Q2 2022 Sun Country Airlines Holdings Inc Earnings Call
Okay.
Welcome to the Sun Country Airlines second quarter 2022 earnings call. My name is Kathy Darnell 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 quest.
And the answer session to ask a question you will need to press star one one on your telephone.
And then here an automated message advising that your hand is raised.
Be advised that today's conference is being recorded I'll 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 agreement, while there's no bans the questions before we begin I would like to remind everyone that during this call the company to make certain statements that constitute forward looking statements. Our remarks. Today may include forward looking statements, which are based upon management's current beliefs expectations and assumptions and are subject to risks and uncertainty.
Actual results may differ materially we encourage you to review the risk factors and cautionary statements outlined in our earnings release and our most recent SEC filings, we assume no obligation to update any forward looking statement and you can find our second quarter earnings release.
Our second quarter press release on the Investor Relations portion of the website at IR <unk> com.
With that said I'd like to turn the call over to Jim.
Thanks, Chris Good morning, everyone.
Demand for all segments of our business remains as strong as it's ever been our revenue in <unk> grew over 29% versus the same quarter in 2019 on block hour growth of 23%.
During the pandemic, we launched to build out our cargo business and now and over the next several quarters. Our main focus as John countries to staff, our airline to get back to 2019 utilization levels on our passenger fleet as quickly as possible we want to deliver this growth while maintaining the operational excellence and service levels that our customers expect of us.
Specialty proud that year to date on country has led the industry in completion factor with 98, 2% in this challenging operational environment that performance during such rapid growth. This is testament to the hard work and talents of all our team members that deliver for our customers each day.
Like all airlines were facing the challenges of record high fuel tight labor market and inflationary pressures, we build a model that we believe can deliver profits in any environment. We are profitable through the pandemic through a war and now through record fuel our flexible network combined with having a large percentage of our flying committed to long term pass through contracts.
Give us the ability to be successful regardless of what challenges we're facing.
By design, our response to high fuel is to cut off peak flying and concentrate our schedule on periods of the calendar when we're able to achieve acceptable returns as fuel rose rapidly through February and into May we aggressively weaker periods like mid week may and September in long haul routes that are more fuel intensive.
These capacity cuts along with all our revenue initiatives allowed us to deliver over 29% scheduled service <unk> growth versus 2019 for two Q as.
As we've had more lead time going into the third quarter, we expect our scheduled surface stratham to approach 40% improvement.
And we continue to see strength across our selling schedule currently posted through April of next year.
We expect not only to be profitable in all environments, but also to deliver industry, leading margins I wanted to give some color as to why for the first time in 10 quarters that isn't the case.
The capacity changes we've implemented in the second and third quarters were all cuts. However, the fare environment in our fleet size justify significantly more flying during peak periods, we werent able to add this flying due to crew constraints since <unk>.
Ratifying our pilot agreement at the end of last year, we haven't had any issues with retention of our hiring however, we're attempting to train about four times the amount of crews versus pre COVID-19 levels at the end of June about a third of our CFO as we're in a training status. This resulted in a reduction for June our peak months of 30% in passenger fleet.
<unk> 2019, with 40% of the fleet committed to contract flying we were under allocated to the best margin opportunities during the quarter, namely scheduled service large volume domestic markets.
As hiring and retention continues to not be an issue. We expect our crew constraints to be temporary again I'm. So proud of all our team members here at Sun country for going above and beyond every day and with that I'll turn it over to Dave.
Thanks, Jude before I get into a discussion of our results recall that Q2 is a seasonally weaker quarter for Sun country. Then Q1. This is unlike many of our competitors whose business strengthens during Q2.
Some country posted an adjusted operating profit of $4 million for the quarter and on an adjusted EPS loss of negative <unk> <unk> per share.
Adjusted operating margin was one 8%.
Our results were driven by a combination of unprecedented growth in unit revenue historically high fuel prices and under capacity driven by staffing issues I'll delve into each one of these items in my remarks.
First revenue and capacity second quarter revenue totaled $219 $1 million or 29% increase versus Q2 2019 demand continues to be robust scheduled service revenue was $152 6 million or 22, 5% increase over Q2 19.
And scheduled service Trasimene grew 29% versus 2019.
For the month of June scheduled service <unk> was 44% higher than 2019 and July finished over 40% higher than July 2019. So recent positive revenue trends are continuing and are evident in our forward bookings.
Our average fare of $173 was 22% higher than Q2 of <unk> 19.
System block hour growth for the quarter was 23% higher than Q2 of 19, driven by the growth of our cargo segment.
System ASM declined by 6% compared to Q2 dollars 19, which was considerably smaller than we would've optimally been even at $4 plus fuel prices as.
As Jude mentioned since finalizing our pilot agreement in December of last year, we've been able to attract all of the pilots we need to meet our staffing requirements. In addition, attrition has continued to moderate since Q4 of last year.
