Q3 2022 Sun Country Airlines Holdings Inc Earnings Call

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The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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Yeah.

Welcome to the Sun Country Airlines third quarter 2022 earnings call. My name is Liz and I will be your operator for today's call.

This time all participants are in listen only mode. After the speaker's presentation, there will be a question and answer session.

Good question during the session you will need to press star one on your telephone you will then hear an automated message advising your hand is rate. Please be advised that today's conference is being recorded I will now.

Now I'll turn the call over to Chris Allen Director of Investor Relations. Mr. Allen you may begin.

Thank you I'm joined today by Jude Bricker, our Chief Executive Officer, Dave Davis, President and Chief Financial Officer, and a group of others to help answer questions. Before we begin I would like to remind everyone that during this call. The company may make forward looking statement certain statements that constitute forward looking statements. Our remarks. Today may include forward looking statements, which are based upon management's current beliefs expectations and assumptions and are subject to.

Risks and uncertainties actual results may differ materially we encourage you to review the risk factors and cautionary statements outlined in our earnings release on our most recent SEC filings, we assume no obligation to update any forward looking statements you can find our third quarter earnings press release on the Investor Relations portion of our website at IR Dot dot com without that I would now like.

I turn the call over to Jude.

Thanks, Chris Good afternoon, everybody.

We have much.

Cited about in our three key results I'm, particularly pleased though with our performance operationally.

July 1st we run a 99, 8% controllable completion factor was 83% a 2014 today, it's been 96 days since we had a cancellation.

This with blackout with growth of over 15% versus the same quarter in 2019.

Operational results like these are a team effort and I'm really proud of what our folks were able to deliver after coming through a tough.

Great.

Since the demand environments rapid recovery began earlier this year. Our focus is sun country has been to staff for growth to restore our passenger fleet utilization to pre pandemic levels. We continue to find sufficient new hires to meet our goals. However, particularly in the case of pilots. We continue to work through training overhang last quarter, we were constrained primarily by first start.

Officers this quarter captain availability has become the constraining input as a rapid hiring works through our training program. We expect fleet utilization to continue to improve into the beginning of 2023 increased utilization is very valuable in this demand environment, our scheduled service <unk> and <unk>.

<unk> 2019 by over 46% are trasimene improvement exceeds that of the industry as a whole due to our sculpted scheduling and the strength of the southern countries brand in our local market based on our sales for travel into 2023 and industry schedules, we anticipate yield strength to continue.

<unk> for the foreseeable future and scheduled service, we're seeing strength across all our markets leisure VFR International domestic peak and off peak, our charter business continues to show yield improvements as well.

Due to the lower cost of incremental capacity adds and the strong yield environment, we expect margins to widen into next year.

The West Coast of Florida, as an important destination for us, particularly in the winter travel season, our thoughts go out to the people of that region as they work to recover from the tragedy of in for Sun country anticipating the demand recovery to that region is challenging typically fort Myers in particular is an increasingly larger part of our network through our March peak.

We've made touch through the end of the year and continue to monitor bookings through the first quarter.

Our customers will travel however, we have less certainty about historically reliable demand, we've launched two new markets in Florida, and we'll redeploy capacity to other sunny destinations. However, the uncertainty is why we have a wider guide than usual for the fourth quarter, we expect the region to fully recover.

And we will be there along the way.

One benefit of our model that's good to highlight in a rising rate environment as our flexible fleet strategy, we buy used aircraft in the spot market. So prices will adjust to finance costs global weakness and a strong dollar and the timing of our deliveries will be in response to our staffing levels based on our current fleet commitments we expect.

<unk> the fleet to grow to 54 aircraft, while also reducing net interest expense and 23 of 22.

To summarize we're not limited by opportunities capital in our aircraft and I am pleased with the progress we're making on staffing <unk> in 2023 are setting up.

Very well for us and with that I'll turn it over to Dave.

Thanks, Dude before I get into a discussion of our results I want to point out that I'll be making comparisons to both last year as well as 2019 in some cases, we have been quicker to get back to a more normalized environment and year over year changes are often more indicative of our progress at this point.

Sun country posted an adjusted operating income of approximately $16 million for the quarter and an adjusted EPS of <unk> 12 per share.

