesday.
Rohit.
At the recent Nick.
That's right.
Yes, no that makes sense.
Alright, its greatest hard and it's come with a lot of work. There's a lot of work involved in very difficult alright, that's enough.
Thank you.
Thanks.
I have more or otherwise.
Sure.
Our next question comes from Duane <unk> with Evercore ISI. Your line is open.
Hey, thanks for the follow up.
This may be an off the wall question and not one I would ask most airlines at this point in the recovery.
But can you just remind us when restrictions on capital return on a go away.
And how you'd be thinking about it if you didn't have those restrictions with your stock at these levels.
Yes, the restrictions go away I think end of September of this year.
Yes.
Position. It this way the balance sheet is really strong we have excess capital on the balance sheet above and beyond what our operating needs are to either buy planes or operate the business. We are strongly cash flow positive, we think that the shares the share prices substantially undervalued.
You can sort of draw from that conclusions you would but.
We think our shares are strong buy at these levels.
Okay. Thank you.
Thanks Duane.
I have a follow up with Catherine O'brien with Goldman Sachs. Your line is open.
Hey, guys. Thanks for the extra time here.
Okay.
One of us might try for that.
But just any high level guideposts, we should think about for what down versus 2019 means in 2022.
<unk>.
Obviously, the path to below 6% in.
In 2023.
I'm guessing this year as a step towards that but just any high level thoughts on how we should be thinking about full year 2022, CASM ex just in the context that downwards. Its 19 comment thanks.
Yes, I think you should be thinking about it as modestly below 2019 levels. So in other words, we're not sort of knocking on the door of six quite yet we should be there in 'twenty three.
It will be modestly below.
Everything goes according to plan, which we're confident and we should be modestly below our 2019 levels.
I think the big variable is input around capacity level.
And how quickly the recovery happens and whether or not the shoulder months in particular are.
We're able to blow those out or not.
And that's going to drive some effect on CASM.
Got it makes sense and then just one more from me just on the new charter contracts can you just give us some color on the impact of those as they ramp up you know I know in the fourth quarter. They are still down 20% or so from 19.
Due to lower military flying when these contracts backfill some or all of that and then I guess, if so do you still have capacity to do more military flying if that demand comes back stronger so just.
Just helping us think through the impact of the new contracts and then what.
What's left in the tank.
Those contracts are fulfilled thanks, so much great.
Great question Catherine This is grant again.
Yes. So this year the successes of the team in 2021 in terms of selling ourselves winning back business, winning new business.
We feel really good about the portfolio in total for 2022.
Have a lot of precision in terms of what it's going to be.
And Thats really helpful. In these times.
Very operationally friendly so a lot of the flying we're going to be doing it will be in pilot. We will have good line of sight on it so it's not going to derive close in.
Changes or drive a lot of work for the organization. So we feel really good about that.
Getting our sort of casino business back to where it was.
Above where it was in 2019 is really important because those are really good contracts for US and then you are absolutely right. We will watch military very very closely and we can opportunistically take it when it makes sense and military.
It had been more competitive just as other airlines have some spare capacity that they've been deploying to military.
Things change and based on the recovery, we will keep close tabs on the military business, we do and we will very much engaged.
Makes sense for us so.
We have upside and we have a really good.
Portfolio to begin with.
Okay, great. Thanks, so much for that.
Thank you and I have a follow up with Chris Stephanopoulos with Susquehanna. Your line is open.
Thanks for taking my follow ups, so on going back to the question on cargo. So you mentioned.
Seek out some issues, but just curious in the context of utilization.
Current fleet I believe its 12 aircrafts.
Sufficient to handle growing or what could be.
Erratic peaks as well as it looks like Amazon is adding a few more.
Or air hubs on the map here. Thanks.
You said <unk> I just wanted to be very clear I think we had to get a minute COVID-19 I mean people were right.
Yes.
Yes.
I don't know I think it's the answer I mean, we have we're running right now a C check line and that will that won't be a constant I think what we saw in the fourth quarter.
For Amazon production for our cargo production is kind of what we would expect.
And a standard quarter going forward until we get more aircrafts.
And I think thats.
My view is it's kind of.
Yes.
Relatively.
Likely I think.
We would intend to continue to have great operations that will be valuable to Amazon or any other cargoes hard and we have a capability that I think is.
Really valuable.
Sure.
Were comfortable and confident that.
Amazon is happy with our performance.
And our.
They want to grow the 700 3700 800 fleet more we're very very viable competitors to get more of those aircrafts, but ultimately it's up to them.
Okay. Thank you.
Thanks, Chris Thank you.
I'm currently showing no further questions at this time I'd like to hand, the conference back over to Mr. Parker for any closing comments.
Thanks, guys. Thanks for your interest everybody have a great day, and we'll talk to you next quarter.
Ladies and gentlemen, thank you for your participation in today's conference you May now disconnect everyone have a wonderful day.
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Paul.