As we implement the new agreement, we've been increasing the size of our hiring and training pipeline to accommodate our growth plans. This work is underway and we continue to make good progress.
Pilot I would put in June was more than double the output in April and our September new hire classes over 30% larger than earlier in the year.
Charter revenue for the quarter was $42 $7 million or 25% increase over Q2 of <unk> 19.
Over 90% of the charter flying we did during the quarter was under long term contracts, while increasing the proportion of business under contract is a favorable trend there remains ample opportunity to increase the amount of profitable AD hoc flying that we do.
In 2019, 49% of our charter flying was ad hoc.
This gap to today's number represents growth potential for our charter segment as the number of available pilots continues to increase.
Cargo revenue for the quarter of $21 2 million was flat with Q1, 'twenty two down by 4% versus Q2 'twenty. One the decrease was driven by more aircraft in heavy check versus last year we.
We did not fly main deck cargo aircraft in 2019.
Turning now to costs, our Q2 non fuel costs per block hour only increased three 6% versus Q2 of <unk> 19, Despite implementation of our new pilot agreement.
Adjusted CASM over the same period increased 15% versus 19, six 4% decrease in total ASM.
This increase in our non fuel CASM is largely driven by the fact that as I mentioned, we were significantly undersized relative to both our initial plans for Q2 and for the profitable flying opportunities that were available to us.
The average price that we paid for fuel in the second quarter was $4 39 per gallon as.
As far higher than the $2 29 per gallon, we paid in the second quarter of <unk> 19.
Relative to the Q2 guidance, we gave last quarter of $3 50 per gallon the higher price drove $15 5 million in <unk> fuel expense.
We've experienced the $3 50 per gallon as we guided the reduction in fuel expense would have led to an adjusted op margin for the quarter of 9%. So would have been despite the capacity challenges I've discussed.
Let me talk now briefly about guidance as we move through Q3 demand environment remains very strong and we expect scheduled service <unk> to be in excess of 40% higher than Q3 of <unk> 19.
We expect third quarter total revenue to be up 25% to 28% versus 19 and operating margin to be between three and 5%.
Our projected Q3 fuel prices $3 84 per gallon and we expect to fly 31% to 30 32000 block hours were approximately $1 5 billion ASM.
We believe the fundamentals of our business plan remains strong and our model is highly resilient to changes in macroeconomic conditions. Our focus remains on profitable growth. The fact that we have grown less than anticipated has resulted in a decline in aircraft utilization relative to pre COVID-19 periods as our pilot output continues to improve.
We anticipate growth will come at higher margin is fixed aircraft costs are already being incurred.
Finally, let me focus on our balance sheet.
We closed the second quarter with $308 million of liquidity, consisting of $283 million in cash and $25 million of Undrawn revolver.
Despite extremely high fuel prices, we generated over $15 million of free cash flow during the quarter, excluding aircraft Capex and we continue to expect to be strongly free cash flow positive for the year.
Our strong balance sheet continues to provide capital deployment flexibility in the quarters ahead.
That I will open it up for questions.
Thank you at this time, we will conduct the question and answer session as a reminder, our quest.
<unk> you will need to press star one one on your telephone and wait for your name to be announced please standby a moment, while we compile the Q&A roster.
We are first call concerned the line of Duane.
Any work with Evercore go ahead your line is open.
Hey, Thanks, good morning.
You gave some of the stats on training.
But maybe you can just kind of re summarize that can you speak to how your throughput.
He is changing.
How did the number of flight instructors change I think you were looking for a step up there.
In the month of July and just maybe.
Bottom line when do you think youre going to be.
Fully back or where you want to be on staffing, maybe with an eye towards the fourth quarter.
Yes, so just a couple more stats I talked about sort of the pretty dramatic increase in our in our pilot output.
There's been a couple of bottlenecks in the training pipeline.
One of the biggest ones, which we've now largely overcome is on basically check airman, Iowa.
Pilots, who can who can certify our pilots to fly before they get online.
We had only five io instructors in the months, leading up to July one when we increase that number to 19, we'll.
We will continue to increase that number in the months ahead.
So that bottleneck, we think is largely cleared.
A couple of other things, we're sort of working through here as we go forward, which I think we're going to have solved I would say in the next quarter to two quarters.
We'll know a lot more in the next several months, but all of our trends are are very favorable.
If you look at our growth as we look out later into the year, we'll be accelerating again relative to the fourth quarter.
So we've just been going through implementing the new pilot agreement.
Good news.
Is sort of some of the uncontrollable factors like attrition and new hires we have a solid handle on so we can attract all the pilots we need in our classes are as big as we want them to be.
Okay, Great and then just for.
A follow up on network, obviously right here and now you are constrained.
But can you give some color on the types of markets that maybe outperformed.