Adjusted operating margin was seven 2% well ahead of our prior guidance. We achieved these results. Despite continued industry challenges, including third quarter fuel prices being 75% higher than last year lingering under capacity driven by driven by staffing issues and the impact of hurricane Ian in the state of Florida.

Let me start with the discussion of our revenue and capacity.

Third quarter revenue totaled $221 $7 million or 28% increase versus last year and 29% better than 2019, we estimate hurricane Ian drove about $1 million in lost revenue during the third quarter.

Demand continues to be robust Q3 scheduled service revenue was $152 5 million or 34% increase year over year Q3 scheduled service <unk> increased a very strong 39% versus last year and 46% versus Q3 of 2019.

Scheduled service <unk> continued to improve within the quarter as July increased 33% August 39% in September 55% versus the same period last year.

Total fare increased 16% versus last year to $167 73.

Combination of higher fares.

And an increase in scheduled service load factor of almost 10 percentage points year over year is indicative of the strong leisure demand environment that we're saying that we continue to see.

Charter revenue for the quarter was $42 9 million or 27% increase year over year, driven by a large increase in flying under long term contracts such as for MLS and Caesars.

Q3 charter flying under long term contracts made up 80% of our charter block hours, while we've been able to sequentially grow our AD hoc flying capacity remains constrained as we focus resources on other flying.

As we continue to make progress towards normalized pilot staffing levels. There is a large opportunity than simply returning to historical levels of AD hoc flying.

Versus the third quarter of last year AD hoc charter flying is almost 70% lower.

Cargo revenue for the quarter of $23 7 million was 3% lower than Q3 of 'twenty. One. This reduction is due entirely to a one time payment from Amazon in Q3 of last year for flying that had been done soon after we started our cargo operations, but had not yet been billed.

Total block hours grew 2% year over year, and 15% versus 2019 since Q3 of 'twenty one our average passenger aircraft count grew 12% and our cargo aircraft count remained flat.

As was the case in Q2, we're still working through the process of expanding our pilot production pipeline as such the utilization of our fleet was 6.4 hours in the third quarter of this year versus seven hours last year on a normalized basis, we expect aircraft utilization to be on the order of eight hours per day, which provides us with significant opportunity.

For very higher margin and earnings growth as we return utilization to normal levels.

We're planning for fleet growth through the remainder of 2022 and into 2023.

The aircraft we have already purchased one entered service in Q3 and five more will enter service during Q4 and Q1 of 'twenty three. Additionally.

Additionally, we are in the process of acquiring three aircraft to be delivered during Q4 of 'twenty three.

In Q1 of 'twenty four and those aircraft will enter service in early 'twenty four we continue to pursue opportunistic purchases of aircraft to support our capacity growth.

Let me turn now to costs are.

Our Q3, adjusted CASM increased 18% on flat total ASM versus the same period last year the.

The increase in our non fuel CASM is largely driven by the fact that our aircraft utilization remains lower than target and the impact of our new pilot agreement, which we signed at the end of last year.

We paid an average of $3 93 per gallon for fuel in Q3 dollars 22, which was 75% higher year over year.

As a reminder, given our differentiated business model, we pass on approximately a third of our total fuel usage to our cargo and charter customers, we've been able to offset a large portion of our higher cost through continued growth and improve unit revenues.

Turning now to guidance for Q4, we're expecting to grow block hours between 9% and 12% versus the same period in 2021 as we've consistently seen leisure demand remains very strong we expect total revenue to increase between 27% and 33% year over year to 202.

1% to $230 million.

At $3 75 jet fuel, we'd anticipate an operating margin of between 4% and 8% in the fourth quarter.

We're giving a little wider guidance range in our numbers as is usually the case as Jude mentioned, we're still assessing the impact of hurricane Ian on our bookings in southwest, Florida during Q4.

Finally, we announced that the Sun country Board of directors has authorized us to repurchase up to $50 million worth of Sun country shares. Our intent is in the near term is to enter into a $25 million accelerated share repurchase agreement, allowing us to quickly acquire a portion of these shares.

Apollo does not intend to sell shares as part of the buyback program.