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Welcome to the Sun country Airlines fourth quarter and full year 2021 earnings Conference call. My name is normal and I'll be your operator for today's call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question. During the session you will need to press star one on your telephone please be advised that the.
Today's conference is being recorded if you require any further assistance. Please press star Zero I would now like to turn the conference over to Mr. Chris Allen Director of Investor Relations. Mr. Allen you may begin.
Thank you.
Joined today by Jude Bricker, our Chief Executive Officer, Dave Davis, President and Chief Financial Officer, and talented group of others that will answer your 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 forward looking statements, which are based on management's current beliefs expectations assumptions and are subject to risks and uncertainties actual results.
May differ materially we encourage you to review the risk factors and cautionary statements outlined in our earnings release, our most recent SEC filings, we assume no obligation to update any forward looking statement you can find our third quarter, our fourth quarter press release on our Investor Relations portion of our website at IR <unk> country Dot com with that said I would now like to turn the call over to Jeff.
Thanks, Chris Good morning, everyone. Today, we're excited to announce full year record results from 2021 further our margins adjusted for cares Act benefit again lead the industry.
Our multi segment business model is unique among airlines 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 this scheduled flexibility and low fixed cost model allow us to respond to both predictable leisure demand fluctuations and <unk>.
Industry shocks, we believe due to our structural advantages will be able to reliably deliver one of the industry's best profitability throughout all cycles as we've been demonstrating through the Covid crisis.
First I want to talk about operations I continue to be amazed and impressed with the aviation professionals, we put on the front lines each day to make this operation work.
Not sure I've ever seen as challenging set of circumstances for an operation as what we've been dealing with since the holiday peak that our folks have.
Delivered as they always do thank you to all my team members.
To start I want to address some of the most commonly raised concerns in our industry first staffing issues.
Certainly seeing the effects of a tight labor market on our staffing needs. Currently we're hiring across all major labor groups shortages. However, most acutely felt in pilots technicians and ramp staff.
Each of those groups, we have negotiated or announced increased pay and benefit offerings. Just recently, we most notably reached a new agreement with our pilot group, bringing our pilot pay above those airlines in our competitive set.
It should also give investors confidence in our ability to staff to our growth targets across the industry I believe staffing challenges where results downward pressure on capacity.
Excuse me capacity and therefore be positive for first second and related as cost pressures, including fuel price, we remain well in control of our cost position, including the new pilot rates, we still expect 2022 X fuel adjusted CASM to come in less than 2019 further we still expect adjusted.
CASM to be under 6% by 2023.
We expect to continue to be able to offset inflationary pressures in labor by cycling out of our legacy fleet deals introducing technology efficiencies and diluting our overhead with growth.
I want to remind everyone about a third of our flying has pass through fuel economics, and our variable schedule service operation allows us to build a schedule that will positively contribute in any fuel environment.
I believe our outperformance of the industry will widen in a high fuel environment all else equal.
Finally, the unit revenue recovery, we certainly have felt the effects of omicron variant on our bookings and like other carriers have reported we are now seeing a strong recovery in demand, particularly for our domestic leisure markets and for our March peak period. We're currently selling in March schedule with maximum volumes limited by staff, indicating our confidence in.
Our recovery.
We also announced new fleet transactions for five additional growth aircraft, Dave will talk more about fleet plan, but I wanted to point out that we're continuing to see favorable price and availability of our feedstock 737 engine aircraft. We expect this to continue as Max production ramps along with the Recut.
<unk> and demand for aircraft.
And with that I'll turn it over to David.
Thanks, Jude we're very pleased with our results in 2021, as we accomplished a lot on a challenging year for the airline industry.
In March we launched our initial public offering which greatly strengthened our balance sheet and gave us the resources necessary to drive our growth.
We grew block hours during the year by 58% versus 2020.
And 13% versus 2019.
We added five passenger aircraft signed long term charter agreements with MLS and Caesars Entertainment and we rapidly negotiated and ratified a new pilot agreement.
All of this was done while maintaining five consecutive quarters of greater than 15% EBITDAR margins.
Our new four year pilot agreement signed in December was negotiated in less than four months time, which speaks to the professionalism and dedication of our pilot group and company negotiating team the.
New deal as a key enabler of our growth plans specific benefits of the agreement include one pay rates benefits and work rules that are highly competitive with our low cost peers and should allow us to recruit the pilots we need to support our growth.
Early indications are promising as pilot applications to Sun country are up by 160% compared to the month prior to the new agreement being announced to <unk>.
New work rules that will allow pilots to start trips from their home locations and provide for the implementation of a preferential bidding system.
These changes will make sun country, a more attractive option for commuting pilots and reduce our costs by allowing us to more efficiently scheduled flight crews and three the ability to assign reserve pilots to basis outside of MSP. This flexibility was a key requirement to unlock potential future Amazon Amazon growth.
Our pilot pay rates were significantly behind the industry and the changes in the new contract are expected to increase our pilot cost per block hour by approximately 34% between 2021 and 2022.