<unk> versus the market.
Underperformance with the benefit of hindsight.
Sure Duane.
The most disappointing under capacity allocations were markets that were in kind of an inelastic state where they were large enough market suite to handle a lot more capacity showed significant revenue improvements and we believe that adding more capacity wouldn't have changed revenue environment much and most of those marks.
That's where Minneapolis to large cities like Denver, Dallas, Baltimore, Boston, New York.
Portland and Seattle.
<unk>.
And Houston Indianapolis So.
Those markets I think where we.
No for sure but were lifted by a return of business demand, which lifted overall fares and we think that there was a lot of opportunity to add significant capacity.
Instead, we were allocated more into fixed fee as we talked about but also.
A lot of leisure markets that didn't see the kind of revenue year over three improvement that we saw in these larger markets.
Grant anything to add no.
Well I would add one thing as we've grown Minneapolis non stop destinations by over 50% through Covid and as Jude mentioned, some markets performed better than others, but I would say broadly Minneapolis performed very very well the new markets didn't meet expectations and we just see a lot of good growth opportunities that remain in the mark.
And we will be opportunistic we will take advantage of it as is.
As the capacity becomes available.
Okay. Thank you.
Thanks, Brian .
Thank you.
Yeah.
Our next call comes from the line of Michael Lindenberg.
Deutsche Bank.
Go ahead your line is open.
Oh, great Hey.
Good morning, guys just.
Following up on.
Hey, guys just following up on <unk> question.
What I did see you pull that also some of the long.
High volumes summer market say west coast to Hawaii.
Assume that that was all because energy prices or fuel prices were above $4 a gallon, but it does sound like that you didn't have the staffing.
Or what was it a combination of both of those markets have worked some of those longer haul markets, where they have worked.
Given where we are overall fares are where pricing is and the higher feeling was it was it mostly a staffing issue that drove that.
I'm just trying to.
Keep in mind, if you would talk about Hawaii, we're talking about.
Market that would've started around memorial day, a little bit before.
And then I mean everything in June works.
On the scheduled service side, so we were making decisions a combination of fuel intensity. So it's about 50 gallons per passenger to fly somebody to Hawaii.
Versus 20, or so on our domestic network.
And then also.
Crew efficiency, because we recruit constrained.
Theres any positioning are.
Yes.
Penalty then we can get more flying done in a different way then that goes into the calculus as well.
Hawaii, we expect to be back next summer.
It would have done just fine in this environment, but we're just trying to put the best stuff in.
Okay. Okay. That's helpful and then just.
I know that's got picked up and maybe it was from an interview when it was just maybe an off the cuff conversation about.
Potentially flying wide body airplanes, and when I sort of think about what you are dealing with right now it doesn't seem like that that's any time soon but maybe it is and it may be that in conversations that youre, having with the with Amazon. If you were to do wide body I'm sure that there'll be a cargo.
As well otherwise I don't think it would make sense.
Anything that you can.
Sort of just add to that maybe again that was kind of.
Okay.
That's right.
Sure. So the question from the reported was.
Noting that wide body rates are in our pilot agreement.
Do we think it will work in my responses, yes, it will work.
But we don't have any plans to do it in the near future. So multiple years from now we might consider more than three years or so and.
And I agree with what your sentiment that there would be need to be kind of a cargo complement as well to get the same synergies.
Out of our multi segment business in narrow bodies into the wide body space.
We're not.
Our focus right now, but pilots out on the line.
And that'll be the focus.
Next two quarters.
Okay great.
Squeeze in one quick one on the pilot contract obviously.
Youre rolling out various elements when is.
When does the PREPA is the preferential bidding.
Bidding system is that now up and running or does that take some time because I do think that that will also help.
<unk> worked through he'll help you work things through.
Are you there yet on that part of the contract.
Yes, so thats a good question Mike the answer is no. So.
Okay. We have we have some of the stuff in place that maybe doesn't help from a productivity perspective, we don't have in places prep bid, which which which will help us.
We don't have that in place yet so.
That's probably early in the year, we're working through with Alpha right now very productively, we got our vendor chose and so forth.
We just got to implement it and thats going to be early next year, but thats going to help no doubt.
Okay, great great. Thanks for the time everyone.
Thank you Michael.
Our next question comes from Barclays from the line of Brandon Glen Ski.
Thanks for taking my question.
Judy Dave does this.
<unk> training.
Problems you are having right now are the construction here does this change your longer term capacity plans, especially as we think about 2023 or 2024 relative to where you were maybe pre pilot contract.
Yes, I mean I think.
In the near term, we're certainly folk constrained by pilots we expect as.
As we move into 2023 to be able our goal and we have line of sight on our plan to achieve a 20% block hour growth rate, which I think is achievable over a more sustained period.