Our balance sheet is very strong with $318 million in total liquidity as of October 31, which includes $25 million and an undrawn revolver.

At the end of the third quarter, our net debt to EBITDA ratio was three times, which is among the lowest for airlines in the U S. We've.

We've invested heavily in our staff members purchased the new aircraft, we need to grow and steadily pay down our aircraft debt as it comes due we view sun country shares as a good investment, especially at current values and we have sufficient liquidity to return capital to our shareholders in a prudent manner.

We believe the fundamentals of our business remains strong and as we continue to demonstrate our model is highly resilient to changes in macroeconomic conditions. Our focus is and will remain unprofitable growth.

With that I'll open it up for questions.

Yes.

At this time, we will conduct a question and answer session. As a reminder to ask a question you will need to press star one one on your telephone and wait for your name to be announced please.

Please standby, while we compile the Q&A roster.

Yes.

Our first question comes from Ravi Shanker at Morgan Stanley . Your line is now open.

Thank you good afternoon gents.

Dave.

Unique seasonality kind of gives you probably a little more kind of forward look then than many of your peers maybe into 2003. When can you give us an update on what you are kind of booking curve looks like for like like January or maybe even beyond that into spring break if you haven't.

Hey, Rob it's we're selling through May right now.

And we've seen the fare improvements that we've seen in the reported period continue out to the entire selling cycle.

So it's too early obviously to make predictions on year over three or a year before.

Trasimene improvements into that period, but there is no sign of any slowdown in the leisure space keep in mind, while we do have a leisure focus we are fairly focused geographically, particularly in the wintertime.

With Minneapolis origination and the surrounding region.

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No.

Sunny destinations across the South Mexico Caribbean, So from what we're seeing it looks really good.

Yes, yes, no slowdown like we sort of talked about previously in either bookings or in.

Some growth.

Great and then maybe as a follow up can you remind us what the economic sensitivity of the chalker business looks like I mean, it sounds like if you are shipping like sports teams around the country doesn't sound, particularly macro sensitive, but how is it done in previous recessions.

Okay.

I mean, I think particularly as the business is now configured.

Probably even more resilient than it has been in the past, which are typically is I mean.

The vast bulk of our flying now is under contract and Thats under contract for things like Major League sports some casino flying which proved to be pretty resilient during recessions.

Some other sort of specialty stuff that we're doing under contract. So I think it's probably very resilient and.

In Peru.

Recessionary periods.

Even some of the AD hoc stuff, we think we can get back even if we sort of entered into a recessionary mode.

The military stuff and so forth. So that business I think is going to be will be strong in all conditions.

Yes.

Very helpful. I'll pass it along thank you.

Thank you.

Please hold while we prepare the next Q.

The next question is from Duane anywhere.

Helane the Q is open.

Hey, Thank you.

<unk>.

So maybe you could give us some.

Detailed thoughts about 2023, but I'm just wondering hypothetically, if we had a blank sheet of paper.

Where would you be deploying the most incremental.

Incremental capacity across the three segments, where are you seeing the highest incremental margin opportunity across.

Across the three segments today.

Scheduled service, particularly.

It's a seasonal function hey, Duane is geographic.

Scheduled service.

Our peak periods.

Clearly the best opportunity that we have it's also the one that's being cut the most due to crew availability because.

A lot of the other segments are long term contracts, which is great. But it's also when we have these kind of really rapid yield recovery environment like we're in today, we can't put a lot of capacity into these peak periods. So they are cut pretty heavily.

But in the summertime, it's our big city connectivity really outperformed I think thats consistent with what the whole industry is seeing and in the wintertime.

Very well established leisure destinations that tend to consume a big portion of our network like Minneapolis to Cancun Fort Myers, Orlando Vegas La <unk>.

Phoenix.

And that's where we're that's why we've put incremental capacity and.

It wouldn't affect the yields in those markets.

Sure.

And it could absorb a tremendous amount based on the bookings were saying.

That makes that makes a lot of sense. Thanks for that and then just on.

Maybe maybe chartering cargo.

<unk> is accounted for.

The same way across those segments and maybe within charter do you have.

Some charter agreements, where fuel is a pass through and others, where it might be.