We expect to be able to absorb most of this cost increase elsewhere, however, and our total 2022 non non fuel operating cost per block hour is expected to increase only 2% versus 2021 and is expected to be 9% lower than it was in 2019.
Pilot cost per block hour expected to decrease in 2023 is the full benefit of the new work rules are realized.
Let me turn now to specific Q4 'twenty one results.
In the fourth quarter of 'twenty, one we delivered adjusted pretax income of $8 million and adjusted EPS of <unk> 10.
On revenue of $172 6 million.
For full year 2021, our adjusted pretax income was $25 4 million and adjusted EPS was <unk> 33 on revenue of $623 million.
We are very pleased with our profitable results in 2021, and given the impact of the pandemic had on industry bookings.
Moreover, the pandemic effects were particularly acute in Q1, which has traditionally sun country strongest quarter.
Operating margins for Q4, and the full year were eight 6% and eight 1% respectively.
We believe our 2021 full year operating margin to be industry, leading.
Regarding costs, our Q4, 'twenty, one GAAP non fuel operating expenses increased $9 million or only 8% versus Q4 2019 on a 25% growth in total block hours.
We've demonstrated an ability to consistently take cost out of the business and we expect to be able to do so going forward.
Per aircraft ownership expense has declined by 22% since 2019.
Despite wage pressure in 2021, our ground handling cost per departure were 3% lower than they were in 2019, while we maintained a completion factor near the top of the industry.
Full year 2021, adjusted CASM was 644.
Only 2% higher than our adjusted CASM in 2019 on an 18% reduction in ASM.
As Jude mentioned, we expect 2022, adjusted CASM, which includes the impact of our new pilot agreement to finish the year lower than the 631, we achieved in 2019.
Turning now to revenue revenue in the quarter finished quite strong despite flying 11% fewer scheduled block hours in Q4 2021 versus 2019 scheduled service revenue finished the quarter down only 7% as average base fare was $111 in Q4 'twenty one.
Versus $99 in Q4 19.
Q4, 2021, ancillary revenue was $1 6 million higher than the same period in 2019.
On a per passenger basis ancillary revenue per Pax was $44, which was the highest in the company's history.
Q4, 'twenty one charter service revenue was down 21% versus Q4 19, while charter block hours were down 22% in the same period.
Both MLS and Caesars charter flying will begin to contribute meaningfully towards the end of Q1 'twenty two.
Let me turn now to guidance.
Q1, 2022 total revenue is expected to be between 215 of $225 million.
As a reminder, the first quarter is historically, our strongest quarter of the year.
Adjusted operating margin is expected to be between eight and 12%.
We're anticipating a fuel price of $2 79 per gallon for the quarter.
Finally, we expect total system at <unk> for the full year of 2022 to be approximately $7 8 billion.
Due to the seasonal nature of our business. We expect Q1 to have the highest level of <unk> followed by Q3.
With that we're now ready to open it up for questions.
Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key please standby, while we compile the Q&A roster.
Next question comes from Hunter Keay with Wolfe Research. Your line is now open.
Hey, Thanks, just a quick one on that last day, some kind of data Thats scheduled plus charter together for $7 8 billion yes.
Yes, Thats right alright, Thanks, and then.
Judy Dave what kind of what your thoughts on this.
<unk> planes that Youre <unk> just bought.
I was wondering.
Not necessarily if you want to comment on that for them, but is there any thought to maybe an evolving view that maybe that could work for you.
We always study it but we haven't been able to make the economics.
Work, thus far and its not close I mean, we're seeing used aircraft values.
More late model aircrafts so.
Six to 10 years old.
That arent much above teardown values still today.
Okay.
And I don't know I was just going to take the Max can compete with that.
I Gotcha alright.
Another question for you.
Spirit frontier deal again.
How are you thinking about that in terms of the overall impact to the overall competitive landscape and how does that change the algorithm for you in terms of how youre thinking about growth.
Got it.
Not at all we don't have a lot of overlap with either of those carriers.
They've both been out there trying to find things that the other doesn't do.
Multiple years as they both.
Growing so rapidly and Minnesota Hasnt been.
Very successful for them.
And I don't think that changes with them as a single company. So my view is we don't have a lot overlap with them now we won't have a lot of overlap with them in the future that makes it not necessarily a great thing, it's not a real positive, but it also isn't really a negative and therefore it doesn't really change what we're doing.
I think generally hunter, we view sort of consolidation in the industry is a good thing.
So from a high level.
Positively inclined towards it.
Alright, im going to get back in the queue. Thanks a lot.
Thanks, Adam.
Thank you.
Comes from Duane <unk> with Evercore ISI Your line is open.
Hey, guys nice to be speaking with you. This morning hope everybody so warm.
It's actually it's actually 40 degrees today.
Greg.
It's an $8 8 million record yet breakout the sunscreen.
On pilot basing, which you now have this new flexibility and you talk about how that's going to help you on the cargo side.
But could you expand a little bit on how that impacts the passenger side of the business.