We're not going to grow for growth purposes, I mean, we need to have high margin opportunities for that incremental flying which I think exists in today's environment, even with fuel price.
But in a recession.
<unk>.
Higher fuel.
That growth rate will change, but we're building out training capacity.
And also we have a contract and a value proposition to incoming pilots with diversity of our flying.
And growth rates there.
I think 20% is.
Tangible yes.
Yeah, Let me let me just give you. This is Dave Hey, Hey, Brandon Let me just give you a couple of other numbers, though so we originally expected to end the year with 42 passenger aircraft.
That's where we'll be.
We are in advanced discussions pretty close right now on three more aircrafts that will delivered to US later in 'twenty three and we are remaining active in the market. The beauty of the fleet plan as we've talked about many times before is we don't have fixed orders coming in so we can we can pivot.
Up and down based on sort of how much we can fly and what the opportunities are and we're going to continue to do that just like we've been doing but we were in the market. We're still looking for aircraft.
We've got a strong beat on three more so we're we're moving forward and planning for sustained growth.
And Dave I guess as you look out into 'twenty, three if youre able to achieve that 20% growth in block hours.
Where would you see the CASM benefit come out.
You mean like like on what P&L line item or like what time period.
No I mean, I think the target.
Below six CASM, but now maybe a little bit around six where would you see longer term CASM.
To be more specific.
While CASM will be heading down as we grow.
I don't have a revised plan right now to give you a number.
I think our costs are well in hand.
I just don't have enough down in the 'twenty three plan yet to give you a good 23 number the other thing to think about this as always talked with us because we got a big cargo business. So we have costs that derive an associated with <unk>. So we really look at a lot of stuff on a cost per block hour basis, which we feel is pretty well in hand.
But I don't have a precise CASM forecast for you right now.
Okay I appreciate it guys. Thank you.
Ryan.
Thank you.
Our next call comes from.
Your line at this Scott Group Wolfe Research.
Hey, Thanks, Hey.
Hey, Thanks, good morning, guys.
Hey, Scott.
You talked about 44% unit revenue growth in June and 40% or so in July any thoughts.
On where we go from here and what Youre seeing with fares as fuel prices are starting to come down.
So Scott I, just want to make a clarifying point, which is that thats for scheduled service.
<unk>.
Which is about 60% of our 70% of our blackout or 65% or something like that and the rest is.
Long term fixed contracts.
Which adjust.
Slowly.
And so yes, it's RASM.
Your question is about long term demand trends, we've seen really consistent year over three unit revenue improvements in sales or the <unk>.
Entire selling schedule out through April .
So we don't see any slowdown associated with it any pullback in demand from where we were on peak levels in July .
Our own capacity can influence that if we're able to add more.
We don't want to get too high where travel is unattainable for a large portion of our customers.
But there's no indication of any.
Any of our forward bookings of any weakness or any change from this summer.
This summer demand profile.
And so at least for now you feel like youll be able to sort of keep the.
The drop in fuel and keep the benefit of that.
Yes.
And then you talked about in the beginning that you want to have industry leading margins.
Maybe just thinking about maybe the goal of double digit margins.
What has to happen realistically when can we get back.
To a double digit operating margin.
Yes, I mean, so if you look back in the second quarter.
D forgone opportunities of flying.
Hard to tell but it's probably worth on a pre tax basis and operating basis in the tune around $15 million.
Which would have put us pretty close to it.
Double digits.
Thank you.
So then the answer to your question becomes how quickly we can put crews out onto line to get the passenger fleet back to utilization levels that we have had in 2019 now that fuel prices higher so the flying opportunities for high utilization or sort of concentrated when fares are naturally higher.
So it may there wasn't that much opportunity loss September there won't be that many opportunities to add other than AD hoc charter opportunities, but for summer months, where this demand environment is so good.
Foregoing significant opportunities with utilization down, 30% and Thats and Thats the key to delivering.
Back to.
Operating margins that lead the industry I think.
So would that be your goal or expectation for 'twenty three to get back to leading the industry.
Yes.
Okay Alright.
Alright. Thank you guys just a couple of other color just because of the Cam myself.
There are some.
As you compare across the industry. So frontier is taking sale leaseback. They take a gain from that there are three carriers in the industry with significant hedge portfolios with significant advantage of those hedge portfolios in a mark to market basis, southwest Alaska and Delta.
And then there is a business customer rebound that we're not benefiting from so just keep that in mind and I think when we think more long term we're in a really good place.
Makes sense. Thank you guys. Thanks.
Thanks.
Thank you.
I would now like to turn it back to Jay.
Becker for closing remarks.
Well thanks for thanks for joining the call everybody and.
We will talk to you in three months.
A great day.
Okay.
Thank you for your participation in today's conference. This does conclude the program and you may now disconnect.
The conference will begin shortly to raise Johan during Q&A, you can dial star one one.
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