Reported differently, just if you could help us think about.

How fuel flows through those two segments.

Yes, so on the charter side, it's typically not a straight pass through winter when an agreement is signed with a charter customer. There is typically a reference price that is inherent in the per block hour rate that the contract is set at <unk>.

And then if fuel goes up there is additional reimbursement from.

From the charter customer, which has a revenue item.

On the.

Cargo side that is in fact, a straight pass through was app with Amazon paying for the fuel and therefore, the fuel costs netting out not showing up in our fuel line.

Okay very clear thank you.

And the next question.

The next question is Thomas Fitzgerald with Cowen Thomas Your line is live.

Hi, Thanks, very much for the time.

Two quick ones for me I was just wondering if you could provide a little bit more color on the.

The hiring in the training pipeline and how is that going in.

As well I just also wanted to curious if you could just talk about the benefit youre seeing from highest interest rates I just saw the interest income line item really jumped this quarter. So thanks very much.

Hey, John Yes.

I'll take the last one first which is just to say I was just calling it out because it will be probably an outlier in the industry and that is to say, we don't have any requirement for debt and supportive of any of our capex and we don't have a lot of Capex plan for next year and also with the spot market being the source of airplanes, we expect.

If you did see a global recession or.

Even region over sessions around the world than there would be more and cheaper airplanes coming available to our benefit.

On the first part.

We're hiring full classes every month, so we're getting all of the new hires we need there's not a whole lot of.

Adding to that wouldn't help us that much because now we're to the stage, where we have sufficient <unk>, we just need to transition into the captain's seat and the process is taking several months to kind of get through.

Gearing up our new higher process into being able to handle classes of the size that we're doing about 20, 20% to 25, a month and then gearing up.

All the infrastructure, we need in order to upgrade <unk> into captains. So that's ongoing.

I think what everybody really wants to hear is when we're going to kind of get back to where utilization is what it is in the is what it was and we have the pilots we need to to fly. This fleet, that's optimal level and we're still probably several months out say six months until we kind of get caught up to our.

Sales keep in mind, the fleet grew for us about 70%.

Pre pandemic levels, because we on boarded a whole cargo fleet.

Through the pandemic. So we got a lot of catching up to do and it's probably going to take us another six months, but the encouraging part.

As we built out the infrastructure, we opened a training center this month with two new Sam's.

Have the same instructors we have.

The check airman, we need we have the new hires we need it's just about getting everybody through the pipeline and so we have line of sight on finishing up.

And get back to where we need to be in a lot of my commentary is really around that flying that's going to be facilitated by that crude growth is really really valuable in this environment.

As we pointed out it's the it's a flying that has been cut the heaviest because of crew shortages.

Alright, just as a reminder, if you would like to ask a question you will simply need to press star one on your telephone.

And Brian the next question.

The next question is from Michael Lindenberg, Michael with.

Bank My your.

Your line is open.

Hey, good afternoon, everyone.

Congratulations on being the first to announce approach shareholder initiative, so that's great and the industry.

Michael Yes, Youre welcome.

With respect to the excise tax and share repos.

Doesn't kick in until January one 2023 is that right or is it before that.

That's right. So basically we are structuring this is.

Our intent when I, we don't know the paper totally finalized, but we're very very close.

<unk>.

Due to a $25 million ASR, and then $25 million open market. The ASR portion of the shares that auction.

The vast bulk of them will be delivered to us very quickly, which means we'll basically be able to take possession before that excise tax kicks in on that full on that first 25 great.

That's fantastic news.

My second question Jude I just wanted to go back to you did call out captain availability.

Not sure if it's just that you aggressively hired a lot of first officers.

That resulted in an imbalance on cruise or if youre still seeing.

<unk> seen some seek more senior pilot this back to two other carriers can you just elaborate on that yes.

Yes, that's the easy one I mean, we're seeing attrition below what we had expected it to be.

So we're not losing captains were losing <unk>.

But for the most part our captains.

Hey, Jason is de Minimis.

It's about getting them into the left seat at this point, okay, great again.

Can I just squeeze in a quick one on cash taxes, when I think about some of the losses that you and others have had have incurred.