How it might impact your thinking with respect to new markets.
Yes, I think one of the biggest things that we got here was the implementation of the PBS system, which is going to allow us to more efficiently schedule pilot help us take cost out and improve trip quality for our pilots. So most other airlines have this in place on country hazards.
So we now we now got it this ability to stage.
Station Reserve pilots.
Out of Minneapolis for cargo trips was a big thing for our for Amazon.
We needed to get it to be eligible for more growth and we've now gotten it so that was a big win for us.
Generally on the on the passenger side.
I think what this does is it improves sort of quality of life for our pilots and makes.
Sun country more.
Interesting for commuting pilots in other words pilots, who don't live here in Minneapolis, because they'll ultimately have the ability to start scripts from from home locations rather than come up here to Minneapolis to startup.
I don't think it necessarily changes our growth strategy of the cities, we're going to fly to but hopefully it's going to help.
Help us get our fair share of pilots rolling forward Joanna it sounded like Youre kind of England towards are we going to create another minneapolis and that isn't in the plan. So.
Our summer growth is going to be.
On the blueprint of our Dallas network, which is seasonal focus on origination traffic from summer peak market like Dallas, and we'll replicate that across major southern southern cities.
For summer traffic, we see a lot of summer opportunities to deploy Minnesota based capacity into non Minnesota Ond's.
And keep in mind, we have.
Significant charter business that doesn't really touch, Minnesota with originations at La <unk> in Gulfport and law firm in Reno in AC and so.
<unk>.
The contract just adds to the flexibility that we can deploy assets around the country.
That makes it makes a lot of sense and then maybe just for my follow up.
You mentioned that this flexibility was helpful vis vis Amazon.
Can you talk about just broad strokes incremental growth opportunities in cargo.
And maybe along those lines, how do you weigh opportunities with perhaps a larger aircraft type, which you can now support.
Versus the potentially the increased complexity of supporting any fleet type thanks for taking the questions.
Thanks, Brian .
Yes, Amazon growth I mean, we're in continuous negotiate discussions I should say with them.
<unk> growth and obviously their primary business is at.
Publicly.
We all read about is growing rapidly.
But our focus remains on leveraging into that recovery for scheduled service.
Our preference would be.
To kind of be able to build out the utilization of our existing passenger fleet. It before we started adding more cargo aircrafts that being said I mean.
If there's an opportunity we'll take it.
Main flexible and.
And I really don't have any comments on any aircraft type rather than the 737.
That we're operating today.
I appreciate the thoughts.
Yes.
Thank you.
Next question comes from Brandon Glinski with Barclays. Your line is open.
Hey, good morning, everyone and thanks for taking my questions sure.
Judy I think you mentioned that Youre flying a march schedule as much as you can based on limitations with staffing did I hear you correctly.
Yeah, that's right. So we started hiring pilots.
Earlier than the rest of the industry.
Kober.
15 months ago and.
But theres just a lot of catching up to do and we've been continually yet so.
We're just in a different situation than the rest of the industry. We went into Covid with 30 years. So a passenger airplane 31 added 12 cargo airplanes, and then have been adding passenger aircraft to the fleet has grown substantially and it's just going to take us a while to staff up to that our training pipeline. We're in the process of expanding but.
We kind of had the training staff that we went into Covid with which was 12 pilots.
A month of capability and we want to make that two or three times that and just takes a little bit of time to ramp that up.
Okay I appreciate that.
It's not something commercial you're seeing like in the spring break period, I think you had pretty favorable commentary on demand.
Yeah, absolutely so.
I mean, it's tough to forecast in a COVID-19 environment as we've been talking about it seems like a long time now.
And the revenue in the first quarter for us and particularly heavily weighted towards the very last several weeks of the quarter.
And so what we're seeing in bookings just over the last two weeks is really really positive.
And just like other waves of the Covid crisis. It is highly correlated to what we see in that.
Falloff in.
Hospitalizations for example across the country and our bookings are turning the corner in the same way.
And just like with other waves as this recovery begins with domestic leisure markets that we serve and now we're starting to see it extend into some of our longer haul markets and international market.
So that's why we have such a wide bracket of our revenue forecast in the first quarter is that there is still quite a lot of uncertainty, but if you extrapolate out.
What we're seeing.
It looks like a really positive finish for the quarter.
Okay appreciate that and if I could just ask one more maybe update.
I know you guys mentioned in the prepared remarks or at least in the release about Amazon and some impacts from operational difficulties can you talk about the.
Financial implications of that if you don't mind.
Yes, the financial implications were pretty minimal.
Had some operational disruptions right towards the end of the year.
Sort of a perfect storm of some staffing issues that were COVID-19 related really really cold weather here and then we had an outage that resulted in sort of an abnormally high level of cancellations for us.
I would I would think of the financial impact in the fourth quarter to us of all of these issues as.
Let's say $1 million ish, so not not a huge impact for us in the fourth quarter.
Thanks, Ian I, just wanted to contextualize a little bit.
Just across the ecosystem, so staffing issues for us, but also all our vendors that we rely on for maintenance and ground support.
Federal agencies, like TSA, and the FAA and air traffic control or having staffing issues associated with both hiring and also sick time were related to COVID-19 .
Then the supply chain so we're.
Delayed in getting aircraft into service and repairs done.
Service bulletins and engineering work from Boeing.
Yes.
A weird environment right now and I continue to believe that that's going to put kind of a governor on industry capacity as we see good commentary there.
Airlines have announced that will be positive for fares as we pushed into the summer period.
Okay. Thank you.
Thank you. Our next question comes from Catherine O'brien with Goldman Sachs. Your line is now open.
Hey, good morning, everyone. Thanks, so much for your time.
Sure Catherine.
So why do you think.
The revenue beat this quarter can you walk us through what drove that I think last quarter. There was some incremental charter opt with.
Afghani.
Right.
The mission that drove part of your third quarter B.
Any any charter ops here higher Amazon or was it just stronger passenger demand payers okay.
Yes.
It was higher fares.
We went into the quarter.
A really uncertain environment right I think when we had the call we're probably coming down off of Delta and then the omicron thing happened so.
We were we were somewhat cautious on the revenue guide and I think the fare environment, just strengthened pretty rapidly and that produced the outperformance.
If you recall back to Delta, we kind of saw this inflection point around late September .
That was just really dramatic where we went from a weak environment for the next day it was.
Increasing and we kind of saw this.
Really strong.
Demand increase up until really Dominic run Varian and through the holiday period and were kind of in that same place now with Amazon as we move into the March period.
And so I'm, just really bullish on demand in the in the next.
Four to six weeks as we move into our.
Peak spring break holiday season.
Got it okay. So that.
That you answered a little bit of my follow up which is just as you're thinking about the fourth quarter. You spoke about had very back half weighted like the last several weeks if you get into March.
Yes, typical seasonality that makes sense, but can you give us some color on how you thought about forecasting the first quarter out.
Is there a fair degree of conservatism in <unk> Q2, just given the market uncertainty or due to the amount of bookings you already have.
Locked in do you feel like you have more certainty than where you were forecasting Mark you just I'm just trying to get some color on how you want to turn it over to grant maybe you Renz R. R.
Revenue for.
For some color, yes does hang together and I would say I would echo what Jude said, it and we've gotten so good at being these waves and sort of how things play out, but as we look to forecast the first quarter. The fourth quarter was pretty instructive in terms of how that sort of return of demand after delta perform and we had.
Three distinct peak periods for us, which was a little bit different we have a holiday school break in October where we saw really good demand Thanksgiving and.
In the second half of December and so using that we have a pretty good sense for the first quarter and one thing Thats really notable about us in the first quarter, we actually have an inflection point just an overall capacity for a while we trailed 2019. This is the first quarter, where we're bigger than 2019 on a pretty substantial.
Basis on the scheduled side of the house, we feel really good about the schedule we have.
In the market, it's really Minneapolis focus we've done a really good job building the brand in Minneapolis connecting with customers here.
The one thing I think that we are doing is just working really closely with our operating team because the airline is fully fully deployed in March and so for us, It's just execution and making sure we deliver and I can say that the team here does that as well as any airline I've seen so we're very far.
Focus on that so just anything that would bring.
Guardrails for the first quarter, just making sure we can deliver and I think there's a ton of confidence here that we will.
That's great and then maybe one for you Dave.
A quick clarification and then a follow up on the balance sheet. So on the five aircrafts.
<unk> <unk> for for I guess first are those part of a planned deliveries this year are covered.
That is incremental and then.
Given Jude comment on.
Your target aircrafts.
Being still for sale and not much above teardown.
Do you have I know theres still some training guardrails you guys are working.
From a balance sheet perspective like if those.
If those deals or perhaps not here to stay forever is there is there capacity on the balance sheet and appetite for management perspective, maybe lock in some aircraft for future periods.
Thanks.
A two part there thanks.
Yes, let me just talk about the fleet situations. So our fleet plan for 2022 has us adding eight passenger aircraft. We signed deals for two of those last year in 'twenty. One so those are going to be delivering the five I mentioned are part of the eight so that brings us to <unk>.
Kevin It's only early February .
That'll be delivering through the year.
And we need to find the only one more to hit our fleet plan, but I think it's fair to say that what you said is accurate.
We continue to see attractive deals in the market, we're very active and to the extent of that.
We see really good deals and maybe we frontload the fleet a little bit we will do that.
Our balance sheet is not a concern we're very well capitalized we have access to whatever to the financing that we need at really attractive rates. So that's not that's not a limiter for us really the only limiter at this point is our ability as really the staffing side, our ability to train pilots get them through.
And fly the aircraft and there's plenty of market opportunities for us plenty of aircraft that are available we have the balance sheet capacity to bring them on.
So yes, we're in a good spot from the fleet perspective.