I mean, you've been mostly profitable over the last year year, and a happy with the first back to profitability.

Good.

Your cash taxes is that going to be still that's going to be a very low rate. When we think about from a cash flow perspective.

Maybe you can just remind us on your status on it. Thank you. Thanks for taking my questions.

Thanks, Mike Yeah. So.

The answer on the cash taxes piece is.

As effectively we will be close to full cash taxpayers and here's why.

While we had a sufficient while we had a significant NOL that we sort of carried through from.

From many years ago.

We also have the TRA agreement in place with our largest shareholder were.

Basically the value of that NOL is essentially paid out to the.

To our shareholders over.

As we generate earnings so effectively if you look at the cash flow of the business, we'd look like full cash taxpayers.

Yes.

And my.

Question.

Okay.

Okay.

The next question is from Christopher <unk> from Susquehanna.

Chris Your line.

Thank you good afternoon, so Dave.

Eight hour utilization target.

You mentioned in your prepared remarks is that based on the active fleet today or with the.

Additionally aircraft that Youre planning on taking and also what's the ceiling that you believe you can comfortably run between that.

Into 2020 upgrade.

Yes, well the eight hour number is sort of are is where we would like the fleet utilization to be so like I said, we're in the sixes.

Now, we're going to be taking additional aircraft into service as we add pilots that will sort of stay flattish and then start to drift up in 2023, and we ultimately hope sometime later in 'twenty three to be at that eight hour number.

The we were doing like nine hour utilization numbers in 2019, which is probably unsustainably high because at that time, we were doing some flying redeye Steph and other things that really wasn't that great. So, we're probably not going to be doing that anymore.

If we're hitting eight hours of utilization, that's where we need to be and Thats, a 23 into the second half of 'twenty three number I will comment that our utilization is somewhat a function of the fuel price. So as fuel prices rise marginal flying is cut and therefore, we were able to manage.

Pass through more effectively than most carriers and as fuel prices fall, we can increase utilization to absorb the increased.

Marginal opportunity so eight hours kind of wherever you'd like to be but that number could be higher or lower depending on where fuel does yes. One other thing I think because it's.

The model is a little bit different than some others. So remember the utilization is not a steady utilization day by day. It is very very dependent on peak periods. So into that low teens hours per day utilization at peak times, and then significantly lower than that on <unk>.

<unk> days, so we're trying to keep the peak utilization as high as possible.

And the troughs are going to be lower trough than they typically would be and the average of those things is what's leading to the to the lower utilization than we want to see.

Okay.

The follow ups are cured with the ATI assay with Amazon are there just remind us is there any contractual minimums with that client and then how soon in advance how much youre going to be flying. So for example at this point do you have a schedule in place.

For this year's peak season. Thank you.

Sure, Chris So theres no minimums.

Right now the flying because the pilots would be more efficient flying something else is probably we would like to be a little bit smaller in the immediate future.

But there are no minimums in the contract and the schedule cycle isn't delineated clearly, but we're on a pretty good pace of about 90 days for 90 days. So 90 days that we're playing in the schedule for the 90 91 to 180 a day.

And that kind of repeats itself and the schedule is very fluid the volumes have been pretty consistent but the schedule as to where the airplanes fly and when they go it's pretty fluid. So this these schedules move around quite a bit a lot.

And so.

I think one of the main things is that we're one of the carriers. The few carriers, perhaps that can do this for them because.

So.

It's also a schedule carrier, where you used to so consistent planning.

It's a very fluid environment and cargo.

One other thing to point out, though is while there are no flying minimums.

Revenue from Amazon comes in the form of both a fixed payment per aircraft not utilization dependent and then a per block hour number so while there arent minimum if there is a fixed payment for aircraft that we receive simply for operating the airplane.

Yes.

Okay. Thank you.

Great.

There aren't any further questions that does conclude our Q&A session.

I will now turn it back over to your CEO Jude Bricker.

Thanks for your interest everybody I hope you have a great afternoon, and we'll talk to you again at the end of the year. Thanks.

That does conclude the conference. Thank you for joining you may now disconnect.

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The conference will begin shortly to raise your hand during Q&A you can dial star one one.

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