Okay, great. Thanks, so much for all the time.
Sure. Thank you.
Question comes from Michael Lindenberg with Deutsche Bank. Your line is open.
Oh, Hi, Yes. This is Shawn Dougherty on for Mike.
My first question is given the recent run up in fuel and putting cargo charter side can you provide us with some more detail on your historic ability to recapture higher fares.
So this is an important concept.
Theres a wide spectrum of revenue outcomes on a scheduled service network.
Our response to high fuel prices is to eliminate.
Flights that are predictably.
Under return targets.
How we rate spares, we don't raise fares by going out across the fleet.
Adding $1 or whatever to the airfare, we just go in and eliminate flights to become marginal and as the new inputs for fuel price.
Become clear to us.
And so.
Thats the model is that we don't have.
Much of our relationship for unit cost and utilization so it just becomes okay.
What's the fuel price input when flights are profitable and hit our hurdle rate at that fuel price. The other ones are eliminated and thats, how we run the skin service business and that's how we're able to pass on.
That's how we were able to maintain our margins and rising fuel prices.
Yes, and I think I think if you look across the industry.
Definitely see that recapture effect that Judy was talking about as sort of you call lower profitable and less profitable flights are unprofitable flights capacity comes downstairs rise and part of this cost is recaptured over time.
Not instant theres a lag but.
That's the trend.
Got it thanks, and my second question can you give us any cost inputs that perhaps maybe for Brian Cowen throughout 2022 to derive the adjusted unit cost below 2018 levels.
Is it really more about just restoring the ASM growth and better utilization of the network. Thanks for the questions.
Yes, I mean, I think <unk>.
Continued averaging down in cost on the fleet side as part of the metric.
<unk>.
We in sourced R.
Our.
The ground handling here in Minneapolis in 2020 that continues to provide dividends for us.
A significant opportunity in <unk> and 'twenty. Two is just continued cost control and leveraging as ASML has come back.
As I pointed out we've been able to essentially absorbed the cost of the new pilot agreement. That's in the numbers. So it's cost control elsewhere and leveraging into to growth.
Thank you.
Next question comes from Christopher <unk> with Susquehanna. Your line is open.
Good morning, everyone and thanks for taking my question so going.
Going back to the.
New work rules, you mentioned with respect to the new pilot deal curious if that was something that the union brought to you or.
It was kind of mutually bought to the table and whether there were sort of any atypical.
Or out of ordinary concessions made during the bargaining period, meaning in this kind of.
Resignation environment, or however, you want to describe it should we expect that perhaps we could see other changes to any upcoming deals you had with other groups.
Yes, so theres sort of a lot in that.
<unk>.
Basically some of the work rules that I talked about here were brought to the table by the company.
Others, like let's say PBS I would probably characterize it as both sides had an interest in and getting that in place.
<unk>.
There is nothing.
Going through sort of the deal there is nothing kind of out of the ordinary for the industry in work rule changes that we made.
Nothing particularly unique.
That's in this deal some of this starting trips at home stuff is fairly unique and we're hammering out the final details on that.
I think one of the things about this agreement.
Is our pilots were substantially behind.
The average of our who we believe our competitors in the low cost world. So there was a lot of ground to be made up.
Which is what drives that pilot cost per block hour number I gave.
We don't believe and the data would indicate that we're not in the same position with our other work groups in other words.
Pay rates benefits and so forth are quite consistent with what our peers pay at this point, so I wouldn't expect to see similar moves.
With other work groups for us.
Just a little more commentary on the negotiation.
We got done a contract that was pretty old.
We've got an amendment negotiated in two months.
And it takes a tremendous amount of effort from.
Our team obviously, but also our pilot group and Alpha National and our NBC and I'm, just so impressed with those guys and I'm really excited.
For the pilots that have been here.
Challenges as some countries had we got pilot.
Payroll for 35 years, and now Theyre going to get.
For the first time, maybe in their whole career and industry, leading contract I'm just really excited for those guys.
It's really kind of amazing that we got this across the finish line in the timeline that we did and it took a lot of working together.
Yeah, that's great that it happened.
Okay and my second one so we go back to I think it was Hunter's question on the.
Announced.
Merger proposal with frontier and Spirit yesterday. So you mentioned it doesn't really impact anything you do and I think you said that you kind of look at consolidation as favorably, but if the recovery in business.
And long haul international does take longer and we have this kind of jump ball approach to managing inventory from your peers in the U S is there perhaps there's also the upselling phenomenon that we keep hearing about so is there perhaps an opportunity within this.
Merger goes through and everything else that's happening to perhaps look at markets, where you typically wouldn't have looked to sell inventory. Thank you.
I just want to be really clear.
We're focused on the peak years of days.
So the combination of spirit and frontier that drive these 12 and 13, our daily utilization of their new aircraft is still going to have that same dynamic. So I don't think this changes at all our opportunity set of really peaky leisure markets that have predictable.
Peaks along.
Dave weaker primarily seasonal sensitivities.
So.
There is a.
Set of <unk>.
Three 400, <unk> that have these really peak contributions from late leisure demand and they're not going to be effectively served.
With any other carrier than us.
The spirit and frontier just can't can't modulate their capacity.
<unk>.
As to what's required to pick up.
The demand that exists on those peak periods.
I don't think it is.
Dave mentioned I think it is a net positive I don't think it changes the dynamic much here in Minneapolis, which is quickly becoming a two airline market.
And I think our growth outside of Minneapolis is still going to be focused on these predictable peak season leisure markets.
Originating from major DMA.
And I think that I feel strong more strongly about that with the merger.
New to us and we're still evaluating it and I think we'll kind of see how it plays out but.
I think it's a.
It's positive for our X Minneapolis growth and it's kind of neutral for Minneapolis.
And our plans here.
Okay. Thank you.
Thank you and I have a follow up with Hunter Keay with Wolfe Research. Your line is open yes.
Yes. Thanks, I got a few did that last comment you made have you guys study what happened in Seattle when does that place became a two airline market with delta and what happened with some of the tertiary competitive capacity there that maybe you couldnt compete on schedule and loyalty any similarities you may see developing here or there yes.
Yeah of course look I mean, Seattle is a bigger market than what we have here.
And the geography is a little bit different with flow over the ocean, but.
But yes, I mean I.
We agree with you.
I think it's an allegory to what we're seeing here with Delta.
We're focused on leisure market.
Think more carefully we want to be.
EBIT more segmented.
The way, we think about the twin cities and focus more directly on leisure, which I think will be less of a front end.
That Alaska is in Seattle to Delta.
But yes, I think I think there is a good model for coexisting.
I would put us right up there with Alaska.
Alright.
As an example here.
These guys are flanked copies now, but alright and then.
On the CASM comment that you made just to be.
Be clear Youre expecting your 'twenty three CASM ex adjusted to be under <unk> on a full year basis, or youre, saying youre going to get there at some point in 'twenty three.
Yes, I mean at this point, we're thinking that our full year number is going to be.
<unk> six.
Got it.
Alright, and then can you talk a little bit about pvs, some more and just elaborate on some of the benefits that it is going to bring to you that might be unique to some country and also just tell people on the call understand why PBS is a beneficial thing for an airline to run anyway.
So I am super passionate about PBS and appropriately recognized shouldnt be so much you don't hear that focus to me, but I just loved the product because and I think it's going to be great for our pilot. So what PBS does is this allows a pilot.
Honoring seniority to select their own schedule instead of US building a months long scheduled and then pilot seniority orders select from that set of schedules option.
So imagine just a portfolio of trips out there around trips from Minneapolis.
Two to three day trips for charters.
Our cargo line that takes you do multiple cities on four or five days and then depending on your situation personally you can select and build the schedule that's best for you.
Obviously, not everybody gets what they want but we are just a lot more likely to satisfy pilots for their own personal scheduling.
Desires in the PBS system than an alliance system, which is just an outdated system.
Further in 2017.
Pilot work rules changed.
117.
The primary change was that legalities are now on a rolling basis instead of on a calendar basis. He used to be able to start the month, a new and now I think it makes perfect sense, it's a rolling basis. So PBS.
As it awards pilot or even flight attendants calendars. It takes into account those restrictions just a lot more.
It's just a lot more efficient for both pilots and the company.
Greg any other comments.
Passion.
Yes.
More desirable triple construction means fewer drive trips, which means more efficiency.
Other pilot workforce.
Okay can I ask a couple more Chris.
Anil.
Yes, I got to your margin.
Go ahead Mark.
Alright, one more refined.
Why do you think your ops have been so strong while others have been so weak.
Folks this voluntary to pick up trips I mean is it a cultural thing.
Or are you getting people to show up because they're small I mean, you can have direct haul a lot of good questions.
I don't feel like it's been really hard.
Let me turn it over to.
So Greg.
Yes.
And I think it's a few things I think that the.
As evidenced by our agreement that we've got with our pilots that shows that we've got a good relationship and we have seen some leaning forward granted mentioned just to close relationship that we have between the commercial team and the operations team to really pinpoint decisions that we need to make super close in.
We actually have daily discussions, where we're looking not only day of next day next few days. So it's just been a lot of close work.
Think that the organization is very much aligned on what we need to accomplish I think that's largely what it is but there's a whole lot of tactics that come in on a daily basis to make this work we should touch on just structural advantages. We have one is where single based operator single fleet type where in Minneapolis, which isn't JFK Honolulu.
But.
In the middle.
So we didn't have to deal with a lot of the ADC constraints that other airlines congestion and things like that so we've also got we've also got a good position at <unk>.
Terminal here, which helps us consistency of analytics just from some advantages such as that that we've got.
And the variable capacity that we get it right.
Schedule win.
Yes, that's the other thing is kind of firebreak natural fire breaks in our schedule that exist.
As we scheduled for demand but.
If youre spirit or frontier.
The only recovery option is to cancel down and reset.
We have today and Tuesday.
Yes.
That's the reason.
Naturally scanner right, yes, now that makes sense.
Alright, its greatest hard and it's come with a lot of work. There's a lot of work involved in very difficult alright, that's enough.
Thank you.
Thanks.
I have more or otherwise.
Sure.
Our next question comes from Duane <unk> with Evercore ISI. Your line is open.
Hey, thanks for the follow up.
This may be an off the wall question and not one I would ask most airlines at this point in the recovery.
But can you just remind us when restrictions on capital return on a go away.
And how you'd be thinking about it if you didn't have those restrictions with your stock at these levels.
Yes, the restrictions go away I think end of September of this year.
Yes.
Yes.
Position. It this way the balance sheet is really strong we have excess capital on the balance sheet above and beyond what our operating needs are to either buy planes are operating the business. We are strongly cash flow positive, we think that the shares the share prices substantially undervalued.
You can sort of draw from that conclusions you would but.
We think our shares are strong buy at these levels.
Okay. Thank you.
Thanks Duane.
I have a follow up with Catherine O'brien with Goldman Sachs. Your line is open.
Hey, guys. Thanks for the extra time here.
Okay.
Nice try for that.
But just any high level guideposts, we should think about for what down versus 2019 named in 2022.
<unk>.
Obviously, the path to below <unk> in.
In 2023.
I'm guessing this year as a step towards that but just any high level thoughts on how we should be thinking about full year 2022, CASM ex just in the context that downward 19 comment. Thanks.
Yes, I think you should be thinking about it as modestly below 2019 levels. So in other words, we're not sort of knocking on the door of six quite yet we should be there in 'twenty three so it will be modestly below.
Everything goes according to plan, which we're confident and we should be modestly below our 2019 levels.
The big variable is input around capacity level.
And how quickly the recovery happens and whether or not the shoulder months in particular are able to blow those out or not.
And that's going to drive some effect on CASM.
Got it makes sense and then just one more from me just on the new charter contract can you just give us some color on the impact of those as they ramp up I know in the fourth quarter. They are still down 20% or so from 19.
Due to lower military flying when these contracts backfill some or all of that and then I guess, if so do you still have capacity to do more military flying if that demand comes back stronger so just.
Just helping us think through the impact of the new contracts and then what.
What's left in the tank.
After those contracts out for Phil Thanks, so much great.
Great question Catherine This is grant again.
Yes. So this year the successes of the team in 2021 in terms of selling ourselves winning back business, winning new business.
We feel really good about the portfolio in total for 2022.
Have a lot of precision in terms of what it's going to be.
And Thats really helpful. In these times because this is very operationally friendly. So a lot of the flying we're going to be doing it will be in pilot will have good line of sight on it so it's not going to derive close in.
Changes or drive a lot of work for the organization. So we feel really good about that.
Getting our sort of casino business back to where it was.
Above where it was in 2019 is really important because those are really good contracts for US and then you are absolutely right. We will watch military very very closely and we can opportunistically take it when it makes sense and military.
It has been more competitive just as other airlines have some spare capacity that <unk> been deploying to military.
Things change and based on the recovery, we will keep close tabs on the military business, we do and we will very much engaged.
Makes sense for us so.
We have upside and we have a really good.
Portfolio to begin with.
Okay, great. Thanks, so much Matt.
Thank you and I have a follow up with Chris Stephanopoulos with Susquehanna. Your line is open.
Thanks for taking my follow ups, so on going back to the question on cargo. So you mentioned.
Sick outs and some issues, but just curious in the context of utilization.
Current fleet I believe its 12 aircrafts.
Sufficient to handle growing or what could be erratic peaks as well as what looks like Amazon is adding a few more.
Dots or air hubs on the map here. Thanks.
You said six yes, I just wanted to be very clear I think we had to get a minute COVID-19 I mean people were right.
Yes.
Yes.
I don't know I think it's the answer I mean, we have we're running right now at T. Chek line and that will that won't be a constant I think what we saw in the fourth quarter.
For Amazon production for our cargo production is kind of what we would expect.
And a standard quarter going forward until we get more aircraft I mean.
And I think thats.
My view is it's kind of.
Yes.
Relatively.
Likely I think.
We would intend to continue to have great operations that will be valuable to Amazon or any other cargoes hard and we have a capability that I think is.
Really valuable.
We are comfortable and confident that.
Amazon is happy with our performance.
And are they.
They want to grow the 700 3700 800 fleet more we're very very viable competitors to get more of those aircrafts, but ultimately it's up to them.
Okay. Thank you.
Thanks, Chris Thank you.
And I'm currently showing no further questions at this time I would like to hand, the conference back over to Mr. Parker for any closing comments.
Thanks, guys. Thanks for your interest and everybody have a great day, and we'll talk to you next quarter.
Ladies and gentlemen, thank you for your participation in today's conference you May now disconnect everyone have a wonderful day.